China - Sixth Railway Project

Document of The World Bank FOR OFFICLAL USE ONLY /1 Jjf/-6/ 9 Repot No P-5943-(I NEKORADUNM AND RECONNDATION OF THE PRESIDENT OF THE -iTERNATIONAL BANR FOR RECONSTRUCTION AND DEVELOPME TO THE EXECUTIVE DIRECTOkS S ON A PROPOSED LOAN IN AN A4OUNT EQUIVALENT TO $420 NULION x _- < > TO C7- < THE PEOPLE' S REPUBLIC OF CHINA <2 FOR A r;7 z _SIXTH RAILWAY PROJECT r . , -- ,+ FEBIRUARY 25, 1993 Thbis document has a restricted distribution 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.  CURRENCY EQUIVALENTS (as of January 1, 1993) Currency Name: Renminbi Currency Unit: Yuan (Y) - 100 Fen $1.00 Y 5.75 $0.174 Y 1.00 ABBREVIATIONS AND ACRONYMS GDP - Gross Domestic Product MOR - Ministry of Railways RIS = Railway Investment Study THIS - Transport Management Information System FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY CHINA SIXTH RAILWAY PROJECT Loan and Proiect Summary Borrowers People's Republic of China Beneficiary: Ministry of Railways (MOR) Amount; $420 million equivalent Terms: 20 years, including 5 years of grace, at the Bank's standard variable interest rate Financinf Plan: Local korei n Total --- ($ million) -- Ministry of Railways 456.4 307.1 763.5 IBRD - 420.0 420.0 Total FinancinE 456.4 727.1 1.183.5 Economic Rate of Return4 23 percent Staff Appraisal Report: Report No. 11357-CHA Mass: IBRD 24578, IBRD 23817R | This document has a restricted distribution 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.  MEMORANDUM AND RECOMKENDATION OF THE PRESIDENT OF TH!D INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED ',OAN TO THE PEOPLE'S REPUBLIC OF CHINA FnR A SIXTH RAILWAY PROJECT 1. I submit for your approval the following memorandum and recommenda- tion on a proposed loan to the People', Republic of China for the equivalent of $420 million to help finance a Sixth Railway Project. The proposed loan would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. The proceeds of the loan would be onlent to the Ministry of Railways (MOR) on those terms. MOR would bear the foreign exchange risi. 2. Background. China's high and sustained GDP growth rate since the open-door policy began in 1979 (8.7 percent per year during 1979-91) has resulted in a large surge in transport demand: during 1979-91, total traffic &rew at 7.2 percent per year for freight and 10.0 percent per year for passen- gers. This high growth has occurred despite the fact that the transport sys- tem in China is much too small for the sizs of the economy and the population it supports. There is a large gap betweer, transport dema..d and supply, which is manifested by suppression of demand and widespread transport bottlenecks. In 1989, the capacity of some 37 percent of railway lines was saturated. The demand/supply gap is a major constraint to China's economic growth. The main causes of this gap are: (a) an inadequate transport infrastructure which has resulted from underinvestment; and (b) the high intensity of freight traffic per unit of economic output (ton-km of freight carried per unit of GDP) due to structural distortions (including price distortions) in the economy. 3. Because of its critical importance to the economy, the railway sys- tem is often regarded by the Chinese as the "backbone of China." The railway system is the most developed transport mode in China, carrying more traffic than all other modes combined. NOR is charged with administering the national standard-gauge railway network, comprising about 53,000 km of main routes. NOR employs about 3.4 million persons, of whom 51 percent work on railway transport. The remaining 49 percent work on various nonrailway transport activities, including construction of railway infrastructure, manufacturing of locomotives, freight wagons, passenger coaches, and various railway equipment parts, as well as a variety of business ventures. A profitable operation, MOR is responsible for financing all of its operating and capital expenditures (through both self-generated funds and borrowings on market terms). Although NOR employs relatively old technology, its equipment and plant utilization is among the world's highest. MOR is well managed and has a disciplined work force. Since the early 1980., MOR has undergone a number of changes to: (a) make its relationship with the Government more effective, through enact- ment of a Railway Law as a framework for railway revulation and introduction of an economic contract comprising (i) a financial responsibility system that gives NOR more financial autonomy, and (ii) an incentive system that ties staff salaries to their productivity; (b) boost its investment and financial planning capability; (c) strengthen its internal management through decentral- ization of executive powers; and (d) modernize its track, equipment and infor-  - 2 - mation technology. rhese changes have helped 14OR serve the economy more effectively. 4. Lessons Learned from Previous Bank Operations. Since 1983, the Bank has assisted the Government through five national railway operations and one local railway operation, totaling $1,365 million in loans and credits. The main objectives of the first four national operations were to finance con- struction to expand traffic capacity in high-priority cor-idors, and to intro- duce new technology to improve the efficiency of MOR's plant and equipment. The fifth national operation introduced railway policy initiatives and tech- nological modernization on a systemwide basis. This new approach would be more extensively implemented under the proposed project. 5. A key lesson learned from the previous railway projects relates to delays in railway procurement and disbursements. These delays have been caulsed by the relatively cumbersome procurement procedures as well as the need to procure a relatively large share of sophisticated equipment and technology requiring complex technical specificatior.s. At the Bank's urging, MOR has in the past 18 months taken several steps to expedite the procurement process: besides employing model documents customized for China, MOR has developed a computerized procurement monitoring system, streamlined its procurement proce- dures, and offered its procurement staff incentives to encourage speedy prepa- ration of draft tender documents. These measures have produced significant improvements. For example, the total amount of contracts awarded under the five ongoing railway loans during a 15-month period ending in mid-December 1992 was $297 million, representing about 26 percent of total commitments for the five loans. The corresponding figures for the preceding 15 months are $153 million and 13 percent. Following this surge in contract awards, railway loan disbursements are expected to accelerate as suppliers deliver the goods procured under these contracts. To expedite the procurement process under the proposed project, NOR has submitted to the Bank draft technical specifications for equipment worth more than 50 percent of the loan amount. 6. Rationale for Bank Involvement. The low cost of railway transport in China and the lack of development of the other modes of transportation ensure a leading role for the railway for at least the next two decades. As China moves towards a market economy, further steps in reform and moderniza- tion are required to prepare MOR for its future role as a market-oriented, autonomous railway. To set a framework for medium-term Bank assistance to NOR, the Bank has prepared, in close cooperation with MOR, a paper entitled "China's Railway Strategy," which is also being distributed to the Executive Directors. The strategy paper and the various components of the proposed project are contributing to the Bank's dialogue with NOR in both policy reform and technological modernization. In particular, the proposed project would help MOR attain financial self-sufficiency and strengthen its financial man- agement. The project would also help MOR bolster its capability for marketing and pricing railway services and focus more on service quality. 7. Proiect Obiectives. The project's main aims are to support kiOR's effort in undertaking: (a) railway policy and management initiatives, (b) institutional development of the railway system, (c) expansion of railway capacity, and (d) modernization of railway technology on a systemwide basis.  - 3 - 8. Project Descriition. The proposed project would consist of: A policv component, comprising: (a) the application of a decision sup- port system developed by MOR with Bank assistance under a Railway Investment Study (RIS) to determine high-priority capacity expansion projects, and optimize future railway investment programs; as well as (b) the formulation and implementation of measures and plans to rationalize the railway tariff system, modernize NOR's accounting standards, and improve MOR's management and economic contract wlth the Government. An investment component, including: (a) a capacity expansion subcompo- nent comprising electrification of two major railway corridors totaling 1,790 route-km; (b) three systemwide technological modernization subcom- ponents for (i) track maintenance mechanization, (ii) locomotive and rolling stock parts manufacture, and (iii) telecommunications and an initial phase of a Transport Management Information System (THIS); and (c) a pilot container transport subcomponent covering two main railway corridors totaling 5,100 route-km. A technical assistance component, including the preparation and implemen- tation of action plans for: (a) expanding and modernizing railway con- tainer transport services; (b) implementing more cost-effective technol- ogy to increase railway capacity at lower cost; and (c) strengthening MOR's environmental protection capability and solving some of its most pressing environmental problems. A set of indicators has been developed to allow the effectiveness of each investment subcomponent to be monitored during its period of operation. 9. Proiect ImDlementation. The proposed project would be carried out by MOR. The project cost is estimated at $1,183 million equivalent, with a foreign exchange component of $727 million equivalent (61 percent). The Bank would finance $420 million equivalent (58 percent of the foreign exchange requirements and 35 percent of the total costs). Retroactive financing under the loan is recommended for expenditures of up to $600,000, incurred after August 31, 1992 but before loan signing, for technical assistance and training activities considered critical to a rapid project start-up. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in the People's Republic of China are given in Schedules C and D, respectively. Two maps (IBRD 24578, 23817R) are also attached. The Staff Appraisal Report, No. 11357-CHA, dated February 25, 1993, is being dis- tributed separately. 10. Proiect Sustainability. The Government has made steady efforts in developing and maintaining the -ailway infrastructure and equipment fleets over the past 40 years. In the current push to accelerate the pace of eco- nomic reform and development, the Government and MOR have shown strong inter- est in taking new initiatives in policy and technology, with a view to prepar- ing the railway system to better serve a future market-oriented economy, by making available more railway services and by improving the quality and effi- ciency of the services. To this end, the proposed project has been designed  -4- to provide a balanced focAs between institutional development and technologi- cal modernization, as well as to permit the performance of the project- financed investments to be monitored over time (para. 8). The tailoring of the project design to MOR's Interests, MOR's ability to execute reform and modernization programs, and the commitment of MOR and the Government to reform--these factors should sustain the project through its economic life. II. Aereed Actions. During negotiations, agreement was reached on the following actions to be undertaken by the Borrower through MOR and other rele- vant government agencies: (a) land acquisition and resettlement of people (para. 13) will be conducted according to the plan agreed with the Bank; (b) MOR will maintain a set of performance indicators for the investment sub- components during their periods of operation at or better than agreed targets; (c) all necessary steps, including raising tariffs, cutting costs, and impro- ving productivity, will be undertaken to generate in 1994 and thereafter funds equaling at least 80 percent of the following year's capital investments; (d) each of the following studies will be completed and, in consultation with the Bank, appropriate steps to implement them will be undertaken: (i) the tariff study; (ii) the accounting study; (iii) the management and economic contract study; (iv) the rail-based container transport study; (v) Phase I of the cost-effective technology evaluation study; and (vi) the environmental protection study. 12. Environmental Asvects. Except for the resettlement impacts (para. 13), none of the investment subcomponents (para. 8) would have adverse impacts on the environment. In fact, the proposed electrification generally would have positive environmental impacts, mainly in reducing air pollution along the two railway lines to be electrified, due to the *:hange in tractive power from diesel to electric. The electric power would come from coal- burning thermal and hydropower plants. These power plants serve general users, of which railway usage is about 1 percent. Due to the greater effi- ciency of air pollution control for large thermal plants and no air pollution from the operation of hydro facilities, t1, switch from diesel to electric power would reduce net emissions of air p.ollutants. This is particularly true in tunnels in mountainous terrain because diesel locomotives are less effi- cient and produce concentrated emissions in this con.ined space. These emis- sions are sucked into the coach ventilation systems in the tunnels, creating even higher concentrations of particulates and carbon monoxide, which pose a health risk to train crews and passengers. 13. Resettlement Issues. The proposed electrification of two railway lines under the capacity expansion subcomponent would entail the construction of power substations and related works, which would result in resettlement of roughly 6,700 people who live at some 150 construction sites (about 45 people per site). NOR has submitted a resettlement action plan satisfactory to the Bank. While resettlement would be funded by MOR, planning and implementing resettlement would be carried out by villages and townships in rural areas and by city district governments in urban areas. The local branches of the Land Administration Office would monitor resettlement activities, and the State Audit Administration would audit the use of funds. Experience under previous railway projects has shown this arrangement to be satisfactory. In 19929 MOR generously funded resettlement, with compensation rates that averaged 15 times the net value of production on acquired land. Continuation of these compensa-  - 5 - tion levels with the proposed electrification would provide a strong basis for satisfactory resettlement. To ensure satisfactory resettlement, MOR has con- tracted with a university to monitor resettlement activity and alert MOR to problems. In the past, MOR has taken steps to correct any resettlement prob- lems identified. i4. Prolect Benefits. The proposed project would contribute directly to China's effort to reform and modernize its railway subsector. The project would remove bottlenecks on two of the most important links of the national railway network. Through better resource allocation and better technology, the project would help improve the efficiency of railway investment. It would provide underpinnings for improvements in railway tariffs, acc:-'