China - Hubei Xiaoagan - Xiangfan Highway Project

Document of The World Bank Report No: 23909-CHA PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$250 MILLION TO THE PEOPLE'S REPUBLIC OF CH1NA FOR HUBEI XIAOGAN-XIANGFAN HIGHWAY PROJECT August 19, 2002 Transport Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective April 2002) Currency Unit = RMB RMB 1.00 = US$0.12 US$1.00 = RMB 8.28 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AAS Accident Analysis System NTHS National Trunk Highway System BMS Bridge Management System OED Operations Evaluation Depatnent BOT Build-Operate-Transfer PAP Project Affected Persons CAS Country Assistance Stragety PCD Provincial Communication Department CFAA Country Financial Accountability Assessment PIP Project Implementation Plan CNAO China National Audit Office PLG Project Leading Group EA Environmental Assessment PMO Project Management Office EIA Environmental Impact Assesment PMR Project Management Report EIRR Economic Internal Rate of Retun PPCA Project Procurement Capacity Assessment EMP Environmental Management Plan PRA Participation Rural Assessment ES Executive Summary PRC People's Republic of China FIRR Financial Internal Rate of Return QCBS Quality- and Cost-Based Selection FYP Five Year Plan RAP Resettlement Action Plan GPN General Procurement Notice RRIP Rural Road Improvement Program GOC Government of China RTC Road Training Center HHAB Hubei Highway Administration Bureau SA Social Assessment HPAB Hubei Provincial Audit Bureau SA Special Account HPCD Hubei Provincial Communications Department SDPC State Development and Planning Commission HPFB Hubei Provincial Finance Bureau SOE State-Owned Enterprise ICB International Competitive Bidding SPN Specific Procurement Notice MBD Model Bidding Document TOR Terms of Reference MOC Ministry of Communications VOC Vehicle Operating Cost MOF Ministry of Finance WBFO World Bank Financed Project Office NCB National Competitive Bidding XXE Xiaogan - Xiangfan Expressway NH3 Third National Highway Project XXEC Hubei Provincial Xiao Xiang Expressway NH4 Fourth National Highway Project Company Limited NMDP National Minority Development Plan XXEH Hubei Provincial Xiao Xiang Expressway NPV Net Present Value Construction Headquarters Vice President: Jemal-ud-din Kassurn, EAPVP Country Manager/Director: Yukon Huang, EACCF Sector Manager/Director: Jitendra N. Bajpai, EASTR Task Team Leader/Task Manager: Michel Bellier, EASTR  CHINA HUBEI XIAOGAN-XIANGFAN HIGHWAY PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 8 C. Project Description Summary 1. Project components 9 2. Key policy and institutional reforms supported by the project 11 3. Benefits and target population 12 4. Institutional and implementation arrangements 12 D. Project Rationale 1. Project alternatives considered and reasons for rejection 14 2. Major related projects financed by the Bank and other development agencies 16 3. Lessons learned and reflected in the project design 17 4. Indications of borrower commitment and ownership 18 5. Value added of Bank support in this project 19 E. Summary Project Analysis 1. Economic 19 2. Financial 20 3. Technical 20 4. Institutional 21 5. Environmental 22 6. Social 25 7. Safeguard Policies 27  F. Sustainability and Risks 1. Sustainability 27 2. Critical risks 28 3. Possible controversial aspects 29 G. Main Loan Conditions 1. Effectiveness Condition 29 2. Other 29 H. Readiness for Implementation 32 I. Compliance with Bank Policies 32 Annexes Annex 1: Project Design Surnmary 33 Annex 2: Detailed Project Description 38 Annex 3: Estimated Project Costs 52 Annex 4: Cost Benefit Analysis Summary 53 Annex 5: Financial Summary 65 Annex 6: Procurement and Disbursement Arrangements 76 Annex 7: Project Processing Schedule 85 Annex 8: Documents in the Project File 86 Annex 9: Statement of Loans and Credits 87 Annex 10: Country at a Glance 91 Annex 11: Environmental Assessment and Action Plan Summary 93 Annex 12: Resettlement Action Plan Summary 103 Annex 13: Financial Management Assessment 109 Annex 14: Summary of Social Assessment of Rural Roads 117 MAP(S) IBRD 31822 MBRD 31823  CHINA Hubei Xiaogan-Xiangfan Highway Project Project Appraisal Document East Asia and Pacific Region EASTR Date: August 19, 2002 Team Leader: Michel Bellier Sector Manager/Director: Jitendra N. Bajpai Sector(s): Sub-national government admninistration (20%), Country Manager/Director: Yukon Huang Roads & highways (80%) Project ID: P070441 Theme(s): Other public sector governance (P), Regional Lending Instrument: Specific Investmnent Loan (SIL) integration (P), Rural services and infrastructure (P) Project'Financing. Data [X] Loan 1 Credit [ ] Grant [ Guarantee [ ] Other: For Loans/Credits/Others: Loan Currency: United States Dollar Amount (US$m): $250 Borrower Rationale for Choice of Loan Terms Available on File: 1 Yes Proposed Terms (IBRD): Variable-Spread Currency Loan (VSL) Front end fee (FEF) on Bank loan: 1.00% Financing Plan (US$m): Source Local Foreign Total BORROWER 440.88 0.00 440.88 1BRD 0.00 250.00 250.00 Total: 440.88 250.00 690.88 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsible agency: HUBEI PROVINCIAL COMMUNICATIONS DEPARTMENT (HPCD) Address: No. 428, JianShe Ave. Hankou, Wuhan, Hubei, 430030 China Contact Person: ir. Ren Binian, Director Tel: (027) 8383-2933 Fax: (027) 8386-9260 Email: Estimated Disbursements ( Bank FYf/US$m): ; FY 2003 2004 2005 2006 2007 Annual 38.00 52.00 l 60.00 80.00 20.00 Cumulative 38.00 90.00 | 150.00 230.00 250.00 ProJect implementation period: July 2002 to June 20 07 . Expected effectiveness date: 12/31/2002 Expected closing date: 12/31/2007 os PAF- R. M.1,2U=  A. Project Development Objective 1. Project development objective: (see Annex 1) The Hubei Xiaogan-Xiangfan Highway Project aims to provide a more effective, safe and efficiently managed transport infrastructure to sustain and support socio-economic development, trade, and regional integration in Hubei province and improve transport links to lagging western region. The project, when completed, will offer the following socio-economic benefits to Hubei province and other areas influenced by the project: * increased transportation capacity and the consequent decrease in traffic congestion in the Xiaogan - Xiangfan corridor and regional and economic integration with the less developed western areas of Hubei province through the construction of Xiaogan - Xiangfan Expressway; * improved accessibility in low income areas in Hubei province through a program of rehabilitation and upgrading of rural roads in poor counties; and * improved management and maintenance of roads and better road safety conditions through the provision of training, technical assistance and equipment to Hubei Provincial Communication Department (HPCD) and related provincial road agencies. 2. Key performance indicators: (see Annex 1) The principal outputs and impact indicators selected for monitoring progress towards the above development objectives are as follows: Output Indicators Reduction of traffic congestion and travel time and Average daily traffic and accident rate on new lower accident rates in Xiaogan - Xiangfan corridor. expressway and existing roads. Improved accessibility in the low-income areas served Average daily traffic on upgraded roads. by the Rural Road Irnprovement Program in Poor Number of days the roads are closed to traffic. Counties. Benefits to population in served areas (incorne, enrollment in high schools). Strengthened role of HPCD and its related agencies Number of staff trained. and improved efficiency of highway management. Percentage of pavement maintenance works procured by contract with independent companies. Test of performance-based maintenance of road pavement. Improved traffic safety. Number of treated black spots. -2-  B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16321-CHA dated 1997/02/25 and Progress Report (R-98-107 dated 05/06/98) Date of latest CAS discussion: 05/28/98 A new CAS, under preparation, is to be presented to the Board in November 2002. The objectives of the strategy proposed by the Bank are to: * improve the investment climate; * accelerate the transition to a market economy; * address the needs of disadvantaged groups and underdeveloped regions; and * facilitate a more sustainable development process. Within the transportation sector, the key areas of this agenda to be supported by the Bank include: * financing economic infrastructure through projects in key traffic corridors, aimed at (i) the development of western provinces, and (ii) the reduction of interregional and intraregional disparities; * financing infrastructure to serve the poorer communities, thereby improving productivity in rural areas; and * facilitating the development of institutions necessary to manage the infrastructure network in an emerging market economy. Accordingly, the sector specific goals supported by the Hubei Xiaogan-Xiangfan Highway project are as follows: * promoting economic growth, improving regional and market integration, and facilitating trade; * reducing poverty in low income western region and other remote areas of Hubei province by improving their accessibility; and * strengthening provincial road institutions, supporting their transition toward market based road activities and improving the efficiency of highway management, especially road maintenance, traffic safety, and the environmental and social impacts of highway construction and operations. 2. Main sector issues and Government strategy: The Bank has carried out several transportation studies in the last five years: Strategy for the Transport Sector (Forward with One Spirit, 1997/98), Operations Evaluation Department (OED) Report on China Transport (1999), Review of Highway Technical Assistance (1999) and China Highway Strategy Review (October 2001). These, together with high-level highway policy seminars, especially the workshop with Chinese government on November 14, 2001, have identified four key issues for the road sector: -3 -  (i) meeting investment needs to sustain economic development, trade and integration; (ii) improving accessibility to remote/low income areas; (iii) fostering sustainable road sector management; and (iv) addressing road traffic safety issues. (i) Meeting investment needs to sustain economic and social development, trade and integration The macroeconomic growth and structural transformation of China's economy, now moving towards light and agro-industry and increased inter-provincial trade, demand a more efficient transportation network. In the past decade, China has embarked on major highway investment programs to expand the existing road network and to remove transport bottlenecks that constrain socio-economic activity, and cause regional disparities. China's investment of US$13 billion in highways in 1997 more than doubled in 1998, 1999 and 2000. At the core of the program is the construction of the National Trunk Highway System (NTHS), a network of approximately 35,000 km of high-grade highways (10,000 km of which was completed by 1999) connecting China's 100 major cities at an estimated cost of US$150 billion. The percentage share of funds allocated by Ministry of Communication (MOC) to different grades of projects in the transportation sector during the last three years has been: NTHS - 30%, other high-grade highways - 30%, improvement of existing roads - 25%, and rural roads - 15%. China's total highway network, at about 1.7 million km, is still relatively low in comparison with its area and population. This has been partly responsible for the existing intraprovincial and interprovincial economic disparities, which can be addressed and resolved by the construction of a road network that links and connects the economically weak western areas with the rest of the country. Accordingly, the balance of expenditure in the road sector has to be carefully considered in the coming years, to ensure that funds are efficiently allocated not only to investments supporting overall economic development and trade, but also to the specific needs of western provinces and their integration in the provincial economy. The financing of these transportation programs through traditional resources is inadequate to meet their scope and demand. Historically, road expenditures have been funded through public resources, often a combination of central government, local budgets, road user charges, and multi and bilateral loans channeled through the public sector. The main road user charge is the road maintenance fee (around RMB 30 billion a year); other charges, including the vehicle tax, contribute only half as much. The road user charge generates less than 40 percent of its potential. The limitations of these charges led the National Congress to replace them with a fuel tax in November 1999, which has not been implemented so far. During 1998 - 2000, almost 50 percent of road development was financed through domestic bank loans to or guaranteed.by local government, and through proceeds of bonds issued by central govemment and lent to local governments. This mode of financing is not sustainable in the long run as it increases government debts and banks have to limit their exposure in any given single sector. Several provinces have also raised private financing from investors through two models: Joint Venture agreements that have mobilized RMB 75 billion (US$9 billion) equity through 80 -4 -  transactions in 14 provinces by end 2000, essentially from Hong Kong based private sources; and the securitization of toll roads with share issues on stock exchanges and private placements amounting to RMB 16 billion (US$2 billion). Although private financing is significant relative to other countries, it has contributed less than 10% of China's total commitment to new road construction since the early 80s. It is limited by two constraints: the few road projects that can attract full private sector financing are most likely to be in the Eastern/Coastal region on corridors where traffic levels are high, and the need for further development of the legal and regulatory framework. The latter issue is addressed in a report on "Private Participation in Infrastructure in China" prepared by the Bank Group at the request of the State Development and Planning Commission (SDPC). It was also discussed during a conference in Beijing attended by government and private sector representatives on November 15 - 16, 2001. Given the financial constraints, there is an urgent need for the government to build a reliable and stable financing scheme of road activities based on user fees. In addition, reforms are needed in several areas of the overall environment for private participation to contribute more widely to highway financing. This can be enabled by: (i) developing the domestic bond market and its opening to corporate issuers, which would open additional long term funding sources to strengthened and consolidated commercialized toll road entities; experience in developed countries shows that bond instruments are also comparatively less expensive than equity and are the main financing source taped by established utilities that operate infrastructures generating steady income; (ii) widening of the range of public-private partnerships models; (iii) improved governance and effective competition in the procurement of private investors; and (iv) more efficient risk allocation. Improvements in the legal and regulatory framework and in procurement practices of private investment are needed to address the above issues. (ii) Improving accessibility to remote, low-income areas The geography of China imposes complexities on the provision of basic road access particularly in the inner low-income provinces. The highest incidence of poverty occurs in inland provinces and in remote mountainous areas, as in western Hubei. Central and local governments have emphasized the role and potential of transportation in the integration of national economy, and in its ability to stimulate growth in remote areas. Improving the infrastructure lowers transport costs of goods and services in addition to providing people with access to social services and economic opportunities. Investment in county and township roads increased from RMB 1.7 billion in 1992 to over RIMB 17.6 billion (US$2 billion) in 1996. During the Ninth Five Year Plan, 188,000 km of local class III and higher class roads were constructed and 5,000 villages made accessible. However, the task in China is still huge and requires significant public resources. The Bank's highway projects in China aim to address poverty issues arising from poor accessibility through targeted interventions in low-income areas. (iii) Sustainable road sector management The sustainability of the highway sector greatly depends on how provincial and local highway institutions address the growing challenges of their transition to a market-supporting role, especially in areas of network expansion, standards and control of construction quality, and preserving road assets. - Transition to market role. Traditionally, the role of government within the transportation sector was one of owner and provider of services for highway financing, construction and operation. - 5 -  However, this role is now evolving towards one of policy maker, planner, and regulator. This strategic readjustment is required to ensure efficient market based activities whose development is at the core of government strategy. The management of the expressway network is being reformed, with the commercialization and corporatization of newly built high-grade highways generating stable toll-based revenue and their operation by independent but government owned shareholding companies. However, this has led to the proliferation of highway corporations, each managing a relatively short section of roads. Hence, the creation of a China model for Provincial Toll Road Authority remains a challenge. More importantly, the government needs to refocus on its new market support role and to encourage the development of independent enterprises (including entities not owned by the state) that can provide cost-effective services for. road construction and operation. - Highway construction quality. Incidences of bridge and road failings or premature wear and tear of highway pavements have raised awareness of quality related issues. The problem has both technical and administrative roots. Contractors, mostly domestic, may be poorly managed, face irregular payments and come under pressure to shorten the construction period. In some cases, quality control suffers because of the lack of authority assigned to the supervision agency to oversee contractors. There is a definite need to strictly apply quality standards and control their enforcement in future Bank highway loans. - Sustainabilitv of road maintenance. In most provinces, proper road maintenance is constrained by insufficient funds. Funds allocated to the road sector have to be shared between road maintenance and construction of new roads. The ongoing rise in vehicle-kilometers emphasizes the need to focus on road maintenance. Accordingly, provincial Communication Departments not only need to develop sustainable funding mechanisms, but also be encouraged to: (i) implement a comprehensive road maintenance policy, (ii) refine their road information systems and effectively use it for road maintenance, planning and operations, (iii) adjust their organizational structures and training programs to maintenance challenges, and (iv) increase competitive and market based procurement of maintenance services through contractual schemes drawing on private sector capacity. (iv) Improving Road Traffic Safety Road traffic safety remains a major issue in China - the country has one of the world's highest road accident rate, which is increasing at a faster pace than the volume of traffic. In 1999, 83,500 people were killed and 286,000 injured in over 400,000 accidents. These numbers are higher than the 1998 figures. Estimates for 2000 indicate an even greater rise in the number of road fatalities, an increase of almost 15% to 95,000. Poor road safety results from several causes: low awareness and poor driving of road users, new and inexperienced drivers, poor vehicle condition, inadequate road design and maintenance, insufficient law enforcement and traffic surveillance, lack of rescue services, and ineffective Accident Information System. Diffused institutional responsibilities in these areas make it difficult to address the problem of road safety in a comprehensive manner. Improvement of road safety requires coordinated actions on "Engineering, Education and Enforcement", usually referred as "the 3 Es". Responsible government agencies should develop an agenda on areas that fall within the realm of their responsibility. Hubei and several other provinces have developed and implemented processes for road safety under Bank financed projects. MOC is planning to make such processes mandatory for all project designs. Bank projects have been - 6-  supported by other agencies, mainly provincial traffic police departments, on specific activities like Accident Infornation Systems and Black Spot Treatment programs. However, provincial Communication Department (PCDs) and other government agencies must strengthen their coordination on road and traffic safety enforcement issues and extend it to include public awareness and education. Government Strategy The transportation strategy of central and provincial govermments aims to ensure that the highway system contributes to the overall economic growth and social integration by facilitating the mobility of people, goods and services. In the Ninth Five Year Plan, investment priorities for the highway sector were firstly, to rapidly develop the NTHS and the provincial and rural roads that feed into it, and secondly, to implement financial reform policies and regulations to ensure efficient use of funds. The strategy succeeded to a large extent with the construction of 240,000 km of highways, including 13,000 km of expressways. However, crucial policy reforms, such as the implementation of the fuel tax, have lagged behind. In the Tenth Five-Year Plan (2001-2005) the goals of the transportation sector are primarily to support economic growth and spread its benefits to low-income populations, with special attention to the development of economically weaker western provinces. In the road sector, priority is given to the expansion and improvement of the existing infrastructure network, mainly through capacity increases, and to further develop transport services using these infrastructures. The plan targets a 200,000 km extension of roads of various classes (around US$84 billion) and entails the following agenda: * continuation of the construction of the NTHS, bringing the length of this backbone network to 26,000 km with the objective to complete it by 2010; and * improvement of highway infrastructure to and within western areas in order to reduce their geographic and economic isolation. A multipronged plan encompasses the following investments: - the development of 8 East-West and North-South corridors totaling about 15,000 km to link the interior regions to the coastal areas by 2020. This includes both NTHS projects and additional key routes; - the rehabilitation and upgrading of about 180,000 km of road network in the western areas; - the development of about 150,000 km of local roads to improve accessibility to rural areas and alleviate poverty in rural towns and villages; and - improved accessibility to low-income populations in all regions of China with a goal to ensure road accessibility to 95% of townships and 93% of villages. Policy and institutional reforms and the development of market regulations will intensify with the country's move toward a market-based economy. Reforms will aim to achieve the following objectives: -7 -  * incite a market role for government agencies in the construction and operation of infrastructure and in the provision of transport services. The role of the government will shift from that of a highway builder and operator to one of regulator, by increasingly relying on competitively contracted works and services, to let the market play its role. Thus, resource allocation will rely more on the market than on government. As infrastructure is a "public good", the contracting of future road construction, and in certain cases road operation, will be through competitive bidding. However, there will be three types of projects: projects which can be fully financed by the market, projects requiring some government contribution to complement private participation, and projects implemented by government, albeit through competitively awarded contracts; * strengthen the efficiency of road sector management and reorganize it to maximize the use of scarce resources through planning, programming, institutional optimization and the introduction of modern methods and technologies; * widen highway financing methods and improve the legal and regulatory framework to mobilize new sources of user charge-based revenues and promote public/private financing mechanisms. The latter includes the securitization of mature assets by strengthened toll road operators, the mobilization of bond savings, the extension of domestic bank funding to privately developed projects, the establishment of a comprehensive legal and regulatory framework, and the development of contract models; and * improve traffic safety. 3. Sector issues to be addressed by the project and strategic choices: The project will address issues mentioned above, while taking into account results achieved in the two ongoing highway projects funded by the Bank in Hubei province, namely: Third National Highway Project (NH3) effective November 1998, and Fourth National Highway Project (NH4) effective December 1999. The new project will specifically address the following objectives: Meeting Investment Needs to Sustain Economic and Social Development, Trade and Integration Hubei, a province with a population of 59 million (1998), is situated in central China, surrounded by Henan, Anhui, Hunan, Sichuan and Shaanxi provinces. It has experienced sustained economic development in the last ten years, and its GDP per capita is on par with the average for China, at RIMB 6,500 (1999). However, there remain, within the Hubei province, significant differences between the developed eastern area around Wuhan, the provincial capital, and the western area where GDP per capita is still under RMB 2,000, dropping as low as RMB 1,000 in some of the westem counties. Hubei is a communication node for North-South and East-West traffic, and a gateway to the less developed western provinces. Passenger traffic in Hubei has increased by about 5 percent per year during the last five years, and freight by approximately 3 percent. Road transportation accounts for 90 percent of passenger traffic and 75 percent of freight volume. The investments in ongoing NH3 and NH4 projects aim to expand highway capacity along China's interprovincial North-South traffic artery that passes through the densely populated and rapidly developing eastern parts of Hubei province and also serves Wuhan. The new project, however, will address the East-West infrastructure needs and reduce intraregional disparities in the province, with the construction of Xiaogan - Xiangfan Expressway (XXE). This XXE project aims to increase highway -8 -  capacity and improve transport services in an east to northwest corridor crucial for the econornic development of Hubei, by providing access to the auto industry in the area and by completing the expressway triangle running within the province. The project will also link the less developed western areas of the province to the Wuhan area, thereby becoming Hubei's major outlet to the west of China. The Ministry of Communications considers this corridor critical to the development of the western provinces. Improving Accessibility to Remote/Low Income Areas Among the 67 counties in Hubei, 38 were classified as poor on the provincial scale in 1995; of these, 25 were also classified as poor on the national scale. All but one of these counties are located in the western mountainous part of the province. The lack of proper infrastructure has been identified as one of the main constraints to their development. 2,500 villages in these counties were without highway access in 1995. There is a strong demand for improvements in communication infrastructure to ensure all weather access, which is quite a challenge in many places given the dominant mountainous terrain. Accordingly, the project includes a Rural Road Improvement Program in Poor Counties (RRIP) located in western Hubei to ensure improved access to social services and markets, while connecting the area to the provincial highways. Institonal Development and Sustainability of Road Sector Management NH3 and NH4 have begun to address key institutional and policy issues for the road sector in Hubei by initiating the preparation of a multi-year institutional development plan; strengthening the role and capacity of HPCD; establishing Road Traffic Safety, Quality Control and Quality Management units; improving the management of the road network; and developing expertise, tools and processes to address road traffic safety issues. The project will support: * a further strengthening of the capacity of Hubei road agencies and their adaptation to market based road activities; * improvements in the sustainability of road management and better road safety conditions, through the provision of training, technical assistance and equipment to HPCD and related agencies; and * initiatives for a closer cooperation among provincial agencies involved in road safety. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The three components of the Hubei Xiaogan-Xiangfan Highway Project address the main sector issues as follows:. Component 1: Increased Highway Capacity and Regional Integration The main capital investment component of the project is the 243.5 km long Xiaogan - Xiangfan Expressway (XXE). This will provide a more efficient, safe and effective means of transportation in a corridor that already serves about a quarter of Hubei province including the developing auto industry belt. -9-  XXE will: (i) directly serve about 6.8 million inhabitants and link several major industrial and hub cities, among them: Wuhan (Provincial capital), Yunmeng (250,000 pop), Anlu (40,000 pop), Suizhou (340,000 pop), Zaoyang (210,000 pop), and Xiangfan (789,000 pop), and (ii) reach the less developed counties in the western and mountainous part of Hubei. Thus, it will help stimulate social and economic development and decrease disparities within the province. In addition, XXE will complete the provincial expressway triangle, which is an integral part of the Hubei road network. At its eastern end, it connects with NH3, a Bank-financed section of the Beijing - Zhuhai expressway corridor that opened to traffic in December 2001. At its western end in Xiangfan, XXE will connect with the existing North-South NR207 and the parallel Xiangfan - Jinzhou Expressway, and also with the existing NR316 and the parallel Xiangfan - Shiyan expressway that run towards the North-East of Hubei and Shaanxi province. Both expressways are under construction by Hubei province and are planned to open to traffic in 2004, before the completion of XXE. However, the success of XXE objectives is not really dependent upon those expressway investments. XXE will be a 2x2 lanes expressway linked to the highway network with 14 interchanges. In addition, three Class II connecting highways (31 km) will link the XXE interchanges to important urban centers. Expressway operations will be supported by three management centers and three maintenafice centers, four pairs of service areas and four pair of parking areas, and necessary traffic management and O&M equipment. Component 2: Improved Accessibility in Poor Counties (RRIP) The project includes a Rural Road Improvement Program in Poor Counties (RRIP) to improve accessibility in low-income areas. Various subprojects are comprised in this component to rehabilitate and upgrade existing road sections to Class IV, m or HI levels. The road selection criteria include county level income, expected impacts on population served, consistency with provincial priorities and economic rate of return. The objective of this component is to ensure all weather road access in affected areas, and linking them to townships and provincial highway system, thereby improving population access to markets, social services and facilities. The first phase of the RRIP has been defined and comprises three subprojects located in nationally classified poor mountainous Western counties (Ensh'i county in Ensh'i Autonomous Region, Zhuxi and Zushan counties in Shiyan prefecture). They cover 259 km and rehabilitation costs are estimated at US$18 million. A second phase will complete the component. The RRIP will have a total estimated cost of US$60 million. Additional road sections will be identified during the project implementation on the basis of the above mentioned socio-economic and network criteria, and the selected roads will be processed in full compliance with all safeguard policies. Component 3: Institutional Development and Road Sector Management This component will strengthen the capacity and the sustainability of highway management in Hubei province in the following areas: Building Sector Institutions and Transition to Market Role. HPCD needs to acquire advanced skills and practices through a multiyear institutional development plan promoted under NH13 and NH14. The project will facilitate the transition of HPCD to the needs of a market economy through a training program for government agencies on highway planning, design, supervision, management and operation, and road safety. The project will also assist HPCD to disseminate knowledge and technical skills on road administration through the development of the provincial Road Training Center. -1 0 -  Sustainability of Road Management. HPCD has embarked on a program of improved road maintenance management and has also evaluated the merits of competitive contracting of pavement maintenance. Tools developed so far will be critical to assess maintenance needs and allocate budgets, particularly after the introduction of the fuel tax in China. In order to strengthen the sustainability of road management, the new project will support the application of road maintenance systems, further develop the contracting out of maintenance works and test the performance based maintenance model as an alternative contractual scheme. In addition HPCD will develop a policy to tackle vehicle overloading and test it on a pilot basis. Finally, HPCD will follow up on NH3 and NH4 initiatives regarding the commercialization of toll generating expressways with the establishment of a shareholding expressway company. Road Traffic Safety. Road traffic safety remains a serious concern in Hubei province. Under the previous projects (NH3 and NH4) HPCD has established a Road Safety Unit, prepared and tested safety guidelines for the design, construction and operation of roads. Under the new project, HPCD will further develop and implement a multipronged road safety agenda, based on an Accident Analysis System, a scale up of black spot treatment practices across the province, and the identification and testing of a road safety village program. A comprehensive road safety plan coordinated with other provincial departments involved in road traffic safety will be prepared by HPCD under the guidance of the Provincial Safety Council. Provision of Equipment. HPCD will acquire equipment to monitor the construction quality and the environmental safety during construction along XXE, and to ensure satisfactory traffic operations. lndlicative Bank- %.of ,- ,;4 ,,, b , Component Costs %oft financing Bank-. l(USSM) Total. (USSM) financing 1. Increased highway capacity and regional integration with 611.31 88.5 230.29 92.1 the construction of Xiaogan - Xiangfan Expressway (XXE) and connecting roads. 2. Improved accessibility in poor counties with the rural 66.23 9.6 10.82 4.3 road improvement program (RRIP). 3. Institutional development and road sector management, 10.84 1.6 6.39 2.6 with capacity building, highway maintenance and expressway management initiatives, road safety agenda and provision of equipment. Total Prolect Costs 688.38 99.6 247.50 99.0 Front-end fee 2.50 0.4 2.50 1.0 Total Financing Required 690.88 100.0 250.00 100.0 Costs include taxes and contingencies 2. Key policy and institutional reforms supported by the project: In line with OED's recommendations, as outlined in its 1999 China highway sector evaluation, and in accordance with the objectives of the Bank's China Highway Strategy discussed with government during the November 14, 2001 highway policy semninar, the project would focus on key policy and institutional reforms as follows:  * strengthening and adaptation of institutions, to meet provincial needs and to tacilitate the move of government organizations in the transportation sector towards a more market based economy; * sustainability of road maintenance. In the absence of a stable and comprehensive funding of road activities expected from the fuel tax, yet to be implemented by the government, the project will assist Hubei province to improve the efficiency of road maintenance, preserve the road network and optimize the use of available resources, while preparing it to reap the full benefits of the improved resource mobilization that would result from the fuel tax enactment; and * road traffic safety. The goal of the project is to support the institutionalization of a proactive approach to traffic safety issues in all HPCD activities and the development of institutional coordination at provincial level. 3. Benefits and target population: The project aims to accelerate economic growth and foster trade in Hubei province through capacity increase and quality improvements in the road network in the Wuhan-Xiangfan corridor. An estimated 36 million people (1998) living in cities and counties will benefit to some extent from the expressway. Lower transport costs should reinforce economic growth, making it possible for new activities to develop in the served areas. It is expected that the bulk of the road corridor traffic will be diverted to XXE. The major quantifiable impacts are: (i) reduction in travel time and vehicle operating costs for provincial road users through the shorter length of itineraries, (ii) improved road geometry and comfort, (iii) reduced traffic interference, and (iv) safer traffic conditions on existing roads. In addition, users of the existing NR107 and NR316 will benefit from reduced travel time as a consequence of reduced congestion levels. In the long term, the development of tourism in the province to historical relics and natural scenic spots will benefit from XXE. Several historical cities and important tourism zones in the corridor will have substantially improved access to and from the North-South road arterial spine of the Beijing-Zuhai corridor and Wuhan airport. Once the whole Yinchuan - Wuhan itinerary is complete, long distance users and interregional trade will also benefit from a more cost effective route between western and coastal provinces. The RRIP component will benefit residents of the low-income counties with improved local roads. Population access to markets, health, education, and other social services will also improve. The institutional strengthening and road sector management component is expected to benefit highway users in the province, through better maintained roads and a reduction in accident rates. Other outcomes, althougil they are difficult to quantify, will include (i) strengthened policy, (ii) improved institutional and technical capabilities of the implementing agency - HPCD - and other related institutions responsible for highway planning, design, supervision, construction, operation and maintenance, and (iii) optimized management of Hubei road network. Furthermore, the project will foster improvements in practices on environment protection, land acquisition and resettlement of project affected people, and participatory approaches to project preparation and implementation. 4. Institutional and implementation arrangements: Hubei Provincial Communications Department (HPCD) is the project executing Agency at all stages of its preparation and implementation. Specific responsibilities are allocated as follows: - 12 -  * the World Bank Financed Project Office (WBFO) in HPCD is responsible for the overall coordination of project activities and relationship with the Bank. It already plays that role under NH3 and NH4 projects; * a preparation group managed by a Vice Director of HPCD has been established to coordinate preparation tasks of Xiaogan - Xiangfan Expressway and supervise design works carried out by the Hubei Design Institute; * the Project Headquarter (Hubei Provincial Xiaoxiang Expressway Construction Headquarter) established within HPCD and a shareholding company owned by HPCD (Hubei Provincial Xiao Xiang Expressway Company Ltd - XXEC) will implement XXE and interconnecting roads (Most of the staff in both agencies remains the same); * a joint team of domestic firms and an international engineering consultant will undertake supervision of XXE works; * upon its completion, XXE, will be operated by Hubei Provincial Xiaoxiang Expressway Company Ltd.; * the RRIP component is being prepared by the Hubei Highway Administration Bureau - HHAB, a department of HPCD - and will be implemented by Construction Headquarters organized by HHAB at th& county level; and * the World Bank Financed Project Office is directly responsible for the preparation and implementation of the institutional and road safety component. The Financial Management Assessment undertaken by the Bank during preparation (Annex 13) concludes that the project will have in place an adequate project financial management system. Hubei Provincial Finance Bureau (BPFB) will carry out all financial aspects of project implementation, including financing arrangements, financial management and overall financial monitoring. HPFB will also be responsible for maintaining, monitoring and reconciling special accounts to be established for the project, and for submitting withdrawal applications to the Bank. HPFB has had extensive prior experience with Bank projects and is familiar with Bank disbursement procedures. Procurement will be managed by Hubei Provincial Xiao Xiang Expressway Company Ltd. The capacity assessment carried out by the Bank during project preparation (Annex 6) confirms that arrangements made and the staff-training programs are satisfactory. By and large, project institutional and implementation arrangements are similar to those made by Hubei province on the ongoing NH3 and NH4 projects. Thus, experience gained by HPCD will be fully available, through both the direct involvement of units, like WBFO or HPFB that have already assumed similar tasks and are familiar with Bank procedures, and the transfer of staff from existing Project Offices. -13 -  At the central level, MOC in central Government will ensure the overall direction of the project, assume an oversight role and provide technical support to the implementing agency. The Bank borrower will be the People's Republic of China, which in turn will on-lend the loan proceeds to Hubei Province through the Ministry of Finance (MOF) on the same conditions. The project will be implemented during 2002 - 2007. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Xiaogan - Xiangfan Expressway Public/Private provision Xiaogan - Xiangfan Expressway will be a toll-generating expressway. In 1998/1999, Hubei Province considered private financing for the Xiaogan-Suizhou section, where traffic is the highest, and undertook the feasibility study of a BOT scheme. However, the preliminary financial assessment concluded that even this section could not be financed without government contribution of 25 to 30% of investment costs. In addition, private investors are generally reluctant to invest in Greenfield road operations - their reservations are reinforced in China by risks involved in the insufficient development of the legal and regulatory framework. The shortcomings have been highlighted in a recent Bank Group report on Private Participation in Infrastructure in China and discussed at a conference jointly organized by the State Development and Planning Commission and World Bank during November 15 - 16, 2001. The Chinese government has confirmed its commitment to mobilize private financing in road investments; but investors would have to wait for effective changes in government policies before undertaking any Greenfield road project. Finally, the complexity and time required for competitive procurement of private investment would have made it difficult to meet the 2005 construction completion date planned by HPCD. Consequently, HPCD has made a strategic choice to implement XXE by itself and finance its construction with public and borrowed funds, and to transfer the infrastructure, once completed, to a commercialized entity (Hubei Provincial Xiao Xiang Expressway Company) for its operation. HPCD might also apply to this project the conclusions of a study on "Expressway Commercialization and Corporatization" undertaken for NH3 and NH4 projects. This study will assess ways to capture efficiency gains with the commercialization of toll road sections and strengthen the financial capacity of commercialized entities. HPCD options are consistent with the securitization model of road assets implemented by other provinces, with Bank financed expressways in several cases. Route alternatives and design standards The primary objective of XXE is to serve the economic corridor between Wuhan and Xiangfan - in the basin of Fuhe river. The major urban centers within this corridor are Xiaogang, Yunmeng, Yundian, Suizhou, Zaoyang, and Xiangfan. Two national highways currently serve this corridor: NR107 from Wuhan to Anlu, and NR316 (two lanes) further west. The corridor is also served by the Hanjiang river (Grade IV), and the Hankou - Daijianghou railway. The latter is not a real competitor of the road infrastructure. Detailed traffic studies undertaken by HPCD and reviewed by the Bank show that the traffic patterns of both modes are very different. The much higher cost of highway use, given the toll level, does not encourage the diversion of passenger traffic from railway. Also, railway mainly carries long distance bulk freight while highways carry more of local transport. HPCD considered two main design alternatives prior to its decision to construct a new expressway. These were: - 14 -  * the upgrading of NR316 from its connection with NR107, with the construction of 2 additional lanes and bypasses of urbanized areas; and * the construction of a four-lane expressway. Feasibility studies have concluded that a new expressway was preferable to other alternatives for the following reasons: (i) traffic mix, (ii) congestion and safety issues in the crossing of urban areas, (iii) lower cost and ease of mitigating or compensating environment and resettlement impacts on housing, commercial, and industrial activities, and (iv) shorter road length. NR3 16, in particular, remains heavily travelled, crosses all the main cities located in the corridor and is congested in urban and suburban sections along which houses and shops/activities have been set up. In addition, NR316 is rather unsafe for road users as the prevailing mix of slow-moving cyclists and motorcyclists, farm and transport vehicles, faster moving cars, buses, and trucks leads to many traffic hazards. Finally, NR316 needs to remain accessible to all local traffic besides long-distance traffic. Thus, its upgrading could not be a satisfactory substitute for a new expressway. BPCD also considered three major alternatives for the alignment of XXE: a northern alignment close to NR316 and the urban areas; a southern and more direct itinerary crossing mountainous areas; and a central scheme. They were compared across a series of criteria, including local and national economics, social and environmental impacts, preferences of local governments, costs and technical feasibility. HPCD selected the central scheme as being the best compromise, offering the highest economic return and getting the most support from local governments. The southern alignment would have crossed more environmentally sensitive areas, poorly served the main cities in the central section and attracted less traffic; the northern scheme would have adversely affected more people, been much longer and more expensive. In a second stage, rminor variants were compared in various locations of the preferred scheme to better integrate environmental and resettlement considerations, and to reduce design and construction risks. Rural Road Improvement Program in Poor Counties (RRIP) The objective of the RRIP is to improve the socio-economic conditions in low-income areas of Hubei province. Hence, all identified subprojects are located in poor counties. They have been selected essentially for their potential to benefit the local development in these areas. The criteria for their selection were based on the poverty level of the area, the consistency of the project with the provincial poverty plan, accessibility level, existing alternative infrastructure and role of the road section in the regional highway network, and cost effectiveness of the investment. The second phase road sections will be selected along the same process.  2. Major related projects rmanced by the Bank and/or other development agencies (completed, ongoing and planned). . Latest Supervision Sector Issue Project (PSR) Ratings .__________________________ . .____________ . (Bank-financed projects only) Implementatlon Development Bank-financed Progress (IP) Objective (DO) - Remove Highway Capacity Shanghai-Zhejiang Highway S S Bottlenecks (1) (ongoing) 1-3, 5 - Institutional Strengthening/ Second Shaanxi Provincial S S Training (2) Highway (ongoing) 1-4, 6 - Rural Roads and Poverty Second Henan Provincial S S Alleviation (3) Highway (ongoing) 1-6 - Highway Safety (4) Second Xinjiang Highway S S (ongoing) 1-5 - Operation and Maintenance of Second National Hwy: S S High-Grade Highways (5) Guangdong/Hunan (ongoing) 1, 2,4-6 - Cost Recovery (6) Third National Hwy: Hubei S S (ongoing) 1, 2, 4-6 Tri-Provincial Highway S S (ongoing) 1-6 Anhui Provincial Highway S S (ongoing) 1,2, 4-6 Fourth National Highway: S S Hubei/Hunan (ongoing) 1, 2, 4-6 Second Fujian Highway S S (ongoing) 1, 2, 4-6 Third Henan Provincial S S Highway (ongoing) 1-6 Guangxi Provincial Highway S S (ongoing) 1-6 Second Jiangxi Highway S S (ongoing) 1-6 Fujian Highway (ongoing) 1-6 S S Inner Mongolia Highway (ongoing) 1-6 Xinjiang m Highway (planned) 1-6 Other development agencies Asian Development Bank ONGOING PROJECTS Hebei and Liaoning Expressways Liaoning and Jilin Expressways Hebei Roads Development - 16 -  Chengdu-Nanchong Expressway Changchun-Harbin Expressway Shanxi Roads Development Southern Yunnan Road Development Chongqing-Guizhou Roads Development Shaanxi Roads PLANNED PROJECTS Shanxi Expressway Chongqing-Guizhou Expressway Guangxi Highway Development Shanxi Roads Western Yunnan Road Development Southern Sichuan Roads Development Japan Bank for International ONGOING PROJECTS Cooperation Hainan Development Qingdao Development Guiyang-Xinzhai Highway Hangzhou-Quzhou Expressway Wanxian-Liangping Highway Liangping-Changshou Highway Hainan East Expressway Xinxiang-Zhengzhou Highway IP/OO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Wbile the overall performance of the Bank Highway Portfolio in China is by and large satisfactory, a number of problems occurred during the implementation of earlier projects, which have been taken into consideration in the design of the proposed project. Past issues on capital investment components primarily include: insufficient soil investigations during feasibility studies; underestimation of the technical complexity of expressway construction leading to inadequate engineering designs; insufficient bid documents, that all too often lead to significant cost variations of civil works; delays in resettlement operations that have affected works schedule; insufficient attention at design stage to restoring local accesses resulting in costly changes during construction; insufficient quality control of construction; late tendering of electrical and mechanical facilities components, which has delayed the completion of some projects or restrained the quality and efficiency of operations during several months. To avoid the occurrence of similar problems in the proposed projcct, HPCD has paid specific attention to a series of risk factors when designing the project and preparing its implementation. Accordingly, it took the following initiatives: -17-  * HPCD has established the resettlement organization at the very early stages of project preparation and has taken into consideration the outcome of surveys to design local crossings; * an international engineering consultant has also reviewed the design of XXE, at the detailed stage on the most complex sections, and advised HPCD on the preparation of the technical elements of the bid documentation; * tendering of E&M works is scheduled early enough to ensure that facilities are completed prior to the opening to traffic of the expressway; and * finally, the quality control of construction, specifically of XXE civil works will be undertaken according to FIDIC rule by a supervisory team, comprised of domestic engineering firms assisted by an international consultant. There will be one Resident Engineer for all contracts and more than one supervisor per km. of the proposed highway. Special attention will be given to the proper organization and management of the supervisory team. Training of domestic supervisors is planned at the beginning of the project. Past experience in Rural Roads Improvement Programs, as in the Second Shaanxi Highway Project and the Second Henan project, has shown the significance of benefits derived from such projects. The provision of basic all-weather roads has effectively contributed to reducing poverty in rural areas, especially when combined with programs for socio-economic development. The 1999 OED assessment of the China portfolio has clearly determined the need to further strengthen the policy dialogue, between China and the Bank, on the highway sector. The institutional component takes stock of policy and reform activities under the ongoing NH3 and NH4 projects. More than three years after the initiation of NH3, results indicate that HPCD is showing strengthening of institutional activities developed under those projects. In order for the institutional component to rank on an equal level with road construction and network capacity expansion, a pro-active approach is being taken. The institutional component builds on NH3 and NH4 outcomes and has been prepared by HPCD in close dialogue with the Bank, assisted by an experienced institutional and policy expert who has been working on previous projects since their inception. 4. Indications of borrower commitment and ownership: There is a strong support for the project from relevant government bodies at both central and provincial levels - SDPC, MOF and MOC at the central level, and Hubei Provincial Government. XXE is a part of a priority corridor planned by MOC to foster the development of western provinces. Hubei province has also retained this investment in its provincial Tenth Five-Year Plan. HPCD is showing further commitment with the ongoing construction of the continuation of XXE as far as the eastern boundary of the province. SDPC and the State Council approved the pre-feasibility study for the project in July 2001. The project feasibility report and financing plan was approved on March 14, 2002, and the preliminary design of XXE was accepted on May 17, 2002. Government contributions have also been approved - US$108 million by MOC, US$133 million by Hubei province and an additional US$200 million borrowed from domestic banks - thereby ensuring sufficient funds for the continuity of the project. - 18 -  5. Value added of Bank support in this project: The Bank has financed about 20 percent (3,500 km) of the first phase of the high priority NTHS in China, and facilitated the acceleration of institutional reforms and strengthening of the highway sector in many provinces. The Bank is heavily involved in Hubei with the financing of arterial highways and institutional reform through the Third and Fourth National Highway projects. Through its further involvement in Hubei with the new project, the Bank would contribute financial resources needed to help remove bottlenecks and increase traffic capacity in a corridor crucial for the province's economic development that will consequently also reduce the physical and economic isolation of western provinces. With the experience gained in over 15 years of work in China's highway sector and in highway reform in other countries, the Bank would continue to play a catalytic role in Hubei's road sector. It would facilitate the challenges of sustainable road management, the move towards market based activities, and the development of institutional and manpower capacity in highway planning, design, supervision, construction, operation, maintenance and finance. Similarly, Bank support would assist BPCD in improving provincial practices in environment protection, land acquisition and resettlement, and social and participatory aspects of highway projects. Furthermore, the design and quality of construction of the new roads would benefit from the Bank's involvement in the project. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$557.5 million; ERR = 20.7 % (see Annex 4) 0 Cost effectiveness o Other (specify) The economic evaluation covers the two project components that entail capital costs: (a) the construction of the 243.5 km Xiaogan - Xiangfan Expressway (XXE); and (b) the RRIP, limited to its first phase including the upgrading of three identified rural roads (total 259 km) in low-income areas of Hubei province. The principal measured benefits of the project are savings in vehicle operating costs, reduction in travel time, and enhanced road safety. The overall economic internal rate of return (EIRR) for the project is estimated at 20.7 percent, 20.7 percent for XXE and 23.0 percent for the RRIP phase. The overall economic Net Present Value (NPV), based on a 12% discount rate, is estimated at RMB 4,627.3 million, consisting of a RM[B 4,499.7 million contribution from XXE and RMB 127.6 million from the RRIP first phase. A description of the economic evaluation method and an analysis of the results are provided in Annex 4, the latter being summarized below: Summary of Economic Evaluation Results EIRR (in %) NPV (Yuan million, 12%) Xiaoran - Xiangfan Expresswav (XXE): Section 1: Xiaogan - Anlu 26.0 1,395.6 Section 2: Anlu - Suizhou 18.4 715.3 Section 3: Suizhou-Zaoyang 18.4 880.8 Section 4: Zaoyang - Xiangfan 20.9 980.3 Subtotal 20.7 4.499.7 Rural Road Improvement Program (RRIP) 23.0 127.6 Total 20.7 4,6273 - 19-  2. Financial (see Annex 4 and Annex 5): NPV=US$ -68.3 million; FRR = 4.6 % (see Annex 4) XXE is the main project component and constitutes about 88.5 percent of the total project investment. XXE is also the only component that would generate revenue, as all rural roads to be upgraded under the RRIP are toll free. HPCD is planning to use the toll revenue from XXE to cover the loan amortization charges. On the basis of toll levels, currently set in the low range, XXE will generate enough revenue every year and throughout the Bank loan period to finance debt service with a standard amortization schedule, due to the large sum of depreciation reserves. Therefore, it should not need any external cash. injection over the life of the project. The profit margin is expected to be low, which will affect the rate of return on capital investment (the project FIRR is estimated at about 4.6 percent at a 5.5 percent discount rate). For the non-revenue earning project entities - rural roads under the RRIP - the financial evaluation focuses on the availability of sufficient counterpart funds and on operating expenses given the nature of financial risks on those investments. All the indicators show that financial risks are modest. A detailed assessment is provided in Annex 5. Fiscal Impact: Hubei's road budgets during project implementation years have been discussed with the Hubei provincial government during preparation and are shown in Annex 5. Revenue and expenditure forecasts during the Tenth Five Year Plan (Annex 5) take full account of project funding and show that BPCD would have sufficient budget resources available for its contribution to project capital investments, while increasing maintenance funding at a higher rate than the extension of the road network. This means that road maintenance will be as integral to the new project as the new highway construction. In addition, investment costs of the RRIP road improvements constitute only a small fraction of HPCD's planned investment expenditures, at 0.4 - 0.8 percent per year over the implementation period; and the required maintenance expenditure of the RRIP is at about 0.4 percent of total road maintenance budgets. Therefore, the fiscal impact of the RRIP would be minimal and the overall financial risk on availability of counterpart funding for construction and maintenance of the project is low. 3. Technical: The technical parameters retained for XXE design and construction cost estimates were established by feasibility, design and engineering studies carried out in two stages by the provincial Hubei Design Institute. Before its preparation, HPCD took into account lessons learned from the ongoing N113 and NH4 projects to ensure the relevance of design and reduce risks of cost overruns with a special attention to the following: * design standards consistent with forecasted volume of traffic; interchanges were designed on the basis of directional traffics and reviewed by the engineering consultant assisting the Bank preparation team; * great consideration given to local development plans and opinions in the location of expressway crossings; -20 -  * strengthening of geological reconnaissance with strict application of MOC's specifications, and thorough design of bridges and slope cuts/protection taking into account the experience gained in Hubei and other provinces; and * substantial hydrological surveys and studies with the participation of hydrological authorities. The feasibility study of XXE was approved by MOC, SDPC and the State Council in March 2002, and the preliminary design was accepted by MOC on May 17, 2002. The design has been reviewed by an international engineering consultant under grant funding (France) and found relevant. The cost estimates of the project reflect May 2002 prices and are based on the latest available engineering studies, prevailing unit rates for civil works checked against effective rates in similar works under Bank financed projects, recent costs of foreign experts from other highway projects in Hubei, and recent price quotations for equipment. Total project costs also include physical and price contingencies: physical contingencies are calculated at 6.5 percent of the baseline costs of civil works, and price contingencies at 4 percent of all baseline costs - excluding land acquisition - on the basis of forecasts on domestic and foreign inflation rates during project implementation. 4. Institutional: Hubei PCD has demonstrated project management capabilities through the implementation of NH3 and NH4 projects. The success of the project will require a strong ownership and continued commitment by HPCD. Institutional issues related to capacity building will also require special attention, in particular institutional strengthening, policy development, and road safety activities. The implementing agency will receive continued assistance from Bank supervision missions. 4.1 Executing agencies: HPCD will be the executing Agency. HPCD is also responsible for NH3 and NH4 and its staff has extensive experience in working with the Bank and is familiar with its requirements on procurement and safeguard policies. 4.2 Project management: HPCD will be responsible for the overall project management. The World Bank Financed Project Office under HP~CD is responsible for the overall coordination of project preparation and implementation; it will also be in charge of the institutional strengthening and road safety components. In addition, the Project Headquarter and XXEC have been established to manage the construction of XXE and interconnecting roads. The Project Headquarter is a temporary organization within HPCD during construction, whereas the XXEC will operate and maintain the infrastructure upon its completion. Most staff of both entities are the same. Finally, the local roads improvement program will be undertaken by county level Construction Headquarters set up by the provincial Highway Administration Bureau under HPCD. 4.3 Procurement issues: The assessment of the procurement capacity of the implementing agency, Hubei Provincial Communication Department (HPCD), and of the procurement agent it has selected (China International Tendering Company) confirms that both have adequate experience working with the Bank and are conversant with Bank Procedures and Guidelines. HPCD is satisfactorily implementing the ongoing NH3 & NH4 projects and the procurement agent has 16 years experience in ICB under Bank financed projects. -21 -  All procurement activities under the project will be undertaken in accordance with Bank Guidelines. Bidding documents for the various procurement packages will be based on the detailed engineering design. The design institute selected by HPCD will prepare the technical elements and the procurement agent will prepare the commercial part of the bidding documents. HPCD will review documents once completed and ensure that commercial and technical aspects are well integrated. The XXEC will implement the procurement of XXE works. The levels of responsibility and ethics code of this entity and its staff are spelled out in the job descriptions of the proposed project. Most of the staff have worked on World Bank financed projects and their experience will help to fulfill procurement functions and efficiently manage procurement activities. HPCD has given assurance of its commitment to follow the Bank's procurement rules, policy and guidelines. All works and goods will be sourced through competitive bidding. There will be no force account. 4.4 Financial management issues: The financial management assessment conducted during project appraisal, based on guidelines issued by the Financial Management Sector Board on June 30, 2001, has concluded that the project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the team's opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project in a reporting format agreed to by the Bank and meeting its requirements. The Financial Management Assessment Report is available in project files and summarized in Annex 13. Funding sources for the project include Bank loan and counterpart funds. The Bank loan will be signed between the Bank and the People's Republic of China (PRC) through MOF, and on-lending arrangements for the Bank loan will be signed between MOF and the Hubei province through its Hubei Provincial Finance Bureau (HPFB), and between HPFB and the HPCD. The Bank loan proceeds will flow from the Bank into a special account maintained by HPFB for the project in respect of reimbursable expenditures incurred, or to contractors or suppliers via bank accounts with major conmnercial banks acceptable to the Bank. In terms of disbursement methods, the project will disburse based on the traditional disbursement techniques and will not be using PMR-based disbursements, in accordance with the agreement between the Bank and MOF. The counterpart funds to be contributed directly to the project will come from three sources: appropriations by MOC, appropriations by HPFB and domestic commercial banks. No outstanding audits or audit issues exist with any of the implementing agencies involved in the proposed project. The task team will however continue to be attentive to financial management matters and audit covenants during project supervision. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The main environmental issues associated with the Hubei Xiaogan-Xiangfan Highway Project are the following: * the selection of an optimal alignment for the projected expressway and new roads, to avoid and minimize impacts on villages and communities, agricultural lands, cultural relic sites, and sensitive and adverse terrain; - 22 -  * adequate public consultation during the preparation and implementation of the project; and * integration of environmental mitigation measures in the Environmental Management Plan (EMP). A major part of the preparation of the design of the XXE was devoted to the selection of an environmentally benign alignment. Three major and six sub alignments were evaluated taking into consideration environment, cultural, social and resettlement issues and technical, economic and political considerations. The selected alignment avoids the Anlu ancient ginkgo trees by 6 km and the Baizhaoshan Natural Forest (a theme park in honor of poets) by about 1.2 km, impacts only two low level, local, cultural heritage sites, avoids a number of villages and minimizes the usage of farm lands. The major environmental impacts during the construction of the proposed XXE and other roads include increases in noise, soil erosion, and the generation of dust. Lesser impacts include the alteration of hydrological regimes, interference with local people and traffic, and impacts on local ecology and irrigation systems. The impact of haul traffic of construction materials (noise, dust, congestion, traffic safety, etc.) using existing roads and access roads is of potential concern. Safe disposal of excess excavated material from cuts will also require close attention during construction. Traffic noise, air pollution from vehicle exhaust emission, soil erosion, pollution from service areas and impacts from induced development are identified as potential adverse impacts during the operation period. The EA Summary report states that there is little forestation in the areas South of Yandian along the XXE alignment. Vegetation in the area is primarily crops including rice, wheat, cotton, etc. The project passes no state-owned tree farms, natural reservation areas, forest park, breed forest of endangered animals or national defense fornation. The closest tree farm, Baizhaoshan Tree Farm, is about 1.2 km away from the alignment. As regards the Natural Habitat, there are no protected or other habitats or reserves because of low forest cover in the province (about 17%). The EA Summary also states that "there are not many wild animals and plants in the area close to the sections Xiaonan, and Xiangyang", and that "..there are no wild animals within the alignment corridor." The key stakeholders are HPCD, farmers and villagers who may lose land, villagers who may be displaced or impacted because of the alignment passing through or near their villages, communities which may become divided by the alignment, and hospitals, schools, libraries, and individual households which may be affected by the construction and operation of the proposed Expressway and interconnecting roads, and by the improvements of rural roads. A total of 3,923 persons were consulted to seek their view in relation to the Expressway and other roads. Their views and general findings are incorporated in the design and the construction implementation and supervision of the project. 5.2 What are the main features of the EMP and are they adequate? Hubei has retained the Shanghai Ship and Shipping Research Institute to undertake the preparation of the Environmental Impact Assessment (EIA) and the EMP. The EMP includes feasible and cost-effective measures necessary to mitigate the project related impacts by incorporating them in the design, and implementing them during construction and operational phases. The EMP also includes relevant clauses for inclusion in the contract documents and appropriate links to the bidding documents. It identifies institutional responsibilities and arrangements, training needs, environmental monitoring plans, equipment requirements, implementation schedules and budget needed to implement the proposed mitigation and monitoring measures. The compliance of the contractors in carrying out the environmental provisions of contract documents will be supervised by the Project Office and Supervision Consultants during construction, and monitored by the Bank during the supervision missions. -23 -  The EMP addresses measures to (i) prevent or minimize soil erosion, construction noise, borrow pits and excess disposal materials reclamation; (ii) manage construction camps; (iii) provide construction safety; (iv) operate and manage temporary access roads during the construction phase; and (v) mitigate increased noise, motor vehicle emissions and community severance during the operation phase. The EMP has developed a series of measures to avoid, minimize, mitigate or otherwise compensate the adverse impact from the project. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: April 2002 The initial Terms of Reference for preparing the EIA/EMP were compiled in December 1998 and were reviewed, revised and approved by SEPA in August 2000. The first draft EIA report was prepared in October 2000 and during the following year, a number of draft EIAEMP reports were reviewed with comments by the Bank. The draft final EA reports were submitted to SEPA in October 2001 and to the Bank in December 2001. Taking into account the Bank's comments, the final drafts of the EA documents were submitted to the Bank on April 8, 2002 and found to be satisfactory. HPCD has informed the Bank that SEPA had approved the Chinese version of the EIA/EMP in February 2002. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? In developing the EIA and EMP, the Environmental Consultant has carried out public consultation and participation meetings, in two rounds between August and September 2000 and from March to May 2001, in cooperation with the Resettlement unit. The people consulted included rnainly those who will be affected directly by the project: farmers, villagers, rural residents, and so on along the proposed alignment. Relevant local government units in the Hubei province, and non-government organizations and experts on various environmental and socio-economic issues were also consulted. A total of 3,923 people were consulted during the preparation of the Environmental Assessment (EA). The input was reflected in developing first, the Terms of Reference for preparing the Expressway EIA and EMP, and then in preparing the EA reports. In compliance with EIA process requirements in China and the World Bank safeguard policies, the completed draft EIA and EMP reports as well as part of the public consultation records were distributed in public places along the expressway. The concerned public has access to the reports at these places since November 2001. In addition, the project information and the availability of the reports were advertised in the Hubei Daily, a province wide newspaper and two of the most popular internet web sites in the province, in December 2001. The availability of the final EA reports was advertised in the Hubei Daily newspaper on April 26, 2002 and the reports were displayed/disclosed in the Provincial and city libraries along the alignment. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The EMP includes environmental monitoring programs for both construction and operation phases. The parameters to be monitored include relocation and resettlement, soil erosion, noise, dust, degradation of water quality, stream sedimentation, solid waste disposal, and so on. Monitoring will be conducted as follows: * during the construction phase, in two approaches: daily and routine monitoring mainly consisting of visual observations and limnited equipment measurements such as hand-held noise meters; and periodic monitoring by professionals using standard methods recognized by regulatory -24 -  authorities. Monitoring reports will be compiled once every three months, summarizing the findings of the monitoring. The reports will be submitted to project owner as well as relevant agencies and the World Bank; and * during the operation phase, noise levels will be monitored once a month during the first six months and once every six months thereafter. Soil erosion will be monitored once every six months, while air and water quality will be monitored once a year. In addition, the construction will be supervised by trained environmental staff from the contractors and the Project Office. During loan negotiation, assurances will be sought from the Hubei Province Communication Department and the Project Headquarter that: (a) the environmental protection measures stipulated in the EMP with regard to the main expressway and its interconnecting roads will be implemented in a manner satisfactory to the Bank; and (b) HPCD shall furnish to the Bank quarterly and annual environmental monitoring reports for the Expressway and their interconnecting roads during construction phase and semi annual reports during the first three years of operation following the completion of the project. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The major social impacts of the project stem from land acquisition and residential demolition associated with XXE construction. A Resettlement Action Plan (RAP) has been prepared to mitigate these impacts. It is based on an inventory of affected assets, census of the affected people, social assessment and consultations with local government agencies and potentially affected people. Land acquisition will affect 178 villages in 32 townships of seven counties. The project will acquire 25,805 mu (or 1,720 hectares) of collective land, including 19,471 mu (or 1298 hectares) of cultivated land and 6,335 mu (or 422 hectares) of non-cultivated land. Expressway construction will also require temporary use of an additional 10,000 mu (667 hectares). In all, land acquisition will affect 17,800 people (4,096 households). Residential demolition will require relocation of 6,942 people (1,592 households). The project will also affect some public facilities, such as power and communication lines, wells and irrigation canals. The RAP prepared by the project office provides details regarding Resettlement Policy Principles and Regulations to be followed, compensation rates and budget, measures to restore incomes where necessary, and institutional and monitoring arrangements. In general, it follows a land-for-land approach to assist farmers in restoring productivity and incomes. Finally, no other activities have been found to be related to the construction of XXE, as per the provisions of OP 4.12, # 4 regarding the scope of application of the Bank policy on involuntary resettlement. XXE is a stand-alone project and no other road section planned contemporaneously or under construction is needed to achieve its objectives. The first phase of the separate rural road improvement program is expected to be implemented within existing right-of-way, and so should not cause any land acquisition or house demolition. A Resettlement Policy Framework nonetheless has been prepared in case design changes during implementation make land acquisition necessary. Some of the rural road improvements will occur within the Enshi Tujia and Miao Autonomous Prefecture. Because a significant proportion of the population residing within this area are members of officially designated national minorities, a social assessment was conducted. Its findings show that the project-affected people along the road sections do not meet the definition of Indigenous People as described in the Bank policy. The selection of Phase 2 rural roads will be based on the socio-economic and poverty criteria already established and the roads will be processed in the same manner as the previous three rural roads already identified. - 25 -  6.2 Participatory Approach: How are key stakeholders participating in the project? Information dissemination: All the affected households and villages have been identified through the census survey. Relevant project information has been provided to the affected villages and local governments through newspaper reports, posters and public meetings. A resettlement information booklet providing, details regarding compensation rates, other entitlement policies and grievance procedures will be distributed to the affected people prior to the resettlement implementation. Participation strategy: Focus group discussions and key information interviews have been used to consult with potentially affected persons. The primary focus of consultations has been on obtaining views and preferences regarding resettlement impacts and mitigation measures, including rehabilitation measures. These views and preferences have been taken into account during RAP revision, and the majority of potentially affected persons agree that the resettlement and rehabilitation measures planned under the RAP would be adequate to address and mitigate any adverse impacts. The affected communities are to play a key role in determining and implementing their livelihood restoration programs. After land compensation amounts are calculated, for example, each village committee will determine how land compensation can best be used to improve, or at least restore, local income-earning potential. Any approach in using the land compensation must be in consultation with the villagers, and later on local banks are to disburse land compensation according to the villagers' decision. HPCD will set up procedures to supervise land compensation use, and local construction banks in each county will participate in resettlement fund monitoring. Both internal and independent monitoring of the resettlement program would be conducted regularly during project implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Wuhan University, independent from the Hubei Government and the XXEC, has been contracted to head the census and inventory survey exercise. This has contributed significantly to the preparation of the RAP. Village committees and farmer groups have also been consulted and provided opportunities to participate in resettlement planning. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The institutional arrangements for resettlement implementation are detailed in the RAP. Wuhan University will be contracted to serve as the independent monitoring agency of the resettlement program. The project will be monitored and the living standards of the PAPs will be evaluated over the course of the project implementation. The monitoring results will be regularly reported and, if needed, remedial actions will be designed. Local construction banks will be involved to supervise the land compensation use. 6.5 How will the project monitor performance in terrns of social development outcomes? The Borrower, the Bank, and an independent monitoring institution will supervise. and monitor resettlement during project implementation and the realization of the stated objectives. - 26 -  7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy ... - - A>plicabilIty- Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) S Yes U No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) ( Yes * No Forestry (OP 4.36, GP 4.36) (9 Yes * No Pest Management (OP 4.09) (9 Yes * No Cultural Property (OPN 11.03) * Yes C No Indigenous Peoples (OD 4.20) (9 Yes * No Involuntary Resettlement (OPJBP 4.12) * Yes ( No Safety of Dams (OP 4.37, BP 4.37) U Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) U Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* (9Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. For OP 4.01 - Environmental Assessment, see Section E.5 above. In addition, all Construction Contracts will contain clauses that define the environrental requirements to be met during the construction of the Expressway and the Interconnecting Roads, and require the contractors to meet performance standards. Compliance will be closely monitored. For OP/BP 4.12 - Involuntary Resettlement, see Section E.6 above. For OD 4.20 - Indigenous People, see Section E.6 above. F. Sustainability and Risks 1. Sustainability: Experience from completed and ongoing highway projects financed by the Bank in China shows a great commitment of implementing agencies to project physical components, that account for the majority of project costs. This is confirmed in Hubei with ongoing NH3 and NH4 projects and the same ownership is expected with the new project. Firstly, the expressway component is a key element of Hubei structuring highway network and is included in its provincial Tenth Five Year Plan; the province financing contribution to the project is also taken into account in budget forecasts. Furthermore, the project financial evaluation shows that XXE totl income should be sufficient opon the infrastructure completion and opening to traffic to both ensure the province's ability to repay the Bank loan on time and to fund timely and relevant maintenance. The level of tolls and their regular review and increase are important for the financial viability of the project. Secondly, the local road improvement program addresses road network deficiencies in low-income counties and accessibility improvements are considered by Hubei to be a key component of its provincial poverty alleviation plan. Finally, the institutional strengthening and road safety components build upon objectives of NH3 and NH4, and HPCD is highly committed to improve the sustainability of road management and has identified proposed activities. -27 -  2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Rik; -, 'RiskRating - RiskMitgatonMeasure From Outputs to Objective Traffic does not grow as projected in M - Critical review of traffic studies by the Bank. Xiaogan - Xiangfan corridor. - Proper setting of toll rates. Inappropriate design standards for XXE. N - Review by the Bank of technical standards during project design. Selection of rural road projects that do M - Effective implementation of selection criteria. not improve accessibility in low income areas. Lack of ownership by HPCD of the M - Design of institutional and road safety institutional and road safety objectives. components contributing to policy and reform objectives endorsed by HPCD. - Continuous dialogue between the Bank and HPCD. - The Bank will conduct workshops to review progress. Training program irrelevant to HPCD M - Dialogue between HPCD and the Bank on the needs and objectives. scope of training programs. Road maintenance budgets insufficient to fund black spot treatment programs. From Components to Outputs Insufficient counterparts funds, M - Strong commitment of MOF, MOC and Hubei unavailability of material and human province to the project. resources on time. - Analysis of projected Hubei highway revenues and expenditures during project preparation. - Dialogue with Hubei province and MOC during project implementation, to include monitoring of resource utilization practices through supervision and audits. Poor quality of XXE design and M - Experience gained by Hubei agencies unrealistic cost estimates. with NH3 and NH4. - Review of XXE design by international experts. Unachievable implementation plan, M -Dialogue with HPCD during preparation delays in preparation. - Project launch workshop after board approval and before implementation start-up. Delays in land acquisition and M - Experience gained by HPCD with NH3 and resettlement. NH4, timely setting up of the resettlement -28 -  management organization and training. - Frequent Bank supervision missions, especially in the first years of implementation. Poor quality of construction resulting, M - Attention to the quality of tender documents among others of weak supervision or and the prequalification of strong contractors. insufficient capacity of contractors. - Procurement experience gained by HPCD with NH3 and NH4. - Supervision team reinforced by international consultants. Irrelevant training program and trained M - Proper selection of trainees. staff does not make use of new skills. - English language training for overseas trainees. - Monitoring of component by Bank supervision. - Attention given by BPCD to provide trainees with the opportunity to apply for suitable jobs. Lack of HPCD ownership on study M - Dialogu}e with HPCD during project recommendations. preparation and implementation. Irrelevant selection of black spots. - Utilization of black spot programming and selection tools developed and tested under NH3 and NH4. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: N/A G. Main Loan Conditions 1. Effectiveness Condition Issuance of acceptable legal opinions. 2. Other [classify according to covenant types used in the Legal Agreements.] 2.1 Agreement Reached with the Government The borrower will ensure that the proceeds of the loan are on-lent to the Beneficiary, Hubei province, on the same terms and conditions as the Bank loan, with the Beneficiary bearing the foreign exchange risk. Xaogan - Xiangfan Expressway: BPCD shall prepare and furnish to the Bank an analysis and recommendations on the structure of toll rates on the Xiaogan Xiangfan Expressway by June 30, 2005, taling into account the findings of other studies on toll-rate structures under Bank-financed highway projects in China and the experience with toll rates on major roads in China. - 29 -  Rural Road Improvement Program in Poor Counties: On any rural road section under the RRIP, Hubei Province shall: (i) prior to commencing works prepare an ELA and EMP in a manner and substance satisfactory to the Bank, (ii) furnish the same to the Bank for its approval, and (iii) carry out such environmental action plan in a manner satisfactory to the Bank. In case land acquisition is required, Hubei province shall also prepare a resettlement action plan satisfactory to the Bank, in accordance with the principles and procedures set forth in the Resettlement Policy Framrework and furnish the same to the Bank for its approval. Finally, Hubei Province shall on any rural road section: (i) conduct a social assessment, satisfactory to the Bank to determine, inter alia, the necessity of a National Minority Development Plan (NMDP), and (ii) if necessary prepare and carry out such NMDP in a manner satisfactory to the Bank. Institutional Strengthening and Road Sector Management: Hubei Province shall, by March 31 of each year commencing in 2003 and continuing through the completion of the project, furnish an annual highway expenditure report -for the Bank's review and comments for the prior year, which shows: (i) the length of each class or highway by condition (excellent, good, fair, and bad) as of December 31 of the previous year; (ii) the completed physical works and actual expenditures of the previous year against the planned physical targets and budgeted funds of that year, for new construction, upgrading/improvement, rehabilitation, periodic maintenance, and routine maintenance; and (iii) the targets of the highway program for the current year, including new construction, upgrading/improvement, rehabilitation, periodic maintenance, and routine maintenance, in terms of planned physical works and planned expenditures. Hubei Province shall, by November 15 of each year, beginning in 2003 and continuing through the completion of the project, prepare and furnish to the Bank an annual institutional strengthening and training report in form and content satisfactory to the Bank, covering progress in implementing its training program, including a training schedule for the future year and a description of the training carried out during the year of the report. Hubei Province shall strengthen the Road Training Center established in 2001 in Hubei, and to this end shall: (i) establish an advisory group with representatives from relevant agencies and entities both within and without the highway sector, to support the leading group in charge of said Center; (ii) develop appropriate courses and training material, including programs for the training of trainers, and establish e-learning facilities; and (iii) from time to time review with the Bank the progress of said center in the delivery of its training programs. Hubei Province shall, by December 31, 2005, complete a study on the development of road maintenance activities by contract in a manner and substance satisfactory to the Bank, furnish such study to the Bank for its review and comments, and thereafter implement its recommendations taking-into consideration the Bank's views thereon. Hubei Province shall, by June 30, 2005, complete a study to assess and make policy recommendations in respect of the management of overloaded highway vehicles, in a manner and substance satisfactory to the Bank, furnish such study to the Bank for its review and comments, and thereafter implement the policy. taking into consideration the Bank's views thereon. -30 -  HPCD shall by December 31, 2003, complete a study on the establishment of an expressway shareholding company, in a manner and substance satisfactory to the Bank, furnish such study to the Bank for its review and comments, and thereafter implement the recommendations of the study taking into consideration the Bank's views thereon. Highway Safety: Hubei Province shall, by December 31, 2005, complete the development of the accident analysis system designed under NH4, and thereafter put such system into effect taking into consideration the Bank's views thereon. Hubei Province shall, by December 31, 2004, prepare a comprehensive road safety action plan for the HPCD road safety unit under terms of reference acceptable to the Bank, provide said plan to the Bank for its review and commnents, and thereafter implement said plan taking into consideration the Bank's views thereon. Hubei Province shall, by December 31, 2003, prepare a blackspots identification and improvement plan under terms of reference acceptable to the Bank, provide said plan to the Bank for its review and comments, and thereafter implement said plan taking into consideration the Bank's views thereon. Environment, Land Acquisition and Resettlement: Hubei Province shall carry out the EMP and RAP on XXE and interconnecting roads in a manner satisfactory to the Bank and furnish any proposed revision of these plans to the Bank for its prior approval. HPCD shall maintain policies and procedures adequate to enable it to monitor and evaluate, on an ongoing basis and in accordance with indicators acceptable to the Bank, the implementation of the EMP and RAP. Hubei Province shall prepare, under terms of reference acceptable to the Bank, and furnish to the Bank: (i) by January 31, starting in 2003 through the period of implementation, a quarterly environment report and a summary annual environmental monitoring report; and (ii) by January 31, 2003, July 31, 2003 and thereafter on January 31 of each year through the period of implementation, an internal resettlement report prepared by the appropriate agencies of Hubei Province, and an external resettlement report prepared by an independent entity acceptable to the Bank, on the implementation and impact of resettlement activities -and the NMDP during the preceding six-months or one year period, as the case may be. 2.2 Reporting and Monitoring Hubei Province shall maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with indicators satisfactory to the Bank, the carrying out of the project and the achievement of the objectives thereof. Hubei Province shall prepare, under terms of reference satisfactory to the Bank, and furnish to the Bank the following reports: * monthly progress reports on the civil works on XXE, commencing January 31, 2003 and continuing through the period of project implementation; * quarterly progress reports on the implementation of all project components, no later than January - 31 -  31, April 31, July 31, October 31 of each year starting in 2003 through the period of implementation; * an annual report by January 31 of each year conmmencing in 2003 through 2007, which integrates the results of the monitoring and evaluation activities on the progress achieved in the carrying out of the project during the preceding year, and sets out any measures recormnended to ensure the efficient carrying out of the project and the achievement of the objectives thereof during the immediately succeeding year; * an implementation report, in a format acceptable to the Bank, within six months of the closing date of the project loan; * a financial monitoring report, which sets forth sources and uses of funds for the project in form and substance satisfactory to the Bank, on a semi-annual basis no later than 45 days after each calendar semester; and * the report of the audit by independent auditors, in accordance with auditing standards acceptable to the Bank, of the project records and account statements no later than 6 months after the end of each year, with a separate opinion by auditors on Statements of Expenditures and special account. H. Readiness for Implementation [l 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. D 1. b) Not applicable. G 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Dg 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [01 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies O 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Michel Bellier Jitend ajpai n Huang Team Leader SectorManager/Director Country ManageriDirector - 32 -  Annex 1: Project Design Summary CHINA: Hubei Xiaogan-Xiangfan Highway Project i. Key PeRorrarce ~ DatCoIl t-oroStr teg, Hierarchy,,p(bjebtites . Inldldators . - . - Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/country reports: (from Goal to Bank Mission) Enhance China's economic Investrnent allocated to roads CAS and country economic Increased econornic activity growth and improve regional and contributing to economic reports. and accessibility in the integration through growth and regional province enhance infrastructure investrnents. integration. opportunities in all sectors and contribute to sustainable and equitable development. Reduce poverty in low income Improved access to services Country reports on poverty Governfment is committed to areas by improving their (school, health center, assessment. tackle disparity of income and accessibility. employment opportunities). development. Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: Provide a more effective, safe Reduction in transport costs in Project performance Economic conditions in the and efficiently managed the Xiaogan-Xiangfan monitoring reports on outcome country and provinces remain transport infrastructure to corridor. indicators. robust. sustain and support socio-economic developrnent, Improved accessibility of low Annual report on highway Central and provincial trade, and regional integration income areas. expenditures. governments are comrmritted to in Hubei province and implement the project. improve transport links to Strengthening of HPCD. western lagging regions. Development of market based Hubei province carries out its road management. poverty elimination plan Improved road traffic safety. HPCD is committed to adapt to new roles with the road sector move towards market based activities. -33 -  - - - - .l ~~~~Key .Perf6rM_-a fibe-. - 'Data _Collectio 'Strategy 1- -- Hierarchy'of Objectives Ind:cators, - ... Critical Asisuornlon]s Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Reduction of traffic - Average daily traffic on new Project performance Traffic grows as projected. congestion and travel time and expressway and existing roads. monitoring reports on output lower accident rates in indicators. Design standards are relevant. Xiaogan - Xiangfan corridor. - Average accident rate on new expressway and existing roads. 2. Improved accessibility in - Average daily traffic on Selected projects effectively the low-income areas served upgraded road sections. improve accessibility to low by the Rural Road income areas. Improvement Program in Poor - Number of days the roads Counties. are closed to traffic. - Benefits to population in served areas (income, enrolnent in high schools). 3. Strengthened role of HPCD - Number of staff trained. Trainees reports. HPCD shows strong and its related agencies and ownership of the institutional irnproved efficiency of - Percentage of pavement Progress reports on social and and road safety objectives. highway management. maintenance works procured environment monitoring. by contract with independent companies. - Test of performance-based Reports on implementation of The training program is pavement maintenance. studies recommendations. relevant to HPCD needs and objectives 4. Improved traffic safety. Number of treated black spots. Program of road safety unit Road maintenance budgets and annual program of black include black spot treatment spot treatment. programs. -34 -  Key Performance- 1 Data Collection Strategy | Hierarchy of Objeciives j Indicators j .* . . Critical Assumptions Project Components Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Construction of Xiaogan - (US$611.31 million) Reports of Bank supervision Sufficient counterpart funds Xiangfan Expressway and missions. material and human resources Connecting Roads are available on time. 1.1 XXE US$505.63 million Project progress reports: Quality of design and relevance of cost estimates. 1.2 Interconnecting Roads US$15.60 million Disbursement reports. Realistic implementation plan and no delays in preparation and imnplementation. 1.3 Supervision US$16.08 million Selection of competent supervision engineers. Selection of comipetent contractors Quality of construction. 1.4 Land Acquisition and US$74.00 million No delays in land acquisition Resettlement and resettlement 2. Rural Road Improvement US$66.23 million Sufficient counterpart funds Program in Poor Counties 3. Institutional Development (US$10.84 million) and Road Sector Management 3.1. Capacity Strengthening US$1.23 million Assignment of trained staff to responsibilities making use of new skills. Ownership by HPCD of study recommendations. 3.2 Highway Maintenance US$0.28 million Management 3.3. Policy for Expressway US$0.18 million Company 3.4 Road Traffic Safety US$0.42 million Effective programming of black spot treatments. 3.5. Provision of Equipment US$8.73 million 4. Front End Fee US$2.5 million * Budgets for each component include contingencies - 35 -  Annex 1-1 Key Performance and Development Indicators A. Development Indicators Project Development Outcome/Impact 2000 2004 2006 2010 Objective Indicators Baseline Benchmark (1st year of Benchmark operation) Provide a more efficient, Average daily traffic on NR316 safe and effective transport (vehlday): ifrhastructure. A-B Xiaogan -Yunmeng 10,120 12,680 3,867 4,822 B-C Yunreng -Anlu 9,756 12,085 4,013 4,150 C-D Anlu-Fushui 7,668 9,359 4,581 5,508 D-E Fuishui - Suizhou 7,159 8,851 4,342 5,167 E-F Suizhou - Xinlong 7,186 7,940 2,657 4,758 F-G Xingnong - Zaoyang 6,975 7,889 3,736 4,619 G-H Zaoyang - Shuanggou 7,943 8,975 4,882 5,546 H-l Shuanggou - Zhangwan 8,657 9,423 4,217 5,882 I-J Zzangwan - Xiangfan 10,040 12,287 8,385 10,814 Average daily traffic on XXE (veh/day) Xiaogan - Anlu 8,287 12,586 AnIu - Suizhou 9,360 13,162 Suizhou - Zaoyang 9,220 12,899 Zaoyang - Xiangfan 9,072 12,296 Accident rates on NR316/NR316 and XXE 65/ 67/ /45 /45 (Accidents per 100 million vehicles) Average daily traffic on RRIP road sections. Dunbao - Banqiao 447 597 630 790 Changwan - Shiyao 339 491 528 702 Quanxi - Xinmatou 362 511 547 719 Number of days RRIP road sections are closed to traffic: Dunbao - Banqiao 65 6 6 6 Changwan - Shiyao 75 4 4 4 Quanxi - Xinmnatou 60 0 0 0 Average household income in areas served by RRIP road sections (RMB) Dunbao - Banqiao 5,810 8,350 8,970 11,968 Changwan - Shiyao 5,052 7,322 7,900 10,641 Quanxi - Xinmatou 6,158 8,884 9,560 12,817 High school enrollment in areas served by RRIP road sections (% of teenagers). Dunbao - Banqiao 2.3 2.9 3.1 Changwan - Shiyao 3.5 4.3 4.5 Quanxi - Xinrnatou 3.9 4.4 4.6 Number of treated black spots in the selected prefectures 70 165 225 (cumulative). - 36 -  B. Implementation Indicators Y2002 Y2003 Y2004 Y2005 Y2006 Y2007 % of civil works completed on XXE 10 40 80 100 % of works completed under the RRIP 20 35 70 80 100 % of completed training (personlmonths) - Domestic 70 90 100 - Overseas 40 65 100 % of equipment procured 30 60 80 100 % of road pavement maintenance procured by contract: - Expressways 70 80 90 100 - Class I and 2 50 55 60 70-80 - Other classes 10-15 15 20 30 Treated black spots (annual program) 30 40 45 50 60 - 37 -  Annex 2: Detailed Project Description CHINA: Hubei Xlaogan-Xlangfan Highway Project By Component: Project Component 1 - US$611.31 million Increased Highway Capacity and Regional Integration Sub-component 1.1: Construction of Xiaogan - Xiangfan Expressway - US$505.63 million 1. The main investment component of the project is the 243.5 km long Xiaogan-Xiangfan Expressway (XXE), linking Wuhan, the provincial capital, to Xiangfan in the north-western part of Hubei province. The XXE will serve an area inhabited by 36 percent of Hubei's population and also the auto industry belt located within the province. It will link the cities of Wuhan, Xiaogan, Yunmeng, Suizhou, Zaoyang and Xiangfan. At its eastern end in Xiaogan, the XXE connects with the Third National Highway (Bank financed project, Ln 43270 - CHA) opened to traffic in 2001; at its western end in Xiangfan it will link with (i) the existing NR316 and the parallel Xiangfan-Shiyan Expressway that runs west towards the border with Shaanxi province, and (ii) the existing North-South NR207 and Xiangfan-Jinzhou Expressway running towards the South of Hubei. Both expressways are under construction by HPCD and will open to traffic in 2004, before XXE becomes operational. Thus, XXE will complete the provincial expressway triangle, the construction of which is a high priority for Hubei. It will also improve the accessibility of the western and lesser-developed areas of the province. 2. XXE will be a 2x2 lanes expressway designed in accordance with MOC's expressway standards for a speed of 120 km per hour. XXE will be operated as a closed toll highway. Construction will also include: (i) 14 interchanges to connect with the local highway network; (ii) four couples of service areas providing facilities for refueling and vehicle repair, restaurants, parking and resting; (iii) four additional couples of rest areas for parking and resting; (iv) adrministration and maintenance facilities located in two centers, three management branches and three maintenance working areas; and (v) the installation of electrical and mechanical equipment for tolling, traffic monitoring, telecommunications and lighting of all interchanges and annex areas. Works will be packaged in 16 ICB and 11 NCB contracts. Sub-component 1.2: Construction of Connecting Roads - US$15.6 million 3. The project includes the improvement or construction of three Class II interconnecting roads with a total length of 31 kn. They will link XXE interchanges to Yunmeng, Suizhou, and Zaoyang, thereby ensuring a good connection to those urban centers, and accommodating the increase in traffic on the existing roads. - 38 -  Sub-component 1.3: Construction Supervision - US$16.08 million 4. A joint Supervision team of local firms and international consultants, headed by a Chief Supervision Engineer will carry out the supervision of XXE in accordance with FIDIC provisions. The team will be organized into several divisions (supervision office, engineering contract, technical management, material and machine management, core laboratory, administrative office, finance and resettlement): * 15 resident offices will be established along the alignment of XXE. These offices will be responsible for field supervision of ICB contracts - civil works and Electrical and Mechanical facilities - and NCB contracts on interconnecting roads and annex areas; * the Central Office will be manned with an estimated 56 local staff and 244 domestic supervisors corresponding to one person per km (input estimated to about 10,736 man-months); * five foreign engineers - full time and part time - will be integrated in the core supervision team to provide services estimated at 71 person-months on project/contract management, earth and pavement works, bridge construction, E&M works and training of local supervision staff (about 300 person-months) prior to the mobilization of contractors; and * the foreign consultants will be selected through international competitive bidding, whose terms of reference and schedule have been agreed to by the Bank, whereas the local supervisors will be hired according to MOC regulations. 5. Supervision of works on local roads will be organized by local construction headquarters established by the Hubei Highway Administration Bureau under HPCD, and the domestic supervisors will be selected according to MOC regulations. Supervision efforts are estimated at 1,920 man-months (80 staff). Sub-component 1.4 - Land Acquisition and Resettlement - US$74 million 6. The construction of XXE will affect 4,096 families (17,800 persons), require the acquisition of about 1,720 ha of land and the relocation of 1,592 households. In addition, an estimated 667 ha of land would be temporarily occupied during construction, generally at sites of major bridges. Population living on these sites will not be directly affected and areas will be returned to farmers once the project is comnpleted. The project will also affect some public facilities, such as power and telecomrmunication lines, wells and irrigation canals. During project preparation, detailed investigations and surveys were undertaken by HPCD and Hubei Design Institute to assess project impacts and prepare the resettlement action plan in accordance with Bank safeguards. Surveys have determ-ined baseline data on income levels and standards of living, and compensation rates have been fixed after consulting local governments and affected people to ensure that living standards of the affected population are at least restored and affected assets are compensated at replacement cost. Land acquisition and resettlement costs include compensations to PAPs and reconstruction of affected public facilities (see Annex 12). - 39 -  Project Component 2 - US$66.23 mililon Improved Accessibility in Poor Counties (RRIP) 7. The Rural Road Improvement Program in Poor Counties (RRIP) will address accessibility issues in low-income areas, with the upgrading and improvement of various rural road sections at a cost estimated at US$60 million. HPCD has identified and prepared a first phase of three sections totaling 259 km. A second phase will complete the program and additional roads will be selected during the project implementation period. 8. A large area of Hubei province is still considered poverty-inflicted, as defined by national and provincial poverty criteria. In 19995, 38 of the 67 counties/cities in the province were classified as "Poverty County". Of these, 25 were also nationally classified as poor areas. Most are located in the mountainous areas of the province, especially in its remote western part, about 450 to 780 km away from Wuhan. This area lags behind significantly with GDP per capita lower.than RMB 2,000 (1999), as compared to an average RMB 6,500 for the entire province. The lack of infrastructure is one of the main concerns. In 1995, 2,500 villages in Hubei were yet to be accessible by highways. This was a major detriment to economic development, depriving the population of ready access to social services, markets and employment opportunities. During the last decade, Hubei province has carried out a comprehensive action plan, specifically an "Annual Poverty Elimination Plan in Poverty Regions of Hubei Province (1996)", that has addressed absolute poverty issues in most of the territory. However there are still areas, county wide and at sub-county level, where development is still significantly lower than the rest of the province and impeded by the lack of satisfactory road accessibility. 9. The RRIP objective is to address the insufficiencies in some of the poorest areas in the province. The project will upgrade/rehabilitate various road sections selected by HPCD in low-income counties according to the following process: * in the first stage, poor counties or inner county areas will be identified on the basis of national and regional classification and development levels; and * in the second stage, local road network in these areas will be screened according to various criteria: - current road condition; - lack of alternative transport infrastructure; - expected impact of project on population access to education, health and other social activities, and on economic development, including facilitation of production and commercialization of local products; - contribution to Hubei province plan to improve the functional responsiveness of the highway network; - strong support by local government and residents; and - expected EIRR higher than 15%. -40 -  Based on these criteria, HPCD has pre-identified 14 road sections of a total length of 1,310 km. A first phase of three sub-projects has been fully identified prior to project appraisal: Tunbao - Banqiao (63.9 km) and Changwan - Shiyao (94.1 km) in the Ens'i Autonomous Region, and Quanxin - Xinmatou (101 km) in Shiyan prefecture. 10. All three sub-projects are located in counties with a GDP per capita ranging between RMB1,700 and 3,300 (Y1999), about or less than half the average in Hubei province (RMB 6,630); in the directly served areas, figures are even lower and range between RMB 1,000 and 1,500. The current classification of selected roads is Class IV or unclassified - the roads are in a poor condition and closed to traffic around 70 days per year, making it difficult to access villages and townships where social services and markets are located, and also therefore, limiting the accessibility to the provincial road network. The rehabilitation and upgrading costs of these Class IV roads are estimated at about US$18 million, and include US$15 million of civil works financed by the Bank, which will be procured through 18 NCB contracts. The project economic evaluation shows that the expected EIRR is between 18 percent and 27 percent. 11. Feasibility studies included an Environmental Assessment and the preparation of an Environmental Management Plan for each project. No resettlement is expected; however, a Resettlement Policy Framework has been prepared by HPCD and would be applied if detail design studies identify locations where some land acquisition is needed. Finally, a detailed social assessment has been carried out for projects located in the Ensh'i Tujia & Miaojia Minority Autonomous prefecture since national minorities live in the served areas. It shows that the project-affected people do not meet the definition of Indigenous People, as per the Bank policy. KU hway charateristic l cost Population county prefctuse CiMoty Highway 7 ngth C Cass Constmurcton Total Bank loan in directly GDPcaplita (km) Klo smicioD) (smi iOD nfluenced amas (itMB IYYY) Ensh'i Tujia & EBhi Tbnhno-Banqiwo 63.9 IV 2003 - 2005 5.01 0.83 44,60D 3306 Mi_ijia Cty Minorky AutomDCus l nihi Changw- Si,iyoo 94.1 IV 2003 -2005 6.64 1.11 37.800 3306 Shiyn Zu'xhi/ Quanxi- Xnmaou 101 IV 2003 - 2005 6.35 1.06 32,600 Zuxhi: 1708 zuDbDD Zushan 1736 Total 18 127,400 Averae Hubei _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~~~~~~~~~~~~~~~~~6630 12. The second phase of the RRIP will bring its total estimated cost to US$60 million, with civil works financed by the Bank amounting to US$50 million. Additional road sections to be rehabilitated will be selected by HPCD according to the same criteria as for the first phase during project implementation. They will be processed independently and in full compliance with Bank's safeguards. HPCD will carry out an Environmental Assessment and prepare an Environment Management Plan for each road section, consistent with the Terms of reference used for the first phase projects. Similarly, the standing Resettlement Policy Framework will apply to road sections that would result in involuntary resettlement. Finally, a social assessment would be carried out by the implementing agency if national minorities live in project areas, in accordance with a Terms of reference agreed with the Bank, and an National Minority Development Plan will be developed if project affected people meet the definition of Indigenous People. - 41 -  Project Component 3 - US$ 10.84 million Instftutional Development and Road Sector Magement 13. The objectives of this component are to: * improve the efficiency and sustainability of the highway sector management in Hubei province, through the strengthening of HPCD and related agencies; * assist policy and institutional reforms on highway management; * support road traffic safety agenda; and * provide relevant equipment. Countrywide economic and policy changes are necessitating a market-oriented role for Hubei road agencies, a role of a policy maker, planner and regulator. There is, therefore, a need for additional training and education, and for policy and institutional development. Activities under the new project have to be well coordinated with those under the ongoing NH3 and NH4 to ensure a strong ongoing policy and institutional reforms. This component includes the following: Sub-component 3.1 - Capacity Strengthening - US$1.23 million 14. Training programs under NH3 and NH4 have started to strengthen the capacity of HPCD, Hubei Design Institutes and Research Institutes to implement highway projects and manage road activities. Under the new project, the training program will also assist in the dissemination of skills across the entire provincial road sector through the establishment of the provincial Road Training Center. Training program The training program aims to enhance professional skills of staff from HPCD (World Bank Financed Project Office, Project Headquarter, Expressway and Highway Bureaus), Design Institutes, Training Institutes and the XXEC, that are specifically responsible for the management of the highway network, in the following areas: - project preparation and management (project management, technical design, construction management, E&M works, supervision, quality management, resettlement, environment protection); - highway sector management (highway maintenance, operation management, system management and road traffic safety); and - institutional activities (financial management, contract management, human resources and training management). Output: - Number of people trained under the program. Outcome: - Improved know-how laying the foundation for a sustainable and lasting performance in new areas such as road safety, environment protection and market economy. -42 -  Indicators: - Percentage of trained personnel able to use the new know-how in their daily work; focus on teachers' training. - Yearly progress reports. Training activities are estimated at US$985,000 and would include overseas study tours (17 man/month), training courses abroad (53 man/month) and domestic courses (445.5 man/month). The training program is summarized in Annex 2.2 and will be up-dated periodically during project implementation. Road Training Center The project will support the strengthening of the Road Training Center (RTC) established by Hubei province in 2001. The Center aims to provide proper training and education to road professionals in the province. The current lack of skilled professionals in the highway sector is an issue of concern, especially with the move towards market based activities and the corresponding increase in the role of independent companies. The Center would address this issue through training courses coordinated by state agencies, construction enterprises and inspection companies. An advisory group with representatives from various organizations, both within and outside the highway sector, would support the leading group responsible for the running of the Center. This arrangement would make domestic training much more efficient than it is today. However, teachers are yet to be trained and suitable courses and supporting educational material yet to be developed. Given the lack of trained teachers in some districts and towns of Hubei province, equipment tools will be needed to deliver e-learning courses in the sub-centers. The training program of teachers is estimated at US$240,000. Outputs: - Establishment of an operational Road Training Center. Outcome: - Increased domestic training capability, increased efficiency and quality. Indicators: - Timely establishment of the center. - Teachers trained in accordance with the training program. - Sufficient training facilities. - E-learning facilities in place and tested. Sub-Component 3.2 - Highway Maintenance Management - US$284,000 15. The project will support HPCD initiatives to improve the efficiency of highway maintenance and move it towards market-based activities. A Road Data Bank, integrating a Pavement Management System (PMS) and a Bridge Management System (BMS), has been developed and a maintenance cost and fund allocation model designed under NH3 and NH4. In addition, a Highway Maintenance Management study has identified a long-term activity plan for the maintenance of the provincial network. HPCD has also initiated competitive procurement of pavement maintenance works in order to increase the efficiency of the highway sector and reduce costs in an acceptable and feasible way. (HPCD has established internal maintenance companies in about 80% of all prefecture and counties.) However, the preliminary report of the NH4 study on competition in the highway maintenance sector identifies major shortcomings such as the lack of incitements and know-how, high costs due to overstaffing and mixed responsibilities. Under the new project, a significant increase in competitive maintenance by contract of the highway network will be achieved, alternative contractual schemes for the procurement of works will be developed and tested with a view to further improve the efficiency and quality of maintenance and to foster market based road maintenance. Recommendations and practical measures to tackle truck overloading will also be identified and tested. - 43 -  Maintenance by Contracts As of November 2001, 30 independent road maintenance companies from provincial, and in a few'cases, municipal, road departments, have been established throughout the province. They are registered as juridical entities, directly responsible for their income and spending, and are not limited to road maintenance works. In addition, maintenance works on expressways are to be procured by contracts. During project preparation, HPCD and the Bank discussed ways to further progress towards a competitive and market based road maintenance. Firstly, HPCD confirmed its intention to increase the share of pavement maintenance works competitively procured through independent companies during the project implementation period and to consider the same for routine maintenance. Secondly, the project will support the development and testing of performance based contracts for the procurement of maintenance works on an area with a significant length of road network, taking into account the existing situation and in accordance with the requirements of the Hubei road maintenance market. The objective is to improve the quality and durability of works, reduce costs and strengthen the capacity of independent maintenance companies. The test will assess the conditions for the successful implementation of performance based contracts in the current development stage of the road sector in Hubei with a view to generalize a satisfactory scheme throughout the province. Experience of other countries illustrates the benefits of such contracts in terms of the quality of the road network and cost savings. To that purpose the project will finance a study on Maintenance by Contract, estimated at US$144,000. Outputs: - Increased market based and competitive maintenance by contracts (objectives are summarized in the table below). - Development and testing of performance based contracts and evaluation of their benefits. Outcome: - Increased know-how in the implementation of competitive market based contracting. - Increased efficiency of road maintenance and improved quality of roads. Indicators: - Increased contracting of road and pavement maintenance in accordance with the objectives below. - Contractual scheme for performance-based maintenance developed and tested. - Evaluation and recommendation made, among others on a procurement policy fostering the capacity of the road sector. Road Class Pavement Works Competitively Procured Planned objective (May 2002) 2005 Expressways 70 % 100 % Class 1 and 2 roads 50% 70% - 80 % Roads < Class 2 10% -15 % 30 % Study on Overloaded Vehicles Overloaded trucks heavily damage roads and pose traffic safety hazards. A national plan has been launched by Ministry of Communications (MOC) to address this issue and HPCD intends to develop a provincial action plan to tackle the problem in Hubei. The project .will support the preparation and evaluation of pilot tests on control practicalities and applicable measures, with a view to develop a comprehensive provincial policy and regulation framework. The study is estimated at US$140,000 and will be organized as follows: * identification of possible policy alternatives and definition of criteria for assessing damages caused by overloaded vehicles; -44 -  * preparation of pilot tests on three different road classes in three different locations in the Province. The objectives are to define and test relevant control practicalities, with the assistance of the Traffic Police Department and representatives of the transport industry, and to assess the efficiency of measures to apply when an overloaded truck is identified. The test would last six months. A movable weight bridge and the operation costs of weight checking would be financed from HPCD's own resources; and * evaluation of the test results and development of a comprehensive policy and provincial regulation on overloaded vehicles applicable to the whole province. Outputs: - A report addressing tests carried out, results achieved, and recommendations on a policy. Outcome: - Policy options to manage truck overloading in the Province. Indicators: - Test carried out in three different locations in the Province and on three different road classes for six months. - Qualified evaluation of results. - Recommendations on a policy. Sub-component 3.3 - Establishment of an Expressway Shareholding Company and Province-wide Management of Expressway Network - US$180,000 16. The project will assist HPCD to improve the management of the toll expressway network. In China, central and provincial government look for wider sources of maintenance funding and improvements in the efficiency of road management. Under NH3 and NH4, HPCD has undertaken a study on expressway commnercialization and corporatization the recommendations of which should be implemented along the "one company to manage one expressway" principle. The new project will support the establishment of a shareholding expressway company and the identification of benefits it might bring to the efficiency of the toll road network management. Recommendations will also be made on ways to improve the financial strength of expressway operating entities, thereby facilitating the mobilization of market financing for future road developments. Outputs: - A report on the process for establishing an Expressway shareholding company based on the conclusions of the Expressway commercialization and corporatization study and experiences in Hunan. - Assessment of improvements the expressway sharebolding company would bring to the efficiency of the toll road network and proposals on their implementation. - Recommendations to Hubei government on responsibilities to assign to the expressway shareholding company to that purpose. Outcome: - Policy regarding the Expressway shareholding company and plan for its development. Indicators: - Development of a model and time schedule for the establishment of the company. - Shares issued on the market. - Evaluation and recommendations. Sub-component 3.4 - Road Traffic Safety - US$420,000 17. The project will support an extensive and coordinated approach of road traffic safety. The road traffic accident situation is already serious in Hubei province, and traffic growth makes safety a problem -45 -  of increasing importance to tackle in a systematic way. NH3 and NH4 projects have concentrated on building foundations. They support a multi-pronged program focusing on institutional improvements, training and development of guidelines and methods to better incorporate safety concerns in the design of project and the management of roads, as follows: * creation in HPCD of a specialized Road Traffic Safety Unit in order to ensure that safety concerns are fully taken into account in all stages of highway development and management; * development and testing of manual and checklists on low cost safety measures in maintenance works, road safety at work sites and safety audit procedures in road design and planning; * development and testing of a model for a pilot road safety program (identification and remedy of black spots), documentation of good examples and introduction of proved principles for organizations in charge; * organization of annual seminars on road safety with the support of the Hubei Province Highway Academy. Three have been organized since 1999, and were largely attended by both provincial Communication Bureaus and Public Security Bureaus at all levels; and * development and testing of an Accident Analysis System on NR107, on the basis of a model designed by Hunan province under the bi-provincial NH4 project. 18. One of the major concerns of HPCD is to institutionalize road safety practices and operations. Accordingly, the new project will support (i) a more comprehensive and better coordinated approach of road safety issues, mobilizing provincial and local institutions around road safety activities, and (ii) the generalization of black spot treatment province wide, with the following components: Institutionalization of a road safety agenda (Road Safely Unit) Under the new project, the Road Safety Unit will move from the phase of development and testing of procedures/manuals on safety audits at design and construction stage to their implementation, on the new project as well as on existing roads. HPCD considers road safety is at the heart of its activities. It will assist the Hubei Provincial Safety Council, responsible for the overall coordination on safety issues in Hubei province, to develop a long-term road safety action plan. During project preparation, meetings with the Council showed that the development of a comprehensive road safety agenda for HPCD activities under the guidance of the Council would create a good opportunity for an increased cooperation on common safety objectives with other provincial departments. In addition, a model for road safety village programs will be developed under the Road Safety Unit coordination and tested in three locations, in order to spread the benefits of traffic safety programs in the countryside and not limit them to the main cities and people close to highways. The project will finance a study to prepare the action plan, estimated at US$160,000. 1. Action plan and intraprovincial coordination Outputs: - A long Term (2002-2006) road safety action plan within the field of road traffic safety, covering the entire province and involving various province level entities through coordinated actions. Outcome: - Increased efficiency in road traffic safety initiatives and understanding among concemed organizations, reduced number of accidents. Indicators: - Joint meetings led and coordinated by the Provincial Safety Council. - 46 -  - Proposed activities under the responsibility of provincial main actors e.g. HPCD-HPHAB, the Police Traffic Department, or other province departments. - Agreed long term road safety action plan with coordinated activities. - Activities carried out in accordance with the plan. 2. Establishment of three Traffic Safety Villages Outputs: - Report on the establishment of three Traffic Safety Villages. Outcome: - Increased road safety in the Villages through higher awareness of adequate behavior in traffic. Indicators: - Selection of villages. - Planned activities. - People, schools and factories informed and trained and an agreement reached on the concept. - Progress reports. Accident Analysis System (AAS) Under the new project, the AAS developed and tested during NH4 would be applied on various classes of roads, and eventually all over the province. It is a very useful tool on road safety work for both HPCD and the Traffic Police, providing information for the preparation and management of the black spot treatment program. The action plan supported by the project will entail the following: * additional tests on several roads and road classes; * evaluation of results and proposal for generalization; * training and distribution of hardware and software; and * stepwise implementation of the system with the testing of three roads in each prefecture by 2006, followed by the extension to at least 50% of all national and provincial roads within six years. Under the project, HPCD would finance the preparation and evaluation of the generalization estimated at US$130,000. Outputs: - Operational Accident Analysis System jointly used by the Traffic Police and HPCD. Outcome: - A useful tool to locate and analyze the most accident-prone spots on the road network in the Province. Indicators: - Initial test carried out on the Shaogan section of NH 107. - AAS used and evaluated on three roads in each prefecture, and policy proposed. - Distribution of software and data input, and training of people concerned in the province. - By the end of 2006, the tests and evaluation would be carried out and six years thereafter 50% of all national and provincial roads covered by the AAS. - Evaluation report Generalization of a black spot treatment program. The new project intends to support the generalization of the black spot treatment model developed under NH3 and the inclusion of road safety programs in annual highway maintenance programs. A stepwise implementation has been agreed with HPCD, with the collection and analysis of accident data on national - 47 -  and provincial roads in all prefecture in the first phase, including the prioritization of black spot treatments across the province and a comprehensive action plan in three selected prefectures where a black spot treatment program will be identified, planned and implemented by using the model developed under NH3. In the second phase, a province wide policy on black spot planning, financing and treatment and on training of HHAB staff will be developed from lessons learned with the first phase. The project will finance the prioritization of black spots and the preparation of the comprehensive plan with a study estimated at US$130,000. Outputs: Phase 1 - Accident data on all national and provincial roads in all prefectures. - Prioritizing of black spots. - A comprehensive black spot treatment program on the national and provincial highways in the three selected prefectures. - Implementation. Phase 2 - Training of staff concerned within HHAB throughout the Province. - Recommendations and decision on black spot planning, financing, implementation and evaluation of effects. Outcome: - Reduced number of accidents. - Inproved know how on how to integrate road safety in Highway Maintenance work to make it a routine and a standard component of the highway maintenance plan. Indicators: Phase I - Progress reports on accident data collection. - Report on the prioritization model and results. - Implementation of a black spot treatment in the three selected prefectures. Phase 2 - Training of concerned people. - Decision on a comprehensive Policy. Sub-component 3.5 - Equipment - US$8.73 million 19. The equipment program takes into account the equipment procured under the previous Bank financed highway projects or by HPCD over the past few years for the strengthening of the road agency capability and the operation of new expressways. NH3 and NH4 projects, for example, include equipment for the operation and maintenance of Dawu-Shenshan-Baoxie, Quanli-Yongan and Zhengdian-Tucheng Expressways. However, they cannot be moved to XXE and specific equipment is needed in order to ensure proper operations and good quality services to users. Accordingly the new project includes the procurement of equipment for: (i) the control of construction quality and monitoring of the environment; (ii) operation and maintenance of XXE after its opening to traffic; and (iii) the institutional strengthening of HPCD and provincial road agencies. The list of equipment has been agreed upon with the Bank and is available in the Project files. -48 -  i