China - Second National Highway Project

Document of The World Bank Report No: 31460 IMPLEMENTATION COMPLETION REPORT (SCL-41240 TF-23133) ON A LOAN IN THE AMOUNT OF US$400 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE SECOND NATIONAL HIGHWAY PROJECT June 23, 2005 Transport Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2004) Currency Unit = Yuan Yuan 1.00 = US$ 0.1207 US$ 1.00 = Yuan 8.2782 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AADT - Average Annual Daily Traffic BMS - Bridge Management System E&M - Electrical and Mechanical EAP - Environmental Action Plan EIA - Environmental Impact Assessment EIRR - Economic Internal Rate of Return ENPV - Economic Net Present Value FIRR - Financial Internal Rate of Return FYP - Five Year Plan GPCD - Guangdong Provincial Communications Department GPFC - Guangdong Provincial Freeway Company Limited HPCD - Hunan Provincial Communications Department HPECDC - Hunan Provincial Expressway Construction & Development Corporation ICB - International Competitive Bidding Jingzhu - Beijing-Zhuhai Expressway LLH - Loudi-Lianyuan Highway MOC - Ministry of Communications NCB - National Competitive Bidding NH2 - Second National Highways Project NEPB - National Environmental Protection Bureau NPV - Net Present Value NTHS - National Trunk Highway System PAPs - Project-Affected Persons PCD - Provincial Communication Department PMS - Pavement Management System RAP - Resettlement Action Plan RMB - Chinese Renminbi SEPA - State Environmental Protection Authority SEPB - State Environmental Protection Bureau SDPC - State Development and Planning Commission SPC - State Planning Commission TOR - Terms of Reference XLE - Xiangtan to Leiyang Expressway XGE - Xiaotang to Gantang Expressway XZH - Xiangtan to Zhuzhou Highway Vice President: Jemal-ud-din Kassum Country Director David R. Dollar Sector Manager Jitendra N. Bajpai Task Team Leader/Task Manager: Christopher R. Bennett  CHINA SECOND NATIONAL HIGHWAY PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 11 6. Sustainability 12 7. Bank and Borrower Performance 13 8. Lessons Learned 15 9. Partner Comments 17 10. Additional Information 28 Annex 1. Key Performance Indicators/Log Frame Matrix 29 Annex 2. Project Costs and Financing 30 Annex 3. Economic Costs and Benefits 33 Annex 4. Bank Inputs 46 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 49 Annex 6. Ratings of Bank and Borrower Performance 50 Annex 7. List of Supporting Documents 51 Map IBRD 27558  Project ID: P003654 Project Name: CN-Nat Hwy2/Hunan-Guangdong Team Leader: Christopher R. Bennett TL Unit: EASTR ICR Type: Core ICR Report Date: June 23, 2005 1. Project Data Name: CN-Nat Hwy2/Hunan-Guangdong L/C/TF Number: SCL-41240; TF-23133 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: Roads and highways (100%) Theme: Municipal governance and institution building (P); State enterprise/bank restructuring and privatization (S); Rural services and infrastructure (S) KEY DATES Original Revised/Actual PCD: 10/07/1994 Effective: 11/27/1997 11/24/1997 Appraisal: 04/05/1996 MTR: Approval: 12/17/1996 Closing: 12/31/2003 12/31/2004 Borrower/Implementing Agency: People's Republic of China/Hunan and Guangdong Provincial Communications Departments Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Nicholas C. Hope (Acting) Country Director: David R. Dollar Nicholas C. Hope Sector Manager: Jitendra N. Bajpai Richard G. Scurfield Team Leader at ICR: Christopher R. Bennett Alfred Nickesen ICR Primary Author: Jacques Yenny 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The project had the following objectives: (a) relieve road transport congestion and improve the integration of interregional trade and commerce between Hunan and Guangdong by assisting in the development of two key sections of the National Trunk Highway System (NTHS) in the principal North-South transport corridor; (b) strengthen institutional capacity at the Hunan and Guangdong Provincial Communication Departments (PCDs) and related institutions; (c) develop a policy dialogue in the areas of the commercialization and corporatization of provincial expressway companies, highway maintenance management, and transport and economic integration; and (d) improve the safety of road transport. The project objectives were clear and in line with the Bank's Country Assistance Strategy (CAS) presented to the Board in June 1995 and the Progress Report of March 26, 1996, supporting China's needs to rapidly modernize and expand its highway system. The objectives were also consistent with the Government's request for continuous assistance of the Bank and other multi and bilateral agencies in developing its NTHS. The project was the second in the series of national highway projects NH1-NH2-NH3-NH4 on the Beijing-Zhuhai (Jingzhu) expressway in the provinces of Guangdong, Hunan, Hubei, Hunan and Hebei. All four projects supported an integrated approach to corridor development. Besides investments in priority expressway links, the project also supported continued institutional development and sectoral reforms aimed at modernizing the management of the highway system. 3.2 Revised Objective: The objectives were not revised. 3.3 Original Components: The original project comprised the following components: (a) Construction of: (i) Xiangtan to Leiyang Expressway (XLE), a 169-km divided, four-lane, access-controlled toll highway in southern Hunan; and (ii) Xiaotang to Gantang Expressway (XGE), a 109-km divided, four-lane, access-controlled toll highway in northern Guangdong. The works would include construction of administration, service and maintenance facilities as well as the supply and installation of electrical, electronic and mechanical (E&M) equipment for tolling, telecommunication, traffic monitoring, and lighting of interchanges, toll plazas and service areas; (b) Interconnecting roads programs: (i) in Hunan, consisting of new construction and upgrading of four roads, with a total length of 39 km, including a new 16 km divided, four-lane, Class I, Xiangtan-Zhuzhou Highway (XZH); and (ii) in Guangdong, consisting of new construction and upgrading of 10 short road sections, with a total length of two km; (c) Construction of Loudi-Lianyuan Highway (LLH), an auto-only, access-controlled, Class II, connecting road of 60 km length; (d) Construction supervision services for XLE, XGE, the interconnecting roads programs in Hunan and Guangdong including XZH, and LLH; - 2 -  (e) Studies/technical assistance in: (i) highway maintenance management in Hunan, (ii) expressway commercialization and corporatization in Hunan; (iii) transport and economic integration in Guangdong; and (iv) expressway safety in Guangdong and Hunan; (f) Staff training programs in Hunan and Guangdong, covering all aspects of highway planning, design, construction, operation, finance, and maintenance; and (g) Equipment for: (i) control of construction quality and monitoring of the environment; (ii) operation and maintenance of XLE and XGE after their completion; and (iii) maintenance of the provincial road network, the Road Data Bank (RDB) and the Pavement Management System (PMS) in Hunan. 3.4 Revised Components: The components were not revised. 3.5 Quality at Entry: The overall quality at entry is rated satisfactory. The assessment is based on: (a) the consistency of the project objectives with China's priorities for the sector and of the Bank's strategy for future highway lending in China; (b) the importance given to improving the capabilities of highway personnel through training; and (c) the attention given to Bank policies, in particular regarding environmental protection and resettlement. Project monitoring indicators were agreed. Although detailed design had been completed by appraisal for both expressway sections, once work started unexpected geological difficulties appeared, which required numerous design and contract changes during execution. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Overview: The overall achievement of the project objectives in the Implementation Completion Report (ICR) is assessed as satisfactory. Despite some delays in implementation due to technical difficulties in both provinces related to inadequate designs, and slow procurement of electrical and mechanical (E&M) works in Hunan, the project objectives were substantially met. The expressway has attracted a significant portion of the corridor traffic, which has reduced congestion and improved travel times in the corridor. The improved road infrastructure has stimulated socio-economic development in the corridor throughout the province and regionally. Both Provincial Communications Departments (PCDs) took advantage of the training and institutional strengthening programs to improve their operational effectiveness. Improvements were made in traffic safety but one section of road in Guangdong was problematic and required additional works to reduce traffic accidents. - 3 -  A. Relieve Road Transport Congestion and Improve the Integration of Inter-regional Trade and Commerce The Xiangtan to Leiyang Expressway (XLE) in Hunan was opened to traffic in December 2000 and the Xiaotang to Gantang Expressway (XGE) in Guangdong opened in April 2003. All interconnecting and other roads included in the project were completed and opened to traffic. The objective of reducing congestion on roads parallel to the new road and increasing the parallel road speeds was met. Of the total 2003 corridor traffic, the expressway took 72% in Hunan and 93% in Guangdong. The diversion rate to the expressway is similar to that predicted in Hunan, but 60% higher (93% vs. 55% predicted) in Guangdong. Travel time has been considerably reduced in both provinces. The project has therefore made a significant contribution to inter-regional trade. It was a key component of the Beijing-Zhuhai (Jingzhu) Expressway, linking the north and south of China. Crossing the provinces of Guangdong, Hunan, Hubei, Henan and Hebei over a distance of approximately 2,500 km, the Jingzhu Expressway had the highest priority of the 12 national trunk routes in the NTHS. As an example of the trade benefits, in 2003, even before the opening to traffic, the city of Shaoguan in Guangdong started the development of its "Expressway Economic Zone" and already reported 36 contracts signed with a total investment of Y1.5 billion (about US$180 million). The economic benefits of the project are considered sustainable, without any predictable element of risk, as traffic has been growing steadily since opening. B. Strengthen the institutional capacity at the Hunan and Guangdong Provincial Communication Departments The impact of technology transfer through training is not easy to measure due to difficulties in defining baseline parameters. However, the eagerness shown by the leaders of both provinces to engage their staff in training activities is evidence of the importance they attached to acquiring modern highway management techniques. More staff received training than the number planned in the Bank's Staff Appraisal Report (SAR). Overseas training took place in North America, Australia and eight different countries in Europe. The topics of training included: operational management, maintenance management, and information systems, traffic engineering and management, mountainous expressways and tunnel maintenance, and highway safety. Numerous training courses were also organized locally. Through overseas training and study tours, and participation in studies and supervision during project implementation, the highway staff of both provinces received satisfactory exposure to new concepts and practices in highway management and technology. C. Develop a policy dialogue in the areas of the commercialization and corporatization of provincial expressway companies, highway maintenance management, and transport and economic integration Hunan Province: The expressway commercialization study provided useful guidance to HPCD for moving the toll road sector of the province towards market based activities. The toll rate study provided further useful guidance for adjusting toll rates on the expressway to the market and to be consistent with other provinces. The toll rates retained for Hunan and Guangdong, of about 0.45 Y/vehicle-km for small vehicles and ranging from 1.30 to 1.35 for heavy vehicles, are close to the average of toll rates charged in a number of other provinces. The highway maintenance study made recommendations regarding the collection of information necessary for the organization of maintenance, modern technology for pavement maintenance, and maintenance planning and financing. In parallel with the study, the HPCD further developed its - 4 -  pavement and bridge management systems. By the end of the project, all the main paved roads and all bridges in the province had been registered in the systems. Guangdong Province: The study on transport and economic integration provided useful information on transportation and its potential role in economic development. It also gave valuable suggestions on planning and decision making for new transport networks, and identified transport nodes where goods and passenger terminals could be located for modal interchanges. D. Improve the safety of road transport. Hunan Province: A number of road safety manuals were prepared and provincial road safety seminars were held annually since 1997. All were very well received and professionally executed. The seminars continued under the Fourth National Highway Project (NH4) and Hunan officials have indicated that they will continue with the seminars after completion of NH4. A pilot study and remedial works at black spots was conducted on NR 107 to serve as a model for the province. All road safety components under NH2 were completed satisfactorily and were followed by an implementation phase under the NH4 project. The key performance indicators given in Annex 1 show a substantially reduced number of accidents involving fatalities per 10,000 registered vehicles from 18 in 1999 to 5 in 2003, and well below the 2005 objective of 10 accidents per 10,000 registered vehicles. Guangdong Province: The component in Guangdong Province focused on expressway safety given by the rapidly expanding network of expressways in the province. Several efforts were made towards establishing an Expressway Road Safety Organization comprising the various parties involved, such as the traffic police, the Highway Administration Bureau (HAB), the maintenance units, and the maintenance operating companies. The HAB has also been issuing a monthly road safety report since April 2001, distributed to all the relevant parties. In 1999, the Ministry of Communication (MOC) issued an order to regulate over-loaded vehicles. Guangdong province introduced a series of measures to address the problem, including stopping the overloading vehicles and unloading the goods and levying fines for damage of the roads. Fixed weighing stations were established in 2001 under a pilot project. The province continued with its black spot eradication program and introduced a number of road safety initiatives. The safety indicator for Guangdong at 12 fatalities per 10,000 registered vehicles for 2003 is in line with the benchmark set in the SAR for 2002, and substantially lower than the 1996 baseline accident record of 20 fatalities per 10,000 vehicles. 4.2 Outputs by components: Construction of Works included expressways, interconnecting roads and other roads as follows: (for components A, B and C - US$938.4 million, SAR estimate includes contingencies; US$980.0 million ICR; actual costs include all civil works) A. Construction of Expressways Hunan Province: This was the first Bank financed highway project in Hunan. Expressway construction included 10 interchanges and about 37 km of connecting roads. The project's original slope design had to be modified and problems for bridge foundations were encountered with karstic holes. These factors contributed to increase the contract costs to some 43% above appraisal estimates. The quality of construction was rated excellent, with smooth pavement and an important effort made for the planting "which makes this expressway nice in the landscape" (April 2001 supervision mission). The expressway was opened to traffic on December 26, 2000. - 5 -  Guangdong Province: The expressway traversed a mountainous area and 25% of the 110 km were tunnels (14 km) and bridges (13 km). Several alternative alignments were evaluated at appraisal and the completed detailed design was reviewed and found satisfactory by foreign consultants in 1996. In spite of what appeared as a thorough preparation, the contractors soon encountered substantial difficulties. The complex geological conditions, which had been underestimated in the design stage, affected the tunnels, bridge foundations and slopes of cuts and embankments. In many locations, the original design was not appropriate for the given topography and geology. In addition, the construction of a new standard highway in the same corridor as the expressway had changed the existing terrain conditions and created new obstacles for bridge pillars in particular. The work contracts started in November 1998, and the larger contracts that included bridges and tunnels took three years until November 2001. The opening of the expressway was delayed by about 18 months until April 2003 because of the need to redesign many parts of the project. Despite the numerous problems and delays encountered during construction, the final result was deemed very good when a Bank mission visited in July 2003. All the slopes appeared very stable, the tunnels looked dry with appropriate lighting and ventilation, and the pavement is smooth with good marking. The expressway looks well integrated in the landscape as a result of the great efforts made for the greening and planting, and rest areas have been provided for drivers to stop and admire the frequent scenic views. B. Construction of Interconnecting and Other roads Hunan Province: The interconnecting roads program included: (i) the construction of the Xiangtan-Zhuzhou (XZH) Highway, which was a 16 km divided, four-lane Class I road; and (ii) the upgrading of 23 km Class II roads linking the expressway to various cities and towns, namely: 5 km linking Zhuting interchange with PR1815; 4.7 km linking Xintang interchange with PR1820 to Hengshan and Hengdong; 3 km at Xinshi interchange linking with the Xiangjian bridge and NR107; and 8.4 km linking Leiyang interchange with NR107. Although the interconnecting roads were completed, the linking of the expressway with the road network was a weakness in the project. For example: (i) interchanges were not always located in the most appropriate sites; (ii) the city of Hengyang was served only by a Class II road in anticipation of a future connection to the Kunming expressway, and in the interim, it is poorly served for connections to NH2; (iii) some local governments had insufficient funds to upgrade their connecting roads; (iv) the locally financed road section to Zhuzhou had inconsistent design standards relative to the NH2 financed sections. Bank missions identified a number of safety related issues for the local roads which were addressed to varying degrees. Lessons learned from NH2 were applied to other Bank funded expressway projects, for example, projects now include all interconnecting roads with a clear agreement with local governments as to the required works and delivery schedule. Guangdong Province: Interconnecting roads consisted of new construction and upgrading of 10 short road sections, with a total length of 2 km to connect the interchanges with existing Class II roads. These works were included under the contract for the expressway. C. Construction of Loudi-Lianyuan Highway The Loudi-Lianyuan Highway (LLH) links two important industrial cities and is part of a new route from Changsha to Lianyuan to be extended in the future to western Hunan. Construction of this road also encountered technical difficulties due to terrain and geology. The frequent rains usually allowed work for only 120 days per year. The contracts signed for a period of 30 months were overly ambitious and had to be extended to 48 months. The road was finally opened to traffic at the end of September 2002. Many houses were built in the vicinity of this road during the extended length of the construction period, in spite of the fact that the highway and its accesses were designed as an auto only access controlled highway. The original design specified a speed of 80 km/h, in accordance with MOC standards, but Bank missions - 6 -  expressed concern about the incompatibility of high speed vehicles trying to mix with pedestrians, bicycles, tractors and animal carts and suggested that the road be reclassified. The MOC drew lessons from this experience and cancelled this type of road in the new standards. D. Construction of Electrical and Mechanical Works (US$86.2 million SAR; US$29.8 million ICR) In Hunan, substantial delays were experienced with the procurement of the E&M equipment. These were not completed until February 2004 and formally handed over in June 2004. Due to this delay the expressway, and in particular the toll collection, had to operate for three and a half years with a manual system. The delays also required extending the loan closing-date by one year. Guangdong province took advantage of its previous experience with E&M procurement and managed to complete the works before the opening of the project to traffic. E. Construction Supervision Services (US$23.4 million SAR; US$26.2 million ICR) Hunan Province: The construction supervision services were provided by foreign and domestic consultants. For the latter, there were 18 contracts implemented by 17 supervision units. The foreign consultants shared their international experiences and assisted the domestic consultants with the application of International Federation of Consulting Engineers (FIDIC) standards. The performance of both domestic and foreign consultants was found satisfactory. Guangdong Province: A single domestic consultant acted as Engineer for the project and there was a single foreign consultant. Their performance was satisfactory. F. Technical Assistance and Studies (US$1.6 million SAR; US$3.3 million ICR ) 1 The five studies in the project (three in Hunan and two in Guangdong) were completed satisfactorily, albeit delivering them between two and four years behind schedule. This illustrates the continuing difficulty of the Bank in convincing its Chinese clients of the value of technical assistance when compared to the more tangible outputs of civil works and equipment. The results of the studies have already been discussed in 4.1 above. The more practical of the studies were those on toll rates, which laid the basis for setting tolls on the new expressways, and the safety study in Hunan, which produced a number of manuals, such as: the safety audit manual for design and the safety manual at road work sites. A number of domestic experts took part in the safety study, thus gaining further experience in the matter. G. Training (US$4.0 million SAR; US$1.7 million ICR) Training activities were eagerly pursued in both provinces and the number of man-months (m-m) of training attended exceeded the targets of the SAR. In Hunan training reached a total of 849 m-m domestically and 116 m-m abroad and in Guangdong, 672 m-m domestically and 114 m-m abroad. Training covered road safety, expressway operation and environmental protection in Hunan. In Guangdong, the topics ranged even more broadly, including in addition to the above topics: highway financing, human resource development, mountainous expressway construction, project planning and management, and quality control management. In addition to the formal training program, the staff of both provinces acquired valuable experience in the construction and supervision of expressways and in the application of the safeguard policies. ____________________________________________________________________________ Note: 1/The Guangdong Project Office had major difficulties in reconciling their final accounts due to staff changes. While most problems were resolved with the assistance of a Bank mission in early 2005, the allocation for `Technical Assistance' was not. This figure should therefore be viewed as unreliable. - 7 -  H. Equipment (US$24.1 million SAR; US$9.5 million ICR) In Hunan, the project included equipment for road maintenance, strengthening of laboratories, environmental monitoring, and further development of the road data base and pavement management system. In Guangdong, the province decided not to procure any equipment to maintain the expressway because they intended to contract the maintenance out. All other equipment described in the SAR was procured satisfactorily and is fully utilized. I. Safeguard Policy Environmental Protection The finished products on the two expressways and the Loudi-Lianyuan highway show a pleasant environment. Trees have been planted to provide protection against erosion and excavated material has been properly shaped. Some environmental problems were noted during construction. In particular, contractor camps had poor sanitary conditions for the workers, some dumped unsightly material and others did not use sufficient spray trucks to minimize dust. These deficiencies were pointed out repeatedly by the Bank's missions, but environmental supervision remained weak as the borrower was concerned primarily with resolving the technical difficulties of the works and the necessary design and contract modifications. The implementing agencies followed only partially the agreed mitigation measures, allowing negative environmental impacts to occur, with the intention of mitigating the impacts later on. Improvements were made as the pressure to solve other issues diminished. Construction camps were gradually improved and areas of disposed material were landscaped. Air, water and noise were monitored regularly and found within the contractual limits, except for some dust from trucks. Land Acquisition and Resettlement (US$55.1 million SAR; US$64.8 million ICR) Hunan Province: The resettlement work associated with the project was completed in 1997. After that, the main activity of the Provincial Resettlement Office (PRO) was to carry out the maintenance of infrastructure affected by the civil works. The resettlement process was well managed from the set up of the PRO in November 1994, followed within one month by the setting up of offices in city, county and townships affected by the project. The offices were fully staffed as required and, after several years of experience, most of the employees became resettlement experts. The project affected persons (PAPs) were generally satisfied with the process and the compensation they received. Their new housing is typically of much higher quality than their previous homes, and with better access to utilities. Many of the new houses are two or three stories high while the old ones were only one story. The total area of rebuilt houses was 495,531 m2 compared with 278,000 m2 of the demolition. Living standards increased also as households were able to diversify their production from rice to fish, pig farms and orchard cultivation. Guangdong Province: Land acquisition and resettlement was largely completed by the end of 1997. Bank supervision missions found that impressive progress was achieved in improving the livelihood of the PAPs. Average incomes were restored and all compensations delivered in a timely fashion. All house construction was completed and all PAPs moved to new houses. According to surveys conducted independently by the Guangzhou Social Science Institute, 80% of the original houses of the removed families were earth-type houses of poor quality, without water or electricity, and with poor lighting and ventilation. The replacement houses were typically of brick and reinforced concrete with more floor space and access to water and electricity. The expressway construction also provided villagers with work and up to one third of the local labor force was employed in one or other related activity. Many services including hotels, restaurants and - 8 -  repair shops were started by the residents in smaller towns along the expressway, in addition to the already mentioned Expressway Economic Zone in the city of Shaoguan. 4.3 Net Present Value/Economic rate of return: The economic evaluation covers the two major components of the project: (a) the two expressways (XLE in Hunan province, and XGE in Guangdong province), including the interchanges and connecting roads, and (b) the other highways in Hunan province. Both costs and benefits reflect December 2004 prices. The results of the two expressways are summarized in the following table. The detailed economic analysis is provided in Annex 3. EIRR (in %) AND ENPV (12%, Y million) of Expressways SAR ICR EIRR ENPV EIRR ENPV Hunan (XLE) 26.3 4,976.0 19.0 2,598.7 Guangdong (XGE) 18.1 2,111.0 19.7 2,636.3 Total 22.1 7,087.0 19.3 5,241.5 Note: The ICR ENPV is different to the sum of the individual ENPVs due to different start and end dates of the discount periods. The combined economic internal rate of return (EIRR) of the two expressways is estimated at 19 percent; the economic net present value (ENPV), at a discount rate of 12 percent, is estimated at Y 5,242 million. Hunan Province: In Hunan, the EIRR and ENPV of the XLE are lower than the SAR estimate, mainly because of the lower demand for traffic in the corridor. While the SAR estimated approximately 20,000 veh/day in 2003, the actual flow was approximately 14,000. The SAR diversion rate was 74 percent against an observed rate of 72.5 percent which shows that the relative demand for the expressway was correctly forecasted. Guangdong Province: In Guangdong, the ICR EIRR and ENPV of the XGE are higher than anticipated at appraisal, mainly due to the much higher traffic levels. The SAR anticipated 2003 traffic at about 8,000 veh/day; the actual traffic was over 14,000 veh/day. The diversion rate was 93 percent compared to the SAR estimate of 55 percent. The following table shows that the overall performance of the other roads exceeded the SAR estimates. EIRR (in %) AND ENPV (12%, Y million) of Other Roads SAR ICR EIRR ENPV EIRR ENPV Loudi-Lianyuan 20.7 200.0 22.9 239.7 Zhuzhou-Xiangtan 47.0 453.0 93.6 619.7 Total 28.4 653.0 38.5 859.4 - 9 -  As shown in the following table, the EIRR for the entire project (the two expressways and the other roads) is estimated at 20.2 percent, compared with 22.4 percent estimated in the SAR. The ENPV, at 12 percent discount rate, is estimated Y 6,094 million compared with Y 7,733 million estimated in the SAR. The lower returns are mainly due to lower than anticipated traffic in Hunan province. EIRR (in %) AND ENPV (12%, Y million) of Project SAR ICR EIRR ENPV EIRR ENPV Expressways (XGE & XLE) 22.1 7,087.0 19.3 5,241.5 Other Highways 28.4 653.0 38.5 859.4 Project Total 22.4 7,733.0 20.2 6,094.3 Note: The ICR ENPV is different to the sum of the individual ENPVs due to different start and end dates of the discount periods. 4.4 Financial rate of return: The XLE in Hunan was opened to traffic in December 2000, and the Guangdong XGE in April 2003. Hunan and Guangdong each formed financially independent expressway companies in their provinces, which are responsible for the day-to-day management, operations and maintenance of the expressways. As shown in Annex 3, the main income of these companies is from tolls charged to the road users. The toll rates are set by the provincial government. The toll revenues are used to cover amortization charges of the Bank and domestic loans. Based on the current toll revenue and operating costs, the companies are able to generate enough total revenue over the loan period to finance the operation, maintenance, and debt service. The profits, however, particularly for Hunan, will be low during the early years of operation due to the high debt-to-equity ratio and the lower than expected traffic demand. The depreciation reserve represents a significant portion (about 55 - 60 percent) of the annual operating costs for each expressway, or about 20 - 30 percent of the annual revenue. For example, in 2004 the depreciation reserves were estimated to be about Y 135 million and Y 100 million for the XLE and XGE respectively. The higher operating costs, resulting from the higher depreciation, would reduce the tax liability and the higher depreciation also helps ensure strong internal cash flows during the life of the project. This insulates the two expressway companies from issues arising from their high debt-to-equity ratios. They are not likely to need to use their equity for external borrowings during the life of the project. There was no financial analysis in the SAR. The detailed financial analysis is presented in Annex 3 and summarized as follows. FIRR (in %) AND FNPV (Y million) of Total Project SAR ICR FIRR FNPV Hunan (4.77% FCI) -- -- -1.4 -2,084.9 Guangdong (4.79% FCI) -- -- -0.8 -2,305.5 Total (4.78% FCI) -- -- -1.1 -4,389.9 Note: FCI is the `Financial Cost of Capital' which was used to calculate the FIRR and FNPV. - 10 -  Based on the current financial status, the expressways may not need any additional external financial assistance. However, the low profit margin produces a negative impact on the financial internal rate of return (FIRR) for the capital investments. The results of the financial evaluation for the project show that the FIRR of the project was -1.1 percent with a NPV (4.78 percent) of Y - 4,390 million. Of which, Hunan has an estimated FIRR of -1.4 percent and Guangdong -0.8 percent. 4.5 Institutional development impact: Overall, the institutional impact of the project was positive. The training program was well attended and successful, and many highway staff gained experience during the construction of the roads and the management of the contracts. Frequent Bank visits and interactions with the implementing agencies contributed to enhancing their knowledge on improving the environment, carrying out the resettlement activities and improving road safety. In Hunan province, the maintenance study combined with further development of the road data base (RDB), the pavement management system (PMS) and bridge management system (BMS) have all contributed to improve maintenance in the province. The PMS has, unfortunately, not been maintained with up-to-date data and includes only bituminous roads. The BMS has been maintained and populated with recent data. Road safety manuals and the annual seminars have contributed to sensitizing the staff on key safety issues. Vehicle weight control was prioritized following the unfortunate accidents which accompanied the opening of the expressway in Guangdong province. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The rainy seasons, although anticipated, still delayed the works in both Hunan and Guangdong. In particular, rain precipitation was higher than normal due to El Ni