China - National Highway II Project (Guangdong- Hunan Highway Corridor)

Report No. PIC1664 Project Name China-National Highway II Project (@#) (Guangdong-Hunan Highway Corridor) Region East Asia and Pacific Sector Transportation Project ID CNPE3654 Borrower People's Republic of China Implementing Agency Guangdong and Hunan Provincial Communications Departments Date this PID Prepared March 27, 1996 Appraisal Date May 1996 Board Date December 17, 1996 Poverty Not Applicable Tentative Project Financing Plan IBRD US$ 400.0 m Central Government US$ 152.8 m Guangdong Province US$ 385.3 m Hunan Province US$ 213.5 m Total Project Cost US$1,151.5 m Country and Sector Background 1. China's economic development since the opening of its economy in the late 1970s has resulted in a 9.5 percent average annual rate of economic growth. Key facets of this growth are rapidly increasing domestic and foreign trade as well as increasing personal mobility and consumption of energy. These, in turn, have caused the demand for transport to surge. Supply capacity, however, is constrained and this is now being recognized as one of the most serious bottlenecks to future economic growth and efficiency. In particular, motorization is growing rapidly but road transport, for historical reasons, has not been widely developed in much of China, outside its cities. The road network ranks among the sparsest in the world relative to geographic area or population and is quite unsafe. 2. At the central level, the basic strategy is to develop a National Trunk Highway System (NTHS). The Ministry of Communications (MOC) is in charge of planning the NTHS, consisting of 12 interprovincial trunk expressways, with a total length of some 30,000 km and connecting 95 major Chinese cities. While giving priority to two North-South and two East-West corridors ("two verticals and two horizontals"), the Beijing-Zhuhai (Jingzhu) Expressway, which is one of the "two verticals", constitutes the highest priority corridor in this program. This expressway crosses the provinces of Hebei, Henan, Hubei, Hunan, and Guangdong over a distance of approximately 2,500 km and will connect, once  completed, Beijing with Guangdong's fast growing Pearl River Delta, and Hong Kong. It is designed as a high-grade, high-performance facility, at a minimum four lane standard, fully access controlled, and will be operated throughout as a toll highway. Jingzhu is scheduled for substantial completion by the year 2000. At the provincial/regional level, the strategy is to concentrate on network maintenance and the expansion and improvement of provincial and rural road networks currently totaling more than 1 million km, to provide greater mobility and to stimulate socio-economic development, particularly in less developed areas. 3. In terms of highway and road transport policy, growing attention is being paid to removing administrative barriers to interprovincial trade and to redefining the Central Government's role in transport, in light of rapid administrative decentralization and growing private sector involvement in highway development and road transport services. Provincial and municipal governments are expected to continue mobilizing most investment resources required, including access to private investment and capital markets, and to seek greater expenditure efficiency through improved highway planning and investment strategies, as well as to modernize maintenance management and improve cost recovery from road users. Local governments are also expected to further the development of road transport services and the road construction industry through deregulation and promotion of competition, access to modern technology and improved management. The Bank has prepared a report (No. 11819-CHA dated February 1994), "CHINA: Highway Development and Management - Issues, Options and Strategies", which provides a strategic framework for action in the foregoing areas and serves as the basis for the Bank Group sector assistance strategy. Linkage to Country Assistance Strategy 4. In highways, the key problem facing China is its comparative neglect of the sector over several decades. The Bank's Country Assistance Strategy (CAS) for China, presented to the Board in June 1995, supports China's needs to rapidly modernize and expand its highway system. To achieve this, GOC, with Bank and other multi- and bilateral assistance, is giving high priority to developing the system of expressways leading to the NTHS. Among other priority corridors, the Bank is already heavily involved in the construction of substantial sections of Jingzhu expressway, between Beijing and Guangzhou. Under the ongoing National Highway (NH1) Project, two important sections are presently being built in Hebei and Henan. Under the proposed Second National Highway (NH2) Project, two priority sections in Guangdong and Hunan would be undertaken. Under a future Third National Highway (NH3) Project which is under preparation, several important expressway sections as well as a major Wuhan Yangtze river bridge under an agreed Build-Operate- Transfer (B-O-T) arrangement would be undertaken in Hubei province. A newly proposed Fourth National Highway IV (NH4) Project would cover two important expressway sections in Hunan and Hubei which will be linked to the Yangtze bridge B-O-T scheme. These four National Highway Projects constitute a well thought-out and well - 2-  balanced series of investment operations which will assist GOC and the concerned provinces in the timely completion of China's highest priority expressway corridor. In general, the Bank's program of support in the highway sector will continue to assist China in the foreseeable future in the financing, development and management of its priority expressway system. Geography of Project Area 5. The proposed NH2 Project is focused in the Central and Southern provinces of Guangdong and Hunan, which border the interior and developed coastal regions of China. Elements of the Jingzhu Expressway in these two provinces would serve a combined population of nearly 130 million, with traffic volume and vehicle fleets which are fast-growing and demographic features which are common to both provinces, described as follows: (a) Guangdong Province is located on the South China Sea at the southeastern corner of China. As of end-1994, Guangdong had a population of 66.1 million covering an area of 178,000 sq. km, with a population density of 371 people per sq. km. Topographically, Guangdong is high in the north and low in the south, with wide areas of hills and low mountains. Almost 75 percent of the total area is mountainous and hilly. The coastline is long and winding, measuring more than 4,300 km along the mainland area. The province, with Guangzhou as its capital, is divided into 3 administrative regions, 9 provincially administered cities, 6 cities at the county level, 73 counties and 3 autonomous counties. The economy of Guangdong has grown by about 15 percent per year since 1980. Gross Output Value of Agriculture and Industry (GOVAI) per capita has averaged nearly 20 percent per year over the same period. The highway network comprises some 83,000 km, of which only about 4,600 km (7 percent) include expressways, and class 1 and class 2 roads. Between 1981 and 1993, the road network grew in length by about 8 percent per year. The vehicle fleet grew more than five times between 1986 and 1994, at an average of 19 percent per year. The fleet of large trucks, buses and agricultural tractors grew between 9 and 11 percent per year while the fleet of passenger cars, light vans and pickups grew at 19 percent per year. The most rapid growth occurred in the motorcycle fleet at 28 percent per year. Traffic growth from 1980 to 1994 was strong. Freight traffic grew at over 10 percent per year, with the strongest growth in water transport and highways. Passenger transport also grew at well over 10 percent per year, with the strongest growth in highway transport at 15 percent per year. (b) Hunan Province is situated in the middle reaches of the Changjiang River in south central China. Stretching 900 km from east to west and 800 km from south to north, Hunan has a total area of 210,000 sq. km. With mountains in the east, south and west, the land generally slopes from south towards the north. Most common land form in this region are hills which occupy about 50 percent of the total area. At the end of 1994, Hunan had a population of 63.1 million and its population density averaged 315 people per sq. km. The province, with Changsha as its capital, is divided into 6 -3 -  administrative regions, 1 autonomous prefecture, 5 provincially administrated counties, 18 cities at the county level, 74 counties and 6 autonomous counties. The economy has grown by about 9 percent per year since 1980 while GOVAI per capita has averaged about 11 percent per year over the same period. The highway network comprises some 58,800 km, of which only 1,750 km (3 percent) are class 1 and class 2 roads. The roads with bituminous and cement pavements amount to only 12,400 km (21 percent). The vehicle fleet grew more than two times between 1986 and 1994, at an average of 12 percent per year. Similar to Guangdong, the fastest growth occurred in the motorcycle fleet at 30 percent per year. Freight and passenger traffic grew at about 5 percent per year from 1980 to 1994. The most rapid growth for freight traffic occurred in road transportation at 6.5 percent per year. In passenger traffic the highway mode grew at about an annual 6 percent. Similar to Guangdong, by the year 1994, about 90 percent of all passenger movements were undertaken by road transport. Project Objectives 6. The proposed project would be the second in the series of NH1-NH2-NH3-NH4 projects for the Jingzhu expressway in Guangdong, Hunan, Hubei, Henan, and Hebei provinces. It would build on its predecessor NH1 and would precede NH3 by about one year and NH4 by about two years. All four projects in the series would support an integrated approach to expressway corridor development, with each of the four operations contributing selected priority sections which would gradually develop into a full corridor system. The specific objectives of the NH2 project would be to: (a) relieve road transport congestion and improve the integration of interregional trade and commerce between Hunan and Guangdong by assisting in the development of two key sections of the NTHS in the principal North-South transport corridor; (b) strengthen institutional capacity at the Hunan and Guangdong Provincial Communications Departments and related institutions, through provision of training, technical assistance and equipment, in planning, design, construction, operation and maintenance of Hunan's and Guangdong's highway networks; (c) develop a new framework for the commercialization and corporatization of provincial expressway companies, through execution of an innovative study to that effect; and (d) increase road safety, through technical assistance and black spot improvement. Project Components 7. This two province highway project would comprise: (a) construction of (i) Xiangtan to Leiyang Expressway (XLE), a 169 km divided four-lane access-controlled highway in Southern Hunan, and (ii) Xiaotang to Gantang Expressway (XGE), a 109 km divided four-lane access-controlled highway in Northern Guangdong. The expressway works would include construction of service, administration and maintenance facilities as well as the supply and installation of electrical, electronic and mechanical (E&M) equipment for tolling, traffic monitoring, telecommunication and - 4 -  lighting of interchanges, toll plazas and service areas; (b) Interconnecting Road Programs (IRP) in Hunan and Guangdong, consisting of new construction of 5 roads, with a total length of 39 km, in Hunan, and of 10 roads, with a total length of 22 km, in Guangdong. The Hunan IRP would include the new 16 km divided four- lane class 1 Xiangtan - Zhuzhou Highway (XZH). The Hunan project part would also comprise new construction of Loudi-Lianyuan Highway (LLH), an auto-only access-controlled class 2 road of 60 km length; (c) construction supervision services for XLE, XGE, the Hunan and Guangdong IRP and LLH; (d) studies/technical assistance in (i) highway maintenance management and expressway commercialization and corporatization in Hunan; and in (ii) transport and economic integration and expressway safety in Guangdong; (e) staff training programs for Hunan and Guangdong covering all aspects of highway planning, design, construction, operation, finance and maintenance; and (f) equipment for: (i) control of construction quality and monitoring of the environment during construction of the expressways; (ii) operation and maintenance of the expressways after their completion; (iii) road data base (RDB) and pavement management system (PMS) in Hunan; and (iv) maintenance of the provincial road network in Hunan. Rationale for Bank Involvement 8. By helping GOC to plan and build the NTHS, of which the Jingzhu expressway is a key element, the Bank supports this essential long-term solution to the serious transport problems facing China, removing infrastructure bottlenecks, facilitating interprovincial trade, and promoting long-distance road traffic. This would help arrest a growing regionalism while furthering the liberalization, facilitation, and cost reduction of transport - key requirements for market-oriented reforms to succeed. Early completion of the expressway corridor between Changsha and Guangzhou would be vital to the future economic development of Hunan province since this would open up this inland province for much needed increases in interprovincial trade with fast-growing Guangdong and Hong Kong and help realize the full economic benefits from large-scale expressway development. The transport and economic integration study for the Hong Kong - Guangzhou - Changsha corridor, by focusing on Northern Guangdong and Southern Hunan, would help integrate these yet underdeveloped rural areas into the fast-growing economies of the Pearl River Delta and Hong Kong. 9. Further to the basic objective of system integration, the Bank would also give priority to the improvement of interconnecting roads at all interchanges of the project expressways. The NH2 project would thus help to counter the prevalent GOC approach to confine the development of the NTHS to the expressways themselves, - 5 -  benefiting long-distance, end-to-end traffic and seriously limiting any sharing in the project benefits by the area alongside the expressway. Bank support is also justified by project assistance to institutional development, which, besides the provision of training and equipment, would include studies on expressway commercialization and corporatization, and highway maintenance management. This would support the introduction of market principles and mechanisms in highway financing, operation, management and maintenance. Bank involvement is also expected to benefit the design and quality of construction of expressways as well as road traffic safety. NH2 would also foster improved practices in the areas of environment, land acquisition and resettlement of project-affected people. Lessons Learned from Past Operations in the Sector 10. The Bank has accumulated substantial experience through the preparation and implementation of a dozen highway projects in China, four of which have been completed. While the overall performance of highway projects is by and large satisfactory, some problems have occurred, including inadequate quality of construction, cost overruns and a late start in the engineering design and procurement of traffic engineering facilities, which have delayed completion of some projects. Preparation of the proposed NH2 project has specifically addressed the above issues. The detailed engineering designs and bid documents for the expressways under the project will soon be reviewed by international experts and construction of these expressways will be supervised by two joint international/local consulting teams with the local teams receiving both formal (in China and abroad) and on- the-job training in supervision of construction activities and environmental aspects of road development. The conceptual designs of the traffic engineering facilities have already been completed. 11. Several of the most important lessons learned in implementation of highway projects worldwide concern road maintenance. Bank policy papers in 1979 and 1988 underscored the fact that neglect of road maintenance can ultimately result in very high costs to restore infrastructure, and that new road construction must be balanced with the need for road maintenance. Previously, this was not an issue in China -- adequate funds were being set aside for this purpose and maintenance was adequately carried out. However, with the expansion of the NTHS (with its high costs), the rapid increase in traffic volumes, and the trend towards using larger trucks with heavier axle loads, concern is growing about the accelerating maintenance requirements in the future. An analysis of the sources and uses of highway funds during the 9FYP in Guangdong and Hunan revealed that the two project provinces would be able to meet their highway expenditure plans. 12. The Bank's recent, albeit limited, experience with the operation and management of tolled expressways in China indicates the need for improvement in this area. The proposed project therefore provides training for staff and equipment for efficient and safe operation and maintenance of the project's high-grade highways. Moreover, the project provinces would benefit from the - 6 -  general results of high-grade highway commercialization and corporatization studies that will be undertaken as part of the NH2 and NH3 projects in Hunan and Hubei, respectively. Limited experience with highway safety programs in China has pointed to the difficulty of their implementation due to poor coordination between the traffic police and the highway departments. The proposed project addresses this problem at least partially by focusing on expressway safety which, in view of the rapid expansion of the expressway network in Guangdong and Hunan, is becoming a serious problem. 13. Experience in the area of land acquisition and resettlement has generally been satisfactory. However, the lesson has been that the Bank should make its requirements well known to the Chinese agencies at an early stage in the preparation of a new project. The Legal Department should also be brought on board early in the project preparation. Experience in the environmental area in China has generally been favorable, however, more attention should be paid to environmental supervision and monitoring during construction, and to training of personnel. The resettlement and environmental aspects of the project were properly addressed throughout preparation, resulting in specific environmental plans for the design, construction and operation phases of the project as well as in resettlement action plans. Both plans would be monitored throughout implementation. Moreover, the proposed project would provide equipment for environmental supervision and monitoring as well as training of staff. Project Cost and Financing 14. Total project cost is estimated to be $1,151.5 million equivalent, excluding loan commitment charges and interest during construction. Project financing would be as follows: $152.8 million (or 13.2 percent of total project cost) from MOC; $213.5 million (18.5 percent) from Hunan; $385.3 million (or 33.5 percent) from Guangdong, and $400 million (or 34.8 percent) from the Bank. MOC's funding would be restricted to the two expressways. The Bank loan of which $200 million will be for Hunan and $200 million for Guangdong would finance about 73 percent of the project's foreign exchange cost. Economic Evaluation 15. The major quantifiable benefits of the project comprise the reductions in vehicle operating costs and time costs. The new expressways between Xiangtan and Leiyang in Hunan and Xiaotang and Gantang in Guangdong will have shorter lengths, improved pavement surface conditions and riding comfort, an improved geometry, reduced traffic interferences, and better safety standards than the existing roads. Therefore, most of the long distance traffic and some of the local traffic is expected to diverge from the existing roads to the new expressways. Since many road users will choose the expressways, there will also be a reduction in congestion levels on the existing roads. Thus, users who will continue using the existing roads will also benefit in the form of time savings due to -7 -  the resulting higher travel speeds that can be driven on the existing roads. Other quantified project benefits are due to the as yet non-existing traffic that will be generated on XLE and XGE as a result of the lowering of transport costs. The estimated economic internal rate of return (EIRR) is 26.3 percent for XLE (169 km) in Hunan; 18.1 percent for XGE (110 km) in Guangdong; and 19.6 percent for the entire expressway corridor between Changsha and Guangzhou, a distance of some 659 km. Separate economic evaluations for LLH resulted in an EIRR of 20.7 percent and for XZH of 47.0 percent. The EIRR for the overall project, including all non-quantifiable project components is 22.0 percent. Environmental Aspects 16. XLE, XGE, XZH and LLH are classified as category A from an environmental perspective. Their Environmental Impact Assessments (EIAs) were prepared, and together with their Environmental Action Plans (EAPs), reviewed by the Bank and found to be satisfactory. The Bank also reviewed and found satisfactory the basic policies, planning proposals and institutional arrangements used in the preparation of all EIAs and EAPs. The EIAs indicate that the proposed alignments for the high-grade highways will not adversely affect ecologically sensitive areas and, provided that the EAPs are implemented, the construction and operation of the highways should have no adverse impacts on the environment. In both Hunan and Guangdong, major environmental impacts during construction will include noise and dust, alteration of hydrological regimes, soil erosion, interference with local traffic, impact on local ecology, and irrigation systems. Of these impacts, noise, dust and soil erosion will be the most serious. 17. Traffic noise, vehicle exhaust, soil erosion and water pollution from service areas were identified as the major adverse impacts during the operation period. The EAPs specify the appropriate mitigation measures, environmental monitoring plans, institutional arrangements, training, equipment requirements and budget needs for their implementation to mitigate the environmental impacts. Major mitigation measures include selection of appropriate alignments, proper design of overpasses and underpasses to minimize local traffic and social disruptions, optimization of earth works to minimize the impacts of borrow areas and material hauling, use of water sprinklers to reduce dust, and construction of noise barriers to reduce traffic noise. The project will also strengthen vehicle emission inspection and promote better vehicle maintenance facilities to reduce air pollution. The detailed engineering design and technical specification for highways incorporate appropriate measures to protect the environment. Land Acquisition and Resettlement Aspects 18. Resettlement Action Plans (RAPs) have been prepared for XGE and XLE by the resettlement offices of the Guangdong Provincial Freeway Company (GPFC) and Hunan Provincial Expressway Construction and Development Corporation (HPECDC). These RAPs are based on the National Resettlement Policy of PRC and the Bank's Operational - 8 -  Directive 4.30 on Involuntary Resettlement, and form the basis for implementation of land acquisition and resettlement of the proposed project. In the preparation of the resettlement component of this project, attention was paid to the effective implementation and monitoring of the resettlement policies. The main objective of the resettlement program is to improve the standards of living of the Project Affected Persons (PAPs) to the levels before resettlement, or at least to restore them. 19. Land acquisition for the NH2 project will have adverse effect on 39,165 persons in two provinces. Total land acquisition is 32,874 mu and a total of 397,676 m2 of private housing will be demolished affecting 1,828 units. In Guangdong 14 enterprises will be removed due to the project, affecting the jobs of 354 employees. The enterprises which will be reconstructed will continue employing their workers and the remaining workers will be placed in comparable employment by the local resettlement organizations. These figures were obtained through censuses of affected population and assets along the alignment, conducted by the highway design institutes responsible for the project. Lost assets, including housing will be compensated at replacement value. Resettlement sites for housing will be provided in the same village and in a location close to the original housing sites. If arable land is available, PAPs losing land will be compensated with equal size plots. If this is not feasible, they will be transferred to non- agricultural activities such as enterprise employment, based on their skills, and receive rehabilitation benefits during the transition. The cost estimate of land acquisition and resettlement is 525,849,695 RMBY. During implementation, resettlement will be monitored by independent monitoring organizations through site visits. Standards of living of the affected population will be monitored through structured surveys after the completion of resettlement. The independent monitors are already appointed and have begun their work. Project Implementation 20. The Guangdong Provincial Communication Department (GPCD) and its subsidiary GPFC and the Hunan Provincial Communications Department (HPCD) and its subsidiary HPECDC would have overall responsibilities for implementation of their respective project parts. XLE, XGE and LLH would be constructed under 26 contract sections to be awarded following international competitive bidding (ICB) procedures. All contractors for these sections would be prequalified. National competitive bidding (NCB) procedures acceptable to the Bank would be used for all interconnecting roads including XZH, and for service areas, toll plazas, as well as administration and maintenance buildings along XLE and XGE. Construction supervision would be provided by two joint international/local supervision teams, independently for XLE and XGE. The project implementation arrangements as proposed by GPCD/GPFC and HPCD/HPECDC in their respective draft Project Implementation Plans (PIP) are satisfactory. The project would be implemented during the period 1997-2002. Amounts and methods of procurement and disbursements, and the disbursement schedule are -9-  shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in China are provided in Schedules C and D, respectively. The Staff Appraisal Report, No.15428-CHA dated March 27, 1996 is being distributed separately. Project Sustainability 21. China has a good record in the sustainability of its highway investments and Guangdong and Hunan Provinces are no exception to this achievement. The sustainability of the project's physical investments is dependent on the quality of the initial construction and adequate funding for future routine and periodic maintenance. The use of two independent construction supervision teams comprising international and domestic experts, combined with up- front construction supervision training and regular Bank supervision missions, will help ensure quality control. To maintain the new expressways, some of the funds collected from road users in the form of tolls will be earmarked for routine and periodic maintenance. Maintenance of other project roads would be funded by revenues from user charges (primarily road maintenance fees collected by provincial highway authorities). Institutional sustainability is also likely. GPFC/GPCD and HPCD/HPECDC are strong provincial highway organizations in China and are very much committed to further improving the capabilities of their staff through the project's technical assistance and training programs. GPCD and HPCD took the lead in designing their programs, which should ensure the transfer of skills envisioned. Risks and Actions 22. The proposed Bank loan, together with secured funding from MOC, Hunan and Guangdong would enable the completion of two critical sections of Jingzhu expressway. There would be no major risks associated with the Bank financed XLE and XGE. Risks related to construction quality, cost overruns, implementation delays, insufficient or untimely maintenance of highways, and ineffective highway safety programs were identified under the Lessons Learned. Project preparation has focused on the mitigation of risks specific to this project or risks identified in other Bank-financed highway projects. Project preparation has incorporated specific lessons from Bank projects in China and has involved MOC for assistance in technical matters and project formulation. International consultants have also been involved in the design of the expressways and road safety components and in the preparation of technical specifications. 23. Bank-wide experience also shows that there are risks of overly optimistic estimates of traffic growth and diversion to the project roads, key assumptions in estimating project benefits. The economic evaluation for this project has considered scenarios with low traffic growth, low diversion of traffic, and cost overruns. The project remains economically viable over a wide variety of scenarios and with a wide range of variations in specific costs and benefits. For example, the cost of the project must increase by 15 percent and its quantified and costed benefits must decrease by 15 - 10 -  percent, before the EIRR of XLE would decrease to 22.2 percent and of XGE to 15.0 percent. Under the same scenario, the entire Guangzhou-Changsha corridor would still achieve an EIRR of 16.4 percent. Contact Point Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 4, 1997. - 11 -