Document of The World Bank Report No: 23317-CHA PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$160 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A NATIONAL RAILWAY PROJECT December 20, 2001 Transport Sector Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective September 2000) Currency Unit = RMB RMB 1.00 = US$0.12 US$1.00 = RMB 8.30 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS 8th FYP Eighth Five-Year Plan (1991-1995) MEPIED Mechanical and Electrical Products Import and 9th FYP Ninth Five-Year Plan (1996-2000) Export Department 10th FYP Tenth Five-Year Plan (2001-2005) MOF Ministry of Finance ADB Asian Development Bank MOP Memorandum of the President BAO-LAN Baoji-Lanzhou railway line MOR Ministry of Railways BAO-ZHONG Baoji-Zhongwei railway line NAO National Audit Office CAS Country Assistance Strategy NCB National Competitive Bidding CAES China Academy for Environmental Sciences NRL National Railway Loan CMC Construction Management Center JBIC Japanese Bank of Intemational Coqoepation CR Chinese Railways OED Operations Evaluation Department DO Development Objective PHRD Policy and Human Resources Development Fund EA Environmental Assessment EAP Environmental Action Plan pkms Passenger Kilometers EIA Environmental Impact Assessment PRC People's Republic of China EIRR Economic Intemal Rate of Retum PTE Passenger Transport Enterprise EPB Environmental Protection Bureau PSO Public Service Obligation FCTIC Foreign Capital and Technical Import Center RAP Resettlement Action Plan FIRR Financial Intemal Rate ofRetum RIS Railway Information System FRSDI First Railway Survey and Design Institute (in SCADA Supervisory Control and Data Acquisition Lanzhou) SDPC State Development Platning Commission FTE Freight Transport Enterprise SEPA State Environmental Protection Agency FY Fiscal Year SIL Specific Investment Loan GDP Gross Domestic Product SOE State-Owned Enterprises GOC Govemment of China TA Technical Assistance ICB Intemational Competitive Bidding tkms Tons kilometers ICR Implementation Completion Report TMIS Transportation Management Infonnation System IP Implementation Progress TOR Terms of Reference JBIC Japan Bank for Intemational Cooperation KfW Kreditanstallt for Wiederaufbau VSCL Variable Spread & Rate Single Currency Loan KM Kilometer WBOC World Bank Office, China KRA Kunming Railway Administration LRAB Lanzhou Railway Administration Bureau ZRAB Zhengzhou Railway Administration Bureau Vice President: Jemal-ud-din Kassumn, EAPVP Country Director: Yukon Huang, EACCF Sector Director: Jitendra N. Bajpai, EASTR Task Team Leader/Task Manager: Richard G. Scurfield, Transport Sector Leader, TUDTR CHINA NATIONAL RAILWAY PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 5 2. Key policy and institutional reforms supported by the project 6 3. Benefits and target population 7 4. Institutional and implementation arrangements 7 D. Project Rationale 1. Project alternatives considered and reasons for rejection 8 2. Major related projects financed by the Bank and other development agencies 9 3. Lessons learned and reflected in the project design 11 4. Indications of borrower commitment and ownership I1 5. Value added of Bank support in this project 11 E. Summary Project Analysis 1. Economic 12 2. Financial 12 3. Technical 13 4. Institutional 13 5. Environmental 14 6. Social 17 7. Safeguard Policies 18 F. Sustainability and Risks 1. Sustainability 18 2. Critical risks 19 3. Possible controversial aspects 19 G. Main Loan Conditions 1. Effectiveness Condition 20 2. Other 20 H. Readiness for Implementation 21 I. Compliance with Bank Policies 21 Annexes Annex 1: Project Design Summary 22 Annex 2: Detailed Project Description 25 Annex 2a: Terms of Reference for a Study on Research on the Cost Model of the Passenger Transportation Company of Kunming Railway Bureau Annex 2b: Termns of Reference for a Study on Establishing Railway Passenger Transportation Enterprises (PTEs) in Railway Bureaus with Sub-bureaus Annex 2c: Terms of Reference for a Study on Establishing a Wagon Ownership Enterprise Annex 2d: Terms of Reference for Tools Integration Work Annex 3: Estimated Project Costs 37 Annex 4: Cost Benefit Analysis Summary 39 Annex 5: Financial Summary for Revenue-Eaming Project Entities 48 A: Financial Analysis of the Bao-Lan Line B: Financial Analysis of Transport Operation of Ministry of Railways (MOR) Annex 6: Procurement and Disbursement Arrangements 57 Annex 7: Project Processing Schedule 65 Annex 8: Documents in the Project File 66 Annex 9: Statement of Loans and Credits 68 Annex 10: Country at a Glance 73 Annex 11: The Reform Program for the Ministry of Railways (MOR) of China 75 Annex 12: The Reform Process in the Chinese Railways 80 Annex 13: Environmental Assessment and Action Plan Summary 86 Annex 14: Resettlement Impacts and Resettlement Action Plan Summary 99 Annex 15: Technical Analysis 107 Annex 16: Financial Management Assessment 110 MAP(S) IBRD 31728 China Railway System, December 2001 IBRD 31717 China.Baoji to Lanzhou Rail Line, December 2001 CHINA National Railway Project Project Appraisal Document East Asia and Pacific Region EASTR Date: December 20, 2001 Team Leader: Richard G. Scurfield Country Manager/Director: Yukon Huang Sector Manager/Director: Jitendra N. Bajpai Project ID: P058846 Sector(s): TW - Railways Lending Instrument: Specific Investment Loan (SIL) Theme(s): Transport Poverty Targeted Intervention: N Program Financing Data [Xl Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For LoanslCreditslOthers: Amount (US$m): US$ 160.0 million Proposed Terms (IBRD): Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan (US$m): Source Local Foreign Total BORROWER 1142.24 0.00 1142.24 IBRD 0.00 160.00 160.00 Total: 1142.24 160.00 1302.24 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsible agency: MINISTRY OF RAILWAYS Address: Foreign Capital and Technical Import Center (FCTIC) Ministry of Railways, 10 Fuxing Road, Beijing, China Contact Person: Mr. Yang Haichang, Director, FCTIC Tel: 86-10-63248406 Fax: 86-10-63241845 Email: FCTICZH@ns.chinamor.cn.net Estimated disbursements ( Bank FY/US$m): FY 2002 2003 2004 2005 2006 Annual 50.00 50.00 35.00 20.00 5.00 Cumulative 50.00 100.00 135.00 155.00 160.00 Project implementation period: March 2000-June 2005 Expected effectiveness date: 05/31/2002 Expected closing date: 12/31/2006 OCS PAD F- R.P U,. AXA A. Project Development Objective 1. Project development objective: (see Annex 1) This project has two objectives: (a) to increase the capacity of the railway network between eastern and western China; and (b) to support the reform program of China Railways. 2. Key performance indicators: (see Annex 1) Key performance indicators have been agreed with the Ministry of Railways (MOR), as follows: Objective . Component Indicators Increase capacity of the railway o Double tracking and upgrading o Length of completed double network between eastern and western of an existing electrified railway tracked and electrified line China. line between Baoji and o Average travel time from Lanzhou. Lanzhou to Baoji and Baoji to Lanzhou o Usage of the line (tonne kilometer equivalent) Support the reform of China o To create Passenger Transport o Railway reform plan is approved Railways Enterprises (PTE) in all by State Council. Administrations, some as o Pilot PTEs are established and independent entities and some allowed to operate with as accounting entities commercial independence. o To regroup the PTEs into o Creation of a wagon ownership market defined enterprises company o To establish wagon ownership o Plans are prepared and company implemented for the o Further development of tools for development of the integrated the management of commercial planning and costing tool. railway operations B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R98-107 Date of latest CAS discussion: 05/28/98 China: Country Assistance Strategy Full Report, 16321-CHA, February 27, 1997 Progress Report, R98-107, May 6, 1998 This project responds to two CAS priorities, to: (i) reduce infrastructure bottlenecks, and (ii) assist government-owned enterprises as they make the transition from a command to a market-based economy. - 2 - 2. Main sector issues and Government strategy: The Government of China (GOC) has commnitted itself to the reform of all State-Owned Enterprises (SOEs), of which China Railways is one of the largest. In the Outline of the Tenth Five-Years Plan For National Economic And Social Development (Approved by the Fourth Session of the Ninth National People's Congress on March 15, 2001), it is stated that the purpose of the government is To accelerate the reform of transportation management system and operation mechanisms with the core focus on the separation of the governtment functions and the enterprise functions, railways will "separate infrastructure from transport operations." MOR submitted a general plan for reform to the State Council in early 2000. This plan is not yet generally available because the details are still under discussion within the government. The challenges faced by MOR are not unlike those that other governments have had to address, as they have sought to reform their railway systems: how to clarify the respective functions of government and enterprise, focus on the market, create and manage competition, and define and reshape private/public boundaries. However, in China, five factors make this reform particularly challenging: First, China's size and its scarcity of infrastructure mean that rail service is a critical part of both the freight and passenger transport networks-56 percent of freight (measured in ton-km) and 37 percent of passengers (measured in passenger-km) go by rail. Given the importance of rail service, reform must be carried out with great care to reduce the risk of disrupting service. Second, Chinese railways still face capacity shortages and demand surpluses, so the need for expansion will remain important and regulatory issues will remain significant. Chinese railways generate the highest traffic density in the world, and the need for continuing expansion is well documented. Third, Government looks to rail revenues to pay for a significant portion of capital outlays. However, because some new lines are justified by social and/or strategic considerations rather than by commercial needs, public funding may be required. Fourth, Railways face increasing competition. Despite the fact that China's railways still carry a major share of freight and passenger traffic, other transport modes have made inroads in the transportation market. Railways have lost approximately I percent of market share every year since 1978. Road traffic for both freight and passengers is increasing very rapidly as the network of inter-city expressways expands, with about 15,000 km already completed and 35,000 km due to be completed by 2010. MOR faces a particular challenge in the freight sector, where an old-style production orientation has limited rail's ability to compete for higher-value traffic. Moreover, the lack of demand-sensitive pricing deprives MOR of the eamings needed to invest in better service capability. If MOR cannot adapt rapidly to competitive conditions, rail's market share will continue to erode for all but bulk cargo. Fifth, The existing technical and managerial standards are below Westem levels, with much of MOR's technology comparable to 1960s and 1970s practices in the West. The restructuring effort will have to include the upgrade of technical and managerial capabilities and information as well as commercial techniques. Fortunately, the establishment of the Transportation Management Information System (TMIS), financed under the Railway VI and Railway VII projects is being completed just as it becomes critically important in supporting improved management and system analyses. In a similar vein, as OED commented in its report Transport in China-an Evaluation of World Bank Assistance (January 11, 1999): Despite major capacity expansion and changes in market structure, the railways are still unable to meet the demands of a liberalized and decentralized economy. Many bottlenecks remain in the economically active coastal areas, and access to the railway system in the inner provinces is sparse. Capacity alone will not address these problems. Accelerating the institutional restructuring and policy development, which - 3 - simultaneously increases system capacity and inter-model transport facilities and improves customer service, will be required to help China's railways compete with other modes of transport. The general approach to railway reform in China is expected to be based on two principles-the separation of govermment functions from enterprise functions, and the separation of infrastructure from operations. Change is likely to proceed in a number of stages: 1 . Separation of railway operations from the other businesses that were under the tutelage of MOR (now substantially completed). 2. Establishment of PTEs in four minor administrations (i.e., administrations with no sub-administrations). 3. Extension of the passenger enterprise separation, at least on an accounting basis, to the other 10 administrations of MOR and separation of the accounting of infrastructure from the accounting of freight. 4. Regrouping of the PTEs in accord with criteria (yet to be agreed) to create between three and five viable enterprises. 5. Regrouping of Freight Transport Enterprises (FTEs) in accordance with the lessons learned from separating the accounting of infrastructure and the establishment of the passenger enterprises. It is not clear how many FTEs will be created-probably three to six. 6. Full separation of infrastructure from operations (known in China as up/down separation). This is likely to be accompanied by a regrouping of infrastructure entities into a limited number of asset-management companies. In addition, at some stage, government must clearly divorce itselffrom operations. Details on the reform process in the railways in China are included in Annexes 11 and 12. Longer-term Implications of Diversified Ownership of Railway Services The longer-term implications of diversified ownership of railway services are numerous. Some of the more likely implications are described below. Spin-off of non-rail activities. MOR has spun off a number of manufacturing activities (manufacturing of locomotives, wagons, coaches, signals and other components) that had previously operated under the aegis of MOR. Although these mostly have been established as SOEs, they all will be privatized eventually because none of them has a critical policy function. Contracting-out of services. Many rail activities can be contracted more economically than they can be done in-house. Potential services to be contracted out include major activities such as track, locomotive, wagon and coach maintenance, as well as smaller activities such as station and office cleaning. Concessioning or Franchising. Concessioning and franchising will emerge as altematives for a number of the operating functions on the separated infrastructure. For example, the potential system-wide freight (or passenger) companies could be operated as concessions. If the FTEs are initially set up to operate over regional infrastructure agencies, they could take the form of franchises with limited tenitories (as in the U.K.), and the stock in the companies holding the franchises could eventually be sold in part or in whole. Private Ownership and or Management. At least some private operators will be allowed under licenses as an altemative to franchising. In addition, railway companies worldwide express growing interest in leasing assets from the private sector, with and without value-added services such as maintenance. The rail - 4 - system in China is an enormous potential market. Two particularly promising and immediate opportunities will arise with the creation of the system-wide container company and a company that will own freight wagons and lease them for rail use. Both of these companies reflect MOR's growing sophistication and determination to look outside the public sector for capital. They also illustrate the difficulty in creating such institutions within the existing framework of MOR. China already has a railway company that is partly privately held. The Guangshen Railway Company operates both freight and high-speed passenger services between Guangzhou and Shenzhen. There are also many smaller railways that are joint ventures between MOR and various provincial or local government agencies. Several of these railways have attempted to sell shares to private investors, and it is likely that either MOR or the local agencies will be even more interested in doing so in the future. 3. Sector issues to be addressed by the project and strategic choices: Since 1992, the World Bank and China have maintained a dialogue on railway reform. A number of major seminars were organized between 1992 and 1997 to discuss these issues. At first, it is fair to say, the initiative for these exchanges often came from the Bank. However, as China's reforms have deepened, the dynamics of the relationship have changed, and MOR now asks to tap the Bank's expertise in this area. In 2000, the Bank's railway advisor visited China for a two-day exchange of views with the Minister and senior members of his management team on specific aspects of railway reform. A similar meeting was held in May 2001, and others are planned. An important objective of the proposed project is to maintain and reinforce this dialogue. The proposed National Railways project addresses a number of these issues: * Improving the rail connection between eastem and central China and the northwest provinces * Strengthening the organization of the PTE in the Kwunming Railway Administration * Assisting in the design of PTEs in all administrations * Assisting in the design of a company to own and lease freight wagons * Developing an integrated planning and informnation tool that will bring together the network planning and costing tools developed under previous projects. The establishment of the PTEs will demonstrate the feasibility of separating the accounts of various railway and non-railway functions. This separation of accounting by function, in turn, will permit more informed decision-making about pricing so as to reflect the true costs of railway passenger services. Accurate pricing should then contribute to the viability of the entity. The creation of a wagon company and a container company, along with the FTEs, is the next step once the PTEs operate effectively. The Bank-supported integrated infornation and planning tools will be required if the restructured railway system is to continue to operate efficiently and effectively in the market economy. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): This project will improve access to transport, strengthen econornic growth and reduce poverty in the northwest of China while supporting efforts to reform China Railways. There are two parts to the project: -5 - * Expansion of railway capacity. This project will finance the expansion of a key east-west railway corridor between Baoji and Lanzhou (Bao-Lan line) by double-tracking and upgrading the existing line. * Assistance with the reform of China Railways. MOR will use technical assistance provided under the project to carry out the following: -- A study to develop a cost model for the PTE in Kunning -- A study to establish pilot railway PTEs in larger administrations with sub-bureaus -- A study to establish a wagon-ownership enterprise -- The development of an integrated planning and costing tool to facilitate the establishment of line-of-business operations. Indicative Bank- % of Component Sector costs : of financing Bank- :____________________________ _______________ (US$M) Total (US$M) financing Component 1. Double-tracking and Railways 1218.71 93.6 156.29 97.7 upgrading of the Bao-Lan line Component 2. Technical Assistance to Railways 2.11 0.2 2.11 1.3 support China Railways Reform Total Project Costs 1220.82 93.7 158.40 99.0 Interest during construction 79.82 6.1 0.00 0.0 Front-end fee 1.60 0.1 1.60 1.0 Total Financing Required 1302.24 100.0 160.00 100.0 2. Key policy and institutional reforms supported by the project: Since 1992, the Bank has supported China's efforts to design and implement a reform program for China Railways. A primary objective of this project is to promote the continuation of this dialogue. To ensure the pursuit of the reform dialogue, MOR and the Bank have agreed to hold an annual forum throughout the life of the project to discuss reform issues. Project funds will also be used to conduct reform studies. Two studies will support the creation of PTEs-the first to help develop a cost model for the PTE in Kunnming, and the second to support the creation of pilot railway PTEs in larger administrations with sub-bureaus. The creation of PTEs is a necessary step for MOR to reach its ultimate goal of separating infrastructure and operations. These studies will address fundamental issues on how to reach this final goal, including the following: * The level and structure of infrastructure access charges * The role of intra-rail competition in freight and passenger services, the methods to achieve the desired competition, and the corresponding need for regulation * The degree to which future Chinese rail services will be commercialized (and thus supported by users rather than the Government) * The eventual role of the private sector in providing services. Policy choices will have to be refined and so that a plan can be developed which will allow MOR to proceed from broad principles to the definition of a detailed implementation plan. - 6 - The third study will help establish a wagon-ownership enterprise in China. Establishing this enterprise is an interim step in the process of reorganizing China Railways freight services. A subsequent step is likely to involve the creation of FTEs. The fourth study will study the feasibility of developing an integrated planning and costing tool to facilitate the establishment of line-of-business operations. MOR acknowledges the importance of developing an enhanced model for planning and managing a market-based railway system. All the individual components of this model-TMIS, Railway Information System (RIS) network analysis modes, and a route-costing model-were all developed under earlier railway projects. 3. Benefits and target population: Benefits from physical investments. With respect to freight traffic, the immediate benefits of the physical investments will consist of the induced value-added attributable to the enhanced output and distribution of agricultural, mineral, and manufactured goods traversing the railways. The benefits with respect to passenger traffic will consist of higher income levels resulting from both the incremental personal travel and the reduction in travel time made possible by the project. The target populations include the industries and populations of the affected areas in the northwestern region of China. Benefits from institutional reform component. The establishment of the PTE will demonstrate the feasibility of developing separate accounts for railway and non-railway functions. This separation will permit more informed decisions on pricing to the true costs of railway passenger service. The target population consists of MOR managers involved in the reform and restructuring of the railways. Moreover, to the extent that the creation of PTEs focuses regional managers' attention on the needs of passengers, personal travelers in the region will also benefit. 4. Institutional and implementation arrangements: Implementation period. Upgrading of the Bao-Lan line began in March 2001 and is expected to continue until March 2004. Some limited site-clearance activities have taken place, and certain civil engineering works on the line between Lanzhou and Tianshui were carried out in 2000. The policy reform studies will be implemented between September 2001 and June 2005. These time estimates are based on the draft implementation, procurement, and disbursement schedules for each component received by the Bank on June 19, 2001. Executing Agency. The Foreign Capital and Technical Import Center (FCTIC) in MOR has overall responsibility for project preparation, implementation coordination, and oversight. To fulfill this role, the FCTIC must work closely with the railway survey and design institutes, the railway construction bureaus, the tendering companies and several departments in MOR headquarters in Beijing and with the railway administrations. Finance. The Ministry of Finance (MOF) will on-lend World Bank funds to MOR on the same conditions as the Bank loan to the MOF. The loan type will be a LIBOR-based floating rate single currency (US$) loan (VSCL), with 20-year maturity, including a 5-year grace period. The 1 percent front-end fee will be financed from the loan. Financial management. Management of project finances will be the responsibility of the Finance Division of FCTIC and the finance divisions of the Zhengzhou and Lanzhou Railway Administration Bureaus. Specifically, FCTIC will be responsible for maintaining, monitoring and reconciling the special account to be set up for the project, preparing withdrawal applications and payment requests. While the Finance - 7 - Department of MOR will oversee the counterpart fund arrangements for the project, the financial divisions of the two railway administrations will be responsible for collecting supporting documents, monitoring contract payments, maintaining accounts of project activities, and preparing project financial statements. Disbursements. The project funds will be disbursed using traditional (not PMR-based) techniques, in accordance with an agreement between the Bank and the MOF. Audit Arrangements. As with other Bank-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO) (established in 1983 as the State Audit Administration) will have overall responsibility for auditing the accounts of the project. The CNAO resident offices in Zhengzhou and Lanzhou will conduct the actual audits. The Bank currently accepts audits performed under the supervision and responsibility of CNAO. Audits of the financial statements of the project and MOR, and the audit of the special account and statements of expenditures will be submitted to the Bank within six months of the end of each financial year. Resettlement and environmental supervision and monitoring. As described in more detail in Section E5, the Zhengzhou and Lanzhou Railway Administration Bureaus will be responsible for the implementation of the environmental plans and policies. Oversight will be provided by the Shaanxi and Gansu Environmental Protection Bureaus (EPBs) and the State Environmental Protection Administration (SEPA). MOR has appointed a resettlement coordinator, and the local land administration bureaus in Shaanxi and Gansu Provinces will be responsible for implementing the agreed resettlement plans. Systematic monitoring of the implementation of the Resettlement Action Plan (RAP) will be undertaken by a qualified institute independent of the project owner and provincial implementing agencies. Progress reporting and planning. FCTIC will be responsible for preparing quarterly and annual progress reports, including annual implementation plans. The quarterly reports will focus on physical and financial progress, outline implementation problems for all components, and suggest corrective actions. The annual progress report will be used to review the progress achieved in the preceding year, update the Project Implementation Plan (PIP), and draw up the implementation plan for the following year. World Bank supervision arrangements. The project has been prepared by a team based in both Beijing and Washington and led from Beijing, and a similar team will supervise the project. The team will include specialists to supervise the financial management systems, procurement activities, disbursement, and the implementation of resettlement and environmental plans. The supervision plan includes a project launch workshop and two formal supervision missions every year, including an annual review mission. A mid-term review of the project is scheduled for the second half of 2004. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Why the Northwestern Region? The Bao-Lan line connects the northwest provinces of Xinjiang Autonomous Region, Qinghai and Gansu with east and central China. These provinces are included in the GOC's recently announced westem development strategy. As part of this strategy, considerable resources will be dedicated to building and upgrading transport infrastructure in the westem regions and to connect these regions to the east and central regions. The provinces are rich in energy and mineral resources, including coal, petroleum, iron ore, salt, limestone, copper, bauxite, and zinc and additional investments - 8 - will provide for the processing of these minerals within the western region. However, the primary markets for these commodities are the distant factories and processing plants of central and eastem China, a hauling distance of 2,200-2,800 km. Given the bulk nature of these products and the considerable shipping distances involved, the railways represent the most practical mode of transport. Haulage by truck is not a cost-effective option and cannot be regarded as a substitute for rail transport of the types of freight concerned. No navigable inland waterways are available, and the pipeline that will link Lanzhou and Chengdu is not scheduled to enter service until 2015, and that will be restricted to one commodity group-refined liquid petroleum products. The most common passenger itineraries-Urumqi-Chengdu and Lanzhou-Guangzhou-are also quite lengthy, and so a substantial part of the passenger market will also be served by the railway. Why the Bao-Lan Line? MOR considered one other option to handle the traffic to and from the Northwest. This option would have involved double-tracking the existing line from Baoji north to Zhongwei (from this point, another route connects Zhongwei with Wuwei and points west-see the map at the end of this document). MOR has studied and compared the two options in depth, beginning with a study in 1990. Capacity and operational considerations made the double-tracking of the Bao-Lan the better near-term choice. The route via Zhongwei is operating at just under 90 percent of capacity, whereas the line via Lanzhou is already at capacity. Moreover, depending on the precise origin and destinations involved, the travel distances through Zhongwei are as much as 49 percent greater. Why the chosen alignment? Because the project proposes the double-tracking of an existing line, the choice of the alignmnent was limited. However, when choosing the precise alignment, MOR took into account the difficult topography of the existing line (the Weihe River Plain, Qinling Mountains, Qi-Lu-He Mountains, and the Longzhong Loess plateau), three major faults in the rock, (varying in length from 10 km to 100 kn) and unfavorable geological conditions in nine zones along the existing line (e.g., areas prone to landslides, faulted rock formations, rock flows, fast-moving streams). MOR concluded that building tunnels and high slopes in the fault zones should be avoided and that bridges should not be built over streams in unfavorable geological zones. Also, MOR decided that the new line should be built to accommodate higher train speeds. As a result, the aligmnent of the second line does not follow exactly the old alignment for a significant portion of its length. This alignrment includes a significantly larger number of bridges and tunnels. The second line will have 230 bridges (with a linear length of 54.6 km, or 10 percent of the new second line) as compared to 98 such bridges (with a linear length of 15.5 km) on the existing line. It has 74 new or enlarged tunnels with a linear length of 72.7 kmn (13.6 percent of the new second line). 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Component 1. Address railway capacity -Railways I-included S S bottlenecks through construction, components 1, 2 (completed) double-tracking, electrification, and the -Railways II-included introduction of modern technology components 1, 2 (completed) -Railways Im-included Component 2. Technical assistance components 1, 2 (completed) /training, transfer of new technology -Inner Mongolia Railway -9- concepts to improve efficiency of Project-included components railway operations and railways' 1, 2 (completed) financial condition -Railways IV-included Component 3. Institutional components 1, 2 (completed) strengthening and training in railway -Railways V-included reform issues and introduction of tools components 1, 2 (completed) needed for making decisions in a socialist market economy -Railways VI-included S S components 1, 2 ,3 (ongoing) -Railways VII-included S S components 1, 2, 3 (ongoing) Other development agencies Asian Development Bank (ADB) -Hefei-Jiujiang Railway (completed) -Jing-Jiu Railway Technical Enhancement (completed) -Daxian-Wanxian Railway (ongoing) -Shenmu-Yanan Railway (ongoing) -Guizhou-Shubai Railway (ongoing) -Xian-Hefei Railway (ongoing) -Ganzhou-Longyan Railway (planned) Japan Bank for International -Nanning-Kunming Railway Cooperation (JBIC) (completed) --Hengyang-Shangqiu Railways (completed) --Xi'an-Ankang Railway Construction Project (III) (ongoing) --Guiyang-Loudi Railway Construction Project (II) (ongoing) --Chongqing-Huaihua Construction Project (planned) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) - 1 0 - 3. Lessons learned and reflected in the project design: The client and the Bank have drawn valuable lessons from preparing and implementing past railway projects, which have been taken into account in the preparation of this railway project. First, a project should not include components to which the client is not fully committed. This can lead to the restructuring of the project, as was the case with Railways VII. Second, including too many components in a project (as was the case in Railways VI and VII) affects implementation negatively because both the client and the Bank have limited resources for supervision and implementation. Third, when designing and implementing project components, the project office, railway staff in MOR in Beijing, and railway staff in the administrations need to work with each other very closely to implement the project efficiently. Fourth, the policy dialogue on reform and restructuring of the railways cannot include only staff in the project office. Senior MOR staff with decision-making responsibilities need to participate in these discussions. (Substantive discussions on reform have been held during project preparation with the minister, vice ministers and other senior management staff). Fifth, client commnitment to Bank guidelines and procedures is essential for project preparation and implementation. Problems have arisen with regard to resettlement and environmental issues in Railways VI and VII because the client originally was not committed to following Bank guidelines and procedures. However, MOR has recently shown its commitment by appointing a resettlement coordinator in MOR headquarters in Beijing. Sixth, the project office needs to provide the Bank with fuller and more complete quarterly and annual reports. 4. Indications of borrower commitment and ownership: All the responsible agencies within GOC, including the State Development Planning Commission (SDPC), MOF and MOR lend very strong support to this project. What is more, the individual components in this project enjoy the committed ownership of all levels in MOR. All the necessary project documents are available, and preparations for the procurement of goods to be financed by the project are well advanced. As noted previously, implementation of the non-Bank-financed civil works for the project has already started. 5. Value added of Bank support in this project: The continuation of the Bank's dialogue with MOR on reform will undoubtedly be the major benefit of the project. We have extensive knowledge of the railway-reform activities in other countries that we can leverage for China's benefit. MOR knows that any mistakes could be very costly given the strategic importance of the railway. We can also assist MOR in developing analytical tools and information systems so that China's reform process can be planned and managed as effectively as possible. This also an investment project. In this regard, the Bank will provide financing to help remove an important bottleneck in the national railway system and increase traffic capacity between the eastem and westem regions of China. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=USS2373 mnillion; ERR = 22.9 % (see Annex 4) O Cost effectiveness O Other (specify) The quantifiable benefits of the project consist of the value added by the induced freight and passenger traffic that will be made possible by the enhanced capacity of the Bao-Lan line. Along with the direct costs of the project itself, complementary costs include: * The investment outlays for the additional railway equipment required to handle the incremental traffic flows made possible by the project * The project costs of electrifying and double-tracking the railway line between Lanzhou and Wuwei (to avoid a bottleneck immediately to the northwest of the project route) * The capital outlays associated with providing new production capacity for the incremental freight traffic that will be transported over the route because of the project * The capital cost of generating the electric power necessitated by the addition of a second track * The further operating expenses required for catenary maintenance. The economic net present value (ENPV), based on a 12-percent discount rate, is estimated at Yuan 19.7 billion. Evaluation results and a description of the methodology used to derive them are provided in Annex 4. 2. Financial (see Annex 4 and Annex 5): NPV=US$ 62 million; FRR = 6 % (see Annex 4) Fiscal Impact: The financial analysis focused on two aspects, the viability of the Baoji to Lanzhou line and the financial sustainability MOR. Baoji to Lanzhou Line. Although the FIRR of 6.0 percent is only slightly higher than the average cost of capital of 5.6 percent, the investment project is justifiable for three reasons: * The Bao-Lan line is an important shipment route for bulk products in and out of northwest China. * The projected financial NPV, after all maintenance, operating and loan repayment obligations have been met, is positive-US$62 million (equivalent) at the discount rate of 5.6 percent. * Because of existing controls over tariff adjustments and the anticipated magnitude of benefits to the local economy, the economic benefits of the proposed project should be emphasized. Annex 5a provides details of the financial analysis of the Bao-Lan line. MOR. The MOR represents the Government of China as owner of the assets constructed under the project and is responsible for repaying the Bank loan. The financial analysis focused on the sustainability of MOR's transport operations. After experiencing losses from 1993 to 1997, MOR transport operations returned to profitability in 1998. Railway operations are expected to continue to be profitable in the years to come. The financial analysis found that MOR will be in a position to maintain its operations as well as - 12- supply the funds needed for planned capital investments. Annex 5b provides details on the financial analysis of the MOR's transport operations. 3. Technical: Bao-Lan Line The existing railway is a single electrified line that passes through mountainous terrain. The project will finance the construction of a second electrified 25-kV line between Baoji and Lanzhou as well as improving 134 km of the existing 491 -km line. The line has sharp curves and climbs from about 600 m above mean sea level at Baoji to 2,050 m at the highest point, and then descends to 1, 530 m at Lanzhou. The alignment of the second line reduces the distance between Baoji and Lanzhou to 467 kmn. The design of the line includes automatic block signaling, which will allow for a headway of 8 minutes on both the tracks. The design capacity of the line is 165 pairs of train per day. The additional capacity will be sufficient to handle the projected growth of passenger and freight traffic to 2015 and beyond. The new alignment significantly improves the minimum radius of curves from 300 m to 800 m (with some exceptions) permitting speeds of up to 120 km/hr. The maximum speed of passenger trains will increase from 90 km/hr to 140 km/hr. As a result, the transit time for passenger trains from Baoji to Lanzhou, currently about 9 hours, will be reduced to 6 hours, 40 minutes. The transit time for freight trains, currently 17 hours, will be reduced to 10 hours. The maximum freight tonnage will increase from 3,350 t (in the up direction) and 2,500 t (in the down direction) to 4, 000 t in both directions. The design of track and bridges on the second line will permit the operation of freight wagons with an axle load of as much as 25 tons. The First Railway Survey and Design Institute (FRSDI) in Lanzhou prepared the feasibility study and the engineering designs (preliminary and final) for the Bao-Lan line. The Appraisal Center in MOR (jointly with the Department of Planning, Department of Construction, and other departments) reviewed the final engineering designs before submitting them to the chief engineer of MOR for his approval. The chief engineer reviewed not only the design of the line but also the availability of counterpart funds. Following his approval, the final feasibility studies based on the final design were submitted to the SDPC and it was approved on December 30, 1999. The technical design was considered satisfactory and viable. No significant technological difficulties are anticipated although it is a challenging engineering project. 4. Institutional: The client for the project is the Ministry of Railways (MOR). 4.1 Executing agencies: The Foreign Capital and Technical Import Center of MOR will have overall responsibility for project implementation. FCTIC has implemented seven Bank-financed railway projects, three ADB-financed projects, and four JBIC-financed projects. Experience confirms that FCTIC has the capacity to ensure the physical implementation of this project. 4.2 Project management: Under the coordination of FCTIC, the First Railway Survey and Design Institute, the Planning Department, the Regulation and Law Department, the Finance Department, the Construction Department, the Transport Bureau, and the Lanzhou, Zhengzhou and Kunming Railway Administration Bureaus will be responsible for specific project tasks. - 13- 4.3 Procurement issues: An assessment of the capacity of both the FCTIC and the tendering companies confirms that all have extensive experience working with the Bank and are conversant with Bank procedures and guidelines. In recent years, MOR has managed Bank financed procurement operations satisfactorily. All procurement activities financed under the project will be undertaken in accordance with Bank guidelines. The draft bidding documents for the procurement packages are based on the final engineering design. FRSDI will prepare the technical part of the bidding documents, and selected procurement agencies will prepare the commercial part of the bidding documents. FCTIC will review the completed documents and ensure that the commercial and technical aspects are well integrated. A total of US$156.29 million of goods will be financed by the Bank. Sixty-four contracts for US$153.51 million will be procured under ICB procedures, and about 32 contracts for $2.78 million will be procured using NCB and shopping procedures. The Bank prior-review threshold of $200,000 will cover all ICB procurement, which represents 98 percent of the total goods procurement. All NCB and shopping procurement will fall below the prior-review threshold and will be subject to the Bank's post review. Bank-financed consulting services total $2.00 million, plus contingencies of $110,000. With the exception of some small individual consultant contracts totalling $200,000 all contracts will be financed using QCBS procedures. Company contracts above $100, 000 will be subject to prior Bank review. All the individual consultant contracts are expected to be below $50,000, and will not be subject to prior review unless they unexpectedly exceed this amount 4.4 Financial management issues: The task team conducted an assessment of the adequacy of the project financial management system and the ability of the project office to manage project finances (see Annex 16). The assessment concluded that this project meets the Bank's financial management requirements. The project will produce project financial management reports in line with the format and content agreed to between the Bank and China. No audits or audit issues are outstanding with any of the executing agencies involved in the project. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summnarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The initial Environmental Impact Assessment (EIA) for the project was undertaken by the China Academy of Railway Sciences (CARS), with assistance from the Ministry of Railway's No. 1 Survey and Design Institute for the Bao-Lan line. In December 1999, MOR retained AGRA Earth and Environmental Limited (later renamed AMEC Earth and Environmental Limited), an independent consulting firm, to review and finalize the EA reports. The double-tracking and upgrading of the Bao-Lan line through mountainous terrain will be challenging environmentally, with pockets of unstable terrain, and the possibility of landslides, erosion and safety concerns. Adverse impacts during the construction phase of the project include: * Noise from construction equipment, transport vehicles, and construction operations * Public health concerns from the disposal of solid wastes * Land acquisition, resettlement and rehabilitation. * Handling, transport and disposal of construction materials. - 14- During the operational phase, noise from trains (running wheels, whistles and shunting of locomotives) may have moderate to high residual impacts, as will an increased power demand from the potential development of the region. The selected route for the Bao-Lan line avoids settlements, populated areas and geologically unstable terrain as much as possible. To minimize and mitigate noise-related impacts during construction and operation, the EMP includes a number of measures such as: * Limiting construction to between 8:30 a.m. and 6:00 p.m. * Building temporary and permanent noise barriers at sensitive locations * Relocating families, schools, and hospitals * Installing double-glazed windows * Planting trees * Limiting the use of train whistles and speed in built-up and sensitive areas. To minimize the potential for landslides, the Bao-Lan line will avoid areas of poor geology and incorporate bridges and tunnels to avoid making slope cuts. The project design also calls for appropriate drainage and retaining walls and other slope-stabilization techniques. Where possible, sewage will be discharged into existing municipal treatment systems; at other stations, sewage treatment plants will be installed. Selected boilers will be fitted with filters to remove particulates. In addition, the EMP provides for training and extensive monitoring during both construction and operation. The EA identified 29 cultural relic sites in the westem section (Gansu) and 19 in the eastem section (Shaanxi). In the eastem section, 14 of the 29 sites were deemed insignificant by the local archeological authority (The Institute of Cultural Relics and Archeology of the Gansu Province), and thus did not require any particular attention, and the other 15 were excavated by the authorities before approval was given for construction. For the eastern section, of the 19 sites identified by the EA, 16 sites were avoided by shifting the alignment. The remaining three sites are being excavated by the Institute of Archeology of Shaanxi Province before approval for construction is given. 5.2 What are the main features of the EMP and are they adequate? The EMP for the Bao-Lan line seeks to eliminate or reduce the potential negative environmental impacts of the proposed lines; enhancing the potential positive effects of the project; and through institutional strengthening, training, and monitoring, ensure that the environmental mitigation measures proposed are properly implemented. The major specific objectives of the EMP are to: * Reduce noise during the construction and operation of the lines, especially near noise-sensitive locations such as schools and hospitals * Increase treatment of industrial and sewage wastes from construction camps, depots, and railway stations * Reduce fugitive dust emissions during construction and boiler emissions during operation * Minimize soil erosion and preserve top soil * Prevent stream sedimentation through implementation of proper in-stream construction techniques and river and stream bank protection during operation. - 15 - While proper implementation of the EMP will reduce the magnitude of the impacts, it is impossible to completely eliminate all noise from the trains, and a moderate level of disturbance is expected to remain despite the mitigation measures. However, these residual impacts are expected to meet GOC and local regulations. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: March 2001 For the Bao-Lan line, the Bank reviewed and provided comments on the preliminary EA in January 2000. The revised draft EA and EMP reports for the Bao-Lan line were resubmitted to the Bank in March 2000. The Bank reviewed and provided written comments to MOR on the reports in April 2000, and additional written commnents on revised reports in October, 2000. The final draft reports were submitted to the Bank in March 2001 and were placed in the Bank's Infocenter in April 2001. 5.4 How have stakeholders been consulted at the stage of (a) enviromnental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? During the early stages of preparation of the project, the local media (radio, TV, and newspapers) provided general infornation about the project including investment, line location, railway station settings, land acquisition and compensation criteria and bridge and tunnel arrangements. During the environmental assessment phase, the assessment units met with many GOC and local departments and agencies, including those for agriculture, statistics, planning, forestry, environment protection, transport, and land. The initial public participation survey included 146 questionnaires; 66 people were surveyed at the outline stage of the environmental assessment and 80 people after the EIA was completed. An additional 36 people were contacted to increase women's participation in the survey. In two more public opinion surveys, an additional 26 and 155 individuals were consulted on the draft ETA. The majority of the people surveyed (95.5 percent) supported the project, and 96 percent thought that environmental issues were important. Ninety-four percent of the sample group considered railway noise a major source of pollution. That pollution category was followed by land acquisition, electromagnetic emission, safety at crossings, water and soil conservation, and solid waste as environmental concems. In addition to these surveys' being conducted, 10 public meetings were held in rural communities along the project route. These meetings took place when the last draft of the EA report was nearing completion. A total of 1,054 primarily rural residents participated in the public consultation meetings. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Environmental monitoring of the Bao-Lan line will be the responsibility of the Zhengzhou and Lanzhou Railway Bureaus ,which will supervise the construction. Oversight will be provided by the Shaanxi and Gansu environmental protection bureau (EPBs) and the SEPA. At all sites, a part-time environmental protection agent will be provided by the responsible railway bureaus. This individual will have responsibility for the implementation of the mitigation measures in the EMP and approval of all environmental works. During the construction period, monitoring will target proper topsoil handling, implementation of measures to avoid soil erosion, proper handling and disposal of sewage, minimization and control of dust and noise, enhancement of construction safety. During construction and operation, monitoring will focus on regular monitoring of sewage (pH, O&G, COD, SS, BOD), noise (ambient dB(A)), air pollutants (NOx, S02, flue gas), and vibration. - 16- Before construction began, training was provided for all staff responsible for environmental protection. This training covered environmental regulations, environmental issues related to construction, monitoring, and implementation of the environmental management plan included in the EA. The preliminary construction works have been monitored during the construction season of 2000 and 2001 and monitoring reports of a satisfactory quality were provided to the Bank. A Bank team also supervised the ongoing works in October 2000 and during the summer of 2001. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Minimizing and mitigating impacts associated with land acquisition and resettlement are the primary social development issues relevant to the project. A Resettlement Action Plan has been prepared by the borrower, and steps have been taken to avoid the resettlement problems associated with previous railway projects in China. According to the project RAP, the project will acquire 6,390 mu (426 hectares) of collective land and retrieve an additional 4,852 mu (about 323 hectares) of railway land from collectives that had been allowed temporary use. Demolition of 297,005 square meters of housing will necessitate the relocation of 2,548 households. (Additional details on the scale of the impacts are provided in Annex 14.) Because construction has already begun, land acquisition and resettlement are ongoing. Extemal monitoring reports were submitted to the Bank in April and July 2001 indicating that the extent of land acquisition required by the project has declined as final designs emerge. The monitoring report also found that compensation rates for all categories of land and affected structures are at least as high as those proposed in the RAP. In early design phases, the doubling of the Bao-Lan Line was expected to result in the closing of 35 small stations that are required at present for switching and siding functions. Because many of these stations are located in relatively small and remote communities, a social assessment process was initiated to study the potential social impact of the station closings. As a result of the physical redesign of the southem end of the line, the number of potential closings declined to 21. Subsequently, and partially in response to draft social assessment findings, MOR decided to "demote" 19 of the 21 stations, meaning that the stations would be closed and staff reassigned, but passenger service on local routes would be at least partially maintained. The remaining two stations would be closed and passenger service discontinued. But improvements to highways in both cases have led to increased public reliance on bus transportation. Passenger counts at both stations have declined in recent years, to a present combined average of 34 passengers a day. Discontinuing service is not expected to create any significant hardship or inconvenience. Project screening and socioeconomic survey results indicate that no minority-nationality communities occupy or use areas in proximity to the project, so an Indigenous Peoples Development Plan was not necessary. 6.2 Participatory Approach: How are key stakeholders participating in the project? Consultations with potentially affected persons have taken place as part of normal project design procedures, as have the environmental assessment, resettlement planning, social assessment, and monitoring of early stages of land acquisition. The RAP has been disclosed to the public in both Gansu and Shaanxi provinces. Additional measures have been taken to provide affected communities with information, through broadcast campaigns and posting of bulletins in public places. - 17- 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? No NGOs or relevant civil society organizations are known to operate in the project vicinity. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? A key constraint in prior railway projects has been weak coordination between MOR and local (e.g., provincial, county, township) land administration officials who are actually responsible for acquiring land and implementing resettlement measures. Measures subsequently taken to improve coordination include: the appointment of a resettlement coordinator within MOR; training and RAP orientation for local land administration bureaus in Shaanxi and Gansu Province; and preparation of formal agreements between MOR, and the two provinces of Shaanxi and Gansu to ensure that implementation is consistent with the RAP terms and standards. The monitoring reports already received by the Bank are judged to be satisfactory. 6.5 How will the project monitor performance in terms of social development outcomes? Systematic monitoring of RAP implementation will be undertaken by a qualified institute independent of the project owner and provincial implementing agencies. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? P_licy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestry (OP 4.36, GP 4.36) 0 Yes 0 No Pest Management (OP 4.09) 0 Yes 0 No Cultural Property (OPN 11.03) 0 Yes 0 No Indigenous Peoples (OD 4.20) 0 Yes * No Involuntary Resettlement (OP/BP 4.12) * Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes 0 No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. The monitoring arrangements described above are considered satisfactory. F. Sustainability and Risks 1. Sustainability: The physical sustainability of this investment is not in doubt. Experience from completed and ongoing Bank-financed railway projects in China confirms MOR's commitment to the physical implementation of its projects. MOR has the ability to build and operate the asset and has provided timely and sufficient maintenance funding for existing infrastructure. - 18- Traffic volumes on the railways in China are expected to continue to grow. EIRR calculations of completed railway projects in China at the time of loan closing-when the railway financed by the loan has been in operation for a few years-frequently show higher values than at project appraisal. The impact of Bank-funded support for railway reform in China is likely to be greater today than it has ever been. The momentum behind the reform effort and the thirst for knowledge are very great. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth colunm of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective 1. Delays to the construction of the N Construction has already started Bao-Lan line 2. Lower than expected through traffic to M Government gives priority to the development of and from western China Westem China 3. MOR does not continue to receive M Pressure for reform is coming from "above". political support for reform 4. MOR does not continue to give priority M State Council will not allow them not to reform to reform and the level of ownership of the specific proposals included in the project is high. From Components to Outputs MOR does not give sufficient priority to N Planning and initial construction works are well the construction of this line advanced Procurement is slow N Political pressure to complete construction is high MOR cannot provide the necessary N Unlikely given the political importance of this counterpart funds investment. MOR has repaid the Bank loans on time to the MOF (China) (see additional note below). Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) Note. Generally, counterpart funds for all previous railway projects have been available on a timely basis, with the notable exception of the funds required to finance the electrification of the Wuhan-Guangzhou line in the original Railways VII. This problem was created because GOC accorded higher priority to the completion of a second competing line after the project agreement had been signed. However, since the restructuring of Railways VII (January 1999), counterpart funds have been available on a timely basis. Given that construction of the Bao-Lan line has already started, this problem should not reoccur with the proposed project. 3. Possible Controversial Aspects: This project is not complicated by the standards of previous Bank projects in China. However, it does include substantial resettlement and environmental protection activities. These have been planned appropriately and in accordance with Bank policies. Also, they are already being monitored and supervised closely because construction work began in eamest in early 2001 with some construction initiated in 2000. - 19- G. Main Loan Conditions 1. Effectiveness Condition The standard conditions of effectiveness apply. No special conditions are required for effectiveness. 2. Other [classify according to covenant types used in the Legal Agreements.] Covenants on Implementation A seminar will be held annually to permrit an exchange of views between the Bank and MOR about railway reform. Dated covenants Completion of the following studies by the corresponding dates is required: * Research on the Cost Model of the Passenger Transportation Company of Kunming Railway Bureau-March 31, 2003 * Study on Establishing Railway Passenger Transportation Enterprises in Railway Bureau with Sub-bureau-March 31, 2003 * Study on Establishing a Wagon Ownership Enterprise in China-September 2003 * Integration of Management Planning Tools-September 2003. Monitoring and Reporting Beginning January 31 2002, MOR shall prepare quarterly reports (using the format agreed at negotiations) and furnish them to the Bank not later than April 30, July 31, October 3 1, February 28 each year. Quarterly reports will: * Establish the physical progress of the implementation of the construction works and other implementation activities for the Bao-Lan line, procurement, and all technical assistance activities * List expenditures by component and sub-component and provide information about the availability of counterpart funds o Summarize environmental and resettlement monitoring and evaluation activities (including monitoring by the independent entities) * Review all other current issues that will have an impact on the successful completion of the project. After fumishing each such report, MOR shall review it with the Bank and take all measures required to ensure the efficient completion of the project, based on the recomrnmendations of the report and the Bank's views. - 20 - Annual Review MOR shall prepare annual reports not later than January 31 each year, beginning in 2002. This report will: * Evaluate physical and financial progress with a comparison against the plans agreed during the preceding year; * Set out the construction and implementation programs for the next year; * Set out the technical assistance program for the next year; * Provide an analysis of the performance indicators. Nid Term Review MOR shall provide the Bank with a mid-term review report prior to July 31 2004. This report will provide a synthesis of all the material provided in the previous annual reports as well as defining a detailed program for completing the project. It will also provide an evaluation of how well the original project objectives are likely to be met and propose measures for correctly any likely shortfalls. H. Readiness for Implementation Z 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. O 1. b) Not applicable. Z2 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 0 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. El 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Richard Oil" ~ie Jitendra N. Bajpai Huang Team Leader Sector Manager/Director Country Manager/Director - 21 - Annex 1: Project Design Summary CHINA: National Railway Project Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Relieve infrastructure Measures of national and Infrastructure development in bottlenecks provincial domestic product China continues to be a high priority. Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: 1. Bao-Lan Line For the Bao-Lan line: Provide enhanced through -Annual freight and passenger Traffic reports provided in Maintenance of political movements of both passenger traffic volumes (trips, conjunction with supervision commitments to the effective and freight on a railway passenger-km, tons, ton-km). and efficient use of between the eastern and -Average freight train speed infrastructure western regions of the country -Average passenger train speed and number of pairs 2. Railway Reform To assist the railway with the -Railway reform plan is Progress reports from MOR MOR maintains its design and implementation of approved by State Council. on the design and commitment to reform its reform plans -Pilot PTEs are established implementation of their and allowed to operate with reform program. commercial independence. -Plans to implement a wagon-ownership company are prepared and a timetable for implementation announced. -Plans are prepared and implemented for the development of the integrated planning and costing tool. - 22 - Key Perfornance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Bao-Lan Line (i) Construction proceeds Double-tracking and Length of completed Supervision reports; quarterly according to plan; operation of the electrified construction (built and and annual progress reports (ii) Through traffic to and railway line between Baoji operational); development from western China grows as and Lanzhou expected. 2. Railway reform Studies and workshops to be Completion of the four studies Supervision reports, quarterly (i)MOR continues to receive financed by the project included in the project progress reports from MOR the appropriate political and consultants. support for this objective. (ii) MOR continues to give priority to railway reform. Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Bao-Lan Line US$1,298.3 million FCTIC information for all (i) MOR give adequate Construction and components: priority to the construction of implementation of the * maintains project this line. improvements management (ii) MOR manages the information system procurement activities * produces monthly correctly. reports on procurement (iii) MOR provides the * provides Bank with necessary counterpart funds. quarterly progress reports that compare planned and actual progress 2. Railway Reform. Studies and workshops to be $2.25 million Quarterly reports from MOR MOR has the enthusiasm to financed through the project. and consultants. proceed with the studies and implement the recommendations. - 23 - MONITORING INDICATOR OF BAOLAN LINE Year 1998 Year 2000 Year 2004 Year 2008 1998 2000 2004 2008 Passenger Train Pair 14 15 19 29 Freight 10298.37 10811.16 14467.3 19821.29 Volume(Ton/Km, million) _ Passenger Volume 5432.4 5658.75 6941.4 8752.2 (Person/KM, million) _ Freight Intensity 20.847 21.885 29.719 10.718 (Ton/Km, Line/Kmn, million) Average Freight Train 23.51 23.51 49.63 49.63 Speed/up (Km/Hour) _ Average Freight Train 24.73 24.73 46.52 46.52 Speed/down (Km/Hour) _ Average Passenger 45.7 45.7 68.45 68.45 Train Speed/up (Km/Hour) _ Average Passenger 16.45 16.45 69.12 69.12 Train Speed/down (Km/Hour) Operating Expense on 0.196 0.0986 Constant ton/Km (RMB Yuan) _ Reform Activities Target Date Railway Reform Plan approved by State Council 12/31/2002 Pilot independent PTEs established 06/30/2002 Implementation program for creation of wagon ownership company 12/31/2003 announced Commitment for developing feasibility of integrated planning and 09/30/2003 costing tool Completion Targets Lanzhou to Tianshui --completion of double tracking 12/31/2003 --completion of electrification Tianshui to Baoji --completion of double tracking 12/31/2004 --completion of electrification - 24 - Annex 2: Detailed Project Description CHINA: National Railway Project This project will expand the capacity of a key section of one of the major railway existing lines linking northwest China with central and eastem China. This line, called the Bao-Lan line, connects the cities of Baoji in Shaanxi Province and Lanzhou in Gansu Province. It forms part of the major route for passenger trains between Shanghai, Xian, Lanzhou and Urumqi. It is also one of two major freight routes into northwest China. The Bao-Lan line was built in 1952 and electrified in 1984 and has a track length of 482 km. The project will double-track and upgrade the existing single-track line. The project also includes a technical assistance component that will finance four studies to support railway reform in China. By Component: Project Component I - US$1298.39 million Double-tracking and upgrading of the Baoji-Lanzhou line (hereafter referred to as the Bao-Lan line). The total cost of double-tracking and upgrading the Bao-Lan line is estimated at US$1.298 billion (Yuan 10.78 billion equivalent), of which the Bank will finance US$156.29 million equivalent, or 12 percent of the total project line costs. After the double-tracking is complete, the new line, with a length of 457 kin, will carry traffic from Baoji to Lanzhou, while the partly improved existing line, with a length of 482 Iam, will carry traffic from Lanzhou to Baoji. The existing line handles 45 train pairs a day, including 14 pairs of passenger trains. After completion of the project, the line will have a capacity of 165 train pairs a day. MOR traffic projections indicate that by 2008 there will be 117 train pairs, including 29 passenger trains, and by 2013, 138 train pairs, including 34 passenger trains. The maximum speed of passenger trains will increase from 90 km/h to 140 km/h. The travel time for an express passenger train going from Baoji to Lanzhou will be reduced to 5 hours, 14 minutes from 8 hours, 51 minutes, and travel time from Lanzhou to Baoji will be reduced to 6 hours, 34 minutes from 8 hours, 40 minutes. The transit time of freight trains will be reduced to 10 hours from 17 hours. Subcomponent 1-Double-tracking of the Bao-Lan Line-US$ 934.1 million The cost of these works is estimated to be US$934 million, or 72 percent of total project line costs. Bank financing is estimated at US$67.2, or 7.2 percent of the subcomponent cost. This subcomponent includes land acquisition and resettlement, temporary engineering works, works to construct subgrade, bridges, tunnels and culverts, laying of track and building construction. The improved alignment of the second line and the upgrading of the existing line will alleviate the current geometric constraints of the existing line (such as tight curve radii and inadequate protection from land slides, among others) and improve the speed, safety and efficiency of the line. The designers and constructors of the project face many challenges, including high embankments, deep cuttings, soft soils, and seriously weathered rock slopes, including many areas prone to landslides. The new line includes 230 bridges of various sizes, with a total length of 54.6 km, compared to 98 bridges with a total length of 15.5 km along the existing line. The proposed line also will include 74 new or enlarged tunnels and a linear length of 72.7 km designed for speeds of up to 120 km/hr. Twenty-four tunnels will be more than 1 km long, and the longest tunnel will be 3.9 km long. The length of the arrival - 25 - and departure tracks at stations will be increased from 810 m to 850 m. Most stations will provide facilities for both freight and passenger services, with a few exceptions that will serve only passengers. The Bank will not finance civil works for the Bao-Lan line but will finance the procurement of rails, turnouts, bridge beams and trunion blocks, using international competitive bidding (ICB) procedures for the purchase of these goods. Subcomponent 2-Modernizing the Bao-Lan line-US$ 264.6 million This subcomponent will finance the procurement of goods and equipment for the Bao-Lan line. The total estimated cost of this subcomponent is US$265 million, or 20 percent of total project line costs, including Bank financing of US$ 89.1 million, or 34 percent of the subcomponent cost. The following procurement packages of goods and equipment are proposed: * Survey and design equipment * Telecommunications * Signaling * Electrification * Power supply - Environment * Maintenance and operation - Track maintenance A brief description of the procurement packages follows. Survey and design equipment. This subcomponent will support the survey and design work for the project line. The Bank will finance all related items, including remote-sensing processing equipment, digital photographic surveying equipment, engineering visual-design system, and GPS satellite locator. Telecommunications. This subcomponent includes a number of subsystems for upgrading the railway telecommunications system on the Bao-Lan line, including those for long-distance and regional, station, and yard communications, data transmission, telephone exchanges, and communication power sources. The Bank will finance part of this subcomponent, including program-control exchangers, transmission equipment, access network, power source, fiber-optic cable, the communication and signal administration and maintenance system, and a digital dispatch and sequence system. Signaling. This subcomponent includes the procurement of an automatic blocking system, station interlocking system, centralized diagnostic system, dispatching and train-monitoring system, equipment for inspection and repair workshops, and on-board locomotive signal devices. The Bank will finance equipment for dispatch-monitoring stations, computer-interlocking facilities, power panels, cables, and switch points. Electrification. This subcomponent consists of traction substations (e.g., traction supply devices), power-feed system (e.g., contact wires) and remote control systems. The Bank will fund equipment for traction substations and contact wires, which include circuit breakers, isolation switches, capacitors, reactors, panels, insulators and telemechanical systems. Power supply. This subcomponent will supply electric power to the non-traction power-supply system, such as automatic block system and through lines and stations. Bank funding will be used to contribute to the procurement of transformers, electric reactors, wires and cables. Local funding will be used for other equipment. - 26 - Environment. This subcomponent is described in Section E of the main document and in Annex 13. Bank funding will be used for procuring environment-related equipment, including equipment for water and soil conservation and sewage handling. Maintenance and operation. This subcomponent will facilitate the maintenance and operation of the project line when it is put into use. Maintenance and operation systems include the examination and repair systems for passenger and freight trains and the checking and repair systems for train-braking systems at marshaling yards. The Bank will finance some of the machines for the maintenance workshops, axle temperature-detection equipment, material handling equipment and tumout repair equipment. Track maintenance. This subcomponent will finance the procurement of the necessary equipment for maintaining the permanent way. The Bank funds will be use to finance machines for tamping, ballast cleaning, rail-flaw detection, rail welding and switch welding, a dynamic stabilizer and track-inspection car as well as a rail-grinding train. Subcomponent 3-Interest during construction and additional locomotive and rolling stock for the first operational year of the Bao-Lan double line-Local funding Interest that accrues during construction will be capitalized and is estimated at US$79.68 million, or 6 percent of total project line cost. Local funding will finance this. The cost of the additional locomotives and rolling stock in the first year of operation after the Bao-Lan line is double-tracked is estimated at US$19.94 million, or 2 percent of total project line cost. This equipment will be financed using local funds. Project Component 2 - US$2.25 million Railway Reform Studies and Technical Assistance This component will finance four studies to support railway reform. The Bank will provide US$2.11 million for these studies, and MOR will pay the interest during the implementation period (US$0.14 mnillion). The project will finance the following studies: * Research on the Cost Model of the Passenger Transportation Enterprise of Kunming Railway Administration. The terms of reference for this study are found in Annex 2a. * Establishing Railway Passenger Transportation Enterprises in Railway Admninistrations with Sub-bureaus. The terms of reference for this study are found in Annex 2b. * Establishing a Wagon-Ownership Enterprise in China. The terms of reference for this study are found in Annex 2c. * Tools Integration Work. The terms of reference for this study are found in Annex 2d. Project Component 3 - US$ 1.60 million The Bank loan will fund US$1.6 million for the front-end fee. - 27 - Annex 2a Terms of Reference for a Study on Research on the Cost Model of the Passenger Transportation Company of Kunming Railway Bureau Background Passenger transportation in China Railways is organized into departments for stations, passenger crews, and maintenance of passenger locomotives in main production. Separating passenger transportation cost management and financial calculations will improve the railways' competitive capacity. Kunming Railway Administration is an experiment in removing administrative levels and establishing PTEs. Purpose To establish a modem railway enterprise, the cost model of passenger transportation must be researched. A cost model assists the railway in analyzing actual costs of operation and the process of spending capital. This analysis allows the passenger transportation company to administer costs effectively and improve its competitive capacity in a market economy. The cost model is also needed for coordinating the economic relations between the railway bureau and the passenger transportation company and making the passenger transportation company a stand-alone economic and market-driven entity. Objective A cost model of the passenger transportation company will be drawn up by analyzing operational cost conditions and operating characteristics of the passenger transportation company of Kunming Railway Administration Bureau. This model will be based on a calculation for each passenger locomotive and coach type, and will be researched and designed in line with the demand of a modem enterprise system. Content of Research The research will include the following elements: * Financial relationships between the railway bureau and the passenger transportation company, including all charges for track access and infrastructure use * Cost items of the passenger transportation company * Responsibilities of operation of the passenger transportation company * The principle and policy of the cost calculation of the passenger transportation company * Reasons (if any) for restricting the passenger transportation company in making a direct profit from the market, and methods of compensation for the company when its market behavior is restricted by government intervention * Influence of cost variables such as charges for using lines, traction of locomotive, services to the passenger transportation company during different periods. - 28 - Annex 2b Terms of Reference for a Study on Establishing Railway Passenger Transportation Enterprises (PTEs) in Railway Bureaus with Sub-bureaus Background Passenger transportation in China Railways is organized under a planned economy. Its main production segment is divided into different production units and management departments. By dividing operational and financial management, China Railways can influence the competitiveness of the PTEs in the passenger transportation market. No single department in the railway administration is in charge of the quality of passenger operations or passenger financial results. Separating infrastructure from operations is the target of reform of Chinese Railways. The process begins with studying PTEs. When some experience has been gained, the scope of reforms will be enlarged. Significance Conducting a study on establishing PTEs in railway bureaus with sub-bureaus is necessary to establish a modem railway enterprise system and realize China Railways'goal of separating infrastructure from operations. Establishing PTEs is an important step in reorganizing railway transportation, mitigating the fragmentation of the railway bureau production departments, and meeting the needs of the market. This study also is necessary to refine the railways' asset-management system and to establish how railway administration bureaus and PTEs will relate, as well as to establish the PTEs as market entities. Target The target of the study is to draw up a design scheme to establish railway PTEs in railway bureaus with sub-bureaus, and then implement the recommendations. Contents The contents of the study include the following aspects: * Specify the relationship between PTEs and railway bureaus with sub-bureaus: --Charges for use of infrastructure --Charges for use of assets owned by railway bureaus --Charges for access to bureaus outside the bureau of origin --Methods of revenue and cost allocation among cooperating PTEs --Rights and obligations of PTEs for track access from bureaus. * Establish the overall organization of PTEs * Spell out management authority and responsibility of PTEs: --What authority do PTE managers have? --To whom do PTE managers report? --What are PTE managers' social responsibilities? --How are their performance standards and goals determined? --Establish job descriptions (authority and objectives) of senior PTE managers. - 29 - * Any reasons for restricting PTEs' ability to maximize income from market (e.g., price regulation, and PSO agreements with the state) * The rules and regulations of management accounting in PTE --Construction of business forms of accounts including 5-year financial forecasting models --Methods for cost allocation between bureaus and PTEs --Structure of accounts to be used in business management --Incentives paid to managers - 30 - Annex 2c Terms of Reference for a Study on Establishing a Wagon Ownership Enterprise Background The China Railways was organized to operate in a planned economy. China is now undertaking a set of railway reforms and is considering various forms of separation of infrastructure from operating enterprises (freight and passenger). As part of the restructuring effort, China also will need to find new ways of wagon ownership and management. Even under the planned economy, China had one of the highest levels of freight wagon use in the world. Significance The Chinese freight wagon fleet of over 400,000 wagons is the second largest in the world. It is based on a relatively limited number of wagon types and sizes designed to promote technical efficiency of wagon use. The vast majority of the wagons are owned by MOR. The future wagon fleet is likely to include many more types and sizes to meet shipper demands. In addition, ownership patterns of freight wagons will also need to reflect a better balance among railways, shippers, privately owned wagons, and privately owned-system wagons. Target The target of this study is to define and establish a near-term wagon ownership enterprise. The near-term model will be a single entity that will assume ownership of MOR's existing wagon fleet and charge the operating entities for wagon use. In addition, discuss a reasonable future ownership pattern for the Chinese freight wagon fleet and describe the legal and policy changes needed to permit such a system to be developed. Contents The study must contain the following aspects: * Define the principles for setting wagon charges and who should oversee or regulate the charges. Discuss who should have responsibility for overseeing financial settlements for wagon use. * Define the cost scope and accounting structure for the wagon ownership enterprise. * Defne the authority and business responsibilities of wagon ownership enterprise management: --To whom do wagon ownership enterprise managers report and how will their performance be measured? --What authorities do they have-independent operation of the business, purchase or disposal of assets, pricing of services, control over costs, including labor? * Define the assets to be owned by wagon ownership enterprise, including wagons, workshops, offices, etc. Discuss whether wagon ownership enterprises will manage other assets such as shipper-owned wagons. * Discuss which entity or entities wagon ownership enterprises will lease wagons to, such as such as administrations or FTEs, or the Central Transport Bureau. Define in detail the options for wagon-use charge structures, including leasing charges, to be paid for use of wagons. - 31 - Seminar on Establishing Wagon Ownership Enterprises Time October 2001 Place Shanghai Participants Policy and Regulation Department, Finance Department, Transportation Bureau, members of project team, Economic and Planning Research Institute, domestic and overseas experts Content --Types and patterns of wagon ownership elsewhere --The forces that define wagon ownership patterns --Information needed to support wagon payments --Legal and regulatory regimes needed --Options for wagon ownership and management in China MOR faces two challenges: first, to support the immediate needs of rail restructuring by creating a wagon ownership enterprise that will manage wagon ownership in the near term; and, second, to lay the foundation for defining and considering options for wagon ownership patterns in the future. The tasks above deal with the immediate need to establish a wagon ownership enterprise. In addition, MOR will sponsor a seminar to be held in Shanghai to discuss longer term issues. An international expert will be selected to prepare a report and present it to the seminar covering the following topics: * Describe wagon ownership patterns in other countries (particularly the U.S. and Canada, but also European systems such as Interfrigo or Intercontainer), and discuss current trends. Include a detailed description of the U.S. wagon fleet-between Class I railroad ownership, ownership by smaller railroads and non-rail operating companies, shipper ownership, fleet ownership of special purpose wagons (container flat wagons (TTX) or tank wagons (GATX)), and other significant owners. v Describe the forces behind the operating patterns above, including the impact of types of commodity and shipment patterns, financial objectives, tax incentives, typical utilization pattems (for example unit train versus free-running applications), and other forces that affect wagon ownership incentives. * Describe in detail the ways in which wagon ownership is compensated, including charges among and between railways (how per diem is calculated and billed), charges paid to owners (finance and use-based leasing), charges to shippers (demurrage), etc. * Describe the information used to support charging for wagon use (AAR's Railinc and comparable European systems such as the UlIC's Hermes) and the computer and communications systems that make them possible. For example, describe deterrnination of wagon position , measurement of distance traveled, and identification of wagon. * Describe the essential aspects of the legal regime of ownership security, bill settlements and tax incentives that underpin these stems. * Based on the current structure of railways in China and the likely changes as indicated by MOR, identify: --Any changes in information systems (TMIS) needed to support wagon charging among owners --Changes in legal systems needed, if any, to facilitate diversity in wagon ownership --Likely trends in wagon fleet types and ownership based on a comparison of the current fleet with broad potential future traffic demands --Near-term opportunities for separated (especially private) ownership for use in a trial demonstration of the concept of diversity in ownership. - 32 - Annex 2d Terms of Reference for Tools Integration Work MOR is a central ministry that oversees 14 geographically based rail administrations. Ten of the 14 Administrations have smaller sub-administrations. The administrations and sub-administrations have responsibility for operating all passenger and freight services within their boundaries. They interchange traffic and share revenues in accord with central directives and methods, and they report annual rofits-to MOR. This organization evolved to suit the demands of the planned economy and, within the planning context, supported one of the most technically efficient railways in the world. It has become clear that China's evolution toward a socialist market-driven economy will place different demands on rail services and on the organization of the entities that provide those services. MOR has recently embarked on a program of restructuring of the railways of China to fit a market economy context. This program will involve a number of different initiatives including: * "Up/down" separation of operating services from infrastructure * Creating new, market-based passenger transport enterprises (PTEs) 3 Creating market-based Freight Transport Enterprises (FTEs) that will initially have the same boundaries as the administrations, but which may in future have broader boundaries and that may eventually incorporate degrees of rail versus rail competition. MOR now faces the challenge of converting these broad policy objectives into an action program in which the alternatives can be developed and their advantages and disadvantages subjected to quantitative analysis. Over the past five years, MOR has begun to acquire the analytical tools and capabilities needed to carry out strategic restructuring analyses. Because these tools were acquired to suit the needs of management in a planned-economy context, though, they lack some of the features needed for strategic analysis and were not developed to be used in combination to allow their capabilities to have the most impact. As the pace of rail restructuring in China intensifies, however, the existing tools will need to be improved somewhat and, more importantly, they will need to be interlinked so that each can be used to maximum value. The manual methods of data management in use today in MOR cannot readily answer "What if' questions or display altemative scenarios quickly. Experience with restructuring shows that the process generates many questions that need a rapid-response capability ensure that all reasonable ideas are explored and evaluated. Only interrelated models can provide such a capability. Three of the tools in question are the Transportation Management Information System (TMIS) data compilations, the network flow model and the point-to-point costing model. The purpose of this TOR is to identify the work that may be needed to adapt these models for strategic planning purposes. TMIS TMIS is the mainframe system (IBM ES 9000 in the central office, but regional mainframes are Compaq and IBM ES 6000) developed by MOR that contains the basic information used to manage MOR's operations and wagon flow. In the very near future, TMIS should provide accurate, up-to-date information about freight traffic flows (the basic shipping document, the waybill, contains excellent information on exact origin, exact - 33 - destination, routing, commodity, weight, wagon type, and revenue) and passenger flows (origin, destination, train number, class, revenue, etc.). Now, however, TMIS data must be processed manually before use in the network flow model and the costing model. By contrast, in the United States, for example, waybill files are automatically processed for use in network and costing models. TMIS uses a series of computer languages including C++ and Java among others. Network Flow Model A network flow model is a computer-based model of the rail network that permits analyses of system operations and map-based presentations in analytical and graphical formats. For example, network flow models will contain, for each link in a network, line identity, ownership, station location (passenger and freight), capacity, number of tracks, signaling, electrification, and any other characteristics that are relevant. This data will permit a series of displays (using colors or line widths) that show line capacity, electrified links, ownership, existence of track access rights, etc. When appropriately coded traffic information is available, network models can display traffic density, flows of individual commodities (for example, coal), seasonal or unbalanced flows of traffic, major interchange points, export/import flows, and many system characteristics. Network models can also develop performance measures such as the number of wagons interchanged by type of wagon and by particular interchange location, the amounts and types of traffic that could be subject to competition if various trackage rights were extended, and impacts on traffic densities of future traffic demands and flow pattems. Network models can also calculate revenue, tons and ton-km by commodity, passengers, passenger-km and revenue by class, by line, and by season. Network models in conjunction with traffic data are the workhorses of market-driven railway management. MOR already has a PC-based network model that will perform a number of these functions. According to initial discussions, however, the MOR model will not permit timely analyses, or quick responses, because it is not configured to take data directly from TMIS. In addition, the current network model is not capable of displaying administration-level or subadministration-level data (because the input data are not coded to show this information). Thus it cannot measure passengers or wagons interchanged among administrations (or future PTEs and FTEs), nor can it compute ton-km or passenger-km produced by administration. It cannot measure the effect of changing operating company boundaries, for example, nor can it measure the effects on improved efficiency of extending passenger trains across the current administration boundaries. It is also not readily capable of showing and estimating the competitive impacts of competitive track access rights. Traffic Costing Models Point-to-point costing models are the essential basis for managing marketing. Costing models permit an estimate of the costs that change as a result of decisions to add or subtract an increment of traffic. As a result, the railway manager can estimate whether adding an increment of traffic (for example, one more wagonload, another train, a contracted unit train, larger wagons) will add more to revenue than it adds to costs. Costing models also permit identification of profitable and unprofitable traffic and, for unprofitable traffic, analysis of ways to reduce costs (or to increase prices). Without good costing models, profitability analysis is impossible. MOR has also been working on point-to-point costing models, and various working prototypes are available. Currently, however, the MOR costing models are not capable of rapid interactions with TMIS data to produce broader profitability analyses, for example by administration or by FTE or PTE, by routes, by commodity nationwide, or by type of rolling stock. A modified costing model could be used in China to estimate profitability of the various PTEs and FTEs, and could estimate the impacts on PTE and FTE profitability under various assumptions as to changes in tariff freedoms and policies, changes in operating procedures, competitive trends, and trackage rights or changes in service boundaries. - 34 - WORK TO BE DONE The tasks below have the primary objective of permitting the network flow model and the costing models work better together in a way that will support strategic planning. Consultant assistance is needed to identify steps to be taken and set up timetables: most of the actual modification work can be done by MOR experts with such additional help from outside experts as is necessary. In the work defined below, recommendations for action should include a rough estimate of the required skills and level of effort needed to complete the recommended tasks. TMIS Studies Review the data loaded into, and reports produced by, TMIS to identify exactly which data exists, when, where and in which format. Recommend methods and media (e.g., magnetic tape, CD) whereby appropriate TMIS based data and reports could be automatically produced for use in the network and costing models. For example, recommend methods to extract from each freight shipment record the basic data for use in network or costing analyses, including origin station, destination station, routing data, wagon type, weight of shipment, commodity, revenue generated, and any other relevant data. Recommend procedures with which this data can be reported in a format that is directly useful in network models and costing models. Network Model Tfhe network model is based on a zone-to-zone analysis using approximately 350 zones. Analyze whether the zone breakdown is detailed enough to pernit workable system structure analyses. In the short run, the zonal structure is probably good enough for initial analyses; if so, define steps needed to develop a station-to-zone lookup table so that TMIS origin and destination data can be readily converted to zonal flows. In the longer run, it may be desirable to add station location codes to the network model so that exact origin-to-destination information will be available if needed; if so, recommend an approach for adding station-location coding to the network model. This approach should consider whether the station locations should be added manually, or whether an automated method should be developed for automatically adding and updating station locations. It is not clear how the network model calculates distances. At the zone-to-zone level, a lookup matrix is needed (if not already available) that shows the distance from any given zone to any other zone. A station-to-station lookup matrix may also be needed. In both cases, if necessary, recommend an approach and timetable for adding this capability to the network model. Two alternatives should be explored on distance calculation-adding a routine to TMIS so that the TMIS data produced for the network and costing models will already have distance data added, or adding the distance calculation capability to the network model or the costing model (both of which may already have partial capabilities to do so in their current form). In addition, consultants should consider adding the capability to calculate distances based on the actual service route, and not simply on a lookup table basis (this will require use of the routing infornation available to TMIS). - 35 - The network model does not contain link coding to indicate ownership (administration, sub-administration, PTE or FTE territory). Recommend an approach to add ownership and trackage or operating rights coding to the network model, along with such other data as may emerge as important. Analyze whether this data should be added manually or whether an automated capability should be developed for revising and updating link coding. Costing Model Costing models require some inputs that are essentially fixed for periods of time (the costing parameters) and then they estimate costs for traffic segments or increments under study. The first step will be to assess the fixed inputs for Kunming and then expand these inputs on an estimated basis to the rest of the MOR system. These inputs consist of network definition, train-related data by section of line, switching data by terminal, wagon utilization data, and a series of unit costs. Most of these data have been analyzed and generated previously; they need updating and some elaborating so that they will be good enough for initial analyses. The fixed inputs need to be developed and refined gradually. Although TMIS can generate much of the information (especially as the TMIS experience is refined), much of the data will need to be approximated in the short run. A serviceable set of tables will probably be needed for the Kunming pilot, so that only minor additional sampling field studies and communications with operating personnel will be necessary. One step will be to develop the initial fixed inputs and provide a longer range recommended plan for refining the inputs over time as better information is generated. The broader scale costing work required for strategic analyses requires a file showing origin, destination, commodity, wagon type, wagons and tons. Passenger costing requires analogous data. This might easily be obtainable from TMIS with very minor modifications (and is the basic input to network modeling as well), including a front-end program to produce the data files and a routine to match the output of the costing model with the original traffic file. The consultant will review the data generated for, and available from, TMIS and the network model and recommend any additional data needed from TMIS, and in what form. In addition, the consultant will review the distance-calculation methods used in either TMIS or the network modeling to ensure that appropriate distances are available for costing calculations. It is possible that the costing model could be the source of the subroutines needed to calculate distances for the network models; the consultants should discuss and make a recommendation as to where the subroutine should be. - 36 - Annex 3: Estimated Project Costs CHINA: National Railway Project MS- ;''-v2..^,,,-g-.>44. 1. Double Tracking of the Bao-Lan Line a) Land Acquisition and Resettlement 73.36 0.0| 73.36 b) Ternporary and Transitional Engineering 35.59 0.0| 35.59 c) Subgrade 95.98 0.00 95.98 d) Bridges and Culverts 152.25 26.05 178.30 e) Tunnels and Open Tunnels 236.45 0.00 236.45 f) Tracking 89.48 37.48 126.97 g) Houses and Buildings 36.15 0.00 36.15 2. Modemizing of the Bao-Lan Line a) Survey and Design 0.00 4.74 4.74 b) Telecommunication 20.49 9.42 29.90 c) Signalling 47.16 7.19 54.35 d) Electrification 31.85 26.39 58.24 e) Power Supply 24.86 1.97 26.83 f) Environment 0.0 1.02 1.02 g) Maintenance and Operational Equipment 33.91 5.88 39.79 h) Track Maintenace 0.00 27.70 27.70 3. Others of Bao-Lan Line /2 62.53 0.00 62.53 4. Technical Assistance 0.00 2.00 2.00 Total Baseline Cost 940.06 149.841 089.90 Physical Contingency /3 75.21 6.74 81.95 Price Contingency /4 27.21 1.82 29.03 Total Project Costs 1042.48 158.401 200.88 Locomotives & Rolling Stocks of Bao-Lan Line /5 19.94 0.0( 19.94 Interest During Construction 79.82 0.00 79.82 Front-End Fee 0.00 1.60 1.60 Total Financing Required 1 142.24 160.00 1302.24 1/: Yuan 8.30 =US$1. 2/: Recurrent Costs. 3/: Physical contingency was calculated at 8% for domestic costs (which mainly relates to civil work), and 4.5% for foreign costs (which only relates to goods and equipment). 4/: Price contingency was calculated at 2.68% for domestic costs by using the most recent MWV projection for domestic inflation rates, and 1.16% for foreign cost (mainly relates to the goods and equipment with the fix or decline trend of price as experienced in the past several railways projects). 5/: The cost of the procurement of the Locomotives and Rolling Stock which will be put in to use at the first operational year, partly financed by MOR as equity and partly financed by the domestic bank. - 37 - Works 797.63 0.00 797.63 Goods and Equipment 175.50 156.29 331.79 Services 0.00 2.11 2.11 Training 0.00 0.00 0.00 Others /2 69.35 0.00 69.35 Total Project Costs 1042.48 158.40 1200.88 Locomotives & Rolling Stocks of Bao-Lan Line /3 19.94 0.00 19.94 Interest During Construction 79.82 0.00 79.82 Front-end Fee 0.00 1.60 1.60 Total Financing Required 1142.24 160.00 1302.24 1/: Yuan 8.30 =US$1. 21: Recurrent Costs. 3/: The cost of the procurement of the Locomotives and Rolling Stock which will be put in to use at the first operational year, partly fmnanced by MOR as equity and partly financed by the domestic bank. - 38 - Annex 4: Cost Benefit Analysis Summary CHINA: National Railway Project Economic Evaluation of the Bao-Lan Line Summary of Benefits and Costs: This annex presents the results of the economic evaluation of adding a second track to the electrified railway line between Baoji and Lanzhou (the Bao-Lan line) and upgrading the existing single track. The investment is expected to yield a net present value (NPV) of Yuan 19.7 billion and to achieve an economic rate of return (EIRR) of 22.9 percent. Main Assumptions: Traffic Although it transports a growing number of passengers, the Bao-Lan line handles primarily freight. Measured in terms of converted ton-krns (where one passenger-km is equal to one ton-km), nearly two-thirds of the traffic today consists of freight. The movement of goods is expected to account for about three-fourths of the growth in traffic from now until 2013 (the benchmark in MOR projections), so freight's share of total traffic on the line will grow to 70 percent. Thus, in assessing the costs and benefits of the proposed project, attention necessarily is focused on the freight sector. Data supplied by MOR show that an overwhelming proportion of the freight moved over the line-75 percent today and a projected 80 percent in the future-is through traffic, i.e., tonnage that neither originates nor terminates on the line itself. Hence, the route serves primarily as a bridge connecting the western regions of Qinghai, Xinjiang, and Gansu with the southern, central, and eastern areas of the country. Consequently, the total haulage length for this traffic is far greater than the 490 km between Baoji and Lanzhou; indeed, the typical overall trip length for the line's through freight traffic is on the order of 2,200-2,800 kms. About three-fifths of this through freight represents eastbound flows of bulk commodities consisting chiefly of crude oil and petroleum products, metal ores and manufactures, and nonmetal products (such as grain, cotton, fertilizer, and salt). Metal ores and related products constitute the most important westbound through freight movements. MOR also indicates that non-local through traffic accounts for a large part of the passenger business over the line, with the major origin-destination pairs being Urumqi-Chengdu, Lanzhou-Guangzhou, and Xining-Beijing. These traffic characteristics mean that very little of the freight handled on the Bao-Lan line is or will be susceptible to diversion by other transport modes. Given the bulk nature of the goods and the long origin-destination distances involved, truck transport over the national trunk highway system is not a feasible option to the railway service described here. In the absence of navigable waterways, the alternative of inland barge movement also is unavailable. Between Lanzhou and Chengdu, a pipeline for refined petroleum products is under construction, with an estimated completion date of 2015. Once in service, this pipeline could attract about one million tons of traffic per year from the Bao-Lan line. This diversion has been allowed for in the freight traffic projection. With the exception of the more circuitous and capacity-constrained railway line between Baoji and Zhongwei (the Bao-Zhong line), there is therefore no other transport choice for most of the through freight traffic projected to be handled via the Bao-Lan line. For Xinjiang and Gansu traffic, the railway distance between Wuwei and Baoji is 746 km via Zhongwei-about 11 percent longer than the 670 km via Lanzhou. For Qinghai traffic, the railway distance between Lanzhou and Baoji is 732 km via Zhongwei-49 percent longer than the 490-km project line. - 39 - Costs Direct Project Costs. MOR advises that 11 percent of total project costs is related to labor outlays (in financial terrns, Yuan 1I.1 billion of an overall Yuan 9.9 billion). For the purposes of economic analysis, labor expenses are shadow-priced to account for non-wage benefits (such as housing, education, and health care). Applying the shadow price factor of 1.6 utilized in previous railways projects to these labor outlays results in a total project cost figure (economic prices) of about Yuan 10.6 billion (see Table 4-1). Complementary Costs. Five types of complementary costs are accounted for in the analysis: * Investment outlays for additional railway equipment required to handle the incremental traffic flows made possible by the project * Project costs of electrifying and double-tracking the railway line between Lanzhou and Wuwei (to avoid a capacity bottleneck immediately to the northwest of the project route) * Capital outlays associated with providing new production capacity for the incremental freight traffic that will be transported over the route because of the project * Capital cost of generating the electric power necessitated by the addition of a second track * Further operating expenses required for catenary maintenance. An allowance of Yuan 279 mnillion is included in direct project costs for resettlement expenses. Because this anount approximates the Yuan 250 million indicated in the resettlement plan, no complementary cost allowance for this item is warranted. Each of these is reflected in Table 4-1 and is discussed in turn. Railway Equipment. These investments relate to the electric locomotives, freight wagons, and passenger coaches required to handle the additional traffic that would be moved over the new line. The analysis takes into account the annual equipment-acquisition schedule, inclusive of the numbers of each type of rolling stock, the pertinent economic unit price, and the overall projected yearly outlays. The financial price of each equipment type has been shadow-priced on a factor of 1.12, as supplied by MOR. The economic cost of the incremental railway equipment amounts to just over Yuan 2 billion (see Table 4-1). Expanding Capacity of Wu-Lan Line. Of the through freight traffic projected to move over the project line, about 40 percent will originate or terninate in Gansu province or the Xinjiang region (the comparable figure for through passenger traffic is 60 percent). To accommodate this volume, the railway line connecting Lanzhou and Wuwei (the Wu-Lan line), which is now a single-track and diesel-operated route, will need to be upgraded. Accordingly, an allowance of Yuan 2.8 billion to electrify and double-track the 175-km Wu-Lan line is included as a complementary cost of the project. As shown in Table 4-1, this amount has been spread over the four-year period 2009-2012. New Production Capacity Investment. MOR indicates that for about 40 percent of the new freight traffic to be carried on the project line, expanded capacity in certain factories and mines by non-railway organizations (shippers) will be required. Consequently, the new investrnent associated with this expanded production capacity should be included as a complementary cost of the project. Primarily, the industries where new production capacity is indicated include refined petroleum products (Lanzhou), silicon iron (Xining), non-ferrous metals (Baiyin), and fertilizer (Golmud). With a cost-recovery factor (depreciation) of about Yuan 500 per ton for these conmnodities, the average investrnent of additional capacity is calculated at about Yuan 4,650 per ton. Per-ton product revenues for the identified commodities in year 2000 prices were obtained from the bureau of statistics in each city. The cost-recovery factor is assumed to - 40 - be 29 percent of product revenues'. Using this cost-recovery value, the capital investment figure is derived by assuming a 12-percent interest cost over a 20-year economic life. With the enhanced capacity of the Bao-Lan line, the incremental freight traffic is projected to approximate 37.1 million total tons by the year 2029. Almost all of this amount (36.1 million tons) will consist of induced traffic. The methodology by which the annual amount of induced freight traffic was derived is explained in under "Benefits" below. The investmnent required to produce 40 percent of this "induced" production (14.5 million tons), therefore, amounts to about Yuan 67.2 billion. Spread over ten years commencing in 2003, this outlay is equal to just under Yuan 6.7 billion per annum (see Table 4-1). Electric Power Generation. Because the existing single track Bao-Lan line is already electrified, the additional electrical demand created by the existence of a second track will be modest. Based on MOR's estimates for both Shanxi and Gansu provinces, in the short term (i.e., to 2008), 133.3 MW of incremental generating capacity will be required; by 2013, another 36.2 MW in new generating capacity will be needed. With MOR indicating that the year-2000 cost of constructing a new electric power plant is about Yuan 5 million per MW, the total capital cost for the requisite incremental Bao-Lan generating capacity is Yuan 847.5 million. In Table 4-1, nearly four-fifths of this amount is allocated to the three-year period prior to 2008, while the remainder is spread over the three years preceding 2013. Catenary Maintenance. Because the operating expenses for electric traction provided by MOR do not include all the costs related to the maintenance of the overhead catenary wire, an annual amount should be added as a complementary outlay. Based on the Railways VII project, this cost per route-km is about Yuan 90,000.6 When this figure is applied to the 490 km (up direction) to be operated, annual catenary maintenance, commencing in 2004, is equal to Yuan 44.1 million (see Table 4-1). Benefits As noted above, the bulk of the incremental traffic that is projected for the Bao-Lan line consists of freight movements. Moreover, given the logistical characteristics of this volume (long-haul bulk commodity movements), except for the refined petroleum-product pipeline mentioned earlier, there are no feasible non-railway altematives that could accommodate these flows. From the standpoint of the economic evaluation, these factors have two significant implications. First, most of the economic benefits will stem from the projected incremental freight rather than passenger traffic. Secondly, allowing for the fact that the available capacity of the neighboring Bao-Zhong line could handle a small portion of this incremental freight (and passenger) traffic, it is nonetheless true that most of the new volume could not be transported in the absence of this proposed component. Hence, most of the incremental traffic properly should be considered as "induced" and valued accordingly as an economic benefit. To derive annual estimates of this "induced" freight tonnage, the starting point was to quantify the increment in Bao-Lan volume in the with-project case as compared to the without-project scenario. Next, the portion of this annual increment that could be diverted to the Bao-Zhong line was derived by estimating the available capacity of the Bao-Zhong line under the assumption that the Bao-Lan project is implemented. This involved subtracting the volume of traffic Bao-Zhong would