China - Henan Highway Project

Document of The World Bank FYOR OMCAL USE ONLY MICROFICHE CO nDY Report No. :P- 5813 CHA Type: (PM) Title: HENAN HIGHWAY PROJECT Re"tNo. P-5813-CFA Author: LEVY. H. Ext. :84021 Room:A7 099 fDept. :EA2TP MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $120 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HENAN HIGHWAY PROJECT OCTOBER 19, 1992 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 (as of March 1992) Currency unit - Yusn (Y) $1.00 - Y 5.45 $0.18 - Y 1.0 $1.0 million - Y 5.45 million $183,486 - Y 1.0 million WEIGHTS AND MEASURES 1 meter - 3.28 feet (ft) 1 kilometer (km) - 0.62 mile (mi) ABBREVIATIONS AND ACRONYMS EA - Environmental Assessment EAP - Environmental Action Plan RAP - Resettlement Action Plan RIP - Road Improvement Program FISCAL YEAR January 1 - December 31  FOR OMCMAL USE ONLY ENAl hIGHWAY PROJECT Loan and Project Summary Borrower: People's Republic of China Beneficiarv: Henan Province Amounts t$120 million equivalent Termas 20 years, including five years of grace, at the Bank's standard variable interest rate ginancing Plan: Local Foreign Total -- $ million) - Provincial government 144.0 _ 144.0 Central government 36.7 - 36.7 IBRD - 120.0 120.0 Total 180.7 120.0 300.7 Economic Rate gf Returns 28 percent on components comprising 71 percent of total project costs Staff Auvraisal Revort: No. 10683-CHA Mapss IBRD No. 23486, IBRD No. 24225 This document has a resticted distribution and may be used by recipients only in the performance of their offic duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDU WAND RECOMMENDATION OF THE PRESIDENT OF THE INTERhATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HENAN HIGHWAY PROJECT 1. I submit for your approval the following memorandun and recommenda- tion on a proposed loan to the People's Republic of China for the equivalent of $120 million, to help finance a Henan Highway Project. The loan would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. The proceeds of the loan would be onlent to Henan Province for 20 years, including five years of grace, at 75 percent of the rate payable to the Bank by the Borrower with a 0.75 percent per annum commitment fee on the outstanding balance. Henan Province would bear the foreign exchange risk. 2. Background. Henan Province is China's second-most populous prov- ince, with about 85 million. Availability of water, a good amount of rain- fall, and a moderate climate, make agriculture its main economic sector. While the province's economy has been diversifying and has grown rapidly the last five years (7.6 percent average annual growth since 1986, despite the recession in 1989/90), it has an average per capita income 40 percent below the national average and important pockets of poverty. About 10 million, or 12 percent of the province's population, are classified as poor. Lack of transport infrastructure is an important contributing factor to this poverty, as highlighted by the Henan Province Agriculture Project (Credit 2242-CHA). 3. As a landlocked province, the transport system is essential to the province's domestic and international trade. Due to the province's strategic location, between the ocean and the coal exporting provinces to its west, and the major north-south and east-west road and rail routes that cross it, Henan, with its capital Zhengzhou at the center, is also a transport hub and a tran- sit province of national importance. 4. In Henan, economic and transport trends are taking place which are similar to those elsewhere in China. The high economic growth rate is induc- ing even higbhr rates in the demand for transport. Transport bottlenecks are widespread, mainly as a result of insufficient transport infrastructure and fleet, but also as a result of inadequate sectoral management, which hampers efficient utilization of transport facilities. The diversification of the economy, mainly to more light and agro-industry, and recent policies to encourage more interprovincial trade, coupled with railways capacity con- straints and recent substantial rail tariff increases for both passengers and freight, are causing an even greater increase in the demand for road trans- port. To meet such increased demand, the Province's Eighth Five-Year Plan, 1991-95, includes as priority investments construction of two national high- ways crossing at Zhengzhou, North-South Route 107 and East-West Route 310. The plan also includes substantial improvements and rehabilitation of provin- cial and rural roads. Construction of the Zhengzhou-Luoyang section of Route  -2- 310 and assistance to the provincial and rural roads programs are the main components of the proposed project. 5. Leosons Learned from Previous Bank Oneratilons. China's highway sector has received about 788 million in Bank Group financing under seven projects. These projects provide for the construction of high-quality national and provincial roads totalling about 1,276 km, and the expansion and Improvement of some 3,250 km of rural roads and major bridges. The projects also provide foreign technical ast stance and training of Chinese personnel in highway-related areas and support studies on key issues of highway developmaent such as pavement management and methods of financing the expansion, improve- ment, and rehabilitation of the road network. 6. The first Highway Project (Loan 2539-CiA/Credit 1594-CIA) was com- pleted in mid-1991, and the Project Completion Report was issued June 29, 1992. The project clearly demonstrated the benefits accruing from improved accessibility to communities deprived of adequate transport infrastructure in economically less developed regions. The main lessons which could be drawn from the project include the need to complete engineering design during proj- ect preparation and the need to more carefully match the Borrowers' require- ments with the technical assis ance selected. With respect to the ongoing provincial highway projects, several major issues have been identified. These include the relatively frequent changes in design, insufficient experience of contractors leading to slow start-up of the contracts, and poor overall plan- ning and worksite management. These experiences were reflected in the design of the proposed project, which devotes more attention to: (a) the readiness and appropriateness of design; (b) the criteria for the prequalification of contractors; (c) packaging civil works into large packages to attract foreign contractors as well as the larger Chinese contractors; and (d) the composition of technical assistance components. 7. Rationale for Bank Groun Involvement. Helpinr, remove infrastructure bottlenecks is a cornerstone in the Bank's assistance strategy for China. Improving Henan's road system, given the province's position as a transport hub of national importance, fits well in this strategy. Further, transport development is essential for the province's own economic development, and Henan, as an inland, less developed province, also supports the objective of according attention to the less privileged areas of China. The civil works components of the proposed project are all for high-return, high-priority road investments, and the Zhengzhou-Luoyang Expressway will have an economic impact both nationally and provincially. The project also will help Henan Communica- tions Department upgrade its capacity for the design and construction of mod- ern roado, and will help it strengthen skills for economic analysis cf road investments. The recommendations stemming from the proposed trucking study, which will be the first provincial study of this kind in China, will serve Henan but will also be useful to other provinces to identify necessary reforms in road transport. 8. Prolect Oblectives. The project objectives are tot (a) improve Henan's road network, with a particular focus on relieving congestion in the heavily trafficked East-West Corridor, linking Henan and other provinces with the new port of Lianyun Gang; rehabilitating and expanding the provincial network, whose traffic is Increasing significantly throughout; and improving  -3- rural roads; (b) strengthen highway sector agencies, mainly in the areas of investment planning, construction and maintenance management, and environment; and (c) make recommendations for Improving the efficiency of road freight transport services, with a particular emphasis on enhancing competition and facilitating entry by collective and small private operators. 9. Prolect Delcrigtion. The project consists of: (a) civil works, comprising construction of about 120 km access-controlled expressway between Zhengzhou and Luoyang (about 105 km single carriage two lane and about 15 km of double carriage four lane), together with service facilities and toll sta- tions for administration and maintenance of the expressway, rehabilitation and imprciement of five provincial roads (total of 180 km) and upgrading to year- round condition of six rural roads (total of 112 km) mainly located in poor areas in northwest Henan and, throughouat the province, a road improvement program (RIP) fer rehabilitation and upgrading of provincial and rural roads (total of about 740 km); (b) equipment for highway maintenance and operations, including environmental monitoring; and (c) an institutional strengthening and reform component, which will: provide training and equipment for five key agencies of Henan's Communications Department; offer a comprehensive training program for highway personnel at all levels; and study trucking services in the Province and ways to improve efficiency. 10. Proiect Implementation. The proposed project would be carried out by Henan Province. The project cost is estimated at $300.7 million equiva- lent, with a foreign exchange component of $120 million equivalent (40 per- cent), and excludes taxes and duties. The Bank would finance $120 million equivalent (100 percent) of the foreign exchange, or 40 percent of the total cost. Retroactive financing for $3.0 million equivalent is recommended for civil works already started in the archeological zone of the expressway, and for related supervision. Expenditures incurred after March 31, 1992 would be eligible for financing. The costs and financing plan are shown in Schedule A. Amount and methods of procurement and disbursements, and the disbursement schedule are in Schedule B. A timetable of key project processing events and the status of Bank Group operations in the People's Republic of China are given in Schedules C and D, respectively. Two maps are also attached. The Staff Appraisal Report, No. 10683-CHA, dated October 19, 1992, is being dis- tributed separately. 11. Proiect Sustainabilit. China has a good record of providing ade- quate resources, human, organizational and financial, to preserve its highway network. Henan Province is no except;.on to this. It has a well established organization for road maintenance, with a reasonable level of funding, and, as a result, the road network is relatively well maintained. This situation is not expected to change in the future, and financial resources allocated to maintenance are likely to continue to be adequate. Highway revenues will continue to increase with traffic, and toll revenues from the proposed expressway will provide additional resources. Thus, the proposed project, which focusoe on priority investments and which includes training, institu- tional strengthening and equipment, should be a well sustainable investment. 12. Agred Actions. At negotiations, agreements were reached with PRC on the onlending arrangements for the proceeds of the loan to Henan Province. In addition, agreements were reached with Henan Province concerning:  -4 (a) enviromuental protection measures for the Zhengzhou-Luoyang Expressway; (b) land acquisition, resettlement and monitoring of resettlement for the expressway, the roads in northwest Henan and those under the RIP program; (c) preparation t d submission to the Bank of a study on toll rates proposed for the expressway; and (d) Terms of Reference for the trucking study. 13. Environmental Aspects. An Environmental Assessment (EA) for the Zhengzhou-Luoyang Expressway was completed by Henan Provincial Environmental Research Institute in 1989. The EA -.dentified several sectio ns of the pro- pose4 expressway as having potentially significant impact on the environment, notably related to archeological areas, noise, dust, traffic and social dis- ruptions during road construction, and noise when the exprossway is in opera- tion. Such impacts are addressed by an Environental Action Plan (RAP), which identifies methods to mitigate them. The engineering design and the technical specifications for the expressway incorporate the mitigating measures required, and appropriate arrangements have been made to ensure their compli- ance during both construction and operation. 14. Approximately 17,000 people will be affected by the construction of the Zhengzhou-Luoyang Expressway. A Resettlement Action Plan (RAP) was pre- pared by Henan's High-Grade Highway Construction Authority which Bank staff reviewed and found to be satisfactory. 15. Since most of the provincial and rural roads to be financed under the project involve primar.ly upgrading of facilities, rehabilitation and maintenance of smaller roads, they are not expected to have a significant impact on the environment. However, EAs and RAPs will be prepared as afpro- priate. Land acquisition and resettlement procedures, whenever needed, will follow similar procedures as for the expressway, and RAPs would be prepared for all subprojects involving resettlement under the road improvement program. 16. Program Objective Categories. The project will help Henan, which is a less developed province. Most of the rural roads to be financed by the project will provide access to currently isolated, economically depressed areas with year-round, motorized-access connections to cities, markets and social services. 17. Proiect Benefits. Reductions of vehicle operating costs, travel time and accidents will be the main benefits of the road investments. The expressway will, in addition, generate substantial benefits to traffic remain- ing on the existing road from reduction in traffic congestion, maintenance costs, and in accidents to the nonmotorized vehicles that will continue to use the road. The expressway will significantly enhance the province's ability to expand intra- and interprovincial trade and the mobility of people. Benefits from the rural roads will stem from the provision of all-veather, motorized- access to and from markets. Some economic benefits will be lost from tolling the expressway, but toll rates will be carefully set to minimize such losses, and will be determined based on analysis of the Chinese exFerience accumulated with other toll facilities. The project will also have significant institu- tional benefit., and will contribute to reduce air pollution, but such bene- fits are difficult to quantify and are not included in the analysis. The estimated rate of return for the project is 28 percent.  18. Risks. Due to the lack of experience of Henan's Highway Department vith the design and construction of modern expressways, and with the related international procurement process, there is a risk of delays in the completion of this wor!t. To minimize this risk, a detailed design review has been car- ried out with the assistance of international consultants, and prequalifica- tions and supervision arrangements have been tightened through the provision of qualified international consultants and training for local supervision personnel. An additional risk of delay for completing the expressway stems from an archeological zone it traverses and the related engineering uncertain- ties. To address this situation, Henan authorities have conducted extensive surveys in this zone, including over one million borings, so as to minimize chances that the expressway construction could encounter new archeological findings and to prevent damage to cultural property and stoppage of construc- tion activities as mandated by national and Henan laws. In addition, works in this zone have been started ahead of the other sections to provide an addi- tional time margin. 19. Recommendatlon. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments Washington, D.C. October 19, 1992  - 6 - Sche,dgle A HENAN IIGRVA! PROJECT Estimsted Cotg sad inancin Plan ($ million) Local Foreign Total Project costs A. Work 1. Zhengzhou-Luoyang Ezpressway Civil work. 48.59 47.99 96.58 Supply and installation (EZ&) 0.44 1.04 1.48 2. Provincial and rural roads in NW Renan 22.39 11.37 33.76 3. load Improvement Program (RIP) 45.72 27.57 73.29 Subtotal 117.14 I7.97 205.11 3. Sui,rvslion of Construction 2J2 1.68 3.96 C. Lguinment 1.24 10.23 11.47 D. Institutional StrXnMthenin 0.33 1.79 2I.d I. jInW 0.09 0.65 I074 F. uck1ng Stu&v 0.24 0.23 0_4Z Base cost 121.32, 102.S 223f 87 Physical contingencies I& 11.90 9.00 20.90 Price contingencies 21.59 8.45 30.04 Subtotal 154.81 120.00 274.81 Land acquisition and resettlement cost 25.89 0.00 25.89 Total project co