China - Highway Project

Document of The World Bank FOR OMCIAL USE ONLY Rqeet No. 5408HA, STAFF APPRAISAL REPORT CHINA HIGHWAY PROJECT April 19, 1985 Transportation Division 1 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and mav be used by recipnts only in the perfermance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRNCY EQUIVALENTS Currency Unit - Renminbi (RMB) US$1.00 = Y (Yuan) 2.84 (as of March 1985) US$0.35 = Y 1.0 US$l milLion = Y 2.84 million USS352,113 = Y I million FISCAL YEAAR January I - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (ki) = 0.62 mile (mi) 1 square meter (sq m) = 10.76 square feet (sq ft) I square kilometer (km2) = 0.4 square miles (sq mi) I hectare (ha) = 0.01 k1m2 = 2.47 acres (ac) = 15 mu I mu = 666.7 sq m = 0.0667 ha L kilogram (kg) - 2.2046 pounds (lbs) I metric ton (m ton) = 2,204 pounds (Lbs) PRLINCIPAL ABBREVIATIONS AND ACRONYMS USED AADT - Average Annual Daily Traffic CADE - Compucer-Aided Design and Engineering CHB - County Highway Bureau CNTIC - China National Technical Import Corporation CTC - Central Trucking Company C-I - County Transport Department ERR - Economic Rate of Return GNP - Gross National Product HB - Highway Bureau HPDI - Highway Planning and Design Institute ESRI - Highway Scientific Research Institute ICB - International Competitive Bidding LCB - Local Competitive Bidding mOC - Ministry of Communications MOE - Ministry of Education MOF - Ministry of Finance PHB - Provincial Highway Bureau PTC - Provincial Trucking Company PTD - Provincial Transport Department SAA - State Auditing Agency VOC - Vehicle Operating Costs  FOR OFICUL USE ONLY HIGHWAY PROJECT TabLe of Contents Page No. Loan, Credit and Project Smmary .................................... v I. TRANSPORT SECTOR A. Economic Setting lI B. Transport System . C. Traffic Trends . . .1 D. Investments ...........2................ .2 E. Ports and Waterways.. . 3 F. Railways... 3 -. Highways 3............ .3 R. Transport Policies and Objectives for the 1980s. 4 II. HIGHWAY SUBSECTOR A. Network ..4 B. Traffic Growth and Characteristics. 6 C. The Vehicle Fleet. 6 D. The Trucking Industry ........... . .............. o....... 7 E. Vehicle Operating Costs, Trucking Tariffs and Profit 8 F. Highway Administration. 8 C. Planning, Budgeting and Financing. 9 H. Engineering ........10 I. Construction and Mtan te nance ...I... Io ........ ... . J. Road Safety .11 K. Staff Training .12 L. Highway Development: Policy and Objectives for the 1980s ...12 III. THE PROJECT A. Project Formulation and Preparation . . 13 B. Project Objectives and Scope ..13 C. Detailed Featuresar.... .... 14 D. Cost Estmts .....i... ...a...0 e0...... 17 E. Financing ...19 F. Implementation ...20 G. Procurement .... ..22 H. Disbursements ...23 This report is based on findings of a Bank Group mission which visited China in October/November 1984, comprising B. P. Kennedy (mission Leader), G. Mahoney, R. J. N. Leonard (Engineers), C. Ohri (Procurement Specialist), J. Yenny, S. Teravaninthorn (Economists) and G. Morra (Training Specialist). The report was written by B.P. Kennedy, R. J. N. Leonard, J. Yenny and S. Teravaninthorn and edited by Ms. P. Brereton. Tis docmet has a resticted distnbution and may be used by reopients only in the peaformance of their oflfi duie Its contents may not otherwise be disdosed witbout World Bank authorization.  Page No. I. Auditing, Reporting and Monitoring ...................... 24 - J. Environmental Effects ................................. 24 IV. ECONOMIC EVALUATION A. General ................................................. 25 B. Construction and Improvement of National Roads .......... 26 C. Construction and Improvement of Rural Roads ............. 26 D. Overall Evaluation and Risks ............................ 27 V. AG REEMENTS REACHED AND RECOMMENDATION .......... ........ ..... 27 TABLES 1.1 Annual Crowth and Modal Split in Freight Traffic, 1949-1983 1.2 Annual Growth and Modal Split in Passenger Traffic, 1949-1983 2.1 Highway Design Standards in China 2.2 Road Pavement Standards 2.3 International Comparison of Vehicle Production in 1980 2.4 Motor Vehicles Manufactured in and Imported into China, 1980-1984 2.5 Total Freight Transport Handled bv State and Social Trucks 2.6 CTC's Vehicle Operating Cost in 1983 2.7 Composition of Vehicle Operating Cost: A Comparison 3.1 National Road Sections to be Improved or Newly Built 3.2 Rural Roads to be Improved or NewLy Built 3.3 Training Program 3.4 Estimated Disbursement Schedule ANNEXES 1. HOC Highway Institutes 2. Significance of Proposed National Road Investments 3. Provincial Profiles 4. Project Implementation Schedule 5. Project Monitoring Indices 6. Economic Evaluation of the Xian-Sanyuan National Road 7. Economic Evaluation of the Fucheng-Yuquan Rural Road 8. Selected Documents and Data Available in the Project File  - iii - CHARTS 1. Organization of the Ministry of Communications (IBRD 26870) 2. Organization of the Highway Bureau of the Ministry of Communications (IBRD 26871) 3. The Relationship between Central and Provincial Transport Departments (IBRD 26423) 4. Organization of the Education and Science and Technology Bureaus of the Ministry of Conimunications (IBRD 26869) MAPS China Transport System - IBRD 18708 Anhiui Province - IBRD 18345 Yunnan Province - 3RD 18347 Guangxi Province - IBRD 18349R Zheijiang Province - IBRD 18350 Sichuan Province - IBRD 18351 Jiangxi Province - IBRD 18352 Shandong Province - IBRD 18353 Shaanxi Province - IBRD 18554  - L - CIAINA HIGHWAY PROJECT Loan, Credit and Projecc Summarr Borrower: People's Republic of China Amount: US$72.6 million equivalenc comprising USS42.6 million equivaient IBRD and SDR 30.3 million (USS30 million equivalent) IDA. Terms: Loan: 20 years including 5 years of grace; standard variable interest rate. Credit: Standard. Project Description: As the Bank Group's first involvement in China's high- way subsector, the proposed project would address a number of needs by assisting Government in: (a) improving the quality of future construction works by modernizing highway design, and by updating and improving construction and material specifications; (b) increasing the cost-effectiveness of highway investments, by improving economic evaluation tech- niques for the evaluation and selection of road investments, and by supporting Government's new policy of moving to competitive bidding for public works; Cc) supporting a highway research program, with par- ticular emphasis on improving and strengthening the existing paved national road network, improving road capacity in congested areas and improving road safety; and (d) strengthening the capabilities of staff working in the highway subsector by carrying out a training program. In addition, the project would support the Government's program for completing the national road network by constructing or improving about 230 km out of a total of 4,000 km of missing links in the network. It would also support a national program of improving economic activity in rural areas through the construction or improvement of about 1,400 km of rural roads. There is some risk of delays in project implementation since this is the first time that competitive bidding will be used for highway construction in China, and these delays could increase costs. This risk would be reduced by appro- priate supervision in the early project stages.  Project Costs: Local Foreign Total (USs million)- Road construction 77.7 51.5 129.2 Design and research improvement 0.1 2.5 2.6 Road maintenance improvement - 1.8 1.8 Training program 2.1 2.1 Consultant services - 0.6 0.6 Base Cost 77.8 58.5 136.3 Physical Contingencies 7.8 5.9 13.7 Price Contingencies 11.2 8.2 19.4 Total Project Cost /a 96.8 72.6 169.4 Right-of-way cost 7.2 - 7.2 Total Financing Required 104.0 72.6 176.6 Financing Plan: IBRD/IDA - 72.6 72.6 Goverrment 104.0 - 104.0 Total Financing 104.0 72.6 176.6 Estimated Disbursement: Bank Group FY 1986 1987 1988 1989 1990 1991 - ----- (USs million) Annual 9 25 30 5 2 1.6 Cumulative 9 34 64 69 71 72.6 Economic Rate of Return: 20% /a Including taxes and duties of about US$16.8 million equivalent.  CHINA HIGHWAY PROJECT I. TRANSPORT SECTOR A. Economic Setting 1.01 Like other centrally planned economies, China's economy is very "transport intensive." In the same land area, U.S. freight traffic is only four and a half times the freight traffic of China with a GNP nine cimes as large. This intensity of transport is explained partly by: (a) China's economic structure, with the service sector accounting for a very low share of GNP; (b) the historical emphasis on heavy industry, requiring the movement of ores, steel, and other bulk products; and (c) the high level of energy con- sumption per unit of output in China's industry (energy use per unit of wDP is two and a half times that of other low-income developing countries). B. Transport System 1.02 China's transport system is heavily concentrated along che eastern seaboard. It comprises about 52,000 route-km of railways, 915,000 km of roads, 109,000 km of rivers navigable by barges of 100 tons or Larger, 15 major national ports and a large number of smaller provincial and municipal ports, and 48 major airports. The main transport corridors are Harbin-Dalian and Beijing-Shenyang in the northeast; Beijing-Tianjin-Shanghai along the east coast; Beijing-Wuhan-Guangzhou linking industrial areas in the northeast and southeast; and Shanghai-Wuhan-Chengdu which cuts across the east-west indus- trial areas. The first four corridors are served mainly by rail, while the last is served mainly by the Changjiang (the Yangtze River). The physical characteristics of the country have also encouraged coastal shipping services. Transport facilities are still very poor in the outlying regions of the north- west and the southwest, where mountainous topography makes investment costs relatively high. C. Traffic Trends 1.03 Domestic freight traffic in 1983 reached 1,007 billion ton-km, almost a fourteen-fold increase since 1952, or an average annual growth rate of almost 9X, systematically higher than the growth of domestic product. The elasticity of freight growth to overall economic growth is, however, less than that experienced by some other low-income countries and reflects the policy emphasis given to regional self-sufficiency rather than inter-regional trade. 1.04 Passenger traffic reached 310 billion passenger-km in 1983, a 12.5-fold increase since 1952 and an average annual growth rate above 8Z. Since 1978, growth has averaged 12% per annum, well above twice the overall rate of economic growth. It is likely that this growth would have been more rapid if it had not been constrained by the limited capacity, particularly of  - 2 - the railways, to offer more passenger services. Despite the rapid growth of passenger traffic in recent years, the mobility of peopie in China is still very low, reaching 270 passenger-km per capita in 1982 versus 785 in India, where GNP per capita is lower chan in China. Assuming an income elasticity of 1.5-1.7, well below the elasticities observed in India and BraziL, passenger traffic in China would reach about 1,500 billion passenger-km per year by the turn of the century, about five times current levels. 1.05 The amount of traffic carried by the various transport modes is becoming somewhat more balanced than in the past. Railways, which have his- torically handled the greatest share of freight and passenger traffic and which have shown substantial growth in recent years, are now beginning to show a decreased share in relative terms. Highway craffic has increased steadily, particularly with the recent development of rural areas which generated a vastly increased demand for short distance passenger travel. The share of railways in freight and passenger traffic measured in ton-km and vassenger-km decreased from 79% and 73%, respectively, in 1960 co 70Z and 59% in 1982. The traffic lost by the railways has apparently gone to highways whose share increased from 2% to 11% for freight traffic and 18% to 36% for passenger traffic over the same period (Tables 1.1 and 1.2). However, the predominance of railways is expected to continue for quite some time, especially for freight traffic. D. investments 1.06 Over the period 1949-79, some Y 110 billion, or 17% of all new investment coming under the heading "State Capital Construction," went to transport. In comparison to other countries, the annual investment in China's transport sector has been relatively low. At about 1.lZ of GNP, it is compar- able to the level in India, but is less than the USSR's 1.41, 2Z in Korea, and 3.3% in Brazil. China's low investment in the sector has made transport a bottleneck to economic development. Coal production, for example, has been curtailed to match available transport, rural areas are short of transport for both agriculture and local enterprises, and ports lack adequate handling tacilities for bulk fertilizer and grain. 1.07 In the past, the railways received nearly 70% of all investment in transport and communications, but starting in the late 1970s the share of investment in railways declined to about 50%, implying a redistribution of investment to other transport facilities. However, the highways subsector has not yet benefitted from this redistribution. Investment on highways has steadily decreased from 25% during 1963-65 to only 12% by the end of 1975%; since then, it has stabilized at around 15% of total transport investment. 1.08 In the coming decades, much larger investment will be needed in transport if bottlenecks to economic development are to be avoided. The pro- posed project would assist in this regard by supporting a major development program of national and rural road construction in order to facilitate both industrial and agricultural growth.  - 3 - E. Ports and Waterways 1.09 Port traffic increased rapidly in the period 1976-80 at an annual average growth rate of 11.3%, reflecting the economic opening of China to foreign trade. Domestic coastal shipping and inland water transport also increased substantially. As a result, ports became congested despite commend- able efforts to achieve higher productivity. A major effort to modernize ports started in the early 1970s and continues, with particular emphasis on container and bulk terminals, the latter mainly for coal. Mhe Bank Group's first involvement in the China transport sector was the Three Ports Project (Loan 2207-CHA) in 1982 which includes a coal berth at Huangpu and container berths at Huangpu, Shanghai and Tianjin. A second ports project is being prepared. F. Railways 1.10 China's railway system more than doubled in size between 1949 and 1983, when it totalled some 52,000 route-km, of which about 9,182 km were double or multiple tracked and some 2,650 km were electrified. Further double tracking and electrification are in progress. Some 75% of all locomotives are still steam-powered. Rail freight traffic has grown from about 39.4 bil- lion ton-km in 1950 to 665 billion ton-km in 1983, at an average rate of 9% p.a. Since 1978, freight traffic has grown less rapidly, averaging about 4.5% p.a. Ten commodities (coal, timber, iron and steel products, construction materials, petroleum, non-metallic ores, grain, metallic ores, fertilizer and cement, in that order) account for about 74% of the ton-km. Passenger traffic by rail has grown from about 21.2 billion pasenger-km in 1950 to 178.0 billion passenger-km in 1983, at an average annual rate of 6.7%. Passenger traffic has exploded since 1978, increasing 62% in five years and putting heavy demand on the existing equipment and line capacity. 1.11 Railway operations are very efficient and show a high level of track and equipment utilization. Traffic density is the second highest in the world after the USSR, averaging 11.9 million net ton-km per route-km for freight and 3.1 million passenger-km per route-km for passengers. Freight car turnaround time is extremely low (at three days) and further savings will not likely be achieved. The Bank Group's first involvement in China's railway sector was the China Railway I Project (Loan 2394-CHA) in 1984 which financed priority infrastructure investments on two lines as well as equipment, technical assis- tance and training for improving electric locomotive production. A second railway project has also been prepared. C. Highways 1.12 The development of the highway network has been relatively neglected compared to the other transport modes. The existing paved network is limited and the quality of road pavements is poor. With motor traffic on the national highways growing at a very high overall annual average rate of 15% since 1978, and in line with che emphasis of Government's new economic policy on the development of light industry and agriculture, and the intention to shift short-distance traffic (less than 200 miles) from the railways to the roads, the Government, in its Seventh Five-Year Development Plan (1986-90), proposes  - 4 - to increase investment to expand and improve the highway network. The highway subsector is described in detail in Chapter II. H. Transport Polices and Objectives for the 1980s 1.13 The transport development policy in the 1980s, unLike that of the past 30 years, has broadened to include not only the expansion of individual modes but also the establishment of links between each mode, the incorporation of new technology, and the improvement of institutions. With these objectives in mind, policy discussion has centered on: (a) capacity constraints for both freight and passenger traffic; (b) the appropriate economic role of the various modes and, in particular, the modal allocation of short-distance traffic; (c) management of the transport system, including policy, planning, coordination, and pricing; (d) the choice of technoLogies for both infrastruc- ture and vehicles; (e) energy conservacion; and (f) the training and develop- ment of staff to handle the above matters. II. HIGHWAY SUBSECTOR A. Network 2.01 Although China's road network is now the sixth largest in the world, it is still relatively underdeveloped. In 1983, the network comprised about 915,000 km, of which only 173,000 km or about 19Z had asphaltic concrete or bituminous coated macadam pavements. Most of these pavements are of poor quality, have exceeded their design life, and are deteriorating rapidly with the increased traffic. As a result, maintenance is becoming increasingly more difficult and costly. Under the project, assistance would be given to carry out a pavement evaluation analysis in order to identify strengthening, rehabi- litation and maintenance programs for the existing paved road network. Current road density of about 94 km per 1,000 sq km or 9.1 km per 10,000 popu- lation is also low, even though the network in 1983 was already 11 times larger than that in 1949. A comparison of China's road density with that of other countries is shown below: Road Network Density km/10,000 population km/1,000 sq km China (1981) 9.1 93.49 USSR (1979) 54.1 63.71 Korea (1980) 12.4 476.77 India (1979) 24.3 488.31 Japan (1980) 95.2 2947.95 Brazil (1980) 118.2 163.85 USA (1979) 280.2 673.24  - 5 - 2.02 For purposes of design and cecbnical specifications, the highway network is classified as Expressway, Class 1, 2, 3 and 4. The various classes are designed for the following average annual daily traffic (AADT) capacities; expressway for more than 25,000 vehicles; Class 1 for more than 5,000 vehicles; Class 2 for 2,000-5,000 vehicles; Class 3 for less than 2,000 vehicles; Class 4 roads, which mainly serve agriculture, for less than 200 vehicles. Table 2.1 shows the road-bed and pavement widths for the various classes of road. A road pavement specification classes paved roads into highest, high, medium or Low quality (Table 2.2). No expressways have yet been built and only some 2% of the total road length has been built co Class I and 2 standards; the network is thus generally of Low standard. 2.03 For administrative purposes, roads are classified as trunk, councy, rural (communal), and special purpose. Trunk roads, which are the responsi- bility of the Provincial Transport Departments (PTDs), consist of national and provincial roads. National roads serve as links between provincial capital cities, other imporcant cities, autonomous regions, ports and major transport terminals. They have been so designated regardless of their condition. Pro- vincial roads serve the provinces and cities, whose local governments are responsible for design and technical specifications. Most provincial roads have been built to standarc's lower than Class 2. County roads, the responsi- bility of the County Transport Departments (CTDs), are usually lower than Class 3. Most commune roads which are built and maintained by local authorities cannot meet even Class 4 road standards, and some road sections are impassable after severe rain. The special purpose roads, built exclusively for mining, forestry or other purposes, are constructed and main- tained by the main user. The length of road in each category is given below. Road Network by Administrative Category Road Length X of total classification (km) network Trunk National roads 108,000 12 Provincial roads 146,300 16 County 322,700 35 Commune 295,500 32 Special purpose 42,500 5 Total 915,000 100 2.04 The administrative classification of the network has become more systematic since 1978, indicating fundamental improvement in planning and management. One of the results has been the identification of some 4,000 km of national road sections which are either missing entirely or substandard and not currently motorable, and as such are considered to be missing road links.  The upgrading of the nationai -oad network, including the construction of missing road links, is among the top priorities of the Ministry of Commznications' v OC) road devejopment plan. which rhe 3ank Group will support under the oroposed projecc by helping to upgrade or construct about 230 km of the identified missing national road links. B. Traffic Growth and Characterist.cs 2.05 Although roads have carried a relatively small share of total traffic in China, the recent growth of motor traffic on the trunk highways has been very rapid. This has led to many problems related to the capacity and structural strength of many roads which were not designed for such traffic. Assuming current annual growth rates of 15Z for motor craffic and 14.5Z for the vehicle fleet, traffic volume will double in less than five years. In the vicinity of some major cities, the annual growth of traffic is now as high as 18-19Z and congestion is already a serious problem. 2.06 Traffic growth and congestion have resulted from several factors including the country's rapid economic growth and a general shift of short- haul transport from rail to road. Congestion, however, is mainlv due to mixed traffic, with slow-mtoving vehicles Like bicycles, tractors, and animal-drawn vehicles impeding traffic flows. Multipurpose tractors, in particular, cause congestion on trunk roads and will not be easily diverted to other roads in the short term. Assuming that the present traffic composition continues. many segments of the existing trunk road network will be saturated within the next five years. M0C is aware of this problem and will study it with assistance under the proposed project. The study would identify possible solutions such as road widening to separate various types of traffic; the addition of parallel restricted-access links in high-volume corridors; construction of bypasses around cities, towns and villages; and substitution of more small (1/2 to 1 ton) pickup trucks for slow-moving vehicles; or a combination of all these measures. Furthermore, future highway planning should seek to relieve traffic congestion. 2.0? Although the Government is aware of existing constraints, its approach to the traffic problem should be broadened to respond more fully to the needs at hand. In 1978, MOC introduced a thorough traffic counting system for some national and provincial roads. With 120 permanent counting stations on the national network and about 6,000 check points on the provincial road network, the count is on a 24-hour basis, three times a month, year-round and includes non-motorized vehicles. However, more origin-destination surveys are needed in order to obtain more accurate information for highway planning and design. C. The Vehicle Fleet 2.08 Most motor vehicles in China are domestically produced. Several features of this production are striking. First, unlike other developing countries, trucks outnumber cars by about nine to one. The yearly production of passenger cars is only one car per.. 84,000 population. This is about 114 that of India, 1/28 that of Peru, and 1/135 that of Chile (Table 2.3). Second, there are almost no light trucks (less than 2 ton capacity) and few  large crucks more than 8 ton capacity (Table 2.4). Finally, -zehicles have outmoded designs and verv low fuel efficiency, wich most trucks being gasoline rather than diesel powered. 2.09 Vehicle manufacturing efficiency is Low due to the small production scale of the large number of manufacturing plants which exist. Some 70 motor vehicle plants are reporced co be in operation, only a Eew of whnch can pro- duce between 15,000-70,000 vehicles per year and some serve only local demand and pr4duce less than 20 vehicles a year. Recognizing the inefficiencv of these operations, the Government is trying to rationalize the industry by integrating smaller factories into larger companias with each ractory special- izing in producing certain parts and components for a final assembly plant. The new integrated plants are expected to avoid duplication, increase special- ization, and make full use of production equipment so as to gain economies of scale. 2.10 In 1983 China produced some 140,000 trucks and was ranked tenth largest among civilian truck producers worldwide, yet this is still not sufficient for the huge and growing domestic demand. The entire stock of trucks is about 1.6 million units. Assuming a very optimistic 10-year depreciation period per vehicle, the present production would be bareLy enough to repLace those depreciated. With a 9Z arn.al increase in freight transport, a shortage of vehicles is inevitable, and tne need 'or trucks with capacities of over 8 tons and less than 2 tons is expected to be particularly acute. China has been regularly importing trucks but the numbers are small and fluctuating: 21,000 in 1981 and about 8,000 in 1982 and 1983. In the long run, there will also be a problem in planning for che complementary development of the vehicle fleet and the road network. The Bank Group has responded to this situation by initiating discussions on the need for a comprehensive review of the road transport industry in China which would '-xamine industry problems and recommend solutions. D. The Trucking Industry 2.11 Competition between public trucks operated by MOC and social trucks 1- is becoming increasingly evident. The share of social trucks in the total fleet grew very rapidly from 30X in 1949 to 86Z in 1979. However, HOC trucks still handle more than 25Z of freight traffic (Table 2.5). MOC's trucking industry comprises the Central rlucking Company (CTC) and the Provincial Trucking Companies (PTCs). CTC specializes in modern, large-volume transport, including a container trucking service. It handles longer distance inter-provincial traffic, while the PTCs handle the shorter hauls and inter- modal transfers. 2.12 Both the MOC and social trucks share problems of misallocation and mismanagement of truck and fuel resources which result in a simultaneous 1/ The term "social trucks" is loosely equivalent to "own account trucks.-' Social trucks are owned by factories, communes or any cooperative organization.  - 3- shortage of some trucks whiLe a large number of trucks are not fully used. This is -R more serious oroblem for the social trucks. iudging from their very low average Load factor of about 35Z compared to the 65Z average load factor for XOC trucks. Aside from empty back hauls, in some communes social trucks are in garages one third of the year because :he communes either Lack fuel to run ctem, or aave more trucks than necessary. Mhe review of che road trans- port industry (para. 2.10) would also examine -wavs to improve operational efficiency, including the potentiaL for using intermodal and road freight terminals. E. Vehicle Operating Costs, rucking Tariffs and Profit 2.13 TvpicaL -;ehicie operating costs (VOWCs) for trucks are show-n .n Table 2.6. .-or the most commonlv used 4-tcn truck, coszs range from 0.10 to 0.17 Yuan (US 3.5 zo 6 cents) per ton-km, derer.ding ia the design standards of the road. FueL (mostly gasoline) and vehicle maintenance account for over 40Z of total VOCs (Table 2.7). Gasoline which is rationed by coupons has been priced for manv years at an average of Y 800 per ton (USS282). The price varies regionally to reflect differences in transport and distribution costs; and has been well above world market price until the recent major fluctuations in exchange rates. Gasoline sold above the cGupon quota is around Yuan 1,000 per ton (US$352), substantially above the FOB Singapore price of US$303 per ton. 2.14 Each year, the Trucking Division of MOC issues a set of planned vehicle operating cost targets and official tariff rates which serve as guide- lines for trucking companies. The official tariff rates ranging from 0.18 to 0.20 Yuan per ton-km are about 17Z higher than the planned VOC target and in theory would ensure a 17% profit to trucking companies; however, actual VOCs are sometimes higher. Details of costs and tariffs are given in the project file. One reason for higher costs is topography and road conditions; another is the practice of trucking companies of keeping many old, inefficient trucks in their fleets which need to be maintained and overhauled at consideraable expense. F. Highway Administration 2.15 Highways as well as inland waterways and coastal shipping are under the HOC which is directly under the State Council. MOC has 11 bureaus in four groups under four vice-ministers in charge of roads and road transport, inland waterways and coastal transport, planning and budgeting, and science and technology (Chart 1). One of the bureaus is the Highway Bureau (HB), with 9 divisions. The MOC also controls 13 highway institutes and companies and, indirectly, the Provincial and County Highway Bureaus in the Provincial and County Transport Departments (Charts 2, 3 and 4). 2.16 The HB gives general policy direction and support to the Provincial Highway Bureaus (PHMs). It issues nationwide policies and regulations, speci- fying construction standards, and provides technical support to the PHBs and  -9- through them to the County Highway Bureaus (cHBs). It also controls the cen- tral pool of construction equipment and manpower which can be mobilized to assist some provincial work if necessary, but does not itself cake the initiative in constructing major infrastructure. The PHBs have financial independence and carry out road planning, construction, maintenance and administration of their roads in line with HB's general policy guidelines; they also oversee the work of the CHBs. Although HB determines overall road design standards, field engineering designs are normally prepared by the Design Institutes of the PHBs. Construction and supervision of works are also done at the PHB level. 2.17 After 1979, in an effort to unify the planning and development of the national road network, the HB became more active in regulacing the PHB's construction and financial decisions. Nevertheless, although the "national road" concept was incroduced for the first time. there was no change in the responsibility for the administration, mainEenance, or financing of these roads. The PHBs still construct, maintain and administer the national roads in their provinces using their provinciaL budgets. Only for some very large projects or for major periodic maintenance would HB plan, coustruct, and share part of the financial burden. G. Planning, Budgeting, and Financing 2.18 MOC and the State Planning Commission are responsible for overall planning of the country's road network, but are directly involved onLy in major projects. Approved projects are passed on to lower level authorities for execution. Highway planning shows three main weaknesses: the planning of roads in relation to other transport modes is not being done; selection of road investments has not been based on economic criteria; and design standards recommended by HB are frequently not followed by the provincial implementing agencies due to shortages of funds. While the application of economic criteria for road investments is now becoming an accepted practice following Bank involvement in the sector, the other two problems persist. The present planning and budgeting system is decentralized enough to promote local initia- tives in planning provincial transport development with the efficient use of local revenues. However, under this system it is difficult to maintain road construction standards throughout the country because quality and design frequently reflect availability of funds. For provincial and commune roads, the formal planning bodies, i.e., the PTDs and PHBs, have to take into account three factors: the present condition of the highway system, MIfC's long-term highway development plan, and projected maintenance fee revenues. Budgetary allocation for roads by the provincial authorities is realistic and adjusted to the predicted road maintenance fee revenues, but recommended standards may be reduced in line with local resources. The question of financing construc- tion will be addressed within the general context of pricing in the transport sector, and specifically through road user charges in the subsector. Under the proposed project, economic criteria have been applied in the selection of road investments. The problem of the lack of intermodal planning would be addressed in the future. 2.19 Road Financing. There are two major sources of road financing: the Capital Construction Investment Budget from the central government and the  - iO - road maincenance *ee coLlecced by che orovincial governments. Funding from the Capital Construction Investment 3udget is in the form of a grant or loan depending on whether the Dro2ect is considered a national investment. It is used only for new investment projects, not for road maintenance. The approved .unds can be withdrawn from the People's Construction Bank which also super- vises the use of funds. The amount of Capital Investment funds allocated for highways in 1981 amounted to Y 823 miLlion. Total revenues from road main- cenance fees amounted to Y 4.0 billion in 1983, 30% of which goes directly for road maintenance expenditures and 20% for expenditures on workshops, machin- ery, equipment, selected road improvements, research, training, administration and management. On this basis, the direct expenditures for the maintenance of the road network would average about Y 3,500 per kilometer which can be considered high. 2.20 The road maintenance fee is imposed on both M1OC and social trucks, but using a different rate system. The road maintenance fee for .MOC trucks is a fixed proportion (10-15Z) of total revenues, but for social trucks, it is a lump-sum fee charged on the vehicle loading capacity (Y 70-100/capacity- ton/month). With the differenc systems, MOC trucks cend co pay a lower tax than do social trucks of comparable size. The road maintenance fee rate is especially costly for the many social trucks which are underused. The justi- fication for the two types of road maintenance fee is unc l" r, particuLarLy since a uniform pricing system exists in most other areas.- The present fee- charging system should therefore be reviewed to determine whether it is an effective tool for use in achieving specific policy targets, that is, whether there is any allocation or distribution rationale behind the non-uniform fee, and what are the economic effects of this fee-charging system. This question will be addressed as part of the Bank Group's dialogue with Government. H. Engineering 2.21 The engineering of road and bridge projects is done by the Planning and Design Institutes at MOC's central, provincial, prefecture and county levels. Major road and bridge projects are done by the HOC Highway Planning and Design Institute (HPDI), by the First and Second Survey and Design Institutes located at Xian and Wuhan respectively and by Provincial design institutes. There is no fixed arrangement for allocation of work to the MOC Institutes based on geographical or technical considerations, the criterion being the current work load of each Institute. The Highway Scientific Research Institute (HSRI) provides support and advice on materials, etc., as needed. Annex 1 gives a description of the Institutes. The design standards (Table 2.1) and guidelines for engineering design are set by HOC. Expatriate consultants are used only for specialized studies and then in joint venture with the HPDI. Since the workload of the HPDI is expanding in line with the increase in traffic on the highway network, the design capacity of the Institute would be strengthened under the project through the provision of 1/ Reasons given by HOC for the lump-sum fee charged on social trucks are (a) the difficulty in getting accurate figures on revenues for a revenue- based fee and (b) a lump-sum fee was expected to encourage efficiency.  - 11 - computer-aided design and engineering equipment and site investigation equipment and through scaff training. I. Construction and Maintenance 2.22 Construccion of roads and bridges was, in the past, normally done as a force account operation by construction bureaus attached to MOC headquarters or to the PTDs and CTDs. The major contractor unit, the China Road and Bridge Engineeri-n Companv attached to the MOC, has operated as a contractor in the Xiddle East and Africa. Formerly caLled the China Highway Construction Company for Foreign Countries, when it undertook projects financed by China under its aid program, the Company in its new capacity as an incernational contractor now executes a wide variety of civil works projects abroad. Although -well staffed wich professional engineers and technicians. -:ae Company Lacks staff experienced in international contracting saw, contract management, and bid preparation. 2.23 In May 1984 the State Council authorized the incroduction of competitive bidding for civil works projects and the establishmenc of con- struction companies from the existing pubLic construction bureaus -o carry out works on national and provincial roads. The MOC has proposed the use of competitive bidding - both incernational competitive bidding (ICB) and local competitive bidding (LCB) - for highways to be financed under the proposed project. To support the Government's move to competitive bidding on highways, the Bank Group staff and an expert on bid documentation are helping prepare the documents needed for ICB and LCB, and expertise would also be financed under the project to help MOC supervise works and ensure quality control. 2.24 National and provincial roads are well maintained by the PTDs. However, maintenance of paved roads is becoming more costly, ranging between Y 3,500 and Y 5,000 per kilometer, due to their poor quality and the rapid traffic growth. The proposed study of the paved road network (para. 2.01) would identify strengthening and rehabilitation needs, and thus help to lower future maintenance costs. Maintenance of county roads by the CTDs is adequate in scope and well organized, but due to the labor-intensive methods used, roads are surfaced with large size, hand-crushed stones providing poor riding surfaces. Equipment would be provided to correct this problem in the project areas. J. Road Safety 2.25 Although the available ctatistics on road traffic accidents are neither comprehensive nor reliable, it is evident that the situation regarding road safety is far from satisfactory. The low geometric and quality standards of most roads combined with the mix of slow and fast moving traffic are not conducive to road safety. It is proposed to strengthen road safety research in China by having the ESRI carry out a study to identify the causes of road traffic accidents. The study would cover (a) a review of the existing system of reporting, recording and analyzing accident statistics; (b) recommendations on improved traffic accident data collection, recording and analysis; and (c) identification of a program for the reduction of traffic accidents.  - 12 - K. Staff Training 2.26 Existing staff of che MOC and the PTDs are in general professionally competent, but many have not been exposed to new technology and therefore often use outmoded work methods and equipment. Preliminary estimates indicate that a substantial number of engineers, assistant engineers and technicians would be required each year by MOC to meet the proposed targets in the Seventh Five-Year Development Plan (1986-90). Following the difficult period of the Late 1960s and early 1970s, technical manpower planning and assessment of related training needs for the highway subsector have only recently been resumed. There is clearly an urgent need to strengthen and expand the output of formal education and the ongoing training programs to increase and upgrade the number of technical staff required to meet the demand for trained person- nel during the PLan period. 2.27 The MOC's Education Bureau has three major divisions, each one responsible for a specific aspect of staff deveLopment, as follows: (a) Training Division. responsible for training courses to upgrade administrative staff, engineers, assistant engineers, technicians and skilled and semi- skilled workers; (b) Education Division (technical/vocational level), respon- sibLe for education and training activities carried out by some 40 technical schools for mid-level technicians and some 100 vocational schools for skilled workers; and (c) Education Division (engineering level), responsible for three highway institutes, one transportation school, six maritime, waterway, and navigation schools, and one medical college (Chart 4). In addition, the PTDs have their own Provincial Transportation Technical Schools and district training centers and carry out their share of education and training programs in accordance with general guidelines issued by MOC's Education Bureau. Most MOC and PTD institutes, schools and centers lack the physical capacity to meet the increasing manpower demand, have scarce and outmoded training equipment, and need to have most of their curricula upgraded to reflect modern technology in the various highway disciplines. The training component included in the proposed project would therefore assist MOC to correct these deficiencies, and to modernize and raise staff professional standards in the highway subsector. L. Highway Development: Policy and Objectives for the 1980s 2.28 Government policy for the highway subsector in the 1980s has a joint focus on quality improvement and expansion of the network to meet increasing demand. This differs from the policy of the past 30 years which sacrificed road quality for road length and left China with a Legacy of substandard roads unable to sustain the recent increase in traffic resulting from rapid economic growth. The MOC now realizes that programs for road network expansion and rehabilitation must proceed simultaneously, supported by quality improvement programs for construction, construction materials, road transport equipment, and road transport industry management. 2.29 The Bank Group's strategy for the subsector is to support Govern- ment's twin objectives for highways by assisting the process of network expan- sion while helping to direct development policy toward greater quality improvement. This support would be within the framework of longer-term objectives concerned with increasing efficiency and cost-effectiveness in  - 13 - meeting the increased transporc demand in the subsecror. These objectives would address specific poiicy, inscttutional and technciogical areas such as: improved economic evaluation techniques for the selection of road invest- ments; improved intermoda. ?Lanninx; transport tariff and road user taxation systems; increased efficiency in -he road transport industry; improved effi- ciency in conscruction by suDporcing Government's policy ot compezitive bidding and deveLopment of the local concraccing industry; staff training; modernization of highway design and updating and improving construction and material specifications; and supportine highway research. The Bank Group has agreed with Government that a number or tnese objectives would be dealt with under the proposed project. Action on the remaining obieccives will be decided in the course of ongoing discussions with Government relating to the Bank's economic and sector work. III. THE PROJECT A. Project Formulation and Preparation 3.01 Preliminary discussions with Government on the highway subsector began i7 1980 during preparation of the Bank's first Economic Repoi.: on China.2l Following further discussion, MOC requested Bank Group assistance to finance a highway project, which was identified in June 1983. A Bank Group preappraisal mission visited China in May 1984 and the project was appraised in October/November 1984. The project was prepared by the Ministry of Commu- nications (MOC) and the Highway Bureaus of the Provincial and County Transport Departments. B. Project Objectives and Scope 3.02 The proposed project would support the Government's policy and institutional objectives for the subsector by: (a) improving che quality of future construction works by i) modernizing highway design and (ii) updating and improving construction and material specifications; (b) increasing the cost-effectiveness of highway investments by (i) improving economic evaluation techniques for the evaluation and selection of road investments and (ii) supporting Government's new policy of moving to competitive bidding for public works; (c) supporting a highway research program, with particular emphasis on improving and strengthening the existing paved national road network, improving road capacity in congested areas and improving road safety; and 2/ Report No. 3391-CHA, China: Socialist Economic Development, June 1, 1981.  - 14 - (d) strengthening the caDabilities of staff working in the highway subsector by carrying out a training program. 3.03 To accomplish these objectives, the projecE would include: (a) construction or improvement of about 230 km of national roads; (b) construction or improvement of about 1,400 km of rural roads; (c) provision of computer-aided design and engineering equipment and site investigation and related laboratory equipment for the Highway Planning and Design Institute (HPDI) in order to modernize future highway designs; (d) provision of laboratory testing and other research-related equipment for the Highway Scientific Research Institute (HSRI) in support of their research program, including studies on the strengthening of the paved national road network, road congestion, and road safety; (e) training of staff from MOC's Highway Bureau, the Provincial Highway Bureaus (PHBs), the HPDI and the HSRI; (f) consultants' services and technical assistance to help the MOC, the PHBs and the Highway Institutes in the supervision and quality controL of road construction, and for studies to be done under the research program and for seminars and workshops as needed; and (g) purchase of basic road maintenance equipment for selected provinces. Other Government development objectives would also be supported by the con- struction works to be carried out under the project. These works would provide important interprovincial road links which would allow increased and more efficient economic activity in and between the provinces. In addition, the improvement of some rural roads would support the Government's policy of promoting economic development in rural areas, where agriculture, the country's primary economic activity, still employs 72% of the country's work force. 3.04 Project roads were selected on the basis of economic criteria and economic evaluation procedures which have been newly introduced into China and which Covernment intends to follow in the future to ensure the cost-effective- ness of investments. Project road construction, both of the national and rural networks, has been kept modest relative to actual needs and is consid- ered to be well within the capacity of the implementing agencies. C. Detailed Features 3.05 The Construction or Improvement of National Roads. The 230 km of national roads to be constructed or improved under the project comprise seven road sections located in six provinces (see Maps). The roads, road length, design standard, estimated cost, traffic and provincial distribution are shown  - 15 - in Table 3.1. Estimated present traffic is relatively heavy and ranges from 264 AADT to 3,064 AADT. One road has been designed to Class 1 standards, two roads to Class 2 and the remainder to Class 3; these design scandards are appropriate. Assurances were obtained from Government that road sections to be constructed/improved and the related design standards would be as agreed during negotiations. Existing alignments will be used to the extent compati- ble with sound engineering and road safety. The significance of each project road is described in Annex 2 and a profile of the project provinces is given in Annex 3. 3.06 The roads, which were selected by the Provincial Transport Depart- ments (PTDs) as che missing Links in the national necwork in most need of urgent construction or improvement, have been the subject of derailed Feasi- bility studies, also prepared by the PTDs with assistance from Bank Group staff. Detailed engineering has been completed and the contract documents for ICB and LCB are being prepared by MOC's Highway Bureau with the guidance of Bank Group staff and the help of expatriate consultants financed under Technical Cooperation Credit 1412-CHA. 3.07 The Construction or Improvement of Rural (County) Roads. The 1,400 km of rural roads to be constructed or improved under the project con- sist of 59 road sections in six provinces (see Maps). The roads, road length, design standard, estimated cost, and provincial distribution are shown in Table 3.2. The roads have been designed to Class 3 and Class 4 standards which are appropriate. Assurances were obtained from Government that the road sections to be constructed/improved and their design standards would be as agreed during negotiations. Existing alignments and bridges will be used to the maximum extent to reduce costs. 3.08 Feasibility studies and designs for the roads have been completed. More simplified documentation suited to such roads, comprising longitudinal profiles, typical cross-sections and priced bills of major quantities have been prepared. The rural roads have been selected for improvement by the County Transport Departments (CTDs) which have also prepared the feasibility studies and detailed designs with the guidance of PTDs, MOC's Highway Bureau, and Bank Group staff. 3.09 Assistance to the Highway Planning and Design Institute (HPDI). GovernmentTs current emphasis on the expansion and improvement of the highway network has involved the Institute in planning and supervising the designs of highways throughout China, but its performance is hindered by outmoded equip- ment and a lack of trained staff. To help the Institute carry out this increasingly heavy work program more efficiently and more cost-effectively, staff would be trained under the project (para. 3.12), and the Institute's equipment would be upgraded and modernized. Computer-aided design and engin- eering (CADE) and other computer equipment as well as equipment for site investigations and materials testing would be financed under the project. In addition, to improve management, an engineering data bank including a national roads condition inventory would be computerized, and computerized management information systems introduced.  - 6 - 3.10 Assistance to the wijarwav Scientific Research Institute (HSRI). The researcn program of the nsti-:ute is described in Annex 1. To support this program. soils and materials :esring equipmenc would be financed under the project. This equipment combined -with the training ot staff (para. 3.12) would enable the Institute :o carry out its program and fulfill its task of being the major scientific and technoLogical research base in China for highway transportation. 3.11 Assistance in the form of equipment and expatriate expertise would also be provided for che olilowing Ehree studies to be carried out bv the Institute: a studv to assess :re methodoLogy for pavement strength evaluation to identify the improvemenc and strengthening needs of the existing paved national roads (para. 2.01); studies for improving road capacity in congested areas near cities (para. 2.06) and road safety (para. 2.25). Assurances were obtained from Government during negotiations that -he studies wouid be carried out under _erms of reference acceptable to the Bank/Association, beginning by July i, :986 and compLeted by December 31, 1987; and that Government and the Bank/Association would exchange views on the findings of the studies. 3.12 Staff Training. The proposed three-year training program (1986- 1988) aims at upgrading and modernizing the skills of the technical staff in the various fields concerned with the highway subsector. The program has a two-fold approach and would: (a) improve the proficiency of engineers and other staff by sending abroad selected personnel to attend academic and practical training courses as well as relevant international conferences; and (b) strengthen the capacity of MOC's Highway Institutes as well as the Provincial Transportation Technical Schools by: (i) purchasing laboratory, computer and photogrammetry equipment, training aids and essential technical books and publications; (ii) training abroad of professors/instructors; and (iii) inviting foreign academic experts for short visits to help upgrade curricula. 3.13 As part of the program, about 65 overseas fellowships would be needed in transportation planning, soils and materials engineering, aerial photogrammetry, economic analysis, financial management and accounting, highway maintenance and equipment management, construction management and supervision including quality control, bridge hydrology, concrete technology and asphalt concrete and asphaltic cement. It is expected that on their return, the trainees would play a major role in the development and management of the Chinese road system and in the transfer of updated technology to other highway staff. The HB would have overall responsibility for implementation of the training component at the national level since the training program is directly concerned with the highway subsector. The PTDs would be directly responsible for day-to-day training activities in the provinces. This train- ing component, although relatively small compared to MOC's staff development needs, is an essential first step toward a long-term process of modernization of the country's highway subsector. Detailed costs of the training program are given in Table 3.3. Assurances were obtained from Government during  - 7 - negotiations that the training would be carried out according to a program agreed with the Bank/Association. 3.14 Consultant Services. A total of about 50 man-months of expatriate consultant expertise is estimated to be needed under the proposed project. Local expertise available in the various Institutes in the sector would be used to the extent possible. Expatriate help would be sought only for those areas of advanced technology where local expertise is lacking. Such areas include the use of advanced instrumentation for measuring road deterioration, analysis of traffic flows, transport economics, etc. Supervision of national road construction or improvement works will be done mainlv bv local staff sup- ported by a number of key expatriates; about 20 man-monchs of foreign exper- tise is estimated to be needed to help set up and implement che crganizational systems and procedures for effective quality control on site. About 15 man- months of expatriate expertise would be needed for studies and the research program to be done by the HSRI (para. 3.11) and about another i5 man-months for help on seminars and workshops on specialized topics related to the high- way subsector. During negotiations, agreement was reached with Government on terms of reference for the consulting services. All consultants wouLd be employed under terms and conditions acceptable to the Bank/Association and in accordance with Bank Group Guidelines. 3.15 Road Maintenance Equipment. Maintenance of the existing rural roads is difficult because the roads are mostly surfaced with uncompacted large size hand-crushed stone, which gives a very rough riding surface. The level of service of these roads could be greatly improved with the application of fine crushed material compacted to a dense layer. Under the project, some mainte- nance equipment, such as motor graders, mobile crushers and smooth-wheel rollers, would be provided to the CTDs for the maintenance of these roads and the rural roads to be constructed or improved under the project. D. Cost Estimates 3.16 The total project cost including physical and price contingencies but excluding right-of-way costs is estimated at about Y 450.4 million, or US$169.4 million equivalent, with a foreign exchange component of US$72.6 mil- lion or about 43%. Project costs are shown on page 18. All base costs are estimated in March 1985 prices. Physical contingencies are calculated at 10% of base cost estimates and applied to all components. For the calculation of price contingencies, it is assumed that exchange rate adjustments will, on average, be made to maintain "purchasing power parity" during the project implementation period. On this basis, price escalation for both foreign and local costs, (a) when expressed in U.S. dollars, is based on expected inter- national annual inflation rates of 5% in 1985, 7.5% in 1986 and 8% in 1987- 1988; (b) when expressed in Yuan, is based on expected domestic inflation of 3% p.a. in 1985-1989. Taxes and duties on construction are estimated at US$16.8 million equivalent. 3.17 The costs of civil works on national and-rural roads have been estimated by the PTDs and CTDs and are based on work quantities calculated from detailed designs. Unit prices for the work items have been computed on the basis of MOC's standard manuals for labor and equipment productivity and  PROJECT COST SUMMARY /a Total Total % of X of Local Foreign Total Local Foreign Total foreign total Project element ------- (Yuan'000) -- - ------ (US$'000) ------- exchange base costs National Road Construction Yancheng-Gaotang (53 km) 16,657 16,657 33,314 5,865 5,865 11,730 50 9 Xian-Sanyuan (35 km) 34,073 34,073 68,147 11,998 11,998 23,995 50 17 Other roads (138 km) 30,233 20,155 50,388 10,645 7,097 17,742 40 13 Rural road construction 139,751 75,251 215,002 49,208 26,497 75,705 35 55 Equipment HPDI 311 3,149 3,460 110 1,109 1,218 91 1 HSRI - 3,900 3,900 - 1,373 1,373 100 1 Training - 6,049 6,049 - 2,130 2,130 100 2 Consultant oervices - 1,778 1,778 - 626 626 100 1 Road maintenance equipment - 5,200 5,200 - 1,831 1,831 100 1 Total Base Costs 221,026 166,212 387,238 77,826 58,525 136,351 43 100 Physical contingencies 22,103 16,621 38,724 7,783 5,853 13,635 43 Price contingencies 14,156 10,265 24,421 11,264 8,188 19,452 42 Total 257,284 193,098 450,382 96,873 72,565 169,438 43 Right-of-way costs 20,269 - 20,269 7,137 - 7,137 Total Financing Required 277,553 193,098 470,651 104,010 72,565 176,575 41 /a Columns may not add up due to rounding.  - 19 - the related annualLy-updated costs, combined with the current costs of materials; the unit prices include adequate allowances for equipment deprecia- tion, overheads and profit for contract work. The cost estimates were reviewed at appraisal and found satisfactory. 3.18 The base cost per kilometer of the Class 1, dual two-lane Xian- Sanyuan national road is about US$680,000, which is acceptable since it includes about 2,000 meters of major bridge works and an underpass to the railway. The base Post per kilometer for the remaining two-lane nationaL roads is about US$155,000, and about US$55,000 for the rural roads. The foreign exchange component is estimated at about 50Z for foreign contractors, and about 40% for domestic contracEors. For the force account work on ruraL roads, the foreign exchange component is estimated at about 35% which reflects the more labor-intensive construction method to be used. 3.19 The costs of computer and laboratory equipment are based on prices quoted by manufacturers outside China. A notional amount has been included for the road maintenance equipi..:.at pending finalization of a list of the PTDs' needs. The costs of the training program are shown in Table 3.3. E. Financing 3.20 The Bank loan of US$42.6 million and an IDA credit of SDR 30.3 mil- lion (US$30 million equivalent) would finance about 43Z of total project costs, or about 1002 of the foreign exchange costs. The Government would provide about US$104.0 million equivalent to meet the remaining capital costs of the project. Details of project financing are shown in the following table:  - 20 - FINANCING PLAN Government (MOC and PTDs) Rank/IDA Total (USs million) National Road Construction - 28.5 25.0 53.5 Rural Road Construction - 49.2 26.5 75.7 Equipment for HPDI and HSRI 0.1 - 2.5 2.6 Road Haintenance Equipment - - 1.8 1.8 Training - 2.1 2.1 Consultant Services - - 0.6 0.6 Subtotal 0.1 77.7 58.5 136.3 Contingencies - 19.0 14.1 33.1 Right-of-way costs - 7.2 - 7.2 Total 0.1 103.9 72.6 176.6 F. Implementation 3.21 MOC would have over'!.l responsibility for implementing the proj- ect. National roads ;;;,Id be constructed or improved under unit priced con- tracts and supervised by the PTDs, which are part of the provincial govern- ments but under HOC leadership. Construction Bureaus presently attached to the MOC or PTDs which have satisfactory experience on road works and adequate resources are being set up as financially and legally independent construction companies to bid on the national road contracts; these companies will form the basis of the new contracting industry in China. PTDs will supervise the con- tracts through a project management unit to be established in each province; each unit will be comprised of a proiect manager, engineer, supervisor and other staff as needed. Construction Gf nationaL roads is expected to start in early 1986 and be completed in about two and a half years. 3.22 Construction or improvement of rural roads (US$94.1 million) would be carried out under force account by CTD construction units for reasons of efficiency. The CTD construction units are well organized and experienced, and have adequate resources and ready access to local materials and local labor, enabling them to start work without delay. Because the works are gen- erally small in scope and are located in remote mountainous areas, inter- national contractors are unlikely to be interested, nor would the preparation  - 21 - of detailed engineering and bid documents to ICB standards be cost-effective for such low standard roads. Similarly, for domestic contracting, there are at present virtualiy no Local contractors for such work in these areas, and the construction companies neWLv-tormed for purposes or national and provin- cial road construccion and upgrading (para. 2.23) mould face substantial mobilization costs, given the tack of familiarity with these areas and their remoteness. The const.uccion units would be directly supervised by the CTDs, but under the overall control of the PTD project management units. The con- struction of rural roads is expected co start by late 1985 and be completed within two years. Funding for ruraL roads under the project will come from the Bank Group, and provincial and local sources. No centrai government resources are anticipated. Local contributions would cover :he costs of 'ocal labor and mate-ials, and compensation within the right-of-way. The scattered location of project rural road construction will require frequent and care- fully planned supervision by Bank staff. Supervision wilL be assisted by quarterly reports an project physical and financial progress. which wilL be base4 on agreed priced Bills of Quantities ior each rural road subproject (para. 3.30) and submitted to the Bank by MOC (para. 3.36). The reports, combined with selective site visics to the various provinces during super- vision missions, are expected to provide a satisfactory means of monitoring progress. 3.23 Road works included in the project represent the total road programs of the various provincial and county governments involved during th2 project period. Under the pr,ject, specialized expertise would be made available to both the provincial and county authorities to help them set up suitable organizations with appropriate systems and procedures to control the quality of work. 3.24 The PTDs are part of the provincial governments, but professionally under the leadership and guidance of MOC. Decisions will be required at the provincial level for project implementation by the PTDs, including allocation of funds and road maintenance charge revenues. Consequently, assurances were obtained from Government during negotiations that MOC and the project pro- vinces viil enter into a Project Implementation Agreement setting out their respective responsibilities in project implementation. While the Bank Group would not be a party to this Agreement, signing of the Project Implementation Agreement on terms and conditions satisfactory to the Bank/Association would be a condition of loan/credit effectiveness, and non-compliance with its pro- visions could be grounds for default under the loan/credit agreement. 3.25 MOC's Highway Bureau would be responsible for implementation of the training component, which would start in late 1985 and continue until end of 1988. The HSRI would continue its research program during the project period and would carry out the three project studies during 1986-87. 3.26 The MOC would be responsible for selecting consultants to provide the expertise on supervision and quality con_rol of civil works; the experts are expected to start work in early 1986 in order to help establish the super- visory organization prior to start of civil works. The expatriate experts needed for the HSRI studies and research program would be recruited as needed from early 1986 and during the period of the studies. It is expected that the procurement of all research equipment would start in early 1986 and be com- pleted by late 1986.  - 22 - 3.27 An implementation schedule for the proposed project (Annex 4) was agreed with Government during negotiations. C. Procurement 3.28 Procurement under the Droject would be carried out as shown in the following table. Procurement Method Total Project Element ICB LCB Other Cosc (US$ million) Civil Works National Roads 44.4 22.0 - 66.4 (20.5) (10.2) - (30.7) RuraL Roads - - 94.1 94.1 (33.1) (33.1) Equipment 2.3 3.2 5.5 (2.3) (3.1) (5.4) Training and Consultants - - 3.4 3.4 (3.4) (3.4) Total 46.7 22.0 100.7 169.4 (22.8) (10.2) (39.6) (72.6) Note: Figures in parentheses are the respective amounts financed by the Sank Group. All figures include estimated physical and price contingencies. 3.29 Construction of national roads under the project will be carried out under international and local competitive bidding (ICB and LCB). The International Tendering Corporation of the China National Technical Import Corporation (CNTIC), in conjunction with MOC, will organize the ICB. HOC and the provinces will organize the LCB. Local bidders wiLl be required to be finAncially and legally autonomous. Two major national road contracts (US$44.4 million) will be carried out through contracts awarded on the basis of ICB by prequalified firms in accordance with Bank Group Guidelines. The other national roads (US$22.0 million), which are unlikely to attract inter- national contractors because of their dispersed location and size, would be awarded on the basis of LCB, the documentation for which is being prepared (para. 3.06). 3.30 Construction or improvement of rural roads (US$94.1 million) would be carried out under force account (para. 3.22). Currently, such construction is done under a Guarantee Letter from the provincial government to MOC and the  - 23 - Ministry of Finance (MOF), ensuring -hat the funds wiil be made a'iailable from budget, Loan or grant sources for mhe roads in question, based on a guarantee from the CTD to the PMD. In the future and under the proposed project, the PTDs would sign priced agreements with the county governments for the con- struction of works. During negotiations agreement was reached with Government on a priced Bill of Quantities for each rural road subproject in order co estabLish a firm and agreed cost. 3.31 Road maintenance equipment (US$2.3 million) would be procured by ICB, but as the equipment to be procured for the HPDI and fSRI (USS1.4 million and US$1.7 million, respectively) and for the training component is highiv specialized, Limited international bidding from at least Ehree suppliers wouLd be used. However, items or groups of items estimated co cost Less than the equivalent of US$50,000 per contract, up co an aggregate amount not to exceed the equivalent of USS300,000, may be procured on the basis of a comparison of price quotations solicited from at least three suppliers eligible under the GuideLines, and in accordance with procedures acceptable to the Bank/ Association. CNTIC or another authorized government agency would be responsible for alL equipment procurement through ICB. 3.32 Under ICB, qualifying domestic contractors and manufacturers would be permitted to participate and would be eligible for a margin of preference of 7PZ for civil works and 15% for goods, or the prevailing customs duties, whichever is lower, in the comparison of bids. Since this would be the first time that contracts would be awarded on the basis of competitive bidding in the highway subsector in China, all contracts for civil -works and equipment would be subject to prior review and agreement by the Bank Group. H. Disbursements 3.33 Disbursement of the Bank loan/IDA credit would be as follows: Ca) 46% of the total cost of national road construction; Cb) 35% of the total cost of rural rcad construction; (c) 100% of foreign expenditures for directly imported equipment or 100% of local expenditures (ex-factory) and 75% of local expenditures for other items locally procured; (d) 100Z of the costs of foreign consulting services and local experts; and (e) 100% of the costs of overseas training of staff. To facilitate disbursement, a Special Account would be opened in US dollars in a Bank acceptable to the Bank Group with an initial deposit of the US dollar equivalent of SDR 10.0 million, which represents the estimated maximum expenditures for a four-month period. Applications for replenishment of the Special Account would be submitted quarterly or whenever the Special Account is drawn down to 50Z of its initial deposit, whichever comes first. The project would be compLeted by June 30, 1990. Loan/credit closing is expected  - 24 - by June 30, 1991. A schedule of estimated disbursements is given in TabLe 3.4 which also shows the Regional highway project disbursement profile. Disburse- ments under the prooosed proiect are estimated to be completed sLizhcly earLier tian .he regional -rofiLe shows. Since China's economv 's arcwing steadily, revenue accruaL. is expected to remain strong during the =rolect period and :herefore delays due to budgetary constrainrs are not an::Ci-ated. A'thougn -he new competitive bidding procurement nehnod is being introduced for the first time in China Eor h.ighways and could cause problems. anv delavs are expecced to be minimizea bV appropriate 3ank GrouD supervisiGn and -ssis- tance duri g the earlv sCage or the -rojecc. 3.34 roanicredit disbursements would be made against priced cznEraccs for national road civii works and ecuipment. and priced agreemencs tor :-e =3rce account Cl';ii. works on rurai roads. Interim certification of cii vorks compLeted and costed at unit rates _n the contracts and agreements Wu;L be done by the Provincial and County Highway Bureaus and certified by -"e HOC. Loan/credit disbursements for training overseas will be made against -he actual costs of travel, subsistence and tuition or training fees. Disburse- ments against statements of expenditure will be needed for the training component and for goods or services costing less than US$50,000. Documents to support statements of expenditure would not be submitted to the Bank Group, but would be retained by the HOC and made available for review by Bank supervision missions. I. Auditing, Reporting and Monitoring 3.35 A State Auditing Agency (SAA) has been established to carry out detailed audits of government agency accounts. Assurances were obtained from Government during negotiations that the accounts of project-related expendi- tures would be audited by independent auditors acceptable to the Bank/ Association, and that audit reports would be sent to the Bank Group for review within six months of the close of each fiscal year. The Bank Group currently accepts SAA audits for this purpose. 3.36 Assurances were obtained from Government during negotiations that project progress reports would be submitted to the Bank Group quarterly by MOC, based on the Project Monitoring Indices shown in Annex 5. Assurances were also obtained on the preparation and submission by Government of a Project Completion Report not later than six months after the loanlcredit closing date. J. Environmental Effects 3.37 The road improvements should cause no significant environmental problems. By following existing alignments to the extent technically and economically feasible, the acquisition of scarce agricultural land will be minimized. The improved alignment and reduction of existing hazardous dust and mud by paving would improve road safety.  - 25 - IV. ECONOMIC EVALUATION A. General 4.01 China's new economic poLicies, particuLarly the empha -s on light industry and the economic responsibility system in agriculture.- are creating a rapidly growing demand for both long- and short-distance road transport. The rapidly increasing oucput of textile. chemical, electronic and food processing industries. which are all well suited to road transport, has been accompanied by a growing demand for transport from producer to consumer between cities and often across provinciaL boundaries.