China - Railway Project

Documni tft1j j' j : i :jY The World s, . 0 FOR OFFICIAL I Report No. 9735 PROJECT PERFORMANCE AUDIT REPORT CHINA FIRST RAILWAY PROJECT (LOAN 2394-CHA) JUNE 24, 1991 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit Yuan (Y) Appraisal (1983) US$ 1.00 - Y 1.98 1984 US$ 1.00 - Y 2.32 1985 US$ 1.00 = Y 2.94 1989 US$ 1.00 - Y 3.80 From Dec. 1989 US$ 1.00 - Y 4.71 ABBREN'TATIONS BN Burlington Northern Railway CTC Central Traffic Control EAAMS Economic Analysis of Aluminum Milling in Shanghai ERR Economic Rate of Return FOB Free On Board GDP Gross Domestic Product GNP Gross National Product KWh Kilowatt-Hour MOR Ministry of Rail NPV Net Present Value PCR Project Comnletion Report PPAR Project Performance Audit Report R&D Rcsearch and Development SAR Staff Appraisal Report Ton-Km Metric Ton-Kilometers FISCAL YEAR: January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office oecto-Cetral Opations Ivakiation June 24, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on China First Railway Project (Loan 2394-CHA) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on China First Railway Project (Loan 2394-CHA)" prepared by the Operations Evaluation Department. Attachment .v7 Th- A1 *rdwr#- ru. 'i t'i a, ' by ro-iipit.qoly; f ~hperforn1fce FOR OFFICIAL USE ONLY R-WEJPrF 9FMANGE AUDIT REPORT FIRST RAILMAY PROJECT (LOAN 2394-CHA) TABLE OF CONTENTS Pane No. PREFACE ......................................................... i BASIC DATA SHEETS ................................................ ii EVALUATION SUMMARY ............................................... iv PROJECT PERFORMANCE AUDIT I. Introduction ...................................... 1 II. China Railways..................................... 1 III. Project Objectives, Definition and Design ......... 9 IV. Project Implementation ............................ 12 V. Project Economics .................. 17 VI. Findings and Issues ............................... 21 Annex I Economic Cost of SS3 (4800kw) Electric Locomotives. 35 Annex II Issues in Technology Transfer ..................... 40 Annex III The Axle Load Issue .............................. 47 Annex IV Borrower Comments ................................ 49 PROJECT COMPLETION REPORT I. Project Review from Bank's Perspective ............ 51 II. Project Review from Borrower's Perspective ........ 62 III. Economic Impact and Statistical Information ....... 69 MM IBRD 17096 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. i PROJECT PERFORMANCE AUDIT REPORT FIRST RAILWAY PROJECT (LOAN 2394-CHA) EFACE This is the report of the performance audit of the First Rail Project in China. It was partially financed by a Bank loan of US$ 220.0 million which was approved by the Board on March 27, 1984. The loan was fully disbursed and closed on December 31, 1990. The PPAR is based on the Project Completion Report (PCR) prepared by the China Department, Asia Regional Office and issued on June 28, 1990 1/ The PCR was supplemented with a revised set of economic analyses prepared in February 1991 by the Transport Operations Division of the China Department. In addition, the PPAR is based on the Staff Appraisal and President's Reports, the loan documents, the transcripts of the Executive directors' meetings at which the project was considered, on a review of project files, and on discussions with Bank staff. An OED mission visited China in November 1990 to discuss the effectiveness of Bank assistance and to make field visits to the completed subprojects. The PCR provides a satisfactory account and assessment of the project experience. Following standard OED procedures, copies of the draft PPAR were forwarded to the government and executing agencies on April 9, 1991 for comments. Comments from the borrower's Foreign Capital and Technical Import Offics were received on June 20, 1991 and are included herein as Annex IV. 1/ Protect Completion Report China Railway Project (Loan 2394-CHA), China Department, Asia Regional Office, The World Bank, June 28, 1990. ii PROJECT PERFORMANCE AUDIT REPQRT 0815 (LOAN 2394-CHA) BASIC DATA SHEET Key Project Data Appraisal Actual or Actual as % IlLn Expctation Current Estimate Appraisal Total Project Costs (US$ million) 692.2 806.4 116 Loan Amount (US$ million) 220.0 220.0 100 Date of Effectiveness 06/84 07/84 Date of Completion 12/87 12/90 Months for Implementation 42 77 183 Economic Rate of Return 17-89 17-82 (Percent) Cumulative Estimated and Actual Disbursements (US$ millions) ESA BA 9.1 EA 82 E990 EM1 Appraisal Estimate 45 170 220 220 220 220 220 Actual 73 136 169 179 204 212 220 Actual as % nf Estimate 163 80 76 77 93 96 100 Project.Dates Original Pln Actual First Mention in Files 09/80 ---- Appraisal 02/81 03/83 Negotiations 02/84 02/84 Board Approval 03/84 03/84 Signing 04/84 04/84 Effectiveness 06/84 07/84 Closing 12/87 12/90 Lit Stalf Inputs (staff-weeks) M181 EXAZ EM X FM EM EMZ EEY8 EY89 lotal Preappraisal 3 7 60 70 Appraisal 58 30 88 Negotiation 31 31 Supervision 2 19 17 14 8 4 64 Other 1 3 1 5 Total 3 8 121 64 19 17 14 8 4 258 Mission Data Mission Tvme MonthfYear No. Persons Staff-Weeks Preparation 06/82 1 1 Preparation 07/82 2 6 Preparation 10/82 5 15 Preappraisal 03/83 6 18 Appraisal 06/83 9 36 Supervision I 07/83 1 2 Supervision II 10/84 7 21 Supervision III 10/85 3 12 Supervision IV 10/87 1 3 Supervision V 03/88 2 1 Supervision VI 05/89 2 1 Supervision VII 05/90 3 8 Other Project Data Borrower: People's Republic of China Executing Agency: Ministry of Railways Follow-on Projects: Second Railway Project 1985, Third Railway Project 1986, Fourth Railway Project 1988, Inner Mongolia Local Railway Project 1989. iv PROJECT PERFORMANCE AUDIT REPORT FIRST RAILWAY PROJECT (LOAN 2394-CHA) EVALUATION SUMMARY 1. Introduction fabricated bridge elements, construction equipment, reinforced The intention is to audit the concrete sleepers etc. The First Project in the context of remaining seven percent operate the entire line of lending (five the 11 universities and colleges, projects) and associated transport 49 technical schools, 86 skilled sector work to date. The First worker training schools, a primary Project was prepared with the idea and secondary education system for that it was to be an initial the children of staff, and a learning experience for the Bank health system for staff and and the Ministry of Railways that families. Assuming four would lead to increased dependents per employee China cooperation in subsequent lending Railways is a sub-economy of 12.8 operations. Subsequent lending million inhabitants with an annual and increased couperation have investment budget of about US$ 2.0 transpired in the six years billion per year. If the Bank following the signing of thi First continues to lend at a rate of US$ loan agreement. The new analyses 200 million per year this would and studies that have been carried account for about ten percent of out in the process of preparing the annual investment budget. the Zollow-on projects greatly enrich the retrospective There is no question that examination of the initial effort China Rail is a serious and in the five loan series. generally efficient physical operation by most standards. 2. Setting However, one question hangs over the Ministry of Rail and thet of China Railways has the fifth the entire transport sector: why largest network in the world and does the Chinese economy require carries the second highest level &U Fauch frZIght tranc-port *a--- of freight and passenger traffic In 1987, the Chinese economy after the Soviet Union. It has generated the need for 4.77 ton- its own ministry with 3.2 million km of transport per $US of GNP. staff. About sixty percent of the For the USSR it was 3.51. For staff work at providing . India it was only 1.4, while for transportation. Another twenty the USA it was only 0.86. percent are organized into the 19 construction bureaus that are In late 1980, when the Bank continuously providing new track first began considering the and facilities. Thirteen percent project under audit, the man the "industrial sector" of 66 preparation mission members faced factories producing locomotives, a curious combination of seemingly rolling stock, signalling, efficient, very high volume, very V high density, financially The 305 km. Xinxiang-Yanzhou profitable rail operations in an line was also a part of the larger economy where price distertions Shanxi Province-Shijiusuo Port and perverse incentives were so project in which Japanese great that the rail system could financing was also involved. have been carrying (at a high Single line capacity of 17 million level of physical efficiency) as tons per year to the Port of much as double the freight traffic Shijiusuo was the original design a market oriented economy of the objective. same size would require.(PPAR Paras. 3-21)' The Zhuhou Electric Locomotive Factory component 3. Objectives evolved from the desire of the Chinese to import electric The best extended definition locomotives to operate with the of the First Rail Project major new line electrification objective is found in a memo in investments being undertaken. the files dated February 3, 1983: After examining the then existing Zhuzhou electric locomotive works, our objective in the first project Bank staff were convinced that, will be to build the basis for a with appropriate investments in good dialogue with China on the the existing manufacturing railway subsector for the longer facility, annual production could term. This objective and be increased from 40 units per implementation of a more year to 120 units, obviating the substantive transport policy- need for imports. oriented dialogue with the Ministry of Railways is likely to A technical assistance and take some years and several training package was also included project to achieve. in the project description. The basic idea was to transfer Thus, the First Project was technoloy for locomotive design conceived as part of a series that and manufacturing from the would allow the Bank to eventually developed countries to China. widen and deepen its participation in support of China's transport The need for a costing study, sector. Specific subprojects became apparent to the economists undertaken were: and financial analysts. The railway investment plan was (and The 355 km. Datong-Taivuan still is) dominated by simple line inproverent was an extension physi-- l-plannln m-es-uesdriven of the Datong-Beijing-Qinhuangdao by the objectives of the State project which was to cater almost Planning Commission and by the wholly to unit trains of Shanxi presence of obvious bottlenecks. coal moving on a double track to Neither true economic nor the Port of Qiahiangdao. The financial analysis figured heavily Datong-Qinhuangdao project, into in investment decisions. Thus, which the Bank-supported project while Bank railway engineers were was to feed, was to be increased generally impressed with the from 42 million tons capacity to operational and implementation 60 million tons per year. This abilities of China Railways, Bank latter investment was to be financial and economic analysts financed by the Japanese. had little to work with. This component was to begin to repair vi that deficiency.(PPAR Paras. 22- possibility of heavier axle loads 30) for the design of major structures and (iii) local control of 4. Implementation Experience automated switching investments.2 The Datong-Taiuan line was The Zhuhou Electric redesigned after loan signing to Locomotive Works component was handle a flow of 60 million tons part of a larger planned expansion per year of coal rather than the of the Zhuzhou works. 7t was to original 33 million ton objective. be Phase 1 of the expansion but A redesigned Datong-Beijing- the Chinese accelerated Phase 2 at Qinhuangdao integrated coal export their own expense, implementing it operation (into which the Datong- concurrently with the Bank- Taiyuan line was to feed) was financed Phase 1 which was delayed increased from 60 million tons per by about two years because of year to 100 million tons per year. procurement problems. In 1989 the When the State Planning Commission nearly-completed Zhuzhou facility issued these new design objectives produced 167 locomotive units that the scope of the project was appear to be of acceptable quality approximately doubled over that - considerably beyond the SAR expected in the SAR. There is no objective of 120 units from 1987 record in the Bank files of a on. revised engineering or economic analysis to define and justify the Generally speaking the expanded scope. technology transfer was successful only in terms of the use of the In 1989, about 44.5 million new machine tools. The real tons of coal were transported over problem for the Chinese that has the new line to the Port of not been solved is how to keep Qinghuangdao. The SAR originally their electric locomotive designs anticipated 38.8 million tons to and manufacturing techniques the port by 1989 so actual traffic abreast of the latest technology. to date is running about 15 percent above appraisal estimates. The costing study report was Civil works implementation was compleLtd by Lhe Chinese in observed to be good. September 1985. By March 1989 the proposed costing procedures were The Xinxiang-Yanzhou line being pilot-tested at sub- subproject went according to administrations in Shanxi and schedule in both cost and timing. Shanghai. The Chinese have been It was completed in 1987 and diligent in puLsulug the beginning carried coal traffic of 13 million of an acceptable system. The tons in 1989 compared to the 9 Audit was unable to determine the million tons projected in the SAR. extent and usefulness of their Implementation was observed to be accomplishments to date.(PPAR generally good. Peras. 31-44) IL: only technical 5. Results shortcomings the Audit could identify with the two line A comparison of the Staff components were: (i) the use of Appraisal Reports for Rail I and jointed rail instead of welded Rail V show how far the Bank- rail for the track and (ii) the Chinese relationship has matured failure to consider the in less than ten years. vii Substantial progress has been made developed world. Going the other in documenting and understanding 20 percent is largely a question the operation of this compiex of adapting for China the latest system and this is currently being technologies and methods in reflected in the most recent management information, lending operation. communications and industrial engineering. The coal transDortation investments were subjected to a Possibly the sirgle most retrospective economic analysis in serious price distortion at the a very comprehensive PCR in which agr level is underpriced the latest conversion factors were electric power (conversion factor used to estimate economic costs of about 4.0) for the industrial and benefits associated with the sector. Since the bulk of the partly redesigned projects. The coal to be transported over the best estimate of the ERR for both two project lines was *ar lines was slightly less than 20 producing electric power for percent, indicating the economic domestic use, the coal-electric viability of both subprojects. power nexus was critical for analyzing the economic goodness of The electric locomotive the associated power and transport manufacturing investment was investments. Had the pricing of judged to be a success. The PCR domestic electric power for analysis utilizes a locomotive industry rather than the price conversion factor of 2.0 and international price of coal been capital costs 36 percent higher more of an element in the economic than the SAR to reflect the Phase analysis, the right questions 2 investment. The ERR for the concerning the economics of power combined Phase I and Phase 2 is production would have been asked. then estimated to be 82 percent, confirming the high return on the There is merit to asking the investment in locomotive right questions concerning the manufacturing and the gains to be ultimate use to which the had from scale economies. This transported coal will be put. would also appear to establish the However, the question is how much Chinese as a major potential of the distortion at the macro competitor for sales in the world economic level can be taken into market.(PPAR Paras. 45-55) consideration when preparing a rail investment project. Is it 5. Findings, Lessons and reasonable to expect the railway Sustainability managers to "...simuiate markets within a framework of planning and Efficiency gains to be made collective ownership..."? Or is at the macro economic level are it more reasonable to require probably more substantial than railway managemen: to continue those at the micro technical making investment, operational and level. This is because China Rail pricing decisions based on current is generally a well-run technical financial incentives and leave the operation compared to railroads in changing of those financial other developing countries. The incentives to those managing the Chinese have already achieved economy at large? about 80 percent of the operating and manufacturing standards of the The Audit believes that the best rail operations in the formal economic analyses of viii subprojects in Rail I were little promoting the use of such more than pro forma exercises done management tools by using them in after the engineering and their own Staff Appraisal investment decisions were made. Reports.3 It was an administrative requirement associated with a Relevant international 1-rld Bank loan that was a minor experience based on good economic element of the overall operation. or financial analyses in a i'hia may have been excusable in competitive environment can be the early years but it continues useful as a check on investment to be the case, despite heavy and operational decisions in China emphasis by the Bank on formal in the absence of market prices economic analysis using conversion and accurate financial costs. Zactors to shift from financial However, there are examples of bad figures to economic figures. A international experience tnat the careful examination of the ongoing Chinese would be well-adviied to electrification, locomotive and avoid and there are some areas rolling stock and permanent way where the Chinese themselves studies indicate that almost no represent the best international economic (or financial) thinking experience. or concepts are being explicitly integr-.. I into the exercises. The question of gustainabilitXr rarely becomes a While formal nomic serious concern in China Railways. analysis may not be making rapid Unremitting rapid growth in headway in the HOR, there is no demand, very high density train reason why the much easier traffic, and constantly recurring fiUancial analysis of projects and bottlenecks have shaped the operations should not be thinking of Chinese railway undertaken. Computing the net planners in a way that has increases in value of coal for happened in few railways of the domestic use because of the developing world in the late existence of adequate rail twentith century. Building, capacity is a difficult task. maintaining and operating a Computing the additional revenues physical activity as potentially associated with moving the coal is dangerous as high density train conceptually much more operations requires skilled straightforward. Associating a pragmatic operators and managers net revenue stream with the and this the Chinese have investments required to make it provided. Without having to worry possible is the sort of analysis about marketing services, China that rail managers should be Rail has been able to maintain encouraged to undertake given the existing capacity by developing a commercial direction in which maintenance ethic that is rarely public entities are expected to found In the developing world. move. This was done by Bank staff The commitment to protection and in the SAR of the Third Railway maintenance of capital investments Project but has since been is manifest and laudable.(PPAR abandoned in favor of economic Paras. 56-85) analyses employing conversion factors, despite the stated Dealing with the railways of China commitment to a railway financial has required the provision of an cost accounting system in the Rail extraordinary array of technical I project. The Bank should be skills by the Bank ranging from ix those conversant with the macro- micro linkage to those concerned with specific industrial engineering applications. So far, the Bank has managed to stay on top of developments by bringing in a variety of international experts to assist in the task. However, as the number of disbursing lending operations increase and the numerous outstanding studies reach critical junctures the task is becoming more difficult and complex. The achievement of the ambitious Rail I project objective has raised the question of whether or not the Bank can keep up the pace with an institution as formidable as China Rail. The more we succeed with sophisticated clients, the more high quality resources we must allocate to deal with the fruits of success. (PPAR Paras. 86-90) 1. For the Region's comment on this matter see footnote 20 on page 8 of the main text. For the Borrower's comments see paragraph 7 of Annex IV. 2. For the Region's comments on these issues see footnotes 35 and 37 in the main text and Annex III. For the Borrower's view see paragraph 2 of Annex IV. 3. For the Region's position on this issue see footnotes 41 and 62 in the main text. 1 PROJECT PERFORMANCE AUDIT REPORT FIS RAILWAY PROJECT (Loan 2394-CHA) I. Introduction 1. Between 1984 and 1990 the Bank has supported five lending operations to China Railways. 1/ The First in 1984 was a loan for US$ 220 million for various new line construction and upgrading subprojects plus expansion of an electric locomotive factory. The most recent Fifth Rail Project in 1991 is to be a US$ 330 million loan for system-wide line and terminal upgrading. In seven years the Bank will have committed a total of US$ 1.2 billion for investments estimated to cost about US$ 3.5 billion. This will be the audit of the first project. 2. The intention here is to audit the First Project in the context of the entire line of lending and associated transport sector work to date. This is because the First Project was prepared with the idea that it was to be an initial learning experience for the Bank and the Ministry of Railways (MOR) that would lead to increased cooperation in subsequent lending operations. Subsequent lending and increased cooperation have transpired in the six years following the signing of the First loan agreement. The new analyses and studies that have been carried out during preparation of the follow-on projects greatly enrich the retrospective examination of the initial effort in the five loan series. Much of this information and analyses is integrated and summarized herein in a fashion that goes beyond the requirements of a conventional audit report. The extra commitment of resources by OED is seen as appropriate given the uniqueness of the China Rail experience and the extent of Bank involvement, both intellectually and financially. I. China Railways 3. China Railways has the fifth largest network in the world and carries the second highest level of freight and passenger traffic after the Soviet Union. It has its own ministry with 3.2 million staff (of which 720,000 are female). About sixty percent of the staff actually work at providing transportation. Another twenty percent are organized into the 19 construction bureaus that are continuously providing new track and facilities. Thirteen percent man the "industrial sector" of 66 factories producing locomotives, rolling stock, signalling, fabricated bridge 1/ In 1989 a US$ 150.0 million loan and credit was also made for the Inner Mongolia Local Railway which was not an all-purpose system- wide operation. 2 elements, construction equipment, reinforced concrete sleepers etc. The final seven percent operate the 11 universities and colleges, 49 technical schools, 86 skilled worker training schools, a primary and secondary education system for the children of staff, and a health system for staff and families. Assuming four dependents per employee China Railways is a sub-economy of 12.8 million members with an annual investment budget of about US$ 2.0 billion per year. If the Bank continues to lend at a rate of US$ 200 million per year, this would account for about ten percent of the annual investment budget. 4. Like virtually all railways, China Rail has its roots in the 19th century. Beginning in 1876 and until the Second World War, 22,000 km were constructed. In 1949, after the war and the revolution, only 11,000 km were in operation. For this reason, the history and development of the system is nearly always treated in two phases - pre and post 1949. Since 1949, the system has been steadily expanded in geographic coverage until it reached its present route length of about 56,000 km. This relatively recent expansion of the system has allowed the Chinese to benefit from the experience of other countries. The track gauge, curvature and gradients plus the design and size of rolling stock have been of post 1945 vintage and, in general, both modern and apprciriate for Chinese circumstances. 21 5. Given the relatively compact habitable area of China between the sea coast and the mountains and deserts of the west, and the huge population and associated economic activity in this area, the derived demand for transport of all kinds is both large and dense. With highway transport only recently coming onto the scene, the railways have been called on to provide the bulk of transport services. As recently as 1977 China Rail carried 73 percent of intercity ton-km. and 64 percent of intercity passenger-km. 2/ Since that time the rapid growth of highway transport has shifted the rail share in 1988 to 59 percent of freight traffic and 53 percent of passenger traffic. Such a dramatic shift in market shares would normally be disastrous for the finances of an enterprise, not to mention the negative psychology associated with being a declining industry. This has not been the case for China Rail because of the large suppressed demand for transport and the rapid growth of the economy in the last ten years which has generated a demand for freight transport growing at an annual rate of 8.9 percent between 1980 and 1988. With road freight output growing from a low base at an unheard of annual rate of 20 percent for the same period, rail-ay freight still grew at an annual rate of 7.1 percent, only l.'J percent below its 1952-1977 performance. Thus, the shift in market shares that troubled so many other railways of the world in the 1950s and 60s is taking place today in China without the usual attendant traumas. 2/ They do not, for instance, have the oversized wheels or two-axle wagons characteristic of much of the low capacity rolling stock of Indian Railways. 2/ This discussion is based on the data found in the Staff Appraisal Report of the Fifth Railway Project, Report No. 8439-CHA, April 5, 1990, Table 1.3, p. 121. This source in turn is based on the Statistical Yearbook of China. 3 5. Unremitting rapid growth in demand, very high density train traffic, and constantly recurring bottlenecks have shaped the thinking of Chinese railway planners in a way that has happened in few railways of the developing world in the late twentieth century. Building, maintaining and operating a physical activity as poter.: lally dangerous as high density train operations requires the skilled pragmatic operators and managers the Chinese have developed. Without having to worry about marketing services, China Rail has been able to organize to maintain existing capacity by developing a maintenance ethic that is rarely found in the developing world. Organizing to expand track and rolling stock capacity has led to vertical integration in the area of civil works construction and industrial production of most rail inputs. Such vertical integration has been constrained only by the boundaries of other ministries such as the Ministry of Energy and the Ministry of Coal. Otherwise the production of electric power and coal would certainly have been added to the activities of the Ministry of Rail. Physical Productivity 6. The performance of China Railways has been impressive in terms of measurable physical results. Of four large railway systems of the world (China, USSR, USA Class I, and India) the Chinese have the second highest freight density (USSR has the highest) in ton-km per route-km. A/ It is triple that of the U.S., and five times that of India. Low density lines are not a problem for Chinese managers. 7. In terms of freight tonnage per car loaded, the Chinese in 1988 were second only to the U.S., were on a par with the USSR, and were two and a half times greater than that of India. 5/ It is however in the area of wagon productivity that the Chinese are unsurpassed. If the freight tonnage per car loaded is used as a surrogate for average wagon capacity on the five systems, then dividing this figure into the ton-km per freight car ow-ep cttiatic yields a physical productivity measure of annual ton-km per ton of wagon capacity. k/ The Chinese were tops in this category in 1988 with 53.6 thousand ton-km per ton of capacity, followed by the USSR with 41.0 thousand, India with 30.0 thousand and finally the U.S. with 12.0 thousand. 2/ The Chinese performance with wagons is an extraordinary 4/ Much of this discussion is based on the data found in the Staff Appraisal Report of the Fifth Railway Project, Report No. 8439-CHA, April 5, 1990, Table 2.6, p. 132. 2/ The poor Indian showing is because of the small capacity of their two axle wagons as opposed to the four axle technology used by the others. g/ The term "tons" or "tonnage" in this report refers to metric tons. 2/ The low figure for the U.S. Class I railroads as a group is due to the large number of specialized wagons owned by leasing firms and shippers - not the railroads. These wagons allow the U.S. railroads to provide services and frequencies that are not offered by the other 4 achievement despite the fact that it implies less than satisfactory levels of service to the users of the Chinese railways in terms of foregone movement and/or long waiting time for wagons and inconvenient loading and unloading times. 8. The MOR does not keep or publish regular records on locomotive availability by type of locomotive, a key figure for the managers of most railways. I/ The data for China are fragmentary and that which exists indicates that the Chinese have been much less successful in utilizing their locomotives intensively than they have been with line and wagon assets. The SAR for Railway IV shows a single entry for availability of the fleet of 2000 diesel locomotives of 84 percent in 1979. The large fleet of 8000 steam locomotives had an availability of 93 percent. 2/ The SAR for Railway V has an estimate for freight locomotives for 1987 of about 82 percent and indicates in the text that the availability of diesel locomotives varies between 77 and 82 percent depending on the locomotive model. 1O/ By this time (1987) the steam fleet was down to 7,700 and the diesel fleet was up to 7,501. The electric fleet was at 2,028. With the rapid growth of the vastly more complicated and costly diesel and electric locomotive fleet one would expect a careful monitoring of the use of this asset. The figures that do exist indicate something around the 85 percent availability level. This is respectable for a developing country railway but about eight percentage points below developed country standards. The probable reason for this relatively low performance is set forth in the audit proper. 9. The productivity of labor can be approached in a physical sense by dividing the combined output of freight and passenger services (one ton- km equivalent to one pass-km) by the labor force directly engaged in providing that output. In China in 1987 it was estimated that 1.93 million workers provided 987.8 billion ton-km and 326.0 billion pass-km for a combined total of 1313.8 billion traffic units. This comes to 0.68 million traffic units per employee. In India in 1988 the figure was estimated at C3 Tn ho the 1 .ls T railwav it- wan 6.06 million while for the three railroads. The Burlington Northern in its coal operations is able to achieve wagon productivities in excess of 70.0 thousand ton- km per ton of wagon capacity. This is a long haul, high capacity, unit train, shuttle operation which probably represents the upper boundary of physically achievable wagon utilization rates. L/ See: Managing Locomotive Availability and Utilization, Infrastructure Notes, Transport No. RW-1, The World Bank, March 1990. 2/ SAR Fourth Railway Project, Report No. 7148-CHA, June 2, 1988, Table 2.1, p. 53. 1/ SAR Fifth Railway Project, Report No. 8439-CHA, April 5, 1990, Table 4.3, p. 161, and para. 2.13, p. 8. 5 Burlington Northern in 1988 it was 10.11 million. 11/ Thus, China Rail uses about six times as much labor per unit of rail output as the U.S. Class I railroads and fifteen times as much as the Burlington Northern. Given the differences in wage levels this may be an appropriate use of labor by the Chinese but the possibility of serious overmanning for some operations should not be dismissed at this level of generalization. Financial Productivity 10. While it is possible to make international comparisons of physical measures of productivity, it is much more difficult to make sense out of financial information. In a centrally planned economy where administered prices are frequently unrelated to costs or scarcity, financial statements give scant indication of how well-managed an institution is. According to its profit and loss statements, China Rail appears to be a successful institution financially and provides by far the lowest cost rail transport in the world. It had operating ratios fluctuating between 67 and 82 percent between 1985 and 1989 while its average freight revenue per ton-km in 1989 was estimated to be 0.6 U.S. cents. 12/ 11. The Class I U.S. railroads currently average revenues of about 2.0 cents per ton-km, while the extremely efficient Burlington Northern long-haul coal railway averaged 1.3 cents per ton-km in 1988. India averages about 1.8 cents per ton-km, while European railroads are in the range of 5.0 to 8.0 cents. Thus, Chinese unit freight revenues are about 46 percent of those of the most efficient U.S. railroad, one third of those of India, and one fifteenth those of Europe. It in extremely unlikely that the real resource unit cost of operating the Burlington Northern in the U.S. is 2.2 times that of Chinese Rail given the longer hauls, higher wagon loads, higher locomotive availability, and the fact that the BN has by far the highest output per man hour of the U.S. system and does not have to cater to passenger transport. This is not to denigrate the Chinese achievement, it is only to make the important point that the financial statements of China Rail are not comparable to those of a railroad competing in a free market economy. The lack of relevance of financial data in the Chinese context is a continuous problem in assessing the goodness of proposed investments as well as assessing performance and this will become evident in the audit proper. The Transport Intensity Problem 12. While there seems to be little question that China Rail is a serious and generally efficient physical operation by most standards, there is one question that hangs over the Ministry of Rail and that of the entire transport sector. That is: why does the Chinese economy require so much JI/ The figures for the Burlington Northern are based on The Analysis of Class I Railway Statistics, The American Association of Railroads, Washington, D.C., 1990. 1J/ Based on the data in SAR Railway V. April, 5, 1990; Table 5.1, and an exchange rate of 3.80 Yuan per US$. 6 freight transport at all? In 1987, the Chinese economy generated the need for 4.77 ton-km of transport pe- $US of GNP. For the USSR it was 3.51. For India it was only 1.4, while ior the USA it was only 0.86. 11/ The Soviet and especially the Chinese economies are extraordinarily transport intensive. 13. The low figure for the U.S. is because in 1988 the service sector, which generates little demand for freight transport, was 65 percent of GDP with industry at 33 percent and agriculture at 2 percent. In India the comparable figures were 38 percent, 30 percent and 32 percent. In China the figures are estimated to be 21 percent, 46 percent and 32 percent. 14/ While India and China have equal shares for agriculture (32 percent) the Chinese emphasis on industry (46 percent as opposed to India's 30 percent) would explain why the Chinese economy is more transport intensive but not why it is almost three and a half times more transport intensive than India. 14. An adjustment can be made here by assuming that the service sector makes no significant demand for freight transport. By deleting the service sector from GNP, the freight intensity for the non-service sectors of GNP (ie. agriculture and industry) can be computed. This yields 2.44 for the U.S, 2.25 for India and 6.03 for China. The adjustment brings Indian transport intensity for the major freight generating sectors roughly into line with the U.S., but the Chinese figures for freight generated by one $US of non-service sector GNP are still 2.5 times those of India and the U.S. Clearly something unusual is happening in China that cannot be explained by the relatively small size of the service sector. An attempt at explaining this phenomenon was made by Bank analysts in 1985 based on 1981 data. At that time the adjustment made by deleting the service sector from GNP brought the Chinese transport intensity below that of the U.S., but still well above India. J/ The most recent (1987) data presented above do not yield the same result and the issue needs to be addressed again with more care since the explanation is of great moment for transport planners in China. j1/ SAR Railway V, April 5, 1990, Table 1.1, p. 119. 1./ worid vevelopmeiL Rpot 1990, The 'orld , Thble 3, pp. 182183. The estimate of non-service GNP is made by applying the sectoral breakdown given in the GDP accounts to the GNP figure. 15/ China: The Transport Sector, A World Bank Country Study, 1985, pp. 2-20. There is a discrepancy in the time series for U.S. freight transport output in the 1985 study ( Table 2.2 p. 45) and that used in the Rail V SAR (Table 1.1 p. 1.19). While both cite the same source, the 1985 study appears to have converted the short ton-mile figures to short ton-km - not metric ton-km, thus overstating the U.S. figures by about ten percent. The SAR for Rail V has made the conversion correctly. A more serious problem with the 1985 analysis is that the Chinese GNP figure for 1981 is very large compared to recent estimates used in the Rail V SAR. This could have resulted from uncertainties of Chinese GNP estimates in the early 1980s. 7 15. The most common explanation for the high degree of transport AD- energy intensity in China is the relative importance of the heavy "smoke stack" industries in the industrial sector. J/ The moit recent economic report by the Bank on China makes the following observation: 11/ Heavy industry absorbs far too much capital, provides below-average returns, and its appetite for energy is one of the root causes of chronic (energy) shortages. 16. The linkage between heavy industry, coal-fired electricity (76 percent of energy production in 1988) and rail transport has been further examined in a recent comprehensive study of transport in Guandong Province. The shadow price or conversion factor for electricity in Guandong Province is estimated at 3.7, that for steam coal at 1.4, while that for diesel fuel is only 1.1. 1_/ Severely underpriced electric power encourages inefficient and excessive use of electric power by heavy industries. The resulting excessive demand for electric power leads to an excessive demand for steam coal which is also underpriced. The excessive and uneconomic demand for steam coal leads to an excessive demand for rail transport of steam coal which is also underpriced. For the typical long hauls (of coal) involved, present railway tariffs appear to recover only about 65 to 75 perczint of long run incremental social cost... Such severe underpricing of the transportation of coal, a commodity in which transportation is a major component of the delivered price, invites excess demand end uneconomic use of both transportation and energy, two of the scarcest goods in the Chinese economy. 12/ Thus, consistent and mutually reinforcing price distortions in the economy at large have encouraged excessive and inefficient demand for the most important rail freight commodity, coal, which the railroad transports at an .lj/ In 1980 it was estimated that the energy requirement of the Chinese Pennomy per $ of GDP was three times that of the U.S., and 1.6 times that of India. See: China: The Energy Sector, A World Bank country Study, 1985, Table 1.7, p. 12. 17/ China: Country Economic Memorandum - Between Plan and Market, The World Bank, Report No. 8440-CHA, May 8, 1990, p. 35. 1/ Guandong Province Comprehensive Transport Study, The World Bank, Draft Report No. 7708-CHA, June 28, 1990, Volume II, Table A3.12, p. 49. The figures in this report are based on an unpublished staff paper by Peter Dittus - "Economic Prices for Project Evaluation in China", China Dept., World Bank, June 1988. 12/ Guandong Province Comprehensive Transport Study, The World Bank, Draft Report No. 7708-CHA, June 28, 1990, Volume I, p. 46. 8 economic loss but (to its credit) with considerable physical efficiency. 2Q/ 17. Another complementary explanation for the high transport intensity conccrns the lack of incentives for processing raw materials to reduce weight before shipping. About 30 percent of raw Chinese coal is made up of rocks, clay and other materials. Only about 20 percent of all coal is processed (virtually all for export) to remove this material before shipping. Thus, about 24 percent of the coal ton-km in China could be avoided if all coal were washed. Since coal makes up about 30 percent of rail freight ton-km, preprocessing would reduce rail freight ton-km by about 7 percent. Coal is probably equally important in the road and water sector so preprocessing of this single commcdity could reduce national freight ton-km by about 7 percent. Moving concentrated iron ore instead of raw ore, sawn timber instead of logs, and fertilizer of high nutrient level are other examples of weight reducing and transport intensity reducing initiatives common in the developed world but not yet common in China. Given the physical efficiency of China Rail and rail freight rates well below economic costs, there is no large incentive to do the preprocessing as there is in market economies. 18. The other promising explanation for the high transport intensity of China is the array of incentives for cross hauling of commodities of all kinds. The allocation of so called "plan" cement and steel to various industries at highly subsidized "state" prices, together with rail freight rates which are well below economic costs makes "plan" inputs transported over long distances financially less costly than nearby "non plan" inputs selling at "market" prices. W1/ The very long average rail hauls for cement in China (450 km in 1988) is just one manifestation of the cross hauling phenomenon. 22/ In virtually every market economy of the world cement plants are located close to their markets to minimize transport 2-0/ The Region notes that the dominance of coal and the relatively low energy efficiency of coal-fired boilers in China are key reasons for the high transport intensity figures. 22/ For the most recent treatment of the problems associated with dual pricing and the move toward price reforms in the Chinese economy see: China: Country Economic Memorandum - Between Plan and Market, The World Bank, Report No. 8440-CHA, May 8, 1990, pp. 59-78, and China; Industrial Policies for an Economy in Transition, The World Bank, Draft Report No. 8312-CHA, June 29, 1990, pp. 53-77. 22/ In 1988, the "state" price for a ton of "plan" cement was 90 Yuan while the "market" price for an ton of "non plan" cement was 193 Yuan. China: Industrial Policies for an Economy in Transition, The World Bank, Draft Report No. 8312-CHA, June 29, 1990, Table 3.2, p. 57. 9 costs and average hauls are usually well below 200 km. leading to truck - not rail- delivery. 231 19. The other institution that promotes cross hauling is the excessive vertical integration of industries and ministries in China in which trade tends to take place between subsidiaries within the industry or ministry without concern for transport costs. 20. It is sometimes suggested that the unusual size of China and the location of its raw materials explains much of the transport intensity of the economy relative to other continental economies. This would certainly be a factor in the case of the USSR and its Siberian-based raw materials but not so for China. For the size of its population and its economy, China is surprisingly compact. Though its total land area is about the same size as the U.S.; the eastern monsoon district, which contains about 45 percent of the land mass, accounts for 90 percent of its cultivated land and 95 percent of the population. Z/ This helps explain the extraordinary intensity of transport network utilization but not the extraordinary transport intensity of the economy. Clearly this matter needs to be dealt with in considerable detail in any future transport sector work. 22/ 21. In late 1980, when the Bank first began considering the project under audit, the preparation mission members faced a curious combination of seemingly efficient, very high volume, very high density, financially profitable rail operations in an economy where price distortions were so great that the rail system could have been carrying as much as double the freight traffic a market oriented economy of tne same size would require. 23/ The Borrower notes that the dual pricing system for cement has recently been abolished. See paragraph 7, Annex IV for the Borrower's views on the general issue of dual pricing. 2A/ Atlas of China, Rand McNally, Chicago, New York, San Francisco, 1990, p. 4. This also includes most of the major coal deposits, especially the high grade and economic Shanxi deposits on the western edge of the region. L5/ The only other explanation for the extraordinarily high transport intensity calculated for the Chinese economy is that the numerator and/or the denominator in the fraction is wrong. If, for instance, the transport intensity of the non-service sectors of the Chinese economy were in line with that of India or the U.S., say 2.25 ton-km per $US of non-service sector GNP, and the ton-km estimates are correct, this would imply a 1987 GNP for China of US$ 859 billion rather than the official estimates of US$ 320 billion. Neither the GNP nor the ton-km estimates are likely to be incorrect enough to explain away the excessive demand of the Chinese economy for freight transport. 10 III. Proiect Objectives Definition and Design 22. The best extended definition of the First Rail Project objective is found in a memo in the files dated February 3, 1983: Our objective in the first project will be to build the basis for a good dialogue with China on the railway subsector for the longer term. This objective and implementation of a &ore substantive transport policy-oriented dialogue with the Ministry of Railways is likely to take some years and several project to achieve. This first project addresses the movement of a key commodity - coal - and covers a wide range of railway investments. It should give us the opportunity to develop a better understanding of part of the Chinese transport sector and to gain the confidence of the Chinese in the Bank as an agency which can provide developmental advice and assistance as well as finance. This should eventually enable us to contribute in subsequent projects to the development of transport policies in China. Thus, the First Project was conceived as part of a series that would allow the Bank to eventually widen and deepen its participation in support of China's transport sector. 11 The Rail I through Rail V Series 23. The table below illustrates the basic nature of the lending series Lo daLt. Project Costs Rail I through Rail V 21/ (millions of US $) 1984 1985 1986 1988 1990 W2/ 1904-90 1U&m Rftil I Rail 11 Rail-II Agil I2 Rail V Total Line Improvement 508.4 202.1 250.5 320.6 926.5 2208.1 Electrifica- tion 82.3 201.6 200.1 66.1 --- 550.1 Manufacturing 41.4 8.5 12.9 148.2 --- 211.0 T.A. & Tng. 1.3 16.9 0.3 3.0 10.9 32.4 Baseline Cost 634.1 429.1 463.8 537.9 937.4 3002.3 Contingencies 58.8 140.0 113.7 62.1 79.4 454.0 Total Cost 692.9 569.1 577.5 600.0 1016.8 3456.3 Bank Loan 220.0 235.0 160.0 200.0 330.0 1145.0 Of the roughly US $3.5 billion of Rail I-V investments undertaken with Bank support, the Bank has financed US $1.1 billion or 33 percent of the expected total cost. About 74 percent of the investments to date have been for line capacity improvements; eighteen percent have been for line electrification and seven percent for manufacturing facilities. The remaining one percent was for technical assistance and training. 24. There is considezfble sillarity in the prtftles nf the first four lending operations. Rail V is an obvious departure from the profile of the others. This is bacause it contains no support for investments in electrification or manufacturing. Virtually all of the Rail V investments are for maintenance equipment, rehabilitation, and expansion of line and terminal capacity. There is also an uncharacteristically large allocation 2&/ The source of the cost estimates are the Staff Appraisal Reports for the respective projects. Excluded from the series is a US$ 150.0 million loan and credit in 1989 for the Inner Mongolia Local Railway. 22/ The SAR for this project is in draft form with the project yet to be negotiated. 12 for technical assistance, studies and training. ZA/ This reflects the effort of the Bank to get away from the specific sub project and bottle- neck removal orientation of the early efforts to a more general support for the entire system. This, in turn, requires a more in-depth dialogue about the larger issues affecting the system from rail pricing and costing to management information and the larger rationale for electrification and investments in manufacturing. Hence, much more emphasis is placed on a series of large-scale studies before supporting more investments in electrification and manufacturing and before shifting to a sector lending format. 22/ 25. At the time Rail I was being prepared the information available to Bank staff was, for the most part, limited to the specific subprojects being considered, and the Chinese were extremely reluctant to use loan funds for studies of any kind. A comparison of the Staff Appraisal Reports for Rail I and Rail V show how far the Bank-Chinese relationship has matured in less than ten years. Substantial progress has been made in documenting and understanding the operation of this complex system and this is currently being reflected in the most recent lending operation. The First Railway Pro1ect 26. The line improvement aspects of Rail I were ?repared by the staff of China Rail and submitted to the Bank as subprojects to be considered for the first lending operation. The basic idea was to facilitate the flow of coal from Shanxi Province in the western mountains to ports on the east coast (about 900 km) for export and for coastal ship movements to the south (see Map IBRD 17096). The 355 km. Datong-TaLyan line improvement was an extension of the Datong-Beijing-Qinhuangdao project which was to cater almost wholly to unit trains of Shanxi coal moving on an electrified double track to the Port of Qinhuangdao. By December 1982, the idea was to increase the capacity of Datong-Taiyuan from 8 million tons of coal per year to 33 million tons. JW The Datong-Qinhuangdao project, into which the Bank-supported project was to feed, was to be increased from 42 million tons capacity to 60 million tons per year. This latter investment was to be financed by the Japanese. 27. The 305 km. Xinxiang-Yanzhou line was also a part of the larger Shanxi Province-Shijiusuo Port project in which Japanese financing was also Z/ Rail II has a larger allocation for this category (US $16.9 million) but US $14.6 million is for construction and equipment of a Railway Academy - not the soft support usually associated with this item. 22/ Separate stufies are being undertaken for: (i) permanent way, (ii) locomotives and rolling stock, (iii) electrification, (iv) telecommunications, (v) network analyses, and (vi) coal flows. .Q/ Based on data in the December 1982 Railways I Project Report. In the March 1984 SAR the capacity objective was reduced to 22 million tons in the text but remained at 33 million tons in the economic analysis in Annex 5. 13 involved. Single line capacity of 17 million tons per year to the Port of Shijiusuo was the original design objective. 1/ 28. The Zhughou Electric Locomotive Factory component evolved from the origin! Aesirp of the Chinese to import electric locomotives to operate with the major new line electrification investments being undertaken. After examining the then existing Zhuzhou electric locomotive works, Bank staff were convinced that, with appropriate investments in the existing manufacturing facility, annual production could be increased from 40 units per year to 120 units, obviating the need for imports. 29. A technical assistance and training package was also included in the project description. 2/ The basic idea was to transfer techoJgy for locomotive design and manufacturing from the developed countries to China. 30. The need for a costing-study, very quickly became apparent to the economists and financial analysts. The railway investment plan was dominated by simple physical planning measures driven by the objectives of the State Planning Commission and the presence of obvious bottlenecks. Engineering solutions were put forward and implemented efficiently, but the concept of demand management through cost-based pricing was completely absent at this stage. Managers were rewarded for traffic and capacity increases which were assumed to be desireable at any cost if they were part of the Plan. Neither true economic nor financial analysis figured heavily in investment decisions. Thus, while Bank railway engineers were generally impressed with the operational and implementation abilities of China Railways, Bank financial and economic analysts had little to work with. This component we.s to begin to repair that deficiency. IV. Project Implementation 31. The overarching objective of improved dialogue and understanding as set forth in paragraph 22 above has certainly been achieved. The quality of the sector work undertaken by the Bank and the Chinese has been good as evid :cd by the published information this audit had access to. A comparison o. the SARs for Rail I and RAil V also gives an indication of how the relationship between the Bank and the Chinese has matured during the preparation and implementation of the lending series. 32. The Datong-Taiyuan line was redesigned after loan signing to handle a flow of 60 million tons per year of coal rather th.n the original 33 million ton objective. A redesigned Datong-Beijing-Qinhuangdao integrated coal export operation (into which the Datong-Taiyuan line was to U1/ Based on data in the December 1982 Railways I Project Report. In the March 1984 SAR the capacity objective was increased to 22 million tons. This 30 percent increment in capacity was made possible by the adoption of a Bank-suggested design concept at a modest increment in cost. It involved placing a siding on the single-line bridge over the Yellow River to avoid this section becoming the ruling bottle- neck in the entire operation. I2/ SAR Rail 1, Annex 2, pp. 33-37. 14 feed) was increased from 60 million tons per year to 100 million tons per year. When the State Planning Commission issued these new design objectives the scope of the project was approximately doubled over that expected in the SAR. The original objective of moving coal in 3,000 ton (gross) trains (up from 1,400 ton trains) was changed dramatically to eventually moving unit trains of 5,000 tons. This was to be achieved with double track, more mechanized coal loading sidings, more powerful locomotives, better signalling, and heavier axle loads requiring heavier track design. The cost of the revised project approximately doubled and completion was delayed two years because of the redes"&gn and the problems of reconstructing a line that was already carrying heavy traffic. There is no record in the Bank files of a revised engineering or economic analysis to define and justify the expanded scope. I2/ 33. In 1989, the Shuoxian-Datong portion (see Map IBRD 17096) of the TaLyuan-Datong line fed approximately 23.2 million tons of coal into the Datong-Beijing-Qinghuangdao line. The Shuoxian-Yuanping and Taiyuan- Yuanping portions of the Taiyuan-Datong line fed 8.2 and 13.1 million tons respectively into the Yuanping-Beijing line which fed the entire 21.3 million tons into the Beijing-Qinghuangdao section. At Beijing the two streams of coal came together forming 44.5 million tons to go on to the port of Qinghuangdao. 14/ The SAR originally anticipated 38.8 million tons to the port by 1989 so actual traffic to date is running about 15 percent above appraisal estimates. Civil works implementation was observed to be good. 34. The Kinxiang-YaJo line subproject went according to schedule in both cost and timing. It was completed in 1987 and carried coal traffic of 13 million tons in 189 compared to the 9 million tons projected in the SAR. Implementation was cserved to be generally good. 35. The only technic 1 shortcomings the Audit could identify with the two line components wete. (i) the use of jointed rail instead of welded rail for the track an4 (ii) the failure to consider the possibility of heavier axle loads for th.. design of major structur-As and (iii) local control of automated switching investments. 36. The use of jointed rail led to repetitive dynamic loads at the joints and that in turn has led to considerable damage to the cross ties at the joint and displacement of ballast. This leads to increased maintenance costs for the rolling stock and track as well as increased fuel consumption by locomotives. Welded rail is being used on the Datong-Qinhuangdao I/ The Borrower notes that all these decisions were made jointly by Bank staff and Ministry of Rail personnel. See paragraph 2 in #nnex IV. AA/ This rather complicated double stream flow of coal from the Shanxi coal fields to Beijing to the port is not clear from the SAR but it is well explained in the PCR economic analysis and can be understood by studying Map IBRD 17096. 15 section of the larger project and should have been used on both the Datong- Taiyuan and Xinxiang-Yarnhou sections. I/ 37. Given the huge capacity constraint China Railways has, increasing wagon capacity with greater axle loads is an obvious direction to move in. Unfortunately, new structures with fifty year useful lives (including those being financed by the Bank) are still being designed for 25 ton axle loads. For a relatively small increment in cost the structures could have been designed to handle the heavier axle loads that are very likely to come in the future (especially for dedicated coal lines). This important but complicated technical issue is addressed in Annex III. HV 38. On both line improvements the Chinese installed what for all intents and purposes could be a CTC technology. Yet, the switches are being operated from individual stations with no central dispatcher. The infrastructure has been modernized but not the operation. Operating the new lines with CTC or even a dispatcher will be particularly important with the advent of mechanized track maintenance. 21/ 39. The Zhuzhou Electric Locomotive Works component was part of a larger planned expansion of the Zhuzhou works. It was to be Phase 1 of the expansion but the Chinese accelerated Phase 2 at their own expense, implementing it concurrently with the Bank-financed Phase 1 which was delayed by about two years because of procurement problems. In 1989 the nearly-completed Zhuzhou facility produced 167 locomotive units that appear to be of acceptable quality - considerably beyond the SAR objective of 120 units from 1987 on. 18/ The future annual output is expected to be about 200 units annually. jA/ The Region notes that the Appraisal Mission recommended additional wodiiTg equipment in the project for this purpose but it was not endorsed at the time by the State Planning Commission. Since then the equipment has been purchased and the benefits to be derived from using long welded rail are now recognise.: Ag/ The Borrower expands on the complexity of this issue in paragraph 2 UZ MUA& V.* 2Z/ The Region notes that very short headways coupled with multiple and frequent shunting operations in the station areas are formidable obstacles to full CTC operations. Even foreign experts have been unable to provide a workable system under these conditions. Another attempt is now being made on the Zhengshou-Vuhan line under Rail II. Mainline CTC is, however, being used on many sections. 2j/ The question of quality is difficult to answer since locomotive availability statistics are not systematically collected and nothing more than locomotive maintenance log books are maintained. Records of maintenance and repairs unrelated to the type and intensity of locomotive use can tell us little about the actual quality of locomotive performance. 16 40. The machinery selection for the Zhuzhou production lines appears to be appropriate and they are well-installed in adequate buildings. However, from an industrial engineering point of view there is much that could be done in terms of overall layout and materials handling between machines. 41. The major observation of the Audit concerning the Zhuzhou facility is that it could expand its capacity another fifty percent to 300 units annually should this output be required, making it one of the largest (and possibly the most efficient because of scale economies) electric locomotive factories in the world. To do this it would be necessary to invest only US$ 3-5 million in machinery and improved factory lighting and go from a one-shift operation co one-and-a-half or two shifts. It would also be necessary to introduce conventional industrial engineering practices into the manufacturing process, principally a quality assurance system, a cost accounting system, and other software innovations to plan and manage an effective multi-shift operation. This would be the low cost alternative to a proliferation of smaller single shift electric locomotive manufacturing operations which seem to be a real possibility in the future as the older steam locomotive manufacturers in China seek to shift to manufacturing the new tractive technology. 42. The danger of this sort of fragmentation has been noted in the 1985 Country Economic Report. Failure to exploit economies of scale has also denied - and continues to deny China an important source of productivity growth and product improvement... .Consolidation of production could have a major impact on product cost and quality even without sophisticated machinery and automated production, by standardizing parts, allowing longer production runs for individual parts, and introducing more specialized machine tools. 2/ With the Zhuzhou facility the costs of fragmentation have been avoided and the benefits of scale economies captured. Diesel locomotives, on the other hand, are manufactured in six factories which clearly are not benefitting from scale economies as the section on "economics" below indicates. 43. Related to the above is the technology transfer objective pursued undpr the loan. Generally speaking, it was successful only in terms of the use of the new machine tools. The outstanding problem for the Chinese is how to keep their electric locomotive designs and manufacturing techniques abreast of the latest technology. None of the major manufacturers of electric locomotives in the world is going to give away or sell cheaply the fruits of their costly R&D programs, especially to such a 2/ China: Long-Term DeveloRnment Issues-and Qptions, A World Bank Country Economic Report, Johns Hopkins University Press, Baltimore and London, 1985. p. 112. 17 formidable potential competitor. AJ/ Part of the solution for the Chinese in the future is to undertake their own R&D - leading to their own designs. This is being approached with the development of the nearby Zhuzhou R&D institute which the Bank supported under this project. However, the independent Zhuzhou R&D facility is responding to other financial imperatives by engaging in revenue generating manufacturing activities rather than the unremunerative R&D activities. Unless the incentives facing the R&D facility are changed, the required design and manufacturing innovations are unlikely to be developed. 44. The costing study report was completed by the Chinese in September 1985. A draft costing manual was prepared and by December 1986 a seminar attended by foreign experts had been held in China to discuss its merits. By January 1987 the consensus of the foreign experts was that the manual, fully implemented, would be an improved reporting system but that the fundamental notion of cost allocation, as opposed to accounting for expenditures, was still missing. By March 1989 the proposed costing procedures were being pilot-tested at sub-administrations in Shanxi and Shanghai. The Chinese have been diligent in pursuing the beginning of an acceptable system. However, the Audit was unable to determine the extent and usefulness of their accomplishments to date. 41/ V. Project Economics Project Analysis in China 45. The fundamental problem with performing economic analyses in China revolves around economic (or shadow) prices as opposed to administered (or financial) prices. AZ/ In a competitive, market-oriented environment we can, in the absence of major externalities, expect financial prices to bear some resemblance to economic prices after corrections are made for taxes. Under such circumstances, financial analyses generally arrive at the same conclusion as economic analyses. Not so in China. Virtually every sector report produrad by thA Rank for China takes on the difficult issue of how to "get the prices right" after many decades of centralized physical planning. The section above on the transport intensity problem sets forth the nature of some of the distortions obtaining in the coal-energy-transport nexus. kO/ Both the Alsthom and G.E. designs and working drawings were included with large equipment purchases. Large-scale imports are unlikely in the future, foreclosing this avenue of technology transfer. 41/1 The Region notes that, under the proposed Rail V project, a plan of action for implementation of the costing system is included. The costing system should help improve the tariff structure eventually, especially for the faster growing high quality services. / Economic Evaluation of Investment Proiects: Possibilities and Problems of ARolving Western Methods in China, by Adrian Wood, World Bank Staff Working Paper No. 631, 1984. 18 Coal Transport Investments 46. The international price of coal is an important assumption for the economic analyses of Rail I because the benefit streams of the two line improvements are based on the net increases in the value of coal production that are allowed by the expansion of dedicated rail and port carrying capacity. The international border price of coal is used in computing the value of the net increases in coal production associated with the project even though some 80 percent of the coal is for domestic use in the south. The international price for coal was high through the mid 1980s, when Rail I was being prepared. By 1987 the international price had fallen by close to forty percent and it is now expected to remain at relatively low levels until the year 2000. &l/ Thus, the primary benefit stream for the two line improvements had been reduced by more than 80 percent with this unforseen development. This would normally be an indication that the project in retrospect was economically unjustified because of an unforseen drop in the value of the commodity for which it was constructed. However, there were offsetting decreases in the cost streams, as well as an increase in traffic levels and these have been reflected in the economic analyses in the PCR for this project. Actual coal production costs are now estimated to be about 18 percent less than assumed in the SAR, while transport costs by rail are now estimated to be 21 percent less than the SAR estimate. Factoring all these into the PCR retrospective analysis, together with the higher capital costs, still yields an estimated ERR of 19 percent. To the extent that the international border price of coal is the appropriate value to place on Shanxi output for domestic use, the rail transport capacity investments are economically justified. Rail Electrification Investments 47. The prices of electric power and diesel fuel are also fundamental to the economic analysis undertaken in association with the electrification investment of the Datona-Taivuan line undertaken in Rail I. The basic options were to continue using coal-fired steam traction (as was and remains the case on the Xinxiang-Yanzhou line), switch to diesel tractive power or switch to electric power. There were good technical reasons to consider electric traction, but these needed to be quantified in an economic analysis since the choice between diesel and electric traction ig by no means obvious even at the volumes of traffic under consideration. A-/ The frustration of the project economist at analyzing f)/ Revision of commodity Price forecasts and Quarterly Review of Commodity Markets, The World Bank, December 1989, Table 1, p. 6. AA/ The major technical reasons usually cited for considering electrification are: (i) steep gradients in mountainous terrain (Electric locomotives can provide the temporary power beyond rated capacity required to negotiate gradients without damage to the engine. Diesels cannot do this), (ii) very heavy traffic flows (in excess of 20 million gross tons annually), (iii) high speed requirements (especially for passenger trains), and (iv) high train frequencies. 19 the choice (which had already been made on technical grounds) is reflected by this 1982 observation from the files: We have made good progress in the preparation of the economic analysis with the information submitted to the mission. However, the method used by the railways is aggregated and difficult to understand. In particular, we have not been able to identify the major savings usually associated with electrification projects. The savings usually obtained when shifting from steam or diesel to electric traction are in energy, labor and maintenance costs. 48. In the end, the Datong-Taiyuan subproject was analyzed as part of the much larger Datong-Beijing-Qinhuangdao investment. 5/ The electrification decision was said to be the least cost solution compared to diesel traction. k6/ The basic capital cost assumptions were that the electrification option would require US$ 48 million in infrastructure investment and US$ 35 million initially in locomotives. The diesel option would require US$ 9 million in depot capital costs and US$ 60 million initially for locomotives. Thus, in capital cost terms, the diesel option was cheaper by only US$ 14 million. The interesting question here is why the diesel locomotives required were estimated to be 58 percent more costly than their electric equivalent when both technologies are manufactured domestically. Major savings in the capital cost of electric locomotives is generally not in line with international experience with electrification. It seems to be the case in China because of government policy to fragment diesel locomotive manufacturing capacity in factories that do not benefit from scale economies. 4/ 49. The major oerating cost savings for electrification were assumed to come from reduced locomotive maintenance costs of about US$ 2 million per year and reduced fuel costs of US$ 5 to 8 million per year. The maintenance cost assumption is in accordance with international experience but not that for energy savings. The fuel cost saving in the SAR comes from the assumption that an all-diesel operation would have an annual energy bill roughly double that of the all-electricity option. The international evidence indicates that a thousand gross ton-km requires about 6 liters of diesel fuel or 23 kWh of electricity. In 1982, J5/ The Bank-supported Datong-Taiyuan investmenL wab oly about eleven percent of the total investment in the rail and port expansion. Ag/ See: SAR Rail I, March 7, 1984, Annex 5, p. 52. A.Z/ Even though the Dalian diesel factory is producing about 186 units per year single shift (comparable to the Zhuzhou electric output) diesel scale economies commence at a level of output of around 400 units per year largely because of the more expensive machinery required for diesel production as opposed to electric production. This observation is based on the costs of a Canadian factory producing 400 units per year compared to the largest European factories producing no more than 200 units per year. European unit cost are about 50 to 100 percent above the Canadian levels for comparable diesel units. 20 international prices for diesel were US$ 0.26 per liter; that for electric power was US$ 0.05 per kWh. Applying these prices to the physical consumption yields US$ 1.50 per thousand gross ton-km for diesel traction and US$ 1.15 per thousand gross ton-km for electric traction. This would be a savings for electric energy over diesel energy of about 30 percent, not the 100 percent implied in the SAR analysis. A/ 50. The PCR did not reexamine the decision to electrify, but the Audit has adjusted the cost streams in the SAR economic to reflect a fuel savings for electrification of 30 percent rather than 100 percent. In addition it has added to the electrification capital costs a figure of US$ 29 million (in 1984 prices) to cover the cost of high voltage transmission line construction by the Energy Ministry to serve the rail requirements. &/ This important element of the capital costs of electrification was excluded from the original analysis. The results of these two adjustments on the original economic analysis showed that the Net Present Value (NPV) of the total cost of the electric option was slightly less than that of the diesel option at a discount rate of 5 percent. At a 10 percent discount rate the results are reversed and the diesel option is the least cost. This is not to state that the electrification decision was obviously wrong. It is only to say, at this stage, that the economic information and analysis in the SAR, the PCR, and in this audit is not sufficiently detailed to remove doubt about the goodness of the tractive technology choice. 51. It is not difficult to find plausible assumptions that help justify the investment in electrification for any line that is expected to carry in excess of 20 million gross tons per year since the international experience supports this. The big unknowns specific to China are the extra capital cost for high voltage transmission line construction to serve the railway system, the subsequent transmission losses, and the geographic distribution of power plants where the short run marginal cost of electric power is well in excess of the average cost of the system. / g/ The international experience with electritcation is caken ZLOm. Railways and Energy, by Liviu L. Alston, World Bank Staff Working Paper Number 634, 1984, pp. 18-46. A_9/ Taken from the PCR economic analysis Table 5, Annex 2, page 4. Although the economic analysis in the PCR did not treat separately the economics of electrification it did (correctly) include the costs of high tension line construction in the total capital investment for the Taiyuan-Datong-Qinhuangdao rail and port investment. IQ/ The Burlington Northern, for instance, despite its very high density long haul coal operations (up to 100 million gross tons per track) has never been able to justify electrification because of the low density and inadequate capacity of power stations in the territory through which its high density rail lines pass. 21 Electric LocoMotive ManufactSIXing Inve tmentl 52. The decision to electrify the Datong-Qinhuangdao and Datong- Taiyuan lines led to an initial decision by the Chinese to import the required electric locomotives. An examination by Bank staff of the existing electric locomotive works at Zhuzhou led to the decision to upgrade and expand the facility to manufacture the locomotives rather than import them. The economic analysis justifying this decision is set forth in Annex 6 of the SAR. 11/ The domestic price of an electric locomotive was then estimated to be about US$ 500,000. By applying a conversion factor of about 1.15, the economic cost was estimated to be about US$575,000. The imported price of an equivalent electric locomotive was estimated at US$ 1,500,000. There was then a saving of about US$ 925,000 for every unit that could be manufactured domestically rather than imported. An investment of US$ 45 million was to allow domestic production to increase from 40 units per year to 120 units per year. At full production the annual benefits would be about US$ 75 million a very good return for a marginal investment in modern machine tools. 53. The Audit attempted to make an independent estimate of an appropriate conversion factor for the Zhuzhou electric locomotives by using two different approaches (See Annex 1). The first approach was to attempt to adjust the individual labor and material accounts of the Zhuzhou factory. This yielded a conversion factor of about 2.4. The second approach was to use an international physical production function and then value the inputs with international prices, in the case of materials, and local labor costs adjusted for fringe benefits. This yielded a conversion factor of about 2.5. The same analysis confirms that the economic cost of a Zhuzhou electric locomotive is still far below the comparable world market price because of the extraordinarily low cost of Chinese labor and the high volume of output over which capital, overheads and R&D costs can be distributed. So low is the economic production cost that the unit saving for avoiding imports in 1990 is about US$ 650,000 ppr unit, With production now approaching 200 units annually, even considering the additional Phase 2 domestic investment there appears to be no question that the "make" option was much superior to the "buy" (foreign) option for electric locomotives. 54. The PWR performs a similar anaisa -v vith a locemntiv-e convsiv n factor of 2.0 and capital costs 36 percent higher than the SAR to reflect the Phase 2 investment. The ERR for the combined Phase 1 and Phase 2 is then estimated to be 82 percent, confirming the high return on the investment in locomotive manufacturing and the gains to be had from scale economies. This would also appear to establish the Chinese as a major potential competitor for sales in the world market. ,1/ SAR Rail I, March 7, 1984, pp. 55-57. 22 55. The big unanswered question is why can the Chinese at Zhuzhou manufacture an electric locomotive of an acceptable quality for such a low cost compared to international prices but cannot do the same thing for equivalent diesel locomotives at the Dalian and February 7 factories and four others. The fragmentation of production and the loss of scale economies are likely to be part of the answer. Given the extraordinary importance diesel traction is playing and will continue to play in the future, a Zhuzhou-like concentration and effort seems warranted in the diesel traction area also. VI. Findings and Issues 56. A major lesson that comes out of an examination of the experience to date is that a comprehensive analysis of the problems and potentials of China Rail requires extraordinarily detailed study at the micro technical Level and the macro economic level with a subsequent attempt at integrating the two. It has taken time and patience and five lending operations to arrive at the point where this is possible in China. For this reason, it is important to view Rail I as only the first step in the process. 57. In the Audit's opinion the efficiency gains to be made at the macro economic level are probably more important than those at the micro technical level. This is because China Rail is generally a well run technical operation compared to railroads in other developing countries. The Chinese have already achieved about 80 percent of the operating and manufacturing standards of the best rail operations in the developed world. Going the other 20 percent is largely a question of adapting for China the latest technologies and methods in management information, communications and industrial engineering. The Macro-Micro Linkage 58. In the last five years, comprehensive Bank sector studies have been completed in energy, transport, industry, agriculture, banking, and coal. These recent studies have transformed our knowledge of these sectors and their relation to the larger economy. Only recently has there been much emphasis on dealing with the practical transitional problems associated with actual attempts to shift from plan to market: China has brought plan and market together under one roof but the relationship is proving more stressful than was anticipated. Simulating markets within a framework of planning and collective ownership has yielded mixed results; and seeking enterprise autonomy through administrative decentralization has proven problematic.... Market and plan pull in different directions and when efficiency collides with employment security and the imperatives of annual production targets, the market is the one made to yield. 52/ W2/ China: Country Economic emorandum - Between Plan and Market, The World Bank, Report No. 8440-CHA, May 8, 1990, p. 102. 23 59. In the early 1980s, neither the sector linkages with the macro economy nor the transitional problems of moving from plan to market were . fully appreciated. This is evident from a critical comment of Loan Committee in November 1983 when the Rail I proposal was being considered: The current (project) description makes it sound almost as if the Bank is supporting an energy project. In the Audit's view, it was entirely appropriate for the project staff to present the Rail I project in .his light and unfortunate that the energy emphasis was subsequently downplayed at the Loan Committee's behest. Possibly the single most serious price distortion in the Chinese economy is that for electric power for the industrial sector. 53/ Since the bulk of the coal to be transported over the two project lines was for producing electric power for domestic use, the coal-electric power nexus was critical for analyzing the economic goodness of the associated powe and transport investments. 54, Had the pricing of domestic electric po- ir for industry rather than the international price of coal been more of an element in the economic analysis, the right questions concerning the economics of power production would have been asked. 60. That, however, would have created a serious administrative problem since the loan funds were to be utilized by the Rail Ministry - not the Coal or Energy Ministry. While there is merit to asking the right questions concerning the ultimate use to which the transported coal will be put, the question is how much of the distortion at the macro economic level can be taken into consideration when preparing a rail investment project. Is it in fact reasonable to expect the managers of the railways to "simulate markets within a framework of planning and collective ownership..."? Or is it more reasonable to require railway management to continue making investment, operational and pricing decisions based on current financial incentives and leave the changing of those financial incentives to those managing the economy at large? %A/ Electricity rates for household consumption are much closer to economic costs than those for industry. L4/ In 1986, China produced 894 million tons of coal of which 9 million tons was erported, with 3.5 million tons going to Japan. Total world coal trade in 1986 was about 320 million tons so China's exports were about 3 percent of the world market and 10 percent of domestic production. Of the 894 million tons produced in 1986, about 531 million tons was moved on the railways and 55 million tons by water. So about 59 percent of coal production moved on the railways with 6 percent moving by water. An unknown residue of the remaining 35 percent moved by truck, probably the bulk of it since mine mouth production is relatively insignificant. See: China: Coal Pricing StUft, The World Bank, Draft Report No. 7377-CHA, February 16, 1989, pp. 13, 30, 65. 24 61. It is certainly unrealistic to ask rail managers to posit an economic scenario where the prices of electric power for industry are trebled, that of coal increased by 50 percent and that of rail freight transport increased by 60 percent with a future freight transport intensity eventually approaching half 1988 levels. The physical bottlenecks created in the rail system with the existing set of macro economic incentives are certainly real and it is understandable that when "...efficiency collides with employment security and the imperatives of annual production targets, the market is the one made to yield." A rail management that refused to triple or quadruple Shanxi coal transport capacity on the grounds that far too much unwashed and underpriced coal was being moved to far too many inefficient users at far too low a freight tariff as a result of uneconomic physical planning assumptions would quickly find itself in "employment security" difficulties. A Bank transport economist who voiced the same concern in 1982 in the face of tremendous traffic growth and capacity constraints would find himself in similar circumstances since the only statistic he could cite to make his case was the extraordinarily high level of freight transport intensity relative to other continental economies. 5-/ 62. It is clear to the Audit that the formal economic analyses of subprojects in Rail I were little more than pro forma exercises done after the engineering and investment decisions were made by the Chinese. They were an administrative requirement associated with the World Bank loan which was a minor element of the overall operation. This was to be expected in the early years. The most recent project analyses undertaken in China indicate that things have improved in some areas. In terms of economic analysis, the recently completed Guangdong intermodal provincial transport study is probably the most advanced application of practical analytical techniques extant - in or out of the Bank. 5_/ Critical to its effectiveness is the use of conversion factors designed to transform financial prices into economic prices. Yet, these conversion factors are based on an unpublished Bank staff paper that is not generally available for scrutiny. Z/ Previous to this recent effort, the only source of conversion factors for project analysis in China was a 1983 study of Aluminum Milling in Shanghai, the so called EAAMS Study. M/ Given the extent of the pricing distortions in the Chinese economy and the existence now of a dual pricing system, it is not an easy empirical effort to derive these conversion factors and keep them updated nor is it an easy task to apply them. It is the sort of effort that might be undertaken by a 55/ The Borrower's views on the general issue of economic reforms are set forth in paragraphs 5 and 6 of Annex IV. 51/ Guandong Province Comorehensive Transport Study, Two Volumes, The World Bank, Draft Report No. 7708-CHA, June 28, 1990. 5j/ Economic Prices for Project Evaluation in China, Unpublished Staff Paper by Peter Dittus, China Department, The World Bank, June 1988. 5/ Economic Analysis of Aluminum Milling in Shanghai, by Shinji Ichishima and Adrian Wood, The World Bank, Annex II, 1983. 25 sophisticated provincial or central planning group, but not by a modal ministry. 63. At the level of the Ministry of Rail, some advanced large scale systems analycic techniqipn Are currently being introduced to assist in modelling coal flows (The Coal Transport Study) on the rail network under different scenarios, and to examine network systems effects for all freight traffic (The Railway Investment Study). At the corridor level, computer simulations are being undertaken to examine the impact of various policy and technological interventions on passenger and freight flows in the most heavily trafficked lines. Thus, the most advanced analytical techniques for transport planning are now being brought to bear on the problems of China Rail. 52/ 64. None of these were available for the first four lending operations and it will probably be several years before they begin to have an impact on the future investments undertaken by China Rail and financed by the Bank. In the meantime, decisions are being influenced by external events and developing bottlenecks. By Rail V electrification was not being financed by the Bank, because of the severe physical shortage of electric power for rail use (implying very high short run marginal costs for electric power), technical problems with maintenance and harmonic interference, and the existence of a viable technical alternative that most energy-starved industrial establishments did not have, ie. the use of steam and diesel traction. This has led to a slow-down of the electrification initiative and a special study of electrification undertaken by China Rail. However, eighteen of the nineteen pages of the background paper for this study deal with engineering design problems while the nineteenth and last page is devoted to the issue of economics. No mention is made of distorted prices for domestic electric power. AQ/ The introduction of economic analysis and macro economic linkages into the thinking of MOR planners is not obvious from the approach used with the electrification issue. / 65. While formal economic enalysis may not be making rapid headway in the MOR, there is no reason why the much easier financial analysis of projects should not be undertaken. Computing the net increases in value of coal production for domestic use because of the existence of adequate rail capacity is a difficult task. Computing the additional rpnenues associated with moving the coal is conceptually much more straightforward. ssociain a riat revcnuc stre- with the 4mwotmantca required to make it possible is the sort of analysis that rail managers should be encouraged to A2/ It is significant to note that most of these imported analytical efforts have been paid for with Japanese grants, a point that is expanded on in Annex 2. AQ/ China: Ministry of Railways Electrification Study. Background Paner on Technical Issues, The World Bank, Asia Technical Department, March 12, 1990. &]/ The same point can be made by scrutinizing the inception reports for the permanent way study and the locomotive and rolling stock study. 26 undertake given the commercial direction in which public entities are expected to move, 66. This exercise was not undertaken in Rail I or Rail II. It was carried out in Rail III and the results are illuminating. According to the Rail III SAR, the Chongqing-Guiyang and Yingtan-Xiamen line upgrading and electrification subprojects generated financigl rates of return of 7 percent and 3 percent respectively. Yet, because the economic returns were said to be so high (23 percent and 33 percent respectively) the projects were undertaken. This conflict between investments that are economically good for the country yet financially bad for the railway is a little unusual. Normally for Bank-financed railways, the situation is reversed and rail managements wish to undertake projects (electrification at low traffic volumes is a typical one) that are financially good but economically bad. The inclusion of subproject financial analyses and their juxtapositinn with the economic analyses in the Rail III SAR naturally raised questions. But, they are questions that abould be raised because they focus in a very practical way on the impact of price distortions in the economy at large and the railway tariff structure. Unfortunately, this innovation was not continued in the Rail IV and Rail V SARs despite the stated commitment to a railway financial cost accounting system that was to be approached under the Rail I project. Presumably a functioning railway costing system is to provide financial data to allow the railway management to make rational investment and operating decisions based on financial considerations. The Bank should be promoting the use of such management tools by using them in their own Staff Appraisal Reports. jZ/ Going for the Othe,r Twenty Percent 67. At the beginning of this section it was stated that China Rail has already achieved a standard of performance about 80 percent of that achieved by the best railways in the developed world. Achieving the other 20 percent is largely a question of adaptation of the industrial engineering practices of the developed world, chiefly facility layout and materials handling for manufacturing operations, and production planning, costing, maintenance procedures and quality assurance systems for both manufacturing and transportation operations. The 1985 Country Economic Report devotes an entire chapter to this general issue and gives numerous examples of successes and failures in the Chinese manufacturing sector. WA/ The Audit has attempted to do the same for the Rail subsector (See Annex II) since Rail I included a component for the improvement of the design and methods of manufacture of locomotives. 2/ The Region notes that they are fully aware of the need to conduct this type of analysis and intend to do so in the future when the costing system is in place. A/ See Chapter 7, "Managing Industrial Technology" in China: Long-Term Development Issues and Options, A World Bank Country Economic Report, Johns Hopkins University Press, Baltimore and London, 1985. pp. 110- 122. 27 68. The lessons that can be derived from the attempts to date at technology transfer in the rail and rail manufacturing subsector can be summarized as follows: (i) there is a misperception on the Chinese side as to what technology is; (ii) the initiative for successful efforts has come from non-Chaluesb 6ouces, and (iii) there in a formidable language barrier. 69. The misperception about the nature of technology springs from the fact that industrial engineering is a new subject in China. The traditional branches of engineering are well developed and well represented in China Rail. However, the study which brings human psychology. information technology, and engineering processes together is almost totally absent from the Chinese scene. For example, an industrial complex as advanced as the Zhuzhou works will have skilled operators running million dollar precision machinery without safety glasses and without even a reasonable degree of illumination, putting both the worker and the work in process at risk for want of very minor expenditures. 70. The most obvious manifestation of lack of industrial engineering information is the obsolete system of record keeping in the locomotive maintenance sheds or the railway manufacturing facilities. Such record keeping makes it virtually impossible to turn over work in process to a second shift with any degree of certainty that the new shift will be able to pick up exactly where the old left off. Inappropriate records also make it impossible to analyze the performance of different locomotives under different operating regimes and different pieces of manufacturing equipment in different configurations - basic tools of industrial engineering. One long term solution to this set of problems is to encourage the development of industrial engineering studies at the university and technical school level. 71. The successful short and medium term attempts at dealing with the soft technology issue have all required major initiatives on the part of foreign groups, individuals, or institutions, at little or no cost to the Chinese. China Rail has been reluctant to go after the "soft" aspects of toreign rechnoluiy because they are not ccnvinced of the cost- effectiveness of paying for methods and approaches as opposed to hardware. 72. The language barrier has also been a formidable obstacle. Industris. ingineering requires an unusually good grasp of language because of the p..aological and problem formulation dimensions which can require a great deal of subtle and complix language. Few translators have the facility to pass on the entire message. The obvious approach to this barrier is to have engineers from China Rail study industri&l engineering in a Mandarin-speaking environment. The most likely places to find such environments outside China are in the advanced industrial concerns in Hong Kong, Taiwan, and Singapore. The "soft" elements of industrial engineering are being successfully transferred from Hong Kong and Taiwan to small industrial firms through joint ventures, but an enormous public sector organization like China Rail has no obvious counterpart in these small Mandarin-speaking enclaves. There are, however, likely to be industrial processes such as ship building or the manufacture of earth moving equipment where relevant industrial engineering principles are applied. Sending Zhuzhou engineers to such enterprises to learn industrial engineering principles is likely to be more productive than sending the 28 same people for short periods to electric locomotive factories where Swedish, English, or French is the language of instruction. 73. In its attempt to go for the "other 20 percent", China Rail will also have to deal with the rationalization problem. Steam locomotive power in China led to a great number of maintenance depots which were the "home" sheds of a small fleet of steam locomotives. To move a train across China was like a relay race in which a steam locomotive and crew pulled a train 100 to 150 miles to the next steam shed where it handed the train over to the next locomotive and crew, refueled and rewatered and prepared for the trip back to the home shed. This relay race mentality still dominates China Railways and its administrative boundaries even though modern diesel locomotives can travel more than a thousand miles with a single train without "handing over". The Bank-financed Xinxiang-Yanzhou Line is part of the larger Shanxi-Shijiusuo Port coal export operation. Over this line of alo ut 800 km there are five locomotive changes as the unit trains pass through each administration. This is wasteful, both in train time (it takes up to six hours to make the switch) and locomotive time. Wj/ To have a locomotive ready and waiting at each changeover means a great deal of locomotive waiting time. Given the high capital cost of modern tractive power (one to three million US$), this is something to be avoided. The simple steam technology with its limited range and the very low capital cost made this an unavoidable and reasonably economic procedure. 74. Even more wasteful of capital is the maintenance of costly diesels and electrics in the old network of modified steam sheds. Originally these sheds worked a single eight hour shift and, in addition to performing the normal maintenance function, manufactured many of the spare parts required for steam locomotives. There has been a tendency in China to maintain the steam maintenance facilities and procedures even though the switch to diesel and electric traction is well-advanced. W/ The single eight hour shift has been retained, which means that when a US$ 1.4 million diesel locomotive goes in for periodic maintenance it is worked on for a maximum of eight hours and then left standing for sixteen hours before it receives attention again. When this procedure is combined with a general tendency to "overmaintain" locomotives, a large percentage of the locomotive fleet is tied up at any one time waiting for maintenance. W/ In addition there is an almost overpowering tendency for yard staff to add cars to unit trains during the locomotive handover. In general, the fewer the yards a train must negotiate the more rapidly it completes its trip. AW There is still much to be said for retaining a fairly large fleet of steam locomotives in China to operate on the low density lines and to be used where a great deal of idle time is unavoidable. A steam locomotive is wasteful of energy (about ten percent efficiency as opposed to twenty-five percent efficiency for electric and diesel- electric) but it is a low capital and maintenance cost operation and can be efficient in situations where a locomotive is required on station but utilized very little. 29 75. Related to this wasteful use of capital is the widespread small- scale manufacture and overhaul of spare parts for diesel and electric locomotives as was the case for steam. Since modern locomotives are vastly more complicated and demanding of clean precision work than steam locomotives, the attempt to manufacture spare parts and overhaul assemblies in the old steam sheds has led to a large investment in underused machine tools and testing equipment. The problem here is how to rationalize the system for the new technologies. That is how to close down most of the old steam sheds and concentrate locomotive maintenance in two to three shift depots where the emphasis is on getting the locomotive back onto the system - not on manufacturing spare parts. This means the use of a unit exchange system in which all spare parts and major components are manufactured and overhauled in a few very good central workshops. The maintenance depots would merely replace spares and major components from their stock and send the components to the central workshops for overhaul. Such has been the general tendency for all railroads the world over and the process has almost always been painful because of the impact of rationalization on the labor force. Concentrating labor in three shift central workshops to maximize the use of costly machine tools and special clean rooms makes good economic sense but requires many people to shift their location of work and dwelling, as well as their working hours. 76. The Chinese have hardly begun to face up to these difficulties. However, they have one very great advantage: Their economy has been growing at the rate of seven to ten percent per year for the last ten years while their total labor force has been growing at only three percent per annum over the same period. Thus, there are potential alternative uses for displaced labor ia China provided the physical mobility of labor is enhanced. 77. The Bank did not formally support the idea of rationalization until Rail V when a study was commissioned. This study should be facilitated so that future lending operations do not finance machine tools going into machine shops that do not make long-term economic sense. The Bank should ideally restrict its support to those Clements of the maintenance and manufacturing facilities identified in the rationalization study. The Chinese may choose to retain certain facilities for regional or political reasons but the Bank need not support these transitional arrangements. There should be a clear notion of the rationalization destination - how long it takes to arrive is another matter. The Importance of International Experience 78. The extent and complexity of China Rail combined with financial data incorporating enormous economic distortions can be so overwhelming that it is easy for the analyst to lose his way. The engineer can be forgiven for his concentration on the physical nature of the operation and the removal of obvious bottlenecks. There are, however, a series of touchstones or international bench marks that the analyst is well-advised to turn to in making initial assessments of the desirability of certain investments or operational practices. Most of these have been utilized in this report. 30 79. The first is the notion of the transport intensity of the economy. Contemplation of this statistic can only lead to the conclusion that successful macro economic policy changes will and should lead to a lessening of the demand for freight transport, especially rail freight transport in China. The desirability of less freight traffic or, more likely, lower growth rates is foreign to the thinking of most railway planners and the achievement of such a goal would not generally be considered a success. It needs, however, to be kept in the foreground of discussions lest the short term bottleneck argument be projected into the indefinite future and prevail to the point that serious overinvestments in capacity take place. This is likely to be a problem with the railways of Eastern Europe and the Soviet Union and their progress, or lack thereof, should be monitored for potentially useful lessons for the Chinese. 80. The second piece of international evidence that needs to be referred to from time to time is that of the Burlington Northern privately owned railway in the U.S. In the last ten years, this large (46,000 route km) freight railroad has made extraordinary progress in capital and labor productivity in a macro economic environment where private financial decisions are likely to be consistent with decisions based on economics. The fact that their revenues per ton-km in a competitive environment are three times those of China Rail cannot be explained by the differences in wage rates and is the most convincing external proof that the financial statistics associated with China Rail are badly distIrted. The BN's technological decisions based on financial analyses also bear examination principally their decisions: (i) when and where to electrify (ii) to go to heavier axle loads and larger capacity wagons (iii) to go to double stack container operations, (iv) to adopt automatic car tracking systems and (iv) to contract with their locomotive manufacturers for locomotive performance guarantees that involve the manufacturers in maintenance subsequent to manufacture. 81. While the BN's decisions concerning electrification may be relevant for certain sections of China Rail, the European experience with, and justification of, electrification of high density lines carrying both freight and passenger traffic provides a rich source of experience provided appropriate adjustments in wage rates can be made. The general rule of twenty million gross tons per year of traffic as the electrification threshold in flat terrain is a useful one to apply in an environment where the results of financial analysis is not likely to make economic sense. / it may not be an elegant approach to the i--"" but it assures that major misallocations of resources do not take place. jg/ Mountainous terrain and the availability of 50,000 volt power (instead of 25,000 volt power) might reduce the threshold as low as 5 millior. gross tons annually. 31 82. In the manufacturing area, the sort of analysis done in Annex I is useful. It draws on the physical productions functions of the best producers in the developed world to get some reasonable notion of what it actually costs the Chinese to produce an electric locomotive. While the results verify the "%.ke" rather than the "buy" option, the difference in costs is nowhere near what the financial accounts show. This gives a much more reasonable perspective to the decision to invest. 83. In the area of rationalization of locomotive maintenance the international experience of centralization and specialization incorporating a unit exchange system is almost certainly the way in which China will eventually go. Here, the recent Bank-supported experience in India with attempts to begin the transition may be more relevant than that of the developed world. The most recent statistical evidence (1989-90) indicates that the Indians have, in the space of three years managed to lift their locomotive availability (diesel and electric) from around 80 percent to 90 percent. fY This would be an extraordinary achievement if it is sustained and would certainly merit study by any railway interested in doing the same. 84. International prices for traded commodities such as coal can be usefully incorporated into the decision to invest in coal movement capacity. This was the approach used in the SAR and the PCR in the economic justification of the line capacity expansions. The case is made in the audit report that a more correct approach would be to analyze the rail capacity investment as part of a national energy project since most of the coal is to be used domestically and could not in any case be exported. Since a national power model is not a tractable analytical tool for a transport economist seeking to explore the economic justification of the coal transport capacity expansion, the recourse to a narrower approach in which the rail investments are considered as part of a coal mining export operation is justified. It has the merit of considering something larger than the immediate rail investment and places an international competitive value on the coal rather than the distorted financial price. 85. Relevant international experience based on good economic or financial analyses in a competitive environment can be useful as a rough check on investment and operational decisions in China in the absence of market prices and accurate financial costs. However, there are many examples of bad international experience that the Chinese would be weil- advised to avoid and there are some areas where the Chinese themselves represent the best international experience. The European experience with high speed passenger trains is an area that should be approached with great caution since neither the economics nor the finances of these innovations have weighed heavily in the decision to go forward. Potentially competitive bus and air operations have sometimes been restricted to ensure a ridership for the new technology which is attractive for its own sake. A similar caution applies to operational innovations undertaken in the U.S. railroads and those of Japan pre deregulation. In general, a highly §V/ Prolect Comletion Renort. India Railway Modernization and Maintenance Project II, The World Bank,, January 1991, p. 37. 32 subsidized rail operation with restrictive labor practices i& unlikely to provide the sort of model relevant for the Chinese. In the area of container transport there are many worthwhile developed country models to emulate. For the transport of large volumes of low income passengers it is unlikely that the Chinese will find anyone to turn to for inspiration except themselves and possibly the Indians and the Soviets since no other country has had to face the volume of low income intercity ridership that the Chinese must increasingly come to terms with. The Task Facing the Bank 86. Dealing with the railways of China has required the provision of an extraordinary array of technical skills by the Bank ranging from those conversant with the macro-micro linkage to those concerned with specific industrial engineering applications. So far, the Bank has managed to stay on top of developments by bringing in a variety of international experts to assist in the task. However, as the number of disbursing lending operations increase and the numerous outstanding studies reach critical junctures the task is becoming more difficult and complex. The Rail I project alone involved procurement of 447 items under 352 contracts with an average size contract of US$ 0.6 million. This is an enormous administrative task for Bank staff to supervise and practically ensures that the single railway engineer assigned to China Rail supervision (the same engineer has responsibility for the equally complex Indian Rail supervision) has little time left for addressing the wealth of issues coming forth from the numerous studies and project preparation exercises. The success of the Bank in achieving its objective of widening and deepening its understanding of China Rail threatens to overwhelm the staff assigned to assimilate and integrate this new knowledge into future lending operations. 87. Only sixty percent of China Rail employees are engaged in providing transportation. The rest operate a major national construction -*yA IrAiiatrial manufacturinp conglomerate. The management and workers of the Burlington Northern Railway, on the other hand, have the enormous advantage of being largely concerned with providing and selling transportation services alone while contracting with other firms for construction services or hardware. An obvious direction for China Rail in the future is to work toward divestiture of construction and manufacturing functions and concentration on transportation of passArgera and freight. In the interim, the Bank's problem in China becomes the mirror image of the management problem of China Rail - it is too large, complex and vertically integrated to be handled effectively by the normal manpower coefficients of the Bank or the planning office of the Ministry of Rail. 88. Part of the answer for the Bank is said to be sector lending to what is, after all, a much better than average third world rail operation. By rising above the multitude of detailed and confusing technical considerations and leaving those to the Chinese, a small team of Bank staff with the requisite diplomatic skills could effect a major transfer of resources at a very low cost. Such an approach was used with India Railways from the start and was abandoned after thirty years and thirteen lending operations when it was determined that little progress was being made with measurable improvements in Indian Rail performance. The audits 33 of the last three sector lending operations with India Rail indicate how superficial the Bank's involvement was in the sector. MA/ It was only after the project-specific Modernization Series was undertaken in India that come underct-nAin nf the !ntrnml constraints to progress was gained and difficult steps were taken to effect improvements. O2/ A form of sector lending patterned after that undertaken initially in India is clearly not the model to follow in China if the Bank wishes to perform its role as a development institution. 89. In China the Bank has, from the outset, approached rail lending from the project specific point of view with the idea of evolving into sector lending, the opposite strategy to the India experience. The early project specific approach has been responsible for the rapid development of knowledge of the detailed problems and potential of China Railways. The challenge now is to shift to a form of sector lending that does not sacrifice in-depth technical understanding to achieve low cost resource transfers. The unique niche of the Bank in an increasingly sophisticated system for international lending for development is the concern for lending for technically and economically feasible public investments. There is no way to maintain the requisite technical understanding in China and, more importantly, use it effectively without making a major expenditure for a wide range of high quality technical expertise, expertise that is frequently not available within the Bank. 90. Assuming the ability of the Bank to make the resources available, the problem of managing the requisite resources effectively remains. Only the highest quality leadership combined with a substantial increase in Bank resources can hope to keep up with the initiatives that have been set in motion under the first five rail lending operations in China. The temptation to retreat to a superficial form of sector lending will be great since neither the management skills nor the enhanced staff resources would be necessary to effect the resource transfer. 2/ The difficult, time-consuming, and sometimes contentious interaction required to efiect miounagful change can also be avoided with a resurrected Indian Rail sector lending approach. Yet, the Bank's long term credibility with clients as sophisticated as the Chinese will depend heavily on continued wide-spectrum technical excellence. Without it the Bank's special niche is eroded and it begins to blend into the existing and non differentiated international system of commercial banking and bilateral aid. The Eg/ PPAR India Rail XI and XII (Credits 280 and 448-IN), OED Report No. 1658, June 30, 1977, and PPAR India Rail XIII (Credit 582-IN), OED Report No. 6055-IN, January 10, 1986. J2/ See: PPAR India MOD1, OED Report No. 7020, November 30, 1987, and g IndiA.MOD2, Transport and Energy Operations Division, Country Dept. IV, Asia Region, January 1991. 20/ The last sector lending rail operation in India (Rail XIII) required only four supervision missions and a total input of 161 staff-weeks. The recently completed MOD2 operation in India required 16 supervision missions 381 staff-weeks to completion. Rail I in China required seven supervisions and 258 staff-weeks. 34 achievement of the ambitious Rail I project objective has raised the question of whether or not the Bank can keep up the pace with an institution as formidable as China Rail. The more we succeed with sophisticated clients, the more high quality resources we must allocate to deal with the fruits of success. 35 Annex I Page 1 of 5 ECONOMIC COST OF SS3 (4.80 kw) ELECTRIC LOCOMOTIVES - AS MANUFACTURED BY ZHUZHOU LOCOMOTIVE WORKS SUMMARY: Zhuzhou Electric Locomotive Works has indicated it costs 1,546,670 Yuan (US$309,300 at 5 Yuan - $1 U.S.) to manufacture an SS3 electric locomotive. Due to the various subsidies on material, power, labor, and methods of accounting, this is not an economic cost. For example; steel is sold to the factory at about 45% of the true cost of production. Research and development for locomotives is undertaken by the Research Institute, and the warrantee cost is borne by the railway. Therefore these costs are also not included in the domestic price of locomotives. Using two methods of adjustment, the "true" cost of an SS3 locomotive has been determined to be between $731,000 and $787,000. This implies a conversion factor from financial to economic cost of about 2.4 and can be compared with the PCR's estimate of 2.0 A comparative world market price for a locomotive similar in design and quality would be in the region of $1.4 million. If the Chinese were selling their locomotives abroad, additional marketing and warrantee costs would have to be included, probably amounting to an additional $150,000 to $200,000. A comparable export price would then be about $ 1,000,000 for the Zhuzhou product. THE LABOR PROBLEM: Logically two of the most significant factors in attempting to determine the economic cost of a locomotive is the true hourly wage rate at Zhuzhou and the actual direct labor hours involved in manufacturing a locomotive. It appears that there are no job numbers. All hours (direct, indirect and supervision) are lumped together and assigned by the accounting department on an estimate basis.!/ Vm"lnyap fring benefits usually consist of vaeation. health and welfare. pension, disability insurance, etc.. In addition, in the Chinese case, fringe benefits would also include subsidized housing and schools. 1/ It is interesting to note that the labor cost for a SS3 locomotive is 22,258 Yen and a SS4 (essentially 2 SS3 locomotives), is 130,406 Yen, or nearly six times as much. 36 Annex I Page 2 of 5 An estimate of the Zhuzhou employees' definable benefits as a percentage of their official wage are as follow: Vacation - only 2 weeks/year for senior management employees, less than 2% Paid Holidays - approximately 3% Pension - probably less than 15% Disability - 3% ? Health, Education etc. - 11.5%+ 2/ Estimated total - 34.5% Typical U.S. fringe benefits are in the 40-50% range, while in Western Europe they are 90-100% of the wage or salary. A detailed study of the Burma Railways, which has an almost identical benefit package to that of the Chinese Railway, indicated a fringe benefit of 70%. Since the fringe benefits appear better on the Chinese Railway, it is reasonable to assume that they must be greater than 70%. If a comprehensive study were made, it is reasonable to assume that the benefits would be at least 100% and may be as high as 200%. The average pay for a factory employee must take into consideration productivity bonus, etc., and is about 1 Yuan per hour, or, with fringe benefits, about 2 to 3 Yuan per hour (U.S. $0.40 to 0.60). Therefore, to ensure all benefits and other subsidies are covered, a labor cost of $0.60 per hour has been used for the economic and comparative analysis. In comparison to developed country skilled labor wages of about $25 per hour, a $0.60 per hour wage is insignificant. It can be seen from the following analysis that whatever the multiplier or direct labor cost is used, it makes little difference to the cost of the locomotive. 2/ At the February 7 Locomotive Works there is a labor force of 7698, of which Workers Direct and indirect 5573 Technicians and management 1329 Medical, teachers, etc. 796 Based on the employees involved, 11.5% are providing health and education benefits, this is very low because many workers, are probably involved in, for example, maintaining the schools, housing, etc.. 37 Annex I Page 3 of 5 ADJUSTED ZHUZHOU ACCOUNTS METHOD: The following analysis is an attempt, with the data available, to develop an economic price by applying conversion factors to the basic elements of the Zhuzhou accounts: Accounting Costs Economic Costs Yuan('000) S('000) Yuan('000) S('OQ) Materials-Based on prices paid 1,264.0 252.8 by Feb. 7 loco works for steel and copper, material costs reflect about 60% of economic cost.21/ 2,106.0 421.0 Laor-Employees receive, on 25.1 5.0 average, 1 Yuan/hour. Typical U.S. benefits are 50% labor cost. In China, benefits include health, education, and housing; therefore must be at least 200% of wages. 75.3 15.0 Fuel & PowFr-electricity 22.3 4.5 is sold at 25% economic price 89.2 17.8 Welfarefund-Assuming 2.2 0.4 underpriced by 50%. 3.3 0.7 Workshop Expenditure-This data 82.9 16.6 probably reflects the maintenance onat- of marhinerv that was either simple or new should be increased by at least 100%. 165.8 33.2 Administrative Expense-The 150.1 30.0 majority of this cost is probably labor and; therefore, should be multiplied by 200% to reflect benefits. 450.3 90.0 Sub-Total (per factory) 1546.7 309.3 2889.9 577.7 2/ Planed price for steel and copper is 45% China market price, and the market price is comparable to the world market price. Based on February 7th. Loco. works data about 60% of steel and copper is purchased at the planned price, which would indicate a weighted average material cost at about 60% economic cost. 38 Annex I Page 4 of 5 Additional Items - Research & Development-(Research Institute has separate accounts) assume 10% of cost of production (Usually about 8% of gross revenue)-- -- 289.0 57.8 Warrantee-Costs borne by railways assume 5% -- -- 144.5 28.9 Total Cost of Manufacture 1546.7 309.3 3323.4 664.4 Profit 10% -/ 154.7 30.9 332.3 66.4 Total Price 1701.4 340.2 3655.7 730.8 ADJUSTED FOREIGN MFG ACCOUNTS METHOD: According to suppliers, a US$ 1.4 million electric locomotive comparable to the Zhuzhou SS3 would have the "World Market" cost breakdown for the various physical inputs as given below. The "China" column indicates the adjustment of the world market element to reflect Chinese conditions. From this analysis it can be seen that the overwhelming advantage of the "make" option is the cost of labor. An imported locomotive has about $375,000 worth of skilled labor embodied in it, whilst the Chinese version has only $15,000 - this despite the fact that the Chinese lccomotive requires 25,000 man-hours of labor as opposed to 15,000 for the import. Labor costs for the import are about 27 percent of the selling price while they are only 2 percent for the Chinese. Chinese skilled labor at Zhuzhou is about half as productive as their foreign counterparts but foreign labor gets paid 42 times as much. 4/ Profit is not included in the Zhuzhou cost accounts, but the price the factory charges the railway does include a ten percent profit of which fifty percent is for employee bonuses with the remainder paid as taxes to the government. 39 Annex I Page 5 of 5 Cost h. akdown (S'00O) World Mairket Cling Material V/ Basic (Steel, Copper)§/ 84 80 Other 362 326 Z/A/ Direct and Indirect Labor World 15,000 hours/loco($25/h) 375 China 25,000 hours/loco ($0.60)2/ 15 Equioment maintenance, depreciation, power etc."/ 149 112 11/ arrantee (5%, I2/) 64 96 Marketing (10%, China 0%) 127 2 1-/ R&D (8% of gross revenue) 112 84 14/ Sub Total 1273 715 Profit 10% 127 72 Selling Price $1400 $787 .5/ Material costs are in the range of 35-45% of the selling price, 35% assumed. j/ There are about 130 tons of steel ($400/ton) and 8 tons of copper ($4000/ton) in this type of locomotive. ./ Chinese material costs, due to lower labor costs, assumed to be 95% for basic material and 90% for other material of world market prices. g/ While labor is cheaper, machinery is operated in such a manner that more labor is required offsetting the labor cost savings in manufacture of other material. 9/ Labor cost includes all fringe benefits and management cost. .jQ/ This cost depends considerably on annual production and is assumed to be the value after all other cost components have been deducted from selling price. f1/ Assumed to be 75% that of World Market to account for reduced labor cost and simpler machinery. 12/ For a world market product of this type, 3% is normal. In China, 7.5% is used because of technology, reliability, and the inability to keep track of components. L1/ Marketing cost assumed to be a minimal $2000 in China. 1A/ Research and development cost assumed to be 75% of the world market due to reduced labor cost. 40 Annex II Page 1 of 7 ISSUES IN TECHNOLOGY TRANSFER SUMMARY: A component of the Railway I loan was technical assistance for the improvement in design and methods of manufacture of electric locomotives. While there was considerable technical assistance associated with the workshop, it was restricted to the installation, operation, and maintenance of the new machinery purchased under the loan. The technical assistance for design and industrial engineering were not undertaken for what appear to be the following reasons: The refusal of the world's locomotive builders to allow representatives of the Chinese Railways into their facilities for proprietary reasons - especially since Zhuzhou will be, potentially, a major competitor. Major research organizations wanted substantial payment for what would be their time, and were unwilling to give away information that had been very expensive to develop. An unwillingness on the part of the Chinese to pay $10,000 to $15,000 per month to a foreign consultant, who may be working with a counterpart earning less than $100 per month. Language problems associated with technology transfer, especially in the softer engineering subjects; such as costing, material handling, plant layout, etc.. A brief tour of the Datong, Zhuzhou, and February 7th factories, as well as several workshops and depots, indicated that while the organization and operation of the railways is probably superior to most, if not all, developing country railways, it is significantly behind the developed countrics in locomotive design and the whole field of industrial engineering. Industrial engineering is a new subject in China and, unlike the other engineering subjects, it requires a much better understanding of a foreign language when studying the subject. In comparison to a mechanical or electrical engineer, language ability must be about twice as good to study Industrial Engineering. Therefore, unless an engineer is very familiar with the foreign language, the study tour approach will not be effective for quality assurance, costing, plant layout, etc.. Long term training is the only viable approach, with the initial study being in the foreign language. Chinese Railways seem to have a large number of well educated professional personnel, and they are eager for the staff to achieve international recognition. It would, therefore, be logical to develop a barter agreement for exchanging the very low cost professional labor in exchange for non- 41 Anno II Page 2 of 7 proprietary technology that is available from the other railroads and research institutions. This has elready worked relatively well during the mid 1980s with approximately 10 engineers working for the Association of American Railroads (AAR). With respect to proprietary technology, it appears that while there are a large number of options, at the present there seem to be only two that are realistic. For stand alone technologies that do not involve a large continuing research expenditure (such as concrete ties) the Bank should assist in the outright purchase of that technology. For the complex technology where there is a large continuing research effort that is required, the joint venture appears at present to be the most logical option. A precedent for this approach has already been set with the five- year-old joint venture between General Railway Signals (GRS) and the Railways Signal and Communication Corporation. A review of the history of the successful technical assistance programs to date has one common feature: one or more non-Chinese people have spearheaded the effort. Dr. Harris was responsible for the AAR program; Bank personnel were the moving force behind the RIS and CTS Project; the GRS firm put in 18 months of continuous effort for the signals project. It is likely that any significant future improvement in complex technology transfer will require an extensive effort on the part of the Bank or others. PROBLEMS WITH CONSULTANTS: A Western consultant on assignment in China will cost, with expenses, $10,000 to $15,000/month. His Chinese counterpart will probably be earning about $80 per month. As a result, there is an understandable reluctance to retain consultants. While a consultant could save investment or increase production many times his cost, it is difficult to prove, and the ability to see the possibility of che savingb would indicate that the person already has a detailed knowledge of the subject. Many consultants are reluctant to contract with the Chinese for various reasons, but the requirement to guarantee results is the most problematic to anyone in the "soft" engineering industry. The effectiveness of the consultant can also be questioned because of problems of language. There are very few Mandarin speaking consultants, particularly in specialized fields. As a result, the consultant must either have a translator, or be working with a counterpart who understands his language. This, in itself, is a problem because the translator or counterpart would need to have familiarity with the technical language. PROBLEMS WITH INDUSTRIAL ENGINEERING: A brief review of several railway factories, workshops, and depots indicates that the machinery for manufacture, overhaul, and maintenance of locomotives is appropriate and, in many cases, state of the art. However, the layout of the facilities, material handling, and the "software" systems such as production planning, costing, and maintenance procedures and quality assurance (classic 42 Annex II Page 3 of 7 industrial engineering) are either very elementary or entirely lacking. These conclusions have been corroborated by representatives of General Electric locomotive company and GRS. The GE locomotive purchase and technology transfer had provisions for transfer of a range of engineering technologies (some 600 people visited Erie). The "hArd" engineering appears to have been transferred successfully, but the industrial engineering has met with little success. There are probably seveial reasons for this: Industrial engineering has historically always followed manufacturing (first you design a product, make sure it works, and then determine how to make it economically and of high quality). Industrial engineering is a brand new subject in China and its benefits are probably not yet recognized by management. It has only recently been introduced as a discipline in Chinese universities. To study industrial engineering requires a much better knowledge of the language than needed for study of a hard science. In mechanical engineering, for example, a formula or an engineering drawing can be understood with very little language familiarity. However, industrial engineering has very few formulas and requires understanding of human psychology and, therefore, a much greater understanding of language. According to the Dean of Industrial Engineering at the University of Illinois, for an undergraduate degree, language skill must be at least twice as good as with a mechanical engineering degree. The primary emphasis in China is plan-driven quantity. There has been very little emphasis on producing high quality products economically. The terms "quality" and "economically" are used but there is a lack of the necessary data systems to determine the true cost and quality of a product. With simple technology, maintenance is not critical. However, with the more advanced technology that China is now developing and the high capacity demands of the raRlway, the software aspects of maintenance technology is becoming increasingly important. TECHNOLOGY TRANSFER - PROPRIETARY: There are several approaches that can be used to obtain proprietary technology for, among other things, design and manufacturing methods. These are reviewed below: Retain a consultant specialized in a specific technology such as the one 43 Annex II Page 4 of 7 who specialized in the design and manufacture of concrete ties: This method would cost $10,000-15,000 per man month, and, therefore, would face the problems menTioned above. The Chinese have been using this approach when the consultant is funded by some form of grant or aid. A better approach may be a fixed fee for a defined technology. (For concrete tie technology the fixed fee cost would be about $85,000). Contract with an independent research and development company such as Ricardo and Co., a diesel engine R & D company: To a limited extant this approach is being used. Acquire a technology as part of a large hardware purchase: The GE Dash 8 technology was included in the purchase of 220 Dash 7 locomotives, a $275 million purchase. Unfortunately, it is unlikely there will be any further large locomotive purchases and, if there were, the technology might not be in the areas where it is most needed. Outright purchase of the locomotive technology from a manufacturer is conceptually straight forward. This method is expensive because the manufacturer is primarily interested in manufacturing and not in aiding a potential competitor. Licensing of a technology: Western companies are reluctant to license technology in China because it is difficult to control the use of the technology, enforce the royalty payments, and obtain hard currency. Acquisition of a technology through a joint venture: Electric locomotive manufacturing has too many suppliers operating in a generally declining marketplace. An appropriate joint venture benefits both partners. A foreign partner would potentially benefit from extremely low cost skilled Chinese labor and scale economies which would help expand the world market share for his technology. The Chinese would receive the technology and R&D support as well as an international marketing -ytem. The big problem is in preparing a public sector Chinese entity for intimate cooperation with a private sector non-Chinese organization. TECHNOLOGY TRANSFER - NON-PROPRIETARY: An example of a relatively successful technology transfer was during the period 1982-1987, when about 10 Chinese Ratiways engineers wvrked at eithCr the- Pueblc Tranupnrtation Test Center or the Chicago Research Facility of the AAR. The main points of the agreement between the AAR and China Railways were that the railway would pay transportation expense to and from China and pay the engineers a salary which would be supplemented by $1000/month from the AAR. The engineers were to be proficient in English and were expected to work as employees of the AAR. Expenses incurred on assignments for the AAR were paid by the AAR. A review of the success for this approach indicates that the engineers performed between 50-80% as efficiently as an American engineer, primarily depending on their proficiency with English. The program was originally designed as an exchange. However, when the AAR engineers went to China, 44 Page 5 of 7 their program (ranging from 4-6 weeks) was not that well-organized and they questioned if their time was usefully spent on behalf of the AAR and the Chinese Railways. Unlike many other railways, the approach to the promotion and job transfer in China is such that it appears than an individual trained abroad in a specific subject will be retained within that field for sufficient time to make use of the training and transfer his knowledge to others. It is, therefore, worthwhile for the Chinese to spend a long time training an individual. There are organizations such as the AAR and various Universities where there is little proprietary information. They would probably welcome qualified Chinese engineers for long term work-training. The British, French, Germans, and Russians operate similar research facilities. Also, there are a number of railways that may well welcome Chinese engineering talent in exchange for access to methods and technology. A possible approach could be for V engineers the Chinese will pay W percent of salary and travel expenses to the host organization and the host guarantees Y man hours of training over a period of Z months. By varying V, W, Y and Z some agreement could probably be worked out. The Chinese engineers would be actively involved in research and development programs that would be of mutual interest. This approach may have merit because Chinese rail appears to have many well qualified engineers and it is eager to have international recognition of their knowledge and skill. In effect, they would be bartering professional services for technical training. There are a number of other possible alternatives for non-proprietary technology transfer: Utilization wherever possible of Mandarin speaking consultants. It is possible there are industrial engineers in Hong Kong, Taiwan or Singapore. Study tours, but they should be restricted to "hard" engineering unless one or more of the participants is fluent in the appropriate technical language of the countries being visited. Consulting firms are sometimes willing to undertake fixed fee training or technology transfer; such as the Line Capacity Study being undertaken by ALK of Princeton. The Chinese appear to be willing to use this approach only when the funds are from a grant. They also they tend to drive very hard bargains with the consultants - to the point where the enthusiasm of the consultant for the initiative it vitiated. 45 Annex I I Page 6 of 7 Wherever possible training/technology transfer should be of the format where several Chinese engineers would: learn the language of the host country prior to the departure from China, spend 4-5 months for additional language study in the host country while familiarizing themselves with the technical subject in question, spend 3-5 months working on the technical subject to perfect their knowledge, towards the end of the working period a delegation of relevant senior railway officials should make a study tour with the appropriate technology being explained by the Chinese engineers who have been working and are now familiar with the new technology. This approach appears to have been successfully used for the Railway Investment and Coal Transportation Investment Studies. For these approaches to work at least the following are required: An individual willing and in the position to promote, negotiate, arrange, and, if possible, continuously review. The successful AAR training was primarily arranged by the head of the AAR research department. The successful Line Capacity, Coal Transport and Railway Investment studies were also formulated by World Bank staff. Also, Bank staff have played an active role in supervising/reviewing these studies. The receiving organization should (as with any potential employee) be able to have the right of final selection. The Chinese would make a preliminary selection. A language proficiency examination would be given as part of the selection process. Should improvement be required, additional language training would take place in the host country at the Chinese expense. THE ORGANIZATION OF TECHNOLOGY TRANSFER: The Chinese are hard bargainers when they are the buyers and they have the money in hand to pay for engineered products. With respect to technical assistance, training, etc., they are buying a "soft" product and they are not sure of its production capacity or overall benefit. They may be unwilling to purchase because of the hypothetical benefits and the tremendous pay difference between a consultant and his counterpart. There also seems to be a lack of confidence in their ability to master the soft technology as well as fears of being held responsible in case of lack of success. 46 Annex II Page 7 of 7 In the railroad field there have been a number of assistance/transfer training projects. A review of these projects indicates that those that have been generally successful (the AAR exchange, the RIS and CTS projects, and - to a certain extent - the line capacity study) have always had a non- Chinese person or persons who put the various packages together and made them work. In the case of the GRS joint venture, it required an 18 month effort on the part of GRS, who, unlike most potential joint venture companies, persisted to the end. These observations lead to the conclusion that lack of marketing experience, cultural and language problems, reluctance to invest hard currency for a benefit of hypothetical value, and in many cases, lack of understanding of the benefits of the technology, makes it difficult for the Chinese to take charge of their technology transfer efforts. It appears to be vital that a third party promoter be involved for technical direction and as a negotiator. 47 Annex III Page 1 of 1 1HE 6AiLE LQAD 15GSUE THE AUDIT POSITION: China Railways, as a general policy, used 21 ton axle loads for bric'ge and track design starting in 1973. By 1986 the axle load for design pur.oses was raised to 23 tons. Twenty-five ton axle loads are being used "experimentally" with coal trains on the Datong-Qinhuangdao line. The Yellow River Bridge that the Bank financed on the Xinxiang- Yanzhou subproject (the longest bridge in Asia) has been designed for 25 ton axle loads. In the last ten years, research and development in the USA has shown that 30 ton axle loads are both technically and economically feasible and 36 ton axle loads are being actively considered. 1/ Given the huge capacity constraint China Railways has, increasing wagon capacity with greater axle loads is an obvious direction to move in. Unfortunately, new structures with fifty year useful lives (including those being financed by the Bank) are still being designed for 25 ton axle loads. For a relatively small increment in cost the structures could have been designed to handle the heavier axle loads that are very likely to come in the future (especially for dedicated coal lines). The Chinese argument against the use of heavier axle loads is that the entire rail network would have to be upgraded rapidly to handle this new technology. Given the huge number of wagons with 23 ton maximum axle loads in the fleet, introducing 30 ton axle load wagons now would be a very gradual process (as was the shift from 21 to 23 ton loads in 1986) taking place over many years and most such wagons would be consigned to unit trains operating on well-defined corridors. The internal Bank argument against the innovation cites the European experience which prefers high speed light axle load freight wagons that do not conflict so much with high speed passenger trains on the same lines. They also assert that the U.S. move into heavy axle load freight wagons is based on the benefits of avoiding restrictive high cost labor practices that do not exist in China. The matter could be easily settled by considering the economics of the proven U.S. technology in the Chinese context - an analysis that has not yet been undertaken. 1/ Seminal research reports on this issue are: "Higher Axle Loads are Feasible - Economics and Technology Agree", by S. Marich and U. Maass, a paper presented at the Fourth International Heavy Haul Conference, 1986; and, "Burlington Northern's Assessment of the Economics of High Capacity/Heavy Axle Load Cars", by R. Newman, A. Zarembski, and R. Resor, American Railway Engineering Association Bulletin No. 726, Washington, D.C., May 1990. 48 Annex III Page 2 of 2 THE POSITION OF THE REGION: China Rail was tied by national standards to which it had to adhere. In China, freight cars are assigned system-wide, any car can go anywhere. 2/ This stems from the acute national shortage of freight cars and partly explains why the Chinese have achieved a world record in the utilization of their fleet. China Rail was facing the chicken and egg dilemma. The standards could not be changed as long as there was no plan to increase the capacity of new freight cars being built and heavier cars could not be built because they would not be used efficiently as long as axle load limitations were not lifted on most lines. Beyond the time and coordination that would be required to introduce such change, there is concern that the safety of the rail operations could be jeopardized. That being said, China Rail is interested in getting help from the Bank to do an en-Sineering economic life cycle cost analysis to determine the optimal rail technology for China, taking the safety issue explicitly into account. One of the key parameters involved would be the wagon size and related axle loading. 2/ The only exception is the new Datong-Qunghuangdao line with a captive fleet of unit train equipment. 49 Annex IV Page 1 of 2 COMMENTS FROM THE BORROWER FOREIGN CAPITAL AND TECHNICAL IMPORT OFFICE MINISTRY OF RAILWAYS ,PRC in Fuxing Road, Beijing, China Te'ex, 222224 )TSRB CN Tel. 86-42757; 86-44327 Attn.: Mr.Graham Donaldson Chief Agriculture. Infrastructure and Human Resources Division Operation Evaluation Department The World Bank Re : Comments on your PPAR for China Railway I Project with Loan No. 2394 CHA Date : June 18. 1991 Dear Sir: 1. I as very pleased to read your Project Performance Audit Report for China Railway I Project with Loan No. 2394 CHA together with your letter dated April 9. 1991. I should say it is an excellent report both with abundant contents and with frank views. through which, we can see the good cooperation between NOR and the Bank in past many years and deepened mutual understanding have established a sound base for futher expanded and continuous cooperation between us in future. 2. 1 basically agree with your audit opinions expressed on the report for Railway I Project with Loan No.2394 CHA. However. what I would like to mention is that for three issues related to two lines ( see your para. 32). all these decision were made jointly by the Bank and NOR after discussion during the Drolect Preparation and appraisal and were met with the design standard of our country . compatible with the technicai conditions of adjacent lines ( except Datong - Ginghuansdao line). For the question why not considering the possiblity of using heavier axieload wagon in future . it has been explained somewhat in your para.37 and footnote 33. Except Datong - Qinghuangdao line, all our railway lines are not run by special wagons for increasing axieload of wagon will involves the technical upgrading on infrastructure of entire railvay network and It Is a complicated issue. So. it seemed to us that It was not appropriate to address this problem in the construction of these two lines. We hope you would consider this situation in your final report. 3. As mentioned in your para. 2. besides auditing Railway 1, the report also sumaarized the new analysis and studies of onioing five projects in last six years. We feel the scope involved in the report Is extensive. For many Issues, although they were only discussed preliminarily on the report, but touched quite deeply to their points. In which, many views on the report could be quite beneficial to Improving our future operation . We are Annex IV 50 Page 2 of 2 going to have thorough study on those issues and identify what can be addressed by MOR and what needs to get coordination with other ministries and will be addressed step by step in the course of deepening reform ind wiLh cutsideation of China's actual situation. 4. For the PPAR is prepared by your department and submitted to the Bank's Board of Directors, we are not going to make too many comments on your report. However, I would like to make some brief explanation on the issues related to our national economic reform. 5. For our economic reform mentioned in your para.58 and other relevant para.. the reform adopted by our government is Stick to reform and open door policy; promote the development of planned commodity economy; address newly emerged contradiction and problems by rectifing and reform. 6. At present, the economic order has been obviously improved, the whole national economy looks good on its development. In next ten years, we will preliminarily establish the new system of socialist commodity economy and economic institution of planned economy combined with market regulation, thus, the advantages of both could be fully played. 7. For the issues related to dual price system and price distortion mentioned in para. 18 ,21 and other relevant sections, the reform of our government is that a reasonable price system is always required no matter for planning or for management. Price reform will ba carried out under the situation of basic balance between the total supply and total demand. Along with the changes of relationship between supply and demand, appropriate and necessary adjustment will be applied on the price to cause the price relation tends to be more reasonable , and realize th tstadual tiansition from dual price system to single price system. But. the step of price reform should be both stable and appropriate. At present, the types of commoditiy under dual price system are reduced, the price differences are diminished . Not long ago, dual price system for cement had been cancelled. We hope that our ongoing econamic reform could be better reflectd on your final report. 8. Last but not least, please accept my high respects and appreciation to the gentlemen who involved the report preparation. Sincere ours, Zhong hon Ben Direct Foreign Capital and Technical Import Office Ministry of Railways. PRC CC: RMC 51 CHINA RAILWAY PROJECT (Loan 2394-CHA) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. Project Identity Name: : Railway Project Loan Number : 2394-CHA RVP Unit : Asia Region Country : China Sector : Transportation Subsector : Railways 2. Background 2.1 The project was the first in the railway subsector. During project preparation, major reforms were introduced in the national economy and a spe- cial emphasis was given to transportation in general and railway transporta- tion in particular. A shift in policy turned railway development away from its traditional role of opening up new economic areas in the interior of the country to the expansion and modernization of the main rail network, concen- trated in the easzern coastal areas, where most of the economic activities were taking place. 2.2 The Government objectives were, and still are, to increase the volume of passengers and freight (especially coal, in support of energy pro- duction) transported by rail, by increasing the carrying capacity of track sections and marshalling yards, increasing the production and use of locomo- tives, passenger coacnes and freight cars, and moderniziag signaling and com- munications. A start was also made in the modernization of management prac- tices, streamlining the chain of command and providing the various echelons with more modern and efficient means, including computers. 3. Project Objectives and Description 3.1 The objectives of the project were basically the same as the overall Government objectives mentioned above. Specifically, of the four components of the project, three were geared at directly increasing the carrying capacity of the railways, and the fourth was geared at improving management efficiency. These components are: 3.2 The Xinxiang-Heze-Yanzhou Line. There was no rail connection between Xinxiang and Heze because the Yellow River represented a formidable obstacle. This critical missing link hampered coal and other freight trans- port between central China and industrial areas and ports on the eastern coast. 3.3 The decision to go ahead with the project was made on the basis of a broad master plan, which included the expansion of existing mines and the development of new mines in coal-rich southern Shanxi and Shaanxi provinces. 52 partly with Bank assistance. Rail capacity increases included, on the western side, the doubling of the feeder line from Jiaozuo to Xinxiang, and on the eastern cide, the construction of a new line from Yanzhou to Shijiusuo, a city on the Yellow Sea coast, where a deep water port was to be built. Japanese financing was secured for the construction of both the Yanzhou-Shijiusuo rail link and the Shijiusuo port. 3.4 Also as part of the overall plan. the middle section between Heze and Yanzhou was to be upgraded. This section had been built with very low standards, adequate for the local traffic but inadequate for the through coal traffic which was to be carried on the new Xinxiang-Shijiusuo route. 3.5 The first component of the Bank railway project was thus made of two subcomponents: the construction of a new 165-km single-track line between Xinxiang and Heze, including a 10-km bridge over the Yellov River, and the upgrading of the 140-km Heze-Yanzhou section. 3.6 The Datong-Taiyuan Line. Another facet of the master plan for increasing coal production and transportation was the expansion of mines in the Datong area and the construction of a new, modern rail link between Datong and the eastern deep water sea port of Qinhuangdao. This was the first Chinese attempt at establishing a dedicated heavy haul rail link for massive coal transport, running unit trains of up to 10,000 net tons. The target capacity of the new line was set at 60 mtpy (later increased to 100 mtpy, para. 5.3). 3.7 The second component of the Bank project was to expand carrying capacity on the Datong-Taiyuan line, serving the many coal mines located south of Datong. The northern section of the line would act as a feeder to the Datong-Qinhuangdao line, while the southern section would carry coal to the Taiyuan area, and east via the newly electrified Taiyuan-Shijiazhuang line. The work consisted of double-tracking two bottleneck sections totaling 127 km, lengthening the existing 34 crossings from 650 to 850 m to allow for longer trains, building four additional crossing points, and electrifying the whole 355 km section. 3.8 The Zhuzhou Electric Locomotive Factory. The Zhuzhou Factory was, and still is, the only factory in China producing electric locomotives. Its output had to be increased to meet the overall demand for locomotives needed by the project as well as other electrification projects under construction and planned. With a modest influx of $20 million in foreign exchange provided by the Bank loan, the factory would import modern machine tools not available domestically, and launch a program of technical assistance and training in the use and maintenance of the imported machine tools, as well as in areas of mechanical and electrical technology and management practices. 3.9 Costing Study. There was a need to update and improve MR's existing costing methodology and thereafter install a costing system that would improve railway operations and management. The study was to be carried out in sepa- rate phases over several years, mainly by MR staff. However, contacts with the outside world would be provided by visits of Chinese costing specialists to foreign railways and by foreign experts providing advice to the Chinese team on an ad-hoc basis. 53 4. Project Design and Organization 4.1 The design of the project, Aq described above, was appropriate and timely (see paras. 8.1 to 8.5 for Bank cottribution to improvements in the design of Lvo components). There was little doubt that increased energy pro- duction and rail transportation would significantly contribute to the develop- ment of the Chinese economy, and the Bank agreed with the priority given by GOC to these sectors. The three infrastructure components included in the Bank project had very favorable rates of return. a fact which was confirmed by the ex-post economic reevaluation (para. 6.5). 4.2 It must be noted, however, that the Bank had practically no role in the selection of the components earmarked for Bank financing. It was a strictly enforced Government policy to allow discussions with foreign lenders only in regard of those specific projects for wiich financing was sought, and no overall analysis of the full investment program and needs was permitted. The Bank reluctantly accepted this edict in view of the high economic returns of the proposed components, showing some understanding for the Government pol, icy of restricting the provision of information to foreigners. As a conse- quence, the Bank could not satisfy itself that the project components had the highest priority, nor that no other components included in the railway invest- ment plan had an unacceptably low justification. 4.3 The unwillingness of the Chinese side to provide the Bank with basic financial and operational information made the appraisal more difficult and less meaningful than it should have been. For example, the only financial data provided were in relation to the particular entities which were to use Bank financing, preempting any broader analysis of the general financial situ- ation of the Ministry of Railways. On the operational side, even the number of locomotives in service was considered restricted information not to be com- municated to foreigners. 4.4 With hindsight, it can be said that the decision by the Bank to go ahead with the project even on those unusually restrictive conditions was right. A relationship was built over the years, and simultaneously with the opening up of China to the outside world, the collaboration between the Bank and the Ministry of Railways became closer and deeper. Today, there is hardly any restriction to the type and scope of information exchanged with the Bank, and the Chinese side initiated in several cases discussions oLL *"bjects of particular interest. 5. Project Implementation 5.1 Loan Effectiveness and Start-up. The loan was approved on March 27, 1984, signed on April 13, 1984, and declared effective on July 10, 1984, which is very satisfactory (subsequent railway loans were handled much slower). Implementation Issues 5.2 Xinxiang-Heze New Line. Construction was started and completed on schedule, including the 10-km bridge over the Yellow River. Procurement delays occurred, which did not affect actual implementation, because the con- struction units were able to "borrow" what they needed (cement, steel, etc.) 54 from other units, and "reimburse" them once the Bank-financed goods were delivered. 5.3 Datong-Taiyuan Line. The start-og construction was delayed by almost two years, because of a major change in design imposed by the Govern- ment soon after the loan was approved. The design capacity of the Datong- Qinhuangdao line was increased from 60 mtpy to 100 mtpy, and the design capa- city of the feeder Datong-Taiyuan line was similarly increased from about 30 mtpy to 60 mtpy. This called for a complete revision of the construction design, which took over a year. When construction actually started, progress was slower than planned, because less time was allocated to the construction teams in light of the higher than expected traffic which had to pass on the existing line. Procurement delayt also played a role in the completion delay. The Bank agreed with these changes in principle because they would greatly benefit the Chinese economy. It would have been less disruptive, however, if MR had adopted the higher traffic levels from the beginning. 5.4 For the Zhuzhou factory, it is difficult to quantify the progress made in implementing the "Bank component" which was defined at appraisal as the first of two phases. The first phase consisted of procuring, with Bank financing, a set of modern machine tools to boost production from 60 locomo- tives per year in 1983 to 120 in 1987. Simultaneously, workshops would be expanded but the corresponding civil works were to be financed locally. A second phase (with or without additional Bank financing under a following project) would subsequently bring the annual production to 200 units, with more facility expansion and additional acquisition of production means. 5.5 Procurement of the sophisticated machine tools under the first phase took much longer than expected, and spveral items had to be tendered two or three times before a satisfactory supplier could be found. In the meantime, the factory went ahead with the civil works of both phases, so that adequate working space was provided. It also advanced the procurement of the second set of machine tools, most of which could be purchased locally. In reality, the two phases were combined by necessity, and one could even say that the second phase was implemented before the first phase was completed. The net result, however, is very satisfactory, since the production of locomotives reached 174 units in 1989, equivalent to 184 units of the type considered at appraisal. Costing Study 5.6 In 1984, MR formed a task force to carry out the various stages of the costing study, with staff from MR's Accounting Bureau, Science and Tech- nology Bureau, and Foreign Capital and Technical Import Office. This task force studied current procedures, their weaknesses, and areas for future improvement in costing methodology, and prepared a report on "Introduction to China's Railway Costing". Study tours were conducted by MR staff in 1984 in Canada, USA, and UK to learn about the western system of railway costing. Foreign railway experts were invited to give lectures on costing. 5.7 Based on the knowledge and experience gained. MR's Science and Tech- nology Bureau, together with the task force, issued a railway costing manual in January 1987. An improved version of the classification of accounts was also introduced in January 1988. Following this, MR decided to carry out 55 pilot testing of the costing manual in the ShaAghai railway subadministration and on the BeitongpiA (Datong-Taiyuan) line in the Datong and Taiyuan subadmin- istrations. The testing is delayed, however, because of a shortage of compu- ters, which are being purchased under ICB.%- The testing and the beginning of a program to implement the costing system on the entire railway network may be about two years later than the target date of December 31, 1989. 5.8 The Bank has simultaneously sought expert opinion from foreign rail- way costing specialists on the quality and comprehensiveness of MRs costing manual. The experts made some recommendations to improve the manual which were accepted by MR and the Bank. During negotiations of The Fifth Railway Project, scheduled for the second half of 1991, the Bank will formalize with MR a time-phased action program to complete the implementation of the costing system on the whole net work. Although the costing study was started under this project, it now has become closely linked to studies under subsequent railway projects. Procurement 5.9 Internal procedures for procurement under ICB were very new to the Chinese side when the project started. Successive authorizations and checks at various levels inside and outside the Ministry of Railways are cumbersome and time-consuming. Also, not until 1987 was a central department in Beijing assigned to externally-financed projects, so that the various implementation units were acting in a very uncoordinated way up to that time. Procurement is probably the only area in this project where progress can be said to have been unsatisfactory. This caused three successive one-year extensions of the Clos- ing Date, from December 31, 1987, ,o December 31, 1990. 5.10 It must also be said, however, that the original Closing Date was too optimistic. The Chinese request was to set it as of June 30, 1987. They assured the Bank that all procurement work would be handled fast, because all the goudb wece urgently needed, and bercniqe the Government had instructed all executing agencies to minimize payment of commitment fees. Since the Bank had no previous experience of procurement in China, it was eventually agreed, after protracted discussions, to set the Closing Date at December 31, 1987, which proved totally unrealistic. Following railway projects benefitted from this experience, and the Bank later mandated the use of standard disbursement profiles, so that Closing Dates are now set more realistically. If the Bank standard disbursement profiles had been adopted for this project, the Closing Date would have been set as of Farch 31, 1991 (Table 3.25 of the Appraisal Report) and there would have been no need for extensions. 5.11 The second extension of the Closing Date was made about six months after the Closing Date of December 31, 1988 (which had been extended previously from the original Closing Date (December 31, 1987). Prior to the second Closing Date (December 31, 1988), it was understood between MR and the Bank that no further extension would be needed, and that the Bank would honor disbursement applications up to June 30, 1989, for commitments made before December 31, 1988. In May 1989, however, the supervision mission in China found out that there had been delays in obtaining export licenses by suppliers for completing the procurement of machinery and equipment, and this would cause the delivery of several items to be delayed beyond June 30, 1989. The decision to extend the Closing Date retroactively was granted by the Regional 56 Vice President after receiving a memorandum from the China Department Director (dated June 1. 1989) explaining the delays in getting export licenses and that the disbursement profile estimated in the SAR was too optimistic given the lack of experience with international proeurements on the part of the Borrower. 5.12 Although a later Closing Date could have been set, the fact remains that procurement was a problem during implementation of this project, and con- tinues to be a problem for subsequent railway projects. Progress was made. however, and although the Second Project is still way behind schedule, the Third is on schedule and the Fourth is ahead of schedule. 5.13 As for the handling of procurement matters, except for the inordi- nate amount of time taken at all stages, work was very satisfactory. Bid evaluation was carried out in a professional manner, and placement and execu- tion of contracts went on very smoothly. Sporadic problems occurred in rela- tion to the granting of export licenses by some Part I countries, but all were eventually rerolved in a satisfactory manner. There were no complaints from suppliers. 5.14 Project Costs. The Xinxiang-Heze-Yanzhou line component was comple- ted on time and almost within the original budget. The cost of the Datong- Taiyuan line was about twice the appraisal estimate, because the design was significantly amended and because construction took two to three years longer than planned (para. 3.3). However, since benefits more than doubled with the new design, the ERR turned out to be higher than expected (para. 6.4). For the Zhuzhou factory. actual costs are not comparable to appraisal estimates because there was no appraisal estimate for the second phase, while in reality the two phases were lumped together during implementation (para. 5.4). An added difficulty for a meaningful comparison comes from the fact that the exchange rate between the Chinese Renminbi and the US dollar varied from 2.0 at appraisal to 4.7 today. A comparative table of appraisal and actual cost is shown on page 18. 5.15 Disbursements. As a consequence of the delays in procurement admin- istration, disbursements were much slower than expected. The table on page 18 summarizes the disbursement process, and compares the appraisal estimates with actuals and the standard disbursement profile. When the loan is closed on December 31, 1990, about $6 million is expected to remain unused and this amount will be cancelled. 5.16 Loan Allocation. There was no reallocation of funds between loan categories, other than the transfer of unallocated funds to Category 1, Equip- ment and Materials. At MOF's request, an amendment to the Loan Agreement was granted on December 24, 1987, increasing from $1.0 million to $2.5 million the total aggregate cost of items and equipment to be procured on the basis of a comparison of quotations received from at least three suppliers eligible under the Guidr'4s, while the maximum value of contracts placed in this way remai- ned uncb..a;d at $100,000. The amendment was granted because, since MR had no other source of foreign exchange, they had to use Loan funds to buy small off- the-shelf items. many costing only a few thousand dollars, for which ICB was not appropriate. 57 5.17 In February 1989, another amendment to the Loan Agreement was made, replacing the MRs obligation to furnish the Bank audited financial statements for the project subunits with the obligation to furnish audited project accounts only. A major reason for the amendment was the limited usefulness of audited financial statements for the project subunits. This amendment was subject to understandings explained in the agreed minutes of negotiations for the Fourth Railway Project, in which MR agreed to provide the Bank on a reg- ular basis with its consolidated income statement and confirm its intention to develop its accounting systems to a point where consolidated financial state- ments (including balance sheets, and fund flow statements) can be produced routinely. 6. Project Results 6.1 Project Objectives. Overall, the project was successful in meeting its principal objectives of increasing traffic capacity. The Zhuzhou factory surpassed the most optimistic forecasts, and the quality of the locomotives produced has been confirmed recently by a delegation of Japanese experts. This came about after a tender for electric locomotives financed under an untied Japanese credit, which was easily won by the Zhuzhou factory against the Japanese competition. Subsequently, the Japanese Government sent an enquiry group of experts to Zhuzhou, in order to confirm the quality of the locomotives manufactured. The group returned to Japan, endorsing the decision to place the order with the Zhuzhou factory. 6.2 Physical Results. The physical targets were achieved on schedule for the first component, the Xinxiang-Heze-Yanzhou line. The Datong-Taiyuan line experienced delays which were only partly the responsibility of the Min- istry of Railways (paia. 5.3). The Zhuzhou factory, both phases combined, more than achieved the expected targets. 6.3 Economic -formance. The economic analysis presented in this report is based on a :eevaluation of data on traffic, operational performance, project costs, coal mine development costs, and project benetits for each project component since the SAR estimates were made. The methodology used in the economic analysis for the PCR is similar to that used in the SAR and incorporates 1990 conversion factors. A substantial revision of the Datong- Taiyuan railway was the major cause of the delay for completion and the cap- ital cost --errun of the project. The economic analysis was therefore read- justed accordingly. 6.4 There are four major factors which positively influence the ERR: (a) the lower cost of coal mine development; (b) increase in traffic capacity expansion on Datong-Taiyuan line; (c) increase in traffic on Xinxiang-Yanzhou line; and (d) the locomotive factory has been put into operation one year ahead of time. On the other hand, these factors were offset by the negative effects of: (a) increase in economic capital cost; (b) the major delay in the project completion of the Datoi.1-Taiyuan line; (c) a substantial reduction of net coal value-added (more than 41 percent) resulting from a 38.3 percent drop of coal price in real terms; and (d) manufacturing cost and maintenance cost savings for locomotives. 6.5 A comparison of the economic impact of the project, between the PCR aiid the SAR. for each major project components in terms of the economic rate 58 of return is given in the table below. The reevaluated economic rates of return (ERR) for the two railway lines (17 percent and 19 percent) turned out to be the same as the SAR best estimates; and a slightly lower ERR on locomo- tive factory facilities (82 percent vs. 84-percent). Detailed analyses are presented in Annexes 1. 2 and 3. ECONOMIC RATE OF RETURN (Z) Zhuzhou Xinxiang-Yanzhou Line Datong-Taiyuan Line Factory SAR estimates PCR SAR estimates PCR SAR PCR Low/a Best High/b Ex-post Lowa Best High/b Ex-post Best Ex-post 12 17 19 17 14 19 22 19 89 82 /a Lowest ERR calculated in the SAR sensitivity analysis, based on 20 per- cent reduction in coal prices. /b Highest ERR calculated in the SAR sensitivity analysis, based on 20 per- cent reduction in the cost of coal mine development. 6.6 Financial Performance. This PCR deals with the financial perfor- mance of MR as a whole, the four individual subadministrations and the Zhuzhou Electric Locomotive factory. MR's financial condition has been quite satis- factory and its financial performance is better than most other railways in the world. The Government policy on railways is also moving in the right direction by making them responsible for their financial results and obliga- tions. In 1986, The Government set performance targets for the railways and abolished corporate tax on railway profits with the objective that MR will be solely responsible for its future debt obligations including self financing of at least a good part of its future investments without any contribution from the State. The appraisal forecast and the actual working and operating ratios of MR are shown in (Table 1) and swinmarized as follows: 1983 1984 1985 1986 1987 Working Ratios (M) Appraisal forecast 54 49 49 50 51 Actual 51 47 53 54 56 Operating Ratios (M) Appraisal forecast 69 62 64 65 66 Actual 67 61 67 67 70 During 1985-87 the working costs and depreciation increased at a faster rate than revenues due to inadequate tariffs in the face of rising inflation and 5) investments. Tariffs changed very little between 1950-87. Inspite of this, actual revenues were higher than forecast for all years, because of higher than expected traffic increases. The profit transfers from MR to Government were higher during 1983-87 than the government capital contributions to MR for investments. 6.7 The Zhuzhou Electric Locomotive factory has shown a superior finan- cial performance than other components of the project (Table 2). The Finan- cial Rate of Return substantially improved from 24 percent in 1982 to 54 per- cent in 1987---much higher than the appraisal targets of about 30 percent during 1983-86 and 27 percent during 1987. However the substantially higher rates of return are also due to low investments up to 1987 and the absence of revaluation of fixed assets. Net profits were increasing and the working and operating ratios remained at satisfactory levels even though they were some- what worse than the appraisal forecast. By surpassing the target capacity production of 120 electric locomotives per year to 180 locomotives in 1989, Zhuzhou factory has substantially strengthened its working capital position. MR however, has taken no action to increase the sale price of locomotives in response to cost increases. The following cost and price analysis of SS3-type locomotives highlights this point: 1988 1989 Cost(Y) - Materials 1,000,598 1,151,212 Wages 20,872 20,025 Other (fuel supplies and admin. cost 255,198 246.371 Total Manufacturing Cost 1.276,668 1.417,608 Selling Price 1,500,000 1,500,000 Profit 223.332 82,392 2 of Profit to Sales 14.9Z 5.52 Ever since the SS3-type locomotives were put into production in 1984, the sales price has been kept constant. Recently the Zhuzhou factory has requested MR to increase the price by 20 percent to Y 1,800,000/locomotive. 6.8 The performance of the four project subadministrations (Taiyuan, Datong, Jinan and Xing Xian) was also satisfactory (Table 3). Xin Xiang and Datong subadministrations have shown a faster increase in financial rate of return compared to Taiyuan and Jinan. The profit per CTK 10,000 (ton-km + Pass-km) has also been rising for all subadministrations (Table 3) and the working and operating ratios are within acceptable range. 6.9 Impact of the Project. The project made a major impact on rail transportation capacity in its areas of influence. The additional mining and transportation of coal made possible by both the new west-east connection over the Yellow River and the capacity expansion of the Datong-Taiyuan line, in conjunction with other related investments (most notably the Datong- 60 Qinhuangdao line, the Yanzhou-Shijiusuo line, and the Shijiusuo port) played a major role in the increase in energy available to the Chinese -economy. The availability of hundreds of new electric locomotives manufactured by the Zhuzhou factory helped this traffic to materialize. 7. Project Sustainability 7.1 The infrastructure investments supported by the project will con- tinue to provide benefits for many years to come, provided adequate care and budget is made available for their maintenance. The Ministry of Railways has a good record in this respect, and later Bank projects provide some help in these areas. 8. Bank Performance 8.1 Although the Bank had no role to play in the selection of the com- ponents to be included in the project (para. 4.2), a significant contribution was made in regard to the actual design of two major items, the Yellow River Bridge and the Zhuzhou factory. 8.2 Given the great potential for coal transport from west to east of the Yellow River, the appraisal team made a thorough review of the design characteristics of the Xinxiang-Heze line. A single-track rail line is a suc- cession of sections between loops, where trains coming from opposite direc- tions can cross each other. All other things being equal, the capacity of such a line is determined by the length of its longest section. This was the case for the new line, which was to be built on a relatively flat terrain. The Yellow river Bridge was to be itself about 10 km long, and because it was impractical to build crossing loops on the slopes in the immediate vicinity of the river embankments, the two crossing loops on each side of the river were to be 14 km apart, making the bridge and its accesses the critical section on the whole line. 8.3 Hence came the idea of building a double-track bridge, in anticipa- tion of a possible future double-tracking of the line, but this alternative was quickly discarded as too expensive. Instead, the Bank team proposed to build a crossing loop somewhere on the bridge, so as to reduce the length of the critical section. This proposal was rejected outright by the Ministry of Railways, but at the Bank team's insistence, was submitted to the engineering bureau in order to perform a benefit-cost analysis. When the mission returned to China several months later, it was advised that the proposal was found not only feasible. but highly beneficial since it would increase the total design capacity by 30 percent from 17 to 22 mtpy, at a relatively low cost. The bridge was eventually built, incorporating a crossing loop. 8.4 For the Zhuzhou factory, the Bank contribution was even more signi- ficant, because the initial request by the Ministry of Railways .:as actually for the Bank to finance 118 imported electric locomotives. The Bank team requested to visit Zhuzhou, the only electric locomotive factory in the country. This was, apart from a normal engineering curiosity, to ascertain the level of domestic technology and the possibility of local manufacture of spares in the future. 61 8.5 After a detailed visit of the installations, the Bank team proposed a different project to the Chinese authorities. Instead of importing locomotives, the prnarr would consist of modernizing and expanding the fac- tory itself. which showed a great potenti&l. had a dedicated and competent management, but was badly in need of more working space, and more modern machine tools and handling equipment in order to improve the accuracy of the parts produced, reduce rejects, and increase the output. The layout of the factory was suboptimal, resulting in unnecessary movements of work in progress. There was also not enough protected space for storing semifinished products. This proposal was eventually accepted by the Ministry of Railways, and the Bank later sent a team of five among the best experts in the world to Zhuzhou, to review in detail the investments to be made and the type of machine tools best suited to each individual operation in need of improvement. The results were quick to materialize. 9. Borrower Performance 9.1 Overall, the performance of the Borrower was quite good, except for: procurement administration (para. 5.7). Construction units and the Zhuzhou factory found innovative ways to compensate for the delay in receiving Bank- financed goods, so that by and large there was no adverse effect on project implementation. 10. Project Relationship 10.1 Bank relationship with the Government and the Ministry of Railways has been good. In spite of frictiona and frustrations in the early stages, because of the extreme difficulty of obtaining adequate information (paras. 4.2 to 4.4), the rapport between Bank staff and their local counterparts improved steadily over the years and has now reached a very good level. 11. Consulting Services 11.1 The training program agreed during appraisal called for about 45 Chinese to be trained abroad for about six months each. This was eventually vetoed by the authorities, and a total of 86 trainees were sent abroad, for shorter periods. Instead of 13 foreign experts expected to visit China, a total of 146 foreign engineers and technicians actually came. All these training activities were related to the Zhuzhou ElecLric Locomotive Factory, for training on imported machine tools and other equipment. The training program was very successful. 12. Project Documentation and Data 12.1 The Loan Agreement was adequate and appropriate for achieving proj- ect objectives. The Staff Appraisal Report provided a useful framework for both the Bank and the Ministry of Railways for review of project implementa- tion. 62 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE 1/ A. Xinxiang-Heze-Yanzhou Line 2.1 Objectives of the Project. The Xin-He-Yan railway is a single line, starting at the new South Xinxiang Station, 5 km to the north of Xinxiang marshalling yard, crossing the Yellow River through Heze, Jining, connecting Yanzhou station at Yanzhou North on the Jin-Pu line. It continues alongside the Jin-Pu line to the north, through Beijiadian, and connects the Taolu South Station on the Yan-Shi line, totaling 337 km. The construction of the project has promoted the international trade and development in the coastal areas, and industrial and agricultural deveillpmluet lai east Henan and south-west Shandong. It has actively increased the capacity of the whole network. 2.2 Evaluation on Decision Correctness. In November 1985, the leader member of the State Council delivered a speech during a visit to the newly opened Xinxiang-Heze railroad. He said that it was in 1981 that the decision, was made to build Yan-Shi line and Shijiu Port for coal export, to be financed by bank loans. However, coal mined in Yanzhou was found not sufficient besides the local consumption and the part to be shipped to the East China via Jin-Pu line and the Grand Canal. The State Council, therefore, immediately decided to build Xin-He line and upgrade He-Yan line which would be connected with Yan-Shi line. This had proved correct. If there were no Xing-He line connecting Shanxi and Yan-Shi line, the Shijiu Port would have been very upset. The Ministry of Railways responded quickly by an early completion of the line, providing a corridor for Shanxi, Henan, and Shandong provinces accessing the sea port of Shijiu. On the same line, the Shijiu Port would develop soon into a multipurpose port, not only as a coal port, and conven- tional port. but also as a container port. This would diverse foreign trade traffic from Xingjiang. Gansu, Shaanxi, Shanxi, Henan, Shandong, North Anhui, and North Jiangsu, etc., to the Shijiu port and release the heavy burden in Qingdao and Lianyungang ports, as well as Longhai and Jin-Pu lines. 2.3 Since the open of this line, traffic in heavy load train direction reached 4.41 million tons in temporary operation in 1986. It reached 5.95 million in 1987 when it was officially open to traffic, and it reached 12.0 million in 1988 and 15.0 million in 1989. The traffic on the He-Yan line was 5.527 million in 1986, 7.Q million in 1987, 1Z.; ai,1lion in 1989, and 15.1 million in 1989. 2.4 Such a high traffic growth rate has been very rare among new single lines developed during the recent three decades. The project has also added 18 pairs of trains to the capacity of Xinxiang-Qiliying section of Beijing- Guangzhou line because of the new Xinxiang South Station. All the above has demonstrated that the decision of the project is correct. 2.5 Procurement. Contract management was a very careful and hard job. In order to well manage a great number of contracts and provide with instant 1/ Since the Borrower's report was too lengthy, a summary was prepared in the Bank and included here. The original documents are in AS3TP Division files. 63 service to review contracts, an expert was positioned to be responsible for a complete set of contract card account. This has centralized the management and enabled procurement planning. contract implementation and disbursement to well cooperate with each other. It has bnn proven satisfactory. 2.6 There were issues and problems in procurement, and the key issues were too many red tapes and long period of procurement. Due to the fact that it was the very first time to use foreign funds, and the first year materials and equipment procurement was lag behind the Project which had been substi- tuted by materials of other projects, the procurement once could not meet the demand of the construction. 2.7 Equipment Management. All the equipment financed by the World Bank had been well taken care of the machinery division of the Major Bridge Bureau, which has a strong functioning department, Equipment imported was usually technically sophisticated and very expensive, considering the technical capa- bility and managerial level.of the field contractors, centralized management had been adopted. The equipment was leased to contractors, replacing the traditional use which had no charges. A special Machinery Leasing Division was set up under the Bureau and the major imported equipment was managed to make sure the implementation of leasing system. 2.8 Completion of Infrastructure Works. The Xing-He line was completed on schedule by end-1986. The Yellow River bridge was completed ahead of sche- dule with rail to meet by end 1985 instead of end-1986. The Heze-Yanzhou upgrading was given lower priority and was completed two years later than the original plan, in 1988 instead of 1986. 2.9 Construction Quality Evaluation. The design of the Xing-He line was done up to Class I trunk line standards. The design and construction of the whole line had been satisfactory. The design and general layout of the Yellow River Bridge and selection of location were well done too. The MR nominated the bridge as a first class good construction work. The alignment and loca- tion of stations and yards were well allocated with proper station facilities. 2.10 Major Factors in Project Implementation. As one of the urgent pro- jects, Xing-He line construction period was very short. Although all the parties concerned in the construction tried their best, there still had been difficulties in provision of design document, conctruction general arrangement and examination between parties A and B, etc. Materials supply to the con- struction of the He-Yan line was not always on time and once affected the construction. For instance, two months was delayed in construction of Yanchou North and Taolu South connecting line due to delay of rail supply. 2.11 Economic Reevaluation. The economic analysis of the three project comopnents, furnished by MR tvo the Bank, was not acceptable due to the lack of sufficient qualitative analysis to support its result (ERR). The Bank sent a mission to Beijing on November 6-9, 1990 to discuss the issues. Besides veri- fying the input data and tht methodology used in the economic analysis, the discussion focused, particularly, on the following two conceptsissues: (i) current prices vs. constant prices; and (ii) economic costs vs. financial costs. 64 2.12 Following the discussion, both parties (the mission and the Bor- rower) agreed on the results pertaining to the ERR of each project comonent presented in Part I, para. 6.5. 2.13 Evaluation on Borrowing Policy iid Work. The priorities of the World Bank lending policies to its member countries on medium and long term are to strengthen infrastructure of energy and transportation so to help econ- omy develop, which have been coincided with the requirement of China. The implementation of this project has demonstrated that the policies are feasi- ble. The way of collecting commitment charges, however, should be considered to be further improved as more flexible. For example, it may charge 15 per- cent of the total undisbursed funds in the first year, and increase to 45 per- cent, 85 percent, and 100 pervent II LtIe second and third and fourth years, respectively, which would be more properly. 2.14 Staff sent by the World Bank in various missions including preap- praisal, appraisal, and supervision and project completion assessment, etc., have been proven very serious and hard working. Some of the staff have been working even regardless of their health. This manner has been highly appreci- ated. 2.15 The Bank staff have also put forward very justified suggestions during the appraisal, which have helped improve the project. For example, a suggestion was made by the Bank staff that a station of meeting be set up on the Yellow River Bridge which would elevate the annual design capacity from 17 to 22 mt. This suggestion has been adopted in the project. The Bank staff also keep regular supervision visits, once or twice a year, which have been demonstrated very helpful in maintaining construction schedule, bidding and procurement, contract implementation, and management and disbursement, etc. B. Datong-Taiyuan Line 2.16 Purpose and Significance of the Project. Starting from Pingwang station at Datong terminal in the north and ending at Tonyuanbei marshalling yard of Taiy%san terminal in the north, the then existing Datong-Taiyuan rail- way was a single-track railway. The total length of the railway upgraded by electrification accounts for 329 km. 17 natnng-Taiyuan railway is a principal railway main line in northern Shanxi area and serves as one of the major routes for transporting coal from Shanxi province. During the Sixth and Seventh FYP, the railway traffic volume was doubled and redoubled. 2.18 Coal deposits in Shanxi province occupy some one-third of the total amount in the country. The coal output in 1987 was 231 mt of which 137 mt ras hauled out. The completion of Datong-Taiyuan electrification has effectively solved the problem of transporting coal from the northern part of Shanxi prov- ince and supported the construction of the Datong-Quighuangdao line, Pingsu open cut coal mine as well as the construction of local coal assembly stations along the railway. With the railway being electrified, it is possible to operate heavy-haul unit trains, which has made a direct contribution to energy supply industry badly needed in the development of the country's national economy. It. addition, the railway also transports a large variety of other materials. Ever since the completion of the project, as a result of the 65 increased transport capacity, the goods exchange passages within the network of Shanxi province. Inner Mongolia, Beijing, Tianjin, and Hebei are widened. CARRYING CAPACITY (mtpy) Pingwan- Suxian Yuanping- Suxian Yuanping Taiyuanbei Before the project 9.70 5.20 7.00 In 1985 with partial project 35.00 12.00 19.32 With project as of 1990 70.00 14.00 19.00 2.19 Principal Construction Items. To meet the needs of traffic volume increase and to improve the section carrying capacity, 172.6 km of the line was double-tracked; 38 stations were extended from 650 m to 850 m. 1,050 m, and some to 1,700 m; steam traction wac replaced by electric traction; signal- ing and communications were improved; the Hanjialing station was improved; and the Daxing division station was built between Shentou and Suxian. 2.20 Important Design Alteration. The upgrading of the Datong-Taiyuan line was totally revised when it was decided to increase the design capacity of the Datong-Qinghuangdao line from 60 mtpy to 100 mtpy. The Hanjialing station was built 1.5 km south of the designed one. Some stations were tz 1,050 M insteA0 of A90 m and four stations were extended to 1,700 m to accommodate 10.000 ton unit trains. The signaling system was changed from semi-automatic to automatic with 10-minute train intervals. The power supply for the electrified railway and various other related equipments were also upgraded accordingly. 2.2i Between Suxian and Yuanping, copper vira waR used for the catenary. And between Yuanping and Tonyuanbei, two additional sections totaling 9.6 km were double-tracked. 2.22 These design alterations resulted in a higher cost. compared with the original estimates. The implementation period was also extended from end- 1987 to end-1990. During this period, materials, and labor costs increased sharply in China. which contributed to the overall cost increase. 2.23 Procurement. Since operation, all the imported equipment have been highly appreciated by operators for their good performance, high reliability and easy maintenance. The outdoor electric isolating switches made in Japan and the indoor electric isolating switches made in West Germany are particu- larly welcomed for being small in size, nice in appearance, and smooth and easy in operation. At present, technology transfer in this field is underway in China. In the near future. China will see a production of high quality 66 switches. Like electric switches, other modern equipment imported for the project will also contribute to a further development of electric products in China. Failures have never occurred on the vacuum circuit breakers imported from Japan. 2.24 Appraisal of the Redesigned Project. The project actually imple- mented is much taore comprehensive than planned. 2.25 Pingwang-Shouxian Section. The hauling tonnage is raised from 1,500 tons to 3,500 tons. The Huairen station is 1.700 m long and has capac- ity to handle 7,000-ton trains which run to Datong and then directly to Qinghuangdao. The actual traffic carried was increased form 5.47 mtpy in 1984 to 18.18 mtpy in 1988. In these four years, 28.6 mt more of coal were car- ried. As a result, not only the demand of traffic has been met, but also great economic benefits have been gained. 2.26 Yuanping-Taiyuanbei Section. The hauling tonnage is raised from 1,500 tons to 3,500 tons. Extension of sidings from 650 m to 850 m started at seven stations in 1984. Capacity was increased by doubling some sections and constructing some more stations. The actual traffic increased from 8.66 mtpy in 1984 to 12.8 mtpy in 1988. In these four years, 12.42 mt more of coal was carried. 2.27 Shouxian-Yuanping Section. The Duanjialing Tunnel (3,532 m long) was doubled and a new station was built. Actual traffic carried increased from 4.01 mtpy in 1984 to 8.05 mtpy in 1988. In these four years, about 10 mt more coal was carried. 2.28 After the line was completely electrified and opened to traffic in 1988, the actual traffic has exceeded the designed figures. 2.29 Reasons for Higher Costs (a) higher cost for land acquisition (more land) and demolition and remodel; (b) more earth/stone work with the new design; (c) bridges and tunnels: a new double-track bridge (not planned) has been built and additional work was done to remove defects in tun- nels; (d) because of the higher traffic, 43 kg/m rails were replaced by 50 kg/m rails; (e) because of upgraded signaling, a 10 kV power line and a main power transformer have been added; (f) the signaling system was upgraded to automatic, with 10-minute intervals; and (g) electrification: copper catenary was used on the middle section. 67 Other additional expenses were incurred for buildings, temporary works, and immunization. The power supply had to be increased. 2.30 Economic Reevaluation. Please see Part II, paras. 2.11 and 2.12. 2.31 Appraisal of the Loan Policy and the Work of the World Bank. All the visiting experts from the World Bank are very much appreciated for their conscientious attitude and high working efficiency in preappraisals. apprais- als, intermediate inspections and postappraisals after the completion of the project. During appraisal, experts proposed many valuable suggestions for improvements. For example, 118 electric locomotives were previously planned to be imported for this project, which might cost about $110 illion. After site investigations, experts from World Bank proposed some investments in the modernization of a locomotive plant in China. The suggestion has been accepted through careful studies. Experts of World Bank came once or twice each year to inspect the progress of project, tendering and procurement per- formance of the contracts, control of the contracts, and payment of loans. We are all very appreciated to their great and valuable contributions. C. Zhuzhou Electric Locomotive Factory 2.32 Objective of the Loan Project. To improve product quality, save energy and raw material consumption, and increase annual output of electric lucomotives from 40 sets to 120 sets by 1987. 2.33 Project Construction Period and Executive Situation. According to the World Bank preestimated report, ZELF should basically finish modernization engineering in 1986 and install the mechanical equipments in 1987. But in comparison with the report, execution was del2yed about two years. The main reasons are as follows: (a) We have not arranged the bidding and contract negotiations on sche- dule. (b) Domestic railway transport for the contracted goods took a long time, because the dimension of some packages have exceeded the limi- tation of railway transport. %c) Some manufacturers have not ser.. their experts in time, therefojre. some equipments had to wait a long time for installation. (d) We had to wait up to five years before obtaining an export license from the US Government. 2.34 Project Costs. The World Bani appraisal considered only the first phase of the factory modernization, witb L.e target of 120 locomotives by 1987 at a total cost of Y 32.574 million. It reality, the first and second phases were combined, and the factory achieved 174 sets in 1987 at a total cost of Y 167.557. The production was 100 units in 1985, so it was 74 percent higher in 1989. But in terms of tractive power produced, it was 82 percent higher because more recent types are more powerful. The SS1 type produced at appraisal had 3,900 kW, the SS4 type produced now has 6,400 kW. 68 2.35 Training. The appraisal report estimated that 45 staff wouAd go abroad for training, about six months each. We have sent our staff abroad far shorter periods, but 86 trainees participated in the program. We also received 146 foreign experts and engineersfor equipment installation and commissioning, much more than estimated earlier. 2.36 Results of the Project. The project was very beneficial, much more than the figures of increased production would indicate. The equipment imported from foreign countries enabled the factory to increase the level of technology of the locomotives produced. Without the World Bank equipment and related training, the factory could not produce the types 8K and SS6. 2.37 Under international tendering financed by Japan, the factory won a contract for 50 SS6 locomotives, at a total price $40 million lower than the price of the next bidder. This would not have been possible without the World Bank project. The Ministry of Railways is, thus, saving about twice the amount invested by the World Bank. This is a very substantial benefit. 2.38 Economic Reevaluation. Please see Part II, paras. 2.11 and 2.12. 69 PART III: STATISTICAL INFORMATION Table 1: PROJECT TIMETABLE Executive Project Summary no record Appraisal Mission 03-18-83 Loan/Credit Negotiations 02-13-84 Board Approval 03-27-84 Loan/Credit Signing 04-13-84 Loan/Credit Effectiveness 07-10-84 Planned Closing Date 12-31-90 Actual Closing Date 12-3.1-90 Flanned Date of Project Completion 06-30-90 Actual Date of Project Completion 06-30-90 Table 2: CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS ($ million) FY85 FY86 FY87 FY88 FY89 FY90 FY91 Estimated 45.0 170.0 220.0 Actual 73.3 135.7 169.2 179.3 204.3 211.9 220.0 Actual/Estimated (2) 162.9 79.8 76.1 NA NA NA NA Table 3: PROJECT IMPLEMENTATION Appraisal Indicators Estimate Actual Borrower Good Good Executing Agency Good Good Institutional Performance Burrower Good Good Executing Agency Good Slow Procurement Completion of construction/upgrading of the track sections 1986 1986 Electrification of the Datong- Taiyuan line 1987 1989 The Zhuzhou factory modernization plan 1986 See para. 5.4 Machine tools installed 1987 1990 70 Table 4: PROJECT COSTS AND FINAVJING A. rovect Cost Appraisal Estimate PCR Actuals Items Yuan $ Yuan $ ---------- million ------------------ Xiuxiang-Yaazhou 851.9 425.9 1,263.4 451.2 Datong-Talyuan 329.4 164.8 826.9 295.3 Zltuzsiou Factory 85.5 42.7 167.6 59.9 Base Cost (March 1994) 1,266.9 633.4 2,257.9 806.4 Physical Contingencies 65.2 32.6 - - Price Contingencies 52.4 26.2 - - Total Project Cost 1,384.5 692.2 2,257.9 806.4 Front-end Fee 1.1 0.5 1.1 0.4 Finance Charge on use of Foreign Capital 200.8 100.4 200.8 71.7 Total Financing Required 1,586.3 793.1 2,459.8 878.5 B. Project Financing Source Planned Final -------------$ thousand--------- IBRV/ ID.A. Equipment/Haterials 201,331.0 219,087.4 Consultants Services 400.0 0.0 overseas Training 700.0 162.8 Special Account 200.0 200.8 Fee 549.0 549.0 Unallocated 16,820.0 0.0 Total 220.000.0 220,000.0 No Cofinancing involved. 71 Table 5: PROJECT RESULTS (Indicators on project arbievements estimated and actual, and comments on factors affecting project results.) - A. Direct Benefits Indicators Appraisal Estimates Estimated Actual (at full develop.) 165km track between 1986 Completed on tar- Xinxiang and leze, get. including 10-km bridge over Yellow River; and upgrading of 140 km Heze-Yanzhuu section DaLong-Taiyuan Line to 1986 capacity haul trains of up to increased 10.000 net tons. The to 100 target capacity was mtpy. 60 mtpy Experienced delays in completion Datong-Taiyuan Line 1987 successfully - electrification of 355 km completed Zhuzhou Electric Locomotive achieved Factory to increase production above to ZOU units per year 1986 target Machine Tools to boost 9Ome locomotivi productions from as 60 1983 to 120 in 1986 1986 above R. Economic Impacts (ERR) SAR Best Estimate PCR Xinxiang-Heze Line 17Z 17? Datong-Taiyuan Line 19? 19? Zhuzhuu Locomotive Factory 892 82? Underlying Assumptions Project Life Full Development 72 C. Financial Impact R: 1983 1984 1985 1986 1987 Working Ratios (Z) Appraisal forecast 54 49 49 50 51 Actual 51 47 53 54 56 Operating Ratios (Z) Appraisal forecast 69 62 64 65 66 Actual 67 61 67 67 70 ZIIUZHOU LOCOMOTIVE: Working Ratios (Z) Appraisal forecast 69 70 68 63 63 Actual 69 68 73 75 76 Operating Ratios (Q) Appraisal furecast 76 77 76 71 71 Actual 74 75 78 80 81 0e 73 Table 5.C1 aible D.Ce: INC~M STAT~4' POR MNSTRY OP RAILWAY, 192.87 (in mil l ion curronf jumn) 193 1904 1985 1986 1987 A.. Actuel Aspo. Actual Apor. Actuei Asp. Actu* Aoor. Ac.ual VO~ME (9ILLIM) FREIT (TonKm) 633 663 649 724 66 809 63 870 705 936 PA58~f (P.M) 168 177 176 203 164 241 192 258 200 283 TOTAL (C.TonKM> 801 840 825 927 850 1.050 675 1.128 905 1.219 FREICw 9.201 10.017 10.903 13,215 11.189 15.773 11.474 17.707 11.84 19,186 PASSEWC 2.890 3,156 3,027 3.663 3.166 4,545 ,3ar2 4,999 3.440 5.563 0T 637 720 656 a71 s75 1.072 696 1.205 716 1.463 CROSS REVEJES 12.728 13.693 14,586 17.749 15,029 21.390 15.472 23.911 16.000 26.212 LUSS MUS. TAX 1.909 2.04 2.188 2.662 2.254 3.368 2.321 1.215 2.400 1.389 TOTAL REV. AFPT TAX 10.819 11.809 12.398 15,087 12.775 19,022 13.151 22.146 23.500 24.923 OPERATINC EXP4SUES(Mi II . Yuan) PAYROLL 1.166 1.177 1.201 1.291 1.237 1.571 1.273 2.582 1,317 2.897 MATERIALS 945 925 974 1.067 1.003 1.361 1.032 1.553 1.068 1.620 ENEROY 1.169 1.469 1.205 1.781 1.241 2.14 1,277 2.290 1,321 2.644 ELECTRICAL 146 161 177 239 195 306 215 3t9 POOV POR MAJ.REPARS 1,916 1.670 2.000 2.159 2.140 2.510 2.268 2.993 2.440 3.314 0TNERS .. &58 589 481 721 505 1.946 530 2.437 556 2.912 TOT. WORKINO EXPUENS 5,600 6.030 6,022 7.019 6.303 9,641 6.595 12.161 6.917 13.976 OEPRECIATION 1.642 1.669 1.714 2.9 1 1.635 2.510 1.962 2.993 2.091 3.314 TOT. OPERAT EXPENSS 7.442 7.899 7.736 9.178 8.138 12.151 8.557 15.154 9.00 17.290 NET OPERATINO REVOJE 3.377 3,910 4.662 5,909 4.637 5.871 4.594 7.492 4.592 7.533 REV.SUB/cACTRS. (383) (424) (400) (506) (420) 525 (430) 849 (450) 199 NET REVeWES 2.994 3.486 4.262 5.403 4,217 6.396 4.164 8.341 4.142 8.532 OEET SERVICE INT 4 REPA¥. 992 REVEIJE OEFORE TAX 2.994 3.486 4.262 5.403 4,217 6.396 4.164 8.341 4.142 7,540 INCOME TAX 1.646 1.917 2.344 2.971 2.319 3.817 2.290 2.278 TRANSPERS TO COVT. 746 750 1.065 765 1.054 1.200 1.041 1.036 REV.AFTER TAX 4 TRANSPS 600 819 853 1.667 844 1.679 83 8.341 828 7.540 OP WHICH: CAP CONSTR. RDS 600 852 643 633 7,368 828 6.121 SPECIAL RO 619 1,667 1.679 973 1.419 WORKING RATIO 54 51 49 4' 49 s3 50 54 51 56 OPffATINO RATIO 69 87 62 et 64 67 85 67 66 70 ss 9NCL10E NM OPERATDO EXPS6E, P490N PAYmelTS, STATISO N0 TRALN 5EuITY. Sourcu: 1R. Mgy 1990 74 Table 5.C2 Table S.C2: CONSOLIDATED INCOME STATEMENT FOR Z4UZHOU LOCAMOTIVE FACTORY FOR 1982-87 (in Y'000) 1982 1983 1984 1985 198 1987 Net Sales After Tax - Locomotive Production 40,246 67,900 90,405 122,371 140,809 188,838 - Overhauls A Major Repairs 8,703 9,975 4,276 4,047 3,322 1,694 - Work for Third Parties 11,474 16,797 13,718 15,594 19,649 27,813 Total 60.423 94,672 0 142.012 163.760 198.345 Working Cost (Loco. prod. * over- hauls * Third Parties) 42,913 84,816 74,112 108,858 122,281 151,218 Depreciation (Loco. prod. * over- hauls + Third Parties) 6,146 6,421 6,740 7,044 8,391 8,587 Operating Cost (Loco. prod. + over- hauls + Third Parties 48,059 70,237 80,852 110,902 130,652 159,800 Net Operating Revenue 12,364 24,436 27,644 31,110 33,128 88,545 Net Non-0oerating Revenues (Fjrenses) (1,899) (2,471) (2,400) (3,544) (3,418) 8,277; Interest Charges on Short-Term Local Loans (120) (579) (1,072) (1,445) (2,199) (2,462) Net Profit Before Tax 10,346 21,386 24,072 26,121 77,511 30,606 Income Tax (552) NIL (11,762) (13,650) (18,364) NIL NIL Profit After Tax 10,346 9,623 10,522 9,767 27,511 30,806 Profit Transferred to the State (7,936) (6,434) (4,338) (462) (17,479) (19,020) Factories Share of Profit 2,409 4,189 6,184 9,316 10,032 11,780 Working Ratio (%) 71 69 8 73 75 76 Operating Ratio (%) 80 74 75 78 80 81 Average Net Fixed Assets (ANFA) in Use 51,707 63,69 55,707 568,936 63,124 71,033 Return on ANFA In Use (N) 24 46 49 65 63 64 Appra'tal Target of Return on ANFA in so - 3 28 31 27 Source: MR and SAR. Date: June 19. 1990 Table 5. C3 Table .4Ca: ACTUAL PROFIT AND COST STATEMENTS FOR FOUR SUBADMINISTRATIONS (Y million) V?2 e14 1985 1986 1987 Taiyuan-Subadministration Revenues 112.88 184.49 219.23 249.36 276.11 848.66 Operating Costs 6.23 110.28 131.23 148.33 177.30 200.44 Net Operating Revenues 46.60 74.21 89.00 101.02 98.81 146.12 Profit After Tax, incl. subsidiaries 27.07 39.38 48.21 56.66 48.41 107..3 Operating Ratio (S) 69 60 60 59 64 .8 CTk 10,000 839,600 887,497 1,048,120 1,16,467 1,2S4,180 1,335,748 Unit Cost (Y) 78.89 124.26 125.57 127.14 141.37 150.06 Rate of Return (5) 2.2 2.5 2.9 8.3 2.5 6.6 Datong Subadminstration Revenues 108.43 136.80 143.2 186.43 212.37 288.74 Operating Costs 68.78 73.48 79.48 98.53 121.80 168.06 Net Operating Revenues 51.86 62.32 63.72 67.90 90.67 133.68 Profit After Tax incl. Subsidiaries 48.49 38.65 42.04 42.30 61.63 114.841 Operating Ratio (1) 62 54 66 69 67 68 CTK 10,000 1,136,083 1,246,326 1,336,665 1,610,283 1,723,177 1,871,994 Unit Cost (Y) 49.98 58.98 69.80 66.26 70.88 81.76 Rate of Return (3) 10.3 8.0 7.6 6.2 8.0 18.3 Jinan Subadministration Revenues 273.7 312.9 343.5 390.8 608.9 680.7 Operating Costs 173.2 193.9 212.6 231.3 314.6 387.7 Net Operating Revenues 100.6 119.0 130.9 169.5 194.3 213.3 Profit After Tax Inel. Subsidiaries 67.0 84.6 71.7 95.1 106.7 169.3 Operating Ratio (X) 63.2 61.9 61.9 69.2 81.8 68.3 CTK 10,000 2,061,766 2,267,516 2,474,886 2,774,908 3,244,666 3,573,649 Unit Cost (Y) 84.04 85.91 86.89 88.35 96.95 102.93 Rate of Return (X) 0.57 0.61 0.44 0.67 0.58 0.85 Xin Xianq Subadministration Revenues 206.8 167.5 172.5 212.8 323.9 La Operating Costs 122.6 86.3 97.1 121.6 216.6 -*u nn..stinn Revenues 83.3 71.2 76.4 91.3 108.3 Profit After Tax Incl. Subsidiaries 47.9 44.7 45.1 66.2 84.7 Operating Ratio (X) 60 55 56 57 67 CTK 10,000 1,473,873 1,547,936 1,669,921 1,982,168 2,174,168 Unit Cost (Y) 83.11 65.75 58.80 61.3 99.16 Rate of Return (X) 7.7 6.9 6.7 8.6 12.4 La Merged into Zhengahou Subadministralon In 1987. Source: MR. Date: June 18, 1990 1982 1983 1984 1985 196 1987 ---------------Profit per CTK 10,000 (Y)---------------- Talyuan 82.25 44.87 46.13 48.67 37.00 80.20 Detong 42.68 31.01 31.45 28.01 36.77 81.38 Jinan 27.85 28.62 28.97 34.27 32.88 47.87 XIn Xiang 32.50 28.88 27.17 29.36 38.98 La La Merged iA Zhengzhou Subadminttration. Sources MR. Dates June 18, 1990 76 Table 6: STATUS OF LOAN COVENANTS Covenant Subject Deadline Status Section 4.01(b)/a The Borrower shall cause As required Complied but MR: (i) to have the needs improve- accounts and financial ments. statements of the Project Subunits for each fiscal year audited, in accord- ance with appropriate auditing principles con- sistently applied by inde- pendent auditors accepta- ble to the Bank; (ii) furnish the Bank (a) No later Complied certified copies of such than six financial statements for months of such year as so audited; that fiscal and (b) the report of such year. audit by said auditors. of such scope and in such detail as the Bank shall have reasonably requested. (iii) furnish the Bank As requested Complied such other information concerning the accounts and financial statements of the Project Subunits and the audit thereof as the Bank shall from time to time reasonably request. Section 4.04 Consult with Bank on rail- By July 1 of Consultations way finances and financial each year have occurred performance and procedures. during super- vision mi44iof. Section 4.05 Carry out a study of As required Phase I comple- Railway Costing. ted. Phase II ongoing under Railway III proj- ect. a The original audit clause in Section 4.02 of LA was amended to limit the audit report to only operations and resources and expenditures of the project subunits in respect of the project including Special Account and SOEs. 77 Table 7: USE OF BANK RESOURCES Number of Staffweeks - Identification through Board Presentation - 169.10 Number of Staffweek, Board Approval through Effectiveness - no record Number of Staffweeks Supervision - 71.40 Date of No. of Total Date of Mission Persons No. of Staffweeks Report 06107/82 1 1 no record 07/01/82 2 6 08/04182 10/03/82 5 15 11/29/82 03/21/83 6 18 04/20/83 06/27/83 9 36 Draft YC SAR prepared 07/12/83 1 2 08/23/83 10/13/84 7 21 no record 10/13/85 3 12 12/30/85 10/19/87 1 3 11/06/87 03/21/88 2 1 03/25/88 05/08/89 2 1 05/17/89 05/15/90 3 8 To be prepared June 4, 1990 78 CHINA PROJECT COMPLETION REPORT RAILWAY I PROJECT (LOAN 2394-CHA) PART I ECONOMIC PERFORMANCE 1 The economic analysis presented in this report is based on a reeval- uation of data on traffic, operational performance, economic cost, and project benefits at each project components since the SAR estimates were made. The methodology used in the economic analysis for the PCR is similar to that used in the SAR and is summarized below. Briefly: (a) all capital investments and coal mine development costs have been revised to 1990 prices and included in the costs stream; (b) the benefit stream, also in 1990 prices, is mainly the value added to the additional amount of coal produced and transported in the railway system and import cost savings for locomotives; (c) a project life of 25 years has been assumed for all railway con- struction facilities. For the Zhuzhou locomotive factory, the proj- ect life is assumed to be 15 years to reflect the average economic life of locomotives. 2 There was a substantial revision in the design of this Datong- Taiyuan railway line after loan negotiation which resulted in the delay of the construction as well as the cost overrun. This factor is taken into consider- ation in the economic analysis for this PCR. 3 After reassessing these revised data, the overall reevaluated eco- nomic rates of return (ERR) for the two railway lines turned out to be the same as the SAR estimates (17 percent and 19 percent respectively); and a slightly lower ERR on locomotive factory facilities (82 percent vs. 89 per- cent). 4 Looking at the three railway components together, there are four major factors which positively influence the ERR: (a) the lower estimate of coal mine development cost; (b) increase in traffic capacity on Datong-Taiyuan line; (c) increase in traffic on Xinxiang-Yanzhou line; and (d) the locomotive factory had been put into operation one.year ahead of time. On the other hand, these factors were offset by the negative effects of (a) increase in economic capital cost; (b) the major delay in the project completion of the Datong-Taiyuan line; (c) a substantial reduction of net coal value-added (more than 41 percent) resulting from a 38.3 percent drop of coal price in real terms; and (d) increase in manufacturing cost and maintenance cost for locomo- tives. Detailed analyses are presented in Annexes 1. 2, and 3. 5 A comparision of the economic impact of the project, between the PCR and the SAR, for each major project components in terms of the economic rate of return, sensitivity analysis and not present value (NPV) is given below: 79 ØCM~IC ~9 Cf (S IN 1. WW in mill ion Yun *t 12%) E NP NPV mR NV Uf NP kl .Se astia. 17 g... 1? 1.894 19 n... 19 4.s$8 8e i,... 82 sel Projctc inv.*t.ent M20. 16 øn. 1o 1.59? 19 .a. .832 Coi min* devaeoeøt .201 n 9... 15 1.457 17 R.. 4.287 -20 19 . e 1 2.330 22 ".a. 19 5.026 Pjact bonefit cilyed I res, 15 Mn. 1S 1,164 17 n.9. le 3.222 Delued 2 yeors L& n.a. 13 S13 15 n.*. 14 1.943 Co*, grice -101 15 n a. 13 473 le n.&. 15 1.758 -20 12 n.&. 9 -896 14 f.i. 10 -1.048 80 ANNEX 1 Page 1 CHINA PROJECT COMPLETION REPORT RAILWAY PROJECT (Loan 2394-CHA) Economic Analysis Xinxianq-Yanzhou Railway Line Project Capital Costs 1. All the capital costs have been revised to 1990 prices for both the PCR's and the SAR's figures. 2. The development of a conversion factor for the PCR's project capital costs is shown in Table 1. The resultant conversion factor for this project component is 1.38 (it was 1.00 in the SAR). Table 1: CALCULATION OF PRICE CONVERSION FACTOR FOR PROJECT CAPITAL COSTS (in million Yuan) Financial Local Foreign Conversion Economic Amount x mount Tota I factor /a Loca I Total Land 134.86 12.8 134.06 1.00 134.86 134.90 Labor: UnskIIled 75.80 7.2 75.80 0.64 48.51 48.50 Semiskilled/Technician 74.84 7.1 74.84 1.61 113.01 113.00 Supervisor 52.58 6.0 52.68 2.00 105.16 106.20 Materials: Steel 31.28 8.0 118.07 55.8 149.3 2.19 68.50 186.60 Timber 13.76 1.3 12.26 6.8 26.01 0.93 12.79 26.00 Cement 27.25 2.6 25.90 12.8 53.16 3.53 96.19 122.10 Others 118.40 11.1 0.71 0.3 117.12 2.00 232.82 233.50 Fuel: Diesel 7.89 0.7 7.89 1.13 8.92 8.90 Gas 10.96 1.0 10.95 1.56 16.97 17.00 Others 6.57 0.8 6.67 1.00 6.57 6.60 Electricity 26.83 2.6 26.83 5.00 133.16 133.20 Construction 144.70 13.8 144.70 1.30 188.11 188.10 Mechanical equipment 137.68 17.6 64.48 25.6 242.16 1.40 262.75 317.20 Others 140.82 13.4 140.62 0.70 96.57 98.60 Total 1,0200 U.0 211.40 100.0 1,283.40 1,526.90 1,738.30 Overall conversion factor 1.38 /a Memo. *Financial and Economic Prices" from Mr. Shahid Yusuf, Lead Economist, AS3CO, July 12. 1990; Economic Prices for Project Evaluation in China, AS3CO, June 1988; and the mission estimates. 3. Comparing the PCR's economic project capital costs with the SAR's. in 1990 price level, the cost of the former is 72.5 percent higher than the latter. The details in Table 3.1(a) are summarized as follows: 81 ANNEX 1 Page 2 Table 2: ECONOMIC PROJECT CAPITAL :OST (1990 prices. Y million) SAR PCR 1983 194.0 275.0 1984 970.1 651.9 1985 351.3 768.4 1986 517.3 1987 285.2 1988 116.9 Total 1.515.5 2.614.7 Change in Z +72.51 Other Canital. Costs 4. This railway development is part of a whole coal production and dis- tribution system. Therefore all coal-related capital costs should be consid- ered within the cost stream. These are summarized as follows: (a) Coal Mine Develooment Costs. The economic cost is calculated at Y 207.5/ton/year, on the basis of estimates of development costs used in the latest Inner Mongolia Local Railway project (April 1989) and revised to 1990 prices. The corresponding figure used in the SAR was Y 349.6/ton/year (at 1990 prices) or 68.5 percent more than the PCR estimate. fhis difference is mainly due to the "high sideo estimate as it was described in the SAR. Coal mine development, the same as the SAR. is assumed to take five years with the following annual distribution of investments in percent of total cost: 10, 15. 30, 30, and 15. As a result, the total coal mine development cost in the PCR is 15.5 percent lowet Liha Lh 'A': c:timite. The details in Table 3.2(a) are summarized as follows: 82 ANNEX 1 Page 3 Table 3: COAL TRAFFIC AND COAL MINE DEVELOPMENT COSTS Traffic (million tons) lb Change Mine Development Costs (million Yuan) SAR PCR /a in Z SAR PCR 1981 139.8 81.6 1982 234.2 207.9 1983 484.2 458.7 1984 562.8 638.6 1985 440.5 649.0 1986 7.0 3.93 -43.9 290.2 445.9 1987 7.7 8.06 4.6 316.4 241.0 1988 8.5 12.18 43.8 351.3 203.3 1989 9.3 12.60 35.2 389.8 313.3 1990 10.2 12.00 17.1 424.7 340.3 1991 11.3 13.67 21.2 409.0 323.7 1992 12.4 15.33 23.6 367.1 229.3 1993 13.6 17.00 24.6 230.7 115.2 1994 15.0 19.60 30.6 78.7 46.7 1995 16.5 18.70 13.3 - 46.7 1996 16.5 19.00 15.2 - 28.0 1997 16.5 19.30 17.0 - 9.3 1998 16.5 19.60 18.8 - * Total 4.719.4 4.378.5 Change in Z -7.2Z /a Actual = 1986-89; forecast after 1990. /b In 1990 prices. The total coal mine development cost in the PCR is 7.2 percent less than the cost estimated in the SAR. This cost differential in coal mine development costs does not have a great impact on the economic rate of return (ERR) because, based on the sensitivity analysis, a 20 percent increase in the coal development costs could only down- size the ERR by about 2 percent. (b) Yanzhou-Shijiusuo Line and Shijiusuo Port. All the economic costs of these two costs streams have been converted from 1983 price level to 1990 price level. The details in Table 3.1(a) are summarized as follows: 83 ANNEX 1 Page 4 Table 4: ECONOMIC COSTS FOR OTHER RAILWAY AND SHIJIUSUO PORT million Yuan) Yanzhou - ShiJiusuo Shiiusuo Port 1983 1990 1983 1990 prices prices prices prices 1981 30 '2.4 24 42.0 1982 45 78.7 36 62.9 1983 90 157.3 72 125.9 1984 90 157.3 72 125.9 1985 45 78.7 36 62.9 Total 300 524.4 240 419.5 Project Benefits 5. Traffic. The annual actual traffic performance, except for the first year (1986), were better than the SAR's forecast. The maximum capacity of the railway line is estimated at 18.8 percent higher than the original forecasts (19.6 Mt vs. 16.5 Mt). Except for 1990 and 1995, the traffic is estimated to grow steadily and reach its maximum capacity in 1994 anc 1998. The reasons for this decline is the traffic after those two years are (a) the rippling effect of rapid financial policy adopted by the State in early 1989 for better control of domestic inflation has caused the lower traffic demand in 1990; and (b) the expected decline in traffic demand of this railway line rn 1A.7 M! in 1995 due to the comaletion of Beijing-Jiujiang railway line in that year (para. 4. Table 3). 6. Coal Value-Added. Most of the coal traffic to the port, estimated at about 80 percent, are delivered to the domestic users, especially to power plants located along the southeast coast. The volume of Chinese coal exports h: been under 20-3r million tons in the past several years, or less than 2-3 percent of its total annual production, which now has exceeded one billion tons per year. A significant increase in this volume of coal exports from the present level is likely to depress the international prices of coal. Coal (especially steam coal), therefore, is not consideced to be a traded good for China. However, given the severity of the energy shortage in the country, the economic contribution of coal is considered to be greater within the domestic economy than as an export to the international coal market. The economic benefit of the increase in coal traffic as a result of this project is, there- fore, conservatively measured in terms of its international border price. A complete new set of coal value-added calculations has been established in this PCR in comparison with the SAR's estimates. Based on the latest available data, the international price of coal is estimated at $42.0/ton, a drop of 38.3 percent compared with the estimate of $68.1/ton in the SAR at 1990 con- stant price level. The cost of coal (inclusive of production, transportation and real/sea transfer costs) has also been decreased by 35.3 percent to $23.1/ton (the PCR) from $35.7/ton (thR SAR). Net coal value-added for the 84 ANNEX 1 Page 4 railway is estimated to have an overall decrease of 41.7 percent to $18.9/ton (the PCR) in comparison with $32.4/ton (the SAR). The detailed calculation of inputs and sources of data are summarized below. Table 5: COAL VALUE ADDED ($/ton) SAR PCR 1983 1990 1990 Percentage prices prices prices change Coal price /a 49.0 68.1 47.0 -38.3 Costs Production /b 15.0 21.8 17.8 -18.3 Transport /c 3.0 5.2 4.1 -21.2 Rail/sea transfer 5.0 8.7 1.2/d -86.2 Subtotal costs 23.0 35.7 23.1 -35.3 Net coal value added: S/ton 26.0 32.4 18.9 -41.7 Y/ton 98.8 !a (1) SAR - From $68.1/ton in 1986 to $81.2/ton in 1995 and increasing at 1 percent pe: annum thereafter (in 1990 price). (2) PCR - "Revision of Commodity Price Forecasts and Quarterly Review of Commodity Markets--December 1989," Ron Duncan, Chief, IECCM, Janu- ary 26, 1990, pp. 6-8; and apply this price until 2000, increasing at 1 percent per annum thereafter. /b PCR - Qinhuangdao LRMC of Datong Coal; China--Coal Pricing Study, AS3, February 16, 1989, p. 41. /c Destination - Shijiusuo Port. (1) SAR - 800 km x 0.8 fen/tkm - Y 6.4/ton; or about $3.0/ton. (2) PCR - 693.5 km x 3.LO fen/tkm - Y 21.5/ton, or about $4.1/ton and where: 3.10 fen/tkm (economic). 1.82 fen/tkm (financial) x 1.7 (eco- nomic conversion factor). (Source: same as b. pp. 83-84.) /d Source: same as /b, p. 84. Economic Rate of Leturn (ERR) and Sensitivity Analysis 7. Based on all the inputs stated above, the detailed reevaluated ERR and sensitivity analysis of this railway line is shown on Table 3.3(a) and summarized as follows: 85 ANNEX 1 - Page 6 Reevalua ted ERR in Z Best estimate 17 Project investment +ZOZ 16 Coal mine development +20Z 15 -zoz 18 Project benefits: Delayed 1 year 15 Delayed 2 years 13 Coal price -10Z 13 -20 9 86 ANNEX 2 Page 1 CHINA PROJECT COMPLETION REPORT RAILWAY PROJECT (Loan 2394-CHA) Economic Analysis Datona-Taiyuan Railway Line Project Capital Cost 1. The calculation of the conversion factor for this railway's capital cost is shown on Table 1. The resultant conversion factor is 1.19 (it was 1.00 in the SAR). Table 1: CALCULATION OF PRICE CONVERSION FACTOR FOR PROJECT CAPITAL COSTS (in mill;on Yuan) Financial Local Foreign Conversion Economic Amount x Amount x Total factor La Local Total Land 32.49 5.0 32.49 1.00 32.49 82.49 Labor: Unskilled 40.10 6.2 40.10 0.64 25.88 25.66 Semiskil[ed/Technician 39.67 8.1 39.67 1.51 59.90 69.90 Supervisor 27.73 4.8 27.73 2.00 55.48 S.46 Materials: S6o*l 30.95 4.8 49.98 27.8 80.83 2.19 87.78 117.68 Timber 19.22 3.0 30.96 17.2 60.18 0.93 17.87 46.83 Cement 10.64 1.4 17.18 9.5 27.79 3.58 37.56 54.71 Fuel: Diesel 6.94 1.1 0.94 1.13 7.84 7.84 Gas 7.47 1.2 7.47 1.65 11.8 11.66 Heavy oil 1.66 0.2 1.66 1.76 2.76 2.76 Others 1.39 0.2 1.89 0.69 0.96 0.6 Electricity 14.88 2.3 14.88 6.00 74.40 74.40 Construction 41.93 6.5 41.93 1.80 54.61 64.51 Mechanical equipment 134.30 20.7 31.08 17.3 165.88 1.40 188.02 219.10 Others 238.00 36.8 50.68 28.2 288.58 0.70 186.80 217.18 Total 647.27 100.0 179.66 100.0 826.92 808.40 983.00 Overall conversion factor 1.19 /a Memo: 'Financial and Economic Prices* from Mr. Shahid Yusuf, Lead Economist, AS3CO, July 12, 1990; Economic Prices for Project Evaluation in China, AS3CO, June 1988; and the mission estimates. 2. dJecause a substantial revision of the original design had been made after loan negotiations. the detailed discussion of the total project cost between the SAR and the PCR will be meaningless. The calculation is in Table 3.1(b) and summarized as follows: 87 ANN'.X 2 Page Z Table 2: ECONOMIC PROJECT CAPITAL COST (1990 prices, Y-million) SAR PCR 1983 66.4 21.9 1984 274.4 116.1 1985 162.6 .03.9 1986 94.4 298.7 1987 288.8 1988 1$0.5 1989 74.4 1990 115.2 Total 597.8 1,299.5 Change in Z 117.4 Other Capital Costs (a) Coal Develooment Costs 3. A Y 207.5/ton/year has been used for this analysis (see Annex 1. para. 4(a)]. The resultant total coal development cost in the PCR is 23.8 percent lower than the SAR 's estimate and listed as follows: 88 ANNEX 2 Page 3 Tab 113: COAL TRAFFIC AND COAL MINE DEVELOPMENT COSTS La (in 1990 prices) Traffic (million tons) Mine Development SAR PCR (b Change Costs (million Yvn) North. South Total North Middle South Toal in X SAR FR 1981 5.6 6.0 11.6 5.0 - 0.0 11.6 0.0 291.9 135.8 1982 8.6 S.S 13.1 6.6 - 6.8 13.1 0.0 545.4 299.4 1983 7.6 7.2 15.0 7.8 - 7.2 16.0 0.0 832.0 677.2 1964 9.2 7.9 17.1 S.5 4.0 8.7 18.1 8.0 1,490.7 1,017.4 1985 10.9 6.6 19.5 7.2 4.0 9.5 21.3 9.0 1,291.7 1,180.4 196 12.6 9.6 22.3 11.5 5.9 11.2 23.6 23.3 1,393.1 1,164.9 1987 15.2 10.4 2S.6 13.7 7.4 13.5 34.7 85.4 1,436.1 1,091.7 198 17.9 11.4 29.3 18.2 0.1 12.8 39.0 33.2 1,309.2 920.7 1989 21.2 12.6 33.8 23.2 8.2 13.1 44.5 31.7 1,130.9 767.4 1990 25.0 13.8 38.8 26.0 9.5 13.5 49.0 26.3 1,069.7 769.9 1991 26.8 14.8 41.6 27.6 10.3 13.8 51.6 24.0 1,017.3 729.3 1992 28.6 15.8 44.4 29.2 11.1 14.1 54.4 22.4 896.7 643.4 1993 30.6 18.9 47.6 31.0 12.0 14.1 57.3 20.7 555.8 402.2' 1994 32.8 18.1 50.9 32.8 12.9 14.7 60.4 18.7 188.8 136.8 1995 36.1 19.4 54.6 34.9 14.0 15.0 63.9 17.2 - - Total 13.046.0 9948.2 Change in X -23.8 /a Since a substantial revision of the original design had been made after negotiations, the traffic calculation and coal mine development cost, therefore, in the PCR has been divided into three sections (north: Shuoxian-Oastung-8eijing-Qinhuangdao; middle: Shuoxian-Yuanping- 8;jing-Qinhuangd&o; south: Talyuan-Yuanping-Beijing-Qinhuangdao). In the SAR, only two sections had been used (north: Datong-Sonjiazhuang; south: Xixin-Taiyuan). b Actual: 1981-89; forecast= after 1990. (b) Datong-Beiiing-QD Pailway cost and QHD Port Cost 4. The capital costs for each construction component has been converted to unify economic cost at 1990 prices. In addition, the capital construction cost for the main line between Datong and Qinhuangdao port has also been added into the cost stream for this economic analysis (the SAR excluded this art of the cost) . The detailed calculations are shown in Table 3.1(b) and summarized as follows: 89 ANNEX 2 Page 4 Table 4: ECONOMIC COSTS FOR OTHER RAILWAYS AND QINHUANGDAO PORT (million Yuan) Beijing- Quinhaungdao Datong-Qinhuangdao la Qinhuanadao Port Main Connection 1983 1990 1983 1S90 line /b ne I Total price price price price 1981 35.0 35.0 15 26.2 14 24.5 1982 50.7 50.7 24 42.0 22 38.5 1983 103.1 103.1 46 80.4 43 75.2 1984 230.1 103.1 333.2 46 80.4 43 75.2 1985 895.8 48.9 944.7 23 40.2 22 38.5 1986 867.2 867.2 1987 670.5 670.5 1988 513.8 513.8 Tota' 3.177.4 340.8 3,518.2 154 269.2 144 251.7 Ia 1990 economic prices. b This cost is not covered within the SAR's economic analysis. c Includes the cost of Fengshada connection line. (c) Other Infrastructure Investments 5. The capital costs to build the cable networks to serve the railway line were paid by the power sector. For the economic analysis, these costs should be included (the SAR excluded this part of costs). Table 5: OTHER INFRASTRUCTURE INVESTMENTS FOR THE RAILWAY (million Yuan) Current 1990 financial economic costs costs 1986 15.9- 27.3 1987 21.2 34.1 1988 10.6 15.7 1989 5.3 7.2 Total 53.0 84.6 90 ANNEX 2 Page 5 Project Benefit 6. Traffic. In the SAR, the economic analysis of the project for this railway line had been divided into two sections: (a) north: Datong- Sungjiazhuan and (b) south: Xinxiang-Taiyuan on the basis of its original design. In the PCR. with the major revision of transport capacity, the proj- ect railway line has been divided into three sections to keep the economic analysis in line with the new design (north: Datong-Shouxian, middle: Shouxian-Yuanping and south: Yuanping-Taiyuan). Based on the new design, the annual transport capacity of the railway line (the south section of Datong) will be 63.9 million tons, which is 17.2 percent higher than the original design of 54.5 million tons per year. The actual coal traffic in 1989, on this section. was 44.5 million tons, a 31.7 percent increase from the SAR's estimate of 33.8 million tons. The detailed traffic demands, by sections, for the SAR and the PCR are shown in para. 3, Table 3. 7. Coal Value-Added. The methodology and inputs used for the calcula- tion of coal value-added have been described above (see para. 6, Annex 1). The main difference between the SAR and the PCR is that a separate calculation of transport cost for each of the three sections (north, middle and south), by transport distance, has been applied for the PCR instead of one unified input used in the SAR. The outcome of these calculation is summarized as follows: Table 6: COAL VALUE ADDED (S/ton) 3AR PCR /a 1983 1990 North Middle South Average Percentage prices prices ------- (1990 prices) --------lb change Coal price 49.0 88.1 42.0 42.0 42.0 42.0 -38.3 Costs Production 15.0 21.8 17.8 17.9 17.8 17.8 -18.8 Transport 3.0 5.2 4.8 5.0 5.1 6.0 -4.5 Rail/sea transfer 5.0 8.7 1.2 1.2 1.2 1.2 -86.2 Subtotil costs 23.0 35.7 23.8 24.0 24.1 24.0 -32.9 Net coal value added: S/ton 28.0 32.4 18.1 18.0 17.9 18.0 -44.3 Y/ton 95.4 94.3 93.6 94.4 /a Transport cost (Destination - Qinhuangdso) by sectors: North: 808 km x 3.1 fen/tkm a Y 24.9/ton or 14.8/ton. Middle: 938 km x 3.1 fen/tkm a Y 26.0/ton or 35.0/ton. South: 860 km x 3.1 fen/tkm = Y 26.7/ton or 85.1/ton. Lb Simple average. Economic Rate of Return (ERR) and Sensitivity Analysis 8. The reevaluated ERR and sensitivity analysis is shown in Table 3.3(b) and summarized as follows: 91 ANNEX 2 Page 6 Reevaluated ERR (2) Best estimate 19 Project investment +20Z 18 Coal mine development +20% 18 -202 19 Project benefits Delayed 1 year 16 Delayed 2 years 14 Cow. price -102 15 -202 10 92 ANNEX 3 Ptage 1 CHINA PROJECT COMPLETION REPORT RAILWAY PROJECT (LOAN 2394-CHA) Economic Analysis Zhuzhou Electric Locomotive Factory Project Caoital Costs 1. Econcmic costs of the project have been evaluated by applying cor:- version factors to domestic prices and market prices for imported item which are shown in Table 1 as follows: Table t: CALCULATION OF PRICE CONVERSION FACTOR FOR PROJECT CAPITAL COSTS /a (in million Yuan) Financial LocaI Foreign Conversion Economic Amount x Amount 5 Total factor L Loca I Total Land 2.42 4.0 32.49 1.00 2.42 2.42 Labor: Unskilled 3.08 5.1 3.08 0.6 1.97 1.97 Semi skilled/Technician 4.13 6.8 4.13 1... 6.24 6.24 Supervisor 8.08 8.1 3.08 2.00 8.16 6.16 Materials: Steel 4.60 7.8 4.60 2.19 10.07 10.07 Timber 1.15 1.9 1.15 0.93 1.07 1.07 Cement 8.75 9.5 5.78 3.53 20.30 20.30 Fuel: Diesel 0.04 0.1 0.04 1.13 0.06 0.06 Gas 0.01 0.0 0.01 1.56 0.02 0.02 Heavy o1l 0 .00 0.0 0.00 1.76 0.00 0.00 Others 0.01 0.0 0.01 1.76 0.02 0.02 Electricity 0.06 0.1 0.06 5.00 0.30 0.30 Co*I 0.06 0.1 0.00 2.12 0.13 0.13 Construction 19.78 32.7 19.78 1.30 25.71 28.71 Mechanical equipment 16.15 25.0 70.22 100.0 86.37 1.40 21.21 91.43 Others 1.18 2.0 1.18 0.70 0.83 0.83 Total 6n.50 109.0 70.22 1L20 199.72 X6.48 166.70 Overall conversion factor 1.28 LA In the SAR, the conversion factor for construction and equipment was 1.06 and 1.34 respec- tively. b Memo. 1Financial and Economic Prices' from Mr. Shahid Yusuf, Lead Economist, AS3CO, July 12, 1990; Economic Prices for Project Evaluation in China, AS3CO, June 1988; and the mission estimates. 2. Comparing the PCR's economic project capital costs with the SAR's, at 1990 prices, the cost of the former is 36.1 percent higher than the latter. 93 ANNEX 3 Page 2 (The PCR's economic project cost, however, includes the Chinese financed Phase II Construction.) The details in Table 3.1(c) are summarized as fol- lows: Table 2: ECONOMIC PROJECT CAPITAL COST (Y million) SAR PCR 1983 1990 1990 prices prices prices 1984 10.1 17.7 24.4 1985 31.5 55.1 33.0 1986 43.4 75.9 43.2 1987 4.6 8.0 68.6 1988 14.2 1989 14.4 1990 15.4 Total 89.6 156.7 213.2 Change in 2 +36.1 Project Benefits 3. The main project benefits can be categorized as (a) manufacturing cost savings, (b) import cost savings, and (c) maintenance cost savings and summarized as follows: (a) Manufacturing Cost Savings 4. The economic cost of producing one locomotive with and without proj- ect has been estimated on the basis of a detailed cost b.ceakdown provided by the factory (Table 3). 94 ANNEX 3 Page 3 Table 3: CALCULATION OF PRICE CONVERSION FACTOR FOR MANUFACTURING COSTS OF LOCOMOTIVES ('000 Yuan) Financial Conversion Economic cost factor La cost Materials: Steel 884.8 2.19 1,937.7 Timber 63.2 0.93 58.8 Others 316 0 2.00 632.0 Fuel: Diesel 7.8 1.13 8.8 Heavy oil 2.8 1.76 4.9 Gas 0.5 1.55 0.8 Electric!ty 10.0 5.00 50.0 Water 1.2 1.00 1.2 Labor: Unskilled 7.6 0.64 4.9 Semi skilled/Technician 93.9 1.51 141.8 Supervisor 16.9 2.00 33.8 Equipment 139.7 1.40 195.6 Otner 2.2 0.70 1.5 Total 1,546.6 3,071.8 Overall conversion factor 1.99 /4 Source: same as footnote Lb of Table 1. 5. For locomotive manufacturing costs, CIF prices have been used for tradeable goods after due adjustment for inland transport costs. Taxes have been excluded. The overall economic conversion factor of 1.99 was applied; the results, compared with the SA, are summarized below (Table 4). 95 ANNEX 3 Page 4 Table 4: MANUFACTURING COST FOR ONE LOCOMOTIVE ('000 Yuan at 1990 prices) Without With Cost project project saving A. PCR: Financial cost 1,901.6 1,546.6 353.0 Economic cost 2,223.6 3,071.1 -848.2 B. SAR: Financial cost 1,901.6 1,649.9 251.7 Economic cost 2,223.6 1,862.4 361.2 C. Change in 2 (A/B): Financial cost +41.0 Economic cost * -334.8 6. Manufacturing cost for one locomotive, at 1990 prices, will yield a financial savings of Y 355,000 per unit; in economic terms, after applying the shadow pricing factor of 1.99. the saving is minus Y 848,200 per unit. The locomotive manufacturing cost comparison, however, for the PCR with project case is the much more advanced SS3 model; other figures are the cost of the old and discontinued SS1 model; and the shadow price factors used in the SAR, without project and with project, were 1.17 and 1.13 respectively. (b) Import Cost Savings 7. The cost of an imported locomotive would be about Y 5.30 million; and the cost saving per locomotive would Y 2.23 million (SAR: Y 1.94 million in 1983 prices; or Y 3.81 million in 1990 prices). (c) Maintenance Cost Savings 8. Based on the actual maintenance record in 1990 prices, the annual maintenance cost saving is minus Y 1,800 per locomotive (Y 27.000/year without project; Y 28.800/year with project). The SAR's figure is Y 1,300/year in 1983 price; or Y 2,272/year in 1990 price. Again, the a:aintenance cost for the case of witht project and the case with project in the PCR arr! based on the SSl and SS3 model respectively. Locomotive Production 9. The current locomotive production capacity of the factory is about 165-170 units per year. This 3xceeds the original annual pro4!uction capacity of 120 (includes the capacity of Phase II Construction) is due to the continu- ous capital investments from other ongoing renovation projects. For the pur- pose of the economic analysis in the PCR, the original annual production capacity has to be applied since the excess production capacity has been brought about by other ongoing renovation project. In addition, with the project, the factory had been put into operation one year ahead of time. 96 ANNEX 3 Page 5 After making those adjustments, the list of annual locomotive production, with and without project, is shown belowt - Table 5: ANNUAL LOCOMOTIVE PRODUCTION (set) With Project Without SAk PCR Year project Total Incre. Total La Incre. 1983 40 1904 40 1985 40 60 20 1986 40 80 40 81 41 1987 40 120 80 102 62 1988 40 120 80 120 80 1989 40 120 80 120 80 1990 40 120 80 120 80 1991 40 120 80 120 80 1992 40 120 80 120 80 1993 40 120 80 120 80 1994 40 120 80 120 80 1995 40 120 80 120 80 1996 40 120 80 120 80 1997 40 120 80 120 80 1998 40 120 80 120 80 1999 40 120 80 120 80 2000 40 120 80 120 80 /a Actual * 1985-89; forecast * after 1990. Economic Rate of Return (ERR) and Sensitivity Analysis 10. The PCR's ERR is 82 percent compared with the SAR's estimate of 89 percent. 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I22.J o56.I 85.6 128.4 25.1 256.1 129.4 D5.A 95.6 129.4 56.1 256.8 I2.4 ).2 .? 13.1 2. 26.5 13.9 . 5.e 0., u.e 5.0 9.0 34. 3 i5.9 fj3.9 Lo. 1. 351.1 34. 6 51.9 103. 183.1 51.9 350.1 34.6 51.9 1.8 03. 51.9 5. 343.9 14.41 MJ. 103.9 193.8 31.9, Må9.i 54.0 G9.9 61 165.9 19.9 0.0 , 0.1 0.0 0.0 0.0 0.0 62.3 &.3 9.3 8.1 58.8 9.3 62.3 L. 1.3 15.1 te.) 9.3 .2.3 6.2 9.3 18.9 18.1 9.3 9.9 0. 8.* *.4 0.0 t.0 0.9 0.0 9.9 0. 9.0 9.0 0.0 0.0 9.0 9.9 0.5 0.9 9.. 9.. 9.g 0.9 0.9 0.0 ladal Saas 0.0 95.6 20t.9 9.1 w3.6 649.0 445.3 24.0 101.3 353.3 349.3 323.1 22.3 115.2 6.1 U. 2.0 1.3 0.9 *.9 9.0 *.0 .0 0.0 0.0 0.0 0.0 0. *1 〕：。：_,(b》 《州•一”．開••••弱間•l一I跑I一觔•．•－ 細．開口開•開•“申口••開口馴‘。－ 細開．叫織網“。 甲開開開憫口寧啊口嗡口口口口 .－一一一一 二細槨．吋“•．•，,,,,lee 惜口自自囑煙目口唱閱閱口口叩•．間州•卜口唱唱 C&．。細“”州啊．：州，,,,，…J&．州“t&&”惜，．。 ：騷t鑰•計t。噸寫騙 ‘一：，名，鴆訕亂一鸛 嗡“鑒榭‘十，珊：馴亂州：憫l嗡：開！I唱•辦l吟I一l&:l州I州低祠 ‘觀．‘間“,“間“,‘闢，＇·’,，•，，磚一”，·”奮二l，·；雲•亂．屹亂鳥路tl.．•斗討細”鰓．點訪．：名話‘”認．越認” 響開二妒”一言ttt；喲們．：面：：亂：:．屆細1：細r.7；鳥屆 ;．面．馴〝珍細．才降‘必亂細．名：物．亂輪．留 ；磚f甲·才紹•j；終二二鰓．，為．&.:&.. :．奮•名．J.‘·才；,：名‘騙；:！斗：：名1．名l細遝 ；學開唱．）么‘歸．盧p：寡亂觔．霧發．名 :．、環．1榆．婦二神．亂，f.I曦． ；胛！:．刁二J:g訌：騙鳥才開么J么． ；二1細」細韋餌．t電”二I抓．蠶：勵 ！化日學，亂．”二，為1‘亂。抓． .，亡亡，.‘二騙g辭．才亂討．零忽鉀．忠戶。r ；豐，&．•，&.0.,..,,.．韶彥 ”夠‘,,.,..,，•，,., l竺f．…。，..&. l胛，.,&.&. 鳥個啊么0.& ‘唱唱可口 糮馴悶：& 衛•“二 細州“，潤”,,&,.fl:．鈴·露叢•．蠶嚥！山二輪〞．名物：0寧‘In鳥．無：細二為•伊．&．鼠名緘，:. .....．••．．•一”開••－•．•••．“••．••綢口•間••••■•－•■••．..．•．••••“．• ,．細鉤“一，&“神t觀ul.., ..．口••口啼•口甲．口口．口口口個口個．唱口開目 細．•“&“謝劍．物””〞”川取鉤鬥“觀一“州•” 亂I露細。計‘閱自細 1州訪才，忽：，鳥‘鰓開各城I斗 嗡“亂聯l州l州4‘越：開．州口t斗‘儲『l憫馮神．為。”l‘州‘州州“坤唱 撇“&.“•“,.&&,I&,”·＇:.‘…。｀…I二么，，二么“:：。1.．名亂：.;．斗．編．&&. I馴，•。劇，•．州悶‘&.&.0 mJ扒二言一亂亂：亂名痲奮．籐 鰓：.！鼯．亂州『審L你鰍t細t 唱亂才么•！,．名鳥•鳥．1爭．1 觔．亂、斗亂t.1亂呂亂露編．才 以．畫。．•鰍：亂t亂•亂寫 奮訂．t當鳥唱亂才婦．：婦．名斗才 I州必痲；.．亂j魷二亂，亂忽 ：執yl么寫亂才鳥．鳥．訂．才 l訂．名胤f．才牌二訊亂綢．；抓為 IZ亂‘·亂唱鳥．j.1 J.t鳥． 么t鳥中鳥騙t．必鳥t亂自 :．么…鳥．也． ‘必么•鳥個鳥． 鳥．鳥．么• 鳥●么t .．• 鳥• 細馴幼一鰓州．她屆。”歸認．斗：!.:.，。胤•馴織才•亂，頃d&&fl么tl亂籐•亂才中磚州•亂•‘. ．••■■■•••■•■■■．••■•••口•目甲•■•口•口••口•目口．■•目■口•■口••••■••••••■■．••••■．．•••．••‘••■•■■•■•．••．•••■•．••••暱 ,．跑纏馴馴卜l.,．•自目細• 個口口口目口目口口口口口口口目口 勵‘劇”禹一。•．畸。個購∥n開’&．開門細啊•”州•“ ___＿瓖細•勵斗增勵 調叩屆鼠，鵬矚縱認矚 嗡‘l個•跑馴露規亂悶州神口口亂惜州叮日閑州坤露州屆州州甩州寫婦悶州陶 嗡“•開“&“開”一l•亂．由．t•．•么．飯．&tl二斗t鳥．&．斗．網鳥•‘•f.,l斗‘么． 細”•〞，&.”娣〞神．•總h•l‘才亂．認中亂中鳥t 瓖h•日鳥才亂•么•么•亂• 細．1臉•認．亂么：么呂馴．亂 劇限•抓，認螂膩才州才亂t 州J一認，鰍．抓才n.t鰍t 馴鼠華亂I觀．亂必名編寡鳥名 馴鼠寫鳥•斗鳥略：織寫觀．蘊 細d亂•認讓協細協名認澀 州．t.：抓f亂．1.．才l.．才亂t 細』。磚他口．亂f亂t鳥l 鳥•鳥•鳥自么•鳥自么t :．么•么．亂個鳥． 鳥•鳥•鳥個么• ‘•鳥•‘• 鳥•么• 么• 么• h闕綢日一細目•f一i。n鳥•l鳥才州才l關．•I么讓馴鳥．認么名認亂唱認亂蠶娥．•翅‘：觀‘t馴鼠，I協名編t斗擊 口口口口口口口目口口申口自甲開口．■••■．•．■•••■•■•‘■■•■■．•．•■．■••．■■■••■■■．•■■••■■■■•■••••••■••■■■■■•■■•■■■■■■■•‘．■■■■••．••■■•■•■•．■••矓d■•••．• 細d細．鳥•l為名朋織．叫亂蠶皂戲鳥t露已亂•I山．f造州．才飼鳥才網亂必攔J用d闕鳥唱儲鳥萬口亂•鳥• 個口口口口開口圈口頗開口口口．•■■••．.．•■••••••••■••■••■••••網開個閑•••■■■．■■■■■■．．■•■■•．■••••．■•■■•．•■••■■•■■■■ ‘■■••••••••■•■．• mås) - ut ru tgill Mit mil £6£61 *681 UZU &N 16 ni %ti 1£1 161 Ul 191 Ul 8 m 18a61 Veitt ;161* t*tu V*M MOI tlluel 1*90£1 6,9601 6.1111 ralt raft llaiz Vårli 11a11 ZOLLOI 8,90:1 Z#9101 6.9601 6.1111 6,L111 6*1111 61LIT? 611111 16a61 6,90c1 91££01 z*910z 6.%oz 6.960z 6 qéoz 6,9601 1,9601 tlaoi 11910V t IU*Z 99£coz 1.giel Z.gioz Z.qioz Z.910z Va01 el90:1 1,5101 raoz 9.cgoz 9.bsøz 9.££01 9.SGOZ zluol e*9091 VW 1,9101 tOUR sluoz VCIO? £#£tøt VMI Søt z ILLOI 8890£1 $*£Ul ZI£661 rua 1.;101 1.£loz ; .£loz 1-sloi toot VUGI 9,9091 81£"1 tIet61 t*1661 ZIMI 1,9661 ZI:661 18£661 roog Vluof IIMST* 519£61 1161361 *%61 V£Lbl **£L61 t ISL61 t %61 1001 Vu91 soffil £99£61 $*9161 81£G61 SIMI 11,9c61 819"1 1119$61 loet Vu01 9,9091 £19£61 slit61 £09£61 G 19£61 919£61 VMI s*ýtbi 010 0,* MI z IUOI 11,~ 9,9061 £*9t61 VMI SIMI VMI VMI 999t61 010 010 6661 IOLLOT eIffil Vual 81"61 £69£61 £19£61 919£61 £89561 9,9t61 010 090 8661 t 1 1:61 to*ttl Zletel 6,1961 tlåbot 9,Cal VL6111 VUel 9,9061 1,6 r16 £661 Z*9101 LOMT £98061 £16181. elý£61 911*81 V6t81 VON M el elet ølet 9661 1 *116 Ollal 6%9.1 elåesi Velel 5,16il 6,Mi 6,081 Vital 1,9* 11% 9661 CIMI t*401 zIe9t1 6,tt91 1,6691 £90891 9,69BI 8*6661 COM1 il% i It* Wl 1,619 B,rbil i 'Iffll 8166£1 GILST VItø *1t9P t 1t9V 9,6i9T VVI VW £661 totiq 9 16*6 £19£6 0,1111 VIM 8,6M 9,9611 98s6V 61*iCi VW tIbu Z661 * litt 0,121 z*116 6*198 £11601 9,196 S,9ZOI £19101 VOUI Latt£ l OM 1661 Vblt Zolø£ TIS9 91t06 r1t16 VLU rløe VM 9,Søll Vett Vot 0661 1 162 VW SIZO 0,068 ZI#66 6,898' 961t6 £11£6 6,011 £*£l£ £1511 010 6961 V6tt zoý19 119 VW BM6 £lite 816£8 ZIM $Otozl 1,01r 1,101 6,911 esbi c *te- i 1t6 ZIM- 6,Lli- Vilt tltzz 99M 9069z 6996£ 1,9Z£ Olltz ZO£R Labi z *Di- i * 199- 196- £96- BOM- 1 1*99- t 19£9- 6**2- t lest z 1t96 6,50 010 010 VITS 9861 4£?- UP- MI- UV- 61tI- 6991- Vll- MI- 016£Cl 0 IW VP Vei t 19L £661 *LV- UV- tisl- tSl- 9*tl- IOLI- »il- *L£l- 9,UCI 412." b6UT tILP 601£9 te61 LIOI- 1101- LIOI- ilDj- Ub- 6011- liol- LIOI- 8,9101 ilfi* 6,511 V/V 9,9IZ te61 s Iftt- £96*t_ £16* £10£- 61i0t- TIM- £ *b*£- VW_ £Ibt£ 61M 679 Ve£ 010 MI 61£11 9,19 0#1* Iz£ 0,0 1961 aon- (»11- sa*A z I IM - (101)4 tIM4 molf -4namp- -Ieh§P 1103 1m13 anid 1f03 si;øuae guiw OUIN ;ýareid ~Ille Al ¥HIND UTM £01 104 Table 3.3 (b) 990JEC? ..8!!31 RiPGA r RAI.6DA M0JUt k,an 2394-.AI Iconosic Rate 04 efturs tEM no eftf~t:vit¥ ansivsis . ..................................... . . ........ . .......... ....... ..............e..is------- . :a. an Ie.....s C.aa .e:. . rh* -0tor ft1194 Uftm~• •(~ n at g . •••••, sett1@ • • Nt P*t1it mt -t-veato§t fse IZ ~ et 4v66 3 1¢r o ee s prosec, gan, oatse Sn a :9 98 Gatofs quain9n raimas Elee. öktone flydnin9 Ialvaå caa cost ••••••-----••••••••- fear rasav -WH Cfaoet. -90 #er, kImr*. •itvR !fostqa nir, tal fom mftltuckepf u isomtj kul ilo *1201 *20 ~..=31 I vett I vers -!i? -20t 1985 0.0 0.0 35. 2*.: 24.4 84.2 27.4 18.7 0.0 :20.4 .220.9 -220.9 •20.3 •21:.7 -220.9 -220.9 -2. •220. 9 1992 0.0 0.0 50.7 42.> 35.. 10.5 73.2 46.7 0.0 40.. -410. •430.! •454.1 -406.j -40.5 -430.5 -430.5 -430.5 1983 21.9 0.0 103.1 10.' 15.2 430.7 141.1 104.3 0.0 957.1 -457.8 -42. 2 -to0 -08.5 -18 •458 -98 •4$2 1984 1l1.1 230.1 103.1 80.4 75.2 W.4 199.2 1W1.1 0.4 L622.3 -1922 -14 •1a9 -:.49 -1s22 •1a2L -1ö22 •!34e 1985 203.9 D91.8 48.9 40.2 8.5 767.2 204.7 208.6 0.0 2407.7 234.0 234.0 .2174 -22! -225 •2091 -2408 -2408 •q29 -22=3 1986 298.7 167.2 0.0 0.0 0.0 781.0 150.9 223.8 27.3 2348.1 167.0 6.8 3 93 å32.7 -1115 •1715 ·1710 •:341 +2114 -2:48 •193 •2010 1987 288.8 610.5 709.1 150.2 232.4 34.4 2085.4 381.6 210.3 612.1 1204.0 -81.4 -439.2 -457.9 -04.9 -1453 -1851 -1161 -1441 1988 180.5 113.8 515.a 116.9 22._ 15.7 1630.7 909.0 268.8 542.9 1620.6 •10.1 -4.2 -41.1 70.9 -426.7 -998.1 -385.6 •761.1 1999 74.4 380.2 18e.2 221.0 7.2 869.0 1287.9 282.9 571.0 2141.8 1272.7 5257.9 1191.3 1354.2 751. 333.0 777.4 282.0 1990 11$.2 361. 182.1 22&.2 0.0 88.1 1555.0 403.5 608.4 228.9183.8 1660.8 602.2 !765.5 1256.7 3.5 1089.8 495.8 199 340.8 173.7 214.8 729.3 1703.8 477.2 634.6 2815.6 2086.3 2086.2 2006.6 2164.0 1839.6 1412.5 145.3 794.3 1992 299.4 554.1 189.9 643.4 1961.3 554.5 661.8 3077.S 2434.1 2434.1 23ö3.3 2:02.9 2112.2 1925. I722.6 1411.0 1993 97.1 96.8 18.3 402.2 2029.2 638.4 689.8 37.4 2935.2 2933.2 2912.2 29^.3 265.3 2413.4 2179.1 1402.9 1994 64.1 33.# 40.5 t1.8 2205.6 721.0 717.9 3651.6 o512.7 3 ;s2.7 2097.9 :527. 3218.6 28.7 2668.6 1824. 5995 2404.1 829.8 748.8 3982.7 3992.7 3982.7 3912.7 3982.7 31.6 3357.4 3062.1 2141.4 1994 2404.1 829.8 748.8 3982.7 3912.7 3982.1 3982.7 3982.1 3982.7 3651.4 3062.1 2141.4 1997 2404.1 829.8 148.8 3982.1 2982.7 3982.7 3982.7 3982.7 3982.7 3982.7 2062.1 2141.4 1998 2404.1 829.8 748.8 3912.7 29M213982.7 312.7 3932.7 39~2.7 3042.1 2141.4 1999 2404.1 829.8 49.8 3982.7 3912.7 3982.7 3982.7 392.7 3982.7 3932.7 302.1 2141.4 2088 /.1 2404.1 829.8 748.8 3982.7 32.7 3982.7 3982.7 9 2.7 3982.7 392.7 062.1 2141.4 288 2428.1 838.1 756.3 4022.3 4022.5 4022.5 4022.5 4022.5 992.7 390.7 3062.1 2141.4 2092 2452.4 844.5 163.9 402.8 4062.8 402.8 4042.8 4042.8 4022.5 3982.7 3062.1 2141.4 2003 2416.9 853.0 771.3 4503.4 4103.4 403.4 4103.4 4103.4 4062.8 4022.3 3062.1 2141.4 2904 2501.7 86.5 779.2 4144.4 4144.4 4144.4 4144.4 4144.4 419S.4 462.8 3%2.1 2141.4 2005 22.7 872.2 787.0 418.9 485.9 48.9 418.9 485.9 4m4.4 402.4 302.1 24.4 2006 2232.0 888.9 794.9 427.7 4227.7 427. W .1 4227.7 4185.9 4144.4 3062.1 2141.4 2007 2577.5 889.7 02.8 4270.0 4270.0 4270.0 4270.0 4270.0 427.7 4185.9 3062.1 2141.4 20M8 2603.3 891.6 810.8 4312.7 4312.7 4312.7 4312.7 4312.7 4270.0 4227.7 3062.1 2141.4 2009 2629.3 9M7.b 819.0 435.1 4355.8 4355.8 4353.8 4355. 4312.7 4270.0 3062.1 2541.4 208 2655.6 916.7 827.1 4399.4 4399, 4399.4 4399. 4 4399.4 4335.8 4312.13M2.5 2141.4 7otså 1299.5 3177.4 340.8 269.2 251.7 578.3 1948.6 :24.2 4.6 15.371 M • 192 11 18: 92 162 141 is: 101 9 (52U3• 4.656 4.332 4,287 5.036 3,222 1,943 1.7138 11.048) .< 1. i2 . . ......... . 0 00 .ue. uite# 1.4. ormsaf at 1% 0.&. k" 2IM #liv*r. 105 Table 3.3 (c) CHINA PROJECT COMPLETION REPORT RAILWAY PROJECT (Loin 2394-CHA) Economic Rate oi Return (ERR) and Sensitivity Analysis -------------------- Zhuzncu Electric Locomotive Factory Moderniation (Y billion) -----------?est estimate---------- ---Senslt:vitv analysis--- - -Benefits---------- Total Wscort Benefits Total Manafact. Import Aint. Net project cost delayed by project cost cost cost cash cost saving Year cost saving saving saving Total flow +450%) -(50%) 1 year 2 years 1984 24.40 -24.40 -36.60 -24.40 -24.40 -24.40 1995 33.00 -33.93 44.56 -0.036 10.59 -22.41 -38.91 -44.69 -33.00 -33.00 1986 43.20 -33.93 91.36 -0.074 57.36 14.16 -7.44 -31.52 -32.61 -43.20 1997 68.60 -33.93 138.15 -0.112 104.11 35.51 1.21 -33.57 -11.24 -58.01 1998 14.20 -33.93 178.26 -0.144 144.19 129.99 122.89 40.96 69.91 43.16 1999 14.40 -33.93 178.26 -0.144 144.19 129.79 122.59 40.66 129.79 99.71 1990 15.40 -33.93 179.26 -0.144 14.19 128.19 121.09 39.66 129.79 128.79 1991 -33.93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1992 -33.93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1993 -33.93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1994 -33,93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1995 -33.93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1996 -33,93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1997 -33.93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1998 -33.93 179.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 1999 -33.93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 2000 -33.93 178.26 -0.144 144.19 144.19 144.19 55.06 144.19 144.19 Total 213.2 -542.9 2591.5 -2.094 2046.5 1833.3 ERR a 82Z 54% 24% 53% 40% NPY (12%) ' 559.3 486.9 101.3 465.1 381.0 ene...e.-m.-..eeme me e eo e eee..............eme ew m e e emme IBRD CHINA 1 10o Hohihot FIRST RAILWAY PROJECT PROJECT COMPONENTS RAILWAYS UNDER EXISTING CONSTHUCTION BANK PROJECT ,EMING •inh.engdao DOUBLE LINE SINGLE LINE . . . . . . . . • . • . • . . . . . ELECTRIFICATION .....e..." UPGRADING huoxian RIVERS Tiin PROVINCE BOUNDARIES INTERNATIONAL BOUNDARIES Baoding Yuanping Heb,an 0 50 1?0 1?0 200 KILOMETERS Canghu MILES 50 100 120 Shijiaihuart Zlhench-ngdi Uyo• . . .• Baljiazhuang y. Yngua Hengshui DogigYantal Yangquanqu Jiexiu Zhongdian WBif.ng Sein ,Handan Zibo cun p // A N 4 0 N G Lif. Ch-nghi HudunOiga K.bi Xintoi Houmna Jincheng Yanzhou - O Shijiusuo iaozuo H e Xinxiang __Y~han For Detil Se I f,"%- -- 18RD 17097 ~t. .~uyag - Zhengzhou Uanyungang KaMfng Ba'oji Tongguanan Mixian U. 5. s. R. xivShangqiu f " xi'anXuzhou -1A NGCS Xuchang MONGOLIA Pingdingshan.k. Thsmpha en pae yTh o9-Bn' tafeoive fohe GengbuCHNA conerenc o rede od i - lsvly for'he int~rnl ..e ofT Wrd ".nk Grou. ede~~mion. .s.d .nd the bo.ndaries n -n thi. Fuyang m,p d. not-ip, ~n th« p-r -f The oc ae ru,aygdmn HuBinan. on th. ega status of any t-ritor or any endors-met or -ccetanc~o u bo.ndarie SETE