China - Second National Railways Project

PID THE WVORLD BANK GROUP AWorldFroeolfPoverty ;n fShop I1,t V.'v.dl ltanf Report No AB49 Initial Project Iniformation Document (PID) Project Name CHINA-Second Nationial Railways Project Region East Asia and Pacific Region Sector Railways (100%) Project ID P075602 Supplemental Project Borrower(s) P.R. CHINA Implementing Agency MINISTRY OF RAILWAYS Address Foreign Capital & Technical Import Center Address 10 Fuxing Road, Beijing, 100844 Contact Person Mr Yang Haichang, Director General Tel 86-10-51841895 Fax 86-10-51841845 Email Environment Category B Date PID Prepared March 12, 2003 Auth Appr/Negs Date August 7, 2003 Bank Approval Date January 8, 2004 1. Country and Sector Background Transport Sector The primary focus of the Government as well as of the Bank's assistance in the past twenty years has been on capital investment to modernilze, upgrade and expand all transport modes. Thouglh much progress has been made, bottlenecks remaini. Capital investments to alleviate these bottlenecks continue to be the focus of both Governimzenit and Bank efforts. Increasingly, to some degree influeliced b' the Bank's encouragement, there is a growing appreciation withinl the Government thal the institutional structure for ifinastructure developmenit and operation needs to be modified, to serve the rapidly evolving needs of the emerging market-driveni Chinese economy. There is a full appreciation of the benefits of institutionial reforms leading to a competitive market-based system that would support sustainable growth in the quality and quanitity of the infrastructure stock and the economy in general. Actual implementation of reformi is takiig place at a deliberate and cautioLus pace whichi tries to balance the risks and complexity of reforms against the dangers of loss of rail market share if it does not keep pace with chaniges in other transport modes. Rail A. Present status: Capacity expansion remains important, but need for reform is clear.  2 PID The current status of China Railways is well summarized by OED in its report Transport in China-an Evaluation of World Bank A1ssistaince (Janluary 11, 1999): Despite major capacity expansion and changes in market structure, the railways are still unable to meet the demands of a liberalized and decentralized economy Many bottlenecks remain in the economically active coastal areas, and access to the railway system im the inner provinces is sparse Capacity alone will not address these problems Accelerating the institutional restructuring and policy development, which simultaneously increases system capacity and inter-modal transport facilities and improves customer service, will be required to help China's railways compete with other modes of transport Operationally efficient, MC)R is one of the very few major railways in the world that is still expanding It also covers its operating and maintenanice costs and generates at least some return on capital. It plays a very important social and econiomilic role in the coulitry. Still, the need for reform is clear. China, Russia and India are the only railways still being run in the form of govermilenlt ministry rather thali as a state-owned enterprise governed by commercial law (and Russia is now convertinig their railway to an SOE). There are many indicators that suggest that reform is needed: * adaptation to change is slow. Though operationally efficient, only limited service choices exist for freight traffic TIhe existing tariff regulation, based in the command and control era, restricts MOR's flexibility in offering market-based services and in pricing the different classes of traffic differently. As a result there is limited incentive and interest in services for higher-value traffic and higher-quality services (containierized transport being a prime example) because of the higher costs, implications on rail linecapacity, and the overall effort involved cannot be covered from value of service based tariffs. MOR is losing freight market share to competing modes and without reformi will likely continue to lose market share, especially for high-value traffic. * non-economnic lise of scarce resoureces. Decisions are driven by a production-based approach which also a remnant of the planned economy. For example, passenger traffic gets priority for capacity for political rather than economic reasons Absent the ability to set prices and modern point-to-point traffic costing systems, MOR's managers have not had the ability to manage based on commercial goals. * inefficient use of new technology: Since decisions are often driven by production consideratiolis rather than in a commercial environimient, changes in operating rules lag the adoption of new techniology. For example, the location and use of marshallling yards reflect the age of the steam engine. Consequenitly, in the era of diesel and electric technology, many marshalling yards that are no longer needed continiue to operate without good reason. * technical and managerial linitations. Existing standards remain below standards in the market economies. B. There is a commitment to reform though implementation has properly been cautious The Government of China (GOC) has committed itself to the reform of Chinia Railways. In the Outline of the Tenith Five-Year Plan For National Economiiic And Social Development (approved by the Fourthi Session of the Ninth National People's Congress on March 15, 2001), it is stated that the purpose of the governiment is "To accelerate the reform of transportation management system and operation mechanisms with the core focus on the separation of the government functions and the enterprise functions, railways will "separate infrastructure from transport operations  3 PID Fundamentally, it is expected that reform will be based on three principles * the separation of government functions from enterprise funictions, * the separation of freight from passenger operations; and * the separation of infrastructure from operations. Implementationi of this reforml agenda has commenced, albeit withi great care. A major step was achieved in mid-2002 wheni Passenger Transport Enterprises (PTEs) were forned in each Administration (there are 14 Regional Administrations), presently on an accoulitinig basis. This policy has been ulider consideration for several years and the Bank had helped refine it over successive projects. Progress has also been made in de-coupling ioio-railway activities from railway activities and redeploying excess staff Authority has been decentralized to the 14 Railway Administrations by way of signing of Railway Asset Management Contracts. About a 100 brancih lines have been separated from main lines on an accounting basis and some have been privatized/concessioned. A large number of Joint Venture lines (mostly between MOR and Provincial or local governments) to construct and operate new lines. New regulations to permit foreign investmerit in railways as required ulider WTO agreements have been introduced (though they may need to be modified to draw a clearer line between the MOR as regulator and China Railways as the enterprise operating competing services). To date, though, no reform implementation plan has been officially approved, and all indications are that progress on the implementation of reform will be deferred until the present leadership transition is complete (top-level appointmeits are expected in March 2003 and lower-level management changes in the months following). It is likely that the new team will continiue the reform program but that they will want to put their own stamp) on it. C. The Bank role thus fair The focus of the Bank's initial China railway projects was allmost completely on capacity enhancement However, since the mid 1990's, the World Bank and China have initiated and maintainied a dialogue on railway reform. This dialogue has featured a number of major semniars where the difficult issues triggered by the reforiml process have been discussed and debated. The Bank's railway advisor has often been asked to give talks on railway reforirn practice in other coulitries and to outlille implications for China These discussions became more intensive wheni, over a four-day period in December 1996, ajoint MOR-Bank meeting hield in Kunmiig, railway staff for the first time presented comprehensive options papers on critical reforn and restructiring problems and engaged with Bank experts on these matters Subsequenitly in October 1997, at anothier four-day session (the Vienna Railway Roundtable co-sponsored by the Bank), Chinese officials responsible for reforn both within and outside of the railways presented a more r efined version of the reform agenda to a community of interinational (as well as Bank) railway experts The initiative for these exchanges often caine from the Bank. As China's reforms have deepened, though, the dynamics of the relationshiip have chaniged, and MOR now asks to tap the Bank's expertise in this area. In 2000, the Bank's railway advisor visited China for a two-day exchange of views with the Minister and senior members of his management team on specific aspects of railway reform. A similar meetinig was held in May 2001, and others are planned. In February of 2002, the Bank's railways adviser attended a Chinia Academy of Railway Sciences (CARS) seminar and a State Council and OECD-sponsored seminar on rail reform. Similarly, in August 2002, at MOR's request, the Bank organized a visit by three North Ainerican experts for a weeklong seminar on freight pricing, regulation and inter-enterprise  4 PID settlement issues. Most recently, the new leadership invited the Bank's country manager to discuss rail reform in December 2002 The Bank has two projects under implementation with the same client: Railway VIl and National Railway (NR), both of which, in addition to capital investments, have significant technical assistance (TA) components focused on reform. All construction on Railways VII is complete and the TA componenits are scheduled to be complete in December 2003 (the loan is scheduled to close in June 2004). NR became effective in April 2002 and continues through 2006. However, constructionl work on the physical component (construction of a second track on the Baoji Lanzhou line) is proceeding ahead of schedule and is expected to be completed by June 2003. The TA subcomiiponienit of this project is also expected to be substantially completed by December 2003. As a result, there will be virtually no overlap betweeni these ongoing projects and the proposed project. * Thus far, one of the Bank's most successful contributions to the reform process has been on the progressive development of analytical tools to support strategic planning. Over a succession of projects the Bank has sponsored the development and continual upgrading of a numliber of decision making tools such1 as costing models, network analysis models and the Transport Management Information System (TMIS). Given the complexity and sensitivity of the reforn process, it has long, been clear that the Chinese authorities would insist on full control of all analyses and recommenidations For this reason, the objective of the tools development is to equip MORto make their own decisions better. Th-ough policy neutral in themselves, these models and systems can serve as invaluable "software" on whicil all future strategic decision-making can be based Presently under Railway Vll two TMIS-related studies are beiig undertaken. The first is for expanding the scope of TMIS beyond traffic operations to transportation management and marketing with the help of e-business technology, and the second would develop an interface with the freight car management system, the locomotive management system and the permanent way management system, and also create the capability of generating more comprelhenisive transportation statistics and analyses Furthermore, as part of the National Railways project, the Bank is supporting the development of an integrated planliing and information tool that will bring together the network planiniig and costing systems developed under previous projects. * The Bank has sponsored a numilber of studies that inform the broader context for reform. In 1993, the Bank withi participation of MOR staff, developed the report, "China's Railway Strategy," (Report No. 10592-CHA) whlicll established many of the issues that are today emerging. As anothier examnple, under the Railways VII loan, studies are being undertaken on the need to modify railway laws to support the reforms, state subsidy policy for railways (Public Service Obligations) and irnprovement in railway productivity (dealing also with labor redeployment). There have been many other TA activities aimed at particular policy issues needed to support the overall reform process. * Although the Bank supported a significant containier component ulider Railway VIl, after the loan had become effective MOR decided against setting up autonomous containier-operatinig subsidiaries at that time, and the project component was canceled. 2. Objectives This Project has two objecl ives: (a) to support the implementation of the ongoing restructurinig and reform program for China Railways; and  5 PID (b) to make capital investmenits that (i) increase the capacity and enviroiinmenital sustainiability of the railway network In-king eastern and western Chinia, and (ii) help Chinia Railways modernize and upgrade track mainitenlanice practices consistent with the goal of operating a modern, competitive rail service 3. Rationale for Bank's Involvement The continuation of the Bank's dialogue with MOR on reform will ulidoubtedly be the major benefit of the project. We have extensive knowledge of the railway-reform activities in other countries that we can leverage for China's benefit. MOR knows that any mistakes could be very costly given the strategic importance of the railway We can also assist MOR in developing analytical tools and informationi systems so that China's reform process can be planied and managed as effectively as possible This is also an investment project. In this regard, the Bank will provide financing to help remove an important bottleneck in the national railway system and increase traffic capacity between the eastern and southwestern regions of China 4. Description There are three parts to the project. Electrification of ithe ZheGan Line. This project will help finanice the electrification of the ZheGan Railway Line betweeni HangzIhou and Zhuzhou (existing double track, 942 km) The ZheGan line is parl of the southernmost east-west main line and links Shanghai and Kunming Purchase of heavy track maintenance equipment. This project will finance the acquisition of heavy equipment for renewal and maintenance of rail and track roadbed. The procurement of these heavy track imachines is part of an ongoing modernizationi and reform project, whose goal is to set up adequalely equipped specialized entities to handle track maintenance on the entire China Railways route network (Track Maintenance Depots - TMD). Assistance with thie reform of China Railways. In addition to assisting MOR with implementing its overall reform agenda, this project will finance techilical assistance related to the following specific issues - changes in work rules related to the use of electric locomotives; - designing more longer-distance trains that can skip intermediate marshalling yards; - phasing out yards no longer needed, - reform of the TMD entities, - study on containers in the China Rail system; and - extending analysis tools, notably TMIS costing models (quantifying costs of carrying different classes of t-affic and cost implications of operating more unit trains and long-distanice trains), and network capacity analysis models 1. Electrification of the ZheGan Line 2. Procuremenit of heavy track maintenanice equipment 3. Technical assistance to support China Railways reform 5. Financing Total (US$m) BORROWER $490 00  6 PID IBRD $242.00 IDA Total Project Cost $732 00 6. Implementation Implementation period. If the project preparation proceeds as currently planned, implementationi could begin in FY2004. In that case it would be expected to continue through the end of FY2007. Executing Agency. The Foreign Capital and Technical Import Center (FCTIC) in MOR has overall responsibility for project preparation, implementation coordination, and oversight To fulfill this role, the FCTIC must work closely with the railway survey and design institutes, the railway construction bureaus, the tendering companiies and several departments in MOR headquarters in Beijing and with the railway administrations. Finance. The Ministry of Finance (MOF) will on-lenid World Bank funds to MOR on the same conditions as the Bank loan to the MOF. The loan type will likely be a LIBOR-based floating-rate single-currency (US$) loan (VSCL), withi 20-year matirity, including a 5-year grace period. The I percent front-enid fee will be financed from the loan [subject to confirmation]. Financial management. IMlanagement of project finanices will be the responsibility of the Finance Division of FCTIC and the finance divisions of the Zhejiang, Jiangxi and Hunani Railway Administrationi Bureaus. Specifically, FCTIC will be responsible for maintaining, monitoring and reconciling the special accoulit to be set up for the project, and preparing withdrawal applications and payment requests. While the Finance Department of MOR will oversee the counterpart funid arrangemlients for the project, the financial divisions of the responsible administrations will be responsible for collecting supporting documents, monitoring contract payments, maintaining accounts of project activities, and preparing project financial statements. Disbursements. The project funds will be disbursed using traditional (not PMR-based) techniques, in accordance with an existing agreement between the Bank and the MOF. Audit Arrangements. As with other Bank-finaniced projects in China, the Foreign Investment Audit Bureau of the Chin1a Natioiial Audit Office (CNAO) (established in 1983 as the State Audit Administration) will have overall responsibility for auditinlg the accoulIts of the project The CNAO resident offices in Zhejiang, Jiangxi and Hunan will conduct the actual audits The Bank currently accepts audits performed ulider the supervision and responsibility of CNAO. Audits of the financial statements of the project aiid of MOR, and the audit of the special account and statements of expenditires will be submitted to the Bank within six monthis of the end of each finanicial year. Resettlement and environmental supervision and monitoring. The Zhejiang, Jiangxi and Hunan Railway Administrationis will be responsible for implementing the environimenital plans and policies. Oversight will be provided by the Environimental Protection Bureaus (EPBs) and the State Environimenital Protection Administration (SEPA) in these states. No significant resettlemenil is anticipated. An independent review of resettleiienit and environmenital aspects of the project will be carried out by the Bank  7 PID Progress reporting and planning. FCTIC will be responsible for preparing quarterly and annual progress reports, including aniual implementation plans. The quarterly reports will focus on physical and financial progress, outline implementation problems for all componenits, and suggest corrective actions. The annual progress report will be used to review the progress achieved in the preceding year, update the Project Implemenitation Plan (PIP), and draw up the implemiienitation plan for the following year. World Bank supervision arrangements. The project has been prepared by a team based in both Beijing and Washington and led from Beijing, and the same team will supervise the project. The team will include specialists to supervise the implementationi of the physical components, financial management systems, procurement activities, disbursement, and the implemenitation of resettlement and environmental plans. The supervisionl plan includes a project launch workshop and two formal supervision missions every year, includinig an annual review mission coinciding with the annual forum on reforms. 7. Sustainability The physical sustainability of this investment is not in doubt. Experience fromn completed and ongoilig Bank-finianced railway projects in Chinia confirms Chinia Railways, commitment to the physical implemenitation of its projects. China Railways has the ability to build and operate the asset and has provided timely and sufficient maintenance fundinig for existing ilfrastructure. Traffic volumes on the railways in Chinia are expected to continue to grow EIRR calculations of completed railway projects In Chinia at the time of loan closing-when the railway financed by the loan has been in operation for a few years-frequenitly show higher values than at project appraisal The impact of Bank-funidecd support for railway reform in Chinia is likely to be greater today than it has ever been The momentum behinid the reform effort and the thirst for knowledge are very great. 8. Lessons learned from past operations in the country/sector The client and the Bank have drawn valuable lessons from preparing and implementing past railway loans, which have been taken into account in the preparation of this railway project. First, a project should not include components to which the client is not fully committed. This can lead to the restructuring of the project, as was the case with Railways VII. Thus while there has been talk and interest in includinig a container element to this project, in light of the Railway VII experience, we have asked MOR to define their vision of the appropriate container transport related element for this project Second, including too many components in a project (as was the case in Railways VI and VII) affects implementation negatively because both the client and the Bank have limited resources for supervision and implementationi Third, wheni designing and implementing project componienits, the project office, railway staff in MOR in Beijing, and railway staff in the regional administrations need to work with each other very closely to implemenit the project efficiently Fourthi, the policy dialogue on reform and restructurinig of the railways must reach beyond the staff in the project office Senior personinel with decision-making responsibilities both inside and outside MOR need to participate in these discussions. (Substantive discussions on reforn have been held during project preparation with the vice ministers and other senior management staff) In addition, in the course of preparing this project there have been fruitful discussiolIs with mid-level managers who are interested in particular elements of reform that impact their work and responsibilities Sucih bottom-up interest may  8 PID accelerate the momentum foi reform across MOR Fifth, client commitment to Bank guldelines and procedures is essential for project preparation and implementation. Problems have arisen with regard to resettlemenit and environmental Issues in Railways VI and VII in large measure because the client wvas not properly organized to fully implement Bank guidelines and procedures However, MOR has recently appointed a resettlement coordinator in MOR headquarters in Beijing. Sixth, China Railway has been cautious In implementinlg their reform agenda. We have, therefore, asked MOR to indicate a realistic timetable for implementationi of key reform steps. 9. Environment Aspects (iincluding any public consultation) Issues : The project's maini physical investment is the electrification of the existing railway line from HangzIhou to Zhuzhoii The main works include constrctioll of traction transformer substations and electric system, upgrading of culverts and bridges when necessary, upgrading of depot equipment and yards, and communication and signalinig systems The potential environmenital issues include construction noise, dust, waste water and solid waste from camp sites, and soil erosion from borrow/disposal areas and safety issue during construction, and durinig operation, noise, increased production of waste water and solid waste, safety and electromagnetism impact will be of concern. The key stakelholders related to the project include MOR, the three regional railway administrations, local affected people along the railway and related local communlities and governments. MOR has retained No.2 Railway Survey & Design Institute to prepare the Environmental Assessmenit of the project as per OP4 01 and to develop appropriate measures to mitigate the impacts. 10. List of factual technical documents: 11. Contact Point: Task Manager Graham Smithi The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone 86-10-65543361 ext 3100 Fax: 86-10-65541686 12 For information on other project related documents contact The lnfoShop The World Bank 1818 H Street, NW Washington, D C 20433 Telephone (202) 458-5454 Fax (202) 522-1500 Web http l/ www wtorldbank org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily  9 PID included in the final project. Tables, Charts, Graphs: Processed by the InfoShop week ending 04/23/2003 For a list of World Bank news releases on projects and reports, click here ' R4r. H WmEEDeAc K = iPrE,A 4P 4fl.' A E