China - Inner Mongolia Highway and Trade Corridor Project

Documentof The World Bank FOROFFICIALUSEONLY ReportNo: 30004-CHA PROJECTAPPRAISAL. DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$100MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR AN INNERMONGOLIA HIGHWAY AND TRADE CORRIDOR PROJECT January 13,2005 Transport Sector Unit East Asia andPacific Region This document has a restricteddistribution andmay be usedbyrecipients only inthe performanceof their official duties. Its contentsmaynot otherwise be disclosedwithout World Bankauthorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective May 2004) CurrencyUnit = RMB RMB 1.00 = US$0.12 US$l.OO = RMB8.28 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS ABM Audit Bureauof Inner Mongolia Autonomous Region ADT Average daily traffic BRFT Border Roads for Trade CAS Country Assistance Strategy CNAO China NationalAudit Office CQ Selection basedon consultants' qualifications CTT Cargo Transfer Terminal E & M Electro-mechanical EAP EnvironmentalAction Plan EL4 Environmental Impact Assessment EIRR Economic internalrate ofretum EMDP Ethnic minority people's development plan EMP Environmental monitoringplan FSL Fixed-spread loan HDM-I11 HighwayDesign and Maintenance Model HMH Hailar-Manzhouli Highway HMPMO Hai-Man Project Management Office ICB International competitivebidding IMCD Inner Mongolia Communications Department IMFB Inner MongoliaFinance Bureau IST Institutional Strengthening and Training LCS Least-Cost Selection MBD Modelbidding documents MOC Ministryof Communications MOF MinistryofFinance N.B.F. Not Bank-financed NCB National competitive bidding QBS Quality-based selection QCBS Quality- and cost-basedselection RAP Resettlement actionplan SBD Standard biddingdocuments SEPA State Environmental ProtectionAgency SFB Selection under a fixed budget Statement o f expenditure voc SOE Vehicle operating costs VSL Variable-spread loan Vice President: Jemal-ud-din Kassum Country ManagedDirector: David R. Dollar Sector Manager: Jitendra N.Bajpai Task Team Leader: Supee Teravaninthom 11  FOROFFICIAJL USEONLY China InnerMongoliaHighway andTrade Corridor Project CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE .............................................................................. 1 1. 1 2. Rationale for Bank involvement...................................................................................................... Country and sector issues ................................................................................................................ 1 3. Higher-level objectives to which the project contributes ................................................................ 3 B. PROJECTDESCRIPTION 3 1. .............................................................................................................. 3 2. Lending instrument.......................................................................................................................... 3 3. 3 4. Project development objective and key indicators .......................................................................... Program objective and phases ......................................................................................................... 5. Project components ............................................................................................ Lessons learned and reflected inproject design .............................................................................. 5 6. Altematives considered and reasons for rejection........................................................................... 5 C. IMPLEMENTATION 7 1. ....................................................................................................................... 7 2. Partnership arrangements (if applicable) ......................................................................................... Institutional and implementation arrangements ...... 3. Monitoring and evaluation o f outcomes/results ...... ................................................................... 8 4. ......... .................................... .................. 8 5 . Sustainability ............................ Critical risks and possible controversial aspects ............................................................................. 8 6. Loadcredit conditions and covenants ................ ....................................................................... 9 D. APPRAISAL SUMMARY .............................................................................................................. 11 1. 2. Economic and financial analyses................................................................................................... 11 Technical ....................................................................................................................................... 3. Fiduciary.................. .........12 12 4. 13 5. Social............................................................................................................................................. .............. 6. Environment ......................................... Safeguard policies ................................ ....................................................................... 14 7. Policy exceptions and readiness ................. Annex 1: Country and Sector or Program Background .................................................................. 17 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .......................... 21 Annex 3: ResultsFramework and Monitoring ................................................................................. 23 Annex 4: DetailedProject Description .............................................................................................. 27 Annex 5: Project Costs ........................................................................................................................ 31 Annex 6: Implementation Arrangements ......................................................................................... 33 Annex 7: Financial Management andDisbursementArrangements ............................................. 35 Annex 8: Procurement ........................................................................................................................ 40 Annex 9: Economic and Financial Impact Analysis ........................................................................ 45 Annex 10: SafeguardPolicy Issues ...................................................................................................... 55 Annex 11: Project Preparation and Supervision ................................................................................ 63 Annex 12: Documentsin the Project File ............................................................................................ 65 This document has a restricted distribution and may be used by recipients only in the performance of their official duties I t s contents may not be otherwise disclosed without W o r l d Bank authorization . .  Annex 13: Statementof LoansandCredits ........................................................................................ 67 Annex 14: Country at a Glance................................................... ......................................................... 71 Maps IBRD33237 IBRD33238 11  CHINA INNERMONGOLIAHIGHWAYAND TRADE CORRIDOR PROJECT APPRAISAL DOCUMENT EASTASIA AND PACIFIC EASTR Date: January 13,2005 Team Leader: Supee Teravaninthom Country Director: David R.Dollar Sectors: Roads and highways (9O%);Sub- Sector ManagedDirector: Jitendra N.Bajpai national government administration (10%) Themes: Export development and competitiveness (P);Rural services and infrastructure (P);Municipal governance and institutionbuilding(P);Trade facilitation and market access (P) Project ID: PO68752 Environmental screening category: Full Assessment LendingInstrument: Specific InvestmentLoan Safeguardscreening category: Limitedimpact [XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 100.00 Proposed terms: VSL Borrower: People's Republic o f China China Responsible Agency: Inner Mongolia Communications Department Hohhot Inner Mongolia China  Annual 15.00 20.00 25.00 25.00 15.00 0.00 0.00 0.00 0.00 Cumulative 15.00 35.00 60.00 85.00 100.00 100.00 100.00 100.00 100.00 Re$ PAD D.7 [ ]Yes [XINO Have these been approvedby Bank management? [XIYes [ ]No I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? Ref: PAD C.5 [ ]Yes [XINO .I Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D.7 [XIYes [ ] N o J Project developmentobjective Re$ PAD B.2, TechnicalAnnex 3 The mainobjective of the project is to maximize the use o f transport infrastructure as a meanto promote intemational trade o fInner Mongolia ingeneral, and Hulunbeir League inparticular. Specifically, it will help speed up the general development o f Hulunbeir League, preparingit to cope with the increasingly important role the central government has assigned to it to be the country's main contact point for trading with Russia. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 (a) Construction of about 177 kmo f the Hailar-Manzhouli Highway (HMH)which i s one of the most important trade corridors between China andRussia; (b) Border Roads for Trade (BRFT) component consisting of five local roads has beendesigned to connect the northeastemhinterland o f China to the intemational border crossings to promote trade with Russia and Mongolia. (c) Trade facilitation componentconsists ofthe development o f cargo transfer terminal (CTT) and a diagnostic study on measures to promote cross-border trade between China and its neighbors. (d) Institutionalstrengthening andtraining component designed to improve the efficiency and sustainability of road sector management inInner Mongolia and strengthen institutional and policy development, focusing on logistics arrangements with neighboring countries. Which safeguard policies are triggered, if any? Re$ PAD D.6, Technical Annex 10 EnvironmentalAssessment (OP/BP/GP 4.0 1) Natural Habitats (OP/BP 4.04) Involuntary Resettlement (OP/BP 4.12) IndigenousPeoples (OD 4.20, beingrevised as OP 4.10)  Significant, non-standard conditions, if any, for: Re$ PAD C.7 Boardpresentation: NIA Loadcredit effectiveness: NIA Covenants applicable to project implementation: Standard implementation covenants on safeguard, procurement and financial management.   A. STRATEGIC CONTEXTAND RATIONALE 1. Country and sector issues The strategic objectives for China according to the WorldBank's Country Assistance Strategy (CAS) of November 2002 are to: e Improve the investment climate; e Accelerate the transitionto a market economy; e Address the needs of disadvantagedgroups andunderdeveloped regions; and e Facilitate a more sustainable development process. Inthis strategic context, the CAS recommendsBank interventioninthe followingareas ofthe transportation sector: e Financingeconomic infrastructure inkey growth corridors, including seaport and external trade corridors and corridors serving westernprovinces; and to reduce inter- and intra-regional development disparities e Financing infrastructure to serve poorer communities, thereby improving productivity inrural areas e Facilitating the development o f institutions necessary for managing and planning the infi-astructure network inChina's rapidly growing market economy. Exports have played an important role inChina's strong economic growth inrecent years. However, becauseinternal transport costs are high, coastal provinces have benefitedmore from this growth than have inlandprovinces. Costs are highinpart becauseof distance, but also because o f inefficient or inappropriate pricingand weak intermodal logistics. Ifinlandprovinces are to have a meaningful share of China's booming export trade, access to these provinces must improve, and constraints on the transportation of goods mustbe overcome. The government's transportation policy emphasizes improving access for inlandprovincesand fostering the development of trade through lower transport costs and improved logistics services. Investment in basic transportation infrastructure and inmeasuresto facilitate the movement andhandling o f goods i s a prerequisite for the promotion of trade. This i s particularly true for China's trade with Russia, inwhich HulunbeierLeagueinInnerMongolia, onChina's northeastern border with Russia andMongolia, plays a keyrole. The city o fManzhouli inHulunbeier hasbeenChina's landport to Russia, Mongolia, and beyond for the past 100 years. 2. Rationale for Bank involvement The roles ofthe cities o fManzhouli and Hailar have increased inimportance as trade between China and its neighbors expands inthis era o f trade liberalizationand globalization. Border trade between China and Russia hasbeengrowing at about 20 percent per year for the past 4-5 years, although from a relatively low base.Trade statistics in2002 showed about 10million tons of freight movedbetweenthe two countries-9 million by rail and 1millionby road. At estimated growth rates o f 20 percent for the next five years and 10percent for the subsequent five years, the trade volume i s expected to reach 30 million tons by 2009 and 42 million tons by 2013. With such a significant increase intrade volume expected, and railways badly overburdened, serious consideration must be given now to investmentintransport links and facilities to move and handle cargo inHulunbeier. Manzhouli, as aresult o fthe blossoming of trade between China and Russia, has become the second- largest international landport inChina after Shenzhen(near HongKong). Despite its importance, it i s essentially a border checkpoint and has no cargo terminal except for some private facilities belongmgto 1  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION A large importers and exporters. Small shippers and traders that do not have their own premises need common loading and unloading facilities. Furthermore, Russian trucks, which carry about 90 percent o f cargo crossing the border by road, are not permittedinChinese territory beyond Hailar; cargo for destinations beyond Hailar has to be carried by Chinese trucks. A terminal for transferring cargo between Russian and Chinese trucks and between modes (road and rail), and for distributingand consolidating cargo inthe Hulunbeier area, i s necessary for promoting trade. Trade and Transport in Hulunbeier,Inner Mongolia Hulunbeierhas a total land area of 253,000 sq. km (80 percentthe size of Vietnam), but with a populationof only 2.7 million, it is one of the most thinly populatedareas of China. However, it is strategically importantbecauseof its long borderwith Russia(1,048 km) and Mongolia (676 km). It has five border crossingswith Russiaand two with Mongolia.All but one of the border crossings are seasonallyopen with bilateralarrangement.The exception,the Manzhoulicrossing, was upgradedin 1996to function as an internationalland port. Currently about 60 percentof trade betweenChina and Russia passes through the land port of Manzhouli. Russiantrucks are allowedto travel about 200 km into China from Manzhoulito Hailar (capitalof Hulunbeier League), while Chinesetrucks are allowed to travel 500 km into Russiafrom the Zabaykal'sk checkpoint acrossfrom Manzhouli.The Russians and the Chinese recentlyhave negotiateda reciprocaldeal and the Chinese have agreed to prepare roadand freight transfer facilities in the next 1-2 years so that Russiantrucks can travel 500 km into China. Importsfrom Russia to China consist of mainlyraw materials- timber and minerals-while exports to Russiaare agriculturaland consumer goods. Hulunbeier's economy relies heavilyon this foreign trade, which makes up about 40 percent of Inner Mongolia'sforeign trade. The following table summarizes a few key features of Hulunbeier'seconomy. China Inner Hulunbeier Inner Mongolia Hulunbeier Mongolia Compared to Comparedto China Inner Monaolia Land area (1,000 9,600 1,183 253 12% (country's 21% km2) third-largest) Population(million) 1,285 23.78 2.68 2% of total (ranks 11% 23rd) Populationdensity 134 20 11 Ranks 28`h (PoPlkm2) GDP per capita 8,184 7,230 7,051 Ranks 15`h(12% Closeto Inner (RMB in 2002) below national Mongolia average) average Highway network 1,820,000 72,673 Has 4% of (kml countrv's network ~ Roaddensity 190 61.4 One-third (kmllg000km2) nationalaverage Total importand 24.64 10.68 Contributes 43% export (RMB billion) of foreign trade of Inner Mongolia Proportionof import 14.3% 56.6% Economy relies and export to GDP heavily on foreign trade. The CAS identifies the strengthening o fregional integration and competitiveness through a well- functioning transportation system as a key objective inthe transport sector. The project will help meet the sector-related CAS obj.ectives o f facilitating trade (domestic and international), improving regional and market integration, and fostering the development o f western regions, whose development lags behind 2  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND SECTION A that o f coastal areas. One of the critical features o f the proposedproject i s the expansion o f the transport route between China and Russia. As a multilateral organization, the Bankhas the unique capacity to liaise with other countries across the border and is ina goodpositionto advise China onthis critical undertaking. 3. Higher-levelobjectivesto which the projectcontributes Besides investment intransport links to Russia andMongolia and expanding highway network capacity in the relatively poor northeastern corridor o f Inner Mongolia, the main challenge o f the project i s to strengthen institutionalcapacity and policy development capability inlogistics for trade between China on one hand and Russia and Mongolia on the other. Technical assistance will be provided to help in setting a foundation for further improvement intrade inInner Mongolia, particularly to help Hulunbeier League plan, facilitate, and expand international trade. The proposed project i s designed with the clear objective o f maximizing the use o f transport infrastructure to promote internationaltrade through Inner Mongolia ingeneral and Hulunbeier League inparticular. It will help accelerate the general development o fHulunbeier League, preparingit to cope withthe increasingly importantsole the central government has assigned to it to be the country's main contact point for trading with Russia. Inso doing, the project aims to: (i) improve the capacity o f transport infrastructure and network planning to handle the significant increase inthe volume o f international freight traffic along China's northeastern border; (ii) develop a freight transfer and trade facilitation program to meet the growing demand for cross-border trade; and (iii) provide technical assistance to the Inner Mongolia Communications Department (IMCD) and Hulunbeier to buildtheir capacity to plan, facilitate, and manage increasing demand for transportation o f international trade traffic. B. PROJECTDESCRIPTION 1. Lendinginstrument The project will be financed through three sources o f funds: central government (Ministry o f Communications [MOC]) budget transfers, local financing from Inner Mongolia, and the Bank loan. The Bank will finance the project through a specific investment loan. The borrower has selected the LIBOR- based U S Dollars Single Currency Loan with variable spread rate (VSL). The borrower had evaluated the various options offered by the Bank and had determined that this choice would provide the Borrower the desirable flexibility inthe management o f foreign currency obligations. V S L repayment terms will be governed by standard country terms. 2. Programobjective and phases Not applicable. 3. Projectdevelopmentobjective and key indicators Development objective. The main objective o f the project is to sustain and promote the development o f cross-border trade between China on one hand and Russia and Mongolia on the other by improving transport infrastructure and logistics. These improvements, inturn, will lower transport costs, increase income from external trade, and raise incomes inInner Mongolia, the country's third-largest province and one o f the poorest provinces o f the western region. Key performance indicators. The principal outcome or impact indicators selected for monitoring progress inachievingthe project development objective are: 0 For the Hailar-Manzhouli Highway (HMH)and the Border Roadsfor Trade (BRFT) components- -Traveltime(projectedtobereducedbyatleast50percentafterHMHcompletion) 3  INNERMONGOLIA HIGHWAY TRADE AND CORRIDOR SECTION B -Trafficvolumeservedbythecorridor,especiallyoftradecargo,projectedtoincreaseby100 percent after HMHcompletion -Shareoftradecargotransportedbyhighwaywillbeincreasedasrailwaywillbededicatedfor transportation o f petroleum imported from Russia. Timber, mineral products and other general cargo will have to be offloaded from the overburdened rail mode o f transport to road, and i s projected to be at least 10percent o f total trade volume For the Cargo Transfer Terminal (CTV- volume o f cargo passingthrough the CTT (projected to increase by factor o f four by 2008). e For the Institutional Strengthening and Training (IST) component-improvement inefficiency and capacity o f local governments to manage the HMHand BRFT infrastructure facilities and promote border trade, measured innumbers o f staff trained who remain inthe jobs for which they receivedtraining (projected at least halfthose trained). Annex 3 gives detailedinformation about indicators and baselines. 4. Project components The project includes the following components: Component I-Hailar-Manzhouli Highway. Expansiono f highway capacity by upgrading or constructing about 177 kmo f HMH.The component i s estimated to cost about US$172 million, of which US$70 million will be financed by the World Bank; Component 2-Border Roadsfor Trade. Upgrading andrehabilitation o f about 413 kmo f the highway network, sections identified either as key links for internationaltrade facilitation at smaller border crossings with Russia and Mongolia, or as critical missinglinks inthe highway network. The component aims to improve transport access to four other seasonal land ports between China and Russia and China and Mongolia. The component i s estimated to cost about US$51 million, of which US$18 million will be financed by the Bank. e Component 3-Cargo transfer terminal and tradefacilitation program. Development o f facilities and trade regime designed mainly for China's import and export trade with Russia and Mongolia, but also meetingthe requirements o fpotentialtrade intransit shippedthrough Chinese seaports to other countries. The primary purpose o f the CTT i s to facilitate the consolidation, distribution, and truclung o f cargo. The component i s composed of: (i) construction o f a transfer station in Hailar housing facilities for transferring cargo between transportation modes (rail and road) and between Chinese and Russiantrucks as well as for warehousing; and (ii) carrying out o f a diagnostic study on measures to promote cross-border trade between China and its neighbors. The study could later form a foundation to further improve a process for the quick and convenient inspection and clearance of cargo by customs and quarantine authorities; and to develop an internationally accepted trade documentation and practices for importers and exporters, transportation carriers, banks, and insurance companies. The component i s estimated to cost about US$2.6 million, and will be financed locally. Component 4-Institutional strengthening and training. Technical assistance and training programaiming to improve the trade logistics planning, trade promotion, and cargo terminal management, as well as project management, environmental monitoring, and supervision o f highway construction. The training program will be designed to include courses and study tours related to logistics operations and trade facilitation to benefit the relevant offices o f Hulunbeier government. The component i s estimated to cost about US$1.2 million and will be financed by the Bank. 4  INNERMONGOLIA HIGHWAY AND TRADE CORRIDOR SECTIONB Project outputs. The project will produce the following outputs to meet the development objectives: Increased transport capacity and better market integration inChina's second-largest land port corridor, Hailar-Manzhouli, innortheasternInner Mongolia; More external trade with neighboring countries through investment inthe BRFT component; Improved capacity o f the road network infrastructure through the provision o f the CTT inHailar. This includes facilities andservices which will facilitate the conduct o ftrade and the movement o f cargo by road between the countries; Enhanced public sector management o froad and CTT infrastructure inHailar by strengthening institutional and management measures; and 0 The diagnostic study on measures to promote cross-border trade will assist China indeveloping a trade regime and documentation compatible with intemational trade practices. 5. Lessons learned and reflected in project design OED's recent assessment o fthe Bank's transport portfolio inChina highlightsa hghlevel o fclient satisfaction with investments inthe highway sector. The overall perfonnance o f the Bank's highway portfolio inChina has been satisfactory; nevertheless, a number o f issues have arisen duringproject implementation. These include a lack o f coordinationamong organizations and levels o f government that has been detrimental to implementation o f the policy agenda, especially for improving road safety, and issues with infrastructure design as well. Two ongoing Bank-financed highway projects inInner Mongolia, the Inner Mongolia component o f the Tri-provincial Highway Project, and the Inner Mongolia Highway Project, have provided the following relevant lessons, which the design o f the proposed project has taken into account: Client ownership and coordination among various levels of government units must improve. The task team ensured that all relevant government units, including Hulunbeier government, IMCD, and other organizations involved, participatedinproject preparationto foster a sense o f ownership as well as create continuity for implementation. Rushing the engineering design without carrying out a thorough geological survey leads to many design variations during implementation. The proposed project has tried to ensure that the design institute has enough time to complete a thorough survey and carry out design work properly. A weak local supervision team causes quality control during implementation to suffer. The project team discussed supervision at length with the Hulunbeier project management office to ensure that the client takes site supervision work seriously and that the local supervision team recruited through national competitivebiddingi s o f good quality. Rushing through theprocurementprocess in order to start construction quickly does not leave sufficient timefor bidders toprepare good bids. The task team for this project insisted on giving bidders sufficient time to prepare good bids and established procedures that do not allow the client to shorten the bidperiod without good reason. 6. Alternatives considered and reasons for rejection HMHcomponent Route alignment alternatives for four HMHroad sections were studied indepth duringproject preparation. The four road sections chosen, totaling about 102km, account for 58 percent o f the length o f the proposedHMH.The alignments chosen, the alternatives, and the reasons that the final choices were made are described below: 5  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTIONB 0 Bayankuren town bypass (section A)-One option was a northern bypass o f Bayankuren that i s 13.67 kmlong, while the other option was a southem bypass 13.0 kmlong. The southern option, although 670 m shorter than the northern, was dropped because the alignment was inthe flood areas o f Hailar River. e Huhenuer Lake section (section B)-One alternative was a new constructionplan with a better alignment, but it would have conflicted with the plannedHuhenuer Lake tourism area and therefore was rejected. The other option (39 km), which uses most o f the existing road with some improvement o f sharp curves, was selected. 0 Chagang to Jalannuer section (section C)-The recommended section i s a new alignment that stretches out the sharp curves of the existing road. It i s about 38 kminlength, about 20 km shorter than the alternative option usingmost o f the existing road. Inaddition, the recommended option i s US$25 million cheaper than the alternative because o f its shorter length. 0 Manzhouli Bypass (section D)-A bypass o f the city o f Manzhouli (12 km) was compared with the existing alignment o f NH301 that passes through the city. The alternative design through the city was dropped because the road width couldnot meet Class Istandards and upgrading the road would have interfered with settlements along the road. The selected alignments were optimized further duringthe preliminary design. About 9 kmo f section B still fell within the plannedHuhenuer Lake tourism area and therefore was changed. The alignment o f section C inthe feasibility report was shifted to pass north o f the lakes instead o f passing betweenthe lakes to avoid unfavorable geologic conditions while keeping environmentalimpacts to the lakes minimal and road length the same. CTTcomponent Three locations for the CTT were considered: (1) at the Manzhouli checkpoint, (2) inHailar, and (3) between Manzhouli and Hailar. The thirdoption had the merit o f space but little else. The first option would have added to the congestion at the checkpoint and would not have permitted Russiantrucks to transit Chinese territory to the maximumdistance permitted. The second option for the site o f the proposed CTT, the Haidong IndustrialDevelopment Zone, overcame the disadvantages o f the first and thirdoptions while also enabling the CTT to replace an obsolete inner city truck terminal. InHailar, the CTT is centrally located inrelationto five other border crossings with Russia andtwo with Mongolia. The type andnature of facilities and services designed for the CTT reflectedthe requirements and preferences o fpotential users based on a survey conducted by the Sociology Department o f Hohai University inMarch 2004. The population o f the survey included importers/exporters, forwarding agents, trucking companies, truck drivers and cargo agents inHailar and Manzhouli. Questions asked inthe survey included the type and nature o f facilities and services to be provided, ownership and management modalities (public vs. private sector), preferences for the type and capacity o f equipment and, inthe case o f truck drivers, the nature o f amenities and conveniences. The survey established that there was an overwhelming support for the CTT with 96% o f the potential users polled expressing interest to rent space at the CTT. Most were infavor o f the CTT being developed and managed by a government agency. The greatest facility requirement was parking bays for trucks followed by conventional and temperature- controlled warehousing. Equipment with a higher capacity (over 10 tons) was preferred over those o f lower capacity. More than 75% o f truckers polledexpressedthe need for diningand washroom facilities, a workshop for minor repairs and overnight accommodation. About 25% o f drivers surveyed were Russian truck drivers. 6  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION B Summary of the key analysis and findingsof the CTT user survey Currently, there i s noregular large cargo handling facility inHailar City. Cargoes are handled and stored with various small companies andor government department storage. Facilities are not open for public use. Some cargoes are handledinopen space by the roads outside the city and some parking facilities are also assuming cargo transfer functions. There is an urgentneedto establish aregular, modern and full-function cargo handlingterminal bothinview o fthe fast growing border trade and the rapid growth o f local economy. Hailar City is by far a most appropriate locationfor suchpurpose. Facilities most neededinclude parking lots (99% of the respondents), large storage house (88%), temperature controlled storage facilities (77%), open storage lots (63%), loading docks and cargo handling equipments (5 1%). Majority polled expressedpreference for hotelrooms, restaurants, public restrooms, gas stations and vehicle repairing services. As for customs and quarantine offices, 89% expressed preference for it, while 12%expressedotherwise. Regarding the terminal investment,43% ofrespondents felt that it i s a highrisk venture, hence the government shouldbe responsible for the terminal investment while 21% felt it shouldbe left to the association o ftraders, and 10%felt it shouldbe done totally byprivate sectors. As for the operation and managementofthe terminal, 30% felt that the terminal shouldbe managed by the government, while 25% felt it shouldbe done by the associations of traders, and 18% prefer to leave it to private sector. 96% of the interviewedexpressedwillingness to rent and use the terminal while 6% are not interested. C. IMPLEMENTATION 1. Partnershiparrangements(if applicable) Not applicable. 2. Institutionalandimplementationarrangements Technically, IMCD has overall responsibility for project preparationand implementation. It will be directly responsible for formulating, implementing, and managingthe project. However, administratively, the local government of Hulunbeier has responsibility for making local arrangements relatedto environmental safeguards, landacquisition, andresettlement arrangements for project-affectedpeople. The Hai-Man project management office (HMPMO) has been established inthe Hulunbeier branchof the IMCD inChenqi, headedby the director general o f IMCD and assistedby the deputy director general of IMCD and the deputy mayor o f Hulunbeier. The HMPMO will assume overall implementation and coordinationresponsibility for all components and every aspect of the project. The CTT component will be developed andoperated by the Hulunbeier government. Inthe longterm, depending on how fast demand for terminal use grows, various facilities inthe terminal may be leasedto and operatedbythe private sector. 7  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION C The project will be implemented 2004-2009. Overall direction of the project at the central levelrests with MOC inBeijing. The Bank loan will be lent to the borrower, the People's Republic of China (PRC). Its MinistryofFinance (MOF) will on-lend the loanproceedsto Inner Mongolia. 3. Monitoring and evaluationof outcomeshesults Monitoringand evaluationdata will be collected and coordinated by the PMO with the active participationo f Hulunbeiergovernment. Baseline information and target values were agreed with IMCD during preparation. HMHcomponent. HMPMOwillpreparequarterly reports delineating implementationprogress and covering procurement, construction progress, and quality, includingall work variations and cost control. After the constructionis completed, the highway will bemonitored and managedby the IMCD High- grade HighwayBureau. Environmentalmonitoring will be entrustedto Hulunbeier Environmental Bureau, which i s an entity independentof IMCD. The monitoring of social andresettlement safeguards will also.bedone by an external independent entity that will be hiredby IMCD. BRFT component. IMCD will have overall coordinationresponsibility for the BRFTcomponent, with intensive participation from the local government o f Hulunbeier. The monitoring and evaluation of outcomes, including the collection of evaluation data, will be done by the government of Hulunbeier with technical support from IMCD. CTT component. The government ofHulunbeierwill be solely responsible for the management and monitoring o f the CTT component. 4. Sustainability The strong commitment o fthe central, provincial, and local Hulunbeier governments to the project is the main indication of the sustainability of the project. Furthermore, the project has national importance because it i s part o f the State Council's plan to expand border trade with Russia through the Hailar- Manzhouli corridor. For their parts, MOC and the govemment o f Inner Mongoliaalready have approved RMB790 millionandRMB 500million, respectively, as the state andprovincial contributionsto the project. 5. Criticalrisks andpossiblecontroversialaspects Although implementation quality andprogress of the Bank's ongoing highway projects inInner Mongolia are generally satisfactory, adding another project inevitably would tax the limitedmanagement resources of the IMCD. The issue was extensively discussedduringproject identification, and top-level managers in IMCD admittedthe needto addressthe problemto avoid compromising the quality of implementation of the ongoing projects or of preparation of the newproject. After several options were explored, IMCD came upwith aninnovative and efficient arrangementto entrust the government o f Hulunbeier to leadthe team o f IMCD staff duringthe preparation of the project. This combines the strength of the two agencies-the government o f HulunbeierLeague, which has the best knowledge of the local situation and development demand; and the staff of IMCD, who are familiar with Bankprocessingrequirements through their involvement inthe two ongoing projects. Another risk is that the transport services and trade facilitation component i s a departure from IMCD's traditional focus on transport infrastructure. Hulunbeiergovernment's involvement inthe early stages of project preparation has been o f critical importance for mitigating this risk and its ongoing participation could compensatefor IMCD's shortcomings intransport services and trade facilitation, which underpin the primary objective of the project and are critical to its success. 8  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION C 6. Loadcredit conditions and covenants The effectiveness conditionis the issuanceo f acceptablelegalopinions. Legal covenants includethe following: a. Hailar-ManzhouliHighway Inner Mongolia shall: (a) take, or cause to betaken, all necessary actions to minimize to the extent possible any involuntary loss by persons of shelter, productive assets or access to productive assets or of income or means of livelihood, temporarily or permanently; (b) carry out the EMPs andRAPs inamanner satisfactory to the Bank; (c) furnishany proposedrevision o f the plans referredto in sub-paragraph (b) above to the Bank for its prior approval; (d) maintain policies andprocedures adequateto enableitto monitor and evaluate onan ongoing basis, inaccordance with indicators acceptableto the Bank, the carrying out o f the EMPs, R A P s and the EMDP; (e) prepare under terms of reference acceptable to the Bank, and fumishto the Bank (i)anannualenvironmentalmonitoringreport,byJune15ofeachyear,commencingJune 15,2006, and untilcompletion of the Project; (ii) May15andNovember15ofeachyearanduntilcompletionoftheProject, by commencingMay 15, 2005, an internal monitoringreport prepared by the appropriate agencies of Inner Mongolia on the implementation and impact o fresettlement activities duringthe preceding one year or six-month period, as the case may be; and (iii)by March 15 and September 15 of eachyear and untilcompletion ofthe Project, commencing September 15,2005, an extemal monitoring report prepared by an independententity acceptable to the Bankonthe implementation andimpact of resettlement activities and the EMDP, duringthe precedingyear or six-month period, as the case may be. (0 prepare, andprovide to the Bank a monthly progress report, inform and content satisfactory to the Bank, on the progress o f civil works, commencingMay 1, 2005, and untilcompletion o f the civil works. b. Border Roadsfor Trade Inner Mongolia shall: (a) take, or cause to be taken, all necessary actions to minimize to the extent possible any involuntary loss by persons o f shelter, productive assets or access to productive assets or of income or means o f livelihood, temporarily or permanently; (b) carry out the EMPsandRAPSinamanner satisfactory to the Bank; 9  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION C (c) furnish any proposedrevision of the plans referred to in sub-paragraph (b) above to the Bank for its prior approval; (d) maintain policies andprocedures adequate to enable itto monitor and evaluate onan ongoing basis, inaccordancewith indicators acceptable to the Bank, the carrying out of the EMPs, RAPs and the EMDP; and (e) prepare under terms of reference acceptable to the Bank, and furnishto the Bank: (i)anannualenvironmentalmonitoringreport,byJune15ofeachyear,commencingJune 15,2006, and untilcompletion of the Project; (ii)byMay15andNovember15ofeachyearanduntilcompletionoftheProject, commencingMay 15,2005, an internalmonitoringreport preparedby the appropriate agencies o f Inner Mongolia on the implementationand impact of resettlement activities duringthe preceding one year or six-monthperiod, as the casemay be; and (iii)by March 15 and September 15 of eachyear and untilcompletion ofthe Project, commencing September 15,2005, an external monitoringreport preparedby an independententity acceptableto the Bank onthe implementation andimpact of resettlement activities and the EMDP, duringthe precedingyear or six-month period, as the case may be. c. TradeFacilitation Component Inner Mongolia shall: (a) take, or cause to be taken, all necessaryactions to minimize to the extent possible any involuntary loss by persons o f shelter, productive assets or access to productive assets or of income or means of livelihood, temporarily or permanently; (b) carry out the EMPsandRAPsinamannersatisfactory to the Bank, (c) furnishany proposed revision o fthe plans referred to insub-paragraph (b) above to the Bank for its prior approval; (d) maintainpolicies andprocedures adequateto enable itto monitor and evaluate on an ongoing basis, inaccordance with indicators acceptableto the Bank, the carrying out o f the EMPs, RAPSand the EMDP; (e) prepare under terms of reference acceptableto the Bank, and furnishto the Bank: (i)anannualenvironmentalmonitoringreport,byJune15ofeachyear,commencingJune 15,2006, and untilcompletion of the Project; (ii) May15andNovember15ofeachyearanduntilcompletionoftheProject, by commencingMay 15,2005, an internal monitoring report prepared by the appropriate agencies o f Inner Mongolia on the implementation and impact o fresettlement activities duringthe precedingone year or six-monthperiod, as the case may be; and 10  INNERMONGOLIA HIGHWAY AND TRADECORRIDOR SECTION C (iii)March15andSeptember15ofeachyearanduntilcompletionoftheProject, by commencing September 15,2005, an external monitoring report preparedby an independententity acceptableto the Bank onthe implementationandimpact of resettlement activities and the EMDP, duringthe precedingyear or six-month period, as the case may be. (f) furnish to the Bank for comments, by December 31,2006, the recommendations of the diagnostic study on measures to promote cross-border trade between China and its land- lockedneighbors study. d, Institutional Strengtheningand Training Inner Mongolia shall: (a) furnishto the Bank for comments, by November 15 ineachyear, commencingNovember 15, 2005, an annual training program and, thereafter, carry out such training programtaking into account the Bank's comments, ifany; and (b) furnishto the BankbyNovember 15 ineachyear, commencingNovember 15,2006, an annual training report describing the training carried out duringthe precedingyear. e. Reporting, monitoring and auditing Inner Mongolia shall: (a) maintainpolicies andprocedures adequateto enable itto monitor and evaluate on an ongoing basis, inaccordancewith indicators satisfactory to the Bank, the carrying out of the Project and the achievement of the objectives thereof; (b) prepare, under terms ofreference satisfactory to the Bank,and furnishto the Bank, on or about February 15 ineachyear, commencingFebruary 15,2006, a report integrating the results of the monitoring and evaluationactivities performedpursuant to paragraph (a) o f this Section, on the progress achieved inthe carrying out of the Project duringthe period precedingthe date of saidreport and settingout the measuresrecommendedto ensure the efficient carrying out of the Project and the achievement o f the objectives thereof duringthe period following such date; and (c) review with the Bank, by May 15 ineach year, commencingMay 15, 2006, or such later date as the Bank shallrequest, the report referred to inparagraph (b) o fthis Section, and, thereafter, take all measures requiredto ensure the efficient completiono f the Project andthe achievement of the objectives thereof, based on the conclusions and recommendations of the said report and the Bank's views on the matter. D. APPRAISAL,SUMMARY 1. Economic and financial analyses Economic (Cost beneJit) EIRR= 17.0%, NPV (12% ) =US$100.7 million This economic evaluation covers: (1)constructiono f the 177kmHMH, (ii) upgradingof five localroads (413 km)underthe BRFT component, and (iii) development ofthe CTT. The principal measured the 11  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION D benefits o f the project come from the HMHand BRFTcomponents. They are savings invehicle operating costs, time savings to vehicle occupants, and enhanced road safety. The estimated overall economic internal rate o freturn ( E M ) for the project i s 17.0 percent, with those for HMH,BRFT, and CTT being 15.7 percent, 21.3 percent, and 24.5 percent, respectively. The overall economic net present value (NPV), based on a 12percent discount rate, i s estimated at RMB 835.5 million, o f which HMHi s estimated to contribute RMB484.4 million, BRFT i s estimated to contribute RMB 318.3 million, and CTT i s estimated to contribute RMB 32.9 million. An analysis o fthe evaluation results and a description o f the method used to derive them are provided inAnnex 9 and summarized as follows: Summary of Economic Evaluation Results ElRR (in %) NPV (RMB million,12%) a. Hailar- ManzhouliHighway (HMH) 15.7 484 4 b Border Roadsfor Trade (BRFT) 21.3 318.3 c Cargo Transfer Terminal ( C T ) 24 5 32.9 Total Project 170 835.5 Financial A fiscal impact analysis was done for boththe HMHand BRFTcomponents. The financial evaluation confirmed the availability o f sufficient counterpart funds and the capacity o f IMCD to finance operating expenses. All the indicators show that the fiscal impacts and risks are modest. A detailed assessment i s provided inAnnex 9. 2. Technical Issues that need special attention from a technical point o f view are: 0 Proper review o f selected design standards, especially to take into consideration safety on a high- speed road; 0 Adequate geological investigationat the design stage to minimize the risk o f encountering major problems at the construction stage, as has occurred inother highway projects inChina; and 0 An appropriate level o felectrical andmechanicalworks at the opening o fthe highway to traffic. 3. Fiduciary Financial management The Bank mission conducted a financial management assessment o f the HMPMO and concluded, onthe basis o f guidelines issued by the Financial Management Sector Board of June 30,2001, that the project meets minimumBank financial management requirements (stipulated inBP/OP 10.02). The assessment found that the project will have inplace a project financial management system that can provide, with reasonable assurance, accurate and timely information on the status o f the project inthe format agreed with the Bank (Annex 7). Procurement A procurement capacity assessment o fthe implementing agencies was carried out duringpreappraisal (Annex 8). The assessment concludedthat the overall risk o f the procurement process i s average. I M C D and dependent entities involved have allocated adequate resources, including experienced staff, to implement the project. These agencies (except those under the local government o f Hulunbeier) are familiar with Bank procurement procedures. An action plan to strengthen the procurement capacity o f the implementingagencies (including staff assigned fkom Hulunbeier) has been discussed with HMPMO and 12  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION D agreed upon. The plan calls for the preparation and dissemination o f a project-specific procurement manual, training workshops, and measures to avoid excessive cost overruns and improve procurement economy and efficiency. Ways inwhich the Tendering and BiddingLaw o f China differs from Bank guidelines were addressed inthe assessment, and clarifications for the procedures to be followed for Bank-financedNCB procurement will be included inthe loan agreement. 4. Social Project planning included a social assessment and the development o f RAPSas well as an ethnic minority people's development plan. This helped identify project impacts, facilitate consultationwith various stakeholders, develop necessary mitigation measures, and put inplace implementation arrangements. The main adverse impact is the needfor land acquisition. The project will require 16,984 muo fland, including 546 muo f cultivated land and 14,287 muo f grassland, affecting 2,129 people in 590 households in 39 villages. The average individual land holding i s large inthe project areas and the average grassland lost for each family i s less than 1percent o ftotal holdings. There will be limited impacts on trees and public infrastructure. FiveRAPShave been developed inline with local laws and policies and World Bank OP 4.12 on InvoluntaryResettlement and are based on consultations with the affected people. These plans describe indetail the impacts, affected populations, consultation process, rehabilitation measures, budget, and implementation and monitoring arrangements. Hulunbeier has 35 ethnic minority groups, with a populationo f 468,600, about 18 percent o f its total population. Projectpreparation was conducted on the basis o f close consultationwith and participation by the local people, including the ethnic minority population. Project information was providedto the ethnic minority groups through radio broadcast, meetings, and village public boards. Various consultation efforts enabled the ethnic minority groups to participate inand influence the project design. The project i s expected to benefit all local populations, including ethnic minority groups, through i) improved transportation conditions, particularly through the BRFTcomponent, ii)improved employment opportunities under the project, iii)promotion o f better use o f natural resources and development o f livestock industries. Adverse impacts are associated mainly with land acquisition, house demolition, and inconvenience in road crossings and operation o f hay-transporting vehicles. Project land acquisition will affect mainly Inner Mongolian families, and the BRFTcomponent will also affect a small number of Daker and Elunchun families. All families have been identified, and mitigation measures have been developed. Two concerns emerged inthe consultation process relating to access to grazing areas and the safe operation o f hay-transporting vehicles with the upgraded highway. These concerns have been shared with the design engineers. Mitigation measures and alternatives have been under discussion with the local populationand some have already been incorporated into the technical design. Consultations are ongoing with local governments and the local population. 5. Environment OP 4.01 Environmental Assessment This i s a category A project under OP.4.01 Environmental Assessment. IMCDhas prepared the Environmental Impact Assessment (EM) and the Environmental Action Plan (EAP) through the required two-step consultation. Those documents were disclosed locally and inWashington, D.C., inJuly 2004. To minimize environmental impacts, intensive alternative analysis was conducted, including the non- project alternative. The design includes the following major considerations: (i) avoid under-planning o f tourism areas; (ii) use the existing alignment as much as possible; (iii) fragile ground in an old avoid miningarea; (iv) avoid passingthrough Manzhouli City; and (v) minimize the road length crossing Erka Wetland. 13  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTIOND At the public consultations, participants voiced their concerns about: (i) free movement o ftheir herd the animals, (ii) recovery o fvegetation along the highway, and (iii) to the scenery from borrow pits damage or dumping sites. Inresponse to these concerns, (i) number o f culverts has been increased from 104 in the the original design to 110, and pathways and passenger overpasses from 30 to 47; (ii)budget for a rehabilitation o f vegetationhas been allocated; (iii)a dumping site will be moved to behind a mountain to avoid spoiling the scenic view. The EIA identified four environmentally sensitive areas: (i) four residential areas with from 17 to 475 households, (ii) one hospital with 260 beds, (iii) seasonal rivers, and (iv) Erka wetland. IMCD has three experience indealing with noise, dust, and water pollution control from past projects, including two Bank projects. The EIA and EAP establishedmitigation measures to control environmentalimpacts to an acceptable level. OP 4.04 Natural Habitat The project area lies mainly ingrassland with herding and agricultural activities. There are n o environmentally protected areas inthe impact zone of the project. A 13 km section o f the proposed alignment passes through Erka Wetland, which i s a natural habitat but not protected, although there are several protected wetlands inInner Mongolia. The safeguardmeeting inJanuary 2004 decided to evaluate the quality and importance o f the Erka Wetland, and an independent internationalecologcal expert was hired to conduct a field survey and review the EIA in M a y 2004 and recommendmitigation measures. According to the international expert: (i) Erka Wetland has internationalimportance interms o f migration of birds; (ii) The project will have major impacts duringthe constructionperiod, but minimal impacts duringthe operation stage; and (iii) promotion of ecotourismandprotectionofthe wetlands were The recommended as mitigation measures. IMCD and the Hulunbeier Government agreed to take the necessary measures to carry out his recommendations. The EAP specifies multiple mitigation measures to control the impacts to an acceptable level. The project will not cause a significant level o f change to the existing environment. Inaddition to mitigation measures, the project will promote ecotourism by buildinga small facility composed o f a small parking lot, wood path, and educational signs, and the local government agreed to set up a wetland protection plan to control long-term impacts from the operation o f the highway. 6. Safeguard policies SafeguardPolicies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revisedas OP 4.11) [XI [X1 [I Involuntary Resettlement (OP/BP 4.12) [I Ethnic Minority Peoples (OD 4.20, being revised as OP 4.10) [X 1 11 Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [I [XI 'Bysupportingtheproposedproject,theBankdoesnotintendtoprejudicethefinaldeterminationoftheparties' claims o n the disputed areas 14  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND SECTION D 7. Policy exceptions and readiness The project will comply fully with Bank policies. The project meets regional criteria for implementation. 15   Annex 1: CountryandSector or ProgramBackground CHINA: Inner MongoliaHighway andTrade CorridorProject COUNTRY PROSPECTSAND ISSUES 1. China i s passing through four major transitions: 0 Froma centrally planned to a market-based economy 0 Froman agrarian to a modem industrial and urbanized economy 0 From a society with a highbirthrate and low longevity to one with a low-birthrate and high longevity 0 Froma closed to an open economy. 2. Improving transport infrastructure, thus reducingtransportation costs, will helpChina expand its external trade andtherefore its degree of openness. TRANSPORT SECTORBACKGROUND 3. For the past 20 years, the Chinese economy has grown remarkably fast, averaging 8-10 percent growth per year, enabling the country tojoin the World Trade Organizationin2001. As a result o f this growth, more motorizedvehicles and heavier traffic have put a heavy demand on infrastructure. Both passengerand freight traffic has grownrapidly inthe past five years-7.1 percent annually for passengers and 5.5 percent for freight. The number ofregistered vehicles, currently 20.5 million, i s expected to reach 34 millionby 2010.This rapid economic development has created the need for an appropriate road network. The lengthof the roadnetwork has more than doubled since 1980, to approximately 1.8 million kmin2003. Evenmore impressive, Chinahadzero kmof expressway in 1985, andwill have 35,000 km by the endof 2005. 4. Despite China's massive investment inthe construction of new highways (2.8 percent of GDP on average from 1997 to 2003), fundingi s still insufficient to meet demand. The government i s developinga long-term plan for the road sector that calls for different kinds of works on 300,000 kmo f roads of various standards and classes that will require US$84 billion over 10 years. China nowrealizes that transport infrastructureis vital for integratingpoorer provinces into the national market, and thus for increasing their degree of openness and realizing their economic potential. 5. But fundingi s not the only issue facing the Chinese road sector-institutional reformi s also intensifying.Transforming the government into a market-supportinginstitution is one o fthe largest transition issues facing China. The strategc focus of the transport sector has been to improve transport efficiency (including safety) while reducing transport costs, which will, inturn, contribute to the competitiveness o f China's external trade. The challenges o f implementingthis strategy inChina's highway sector include improving management o f the sector, rationalizing road expenditures and revenue arrangements, enhancing accessibility to remote and low-income areas, and improving traffic safety. 6. Sector management. Inthe highway sector, the government's role inproviding transport infrastructure (construction andmaintenance) and services i s shiftinggradually fi-om that o f owner, investor, and manager to one of regulator. As regulator, the government must oversee and encourage the development o f more independent enterprises (insome cases, not ownedby the state) that can provide cost-effective civil works and services. The pace o f this transformationdepends on the level of development o f the provinces, which varies widely, especially between coastal and interior provinces. 17  INNERMONGOLIA HIGHWAY TRADECONDOR AND ANNEX1 Managing road expenditures 7. The sector i s striving to improve efficiency and minimize the costs o fproviding services. Efforts by the provincial communications departments (PCD) to improve operations while rationalizing and minimizingcosts cover all activities o f a road administration, from planning to design, construction, and maintenance o f roads at all levels. 8. Planning. The allocation o f funds between maintenance and new constructionremains a major problem, which is part o f planning. There i s a need for more discriminating investmentanalysis, starting with planning. Itwill be necessary for the country to be more selective when planning itsroad expenditures, even though there is still a strong demand for additional investments inthe roadnetwork. 9. Balance of expenditures. China's National TrunkHighway System consumes 60 percent o f highway sector resources, reflecting the country's focus on growth rather than distribution. The imbalance between classes o f roads should be reviewed carefully to determine whether the current allocation o fresources i s the most efficient for supporting economic development. The need for careful analysis o f future investments will be especially important for projects proposed inthe western provinces, where the types and scale o f investmentare likely to differ from those inthe eastern provinces. 10. Constructionquality. Highway construction quality remains a serious concern. Incidences o fbridge and road failings and premature wear and tear on highway pavement have raisedhigh-level Government official's awareness o f the issues. The problem has been technical and administrative roots. Managing road revenue and financing 11. Resources are inadequate to meet the increasing demandplaced on road infrastructureby a rapidly growing economy. 12. Road user charges. The main road user charge is the road maintenance fee, which bringsinrevenues o f more than RMB 35 billion a year. Other charges, including the vehicle tax and registration fee, contribute probably half as much as the maintenance fee. Roadusers thus bear a relatively large portion o f annual road expenditures-about one-quarter inthe past two years. Inaddition, the roadmaintenance fee i s inefficientbecause it i s expensive to administer yet easy to evade, and generates less than 40 percent o f its potentialrevenue. 13. Fuel tax. China has discussedintroducinga fuel tax for some years, and althoughthe National Congress passed the fuel tax resolution inNovember 1999, its implementationhas been deferred indefinitely. 14. Securitization. The sale o f highway equity through initialpublic offerings and private placements has been an innovative feature o f mobilizing private resources for the highway sector. Unlike with build- operate-transfer projects, the securitization o f highways already open to traffic greatly reduces investors' risk.However, given the proliferation o froadcompanies inallprovinces, the securitizationo froadassets has slowed significantly inthe past two years. Inthese circumstances, the government should focus on buildinga reliable and stable roaduser fee-based financing framework. At the same time, regulatory reforms are necessary to open opportunities for different modes o f public-private partnerships, mobilize domestic savings through the issuance o f bonds, and broaden the investor base. Enhancing accessibilityto remote and low-income areas 15. The geography o f China poses great obstacles to providing basic road access throughout the country, particularly ininner and low-income provinces. Although the role o f transport access inintegratingthe national economy, stimulating growth inremote areas, and ensuring the basic mobility needs o fthe poor has been emphasized, providing this access i s an enormous task that requires significant public resources. 18  INNERMONGOLIAHIGHWAY AND TRADECORRIDOR ANNEX1 Traffic safety 16. Traffic safety remains a major issue. In2002 Chinarecorded 773,000 accidents, with 109,000 fatalities and 562,000 injuries, a direct economic loss estimated at US$3 billion. The Asian Development Bank estimates the total economic loss from road crashes at US$12 billion per year. The traffic fatality rate i s three times the US.rate and i s among the world's highest, androad accidents are the leading cause o f death for Chinese people under age 45. As alarming as these figures are, they probably understate the reality. World Bank projections indicate that ifcurrent trends continue, traffic fatalities will rise from 7.4 per 100,000 people in2000 to more than 10per 100,000 people in2005. 19   Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies CHINA: InnerMongoliaHighway andTradeCorridorProject Latest Supervision (PSR) Ratings (Bank-financed projects only) I_- Implementation Development Sector Issue Project Progress Objective Bank-financed l____-._._.---ll 1.Removehighwaycapacity AnhuiProvincialHighway(ongoing) I. bottlenecks (sector issues 1-5) S S 2. Institutionalstrengthening and SecondHenan ProvincialHighway training (ongoing) (sector issues 1-6) S S 3 . Ruralroadsandpoverty ThirdNationalHighway: (ongoing) alleviation (sector issues 1, 2,4-6) S S Third HenanProvincialHighway 4. Highway safety (ongoing) (sector issues 1-6) S S 5. Operationandmaintenance of Tri-ProvincialHighway(ongoing) high-gradehighways (sector issues 1-6) S S FourthNationalHighway(ongoing) 6. Costrecovery (sector issues 1-5) S S SecondFujianHighway(ongoing) (sector issues 1,2,4-6) S S GuangxiHighway(ongoing) (sector issues 1-6) S S SecondJiangxiHighway(ongoing) (sector issues 1-6) S S Inner MongoliaHighway(ongoing) (sector issues 1-6) S S Xinjiang I11Highway(ongoing) (sector issues 1-6) S S HubeiXiaogan-XiangfanHighway (ongoing) (sector issues 1-6) S S SecondAnhui HighwayProject(sector issues 1-6) S S HubeiShimanHighwayProject (sector issues 1-6) 21  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX 2 Other development agencies AsianDevelopmentBank Ongoingprojects: Changchun-Harbin Expressway: Hashuang Expressway Changchun-Harbin Expressway: ChangyuExpressway Shanxi Roads Development Southem Yunnan RoadDev. Chongqing-GuizhouRoads Dev. (Leichong Expressway) Shaanxi Roads Development Guangxi Roads Development Chengdu-Nanchang Expressway Shanxi RoadDevelopmentI1 Southem Sichuan Roads Dev. NingxiaRoads Development Westem YunnanRoads Development HunanRoads DevelopmentII Guangxi Roads Development I1 JapanBankfor International Cooperation Ongoingprojects: Hangzhou-Quzhou Expressway Wanxian-Liangping Expressway Liangping-Changshou Expressway HainanEast Expressway Xinxiang-Zhengzhou Highway Heilongjiang Heife-Beian Road Gansu Province Road Construction Project HunanProvince Road Construction Project 22  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND Annex 3: ResultsFramework and Monitoring CHINA: Inner MongoliaHighwayandTrade CorridorProject ResultsFramework PDO OutcomeIndicators Use of Outcome Information Promote trade expansion by - Reduced travel time along the Feedbackto the Regional providing convenient transport and HMHcorridor Development Planto promote more relevant trade facilitation international trade andtake - Increased volume o f cargo for measuresto remove obstacles impodexport at the border - Increasedtonnage of cargo handled at CTT IntermediateResults ResultsIndicatorsfor Each Use of ResultsMonitoring (One per Component) Component Component1: Component1: Component 1: Improve capacity o f transport Progress o f works completed ("A) Monitoring o f implementation infrastructure along Hailar- progress and action plans to address Manzhouli corridor (HMH) possible delays Component2: Component2 : Component2: Improve highway network to handle Progress o f works completed ("A) Monitoring o f implementation increasing volume o f international progress and action plans to address freighttraffic (BRFT) possible delays Component3: Component3: Component3: Develop the cargo transfer terminal Progress o f works completed ("h) Monitoring o f implementation and trade facilitation progress and action plans to address possible delays Component4: Component4: Component4: Buildup institutional capacity in Number o f staff trained; Monitoring o f implementation IMCD and local Hulunbeier progress and action plans to address government Diagnostic study report completed possible delays 23   W d 0 0 0 0 0 0 0 0 0 0 0 0 '? s m m c u - -b* - m a? c9 al en Y % nx  0 0 ? ? 0 a z z s 0 0 0 0 ? 0 0 c o c o 0 o o o o c 0 0 (D o a c o c o ~ 538 7 b z 0 N o oN o o cC 0 0 ~ N C U C N c o 0 0 Nc\I c 0 m U w - ca, a, 2 , E L r5 o s 8 E E m -Ya P n .-P u) .-C d se c  Annex 4: DetailedProjectDescription CHINA: Inner MongoliaHighway andTrade Corridor Project COMPONENT 1-HIGHWAY CAPACITY EXPANSION(US$172.69 MILLION) Constructionof the Hailar-Manzhouli Highway:US$163.38million 1. Constructionofthe approximately 177 kmHailar-Manzhouli Highway (HMH)i s the project's main component. This does not include the 4 kmJalannuer-Manzhouli section built under a public-private investment scheme, but does include a city road section connecting to the customs area inManzhouli. Of the 177 km, 110kmwill be reconstructed and widened, and 56 kmwill be new constructionon a new alignment. The last section bypassing Manzhouli will be also widened to four lanes. The eastem link from Hailar to Yakeshi i s under construction and is expected to be completedby August 2005. 2. The HMHi s a divided, four-lane, partially access-controlled highway that could be operated as an open toll highway if I M C D finally decided to toll the highway. It will include two interchanges and three toll stations, service areas, and parking bays, as well as facilities for highway administration and maintenance. Equipment:US$3.94 million 3. Equipment will be procured for maintaining national and provincial highways (including expressways) and other lower-class roads. Equipmentneeded for controlling constructionquality and monitoring and for institutional strengthening will be procured or suppliedbefore civil works begin and will be financed locally. The equipment list, which includes cost estimates, is available inthe project file. Supervisionof construction:US$5.37 million 4. A supervision team composed o f local firms and intemational consultants and headedby a chief supervision engineer will supervise the construction o f HMHin accordance with FDIC provisions. The chief supervision engineers' office will be located at Chenqi and will be staffed with 200 domestic supervision engineers (for about 3,600 person-months). Local supervision engineers will be hired according to MOC regulations andprocedures. Two foreign engineers will be integrated into the core supervision team. These services are estimated at 38 person-months, including about 2 person-months for the training services. COMPONENT 2-BORDER ROADSFORTRADE (US$51.30 MILLION) 5. The Border Roads for Trade (BRFT) component has been designed to connect with ports and international border crossings to promote trade with Russia and Mongolia and fill inmissinglinks inthe critical roadnetwork. Inner Mongolia recognizes that eastem Russia's and Mongolia's trade with countries beyond China conceivably could transit Chinese territory for shipments through Chinese seaports. 6. The originally proposed road sections included 13 sections with a total length o f about 1,350 km.Five sections with a total length o f about 413 kmwere selected for inclusion inthe project, o f which 71 km will be Class 11highway and 342 kmwill be Class I11roads. The roads were selected according to the following criteria: e They were existing roads that needed improvement or upgradingto strengthen a local highway network and/or; e They connect to a port or internationalborder crossing to promote trade, 27  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX4 7. Feasibility studies and environmental assessment reports for eachproposedroad section were reviewed. The selected road sections are shown inthe following table. The EIRRrange from 15.3 percent to 22.5 percent. Border Roadsfor Trade Segments Estimated Road Class Planned Construction Completed Subgrade cost Road Section Current Planned Length(km) Width (m) (RMB million) Remarks Illor Links to high- Dayangshu-Baihuapai substandard II 70.5 8.5 109.54 poverty area Connects to importantland Zhalainuoer-Heishantou Substandard 111 138.0 8.5 134.95 port to Russia Links to seasonal portto Yimin-Handagai Substandard 111 103.0 7.5 88.43 Mongolia Connectswith Alatanemole-Arihashate III/IV 111 82.5 7.5 44.01 Mongolia Connects to land port to Amugulang-Ebuduge Substandard 111 19.3 8.5 16.43 Mongolia US$47.36 413.3 393.06 million COMPONENT3-TRADE FACILITATION COMPONENT (US$2.64 MILLION') 8. The trade facilitation component o fthe project consists o fthe development o f a cargo transfer terminal (CTT) and a diagnostic study on measuresto promote cross-border trade betweenChina and its neighbors.. CTT (US$2.54 million) 9. The purpose of the CTT i s to provide the facilities and services necessaryfor the transfer of cargo fkom Russian trucks to Chinese trucks as well as for the distribution and consolidationo f cargo. The CTT will be developed inphases.The first phaseof the proposed CTT i s designed to have the capacity to handle 850,000 tons of cargo per year. 10. The CTT, located inthe Haidong IndustrialDevelopment Zone inHailar, will have basic facilities and utilities such as a substation and power lines, an office block o f 600 sq. m, warehouses (temperature- controlled for conventionalproducts and fruits and vegetables) with a total floor area of 6,000 sq. m, a loading/unloadingplatform o f 1,600 sq. m, a container yard of 2,O 10 sq. m, a maintenance workshop of 500 sq. m, vehicle parking lots, a heated covered garage o f 750 sq. m, and a small buildinghousing a cafeteria, washrooms and public conveniences, and overnight accommodations for truck drivers. Customs officers, stationed inthe Haidong Industrial Economic Zone, will be available to clear cargo at the CTT. A rail sidingprovides access to the Binzhou Line(Harbin-Manzouli). The CTT will have cargo handling equipment: cranes, forklift trucks, pallets, stackers, a weigh-bridge, and computer servers for a computerized management and operating system. Study on measuresto promotetrade (US$O.lO million) 11. The diagnostic study will identifymeasures that will help develop the fullpotential for cross-border trade between China, Russia, and Mongolia. These measureswill include the development o f infrastructure facilities and transportation network necessaryto handle the movement o f cargo between 28  INNER MONGOLIA HIGHWAY AND TRADECORRIDOR ANNEX4 the two countries as well as trade facilitation measures to promote the conduct and development of trade. The study will: 0 Review the whole process andregime inwhich cross border trade is now conducted; 0 Identify constraints (physical, systemic, procedural), ifany, on conducting cross-border trade; 0 Recommendmeasures to overcome such constraints and foster the development of trade; 0 Suggest action plans for the short, medium, and longterms. 12. The study will require 3 person-months from each of a trade economist, a trade specialist, and a transport specialist. These consultants will supervise staffers who will collect data (for an estimated aggregateof 15 person-months). 13, The trade facilitation component is estimated to cost RMB22 million (US$2.64 million) and will be financed locally. COMPONENT&INSTITUTIONAL STRENGTHENINGAND TRAINING(US%1.17MILLION) 14. The IST component of the proposed project was designedto improve the efficiency and sustainability of road sector management inInner Mongolia and strengthen institutional and policy development, focusing on logistics arrangementswith neighboring countries. 15. A training program under previous projects has started strengthening the capacity o f IMCD and relatedagencies. The programwill buildon training begun under these projects without duplicating it. New courses will take into consideration the activities ofthe ongoing Inner MongoliaHighwayProject while relating directly to the implementationofproject components. Subjects under overseastraining and study tours include development and promotion of internationaltrade activities, trade logistic planning and management, planning and design of trade processing zone, and container transport management in additional to the usual and conventional technical subjects of highway design andproject management. 16. The trainingprogram will include overseas study tours (36 person-months), training courses abroad (40 person-months) and domestic courses (294 person-months). It will be updatedperiodically during project implementation. 29   Annex 5: Project Costs China:Inner MongoliaHighwayand Trade Corridor Project Project Cost By Componentandlor Activity Local Foreign Total US$ million US$ million US$ million 1.Works 128.80 78.72 207.52 a) Hailar-ManzhouliHighway (HMH) 94.69 63.87 158.56 i) CivilWorks 86.03 57.35 143.38 ii) Buildings 2.43 1.04 3.47 iii) Traffic Engineering 5.44 3.63 9.07 iv) E & M Facilities 0.79 1.85 2.64 b) Border Roadsfor Trade (BRFT) 33.15 14.21 47.36 c) Cargo TransferTerminal (CTT) 0.96 0.64 1.60 2. Supervisionof Construction 5.30 0.76 6.06 a) HMH 4.61 0.76 5.37 b) BRFT 0.69 0.00 0.69 3. Equipment 1.20 3.32 4.52 a) Road Maintenance 1.03 2.41 3.44 b) Cargo Handling at CTT 0.17 0.41 0.58 c) Institutionalstrengthening 0.00 0.50 0.50 4. Training 0.10 0.57 0.67 5. Trade PromotionStudy 0.10 0.00 0.10 Total BaselineCost 135.50 83.37 218.87 6. Contingencies 16.33 10.35 26.68 PhysicalContingencies 12.88 7.87 20.75 Price Contingencies 3.45 2.48 5.93 7. LandAcquisitionand Resettlement 8.43 0.00 8.43 a) HMH 4.82 0.00 4.82 b) BRFT 3.25 0.00 3.25 c) CTT 0.36 0.00 0.36 Total Project Costs' 160.26 93.72 253.98 Interestduring construction 4.91 3.27 8.18 Front-endFee 0.00 0.50 0.50 Total FinancingRequired 165.17 97.49 262.66 'Identifiable taxes and duties are US$8.18 million, and the total project cost, net of taxes, is US$ 253.98 million.Therefore, the share of projectcost net of taxes is 29.4%. 31   Annex 6: ImplementationArrangements CHINA: InnerMongoliaHighwayandTrade CorridorProject 1. IMCDhas demonstrated project management capabilityby successfully implementingtwo previous projects. IMCD has been an executing agency for the ongoing Tri-Provincial Highway Project since March 1999 and for the Inner Mongolia Highway Project since November 2002. Because the project site i s far from the regional capital, IMCD has established the Hai-Man ProjectManagement Office (HMPMO) inthe Hulunbeier brancho f IMCD inChenqi. HMPMO will be headedby the director- general o f IMCD and assisted by a deputy director general o f IMCD and a deputy mayor of Hulunbeier. Because Hulunbeier has not handledsuch a large-scale project before, experienced staff fromvarious bureaus o f IMCD and Hulunbeier will be assigned to support the HMPMO. All the staff to be assigned to this project will receivetrainingbeforeproject implementationcommences. Overall direction o fthe project at the provincial level will remainwith IMCD. 2. China InternationalTendering Company has been retainedas the procurement agency for all aspects o f civil works o f the project requiring ICB and for equipment to be procured from abroad. The supervision of constructiono f the HMHwill be carriedout by ajoint foreign-local supervision team. The supervision o f constructiono f the BRFT will be carriedout by local supervision teams. 3. IMCDinHailar will develop and own the Cargo Transfer Terminal (CTT) butkeep its options open by invitingprivate sector participation inthe provision o f services inthe CTTbyrentingpremises andor equipment from IMCD inHailar upon the completion o fPhase 1development. Phase 1, about 80,000 sq. m, will include basic facilities andutilities within its perimeter. 4. Bank supervision missions are scheduled for twice a year. Headquarters andresident mission staff will cooperate inthis activity duringthe limitedconstruction periodfrom April to September. During implementation, project performance, including achievement o fproject outputs and development objectives, will be monitored during supervision missions and through annual monitoring reports. 33   Annex 7: FinancialManagementandDisbursementArrangements CHINA: Inner MongoliaHighway and Trade Corridor Project SUMMARY 1. The financial management specialist conductedan assessmento f the adequacy o f the financial management system o f the Inner Mongolia Transport and Trade Facilitation Project. The assessment, basedon guidelines issuedby the Financial Management Sector Board on October 15, 2003, concluded that the project meets minimumBank financial management requirements, as stipulated inBP/OP 10.02. The financial management specialist found the project will have inplace an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status o f the project inthe reporting format agreed with the project andrequired by the Bank. 2. Fundingsources for the project include the Bank loan and counterpart funds. The Bank loan will be signed between the Bank and the People's Republic o f China through the Ministry o f Finance (MOF), and on-lending arrangements for the Bank loan will be signed between MOF and the Government o f Inner Mongolia through Inner Mongolia Finance Bureau (IMFB)and then between IMFBand the Inner Mongolia Communications Department (IMCD). Counterpart funds will come fromloans from local banks and government appropriations and will be provided to HMPMO through IMCD.No outstanding audit or audit issue exists with the implementingagency. The task team, however, will continue to be attentive to financial management matters and audit covenants duringproject supervision. COUNTRY ISSUES 3. The World Bank has not performed a country financial accountability assessment for China and therefore has relied on a similar exercise carried out by the Asian Development Bank in2000 for reference. Developments inpublic expenditure, accounting, and auditing, and Bank experience with projects inChina inrecent years show that substantial achievement inpublic financial management has been made and further improvement i s expected incoming years. The government has come to realize the importance o f establishing and maintainingmarket mechanismto ensure transparency and accountability and minimize potential corruption. 4. FundingofBank projects (inparticular Bankloans) i s controlledand monitoredby MOF and its extension offices (finance bureaus at provincial, municipal/prefecture, and county levels). However, project activities are carriedout by implementing agencies o f a specific industryor sector because they have the expertise required. This arrangement usually requires extensive coordination because the multiple levels o f management of fundingand implementation sometimes work to the detriment o f smooth project implementation. RISKANALYSIS 5. The following risks and corresponding mitigating measures have been identified: Risk Risk Rating MitigatingMeasures I.InherentProjectRisk Moderate This is the first Bank-financed project that HMPMOwill execute, and the financial staff have no Bank experience.The task team will monitorthe project closely from the initial stage, and a training programwas implemented in August 2004 with help from the financial management specialist from the Bank office in Beijing. II. Control Risk ImplementingEntity Moderate Close monitoring by the task team is neededto ensure the implementingentity is familiar with Bank proceduresand requirements. 35  INNER MONGOLIA HIGHWAYTRADECORRIDOR AND ANNEX7 Risk Risk Rating Mitigating Measures Funds Flow Low The Bank loanwill be managed by IMFB,which had experiencewith several Bank projects before and is qualified to handlethis project. Staffing Moderate Becauseall the financial staff have no Bank experience, trainingwas provided after pre-appraisal,and close monitoring and supervision will be performedby the task team throughout the implementationprocess. Accounting Policies and Procedures Low Accounting policiesand proceduresare already in place. InternalAudit Moderate HMPMOhas hired an individual internalauditorto monitor and inspect the work of the financialfunctions periodically.For efficiency and effectiveness,no assessmentwill be made on this person's competency and the task team will rely on external audits and Bank supervisionreviews. ExternalAudit Low The external auditor, China NationalAudit Office (CNAO),has extensive audit experiencewith Bank projects. Reporting and Monitoring Low Format of financialstatementsand frequency of submission have been clearly defined by the Bank and MOF. InformationSystems Low HMPMOwill use the computerizedfinancial management system User Friend (YongYou). The task team will monitor the processingof its accountingwork closely during the initial staae and subseauent reaularsuoervisionmissions. FUNDSFLOW 6. Funding for the project includesthe Bank loan and counterpartfunds. Counterpartfunds will be loans from local banks andgovernment appropriationsand will be provided to HMPMO through IMCD. One special accountwill be set up and managedby the IMFB. The funds flow is depictedbelow. I I I I I I I I World Bank Special account HMPMO Suppliers and managed by IMFB contractors I I I I L I I I IMPLEMENTINGENTITY AND STAFFING 7. This project is headed by IMCD and will be implementedby HMPMO, which was established specifically for this project.HMPMO is headedby the deputy director of Hulunbeier Communications Bureau.Experiencedstaff from various bureaus ofHulunbeier has beenassignedto supportHMPMO. IMCD I c HulunbeierCommunications Bureau i HMPMO 8. HMPMO will be responsiblefor: 0 Managing, monitoring, andmaintaining project accountingrecords; 0 Retaining original supportingdocuments for project activities; 0 Preparingfinancial statements and submitting them regularly to the Bank for review and comment. 36  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX7 9. Adequate project accounting staff with educational background and work experience commensurate with the work they are expected to perform is one o fthe factors critical to successful project financial management. On the basis o f discussions, observation, and review o f the educational background and work experience of the staff identified for financial and accounting positions inHMPMO, the financial management specialist finds that the staffs are qualified and appropriate to the work they are expected to assume. 10. Because most ofthe financial staff is new to Bank projects, IMCD's project implementation plan includes a training program for financial and accounting staff on the following topics: 0 Bank's financial management policy and disbursement procedures 0 Fund, asset, and contract management 0 Format and content o f project financial statements 0 Audit requirements. 11. The task team recommended that a project financial managementmanual be prepared providing detailed guidelines on financial management, intemal controls, accounting procedures, fundand asset management, and withdrawal applicationprocedures. Preparation o f the manual was supported fully by Bank staff, who reviewed and commented on draft versions. The manual will be finalized after negotiations and the final version distributedto all financial staff before project start-up. ACCOUNTINGPOLICIESAND PROCEDURES 12. The administration, accounting, and reporting o f the project will be set up inaccordance with MOF Circular 13 o f January 2000, Accounting Regulations for World Bank FinancedProjects. The standard set of project financial statements includes the following statements: 0 Balance sheet 0 Statement o f source and use o f funds for each component 0 Statement o f implementation o f loan agreement Statement o f special account. 13. The unauditedproject financial statements will be submitted to the Bank semiannually (by August 15 and February 15). Audits 14. Internal audits. Although HMPMO has assigned an individual internal auditor to monitor andinspect the financial functions periodically, we have not assessedand will not assess the competency o f the intemal audit because the costs o f doing so outweigh the benefits. Therefore, work performed by the intemal auditor will not be used. However, we will review intemal audit reports duringsupervision to identify issues for consideration and support the development o f the intemal audit function. 15. External audits. Project financial statements must be auditedinaccordance with standards acceptable to the Bank. Like other Bank-financedprojects inChina, this project will be auditedinaccordance with IntemationalAuditing Standards and the GovernmentAuditing Standards o f the People's Republic o f China. The Audit Bureau o f Inner Mongolia Autonomous Regon has been identified as auditor for the project and will issue annual audit reports, which will be subject to review by the China National Audit Office. The annual audit reports o fproject financial statements will be submitted to the Bank by HMPMO within 6 months o fthe end o f each calendar year (by June 30). 16. Supervision. A detailed supervision plan for this project i s included inthe China Audit Strategy document. This document will take into consideration the size o f the project and the risks identified. 37  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX 7 InformationSystem 17. HMPMO will use the computerized financial managementsystemUser Friend(Yong You), a well- established accounting software packageapproved by MOF for this project. The task team will monitor the processing o f accountingwork closely, especially in the initial stage to ensure complete and accurate financial information will be provided ina timely manner. PROCUREMENTARRANGEMENTS 18. The thresholds set for procurement post-review will be consistent with those for statements of expenditures (SOE) for disbursement. The financial management specialist and procurement staff should participate in supervisionmissions to ensurethat contracts are awarded in line with Bank procurement guidelines and that contract payments are inaccordance with the terms of the contract and well supported. DISBURSEMENTARRANGEMENTS 19. The project will disburse usingtraditional disbursementtechniques. Bank loan proceedswill be disbursed against eligible expenditures as follows: 0 Civil works: o 44% of expenditures for HMHcomponent o 40% for buildingsexpenditures o 40% for traffic engineering o 38% for expenditures underthe BRFTcomponent 0 Equipment-1 00 percent of foreign expenditures, 100 percent of local expenditures (ex-factory), and 75 percent o f other items procuredlocally, 0 Consulting service-9 1percent of expenditures, and 0 Training-1 00 percent of expenditures. 20. Disbursement methods, such as replenishment, direct payment, and special commitment, are available for the project. SOE limitswill be set in line with the following post-review thresholds: (i) all contracts for goods estimated to cost the equivalent of $400,000 or less; (ii)all contracts for civil works estimated to cost the equivalent of $4 million or less (iii) consultant contracts estimated to cost $100,000 for firms; (iv) all training. 21. One special account will be established at and maintainedby IMFB.The authorized allocation of the special account will not exceedUS$6 million equivalent (about 4 months of eligible expenses). The initial authorized allocation from the Bank will be US$4.0 millionuntilthe aggregatewithdrawals and outstanding special commitments equal or exceedUS$12.0 million equivalent. Bank funds will be disbursed to the special account set up at HMPMO, and then to suppliers and contractors. 22. IMFB will be directly responsible for the management, monitoring, maintenance, and reconciliation of the special account activities. Supportingdocuments requiredfor Bank disbursements will be prepared by HMPMO and submitted to IMFBfor verification and approval before they are sent to the Bank. The flow of withdrawal applications is as depicted below. Contractor or HMPMO IMFB World Bank supplier b b FINANCIALCOVENANTS 23. Inaddition to the standard financial covenants described inthe legal document, specific financial covenants(ifany) applicable to the project are detailed in section C of the project appraisal document. 38  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX7 RETROACTIVE FINANCING 24. Retroactive financing of up to US$3 million will be appliedto civil works expenditures made after August 1,2004 for the first package of BRFT component and some testing and quality control equipment. 39  Annex 8: Procurement CHINA: Inner MongoliaHighwayandTrade CorridorProject GENERAL 1. Procurement for the proposed project will be carried out inaccordancewith the World Bank's Guidelines: Procurement Under IBRDLoans and IDA Credits datedMay 2004, and Guidelines: Selection and Employment o f Consultants by World Bank Borrowers datedMay 2004, and the provisions stipulated inthe legalagreement.The generaldescription ofvarious items underdifferent expenditure categoriesare described below. For eachcontract to be financed by the loan, the procurement or consultant selection method, the need for prequalification, estimated costs, prior review requirements, and time frame were agreedbetween the borrower and the Bank task team, as shown inthe procurement plan. The procurement planwill be updated at least annually or as requiredto reflect actual project implementation needs and improvements ininstitutional capacity. 2. Procurement of Works. Works to beprocuredunder this project include: i)8 contracts with an average contract value of about US$18 million for Hailar-Manzhouli Highway (HMH)under ICB procedures inone biddingactivity; ii)14 contracts with an average contract value o f about US$3.5 million for highway network improvements, iii)3 contracts for HMH'straffic engineering, and iv) 3 contracts for buildings,all underNCB procedures on a slice-and-package basis. Procurement will use the Bank's standardbiddingdocuments (SBD) for ICB contracts, andthe Bank-approvedChinese model biddingdocuments (MBD) (dated May 1997 and issuedby MOF) for NCB contracts. Revisions to the Bank SBDs since 1997will beincorporated into MBDs. 3. Procurement of Goods.Goods to be procuredunder this project include: i)two contracts for road maintenance equipment under ICB procedures; and ii)vehicles, testing equipment, and office equipment for the borrower's capability strengthening to be procuredthrough NCB or Shoppingprocedures. Procurement will use the Bank's SBD for ICB and the Bank-approvedChinese MBD for NCB contracts. Revisionsto the Bank SBDs since 1997 will be incorporated into MBDs. 4. Procurement of non-consulting services. m o t Applicable] 5. Selection of Consultants and Training. Consulting services will be required for HMHconstruction supervision and staff training to be implementedunder the ISTcomponent. HMSconstruction supervision (one assignment) with an estimated amount of about US$780,000 will be procured through quality- and cost-basedselection (QCBS). Training including small assignments for contracts of less than $100,000 each will beprocuredinaccordancewith the provisions ofparagraphs 3.7 through 3.8 o f Consultant Guidelines.Inaddition, individual consulting services, ifany, will apply the provisions of paragraphs 5.1 through 5.4 of Consultant Guidelines.The Standard Request for Proposals (May 2004) will be used. Short lists of consultants for services estimated to cost lessthan $300,000 equivalent per contract may be composed entirely o f national consultants inaccordance with the provisions of paragraphs 2.6,2.7 and 2.8 o f the Consultant Guidelines. 6. Operational Costs. [Not Applicable] 7. Others. [Not Applicable] ASSESSMENTOF THE AGENCY'S CAPACITY TO IMPLEMENTPROCUREMENT 8. Procurement activities will be carried out by the Hai-Man Project ManagementOffice (HMPMO). The agency is staffed with 10experienced engineers as ofMay 2004 and more will behiredwith the progress of the project. The procurement unit i s staffed with four procurement officers inHMPMO. However, some experienced staffers from the Foreign Capital Utilizing Office o f IMCD and the 40  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX8 procurement agent CNTIC who have experience inBank-financed projects have been supporting HMPMO's procurement since the early stages o fthis project. 9. A capacity assessment o f the implementing agency to implement procurement actions for the project was carried out inApril and May 2004. The assessment reviewedthe organizational structure for implementingthe project andthe interaction between the project's staff responsible for procurement and the IMCD's relevant central unit for administration and finance. 10. Most o f the issues and risks conceming procurement for project implementation have been identified. They include: i)HMPMOwas established specifically to manage the proposed project and, as any new organization, might experience a leaming curve period; ii)Bank procurement policies and procedures, especially new features o f electronic biddingand publishingcontract award information, are new to most HMPMO staffmembers, although a few transferred from previousBank-financedprojects; iii) HMPMO's communication slulls inEnglishis weak; iv) Non-local bidders may not be interested inthe proposed NCB biddingbecause o fthe severe winter climate inthe area; and v) Severe climate conditions make the constructionperiod short and supervision difficult. 11. The corrective measures that have been agreed on are: i)The Foreign Capital Utilizing Office o f I M C D and HMPMO's procurement agent, CNTIC, which bothhave enough experience inhandlingthe Bank's ICB and major procurement activities, will support the HMPMO from the early stages o f the project; ii)The procurement manual describing all the procurement procedures to be followed and the clear responsibility o f each unit shall be distributed to all concemed staff o f HMPMO and IMCD. Specific training and periodic training on the Bank's procurement policies and project management will be arranged by H M P M O for its procurement staff; iii)HMPMOwill organize Englishtraining courses for its procurement staff to improve their communication skills inEnglish;iv) Specific training on the Bank's SBDs will be arranged by HMPMO for bidders; and v) Inaddition to local supervisiontraining by an international consulting team, an overseas study tour and training program will be implemented. 12. The overall project risk for procurement is AVERAGE. PROCUREMENTPLAN 13. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the task team on August 15, 2004. and is available at the HMPMO's office inHulunbeier, Inner Mongolia (Attachment 1). Shouldbe deleted It will be available inthe Project's database and postedinthe Bank's external website after the Loan approval. The Procurement Planwill be updatedinagreement with the task team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. FREQUENCY OFPROCUREMENT SUPERVISION 14. Inaddition to the prior review supervision to be carriedout by Bank officers, the capacity assessment o f the implementing agency has recommended a supervision mission to visit the field every six months to carry out post-review of procurement actions when some procurement activities have been carried out, or when some post-review contracts have been signed and implemented duringthe review period. 41  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX8 Table A: ProjectCosts by ProcurementArrangements (US$ million equivalent) ProcurementMethod' Expenditure Category ICB NCB Othe? N.B.F. Total Cost 1. Works 164.27 67.86 0.00 1.80 233.93 (71.21) (25.32) (0.00) (0.00) (96.53) 2. Goods 1.13 0.20 0.30 2.99 4.62 (1.13) (0.20) (0.30) (0.00) (1.63) 3. Services 0.00 0.00 1.36 5.64 7.00 (0.00) (0.00) (1.34) (0.00) (1.34) 4. Miscellaneous 0.00 0.00 0.00 16.61 16.61 (0.00) (0.00) (0.00) (0.00) (0.00) 5.Front-endfee 0.00 0.00 0.50 0.00 0.50 (0.00) (0.00) (0.50) (0.00) (0.50) Total 165.40 68.06 2.16 27.04 262.66 (72.34) (25.52) (2.14) (0.00) (100.00) 'Figures in parentheses are the amounts to befinanced by the {LoanlCrediVTrustFund}. All costs includecontingencies. 2Includes civil works and goods to be procured through national shopping, consulting services, training, and technical assistance services. Table AI :ConsultantSelectionArrangements (optional) (US$ million equivalent) Selection Method Expenditure Category Consu'tant Services QCBS QBS SFB LCS CQ N.B.F. Total Cost' A. Firms 0.78 0.00 0.00 0.00 0.58 5.64 7.00 (0.76) (0.00) (0.00) (0.00) (0.58) (0.00) (1.34) B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.78 0.00 0.00 0.00 0.58 5.64 7.00 (0.76) (0.00) (0.00) (0.00) (0.58) (0.00) (1.34) Includingcontingencies Note: QCBS = Quality- and Cost-BasedSelection QBS = Quality-basedSelection SFB = Selection undera Fixed Budget LCS = Least-Cost Selection CQ = Selection Basedon Consultants' Qualifications N.B.F. = Not Bank-financed Figuresin parenthesesare the amounts to be financed by the Bank Loan. 42  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX8 Table 6:Thresholdsfor Procurement Methodsand Prior Review Expenditure ContractValue Threshold Procurement Contracts Subjectto Category (US$ thousand) Method Prior Review (US$ million) 1. Works Equal to or more than 15,000 ICB, prior review 164.27 Less than 15,000 but equal to or morethan 4,000 NCB, prior review 0.00 Less than 4,000 NCB, post review 67.86 2. Goods Equal to or more than 400 ICB, prior review 1.13 Less than 400 but equal to or more than 100 NCB, post review 0.20 Less than 100 Shopping, post 0.10 review 3. Services Equal to or more than 100(firms) QCBS 0.78 Less than 100 (firms) Other, post review 0.00 Total value of contracts subject to prior review: $166.18 million Overall Procurement Risk Assessment: Average Frequency of procurementsupervisionmissions proposed: One every 6 months (includesspecial procurementsupervisionfor post- review/audits) Table C: Allocation of Loan Proceeds ExpenditureCategory Amount in US$ million FinancingPercentage Works HMH civil works 63.50 44% Buildings 1.39 40% Traffic Engineering 3.63 40% Border Roadsfor Trade 18.00 38% Goods 1.60 100%of foreign expenditures, 100%of local expenditures(ex-factory costs) and 75% of local expendituresfor other items procured locally Consultant's Services 0.76 91% of foreign expenditures Training 0.57 100% Unallocated 10.05 Front-endfee 0.50 100% Total 100.00 43   Annex 9: Economic and Financial Analysis CHINA: InnerMongoliaHighway and Trade Corridor Project ECONOMIC EVALUATION Preface 1. The economic evaluation of the project covers the following threeproject components: a. Construction ofthe a 177kmHailar - Manzhouliclass Ihighway (HMH). b. Upgradingandimprovement offive roads(435 km) whichhavebeenidentifiedeither as akey linkage of the smaller inlandports for international trade with RussiaandMongolia andor as a critical llnkto the local hghwaynetwork under the border roads for trade (BRFT) component. c. The development of a cargotransfer terminal (CTT) at Hailar. 2. The analysis is basedonthe actual and forecast data on traffic volume, vehicle operating cost, user's time cost savings, accident reduction cost and economic project cost. The main inputs for the evaluation are: a) capital investment and maintenancecosts, reflecting September2004 prices; b) the benefit stream, alsoreflectingSeptember2004 prices, that comprisesof savingsin VOC, travel time savings, andreductioninaccident costs; c) a capital investment period from 2005-2009 and an evaluation ofbenefits period of20 years, and d) fullbenefits starting to accruein2008 for HMHandCTT, and 2007 or 2008 depending on the construction completion ofthose roads under the BRFTcomponent. Hailar-Manzhouli Highway (HMH) 3. Overview.The Inner MongoliaAutonomous Regon(IMAR) has avast landareaof 1.18 million km'. Itis aninlandtransport hublocatedinthenorthemregionofChinaservingthe east-westcorridor linlungChina's westem provinces to the coastalareas inthe east. Hulunbeier League (the project site) is the secondlargest leagueo fthe region(about a quarter millionsquarekmor about the size of the UK). This leaguebridges Russia andMongoliawiththe other two northeastem provinces of China, Heilongjiangand Jilin. 4. Thenationalhighway route 301(NR3Ol) has a total lengthof 1,436 km, 611kmo f whichrunning through Hulunbeierand the remaining 825 kmpassing through Heilongjiang province. The highway i s the most important East-West transport corridor for the entire northeastemregionofChina. The NR301 starts from Suifenhe, and town inHeilongjiang Province inthe east, to Manzhouli, the landport bordering Russia onthe west. GOC recently approved a planto upgrade the entire NR301, whereby the section in Heilongjiang province has already been upgraded to an expressway standard. The upgradingworks of NR301inHulunbeierhas recently been started and the proposed HMHis the last and westem most portion of the NR301. InHulunbeier, more than half of its populationlives along the NR 301. The proposed HMHwill improve accessibility for local peoples to the outside world as well as to help balance the economic development within the IMAR. Given the importantrole ofthe highway corridor to the local economy, the proposedproject has the highest priority inInner Mongolia's regional highway development plan. 5. CurrentConditionofHMHCorridor(without project). The pavement condition ofthe existingroad i s very poor, resultinginlow speeds andhighsafety risks. The growth o fmotorized traffic between 1995 and 2003, an average o f 12.9 percent per year, rendered a traffic o f about 2,3004,500 motorizedvehicles per day in2003. Non-motorized and other traffic (bicycles, animal carts, small farm tractors, motorcycles, etc.) added another 150-200 vehicles per day. Even with amodest projected 10.8 percent future annual growth, motorizedtraffic will reach 3,700-7,300 vehicles per day by 2008, the 45  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX9 plannedopening year of the HMH. Withthe total capacity for the existing Class I11standardroads at 2,300 to 3,500 vehicles per day, the optimum timing for construction o fthe newroad i s now. NormalTraffic, by Sections(ADT) Section1 Section 2 Section3 Hailar-Wuzhour WuzhourJalainur Jalainur-Manzhouli Road lengthin km (old roadI new road) 60 I57 1251105 16/15 Road class (old road I new road) 111 I I 111 I I 111 I I Road condition(old roadI new road) Poor I Good Poor I Good PoorI Good Terrain Flat Flat Flat Capacity (ADTlday) (old roadI new road) 2,300135,000 2,300 135,000 3,500 135,000 Traffic on existing road (ADT) 1995 1,323 867 I,758 2000 2,300 1,525 3,105 2001 2,632 1,709 3,543 2002 3,006 I,928 3,975 2003 3.604 2,288 4,520 Traffic with the project: a. Existingroad 2008 2,284 1,336 3,059 201a 4,066 2,141 4,840 2028 5,936 2,792 6,061 b. New HMH 2008 4,003 2,407 4,305 2018 8,900 4,824 8,285 2028 12,989 6,283 10,386 Sources: IMCD and Bank staff 6. The estimatedTraffic Growthonthe HMHcorridor. IMCD's estimates oftraffic onHMH were madeonthe basis of routinetraffic counts and a comprehensiveorigin and destination (OD) survey that took place on June 2001 (updated on October 2002 and December 2003). Those forecasts were further reviewedandconfirmedby an independenttransport institute inBeijingto review regionaltransport demandand traffic on t h s highway corridor. Projections ofnormal, generatedanddivertedtraffic were made for 18 zones on the basis of a conventional growthmodel. The traffic on the proposed HMHincludes diversion from the existingroad. Giventhe historicaltrend on economic growth of Hulunbeierwas 9.7 percent during 1995-2002and the current forecastsincomingyears (about 9-10 percent), the projected traffic growthrates inthe project corridor are estimatedto be 10.8 percent per year between 2003 - 2008,6.6 percent between2008-2018, and 3.0 percent between 2018-2028. The overall traffic growthrates are summarizedas follows: Annual Traffic Growth Rate (actual and projection) Car Bus & Truck Average Actual: 1995-2003 13.7% 11.7% 12.9% Projection: 2003-2009 10.9% 10.7% 10.8% 2009-2019 6.9% 6.1% 6.6% 2019-2029 3.0% 3.0% 3.0% Sources: The IMCD and the Bankstaff. 46  INNERMONGOLIA HIGHWAYTRADECORRIDOR AND ANNEX9 7. Alignment Alternatives. The HMHfeasibility study consideredand compared five alternative route alignments betweenHailar and Manzhouli. Ittakes into consideration the local economic development, the shortest traveling route, the lowest engineering cost andcoordination with the entire highway networks. The preferred alignment was selected because o fits least overall cost, higher EIRRand better coordinationwith the local economic developmentplan and local / nationaltransport networks. Details are available inthe feasibilitystudy reports. 8. Estimated Traffic on the Highway (with project). The HMHis plannedto become operational in2008. Diversionratiosofthe corridor traffic onHMHarebasedonthe informationprovidedbythe O/D survey and the traffic studies, .They were calculated byusingfinancial VOC for the roadusers, with the impacts o f the level o f proposed tolls on the new highway, travel distance, and experience from other recently Bank financed highways inChina. The results o fthe analysis indicate that between 59 - 64 percent o f motorized vehicles in2008, depending on the road section, may be diverted to the new highway. The traffic diversion i s expected to increase linearly inthe first ten years to reach63 - 69 percent by the year 2018 and stabilize thereafter. 9. Traffic generated by the new highway i s assumed to be 10percent o f the normal traffic. This assumptionis consistent withthe experience onother recent hghwayprojects inChina. To be on a conservative side, this economic analysis didnot take into consideration possible traffic diversion from railway to the new highway, although Manzhouli i s linkedbyrailto Hailar. The highway corridor traffic forecast, by sections, i s summarized as follows: NormalTraffic, by Sections (ADT) Section 1 Section2 Section3 Hailar- Wuzhour Wuzhour- Jalainur I Jalainur- Manzhouli - Traffic on the existing road: 1995 1,323 867 1,758 2000 2,300 1,525 3,105 2001 2,632 1,709 3,543 2002 3,006 1,928 3,975 2003 3,604 2,288 4,520 Traffic without the project: 2008 6,287 3,743 7,364 2018 12,966 6,965 13,125 2028 18,925 9,075 16,447 Traffic with the proiect: a. Traffic on the existing 2008 road 2,284 1,336 3,059 2018 4,066 2,141 4,840 2028 5,936 2,792 6,061 b. Traffic on the new HMH 2008 4,003 2,407 4,305 2018 8,900 4,824 8,285 2028 12,989 6,283 10,386 c. Traffic diversion (in %) 2008 63.7% 64.3% 58.5% 2018 68.6% 69.3% 63.1% 2028 II 68.6% 69.2% 63.1Yo Sources: IMCD and the Bank staff. 10. Economic Costs. Investmentcosts have been convertedto economic costs by the elimination o f price contingency, taxes, custom duty on imported materials and by the application of shadow price factors. The resulting overall economic cost i s about 96 percent o f the financial cost. 47  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX9 11. Economic Benefits. Project benefits were estimatedby usingthe VOC equations developedby the Highway Design and Maintenance Model (HDM-111).The economic analysis includes the benefits derived from: (i) VOC savings on the new highway for normal and generated traffic, (ii) savings time through relieved congestion on the existingroad, and (iii) lower accident costs. The benefitsresulting from the lower level o f congestion were quantified. The value o fpassenger time savings was estimated at RMB 1.50per passenger hour, onthe basis ofupdatedvalues from areport on feasibility study methodology for highways inChina (Rust PPK, Australia Feasibility Study Methodology Report, May 1996). The same sources were used for vehicle accident rates on different classes o froads. Economic Vehicle Operating Costs (RMB per km, September 2004 prices) Type of Vehicle Old Road New Road Car 0.685 0.797 Medium bus 1.324 1.768 Large bus 2.378 3.100 Small truck 1.000 1.109 Mediumtruck 1.484 1.750 Large truck 2.118 2.463 Tractorhrailer 3.526 4.011 Accident Rates and Costs in China Road class Accidents per 100 million vehicle km Damage (RMBI accident) Expressway -40 + 0.005 AADT 12,000 MotorwayClass I 37 + 0.003 AADT 9,000 MotorwayClass II 83 + 0.0065 AADT 7,000 Highway Class II 133 + 0.007 AADT 6,000 Highway Class 111 140 + 0.03 AADT 4,000 Source: TableE4.1, page E21, RustPPK. AustraliaFeasibility Study MethodologyReport,May 1996. 12. The EIRR, sensitivity tests and switching values o f HMHare summarized as follows: EIRR, Sensitivity Tests and Switching Values of HMH ElRR (Yo) NPV (12%, RMB million) Estimated ElRR Hailar-Wuzhour 20.5 382.6 Wuzhour-Jalainur 13.5 99.2 Jalainur-Manzhouli (border) 10.7 (22.3) Whole route - 484.4 15.7 Sensitivitytest Delay the completionby one year 14.8 382.2 Higher capital cost (+IO%) (a) 14.4 335.4 Lower benefits (-10%) (b) 14.3 286.9 Combine (a) and (b) 13.2 162.8 Zero value of passengertime 14.5 318.4 Zero generatedtraffic 15.1 402.5 48  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX9 Lower traffic Droiection (-15%) 14.1 258.0 Switching values % increase Cost increase to reduce ElRR to 12% 139% Benefit reductionto reduce ElRR to 12% 72.0% BorderRoadsFor Trade Component 13. There are five roads under BRFT.The current conditions o f the five roads have been classified by IMCDas among the worst inthe district. The standards o f these roads are very low, andmost do not even have proper pavement. The relatively heavy daily traffic is accelerating the deteriorationo f the road surface. Most o f the roads are inaccessible duringrainy days and the snow season. This adds travel distance and time for its users. The main objective o f the rehabilitationprogram is to upgrade the road class to all-weather accessibility. 14 The current traffic levels o fthe five roads are inthe range o f 300-1,000 ADT. Because the five roads are locatedinthe same district, the local economic development and traffic patterns are similar. All the five roads pass through very lightly populated areas, traffic growth rates have been estimated conservatively at 1.O percent from 2000 to 2005, and reducedby .05 percent for each o f the 5 years from 2005 to 2015. The generated traffic i s assumed to be 5 percent o fthe normal traffic. 15. Similar to the HMH,the VOC equations were used to quantify the economic costs and analyze benefits o f the five road. The main evaluated benefits would be reducedVOCs through the providing o f a better road surface, and the associated upgrading o f road class would also result inhighertraffic speeds, improvemento froadroughness index and a shorter average transport distance ensured by all-weather conditions. 16. The best estimates o f EIRRs for the five roads range from 16.3 percent to 28.9 percent. The overall ERR and NPV (12 percent) for the BRFTi s 21.3 percent and RMB 318.3 millionrespectively. The results o f economic evaluations are summarized below: ElRR and NPV of BRFT Length (km) ADT Road class ElRR NPV (12%, (old/ new) 2003 Terrain (old/ new) (in %) RMB million) Dayangshu-Baihuapai 72.0 70.5 1,022 Hilly 1111II 28.9 181.1 Zhalannuoer-Heishantou 138.0 138.0 366 Flat UI 111 16.3 49.4 Yiminsumu-Handdagai 103.0 103.0 378 Hilly UI 111 17.3 43.3 Alatanelemo-Arihashate 82.5 82.5 292 Flat IVI 111 23.6 44.3 Amugulong-Erbuduge 21.0 19.3 298 Flat UI Ill 20.4 12.4 Total 416.5413.3 - 318.3 21.3 U: Unclassifiedroad. 17. The risks considered for economic evaluation include: 0 slower than projected growth o f traffic; 0 higher than project cost o f civil works; and 0 lower than expected VOC savings. All these risks were analyzed through sensitivitytests andthe evaluationresults were found to be robust for all o f them. For the project component to be non-acceptable (i.e. an EIRRlower than 12percent or a nilNFV at 12discount rate), the benefits wouldhave to fall to less than 20 percentofthose inthe base 49  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX9 case with no change incosts, or the costs would have to increase to more than 1.81 times those o f the base costs, or the costs would have to increase by 30 percent and the benefits fall to 50 percent at the same time. 18. Additional benefits expected from the project, but not includedinthe ERR calculation, are: increase inthe income of poor rural farmers, because o fbetter access to town markets andjobs, and increased accessibility to schools and hospitals. The quantifiable beneficiaries are estimated at (a) about 800 extra children attending school (about 10%percent o f total 88,700 children inthe direct road service areas) and (b) 1,300 extra people receiving health services (1 percent o f 128,900). Such extra benefits are summarized below: AdditionalSocial Benefitsof the BRFT Component Extra children Extra people attending attendingschool/_^-..-l._.ll-_ll_lll.-_-.-_II--l_ year health services/year ,,^^^ " " ~ 1 ChenBaragQi 400 600 2 Xin BaragZuoqi 200 400 3 Xin Barag Youqi 200 300 Total 800 1,300 Sources: IMCD andthe Bank staff. Trade Facilitation Component 19. Overview: IMCD is planningto builda cargo transfer terminal (CTT) at Hailar. The proposed facilities will also include customs clearance services which will reduce the business pressure o f the land port at Manzhouli. The investment will enhance the service level for the fast growing trade demand among China, Russiaand Mongolia. The CTT will be able to provide more flexible, reliable and safe services to trade. Experience with Bank activities elsewhere found that effectively addressing the trade facilitation and port efficiency issues would contribute positively to reducing import price. 20. The economic evaluation focus on the gains derived from the efficiency improvement because it i s representingthe majority of quantifiable benefits o fthe component. The direct benefits o f the CTT i s the reduction o f the travel time, waiting time for cargo and passenger traffic at the land port o f Manzhouli. In2003, the average highway waiting at Manzhouli was about 30 minutes, eightminuteslongerthan in 1995. For the railway, the average processingtime increased from 10minutes to 15 minutes duringthe same period. The majority of the increase inservice time occurred from 2000- 2003 due to fast increases intraffic volume. At Manzhouli, the total traffic volume has increasedby24.6 percent per annum for cargo traffic and 16.9 percent per annum for passenger traffic. It i s estimated that the annual growth o f cargo and passenger traffic will be 9.2 percent and 11.4 percent, respectively, during2003 -2010; 4.8 percent and 5.1 percent, respectively, during2010-2020. Total Traffic Volume at Manzhouli 1995 2000 2003 2010 2020 2000-03 2003-10 2010-20 pa pa pa Cargo ('000 ton) 2,883 5,873 11,350 21,000 33,500 24.6% 9.2% 4.8% Passenger ('000 person) 314 882 1,409 3,000 4,950 16.9% 11.4% 5.1% Source: IMCD and Bank staff estimate 21. With the project, despite the increasing traffic volume, it is estimated that the processingtime and waiting time at Manzhouli in2010 will remain at the 2000 level. The CTT i s planning to begin operations in2008. Total first-year benefits are estimated at RMB 5.95 million and most benefits (about 50  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX9 90 percent) accrue to cargo traffic. The EIRR and NPV (at 12percent) for CTT are estimated to be 24.5 percent and RMB 32.9 million, respectively. OVERALL ECONOMIC EVALUATION 22. The overall EIRRof the project (including HMH,BRFT and CTT) is 17.0 percent andthe NPV (at 12percent) i s RMB 835.5 million. 23, Project Risks. Most sections o f the HMHand BRFT show acceptableeconomic returns. IMCD has extensive experience inthe construction and operation of high-grade highways andrural road projects, which minimizes the technical risks associatedwith the implementationo f the project. The main tangible risk i s that prolongeddelays will affect the construction schedule. The impact o f uncertainty was tested through the probabilistic riskanalysis. 24. Probabilistic Risk Analysis. Because the cost of BRFT and CTT constitutes only about 24 percent of total capital investment and their EIRRs are higher than that of HMH,the probabilistic risk analysis for the project focused on the construction o f HMH.The highest uncertainty factors associated with the economic evaluationof HMHhave been identifiedas: (i) traffic growthrate, (ii) diversion rate to traffic the new expressway, (iii) of VOC, (iv) changes incapital investment, and (v) delay of the opening value by one year. The results o fthe probabilistic risk analysis show that the EIRRis 14.5 percent for the most likely scenario, 10.2 percent for the low scenario, and 20.6 percent for the highscenario. The standard error of the mean i s 0.3 percent. The detailed results of the Monte Carlo test and probabilistic risk analyses summarized as follows: Summary of HMH Probabilistic Risk Analyses Range of EIRR Most likely Standard error (%I EIRR (%) of the mean (%) Section1: Hailar-Wuzhour 10.7-29.0 19.8 0.5 Section2: Wuzhour -Jalainur 10.8-14.4 12.0 0.5 Section3: Jalainur -Manzhouli 5.6-1 5.2 9.6 0.3 (border) Total HMH 10.2-20.6 14.5 0.3 Financial Evaluation of IMCD 25, IMCD's financing plan has two main features: an emphasis on new construction and an increase inmaintenance expenditures, whichdependlargely ongrants fromMOC. Although IMCDbudgeteda large grant from MOC, a moderate self-financing ratio (total internal cash generation against total revenue) for 2006-20 10 (27.3 percent) will ensure the implementation o f the developmentplan even without the grant from MOC. This ratio has improved since the 2001-2005 period(21.9 percent). 26. Interms ofthe long-term sustainability ofroadmaintenance withthe resources allocated, the averageyearly increase inmaintenance expenditures duringthe 2001-2005 period(3.1 percent) exceeded the growth o fthe roadnetwork (2.8 percent), which means a net increase inthe average maintenance expenditure per kilometer. The trend should continue duringthe 2006-2010 period (see revenue and expenditures table below: 51  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX9 Inner Mongolia Highway Revenueand Expenditure During its lothandIlth (RMB million) FYP Revenue: I 1 Road maintenancefee 1,065 1,130 1,014 1,232 1,294 1,359 1,427 1,598 1,673 1,812 2 MOCsubsidy 1,133 1,051 2,123 3,538 3,500 3,500 3,500 3,500 3,500 3,500 3 Tolls revenue 154 285 366 900 1,200 1,600 1,650 1,700 2,100 2,500 4 Bankloan 3,067 3,248 4,077 4,400 4,700 5,000 6,000 6,000 6,000 6,000 Total 5,419 5.714 7.580 10.070 10.694 11,459 12.577 12.798 13.273 13.812 Expenditure: New construction 2,567 2,793 4,180 6,380 6,702 7,163 7,869 7,470 7,592 7,613 Rehabilitation 1,992 1,860 2,292 2,473 2,677 2,886 3,184 3,662 3,893 4,238 Routine maintenance 346 388 392 442 476 504 544 608 645 725 Local maintenance 88 82 89 96 104 112 121 131 141 152 Administrationand study 8 8 8 10 12 14 16 i a 20 22 Management 212 263 285 307 332 358 387 418 451 488 Other expenditures 83 a6 92 loo io8 116 126 136 147 158 Repaymentof interestand principle 123 234 242 262 283 306 330 355 384 416 Total 5.419 5.714 7,580 10.070 10.694 11.459 12,577 12.798 13,273 13,812 Total Road Network(km) -(a) 70,408 72,673 75,705 77,896 80,896 84,340 87,367 95,676 96,876 100,000 Average annual increase in road network -- 3.2% 4.2% 2.9% 3.9% -- 3.6% 9.5% 1.3% 3.2% 3.5?6 Total maintenanceexpenditure (millionYuan) -(b) 1-1 434.00 470.00 481.00 538.00 580.00 616.00 665.00 739.00 786.00 877.00 Average unit maintenance. expenditure ('000 Y/km)- (b)/(a) 6.16 6.47 6.35 6.91 7.17 7.30 7.61 7.72 8.11 8.77 Average annual increasein maintenanceexpenditures -- 4.9% -1.8% 8.7% 3.8% 1.9% 4.2% 1.5% 5.0% 8.1% /-ISumofroutineandlocalmaintenance. : 1-2: Actual 2001-2003, forecast, 2004-2005, and 2006-2010. 52  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX9 Fiscal Impactof the HMH,BFWT and CTT Investment 27. IMCDbudget forecasts show that the investment and maintenance/ operation o fthe HMH,BRFT and CTT components inthe project constitutes only a small fraction o f IMCD's fund flow. Based on IMCD's plan, the capital investment o f BRFT and CTT will require less than 2.0 percent o f the projected annual total IMCDrevenue. Inaddition, the requiredmaintenance and operation expenditure o f BRFT and CTT i s less than one percent o f the total maintenance expenditure o f IMCD. These low ratios indicate that the project presents a modest financial risk as regards the availability o f a counterpart fundingfor the constructionandmaintenance o fthe projectroads. These figures are summarized as follows: IMCD: Investments, Revenueand Maintenance Expenditures (RMB million) 2005 2006 2007 2008 2009 2010 Investmentsand Revenue: BRFT and CTT Investments(a) 216.92 213.50 45.92 Total IMCD Revenue (b) 10,694.00 11,459.00 12,577.00 12,798.00 13,273.00 13,812.00 Ratios (a)/(b) 2.0% 1.9% 0.4% Maintenance/operating Expenditures BRFT and CTT (c) 2.36 4.32 4.48 4.75 Total IMCD Maintenance Expenditure(d) 616.00 665.00 739.00 786.00 877.00 Ratios (cY)dl 0.4% 0.6% 0.6% 0.5% Sources: IMCD and Bank staff 53   Annex 10: Safeguard Policy Issues CHINA: Inner MongoliaHighway and Trade Corridor Project ENVIRONMENT Background 1. The Chinese ResearchAcademy of Environmental Science, an entity independent from the Inner Mongolia Communications Department (IMCD) interms of financial and personnel management, carried out the environmental impact assessment (EIA). 2. The EIA and environmental actionplan (EAP) cover the project's physical components: (1) 177 km of Class Ihighway from Hailar to Manzhouli (HRH) to the border with Russia, 106.5 kmof which will be upgraded, with the rest newly constructed; (2) construction of an 8-ha cargo transfer terminal (CTT) in Hailar City; and (3) Border Roads for Trade, the improvement o f five road sections, 430 kmintotal. 3. The proposed HMHalignmenthas the following environmentally sensitive spots: (1) four residential areas, (2) one hospital with 260 beds, (3) three seasonalrivers, and (4) the ErkaWetland. 4. The CTT will be a truck terminal where imported goods arere-loaded from Russian trucks to Chinese trucks. The CTT will be located inan industrial area, Haidong Industrial Development Zone, which has no environmentally sensitive spots. Wastewater treatment facilities, including a shutdown systemfor accidents, will be installed. The highway betweenHailar and the CTT i s under construction. The EIA of the highway was submittedto the Bank inJune 2004 for its approval. 5. The EL4and EAP for the BRFT were drafted by the InnerMongoliaEnvironmental Science Institute, discussed with the public, and submitted to the Bank for review and approval. The EIA found that one road section will cross a local nature reserve, and after discussion with the Bank, IMCD changed the design to avoid this crossing. The EIA identifiedresidential areas and a hospital as environmentally sensitive spots, and the EAP describes mitigation measures. EcologicalEnvironment 6. The EIA reports identified no protected areas inthe impact zone o f the project, which was confirmed byDirectory of Wetlandsby IUCNandBiodiversity Review of China byWWF. The project area lies mainly ingrassland with herdingand agricultural activities except for a 13 kmsectionthrough Erka Wetland. 7. Hulunbeier Region i s home to several protected wetlands. Erka Wetland, however, althougha natural habitat, i s not a protected area. To evaluate the quality and importance o f the Erka Wetland, two local ecological experts, from the College of Ecology and Environment o f the Inner MongoliaUniversityof Agriculture andthe Inner MongoliaAcademy of Environmental Sciences conducted ecological surveys. Bothexperts agreedthat Erka Wetland i s an ordinary wetland and appropriate mitigation measureswill limitimpacts oftheprojectto anacceptable level. 8. The safeguardmeetingrequested confirmation o f the two national experts' conclusion, and the task team hiredDr.Martin Williams, an independent ecological expert based inHongKong, to review the ecological impacts of the HRHcomponent, inparticular on the Erka Wetland. The mission examined the wetland and reviewed the draft EIA May 17-20,2004. The summary o f his report was incorporated into the EIA.Dr.Williams found that althoughthe Erka Wetland i s not aprotectedarea, it has international importance interms of migration o fbirds and shouldbe protectedas much as possible. He also found that the project will havemajor impacts duringthe constructionperiod, but only minimal impacts during operations, and he recommended mitigation measures for protecting the wetland, which are included in the EAP and summarized inthe followingparagraphs. 55  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX10 9, Wetlandprotection. The Manzhouli government, before the highway opens, will draw up a wetland protectionplan introducing landuse planning (i.e., zoning), to ensure that no highway-related developments damage the wetland, especially on lands that rarely or never flood. Important small lakes and ponds near the Erka Wetland will be included inthe wetlandprotection plan. The Manzhouli government environment department will examine all developments arising from highway operationfor adverse impacts on the wetland and will impose mitigation measuresifnecessary.The Manzhouli government environment department also will patrol the wetland to ensureno huntingtakes place during either construction or operation. The HMPMO will implement similar mitigation measures at the other wetland areas duringconstruction work. Vehicle speeds will be set low inthe wetland area. 10. Wetland observationfacility. To provide an opportunity for people to observe and learn about the ecology o f the wetland, a wetland observation facility will be built by IMCD with the involvement of the environmentaldepartment of the Manzhouli government. The facility will include artificial birdnest sites, such as floating or elevated platforms, parking for about 10vehicles, narrow wooden paths over the wetland, and educational information on signingboards. 11. Special ecological monitoring. The EAP calls for special ecologicalmonitoring for the Erka Wetland for three years during construction and three years duringoperation. Monitoringwill determine ifbirds are lulledby vehicles traveling the highway across Erka or by the introduction of new power or telephone lines beside the highway. Ifso, mitigation measureswill be taken. Other environmentalissues 12. Noise and air quality. The noise level i s generally low along the proposed alignment. Inresidential areas the Class 4 noise standardi s satisfied. However, at the MineralHospital along the existinghighway, Class 4 standard i s satisfied but Class 1standardi s not because of existingtraffic. According to the EIA, the future noise level will be reducedby 5 dB in2015 because (1) the proposed alignment will divert a major part o f the traffic from the existing highway to the new highway and (2) six lines of trees will be plantedalong the new alignment, which i s 140 mfrom the hospital. Air quality meets standards. 13. Water quality. The water quality along the route i s fairly good, meeting the water quality standards of Class I11claimed by the Inner Mongolia Environmental Protection Bureau. 14. Cultural relics. HulunbeierArcheological Authority determined that there are no cultural relics along the project alignment. Potentialenvironmentalimpactsand their mitigationmeasures Design Phase 15. Alternatives analysis. Six alternatives, includingthe non-project altemative, were studied. The design includes the followingmajor considerations: (i) under-planningo f tourism areas; (ii) the avoid use existing alignment as much as possible; (iii) avoid fragile ground inan old miningarea; (iv) avoid passing through Manzhouli City; and (v) minimize the road lengthcrossing Ekra Wetland. 16. Erka Wetland. The design of the highway will make the wetland section as short as possible andthe bridgestructure as longas possible inorder not to interferewith water flow. Intotal, 1,640 mor 12.4 percent o f the section will be bridge; inaddition 10 culverts will be constructed. Temporary land will be minimized inthe wetland. No dumpingsites will be set inthe wetland. 17. Social Disruption. To prevent social disruption by the Class Ihighway, following recommendations from public consultations, the number o f culverts increased from 104 inthe original designto 110, and pathways andpedestrian overpasses from 30 to 47. 56  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX10 ConstructionPhase 18. Noise. Heavy machinery operation and other construction activities will have adverse impacts on the acoustic environment inthe populatedproject areas. Strict regulations on the schedule of construction works will be implementedto minimize these impacts. Heavy machinery operationwill be prohibited between 1O:OO p.m. and 6:OO a.m. 19. Air pollution. Dust duringconstruction work was identifiedas a major environmental impact at this stage of the project. Asphalt mixingplants will be located at least 300 mfrom residential areas on the leeward. Material sites andmixing sites will be at least 100maway from residents. Construction sites and mixing sites will be sprayed with water regularly. 20. Waterpollution. Wastewater from construction sites and camps will not be discharged into water bodies, but will be treated and applied to land. Domestic solid waste from construction sites and camps will be collectedregularly and disposed of inan appropriate manner. Duringbridge construction, cofferdam and sedimentation ponds will be made to prevent water turbidity. 21. Vegetation,Most parts of the existing highway have already obtained enough right-of-way for a Class Ihighway.Notreeswillbecutbecausetheareaisgrassland.Rehabilitationofvegetationwillbe conducted after the construction work. 22. Erka Wetland,No wastes or wastewater will be allowed to be dumped into the wetland. Temporary land use will be minimized inthe wetland area. Huntingwill be strictly prohibited. Special monitoring of the ecologicalcondition of Erka Wetland will be conducted by ecological experts duringconstruction. 23. Cultural relics. Although not expected, if cultural relics are found duringconstruction, excavation will be stopped immediately, and the local cultural authority will be informed o f the discovery. Constructionwill not resume untilthe cultural relics have been identifiedby the authorizedinstitution and preservation measurestaken. Operation Phase 24. Erka Wetland. The speed limitwill be reduced andno phone poles will be set inthe wetland section. The local govemment will establish a wetlandprotection plan; andlanduse around the wetlandwillbe controlled. Ecotourismwill be promoted with carefully designed facilities for observationto enhance public understandingof the importance ofwetland protection. Special monitoring onthe ecological condition of Erka Wetland will be conducted for three years duringthe operationperiod. 25. Waterpollution. Wastewater from service centers or toll stations will be processed to achieve the second-level farmland Irrigation Water Quality Standards and the water will be applied to the land. 26. Vegetation and soil erosion. Landusedtemporarily will be cleaned up after construction. Grass seed will be sown at temporarily usedlandand at borrow pits.The sites will be coveredwith straw to facilitate vegetation recovery. Environmentalmonitoring 27. Duringthe construction and operationphases, environmentalmonitoring will be carriedout to verify the project's actual impacts on the environment, identify unexpected environmental problems at an early stage, and adjust environmental measures as appropriate. Environmentalmonitoring will be conducted by the EnvironmentalProtectionOffice of IMCD duringconstruction. Inthe operational stage, monitoring will be entrustedto local environmentalmonitoringcenters. The results ofmonitoringwill be reported quarterly to the Bank and local environmental authorities. Special ecological monitoring will be conducted during construction andthe first three years o f operationto observe the impacts o f the project on the wetland and additional mitigation measures will be taken ifnecessary. The national independent experts who helpedprepare the EIAwill be asked to take part inthe monitoring. 57  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX10 Institutionalarrangementsandtraining 28. IMCD will set up a chief supervision office and two station offices at Hailar andManzhouli. It will assign two supervision engineersto beresponsible for environmental protection. To enhance environmental protection knowledge and slulls, key environmental protection staffwill receive intensive training, includinglectures by experts, site visits to similar projects, andperiodic national or international training. A training budgetof US$62,000 has been allocated. Publicconsultationandinformationdisclosure 29. A two-stage public consultation was carried out according to World Bank guidelines:shortly after environmental screening and before the terms ofreference for the EA were finalized (September 2003); and after the draft environmental assessment report was prepared(November 2003). Meetings were held with local people at project-affected towns and surveys were carried out through questionnaires. Project- affected individuals, organizations of concernedvillagers, and village committees were intensively consulted. 30. Apart from resettlement-related issues, the public voiced concerns about social disruption by the expressway and environmentalprotection duringconstruction. Their feedback i s reflectedinthe engineering designs and the EAP:more culverts, pathways, andpedestrian overpasses; the budget allocated for rehabilitationo f vegetation; a dumping site relocated to preserve the scenic view. 3 1. Duringthe national approval procedure, SEPA requested IMCDto conduct a first-class ecological assessment accordingto SEPA standardsbecause 13 kmof the proposed highway crosses a wetland. The reviseddraft EL4was submitted to SEPA inMarch2004 and was approved inJuly 2004. 32. The ETA and EAP were disclosed locally at the project office inHulunbeier and the government offices inHailar and Mazhouli, as well as inWashington, D.C., inJuly 2004. The final ETA and EAP were submitted to the Bank inJuly 2004. SOCIALASPECTS OF PROJECTPREPARATION Social assessment 33. The social assessment was designedto i)map out the general socioeconomic situation inproject areas; ii)facilitate consultationand assist inthe resettlement planningprocess; iii)identify ethnic minority groups, facilitate consultationwith them, assess relatedproject impacts andrecommendnecessary mitigation measures; and iv) identifystakeholders and conduct a stakeholder analysis. The social assessment was conducted through desk analysis of historical data, government statistics, and academic research; and insample field surveys through interviews, group discussions, and questionnaire surveys. The samplewas chosento berepresentative interms o f gender, ethnicity, occupation, age, economic status, and impact; and analysis and documentation o f the findings. 34. Hulunbeier Municipality i s rich innaturalresources, particularly coal, oil, and iron, with large and well-known grazing areas. There are many ethnic minority groups inHulunbeier, accounting for 18 percent o f the population. Primary stakeholders include: i)people involvedinborder trade, ii)urban populations along the highway and roads, iii)farmers and herdsmen along the highway androads, iv) people engagedintransportation. 35. The social assessment includeda survey of stakeholders directly involvedinborder trade. The type and nature of facilities and services designedfor the CTT reflectedthe requirements and preferences of potential users basedon a survey conducted by the Sociology Department o f HohaiUniversity inMarch 2004. The population o f the survey includedimporters/exporters, forwarding agents, trucking companies, truck drivers and cargo agents inHailar and Manzhouli. Questions asked inthe survey included the type and nature of facilities and services to be provided, ownership and management modalities (public vs. private sector), preferences for the type and capacity o f equipment and, inthe case of truck drivers, the 58  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX10 nature o f amenities and conveniences. The survey establishedthat there was an overwhelming support for the CTT with 96% of the potentialusers polled expressing interest to rent space at the CTT. Most were in favor o f the CTT being developed and managed by a government agency. The greatest facility requirement was parking bays for trucks followed by conventional and temperature-controlled warehousing. Equipmentwith a higher capacity (over 10 tons) was preferredover those o f lower capacity. More than 75% of truckers polled expressed the need for dining and washroom facilities, a workshop for minor repairs and overnight accommodation. About 25% o f drivers surveyed were Russiantruck drivers. 36. The following summarize the key analysis and findings o fthe CTT user survey: Currently there is no regular large cargo handling facility inHailar City. Cargoes are either handled and stored with various small companies and/or government department storage facilities which are not open for public use. Some cargoes are handled inopen space by the roads outside the city and some parlung facilities are also assuming cargo transfer functions. There i s an urgent needto establish a regular, modem and full-function cargo handling terminal both inview o f the fast growing border trade and the rapid growth o f local economy. Hailar City i s by far a most appropriate location for such purpose. Facilities most neededinclude parkinglots (99% o f the respondents), large storage house (88%), temperature controlled storage facilities (77%), open storage lots (63%), loading docks and cargo handling equipments (5 1%). Majority polled expressed preference for hotel rooms, restaurants, public restrooms, gas stations and vehicle repairing services. As for customs and quarantine offices, 89% expressedpreference for it, while 12% expressed otherwise. Regarding the terminal investment, 43% o f respondents felt that it is a highrisk venture, hence the government should be responsible for the terminal investment while 21% felt it shouldbe left to the association of traders, and 10% felt it shouldbe done totally by private sectors. As for the operation andmanagement ofthe terminal, 30% felt that the terminal shouldbe managedby the government, while 25% felt it should be done by the associations o f traders, and 18% prefer to leave it to private sector. 96% o f the interviewed expressed willingness to rent and use the terminal while 6% are not interested. 37. The Project will play an important role inthe formation o f the internationalborder trade route in northeastern Asia, regional cooperation and development, resource development, and local economic development. Adverse impacts relate mainly to acquisition o f grassland. This impact i s considered small because o f the small quantities o f land lost and the large size o f land holdings. Local concerns have been considered and are reflected inthe engineering design. The consultationprocess indicates a highlevel o f endorsement o f the project among the primary stakeholders. Landacquisitionandresettlementplanning 38. The project will require the acquisition o f land. Five resettlement action plans (RAPS)have been developed inline with local laws andpolicies and World Bank OP 4.12. The planning activities included i)adetailedinventoryofvariouscategoriesofimpactsandacensusofaffectedpeople,tabulatedby household and village; ii)a socioeconomic survey inthe project areas to analyze the project impacts, understand the socioeconomic background inthe project areas as the basis for resettlement planning and consult the affected people for their feedback to the resettlement planning; iii)a social assessment by the National Resettlement Research Center inthe project areas; and iv) consultations with the local 59  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX10 population. Local governments, village leaders, and the affected populationparticipatedinthe census and inventory, the finalization of the alignment, compensation rates, and the relocationand livelihood development schemes. Project information and resettlement policies were disseminatedbefore and during the consultation process. The final draft RAPs have beenplacedinlocal libraries and their availability announced inlocal newspapers. 39. This project will affect 39 villages in30 townshps in6 counties and banners. The RAPs contain descriptions of the policy framework, adverse impacts, and affected populations.The project will require 16,984 muof land, including546 muo f cultivated land, and 14,287 muo f grassland. The project will also require the demolition of 535 m2 of housing. Land loss will affect 2,129 people in590 households and house demolition will affect 21people in4 households. 40. The RAPs document rehabilitation measures.The grasslandacquired amounts to less than 1percent ineachvillage. Various options havebeendiscussedwiththe affectedpeople, includingland redistribution and cashpayments. At the request of the affected people, cashpayment was selected for the resettlement program. The relocated families all planto buildreplacement houses inthe same villages. 41. The RAPs contain detailed resettlement budget and financing plan developed on the basis of the inventory and compensationrates. The total resettlement budget i s estimated at RMB 24.46 million, (US$2.95 million). Resettlement will be financed entirely through government fimds. The plans also describe indetail the resettlement implementation arrangements. The Inner MongoliaAutonomous Regionhas established a multi-level organizational framework to plan and implement resettlement. This framework has resettlement offices at the project level as well as prefecture/city, countyhanner, and township levels. These offices have been staffed with experienced experts andtheir responsibilitieshave been specified inthe RAPs. 42. The RAP contains detailed procedures and timeframe for grievance redress. The project office has designed a grievance redress mechanism. The project office has prepared a Resettlement Information Booklet describing this mechanism and has distributedit to all affected households. 43. The project office has designed internal and independentmonitoring mechanisms for RAP implementation. Internalmonitoring will be conducted through the resettlement offices at various levels of government. It will focus on physical progress of RAP implementation. Independentmonitoringwill be carriedout by East China Science and EngineeringUniversity every six months. Apart fromphysical progress, it will evaluate livelihood restorationefforts and their effectiveness. The RAP describes indetail monitoring purpose, responsibility, indicators, methodology, procedures andreporting requirements. Ethnicminoritypeople's developmentplan(EMDP) 44. HulunbeierMunicipality i s an ethnic minority area. IMCD engagedthe Social Development Institute of Hehai Universityto conduct a social assessment inthe project areas and develop an EMDP.The EMDP was developed on the basis of an analysis o f local policies on ethnic minorities, a desk analysis of historical, academic researchand statistic data, a sample questionnaire survey, interviews o f key informants and focus groups discussions among different ethnic minority groups. The EMDP describes the ethnic minority groups identifiedinthe project areas that will be affected, the legal framework regardingethnic minority groups, social and economic life o f the ethnic minority groups, project benefits as well as adverse impacts, information dissemination and consultationefforts, and proposedmeasures and implementationarrangements, including budget, institutions and monitoring arrangements. 45. Hulunbeier Municipality has 35 ethnic minority groups, with a population o f 468,600, about 18 percent of the population. The larger groups include Mongolian, Manchurian, Dakar, Hui, Ewenlu, Korean, and Elunchun.The consultant team collected feedback from the stakeholders and analyzed the project impacts on them. The project i s expected to benefit all local population, including the ethnic minority groups. Project benefits are expected ini)improved transportationconditions, particularly 60  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX10 through the BRFT component, ii)improved employment opportunities under the project, iii)promotion of better use of natural resources and development of livestock industries. 46. The project is also expected to have direct adverse impacts on the ethnic minority groups, associated mainly with land acquisition and house demolition, inconvenience inroad crossings and operation of hay- transporting vehicles. Project land acquisition will affect mainlyMongolian families, and the BRFT component will affect a small number of Daker and Elunchunfamilies. Ofthe 590 affected families, 320 are ethnic minority families, including 23 Dakar and 5 Elunchunfamilies. The families along the roadare scatteredand the average grasslandholding i s large, the land acquisition impact i s small, and cash payment i s considered a sufficient measurefor rehabilitation purpose. This was also the popularrequest in the consultationprocess. These are fully reflectedinthe RAPs. 47. The consultation process and the questionnaire survey also elicited concerns from the ethnic minority groups along the proposed highway upgrading: One concerned access to grazing areas. This concern was shared with the project design engineers, who took different versions o f the alignment design to local consultation sessions. As aresult of these repeatedconsultations, the number o fproject passes has increased from 23 inthe origmal design to 47 inthe current design. The engineers promisedto continue this consultationprocess to further optimizethe project design. The secondissuewas the safe operation of hay-transporting vehicles with the upgraded highway duringharvest season. Alternatives are being considered to address this issue, including a new alignment, a parallel special route for slow traffic, and special traffic control measuresduring hay harvesting season. Consultations are ongoing with local governments and the local population. 48. Project information was provided to the ethnic minority groups through broadcast, meetings and village public boards. Project authorities will continue the consultationprocess to ensure the participation of the Mongolian minoritypeople inthe decision-making process duringproject implementation. 49. The multilevel resettlement organization has been delegated responsibility for implementingthe EMDP. EMDP-related costs are includedinthe R A P s and project engineering costs. IMCD and Hulunbeier government have established mechanisms for internal and independent monitoring of EMDP implementation.HehaiUniversity has been engagedto conduct independentmonitoring once a year until one year after project completion. 61   Annex 11: Project Preparation and Supervision CHINA: Inner MongoliaHighway andTrade Corridor Project Planned Actual PCNreview 1211712003 12/17/2003 InitialPID to PIC 12/24I2003 1212412003 Initial ISDS to PIC 12/24/2003 12/24/2003 Appraisal 09/06/2004 0912512004 Negotiations 12/06/2004 BoardRVP approval 0111812005 Planned date o f effectiveness 0411812005 Planned date o f mid-term review Planned closing date 06l3Ol2010 KEYINSTITUTIONSRESPONSIBLEFORPREPARATIONOF THE PROJECT: Inner Mongolia Communications Department, jointly with Hulunbeier prepared the project with an assistance by (i) Highway Engineering Consulting Supervision General Company for the China engineering feasibility study o f HMH; (ii) Hulunbeier Highway Survey and Design Institute for the engineering feasibility study o f BRFT, (iii) BeijingEnvironmental Science Academy for the environmental assessment of HMHand (iv) MAR Environment and Science Institute for the environmental assessment o f BRFT. 50. Bank staff and consultants who worked on the project included: Name Title Unit Supee Teravaninthorn Task Team Leader/Sr. Economist EACCF Yasuhiro Kawabata Sr. Highway Engineer EASTR Gao Boping Transport Specialist EACCF Zhang Wenlai Highway Engineer EACCF Naoya Tsukamoto Sr. Environment Specialist EASES Chaohua Zhang Sr. Social Sector Specialist EASES Han-Kang Yen ResearchAnalyst EASTR Dawei Yang Procurement Specialist EACCF Hongkun Yang Procurement Specialist EACCF Yi Geng Financial Management Specialist EAPCO Karin Nordlander Lead Counsel LEGEA K e k Choo Chung Logistics Consultant Teresita Ortega ProgramAssistant EASTR Jing Xu Team Assistant EACCF 63  INNERMONGOLIA HIGHWAYTRADECORRIDOR AND ANNEX 11 Bankfunds expendedto dateon projectpreparation: Bank resources: US$224,03 1(as of July 8,2004) Trust funds: Total: US$224,03 1 EstimatedApprovalandSupervisioncosts: Remainingcosts to approval: US$200,000 Estimatedannual supervisioncost: US$90,000 64  Annex 12: Documentsinthe ProjectFile CHINA: Inner MongoliaHighway and Trade Corridor Project GeneralDocuments 0 Feasibility Study Report for Hailar-Manzhouli Highway March2003 0 RevisedFeasibility Report for HMH December 2003 0 Feasibility Report for Dayangshu-Baihuapai road improvement December 2003 0 Feasibility Report for Zhalainuoer-Heishantou road improvement M a y 2004 0 Feasibility Report for Yimin-Handagai road improvement M a y 2004 0 Feasibility Report for Alatanemole-Arihashate road improvement December 2003 0 Feasibility Report for Amugulang-Ebuduge road improvement December 2003 0 ImplementationOrganization Structure July 2004 0 Project Implementation Plan July 2004 Safeguard Documents Environment 0 Environmental Impact Assessment (EIA) TOR for HMH January 2003 0 EIA Summary for Dayangshu-Baihuapai M a y 2004 0 EIA Summary for Zhalainuoer-Heishantou M a y 2004 0 EIASummary for Yimin-Handagai M a y 2004 0 EIA Summary for Alatanemole-Arihashate M a y 2004 0 EIA Summary for Amugulang-Ebuduge M a y 2004 0 Additional report on the Erka Wetland June 2004 0 EIA Summary for HMH July 2004 0 E I A f o r H M H June 2004 0 Environmental Management Plan for HMH April 2004 Social/Resettlement 0 Resettlement Action Plan February 2004 0 Social Assessment o f the HMHinvestment February 2004 0 Social Assessment o fthe investment for Cargo Transfer Terminal June 2004 Other Documents 0 Procurement Plan June 2004 0 Project Procurement Capacity Assessment August 2004 0 ProjectFinancial ManagementAssessment August 2004 65   Annex 13: Statementof LoansandCredits CHINA: InnerMongoliaHighway and Trade Corridor Project 19-Jul-04 Differencebetween expected and actual disbursements* OriginalAmount in US$ Millions Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig. Frm Rev'd PO75602 2004 CN-2nd National Railways (Zhe-GanLine) 200.00 0.00 0.00 0.00 200.00 0.00 0.00 PO73002 2004 CN-Basic Education in Western Areas 100.00 0.00 0.00 0.00 99.34 -0.66 0.00 PO65463 2004 CN - Jiangxi IntegratedAgric. Modern. 100.00 0.00 0.00 0.00 99.00 3.49 0.00 PO66955 2004 CN-ZHEJIANG URBAN ENVMT 133.00 0.00 0.00 0.00 133.00 0.00 0.00 PO69852 2004 CN-Wuhan UrbanTransport 200.00 0.00 0.00 0.00 200.00 106.60 0.00 PO81749 2004 CN-Hubei Shiman Highway 200.00 0.00 0.00 0.00 200.00 0.00 0.00 PO77615 2004 CN-GEF-Gansu & Xinjiang Pastoral Develop 0.00 0.00 10.50 0.00 10.50 1.20 0.00 PO77137 2004 CN-4th InlandWaterways 91.00 0.00 0.00 0.00 91.00 0.00 0.00 PO65035 2004 CN-Gansu & Xinjiang PastoralDevelopment 66.27 0.00 0.00 0.00 65.61 7.13 0.00 PO75728 2004 CN-GuangdongiPRD UR ENVMT 128.00 0.00 0.00 0.00 128.00 0.00 0.00 PO68058 2003 CN-Yixing Pumped Storage Project 145.00 0.00 0.00 0.00 133.05 -3.10 0.00 PO40599 2003 CN-TIANJIN URB DEV II 150.00 0.00 0.00 0.00 143.82 4.22 0.00 PO67337 2003 CN-2nd GEF Energy Conservation 0.00 0.00 26.00 0.00 14.60 18.90 0.00 PO76714 2003 CN-2nd Anhui Hwy 250.00 0.00 0.00 0.00 247.50 20.50 0.00 PO56847 2003 CN-3rd Xinjiang Hwy Project 150.00 0.00 0.00 0.00 99.33 14.33 0.00 PO70191 2003 CN-SHANGHAI URB ENVMTAPLl 200.00 0.00 0.00 0.00 190.00 10.00 0.00 PO70441 2003 CN-Hubei Xiaogan Xiangfan Hwy 250.00 0.00 0.00 0.00 144.33 -15.67 0.00 PO64729 2002 CN-SUSTAINABLE FORESTRYDEV. PROJECT 93.90 0.00 0.00 0.00 76.07 10.91 0.00 PO58846 2002 CN-Natl Railway Project 160.00 0.00 0.00 0.00 31.60 6.60 0.00 PO60029 2002 CN-Sustain. Forestry Dev(Natura1Forest) 0.00 0.00 16.00 0.00 14.11 4.60 0.00 PO71147 2002 CN-Tuberculosis Control Project 104.00 0.00 0.00 0.00 82.74 -212 6 0.00 PO70459 2002 CN-Inner Mongolia Hwy Project 100.00 0.00 0.00 0.00 85.63 8.63 0.00 PO68049 2002 CN-Hubei Hydropower Dev in Poor Areas 105.00 0.00 0.00 0.00 84.02 18.52 0.00 PO45915 2001 CN-Urumqi UrbanTransport 100.00 0.00 0.00 0.00 49.76 49.78 0.00 PO47345 2001 CN-HUAI RIVER POLLUTIONCONTROL 105.50 0.00 0.00 0.00 84.00 -2150 0.00 PO56596 2001 CN-Shijiazhuang Urban Transport 100.00 0.00 0.00 0.00 85.41 58.61 0.00 PO56199 2001 CN-3rd InlandWaterways 100.00 0.00 0.00 0.00 74.99 6.49 0.00 PO51859 2001 CN-LIAO RIVER BASIN 100.00 0.00 0.00 0.00 60.26 26.76 0.00 PO58845 2001 Jiangxi II Hwy 200.00 0.00 0.00 54.77 63.13 8.90 0.00 PO56516 2001 CN -WATER CONSERVATION 74.00 0.00 0.00 0.00 33.96 8.66 0.00 PO58843 2000 Guangxi Highway 200.00 0.00 0.00 0.00 90.20 46.20 0.00 PO49436 2000 CN-CHONGQING URBAN ENVMT 200.00 0.00 0.00 3.70 148.51 74.91 0.00 PO56424 2000 CN-TONGBAI PUMPEDSTORA 320.00 0.00 0.00 100.00 146.04 113.24 0.00 PO58844 2000 3rd Henan Prov Hwy 150.00 0.00 0.00 0.00 49.58 28.58 0.00 PO42109 2000 CN-BEIJING ENVIRONMENTII 349.00 0.00 25.00 0.00 282.76 195.51 0.00 PO45264 2000 CN-SMALLHLDRCATTLE DEV 93.50 0.00 0.00 0.00 10.32 5.62 0.00 PO64924 2000 CH-GEF-BEIJINGENVMT II 0.00 0.00 25.00 0.00 23.32 20.51 5.51 PO64730 2000 CN Yangtze Dike Strengthening Project - 210.00 0.00 0.00 0.00 105.73 105.73 0.00 PO45910 2000 CN-HEBEI URBAN ENVIRONMENT 150.00 0.00 0.00 0.00 113.96 50.96 0.00 PO41268 1999 CN-Nat Hwy4/Hubei-Hunan 350.00 0.00 0.00 0.00 50.33 40.33 0.00 PO56216 1999 CN - LOESSPLATEAU II 100.00 50.00 0.00 0.00 16.79 18.92 -2.91 PO38121 1999 CN-GEF-RENEWABLEENERGY DEVELOPMENT 0.00 0.00 35.00 0.00 21.96 29.90 11.38 PO60270 1999 CN-ENTERPRISEREFORM LN 0.00 5.00 0.00 0.00 2.25 3.75 3.53 PO57352 1999 CN-RURALWATER IV 16.00 30.00 0.00 0.00 19.57 16.16 11.34 PO56308 1999 CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 1.17 1.17 0.00 PO42299 1999 TEC COOP CREDIT IV 10.00 35.00 0.00 0.00 34.23 -12.39 0.00 PO46829 1999 RENEWABLEENERGYDEVELOPMENT 100.00 0.00 0.00 0.00 12.87 99.87 10.00 67  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX 13 Difference between expected and actual disbursements* OriginalAmount in US5 Millions Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig. Frm Rev'd PO46564 1999 CN - Gansu & Inner Mongolia Poverty Red. 60.00 100.00 0.00 13.30 33.46 29.39 -8.83 PO46051 1999 CN-HIGHER EDUC. REFORM 20.00 50.00 0.00 0.00 5.69 7.31 0.00 PO03653 1999 CN-Container Transport 71.OO 0.00 0.00 18.61 3.01 21.62 0.70 PO43933 1999 CN-SICHUAN URBAN ENVMT 150.00 2.00 0.00 0.00 84.94 82.56 26.76 PO49665 1999 CN-ANNING VALLEY AG.DEV 90.00 30.00 0.00 0.00 17.31 12.48 0.00 PO51856 1999 ACCOUNTING REFORM& DEVELOPMENT 27.40 5.60 0.00 0.00 17.60 17.51 0.00 PO36953 1999 CN-HEALTH IX 10.00 50.00 0.00 0.00 33.31 23.58 -0.01 PO51888 1999 CN - GUANZHONG IRRIGATION 80.00 20.00 0.00 0.00 23.25 19.84 0.00 PO51705 1999 Fujian II Highway 200.00 0.00 0.00 0.00 51.OO 51.00 0.00 PO50036 1999 Anhui Provincial Hwy 200.00 0.00 0.00 9.60 32.99 42.59 0.00 PO41890 1999 CN-Liaoning UrbanTransport 150.00 0.00 0.00 0.00 26.78 26.78 0.00 PO36414 1998 CN-GUANGXI URBAN ENVMT 72.00 20.00 0.00 10.19 58.34 66.26 312 7 PO36949 1996 CN-Nat Hwy3-Hubei 250.00 0.00 0.00 0.00 21.15 21.15 0.00 PO03539 1998 CN -SUSTAINABLE COASTAL RESOURCES DE 100.00 0.00 0.00 2.06 45.61 47.68 0.47 PO03566 1998 CN-BASIC HEALTH (HLTH8) 0.00 65.00 0.00 0.00 35.87 24.51 0.00 PO03606 1998 ENERGY CONSERVATION 63.00 0.00 22.00 0.00 31.67 18.37 0.00 PO03614 1998 CN-Guangzhou City Transport 200.00 0.00 0.00 20.00 100.31 120.31 100.31 PO03619 1998 CN-2nd InlandWaterways 123.00 0.00 0.00 37.00 15.35 52.35 1.49 PO35698 1998 HUNAN POWER DEVELOP. 300.00 0.00 0.00 145.00 215 2 166.52 -12.39 PO45768 1998 Tri-Provincial Hwy 230.00 0.00 0.00 0.00 15.58 15.58 0.00 PO46563 1996 CN - TARIM BASIN II 90.00 60.00 0.00 2.67 7.14 10.44 0.00 PO46952 1998 CN - FOREST. DEV. POOR AR 100.00 100.00 0.00 0.00 29.62 -69.61 17.19 PO49700 1998 CN - IAIL-2 300.00 0.00 0.00 0.00 1.65 1.65 0.75 PO51736 1998 E. CHINNJIANGSUPWR 250.00 0.00 0.00 86.00 43.86 129.86 16.77 PO37859 1998 CN-GEF Energy Conservation 0.00 0.00 22.00 0.00 0.71 22.06 0.00 PO40185 1998 CN-SHANDONGENVIRONMENT 95.00 0.00 0.00 1.40 20.07 21.47 10.27 PO03590 1997 CN - QINBA MOUNTAINSPOVERTY REDUCTIO 30.00 150.00 0.00 0.00 3.20 6.55 -1.41 PO36405 1997 CN - WANJIAZHAI WATER TRA 400.00 0.00 0.00 75.00 13.07 88.07 0.00 PO44485 1997 SHANGHAIWAIGAOQIAO 400.00 0.00 0.00 0.00 72.21 49.01 51.76 PO03637 1997 CN-NAT'L RURALWATER 3 0.00 70.00 0.00 0.00 0.56 3.77 3.35 PO03650 1997 TUOKETUOPOWEWINNER 400.00 0.00 0.00 102.50 29.55 132.05 29.55 PO40513 1996 2nd Henan Prov Hwy 210.00 0.00 0.00 19.00 12.88 31.68 23.88 PO03599 1996 CN-YUNNAN ENVMT 125.00 25.00 0.00 19.48 35.68 56.92 17.43 PO03602 1996 CN-HUBEI URBAN ENVIRONMENT 125.00 25.00 0.00 47.32 17.07 66.43 4.10 PO03594 1996 CN - GANSU HEXI CORRIDOR 60.00 90.00 0.00 0.00 71.13 60.31 0.00 PO34618 1996 CN-LABOR MARKET DEV. 10.00 20.00 0.00 0.00 5.56 7.67 0.00 PO03571 1995 CN-7th Railways 400.00 0.00 0.00 119.00 10.28 129.28 10.28 PO03596 1995 CN-YangtzeBasin Water Resources Project 100.00 110.00 0.00 1.92 0.21 4.60 4.60 PO03603 1995 CN-ENT HOUSING& SSR 275.00 75.00 0.00 57.46 37.16 92.53 7.19 PO03639 1995 CN-SOUTHWESTPOVERTY REDUCTIONPROJE 47.50 200.00 0.00 0.01 1.21 25.36 25.36 PO03540 1994 CN-LOESSPLATEAU 0.00 150.00 0.00 0.00 0.93 0.27 0.00 PO03632 1993 CN-ENVIRONMENTTECH ASS 0.00 50.00 0.00 0.00 0.66 1.44 1.12 Total: 11,768.07 1,612.60 181.50 945.98 5243.72 2,912.98 400.83 68  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX13 CHINA STATEMENTOF IFCs HeldandDisbursedPortfolio (US$ million) Mar-04 Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2002 ASIMCO 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.00 2003 Anjia 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 BCIB 0.00 0.00 11.60 0.00 0.00 0.00 0.00 0.00 1999100102 Bank of Shanghai 0.00 24.67 0.00 0.00 0.00 24.67 0.00 0.00 2002 CDH China Fund 0.00 15.17 0.00 0.00 0.00 2.09 0.00 0.00 2003 CSMC 0.00 12.00 0.00 0.00 0.00 9.60 0.00 0.00 2004 CUNA Mutual 0.00 12.00 0.00 0.00 0.00 1.47 0.00 0.00 1998 Chengdu Huarong 6.28 3.20 0.00 7.04 6.28 3.20 0.00 7.04 1998 Chengxin-IBCA 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00 1992 China Bicycles 4.50 0.00 0.00 0.00 4.50 0.00 0.00 0.00 2004 China II 28.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 China Re Life 0.00 15.41 0.00 0.00 0.00 15.29 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1995 Dupont Suzhou 7.79 0.00 0.00 0.00 7.79 0.00 0.00 0.00 1994 Dynamic Fund 0.00 8.05 0.00 0.00 0.00 6.40 0.00 0.00 2003 Great lnfotech 0.00 3.50 0.00 0.00 0.00 2.80 0.00 0.00 1999 Hansom 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00 2002 Huarong AMC 9.00 3.00 0.00 0.00 9.00 0.49 0.00 0.00 2004 IB 0.00 52.18 0.00 0.00 0.00 0.19 0.00 0.00 2002 IEC 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Leshan Scana 5.21 1.35 0.00 0.00 3.61 1.35 0.00 0.00 2001 Maanshan Carbon 9.00 2.00 0.00 0.00 9.00 2.00 0.00 0.00 2001 Minsheng Bank 0.00 23.50 0.00 0.00 0.00 23.50 0.00 0.00 2001 NCCB 0.00 26.58 0.00 0.00 0.00 26.46 0.00 0.00 1996 Nanjing Kumho 0.00 3.81 0.00 0.00 0.00 3.81 0.00 0.00 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 1.95 0.00 0.00 0.00 1.95 0.00 0.00 1997 Orient Finance 6.67 0.00 0.00 8.33 6.67 0.00 0.00 8.33 2003 PSAM 0.00 1.93 0.00 0.00 0.00 0.00 0.00 0.00 19971'00 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 2001 Peak Pacific 0.00 0.00 25.00 0.00 0.00 0.00 0.00 0.00 2003 SAlC 12.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2004 SETS 0.00 0.08 0.00 0.00 0.00 0.00 0.00 0.00 2000 SSlF 0.00 4.50 0.00 0.00 0.00 1.02 0.00 0.00 1998 Shanghai Krupp 27.50 0.00 0.00 61.43 27.50 0.00 0.00 61.43 1999 Shanghai Midway 0.00 16.02 0.00 0.00 0.00 16.02 0.00 0.00 1993 Shanxi 15.36 0.00 0.00 0.00 12.81 0.00 0.00 0.00 2002 Shenzhen PCCP 3.76 0.00 0.00 0.00 3.76 0.00 0.00 0.00 2001 Sin0 Gold 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 1995 Sino-Forest 23.33 0.00 0.00 0.00 18.33 0.00 0.00 0.00 2000 Suzhou PVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 1996 Wanjie Hospital 13.64 0.00 0.00 0.00 13.64 0.00 0.00 0.00 2004 Weihai Weidongri 0.73 0.00 0.00 0.00 0.73 0.00 0.00 0.00 Wumart 0.00 6.48 0.00 0.00 0.00 6.48 0.00 0.00 Total Portfolio: 212.50 311.86 36.60 83.80 134.49 188.96 0.00 79.66 69  INNER MONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX 13 ApprovalsPendingCommitment FY Approval Company Loan Equity Quasi Partic. 2002 ASIMCO 0.00 5.00 0.00 0.00 2004 CCB-MS NPL 0.00 0.00 3.00 0.00 2003 Cellon 0.00 0.00 5.70 0.00 2004 Colony China 0.00 0.00 50.00 0.00 2002 Darong 10.00 0.00 1.50 8.00 2002 HuarongAMC 15.00 0.00 0.00 0.00 2002 IEC 0.00 5.00 0.00 0.00 2002 KHIT 0.00 0.00 3.00 0.00 2004 NCFL 0.00 0.00 17.88 0.00 2004 Nanjing KumhoEx 34.00 0.00 6.00 0.00 2003 Peak Pacific 2 0.00 0.00 10.00 0.00 2004 SIBFI 0.26 0.00 0.00 0.00 2002 SML 1.oo 0.00 0.00 0.00 2002 Sino Mining 5.00 0.00 0.00 5.00 2002 Zhong Chen 0.00 0.00 0.00 32.00 Total pendingcommitment: 65.26 10.00 97.08 45.00 70  Annex 14: Countryat a Glance CHINA: Inner MongoliaHighway and Trade Corridor Project East Lower- POVERTYand SOCIAL Asia 8 middle- China Pacific income Developmentdiamond. 2003 Population,mid-year (mil/ions) 1,288.4 1,855 2,655 Life expectancy GNI per capita (Atlas method, US$) 1,100 1,080 1.480 GNI (Aflas method, US$ billions) 1,411.6 2,011 3,934 Average annual growth, 199743 1 ~ Population(77) 0.8 1.O 0.9 Laborforce (%) 0.9 1.1 1.2 1 GNi Gross per primary Most recent estimate (latest year available, 199743) j capita nrollment Poverty (% ofpopulation below nationalpovertyline) 5 Urbanpopulation (% of total population) 39 40 50 Lifeexpectancy at birth (years) 71 69 69 - Infant mortality(per 1,000live births) 30 32 32 Chiid malnutritionIs/, of children under 5) 10 15 11 Access to improvedwater source Access to an improvedwater source (77 of population) 75 76 81 Illiteracy(% ofpopulation age 15+) 9 10 10 Gross primary enrollment (% of school-agepopulation) 114 111 112 -China Male 114 112 113 I - Lower-middle-incomegroup Female 114 111 111 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1983 1993 2002 2003 Economicratios. GDP (US$ billions) 227.4 431.8 1,266.1 1,412.3 Gross domestic investmenffGDP 33.8 43.3 40.4 44.4 Exports of goods and servicesiGDP 8.3 17.1 28.9 34.3 Trade Gross domestic savings/GDP 34.5 41.8 43.4 47.0 Gross national savingslGDP 35.1 41.8 43.2 47.6 I Current account balance/GDP 1.7 -2.1 2.8 3.2 Domestic Interestpayments/GDP 0.2 0.6 0.3 0.3 savings investment Total debffGDP 4.2 19.9 13.3 13.7 Total debt service/exports 10.1 9.4 7.9 7.2 I Presentvalue of debffGDP 12.8 Present value of debffexports 41.8 indebtedness 1983-93 199343 zoo2 2003 200347 (average annualgrowth) -China GDP _ _ 9.5 8.6 8.3 9.1 7.7 GDP per capita 79 7 6 7.6 8 4 7.0 Lower-middle-incomeSrouo ~ STRUCTURE of the ECONOMY l9E3 1993 2002 2003 Growth of Investmentand GDP (%) (% of GDP) Agriculture 330 199 15.4 146 I industry 446 474 51 1 523 Manufacturing 365 345 354 393 ,o Services 224 327 335 33 1 I Privateconsumption 51 3 452 434 404 1 ' ' 98 9, 0, 01 02 d3 General governmentconsumption 141 130 132 126 Imports of goods and services 7 5 186 259 318 -GDI - O ' G D P (average annualgrowth) I Growth of exports and Imports (Oh) Agriculture 4 2 3 4 Industry 119 104 Manufacturing 115 103 Services 107 8 2 Privateconsumption 110 7 1 General governmentconsumption 9 7 8 5 7 0 5 5 98 99 W 01 02 03 Gross domestic investment 9 2 9 3 137 198 ~ ~ p -O'imports s o ~ Imports of goods and services 9 9 134 275 248 71  INNERMONGOLIA HIGHWAY TRADECORRIDOR AND ANNEX14 China PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation (%) Domesticprices I (% change) 4 , Consumer prices 4.5 14.7 -0.8 1.2 ImplicitGDP deflator 1.1 14.6 -0.6 2.2 Government finance I ("A of GDP,includes current grants) Current revenue 23.0 13.7 18.3 18.7 Current budget balance .. 2.2 1.o 1.3 4' -GDPdeflator +CPI Overallsurplusideficit -0.7 -0.7 -3.3 -2.5 TRADE I 1983 1993 2002 2003 , (US$ millions) Exportand import levels (US$ mill.) Total exports (fob) 22,226 91,744 325,565 438,228 1500000 Food 2,853 8,399 14,623 17,533 Fuel 4,666 4,109 8,372 11,110 Manufactures 12,606 75,078 297.085 403,560 300 000 1 Total imports(cifJ 21,390 103,959 295,203 412,760 Food 3,122 2,206 5,237 5,959 Fueland energy 111 5,819 19,285 29,214 Capital goods 3,988 45,023 137,030 192,869 97 98 99 w 01 02 Export price index (1995=100) 41 81 78 82 O3 Importpriceindex (1995-100) 69 88 66 95 Exports Imports II Terms of trade (1995=100) 60 93 90 86 BALANCEof PAYMENTS I 1983 1993 2002 2003 I Current (US$ millions) account balanceto GDP ( O h ) Exports of goods and services 24,804 102,643 365,395 485,003 5 - Imports of goods and services 22,545 111,776 328,013 448,924 Resourcebalance 2,259 -9,133 37,383 36,079 Net income 1,158 -1,284 -14,945 -7,838 Net currenttransfers 511 1,172 12,984 17,634 Current account balance 3.928 -9,245 35,422 45,875 Financingitems (net) -1,233 11,012 40,085 71,148 Changes in net reserves -2,695 -1,767 -75,507 -117,023 1 97 98 99 W 01 02 03 1 Memo: Reserves includinggold (US$ millions) .. 27,336 297,735 416,208 Conversionrate (DEC,local/US$) 2.6 8.0 8.3 8.3 EXTERNALDEBTand RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Composition of 2003 debt (US$ mlll.) Total debt outstandingand disbursed 9,609 85,928 168,337 193,567 IBRD 4 4,549 11,254 10,657 A 10.657 IDA 67 5,160 9,423 10,314 6: 10,314 Total debt service 2,691 10,166 30,596 37,064 IBRD 3 544 2,981 2,690 IDA 1 38 180 219 Compositionof net resourceflows Officialgrants 73 272 311 Officialcreditors 623 4,615 -1,206 -3,092 Privatecreditors 363 8,217 -4,550 -1,769 Foreigndirect investment 916 27,515 53,074 55,507 Portfolioequity 0 3,818 World Bank program Commitments 438 2,315 1,058 1,250 A . IBRD E. Bilateral Disbursements 71 1,845 2,020 1,616 B IDA D- Other multilateral F Pnvate - Principalrepayments 0 248 2,502 2,459 C IMF -- G- Short-term Net flows 71 1,597 -482 -843 Interestpayments 3 333 660 450 Nettransfers 68 1,264 -1,142 -1,293 Devecopmenr t conomics 72  MAP SECTION