China - Second Inland Waterways Project

Document of The World Bank Report No: 17738-CHA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$123 MILLION TO PEOPLE'S REPUBLIC OF CHINA FOR A SECOND INLAND WATERWAYS PROJECT April 29, 1998 Transport Sector Unit East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (Exchange Rate Effective December 1997) Currency Unit = Yuan (Y) Y 1.00 = US$0.12 US$1.00 = Y 8.27 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy dwt - Deadweight ton (for vessel) EACCF - Country Director of China, East Asia and Pacific Region EAP - Environmental Action Plan EASTR - Transport Sector Unit, East Asia and Pacific Region EIA - Environmental impact Assessment EIRR - Economic Internal Rate of Return FIRR - Financial Internal Rate of Return FY - Fiscal Year G - Guangdong GPWB - Guangdong Province Waterway Bureau GOC - Government of China ICB - International Competitive Bidding IWT - Inland Waterway Transport IWW - Inland Waterway J - Jiangsu JPWB - Jiangsu Province Waterway Bureau NCB - Local Competitive Bidding NBF - Not Bank Financed Ln - Loan L-S-R - Lianhuashan-Shawan-Ronggui MOC - Ministry of Communications MOF - Ministry of Finance NPV - Net Present Value OED - Operations Evaluation Department PMO - Project Management Office PWB - Provincial Waterway Bureau RAP - Resettlement Action Plan RRFA - Rate of Return on Average Net Fixed Assets RVP - Office of Regional Vice President SPC - State Planning Commission TA - Technical Assistance teu - twenty-foot equivalent unit (for container) WB - Waterway Bureau WW - Waterway Z-H - Zhaoqing-Hutiaomen Vice President: Jean-Michel Severino, EAPVP Country Director: Yukon Huang, EACCF Sector Manager: Jeffrey S. Gutman, EASTR Task Manager: Toshiro Tsutsumi, EASTR  China Second Inland Waterways Project CONTENTS A. Project Development Objective ............................................................2 1. Project development objective and key performance indicators ..........................................................2 B. Strategic Context ............................................................2 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project ...............................2 2. Main sector issues and Govermment strategy ............................................................2 3. Sector issues to be addressed by the project and strategic choices .......................................................4 C. Project Description Summary ............................................................5 1. Project components ............................................................5 2. Key policy and institutional reforms supported by the project ............................................................6 3. Benefits and target population ............................................................6 4. Institutional and implementation arrangements ............................................................6 D. Project Rationale ............................................................7 1. Project alternatives considered and reasons for rejection ............................................................ 7 2. Major related projects financed by the Bank and/or other development agencies ...............................7 3. Lessons learned and reflected in proposed project design ............................................................ 7 4. Indications of borrower commitment and ownership ............................................................8 5. Value added of Bank support in this project ............................................................8 E. Summary Project Analyses ............................................................9 1. Economic ............................................................9 2. Financial ........................................................... 11 3. Technical ........................................................... 11 4. Institutional ........................................................... 11 5. Social ........................................................... 11 6. Environmental assessment ....................... 12 7. Participatory approach ....................... 14 F. Sustainability and Risks ....................... 14 1. Sustainability: ....................... 14 2. Critical risks: ....................... 14 3. Possible controversial aspects: ....................... 15 G. Main Loan Conditions ....................... 15 1. Effectiveness conditions: ....................... 15 2. Other ........................15 H. Readiness for Implementation ....................... 15 I. Compliance with Bank Policies ....................... 16  Page ii Annex 1: Project Design Summary ....................................................... 17 Annex 2: Project Description ....................................................... 19 Annex 3: Estimated Project Costs ....................................................... 22 Annex 4: Cost Benefit Analysis Summary ....................................................... 23 Annex 5: Financial Analysis ....................................................... 30 Annex 6: Procurement and Disbursement Arrangements ....................................................... 35 Annex 6, Table A: Project Costs by Procurement Arrangements ..................................................... .. 37 Annex 6, Table Al: Consultant Selection Arrangements (Optional) ..................................................... 38 Annex 6, Table B: Thresholds for Procurement Methods and Prior Review ......................................... 38 Annex 6, Table C: Allocation of Loan Proceeds ....................................................... 39 Annex 7: Institutional Development and Reforms ....................................................... 40 Annex 8: Management Information System (MIS) ....................................................... 44 Annex 9: Financial Management ....................................................... 45 Annex 10: Environmental Assessment and Action Plan Summary ...................................................... 46 Annex 11: Project Processing Budget and Schedule ....................................................... 58 Annex 12: Documents in the Project File ....................................................... 59 Annex 13: Statement of Loans and Credits ....................................................... 60 Annex 14: Country at a Glance ....................................................... 63 MAPS IBRD 29238: China Inland Waterways II Project IBRD 29239 Jiangsu Province IBRD 29240 Pearl River Delta  China Second Inland Waterways Project Appraisal Document East Asia and Pacific Regional Office Date: April 29, 1998 Task Team Leader/Task Manager: Toshiro Tsutsumi Country Manager/Director: Yukon Huang Sector Manager/Director: Jeffrey S. Gutman Proj ect ID: CN-PE-3619 Sector: Transportation Program Objective Category: Private Sector Development Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [ Yes [Xl No Project Financing Data [X] Loan [] Credit [] Guarantee [] Other [Specify] For Loans/Credits/Others: Amount (US$ M/SDR M): US$123 million Proposed tenns: [] Multicurrency [X] Single currency, specify US$ Grace period (years): 5 [] Standard Variable [ Fixed [X] LIBOR-based Years to maturity: 20 Commitment fee: 0.75% Service charge: N/A Financing plan (US$ M): Source Local Foreign Total Government 166.3 0.0 166.3 Cofinanciers 0.0 0.0 0.0 IBRD 0.0 123.0 123.0 IDA 0.0 0.0 0.0 Other (specify) 0.0 0.0 0.0 Total 166.3 123.0 289.3 Borrower: People's Republic of China Guarantor: Responsible agency(ies): Communications Departments of Guangdong and Jiangsu Provinces Estimated disbursements (Bank FY/US$M): 1998 1999 2000 2001 2002 2003 2004 Annual 5 18 28 30 25 12 5 Cumulative 5 23 51 81 106 118 123 For Guarantees: [] Partial credit [] Partial risk Proposed coverage: Project sponsor: Nature of underlying financing: Terms of financing: Principal amount (US$) Final maturity Amortization profile Financing available without guarantee?: [X] Yes [ No If yes, estimated cost or maturity: Estimated financing cost or maturity with guarantee: Project implementation period: Expected effectiveness date: 08/28/98 Expected closing date: 06/30/2005  Page 2 A. Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): Inland Waterway Transport (IWT) is known in most situations as the least costly, the least energy consuming, and least hazardous mode of transportation. Despite these advantages, IWT has become less attractive for time-sensitive valuable cargo and short haul transportation following the higher priority given to development of rail and road infrastructure. However, IWT is now receiving increased attention, particularly because of its low environmental impact, the development of multipurpose water resources systems and increased importance of intermodal transportation. China has five major IWT systems, e.g. Yangtze River, Pearl River, Grand Canal, Heilong Jiang, and Huaihe. The Yangtze is the largest system, (in length, depth and traffic) and has improved more than the others. Under the Ninth Five-Year Plan, the Government of China (GOC) decided to develop the Pearl River in Guangdong Province and the Grand Canal in Jiangsu Province, the second and third largest systems. These developments represent continuation of the Guangxi and Zhejiang components of the Bank's first Inland Waterways project in China (Loan 39106-CHA). The Govermnent also decided to divert funds from the road and port subsectors to finance IWT development. The objective of the proposed project is to provide more efficient and productive IWT services which would be more competitive than the current services. This would be achieved through reduction of unit cost and transit time by: (a) upgrading Inland Waterways infrastructure to allow navigation of larger size vessels, (b) increasing shiplock capacity to reduce waiting time, and (c) increasing financial and organizational capacity of IWT agencies. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 16321-CHA. Date of latest CAS discussion: March 18, 1997 (note: updating of the CAS is scheduled for May 28, 1998): (a) Reduce infrastructure bottlenecks and provide better access to interior provinces by supporting the effort of the Government of China (GOC) to alleviate transport bottlenecks by assisting modernization of IWT modes; and (b) reduce fiscal constraints of Provinces and maintain the momentum of structural reforms by increasing financial and institutional autonomy of provincial IWT agencies. 2. Main sector issues and Government strategy: IWT demand increased at an average of 7 percent annually for the period 1990-1994. As IWT's major cargoes are coal, ores and construction materials transported over long distances, it has become a practical means of relieving congestion on other transportation modes. IWT is not presently fully achieving its objectives of providing low-cost transport for bulk products, since its operations are mainly by small vessels that have high operating costs. Significant progress has already been made on institutional reforms to provide a competitive context for IWT services. IWT management was decentralized from the Central to the local Provincial govermnents; IWT services, such as river ports, shipping companies, freight forwarding, and ship building, were commercialized and corporatized; waterways transport tariffs were partly liberalized (tariff negotiations between shipping companies and cargo owners are allowed within a limited range); cargo allocation by  Page 3 the government has been substantially eliminated; and many barriers to free entry to the industry were removed. These reforms have started to create a more competitive environment for the subsector. However, there are several issues that need to be addressed to stimulate IWT development: (a) modernization of the vessel fleet (particularly increases of vessel size); (b) improvement of IWT infrastructure to allow the use of larger vessels; (c) implementation of more market-based pricing to stimulate competition between modes; (d) rationalization of user charges; (e) improved cost recovery and reduction in government subsidies; and (f) institutional reform to make it more conducive to competitive operations . Modernization of IWT Fleet. An increase in the average vessel size is essential for IWT efficiency to improve, and to help reduce congestion of channels, shiplocks and ports. For example in Jiangsu, although the number of larger (i.e., 1,000-2,000 dwt) vessels is expected to increase, a realistic projection shows that by the year 2010, over 84 percent of the fleet will still consist of vessels of less then 500 dwt. GOC recognized the importance of this issue , and Jiangsu Province has recently carried out a study of how to stimulate an increase in vessel size (the first phase Vessel Size Increase Study). Improvement of IWT Infrastructure. Upgraded IWT networks are needed to so that IWT operators can use the larger vessels needed to achieve the subsectors potential low operating costs. IWT agencies, however, do not have sufficient information (i.e. origin-destination of cargo, vessel type, vessel size, vessel age, reconstruction of fleet, cargo owners and their facilities, port facilities and their development plans) to plan network development. Market-Based Pricing. After the recent reforms, market competition exists to some extent within each mode except rail, but intramodal competition is still limited through freight tariff regulation. Road and inland waterway (IWW) freight tariffs can be negotiated within a range of plus or minus 20 percent of the established tariffs, but rail freight tariffs are still strictly controlled with a view to helping to stabilize major commodity prices. This remaining control results in allocative distortions between modes. User Charge and Cost Recovery. User charges for each mode should be based on similar principles of cost recovery and equity. The impact of port and waterway charges on international trade also needs to be taken into account. No country aims at full cost recovery of IWT costs, including investment, operation and maintenance. Even in the USA, revenue from user charges covers only about 15 percent of the total. In China the rate of cost recovery varies by province. For example, in Jiangsu, user charges recover about 60 percent of total costs (100 percent of channel operations/maintenance costs but 0 percent for new investment). IWT user charges in China presently include: (a) a Channel Maintenance Tax, based on the gross revenues for SOEs and the registered tonnage of barges for other operators; (b) a Shiplock Fee, based on gross tonnage of the vessel passing through the locks; and (c) a Channel Construction Tax, charged in some Provinces according to the registered dwt of each vessel. The structure of these charges needs to be reviewed from the point of view of revenue generation and charging for infrastructure on the basis of costs imposed or benefits received. Reforms of 1994 allowed Provincial Waterway Bureaus (PWBs) to establish their own Channel Construction Taxes, which now varies significantly between them (for example, 2 Yuan/barge ton/month in Jiangsu and nothing in Zhejiang). Since IWW cargo generally is of low unit value, and tariffs are low in the competing rail mode, increases in user charges can result in mode shifts to more costly modes. To resolve this dilemma, the National Government permitted a cross subsidy scheme, in which: (a) IWT agencies may own and operate hydropower plants, and sell electricity as a byproduct of dams built for navigational purpose, and use the revenues to finance navigation improvements; and (b) a new fund was established in MOF making use of part of the revenue of the road vehicle purchasing fee and all of the port development  Page 4 fund. IWT Administration. IWT agencies should manage the sector in the interests of users; they need to be operationally and managerially efficient to enhance modal competitiveness. In addition, to maintain their financial viability without necessarily increasing user charges, their own productivity needs to increase. China's IWT agencies are more decentralized then those of other countries and several of their functions have already been commercialized. Although PWBs themselves still remain part of the Provincial Government administration, they are usually financially autonomous and are undergoing further reform. Jiangsu Province Waterway Bureau (JPWB) is substantially autonomous and has separated designing and construction dredging responsibilities by creating SOEs. Their procurement procedures for civil works construction are based on competitive bidding, following a market economy. Similar commercialization has been implemented in Guangdong Province. 3. Sector issues to be addressed by the project and strategic choices: The key sector issue to be addressed by the project would be: (a) encouragement of vessel size increase; (b) development of planning and management capacity of IWT agencies; and (c) increased cost recovery for new investments. For the sustainability of the project, modernization of the IWT fleet would critical. However, while it is the responsibility of shipping operators to choose the vessels that best suit their business, IWT agencies should create an environment that provides appropriate incentives. To help achieve this, they need to become more knowledgeable about operations and of the infrastructure that is needed to maximize the sectors' efficiency. To able to finance the investment needed, they must set their user charges to cover their costs and provide for investment funding, while maintaining competitiveness with other modes of transport. Technical assistance (TA) will be provided for the second phase study on increasing vessel size to encourage the use of larger vessels as well as the development of database to meet the future development of a Management Information System (MIS). TA for navigational safety development and institutional reforms leading to commercialization of the maintenance dredging department (Guangdong) will also be provided. Strategic Choices Two Provinces, Guangdong and Jiangsu, have been chosen as a priority for the modemization and reform process, because: * Jiangsu has the longest and Guangdong the second longest IWT networks (23 percent and 10 percent, respectively, of the national total); * Guangdong and Jiangsu Inland Waterways carry the largest and second largest share of freight traffic, respectively (53 million and 47 million tons, which comprise 18 and 16 percent of the national total freight traffic, respectively); * Jiangsu and Guangdong Inland Waterways form the greater part of the Yangtze River and the entire Pearl River Deltas networks, respectively, and; * their inclusion represents a continuation of the Zhejiang and Guangxi IWT being developed under the first Bank-financed project. If implemented successfully, this project would be a significant milestone for sustainable development of China's IWT system.  Page 5 C. Project Description Summary 1. Project components: The project would include two major IWT Provinces, Guangdong and Jiangsu. Both Provinces have decentralized their IWT functions and have well developed management organizations. Under the first reform (1981-82), IWT management was decentralized from the Central Government to Provincial Governments. Waterway Bureaus (WBs) were created under the Provincial Communication Departments. The WBs were further reformed by separation of their commercial activities, such as river port operation, and waterway dredging and design. They are now financially autonomous in terms of operation and maintenance, but have not yet fully developed their planning and management capacity to encourage modernization and commercialization of IWT industries. To address major issues, the project comprises: Cost Including Contingencies % of Bank Fiancing % of Bank Project Component Category (US$ M) Total (US$ M) Financing Guangdong Province 165.9 100 70.0 42 Al. Renovation of Zhaoqing-Huatiaomen and Physical 121.3 21 51.5 42 Lianhuashan-Shawan-Ronggui (L-S-R) Waterways A2. Enhancemant of maintenance dredging Physical and 17.7 3 17.4 98 capacity and operational management Institutional A3. Technical assistance for institutional Policy, Institutional 2.4 0 1.1 46 development and implementation support, and Implementation and training Support A4. Resettlement, monitoring and maintenance Implementation 22.3 4 0.0 0 during implementation Support A5. Tax and duties 2.2 0 0.0 0 Jiangsu Province 123.4 100 53.0 43 Bl. Construction of five shiplocks Physical 105.2 18 52.4 50 B2. Technical assistance for institutional Policy, Institutional 2.2 0 0.6 27 development and implementation support, and Implementation and training Spport B3. Resettlement, design and monitoring Implementation 15.8 3 0.0 0 Support B4. Tax and duties 0.20 0 0.0 0 Total 289.3 100 123.0 43  Page 6 2. Key policy and institutional reforms supported by the project: * Encouragement of the modernization of IWT fleet to reduce its operating costs; * Commercialization and capacity increase in planning and management of WBs; and * Introduction of the strategic user charge for investment cost recovery into IWT sector. Although the modernization of fleet is not the direct responsibility of WBs, a study resulting in specific recommendations of how to achieve increases in vessel sizes, would be undertaken under the Project. Database development as the first step of MIS will also be implemented. Guangdong and Jiangsu Provinces plan to further increase cost recovery. Modal competition between rail and Inland Waterways will be carefully monitored in terms of Inland Waterways freight tariffs, particularly the impacts of possible IWT user charge increases and future rail freight tariff. JPWB has been decentralized from Provincial Communication Department and is almost financially and institutionally autonomous. GPWB is still going through the process and needs more assistance with its institutional reforms. Under the project, GPWB will prepare a study for the commercialization of the dredging department. A Management Information System (MIS) will be developed to modernize IWT operation and increase planning capacity of IWT agencies (see Annex 8 for more details). 3. Benefits and target population: Direct Benefits: would derive mainly from (a) reduction of transport cost by using larger vessels (G and J) and by providing direct waterway access for oceangoing vessels for dry bulk and containerized cargo, thus reducing transshipment cost (G); (b) reduction of shiplock waiting time (J), and; (c) a reduction of congestion in other modes of transport (road and railwayXG and J). These benefits would accrue to both project Provinces, as well as to the inland provinces of Shanxi, Shaanxi, Guizhou, Yunnan, and Guangxi Provinces, from which coal (major cargo of IWT) is produced and transported to the south by waterway. Other benefits would include: (a) safer IWT operation; (b) strengthened institutional capacity of IWT agencies; (c) better planning of improvements to the IWT network; (d) introduction of improved technology for more efficient maintenance for IWT, (e) poverty reduction by providing better access to landlocked regions; and (f) environmental enhancement by improving narrow and abandoned channels in the existing IWT system. It is estimated that more than 57 million people would directly benefit from the proposed project (or about 20 percent of the population in Guangdong and Jiangsu, and 5-10 percent of the adjacent/inland Provinces). 4. Institutional and implementation arrangements: The proposed project would be implemented by the PWBs of the Provincial Communication Departments in each province. Ministry of Communication (MOC) will be the coordinating agency at the Central Government level. Ministry of Finance will onlend to Provincial Governments. PWBs will establish Project Management Offices and branch offices for regional implementation and will appoint through a competitive process, qualified tendering company(ies) familiar with Bank procurement guidelines. Supervision consultants for construction would be appointed locally. Both PWBs have rich experience in implementing IWT investment projects for years albeit on a small scale. These Provincial agencies also have experience in institutional development and management of the IWT network.  Page 7 D. Project Rationale 1. Project alternatives considered and reasonsfor rejection: The IWT mode has the potential to be the most economical and environmentally friendly mode of transport for low value bulk cargo over long distances. Alternative modes, road and railway, are heavily congested and capacity expansion would require huge investments. For IWT, different waterways' cross- sectional configurations and alternative channel developments for IWT network were compared as alternatives. The proposed project was selected after the comparison of investment costs, level of future maintenance (siltation problem), operational benefits, and connectivity with other parts of the IWT network. 2. Major relatedprojects financed by the Bank and/or other development agencies: Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed Projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Bangladesh: Inland Water Transport Improve IWT capacity Rehabilitation Project (completed) S Provide year-round efficient water Thailand: Inland Waterways and US transport for export Coastal Port Project (completed) Improve vessel safety Bangladesh: Third Inland Waterways S S Increase Inland Waterways traffic capacity Project (ongoing) * Improve institutional capacity Increase financial capacity of the IWT China: Inland Waterways Project S S agencies (ongoing) Corporatize IWT agencies Prioritize possible projects Yangtze Economic Zone Transport NA NA (YETZ) Study (completed) Other development agencies None 3. Lessons learned and reflected in proposedproject design: This project would be the second IWT project in China (the first project is ongoing) and Bankwide experience in this subsector is very limited. China's first Inland Waterways project is progressing satisfactorily both in physical and institutional terms (financial viability for the cross-subsidy from the power generation and sale of electricity is not yet established). Major contracts for both civil works and procurement of equipment have been awarded without any significant delays. Implementation is also being carried out approximately on schedule. This is mainly due to the strength of China's executing agencies in preparing engineering design and handling the bidding process. The first major institutional reform was achieved through establishing a company for dam/shiplock operation by separating from the Provincial Communication Department. Implementation of resettlement action plans and environmental  Page 8 action plans have also been satisfactory. Executing agencies are paying a lot of attention to the conditions of resettlement as well as the progress made. However, compared to the strength of China's executing agencies in the physical aspect, TA components, such as institutional reform, appear to be less executed. Taking this into account, TA components under the project were designed to be realistic, practical, and simple, but will be expanded and developed further for future needs. TA will be helped by the first stage of a similar study being implemented locally. Agreement of the TA implementation has been discussed upfront, from the identification stage. Bankwide experience in the port subsector based on OED's analysis of 35 projects completed between 1980 and 1992, indicates two major problems: (a) a long implementation period due to the underestimation of civil work construction periods and a long procurement period; and (b) lower than expected benefits through overoptimistic traffic projections. To minimize these problems, engineering design for the proposed project has been substantially completed. Since the project would include no complicated civil works, prolongation of project execution would be unlikely. The Bank has carefully reviewed and reduced the traffic forecasts, and made them compatible with current expectations of national, regional and provincial economic development. Bankwide railway experience, based on findings by OED through the review of 40 Bank-financed projects conducted between 1985 and 1992, also indicates optimistic traffic forecast as a major problem followed by: (a) weak financial condition, (b) ineffective tariff policy, (c) institutional rigidity, and (d) low operational efficiency. These findings are relevant to the proposed project, and the Task Team has: (a) undertaken an exhaustive analysis of the borrowers financial viability; (b) determined that the present tariff policy will generate sufficient revenues to fund counterpart expenditures and loan amortization; (c) defined a realistic institutional reform program; and (d) agreed with the Borrower on a series of actions that will increase productivity. China's highway experience in some Bank-financed projects indicates: (a) inadequate quality of construction and (b) cost overruns. Although the proposed project would not require advanced technology for civil work construction, the project would take into account the need to use experienced and competent contractors and supervision consultants, as well as a careful determination of project cost estimates. 4. Indications of borrower commitment and ownership: The project has been included in the Ninth Five-Year Plan and approved by the State Planning Commission (SPC) and Ministry of Finance (MOF). The Ministry of Communications (MOC) responsible for coordination of the project is strongly supportive of the project and has organized workshops to assist Guangdong and Jiangsu WBs in preparation of the project. Commitments of the Provincial Communication Departments for provision of counterpart funds have been made. 5. Value added of Bank support in this project (see C. 2 for more details): * Pressure to increase the average size of the vessel fleet, the single most important action for the subsector to realize its potential cost advantages; * Continued modernization of IWT operations and commercialization of IWT agencies (i.e. dredging); and * A stronger relationship between planning of waterway infrastructure and operations.  Page 9 E. Summary Project Analyses 1. Economic (supported by Annex 4): [X] Cost-Benefit Analysis: NPV = US$210.1 million; ERR = 21.4% [ Cost Effectiveness Analysis: [ Other ERR ENPV Overall project 21.4% US$210.1 million Guangdong subproject 21.0% US$103.3 million Jiangsu subproject 21.9% US$106.8 million The economic evaluation was undertaken on the basis of cost minimization to satisfy a given level of waterway transport demand. The evaluation was based on a comparison of the economic costs of investment with quantified project benefits, which were those attributable to reduced vessel delays and savings in vessel operating costs through operating larger ships. Since the financial analysis was based on the revenues and expenditures of the Inland Waterway Bureaus, there is no direct relationship between the outcomes of the economic and financial analyses. Economic investment costs were derived by subtracting price contingencies, taxes and subsidies from, and applying a shadow price for manual labor to, financial investment costs. Financial vessel operating costs were converted to economic costs by eliminating taxes and subsidies. The benefits of the Guangdong subproject would derive mostly from the operation of larger vessels on the delta of the Pearl River. The benefits of the Jiangsu subproject would mostly arise from reductions of delays at shiplocks on the Grand Canal, so a simulation model of vessels moving through the shiplocks was used to generate projections of vessel delays and operating costs. The estimate of these benefits was based on the outputs of a simulation model of more than 200 freight movements between their origins or destinations, and taking account the rate of growth of demand for waterway transport, the operating costs of vessels of different sizes and the rate of change of vessel size and the impact of the project on that rate. Sensitivity tests were made with variations in the assumed values for these key variables. A lower level of demand for waterway transport would reduce the benefits of both subprojects, but much more in Jiangsu, since the delay to vessels waiting to pass through the locks goes up more than proportionally with the number of vessels. Similarly, at the low level of demand, the subproject would be marginally unjustified. The benefits of this subproject would increase much more than proportionally with traffic.  Page 10 SUMMARY OF ECONOMIC EVALUATION AND SENSffiVITY TEST RESULTS ERR (%) ENPV (US$ mln) Basic 21.4 210.1 Guangdong 21.0 103.3 Jiangsu 21.9 106.8 Demand for waterway transport: Higher Guangdong 22.8 126.9 Jiangsu 33.3 509.2 Demand for waterway transport: Lower Guangdong 17.9 59.0 Jiangsu 11.5 -3.1 Change to larger vessels: Faster Guangdong 18.1 60.3 Jiangsu 16.3 7.6 Change to larger vessels: Slower Guangdong 12.1 1.0 Jiangsu 33.6 591.0 Large vessel operating costs: Lower Guangdong 23.7 130.3 Jiangsu 22.1 108.9 Large vessel operating costs: Higher Guangdong 15.1 29.0 Jiangsu 21.8 106.3 The average size of vessels presently operating in the two provinces is much less than the maximum permitted on the waterways. In Jiangsu, this is in part because many of the voyages are for very short distances, less than 50 kin, for which larger vessels would be inappropriate, but more because of the lack of incentives to invest in larger vessels despite their overall cost advantages. The use of larger vessels would reduce the benefits of the Jiangsu subproject because the delays at the shiplocks would be shorter. This loss would be partly compensated by the savings in vessel operating costs on the remainder of the voyage, and would not be large enough to make the project benefits unsustainable. Although there are also many short distance voyages on the Pearl River, their impact is overshadowed by the large proportion of longer voyages that would be able to benefit from the larger vessels that the subproject would make feasible. Unlike in Jiangsu, the benefits of the Guangdong subproject would be increased with a faster introduction of larger vessels. If the cost advantages of larger vessels turn out to be less than assumed, the benefits of both subprojects will be reduced, but not by enough to make them unjustifiable.  Page I 1 2. Financial (supported by Annex 5): NPV (6% DCR) FIRR (Y million) (%) (a) Guangdong Province 403.8 9.3 (b) Jiangsu Province 386.8 7.8 (c) Whole Project 790.6 8.3 3. Technical: All physical components of the project are based on detailed feasibility studies undertaken by the Waterway Design Institute of each Province. These feasibility studies have been approved by the Central Government. Coordination with related agencies, e.g., Port Authorities, Water Resource, Hydropower, have been sought. Major technical concern, siltation problem and changes of water level after the channel deepening/widening, have been carefully studied for the Guangdong component. Guangdong used both physical and mathematical models as well as pilot dredging at the entrance channel to verify the applicability of the mathematical model. For the Jiangsu component, siltation would not be a major problem, since channels are separated with shiplocks and water flow is minimal. Cost estimates for all components have been based on similar locally financed projects already carried out by GPWB and JPWB. Detailed design has been and will be undertaken by experienced domestic consultants. Both Guangdong and Jiangsu have experience in implementing similar projects, and there would be no major problem in designing, supervising and implementing the project. The technical design of the project is considered sound. 4. Institutional: (a) Executing Agencies. Executing agencies for Guangdong and Jiangsu components will be Guangdong Province Waterway Bureau (GPWB) and Jiangsu Province Waterway Bureau (JPWB), respectively. They are under the Provincial Communication Departments and are responsible for the management of physical Provincial IWT network. Although both Waterway Bureaus have no experience in implementing the Bank-financed projects, the experienced Provincial Communication Departments will provide guidance to familiarize Waterway Bureaus with procedures for Bank- financed projects. (b) Project Management. Each Waterway Bureau has established a Project Management Office (PMO), which comprises Planning, Financial, Engineering/Procurement, Environmental Departments, as well as local branch offices, to prepare and implement the project. Experienced tendering agencies will be engaged to assist in procurement for both Provinces. Extensive training will be implemented under the project for improvement of management and human resource development. 5. Social: The social impacts of this project are largely related to land acquisition. Guangdong component would impact on 24 hectares of land (including fish ponds), of which 18 hectares are cultivated, affecting 128  Page 12 people. Jiangsu component would require the acquisition of 75 hectares of land, the borrowing of 287 hectares of land, and the demolition of 91,839 square meters of houses. The number of people affected is 1594, of whom 224 are planned to be reemployed in either agriculture or rural enterprises. 60 rural enterprises would be affected by losing parts of their attached structures, but the majority of their operations will not be affected. Extensive consultations have been undertaken in the design and resettlement planning over the canal alignment to minimize adverse impacts. As a result, project impacts have been minimized substantially. Resettlement action plans (RAP) have been completed and cleared by the Bank. The RAPs provide an elaborate process of consultation with and participation of the various stakeholders in the RAP planning, adverse impact analysis, legal framework for resettlement, strategy and implementation program for compensation, relocation and livelihood development, budget and financing arrangements, institutional setup, monitoring and grievance mechanisms. An institution is already in place at different levels of government in both Guangdong and Jiangsu Provinces to implement the RAPs. The project is expected to open up more economic opportunities to the population in the project area. Women's role and access to resources are expected to remain the same in the project area. They would benefit directly from the improved housing conditions and living environment under the project and their access to economic opportunities is expected to be much enhanced. 6. Environmental assessment: Environmental Category [X] A []B []C Environment assessment (EA) of the project components have been carried out by the Scientific Institute of Pearl River Water Resources Protection (Guangdong component), and by the Second Harbor Engineering Investigation & Design Institute of Ministry of Communications, in association with Hehai University (Jiangsu component). Preparation of the EA was based on national procedures, including Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by International Financial Organizations (June 1993, NEPA), and the Bank Operational Directives 4. 01. The draft EA documents such as Environmental Impact Assessment Reports (EIAs), Environmental Action Plans (EAPs) and Executive Summary were submitted to the Bank in December 1997. Subsequent to the appraisal, the revised EA documents were submitted to the Bank in March 1998 and found satisfactory. The major findings and discussions in these documents are summarized below. More detailed information about the EA is provided in Annex 10* to this document. (a) Guangdong Component Potential Impacts. Major potential impacts during the construction phase include: short-term degradation of water quality due to dredging and shoreline construction activities; noise pollution due to construction work; and loss of aquatic habitat. Those during the operation phase include long-term increase in shipping traffic noise and increased volume of ship wastes. The EIA determined there are no cultural/heritage properties, environmentally sensitive or protected areas nor endangered fauna/flora in the project area. The EIA determined that concentrations of key contaminants in sediments proposed for dredging are less than the national Class II Soil Quality Criteria and therefore suitable for on-land disposal or use for general fill or farmland. Mitigation Measures. Measures have been identified to mitigate potential impacts. These are similar to measures adopted for the China Inland Waterway I Project and which have been found to successfully  Page 13 reduce impacts. These measures include: (a) excavation of much of the channel widening/straightening in the "dry" rather than dredging, (b) construction of temporary coffer dams and/or other water control structures to protect key water intakes, (c) strict regulation of construction work during nondaylight hours, (d) enforcement of stricter shipping regulation of wastes from ships and (e) environmental monitoring at major environmentally sensitive points, including water intakes. Public Consultation and Feedback Public consultation has been carried out during the preparation of the project. The following activities were conducted: (a) a series of workshops with participation by experts; (b) receipt of comments from key decisionmakers; (c) interviews with local people and representatives through a public opinion survey and questionnaire; and (d) public availability of EA documentation. The EA documents were made available to the public at GPWB in November 1997. The documents were also sent to the Public Information Center. Feedback from the consultation included: (a) issues of flood control and potential impacts on fisheries; (b) potential impacts on water intakes during the construction phase; and (c) waste disposal of increased volume of ship during the operation phase. These were addressed in the EIA and EAP. (b) Jiangsu Component Potential Impacts. The EIA identified several potential major impacts during the construction phase: short-term degradation of water quality due to dredging and construction activities along the shoreline, and noise pollution due to construction work. Those during the operation phase include noise and increased volume of ship waste. The EIA determined no cultural/heritage property, environmentally sensitive or protected areas nor endangered fauna/flora are observed in the project area. The EIA determined the concentrations of key contaminants in sediments proposed for dredging are less than the national Class II Soil Quality Criteria and therefore suitable for on-land disposal or use for general fill or farmland. Mitigation Measures. Measures have been identified to mitigate potential impacts. These are similar to measures adopted for the China Inland Waterway I project and which have been found to successfully reduce impacts. The measures include: (a) excavation of soils for new shiplocks in the "dry", (b) construction of temporary coffer dams and/or other water control structures to protect key water intakes, (c) strict regulation of construction work during nondaylight hours, (d) enforcement of stricter regulations of wastes from ships and (e) environmental monitoring at major environmentally sensitive points, including water intakes. Public Consultation and Feedback. Public consultation has been carried out during the preparation of the project. The following activities were conducted: (a) a series of workshops with participation by experts; (b) receipt of comments from key decisionmakers; (c) interviews with local people and representatives through a public opinion survey and questionnaire; and (d) public availability of EA documentation. The EA documents were made available to the public at JPWB in January 1998. The documents were also sent to the Public Information Center. Feedback from the consultation included: (a) potential impacts on water quality during the construction phase; and (b) environmental management needs to be implemented in an appropriate manner. These issues were addressed in the EIA and EAP.  Page 14 7. Participatory approach (a) Primary Beneficiaries and Other Affected Groups. The primary beneficiaries of the project are the Inland Waterway shipping companies and river port authorities in Guangdong and Jiangsu Provinces. However, the project will also benefit shipping companies outside of the project provinces that will access to the project Inland Waterways. Cargo owners and consumers of goods will also be beneficiaries after the improvement of Inland Waterways Transportation. They were broadly consulted during project preparation on the occasion of provincial committee meetings, workshops and general consultations for environmental and social assessment. (b) Other Key Stakeholders. These include: (i) the related local government agencies (i.e., Provincial Planning Commission, Construction Commission, Environmental Protection Bureau, Municipalities), which require project coordination during both project preparation and implementation, and (ii) villages and persons affected by the project. Extensive coordination was carried out with the local agencies. In the process of formulating resettlement policies and preparing the RAP, special attention was provided to consultation with affected communities and people. F. Sustainability and Risks 1. Sustainability: It is expected that the project will be designed so that the impact of the user charge will be absorbed by the transport cost saving from the increased vessel size and waiting time reduction. Proper and realistic financial and institutional reforms would also be carefully designed and implemented in the project. This project is expected to be a significant step for sustainable IWT development in China. 2. Critical risks: Risk Risk Rating Risk Minimization Measure Project outputs to development objectives 1. IWT mode will remain uncompetitive N 1. Borrower will set user charges within an appropriate range altough it is the least cost mode for much based on careful comparison with rail/road costs and tariffs. traffic. 2. Vessel size conversion with increased size M 2. Study to promote vessel size increase will be implemented is not realized and measures will be recommended 3. IWT agencies will be financially N 3. New tariff and institutional structures will be aimed at unsustainable. giving cost reduction incentives to IWT agencies, and revenue potential to ensure their financial sustainability. Project components to outputs 1. Implementation quality is unsatisfactory. N 1. Quality of engineering supervision groups will be ensured. 2. Reform action plans are not sufficiently N 2. TORs and Plans will be reviewed carefully. realistic and applicable. Overall Risk Rating N Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)  Page 15 3. Possible controversial aspects: None likely. G. Main Loan Conditions 1. Effectiveness conditions: Standard conditions for effectiveness. 2. Other [classify according to covenant types used in the Legal Agreements.]: Agreement to be reached with MOF, MOC, GPWB and JPWB * Account/Audits. GPWB and JPWB should appoint independent auditors which are acceptable to the Bank and make financial audit reports available to the Bank within six months after the close of each fiscal year. * Monitoring, Review and Reporting. GPWB and JPWB shall: carry out satisfactory procedures for monitoring the progress of the project in terms of physical execution and financial reports and furnish quarterly progress reports to the Bank. - Financial Performance. GPWB and JPWB shall: beginning 1999, prepare annually a rolling five- year financial plan satisfactory to the Bank. * Guangdong Province will: (i) prepare under guidelines acceptable to the Bank a plan for the collection of additional revenues for GPWB, including a channel construction fee, for the purpose of raising the annual revenues of GPWB; (ii) by no later than July 1, 1999 furnish to the Bank for its review and comments said revenue collection plan; and (iii) take all action necessary on its part to put into effect said revenue collection plan for the fiscal year starting January 1, 2000, taking into account the Bank's views thereon. H. Readiness for Implementation [X] The engineering design documents for the first year's activities are complete and the project is ready for implementation. [ ] Not applicable. [X1 The procurement documents for the first year's activities are complete and are ready for implementation. [X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [1 ] The following items are lacking and are discussed under loan conditions (Section G):  Page 16 I. Compliance with Bank Policies [X] This project complies with all applicable Bank policies. [1 ] [The following exceptions to Bank policies are recommended for approval: The project complies with all other applicable Bank policies.] Task Manager: Toshiro Tsutsumi Sec reffreyS.Gutman  Page 17 ANNIEX I ANNEX 1: PROJECT DESIGN SUMMARY Narrative Summary Key Perfornance Indicators Ln Monitoring and Supervision Critical Assumptions and Risks CAS Objective (CAS Objective to Bank Reduce infrastructure Mission) bottlenecks by modemizing IWT subsector Project Development Objectives (Development Objectives to 4CAS Provide more efficient and Objective) productive IWT services * Reduction in cost per ton-km * Monitor and assess the transport * Industry will respond by * Increase in average vessel dwt cost . increasing vessel cargo capacity * Assess the transport cost for (size) IWT and railway * Capital investment in fleet will * Monitor vessel size increase be available Project Outputs (Outputs to Development * IWW are upgraded in * Traffic of vessels in design size * Monitor and evaluate via Objectives) Guangdong and larger size of * Shiplock waiting time is reduced progress reports and supervision * Upgraded channels are properly vessels are navigable * Average tonnage per lockage at missions operated * Shiplock capacity in Jiangsu is each shiplock increases * Financial conditions are * Shiplock is properly operated increased * Specific recommendations are monitored by five-year rolling * Barge size increase is profitable * Competition with railway is made for vessel size increase plans to users appropriate after the possible * Financial monitoring indicators user charge increase in five-year rolling plan are * Vessel size increase study is agreed completed * MIS database is established * Computerized financial accounting is established Project Components Cost of components, including Inputs are monitored and (Components to Outputs) Guangdong Provin contingencies, (in $'000) evaluated via progress report and Implementation quality is * Upgrading Xijiang Channel 90,084 disbursement report satisfactory (168 km long) * Upgrading L-S-R Channel 25,710 (90 km long) * Navigational Safety 23,284 Improvement * of which * Renovation of Maintenance 5,766 Stations * Procurement of equipment, 17,369 including one dredger, maintenance equipment, GPS System, and maintenance and work boats * Navigational Safety Study 148 * MIS and computerized finan- 368 cial accounting system devel- opment * Training 868 Jiangsu Province * Expanding shiplock capacity 105,159 along Grand Canal (5 shiplocks) * MIS and computerized financial accounting system development 181 * Training 1__ _ _ _ _ _ _ _ 550 ___ La Baseline and targeted values should be shown, with the latter divided into values expected at mid-term, end of project and full impact.  Page 18 ANNEX I ANNEX 1A: PERFORMANCE INDICATORS 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 I Average Vessel Size (dwt) Guangdong (Provincial WWs) 310.0 325.5 341.8 358.9 376.8 395.6 415.4 436.2 458.0 480.9 505.0 530.2 556.7 Jiangsu (Provincial WWs) 84.2 86.6 89.0 90.4 91.8 93.2 94.6 96.0 96.8 97.6 98.4 99.2 100.0 2 Shiplock Waiting Time (hours/vessel) Jiangsu Xietai 1.1 1.3 1.5 Suqian 0.6 0.8 0.9 Huaiyin 0.8 1.0 1.2 Huaian 0.8 1.0 1.2 Jianbi 0.6 0.8 0.9 3 Financial Guangdong Working Ratio(%) 88 82 71 71 70 70 70 70 70 Self-financing Ratio (%/e) -10.0 2.5 10.4 8.7 30.2 -3.6 -3.2 0.4 100.0 Debt-service Coverage Ratio (%) -0.3 1.4 3.0 2.2 2.1 0.7 0.7 0.7 1.3 Jiangsu Working Ratio (%) 51 48 47 47 47 47 47 47 47 Self-financing Ratio (%) 131 90 70 71 59 53 49 63 63 Debt-service Coverage Ratio (%/6) 46.8 33.3 18.4 12.9 12.5 5.4 7.4 7.7 9.2  Page 19 ANNEX2 ANNEX 2: PROJECT DESCRIPTION GUANGDONG PROVINCE Component 1-US$121.3 million (Renovation of Zhaoqing-Huatiaomen (Z-H) and Lianhuashan-Shawan-Ronggui (L-S-R) Waterways) (a) Renovation of Zhaoqing-Hutiaomen (Z-H) Waterway. Z-H waterway will be renovated, by widening, deepening and short-cutting (100 m wide, 6.0 m deep and 650 m radius of bend) to accommodate up to 3,000 dwt oceangoing vessel. This component would include: (i) stone works (2,097,000 mi3), (ii) dredging- (8,984,000 m3), (iii) slope protection with stone (217,000 mi3), (iv) shoal explosion (569,000 m ), (v) short-cutting (earth works 3,373,000 m3, slope protection with stone 258,000 m3, and shoal explosion 19,000 m 3). (b) Renovation of Lianhuashan-Shawan-Ronggui (L-S-R) Waterway. L-S-R waterway will be renovated, by widening, deepening and short-cutting (80 m wide, 4.0 m deep and 500 m radius of bend) to accommodate up to 1,000 dwt oceangoing vessel. This component would include: (i) stone works (145,000 mi3), (ii) dredging (1,032,000 m3), (iii) slope protection with stone (120,000 mi3), (iv) shoal explosion (265,000 m ), (v) short-cutting (earth works 2,111,000 m3, slope protection with stone 20,000 m3, and no shoal explosion). (c) Construction of Channel Markers. 107 markers (48 water and 59 land markers) on Z-H and 58 markers (19 water and 39 land markers) on L-S-R waterways with control station and remote monitoring system will be constructed. (d) Renovation of Waterway Maintenance Station. Stations at Zhaoqing and Jiangmen for Z-H and at Chencun and Rongqi for L-S-R will be renovated. (e) Construction of Docks. 4 terminals for Inland Waterways work boats will be constructed at Zhaoqing and Jiangmen for Z-H and at Chencun and Rongqi for L-S-R. Component 2-US$17.7 million (Enhancement of maintenance dredging capacity and operational management) The following will be procured under the project: (a) Suction Hopper Dredger. One suction dredger for emergency channel dredging with capacity of 1,000 m3/h. (b) Channel Marker Work Boats. Two channel marker work boats with 300 kW power. (c) Channel Maintenance Work Boats. Four maintenance work boats with 140 kW power. (d) Speed Boats. Four speed boats with 60 kW power. (e) GPS Survey System. One set of GPS survey system. (f) Maintenance Equipment. Four sets of maintenance equipment and battery chargers for four maintenance stations. (g) Telecommunication Network System. Telecommunication system for vessel navigation and management. (h) Traffic Vehicle. Six cars.  Page 20 ANNEX2 Component 3-US$2.4 million (Technical assistance for institutional development and implementation support, and training) (a) Construction Supervision. Supervision consultants will be appointed. (b) Development of Management Information System. Software development and hardware will be procured to create a new database. Data would include the following: (i) vessel registration number, (ii) owners name, address, telephone, (iii) number etc., (iv) date the vessel was constructed or rebuilt, (v) size of vessel (length, width, draft), (vi) horsepower fuel type, (vii) deadweight ton (dwt), (viii) net registered ton (NRT), (ix) maximum speed, (x) type of vessel (bulk dry, bulk liquid, container), (xi) provinces in which vessel registered, (xii) crew size, (xiii) other relevant factors. (c) Navigational Aids Development Study. Consultants will be engaged in study for designing navigational aides at the congested entrance channels. (d) Training Program. An extensive domestic and overseas training program will be implemented. JUANGSU PROVINCE Component 4-US$97.6 million (Civil works for construction of the five shiplocks) (a) Construction Shiplocks. Five shiplocks (four on the North Grand Canal and one on the South Grand Canal) would be constructed. The four shiplocks on North Grand Canal (at Xietai, Suqian, Huaiyin, and Huaian) will be able to accommodate 2,000 dwt barges and are 23 m wide, 260 m long (only Xietai has 230 m) and 5 m deep. One on the South GC at Jianbi is to accommodate 1,000 dwt barges and width of 23 m, a length of 230 m, a depth of 4.0 m. Component 5-US$7.6 million (Goods for the five shiplocks) (a) Equipment for Shiplocks. Shiplocks equipment (gates, hoists, computerized control systems, etc.) would be procured. Component 6-US$1.7 million (Technical assistance for institutional development and implementation support, and training) (a) Construction Supervision. Supervision consultants will be appointed. (b) Study on the increase in vessel size and Development of Management Information System. Consultants will be engaged to: (i) review the outcome of the first phase study which was implemented by local funds; and (ii) implement the second phase study, including development of a database which would include information similar to Guangdong Province's. (c) Training Program. An extensive domestic and overseas training program will be implemented.  Page 21 ANNEX 2 Training Plan for Guangdong [Component 3-(d)] Domestic Foreign Nature of Training Number Month Number Month 1. Policy Support: Inland Waterway Development, Planning and Financing 0 0 10 0.5 Inland Waterway Management 0 0 8 0.5 Environmental Monitoring and Protection 10 0.5 10 0.5 Subtotal 10 28 2. Implementation Support: Waterway Construction and Maintenance 20 1.0 20 1.0 Design 10 1.0 10 0.5 Construction Supervision 15 1.0 20 0.5 Procurement and Contract 10 1.0 5 1.0 Subtotal 55 55 3. Institutional Development: Financial Management 20 1.0 15 1.0 Economic Analysis and Evaluation 10 1.0 10 0.5 Project Management 10 1.0 20 0.5 Computerization 10 1.0 0 0 English 10 3.0 0 0 Subtotal 60 45 Grand Total 125 128 Training Plan for Jiangsu [Component 6-(c)1 Domestic Foreign Nature of Training Number Month Number Month 1. Policy Support: Inland Waterway & Shiplock Operation & Management 0 0 5 1.0 Environmental Monitoring & Protection 10 0.5 6 1.0 Subtotal 10 11 2. Implementation Support: Shiplock Design 0 0 5 1.0 Construction Supervision 12 1.0 8 1.0 Procurement and Contract 5 1.0 6 0.5 Subtotal 17 19 3. Institutional Development: Financial Management 10 1.0 8 1.0 Economic Analysis and Evaluation 5 1.0 0 0 Project Management 8 1.0 30 0.5 English 8 3.0 0 0 Subtotal 31 38 Grand Total 53 68  Page 22 ANNEX 3 ANNEX 3: ESTIMATED PROJECT COSTS Y'000 US$'000 % foreign Local Foreign Total Local Foreign Total exchange (A) Guangdong Component Civil Works 462,403 353,712 816,115 55,913 42,771 98,684 43 Zhaoqing to Hutiaomen Waterway (WW) 383,066 224,268 607,334 46,320 27,118 73,438 37 L-S-R WW 64,948 105,967 170,915 7,853 12,813 20,667 62 Maintenance Stations and Terminals 14,389 23,477 37,866 1,740 2,839 4,579 62 Equipment 2,101 124,804 126,905 254 15,091 15,345 98 T/A and Training 8,211 8,868 17,079 993 1,072 2,065 52 of which: Policy Support 391 1,423 1,814 47 172 219 Implementation Support 6,737 2,727 9,465 815 330 1,144 Institutional Development 1,083 4,718 5,801 131 570 701 Resettlement 35,065 0 35,065 4,240 0 4,240 0 Monitoring, IWW maintenance 134,966 0 134,966 16,320 0 16,320 0 Base Cost 642,746 487,384 1,130,130 77,720 58,934 136,654 43 Physical Contingency 54,023 52,614 106,637 6,532 6,362 12,894 49 Price Contingency 77,346 38,898 116,244 -',353 4,703 14,056 33 Tax and Duties 18,559 0 18,559 2,244 0 2,244 0 Total Project Cost 792,674 578,896 1,371,570 95,849 70,000 165,849 42 (B) Jiangsu Component Civil Works Shiplock Construction 190,889 311,451 502,340 23,082 37,660 60,742 62 Channel Construction 146,970 0 146,970 17,771 0 17,771 0 Equipment 0 51,890 51,890 0 6,274 6,274 100 T/A and Training 10,440 3,950 14,390 1,262 478 1,740 27 of which: Policy Support 133 549 682 16 66 82 Inplementation Support 9,263 671 9,934 1,120 81 1,201 Institutional Development 1,044 2,730 3,774 126 330 456 Resettlement 62,520 0 62,520 7,560 0 7,560 0 Base Cost 410,819 367,291 778,110 49,676 44,412 94,088 47 Physical Contingency 38,524 32,556 71,080 4,658 3,937 8,595 46 Price Contingency 75,282 38,463 113,745 9,103 4,651 13,754 34 Design and Monitoring 55,679 0 55,679 6,733 0 6,733 0 Tax and Duties 2,000 0 2,000 242 0 242 0 Total Project Cost 582,304 438,310 1,020,614 70,412 53,000 123,412 43  Page 23 ANINEX 4 ANNEX 4: COST BENEFIT ANALYSIS SUMMARY Objective 1. The objective of the proposed Project is to increase the efficiency, improve the quality and reduce the costs of inland waterway transport on the Grand Canal in the province of Jiangsu and oni the Pearl River waterway in the province of Guangdong. Between them, these two provinces account for more than 50 percent of the freight transported by waterways in China, and in total they account for rnore waterways transport than any country other than the United States. Although the Grand Canal is; the oldest man-made waterway still in operation, its has suffered from lack of development and it shiplocks now act as bottlenecks to its maintaining its share of freight transport. The project in Jiangsu will reduce rapidly increasing congestion at the major shiplocks, while in Guangdong the project will allow the use of ships of up to 3,000 dwt on the Z-H waterway and up to 1,000 dwt on the L-S-R waterway. Alternatives Considered 2. Although congestion in Jiangsu, and the use of inefficient small ships in Guangdong, already increase transport costs, the operational and cost impacts will escalate as demand increases. The alternatives considered included using different modes to transport the expected increases in freight traffic, and improving the waterways to different standards. 3. Waterways need less investment per unit of additional capacity than other modes, and the potential to operate at lower costs, particularly for bulk products transported over distances of about 500 km (the higher costs of access and transshipment make waterways more expensive over shorter distances and for nonbulk products). Through previous lack of investment in new capacity, these benefits are not presently being realized COMPARISON OF FREIGHT TRANSPORT COSTS BY MODE AND DISTANCE (US cents per ton-km) Mode/Distance 300 km 500 km 1,000 km 2,500 km Inland waterway 5.0 3.0 1.2 0.8 Railway 4.5 3.5. 2.5 2.2 Road 4.6 4.4 4.2 4.0 Notes: Estimates are for bulk products transported door to door using 500 dwt vessels, 1,000 net ton unit trains or 3S ton semitrailers. Bank estimates 4. Jiangsu. The proposed Jiangsu subproject will provide for a capacity increase of approximately 50 million tons per year on the Grand Canal, at a total cost of about US$124 million. Providing the same capacity increase in the railway would require an investment of at least US$500 million (250 km of single-track railway at US$2 million per km) and rather more for equivalent road capacity. Providing new shiplocks with a capacity for vessels of only 500 dwt instead of 1,000 dwt would block the future operation of these larger vessels, needed both to maximize the capacity of the Canal and to minimize operating costs. However, the present average vessel size is less than 100 dwt, and unless additional measures are taken to encourage the use of larger vessels, neither the cost advantages of waterway transport of the potential benefits of the new shiplocks will not be realized.  Page 24 ANNEX 4 5. Guangdong. Improvements to Guangdong subproject are aimed more at reducing transport costs than increasing capacity. It would no be possible to the same potential cost savings by investing in other modes of transport. In addition, the alternative road and rail modes are already operating at or over capacity and further costly investment would be needed to accommodate the waterway traffic. The alternatives considered were to increase the maximum ship size to 5,000 dwt on the Pearl River and to 3,000 dwt on the L-S-R waterway. Improving the waterways to a higher standard would not bring any worthwhile additional benefits, while lower standards would not allow sufficient cost savings to justify the investment. In addition, several alternative accesses to the sea from the Pearl River delta were examined, and rejected as being more expensive than the selected option while offering no operational advantages. Method of Economic Evaluation 6. The economic evaluation of the subprojects in the two provinces was undertaken independently since the benefits of each are of a different nature and there is no operational connection between them. The basic data on which the simulation models model were calibrated, the model specifications and calibration results, as well as the detailed results of their application, are available in the Project Files. 7. Jiangsu. The evaluation of benefits of this subproject was based on the outputs of a shiplock queuing model, which estimated the queue lengths, vessel waiting times and delay costs that would arise with and without the proposed investments. The model also took account of the distribution of vessel sizes using the locks, the projected increase in waterway traffic and the changing pattern of demand throughout the year. 8. Capacity at shiplocks has an impact on delays similar to that of an intersection on the capacity of a highway. Until a critical point is reached, increases in traffic cause few delays, but once that point is passed, delays increase rapidly and queue lengths become very long and unstable. Average waiting time not only increases rapidly, but becomes subject to large variations. The five shiplocks that would have their capacity expanded under the project are already operating close to or beyond this critical point, with average demand to capacity ratios in excess of 1.0. However, the large variation in traffic between different days of the month and seasons of the year, allows these delays to dissipate quickly. As traffic on more days of the year approaches the critical point, dissipation of the delays becomes more difficult and delay costs escalate quickly. Three of them have already passed the optimum timing for capacity increases, and the other two will reach that point within two years of the opening of the proposed capacity increases. Although the investment in each of the shiplocks was evaluated separately, their development should be considered as a single project. Increasing the capacity of one of them without addressing the others, would simply transfer the queue to the next unimproved shiplock, and few benefits would accrue. 9. Guangdong. The benefits of this subproject were estimated from the outputs of a shipping operations simulation model. It took account of the origins and destinations of more than 200 traffic flows, the operating costs of vessels of different sizes and the projected composition of the vessel fleet. The model determined the least costly movement with and without the proposed project, including ship type and waterway route, for each traffic flow, and the total cost in each case. Since no impact of the subproject on the size and orientation of trade flows was not taken into account, the method of evaluation was one of cost minimization. 10. At present, many shipments, particularly of coal and containers, are made in small vessels for the waterway part of the voyage, with transshipment to or from a larger seagoing vessel near to the mouth of  Page 25 AN1NEX 4 the River for the sea voyage. Increasing the size of vessel that can use the waterway would allow these shipments to use a seagoing vessel from origin to destination and avoid the costs of transshipment, although the seagoing part of the voyage would be in a smaller and less efficient ship. The benefit would therefore only apply to voyages involving relatively short sea movements, such as those of coal from Vietnam and ports on the South China Coast, or of containers to Taiwan or Korea. Most containers for more distant destinations are presently transshipped at Hong Kong or ports near the mouth of the Pearl river, and these movements are unlikely to change their pattern, although the river part of the voyage will be able to take advantage of the larger vessel capacity. The present ship sizes on the Pearl River delta are much less than the maximum permitted, since many movements are for local products such as cement, transported over short distances for which small vessels are more appropriate. Even with the project these movements will continue to be made in small vessels, so the average ship size will only increase to a little more than 300 dwt. 11. The estimated benefits of the project are subject to assumptions about: * the rate of growth of the economy, * changes in the infrastructure and methods of operation of transport modes competing with the waterway; D the rate of change of the vessel fleet to take advantage of the increased depth of water, and; * the operating costs of ships of different sizes. All these parameters were investigated through sensitivity tests made with the simulation model. 12. The proposed improvements to the Pearl River waterways are interdependent. Allowing for 3,000 dwt vessels to use the Z-H waterway will divert some traffic from the L-S-R waterway, while improvements to the latter to allow vessels of up to 1,000 dwt will attract some traffic that would otherwise have to use the Z-H waterway. The benefits from undertaking both improvements together are therefore greater than the sum of doing them both independently, and this is reflected in the application of the simulation model and in the evaluation results. Basic Assumptions 13. The most important of the large number of assumptions been made to explore the impact of many variables on the two subprojects are shown in the following tables: WATERWAY TRAFFIC GROWTH RATES (%) 1995to2000 2001to2010 2011to2020 Low waterway traffic growth rate Jiangsu 4.0 4.0 3.0 Guangdong 5.0 4.0 3.0 Basic waterway traffic growth rate Jiangsu 5.0 5.0 4.0 Guangdong 5.8 4.6 4.0 High waterway traffic growth rate Jiangsu 6.0 6.0 5.0 Guangdong 6.9 6.0 5.0  Page 26 ANNEX 4 AVERAGE VESSEL SIZES (dwt) Without project With project Jiangsu (all shiplocks on northem section of Grand Canal) 1995 66.0 66.0 2000 70.6 70.6 2005 75.6 88.3 2010 83.1 110.3 2015 91.4 137.9 2020 100.6 172.4 Guangdong (2010) Upper reaches of Z-H waterway 194 327 Lower reaches of Z-H waterway 184 381 L-S-R waterway 199 342 VESSEL OPERATING COSTS Generic ship operafing costs- Low Basic High US cents per ton-km 50 tons 10.78 13.54 16.25 1OOtons 7.91 9.31 10.43 300 tons 4.35 5.12 5.74 500tons 2.38 2.80 3.14 1,000 tons 1.23 1.46 1.62 3,000 tons 1.00 1.17 1.31 Guangdong Upper reaches of L-S-R waterway Lower reaches of US cents per ton-km Z-H waterway Z-H waterway Average without project 2000 9.29 9.19 9.46 2005 9.20 9.15 9.40 2010 9.15 9.10 9.35 2015 9.10 9.05 9.30 2020 9.05 9.00 9.25 Average with project 2000 8.63 8.46 8.46 2005 8.43 8.24 8.24 2010 8.23 8.03 8.03 2015 8.10 7.88 7.88 2020 7.96 7.73 7.73 Jiangsu, US cents per vessel hour Without project With project Average without project 1995 12.19 12.19 2000 11.98 11.85 2010 11.34 10.80 2020 10.67 10.12 Evaluation Results 14. The overall economic rate of return (ERR) of the two components of the project taken together is 21.4 percent and the economic net present value is US$207.2 million. The Jiangsu subproject has an  Page 27 ANNEX 4 indicated ERR of 21.9 percent and an ENPV of US$106.7 million. The indicated economic rate of return (ERR) and a net present value (ENPV) of Guangdong subproject are 21.0 percent and US$100.5 million respectively. If the two parts of this subproject were to be made independently, the Z-H Waterway improvements would show an ERR of 17.5 percent and an ENPV of US$45.5 million, while the 1S-R Waterway improvements would have an ERR of 20.2 percent and an ENPV of US$42.2 million. SUMMARY OF ECONOMIC EVALUATION RESULTS ERR NPV Invest (%/6) (US$ mln)- (US$ min) Jiangsu Shiplocks XietaiNo.2 28.7 55.1 12.0 HuaianNo.3 17.8 7.4 19.1 Huaiyin No.3 22.8 17.4 17.2 SuqianNo.3 20.6 18.1 20.6 Jianbi No.2 15.9 8.7 17.4 Subtotal 21.9 106.7 86.3 Guangdong Z-H Waterway 17.5 45.5 95.3 L-S-R Waterway 20.2 42.2 27.5 Subtotal 21.0 100.5 112.8 Total 21.4 207.2 199.1 Results of Sensitivity Tests 15. Jiangsu. The evaluation results for this component are very sensitive to the growth in traffic and inversely related to increases in vessel size. If the rate of growth of traffic were to be at the lower levels indicated, the ERR would fall to 11.5 percent and the ENPV would be slightly negative at -US$3.1 million. Conversely, if waterway traffic increased at the higher rates show, the ERR would increase to 33.3 percent and the ENPV to US$509.0 million. The capacity of the shiplocks depends on the mix of vessel sizes that use them. A given volume of freight transported in smaller vessels would take more time to pass through them than the same volume of freight transported in larger vessels. So the benefits of the project would be reduced (although the cost of transport would also be significantly reduced) if the fleet comprised larger vessels. 16. The impact of vessel size had been tested in two ways. First, the average vessel size might increase more slowly than assumed, whether or not the project is implemented. A slower increase would result in an ERR of 33.6 percent and an ENPV of US$591.1 million. A faster increase in vessel size, while being beneficial in terms of vessel operating costs, would reduce the subproject's ERR to 16.3 percent and its ENPV to just US$7.6 million. Second, it is hoped that implementation of the project would itself lead to a faster increase in average vessel size than would occur otherwise. If this comes about, the ERR would increase to 22.6 percent and the ENPV to US$108.9 million, whereas is there were to be no impact of the subproject on ship size, the ERR would reduce to 21.4 percent and the ENPV to US$100.2 million. 17. These increases would be the result of two counterbalancing effects, the larger vessels would reduce the delays at the shiplocks, and also the benefits of the project, while the lower operating costs of  Page 28 ANNEX 4 the larger vessels would be an additional benefit attributable to the project. Even under the most optimistic assumptions about the introduction of larger ships, most of the freight on the Grand Canal would still be transported in small ships since these are the only ones that have access to the feeder canals. Only increasing the maximum vessel in these canals or introducing a system of transshipment from large to small vessels, would the use of larger vessels increase significantly. The evaluation results are therefore relatively insensitive to assumptions about the operating costs of larger vessels compared to smaller ones. Even with a large range of assumptions about these costs, the ERR does not vary by more than one percentage point above or below the basic value, and the ENPV varies only within a range of +/- US$2 million. 18. Projecting how delays at shiplocks will increase as more vessels try to use them is an inexact science and highly dependent on the mathematical formulation of the model used. The model used here assumes that vessels will arrive at the shiplocks according to a Poisson distribution, and that the service rate, the time that it takes a vessel to pass through the system, will follow a Rectangular distribution. Small variations in the values of the parameters of these models can have a large impact on the size of the projected delays. Several different forms of delay model were testedI with a wide range in their parameter values. The evaluation results were found to highly sensitive to both the form of the model and its parameter values. However, the existing delays at three of the five shiplocks are sufficient to justify the proposed investments with no increase in demand. For the other two, all the models with parameter values that reasonably representation delays with the present level of traffic, indicated acceptable levels of ERR and positive values of ENPV. RESULTS OF SENSITIVITY TESTS FOR THE JIANGSU SUBPROJECT ERR ENPV Probability (%/0) (US$ min) (%) Basic 21.9 106.7 50 Lower demand for IW transport 11.5 -3.1 30 Higher demand for IW transport 21.1 101.1 20 Probability weighted result 21.1 101.3 Slower growth in vessel size 33.6 591.0 20 Faster growth in vessel size 16.3 7.6 20 Very fast growth in vessel size 13.2 31.6 10 Probability weighted result 22.3 123.1 Larger vessel size through project 22.1 108.9 30 No increase through project 21.4 100.2 20 Probability weighted result 21.9 106.6 Higher operating costs of larger ships 21.8 106.3 30 Lower operating costs of larger ships 22.1 108.9 20 Probability weighted result 21.9 107.0 Slower growth of congestion 17.9 52.1 30 Faster growth of congestion 30.4 282.4 20 Probability weighted result 22.4 72.4 Alternative model specifications Random arrivals 22.4 110.6 25 Independent service times 22.6 114.7 25 Probability weighted result 22.4 109.7 Axrivals distributed according to a Poisson or random pattern and service rates according to Erlang or independent distributions. See The Optimum Number of Berths at a Port, WB Staff Working Paper No.29, 1968.  Page 29 A1NNEX 4 19. Guangdong. The evaluation results for the Guangdong component are most sensitive to assumptions about the benefits of lower operating costs of larger vessels. This component of the project would have an ERR of 15.1 percent and an ENPV of US$29.0 if the operating costs of larger vessels were to be higher than assumed, but 23.7 percent and US$130.3 million respectively with lower costs (that is, higher subproject benefits) for larger vessels. The benefits are also sensitive to the rate at which existing smaller ships would be replaced by the larger ships needed to take advantage of the improved waterways. At present less than 20 percent of the ton-km are transported in ships that take advantage of the existing limits, so additional incentives would be needed to encourage the conversion of the fleet to the even larger vessels needed to maximize benefits of the subproject. If after ten years only 40 percent of the traffic that could take advantage of the improved waterway to be transported in larger ships had made the change instead of the 80 percent assumed in the base case, the ERR would be just 12.1 percent and the ENPV close to zero. 20. A high proportion of the benefits of this component of the project would accrue to existing traffic, so the economic rate of return is relatively insensitive to the assumed growth in traffic. With the lower rates of growth of traffic indicated in the above Table, the ERR would be 17.9 percent and the ENPV US$59.0 million. If there were no growth in traffic, the ERR would fall to 4.5 percent and the ENPV to US$6.1 million. RESULTS OF THE SENSITIVITY TESTS FOR THE GUANGDONG SUBPROJECT ERR ENPV Probability (%/6) (US$ min) (%) Basic 21.9% 100.5 50% Lower demand for IW transport 17.9% 59.0 30% Higher demand for IW transport 22.8% 126.9 20% Probability weighted result 20.4% 93.3 Slower growth in vessel size 12.1% 1.0 10% Faster growth in vessel size 18.1% 60.3 40% Probability weighted result 20.9% 97.9 Higher operating costs of larger ships 15.1% 29.0 30% Lower operating costs of larger ships 23.7% 130.3 20% Probability weighted result 19.3% 76.6  Page 30 ANNEX S ANNEX 5: FINANCIAL ANALYSIS Major Financial Reforms 1. Provincial governments assume most of the responsibilities for waterways in China through the provincial IWW authorities, which handle day-to-day management, operation, construction and development. Major projects or plans affecting the long-term development of the provincial IWW sector, however, require the approval of MOC. 2. During the last few years, some major changes have been made to improve the effectiveness of the provincial IWW financial administration and reporting procedures. These included the following: (a) New Accounting Standards. Beginning July 1, 1993, the MOF introduced accounting reforms to all government agencies and State-owned Enterprises (SOE) by issuing revised accounting standards. The reforms were also part of the Government's efforts to deepen its "Open Door" policy, and was an initial step to transform the planned economy to a market-oriented economy. The first step of the accounting reform was to link the Chinese accounting practices with general international accounting standards. Further accounting reforms will be necessary to fully convert the Chinese standards and practices to the international standards. (b) Changing the Sources of Project Financing. The grants from the State to finance capital construction of projects have been replaced by a mixture of grants and commercial loans. The PWBs are now required to repay these loans from their internal cash generation. The impacts of this policy are: (a) reduced budgetary appropriation from the State; and (b) the need to repay loan (principal and interest) pressurizes fund recipients to maximize the profitability of projects through better business management practices. (c) Tariffs. There are two sets of tariffs: (a) the basic tariff which is regulated by the State and is national in scope, such as the channel maintenance fee; and (b) the provincial tariff which is regulated by the province such as channel construction fee and may not be consistently applied throughout the country; for example, while JPWB collects such a fee, GPWB has not promulgated one. Beginning 1998, the channel maintenance fee payable by SOEs was reduced from 8 percent to 6 percent. This would result in a lower profit margin for the WBs, particularly for GPWB which may even incur occasional losses during the construction period. Past and Present Financial Positions 3. The financial results for each provincial WB (1993-96) are summarized below: Guangdong Province Jiangsu Province 1993 1994 1995 1996 1993 1994 1995 1996 Traffic (million tons) 162.73 177.59 154.86 161.00 259.15 272.97 271.61 288.00 Total revenue (Y million) 185.68 214.84 225.33 226.60 370.44 569.36 723.10 730.29 Operating costs, tax and expenses 155.21 185.13 190.66 199.34 286.38 360.25 391.67 422.50 (Y million) La Net cash surplus (Y million) 30.47 29.71 34.67 27.26 84.06 209.11 331.43 307.79 Working ratio (%) 71 73 72 75 64 52 43 45 /a Jiangsu has a very low depreciation while Guangdong has none at all.  Page 31 ANINEX 5 4. Between 1993 and 1996, the net cash surplus for Guangdong has been diluted as there waes no major tariff increase. The average growth of operating revenue (6.9 percent a year) was slower than the growth of operating expenses (8.7 percent a year). 5. For Jiangsu, revenues grew faster than traffic between 1993 and 1996 due to the introduction of a new tariff item (channel construction fee) in 1994. During this period, average revenue per ton of cargo handled increased from Y 1.43 to Y 2.54 (or 21 percent annually). Despite the increase in fees, there was no decrease in shipping traffic indicating that the industry could successfully absorb increases. Operating cash surplus, assisted by the lower growth in operating costs (increased by 11.4 percent annually), has consequently tripled during the period. 6. Both JPWB and GPWB have proven very effective in controlling operating costs. For exarnple, between 1993 and 1996, average operating cost increases in these two provinces (8.7 percent for Guangdong and 11.4 percent for Jiangsu ) were lower than the general price inflation in the nation (14.2 percent). In particular, GPWB managed to lower operating cost increases to an annual average of 8.7 percent in spite of the province being one of the fastest-growing areas in China with economic growth averaging nearly 20 percent per year since 1980, and recent data indicates no slackening in this lpace. IWW traffic in Guangdong has almost doubled during the last ten years. 7. Besides their sound financial performance, it should be noted that profits for the PWBs are generally overstated since depreciation, which is a part of the operating costs, has not been properly accounted for. For example, Guangdong has no depreciation while Jiangsu has a very low provision. To better reflect operating costs, the PWBs agreed to increase the amount set aside for depreciation umder the project. 8. The two WBs are financially sound. As of December 31, 1996, current assets substantially exceeded current liabilities, with over two-thirds of the current assets in the form of cash. The cuTrent ratio was in the comfortable range of 3.2 and 1.6 for Guangdong and Jiangsu, respectively. There are no long-term debts for the two provinces. The salient points of the balance sheet for 1995 and 1996 are as follows: Guangdong (Y million) Jiangsu (Y million) 1995 1996 1995 1996 Assets: Fixed assets/_a 153.53 173.10 1,123.48 1,496.12 Current assets 191.5 230.13 375.87 585.05 Other assets 0 0 9.62 9.89 Total 345.03 403.23 1,508.97 2,091.06 Equity 298.38 331.63 1,140.31 1,728.06 Long-term debts 0 0 0 0 Current liabilities 46.65 71.60 360.34 355.06 Other liabilities 0 0 8.32 7.94 Total 345.03 403.23 1,508.97 2,091.06 Current ratio 4.1 3.2 1.0 1.6 Debtl(debt + equity) ratio - -- -- -- La Net value based on historical cost.  Page 32 ANNEX 6 Future Financial Performance 9. To forecast future financial projections of the PWBs (1997-2006), it is assumed that (a) cost of depreciation would be increased gradually from 0 percent and 0.84 percent to 6.19 percent and 2.63 percent of total operating costs for Guangdong and Jiangsu, respectively; (b) overall operating costs would increase by 3 percent per year in addition to the general price increase; and (c) GPWB will collect a channel construction fee for the project areas. In relation to total fixed assets, the overall depreciation rates would increase from 0 percent and 5.7 percent to 5.8 percent and 8.1 percent for Guangdong and Jiangsu, receptively. 10. The Guangdong Provincial Government intends, starting in the year 2000, to collect a channel construction fee in the project areas. The fee only applies to general cargo and container ships over 1,000 dwt because these are the biggest beneficiaries of the proposed project. The fee ranges from 8 to 17 percent of estimated total transport costs savings and should not deter potential users. GUANGDONG: THE PROPOSED CHANNEL CONSTRUCTiON FEE Over 1,000 dwt and under 3,000 dwt ships Over 3,000 dwt ships General cargo (Y/ton) 0.5 (3.0) 3.0 (40.0) Container (Y/teu) 5.0 (60.0) 150.0 (1,600.0) Note: The figure in parenthesis represents the estimated total transport cost savings for the IWW users. 11. With the project, the average growth of fixed assets during the project construction period would be 15.7 percent for Guangdong and 13.5 percent annually for Jiangsu. As a result the investment in fixed assets in 2006-the first operating year after completion of the project-would be 4.3 times and 3.6 times greater than the level in 1996 for Guangdong and Jiangsu, respectively. The FIRR of the project is estimated at 8.3 percent ( 9.3 percent for Guangdong and 7.8 percent for Jiangsu). Working ratio for Guangdong would be in the range of 70-88 percent; for Jiangsu, it would be 47-51 percent. Financial Sensitivity Analysis and Risk Assessment 12. The financial condition of the WBs depends on the capital investmnent and the amount of annual operating revenue they generate which is directly related to (a) the volume of traffic volume, and (b) the amount of channel construction fee for Guangdong. Several financial sensitivity scenarios were carried out to examine the impact on the viability of the project, namely, reducing the level of traffic by 10 percent, increasing capital cost by 10 percent, reducing the channel construction fee by 50 percent and the omission of the collection the fee. The results show that not collecting of the fee has a much greater impact than the changes of traffic volume. Without the collection of the fee, GPWB will not be able to fully support its daily operating cost from its operating revenue. 13. If the IWW traffic is reduced by 10 percent, the FIRR of the project would drop to 4.7 percent (8.1 percent for Guangdong and 2.8 percent for Jiangsu). Increasing the capital cost by 10 percent has the least effect on the project. It should be noted that the lower traffic forecast used in the financial evaluation is the outcome of Guangdong province implementing a very extensive highway construction plan which would compete with waterways on short distances. Jiangsu province has decided to build a  Page 33 ANNEX 5 railway line in Subei. The railway will compete with waterways on long distances in the area. The best estimate average first 10-Year annual traffic growth (1997-2007) of 2.6 percent for Guangdong and 3.0 percent for Jiangsu was adopted. 14. The results of the financial sensitivity analysis for 2006 is shown as follows: FINANCIAL SENSITIVITY ANALYSIS-2006 (in %) Guangdong Jiangsu Base Traffic Capital The Fee No Base Traffic Capital Case 10%/oless cost +10% 50%1less Fee Case 10% less cost +10% Profitability: RatereturnonANFAla 3 -1.9 3 -0.5 -4.3 39 35 38 Operating ratio 75 82 75 80 86 48 50 48 Working ratio 70 77 70 75 81 47 49 47 FIRR 9.3 8.1 8.3 6.2 2.7 7.8 2.8 7.8 Liquidity: Current ratio 1.5 -0.1 1.5 -0.5 -0.5 3.9 3.4 3.8 Leverage: Debit service coverage 1.3 0.3 1.3 0.6 -0.3 9.2 8.4 9.2 Debt / (debt + equity) ratio 43.8 48.1 50.0 46.4 49.3 16.7 17.3 16.7 La Average net fixed assets (historical value). 15. To ensure that the project will be successful financially, an assurance was obtained from the PWBs that beginning in 1999, the WBs will prepare annually a rolling five-year financial plan which would include the projected traffic, revenues, costs, capital expenditures and have it discussed with the Bank. 16. For monitoring the financial performance, the working ratio, self-financing ratio and debt service coverage ratio were selected as financial indicators. During project supervision, these finarncial performance indicators would be closely monitored by the Bank. A variance of less than +/- 15 percent would be acceptable. The WBs would be required to improve their financial performances by increasing tariffs or reducing costs or capital expenditures in the event that the selected targets are not achieved.  Page 34 ANNEX 5 FINANCIAL PERFORMANCE INDICATORS (in %) Guangdong Jiangsu Working Self-financing Debt Service Working Self-financing Debt Service Ratio Ratio Coverage Ratio Ratio Ratio Coverage Ratio 1998 88 -10 -0.3 51 131 46.8 1999 82 2.5 1.4 48 90 33.3 2000 71 10.4 3.0 47 70 18.4 2001 71 8.7 2.2 47 71 12.9 2002 70 30.2 2.1 47 59 12.5 2003 70 -3.6 0.7 47 53 5.4 2004 70 -3.2 0.7 47 49 7.4 2005 70 0.4 0.7 47 63 7.7 2006 70 100 1.3 47 63 9.2 Notes: Working ratio = (Operating Costs - Depreciation ) / (Operating Revenue - Business Taxes) Self-financing ratio = Average of the last three years' total investments / (Net profit + Depreciation) Debt service ratio = (net profit + depreciation) / (principal + Interest) Training 17. To introduce modern financial techniques to the provinces, a technical assistance and training program were prepared and agreed with the Borrowers. The training has three modules: (a) domestic training, (b) overseas training, and (G) foreign experts assistance in China. 18. The contents of the training include, but are not limited to, the following: (a) domestic training: international accepted accounting standard and practices, business English, computer training; (b) overseas training: marketing, financial management, business strategies, fund flow management; and (c) professional financial experts to be engaged to help the IWW staff in implementing above in China. 19. Agreement was reached during negotiations that: (a) the Government, (i) will onlend the proceeds of the Bank loan to the PWBs on terms and conditions satisfactory to the Bank; (b) the WBs will: (i) submit to the Bank, the audited financial statements not later than six months after the end of each financial year; (ii) beginning in 1999, prepare annually a rolling five-year financial plan and discuss it with the Bank; and (c) GPWB will: (i) prepare under guidelines acceptable to the Bank a plan for the collection of additional revenues for GPWB, including a channel construction fee, for the purpose of raising the annual revenues of GPWB; (ii) by no later than July 1, 1999 furnish to the Bank for its review and comments said revenue collection plan; and (iii) take all action necessary on its part to put into effect said revenue collection plan for the fiscal year starting January 1, 2000, taking into account the Bank's views thereon.  Page 35 ANNEX S ANNEX 6: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS PROCUREMENT All procurement of goods and works will be carried out in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits, dated January 1995, revised in January and Auguist of 1996 and September 1997. The bidding documents for civil works and goods will follow the Model Bidding Documents published by MOF. Domestic Preference. In the procurement of civil works and goods, domestic preference may be granted in accordance with, and subject to, the provisions of paragraphs 2.54 and 2.55, and Appendix 2 of the Guidelines. Procurement Methods (Table A) About 83 percent ($102 million) of the loan would be used for financing civil works and goods procured through International Competitive Bidding (ICB). About 14 percent ($18 million) of the loan woulld be used for financing civil works procured through National Competitive Bidding (NCB), and about 3 percent ($4 million) for TA and training. Civil Works. Dredging works for Xijiang (from Zhaoqing to Hutiaomen) and L-S-R channel for Guangdong component, and construction of the five shiplocks for Jiangsu would be procured through ICB. Since the nature of the works is not complicated, other minor works for Guangdong (e.g. bank protection, short-cutting of shoals, shoal blasting, minor channel excavations, etc.), costing less than $10 million and would not attract foreign bidders, will be procured through NCB (estimated aggregate amount of $28.8 million). Goods. Major equipment (dredgers, boats and shiplock equipment) would be procured through ICB. For each of Guangdong and Jiangsu, small pieces of equipment (e.g. survey equipment, maintenance parts) of which the contract price would be less than $200,000 per contract with an aggregate not exceeding $1,000,000 would be procured through International or National Shopping procedures. International Shopping will be applied to contracts of over $100,000 and below $200,000 per contract (estimated aggregate amount of $600,000 for each Province). Goods costing less than $100,000 per contract with an aggregate amount up to $400,000 for each Province may be procured through National Shopping. TA and Training. TA for both Guangdong (MIS development and navigation safety study) and Jiangsu (2nd phase study the increase of vessel size) would be small with each contract estimated to cost less than $100,000 and will be procured through Consultants' Qualifications or Others (selection of individual consultants). Training will be implemented on an annual basis in accordance with the requirement of the Central Government. Training will be carried out mainly at training institutions that offer general training courses, following a comparison of training courses offered by institutions. Not Bank-financed components would include: (a) Xijiang (B-H) construction for Guangdong which requires advanced implementation ahead of the Bank-financed components, and entrance channel construction for five shiplocks whose construction are small in scale but would require a step-by-step program in line with the resettlement and land acquisition schedule.  Page 36 ANNEX 6 Prior Review Thresholds (Table B) Civil works contracts estimated to cost over $1.0 million, and contract for goods with a contract price more than $500,000 will be subject to the Bank's prior review. Prior review for civil works and equipment would cover 77 percent and 19 percent of the total Bank loan, respectively, and in aggregate would amount to 96 percent of the loan. Contracts for consultant services exceeding $100,000 for firms or $50,000 for individuals will be subject to the Bank's prior review. However, Terms of Reference for all consultant services will be subject to the Bank's prior review. For the contracts that do not require Bank's prior review, a post review will be carried out on the basis of one out of four contracts. DISBURSEMENT Allocation of Loan Proceeds (Table C) The loan would be disbursed against: (a) 62 percent of works for Guangdong and Jiangsu components, (b) 100 percent of foreign expenditure, 100 percent of local expenditure (ex-factory cost) and 75 percent of local expenditures for other items procured locally, (c) 100 percent of expenditure for consulting services and training. Use of Statements of Expenses (SOEs) Withdrawal from the loan account would be made on the basis of SOEs for expenditure for: (a) civil works under contracts costing less than $1.0 million, (b) goods under contracts costing less than $500,000, (c) services provided by consulting frms under contracts costing less than $100,000, and (d) services provided by individual consultants under contracts costing less than $50,000. Special Account Each of Guangdong and Jiangsu would have a separate special account with an amount of $4.0 million. Advance Contracting Guangdong and Jiangsu Provinces requested advanced contracting and retroactive financing. The amount subject to retroactive financing is estimated at about $12.3 million. This amount would apply to payments made after March 30, 1998.  Page 37 ANNEX 6 ANNEX 6, TABLE A: PROJECT COSTS BY PROCUREMENT ARRANGEMENTS Procurement Method Total Costs Expenditure Category ICB NCB Other NBF (including contingencies) Guangdong Component 1. Civil Works 56.8 28.8 35.7 121.3 (34.0) (17.5) (51.5) 2. Goods 16.4 1.0 0.3 17.7 (16.4) (1.0) (17.4) 3. Services 1.4 1.0 2.4 (1.1) (1.1) Jiangsu Component 1. Civil Works 75.3 22.7 98.0 (44.9) (44.9) 2. Goods 6.6 1.0 7.6 (6.6) (1.0) (7.6) 3. Services 0.6 1.4 2.0 (0.5) (0.5) Total 155.1 28.8 4.0 61.1 249.0 (101.9) (17.5) (3.6) (0.0) (123.0) Notes: (1) NBF = Not Bank-financed (includes elements procured under parallel cofinancing procedures, consultancies under trust funds, any reserved procurement, and any other miscellaneous items). (2) Other includes: (a) procurement of goods through International/National Shopping, and (b) consultant services. (3) Figures in parenthesis are the amounts to be financed by the Bank loan/IDA credit  Page 38 ANNEX 6 ANNEx 6, TABLE Al: CONSULTANT SELECTION ARRANGEMENTS (OPTIONAL) (in US$ million equivalent) Consultant Services Selection Method Total Cost Expenditure Category QCBS QBS SFB LCS CQ Other NBF (including contingencies) A. Firms 0.3 0.2 0.5 B. Individuals 0.1 0.1 Total 0.3 0.1 0.2 0.6 Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. NBF = Not Bank-financed. Figures in parenthesis are the amounts to be financed by the Bank loan. ANNEX 6, TABLE B: THRESHOLDS FOR PROCUREMENT METHODS AND PRIOR REVIEW Expenditure Contract Value Procurement Contracts Subject to Prior Review/Estimated Category (Thlshold) Method Total Value Subject to Prior Review (US$'000) (USS million) 1. Works Guangdong and Jiangsu 1,000 ICB, NCB All contract, except for shopping items totaling US$157 million of contract price 2. Goods Guangdong and Jiangsu 500 ICB and NCB All contracts, except for shopping items totaling US$25 million of contract price 200-100 International Shopping No prior review is required 100 National Shopping No prior review is required 3. Services Training 100 for firms and 50 for Terms of references totaling US$0.45 million individual consultants of contract price Total value of contracts subject to prior review: S182 million ($119 million)  Page 39 ANNEX 6 ANNEX 6, TABLE C: ALLOCATION OF LOAN PROCEEDS Expenditure Category Amount in US$ million Financing Percentage Guangdong Component 1. Civil Works 43.0 62 2. Goods 15.0 100/100/75 3. Consultant Services and Training 1.0 100 4. Unallocated 11.0 Subtotal 70.0 Jiangsu Component 1. Civil Works 38.0 62 2. Goods 6.0 100/100/75 3. Consultant Services and Training 0.5 100 4. Unallocated 8.5 Subtotal 53.0 Total 123.0  Page 40 ANNEX7 ANNEX 7: INSTITUTIONAL DEVELOPMENT AND REFORMS A. GUANGDONG COMPONENT Present Organization The Guangdong Provincial Waterways Bureau (GPWB) is a unit of the Guangdong Provincial Communications Department (GPCD) and is responsible for construction, maintenance and management of waterways within Guangdong Province. Part of the GPWB organization includes bureau in Dongjiang, Xijiang, Beijiang, Yuezhong, Yuexi, Yuedong, Meizhou, Shenzhen, Zhuhai and a Waterway Station at Guangzhou. The GPWB fee collection system is based on vessel ownership: fees from state-owned, multimodal, joint-venture and foreign-owned units are collected directly by GPWB; fees from collective and individually owned vessels are collected by local communications department offices. At present, the system cannot keep up with increasing waterway traffic demands. To increase inland waterway transportation efficiencies and better make use of the extensive natural waterway resource in the Province, the following five-point reform program is proposed to be implemented during the Second Inland Waterway Project. Objective of Institutional Reform (a) Waterway Management System Reform. The Guangdong Provincial Government has decided to promote GPWB from divisional level to deputy director level status within GPCD. At the same time, building on the existing regional system, GPWB is planning to establish, by the end of 1998, five additional waterway bureau at Zhongshan, Dongguan, Jiangmen, Yangjiang and Shaoguan. (b) Human Resource Development. To improve the competency and quality of waterway management, GPPWB will implement a training program to include foreign study tours and domestic and overseas training. In particular, the program will focus on waterway financial management experience in developed countries to further strengthen the proposed financial reforms and waterway financial management expertise. A total of 123 person (139 person-months) will receive domestic training; 92 persons (81 person-months) will take part in overseas training. Estimated training cost is US$0.7557 million (equivalent to Y 6.205 million), of which US$0.6885 of the Bank Loan will be used. Detailed information is provided in "Training Plan for Proposed Second Inland Waterways Project-Guangdong Province." (c) Establishing a Dredging Corporation. To better utilize the proposed purchase of a new suction hopper dredge, GPWB proposes to establish a limited liability financially independent corporation. The trailing suction hopper dredge will have a capacity of 800-1,000 m3/hr, with annual production of 1,500,000 m3 and staffing of 60-70 people.  Page 41 ANNEX7 TIME SCHEDULE FOR DREDGING CORPORATION Content Time Order equipment 1998 Put auxiliary equipment into use; technical crew training 1999 Trailing suction hopper delivered and commissioned 2000 Put dredge into general operation 2001 ESTIMATED DREDGING ACTIVITY Volumes Time 300,000 m3 2000 1,500,000 m3 2001 1,880,000 m3 2002 (d) Financial Information System (FIS). The purpose of an FIS will be to share data source, enhance cooperation among departments and increase work efficiency and overall management. The FIS reform will focus on computerization of the accounting, financial management and waterway fee collection systems. The computerized accounting will replace manual accounts recording and preparation of fmancial statements. Computerization of the financial management system will provide a greatly improved means for overseeing the financial status and generating financial information and analysis reports. Computerization of the fee collection system will permit: (i) automated ticket issuance and account settlement; (ii) setting up a vessel registration system to provide information on vessel operational characteristics (e.g., ship owner's name, address, telephone, date of manufacturing of renovation, ship type (length, width draft) horsepower, net tonnage, maximum speed and place of registration. FIS IMPLEMENTATION SCHEDULE Item Time System design and installation 1998-2001 Accounting computerization system 1998-2000 Financial management system 1999-2002 Fee collection system 1998-2002 (e) Financial Reform Plan. Through the proposed training and other human resource development, modem financial techniques and approaches would be applied to increase departmental efficiency. The work is scheduled to be completed by 2000. Access to additional financial resources, in particular use of domestic ftnds, will be explored to improve the financial condition of the Waterways Bureau.  Page 42 ANNEX 7 B. JIANGSU COMPONENT Technical Assistance for Designing of a Basic Capability for Inland Navigation Systems Analysis (Second Phase Vessel Size Increase Study) Outline Terms of Reference 1. Subject. A Program to Improve the Operating Efficiency of the Inland Waterway Fleet of China. 2. Introduction. It has been identified that an increase in the average vessel size of the Jiangsu inland waterway fleet is critical to accomplish an increases in Inland Water Transport (IWT) efficiency and reduction in the congestion of channels, shiplocks and ports. The Government of China (GOC) recognizes this importance, and Jiangsu Province Waterway Bureau (JPWP) has recently completed a study for vessel size increase. The study provides a review of the current situation and includes recommendations for future IWT development. It is indicated that although the number of larger (i.e. 1,000-3,000 dwt) vessels is expected to increase, projections reported by the government show that by the year 2010, over 84 percent of the fleet will still consist of these very small vessels of less than 500 dwt. More importantly, the number of these vessels are projected to increase from their current level of 25,400 to nearly 40,500 by the year 2010, and to over 45,600 by the year 2020. The JPWP recognizes that this situation cannot be permitted to continue, and is well along in completing research and formulation of a definitive program which will result in a much more efficient IWT fleet. 3. Objectives: The major objective of the proposed study is to establish a basic analytical capability within the JPWB for inland navigation systems analysis for project planning and capital investment decision making. To achieve these objectives the following must be accomplished: (a) Develop computerized tools for analysis of an optimum IWW fleet, and install on a JPWB computer; (b) Establish a JPWB capability in inland navigation systems analysis; (c) Identify the socioeconomic, financial and cultural issues to realize this fleet composition; (d) Provide recommendations, regulations and incentives to encourage shipping companies to increase the average vessel size of their fleet. 4. Scope of Work (a) Develop a Detailed Plan of Study for the successful completion of the study, including specific program recommendations for improving the operating efficiency of the Jiangsu Province Inland Waterways System. The proposed study should lead to a specific government program for assuring that the number of very small vessels (e.g. less than 500 dwt) not be permitted to increase beyond that necessary to transport cargo over segments of inland waterways where larger vessels cannot transit, or where the market is so small as to prohibit the efficient use of large vessels. The size and nature of such vessels should be specified, and "larger vessels" should include the use of barges and push-tows as well as self-propelled vessels. The final program should include one or more, regulations, prohibitions, incentives and/or subsidies to facilitate the implementation of this program, since social and economic deterrents will otherwise undermine its success. Recommendations should include social, as well as economic, mitigation. (b) Conduct a Traffic Flow Analysis, river origin to river destination, by major commodity types. It should include only those commodity groups which make up the majority of the total cargo, such as coal, logs, building materials, etc. (c) Inventory and Evaluate IWW Characteristics and constraints of the inland waterway system as they affect the use of vessels, especially vessels greater than 100 dwt, within the boundaries of the  Page 43 ANNEX 7 origin-destination Study Component I above. This would include a computerized representation of the inland waterway system over which this traffic is transported, and include as a minimum, channel width, depth, and radii of bends, bridges and their characteristics, as well as locks and other water oriented structures or activities which might represent a constraint on the safe or efficient operation of commercial navigation. (d) Inventory and Evaluate Vessel Characteristics including vessel dimensions, horsepower, cargo carrying capacity, crew size, fuel consumption, operating cost, vessel users fees, etc. Most of these data should already exist. (e) Match Current Vessel Types, by Commodity T, by Origin/Destination. Inventory a variety of larger vessel types which might service these markets in the future. Coordinate with members of study components III and IV, and prepare data in proper computer input format. (f) Input and Run the IWW Model, and identify those segments of inland waterborne commerce where the volume of traffic is sufficient to use larger vessels, both current and projected. Where constraints are identified, they should be specified, along with estimates of the solution and cost of removing the obstacle. Optimize current and projected traffic flows and present the most economically efficient fleet operation for this traffic. Identify costs and savings in both operating costs, capital improvements and maintenance costs (e.g. the delay of lock replacements, etc.). (g) Formulate Alternatives and Identify the Current and Future Optimum Fleet Size and Their Vessel Characteristics, identify the socioeconomic, financial and cultural impacts and barriers to the replacement of these segments of the fleet. Formulate specific alternative programs which could be used to minimize negative impacts and maximize positive impacts. Write final report and make specific program recommendations to meet the Study Objectives. 5. Current Status of the First-Phase Study. The first-phase study (detailed above) is currently being conducted and supervised by JPWB. JPWB has agreed that upon completion of their study, all of the study components outlined above may be reviewed in detail by an international consulting company with experience in inland waterway planning, systems analysis, port and vessel operations, and computer simulation modeling. Consulting firm will evaluate the appropriateness of the models and verify its application in this study. Any differences, be it in the model, the data, or the analysis and conclusions will be addressed at that time. 6. Study Schedule. The diagram below provides a proposed time outline for the study. Comp. Component Month Month Month Month Month Month Month No. Name 1 2 3 4 5 6 7 I Plan of Study & Mgmt _ _ - II Traffic Flow Analysis III IWW Characteristics IV Vessel Characteristics V Match Characteristics VI Input and run IWW Model VII Formulate recommendations & Write Final Report  Page 44 ANNEX 8 ANNEX 8: MANAGEMENT INFORMATION SYSTEM (MIS) In preparation for the introduction of a modem computerized accounting system, GPWB should create a Management Information System (MIS) database for vessel operations. Under this project Steps 1 and 2, as described in the following text, are recommended to be implemented. Step 1. Create a computerized database of all vessels registered in Guangdong or Jiangsu Province. Step 2. Develop basic analytical capability of this computerized database. Data would include the following: * vessel registration number * owners name, address, telephone number etc. * date the vessel was constructed or rebuilt * size of vessel (length, width, draft) * horsepower * fueltype * deadweight ton (dwt) * net registered ton (NRT) * type of vessel (bulk dry, bulk liquid, container) - other Provinces in which vessel registered The additional steps have been provided to assist JPWB in future enhancements of their MIS: Step 3. Add operating statistics to the Step 1 database. For example, when loading cargo, the vessel registration number would be recorded along with type of cargo (e.g., coal), amount of cargo, origin, destination, cargo owner and specific routing information, as appropriate. This would give the Government and the company basic tonnage and operating data. Step 4. Create a computerized database of the Jiangsu Province inland waterways, channels, major ports, rail/highway links, system constraints (e.g., bridge clearance, channel bends, etc.). Step 5. Integrate the databases created in Steps 1 and 4 and create basic computer programming capability to conduct origin/destination tracking of vessels throughout the system. Step 6. Develop a simplified inland waterway fee collection system based on Step 5 computerization. Step 7. Simulate a provincewide waterway fee collection system. Step 8. Pilot test the new fee collection system. Step 9. Modify and implement the new fee system. Step 10. Create a database on commodity flows handled on Jiangsu inland waterways. Step 11. Expand database to include ocean ports and transshipment points (if not already included in Step 4 database). This inland waterway system should be developed with the objective of eventually integrating it into a complete Inland Navigation System Analysis, suitable for inland waterway planning, project evaluation and design.  Page 45 ANNEX9 ANNEX 9: FINANCIAL MANAGEMENT GPWB and JPWB (the executing agencies) will establish financial management acceptable to the Bank as below: Accounting. The executing agencies modified their accounting system under the instruction of MOF and maintained the new system since July 1993. The purpose of the modification was to link Chinese accounting system with general international accounting standard. The proposed project will be managed by the new accounting system which has been proven adequate. The executing agencies have their own financial departments with the experienced capable financial staff. Their capability has been proven through implementation of similar (but smaller) project to the proposed project. Auditing. The executing agencies will be audited by Provincial Auditing Bureaus under the authorization of State Audit Administration (SAA). Both of them have been experienced in auditing Bank-financed projects. Jiangsu Provincial Communication Department also has Audit Division which will periodically audit financial situation of JPWB. Auditing report will include: (a) Project Financial Statements to oversee progress of the project (b) Executing Agency Financial Statements to ensure the project is financial viable and may warrant continued funding (c) Statement of Expenditures (SOEs) to verify that claimed expenditures were properly supported (d) Special Accounts to verify that funds were properly disbursed for project-related expenditures throughout (e) Reports on Internal Control to report outlining any recommendation for improving internal accounting controls identified as a result of a financial statement audit Financial Reporting. It was agreed that the executing agencies will submit the following three types of financial reports not later than six months after the end of each fiscal year following the format acceptable to the Bank: I. Financial Statements consisting of: (a) Statement of Sources and Uses of Fund; (b) Statement of Cost by activities, showing the actual against budgeted costs with variances (Cost Variance Report); (c) Statement of unit Variance comparing the actual and planned physical output with the actual and planned cost for each unit of output; (d) Project Expenditure forecast for six months by activity; (e) Special Account Reconciliation Statement, which will be the basis for replenishment; and (f) Expenditures by disbursement categories. II. Project Progress Report III. Procurement Report for prior review contracts for goods, works and consultants' services. Although GPWB and JPWB have no experience in borrowing the Bank loan, Guangdong and Jiangsu Provinces have good records in complying the Bank's financial covenants.  Page 48 ANNEX 10 ANNEX 10: ENVIRONMENTAL ASSESSMENT AND ACTION PLAN SUMMARY Background 1. Environment assessment (EA) of the project components have been carried out by Scientific Institute of Pearl River Water Resources Protection (SIPRWRP) for the Guangdong component and by the Second Harbor Engineering Investigation & Design Institute of Ministry of Communications in association with HeHai University for the Jiangsu component. 2. The draft final Environmental Impacts Assessment Reports (EAIs), draft final Environmental Action Plans (EAPs) and draft final Summary Environmental Impact Assessment Reports (ES) were submitted to the Bank in December 1997. After Bank review, conditional clearance was provided. Remaining environmental issues were resolved during the appraisal in February 1998. Revised EA documents were submitted to the Bank in March 1998 and found satisfactory. 3. During the EA work in the two provinces, the local people and governments concerned were consulted and their opinions have been reflected in the project design and environmental mitigation measures, as appropriate. 4. The policy and administrative requirements for environmental assessment of development projects in China were followed on the basis of the project being classified by the Bank as category A, including Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by International Financial Organizations (June 1993, NEPA) and Bank Operational Directives 4.01. Brief Project Description 5. The Second Inland Waterways Project includes the following physical components: Guangdong Component (a) Upgrading (widening, straightening, and deepening) the navigational channel of the Xi Jiang between Zhaoqing and Hutiaomen, consisting of the river channel section between Zhaoqing and Baikingtou (123 km) and the Hutiaomen Channel between Baikingtou and Hutiaomen (45 km). This improvement will permit navigation by 3,000 dwt vessels. (b) Upgrading (widening, straightening, and deepening) of the L-S-R Waterway to provide navigation by 1000 DWT vessels. The L-S-R waterway provides an important cross-delta link from the Xizhiyang to the east and the Xi Jiang to the west and consists of three linked waterway systems totaling approximately 90 km. Jiangsu Component Augmenting existing investments for the upgrading of the Grand Canal north of the Chang Jiang by constructing new additional shiplocks at Jietai (second lock), Suqian (third lock), Huaiyin (third lock), Huai'an (third lock) and Jianbi (second lock).  Page 47 ANNEX 10 Baseline Environmental Description Guangdong Component 6. Natural Environment. The Pearl River Delta is located in a semitropical climate with strong monsoons in the May-October period. Mean annual rainfall is 1648.9 mm with an annual mean temperature of 21.8