China - Third Inland Waterways Project

Report No. PID9350 Project Name China-Third Inland Waterways (@) Region East Asia and Pacific Region Sector Ports & Waterways Project ID CNPE56199 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Address HUNAN PROVINCIAL GOVERNMENT EXECUTED BY HUNAN XIANGJIANG NAVIGATION CONSTRUCTION AND DEVELOPMENT CORPORATION LTD. (HXNCDC) Address: 286 West Wuyi Road, Changsha, Hunan Contact Person: Mr. Li Jun Tel: 0731-2252233 Fax: 0731-2252299 Email: Hxncdl@Sina.com Environment Category A Date PID Prepared May 30, 2001 Projected Appraisal Date March 21, 2001 Projected Board Date June 21, 2001 1. Country and Sector Background The main issues and Government strategy in China's inland water transport are as follows:(a) Competitive development of IWT sectorInvestment in waterways infrastructure over the last half century has been insignificant compared with the investment in other transport modes. The waterways infrastructure is presently inadequate, and thus it prevents IWT from contributing fully to support economic development. Railway and highway infrastructure have steadily improved, and is now close to allowing these sectors' operations to be cost-effective and user-friendly. In contrast, waterways infrastructure has improved little, and in the last three Five-Year Plans, its share of investment has been significantly less than its share of ton-kms. Although some waterway services are efficient, most are operated by inefficient companies that have small vessels with high operating costs.(b) Decentralization and institutional reform of IWWAlthough the inland waterways sector has been significantly decentralized, and some institutional responsibilities have been commercialized, further restructuring and commercialization are needed to make the agencies that oversee inland waterway transport more responsive to users' needs. Lack of coordination between agencies representing different users of the waterways (irrigation, power generation, water supply, and transport) has seriously impeded development of waterway transport. In addition, separation of responsibilities for waterway and railway transport between different ministries impedes the cooperation and coordination needed for both sectors to fulfill their roles. Because most potential inland waterway freight requires another mode of transport at the beginning or end of its journey, greater facilitation of multimodal freight transport is necessary for waterways to increase their share of traffic.(c) Deregulation of freight tariffA long period of controlled  tariffs that lasted until 1998 hampered the competitiveness of the IWT sector. Under the regulated tariff, operators had no significant advantage in operating larger and more cost-effective vessels, so they had also no incentives to replace smaller vessels with larger ones. Most waterway vessels are powered barges that operate as independent units rather than in convoys. The lack of serious competition between waterway transport companies and the lack of cost-consciousness by users have contributed to the failure of waterway operations to become more efficient. The greatest impediment to increased operating efficiency and increased modal share has been the lack of any incentive to increase vessel sizes and therefore reduce costs. Since most freight tariffs were deregulated, there is a growing awareness of the advantages of larger, more cost-effective vessels and in particular of push-tow convoys (especially the push tow convoys that have proved so effective in other parts of the world which are used little in China).(d) Provision of investment fundsMost provinces with large waterway systems have implemented some form of direct user charges, typically including a channel maintenance fee, a channel construction fee and charges for use of shiplocks. The revenues from channel maintenance and construction fees were expected to cover the amortization of charges of loans for waterway development. A new system is being considered to replace these charges with a uniform fuel price surcharge. Under this system, the fees would be collected by the company supplying the fuel, then passed on to the agency responsible for administering the charge. The Government of China (GOC) utilizes loans from the World Bank for waterway investment and then lends the funds to the provinces to cover about 40 percent of project costs. The remainder comes from the provinces' own resources. The resulting level of cost recovery from users is one of the highest cost-recovery levels for waterway investment and maintenance in the world. (In comparison, in the United States which is considered a good example, cost-recovery levels are 20 percent overall -- 100 percent for new investment and 0 percent for maintenance.) (e) Policy guidelines for modernization of IWT fleetWhile waterway transport has the potential to provide the lowest transport cost for a wide range of products over a range of travel distances, these low costs are very dependent on vessel size. There are many family-owned barges in operation -- in some provinces, more than 90 percent of all vessels are individually owned. Family businesses do not have access to sufficient financing to invest in larger and more efficient vessels and are too small to implement the integrated logistics systems that are necessary to take advantage of the lower operating costs that come push-tow operations allow. The few commercial fleets presently in operation are owned mostly by companies in which provincial or municipal governments have a controlling interest. Until now, these companies have had little incentive to become more efficient. MOC has realized the critical importance of vessel size on operating costs and is undertaking studies to find the best way to bring about a rapid increase in average vessel size. 2. Objectives The objective of the Third Inland Waterways Project is to reduce transport and energy bottlenecks by:(a) improving market access of the remote inland areas of Hunan Province;(b) providing more efficient and economic inland waterway transport (IWT); and(c) generating power to supplement the needs of the remote areas. 3. Rationale for Bank's Involvement -2-  Bank involvement in the project will provide further IWT policy reform. Through preparation of the project, the Bank is assisting MOC in developing and implementing national policy guidelines for modernizing the IWT fleet. The Bank, under the ongoing second Inland Waterways project, is also assisting Jiangsu Province in drawing up a provincial policy for modernizing the IWT fleet. It is expected that the proposed project will integrate China's policy guidelines on fleet modernization. The proposed project will also assist commercialization of HXNCDC. The IWW1 project implementation provided inland provinces, including Hunan Province, opportunities to learn competitive and transparent procurement processes, as well as institutional capacity development. The proposed project will assist HXNCDC in providing a development strategy for Xiangjiang IWT, including containerization of waterway transportation. In addition, the proposed project will assist institutional development of HXNCDC, including strengthening its financial management to ensure that the proposed project is financially sustainable. 4. Description The proposed project will include: A. Construction of Zhuzhou Shiplock; B. Construction of Zhuzhou Dam and Powerhouse (a dam about 15 m high) with a capacity of 140 megawatts of hydroelectric power generation primarily to increase upstream water depth for navigation and power supply, and to provide a highway bridge over the Xiangjiang River in Hunan Province; C. Construction of access roads; D. Construction of river bank protection; E. Upgrading the Xiangtan - Zhuzhou channel section by dredging; F. Strengthening of sector management and further commercialization of HXNCDC, the IWT agency, through: (a) training, (b) technical assistance, and (c) enhancement of its financial capacity; andG. Resettlement. 5. Financing Total ( US$m) Total Project Cost 220.22 6. Implementation The proposed project will be carried out by Hunan Province. The implementing agency will be HXNCDC in accordance with the Subsidiary Loan Agreement between Hunan Province and HXNCDC. HXNCDC is a State-Owned limited liability company, established in November 1994 by HPCD and authorized by Hunan Province to implement IWWl.Financial management and disbursement. The financial management aspects of the project are to be handled by the Finance Department of HXNCDC and by Hunan Provincial Finance Bureau (HPFB). Specifically, the HXNCDC finance department will be responsible for bookkeeping, collecting and maintaining supporting documents, preparing withdrawal applications, monitoring project payments and preparing project financial statements. HPFB will be responsible for maintaining, monitoring and reconciling the special account to be set up for the project, and reviewing, verifying and approving withdrawal applications prepared by HXNCDC before submitting them to the Bank for withdrawal processing. In terms of disbursement technique, the project will disburse using traditional disbursement techniques and will not be using Project Management Report- (PMR) based disbursements, in accordance with Bank and MOF policies.Auditing Arrangements. As with other Bank-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO), established in 1983 under the name of the State Audit Administration, will have overall responsibility for - 3 -  auditing project accounts. The Hunan Provincial Audit Bureau will conduct the fieldwork and issue audit reports. The Bank currently accepts audits performed under the supervision and responsibility of CNAO. Audits of the financial statements of the project, and the audit of the Special Account and Statement of Expenditures will be submitted to the Bank within six months of the end of the financial year. The audit reports of the project will also include opinions on whether the project was in compliance with financial covenants, if any. 7. Sustainability The benefits of the proposed project are likely to be sustainable. The traffic along the Xiangjiang River is steadily increasing, indicating that inland waterways offer a competitive transportation mode. Under the IWW1 project, Xiangjiang traffic and vessel size have increased and it is expected that IWT on the Xiangjiang River will be more competitive after 1,000-dwt vehicles can navigate up to Hengyang (from Shanghai or Wuhan on the Yangtze River) during the dry season. Siltation along Xiangjiang has been minor and would not be changed in future. 8. Lessons learned from past operations in the country/sector Although the proposed project will be the third IWT project in China (the First and Second projects are ongoing), Bank experience in this subsector is very limited. China's two projects are progressing satisfactorily both in physical and institutional terms. Short-term financial viability for the cross-subsidy from the power generation and sale of electricity has been proven, but long-term sustainability has not yet been tested. Major contracts for both civil works and procurement of equipment have been awarded without any significant delays. Implementation is also being carried out close to schedule. This is due mainly to the strength of China's executing agencies in preparing engineering design and handling the bidding process. The major institutional reform has been achieved by establishing SOEs for dam/shiplock operation and by separating these SOEs from the Provincial Communication Departments (in Hunan and Guangxi Provinces). Implementation of resettlement action plans and environmental action plans has also been satisfactory. Executing agencies pay close attention to the conditions of resettlement, as well as to progress achieved. In terms of dam construction under IWW agencies, however, engagement of experienced consultants with particular expertise in designing and constructing dam will be essential. Drawing on experience gained from the first two projects, the IWW agency identified and appointed qualified consultants to carry out the preparation of the proposed project. Because China has greater expertise in waterway and small hydro-dam design and construction than other countries, and because the experience from the first two projects was satisfactory, local design will be used for the proposed project. Local experience in waterway construction and dredging from the previous projects was also satisfactory. Although Hunan Province used international competitive bidding (ICB) to contract its dam construction under the first project, Guangxi Province used domestic national competitive bidding (NCB) financed locally. Both results were satisfactory, although the Hunan outcome was slightly better. Local supervision consultants for all civil works components (financed locally) have been satisfactory and will be used again in the proposed project. Power generators were procured under ICB and installed locally. This proved acceptable to the provinces and the Bank and had a satisfactory outcome, and this course of action will be - 4 -  followed again. The Operations Evaluation Department's (OED) analysis of 35 Bank-financed projects completed between 1980 and 1992 in the port subsector (not only in China) indicated two major problems: (a) long implementation periods due to the underestimation of the time needed for procurement and civil works construction; and (b) lower-than-expected benefits due to over-optimistic traffic projections. To minimize the first of these problems in the proposed project, engineering design has been substantially completed, and procurement procedures have been agreed and are similar to those used before. Because the project does not include complicated or unfamiliar civil works, delayed project execution is unlikely. The Bank has carefully reviewed the provinces' traffic forecasts and reduced them to levels compatible with current Bank expectations of national, regional and provincial economic development.China's highway experience in some Bank-financed projects indicates: (a) inadequate quality of construction, and (b) cost overruns. Although the proposed project would not require advanced technology for civil works construction, the project will take into account the need to use experienced and competent contractors and supervision consultants, as well as careful determination of project cost estimates. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : The project complies with the requirements of OD 4.01. The project is classified Category A since it includes involuntary resettlement, channel dredging and construction of a dam.Preparation of EIA and EAP. After the pre-feasibility study report for Zhuzhou Navigation and Hydropower Project was completed, the environmental assessment works for this project started in 1999 with the appointment of the Hunan Environmental Protection Research Institute as Environmental Assessment (EA) consultant. The EA was prepared according to the Chinese national procedures and the World Bank's OP 4.01. The Environmental Impact Assessment (EIA), Environmental Action Plan (EAP) and EA Summary reports for this project were reviewed by the Bank and discussed with HPCD during the pre-appraisal mission in December 2000. The final draft EIA, EAP and EA Summary were submitted to the Bank in January 2001, and were found satisfactory. During the EA work, the local people in the project area were intensively consulted, and their opinions have been reflected in the project design and environmental mitigation measures, as appropriate. The relevant information and documents were provided before each consultation. The final EA reports were disclosed locally on January 19, 2001 with an advertisement in the local newspaper, and were sent to the World Bank's InfoShop for disclosure on January 22, 2001. The major findings and discussions are summarized below.Potential Impacts and their Mitigation Measures. Major potential impacts during the construction phase include: noise, air and water pollution due to construction works; vegetation loss; soil erosion; and pollution due to dredging. Potential impacts during the operation phase include: inundation of land; impedance of fish migration; and water pollution in the reservoir.Two options for the dam site were studied to minimize the adverse impacts at the design state, and no distinct differences in environmental impacts were found except for the inundation of farmland. The site selected for the dam provokes inundation of 30 percent less farmland and generates 30 percent more electricity than the other site. In addition, this project, compared with the no-project option, will provide environmental benefits in two - 5 -  ways. First, the dam's generation of hydropower will emit fewer air pollutants than a thermal power plant, which would be built in a no project scenario. Second, the project will relieve traffic congestion on highways by shifting cargo transport from highway to inland waterway. The EA has ascertained that the area affected by the project has no critical natural habitat, no environmentally protected areas, no rare fauna or flora, and no cultural relics. To minimize the inundation of farmland, project design includes construction of drainage channels downstream, the raising of the level of farmland, and construction of pump stations. These measures will reduce the inundation area by 86 percent to 186 ha. What is more, given that the release of fry at Dayuandu Dam, located 96 km upstream and constructed under IWW1 project, has been successful in mitigating the dam's impact on fishery resources, this project will also employ the same measure.Social Impact and Resettlement.OD 4.30 on Involuntary Resettlement applies to this project. The key social impact of the project relates to involuntary resettlement. Without protective works, the project would have affected 90 villages -- 1,342 ha of land, most of which are farmland, and 68,737 square meters of houses -- largely by inundating land and demolishing structures. Extensive efforts have been devoted to minimizing adverse impacts and different alternatives have been compared. As a result, protective works have been chosen and designed, and are detailed in the RAP (see Annex 12). The protective works as designed will protect 45 villages from losing land. These works reduce the amount of farmland to be inundated from 1,342 ha to 186 ha -- a decrease of 86 percent. Similarly, the number of people losing land will be reduced to 2,189, and the number of people relocating will be reduced from 1,205 to 280.The impact assessment indicates that the run-off nature of the reservoir and the minimization efforts will keep project impacts scattered and relatively small. Of the 45 villages losing farmland, three villages will lose more than 20 percent of their land holding, one will lose 16 percent, nine will lose from 5 percent to 10 percent, and 32 will lose less than 5 percent. Under the village land-sharing arrangements, no one is losing all their farmland. The land to be inundated is low-yielding and subject to annual flooding. The socioeconomic survey indicates that the income structure of the affected farmers is quite diverse, and on-farm income accounts for only 26 percent of their household income. Resettlement planning for the project started in May 1999. Planning activities included the development of topographic maps (1:2000 scale), a detailed census of the affected population, the inventory of affected assets, a sample socioeconomic survey, consultations on resettlement and rehabilitation strategy, as well designs of the protective works. On the basis of these activities, an RAP was prepared in line with local laws and World Bank OD 4.30 on Involuntary Resettlement. Because the number of relocating households is small, they will all be relocated within existing villages. For those affected by farmland acquisition, the rehabilitation strategy is land- and agriculture-based, and includes land reallocation and land and fish pond development. The RAP contains details on the following aspects of resettlement: (a) the census; (b) inventory; (c) analysis of impacts; (d) the legal framework and resettlement principles; (e) rehabilitation action plan; (f) reconstruction of affected infrastructure; (g) design of protective works; (h) resettlement and rehabilitation budget; (i) institutional arrangements; (j) consultation and participation of the affected people; (k) grievance mechanisms; (1) monitoring arrangements; and (m) training of resettlers, and preferential policies. - 6 -  11. Contact Point: Task Manager Toshiro Tsutsumi The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-458-2955 Fax: 202-522-3573 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending June 1, 2001. - 7 -