China - Second Railway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15230 PROJECT COMPLETION REPORT CHINA SECOND RAILWAY PROJECT (LOAN 2540-CHA) DECEMBER 29, 1995 Transport Operations Division China and Mongolia Department East Asia and Pacific Region 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 April 1985) Currency = Renminbi (RMB) Currency Unit = Yuan (Y) Y 1.00 = 100 Fen $1.00 = Y 2.84 Y 1.00 = $0.35 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES m = meter (= 3.281 feet) m 2 =square meter (= 10.764 square feet) m3 cubic meter (= 35.315 cubic feet) km kilometer (= 0.621 mile) tkm ton-kilometer (= 0.621 ton-mile) pkm passenger-kilometer (= 0.621 passenger-mile) mu 0.1647 acre = 0.0667 hectare (ha) kWh kilowatt hour (= 860.42 kcal) ctk Converted tkm, traffic unit (1 pkm = 1 tkm) Mt million tons Mtpy million tons per year ABBREVIATIONS AND ACRONYMS CARS China Academy of Railway Sciences CPCF Changchun Passenger Coach Factory ERR Economic Rate of Return FCTIO Foreign Capital and Technical Import Office MIS Management Information System MOR Ministry of Railways OECF The Overseas Economic Cooperation Fund of Japan PCR Project Completion Report RERR Reevaluated Economic Rate of Return RIS Railway Investment Study SAR Staff Appraisal Report SPC State Planning Commission TMIS Transportation Management Information System  The VIiiorld Bank FOR OFFICLAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation December 29, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on China Second Railway Project (Loan 2540-CHA) The Project Completion Report (PCR) on the China: Second Railway Project (Loan 2540, approved in FY85) was prepared by the East Asia and Pacific Regional Office, with Part II contributed by the Borrower. The loan for US$235 million equivalent was approved on May 14, 1985 and closed on June 30, 1994, two years behind schedule. A balance of US$15 million of the loan amount was canceled. The project was prepared at a time when the transport system was becoming increasingly bottlenecked as a result of China's high and sustained economic growth and its inadequate transport infrastructure. The project's main objective was to help the Ministry of Railways (MOR) finance the expansion of railway capacity. To this end, the project comprised: (a) upgrading the Beijing-Guangzhou line, a key transport artery; (b) modernizing a railway car factory; (c) building new laboratories for materials and equipment testing; (d) conducting a management information system (MIS) study; and (e) providing technical assistance to MOR's railway universities. Although the project progressed slowly in the first 5 years and its completion was delayed due to protracted procurement and to a general retrenchment on investments in China during that period, the project's physical components, which comprised 96 percent of project costs, were satisfactorily executed. The line upgrading and the modernization of the railway car factory were completed. The implementation of the institutional components was less successful. Conduct of the management information system study was hampered for lack of computer equipment; funds were reallocated to purchase such equipment, and, in the end, the MIS study was not done. The laboratory component was completed but with a reduced scope. Modernization of MOR universities was not implemented due to Government's reluctance to utilize technical assistance for this purpose. Four technical studies dealing with MOR's infrastructure and equipment were added to the project's scope during its implementation, and helped to prepare a subsequent project. The economic rate of return for the project's physical investments, comprising 96 percent of total project costs, is estimated at 16 percent, compared to 25 percent estimated at appraisal. On completion of the project, the financial condition of the railway was satisfactory as anticipated at appraisal. The Operations Evaluation Department rates the project's outcome as satisfactory, its institutional development as negligible and its sustainability as likely. 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.  The PCR is good. It offers a candid assessment of the project and contains a substantial amount of supporting tables and annexes. An important lesson noted is that Borrower's reluctance to utilize project's funds for the recruitment of outside consultants substantially hindered the institutional development component. The project may be audited, together with other China railway projects currently nearing completion. Attachment  FOR OPFICIAL USE ONLY PROJECT COMPLETION REPORT CHINA SECOND RAILWAY PROJECT (LOAN 2540-CHA) CONTENTS Preface .............................................. i Evaluation Summary ..................................... ii PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE ... ....... 1 Project Identity .................................... 1 Background ...................................... I Project Objectives and Description ......................... 2 Project Design and Organization .......................... 3 Project Implementation ................................ 3 Project Results ..................................... 7 Project Sustainability ................................. 13 Bank Performance .................................. 13 Borrower Performance ................................ 14 Project Relationship ................................. 15 Consulting Services .................................. 15 Project Documentation and Data .......................... 15 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE . . 16 PART III: PROJECT STATISTICAL INFORMATION ................ 17 Table 1: Related Bank Loans and/or IDA Credits ..... .. ........ 20 Table 2: Project Timetable ........... .. ............... 21 Table 3A: Cumulative Estimated and Actual Disbursements ... ...... 21 Table 3B: Disbursements by Category ........ .. ............ 22 Table 4: Project Implementation .......... .. ............. 22 Table 5A: Project Costs ...... ......... ................ 23 Table SB: Project Financing ........... .. ............... 23 Table 6: Project Results ..24 Table 7: Status of Covenants ..25 Table 8: Use of Bank Resources ..26 A. Staff Inputs .26 B. Missions .26 Annex 1 Income Statements ...... .......... ................. 27 Annex 2 Economic Reevaluation of Zhengzhou-Wuhan Track Upgrading . .. 32 and Electrification Annex 3 Economic Evaluation of the Changchun Passenger Coach Factory ... . 42 Modernization Annex 4 Project Review from Borrower's Perspective ...... .. ......... 48 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 wiihout World Bank authorization.  I  PROJECT COMPLETION REPORT CHINA SECOND RAILWAY PROJECT (LOAN 2540-CHA) PREFACE This is the Project Completion Report (PCR) for the Second Railway Project in China, for which Loan 2540-CHA in the amount of $235 million was approved on May 14, 1985. The loan was closed on June 30, 1994, two years later than originally planned. Disbursements amounted to $219.668 million. A total of $15.0 million was canceled from the loan effective April 22, 1991. Final disbursement was made on November 3, 1994, and the balance of $332,178 was canceled on November 3, 1994. The PCR was prepared by U. Marggraf (Task Manager), H. Deboeck (Financial Analyst), M. Rasheed (Financial Analyst), and H. K. Yen (Research Analyst) of the Transport Operations Division, China and Mongolia Department of the East Asia and Pacific Region and reviewed by Messrs. Richard Scurfield (EA2TP Division Chief) and Yo Kimura (EA2 Project Advisor). The Borrower provided comments that are included as Part II of the PCR. Preparation of this PCR was started during the Bank's completion mission. It is based on material in the project file. The Borrower contributed to preparation of the PCR by preparing its own evaluation of the project's execution and commenting on the draft PCR.  .. ....:  - ii - PROJECT COMPLETION REPORT CHINA SECOND RAILWAY PROJECT (LOAN 2540-CHA) EVALUATION SUMMARY Project Objectives i. The Project's principal objective was to make a direct contribution to the Government's goal of increasing railway capacity to support economic growth by assisting the Ministry of Railways (MOR) in financing urgently needed investments to expand its transport and production capacity. To that end, the project was to increase railway line capacity in central China on the important route between Zhengzhou and Wuhan and to increase the production of passenger coaches. In addition, the project was to strengthen applied research, continue the modernization of MOR's management techniques, and advise on improvements in university curricula (para. 3.1). Implementation Experience and Results ii. The project became effective on November 22, 1985, about six months after Board approval on May 14, 1985. The loan was closed on June 30, 1994, two years later than originally planned. iii. The Zhengzhou-Wuhan Upgrading and Electrification component (para. 5.3) was well prepared at appraisal. Shortly after Board approval, however, MOR had to reduce investments for capital construction by at least 10 percent in order to meet a cost- cutting requirement by the Government. This action resulted in a complete revision of both the design and the implementation schedule, and a consequent delay of over two years. The component was essentially completed by December 1992. A few items, which did not affect the line capacity but did create safer train operations, remained unfinished until early 1994. One of the project's principal objectives, the expansion of MOR's railway capacity on an important route in China, was successfully met (para. 6.2). iv. The Changchun Passenger Coach Factory (CPCF) component (paras. 5.4 and 5.5) was approved as a first phase of factory modernization, which was intended to provide careful preparation of the second phase, while the number and quality of coaches produced at the factory were expected to increase moderately. The second phase to implement consultants' recommendations and to equip the factory with machinery needed for the more efficient production of a newly designed coach had been planned for a later project. Shortly after the successful completion of the foreign consultants' work in 1990,  - ill - local management of the factory combined the two phases in order to maintain momentum. Originally, completion of the component was scheduled for the end of 1988. With the coalescing of the two phases, installations were finished by the end of 1993. The objective of the project component was to increase coach production at the factory based on improvement in production technology and better factory equipment and machinery. This objective was fully achieved although differently than planned at appraisal (para. 6.3). v. The China Academy of Railway Sciences (CARS) component (paras. 5.6 and 5.7) consisted of equipment and instruments for two new laboratories to test rolling stock and track components, and consultant services to assist in the finalization of their design, and setting up the facilities. During implementation, however, the Chinese side found that the cost of the consultancy was much higher than anticipated. After years of discussions at all levels inside MOR, and with the Ministry of Finance (MOF) and the State Planning Commission (SPC), CARS decided not to build the mechanical laboratory because it was too expensive. Construction of the track-component testing laboratory, which began in 1991, was completed in early 1994. The project objective to strengthen applied research was, therefore, only partially met (para. 6.4). vi. The project's main technical assistance component (paras. 5.8 to 5.10) was to carry out a Management Information System (MIS) study to improve MOR's quality of management and railway operations with the help of a computerized information system. Quite ambitiously, the study was also to provide sufficient experience of the new MIS for MOR to decide how to extend it to other units. Due to a shortage of computers to collect data, however, the allocated funds were used to purchase computer and telecommunications cabling equipment for a different pilot project to computerize the existing expense and revenue accounting systems of the whole Harbin Administration. Implementation of this computerization was completed in June 1992 without achieving the MIS study's objectives (para. 6.5). vii. Finally, the project component for the provision of technical assistance to MOR's universities (para. 5.11) to strengthen curricula and meet MOR's changing technology and management needs was not achieved because the component was never implemented (para. 6.6). viii. Procurement. The Bank's procedures for procurement under international competitive bidding (ICB) were still very new to MOR when the project started. The workload for MOR was quite remarkable. Procurement administration was generally unsatisfactory until early 1992, when a reorganization of the Foreign Capital and Technical Import Office (FCTIO) improved the progress of procurement activities. In retrospect, handling of procurement matters was the weakest part of project execution. The main impeding factors were: (a) a very cumbersome approval process, with repetitive controls from other government organs; and (b) an inherent lack of knowledge and experience of contracting in a market economy (paras. 5.12 to 5.15). ix. Disbursement. The total project cost was $546.1 million compared to the appraisal estimate of $569.1 million, 4 percent lower than originally calculated. This  - iv - comes predominantly from the conversion of costs expressed in Yuan into US dollar at devalued Yuan to US dollar exchange rates, which exceeded by far the price contingency in US dollars. The overall result shows the Borrower's attempt to focus on physical elements of the project with the emphasis on substituting foreign funds by local ones wherever possible (paras. 5.16 and 5.17). x. Sustainability. The sustainability of this project is supported by the results of sensitivity analyses conducted for both components. In the case of the Zhengzhou- Wuhan Upgrading and Electrification component, increasing the project costs and mine development costs by 20 percent, respectively, had only a minimal impact on the ERR-lowering it from 16 to 15 percent. Similarly, for the passenger coach component, reducing the benefits by 50 percent resulted in an ERR of 18 percent compared to a base case value of 25 percent. xi. Bank Performance. Although the Staff Appraisal Report (SAR) identified the risk from inadequate project implementation and operation as negligible, the project did not progress well in the first five years. During those years, there were only small (one staff member) Bank supervision missions, after an initial, fully-staffed mission in October 1985. Beginning in 1990, systematic and in-depth supervision addressed outstanding issues, with an emphasis on agreeing with MOR and SPC that specific measures be taken by the railways to improve implementation performance. The missions appear to have significantly contributed to improved project progress. Since then, supervision reports provide a clear picture and assessment of project progress and the reasons for delays in the past (para. 8.1). xii. Borrower Performance. Overall, MOR's administrative performance was quite good, except for procurement and regular reporting (para. 9.1). MOR had, however, some difficulty in coping with the requirements of being a project executing agency until it belatedly installed the FCTIO to rectify the shortcomings. Reporting was weak, untimely and barely informative. Over the years, the Bank emphasized in supervision missions that reporting, especially quarterly reporting, had to be improved with regard to content and timing. Remedial steps take by FCTIO improved the situation somewhat but not yet to a satisfactory level (para. 9.2). Findings and Lessons Learned xiii. The project achieved only some of its objectives (para. 6.1). It was to make a direct contribution to the Government's objectives of increasing railway capacity, to strengthen applied research, continue the modernization of MOR's management techniques, and advise on improvements in university curricula. When the loan was closed, the project results were mixed: in essence, the objectives related to physical investments were achieved, but not those connected to technical assistance. xiv. The most important lessons (paras. 8.1 to 9.2) learned relate to the need for: (a) stronger ownership of future projects by the Borrower, (b) the Bank focusing on supervision in the early years of the project, (c) the establishment with MOR of a  procedure to properly record the Bank's agreement to changes of the project scope after appraisal, (d) an improvement of the Bank's administrative efficiency in procurement, and (e) MOR to realize that adequate emphasis on implementation of ongoing projects and feedback to the Bank are essential for the successful preparation of new projects. Experience with subsequent projects demonstrates that these lessons are still valid. Most important for achieving project objectives is the ownership aspect. The Bank, therefore, should establish at the beginning of project preparation a clear understanding with the Borrower of what should and can realistically be achieved in a given timeframe. A joint planning meeting with high-level participants not only from MOR but also from SPC and other Government bodies, which are involved in policy refonn, could serve as a forum to discuss the Bank's and the Borrower's objectives and possible scope of a new project and reach an early agreement on a common approach to its preparation.  PROJECT COMPLETION REPORT CHINA SECOND RAILWAY PROJECT (LOAN 2450-CHA) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity Project Name Second Railway Project Loan No. 2450-CHA RVP Unit East Asia and Pacific Region Country China Sector Transport Subsector Railways 2. Background 2.1 China's economy is transport-intensive, like most other centrally planned economies. The transport system is heavily concentrated along the eastern seaboard and historically has been served mainly by railways, inland water transport and coastal shipping. It is also characterized by high-intensity freight traffic. Economic growth, especially after the Government adopted the open-door policy in 1978, continuously outpaced capacity expansion. Although China's railway network more than doubled in size, and the length of the highway system increased ninefold between 1952 and 1983, the transport network was and is one of the sparsest in the world compared with the area and population it serves. 2.2 The surge in traffic occurred despite capacity constraints and related bottlenecks. By 1983, highway traffic had grown at the highest annual rate (15 percent) compared with 8 percent for railway traffic and over 9 percent for coastal and inland waterway traffic, reducing the railway's share of total traffic from 82 percent in 1952 to 66 percent. 2.3 Over the period 1953-80, about 15 percent of all new investments under central government control went to transport. Compared to other countries, the annual investments in China's transport sector had been rather low. In the early 1980s, the Government prepared its Seventh Five-Year Development Plan (1986-90), which recognized the need for much larger investments in all modes of transport if bottlenecks to economic development were to be avoided. Individual modes were to be expanded and  -2- links established between them, together with the incorporation of new technology and the strengthening of institutions. 2.4 By 1983, China's railway capacity was insufficient to meet traffic demands. Growth in freight traffic averaged 9 percent a year between 1952 and 1983, but slowed to around 4.5 percent a year since 1978, as traffic saturated existing lines and rolling stock capacity. The Government was aware of these impediments to growth and placed special emphasis on developing the transport sector, as well as on the energy sector, which was dependent on coal transport by rail. 2.5 In 1982, the Bank became involved in the transport sector for the first time with the Three Ports Project (Loan 2207-CHA), followed, in 1984, by the First Railway Project (Loan 2394-CHA). In 1985, further port and highway subsector projects were under preparation. This project, the second in the railway subsector, aimed to assist the Government in increasing railway transport capacity that was essential for sustained economic development. 3. Project Objectives and Description 3.1 Project Objectives. As stated in the SAR, the project was to make a direct contribution to the Government's objective of increasing railway capacity to support economic growth by assisting MOR in financing urgently needed investments to expand its transport and production capacity. To that end, the project was to increase railway line capacity in central China on the important route between Zhengzhou and Wuhan and to increase the production of passenger coaches. In addition, the project was to strengthen applied research, continue the modernization of MOR's management techniques, and advise on improvements in university curricula. 3.2 Project Components. The project comprised the following components: (a) Additional line capacity on the 547 km Zhengzhou-Wuhan section of the Beijing-Guangzhou line, one of the most important transport arteries in China; (b) Improvements in the production technology and increases in coach production at the Changchun Passenger Coach Factory (CPCF); (c) Assistance in development of the China Academy of Railway Sciences (CARS) with new laboratories for materials and equipment testing; (d) A Management Information Study in a selected area of the Ministry of Railways (MOR); and (e) Technical assistance to MOR's universities to strengthen curricula and meet MOR's changing technology and management needs.  -3- 3.3 In March 1991, the project scope was extended to include four studies on: (a) permanent way maintenance and rehabilitation; (b) locomotive and rolling stock maintenance and rehabilitation; (c) system electrification; and (d) system telecommunications. The objectives of the studies were to deal better with systemwide issues that affect the quantity and quality of railway services and the utilization of assets, and to identify future investment needs. The studies were included in this project to assist in the preparation of the Fifth Railway Project. 4. Project Design and Organization 4.1 The concept and the scope of the project was proposed by MOR. The timing of the project was appropriate, as pressure continued to alleviate the growing capacity constraints of the railways. In the context of the Government's special emphasis on developing the transport sector, the project was designed along the lines established in the first Railway Project but was innovative in providing technical assistance and training on a much broader basis than the first project. 4.2 The first Bank mission was sent in March 1984, and the project was appraised in October 1984. It became effective on November 22, 1985, about six months after Board approval on May 14, 1985 (Table 2). 5. Project Implementation 5.1 Although the Staff Appraisal Report (SAR) identified the risk from inadequate project implementation and operation as negligible, the project did not progress well in the first five years. MOR had some difficulty in coping with the requirements of being a project executing agency until it belatedly installed the Foreign Capital and Technical Import Office (FCTIO) to rectify the shortcomings. Poor communication with the Bank was symptomatic of a weak organization. There was no regular reporting, and written information on implementation provided to the Bank was barely informative. 5.2 After an initial mission in October 1985, there were only small Bank supervision missions until mid-1990 (Table 8B). After that, supervision started to systematically tackle outstanding issues with an emphasis on agreeing with MOR and SPC that specific measures be taken by the railways to improve implementation performance. In the end, the loan closing date had to be extended by two years to June 30, 1994. Zhengzhou-Wuhan Upgrading and Electrification 5.3 This component was well prepared at appraisal time. Shortly after Board approval, however, MOR had to reduce investments for capital construction by at least 10 percent in order to meet a cost-cutting requirement by the Government. This action resulted in a complete revision of both the design and the implementation schedule, and a consequent delay of over two years. Some savings were found, such as phasing investments more gradually (e.g., lengthening the tracks of only every other station, in a first phase. The project was essentially completed by December 1992. A few items,  -4- which did not affect the line capacity but did create safer train operations, remained unfinished until early 1994, due to late provision of MOR funds and difficulties with suppliers. The Changchun Passenger Coach Factory 5.4 The project component was conceived as the first phase of a two-phase program. Its primary objective was to provide careful preparation for the second phase, while some improvements in both number and quality of coaches produced at the factory were expected to occur. The second phase was projected for the future, possibly with additional Bank financing, to implement consultants' recommendations and to equip the factory with machinery needed for the more efficient production of a newly designed coach. Bank support under the project was for technical assistance to the factory covering a feasibility study on the expansion of production, the development of a new coach design, training of factory staff in modem technical and managerial practices, as well as to increase the current production and to improve coach quality. In addition, the project provided funds for the purchase of some factory equipment and machinery. 5.5 Shortly after the successful completion of the foreign consultants' work in 1990, local management of the factory combined the two phases in order to maintain momentum. Instead of waiting for the appraisal of another railway project, MOR decided to reallocate funds from the China Academy of Railway Sciences component. The foreign funding for equipment was raised by about $5 million after consulting the Bank's team only informnally, and the production program was changed accordingly. According to the original SAR schedule, completion of the component was scheduled for the end of 1988. With the coalescing of the two phases, this schedule was revised to June 1992 and completed by the end of 1993. The China Academy of Railway Sciences (CARS) 5.6 The plans for this component submitted to the Bank at preappraisal were not very firm. After assistance was given by a foreign specialist to help the Bank with its appraisal, the component was included in the project. It consisted of equipment and instruments for two new laboratories to test rolling stock and track components; consultant services to assist in the finalization of their design, carrying out of the purchase procedures, and setting up the facilities; and training of Academy staff in the fields related to the new laboratories. 5.7 The plan was that CARS would select a partner to carry out the design of the new facilities, which were to involve modem technology with which CARS was not familiar enough. A short list of firms was agreed. When the proposals were received, however, the Chinese side found that the cost of the consultancy was much higher than anticipated. Discussions at all levels inside MOR, and with MOF and SPC, lasted for years. After five years of total inactivity, the component was believed to be dead. Finally, CARS came to the conclusion that building the mechanical laboratory would be too expensive. When an agreement was reached to drop the mechanical laboratory from  - 5 - the project, the foreign exchange budget was reduced from $15.0 to $9.0 million. The component began moving ahead. Construction of the track component testing laboratory, which began in 1991, was completed in early 1994. Management Information System (MIS) Study 5.8 The main purpose of this study was to improve MOR's quality of management and railway operations with the help of a computerized information system. The study's recommendations of streamlining and accelerating flows of information were to be implemented in a pilot area of MOR and one of its factories. Quite ambitiously, the study was also to provide sufficient experience of the new MIS for MOR to decide how to extend it to other units. 5.9 Between 1985 and 1992, the project did not focus on conducting a MIS study as originally envisaged. MOR was short of computers to collect needed data for the pilot testing of the MIS in the designated Harbin Administration, starting with the Mudanjiang Subadministration. The allocated funds, therefore, were used to purchase computer and telecommunications cabling equipment for a different pilot project designed to computerize the existing expense and revenue accounting systems in the whole Harbin Administration. Implementation of this computerization was completed in June 1992 without achieving the MIS study's objectives. 5.10 In June 1992, MOR agreed to bring the narrower financial MIS study effort in line with the full scope as appraised. The objective of a new action plan was to develop an integrated financial MIS system for China Railways as a whole, using a "top-down" approach. In addition, MOR decided to adopt a centralized database approach for a Transportation Management Information System (TMIS), which would significantly impact the present MIS data flow, and not to proceed with the implementation of the MIS beyond the Harbin Administration in its original concept. A new short-term action plan was agreed, which focused on developing this type of information to complete these study tasks by early February 1993. The emphasis of the MIS work shifted to the TMIS, a Yard Information System and an Intermodal Information System under the Sixth and Seventh Railway Projects. Technical Assistance to MOR Universities 5.11 The intention of the technical assistance was to assemble a group of high- level (expensive) experts in higher education, to study graduates' skill mix as compared with likely future needs, determine areas within MOR where new technology was most relevant, and recommend adaptations in curricula. There was not much enthusiasm within MOR, and absolutely no support outside MOR, since the Ministry of Education (now a State Commission) was more interested in the institutes of higher education under its direct control, and did not favor Bank assistance to MOR's universities. During project implementation, it became quite clear that there was an extreme reluctance in China about hiring outside technical assistance, because the going rate of 300 to 500 times the cost of an equivalent Chinese staff looked prohibitive. The Government did not agree to allocate  -6- funds to this component, although it was listed as part of the project in both the SAR and the Loan Agreement. The October 1991 supervision mission reported: "For all practical purposes, this component is dead"; it was never implemented. Procurement 5.12 The project, approved by the Board only 14 months after the First Railway Project, experienced the same difficulties as the earlier one. The workload for MOR was quite remarkable: 292 items were procured through 255 contracts. Successive authorizations and checks at various levels inside and outside MOR were cumbersome and time-consuming. Internal procedures for procurement under ICB were still very new and unsuitable to MOR when the project started. The various activities were carried out by several departments and were generally uncoordinated until 1987 when MOR assigned externally-financed projects to a central department. 5.13 Procurement administration was generally unsatisfactory until early 1992, when a reorganization of the Foreign Capital and Technical Import Office (FCTIO) of MOR improved the progress of procurement activities. Nevertheless, the closing date of June 30, 1992 could not be met; and the date had to be extended to June 30, 1994, due to the two-year delay of procurement for the Zhengzhou-Wuhan line, which began after the new designs and budget were finalized. 5.14 Procurement of a Central Traffic Control System started in 1987 illustrates best the way procurement sometimes was dealt with. Bid evaluation took almost two years because of (a) the new technology involved and (b) the fact that an apparently ill-adapted local firm was the lowest bidder. The two years were needed to clarify the many technical specifications involved in the technology, apparently not fully understood by the local bidder. After this was achieved, more than a year was spent on clarifying the terms and conditions of the contract. At the end of 1991, contract negotiations resulted in a new price, half a million dollars (about 16 percent) higher. At that time, misprocurement with cancellation of the loan portion was proposed by the supervision team. 5.15 In retrospect, handling of procurement matters was the weakest part of project execution. The main impeding factors were: (a) a very cumbersome approval process with repetitive controls from other Government organs; and (b) an inherent lack of knowledge and experience of contracting in a market economy. Project Costs 5.16 The total project cost was $546.1 million compared to the appraisal estimate of $569.1 million, 4 percent lower than originally calculated (Table 5). This comes predominantly from the conversion of costs expressed in Yuan into US dollar at devalued Yuan to US dollar exchange rates, which exceeded by far the price contingency in US dollars. The overall result shows the Borrower's attempt to focus on physical elements of the project with the emphasis on substituting foreign funds by local ones wherever possible.  5.17 The Zhengzhou-Wuhan line component was completed at $499 million, well within the original budget ($535.8 million), mainly due to the cost cutting at the beginning of project implementation, although inflation over two additional years compensated for some of the savings. Final costs of the Changchun Passenger Coach Factory component ($22.5 million) were about twice the appraisal estimate of $11.3 million, mainly because they also contain the second phase, which was planned at appraisal but intended to be carried out under another Bank-financed project. The costs for the second phase had not been defined because its content was to be based on the consultants' recommendations. As a result, local costs in Yuan for civil works increased twelvefold and for equipment sevenfold. The foreign exchange part of equipment was threefold in US dollar terms, while MOR had reduced the technical assistance and training element by about 25 percent. The CARS component was estimated at $21.5 million. Despite the substantial reduction of scope ($6 million), final costs were $18 million, actually exceeding the reduced cost base by about 16 percent. The expenditures originally allocated for the MIS study exceeded substantially the costs estimate ($0.5 million) due to MOR's fundamental change of approach and substance; $3.3 million were spent on this redefined component. Four technical studies were added to the project to assist in the preparation of the Fifth Railway Project, which cost $3.3 million. Disbursements 5.18 As a consequence of the delays in procurement administration, disbursements were much slower than appraised. Table 3 summarizes the disbursement development, and compares the appraisal estimates with actuals. Effective April 22, 1991, $15 million were canceled because of ICB procurement delay for the Zhengzhou-Wuhan line section. Needed goods were purchased with local funds in order to suit the implementation schedule. When the loan was closed on June 30, 1994, about $511,000 remained unused, of which $332,177.71 were canceled on November 3, 1994. Loan Allocation 5.19 The loan was allocated as established in the SAR. An amendment to the Loan Agreement was granted on March 21, 1991, creating a new category to finance additional four studies included in the preparation of the Fifth Railway Project and allocating $3.5 million to it from the unallocated fund category. 6. Project Results 6.1 As stated in the SAR, the project was to make a direct contribution to the Government's objective of increasing railway capacity to support economic growth by assisting MOR in financing urgently needed investments to expand its transport and production capacity. To that end, the project was to increase railway line capacity in central China on the important route between Zhengzhou and Wuhan, and the production of passenger coaches. In addition, the project was to strengthen applied research, continue the modernization of MOR's management techniques, and advise on improvements in university curricula. When the loan was closed, the project results were mixed: in  -8- essence, the objectives related to physical investments were achieved, but not those connected to reform of management through technical assistance. 6.2 One of the project's principal objective, the expansion of MOR's railway capacity to support economic growth on an important route in central China, was successfully met by increasing traffic capacity through upgrading the 547 km Zhengzhou- Wuhan section of the Beijing-Guangzhou line. 6.3 Another main objective of the project was to increase coach production at the Changchun Passenger Coach Factory based on improvement in production technology and better factory equipment and machinery. This objective was fully achieved, although differently than planned at appraisal. The Bank-financed technical assistance of this component produced very good results, on both the design and the training aspects. One of the results was the design of a new type of coach using modern technology and better materials. The time between major overhauls is now 10 years for the new coach compared with to 4 years for the traditional model. Actual capacity of 1,040 coaches per year is clearly beyond the appraisal target of 800 coaches per year for the first phase. 6.4 The project objective to strengthen applied research was to be achieved through assistance to CARS, although two new laboratories for materials and equipment testing had to be built and the kind of tests to be carried out in them were not very specific at appraisal. The mechanical laboratory was not built because it turned out to be too expensive, and consultants' input was rather limited. As a result, the objective was only partially met. A demonstration of the track component testing laboratory to participants of the Heavy Haul Congress in 1993, however, was reportedly quite impressive. 6.5 The SAR stated as an other objective that the project was to continue the modernization of MOR's management techniques although no reference was made to ongoing efforts. The original concept for the proposed MIS Study as a pilot study was that MOR would: (a) form a study team, (b) develop a financial MIS with the assistance of outside consultants, and (c) then implement this system in the Harbin Administration, starting with the Mudanjiang Subadministration. Due to a shortage of computers to collect data, MOR changed the study's whole focus and allocated funds to the purchase of computer and telecommunications cabling equipment to computerize parts of the existing accounting systems in the whole Harbin Administration. Although management of this administration reported that they were very pleased with the system, there were essentially few direct, tangible benefits that could be claimed in terms of improved operations or reduced clerical staff. However, the MIS study's objectives-streamlining and accelerating flows of information in a pilot area, and to provide sufficient experience for MOR to decide how to extend the system to other units-were not achieved. 6.6 The project objective of providing technical assistance to MOR's universities to strengthen curricula and meet MOR's changing technology and management needs was not achieved because the component was never implemented.  - 9 - 6.7 During project implementation, no environmental or resettlement problems arose. Financial Performance 6.8 This section deals with MOR's financial results of the total operation, as well as the Zhengzhou-Wuhan Upgrading and Electrification and the Changchun Passenger Coach Factory components as part of project. The evaluation of MOR's performance should be seen in the context of financial matters, described in Annex 1. 6.9 During 1984-92, MOR was profitable. In 1993, MOR reported a net loss of Y 0.7 million (after paying Y 3.2 billion interest from surcharge revenues); had the surcharge revenues been included with base tariff revenues, MOR would have shown a profit of Y 20.4 billion. Estimated net losses for 1994 and 1995 are Y 2.9 billion and Y 4.4 billion, respectively; including surcharge revenues would result in a profit of Y 26.0 billion and Y 24.3 billion in 1994 and 1995, respectively. These results are net of MOR's transfers to the Government. 6.10 The income statements for the total operation of MOR is given in Annex 1, Table 1, showing the appraisal forecast for 1984 and 1985, the actual results from 1984 to 1993, and the estimated results for 1994 and 1995. The improvement in the 1986 to 1989 net income (compared to previous years) mainly reflects the introduction of the economic contract in 1986 by which MOR was exempted from paying income tax to the Government. The improvement in 1990 net income mainly reflects the increase in across- the-board freight tariffs that took place in that year. Since 1991, revenues from base tariffs are supplemented by revenues from a freight surcharge. Revenues from base tariffs are declining in the 1990s because these tariffs did not keep pace with inflation and the complete phasing out of input subsidies. This is also reflected in the working and operating ratios that are increasing. 6.11 The actual working and operating ratios for 1984 and 1985 (see table below) were marginally better than the appraisal forecast for those years. However, one can question the relevance of these relatively low ratios as they were distorted by input subsidies. There were no forecasts for the ratios in the SAR beyond 1985.  - 10- WORKING AND OPERATNG RATIOS (Percentages) 1984 1985 1986 1987 1988 1989 1990 Working Ratio Appraisal Forecast /a 45 47 Actual 40 40 51 53 60 67 57 Operating Ratio Appraisal Forecast /a 56 58 Actual 52 52 63 66 72 79 68 /a The ratios were recalculated to be consistent with the calculations in this PCR. WORKING AND OPERATING RATIOS (CONTINuED) (Percentages) Appraisal Estimate 1991 1992 1993 1994 1995 Working Ratio Excluding Surcharge Revenues 62 64 75 86 87 Including Surcharge Revenues 59 54 52 55 58 Operating Ratio Excluding Surcharge Revenues 73 75 85 97 99 Including Surcharge Revenues 70 63 59 62 65 6.12 The statement of actual revenues and costs for 1993 for the Zhengzhou- Wuhan line is given in Annex 1, Table 2. A comparison is made between appraisal estimates for 1995 (SAR Table 5.9) and actual results in 1993 (Annex 1, Table 2) and the results are as follows:  - 11 - Yuan Million 1995 1993 SAR Estimate Actual Traffic: (converted ton-km, billion) 56.3 65.3 Costs: (Yuan, million) Operations 247.9 483.9 Stations and Terminals 29.7 109.8 Maintenance of locomotives and rolling stocks 54.1 186.5 Subtotal 331.7 780.2 Infrastructure maintenance 203.2 558.3 Direct Cost 534.9 1,338.5 Overheads 42.8 144.7 Total Costs 577.7 1j483.2 Sales Revenues 894.7 3,241.1 Net Operating Revenues 317.0 1.757.9 Operating Ratios (%) 65 46 6.13 The Zhengzhou-Wuhan line's electrification and upgrading has given a better-than-expected impact on its traffic carrying capacity. The converted tkm (pkm plus freight tkm) of 65.3 billion for 1993 have already surpassed, by 16 percent, the appraisal estimate of 56.3 billion for 1995. The financial performance is also far better than targeted. The operating ratio for 1993 has already improved to 46 percent as compared to the appraisal target of 65 percent in 1995. The revenues of Y 3,241 million for 1993 are Y 2,346 million higher than the appraisal estimate of Y 894.7 million in 1995, while the costs are only Y 905 million higher. Even though the financial performance is good, MOR and the Administrations of Zhengzhou and Wuhan should focus on improving the tariff structure in order to ensure that operating costs are appropriately reflected in rates. 6.14 The income statement for the Changchun Passenger Coach Factory is given in Annex 1, Table 3. Although this table shows that the converted number of passenger coaches manufactured has increased by 10 percent from 1,159 in 1988 to 1,272 in 1992, these quantities are not reliable because the conversion factor used in quantifying the production of coaches in terms of standard units is not accurate. The factor appears to be too high, which may understate number of coaches actually manufactured. The financial performance of the factory has not been the same as expected during appraisal. The  - 12 - headquarters in Beijing control the prices, and the factory management has no freedom in setting the sales prices to reflect cost. Although the working and operating ratios have been positive, they have been on the high side. While the operating costs have been increasing rapidly, the sales price adjustments have not been adequate. The average revenues and manufacturing costs per coach were: 1988 1989 1990 1991 1992 Average Revenue/Coach (Y'000) 230 266 373 397 405 Average Manufacturing Cost/Coach (Y'000) 209 287 330 353 382 Profit/(Loss) per Coach (Y'000) 21 (21) 43 44 23 The above figures indicate that the profit margin per coach was not high enough to generate sufficient profit for paying interest and other expenses. MOR has been notified that the pricing policy for this factory should be carefully reviewed and adjustments should be made to improve the financial condition. Economic Reevaluation 6.15 The economic analysis presented in this report is based on a reevaluation of data on traffic, operational performance, economic cost and project benefits of each of the project components since the SAR estimates were made. The methodology used is similar to that used in the SAR and is summarized below. Briefly: (a) all the investments costs (capital, coal mine development, 110 kV power line and rolling stock) have been revised to 1994 prices and included in the costs stream; (b) the benefit streams, also in 1994 prices, consist primarily of the value added to the economy from the incremental freight and passenger traffic made possible by these project components and, in the case of the Changchun Passenger Coach Factory component, the savings in major passenger coach overhaul outlays; and (c) a project life of 20 years has been assumed for all railway construction facilities. 6.16 As detailed in Annex 2, the Economic Rate of Return (ERR) for the Zhengzhou-Wuhan Upgrading and Electrification component is 16 percent. The comparable figure estimated in the SAR was 24 percent. The ERR for the Changchun Passenger Coach Factory component is 25 percent. For the reasons set forth in Annex 3, this result is not comparable to the ERR reported in the SAR. The overall ERR for both components taken together is equal to 16 percent.  - 13 - 6.17 Other Project Components. Some of loan amount (about 2.6 percent) was allocated to the other two components, namely for CARS and the MIS Study for improvement of its facilities, railway managerial and operational efficiency. The results of these improvements are not quantifiable in monetary terms and, consequently, cost- benefit analysis of these investments cannot be undertaken in the usual manner. However, the benefits are expected to be large. 7. Project Sustainability 7.1 The sustainability of this project is supported by the results of sensitivity analyses conducted for both components. In the case of the Zhengzhou-Wuhan Upgrading and Electrification corilponent, increasing the project costs and mine development costs by 20 percent, respectively, had only a minimal impact on the ERR-lowering it from 16 to 15 percent. Similarly, for the Changchun Passenger Coach Factory component, reducing the benefits by 50 percent resulted in an ERR of 18 percent compared to a base case value of 25 percent. 8. Bank Performance 8.1 Although the project did not progress well in the first five years, the Bank provided very inadequate budget resources for supervision during those years. After an initial mission in October 1985, there were only small Bank supervision missions until mid- 1990, always carried out as limited supervision by a single person or in connection with other projects where the emphasis was on project preparation or appraisal. There was little of "an implementation culture .... -to enable us to get results on the ground" (quoted from: Office of the President, FYI to all staff of May 11, 1994). Beginning in 1990, systematic and in-depth supervision addressed outstanding issues with an emphasis on agreeing with MOR and SPC that specific measures be taken by the railways to improve implementation performance. The missions appear to have significantly contributed to the better progress of the project. Since then, supervision reports provide a clear picture and assessment of project progress and the reasons for delays in the past. Lesson: The Bank should focus on supervision in the early years of the project. This would mean more and carefully selected field visits to the implementation agencies of MOR (and not just accepting desk reports at MOR), and a commitment to follow up at regular intervals. 8.2 The project achieved only some of its objectives. This underlines the need for stronger ownership by the Borrower of future projects. Lesson: At the very beginning of project preparation, the Bank should establish a clear understanding with the Borrower of what should and can realistically be achieved in a given timeframe. A joint planning meeting with high-level participants not only from MOR but also from SPC and other  - 14 - government bodies, which are involved in policy reform, could serve as a forum to discuss the Borrower's and the Bank's objectives and possible scope of a new project and reach an early agreement on a common approach to its preparation. 8.3 The content of the Bank's files as well as the supervision reports were exclusively concerned with recording events-with little explanation why changes were made and without analysis of their benefits. A kind of a "credit line approach," which is still prevailing on the Borrower's side in several subsequent projects, appears to have been the accepted attitude of the Bank. Outstanding examples are the MIS component and the bringing forward of second phase of the CPCF component. Lesson: The Bank should establish with MOR a procedure to properly record the Bank's agreement to changes of the project scope that will affect the project as appraised. 8.4 MOR had no access to foreign exchange except through Bank and OECF funds. As a direct consequence, the Bank had to deal with a very large scope of procurement accepting also small items not produced in China. The loan amount of $220 million was disbursed through 255 contracts (292 items) ranging from $1,850 to $22.6 million, at high administrative costs for the Bank. Indicative is that about 85 percent by volume of the Bank's files relate to procurement. Lesson: In future projects, the Bank should try to increase the administrative efficiency in procurement by agreeing with MOR on Bank-financing of fewer but larger contracts for goods to be imported. 9. Borrower Performance 9.1 The Borrower was the People's Republic of China, the Ministry of Railways its project executing agency. Overall, MOR's administrative performance was quite good, except for procurement and regular reporting. The fact that the second railway project followed quickly after the first explains why there was little institutional experience during the first years. An MOF telex dated June 11, 1992 summarized the situation: "During the initial period of its implementation, Railways II faced a lot of difficulties, including inexperience by MOR staff in the World Bank's procurement procedures, lengthy internal review process, change of design and technical specifications, etc., and as the consequences, the project was much delayed. The Chinese Government, and in particular, its MOR, has recognized the important implications the delay had for this project ... and has been taking serious efforts to address the problems. As a result, the overall situation has been considerably improved, and we are confident that in future implementations, the delay of this kind would be avoided." SPC appeared to have been the major stumbling block in MOR's decision-making. Sometimes, MOR's proposals were effectively being put on ice for weeks and months until an "agreement" had been reached. SPC's role  - 15 - affected mainly procurement, but also implementation of components when cost revisions had to be made. 9.2 While the Bank did not focus enough on supervision in the early years of the project, MOR had some difficulty in coping with the requirements of being a project executing agency until it belatedly installed FCTIO to rectify the shortcomings. Reporting was weak, untimely and barely informative. Over the years, the Bank emphasized in supervision missions that reporting, especially quarterly reporting, had to be improved with regard to content and time. Remedial steps take by FCTIO improved the situation somewhat but not yet to a satisfactory level. Lesson: MOR should realize that adequate emphasis on implementation of ongoing projects and feedback to the Bank are essential for the successful preparation of new projects. Further strengthening FCTIO should be considered. 10. Project Relationship 10.1 The Bank relationship with the Government and MOR was good. Bank staff were always well received and their comments were respected and acted upon by their Chinese colleagues, both at MOR and the project subunits, who were very receptive to suggestions. 11. Consulting Services 11.1 A foreign firm was successfully employed in modernization of the Changchun Passenger Coach Factory. Other technical assistance, however, failed partially (the CARS component), to a greater degree (the MIS study) or completely (MOR universities). Chinese reluctance to use foreign consulting services to be paid out of loan funds was the main underlying cause for abandoning the university component. 12. Project Documentation and Data 12.1 The Loan Agreement was well prepared and served its purpose adequately. The few covenants were appropriate; they were all complied with. 12.2 The SAR was clearly written and provided a useful framework for all parties during project implementation. 12.3 Information for the preparation of the PCR was provided by MOR and the Changchun Passenger Coach Factory. Some additional information was also obtained during supervision missions in October 1993 and May 1994, through extensive discussions with MOR personnel and representatives of the Changchun Passenger Coach Factory.  - 16 - PART II: PROJECT REVEEW FROM THE BORROWER'S PERSPECTIVE A. ZHENGZHOU-WUHAN LINE 2.1 Objectives of the Project. The Zhengzhou-Wuhan Line surpassing Henan and Hubei provinces is one of the busiest section in the Beijing-Guangzhou Railway Corridor which connects the south and north of China. The Zhengzhou-Wuhan Line starting at the Zhengzhou North Marshalling Yard in the north, the biggest one in the Asia to the Wuhan Terminal in the south, with total length of 547 km, plays very important role in the Beijing-Guangzhou Corridor and even whole national railway network. The construction of the project has ensured the commodity exchange between the north and the south, and promoted the development of industry and agriculture in the central China and improved the transportation capacity of the railway network as a whole. 2.2 Evaluation on Decision Correctness. Along with the reform and opening to the outside world, as well as the development of the national economy, the existing line capacity of Zhangzhou-Wuhan had been saturated, especially of the section between Xingyang and Guangshui with gradient of 12.5 per thousand and surpassing the Dabishan Mountain at the border of the two provinces. The diesel locomotive was used for this line with yearly carrying capacity of only 37 mil. tons. However, the down bound traffic in 1984 had reached 41 mil. tons. Thus, the line became a bottleneck in Beijing-Guangzhou Railway Corridor. After the normal operation of the electrification line at the end of 1992, the yearly traffic carried has been more than 60 mil. tons and 22 pairs of passenger trains per day. The constraints of transportation for this line has been relieved. All the above has demonstrated that the decision of the project is correct. 2.3 Implementation of the Project. In order to respond the requirements by the government for reducing the investment on the capital construction projects, the original design of the project had to be revised in the early years of project implementation, so as to reduce the total cost of the project, which caused two years delay on project completion, and changed the closing date of the loan to June 30, 1994. The electrification of Zhengzhou-Wuhan line was open to the traffic at the end of 1992. The major objective of improving the capacity for the line has been achieved. 2.4 Procurement. In the early years of project implementation, the progress of the procurement was rather slow. The reasons for such slippage was that the most of staffs involved in the procurement and loan management in MOR were new hands to the Bank operation and not familiar with the procurement procedures. Furthermore, there were no sound management system and smooth working channels within MOR. Therefore, in order to address these kinds of problems, MOR made a timely organization restructuring, and set up the Foreign Capital and Technical Import Office composed of the experienced people. As a result, the procurement progress was improved. However, the loan was extended by two years due to the serious delays in the beginning of the project implementation, which is a lesson for us to draw.  - 17 - 2.5 Construction Quality Evaluation. The future development for heavy haul and density, and high speed was considered in the design of Zhengzhou-Wuhan Line. Therefore, the high technology and full scale technical upgrading were applied not only on the track, yard, signalling, interlocking and blocking system, but also on the traction and power supply system for the electrification in which new technology and equipments, and testing devices with the state-of-art technology were imported, and new technology of "V" type reverse operation was introduced first time in China Railway. The design and construction of the line had been satisfactory. B. CHANGCHUN PASSENGER COACH FACTORY (CPCF) 2.6 Objectives of the project was to improve the quality and quantity of passenger coaches by way of upgrading the manufacturing technology and machining equipment for the CPCF. The objective was fully achieved when the project was completed at the end of 1993. 2.7 Implementation of the Project. Based on the SAR, the CPCF project was to be implemented by two phases. The loan of the railway II was only to finance the Phase I of the project. At the Phase I, the CPCF signed a TA contract with an UN-based company for a feasibility study aiming to address the expansion of the production and product quality. It was also required by the contract to design a new kind of coach, and train the people of the factory on modem technology and management method so as to help improve the quality and quantity for the factory in the quickest way. Soon after the completion of the TA and in order to implement the recommendations by TA consultants as soon as possible, MOR consulted with the Bank for shifting 5 mil. USD from the component of China Academy of Railway Science to the CPCF project so as to merge two phases originally planned into one. The whole project was completed at the end of 1993. Although it was two years delay for the completion of the CPCF component, the objectives of the two phases have been achieved, realizing the manufacturing capacity with 1,500 coaches of new type per year. The fact shows the decision of the project is correct. C. CHINA ACADEMY OF RAILWAY SCIENCE (CARS) 2.8 The purpose of construction of the track dynamic lab was to provide a necessary means of testing for China Railway to analyze and address the lower loading capacity of track structure, severe damage of components, too fast deterioration of track geometry, short service life of rail and switches, too often overhaul and scheduled maintenance of the track, all which are the problems for the railway transportation with heavy haul, high density, heavy axle load and high speed. The project also aims to provide a basis for the preparation of related technical policies, and revision and optimization of the technical rules and criteria for track management. 2.9 The construction of the track dynamic lab has greatly enhanced the capabilities of research and experiment on dynamics of track and rolling stocks for China Railway, with a significance on research and improvement of the loading capacity of the  - 18 - track, skills of track maintenance, optimization of the technical rules and criteria for the track management, and enhancement of the technical level of the track. 2.10 A demonstration of the lab, just after its completion, was held in 1994 for the foreign experts during then the International Railway Heavy Haul Conference in Beijing. The demonstration made impression on everyone. 2.11 The construction of computer aided simulation testing lab for locomotive and rolling stocks has played an important role on improvement of design skill of locomotives and rolling stocks, acceleration of the research time for developing rolling stocks with new models, upgrading of the old type locomotives and rolling stocks, so as to meet the increasing demands for the transportation. D. MANAGEMENT INFORMATION SYSTEM (MIS) 2.12 The purpose of the component was to help MOR set up a financial MIS at the Mudanjiang Railway Subadministration as a pilot test and do some preparatory works for MOR's modernization of the transportation dispatching and operation management. After the completion of the component, Mudanjiang Subadministration, starting from the information management of transportation, finance and statistics and expanded to locomotive, wagons, track maintenance, signalling and telecommunication, personnel and wages, education and office automation, has preliminarily possessed a cross- subadministration MIS. 2.13 Evaluation of the Lending Policy and Performance. The focus of the Bank policies in terms of the medium and long term lending to the member countries are always to help member countries improve the infrastructure on the energy and transportation and develop their economy, which are compatible with China's requirements. The implementation of the Bank financed railway project shows the Bank's policies are viable. However, the way of commitment charges needs to be further improved so as to reflect some flexibilities. For example, the Bank could charge the commitment fee just for the amount equivalent to 15 % of the total undisbursed amount of the loan for the first year after the effectiveness of the loan; 45% of the total undisbursed amount of the loan in the second year; 85% of the total undisbursed amount of the loan in the third year and 100% of the total undisbursed amount of the loan in the fourth year. The different commitment charges should be applied for the different projects with different construction cycles. In this way, the charging system for commitment fee could be more reasonable. 2.14 Evaluation of the Bank Staff. The staffs sent by the Bank for the preappraisal, appraisal, supervision and post evaluation all are diligent and hard-working, and sometimes the Bank staffs concerned their work more than their health, which won the high praise from MOR. 2.15 The World Bank missions came to China for supervision at least twice a year, and often went to the construction site. The fact shows that the supervision did help  - 19 - the progress of the project implementation, bidding and procurement, implementation of the contract, project management and disbursement. 2.16 There were no issues related to the environment and resettlement in the course of the project impl'ementation.  - 20 - PART III: PROJECT STATISTICAL INFORMATION Table 1: RELATED BANK LOANS AND/OR IDA CREDITS [_Loan/Credit __Purpose _ Year of |_Status Comments | Tide I I Approval I I Ln. 2394-CHA Construction of a 165 km single track from Xinxiang to Heze; 1984 Completed Closed 12/31/90 First Railway capacity increase of the existing 140 km Heze-Yanzhou sec- Project tion; track doubling of a 127 km section of the Datong- PCR of 06/24/91 Taiyuan line; electrification of the 355 km Datong-Taiyuan line; doubling the production capacity of the Zhuzhou Electric Locomotive Factory; technical assistance and training for the factory staff; and undertaking a costing study (phase 1). Cr. 1680-CHA/ Provision of additional capacity on the 456 km Chongqing- 1986 Completed Closed 06/30/95 Ln. 2394-CHA Guiyang line and the 704 km Yingtan-Ziamen line; improve- Third Railway ment of technology and increase of production of the Xi'an Project Railway Signaling Factory; provision of track maintenance equipment for better permanent way maintenance; and continu- ation of the traffic costing study started under the First Railway Project. Ln. 2968-CHA Track doubling and panlial electrification of the 492 km 1988 In progress Current closing Fourth Railway Yueshan-Xiangfan line; capacity expansion and quality date: 06/30/96 Project improvement of three locomotive and rolling stock factories; and development of a strategic plan for the capacity expansion of the Beijing-Shanghai line. Cr. 2014-CHA/ Construction of a 937 km single track line; acquisition and 1989 In progress Current closing Ln. 3060-CHA installation of operational equipment; and recruitment and date: 12/31/96 Inner Mongolia training of staff to operate the line. Railway Project Ln. 3406-CHA Rehabilitation and maintenance of 500 km of track, 200 loco- 1991 In progress Current closing Fifth Railway motives and 6,000 rolling stock; double tracking of 594 km of date: 12/31/98 Project the Zhengan line; expansion of the Xuzhou terminal; and car- rying out an action program of implementation of the railway cost accounting system. Ln. 3581-CHA Electrification and modemization of the 694 km Beijing- 1993 In progress Current closing Sixth Railway Zhengzhou line and the 1,094 km Chengdu-Kunming line; sys- date: 06/30/99 Project temwide technological modemization for track maintenance mechanization, telecommunications and a transport manage- ment information system, and container transport. The policy component comprises improvement of the efficiency of railway investments, and the formulation and improvement of measures to rationalize railway tariffs, modemization of MOR's account- ing standards and improvement of railway management and regulation. Technical assistance comprises the preparation and implementation of action plans for expanding and modemizing container transport, implementing more cost-effective railway technology for capacity expansion, and strengthening MOR's environmental protection. . Seventh Rail- Policy reform and institutional development to provide techni- 1995 /a Negotiated Current closing way Project cal assistance to implement railway restructuring reform, tariff date: 12/31/01 reform, and labor productivity enhancement. Investment com- ponents entail: electrification and modernization of the 1,044 km Wuhan-Guangzhou line; expanding capacity system- wide (purchase of three-phase AC electric locomotives); upgrading telecommunications systems; modernizing information systems; commercializing container transport (purchase of equipment and technical assistance to establish and operate two or more container transport corporations); and protecting the environment (polit-testing environmental programs and upgrading MOR's environmental management system). aScheduled for Board approval on June 1, 1995.  - 21 - Table 2: PROJECT TIMETABLE Item Planned Revised Actual First mentioned in files 03/11/82 Government's application N/A Project Brief 03/13/84 Preappraisal mission 00/04/84 03/28/84 Appraisal mission 00/09/84 00/10/84 10/09/80 Loan negotiations completed 04/05/85 04/12/85 Board approval 05/20/85 05/14/85 Loan signature -- 08/26/85 Loan effectiveness -- 11/22/85 Loan closing 06/30/92 06/30/94 06/30/94 Loan completion 12/31/91 06/30/94 06/30/94 Source: Bank staff. Table 3A: CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS ($ millions) IBRD FY 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Appraisal estimate 3.8 45.4 112.9163.4 214.0 235.0 Actual 14.6 24.9 41.4 76.4 115.2 146.0 181.3 213.6 219.5 219.7 Actual as % of estimate 384.1 54.8 36.6 46.8 53.8 62.1 NA NA NA NA Notes: (1) $15.00 million cancelled effective 04/22/91. (2) $332,177.71 canceled effective 11/03/94. (3) The final disbursement was made on 11/03/94. Source: Bank staff.  - 22 - Table 3B: DISBURSEMENTS BY CATEGORY ($ millions) Allocation Actual Amount Category at Appraisal Disbursed Equipment and materials /a 208.00 216.41 Consultant's services and training 7.00 3.26 Consultant's services and overseas tours /b 0.00 0.00 Unallocated 20.00 0.00 Total 235.00 219.67 /a $15.00 million cancelled effective 04/22/91; $332,177.71 canceled effective 11/03/94. /b This category was added on 03/21/91. Source: Bank Staff. Table 4: PROJECT IMPLEMENTATION [ Appraisal Estimate] Revised Date J Actual or PCR Estimate Zhengzhou-Wuhan 12/91 Essentially completed in 12/92. A few Upgrading and items remained unfinished until early 1994. Electrification Changchun 12/88 06/92 Completed by 12/93. Revised date due to Passenger Coach coalescing of the two phases. Factory Chinese Academy 12/89 03/94 of Railway Sciences MIS study 12/88 02/93 Different pilot project completed by 11/92. Continuation of the MIS under the Sixth and Seventh Railway Projects. MOR universities Not defined Not implemented 4 studies under N/A 12/91 04/92 Railways V Source: Staff Appraisal Report, MOR and Bank staff.  - 23 - Table 5A: PROJECT COSTS ($ million) Appraisal Actual Local Foreign Total Local Foreign Total Zhengzhou - Wuhan Line 224.2 180.0 404.2 310.9 188.1 499.0 Changchun Coach Factory 1.3 7.2 8.5 7.2 15.3 22.5 Academy 4.3 11.6 15.9 8.3 9.7 18.0 MIS study 0.0 0.5 0.5 0.0 3.3 3.3 4 studies under Railways V 0.0 0.0 0.0 0.0 3.3 3.3 Total Base Costs /a 229.8 199.2 429.0 - - - Physical Contingencies 19.8 4.8 24.6 - - - Price Contingencies /a 71.4 43.9 115.4 - - - Total Project Costs /a 321.1 248.0 569.1 326.4 219.7 546.1 /a Totals may not add up due to rounding. Source: Staff Appraisal Report and MOR. Table 5B: PROJECT FINANCING Appraisal Actual Government Bank Government Bank (Y mln) ($ mln) (Y mln) ($ mln) Zhengzhou - Wuhan Line 1,086.3 176.2 1,464.7 188.1 Changchun Coach Factory 21.6 7.2 29.1 15.3 Academy 41.0 11.6 44.4 9.7 MIS study 0.0 0.5 0.0 3.3 4 studies under Railways V 0.0 0.0 0.0 3.3 Contingencies 184.9 39.5 - - Total /a 1333.8 235.0 1,538.2 219.7 /a Totals may not add up due to rounding. Note: 0.35 is exchange rate of 1 Yuan at appraisal. Source: Staff Appraisal Report and MOR.  - 24 - Table 6: PRoJEcr RESULTS Economic Impact Economic Rate of Return - % Appraisal Base Estimate Actual Zhengzhou - Wuhan Line Best estimate 24 16 1 /a 23 15 2 /b 23 15 3 /c 25 18 Changchun Coach Factory /d Best estimate 47 25 4 /e 37 18 Overall ERR 25 16 /a 20% increase of project costs. /b 20% increase of coal mine development costs. /c 20% decrease of coal mine development costs. /d For reasons set forth in Annex 3, the actual ERR is not comparable to the ERR reported in the SAR. /e 50% per year reduction of benefits.  - 25 - Table 7: STATUS OF COVENANTS [ Covenant | Subject Compliance Status Section 3.03 Commence MIS study 1/31/1986 Complied with. The scope was expanded to include transportation. The work is now being interfaced with the proposed Seventh l___________________________________________ ____________ R ailw ay Project. Section 3.04 Carry out the training in accordance with a Complied with program agreed with the Bank except for TA for MOR Universities. Section 3.05 Carry out four studies (added on March 21, 12/31/1991 Complied with by 1991) and furnish reports on those studies 04/92. Section 4.01 (a) Maintain records and accounts adequate to Complied with. reflect, in accordance with sound accounting practices, the operations and financial condi- tions of each of the Project Subunits Section 4.01 (b) In respect of the accounts: (i) have them, including Special Accounts, Annually Complied with audited each fiscal year by independent auditors commencing since 1987. using appropriate auditing principles consis- 1986 tently applied; (ii) furnish, not later than six months after the 6/30/1986 Complied with end of each fiscal year, a certified copy of the and annually since 1987. audit report; thereafter (iii) furnish other information concerning the Complied with. accounts as shall be from time to time requested Section 4.01 (c) For all expenses made on the basis of state- ments of expenditure: (i) maintain separate records and accounts; Complied with. (ii) retain all records until one year after the 6/30/1995 Not yet due. Closing Date; (iii) enable the Bank's representatives to exam- Complied with. ine such records; (iv) include the separate accounts in the annual Complied with. audit and submit a separate opinion by the audi- tors as to whether the proceeds of the Loan have been used for the purpose for which they were provided Source: Bank staff.  - 26 - Table 8: USE OF BANK RESOURCES A. Staff Inputs FY 1985 1986 1987 1988 1989 199(0 1991 1992 1993 1994 Total Preparation/Preappraisal 21.8 21.8 Appraisal 71.1 71.1 Negotiations 7.0 7.0 Supervisioni 0.5 11.7 5.2 10.7 8.2 9.7 14.9 13.5 10.9 8.6 93.9 B. Mission Data Stage of Month/ No. of Days in Specialization Performance Types of Project Cycle Year Staff Field Represented /a Rating Status /b Problems /c Preparation Oct 1982 5 8 EGR,ECN,FNA, 2C Preparation Jul 1983 9 10 EGR,ECN,FNA, 4C Preappraisal Apr 1984 9 20 EGR,ECN,FNA, 5C Appraisal Oct 1982 7 30 EGR,ECN,FNA, 3C Supervision 1. Oct 1985 3 7 EGR/FNA I --- 2. Oct 1987 1 6 C [EGRJ n/a --- 3. Mar 1988 1 5 C [EGRI n/a --- 4. May 1989 1 3 EGR n/a --- 5. Oct 1989 1 2 C IEGR] n/a --- 6. Jun/Jul 1990 2 7 EGR/FNA 2 T, M, F 7. OctVNov 1990 2 6 FNA,C [EGRI 2 T, M, F 8. FebiMar 1991 2 5 FNA,C [EGRI 2 T, M, F 9). Oct 1991 3 3 EGR/FNA/C [EGR] 2 T, M, F 10). May/Jun 1992 3 4 FNA,Cx2 [EGRI 2 T, M, F 11. Nov 1992 3 5 FNA,Cx2 [EGRI 2 T, M, F 12. Apr 1993 3 4 EGR/FNA/C [EGRI 2 T, M, F 13. Oct 1993 3 5 EGR/FNA/C [EGRI 2 T, M, F 14. Mav 1994 3 5 FNA,Cx2 [EGRI n/a M, F /a C - Consultant, EGR = Engineer, ECN = Economist, FNA = Financial Analyst, ESP Environmental Specialist, MEC = Mechanical Engineering Consultant, MISC = MIS Consultant. /6 I Problem-free of Minor Problems, 2 Moderate Problems. /c T - Technical, M = Management. F = Financial, 0 = Other.  - 27 - ANNEX 1 INCOME STATEMENTS 1. The evaluation of MOR's financial performance should be seen in the following context: (a) Transfers to the Government consisted in 1984 and 1985 of an income tax of 55 percent on net revenues and a business tax of 5.35 percent applied on gross operating revenues from base tariffs [see (b)]; from 1986 to 1989 the transfer was a business tax only; from 1990 to 1993, transfers consisted of the business tax and an annual lump sum payment of Y 2.0 billion; from 1991 [when the freight surcharge was introduced-see (b)] a 0.24 percent business tax on surcharge revenues was applied in addition to the 5.35 percent business tax and the annual lump-sum transfer; since 1994 transfers are the two kinds of business tax and an income tax of 33 percent applied to net operating revenues from base tariffs [see (b)]; (b) Railway revenues are, by Government decree, divided into two parts: the first is from base tariffs, which covers operating expenses and contributes to the net income of the railway's transport operation; the second comes from a Railway Construction Fund freight surcharge introduced in 1991, which is earmarked for capital investments and cannot be used to meet operating expenses. This separation has served the Government's effort to control MOR's operating costs; (c) Tariff increases consist of across-the-board increases and selective increases. Until MOR became responsible for financing all of its expenditures in 1986, its tariffs had changed little since the mid-1960s. On September 1, 1989, average passenger fares were increased by 112 percent; average freight rates were increased by 24 percent in March 1990. On March 15, 1991, MOR was allowed to introduce a freight surcharge of 0.2 fen per tkm; the surcharge was increased to 1.2 fen and 2.7 fen per tkm on July 1, 1992 and July 1, 1993, respectively. Selective increases in freight rates (for example, new rates for new lines) and passenger fares (for example, higher fares during periods of high demand in selected administrations) have taken place in 1994 and 1995; no across-the-board tariff increases were implemented since 1994; (d) In 1986, the Government and MOR entered into an economic contract under which MOR must finance all of its operating and capital expenditures (until 1984, capital expenditures were financed from the  - 28 - ANNEX 1 State budget as a grant; in 1985 the financing was a budget loan). In return, MOR is allowed to keep its net income after transfers to the Government [see (a) above]; (e) In 1991, a Railway Law was enacted that lays down the powers and obligations of the central and local governments, MOR, the railway customers (shippers and passengers), and the public at large, pertaining to railway construction, ownership, management, tariff-setting, and operations (including service quality, passenger safety, and environmental protection). With regard to tariffs, adjustments of the base tariffs and freight surcharge require approval from SPC/State Council. MOR's flexibility in tanif setting is thus limited. 2. In July 1993, MOF issued new national accounting guidelines with the objective to bring China's accounting system closer to international accounting standards. In response to these new guidelines, MOR revised its accounting guidelines, classification of accounts and reporting in financial statements. MOR is developing accounting policies for the railways, with the assistance of consultants, under Railways VI. 3. MOR has undertaken studies and developed tools to introduce financial and technical reforms in its operations. In the costing area, the costing manual has been prepared under Railways V and a costing model was developed under Railways VI. This model has been used to underpin requests in tariff increases to SPC in 1994 and 1995. In the area of investment planning, the initial Railway Investment Study was completed under Railways V and has been used to prioritize future investments in the railways; these results also supported the Government's decision in 1992 to raise the economic growth rate for infrastructure investment planning from 6 percent a year to 8- 9 percent. In the technical area, six studies funded under Railways IV, V and VI focused on technical improvements with systemwide implications, including its telecommunications and information systems, maintenance and rehabilitation of tracks and locomotives and rolling stock, electrification, and heavy haul operations. MOR applied their findings in modernizing the railways. 4. Finally, several studies were launched under Railways VI to deal with tariffs and costing, accounting issues, as well as regulations, management concerns, and restructuring. They provided a basis for: (a) rationalizing tariffs in the market framework; (b) redefining the Government-railways relationship; (c) restructuring the monolithic railway organization into a number of profit-oriented, market-focused enterprises; (d) bolstering the railways' treasury capability; (e) improving its labor productivity; (f) rationalizing its diversified businesses; (g) reforming its housing system; and (h) enhancing its human resources. Some of the studies' results support the Bank's reform assistance under Railways VII.  Table 1: AcTuAL AND FORECAST CONSOLIDATED INCOME STATEMENTS FOR THE TWELVE MONTHS ENDING DECEMBER 31 (in Y million) 1984 1984 1985 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Appraisal Actual Appraisal Actual Actual Actual Actual Actual Actual Actual Actual Actual Forecast Forecast VOLUTME t're-gnt (tkm bil.) 693 724 724 809 870 946 986 1,037 1,048 1,081 1,141 1,192 1,241 1,303 Passenger (pkm bil.) 190 203 203 241 258 284 326 303 260 281 313 348 360 380 Total (ctkm bil.) 883 927 927 1,050 1,128 1.230 1,312 1.340 1.308 1,362 1,454 1,540 1,601 1.683 REVENUES PREITlT 11647 13.215 12 171 15:773 17.707 19,186 19,925 22,007 27.213 31,139 39.229 58,402 68.876 72 317 From rates fft-47 T2,Zl 7 IZ,1/1 TT7952/ I7h213 14i JUt52 3 5 33U3 9 0 3,LT From surcharge - - - - - - - - - 1,996 8,604 24,347 33,507 35,181 PASSENGERS 3,377 3,663 3,613 4,545 4,999 5,563 6,381 7,665 11,090 12,180 13,814 15,882 17,172 25,726 OTHER 742 871 764 1,072 1,205 1,463 1,756 1,935 2,802 3,385 3,428 6,010 6,280 6,594 TOTAL OPERATING REVENUES 15.766 17,749 16,548 21,390 23,911 26,212 28.062 31,607 41.105 46,704 56.471 80.294 92,328 104,637 EXPENSES UJFERATING EXPENSES Payroll 1,286 1,291 1,404 1,571 2,582 2,897 3,444 3,905 4,277 5,566 7,400 9,500 11,487 13,555 Materials 1,060 1,067 1,113 1,361 1,553 1,820 2,598 2,870 3,258 3.772 4,825 6,777 7,209 8,002 Energy. 1,763 1,781 1,955 2,253 2,596 2,644 3,075 3,383 3,846 4,351 5,393 8,513 10,597 13,246 Electi ciy - - - - - 389 530 740 897 1,023 1,290 2,285 3,259 4,497 Major Repairs 2,103 2,159 2,226 2,510 2,993 3,314 3,414 5,874 6,527 7,277 8,085 8,915 11,435 13,207 De1reciation 1,803 2,159 1,908 2,510 2,993 3,314 3,414 3,924 4,356 4,864 5 402 5,943 6,448 7 996 Oither 678 721 738 943 2.437 2,912 3,797 4,286 4,646 5,656 3,416 5,708 6,711 7 986 k) Inflation 143 - 319 - - - - - - - - - - - TOTAL OPERATING EXPENSES 8,836 9,178 9.663 11,148 15,154 17.290 20,272 2 27, 32,509 35,811 47.641 57146 OPERATING INCOME 6 930 8 571 6.885 10,242 8.757 8,922 7790 6,625 13.298 14,195 20.660 32.653 35.182 36.148 Nonoper,ati,ng Income from 263 (506) 271 (478) 849 992 865 479 200 49 237 399 400 410 subsidiaries & factories NONOPERATING EXPENSES Interest - - - - - 992 754 1,871 1,940 2,115 1,763 3 092 4 534 6,448 Nonoperating expenses 686 - 747 - - - - - - - 3,815 4,445 3,080 3,480 INCOME BEFORE TAXES 6.507 8.065 6 a49 9.764 9.606 8.922 7.901 5,233 11.558 12,129 15,19 25.515 27,968 26,63 Business tax 2,365 2,662 2,482 3,368 1,265 1,382 1,487 1,675 2,188 2,499 2,693 3,130 (1,005) (1,055) Income tax 2,278 2,971 2,160 3,517 - - - - - - - - - - Transfers to gov't 765 - 780 - - - - - 2,000 2,000 2,000 2,000 - - NET INCOME 1,099 2.432 987 2,879 8,341 7,540 6.414 3,558 7 370 7.630 10,626 20,385 28,973 27.685 Of which allocated to: Retained Profits 1,099 2,432 987 2,879 8,341 6,121 4,952 2,258 5,870 4,111 3,907 (734) (2,911) (4,355) SpeiLal Fund for Health & Welfare-- - - - 1.419 1,462 1,300 1,500 1,630 ---- Cway Construction Fund - - - - - - - - - 1,889 6,719 21,119 31,884 32,040 Working Ratio: Netl oTSurcharge Revenues 45% 40% 47 40% 51% 53% 60% 67% 57% 62% 64% 75% 86% 87% Including SItrharge Revenues 45% 40% 47% 40% 51% 53% 60% 67% 57% 59% 54% 52% 55% 58% Operatin tio: Z NetofSurcharge Revenues 56% 52% 58% 52% 63% 66% 72% 79% 68% 73% 75% 85% 97% 99% ri Including Surcharge Revenues 56% 52% 58% 52% 63% 66% 72% 79% 68% 70% 63% 59% 62% 65% Source. MOR and Bank staff, November 1994.  Table 2: LINE GROSS OPERATING REVENUE AND COST (1993) WITH AND WrrHoUr PROJECT (Y million) Salaries Energy Others Maior repairs Depreciation Total W/out With W/out With W/out With W/out With W/out With W/out With 1. Operation: Steam locomotive P 0.67 0.67 0.89 0.89 0.06 0.06 - - 0.29 0.29 1.91 1.91 F 9.69 9.69 19.94 19.94 1.7 1.7 - - 1.57 1.57 32.9 32.9 IGross Operating Revenue Without With Diesel locomotive P 3.44 8.26 86.4 2.46 1.4 0.07 - - 4.53 0.75 95.77 3.54 F 9.45 2.2 251.6 28.06 0.83 0.34 - - 21.42 3.04 283.3 33.64 JFreight traffic (bin tkm): 46.14 53.60 Electric locomotive P - 2.62 - 25.38 - 2.02 - - - 3.73 - 35.75 F - 6.29 - 172.74 - 11.49 - - - 14.93 - 205.45 JUnit revenue (fen/tkm): 5.35 5.35 Passenger coaches P 2.0 1.6 1.53 0.93 10.34 8.59 - - 13.41 10.67 17.28 21.79 lGross Freight Revenue Freight cars F - - - - 132.3 106.03 - - 45.6 33.52 177.9 139.55 1 (Y mln): 2,468.40 2,867.60 Train operations P 10.3 9.76 0.7 0.5 0.34 4.88 - - - - 17.34 15.14 F 5.32 4.25 - - 12.53 9.93 - - - - 17.85 14.18 IPassenger Traffic (bin pkm): 8.97 11.67 Power facilities P 0.31 2.06 1.51 10.36 0.8 2.29 - - 0.01 0.26 2.63 14.97 F 1.42 8.27 3.3 39.77 1.4 9.15 0.2 1.05 6.32 58.22 lUnit Revenue (fen/pkm): 4.43 4.43 Subtotal - P 16.72 16.97 90.33 42.52 18.94 17.91 18.24 15.7 144.23 93.10 1 Operations F 25.88 30.7 274.84 260.49 I48.76 138.64 68.79 54.11 518.27 483.94 IGross Pass. Revenue (Y min): 397.30 56.98 11. Stations & P 12.30 10.02 1.60 1.43 11.61 9.25 - - - 25.51 20.70 1Total freight & passenger Thermals F 53.43 4.49 8.34 7.21 42.5 37.02 - - - - 104.27 89.13 Jrevenue (Y mmn): 2,865.70 3,384.58 111. Maintenance Steam locomotive P 0.38 0.38 0.03 0.03 1.13 1.13 - - - - 1.54 1.54 F 4.77 4.77 0.23 0.23 4.54 4.54 1.55 1.55 - - 11.09 11.09 ISales tax (15%. Y mln): 121.51 143.51 Diesel locomotve P 4.51 2.80 20.68 0.19 26.4 11.21 5.45 3.83 - - 57.04 18.03 F 9.43 6.65 21.83 1.02 66.8 44.8 21.37 15.33 - - 199.43 47.87 INet sales revenue (Y mln): 2.744.19 3,241.07 Electric P - 0.26 - - - 1.56 - 0.34 - - - 2.16 locomotive F - 1.51 - - - 6.31 - 3.21 - - - 11.03 Operation P - - - - 2.3 10.62 - - - - 2.3 10.62 facilities F - - - - 4.15 28.54 - - - - 4.15 28.54 Passengercoaches P 4.53 3.66 0.93 0.69 0.43 6.18 11.4 8.22 - - 25.29 18.75 Freight cars F - - - - 3.54 2.36 42.3 34.47 - - 45.84 36.83 Track & per- P 4.03 4.24 0.31 0.35 16.3 17.22 15.14 18.63 14.8 15.02 50.58 55.46 manent way F 18.93 21.24 1.34 1.82 65.4 68.89 63.51 74.53 65.31 69.87 214.49 236.35 Teleconim. & P 1.91 1.95 0.54 0.69 4.1 4.47 1.1 1.3 1.02 1.22 8.67 9.63 signaling F 8.92 9.80 2.13 2.47 15.4 17.89 4.13 5.23 4.14 4.96 34.72 40.35 Buildings P 0.7 0.95 0.07 0.09 1.43 2.23 2.45 3.39 2.1 3.28 6.75 9.94 F 2.84 3.21 0.31 0.42 5.32 11.05 8.31 13.61 9.4 13.13 26.19 39.35 Miscellaneous P - - - - 13.43 12.49 5.15 4.72 1.36 0.89 19.94 18.10 F - - - - 21.31 19.27 15.76 14.06 2.93 2.61 40.0 35.94 Subtotal - P 16.06 14.24 22.56 2.04 73.52 67.11 40.69 38.43 19.28 20.41 172.11 144.23 Maintenance F 44.89 47.18 25.84 5.96 186.46 201.65 156.93 161.99 81.48 90.47 495.90 507.25 Overhead P 7.41 6.25 0.3 0.06 19.32 17.03 - 5.14 5.32 32.17 27.66 F 37.86 31.3 0.52 0.28 74.36 68.17 - - 24.23 17.31 136.97 117.06 Total P 52.49 47.48 114.79 46.05 123.39 111.3 40.69 40.43 42.66 40.43 374.02 285.69 F 162.06 154.08 309.54 277.94 452.08 445.48 156.45 161.99 174.8 161.99 1,255.41 1,197.48 Total Passenger & Freight Cost 214.55 201.56 424.33 319.99 575.47 556.78 197.62 202.42 217.46 202.42 1,629.43 1.483 17 Net Operating Revenue 1.114.76 1.757.90 Source: MOR, September 1994.  - 31 - ANNEX 1 Table 3: CHANGCHUN PASSENGER FACToRY: CONSOLIDATED INCOME STATEMENT, 1985-92 (Y million) Item 1985 1986 1987 1988 1989 1990 1991 1992 No. of cars produced/a - - - 1,159 1,130 1,081 1,054 1,272 Gross revenues 166.01 186.90 229.84 277.24 333.24 414.14 437.42 533.55 Sales tax 8.27 9.25 9.46 10.66 12.43 10.86 18.17 18.11 Net sales revenue 157.74 177.65 220.38 266.58 300.81 403.28 419.25 515.44 Working expenses 126.17 144.67 190.61 231.29 312.93 343.43 356.49 468.91 Other expense - 0.06 0.09 0.11 0.12 0.10 0.35 0.30 Subtotal - Working expense 126.17 144.73 190.70 231.40 313.05 343.53 356.84 469.21 Basic depreciation 8.18 9.13 9.72 10.41 11.32 13.48 15.41 17.80 Total operating expense 134.35 153.86 200.42 241.81 324.37 356.99 372.25 487.01 Net operating revenues 23.39 23.79 19.96 24.77 -3.56 46.29 47.00 28.43 Nonoperating revenues - - - - - - - - Other revenues - - - - - - - - Total operating revenues 23.39 23.79 19.96 24.77 -3.56 46.29 47.00 28.43 Nonoperating expenses 2.33 2.69 4.47 6.72 7.66 9.57 10.34 12.25 Interest 0.55 1.04 2.44 3.04 7.50 14.45 9.37 8.05 Profit before tax 20.51 20.06 13.05 15.01 -18.72 22.27 27.29 8.13 Income tax - - - - - - - - Profit after tax 20.51 20.06 13.05 15.01 -18.72 22.27 27.29 8.13 Working ratio (%) 79.99 81.47 86.53 86.80 97.58 85.18 85.11 91.00 Operating ratio (%) 85.17 86.61 90.94 90.71 101.11 88.52 88.79 95.00 Net fixed assets 91.51 98.86 105.83 115.08 122.94 161.37 179.09 193.87 Actual rate of return 26 24 20 22 -3 29 26 19 Estimated rate of return (SAR) 21 25 30 32 25 29 34 42 /a Converted production. Source: MOR, September 1994.  -32 - ANNEX 2 ECONOMIC REEVALUATION OF ZHENGZHOU-WUHAN TRACK UPGRADING AND ELECTRIFICATION Project Capital Costs 1. All capital costs have been revised to 1994 prices for both the PCR and SAR. 2. The development of a conversion factor for the PCR's project capital costs is shown in detail in Table 2.1. The foreign cost has been converted to Yuan by using an 8.7 shadow exchange rate. The resultant conversion factor for this project component is 0.95. 3. The PCR economic project costs are 30.7 percent higher than those reported in the SAR (adjusted to comparable 1994 prices levels). The details are reported in Table 2.2a and are summarized on a year-by-year basis as follows: ECONOMIC PROJECT CAPITAL COST (Million Yuan) SAR PCR Year 1984 prices 1994 prices 1994 prices 1986 164.2 288.1 76.5 1987 376.9 620.1 181.2 1988 278.3 412.2 246.4 1989 245.2 342.3 410.4 1990 221.2 290.9 564.3 1991 11.6 14.6 611.6 1992 - - 230.4 1993 82.9 1994 - - 168.6 Total 1.297.4 2,572.3 2,572.3 Difference + 30.7%  - 33 - ANNEX 2 4. The increased economic project costs are attributable to two major developments: (a) subsequent changes and additions to the initial design that resulted in a scope of work considerably larger than the plan that was evaluated at appraisal (see Table 2.2b); (b) budgetary constraints that precluded MOR from adhering to the original implementation schedule-a factor that shifted the project to a later period marked by higher-than-anticipated cost inflation. Other Capital Costs 5. This railway development is part of an integrated coal production and distribution system. All coal transport-related capital costs, therefore, should be considered within the cost stream. The detail comparisons are in Table 2.2 and summarized as follows: (a) Coal Mine Investment Costs. The economic cost is calculated at Y 653.0/ton/year, on the basis of an investment model described in the Sixth Railway Project and updated to 1994 prices in the Seventh Railway Project (December 1994). This value is about 60 percent higher than the corresponding figure used in the SAR (Y 407.3/ton/year at 1994 prices). As in the SAR, coal mine development is assumed to be spread equally over the five years prior to production increments. With respect to volume, current projections call for incremental traffic on the line to grow to 33.83 million tons by 2015 or almost 30 percent less than the 47.8 million tons indicated in the SAR. Taken together, the higher cost of creating new production and lower volume estimate yields an overall amount for mine investment in the PCR that is 25.5 percent higher than in the SAR. The detailed calculations are shown in Table 2.3 and estimated in Table 2.2a. (b) 110 kV Power Line. Current costs in the SAR and the PCR have been converted to 1994 constant economic prices. The investment on this item has been delayed by five years, and the actual total investment is 53.7 percent lower than the SAR estimate. (c) Equipment and Rolling Stock. The financial and economic prices (as of January 1, 1994) for freight locomotives (electric and diesel) and for freight wagons are presented in the table below (these data are reported in the Seventh Railway Project). According to MOR, 114 electric units have replaced a comparable number of diesel locomotives on the project route. Consequently, only the difference in their respective economic costs properly are attributed as a complementary cost to the project. To accommodate the incremental freight traffic, MOR indicates that 1,185 wagons have been acquired. Since the project is not expected to result in altering the volume the volume of passenger traffic, no complementary equipment costs (or benefits) have been quantified for passenger coaches.  -34 - ANNEX 2 Taken together, equipment and rolling stock outlays are 81 percent lower than the SAR estimate (see Table 2.2a). Financial Economic Unit Total cost -------- (Y million) -------- (net increase) (Y million) Locomotives: 1. Electric 5.7 7.4 2. Diesel 3.1 4.0 Net (1)-(2) 3.4 114 387.60 Wagons 0.133 0.159 1,185 187.94 Total 575.54 Project Benefits 6. Traffic. Actual traffic performance was lower than the SAR forecast (Table 2.4). The future growth of coal transport is also expected to be lower than the SAR estimate due to the completion of two other railways within the next three years (Jiaocheng railway in 1995 and Jingjiu railway in 1997). The total traffic of the railway, however, is expected to reach its designed capacity of 70 million tons per year in the year 2011. 7. Coal Value-Added. All the coal transported by the railway over the project route is for consumption by domestic users. Therefore, the economic contribution of coal is considered to be much greater within the domestic economy than as an export item. Utilizing the coal investment model referred to above, and allowing for capital recovery (depreciation), the value of the induced traffic made possible by this project is calculated at Y 131 per ton in 1994 prices (see Working Paper 24, Railways VII-China, p. 3 and Working Paper 22, Railways VI-China, p. 4). This figure is applied to the incremental traffic delineated in Tables 2.2a and 2.3 to yield the benefits reported in Table 2.5. 8. Nonquantified Benefits. Additional benefits-and hence a higher economic rate of return-are associated with the lower operating and maintenance costs of electric as contrasted with diesel locomotives. Because adequate data are not available, these savings have not been quantified here (as well, theses benefits were not documented in the SAR). Furthermore, from an environmental perspective, the benefits of electrification also are of consequence. This is particularly evident in  - 35 - ANNEX 2 maintenance shops where a serious environmental problem-the disposition of waste diesel oils-is avoided by the substitution of electric units. Least-Cost Alternatives for Electrification 9. Without electrification of the existing railway, the congestion of the railway line will lead to the building or upgrading of a new nonelectrified railway line to meet the traffic demand. The capital cost of such an alternative will be much higher than electrification of the existing facility (see Railways VII SAR, Corridor Expansion Component). Reevaluated Economic Rate of Return (RERR) and Sensitivity Analysis 10. Based on all the inputs stated above, the detailed RERR and sensitivity analysis of this railway line, in comparison with the SAR, are shown on Table 2.5 and summarized as follows: SAR PCR Best estimate 24% 16% Project cost: 20% Increase 23% 15% Coal mine development cost: 20% Increase 23% 15% 20% Decrease 25% 18%  -36 - ANNEX 2 Table 2.1: ZHENGZHOU-WUHAN LINE: PRICE CONVERSION FAcrOR (Y million) Conver- sion Financial - Current Shadow priced Econornic - 1994 factor Local Foreign Total Local Foreign Total Local Foreign Total Land 0.80 189.63 0.00 189.63 151.70 0.00 151.70 222.79 0.00 222.79 Labor: Unskilled 0.54 106.67 0.00 106.67 57.60 0.00 57.60 84.59 0.00 84.59 Semiskilled/Technician 0.80 105.18 0.00 105.18 84.14 0.00 84.14 123.57 0.00 123.57 Supervisor 2.00 74.07 0.00 74.07 148.14 0.00 148.14 217.56 0.00 217.56 Materials: Steel 1.00 44.44 299.10 343.54 44.44 299.10 343.54 65.26 309.13 374.39 Timber 1.00 19.26 31.09 50.35 19.26 31.09 50.35 28.29 32.13 60.42 Cement 1.00 38.52 65.93 104.45 38.52 65.93 104.45 56.57 68.14 124.71 Sand 0.80 5.93 0.00 5.93 4.74 0.00 4.74 6.96 0.00 6.96 Stone 0.80 162.96 0.00 162.96 130.37 0.00 130.37 191.46 0.00 191.46 Bitumen 1.00 1.48 0.00 1.48 1.48 0.00 1.48 2.17 0.00 2.17 Others 0.80 103.70 1.61 105.31 82.96 1.61 84.57 121.83 1.66 123.49 Fuel: Diesel 1.00 10.37 0.00 10.37 10.37 0.00 10.37 15.23 0.00 15.23 Gasoline 1.00 14.81 0.00 14.81 14.81 0.00 14.81 21.75 0.00 21.75 Heavy oil 1.00 1.48 0.00 1.48 1.48 0.00 1.48 2.17 0.00 2.17 Others 1.00 8.89 0.00 8.89 8.89 0.00 8.89 13.06 0.00 13.06 Electricity 2.00 37.04 0.00 37.04 74.08 0.00 74.08 108.79 0.00 108.79 Water 1.00 14.81 0.00 14.81 14.81 0.00 14.81 21.75 0.00 21.75 Construction 0.80 204.44 0.00 204.44 163.55 0.00 163.55 240.19 0.00 240.19 Mechanical equipment 1.00 263.70 138.30 402.00 263.70 138.30 402.00 387.27 142.94 530.21 Others 0.80 74.09 0.00 74.09 59.27 0.00 59.27 87.04 0.00 87.04 Total 1,481.5 536.0 2 017.5 1,374.3 536.03 1.910.3 2.018.3 554.0 2 572.3 Overall conversion factor 0.95  -37 - ANNEX 2 Table 2.2a: ZHENGZHOU-WUHAN LINE: COAL TRAFFIC AND ECONOMIC COST COMPARISONS (Y million) Traffic (million tons) Project Capital Cost Mine Investment 110 kV Power Line Rolling Stock Incre- SAR PCR SAR PCR SAR PCR SAR PCR Year SAR PCR mental 1984 1994 1994 1984 1994 1994 1984 1994 1994 1984 1994 1994 1986 37.0 32.08 164.2 288.1 76.5 141.5 325.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1987 37.0 33.80 376.9 620.1 181.2 187.7 432.3 0.0 21.2 48.8 0.0 23.6 54.3 0.0 1988 37.0 34.39 278.3 412.2 246.4 211.5 487.1 3.3 21.2 48.8 0.0 23.6 54.3 0.0 1989 37.0 36.01 245.2 342.3 410.4 235.4 542.1 344.8 21.2 48.8 0.0 23.6 54.3 0.0 1990 37.0 36.21 221.2 290.9 564.3 260.8 600.6 703.9 21.2 48.8 0.0 184.5 424.9 0.0 1991 45.9 33.81 11.6 14.6 611.6 144.7 333.2 743.1 0.0 0.0 0.0 0.0 1992 48.8 36.17 230.4 98.6 227.1 743.1 36.8 60.1 138.4 575.5 1993 50.3 36.27 0.10 82.9 74.7 172.0 818.2 54.1 35.0 80.6 0.0 1994 51.8 41.50 5.33 168.6 50.9 117.2 515.9 37.6 86.6 0.0 1995 53.4 47.00 10.83 25.4 58.5 197.2 39.7 91.4 0.0 1996 55.0 47.60 11.43 0.0 0.0 288.6 40.7 93.7 0.0 1997 52.8 48.20 12.03 0.0 0.0 417.9 16.4 37.8 0.0 1998 50.8 48.80 12.63 0.0 0.0 489.8 17.6 40.5 0.0 1999 48.8 49.40 13.23 0.0 0.0 587.7 18.8 43.3 0.0 2000 46.8 50.02 13.85 0.0 0.0 684.3 20.1 46.3 2001 45.8 52.02 15.85 33.4 76.9 666.1 21.5 49.5 2002 47.9 54.60 18.43 73.2 168.6 613.2 23.0 53.0 2003 50.0 56.30 20.13 116.1 267.4 621.0 24.6 56.7 2004 52.3 58.40 22.23 160.6 369.9 606.0 26.4 60.8 2005 54.6 60.50 24.33 208.3 479.7 594.2 28.8 66.3 2006 57.1 62.22 26.05 222.7 512.9 508.0 30.2 69.5 2007 59.6 63.99 27.82 233.8 538.4 392.5 32.3 74.4 2008 62.3 65.81 29.64 244.9 564.0 273.6 34.4 79.2 2009 65.1 67.68 31.51 256.1 589.8 151.5 68.7 158.2 2010 68.1 69.60 33.43 265.6 611.7 26.1 67.8 156.1 2011 71.1 70.00 33.83 217.9 501.8 0.0 70.0 161.2 2012 74.3 70.00 33.83 167.0 384.6 74.7 172.0 2013 77.7 70.00 33.83 112.9 260.0 79.0 181.9 2014 81.2 70.00 33.83 57.3 132.0 80.7 185.8 2015 84.8 70.00 33.83 0.0 0.0 87.3 201.0 Total 1,297.4 1,968. 2,572. 3,801.0 8,753.7 10,990. 84.8 195.2 90.9 1,290.7 2,972.0 575.5 Average growth, % p.a. 1993-2015 3.8 3.6 SARIPCR (1994 prices) 30.7 25.5 -53.4 -80.6  -38 - ANNEX2 Table 2.2b: ZHENGZHOU-WuHAN LiNE: QUANTrrY OF MAJOR WORIS (Y million) SAR PCR Change Unit (Plan) (Actual) in % Earthwork mln m3 1.67 2.40 +43.7 Masonries min m3 0.21 0.28 +33.3 Bridges and culverts meter 3,035 3,996 +31.7 Land mu 1,586 1,821 +14.8 Rails laid km 80.80 89.20 +10.4 Turnout laid set 170.00 225.00 +32.4 Ballast laid min m3 0.25 0.37 +48.0 Buildings miln m2 0.20 0.23 + 15.0  Table 2.3: ZHENGZHOU-WUHAN LINE: INVESTMENT iN COAL MINNG (Y million, 1994 prices) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Ecn. coal mine dev. cost (Y/ttyr.): Distribution by years: 1992 /a 500.0 1st. 2nd. 3rd. 4th. 5th 1994 Lb 653.0 326.5 20% 20% 20% 20% 20% 1/2 yr. Annual Traffic (million tons) 36.17 36.17 36.17 36.17 36.17 36.27 41.50 47.00 47.60 48.20 48.80 49.40 50.02 52.0254.60 56.30 58.40 60.50 62.22 63.99 65.81 67.68 69.60 Incremental Traffic (million tons) 0.00 0.00 0.00 0.00 0.10 5.23 5.50 0.60 0.60 0.60 0.60 0.62 2.00 2.58 1.70 2.10 2.10 1.72 1.77 1.82 1.87 1.92 Mining Investment (Y mln) 16.3 3.3 3.3 3.3 3.3 3.3 1,707.6 341.5 341.5 341.5 341.5 341.5 1,795.8 359.2 359.2 359.2 359.2 359.2 195.9 39.2 39.2 39.2 39.2 39.2 195.9 39.2 39.2 39.2 39.2 39.2 195.9 39.2 39.2 39.2 39.2 39.2 195.9 39.2 39.2 39.2 39.2 39.2 202.4 40.5 40.5 40.5 40.5 40.5 653.0 130.6 130.6 130.6 130.6 130.6 842.4 168.5 168.5 168.5 168.5 168.5 555.1 111.0 111.0 111.0 111.0111.0 685.7 137.1 137.1 137.1137.1 137.1 685.7 137.1 137.1137.1 137.1 137.1 561.6 112.3112.3 112.3 112.3 112.3 577.9 115.6 115.6 115.6 115.6 115.6 594.2 118.8 118.8 118.8 118.8 118.8 610.6 122.1 122.1 122.1 122.1 122.1 626.9 125.4 125.4 125.4 125.4 125.4 130.6 26.1 26.1 26.1 26.1 26.1 0.0 0.0 0.0 0.0 0.0 Total (million Yuan) 3.3 344.8 703.9 743.1 782.3 818.2 515.9 197.2 288.6 417.9 489.8 587.7 684.3 666.1613.2 621.0 606.0 594.2 508.0 392.5 273.6 151.5 26.1 /a Railway 6, Vol. 2, Febnuruy 1993. Working Paper 22, p. 4. /b Railway 7, Vol. 2, December 1994, Working Paper 24, p. 3.  -40 - ANNEX 2 Table 2.4: ZHENGZHOU-WUHAN LNE: ACTUAL FREIGHT TRAFFiC (1985-93) (Million tons) Zhengzhou-bei Zhengzhou Mengmiao Luohe Xinyang Guangshui Jiang'an Mengmiao to to to to to to to to Zhengzhou Mengmiao Luohe Xinyang Guangshui Jiang'an Wuchang Pingdingshan 1985 Up 15.70 22.97 23.44 23.14 21.60 21.02 23.65 15.30 Down 34.66 37.69 49.94 45.62 42.23 42.02 40.83 3.22 Coal 20.12 21.05 32.24 29.42 27.02 26.78 22.81 13.64 1986 Up 28.21 25.62 24.60 23.94 22.13 21.52 25.32 15.53 Down 37.83 41.09 52.41 47.91 44.68 44.37 42.46 2.83 Coal 20.25 21.79 32.08 29.19 26.98 26.67 22.50 12.94 1987 Up 29.60 26.55 25.92 25.20 23.57 22.89 23.98 14.99 Down 41.87 45.13 56.76 52.65 49.21 48.89 42.98 2.52 Coal 21.91 22.93 33.80 31.47 29.18 28.78 23.53 13.30 1988 Up 30.41 27.23 26.65 26.01 24.30 23.58 26.31 14.37 Down 44.90 48.09 59.86 55.55 52.02 51.28 47.62 1.70 Coal 21.83 23.03 34.39 31.07 29.36 28.99 24.48 13.38 1989 Up 33.12 29.69 28.76 28.72 27.12 26.50 29.57 14.62 Down 46.46 50.15 62.23 57.67 53.74 53.50 50.07 1.68 Coal 22.79 34.25 36.01 33.20 30.15 29.85 25.38 13.60 1990 Up 32.15 28.74 27.86 27.61 26.12 25.76 29.36 14.40 Down 47.86 51.77 63.22 59.62 56.44 56.10 53.50 1.80 Coal 23.59 25.24 36.22 34.03 31.58 31.25 26.98 13.49 1991 Up 34.84 30.76 29.59 29.25 27.81 27.37 31.20 14.49 Down 46.84 50.69 62.35 59.48 56.97 56.69 54.70 1.48 Coal 21.80 22.85 33.81 32.02 30.07 29.16 25.61 13.35 1992 Up 35.32 31.80 30.63 30.37 28.90 28.66 32.69 14.49 Down 54.93 55.03 67.29 64.65 62.23 61.95 59.35 3.36 Coal 22.49 24.81 36.17 34.66 32.85 32.59 27.48 17.85 1993 Up 35.60 31.90 31.00 31.00 29.90 29.50 33.00 15.20 Down 51.60 56.50 68.00 56.10 63.50 63.50 63.50 3.20 Coal 21.05 23.99 36.27 34.55 32.92 32.68 27.54 14.72 Source: Ministry of Railways.  -41- ANNEX 2 Table 2.5: ZHENGZHOU-WUHAN LINE: REEVALUATED ECONOMIC RATE OF REruRN (REER) AND SENSITIVITY ANALYSIS (Y million, 1994 prices) Best estimate Sensitivity Analysis Costs Benefits Net Project Project Mine 110 kV Rolling (value cash costs Mine develovment costs Year costs development line stock Total added) flow (+20%) (+20%) (-20%) 1986 76.5 0.0 0.0 0.0 76.5 (76.5) (91.8) (76.5) (76.5) 1987 181.2 0.0 0.0 0.0 181.2 (181.2) (217.4) (181.2) (181.2) 1988 246.4 3.3 0.0 0.0 249.7 (249.7) (298.9) (250.3) (249.0) 1989 410.4 344.8 0.0 0.0 755.2 (755.2) (837.3) (824.1) (686.2) 1990 564.3 703.9 0.0 0.0 1,268.2 (1,268.0) (1,381.0) (1,409.0) (1,127.0) 1991 611.6 743.1 0.0 0.0 1,354.7 (1.355.0) (1,477.0) (1,503.0) (1,206.0) 1992 230.4 743.1 36.8 439.5 1,449.9 (1,450.0) (1,496.0) (1,598.0) (1,301.0) 1993 82.9 818.2 54.1 0.0 955.2 6.6 (948.7) (965.2) (1,112.0) (785.0) 1994 168.6 515.9 0.0 684.5 698.2 13.7 (20.0) (89.4) 116.9 1995 197.2 0.0 197.2 1,418.7 1,221.5 1,221.5 1,182.1 1,260.9 1996 288.6 0.0 288.6 1,497.3 1,208.7 1,208.7 1,150.9 1,266.4 1997 417.9 0.0 417.9 1,575.9 1,158.0 1,158.0 1,074.4 1,241.6 1998 489.8 0.0 489.8 1,654.5 1,164.8 1,164.8 1,066.8 1,262.7 1999 587.7 0.0 587.7 1,733.1 1,145.4 1,145.4 1,027.9 1,262.9 2000 684.3 684.3 1,814.4 1,130.1 1,130.1 993.2 1,266.9 2001 666.1 666.1 2,076.4 1,410.3 1,410.3 1,277.1 1,543.6 2002 613.2 613.2 2,414.3 1,801.1 1,801.1 1,678.5 1,923.8 2003 621.0 621.0 2,637.0 2,016.0 2,016.0 1,891.8 2,140.2 2004 606.0 606.0 2,912.1 2,306.1 2,306.1 2,184.9 2,427.3 2005 594.2 594.2 3,1877.2 2,593.0 2,593.0 2,474.1 2,711.8 2006 508.0 508.0 3,412.5 2,904.5 2,904.5 2,802.9 3,006.1 2007 392.5 392.5 3,644.4 3,251.9 3,251.9 3,173.3 3,330.4 2008 273.6 273.6 3,882.8 3,609.2 3,609.2 3,554.5 3,663.9 2009 151.5 4,127.8 4,127.8 4,127.8 4,097.5 4,158.1 2010 26.1 4,379.3 4,379.3 4,379.3 4,374.1 4,384.5 2011 4,431.7 4,431.7 4,431.7 4,431.7 4,431.7 2012 4,431.7 4,431.7 4,431.7 4,431.7 4,431.7 2013 4,431.7 4,431.7 4,431.7 4,431.7 4,431.7 2014 4,431.7 4,431.7 4,431.7 4,431.7 4,431.7 2015 4,431.7 4,431.7 4,431.7 4,431.7 4,431.7 Total 2.572.3 10,990.0 90.9 439.5 13,915.0 RERR (%) 16 15 15 18 NPV (12%) 2,000 1,704 1,403 2,596  - 42 - ANNEX 3 ECONOMIC EVALUATION OF THE CHANGCHUN PASSENGER COACH FACTORY MODERNIZATION Introduction 1. As of the mid-1980s, the Changchun Passenger Coach Factory produced nearly three-fifths of China's railway coaches. Given the pressing need for more and better-quality passenger rolling stock, this facility was selected as the most promising location for upgrading and expansion. 2. At the time of appraisal, the modernization was to occur in two distinct and separate phases. The primary objective of the first phase was to designate a suitable foreign partner for transfers of design and technology. Along with the appropriate local personnel, the partner also was to evolve recommendations for the second phase during which most of the production of the new design would take place. (Included in the first phase was a small amount of welding and surface treatment machinery and machine tools to be used for any design that was likely to be selected for second-phase production.) 3. The objectives of the first phase were attained as planned. The recommended new coach, designed with the assistance of British Rail Engineering Limited (BREL), was approved at all levels in China. Rather than wait for Bank evaluation and appraisal of a follow-on effort, the Chinese elected to proceed without additional Bank funding. 4. In light of these developments, the two phases of this component as originally contemplated are indistinguishable. From the standpoint of economic evaluation, therefore, it is not possible to isolate the costs associated with the "first phase" from the total project outlays. Thus, the analysis, which follows, embraces the costs and benefits of the overall Changchun Passenger Coach Factory modernization effort. As such, though, it is important to recognize that the results reported here are not comparable to the SAR evaluation, which necessarily focused only on the first phase. Project Capital Costs 5. The factors developed to convert financial prices into shadow prices are identified in Table 3.1 Foreign costs have been converted to Yuan by using the shadow exchange rate of 8.7 Yuan per US dollar. The resulting overall conversion factor for all items is 0.98. When restated at 1994 price levels, the economic project costs are 32.5  - 43 - ANNEX3 percent higher than the shadow costs. This is shown for the total project in Table 3.1 and on a year-by-year basis in Table 3.3. Project Benefits 6. Because the new coach is far more durable than its predecessor, it is able to accumulate more time in revenue service, thereby facilitating an incremental amount of railway passenger traffic volume. In addition, the newer rolling stock will require fewer and less costly major overhauls than the coach it replaces. Each of these factors contributes to two discreet benefit streams, which are considered in turn. (a) Value-Added to the Economy 7. Constructed of higher-quality and longer-lasting materials, the passenger equipment now being produced at the Changchun factory requires far less time for routine maintenance compared with prior models. Older coaches on average spent 125 days per year out of service for maintenance or 2.5 times as long as the 50 days for the new wagon. This means that the newer coach is in operating service 315 days per year compared with only 240 days for the older version. Assuming that both coaches account for 56,000 passenger-kilometers (pkm) per day (12.5 hours per day, 35 km per hour, and 128 passengers per coach), the additional 75 days of inservice time enables the railway to achieve about 4.2 million incremental pkm for each coach annually. 8. As a consequence of this project, annual production at the Changchun factory amounts to 1,040 coaches-or 240 more than the 800 units manufactured prior to modernization. At 4.2 million pkm per additional coach, the project results in just over 1 billion more pkm of railway capacity each year. 9. Railway passenger traffic has experienced rapid expansion in China. As of 1993 (the most recent year for which data are available), the volume of intercity railway passengers approximated 1.0 billion persons per year-about 200 million more than in 1980. Over the same time period, the average trip distance doubled, from 186 km in 1980 to 372 km in 1993. In combination, these elements have produced a 2.5-fold increase in railway pkm. Even allowing for the concurrent rise of the nonrailway modes, the volume of passenger traffic by railway in 1993 was substantial, amounting to almost 345 billion pkrn. 10. This long-term increase in personal rail travel (as gauged by railway pkm) has been reflected by similar growth in the economy [as measured by gains in the real gross domestic product (GDP)]. Between 1980 and 1993, the correlation in the behavior of these two indices is quite strong: a regression analysis of these two values for this period yields an R-squared of 0.85. Even if this relationship should deteriorate somewhat due to the enhanced roles of the nonrailway modes, the implication is that growth in rail passenger travel will continue to move in concert with real national economic output, especially in the near term.  -44 - ANNEX 3 11. Under these conditions, incremental growth in the output of the country's goods and services constitutes the major economic benefit of this project. Table 3.2 reports the time series for real GDP and railway pkm used in this analysis. The data from 1980 to 1993 are actual, while those from 1994 onward are estimates. In the "without project" scenario, GDP is projected to increase at an average annual rate of 7.0 percent over the period 1994-2000 and at an average annual rate of 4.0 percent for the years 2001- 2015. The values for railway pkm in the "without project" case are predicated on this GDP forecast utilizing the regression relationship for the 1980-93 period noted in the prior paragraph. To develop a "with project" projection, the incremental pkm attributable to the additional output of the Changchun factory are added to the "without project" pkm on an annual basis from 1994 through 2003 (it is assumed, conservatively, that all of the older model coaches will have been replaced by this latter year). Using these "with project" pkm and the same regression relationship established earlier, a projection of "with project" real GDP is derived. 12. The differential pattern of real GDP growth in the "without project" and "with project" scenarios thus comprises the incremental real GDP benefits attributable to the project. These values are detailed in Table 3.2 and replicated in Table 3.3. (b) Major Overhaul Savings 13. An additional benefit is associated with the major overhaul savings made possible by the lower maintenance costs and longer operating cycles of the newer equipment. Previously, the typical passenger coach required a major overhaul every 4 years, but with the newer model, this period has been extended to 10 years. With unit maintenance costs of Y 180,000 for the new coach (compared to Y 200,000 for the predecessor model), the average annual overhaul outlay amounts to Y 18,000 over 10 years (Y 180,000/10) or 64 percent less than the comparable Y 50,000 figure (Y 500,000/10) for the older coach. With production of the new coach equal to 1,040 units per year contrasted with 800 coaches annually for the prior model, the per-year incremental savings benefit as shown in Table 3.3 amounts to Y 21.28 million. Economic Rate of Return and Sensitivity Analysis 14. Based on the inputs stated above and as shown in Table 3.3, the net present value (at 12 percent) for the overall Changchun Passenger Coach Factory modernization project is Y 180.2 million and the economic rate of return is 25 percent. 15. Three alternative scenarios are developed in the sensitivity analysis. In the first two cases, the two benefit streams are reduced by half, respectively. The effect of these assumptions are to lower the ERR to between 20 and 23 percent For the third scenario, both benefit streams are reduced by half simultaneously. Here, the ERR is equal to 18 percent.  - 45 - ANNEX 3 Table 3.1: CHANGCHUN PASSENGER COACH FACTORY: PRICE CONVERSION FACTORS (Y million) Conver- sion Financial - Current Shadow priced Economic - 1994 factor Local Foreign Total Local Foreign Total Local Foreign Total Land 0.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Labor: Unskilled 0.54 0.43 0.00 0.43 0.23 0.00 0.23 0.30 0.00 0.30 Semi skilled/Technician 0.80 0.72 0.00 0.72 0.58 0.00 0.58 0.77 0.00 0.77 Supervisor 2.00 0.58 0.00 0.58 1.16 0.00 1.16 1.54 0.00 1.54 Materials: Steel 1.00 0.93 0.00 0.93 0.93 0.00 0.93 1.23 0.00 1.23 Timber 1.00 0.21 0.00 0.21 0.21 0.00 0.21 0.28 0.00 0.28 Cement 1.00 0.42 0.00 0.42 0.42 0.00 0.42 0.56 0.00 0.56 Sand 0.80 0.03 0.00 0.03 0.02 0.00 0.02 0.03 0.00 0.03 Stone 0.80 0.42 0.00 0.42 0.34 0.00 0.34 0.45 0.00 0.45 Bitumen 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01 Others 0.80 0.13 0.00 0.13 0.10 0.00 0.10 0.13 0.00 0.13 Fuel: Diesel 1.00 0.02 0.00 0.02 0.02 0.00 0.02 0.03 0.00 0.03 Gasoline 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01 Heavy oil 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01 Others 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01 Electricity 2.00 0.30 0.00 0.30 0.60 0.00 0.60 0.80 0.00 0.80 Water 1.00 0.14 0.00 0.14 0.14 0.00 0.14 0.19 0.00 0.19 Construction 0.80 0.22 0.00 0.22 0.18 0.00 0.18 0.24 0.00 0.24 Mechanical equipment 1.00 14.97 44.51 59.48 14.97 44.51 59.48 19.84 58.99 78.83 Others 0.80 9.51 0.00 9.51 7.61 0.00 7.61 10.08 0.00 10.08 Total 29.07 44.51 73.58 27.55 44.51 72.06 36.51 58.99 95.50 Overall conversion factor 0.98  -46 - ANNEX 3 Table 3.2: RAILWAY PASSENGER TRAFc AND REAL DomESIc PRODUCT, ACTUAL (1980-93) AND PROJECTED (1994-2015) Railway Passenger Traffic (bln pkm) GDP (Y billion) Without With Incre- Without With Incre- Year project project mental project project mental 1980 133.4 133.4 974.4 974.4 1981 142.4 142.4 1,022.1 1,022.1 1982 152.2 152.2 1,113.6 1,113.6 1983 172.1 172.1 1,226.3 1,226.3 1984 199.2 199.2 1,404.7 1,404.7 1985 237.1 237.1 1,572.6 1,572.6 1986 254.5 254.5 1,700.6 1,700.6 1987 280.1 280.1 1,881.4 1,881.4 1988 321.1 321.1 2,081.6 2,081.6 1989 299.0 299.0 2,173.5 2,173.5 1990 257.1 257.1 2,260.7 2,260.7 1991 279.5 279.5 2,442.2 2,442.2 1992 311.7 311.7 2,766.8 2,766.8 1993 344.9 344.9 3,138.0 3,138.0 1994 403.6 404.6 1.0 3,357.7 3,367.3 9.6 1995 428.3 430.3 2.0 3,592.7 3,611.9 19.2 1996 454.7 457.7 3.0 3,844.2 3,873.0 28.8 1997 482.9 486.9 4.0 4,113.3 4,151.7 38.4 1998 513.1 518.2 5.0 4,401.2 4,449.2 48.0 1999 545.5 551.5 6.1 4,709.3 4,766.9 57.6 2000 580.1 587.1 7.1 5,038.9 5,106.2 67.2 2001 601.2 609.3 8.1 5,240.5 5,317.3 76.8 2002 623.2 632.3 9.1 5,450.1 5,536.5 86.4 2003 646.1 656.2 10.1 5,668.1 5,764.2 96.0 2004 669.9 680.0 10.1 5,894.8 5,990.9 96.0 2005 694.7 704.7 10.1 6,130.6 6,226.7 96.0 2006 720.4 730.5 10.1 6,375.9 6,471.9 96.0 2007 747.2 757.3 10.1 6,630.9 6,726.9 96.0 2008 775.0 785.1 10.1 6,896.1 6,992.2 96.0 2009 804.0 814.0 10.1 7,172.0 7,268.0 96.0 2010 834.1 844.2 10.1 7,458.9 7,554.9 96.0 2011 865.4 875.5 10.1 7,757.2 7,853.3 96.0 2012 898.0 908.0 10.1 8,067.5 8,163.5 96.0 2013 931.8 941.9 10.1 8,390.2 8,486.2 96.0 2014 967.1 977.1 10.1 8,725.8 8,821.8 96.0 2015 1,003.7 1,013.8 10.1 9,074.9 9,170.9 96.0  -47 - ANNEX 3 Table 3.3: ECONOMIC RATE OF RETURN (EER) AND SENSITIVITY ANALYSIS: CHANGCHUN PASSENGER COACH FACTORY (Y million, 1994 prices) Sensitivity analysis Base case Case I Case 2 Case 3 Benefits Net Incremental Maintenance Total Capital Incremental Maintenance cash GDP savings benefits Year cost GDP saving flow (-50%) (-50%) (-50%) 1986 10.1 (10.10) (10.1) (10.1) (10.1) 1987 15.9 (15.90) (15.9) (15.9) (15.9) 1988 21.7 (21.70) (21.7) (21.7) (21.7) 1989 16.1 (16.10) (16.1) (16.1) (16.1) 1990 10.0 (10.00) (10.0) (10.0) (10.0) 1991 9.7 (9.70) (9.7) (9.7) (9.7) 1992 10.0 (10.00) (10.0) (10.0) (10.0) 1993 2.0 (2.00) (2.0) (2.0) (2.0) 1994 0.0 9.6 21.28 30.88 26.1 20.3 15.5 1995 0.0 19.2 21.28 40.49 30.9 29.9 20.3 1996 0.0 28.8 21.28 50.09 35.7 39.5 25.1 1997 0.0 38.4 21.28 59.69 40.5 49.1 29.9 1998 0.0 48.0 21.28 69.30 45.3 58.7 34.7 1999 0.0 57.6 21.28 78.90 50.1 68.3 39.5 2000 0.0 67.2 21.28 88.50 54.9 77.9 44.2 2001 0.0 76.8 21.28 98.11 59.7 87.5 49.0 2002 0.0 86.4 21.28 107.71 64.5 97.1 53.8 2003 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2004 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2005 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2006 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2007 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2008 0.0 96.0 21.28 I17.31 69.3 106.7 58.6 2009 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2010 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2011 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2012 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2013 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2014 0.0 96.0 21.28 117.31 69.3 106.7 58.6 2015 0.0 96.0 21.28 117.31 69.3 106.7 58.6 Total 95.5 ERR (%) 25 20 23 18 NPV (12%) 180.2 91.4 147.5 58.5  ANNEX 4 - 48 - P~Sf-APPRAISAL OF DOUBLE-TRACK ELECTRIFICATION PROJECT BETWEEN ZHENGZHOU AND WUCHANG WITH THE SECOND LOAN FROM THE WORLD BANK 1. Features of the Project 1.1 Name of the Project Double-track electrification project between Zhengzhou and Wuchang 1.2 Loan Code for the Project 2540CH4 1.3 Dates Related to the Loan 1.3.1 Date of negotiation on agreement of the loan April 8, 1985 1.3.2 Date of approval by the executive board of directors of the World Bank May 14, 1985 1.3.3 Date of signature by the two sides August 26, 1985 1.3.4 Date of the agreement of the loan going into effect October 22, 1985 1.3.5 Dead line for drawing money June 30, 1992, and postponed to June 30, 1994 2. Basic Situation of the Project 2.1 Goal and Significance The existing double-track railway line of Zhengzhou-Wuchang section, located in the south of Henan province and the north of Hubei province, is the middle section of Beijing-Guangzhou Railway and has a total length of 547 kilometers. It extends up north to Beijing, and down south to Guangzhou. It intersects China's main line from  - 49 - east to west - the Longhai Railway at Zhengzhou, joins Hankou-Danjiang Railway in the south, and links up water transport of the Yangtze River. It is an artery running through the south and north of China and connecting the northeast, the north and middle west of China, and is a strategic passage of transporting coal of the north to the south, undertaking arduous passenger and freight transport tasks. The section between Xinyang and Guangshui is the most difficult section, with the ruling grade of 12.5% and maximum down grade of 17.7% . It is difficult for steam or diesel locomotives to run upgrade in this section, and when running down grade, locomotives can hardly run at limited speed required for safety operation. Therefore, the Xinyang-Guangshui section is the controlling section of the whole line. The carrying capacity of that section used to be 37 million tons. However, the carrying capacity of down direction has been over-saturated since 1984, and has become the "bottle neck" on Beijing-Guangzhou Railway. Thus, the section must be upgraded technically, in order to meet the requirement of future passenger and freight traffic. Because of the long period required by easing the grade, large investment, and large areas of farmland to be used, it is decided to do technical upgrading in stations and yards and carry out electrification. In this way, not only can the whole existing track be used so that investment can be saved and construction speed will be fast, but also can the operation problems of Xinyang-Guangshui section be solved. 2.2 Main Technical Specifications 2.2.1 Grade of railway: I-grade main line 2.2.2 Number of mainline: double-track 2.2.3 Ruling grade: 6% (single locomotive) 12.5% (double locomotive) 2.2.4 Minimum radius of curve: 600m 2.2.5 Effective length of receiving-departure track: 850m, 1050m 2.2.6 Type of locomotive: electric 2.2.7 Model of locomotive: SS4 (freight), SS3 (passenger) 2.2.8 Tonnage rating of locomotive: 5000t (freight) lOOOt (passenger)  - 50 - 2.2.9 Type of block: automatic block 2.2.10 Headway: signal arrangement 6 minutes computation capacity 7 minutes 2.3 Designed Traffic Volume The designed traffic volumes after revision in 1987 are listed in the following table. ------------------------------------------------------------ Section Freight Traffic Volume Passenger Train up down Pairs ( pairs/day) ------------------------------------------------------------ Zhengzhqu- Xinzheng 2630 5050 36 ------------------------------------------------------------ Xinzheng- Luohe 2290 5400 36 ------------------------------------------------------------ Luohe- Xinyang 2220 6150 30 ------------------------------------------------------------ Xinyang- Guangshui 2030 5630 26 Guangshui- Jiang'an West 1990 5620 32 ------------------------------------------------------------ 2.4 Main Items of the Project ( including Zhengzhou-Wuchang, and Mengmiao-Pingdingshan east) 2.4.1 Electrification project and related signalling and communications project 2.4.2 Technical upgrading and expansion projects of Zhengzhou Terminal, Xinyang Marshalling Yard, Jiang'an West Marshalling Yard, and Wuchang South Marshalling Yard. 2.4.3 construction project of New Hankou Passenger Station. 2.5 Main Engineering Volume 2.5.1 Electrification project a. Traction sub-station: 8 b. District: 8  - 51 - c. Open-close sub-station: 12 d. AT sub-station: 10 e. Electric locomotive depot: 2 f. Power supply station: 1 g. Contact wire gang: 27 2.5.2 Reconstruction and expansion project of Xinyang, Jiang'an West and Wuchang South Marshalling yards, and construction project of New Hankou Passenger Station. a. Earthwork and stonework of subgrade: 2.4 million m3 b. One extra large bridge: 1221m c. 14 medium-sized and small bridges: 391m d. 103 culverts: 2384m e. Rail laid: 89.2km f. Turnouts laid: 225 g. Ballast paved: 366000m3 h. Industrial and residential buildings: 240000m2 2.5.3 Signalling and Communications Upgrading Project a. Communications No. Name of Project Unit Amount Remarks ------------------------------------------------------------ 1 8-core-single-model optical cable km 579.01 2----------lon-distance---------cable-------km---583.77----- 2 14x4x0.8 long-distance cable km 583.77 3 14x4xO.9 long-distance cable km 75.5 ------------------------------------------------------------ 4 14OMbit/s photoelectric digi- tal transmission equipment system 1 5-------b---t-------photoelectric--------------d---git------ 5 8Mbit/s photoelectric digital  - 52 - transmission equipment system 1 ------------------------------------------------------------ 6 2Mbit/s cable digital trans- system 4 Luohe- mission equipment Pingdong ----------------------------------------------------------__ 7 2Mbit/s cable digital trans- system 5 Zhengzhou mission equipment area ------------------------------------------------------------ 8 2Mbit/s cable digital trans- system 10 Wuhan mission equipment area ------------------------------------------------------------ 9 program-controlled digital line 6100 exchange ------------------------------------------------------------ 10 signal-command change-over system 1 equipment ------------------------------------------------------------ 11 system 1 multiplexer (including DCE) 12 air pressure monitoring system 1 equipment ------------------------------------------------------------ 13 measuring meter set 3 Zhengzhou Xinyang Wuchang b. Signalling (1) Block 986 sets of UM71 equipment 575 point-type equipment 215 TVM300 cab signal 2000 kilometers of outdoor cable 890 ground proceed signals 120 sectional power supply panel (2) Microcomputer interlocking One main cabinet of interlocking One multichannel transmission equipment One set of technical staff terminal for maintenance 1.5 kilometers of data transmission cable 5 outdoor equipment boxes 8 microcomputer interlocking module frames at throat (3) Centralized traffic control  - 53 - Traffic control center are established one each in Zhengzhou and Wuhan 8 control sections 93 stations are centralized controlled and supervised (76 foreign-financed, 17 local-financed). Among them, 50 are CTC controlled (44 are divided into 2 bureau-control areas, 5 are not specified, and one is divided into 4 bureau-controlled areas); 43 are dispatch supervised stations. 3. Strategic Decision of the Project 3.1. Process 3.1.1 In order to raise the traffic capacity of Zhengzhou-Wuhan section on Beijing-Guangzhou Railway and ensure smooth traffic of the Beijing-Guangzhou main line, in September, 1978, the Ministry of Railways sent to the State Planning Committee the "Report on Terms of Reference of the Electrification Project of Zhengzhou-Wuhan section of Beijing-Guangzhou Railway with the number of (78)TJZ1499. 3.1.2 In December, 1982, the State Planning Committee sent to the State Council for approval the "Examination Report on Terms of Reference of the Electrification Project of Zhengzhou-Wuchang and Hengyang-Guangzhou sections of Beijing-Guangzhou Railway" with the number of JJ(1982)1103. 3.1.3 In January, 1983, the State Planning Committee sent back to the Ministry of Railways the "Official Reply to the Terms of Reference of the Electrification Project of Zhengzhou-Wuchang and Hengyang-Guangzhou sections on Beijing-Guangzhou Railway' with the number of JJ(1983)14, which had been approved by the State Council, and required the Ministry of Railways to carry out according to the document. 3.1.4 In 1983, the Ministry of Railways transmitted to related construction and designing units the notice of the "Official Reply to the Terms of Reference of the Electrification Project of Zhengzhou-Wuchang and Hengyang-Guangzhou sections on Beijing-Guangzhou Railway" with the number of (83)TJZ654. According to the above reports, application and  - 54 - approval, the project is officially listed among the state construction projects. 3.2 Appraisal The Beijing-Guangzhou Railway is a main transport lifeline running through the south and the north of China, and also one of the six busy main lines along the coast. The Zhengzhou-Wuhan section, located in the central plains, is a section of busy passenger and freight traffic volume on the Beijing-Guangzhou Railway, and is the key passage of transporting coal of the north to the south. Apart from receiving large amount of coal from places further than Zhengzhou, the section has coal mines of Pingdingshan, Mixian and Yuxian in west Henan province along it. The section used to have a transport capacity of only 37 million tons, but in 1985 the transport capacity reached 45.6 million tons, which made the carrying capacity over-saturated. If electrification is not carried out, it will be very difficult to meet the requirement of the ever-increasing traffic volume. After electrification of Zhengzhou-Wuchang section, the transport capacity can reach 78 million tons. After the section was open to traffic after electrification in 1992, the freight traffic volume has reached 64.6 million tons, and 27 pairs of passenger trains are run each day. The tonnage rating of locomotives has been raised from 3700t before electrification to the current 5000t of SSd electric locomotive. It is predicted that the freight traffic volume will reach 74.7 million tons in the year of 2000, and the transport task can still be completed. Real operation proved that the electrification upgrading of railway in this section can greatly raise transport capacity and meet the needs of ever-increasing traffic volume. Therefore, the strategic decision is completely correct. 3.3 Major Changes in the Design According to the comments of the Appraisal Committee of the Ministry of Railways, the original design was changed in the following aspects: 3.3.1 In order to meet the needs of "V"-type maintenance window on busy double-track electrified railway, equipment fitted to opposite direction running of trains are added to electrification and signalling and communication equipment.  - 55 - 3.3.2 In the Jiang'an West Marshalling Yard, the semi-automatic humps of the original design were changed into automatic humps. The turnout at the tail of marshalling yard was changed from electric centralized control to microcomputer centralized control. The four tracks of the receiving yard was extended to 1050m. One track was added to the shunting yard. Two tracks were added to down direction departure yard. The Huangpu Cross-over with a span of 36m (8+10+10+8m) was added. In Wuchang South Marshalling Yard, the mechanical hump of the original design was changed into automatic hump, and the turnout at the tail of the marshalling yard was changed from the original electric centralized control to microcomputer centralized control. 3.3.3 Hankou Passenger Station is moved out of the site, and a new one is going to be built outside Jiang'an West Station. 3.3.4 Add an infrared HB detection system. 3.3.5 In the original design, electronic shift frequency automatic block and shift frequency cab signal are applied to the Zhengzhou-Wuchang double-track section, and except the Zhumadian-Guangshui section which uses centralized shift frequency, other sections all use decentralized shift frequency. The total investment was 1.933 million yuan. Then the Ministry of Railways changed the design into importing the French 4-aspect, non-insulation track circuit in electrified sections, and cab signals with speed supervision. The estimated investment is 181.88 million yuan. 3.3.6 The effective length of tracks in stations is extended to 1050m. In the preliminary design, it was planned to extend the effective length every one station. Then, according to the need of operation, all the stations except 18 of them in the Zhengzhou-Wuchang section have their effective length of tracks extended. 4. Implementation of the Project 4.1 Implementation Organization 4.1.1 Designing institute Electrification Survey and Design Institute, Electrification Bureau, MOR  - 56 - Signalling and Communications Survey and Design Institute, Electrification Bureau, MOR Fourth Survey and Design Institute, MOR Zhengzhou, Xitan and Wuhan Survey and Design Institute, Zhengzhou Railway Administration Mid-South Architecture Design Institute 4.2 Builder: Zhengzhou Railway Administration 4.3 Construction Unit: Electrification Bureau, MOR Signalling and Communications Engineering Corporation, MOR Zhengzhou Railway Administration Second Engineering Bureau, MOR General Construction Corporation of Wuhan City 4.4 Units in charge of Inviting Tenders and Purchase China National Technical Import and Export Corporation China National Machinery Import and Export Corporation China National Instrument Import and Export Corporation China Railway Import and Export Corporation  - 57 - POST APPRAISAL ON ZHENG-WU LINE 2. Purchase on bids 2.1. General descriptions A total of US$188130 thousand foreign funds has been used in this project for the purchase of the following materials and equipment(see table 6). Table. 6 ------------------------------------------------------------------- Serial Descriptions Amount Percentage no. (Thousand US$) (%) ------------------------------------------------------------------- I Rails 3,915 2.08 2 Fishplates 1,503 0.80 3 Other steel 23,781 12.64 4 Cement 4,406 2.34 ------------------------------------------------------------------_ 5 Timber 9,566 5.08 ------------------------------------------------------------------_ 6 Non-ferrous metal 1,987 1.06 ------------------------------------------------------------------_ Sub-total(material) 45,158 24.00 ----------------------------------------------------------------__- 7 Communication cables 7,825 4.16 ------------------------------------------------------------------_ 8 Communication equipment 16,550 8.80 9 Signalling cables 6,800 3.60 10 Signalling equipment 34,363 18.27 ----------------------------------------------------------------__- 11 Power cables 1,283 0.68 12 Power equipment 33,303 17.71 ----------------------------------------------------------------__- 13 Insulators 1,351 0.72 ------------------------------------------------------------------_ 14 Miscellaneous wires 16,200 8.61 -----------------------------------------------------------------__ 15 Miscellaneous equipment 5,175 2.75 ------------------------------------------------------------------_ 16 Vehicles 6,408 3.41 17 Instruments 2,506 1.33 18 Design & construction facilities 11,208 5.96 Sub-total (equipment) 142,972 76.00 ---------------------------------------------------------------__--  - 58 - Sub-total 188,130 Reserve funds 610 Total 188,740 The materials and equipment listed in the table have been purchased through international competitive bidding or from the markets in accordance with the agreements on loans and purchasing instructions. 30 international bids have been invited in the period of 1986 to 1992, with 129 manufacturers in 18 countries and regions won the bids, among them 41 in P.R of China, 23 in USA, 18 in Japan, 13 in England, 7 in Germany, 7 in France, 6 in Switzerland, 1 in Belgium, 1 in Austria, 1 in Australia, 2 in Sweden, 2 in Denmark, 1 in Brazil, 2 in Canada, 1 in Argentina, 1 in Italy, 1 in Taiwan and 1 in Hong Kong. 209 contracts with a total amount of US$188,130 thousand have been concluded. Of the contract amount, US$53,190 thousand are signed by Chinese manufacturers, taking account 28.27X of the total. 2.2 Comparisons between appraisal planning and actual fulfillment (annually) The implementation of purchase has delayed due to fundamental modification of designs, increase of projects and update of purchasing lists, the last contract of this project was concluded in January, 1993. See table 7. Table. 7 ------------------------------------------------------------------- Year 1985 1986 1987 1988 1989 1990 1991 1992 1993 Planning ------------------------------------------------------------------_ Actual 2.3 Contract amount of purchases in the following years are shown in table 8. Table. 8 Unit: One thousand US$ Year Contract amount Contract amount Percentage (one year) (accumulated) (accu.amount /total) --------------------------------------------------------__--------- 1986 21,047 21,047 11.19 ------_---------------------------------------------------------__- 1987 6,434 26,481 14.08 ----------------------------------------------------------------__- 1988 37,767 62,428 33.18 ----------------------------------------------------------------__- 1889 49,471 113,719 60.45 1990----------15,018-------------128-------737--------68.43----__-- 1990 15,018 128,737 68.43  - 59 - ------------------------------------------------------------------- 1991 27,838 156,575 83.22 ---------------------------------------------------------------__-- 1992 26,451 183,026 97.29 ---------------------------------------------------------------__-- 1993 5,104 188,130 100.00 --------------------------------------------------------------__--- 2.4 Coefficient of purchase and payment The accumulated contract amount and the actual payment in 1986-1994 are shown in table 9. Table. 9 Unit: One thousand US$ ----------------------------------------------------------------__- Year Contract amount Actual payment Percentage (t) (accumulated) (accumulated) (payment/purchase) 1986 21,047 13,464 63.97 ------------------------------------------------------------------- 1987 26,481 22,367 84.46 ----------------------------------------------------------------__- 1988 62,428 33,166 53.13 1989 113,719 50,904 44.76 ----------------------------------------------------------------__- 1990 128,737 96,313 74.81 1991 156,575 129,817 82.91 ---------------------------------------------------------------__-- 1992 183,026 151,374 82.70 ---------------------------------------------------------------__-- 1993 188,130 173,414 92.18 ---------------------------------------------------------------__-- 1994 188,130 183,130 100 -----------------------------------------------------------------__ 2.5 Experiences and lessons on purchases and contract negotiations The purchases of this project have been implemented in accordance with the agreements of the loan and the instructions of purchase. Supported by the State Planning Committee, Ministry of Finance and the World Bank, the task group has been working hard to implement the purchases and has obtained the following experiences: 1) Organization has been reformed and purchase management improved Founded in March, 1987, the Foreign Capital and Technical Import Office, MOR, under the leadership of deputy minister and chief engineer, is empowered to carryout the centralized-management of foreign capital, including project creation and implementation, purchase on bids and technology import. The implementation capability has been improved since the centralized management superseded the dispersed one. The task group, organized for purchase management, has summed up some experiences in purchase  - 60 - implementation, such as, international tendering, bidding documents evaluation and contract negotiation, leading to improvement of purchase quality. In the purchase process, a responsibility system combining the centralized management and management by levels has been set up, which is organized by the Foreign Capital and Technical Import Office with the participation of project management departments and customers. Purchase implementation groups have been built up to work out bidding documents, to carry out the evaluation of bids, contract negotiations and project implementations. In the process of purchase , all of the designing departments, construction teams and customers have played important role in individual links of the project. 2) Competition between purchase agencies has been intensified At the primary stage of implementing this project, the International Tendering Division, China National Technical Import and Export Corporation was the only agency for the purchase, since 1987, the International Tendering divisions of China National Machinery Import and Export Corporation and China National Instrument Import and Export Corporation have become its competitors. Competition between agencies has led to a higher efficiency and better service. 3) Quality of bidding documents has been upgraded With a view of upgrading the quality of bidding documents, a technical consultation service was built up in 1990. Qualified technical personal have been employed to support the purchase, for example, to work out technical specifications attached to the bidding documents. Computer-based management of the documents has also played a key role in speeding up documents preparation and shortening the purchase cycle. 4) Market investigations have been focussed With the deepening and expanding of China's reform and opening to the outside world, fresh information on new products and technologies have been gathered from both home and abroad through technical survey, design communication, technical training and technical exchanges. This has contributed a great deal to the building up of project and working-out of bidding documents, bids evaluation and contract negotiations. The "China Modern Railway Exhibition, 1992" attracted 55 foreign manufacturers, during the period of the exhibition, contracts amounted US$ 64million in total have been concluded. 5) Problems a) Long purchase cycle due to complicated approving process; b) System equipment has been purchased from different manufacturers by small separated items, which effects the operating reliability of the system. For example, of the primary equipment  - 61 - for the power sub-station in Zheng-Wu line, different items are supplied by Alsthom, France, ABB, Sweden and Chinese manufacturers, and, of the secondary equipment, manufacturers are TUM, Japan, ABB, Sweden and Westinghouse, England. These multivendor-equipment have given rise a lot of difficulties in interfacing. c) Software of the equipment could not meet the requirements of the Chinese Railway due to that the operation conditions of the railway have not been clearly specified in the contracts. 3. Evaluation of the equipment imported The line, an important trunk channeling the North and South China, is featured by high technical standard and therefore, the following equipment with comparative advanced technologies have been imported: 1. Optical transmission equipment 1 set 2. Program-controlled exchange 13100 lines 3. Package switching network 4 joints 4. Optical cables 600km 5. Microcomputer interlocking device 1 set 6 CTC 1 set 7. Auto blocking system and Loco. Signalling 1 set ( 400 sets on the wayside, 31 sets on the loco.and 300 sets of point type) 8. Telecontrol 2 sets 9. Traction power transformer 129 sets 10. Segment insulator 470 sets 11. Failure points calibrating devices 2 sets 12. Relay 1 set 13. Rail flaw detecting car 1 set 14. Track recording car 1 set 15. Hi-rail cars 5 set 16. Computer network system 1 set These equipment are featured by advanced technology, fine structure and good quality, compact and light weight, easy operation and maintenance, safety and reliability. Since the operation of the system, very few failures have been discovered in segment insulator, relay, failure point calibrating and tele-control devices. Most of the above equipment are introduced to China for the first time, therefore, the software used in computer-based interlocking system, CTC, etc. should be improved so as to meet the actual conditions of the Chinese Railway. 4. Comment on suppliers Most of the suppliers have acted strictly according to the contracts, including delivery date, product quality and after sale service. Many of them have sent their technical personal to carry out the on-site installation and testing of equipment and training of operators. Some of them, such as ABB, Jisima, Birili, have sent their experts now and then to visit end users and offer  - 62 - consultations after the completion of guarantee period , and have supplied some parts free of charge. A few suppliers, however, have delayed their delivery, installation and testing date of the equipment, even asking for a higher price. Sone quality problems have not been tacked on time.   IMAGING DRAFT CONFIDENTIAL Report No: 15230 Type: PCR