China - Dalian Port Project

Document of The World Bank FOR OFFICIAL USE ONLY <~~ iS07- rcs N Report No. 6588-CiA STAFF APPRAISAL REPORT CHINA DALIAN PORT PROJECT January 5, 1988 Transport and Energy Operations Division Country Department 3 Asia Regional Office This document has a restricted distribu'ion and mas be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of December 1987) Currency name = Renminbi Currency unit = Yuan (Y) US$1.00 = Y 3.70 US$0.27 = Y 1.00 US$270,270 = Y 1,000,000 FISCAL YEtR January 1 to December 31 MEASUREMENT EQUIVALENTS MeLric System British/US system 1 meter (m) = 3.281 feet 1 square meter ( 2) = 10.764 square feet ! cubic meter (m ) = 35.315 cubic feet 1 kilometer (km) = 0.621 mile 1 ton-km = 0.621 ton-mile 1 ton = 2,208 pounds PRINCIPAL ABBREVIATIONS AND ACRONYMS USED AAPRC - Audit Administration of the Peoples Republic. of China CHC - Cargo Handling Corpora:ion cif - Cost, insurance and freight COS';O - China Ocean Shipping Corporation dwt - Dead weight tons ERR - Economic Rate of Return fob - Free on board FYP - Five Year Plan GOC - Government of China MLW - Mean Low Water MOC - Ministry of Communications MOF - Ministry of Finance MR - Ministry of Railways DM - Dalian Municipality PDA - Port of Dalian Authority nrt - Net registered ton SPC - State Planning Commission USCD - United Stevedoring Company of Dalian  CHINA FOR OMCIAL USE ONLY OALIAN PORT PROJECT Table of Contents Page No. I THE TRANSPORT SECTOR ...................... ............... 1 A.* Traffic .......... ~ ..c..ec. c ............* * *.... ......... 1 B . Investment.......................................,.. 1 D. Transport Issues and Objectives in the 1980s ......... 3 II. THE PORTS SUBSECTOR ..................................... 4 A. Port Facilities4............ .....cge 4 B. Traffic .. ....... ...cc.ee...~.. ..................g.e cc . ..... 4 C. Investment Priorities and Technology .............. . 4 D. Organization and Man agementin..............ent.... 4 E. Operations and Maintenance..o..................ss.... 5 FC. Tarfsar i f fs....... .. .....eec. .. 6 G. The Role of the Bank Groupo.. o..................... 7 H. Experience in Past Lending ........................... 8 III. DALIAN PORT.. . ...... e e e e e e c c c e c e............... 8 A. Facilities ............................... 8 C. Operat ions ............................... 9 D. Organization and Management ... .................. 10 E. Planning, Budgeting, Accounting and Auditing ......... l F. Port and Hinterland Connections o0000969600664*6..... 11 iV. THE PROJECT.. ......... 12 A. Project Objectives. s......e.e..... ...... cc........... .o 12 B. Description of the Main Project Item s c.. ..cc 12 C. Cost Estimates . . ....... ..c..c ..ec 14 D. Financing Plan. ccc..cc...c....c..c.c............c.cc..c.c......cc..c15 E. Status of Preparation. c cc c cccc . ....................... 16 F. Implementation. 16 G. Procurement . . ee e e e e ce e c c e c c. c e e e c e e c c c 17 H. Disbursement ...... c 18 I. Ecology and Environment...o ............ .... o....... 18 Jo. Reporting... ...... ...... . 19 This report was written by Ismail Mobarek, Keith Thomas and Supee Teravaninthorn, who appraised thi project in November 1986. This document has a restricted distributiou and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page iO, V. ECONOMIC EVALUATION. . ....**....... o.... 20 A. Economic Evaluation... ............................o. 20 B. Overall Evaluation and Sensitivity Analysis.......o.. 20 C. Risks. ........ e,e o eo g eeoooeoe eg ..ee.e.o.eo...... 21 VI. FINANCIAL ANALYSIS. AYI*oeo e.g ooee....eeco.oo gse.o . e 21 Ao Past Results.o.o.oosu l ts.... s......... oooo..o......o 21 B. Future Financial Performanceggo .e..e.ooo..e.. o 22 VII. AGREEMENTS TO BE REACHED (,ND RECOHMENDATIOVNSoeoe..e....o 24 ANNEXES 1. Documents in Project File 2. Outline of Requirements for Technical Training 3. Terms of Reference: Financial Training 4. Technical Assistance and Training: Schedule and Estimated Costs 5. Tarms of Reterence: Update of the Port's Master Plan 6. Terms of Reference: Intermodal Container Distribution Study 7. Terms of Reference: Construction Supervision TABLES 3.1 Dalian Port-Existing Terminals 4.1 Project Cost Estimates (US$) 4.2 Project Cost Estimate (RMB) 4.3 Equipment Cost Estimate 4.4 Di&,bursement Schedule 5.1 Port Traffic, 1977-2010 5.2 Cargo Handling Without and With Proposed Berths - General Cargo Berth 5.3 Cargo Handling Without and With Proposed Berths - Container Berth 5.4 Economic Benefits - General Cargo Berth 5.5 Economic Benefits - Container Berth 5.6 Unit Cost of Ship Waiting in Port 5.7 Economic Rate of Return (ERR) ard Sensitivity Analysis 6.1 PDA: Income Statements, 1983-93 6.2 PDA: Funds Flow Statements, 1983-93 6.3 PDA: Balance Sheets, 1983-93 6.4 Anaumptions for the Financial Forecasts  - iii - CHARTS A. Organization Chart FDA B. Implementation Schedule C. Procuremnt Schedule MAPS IBRD 19866  CHINA DALIAN PORT PROJECT Loan/Credit and Project Sumary Borrowert People's Republic of China Beneficiary: Port of Dalian Authority (PDA) Amount: $96.0 million equivalent comprising a bank loan of $71.0 million and an IDA Credit of SDR 18.2 million ($25.0 million equivalent) Terms: For the loan, twenty years, including five years of grace, at the standard variable interest rate; for the credit, standard with 35 years maturity. Reiending Terms: The proceeds of the loan and credit would be onlent from the Government of China (GOC) to PDA under a subsidiary loan agreement with a 20-year term, including 5 years of grace, at an interest rate of 5X p.a. The foreign exchange risk between the dollar and RMB and commitment fees of three quarters of 1% would be borne by PDA. Proiect (objectives: The principal objective of the project is to assist the Government in the effort to relieve congestion and increase the handling capacity in the ports subsector. The project would provide for infrastructure development in a key port in northeastern China, as well as technical t.ssistance and training to strengthen the port's manage- ment and improve its operating capabilities and to address intermodal aspects of port operations. Project Description: The proposed project consists of: (a) construction of two container berths and two general purpose berths capable of conversion to container berths as and when needed, to- gether with the necessary infrastructure such as dredging, reclamation, pavement, roadways, railways, water supply and sewerage systems; (b) provision of "ie required load- ing/unloading eq.ipment, navigational aids and some harbor operation equipment and boats; and (c) provision of training and technical assistance for port planning, con- struction supervision, financial management, and prepar- ation of two studies, one for upddting the port's Master Plan and the other for intermodal distribution of containers in the hinterland of Dalian.  - ii - Risk: The project has no significant risks since all components involve proven technology that has been in extended use in China or in other parts of the world. Additional training will be provided to PDA's personnel to assure the proper operation of the facilities. The only possible risk would be of delay in project start-up due to t.^e first-time use of ICB procedures by PDA. To minimize this risk, appro- priate Bank assistance and s"pervision will be provided in the early stages. Estimated Project Costs: Local Foreign Total -------------(US$ million)----------- Civil works 113.9 54.6 168.5 Equipment 1.3 26.0 27.3 Training 1.0 1.5 2.5 Technical Assistance 2.0 2.4 4.4 Subtotal 118.2 84.5 202.7 Contingencies Physical 11.3 8.5 20.3 Price 4.6 3.0 7.6 Total Project Cost /a 134.6 96.0 230.6 Financing Plan: Bank Loan - 71.0 71.0 IDA - 25.0 25.0 Government 134.6 - 134.6 Total 134.6 96.0 230.6 Estimated Disbursements: Bank FY 1989 1990 1991 1992 1993 Annual 30.0 30.0 20.0 13.0 3.0 Cumulative 30.0 60.0 80.0 93.0 96.0 Economic Rate of Return: 201 Map: IBRD No. 19866 /a The project is exempt from taxes and duties.  CHIIIA DALIAN PORT PROW'3CT I* THE TRANSPORT SECTOR 1.1 Chinese policy statements repeatedly identify transportation and enet.gy shortages as the two most critical bottlenecks in the economy. Coal is at the heart of both problems, because coal is simultaneously the most impor- tant source of energy and the largest user of transport capacity. This dual problem with coal is exacerbated by Chin&'s high level of energy consumption per unit of CDP (about two and a half times that of other LDCs). However, the need to ship large volumes of coal is not the sole cause of the transportation bottleneck. The rapid growth of China's economy in recent years has stimula- ted an increasing demand for the shipment of commodities of all sorts, and for passenger travel as well. Efforts to reduce waste within the transport system (for example, by eliminating cross-hauling of the same commodity, increasing the processing of raw materials before shipment, and increasing the intensity of road and waterway utilization) are certainly desirable. More fun- damentally, however, the Government's strategy for solving transportation shortages will have to rely on an expansion of the system's capacity, primar- ily by increasing the productivity of existing facilities wherever possible, and secondarily by building new facilities where needed. A. Traffic 1.2 Freight Traffic. Domestic freight transported in 1985 reached 1,276 billion ton-km, representing a 131 increase over 1984 and an average annual growth rate since 1952 of almost 91, consistently higher than the gtowth of domestic product. By the year 2000, domestic freigrhz traffic could be in the range of 3,000 billion ton-km. The modal split has moved toward a more balanced use of modes, with the railways' dominant share of 82% in 1952 reduced to 641 by 1985. 1.3 Passenger traffic reached 425 billion passenger-km (p-km) in 1985, up 17% over 1984 and representing an average annual growth rate of 13% since 1978 and almost 9% since 1952. This illustrates the increasing demand for travel as Income grows. It is likely that this growth would have been even more rapid if it had not been constrained by the limited capacity of the transport sector, particularly the railways, to offer more passenger services. Railways are the major passenger carrier, handling 57% of the traffic in 1985. Despite the rapid growth of passenger traffic in recent years, the mobility of the Chinese people is still much lower than that of people in countries with comparable income levels. By tha turn of the century, passenger traffic may well reach about 1,500 billion p-km per year. B. Investment 1.4 Over the period 1953-85, some Y 154 billion, or 14% of all new investments under central government control, went to transport. In comparison with other countries, annual levels of transport investment appear  - 2 - somewhat on the low side, a factor contributing to trarsport being a bottle- neck to economic development. For example, by 1983, 30 million tons of coal had accumulated in Shanxi Province for lack of transport, and some of this stockpiled coal was destroyed by spontaneous combustion. Despite a recent policy of curtailing production to match available transport, the volume of coal stockpiled has increased to about 50 million tons at the end of 1987. Rural areas are short of tvansport, both for agriculture and for other rural eaiterprises. In the ports, lack of proper handling facilities is hampering trade in bulk commodities such as fertilizers, cement and grain. In the coming decades, a much larger investment effort will be needed in transport if these bottlenecks are to be overcome. C. Systems 1.5 The railway system consists of some 52,000 route-km, of which about 9,700 km are double or multiple-track and 3,100 km are electrified. The net- work is served by 114100 locomotives, 291,000 freight cars and 19,600 passen- ger coaches. At present, 68% of tractive power is still steam, 28% diesel and 4% electric. Freight traffic density averages 15 million net ton-km per route-km which is the highest freight density in the world after the Soviet Union, and 50% higher than freight density in the United State'. Freight traffic reaching 812 billion t-km in 1985. Growth averaged 6.2% p.a. since 1978, and reached 9% in 1985. Three-quarters of all freight traffic involves ten commodities including coal, iron and steel, grain and construction materials. The passenger traffic density of 4.2 million passenger-km per route-km also ranks second in the world, after India. In 1985 1.1 billion passengers were carried. The average annual increase since 1978 has been 11%. Despite some possible rationalization in the transport of natural resources and heavy industrial outputs, there is no question but that the transport demand for the major commodities will continue to grow rapidly. Thus, although its share of the total is expected to decrease, rail traffic will continue to grow, requiring massive investments in linc capacity, motive power and rolling stock well into the future. 1.6 The highway system comprised about 927,000 km in 1984, of which about 180,000 km were asphalt paved, about 510,000 km, gravel and sand paved, and the remainder dirt roads. Despite impressive expansion of the road net- work since 1949, when only some 80,000 km of motorable roads existed, the roads in China today arc inadequate because: (a) pavement strength and quality are poor; (b) there are many thousand kilometers of extremely rough macadam- surtaced roads with traffic in excess of 300 average daily traffic (ADT); (c) congestion is a growing problem particularly near cities, due to the mixing of slow and fast moving traffic; and (d) there are gaps of about 4,000 km in major national roads linking large cities and provincial capitals. The road network and road transport in China today can therefore be characterized as underdeveloped. Road maintenance, however, is well organized and currently absorbs much of the attention and resources of the provincial and other local road authorities. Except in western China, the highway network is still very much a system of feeder roads to the railways. Nevertheless, motor traffic has teportedly grown at a very high overall annual average of 15% on the national highways since 1978.  -3- D. Transport Issues and Objectives in the 1980s 1.7 The transport system has been severely taxed by the pace of recent economic development and capacity constraints are evident in all mode.. Coal transportation is a particularly serious case because of its significance for energy supply and hence for industrial 3rowth. At preeent, transport is a greater constraint on the sunply of energy than is coal mine development. China also needs to substantially expand its port and waterway facilities to relieve the growing hindranLe to external trade caused by inadequate berth capacity and container handling capability. But the most serious need is for dramatically expanded road transport, especially in rural areas where increased specialization has created an urgent demand for better farm-to- market transport services. Road transport wiil aiio be called upon to meet a growing share of the demand for passenger transportation from the increasingly mobile population. 1.8 China's Seventh Five-Year Plan (1986-90. recognizes %ll these sectoral needs. By the end of the Plan period, freight traffic is projected to be 45% higher than in 1985, and passenger traffic 60% higher, witis a dis- proportionately greatei share of the increase falling on road transport. To meet these needs, substancial investments are envisioned, especially in new rail lines, double-tracking and electrification of existing lines, new high- ways, and more berth3 at coastal ports. The Plan also proposes to secure efficiency gains in transportation from operational improvements; these include the development of integrated intermGdal transportation networks, in particular for coal transportation and for import/export trade, and technolo- gical improvements such as container-handling facilities and intermodal trans- port centers. To facilitate these developments, the Plan envisions signifi- cant institutional changes in the sector, including an extension of the policy of separating the functions of government from those of operating enterprises and delegating greater authority to the latter (recently begun in the ports subsector, paras. 2.4-5). Continuing adjustment of charges for transportation services is expected to assist the funding of investments in the sector from internally generated resources. 1.9 The Bank subscribes to the Government's objectives for development of the transport sector, and is supporting its initiatives with both financial and technical assistance. Three railway projects (Loans 2394-CHA, 2q40-CHA, and 2678/Cr. 1680-CHA) have assisted the expansion of capacity on key routes and the manufacture of electric locomotives, passenger coaches and signalling equipment; two highway projects (Loan 2539/Credit 1594-CHA, and Loan 2811/Credit 1792-CHA) involves the construction or improvement of national and rural roads. Port-related activities are described in paras 2.18-2.19. Besides these subsector-specific operations, the Bank has recently begun to assist the Government in the conduct of strategic studies of a wider nature: a review of the utilization of water transport was recently completed, a comprehensive transportation study for Guangdong Province is ir progress, and another to cover the five provinces of the Shanghai Economic Zone has been proposed.  - 4 - II. THE PORTS SUBSECTOR A. Port Facilities 2.1 China has 15 major deep-water ports, but six of these handle over 80X of the total traffic: Shanghai, Dalian, Qingdac, Qinghuangdao, Huangpu and Tianjin. Shanghai, with 96 berths, is one of the ten largest ports in the world. In 1986 it handled 126 million tons of cargo and more than 10 million passengers. There are also many minor ports along China's 2,000-km coaatline and 110,000 km of navigable rivers. B. Traffic 2.2 By comparison with other developing countries, China's port traffic is low in relation to the size of its economy. However, it is now growing rapidly following the opening of the economy to foreign trade: between 1977 and 1985 traffic at the 15 major ports almost doubled to 311 million tons. Tonnages of domestic and foreign cargoes are in,creasing about equally but foreign traffic is growing at a faster rate. Foreign trade is expected to continue growing in stride with the economy as a whole; the Seventh Five-Year Plan envisions port traffic reaching 500 million tons by 1990, over 50% higher than the 1985 volume. C. Investment Priorities and Technology 2.3 In the Seventh Five Year Plan, Government proposes to invest over ' 10 billion in the subsector. Major investments include 120 deep water berths and 80 smaller ones, which together with other improvements would increase coastal harbor capacity to handle the 500 million tons envisioned in para. 2.2 above. 2.4 One of the Government's priorities for the Seventh Five-Year Plan is to update technology. For :he port subsector, this will involve in particular: (a) palletization and containerization facilities for break bulk cargo; (b) specialized handling equipment for bulk cargo, the majority of which is now mixed with break bulk handling, resulting in unnecessariiy low efficiency; and (c) computerization of documentation flow and management information at the berths. D. Organization and Management 2.5 The organization of the subsector is currently being changed in an effort to cbtain greater productivity and faster development by increasing local autonomy and accountability. Until recently, all the major ports in China were responsible to, and closely controlled by, the Ministry of Communi- cations (MOC). In 1985 a "pilot system refo.zm" was introduced in which the primary leadership of one port--Tianjin--was transferred from MOC to its local  governmel1t and ax the same time considerably greater autonomy was given to the port's management, particularly in relation to development planning and financial control. In 1986, revised organizational arrangements were made for the ports of Shanghai and Dalian, which were also placed under the primary leadership of their respective local governments. All remaining ocean ports will be transferred to local government control before ^.he end of 1988. 2.6 The objective of this program of decentralization is to develop the capability and initiative of the ports' local managements, in the interests of improved efficiency of operations and more effective development of the ports. However, the details of reallocation of responsibilities differ in the four cases so far implemented, most particularly as to the approval of long- term development plans (delegated in the cate if Tianjin, but retained by MOC in the case of Shanghai, Dalian and Huangpu) and the exemption of port profits from tax (complete for Tianjin, but partial for Shanghai, Dalian and Huangpu, although on a different basis than previously). Recent comments by Chinese leaders have expressed satisfaction with the program in general, but it is too early to evalliate the different organizational models, and hence to be sure what pattern may be adopted for the ports yet to be decentralized. 2.7 Although the decentralization program confers considerably greater authority and responsibility on port managements than hitherto--even in the cases of more limited delegation such as Shanghai, Dalian and Huangpu--the ports, although profitable, are still far from operating on a commercial basis. In particular, they are not free to develop I eir own tariffs (para. 2.14), or to compete for traffic, which is allocated y MOC. But all the ports are overloaded and would have little incentive to compete for business at present; there is in any event no foreign port which would be vulnerable to competition, so they could only compete amongst themselves. The gains from competition would thus likely be modest but the risk of introducing disorder into an already strained system could be high. In these circumstances the retention of central government control over tariffs and traffic allocation is prudent, and further movement towards a commercial basis is not expected until port capacity has been substantially increased and the new organizational models have been fully evaluated. E. Operations and Maintenance 2.8 All the major ports operate continuously with a three-shift system, but operations are increasingly hampered by congestion and by the fact that a lot of the equipment is outmoded and slow. In 1985 the average waiting time in Dalian port was 6.7 days, up from 5.7 days in 1983 and 3.6 days in 1981. Total port time in 1985 averaged 10.4 days. In Tianjin the average in 1983 was 5.5 days; in 1984 it increased to 7 days. Other aspects of port opera- tiLns contribute significantly to long berth times in Chinese ports. First, documentation procedures are complicated end ponderous. Frequently this results in port equipment not being in the right place at the right time and sometimes in cargoes arriving before bills of lading have been received by the port. Second, in some of the southern ports a large proportion of traffic involves s.ip-to-ship or ship-to-barge transfers, some of which could be avoided by direct trading between minor ports or by using modern sea-going barges capable of operating on both coastal routes dnd inland waterways.  - 6 - Third, not all shipping and domestic distribution is arranged as efficiently as it might be and some transshipment cargoes could be distributed more easily by rail from another port. MOC has begun rationalizing some traffic flows. shanghai, for example, has already had some coal traffic directed to their final destinations in surrounding provinces and, by the year 2000, approxi- mately 40 million tons of other transshipment traffic is expected to be diverted from the port. 2.9 Recently the ports of Shanghai and Dalian have each retained foreign consultants to review their operations, identify weaknesses and recommend improvements. The reports from these reviews have been submitted and their conclusions and recommendations are currently under implementation as part of the Seventh Five Year Plan. 2.10 Each major port has its own maintenance works and port equipment is kept serviceable, although much of the equipment suffers frequent breakdowns because of age. The most serious maintenance problem is siltation at the estuarine ports and this requires considerable routine dredging. Some of the dredging ma- be excessive and might be reduced as a result of survey work to provide a better understanding of estuarine flows. 2.11 Congestion is the overriding problem affecting virtually all of China's ports. The shortage of berths causes long waiting times; in 1985 the average was 11.1 days, up from 8.7 days in 1984. The extent of port conges- tion is so serious that it threatens to hold back further expansion of China's foreign trade. Within the inadequate total berth capacity, the distribution of dedicated facilities does not match the present pattern of traffic. In particular, container handling capacity is well below the potential for con- tainerized cargo, much of which therefore has to be inefficiently handled as general cargo, Specialized equipment is similarly scLLce, and much of the equipment that exists is old and outmoded. As a result, ships are further delayed by slow turnaround times once they have reached a berth. 2.12 A scarcity of storage area and inadequate rail and road links hamper the efficient turnaround of arriving cargo in a number of the ports. The pro- per interfacing of different transportation modes is an aspect of port devel- opment which is now receiving the urgent attention of MOC; however, only road connections are within its own jurisdiction, while railway connections are the responsibility of the Ministry of Railways (MR). MR is itself facing a seri- ous shortage of capacity, and the coordination of its own priority projects with those of MOC is important. 2.13 Port management systems need updating, particularly in the areas of operations control, management information, and costing. Computer capacity at most of the ports is small, and its enlargement is probably a prerequisite to improvement in all the above areas. F. Tariffs 2.14 The structure of port tarif.s and tariff rates are determined jointly by the MOC and the State Price Bureau. The present tariff structure was set up in 1978 on the basis of a somewhat arbitrary allocation of costs to  - 7 - the different port services. The structure also reflects all the distortions inherent in the prices of the different factor inputs. As a first step in rationalizing tariffs, the Bank's first port project in China (Ln 2207-CHA, October 1982) includes a study of the economic costs of providing port ser- vices for coal and containers at the project facilities. This study is expected to be completed in 1988, following the first complete year of project operation. The results will be made available to Dalian port. 2.15 Foreign ships pay higher harbor dues and charges than local ships. About 80% of all Chinese cargo is carried in vessels owned or operated by the Chinese Ocean Shipping Company (COSCO), which is controlled directly by MOC. In national terms, port tariffs paid by COSCO are little more than a transfer payment between two parts of HOC. Tariff rates could be set for efficiency objectives, but instead they seem to reflect the relative financial strengths of COSCO and the ports and their different investment requirements. By con- trast, rates for foreign vessels seem to he set on the basis of what the mar- ket will bear. A 40% increase was effected in February 1985, but there was no increase in the lower rates charged for domestis vessels, and HOC says it has no immediate plans to increase these rates. 2.16 There are no shipping conference rates for Chinese ports and the ports only rarely pay demurrage charges for ship waiting. Charter contracts usually include an allowance for ship waiting time, but these charges are paid by the cargo owner, not by the port. Recently, however, ports have been sign- ing contracts with ship operators guaranteeing a certain turn around time, with demurrage charges payable by the port if the time is exceeded or premiums payable by the ship if it is handled faster. Usually the premiums far exceed the demurrage charges. 2.17 One of the conditions precedent to rational tariff action is the adoption of an accurate and uniform system of costing at the ports. At the present time none such exists, but the Bank has begun discussions with MOC on developing such a system, possibly with Bank funding. G. Tne Role of the Bank Group 2.18 The Bank has supported, and will continue to support, the Government's objective of expanding capacity and improving productivity in the ports. The first lending operation in the subsector (Three Ports Project, Ln. 2207-CHA) financed additional container handling capacity in Shanghai, Huangpu and Tianjin and a coal terminal at Huangpu. The second (Tianjin Port Project, Ln. 2689-CHA) is financing the construction of eleven additional berths at Tianjin for timber, construction materials and general cargo. The third (Huangpu Port Project, not yet effective) will finance the construction of five additional berths in the Xinsha area of Huangpu port for coal, iron ore, bulk fertilizer and general purpose. Further operations are in preparation for the ports of Shanghai, Xiamen and Ningbo. 2.19 The Government has already initiated new organizational models designed to improve the productivity and efficiency of port operations (para. 2.5). The Bank has supported management systems improvement with project components addressing computer development, technical studies and  - 8 - training, and containerization of cargo. The work of Bank missions has also been instrumental in developing Chinese expertise in the economic evaluation of investment projects, and in updating various aspects of port operation. H. Experience in Past Lending 2.20 Construction of the Three Ports Project (Loan 2207-CHA) is complete. Some minor equipmelit is still to be delivered before the loan closing date of June 30, ,988 (one year behind schedule envisioned at appraisal). There has been a considerable foreign exchange cost saving under the project as a result of bids being lower than expected, and $55 million of the original loan of $124 million has been cancelled. The project is problem free. The Tianjin Port Project (Loan 2689-CHA $130 million) is proceeding on schedule and completion is expected by December 1990. III. DALIAN PORT 3.1 Dalian port, built in 1899, the second largest port in China after Shanghai, is located in the northeast of China between the Yellow Sea and the Bo Hai on the Liaodong Peninsula (Map IBRD 19866). Its economic hinterland includes the three northeast provinces of Liaoning, Jilin and Heilongjiang and four large districis in the eastern part of Inner Mongolia, covering an area of 1.20 million kmi with a population of 102 million. There are no other ports which could economically serve these areas; the other ports in the vicinity (Yinkou at the mouth of the Liaohe river and Dandong at the mouth of the Yalu river) are both estuarial ports with inadequate water depth. 3.2 The tide at Dalian is semi-diurnal (twice daily), with an average range between mean high and low water springs of 2.1 m. The port has three entrance channels: the main harbor channel is 3,500 m long and 10 m deep; the Ganjingzi channel is 5,000 m long and 9 m deep; the Nianyu Bay Channel is 1,600 m long and 17.5 m deep. The port has nire breakwaters with a total length of about 7 km. Ice forms in the port for about 50 days per year, but only in shallow areaf. along the shoreline; it has little effect on ships' navigacior and berthing. The siltation in the harbor area is very limited, estimated at 10 cm per annum. The soil ranges from silty to silty clay to clay, over weathered bedrock. Its depth varies from place to place. The earthquake intensity in the Dalian region is 7 on the Richter Scale. A. Facilities 3.3 All traffic in and out of Dalian port is handled at its 51 existing berths located in the main harbour and five satellite harbours (Table 3.1). These berths are functionally classified as either specialized berths (29 of them) assigned to handle certain commodities, or broadly defined general cargo berths handling the rest of the traffic. The specialized berths handle: passengers (5), loose cargo on small domestic craft (6), petroleum products (4), timber (4), crude oil (2), iron ore (2), maize exports (2), bulk grain (2), and one each for soybean and container traffic. The container berth is a substandard berth renovated in 1983 by combining two general cargo berths of 270 m and is partially equipped with container handling facilities. The  -9- rema;ning 22 berths are for general cargo traffic comprising principally iron and steel, non-metallic ores, and chemical fertilizer. 3.4 Four specialized berths to handle coal and dangerous goods are under construction and will be completed in 1988 on a satellite harbor, Heshangdao; an extension of the crude oil terminal is also planned. In addition, .urther extension of several specialized berths is underway using domestic resources. This increase in capacity will be adequate to handle the future growth of specialized traffic, leaving container and general cargo traffic to be taken care of under the proposed project. This traffic is now the major cause of congestion at the port. The growth of container traffic especially, has beer remarkable, starting with 59,000 tons in 1982 and rising to 404,000 tons in 1985. From 1984 container traffic has actually saturated the berth capacity; in 1987 PDA completed renovation of one berth in Xianglujiao satellite harbor to temporarily handle additional container traffic until early 1992 when the project container berths are scheduled to be completed. 3.5 The harbor has a total of 47 warehouses with a surface area of 270,000 sq m. The land area is 4.7 sq km, which is inadequate. The city has specified a special area for long-term storage warehouses away from the port. B. Traffic 3.6 Dalian's traffic has increased very rapidly and now exceeds the port capacity by over 25%, causing heavy congestion. Total port traffic in 1985 was approximately 44 million tons, an 8% p.a. growth since 1977. PDA fore- casts the total traffic to reach 77 million tons in 2000, an average of almost 4% p.a. growth. The traffic structure is not expected to change much. In addition to crude oil and petroleum products which take up half of the traif- fic, major commodities are: coal, grain, iron ores and general cargo (Table 5.1). The share of containerized cargo in general cargo is expected to increase very rapidly, from 4% at present to 24% in 2000. The forecast also shows a significant growth of incoming coal (23% p.a.) due to the industriali- zation plans for the northeastern region. C. Operations 3.7 Pre~sently the majority of the 22 general cargo berths can only accommodate ships of up to 10,000 DWT with an average shipment size of 5,000- 6,000 tons, which is relatively small; the existing substandard container berth accommodates 5,000 DWT ships or 2,500 tons shipment size. Therefore the rapid increase in traffic is boing accommodated mainly through an increase in the number, rather than the size, of ships arriving at the port, thus greatly adding to the congestion. 3.8 Other factors contributing to the port's congestion are the ineffi- ciency of the handling facilities at berth, the insufficiency of storage area and the poor hinterland transport aervices. About 30-40% of handling equip- ment is over 20 years old, requiring frequent repair and maintenance. Some- times ships are waiting at berth for handling equipment to be returned from the repair shop. Likewise, some ships can not be unloaded because there is no  - 10 - empty shed or storage area. The problem of storage area is closely related to the condition of hinterland transport services. Since 90% of hinterland transport to and from Dalian port has so far been by railway, it depends largely on the railway authority allocating wagons for the wise of the port; the allocation has not always been sufficient. 3.9 To address these problems a rehabilitation program was recently prepared by foreign consultants. The program is now being implemented and includes reclaiming land to increase the storage area, shortening wagon turnaround time to make full use of the allocated wagons, and improving the road transport facility to divert traffic from rail to road. Though such a rehabilitation plan would increase port capacity about 5-10, it is still far from sufficient to accommodate the rapid growth of port traffic which, by 1990 and 2000, is forecas: to be 20% and 75X greater than the 1985 volume. 3.10 Congestion on the cortainer berth is worse. Given the present shortage of container berth facilities, and the anticipated increase in container traffic, without the project the port would have to convert at least one more general cargo berth to handle container traffic. This would leave only 21 berths for handling non-containerized general cargo and two berths for containers. D. Organization and Management 3.11 The Port of Dalian Authority (PDA) was formed on January 1, 1986, by the merger of the United Stevedoring Corporation of Dalian (USCD) with part of the Dalian Port Administration Bureau (DPA). It is an economic and adminis- trative unit under the primary leadership of the Dalian Municipality (DM) and the secondary leadership of the Ministry of Communications (MOC). PDA has responsibility for most aspects of port administration, with the main excep- tion of harbor superintendency wnich is the responsibility of the Ocean Safety Superintendency Bureau of Dalian, a unit under MOC, which was formed to assume the remaining responsibilities of DPA after the merger. The details of PDA's p,wers and duties are defined in a charter approved by the DM on August 3, 1987. The Charter is acceptable to the Bank group. The scope of its authority represents a significant delegation from MOC, which prior to 1986 had closely controlled the port through USCD and DPA. MOC does, however, retain control over PDA's major development plans (para. 3.13). PDA has also been given greater control over its own financial affairs (parn. 4). These arrangements are consistent with the Government's policy of decentralizing responsibility for port administration and increasing the autonomy of the ports' local managements (para. 2.4-5). 3.12 PDA is managed by a director, appointed jointly by DM and MOC, who reports to d Port Management Commission established by DM. The director is supported by three deputy directors responsible for staff functions such as planning, finance, personnel, environmeutal protection and safety, and a chief engineer. The operations of the port are carried out by a number of self- accounting units whose managers also report to the director of PDA. These include seven berth district operating units, and others concerned with infra- structure services as well as a staff hospital, college and technical school. Construction projects at the port are managed by the Construction  - . 1 - Comnand Department, which is a self-accounting unit reporting separately to the director of PDA. E. Planning, Budgeting, Accounting and Auditing 3.13 The long-term planning of Dalian port's development and the approval of major projects (over RMB Y 30 million) remains the responsibility of MOC. Smaller projects are within the authority of the municipality, through the mechanism of a Port Development Leading Group chaired by the director of PDA in the capacity uf assistant to the Mayor. The principal instrument of control of port operations is the annual operating plan and budget which is subject to approval by DM's Porc Management Commission. 3.14 PDA operates an accrual-based accounting system and follows account- ing procedures laid down by the Ministry of Finance (MOF). Its chart of ac- counts and the form of its financial statements (income statement and balance sheet) are as prescribed by MOC. Consolidated statements are prepared annually for the Authority and its subordinate units and, with the addition of a funds flow statement, these will be acceptable to the Bank group for the purposes of financial reporting. 3.15 PDA's accounts, like those of its predecessor organizations, are nominally subject to audit by the Audit Bureaus of the Dalian Municipality and of MOC. In fact no audit has been carried out. It is intended that the Audit Administration of China (AAPRC) will assume responsibility for auditing when the proposed loan is approved. AAPRC carries out the audit of most Bank proj- ects in China and is acceptable to the Bank group as an independent external auditor. At negotiations, assurances were obtained from PDA that it will submit its audited financial statements to the Bank group not later than six months after the end of each financial year. F. Port and Hinterland Connections 3.16 The port is connected to the national rail neLioork by a major rail line. As for highways, the Chenda artery connects the porL to the entire northeast. Improvements planned for the Seventh Five Year Plan oeriod are: (a) Highway: By 1990 the provincial highway authority will complete upgrading the Dalian-Shenyang road section to Class One (four-lane center divided road). The entire road length will also be shortened to 380 km from the existing 420 km. This is to accommodate the increasing port traffic and the diversion of short distance traffic from rail to road. There will also be a Class Two road extending from the new port facilities located at Dayaowan, through the Special Economic Development Zone, and joining with the national road at Jin county; (b) Railway: (i) a line extension from Jin counLty marshalling yard through the economic zone to connect with the in-port rail line at Dayaowan;  - 12 - (ii) an increase in motive power by replacing the existing steam locomotives with 41 imported diesel locomotives; and (iii) construction of a new marshalling yard at Jin county to serve the new line extension, and upgrading the existing marshalling yards at Nanguanling north of Dalian, Sujiatun south of Shenyang, Siping and Changcun of Jilin province. 3.17 Assurance was obtained at negotiation that the road and railway connections from the new port facility at Dayaowan to the main Dalian-Shenyang highway and railway will be completed and open to traffic on completion of the project. IV. THE PROJECT A. Project Objectives 4.1 The objectives of the proposed project are to increase Dalian port's capacity to handle cargo flow and improve its operational procedures. The project would: (a) assist the urgent expansion of port capacity in China, which is in danger of becoming a constraint to economic growth; (b) facilitate technology transfer in areas such as long term planning (ma ter planning), financial planning and control, and improved berth management generally; Cc) support with technical assistance the development of the research and design capabilities of MOC; (d) facilitate the study of the present and potential use of containers in the hinterland of Dalian to ensure adequate coordination of transportation and storage facilities; and (e) address the training needs of port operators, maintenance personnel and managers. B. Description of Main Project Items 4.2 The proposed project (Map IBRD 19866) consists of: (a) Construction of two container berths for 30,000 DWT ships and two general purpose berths for 25,000 DWT ships capable of conversion to container berths as and when needed. These berths will require: (i) cor.structian cf a 1,840 m long breakwater and shore protec- tion work:;; (ii) dredging of about 2.5 millicn m3 of soil, backfill and stabilization of the fill material; (iii) construction of two container freight stations; (iv) construction of necessary railway, roads, warehouses, and storage yards; (v) construction of railway lines from in-port rail line of Dayaowan to the Jin-xian marshalling yard, and an access road from Dayaowan to the Shen-da freeway;  - 13 - (vi) installation of water supply, sewerage and power supply systems; (vii) provision of the required loading/unloading equipment, navi- gational aids, harbor operations equipment and boats; and (viii) construction of required maintenance buildings, auxilliary buildings and others. (b) training of port operators and other specialists through technical assi3tance in: (i) port operations, design, planning and construction supervision; (ii) financial control, including in particular capital expenditure planning and control and operating cost monitoring. (c) a study of intermodal transport of containers in the port hinterland to reduce port congestion; (d) reviewing and updating the port master plan which is under preparation by the staff of PDA. 4.3 Berth Construction. The new port facilities will be constructed at Dayaowan, 50 km away from Dalian city and the existing port facilities. To protect the new berths against waves, a 1,840 m long breakwater will be constructed, partly as a rubble mound and partly as a caisson structure. The new berths comprise two container berths 636 meters long with 12 m depth and two general purpose berths 480 meters long, one with 11 m depth alongside and the other with 12 m. The quaywall is designed using reinforced concrete caissons with an alternative design using counterfort wall. Basin dredging amounts to 2.5 million cubic meters and will be dumped away in the sea since the material is not suitable as fill behind the quaywall. Reclamation for a 475 m wide container yard and the rest of the area required for highway and railway will be provided by using rock fill from a nearby mountain. Water supply, sewerage and power supply will be provided from the mains leading to the crude oil terminal; these have enough capacity for present needs and for the new project as well. Two container freight stations are planned, one for trucks and the other for the railway. 4.4 Training. In addition to the operational training required for the new container handling equipment which will be provided by the suppliers, PDA will train the other personnel required for the project (Annex 2). On- the-job training in project supervision will be provided by foreign consultants who will also assist in the supervision. Terms of reference (TOR) for construction supervision was discussed and agreed during negotiation (Annex 7). Foreign consultants will also be needed to provide training in techniques of financial control, which PDA has specifically requested in order to equip itself to discharge the wider responsibilities it has recently acquired for the direction of its own financial affairs (para. 6.4). During  - 14 - negotiations TOR for financial training were discussed and agreed with PDA (Annex 3). Foreign consultants will be recruited according to the Bank Guidelines. At negotiations, assurances were obtained from PDA that it will carry out the training in accordance with the program agreed with the Bank (Annex 2). 4.5 Port Master Plan. Under the Three Ports Project (Ln. 2207-CHA), the Bank financed a Master Planning Course at Yantai during August 1985. With the tools and techniques now available to the Chinese experts, PDA will update the port's master plan. The master plan will take into consideration, as before, the development of neighboring ports and the new economic zones. At negotiations, assurances were obtained from PDA that it will update its master plan on the basis of the terms of reference agreed with the Bank group (Annex 5), and wilt complete it by June 30, 1989. 4.6 Studies. The project would include an intermodal tran.port study for container distribution in the hinterland of Dalian port. The study would identify the origin and destination of containerized cargo and the location for inland collection and distribution centers. PDA will carry out this study assisted by MOC. At negotiations, assurances were obtained from GOC and PDA that PDA will carry out the study on the basis of the terms of reference agreed with the Bank group (Annex 6), will complete it by December 31, 1989 and GOC will take the necessary steps to implement accepted recommendations. C. Cost Estimates 4.7 The total project cost is estimated at Y 969 million or US$231 million equivalent, with a direct and indirect foreign exchange compo- nent of Y 402 million or US$96 million equivalent. Project cost estimates are summarized below; details are presented in Tables 4.1, 4.2, and 4.3.  - 15 - SUMMARY OF PROJECT COST ESTIMATES (December 31, 1987 prices) (US$1 * RMB Y 3.70) Foreign Local Foreig.a Total Local Foreign Total as Z ------- RMB Y '000 - ------- US$ '000 ------ of total Civil works 421.6 202.0 623.6 113.9 54.6 168.5 32.4 Equipment 5.0 96.4 101.4 1.3 26.0 27.3 95.2 Subtotal 426.6 298.4 725.0 115.2 80.6 195.8 41.2 Technical assist- ance and training 11.0 14.4 25.4 3.0 3.9 6.9 56.5 Base Cost /a 437.6 312.8 750.4 118.2 84.5 202.7 41.6 Physical con- tingencies (10%) 43.8 31.3 75.1 11.8 8.5 20.3 41.6 Price con- tingencies 86.0 57.5 143.5 4.6 3.0 7.6 39.5 Subtotal 129.8 88.8 218.6 16.4 11.5 27.9 41.2 Total 567.4 401.6 969.0 134.6 96.0 230.6 41.6 /a The project is exempt from taxes and duties. 4.8 Cost estimates for civil works including design and supervision are based on completed final designs and on unit prices for ongoing similar works in China. Equipment costs are based on the costs of similar equipment recentlv purchased in China and in Bank-financed projects in other coun- tries. Estimates are in constant January 1988 prices. Physical contingencies of 10% have been included for all project components. Price contingencies for local costs assume annual increases of 6.5% for 1988 through 1990 and 4.5% thereafter. Price contingencieg for foreign costs assume an annual increase of 1.0% for 1988 through 1990 and 3.5% thereafter. About 200 man-months is estimated for technical assistance requirements. The rest of the technical assistance will be used for training purposes. D. Financing Plan 4.9 Financing for the project will be provided as follows:  - 16 - (Figures in US$ million) Source of finance Local Foreign Total IBRD 0.0 71.0 71.0 IDA 0.0 25.0 25.0 Government 134.6 0.0 134.6 Total 134.6 96.0 230.6 The Bank loan/credit will be made to the People's Republic of China and will be used to finance the foreign exchange cost of civil works and procurement of equipment under contracts awarded mainly through international competitive bidding (ICB) (see para. 4.14), and the costs of technical assistance and training. The Government will finance the remaining local costs. At negotiaticns, assurances were received that the Government will onlend the proceeds of the loan and credit to PDA on terms and conditions satisfactory to the Bank group. In accordance with the Government's established procedures, the on-lending terms between the Government and PDA for the proceeds of the Bank loan and IDA credit will be those prescribed for enterprises in the ports subsector; currently these are 5% p.a. over 20 years with 5 years grace period. PDA will bear the foreign exchange risk between the US dollar and the Yuan. These terms and conditions are acceptable to the Bank group; signature of a subsidiary loan agreement satisfactory to the Bank group would be a condition of effectiveness. E. Status of Preparation 4.10 Detailed designs were completed in September 1987. Consultants, financed through the Technical Cooperation Credit (TCC), reviewed the designs and prepared the bidding documents. Prequalification of contractors is completed and the call for tenders will be issued in January 1988. F. Implementation 4.11 Consttuction of the railway and highway connections outside the port area (para. 3.16-17) started early in 1986 and is the responsibility of MR and Dalian Municipality, respectively. The implementation of the remaining physical components of the proposed project is the responsibility of PDA under the overall supervision of the MOC Capital Conszruction Department. Assistance is provided by the Waterway Design Institute, foreign consultants and China National Technical Import Corporation as appropriate for project implementation and supervision of construction. The remaining components of the project (training, technical assistance and studies) are the responsibility of PDA. 4.12 Land needed for the project will be reclaimed from the sea and com- pacted under the project. Surrounding the reclamation area by dykes will be  - 17 - carried out to prevent the spreading of turbid waters. Civil works and equipment installation are expected to be completed by the end of 1992. The construction and procurement schedules are shown in Charts B and C. C. Procurement 4.13 Procurement would be carried out according to the following table: (US$ million) Procurement method Total Project element ICB LCB Other cost Civil works 100J.0 90.6 - 190.6 (57.0) (5.0) (62.0) Equipment 31.0 1.0 32.0 (29.0) (1.0) (30.0) Technical assistance and training(including - - 8.0 8.0 studies) (4.0) (4.0) Total 131.0 90.6 9.0 230.6 (86.0) (5.0) (5.0) (96.0) Note: Figures in parentheses are the respective amounts to be financed by the Bank loan. All figures include estimated physical and price contingencies and are rounded. Three civil works contracts will be awarded through ICB, one for reclamation (US$29 million), one for breakwater and wharf construction (US$65.0 million) and the third for the container freight station (CFS) (US$6.0 million). The remaining civil works, including the rest of the infrastructure inside and outside the port and not financed by the Bank group, will be carried out by contractors chosen through LCB. Two relatively small dredging contracts (US$2.5 million each) will be procured by LCB procedures satisfactory to the Bank. The dredging works under the first contract are urgently needed in order to open a channel for transport of construction equipment to the port; and this work was scheduled to start in January 1988 and the second dredging contract will follow thereafter. The quantities of materiaL to be dredged under the two contracts are too small to attract the interest of international contractors. Nevertheless, international contractors will not be precluded from participation in LCB for Bank-financed procurement. 4.14 Prequalification of contractors will be carried out for civil works contracts to be awarded under ICB; qualifying domestic contractors for such  - 18 - works will receive a preference in bid evaluation of 7