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 handle with a double-tracked Bao-Lan line in operation from the annual capacity of Bao-Zhong (about 20 million tons). With the growth in Bao-Zhong's own traffic, the capacity available to accept diversions from Bao-Lan becomes smaller over time. In addition, to account for the operation of the Lanzhou-Chengdu refined petroleum-products pipeline, another one miflion tons per year is considered to be diverted beginning in 2015. Once all of this "divertable" traffic is accounted for, the remaining volume in the Bao-Lan incremental traffic category is considered to be "induced" tonnage that would not be transported unless this project is implemented. -41 - Following the methodology utilized in Railways VI, the value added for induced traffic is regarded as the difference between ex-factory commodity revenues and associated production and transport costs. For representative commodities, unit revenues were obtained from individual city statistical bureaus. On average, revenues approximated Yuan 2,300 per ton. Production costs were assumed to be 76 percent of ex-factory revenues, or an average of Yuan 1,748 per ton7'. The railway transport costs for typical shipment distances supplied by MOR amounted to an average of Yuan 144 per ton. This yields a value added of about Yuan 400 per ton. In the prior discussion, the capital cost associated with expanding manufacturing capacity was treated as a complementary cost. To avoid double-counting, a capital cost-recovery factor (depreciation) had to be added back to the value-added calculation for certain products. With the unit capital cost recovery assumed to be 29 percent of production costs,' this equates to Yuan 507 per ton. Adding this amount back to the previous value-added figure of Yuan 400 per ton yields a value added before cost recovery of Yuan 915 per ton. As noted in the prior discussion, about 40 percent of the induced freight traffic consists of products where some added production capacity is required; for this traffic, the value added before the capital cost recovery figure of Yuan 915 per ton is appropriate. For the remaining 60 percent of induced freight traffic, extant production capacity is deemed to be sufficient to generate the indicated railway traffic volumnes; here, the lower value added (inclusive of an already sunk capital cost-recovery factor) of Yuan 400 per ton is applicable. Taken together, the weighted average value added applied to all induced traffic is Yuan 600 per ton. When applied to the estimated annual volumes of induced tonnage, the induced freight benefits are as reported in Table 4-1. For the induced passenger benefits, a similar methodology was employed. The volume of induced passenger travel was estimated. The unit value added was assumed to be half of that associated with freight traffic, or Yuan 300 per passenger. The resulting annual monetary value of the induced passenger benefit is displayed in Table 4-1. Economic Rate of Return and Sensitivity Analyses Net benefits are calculated for the 30-year period 2000-2029 to derive estimates of NPV and EIRR (a discount rate of 12 percent was used). As reported in Table 4-1, the estimated NPV is about Yuan 19.7 billion in 2000 prices, and the EIRR is 22.9 percent. Sensitivity analysis / Switching values of critical items: Adjustments were made in three of the base-case assumptions to test the sensitivity of these results. Two of these adjustments relate to estimates of costs, while the other concerns the valuation of the induced freight-traffic benefit. The results are reported in Table 4-2. The two cost adjustments involved raised the direct project costs and the complementary incremental development costs by 50 percent. The direct project cost increase lowers the NPV to Yuan 19.4 billion and the EIRR to 20.4 percent. The incremental development cost increase results in a NPV of Yuan 19.7 billion and an EIRR of 17.2 percent. - 42 - Similarly, for the induced freight-benefit category, a decline of 50 percent was postulated. This yielded an NPV of Yuan 11.1 billion and an EIRR of 13.3 percent. All of these adjustments result in acceptable NPV and EIRR outcomes. In addition, an analysis of the switching values (values at which the project's NPV becomes zero or the EIRR equals the discount rate) was undertaken. Here, the critical switching value would be attained if, with no change in benefits, the total costs (direct plus complementary) of the project were to rise 1.89 times (from Yuan 84.7 billion to Yuan 160 billion). A similar outcome would result if, with no change in costs, the total benefits of the project were to decline by 47.1 percent (from Yuan 489.1 billion to Yuan 258.9 billion). In the context of the prior discussion and acknowledging the magnitude of the shifts that are indicated, the chances that these outcomes would occur must be regarded as unlikely. It should be recognized that these sensitivity tests are limited by the fact that they cannot determine the degree of uncertainty associated with these outcomes. To compensate for this, a probabilistic risk analysis using the Monte Carlo technique was perforned whereby the key inputs to the analysis are allowed to vary at random between set limits and all factors are permitted to change simultaneously. By evaluating the resulting distributions, the risk accompanying the various decisions can be assessed. The factor with the most uncertainty and impact on the economic evaluation of the Bao-Lan line is the induced freight benefit. The results of the probabilistic risk analysis for this variable show that the likely range for the EIRR falls between 21.2 percent and 24.3 percent, and for the most likely scenario the EIRR is 22.7 percent (see Table 4-3). References The First Survey and Design Institute of the Ministry of Railways, The Feasibility Study of the Proposed New Second Line on Baoji-Lanzhou section of Lianyungang-Lanzhou Railway (August 2000) (the Bao-Lan Feasibility Study) at Part V, paragraph 3. 1, and aftemoon meeting notes of November 11, 1999. China: Seventh Railway Project (Loan No. 3897-CHA): Proposed Restructuring and Amendment to Loan Agreement, (R99-2, January 13, 1999) (the Seventh Railway Project Loan) p. 21, para 6. Resettlement Plan (December 2000) Section 5.5, and morning meeting notes of December 7, 2000. Supplementary Volume for Project Implementation, Sixth Railway Project (Report No, 11357-CIHA, February 25, 1993) Working Paper No. 22) (Sixth Railway Project Loan) Bao-Lan Feasibility Study, chapter VII, table following paragraph 11. Seventh Railway Project Loan, paragraph 10. Sixth Railway Project Loan, Working Paper 22 Ibid - 43 - Table 4.1 Cost-Benefit Analysis of the Baolan Line (Year 2000-yuan in Million) Drec Costs CC& _BaoLalueAdded La. Laf-w IrcremertJ Eleirc Caeray TOTAL Indtxnd Inidind TYTAL NE_ Year Eauunert Exa D __ P _1 CX6TS Fr BeENffS BEBEFITS 2X0 742469 742469 -(74247) 2001 2425.875 Z425.875 (2425.37) 2002 4,902886 4,902886 (4_90239 9 2XX3 2,535.310 45sas 6,722040 9,716214 (9,716.21) 2004 129.19N 6,722040 44.10D 6a895.338 2736.000 618000 3,354.000 (3,541. 34) 2005 138. _ 6,722040 222167 44.100 7,126.710 4,602X000 909.000 5,511 000 (1,615 71) 2X06 125. _ _ 6,722040 922167 44.100 7,114.013 6,672000 1,266X000 7,93800o 823.99 27CY7 207.71 6,722040 222167 44.100 7,196.024 8,92200X0 1,611 .000 10,533.000 3,336.98 2008 99.6_ 6,722040 44.10) 6,866.047 10,416.00) 1,944000 123660.000 5,493.35 2009 8247 700000 6,722040 44.10D 7,548.610 12,04200) 2,2D5.00) 14,247000 6,698. 39 2010 86. 700.000 6,722040 60.3 44.100 7,612817 13,044.00) 2283.000 15,327.000 7,714 18 2011 9221 700.000 6,722040 60.33 44.100 7,61a6B3 14,076.000 Z454.000 16,530.00) 8,911 . 32 2012 60.171 700.0o 6,722040 60.3 44.100 7,596.645 15,162000 2622000 17,784.000 10,197.36 2)13 80.357 44.100 124.457 15,726)000 Z83&0a0 18,564o00) 18,439.54 2)14 1 38.775 T I _ 44.100 82875 17,47aooo 2958ooo 20,43600o 20,353.12 2)15 41.07 _ - 44.10) 85.179 17,190)OO 3,078000 20,268.000 20,1232 2016 43.90o 44.100 88.009 1750200)1 317700) 20,6790)00 20,590639 2017 44.14 h 44.100 88.244 17,826.000 3,276.000 21102000 21,013.76 2018 25.571 _ _ _ 44.100 69.670 18,160.00) 3,375.00) 21,525.000 21,455.33 2019 r 25.571 _ _ 44.100 69.670 18468.000 3474.000 21,942000 21,872.33 ) 2020__ 1 26.09 1 1 1 44.10) 70196 18,792000 3,573.00) 22365.000 22,294.30 2021 | 26.359 | |_j_44.100 70.459 19,12B000 3,67200) 2280o)o0 22729.54 a22 i 26.3% _ _ _ 44.100 70.459 19,4640)) 3,714.00) 23,17800) 23,107.54 2Y3M 30. r _ __ 44.100 7M.69 1980)0))0 3,753.000 23,553.000 23,47793 -24 32-393 r __| 44.100 76.493 20,14200) 3,7920)) 23,934000 23,857.51 2025 31.6D4 44.10) 75.704 20,4o000) 3,828.00) 24,3180)0 24,24230 |2 ___ | 32.39 _ _ r |44.100 76.493 20,320) 3,64.00) 24,696.(XX 24,619.51 |2L |7 332911 | 44.10) 77.391 21,18&6O0 3,897.00 25,W.000 25,005.61 20 228 1 18410 T 7 _ 44.10) 629510 21540.00) 3,930.00) 25,470.000 25,407.49 2C2 9__ 18A410 __r__ 44.100 62510 21,68400) 3,9600)0 25,64400) 25,581.49 Tcd | 10,606.540 2056.679 2800.0001 67,220.40) 847.500 1,146X00 84,677.719 413,0700)) 76,G710)00 489,141.00) 404,4632s1 Net Peset Vakeat 12%: 19,730.488 EcronicRad Ret 2291/ _ VAF F. -t - 44 - Table 4-2 Sensitivity Analysis for Bao-Lan Line (Year 2000 Yuan in millions and percent) ______ ______ ______ NPV EIRR ________ ________ ________ ________ Y uan m illions) _ _ _ e nt Base Case 19,730.488 22.91 __ _ XIncrease Direct Project Costs by 50% 19,399.029 20.36 Increase Complementary Development Costs by 50% D 19,730.488 17.19 Decrease Induced Fre ght Benefits by 50% 11,087.312 13.25 Source: Table 4-1. -45 - Table 4-3 Crystal Bali Report Forecast: EIRR Summary: Display Range is from 17.89% to 27.44% Entire Range is from 17.66% to 28.61 % After 1,000 Trials, the Std. Error of the Me an is 0.06% Statistics: Value Trials 1000 Mean 22.73% Median 22.67% Mode --- Standard Deviation 1.80% Variance 0.03% Skewness 0.06 Kurtosis 2.76 Coeff. of Variability 0.08 Range Minimum 17.66% Range Maximum 28.61% Range Width 10.95% Mean Std. Error 0.06% Forecast EIRR 1,000 Trials Frequency Chart 0 Outiers 016 __ _ _ - 1575 = 011 - 5 LB Ws IL ,2 i lESIilllll§II II,5,, 25 17.9% 2028% 22 f6i% 256% 27.44% -46 - Percentiles: Percentile % 0% 17.66% 10% 20.38% 20% 21.15% 30% 21.79% 40% 22.24% 50% 22.67% 60% 23.17% 70% 23.72% 80% 24.27% 90% 25.11% 100% 28.61% End of Forecast Assumptions Assumption: VA Freight Normal distribution with parameters: VA F"Ight Mean 100% Standard Dev. 10% Selected range is from -Infinity to +Infinity 70% 85%. 100% tss 130 End of Assumptions - 47 - Annex 5: Financial Summary CHINA: National Railway Project Years Ending December 31, US$ Million |Year I I Year 2 |Year 3 | Year 4 | erYear er6|Year 7| Total Financing Required Project Costs Investment Costs 77.2 254.9 532.5 285.7 0.9 0.1 0.( Recurrent Costs 6.7 19.3 21.7 21.7 0.0 0.0 0.0 Total Project Costs 83.9 274.2 554.2 307.4 0.9 0.1 0.0 Interest during 1.3 11.2 28.9 38.4 0.1 0.0 0.0 construction Front-end fee 0.0 1.6 0.0 0.0 0.0 0.0 0 ( Total Financing 85.2 287.0 583.1 345.8 1.0 0.1 0.0 Financing IBRD/IDA 0.0 17.2 125.2 16.5 1.0 0.1 0.( Government 85.2 269.8 457.9 329.3 0.0 0.0 0.( Central 0.0 0.0 0.0 0.0 0.0 0.0 0.t Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.( Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.C User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.C Others 0.0 0.0 0.0 0.0 0.0 0.0 0.C Total Project Financing 85.2 287.0 583.1 345.8 1.0 0.1 0.U Main assumptions: Ministry of Railways (MOR) will be the solely responsible for the implementation of this project and will mobilize all the necessary financing, and repay all funds borrowed for its construction. Therefore, this analysis focuses on two issues. Firstly, the financial soundness of the Bao-Lan line, which accounts for nearly 98% of the Bank loan. Secondly, the analysis reviews the financial viability and debt servicing capacity of MOR. A. Financial Analysis of the Bao-Lan Line Objective This analysis should be read in conjunction with the economic analysis of the Bao-Lan line in Annex 4 of this document. The objective, in general terms, of the financial analysis is to confirm the financial soundness of the investment in the line. Specifically, the analysis focuses on: * The financial rate of return compared to the average cost of capital for double-tracking and upgrading the line * The adequacy and timely availabil:ity of the necessary counterpart funds required to complement Bank funding * The results of sensitivity analyses designed to test changes in the base case assumptions. -48 - Because the calculations of the financial rate of return are based on the projected net cash flows of the Bao-Lan line, the debt servicing of all loans (including the Bank loan for this line) and the cost of annual and periodic repairs and replacements have been taken into account. Background MOR represents the Government of China (GOC) as the sole owner of the Bao-Lan line. The total investment costs of the line (comprising construction costs, interest on loans during construction, and the costs for acquiring locomotives and rolling stock) will be financed by MOR using internal funds and loans obtained from domestic banks (mainly the State Development Bank) and the World Bank. See Table A5.1 for details. The monies to service these loans will be obtained from operating revenues generated by the Bao-Lan line when it starts operations. Table A5.1 summarizes the financing of the Bao-Lan investment. Table A5.2 shows these figures in US$ at the exchange rate of Yuan 8.30 per dollar. Table A5.1: Financing of the Bao-Lan Line (In Yuan Millions) Item Domestic Foreign Total Equity: Ministry of Railways 5 _719 5,719 Loans: Domestic: State Development Bank 3760- 3,760 Foreign: The World Bank --- 1,297 1297 Total 9,479 1 297 10,776 Table A5.2: Financing of the Bao-Lan Line (In US$ Millions) Item Domestic Foreign Total Equity: Ministry of Railways 689 689 Loans: Domestic: State Development Bank 453 |___ ---_| 453 Foreign: The World Bank --- 156 156 Total 1,142 156 1,298 The line will be constructed between 2000 and 2003, and both passenger and freight operations are scheduled to start in 2004. MOR forecasts that about three-fourths of total traffic between 2004 and 2029 will be freight traffic. The Zhengzhou and Lanzhou Railway Administration Bureaus (RABs) will be responsible for operating the sections of the line within their jurisdictions in Shaanxi and Gansu Provinces respectively. The Zhengzhou and Lanzhou RABs are required to forward revenues from operating the Bao-Lan line to MOR. MOR compensates the RABs for the costs they incur in operating the line, allocates a profit or loss through the MOR "inter clearance of revenues" system, and pays interest and principal on domestic and foreign loans. - 49 - Traffic, Tariffs, Costs and Other Assumptions Full details of the assumptions made to prepare the base case of this analysis and the base-case financial statements of Bao-Lan line are available in the project file (balance sheet, income statement and sources and applications of funds statement). The assumptions are explained below. Traffic. The projected increases in traffic are rather modest. They focus on the traffic volume increases caused by incremental market growth and do not take into consideration the potentially higher traffic demand that may be realized as the proposed Westem Region Development Strategy is implemented. Specifically, the projections of the incremental increase in traffic volume take into account the following: * The potential areas and populations that will benefit from the Bao-Lan line * The variety and volume of natural resources (such as oil, ores, fertilizers and non-metal products) available in the areas served by the Bao-Lan line * Constraints due to the restricted capacity of the current line. Freight Tariff. It is assumed that from 2004 onwards the average tariff rate for the Bao-Lan line will be Yuan 0.0896 per ton-kin, which is the same level as in 2000. This is considered a conservative assunption. Although the feasibility study submitted by MOR indicates that only the basic tariff and construction surcharges apply to the Bao-Lan line, it is noted that the proposed Bao-Lan line, as a new electrified line, would also qualify for a supplementary electrification charge, which became effective in 1993 for all existing and new electrified lines. Passenger Tariff. The current Bao-Lan single-track line offers both regular and slightly higher-quality service trains, and the average tariff was a little over 0.12 Yuan per person-km in 2000. In addition to the basic tariff approved by SDPC and applicable to regular passenger trains, a higher tariff applicable to trains with better services (i.e., higher speed or better facilities) was approved by SDPC in 1992. Although after the project is completed in 2004 the Bao-Lan line will be able to offer much higher-quality services and consequently command higher tariffs, the financial analysis assumes that the average tariff level of the current Bao-Lan single line for 2000 will continue to apply throughout the period 2004-2029-also a conservative assumption. Costs. Costs include: * Variable costs such as payroll, materials, electricity supply and repairs * Fixed costs such as general administrative expenses, welfare benefits, and pensions * Depreciation for infrastructure, locomotives and rolling stock The useful life of infrastructure was assumed to be 25 years, and the useful life of locomotives and rolling stock 16 years, which is acceptable when compared to the current practice of Class I railways in the United States. Interest Expenses. Interest expenses were calculated using the interest rates at which different loans are expected to be obtained, taking into account the current interest rate structure. Taxes. Taxes were calculated according to current tax rates for business taxes, city construction surcharges, and educational supplementary charges. In accordance with China's tax regulations, the - 50 - railways are subject to a corporate income tax rate of 33 percent. Freight revenues generated from construction charges are exempt from this tax, and operating losses can be carried forward for up to five years. Net Cash Flows and Financial Internal Rate of Return (FIRR) The weighted average cost of capital (loans and equity) was calculated as 5.6 percent (see Table A5.3). This figure has been used to calculate the discounting net cash flows and to obtain the net present value (NPV) of investments in the Bao-Lan line. Table A5.3: Weighted Average Cost of Capital Item Amount Opportunity Cost (in US$ million) or interest rate Equity: Ministry of Railways 689 5.00% Loans: Domestic: State Develooment Bank 453 6.21% Foreign: The World Bank 156 6.50% Total amount / weighted average cost 1298 5.60% Net Cash Flows and FIRR. Net cash flows are calculated for the 30-year period 2000-2029 to derive estimated NPV and FIRR. The NPV at the weighted average cost of capital of 5.6 percent is Yuan 517 Million and the FIRR is 6.0 percent, which indicates that the investment is acceptable. The section on sensitivity analyses provides further information. Sensitivity Analysis The financial sensitivity tests are detailed in Table A5.4. The following four factors may have a direct impact on the output of the financial evaluation: * Traffic * Tariffs * Operating costs (i.e. operating expenses less depreciation) * Cost of project investment. Table A5.4: Sensitivity of Financial Evaluation Output to Variations in Four Factors Factors \ Fluctuation Range (FIRR) Output -30% -20% -10% 0% 10% 20% 30% Traffic Volume FIRR 3.1% 4.1% 5.1% 6.0% 6.8% 7.6% 8.3% Tariff FIRR 2.5% 3.8% 4.9% 6.0% 7.0% 7.9% 8.8% Operating Cost FIRR 7.0% 6.6% 6.3% 6.0% 5.6% 5.3% 4.9% Project Investment FIRR 8.5% 7.5% 6.7% 6.0% 5.4% 4.8% 4.3% Although the projected traffic volumes in the base case are modest, higher traffic volurnes are likely if potential market demand is met and the economy in the service areas served by the Bao-Lan line grows as anticipated. Because most prices are not expected to change significantly in the short term, no major changes are expected in operating costs. Even if salary and wages increase, as is likely, MOR will take steps to imnprove productivity and restrain price increases. - 51 - Modest physical and price contingencies have been allowed for in the current capital cost estimates. Experience from previous Bank railways projects indicates savings are more likely. The tariff has the greatest impact on FIRR. Although tariff ceilings are currently in place for both freight and passenger traffic, both MOR and SDPC will be under pressure to deregulate tariffs as the economy becomes more market-oriented. Compared to tariffs for other transportation modes in the project areas, freight and passenger tariffs on the Bao-Lan line are relatively low, and consequently any increase in tariff is expected to be absorbed without a major impact on traffic volumes. Availability of Counterpart Funds, Servicing of Bank Loans and Sustainability of the Bao-Lan Line The Sources and Applications of Funds Statement (included in the project files) shows how MOR proposes to make funds available to finance both construction and the purchase of locomotives and rolling stock. According to the information provided, and taking into account MOR's performance under previous railway loans, the Bank team believes that the counterpart funds will be made available on a timely basis to complete the project. Conclusion According to this analysis, the base case with FIRR of 6.0 percent exceeds the weighted average cost of capital of 5.6 percent and demonstrates that the investment cost will be recovered within a reasonable period. B. Financial Analysis of Transport Operation of Ministry of Railways (MOR) MOR represents the Government of China as the owner of the assets to be funded by the National Railways project and is responsible for repaying the Bank loan and all domestic loans. This part of the analysis focuses, therefore, on the financial viability of MOR. Using the audited historical and projected financial statements as a base, this analysis examines the financial performance of MOR's transport operations from 1993 to 2005, including actual and forecasted figures. Past And Present Financial Performance Since 1986, there has been an economic contract between MOR and GOC that states that MOR must finance all of its operating and capital expenditure through intemally generated funds and borrowings. The revenues generated from passenger and freight transport operations were the major sources of revenue for financing operations. In addition, between 1986 and 1990, they were the only source of funds for capital expenditures. However, in 1991, the introduction of a railway construction freight surcharge was approved by GOC. Since then, this surcharge has been the main revenue source for financing capital expenditures. By means of the 1986 economic contract, GOC had hoped to encourage MOR to operate the railways in accordance with market principles. MOR rose to the challenge. Between 1986 and 1992, MOR made a profit on its transport operations. It also electrified 4,200 km of track and completed 1,500 km of new lines. What is more, from 1990 to 1992, MOR remitted annual profits of Yuan 2 billion to GOC, even with the tariff levels set by SDPC. The situation changed in 1993 when MOR transportation operations began to lose money. This unprofitable situation continued through 1997, for the following reasons: - 52 - * Tariffs and surcharges continued to require prior approval by GOC. * Between 1993 and 1995, the consumer price index increased-by 14.7 in 1993, 24.1 in 1994, and 17.1 in 1995-while the freight tariff and railways construction freight surcharge remained constant. * The railways were operating in an increasingly competitive environment and lost market share. Table A5.5 summarizes figures for revenue and expenses for the period 1993-1999. Table A5.5: Actual Revenue And Expenses, 1993-1999 (In Yuan Millions) Item/Year 1993 1994 1995 1996 1997 1998 1999 Operating Revenue 80,294 93,608 99,367 112,004 121,283 128,042 136,209 of which surcharge revenue 24,347 33,935 34,762 35,319 35,115 35,785 36,370 Operating Expenses 47,641 57,086 64,056 70,453 81,226 84,836 90,290 Operating Income 32,653 36,522 35,311 41,551 40,057 43,206 45,919 Net Income /a 20,385 25,294 19,380 23,027 20,181 23,167 28,491 of which transfer to: Income/(loss) from Transport Op. (734) (2914) (6419) (1379) (2613) .1,265 4,166 Fund for Railway Upgrading 21,119 28,208 25,799 24,406 22,794 21,902 24,325 Working Ratio (%) /b 75% 86% 89% 79% 81% 79% 78% Operating Ratio (%) Ic 85% 97% 101% 92% 94% 92% 91% Unit Operating Revenue (Fenlctkm) 3.63 3.76 4.00 4.76 5.19 6.13 6.42 Unit Operating Expense (Fenlctkm) 3.09 3.60 3.97 4.37 4.89 5.63 5.80 /a: Operating income plus net non-operating income, less taxes. Income of DECO is combined into the net income from 1998 onwards. /b: Working Ratio: Operating expenses minus depreciation, expressed as a percentage of operating revenues minus construction freight .surcharge revenues. /c: Operating Ratio: Operating expenses expressed as a percentage of operating revenues minus construction freight surcharge revenues. MOR's transport operations returned to profitability in 1998 when MOR. Freight-tariff increases of 0.5 fen in 1998 and 0.11 fen in 1999 also contributed to the net operating income of the railway, while deflation in 1998 and 1999 also helped boost operating results. As Table A5.6 shows, MOR's transport operations are expected to continue to make a profit. Future Financial Performance Forecast: Base Case The base-case assumptions are presented in Table A5.6, and more detailed information is available in the project file. The following key financial assumptions were made for the base case for the years 2000 to 2005:. * Combined freight and passenger traffic (ctkm) will increase at 2 percent per year, compared to the projected GNP growth rate of 7 percent (a conservative assumption). * The average freight tariff (including base tariff and freight surcharge) will decrease by 3 percent in 2000 and 1 percent per year during the period 2001 to 2005. - 53 - * The average passenger tariff will increase by 1 percent per year. * Operating expenses (excluding (lepreciation) will increase at a rate of 2 percent per annum. These estimates were prepared on the basis of the investment plans in China's 1 0th Five-year Plan. They include Yuan 65 billion for a capital investment program in 2000 (including Yuan 57 billion for new investment and Yuan 8 billion for equipmnent replacement), and Yuan 392.5 billion during the period 2001 to 2005 (including Yuan 350 billion for new investment and Yuan 42.5 billion for equipment replacement). Table A5.6: Forecast Revenue And Expenses, 2000-2005 (In Yuan Millions) Item/Yea r 2000 2001 2002 2003 2004 2005 Operating Revenue 141,042 143,542 146,242 148,942 151,642 154,342 of which surcharge revenue 36,500 37,000 37,700 38,400 39,100 39,800 Operating Expenses 94,035 96,129 98,076 100,065 102,457 104,513 Operating Income 47,007 47,413 48,166 48,877 49,185 49,829 Net Income 24,187 24,322 24,697 24,968 25,147 25,346 of which transfer to: I Income/(Ioss) from Transport Op. 4,965 5,131 5,349 5,464 5,487 5,530 Fund for Railway Upgrading 19,222 19,191 19,348 19,504 19,660 19,816 Working Ratio (%) 78% 79% 79% 79% 79% 79% Operating Ratio (%) 91% 91% 91% 92% 92% 92% Unitoperating revenue (Fen/ctkm) 6.16 6.15 6.15 6.14 6.14 6.13 Unit operating expense (Fen/ctkm) 5.54 5.561 5.56 5.59 5.59 As Table A5.6 shows, MOR's transport operations are forecast to continue to make a profit until 2005. The working ratio is projected to be just below 80 percent, while the operating ratio is projected to remain at just above 90 percent. Sensitivity Analysis The sensitivity analysis focuses on MOR's financial sustainability, using three scenarios-low, medium and high-related to average freight and passenger tariff, construction freight surcharge, and capital investments. The results of key ratios are presented in Table A5.7. - 54 - Table A5.7: Sensitivity Analysis-Key Ratios, 1999-2005 'qCeJa. V-' .199 20ri 2n01 2102 20fu 2n4 20011 BaseCase- -_ _ _ Operating Ratio (%) 91 91 91 91 92 92 92 Self-Financing Ratio (%) /a 45 30 27 26 26 26 - Debt Service Coverage /b 2.30 1.63 1.61 1.60 1.59 1.58 1.56 Low-Case-Average freight/passenger tariff and construction freight surcharge decrease by 3% annually from 2000 onwards; Capital investment increases to higher level Operating Ratio (%) 91 90 92 94 97 100 102 Self-Financing Ratio (%) 44 32 25 20 15 11 - Debt Service CoveraRe 2.30 1.71 1.48 1.48 1.37 1.26 1.16 Mediurm Case..No change in freight /passenger tariff and construction freight surcharge onwards 2000; Capital investment remains constant Operating Ratio () 9 1 87. 87 87 87 88 88 Self-Financing Ratio (%) 45 39 37 36 36 37 - Debt Service Coverage 2.30 1.83 1.83 1.83 1.82 1.81 1.80 HighiCase..Average freight/passenger tariff and construction freight surcharge increase by 3% annually onwards 2000; Capital investment decreases to lower level _ ___ Owrating Ratio() 9 1 85 83 81 79 77 75 Self-Financing Ratio (%/6) 45 48 53 59 67 75 - Debt Service Coverage 2.30 1.95 2.07 2.19 2.3 2.42 2.54 la: Self-Financing Ratio: Intemally generated funds [i.e. Income after taxes (losses) plus construction freight surcharge ( net of taxes and after interest payment) plus depreciation minus principal repayments] as a percent of the average capital investments and equipment replacements in years (x-1), x and (x+1) /b: Debt Service Coverage: Income after taxes (losses plus interest and depreciation divided by interest and repayment on long-term loans to be paid in the same year) These sensitivity tests demonstrate how sensitive the financial results are to even small adjustments in fares. The self-financing ratio in the base case hovers at between 25 percent and 30 percent, which is clearly on the low side of acceptable. However, the debt-service ratio is at a more acceptable level, between 1.55 and 1.60. Furthermore, the debt-service ratio is expected to deteriorate only very slightly during the period 2006 to 2010. These tests also show that even small real increases in fares would move both these ratios into more satisfactory territory. On the other hand, even a small increase in capital expenditures would have the opposite effect of moving these ratios into unsatisfactory territory. - 55 - Based on all the information available to the task team, the most likely scenario is that the price bureau of SDPC is unlikely to allow MOR to increase freight fares any faster than inflation, and passenger fares only a little faster than inflation. Also, given the investrnent assumptions included in the 10th Five-year Plan, MOR will continue to invest in new capital projects at rate which is consistent with the investment rate of the last two years. Conclusions It is reasonable to conclude that, until 2005, MOR will be in a position to maintain its transport operations and meet its funding needs for capital investments. If the current reform program is implemented and MOR is allowed to operate in an even more market-oriented fashion, it is anticipated that MOR will be able to continue to operate profitably even after 2005. - 56 - Annex 6: Procurement and Disbursement Arrangements CHINA: National Railway Project Procurement Summary of the Assessment of Agencies' Procurement Capacity The Foreign Capital and Technical Import Center (FCTIC) of the Ministry of Railways (MOR) will be responsible for coordinating procurement for the Bank-financed activities in this project. FCTIC has chosen the International Tendering Company of China Machinery Import & Export Corporation (CMC-ITC) as the procurement agent for all International Competitive Bidding (ICB) and National Competitive Bidding (NCB) procurement activities, and the China Railway Import & Export Corporation (CRIEC) as the agent for all goods shopping and consulting-services procurement activities. CMC-ITC is an experienced procurement agent and is familiar with the international and national competitive bidding procedures for Bank-financed projects. CMC-ITC was MOR's procurement agent for the Bank-financed China Railways VII project. CRIEC was the appointed agent for shopping and consulting-service procurement for both the Railways VI and VII projects. It is familiar with the Bank's procedures for shopping and consulting-services procurement and is qualified to undertake the assigned procurement tasks. The assessment found that FCTIC should be capable of managing all procurement activities satisfactorily. Staff members who were involved in previous Bank-financed railway projects are familiar with the Bank's procurement procedures. The need for strengthening the agencies' procurement capacity has been identified and an action plan was prepared during the assessment. The action plan includes the preparation and dissemination of a project procurement manual and sample forms for quotation solicitations used in shopping procedures, among other things. The assessment identified some shortcomings in the general procurement framework in China, including some aspects of the bidding law for construction projects that became effective January 1, 2000. The shortcomings are summarized in an attachment to this annex. These are country-wide issues that are being addressed in an ongoing dialogue between the Government of China (GOC) and the Bank. The bidding law does make an exception for procurement financed by loans or aid from intemational institutions or foreign governments that require different procedures. Accordingly, MOR has agreed to follow Bank guidelines wherever there are differences between these and national procedures. Another concern identified during the assessment is the length of GOC's intemal review process for ICB goods procurement, both before the draft bidding documents and bid evaluation reports are submitted to the Bank for review. The review period can be lengthy when a disagreement arises among the govenunent agencies involved in the review process. The Mechanical and Electrical Product Import and Export Department (MEPIED) of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) is authorized to conduct such reviews and resolve any disagreement. To mitigate this risk, procurement planning will incorporate additional time for the review processes. Procurement Arrangements Procurement Plan. A procurement plan has been prepared using Microsoft Project and is included in the Project Implementation Plan (PIP). The procurement packaging plan has been prepared taking into - 57 - consideration the prospective sources of supply in China and from abroad. For each group of similar contracts within each category of goods, there will be a single Invitation for Bids (IFB) to be advertised. Bidders may bid for one or any combinations of the contracts under an IFB. Discounts offered for award of multiple contracts will be evaluated to arrive at the lowest evaluated cost to the purchaser. Procurement procedures. The following Bank guidelines will govem all Bank-financed procurement under the project: * For goods. Procurement under IBRD Loans and IDA Credits (dated January 1995 and revised in January and August 1996, September 1997 and January 1999) * For the selection of consultants. Selection and Employment of Consultants by World Bank Borrowers (dated January 1997 and revised September 1997 and January 1999) Format of the Documentation. The following formats will apply: * Evaluation reports. The Bank's Standard Bid Evaluation Form, Procurement of Goods or Works (dated April 1996, translated into Chinese by MOF May 1997), and Sample Form of Evaluation Report for Selection of Consultants (dated October 1999). - Model Bidding Documents. The Bank-approved Chinese Model Bidding Documents (MBD) (dated May 1997, prepared by MOF based on the Bank's Standard Bidding Documents [SBDs]) will be adopted for all ICB and NCB activities for goods. - Project-Specific Document. A model procurement document for goods using shopping procedures will be prepared and used by the procurement agency. - Revisions to Model Bidding Documents. The amendments included in the Bank's updated SBD for Procurement of Goods (dated January 1995 and revised March 2000 and January 2001), which have not yet been included in the MBD, dated May 1997, will be incorporated into the bidding documents used for goods contracts. Domestic Preference. For goods contracts, qualified domestic bidders will be eligible for a preference equal to 15 percent of the cost, insurance and freight (CIF) price, or the sum of the customs duties and import tax payable by a non-exempt importer, whichever is less. Advertisement. The General Procurement Notice (GPN) was published in the United Nations Development Business (UNDB), No.553 of February 28, 2001, and will be updated every year until all major ICB procurement activities and major consultant assignments have been completed. Specific Procurement Notices (SPNs) for all ICB and NCB procurement activities will be published in at least one newspaper with a national circulation. In addition, the SPNs for contracts estimated to cost more than $ 10 million will be published in the print version of the UNDB, allowing at least 45 days for bid preparation (75 days for contracts above $15 million). Similarly, invitations for expressions of interest for consulting contracts expected to cost more than $200,000 equivalent must be advertised in the UNDB of the print version at least thirty days before the deadline for preparation of the short list. - 58 - Procurement Methods (Table A) A total of $156.3 million of equipment and materials is expected to be financed by the project, using the following procedures: * ICB. About $153.5 million of equipment will be procured using ICB procedures. This represents 98 percent of total equipment purchases. These larger goods contracts will be for track materials, communication equipment, signaling equipment, traction substation equipment, electrification, survey and design equipment, permanent-way equipment and precast concrete bridge beams. * NCB. Equipment and materials for power supply equipment, environmental protection equipment, and operation and maintenance equipment estimated to cost between $50,000 and S200,000 per contract will be procured using NCB procedures, up to an aggregate of $2.6 million. * Shopping. Other items or groups of items estimated to cost less than $50,000 per contract, with an aggregate amount not exceeding $210,000, will be procured following intemational shopping or national shopping procedures as stated in Articles 3.5 and 3.6 of the guidelines. International shopping will be on the basis of the comparison of price quotations solicited from at least three suppliers from two or more countries. National shopping will also be on the basis of a comparison of at least three quotations and may be used where the desired goods are ordinarily available from more than one source, at competitive prices. Consulting Services. The value of consulting services to be procured is estimated to be $2.11 million and will be financed fully by the Bank. TORs of four contracts, each costing about $300,000, have been reviewed by Bank. For brief description of the four contracts, please see Project Component 2 in Annex 2. These will be procured under Quality and Cost-Based Selection (QCBS) procedures. In addition, an amount of $911,000 is reserved for assignments for other studies and annual seminars to support the reform of the Chinese railway industry ($700,00 to be used to finance consulting contracts, using QCBS procedures, with the balance being available to finance contracts for individual consultants). Retroactive financing. Retroactive financing of up to $16 million may be applied to expenditures made after November 2001 for the procurement of goods and equipment. - 59 - Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method' Expenditure Category ICB NCB Other2 N.B.F. Total Cost 1. Works 0.00 0.00 0.00 797.63 797.63 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 153.51 2.57 0.21 175.50 331.79 (153.51) (2.57) (0.21) (0.00) (156.29) 3. Services 0.00 0.00 2.11 0.00 2.11 (0.00) (0.00) (2.11) (0.00) (2.11) 4. Miscellaneous local costs 0.00 0.00 0.00 69.35 69.35 resettlement, design and (0.00) (0.00) (0.00) (0.00) (0.00) construction supervision, etc. 5. Interest during 0.00 0.00 0.00 79.82 79.82 construction (0.00) (0.00) (0.00) (0.00) (0.00) 6. Front-end fee 0.00 0.00 1.60 0.00 1.60 (0.00) (0.00) (1.60) (0.00) (1.60) 5. Cost of Locomotives & 0.00 0.00 0.00 19.94 19.94 Rolling Stocks (0.00) (0.00) (0.00) (0.00) (0.00) Total 153.51 2.57 3.92 1142.24 1302.24 (153.51) (2.57) (3.92) (0.00) (160.00) Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2Includes goods to be procured through shopping, consulting services. - 60 - Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Selection Method Consultant Services Expenditure Category QCBS QBS SF8 LCS CQ Other N.B.F. Total Cost A. Firms 1.90 0.00 0.00 0.00 0.00 0.00 0.00 1.90 (1.90) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (1.90) B. Individuals 0.00 0.00 0.00 0.00 0.00 0.21 0.00 0.21 (0.00) (0.00) (0.00) (0.00) (0.00) (0.21) (0.00) (0.21) Total 1.90 0.00 0.00 0.00 0.00 0.21 0.00 2.11 ( (1.90) (0.00) (0.00) (0.00) (0.00) (0.21) (0.00) (2.11) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan. - 61 - Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review' Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works Not Bank financed 2. Goods >S200 ICB, Prior Review 64 contracts for $153 51 $50-200 NCB, Post Review million will be prior <$50 Shopping, Post Review reviewed. Post review ratio: one in three contract>. 3. Services Firm >100 QCBS, Prior Review Aggregate value of $1.90 million for firms and Individual >50 Section 5 of Guidelines, individuals Prior Review Individual <50 Section 5 of Guidelines, Post Review 4. Miscellaneous _ 5. Miscellaneous 6. Miscellaneous Total value of contracts subject to prior review: $155.41 million Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits) Procurement activities will continue to be managed out of the Beijing office by procurement specialists Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 62 - Disbursement Allocation of loan proceeds (Table C) The proposed loan of US$ 160 million would be disbursed over a period of four years, up to the closing date of December 31, 2005. The allocation of loan proceeds according to expenditure category is outlined in Table C. Table C: Allocation of Loan Proceeds Expenditure Category Amount in US$million Financing Percentage Goods and Equipment 156.29 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 75% of local expenditures for other items procured locally Consulting Services and Training 2.11 100 Unallocated 0.00 Total Project Costs 158.40 Interest during construction 0.00 Front-end fee 1.60 Total 160.00 Use of statements of expenditures (SOEs): Withdrawals for the loan account will be made on the basis of SOEs for the following expenditures: 3 Goods contracts of less than $200,000 D Services provided by consulting firms with contracts of less than $100,000 v Services provided by individual consultants with contracts of less than $50,000 3 All training activities Special account: Authorization, allocation and operation of the special account. To facilitate disbursements, a special account will be opened with an authorized allocation of $10 mnillion, the estimated average expenditures for a four-month period. - 63 - Attachment to Annex 6 Summary of Deviations of the Chinese Bidding Law from Bank Guidelines in Respect of ICB Goods Procurement Funds for procurement. The Bidding Law requires that the purchaser possess or secure sources for the funds required for the procurement before carrying out bidding for the procurement and that he clearly specify such informnation in the bidding documents. The Bank has no such requirement. Advertisement. The Bidding Law allows the invitation for bids to be announced in newspapers and other media, including information networks or others. The Bank requires advertisement in a national daily newspaper. Time for bid preparation and submission. The Bidding Law sets the minimum time for bid preparation and submission as 20 days. The Bank generally requires 30 days for NCB contracts and 45 days for ICB contracts. Minimum number of bids. The Bidding Law requires re-bidding if fewer than three bids are received. The Bank allows evaluation of a single bid. Bid evaluation. The Bidding Law allows bids to be evaluated by scoring method and stipulates that a bid of less than cost must be rejected. However, the Bidding Law does not have provisions for determining the cost. This approach is unacceptable to the Bank. Evaluation must be on the basis of price. -64 - Annex 7: Project Processing Schedule CHINA: National Railway Project Project Schedule Planned Actual Time taken to prepare the project (months) First Bank mission (identification) 04/16/1999 04/16/1999 Appraisal mission departure 06/15/2001 11/27/2001 Negotiations 07/16/2001 12/10/2001 Planned Date of Effectiveness 12/01/2001 05/31/2002 Prepared by: Ministry of Railways, Beijing Preparation assistance: PRD Grant Fund: TF029623 (Recipient-Executed Part) - US$736,100, TF029702 (Bank-Executed Part) - US$178,690 Bank staff who worked on the project included: Name Speciality Richard G. Scurfield Task Team Leader from August, 2000 to Board, TUJDTR Hennie Deboeck Task Team Leader until August, 2000, EASTR Karin Budin Peer Reviewer, TUDTR Robin Carruthers Economic Analysis, EASTR Yi Dong Disbursements, EACCF Daniel Gibson Resettlement, EASES R. I. Gopalkrishnan Procurement, EAPCO Liu Yi-Ling Disbursements, LOAG3 Liu Zhefu Resettlement, EACCF Hoi-chan Nguyen Legal, LEGOP Teresita Ortega Program Assistant, EASTR Mirtha Pokomy Peer Reviewer, LCSFT Jorge Rebelo Peer Reviewer, LCSFT Tony Shen Financial Management, EACCF Shao Yuping Operations and Financial Analysis, EACCF Anil Somani Environment, EASES Jitendra Sondhi Engineering, Consultant Richard Spero Transport Economics, Consultant Louis Stanley Thompson Railway Reform and Restructuring, TUDTR Wang Chaogang Social Assessment, EACCF Yang Dawei Procurement Assessment, EACCF Li Xiaoping Procurement, EACCF Dong Wenyan Program Assistant, EACCF -65 - Annex 8: Documents in the Project File* CHINA: National Railway Project A. Project Implementation Plan Bao-Lan Line and Technical Assistance 1. Project Implementation Plan, June 2001 B. Bank Staff Assessments 1. Aide Memoire, May 6,1999 2. Aide Memoire, November 19, 1999 3. Railway Reform in China: The Great Railway Challenge, October 14, 1999 4. MOR's Reform Program, December 2, 1999 5. Mission Report of Bao-Lan Railway Line, February 11, 2000 6. Aide Memoire, September 29, 2000 C. Other Bao-Lan Line Feasibility Studies 1. The Feasibility Study of the Newly-Built Second Line on Baoji-Lanzhou Section of Lianyungang-Lanzhou Railway, The First Survey and Design Institute of Ministry of Railways, July 1999 2. The Feasibility Study of the Newly-Built Second Line on Baoji-Lanzhou Section of Lianyungang-Lanzhou Railway, The First Survey and Design Institute of Ministry of Railways, December 1999 3. Feasibility Study Report, The First Survey and Design Institute of Ministry of Railway, April 2000 4. The Feasibility Study of the Proposed New Second Line on Baoji-Lanzhou Section of Lianyungang-Lanzhou Railway, The First Survey and Design Institute of Ministry of Railways, August 2000 Environment I . Environmental Impact Assessment (EIA), Academy of Railway Science of the Ministry of Railway, March 2000 2. Environmental Action Plan (EAP), Academy of Railway Science of the Ministry of Railways, March 2000 3. Environment Monitoring Report, Beijing OASIS Environment Protection Technology Co. Ltd., August 2000 4. Environmental Impact Assessment (EIA), The Center of Environmental Assessment and Engineering of the Scientific Research Institute, Railway Department of the Ministry of Railways, August 2000 5. Environmental Action Plan (EAP), The Center of Environmental Assessment and Engineering of the Scientific Research Institute, Railway Department of the Ministry of Railways, August 2000 6. Environmental Impact Assessment (EIA), Environmental Action Plan (EAP), and EA Summary, The Center of Environmental Evaluation and Engineering of the Research Academy of Railway Sciences of the Ministry of Railways, AMEC Earth & Environmental Limited, March 2001 - 66 - Resettlement Action Plans 1. Resettlement Action Plan for Baoji-Lanzhou, Ministry of Railways, (no date, received in May 2000) 2. An Evaluation Report on the Social Impact of the Closed-Down Rail Stations along Weishuiyu--Lanzhou Section of Baoji --Lanzhou Railway Line (The Third Version), Research Institute of Foreign Capital Introduction & Utilization of Southwest Jiaotong University, August 18, 2000 3. Resettlement Action Plan for Baoji-Lanzhou (fifth draft), Ministry of Railways, August 18, 2000 4. Resettlement Action Plan for Baoji-Lanzhou (eighth draft), November 20, 2000 Economic and Financial Reports 1. The Tables of Forecast Freight and Passenger Traffic, and Equipment Acquisition Schedule(With and Without Bao-Lan line) 2. Assumption for Financial Analysis 3. Forecast Financial Statements (Income Statement, Balance Sheet, Sources and Applications of Fund Statement) Performance Indicators 1. Performance Indicators, February 2001 MOR Information 1. Actual and Forecast Income Statement of Transport Sector of MOR (1993-2005) Reform in the Kunming Administration (Passenger Transport Enterprise) 1. Specific information regarding aspects of the Kunming PTE component to be financed under the project, December 1999 *Including electronic files - 67 - Annex 9: Statement of Loans and Credits CHINA: National Railway Project 07-Dec-200 1 Difference between expected and actual Original Amount in USS Millions disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd P045915 2001 Urumqi Urban Transport 100.00 0.00 0.00 0.00 89.12 19.57 0.00 P058845 2001 Jiangxi II Hwy 200.00 0.00 0.00 0.00 200.00 0.00 0.00 P047345 2001 CH-HUAI RPVER POLLUTION CONTROL 105.50 0.00 0.00 0.00 105.50 0.00 0.00 P056596 2001 Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 100.00 18.53 0.00 P056516 2001 WATER CONSERVATION 74.00 0.00 0.00 0.00 70.20 6.60 0.00 P056199 2001 Third Inland Waterways 100.00 0.00 0.00 0.00 100.00 0.83 0.00 P051859 2001 CH-LIAO RIVER BA9N 100.00 0.00 0.00 0.00 100.00 0.00 0.00 P058844 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 136.83 1.50 0.00 P058843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 185.22 29.55 0.00 P049436 2000 CN-CHONGOING URBAN ENVIRCNMENT 200.00 0.00 0.00 0.00 196.00 14.83 0.00 P064730 2000 Yangtze Dke Strengthening Project 210.00 0.00 0.00 0.00 198.90 60.98 0.00 P056424 2000 TONGBAI PUMPED STCRA 320.00 0.00 0.00 0.00 318.00 34.93 0.00 P045910 2000 CH-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 142.06 12.40 0.00 P045264 2000 SMALLHLDR CATTLE DEV 93.50 0.00 0.00 0.00 69.02 24.44 0.00 P042109 2000 CH-BEIJING ENVIRONMENT II 349.00 0.00 25.00 0.00 358.15 58.06 0.00 P049665 1999 ANNINGVALLEYAG.DEV 90.00 30.00 0.00 0.00 63.68 5.36 0.00 P003653 1999 Container Transport 71.00 0.00 0.00 3.13 53.08 55.68 0.00 P050036 1999 Anhui Provinrial Hwy 200.00 0.00 0.00 0.00 133.07 35.12 0.00 P043933 1999 CH-SICHUAN URBAN ENMARONMENT 150.00 2.00 0.00 0.00 100.88 23.69 2.33 P051705 1999 Fujiang 11 Highway 200.00 0.00 0.00 0.00 156.95 74.20 0.00 P046564 1999 Gansu & Inner Mongola Poverty Reducion 60.00 100.00 0.00 0.00 119.71 37.53 0.00 P046829 1999 RENEWABLE ENERGY DEVELOPMENT 100.00 0.00 0.00 0.00 13.00 60.00 0.00 P046051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 32.21 26.69 0.00 P041890 1999 Liaoning Urban Transport 150.00 0.00 0.00 0.00 91.63 46.77 0.00 P042299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 39.03 -3.43 0.00 P036953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 48.33 9.57 0.00 P051856 1999 ACCCUJNTING REFORM & DEVELOPMENT 27.40 5.60 0.00 0.00 23.42 21.24 0.00 P056216 1999 LOESS PLATEAU II 100.00 50.00 0.00 0.00 109.44 53.54 0.00 P057352 1999 CN-RURAL VATER SUPPLY IV 16.00 30.00 0.00 0.00 38.57 13.24 0.00 P058308 1999 CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 4.26 4.12 0.00 P038121 1999 RENEWABLE ENERGY DEVELOPMENT 0.00 0.00 35.00 0.00 26.97 9.33 0.00 P063123 1999 YANGTZE FLOOD EMERGY 40.00 40.00 0.00 0.00 1.90 2.87 2.87 P060270 1999 CN-ENTERPRISEREFORM LN o.Do 5.00 0.00 0.00 4.64 6.66 0.00 P041268 1999 Nat Hwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 241.35 54.69 0.00 P051888 1999 GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 73.69 28.54 0.00 P045788 1998 Tn-Provindal Hwy 230.00 0.00 0.00 0.00 115.59 59.63 0.00 P037859 1998 EGY CONSERVATION PRO 0.00 0.00 22.00 0.00 7.72 20.61 0.00 P003539 1998 SUSTAINABLE COASTAL RESOURCES DEV. 100.00 O.00 0.00 0.00 63.99 32.33 0.00 P036949 1998 Nat Hwy3-Hube 250.00 0.00 0.00 0.00 93.51 3.51 0.00 P003566 1998 CN-BASIC HEAL1H (HLTH8) 0.00 85.00 0.00 0.00 49.72 19.33 0.00 P035698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 100.00 185.20 196.45 1.16 P036414 1998 CH-GUANGXI URBAN ENVIRONMENT 72.00 20.00 0.00 0.00 82.52 42.08 0.00 P040185 1998 CH-SHANDONG ENVIRONMENT 95.00 0.00 0.00 0.00 37.56 26.83 0.00 P049700 1998 IAJL-2 300.00 0.00 0.00 0.00 119.09 36.11 0.00 P003606 1998 ENERGYCONSERVATION 63,00 0.00 22.00 0.00 52.97 11.49 0.00 P003619 1998 2nd Inland Waterways 123.00 0.00 0.00 0.00 9362 62.06 0.00 P051736 1998 E. CHINAJJIANGSU PWR 250.00 0.00 0.00 0.00 176.31 172.81 156.09 P046952 1998 FOREST.DEV.POORAR 100.00 100.00 0.00 0.00 115.04 -15.00 51.12 P003614 1998 Guangzhou City Transport 200.00 0.00 0.00 0.00 130.81 120.27 0.00 P046563 1998 TARIMBASIN II 90.00 60.00 0.00 2.67 82.78 48.87 0.00 P003591 1998 STATE FARMS COMMERCI 150.00 0.00 0.00 80.91 8.45 64.96 8.24 P036952 1997 CN-BASIC ED. IV 0.00 85.00 0.00 0.00 2.56 4.55 0.00 P036405 1997 WANJIAZHAI WATER TRA 400.00 0.00 0.00 75.00 60.51 93.35 25.35 - 68 - Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Revd P003635 1997 CN-VOC. ED. REFORM PROJ 10.00 20.00 0.00 0.00 2.88 3.85 0.00 P035693 1997 FUEL EFFICIENT IND. 0.00 0.00 32.80 0.00 9.97 32.81 0.00 P003590 1997 (INBA MCUNTAINS POvERTY REDUCTION 30.00 150.00 0.00 0.00 85.15 81.73 0.00 P003350 1997 TUOKETUO POWERAINNER 400.00 0.00 0.00 102.50 205.44 271.01 17.54 P044485 1997 SHANGHAI WAIGAOQIAO 400.00 0.00 0.00 0.00 283.15 125.55 27.70 P003643 1997 Xinjiang Hwy 8 300.00 0.00 0.00 60.00 64.06 117.06 -7.61 P003637 1997 CH-NATIONAL RURAL WATER III 0.00 70.00 0.00 0.00 28.82 22.07 18.83 P003654 1997 Nat Hwy2lHunan-Guangdong 400.00 00. 0.00 0.00 150.69 127.36 0.00 P034081 1997 XLAOLANGDC MULTI, 8 430.0 0.00 0.00 0.00 92.54 118.76 0.00 P038988 1997 HEILCNGJIANGADP 120.00 0.00 0.00 0.00 36.56 28.98 0.00 P040513 1996 2nd Henan Proy Hwy 210.00 0.00 0.00 0.00 103.30 96.64 -15.03 P003646 1996 CN-CHONGQING IND POL CT 170.00 0.00 0.00 164.82 3.00 164.49 2.28 P003569 1996 Shanghai-Zhejiang Hwy 260.00 0.00 0.00 53.34 17.32 70.65 14.28 P003602 1996 CH.HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 28.32 64.60 93.74 32.28 P003589 1996 CN-DISEASEPREVENTION (HLTH7) 0.00 100.00 0.00 0.00 18.48 29.30 0.00 P003638 1996 SEEDSSECTORCOMMER. 80.00 20.00 0.00 9.40 21.42 25.98 0.00 P003594 1996 GANSU HEXI CCRRIDOR 60.00 90.00 0.00 0.00 97.62 56.21 0.00 P003599 1996 CH-YUNNAN ENVIRCNMENT PROJECT 125.00 25.00 0.00 0.00 105.80 86.66 29.69 P003563 1996 ANIMAL FEED 150.00 0.00 0.00 127.50 2.70 130.20 2.46 P003507 1996 ERTANHYDRO II 400.00 0.00 0.00 0.00 1.11 6.75 0.00 P034618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 12.58 14.87 0.00 P036950 1996 CN-BASICED.POORIII 0.00 100.00 0.00 0.00 0.29 8.17 0.00 P003652 1996 2nd Shaanxi Prov Hwy 210.00 0.00 0.00 0.00 52.68 52.68 0.00 P003649 1996 SHANXIPOVERTYALLEV 0.00 100.00 0.00 0.00 13.16 16.83 0.00 P003648 1996 CH-SHANGHAI SEWERAGE II 250.00 0.00 0.00 0.00 101.90 98.70 0.00 P003603 1995 CH-ENTERPRISEHOUSING& SOC SEC REF 275.00 75.00 0.00 20.00 110.77 129.53 21.42 P003600 1995 CN-TECFINOLOGY DEVELOPMENT 200.00 0.00 0.00 3.02 38.13 40.15 0.00 P003598 1995 CH-LIAONING ENVIRONMENT 110.00 0.00 0.00 0.00 24.75 24.75 4.01 P003596 1995 YANGTZE BASIN WATER 100.00 110.00 0.00 0.00 3.03 5.60 0.00 P003585 1995 SHENYANG IND REFORM 175.00 0.00 0.00 0.00 41.52 41.19 0.00 P003571 1995 RAILWAYS VII 400.00 0.00 0.00 29.00 166.25 175.09 119.10 P003402 1995 NATURE RESERVE MGMT 0.00 0.00 0.00 0.00 0.96 2.41 0.00 P036041 1995 FISCAL& TAX REF. & 25.00 25.00 0.00 0.00 5.61 8.11 6.97 P003647 1995 ECONOMIC LAW REFORM 0.00 10.00 0.00 0.00 4.66 5.41 0.00 P003639 1995 SOUTHWEST POV. REDUC 47.50 200.00 0.00 0.00 29.38 54.25 0.00 P003642 1995 ZHEJIANG POWER DEVT 400.00 0.00 0.00 0.00 65.85 64.01 0.00 P036947 1995 SICHUAN TRANSMISSICN 270.00 0.00 0.00 65.00 45.35 110.35 6.67 P003634 1995 CN-MATERNAL CHLD HEAL1(HLTH6) 0.00 90.00 0.00 0.00 4.44 7.76 0.00 P003593 1994 SONGLIAO PLAIN ADP 0.00 205.00 0.00 0.00 7.02 1.66 0.00 P003586 1994 CH-SHANGHAI ENVIRCNMENTPROJECT 160.00 0.00 0.00 0.00 36.24 36.24 19.47 P003641 1994 YANGZHOU THERMAL POW 350.00 0.00 0.00 11.50 4.55 16.05 -0.21 P003644 1994 XIADLANGDI RESETTLEMENT 0.00 110.00 0.00 0.00 10.58 8.63 0.00 P003609 1994 SICHUAN GAS DEJ & CONSERVATION 255.00 0.00 10.00 0.00 56.81 56.81 0.00 P003404 1994 SICHUAN GAS DEV. CON 0.00 0.00 10.00 0.00 0.02 0.78 0.00 P003626 1994 Fujian Prov Highway 140.00 0.00 0.00 0.00 31.05 31.05 30.25 P003540 1994 LOESS PLATEAU 0.00 150.00 0.00 0.00 2.81 -3.52 0.00 P003557 1994 FOREST RESOURCE DEV 0.00 200.00 18.40 0.00 1.94 6.13 0.96 P003595 1994 RED SCLS I DEVELCP 0.00 150.00 0.00 0.00 13.03 8.85 9.38 P003473 1993 CH-ZHEJIANG MULTICITIES DEVELCPMENT 0.00 110.00 0.00 0.00 6.42 6.80 6.81 P003616 1993 TIANHUANGPING HYDRO 300.00 0.00 0.00 17.00 21.67 38.41 0.00 P003623 1993 FINANCIALSECTORT.A 0.00 60.00 0.00 0.00 8.99 3.48 3.48 P003627 1993 GRAIN DISTRIBUTION P 325.00 16.00 0.00 0.00 52.33 53.16 34.83 P003597 1993 TAIHUBASINFLOODCO 100.00 100.00 0.00 0.00 3.17 .1.11 -1.11 P003632 1993 CN-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 6.56 7.62 7.30 P003592 1993 REF. INSTL.& PREINV 0.00 50.00 0.00 0.00 4.24 4.87 0.00 - 69 - Differenre between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Re i'd P003624 1992 CN-INFECTIOUS DISEASES(HLTH5) 0.00 129.60 0.00 0.00 3.88 0.26 0.22 Total: 14621.90 3482.20 175.20 953.10 7610.41 4673.76 639.1E - 70 - CHINA STATEMENT OF IFC's Held and Disbursed Portfolio MAY-2001 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1999/00 Bank of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 1996 Beijing Hormel 3.21 0.50 0.00 2.75 3.21 0.50 0.00 2.75 1998/00 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Caltex Ocean 21.00 0.00 0.00 36.82 21.00 0.00 0.00 36.82 1998 Chengdu Huarong 7.40 3.20 0.00 0.00 0.00 3.20 0.00 0.00 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987/92/94 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 China Walden Ven 0.00 0.77 0.00 0.00 0.00 0.77 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1999 Dujiangyan 25.59 0.00 0.00 30.00 6.90 0.00 0.00 8.10 1995 Dupont Suzhou 15.58 4.15 0.00 20.80 15.58 4.15 0.00 20.80 1994 Dynanic Fund 0.00 10.01 0.00 0.00 0.00 8.35 0.00 0.00 2000 Elkem Carbon 6.30 1.70 0.00 6.00 0.00 0.00 0.00 0.00 1999 Hansom 0.00 16.10 0.00 0.00 0.00 16.10 0.00 0.00 1996 Jingyang 35.00 0.00 0.00 76.92 35.00 0.00 0.00 76.92 1998 Leshan Scana 6.10 1.35 0.00 0.00 4.50 1.35 0.00 0.00 1996 Nanjing Kumho 8.76 3.81 0.00 24.91 8.76 3.81 0.00 24.91 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00 1995 Newbridge Inv. 0.00 2.13 0.00 0.00 0.00 2.13 0.00 0.00 1997 Ningbo 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1997 OrientFinance 11.43 0.00 0.00 14.29 11.43 0.00 0.00 14.29 1997/00 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1997 PTP Hubei 12.63 0.00 0.00 25.38 12.63 0.00 0.00 25.38 1996 Pacific Ports 0.00 2.54 0.00 0.00 0.00 2.54 0.00 0.00 1998 Rabobank SHFC 1.35 0.00 0.00 1.35 1.35 0.00 0.00 1.35 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.45 0.00 0.00 1998 Shanghai Krupp 30.00 0.00 0.00 68.80 6.07 0.00 0.00 13.93 1999 Shanxi 19.00 0.00 0.00 0.00 12.52 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.99 0.00 0.00 3.76 0.99 0.00 0.00 2001 Sino-Forest 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1995 Suzhou PVC 14.67 2.48 0.00 14.80 14.67 2.48 0.00 14.80 1998 WIT 5.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 1996 Weihai Weidongri 2.48 0.00 0.00 0.00 2.48 0.00 0.00 0.00 1993 Yantai Cement 8.30 1.95 0.00 4.43 8.30 1.95 0.00 4.43 1998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 Total Portfolio: 262.56 100.02 0.00 332.25 168.16 80.73 0.00 244.48 Approvals Pending Conmmitment FY Approval Company Loan Equity Quasi Partic 1998 PTP Hubei BLINC 0.00 0.00 0.00 1.50 2000 Wan Jie Hospital 15.00 0.00 0.00 0.00 2000 CIMIC Tile 15.00 5.00 0.00 15.00 2000 SBCF I 0.00 0.00 15.00 0.00 2000 Meijing 9.00 0.00 0.00 7.30 2000 CIG Zhapu 6.00 5.00 0.00 0.00 - 71 - 2001 Sino-Forest 25.00 0.00 0.00 0.00 2001 Minsheng 0.00 23.50 0.00 0.00 2001 Peak Pacific 25.00 0.00 0.00 0.00 2001 NCCB 0.00 0.00 26.58 0.00 2001 Maanshan Carbon 9.00 0.00 2.00 5.00 2001 AACI 0.00 0.00 2.00 0.00 2001 Daning Coal 0.00 0.00 0.00 15.00 Total Pending Commitment: 104.00 33.50 45.58 43.80 - 72 - Annex 10: Country at a Glance CHINA: National Railway Project East Lower- POVERTY and SOCIAL Asia & middle- China Pacific Income Development dlamond 2000 Population, mid-year (millions) 1,262.5 1,853 2,046 Life expectancy GNI per capita (Atlas method. US$1 840 1t060 1,140 GNI (Atlas method, US$ billions) 1,061.2 1,964 2,327 Average annual growth, 1994-00 Population (%) 1.0 1.1 1.0 Labor force (%) 1.2 1.4 1.3 GNI Gross per primary Most recent estimate (latest year available, 1994-00) capita enrollment Poverty (% of population below national poverty line) 5 Urban Dopulation (% of totaf population) 36 35 42 Life expectancv at birth (vears) 70 69 69 Infant mortalitv (per 1, 000 live births) 30 35 32 Child malnutrition (% of children under 5) 9 13 11 Access to improved water source Access to an improved water source (% of population) 75 75 80 Illiteracy (% of population e.qe 15+) 16 14 15 Gross primarv enrollment (%of school-ape population) 123 119 114 Chrna Male 123 121 116 -- Lower-middle-income group Female 123 121 114 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1980 1990 1999 2000 Economic ratlos' GOP (US$ billions) 216.2 363.0 997.5 1,076.9 Gross domestic investment/GOP 35.2 34.7 37.2 37.3 Exports of qoods and services/GDP 7.6 17.5 22.0 25.9 Trade Gross domestic savinoslGDP 34.9 37.9 40.1 39.9 Gross national savinqslGDP 34.9 38.3 38.7 39.2 Current account balancelGDP -0.4 3.8 1.6 1.9 Domestic Investment Interest pavments/GDP 0.2 0.7 0.6 0.7 svns Total debtlGDP .. 15.2 15.5 13.9 Total debt service/exports 8.0 9.9 9.0 7.4 Present value of debtGDP .. . 13.5 Present value of debtUexports .. .. 58.7 Indebtedness 1980-90 1990-00 1999 2000 2000-04 iaveraqe annual growth) GDP 10.1 10.3 7.1 7.9 7.4 - China GDP per capita 8.5 9.2 6.1 7.2 6.7 Lower-middle-income group Exports of qoods and services 11.0 16.5 13.9 32.0 11.1 STRUCTURE of the ECONOMY 1980 1990 1999 2000 Growth of Investment and GDP I%) (% of GDP) 20 Aqriculture 30.1 27.0 17.6 15.9 Industry 48.5 41.6 49.4 50.9 15 Manufacturinq 40.5 32.9 33.6 34.5 10 Services 21.4 31.3 32.9 33.2 Private consumption 50.5 49.9 47.4 47.0 95 96 97 98 99 00 General government consumption 14.6 12.1 12.5 13.1 GDI GDP Imports of goods and services 7.9 14.3 19.1 23.2 1980-90 1990-00 1999 2000 Growth of exports and Imports 4%) (average annual growth) Aqriculture 5.9 4.1 2.8 2.4 40 IndustrV 11.1 13.7 8.1 9.6 3 Manufacturinq 11.1 13.4 8.3 9.7 20. Services 13.5 9.0 7.5 7.8 iso 7 r Private consumption 9.4 8.8 2.6 6.0 _ General government consumption 9.8 9.4 8.4 12.0 -10 5 9S g 99 oo Gross domestic investment 10.8 11.6 3.2 7.9 Exports t.Impoers Imports of aoods and services 9.1 16.1 22.3 24.8 Note: 2000 data are preliminary estimates. * The diamonds show four kev indicators in the countrv (in bold) compared with its income-group average. If data are missino the diamond will be incomDlete. - 73 - China PRICES and GOVERNMENT FINANCE Domestic prices 1980 1990 1999 2000 Inflation (%) (% change) 30 Consumer prices 6.0 3.1 -1.4 0.4 20 Impliait GDP deflator 5.6 5.5 -2.2 0.9 _ Government finance G (% of GDP, includes current grants)9 6 97 B 9 Current revenue 25.7 19.7 15.0 15.3 10 Current budget balance .. 3.0 1.3 0.6 - GDP deflator * CP1 Overall surplus/deficit -1.5 -0.6 -4.0 -3.6 __________________ TRADE 1980 1990 1999 2000 Export and Import levels (USS mill.) Total exports (fob) 18,270 62,091 194,931 249,210 30,000 Food 2,985 6,609 10,458 12,282 Fuel 4,280 5,237 4,659 7,851 200.0oo Manufactures 9,005 46,205 174,990 223,752 Total imports (cif) 20,017 53,345 165,699 225,097 Food 2,927 3,335 3,619 4,758 150,5w 00L Fuel and energy 203 1,272 8,912 26,037 Capital goods 5,119 16,845 69,469 91,934 r , _ .0_ , 94 95 93 97 98 99 00 Export price index (1995=100) 25 78 69 67 Import price index (1995=100) 22 80 71 75 U Exports Imports Terms of trade (1995=100) 116 97 98 90 BALANCE of PAYMENTS (IUS$ millions) 1980 1990 1999 2000 Current account balance to GDP (%) Exports of goods and services 20,167 67,971 218,496 279,561 s Imports of goods and services 20,859 55,537 189,799 250,688 Resource balance -692 12,433 28,697 28,873 Net income -100 1,055 -17,973 -14,666 3 Net current transfers .. 274 4,943 6,311 2 Current account balance -792 13,762 15,668 20,519 1 - - I i . . Financing items (net) .. -7,673 -7,163 -9,971 a -__ Changes in net reserves .. -6,089 -8,505 -10,548 94 95 9r 97 99 99 00 Memo: Reserves includinp qold (US$ millions) .. 16,963 161,404 171,753 Conversion rate (DEC, locallUS$) 2.1 5.1 8.2 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ millions) Composition of 2000 debt (US$ mill.) Total debt outstanding and disbursed .. 55,301 154,223 149,800 IBRI D 2,865 10,400 11,118 (DA G. 17174 A:3,016 8,907 8,771 . ,B:,771 Total debt service 1,652 7,057 20,655 21,728 i2,ss6 IBRD .. 416 1,142 1,291 IDA .. 19 117 131 Composition of net resource flows .g g _ E: 28,510 Official grants 7 143 201 147 Official creditors .. 1,727 1,706 1,928 Private creditors .. .. -1,854 1,985 Foreign direct investment 57 3,487 41,015 42,096 Portfolio equity 0 0 1,808 7,814 F 8,61 World Bank program Commitments .. 953 2,097 1,536 A - IBRD E - Bilateral Disbursements .. 1,098 1,756 1,907 B-IDA D -Otherrmultilateral F- Private Principal repayments .. 216 558 644 C - IMF G - Short-term Netflows .. 882 1,198 1,263 Interest payments .. 219 701 778 Net transfers .. 663 497 485 Development Economics 9/6/01 - 74 - Additional Annex 11 The Reform Program for the Ministry of Railways (MOR) of China CHINA: NATIONAL RAILWAY Discussions on railway reform between the Ministry of Railways of China (MOR) and the State Council have intensified over the past year. In early 2000, MOR presented an initial set ofproposals to the State Council. MOR responded to the council's questions and the broad approach to railway restructuring has been established. Since then, MOR has begun to implement many aspects of the plan. The railway restructuring approach should be understood as a framework for future decision-making. The direction MOR will take and the issues it faces are just now taking shape, and it is not possible to address all the issues that will emerge in the next decade. However, as the following quotes from the 10th Five Year Plan make clear, refonn of the railways is now an official policy of the Government of China. Premier Zhu Rongji's Report on the Outline of the 10th Five-Year Plan For National Economic And Social Development (Delivered at the Fourth Session of the Ninth National People's Congress on March 5, 2001) VII. Further Deepening Reforms and Opening Wider to the Outside World We need to further reform the management systems of industries such as electricity, railways, civil aviation and telecommunications, and introduce a mechanism for competition. The reforms needs to improve the relations between the government and enterprise so as to meet the requirements of a socialist market economy. The Outline of the 10th Five-Year Plan for National Economic and Social Development ( Approved by the Fourth Session of the Ninth National People's Congress on March 15, 2001) From Chapter 7, Intensifying Construction of Infrastructure Facilities and Improving the Distributions and Structures: To accelerate the reform of transportation management system and operation mechanism with the core focus on the separation of the government function and the enterprise function, railways will carry out separation of infrastructure and transport operation ".... The 10th Five-Year Plan For China Railways (Published by MOR on June 12, 2001) From I1I. Instruction Policy and Strategy Target of the Railways Development for the Tenth Five- Years Strategy Target of the Railways Development for the Tenth Five- Years: .... Make significant progress on the separation of the functions of the government and the enterprise, the separation of infrastructure and transport operation, introduction of the competition, and strengthen monitoring and management. - 75 - From IV. Railways Development Plan for the Tenth Five-Years 5. Deepen transportation system reform: According to the overall reform view of "the separation of the functions of the government and the enterprise, the separation of infrastructure and transport operation, introduction of the competition, and strengthen monitoring and management", accelerate to deepen the railways reform, establish the transportation management system and operation mechanism which meet the requirements of a socialist market economy. EXISTING PROBLEMS Confusion Over State Versus Enterprise Roles. Three years ago, China had one of the few remaining monolithic state railway ministries (Russia and India also still operate railway ministries). There are no remaining ministries of railways in market economies. The most common model is to have govermnent functions performed by another ministry (usually the ministry of transport), while transport operations are performed by rail enterprises (usually joint stock companies operating under commercial law). MOR's confusion over the respective roles of govenmment oversight and regulation and the commercial function has come to mean that neither is done well. MOR's Geographically-based Structure. Rail operations in China currently are performed by 14 administrations (and over 50 subadministrations), each of which occupies a distinct territory. While most railway traffic must be exchanged between or among two or more administrations, most of the railway's resources (locomotives and track maintenance equipment, for example) are under the control of individual administrations and subadministrations. Moreover, there is no intrarail competition. Consequently, service suffers and costs go up at rail interchange points. In addition, the multiplicity of administrations and subadministrations creates excessive costs due to duplicative management functions and layers. Internal Organization of Adniinistrations and Subadministrations. A legacy of the planned economy is that the operating units were organized to provide transport according to plan, not to define and serve the needs of customers. The planning-style production cost center units (locomotive shops, wagon shops, civil engineering, electrical engineering, transport management) will give way to market-defined, commercial units (regional passengers, national passengers, freight, etc., each having full control over its operating assets). This will permit commercial rather than production objectives. Imposed Social Functions. The planned economy offered a large nurnber of cross-subsidies under which losses on social activities were supported by excess profits on captive customers. In the past, the knowledge about costs was so limited that the cross-subsidies could not be measured, nor with prices controlled could MOR take action to reduce social losses. As railways in China enter a market context in which they face stiff competition from other transport modes, the railways will not be able to afford social finctions and will have to establish a rate-setting regime that permits distinguishing between commercial and social activities. Railways can provide comnmercial services, and government will define and support social activities through public service obligation (PSO) payments. The social element includes services for students and special goods; it may also include investments to build lines in rural areas of China where the curTent population density will not immediately support rail construction. - 76 - THE GUIDELINES FOR CHANGE Restructuring must foster: * Separation and clarification of the respective roles of government and commercial enterprise * Restructuring of transport enterprises to permit meeting market needs rather than production targets * Adoption by all new enterprises of a commercial approach to operations so as to achieve market-oriented results * Attention to a proper regulatory structure for the new enterprises. THE GENERAL MODEL TO BE FOLLOWED The guiding concept behind the restructuring will be "up/down" separation, the term that China uses for what is called infrastructure separation in the European context. The up/down models are similar to those required by the current European Commission Order 91-440, 2001/12, 2001/13 and 2001/14, and require either accounting separation of infrastructure costs (with charges for use to operators) or actual institutional separation of infrastructure provision from operators. MOR has decided to pursue the creation of infrastructure enterprise(s) (as in the U.K. and Germany) rather than government agencies (as in Sweden). This general approach also will permit various mixed models, especially in transitional stages. This is, in effect, the approach in North America and Japan. CHINESE CHARACTERISTICS Developing and staging the up/down approach will require evaluating a number of advantages and disadvantages that concern most countries as well as several factors that are unique to China. The general issues are clarity of governnent and enterprise functions, market focus, competition versus regulation, and private/public boundaries. Four issues are specific to China. First, the Chinese rail sector is still expanding and the Government, with increasing demands on its resources, looks to rail revenues to pay for a significant portion of the required capital outlays. At the same time, however, when the new lines are justified by social or strategic considerations rather than by conmmercial needs, public funding may be required. Second, China's large size and scarcity of infrastructure means that rail services are a critical part of both the freight and passenger transport networks (56.4 percent of freight ton-km and 35.6 percent of passenger-km go by rail). Because of the importance of rail traffic, the transition to up/down separation will have to be conducted with great care to reduce the risk of disrupting service. Third, Chinese railways still face capacity shortages and surplus demand, so system expansion needs will remain important and regulatory issues will remain significant. Fourth, the existing technical and managerial standards are below Western levels, with much of MOR technology resembling 1960s and 1970s practices in the West. The restructuring effort will have to include upgrading technical and managerial capabilities and information as well as improving commercial techniques. Fortunately, the Transportation Management Information System (TMIS) is being completed just as it becomes critically important in supporting improved management and system analyses. - 77 - A STAGED APPROACH The agreed approach to restructuring encompasses three stages, each of which has a number of tasks. Each stage could take two to three years (or, based on experience elsewhere, longer). Stage One-2000 through 2002. Task one. Each of the four minor administrations (those with no subadministrations) will institutionally separate their passenger services (forming passenger transport enterprises, or PTEs), while freight will remain operationally integrated with infrastructure (although an accounting separation will be approximated). One of the larger administrations (in Guangzhou) is piloting the creation of a PTE in a more complex environment with subadministrations. All major administrations then will form PTEs following the experience with the pilots. Passenger services are being separated first because passenger services make up the minority of railways traffic (nationally, passengers constitute about 20 percent of MOR traffic), and it will be easier to start with passenger services. Part of the policy component of the National Railways project will support the formation of the PTE in the Kunming Railway Administration. The Kunming PTE will pilot PTE establishment and incorporate the lessons learned from the PTE in Guangzhou. The PTEs will be established by the end of 2001, at first on an accounting basis and then as rapidly as possible on an institutional basis. Task two. MOR will develop, test and implement an accounting separation of freight and infrastructure costs. MOR is concerned about the implications of this step because the national unified freight tariff structure might be inconsistent with the expectation that infrastructure costs will vary considerably according to local conditions: this will require analysis of tariffs and infrastructure access formulae. It seems clear that oversight and regulation of access charges will be required as the infrastructure enterprises are established. The Bank may assist in the analysis and creation of regulatory functions. Task three. MOR will analyze the feasibility of specialized freight operating companies to haul, for example, containers, or oversized or dangerous commodities. These specialized operating companies also might entail establishing specialized railways to, for example, haul coal. The current Datong-to-Qinghuangdao operation (and its potential extension) is an example of an operation that potentially could be set up as a separate company. MOR intends to establish a container company in the near future. Task four. Uneconomic branch lines may be separated and made into local joint ventures or independent entities, or even be privatized or concessioned. If these lines cannot be commercialized, they will either be discontinued or supported by government as PSOs. The Bank may assist in the analysis of the branch line issue. Task five. The feasibility of establishing various options for wagon ownership will be examined. These options could include central ownership and general use, ownership by the freight transport enterprises (FTEs), private or shipper ownership, or some combination of all options. MOR intends to establish at least one freight wagon company in the near future. The Bank will assist in the analysis of the structure of this company as well as the broader issue of the structure and ownership of the Chinese wagon fleet. - 78 - Other tasks previously discussed. Each administration will separate its rail functions from its non-rail functions. Non-rail functions include commercial activities (stores, restaurants, diversified enterprises) and social activities (schools, hospitals, housing). In most cases, the social activities will be transferred to government (national, regional and local), although some activities (schools in very remote areas) may remain under railway administration control. Also, MOR has granted its non-rail activities (LORIC, construction companies) independent status. In this case, an independent status means that the activities become joint stock companies in which the shares are controlled elsewhere in government, and eventually are sold publicly. Stage Two - 2003 through 2005 Task one. With the experience gained from the first stage, the 14 separate PTEs will be restructured. To meet the market structure for passenger travel, enterprises will be regrouped across the current administrative boundaries. Three to five PTEs for long-haul service and a number of local enterprises will be created. PTEs may compete with each other if the enterprise design includes overlapping of service areas. Or, one or more system-wide passenger companies may be created (like Amtrak in the United States). In addition, outside investors eventually may be brought in as appropriate after the PTEs are restructured. Task two. Install FTEs in all administrations on an accounting basis. Because the PTEs already will have been created, much of the accounting structure already will be in place. Next, as with the PTEs, the FTEs will be regrouped across the current boundaries. The question of how many FTEs will created has not been resolved; currently, two to six FTEs are envisioned. Intrarail competition is even more imnportant and sensitive for freight services than for passenger services. MOR's thinking on how to create and measure competitive effects has not yet been defined. Creating both PTEs and FTEs has potential tax implications that will need to be studied. As soon as the enterprises are actually separated, the infrastructure access payments will no longer be internally sheltered and will possibly be exposed to taxation. In addition, stage two may have to deal with issues not resolved from stage one. Stage Three The full up/down separation will be completed. The FTEs will be fully institutionally separated from infrastructure if this appears appropriate after further study. The structure of the FTEs and PTEs will change to reflect the evolution of the freight and passenger transport market structure. It is also not clear when private sector involvement in rail freight transport will emerge, although it is clear that private investment is an objective in principle. Specialized companies (such as for containers) may be the first privately invested operators on public infrastructure, and it is likely that private ownership of freight wagons will be another early entry for the private sector. - 79 - Additional Annex 12 The Reform Process in the Chinese Railways CHINA: NATIONAL RAILWAY The China Railways group (CR) was founded under the overall tutelage of the Ministry of Railways of China (MOR). This Annex will use the term MOR to describe the Railway Ministry employees in Beijing who perform a series of oversight, regulatory and coordinating roles vis-a-vis the 14 regionally based administrations (collectively called the China Railways Group or CR) which are responsible for operating the system. MOR constitutes one of the largest production organizations in the world. It employs 3.2 million people, or about one-third of all the rail employees in the world. As is common in planned economies, about half of these employees are engaged in a vast range of social, industrial and commercial activities outside the rail operational sphere. The traffic of the CR group is substantial. As of 1999, its freight volume amounted to 1,181 billion ton-km (only the U.S. railway network hauls more) and accounted for just over half of all domestic freight traffic volume. CR passenger traffic in 1999 was equal to 375 billion passenger-km (along with India, the world's largest) and represented well over a third of the national total by all modes. By these measures, therefore, CR constitutes one of the most significant railways in the world. As China began to make a transition to the "socialist market" economy, however, GOC realized that the organization of both CR and MOR would need to be modified. Elaboration of the strategy for change has been long and detailed. The Bank has supported the process of railway reform in the Railways VI and Railways VII projects and a number of seminars, including discussions held in Beijing (February 1996) and Kunming (November 1996) and two Railway Roundtables held in Vienna (September 1990 and October 1997). The Bank also sponsored at least three reform seminars in Beijing between 1993 and 1995. MOR acknowledges that the Bank's involvement has had a positive effect on railway reform in China. Because of the critical transport and political roles played by the CR group, the reforn process has rightly been conducted slowly and cautiously. At the same time, however, CR's market position has declined, partly because of improvements in the highway network and partly because of MOR's lack of ability to identify or respond to market forces. This decline, in turn, has stimulated reform initiatives-a process that appears to be gaining momentum. The general direction of change is emerging. The purpose of the Bank's missions over the past two years has been to gauge the current status of the reform program and to define how the program can be supported using Railways VII and National Railways project funding. Until the reforms began, the railway system in China was organized on three levels. MOR was the central point of contact between Government and railway operations. MOR received plan targets, prepared budgets, directed operational and management policies, and oversaw the implementation of Government orders. MOR also managed directly a number of large industrial activities such as locomotive production and railway construction and managed directly some social services such as central universities. The administrations (traditionally there were 12, now there are 14) are regionally based and are the actual operators of rail service and of certain industrial activities and are the suppliers of social services such as schools and hospitals. Most of the administrations were divided into regional sub-administrations to which were delegated the performance of most of the activities of the administrations. - 80 - Until about a decade ago, the administrations were effectively cost centers, totally focused on system management, with all revenues collected and distributed at the MOR level. More recently, the administrations have been converted into "accounting centers" in which many of the costs of operation have been assigned to the administrations, and they have been allowed to "keep" their revenues based on a complex system of division of revenues among administrations based on formulae developed and implemented by MOR. In turn, the administrations have made their sub-administrations into profit centers using allocation methods similar to those provided by MOR. Between 1994 and 1999, although CR recorded a Yuan 9.4 billion increase in operating income (revenues less operating expenses), the gain was entirely offset by equal growth in non-operating outlays, of which 90 percent relates to the cost of interest. Thus, the sharp jump in interest expenses has had the effect of dissipating whatever gains CR has been able to achieve from increased revenues (primarily attributable to rate increases rather than traffic growth). To illustrate: as of 1994, almost 70 percent of operating income dropped to the bottom line, with only 30 percent allocated to pay for non-operating (mainly interest) costs. By 1999, however, only about half of operating income was being reflected in the bottom line net income as an almost identical proportion was being utilized to cover non-operating outlays. Under these conditions, net income has not changed since 1994 (from Yuan 25.3 billion to Yuan 25.8 billion). By most measures of physical productivity, CR very effectively played its assigned role as the backbone of the Chinese transport system during the years of economic planning. Traffic density (converted tons-km per km of line) and output per locomotive (CT-km per locomotive) in China are the highest in the world. CR's output per freight wagon (ton-km per wagon) is second only to the United States', where wagons are larger and axle-loads higher. The coming of the socialist market has brought with it the realization that a different organization will be needed if China's transport network is to continue to perform under the new conditions: the monolith must evolve. Railways never change rapidly under the most favorable of conditions; sheer size and complexity, vested interests, political sensitivities, entrenched mentalities, diffused legal rights - all combine to yield an inherently ponderous process. The time from Penn Central bankruptcy to the re-privatization of its successor (Conrail) took 17 years and eight billion dollars. The restructuring of British Rail and Japanese National Railways was similarly time-consuming (and money-consuming). The restructuring of the CR group of railways will be, if anything, even more difficult and economically risky than any of these. Acknowledging this, MOR has moved forward (more quickly than expected one year ago) with reshaping of the CR group. Though many of the details remain to be developed, the broad shape of the restructuring and reform is now emerging as expressed in four slogans: Separation of Government Function and Enterprise Operation; Up/Down Separation, Market Orientation and Regulation. Separation of the government and enterprise functions By the emerging defliition, MOR is "govemment" and the administrations, sub-administrations and the MOR level industrial functions are "enterprises." Officially, in 1999, the central staff of MOR was cut from 809 to 400, and the number of departments and divisions has been cut by 30 to 40 percent. In fact, many of the staff have been transferred to new "organizations" such as the Centralized Railway Transport Commanding (dispatching) Center and the Railway Construction Management Center which will provide centralized services but not with "government" employees. The remnants of MOR will have a delimited set of functions related to regulation, centralized oversight and coordination, and management of central Government investment, including: - 81 - * Development of strategy for the rail sector within the Chinese transport system. * Planning for development of the railway network and allocation of the funds collected by the "construction surcharge," (a flat per tkm charge in addition to commodity and distance based tariff rates) supplemented by loans from domestic policy banks as well as international debt instruments from the World Bank, the ADB, and various national entities. * Railway construction management (later to be established as a separate, asset management company). * Technical standardization and policies to facilitate interchange among the new PTEs and FTEs. * Planning and assistance to railway restructuring. * Financial management services support to the railway sector including initiating proposals for tariff changes subject to SCTC approval. In addition, MOR will establish and oversee the system whereby revenues collected on freight and passenger traffic that crosses PTE or FTE boundaries are divided among the enterprises involved (current plans call for the originating PTE or FTE to retain all revenue while paying to forwarding PTEs or FTEs an access fee based on type of track and speed of train). * Managing the national railway command center, which will implement integrated national train scheduling and dispatching. * For the near future, MOR will remain the owner of all freight wagons and will have the responsibility to ensure an adequate wagon supply (at least 95 percent of the wagons needed). FTEs will pay for wagon usage (currently 55 Yuan/day). MOR is evaluating the establishment of separate wagon ownership companies, including a mix of FTE, central and perhaps private ownership. * Decentralization of selected universities to local authorities. * Intemational cooperation and relations. * Public security and safety. * Special transport operations of a national character. * Propaganda, and other functions as assigned. PTEs and FTEs will acquire corresponding functions and responsibilities. In effect, they will be given somewhat broader authority to manage their territory, subject to the following constraints: * They will "own" some of the assets assigned to them (locomotives, passenger coaches, non-rail activities) and they have full rights to operate, improve and dispose of them. They have the duty to ensure that the full value of the assets entrusted to them remains within the enterprise. * They will be expected to meet individual profitability targets set for them. * Meeting accountability targets, ensuring public safety and paying taxes that their "income" generates. * Subject to MOR's regulatory approval, PTEs and FTEs will have the right to increase tariffs so long as they are below the maximum level established nationwide by MOR/SDPC for certain train services. * For locomotives and for passenger coaches, PTEs and FTEs will have full control over their procurement spending, and (after a short transition period), former enterprises will have no favored position for supply of equipment. - 82 - At least one major issue remains unresolved as the separation process proceeds. MOR is well aware, as a result of its examination of foreign experience, that it is probably saddled with a number of services, "hard class" passengers and provincial freight that lose money. This burden is likely to emerge with greater force and clarity when the restructured railway organization permits better assignment of revenues and costs to particular services. Discussions have begun with State agencies to develop a better policy for identifying and defining compensation for these social (PSO) services, but no conclusion has yet been reached. CR's capital needs are large - amounting to Yuan 330 billion over the next five years. Apart from the construction surcharge fund which, along with operating income, should yield about Yuan 130 billion, the bulk of these investments are financed by long-term debt, nearly 80 percent of which is provided from domestic sources. Given the likelihood that funding from domestic policy banks will be reduced in the near term, the ability of CR to build new lines and electrify or double track existing routes will be constrained. At the same time, however, economic growth will continue to create bottlenecks in capacity throughout the CR system. Under these conditions, less expensive methods of expanding capacity (longer lasting rail, heavier axle loadings, more powerful locomotives, better bridge construction, etc.) will become more financially attractive. This, in turn, should spur changes in the way CR operates and markets both its freight and passenger services. MOR is now contemplating a novel way of dealing with the revenue "divisions" issue -- the need to divide revenue among all PTEs or FTEs involved in originating, hauling and terninating the traffic. Revenue divisions based on cost allocations are the price paid for operating organizations based on geography rather than market structure (major traffic flows). Divisions create a kind of "border effect," which imposes operational costs (such as changing locomotives at boundaries), service deficiencies (such as schedule uncertainties caused by interchanges of infonnation, equipment and crews) and unpredictable incentives among those sharing the revenue if any of the participants perceives its share to be unfair or inadequate. MOR proposes to institute an approach under which the originating enterprise keeps all of the revenue and then pays subsequent companies a haulage or access fee based (for passengers) on type of train (high and low quality) and class (high, medium and slow speed) of track. The approach for managing freight revenue allocations has not yet been defined, but will be similar. This issue has a powerful link with infrastructure unification because MOR believes that it would not be practical to have several infrastructure units, each trying to institute six specific levels of charges for passenger and a similar number for freight users. Enterprise restructuring The heart of the enterprising restructuring lies in two changes, reliance on the PTEs and FTEs as the fundamental management units for rail service along with regrouping, probably unification, of the infrastructure. As suggested above, the administrations have been profit centers for several years, but it appears that this has been more for MOR's accounting convenience than for actual managerial accountability. As of the beginning of January 1999, the administrations have been converted into legal entities that "own" their assets and have a much wider range of authority. Though they are still subject to central control in a number of areas, they are now independent enough to be able to act in their own interest, even when that interest diverges from that of other administrations or even MOR. Based in part on negotiations between administrations and MOR, each administration was been assigned individual "profit" targets (i.e., retum on assets) consonant with the order to MOR from Government to erase the overall CR group "deficit" within three years. Discussions with the Kunming and Shanghai administrations established that the administrations do, indeed, have such profit targets and that they take them seriously. As discussed below, though, the administrations by and large lack the information they would need to determnine how to increase "profits"(in particular, they cannot yet link specific costs and - 83 - revenues by business line) so their ability to increase profits is uncertain, and the actions they will take to meet profit targets are unpredictable. Moreover, MOR has concluded that the existing 14 geographic administrations are not optimum units for serving either passenger or freight markets. "Up/down" separation with regrouping of the initial 14 PTEs and FTEs is the ultimate objective. This means that the administrations will initially split their accounts (not institutionally) between infrastructure costs and PTE or FTE operating costs and that the costs of infrastructure will be charged to either the FTE or the PTE, depending on the cost allocations that emerge. Starting with the PTEs and then the FTEs, the current set of 14 of each will be regrouped into three to five larger, institutionally separated companies based on the actual structure of traffic flows in China. Though infrastructure accounting separation is the long-range objective, methods for implementing the separation, including techniques for access charging and capacity management, are still being defined. Market orientation A series of measures have been adopted to encourage sensitivity on the part of the administrations to market forces. The most important of these is the decision to create Passenger Transport Enterprises (PTEs), initially at the administration level, in order to put control over operating assets in one place, and to bring control over both costs and revenue into one entity. The orders require these entities to take a "corporate" form, and even envision issuance of common stocks, thus creating the possibility that private investors might eventually play a role in operating parts of the Chinese rail system. Of the 14 administrations, four are "minor" administrations having no sub-administrations (Kunmning, IIohhot, Kunming, and Liuzhou). MOR has decided to adopt a series of PTE pilots in these administrations in order to try out the concept and learn how to implement it. A mission visited Kuming Railway Administration (KRA) and discussed the possibility of Bank assistance to the administration of implementing their PTE. This resulted in terms of reference (TOR) for assistance in setting up and establishing the management structure and cost allocations for the PTE vis-a-vis infrastructure. The creation of PTEs will require major changes in management information systems at MOR and the administrations. Current accounting systems were primarily developed for reporting purposes in the Government context (as is true of all Govemment accounting systems), and not for developing timely, business-driven information. The thrust of the TOR is to help KRA to devise and implement the revisions in its information system needed to separate infrastructure costs from operations and to separate the costs of the PTE from other operating costs. The organizational change will inevitably produce FTEs as "profit centers" if not immediately as separate corporations. In effect, this will eventually result in administrations that separate and spin off social activities, operate non-rail businesses on a separate basis, operate separate PTEs, operate infrastructure as a cost center charged with collecting some as yet undefined part of its costs from its users, and operate freight as a profit center allied with the infrastructure operation. - 84 - Assessment MOR's conceptual approach is a reasonable one. Its eventual success will depend on the solution of several critical problems: * The PSO problem. Profit maximizers do not do well at administering cross subsidies, and this problem will be exacerbated by the creation of PTEs where the burden will be unavoidably clear. MOR and GOC will need to continue their discussions ON potential approaches to the PSO issue, and it would be desirable if local governments could be included. * The flat freight-tariff structure issue. MOR's current freight tariff is far too flat to permit demand-sensitive pricing, and this is aggravated by the effect of the freight surcharge for infrastructure construction. Market and profit-driven entities will rapidly realize that the lack of demand-sensitive pricing is costing them business and profits. At some point in the near future, MOR and GOC need to discuss an improved form of tariff control that permits more pricing flexibility, while still restraining the exercise of monopoly power. The need to confront the flat freight tariff is likely to be accelerated by the decline of coal as an energy source in China's economy (coal is far and away CR's most significant commodity). The shift to a method revenue division in which the originating carrier keeps the revenue minus a fixed payment to forwarding carriers is likely to facilitate value-of-service pricing, but will increase pressures within the system to create more flexibility in freight tariffs. o The tariff divisions issue. MOR used to distribute revenues among administrations based on a complex, and manipulated, formula related to the "simulated" costs of loading, unloading, and line-haul activities. The word simulated indicates that MOR now takes both difference in cost of operation and revenue "need" into account in calculating the divisions formulae. Experience with this type of system in North America conclusively demonstrated that enterprises can be forced to spend as much time "gaming" the system as they do promoting business. The shift to a system of formulary payments to forwarding carriers will reduce the divisions "gaming" if the payments are seen as reasonable. Thus, the system for setting the forwarding payment will become as important as the current divisions formulae but, if implemented on a broader area, will be harder to manipulate. - Only by chance are business decisions better than the information available on which to act. As of now, neither MOR nor the administrations have the information they need to operate like businesses. They cannot determiine where profits and losses are generated, and they cannot link the revenues and costs of specific actions. MOR's decision to adopt intemational accounting standards will be critical in improving management information. * MOR has only general and incomplete criteria for deciding how to group the new PTEs and FTEs. In addition, the criteria now under consideration will inevitably be conflicting, and resolving these conflicts will not be straightforward. Also, MOR has not yet developed the methods and criteria for designing the degree of competition to be generated. The Bank has strongly recommended that MOR's analytical capability to define scenarios and measure results be upgraded, especially by improving the linkage between TMIS, the network modeling and the cost models. MOR has agreed to incorporate an analysis of the feasibility of improving their tools as a part of National Railways. - 85 - Additional Annex 13 Environmental Assessment and Action Plan Summary C[IINA: NATIONAL RAILWAY Background The China National Railway project consists of building a second electrified 25-kV rail for the Bao-Lan railway line as well as rebuilding 28 percent (134 km) of the existing line. The existing railway is a 491-kin, single electrified line that passes through mountainous terrain. The line is a key section of the rail corridor connecting northwest China with central China. The existing line has relatively 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 by 24 km to 467 km. The decision to build a second line was taken because signaling improvements on the existing single line would not have been sufficient to allow the line to accommodate projected traffic growth. In 1998, the single line handled 45 pairs of trains, including 14 pairs of passenger trains, but projections indicate that by 2013, the Bao-Lan line will need to transport 34 pairs of passenger trains and about 48 million tons of freight. After the completion of the project the line will have the capacity for 50 pairs of passenger trains per day and 60 million tons of freight per year. The additional capacity created by the project will be sufficient to handle the projected growth in passenger and freight traffic well beyond 2013. With the twining of the line, the maximum speed of passenger trains will increase from 90 km/h to 140 km/h while the maximum speed of freight trains will remain unaltered at 80 km/h. The current transit time of 9 hours for passenger trains from Baoji to Lanzhou will be reduced to 6 hours and 40 minutes. Time spent by freight trains waiting for signals will be virtually eliminated, and the current transit time of 17 hours will be reduced to 10 hours. The proposed design of the tracks and the rail bed includes measures to alleviate problems of high embankments, soil settlement, unstable slopes, areas of potential high erosion, and areas prone to landslides. The second line will have 230 bridges, with a combination of very large (>500 m), large (100 m to 500 m) and medium (20 m to 100 m) bridges, for a total linear length 54.6 km.. The bridges have been designed to withstand 100-year floods. The proposed second line will have 74 new or enlarged tunnels with a total linear length of 72.7 km (13.6 percent). Of these, 24 tunnels have a length of more than 1 km, and the longest tunnel is 3.92 km long. Bank Financing The total cost of the project is estimated at Yuan 10.62 billion (US$ 1.22 billion), with the Bank financing US$156.29 million, or 12.3 percent, of the total. The Bank will not finance civil works for the Bao-Lan line, but will finance the procurement of the rails, bridge beams, telecommunications and signaling system and track maintenance system. An additional US$2.11 million will be provided for technical assistance to support China Railways reform. - 86 - Bank Involvement Since 1992, the Bank has supported China's efforts to design and implement a reform program for China Railways. The project will promote the continuation of this dialogue by supporting a number of important studies on the establishment of railway freight transport enterprises (FTEs), the development of an integrated planning and costing tool to facilitate the establishment of line-of-business operations, and pilot railway passenger transport enterprise (PTE) programs in a minor and a major administration. This project has the strong support of all responsible agencies of the Government-SDPC, MOF and MOR. The individual project components too have high ownership from all levels of MOR. While the Bank will provide financing to remove an important bottleneck in the national railway system and increase traffic capacity between the eastern and western regions of China, reform of the MOR is expected to be the major benefit of the project. Current Status of the Project This project is the eighth in a series of railway projects the Bank has financed with the Ministry of Railways in China. The project has been under-preparation since early 1999. It was agreed early in the process that the Bank will only finance equipment and provide selected technical assistance related to reform of the railways. However, construction work on the western section of the Bao-Lan line (Tianshui-Lanzhou) started in early 2000, followed by work on the eastern section (Baoji-Tianshui) in December 2000. The Bank has chosen to continue with preparation of the project, even though construction has started, primarily because it will enable us to maintain our dialogue with the Ministry about the reform of China Railways, and on the understanding that MOR would implement the project in accord with all the relevant Bank policies, including those related to all applicable safeguard issues. As of June 2001, in the western section a substantial part of the relatively simple civil engineering works is complete. About 150 km of sub-grade is complete with about 48 km of track laid, while a 16.5-km section (near Longxi) is already operational. In the eastern section, much of the work is concentrated on digging for the turmels and laying bridge foundations. Sub-grade work has not yet started. At the end of June 2001, the eastern section had reached about 21 percent completion. In accord with standard the Bank's procedures for projects under construction, the Bank has been receiving environmental supervision reports since mid-2000 and have supervised environmental activities three times during the same period (June 2000, October 2000, and July 2001). Environmental Supervision of the Project In both the western and eastern sections, MOR started construction of the project only after receiving approval of the Chinese version of the EIA from the State Environmental Protection Administration (SEPA). To ensure that environmental management and monitoring has been carried out in accordance with the Environmental Action Plan (EAP) submitted to the Bank, MOR has been submitting quarterly environmental monitoring reports, and the Bank has supervised the environmental aspects of the project three times. The latest Bank supervision was carried out July 18-24, 2001. To date, MOR has submitted five quarterly environmental monitoring reports, and the latest, dated July 2001, covers the period April-June 2001. The environmental monitoring reports and Bank supervision aide-memoires show that MOR has provided adequate training to its own staff and to contractors staff and that the environmental aspects of the project are properly managed and supervised. Construction sites are well managed and the camps have good sanitation, recreational facilities and staff accommodations. Disposal sites for excess waste from tunnels and borrow areas were properly selected and - 87 - are being properly managed, and the contractors and MOR have consulted local village councils and farmers on the locations and ultimate use of the sites. At a number of sites, MOR and the contractors have reached agreements with the local authorities and village councils on the ultimate use of the camp sites and waste-reclamation sites. For example, at the Xinquercha Tunnel site, the construction camp was built to conform to the layout of a school, and it will be donated to the village when the project is completed. In most cases, the reclaimed sites will be used as agricultural land. At all sites, MOR and the contractors have agreed to sensitize the population of their construction camps to the perils of HIV/AIDS and to display posters on HIV/AIDS, safety, and the environment. Cultural-relic sites also were well surveyed and were excavated by provincial cultural and archeological institutes before permission to commence construction was given. The design has been modified a number of times to avoid cultural-relic sites (e.g., 13 of the 16 cultural-relic sites in the eastem section were avoided by a judicial shift in the alignment). As construction progresses, MOR has instructed the local railway administrations and the contractors to begin relocating a number of schools in accordance with the EAP. Environmental Assessment The National Railways project is classified as a World Bank Category A project because it involves major railway construction, partially on new alignment, increased noise, occupation of fertile and barren land, soil erosion, and resettlement. As required by World Bank Operational Procedures OP4.01, an environmental assessment (EA) was carried out. The Research Academy of Railway Sciences, with the assistance of the First Survey and Design Institute of the Ministry of Railways (MOR) and support from independent intemational consulting specialists, conducted the EA. Drafts of EA documents, including the Environmental Impact Assessment (EIA), Environmental Management Plan (EMP) and Executive Summary (ES) were reviewed and discussed in detail during project preparation. The final drafts of the EA documents were submitted to the Bank on April 2, 2001, and were found satisfactory. The policy and administrative requirements for the environmental assessment of development projects in China were followed during the preparation and evaluation of EA, as were the Bank's safeguard policies. Major laws and regulations of the People's Republic of China that apply to the EA are as follows: * Laws of Environmental Protection * Law of Water and Soil Conservation * Law of Air Pollution Control * Law of Water Pollution Control * Law of Environmental Noise Pollution Control * Circulation on Strengthening EIA for Construction Projects Receiving International Financing * Technical Standards on EIA of Railway Engineering Construction Projects * EIA Administrative Measures for Railway Construction Projects * Technical Specifications for Environmental Impact Assessment. Brief Project Description The National Railways project includes the construction of 482 km of electrified railway from Baoji in Shaanxi province to Lanzhou in Gangsu province (see map No. IBRD 31717, at end of this document). Additional components include building two new passenger stations and expanding two more, rebuilding one locomotive depot, constructing a total of 507 km of access roads, and expanding power supply, water supply, sewage treatment, solid waste disposal, and other auxiliary facilities. The EA studied the entire project, including the components not financed by the Bank. - 88 - Baseline Environmental Description The project area east of the Quercha River belongs to the southern temperate zone meta-hurnid climate district, and west of the watershed, to the middle temperate zone meta-drought climate district. The average annual temperature ranges from 3.5CC to 12'C, average annual precipitation from 319.4 mm to 679.1 mm, and evaporation from 1,287.6 mm to 1,624.9 mm. Altitude generally rises from east to west from about 600 m in Baoji to 1,400 m in Lanzhou. The topography is characterized by a high terrace in the river valley east of Tianshui and mountainous terrain with numerous steep gorges towards the west. Ambient air quality was monitored near three major railway stations along the Bao-Lan line in January 2000 at the peak of the heating season when air quality is usually at its worst. The results indicate that total suspended particulates exceeded applicable standards in all three locations most of the time. SO concentrations are most serious in Tianshui and Lanzhou, where levels exceeded the standards 40 percent to 80 percent of the time, respectively. NOx levels were within acceptable standards. Noise levels in 54 sensitive locations within 120m of the Bao-Lan line were measured between October 1999 and April 2000. Daytime noise levels at 11 locations exceeded the standards by 0.1 dB(A) to 9.7 dB(A), and night-time noise at five locations exceed the standards by 1.5dB(A) to 21.6dB(A). Night-time noise at schools (except for five boarding schools) was not measured because the schools are deemed non-sensitive during the night. Surface water quality was monitored in three locations in the Weihe River near an existing locomotive depot, which is a primary wastewater discharge source of the railway line. The results show that COD exceeds the standards in two locations and BOD exceeds the standards in one location. The primary type of soil erosion in the project area is water and fluvial erosion caused by disturbance to surface vegetation. Common forms of soil erosion include movement of surficial materials, ditch failures due to the lack of vegetation, and landslides (common in the Weihe River Valley on slopes that range from 70 degrees to 90 degrees). Other common forms of erosion are karst topography resulting in a string of subsided subsurface soil layers (extremely unstable for the construction of surface facilities), and rock falls and mud flows. The total existing soil erosion at the project area is estimated to be 70,000 tons per year, due both to natural and man-made factors. Professional archeology and cultural relics institutes conducted a survey between March and May 2000. The institutes identified 29 cultural relic sites in the western section (Gansu) and 19 in the eastern section (Shaanxi). In the eastern section, 14 of the 29 sites were excluded by the local archeological authority (The Institute of Cultural Relics and Archeology of the Gansu Province) as being insignificant 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. The total population serviced by the railway line is 9 million and the total serviced area is 700,000 km2, including approximately 1.4 million ha of cultivated land. The major cities along the railway line include Baoji in Shaanxi province, and Tianshui, Gangu, Wushan, Longxi, Dingxi, Yuzhong and Lanzhou in Gansu province. - 89 - Analysis of Alternatives Four sets of alternatives were considered and compared during project planning: * Construction of a completely different railway line serving the same destinations * Building railway lines as opposed to upgrading highways in the same transportation corridor * Different alignments and/or designs at selected sections for the Bao-Lan second line. * No action alternative. Baoji and Lanzhou also are connected by rail through the city of Zhongwei to the north. However, the Baozhonglan rail line is about 299 km longer than the Bao-Lan rail line. For all aspects of the natural and socioeconomic environments, the impacts associated with constructing a second Baozhonglan line are much higher than those associated with the Bao-Lan second line. Baoji and Lanzhou are connected by 684 kIn of highway and upgrading the highway was considered as an alternative to constructing the Bao-Lan second line. Comparing the two alternatives shows that the second rail line will occupy less land, create relatively less noise (except at certain intervals), require less power, provide more efficient and less expensive bulk freight transport, offer better transport safety, and generates less waste and air pollution, although it is not as convenient to residents along the alignment. For the double-tracking of the existing line, the choices of alignment were limited. In developing the alignment, the project took into account the difficult topography of the existing line (the Weihe River plain, Qinling Mountains, Qi-Lu-He Mountains, and Longzhong Loess plateau), three major faults in the rocks (varying in length from 10 km for the shortest fault to 100 km for the longest fault), and unfavorable geological conditions in nine zones along the existing line (e.g., areas prone to landslides, faulted rock fornation, rock flows, and fast-moving streams). Engineering and geological data showed that building tunnels and high embankments in the fault zones should be avoided and that bridges should not be built over streams in unfavorable geological zones. As a result, the alignment of the second line does not follow the exact alignment of the old line for a significant portion of its length. The alignment of the second line includes a significantly larger proportion of bridges and tunnels. Finally, the "no action" or "do-little" option was evaluated. However, this option, even with improved signalling on the existing line, would not have been sufficient to allow the line to accommodate the expected traffic growth. With the general route selected to avoid geological and technical problems, different alignments and designs were considered at five sections of the proposed Bao-Lan second line to find the options with the least environmental impact. These alternatives are detailed in the EIA report. * Section 1-Alignment for crossing landslide zone between Weitan and Boyang Three alternatives were considered. These were: * A north alignment, which includes four large and four medium bridges and three tunnels for a total distance of 6.945 km, of which 5.816 km (or 84 percent of the length of the section) will be bridges and tunnels. - 90 - * A middle alignment, which includes one large and four medium bridges and two tunnels (the longer one 2,140 m long) for a distance of 6.05 km, of which 5.14 km (or 85 percent) will be bridges and tunnels. * The south section, which includes one large and three medium bridges and two tunnels (the longer one 3,897 m long) for a length of 6.14 kin, of which 6.119 km or 90 percent will be bridges and tunnels. The north alignment was selected because less agricultural land is required and it offers better geological safety, with minimum potential for soil erosion and river sedimentation. * Section 2-Crossing to Putaoyuan railway station Three alternatives were considered. These were: * Long bridge to cross Weihe River to the end section through Dichuan Weihe bridge * Land-based option to increase the height of the terrace by 8 m through soil and rock filling to shorten the bridge by 788.6 m e Similar to the long-bridge option in alignment, except passing through the Putaoyuan railway station The long-bridge option was selected because it has smaller requirements for bridges, culverts and channels and a shorter distance, occupies less highly productive farmland, requires a lower volume of soil and rock removal and filling, and has less potential for erosion and river sedimentation. * Section 3-Luotuoxiang to Sangyuanzi Three alternatives were considered. These were: e Land-based option, which includes three medium bridges for a total length of 3.10 km 3 Channel option, which is similar to the land-based option except that it passes through a short tunnel, for a total length of 3.077 km * Parallel option, which runs mostly parallel to the existing line with five intersections with the Sandian Agricultural Irrigation Scheme The land-based option was selected because, although it occupies more land, it requires less soil and rock disposal and has lower potential for soil erosion. * Section 4-Ancient tree at Pengjiaying Village The original alignment would have required removing a Chinese scholar tree that is said to have been transplanted by migrants from Shanxi province over 400 years ago during the Ming Dynasty. An alternative alignment, shifted 15 m to the left, was selected to respect the will of the local people to preserve the tree. This distance was considered adequate by the local cultural institute. * Section 5-Old city of West Qing Dynasty The original alignment would have passed through an old city of the West Qing Dynasty that is a provincial-level cultural relics site in Gansu Province. An alternative alignment, a shift of 4-10 m to the left of the original alignment was selected to protect the historic cultural site. This distance was also considered adequate by the local cultural institute. - 91 - * Section 6-Tuoshi Station Two alternatives were considered. These were: * The Toushi County option, which would locate the station on the northern bank of the Weihe River, involving 2.77 km of bridges and tunnels * The Ji County option, which would locate the station on the southern bank of the Weihe River, involving 3.14 krn of bridges and tunnels. The Toushi County option was selected because when compared with the Ji County option, it runs in a straighter line, relies on better and more stable geological conditions, requires a shorter length of tunnels and less waste material requiring disposal, occupies less agricultural land, and causes less disturbance to the public and existing infrastructure. * Section 7-Huchaowan to Wangzi Two alternatives were considered. These were: * Crossing the Weihe River twice through a 4,174-r-long tunnel, with a total bridge and tunnel length of 5.997 km * Crossing Weihe River four times through three tunnels, with a total bridge and tunnel length of 5.48 km The single-tunnel option rather than the three-tunnel option was selected because it causes little impact on nearby villages, requires no housing relocation and less agricultural land, and is a shorter route, although it creates more spoil waste from tunnel excavation. - Section 8-Washan tunnel Three altematives were considered. These were: * Relocating both existing tunnels along separate alignments, totaling 3.46 km with 1.503 km of tunnel * Double-tracking the entire section, using 2.045 kmn of existing line * Maintaining one of the existing lines and build only one new line The double-tracking option was selected because of its relative geological stability, shortest length, lowest noise impact, and lowest operating cost. * Section 9-Xiejiapo to Tudianzi Two altematives were considered. These were: * Through two tunnels and over the Weihe River on the Sishilipu Great Bridge, involving the reconstruction of 1.258 km of line, four bridges and two tunnels * Same as the right track in the first option except the roadbed, tunnels, and bridges are widened to accomnmodate double-tracking The second option was selected because of it has minimal impact on agriculture, resettlement, and noise and has the lowest operating cost. - 92 - * Section 10-Lijiaping to Jinjiacun Three alternatives were considered. These were: * Construction of new double-track in the 4,010-m-long Quercha tunnel with the total newly built line 10.18 km long * Construction of a line parallel to the existing line, a new 1780-m double-track tunnel, and six bridges, with a total line length of 9.2 km. * Construction of a single-track line to detour the long lop, requiring construction of 4.09 km single-line tunnel and 5.04 km of new rail bed and track The first option was selected because it has the shortest and straightest alignment, requires the least agricultural land, creates the lowest noise impact and has the lowest operating cost. Cultural Relics Between March and May 2000, the Institute of Archeology of Shaanxi Province and the Institute of Cultural Relics and Archeology of Gansu Province surveyed the entire alignment and identified 19 cultural relics sites in Shaanxi Province (eastern section) and 29 in Gansu Province (western section) in the vicinity of the construction area. In the selection and design of the alignment, 16 of the 19 sites identified in the Shaanxi Province were avoided by judicious shift in the alignment. The remaining three sites will be properly excavated before construction begins. In Gansu Province, II of the 29 sites were avoided by shifting the alignment. The remaining sites will be excavated under the supervision of the Institute of Cultural Relics and Archeology of Gansu Province. The protection of the cultural relics sites has been incorporated in the EAP, and no construction will commence until the sites have been cleared by the respective institute. If a chance find is identified, construction will be stopped and the provincial archeological and cultural relics institute notified. Construction will only start again once the site has been investigated, appropriate mitigation measures have been implemented, and permission has been given by the local institute. Enviromnental Impacts and Mitigation Plan The major potential environmental impacts associated with the project and their mitigation measures are presented in detail in the project EA. The EA covers topographic change, soil erosion, geological disturbance, construction noise, disposal of excess materials, construction camps, temporary access roads during the construction phase, as well as increased noise and vibration, electromagnetic impacts, and wastewater from locomotive repair and maintenance facilities during the operation phase. The EA has developed measures to avoid, minimize, or mitigate the adverse impacts of the project or otherwise compensate for them. These mitigation measures are summarized below. Design Phase In addition to the altemative alignments and designs described above, the routing of the project was considered during the design phase to avoid and minimize adverse impacts on the surrounding environment. The routing design took into consideration the extent of disturbance to vegetation growth, the number of water crossings, unstable terrain and other geologically hazardous areas, populated or otherwise sensitive areas, the occupation of fertile lands, and disturbance to cultural relics. Noise. The assessment found 59 locations considered sensitive receptors -locations that may be subject to sufficient noise impact from the project to warrant mitigation measures. The sensitive receptors include 43 schools (one of which is a boarding school, which is sensitive to noise at night as well as during the day), one hospital, one kindergarten and 15 residential areas. Noise at 41 of these sensitive receptors is - 93 - predicted to exceed the standard by a range of 2.6 dB(A) to 25.2 dB(A) when the project is completed. A number of measures to minimize noise have been incorporated into the design. The seven sensitive receptors closest to the railway tracks and the most heavily impacted schools will be relocated to eliminate the noise impact. For the school and other sensitive receptors that will remain in their current locations, other mitigation measures will be adopted to protect the sensitive receptors from train operating noise. These measures include erecting sound barriers at six schools, one clinic and one residential area, installing double-glazed-windows at 11 schools, creating vegetation separation, and incorporating long-welded tracks into the design. Silencers will be installed on eight boilers in the train stations and in repair and maintenance facilities to reduce noise levels. Waste management. To minimize the impact on hydrology, bridges are designed high and long enough to withstand a 100-year flood. Bridge design incorporated the fewest possible bridge pilings in water courses to encourage efficient flood discharge. New industrial wastewater treatment plants will be built at the Tianshui and Langzhou locomotive depots, Langzhou maintenance depot, and Longzxi turnaround depot. New sewage treatment plants at the Baoji, Tianshui, Longxi and Dingxi stations will be built to meet the wastewater discharge standards. In the intermediate stations, septic tanks will be installed, and the effluent will be discharged with irrigation-quality standards to irrigation ditches. Air pollution. The impact on ambient air quality comes mainly from boiler emissions. To mitigate these impacts, oil-fired burners are included in the design of the boilers. Filters will be installed at Gangu County, Wushan station and Tianshui depot to control boiler emissions. Coal-fired boilers with a capacity of more than one ton will be equipped with desulfurization systems with 50-percent efficiency, and low-sulfur-content coal will be used in these boilers. The project is designed for electric trains rather than diesel trains to eliminate emissions. Diesel engines will be used only on an as-required basis in the yards of the Longxi depot. Electromagnetic radiation from the project railway will disturb the television signals in residential areas close to the railway tracks. To mitigate these impacts, a TV antenna system will be installed for the community at Caijiasi village in Gangu county and Shangjiezi village in Wushan county. Existing roads will be used as much as possible for access to construction sites in order to reduce the need to build temporary access roads. The occupation of land will be minimized by routing the proposed railway near the existing line to the extent possible. Land that is occupied temporarily for construction will either be used for permanent operations (e.g., some access roads), be dedicated to other functions (e.g., from borrow pit to fish pond), or be restored and reclaimed through appropriate landscaping. All excess materials from construction activities will be disposed of safely in existing landfills. The project will require the relocation of 432,352 m2 of residential and factory housing that is home to 8,204 people. All relocated residents will be properly compensated and will receive training for new employment. Special consideration in terms of compensation will be given to the elderly, illiterate and farmers. For people whose sources of well water will be disrupted by the construction of tunnels, additional water wells and other water supply sources will be developed. (See Annex 14) Construction Phase The land occupied during construction will be kept to a minimum to minimize the project's envirormental impact. Areas that must be occupied will be revegetated after construction is completed. In total, 255 ha of land occupied temporarily by project construction activities will be revegetated and recovered. - 94 - Noise. Large and noisy construction activities will be kept away from populated areas. Loud construction machinery and major construction activities will be restricted strictly to the daytime. Temporary noise barriers will be constructed to protect sensitive receptors from construction noise. Construction traffic will be directed to avoid sensitive locations during the day and will be banned at night. Waste management. To minimize adverse impacts on surface water during construction, water runoff will be diverted during construction, with complete isolation of work areas and restored following construction. River-crossing construction activities will be scheduled to the extent possible during the low-flow periods. Sewage discharge from construction camps also will be a potential source of water contamination. To mitigate the potential impact, no sewage from construction camps will be allowed to discharge without treatment. The sewage will be either held at the site and transported to treatment facilities regularly or will be treated on site by septic tanks or other means to meet irrigation-discharge standards. Air pollution. The temporary dirt roads and construction-materials storage areas will be watered at least twice a day during dry weather to minimize airbome dust. Materials in trucks will be covered during construction and all motor vehicles will be maintained to minimize emissions. Management of construction. Retaining walls and other slope-stabilization techniques such as stone retention troughs will be built during construction in 243 locations along the line to control unstable geological areas and surface erosion. Temporary holding and settling tanks will be installed at the construction sites, and construction activities will be suspended during extremely wet weather to minimnize soil erosion. Cultural relics. Construction camps will be located to minimnize disturbance to communities. Solid and liquid waste will be stored with proper protection and removed from sites regularly by qualified vendors for disposal. Four cultural relics that are directly on the project alignment will undergo protective excavation before construction begins. The relics will be moved to provincial museums for permanent protection and display. Operation Phase Noise. To minimize noise impacts during operation of the rail line, the volume and frequency of train whistles will be decreased and train speeds will be reduced in heavily populated zones. To the extent possible, train operations at night will be minimized. Air pollution/Waste Management. Pollution control facilities such as air emissions filters and wastewater treatment plants will be properly maintained to ensure they function as designed. Boilers will be maintained to run at optimum conditions and efficiency to minimize emissions. Rubbish from passenger trains will be bagged and transported to Baoji, Tianshui, and Lanzhou stations where it will be disposed of at the local approved sanitary waste facilities. Staff from closed railway stations will be offered new employment in the railway system. Assistance will be provided for altemative employment. Railway housing and buildings no longer used when the project is completed will be sold to the local community (See Annex 14). - 95 - Extensive environmental monitoring programs will be implemented during both construction and operation phases (details below) to ensure that adverse environmental impacts do not exceed the projected impacts and that the mitigation measures proposed are implemented and effective. Inadequate mitigation or unexpected adverse impact will be detected promptly by the monitoring programs and appropriate actions will be taken to address them. Environmental Monitoring The EAP includes environmental monitoring programs for both construction and operation phases. The parameters to be monitored include land acquisition, relocation and resettlement, soil erosion, noise, dust, degradation of water quality, stream sedimentation, solid waste disposal, and electromagnetic radiation. During the construction phase, environmental monitoring will be conducted with two approaches: daily and routine monitoring consisting of mainly visual observations and limited equipment measurements such as handheld noise meters; and periodic moinitoring by professionals using standard methods recognized by regulatory authorities. Monitoring reports will be compiled once every four months, summarizing the findings of the monitoring. The reports will be submitted to project offices as well as relevant agencies and the World Bank. During the operation phase, noise levels will be monitored once every two months for the first six months and once every six months thereafter. Soil erosion will be monitored every six months, and air and water quality will be monitored once a year. Public Consultation Three rounds of public consultation were carried out during the EA (see table at end of this annex). The first round took place during project screening and the preparation of tenns of reference in May 1999. The second round of public consultation was the at the issuance of various draft EA reports between October 1999 and June 2000. The third public consultation came at the issuance of the final EA report between November to December 2000. Several techniques were used to engage the public, including public-opinion surveys using questionnaires, and public meetings in villages. The people consulted included mainly those who will be affected directly by the project. Relevant government and local community organizations and experts on various environmental and socioeconomic issues also were consulted. First Round (May 1999) The first round of public consultation was conducted in the early stage of the EA when the terms of reference for environmental assessment were prepared. Public opinion questionnaires were distributed to 66 local residents of different ages, sexes and educational backgrounds who would be affected directly by the project, as well as local environmental bureaus and other experts. The main objective was to identify main public concerns and determine environmental impact assessment criteria and contents. Noise, electromagnetic radiation, vibration, garbage and land acquisition and resettlement were identified as major issues of potential concern. Second Round (October 1999 through June 2000) The second round of public consultation was carried out at the completion of several versions of draft EA reports, mainly through public opinion surveys using pre-designed public opinion questionnaires. A total of 297 individuals in four separate surveys filled out and returned the questionnaires offering their opinions on the EA reports' findings and recommendations. Among these individuals, 45-69 percent were farmers and residents from project-affected areas, and 25-40 percent were teachers and students from affected schools. One survey focused specifically on the opinions of women. - 96 - The public opinion survey showed that the vast majority (94.5 percent) of those who returned the questionnaires supported the project. The public awareness of the project increased substantially during the preparation period, from 23 percent of those surveyed in the first round to 94 percent in the second round. Major environmental issues raised by the affected public included safety at railway crossings, train noise, water and soil conservation, effects on the development of the local economy, and land acquisition and relocation. These issues were considered as the design team determined the railway alignmnent, station locations, and the arrangements for water supply, wastewater treatment and discharge, and electricity supply. The EA team responded to public concerns by setting up tunnel crossings and road junctions at regular intervals along the proposed railway, particularly in areas where schools and/or villages are located. Schools will be relocated, noise-barriers will be erected, double-glazed windows will be installed, and green belts will be created to address noise concerns. Soil and water conservation measures will be incorporated into the design at an investment of 2.4 percent of total project cost. These conservation measures include covering side slopes, road beds, borrow pits and spoil disposal sites and reclaiming disturbed lands. To address concerns about local economic development, priority will be given to the use of local resources during the project construction. Third Round (November to December 2000) The third round of public consultation was conducted at the final draft EA report stage. This consultation consisted of a series of 10 public meetings in villages along the railway. A total of 1,054 rural residents participated in the meetings. The public meetings were particularly important in the rural areas because many people who are illiterate cannot express themselves through public-opinion survey questionnaires but can do so in public meetings. In this way, public meetings can give the public access to information and give them a forum to raise their concerns about the project, the EA findings, and the recommended mitigation measures. The main concern raised during the public meetings was land acquisition and compensation. Noise and television signal reception remained concerns of the farmers. The EA team assured villagers that an appropriate compensation schedule will be established and implemented promptly. The meeting participants were generally satisfied with the proposed mitigation measures for potential adverse impacts, including noise and television-signal reception. Information Disclosure In compliance with EIA process requirements in China, the completed draft and final EIA reports were distributed to local environmental protection bureaus (EPBs) in the project area. The concerned public can have access to and review the reports at local EPB offices and in Shaanxi and Gansu provincial libraries (see attached tables for details). They were placed in the Infoshop in Washington in early April 2001. As from the same date, it has been available to members of the public in English and Chinese from the Bank's office in China. - 97 - Public Consultation Substance By whom, with whom When Where Bank Policy EA TOR, using By First MOR D)esign May 4-17 29 villages, schools OP4.01 public opinion Institute with affected 1999 and organizations questionnaires people and experts along Bao-Lan line Draft EA reports, By MOR First I)esign October 19-29, 53 villages, schools OP4.01 using public Institute and Research 1999 and organizations opinion Academy of Railway Science along Bao-Lan line questionnaires with affected rural residents Draft EA reports, By MOR First Design January 7-9 8 villages, schools and OP4.01 using public Institute, with affected rural 2000 organizations along opinion residents Bao-Lan line questionnaires Draft EA reports, By Research Academy of April 3-8 11 villages, schools OP4.01 using public Railway Science and MOR 2000 and organizations opinion First Design Institute, with along Bao-Lan line questionnaires affected rural residents Draft EA reports, By Research Academy of June 8-19 9 villages along OP4.01 using public Railway Science and MOR 2000 Bao-Lan line opinion First Design Institute, with questionnaires affected rural residents Final draft EA By Research Academy of October 9 villages and 1 OP4.01 report using Railway Sciences, with 29-December school along public meetings affected rural residents 4, 2000 Bao-Lan line Information Disclosure Document Date of disclosure Location Bank Policy EA TOR August 1999 SEPA and MOR in Beijing; OP4.01 EBPs in Xian, Baoji, Lanzhou, Tianshui, Dingxi Draft final EA report March 2, 2001 Public notice on Shaanxi Daily OP4.01 March 12, 2001 and Gansu Daily respectively, March12, 200 about completion and availability of draft final EA reports in Shaanxi and Gansu libraries Revised draft final report April 6, 2001 Shaanxi and Gansu libraries; OP4.01 MOR Environmental Office Beijing - 98 - Additional Annex 14 Resettlement Impacts and Resettlement Action Plan Summary CHINA: NATIONAL RAILWAY Introduction This annex reviews adverse impacts related to land acquisition or changes in land use for the National Railways project, and the arrangements proposed in the Resettlement Action Plan (RAP) to mitigate them. Consistent with World Bank Operational Directive 4.30 on Involuntary Resettlement, the objectives of resettlement planning for the project have been to avoid or minimize adverse impacts, and to ensure that incomes and living standards are improved (or at least restored) for all persons adversely affected by the project. Most of the land acquisition will occur in Gansu Province, where many areas are characterized by poor soils and water scarcity. Most of these areas support a relatively sparse population (a significant proportion of the land to be used is uncultivated desert wasteland). Special care has been taken in resettlement planning to ensure that rehabilitation measures are sufficient in particular areas where the labor-to-land ratio is comparatively high. Project Composition While the project objectives include support for national railway institutional reform, the project also includes a civil works component-double-tracking the existing Bao-Lan (Baoji to Lanzhou) line. In many areas along this line, there will be little or no land acquisition because the second line will run parallel to the existing line, within an existing right-of-way. Because much of the alignment follows a river through mountainous terrain, however, there are also areas where the two lines diverge, leading to land acquisition and other resettlement-related impacts. Land Acquisition and Resettlement-Related Impacts Based on project designs to date, double-tracking along the Bao-Lan Line will require the permanent acquisition of 6,390 mu (426 hectares) of land. This includes 6,010 mu (about 400 hectares) of collective-owned rural land and 380 mu (about 25 hectares) of state-owned urban land. Of the collective-owned land to be acquired, about 4,515 mu (301 hectares) is cultivated, including about 972 mu (about 65 hectares) of irrigated land, 3,284 mu (about 219 hectares) of dry land, 143 mu (about 10 hectares) of vegetable land, and 116 mu (about 8 hectares) of orchard. The remainder of the land to be acquired consists of about 90 mu (six hectares) of housing grounds, about 14 mu (about one hectare) of woodland, and 1,007 mu (about 67 hectares) of uncultivated desert land. An additional 4,852 mu (about 323 hectares) of railway-reserved land will be retrieved from collectives that had been penrnitted temporary use for cultivation. The project also will require the temporary acquisition of 5,508 mu (about 367 hectares) from collectives for use during the construction period. Structural demolition of private residential housing is expected to total 312,430 square meters, with 2,648 households (8,761 individuals) affected. A total of 40 enterprises or work units will be affected by non-residential demolition, but no one will permanently lose existing employment because of the project. Additionally, nine households presently occupying illegally built workers' quarters on railway land will require relocation. They are to occupy altemative workers' quarters to be provided by the railway. - 99 - Relatively minor design changes are likely to continue until implementation. Typically, final designs result in marginal decreases in land acquisition and structural demolition, as well as changes in proportion among categories of affected land and structures. These patterns are borne out in an April 2001 independent monitoring report regarding early stages of implementation where construction has already been initiated. Socioeconomic survey results and Bank field visits indicate that no minority nationality communities are located in proximity to the existing and proposed rail alignments. Legal and Policy Framework The legal basis for land acquisition and resettlement planning includes national, provincial and local laws and regulations. Relevant national laws or regulations include the Land Administration Law (1999), City Planning Law (1990), and the Administrative Regulation on Urban Building Demolition and Relocation (1991). Because the proposed works traverse two provinces and three urban areas, coordination among administrative jurisdictions is important to effective resettlement implementation. Official letters have been obtained from Gansu and Shaanxi provincial authorities stating that they will implement land acquisition and resettlement in accordance with the RAP. In China, all land officially designated as urban is owned by the state, and all cultivated rural land is owned by village collectives. As a result, there are two types of land acquisition for this project. One is to acquire collectively owned rural land, with compensation and other forms of assistance provided to the collectives losing the land. The other type of land acquisition is to acquire land-use rights within the urban built-up area. In this case, the acquiring agency or unit must provide adequate compensation or resettlement housing for the displaced families and affected enterprises. When collectively owned farmland is acquired, the future land user pays compensation for land, loss of crops and attached properties, and a resettlement subsidy for the rehabilitation of affected persons. According to the Land Administration Law (as revised in 1999), the land compensation will be 6 - 10 times the average annual output value per mu for the three years before land acquisition. The resettlement subsidy, determined according to the number of agricultural population to be resettled, is usually an additional 4-6 times the average annual output. Young crop compensation and compensation for affected structures or other fixed assets are paid directly to individuals. The land compensation and resettlement subsidy is to be paid to the collectives losing the land. This compensation is to be used for production development, non-farm employment and income-generating activities for the affected people. With village members' prior approval, it can also be used for improving community facilities or services. By law, separate accounts on resettlement compensation are to be kept at each affected village, with financial reports provided annually to the next higher level of government. Compensation Standards In railway projects, the Ministry of Railways typically negotiates a single comprehensive compensation package with each province involved, with the understanding that actual compensation rates in each administrative jurisdiction will be based on replacement cost for various categories of affected assets. This means that compensation rates (and, in the case of land compensation, the multiples of output value used to establish compensation rates) vary from location to location. In each case, however, compensation rates meet or exceed legal requirements, and meet or exceed replacement cost valuation. - 100 - In Gansu Province, the minimum land compensation rate for irrigated land is Yuan 7,200 (about US$878) per mu, which is 8.5 times the average agricultural output. The minimum amount of resettlement subsidy for loss of irrigated land is Yuan 4,800 (about US$585) per mu, which is 5.6 times average agricultural output. For dry land, the minimum land compensation rate is Yuan 3,520 (about US$429) per mu, which is about 6.6 times the average agricultural output of Yuan 530. The minimum resettlement subsidy for loss of dry land is 2,400 Yuan (about US$292) per mu, or about 4.5 times average agricultural output. But actual compensation rates for irrigated land range as high as 13,200 Yuan (about US$1,609) per mu, reflecting higher output values in some areas. And the amount of the resetflement subsidy ranges as high as Yuan 12,800 (about USS 1,561) per mu, generally reflecting higher population densities in irrigated areas and a corresponding need for increased economic rehabilitation assistance. For dry land, the maximum land compensation is Yuan 5,200 (or about US$634) per mu, and the maximum resettlement subsidy is Yuan 4,800 (or about US$ 585) per mu. For the relatively small amounts of vegetable land or orchards to be acquired, compensation rates (including land compensation and resettlement subsidy) range from Yuan 16,000 (about US$ 1,951) to Yuan 26,000 (about US$ 3,170) per mu. In Shaanxi Province, the minimum land compensation rate for irrigated land is Yuan 7,500 (about US$915) per mu, which is 8.2 times the average agricultural output. The minimum amount of resettlement subsidy for loss of irrigated land is Yuan 5,000 (about US$ 610) per mu, which is 5.5 times average agricultural output. For dry land, the minimum land compensation rate is Yuan 3,720 (about US$453) per mu, which is about 6.8 times the average agricultural output. The minimum resettlement subsidy for loss of dry land is Yuan 2,480 (about US$ 300) per mu, or about 4.5 times average agricultural output. But actual compensation rates for irrigated land range as high as Yuan 8,700 (about US$1,060) per mu, reflecting higher output values. And the amount of resettlement subsidy ranges as high as Yuan 5,800 (about US$ 707) per mu, generally reflecting greater need for economic rehabilitation assistance. For dry land, the maximum land compensation rate is Yuan 4,080 (about US$497) per mu and the maximum resettlement subsidy is Yuan 2,720 (or about US$332) per mu. In Shaanxi, the combined land compensation and resettlement subsidy rate for vegetable land is Yuan 26,000 (about US$ 3,170) per mu, and for orchard land it is Yuan 21,000 (about US$ 2,561) per mu. For desert wasteland, the project will pay a nominal compensation of Yuan 100 (about US$12) per mu. For houseplot land, compensation rates range from Yuan 4,000 (about US$488) to Yuan 6,000 (about US$732) per mu. To offset any inconveniences for loss of retrieved railway land, the project will pay a flat rate of Yuan 3,000 (about US$366) per mu. Compensation rates for affected structures are based on replacement cost and are the same for both provinces. The rate for residential structures constructed primarily of brick and concrete will be Yuan 330 (about US$ 40) per square meter. For residential structures constructed primarily of brick and wood, the rate will be Yuan 300 (about US$ 37) per square meter. The rate for commercial or industrial structures will be Yuan 420 (about US$ 51) per square meter, to reflect relatively higher costs for fixtures and finishing. Those required to relocate residences also receive additional assistance to offset moving expenses. Most enterprises are only partially affected and will remain in operation on existing premises. Two will move to new locations. Any workers who may be affected by any temporary work stoppages will receive transitional wage support. In many cases, local authorities may increase compensation rates for acquired land and demolished structures in response to local variations in property valuation or to meet other local contingencies. In all cases, however, compensation will meet or exceed standards established in the RAP. - 101 - The project also will affect public infrastructure. Compensation based on replacement value will be paid to the relevant government agencies or local governments to restore the affected infrastructure and services. Rehabilitation Arrangements The proposed railworks will pass primarily through relatively remote and sparsely populated rural areas. In some areas where the proposed alignment follows a river valley, irrigated lands support higher population densities. The railworks also will affect three urbanized areas (Baoji in Shaanxi Province, and Tianshui and Lanzhou in Gansu Province). Resettlement planning has included review of impacts on incomes in three categories: urbanized areas, sparsely populated dry areas, and more densely populated irrigated areas. No one will lose wage employment because of the project. In some villages located near urban areas, land values are increasing while the proportion of income derived from agriculture is declining. Land redistribution generally is not undertaken in these areas. Instead, most of the persons losing land (many of whom have reliable alternative sources of income unaffected by the project) prefer to receive a cash payment. At their option, however, they can receive employment instead (in which case the cash payment goes to the employer providing the jobs). Funds for economic rehabilitation range from Yuan 7,020 (about US$856) to Yuan 11,790 (about US$1,438) per person depending on location, which in all cases is more than three times the net per capita annual income. In sparsely populated rural areas with dry land cultivation, per capita land holdings are relatively large, and villages typically have ample land reserves. Land redistribution will be undertaken, resulting in little or no reduction in per capita holdings. Land compensation and resettlement subsidy funds will be used to improve agricultural productivity through irrigation development, construction of greenhouses, soil improvement, and other activities. (As required by Chinese law, the railway also will pay a separate fee to allow each province to develop new lands for cultivation. It is expected that some of these funds will be invested in areas near the project, providing an additional source of benefits to affected persons in some areas.) For affected persons living in higher density areas (including rural areas relatively close to cities and areas with ample water for irrigation), two factors generate increased funding for rehabilitation arrangements. Land compensation rates are higher, reflecting the higher productive value of irrigated land or land used for vegetable or fruit production. Also, a village-by-village review was undertaken, resulting in increased resettlement subsidies for villages where per capita land holdings are particularly low. As in more sparsely populated areas, land redistribution will be undertaken in most of these areas so that all village members retain access to land, and compensation payments will be used by the village to improve agricultural production. In any areas where land redistribution is not undertaken, affected individuals will receive proportional amounts of land compensation and resettlement subsidy directly (or altemative employment if they prefer). Institutional Arrangements In China, the Ministry of Railways has no authority to acquire land through regulatory means, or to directly implement any resettlement-related measures. Land acquisition authority, and resettlement-related responsibilities, lie instead with the provinces involved. Under such circumstances, close coordination between the railway ministry and the provincial land administration bureaus is essential to effective resettlement. - 102- Building on past Bank experience with railway projects in China, MOR and each province have established a "provincial leading group" to address any issues that may arise during implementation. MOR also has established an intemal land acquisition and resettlement coordination group to work with provincial-level authorities on routine matters. A resettlement coordinator also has been appointed within MOR itself. Coordination is also promoted through creation of a system of resettlement offices in local-level railway offices that parallels land administration offices within each province. Because Shaanxi and Gansu provinces are not official project borrowers and are not parties to project agreements, separate letters of agreement have been obtained in which each province formally agrees to implement land acquisition and resettlement measures in accordance with RAP standards and procedures. Through PHRD assistance, the project has supported the development of specific regulations regarding land acquisition and resettlement by MOR. The Regulations on Land Acquisition, Housing Demolition and Displaced-Population Resettlement Caused by Railway Construction Projects are intended to provide a stronger foundation for contracts between MOR and counterpart govenmment agencies responsible for resettlement implementation. The regulations are expected to be published in 2001, and eventually are expected to apply to all railway construction activities regardless of sources of financing. Community Participation and Public Disclosure Potentially affected communities were consulted during both project design and preparation of the RAP. Additional formnal and informal consultations were undertaken by city- and county-level land administration officials. (Formal consultations are listed in the RAP by county and city.) The consultation process was initiated well before project-related construction began in 2000. Consultations with potentially affected persons occurred during the process of conducting impact surveys, which began in June 1998. Affected persons were involved in identifying project-related impacts and in measuring potential losses of land, structures and other assets. Village-level consultations also took place in 1999 to review proposed compensation rates and other aspects of the draft RAP, and in 2000 in response to RAP revisions. The consultation process will continue throughout implementation in conjunction with resettlement monitoring activities. Information regarding the project and the resettlement program has been publicly disclosed as required by Bank policy. The draft RAP is available for public review at the Gansu and Shaanxi provincial libraries, with notification published in the Gansu Daily on March 2, 2001, and in the Shaanxi Daily on March 12, 2001. Additionally, the draft RAP was placed in the Bank's Infoshop on April 3, 2001. In addition to formal RAP disclosure, separate camnpaigns have been, or will be, undertaken to ensure that affected persons are informed about resettlement aspects of direct relevance to them. This information, published in booklets for distribution to households or in posters for village display, includes the projected timetable, compensation standards, rehabilitation measures, and information regarding whom to contact and procedures to be followed for those with complaints. Resettlement Cost and Implementation Schedule The cost of land acquisition and implementing resettlement measures is budgeted at Yuan 249.88 million (about US$30.47 million), including payment of associated fees, monitoring costs and contingency allowances. Estimated resettlement costs are included in the project budget. - 103- Monitoring of Resettlement Implementation Resettlement implementation will be subject to external project monitoring, to be conducted by a team that is to function independently of the project owner and provincial resettlement implementing agencies. External reports will be submitted to MOR and the Bank twice a year for the first two years (when implementation is at its most intense) and once a year thereafter for the duration of the project. The reports will review whether implementation is in compliance with RAP terms and will evaluate the effectiveness of resettlement measures in improving or restoring incomes and living standards. Because construction has already begun in some areas, the independent monitoring process has started in advance of formal project approvals. A monitoring report was submitted to the Bank in April 2001. As already stated, this report indicates that local compensation rates for land and structures meet or exceed rates established in the RAP. A Bank supervision team supervised the associated resettlement activities in July 2001. - 104 - Table A. Public Participation Date Place Participants Contents Conclusion From June The affected The first S&D of MOR, 1. Project scope 1. General support for the project 1998 to houses, households, persons in charge 2. Materials to be 2. Consent to the methodology of May 2000 enterprises of demolition and land demolished and land the survey and acquisition in affected units acquisition 3. Consent to the resettlement institutions 3. Initial resettlement policy policy and project outline and scheme On May 12, In Lanzhou and The MOR, Gansu and Shannxi 1. All kinds of compensation Initial determiination of all kinds 2000 and on Xi'an provincial governments, policy (suggestions from of compensation policies, August 17, Lanzhou and Zhenzhou railway project-affected persons taken resettlement proposals and project 2000 bureaus, Gansu and Shannxi into consideration) scope provincial Land Administration 2. Land acquisition, and Bureaus demolition and resettlement proposals 3. Project scope May to In Lanchou and Lanzhou and Zhengzhou railway Soliciting opinions on Agreement to compensation rates August 2000 Xi'an bureaus, Gansu and Shannxi compensation rates and and resettlement proposals; Province Land Administration resettlement proposals compiled the RAP on the basis of Bureaus, the affected cities and conclusions counties May to In the affected The land administration, 1. Soliciting opinions on 1. Each villages consents to September counties, town govemor of the counties, towns compensation rates for land compensation rates. 2000 and villages and villages, the affected acquisition and demolition 2. The land acquisition-affected households and units 2. Labor resettlement persons will receive a readjusted proposals after land allocation of land. acquisition 3. Part of the compensation fee will 3. How to spend land be paid to the affected persons. compensation fee November In Lanzhou and Lanzhou and Zhengzhou Further study of problems in 1. Determining resettlement policy 20, 2000 Xi'an railway bureaus, Gansu and finalizing the resettlement and schemes Shannxi Province Land policies 2. The RAP has been complied Administration Bureaus, the with. affected cities, counties On March Gansu and The public Announcing the RAP Article was welcome. 2, 2001 and Shannxi March 12, Daily 2001 - 105 - Table B. Policy Disclosure Document Means and Language Date of Disclosure Telephone Number Bank Requirementb, and Location Information card Publicized at the same time When the land 0931-4922177 or BP 17.50 as the notices for land acquisition and 4922757 acquisition and demolition demolition for the No 156, Peace Road, for the project are issued project begins Lanzhou City; In Chinese 029-2323757, Railways Commanding Office Announcement of the Gansu Daily March 2,2001 13609369704 BP issuance of the RAP No 118, Binghe Road, 17.50 Lanzhou; OP Shannxi Daily March 12 ,2001 029-2323757, Railways 4.01 Commanding Office In Chinese RAP For information March 2 ,2001 and 0931-4922177 or BP 17.50 Put in Gansu and Shanxi March 12, 2001 4922757 OP 4.01 libraries No 156, Peace Road, Lanzhou City; In Chinese 029-2323757, Railways Conmmanding =____________________________________________ =______=_____.______==.=____________, O ffi ce - 106 - Additional Annex 15 Technical Analysis CHINA: NATIONAL RAILWAY The China National Railways project will build a second electrified line of 25 kV for the Bao-Lan railway line as well as rebuild 28 percent (134 km) of the existing line. The existing railway is a 491-km single electrified line that passes through mountainous terrain and is a key section of the rail corridor connecting northwest and central China. The line has relatively sharp curves and it climbs from about 600 m above mean sea level at Baoji to 2,050 m at its highest point and then descends to 1,530 m of elevation at Lanzhou. The alignment of the second line reduces the distance between Baoji and Lanzhou to 467 km. The decision to build a second line was taken because signaling improvements on the existing single line would not be sufficient to allow the line to accommodate projected traffic growth. The criteria used to design the alignment of the second line include avoiding problems encountered with the existing line, technical feasibility, the types of economy that the land supports, a preference for uncultivated land, and political and social factors. The alignment also was chosen to minimize cost and environmental and resettlement impacts. The existing line suffers from several problems, including a sharp curve radius of 300 m, unfavorable geological conditions, and a course along rivers that leads to the collapse of the subgrade and to flooding. The project seeks to address these problems in several ways. The project significantly increases the minimum radius of curves to 800 m (with some exceptions), which permits speeds of up to 120 kmn/h. The project also will make use of new technology for tunneling and will avoid sites with poor geological conditions. The alignment of the second line either avoids unfavorable geological zones, or unfavorable conditions are treated to ensure the safe operation of trains. As a result, the alignment of the second line does not follow the original alignment for a significant portion of its length. Several options for alignment were considered and the final alignment was selected on the basis of the above mentioned considerations. The design capacity of the double-tracked line is 165 pairs of train per day. In 1998, the single line handled 45 pairs of trains, including 14 pairs of passenger trains, but projections indicate that by 2013, 138 pairs of trains, including 34 passenger trains, will be needed on the Bao-Lan line. Freight traffic is projected to increase from 20 million tons in 1998 to about 48 million tons in 2013. After the completion of the project the line will have the capacity for 50 pairs of passenger trains per day and 60 million tons of freight per year. The additional capacity created by the project will be sufficient to handle the projected growth in passenger and freight traffic well beyond 2013. The line is designed with a headway of 8 minutes on both tracks. The receiving and departing line length will increase from 810 m to 850 m, and 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 maximum speed of passenger train will increase from 90 km/h to 140 krn/h while the maximum speed of freight trains will remain unaltered at 80 kmn/h. The transit time for passenger trains from Baoji to Lanzhou will be reduced from about 9 hours to 6 hours and 40 minutes. When the double line is put into operation, time spent by freight trains waiting for signals will be eliminated to a large extent and the current transit time of 17 hours will be reduced to 10 hours. - 107 - The second line is designed with a ruling gradient of 6 and 13 per thousand for single and double-locomotive operations respectively. The design of the road bed includes measures to resolve problems with high embankments, collapsible soils, seriously weathered rock slopes, areas susceptible to falling rocks, potential erosion areas, and areas prone to land slides. The track will be 60-kg/m fully heat-treated rail laid on 1,760 prestressed concrete sleepers per kilometer and a ballast cushion of 30-35 cm. At stations, no. 12 turnouts permitting a maximum speed of 45 km/h will be used. The second line will have 230 bridges, with a combination of very large (>500 m), large (100 m to 500 m) and medium (20 m to 100 m) bridges, of a total linear length 54.6 km. The existing line has 98 bridges with a linear length of 15.5 km. The bridges have been designed to withstand 100-year floods. The proposed second line will have 74 new or enlarged tunnels with a total linear length of 72.7 km (13.6 percent). Of these, 24 tunnels have a length of more than 1 kin, and the longest tunnel is 3.92 km long. The design of the track and bridges on the second line will permit the operation of freight wagons with an axle load of up to 25 tons. This will facilitate the increase of axle load of freight cars at a later date in line with the conclusions of the CETE study report. The second line will be built to China Railways clearance design standards for electrified lines and will not permit double-stacked container operation. The decision not to build to double-stacked container standards was made because the Bao-Lan line is an electrified line with a large proportion of track passing through tunnels. Furthermore, this is not a corridor on which enough container traffic is anticipated to justify the additional investment for enlarging the moving dimensions and tunnels and raising the height of catenary on the new and existing line. The design of the roadbed, bridges and tunnels is earthquake resistant. The Bao-Lan line has 73 stations at present. To maximize the capacity of the single line, the average distance between stations is currently less than 7 km. When the second line is built and automatic blocks are installed on both lines, it will be possible to push trains at greater intervals, which allows for longer distances between stations. Upgrading the old line's electrical infrastructure and completing the new track will allow China Railways to close 32 stations on the Bao-Lan to improve efficiency and reduce costs. The new average distance between stations will be 12.9 km. The Lanzhou locomotive depot will provide locomotives for Lanzhou-Baoji passenger service, while Tinshui depot will provide locomotives for Tinshui-Lanzhou and Tinshui-Baoji passenger trains. West Lanzhou and Tinshui locomotive depots will provide locomotives for freight services. The project includes plans for additional facilities at Lanzhou, West Lanzhou, Tianshui and East Baoji locomotive depots to handle the additional maintenance workload. With more passenger and freight traffic on the line, the maintenance workload for wagons and passenger coaches will substantially increase. Facilities at Tianshui and Baoji for freight-wagon repair and at the Lanzhou terminal for the servicing of passenger coaches will be augmented. By 2008, 67 locomotives and 433 passenger cars will be added. A twenty-core optical fiber cable for direct burial will be used for long-distance communication. Existing cables, with some partial replacement, will be used for regional, station and yard communication. The telephone exchange at Baoji will be enlarged. Digital equipment will be adopted for the communication system for train dispatching, power dispatching, and traction power supply dispatching. - 108 - Automatic blocks capable of 8-minute intervals between train departures will be installed on both lines. Error-tolerant computerized interlocking equipment will be installed at Baoji, Lanzhou, Tianshui, Longxi and East Lanzhou. The existing infrared hot box detection system will be extended to cover the second line. A computerized signal diagnostic system will be set up. A system for monitoring the condition of the line between stations from dispatching centers at Xi'an and Lanzhou also will be established. Three 10-kV distribution centers-at Tainshui, Tonganyi and Xianguanying-will be built. Six distribution centers-at Gansu, Wuwei, Longxi, Dingxi, Gaoai, and Hongshangeng-will be rebuilt and will supply power to the automatic block system and the electrical through line and stations. Two additional traction substations at Fulinu and Tianshui will be set up and the capacity of existing substations augmented. There will be 14 substations in all. Four substations will have a capacity of 50 MVA, eight substations will have a 40-MVA capacity, and two sub-stations will have a capacity of 31.5 MVA. The traction power requirement in 2008 is estimated at 190 MW and in 2013 at 227 MW. MOR has been asked to provide evidence confirming that power companies will be able to supply the required electrical load. The traction substations will be supplied with double 110-kV power lines and two traction transformers-one operating and the other standby. The equipment connected with the 11 0-kV power supply source will be autoswitched. The existing traction substations will keep original 1 10-kV connections, while the new substations will adopt double-T 110-kV connections. Parallel capacitance compensation devices will be set on the 27.5-kV busbar of traction substations to improve the power factor and partly filter higher harmonics. Remote control systems will be set up for power dispatch and to manage and control the power-supply devices. The second line will have autotensioned catenary equipment and brass contact wires. The technical design is considered satisfactory and viable. No significant technological difficulties are anticipated, although it is a challenging engineering project. - 109 - Additional Annex 16 Financial Management Assessment CIIINA: NATIONAL RAILWAY Preamble 1. The objectives of the National Railways Project (the "Project") are to provide: (a) enhanced rail capacity for both passenger and freight between the northwestern regions of China and the central and eastern regions; and (b) to further the reform of the railways in China. 2. The main components of the Project include (a) double-tracking of the Bao-Lan line; and (b) studies to further the reform of the railways in China. 3. Total estimated Project cost is approximately US$1.3 billion, including the Bank Loan of US$160 million. I. Background 4. This report is the result of a review conducted by Tony Shen, Senior Financial Management Specialist, EACCF, to determine whether the Project agencies will have in place an adequate financial management system as required by Bank OP/BP 10.02. The review was performed in accordance with the following guidelines: - The Guide for Review and Design of Accounting and Reporting System for World Bank Projects (Central Operational Services Unit, East Asia and Pacific Region, December 1997); - Review of Financial Management System (Annex II, LACI Implementation Handbook); and * Project Financial Management Manual (Loan Department, The World Bank). 5. The review included site visits and discussion with key project financial/accounting staff. The task team discussed and reviewed the proposed procedures and guidelines for establishing a sound project financial management system, including staffing, training, accounting, internal controls, reporting requirements, auditing and budgeting. They met with the following agencies: MOR * Foreign Capital and Technology Import Center, MOR * Finance Department, MOR * Construction Management Center, MOR Bao-Lan Line * Zhengzhou Railways Administration Bureau (ZRAB) * Lanzhou Railways Administration Bureau (LRAB) - 110- II. Organization of Project Financial Management Structure ofprojectfinancial management 6. The Bao-Lan Line will be constructed by the construction management center of both ZRAB and LRAB. The Finance Department of MOR (for the counterpart funds) and the Foreign Capital and Technology Import Center (FCTIC) of MOR (for the Bank funds) together will assume overall responsibility for the financial management aspects of the Project. Loan disbursement arrangement 7. An on-lending agreement will be signed between the Ministry of Finance (MOF) and MOR. The Project will use traditional disbursement techniques and will not use PMR-based disbursements, in accordance with the agreement reached between the Bank and MOF. The disbursement arrangements of Bank funds are consistent with those of previous railways projects. 8. A Special Account will be established by MOR. The FCTIC will be directly responsible for the management, monitoring, maintenance and reconciliation of the Account. Funds will flow from the Bank to FCTIC, and onto vendors and contractors. 9. The Bank loan will be used solely for the purchases of equipment, goods and consulting services for the Project, and the procurement will be centrally organized and managed by the FCTIC. Consequently, the FCTIC will be responsible for keeping track of procurement activities for the Project, maintaining supporting records, and passing copies of transaction records to ZRAB and LRAB for bookkeeping purpose. In addition, FCTIC will also prepare withdrawal applications and with proper approval from its chief send them to the Bank for reimbursements. 10. FCTIC will be responsible for passing copies of procurement records and attributing the corresponding Bank debts to the regional administrations when equipment, goods, and consulting services are purchased and transferred. In this way, ZRAB and LRAB will maintain complete records of Project activities financed by Bank loans. For Project activities financed by counterpart funds, ZRAB and LRAB will have direct control over expenditures and will be held accountable for maintaining relevant supporting documentation. The Finance Department of MOR will be responsible for supervising financial and accounting activities assumed by ZRAB and LRAB in connection with counterpart funds. 11. The FCTIC is the only party directly involved in the preparation of withdrawal applications. It has accumulated extensive experience from the seven prior Bank financed railways projects, and is familiar with disbursement, procurement, financial reporting and auditing requirements of the Bank. To date, the Bank has not noted any material exceptions made by FCTIC in respect of withdrawal applications. m. Staffing and Training 12. Discussions with relevant financial and accounting staff of ZRAB and LRAB showed that ZRAB has been involved in the financial management aspects of prior Bank railways projects and therefore is familiar with the Bank's procedures and requirements. However, most of the financial and accounting staff of ZRAB and LRAB concemed are relatively new to Bank projects. Consequently, well-designed and focused training needs to be provided before Project implementation by the Finance Department of MOR and FCTIC to all relevant staff members to ensure a sufficient degree of familiarity with Bank - 111 - requirements so that they can fulfill their responsibilities. In addition, the Bank task team will provide training in project financial management when needed. 13. After reviewing the training program prepared by MOR, we noted that all relevant topics have been properly included, and that the staff who will participate in the training have been identified. The following topics will be covered in the training program: * Bank procedures and requirements for the withdrawal of Bank funds * Format and content of the standard set of financial statements and the timing of submission * Project and enterprise audit requirements * Bank policies on project financial management * Relevant accounting regulations and circulars issued by MOF, as compiled and updated by MOR The training program is expected to take place before project implementation. The financial management and disbursement unit of the Bank's Beijing office will participate in the program to address some key areas of the Bank's financial management and disbursement policies and requirements. 14. We further noted that ZRAB and LRAB have already been staffed with adequate staff with staff who have the right combination of financial and accounting skills and work experience. The construction management centers of both ZRAB and LRAB have been responsible for railway construction projects initiated by MOR or themselves for years and consequently, they also have been staffed with qualified financial and accounting personnel. 15. From discussions with the Finance Department of MOR, we noted that detailed financial and accounting regulations or circulars (updated on an annual basis) have been issued by MOR to all financial and accounting departments throughout the MOR system to provide guidance on the various operational aspects of construction projects, such as: a) Financial Management of Construction Project; b) Cost Accounting for Railways Construction Project; c) Accounting for Project Management Fees; and d) Fixed Asset Management We noted that sets of these regulations and circulars are kept at ZRAB and LRAB, and that they are proper and consistent with description in Section IV below. IV. Financial and Accounting System 16. In addition to referenced regulations and circulars, the administration, accounting and reporting of the Project will be set up in accordance with the following guidelines issued by MOF: a) In line with other Bank financed railway projects in China, the Project will use the "Accounting Standards Applicable to State-owned Construction Projects (the 'Standards')" issued by MOF as a basis for bookkeeping and preparation of project financial management reports. Accrual accounting and double-entry bookkeeping will be adopted by the Project. The financial and accounting staff of the Project is familiar with the Standards, because the Standards also apply to other MOR construction projects financed by non-Bank funds. - 112- b) Circular #12: "Regulations for the Submission of Withdrawal Applications" issued in December 1996 by MOF. The circular includes detailed procedures for preparing and submitting withdrawal applications and retention of supporting documentation; and c) Circular #13: "Accounting Regulations for World Bank Financed Projects" issued in January 2000 by MOF. The circular is modeled after the Standards, providing detailed guidelines for accounting treatment and covering the following: * Chart of account * Detailed accounting instructions for each account * Standard set of project financial statements * Instructions on the preparation of project financial statements The Bank and MOF have agreed to the standard set of project financial statements mentioned above. This set of statements applies to all Bank projects appraised after July 1, 1998 and includes the following: * Balance sheet * Statement of source and use of fund * Statement of implementation of credit/loan agreement * Statement of special account 17. Circular #13 is a simplified version of the Standards that takes into consideration of the unique characteristics of Bank projects. The Standards are modeled after the principles of Intemational Accounting Standards and provide detailed guidelines on accounting for project activities in an infrastructure oriented project. V. Internal and Other Controls 18. A well-designed intemal control system (both administrative and accounting) is one of the key elements critical to the success of a project. Following the review of various regulations issued by MOR, we noted that sufficient controls have been built into the administrative and accounting control systems for the major areas of operation. The controls have the following features: a) A system of authorization, verification, reconciliation, record procedures and project reporting adequate to provide reasonable control over project costs, security of assets, schedules and technical performance; b) Delegation of duties; and c) Timely and accurate financial and management reporting. VI. Reporting Requirements 19. This Project will use the standard formats agreed to by MOF and the Bank for consolidated financial statements. In terms of reporting cycle, the consolidated financial statements will be submitted biannually (no later than October 1 and April 1 respectively) to the Bank and will include the following: * Balance Sheet; * Statement of Sources and Uses of Funds by Project Activity; * Statement of Implementation of Loan Agreement; and * Statement of Special Account. - 113- In addition, the following MOR annual financial statements must be audited and submitted together with the audit reports of the project: * Balance sheet * Income statement * Statement of fund flows FCTIC, ZRAB and LRAB will maintain original supporting documents and keep books for transactions incurred for the Project. The Finance Department of MOR will be responsible for coordinating and consolidating project financial statements submitted separately by FCTIC, ZRAB and LRAB. VII. Audit Arrangements 20. The Bank requires the Project to have its annual project financial statements audited in accordance with standards acceptable to the Bank. In line with other Bank financed projects in China, the Project will be audited in accordance with the Government Auditing Standards of the People's Republic of China (1997 edition). The China National Audit Office and its residence offices have been identified as auditors for the Project as follows: * MOR portion - China National Audit Office * Bao-Lan Line - Offices of CNAO in Zhengzhou and Lanzhou Annual audit reports on the financial statements of MOR and the Project will be due to the Bank within six months of the end of each reporting year, with a separate opinion on statements of expenses and the special account. VIII. Budgeting 21. The annual budget for the Project will be prepared by the Construction Management Center of MOR according to project funding needs and physical progress reports prepared by ZRAB and LRAB and then submitted to the State Development and Planning Commission for approval. In addition, the construction management centers of both ZRAB and LRAB will prepare a monthly budget, based on the approved annual budget, physical progress reports on construction in the previous months, and expected construction work for the following month. The monthly budget then becomes the basis for requesting funding from MOR. ZRAB and LRAB will also compare the budgets to the actual amounts spent on a monthly basis and report major deviations. In addition, we have advised the project that any major changes to the original plan requires prior review and approval fromn the Bank. IX. Proposed actions 22. As noted above, financial and accounting staff in the implementing agencies should receive training and/or participate in the project launch workshop before project implementation. See Table Al 6.1 for the proposed action plan. - 114- X. Conclusion 23. The Bank task team has determined that if the needed training is provided to the staff in the implementing agencies, the project will satisfy the Bank's financial management requirements stipulated in OP/BP 10.02. In the team's opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the Project in the reporting format agreed with the Project and as required by the Bank. Table A16.1 Proposed Action Plan Description Borrower Bank Target Date Responsibility Responsibility A. Training 1. Project launch workshop or financial, Finance Dept, FMS, Before project management seminar completed for all related MOR, FCTIC, Disbursement, implementation staff on the following topics: ZRAB, and Officer, World LRAB Bank Office in Beijing (WBOB) a) Bank procedures and requirements for the withdrawal of Bank funds b) Format and content of the standard set of project financial statements and timing of submission c) Project Financial Management System Manual d) Project and entity audit requirement B. Special Account 1. Obtain domestic clearance for opening SA FCTIC Disbursement, Before officer, WBOB withdrawal of initial deposit 2. Open corresponding RMB bank account FCTIC Disbursement, Before officer, WBOB withdrawal of initial deposit 3. 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