China - Shandong Provincial Highway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17935 IMPLEMENTATION COMPLETION REPORT CHINA SHANDONG PROVINCIAL HIGHWAY PROJECT (LOAN 3073-CHA/CREDIT 2025-CHA) June 1, 1998 Transport Sector Unit East Asia and Pacific Regional Office 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.  CURRENCY EQUIVALENTS Currency Unit = Yuan (Y) = 100 Fen 1989 $1= Y 3.76 1990 $1= Y 4.78 1991 $1= Y 5.32 1992 $1= Y 5.76 1994 $1= Y 8.60 1995 $1= Y 8.35 1996 $1= Y 8.30 1997 $1=Y8.30 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (km2) = 0.4 square miles (mi ) 1 hectare (ha) = 0.01 km = 2.47 acres (ac) = 15 mu 2 1 mu = 666.7 m = 0.0667 ha Vice President Jean-Michel Severino, EAPVP Country Director Yukon Huang, EACCF Sector Manager Jeffrey Gutman, EASTR Task Manager Hatim Hajj, Principal Transport Specialist, EASTR  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS ADT - Average Daily Traffic DF - Diversion Factor E&M - Electronic, Electrical and Mechanical ERR - Economic Rate of Return FRR - Financial Rate of Return HPDI - Highway Planning and Design Institute HSRI Highway Scientific Research Institute ICB - International Competitive Bidding ICR - Implementation Completion Report JQE - Jinan-Qingdao Expressway JQEMB - Jinan-Qingdao Expressway Management Bureau LCB - Local Competitive Bidding MOC - Ministry of Communications NPV - Net Present Value PCR - Project Completion Report pkm - Passenger-kilometer PMS - Pavement Management System RDB - Road Data Bank SAR - Staff Appraisal Report SPTD - Shandong Provincial Transport Department tkm - Ton-kilometer TOR - Terms of Reference vkm - Vehicle-kilometer VOC - Vehicle Operating Cost 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.  CONTENTS PREFACE ........................................................ iii EVALUATION SUMMARY ........................................................v PART I: PROJECT IMPLEMENTATION ASSESSMENT ..................................1 A. Project Objectives and Description ........................................................ 1 B. Achievement of Project Objectives ........................................................ 2 C. Implementation Record and Major Factors Affecting the Project .............. 11 D. Project Sustainability ....................................................... 12 E. Bank Group Performance ....................................................... 13 F. Borrower Performance ....................................................... 14 G. Assessment of Outcome ....................................................... 15 H. Future Operations ....................................................... 16 I. Key Lessons Learned ....................................................... 16 PART II: STATISTICAL TABLES ....................................................... 18 Table 1: Summary of Assessments ....................................................... ;.18 Table 2: Related Bank Group Loans/Credits ................................................... 19 Table 3: Project Timetable ...................................................... 20 Table 4: Loan/Credit Disbursement: Cumulative Estimate and Actual ........... 20 Table 5: Key Indicators for Project Implementation ....................................... 21 Table 6: Key Indicators For Project Operations .............................................. 21 Table 7: Studies included in Project ...................................................... 21 Table 8a: Project Costs ...................................................... 22 Table 8b: Project Costs ...................................................... 23 Table 8c: Project Financing ....................................................... 24 Table 9: Economic Costs and Benefits ....................................................... 24 Table 10: Status of Legal Covenants ....................................................... 25 Table 11: Compliance with Operational Manual Statements .......................... 26 Table 12: Bank Group Resources: Staff Inputs ............................................... 26 Table 13: Bank Group Resources: Missions .................................................... 26 ANNEX 1: ECONOMIC AND FINANCIAL EVALUATION .............................. 27 TABLE 6: FINANCIAL EVALUATION ...................................................... 44 ANNEX 2: BORROWER'S CONTRIBUTION TO THE ICR ............................. 46 ANNEX 3: APRIL 1997 SUPERVISION MISSION'S AIDE MEMOIRE .......... 57  I  - 111 - IMPLEMENTATION COMPLETION REPORT CHINA SHANDONG PROVINCIAL HIGHWAY PROJECT (LOAN 3073-CHA/CREDIT 2025-CHA) PREFACE This is the Implementation Completion Report (ICR) for the Shandong Provincial Highway Project in China for which Loan 3073-CHA in the amount of $60 million equivalent and Credit 2025-CHA in the amount of SDR 38.8 million ($50.0 million equivalent) were approved on September 8, 1989 and made effective on December 11, 1989. The loan and credit were frilly disbursed and the last disbursement took place on July 24, 1997. The ICR, under the guidance of Messrs. Otto Raggambi (Consultant, Highway Engineer) and Hatim Hajj (Task Manger), Transport Department (EASTR) of the East Asia and Pacific Region was prepared by Manzoor Rehman (Consultant). Mr. Han-Kang Yen (Research Analyst) carried out economic and financial analysis for the completed project. The borrower's implementation evaluation summary for the project is annexed to the ICR. Preparation of this ICR began in April 1997, and an ICR mission had discussions with representatives of the Ministry of Communications (MOC) and the Shandong Provincial Transport Department (SPTD) regarding the preparation of the ICR. The ICR is based on discussions held in the field, materials available in the project file and additional data provided by SPTD. SPTD has also submitted to the Bank Group a copy of its evaluation report for the Jinan-Qingdao Expressway (JQE) and other project components.   CHINA SHANDONG PROVINCIAL HIGHWAY PROJECT (LOAN 3073-CHA/CREDIT 2025-CHA) EVALUATION SUMMARY Introduction and Project Objectives 1. In response to increasing demand for road transport services arising from the accelerated development of the economy during the early 1 980s the Chinese Government decided to accord high priority to increasing road transport capacity in heavily trafficked corridors connecting major cities and industrial centers in the various regions of the country. The Shandong Provincial Highway Project was formulated to provide adequate road transport capacity in the Jinan-Qingdao corridor through the construction of a new high-class highway. In addition, the scope of project also included the following components for technology transfer to provincial institutions involved in the road transport subsector: (a) improving road planning techniques; (b) evaluating paved road network condition and preparing pavement strengthening and maintenance management programs; (c) developing institutional capacity for supervising road construction works; (d) carrying out staff training; (e) strengthening highway research; and (f) improving road safety. 2. The objectives and the scope of the project reflected the road infrastructure improvement priority of Shandong Province, the Central Government's developmental strategy and the Bank Group's assistance strategy for the road transport subsector. Implementation Experience and Results 3. The main objective of the project of meeting road transport demand in the heavily trafficked corridor between Jinan and Qingdao was achieved by completing the construction of the 319 km Jinan-Qingdao Expressway (JQE) by the end of 1993. The 1997 average daily traffic on the Expressway was higher than that projected at appraisal. However, because of the substantial increase in the overall investment in the JQE compared to appraisal assumptions, the ICR's estimate of about 19 percent for the ERR falls below the appraisal estimate of 23 percent. In addition to cost increases over and above appraisal estimates, mostly due to the impact of high inflation during the implementation period, additional items of works were undertaken and further expenditures incurred, which were not taken into account at the time of project appraisal. However, most of the additional investments were made in the interest of enhancing the operational efficiency of the JQE. These included the cost of the installation of traffic  - vi - monitoring, telecommunications and tolling systems, the construction of service and maintenance facilities and fencing of the JQE's right-of-way along its entire length. 4. Civil works were completed as scheduled and the JQE was opened to traffic at the end of 1993. However, the completion of the project as a whole was delayed by about two years, due primarily to the delayed completion of the installation of traffic monitoring, telecommunications and tolling systems. The circumstances leading to the delay were such that the Bank Group had no objection to extending the loan and credit closing dates by two years to June 30, 1997. 5. The key features of the implementation of the other project components are as follows: (a) Equipment acquisition for the maintenance of the JQE was delayed by almost two years and the type and number of units acquired were modified resulting in an about 50 percent increase in cost. There was no substantial change in the acquisition of equipment for road condition survey and road research. Equipment for traffic monitoring, telecommunications and tolling systems were not procured separately as originally planned. Instead, the Bank Group agreed to the financing of a contract covering both the supply of equipment and the installation works for establishing these systems. A small amount was used for acquiring safety equipment following the recommendations of a study of the JQE's safety problc (b) The staff training program was implemented more or less as planned and with only minor deviation in cost. However, almost twice as many people were involved in the training programs but over shorter periods of training. (c) A pilot study for pavement evaluation and formulation of road improvement and management programs was satisfactorily completed under a Finnish bilateral aid. The expansion of the program for the primary 17,000 km national and provincial network of the Province commenced in the early 1990s and made good progress to date. (d) Because of the excessively high rate of traffic accidents on the JQE a highway safety study was conducted in early 1997. This study was a substitute for a pilot road safety study originally formulated for addressing the road safety concerns on the national/provincial road network of the province. The study's recommendations are being followed up by the agencies responsible for the management and traffic safety aspects of the JQE. Summary of Findings, Future Operations, and Key Lessons Learned 6. Notwithstanding some of the deficiencies noted during the implementation of the JQE, the two-year delay in project completion and the significantly higher-than- envisaged overall cost, the project was completed satisfactorily. The ICR estimate of the  - vii - ERR, although lower than that at appraisal, confirms that the project's development objectives were also achieved. Furthermore, the condition of the JQE's civil works and the benefits emanating from the investment are sustainable, and are not expected to be exposed to future risks. 7. The Jinan-Qingdao Expressway Management Bureau (JQEMB), which was set up as the agency responsible for the administration of the JQE at the end of 1993, is adequately staffed and has the material and financial resources to ensure the satisfactory operation and maintenance of the Expressway. The relatively high rate of accidents remains a major concern despite the measures being taken by JQEMB, jointly with the Traffic Safety Unit of the Public Security Administration, to mitigate accident hazards as a follow-up to the findings and recommendations of the traffic safety study completed in May 1997. 8. The following lessons learned are relevant to the still ongoing and future Bank Group-financed highway projects: 9. Project Preparation and Costing. The scope of the highway component of the project lacked clear definition and consistency. Thus, the project highway was not built according to a well-conceived and well-defined concept; it rather "evolved" into an expressway facility in the course of implementation. As it happened, this deficiency has not been detrimental to the viability of the JQE. The higher cost of the JQE was compensated by higher-than-expected stream of benefits on account of the higher-than- expected diversion of the corridor traffic to the JQE. Nevertheless, the deficiency of the formulation of the project has been transparent enough to put it on record, even if there were mitigating circumstances for it at the time of project formulation: (a) the Borrower had no clear policy for the development of the strategic highway network for the country; (b) constraints on the availability of counterpart funding for the project must have been seen as a major risk; and (c) limited experience with the design and operation of the electronic, electrical and mechanical works (traffic monitoring, telecommunications and tolling) for tolled highways that could explain the initial omission of some highway- related expenditure items from the project. Notwithstanding these considerations, it could be argued that the Bank Group could have been more alert to the potential disadvantages in proceeding with the financing of the Jinan-Qingdao Highway with a vague definition of its scope and ultimate objectives. 10. Highway Safety. The traffic safety record of recently completed Bank Group- financed highways has been a major cause for concern. The high rates of accidents on recently built expressways also bring into question the conventional notion that expressways are safer than the arterial roads of the network. Although there is no conclusive statistical evidence either way, the indications are that the Chinese drivers' lack of experience in handling vehicles at high speeds, combined with the relatively poor condition of the vehicle fleet, have been the major causes of the excessive rate of accidents on high-standard highways. Since the road safety is a complex issue, which extends well beyond engineering aspects, the ICR issued for the Jiangxi Provincial  - viii - Highway Project already highlighted the importance of formulating a comprehensive road safety strategy for China and recommended to the Bank Group to intensify its dialogue with the Central Government on the issues involved. Well-documented evidence of the safety record of the JQE adds further urgency to the earlier recommendation regarding highway safety issues. 11. Preparation and Execution of Electronic, Electrical and Mechanical (E&M) Works for Expressways. The two-year delay of the completion of the project is partly attributable to the fact that initially the project covered only the acquisition of equipment associated with traffic monitoring, telecommunications and tolling but not its installation. Although, the decision to include the full extent of the works in the project under Bank Group financing was made soon after the commencement of civil works, the preparation and processing of the E&M works proceeded very slowly. Since similar delays occurred under other Bank Group-financed highway projects under implementation in the early 1990s, the Bank Group, in consultation with MOC, initiated steps that now ensure that the design and technical specifications for E&M works are completed more or less at the same time as the design and the technical specifications for the civil works contracts.  CHINA SHANDONG PROVINCIAL HIGHWAY PROJECT (LOAN 3073-CHA/CREDIT 2025-CHA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES AND DESCRIPTION 1. China joined the World Bank Group in 1980 and lending operations began soon after. However, Bank Group involvement with highway infrastructure only began in April 1983, with the identification of the first Highway Project (Loan 2539/Credit 1954- CHA). The project provided funding for the improvement of provincial roads and the construction of critical missing links in nine provinces, particularly those that constrained interprovincial road transport. Although the involvement was limited, this initial step helped familiarize the Bank Group with the highway subsector issues in China and to identify subsectoral priorities in subsequent projects. It became apparent that the shortage of capacity in heavily congested corridors of the national and provincial road networks constitutes one of the major impediments to the development of the country's economy at an accelerated rate. Under the Seventh Five-Year Plan (7FYP, 1986-90) and subsequent five-year plans, measures were taken to address the needs for road transport capacity improvements in the key corridors of the national and provincial road networks. The Bank Group was supportive of such objectives of the Government as reflected in the Bank Group's lending strategy for the development of the highway subsector in China. From FY85 until the present, in addition to this project, the Bank Group approved the financing of 17 highway projects as listed in Table 2, Part II, of this report. A PCR was issued for the first Highway Project, and ICRs have been issued for the Shaanxi, Jiangxi and Sichuan provincial highway projects, the Beijing-Tianjin-Tanggu Expressway Project and the Jiangsu Provincial Transport Project. 2. The existing arterial roads between Jinan and Qingdao were of low capacity and became heavily congested by the end of the 1980s. The project's primary objective therefore was to provide a high-capacity, high-standard highway in this important corridor between Jinan the capital of Shandong Province and Qingdao, one of the main ports in China. The project also aimed to achieve the following policy and institutional development objectives: (a) improving road planning techniques; (b) evaluating pavement conditions on selected sections on the road network and preparing a pilot pavement strengthening and maintenance management programs; (c) developing institutional capacity for supervising road construction works; (d) carrying out staff training; (e) strengthening highway research; and (f) improving road safety.  - 2 - 3. Under the overall supervision of the Ministry of Communications (MOC) and the Shandong Provincial Government the Shandong Provincial Transport Department (SPTD) was designated as the executing agency for administering the preparation, design and implementation of the project. The project comprised: (a) the construction of a 319 km four-lane divided highway between Jinan and Qingdao; (b) consulting services to assist SPTD in construction supervision and help train SPTD staff in day-to-day supervision and quality control functions; (c) acquisition of road condition survey equipment, evaluation of existing road pavements and preparation of a pavement strengthening and maintenance management pilot program for 560-km of the road network; (d) acquisition of equipment for road maintenance, traffic monitoring, telecommunications and tolling systems, and road research; (e) conducting training courses for SPTD staff; and (f) improving road safety. 4. The Bank Group approved the Bank loan and the IDA credit for the project in May 1989. The scope of the project was in line with investment priorities for road transport infrastructure improvement in Shandong Province, and was also consistent with the Central Government's policy and the Bank Group's assistance strategy for the development of the road transport subsector in China. B. ACHIEVEMENT OF PROJECT OBJECTIVES 5. Project objectives were substantially achieved as indicated by the implementation summaries of the various project components in the following. Jinan-Qingdao Expressway (JQE) 6. Preparation, Design and Scope. The preliminary engineering and the economic feasibility study for the highway was completed in the latter part of 1986, and the study's recommendations were endorsed in principle shortly thereafter by the Central Government. A Bank Group contact mission visited Shandong Province in February 1987, following which the survey and design institutes of MOC, located in Xian and Beijing, and the Shandong Provincial Highway Design Institute proceeded with the preparation of the engineering design for the highway. Later on a local/foreign joint venture of consultants helped finalize the design and the preparation of bidding documents. These services were partially financed under the US Trade Development Program. 7. Originally, the highway was designed to Class I highway standards, although already during the project appraisal SPTD expressed its preference to change the geometric standards of the highway from Class I to expressway standards. Since the highway's alignment traverses flat terrain throughout its length, the only major difference in geometric parameters between the two alternatives was the formation width, which was 23 m for Class I highways and 26 m for expressways (Table 1.4 of SAR). In October 1987, the Shandong Provincial Transport Department requested the Bank Group's assessment regarding the economic viability of building the Jinan-Qingdao highway to expressway standards. In December 1987, the Bank Group advised SPTD as well as the  -3 - Central Government that, according to its analysis, the expressway design option with 26 m formation width yielded a higher "net present value", and that, the Bank Group, in general, was supportive of the concepts of longer-term objectives, and had no objection to building the new highway with a 26 m wide formation. Considering that the difference in the economic viability of the alternatives were not significant, the Bank Group also indicated that it was prepared to finance either alternative. However, SPTD failed to obtain Central Government endorsement for the change, seemingly for budgetary reasons. A likely other reason for the Central Government's position could have been that it had no strategy at that time for the development of an interprovincial expressway network for the country and its standards, and that had not crystallized until the early 1990s. China now has a clear strategy and well defined design standards for its expressway network. 8. As a compromise, shortly before negotiations an understanding was reached between SPTD and the Bank Group, with the consent of the Central Government, that the most heavily trafficked section between Jinan and Zibo (120.3 km), would be built with 26 m formation width, while on the other segments of the highway the formation would remain 23 m wide. While this was a relatively slight change in scope, the partial acceptance of expressway geometric standards was significant because it opened the door for the broadening of the scope of the works, and during implementation additional investments were made to ensure that by the time all works were completed, the requirements for operating the new highway as a tolled expressway are fully met. 9. Civil Works. The JQE is located more or less centrally between the northern and southern arterial roads and carries motorized vehicles only. The two parallel arterial roads in the corridor will continue to serve motorized and nonmotorized local traffic. In addition to serving a densely populated rural corridor, JQE links four major cities-Jinan, Zibo, Weifang and Qingdao-with a population of 3.4, 2.7, 7.8 and 6.2 million, respectively. There are 21 interchanges to connect JQE to the corridor's arterial and secondary road network. Civil works were executed under eight contracts, of which seven contracts were awarded following ICB procedures and one contract award was made following national bidding. 10. Compared to similar major highway projects constructed under Bank Group financing, such as the Beijing-Tianjin-Tanggu Expressway, and those in Shaanxi, Jiangxi and Sichuan provinces (Table 1 of Part II), there were relatively few major deviations from the original engineering design. The major additional works and variations that have occurred included: (a) the change of the type of material for backfilling of embankments at structures to reduce the risk of excessive settlements; (b) adding retaining walls to bridge approaches to reduce the extent of acquisition of valuable agricultural land; (c) building one additional interchange in the vicinity of Shouguang township at km 158+640 to provide for traffic to be generated by new residential and commercial developments; and (d) providing guard rails on embankments exceeding 3 m in height, rather than 4 m in height as originally envisaged. The major works executed to meet expressway operational requirements, which were originally not covered by the scope of the project, included (a) the construction of roadside facilities along the Expressway,  -4 - comprising 21 toll stations, 7 service areas and 11 buildings for general and toll administration and maintenance depots; and (b) erecting protective fencing along the Expressway. 11. Implementation and Supervision. The Expressway was substantially completed and opened to traffic in December 1993. The execution of the works was not proceeding without problems. Although the local contractors were prequalified, they lacked experience in carrying out major highway works of comparable magnitude and complexity, managerial skills and material and financial resources. As highlighted in the quarterly progress reports and observed during Bank Group supervision missions, the civil works were not carried out consistently according to the technical specifications. The Bank Group's April 1993 supervision mission, for example, noted defective workmanship and materials during the execution of several phases of the ongoing works as well as the lack of adequate supervision. Consequent on such observations, an understanding was reached with SPTD about the measures to be taken for improving the quality of construction and the effectiveness of supervision operations. The Bank Group also insisted that a foreign supervisor be mobilized, in addition to two site supervision engineers already on site, to assist with the quality control in general and with the critical phase of asphalt paving works in particular. The executing agency complied with the Bank Group's requests and also assured the Bank Group that the contractors, as instructed by the supervision units, had corrected and will be correcting deficient works to ensure that the technical specifications are met. 12. A foreign consulting firm, engaged to assist SPTD in construction supervision, provided 124 person-months of services. A combined team of SPTD and foreign and local engineers were responsible for on-site supervision and quality control, and ensuring that works on the JQE were carried out in full compliance with the technical specifications. The supervision organization set up for this purpose comprised a Central Supervision Unit, headed by the Chief Supervision Engineer, and five Resident Supervision Units located along the alignment of the Expressway. The foreign engineering personnel helped establish the framework and procedures for the supervisory work and trained the SPTD staff, local engineers and technicians. Such training was not only a significant means of technology transfer but also an essential measure for trying to ensure effective control of the quality of JQE construction with adequately trained personnel. The performance of the supervision units was generally satisfactory, except for periodic lapses, as highlighted in para. 11. Despite these difficulties, the intervention of SPTD and the supervision units eventually ensured that the quality of construction met the technical requirements. Overall, the effectiveness of supervision seems to be proven by the relatively infrequent and only minor correcting works emerged following the completion of JQE. 13. Traffic Monitoring, Telecommunications and Tolling Systems [Electronics, Electrical and Mechanical (E&M) Worksl. The original scope of the project covered only partially the equipment requirements of the E&M works and did not include at all the systems' software development and installation works. However, the Bank Group  -5 - already in the early phase of the implementation agreed to utilize a portion of the unallocated loan/credit proceeds for financing a supply and installation contract to undertake the entire E&M works. Because SPTD primarily focused on the timely completion of JQE's civil works and it lacked experience with the type of E&M works required for expressway operations, the formulation and design of this component was delayed. The bidding documents were issued only in March 1995, and further delays were encountered during ICB procurement, bid evaluation and clearance of the contract award processes at provincial and national levels as well as in the Bank Group. Consequently, the for E&M works supply and installation contract was awarded only in May 1996. Moreover, there were delays in establishing the letter of credit for this contract. The contractor's mobilization of sufficient manpower and other resources proceeded slowly, and the installations of the systems suffered further delays. Thus, the commissioning of systems was completed only at the end of June 1997 and trial operations commenced in July 1997. Fortunately, the delays had no substantive adverse effect on the operation of the JQE. Traffic has been using the Expressway since December 1993, and tolls were collected since then using temporary toll collection facilities. The supervision of the E&M works was carried out satisfactorily by a group of local experts specially selected for the task from various institutions. The personnel and the scope of sevices of the group was approved by the Bank Group. 14. Improving Road Safety. Road accident statistics for the Province, which was reviewed during project preparation revealed that road safety concerns warranted urgent attention. It was therefore agreed at negotiations that a Road Safety Program will be carried out under the project. The scope of the Program was designed to be in line with the recommendations of the China Road Safety Project, which was financed under the first Highway Project (Loan 2539-CHA/Credit 1594-CHA), and the experience gained from the Sichuan Road Safety Pilot Program, executed by the Highway Scientific Research Institute (HSRI) of MOC with the assistance of foreign experts during 1987. The objective of the Shandong Road Safety Program was to collect and analyze traffic accident data on two major provincial roads (200 km in total length), which would have helped identify high frequency accident locations (black spots). Such data would have led to the implementation of safety measures for reducing the number of traffic accidents (Annex 3 of the SAR). This pilot exercise for identifying road safety measures was to be eventually extended to cover the more heavily trafficked segments of the national and provincial road network of the Province. However, SPTD had encountered administrative difficulties in the execution of this project component since in the late 1980s the Central Government decided to transfer the responsibility for traffic safety, including accident data collection and decisions on improvement measures for accident reductions, from the Provincial Transport departments to the Public Securities departments nationwide. Initially, SPTD requested the Bank Group's concurrence to the deletion of this project component. However, soon after the JQE was opened to traffic, there was a rapid buildup of an alarmingly high number of accidents. Thus the Bank Group agreed to SPTD's request that a comprehensive assessment should be made of the prime reasons for the high accident rates on the JQE instead of the original pilot road safety program. During  - 6 - 1994-97, the average annual number of accidents was about 1,000, resulting in 300 injuries and 100 fatalities. 15. With the support of SPTD, reputable international road safety experts carried out, according to terms of reference approved by the Bank, a 45-day investigation during February and March 1997. The experts' June 1997 report details the findings of the study and also outlines a 13-point action plan for accident reduction measures. The report identified poor driver behavior and excessive speed as the major causes of accidents. This is also reflected in the high proportion (49 percent) of single-vehicle accidents of which many resulted in fatalities. In addition to the drivers' lack of experience in traveling on high-speed highways, overloaded vehicles and vehicle defects, narrow shoulders on the 23 m wide sections of the JQE, poor geometry of exit and entry points at interchanges, and lack of safety provisions for maintenance crews were also substantive contributing factors to the poor safety record of the JQE. The implementation of the recommended safety plan for the JQE will require the coordinated effort of JQEMB and the Traffic Police Unit of the Public Security Department. As a first step, JQEMB proceeded with the acquisition of traffic safety-related goods and equipment, including computer hardware and software, warning signals for vehicles, beacon lights, and reflective clothing for expressway maintenance crews. Some of these equipment were financed under the project. 16. Land Acquisition and Resettlement. The cost of land acquisition and resettlement related costs increased from Y 37.06 million to Y 262.00 million. The expenses covered the removal and relocation of communication and electricity cables, intersecting and service roads, drainage and irrigation systems, dwellings and other buildings, and compensation payments for land and resettlement. Additional works were required and higher cost incurred in infrastructure relocation and rehabilitation than originally expected. Higher cost was also incurred at an archeological site to ensure the adequacy of protection. The substantial difference between the estimated cost and eventual expenditure can also be explained by the difficulties in making realistic cost estimates during project preparation of a massive program involving the acquisition of about 6,600 acres of land and relocation of about 30,000 individuals without prior experience in carrying out a program of similar magnitude and complexity. Moreover, because of the substantial interval between the time when the original estimates were made and the time of compensation payments, inflation and property value appreciation had a major impact on the final cost. As confirmed by the Bank Group's November/December 1994 Resettlement Review Mission, the land acquisition, resettlement and compensation procedures agreed at negotiations were substantially followed. 17. Environmental Protection. Since the JQE traverses flat terrain, the construction of the JQE was expected to have only very limited adverse impact on the environment. The engineering design and technical specifications provided specific treatments for the protection of embankment slopes and roadside drainage, which were applied during implementation. During the construction of the JQE, no adverse environmental problem  -7 - emerged. Some erosion or slope failure could occur on the higher embankment section of the JQE, with a risk of temporary disruption and potential pollution to irrigation channels. However, JQEMB would be well equipped to handle such emergencies promptly and efficiently. Also, it is plausible to assume that there has been a reduction of noise and air pollution in towns and villages along the arterial roads because of the diversion of traffic to the JQE from the parallel arterial roads. 18. Investment Costs. In the SAR the civil works construction cost of the highway was estimated at Y 1,603.24 million, including physical and price contingencies. A comparable final cost of JQE's civil works was Y 1,975.94 million, representing a cost increase of Y 372.70 million, about 23 percent, in current prices. Of this amount, about 40 percent was related to greater-than-expected physical quantities and extra works carried out under variation orders, and the remaining amount was paid to the contractors as compensation for price escalation. Other major Expressway-related expenditures included (a) supply and installation of equipment for E&M works. (Y 125.34 million); (b) consultant services for construction supervision (Y 40.50 million); (c) construction of facilities along the Expressway, such as service areas, administration buildings and maintenance depots (Y 203.50 million); (d) acquisition of equipment for the maintenance of the Expressway (Y 51.13 million); (e) land acquisition and resettlement (Y 262.0 million.); (f) design and survey (Y 30.92 million); (g) administrative overhead (Y 52.02 million); and (h) foreign exchange adjustment cost (Y 99.26 million). Including the above, and some other minor cost items, the final investment cost of the JQE in current prices became Y 2,850.39 million, as detailed in Table 2A of Annex 1. This cost is not directly comparable to the about Y 1,700.00 million investment cost for the highway presented in the SAR because the substantial expansion of the scope of the highway works to meet expressway operational requirements were not contemplated at the time of project appraisal. 19. Economic Evaluation. The ICR economic analysis is presented in Annex 1. The ERR on the JQE investment is estimated at 19.1 percent versus the SAR estimate of 23.0 percent. The reestimation of the ERR was based on the JQE's final investment cost, converted to economic cost at 1997 prices. The ICR analysis of ERR also included revised indices for shadow pricing, actual corridor traffic data on the JQE reflecting the split of traffic between the two parallel arterial roads and JQE during 1994-97, revised traffic forecast during 1998-2015, and updated vehicle operation costs (VOCs). The relatively small difference between the SAR and ICR estimates for ERR is the combined effect of the higher cost being well compensated by the higher benefits accruing from the greater-than-expected buildup of JQE traffic during the last four years, and the expectation that a similar trend will continue during 1998-2015. The key conclusion of the economic evaluation are: (a) The economic cost of Y 4,229.90 million arrived at in the ICR calculation is about 67.9 percent higher than the Y 2,520.00 million presented in the SAR, based on December 1997 constant prices.  -8 - (b) The 1997 average daily traffic (ADT) in the corridor of the Expressway differed only marginally from that forecast in the SAR. However, the split of traffic between the two arterial roads located on the northern and southern side of the JQE and on the JQE was somewhat different from that expected at appraisal. The rate of diversion of traffic on Section I of the Expressway (Qingdao-Weifang) was about 55 percent higher than forecast. On Section 2 (Weifang-Zibo) it was about 8 percent higher, while on Section 3 (Zibo-Jinan) the difference was insignificant. (c) The 1997 daily traffic on Sections 1 and 3 well exceeded SAR forecast but fell below somewhat of the forecast level on Section 2. However, the net result was that the 1997 ADT traffic on the JQE, in terms of the weighted average daily traffic per kilometer on the three sections of the JQE, was 390,000 vehicle- kilometer (vkm)/day higher than the SAR forecast, a difference of about 12 percent. Such increase represents a substantially higher level of VOC savings for 1997 than assumed during project appraisal. (d) Higher VOCs and associated benefits are expected to be sustainable in the future, even with somewhat lower annual traffic growth rates than presented in the SAR (para. 8 of Annex 1). 20. Financial Evaluation. The toll revenue is the only source of income from the JQE. The toll charges were changed once (in July 1995) since the opening of JQE to traffic in December 1993 and are still in force. The revenues increased by an average of 38.3 percent a year during the first three years of operation (1994-96). The financial cost of Y 3,063.65 million included the investment cost of Y 2,850.38 million for the JQE, as well as Y 212.97 million, representing loan/credit servicing cost, taxes and the cost of minor project components (Table 2A of Annex 1). The estimated financial rate of return (FRR) against the financial costs is 8.8 percent. The revenue stream generated is expected to cover future operating and maintenance costs of the JQE and also meet still outstanding financial obligations on borrowings. The detailed financial analysis is presented in Table 6 of Annex 1. 21. Tolling. The expressway is operated as a closed toll system with 21 toll stations. The toll rates are determined according to the types of vehicle and distance traveled. As stipulated in Section 2.06 of the Project Agreement, the toll rates charged should not exceed 30 percent of the VOC savings for the various groups of vehicles. On average, the toll rates for large-size vehicles are comparable to, and on medium-size vehicles, tractor- trailers, are only slightly higher than 30 percent of the VOC savings. However, the toll rates for small-size vehicles well exceed 30 percent of the VOC savings. The sections of the JQE on which the travel distance is significantly shorter than on the parallel arterial roads, the 30 percent of VOC savings are close or even higher than the toll rates. This could indicate that toll rates higher than 30 percent of VOC savings are not necessarily a deterrent to road users, if it results from substantial distance and time savings. The economic and financial VOCs and 30 percent of the VOC savings, as of 1997, are  - 9- presented in Table 7 of Annex 1. The outcome of the analysis is approximate and indicative only. A comprehensive origin and destination survey-based study of the JQE traffic would be required for reaching more reliable conclusions regarding the relationship between toll charges and VOC savings. Obviously, this could not be done within the scope of this ICR. Equipment Procurement 22. The following groups of equipment were to be purchased under the project at an estimated cost of $13.20 million, including physical and price contingencies: (a) maintenance equipment, including five types, 25 units for $4.00 million; (b) instruments and equipment for the road condition survey program, three types and four units for $0.25 million; (c) research equipment for central road laboratory, three types, 19 units for $0.80 million; and (d) equipment for traffic monitoring, telecommunications and tolling for $8.15 million. 23. The maintenance equipment acquired under item (a) exceeded the original estimate in terms of types, number of units and cost. SPTD had requested and the Bank Group agreed to the procurement of additional equipment and altogether 18 types, 28 units were acquired for $6.16 million. The about 50 percent increase in investment for highway maintenance equipment was well justified, considering the close to 320 km length of the JQE and SPTD's complete lack of modern maintenance equipment for high- class highways. The additional cost was covered from the unallocated contingency category of the loan proceeds. 24. The acquisition cost of instruments and equipment for road condition survey and Road Data Bank (RDB), item (b) above, as well as instruments and equipment for the road laboratory, item (c) above, were within the budget allocated for these purposes. The actual expenditures were $0.18 million and $0.49 million, respectively. However, the list of items purchased differed somewhat from those listed in Tables 3.1 and 3.4 in the SAR based on a further review of requirements during project implementation. 25. As elaborated in para. 13, traffic monitoring, telecommunications and tolling systems for the JQE were provided through a supply and install contract, and equipment related to this component of the project was not procured separately. 26. The road safety measure-related equipment acquisition was an addition to the project, at a cost of $17,000, including computer hardware and software, warning signals for vehicles, beacon lights and reflective clothing for expressway maintenance crews. Staff Training 27. Training of SPTD Staff. The training program implemented comprised training courses and study tours conducted in several European countries, the United States, Canada and Thailand. The training courses, under 15 separately organized programs, covered the following topics: highway planning and design, highway and bridge  - 10- construction, project, pavement, equipment, highway maintenance and financial management, expressway operations including tolling and overall highway administration, and RDB and Pavement Management System (PMS) programs and applications. Most of the training courses were prepared and administered under an MOC-coordinated program, involving the staff of several other provincial transport departments, which were executing agencies of simultaneously ongoing Bank Group- financed highway projects with staff training components. The training program commenced in July 1991 and was completed during the first half of 1997. 28. A total of 89 persons participated in the program, involving about 112 person- months, at an overall cost of $920,000, i.e. about $8,200/person-month. The program as envisaged would have included the training of 37 persons involving 150 person-months at an estimated cost of $900,000, corresponding to $6,000/person-month. The training program as executed involved more than twice as many trainees but with shorter periods of training. This resulted in higher overall costs of travel and accommodation, which, in addition to inflation, could explain the higher-than-expected per person-month cost of training. The person-months cost of training is similar to those incurred under other recently completed Bank Group-financed highway projects in China. Pavement Evaluation, Road Data Bank and Pavement Management System 29. Originally, the road pavement evaluation component of the project was to be carried out by SPTD with the assistance of consultants financed from the proceeds of the Bank Group loan/credit in accordance with the terms of reference presented in Annex 2 of the SAR. However, shortly before the conclusion of the loan/credit negotiations, an agreement was reached between the Chinese and Finnish governments that this project component will be undertaken by SPTD with the assistance of a Finnish technical team under bilateral aid. Thus, SPTD and a team from the Finnish National Road Administration proceeded with a pilot study during March 1989 and June 1990 to evaluate existing pavement conditions of road segments totaling 560 km in the Jining District of the Province. The report of the study was completed in April 1991. The pilot study identified equipment, materials and manpower resources required for road condition survey, prepared programs for pavement strengthening and maintenance management for the pilot district. The comprehensive computerized system established was suitable for determining investment priorities for the paved roads, and also laid the groundwork for the development of a program for paved road strengthening and maintenance management for Shandong Province. 30. The system developed under the pilot study was functional and quite suitable for applying it to the main paved network of the Province. However, it was decided to bring the system developed under the pilot program in line with the nationwide programs, which evolved in the interim based on the Chinese RDB and PMS. In the early 1990s good progress was made on the development and pilot application of both programs by the Highway Planning and Design Institute (HPDI) and the Highway Scientific Research Institute (HSRI), respectively, under the guidance and coordination of MOC. The  merging of the Jining District pilot program and the nationwide programs took place during 1991-93. Thereafter, the RDB has been built up gradually for the core 17, 000 km national and provincial network, and the PMS has been introduced in all 17 prefectures/municipalities of the Province. C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 31. Although the overall completion of the project was delayed by about two years, its main objective, i.e., to relieve traffic congestion in the Jinan-Qingdao corridor, was achieved with the opening of the JQE to traffic at the end of 1993 as planned. The two- year project completion delay was predominantly due to the delay in the preparation, procurement and implementation of the E&M works. However, it was possible to commence toll collection through taking temporary measures; thus, cost recovery suffered no delays. 32. Delays in the implementation of E&M works occurred for a number of reasons. It seems that at the time of project preparation there was no firm timetable for operating the Jinan-Qingdao Highway as a tolled facility. Such uncertainty is reflected in the scope of works presented in the SAR, which did not cover the installation component of E&M works, the construction of roadside facilities and fencing of the highway's right-of-way, provisions that are normally required for the efficient operation of a tolled expressway. One of the reasons for the somewhat vague definition of the scope of the Expressway works could have been the absence of the Central Government's firm policies on tolled expressways in the early 1990s. During implementation, at SPTD's request, the Bank Group agreed to the financing of the foreign exchange components of a supply and installation contract for the E&M works from the uncommitted balance of the loan/credit proceeds. However, with the limited experience in China in the planning, design and procurement of this type of works, the delays that occurred are understandable. Some further delay occurred also during the execution of the contract. 33. The additional investments for providing roadside facilities, covering the construction of buildings for general and toll administration and maintenance depots, and fencing of the JQE's right-of-way to ensure that motorized vehicle entry to and exit from the JQE can take place only at interchanges, and to keep away pedestrians, tractors, animal-drawn vehicles from the Expressway, were made by the Province under local financing, following consultation with the Bank Group. 34. Despite the limited experience of the civil works contractors in similar large-scale highway works, the periodic lapses in performance and lack of consistency and effectiveness of quality control by the supervision units the JQE was completed satisfactorily. This is substantiated by the fact that no substantive technical deficiency surfaced during the almost four-year operation of the JQE. However, the very high level of accidents remains a major concern, although with the execution of the safety program recommended by the recent safety study there is a good chance that the safety record of the JQE would improve over time.  - 12- 35. The timing of the completion of the relatively minor components of the project shifted also because of the lower priority accorded these components after realizing that an overall delay of about two years could no longer be avoided on account of the delay to the E&M works. Thus, equipment acquisition and some of the training prograrn were finalized only during the first half of 1997. Regarding the acquisition of maintenance equipment for the JQE, delays were encountered during the preparation of bidding documents by designated procurement agencies and internal clearance processes, which required the submission of documentation for all imported equipment to a designated State agency. 36. The objectives of the pilot program for pavement evaluation and the development of a methodology for the preparation of road investment and maintenance programs were achieved, and its extension to the 17,000 km core arterial road network of the Province proceeded well. Such progress was supported by the development of the RDB and PMS programs nationwide under the Central Government's initiative and coordination and their introduction to all prefectures and municipalities of the Province. The SAR did not stipulate any particular timetable for such expansions of the programs but the advances made to date by the Province in this respect are commendable. D. PROJECT SUSTAINABILITY 37. The physical condition of the JQE has shown no signs of adverse deterioration since it has been in service. The increase in corridor traffic is expected to continue in line with the trend of the economic development in the influence area of the JQE, and the Expressway's share of traffic is expected to remain significant. Thus, there is no discernible risk to the steady growth in toll revenues, which should be adequate for funding the administrative and maintenance expenses of the JQE, the servicing of debt and the repayment of the loan and credit as scheduled. 38. The maintenance equipment fleet acquired under the project should provide adequate long-term service, since operators have been trained, sufficient stock of essential spares have been purchased and maintenance facilities have been provided. 39. The information from the staff training program is expected to be disseminated within the provincial institutions involved, reach the majority of SPTD personnel and have a long-term influence on provincial road administration and management methods and highway-specific technology. 40. The methodology of the pavement evaluation pilot study and application of the Chinese RDB and PMS programs have been deployed in all prefectures and municipalities of the Province. It is expected that, with the regularly collected input data, the system will provide the necessary output information to help make improved investment decisions for road improvement and maintenance as part of the budgetary process.  - 13 - E. BANK GROUP PERFORMANCE 41. The scope of the project, in general, was in line with the sectoral investment priorities and the development objectives of the Province and the Central Government and with the Bank Group's assistance strategy for China in the late 1980s. However, the formulation of the project lacked clarity regarding the requirements for the construction of a new highway in the Jinan-Qingdao corridor. The Province was in favor of adopting an expressway design standards for the new highway from the beginning; however, during the project's preparation the Central Government was unwilling to endorse the Province's request, seemingly for budgetary reasons, and Class I highway design standards were adopted for the new highway over most of its length (para. 7 and 8). During implementation, the scope of the Jinan-Qingdao Highway was expanded into a full-fledged tolled expressway, except that the formation width remained 3 m narrower over a 200 km section of the highway. It could be argued whether the Bank Group should have had the foresight and firmness to formulate the highway component of the project fully meeting expressway requirements from the beginning. 42. A comparative economic evaluation for the highway design standard alternatives was not carried out as part of the ICR evaluation. However, the traffic safety study (para. 15) identified the narrower shoulders and central medians as safety risk features with very limited recourse for corrective measures. Since the width of the pavements are the same for both a Class I highway and an expressway design alternative, the 3 m reduction in the formation width required the narrowing of shoulders and central median. The other negative aspect of the lack of clarity concerning the exact nature of the specifications for the new highway was that substantive additional investments had to be made during implementation, as detailed in para. 10, to achieve the requirements for operating the new highway as a tolled expressway. 43. Despite these negative aspects of the piecemeal adjustments made to the scope of the JQE during its construction, it would be farfetched to level the blame on the Bank Group for the way the highway was formulated. It should be recognized that the development of the strategic interprovincial expressway system at the end of the 1980s and the beginning of the 1990s was in a transitional phase. The Bank Group would not have been prudent to insist on a higher-level investment in this project against the firm views of the Central Government. Furthermore, the economic evaluation methodologies were not sufficiently refined to draw firm conclusions from minor geometrical differences on the overriding merits between the alternatives. As it happened, other than the safety aspect referred to in para. 15, no adverse impact has been noticed regarding the operation of the JQE as an effect of the manner the JQE was implemented. 44. The Bank Group mounted 10 supervision missions during 1990-97, which is on average just slightly more than one mission per year. On other Bank Group-financed highway projects that were implemented more or less simultaneously with the Shandong Provincial Highway Project, the frequency of supervision missions was closer to two per year. A plausible explanation for this is that considering staff resource constraints and the  -14- fact that most of the other ongoing highway projects encountered greater implementation difficulties than this project, there was no major risk involved by lowering the frequency of missions. Furthermore, SPTD gained experience during the execution of the Shandong provincial road component of the first Highway Project, and the advantage of such experience was well manifested in SPTD's ability to handle the execution of the project without major risk and difficulty. Thus, the Bank Group's involvement in the implementation of the project was adequate and commensurate with the level of local experience and complexity of the project. 45. The Bank Group has shown flexibility in dealing with the changes in the project's scope, such as the financing of one additional interchange, the supply and installation contract for E&M works and not just the equipment acquisition as originally planned, and a safety study for the JQE instead of a pilot safety study for the provincial road network. Also, in response to the Borrower's request to extend the closing date by one year, the Bank Group concluded that a two-year extension was more realistic for completing the still outstanding works. During this period SPTD also proceeded with the extension of the scope of the JQE by providing administrative and maintenance facilities along the JQE and fencing the right-of-way of the JQE. The Bank Group had no objection to carrying out these works as part of the project, although these works had to be financed entirely by the Province since the loan and credit funds had already been fully committed. F. BORROWER PERFORMANCE 46. SPTD under the first Highway Project was exposed to implementation management practices normally associated with Bank Group-financed projects. The benefit of that experience was apparent during the preparation and administration of the project. Moreover, SPTD has had a reputation as one of the most experienced road administrations in China with a well-constructed and well-maintained road network. The Borrower and SPTD have complied substantially with the conditionalities of the loan, credit and project agreements. The Bank Group's procedural requirements were substantially followed, although there were gaps and delays in SPTD meeting progress reporting requirements. The cooperation between the Borrower, the Executing Agency and the Bank Group was cordial and professional throughout the preparation, appraisal and implementation of the project. 47. SPTD can take credit for the substantial completion of the JQE's civil works as scheduled. As indicated in the preceding, the experience of civil works contractors in the implementation of highway works to international specifications was limited. However, despite the problems encountered by the contractors from time to time on account of a shortage of material supplies, lack of financial resources and contract administration skills, SPTD was able to help overcome such difficulties with its managerial and technical experience and the support of the supervision units. 48. Since the experience with the supply and installation of traffic monitoring, telecommunications and tolling systems in China was very limited in the early 1 990s, it is  - 15 - understandable that SPTD had problems in defining the scope of the required E&M works for the JQE. Delays occurred not only in the preparation but also in the procurement and execution of the works. The process for obtaining internal clearances for the bidding documents was also much slower than expected due to the cumbersome internal clearance process of equipment procurement involving some departments of the Central Government. G. ASSESSMENT OF OUTCOME 49. The project was implemented satisfactorily and its objectives have been substantially achieved. The main component of the project, the construction of the JQE, was completed and opened to traffic at the end of December 1993, as scheduled. The development objectives of the project have also been achieved and the economic reevaluation presented in this report confirmed that the investment in the JQE was economically viable, with a slightly lower estimate for the ERR than that of the SAR. Furthermore, the economic benefits are considered to be sustainable without any predictable elements of risk. Because of the favorable prospect for continued strong economic activity in the influence area of the JQE, the road user benefits as well as toll revenues are expected to increase proportionally with the rate of traffic growth. 50. Overall, the contractors' performance was adequate despite periodic lapses in the quality of works and recurrent problems with material and financial resources. The executing agency's prior experience in the administration of Bank Group-financed road works, combined with technical and administrative competence, was a major attribute to the satisfactory outcome of the project. The supervision units also performed satisfactorily, despite periodic lapses in their perseverance and effectiveness in controlling quality. 51. The level of impact of technology transfer through training is not easy to measure due to a lack of well-defined baseline parameters. Nonetheless, the training courses and study tours were a useful means of technology transfer and provided a satisfactory level of exposure to new concepts and incentives for adoption in the Chinese environment. Similarly, technology transfer through modern equipment for the operation and maintenance of the JQE should achieve its objectives and ensure that the JQE will be efficiently operated and adequately maintained. 52. The pilot pavement evaluation study was implemented satisfactorily. The local personnel participating in the pilot program gained valuable experience in the various aspects of the system's development. The progress on sectoral development in the context of the expansion of RDB and PMS programs for the core arterial road network of the Province has been also good. This was achieved through the adoption of the Chinese RDB and PMS programs, which were developed for nationwide applications and required some adjustment to the system evolved from the Jining District pilot study. At present, the RDB and PMS programs are operational in all 17 prefectures/municipalities of the Province and cover the primary paved network of 17,000 km.  - 16- 53. Overall, the project was implemented within the terms of the development credit and loan agreements, and in substantial compliance with the Bank Group's procedural requirements. The credit and loan proceeds were not extended to any component of the project without obtaining prior clearance from the Bank Group. H. FUTURE OPERATIONS 54. Since the end of 1993 the operation and maintenance of the JQE, has been the responsibility of JQEMB. As demonstrated over the last four years, JQEMB is a well- organized and technically competent institution to have such responsibility. The operational and financial parameters of the JQE, such as traffic volume, tolling revenues, traffic accident records, annual maintenance fees and administrative overhead expenditures will be monitored routinely, and the performance of the JQE will be periodically reassessed in terms of ERR and FRR. JQEMB is in the process of consolidating administrative and operational rules and regulations in staff manual formats. 55. SPTD will continue to make improvement to the RDB and PMS programs. A new version of the computer model for PMS should be operational by the end of 1998. Having the RDB and PMS programs in place, the appropriate application of these programs should help optimize the benefits from road improvement and maintenance investments. 56. There could be a major change in the ownership and management of the JQE if Shandong Province succeeds in selling a portion (60 percent) of the JQE to a Hong Kong- based financial institution. The remaining portion of the assets of the Expressway would be administered by a stock holding company to be established, and the shares of the company would be listed on one of the Chinese stock exchanges. The JQE was valued at Y 5.2 billion in early 1997. The Bank Group has informed the Province and the Central Govermment about its no-objection to such transformation of ownership for the JQE in principle, subject to receiving specific documentation on the terms of the transactions and regulations involved, as required by the Bank Group. I. KEY LESSONS LEARNED 57. Project Preparation and Costing. The scope of the highway component of the project lacked clear definition and consistency. Thus, the project highway was not built according to a well-conceived and well-defined concept; it rather "evolved" into an expressway facility in the course of implementation. As it happened, this deficiency has not been detrimental to the viability of the JQE. The higher cost of the JQE was compensated for by higher-than-expected stream of benefits on account of the higher- than-expected diversion of corridor traffic to the JQE. Nevertheless, the deficiency of the formulation of the project has been transparent enough to put it on record, even if there were mitigating circumstances for it at the time of project formulation: (a) the Borrower had no clear policy for the development of a strategic highway network for the country; and (b) constraints on the availability of counterpart fumding for the project must have been seen as a major risk; and (c) limited experience with the design and operation of  - 17- electronic, electrical and mechanical works (traffic monitoring, telecommunications and tolling) which could explain the initial omission of some highway-related expenditure items from the project. Notwithstanding these considerations, it could be argued that the Bank Group could have been more alert to the potential disadvantages in proceeding with the financing of the Jinan-Qingdao highway with a vague definition of its scope and ultimate objectives. 58. Highway Safety. The traffic safety record of recently completed Bank Group- financed highways has been a major cause for concern. The high rates of accidents on recently built expressways also bring into question the conventional notion that expressways are safer than arterial roads of the network. Although there is no conclusive statistical evidence either way, the indications are that the Chinese drivers' lack of experience in handling vehicles at high speeds, combined with the relatively poor condition of the vehicle fleet, have been the major causes of the excessive rate of accidents on high standard highways. Since road safety is a complex issue, which extends well beyond engineering aspects, the ICR issued for the Jiangxi Provincial Highway Project already highlighted the importance of formulating a comprehensive road safety strategy for China and recommended to the Bank Group to intensify its dialogue with the Central Government on the issues involved. Well-documented evidence of the safety record of the JQE adds further urgency to the earlier recommendations regarding highway safety issues. 59. Preparation and Execution of E&M Works for Expressways. The two-year delay of the completion of the project is partly attributable to the fact that initially the project covered only the acquisition of equipment associated with traffic monitoring, telecommunications and tolling, but not its installation. Although, the decision to include the full extent of the works in the project under Bank Group financing was made soon after the commencement of civil works, the preparation and processing of the E&M works proceeded very slowly. Since similar delays occurred under other Bank Group- financed highway projects under implementation in the early 1990s, the Bank Group, in consultation with MOC, initiated steps that now ensure the design and technical specifications for E&M works are completed more or less at the same time as the design and the technical specifications for the civil works contracts.  - 18- PART II: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic policies x Sector policies X Financial objectives (cost recovery) X Institutional development X Physical objectives X Poverty reduction X Gender issues X Other social objectives X Environmental objectives X Public sector management X Private sector development X B. Project Sustainability Likely Unlikely Uncertain x C. Bank Group Performance Highly Satisfactory Satisfactory Deficient Identification x Preparation assistance X Appraisal X Supervision X D. Borrower Performance Highly Satisfactory Satisfactory Deficient Preparation X Implementation X Covenant compliance X Operation (if applicable) X E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory x  - 19 - TABLE 2: RELATED BANK GROUP LOANS/CREDITS Year of Loan/credit title Purpose approval Status Highway Project Provincial road network FY85 completed Ln.2539-CHA/Cr. I 954-CHA expansion/ improvement Beijing-Tianjin-Tanggu Expressway Project see footnote La FY87 completed Ln.281 I-CHA/ Cr. 1792-CHA Sichuan Provincial Highway Project see footnote La FY88 completed Ln.295 I -CHA/ Cr. 1917-CHA Shaanxi Provincial Highway Project see footnote La FY88 completed Ln.2592-CHA Jiangxi Provincial Highway Project see footnote La FY89 completed Cr. 1984-CHA Jiangsu Provincial Transport Project see footnote La FY91 completed Ln.3316-CHA/Cr.2226-CHA Zhejiang Provincial Highway Project see footnote La FY92 ongoing Ln.3471-CHA Henan Provincial Highway Project see footnote /a FY93 ongoing Ln.3531-CHA Guangdong Provincial Highway Project see footnote La FY93 ongoing Ln.3530-CHA Fujian Provincial Highway Project see footnote La FY94 ongoing Ln.3681 -CHA Hebei/Henan National Highway Project see footnote La FY94 ongoing Ln.3748-CHA Xinjiang Highway Project I see footnote La FY95 ongoing Ln.3787-CHA Shanghai-Zhejiang Highway Project see footnote La FY96 ongoing Ln.3929-CHA Second Shaanxi provincial Highway Project see footnote /a FY96 ongoing Ln.3986-CHA Second Henan Provincial Highway Project see footnote La FY96 ongoing Ln.4027-CHA Second Xinjiang Highway Project see footnote La FY97 ongoing Ln.4099-CHA Second National Highway Project see footnote La FY97 ongoing Ln.4124-CHA /a These highway projects, typically, have had the following components: (i) construction of a major highway; (i) improvement of provincial roads; (iii) procurement of road maintenance equipment; and (iv) institutional development components, such as RDB and PMS programs, staff training and selected subsector-oriented studies.  - 20 - TABLE 3: PROJECT TIMETABLE Steps in project cycle Date planned Date actual Identification (Executive Project Summary) 08/87 08/87 Preparation 10/87 04/88 Appraisal 01/88 07/88 Negotiations 04/88 04/89 Board presentation 06/88 05/89 Signing 09/89 09/89 Effectiveness 12/89 12/89 Project completion 12/94 06/97 Loan closing 06/95 06/97 TABLE 4: LOAN/CREDIT DISBURSEMENT: CUMULATIVE ESTIMATE AND ACTUAL (US$ million) FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 Appraisal estimate 11.00 22.00 48.40 77.00 101.20 110.00 Actual 7.00 18.05 46.29 74.03 87.76 89.95 94.00 105.73 110.00 Actual as % of adjusted estimate 64.0 82.0 95.0 96.0 86.0 82.0 85.5 96.1 100.00 Date of final disbursement July 24, 1997  -21 - TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Estimated LZ Actual Key implementation indicators in SAR Start Complete Start Complete 1. Highway Construction 04/89 06/94 06/90 12/93 2. Equipment for Pavement Evaluation 06/89 04/90 01/92 02/93 3. Equipment for Road Maintenance 09/91 10/92 07/95 06/97 4. Equipment for Traffic Monitoring 05/93 05/93 06/96 06/97 5. Road Data Bank 12/90 12/94 02/96 06/97 6. Consulting Services 08/89 12/94 07/90 12/93 7. Staff Training Lb 06/89 12/92 07/90 07/97 8. Road Safety NA NA 02/97 06/97 La Pages 73-74 of the Staff Appraisal Report. Lb Most of the staff training program was completed by the end of 1996. TABLE 6: KEY INDICATORS FOR PROJECT OPERATIONS Length (Iam) Traffic (1997 ADT) Estimated Actual Estimated Actual Highway Construction Qingdao-Weifeng 100.00 100.00 7,541 10,763 Weifeng-Zibo 98.00 98.00 11,946 10,609 Zibo-Jinan 121.00 120.30 10,680 12,317 Total 319.00 318.30 TABLE 7: STUDIES INCLUDED IN PROJECT Study Purpose as defined at Appraisal/Redefined Status Impact of Study Pavement Management SPTD proposed to evaluate the condition Completed Implemented in all 17 prefec- and Strengthening Study of the paved roads in order to prepare a tures and covers full length of strengthening program and to review the the 17,000 km paved road organizational and operational aspects of network. paved roads maintenance to bring them up to date.  - 22 - TABLE 8A: PROJECT COSTS (Y million) Appraisal estimate Actual/atest estimate Item Local Foreign Total Local Foreign Total Jinan-Qingdao highway 563.28 585.89 1,149.17 1383.16 592.78 1,975.94 Consultant services for supervision 20.00 4.80 24.80 26.80 13.70 40.50 Equipment for road strengthening program 0.00 0.75 0.75 0.00 1.48 1.49 Road planning (Road Data Bank) 0.00 1.85 1.85 0.00 4.32 4.32 Road maintenance equipment 0.00 11.10 11.10 0.00 51.13 51.13 Research equipment for central road 0.00 2.22 2.22 0.00 4.07 4.07 laboratory Traffic monitoring and communication 0.00 22.80 22.80 44.00 81.34 125.34 equipment Staff training 0.00 3.33 3.33 0.00 7.64 7.64 Technical assistance and road safety 0.00 0.37 0.37 0?00 0.83 0.83 equipment Subtotal 583.28 633.11 1,216.39 1,453.96 757.29 2,211.25 Additional Cost Items Design and Survey 30.92 0.00 30.92 Facilities along JQE 203.50 0.00 203.50 Research; test-section of JQE 4.88 0.00 4.88 Overhead 52.02 0.00 52.02 Foreign exchange loss 99.26 0.00 99.26 Loan/credit serivicing and tax 199.82 0.00 199.82 Subtotal 590.40 0.00 590.40 Base Cost 583.28 633.11 1,216.39 2,044.36 757.29 2,801.65 Physical contingencies 58.33 63.31 121.64 Price contingencies 232.54 99.89 332.43 Subtotal 874.15 796.31 1,670.46 Land acquisition cost 37.06 - 37.06 262.00 0.00 262.00 Total Project Cost 911.21 796.31 1,707.52 2,306.36 757.29 3,063.65  - 23 - TABLE 8B: PROJECT COSTS (US$ million) Appraisal estimate Actual/latest estimate Item Local Foreign Total Local Foreign Total Jinan-Qingdao highway 152.24 158.35 310.59 346.56 148.53 495.09 Consultant services for supervision 5.40 1.30 6.70 3.23 1.65 4.88 Equipment for road strengthening program - 0.20 0.20 0.00 0.18 0.18 Road planning (Road Data Bank) - 0.50 0.50 0.00 0.52 0.52 Road maintenance equipment - 3.00 3.00 0.00 6.16 6.16 Research equipment for central road - 0.60 0.60 0.00 0.49 0.49 laboratory Traffic monitoring and communication - 6.15 6.15 5.30 9.80 15.10 equipment Staff training - 0.90 0.90 0.00 0.92 0.92 Technical assistance and road safety 0.00 0.10 0.10 0.00 0.10 0.10 equipment Subtotal 355.09 168.35 523.44 Additional Cost Items Design and Survey 7.73 0.00 7.73 Facilities along JQE 29.07 0.00 29.07 Research; test section of JQE 0.70 0.00 0.70 Overhead 10.40 0.00 10.40 Foreign exchange loss 19.85 0.00 19.85 Loan/credit servicing and tax 39.96 0.00 39.96 Subtotal 107.72 0.00 107.72 Base Cost 157.64 171.10 328.74 462.81 168.35 631.16 Physical contingencies 15.76 17.11 32.87 Price contingencies 24.87 27.00 51.87 Subtotal 198.27 215.21 413.48 Land acquisition cost 10.02 - 10.02 70.81 0.00 70.81 Total Project Cost 208.29 215.21 423.50 532.62 168.35 701.97  - 24 - TABLE 8c: PROJECT FINANCING (US$ million) Appraisal estimate Actual/late estimate Source Local Foreign Total Local Foreign Total IBRD/IDA 0.00 110.00 110.00 0.00 110.00 110.00 Central Government 40.50 0.00 40.50 191.69 0.00 191.69 Provincial Government 167.79 105.21 273.00 345.93 58.35 400.28 Total 208.29 215.21 423.50 533.62 168.35 701.97 TABLE 9: ECONOMIC COSTS AND BENEFITS Costs La Benefits Lb NPV k ERR (%) Jinan-Qingdao Highway The ICR 4,229.90 411.70 2,689.80 19.1 The SAR 2,520.00 397.80 4,771.20 23.00 La December 1997 prices. See table 2A of Annex 1. & First-year benefits (December 1997 prices). See Table 5 of Annex 1. LI Discount rate = 12 percent.  - 25 - TABLE 10: STATUS OF LEGAL COVENANTS Cove- Original Revised Agree- nant Present fulfillment fulfillment ment Section type Status date date Description of covenant Comments Credit 2.02(b) I C Open Special Account and operate it according to Schedule 4 of the Development Credit Agreement 3.01(a) 5 C Commitment to project objectives and meeting obligations by Beneficiary under the Project Agreement 3.01(b) 3 C Satisfactory onlending arrangement to Beneficiary 3.02 5 C Compliance with Schedule 3 of the Development Credit Agreement 3.03 5 C Meeting requirement of General Conditions, Section 9.03-9.08 4.01 I C Maintaining adequate financial recording and auditing reporting requirements Project 2.01 5 C Commitment to project objectives and meeting obligations by Beneficiary under the Project Agreement 2.02 5 C Compliance with Schedule 3 of the Development Credit Agreement 2.03 5 C Meeting requirement of General Conditions, Section 9.03-9.08 2.04(a) 9 C Exchange of views with the Bank Group 2.04(b) 9 C Information on interference with project implementation 2.05 12 C Carry out Resettlement Plan 2.06 9 CP Toll charges not to exceed 30% of vehicle operating cost savings Covenant Class: Status: I = Accounts/audits 8 = Indigenous people C = covenant complied with 2 = Financial performance/revenue 9 = Monitoring, review, and reporting CD = complied with after delay generation from beneficiaries 10 = Project implementation not CP = complied with partially 3 = Flow and utilization of project covered by categories 1-9 funds 11 = Sectoral or cross-sectoral 4 = Counterpart funding budgetary or other resources 5 = Management aspects of the allocation project or executing agency 12 = Sectoral or cross-sectoral policy/ 6 = Environmental covenants regulatory/institutional action 7 = Involuntary resettlement 13 = Other  - 26 - TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS There was no significant lack of compliance with an applicable Bank Group Operational Manual Statement (OD or OP/BP) TABLE 12: BANK GROUP RESOURCES: STAFF INPUTS Planned Actual Stage of project cycle Weeks $ Weeks $ Preparation to Preappraisal NA NA 62.2 169.5 Appraisal NA NA 44.8 109.9 Negotiations to Board NA NA 5.8 16.4 Supervision NA NA 64.5 187.4 Completion NA NA 7.0 15.8 Total 184.3 499.0 .a As of November 25, 1997. TABLE 13: BANK GROUP RESOURCES: MISSIONS Performance rating Specialized staff Imple- Devel- Stage of project cycle Month/ Number of Days skills represented mentation opment Type of year persons in field La status L objectives problems La Identification 2/22/87 6 6 E, 00, Sp, OA Identification 7/12/87 4 5 E, 00, Sp, OA Preparation 10/12/87 3 6 E, 00, Sp Appraisal 6/19/88 3 15 E, 00, Con Board through 7/20/89 1 16 E Effectiveness 10/23/89 3 20 E, E, Sp Supervision 1 7/16/90 1 3 E 2 1 Supervision 2 3/3/91 3 5 E, 00, Con 2 1 Supervision 3 10/17/91 3 6 E, Con, 00 2 1 Supervision 4 7/25/92 2 6 E, 00 2 1 Supervision 5 4/11/93 2 6 E, OA 2 1 Supervision 6 4/7/94 2 2 E, Sp S S Supervision 7 7/15/95 1 5 E S S Supervision 8 7/14/96 3 2 E, RA, OA S S Supervision 9d 11/2/96 3 6 E, RA, OA S S Supervision 10d 4/11/97 3 6 E, RA, OA S S la 00: Operations Officer; E: Engineer; OA: Operations Analyst; Con: Consultant; FA: Financial Analyst; Sp: Transport Specialist; OS: Operations Specialist; EN: Environmentalist; CO: Counsel; DO: Disbursement Officer; RA: Research Analyst; TS: Training Specialist. 1 I. Highly satisfactory; 2: Satisfactory; S: Satisfactory Lg Typically the problems included: lack of operational and financial resources of the contractor; quality deficiencies and lack of consistently effective control of supervision and implementation delay issues Ld These missions served also as completion missions.  -27 - ANNEX I ANNEX 1: ECONOMIC AND FINANCIAL EVALUATION Preface 1. The economic analysis presented in this ICR for the Jinan-Qingdao Expressway (JQE) is based on updated data on traffic, vehicle operating costs (VOCs), economic cost and road user benefits and revised assumptions regarding future traffic growth rates. The methodology used in the economic analysis is similar to that used in the SAR and is summarized as follows: (a) capital investment and maintenance costs have been revised to reflect December 1997 prices and are included in the cost stream; (b) the benefit stream, also reflecting December 1997 prices, consists of savings in VOCs reduced traffic congestion on the existing roads, and cost savings on account of accident reduction; (c) a project life of 20 years has been assumed and the capital investment period for the Expressway was from 1989 to 1997; and (d) full benefits started to accrue on the Expressway in January 1994. 2. As in the SAR, the Expressway was divided into three sections for economic evaluation. Section 1: from Qingdao to Weifang (100.0 km); Section 2: from Weifang to Zibo (98.0 km); and Section 3: from Zibo to Jinan (120.3 km); 3. In addition to the JQE, there are two main existing arterial roads, a north road and a south road, along the Jinan-Qingdao corridor. Cost and benefit analyses were carried out separately for each section, as well as the JQE a whole. Corridor Traffic 4. The 1997 corridor traffic and its distribution between the two arterial roads and the JQE is presented in the following table, indicating the SAR forecast and the latest traffic census data:  -28 - ANNEX I NUMBER OF MOTORIZED VEHICLES PER DAY (ADT) FOR 1997 The The The New Total Diversion North Road South Road Expressway Corridor Factor (DF) (1) (2) (3) (4)=(1+2+3) (5)=(3/4) SAR Section 1 4,600 6,835 7,541 18,976 39.7% Section2 5,685 1,182 11,946 18,813 63.5% Section 3 5,440 6,218 10,680 22,338 47.9% ICR Section 1 3,911 2,838 10,763 17,512 61.5% Section 2 3,210 1,654 10,609 15,473 68.6% Section 3 5,718 7,850 12,317 25,885 47.6% (ICR/SAR) Ratios Section 1 85.0% 41.5% 142.7% 92.3% Section 2 56.5% 139.9% 88.8% 82.2% Section 3 105.1% 126.2% 115.3% 115.9% Sources: Jinan-Qingdao Expressway Management Bureau and the Bank Group staff. 5. As shown above, the total corridor traffic for 1997 (i.e., the sum of traffic on the sections of the two existing arterial roads parallel to the JQE and the JQE) was either close to or higher than the SAR estimates, with the exception of Section 2. Also, the actual diversion of traffic to the JQE was at a higher rate than forecast (Section 1) or at about the same rate (Sections 2 and 3). The higher Diversion Factor (DF) ratio indicates that the JQE attracted a higher proportion of the corridor traffic. As a result, the volume of traffic in 1997 was considerably higher than the appraisal forecast on Sections 1 and 3 of the JQE but lower on Section 2. The actual DF ratio, based on four-year operation of the Expressway, shows that the ratio was quite steady for each section as shown in the following table. The net increase of the 1997 average traffic above SAR estimate, in terms of the weighted average of traffic on the three sections of the JQE in vehicle- kilometers per day, is about 390,000 or 12 percent. TRAFFIC DIVERSION FACTORS TO THE EXPRESSWAY (in %) Section 1 Section 2 Section 3 1994 59.7 65.4 49.7 1995 54.3 70.1 46.3 1996 62.1 69.6 48.2 1997 61.5 68.6 47.6 Traffic Projection 6. The projected traffic for the three sections of the expressway for the years 1997- 2015, by type of vehicle, is detailed in Table 1 of this Annex. During 1994-97, actual  -29 - ANNEX I traffic census data were used while for subsequent years the following growth rates have been assumed: (a) normal traffic, except for small cars, would increase by 7.0 percent a year between 1997 and 2000, 6.0 percent a year between 2000 and 2005, and 5.0 percent a year thereafter; (b) since small cars constitute the major portion of the traffic and the traffic demand is very strong, the growth rate for small cars is estimated to be 2.0 percent higher than for other types of vehicles, and (c) generated traffic is assumed to be 2 percent to allow for additional traffic which results from the expansion of the national trunk highway system in China in general and Shandong province in particular. 7. In the SAR, by comparison, the normal traffic growth rate for the new expressway was estamated at 11.4 percent a year between 1994 and 2000; and 7.6 percent a year thereafter. The generated traffic growth rate was assumed to be 13.5 percent of the normal traffic. It was further assumed that some of the railway traffic, both passenger and freight, would divert to the JQE. Diversion of railway traffic has been discounted in the revised projection for the ICR because: (a) Most of the railway traffic between Qingdao and Jinan is through traffic. On the other hand, it was estimated that, in 1996 and 1997, less than 10 percent of the road traffic had origins and destinations directly between Qingdao and Jinan and vice versa. Thus, traffic diversion from rail to road is of little significance. (b) Highway tariffs [about 40 fen per ton-kilometer (tkm) or passenger-kilometer (pkm)] are much higher than those for rail transport (6-8 fen per tkm or pkm). 8. Based on the historical data and projection of the economic development of the Province and in the influence area of the JQE, the long-term normal traffic growth rate (1994-2010) for the JQE has been estimated in the range of 5.6 to 9.0 percent, compared to the SAR estimate of uniform growth rate of 9.0 percent for all three sections of the Expressway. On this basis and the assumptions presented in the above paras. 6-7, the ICR overall traffic forecast for the expressway is more conservative than that of the SAR. The SAR and ICR traffic projections by sections are shown in the following table:  -30 - ANNEX I TRAFFIC FORECAST COMPARISON (ADT) Section I Section2 Section3 Qingdao-Weifang Weifang-Zibo Zibo-Jinan SAR 1994 5,458 8,647 7,731 1995 6,079 9,631 8,610 1996 6,771 10,727 9,589 1997 7,541 11,946 10,680 2000 10,418 16,505 14,753 2005 13,848 21,900 19,612 2010 21,660 33,950 30,690 Average growth per year 1994-2010 9.0% 9.0% 9.0% ICR 1994 6,241 8,364 10,130 1995 7,094 9,970 10,846 1996 10,461 10,357 12,008 1997 10,763 10,609 12,317 2000 13,165 13,004 15,145 2005 18,462 18,173 19,218 2010 24,759 24,285 24,320 Average growth per year 1994-2010 9.0% 6.9% 5.6% Note: All figures are rounded. Economic Costs 9. The financial cost for the JQE was converted to economic cost (Table 2A) by applying the shadow prices shown in Table 3. The overall effect of the revised financial cost and shadow prices is that the total economic cost of JQE is 67.9 percent higher than the SAR estimates, both at constant December 1997 prices. The foreign and domestic price indexes used for the economic cost determination are presented in Table 2B. ECONOMIC COST COMPARISON (Y million) SAR ICR ICRISAR (in%) 1989 prices 1997 prices Current prices 1997 prices 1997 prices Total Costs 1,743.4 2,520.0 2,850.4 4,229.9 167.9 Economic Benefits 10. The economic analysis includes the benefits derived from: (a) VOC savings, (b) passenger time savings, (c) relieved congestion on the two parallel arterial roads; (d)  -31- ANNEX I accident cost saving, and (e) construction cost savings (Table 5). The updated VOC per km for the various types of vehicles used in the ICR and the SAR are presented in Tables 4A and 4B respectively. 11. The actual traffic census data for 1994-97 shows that, on average, about 60 percent of corridor traffic diverted to the JQE. The drop in traffic level on the two existing arterial roads reduces traffic congestion on these roads. The benefits resulting from the lower level of congestion were quantified on the basis of the' parameters shown in Table 4C. 12. The value of passenger time savings was estimated as Y 1.0 per passenger-hour. This level of cost saving is an overall average of the economic value of travel time for passengers in cars, vans and buses for Chinese highway projects, based on a recent study.' 13. Accident cost savings were calculated according to the following formula:2 B =C * (Ro -Rw )* V Where: B = annual benefit from accident savings; C = cost per accident; R = accident rate (per 100 million vkm) without (Ro) and with (Rw) the project; and V = annual vkm of travel (in 100 million vkm). The constants used in the above formula for "R' (for different classes of roads and the value of direct property damage) and "C" (for the various classes of roads in China) are as follows: R (100 million vkm) C (Y/accident) Expressway - 40 + 0.005 ADT 15,000 Class I road 37 + 0.003 ADT 10,000 Class 11 road 133 + 0.007 ADT 6,500 Class IlI road 140 + 0.03 ADT 4,500 14. The condition of the two parallel arterial roads will need to be upgraded when the traffic reaches about 12,000 ADT. With the diversion of traffic to the JQE, there will be a delayed need for such upgrading. The upgrading/periodic maintenance cost of the parallel arterial roads is estimated to be Y 5.0 million per kilometer in 1997 prices. Rust PPK. Australia Feasibility Study Methodology report (March 1996) page 5, Annex G.5 2 From the above study report, page E-1 9, Appendix E.  - 32 - ANNEX I Economic Evaluation 15. The economic rate of return (ERR) on the JQE investment is estimated to be 19.1 percent versus the SAR estimate of 23.0 percent. Although the recalculated ERR is lower than that presented in the SAR, the high investment cost has been offset by the higher- than-estimated benefits generated by a greater volume of traffic than estimated at appraisal. Total costs and benefits streams, ERR and Net Present Value (NPV) for JQE are presented in Table 5. SAR ICR Best estimate of ERR 23.0% 19.1% NPV (12%, Y million) 4,771.2/a 2,689.8 /a NPV was Y 2,182.7 million at 1989 prices and updated to 1997 prices by multiplying with a factor of 2.1859. 16. Besides the normal traffic growth scenario, two traffic growth alternatives have also been considered: e.g., a lower traffic growth projection (30 percent lower than the normal traffic growth) and a higher traffic growth projection (30 percent higher than the normal traffic growth). The traffic growth and annual average growth rates under these two scenarios are as follows: THE EXPRESSWAY TRAFFIC FORECAST SCENARIOS (ADT) Section I Section 2 Section 3 Qingdao-Weifang Weifang-Zibo Zibo-Jinan The Low Projection: 1994 6,241 8,364 10,130 2000 12,097 11,950 13,918 2005 14,716 14,485 15,967 2010 17,098 16,770 17,936 Average growth per year 1994-2010 6.5% 4.4% 3.6% The High Projection 1994 6,241 8,364 10,130 2000 14,291 14,123 16,442 2005 23,013 22,664 23,052 2010 35,476 34,818 32,854 Average growth per year 1994-2010 11.5% 9.3% 7.6% Note: All figures are rounded. 17. The overall ERR and NPV for the different traffic growth scenarios are summarized in the following table. It shows that even with the lower traffic projection,  33 - ANNEX 1 which is most unlikely to happen, the JQE investment still would yield an ERR of 16.8 percent. The low traffic growth scenario The high traffic growth scenario Best estimate of ERR 16.8% 21.5% NPV (12%, Y million) 1,544.9 4,359.5 Sensitivity Analysis 18. The ERRs summarized below show the effects of possible changes in the assumptions made in the evaluation and could alter the yields on the investment. Since the cost of operation and maintenance of the JQE is a relatively small portion of the investment cost, any variation in these costs would have no discernible impact on the ERR. The impact of changes in the traffic levels is covered in paras. 16 and 17. The ERR of 16.8 percent is still an acceptable yield in case the traffic level is 30 percent below the most probable level assumed. The effects of 50 percent reduction in benefits attributable to lower operating cost savings, 50 percent reduction in benefits due to less- than-estimated saving in travel time cost savings, 50 percent reduction in benefits on account of cost savings due to reduced congestion, and a 20 percent reduction in total benefits are also shown Table 5. In all cases listed, the ERR still remains at least 14 percent, exceeding 12 percent, a percentage normally regarded to be the minimum for highway investment in China. SENSITIVITY ANALYSIS ERR (in %) NPV(12%, Y million) VOC savings reduced by 50% 14.1 676.0 Passenger time savings reduced by 50% 18.3 2,394.3 Congestion savings reduced by 50% 18.4 2,352.0 Total benefits reduced by 20% 16.0 1,401.3 Financial Evaluation 19. The toll revenue is the only major financial income from the operation of the JQE. The toll charges have been changed once (in July 1995) since the Expressway was opened to traffic in December 1993. The actual total revenue increased by an average of 38.3 percent a year during the first three years of operation (1994-96). The estimated financial rate of return (FRR) against the full costs of the JQE is 8.8 percent. This estimate indicates that the revenue from the JQE is expected to cover fully the operation and maintenance costs of the JQE and also meet all financial obligations such as loan/ credit servicing and repayments. The details of the financial analysis are shown Table 6, and the results are summarized in the following table:  -34 - ANNEX 1 FINANCIAL ANALYSIS RESULTS Input Data: Total cost Y 3,063.65 million Total debt Y 523.44 million Total equity Y 2,540.21 million Period of loan 20 years Grace period 5 years Loan interest rate (onlending rate) 5.3% Results Rate of return on equity 10.1% Financial rates of return: Best estimate 8.8% Toll revenue (-10%) 7.2% Operating costs (+10%) 8.4% Toll revenue (-10%) and operating costs (+ 10%) 6.8% Level of Toll Charges 20. The expressway operates as a closed toll system with 21 toll stations. The tolls are determined by the type of vehicle and distance traveled. There are five groups of vehicles: (a) passenger cars and small trucks; (b) medium buses and trucks; (c) large buses and trucks; (d) tractor and trailer; and (e) extra-large vehicles. The longer the distance traveled, the lower is the toll per kilometer (Y/vkm), as listed below: Distance Small Vehicles Medium Vehicles Large Vehicles Tractor Trailer Extra-large vehicles Under 100 km 0.32 0.40 0.48 0.72 1.12 100-200 km 0.29 0.39 0.45 0.69 1.09 Over 200 km 0.24 0.32 0.40 0.64 1.04 21. According to Clause 2.06 of the Project Agreement, the toll rates charged should not exceed 30 percent of the total VOC savings. In the absence of a comprehensive traffic origin and destination survey and VOC savings calculation for various trips involved, an approximating analysis has been used to highlight the present relationship between the prevailing toll rates and the financial VOC savings on the three sections of the Expressway for which economic evaluations have been carried out, and the economic and financial VOCs have been available, as of 1997. On the basis of the prevailing toll rates and VOC savings shown in Table 7, the following tentative conclusions may be drawn: (a) The JQE toll charges for large-size vehicles are reasonable and are slightly high (compared to VOC savings) for medium-size vehicles, tractor and trailers. The charge is quite high on small-size vehicles (small passenger cars, vans, minibuses and small trucks). The high toll charge on small vehicles may reflect the high traffic demand by this type of vehicle, and the greater propensity to pay by the  - 35 - ANNEX 1 operators/owners of these vehicles. In 1997 small passenger cars constituted about 35-50 percent of the total Expressway traffic. (b) On the section where the travel distance on the Expressway is significantly shorter than on the parallel arterial roads, the driver may prefer to use the Expressway. In such a case, as on Section 1, the toll level has less effect on the decision to use the Expressway. This could indicate that toll rates higher than 30 percent of VOC savings are not necessarily a deterrent to road users, if it results from substantial distance and time savings. Toll rates are high on Sections 2 and 3 because the savings in travel distance, compared to the distance of travel on the parallel arterial roads, are relatively small.  TABLE 1A: JINAN-QINGDAo HIGHWAY CORRIDOR TRAFuFnc SummARY (Qingdao-Weifang Section, AADT) Nok So.,1 X3. Mo SO"l Sot% No.13. load. Nra Nartl. Sw..* SC. North 50.1)1 North33ai sooth' Ido Mtod good Yo.,LoI lbS Koa %*3o"l !4*4 Kt !a3s od a~ s ~a4 Ifliriloot Mfi- l ls ood !o*d 06t*.oo o 33* 7.0 3S.1 3 4 F F F II 311 E.Prmu Fair fair Good 31-10 I"- 80-330 1* to t 23.0 3.114 311% 3,0% 0P..od3 (?o40d3 IFo"d3 --.--4.11 Car- ".f...-3rdor 1o..-. ----lArK Bad-- *.3,oTrolk.-- -llo.6o.a Trod- --Lar Trmk- --Tro.tor.Trollr- -- Tol*----- 30.1)4 3i~lhokt UMM11.A l 1.31100 w1)130o1 witbao wth*ow W4Ilool WiIhooi old S*. 034 'ar 01.1 0 Nm, Old Old 'ae Old Old SC. Omd Old Nr Old Old NM. Old Old N, Old Old N.* Old rood road rood rood rood road rood rood rod rood road road r08 road r ood ro rood 1*04 roa rood Ij rood rood rood rood ,Od rood road 3994 103 70 11030 3.r34 1.333 339 477 31)3 273 133 3 4 III 771 343 112 634 303 3Jul 193 710 39 M4 44 1333 3.7*7 3,7*4. 2.473 3993 2.71?~~~~~I 3.393 1,374. 737 279' *3 73 13 396 944 M3 733 7M1 4311 72 1,013 703 306 344I 337 33 6.616 3,121 3.403 *996 ~~~~~~~3.621 I,1m k.432 3*3 4011 423 226 is 2013 31)10 243 33 932 61)3 333 1,322 S"1 334 341 236 92 11.333 4.61)3 3,730 3997 3~~~~~~~.71.3 ,1)210 1,417 931) 4310 330 236 19) 3*3 3.333 M7 473 9)1 636 I74 1,3731 920 3331 362 762 Wo) 11."6 4,73 3.933 73311) ~~~~~~4.61* 2.1134 3,14 3,30%4 493 394 377 73 33 3.373 3*3 *073 3,3.1 73 433 3,49 I.3m 3337 423 314 333 *0.463 3.793 4,669 313) 6.014* 4.33. 3,734 1,411 636 74 33 39) 341 1.331 399) 3,72 3,363 9114 077 2,0333 1.472 331 37 433 133 34,613 6.124 6,491 3131 9,0.6 5.1)433 3. 1, 4311 3,u 37 1.3333 471 33 43 2,763 34.9 3.133 *,"3 3.336 736 3.'3 3.179 6711 719 s36 393 MM33 3.99 1,629 30*3 13.330 .1.91 S3,39 O.36 u 36 13.293 6312 47 333 2.1113 0.3 2.333 7.312 1,6313 939 3,763 2,390 1163 931) 614 246 2G.J33 34,6431 1.4'34 *993 330 3413 03 t t 2.39 1.71)1 39 w 3,93 23 134 76 is 331 6*1 *09 497 633 3t3 731 3,03 1193 *4 *4 33 39 3,743 3,493 1,741 M99 7,0113 1,770 3,1)4 3Ito 133 22 33 Is 93 $1)3 *93 623 IV3 Its 71.2 3.1)3 91*1 is) 369J 233 69) 6.43 3,973 2,477 W4 ~~~~~3.9*7 2.713 1.133 743 3139 339 $17 34 *1)3 932 309 163 1.1)4l 763 277 1,30 1,143 *60 399 326 73 0,31) 3,w11 2,6.43 MY9 4.3373 3.4113 *313 77 323 336 131 is *1)3 1.010 31 6930 1,037 33 333 1,334 1.170 3114 433 333 so) 3.644 6,131) 2.833 2*041 1,473 3.617 *166 oil 674 39 M1 29) *26 I,1m )9 9111 1,276 933 341 1.39$ 1,399 *96 43S 399 39 30.693 3,372 3,323 21093 3,433 S.3.u.. z 14 1,322l 13 37 21)1 39 369 l.3144 31*3 3,1)0 1.31)7 3.331 436 2.134 3.073 262 633 334 139 14,977 10,331 4.639 71013 loi5)4. 7 )?4 3433 3.1.. *L 46 301 766 31 3, .3.1)3 647 3,3317 .3 1.37 '97 3533 3.73) 2,309 334 334 6*3 132 70,497 33,163 6,397 240131,.4 333 4,333 I.99 3.363 633 140 64 MP1 3.9, 36, 1.7,17 3,731 3.1)34 343 3.475 3.3349 476 3.06. 1170 3114 36.9*9 13.633 32324. 3934 ~~~~~ ~~4393. 3,l7