China - Railway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4560-CHA STAFF APPRAISAL REPORT CHINA RAILWAY PROJECT March 7, 1984 Transportation Division 1 Projects Department East Asia & Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency - Reniminbi (RMB) 1 Yuan (Y) = US$0.50 1 Yuan = 100 fen (as of March 1984) FISCAL YEAR (FY) January 1 to December 31 WEIGHTS ANI) MEASURES m = meter (=3.281 feet) sq m = square meter (= 10.764 square feet) cu m = cubic meter (= 35.315 cubic feet) km = kilometer (= 0.621 mile) tkm = ton-kilometer (= 0.621 ton-mile) pkm = passenger-kilometer (=0.621 passenger-mile) mu = 0.1647 acre = 0.0667 hectare (ha) kwh = kilowatt hour (= 860.42 kcals) CTK = Converted ton-km, traffic unit (1 pass-km - 1 ton-km) mt = million tons mtpy = million tons per year PRINCIPAL ABBREVIATIONS AND ACRONYMS USED CIF = Cost, insurance and freight COSCO = China Ocean Shipping Corporation CSA = Changjiang Shipping Authority CTC = Centralized Traffic Control dwt = dead weight tons FCL = full car load FOB = free on board GFA = Gross fixed assets ICB = International competitive bidding LCL = less than car load MOC = Ministry of Communications MOE = Ministry of Education MR = Ministry of Railways NFA = Net fixed assets PBC = People's Bank of China PCBC = People's Construction Bank of China RRAs = Regional Administrations SAA = State Audit Agency SFYP = Sixth Five-Year Plan TU = Traffic Unit  FOR OFFICIAL USE ONLY CHINA: RAILWAY PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE TRANSPORT SECTOR ..................... * 1 II. THE RAILWAY SUBSECTOR ........... 9999 *9999 *99*9999*99 9999999 3 III. THE PROJECT ................................................ 7 A. Project Objectives..*.... 7 B. Project Description9...... .................... ... .... . 7 C. Cost Estimates and Financing........................... 10 D. Project Implementation.*. ........... ............. 12 E. Procurement ...... .............................. 12 F. Disbursements ....................................... . ......... 13 Go Environment, ... . .. . . .............................. 14 IV. ECONONIC EVALUATION ................ ....................... ...........*. 14 A. Main Benefits ................................. 14 B. Xinxiang-Yanzhou Line .................................. 15 C. Datong-Taiyuan Line ............................... .... 15 D. Zhuzhou Locomotive Factory ........... ........ 16 E. Overall Evaluation and Risks.999999999999*999999999999. 17 V. FINANCIAL EVALUATION ...............*......99 9 9 .....99999999 17 A. Ministry of Railways..... . 18 B. Project Sub-Administrations ............. o ........o ...... ..... 22 C. Improvement of Financial Procedures.................... 23 D. The Zhuzhou Locomotive Factory ..............o ............ 23 VI. RECOMMENDATIONS ........................ .............. ...... 25 This report is based on the findings of an appraisal mission to China in March/April 1983. Mission members included E. Karman (mission leader), E. James, P. Levy, L. Uy, J. Yenny and J. DeGryse (consultant). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Page No. ANNEXES 1. Project Description ........................*.. 26 2. Technical Assistance and Training. . 33 3. Proposed Railway Traffic Costing Study ..38 4. Economic Evaluation of the Xinxiang-Yanzhou Line . .43 5. Economic Evaluation of the Datong-Taiyuan Line . .48 6. Economic Evaluation of the Zhuzhou Electric Locomotive ...... .. 55 7. Selected Documents and Data in the Project File. 58 SUPPORTING TABLES Table 1.1: Investment in the Transport Sector Table 1.2: Capacity of Rail Lines from Shanxi Province to the East Coast Table 2.1: Originating Freight Traffic (tons) Table 2.2: Freight Traffic Performance (tkm) Table 2.3: Freight Traffic Average Distance Table 2.4: Passenger Traffic Table 2.5: Railways: Selected Operational Statistics, 1970-81 Table 3.1: Aggregated Composition and Cost Estimates Table 3.2: Composition and Cost Estimates, Xinxiang Connections Table 3.3: Composition and Cost Estimates, Xinxiang-Heze New Line Table 3.4: Composition and Cost Estimates, Yellow River Bridge Table 3.5: Composition and Cost Estimates;, Heze-Yanzhou Line Upgrading Table 3.6: Composition and Cost Estimates, Yanzhou Connections Table 3.7: Composition and Cost Estimates, Datong-Taiyuan Line Track Upgrading Table 3.8: Composition and Cost Estimates, Datong-Taiyuan Line Electrification Table 3.9: Composition and Cost Estimates, Zhuzhou Electric Locomotive Factory Modernization Plan (1983-86) Table 3.10: Summary List of Goods, Infrastructure Subprojects Table 3.11: Detailed List of Goods, XinxiaLng Connections Table 3.12: Detailed List of Goods, XinxiaLng-Heze New Line Table 3.13: Detailed List of Goods, Yellow River Bridge Table 3.14: Detailed List of Goods, Heze-Yanzhou Line Upgrading Table 3.15: Detailed List of Goods, Yanzhcu Connections Table 3.16: Detailed List of Goods, Datong-Taiyuan Upgrading and Electrification Table 3.17: Detailed List of Goods, All Infrastructure Subprojects Table 3.18: Detailed List of Goods, Zhuzhou Electric Locomotive Factory Table 3.19: Implementation Schedule, Xinxiang-Heze Line Table 3.20: Implementation Schedule, Yellow River Bridge Table 3.21: Implementation Schedule, Heze--Yanzhou Upgrading Table 3.22: Implementation Schedule, Electrification of Datong-Taiyuan Railway Table 3.23: Implementation Schedule, Zhuzhou Electric Locomotive Factory Table 3.24: Tendering Schedule Table 3.25: Cumulative Disbursement Schedule  - iii - Table 4.1: Traffic on Xinxiang-Yanzhou Line Table 4.2: Traffic and Capacity of Datong-Taiyuan Line Table 5.1: MR - Profit and Cost Statements, 1975-81 Table 5.2: MR - Actual and Forecast Income Statements, 1981-87 Table 5.3: Flow of Funds between State and MR, 1979-87 Table 5.4: MR - National Western Presentation of Actual and Forecast Calculations of Fixed Assets, Depreciation and Average Fixed Assets in Use, 1980-87 Table 5.5: MR National Western Presentation of Actual and Forecast Income Statements, 1981-87 Table 5.6: MR - National Western Presentation of Actual and Forecast Sources and Applications of Funds and Debt Service, 1981-87 Table 5.7: MR - National Western Presentation of Actual and Forecast Summarized Balance Sheets, 1981-87 Table 5.8: Profit and Costs Statements for the Four Subadministrations Concerned, 1980/81 Table 5.9: Zhuzhou Locomotive Factory: Funds Balance Statement, 1982-86 Table 5.10: Unit Costs, Revenue, etc. for the Four Subadministrations Table 5.1la: Zhuzhou Locomotive Factory: Income Statement - Locomotive Production, 1981-87 Table 5.11b: Zhuzhou Locomotive Factory: Income Statement - Locomotive Overhaul and Major Repairs, 1981-86 Table 5.11c: Zhuzhou Locomotive Factory: Income Statement - Work for Third Parties, 1981-86 Table 5.11d: Zhuzhou Locomotive Factory: Consolidated Income Statements, 1981-97 Table 5.12: Zhuzhou Locomotive Factory: Funds Flows Statement, 1983-87 Table 5.13: Zhuzhou Locomotive Factory: Funds Balance Statement, 1982-87 MAPS IBRD 17095R - China Railway Network IBRD 17096 - Railway Project Components IBRD 17097R - Railway Project: Yellow River Bridge on Xinxiang-Heze Line   I. THE TRANSPORT SECTOR 1.01 Like other centrally planned economies, China's economy is very "transport intensive." With the same land area, US freight traffic is only four and a half times the freight traffic of China for a GNP nine times that of China. This intensity of transport is explained mainly by two factors: (a) the historical emphasis on heavy industry requiring movements of ores, steel and other products; and (b) the high level of energy consumption, per unit of output in China's industry (energy use per unit of GDP is two and a half times that of other LDCs). 1.02 Investments. Over the period 1949-79, some Y 110 billion, or 17% of all new investment coming under the heading "State Capital Construction," went to transport. In comparison with other countries, transport investments appear somewhat on the low side. In the first two decades after liberation, the railways absorbed well over 50% of all new investments in the transport sector (Table 1.1). Most railway investments went to construct new lines to the interior, while the northeast plains and coastal areas have 80% of the railway's freight traffic. As a result, major capacity constraints developed and are now particularly evident in coal transport. 1.03 Because of the recent expansion of external trade, increasing emphasis has been given lately to the development of ports and ocean ship- ping. Many berths were constructed in the 1970s in China's 15 major ports. Investments in the shipping fleet have also been large, averaging about Y 500 million p.a. since 1976. By contrast, investments in inland waterways and roads over the past 30 years have been modest. Nevertheless, an average 25,000 km of roads has been added to the network annually since liberation, much of it at rather low standards. 1.04 Traffic Trends. Domestic freight transported in 1981 reached 852 billion ton-km (t-km), a 12-fold increase since 1952, or an average annual rate of almost 9%, systematically higher than the growth of domestic pro- duct. The relationship of freight growth to overall economic growth is, however, less than that experienced by some other low income LDCs, which reflects the development policy emphasis given to regional self-sufficiency rather than to interregional trade in foodstuffs and consumer goods. The modal split has moved toward a more balanced use of modes, but the railways still handle 67% of traffic versus 82% in 1952; this predominance is expected to continue for quite some time. 1.05 Passenger traffic reached 274 billion passenger-km (p-km) in 1982, an 11-fold increase since 1952 and an average annual growth rate above 8%. Since 1978, growth averaged 12% p.a., well above twice the overall rate of economic growth. This illustrates the potential demand for travel as income grows. It is likely that this growth would have been even higher if it had not been constrained by the limited capacity, particularly of the railways, to offer more passenger services. The modal split has shifted more rapidly than for freight toward the road mode, and the railways now handle less than 60% of the traffic versus over 80% in 1952.  -2- 1.06 Railways and Energy Transport. Coal provides over 70% of the energy consumed in China and as a result of economic resforms, production has increased rapidly from 550 million tons (mt) in 1977 to 666 mt in 1982. The recently released 1981-85 plan target is for 700 mt by 1985. The railways play a key role in the distribution of energy, mainly coal. In 1981 the railways trans- ported 412 mt of coal and this traffic accounted for 32% of the total t-km performed that year. However, transport bottlenecks developed in railways and to a lesser extent in ports. Despite lower total production in 1980 and 1981, a stockpile of over 10 mt has accumulated in Shanxi Province alone because of lack of rail capacity. Some of these stocks are being lost due to spontaneous combustion. Recent production statistics for 1982, up 7% from 1981, indicate that the situation has probably worsened recently. 1-07 Shanxi is endowed with one third of all coal reserves in China, and is also more accessible to consuming areas! than other coal rich areas in the remote northeast or Inner Mongolia. In 1982, coal production in Shanxi reached 144 mt, 20% of the national total. Mine developments presently under way and planned are expected to bring production over 150 mt by 1985/86 and possibly near 200 mt in the early 1990s. This includes a mine that will be developed under a proposed Bank project. Railway capacity to move coal from Shanxi to industrial areas and ports on the east coast is presently limited to less than 90 mt p.a. The Ministry of Railways (MR) has launched a major investment plan on seven routes to increase their capacity to over 150 mt p.a. by 1986 (Table 1.2). The proposed project is a direct contribution to the capacity increase of two of these seven lines. 1.08 Other Transport Modes. Port traffic grew rapidly in the 1976-81 period, reflecting the economic opening of China to foreign trade. Annual growth averaged 11.3%. Domestic coastal shipping and inland water transport also increased substantially. As a result, ports became congested despite commendable efforts to achieve high productivity. A major effort to modernize ports started in the early 1970s and continues with particular emphasis on container and bulk terminals, the latter mainly for coal. The Bank's first transport operation in China was the Three Ports Project (Loan 2207-CHA, 1982), which includes a coal berth at Huangpu. 1.09 The highway network comprised about 897,000 km in 1982, of which about 151,000 km were asphalted. Road pavement standards are low and the extent of the paved network is limited. Road maintenance, however, is well organized and currently absorbs much of the attention and resources of the provincial and other road authorities. Except for Western China, the highway network is still very much a system of feeder roads to the railways. Never- theless, motor traffic on the national highways since 1978 reportedly has grown at a very high overall annual average of 15%. 1.10 Transport Issues and Objectives in the 1980s. The Sixth Five-Year Plan 1981-85 (SFYP) approved in December 1982, includes Y 27.5 billion (16.2% of the total) earmarked for transport sector inviestments. The railways would get 63% of this amount. The plan document does not directly mention issues in the transport sector, but a number of other recent publications give a fairly consistent picture of some key problems. The most important sectoral issues at this time are: (a) the capacity constraints both for freight and passenger  -3- movements; (b) the appropriate economic role of the various modes and in par- ticular the modal allocation of short distance traffic; (c) the management of the transport system including policy, planning, coordination and pricing; (d) the choice of technologies for infrastructure as well as vehicles; and (e) the training and development of staff in all the above matters. II. THE RAILWAY SUBSECTOR 2.01 Long-term Bank Objectives. The Bank's long-term objective is to assist MR in introducing such changes in policies, institutions, infrastruc- ture, motive power and rolling stock, terminals, and operations that are necessary for the railway to meet, in a cost effective manner, the increasing demand for railway transport generated by growth in the economy. The vehicle for this dialogue in the longer term would be railway sector lending opera- tions focusing on specific issues, such as relieving regional transport infrastructure bottlenecks, modernizing motive power technology, improving manufacture and maintenance of motive power and rolling stock, improving terminal handling operations and modernizing education and training. The proposed project is a first step in the introduction of such sector lending operations, and would involve the removal of important bottlenecks for trans- porting coal from the Shanxi coal fields to the coast, as well as some initial activities involving costing, manpower planning, education and technology. 2.02 Organization, Management and Staff. The railways of China are the major carrier in the modern transport sector and have their own Ministry. Operations are largely in the hands of 18 regional administrations (RRAs). Each administration, headed by a General Manager, is made up of eight depart- ments and three or more operating subadministrations. Altogether MR employs 2.7 million people, of whom 1.6 million are involved in the transportation function. The others are engaged in industry (MR operates 68 factories pro- ducing locomotives, rolling stock, etc.), capital construction (new railway track, bridges, electrification, workshops, housing, etc.), education and other activities. 2.03 Education and Training. This is a very important function of MR which operates over 2,000 schools with 100,000 teachers and staff. At the top of the system are 10 universities of which seven are technical, two medical and the last a teachers' college. Most universities now also have graduate programs. There are also eight research institutes. For high school graduates who cannot enter university, MR operates over 60 Intermediate Technical Schools with two-year programs and Technical Workers Schools to train locomotive drivers and other trade workers. In addition, MR operates middle and primary schools with enrollment exceeding one million. Outside this formal education system, MR has 20 Staff Training Colleges for in-service training. The problems encountered by MR are similar to those of others dealing with education in China. Programs need modification to reflect the technological changes which are accompanying for example, the gradual switch from steam to diesel and electric traction, with emphasis on management and on economic and financial analysis. Most teaching materials now in use were written in the 50s and 60s and need upgrading- Also, education and training  - 4 - are too narrowly specialized and MR wishes to move to more comprehensive training to increase the flexibility of future staff assignments. A second railway project now under preparation may include an education and training component to address some of these issues. 2.04 Railway Facilities. The railway system in China has more than doubled in size since 1949 from 22,000 route-km to about 50,000 km of which 8,300 km were double or multiple track and some 1,700 km electrified at the end of 1981. Further double tracking and electrification are in progress. 2.05 The locomotive fleet consists of aboult 10,000 units, 75% of which are steam, 22% diesel, and 3% electric. Demand for electric locomotives will increase rapidly to some 120 locomotives per year by 1985-86. This project includes urgently needed equipment to increase production capacity from 40 locos p.a. to 120 locos p.a. A second project now under preparation will focus on improving locomotive technology with the assistance of an inter- national panel of specialized consultants. In 1979, the freight car fleet numbered 259,000. In recent years, rolling stock acquisitions have generally kept pace with traffic growth except in 1981, reflecting the overall economic slowdown experienced during that year. Passenger coach acquisition has increased over the last few years, following the rapidly rising demand for passenger travel. It is, however, still below MR's estimated need of at least 1,200 coaches p.a. 2.06 Traffic and Operations. China has the third largest freight railway system in the world after the USSR and the USA. Freight traffic has grown from about 100 million tons in 1950 to over 1 billion tons in 1981 (Table 2.1) while ton-km grew from 39.4 billion to 570.2 billion or at an average rate of 9% p.a (Table 2.2). Recently, freight traffic has grown less rapidly, averaging about 5.7% p.a. since 1977. Ten commodities: coal, timber, iron and steel products, construction materials, petroleum, grain, non-metallic ores, fertilizer, metallic ores and cement (in that order) account for about 75% of the ton-km. Average transport distance has increased continuously from 395 km in 1950 to 544 km in 1981 (Table 2.3). The global freight traffic forecast included in the SFYP is for 666 billion ton-km in 1985, a 3.0% p.a. growth over 1980. The strong 1982 growth more than compensated for the 1981 stagnation making the combined two-year growth 8%, somewhat ahead of the forecast. Passenger traffic has grown from about 150 million passengers in 1950 to 950 million in 1981, while p-km grew from 21.2 billion to 147 billion or at an average rate of 6.5% p.a. Passenger traffic exploded since 1978, increasing 44% in four years and putting heavy demand on the existing equipment as well as on line capacity (Table 2.4). The growth of passenger traffic is exceeding forecasts and it is clear that passenger traffic will continue to be determined more by the capacity provided by the railways than by the market's demand. 2.07 Operations are efficient and show a high level of track and equipment utilization (Table 2.5). Traffic dens:Lty is the second highest in the world after the USSR. It averages 11.9 mill-ion net t-km per route-km for freignt and 3.1 million p-km per route-km for passengers. Freight car turnaround time (at 3.0 days) is extremely low and it is difficult to see further savings here. The number of freight cars per train has remained  - 5 - relatively constant at around 35 cars. This is largely a consequence of the length of passing loops which is 650 m for 75% of the stations and 850 m for the rest. A number of station lengthening programs is under way to allow operation of longer trains in the future. 2.08 Planning and Investments. Coordination of railway investment planning is the responsibility of the Planning and Statistics Bureau at the Ministry's headquarters. The emphasis of the SFYP is to increase the coal carrying capacity from western provinces to the east coast. A secondary objective is to relieve capacity constraints on lines of the eastern seaboard and in particular to develop more passenger transport facilities. Railway investments have fluctuated considerably over the past 30 years, somewhat in tune with general economic development. After a rapid buildup in the 1950s, investments fell off considerably in the early 1960s. They gradually increased again to reach their highest levels during the Fourth Five-Year Plan (1971-75), averaging almost Y 3.5 billion p.a. In recent years, they have fallen off again, particularly in 1981 when MR was allocated less than Y 1.5 billion for investments, as a consequence of economic retrenchment and reformulation of Government economic policies. 2.09 The Ministry of Railways has four general design institutes which are adequately staffed with competent staff. Over the years, these institutes have designed a large number of civil work projects, such as new tracks, track doubling, tunnels, buildings, small and medium-size bridges. The designs are well adapted to labor-intensive construction methods which are adequate in China. In addition, there are two other institutes specialized in both design and construction of electrification and major bridges, respectively. The Electrification Institute has prepared all electrification projects to date (about 1,600 km) on the basis of technology widely used in developed countries, i.e., 25 KV-50 Hz. The Major Bridge Institute has designed and executed a number of very large projects including the Nanjing Bridge (14 km including approaches, with a double railway track on the lower deck and a six- lane highway on the upper deck) and seven other large bridges over the Yangtze River. All these projects are of a high technical standard. 2.10 The Ministry of Railways has five construction bureaus in charge of track and general civil works, a factory construction bureau and a tunnel construction bureau, all of which have experienced, skilled and management staff (unskilled labor is recruited locally for each project). The construction quality is good. The projects have generally been completed on or ahead of time, and cost overruns are the exception. 2.11 Tariffs and Costs. Rates and fares were not changed between 1967 and December 1, 1983, when freight tariffs were revised. This revision con- sisted mainly of: the doubling of the minimum distance charged, from 50 to 100 km; and a 23% rate increase covering 75% of freight, including bulk commodities like coal, cement, oil, and fertilizer. The current average freight haul of about 550 km corresponds to an average net receipt (after sales tax) of Fen 1.43 per ton-km, which compares favorably with the average operating cost of about Fen 0.94 per ton-km, leaving a wide profit margin of 52% above operating costs. For passengers, the average distance traveled is 156 km, and the average gross revenue per passenger km is Fen 1.46 as compared  -6- to the estimated average cost of Fen 1.08, i.e. a profit margin of 35% above operating costs. Consequently, railway operations are highly profitable. 2.12 There is a substantial amount of costing data available at administration and subadministration levels, but little of these are developed at MR level, where "gross" costing is the rule. The Ministry of Railways acknowledges that the findings of their comprehensive costing studies carried out some 15 to 20 years ago (and on the basis of which the still prevailing tariff structure was fixed) are outdated. Undier the proposed project, MR will carry out a comprehensive railway costing study (paras. 3.10 and 5.19). 2.13 Budget, Accounting and Audit. The Ministry of Railways' financial procedures are recorded in a comprehensive "Manual on Railway Finances". The annual recurrent budget is prepared at subadministration and administration levels and ultimately finalized at the MR leveL (Project File). The annual capital budget is prepared at the MR level within the global allocation of resources earmarked by the State Planning Commission. Since 1983, MR is to pay to the State (a) sales tax set at 15% of gross operating revenue; (b) income tax set at 55% of net profits; and (c) the share of after tax profits it is not allowed to retain. The same system applies to the Zhuzhou factory, but the sales tax rate has been set at 5.3%. The State uses part of the proceeds of the tax to finance railways and factory investments. 2.14 The Ministry of Railways' accounting procedures are generally satisfactory. The Ministry of Railways is usinig a double-entry accounting system on an accrual basis; the dual recording concept is applied although the debit-credit technique has been replaced by an "increase-decrease" system. The most unusual feature of both MR and the Zhuzhou factory is the dual system of depreciation, which comprises a basic provision of 3% and an additional "provision for major repairs" which grew from 1% in 1979 to 3.5% in 1982 (2.5% for the Zhuzhou factory). The handling of this provision as a component of depreciation is debatable since maintenance should normally be charged to working expenses. This dual system is based on the cumulated historic gross value of depreciable fixed assets instead of taking into account the actual economic life of depreciable items. This handling of depreciation distorts the true earning position of MR and the Zhuzhou factory (para. 5.11). There are other shortcomings in financial procedures like the lack of long-term financial planning and insufficient use of data processing. 2.15 Audit. The Ministry of Railways has a "Financial Checking Division" which performs internal auditing; it also checks the correlation of revenue and expenditure with planned allocations. The Peoples' Bank of China (PBC) is MR's paying and collecting agent and keeps a close record of MR's budgetary allocations including their subsequent adjustments. The Peoples' Bank of China's inspectors regularly check the use of funds by MR. The Peoples' Construction Bank of China (PCBC) fulfills a similar role for investment funds. The Ministry of Railways produces an annual report which is sent for review to the Ministry of Finance within five months after the close of the fiscal year. The Ministry of Finance issues a Certificate of Approval. The above-described control system is satisfactory for project implementation.  7 III. THE PROJECT A. Project Objectives 3.01 In July 1982, the Government requested Bank assistance in financing urgently needed rail investments necessary to transport the increasing coal production. The proposed project was prepared by the Government and Bank staff; it was appraised in March/April 1983. This project would make a direct contribution to the Government's overall plan for increasing the supply of energy which is urgently needed to support economic development in China. It would also provide assistance to MR for expanding and improving electric loco- motive production and for long-term design upgrading in electric locomotive technology, which could eventually be implemented in a subsequent project. Capacity wise it would help remove some of the existing constraints of the railway network to move coal between the mines of Shanxi Province and major industrial centers and ports in eastern China. This work forms part of a regional plan of construction and upgrading on seven different lines and three ports and is expected to be completed by 1986 (Table 1.2 and Map IBRD 17096). B. Project Description -/ Xinxiang to Yanzhou Line (305 km) 3.02 This line, in Henan and Shandong Provinces, will close the gap between the coal production areas of southern Shanxi and the line presently being built between Yanzhou and the new east coast port of Shijiusuo. Both the line and the port are under construction with Japanese financial assis- tance and completion is expected by the end of 1985. It is therefore impor- tant that the Xinxiang-Yanzhou line be completed at about the same time. The project would include: (a) construction of 165 km of single track between Xinxiang and Heze; (b) a 10 km long bridge across the Yellow River, which is part of item (a); (c) upgrading and capacity increases on the existing Heze-Yanzhou line (139.5 km); and (d) connections to other lines and yards at Xinxiang and Yanzhou. 3.03 The Xinxiang-Heze section will be constructed to design standards allowing operation of 3,500 ton trains (steam traction), and would have an overall capacity of 22 million tons per year. In general, the terrain is flat and presents few construction problems. The existing Heze-Yanzhou line would be upgraded to a similar standard (currently it can only handle 2,700 ton trains) which is also the one being used for the neighboring Yanzhou-Shijiusuo 1/ A more detailed description of the project components is given in Annex 1.  - 8 - section, now under construction. Thus, after completion, coal trains would run between Xinxiang and Shijiusuo without intermediate marshalling. The additional coal traffic requires construction of- rail connnections (involving new station and yard facilities) at Xinxiang and Yanzhou. 3.04 The Ministry of Railways considered various possible alignments for the 10 km long Yellow River rail bridge (see Map IBRD 17097R), which, at US$110 million equivalent, constitutes a very large single item in the overall project construction plan. Two options to the north of the site eventually selected were rejected on account of flood risk involving potential washout of track to the west of the river. A third site was rejected because of higher costs associated with a longer central steel section than needed for the site eventually chosen. The chosen site, although involving the longest total length of bridge work, requires a relatively short steel truss portion (1.6 km) directly over the river. Adjacent areas present a very low flood risk, and are thus highly suitable for adjoining track. West of the steel truss section, there will be a 4 km steel girder section. Concrete approaches on both sides will total about 4.5 km. 3.05 During appraisal, the possibility of aL double-track bridge was also discussed, but rejected as not economically justified. However, at the sug- gestion of the Bank team, a crossing loop was added on the western access of the main bridge, which will reduce the length of the critical (single track) section from about 14 km to 8 km, thereby increasing line capacity from less than 17 million ton per year (mtpy) to about 22, at a relatively modest cost. Datong-Taiyuan Line (355 km) 3.06 This line is located in Shanxi Province and links Datong, the largest mining center in northern Shanxi, with Taiyuan, the provincial capi- tal, also a major mining and industrial center. The project would include: (a) double-tracking of two sections totalling 127 km which are major bottlenecks at present; (b) lengthening of all (34) existing crossing stations from 650 to 850 m; (c) construction of four additional crossing stations; and (d) line electrification in 25 KV-5OHz, the standard in use elsewhere in China, and Centralized Traffic Control signalling on 355 route-km (about 540 track-km). 3.07 The impact of double tracking and electrification as proposed will be a significant increase in overall capacity (from 7 to 22 million tons per annum) as associated with a train size of 3,000 tons (and 3,500 tons over some stretches) compared with 1,400-1,500 tons currently. Rugged terrain and steep gradients will require double and triple heading over certain sections.  Electric Locomotives: Manufacture and Technical Assistance 3.08 This component would assist the Zhuzhou Electric Locomotive Factory (the only one in China) in increasing its output to meet the overall demand for electric locomotives which will be needed by the proposed project as well as other electrification projects presently under construction. This project would therefore include: (a) equipment (mainly modern machine tools not produced in China) needed to increase and improve production of electric locomotives of the present design (Shaoshan Types I and III) to meet the forecast demand of 120 locomotives per year in 1986 and thereafter; and (b) technical assistance and training in areas of: - general mechanical and electrical technology and practices; - use and maintenance of the more advanced equipment referred to in (a) above; and - specialized technology and management practices. 3.09 A comprehensive program has been set up, under which Chinese operators, foremen and engineers will study and gain practical experience abroad (510 manmonths). Also, foreign specialists will come to China to teach and demonstrate modern technologies and practices (38 manmonths). The average cost of overseas training for Chinese operators is US$1,700 per manmonth including travel and subsistence but excluding salary. The average cost of foreign experts in China is US$10,900 per manmonth, including travel, salary and subsistence. The total cost of the program is about US$1.3 million. Foreign experts for specialized training on modern imported equipment would be provided by the supplier, i.e., the successful bidder under International Competitive Bidding (ICB). Other technical assistance would be contracted according to Bank guidelines. The detailed composition, scheduling and cost of this program is given in Annex 2. To facilitate disbursements against the costs of the training program, a revolving fund will be established (para. 3.18). Costing Study 3.10 To update and improve its costing system, MR will undertake a costing study. The aim of the study will be to improve the existing costing methodology and thereafter install a costing system that will improve railway operations and management. This study will be performed in separate phases over several years (ending December 31, 1989), since some adjustments are generally necessary after an initial period of implementation. It will be carried out by a team to be organized by MR and staffed by representatives of MR administrations, subadministrations, and institutes or universities. After completion of each stage, reports will be prepared and submitted to the Bank for an exchange of views with the study team and MR. Terms of reference for the study and details on its implementation are given in Annex 3.  - 10 - C. Cost Estimates and Financing 3.11 Detailed designs are completed for all project works. Quantities were derived from final engineering and unit prices are based on recent experience with similar works. Estimated project costs are expressed in March 1984 prices. Physical contingencies of 5% are included for infrastructure works. Annual price contingencies were applied to local and foreign costs as follows: 7.5% in 1984, 7% in 1985, and 6% in 1SI86 and 1987. An exchange rate of Y 2.0 to US$1 was used for the calculation of the US dollar equivalent costs. The estimated project cost, including contingencies, the charge on the use of foreign exchange under Government's internal settlement rate system, and the capitalized front-end fee of US$0.5 million is about US$793 million, of which about US$251 million represents direct and indirect foreign exchange costs. Aggregated and detailed cost estimates are given in Tables 3.1 to 3.9. The Government has requested a loan of US$220 million which would cover about 88% of the estimated total foreign exchange costs. The Ministry of Railways will finance other materials, equipment and construction costs from its own resources. 3.12 The proposed Bank loan would finance selected materials and equipment for infrastructure works, equipment for the locomotive factory, technical assistance and training. A list of items to be financed by the proposed loan is given in Tables 3.10 to 3.18. A summary of the project costs and of the proposed loan is shown on page 11.  - ~ ~~~~~~~~~~ 11 - For- For- Prop. Foreign Local eign Total Local eign Total loan as % of (Y mln) (US$ mln) Total Infrastructure Subprojects Xinxiang CDnnections 75.0 21.2 96.2 37.5 10.6 48.1 9.1 2.1 Xinxiang-Heze New Line 257.4 56.4 313.8 128.7 28.2 156.9 23.9 18.0 Yellow River Bridge 133.3 86.3 219.6 66.6 43.2 109.8 35.1 39.2 Heze-Yanzhou Upgrading 94.6 59.2 153.8 47.3 29.6 76.9 24.9 38.5 Yanzhou Connections 48.7 19.8 68.5 24.3 9.9 34.2 7.9 29.0 Datong-Taiyuan Upgrading 82.5 82.4 164.9 41.2 41.2 82.5 38.1 50.2 Datong-Taiyuan Eectrif. 76.1 88.4 164.5 38.1 44.2 82.3 37.7 53.7 Electric Locomotive Factory Modernization 50.0 32.9 82.9 25.0 16.4 41.4 15.9 39.4 Techn. assist. & traing. - 2.6 2.6 - 1.3 1.3 1.3 100.0 Base Cost (March, 1984) 817.5 449.3 1,266.9 408.8 224.6 633.4 193.9 35.4 Physical contingencies 34.0 31.2 65.2 17.0 15.6 32.6 8.8 48.1 Price contingencies 32.0 20.4 52.4 16.0 10.2 26.2 16.8 38.2 Total Project Costs 883.5 500.9 1,384.5 441.8 250.4 692.2 219.5 36.2 Front-end Fee on Bank Loan - 1.1 1.1 - 0.5 0.5 0.5 100.0 Finance charge on ue of foreign capital - 200.8 - 200.8 100.4 - 100.4 - - Total Financing Required 1,084.3 502.0 1,586.3 542.2 250.9 793.1 220.0 31.6 a/ Based on an internal settlement rate of US$1.0 = Y 2.8, MR wuld have to pay a premiun equivalent to 40% of total foreign capital employed. Notes: 1. Total physical contingencies are about 5% of base costs; local and foreign price contingencies are about 3.9% of the respective base cost plus physical contingencies. This percentage is lowr than usual because (a) some preparatory work vas done in 1983 (with little foreign exchange and no retroactive Bank financing) for which there is no need for price contingencies, and (b) the implementation schedule is front-loaded, with about half of the expenditure planned for 1984. 2. Import taxes and duties are not included in project costs and Government will not charge such taxes and duties on imports attributable to this project.  - 12 - D. Project Implementation 3.13 Civil works, track laying and installation of electrification equip- ment (substations, catenary, signalling and telecommunications) will be imple- mented by MR using two of its Construction BureaLus, the Major Bridge Bureau and the Electrification Bureau, (paras. 2.09 and 2.10), in accordance with the detailed schedules given in Tables 3.19 to 3.23. These agencies are well staffed with key technical specialists and skilled workers as well as with managers and supervisory personnel. They are highly experienced in the type of works to be carried out and with the labor-intensive methods of construc- tion that are appropriate. The construction bureaus generally provide skilled manpower and supervision, while entering into agreements with local authori- ties for unskilled labor requirements. The Ministry of Railways' construction bureaus have built an average of 1,000 km of track each year over the last decade, which has involved projects calling for similar techniques and methods, and are well able to maintain the pace and scale of the project con- struction program. Completion of construction/ upgrading of the track sections would be by end 1986, with electrification of the Datong-Taiyuan line by end 1987. The Zhuzhou factory modernization plan would be substantially completed by 1986, with the last machine tools installed in 1987. E. Procurement 3.14 Procurement of selected materials and equipment for infrastructure works and equipment for the locomotive factory (totalling about $217 mil- lion) will be subject to international competitive bidding (ICB) in accordance with Bank guidelines for procurement. Small items of equipment, mainly hand tools and measuring aids, worth less than US$100,000 per contract and totaling less than US$1.0 million, will be purchased on the basis of quotations from at least three suppliers in accordance with procedures acceptable to the Bank. Procurement under ICB will be divided into about 30 packages, ranging in value from US$300,000 to US$40 million (Table 3.24). In bid evaluation, Chinese manufacturers will be allowed a preferential margin of 15% of the CIF cost of competing imports, or the relevant prevailing level of customs duties, whichever is lower. 3.15 For items not financed by the Bank, Government procurement proce- dures will apply. Such items comprise civil works, to be undertaken by MR's construction bureaus as described in para. 3.13, various local materials, and miscellaneous equipment. As regards the procurement of civil works, the arrangements proposed for the project are similar to those in use throughout China. They involve the assignment of construction contracts to one of the construction bureaus specialized for the particular type of works (in this case a construction bureau of the Ministry of Railways), with a contract which details the work to be done, unit prices, quantities and completion schedules, bonus and penalties for early/late completion, and compensations through additional payments or extension of time for factors beyond the contractor's control. Major materials such as cement and steel are independently arranged by the owner and supplied to the construction bureau. In this case, such materials are to be procured through ICB and financed by the Bank loan. Costs of work carried out by the construction bureaus compare favorably with international contracts for similar works.  - 13 - 3.16 The construction schedule precludes international competitive bidding. In order to complete the Yellow River Bridge and the new Xinxiang- Yanzhou line by end-1985/early 1986, construction has to begin in early 1984, and the construction bureaus are already being mobilized. These two elements of the project are urgently needed to link the coal producing areas to the Yanzhou-Shijiusuo line which is now under construction and scheduled for completion by end-1985. Preparation of bidding documents, bidding, bid evaluation and construction mobilization could lead to a delay of at least one year, which would impose a significant financial penalty on the coal producers and the railways. 3.17 The Government is giving thought to modifying existing practices for dealing with civil works construction. It has already done so in a recent power project, where ICB was made possible for a special component of civil works (water conductor-pressure tunnels) and turned out to be successful. In many sectors, however, the reorganization required would be more fundamental, since design, construction and supervision of civil works are currently vested in the Ministries themselves. Under the present arrangement, by which the construction bureau is a wing of the Ministry and not an independent entity with financial and managerial independence, it cannot participate in an ICB for which the Ministry is the Purchaser. Companies with administrative, financial and legal independence would have to be created, as was done in the case of the power project mentioned above. This will take time and effort to accomplish. The Bank's intention is to continue pressing the Government to introduce necessary organizational and legal changes leading to the creation of independent companies, which would be able to participate in railway civil works construction under ICB, in China and abroad. F. Disbursements 3.18 Disbursement of the proposed loan would be as follows: (a) 100% of the CIF cost of imported equipment and materials; (b) 100% of the ex-factory cost of locally manufactured equipment and materials; (c) 100% of the cost of technical assistance and overseas training. Domestic transport from port or factory would not be eligible for Bank financing. Any savings under the loan would be cancelled unless otherwise agreed with the Bank. To facilitate disbursements against the cost of overseas training (para. 3.09), a revolving fund will be established with an initial deposit of US$200,000, equivalent to about three months of expected expenditures. 3.19 An estimated schedule of disbursements is given in Table 3.25. Dis- bursements are based on the assumption that the proposed loan would become effective by June 1984.  - 14 - G. Environment 3.20 No negative impact on the environment is anticipated from the project. The electrification of the 355 km section between Datong and Taiyuan (presently steam-operated) will significantly reduce pollution in the area. The new steam-operated line between Xinxiang and Heze cuts through a relatively low population density area. IV. ECONOMIC EVALUATION A. Main Benefits 4.01 The project would make a direct contrilbution to the Government's overall plan of increasing the supply of energy necessary for the sustained development of China. It would increase the capacity of the railway network to move coal between the mines of Shanxi Provinces and east coast ports and cities (para. 1.07). At present, Shanxi coal mining capacity cannot be fully utilized because of shortage of railway capacity and limitations on stock- piling imposed by self-combustion. While the Chinese have started investigat- ing coal slurry pipeline transportation, Shanxi Province is short of water and no viable coal transport alternative to railways is available at present. The project is part of an urgently required rail development program which will bring the capacity to move coal from Shanxi from less than 90 mt to over 150 mt p.a. by 1986-87. In addition to the rail program, port capacity for coal is being increased at several existing ports and a new coal port is being built at Shijiusuo with Japanese assistance. New mines are under development together with expansion of existing ones. The project would also contribute to the improvement and expansion of electric locomotive production in China. 4.02 Each ton of coal (a traded good) is projected to be worth about US$50 FOB Chinese port in 1983 prices (Annex 4, para. 4). The combined pro- duction, transport and handling costs are estimated at US$23/ton. The net value added of coal production generated by the coverall energy and transport development plan is thus US$27/ton. This net value added is the main benefit from the project. Coal is the main source of energy in China and thus the benefits of the project will accrue widely throughout the economy. The detailed economic analysis of the major project components is given below. 4.03 For this analysis, all inputs and outputs were evaluated in mid-1983 constant economic prices. Taxes and duties were excluded from financial prices. For traded goods, the CIF prices of imports and FOB prices of exports were used in estimating the cost of materials and equipment with due adjust- ment for the cost of inland transportation. The official exchange rates were used to convert foreign currencies to Renminbi. A conversion factor of 0.5 was applied for unskilled labor costs, while the shadow wage rate was calculated at four times the actual wage for highly qualified supervisory staff.  - 15 - B. Xinxiang-Yanzhou Line 4.04 This investment includes the construction of a new section between Xinxiang and Heze. The existing line from Heze to Yanzhou is presently a branch line with traffic in the order of 3 mt p.a. near Yanzhou dropping to about 1 mt p.a. near Heze. This traffic is expected to continue after the new section is opened, but through coal traffic will be dominant. Among the mines in south Shanxi which will be served by the line is a mine which will be developed under the Bank's proposed coal project. This mine would produce about 4 mt p.a. by the late eighties. The project line will have a capacity of about 22 mt p.a. Coal traffic in the opening year of 1986 is estimated around 7 mt, growing rapidly at 10% p.a. and possibly faster in the early years (Table 4.1). 4.05 The benefits are in terms of value added to coal which will be transported using the line. Included in the cost streams are the required investments in: (a) coal mines, estimated on the basis of information from the proposed Bank coal development project; (b) the. proposed project; (c) the new rail line between Yanzhou and Shijiusuo; and (d) the new port of Shijiusuo. The latter two items are presently under construction with finan- cial assistance from Japan. The economic rate of return of the entire set of investments above, which includes the proposed project, is 17% with a 25-year period for benefits. While the life of the mine, rail and port investments is much longer than 25 years, benefits beyond the 25th year increase the rate of return only marginally. Details are presented in Annex 4. C. Datong-Taiyuan Line 4.06 This line has three distinct sections: a northern third with major traffic flowing north; a southern third with major flows to the south; and a middle mountainous section with more balanced traffic. On the northern third, coal traffic will go through Datong and east to Beijing and Qinhuangdao. From the other sections, some coal will go through Yuanping to Beijing and points east, and some will go to the Taiyuan area and east via the recently electri- fied Taiyuan-Shijiazhuang line. Present traffic on the line ranges from 8 to 10 mt p.a. near Datong and Taiyuan to 5 mt p.a. through the central and more mountainous section. In addition to freight, there are some 10-12 passenger trains per day on the line, and the northern and southern sections are vir- tually at capacity with their single track steam operation (7 to 10 mt p.a.). 4.07 There are major mining development projects about to start along the northern section, and sustained growth of production is also expected along the rest of the line. A detailed traffic forecast is given in Table 4.2. By the mid-1990s, traffic is expected to exceed 30 mt p.a. on the northern section, reach 19 mt p.a. on the southern section, and some 12 mt p.a. through the mountains. The annual capacity of the line with the project for these three sections will be respectively 33, 20, and 14 mt. 4.08 The benefits will again be mainly in terms of value added to coal which will move on the line after its capacity is increased. Included in the  - 16 - cost streams are the required investment in: (a) coal mines; (b) the proposed project; (c) the improvement of the Datong-Beijing line; (d) the improvement and new line construction between Beijing and Qinhuangdao; and (e) the new coal terminal at Qinhuangdao port. The latter two items are presently under construction with financial assistance from Japan, while work on the Datong- Beijing line electrification is proceeding with the Government's own funds. Some foreign investment is expected in the coal mines along the project line. The economic rate of return of the entire set of investments above, which include the proposed project, is estimated at 19% over a 25-year period for benefits. Details are presented in Annex 5. 4.09 The alternative of providing the necessary capacity increase with diesel rather than electric traction has been considered and rejected as more costly. The analysis of the investment and operating costs for the electric and diesel alternatives is given in Annex 5. Furthermore, the lines at both ends of the proposed project are already electrified: Datong-Beijing in the north and Taiyuan-Shijiazhuang in the south; so from an operating point of view it also makes more sense to have the middle section under the same type of traction. D. Zhuzhou Locomotive Factory 4.10 This proposed component would assist the factory in increasing its output to meet the overall demand for electric locomotives which will be needed by the proposed project as well as other electrification projects presently under construction. The proposed factory modernization will have the following benefits: (a) reduced production cost of locomotives resulting from more efficient production methods, requiring less materials, labor and energy and having fewer parts which need to be rejected or repaired; (b) savings in the cost of locomotives (which otherwise would have to be imported) resulting from an increase in production capacity from the present 40 locomotives p.a. to 120 locomotives p.a.; and (c) reduction in repair and maintenance costs of locomotives for the operating railway administrations, due to the improved quality of the locomotives which will be produced with the project. 4.11 The first year benefits are estimated at 95% of the investment costs and the second year at almost twice the investment costs. The return of the project is thus very high. This is because the project is a marginal investment in a factory which is already established. A detailed economic analysis with streams of costs and benefits is given in Annex 6.  - 17 - E. Overall Evaluation and Risks 4.12 Overall economic evaluation shows that implementation of all project components is well justified and should proceed without delay. The overall ERR including the costs and benefits of the locomotive factory is estimated at 19%. 4.13 All project components involve proven technology that has been in extended use in China or in other parts of the world; technological risks connected with the project are therefore small. In addition, MR has success- fully completed similar projects for a number of years and has competent expertise; risks from inadequate project implementation and operation are therefore negligible. The constraint placed on development by the tight energy situation guarantees that all efforts will be made by the Government to increase production of coal as well as develop the transport capacity to dis- tribute it where needed. The risk is therefore very low that the rate of return would fall below the estimate above. The sensitivity analysis for the major project components is summarized below: Internal Economic Rates of Return Xinxiang Datong Yanzhou Taiyuan line line Best estimate 17 19 Project investment +20% 16 19 Coal mine development +20% 16 17 -20% 19 22 Project benefits delayed 1 year 15 17 delayed 2 years 14 15 Coal price -10% 15 16 -20% 12 14 V. FINANCIAL EVALUATION 5.01 The four subadministrations directly concerned with the project handle only about 7% of MR's traffic. Their financial results have conse- quently only a minor effect on MR's overall financial performance which is analyzed below.  - 18 - A. Ministry of Railways Past Financial Performance 5.02 The profit and costs statements (income statements) of MR for the period 1975-81 are given in Table 5.1. A summary follows: 1975 1976 1977 1978 1979 1980 1981 (Y million) Traffic (bln CTK) 520 482 558 642 680 709 717 Sales Revenue 7,065 6,588 7,479 8,507 9,094 9,454 9,613 Working expenses 2,458 2,491 2,688 2,955 3,273 3,590 3,464 Depreciation 1,550 1,550 1,845 2,051 2,100 3,271 3,490 Operating Expenses 4,008 4,041 4,533 5,006 5,373 6,861 6,954 Net Operating Revenue 3,057 2,547 2,946 3,501 3,721 2,593 2,659 Non-operating expenses 95 247 132 119 218 336 419 Profit 2,962 2,300 2,814 3,382 3,503 2,257 2,240 Working ratio 35 38 36 35 36 38 36 Operating ratio 57 61 61 59 59 73 72 5.03 Except for 1976 (effect of Cultural Revolution), sales revenue grew steadily in line with traffic. Revenue per CTK was very stable, with an income of Fen 1.22 per ton-km and Fen 1.46 per passenger-km. Revenue other than that from freight and passengers was small, about 5% of total revenue; it concerned essentially revenue from loading and unloading of freight cars and terminal charges. 5.04 Working expenses also showed a stablea trend; they were unusually low compared to revenue, resulting in an amazing working ratio of about 36%. The main reasons for such a favorable result are that: (i) staff productivity is high (581,000 CTK per employee in 1981); (ii) salaries represent only about 31% of working expenses, as compared to an average of 65% in other railways in south and east Asia; and (iii) working expenses do not include the "major repairs" expenses, for which a provision is made and included in the deprecia- tion figures.  - 19 - 5.05 The main components of the working expenses are: (a) salaries (31%), averaging since end-1981 a very low Y 830 per staff- year. However, fringe benefits, such as productivity bonuses and social advantages, increased the real cost per staff-year to Y 870; (b) materials (25%), averaging a low Y 1.2 million per one billion CTK; and (c) fuel (30%), averaging about Y 1.5 million per one billion CTK on the basis of the present distribution of motive power (75% steam, 22% diesel, 3% electric in 1982). 5.06 Depreciation, calculated at 6.5% of depreciable gross fixed assets in use may appear high, but includes a provision for major repairs (para. 2.14). Moreover, the asset values used are mostly historical book values. The question of what would be a more satisfactory depreciation provision would need further examination in the context of improvement of financial pro- cedures. The operating ratio, which would be unaffected by the inclusion of the provision for major repairs in either working expenses or in depreciation, remained since 1980 at a favorable 72-73%. 5.07 Nonoperating expenses concerned essentially staff fringe benefits, welfare, pension and education expenditure. Profit from subsidiaries is the aggregated net profit from factories, shops, etc. These subsidiaries do not include motive power and rolling stock factories which report to the Indus- trial Department of MR. 5.08 The favorable working and operating ratios discussed above and the substantial profit shown in the income accounts a priori suggest a high rate of return. On the basis of the information obtained, MR's rate of return on the estimated average net fixed assets in use for 1981 was 5.7%, a good performance. However, it should be mentioned that the particulars of the valuation and revaluation(s) of fixed assets are unknown. Historically, the rate of inflation has been very low in China (less than 1% p.a. between 1952 and 1980). Nevertheless, the rate of return as assessed should be interpreted with caution. Future Financial Performance 5.09 The actual 1981, estimated 1982 and forecast 1983-87 income state- ments in constant terms are shown in Table 5.2. Forecasts are based on the assumption that traffic will grow as planned in the Sixth Five-Year Plan 1981-85, i.e., 6% p.a. in pass-km and 3.0% p.a. in ton-km. The criteria used for forecasting revenue and costs are available in the Project File. A summary of Table 5.2 follows.  - 20 - 1981 1982 1983 1984 1985 1986 1987 Actual Est. --------------- Forecast ------------ ------------------- (Y million) -------------------- Net Sales Revenues 9,613 10,443 10,819 12,398 12,775 13,151 13,600 Working expenses 3,464 3,717 3,884 4,022 4,163 4,307 4,477 Prov. for major repairs 1,880 1,944 1,916 2,000 2,140 2,288 2,440 Depreciation 1,610 1,667 1,642 1,714 1,835 1,962 2,091 Net Operating Revenue 2,659 3,115 3,377 4,662 4,637 4,594 4,592 Net nonoperating expenses 419 379 383 400 420 430 450 Profit liable to income tax 2,240 2,736 2,994 4,262 4,217 4,164 4,142 Income tax - - 1,647 2,344 2,319 2,290 2,278 Add'I remittance to State 1,859 2,271 748 1,066 1,055 1,041 1,036 MR Retained Profit 381 465 599 852 843 833 828 Working ratio (%) A 56 54 54 49 49 50 51 B 36 36 36 32 33 33 33 Operating ratio (%) 72 70 69 62 64 65 66 Rate of return on average net fixed assets A 5.7 6.5 6.7 8.8 8.3 7.8 7.4 Line A: Assume that provision for major repairs is included in working costs. Line B: Traditional MR handling of depreciation. Two sets of working ratios and rates of return on average net fixed assets in use are presented. The first set (Line A) is based on the assumption that the provision for major repairs is included in working expenses. The second set (Line B) is based on MR's traditional approach. Under option A (which seems more logical for reasons explained in para. 2.14), the working ratio is expected to improve from 54% in 1982-83 to 49% in 1984-85 as a result of the December 1, 1983, tariff increase and to deteriorate slightly thereafter. The rate of return would increase from 6.5% in 1982 to 6.7% in 1983 and 8.8% in 1984 due to the tariff increase, and to progressively decrease to 7.4% in 1987. This situation stems from the substantial increase in net fixed assets which are expected to rise from Y 47 billion in 1982 to Y 63 billion in 1987. As a result of MR's comprehensive investment plan, the Railways' capacity will exceed the anticipated demand during this period; hence a temporary lower utilization of the investments and consequently a decline in the rate of return after 1984. However, all ratios indicate that MR's financial position is expectecd to be better than that of most railways in the world. Under MR's traditional approach to depreciation, the working ratio is expected to improve from 36% in 1982-83 to 32% in 1984 and to remain steady at about 33% thereafter. The operating ratio is expected to vary from about 70% in 1982-83 to 62% in 1984, and to 66% in 1987, a very comfortable level.  - 21 - 5.10 The profit delivery system - by which practically all cash generated by MR was remitted to the State while the State financed all railway invest- ments - has, through 1982, been highly profitable for the State. This situa- tion is expected to continue under the recently introduced taxation system, as shown in Table 5.3 and summarized below: 1981 1982 1983 1984 1985 1986 1987 (Y million) Remittance to the State 5,167 5,781 5,946 7,315 7,464 7,614 7,806 State-financed investments 1,600 3,000 4,200 4,200 4,300 4,400 4,500 Net flow of funds to the State 3,567 2,781 1,746 3,112 3,164 3,214 3,306 During 1981-87, the gross flow of funds to the State is estimated at Y 47.1 billion as compared with State-financed investments of Y 26.2 billion, or 56% of funds received; Wis leaves a comfortable cash balance of Y 20.9 billion in favor of the State.- 5.11 Because of the peculiarities of Chinese accounting, the financial relationship between State and MR, the handling of depreciation, and the new taxation system, an attempt has been made to translate into notional western- type income accounts the actual and forecast earnings position of MR, treating major repairs as investment items (which may only be partly true) and assuming depreciation at 4% of depreciable gross fixed assets (based on historical asset values and including the new investments). The presentation is in Tables 5.4 to 5.7. The exercise shows that MR would, during the period 1981-87: (a) maintain a good earnings position with working and operating ratios of about 36 and 57, respectively, over 1981-83, and about 33 and 54 in 1987; (b) achieve an estimated rate of return of 9.2% in 1982-83, increasing to 11.3% in 1984 and decreasing slightly to 10.3% in 1987; (c) generate sufficient cash to finance its investments and debt service, while building up a substantial cash balance (Y 2.5 billion); and 1/ The calculations do not include: (a) the very minor (0.7%) increase in MR's 1981-87 investment costs due to the application of the Internal Settlement Rate, (para. 3.12); and (b) the annual service of the proposed Bank loan which at 11% interest over 20 years represents about Y 100 million.  - 22 - (d) pay to the State Y 41.4 billion in the form of sales tax, income tax and shares in MR's profits. Although notional, the exercise is based on MR's actual and forecast parameters; it clearly illustrates the strong financial position of MR and its creditworthiness as beneficiary of Bank funds. 5.12 The Ministry of Railways' financial situation is thus expected to remain satisfactory, with little risk of deterioration in the medium term. Agreement was reached at negotiations that MR would consult with the Bank: (a) semi-annually on project financing and disbursments; and (b) annually on the finances and financial performance of MR, its administrations and sub- administrations concerned with the project. The consultations would be based on the updated data concerning the railways' operations and finances as pub- lished in various forms on a periodical basis, mainly in the China Statistical Yearbook. 5.13 Audit. At negotiations an assurance was obtained that audited statements covering: (a) Profits and Cost and FuLnd Balance Statements covering the subadministrations concerned with the project and the Zhuzhou factory; and (b) an extract from the Improvement and Construction Fund Statement identi- fying project financing and expenditure would be furnished to the Bank no later than 6 months after the close of the fiscal year. Initially, the Ministry of Finance will issue Audit Reports in accordance with methods and procedures acceptable to the Bank until the new State Audit Agency (SAA) is in a position to issue acceptable audit reports. 5.14 Project Completion Report. Agreement was reached during negotia- tions that MR will prepare a Project Completion Report covering both the infrastructure and factory components of the project. This report should be submitted to the Bank no later than six months after the loan closing date. B. Project Subadministrations 5.15 As mentioned in para. 2.12, MR does not have recent traffic costing information by line and commodities. Therefore, an analysis of the antici- pated financial impact of the project on the two project lines is not possible at this time. However, an analysis of the 1980-81 income statements of the Datong and Taiyuan subadminstrations, which include the Datong-Taiyuan line and of the Jinan and Xinxiang subadministrations, which include the Xinxiang- Yanzhou line (Tables 5.8, 5.9 and 5.10), favor an expectation that the economically justified project will also have a beneficial effect on the four subadministrations, and thus on MR's financial performance. 5.16 The tables show that, in 1981, the Datong and Taiyuan subadmini- strations achieved respective working and operating ratios of 39 and 67%, and 31 and 65%. The Jinan and Xinxiang subadministrations achieved an even better performance with respective working and operating ratios of 30 and 63%, and 28 and 60%. These ratios disclose substantial profits, but should be interpreted with caution as the revenue figures used represent budgetary allocations by MR, based on a general formula. These profits are likely to increase as a result of project implementation since although gross operating revenue per  - 23 - traffic unit is not expected to change substantially, operating unit costs are expected to decline as the fixed costs are spread over a traffic three times higher in 1986 (when the project is fully operational) than in 1981. 5.17 These projections are, however, somewhat tentative given the limited cost data available. In fact, use of a cost per "traffic unit" suffers from the disadvantages of ignoring the traffic characteristics of the passenger and freight traffic services, and the nature of fixed and variable costs. Improvements in costing and the case study under the proposed costing study would enable MR to have a better measure of the likely future results (paras. 3.10, 5.19 and Annex 3). C. Improvement of Financial Procedures 5.18 There is a need for updating and modernizing MR's financial procedures to assist in its efforts to further improve the efficiency of the railway system. This could best be done as part of a long-term, comprehensive review of MR's financial procedures involving, inter alia, (a) long-term financial objectives; (b) long-term financial planning; (c) budgeting; (d) accounting; (e) cost accounting; (f) management information; and (g) data processing. Implementation of such a financial procedures improvement program would be spread over several years and would be supported through a number of projects. During negotiations, it was agreed that MR's financial procedures would be discussed annually in parallel with the discussions on the railways' financial performance and situation. 5.19 The traffic costing study to be undertaken under the proposed project is intended to be the first stage of this program. Details of the arrangements for the conduct of the study as well as detailed terms of reference (Annex 3) were settled at negotiations. The responsibility for the traffic costing study will rest with MR. The Bank will assist MR in financing study tours, staff training, technical assistance, and equipment. D. The Zhuzhou Locomotive Factory 5.20 Implementation of the Zhuzhou locomotive factory component of the proposed project is expected to increase the factory's production capacity, improve productivity and consequently reduce unit production costs. This reduction will further improve the already satisfactory financial performance of the factory, as can be seen from Tables 5.11 (a)-(d), 5.12 and 5.13 which show the factory's detailed and consolidated income statements, flows of funds and summarized funds balance statement in actuals for 1981-82 and as forecast over 1983-86. These tables are summarized hereafter.  - 24 - Income Statement 1981 1982 1983 1984 1985 1986 1987 (Y thousands) Net Operating Revenue from: Locomotive sales 434 9,737 17,010 22,802 28,748 41,156 40,886 Locomotive overhauls/a 217 1,516 1,570 763 - - - Work for third parties/a 799 2,618 1,928 477 - - - Total 1,450 13,871 20,508 24,042 28,748 41,156 40,886 Nonoperating expenses - 3,594 6,161 8,728 10,268 12,321 12,321 Interest charges - 626 2,554 2,614 2,747 4,572 4,782 Profit before tax 1,450 9,651 11,793 12,700 15,733 24,263 23,783 Income tax - - 6,486 6,985 8,653 13,345 13,081 Net Profit 1,450 9,651 5,307 5,715 7,080 10,918 10,702 /a Will be discontinued by the end of 1984. Funds Balance Statement 1982 1983 1984 1985 1986 1987 (Y thousands) Assets Net fixed assets 54,032 61,284 83,912 120,878 148,717 150,472 Working capital 30,847 31,740 32,550 43,400 52,080 55,000 Other assets 8,390 9,708 11,374 12,691 12,940 13,440 Total 93,269 102,732 127,836 167,969 213,737 218,912 Liabilities Equity equivalent 93,269 102,732 127,836 167,969 213,737 218,912 5.21 The rate of return on average net fixed assets in use is expected to grow from about 26% in 1982 to 31% in 1986 when all project investments are in operation and production methods improved. These high profits will be reflected in a 69% increase in working capital after payment of income tax and  - 25 - the State's share in the factory's profits over 1982-86. During this same period, net fixed assets and the net worth of the factory will more than double. Implementation of the project will consequently be highly beneficial. 5.22 As for the railways, this first project should provide the starting point for a constructive dialogue between the factory's management at both the MR and local levels and the Bank, on ways and means to further improve the factory's financial planning, accounting, cost accounting, and management information system. These improvements would help management to closely plan and monitor productivity, detect inadequacies and take corrective action leading to increased profitability. Exchanges of views on the improvement of the factory's financial and cost analysis procedures should coincide with periodical discussions on its financial results referred to in para. 5.12 and on locomotive production costs. Agreement on this was reached at negotia- tions. VI. AGREEMENTS REACHED AND RECOMMENDATIONS 6.01 During loan negotiations, agreements or assurances were obtained on the following: (a) details, timing and terms of reference of a comprehensive railway traffic costing study (paras. 3.10, 5.19, and Annex 3); (b) submission of annual audit reports covering (i) MR subadministra- tions and administrations concerned with the project; (ii) the Zhuzhou locomotive factory; and (iii) project expenditures (para. 5.13); and (c) consultation with the Bank on project expenditures and on the finances, financial performance and financial procedures of MR and its subadministrations concerned with the project, and the Zhuzhou factory (paras. 5.12, 5.18 and 5.22). 6.02 Subject to the above agreements, the proposed project is a suitable basis for a Bank loan of US$220 million to the People's Republic of China. This amount includes the front-end fee of 0.25% totalling about US$0.5 million, which will be capitalized. The loan would be for a term of 20 years including a 5-year grace period, at the standard variable rate.  ANNEX 1 -26 - Page 1 CHINA RAILWAY PROJECT Project Description 1. The project comprises the following parts: (a) Capacity increase infrastructure works on the Xinxiang-Heze-Yanzhou line; (b) Capacity increase infrastructure works on the Datong-Taiyuan line; (c) Modernization of the locomotive factory in Zhuzhou; and (d) Technical assistance and training for the factory staff (see Annex 2). A. Xinxiang-Heze-Yanzhou Line 2. Present Situation. Today, there is no direct rail connection betwen Xinxiang and Heze. From Heze to Yanzhou the existing line (which was built using mostly second-hand rails and ties on a thin ballast bed) has an operational capacity of only about 4 million net tons per year. Proposed Improvements 3. In order to fill the gap, five subprojects will be implemented. They are: (a) building rail connections to the existing network in the Xinxiang area; (b) building of a new line between Xinxiang and Heze; (c) on this section, building a 10 km bridge over the Yellow River; (d) upgrading the existing line between Heze and Yanzhou, and (e) building rail connections to the existing network in the Yanzhou area.  ANNEX 1 -27 - Page 2 4. Xinxiang Connections. Xinxiang is a busy rail center, at the junction of the main Beijing-G'uangzhou line (double track) and the Yueshan line (double tracking under construction). When the eastern connection to Heze and the Yellow Sea is built, total traffic passing and marshalled in Xinxiang will exceed the present limited capacity of the station and yard. The cost of expanding the facilities in their present location would be prohibitive. Therefore, an additional station and yard will be built 4.6 km south of Xinxiang and a new 8.7 km track will link the new installations to the existing Yueshan line. The new line to Heze will start from Xinxiang-south. To cope with increasing traffic, the locomotive depot will be expanded. 5. Xinxiang-Heze New Line. This will be a 165 km long single track, with the following characteristics: - maximum gradient: 0.4% - minimum curve radius: 800 m - effective loop length: 850 m, expandable to 1,050 m - relay, semi-automatic signalling - 50 kg/m rails - 1,760 concrete ties per km. - steam traction, 3,500 ton trains - design capacity: 22 million tons per year The terrain between Xinxiang and Heze is flat. Near the Yellow River, some earthworks are needed but the track will only be one to two meters above the rest of the land. Generally speaking, this is a very simple piece of civil works. Yellow River Bridge (Map IBRD 1709R) 6. The limits of this major bridge/trestle structure are in the area of Dongzhaodi at the west abutment and Xibaocheng at the east abutment, -rhere the railroad will pass just south of Dongming. While the overall length of the bridge is in excess of 10 km, only about 1.6 km of bridge length is over the permanent river bed. On the western side, the remainder is (a) over a five-km land area which is normally cultivated, but occasionally flooded, and (b) over the normal flood plain of about three km between the high hazard flood dikes and the main river channel. Also, a small area of flood plain, about 0.6 km, will be bridged just to the east of the main river channel. 7. The bridge structure itself is of a classic design in its main elements, and of a rather modern design in the selection of some of the structural materials and section shapes in the approach superstructure.  ANNEX 1 - 28 - Page 3 Between thewest abutment and station W0010, prestressed concrete "T" type deck girder spans will be built over an agricultural area. Each of these simply supported concrete spans will be 32.7 m long. Between station W0110 and the main channel, over agricultural land and the hazardous flood plain, 100 spans of structural steel deck plate girders will be utilized. Each of the simply supported spans will be 40.7 m long. Over the Yellow River main channel, the design is a traditional structural steel through truss of the modified double Warren type. Nine of the trlss spans over the western side of the main channel are simple spans of 90 m each, followed by two series of continuous through steel trusses of the same modified double Warren design. The first is a four-span unit and the second a three-span unit, both with individual 108 m long spans. Between the maiLn channel and the eastern dike and up to the eastern abutment, 19 prestressed concrete deck girder spans will be used, each 32 m long. 8. The "T" section deck prestressed. concrete approach spans are rather modern in design and considered to be quite effective. These make an economic superstructure while providing sufficient strength and safety. They have been used safely for about 20 years around the world and are considered an excellent selection. Further, they afford the possibility of utilizing a ballasted deck at least for about 40% of the structure length. On a railway bridge, a ballasted deck provides for easier track maintenance without the problems associated with individual bridge timbers. The steel spans (both truss and girder), while traditional, are an excellent and safe selection; they have been used around the world for over a century. 9. The substructure consists of a variety of reinforced concrete and steel shell concrete pier stems essentially of the hammerhead or "T" pier type, but using a series of stem shapes depending on location in and out of the water, and dimensional changes to reflect variable pier height and relative economics of construction. Further, the founding base is formed as a caisson for the river piers, while drilled piles are selected to found the greater number of approach span pier foundations. 10. Piers at the water's edge are reinforced concrete open caissons. Piers in the water are open caissons on steel shells, concrete filled in the lower portions. A variety of configurations for the cells in the open caissons were selected for maximum utilization of materials stress, and therefore maximum economy. Single circular section hammerhead columns form a stem which is constructed atop the caisson base and is further topped by a pier cap long enough to pick up the bearings of the trusses. Piers for the approach spans are essentially of hammerhead configuration, but vary to full stem width as necessary to reflect the structural requirements that correspond to variable height. They consist of pile foundations topped by a footing of reinforced concrete upon which is placed a reinforced concrete stem of variable sectional configuration. The stem is further topped by a reinforced concrete pier cap which is long enough to pick up the steel plate girders or prestressed concrete "T" sections. The pier types are conven- tional, having been used hundreds of times around the world. They are considered both economic and safe.  ANNEX 1 - 29 - Page 4 11. MR considered several possible alignments (see map IBRD 17097R). The two northernmost, although slightly less expensive to build, were not retained because of flooding over a 10 year cycle. The flood gate between Zhanglindun and Qucun is opened during the 10 year major floods, which would partly destroy six to nine km of track, west of the river. The third alignment studied did not present this danger but crosses the permanent river bed where it is relatively wide, thus increasing the cost of the major steel spans of the bridge. The fourth alignment studied, shown in red on the map, was selected. It passes south of Dongming and results in the longest overall structure. However, the major steel spans are shorter, as is the total track length. The location of the track outside the limits of the dikes is on a terrain which is very unlikely to be washed away, even under extreme flooding. 12. When the bridge location and design were examined during appraisal, the alternative of building a double track bridge was discussed. The Major Bridge Design Institute of MR had costed and rejected this alter- native as not economically justified. As a consequence of further discussions with the Bank team, another solution was eventually adopted: building a crossing loop on the western access to the main bridge. This will reduce the critical section length from about 14 to less than 8 km, increasing line capacity from 17 to 22 mpty, at a relatively modest cost. At the location of the crossing loop, the bridge width will be doubled for the two track alignment. The deck structure will consist of multiple parallel prestressed concrete "T" sections. This arrangement will be carried over 38 spans, or a distance of 1.25 km, at the end of which the structure will return to single track width. 13. Upgrading the Heze-Yanzhou Line. The present characteristics of this line are as follows: - single line - maximum gradient: 0.4% - minimum curve radius: 800 m - effective loop length: 650 m expandable to 850 m. - relay, semi-automatic signalling - 40 and 43 kg/m second hand rails - used wooden ties - steam traction, 2,700 ton trains; 3,300 ton trains between Jining and Yanzhou. - 13 intermediate stations  ANNEX 1 -30- Page 5 - between Heze and Jining: 59 bridgtes including one to be rebuilt; - between Jining and Yanzhou: 27 bridges, 26 of which to be rebuilt. This section will be upgraded to bring it to the same standard as the new Xinxiang-Heze section (para. 5. preceding), which is also the standard adopted for the neighboring section from Yanzhou to Shijiusuo, presently under construction. The same train will therefore run between Xinxiang and Shijiusuo, without intermediate marshalling. 14. Yanzhou Connections. The situation in Yanzhou (on the main Beijing-Shanghai double-track line) is similar to that in Xinxiang. With the additional coal traffic coming from the west and continuing east to Shijiusuo, once the Xinxiang-Heze line is built, the present station and yard will no longer be adequate. A new facility will be built south of Yanzhou, where the two new western and eastern sections will be connnected. B. Datong-Taiyuan Line 15. Geographical Setting. This line can be divided in six sections of different characteristics: (a) Datong-Pingwang (12 km): double track, part of the Datong area territory. (b) Pingwang-Shuo Xian (118 km): single track on a relatively flat terrain, with embankments less than, 2 m high. (c) Shuo Xian-Yuanping (97 km): single track on a rugged terrain, including the 3.3 km long Duanjialing tunnel through the Hengshan mountain near the Fenghuancun station. (d) Yuanping-Huanghouyuan (108 km): single track except for 7 km between Taihe and Beibai where it is double. Generally flat terrain except in the areas of the Hutuo and Fin Rivers. (e) Huanghouyuan-Taiyuan-North (10 km): single track, flat terrain in suburban areas. (f) Taiyuan-North-Taiyuan (10 km): double track in the Taiyuan area territory. 16. Present line Conditions. Other characteristics are as follows; - maximum gradients: Datong-Shuo Xian: 0.6% Shuo Xian-Yuanping: 2.2% Yuanping-Taiyuan: 1.2%  ANNEX 1 -31 - Page 6 Curves: 228 (62.7 km total) including three (2.7 km in total) of 250 m radius effective crossing loop lengths: 650 m relay, semi-automatic signalling, color light signals large and medium bridges: 34 (2,640 m in total) small bridges and culverts: 541 tunnels: 13 (5,861 m in total) 43 kg/m rails on 1,600-1,760 wooden ties/km open wire communications 17. Proposed Infrastructure Improvements - double the track between Pingwang and Shuo Xian (118 km) and between Fenghuangeun and Changzhen (9 km) - extend the length of the crossing loops 'from 650 to 850 m (34 places) - add four 850 m crossing loops on the single track section of the line - strengthen 21 large and medium bridges - strengthen 397 small bridges and culverts - enlarge two tunnels 18. Electrification Works. - electrify the whole line, 355 route-km or about 540 track-km in 25 KV-50 Hz, the standard already used elsewere in China - lay an underground cable for communications and signalling - upgrade the signalling system to CTC with cab signals 19. Operations after the Project. Compared with the present 1,400 ton trainsnorthbound and 1,500 ton trains southbound, future trains will all be 3,000 tons between Yuanping and Taibei. Single locomotives will be used between Datong and Shuo Xian (0.6% gradients), double heading between Yuanping and Taiyuan (1.2% gradients) and triple heading between Shuo Xian and Yuanping (2.2% gradients).  ANNEX 1 - 32 - Page 7 C. Modernization of the Zhuzhou Factory 20. In order to more than double electric locomotive production by 1986/87, some workshops will be expanded. The main thrust, however, is to equip existing workshops with more modern machine-tools to increase production, reduce rejects and provide adequate quality control. A number of high productivity numerically-controlled machiine tools will be purchased, some with microprocessor control. An extensive training program is planned (Annex 2) to enable the factory staff to use and maintain this new production equipment.  - 33 - ANNEX 2 Page 1 CHINA RAILWAY PROJECT Technical Assistance and Training (Zhuzhou Electric Locomotive Factory) 1. Four packages of combined technical assistance and training are included in this project. The first three address specific training needs identified during project preparation and appraisal. The fourth package was identified in July 1983, during discussions with a panel of international experts in electric locomotive design and manufacture, which visited China in relation with the identification/preparation of a second railway project. The purpose of these training packages is described below. Training sched- ules and detailed cost estimates are presented at the end of this Annex. 2. General Training. There is a need for foremen and skilled workers to be exposed to technology, methods and procedures used abroad. This is the case for several technical areas of the Zhuzhou factory and is the result of long years of isolation during which only sporadic contacts were possible between Chinese and foreign technicians. Training will be in the following areas: (a) Electric locomotive technology: - welding - heat treatment - die design and technology - electronics (b) Electric locomotive design and testing: - thyristor converters - adhesion utilization - testing techniques - locomotive dynamics - failure diagnosis - noise control  34 - ANNEX 2 Page 2 (c) Computer applications: - computer-aided design - micro-processor applications - electronic data processing - NC machine tool programming (d) Traction motors and electrical equipment: - traction motor technology - F/H class insulation - reliability testing - air and vacuum circuit breakers - main transformers (e) Semi-conductor devices (f) Scientific research management A total of 18 man-years has been set aside for this basic training. Individual programs will be arranged taking package #4 (para. 5 following) into consideration, so as to avoid duplication. 3. T.A./Training Related to Production Equipment. Part of the proceeds of the proposed loan will finance some production equipment tech- nologically more advanced than that presently in use in the Zhuzhou factory. Some numerically-controlled or micro-computer assisted machine tools are not yet produced in China. Operator training is essential if the benefits of this investment are to materialize. The following program was therefore decided: (a) MNC milling and boring machine: 2 operators, 12 mm (b) Digital display jig grinder: 1 operator, 6 mm (c) MNC C02 laser cutting machine: 2 operators, 12 mm (d) Axle box transfer line: 1 expatriate, 4 mm (e) Friction screw press: 2 operators, 12 mm (f) Transformer lamination machine: 2 operators, 12 mm (g) Vertical plate bending machine: 2 operators, 12 mm (h) Automatic cable cutting machine: 1 operator 6 mm  -35 - ANNEX 2 Page 3 (i) Cable cutting, stripping and crimping machine: 1 operator, 6 mm (j) Feedback test bench: 3 operators, 18 mm (k) Computer system: 4 operators, 24 mm In all, 20 operators will be trained abroad for about six months each, and one foreign expert will teach and train local operators for a)out four months. 4. T.A./Training Related to R&D Equipment. This package is basically designed in the same manner as the previous one, but deals with a different set of equipment to be used by a different group of operators. The program is as follows: (a) Traction motor/bogie vibration bench: 4 operators, 24 mm + 2 experts, 6 mm (b) CAD/CAM/CAE systems: 2 operators, 12 mm + i expert, 2 mm (c) Data processing: 1 operator, 6 mm (d) Combined environmental test chamber: 2 operators, 9 mm + 1 expert, 2 mm (e) Instruments and other equipment: 1 operator, 6 mm In all, 10 operators will be trained abroad for a total of 57 man-months, while four foreign experts will train R&D operators for a total of ten man-months. 5. Specialized Training. The panel of electric locomotive experts which visited Zhuzhou in July 1983 identified the need for training in several specific fields. Generally, this package addresses higher level staff, i.e. plant manager or assistant manager, specialized workshop managers, trainers, etc. most of whom have college education or equivalent experience. The training will be for: (a) Production organization and manage- ment 4 trainees, 24 mm + 2 experts, 6 mm (b) Welding technology 2 trainees, 24 mm + 3 experts, 9 mm (c) NC machine tools - programming: 4 trainees, 36 mm - maintenance: 2 trainees, 12 mm (d) Cabling technology: 2 trainees, 12 mm (e) Electronic technology: 1 expert, 3 mm (f) To be determined later: 1 trainee, 9 mm + 2 experts, 6 mm  -36 - ANNEX 2 Page 4 This package is thus composed of 15 trainees going abroad for a total of 117 man-months, while eight experts would visit Zhuzhou for a total of 24 man- months. 6. Programming and Cost Estimates. The timing of the various training phases has been arranged on a preliminary basis. For the equipment-related training, the trainees would visit the supp]ier's plant or other factories where similar equipment is used, and only later would the foreign experts come to China, to complete the training on site. The total program amounts to 548 man-months of Chinese trainees abroad, plus 38 man-months of foreign experts in China. The total cost is estimated at about US$1.3 million, on the following basis: