China - Third Henan Provincial Highway Project

Report No. PID7855 Project Name China-Third Henan Provincial Highway (@) Project Region East Asia and Pacific Region Sector TT-Transportation Project CHPE58844 Borrower(s) People's Republic of China Implementing Agency Henan Provincial Communications Department (HPCD) Environment Category A Date PID Prepared June 7, 1999 Projected Appraisal Date January 10, 2000 Projected Board Date April 21, 2000 1. Country and Sector Background Several important pieces of sector work have been carried out by the Bank in the last five years: (i) Highway Development and Management: Issues, Options and Strategies (1994); (ii) A Strategy for the Transport Sector (Forward with One Spirit, 1997/98); (iii) Review of Highway Technical Assistance (1998/99); and (iv) OED Report on China Transport (1998/99). These, together with a few high-level dissemination seminars, have led to the identification of five main challenges facing China in its attempt to cope with the rapid expansion of its highway network, summarized in the recent note on "China Highway Sector Issues" of February 1999 as follows: Building sector institutions. The sustainability of the highway sector greatly depends on the strength of its provincial and local highway institutions to address the growing challenges of road traffic safety, construction quality standards and control, road asset preservation, network expansion, market responsive facility provision and resource mobilization. Institutional fragmentation within and between levels of government needs stronger attention. For instance, any effective solution to the daunting road safety issue will require stronger coordination between the provincial communications departments (PCDs) and the traffic police which is part of another department. Similarly, to commercialize and corporatize the provincial road agencies, particularly those with stable toll-based revenues, there is a need to restructure them into commercial entities such as shareholding companies or toll road authorities. To support such reforms sector institutions will require new skills and a better understanding of new practices to effectively play the roles of tomorrow. Strengthening Resource mobilization. The Chinese government faces a daunting challenge of resource mobilization to meet future needs for the construction and maintenance of its highway system. The current regional crisis and a fragile local financial sector are severe constraints on borrowings, specifically in the international markets while the potential for private financing remains limited under the current economic and regulatory environment. The number of highway projects that can be marketed (those with strong traffic revenue potential) to private sector investors are  insignificant compared to the sector's resource requirements. Under these conditions the focus should be on building a reliable and stable road user fee based financing framework. In parallel, regulatory reforms would be necessary to open opportunities for different modes of public-private partnerships, to mobilize domestic savings through the issuance of bonds and to broaden the investor base. A fuel tax, under consideration, promises revenue higher than the current provincial road maintenance fee while at the same time, it would offer new options for debt financing. Enhancing accessibility to remote/low income areas. The geography of China poses heavy demand and difficulty on the provision of basic road access in various parts of the country, particularly in inner and low income provinces. Although the role of transport access to integrate the national economy, to stimulate growth in remote areas, and to insure basic mobility needs of the poor has been emphasized, the task is enormous and requires significant public resources. The Bank's provincial highway program in China aims to favorably impact poverty levels, through targeted interventions in low income areas. But provincial and central government agencies often refrain from borrowing for this purpose since no dedicated revenue source for loan repayment is easily identified (unlike for toll roads). A renewed effort is recommended to support road development in low income areas as part of the Bank's future lending and non-lending services for the sector. Sustaining road maintenance. Due to the rapid pace of road expansion in many provinces, maintenance funds are diverted to construction of new roads. The current trend and practice may soon become unsustainable unless sector institutions and the existing framework for resource mobilization are developed to address the future maintenance needs. In the past central and provincial road agencies have resisted Bank funding for road maintenance on grounds that the loan funds are urgently needed for the construction of revenue-generating new high-grade highways rather than the non-tolled roads which do not generate dedicated revenue for loan repayment. A stronger effort on behalf of the Bank and the relevant Chinese sector institutions is recommended to make road maintenance a more integral and prominent part of future Bank highway projects. Of specific importance in this increasingly challenging area are comprehensive policy and institutional reform initiatives so as to put sector agencies in a position to conduct and sustain road maintenance activities. PCDs need to be encouraged to develop a sustainable road maintenance policy, refine their road information systems for direct use in maintenance planning and operations, develop sustainable funding mechanisms and adjust their organizational structures and training programs to devote more resources to maintenance. Improving construction quality. Highway construction quality remains a serious concern of the sector. Recent incidences of bridge and road failings or premature wear and tear of highway pavements have raised awareness of the issue to high-level government officials. The problem has both technical and administrative roots. Contractors, mostly domestic, are not always well managed, frequently face irregular payments, and often come under pressure to shorten the construction period. In some cases, quality control suffers due to the lack of authority assigned to the construction supervision agency by the owner vis-a-vis contractors. While the central government appreciates Bank involvement in the sector leading generally to improved design reviews, supervision and resulting construction quality, there is a definite need to reinforce rigid construction quality standards, control and enforcement in future Bank highway loans. Government Strategy. In the medium term, the main concerns of the central - 2 -  and provincial highway authorities are to ensure that the highway system helps integrate China's national economy and facilitates mobility of goods and services. This should correspond to the comparative economic and technological advantages of highways vis-a-vis other modes of transport and to available financial resources. Under such strategy, the investment priority for the highway sub-sector during its Ninth Five-Year Plan (9FYP, 1996-2000) were identified as follows: high priority was given to developing rapidly the National Trunk Highway System. MOC has identified about 35,000 km of highways throughout the country that would constitute a network of modern inter-provincial highways under the NTHS. These are targeted for completion by year 2010. The first phase of the NTHS investment (totaling 17,000 km) concentrates on 2 vertical, 2 horizontal and 3 connections to seaports. By the end of 1998, about 7,500km of the NTHS Phase I were completed, and another 4,500km will be completed by 2000. According to MOC's estimates the entire 17,000km of NTHS Phase I should be completed by 2003. The construction of the second phase (additional 3 vertical and 5 horizontal trunk highways) will continue until 2020 when the entire system is expected to be completed., development of provincial and rural roads that will feed into the NTHS was planned simultaneously in order to maximize the benefit of NTHS investment; and policies and regulations reforms to be intensified with priority attention given to financing issues and to ensuring efficient utilization of funds. 2. Objectives The project aims at providing a more efficient and effective transport infrastructure in support of social and economic development in Henan Province. To meet the above development objective, the project will produce the following outputs: (A) traffic congestion relieved and mobility increased in the Zhumadian- Xinyang corridor, a key section of China's National Trunk Highway System (NTHS); (B) accessibility to the poor areas in the province improved; and (C) efficiency and effectiveness in public sector management of the road network enhanced. 3. Rationale for Bank's Involvement The Bank is already heavily involved in the financing of several other high priority sections in the Jing-Zhu corridor through the First, Second and Third National Highway Projects which are all ongoing and progressing well, as well as through the Fourth National Highway Project which has just been negotiated. The continued involvement of the Bank would result in much needed additional financial resources to help remove highway bottlenecks and increase traffic capacity in this high priority transport corridor. Bank involvement would accelerate policy, institutional and manpower development in highway planning, design, supervision, construction, operation, maintenance and finance. Bank involvement would also be expected to benefit the design and the quality of construction of the roads to be undertaken. 4. Description 1. New construction in main corridor: -3-  1.1 expressway 1.2 linking roads 1.3 construction supervision 1.4 land acquisition/resettlement 2. Construction and improvement of rural roads in poor counties. 3. Capacity Building: 3.1 training 3.2 studies 3.3 provision of equipment 5. Financing Total ( US$m) Government 242 IBRD 136 IDA 0 Total Project Cost 378 6. Implementation The Henan Provincial Communications Department (HPCD) has the overall responsibility for project preparation and implementation. Under HPCD, the Henan Provincial Expressway Construction Bureau, the executing agency for the other Bank-financed expressway projects in the province, would also be the executing agency for the proposed Zumadian-Xinyang expressway. Other project components such as the interconnecting road program, the rural road program, the TA , study and training components and the procurement of equipment would be executed by the Highway Administration Bureau (HAB) and the Foreign Capital Utilization (FCUO) under HPCD. The project would be implemented during 2000- 2005. Overall direction of the project at the central level would rest with the Ministry of Communication (MOC). MOC will assume an oversight role and provide some technical support. The Bank loan would be granted to the Borrower, the Ministry of Finance (MOF), which in turn would onlend the loan proceeds to Henan Province on the same conditions. 7. Sustainability Traffic volumes on highways are expected to continue to grow. Experience from completed and ongoing Bank-financed highway projects in China shows a great commitment for implementation of the physical components of the project, which account for the majority of the project cost. The level of tolls and the need for their periodic review are important for the financial viability of the project and the ability to repay the Bank loan as well as to provide timely and needed maintenance. More generally, project sustainability would be enhanced by an early enactment of the fuel tax reform. 8. Lessons learned from past operations in the country/sector While the overall performance of the large Bank highway portfolio is by and large satisfactory, a number of problems have occurred, which have been taken into consideration in the design of the proposed project. These problems include: inadequate engineering designs and bid documents including costing of civil works; quality control of construction; late commencement of electrical and mechanical facilities component (which has delayed completion - 4 -  of some projects and necessitated the extension of the closing date of several Bank loans), and some lack in the scope and speed of policy and institutional reforms, specifically relating to road maintenance, improved high-grade highway management and operation, and traffic safety. A recent OED assessment on the China portfolio has clearly determined that the policy dialogue between China and the Bank in the highway sector needs to be further strengthened. During preparation of the proposed project, focus will be on engaging HPCD in a continuing policy dialogue which started with the preparation of the first Henan Highway Project. While the results of these efforts are encouraging, in that policy and institutional reforms now enjoys a higher degree of visibility and ownership with HPCD, much remains to be done during implementation of the ongoing and new projects so as to make policy and institutional reform components rank on an equal level with road construction and network capacity expansion. The Region is developing a more proactive approach in this area by, for example, staffing project preparation and supervision missions more regularly with experienced institutional and policy experts, and by advancing the sector policy dialogue with MOC through more frequent policy workshops which then feed into project design. Finally, experience with rural roads in South Asia and Africa, as well as with the Bank's Shaanxi Highway Project and Second Henan Highway Project in China, has shown that provision of basic access through all-wheather roads and provision of non-motorized transport are effective means of reducing poverty in rural areas, especially when combined with programs for socio- economic development. 9. Program of Targeted Intervention (PTI) No 10. Environment Aspects (including any public consultation) Issues: It is most likely that noise and air pollution would be major issues during construction phase. Also, during the operation phase, noise pollution might be a major environmental problem at several populated areas. TBD. A full EA documentation and Resettlement Action Plan in accordance with Bank Guidelines will be prepared. 11. Contact Point: Team Leader Jacques M. Tollie The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 1 202 4582587 Fax: 1 202 5223573 The InfoShop The World Bank 1818 H Street, N.W. Washington D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Processed by the InfoShop week ending June 25, 1999. - 5 -  Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. - 6 -