China - Fifth Railway Project

DOoami or The World Bank OFFKIAL USE ONlY Mli CROP YCHE COEPY .eport lNo. f- 5269--(,CHA Type: (PM) N P-5269-C1A SA BETj, AL! X'l6711 / / Ai;TIN MEMORANDUM AND RECOMMENDATION OF THE PREszWI OF THE TERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXCUTIVE DIRECTORS ON A PROPOSED) LONM IN AN AMOUNT EQUIVALENT TO US$330.0 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A FIFTH RAILWAY PROJECT AUGUST 28, 1991 T dscmeaw has a rgsyicted dkfiktdbton Sod may be Used by recipienft only In the parad o d .fIsI 4waei titl wotaeuts may eot o4.wIs be disclosed witwo Wid Bok _  CURRENCY EQUIVALENTS (as of April 1991) Currency Name: Renminbi Currency Unit: Yuan (Y) 1 Yuan - 100 Fen $1.00 = Y 5.22 $0.19 = Y 1.00 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles 1 hectare (ha) = 2.47 acres 1 kilogram (kg) = 2.2 pounds (lb) 1 ton (t) = 1,000 kg = 2,205 pounds ABBREVIATIONS AND ACRONYMS GOC - Government of China HOF - Ministry of Finance MR - Ministry of Railways PPAR - Project Performance Audit Report RIS - Railway Investment Study  FOR OFFCIAL UV ONLY CHINA FIFTH RAILWAY PROJECT Loan and Project Summary Borrower: People's Republic of China Beneficiary: Ministry of Railways (MR) Amo%mt: $330 million equivalent Terms: 20 years, including 5 years of grace, at the Bank's standard variable interest rate Onlending Terms: Between the Ministry of Finance and the Ministry of Railways: 20 years, including 5 years of grace at the interest rate of 5 percent per year. MS will bear the foreign exchange risk. Local Foreign Total Financing Plan: Government/MR 473.9 201.7 675.6 IERD - 330.0 330.0 Total 473.9 531.7 1,005.6 Economic Rate of Return: 33 percent Staff Appraisal Report: Report No. 8439-CHA Maps IBRD No. 22097 This document has a rstricted distribution and may be used by recipients only in the peormaice of their officia duties Its contents may not otherwise be disclosed without Wodd Bank authoriz --  MEHORAWN AND RECOMMENDATION OF THE PRESIDENT OF TEE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR A FIFTH RAILWAY PROJECT 1. The following memorandum and recomuendation on a proposed loan to help finance the railways of China for $330 million equivalent is submitted for approval. The loan would be for 20 years, including 5 years of grace, at the Bank's standard variable interest rate. The proposed onlending terms between the Ministry of Finance (MOP) and the Ministry of Railways (MR) would be 20 years including five years of grace at 5 percent interest rate. MR will bear the foreign exchange risk. 2. Background. Railway traffic in China has been growing at a very rapid rate: 68 percent from 1970 to 1980 and 89 percent from 1980 to 1989. In 1989, China's railways carried 1,086 billion freight ton-kilometers (63-percent of all freight traffic in China, equivalent to two thirds of the traffic carried by US railways) and 303 billion passenger-kilometers (50 per- cent of all passenger traffic in China). Rail traffic is expected to maintain a somewhat lower, but still high, growth rate in the next decade. The freight ton-kilometers hauled per dollar of gross national product in China is the highest in the world. Compared with the traffic growth, investment in raii. ways has been inadequate, and MR has had to resort to intense utilization of its existing assets. MR has managed to carry the continuously growing traffic volumes without significant improvements in rail technology and operations that have been occurring elsewhere in the world. While such improvements in technology would not have obviated the need for any expansion in basic infra- structure--new main line routes, double-tracking of existing routes, and new and expanded terminals would still have been needed--they would have raised the traffic-carrying capacity of China's railways significantly in critical corridors at least cost. However, the shortage of funds (both local and for- eign) and a lack of the necessary domestic manufacturing capability have hin- dered the adoption of even the most cost-effective improvements in technology. At the same time, the need for additional capacity combined with the limited availability of resources has resulted in a backlog of overdue maintenance and rehabilitation for track, locomotives, and rolling stock, which may become critical if new investments in capacity are not made. 3. Lessons Learned from Previous Bank Operations. Out of the ptevious five railway projects, only the first project (Loan 2394-CHA) has been closed, on December 31, 1990. A PPAR (No. 9735, dated June 24, 1991) has been issued. The physical components of the project were successfully completed. The PPAR observed that a high transport intensity has been created by price distortions which have encouraged excessive demand for railway transport causing heavy investments, and that efficiency gains to be made at the macroeconomic level are probably more substantial than those at the microtechnical level since China railways are generally efficient and technically well run. 4. Rationale for Bank Involvement. The previous Bank lending in rail- ways in China was concentrated on augmenting the rail-carrying capacity with- out much emphasis on institutional development. The proposed project marks a major departure from past practice in the type of railway investments assisted by the Bank Group. While it would continue to support major investments to overcome the acute shortage of railway infrastructure capacity to cope with  -2- potential traffic demands in China, it would also focus on dealing with systemwide problems such as railway technology, operations and management. In addition, the reform-oriented aspects would deal with two major system reforms relating to tariff restructuring based on true costs and to prioritization of future railway investment programs based on economic justification. It is thus a transition from the Bank Group's part five railway projects in China, which primarily supported specific capacity expansion investments. Over the past few years, the dialogue between MR and the Bank has widened to cover a large number of areas where MR needs assistance on a systemwide basis. Four of these areas--rehabilitation of track, rehabilitation and maintensace of locomotives and rolling stock, electrification, and telecoamunications--have been selected as priority areas in which MR would like Bank financing in future operations. The preparation of action and development plans in these four areas, as well as preparation of the Railway Investment Study (RIS' to enable MR to use modern tools to establish economic priorities, will be moni- tored through the proposed Fifth Railway Project. Tariff reforms will also be introduced following the implementation of the railway costing system in accordance with an agreed plan of action between MR and the Bank. This will ensure that tariffs would appropriately reflect real costs of operations. The Bank and MR have agreed to include two small components for track rehabilita- tion and for locomotive and rolling stock rehabilitation on a pilot basis to help MR make a beginning in these two high-priority areas with systemwide benefits. Finally, the proposed project includes two specific capacity expan- sion components. The rationale for financing them continues to be, as in the past, the general shortage of funds facing MR for investment needs and the specific shortage of foreign exchange for financing much-needed components and materials. 5. The systemwide components and studies are intended to assist MR to move away from the current practice of working out ad-hoc solutions to prob- lems and instead to develop consistent, long-range, systemwide plans for improvement and growth that better utilize scarce resources and lay the basis for future broad-based Bank lending to China's railways. Without Bank Group involvement, MR is likely to carry on as before, working out solutions to problems as they arise. The result would be postponement of the development and implementation of systemwide approaches to many areas of MR's operations, maintenance, and management where such approaches are needed, making it more difficult and expensive to introduce such approaches later. 6. Proiect Obiectives. The overall objective of the project is to ensure that MR becomes more efficient and continues to be financially viable through better operations, maintenance practices, investment planning, and tariff policies. The specific objectives are to assist MR to: (a) introduce recent developments in rail technology and maintenance and rehabilitation practices, in order to enhance efficiency and capacity; (b) develop systemwide plans and planning tools for its major subsectors; (c) adopt modern planning and analytical techniques for establishing investment priorities and tariff restructuring; and (d) add capacity where such additions are urgently needed and justified. 7. Prolect Description. The proposed project would consist of (a) two systemwide components, to assist MR to introduce recent technology and advanced materials in the maintenance and rehabilitation of track, and to meet the shortage of critically-needed items of material, components, and equipment for rehabilitation of locomotives and rolling stock; (b) two capacity expan- sion components, to complete double-tracking of the 944-km Zhegan (Zhuzhou-  -3- Hangzhou) line, and to expand capacity at the Xuzhou marshalling yards; and (c) an action plan for the development and implementation of the Railway Traf- fic Costing System leading to formulation of recoumendations for tariff restructuring. In addition, MR is currently carrying out five important stud- ies which started during the project preparation. Four of the five studies are technical studies which are focusing on track maintenance and rehabilita- tion, locomotive and rolling stock maintenance and rehabilitation, electri- fication and telecommunications: and the fifth study is focusing on the rail- way investment prioritization. 8. The five studies are given high priority by MR, as they will assist it in looking at future investment requirements in a rational, systemwide context. Furthermore, the studies would recommend investment plans in their respective areas for the Eighth Five-Year Plan and at the same time provide the basis for future Bank Group assistance to MR. Finally, the studies would be linked directly to the Improvement of operational performance in their respective functional areas since they will identify meaningful parameters of performance, set targets for these parameters, and measure actual results against the targets. The project would be carried out by MR and is expected to be completed by mid-1998. 9. The total cost of the project is estimated at $1,005.6 million equivalent with a foreign exchange component of $532*1 million (53 percent). A breakdown of project costs and the financing plan are shown in Schedule A. Amounts, procuremuat and disbursement methods, and the disbursement schedule are shown in Schedule B. The timetable for key project processing events and the status of B&nk Group operations in China are shown in Schedules C and D. A map is also attached. A Staff Appraisal Report, No. 8439-CIA dated August 28, 1991, is being distributed separately. 10. Environmental Effects. The project will have no adverse effect on the environment. The Zhegan line double-tracking will follow existing align- ment on go percent of the track length. This will necessitate the resettle- ment of about 25,000 people over the course of the project (para. 11). The Xuzhou terminal component of the project will have a positive environmental impact. Since 1972, MR has its own Realth and Environmental Protection Department, which follows established rules and regulations in assessing envi- ronmental impacts and in preventing new pollution and ervironmental hazards. As required by the governent rules, over 60 percent of iler, industrial and raill_ay hospital wastewater was being treated at the end of 1988. During appraisal of the proposed project, an assessment of environmental issues was made to ensure that future projects will focus on providing assistance in environmental and waste management control. Furthermore, at the request of MR, a specific proposal was made by the Bank for UNDP financing in three areas of health hazard and pollution control. These areas are (a) reduction of noise pollution in railway factories: (b) treatment of garbage and nightsoil in passenger trains; and (c) sterilization of passenger coaches to prevent diseases from spreading. 11. Agreed Actions. The Borrower has agreed on the followingt (a) to be financially self-reliant under GOC's new policy, which would require that rail tariffs should be based on costs and should be periodically revised to ensure sufficient cash generation to cover all financial obligations and con- -tribute 20 percent or more of its total investments during 1991-93 and 25 per- cent or more thereafter; (b) to use, upon satisfactory conclusions of the RIS, the analytical techniques in preparing economically optimal investment pro-  -4- grams, to carry out the four technical studies according to agreed timetables, to present to the Bank a report on their initial phases by March 31, 1992, and to use the findings and recommendations for MR's future development; (c) to develop and carry out an action plan for the implementation of the costing system, and formulate a program for restructuring cost-based tariffsg (d) to ensure that resettlement of the people affected by the Zhegan line double- tracking will be carried out according to plans agreed with the Bank and that the land will be available well ahead of the construction work; (e) to reha- bilitate list of high-density track sections on which high-quality imported components to be financed under the project will be installed; (f) to maintain the availability of its fleet of imported dieeel and electric locomotives (whose maintenance will be assisted under the project) at 82 percent; (g) to maintain an operating ratio of 82 percent or better; and (h) to submit annual audit reports on project subunit accounts, statement oi expenditure, special account and MR's consolidated income statement. An understanding was also reached that MR will rehabilitate at least 4,000 km of track annually with its own funds. 12. Justificetion and Risks. The project would produce benefits in the form of (a) extended track life leactng to longer intervals between track maintenance activlties and thus inc tased traffic capacity; (b) greater avail- ability of locomotives and rolling stock through the supply of critical compo- nents and materials in short supply as well as improved workshop procedures that would reduce in-shop time; (c) additional needed crspacity on a ma or route and a major terminal; and (d) more cost-effective use of scarce resources for HR, through better investment planning, while providing safe, reliable, and economic railwr.y service to users. The estimated economic rate of return is 33 percent for the project as a whole, con isting of 28 percent for the permanent way system component, 25 percent for he mechanical system component, 35 percent for the Shegan line, and 31 pet t for the Xuzhou com- ponent. There is a potential risk of delay in the cc. etion of the double- tracking of the Zhegan line. But this component has been deferred once, and MR has already begun implementing portions of it on its own, because of the traffic growth in this corridor; in any case, a delay cf one or two years will not affect the economic rate of return significantly. There are no known risks in the other parts of the project. 13. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. August 28, 1991  -5- Schedule A CHINA FIFTH RAILWAY PROJECT Estimated Costs and Financing Plan (S million) Local Foreign Total Project Costs2 Pe,manent way 32.3 85.0 117.3 Locamotives and rolling stock 3.5 56.1 59.6 Zhegan line 338.4 295.9 634.3 Xuzhou terminal 57.4 57.9 115.3 Base Cost 431.6 494.9 926.5 Physical contingencies 22.8 .1.6 34.4 Price contingencies 19.5 25.2 44.7 Total Proiect Cost /a 473.9 531.7 1,005.6 Financing Plan: IBRD - 330.0 330.0 GovernmentfMR 473.9 201.7 675.6 Total Financing 473.9 531.7 1,005.6 fL Import taxes and wAties are not included in project costs and the Govern- ment will not charge such taxes and duties on imports for the project.  Schedule B CHINA FIFTH RAILWAY PROJECT Procurement Method and Disbursements la ($ million) Procurement Method Total Project element ICB LCB Other l cost Civil works - 365.0 - 365.0 Materials 221.4 37.1 111.5 370.0 (106.6) (106.6) Equipment 207.7 i7.2 15.5 270.4 (207.7) (15.5) (223.2) Consultants' services and training - - 0.2 0.2 (0.2) (0.2) Total 429.1 449.3 127.c 1,005.6 (314.3) (15.7) (330.0) Disbursements Category Loan Percent financed (1) Equipment and materials 329.8 100I of foreign expendi- ture and 100? of local expenditure (ex-factory cost) (2) Consultants' services 0.2 1002 and training Total 330.0 Estimated Disbursements: Bank FY 1992 1993 1994 1995 1996 199? 1998 -($----------------- million) -------------------- Annual 14.8 99.7 117.1 45.6 25.6 17.6 9.6 Cumulative 14.8 114.5 231.6 277.2 302.8 320.4 330.0 L! Figures in parentheses are the respective amounts to be financed by the Bank. Lb Inoludes direct contracting and international and locaL 'thopping.  -7- Schedule C CHINA FIFTH RAILWAY PROJECT Timetable of Kel Proiect Processing Events Time taken to prepares 11 months Prepared by: The Ministry of Railways First Bank missiont May 1989 Appraisal mission departure: January 1990 Updating missiont March 1991 Negotiations: August 5-7, 1991 Planned Date of Effectiveness: December 23, 1991 List of relevant PCRs and PPARs: First Railway Project (PPAR Report No. 9735, June 24, 1991)  - 8- ScheduleS Poo i of 3 STAUS op SK QW OPATIONS 1 IN TE PReo $ R S uulC Of CHINA A. STATEENT OF SN LOA AND IDA CDITS (AS of J 30 19W) LoWV A CM t iUtlon) credit Soat. t of tiuelLstior) 1-er FT rower Purose ItA trdisb. (a) Ten lm end fourten credits have ben fully disbursed. 1030.5 79.9 - Of ihich SCAL: 2967/193U U PLC lurst Saetor AdJ. 200.0 100.0 1411 84 PLC Polyttchnie/TV Univrity 15.0 16.7 2382 31 PRC Lubuge Hydroelectric 141.4 - U.6 1472 84 PRC lural Health & eica1l Educ. t5.0 7.7 246 04 PLC Petrole III (Kraay) 92.5 - 3.9 24411500 84 PoC Agricultural Education 11 45.3 (23.5)(b) 5.0 1S16 85 PRC AgricuLtural Research tl . 25.0 4.0 1551 85 PRC University Develtopmnt II - 145.0 12.0 2493 85 PRC Power II 117.0 * 10.6 2501 85 PRC Chascun (Luen) Coal Minirf 79.5 46.6 1578 O5 PRC Rural Water Supply 80.0 1.4 253911594 85 PRC Highway 1 31.6 C30.0)(b) 2.0 2540 SS PRC Railway 11 220.0 -9.8 2541 85 PRC Fertilier Rehab. A 97.0 - 0.7 .1605 ~~~Energy Sawing .1605 JS ORC Forestry Developmnt 47.3 6.2 2579/1606 5 PIIC PiShiflng-Chachu Are 0ev. 17.0 75.0 2.0 2580 85 PRC Weiun Gas field Technical 25.0 4.8 Assistance 1642 86 PRC Rural Credit t 90.0 0.6 2659/1663 86 PRC Indutrial Creit III (CIB Itl) 75.0 25.0 11.7 1664 86 PRC Technical tooperation Credit SI 20.0 15.9 1671 J6 PRC Provincial Universities 120.0 12.8 2678/1660 86 PRC Third Railwtay 160.0 70.0 122.4 2689 86 PAC Tianjin Port 130.0 66.9 169 36 PlC Freshwater Fisheries 60.0 1.8 2706 U6 PRC eilgng Therml Power 225.0 43.? 270? 86 PRC Yantsn Hydroeletree 52.0 - 16.4 27/1713 86 PKC Rural elth & Preventive Hed. 15.0 65.0 43.2 1733 S7 PaC Red Soils - 40.0 o.7 2773 S PRC Shulkou Hydroelectric 140.0 49.8 278/1763 7 PRC Indkstrial Credit IV (CI1 IV) 250.0 50.0 76.5 278 57 PWC Shanhi machine Tools 100.0 . 43.6 1764 87 PRC Xinjila Agricultural Dcv. - 70.0 27.5 2794/1779 87 PRC Shanghai Sewrage 43.0 100.0 96.6 2811/1792 ST PRC Beijing-Tionjin-Tanggu Expressway 25.0 125.0 66.1 2812/1793 8T PRC Gansu Provincial Dev. 20.0 150.5 96. 1835 1? PRC Plonning Support a Special Studies 20.? 14.7 2838 67 PLC Fertilizer Rationalization 97.4 29.5 2852 87 PRC Vujing Themal Power 190.0 . 97.3 1871 88 PIC Rural Credit III . 170.0 14.3 2877/1845 as PRC Huangpu Port 63.0 25.0 66.2 2907/1875 88 PRt Dolian Port 71.0 25.0 S7.6 t885 U8 PRC Northern Irrigation . 103.0 52.7 2924/1887 a8 PRC Coastal Lnds 0ev. 40.0 t60.0)(b) 29.2 1908 W8 PRC Teoacher Training - S0.0 13.7 2943 SB PRC PharmaCeuticals 127.0 36.8 2951/1917 BB PIC Sichuan Nighwey 75.0 S0.0 100.3 2952 6 PRC Sheanxi Highuwy 50.0 2 28.1 1918 88 PRC Daxing An Ling Forestry - 56.9 28.2 295s 88 PRC BSilungang II 16S.0 - S.3 2958 88 PRc Phosphate Dev. 62.7 - 59.6 296a8 s PRC Railwa JV 200.0 - 117.5 1984 89 PRC JiSngxi Provincial Highway 61.0 42.1 1997 69 'cC hsanxi Agricu!tur3l Dev. 106.0 92.6 2006 89 PRC lextbook Development r7.0 5.5  -9- schdle D Pap 2 of 3 Aunt CUSS Dittion) Credift Cor- (nat of met 10:1M) lulr tY rowr purpose a" IDA Uvdisb. (a) 2009 0 MC lntegted Ih. Netth 52.0 43.1 3C06 69 PlC inbo & Shafi Ports 76.4 35.3 3o0 09 tC 4mn Port 36.0 31.5 3022 89 FtC Tianjin Liht Industry 1W,.0 133.4 * 3N0O/2014 59 PliC lwr Nmotia tBelwy 70.0 60.0 139.5 201? 89 PIC Uane Arwiculture Dev. 109.0 60.? 3066 59 PRC Ihuei Phosphate 137.0 135.9 307M/202S 89 FEC Shadong Proy. HIgh*w 60.0 50.0 93.6 3075 09 PRC fifth InCustrial Credit 300.0 196.8 2091 90 PRC N.Chins Eerthqueke Reconstr. 30.0 7.3 209? 90 PRC Jimngxi Agrie. Oev. 60.0 53.8 2114 90 PRC Vocationat & Tech. Educ. NW 50.0 44. 2145 90 PC Rational Afforestation - 300.0 262.0 2159 90 PRC Nbei Agricultural Dev. - 1S0.0 126.6 2172 91 PRC Wid-YangUe Agricultural Dev. 64.0 55.5 326S/2162 91 PtC Rural Credit IV 75.0 200.0 233.4 3274/2186 91 PRC Rurat 1dust Tech (SPARK) 50.0 64.3 109.4 32B6/2201 91 PRC Nediwi-Sized Cities 0ev. 79.4 89.0 157.6 3288 91 PRC Shanghai Industrial D0v. (c) 150.0 - 150.0 2210 91 PAC Key Studies Development 131.2 122.4 2219 91 PRC Ligoning Urban Infrastructure Cc) 77.8 71.4 3316/2226 9 PRC Jiags u Provi. Ieansport Cc) 100.0 53.6 1so.7 2242 91 PRC genin Agricul. Dev. (c) 110.0 107,3 3337/2256 91 PRC Irrig. Agricut. Intensif. (c) 147.1 187.9 330.3 Total 5,709.8 4,905.1 4,819.7 of which has been repaid 350.2 0.0 Total now held by Bank end IDA S,359.6 4.905.1 Amount sold: Of whici' repaid Total Undistursed 2,608.2 2,211.4 4.819.? (a) As credits are denominated in tORs (since IDA Replenishment VI), undibursed SDR credit bAlances *re converted to dottars at the current exchange rate beteen the dottar and the SDR. In some cases, therefore, the undisbursed balance indicates a dolar amount greater than the original principal credit emount expressed in dollars. (b) Credit fully dibursed. tc) Not yot effective.  - 10 - U l 0 paoe 3 of' 3 S. STATIMIT Of ItC IIHESTNS cA* of Am 30, 1991) lint- Ty" of Loan E1iuty Total amt No. FT SOffewer ~lfls...... CSS Pilion) ..... 0_ 13 6 oumnzho nd Peqet AutXm tto 15.0 3.2 18.2 974 66 Jf Chino lwotewnt Co. Inwetmnt 3.0 1020 U shwn Chm S. O cycle 5.0 Sicycles Co. Ltd. NW"factur 1066 69 Crom Electronics Electrnics 15.0 15.0 1119 89 Shenahe Chromr Solsr soler (a) 2.0 1.0 3.0 Enhrgy Enery Total Gross Coanitents 40.0 4.2 4.2 Les cancellations, terminations 2.2 * 2.2 *epe)uent sles Total Commitasts now Netd by IFC 37.S 4.2 42.0 Total Lndisbursed 0.0 0.0 (a) Loan stlequently caelled. 7/23/91 AS3C  C H I N A ( I U.S.S.R. i FIFTH RAILWAY PROJECT ) * Project Terminal PteiousProj!A at -@-- ElecrIibcation p _; - Railoads b tvJa F ies MONGOLIAr - -N.on-Bank Financed -.--e-.- Elecrifed Uns in operaton ElectrTmed Lines under constructon Single Track Railroads T Double Track Railroa_ds Doub Track Railroads under construction lne-national Boundaries ' '-'-- , , '-'/ k% v F J/DE/DEM..fOM -^ j S y , + ~~~~~~~~~~~~~~~REP. OF I?EA > ,/ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~E. OF w \ ,Xn7 i - *1-{ s$$ r ,