China - Third Railway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6002 -CHA STAFF APPRAISAL REPORT CHINA THIRD RAILWAY PROJECT March 7, 1986 Transportation Division 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 autborization.  CURRENCY EQUIVALENTS Currency : Renminbi (RMB) 1 Yuan (X) = 100 Fen = US$0.31 X 3.20 = US$1.00 (as of January 1986) FISCAL YEAR (FY) January 1 to December 31 WEIGHTS AND MEASURES m = meter (- 3.281 feet) sq m = square meter (- 10.764 sqare feet) ou m = cubic meter (t 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) kN = kilo-Newton (= 9.81 ton-force) kwh = kilowatt hour (= 860.42 koals) CTK = Converted tklc or traffic unit (1 pkm = 1 tkm) mt = million tons mtpy = million tons per year PRINCIPAL ABBREVIATIONS AND ACRONYMS USED CIF = Cost, Insurance and Freight CRSCC = China Railway Signal & Communications Company CTC = Centralized Traffic Control EAAMS = Economic Analysis of Aluminum Milling in Shanghai ERR = Economic Rate of Return FAS = Free Alongside Ship FOB = Free on Board FYP = Five-Year Plan GRS = General Railway Signal ICB = International Competitive Bidding MR = Ministry of Railways SAA = State Audit Agency SOE = Statement of Expenditure SPC = State Planning Commission TSP = Triple Superphosphate XRSF = Xi'an Railway Signalling Factory  FOR OFFII USE ONLY CHINA - THIRD RAILWAY PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE TRANSPORT SECTOR ........................................ t II. THE RAILWAY SUBSECTOR ................3 III. THE PROJECT A. Project Origin and Objectives.......... 8 B. Project Description Chongqing-Guiyang Line Upgrading and Electrification.. 9 Yingtan-Xiamen Line Upgrading and Electrification..... 10 Xi'an Railway Signalling Factory.........c 10 Maintenance of Permanent Wyy 11 Traffic Costing Sdu dy 12 C. Cost Estimates and Financing.... 13 D. Project Implementation.............. ................ 15 E. Procurement*. 15 F. Disbursements....... 16 G. Environment ........... 17 IV. ECONOMIC EVALUATION A. Main Benen e rl...... 17 B. Chongqing-Guiyang Line Upgrading and Electrification.... 17 C. Yingtan-Xiamen Line Upgrading and Electrification....... 18 D. Xi'an Railway Signalling Factory.... 19 E. Maintenance of Permanent Wayay....................e.. 20 F. Overall Evaluation and Risks ........................... 20 V. FINANCIAL ANALYSIS A. Past Financial Performance: MR.......................... 21 B. Future Financial Performance: MR 22 C. Line Upgrading and Electrification..fica.......tion.... 23 D. China Railway Signal & Communications Companypany....... 24 VI. AGREEMENTS REACHED AND RECO OMENDATION........... 25 This report is based on the findings of an appraisal mission to China in June/July 1985. Mission members included E. Karman (mission leader), P. Leiy, K. Thomas, R. Masthagen, L. Uy, and R. Huenemann (oonsultant). This document has a rstricted distribution and may be used by recipients only in the perfofmance of their ofeial duties Its contents may not otherwise be disckoed without World Bank authoriution. j  - ii ANNEXES 1. Organization Chart of the Ministry of Pailways ......,......*# 26 2. Technical Assistance & Training Program....................... 27 3. Economic Evaluation: Chongqing-Guiyang Line.*.*... o.oo....e. . 28 4. Eoonomic Evaluation: Yingtan-Xiamen Lnn e 34 5. Economic Evaluation: Xi'an Railway Signalling Fatoryo......... 40 6. Financial Analysis: Assumptions and Methodology ..........42 7. Documents Available in the Project File ..............48 SUPPORTTNG TABLES Table 1.1: Investment in the Transport Sector Table 2.1: Selected Operational Statistics Table 2.2: Freight Traffic Performance Table 2.3: Originating Freight Traffic Table 2.4: Freight Traffic Average Distance Table 2.5: Passenger Traffic Composttion and Cost Estimates: Table 3.1: Chongqing-Guiyang Line Table 3.2: Yingtan-Xiamen Line Table 3.3: Xi'an Railway Signalling Factory Table 3.4: Aggregate Cost Estimates List of Goods and Services: Table 3.5: Chongqing-Guiyang Line Table 3.6: Yingtan-Xiamen Line Table 3.7: Xi'an Railway Signalling Factory Table 3.8: Maintenance of Permanent Way Table 3.9: Total Project Implementation Schedules: Table 3.10: Chongqing-Guiyang Line Table 3.11: Yingtan-Xiamen Line Table 3.12: Xitan Railway Signalling Factory Table 3.13: Disbursement Schedule Rate of Return Calculations: Table 4.1: Chongqing-Guiyang Line Table 4.2: Yingtan-Xiamen Line Table 4.3: Xi'an Railway Signalling Factory Table 5.1: MR: Income Statements 1981-1984 Table 5.2: Chongqing-Guiyang Line, Income Statement Table 5.3: Chongqing-Guiyang Line, Financial Incremental Analysis Table 5.4: Yingtan-Xiamen Line, Income Statement Table 5.5: Yingtan-Xiamen Line, Financial Incremental Analysis MAPS IBRD 18976 - China Railway Network - Electrification IBRD 191T5 - Chongqing-Guiyang Line IBRD 19174 - Yirngtan-Xiamen Line  - iii - CHINA THIRD RAILWAY PROJECT Loan/Credit and Project Summary Borrower: People's Republic of China. Beneficiary: Miniptry of Railways (MR). Amount: Bank loan: US$160.0 million equivalent. IDA credit: SDR 63.0 million (US$70.0 million equivalent). Terms: Bank Loan: 20 years including 5 years of grace at standard variable interest rate. IDA Credit: standard. ProJect Description: This will be the Bank Group's third involvement in the railway subsector. The proposed project would support the Government's objectives of increasing railway capacity and improving its operations and efficiency. It would also further develop MR's technical and managerial capabilities and oontribute to the overall economic growth of the country. The project will con- sist of five components: (a) upgrading and electrification of the 456 km single track line between Chongqing in Sichuan pro- vince and Guiyang in Guizhou province; (b) upgrading and elec- trification of the 704 km single track line between Yingtan in Jiangxi province and Xiamen in Fujian province; (e) increasing the capacity of the Xi'an Railway Signalling Factory, which is a part of the China Railway Signal and Communication Company, and improving the quality of its production; (d) introducing mechanized track maintenance on a pilot project basis by pro- viding equipment, technical assistance and training; and (e) supporting the continuation of the Traffic Costing study, ini- tiated under the First Railway Project (Loan 2394-CHA). The electrification works involve proven technology that is already in wide use in China and elsewhere in the world; technological risks are therefore small. Similerly, the modernization of the Xi'an factory carries little risk, since it will include the participation of an established foreign manufacturer. The Ministry of Railways has successfully completed similar pro- jects for a number of years; risks from inadequate project implementation and operation are therefore negligible. There- fore, the risk is low that the benefits of the project would fall substantially short of projections.  - iv - Project Costs: Local Foreign Total ---------- (US$ million) ----------- Chongqing-Guiyang Line 10-4.7 95-.7 200.4 Yingtan-Xiamen Line 113.8 119.2 233.0 Xi'an Railway Signalling factory 0.9 12.0 12.9 Permanent Way Maintenance - 17.2 17.2 Traffic Costing Study - 0.3 0.3 Base Cost 219.4 244.4 463.8 Physical Contingencies 22.0 12.2 34.2 Price Contingencies 39.1 40.4 79.5 Total Project Cost!' 280.5 297.0 57T-5 Financing Plan: IBRD - 160.0 160.0 IDA - 70.0 70.0 Government 280.5 67.0 347.5 Total Financing 280.5 297.0 577.5 Estimated Disbursements: Bank Group FY 1987 1988 1989 1990 1991 192 199 Annual 2.3 16.1 57.5 57.5 50.6 41.4 4.6 Cumulative 2.3 18.4 75.9 133.4 184.0 225.4 230.0 Rate of Return: 30% a/ Import tax and duties are not included in project costs and the Government will not charge such taxes and duties on imports for the project.  I. THE TRANSPORT SECTOR 1.01 The structure of China's economy, which for three decades emphasized heavy industry at the expense of light industry and the service sector, is still inherently "transport intensive," despite recent reforms of the sectoral priorities. Chinese policy statements repeatedly identify transportation and energy shortages as the two most critical bottlenecks in the eoonomy. Coal is at the heart of both problems, beoause coal is simultaneously the most impor- tant source of energy and the largest user of transport capacity. This dual problem with coal is exacerbated by China's high level of energy consumption per unit of GDP (about two and a half times that of other LDCs). However, the need to ship large volumes of coal is not the sole cause of the transportation bottleneck. 1.02 The rapid growth of China's economy in recent years has naturally entailed a growing demand for the shipment of commodities of all sorts, and for passenger travel as well. Efforts to reduce waste within the transport system (for example by eliminating cross hauling of the same eommodity, increasing the processing of raw materials before shipment, and increasing the intensity of road and waterway utilization) are certainly desirable. More fundamentally, however, the Government's str-ategy for solving transportation shortages will have to rely on an expansion of the system's capacity, primarily by increasing the productivity of existing facilities wherever possible, and secondarily by building new faoilities where needed. 1.03 Freight Traffic. Domestic freight transported in 1984 reached 1,131 billion ton-km (tkm), more than a 15-fold increase since 1952, or an average annual growth rate of almost 9%, systematically higher than the growth of do- mestic product. By the year 2000, domestic freight traffic could be in the range of 3,000 billion tkm, or nearly three times the 1984 level. The modal split has moved toward a more balanced use of modes, but the railways still handle 64% of the traffi versus 82% in 1952; this predominance is expected to continue for quite some time. 1.04 Passenger traffic reached 362 billion passenger-km (pkm) in 1984, a 14.6-fold increase since 1952 and an average annu&l growth rate of almost 9%. Since 1978, growth has averaged 13% p.a. This illustrates the potential demand for travel as income grows. It is likely that this growth would have been even more rapid if it had not been oonstrained by the limited capacity, particularly of the railways, to offer more passenger services. The modal split has shifted more rapidly than for freight, and the railways now handle 56% of the traffic versus over 80% in 1952. Despite the rapid growth of passenger traffic in recent years, the mobility of people in China is still much lower than in coun- tries of comparable income levels. By the turn of the century, passenger traf- fic may well reach about 1,500 billion pkm per year or about four times current levels.  -2- 1.05 Investments. Over the period 1953-84, some X 136 billion, or 14% of all new investments under central government control, went to transport (Table 1.1). In comparison with other oountries, annual levels of transport investment appear somewhat on the low side, a factor contributing to make transport a bottleneck to economic development. For example, by 1983, 30 million tons of coal had accumulated in Shanxi for lack of transport, and some of this stock- piled coal was destroyed by spontaneous combustion. Despite a recent policy of curtailing production to match available transport, the volume of coal stock- piled in Shanxi increased during 1984. Rural areas are short of transport, both for agriculture and for local enterprises. In the ports, lack of proper han- dling facilities is hampering trade of bulk commodities such as fertilizers, cement and grain. In the forthcoming decades, a much larger investL_-t effort will be needed in transport if these bottlenecks are to be overcome. 1.06 Port traffic has grown rapidly since 1976, reflecting the economic opening of China to foreign trade. Annual growth has 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 pro- ductivity. 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 Group's first transport operation in China was the Three Ports Project (Loan 2207-CHA, 1982), which includes container terminals at Huangpu, Shanghai, and Tianjin, and a coal berth at Huangpu. A second port project, which will provide eleven additional berths at Tianjin, is now being considered for Bank financing. 1.07 The highway network comprised about 915,000 km in 1983, of which about 180,000 km were asphalt paved, about 510,000 km were gravel or sand paved, and the remainder were earth roads. Despite impressive expansion of the road network since 1949, when only some 80,000 km of roads suitable for motor -ehicles existed, the roads in China today are inadequate because: (a) pavement strength and quality are poor; (b) there are many thousand kilometers of ex- tremely rough macadam surfaced roads with traffic in excess of 300 average daily traffic (ADT); (c) congestion is severe near cities, due to mixed slow and fast moving traffic; and (d) there are gaps of about 4,000 km on major national roads linking large cities and provincial capitals. The road network and road transport in China today can therefore be characterized as under- developed. Road maintenance, however, is well organized and currently absorbs much of the attention and resources of the provincial and other local road authorities. 1.08 Except for western China, the highway network is still very much a system of feeder roacs to the railways. Nevertheless, motor traffic has grown at a very high overall annual average of 15% on the national highways since 1978. The Bank's First Highway Project (Loan 2539-CHA/Credit 1594-CHA, 1985) involves the construction or improvement of about 290 km of national roads and about 1,400 km of rural roads. 1.09 Transport Issues and Objectives in the 1980s. The transport system has been severely taxed by the recent economic development, and capacity con- straints are evident in all modes. At present, railway transport is a greater constraint on energy supplies than coal mine development. Recently initiated  -3- projects of line electrification and new line construction are addressing the problem although it will take several years to alleviate bottlenecks between major mining areas and coastal cities. Improved freight car technology and other operational improvements could also contribute to capacity increases. China will also need to expand substantially its port and waterway facilities for domestic and foreign trade. But the most serious transport need is for dra- matically expanded road transport, especially in rural areas where increased specialization has created an urgent demand for better farm-to-market transport services. It is widely recognized in China that road transport should and will play a larger role in the future. Yet there seems to be no strategic plan to bring this about. There is a need for more efficient trucks of both larger and smaller size, as well as for more and better roads to handle the traffic. Potential sources of financing for road development, such as road user charges, need to be investigated as they could generate sufficient funds for an acceler- ated construction and betterment p-ogram as well as contributing to an econom- ically appropriate division of traffic between modes. Considerable efficiency gains could be made in the entire transport system through better intermodal coordination, which has thus far been impeded by the vertical and self- contained organization of transport and other sectoral agencies. Through con- tainer transport from origin to destination is still the exception. Changes in policy, pricing and management of the system are needed to maximize the bene- fits of intermodal transport. To support all the development referred to above, staff development and training will be an important objective in the sector. II. THE RAILWAY SUBSECTOR Oroaization 2.01 The principal agency in the subsector is the Ministry of Railways (MR), with a staff of some 3.1 million, which administers a nationwide, inter- connected system of 52,000 route-km. Other railroads are administered by the Ministries of Coal Industry, Forestry, and Communications for uses associated with their own operat.Zons, and by provincial governments for limited services within their own jurisdictions. The Chinese system is the fifth largest and carries the second highest freight and passengc' traffic in the world. 2.02 Four Vice-Ministers and a Chief Engineer support the Minister of Railways in administering 19 bureaus concerned with speeific functional aspects of MR's work, and 13 regional administrations which are responsible for opera- tions. MR's organization chart is at Annex 1. The regional administrations are organized in the form of State-owned enterprises, which are self-accounting, have authority over their own retained earnings, and have contractual capacity and the right to hire and fire staff. Each administration is headed by a gener- al manager, and is typically divided into a number of subadministrations, each of which controls the basic units (stations, workshops, etc.) that are respon- sible for day-to-day operations within its territory. 2.03 MR also controls a number of factories, which together provide the greater part of MR's requirements of locomotives, passenger and freight cars, ties, fishplates, etc., and nine construction companies which carry out most of  -4- the civil works. Design, engineering and architectural services are also car- ried out "in house" by a number of specialist bureaus. Signalling and communi- cation facilities are the responsibility of the China Railway Signal and Com- munications Compar.y (CRSCC), a State-owned enterprise under the directio-. of MR. CRSCC will be a beneficiary of part of the proposed loan and credit, and is further described at para. 3.11. Education and Research 2.04 In coordination with the State Education Commission, MR operates 11 universities, 20 staff colleges for in-service training, and more than 2,000 schools with 100,000 teachers and staff. Eight of the universities provide technical courses, two provide medical courses, and one is a teacher training oollege. Itost of them now offer graduate programs. For high school graduates unable to enter university, MR operates more than 60 vocational schools which train locomotive drivers and other operations staff; MRt's other schools provide primary and secondary education for an enrollment now exceeding one million. Graduates of MR's schools proceed exclusively to employment in MR, but grad- uates of MR's universities may be employed elsewhere. 2.05 The Ministry also operates the ten research institutes which comprise the China Academy of Railway Sciences. Mostly, the institutes are concerned with applied research and acceptance tests on new products procured locally and abroad, but the institutes also provide instruction av Masters and Doctorate levels. Planning and Investment 2.06 On the basis of national production plans and origin/destination tables for key products and of its own observation of passenger movement pat- terns, MR develops five-year traffic forecasts by principal routes throughout its network. At the regional administration level, these forecasts are trans- lated into traffic density patterns and compared with existing line capacities. From these comparisons are derived the railway's requirements in motive power and rolling stock and in route capacity enhancement. Production sehedules and work programs are developed for MR's own factories and construction companies, and the total investment plan is submitted to the State Planning Commission (SPC) for approval; SPC may indicate the need for some adjustment, and further iterations of some on all of the process may be required, but finally a total plan is evolved which is consistent (and integral) with the national five-year plan. From this plan, various subsidiary plans are derived, including a man- power development plan and a schedule of material requirements (in particular, rails and other steel products) from external suppliers. At present, however, a financial plan does not form part of the package. 2.07 In the 1981-85 Sixth Five-Year Plan (FYP), after falling to 1 1.4 billion in 1981 during a period of budgetary stringency, railway invest- ments were increased to 1 2.6 billion in 1982, X 4.2 billion in 1983, and V 6.4 billion in 1984 (Table 1.1). The 1983 amount represented over half the total investment in transport of 1 7.2 billion, but was still far short of the level  -5- which would be needed to alleviate bottlenec a. The Seventh FYP (1986-1990), now in preparation, will focus on upgrading existing facilities; the antici- pated traffic growth (paras. 2.13 and 2.14) will be carried primarily by the existing system. Nevertheless, expenditore levels are expected to be at least equal to those of the Sixth FYP. Budgets. Accounts and Audit 2.08 The expense of MR's bureaus forms part of the central Government bud- get, and is not recovered from railway revenues. Operating costs of the region- al administrations are controlled by annual budgets compiled at subadministra- tion level. Accounting is likewise focused at the subadministration level, al- though some basic procedures such as cash collection and disbursement are decentralized tc the operating units. Consolidation of budgets and financial statements is routinely oarried out only up to the administration level; con- solidation at the overall system level (all administrations combined) is gen- erally confined to income statement items (para. 5.01). The accounting system is double entry, on the accrual basis, and accounting rules and procedures are uniform between administrations. China applies a dual system of depreciation comprising a basic provision of 3% and an additional "provision for major repairs" of 3.5% of historic value of fixed assets. The Government is conscious of the distorting effect of this handling of depreciation on enterprises' true earnings position. Therefore, it decided on April 26, 1985, to switch to a straight line depreciation system taking into coUasideration the anticipated lifetime of assets. The date for application of the new system to MR has not yet been decided. 2.09 In common with all ministries whose responsibility includes the su- pervision of enterprises, MR contains an Audit Bureau, whose principal func- tions are to monitor compliance with accounting rules and to evaluate the effi- ciency of operations. MR's Audit Buxreau was established as recently as 1985, and its procedures are being developed with a pilot administration. The Indus- trial Transport Bureau of the State Audit Agency (SAA) also carries out test audits of parts of MR's operations selected randomly. In particular, SAA will audit the accounts of subadministrations which are beneficiaries of Bank loans and IDA credits. At negotiations, it was agreed that the project accounts and the financial statements of (i) the Chongqing, Guiyang and Fuzhou railway sub- administrations; and (ii) the Xi'an Railway Signalling Factory will be audited by independent auditors acceptable to the Bank Group, and audit reports will be sent to the Bank Group for review not later than six months after the end of each fiscal year. Railway Facilities and Rolling Stock 2.10 China's railway network more than doubled in size between 1949 and 1984, from 21,800 to 51,700 route-km. The network now includes 9,700 route-km of double track and 3,100 route-km of electrified track. Further double track- ing and electrification works are in progress as present line capacity is in- sufficient to meet traffic demands. The rail network is served by a fleet of 11,100 locomotives, 291,000 freight cars and 19,600 passenger coaches. At pre-  - 6 - sent, 68% of tractive power is still steam, 28% is diesel and 4% is electric. Rolling stock includes large numbers of older wagons and coaches, many in poor condition and with high operational and maintenance costs. Traffic growth has outstripped production of new units and the fleet is far from adequate (for detailed data on the railway system, see Table 2.1). Operations 2.11 Despite the limitations of network and rolling stock, rail operations utilize track and equipment intensively and efficiently (Table 2.1). Freight traffic density averages 15.0 million net tkm per route-km which is the highest freight density in the world after the Soviet Union, and 50% higher than freight density in the United States. China's passenger traffic density of 4.2 million passenger-km per route-km is also the second highest in the world, thi& time after India. Passenger traffic density in the Soviet Union is roughly the same as in China. Despite this heavy traffic density, track and other fixed installations are carefully maintained, although the labor-intensive methods now used are rapidly becoming inadequate for the maintenanee of trunk lines and will soon become inadequate elsewhere under the traffic planned for the future. 2.12 Scope for utilizing track and equipment even more efficiently is mostly limited to lengthening trains (freight4car turnaround time is already extremely quick and it would be difficult to improve upon the present average of 3.4 days). The average train now has 35 cars as 75% of passing loops are only 650 meters long. Most of the remaining 25% of loops are 850 meters long, which allows 50-car trains to run in some regions. A program is under way to extend passing loops in more regions. Traffic 2.13 Freight traffic on the railways has grown from about 100 million tons in 1950 to 1.2 billion tons in 1984. Because of an increase in the average length of haul, traffic volume in tkm has grown even faster, from 39.4 billion in 1950 to 533.2 billion in 1978, averaging 10% p.a. Since 1978, growth has slowed to around 4.5% p.a., but was again 9% in 1984. Three quarters of all freight traffie involves ten important basic commodities (including coal, iron and steel products, grain and construction materials), and the shortage of freight capacity has emerged as one of the key constraints on economic growth (Tables 2.2, 2.3 and 2.4). The Seventh FYP envisions an annual growth rate of 6%, leading to a freight traffic of 1.7 billion tons by 1990. 2.14 In 1950, the railways carried about 150 million passengers; in 1984, they carried 1,123 million (Table 2.5). The growth of passenger traffic has been particularly rapid since 1978 -- that is, since the introduction of major economic reforms. In just the six years from 1978 to 1984, passenger traffic increased from 109.1 to 204.3 billion pkm, an average of 11% p.a. This rapid growth shows the high priority afforded to personal travel out of the extra income generated by the economic reforms. Yet the mobility of people in China is still low. Average per capita travel in India is about 800 pkm p.a., much more than China's average of about 300 pkm p.a. This low mobility is partly due  - 7 - to a shortage of transport infrastructure: there is an acute shortage of pas- senger coaches, and on crowded lines passenger trains compete for space with freight trains. The Seventh FYP envisions an annual growth rate of 6%, leading to a ridership of 1.6 billion passengers by 1990. Tariffs 2.15 In common with other sectors, the railways have changed their tariffs very little since the early 1950s. Freight rates were inereased in late '983 for the first time since 1967, at which time they had been reduced, but passen- ger rates, however, remained at the 1967 level. The 1983 freight rate reform doubled the minimum chargeable distance to 100 km, and increased rates for 75% of the commodities (including coal, cement, oil and fertilizers) by 23% on average. As of end May 1985, the average freight haul of about 572 km yielded an average gross revenue of Fen 1.68 per tkm, 57% above avevage operating costs. The average passenger journey was 169 km, and this yielded a gross reve- nue of Fen 1.78 per pkm, 65% above operating costs. To further discourage short haul traffic, the Government introduced the following rate increases effective June 1, 1985: (a) 36.8% for less than 100 km passenger trips; (b) 50% for monthly suburban season tickets; and (c) I 4.00 per ton for freight transport up to 200 km. It is too early to assess the effect of these rate changes on MR's finaneial results. Government Objectives and the Role of the Bank Group 2.16 The Sixth Five-Year Plan (1981-1985) allocated Y 27.5 billion, 16.2% of total investments, to the transport sector. Of this, I 17.3 billion was for investment in railways. These resources have facilitated considerable develop- ment of the railway network, but not enough to keep pace with China's rapid economic growth. If China is to achieve its goa. of quadrupling the %ross value of industrial and agricultural outrut by the year 2000, the railway's expansion and modernization must be accelerated. The Bank Group's strategy for the sub- sector is to support this acceleration of railway expansion and the improvement of operational efficiency. It will, in addition, assist MR in modernizing its technical and management capabilities. The first part of the strategy is thus to be responsive to the immediate material needs of China's railway system as they arise; the second part is to help better equip the subsector with the expertise it needs to tuanage the future development of the railway system. 2.17 The first project (Loan 2394-CHA, April 1984, presently being imple- mented on sce1'dule) contained components to alleviate bottlenecks on two key routes, and to increase locomotive production; the second (Loan 2540-CHA, August 1985, Just entering implementation) focussed on further route capacity improvements and the expansion of passenger coach manufacture. The presen4 pro- ject will continue the provision of enhanced route capacity -- in this case aimed at improving the flow of mining and agricultural products -- and will provide both hardware and software to increase and modernize the manufacture of signalling and switching equipment. Updated technology in track maintenance will also be introduced.  -8- 2.18 On the software side, the first project initiated the design of a traffic costing system, and a study team from MR has now examined railway cost- ing systems in Europe and in the USA and has reported on its main oonolusioms and recommendations. The second stage (supported partly from the first loan and partly from the present one, para. 3.18) will complete system specification and implement it on a pilot basis. The second railway project provided for the startup of a major management information system study, which is just getting under way in selected areas of MR. In the context of ongoing project work, the Bank Group has also begun a dialogue with MR on aspects of total system plan- ning and control, and will shortly present a seminar (with the assistance of senior railway executives from U.K.) to demonstrate approaches to system man- agement better tailored to MR's needs in the new era of economic reforms (paras. 5.06 and 5.07). By such means, the Bank Group hopes, through the instrumentality of future projects, to be of assistance to China's railway sub- sector in its organizational development as well as in its system expansion. III. THE PROJECT A. ProJect Origin and Objectives 3.01 In January 1985, the Government requested Bank Group assistance in financing urgently needed investments in the railway subsector. The objectives of the proposed project would be to increase transport capacity on the Chong- qing-Guiyang and Yingtan-Xiamen lines, to modernize and increase the production capacity of the Xi'an Railway Signalling Factory, to improve the maintenance of permanent way on heavy-traffic lines, and to support the continuation of the Traffic Costing Study initiated under the First Railway Project. The proposed project was prepared by the Government and was appraised in June/July 1985. This project will make a direct contribution to the Government's overall plan for increasing railway capacity to support sustained economic development. B. Projeot Description 3.02 The proposed project would be the third step in the Bank Group's long-term lending strategy (para. 2.17). The project oonsists of five compo- nents designed to: (a) provide much-needed additional capacity on the 456 km Chongqing- Guiyang line, which supports vital mining and agricultural activities in southwest China; (b) provide urgently-needed additional capacity on the 704 km Yingtan- Xiamen line, which is the major link between the Special Economic Zone at Xiamen and the interior of China and carries important coal and timber traffic; (c) improve technolo3y and increase production at the Xi'an Railway Signalling Factory, thereby providing essential equipment for the upgrading of traffic control and safety throughout China;  - 9 - (d) provide better maintenance for permanent way on lines with heavy traffic density, where traditional labor-intensive methods prove inadequate; and (e) proceed with the traffic costing study started under the First Railway Project, Loan 2394-CHA (April 1984). (a) Chongoing-Guoiang Line Upgrading and Electrification 3.03 The Ministry of Railways proposes to upgrade and electrify the 456 km single-track line from Chongqing in Sichuan province to Guiyang in Guizhou pro- vince, most of which runs through difficult mountainous terrain. On the most difficult section (the 16? km between Ganshui and Nangongshan) the 1984 traffic of 5.14 million tons in the heavy (northbound) direction, plus six daily pairs of passenger trains, was already in excess of normal operating capacity and was achieved only by extraordinary efforts. Traffic on the remaining sections is also approaching capacity. The ruling gradient on most of the route is 1.25%, but there are two more difficult sections: the 32 km from Mengdu to Liangfengya (2.2%) and the 69 km from Gelaoba to Jiuchang (2.0%). An additional major pro- blem is posed by a four-km long tunnel in the central section of the line, where the diesel locomotives overheat, especially in summer. Because of the difficult terrain, double tracking or realignment would be far more expensive than electrification. Electricity will be provided primarily by the 630 MW hydro project at Wujiang, and secondarily by two thermal generating stations at Chongqing and Guiyang. 3.04 U2gradint. To achieve required capacity, sidings will be extended from 750 m to 850 m on the Chongqing-Ganshui section and from 550 m to 750 m on the Ganshui-Guiyang section. In addition, the track will be upgraded through: replacement of 43 kg/u rails with 50 kg/m rails on the last 27 km equipped with light rails; improvements to embankments, culverts and bridass; and increased clearance, waterproofing and improved drainage of tunnels. Communications and signalling would also be improved by replacement of the open wire system with cables, possibly fiber optics, and installation of cab signals and automatic train stop. The signalling component will include replacing board signals with colored lights and replacing manually-controlled switches with remote-controlled power switches. 3.05 Electrification. The railway will be electrified in 25 kV, 50 Hz, with booster transformers. The overhead catenary system will be a simple trol- ley wire except for the Luohuang-Xiaba section (41 km), outside Chongqing, where a messenger wire system will be used. A steel/aluminum contact wire with a 215 sq mm section will be used on the main line; in sidings, the section will be 173 8q =m. 3.06 There will be eight substations, four 20 MVA, two 15 MVA, and two 31.5 MVA, all with a standby transformer. The primary voltage will be 110 kV, the secondary voltage 27.5 kV; all substations will be remote controlled. The power system is shown on Map IBRD 19175.  _10 - (b) Yingtan-Xiamen Line Upffading and Electrification 3.07 The 704 km single-track line from Yingtan in Jiangxi province to Xia- men on the coast in Fujian province was built to low gradient and curve stand- ards in the 1950s. The line's limited capacity has three causes: steep gra- dients, lengthy sections without passing loops, and heavy curvature. The ruling gradient for most of the line is 1.2%, but is exceeded in two sections: 44 km from Zixi to Guangze (2.0%) and 51 km from Yong'an to Chengkou (2.2i). More serious is the problem of long sections that have no passing loops, which oc- curs because the line snakes its way through a series of narrow river valleys, with a steep slope on one side and water on the other. Finally, there is the problem of severe curvature: of the T04 km, curves occupy 372 km (54%), and curves with a radius of 300 m or less occupy 193 im (28%). 3.08 Upgrading. Line upgrading will consist of extension of a few remain- ing short crossing loops from 450 m to 650 m, construction of new freight yards, undercutting of ballast in tunnels to increase clearance, waterproofing and drainage improvements in tunnels, replacement of overhead oommunication wires by cables (possibly fiber optics), installation of radio communication between locomotive drivers and train dispatchers, and installation of automatic train stop; centralized traffic control (CTC) is also being considered but no decision has been made yet on this. 3.09 Electrification. The railway will be electrified at a voltage of 25 kV, 50 Hz, with booster transformers. The overhead catenary system will be a simple trolley wire except in double-heading sections in the mountains (95 km) where a messenger wire system will be used. 3.10 The line will have a total of 17 substations (5 of 31.5 MVA and 12 of 20 MVA, each with a standby transformer), with an average distance of about 40 km between the stations. The substations will have a primary voltage of 110 kV and a secondary voltage of 27.5 kV. The primary side will be protected by an oil minimum circuit breaker and the secondary side by a vacuum circuit breaker. All stations will be remote controlled. The estimated power required is about 95 MW and energy consumption is expected to be about 525 GWh per year. In the beginning, power will be supplied by the existing integrated grid but in the near term it will come primarily from two new hydro stations, both now under construction: 300 MW at Shaxikou and 1,400 MW at Shuikou (Map IBRD 19174). (c) Xi'an Railway Signalling Factory 3.11 The Xi'an factory is part of the China Railway Signal and Communica- tions Company (CRSCC), a State-owned enterprise under the supervision of MR. CRSCC was formed in 1980 from what had previously been a bureau of MR. Its facilities comprise four signalling factories, three communications factories, and two cable factories. It employs 16,000 workers, of which 2,000 are techni- cians. Its primary responsibility is to meet the requirements of MR, which are set down in the form of delivery schedules at six month intervals, and this activity typically absorbs upward of 80% of its production, for which prices are set on a cost-plus basis. The remainder is sold to local railway systems and to the other ministries with railroad operations (para. 2.01). Besides  _ 11 - being a supplier to MR, CRSCC also acts as its technical adviser and construc- tion supervisor on signalling matters. These activities are organized in a subordinate R & D company (Beijing Railway Automation, Survey and Development Company) and three construction companies, all of which have undertaken pro- jects overseas as well as in China. 3.12 The Xi'an Railway Signalling Factory (XRSF) is the largest and most diversified of the four factories that produce signalling and electrical equipment. It has about 3,200 employees, including 335 technical personnel. Among its products are relays, switch machines, other signal parts, control panels for diesel locomotives, and locomotive radiators. 3.13 System-wide, MR uses about 2,000,000 relays of the AX type manufac- tured at XRSF. The AX relay has several shortcomings, which affect its relia- bility in the field; its current life expectancy is one million cycles or about 15 years. The Xi'an factory produced about 110,000 relays in 1984, near its capacity limits, but is being asked to produce 220,000 in 1988, and 300,000 in 1990, of whioh only about 30,000 are for replacement and the rest are for new installations. Yet, with the current life expectancy, replacements alone should require about 133,000 relays per year. The proposed modernization of the fac- tory would increase output to 300,000 relays p.a. 3.14 The model ZD6 switch machine, of which XRSF can produce about 6,000 per year, was designed for use with 43 kg rail and is too weak for handling 50 kg rail, especially in cold weather. The ZD6 sometimes fails in service, creat- ing the risk of derailment. Since MR plans to upgrade its high density routes to 60 kg (and eventually 70 kg) rail, a stronger, safer model is needed. The Seventh Five Year Plan (1986-90) calls for XRSF to produce 12,000 switch ma- chines per year in 1990, either the ZD6 or preferably an improved model, and this target is far beyond the factory's current capabilities. 3.15 The factory needs better equipment and facilities as well as tech- nical assistance and training. In May-June 1985, the Bank Group helped organize a study tour for representatives of the Xi'an factory and CRSCC (para. 3.11). The group visited six major suppliers of railway signalling equipment in four developed countries. After this visit, CRSCC deeided to enter into a technical assistance contract (not financed by the Bank Group) with an American supplier, General Railway Signal (GRS) of Rochester, N.Y. The contraot includes techno- logy transfer to the Xitan factory, technical assistance by GRS experts second- ed to XRSF, and training of factory staff. Specifically, GRS will assist CRSCC to modernize the Xilan factory, increase its capacity, and improve both the design and the quality of the relays and switch machines produced. The Bank Group's contribution will be to finance machine tools, handling equipment, and other production and management aids. (d) Maintenance of Permanent Way 3.16 Track maintenance has traditionally been carried out. manually in Chi- na, although a few primitive mechanical devices are used for some operations. The quality of the work performed by hand is not adequate, therefore the track does not stay in good condition very long; regular maintenance must be repeated  - 12 - at rather short intervals. In addition, there is a need to redo up to 60% of the levelling adjustments right after they are completed, because the results are not satisfactory. Traffic is increasing on many lines and the track dete- riorates faster while time for track maintenance becomes shorter: manual main- tenance is a slow process, no longer adequate for providing the track quality and safety needed for present and future traffic levels. To prevent accidents, slow orders are increasingly imposed, reducing line capacity at a time when more capacity is badly needed. Better track maintenance methods are clearly required and MR has now decided to mechanize some operations such as tamping, levelling, lining, ballast cleaning and ballast regulating. 3.17 The proposed project will assist MR in determining the types and numbers of mechanical equipment best suited to the Chinese conditions of heavy traffic, short intervals between trains, and low wage levels. Equally important is the design of a track maintenance program, the organization of track mainte- nance teams, the adjustments needed in train operations to allow the use of heavy on-track machinery, and the training of staff in operating atid maintain- ing the new equipment. The proposed project will therefore, in addition to providing financing for hardware, focus heavily on the important matter of staff training (Annex 2 and Table 3.8). (e) Traffic Costing Study 3.18 This study was initiated under the First Railway Project (Loan 2394- CHA, April 1984). The study is progressing well and on schedule; the first stage -- a study tour for MR officials to expose them to current costing sys- tems in the U.S. and in Europe -- has been completed. The second stage will comprise the specificatior of the system to be adopted by MR, and pilot system implementation and training. Since this stage will not be completed by Decem- ber 31, 1987, the loan closing date for the first project, the proposed loan and credit will include funds (about US$300,000) to finance the foreign costs of the study after that date. During negotiations, it was agreed that the Bor- rower shall continue to carry out the study according to the terms of reference and timetable agreed with the Bank under the First Railway Project, Loan 2394-CHA, and according to arrangements acceptable to the Bank Group under this project. Technical Assistance and Training 3.19 Training of staff in new technology and management is included in the various components above. The corresponding technical assistance and training program totals 333 man-months, of which 261 man-months are for training Chinese staff abroad and 72 man-months are for technical assistance by foreign experts in China. During negotiations, it was agreed that the program will be carried out according to the outline and timetable given in Annex 2.  - 13 - Cost Estimates and Financing 3.20 Detailed designs are completed for all project works. Quantities were derived from final engineering, and unit prices are based on current world mar- ket prices for equipment to be imported. The cost of equipment and materials to be procured locally and not to be financed by the Bank Group was estimated on the basis of current domestic prices. The estimated project cost, expressed in January 1986 prices and including training and contingencies is about US$577.5 million, of which US$29t.0 million represents direct and indirect foreign ex- change costs. Cost estimates are given in Tables 3.1 to 3.4 and are summarized on p.14. The Government has requested a loan and a credit totaling US$230.0 million which would cover about 77% of the estimated foreign exchange cost. The Government will finanoe other materials, equipment and oonstruction costs from its own resources. 3.21 An average of 7.4% physical contingencies was included in estimated project costs. Annual price escalation rates were applied to local and foreign costs in accordance with Bank Group guidelines, as follows: 7.0% in 1986 and 1987, 7.5% in 1988, 7.7% in 1989, 7.6% in 1990, and 4.5% in 1991. The January 1986 exchange rate of Y 3.20 to the US dollar was used for the calculation of the foreign exchange costs. The total cost of consultants to assist MR in track electrification works and track maintenance mechanization is estimated at about US$0.4 million. In addition, US$1.2 million will be earmarked for training MR personnel abroad in track electrification works, signalling equipment techno- logy and manufacture, and mechanized track maintenance (Annex 2); US$300,000 will be allocated to the continuation of the costing study. 3.22 The proposed Bank loan and IDA credit would finance: (a) for the Chongqing-Guiyang and Yingtan-Xiamen lines upgrading and electrification: rails, other steel products, timber and cement, transformers, copper wire, insulators, power and signalling cables, design and construction equipment, technical assistance and training; (b) for the Xi'an Railway Signalling Factory: machine tools and other equipment needed to increase production to the required levels, technical assistance and training; (c) for the maintenance of permanent way: the foreign exchange cost of imported equipment, technical assistance, and training; and (d) for the Costing Study: the foreign exchange component of the con- tinuation of the study beyond the Closing Date of Loan 2394-CHA. A list of items to be financed by the proposed loan and credit is given in Tables 3.5 to 3.9. A sumnmry breakdown of the project costs (in January 1986 prices) and of the proposed loan and credit is shown in Section E page 15.  _ 14 - -