China - Third Xinjiang Highway Project

Document of The World Bank Report No: 24645-CHA PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION TO TBE PEOPLE'S REPUBLIC OF CHINA FOR THIRD XINJIANG HIGHWAY PROJECT August 12, 2002 Transport Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective March 2002) Currency Unit = RMB Yuan RMBl.00 = US$0.12 US$1.00 = RMB8.30 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS CAS = Country Assistance Strategy CBMS = China Bridge Management System CPMS = China Pavement Management System EA = Environmental Assessment EAP = Environmental Action Plan ECAP = Ethnic Community Action Plan EIA = Environmental Impact Assessment E&M = Electrical and Mechanical IST - Institutional Strengthening and Training XCD = Xinjiang Communications Department LACI = Loan Administration Change Initiative LRRP = Local Road Rehabilitation Program KSH = Kuitun-Sailimu Highway MOC = Ministry of Communications MOF = Ministry of Finance NTHS = National Trunk Highway System PAD = Project Appraisal Document PCD = Provincial Communications Department PIC = Public Information Center PEO = Project Executive Office RAP = Resettlement Action Plan RDB = Road Data Bank SDPC = State Development and Planning Commission VOC = Vehicle Operating Cost Vice President: Jemal-ud-din Kassum, EAPVP Country Director: Yukon Huang, EACCF Sector Director: Jitendra N. Bajpai, EASTR Task Team Leader/Task Manager: Jacques Tollie, Senior Highway Engineer, EASTR  CHINA THIRD XINJIANG HIGHWAY PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 7 C. Project Description Summary 1. Project components 9 2. Key policy and institutional reforms supported by the project 10 3. Benefits and target population 10 4. Institutional and implementation arrangements 11 D. Project Rationale 1. Project alternatives considered and reasons for rejection 11 2. Major related projects financed by the Bank and other development agencies 12 3. Lessons learned and reflected in the project design 12 4. Indications of borrower commitment and ownership 12 5. Value added of Bank support in this project 12 E. Summary Project Analysis 1. Economic 13 2. Financial 13 3. Technical 14 4. Institutional 14 5. Environmental 15 6. Social 17 7. Safeguard Policies 21 F. Sustainability and Risks 1. Sustainability 21 2. Critical risks 21  3. Possible controversial aspects 22 G. Main Conditions 1. Effectiveness Condition 22 2. Other 22 H. Readiness for Implementation 24 I. Compliance with Bank Policies 25 Annexes Annex 1: Project Design Summary 26 Annex 2: Detailed Project Description 28 Annex 3: Estimated Project Costs 38 Annex 4: Cost Benefit Analysis Summary 39 Annex 5: Financial Summary 50 Annex 6: Procurement and Disbursement Arrangements 61 Annex 7: Project Processing Schedule 66 Annex 8: Documents in the Project File 67 Annex 9: Statement of Loans and Credits 69 Annex 10: Country at a Glance 73 Annex 11: Major Related Projects financed by Development Agencies 75 Annex 12: The Regional Dimension 76 Annex 13: Review of the Financial Management System 77 Annex 14: Environmental Assessment and Action Plan Summary 84 Annex 15: Land Acquisition and Resettlement Action Plan Summary 95 Annex 16: Social Assessment and Ethnic Communities Action Plan Summary 99 Annex 17: Road Maintenance Management Improvement 108 MAP(S) 1. IBRD No. 31860 2. IBRDNo. 31783 3. IBRDNo.31861  CHINA Third Xinjiang Highway Project Project Appraisal Document East Asia and Pacific Region EASTR Date: August 12, 2002 Team Leader: Jacques M. Tollie Sector Director: Jitendra N. Bajpai Sector(s): Roads & highways (99%), Sub-national Country Director: Yukon Huang government administration (1%). Project ID: P058847 Theme(s): Rural services and infrastructure (P) Lending Instrument: Specific Investment Loan (SIL) -ProjectFinancing-Data [X] Loan [1 Credit [ Grant [ ] Guarantee [ Other: For Loans/Credits/Others: Loan Currency: United States Dollar Amount (US$m): $150.00 Borrower Rationale for Choice of Loan Terms Available on File: I Yes Proposed Terms (IBRD): Fixed-Spread Loan (FSL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.85% for first four years, 0.75% Front end fee (FEF) on Bank loan: 1.00% thereafter Payment for FEF: Capitalize from Loan Proceeds Initial choice of Interest-rate basis: Maintain as Variable Type of repayment schedule: [X] Fixed at Commitment, with the following repayment method (choose one): customized [ ] Linked to Disbursement Conversion options: [X]Currency [X]Interest Rate [X]Caps/Collars: Capitalize from Loan Proceeds Financing Plan (US$m): Sou'rce' Local Foreign. Total BORROWER 184.20 0.00 184.20 IBRD 0.00 150.00 150.00 Total: 184.20 150.00 334.20 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsible agency: XINJIANG COMMUNICATIONS DEPARTMENT (XCD) Xinjiang High Grade Highway Construction Authority Address: Urumqi, Xinjiang, China Contact Person: Mr. Aman Haji, Director Tel: No. 86-991-2574919 Fax: No. 86-991-2574907 Email: Estimated Disbursements ( Bank FY/US$m): FY 2003 2004 ' 2005: - 2006 2007 2008 Annual 30.00 35.00 35.00 30.00 16.00 4.00 Cumulative 30.00 65.00 100.00 130.00 146.00 150.00 Project implementation period: June 2002 - June 2007 Expected effectiveness date: 12/31/2002 Expected closing date: 12/31/2007 OS PAD F- P- R.M., Y  A. Project Development Objective 1. Project development objective: (see Annex 1) The project aims to improve transport infrastructure and sector govemance in support of social and economic development in Xinjiang Uygur Autonomous Region (XUAR), a remote province in Western China. To meet the above development objective, the project will produce the following outputs: A. Traffic congestion relieved and mobility increased along the regional and international trade corridor between Kuitun and Sailimu close to the Kazakhstan Border, part of the main east-west section of China's National Trunk Highway System (NTHS); B. Accessibility to selected poor areas in the Region improved through a Local Roads Rehabilitation Program (LRRP); and C. Efficiency and effectiveness in public sector management of the road network enhanced. 2. Key performance indicators: (see Annex 1) The principal outcome/impact indicators selected for monitoring progress towards the above development objectives are: a. Gross Output Value of Agriculture and Industry (GOVAI) in affected counties along the Kuitun-Sailimu and the LRRP corridors. b. Transport costs at selected locations. c. Balance of provincial road expenditures programs d. Traffic accident fatality rates. e. Traffic volume and travel time along the Kuitun-Sailimu corridor. f. Road network condition (roughness data). B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16321-CHA dated 03/18/97, and Progress Report R98-107 dated 05/28/98 Date of latest CAS discussion: 05/28/98 The CAS, which reflects the Bank's strategic objectives of fostering growth, reducing poverty, supporting better governance, and improving the environment, has identified infrastructure improvement as one of the key areas of China's development agenda to be supported by the Bank. The sector-specific goals supported by the project are: contribution to growth and national integration through removal of highway bottlenecks, affecting inter-provincial trade and commerce; contribution to poverty reduction through improving accessibility in low-income counties of a western remote province; improvement in governance through strengthening public sector management in the road sector, and promotion of a sustainability agenda including traffic safety and environmental and social considerations in highway design, construction and operation. -2-  2. Main sector issues and Government strategy: Several important pieces of sector work were carried out by the Bank in the recent past: (i) A Strategy for the Transport Sector (Forward with One Spirit, 1997/98); (ii) Review of Highway Technical Assistance (1998/99); (iii) OED Report on China Transport (1998/99); and (iv) Highway Sector Strategy Review (2001). The latter, which was discussed with the Government in late 2001, has identified five main challenges facing China in its attempt to cope with the rapid expansion of its highway network: 1. Sector management. Transforming the Govemment into a market-supporting institution is one of the largest transition issues facing China today. In the highway sector, the Govemment role in the provision of infrastructure (construction and maintenance) and of transport services, is to shift gradually from that of owner, investor and manager to one of regulator, overseeing and encouraging the development of more independent (in some cases, non-state) enterprises, able to provide cost effective civil works and services. The pace of such transformation varies with the level of development of provinces. There is a big difference between the coastal provinces and interior regions such as Xinjiang which are lagging in the pace of reform. The road transport industry has been deregulated and is now very competitive, except for the haulage of some strategic commodities. There are many small truck operators with limited spatial network, whereas large local enterprises (mostly state-owned enterprises) have their own fleet. The main constraints to enhancing the efficiency of the industry are (i) poor organization and management to deliver comprehensive transport services to their customers, and (ii) the poor state of facilities and fleet. The Govemment has recognized the importance of efficient logistics for the development of lagging regions and the need to reduce the overall land transport costs in order to stay competitive in the WTO era. 2. Managing road expenditures. As custodian of the road system, the sector should strive to increase efficiency and minimize the costs of infrastructure provision. These efforts, to constantly improve, rationalize and minimize the costs of operations of the Provincial Communications Departments (PCD), should cover all activities of a road administration, from planning to design, construction and maintenance of all level roads. Starting with planning, there is a need for more discriminating investment analysis. It will be necessary for the country to be more selective when planning its road expenditures, even though there is still a strong demand for additional investments in the road network. The allocation of funds between maintenance and new construction remains a major problem. Based on an estimate that about one third of the road maintenance fee revenues (30 billion Yuan) actually goes to maintenance, this would mean that maintenance expenditures are about Yuan 10 billion a year, or less than 4% of the total road annual expenditures of 216 billion Yuan in the last two years. Should the situation be allowed to continue, China is likely to face major reconstruction costs in the future. A related issue is the balance of expenditures between various classes of roads. At present, the NTHS consumes 30% of the resources in the sector, with another 30% for other high-grade highways. With near completion of the priority links, this proportion should be seriously reviewed to see if it continues to be an efficient use of resources to support economic development. The need for careful analysis of future investments will be especially important in the case of projects proposed in the westem provinces, where the types and scale of investments are likely to differ from that in the eastem provinces. Highway construction quality remains a serious concem of the sector. Incidences of bridge and road failings or premature wear and tear of highway pavements have raised awareness -3 -  of the issue to high-level Government officials. As a result, quality control has been strengthened through increased authority assigned to the construction supervision agency by the owner vis-a-vis contractors. While the central government appreciates Bank involvement in the sector leading generally to improved design reviews, supervision and resulting construction quality, there is still a definite need to reinforce rigid construction quality standards, control and enforcement in Bank highway projects. 3. Managing road revenues and financing. Traditional resources are inadequate to meet the increasing demands placed on road infrastructure by a growing economy. At present, the main road user charge is the road maintenance fee, which brings revenues around Yuan 30 billion a year. Other charges, including the vehicle' tax, probably contribute half as much as the maintenance fee. So road users have covered about one quarter of annual road expenditures in the last two years. This is clearly insufficient to limit the fiscal burden of the road sector. In addition, the road maintenance fee is inefficient. It is expensive to administer, easy to evade and currently generates less than 40% of its potential revenues. China has been discussing the introduction of a fuel tax for some years, but no implementation has been decided yet because of the difficult technical and political issues associated with (i) the level of such a tax and the amount of revenues desired, (ii) what proportion of these revenues would go back to the road system and how these revenues would be allocated between MOC and the provinces, and (iii) whether the fuel tax would be accompanied by an axle-load charge to ensure that heavy vehicles pay for the additional damage they cause to roads and which cannot normally be covered by the fuel tax. Securitization i.e. the sale of highway equity through IPOs and private placements have been an innovative feature of mobilizing private resources for the highway sector. Unlike BOTs, securitization of highways already opened to traffic greatly reduces the risk of the investors. The question is how should securitization of existing road assets be continued and developed given the proliferation of road companies in all provinces. An undeveloped domestic financial sector is also placing severe constraints on borrowings, specifically in the international markets while the potential for private financing remains limited under the current economic and regulatory environment. The number of highway projects that can be marketed (those with strong traffic revenue potential) to private sector investors are insignificant compared to the sector's resource requirements. Under these conditions the focus should be on building a reliable and stable road user fee based financing framework as described above. In parallel, regulatory reforms are necessary to open opportunities for different modes of public-private partnerships, to mobilize domestic savings through the issuance of bonds and to broaden the investor base. 4. Enhancing accessibility to remote/low income areas. The geography of China poses heavy demand and difficulty on the provision of basic road access in various parts of the country, particularly in inner and low income provinces. Although the role of transport access to integrate the national economy, to stimulate growth in remote areas and insure basic mobility needs of the poor has been emphasized, the task is enormous and requires significant public resources. The Bank's provincial highway program in China aims to favorably impact poverty levels, through targeted interventions in low income areas. But provincial and central government agencies often refrain from borrowing for this purpose since no dedicated revenue source for loan repayment is easily identified (unlike for toll roads). A renewed effort has been recommended to support road development in low income areas as part of the Bank's future lending and non-lending services for the sector. -4 -  5. Social and environmental impacts. Traffic safety remains a major issue when sector externalities are considered. Although death rate from traffic accidents has decreased from 100 per 10,000 vehicles in the late seventies to about 75 deaths per 10,000 vehicles in 1994, the rate remains one of the highest in the world. In 1999, 83,500 people were killed and 286,000 injured in over 400,000 accidents. Besides deaths and injuries accidents cause property damages and their overall economic and social costs are high. To improve road safety requires coordinated actions on "Engineering, Education and Enforcement". However the current diffusion of responsibilities in these different areas makes it difficult to address the problem of road safety in a comprehensive manner. At the level of MOC and the PCDs, there is a need to continue working on the "Engineering" aspects of road safety, which are within their area of responsibility. MOC is planning the systematic use of safety audits as part of project design and a manual is under preparation, which is to be circulated to the provinces soon. ADB has recently sponsored the preparation of "Road Safety Guidelines for the Asia Pacific Region" and a Chinese translation should be available soon. PCDs should also continue and improve the collection and analysis of accident data and extend the programs of "black spot" correction. The role of the Bank so far has largely been confined to matters under the jurisdiction of its project executing agencies, namely the engineering aspects of road safety. For the situation to change dramatically, the matter needs to be elevated to the highest levels of Government. Social and environmental assessments are regularly carried out in the context of Bank financed highway projects. The process is now well established and will continue. It is necessary to further develop the sensitivities of all highway personal to these matters, so that they become routine practice, not only on Bank financed projects, but overall in the sector. In particular, environment and resettlement considerations should be introduced in earlier stages of project planning and consideration of alternatives. Government Strategy. The main concerns of the central and provincial highway authorities are to ensure that the highway system helps integrate China's national economy and facilitates mobility of goods and services. This corresponds to the comparative economic and technological advantages of highways vis-a-vis other modes of transport and to available financial resources. Under such strategy, the investment priority for the highway sub-sector during the Ninth Five-Year Plan (9FYP, 1996-2000) were identified as follows: 1. High priority was given to developing the National Trunk Highway System. The Ministry of Communication (MOC) identified about 35,000 km of highways throughout the country that would constitute a network of modern inter-provincial highways under the NTHS. The first phase of the NTHS investment (totaling 17,000 km) should be completed by 2003. The construction of the second phase will continue until 2010 when the entire system is expected to be completed. 2. The development of some 130,000 km of provincial and rural roads that feed into the NTHS was planned and undertaken simultaneously to maximize the benefit of NTHS investment. 3. High priority was also given to providing all-weather access roads to remote/ low income areas in the poor counties. 4. Policy and regulatory reforms were to be intensified, with priority attention given to financing issues and ensuring the efficient utilization of funds. - 5 -  This strategy has succeeded in several respects. Of the identified 17,000 km of NTHS Phase I, construction of about 13,000 kmn has been completed. Many provinces have provided all weather road access to nearly all villages. However, institutional and policy reforms have lagged behind. Under the Tenth Five-Year Plan (lOFYP, 2001-2005), highway sector institutional reforms are expected to intensify in the context of the country's move towards a more open and competitive economy, along the following lines: * Change in the role of Government with growing role for the market in providing both infrastructure and transport services; * Decentralization and reorganization of the sector to maximize the use of scarce resources through planning and programming (including greater use of RDB, PMS, BMS), to increase reliance on contract work and services, to improve supervision and quality control, and to introduce appropriate technologies and standards, etc.; * Mobilizing new sources of user charge based revenues and promoting public/private financing mechanisms including asset securitization and revised BOT law, mobilization of national savings (bond issues), etc.; * Improving rural accessibility in all provinces and links to and within Western provinces and; * Improving traffic safety while minimizing environmental and social impacts on people affected by highway development. Special mention needs to be made of the Government's Western Development Program. The 12 provinces making up the Western Region cover 6 million square kilometers, about 60% of the country's total land area and accounts for 25% of the population. Since the adoption of economic reforms in 1978, development accelerated greatly in the east. In 1995, 66% of the industrial output came from the east but only 10% from the west, the remainder being from central China. By 1998, per capita income in the east was three times that in the western region. The west has been a primary supplier of raw material. There is great potential for processing primary material and agriculture products in the west. A major objective of the 10th FYP is therefore to develop Western Provinces. For the road sector, the Government is developing a long-term plan, which involves actions at three levels: * East-West connections: MOC plans to develop 8 corridors totaling about 15,000 km to link the Westem Region and East China; * Network improvements within the Western Region: This will include rehabilitation and upgrading of technical standards of about 180,000 km of the road network in the western areas; and * Rural access: To alleviate poverty in the rural towns and villages, about 150,000 km of rural roads have been identified for improvement. The above plan involves different types of works over 300,000 km of roads of various standards and classes and would require large funding. The new western initiative is expected to require US$84 billion over 10 years. The Government is exploring opportunities for mobilizing funds for this plan, including ways to channel eastern region contributions and related budget transfer mechanisms. Because of low population densities, low incomes and generally difficult topographic and climatic conditions, costs of road development in the west will be high and the potential for cost recovery would remain limited for some time. To efficiently service the greatest number of people, standards will need to be in tune with traffic demand, rather than determined politically. This requirement was well understood in the case of this project, where the proposed trunk road is at expressway standards on 6% of its length, at Class I standards on 74%, and at Class II on 20%. -6 -  3. Sector issues to be addressed by the project and strategic choices: The project will address several of the above issues, particularly those considered to be most relevant to the context of the XUAR Region. The previous projects (Xinjiang Highway Project (XHP1), completed in 2001, and the ongoing Second Xinjiang Highway Project (XHP2)) had tackled some of these issues, and hence project preparation focused on taking stock of past achievements, clarifying/confirming the policy and institutional goals, and agreeing on the remaining steps to meet these goals. 1. Sector management. The project will pursue efforts in two main areas: -Developing Institutional Capacity. The recent decentralization of much administrative decision-making from MOC to the PCDs has impacted the local organizational and human resource capacity. Strengthening and modernizing of XCD began under the previous projects and will continue under this project. During preparation and implementation of the project, staff from various XCD agencies will be trained, both on-the-job and in carefully designed courses in transport planning and economics, engineering, quality control, environmental monitoring and assessment and highway safety. -Transportfacilitation: In view of the importance of regional integration and trade in the case of Xinjiang (see Annex 12), two studies had been undertaken: an Intercity Passenger Study under XHP1, and a Regional Transport Study under XHP2. The main outputs of both studies were proposals for the medium and long term transport investment programs, and policy recommendations aimed at strengthening the institutional structure for the provision of transport services. The project will focus on the studies recommendations which are under the purview of XCD, in particular (i) the institutional strengthening of the Transportation Administration Bureau under XCD, and (ii) the development and implementation of a Regional Transport Services Information System. The latter will provide an updated diagnostic and recommendations for the road transport industry to improve its contribution to the logistics function. Moreover, it will establish a framework for dialogue between XCD and the transport industry to enhance the industry's efficiency and responsiveness to their customers needs. 2. Managing road expenditures. The project will pursue efforts in two main areas: -Sustaining road maintenance. Bank's dialogue on this issue under the previous projects has raised awareness and understanding of the extent of the problem. XCD has a Road Database (RDB) that could feed into the provincial version of the Chinese Pavement Management System (CPMS), but neither of these systems are fully operational. The project will operationalize both the RDB and the CPMS so that maintenance planning be based on a decision support system covering the entire network in the Region. Moreover, the project will support XCD's efforts to enhance the practice of contracting out maintenance activities. One expected impact of this focus on maintenance management is to continue the trend on increased budget allocations for maintenance in the Region (achievement during 1996-2000 was an annual average budget increase of 17%, and the expectation for 2001-2005 is a 9% annual increase -see Appendix D in Annex 5). Thus a more balanced expenditures program is expected. This will be monitored throughout the project. -7 -  -Improving construction quality. In addition to ensuring the enforcement of all safeguard policies including efficient procurement of works and services, the project will focus on two aspects. First, to improve the engineering design, technical assistance was provided during project preparation for the review and optimization of geometric and geotechnical design as well as the E&M systems. Second, to strengthen construction supervision, the project is promoting the involvement of foreign partners in the joint local-foreign supervision team. 3. Managing road revenues and financing. The project highway will be under the management of the Xinjiang High Grade Highway Administration Bureau (XHGHAB). XHGHAB currently manages the main highways and expressways constructed under the previous Bank projects. It is organized as'a Branch of Government. Instead of commercializing XHGHAB, XCD intends to strengthen it with the provision of modern tools and equipment till the XHGHAB's road assets reach a critical mass necessary for securitization or any other form of commercialization. The project will pursue the dialogue with XCD on improving the organization and management of toll highways. Also, through an improved utilization of the CPMS, the project will create the conditions for an easier implementation in the Region of the fuel tax reform when it is enacted. 4. Enhancing accessibility to remote/low income areas. XUAR has a total of 87 counties, including county level cities. Thirty of these counties are designated poor counties, and most are in the southwest and northwest part of Xinjiang. The 9th FYP (1996-2000) has emphasized the provision of access to the poor communities. During the plan period, as a matter of state policy, Xinjiang has aggressively pursued the provision of basic road access to the villages in the poor counties. About 97% of the villages in Xinjiang have motorable road access. These are generally Class IV or Unclassified roads. They are not necessarily all weather roads, but generally open to traffic except during very heavy rain and snow. XCD plans to continue this program during the 10th FYP. In the 30 poor counties, presently basic road access to the villages varies from 85% to 100%. This is a significant achievement within a short timeframe. The proposed investments during the 10th FYP period (2001-2005) would improve the quality of road access further in terms of maintenance and rehabilitation, as well as the functional responsiveness of the road network. The project will assist the Region in this endeavour (Annex 2.B). 5. Externalities. The project will focus on two issues: -Road safety: a study of factors contributing to road accidents was completed under XHP1, and recommendations regarding improved data collection and preparation of blackspot programs were implemented under XHP2. More needs to be done, particularly in the area of safety audits and driver behavior. The role of the "Leading Group" promoted to improve cooperation between XCD and the Traffic Police will continue under the project. -Addressing the needs of minorities. This is a Region-specific feature, which is being dealt with through Ethnic Communities Action Plans prepared on the basis of the social assessments undertaken for this project (Section E-6 below). -8 -  C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Kuitun-SailimuHu Highway 1. The main project component is the Kuitun-SailimuHu Highway (KSH), an important section of the National Trunk Highway System (NTHS) and the remaining gap on the 1430 km stretch of the National Highway 312 in Xinjiang. Various design alternatives were considered, including: i) the construction of a four-lane expressway; ii) the construction of additional two lanes (Class 1 standard); iii) upgrading of the existing two lane roads to Class 1 and/or Class 2 standard; and iv) combining new and existing alignments. The preferred alternative was a combination in tune with the traffic needs of the 302.6 km highway section: (i) Kuitun to Wusu: new construction of a 18 km expressway; (ii) Wusu to Bole Fork: upgrading to a 229 km Class 1 highway; and (iii) Bole Fork to SailimuHu: rehabilitation of a 55.6 km Class 2 highway. About 80% of the KuiSai highway will use the existing alignment; the new alignments mostly serve as bypasses to the urbanized areas in Wusu and Jinghe. Local Roads Rehabilitation Program 2. The primary objective of the local roads component is to assure that in poor counties villages have primary road access and townships are well connected to the provincial and national highway system. Taking into account the progress already made in providing basic access to almost all the villages in the poor counties as well as the expenditures proposed during the 10th FYP to complete this basic accessibility, the proposed component would focus on road links between the major townships and the provincial and national highways in the rural areas of Xinjiang. The eligibility criteria (economic/ social/ environmental) have been defined for the LRRP (see Annex 2). A tentative list of 12 links has been proposed by the Region, totaling about 600 km. This will be a four-year rehabilitation program, to be implemented under a programmatic approach. The links selected for the first year program were evaluated during project preparation. Strengthening Sector Institutions 3. The capacity building component will include institutional strengthening, training, and provision of specialized equipment, to address the sector issues identified to be key to preparing the sector for future reforms as per section B.3 above. This includes traffic safety, toll highway management, road management and maintenance, and transport facilitation. The relevant institutional and policy actions are described in Annex 2.1 which provides an outline of the various action plans that would be consolidated into an "Institutional Development and Reform Plan" (para G.2.2.c. below). -9-  . . Indicative Bank- % of Component Costs % of financing Bank- (US$M) Total (US$M) financing 1. New construction in main corridor: 1.1 Main highway 248.93 74.5 121.89 81.3 1.2 Construction supervision 8.42 2.5 1.29 0.9 1.3 land acquisition/resettlement 14.39 4.3 0.00 0.0 2. Rehabilitation of local roads in poor counties 44.88 13.4 16.10 10.7 3. Capacity building: 3.1 institutional strengthening and 3.57 1.1 0.44 0.3 traffic safety 3.2 studies 0.86 0.3 0.74 0.5 3.3 strengthening of laboratories 11.65 3.5 8.04 5.4 and O&M services Total Project Costs 332.70 99.6 148.50 99.0 Front-end fee 1.50 0.4 - 1.50 1.0 Total Financing Required 334.20 100.0 150.00 100.0 2. Key policy and institutional reforms supported by the project: The key policy reform which would enhance further project sustainability is the establishment of the fuel tax which would replace several existing road user fees. No conditionality is attached to this reform which is still in the legislative arena (para B.2.3 above). Once enacted, such reform would improve resource mobilization for sustaining road maintenance and improving the provincial road expenditures program needs, but this may take some time. To reap these benefits in a shorter timeframe, XUAR needs to prepare its institutions for undertaking the future reforms. The project is designed to assist the Region by focusing on reform areas supported by XCD and within its governance. 3. Benefits and target population: The project would foster inter-regional and international trade facilitation by reducing user costs, improving road safety and creating conditions for economic growth in one of the remotest region of China. More specifically, the major quantifiable benefits of the project are the reduction on vehicle operating costs and time costs of road users. The highways improved under the project will have shorter length, improved surface conditions and riding comfort, improved geometry, reduced traffic interference, and better safety facilities than the existing roads. The project will also benefit residents of poor counties in the Region, through improved access to health, education and other social services as well as to markets. The total affected population in the main corridor is estimated at about 3.2 million, and the affected population in poor counties is roughly estimated at 2 million. Other benefits which are non-quantifiable, would include strengthening the capabilities of the regional agencies and their related institutions which are responsible for the planning, design, financing, supervision, construction, operation and maintenance of highways in Xinjiang. Also, the project is expected to result in lower traffic accident rates on the highway network through the - 10 -  implementation of the traffic safety component. Furthermore, the proposed project should lead to improvements in the quality of construction of highways through the continuing introduction of improved technology and stricter arrangements for supervision of construction. The project would also foster improved practices in the areas of environment, land acquisition and resettlement of affected people and participatory approaches to project preparation and implementation. 4. Institutional and implementation arrangements: XCD has the overall responsibility for project preparation and implementation. Under XCD, the Xinjiang High-grade Highway Construction Authority, the executing agency for the previous Bank-financed highway projects in the Region, will also be the executing agency for the proposed KSH. Other project components such as the local road program, the TA and training components and the procurement of equipment will be executed by the Highway Administration Bureau (HAB) and the PEO under XCD. The project will be implemented during 2002- 2007. Overall direction of the project at the central level will rest with the Ministry of Communication (MOC). MOC will assume an oversight role and provide some technical support. The Bank loan will be extended to the Borrower, the Republic of China, which in turn will onlend the loan proceeds to XUAR on the same conditions. Close cooperation between PEO and the Financial Bureau of XUAR is expected for a smooth project implementation. Details on funds flow are presented in Annex 13. D. Project Rationale 1. Project alternatives considered and reasons for rejection: 1.1 Public/private provision: Considering the reluctance of private investors for greenfield operations in the current circumstances in China, as well as the financial conditions specific to the KSH, a strategic choice was made to (i) provide the infrastructure from public funds and (ii) work with XCD on an improved framework for operation of toll highways in the Region, so that when the economy in the Region is more developed, commercialization of the toll authority could be facilitated. 1.2 Trade facilitation: Given the importance of the project corridor in supporting the westem region development strategy, through domestic market integration, and in facilitating international trade between China and Central Asia, a strong trade facilitation component was initially envisaged. However, in light of the ongoing regional initiatives within Central Asian countries and activities of other partners(see Annex 12), the project scope was limited to improving the physical infrastructure and responsiveness of the transport industry in trade facilitation. Moreover it was recognized that the cross-border facilitation issues required sustained engagement in the ongoing dialogue between China and the neighboring Central Asian countries, and that the project was not an appropriate vehicle for it. 1.3 Route alternatives: Considering the existing and future socio-economic development and growth potential in the area of influence of the project, the existing and future volumes and composition of traffic in the corridor and the capacity of the existing modes of both rail and road, the proposed design for KSH would address in the most economical way the needs in the corridor. The option of constructing an expressway on a new alignment parallel to the existing National Highway 312 was considered but rejected based on the findings of the prefeasibility studies. The selected KSH alignment took into account potential environmental and resettlement impacts, and minimized these impacts. 1.4 Links alternatives: Under the LRRP, alternative links were considered based on socio-economic impacts on the one side, and technical urgency due to poor road condition on the other side. Criteria have been defined for screening and final selection (as described in Annex 2, section B). - 11 -  1.5 Design standards: Alternative technical standards (lane number/width, bridge types, staging, etc.) were considered as part of the engineering design. Tenders will be called on the basis of the optimized design. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest, Supervision Sector-lssue ~~~--*roject ; PR):Rtig'is . __ ___ ____ ___ ____ ___ ____ __- ____ ___ ____ ___ ____ ___ ; (Bank-flnanced pr6 ects 6nily), Implementation Development Bank-financed Progress (IP) Objective (DO) (Please refer to Annex 11) Other development agencies (Please refer to Annex 11) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: While the overall perfornance of the Bank highway portfolio iii China is in general satisfactory, a number of issues have been identified for due consideration in the design of the proposed project. These include: inadequate engineering designs and bid documents including costing of civil works; quality control of construction; late commencement of electrical and mechanical facilities component (which delayed completion of some projects and necessitated the extension of the closing date of several Bank loans), and slow pace of policy and institutional reforms, specifically relating to road maintenance, improved high-grade highway management and operation, and traffic safety. An OED assessment of the China portfolio completed in 1999 determined that the policy dialogue between China and the Bank in the highway sector needs to be elevated and maintained. During preparation of the proposed project, XCD was engaged on the policy matters which were started under XHP1 and XHP2. It was important to map what institutional reforms were truly supported by XCD and within its governance, and what reforms would first require building consensus among critical stakeholders. The outcome of these efforts has been integrated in the project design. 4. Indications of borrower commitment and ownership: Discussions so far have shown that there is strong support for the project at various levels of Government. The KSH is the terminal element of the much larger corridor from Shanghai to Kazakhstan Border which, with a total length of some 4500 km, constitutes one of China's highest priority highway investments. The project's KSH is the last section of the corridor to be upgraded within Xinjiang. Also XCD is committed to make progress on the reform agenda, through continuing dialogue on the five -year Institutional Development and Reform Plan under-the project. 5. Value added of Bank support in this project: To deepen the strengthening of sector governance through sustained engagement while supporting the completion of the most important East-West land bridge within China and between China and Central Asia. The Bank involvement would result in (i) strengthening of sector institutions by building upon the past achievements, particularly in the areas of human capacity building, asset maintenance, and management of sector externalities (safety, environment and social dimensions), (ii) introduction of the - 12 -  social assessment process in the regional transport infrastructure design and implementation, (iii) adoption of a design approach which is more responsive to traffic demand, especially with respect to the National Trunk Highway System (NTHS), and (iv) proper attention paid to local roads that serve as connectors between the NTHS and the rural low income areas. Finally, in view of the important regional dimension of the corridor, the Bank is well placed to address the issue of regional integration by involving the ECA and EAP regions. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$238.9 million; ERR = 21.0 % (see Annex 4) 0 Cost effectiveness O Other (specify) This economic evaluation covers two project components that account for all of the project costs: (a) construction and upgrading of the Kuitun-Sailimuhu Highway (KSH), totaling 302.6 km and (b) upgrading of 12 rural roads under the Local Road Rehabilitation Program (LRRP), totaling 603 km. to help the poor areas in the region. The principal measured benefits of the project are savings in vehicle operating costs, time savings to vehicle occupants and enhanced road safety. The estimated overall economic internal rate of return (EIRR) for the project is 21.0%, with those for KSH and LRRP being 19.6% and 32.2%, respectively. The overall economic.net present value (ENPV), based on a 12% discount rate, is estimated at RMB 1,983.1 million, of which KSH is estimated to contribute RMB 1,549.6 million and LRRP is estimated to contribute RMB 433.5 million. An analysis of the evaluation results and a description of the method used to derive them are provided in Annex 4 and is summarized as follows: Summary of Economic Evaluation Results EIRR (in %) NPV (RMB million, 12%) Kuitun - Sailimuhu Hlighway: Section 1: Kuitun - Usu 20.6 178.2 Section 2: Usu - Bole 18.2 1,007.2 Section 3: Bole - Sailimuhu 31.1 348.2 Subtotal 19.6 1.549.6 Local Road Rehabilitation Program 32.2 433.5 Total 21.0 1,983.1 2. Financial (see Annex 4 and Annex 5): NPV=US$ -60.5 million; FRR = 2.8 % (see Annex 4) Construction of KSH is the main component of the project and the only one that would generate revenue. All the twelve rural roads to be upgraded under the LRRP are toll free. The XCD is planning to use the toll revenue from KSH to cover the loan amortization charges. Although the highway will generate enough total revenue over the loan period, with a standard amortization schedule, there will be cash deficits in 2015 when KSH needs major maintenance. These annual deficits can be met by transferring the reserve funds from the previous years. Based on the proposed toll level, KSH may not need any external cash injection over the loan period. Yet, the highway toll in Xinjiang is the lowest among all the highway projects financed by the Bank to China. The toll revenue may generate the sufficient funds to support the highway operations including the debt services, but the low profit margin will affect the rate of return to the investment. The FIRR for KSH is expected to be 2.8 percent. For non-revenue earning entities (the twelve toll free roads under LRRP), the financial evaluation is focused on the availability of - 13-  sufficient counterpart funds and the operating expenses including the financial risks for the project roads. All the indicators show that the financial risks for these toll free roads are modest. A detailed assessment is provided in Annex 5. Fiscal Impact: The expenditures on road construction and maintenance for the "toll-free" roads included in the project constitute only a small fraction of XCD fund flow. Therefore the fiscal impact would be minimal. Based on the XCD plan, the capital investment for the LRRP program is less than 2.4 percent of annual total XCD revenue. In addition, the required maintenance expenditure for LRRP is less than 0.7 percent of total maintenance expenditure of XCD. These low ratios indicate that the project presents a modest financial risk regarding availability of counterpart fund for construction and maintenance of the project roads (see Section F.2 below). 3. Technical: Special attention was paid to finalizing the engineering design before bidding would start to minimize variations orders during implementation and ensuing cost overruns. The preliminary design reviewed by Zhongjiao Highway Planning and Design Institute, a Beijing based consultant, and the revised design reviewed by a team of foreign consultants (SNC-Lavalin). The main recommendations were: * the choice of upgrading on same alignment entails some trade-offs on the class 2 mountainous section between Bole Fork and Sailimu. On this 23 km long section, the average grade is slightly higher than the recommended standard, and visibility is sometimes limited due to horizontal curvatures. Mitigation measures include paved climbing lanes and graveled runaway lanes as well as flatter embankment slopes. * close attention needs to be paid to construction detours during implementation. * frost heave on salty soils to be dealt with through gravel separation layer protected by filter layers. * to complement the safety audit at design stage, a safety audit will be conducted before opening the road to traffic to look at critical areas such as intersections, urbanized areas and borrow pits. These recommendations have been taken into account. There were also suggestions to improve national standards regarding (i) flexible versus rigid pavement designs, and (ii) bridge foundation design which tends to be too conservative, especially when large footings are concerned. Improving national standards is part of the ongoing dialogue between Bank and MOC at central level. 4. Institutional: All institutional issues related to capacity building were paid special attention, in particular the introduction of management systems and associated organizational arrangements. The successful implementation of the institutional components will require continued strong commitment from XCD. 4.1 Executing agencies: They have been involved in the two previous projects and are faniliar with the Bank requirements. However, in light of the ethnic minority mix of the region (see section F below), special care is warranted to continue securing government's understanding and trust on the issues linked with minorities. -14 -  4.2 Project management: The arrangements described in para C.4 above were found satisfactory. All the concerned agencies are fully familiar with Bank procedures after having successfully managed two Bank projects. Full ownership has been taken by XCD management of the project objectives, especially the institutional components which will require continued strong commitment. PEO have carefully prepared the Project Implementation Plan (PIP) where all implementation arrangements and responsibilities have been clearly defined. 4.3 Procurement issues: A Project Procurement Assessment was conducted during pre-appraisal, as summarized in Annex 6. Based on past performance, the agency capacity was found satisfactory 4.4 Financial management issues: A Financial Management Assessment was conducted during pre-appraisal (Annex 13). The assessment concluded that the project meets the Bank financial management requirements, as stipulated in BP/OP 10.02. The project has in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project in the reporting format agreed with the project and as required by the Bank. Funding sources for the project include Bank loan and counterpart funds. The Bank loan will be signed between the Bank and the People's Republic of China represented by the Ministry of Finance (MOF), and on-lending arrangements will be signed between MOF and Finance Bureau of Xinjiang Uygur Autonomous Region (FBXUAR), and between FBXUAR and XCD. The Bank loan will flow from the Bank to a project special account maintained by FBXUAR, to the project for reimbursable expenditures incurred and advanced by the project, or to contractors or suppliers via bank accounts with major conmnercial banks acceptable to the Bank. In terms of disbursement technique, the project will be disbursing based on the traditional disbursement techniques and will not be using PMR-based disbursements, in accordance with the agreement between the Bank and MOF. The counterpart funds will come from two sources: one part from appropriations by MOC, and the other part from XCD. No outstanding audits or audit issues exist with the implementing agency involved in the proposed project. The task team however will continue to be attentive to financial management matters and audit covenants during project supervision. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. After completion of the feasibility study report by Xinjiang Highway Planning, Survey & Design Institute, environmental assessment work started in June 1999 with the appointment of Xinjiang Environmental Techniques and Assessment Center (XETAC) as an Environmental Assessment (EA) consultant. The EA works were prepared according to the Chinese national procedures and the World Bank's OP 4.01. The first draft of Environmental Impact Assessment (EIA) was submitted to the Bank in May 2001. Since then intensive discussions were made among XCD, XETAC, and the Bank during several missions and through e-mails. Other environmental documents - Environmental Action Plan (EAP), EA Summary reports, Initial Environmental Examination and Environmental Action Plan (IEE & EAP) for the Local Roads Rehabilitation Program (LRRP) - were also reviewed by the Bank throughout project preparation (see para 5.3 below). -15-  During the EA work, local people in the project area were intensively consulted, and their opinions have been reflected in the project design and enviromnental mitigation measures, as appropriate. Relevant information and documents were provided before each consultation. The final EA reports were disclosed locally at the end of January 2002 with an advertisement in the local newspaper, and sent to the World Bank's InfoShop for disclosure at the beginning of February 2002. An addendum/corrigendum was issued in May 2002 and disclosed at the same time, both locally and in the Bank's InfoShop. The major findings and discussions are summarized below. More detailed information is given in Annex 14. Major Potential Impact. More than 80 % of the 302.6 kn proposed main highway will be simply upgraded from the existing highway. The results of EA work indicate that there exist no protected areas ,critical natural habitats, or cultural relics along the proposed alignment. The expected major potential impacts are noise, dust, and damage to fragile vegetation, which are common in most highway projects in China. A local ecological expert conducted field-surveys and identified two sections as ecologically sensitive spots and developed mitigation measures. One section belongs to a desert area with fragile vegetation. The other is the western section near Sailimu, where the lake, mountains, and grasslands compose beautiful scenery. As the results of the analysis and extensive consultations with local people, a wide range of mitigation measures were developed in the EIA including rehabilitation of vegetations, resettlement, noise barriers, water-spray and material covers for dust control. In order to protect vegetation in the arid western area, the existing alignment has been utilized and upgraded as much as possible. Mitigation Measures. As a result of the analysis, a wide range of mitigation measures was developed in the ETA including rehabilitation of settlements and plantations, noise barriers, water spray and material covers for dust control. In order to protect the fragile vegetation in the arid western area, the existing alignment will be utilized and upgraded as much as possible, instead of building a new highway. The new expressway is limited to only the first 18.5 km from Kuitun City. For the next 171 km, existing road will be upgraded to class 1 highway except for 42 km of new bypasses, which are made to avoid residential areas and sand accumulation. The last section, 58 Iam, will be upgraded only to class 2 highway. At the same time, special attention will be paid to the ecologically sensitive areas during construction, and rehabilitation works also will be commenced imnmediately after the construction works. Local Roads Rehabilitation Program (LRRP). There is no new construction and no need for land acquisition in the first year program. There exist no Protected Areas along the project alignments. The ecological and cultural environments were surveyed and no critical natural habitats or cultural property were found. The existing air and acoustic environment were monitored and potential impacts were projected. As all construction works comprise rehabilitation of existing roads, no significant impacts are envisaged. In order to minimize the environmental impacts of the project, a variety of mitigation measures has been integrated into the EAP, including noise and air pollution, water pollution, and traffic safety. For the latter years program, no significant impacts are expected for the same reasons as above. However, in case some land acquisition is found to be necessary, the procedures will follow the policy framework prepared under the project. -16 -  5.2 What are the main features of the EMP and are they adequate?. The EAP comprises an environmental protection plan and an environmental monitoring plan. Both plans specify responsible parties and supervising parties for their implementation at design stage, construction stage, and operation stage. The protection plan involves practical and cost-effective measures necessary to mitigate the project-related impacts, such as rehabilitation works for desert vegetation. In order to ensure its implementation, the EAP also includes training, institutional arrangements, implementation schedule, and budget necessary to implement it. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: February 2002 The EA work has been entrusted to the Xinjiang Environment Technique and Assessment Center, which is a public corporation supervised by the Xinjiang Environmental Protection Bureau and independent from the implementing agency in terms of administrative jurisdiction. The TOR for the EA was submitted to the Bank for review in September 2000. The Bank reviewed the EA reports several times from May 2001 to January 2002. The Bank received the fifth and final draft of the EIA, EAP, and EA Summary in May 2002. They were sent to the Bank's InfoShop for disclosure at the same time. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? A two-stage public consultation was carried out according to the World Bank's guideline: (a) shortly after environmental screening and before the terms of reference for the EA were finalized (August 1999); and (b) after the draft EA report was prepared (September 2001). The consultation was conducted through meetings with local people at project-affected towns and through surveys with questionnaires. Project-affected individuals, organizations of concerned villagers, and village committees were intensively consulted. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? During the construction and operation phases, environmental monitoring will be carried out to verify the project's actual impacts on the environment, identify unexpected environmental problems at an early stage, and adjust environmental measures as appropriate. The monitoring will cover pollution related issues, ecological environment, and social issues. Environmental monitoring will be entrusted to Xinjiang Environmental Monitoring Center. The results of monitoring will be reported to the Bank and relevant local authorities. The environmental monitoring plans are provided in Annex 14. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. Land acquisition and resettlement. (Details are in Annex 15). The major social impacts of the project stem from land acquisition and residential demolition associated with expressway construction. A resettlement action plan (RAP) has been prepared and approved by XUAR to mitigate these impacts, and to otherwise ensure that incomes and living standards of the affected people are improved, or at minimum restored. The RAP, based on an inventory of affected assets, census of the affected people, social assessment and consultations with local govemment agencies and potentially affected people, was disclosed both locally and in the Bank's InfoShop in February 2002. - 17 -  Land acquisition will affect 21 villages in 11 townships of four counties. The project will require the permanent acquisition of 6,112.7 mu (or 407.5 hectares) of land, including 1,953.7 mu (or 130.3 hectares) of cultivated land and 4,159 mu (or 277 hectares) of non-cultivated land. Works on the main highway will also require temporary use of an additional 13,904.8 mu (927 hectares) of collective grass land. In all, land acquisition will affect 1,450 people ( 331 households). Residential demolition will require relocation of 579 people (145 households). The project also will affect some public facilities, such as power and communication lines, wells and irrigation canals. The RAP prepared by the project office provides details regarding resettlement policy principles and regulations to be followed, compensation rates and budget, measures to restore incomes where necessary, and institutional and monitoring arrangements. In general, it follows a land-for-land approach to assist farmers in restoring productivity and incomes. The separate rural road rehabilitation component is expected to be implemented within existing right-of-way; and so is not expected to cause any land acquisition or house demolition. A resettlement policy framework nonetheless has been prepared in case design changes during implementation make land acquisition necessary. Arrangements regarding minority nationalities. (Details are in Annex 16). Xinjiang is ethnically diverse. Though the region is officially designated as the Xinjiang Uygur Autonomous Region, members of the Uygur minority nationality constitute less than half of the regional population: Han Chinese, Kazakhs, Mongols, Tajiks, Kyrgis, Uzbeks, also form sizable proportions of the regional population. The proportion of Han Chinese has increased rapidly over the past century through various forms of sponsored or spontaneous migration. The Bank task team and the project agency agreed early in the project preparation phase that inadequate consultation with minority nationalities, and inadequate understanding of minority nationality communities' transport-related constraints and preferences could generate adverse community impacts, or could result in inadequate project design or effectiveness. In accordance with terms of reference agreed with the Bank, the XCD engaged consultants to conduct a social assessment, covering both the Kuitun-Sailimu highway component and roads to be improved under the Local Roads Rehabilitation Program. The purposes of the social assessment included: to consult specifically with minority nationality communities regarding their transport needs and constraints, and their views and preferences regarding the project; to obtain information from local residents that may be relevant to project design or operation; to determine whether potentially affected minority nationality communities exhibited the distinguishing characteristics (as listed in OD 4.20) that might make them vulnerable to disadvantage in the development process; and to gather information necessary for preparation of an Ethnic Communities Action Plan (ECAP), if one were deemed necessary to meet the requirements of OD 4.20. The social assessment process and the resulting social assessment report were reviewed by both a national and international consultant hired by the Bank. The results indicated that all five of the distinguishing characteristics listed in OD 4.20 are relevant within the project area, though the extent of relevance varies from group to group and from place to place. As a result of the above consultations, it was agreed that preparation of an ECAP was necessary to protect minority nationality communities from potentially harmful impacts, and to ensure culturally appropriate project design. An ECAP subsequently has been prepared by XCD. The ECAP responds - 18 -  directly to issues and concerns raised by members of mninority nationality communities. Categorically, these issues and concerns relate to: * Protection of ecologically fragile pasture areas * Maintenance of access for migrating livestock * Roadway and traffic safety (including multilingual road signage) * Maintenance of access for pedestrians and non-motorized traffic * Cultural sensitivity during construction, especially in the vicinity of mosques * Culturally appropriate treatment in relocation of tombs In some cases (e.g., protection of pasture areas, or relocation of tombs), the issues have already been addressed in the separate RAP or EAP prepared for the project. For these cases, the ECAP describes actions or measures included in the RAP or EAP that will address issues raised during the social assessment process. In some cases, the issues raised by members of minority nationalities relate to highway safety or access. For these cases, the ECAP describes actions already taken or to be taken to ensure appropriate project design and operation. The ECAP also includes measures to address issues relating to cultural sensitivity, including construction procedures and contractor behavior in the vicinity of mosques, culturally appropriate relocation of tombs, and ensuring bilingual road signage. Only five of an estimated 12 local roads to be improved under the LRRP are included in the first year's construction program. Until selection of remaining roads is finalized, it is impossible to conduct consultations among potentially affected persons. Following final selection, a separate social assessment (based on the same terms of reference) will be undertaken. If warranted, a revised ECAP satisfactory to the Bank will be required prior to Bank approval for civil works contracts. 6.2 Participatory Approach: How are key stakeholders participating in the project? Information dissemination: All the affected households and villages have been identified through the census survey. The RAP has been translated in both Uygur and Chinese languages, their availabilities have been advertised in Xinjiang Autonomous Region Daily Newspapers for those who are interested in the project information and resettlement policy available to read in the Autonomous Regional Library without any charge. The.hot-lines for information disclosure have been settled and appointed staff in the project office will answer any questions related to the project information and resettlement policy. The project office also required the relevant project affected counties to make the same statements and the information has been replaced in the county public library. Relevant project information has been provided to the affected villages through newspaper reports, posters and public meetings. A resettlement information booklet providing details regarding compensation rates, other entitlement policies and grievance procedures was distributed to the affected people prior the resettlement implementation. The ECAP also was publicly disclosed, in both Chinese and Uygur translations. Participation strategy: Focus group discussions and key informant interviews have been used to consult with potentially affected persons, in both RAP and ECAP preparation. For the RAP, the primary focus of consultations has been on obtaining views and preferences regarding resettlement impacts and mitigation measures, including rehabilitation measures. These views and preferences have been taken into account during RAP revision, and-the majority of potentially affected persons agree that the resettlement and rehabilitation measures planned under the RAP would be adequate to address and mitigate any adverse impacts. For the ECAP, the consultations were conducted to obtain views and preferences specifically from minority nationality communities. The ECAP responds directly to issues and concerns raised during these consultations. -19-  The affected communities are to play a key role in determining and implementing their livelihood restoration programs. After land compensation amounts are calculated, for example, each village committee will determine how land compensation can best be used to improve, or at least restore, local income-earning potential. Any approach in using the land compensation must be subject to consultation with the villagers and later on, local banks are to disburse land compensation according to the villagers' decision. The Xinjiang Communications Department will set up procedures to supervise land compensation use, and local banks in each county will participate in resettlement fund monitoring. Both internal and independent monitoring of the resettlement program would be conducted regularly during project implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? A Survey & Design Institute from Hangzhou, Zhejiang Province was contracted to conduct the census and inventory survey exercise. This has contributed significantly to the preparation of the RAP. Village committees and farmer groups have also been consulted with and participated in the resettlement planning process and the preparation of the project. Project information was disseminated among them during the consultation sessions. Their feedback has been incorporated into the RAP and the consultation session concluded that the resettlement and rehabilitation measures planned under the RAP would be adequate to address and mitigate any project impacts on land acquisition and house demolition. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? Institutional arrangements are detailed in the RAP and the ECAP. The project agency has capacity within its resettlement office to implement the required resettlement activities, as evidenced in the previous two Bank financed projects. Preparation of the present project has increased emphasis on the monitoring of resettlement by external sources, and provision of training on RAP requirements to the responsible county- and township-level officials. East China Hydro-Power Design Institute and Xinjiang Social Science Academy, independent from Xinjiang Uygur Autonomous Region and the project office, will be contracted to serve as the independent monitoring agencies of the resettlement program. The project will be monitored and the living standards of the PAPs will be evaluated over the course of the project implementation. The monitoring results will be regularly reported and, if needed, remedial actions will be designed. Many of the actions described in the ECAP refer to measures incorporated in the separate RAP or EAP. For other actions, XCD accepts implementational and financial responsibhlity. 6.5 How will the project monitor performance in terms of social development outcomes? Implementation of the RAP will be monitored internally by the project agency and externally by a qualified resettlement institute wholly independent of the project agency. Actions described in the ECAP but incorporated into the separate RAP or EAP will be monitored in keeping with RAP or EAP monitoring arrangements. For other actions included in the ECAP itself, XCD will prepare an annuai implementation monitoring report for Bank review. -20-  7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy ' - Applicability Environmental Assessmnent (OP 4.01, BP 4.01, GP 4.01) __ Yes U No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) U Yes * No Forestry (OP 4.36, GP 4.36) U Yes * No Pest Management (OP 4.09) U_ Yes * No Cultural Property (OPN 11.03) U Yes * No Indigenous Peoples (OD 4.20) *_ Yes U No Involuntary Resettlement (OP/BP 4.12) * Yes U No Safety of Dams (OP 4.37, BP 437) U Yes w No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) U9 Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* __ Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. For OP 4.01, Environmental Assessment, see Section E-5 (above). For OD 4.30, Involuntary Resettlement, and for OD 4.20, Indigenous Peoples, see Section E-6 (above). F. Sustainability and Risks 1. Sustainability: The past trend suggests that traffic levels on highways would continue to grow in tune with regional economic growth. Experience from completed and ongoing Bank-financed highway projects in China show that commitment towards implementation of the physical components of the project has been strong but the pace of institutional reform has been slow. The level of tolls and its periodic adjustment are important for the financial viability of the project including repayment of the Bank loan and timely maintenance. Project sustainability is enhanced by the gradual approach taken towards the reform process, tailored to the Xinjiang context in that it is recognized that the pace of reform here is slower than in a coastal province. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Rlsk Rating . Risk-Mitigatlon Measure From Outputs to Objective - Internalization of improved procedures M Detailed TOR for all services, and close for sector organization, management, and supervision from Bank missions. operation. - Continued commitment to implement M XCD demonstrated a high level of ownership TA's final recommendations. in the preparation of the various action plans. - Reorganization of XCD not disruptive, S Assurance was obtained on stability of core instead taken as an opportunity to staff involved in project management. improve efficiency. - 21 -  From Components to Outputs - Counterpart resources available in M Strong commitment from XUAR. Also, MOC timely mranner is providing a substantial contribution. - Incentives are adequate to obtain good S XCD took strong measures to reinforce performance from the selected accountability in recent years. Careful review contractors and consultants- of procurement awards and strict- contract supervision. -Political pressure do not interfere with S PIP was carefully prepared by XCD; should be realistic implementation plan and quality maintained as main tool for project requirements. management. -Opportunities are opened to trainees to M Demand is high for skilled staff and is likely to apply new skills in workplace. remain so. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: Besides the above project risks, there are external risks given that the project is situated in a socially sensitive area (in particular in terms of the multiplicity of ethnic communities involved in this border Region). A number of precautionary steps were taken during project preparation, including (i) convening several special safeguard review meetings within the Bank to identify potential risks and provide guidance to the task team, and (ii) staffing missions with intemational/national consultants to advise and assess external and safeguard risks. While recognizing that the project per se is not particularly sensitive, but that it is the context which is showing some ethnic sensitivity, the Bank has decided to maintain the project under close monitoring from the Safeguards Quality Assurance and Compliance Unit. G. Main Loan Conditions 1. Effectiveness Condition Issuance of acceptable legal opinions. 2. Other [classify according to covenant types used in the Legal Agreements.] 1. Agreement Reached with the Government: The borrower will ensure that the proceeds of the loan are onlent to the Beneficiary (XUAR) on the same terms and conditions as the Bank loan, with the Beneficiary bearing the foreign exchange risk. 2. Agreements Reached with the Beneficiary: Highway Expenditures a) A condition of eligibility for LRRP subprojects shall be the submission, for each LRRP package, of technical, economic, social and environmental justifications satisfactory to the Bank; -22 -  b) XUAR shall, by March 31 of each year commencing in 2003 and ending in 2007, furnish an annual highway expenditure report for the Bank's review and comments for the previous year, which would: (i) show the length of each class of highway by condition (excellent, good, fair and bad) as of December 31 of the previous year; (ii) show the completed physical works and actual expenditures of the previous year against the planned physical targets and budgeted funds of that year, for new construction, upgrading/improvement, rehabilitation, periodic maintenance, and routine maintenance; and (iii) show the targets of the highway program for the current year, including new construction, upgrading/ improvement, rehabilitation, periodic maintenance, and routine maintenance, in terms of planned physical works and planned expenditures. Policy and Institutional Reform and Road Traffic Safety Programs, and Training c) XUAR shall: (i) by October 31, 2002, complete an institutional development and reform plan (IDRP) for the next 5 years for its respective highway sector, such plan to cover the areas of, inter alia, road safety, organizational development and strengthening, pavement design, training needs, equipment needs, management systems development, and transport services; and (ii) furnish said plan to the Bank for its review and comments; d) The IDRP referred to in sub-paragraph (c) above shall be based on the outline presented in Annex 2.1. This includes in particular two studies to be carried out: one on a Regional Transport Services Information System (RTSIS), aimed at transport facilitation in the Region, and the other on Road Maintenance Management Improvement (RMMI), aimed at enhancing strategies and tools for managing the road assets and making optimal use of funds in the road sector. Once developed, these systems will be implemented and monitored under the project; e) XUAR shall: on the basis of the IDRP referred to in sub-paragraph (c) above, (i) by September 30 of each year, commencing in 2003, prepare and provide to the Bank for its review and comments an annual program of implementation; and thereafter (ii) take all appropriate actions to implement said annual program, taking into consideration the Bank's view thereon.; f) XUAR shall: (i) carry out the training, in accordance with training programs acceptable to the Bank; and to that end (ii) by September 30 of each year, commencing in 2003, furnish to the Bank for its prior approval a rolling two-year training program; g) XUAR shall: (i) by March 31, 2004, complete an analysis and recommendation for the toll rates on the KSH taking into consideration the results of the similar studies on toll rates conducted under other Bank-financed highway projects in China and the experience with toll rates on major roads in China; (ii) furnish said analysis to the Bank for its review and comments; and thereafter (iii) implement the recommendations of said study, taking into consideration the Bank's view thereon; h) XUAR shall maintain the Leading Group for Traffic Safety and the Traffic Safety Secretariat. Environmental and Social Protection i) XUAR shall carry out the EAP, the RAP and the ECAP in a manner satisfactory to the Bank and furnish any proposed revision of these plans to the Bank for its approval; - 23 -  j) XUAR shall maintain policies and procedures adequate to enable them to monitor and evaluate on an ongoing basis, in accordance with indicators acceptable to the Bank, the carrying out of EAP, RAP, and ECAP; and k) XUAR shall prepare and furnish the Bank with: (1) by January 31 of each year starting in 2003, an annual environmental monitoring report during the construction phase and for each of the first three years following completion of construction; and (2) by October 31, 2002, and thereafter by March 31 and September 30 of each year starting in 2003 and extending until two years after the resettlement is completed, internal monitoring reports prepared by Xinjiang agencies; and (3) by June 30 and December 31 of each year, commencing on December 31, 2002 and for the same time period mentioned above, reports prepared by an independent agency acceptable to the Bank, about the implementation and impact of the resettlement activities during the previous six months; and (4) by March 31 of each year starting in 2003, an annual monitoring report on the implementation of the ECAP. Reporting, Monitoring and Auditing XUAR shall prepare on the basis of guidelines acceptable to the Bank and submit to the Bank: * a quarterly progress report on project implementation, covering all components and assessing the extent to which various implementation and development objectives have been met in the course of project execution and operation; * a semi-annual Financial Management Report providing information on all aspects of project implementation and showing how disbursement and procurement are linked to physical progress; * an annual report on the Performance Monitoring Indicators defined under the project; * the audited accounts for the project, statements of expenditures, and special accounts by independent auditors acceptable to the Bank within six months of the close of each fiscal year; and * within six months of the closing date of the Bank loan to the project, an implementation completion report in a format acceptable to the Bank. H. Readiness for Implementation 3 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0I 1. b) Not applicable. z 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 0I 4. The following items are lacking and are discussed under loan conditions (Section G): -24 -  1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. a 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Jacques M. Toi Emmanuel Y. Jimenez vk Huang Team Leader Acting Vice President Mountuy Director -25 -  Annex 1: Project Design Summary CHINA: Third Xinjiang Highway Project Key Performance Data Collection Strategy Hierarchy of Objectives Indicators ' Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Support social and economic a. Gross Output Value of -Region annual economic Increased economic activity development in Xinjiang Agriculture and Industry reports/statistics. and accessibility to all areas in Uygur Autonomous Region (GOVAI) in affected counties the Region enhance (XUAR). and in a few control counties -Country-economic reports opportunities in all sectors, along the project corridors. and contribute to sustainable and equitable development. Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Improve transport b. Transport costs at selected -Annual report on highway Other projects in transport and infrastructure and sector locations. network operation. rural development sectors govemance in XUAR. contribute successfully to performance of the economy. c. Balance of provincial -Annual review of sector expenditures programs: allocations and expenditures. *between new construction, rehabilitation and -Review of functional maintenance, and classification. *between classes of roads. d. Traffic accident rates on new and existing highways. Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Traffic congestion relieved 1.1 Average daily traffic on -Project performance -Internalization of improved and mobility increased in new highway. monitoring reports. procedures for sector main corridor Kuitun to 1.2 average vehicle speed. organization, management, Kazakhstan Border. and operation. 2. Accessibility to poor areas 2.1 Average daily traffic on -Continued commitment to in the Region improved. local roads in affected areas. implement TA's final 2.2 number of days roads are recommendations. closed to traffic. 3. Efficiency and 3.1 Qualitative evaluation -trainees reports. -Reorganization of XCD not effectiveness in public sector reflecting sharing of new disruptive, instead taken as an management of the road knowledge and exercising new -reports on implementation'of opportunity to improve network enhanced. skills by staff trained under studies recommendations. efficiency. the project, as well as improvement of performance in specific functions and activities. - 26 -  3.2 Quality of construction -annual report on IRI survey and maintenance as measured data. by pavement roughness. 3.3 Quality of project -progress reports on social and management in social and environmental monitoring environmental aspects activities. Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. New construction in main (in US$ million) Progress reports and -Counterpart resources corridor: disbursement reports. available in timely manner 1.1 KSH * 248.93 1.2 works supervision * 8.42 -incentives are adequate to 1.3 land acquisition & * 14.39 obtain good performance from resettlement. the selected contractors and consultants. 2. Rehabilitation of local roads * 44.88 -political pressure do not in poor counties. interfere with realistic implementation plan and quality requirements. 3. Capacity building: * 16.08 -opportunities are opened to 3.1 training trainees to apply new skills in 3.2 studies workplace. 3.3 provision of equipment. Total project costs 332.70 -27 -  Annex 2: Detailed Project Description CHINA: Third Xinjiang Highway Project By Component: Project Component 1 - US$271.74 million The first output is Reduced Congestion and Increased Mobility in the Main East-West Corridor. To meet this objective, three sub-components are designed as follows: Al. Construction of Kuitun-Sailixnuhu Highway (KSH): US$ 248.93 million The proposed expressway is an important part of the National Trunk Highway System (NTHS) as well as of the main East-West corridor in Xinjiang. As part of the NTHS, the KSH will connect Kuitun (the end of the Urumqi-Kuitun Expressway financed under the Second Xinjiang Highway Project) to Sailimu Lake (about 120 km from the border with Khazakstan). This 312 km long section represents the remaining gap of the NTHS yet to be completed on the 1430 km long stretch of the National Highway 312 traversing Xinjiang. This route is also the main trunk line of Xinjiang, serving an area with large and diverse economic development potential, and an important international communication line since ancient times (it was part of the northern section of the Silk Road). At present the corridor is served by a Class 3 road, whose capacity is exceeded in the first section and reaching its lirmit elsewhere; the existing road needs upgrading to accommodate traffic forecast in 2010 as follows: 20,000 veh./day in the first section, 12,000 in the mniddle, and 4,000 in the last section. Various alternatives were considered including: i) a new construction of additional two lanes (Class I standard); or ii) upgrading the existing two lane roads to Class 1 and/or Class 2 standard; or iii) combining new and existing alignments. The preferred alternative was a 302.6 km long highway consisting of three sections: 0 Kuitun to Wusu: a 18 km expressway; 0 Wusu to Bole Fork: a 229 km Class 1 highway; and 0 . Bole Fork to SailimuHu: a 55.6 km Class 2 highway. About 80% of the KSH will be on the existing alignment, the rest dealing mostly with bypasses of urbanized areas in Wusu and Jinghe. This solution would reduce land acquisition requirements and minimize environmental impacts, while reducing the total length from 312 km to 302.6 km. In addition to roadway construction, the component includes: (a) service areas and facilities for operation and maintenance of the expressway; and (b) supply and installation of electric and mechanical systems for toll collection, telecommunication, traffic monitoring, road safety and lighting of toll plazas and interchanges. A2. Construction supervision: US$ 8.42 million Supervision of the KSH will be carried out by a Joint Supervision Team (JST) which is an association between a foreign firm, which will be selected according to terms of reference and procurement schedule agreed with the Bank, and a local firm selected according to MOC regulations. The JST will act as the Engineer under FIDIC terms. It will be headed by a chief engineer and each of the fifteen contract sections will have a resident engineer. The foreign partner is expected mobilize in late May 2002, and start actual supervision activities in late June 2002. A3. Land acquisition and resettlemtent: US$ 14.39 million Construction of the KSH will require permanent use of about 407.5 hectares of land, and will affect 1450 persons, who need to be relocated. Another 927 hectares of land would be required to be leased temporarily in the course of construction, generally at sites of big bridges, thus with no affect on the population. Along the alignment, no enterprise will be affected. Project impacts were identified through a detailed investigation of affected persons and properties conducted by Xinjiang Communications Planning, Survey and Design Institute. A baseline social-economic survey of the affected people is being carried out before the actual implementation of resettlemnent to determine their existing income levels and standards of living. - 28 -  Project Component 2 - US$44.88 million B. The second output is Improved Accessibility to Poor Areas in the Region. To meet this objective, the project includes a Local Roads Rehabilitation Program (LRRP) component, which would cover about 600 km of local roads in selected poor areas in Xinjiang. These local roads would be rehabilitated without change in alignment. The component is aiming at increasing incomes in the low-income counties by providing improved accessibility and market efficiency through enhanced connectivity. It would also assist in improving the incomes of the various demographic groups in the population. The criteria for selection of links under the LRRP would follow a two-stage screening: First-stage screening- three criteria would be considered as follows: 1. Low-income area: the Per Capita Income should be at or below the average in Xinjiang (currently RMB 6470). 2. Representation of various ethnic group in the impacted population. 3. Road Condition Index (RCI). A value below 55 would signal a need for rehabilitation. Second-staee screening- two criteria would be considered as follows: 1. Analysis of the economic and social benefits of each proposed link. The expected minimum EIRR is 12%. 2. Compliance with safeguard policies, to be ascertained through (i) environmental assessment, (ii) social assessment and ensuing minority development plan, and (iii) if necessary, a resettlement action plan. The first-stage screening has been carried out and a preliminary LRRP program, composed of 12 links as shown in the two tables overleaf, has been agreed. Implementation would be as follows: Year One Procram. This will include the first five links in the list, for which the second-stage screening has been completed. The results of feasibility studies is summarized in Annex 4, and compliance with safeguard policies has been ascertained as per Sections E.5 and E.6 of PAD. Later Years Program. The rest of LRRP will be implemented in three years. Annually, XCD would provide the Bank with a proposed annual imnplementation plan for its review and prior approval. As part of this plan, XCD would carry out the second-stage screening and prepare for each link (i) a feasibility study and (ii) reports showing compliance with safeguard policies in accordance with the agreed ftameworks. In the event XCD propose for substitution in the program a link not previously identified, XCD would carry out new analyses to ensure that all criteria for selection have been met. - 29 -  Table A - LRRP Tentative list Link Highway Location Length, Class of Highway Road No. No. Km Existing Proposed Condition _____ _________ ~~~~~~~~~~~~~~~Index 9 S 303 Santai - Qitai 34 3 2 43 10 S 303 Mulei - Tuyuantun - Qitai 55 3 2 44 3 S 220 Bayitouhai -Tekese - Zaosu 84 3 2 55 7 S208 Awati-Akesu 59 3 2 41 8 S 307 Baicheng - Yuergun 30 3 2 36 11 S 221 Tacheng - Eming 50 3 2 49 6 S 311 Jiashe - Sule 20 3 2 4 S 310 Yuepuhu - Tazihong 25 3 2 22 1 G 315 Keriya - Pishan 43 3 2 2 G 218 Zaketai - Nalati 48 3 2 48 S S 315 Qiaoerma - Zhongfengchang 89 4 3 36 12 S 318 Fehai - Guoyingnongeheng 66 3 2 41 Total Length (km) 603 Total Cost (RMB 403 million) . Table B - LRRP Socio-economic data Link Per Population No. capita Total Han Uygur Kazak Hui Other income 9 3,692 79,117 62,141 4,209 5,582 5,107 2,078 10 4,003 23,727 19,984 1,406 2,122 94 121 3 2,473 34,414 6,320 19,511 3,950 1,916 2,717 .7 4,076 74,742 7,252 67,485 1 4 8 2,679 50,062 6,741 43,191 52 78 11 6,969 67,045 38,705 1,244 12,061 6,523 8,512 6 9,559 16,170 1,676 947 9,313 3,700 534 4 1,955 122,791 4,590 118,201 _ 1 9,559 16,170 1,676 947 9,313 3,700 534 2 4,439 105,923 26,965 11,668 58,953 8,337 ___ 5 2,402 94,158 30,827 9,267 42,152 4,472 7,440 12 5,594 15,773 9,473 21 4,672 984 623 Project Component 3 - US$ 16.08 million The third output is Enhanced Sector Management. To meet this objective, the project includes three sub-components as follows (Annex 2.1 below provides an outline and monitoring plan of the various tasks): - 30 -  Cl. Institutional Strengthening/Training: US$ 1.00 million Several departments of XCD have been strengthened and extensive training programs have been undertaken under the provisions of previous projects. In particular, most offices dealing with Bank projects were strengthened substantially and have benefited from the various training programs. It is now proposed to target (i) XCD Head Office (XHGHAB), (ii) the Xinjiang Provincial Survey, Planning and Design Institute (XRSPDI) and (iii) the QCMC. In particular, XRSPDI and QCMC are crucial links at both ends of the construction quality chain, and experience under previous projects has shown that important quality gains can be obtained through the strengthening of these units. In addition, comprehensive training (in China and abroad) is also included in the areas of environmental protection, construction and maintenance technology and mnanagemnent, highway network planning and operations management, for senior professionals. Comprehensive study tours abroad are planned for senior management personnel in the areas of highway administration and management, highway network planning, financing, management and regulatory policy, and post-project evaluation. A summaIry of both training programs is provided in Annex 2.2. C2. Studies and Technical Assistance: US$ 0.63 million a) Road Maintenance Management Improvement (RMMI). The purpose is to provide XCD with a modem tool for managing the road assets and making optimal use of funds in the road sector. Specifically the two objectives are i) to institutionalize computer-based support for network management; and ii) to improve maintenance strategies and programs to make the most effective use of budget allocations. The task would: a) Upgrade the present database and computer systems - to produce good executive informnation, extend and adapt the application of CPMS to all the N/P network, install a computer network, and train staff in road management and use of the system; b) Prepare the 2003 annual program and new 5-year plans using the new system, and c) Strengthen the management of large road maintenance equipment assets. The tasks would be implemented by HAB and PEO. Background and details of the component are given in Annex 16. b) Continuous Support to Other Critical Sector Issues. Under previous projects, three critical areas were identified: Road Safety, Organization/Management of Toll Highways, and Transport Facilitation. Assistance was provided in the form of studies, which are now all completed. The studies recommendations were thoroughly discussed, and action plans have been prepared to implement the agreed recommendations. The project will now assist in the further implementation of these action plans. * Road Safety. Traffic safety risk in China is substantially higher than in many of the fully motorized developed countries. During 1994, there were 24.3 fatalities per 10,000 motor vehicles, compared to 1.3 in Japan, 1.5 in the UK, 1.9 in Canada, and 2.2 in Germany. The situation is much worse in Xinjiang than in China as a whole, with 38.2 fatalities per 10,000 vehicles. The proposed traffic safety component will assist to addressing this challenge, based on the work done under XHP1 and XHP2 which showed that the problem is complex, involving the design and maintenance of highways, driver education and behavior, loading and balancing of trucks, vehicle condition and maintenance standards, education and enforcement, and institutional arrangements. This is not a single agency problem, and experience has shown that tackling it is fraught with difficulties (jurisdictional, cost sharing, non-physical elements). Hence the design of the component: i) In view of their importance for effective results in this area, the multi-agency Leading Group for Traffic Safety (LGTS) as well as the Traffic Safety Secretariat (TSS) established under XHP2 will continue under XHP3. ii) Two Traffic Safety Action Plans have been prepared: the first dealing with infrastructural elements would be under the control of XCD; the second dealing with all other elements would be under the purview of the LGTS. Implementation of these Action Plans will be closely monitored under the project. * Improved Management of toll highways. XCD prepared an action plan to improve toll highway management including (i) review of findings and recommendations made in studies of - 31 -  Organization, Management and Maintenance of Toll Highways recently completed under other projects, (ii) review of experience in other provinces and other countries, (iii) preparing recommendations appropriate for Xinjiang, and (iv) implementing the recommended actions. The overall implementation would cover the period October 2002-October 2005. * Improved Transport Services. XCD prepared two reports on (i) Current functions of the Transportation Administration Bureau (TAB) and areas in need of strengthening, and (ii) a proposal for a Regional Transport Services Information System (RTSIS) to improve the management of transport facilities and services in Xinjiang. Development of the RTSIS will involve private and public sector freight operators as weUl as the container transport industry in Xinjiang. Both the strengthening of TAB and the RTSIS will be supported under the project. C3. Equipment for Institutional Strengthening and Operation and Maintenance: US$ 14.45 million a) Institutional Strengthening (US$ 3.64 million). The project will provide specialized equipment for institutional strengthening of the head office of XCD, the Construction Quality Control Center and the Design Institute, as well as equipment needed for the study under the Road Maintenance Management Improvement component. The agreed lists of equipment, available in the Project Files, have taken account of the equipment that were procured under the previous highway projects financed by the Bank as weU as the equipment that were procured by XCD over the past few years for the strengthening of the capabilities of relevant agencies. Equipment utilization ratios will be used as performance indicator. b) Operation and Maintenance (US$ 10.81 miUion). Under previous projects in the province, equipment was provided for the operation and maintenance of the arterial road network. The needs have been updated. The agreed list is in the Project Files. In addition, a component to improve the management of large fleet of road maintenance equipment is included as part of the RMMI. -32 -  Annex 2.1: Institutional Development and Reform in Xinjiang Highway Sector CHINA: Third Xinjiang Highway Project I. PLAN OUTLINE 1. Institutional Development,and Reform Plan (IDRP) End Results: A. Institutionalization of highway sector management improvement through the reform and development process over five years. B. A successful implementation of the organizational reform in Xinjiang Communication Department (XCD). Outputs: A. Preparation of the five-year IDRP for XCD. B. Annual joint reviews of the IDRP. Indicators: A. Achievement of the implementation targets as indicated by the IDRP. B. Staff Components and other efficiency indicators. Implementation Agency: XCD Implementation Period: 2002-2007 2. Traffic Safety End Results: Decrease in accident rates and improvement in road safety. Outputs: A. Implementation of highway safety audits on a 260 Km section of the Highway S201 (Karamay-Hutubi). B. Making the above section a demonstration project for highway safety, by improvement of all the black spots along the entire length of S201, as part of the rehabilitation of S201. C. Providing the necessary equipment for traffic police for enhancing the traffic safety on Kuitun-Sailimuhu Highway (KSH), by appropriate enforcement of traffic laws and regulations. Indicators: A. Highway Safety Audit Reports for S201. B. Annual progress reports on S201 black spots improvements and the demonstration project. C. Enhancement of traffic safety on Highway S201 as indicated by traffic safety monitoring indicators as compared to the base year before improvements: i. Number of accidents per 10,000 vehicle/km ii. Number of fatalities and injuries per 10,000 vehicle/km iii. Direct economic losses due to traffic accidents Implementation Agency: PEO and Highway Safety Leading Group Implementation Period: 2002-2007 - 33 -  3. Institutional Strengthening and Staff Training End Results: Improved management level and efficiency in XCD functions through introduction of new technology, advanced management skills and necessary equipment procurement. Outputs: A. Improvement in professional skills through training. B. Availability of appropriate office technology equipment for various units under XCD. C. Implementation of institutional strengthening of XCD, XHHAB, XHAB, XTAB. Indicators: A. Utilization of new technology and skills by trained staff in their daily work. B. Annual updating of the two-year rolling training program Implementation Agency: PEO Implementation Period: 2002-2006 4. Enhanced Toil Highway Management and Rate Structures End-Results: A. Increased efficiency in toll highway management. B. Increased know-how about the options, and a basis for decisions as regards toll road financing. Outputs: A. Completion of the study on toll highway management and toll rate structures. B. Enhancement of data collection system and toll collection system. C. Formulation of policies and regulations for toll rate structures. Indicators: A. Progress report on study B. Annual review of toll highway operations. Implementation Agency: PEO Implementation Period: 2002-2005 5. Road Management and Maintenance Improvement End-Results: A. Ability to link predicted long and short term pavement conditions with different scenarios of budget levels and maintenance policies. B. Capability of analyzing impacts of different investment strategies on road network condition in a specified life cycle period. C. Recommended action plans for individual road maintenance and rehabilitation. D. Implementation of an asset management system for maintenance equipment. Outputs: A. Predicted road condition reports based on roughness and other indicators. B. Graph reports of road condition comparisons by region and road class. C. Level of service capability report for each class of road and traffic level. D. Historical information and data updating system for road surface structure. E. Report on equipment (property, cost, maintenance, operation service standards). Monitoring Indicators: A. Annual report on highway network condition. B. Annual report on maintenance and rehabilitation plan. C. Report on asset value of individual equipment and its performance history. Implementation Agency: XHAB and PEO Implementation Period: 2002-2005 -34-  6. Transport Facilitation End-Results: A. Traffic facilitation measures lead to improved utilization rates on main highways, increased revenues from tolls and enhanced economic exchanges between Xinjiang and adjacent areas. B. More efficient transport services through the establishment of a modem information system. Outputs: A. Diagnostic of regional transportation conditions including cross-border operations and containerization potential. B. Recommendations for improvements. C. Development and effective operation of a Road Transportation Services Information System. Monitoring Indicators: A. The study progress reports and a final study report. B. Progress in implementation of study recommendations. Implementation Agency: XHHAB and PEO Implementation Period: 2002-2005 -35 -  II. MONITORING PLAN COMPONENT 2002 2003 2004 2005 2006 2007 A. Institutional Prepare a five-year Progress report for Progress report Progress report Progress report General Development IDRP. Joint review joint review by for joint review for joint review for joint review report on and Reform by October based October. by October. by October.. by October. actual Plan (IDRP) on actual status of implement- institutional reform ation status of XCD and its of IDRP. affiliated agencies. . . . B. Traffic Report on S201 - Presentation of Presentation of Presentation of Presentation of General afety accident status and progress report progress report progress report summary report report on black spots iden- about black spot about black spot about black'spot about black spot highway tification prior to improvement and improvement and improvement and improvement and safety rehabilitation; model project of model project of model project of model project of component. safety audit report S201 by the end S201 by the end S201 by the end S201 by the end at preliminary of the year. of the year. of the year. of the year. design phase. C. Institutional Xinjiang 210 pm, Xinjiang 125 pm, Xinjiang 150 pm, Xinjiang 100 pin, Presentation of Strengthening domestic 34 pm, domestic 33 pm, domestic 18 pm, domestic 10 pm, final Institutional and Staff overseas 21 pm, overseas 16 pm, overseas 6 pm, overseas 2 pm, Strengthening and Training (prm overseas study tour overseas study tour overseas study overseas study Staff Training Derson/month) 8 pm, progress 8 pm, progress tour 10 pin, tour 11 pm, Report report to be report to be progress report to progress report to presented and a presented and a be presented and be presented and two-year roliing two-year rolling a two-year rolling a two-year rolling training program to training program to training program training program be updated. be updated. to be updated. to be updated. D. Toll Highway A detailed toll 'Final toll study Toll system to be AdjustmenV trial Annual report Study study action plan to report to be installed on the of toll system, on toll be prepared and presented basis of study operators training highway survey to be results and equipment to operation. I conducted be used E(1). Highway Data collection for CPMS reports Annual repon on Annual repon on Annual report on Management input to CPMS. prepared by 4-2003 highway highway highway and (condition reports, maintenance and maintenance and maintenance and Maintenance M&R treatment road condition. road condition. road condition. mprovement plans, budget allocations) based on data of 2002. E(2). Equip- EAMS development Overseas study tour Completion of Series reports Progress report ment asset plan based on Bank and selection of EAMS and series prepared on the on management financed fleet, foreign specialists reports prepared basis of EAMS implementation system (EAMS) training specs. and for training and on basis of specs and user's of EAMS. report by October consultants for EAMS specs. trainin'g. 2002 EAMS. F. Transport Surveys of freight Domestic/overseas Review of study Progress report Progress report Facilitation market to establish study tours, recommendations on on the feasibility of a investigation of and preparation implementation implementation Road Transport Ser- various organization of Action Plan. of Action Plan. of Action Plan. vices Information modes. Center (RTSIC) - 36 -  Annex 2.2 Suwmary of Training Program Xinjiang Domestic Abroad Abroad Study Top i cs No. Prs. RIB No. Prs RMB No. Prs. USD No. Prs USD /M (000) . /M (000) /M (000) . /M (000) Highway supervision 50 50 110 = 15 15 = ighway safety 150 150 18 36 8 8 vironmental monitoring 20 20 44 ressway operation 100 100 220 15 15 75 8 4 39. 2 d management ighway maintenance 100 100 220 8 4 39.2 oreign consulting expert __=____(2) (4) (80) = dainistration of 100 100 220 6 3 29.4 intenance equipment _ oreign consulting expert - (3) (6) (120) dministration of 20 10 50 8 8 76 ighway construction lic management = = 8 4 39.2 nstruction management 6 6 57 information system inancial management 10 5 25 4 2 20 udit 2 2 19 uman resource 10 5 49 evelopment _ esting 15 15 33 8 8 40 ter application 50 50 110 = ighway planning and 8 4 39.2 esign I Expressway toll 6 3 29.4 nanagement iighway management system 12 6 30 8 4 39. 2 laws and regulations lxprossway transportation 10 5 25 management ,oods circulation 10 5 25 4 2 20 iighway transportation 4 2 20 nanagement iighway transport economy 6 6 57 adjustment and planning ransport and environment 10 5 25 - Sub-Total 585 585 957 113 95 295 4s 209 74 37 363,9 . (Consultants costs) _ I (5) (10) (200) TOTAL COST: RMB1,252,000 and $772,800, equivalent to $923,643 - 37 -  Annex 3: Estimated Project Costs CHINA: Third Xinjiang Highway Project Local Foreign- Total Project!Cost By.Component US $million US $million. ; US:$million KSH - Civilworks 110.11 101.28 211.39 - E&M works 1.52 6.10 7.62 - Service facilities 7.16 6.59 13.75 - Works supervision 7.13 1.29 8.42 - Resettlement 14.39 0.00 14.39 LRRP - Civil works 26.80 15.00 41.80 [ST 0.50 0.36 0.86 Traffic safety 2.63 0.08 2.71 RMMI 0.05 0.57 0.62 RTSIS 0.05 0.11 0.16 Toll Study 0.02 0.06 0.08 Strengthening of laboratories and O&M services 3.61 8.04 11.65 Total Baseline Cost 173.97 139.48 313.45 Physical Contingencies 7.02 6.02 13.04 Price Contingencies 3.21 3.00 6.21 Total Project Costs' 184.20 148.50 332.70 Front-end fee 1.50 1.50 Total Financing Required 184.20 150.00 334.20 Local Foreign' Total- Project Cost By-Category US $million US $Million US $million Works 146.04 128.97 275.01 Goods 6.11 8.34 14.45 Services 7.19 1.41 8.60 Training 0.25 0.75 1.00 Resettlement 14.39 14.39 Contingencies 10.22 9.03 19.25 Total Project Costs1 184.20 148.50 332.70 Front-end fee 1.50 1.50 Total Financing Required 184.20 150.00 334.20 identifiable taxes and duties are 15 (US5m) and the total project cost, net of taxes, is 319.2 (USSm). Therefore, the project cost sharing ratio is 46.99 % of total project cost net of taxes. -38 -  Annex 4: Cost Benefit Analysis Summary CHINA: Third Xinjiang Highway Project [For projects with benefits that are measured in monetary terms] Present Value of Flows Fiscal Impact Economic Financial Analysis' Analysis Taxes Subsidies Benefits: 22,132.4 7,691.1 RMB million Costs: 3,319.2 2,492.3 RMB million Net Benefits: 18,813.2 5,198.8 RMB million IRR: 21.0 2.8 In% I The valuc of financial benefits is lower than that of economic benefits because of controls on the toll charges for thc highway and the non-revcnue-eaming roads under the LRRP. If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value of financial benefits is less than that of economic benefits because of controls on electricity tariffs." Summary of Benefits and Costs: The overall EIRR of the project (including KSH and the twelve local roads ) is 21.0 percent and the NPV (12%) is 1.98 billion RMB. The overall EIRR of the project is summarized as follows: Summary of Economic Evaluation Results EIRR (m! %) NPV R.MB million, 12%) Kuitun - Sailimuhu Highway: Section 1: Kuitun-Usu 20.6 178.2 Section 2: Usu- Bole 18.2 1,007.2 Section 3: Bole-Sailimuhu 31.1 348.2 Subtotal 19.6 1.549.6 Local Road Rehabilitation Program 32.2 433.5 Total 21.0 1 983 1 Main Assumptions: Preface 1. The economic evaluation of the project covers the following two project components: a) new construction and upgrading of a 302.6 km Kuitun - Sailimuhu Highway (KSH) and b) upgrading of twelve rural roads (total 603 km) in the poor areas under the plan of Local Roads Rehabilitation Program (LRRP). 2. The analysis is based on the actual and forecasted operating data on traffic, vehicle operating cost (VOC), economic project cost and transport user benefits. The main inputs to and assumptions for the evaluation are: - 39 -  a) capital investment and maintenance costs, revised to reflect February 2002 prices; b) the benefit stream, also reflecting February 2002 prices, is comprised of savings in VOC, travel time savings through reduced congestion on the existing route, and reduction accident costs; c) an assumed project life of 20 years, the capital investment period during 2001-2008, depending on the road; being evaluated and d) full benefits starting to accrue on KSH in 2006, for the twelve rural roads from 2003 to 2006 (depend on the roads being considered). 3. This Annex is comprised of three parts. Part I is the economic evaluation of KSH; Part nI is the economic evaluation of the twelve rural roads under LRRP; and Part III is the overall economic evaluation of the project, including probabilistic risk analysis. PART I: KUITUN - SAILIMUHU HIGHWAY 4. For purpose of evaluation, the KSH has been further divided into three sections: Length of the Length of the new existing road (kn) highway (kn) Section 1: Kuitun-Usu 18.5 18.0 Section2: Usu-Bole 235.5 229.0 Section 3: Bole-Sailimuhu 58.0 55.6 Total 312.0 302.6 Highway Expansion Plan -Justification for Investment 5. Overview. Xinjiang has a vast land area (1.66 million km2) and is an inland transport hub located in the western region of China serving the east-west bound transport for linking central Asia and Xinjiang to China's east coastal areas. Tianshan Mountain lies in the middle of Xinjiang, crossing from west to east and divides the land into two large basins- Junggar Basin (North) and Tarim Basin (South). The desert and mountains constitute the major terrain and 25 percent of the oasis land inhabits over 90 percent of total population (17.7 million). Most of economic activities (about 80 percent of GDP) are generated from the northern part of Xinjiang. Basically, the entire region of Xinjiang is being classified by the State as a poverty region. 6. Currently, GOC is planning to build two vertical highway routes, two horizontal highway routes and three main highway corridors before 2020. One of the horizontal highway routes passes through the northern part of Xinjiang from east to west - Lianyungang/Korgas Highway (LKH). The total length of LKH is about 4,400 km. The length of LKH in Xinjiang is about 1,430 km. Except for the project section, all other parts of LKH in Xinjiang are either completed or under construction. Given the important role of the highway corridor to the local economy and the near completion of other sections, the proposed project has the highest priority in Xinjiang's regional highway development plan. Level and Timing of Investment 7. For this highway corridor, motorized traffic on the road has been increasing an overall average of 10.2 percent per year between 1990-2000 and by 2000 had reached 2,100-6,000 motorized vehicles per day throughout its length. Non motorized and other traffic (bicycles, animal carts, small farm tractors and motorcycles etc) add to an equivalent of about another 100-200 motorized vehicles per day. Even with a modest projected 6.2 percent annual growth, motorized traffic alone in this highway corridor would reach between 3,100 - 8,500 vehicles per day by 2005, the proposed full opening year. This would exceed the capacity of the existing road. An economic assessment of the optimum opening year of the highiway shows that two out of the three sections of the road (or over 80% of the road in length) reached its capacity before 2000, so the optimum timing is now to construct the road as quickly as possible. -40 -  Section I Section 2 Section3 Kuitun - Usu Usu - Bole Bole- Sailimuhu Road Class (old road / new road) I / Expressway Ill / Class I ll I Class 11 Road Condition (old road / new road) Fair / Good Fair / Good Poor / Good Terrain Flat Flat Hilly Capacity (AADT/day) (old road / new road) 2,600/ 20,000 2,600 / 12,500 2,200 / 5,000 Motorized Traffic - 2000 (AADT/day) 6,000 2,900 2,100 Year for Capacity Before 2000 Before 2000 2001 Optimum Opening Year Before 2000 Before 2000 2000 Proposed Opening Year October 2005 October 2005 October 2005 Highway Corridor Traffic 8. Estimates of base year traffic were made on the basis of routine traffic counts and a comprehensive origin and destination (OtD) survey that took place on November 11, 1999 (updated on August 20001. Projection of base, generated and diverted traffic were made for 26 zones on the basis of a conventional growth model. A regression analysis was used to derive a relationship between economic growth and road transport demand. Based on the local economic growth and the traffic demand, it is estimated that traffic growth in the project corridor will be overall 6.2 percent per year between 2000-2006, 4.2 percent between 2006-2015, and 2.3 percent between 2015-2025. The overall traffic growth rates are summarized as follows: Annual Traffic Growth Rate _ _ _ . _ . _ ' U*a._. ...... _ :__:__s__ ........... . .. _ sWN$ . ]_1 1 ] - ....... .. _ > __. _ .. . . . ... .. Car Bus & Truck Average Actual: 1990-2000 15.1% 9.3% 10.2% Projection: 2000-2006 7.2% 5.9% 6.2% 2006-2015 5.2% 4.0% 4.2% 2015-2025 3.2% 2.0% 2.3% 9. Alternatives. In the feasibility study, two altemative route alignments were considered, i.e. the north alignment, central alignment and south alignment. Each alternative was compared on the basis of costs, benefits, service to local cities and relationship to future economic development. The south alignment was selected on the basis of least overall cost and without having any additional environmental or resettlement consequences compared with the other two alternatives (details are available in the feasibility study reports). Traffic on the Highway 10. The new highway is planned to become operational in 2005. Based on the information provided by the O/D survey and the feasibility study, the diversion ratios were calculated by using financial VOC for the road users as an independent variable, with the impacts of the level of proposed tolls on the new highway, travel distance, and experience from other recently Bank financed highways in China. The results of the potential division of traffic to the new road shows that between 61-67 percent of motorized corridor traffic may be diverted to the new highway, depending on the road section and for the opening year of KSH. Sensitivity tests with lower diversion rates show that the KSH would still be justified with an average division rate of about 50%, a rate exceeded in most the toll highways so far financed by the Bank in China. ll. Traffic generated is assumed to be 10 percent of the basic traffic. Although there is an existing railway line between Kuitun and Jinhe (near Bole, about 170 1am), no diversion of traffic from the railway to the new highway has been taken into account. The railway undertakes mainly long distance bulk freight transport with different O/D and the average freight transport distance for railway in 2000 is estimated to be 845 km. Most low valued bulk freight presently carried by the railway would not be affected by its faster times but the higher tariffs of the highway (rail tariffs are about 0.26 RMB per ton-kmn compared with about 0.32 RMB per ton-km for road transport). The highway corridor traffic forecast, by sections, is summarized as follows: - 41 -  Normal Traffic, by Sections (AADT) Section 1 Section 2 Section3 /_I Kuitun - Usu Usu - Bole Bole - Sailimuhu The existine road: Actual 1990 2,427 1,011 746 1995 3,723 1,750 1,403 1998 5,106 2,364 1,842 1999 5,621 2,600 2,026 2000 5,991 2,902 2,113 Forecast 2006 2,797 1,613 -- 2015 3,835 2,246 2025 4,522 2,698 -- The new hiehway: Forecast 2006 5,732 2,538 3,094 2015 8,414 3,764 4,640 2025 10,634 4,820 6,039 L/1: The old road upgrading. Economic Costs 12. Financial costs have been converted to economic costs by the elimination of price contingency, interest payment during the construction, taxes and custom duty on imported materials by the application of shadow prices to each section of the new highway. The overall average shadow price is 1.10 and the resulting overall economic cost is similar to the financial cost. Economic Benefits 13. The economic analysis includes the benefits derived from: (a) VOC savings on the new highway for normal and generated traffic (summarized as below), (b) time savings through relieved congestion on the existing road, and (c) lower accident costs. The benefits resulting from the lower level of congestion were quantified. The value of passenger time savings was estimated at Y 1.5 per passenger-hour, based on updated values from a report on feasibility study methodology for highways in China (Rust PPK. Australia Feasibility Study Methodology Report, March 1996). The same source was also used for vehicle accident rates on different classes of road. The benefits of generated traffic were calculated using the standard demand curve analysis and an assumed linear relationship between demand and travel cost over the relevant cost range. -42 -  Economic Vehicle Operating Costs (RMB per km, February 2002 prices) With the Project Without the Project Section 1 Section 2 Section 3 Section 1 Section 2 Section 3 Car 0.748 0.842 0.958 0.960 0.998 1.081 Medium bus 1.330 1.475 1.614 1.944 2.021 1.994 Large bus 2.891 3.073 3.270 4.104 4.181 4.091 Small truck 1.353 1.456 1.595 1.667 1.744 1.850 Medium truck 1.753 1.856 2.028 2.057 2.134 2.318 Large truck 2.312 2.471 2.647 2.736 2.813 3.090 Tractor/trailer 3.611 3.770 4.294 4.219 4.296 4.966 Sample of Economic Vehicle Operating Cost Calculation (RMB per 1,000 vehicle-kn, February 2002 prices) Medium Large Small Medium Large Trailer/ Car bus Bus Truck truck Truck Container The New Hiehwav Fuel 306 416 900 576 736 .750 840 Tires 35 35 130 55 130 480 1,073 Maintenance 330 441 912 648 752 802 923 Crew 1 3 3 3 3 3 3 Depreciation 26 102 279 71 132 277 772 Subtotal 698 997 2.224 1.353 1.753 2.312 3,611 Time value of passengers 50 333 667 Total 748 1.330 2.891 1.353 1.753 2.312 3.611 The Existing Road Fuel 408 544 1,125 800 928 990 1,140 Tires 39 40 149 61 140 540 1,188 Maintenance 367 490 1,013 720 835 891 1,026 Crew 4 7 7 7 7 7 7 Depreciation 29 113 310 79 147 308 858 Subtotal 847 1.194 2,604 1 667 2.057 2736 4.219 Time value of passengers 113 750 1,500 Total 960 1.944 4.104 1.667 2.057 2.736 4.219 Economic Evaluation 14. Total costs and benefits streams, Economic Internal Rate of Return (EIRR) and Net Present Value (NPV), for each section of the expressway were calculated. The overall EIRR for KSH is estimated to be 19.6 percent with the following results for each road section and summarized as follows: Economic Evaluation of KSH NPV (12%, Extra Extra people Minority as % EIRR million children attending health of the total (in %) RMB) attending services /_i local school/ i. population Kuitun-Usu 20.6 178.2 2,400 3,600 12.4 Usu - Bole 18.2 1,007.2 5,200 8,900 30.3 Bole-Sailimuhu 31.1 348.2 100 200 95.0 Whole route 19.6 1,549.6 7,700 12,700 25.9 /_I: Inforrnation was collected to establish baseline data on the indirect benefits derived from improved access to education and health care services. However, its quantifiable benefits were not included. 15. The distribution of the estimated benefits shows that (a) the main beneficiary is the road user on this highway corridor, (b) the traffic that uses the KSH constitutes the majority of the road user's benefits (61.0%), and (c) trucks will receive 48.6% of the project benefits, while cars and buses will receive 44.2%. Summary the breakdown of the benefits as follows: -43 -  Distribution of the Project Benefits (NPV, 12%, million RMB) Road user Road agency Society Total benefits 3,311.3 (1,761.7) 1,549.6 Of which: Road user: a. By traffic: Expressway traffic Generated traffic Existing road traffic Road safety Total 2,018.5 100.9 1,116.1 75.8 3,311.3 61.0% 3.0% 33.7% 2.3% 100.0% b. By vehicles: Cars Buses Trucks Trailers Total 692.9 737.1 1,608.6 272.7 3,311.3 20.9% 22.3% 48.6% 8.2% 100.0% Sensitivity Analysis 16. The basic evaiuation of the project, by section and on the whole, indicates that the selected alignment is economically viable, and the sensitivity tests with respect to higher cost, lower benefits and traffic projection, zero value of time and zero generated traffic benefit to the new highway maintain this position. The analysis of the optimum year for opening of the road showed that delaying the completion by two years would reduce the EIRR by about 4.3 percent. Sensitivity Tests on the Economic Evaluation of KSH EIRR (%) NPV (12%, million RMB) Delay the completion by one year (to October 2006) 17.3 1,081.5 Higher capital cost (+25%) (a) 16.7 1,093.1 Lower benefits (-20%) (b) 16.7 874.4 Combine (a) and (b) 14.0 433.9 Zero value oftime 17.3 1,018.7 Zero generated traffic 19.1 1,425.0 Lower traffic projection 16.2 719.7 Switching values % increase Cost increase to reduce EIRR to 12% 188 % Benefit reduction to reduce EIRR to 12% 53 % 17. In addition, the sensitivity of the evaluation resulting from variations in the costs and benefits of the project indicate that the conditions for the project's viability to fall below the minimum acceptable, that is, a NPV of less than zero by using 12 percent discount rate or an EIRR of less than 12 percent, are unlikely to occur. The benefits would have to fall to less than 53 percent of those in base case with no change in costs, the costs would have to increase to more than 1.88 times those of the base costs, or the costs would have to increase by 131 percent and the benefits fall to 70 percent at the same time. PART II: LOCAL ROADS REHABILITATION PROGRAM (LRRP) Selection of Highways and Its Traffic 18. The LRRP consists of twelve local roads, classified by XCD as among the worst roads in the region. The main objective of rehabilitation program is to upgrade existing local roads to Class II or Class III roads. The total length is 603 km and listed below: -44 -  Length (km) Construction period 1. Santai- Qitai 34 2002-2003 2. Mulei- Qitai 55 2002-2003 3. Bayituohai- Zhaosu 84 2002-2003 4. Tacheng- Eming 50 2004-2005 5. Awati- Akesu 59 2003-2004 6. Baicheng- Yuergun 30 2003-2004 7. Jiashi - Sule 20 2005-2006 8. Yuepuhu- Tazihong (G315) 25 2005-2006 9. Keriya - Pishan 43 2005-2006 10. Zeketai- Nalati 48 2004-2005 11. Qiaoerma- Zhongfengchang 89 2005-2006 12. Fuhai- Guoyingmuchang 66 2004-2005 Total 603 19. Since all the twelve roads are located in the same region, the local economic development and traffic patterns are quite similar. Based on the actual traffic levels and local economic growth rates, traffic growth rates have been estimated, depending on the location of the roads, to be 3.0-5.0 percent from 2000-2005, reduced by I percent for each of the 5 years from 2005-2025. Economic Costs and Benefits 20. Financial costs have been converted to economic costs using the same method and factors as for the KSH, with the following results: Financial and Economic Cost For LRRP (million RMB) Financial Economic 1. Santai- Qitai 27.05 26.86 2. Mulei- Qitai 43.76 43.45 3. Bayituohai- Zhaosu 33.60 33.36 4. Tacheng- Eming 35.00 34.75 5. Awati- Akesu 53.10 52.72 6. Baicheng- Yuergun 27.41 27.21 7. Jiashi - Sule 10.00 9.93 8. Yuepuhu- Tazihong (G315) 22.50 22.34 9. Keriya - Pishan 31.80 31.57 10. Zeketai- Nalati 33.60 33.36 11. Qiaoerma- Zhongfengchang 26.70 26.51 12. Fuhai- Guoyingmuchang 59.40 58.98 Total 403.92 401.04 21. The principal evaluated benefits of the local roads would be reduced VOCs through providing a better road surface and the associated upgrading of road Class would also result in higher traffic speeds and improvement of road roughness index. In most of these less densely populated rural areas, it is assumed that there is no generated traffic. Economic Evaluation and Sensitivity Analysis 22. The best estimates of EIRRs for the twelve local roads range from 12.2 percent to 49.2 percent. The overall EIRR and NPV (12%) for the LRRP is 32.2 percent and 433.5 million RMB respectively. -45-  EIRR and NPV Summor LRRP NPV (12%, Extra children Extra people Minority at EIRR million attending attending health of the tot: (in %) RMB) school /_u services it local , _,, , , , _ ,, populatie 1. Santai- Qitai 34.7 50.3 5.880 4,190 24.5 2. Mulci-Qitai 30.8 66.6 4.740 3,160 24.7 3. Bayituohai- Zhaosu 47.9 104.0 1,860 1,430 68.9 4. Tachcng- Eming 49.2 81.1 4,010 3,090 41.3 5. Awati-Akcsu 40.7 109.1 950 730 53.1 6. Baicheng- Yucrgun 22.4 46.2 1,310 1,200 97.9 7. Jiashi - Sulc 44.6 19.7 2,610 1,970 96.5 8. Yucpuhu-Tazihong(G315) 31.9 26.6 3,560 3,230 93.7 9. Kcriya - Pishan 21.8 20.0 1,840 1,390 98.7 10. Zckctai-Nalati 18.9 46.9 670 370 59.3 Il. Qiaocnna- Zhongfengchang 22.8 44.5 1,280 980 71.6 12. Fuhai- Guoyingmuchang 12.2 66.5 1,080 770 43.8 Total 32.2 433.5 29,790 22,510 58.6 /_LI: Infonmation was collected to establish baselinc data on the indirect benefits dcrvcd from improved access to education and health carc services. However, its quantifiablc bcncfits were not includcd. 23. The risks associated with evaluation of the local roads are that traffic will grow more slowly than projected, that the civil works will be more expensive than projected and that the savings in VOC will be less than expected. All these risks were analyzed through sensitivity tests and the evaluation results were found to be robust to all of them. For the project component to be non-acceptable (i.e. EIRR of less than 12% or NPV of zero), the benefits would have to fall to less than 40.8 percent of those in base case with no change in costs, the costs would have to increase to more than 2.46 times those of the base costs, or the costs would have to increase by 145 percent and the benefits fall to 59 percent at the same time. PART III: THE OVERALL ECONOMIC EVALUATION OF THE PROJECT Overall Econornic Internal Rate of Return (EIRR) 24. The overall EIRR of the project (including KSH and the twelve local roads ) is 21.0 percent and the NPV (12%) is 1.98 billion RMB. The overall EIRR of the project is summarized as follows: Summary of Economic Evaluation Results EIRR (in %/o) NPV (RMB million, 12%/o) Kuitun - Sailimuhu Highway: Section l: Kuitun - Usu 20.6 178.2 Section 2: Usu- Bole 18.2 1,007.2 Section 3: Bole -Sailimuhu 31.1 348.2 Subtotal 19.6 1.549.6 Local Road Rehabilitation Program 32.2 433.5 Total 21.0 1 983 1 Project Risks 25. All sections of the KSH and LRRP show acceptable and robust economic returns. XCD has rich experiences in construction and operation of expressway and local road projects so the technical risks of implementing the project are minimal. Physically, the only remaining tangible risks are that prolonged delays may occur in the course of implementation due to very tight construction schedule and budget. This will be tested through the probabilistic risk analysis to estinate the degree of uncertainty for the project. -46 -  Probabilistic Risk Analysis for Economic Evaluation of KSH 26. To determine the degree of uncertainty for the project, a probabilistic risk analysis using Monte Carlo techniques was carried out. In a Monte Carlo analysis, each uncertainty factor is allowed to vary at random between set limits and all uncertainty factors are allowed to change simultaneously. Monte Carlo simulation provides probability distributions of the potential outcomes of decisions. By analyzing these distributions, we can assess the risk associated with making various decisions (or probabilistic risk analysis). The product of the analysis is a judgment on the possible range of the decision variable, and on the likelihood of each value within this range. The degree of uncertainty factors in the analysis also includes, particularly, the lessons learned from the completion of the first Xinjiang highway project. 27. For the twelve local roads, the sum of capital cost constitutes only about 14 percent of total capital investment. In view of their higher EIRR and lower capital investment, the probabilistic risk analysis for the project is focused instead on the construction of KSH. The factors with the most uncertainty associated with the economic evaluation of KSH have been identified by the following: (a) traffic growth rate, (b) traffic diversion ratio to the new highway, (c) the value of vehicle operating costs, (d) capital investment, and (e) delay the new highway opening year to October 2006. The results of probabilistic risk analysis shows that the EIRR for the most likely scenario is 19.5%. The low scenario is 12.7% and the high scenario is 27.5%. The standard error of the mean is 0.4%. The detailed results of Monte Carlo test and probabilistic risk analyses are shown in Appendix A and summarized as follows: Summary of KSH Probabilistic Risk Analyses Most likely Standard Error of Range of EIRR EIRR the Mean Section l: Kuitun-Usu 13.1%-28.8% 20.2% 0.5% Section 2: Usu - Bole 12.1% - 26.3% 18.5% 0.4% Section 3: Bole - Sailimuhu 20.7% 36.9% 28.3% 0.5% Total 12.7% - 27.5% 19.5% 0.4% - 47 -  APPENDLX A XINJIANG: KUITUN - SAILIMUHU HIGHWAY EIRR SIMULATION AND PROBABILISTIC RISK ANALYSIS Summary: Display Rangc is from -10.0% to 60.0% EIRR (in%) Entire Range is from -1.2% to 97.3% EIRR (in%) After 1,077 Trials, the Std. Error of the Mean is 0.4% Statistics: Value Percentiles: Trials 1077 Mean 21.9% Percentile EIRR (in%) Mcdian 19.5% 0% -1.2% Mode --- 10% 5.8% Standard Dcviation 14.4% Low Sccnario 20% 9.9% Variance 2.1% = 30% 12.7% Skewness 1.21 Most Likely 40% 16.3% Kurtosis 5.47 = 50% 19.5% Cocff. of Variability 0.66 High Scenario 60% 23.0% Range Minimum -1.2% c 70% 27.5% Range Maximum 97.3% 80% 32.3% Rangc Width 98.4% 90% 40.7% Mean Std. Error 0.44% 100% 97.3% I Foreast: Kultun- Salimnuhu Highway (2008) 1 1,077 Trils Frquency Qiwt 19 Outliers .030 32 as_.022 _ ___ __l_ _ .24 X .015 l. 11 .10.0% 7 5% 2.0% 425% s00% EIRR (W%) Assumptlons Traffic Growth Rate Traffic Diversion Ratio Normal distribution with parameters: Normal distribution with parametcrs: Mean 90.0% Mean 90.0% Standard Dcv. 20.0% Standard Dev. 15.0% Selected range is from -Infinity to +Infinity Selected range is from -Infinity to +Infinity Mean value in simulation was 89.6% Mean valuc in simulation was 89.8% Value of the VOC Capital Cost Triangular distribution with parameters: Triangular distribution with parameters: Minimum 90.0% Minimum 100.0% Likelicst 100.0% Likelicst 115.0% Maximum 110.0% Maximum 130.0% Selected range is from 90.0% to 110.0% Selected rangc is from 100.0% to 130.0% Mean value in simulation was 100.1% Mean valuc in simulation was 121.4% -48 -  Sensitivity analysis / Switching values of critical items: Sensitivity Tests on the Economic Evaluation of KSH EIRR (%) NPV (12%, million RMB) Delay the completion by one year (to October 2006) 17.3 1,081.5 Higher capital cost (+25%) (a) 16.7 1,093.1 Lower benefits (-20%) (b) 16.7 874.4 Combine (a) and (b) 14.0 433.9 Zero value of time 17.3 1,018.7 Zero generated traffic 19.1 1,425.0 Lower traffic projection 16.2 719.7 Switching values % increase Cost increase to reduce EIRR to 12% 188 % Benefit reduction to reduce EIRR to 12% 53 % -49 -  Annex 5: Financial Summary CHINA: Third Xinjiang Highway Project Preface 1. The financial evaluation of the project is comprised of two parts. Part I is for the revenue earning entity; and Part II is for the non-revenue earning entity. Since KSH is designed as a toll road and is the only road in the project which generates the revenue (the total cost of KSH constitute about 86 percent of total project cost) and there is no revenue for the twelve local roads under the Local Road Rehabilitation Program (LRRP), Part I will be focused on KSH and Part II will be focused on LRRP. Except for the Bank's loan, KSH does not have any other outstanding long-term debt. To measure the opportunity cost of capital for the local grants, an overall average of 5% is applied. The financial cost of the project is calculated on the basis of the weighted average cost of the various sources of funds. The weighted average financial cost of the capital is estimated to be 5.0% (50% from the Bank at 5%, 50% grants, 44.1% from MOC and 5.9% from XCD, at 5%). PART I: THE FINANCLAL EVALUATION OF KSH 2. KSH is planning to be put it into operation in October 2005. XCD will establish an operation entity in charge of KSH. The operation entity, on behalf of XCD, will be responsible for the day to day management, operation, maintenance, and development of the highway. The main financial revenue of the KSH would be the toll income from the road users and the toll charges are strictly controlled by the government. Starting 2001, the government granted the tax exemption status to XCD. The KSH will operated as the tax free operation entity. The Financial Objective 3. XCD has clearly indicated that the purpose of toll collection on KSH is to repay the Bank's loan, to cover operating and non-operating expenses and routine maintenance, instead of maximizing the financial rate of return on the investment. The toll charges were on the low side (the net weighted average is about 0.62 Yuan per vehicle-km) with a low annual growth assumption. The toll charges forecast has been assumed to be increasing once every five years (20 percent or average 3.7 percent p.a.). Financial Forecast 4. Toll. The toll is charged on the basis of vehicle size (small passenger cars, large buses, small trucks, medium trucks, large trucks and trailers) and distance traveled. Some toll exempted vehicles (police, ambulance and military as well as some sections are operated as open highway) are expected to be 10 percent of total traffic. Currently, the toll in Xinjiang is the lowest among all the Bank's financed highway projects in China. In 2001, the toll in Xinjiang is only about 54% of the average toll charged by other completed highway projects financed by the Bank. Even with the expected toll inicreases, the toll for Xinjiang in 2005 still maintains about 92 percent of the average toll charged by the other five provinces in 2000. - 50 -  Toil Charges Comparisons (Yuan/ vehicle-km) Small Medium Large Heavy Extra vehicle vehicle vehicle vehicle large Average Tolls- Xinilan: 2000 (a) 0.200 0.350 0.400 0.800 -- 0.438 2005 (b) 0.350 0.525 0.700 1.400 -- 0.744 Tolls (in 2000): 1. Hebei 0.280 0.460 0.740 0.930 0.5Y/tk 0.603 m 2. Henan 0.280 0.460 0.740 0.930 0.5Y/tk 0.603 m 3. Shanghai' 0.600 0.550 0.600 0.600 0.600 0.588 4. Zhejiang* 0.450 0.800 1.200 1.600 -- 1.013 5. Guangdong 0.450 0.900 1.462 2.138 -- 1.238 Average (c) 0.412 0.634 0.948 1.240 -- 0.809 Ratios: (a)/(c) 48.5% 55.2% 42.2% 64.5% 54.1% (b)/(c) 85.0% 82.8% 73.8% 112.9% 92.0% *:Plus the basic fee (YNch.) 5.0 10.0 15.0 20.0 25.0 5. Operations. Based on the actual operating practice of the existing six toll highways, the operating costs of KSH can be categorized: working cost (a. wage and benefits, b. maintenance, c. operating materials and supplies, d. administration, e. others), and operating cost (working cost + depreciation). All other expenses e.g. interest payments of the loan and others, are also included in the calculation of the profitability of KSH. 6. Profitability. The tax exemption status of KSH (par. 2) will inject, by estimation, an additional revenue of 40 million Yuan annually to the highway. The results show, except for the year (2015) when major maintenance takes place, that KSH would be able to pay all expenditures, including operation, non-operating expenses and routine maintenance, for operation of the highway (Income statement, page I of 3, Appendix A). 7. Cash flow. The low toll charges policy on vehicles may not affect the daily operation of the highway. The capital requirements for the loan repayment and the major maintenance, however, would generate cash pressure on KSH. The deficit from the operations may be met by transferring the reserve funds from the previous years. It is expected that KSH would not need any external cash injection over the life of the loan (Sources and applications of funds, page 2 of 3, Appendix A). 8. Leverage. The high portion of the loan (50%) would affect the leverage of KSH in the early years of operations which will erode the part of the highway equity and cause the debt/ equity ratio and debt/ capital ratio (the financial leverage of the company) to not be sound until 2011. But this will not affect the liquidity of KSH. The current ratio would be in the sound range of 3.1 and over (to avoid short-term solvency problems, the current ratio should be more than 1.0). (Balance sheet, page 3 of 3, Appendix A). To guarantee the financial viability, XCD has reiterated their full commitment to the highway and released an official document to the Bank for full financial support to the KSH. The major assumptions for financial evaluation are shown in Appendix B. 9. Financial Internal Rate of Return (FIRR). Based on the proposed toll level, KSH may not need any external cash injection. But, the low toll level and the low toll growth assumptions would generate a great impact on the rate return to the capital investment. The result of the financial evaluation shows that the FIRR for the project is expected to be 2.8 percent. And, the FIRR would not change much if they delay the KSH opening to October 2006 (2.4 percent). 10. Financial Probabilistic Risk Analysis. To measure the degree of financial uncertainty for the project, a probabilistic risk analysis using Monte Carlo techniques was carried out. The five most uncertain factors which may affect the financial evaluation have been identified: (a) traffic growth, (b) toll charges, (c) total working costs, (d) capital investment, and (e) delay in opening the highway to October 2006. The result reveals that the most likely FIRR would be 1.2 percent, while the worst and the best FIRR would be -2.2.percent and 3.7 percent, respectively. - 51 -  The detailed is in Appendix C and summarized as follows: Summary of Financial Sensitivity and Probabilistic Risk Analysis Financial Sensitivity Tests Financial Simulation and Risk Analysis Open in Open in Rangc of Most Likcly Std. Error o1 Oct. 2005 Oct. 2006 FIRR / NPV FIRR / NPV Thc Mean FIRR (in %) 2.8 2.4 -2.2-- 3.7 1.2 0.2 NPV (5.0%, million Yuan) -501.9 -584.6 -1,960.8 - -676.3 -1,305.6 40.2 Impact on Level of the Toil Charge 11. The level of tolls need to satisfy two objectives: (a) generate enough revenue to obtain the higher financial rate of return on investment, but (b) not deter potential users and compromise economic objectives. These objectives can be contradictory, since the former requires a higher toll while the latter requires a lower one. The analysis shows that the overall average unit toll revenue for 2005 would be about 0.62 Yuan/veh-km, which should generate the minimum sufficient funds to serve the repayment of the loan. Sensitivity tests to the level of tolls (see the table below) showed that even at a toll of 3.0 Yuan/veh-km, both EIRR and FIRR are still justified. Beyond this rate, the EIRR falls rapidly while the FIRR almost reaches its maximum. Further, if all construction costs were privately financed instead of being covered by a 50% government grant, average tolls would need to be over 3.0 Yuan/veh-km to generate optimal FIRR to providers of both debt and equity, and this toll level would substantially reduce the project's economic benefits. Sensitivity of Evaluation Results to Variations in Toil Charges Average Toll charges (Yuan/veh-km) EIRR (%) FIRR (%) 0.31 22.8 -11.4 0.62 19.6 2.8 1.00 18.4 11.2 2.00 16.2 221.3 3.00 13.3 24.9 5.00 9.0 24.1 PART II: THE FINANCIAL EVALUATION OF LRRP 12. The twelve roads under LRRP are toll free roads. The financial evaluation of these non-revenue eamings should ensure that XCD maintains a sound financial practice to minimize the financial risks, i.e. the lack of counterpart funds for the construction including the future operating expenses to the project roads. 13. XCD has provided the financing plan for total revenue and expenditure of XCD for the Ninth Five Year Plan (9th FYP, 1996 - 2000), the 10th FYP (2001 - 2005) and the draft of the 11 th FYP (2006 - 2010). Based on the Xinjiang highway development plan, XCD has acquired the sufficient funds to cover the funds demanded on new road construction and the existing road network maintenance. In addition, a moderate self-financing ratio of XCD would ensure the implementation of the development plan. The latest actual data from 2000 revealed that about 43 percent of XCD's total revenue are generated from the intemal cash flow. The detailed source and expenditure for 1996 - 2005 is shown in Appendix D of this Annex. 14. Following the increases in the length of the provincial road network every year, XCD also provides additional resources for maintenance on the existing road networks. During the 9th FYP and the I 0th FYP, the increases in rate of an average unit road maintenance expenditure is much larger than the increases in rate of road network. It is estimated that increases of road network and average unit maintenance expenditure for the 9th FYP and the 10th FYP are 2.1 percent vs. 10.4 percent and 2.2 percent vs. 5.0 percent, respectively. The soundness of these allocation in terms of (i) level of retums and (ii) distribution across types of works will be reviewed as part of the LRRP. The overall program shows that the expenditures and road construction and maintenance for the - 52 -  "toll-free" roads included in the project constitute only a small fraction of XCD's fund flow. Therefore the fiscal impact would be minimal. Based on the XCD plan, the capital investment of LRRP is less thani 2.6 percent of the annual total XCD revenue. In addition, the required maintenance expenditure of LRRP is less than 1.5 percent of the total maintenance expenditure of XCD. These low ratios indicate that the project presents a modest financial'risk regarding availability of a counterpart fund for construction and maintenance of the project roads. The details are shown in Appendix D of this Annex and summarized as follows: XCD: Average Increase in the Road Network and ! Road Maintenance Expenditures.(in.%) 9tn FYP 10FYP Average annual increase in the road network 2.1 2.2 Average annual increase in maintenance expenditures 10.4 5.0 XCD: Investments, Revenue and Maintenance Expenditures (million Yuan) 2002 2003 2004 2005 2Q0i Investments and Revenue: LRRP Investments (a) 83.53 85.29 118.50 98.40 1