China - Fourth and Fifth Railway Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 19331-CHA IMPLEMENTATION COMPLETION REPORT CHINA FOURTH RAILWAY PROJECT (LOAN 2968-CHA) FIFTH RAILWAY PROJECT (LOAN 3406-CHA) MAY 24, 1999 Transport Sector Unit 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 Currency Name = Renminbi Currency Unit = Yuan (Y) Yuan Rate per US$1.00 1985 2.94 1991 5.32 1986 3.45 1992 5.53 1987 3.72 1993 5.76 1988 3.72 1994 8.62 1989 3.76 1995 8.35 1990 4.78 1996 8.32 1997 8.29 1998 8.28 1999 8.28 FISCAL YEAR January 1 - December 31 MEASUREMENT EQUIVALENTS Metric System British/US system 1 meter (in) = 3.281 feet (ft) 1 kilometer (km) = 0.621 mile (mi) 1 square meter (m2 10.764 square feet (ft2 1 hectare (ha) = 0.01 km = 2.47 acres (ac) = 15 mu 1 mu = 0.1647 acre = 0.0667 hectare 1 metric ton (t) = 2,208 pounds (lbs.) 1 passenger-km (p-km) = 0.621 passenger-miles 1 t-km = 0.621 ton-mile 1 converted t-km (ctk) = 1 traffic unit (1 p-km + 1 t-km) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED EIRR - Economic Internal Rate of Return FCTIC - Foreign Capital and Technical Import Center FCTIO - Foreign Capital and Technical Import Office FEPS - Final Executive Project Summary ICB - International Competitive Bidding ICR - Implementation Completion Report ITC - International Tendering Company JGF - Japanese Grant Fund MOF - Ministry of Finance MOR - Ministry of Railways OIS - Operating Information System PCR - Project Completion Report SAR - Staff Appraisal Report SPC - State Planning Commission TMIS - Transport Management Information System TMP - Telecommunications Master Plan UNDP - United Nations Development Program YIS - Yard Information System Vice President Jean-Michel Severino, EAP Country Director Yukon Huang, EACCH Sector Manager Jitendra N. Bajpai, EASTR Staff Member Udo Marggraf, EASTR CONTENTS FOR OFFICIAL USE ONLY PREFACE..................................................... i EVALUATION SUM M ARY ........................................................................................... PART I. IMPLEMENTATION ASSESSMENT A. Project Objectives ................................ .............. B. Achievement of Objectives.......................................3 C. Implementation Record and Major Factors Affecting the Project............... 14 D. Project Sustainability .........................................39 E. Bank Performance ............................................40 F. Borrower Performance ............................. ...........43 G. Assessment of Outcome.......................................44 H. Future Operations ................................................46 1. Lessons Learned................ ....................... .....47 PART II: STATISTICAL ANNEXES FOURTH RAILWAY PROJECT ..............................49 Table 1: SUMMARY OF ASSESSMENTS ...........................49 Table 2: RELATED BANK LOANS/CREDITS .......... ...................50 Table 3: PROJECT TIMETABLE ......................................51 Table 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL..........51 Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION .....................52 Table 6: KEY INDICATORS FOR PROJECT OPERATION.....................52 Table 7: STUDIES INCLUDED IN PROJECT ....................................53 Table 8A: PROJECT COSTS .............................................54 Table 8B: PROJECT FINANCING .....................................55 Table 8C: ALLOCATION OF LOAN PROCEEDS .....................55 Table 9: ECONOMIC COSTS AND BENEFITS .............................56 (Yuan million, 1997 prices) Table 10: STATUS OF LEGAL COVENANTS ................. ............56 Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS ...............57 Table 12: BANK RESOURCES: STAFF INPUTS ...............................57 Table 13: BANK RESOURCES: MISSIONS.................................58 FIFTH RAILWAY PROJECT ................................59 Table 1: SUMMARY OF ASSESSMENTS...........................59 Table 2: RELATED BANK LOANS/CREDITS ........................60 Table 3: PROJECT TIMETABLE ......................................61 Table 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL..........61 Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION ... ..................62 Table 6: KEY INDICATORS FOR PROJECT OPERATION......................62 Table 7: STUDIES INCLUDED IN PROJECT............... ...............63 Table 8A: PROJECT COSTS ...........................................64 Table 8B: PROJECT FINANCING ......................... ............65 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. -2- Table 8C: ALLOCATION OF LOAN PROCEEDS ............. .................65 Table 9: ECONOMIC COSTS AND BENEFITS ............... .................66 (Yuan million, 1997 prices) Table 10: STATUS OF LEGAL COVENANTS ........................... .....67 Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS ...............68 Table 12: BANK RESOURCES: STAFF INPUTS ............... ...............68 Table 13: BANK RESOURCES: MISSIONS.................................69 Appendix A: ICR Completion Mission's Aide-Memoire..................70 Appendix B: Borrower's Contribution to the ICR..........................71 Annex 1: Financial Evaluation of the Fourth and Fifth Railway Projects ...... .....72 Annex 2: Economic Reevaluation of the Fourth and Fifth Railway Projects ... ......79 COMBINED IMPLEMENTATION COMPLETION REPORT CHINA FOURTH RAILWAY PROJECT - (LOAN 2968-CHA) AND FIFTH RAILWAY PROJECT - (LOAN 3406-CHA) PREFACE This is the combined Implementation Completion Report (ICR) for the Fourth and Fifth Railway Projects in China. Loan 2968-CHA in the amount of US$200 million for the Fourth Railway Project was approved on June 23, 1988. This loan was closed on June 30, 1998, after being extended twice, each time for a year. Final refund was made on February 10, 1999, and US$ 2.1 million of the loan amount was canceled. A loan in the amount of US$330 million for the Fifth Railway Project (Loan 3406- CHA) was approved on September 24, 1991. This loan was closed on December 31, 1998. Final disbursement was made on April 26, 1999, and US$7.65 million of the loan amount was canceled. The ICR was prepared by Messrs./Mmes. Udo Marggraf (Task Manager), Hennie Deboeck (Financial Analyst), Richard Spero (Transport Economist, Consultant) of the Transport Sector Unit, East Asia and Pacific Region, Daniel Gibson (Resettlement Specialist, EASES) and Anil Somani (Environmental Specialist, EASES). It was reviewed by Messrs. Bajpai and Scurfield. The borrower's implementation evaluation summary for the project is included as Appendix B to the ICR. The ICR began before the project closing date, and was based on material in the project file and data provided by the Ministry of Railways (MOR). The Borrower contributed some data and comments during the preparation of the ICR.  FOURTH RAILWAY PROJECT (LOAN 2968-CHA) AND FIFTH RAILWAY PROJECT (LOAN 3406-CHA) CHINA EVALUATION SUMMARY Introduction i. China's economic development, which accelerated after the Government adopted the open-door policy in 1978, substantially increased demand for railway transport. In order to sustain this pace of economic development, the Government has endeavored since the 1980s to expand the capacity of its national railway system. In 1984, the Bank first became involved in the railway sub-sector. By January 1987, three such railway projects had become effective. All three were designed to assist the Ministry of Railways (MOR) to develop its national railway network. The Fourth and Fifth Railway Projects reflected this priority, as they were designed to help the MOR finance investments that were urgently needed to increase its transport and production capacity. Project Objectives ii. The Fourth Railway Project aimed to enhance the productivity of existing assets by raising the level of technology used in different activities within MOR, particularly in train operations, maintenance, administration, and manufacturing. The Fifth Railway Project also focused on efforts to ensure that MOR became more efficient and continued to be financially viable thorough better operations, maintenance practices, investment planning, and tariff policies. Three major objectives were to: (a) introduce recent developments in rail technology and maintenance and rehabilitation practices; (b) develop system-wide plans and planning tools for MOR's major sub-sectors; and (c) develop modern planning and analytical techniques for establishing investment priorities and tariff structure. These objectives reflected the Government's development approach and the Bank's evolving strategy for the sector. iii. The Fourth Railway Project included two major investments: (a) to increase capacity on the Yueshan-Xiangfan section of the Jiaozuo-Zicheng line in the Beijing- Guangzhou railway corridor; and (b) the modernization of three locomotive and rolling stock factories. In addition, the project was supposed to carry out a Strategic Plan Study in the areas of telecommunications and computerization in order to improve operational management and transportation capacity. Provision of technical assistance and training was included in the factory modernization and Strategic Plan Study components. - 11 - iv. The Fifth Railway Project included two system-wide components to assist MOR in introducing new technology and advanced materials for maintaining and rehabilitating tracks. The project was also intended to address the shortage of critically needed materials, components and equipment for rehabilitating locomotives and rolling stock. To this end, two capacity expansion components were designed that would allow MOR to complete the double-tracking of the 944 km Zhegan (Zhuzhou-Hangzhou) line and to expand capacity at the Xuzhou marshalling yards. An action plan was for developed to implement the Railway Traffic Costing System. This in turn led to the formulation of recommendations for tariff restructuring. In addition, the project relied heavily on five studies initiated during project preparation, focussing on track maintenance and rehabilitation, locomotive and rolling stock maintenance rehabilitation, an integrated system plan for electrification, an integrated system plan for telecommunications, and a railway investment prioritization. v. Both project-planned investments were appropriate vehicles for reaching these objectives. While the study components in both projects were somewhat complex, the other components were traditional and not too risky. Implementation Experience and Results vi. Implementation of the Fourth Railway Project proceeded somewhat slower than expected, largely due to a change in the construction schedule of the Yueshan-Xiangfan line. Further delays were encountered when the alignment of the Longmen tunnel had to be altered to avoid damage to a famous Buddhist temple. Project start-up of the Fifth Railway Project was postponed for about a year by the aftermath of the Tiananmen incidents in May/June 1989. Two components delayed the completion of the project substantially: the Zhegan line capacity expansion and one of the five planning studies that required the testing of foreign materials. The main reasons for the Zhegan line's implementation delay were design changes due to a switch to local technology for signalling and to improve the original design for telecommunications. Tests with the foreign materials as part of the Permanent Way Maintenance and Rehabilitation Study began about one year later than originally planned because the schedule was somewhat over-optimistic and not in line with the SAR and the late loan effectiveness, and were completed by October 1998. A report evaluating the test results is currently under preparation and is expected to be completed by June 1999. vii. Project costs of the Fourth Railway Project were 58 percent higher than expected, with an actual cost of US$945.6 million compared to an appraisal estimate of US$600 million. The main reasons for cost increase were: (a) the delayed start on the tunnel works on the Yueshan-Xiangfan line by two years to April 1993; (b) a change in the construction schedule of the Yueshan-Laoyang section; (c) inadequate estimates of local costs for the Yueshan-Xiangfan line component; and (d) the impact of steep inflation on the cost of materials and equipment in the early 1990s. In terms of local currency, total costs were 135 percent above appraisal estimates. The difference between dollar and Yuan costs was due to the devaluation of the Yuan over the life of the project from Yuan 3.7 per dollar to Yuan 8.3 per dollar. - Ill - viii. Project costs of the Fifth Railway Project were 61 percent higher than expected, with an actual cost of US$1,550.3 million compared to an appraisal estimate of US$1,005.7 million. The cost increase stemmed mainly from the Zhegan line component. The main reasons included: (a) design changes to improve the original design for telecommunications; (b) the impact of steep inflation on the cost of materials and equipment in the early 1990s; (c) inadequate estimates of local costs for the Zhegan line component; and (d) use of the US$43 million loan balance with procurement undertaken in 1997. In terms of local currency, total costs were 124 percent above appraisal estimates. ix. The Fourth and Fifth Railway Projects are likely to be sustained. With respect to physical sustainability, MOR's record in maintaining infrastructure, locomotives and rolling stock is good and there is no reason to believe this will change. Nevertheless, deteriorating finances are a cause for some concern. MOR has been operating at a loss since 1993 and has recently announced an unprecedented near-term program designed to improve dramatically bottom line earnings. From an economic perspective, sustainability was assessed in terms of the sensitivity of the project component's EIRR to changes in benefit and cost assumptions. All of the results were satisfactory. x. Bank performance during identification, preparation and appraisal of the Fourth Railway Project was moderately satisfactory. The Fifth Railway Project was satisfactorily identified, prepared and appraised. Both projects were consistent with the Government's objectives, which were to increase railway transport capacity so as to sustain economic development, and to enhance expertise needed to manage the railway's future development. Project performance indicators, consistent with the practice in the 1980s, were not developed with sufficient detail and specificity. xi. Overall, MOR's administrative performance was generally satisfactory. Civil works were carried out according to current MOR standards and are of good quality. Although the three locomotive and rolling stock factories participating in the Fourth Railway Project had little institutional experience with Bank projects, relatively few problems arose during project implementation of both projects. xii. The overall outcome of both projects is rated as satisfactory. The objectives for the Strategic Plan Study under the Fourth Railway Project were somewhat narrowly defined, which made it quite easy for MOR to achieve them, although the study was intended to help promote a broader-based dialogue between the Bank and MOR. The outcome of the study may also have been affected by the Bank's desire to retain it in the project even though the Beijing-Shanghai line modernization component had been postponed. The Fifth Railway Project did not technically achieve several sub-components of the Locomotive and Rolling Stock System-wide Component. The objectives for the five studies under this project were more ambitious than those in the previous railway project. This may help to explain why the objectives of the Locomotive and Rolling Stock Maintenance and Rehabilitation Study were basically not achieved. - iv - Summary and Findings, Future Operations and Lessons Learned xiii. Future operations will have to be consistent with the Chinese Government's objectives for the transport sector. A Strategy for the Transport Sector' identified two primary objectives. These were to: (i) enhance China's economic growth and increase its competitiveness in world markets; and (ii) reduce income disparities between inland and coastal provinces and rural and urban areas. Achieving these objectives will require the Government to: (i) stimulate competition; (ii) promote development of the transport network to alleviate capacity bottlenecks and provide capacity for economic growth; (iii) open up isolated areas; (iv) charge for the use of infrastructure so as to cover long-term social costs; and (v) implement institutional reform that recognizes the transport sector as a whole, rather than as an aggregation of independent modes. Reducing the sector's negative effects on the environment and improving its poor safety record should be a third sector objective. xiv. In recent years, the Bank has worked with the central and provincial governments and MOR to assess the institutional changes, pricing and regulatory measures needed to stimulate a more market-responsive transport sector, based upon concepts of integrated transport systems. The next stage, which is already underway, is to progress from concepts to specific policies and actions, and then to their implementation. xv. The problems identified in this ICR and new approaches taken by the Bank's project team with respect to policy initiatives and technology are relevant to the preparation and execution of future Bank-financed railway projects in China. The main lessons learned from these projects are as follows: a) Bank management's re-assessment of the past lending strategies appears to have had a fundamental impact on MOR's and the Bank's approach in the Fifth Railway Project. The ICRs for the Sixth and Seventh Railway Projects should evaluate whether the Fifth Railway Project, which was regarded as a transitional operation, really paved the way for more meaningful cooperation with MOR. b) Extensive studies proved to be a challenge to MOR. The Planning Studies under the Fifth Railway Project were a somewhat ambitious attempt to look at future investment requirements in a rational, system-wide context. Although the range of achievements varied substantially, the ICRs for subsequent projects should evaluate whether they really enhanced the MOR's contribution to the transport sector in China. c) The Fourth Railway Project had three studies and two physical components with six different locations. By contrast, the Fifth Railway Project consisted of four physical components with nine different China, Forward with One Spirit: A Strategy for the Transport Sector, April 23, 1998, Report No. 15959-CHA locations and eight studies. Both projects required a multitude of professional skills for appraisal and supervision, which resulted in expensive project appraisal and supervision. This may explain why the Bank's involvement was not always adequate during implementation. Therefore, in order for future projects to be more efficient, manageable and cost-effective, they should consist of only a few components that are specifically targeted to achieve the transport sector's objectives. d) MOR has historically been very reluctant to involve the Bank in broader strategic planning, ostensibly because it has not wanted to spend Bank loans on technical assistance. Some of the studies' objectives and targets in the Fifth Railway Project were somewhat ambitious and one of the five Planning Studies basically did not achieve its objectives. It is, therefore, very important to receive MOR's full-hearted support and commitment during appraisal of future projects. e) Future appraisals should avoid such arbitrary changes as were experienced during the preparation of the Fourth Railway Project. In addition, realistic procurement plans, adequate estimates of local costs and implementation schedules providing for inevitable delays are essential for successful project implementation. (f) If the problem of MOR's inadequate progress reporting cannot be resolved, supervision of ongoing projects should focus more on collection of information in a format conducive to the production of ICRs.  COMBINED IMPLEMENTATION COMPLETION REPORT CHINA FOURTH RAILWAY PROJECT - (LOAN 2968-CHA) AND FIFTH RAILWAY PROJECT - (LOAN 3406-CHA) PART I. IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES 1. As with most other centrally planned economies, China's economy is transport-intensive. Railways, highways, inland water transport and coastal shipping are concentrated along the eastern seaboard and serve high-intensity freight traffic. Due to rapid economic growth-- particularly after the Government adopted an open-door policy in 1978--demand for transport outpaced the supply. This network has always been relatively small in proportion to China's great land mass and enormous population. From 1952-1983, the sheer length of the railway system more than doubled while that of the highway system increased nine-fold. Growth in rail freight averaged 9 percent a year over this period, but slowed to around 4.5 percent a year after 1978, as traffic saturated existing lines and rolling stock capacity. Nevertheless, by 1983, the rail system could not meet transport demand. Aware of these shortcomings, the Government focused on developing the transport sector, and railways in particular, which played a critical economic role in China by transporting coal, the main energy source, throughout the country. 2. The Bank first became involved in the railway sub-sector in 1984. By June 1988, three projects had been designed to assist the Government to develop the railway network and to enhance expertise needed to manage the railways' future development. Another project, which focused on expanding the capacity of "local railways", was also already approved when the Fifth Railway Project was appraised. 3. The Fourth Railway Project, approved in May 1989, had three objectives that reflected the Government's railways' development strategy during the Seventh Five-year Plan (1986- 1990). These were to: (i) increase the capacity of key routes and terminals; (ii) enhance the productivity of existing assets by raising the level of technology within the Ministry of Railways (MOR), e.g. in train operations, maintenance, administration, and manufacturing; and (iii) expand rolling stock manufacturing facilities. 4. The project's four main components were to develop: (a) the double-tracking and partial electrification of the Yueshan-Xiangfan section of the Jiaozuo-Zicheng (Jiaozhi) line in the Beijing-Guangzhou railway corridor; (b) the expansion and modernization of three locomotive and rolling stock factories; -2- (c) a Strategic Plan Study of telecommunications and computerization, to be pilot- tested on the Beijing-Shanghai railway corridor in order to improve operational management and transoortation capacity; and (d) training and technical assistance needed for the factory modernization component and the Strategic Plan Study. 5. All four components, but especially the Strategic Plan Study, were chosen to provide a bridge to possible sector lending. The priority given in the Strategic Plan Study towards efficiency and modernization marked a significant departure from facility-oriented components in previous railway loans to China. This component was designed to promote a broader-based dialogue between the Bank and MOR. 6. The Fifth Railway Project, approved in September 1991, had four objectives: (i) to introduce recent developments in rail technology and maintenance and rehabilitation practices; (ii) to develop system-wide plans and planning tools for MOR's major sub-sectors; (iii) to develop modem planning and analytical techniques for establishing investment priorities and tariff structure; and (iv) to add capacity where such additions were urgently needed and justified. 7. The project included: (a) two system-wide components: (i) the introduction of recent technology and advanced materials for maintaining and rehabilitating tracks; and (ii) eliminating the shortage of critically needed materials, components and equipment for rehabilitating locomotives and rolling stock; (b) two capacity expansion components: (i) double-tracking of the 944 km Zhegan (Zhuzhou-Hangzhou) line; and (ii) to expand capacity at the Xuzhou marshalling yards; and (c) an action plan to develop and implement the Railway Traffic Costing System, including recommendations for tariff restructuring. In addition, the project relied heavily on five studies initiated during project preparation, focussing on: (i) track maintenance and rehabilitation; (ii) locomotive and rolling stock maintenance rehabilitation; (iii) an integrated system plan for electrification; (iv) an integrated system plan for telecommunications; and (v) setting priorities for future railway investments. 8. Project objectives were realistic, clearly articulated and consistent with the Government's goals and the Bank's assistance strategy to develop the railway sub-sector. Planned investments to achieve these objectives were also appropriate. While the study components in both projects -3- were somewhat complex, the other components were traditional and not too risky. As has been the case with previous projects, implementation timing was optimistic. B. ACHIEVEMENT OF OBJECTIVES 9. The Fourth and Fifth Railway Project's objectives were substantially achieved. The railway infrastructure network was improved and expanded, resulting in increased freight and passenger traffic. More specifically, progress towards achieving Fourth Railway project's objectives were as follows: Fourth Railway Project 10. Increase the capacity of key routes and terminals: The project achieved this objective by double-line tracking and partial electrification of the Yueshan-Xiangfan Line. The aim was to substantially enhance the capacity of the railway's highest density routes and thereby increase coal transportation south from Shanxi to the Han River at Xiangfan or to the Yangtze River at Wuhan. The project resulted in double tracking 492 km of a single-track line and electrifying 113 km of the northern section from Yueshan to Luoyang.' Freight traffic increased from 29.3 million tons2 in 1992 to 64.8 million tons in 1998. By 2005, traffic is expected to reach a maximum of 85.3 million tons. Passenger trips rose from 4.9 million passengers in 1992 to 10.9 million in 1998, and is expected to reach its highest level in 2005 with 17 million passengers. By these indicators the project has successfully met its first objective. 11. Enhance the productivity of existing technological assets: The project modernized both the rail system's telecommunications network and the system's management of operational information. A Strategic Plan Study was designed to develop telecommunications and computerization to be tested on the Beijing-Shanghai railway corridor. The operating information management part of the study analyzed a proposed Operating Information System (OIS) and developed a Transportation Capacity Computer Modeling system. Overall, these project objectives have been achieved with one exception (para. 15 (a) (i)). 12. Telecommunications. The objective of the telecommunications study was to update MOR's current telecommunications system based on such new technological developments such as digitalization and fiber optics transmission. Specifically, the data transmission alternatives were to be analyzed and solutions proposed. The study was successfully completed by the end of 1993, with the exception of one of the seven contracted tasks: * Between 1991 and 1993, the study laid the technical foundation to set up a modem package-switching network. This covered the full cycle from design to bidding, construction and cut-over. In 1994, all hardware for the 800 nodes under phase I of the The above kilometer lengths were planned; the actuals are 490.8 km of double-tracking and 123.1 km of electrification. 2 The SAR referred to traffic of 15.9 million tons of freight between Jiyuan and Luoyang, and 25.4 million tons between Luoyang and Baofeng and six daily pairs of passenger trains in 1985 (para. 3.5). -4- X.25 project was installed, and ready to be used for TMIS. Phase II is now underway, and is designed to further enhance the system's capacity. * Staff training overseas and in China was so successful that those trained are now the backbone staff for the expansion and application of TMIS. * The system master plan for telecommunications development elaborated through this project began to be implemented in 1995. 13. Operating Information System (OIS). The objective of the data processing strategic plan was to develop a computer-based operating information system for MOR. The system uses a real-time, integrated data base that can be used by MOR operating management at all levels to monitor and execute transportation and other operating plans--including rolling stock maintenance activities. With approval by MOR of the recommendations and the overall OIS design (software acquisition), the objective for this component was achieved in August 1993. 14. Transportation Capacity Computer Modeling. Another objective of the operating information management study was to demonstrate the usefulness of computer models to evaluate the relative benefits and costs of alternative operating investments and practices. To this end, powerful computer models were introduced which permitted MOR study teams to evaluate operating practices on the Beijing-Shanghai railway corridor. The Government hoped to increase the capacity of this line as much as possible over the next five years. At negotiations, an agreement was reached on the action plan to evaluate improvement measures on the Beijing- Shanghai railway corridor. 15. In 1991, the MOR acquired five computer software programs called "Program of the Line Transportation Capacity Analysis Models." Three of the programs were successfully modified to suit Chinese circumstances. On the other hand, two programs proved to be of very limited value because they were written in APL/2, a software language rarely used in China. Nevertheless, the objective of demonstrating the usefulness of computer models to help evaluate the relative benefits and costs of alternative operating investments and practices was achieved. 16. Expand rolling stock manufacturing facilities: Accordingly, the project focused on the expansion and modernization of three locomotive and rolling stock factories. High-precision machine tools were introduced that reduced or eliminated quality-control problems in the new locomotives, coaches and freight wagons. This step alone significantly reduced fuel consumption and maintenance costs for new locomotives and other rolling stock. 17. The three factories assisted through the project have achieved the following: a) The February 7 Locomotive Works (F7LW) has increased the production of locomotives as well as improved its quality and capability to develop new or improved products. It was expected to achieve an annual production of 30 sets of diesel locomotives model Beijing and 70 sets of shunting locomotives model Dongfeng 7 (DF 7) in 1990. All Bank-funded machine tools are performing to their rated capacities. The workshop authorities have set up an expert group of software and electronic specialists who can provide a basic level of maintenance -5- for the new computerized controlled machines. In this instance, project objectives have been achieved, albeit 5 years later than planned. b) The Sifang Locomotive and Rolling Stock Works (SLRSW) had the following objectives: (i) to enable SLRSW to produce 800 coaches and overhaul 100 annually by 1992, (ii) to increase locomotive production to 150 units annually by 1994, and (iii) to achieve quality improvements leading to lower fleet maintenance and operating costs. (i) Coaches: While the coach factory modernization program was underway, MOR introduced a more modern coach type YW25, for which the plant capacity was now 600 coaches. As the design of the new coach was more complex than the YW22 coach, conversion factors were used to calculate the achievement of targets. For 1995, the result was 864 sets based on 1.66 as average of the revised factors. In addition, SLRSW overhauled 120 coaches in 1993 and 117 coaches in 1994. Since both average conversion factors are in line the assessment of the Bank mission, and the production and overhaul targets set at appraisal were met,3 the objective for coaches has been achieved. (ii) Locomotive Production: The objective of increasing locomotive production to 150 units annually by 1994 was in its literal sense not achieved. In April 1988, MOR unilaterally lowered the production target to 100 units, citing actual transportation needs. MOR's decision went undetected by the Bank for a period of about six years. Plant capacity, however, was nevertheless assessed by a supervision mission in 1995 as being far in excess of the capacity of 100 locomotives per year now approved by MOR. Indeed, in 1995 the Sifang Works manufactured 122 locomotives. (iii) Product quality improvements: The production quality of coaches and locomotives has improved substantially due to plant modernization and the use of such new materials as corrosion proof steel and fiberglass reinforced plastic. Maintenance costs per locomotive were brought down from Yuan 500,000 to Yuan 80,000; and "warranty" repairs fell to insignificant numbers. To the extent that plant capacity was assessed as far in excess of the production capacity this objective has been substantially achieved. c) Qigihar Rolling Stock Works (QRSW). Production targets at this factory included: (i) increasing the manufacturing capacity to 9000 freight wagons per year; (ii) improving freight wagon overhaul periodicity from the present five years to an interval of 7 to 10 years with special emphasis on anti-corrosion measures; and (iii) providing skill upgrading, especially to operate the new equipment being procured as a part of this project component. The project was also to address questions of process engineering and pollution control. For reason of greater efficiency MOR re-directed coach overhauls to other factories from 1995 onwards. -6- (i) Manufacturing capacity: The objective of increasing freight wagon production output to 9,000 units annually was not achieved, because in 1995 MOR used a market forecast to set an annual production guideline of only 8,000 wagons for QRSW. Production figures show a maximum of 8,562 freight wagons were produced in 1994, followed by 7,777 wagons in 1995, 8,192 wagons in 1996 and 8,190 wagons in 1997. (ii) Freight wagon overhaul periodicity: The objective of increasing this from five years to an interval of 7 -10 years with special emphasis on anti-corrosion measures was achieved. A freight wagon overhaul interval of nine years was reached in 1995. In addition to better production methods and materials, a contributing factor was MOR's policy of conducting more intensive repairs. As a result, overhaul capacity increased from 1,900 wagons in 1987 to 3,600 wagons in 1995, and has remained on the same level since 1995. (iii) Skills upgrading: Sufficient training and technical assistance was provided to achieve this objective-particularly to operate the newly purchased equipment. 18. Based on the fact that sufficient technical assistance and training was provided to upgrade skills, specially to operate the new equipment procured, it is judged that the sub-components objectives have also been substantially achieved. 19. Technical Assistance and Training. A program to educate staff in new technology and management was included in the Strategic Plan Study and the Factory Modernization components. Factory Modernization was also supported through the financing of visits by Chinese technicians to similar plants abroad, and by visits of foreign experts to factories in China. Retraining of staff whose skills became redundant after modernization was financed domestically. 20. The technical assistance and training objectives were--with one exception--achieved. The MOR believed that the 12 person-months of international technical assistance contracted for the Operating Information System was sufficient. Evidently, the need for foreign assistance in this area was over-estimated at appraisal. A five-member team was trained to work on Transportation Capacity Computer Modeling. Of those, only the single staff member from CARS is still working on this type of computer modeling. Therefore, this objective has been only partially achieved. Fifth Railway Project 21. Introduction of new rail technology, maintenance and rehabilitation practices to enhance efficiency and capacity: To achieve this objective, MOR formulated with Bank assistance a system-wide component for regular investments in track maintenance machines. Enhancing MOR's long-range track upgrading program would permit an increase in the existing maximum speed of passenger trains from 120 km/h to 140 km/h. The maximum speed for freight trains would rise from 70 km/h to 80 km/h, and the axle load for freight wagons would increase from 21 tons to 23 tons and eventually to 25 tons. The Bank's financial contribution focused on the purchase of on-track machinery to install and maintain the rails, sleepers, fastenings and -7- imported switch components to observe their performance and evaluate the higher quality materials and mechanized practices. Hard rails were installed on selected high-density curved line sections totaling 500 km of track including installation of imported concrete sleepers and fastenings on a 5-km test section. 22. Following a study's recommendations (para. 44), MOR organized track maintenance machine groups. Each of these maintenance groups came equipped with 2 tamping machines, I ballast regulator, and 1 track stabilizer. Similarly, track rehabilitation teams were equipped with 2 ballast cleaners, 2 one-tie tamping machines, I two-tie tamping machine, lballast regulator, and I track stabilizer. The purchase of the track machines enabled MOR to set up 3 maintenance and 3 rehabilitation groups of a current total of 37 maintenance and 13 rehabilitation personnel. Some 487 km of hard rails were installed in 37 small curved track sections on heavy traffic lines. Subsequently, MOR's long-range track rehabilitation and upgrading program showed remarkable progress. Therefore, the component's objective under this project has been fully achieved. 23. Improvement in the Rehabilitation of Locomotives and Rolling Stock: This involved three components: i) the alleviation of shortages in wheels for passenger coaches and freight wagons; ii) a systematic diagnosis of maintenance problems; and iii) the preparation of action plans for their long-term solutions (paras. 37 to 39). 24. Specific objectives included: (1) the provision of 4000 wheel sets which would restore to service at least 200 passenger coaches and 1500 freight wagons awaiting wheel replacements; (2) to achieve an availability rate of 82 percent for the imported diesel and electric locomotives; and (3) to increase the overhaul capacity of the Shenyang Loco Works from 72 DFHI/2/5 diesel locomotives per year to 150 locomotives annually; 4) to increase the production capacity of the Shenyang Spare Part Works to manufacture 20,000 air brake sets of a new design per year; 5) to increase the overhaul capacity of the Lanzhou Loco Works from 72 diesel locomotives per year to 150 locomotives annually; 6) and to increase the production capacity of the Puzhen Works, Roller Bearing Section to manufacture 35,000 sets of roller bearings of a new integral cage design. Taken together, all of these actions were designed to bring a qualitative change in the manufacturing processes. 25. (1) Wheel sub-component. Orders had been placed for forged wheels (10,000 t, delivered as 26,179 pieces) and cast wheels (8,000 t and 10,000 t, delivered as 47,264 pieces in total) in November 1993 and March 1994 respectively, and delivered ten to fourteen months later. The wheel inputs achieved the objectives stated in para. 24 by using the cast wheels for new gondola wagons type 63A with 60 tons capacity, which were then operated as coal wagons on the Datong-Qinhuangdao line. The forged wheels were used in coaches of a new design, the improved type 25 G. 26. (2) Locomotive sub-component. About US$8 million of the US$10 million earmarked for critical components were used for maintenance of diesels locomotives and the balance for electric locomotives. The last deliveries were made in November 1994. The objective to reach an 82 percent availability of imported diesel and electric locomotives (para. 24, item 2) was achieved in 1995 and the years thereafter. -8- 27. Workshops and depots sub-component. (3) Shenyang Locomotive Works. The objective to increase the overhaul capacity from 72 DFH1/2/5 diesel locomotives per year to 150 locomotives annually (para. 24, item 3) was, in its literal sense, not achieved. During project implementation (at the end of 1992), MOR revised the annual periodic overhaul targets from the project target of 150 locomotives down to 60 locomotives of DFH3 type. While acknowledging that the SAR does state the higher capacity, MOR justified the downward revision by citing a change in the nature of the workload. Simply put, the newer locomotives were able to run for longer intervals between maintenance overhauls. The explanation is reasonable. Installed capacity is actually higher than the revised periodic overhaul target because of the additional inputs provided by the project. Quality of output has been increased substantially. Overhaul intervals were extended from 510,000 to 630,000 km depending on the type of locomotive to 700,000 to 900,000 km, thus reducing maintenance costs. In addition, the locomotives' repair time in workshops was shortened. (4) Shenyang Spare Part Works. Implementation was scheduled for completion by the end of 1994. Delay in procurement and a long testing and acceptance phase for sophisticated machinery sets prevented the sub-component to become fully operational before May 1996. Once on stream, however, this spare-parts factory produced 22,000 air brake sets of the new design, thus over-achieving the project objective of 20,000 sets stated in para. 24, item 4. Actual production in 1997 was 20,026 sets. In addition, quality was improved to such a level, that the works passed the ISO 9001 standard in September 1997, which is higher than the standard set by MOR. (5) Lanzhou Locomotive Works. The objective here was to increase the overhaul capacity from 72 diesel locomotives per year to 150 locomotives annually (para. 24, item 5). This goal was in its literal sense not achieved. As for the Shenyang Locomotive Works, MOR revised the annual periodic overhaul targets downwards at the end of 1992. After delivery and acceptance of the machines and equipment in November 1994, 50 locomotives should have been overhauled in 1994 according to phase I of the plan, and 150 Locomotives per year beginning in 1996 in a phase II. During 1994, 60 DF4 locomotives were actually overhauled, 84 in 1995, 102 in 1996, 130 in 1997, and 127 locomotives in 1998. Thus, the works' capacity has been increased substantially by the Bank funded machines and equipment.. (6) Puzhen Works. All Bank funded machines were delivered by the end of 1994 and became operational by the end of February 1995. Implementation was on schedule and the plant was to produce 24,000 sets of roller bearings of new design by mid 1995 and 35,000 sets in 1996. The target for 1996 (para. 24, item 6) was already achieved in 1995 with the production of 36,018 sets. In 1998, 42,188 sets were manufactured. 28. Expansion of the Zhegan Line Capacity: One of the project's aims was to add capacity where such additions were urgently needed and justified. In the light of the rapid growth in traffic, the Government's investment in railways had been inadequate. Much investment had been in large projects such as construction of new lines, conversion of motive power from steam to diesel and electric, expansion of large marshalling yards, and new facilities for manufacturing -9- and equipment maintenance. While these programs helped MOR carry more traffic, achievement of the rapid rate of traffic growth was possible only because of more intense utilization of existing infrastructure. Consequently, much of the existing infrastructure was used at its capacity. Capacity of the Zhegan line had gradually been expanded, mainly by double-tracking several sections and by expanding facilities at stations to handle longer trains. The double- tracking started during the Seventh Five-year Plan and covered the sections with the most serious bottlenecks. Bank assistance to MOR to complete double-tracking of the 944-km Zhegan line was instrumental in achieving the objective of capacity expansion. Work involved the doubling of the remaining 594km, including the replacement of a 2.6-km single-track bridge over the Gan River with a double-track bridge at a new location to provide better clearance for ships. Operations on the new sections began in December 1995, but subsequent installations of operational and telecommunications equipment are expected to be completed by March 1999 (para. 95). The results are dramatic: freight traffic increased from 64.4 million tons4 in 1991, to 136.4 million tons in 1998. By 2005, traffic is expected to reach a maximum of 145.2 million tons. Passenger trips rose from 51.2 million passengers in 1991 to 71.5 million in 1998, and is expected to reach its highest level in 2005 with 76.7 million passengers. 29. Expansion of the Xuzhou Terminal. Located at the junction of major trunk lines in Jiangsu province, this terminal was already in the midst of a multistage expansion program dating back to 1986. To assist MOR in its capacity expansion program, the Bank's contribution focused on high technology. Specifically, this took the form of a computer-aided dispatching system, including a Yard Information System (YIS). Also included in this package was automation equipment for the marshalling yard, modernization of operational management including appropriate communications equipment, and the pilot testing of high-speed switches for marshalling yards. The component was successfully completed with the hand-over of the operating system for the whole terminal and the adjacent northern (98km) and the southern (56 km') line sections on December 10, 1998. The systems are functioning well thus achieving the objective of expanding the capacity of the terminal through improved operations. 30. Planning Studies. In order to help MOR to deal better with system-wide issues that affected the quantity and quality of its services, five studies were scheduled to be carried out by teams composed of MOR staff supported by external specialists. The achievement of their objectives varied substantially as explained below. 31. Permanent Way Maintenance and Rehabilitation Study. The objective of the study was to undertake a comprehensive review of track rehabilitation and maintenance standards. Also studied were methods to help MOR develop a technically and economically optimal program. A research program involved the following four principal tasks: (a) general investigation and analysis of track rehabilitation and maintenance standards and procedures at home and abroad; (b) dynamic measures and tests, both on the test track and in the field; (c) tests to be conducted using the Chinese Track Dynamic Test Laboratory; and (d) comprehensive high-volume durability tests. 4 The SAR's reference (para. 3.13) to a traffic of up to 30 million tons of freight and 13 to 22 daily pairs of passenger trains on different sections of the line in presumably 1991 could not be substantiated for the economic evaluation. -10- 32. With the submission of the study report to the Bank in April 1992 the objective of task (a) was achieved. The Bank judged the report as well done and very detailed, and supported its action plan to achieve five objectives critical for MOR. These included: (i) expedite track rehabilitation and augment structural strength; (ii) complete a "soft research project"; (iii) install heavy on-track machines; (iv) undertake a research program; and (v) set up a Permanent Way Equipment Center at MOR. The research program was to include two test sections on which different track component designs and maintenance practices and management standards were to be tested. Foreign consultants' experience, however, was not reflected in the study report. A visit abroad in 1998 to study maintenance practices under conditions of heavy axle load combined with heavy traffic and freight train speeds of 80 km/h and passenger train speeds of 160 km/h rectified the earlier deficiency. With this, the study objective was fully achieved, albeit much later than planned. 33. Tasks (para. 39, (b) and (c)) were to test the wear of foreign and local materials such as head hardened rails and 60 kg/m rails under 21 ton and 25 ton axle loads in the field and the Chinese Track Dynamic Test Laboratory. Fatigue tests were applied to imported switch components, and track sections under traffic were measured for changes of gauge, profile, alignment, cross-level and twist. 34. Comprehensive high-volume durability tests dealing with the reactions between rolling stock and track, task (d) of the study, were also combined with "tests in Chinese Track Dynamic Laboratory" in September 1995. In order to improve the depth of research, "computer simulation analysis" was changed from "two-dimensional" to "three-dimensional" testing thereby delaying completion of the activities. 35. The study did not establish target dates for the numerous recommendations to be made. During project supervision, however, they were provided upon the Bank's request. Most of the test due dates were in 1998. A report evaluating the test results and presenting recommendations is under preparation and expected to be completed by June 1999. It is, therefore, not yet clear whether the test objectives for tasks (b), (c) and (d) have been achieved. 36. One of the most important outcomes of the study was the recommendation to establish track maintenance machine groups in eight of the twelve (at that time) railway administrations covering 30,000 km of main line track with 30 million tons of traffic per year. Since 1992, however, traffic grew to such an extent that all administrations now have line exceeding the 30 million per year mark adding up to 45,000 km by the year 2000. Therefore, MOR found it necessary to provide each administration with at least one set of machines. Because of the creation of the Nanchang and Kunming administrations, depots with some equipment were installed in Nanchang at the end of 1997, and in Kunming in 1998. The rehabilitation machine groups were created in six regional administrations. By the end of 1998, 37 track maintenance and 13 track rehabilitation groups were established. 37. Locomotive and Rolling Stock Maintenance and Rehabilitation Study. The objective of the study was to prepare action plans to optimize the maintenance, reliability, availability and utilization of diesel locomotives and rolling stock. Specifically, the objectives were to enable MOR to: - 11 - a) reduce the total amount of time required for repairs, including periodic and routine repairs (Part I); b) improve its overall maintenance system, regulations, planning, facilities, methods and procedures; apply the most economic methods so as to increase repair efficiency and quality (Part II); and c) provide a basis for future levels of expenditures required for maintenance and rehabilitation of locomotives and rolling stock assets (for years 1991-1995 in detail and indicated levels for 1995-2000). 38. The scope of work was divided into ten short-term studies and seven long-term studies. In view of the diversity in stock and severity of maintenance problems, MOR decided to concentrate first on studies related to diesel locomotives. Attention thereafter was to focus on coaches and wagons. 39. The study report, which was delivered on time in April 1992, constituted the final report for the ten short-term studies. It left much to be desired and was, therefore revised in October 1992. The technical content needed to be improved and the report lacked a specific action plan. Following Bank advice, the revised report focused on the DF-4 locomotive only, but MOR was also supposed to indicate which type of locomotive or rolling stock would be next in line after the DF-4 locomotive program. After completion of the Short Term Plan, MOR dismissed the study team in December 1993. Subsequently, nobody was delegated to implement the action plan for the DF-4 locomotives. The Long Term Plan was never developed. Apparently, its draft action plan faced internal difficulties. During the ICR mission, MOR claimed that the study's range was too ambitious, covering the whole railway network, substantial reforms as well as changes of maintenance practices and workshop layouts. The study's objectives were basically not achieved. 40. System Electrification Study. The objective5 of the study was to prepare plans for the electrification of railway lines for the 8th Five Year Plan. The final selection of candidate lines for electrification was to be determined on the basis of economic priorities and optimal timing of investments. 41. The specific objectives of the study were to: a) provide a basis for possible future lending operations involving the World Bank and other financing sources; b) identify the items required for electrification that require foreign exchange either because they are only available from abroad or because local supplies are inadequate; and c) address technical issues related to design, operation and maintenance of electrification projects. SAR Fifth Railway Project, para. 3.21. - 12 - 42. The study report was very detailed and satisfactory to the Bank. Acceptable methodology and technical design assumptions were used for each of the ten lines targeted for electrification. EIRRs for each of the lines provided a suitable ranking for future MOR activities. Annual cash flows properly reflected: (a) the year-to-year timing of initial investments in electrification infrastructure and electric locomotives; (b) the year-to-year timing of the initial savings in investment in diesel locomotives and rolling stock at the beginning of the assumed 25 year life of the project; (c) the annual net operating cost savings up to full capacity utilization; and (d) the incremental effects of extending an existing electrification to adjacent lines. With this study report the specific objectives were fully achieved. 43. System Telecommunication Study. MOR intended to install a telecommunications network to meet data communications needs for four principal users: a Transport Management Information System; electronic mail; off-line management information system; and a passenger seat reservation system. Under the Fourth Railway Project, a package-switching network for MOR's "backbone" telecommunications network was studied. The System Telecommunication Study was a continuation of MOR's efforts to modernize its telecommunications infrastructure. 44. The objective of the study was to prepare a long-range plan for modernization and expanding MOR's telecommunications network including facilities for voice, data, radio, facsimile, and teleconferencing. Users of the system would include not only railway personnel, but also individuals associated with such ancillary activities as factories, universities and other schools, hospitals, various support activities, and MOR staff and families (particularly in isolated locations not served by public telecommunications services). 45. The specific objectives of the study were to: a) provide a basis for possible future lending operations involving the World Bank and other financing sources; b) identify the items required for telecommunication that require foreign exchange either because they are only available from abroad or because local supplies are inadequate; and c) address technical issues related to design, operation and maintenance of telecommunication projects. 46. With the submission of a long term technical plan (Report A) and a short and medium term implementation plan (Report B) the objectives of the study were fully achieved. The Bank review of these reports acknowledged that a major task had been completed and concluded that the study Report B was very useful for the proposed Sixth Railway Project. It contained a very specific program, a detailed schedule and cost estimates for investments in the years 1993-1997. These investments included upgrading the transmission, telephone exchange, data communication, video conference networks, and mobile communication facilities. One of the main study objectives - to assist in the preparation of the next project - was achieved. But both reports needed further improvement to achieve the second objective. MOR also evidently needed further assistance in developing a long term strategy in telecommunications by defining the short and medium term plan (Report B) and the long term technical plan (Report A). The Bank, - 13 - therefore, recommended that both reports be treated as MOR's Telecommunications Master Plan (TMP). 47. Railway Investment Study (RIS). The primary objective was to develop and implement a computer-based analysis system, within which the following specific objectives were identified: a) preparation of economic evaluations of critical investment alternatives for expanding railway capacity; b) identification of expenditures which might expand capacity of 8th Five-year Plan and more broadly of the 9t" and later Five-year Plans; c) comparison of capital investment alternatives, particularly for additions to capacity; d) improvement of traffic forecast accuracy; e) estimates of quantitative and credible economic benefits for each type of investment alternative; and f) identification of specific changes in operating practices with potential for operating cost savings and energy conservation. 48. The RIS achieved its objectives by developing a decision support system of traffic forecasting, performance, network optimization, benefit/cost, and geographic information system models. The February, 1993 Gray Cover Report, China 's Railway Strategy (Report No. 10592- CHA) summarized the achievement of all six of RIS's original objectives. The first and third objectives-evaluation of critical investment alternatives, and comparison of capital investment alternatives-were closely linked. As a result, it became clear that ii: made good economic sense to shift some investment in the original MOR investment program away from new line construction and towards double-tracking, electrification, and new locomotives and wagons. Electrification and double-tracking have lower unit costs of capacity expansion, while increasing rolling stock would make use of underutilized existing lines. 49. The second and fifth objectives-identification and justification of capacity expansion expenditures, and estimation of economic benefits-were much more targeted. The RIS also helped to identify ways of minimizing costs (investment costs + operating costs + costs of unsatisfied demand) across a wide range of projects. Two optimal sets of projects were designed, one for a low 6 percent GNP growth forecast, and one for a high 8.9 percent forecast. Economic benefit/cost ratios were calculated for 16 individual projects within the optimal sets. The report found that "the RIS methodology may help MOR design a railway network that offers 23 or 27 percent more traffic carrying capacity"6 for the same level of budget. About 10 percent of the 23 to 27 percent throughput gain would be due to optimization of the scale, location, and timing of investments. Another 10 percent of the throughput gain could be attributed to improved train routing. The RIS "traffic assignment" methodology provided a powerful tool to coordinate 6 China 's Railway Strategy (Report No. 10592-CHA), page 23. - 14 - simultaneously among multiple routing options for tens of thousands of origin-destination pairs. Needless to say, optimal traffic assignment was impossible without computerization. 50. The fourth objective-improved traffic forecasting-was achieved by developing a traffic forecasting module that predicted inter-zonal and intra-zonal freight traffic for coal and non-coal freight. The systematic nature of the methods introduced by the RIS was a significant improvement over past methods used by MOR. With this, the objectives of what later was to be called Phase I were achieved. 51. Technical Assistance and Training. The project did not provide for any specific technical assistance and training except for the YIS sub-component of the Xuzhou terminal. During the period of project identification, US$200,000 was allocated for consultant services and training. The five planning studies (para. 38) were taken out of the project after negotiations because they are now financed from funds in the ongoing Second Railway Project and Japanese Grant Facility Funds (para. 87). C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT Implementation Schedule - Fourth Railway Project 52. The Board approved this project on March 15, 1988, and the loan became effective on March 27, 1989. 53. From the start, implementation proceeded with impressive speed due to advanced preparation of procurement documents at Board presentation. This raised expectations that the project could be completed by the target date of December 1996. By mid 1995, commitments against the loan total of US$200 million had risen to US$197 million. The remainder was to be used for two crankshaft grinding machines procured together under the Fourth and the Fifth Railway Projects. A substantial delay in delivering the machines required two extensions of the Loan Closing Date. 54. The project was finally completed with the delivery and acceptance of the delayed crankshaft grinders in March 1998, resulting in an overall project completion delay of two and a quarter years. The planned project implementation time-a specific implementation schedule was not included in the SAR-was, however, much more realistic than in previous projects. 55. Yueshan-Xiangfan Line Double-Tracking and Partial Electrification. This project component involved doubling or upgrading of 490.8 km of track of which 123.1 km was to be electrified. The associated works included tunneling, new bridges, changing to heavier rails and improving track structure, communication and signaling. Work had already begun in 1987, while the project was still under appraisal. 56. The partial electrification of the line was completed in December 1995 and double- tracking by the end of January 1996. Electrical power, however, was not supplied by the Henan Provincial Power Department in time, and, therefore, trains on the electrified line section were hauled by diesel locomotive until April 4, 1997. The economic benefits of electrification were nevertheless achieved with a delay of 15 months. - 15- 57. Originally, work was to be completed by the end of 1995. The delay in project completion was caused by two main factors: a) The alignment of the Longmen tunnel to avoid damage to a famous Buddhist temple. Three alternatives were considered for the alignment of the second track, 20 km away, 5 km away and immediately adjacent to the existing line. The Ministry of Arts was afraid that a railway line too close to the temple might damage this national treasure, even though seismic research suggested otherwise. The dispute with local authorities delayed work on the tunnel by two years. b) A change of the construction schedule of the Yueshan-Laoyang section was required when delays were encountered in the newly built Houma-Yueshan line. Electrical power supply for both lines was designed as one integral system, thus permitting the use of electric locomotives only after construction completion of both lines. 58. The installation of a remote control facility for the electric sub-stations and the construction of housing for staff, 6 underpasses for cars and 8 flood culvert, and water supply for 19 stations, was completed by the end of 1997. 59. Expansion and Modernization of Three Locomotive and Rolling Stock Factories. The Bank's assistance focused on the provision of modern machine tools, instruments and training. Local investments for plant modification and expansion were initiated as far back as 1987, while Bank funding was planned for the years 1988 to 1991. The individual amounts were: * February 7 Locomotive Works - US$7 million; * Sifang Locomotive and Rolling Stock Works - US$15 million; * Qiqihar Rolling Stock Works - US$15 million. 60. Planned implementation, identifiable in the SAR only through the years of investment allocation, commenced in September 1988 and ran through: * December 1991 for the February 7 Locomotive Works; * December 1992 for the coach system and - according to information from MOR - to * December 1994 for the locomotive system for the Sifang Locomotive and Rolling Stock Works; and * December 1991 for the Qiqihar Rolling Stock Works. 61. Start-up, however, was delayed until May 1989 due to late effectiveness of the loan. Concerns over higher than estimated bid prices and technical difficulties during bid evaluation resulted in the signing of first contracts in March 1991, except for the Qiqihar Rolling Stock Works which signed contracts for the first lot of 11 items between October 15, 1990 and November 20, 1990. 62. February 7 Locomotive Works. Deliveries and installation posed no problems. With the last "acceptance" of equipment in March 1994, this sub-component was completed and fully operational. - 16 - 63. This plant's capacity was to be raised to 100 locomotives per year in 1990. In 1991, MOR established a structural adjustment of the work's production program. One line of diesel locomotives was discontinued, and the resulting capacity allocated to the production of shunting locomotives model Dongfeng 7. Target capacity was set for 100 DF 7 locomotives per year, and as a result of this project, 100 DF 7 shunting locomotives were actually produced in 1993. A supervision mission in 1995 established the work's capacity as follows: * Manufacture of DF 7 shunting locomotives - 100 for MOR and 10 for others; * Manufacture of diesel engines - 130 (110 for locomotives and 20 as spares); * Supply of spare parts for repair of 150 diesel locomotives at Luoyang; and * Supply of spare parts for diesel locomotives model Beijing and shunting locomotives model Dongfeng 7. 64. In 1995, F7LW instituted the five-day working week thus reducing working time substantially. In spite of this, an output of 109 locomotives was achieved in that year. 65. The Bank-funded modernization of the February 7 Works included a new painting factory, using painting and fog purifying equipment to improve labor conditions. In addition, a new sewage treatment station was built. 66. Sifang Locomotive and Rolling Stock Works. The modernization program for the Sifang Works focused on the production systems for locomotives and coaches. The first batch of machine sets, with one exception, arrived between July 1991 and April 1992. These machine sets were promptly commissioned in early 1993. 67. The original completion dates were revised three times: first to December 1993, than to March 31, 1994 for the new coach facility and to June 30, 1994 for the modernization of the existing locomotive works. The third targets were set for March 1995 for the coach works and December 1994 for the locomotive works. A gantry type machine center, which was part of the first batch, suffered quality problems. Sifang's engineers themselves finally overcame these problems and integrated the machine center into the production process in May 1995. Similar installation problems were encountered with two other machine sets, delaying their commissioning until August 1995. 68. Overall, the sub-component's completion was delayed by either one year - accepting MOR's account - or two years using the investment schedule of the SAR as guidance. The delay was primarily caused by the need to move the Bogie Shop to the new coach manufacturing facility, a distance of about 40 km. At the urging of the Bank, MOR's management made this a priority at the highest level, and by the end of 1993, the shop was moved. By the end of 1994, the modernization program for the locomotive shop was completed. However, as the local funds for the modernization of the forge and foundry shops has not been made available, a shortfall of various components is still being met by outside suppliers. Technically, the locomotive shop was fully operational by 1994. MOR did rationalize the locomotive and coach repair activities, which were seized in 1994 and 1995 respectively. From then onwards, Sifang Works was to confine itself only to the manufacture of new DF 5 locomotives and coaches. 69. While the Bank funded modernization of the Sifang Works took place, two water treatment stations, one each for the locomotive and coach systems, were built. Other pollution -17- control measures funded locally addressed the problem of smoke control for the plants' coal boilers. 70. Qiqihar Rolling Stock Works (QRSW) is the largest freight wagon factory in China. It manufactures a variety of freight wagons, as well as air brake equipment, wheel sets, bogie components and couplers. Many of these wagons, however, suffered from corrosion due to inferior painting and metal preservation. Bank funding was budgeted at US$15 million for the critical machines necessary to solve this problem. The machines were delivered from December 1991 to early 1994, and they were placed into operation in August 1994. A second procurement lot-instruments valued about US$784,000-were purchased between August 1992 and April 1993. 71. The sub-component's completion originally scheduled for the end of 1991 was rescheduled four times. The problem, which had been anticipated and addressed by various missions, was a delay in the commissioning of the production line for a finishing machine used to mount axles and wheels in the wheel shop. The line should have been commissioned in June 1993. Delivery of an imported axle journal grinder was delayed by 10 months because of a design change. At the same time, delivery of two domestic machines for the line was delayed by 13 months. After installation, the imported machine failed and problems arose with the integration of this machine with the domestic-made material handling system. Test running at low production capacity started September 1995, and the system was finally accepted in February 1996, although the efficiency of the axle journal grinder did not fully satisfy the production line capacity requirement. Nevertheless, production quality has improved, productivity has gone up and costs have been relatively contained. 72. Three machines were not purchased, either because the offers did not meet technical specifications or because management decided that such a technically complicated machine was not needed for the production of freight wagons. Instead, management purchased simpler domestic equipment to do the same job. 73. The Bank funded modernization of the Qiqihar Works resulted in pollution reduction due to the use of the newly purchased machine sets. Environmental improvements were achieved in terms of dust, noise and gas emission in the steel preservation lines and better paint filtering in the wagon painting shop. 74. Strategic Plan Study. This study was intended to be replicated elsewhere on other major railway lines in the country. At negotiations, agreement was reached to test and evaluate improvement measures on the Beijing-Shanghai line. The study was to be carried out by a project team (MOR staff) in collaboration with foreign experts where appropriate. 75. Telecommunications. The scope of the study included: a) a general overview of the existing network operated by MOR and, if possible, the Ministry of Post and Telecommunications, and an analysis of the constraints associated with the use of both networks; b) traffic analyses and demand projections of communication requirements for 5 and 10 years; -18- c) a review of technological trends in voice and non-voice communications; d) the formulation of overall system design principles; e) the elements of technical plans; f) a comparison of system architecture alternatives; g) the principles of procurement policy; h) a separate study to identify the optimal data transmission network for MOR by analyzing options; and i) a detailed cost comparison of alternative telecommunications approaches on the Beijing-Shanghai railway corridor. 76. MOR's goal was to establish a data communication network. Such technology was new to MOR, and in order to understand fully its potential, MOR staff needed to compare network systems from France, Germany and North America. Consequently, system evaluation took much longer than planned. More than two years later than planned at appraisal, the technical service contract was signed in January 1991 with Canadian/US consultants totaling US$499,900 financed from PHRD funds. 77. Of the seven items, six were completed by December 1993. One item was a study of the X.25 project. Its team began in early 1992 preparing technical specifications for procurement. This was followed by pilot testing of the X.25 project at the end of 1994. The latter was said to have been funded under the Second and Third Railway Projects. Part (i) of the study, the detailed cost comparison of alternative telecommunications approaches on the Beijing-Shanghai railway corridor was not carried out. According to MOR telecommunications staff, this task was included in the Beijing-Shanghai Corridor study funded by Canadian International Development Agency. 78. The last task under the Telecommunications Study was the commissioning and trial evaluation of a package-switching network. This required the availability of an IBM mainframe computer, purchased for TMIS under the Sixth Railway Project. Due to a delivery delay of two years, the consultants team returned home, and the seventh task was postponed. When the IBM machine was finally delivered, the consultants resumed work, and the task of evaluating a package-switching network was completed in September 1997. 79. Operating hformation System. This study re-examined the findings and conclusions developed by a MOR working group in 1985. Comparisons were made between the projected benefits and costs of MOR's hierarchical computer architecture with the more common approach of building an integrated data base that would support transportation decision-making at all levels. 80. In August 1988, MOR formed the OIS project team. In November and December 1989, four foreign railway companies (two European, one US and one Canadian) presented their -19- railway OIS to MOR. For three weeks in August 1990, five MOR staff visited three foreign railways to study the application of the OIS. After the selection of a suitable consultant firm, a technical team of 12 people was trained abroad for four weeks in the system architecture of Transport Reporting and Control System (TRACS), the chosen O[S. Foreign consultants began their work in China, in January 1992, proposing the system architecture of a Transport Management Information System in September 1992. A formal report jointly produced by MOR and the consultants was sent to the Bank in October 1992. The report proposed a mainframe based information system with central databases and transactions to serve railway operations at every level. At the same time, mini computers were installed in MOR's regional offices and yards to enable local data processing at that level. The use of a well proven existing information system with some modifications to meet MOR's specific requirements was regarded as feasible. The recommendations and the overall design were examined and approved by MOR in August 1993. 81. Transportation Capacity Computer Modeling. The scope of the study included: a) the analysis of existing transportation capacity of busy sections of the Beijing- Shanghai railway corridor; b) the application of an existing network simulation model to evaluate various alternatives on the Beijing-Shanghai railway corridor; c) a study and analysis of possible types of investments, and changes in signaling and operating practices at various traffic levels; and d) the development of investment cost estimates for each of the above alternatives, and formulation of least-cost solutions for increasing capacity of the Beijing- Shanghai railway corridor as much as possible. 82. In 1991, MOR acquired a software set, "Program of the Line Transportation Capacity Analysis Models," which contains five software programs: a) The Personal Computer Train Performance Calculation (PCTPC) is for the simulation of train performance with different traction weight under different running conditions, calculation of running time, evaluation of train traction and running characteristics. b) The Line Capacity Train Schedule System (LCTSS) is a management software for train time-tables and train-working diagrams. It provides the environment for the management of the train-working diagram. c) The Capacity Model (C-Model) simulates train running. It evaluates the line passing capacity, technical line conditions, train organization modes and various capacity expansion options. - 20 - d) The Princeton Transport Network Model (PTNM) is an analytic network tool for diagram analysis. It is used to review traffic density and to select the optimized routes. e) The Automatic Blocking Model-Geography (ABM-GE) compiles and optimizes train formations. 83. After partial modification of the first three programs by the MOR team to suit Chinese circumstances and to enhance the analysis of scientific research, the applicability of the model was improved. On the other hand, the applicability of the two last programs proved to be very limited because they were written in APL/2 language which is rarely used in China, and, therefore could not be modified. Up to now, they have not been used. 84. In early 1995, the programs were used to study V-type windows and equipment requirements for stations and yards on the Datong-Qinhuangdao line. As a result, the calculated running time of trains was used to draw the train-working diagram for the line. The modified LCTSS system can now be used not only for editing train-working diagrams and train time- tables but also for drawing double track train-working diagrams. The program was used to prepare train-working diagrams for increased speeds and many other options on the Zhengzhou- Wuhan and the Shenyang-Shanghai Guan lines. The C-Model was used for the analysis of: (i) the saturated capacity of two single line sections of the Xiangfan-Chongqing line, each about 140 km long; (ii) actual achievement of double tracking a part of a single line section and of additional stations for train crossing and overtaking, and (iii) the effect of changing the train operation plan in the 180 km double track section Xuzhou-Fuliji of the Beijing-Shanghai line. 85. Technical assistance for the Beijing - Shanghai Line Capacity Study resulted in five computer models out of which three were used in MOR's studies of line capacity since 1995. Transport Capacity Computer Modeling has been a continuous task since 1991. 86. Technical Assistance and Training. Training of staff in new technology and management was included in the Factory Modernization and the Strategic Plan Study. During negotiations, a very specific program was agreed. The technical assistance and training program totaled 366 man-months, of which 210 man-months were for training Chinese staff abroad and 156 man- months for technical assistance by foreign experts in China. 87. Factory Modernization. Each of the works carried out an intensive program complementing the purchasing of the machines. 150 man-months of Chinese staff training abroad were planned at appraisal. This training was mainly for operational and maintenance staff for the new machines. 118 man-months were carried out. Taking into account that a few large machine sets were not purchased, this objective has been achieved. In addition, it was planned at appraisal that foreign experts would spend 6 man-months in China in 1989. Actually, foreign assistance totaled 10.5 man-months from 1991 to 1994. In addition, the Qiqihar Rolling Stock Works provided more than 1,100 man-months of training for operational and maintenance staff for the Bank funded machines. The Sifang Locomotive and Rolling Stock Works sent staff for a total of 96 man-months to courses in China and other factories. 88. Strategic Plan Study. 60 man-months of Chinese staff training abroad were planned at appraisal. Related to Telecommunications, MOR management and technical staff training was -21 - extended to 90 man-weeks or about 21 man-months. US consultants provided this training on their premises. Trained staff played important roles in designing, constructing, operating and managing the data network. Under the Operating Information System section of the study, 15.5 man-months were carried out. In connection with the Transportation Capacity Computer Modeling, 30 man-months of training were performed. 89. At appraisal, it was planned that foreign experts would spend 80 man-months in China over a period of four years to assist in the Telecommunications part of the study. Actually, foreign assistance totaled 64 man-months from 1992 to 1997. This objective has been achieved, although with delay and a longer than planned implementation time. Foreign assistance for the Operating Information System totaled 12 man-months from December 1991 to May 1992, although it had been planned that foreign experts would spend 40 man-months in China over a period of two years. In connection with the Transportation Capacity Computer Modeling, foreign assistance totaled 30 man-months as planned from 1991 to 1994 instead of a period of two years. Implementation Schedule - Fifth Railway Project 90. The Board approved the project on September 24, 1991, and the loan became effective on January 9, 1992. Negotiations were originally planned for end-April 1990. They were, however, seriously delayed for 13 months as an aftermath of the Tiananmen :incidents in May/June 1989, which affected most investment projects. 91. Permanent Way System-wide Component. This component comprised the purchase of on-track machinery, hard rails, sleepers and fastenings. Nearly all of the track maintenance machines were delivered in 1993 and 1994; a track-recording car was delivered in December 1995. Five rail flaw detectors were delivered in August 1997. Test equipment for the Professional Design Institute of MOR in Beijing was delivered in 1993. Equipment for a sleeper factory was delivered in 1994 to the sleeper factory in Zhuzhou (Hlunan). While the machines and the track materials were purchased some procurement problems occurred. 92. There were some minor deviations from the agreed upon purchasing program. Originally, MOR planned to purchase 7 gauge measuring sets. Later, MOR decided to procure only 5 sets but bigger ones. These were delivered in 1995 and distributed to Hohhot, Zhengzhou, Jinan, Shanghai, and Lanzhou. MOR decided after one procurement attempt not to purchase wheel flange lubricators. MOR wanted a specific technology--lubricators with sensors that can be used on both curves and straight-line sections of railway track-but admitted later that it actually did not know whether such technology existed. All bidders had offered lubricators without sensors. 93. Locomotive and Rolling Stock System-wide Component. Purchasing progress for the three sub-components was satisfactory: a) The wheel sub-component was to provide a Bank loan of US$28 million for procurement of wheels, to meet partially the shortfall in domestic production. Orders for US$10.26 million for forged wheels (10,000t), had been placed in November 1993. These wheels were delivered in September 1994. For the cast wheels, two orders for US$8.24 million and US$10.95 million for 8,000t and 10,000t were placed with two firms. All deliveries from one of the firms had been - 22 - made by November 1994, and the last shipment from the second firm reached China in May 1995. b) The locomotive sub-component was to provide a Bank loan of US$10 million for provision of unit exchange and spare parts for diesel and electric locomotives in seven depots. They were delivered in 1993 and 1994. c) The workshops and depots sub-component was to provide a Bank loan of US$22 million for provision of critical machinery and plant at different locations, the important sub-components being Shenyang Loco Works, Shenyang Spare Part Works, Lanzhou Loco Works and the Puzhen Roller Bearing Section. Implementation was scheduled to be completed by the end of 1994. A five months of delay occurred due to late placement of some orders. 94. Zhegan Line Capacity Expansion. By the end of 1990, 350 km of the 944-km Zhegan (Zhuzhou-Hangzhou) line was already double-tracked. Bank assistance to MOR was divided into three sections of the line: (a) the 322 km section from Bailutang to Xingtangbian, (b) the 567.8 km section from Xingtangbian to Laoguan, and (c) and the 52.8 km section from Laoguan to Zhuzhou (in SAR: Laoguan - Wulidan section, 48 km). Work under this project involved the doubling of remaining 594 km including the replacement of a 2.6-km single-tack bridge over the Gan river with a double-track bridge at a new location to provide better clearance for ships. Civil works started in September 1983. In the years up to 1989, progress was quite slow due to a shortage of local funds. Construction activities ceased in March 1989 and were resumed in May 1993 with funding from this project. From then onwards, implementation progress was good. 95. The work program included: the construction of a second track; lowering of gradients from 10 to 12 in a thousand to 6 in a thousand; the remodeling of stations and marshalling stations; improvement of signaling through the installation of an automatic block system; modernization of long-distance telecommunications, especially through the laying of a fiber optical cable and setting up 'microwave telecommunications; and the installation of hot box detectors, computers in marshalling yards, and operational equipment (minicomputers). The old single track Gan River bridge (Zhang Shu bridge) was completely dismantled and replaced by a double-track bridge of 3,069 meters total length at a cost of 255,218,400 Yuan (about US$32.9 million). It was opened for traffic on June 9, 1995. Operations on all new sections began in December 1995. 96. At the end of 1995, it was decided to purchase a 12 core fiber optical cable instead of the planned 8 core cable to increase telecommunication capacity. Its installation was completed in September 1998, and most of the subsequent installation of switching equipment was completed in March 1999. The final part of hot box detectors installation, which depends on the completion of the new signaling system, was completed in March 1999. Compared to SAR estimate, project work completion on the Zhegan line was more than three years late. 97. These delays, as well as the cost increases, can be attributed to: (1) design changes required by a switch to local technology for signaling; (2) insufficient funds in the early years, especially from 1983 to 1985; (3) budget revisions due to inflation; and (4) the fact that work - 23 - time allocated was often insufficient, and traffic operations interfered more than had been expected. 98. Xuzhou Terminal. At appraisal, the terminal was already in the midst of a multistage expansion program, which began in 1986. MOR completed all infrastructure works without Bank participation. The proceeds of the loan were to be used to upgrade and modernize dispatching and marshalling operations, and to improve communications. 99. Capital construction (bridges, track laying and buildings) for the marshalling was completed in September 1990 and for the passenger station by the end of 1997. The computer- aided dispatching system was installed between September 1995 and March 1997. Trial operations and final acceptance occurred in November 1998. The late construction of a signaling and telecommunications tower and the subsequent installation of telecommunications equipment affected implementation. 100. Progress of this component was also intimately linked to progress in procurement of operational control equipment for the computer-based Yard Information System, because it depended on the purchase of minicomputers. Installation was scheduled to be completed between February 1994 and September 1994. The YIS encountered delays due to a Bank recommendation that the hardware should be acquired only after software was completed. In March 1994, the Bank's computer expert consultant recommended that procurement of the YIS mini-computer be delayed and re-submitted at a later date when the Transport Management Information System (TMIS) project team under the Sixth Railway Project was able to give assurance that; (i) the Xuzhou YIS hardware configuration was in conformance with the standardized approach for the YIS systems within the overall TMIS design; (ii) a more definite and practical evaluation criteria had been developed; and (iii) the maintenance approach for the Xuzhou computer was in conformance with the planned approach for maintaining YIS computers under TMIS. In April 1994, the Bank wrote the International Tendering Company (ITC) that it had decided to recommend a delay in procurement. The Bank finally gave approval for procurement of the YIS system hardware in September 1994, and for the procurement of the Xuzhou sub-administration hardware in May 1995. The sub-component was completed in November 1998 with a delay of about four years. 101. Planning Studies. In order to assist MOR to deal better with system-wide issues that affected the quantity and quality of its services, five studies were to be carried out by teams composed of MOR staff supported by external specialists. The five studies comprised: a) permanent way maintenance and rehabilitation; b) locomotive and rolling stock maintenance and rehabilitation; c) system electrification; d) system telecommunications; and e) railways investment evaluation and priorities, or Railway Investment Study (RIS). 102. Reports of the four technical studies were submitted to the Bank in April 1992. Those for Permanent Way, Electrification, and Telecommunications (Report B) were found satisfactory. - 24 - However, the Locomotive and Rolling Stock Maintenance and Rehabilitation Study Report was unsatisfactory and MOR was, therefore, asked to revise it. 103. Permanent Way Maintenance and Rehabilitation Study. The task of the study was to undertake a comprehensive review of track rehabilitation and maintenance standards and methods in order to help MOR develop a technically and economically optimal program. The China Academy of Railway Science (CARS) and the Permanent Way Bureau of MOR carried out the research program. It involved the following four principal tasks: a) general investigation and analysis of track rehabilitation and maintenance standards and procedures at home and abroad; b) dynamic measures and testing on the test track and in the field; c) tests to be conducted using the Chinese Track Dynamic Test Laboratory; and (d) comprehensive high-volume durability tests. 104. Task (a): In 1989, the MOR study team began an extensive and in-depth investigation of the permanent way of China's railway network. The final report was supplemented by a schedule for completion of study tasks during the 1992-95 period and observations on the technical visits to Europe and North America. After lessons from foreign consultants, MOR decided in 1997 to conduct in 1998 a fourth and last visit abroad to study additional maintenance practices. 105. Task (b): Procurement of the imported track materials for this task (60 kg/m hardened rails for 20 km; fastenings; concrete sleepers for 5 km; 16 turnouts (switches); and glued insulated joints) funded by the Bank began in February 1992, immediately after loan effectiveness. The selected test line Beijing-Tianjin, which is part of the Beijing-Shanghai corridor, was thought to have a quite constant traffic volume of 80 million gross tons per year. A volume of 600 million tons of traffic was regarded as necessary to evaluate the track. Tests with the foreign materials began in November 1994, about one year later than originally planned, and were completed by October 1998. During the same period, switch components also imported under the Fifth Railway Project were tested in a section near Xuchang, a site on the Beijing- Zhengzhou line. A report evaluating the test results is currently under preparation and is expected to be completed by June 1999. Important tests related to defects and service life of rails, sleepers, fastenings and switches, and to the long term problem of track sinking (due to inadequate embankment soil) will require a further three years. These tests cannot be finished in the near future because: (1) track laying with the test material was completed in November 1994 instead of the end of 1991; and (2) a decrease of the annual transport load (68.6 million gross tons in 1997 instead of the assumed 80 million). Until the end of 1998, only about 400 million gross tons or two thirds of the necessary total load have passed over the test materials. 106. Task (c): The study was to conduct tests using the Chinese Track Dynamic Test Laboratory. The October 1993 supervision mission, reported that construction of the laboratory, which began in 1991, was completed and the continuous cycle operation ramp already in use. All testing equipment with the exception of a few small auxiliary items had been delivered. An extensive acceptance phase of the test equipment, and testing phase of the data acquisition, analysis and processing system followed until the laboratory's full operation. Tests began in September 1995 and were finished by April 1998. -25- 107. Task (d) of the study, comprehensive high-volume durability tests (task no. 8), was combined with task no. 4 "test in Chinese track dynamic laboratory" in September 1995. Part of the task no. 8 were 21 ton and 25 ton axle load tests to be carried out in AAR's Transport Test Center (TTC) in Pueblo. According to CARS's management, these tests could not be carried out at the planned time because TTC was fully occupied with own 33 ton and 36 ton axle load tests, and CARS had its own testing capabilities since February 1994. The third reason given was to save costs. In addition, "computer simulation analysis" dealing with the reactions between rolling stock and track was originally planned to be carried out as "two-dimensional" tests. CARS changed these to "three-dimensional" ones thereby delaying completion of the activities. Activities began in November 1993 and were completed in April 1998. 108. Locomotive and Rolling Stock Maintenance and Rehabilitation Study. From the beginning, MOR staff had been focussing on critical items identified in the Inception Report of January 1990 for this study, which had been sent to the Bank. The scope of work was divided into ten short-term studies and seven long-term studies. In view of the diversity (covering diesel and electric locomotives, and passenger coaches and freight wagons) and severity of maintenance problems, MOR decided to concentrate first on studies related to diesel locomotives. Attention thereafter was to focus on coaches and wagons. In November 1991, seven high-level MOR staff visited the USA, Canada and India for 15 days to study maintenance practices, organization and characteristics of operations. 109. The study report, which was delivered on time in April 1992, was the final report for the short-term studies. It left much to be desired, because - according to MOR - a very young translator had been used. The resulting report was nearly incomprehensible. In addition, the report's technical content needed improvement and the report lacked a specific action plan. Following Bank advice, a revised report focused entirely on the DF-4 locomotive. MOR also had to indicate which type of locomotive or rolling stock would be next in line after the DF-4 locomotive program. Preparation of similar analyses and action plans was also to begin for the new program. The Bank also suggested that MOR consider sending a team of locomotive maintenance officers to selected North American railway shops for training in shop layout planning, selection of shop machinery, and design and management of a unit exchange maintenance system. 110. The quality of the revised report sent to the Bank in October 1992, while improved, was still not fully satisfactory. A detailed analysis of each of the submitted studies was handed over to MOR in form of a check list. While actions on most of the items could be started, these having collected an adequate data base, MOR was advised to: (i) set up an adequate organization for the duration of the studies - the strength of 37 staff was considered inadequate; (ii) translate all study recommendations into implementation plans, and stipulate target dates; (iii) prepare and forward the overall Master Plan for all the studies agreed to in the Inception Report; and (iv) re-submit revised action plans with target dates for three unsatisfactory DF-4 studies items. 111. Work on the remaining studies related to freight wagons., passenger coaches, electric locomotives and other locomotives, was limited to a few studies, such as an evaluation of repair technology and standardization of rules. One report given to the Bank, a revised rules manual for freight wagons, was not done in a structured manner. Apparently, the organization assigned to this task at that time could not cope with the studies in addition to its own regular work. - 26 - 112. After the completion of the Short Term Plan, MOR dismissed the study team in December 1993 (MOR's original target date). This was in contradiction to the SAR, which envisaged a study time up to 19957 with the effect that nobody was in charge to implement the action plan for the DF-4 locomotives. The Long Term Plan was never developed. Apparently, its draft action plan faced internal difficulties. MOR claimed during the! ICR mission, that the study's range was too ambitious, covering, as it did, the entire railway network. 113. System Electrification Study. In 1989, the MOR Electrification Study Team began a comprehensive study of ten lines proposed for electrification, including several technical investigations as well as complete economic and financial analyses. In December 1991, a first study group of 9 specialists in the technical and economic evaluation of electrification proposals visited railways in France, Germany, and Sweden for 30 days to investigate operational, maintenance, technical design and economic issues. The report submitted to the Bank in April 1992 reviewed those discussions and made several recommendations. These included: methods of inspection and maintenance; the remote operating of substations; design principles of reverse running on double-tracked lines and complex junctions; appropriate harmonic interference standards and mitigation measures; desirable technical design improvements; and organizational changes. 114. A second group of 6 staff including a specialist from the Ministry of Energy visited the same countries in May 1993 for 20 days focussing on electric system interference problems and related locomotive and electric power distribution issues. The group's mission report did not lead to a revision of the April 1992 report, but influenced the design of electric locomotives and of protective measures against electric power interference. 115. System Telecommunication Study. Under the Fourth Railway Project, MOR designed a package-switching network for MOR's "backbone" telecommunications network of five principal and 40 sub-nodes with the assistance of foreign consultants. Under this project, MOR drafted a long term technical plan (Report A) and a short term implementation plan (Report B) to meet all of its telecommunications needs. This plan addressed not only the need for data communications but also for voice, facsimile, and radio. A draft Report B was provided to the Bank in mid-1991 and the final report in October 1992. Report A arrived at the Bank in July 1992. Bank review was completed in March 1993 and concluded that both plans needed revision. 116. The Bank recommended that a long term Telecommunications Master Plan based on this study be prepared. MOR agreed and proposed five topics for a seminar to be held first in autumn 1993: a) development trends of telecommunications technology (switch, transmission, networking - IN, ISDN, BB-ISDN, - mobile radio, and new services such as seat reservation, e-mail, voice mail); b) network optimization for structure and capacity, including tools (software); c) operations, maintenance, administration and commercialization; d) benefit analysis of telecommunications networks; and e) any other item the Bank may recommend. 7 SAR Fifth Railway Project, para. 3.20. - 27 - 117. A 3-day workshop on railway telecommunications arranged by a telecommunications expert of the Bank was held in China in October 1993. Its purpose was to: a) focus on complex factors influencing the development of MOR's telecommunications system; b) discuss if MOR's needs are properly planned, effectively implemented and efficiently operated so that the latest technology is economically applied; and c) introduce and disseminate MOR's draft Telecommunications Master Plan as a vehicle to achieve the above-defined purpose. 118. The workshop's 70 participants reviewed and discussed the TMP under the guidance of foreign experts. The workshop endorsed the need for further studies and Chinese experts' study visits abroad to get acquainted with the latest developments in the rapidly changing field of telecommunications technology. The draft TMP, a technical document aimed at facilitating strategic decision making had shortcomings despite its overall usefulness. It was recommended to augment the plan with Section and Access Networks, operations and maintenance organization, and network management. A separate part of the Plan was to deal with reviews and solutions for human resources management. The final TMP was used as a basis for the system- wide telecommunications components of the Sixth and the Seventh Railway Projects. 119. Railway Investment Study. During appraisal, RIS was already underway. Its TOR was agreed between MOR and the Bank in February 1989. Signing of the Japanese Grant Fund followed in April 1989, and the RIS Inception Report was approved in November 1989. A policy/technical team consisting of experts and decision-makers visited the United States in July 1990. Five core RIS team members came to the United States for technical training from January to September, 1990. With the production of the White Cover Report in July, 1991, phase I of the study was essentially completed. The final report titled China's Railway Strategy (Report No. 10592-CHA), however, was finished as late as February 1993 because of the time needed for MOR's official approval. 120. Railway Environmental Studies. [see Environmental Protection (paras. 144 to 146 below) with regard to achievements] 121. MIS Study. MOR had agreed8 to broaden the MIS study effort in line with the study scope described in SAR of the Second Railway Project. The action plan was prepared leading to the inclusion of a Transport Management Information System in conjunction with a system-wide component for telecommunication. 122. Costing Study. During appraisal of this project, agreement was reached to avoid further delays. Steps were taken to complete the implementation of a costing system on the railway network and to formulate a tariff restructuring. The study, which had been started with financing SAR Fifth Railway Project, page 79, para. 10. - 28 - from the First Railway Project in 1984, and continued under the Third Railway Project, was considerably behind schedule and its costing manual needed improvement. 123. In April 1990, a Bank consultant reviewed MOR's draft costing manual and made recommendations for changes. MOR staff working on the development of the costing system visited Northern American railways in June 1991 to learn about the costing systems applied by these railways. Between November 1991 and July 1992, MOR produced a costing system to meet the requirements of the Tariff Reform Study under the Sixth Railway Project. The results were a unit cost system and the application of the unit cost system to the determination of a cost/distance scale for each freight commodity, passenger seat type, train class and traction type. 124. In July 1992, a Bank consultant related the cost scales to the railway's financial statements, and documented the relationships between accounting and statistical data sources and cost scales. The revised draft costing manual was reviewed by the Bank in March 1994. After the endorsement of the costing manual by the Department of Science and Technology of MOR in December 1994, the Finance Bureau of MOR submitted the costing manual to the Minister of Railways in October 1995. Subsequently, an Evaluation Committee comprising representatives of the State Planning Commission (SPC), the State Price Bureau (SPB), the Ministry of Finance (MOF) and the Department of Science and Technology of MOR endorsed the manual. Since then, its application has been mandatory in MOR's administrations, sub-administrations and stations. 125. In November 1995, the Bank received an English copy of the manual entitled, "Costing and regulation for China's Railway Transportation." The manual was incomplete because an important element, the section for freight transport, was not included at that time; it was still awaiting clearance from the Finance Bureau of MOR. The freight manual was received on May 17, 1996. 126. The costing study activities under Fifth Railway Project led to the detailed design of a costing system, and to a work plan for the actual development of such a system. The costing system developed under the Sixth Railway Project as part of the Tariff Reform Study represents an early stage of the development of the system designed and recommended under the Fifth Railway Project. It was designed and used to develop cost-distance scales by commodity for freight traffic, and passenger costs by seat and train class. This information was applied to an evaluation of the railway's tariff structure. 127. Use of Loan Balance - Fifth Railway Project. When the Bank's remaining project funds of US$43 million became available, MOR requested permission on June 7, 1995 to use these for additional permanent way maintenance machines totaling US$22.9 million, telecommunications equipment for the Xuzhou terminal expansion totaling US$10.38 million, and items under "Industry System" totaling US$6.3 million. A 10 percent price contingency was kept in reserve. 128. In April 1997, after an unduly protracted process lasting 22 months, an agreement was reached on how to use the loan balance. Nearly half of the total loan balance stemmed from the unilateral decision of MOR to use local funds for the purchase of automatic block system equipment for the Zhegan line. The Bank funding for this purpose had been an estimated US$20 million. Normally, Bank policy stipulates that surplus loan funds have to be canceled. In this -29- instance, the Bank indicated that it might agree to apply some or all of the savings to finance additional project activities provided that these had high priority and were consistent with the project's original objectives. Because MOR's request fell short of meeting the Bank's requirements, FCTIO was asked to: * focus on the current project entities; * provide sufficient explanation of each item; * demonstrate the support to the project objectives including the benefits; and * give consideration to the time needed for procurement ander ICB and especially the delivery time needed when selecting items for proposal. In addition, it was made clear that the Bank would not grant an extension of the loan closing date of December 31, 1998, for the purpose of completing procurement. 129. In August 1996, the Bank agreed to the permanent way maintenance machines and telecommunications equipment proposals. At the same time, the Bank informed MOR that the proposed items under "Industry System" would not meet any of the project's stipulated objectives. MOR was informed that proposed items should be closely linked to those specific operations for which an economic evaluation has been made during appraisal. Eventually, MOR responded by altering its request, and on April 24, 1997, the Bank provided the no objection. Three machines for the Puzhen Works (US$2.0 million) would be included in the Fifth Railway Project. Additional telecommunications equipment (SPC lines) worth US$4.3 million would be folded into the project, while US$3.42 million was kept as a contingency for all outstanding procurement. 130. Environmental Protection - Fourth and Fifth Railway Projects. In 1989, when the Fourth Railway Project was approved by the Bank, there were few formal requirements for integrating the environment into project design. Neither a formal environmental assessment nor an environment management plan was prepared. (The Bank's Operational Directive (OD) 4.01 on Environmental Assessment was only formalized in October 1991.) As a result, the SAR was vague and non-specific about the environmental impacts of the project and various measures to mitigate them. The SAR nevertheless asserted that "no negative impact on the environment is expected from the project." It stated that the electrification of the Yueshan- Luoyang line "will significantly reduce air pollution in the area," and that the modernization of the three locomotives and rolling stocks works "will bring about significant improvements in pollution." However, the report did not further specify the improvements nor how they would be achieved. 131. On its part, MOR has followed the State and local Environment Protection regulations, its own environmental requirements and other applicable regulations in the design and construction of the project. The major project-related achievements and some outstanding issues are presented below: 132. Yueshan - Xiangfan Line. In order to protect 1,500 years-old Longmen stone carvings in a Buddhist temple, the alignment of the Longmen tunnel was shifted. Where the tunnel used to stand only 270m from the temple, it now rests 800m away. This distance should be sufficient to protect the temple and its 10,000 odd carvings in the hillside from damage due to vibrations from the construction of the tunnel and the operation of the trains. As an additional precaution, steel -30- plates were installed under the sleepers to reduce and absorb the vibrations. During the construction of the tunnel and the line, sectional blasting and smaller explosive charges were used to minimize the potential for damage to the grottoes from explosion related vibrations. 133. The environmental impact of construction and operational-related dust, noise, water pollution, and traffic were minimized and mitigated by a variety of measures. These measures included: the construction of temporary haul roads to transport construction materials; the use of water sprayers to suppress dust; construction of over 60 underpasses and overpasses to permit movement of people, traffic and livestock; reclamation of nearly sixty percent of construction land along the line through planting of grass, shrubs and trees; construction of enclosed balconies; planting of trees; modification of a public address system to reduce and protect residents living near the Luoyang terminal from excess noise; and the construction of 50 m3/h wastewater treatment plants at Baofeng and Xiangfan to recover oil for recycling and wastewater for reuse. 134. Despite the above improvements and changes, emissions from steam locomotives is still an unresolved problem. Although, China no longer produces steam locomotives, there is no timetable to phase out the steam locomotives from the Yueshan-Xiangfan line. Also, since the steam locomotives receive minimal maintenance, the emissions issue will continue to fester. In the longer term, the lack of regular SOx, NOx and noise monitoring may dilute the positive achievements in other areas. 135. Expansion and Modification of Three Locomotive and Rolling Stock Factories. At the Sifang Locomotive and Rolling Stock Works, the installation of modem machine tools and equipment had a major impact on reducing production wastes and in providing better operating conditions to the plant workers through reduction in dust and fumes. The introduction of new foundry technology and the use of self hardening resins has lowered dust emission and has increased dust recycling to about 90 percent. However, this still fell short of MOR's own internal requirements and State regulations. Dust emissions from the factory boilers comply with the State regulations. 136. Two new wastewater treatment plants were also built - a 1,200 m3/d plant at the old factory for removing oil and a 5,000 m3/d plant (with room to double the capacity) for treating domestic and production wastes at the new factory. Effluents from both plants comply with the State regulations. Noise from the diesel engine testing facility too has been reduced to State level requirements through proper insulation of the test facility. Overall, the investment has had a positive impact on the work environment through reduction in waste, accidents and improved working conditions. However, due to lack of money and technology, Sifang Works has not been able to handle SOx, NOx and other pollutants in emissions from boilers and diesel engines. At the old factory, Sifang is facing water shortages. At the same time, it is unable to capitalize on the use of recycled water because the factory's old architectural plans have been lost, making it very difficult to identify underground connections. At the new factory, only 10 percent of the water is being recycled due to the low quality of the recycled water. Cleaning of the molds at the foundry is also presenting a major challenge. 137. The installation and use of new equipment at the February 7 Locomotive Works has led to an integrated production operation. The results are impressive: efficient space utilization, better products, increased production and lower cost. In particular, the introduction of gas cutting -31 - machinery has reduced material wastage from 20 percent to 5 percent, reduced grinding, lowered energy consumption and has resulted in better product quality. Similarly, the new milling machines have resulted in a 80 to 90 percent reduction in the use of cutting fluids. The production of solid waste too has declined; most of it is now either recycled or returned to the suppliers. Finally, because some of these machines are housed in air conditioned enclosures, there has been 5-7 dB(A) decrease in noise pollution. Overall, the investment has lowered noise pollution, reduced wastage and created a cleaner work environment. The new investment has had marginal impact on air emissions or on water quality. Generally, wastewater is treated and discharged without recycling. 138. The introduction of new technology at the Qigihar Rolling Stock Works has increased the service life of equipment for corrosion related repairs from about 5 years to between 8-10 years. Overall, there has been a 5-8 years increase in the service life of the equipment. The introduction of new technology has had a dramatic impact on reduction in dust, paint aerosol and noise from blasting machines. Dust emissions dropped from 100 mg/I to 4-12 mg/. Similarly, the use of semi-enclosed environment for painting of wagons has led to a saving of 1.7 kg of paint per wagon. The environmental benefits are indirect but tangible. 139. The double tracking of the Zhegan line under the Fifth Railway Project was basically carried out on one side of the existing line. The work was carried out according to the EIA report approved by NEPA in 1993. The environmental effect was mostly confined to construction related impacts and MOR's own internal supervision and environmental management procedures were used to minimize and mitigate the construction related environmental impacts. 140. However, to assist MOR on a broader front with the management and mitigation of environmental problems throughout the railway system, the project arranged a US$200,000 grant from UNDP to enable MOR's key environmental and health and safety experts to visit foreign railway operations to review international practices first hand and to engage noise, waste management and health and safety experts to visit MOR's operation in China and to advise MOR in resolving some of the more pressing noise and sanitation problems. The experts also assisted MOR with scoping a long-term waste management strategy. 141. As a result of the UNDP grant, in September 1992 and 1993, two teams of six member delegation from the Environmental Department of MOR, Design Institutes and Foreign Capital Office, visited USA and Canada for about 15 days each time. The missions visited Canadian National Railways, Canadian Pacific Railways and Amtrak in USA. The teams visited government departments, research institutes, and railway headquarters and gathered first hand information on sanitation, excreta disposal, garbage handling and disposal, coach sterilization, water supply, food hygiene and handling, etc. during the operation of short and long distance passenger trains in North America. The missions also gathered :information on railway noise control standards and current practices to control excess noise, traffic noise barriers, environmental monitoring, etc. 142. In June 1992, three Canadian experts visited China for about twenty days. The experts held meetings and training workshops on environmental issues pertaining to MOR and provided advice to MOR on railway noise controls (noise barriers, locomotive noise reduction, reduction in use of whistles, etc.), environmental sanitation, garbage handling and disposal, food hygiene and handling, passenger train sterilization, use of insecticides and rodent control measures, noise - 32 - monitoring, etc. As a result of this new knowledge and exchange in ideas and discussions with foreign consultants and overseas visits, MOR completed two internal reports on "Control Efforts on Environmental Sanitation and Railway Environment Noise of North American Railways" and "Study of China's Railway Environment Sanitation and Train Operation Noise" which recommended environmental control measures for China Railway. 143. In December 1996, MOR completed the construction of a 10 t/hr wastewater treatment plant at Jinzhou to treat oily wastewater and contaminated stormwater. The plant is over designed but operating successfully. 144. Environmental Protection - Areas for Assistance. During the appraisal of the Fifth Railway Project, the Bank proposed to assist MOR in the preparation of specific recommendations for financing under future projects. At MOR's request, United Nations Development Program (UNDP) financing was sought for the following three critical study areas for foreign experts: a) noise pollution created by dense railway lines, high-speed trains and machines in the railway workshops and factories; b) night soil and garbage collection in passenger trains; and c) sterilization of passenger coaches to eliminate/reduce health hazards caused by infectious diseases carried by passengers on long journeys, rodents, vermin, etc. 145. The studies' objectives were to establish cost effective and technically sound strategies for these areas, and the total costs were estimated at USS200,000. Of this total, US$90,000- 100,000 were allocated to cover the costs of consulting services and US$40,000-50,000 to cover the cost of study tours by Chinese counterpart teams to foreign railways. In December 1991, UNDP approved US$140,000 of the total estimated costs, and the remaining US$60,000 was approved in August 1992. 146. Three foreign experts were engaged to visit China and study environmental problems in the Beijing, Guangzhou, Shanghai, Shenyang and Zhenzhou administrations in June 1992. Following their diagnostic work, the consultants prepared a comprehensive report including several cost-effective recommendations to fight against pollution and health hazards in the above-stated three areas. In September 1992, a Chinese railway delegation comprising six environmental experts were sent to Canada and the United States to familiarize themselves with foreign practices and procedures used in controlling environmental pollution. This delegation prepared a technical report and submitted their findings to MOR top officials who were very pleased with the outcome. With the hiring of an environmental expert to assist in the preparation of the Seventh Railway Project the UNDP funds were fully used. 147. Land Acquisition and Resettlement - Fourth and Fifth Railway Projects. As older projects in the transport portfolio, both the Fourth and the Fifth Railway Projects were prepared in accordance with Chinese law and procedures and approved by the Bank without the requirement of a formal Resettlement Action Plan. While land acquisition and resettlement- related estimates were made available to the Bank prior to approval, formal and complete census - 33 - survey results were not provided and implementation arrangements and responsibilities were not clear. Without the baseline information provided by surveys, the effectiveness of resettlement measures taken during implementation now can only be assessed in a nonsystematic manner. Moreover, because resettlement was not seen at the time to be an integral part of transport sector projects, both projects received only irregular resettlement supervision and were not subject to independent monitoring. Site visits in some areas indicated that resettlement may have resulted in hardship for some persons. But limited supervision and project authorities suggest that most affected people have restored their incomes and living standards. 148. The Fourth Railway Project was appraised in 1987 and declared effective in 1989 with no systematic attention to land acquisition or resettlement issues evident in the SAR or other Bank documentation. Land acquisition and resettlement activities generally were completed in both affected provinces (Henan and Hubei) by 1995. Resettlement field supervision appeared to have been limited to one multi-project thematic supervision exercise, conducted in late 1994. Additionally, project officials made a verbal presentation regarding project resettlement status to a Bank mission in 1997. Because of a lack of baseline data for comparative purposes, no separate field mission was undertaken for the purposes of this completion report. The following aggregate data regarding the scale and cost of land acquisition and resettlement have been provided by MOR: Land Acquired: 13,975 mu Structural Demolition: 70,632/m2 People Relocated: 3,973 Cost of Housing Compensation: 10.73 million RMB Cost of Land Compensation: 171.84 million RMB 149. Project records indicate that design alterations reduced the scope and potential impact of land acquisition. In general, most of the individuals who have been affected do not appear to have been significantly harmed by the project. The linear nature of the railway work means that land acquisition has been spread along a long corridor, making it possible for the Chinese practice of land redistribution to minimize the impact. Field supervision also found that households required to relocate now have access to newer housing with more modem amenities. But many if not most relocating households used their own savings or other resources in addition to housing compensation to obtain new housing. 150. The 1994 supervision mission found that compensation for land and other assets was paid by MOR to county land administration bureaus in a timely manner, but that county and local governments sometimes withheld portions of the compensation from persons actually affected. MOR subsequently stated that compensation problems had been rectified, and provided reports indicating that compensation levels in some cases were higher than initially agreed. The mission also reported that land acquisition in Hubei Province had left some persons landless or jobless, resulting in significant hardship. During the 1997 mission, MOR provided official statements from local officials indicating that the episode of landlessness cited in 1994 followed from land acquisition not associated with the Bank project. MOR also indicated that there had been no significant delay in providing employment; the apparent delay stemmed from the practice of not providing employment until land was actually taken for project use. MOR stated that all - 34 - resettlement activities have been completed and that there are no outstanding grievances or issues. 151. The Fifth Railway Project was appraised in 1990 and declared effective in 1992 with very little attention to land acquisition or resettlement issues evident in the SAR or other Bank documentation. Resettlement field supervision appears to have been limited to one multi-project thematic supervision exercise conducted in late 1994 in Jiangxi and Zhejiang provinces, and a field supervision in 1998 in the same provinces during preparation of this completion report. The following aggregate data regarding the scale and cost of land acquisition and resettlement have been provided by MOR: Land Acquired: 19,456 mu Structural Demolition: 342,852/m2 People Relocated (est.): 13,860 (2960 households) Land and Housing Compensation: 316.58 million RMB 152. Project records indicate that land acquisition and its corresponding costs and impacts are greater than anticipated in the SAR. The project required 19,456 mu of land, against an estimate of 15,827 mu in the SAR. Structural demolition totaled 342,852 square meters, against an estimate of 259,602 square meters. As a consequence, land and housing compensation costs totaled 316.58 million RMB, as compared to 223.2 million in the SAR. It is likely that some of the discrepancy reflects differences in categorical definitions as well as erroneous estimation. Some of the cost also reflects increases over agreed compensation rates. In general, most of the individuals who have been affected do not appear to have been significantly harmed by the project. 153. In at least one instance, disputes over compensation led to a six-month implementation delay. MOR subsequently stated that compensation problems had been rectified, and that there were no outstanding grievances. Compensation rates for land and housing increased over time in Zhejiang Province, but did not do so in Jiangxi Province (whether rates increased in Hunan Province remains unknown). The mission also reported that jobs had been provided to those losing access to land, but that some enterprises were not consulted regarding placement of employees or were not provided compensation for employee training and placement. During the 1998 mission, MOR stated that delays in payment of compensation to enterprises had been corrected. Employers visited during the 1998 mission indicated satisfaction with resettlement arrangements. In site visits, some individuals complained that they subsequently lost employment they had been provided following loss of their agricultural land. Project officials indicated that this loss of employment reflects enterprise restructuring or failure, for which the project cannot be considered responsible. MOR stated that all resettlement activities have been completed and that there are no outstanding grievances or issues. 154. Procurement - Fourth and Fifth Railway Projects. During project preparation of the Fourth Railway Project, the Bank was concerned about the fact that it had taken the authorities some time to become fully familiar with the Bank's procurement procedures. Therefore, staff had worked with MOR during the year before Board presentation to establish a special office - -35- the Foreign Capital and Technical Import Office (FCTIO) to expedite procurement. As a result, preparation of procurement documents was regarded as well advanced at Board presentation. 155. At the beginning of the Fourth Railway Project, procurement progress was remarkable and far better than in all previous projects. The overall good performance exceeded appraisal estimates with the exceptions addressed below (paras. 156 and 157). However, these exceptions were due to the Bank's insistence in receiving part of the bidding documents as soon as possible, and should also be seen in relation to the slow implementation of the earlier projects. 156. Since all railway projects handled by MOR experienced procurement delays, it had been agreed that MOR would prepare a detailed timetable for all procurement activities for the whole Fifth Railway Project. The procurement schedule, however, was extremely over-optimistic and unsatisfactory. It showed that all tenders would be issued within a short period of one year (1993), which is an unrealistic goal. A revised schedule, supposedly taking into account the needs of the project and the usually extended time needed for preparing technical specifications, was still very ambitious, concentrating most procurement in 1993. After building up a good pace of procurement activity through early 1994, the rate of entering into new commitments became sluggish. Except for two crankshaft grinding machines, procurement of the locomotive and the rolling stock component for the Bank-funded items was good. Preparation of technical specifications for the automatic block system (ABS, US$20 million) for the Zhegan line had been delayed. MOR postponed procurement until a similar equipment with more advanced technology was tested on the Beijing-Kowloon line. According to the Shanghai Administration, the domestically supplied new ABS functioned well by the end of 1994. The administration then proposed to MOR the purchase of the new system with domestic instead of Bank funds, and to use the loan funds for "more important" items. Consequently, FCTIO informed the Bank of the decision to procure the ABS with domestic funds. 157. In June 1994, bids were opened for three crankshaft grinding machines to be procured together under the Fourth (2 machines as part of the "other equipment" sub-component of the Yueshan-Xiangfan line component) and the Fifth Railway Projects. Evaluation of the bids lasted for about seven months, and the Bank gave its "no objection" to the recommended award of contract on June 6, 1995. The price of each machine was about US$1.38 million equivalent. In August, 1995, MOR requested an extension of the Closing Date by one year, explaining that at the signing of the contract on July 3, 1995, it became clear that the last payment for the machines would have to be made in February 1997. The long delivery schedule can be attributed to the advanced technology required in the technical specifications which in turn required a lengthy manufacturing schedule. On April 1, 1997, MOF requested an extension on the Closing Date to June 30, 1998 on the grounds that the supplier had gone bankrupt and, therefore, was unable to deliver on time. The machines were finally delivered in February 1998. 158. Managers of the three factories participating in the Fourth Railway Project realized early on that their planning assumptions did not correlate well with reality. This was admittedly caused by a lack of experience with foreign advanced equipment and international procurement. Bid prices substantially higher than estimated forced MOR to annul the purchase of some items, the lack of which was reported to have had no or little negative effect on realizing the objectives. Longer than expected internal approvals, and installation and commissioning added about one year to the total implementation time of the component. -36- 159. One complaint by a bidder caused considerable trouble during implementation of the Fourth Railway Project. An order for six full-section ballast cleaners (four of which were financed under the Fifth Railway Project) was recommended by MOR to be placed with the second lowest bidder. The Bank did not object because the bid evaluation report gave convincing reasons for rejecting the cheaper bidder. This bidder launched an official protest, and the Bank instructed MOR not to sign the contract until the matter was clarified. After intensive review, the Bank settled this case and confirmed the award to the second lowest bidder. 160. Although all previous railway projects experienced some procurement problems, the Fifth Railway Project was the first project where bid evaluation reports had to be rejected by the Bank due to quality problems in the evaluations, and which saw several major complaints from bidders. The project had several complex products for which the technical specifications were not adequately prepared. 161. To counterbalance this, Bank reviews of draft bidding documents became more cumbersome, correcting many details which should have been know at this stage. The example of the YIS mini-computers for Xuzhou and TMIS computers procurement illustrates the problems encountered. The bid evaluation criteria were too indefinite; it was not clear from the technical specifications who would be responsible for performing maintenance on the YIS computers, and for how long. Without good reasons, MOR wanted to have two very different procurements combined in a single tender. The following excerpt from a Bank fax highlights typical difficulties with bid evaluations: "We are unable to approve the bid evaluation report because it did not contain full information and was not prepared in a satisfactory manner. The evaluated prices were different from the corresponding bid prices, but were not explained in a supplemental sheet listing the reasons why items were added or subtracted, with their costs." 162. In another case, a tender was issued for the purchase of 20,600 tons of alloy steel rails. MOR recommended the rejection of the lowest bidder because of its unsatisfactory financial condition. The government of this bidder's country had already put up the firm for sale, but a deal had not been concluded. The matter was reviewed at different levels in the Bank following which the Bank decided in favor of the lowest bidder and suggested that MOR should obtain additional guarantees from the firm's government satisfactory to the ITC and MOR. The guarantee would have to cover fully the performance of the contract without any conditions and restrictions. Upon the ITC's recommendation reversing the original outcome of the bid evaluation, the Bank expressed its "no objection" to award the contract to the lowest bidder. 163. Bidders challenged bid evaluations. There were two additional cases: a) A bidder for a Production Line for Pre-stressed Concrete Sleepers complained to the ITC for not being awarded the contract. The Bank requested a justification for this rejection but recognized in the case a very spiny procurement problem, involving the word of a bidder (and certain corroborative evidence) against that of the ITC's. After an exhaustive review, the Bank came to the conclusion that the bid of the protesting company was incomplete and non-responsive. b) On December 6, 1994, a US firm filed an official complaint with both the Bank and a US Senator. This firm stated that it had been informed verbally by MOR that the contract for two Crankshaft Grinding Machines (a third grinder was funded under - 37 - the Fourth Railway Project) would go to a European firm, at a higher price, because the end-user preferred machines from that particular country. At that time, the Bank had not yet received the bid evaluation report. Although twice requested, the report was not received until March 1995. A retired Bank staff was sent to Beijing to clarify technical points in this report. The Bank expert confirmed that the US bidder should not be awarded the contract because of technical deficiencies of the machine offered. Nevertheless, although the Bank normally did not require complete financial evaluation when a bidder was rejected on technical grounds, a full analysis of all bids was requested. In the end, the Bank accepted the tendering company's original proposal for award, because the complaining bidder also would have lost on price. 164. Project Costs - Fourth and Fifth Railway Projects. In terms of US dollars, project costs of the Fourth Railway Project were 58 percent higher than expected, with an actual cost of US$945.6 million compared to an appraisal estimate of US$600 million. The main reasons for this cost increase were: (a) the delay by two years to April 1993 for the tunnel works on the Yueshan-Xiangfan line; (b) a change of the construction schedule of the Yueshan-Laoyang section; (c) inadequate estimates of local costs for the Yueshan-Xiangfan line component; and (d) the impact of steep inflation on the cost of materials and equipment in the early 1990s. Mainly factors (a) and (b) but also the six months delay in project effectiveness pushed the implementation period into the high inflation years. In terms of local currency, total costs were 135 percent above appraisal estimates. The difference between dollar and Yuan costs was due to the devaluation of the Yuan over the life of the project from Yuan 3.7 per dollar to Yuan 8.3 per dollar. 165. In terms of US dollars, project costs of the Fifth Railway Project were 61 percent higher than expected, with an actual cost of US$1,550.3 million compared to an appraisal estimate of US$1,005.7 million. This cost increase stemmed mainly from the Zhegan line component. The main reasons were: (a) design changes to improve the original design for telecommunications; (b) the impact of steep inflation on the cost of materials and equipment in the early 1990s, (c) inadequate estimates of local costs for the Zhegan line component, and (d) use of the US$43 million loan balance with procurement undertaken in 1997. In terms of local currency, total costs were 124 percent above appraisal estimates. The difference between dollar and Yuan costs was due to the devaluation of the Yuan. 166. Financing of US$3,535,000 of foreign costs for the four planning studies was provided by the Second Railway Project. In addition, MOR spent US$1.47 million of its own funds mainly on the installation track materials and tests under the Permanent Way Maintenance and Rehabilitation Study. The fifth study, the Railway Investment Study was financed by the Japanese Grant Facility Fund. Expenditures for the Costing Study were borne by the Third Railway Project. 167. Financial Performance - Fourth and Fifth Railway Projects. The detailed financial evaluation for both projects is given in Annex 1. The most important points are: 168. The financial evaluation in the SAR for the Fourth Railway Project focused only on the income statement covering the 1982 - 1990 period. Of particular importance is the fact that the Fifth Railway Project was the first railway project in China for which a complete set of financial - 38 - statements (income statement, cash flow statement and balance sheet) was obtained. This was a significant step forward compared to the first four railways projects. However, during the financial discussions in subsequent railway projects it became apparent that the focus of the financial statements was not uniform. The balance sheet focused on transport and non-transport enterprises, the income statement focused on transport enterprises only, and the cash flow statement was a hybrid of the two statements. Because different principles were applied in the preparation of the statements, and because the railways are currently in the process of segregating non-transport enterprises from transport enterprises (five financially independent firms will be set up covering construction, engine building and components, telecommunications and support) the remainder of this analysis focuses on the consolidated income statement of the transport enterprises only. 169. The 1987-1992 income period. As reflected in the consolidated income statements in Annex 1, MOR had a positive net income in this period. Income improved from 1987 to 1989 mainly because MOR was exempted from income taxes. In 1990, MOR benefited from an across-the-board increase in freight tariffs. Since 1991, revenues from base tariffs have been supplemented by a freight surcharge. The reported operating ratios (operating expenses relative to operating revenues), deteriorating gradually, were low. If reported costs were not understated or distorted by subsidies (several input factors didn't reflect market prices), operating ratios would have been even lower. 170. The 1993-2002 income period. MOR has been operating at a loss since 1993. In general, these negative results were attributable to a decline in market share vis-A-vis the other transport modes, an inadequate operating ratio and a rising level of debt obligations. Acknowledging these trends, MOR has announced an unprecedented near-term program designed to improve dramatically bottom line earnings. Specifically, as the forecast income statement in Annex 1 also shows, losses are projected to decline sharply in 1999 and breakeven status is anticipated by the year 2000. To achieve these ambitious targets, the measures described in Annex 1 will be undertaken. 171. Economic Reevaluation - Fourth and Fifth Railway Projects. From the reevaluation presented in Annex 2, the net present values (NPV) and economic rates of return (EIRR) of the various components of the Fourth and Fifth Railway projects reflect economic outcomes that range from satisfactory to highly satisfactory. 172. With respect to the Yueshan-Xiangfan double tracking and partial electrification component of the Fourth Railway Project, the NPV is just under Yuan 23 billion in 1997 prices and the EIRR is 19.8 percent. This rate of return, though significantly lower than the SAR figure of 36.9 percent, is satisfactory. The primary reason for the decline in the EIRR relates to the greater amount of local direct project outlays (foreign costs were about 17 percent lower than projected in the SAR). Restated in terms of 1997 values, the SAR anticipated that this component would require about Yuan 2.3 billion in direct local expenditures. Nonetheless, the reevaluation indicates that actual local costs amounted to Yuan 5.9 billion -- more than 2.5 times greater than the SAR-derived figure. Over half of this sum traces to the latter stages of the project during a period when more than 90 percent of the foreign costs already had been incurred. -39- 173. The economic performance of the traditional components of the Fifth Railway Project has been quite similar to what was expected in the SAR. Thus, both the SAR and the reevaluation here calculate EIRR's for the Zhegan line component of 35 percent. Similarly, the recomputed EIRR of the Xuzhou terminal expansion, 29.2 percent, is only slightly higher than the 26 percent value in the SAR. 174. The rates of return derived here for the pilot track rehabilitation and freight wagon wheel components of the Fifth Railway Project (106 percent and 233 percent, respectively) are substantially higher than those reported in the SAR (27 percent and 26 percent, respectively). This apparent discrepancy results from the SAR's reluctance to use the value-added approach to measuring the benefits of these components even though this methodology is adopted elsewhere in the SAR (and in this ICR as well). Indeed, the SAR, conceding that the value-added approach provides "a better estimate" of the benefits, indicates that it would yield rates of return for these components in excess of 100 percent - more in line with those calculated here.' D. PROJECT SUSTAINABILITY 175. Both, the Fourth and Fifth Railway Projects are likely to be sustained. With respect to physical sustainability, MOR's record in maintaining infrastructure, locomotives and rolling stock is good and there is no reason to believe this will change. However, deteriorating finances cause some concern. MOR has been operating at a loss since 1993 but has recently announced an unprecedented near-term program designed to dramatically improve bottom line earnings (Annex 2). 176. From an economic perspective, sustainability was assessed in terms of the sensitivity of the project component's EIRR to changes in benefit and cost assumptions. All of the results were satisfactory. 177. Because of the Strategic Plan Studies prepared under the Fourth Railway Project MOR possesses now the basis of a modern telecommunications network into which major investments funded by the Bank under the Sixth and Seventh Railway Projects are currently being carried. MOR is installing the Operating Information System as a Transport Management Information System under the ongoing projects. Three of the five models adopted under Transportation Capacity Computer Modeling are used by CARS to analyze some line sections that have the potential for speed increase; eleven staff members are working under this contract. 178. The five Planning Studies prepared under the Fifth Railway Project resulted in: a program to purchase track maintenance machines for ongoing projects and with other foreign aid funding; improved design, operation and maintenance of electrification projects; establishment of a Telecommunications Master Plan, which became the basis for subsequent investments under later railway project; and a system to enable MOR to conduct economic evaluations necessary to identify desirable capacity expansion expenditures. 9 See SAR Fifth Railway Project, p 56, note 2. - 40 - E. BANK PERFORMANCE 179. Bank performance during identification, preparation and appraisal of Fourth Railway Project was, in the end, moderately satisfactory. The activities were eventful as described below (paras. 180 to 185). The Fifth Railway Project was, however, satisfactorily identified, prepared and appraised. Both projects were consistent with the Government's objective, which was to increase railway transport capacity so as to sustain economic development, and to enhance expertise needed to manage the railway's future development. Project performance indicators, consistent with the practice in the 1980s, were not developed with sufficient detail and specificity. 180. Project Preparation for the Fourth Railway Project. Originally, the project focused on four major components and technical assistance with a loan amount of US$200 million. During pre-appraisal in March/April 1987-just one year after negotiations for the Third Railway Project-the Government withdrew two of the four components totaling US$44 million and proposed two new components instead, namely the Zhuzhou-Hangzhou line-doubling (US$85 million) and the Beijing-Shanghai line modernization (US$72 million), for a total of US$157 million. At the same time, it also requested an increase of the remaining component from US$130 million to US$163 million. Without any explanation, the Final Executive Project Summary (FEPS) indicated that Bank financing would be US$357 million. 181. By March 1988, the project content had changed again. The two large components introduced in March/April 1987 were withdrawn because of SPC and MOF concerns about an uncommitted balance of some US$420 million from three previous loans. The deleted components were expected to form the core of a Fifth Railway Project in FY 89. The project now comprised the three final components with a loan amount of US$202.5 million including the Strategic Plan Study, which was retained even though the Beijing-Shanghai line modernization component had been postponed. The main reason given by the Bank for retaining the study was that otherwise the Bank would be supporting only traditional hardware investments, and the rationale for Bank financing of this project would be very weak. 182. Following the FEPS, the appraisal mission attempted, but failed to obtain agreement with MOR to conduct a formal study in factory modernization strategy. Nevertheless, it was the Bank's expectation that MOR staff would receive technical assistance and training in order to improve the preparation of future factory modernization projects. To improve upon the dialog between MOR and the Bank, an executive summary report on factory modernization strategy was prepared for discussion with MOR during negotiations. 183. The questionable nature of the Strategic Plan Study's appraisal was underscored by the invitation-to-negotiations telex of March 16, 1988. It stated: "we will wish to discuss the current status and detailed arrangements for implementation of Strategic Plan Study as broadly outlined in Annex Two of the draft Appraisal Report to ensure that this very important component is not delayed and that it progresses quickly well to meet China Railway's needs." [Underlining added]. Later, on April 21, 1988, the Bank acknowledged that "MOR reserves the right not to implement proposals that it considers not appropriate for the railways in China" while indicating that grant funds would assure financing the study. -41- 184. That a certain lack of clarity existed about the essence of the Strategic Plan Study came to light shortly after Negotiations. A Bank memorandum of September 21, 1988, recorded that the letter of invitation issued to MOR relating to telecommunications was not in accordance with the understandings as described in the SAR, Loan Agreement and the agreed Minutes of Negotiations. The main issue of contention was that MOR was confining its request for foreign assistance to the development of dedicated railway data network instead of a far more ambitious telecommunications Strategic Plan for MOR. The dedicated data network might-or might not- be part of a larger telecommunications plan for MOR. But MOR's insistence on confining the project to the narrow goal of a dedicated data network represented a substantial deviation from the objective to develop a plan for telecommunications as a whole. 185. A major concern raised at the loan package clearance with regard to the Strategic Plan Study was the fact that MOR had historically been very reluctant to involve the Bank in broader strategic planning. Ostensibly, this reluctance was explained by its desire not to spend the proceeds of the Bank's loan on technical assistance, citing the excessive wages and living expenses earned by expatriate technical experts. This concern, however, could be alleviated through the possible availability of Japanese grant funds of about US $2 million. 186. At Negotiations, it was finally agreed that the loan amount vould be reduced by US$2.5 million to US$200 million. "The reduction resulted from (a) the reluctance of the Chinese Government to borrow US$2.5 million at Bank rates for the estimated foreign cost of the Railway Strategic Plan Study; (b) the availability of US$1.5 million from the Japanese Yen Grant Facility; and (c) our agreement to relocate US$1.0 million from unallocated funds in the Third Railway Project". By obtaining the grant funds, the issue was resolved. Actually, Bank staff described this solution as a breakthrough when two Board speakers raised the matter. 187. The Minutes of the Board Presentation of the Fourth Railway Project, recorded and emphasized that, "in view of a team of railway experts organized by the World Bank last year, the railways may be able to increase throughput substantially on key corridors by investments in technological modernization, which at the same time would significantly enhance the quality of services offered to the railway's customers. That work has given rise to the Strategic Plan Study for railway computerization and telecommunication, and it is this aspect -- and the potential it promises -- which makes this project such an exciting one .... 188. The above summary of project appraisal allows the following conclusions: a) Although the Bank may have had a clear view of its assistance strategy, there was no apparent concept of what would be the best project approach under the given circumstances. b) The Bank's acceptance of MOR's oscillation with regard to the project content could be interpreted as an indication that this project followed too closely to the approval of Third Railway Project. c) The compromise to acquire US$1.5 million from the Japanese Yen Grant Facility and to relocate US$1.0 million from unallocated funds in the Third Railway Project for the Strategic Plan Study demonstrates clearly MOR's lack of interest-and the Bank's substantial interest-in keeping the study in the project. - 42 - 189. Staff training was strongly emphasized as a key component during the project's design phase. Although called an "outline" in the SAR text of the Fourth Railway Project, the corresponding annex conveys the impression of in-depth preparation for staff training. It is, therefore, quite surprising that apparently little attention was given to training implementation during supervision. Bank files are silent on this matter. 190. When the Fourth Railway Project became effective, the Bank expressed its management's increasing uneasiness about lending for railways to China. A letter'o to the Minister of Railways explained that, unlike in other countries, railway projects in China had been prepared in a narrow and restrictive way. All non-study components in the past projects had dealt with upgrading, expanding and modernizing of individual physical plants of the railways. Although there was nothing wrong with these "plant-specific" components themselves, the problem was that the Bank had had to appraise these components not only with limited information, but also in isolation from the rest of the railways. As a result, the Bank knew too little about the railway system and the economic priorities of the components appraised relative to other investments. 191. To enable the Bank to continue its cooperation with MOR and enhance its contribution in the sector, the letter suggested that, as a minimum, it would be necessary for: a) The Bank to acquire more knowledge on China railways, in order to determine the most needy areas for Bank assistance, and to design future railway sector-type operations for China. This would involve conducting a comprehensive dialogue covering the railway's operations, motive power, rolling stock, infrastructure, telecommunications, maintenance, expenditure programs, investment planning, and finances; and b) Future railway operations should comprise "system-wide" components, which entail upgrading, expansion, modernization, and efficiency improvements of major aspects of the railways on a network-wide basis, instead of plant-specific components as in the past. 192. The letter also stated that such operations would require considerable preparation by both MOR and the Bank and, therefore, were not likely to be feasible for at least two years. However, it would be essential for the Fifth Railway Project to be a transitional operation, in order to pave the way for more meaningful cooperation in the future. 193. This letter appears to have had a fundamental impact on MOR's and the Bank's approach to the Fifth Railway Project. 194. Although both projects were sufficiently supervised in terms of short, standard missions, Bank involvement was not always adequate during implementation. The Bank's supervision should have focused more heavily on environmental protection and resettlement. This is a fair 10 Draft letter of March 14, 1989, marked Attachment 5. Bank files do not contain a signed copy. - 43 - judgment even though at the time of project effectiveness, environmental protection and resettlement did not play the role it does now. The projects were approved without the requirement of a formal Environmental Assessment and Resettlement Action Plan. It would have been of great advantage if an environmental management plan had identified the various environmental impacts of the projects and measures to mitigate them. And if resettlement action had been preceded by socio-economic baseline studies against which social impacts could have been measured, this too would have been very helpful. F. BORROWER PERFORMANCE 195. Overall, MOR's administrative performance was generally satisfactory. Civil works were carried out according to current MOR standards and are of good quality. With the exceptions addressed below, there were only a few problems during implementation of both projects. This was the case even though the three locomotive and rolling stock factories participating in the Fourth Railway Project had little institutional experience with Bank projects. MOR and its regional organizations which benefited from the Fourth and Fifth Railway Projects were very cooperative and helped prepare information for this ICR. They provided some data to complement those available in the Bank's project file, which produced a more comprehensive picture of project implementation. 196. Planning Studies - Fifth Railway Project. The SAR reported that MOR gave the studies high priority since they would assist it in looking at future investment requirements in a rational, system-wide context. Furthermore, the studies were to recommend investment plans in their respective areas for the 8th Five-year Plan, and at the same time provide the basis for future Bank Group assistance to MOR. Finally, the studies were to be linked directly to improving operational performance in their respective functional areas, and, where practical, to identify meaningful parameters of performance, set targets for these parameters, and measure actual results against the targets. These were quite ambitious promises. The achievement of the studies' objectives varied substantially from "fully achieved" to "basically not achieved." With the exception of the Permanent Way Maintenance and Rehabilitation Study and the RIS, they failed, however, to provide a link to improving operational performance in their respective functional areas. In the case of the Locomotive and Rolling Stock Maintenance and Rehabilitation Study, there was also a failure to provide a basis for possible future lending operations involving the Bank and other sources. 197. Procurement. Tender documents for procurement (luring the first year of implementation of the Fourth Railway Project were supposed to be submitted to the Bank prior to Negotiations. This did not happen. The Minutes of Negotiations recorded that they were to be provided by the date of the Government's final agreement to the negotiated documents, i.e. two weeks later. This agreement was given on May 24, 1988, but because of "domestic reviewing works for the bidding documents" they were not ready by the date planned. On June 6, the Bank expressed its disappointment and pointed out that "during appraisal in October 1987, MOR assured our mission that it would be easy to send these documents to the Bank before Negotiations". Some of them were received on June 20, which facilitated Board approval of the project. With a telex of October 26, 1988, the Bank admonished MOR that documents for only two tenders had been received, although bidding documents for all tenders for materials and equipment to be procured during the first year of implementation were to be sent to the Bank - 44 - before Negotiations. On November 11, 1988, MOR replied that adjustments for the purchasing lists and some necessary domestic procedures prevented them from fulfilling the obligation. This historical summary suggests that preparation work for appraisal was not as mature and finalized as it appeared to be in the SAR. 198. Since all railway projects handled by MOR experienced procurement delays, MOR prepared a detailed procurement schedule for the Fifth Railway Project. It was over-optimistic and unsatisfactory. This tendency has been observed in subsequent railway projects, which raises the question of MOR's willingness to learn from past experience. 199. Since 1992, the issue of streamlining MOR's procurement process had been addressed by several Bank missions. Although they were informed that "MOR would continue efforts in streamlining of procurement process and engage experienced staff," substantial improvements were not made. On the contrary, the Fifth Railway Project was the first with an increasing number of quality problems and complaints by bidders. 200. Progress Reports. Implementation reporting was scant and became irregular beginning in the early 1990s. With the exception of procurement tables, MOR did not provide comprehensive sets of progress reports. The quality of those reports was also unsatisfactory. Bank missions pointed out that MOR's reports were merely a collection of construction schedules with incomplete explanatory text. FCTIO staff, however, repeatedly stressed that they had difficulties in obtaining the basic information in project implementation from MOR's administrations. On several occasions, FCTIO's management gave the impression that it considered the preparation of progress reports to be an onerous task, one that had to be carried out solely for the benefit of the Bank. In response, Bank staff repeatedly explained that the reports ought to be very useful to MOR's senior and middle management in monitoring project implementation progress. 201. Some of these deficiencies were offset by extensive information provided during supervision missions; this did not apply, however, to the expansion and modernization of three locomotive and rolling stock factories, a major component of the Fourth Railway Project. For example, although several times requested, MOR never provided the Bank with a realistic assessment of plant capacities to facilitate the evaluation of the Bank-funded investments and SAR objectives. G. ASSESSMENT OF OUTCOME 202. The overall outcome of both projects is rated as satisfactory, although this assessment needs to be qualified with regard to the Fifth Railway Project. Several sub-components of the Locomotive and Rolling Stock System-wide Component under this project were technically not achieved. The objectives for the Strategic Plan Study under the Fourth Railway Project were somewhat narrowly defined although this component was intended to help promote a broader- based dialogue between the Bank and MOR which made it quite easy for MOR to achieve them. The outcome of the study may also have been affected by the Bank's desire to retain it in the project even though the Beijing-Shanghai line modernization component had been postponed . The objectives for the studies under the Fifth Railway Project were more fundamental which -45 - may have contributed to the minimal outcome of the Locomotive and Rolling Stock Maintenance and Rehabilitation Study; the objectives were basically not achieved. 203. The Fourth Railway Project, had three particular objectives, which reflected the main thrust of the Government's development strategy for railways during the 7th Five-year Plan (1986-1990). Of these, and it was not necessarily the most important one, was the aim of increasing the capacity of key routes and terminals. The double-tracking of the 492 km single- track line and the 113 km electrification of the northern section from Yueshan to Luoyang met this objective by providing value added to the economy; new goods production (and incremental passenger movement) were made possible by the additional transport capacity of the railway route. 204. The second and third objectives were to enhance the productivity of existing assets by raising the level of technology used in different activities within MOR, e.g. in train operations, maintenance, administration, and manufacturing; and to expand rolling stock manufacturing facilities. These were mainly achieved through an extensive expansion and modernization program of three locomotive and rolling stock factories. Although envisaged production targets were not met due to major changes in the work allocation of MCR's locomotive and rolling stock, the expected enhancement of the existing assets enabled MOR to raise production and overhaul capacity of locomotives, coaches and freight wagons. It also permitted MOR to improve both quality and productivity, while enhancing its capability to develop new products. 205. The second project objective was also addressed through a Strategic Plan Study, which was to develop strategic plans in the fields of telecommunications and computerization in order to improve operational management and transportation capacity. This was consistent with the Government's goal and the Bank's assistance strategy to develop the railway sub-sector; but it also raised quite high expectations with regard to a broader-based dialogue between the Bank and MOR. One tangible outcome of the study is the fact that in telecommunications, MOR has established the foundation for a data communication network. In addition, the OIS study defined a strategic approach to develop a computer based operating information system, and since 1991, MOR has been operating a computerized line transport capacity analysis of its railway system. 206. The Fourth Railway Project had a further, important general objective'1, which was to provide a bridge to possible sector lending through the choice of the components, in particular the Strategic Plan Study. The study, which was to be tested on the Beijing-Shanghai railway corridor, was to be an innovation that could be replicated elsewhere on other major railway lines in the country. Recorded implementation history, however, reveals little about whether this objective was achieved. As the evaluation of the relative benefits of alternative operating investments and practices on the Beijing-Shanghai railway corridor was not carried out, and information provided by MOR during the ICR completion mission did not convincingly address the issue, it appears that this secondary objective was not achieved. 207. During preparations for the Fifth Railway Project, the Bank's project team claimed that a new era in the Bank's relationship with MOR had commenced with the identification mission in May 1989. Various approaches and the project scope were discussed, especially the concept of a " SAR Fourth Railway Project, para. 3.2. - 46 - "system-wide component" and the new railway project's link to future lending through the preparation of studies and action plans. Actually, the four objectives for the Fifth Railway Project--which were to ensure that MOR became more efficient and continued to be financially viable through better operations, maintenance practices, investment planning, and tariff policies-- demonstrated a departure from previous conventional projects. 208. The first objective of the Fifth Railway Project was to introduce recent developments in railway technology and maintenance and rehabilitation practices. This was fully achieved when MOR established a long-range track rehabilitation and upgrading program. This program included the creation of track maintenance and track rehabilitation machine groups, and required the purchasing of track machines. This investment in a modem maintenance program was replicated in subsequent railway projects and with other foreign funding. In addition, the placement of imported heat-treated rails in 500 km of mainline track with the most severe curvature resulted in savings due to longer life than domestic rails; these heat-treated rails reduced replacement and maintenance costs substantially. 209. The second and third objectives were to develop system-wide plans and planning tools for MOR's major sub-sectors and to develop modem planning and analytical techniques for establishing investment priorities and tariff structure. The five wide-ranging studies prepared under the Fifth Railway Project became the basis for preparation of later operations. They also introduced more efficient techniques in track maintenance, at least pertaining to the evaluation of repair technology and standardization of rules for one locomotive type. They also detenrined the final selection of candidate lines for electrification under the 8th Five-year Plan. Finally, the project produced what later became MOR's Telecommunications Master Plan. This substantially improved the operating efficiency of the Chinese railway system by providing MOR with the capability of conducting economic evaluations necessary to identify desirable capacity expansion expenditures. 210. Finally, capacity was added where urgently needed and justified. The Zhegan line capacity expansion added value to the economy through the additional shipping capacity for new goods and more passengers. The enhanced capacity of the expanded Xuzhou terminal produced value added benefits in terms of both coal and non-coal traffic. The system-wide locomotive and rolling stock component helped to meet a few critical materials, machinery and equipment requirements for increasing overhaul and production capacity. H. FUTURE OPERATIONS 211. Future operations will have to be consistent with the objectives China has for its transport sector. A Strategy for the Transport Sectorl2 identified two primary objectives: (i) to enhance China's economic growth and increase its competitiveness in world markets, and (ii) to reduce income disparities between inland and coastal provinces and between rural and urban areas. Achieving these will require: stimulating competition; promoting development of the transport network to alleviate capacity bottlenecks and provide capacity for economic growth; the opening up of isolated areas; charging for the use of infrastructure so as to cover long-term social costs; 12 China, Forward with One Spirit: A Strategy for the Transport Sector, April 23, 1998, Report No. 15959-CHA -47 - and implementing institutional reform that recognizes the transport sector as a whole, rather than as an aggregation of independent modes. Reducing the sector's negative effects on the environment and improving the sector's poor safety record should be the third of the sector's objectives. 212. In recent years, the Bank has worked with the central and provincial governments, as well as with MOR, to assess the institutional changes and pricing and regulatory measures needed to stimulate a more market-responsive transport sector, based on concepts of integrated transport systems. The next stage, which is already underway, is to progress from concepts to specific policies and actions, and then to their implementation. 213. One result of the inadequate transport infrastructure is its contribution to perpetuating large income disparities between rural and urban areas and,between inland and coastal provinces. Highway and railway links between the inland provinces and principal domestic markets in the coastal provinces and their deep-water ports used for international trade are so poorly developed that it can take weeks for a container to move the typical 1,000kms involved. Future projects should build on the experience of those recently implemented that include components to address physical isolation that will improve access to inland provinces. 214. After seven railway lending projects, success has been achieved in the form of physical investments, studies and pilot projects that lead the railway towards a more commercial and businesslike approach to its operations. Policy and institutional reform has come more slowly than the Bank has hoped for, but this is in keeping with China's conservative approach to such fundamental changes. Future lending may have less emphasis on physical components and studies, and more on implementation of policies to stimulate competition, and create an enabling environment for more user-oriented multi-transport services. I. LESSONS LEARNED 215. Both projects, like the earlier ones, were relatively simple with regard to their physical components. However, procurement problems arose during implementation. The appraised estimates of costs and implementation timing proved optimistic. These deficiencies are less understandable since the Bank and MOR had accumulated sufficient experience in implementing Bank-assisted railway projects in China by the time of their appraisal. The main lessons learned were as follows: a) Bank management's re-assessment of previous lending policies appears to have had a fundamental impact on MOR's and the Bank's approach in the Fifth Railway Project. The ICRs for Sixth and Seventh Railway Projects should evaluate whether the Fifth Railway Project, which was regarded as a transitional operation, really paved the way for more meaningful cooperation with MOR. b) Extensive studies proved to be a challenge to MOR. The Planning Studies under the Fifth Railway Project were a somewhat ambitious attempt to look at future investment requirements in a rational, system-wide context. Although the range of the studies' achievements varied substantially, the ICRs for subsequent projects -48 - should evaluate whether they really enhanced MOR's contribution to the transport sector in China. c) The Fourth Railway Project had three studies and two physical components with 6 different locations. (The Yueshan-Xiangfan line double-tracking and partial electrification was split into three distinctive sections.) By contrast, the Fifth Railway Project consisted of four physical components with 9 different locations and 8 studies (the five Planning Studies and three additional studies). Both projects, but especially the Fifth Railway Project, required a multitude of professional skills for appraisal and supervision, which caused expensive project appraisals and supervisions and may have contributed to the Bank's involvement not having been always adequate during implementation. Therefore, future projects should consist of only a few components, which are specifically targeted to assist in achieving the transport sector's objectives in order to make them more efficient, manageable and cost-effective. d) MOR has historically been very reluctant to involve the Bank in broader strategic planning, ostensibly because it has not wanted to spend Bank loans on technical assistance. Some of the studies' objectives and targets in the Fifth Railway Project were somewhat ambitious; and one of the five Planning Studies basically did not achieve its objectives. It is, therefore, very important to receive MOR's full-hearted support and commitment during appraisal of future projects. e) Future appraisals should avoid such arbitrary changes as experienced during the preparation of the Fourth Railway Project. In addition, realistic procurement plans, adequate estimates of local costs and implementation schedules providing for inevitable delays are essential for successful project implementation. f) If the problem of MOR's inadequate progress reporting cannot be resolved, supervision of ongoing projects should focus more on collection of information in a format conducive to the production of ICRs. - 49 - PART II: STATISTICAL ANNEXES FOURTH RAILWAY PROJECT Table 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro policies x Sector policies x Financial objectives x Institutional development x Physical objectives Poverty reduction x Gender issues x Other social objectives x Environmental objectives x Public sector management x Private sector development x Other - Resettlement x B. Project Sustainability Likely Unlikely Uncertain x C. Bank performance Highly satisfactory Satisfactory Deficient Identification x Preparation assistance x Appraisal x Supervision x D. Borrower performance Highly satisfactory Satisfactory Deficient Preparation x Implementation x Covenant compliance x Operation (if applicable) Highly Highly E. Assessment of outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactory x -50- FOURTH RAILWAY PROJECT Table 2: RELATED BANK LOANS/CREDITS Year of Loan/Credit Title Approval Status Preceding Operations: 1. First Railway Project Line capacity expansion; doubling 1984 Completed on (Ln. 2394) locomotive production; costing study. 12/31/90 (PCR 6/24/91) 2. Second Railway Line capacity expansion through upgrade 1985 Completed on Project (Ln. 2540) and electrification; expand passenger 06/30/94 (PCR coach production capacity; strengthen 6/30/95) applied research; modernize management techniques; advise on improvements in university curricula. 3. Third Railway Capacity expansion of two lines; 1986 Completed on Project (Ln. 2540, improvement of technology in a 06/30/95 (ICR Cr. 1680) signaling factory; improvement of track 6/26/96) maintenance; continuation of costing study. Following Operations: 1. Inner Mongolia Construction of single track line; 1989 Completed on Railway Project acquisition of operational equipment; 12/31/96 (ICR (Ln. 3060/Cr. 2014) training and recruitment of staff. 6/25/97) 2. Fifth Railway Track rehabilitation and maintenance; 1991 Completed on Project (Ln. 3406) acquisition of locomotives and rolling 12/31/98 stock; line capacity expansion; expansion of Xuzhou terminal; implementation of costing study. 3. Sixth Railway Project Line capacity expansion; technological 1993 To be (Ln. 3581) moderization for track maintenance, completed on telecom, MIS and container transport. 06/30/99 Policy reforms to rationalize tariffs, modernize accounting standards and improve railway management and regulation. 4. Seventh Railway Policy reform and institutional 1995 To be Project (Ln. 38970) development to provide TA to completed on implement railway restructuring, tariff 12/31/02 reform and labor productivity enhancement. Investments include: line electrification; purchase of locomotives; upgrading telecomn system; commercializing container transport; and protecting the environment. - 51 - FOURTH RAILWAY PROJECT Table 3: PROJECT TIMETABLE Item Date Planned Revised Date Actual Identification Pre-appraisal March 1987 June/July 1987 Appraisal June/July 1987 October 1987 Negotiations January 1988 May 9 to 13, 1988 Board approval March 15 1988 June 23, 1988 Signature End November 1988 January 25, 1989 Effectiveness September 30 1988 March 27, 1989 Project completion Dec. 31, 1995 March 30, 1998 Loan closing June 30, 1996 June 30, 1998 FOURTH RAILWAY PROJECT Table 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL (US$ million) FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 Appraisal estimate 6.00 34.00 50.00 44.00 26.00 16.00 16.00 8.00 -- Actual 1.16 42.59 38.71 28.24 17.14 48.09 19.54 1.76 - 0.68 Actual as% of estimate 19.30 125.30 77.70 64.20 65.90 300.60 122.10 22.00 Date of refund: February 10, 1999 - 52 - FOURTH RAILWAY PROJECT Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Completion Planned Actual Delay Item/Year Start Completed Start Completed (months) Yueshan-Xiangfan Line 1987 1995 1987 12/97 /a 24 months Three Factories 09/88 1991 12/91 12/95 48 months Strategic Plan Study 08/88 06/91 08/88 12/95 /b 54 months la Two machines costing about $2.8 million were delivered in February 1998, and accepted on March 30, 1998. /b By December 1995, the study was essentially completed. Due to a delivery delay of a computer purchased under the Sixth Railway Project, consultants services lasted until September 1997. FOURTH RAILWAY PROJECT Table 6: KEY INDICATORS FOR PROJECT OPERATION The SAR did not define key indicators for operation. - 53 - FOURTH RAILWAY PROJECT Table 7: STUDIES INCLUDED IN PROJECT The project contained a Strategic Plan Study as one of the four main components. Details are provided in the text part of this ICR. Study Name Purpose as defined at Status Impact of Study appraisal/redefined Strategic Plan Develop strategic plans Study in the fields of telecommunications and computerization in order to improve operational management and transportation capacity. Telecommunicatio Review MOR's current Satisfactorily Study resulted in a ns telecommunications completed system master plan for strategy plans and to telecommunications update them based on development, which, new technological since 1995, is being developments. implemented under the ongoing projects. Operating Define and obtain Satisfactorily Study defined a Information management agreement completed strategic approach to System (OIS) on a strategic approach to develop a computer developing a computer based operating based operating information system. information system for MOR as a whole. Transportation Demonstrate the Satisfactorily Computer models Capacity usefulness of computer completed except helped evaluate the Computer models to help evaluate for the evaluation relative benefits and Modeling the relative benefits and of the relative costs of alternative costs of alternative benefits of operating investments operating investments alternative and practices. and practices. operating investments and practices on the BeiJ ing- Shanghai railway corridor. - 54 - FOURTH RAILWAY PROJECT Table 8A: PROJECT COSTS Planned Local Foreign Total Local Foreign Total ----- (Yuan mil) ----- ----- (US$ mil)- Yueshan-Xiangfan Line 692.9 737.8 1,430.7 187.3 199.4 386.7 Three Factories February 7 83.4 35.0 118.4 22.5 9.5 32.0 Sifang 204.7 80.9 285.6 55.3 21.9 77.2 Qiqihar 81.8 62.6 144.4 22.1 16.9 39.0 Strategic Plan Study 1.9 9.3 11.2 0.5 2.5 3.0 Total Base Costs 1,064.7 925.6 1,990.3 287.7 250.2 537.9 Physical Contingencies 106.3 45.8 152.1 28.7 12.4 41.1 Price Contingencies 149.9 148.6 298.5 10.5 10.5 20.0 Total Project Cost 1,320.9 1,120.0 2,440.9 326.9 273.1 600.0 Actual Local Foreign Total Local Foreign /b Total ----- (Yuan mil) ----- ----- (US$ Mil) ----- Yueshan-Xiangfan Line /a 2,314.4 2,464.4 4,778.8 361.5 384.9 746.4 Three Factories February 7 148.4 44.3 192.7 30.7 7.9 38.6 Sifang 374.7 93.3 468.0 82.1 16.0 98.1 Qiqihar 174.2 114.7 288.9 38.8 22.0 60.8 Strategic Plan Study -- 9.1 9.1 -- 1.6 1.6 Total Base Costs 3,011.7 2,725.8 5,737.5 513.1 432.4 945.5 Physical Contingencies -- -- Price Contingencies -- -- Total Project Cost 3,011.7 2,725.8 5,737.5 513.1 432.4 945.5 Notes: /a The same cost distribution as in the SAR has been used to reflect the indirect foreign exchange costs. - 55 - FOURTH RAILWAY PROJECT Table 8B: PROJECT FINANCING Appraisal Estimate Actual/Latest Estimate Responsible Party / Component Yuan US$ Yuan US$ Million Million Million million IBRD 740.0 200.0 1,201.1 197.92 Japanese Grant Facility (PHRD) /a 1.5 9.1 1.59 Government 1,474.5 398.5 4,527.3 745.94 Total 2440.9 600.0 5,737.5 945.45 Notes: /a By the time of Board presentation, co-financing of Yen 200 million from the Government of Japan to assist in the financing of the Strategic Plan Study had been granted. FOURTH RAILWAY PROJECT Table 8C: ALLOCATION OF LOAN PROCEEDS Planned Actual Category US$ '000 US$ '000 1. Equipment and materials 186,100 197,803.6 (including transfer of technology) 2. Consultants' services 2,800 114.4 (including software and training) 3. Unallocated 11,100 -- 4. Special Account /a 1.6 Cancellation 2,080.4 Total 200,000 200,000.0 la The amounts indicated under the Special Account category represent the exchange rate fluctuation from the time of the advances to the Special Accounts to the time of documentation/recovery of the account. -56- FOURTH RAILWAY PROJECT Table 9: EcoNoMIC COSTS AND BENEFITS (Yuan million, 1997 prices) Total Total NPV EIRR Costs /a Benefits /b (@ 12%) % Yueshan-Xiangfan Line Double-Tracking and Partial Electrification ICR: 41,644 340,004 22,913 19.8 SAR: 17,304 219,268 30,363 36.9 /a Sum of undiscounted cost stream. /b Sum of undiscounted benefit stream. FOURTH RAILWAY PROJECT Table 10: STATUS OF LEGAL COVENANTS Covenant Original Revised Section Description of Covenant Class Status Date Date Comments Loan Open and maintain a special account I C N/A N/A Agree.t 2.02 (b) Loan Borrower to carry out the Strategic 9 C N/A N/A Agrec.t Plan Study for Railway Capacity, 3.03 Operation Information System and Telecommunications Loan Borrower to carry out the training 10 C N/A N/A Agree.t under Part D in accordance with a 3.04 program (in new technology and management) agreed with the Bank Loan Submit Annual Audit Reports by June 1 C N/A N/A Agree.t 30 each year 4.01 Covenant Class: Status: = Accounts/audits 8 = Indigenous people C = Complied with 2 = Financial performance/revenue 9 Monitoring, review, and reporting CD= Compliance after delay generation from beneiciaries 10 = Project implementation not CP = Complied with partially 3 = Flow and utilization of project covered by classes 1-9 NC Not complied with funds II Sectoral or cross-sectoral SOON = Compliance expected in 4 = Counterpart funding budgetary or other resources reasonably short time 5 = Management aspects of the allocation project or executing agency 12 Sectoral or cross-sectoral policy! 6 = Environmental covenants regulatory/institutional action 7 = Involuntary resettlement 13 p Other -57- FOURTH RAILWAY PROJECT Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS Statement Number and Title Describe and Comment on Lack of Compliance There was no significant lack of compliance -- with an applicable Bank Operational Manual Statement (OD or OP/BP) FOURTH RAILWAY PROJECT Table 12: BANK RESOURCES: STAFF INPUTS (Weeks) FY FY FY FY FY FY FY FY FY FY FY FY FY FY Total 86 87 88 89 90 91 92 93 94 95 96 97 98 99 Pre-appraisal 44.4 108.9 36.5 189.8 Lending Dev. 3.2 1.9 5.I Appraisal 85.4 85.4 Negotiations 16.4 16.4 Supervision 11.8 12.9 12.7 11.3 14.3 8.9 11.7 4.0 12.9 9.9 1.8 112.2 SPNP 0.5 0.5 Completion 9.6 9.6 Total 44.4 112.1 140.2 11.8 12.9 12.7 I1.3 14.3 9.4 11.7 4.0 12.9 9.9 11.4/a 419.0 /a As of May 11, 1999 -58- FOURTH RAILWAY PROJECT Table 13: BANK RESOURCES: MISSIONS Performance Rating /b Stage No. Days Specialized Imple- Develop- Types Of Month/ of in Staff Skills mentation ment of Project Cycle Year Persons Field Represented /a Status Objectives Problems /c Identification None Preparation None Pre-appraisal June/July 1987 11 14 ECN, ENG, FNA, MISC, TC, OC, SC Appraisal October 1987 10 13 ECN, ENG, FNA, MEC, MISC, OC,TC Supervision 1 January 1989 3 2 FNA, ECN, ENG (C) 2 1 P Supervision 2 May 1989 1 2 ENG, ENG (C) d/ Supervision 3 January 1990 5 4 ENG, ENG (C), ECN, d/ TC, MEC, MISC Supervision 4 June/July 1990 3 5 FNA, ENG, ENG (C) 1 1 TA Supervision 5 Oct./Nov. 1990 2 1 FNA, ENG (C), I I TA Supervision 6 Feb./Mar. 1991 6 4 FNA, ENG, MEC, TC, I I TA MISC Supervision 7 Oct./Nov. 1991 3 2 FNA, ENG (C), MEC 2 1 P, TA Supervision 8 March 1992 1 2 TC -- -- -- Supervision 9 May/June 1992 4 2 FNA, ENG (C), MEC, 2 1 TA MISC Supervision 10 November 1992 4 3 FNA, ENG (C), MEC, 2 1 TA MISC Supervision 11 April 1993 3 2 FNA, ENG, MEC 2 1 P, TA Supervision 12 October 1993 3 7 FNA, ENG, MEC 2 1 P, TA, T Supervision 13 May 1994 3 2 FNA, ENG (C), MEC S S TA, T Supervision 14 May/June 1995 3 7 ENG, MEC S S TA, T Supervision 15 September 1995 1 2 FNA S S TA, T Supervision 16 July 1996 1 6 ESP -- -- -- Supervision 17 October 1996 1 6 ENG S S F, TA, T Supervision 18 April 1997 1 4 ENG S S -- Supervision 19 May 1997 1 4 RES -- -- -- Supervision 20 October 1997 1 1 ENG S S -- Supervision 21 March 1998 1 1 ENG S S -- Supervision 22 December 1998 1 1 RES -- -- -- ICR Jan./Feb. 1999 1 3 ENG -- -- -- /a C = consultant; ENG = engineer; ECN = cconomist; FNA = financial analyst; ESP = environment specialist; MEC mechanical engineering consultant; MISC = MIS consultant; OC = operations consultant; RES= resettlement specialist; SC = signaling consultant; TC = tciccom engineer. /b I= no significant problems; 2 = moderate problems; 3 = major problems; S = satisfactory. /c F= financial; M = management; P = procurement; S = studies progress; TA = technical assistance; T = training. /d No Back-to-Office report in Files. - 59 - FIFTH RAILWAY PROJECT Table 1: SUMMARY OF ASSESSMENTS A. Achievement of Objectives Substantial Partial Negligible Not applicable Macro policies x Sector policies x Financial objectives x Institutional development x Physical objectives x Poverty reduction x Gender issues x Other social objectives x Environmental objectives x Public sector management x Private sector development x Other - Resettlement x B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly satisfactory Satisfactory Deficient Identification x Preparation assistance x Appraisal x Supervision x D. Borrower Performance Preparation x Implementation x Covenant compliance x Operation (if applicable) Highly Highly E. Assessment of outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactory x - 60 - FIFTH RAILWAY PROJECT Table 2: RELATED BANK LOANS/CREDITS Year of Loan/Credit Title Approval Status Preceding Operations: 1. First Railway Project Line capacity expansion; doubling 1984 Completed on (Ln. 2394) locomotive production; costing study. 12/31/90 (PCR 6/24/91) 2. Second Railway Line capacity expansion through upgrade 1985 Completed on Project (Ln. 2540) and electrification, expand passenger 06/30/94 (PCR coach production capacity; strengthen 6/30/95) applied research; modernize management techniques; advise on improvements in university curricula. 3. Third Railway Capacity expansion of two lines; 1986 Completed on Project (Ln. 2540, improvement of technology in a 06/30/95 (ICR Cr. 1680) signaling factory; improvement of track 6/26/96) maintenance; continuation of costing study. 4. Fourth Railway Line capacity expansion; expansion and 1988 Completed on Project (Ln. 2968) quality improvement for three 06/30/98 (ICR locomotive and rolling stock factories; combined with strategic plan development for Beijing- ICR Railways Shanghai line. V) 5. Inner Mongolia Construction of single track line; 1989 Completed on Railway Project acquisition of operational equipment; 12/31/96 (ICR (Ln. 3060/Cr. 2014) training and recruitment of staff. 6/25/97) Following Operations: 1. Sixth Railway Project Line capacity expansion; technological 1993 To be (Ln. 3581) modernization for track maintenance, completed on telecom, MIS and container transport. 06/30/99 Policy reforms to rationalize tariffs, modernize accounting standards and improve railway management and regulation. 2. Seventh Railway Policy reform and institutional 1995 To be Project (Ln. 38970) development to provide TA to completed on implement railway restructuring, tariff 12/13/02 reform and labor productivity enhancement. Investments include: line electrification; purchase of locomotives; upgrading telecom system; commercializing container transport; and. protecting the environment. -61- FIFTH RAILWAY PROJECT Table 3: PROJECT TIMETABLE Item Date Planned Revised Date Actual Identification -- May 1989 Preappraisal September 1989 September 1989 Appraisal January 1990 January 1990 Pre-negotiation -- June 1990 Negotiations April 30 - May 4 August 5 - 7, 1991 1990 Board approval -- September 24, 1991 Signature -- October 28, 1991 Effectiveness before Dec. 31 1990 January 9, 1992 Project completion June 30, 1998 June 1999 /a Loan closing December 31, 1998 December 31, 1998 /a Most of the Permanent Way Maintenance and Rehabilitation Study' test due dates were in 1998. A report evaluating the test results and presenting recommendations is under preparation and expected to be completed by June 1999. FIFTH RAILWAY PROJECT Table 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL (US$ million) FY92 FY93 FY94 FY95 Y96 FY97 FY98 FY99 Appraisal estimate 14.8 99.7 117.0 45.6 25.6 17.6 9.7 -- Actual -- 43.0 90.93 130.6 25.6 9.8 1.0 6.6 Actual as % of estimate 0.0 43.1 77.7 286.4 99.9 55.9 10.3 -- Date of final refund: April 26, 1999 - 62 - FIFTH RAILWAY PROJECT Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Completion Planned Actual Delay Item/Year Start Completed Start Completed (months) P-way System-wide 1992 1994 /a 1993 10/98 46 months /b Locomotives and 1992 1994 /a 1993 02/98 50 months /c Rolling Stock System- wide Zhegan Line 1993 1995 05/93 12/97 24 months /d Xuzhou Terminal 1991 1994 1993 11/98 47 months Planning Studies 1990 1995 1990 12/97 24 months /a The SAR did not provide an implementation schedule. Therefore, the list of goods was used, however with one added to accommodate for testing and acceptance of equipment and machinery. /b Loan savings financed additional track maintenance equipment. Without this, the component would have been completed by August 1997. /c Loan savings financed additional factory equipment. Without this, the component would have been completed by May 1995. /d Loan savings financed additional telecommunications equipment to improve safety and quality of operations. With this, the components have been completed by September 1998. /e Most of the Permanent Way Maintenance and Rehabilitation Study test due dates were in 1998. A report evaluating the test results and presenting recommendations is under preparation and expected to be completed by June 1999. FIFTH RAILWAY PROJECT Table 6: KEY INDICATORS FOR PROJECT OPERATION The SAR did not define either performance or efficiency indicators for operation. Bank management was advised' that the Bank's assessment was more quantitative than qualitative, and neither MOR nor the Bank was in a position to the extent to which performance should improve in any particular area. For this reason the Bank sought and obtained MOR's agreement to carry out the five planning studies. 1 OM to Vice President dated January 17, 1990. - 63 - FIFTH RAILWAY PROJECT Table 7: STUDIES INCLUDED IN PROJECT Study Name Purpose as defined at Status Impact of Study appraisal/redefined Permanent Way Comprehensive review Task (a) MOR established a long- Maintenance and of track rehabilitation satisfactorily range track rehabilitation Rehabilitation Study and maintenance Completed, the and upgrading program and standards and methods research program the concept of track in order to help MOR (task b) is expected maintenance and track develop a technically to be completed by rehabilitation machine and economically June 1999. groups, and began optimal program. purchasing track machines, which it continued under the following railway projects and with other foreign funding. Locomotive and Prepare action plans to Partially Negligible except for the Rolling Stock optimize the completed evaluation of repair Maintenance and maintenance, reliability, technology and Rehabilitation Study availability and standardization of rules for utilization of diesel one locomotive type. locomotives and rolling stock. System Electrification Prepare plans for the Satisfactorily Determined the final Study electrification of railway completed selection of candidate lines lines for 8tlb Five-year for electrification for the 8 Plan. Five-year Plan on the basis of economic priorities and optimal timing of investments. System Prepare a long-range Satisfactorily Produced what later Telecommunication plan for modernization completed became MOR's Study and expanding MOR's Telecommunications telecommunications Master Plan. network. Railway Investment Improve the operating Satisfactorily Developed and applied a Study (RIS) efficiency of the Chinese completed decision support system railway system by consisting of an integrated providing MOR with the suite of traffic forecasting, capability of conducting cost, performance, network economic evaluations optimization, benefit/cost, necessary to identify and geographic information desirable capacity system models. _ expansion expenditures. - 64 - FIFTH RAILWAY PROJECT Table 8A: PROJECT COSTS Planned Local Foreign Total Local Foreign Total ----- (Yuan mil) ----- ----- (US$ mil) ----- System-wide Components Permanent Way 168.3 443.6 611.9 32.3 85.0 117.3 Locomotive/rolling stock 18.3 293.0 311.3 3.5 56.1 59.6 Zhegan Line 1,765.9 1,544.6 3,310.5 338.4 295.9 634.3 Xuzhou Terminal 300.3 302.2 602.5 57.5 57.9 115.4 Base Costs 2,252.8 2,583.4 4,836.2 431.7 494.9 926.6 Physical Contingencies 119.0 59.7 178.7 22.8 11.6 34.4 Baseline Estimate 2,371.8 2,643.1 5,014.9 454.5 506.5 961.0 Price contingencies 214.3 274.8 489.1 19.5 25.2 44.7 Total Project Cost 2,586.1 2,917.9 5,504.0 474.0 531.7 1,005.7 Actual Local Foreign Total Local Foreign Total - (Yuan mil) ----- ----- (US$ mil) ----- System-wide Components Permanent Way 348.7 862.4 1,211.1 44.9 109.6 154.5 Locomotive/rolling stock 10.9 505.2 516.1 1.4 61.4 62.8 Zhegan Line /a 4,652.0 4,067.7 8,719.7 642.1 561.5 1,203.6 Xuzhou Terminal 621.9 156.5 778.4 110.2 19.2 129.4 Base Costs 5,633.5 5,591.8 11,225.3 798.6 751.7 1,550.3 Physical Contingencies Baseline Estimate 5,633.5 5,591.8 11,225.3 798.6 751.7 1,550.3 Price contingencies Total Project Costs 5,633.5 5,591.8 11,225.3 798.6 751.7 1,550.3 Notes: la The same cost distribution as in the SAR has been used to reflect to indirect foreign exchange costs. - 65 - FIFTH RAILWAY PROJECT Table 8B: PROJECT FINANCING Appraisal Estimate Actual/Latest Estimate Responsible Party / Component Yuan US$ Yuan US$ Million Million Million million IBRD 1,722.6 330.0 2,531.3 322.4 Government 3,781.4 675.7 8,694.0 1,227.9 Total 5,504.0 1,005.7 11,225.3 1,550.3 FIFTH RAILWAY PROJECT Table 8C: ALLOCATION OF LOAN PROCEEDS Planned Actual Category US$ '000 US$ '000 1. Equipment and materials 329,800 322,249.0 2. Consultants' services 200 119.0 3. Unallocated 0 0 4. Special Account /a (17.3) Cancellation 7,649.3 Total 330,000 330,000.0 /a The amounts indicated under the Special Account category represent the exchange rate fluctuation from the time of the advances to the Special Accounts to the time of documentation/recovery of the account. - 66 - FIFTH RAILWAY PROJECT Table 9: EcoNOMIC COSTS AND BENEFITS (Yuan million, 1997 prices) Total Total NPV EIRR Costs /a Benefits /b (@ 12%) % Zhegan Line ICR: 48,150 831,365 97,709 35.0 SAR: 17,674 149,688 15,427 34.8 Xuzhou Terminal ICR: 53,506 419,754 31,879 29.2 SAR: 26,181 266,247 25,818 31.0 Track Rehabilitation Materials ICR: 831 3,689 1,197 105.7 SAR: 917 1,088 73 26.8 Wheels for Freight Wagons ICR: 898 22,408 12,120 233.0 SAR: 514 4,764 850 36.0 /a Sum of undiscounted cost stream. /b Sum of undiscounted benefit stream. -67- FIFTH RAILWAY PROJECT Table 10: STATUS OF LEGAL COVENANTS Covenant Original Revised Section Description of Covenant Class Status Date Date Comments Loan Open and maintain a special account I C N/A N/A Agree.t 2.02 (b) Loan Submit Annual Audit Reports by June 30 1 C N/A N/A Agree.t each year 4.01 Loan MOR to maintain a ratio of total 2 C N/A N/A Actual performance was better than Agree.t operating expanses to total operating target revenues not higher than 82% for each 4.02 year following )ecember 30, 1990 Loan Achieve self-financing ratio of 20% for 2 C N/A N/A Agree.t 1991 - 93 and of 25% or more thereafter 4.03 Loan (1) Achieve locomotive availability of 10 C N/A N/A Agree.t 82%; (ii) carry out resettlement of the affected people; (iii) implement traffic Sched. 6 costing system as per agreed plan, and (iv) furnish to the Bank by March 31, 1992, a report on the initial phase of the planning studies being carried out under the Second Railway Project, and use the findings and recommendations of the studies. Covenant Class: Status: 1 = Accounts/audits 8 = Indigenous people C Complied with 2 = Financial performance/revenue 9 Monitoring, review, and reporting CD= Compliance after delay generation from beneficiaries 10 Project implementation not CP = Complied with partially 3 = Flow and utilization of project covered by classes 1-9 NC = Not complied with funds 11 Sectoral or cross-sectoral SOON = Compliance expected in 4 = Counterpart funding budgetary or other resources reasonably short time 5 = Management aspects of the allocation project or executing agency 12 Sectoral or cross-sectoral policy/ 6 = Environmental covenants regulatory/institutional action 7 =Involuntary resettlement 13 eOther - 68 - FIFTH RAILWAY PROJECT Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS Statement Number and Title Describe and Comment on Lack of Compliance There was no significant lack of compliance -- with an applicable Bank Operational Manual Statement (OD or OP/BP) FIFTH RAILWAY PROJECT Table 12: BANK RESOURCES: STAFF INPUTS (Weeks) FY FY FY FY FY FY FY FY FY FY FY FY Total 88 89 90 91 92 93 94 95 96 97 98 99 Pre-appraisal 3.3 19.3 110.2 132.8 Lending Dev. 0.1 0.1 Appraisal 52.4 52.4 Negotiations 14.5 31.7 18.2 64.4 Supervision 27.9 21.5 15.7 16.7 10.7 8.5 14.6 8.6 124.2 SPN Core- 5.7 0.3 0.3 0.3 2.6 0.6 9.8 Procurement Completion 5.5 5.5 Total 3.3 19.4 177.1 31.7 46.1 21.5 21.4 17.0 11.0 8.8 17.2 14.7/a 389.2 /a As of May 11, 1999 - 69 - FIFTH RAILWAY PROJECT Table 13: BANK RESOURCES: MISSIONS Performance Rating /b Stage No. Days Specialized Imple- Develop- Types Of Month/ of In Staff Skills mentation ment of Project Cycle Year Persons Field Represented /a Status Objectives Problems /c Pre-Identification January 1989 4 ECN, ENG no TOR Identification May 1989 5 5 ENC, FNA, ENG Preparation Sept,/October 7 16 ECN, ENG, FNA, TC, 1989 MISC Appraisal January 1990 11 20 ECN, ENG, FNA, MEC, TC, ESP, MISC Pre-negotiation June 1990 2 4 ENG, FNA Discussion Feb./March 1991 7 9 ECN, ENG, FNA, MEC, TC, MISC Supervision I Oct./Nov. 1991 4 4 ECN, ENG FNA,MEC l 1 Supervision 2 March 1992 1 2 TC - - Supervision 3 May/June 1992 4 5 ECN, ENG, FNA, MEC 2 1 P Supervision 4 November 1992 4 3 FNA, ENG, 2 1 P ENG (C), MEC Supervision 5 April 1993 4 6 FNA, ENG, ESP, MEC 2 1 P Supervision 6 October 1993 3 5 FNA, ENG, MEC 2 1 P Supervision 7 May 1994 3 6 FNA, ENG (C), MEC S S P Supervision 8 May/June 1995 3 7 ENG, MEC, TC (C) S S P Supervision 9 September 1995 1 2 FNA S S P Supervision 10 June 1996 2 2 ENG, TC (C) S S P Supervision II April 1997 I 2 ENG S S -- Supervision 12 September 1997 I 3 ESP -- -- -- Supervision 13 October 1997 I 8 ENG S S -- Supervision 14 March 1998 I 2 FNA -- -- -- Supervision 15 December 1998 I 7 RES - - -- ICR Jan./Feb. 1999 1 11 ENG ICR February 1999 1 5 RES la C = consultant; ENG = engineer; ECN = economist; FNA = financial analyst; ESP= environment specialist; MEC mechanical engineering consultant; MISC= MIS consultant; RES= resettlement specialist; TC = telecom engineer. /b I = no significant problems; 2 = moderate problems; 3 = major problems; S= satisfactory. /c F= financial; M = management; P = procurement; S = studies progress; TA = technical assistance; T = training. /d No Back-to-Office report in Files. 70 APPENDIX A: ICR COMPLETION MISSION'S AIDE-MEMOIRE CHINA FOURTH AND FIFTH RAILWAY PROJECTS (LOANS 2968 and 3406-CHA) IMPLEMENTATION COMPLETION REPORT MISSION (February 2, 1999) AIDE-MEMOIRE A World Bank mission comprising Mr. U. Marggraf visited the Ministry of Railways as a post completion mission for the Fourth and Fifth Railway Projects to seek updated information on implementation and achievement of objectives. The mission discussed the completeness and accuracy of the draft Implementation Completion Report (ICR) for the Fourth Railway Project dated January 11, 1999, which had been sent to FCTIC of MOR prior to the mission's arrival. Data and information collection for the Fifth Railway Project was based on component papers made available to FCTIC in mid- October 1998. This aide-memoire records the understandings reached with regard to FCTIC's contribution to the ICRs. MOR and its regional organizations which benefited from the project were very cooperative and helped prepare information for this ICR. They provided some data to complement those available in the Bank's project file, which produced a more comprehensive picture of project implementation. The mission wishes to express its sincere thanks to MOR, especially to the staff from FCTIC and the project teams of the MOR administrations for their excellent cooperation, detailed information provided, and for courtesies extended. It is the Bank's intention to combine the ICRs for both projects into one report. Because this report shall be delivered to the Bank's Operations Evaluation Department by May 1, 1999, it was agreed with FCTIC that: - a final draft combined ICR will be sent to MOR and the Ministry of Finance to obtain their comments shortly after the mission's return to Washington; and - comments from MOR and the Ministry of Finance and the Borrower's contribution to the combined ICR would be sent to the Bank within two weeks after receipt of the final draft combined ICR. - 71 - APPENDIX B: BORROWER'S CONTRIBUTION TO THE ICR Projects Objectives Due to the Ist development of China's national economy since carrying out the reform and open policy, railway sector has been remained as one of the bottlenecks. The objectives for these two Projects are to increase railway's transport capacity, so as to meet the requirement. The FourtLh Railway Project includes the components of doubIc-tracking Yucshan-Xiangfan railway line, imodcrnization of QiQihar, Sil'ang and February Seventh Locomotives and Rolling Stocks Works. Due to protecting the state-key relic called Longmen Stone carvings in I lnan ProvinicC, the design and construction of Yuenshan-Xianglan railway line was special revision, which Iade the construction schedule delay fI two years. Ii fth Rai lwav Project covers the components ofihegan railway line upgrading, Xuzhou termiial Cxpansion, mlanutheturing system-wide, and Permanent way system-wide. Due to revising design ofZhengan railway line, closing date was extended for one year. All the targets are achieved. According to the criteria, the State Acceptance committee and the National Environmental Protection Agency reviewed and accepted all the sub- cornmponents. Thc comments to the World Bank: The Bank mission stals worked very hard during the project cycle and their hard-working was highly appreciated by the Borrower. The periodical supervision mission to the fields were necessary, which lacilitates implementation schedule greatly. - 72 - ANNEX 1: FINANCIAL EVALUATION OF THE FOURTH AND FIFTH RAILWAY PROJECTS 1. The financial evaluation in the Staff Appraisal Report for The Fourth Railway Project focuses on the income statement covering the 1982 to 1990 period (1982 to 1986 is historical information; 1987 to 1990 are projected results). The evaluation in the Staff Appraisal Report for the Fifth Railway Project includes for the first time all consolidated financial statements (income statement, cash flow statement and balance sheet) and focuses on the 1985 to 1995 period (1985 to 1989 is historical information; 1990 to 1995 are projected results). 2. The inclusion of all financial statements in The Fifth Railway Project is an important step forward. However, during the financial discussions in subsequent railway projects it became apparent that the focus of the financial statements is not uniform: the balance sheet focuses on transport and non-transport enterprises, the income statement focuses on transport enterprises only, and the cash flow statement is a hybrid of the two statements. Because different principles are applied in the preparation of the statements, and because the railways are currently in the process of segregating non-transport enterprises from transport enterprises (five financially independent firms will be set up covering construction, engine building and components, telecommunications and support) the remainder of this analysis focuses on the consolidated income statement of the transport enterprises only. 3. The evaluation of the actual consolidated income performance from 1987 to date and projections through 2002 for the fourteen railway administrations managed by the Ministry of Railways (MOR) is presented in Tables I and 2. It was done in two parts, i.e. from 1987 to 1992, and from 1993 to 2002 because on July 1, 1993 the Ministry of Railways adopted new accounting guidelines which are more aligned to international accounting standards. Hence, financial information before and after 1993 is not comparable. 4. Context. In evaluating MOR's performance following factors need to be taken into account: * Railway revenues accrue from two sources: base tariffs, which are applied against operating expenses, and a Railway Construction freight surcharge, introduced in 1991, which is earmarked for capital investments, including interest payments on loans for such investments; * In 1986, the Government and MOR entered into a contract under which the latter had to finance all its operating and capital expenditures (until 1984, the Government financed capital expenditures from the national budget, while in 1985, these were financed from a budget loan). In return, MOR was to keep its net income after it paid taxes. - 73 - * MOR's capacity to set tariffs is limited because changes to base tariffs and freight surcharges for all the trunk lines and for most of the local lines have to be approved by the State Planning Commission (SPC) and the State Council. * Inflation was two digits until 1995 and from 1993 to 1994 input subsidies for energy and electricity were phased out. * MOR revalued its fixed assets in 1994, which affects the amount of depreciation in its income statement. 5. 1987-1992 period. As reflected in the consolidated income statements in Table 1 MOR had a positive net income in this period. Income improved from 1987 to 1989 mainly because MOR was exempted from income taxes. In 1990, MOR benefited from an increase in freight tariffs, across-the-board. Since 1991, revenues from base tariffs have been supplemented by those from a freight surcharge. The reported operating ratios, deteriorating gradually (see below). If reported costs were not understated or distorted by subsidies, because several input factors didn't reflect market prices, they would have even be worse (see ratios under paragraph 7 when input subsidies had been phased out). The working and operating ratios for the 1987 to 1992 period were as follows: MOR WORKING AND OPERATING FLATIOS Percentages/Year: 1987 1988 1989 1990 1991 1992 Working Ratio: Appraisal Forecast-SAR IV ------------------------No forecasts----------------------- Appraisal forecast-SAR V 56 63 70 60 62 64 Actual 1/ 53 60 67 57 62 70 Operating Ratio: Appraisal Forecast-SAR IV 62 64 66 68 No forecasts Appraisal forecast-SAR V 70 76 83 71 73 75 Actual 1/ 66 72 79 68 73 81 1/ Excluding freight surcharge revenues because at Appraisal of the Fourth and Fifth Railway Projects, it was not known that such surcharge would be introduced in 1991. 6. 1993-2002 period. As reflected in the consolidated income statements in Table 2, MOR has been operating at a loss since 1993. In general, these negative results are attributable to a decline in market share vis-a-vis the other transport modes, an inadequate operating ratio (operating expenses relative to operating revenues), and a rising level of debt obligations. a) Market Share. In 1990, in terms of ton-km, the railways accounted for 40.5 percent of total ton-km transported by all modes; in 1997 the railway share - 74 - had fallen to 34.3 percent. In terms of passenger-kn, the railways accounted for half of the traffic in 1989, while their share fell to 35.4 percent in 1997. Aside from the declining market share, there appears to be some change in the nature of the non-railway competition for freight and passenger traffic. This change suggest that the railways may also be losing its comparative advantage to transport long-distance bulk commodities, and passengers over medium and long distances. b) Operational Results. These results are obtained by comparing operating expenses with operating revenues. In summary, increases in operating revenues between 1993 and 1997, Yuan 41 billion, have outpaced increases in operating expenses, Yuan 33.6 billion, during the same period. However, the Yuan 7.4 billion difference has not been sufficient to cover the Yuan 8.1 billion increase in interest expenses between 1993 and 1997. This increase in interest expenses is attributable to high interest rates (double digits) and to increasing debt obligations. c) Long-term debts, which comprise domestic loans from the State Development Bank and the Capital Construction Bank, and foreign loans from OECF, ADB, the Bank and others, increased by Yuan 95.8 billion between 1993 and 1997. Of this increase, Yuan 79.2 billion or about 83 percent of the increase, are attributable to increases in domestic loans. The increase in debts results in MOR reporting losses on transport operations. 7. The deteriorating trend in MOR's net results is also reflected in the forecast and actual working and operating ratios. With respect to freight traffic in the 1980s the railways appear to have lost considerable merchandise traffic to the highways; in the 1990s there appears to be a shift in the transport of bulk commodities from the railways to the waterways. To illustrate, between 1980 and 1988, the railway share experienced a drop from 47.5 percent to 41.5 percent; during this period the market share by trucks increased from 6.4 percent to 13.5 percent. In the more recent 1990-1996 timeframe, the truck share has increased by only 0.9 percentage points - from 12.8 percent in 1990 to 13.7 percent in 1996. By contrast, the proportion of freight traffic handled by China's water carriers (including the ocean portion of domestic movements) has grown by almost 5 percentage points - from 44.2 percent in 1990 to 49.1 percent in 1996. Likewise, with respect to passenger traffic, most of the traffic lost by the railways initially was accommodated by the highway modes (between 1980 and 1988, the 8.1 percentage point decline in the railway share of passenger-km was matched by a 8.7 percentage point gain in the highway share). More recently, the loss in the rail passenger market share is attributable to the aviation sector as well as the highway modes. Thus, since 1990, the road share grew by 7.1 percentage points; the aviation mode was up by 4.1 percentage points, while the railways' share declined by 10.0 percentage points. - 75 - MOR WORKING AND OPERATING RATIOS Percentages/Year: 1993 1994 1995 Working Ratio: Appraisal Forecast-SAR IV ---------Not Applicable-------- Appraisal forecast -SAR V 65 65 65 Actual 1/ 75 86 89 Operating Ratio: Appraisal Forecast-SAR IV --------Not Applicable------- Appraisal forecast -SAR V 76 76 76 Actual 1/ 85 97 101 I! Excluding freight surcharge revenues because at Appraisal of The Fourth/Fifth Railway Poject, it was not known that such surcharge would be introduced in 1991. 8. Acknowledging these trends, MOR has announced an unprecedented near-term program designed to dramatically improve bottom line earnings. Specifically, as the forecast income statement in Table 2 also shows, losses are projected to decline sharply in 1999 and breakeven status is anticipated by the year 2000. To achieve these ambitious targets, the following measures will be undertaken: a) Recapturing Passenger Traffic. Having experienced both absolute and relative declines in inter-city passenger business, the railways are instituting wholesale improvements in train services and pricing. Under a new operating plan, 286 train-pairs will be discontinued, while other services will be re-configured to enable the operation of more express and high-speed trains. A greater number of overnight and air-conditioned trains also will be introduced. In addition, on April 1, 1998 the State Development Planning Commission approved a MOR proposal whereby the railways would be allowed to adjust passenger tariffs within a zone of pricing flexibility for trains operating on lines parallel to highways. This proposal is currently before the State Council. b) Reducing costs by: (i) implementing the policy (starting in 1998) that operating expenses can only be incurred if operating revenues are generated; (ii) reducing transport staff by 300,000 from 199B to 2000; (iii) reducing staff in the Ministry of Railways from 800 to 400 in 1998; (iv) linking employee salaries to financial results (instead of physical output results) for freight transport and to number/value of tickets sold for passenger transport; (v) enhancing the performance efficiency of locomotives and rolling stock; (vi) introducing competitive bidding for the procurement of fuel, materials, and some equipment needed by the 14 Railway Administrations and (vii) - 76 - implementation of the Asset-Liability Management System from January 1, 1999 onwards.' 2 By implementing the "Asset-Liability Management System" MOR is taking the first step in restructuring railway transport operations. The 14 Railway Administrations will become railway enterprises. The purposes of this restructuring are to separate Government functions from enterprise functions, resolve the issue of the ownership of assets, maintain/increase value of railway assets, and reach the target of revenues and expenses breaking even by the year 2000. The salient features of the Asset-Liability Management system are that railway lines, once construction is completed, and locomotives and passenger coaches allocated by MOR to the Administrations from 1992 onwards, will become the fixed assets of the Administrations on January 1, 1999. MOR will assume the debt servicing for the lines; debts related to the rolling stock will be serviced by the Administrations. Inter- administration traffic will be dispatched by MOR; intra-administration traffic will be dispatched by MOR or the Administrations pending on the available capacity at the borders between Administrations. MOR will no longer monitor Administrations revenues/expenses on a monthly basis. Instead the management of the Administrations will have to deposit a sum of money with MOR at the beginning of a fiscal year. At the end of the fiscal year, the performance of the administrations will be evaluated based on three indicators: rate of return on assets, rate of return on equity and financial gains/losses. The level of return rates and gains/losses will determine whether the Administrations get the original deposit returned with a bonus or at the original amount or whether MOR keeps the original deposit. - 77 - Table I Actual and Forecast Consolidated Income Statements For the year ended December 31 (in Yuan millions) Actual Actual Actual Actual Actual Actual 1987 1988 1989 1990 1991 1992 (per audit) (per audit) (per auditi (per audit) (per audit) (per audit) VOLUME Freight (Ton-km bil.) 946 986 1.037 1,048 1,081 1,141 Passenger (Pass-km bil.) 284 326 303 260 281 313 Total (C.Ton-km bil.) 1,230 1,312 1,340 1,308 1,362 1,454 REVENUES FREIGHT 19,186 19,925 22.007 27,213 31,139 39,229 From rates 19,186 19,925 22,007 27,213 29,143 30,625 From surcharge 1/ 1,996 8,604 PASSENGERS 5,563 6,381 7,665 11,090 12.180 13,814 OTHER 1.463 1,756 1,935 2,802 3,385 3,428 TOTAL OPERATING REVENUES 26,212 28,062 31,607 41,105 46,704 56,471 OPERATING EXPENSES: Payroll 2,897 3,444 3.905 4,277 5,566 7,400 Materials 1,820 2,598 2.870 3,258 3,772 4,825 Energy 2,644 3,075 3,383 3,846 4,351 5,393 Electricity 389 530 740 897 1,023 1,290 Major Repairs 2/ 3,314 3,414 5,874 6,527 7,277 8,085 Depreciation 2/ 3,314 3,414 3,924 4,356 4,864 5.402 Other 3/ 2,912 3,797 4,286 . 4,646 5,656 7,231 TOTAL OPERATING EXPENSES 17,290 20,272 24,982 27,807 32,509 39,626 OPERATING INCOME 8,922 7.790 6,625 13,298 14,195 16,845 Non-Operating Income from Subsidiaries & Factories 4/ 992 865 47) 200 49 237 NON-OPERATING EXPENSES Interest and repayments 5/ 992 754 1,871 1,940 2,115 3,011 INCOME BEFORE TAXES 8,922 7,901 5,233 11,558 12,129 14,071 Business tax on book tariffs and book fares 1,382 1,487 1,675 2,188 2,392 1,597 revenues 6/ Business tax on surcharge revenues 107 1,096 Transfers to Gov't 0 0 2,000 2,000 2,000 NET INCOME 7.540 6,414 3,558 7,370 7,630 9,378 of which allocated to: Capital Construction Fund 6,121 4,952 2,258 5,870 4,111 0 Special Fund for Health & Welfare 1,419 1,462 1,300 1,500 1,630 1,870 Railway Construction Fund 0 0 0 0 1,889 7,508 Working Ratio: Excluding Surcharge Revenues 8/ 53% 60% 679o 57% 62% 70% Including Surcharge Revenues 8/ 59% 62% Operating Ratio: Excluding Surcharge Revenues 8/ 66% 72% 79% 68% 73% 81% Including Surcharge Revenues 8/ 70% 72% PRO-MEMOIRE Allocation to Railway Construction Fund Surcharge Revenues before Taxes 1,996 8,604 Minus Surcharge Business Taxes (107) (1,096) Net Transfer 1,889 7,508 I/ Introduced on March IS, 1991 at 0.2 fen per ton-km. On July 1, 1992, the surcharge was Increased to 1.2 fin per ton-km. The Railway Construction Fund replaced the Capital Construction Fund. 2/ Depreciation is pre-determined at 4% of historical costs of fixed assets, for 1987-1991 provisions for major repairs were 6% of historical costs of fixed assets; In 1992 the provision for major repairs was 10% of the historical costs of fixed assets. 3/ Includes funds collected by Railway Administrations to build staff houses. 4/ Net contributions, i.e. after deducting expenses including depreciation. 5/ Under the accounting rules prior to July 1, 1993, plterest and principal repayments were shown in the Income statement. 615.35% on gross operating revenues. 7/ Net of business taxes on freight surcharge revenues. - 78 - Table 2 CHINA FOURTH AND FIFTH RAILWAY PROJECTS Actual and Forecast Consolidated Income Statements For the year ended December 31 (in Yuan millions) Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (per audit) (per audit) (per audit) (per audit) (per audit) MOR sub MOR sub MOR sub MOR sub. MOR sub. VOQUM 10/27198 10/27/98 10/27/98 10/27/98 10/27/98 Freight (Ton-kmb l 1.192 1,226 1,262 1,292 1.305 1,073 1.136 1.203 1.273 1.348 Passenger (Pass-km bil 348 361 352 319 355 379 409 441 476 514 Total (C Too-km bil ) 1.540 1,587 1,614 1.611 1.660 !,452 1.545 1.644 1,749 1.862 REVENUES FREIGHT 58,402 68.535 70,369 75.422 81,196 84.900 92.100 98,600 105,600 113.100 From rates 34.055 34,600 35.607 40.103 46,081 49.500 54.600 58.900 63.600 68.600 From surcharge 24.347 33,935 34,762 35,319 35,115 35,400 37.500 39.700 42,000 44.500 PASSENGERS 15.882 17,328 20.160 23.716 26.093 29.300 31.600 34,100 36.800 39.700 OTHER 6.010 7.745 8.838 12,866 13,994 12,800 13.800 14,900 16.000 17,200 TOTAL OPERATING REVENUES 80.294 93.608 99,367 112.004 121.283 127.000 137,500 147,600 158,400 170,000 EXPENSES OPERATING EXPENSES Payroll 9,500 11,578 13,956 16.141 18.484 19,480 21.280 23.180 25.280 27,280 Matenals 6,777 7,011 8.553 8,048 9.039 9,143 9.433 10.783 11,616 12.858 Energy 8.513 9,764 10.108 10,598 12.132 12,559 13.631 14.481 15,239 16,035 Electrcity 2.285 3.003 3,218 4,038 4.833 5.258 5,880 6.497 7,348 8.423 Major Repairs 8,915 11,581 11,689 13,067 15.398 16,475 17,429 18.462 19.533 20.396 Depreciation 5,943 6.580 7.373 9.684 11.316 12.210 13.050 13,860 14,953 16.089 Other 1/ 5.708 7.569 9.159 8,877 10,024 10.825 11,358 12,003 13,051 13,933 TOTAL OPERATING EXPENSES 47.641 57.086 64.056 70,453 81,226 85.950 92,061 99.266 107,020 115.014 OPERATING INCOME 32.653 36,522 35,311 41.551 40,057 41,050 45,439 48.334 51,380 54.986 Non-Operating Income from Subsidiaries & Factories 21 399 (28) (858) (1.036) (453) -500 -500 -500 (500) (500) NON-OPERATING EXPENSES Interest3/ 3.092 4.627 7,836 10.819 11.252 13.400 14,100 14.900 15,900 15.300 Non-operating expenses 41 4,445 3.536 4,011 4.090 4.310 4,610 4,623 4,638 4,753 4,848 INCOME BEFORE TAXES 25,515 28,331 22.606 25.606 24,042 22,540 26.216 28,296 30,227 34,338 Business tax on book tariffs and book fare (2,994) (1.934) (2.094) (2,485) (1.807) (1,906) (2.115) (2.305) (2.511) (2,731) revenues 5/ Business tax on surcharge revenues 6/ (136) (1,099) (1,126) (1,144) (2,151) (2.209) (2,340) (2,477) (2.621) (2.777) Transfer to Water Resource Fund (985) (1.062) (1,125) (1,191) (1.260) (1,335) Income tax TransferstoGovt (2.000) 0 0 0 0 0 C 0 NET INCOME 20,395 25.298 19,386 21.977 19.099 17,363 20.636 22.323 23,835 27.495 of which allocated to Retained Profits (734) (2,911) (6,414) (1.379) (2,613) (2.428) (424) 0 356 1,072 Railway Construction Fund 71 21.119 28,209 25.800 23,356 21.712 19,791 21,060 22,323 23,479 26,423 Working Ratio Excluding Surcharge Revenues B/ 75% 86% 89% 60% 83% 82% 81% 81% 81% 81% Including Surcharge Revenues 8/ 52% 55% 58% 55% 59% 59% 58% 59% 59% 59% Operating Ratio Excluding Surcharge Revenues 8 85% 97% 101% 93% 97% 96% 94% 94% 94% 94% Including Surcharge Revenues 8/ 59% 62% 65% 64% 68% 69% 68% 68% 69% 69% PRO-MEMOIRE Allocation to Railway Construction Fund Surcharge Revenues before Taxes 24,347 33.935 34,762 35.319 35,115 35,400 37,500 39.700 42,000 44,500 Minus Surcharge Business Taxes (136) (1,099) (1,126) (1,144) (2.151) (2.209) (2.340) (2.477) (2.621) (2,777) Minus Interest (3.092) (4,627) (7.836) (10,819) (11.252) (13,400) (14.100) (14,900) (15,900) (15.300) Net Transfer 21,119 28,209 25,800 23,356 21,712 19,791 21,060 22,323 23,479 26.423 1/ Includes pensions for retired employees. welfare benefits (housing, health, educaton, cost of living adjustments), and general administrafive expenses 2/ Expenses, including depreciation, charged to subsidiaries and factories exceed their revenues 3/Pror to 1995, MOR had to pay interest on loans from September 21 in year x to September 20 in year x+1. From 1995 onwards. MOR had to pay interest on loans from September 21 in year x to December 31 in year x+1 (i.e 5 quarters of interest). In 1996, MOR had to pay interest from Jan 1 to Dec 31 (check with MOR). 4/ Includes expenses for schools, police, natural disasters, etc 5/ In 1994, the business tax percentage on book tariffs/fares revenues decreased from 5 35% to 3.24%. & The tax percentage on freight surcharge revenues is 3.24%. 7/ Net transfer to railway construction fund (equals surcharge revenues before taxes minus surcharge business taxes minus interest) 8 Net of business taxes on surcharge revenues Source: MOR Staff. October 1998. - 79 - ANNEX 2: ECONOMIC REEVALUATION OF THE FOURTH AND FIFTH RAILWAY PIROJECTS Introduction 1. This annex presents economic reevaluations of the major components comprising the Fourth and Fifth China Railway projects.' These include the Yueshan-Xiangfan line of the Fourth Railway Project and the Zuzhou-Hangzhou line, the Xuzhou terminal, and the track rel iitz m and the wheels for freight wagons system-wide components of the Fifth Railway Project. For the most part, the benefits produced by these components center on the ability of the railways to accommodate additional traffic as a consequence of capacity expansion (either by means of the double-tracking of a line, the enlargement of a marshalling yard, or the provision of supplemental freight wagons). Accordingly, in addition to the direct costs of the project, the economic evaluation of these components necessarily must comprehend the complementary capital investments associated with this incremental traffic. It is against these direct and indirect cost streams that the value-added benefits of the additional traffic should be properly measured. For the respective components, each of these subjects is considered in turn. YUESHAN LINE (FOURTH RAILWAY PROJECT) Direct Project Costs 2. On a financial basis, the total direct outlays of the Yueshan double-tracking and partial electrification project amounted to Yuan 4.8 billion (see Table A below). Local costs by year were furnished by MOR, while the annual US dollar amount of foreign costs were converted into Yuan at the appropriate annual exchange rate. Direct project economic costs were derived from the financial costs by shadow pricing the labor component of local costs. Based on the data supplied by MOR, about a fifth of local labor costs were classified as labor outlays. This amount (Yuan 807 million) was shadow priced at a rate of 1.6 reflecting the factor employed in Railways VII.' Nonlabor local costs were not shadow priced. These figures were then transformed into constant 1997 Yuan using the annual overall Gross Domestic Product deflator for local costs and the annual Imports of Goods and Non Nonfactor Services deflator for foreign costs, respectively. On this basis, the economic direct costs of the project in constant 1997 values are equal to Yuan 7.7 billion. Two of the components - completion of the double-tracking of the Zhuzhou-Hangzhou (Zhegan) line, and expansion of the Xuzhou terminal - initially had been part of the Fourth Railway Project but subsequently were withdrawn because of their impact on the overall size of the proposed loan. See, SAR Fifth Railway Project, para 3.4 and SAR Fourth Railway Project, para 3.1. 2 See SAR, Eighth Railway Project, Report No. 13795-CHA, Working Paper No. 24, p. 2. - 80- Table A: ICR Financial and Economic Direct project Costs (Yuan million) Local Foreign Total Financial 3,967.1 811.7 4,778.8 (current) Economic 5,939.6 1,725.7 7,665.3 (constant, 1997) 3. By restating the economic costs of the SAR in 1997 Yuan, it is possible to compare the direct project costs of the ICR and the SAR. The results are shown in Table B. The annual economic costs presented in the SAR were apportioned into local and foreign categories on the basis of the designations presented therein.3 Employing the same domestic and import deflators referenced above, these outlays were converted into constant 1997 Yuan. As can be seen in Table B, the ICR direct project cost figure of Yuan 7.7 billion is 74 percent higher than the comparable 1997 Yuan 4.4 billion derived from the SAR. Table B: Economic Direct Project Costs (Yuan million, 1997 prices) ICR SAR ICR/SAR 1988 n.a. 1,719.2 n.a. 1997 7,665.3 4,395.9 1.74 Source: SAR, Table 4.1 and Table A. Complementary Capital Costs 4. Several types of complementary capital outlays should be included in the overall cost stream of the project. These include the investment costs associated with providing new production capacity for the incremental coal and non-coal traffic to be carried on the line as well as for the additional locomotives and freight wagons needed to handle the new traffic. New Production Capacity Investment Costs. In the Fourth Railway Project SAR, the 1988 economic cost of developing new production capacity for both coal and non-coal commodities was estimated at Yuan 160 per ton.4 This figure is substantially lower than the Yuan 210 per ton value provided in the SAR for The Fifth Railway Project.5 In both analyses, the figure used for the 3 SAR Fourth Railway Project, p. 39, para 1. 4 SAR Fourth Railway Project, p. 41, para 2(c). s SAR Fifth Railway Project, p. 62, para 6. - 81 - new coal investment is the same as for the new non-coal investment. 6 For the calculations in the ICR, the higher figure of The Fifth Railway Project expressed in 1997 prices (Yuan 403 per ton) is employed for the new coal investment. In addition, to reflect its greater value, the non-coal investment amount in the ICR has been doubled (Yuan 806 per ton). * The additional line capacity for freight traffic made possible by the Yueshan project is equal to about 50 million tons per year.7 MOR's traffic data for the line (see Table 1) indicate that about half of the incremental freight traffic will be comprised of coal. Under these conditions, the ICR analysis assumes that a similar share of the additional new production capacity will be coal-related. Accordingly, the complementary costs of new coal investments embrace 25 million tons of capacity at Yuan 403 per ton, while the comparable figure for 25 million tons of non-coal capacity is Yuan 806 per ton. The resulting amounts have been spread equally over the five-year period, 1988-1992. * Additional Railway Capital. MOR provided an annual schedule of locomotive and rolling stock acquisitions related to the incremental traffic made possible by the project. For the period 1987-2005, these include 34 electric locomotives, 148 diesel locomotives, 5,335 freight wagons, and 208 passenger coaches. Based on the economic unit prices utilized in the Restructured Seventh Railway Project,8 the total amount of additional investment required for railway equipment for each year were derived. Project Benefits 5. The benefits from the project stem from the value added to the economy from the new goods production (and incremental passenger movement) made possible by the additional transport capacity of the railway route.9 These benefits were separately calculated for coal and non-coal traffic. 6. Consistent with the SAR, the international price of coal at Shanghai was the benchmark. From the Bank's Commodity Price Data Base, the average 1997 price for U.S. and Australian export coal was $35.75 per metric ton or Yuan 296 per metric ton. As for the delivered price of domestic coal, the starting point is the cost of production. According to the SAR, the minemouth economic cost of production as of 1988 was Yuan 10 per ton. SAR Fifth Railway Project, p. 62, para 7 and electronic data in the Fourth Railway Project file. SAR Fourth Railway Project, p. 11, paras 3.6 and 3.7. These 1997 unit prices are: electric locomotives (Yuan 11.158 million); diesel locomotives (Yuan 8.778 million), freight wagons (Yuan 0.344 million), and passenger coaches (Yuan 1.232 million). See, China: Seventh Railway Project (Loan No. 3897-CHA) Document No. R99-2 (January 13, 1999) p. 27, Table 4.4. Modest operating cost savings result from the substitution of electric for diesel traction, but since this only applies to the 122 km between Yueshan and Luoyang, no such calculation was made for the SAR. - 82 - Allowing for Yuan 47 per ton in transport and loading expenses from mine to Shanghai,'o the overall costs of domestic coal are equal to Y57 per ton. Expressed as a 1997 value, this total cost amounts to Yuan 125 per ton. Thus, the value added benefit is Yuan 171 per ton -- the difference between the border price of Yuan 296 per ton and the Yuarn 125 per ton cost of domestic coal transported via the project route. 7. For non-coal traffic, the SAR assumed that the value added per ton was twice that of coal.' Consistent with this approach, the calculations in the ICR place the value added of non-coal traffic at 1997 Yuan 342 per ton (i.e., double the Yuan 171 amount determined for coal.) 8. Similarly, the benefits for passenger traffic replicate the methodology employed in the SAR whereby it is assumed that the economic value of a passenger trip is at least equal to the economic value of the freight traffic displaced. Essentially, this figure is commensurate with the per ton amount for non-coal traffic just discussed. Consequently, in the ICR, the value added accorded each incremental passenger trip amounts to Yuan 342. Economic Rate of Return and Sensitivity Analysis 9. For the economic reevaluation, net benefits are calculated for the 29-year period 1987-2015 to derive estimates of NPV and EIRR (a discount rate of 12 percent was used). As reported in Table 2, the estimated NPV is Yuan 22.9 billion in 1997 prices and the EIRR is 19.8 percent. 10. Adjustments were made in three of the base case assumptions in order to test the sensitivity of these results. Two of these related to the valuation of benefits, while the third concerned the calcula*ion of the major complementary cost component (see the accompanying Table C. * Freight Traffic Growth. The base case adopts the projections provided by MOR. When these volumes are adjusted downward by a third (for both coal and non-coal tonnage) in each year of the forecast, the NPV fell to Yuan 10.5 billion in 1997 prices and the EIRR declined to 15.9 percent. * Coal Border Price. As an input to the value-added calculation, the base case adopts the 1997 average border price of coal (Yuan 296 per ton). To test the sensitivity of this assumption, the coal border price was reduced by 15 percent (in 1998, the annual decline was equal to 12.3 percent). Under these conditions, the NPV amounts to 1997 Yuan 10.6 billion and the EIRR is equivalent to 16.0 percent. 0 This figure includes the following per ton amounts: loading to rail, Yuan 3; rail to river transport, Yuan 15; river transport, Yuan 24; and transshipment at Shanghai, Y5. See SAR Fourth Railway Project, p. 41, para 3. " SAR Fourth Railway Project, p. 42, para 5. - 83 - Development Costs. The sensitivity of the complementary costs of coal and non-coal development was tested by increasing these values by 25 percent. This adjustment yielded a NPV of 1997 Yuan 18.1 billion and EIRR of 17.4 percent. All of these adjustments result in acceptable NPV and EIRR outcomes. Table C: Sensitivity Analysis NPV EIRR (1997 Y % million) Base Case 22,913 19.8 Reduce freight traffic volume by 1/3 10,475 15.9 Reduce coal border price by 15 percent 10,619 16.0 Increase development costs by 25 18,052 17.4 percent ZHEGAN LINE (FIFTH RAILWAY PROJECT) Direct Project Costs 11. Table D presents the financial and economic direct project costs for the Zhegan line component of the Fifth Railway Project. The sources and methodology supporting these calculations are identical to those employed for the analysis of the Yueshan line described earlier. Compared to a current financial cost of Yuan 8.7 billion, the component after shadow pricing of the labor costs (about 16 percent of overall local expenses) and conversion to constant 1997 values is equal to Yuan 12,023.1 Table D: ICR Financial and Economic Direct Project Costs (Yuan million) Local Foreign Total Financial 7,691.0 1,018.6 8,709.6 (current) Economic 10,593.2 1,429.9 12,023.1 (constant, 1997) 12. MOR estimates that since 1991 outlays of Yuan 664 million have been devoted to resettlement. Expressed in constant values, this is equivalent to 1997 Yuan 905.2 million. - 84 - The SAR estimate for resettlement in the period 1991-1996 was equal to Yuan 223 million or, in 1997 terms, Yuan 347 million.'2 Thus, viewed on equivalent terms, actual resettlement expenses were 2.6 times what had been estimated in the SAR. 13. When translated into constant 1997 Yuan, the direct project costs estimated in the SAR amount to almost Yuan 8.4 billion. This is approximately 43 percent higher than the comparable ICR calculated figure (see Table E). Table E: Economic Direct Project Costs (Yuan million, 1997 prices) ICR SAR ICR/SAR 1990 n.a. 4,266.1 n.a. 1997 12,023.1 8,384.5 1.434 Source: SAR, Table 4.5 and Table D. Complementary Costs 14. As was the case for the Yueshan line discussed earlier, complementary costs involving both new production capacity as well as incremental railway equipment need to be included in the analysis. With minor exceptions, the procedure for quantifying these costs follows that employed in the Yueshan reevaluation. * New Production Capacity Investment Costs. Stated in 1997 prices, the cost per ton for new coal mine investment is Yuan 403, while the comparable number for non-coal investment is Yuan 806. These are the same values as were used in the updated Yueshan line assessment above." * The additional line capacity for freight traffic made possible by the Zhegan project is equal to about 40 million tons per year.14 MOR's traffic data for the line (see Table 3) indicate that about a fifth of the incremental freight traffic will be comprised of coal with the remaining 80 percent associated with other commodities. Under these conditions, the ICR analysis assumes that similar shares of the additional new production capacity will be oriented to coal and non-coal products respectively. Accordingly, the complementary costs of new coal investments embrace 8 million tons of capacity at Yuan 403 per ton, while the equivalent figure for 32 million tons of non-coal capacity is Yuan 12 SAR Fifth Railway Project, p. 30. 13 In contrast to the analysis in The Fourth Railway Project, the Fifth Railway Project evaluation assumed that the unit investment costs for coal and non-coal commodities would be the same. See SAR Fifth Railway Project, p. 62, para 7. 14 SAR Fifth Railway Project, p. 34, para 4.11. - 85 - 806 per ton. The resulting amounts have been spread equally over the five- year period, 1986-1990. * Additional Railway Capital. MOR provided an annual schedule of locomotive and rolling stock acquisitions related to the incremental traffic made possible by the project. For the period 1991-2005, these include 713 diesel locomotives, 19,500 freight wagons, and 1,545 passenger coaches. The 1997 economic unit prices for these equipment categories used in the Yueshan reevaluation also were adopted here. Project Benefits 15. As with the Yueshan line, the benefits from the Zhegan line project stem from the value added to the economy from the new goods production (and incremental passenger movement) made possible by the additional transport capacity of the railway route. In accordance with the previously outlined methodology, these benefits were separately calculated for coal and non-coal traffic. 16. Due to somewhat shorter transport hauls and less in the way of transloading operations, the delivered cost of domestic coal via the Zhegan line is equal to 1997 Yuan 101 per ton -- Yuan 24 per ton lower than for the Yueshan line. With the international border price at 1997 Yuan 296 per ton (see discussion of the Yueshan line), the value added benefit is equivalent to Yuan 195 per ton (Yuan 296 less Yuan 101). 17. For non-coal traffic, the SAR assumed that the value added per ton was the same as that of coal.15 This is inconsistent with the approach adopted in The Fourth Railway Project where the value-added of non-coal traffic was deemed to be higher than that of coal.'6 Consistent with the methodology used in The Fourth Railway Project and in the reevaluation of the Yueshan line above, the value added of additional non-coal traffic for the Zhegan line is assumed to be 1997 Yuan 390 per ton (i.e., double the Yuan 195 amount determined for coal.) Likewise, the benefits for incremental passenger traffic are assumed to be commensurate with that of non-coal traffic (1997 Yuan 390 per trip). Economic Rate of Return and Sensitivity Analysis 18. For the economic reevaluation, net benefits are calculated for the 30-year period 1986-2015 to derive estimates of NPV and EIRR (a discount rate of 12 percent was used). As reported in Table 4, the estimated NPV is Yuan 97.7 billion in 1997 prices and the EIRR is 35.0 percent. 1s SAR Fifth Railway Project, p. 63, para 11. 16 SAR Fourth Railway Project, p. 42, para 5. This inconsistency is further complicated by the fact that the 1990 international border price for coal in The Fifth Railway Project ($18.36 per ton) is significantly higher than that of the 1988 price in The Fourth Railway Project ($9.19 per ton). SAR Fourth Railway Project, p. 41, para 3 and SAR Fifth Railway Project, p. 63, para 9. - 86 - 19. Adjustments were made in four of the base case assumptions in order to test the sensitivity of these results. Three of these relate to the valuation of benefits, while the third concerns the calculation of the major complementary cost component (see the accompanying Table F). * Freight Traffic Growth. The base case adopts the projections provided by MOR. When these volumes are adjusted downward by a third (for both coal and non-coal tonnage) in each year of the forecast, the NPV fell to Yuan 65.6 billion in 1997 prices and the EIRR declined to 29.3 percent. * Coal Border Price. As an input to the value-added calculation, the base case adopts the 1997 average border price of coal (Yuan 296 per ton). To test the sensitivity of this assumption, the coal border price was reduced by 15 percent (in 1998, the annual decline was equal to 12.3 percent). Under these conditions, the NPV amounts to 1997 Yuan 69.2 billion and the EIRR is equivalent to 30.1 percent. * Traffic Mix. Based on MOR data, 80 percent of the freight traffic on the Zhegan line is comprised of non-coal commodities that bear a higher value- added than does the coal traffic. This sensitivity test altered the proportions such that coal and non-coal volume each accounted for 50 percent. With this adjustment, the NPV declined to 1997 Yuan 96.6 billion and the EIRR dropped to 34.5 percent. * Development Costs. The sensitivity of the complementary costs of coal and non-coal development was tested by increasing these values by 25 percent. This adjustment yielded a NPV of 1997 Yuan 92.4 billion and EIRR of 31.2 percent. On the basis of these adjustments, the NPV and EIRR outcomes remain satisfactory. Table F: SENSITIVITY ANALYSIS NPV EIRR (1997 Y % million) Base Case 97,706 35.0 Reduce freight traffic volume by 1/3 65,587 29.3 Reduce coal border price by 15 percent 69,223 30.1 Shift freight traffic mix to 50% coal; 50% non- 96,591 34.5 coal Increase development costs by 25 percent 92,415 31.2 - 87 - XUZHOU TERMINAL (FIFTH RAILWAY PROJECT) Direct Project Costs 20. The financial and economic direct project costs for the Xuzhou terminal expansion and modernization component of the Fifth Railway Project are displayed in Table G. The sources and methodology supporting these calculations are identical to those employed for the analyses of the prior components. Compared to a current financial cost of Yuan 778 million, and after shadow pricing of the labor costs incurred since 1992 and conversion to constant 1997 values, this component is equal to Yuan 1,361 million. Table G: ICR Financial and Economic Direct Project Costs (Yuan million) Local Foreign Total Financial 621.9 156.5 778.4 (current) Economic 1,173.1 188.0 1,361.1 (constant, 1997) 21. When translated into constant 1997 Yuan, the direct project costs estimated in the SAR amount to almost Yuan 1,610 million. This is approximately 15 percent lower than the comparable ICR calculated figure (see Table H).7 Table H: Economic Direct Project Costs (Yuan million, 1997 prices) ICR SAR ICR/SAR 1990 n.a. 816.0 n.a. 1997 1,361.1 1,610.0 0.845 Source: SAR, Table 4.6(a) and Table G. 17 The expansion of the Xuzhou terminal involved a multistage program that commenced in 1986. About 70 percent of the outlays were expended before 1991 prior to Bank funding. SAR Fifth Railway Project, p. 23, para 3.16 and Table 3.17, p. 114. In the absence of adequate pre-1991 data, the aggregate values provided in the SAR for these years could not be updated. In the economic reevaluation, therefore, the direct project costs for the pre-1991 as reported in the SAR have been adopted with the only adjustment being for inflation. Under these conditions, comparisons of direct project costs in the SAR with those in the ICR must be qualified. -88- Complementary Costs 22. Complementary costs involving both new production capacity as well as incremental railway equipment need to be included in the analysis. With the minor exceptions noted below, the procedures for quantifying these expenditures follow that employed in the reevaluation of the prior components. * New Production Capacity Investment Costs. Stated in 1997 prices, the cost per ton for new coal mine investment is Yuan 403, while the comparable number for non-coal investment is Yuan 806. These are the same values as were used in the updated Yueshan and Zhegan lines assessments above. IS * The additional capacity for freight traffic made possible by the Xuzhou project is equal to about 65 million tons per year." MOR's traffic data for the line (see Table 5) indicate that about two-fifths of the incremental freight traffic will be comprised of coal with the remaining 60 percent associated with other commodities. Under these conditions, the ICR analysis assumes that similar shares of the additional new production capacity will be oriented to coal and non-coal products respectively. Accordingly, the complementary costs of new coal investments embrace 26 million tons of capacity at Yuan 403 per ton, while the equivalent figure for 39 million tons of non-coal capacity is Yuan 806 per ton. The resulting amounts have been spread equally over the five-year period, 1992-1996. * Additional Railway Capital. The incremental traffic made possible by the project, will require periodic acquisitions of both new locomotives and additional rolling stock.20 The 1997 economic unit prices for these equipment categories are the same as those provided in the assessments of the prior components. Project Benefits 23. The enhanced capacity of the Xuzhou terminal expansion produces value added benefits in terms of both coal and non-coal traffic. Each of these benefit categories has been quantified in accordance with the methodology outlined in the discussion of the Zhegan line. Accordingly, the value-added for coal traffic is 1997 Yuan 195 per ton and for non-coal commodities 1997 Yuan 390 per ton. (As noted, MOR indicates that approximately 40 percent of the incremental tonnage will be accounted for by coal traffic with 60 percent 18 In contrast to the analysis in The Fourth Railway Project, the Fifth Railway Project evaluation assumed that the unit investment costs for coal and non-coal commodities would be the same. See SAR Fifth Railway Project, p. 62, para 7 and p. 67, para 7. 19 SAR Fifth Railway Project, p. 35, para 4.15. 20 In roughly five year increments, these purchases include six diesel locomotives and 7,300 freight wagons. The wagon purchases are based on 1997 utilization rates of 57.3 tons per wagon, 332 days per wagon per year, a wagon cycle time of 4.57 days, resulting in 72 wagonloads per year. On this basis, about 7,300 wagons would be required to accommodate 30 million incremental tons. - 89 - associated with non-coal movements.) Consistent with the SAR, for this component, passenger traffic was not assumed to yield quantified benefits. Economic Rate of Return and Sensitivity Analysis 24. For the economic reevaluation, net benefits are calculated for the 30-year period 1986-2015 to derive estimates of NPV and EIRR (a discount rate of 12 percent was used). As reported in Table 6, the estimated NPV is Yuan 31.9 billion in 1997 prices and the EIRR is 29.2 percent. 25. Adjustments were made in three of the base case assumptions in order to test the sensitivity of these results. Three of these relate to the valuation of benefits, while the third concerns the calculation of the major complementary cost component (see accompanying Table I). * Freight Traffic Growth. The base case adopts the projections provided by MOR. When these volumes are adjusted downward by a third (for both coal and non-coal tonnage) in each year of the forecast, the NPV fell to Yuan 15.0 billion in 1997 prices and the EIRR declined to 21.2 percent. * Coal Border Price. As an input to the value-added calculation, the base case adopts the 1997 average border price of coal (Yuan 296 per ton). To test the sensitivity of this assumption, the coal border price was reduced by 15 percent (in 1998, the annual decline was equal to 12.3 percent). Under these conditions, the NPV amounts to 1997 Yuan 29.4 billion and the EIRR is equivalent to 28.1 percent. * Development Costs. The sensitivity of the complementary costs of coal and non-coal development was tested by increasing these values by 25 percent. This adjustment yielded a NPV of 1997 Yuan 28.1 billion and EIRR of 25.6 percent. From an economic perspective, all of these results are satisfactory. Table I: SENSITIVITY ANALYSIS NPV EIRR (1997 Y % millions) Base Case 31,879 29.2 Reduce freight traffic volume by 1/3 15,030 21.2 Reduce coal border price by 15 percent 29,396 28.1 Increase development costs by 25 percent 28,054 25.6 - 90 - SYSTEMWIDE COMPONENTS (FIFTH RAILWAY PROJECT) 26. Several permanent way and rolling stock system-wide components were included in the economic evaluation of The Fifth Railway Project. Of these, the most significant concerned Track Rehabilitation Materials (heat-treated, head-hardened rails) and wheels for freight wagons; each is considered here. Track Rehabilitation Materials 27. This component involved the import of heat-treated rails and their placement in 500 km of mainline track with the most severe curvature. Compared to their domestically manufactured counterparts, these imported rails possess a longer useful life and cost less to maintain. Hence, as Table 6 summarizes, the benefits from this component are significant. 28. Based on MOR records, the average cost of the imported rails was equal to just under Yuan 425,000 per km. Inclusive of other track materials (OTM) (Yuan 47,150 per km) and labor (Yuan 75,800 per km), the total installation cost for 500 km of rail amounts to slightly less than Yuan 274,000. Because of the longer life, these rails can remain in service for three years before replacement assuming that annual maintenance is performed (Yuan 2,104 per km or about Yuan 1,000 for 500 km). Taken together, these items constitute the costs of the component. 29. The benefits are comprised of the savings incurred by not using domestic rails in these critical curved sections. Even with maintenance, these rails are unable to withstand the effects of frequent (and often heavy weighted) train service. Consequently, they need to be replaced annually. As supplied by MOR, the unit costs of the domestic rail is Yuan 481,250 per km and its annual maintenance amounts to Yuan 10,620 per km (OTM and labor costs are identical to those shown for heat-treated rail). 30. Over a thirteen-year period, three installations of the heat-treated rails would take place. Based on this cycle, the NPV of this component is about Yuan 1.2 billion and the EIRR is 106 percent. Wheels for Freight Wagons 31. This component calls for the import of wheel for railway rolling stock - primarily freight wagons - in order to compensate for shortfalls in domestic wheel production.21 At a relatively low cost, MOR would be able to place more new as well as out of service equipment into service. Again, as Table 7 reveals, the benefits of this additional freight carrying capacity are substantial. 32. In conjunction with this component, MOR in 1994 and 1995 imported more than 47,000 wheels which were installed on just over 5,900 freight wagons. Along with the direct cost of the wheels themselves (Yuan 165 million), the economic assessment also includes the 1 SAR Fifth Railway Project, p. 21, para 3.11 and p. 57, para 14. -91- complementary outlays associated with the additional wagon and locomotive supply required to handle the incremental traffic made possible by the component.22 33. Utilizing the value-added methodology developed for other components, the benefits of additional wagon capacity can be calculated.23 Assuming that each wagon would carry about 3,900 tons per year,24 and adopting the comparatively low value-added of coal (Yuan 195 per ton), the annual benefits produced by the 5,900 incremental wagons approximates Yuan 4.5 million. 34. Postulating a five-year period of use, the NPV of this component is 1997 Yuan 12.1 billion and the EIRR is 233 percent. As a sensitivity test, the value added was reduced by 15 percent. This resulted in a NPV of 1997 Yuan 11.6 billion and an EIRR of 217 percent. Clearly, these returns remain satisfactory. 22 These complementary costs are estimated at about Yuan 733 million based on a restatement (in 1997 prices) of the values calculated in the SAR. See SAR Fifth Railway Project, p. 57, para 16. 23 For this and other system-wide components, the SAR acknowledges that the value-added methodology employed here would "provide a better estimate of the benefits" producing rates of return exceeding 100 percent. Nonetheless, claiming that "it is difficult to identify the commodities carried" and "to evaluate the commodities' value added," the SAR does not adopt this approach here. SAR fifth railway Project, p. 56, note 2. At the same time, however, the SAR, in its assessment of the Zhegan line and the Xuzhou terminal, does use the value-added procedure even though a variety of coal and non-coal products are involved. 24 This figure is based on the following system-wide data for 1997: 57.3 tons per wagon; 85 percent utilization rate or 310.25 days per wagon per year; 4.57 days per wagon cycle; and 67.9 wagonloads per wagon per year. -92 - Table 1 Yueshan-Xiangfan Line Freight and Passenger Traffic, 1992-2015 Freight Passenger Trips (tons, (millions) millions) Without With Without With Year Project Project Increment Project Project Increment 1992 29.262 44.508 15.246 4.908 6.668 1.760 1993 29.262 46.229 16.967 4.908 7.479 2.571 1994 29.262 50.492 21.230 4.908 8.539 3.631 1995 29.262 54.344 25.082 4.908 8.501 3.593 1996 29.262 57.705 28.443 4.908 9.218 4.310 1997 29.262 61.065 31.803 4.908 10.000 5.092 1998 29.262 64.754 35.492 4.908 10.857 5.949 1999 29.262 68.688 39.426 4.908 11.779 6.871 2000 29.262 64.344 35.082 4.908 12.760 7.852 2001 29.262 67.951 38.689 4.908 13.520 8.612 2002 29.262 71.885 42.623 4.908 14.318 9.410 2003 29.262 76.065 46.803 4.908 15.159 10.251 2004 29.262 80.492 51.230 4.908 16.037 11.129 2005 29.262 85.246 55.984 4.908 17.002 12.094 2006 29.262 85.246 55.984 4.908 17.002 12.094 2007 29.262 85.246 55.984 4.908 17.002 12.094 2008 29.262 85.246 55.984 4.908 17.002 12.094 2009 29.262 85.246 55.984 4.908 17.002 12.094 2010 29.262 85.246 55.984 4.908 17.002 12.094 2011 29.262 85.246 55.984 4.908 17.002 12.094 2012 29.262 85.246 55.984 4.908 17.002 12.094 2013 29.262 85.246 55.984 4.908 17.002 12.094 2014 29.262 85.246 55.984 4.908 17.002 12.094 2015 29.262 85.246 55.984 4.908 17.002 12.094 Freight: Baofeng-Nanyang segment; passenger: Luoyang-Xiangfan segment. Source: Ministry of Railways. Table 2 Yueshan-Xiangfan Double Tracking and Partial Electrification (Railways IV) Economic Rate of Return Calculation COSTS BENEFITS Coal Non-Coal Additional Coal Non-coal Passenger Transport Total NET BENEFIT Year Direct Develop- Develop Rwy Total Value Added Value Added Value Added CostSavings Benefits CASH FLOW Pje ct ment ment Equip. Costs 1987 299 21 320 (320) 1988 525 2,014 4,028 9 6,576 - (6,576) 1989 534 2,014 4,028 19 6,595 - (6,595) 1990 740 2,014 4,028 32 6,814 - (6,814) 1991 825 2,014 4,028 45 6,913 - (6,913) 1992 770 2,014 4,028 29 6,841 1,300 2,600 600 4,500 (2,341) 1993 700 114 813 1,447 2,893 877 5,216 4,403 1994 866 221 1,087 1,810 3,620 1,238 6,668 5,581 1995 874 422 1,297 2,138 4,277 1,225 7,640 6,344 1996 624 139 764 2,425 4,850 1,470 8,745 7,981 1997 907 367 1,274 2,711 5,423 1,736 9,871 8,596 1998 318 318 3,026 6,052 2,029 11,106 10,789 1999 281 281 3,361 6,723 2,343 12,427 12,146 2000 314 314 2,991 5,982 2,678 11,650 11,337 2001 247 247 3,298 6,597 2,937 12,832 12,585 2002 261 261 3,634 7,268 3,209 14,110 13,849 2003 318 318 3,990 7,980 3,496 15,466 15,148 2004 296 296 4,368 8,735 3,795 16,898 16,602 2005 316 316 4,773 9,546 4,124 18,443 18,127 2006 4,773 9,546 4,124 18,443 18,443 2007 4,773 9,546 4,124 18,443 18,443 2008 4,773 9,546 4,124 18,443 18,443 2009 4,773 9,546 4,124 18,443 18,443 2010 4,773 9,546 4,124 18,443 18,443 2011 4,773 9,546 4,124 18,443 18,443 2012 4,773 9,546 4,124 18,443 18,443 2013 4,773 9,546 4,124 18,443 18,443 2014 4,773 9,546 4,124 18,443 18,443 2015 4,773 9,546 4,124 18,443 18,443 Total 7,665 10,070 20,139 3,770 41,644 89,001 178,002 73,000 340,004 298,360 NPV@12%: 22,913 IRR: 19.84492% - 94 - Table 3 Zhuzhou-Hangzhou (Zhegan) Line Freight and Passenger Traffic, 1991-2015 Coal (tons, millions) Non-coal (tons, millions) Passenger Trips (millions) Without With Without With Without With Year Project P2ject Increment Project Pject Increment Project Project Increment 1991 15.366 21.237 5.871 49.049 80.839 31.790 51.192 55.836 4.644 1992 15.366 22.926 7.560 49.049 86.015 36.966 51.192 56.498 5.306 1993 15.366 24.027 8.661 49.049 89.468 40.419 51.192 63.737 12.545 1994 15.366 24.533 9.167 49.049 92.134 43.085 51.192 67.785 16.593 1995 15.366 25.487 10.121 49.049 99.519 50.470 51.192 65.571 14.379 1996 15.366 27.955 12.589 49.049 102.054 53.005 51.192 62.093 10.901 1997 15.366 27.387 12.021 49.049 101.569 52.520 51.192 65.386 14.194 1998 15.366 29.171 13.805 49.049 107.224 58.175 51.192 71.495 20.303 1999 15.366 29.441 14.075 49.049 108.389 59.340 51.192 72.200 21.008 2000 15.366 29.628 14.262 49.049 115.310 66.261 51.192 72.750 21.558- 2001 15.366 29.846 14.480 49.049 110.302 61.253 51.192 73.550 22.358 2002 15.366 30.065 14.699 49.049 111.065 62.016 51.192 74.200 23.008 2003 15.366 30.284 14.918 49.049 111.836 62.787 51.192 74.850 23.658 2004 15.366 30.533 15.167 49.049 112.597 63.548 51.192 75.500 24.308 2005 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2006 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2007 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2008 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2009 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2010 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2011 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2012 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2013 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2014 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 2015 15.366 30.871 15.505 49.049 114.359 65.310 51.192 76.700 25.508 Source: Ministry of Railways. Table 4 Zhuzhou-Hangzhou (Zhegan) Double Tracking (Railways V) Economic Rate of Return Calculation (1997 Yuan, millions) COSTS BENEFITS Direct Additional Coal Non-Coal Coal Non-coal Passenger Total NET BENEFIT Year Project Rwy Equip. Development. Development. Total Costs Value-Added Value-Added Value-Added Benefits CASH FLOW 1986 644.448 5155.584 5,800.0 - (5,800.0) 1987 644.448 5155.584 5,800.0 - (5,800.0) 1988 644.448 5155.584 5,800.0 - (5,800.0) 1989 644.448 5155.584 5,800.0 - (5,800.0) 1990 1,415.8 644.448 5155.584 7,215.8 - (7,215.8) 1991 716.8 240.2 957.0 1,467.5 11,740.1 1,809.6 15,017.2 14,060.2 1992 941.1 140.1 1,081.2 1,735.0 13,880.1 2,067.6 17,682.7 16,601.4 1993 1,778.1 290.3 2,068.4 1,912.5 15,299.7 4,888.3 22,100.5 20,032.2 1994 2,153.1 320.3 2,473.4 2,036.1 16,288.6 6,465.7 24,790.3 22,316.9 1995 1,755.7 370.4 2,126.1 2,361.0 18,888.1 5,603.0 26,852.1 24,725.9 1996 1,186.5 430.4 1,616.9 2,556.0 20,447.7 4,247.7 27,251.3 25,634.4 1997 2,058.3 1331.3 3,389.6 2,514.9 20,119.4 5,530.9 28,165.2 24,775.6 1998 10.2 730.7 740.9 2,804.8 22,438.4 7,911.3 33,154.5 32,413.6 1999 7.8 760.8 768.6 2,860.7 22,885.7 8,186.0 33,932.5 33,163.9 2000 790.8 790.8 3,137.7 25,101.5 8,400.4 36,639.5 35,848.8 2001 310.3 310.3 2,951.0 23,608.3 8,712.1 35,271.4 34,961.1 2002 210.2 210.2 2,989.3 23,914.4 8,965.4 35,869.1 35,658.9 2003 310.3 310.3 3,027.9 24,223.0 9,218.7 36,469.6 36,159.3 2004 700.7 700.7 3,067.2 24,537.9 9,471.9 37,077.1 36,376.4 2005 200.2 200.2 3,149.1 25,192.5 9,939.5 38,281.1 38,080.9 2006 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2007 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2008 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2009 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2010 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2011 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2012 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2013 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2014 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 2015 - 3,149.1 25,192.5 9,939.5 38,281.1 38,281.1 Total 12,023.2 7,137.1 3,222.2 25,777.9 48,160.5 70,061.3 560,490.6 200,813.4 831,365.3 783,204.9 NPV@12% $97,706.29 EIRR 35.0% - 96- Table S Xuzhou Terminal Expansion and Modernization (Railways V) Economic Rate of Return Calculation (1997 Yuan, millions) COSTS BENEFITS Direct Coal Non-Coal Railway Total Coal Non-coal Total NET BENEFITS Year Costs Develop Develop Equipment Costs Value Add Value Add Benefits CASH FLOW 1986 227.4 227.4 (227.4) 1987 216.4 216.4 (216.4) 1988 193.0 52.67 245.7 (245.7) 1989 177.4 177.4 (177.4) 1990 167.9 2,511.20 2,679.1 (2,679.1) 1991 61.0 61.0 (61.0) 1992 9.9 2,094.5 6,283.4 8,387.7 (8,387.7) 1993 53.0 2,094.5 6,283.4 8,430.8 (8,430.8) 1994 74.3 2,094.5 6,283.4 8,452.1 (8,452.1) 1995 95.9 2,094.5 6,283.4 2,563.87 11,037.6 4,560.7 14,274.0 18,834.7 7,797.1 1996 22.1 2,094.5 6,283.4 8,399.9 4,755.6 12,948.0 17,703.6 9,303.7 1997 31.0 31.0 4,287.8 10,803.0 15,090.8 15,059.9 1998 25.6 25.6 3,703.1 8,190.0 11,893.1 11,867.5 1999 6.3 6.3 3,313.3 10,920.0 14,233.3 14,227.0 2000 2,563.87 2,563.9 3,118.4 17,160.0 20,278.4 17,714.5 2001 3,898.0 17,550.0 21,448.0 21,448.0 2002 3,898.0 17,550.0 21,448.0 21,448.0 2003 3,898.0 17,550.0 21,448.0 21,448.0 2004 3,898.0 17,550.0 21,448.0 21,448.0 2005 2,563.87 2,563.9 3,898.0 17,550.0 21,448.0 18,884.1 2006 3,898.0 17,550.0 21,448.0 21,448.0 2007 3,898.0 17,550.0 21,448.0 21,448.0 2008 3,898.0 17,550.0 21,448.0 21,448.0 2009 3,898.0 17,550.0 21,448.0 21,448.0 2010 - 3,898.0 17,550.0 21,448.0 21,448.0 2011 3,898.0 17,550.0 21,448.0 21,448.0 2012 3,898.0 17,550.0 21,448.0 21,448.0 2013 3,898.0 17,550.0 21,448.0 21,448.0 2014 3,898.0 17,550.0 21,448.0 21,448.0 2015 - 3,898.0 17,550.0 21,448.0 21,448.0 Total 1,361.11 10,472.28 31,416.84 10,255.47 53,505.70 82,209.1 337,545.0 419,754.12 366,248.4 NPV @12% 31,878.72 EIRR 29.2% Table 6 Track Rehabilitation Materials (Railways V) Economic Rate of Return Calculation (1997 Yuan, thousands) COSTS SAVINGS Heat- Treated Total Domestic Total NET BENEFITS Year Rail OTM* Labor Maintenance Cost Rail OTM* Labor Maintenance Savings CASH FLOW One 212,285 23,575 37,900 273,760 (273,760) Two 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Three 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Four 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Five 212,285 23,575 37,900 273,760 240,625 23,575 37,900 5310 307,410 33,650 Six 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Seven 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Eight 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Nine 212,285 23,575 37,900 273,760 240,625 23,575 37,900 5310 307,410 33,650 Ten 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Eleven 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 Twelve 1,052 1,052 240,625 23,575 37,900 5310 307,410 306,358 "'' ~ f%dVn =qIfn -20V7Af 410 Thirteen 240,625 23,57-15 j,7V0 5310 307,410I37,41 Totals 636,855 70,725 113,700 9,468 830,748 2,887,500 282,900 454,800 63,720 3,688,920 2,858,172 * OTM= Other track material. NPV@12% 1,197,100.96 EIRR= 105.7% - 98 - Table 7 Wheels for Freight Wagons (Railways V) Economic Rate of Return Calculation (1997 Yuan, millions) COSTS BENEFITS NET BENEFITS Year Direct Costs Mfg. Costs Total Costs Value Added CASH FLOW 1994 71.13 366.49 437.62 (437.62) 1995 94.31 366.49 460.80 (460.80) 1996 4,481.52 4,481.52 1997 4,481.52 4,481.52 1998 4,481.52 4,481.52 1999 4,481.52 4,481.52 2000 4,481.52 4,481.52 165.44 732.98 22,407.60 21,509.17 NPV@12%= 12,120.48 EIRR= 233% IBRD 22097 100- 11ý0° T20° 3 0° CHINA MGuong~ C H I N A \ 0, FIFTH RAILWAY PROJECT Propose_dProjt:h. 0. - Project Line w ynq Project Terminal Hair Eon Previous Projec. N r , - Electrification Swe"in äcJimuSIH Railroods yi fc, Sviiv A Factories MO N GOL YAishi .. - . .. Non-Bank Financed Harbin Sankeshv Electrified Lines in operation Boceng Mdnii Electrified Lines under construction I Single Trock Railroads ,- - Tumn Double Track Railroads Tongpino Double Track Railroads /"gongianghe- under construction - - - International Boundaries ..de Fushun enyang A YDEM. PEOytÉS Hohhot Jinin Zhanioko Dondong ( REP, OF KOREA BEUING uengdse Yumen o Shenmu TcinREP. OF hil, _g I KOREA Yinchucn hi. ag Shengli uwei Toiyu n Dezhou I Sfång ýZhongwei Jnn .nC ~.hi AYni %n c h n~ h o u XinYnzouShiisuo JAPAN anhu \Ho a Yueshan Jioot (Lionyungang Luoycn shongqiv c Pingdinu Uhou Xi'a Pindingho • Meng ioo Dengbv Fuyang Yongpinggun Hain:n Npnn 30 Ankang Xiongfon H $f,nghoi /hH ngzhous Wuhgon / ogo Chengdukoo D. Xivn Chongqing Shimu mgnawbion Xicononhai Nanchang Luohuung inglan ChnsoZhuzhou sgg ,Fioooo- XAchwng jiuchong Zhliii"g Huaihua Wulidun Lcogucn dgepLoizhou Hengy.ng Yong'a-n Fu-hou Guiyan A1 An Zhangping K.nming LU-ho. Guansh; hen.hen ý_ NH ÓÑGKONG 20°- rAACAO, PORT. I~~~~ b----9 10 200 300 400 500 KILOMETERS /ANMA AR ET N APA 6 l60 200 300 MILES LAO PEOPLE' 5.,~p--,·#~d awrann eeir rcmesn• DE X& RL'P .n e-ann THAIL? ND jga a,r-m rh.e- .--reO~h,-yndar ff- MAY 1991