China - Container Transport Project

Document of The World Bank Report No: 18433-CHA PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$71 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FORA CONTAINER TRANSPORT PROJECT FEBRUARY 16, 1999 Transport Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective May 1998) Currency Unit = Yuan Yuan 1.00 = US$0.12 US$ = Yuan 8.3 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy NCB - National Competitive Bidding CGA - Customs General Administration PFB - Provincial Finance Bureau CPG - Central Procurement Group PHRD - Population and Human Resources Department CPMO - Central Project Management Office PIP - Project Implementation Plan COSCO - China Ocean Shipping Company PPLG - Provincial Project Leading Group EDI - Electronic Data Interchange PPMO - Provincial Project Management Office EIR - Equipment Interchange & Receipt PSB - Public Security Bureau ERR - Economic Rate of Return QCBS - Quality and Cost based Selection IAAS - Internationally Acceptable Accounting RMC - Bank's Resident Mission in China standards ICB - International Competitive Bidding SA - Special Account ICD - Inland Container Depot SDPC - State Development Planning Commission IBRD - International Bank for Reconstruction SEA - Sectoral Environmental and Development Assessment IDA - International Development Agency SETC - State Economic and Trade Commission ISO - International Standards Organization SFB - Selection under Fixed Budget ITC - International Tendering Company Sinotras - China National Foreign Trade Transportation Group JV - Joint Venture SOE - State Owned Enterprise MFB - Municipal Finance Bureau S02 - Sulphur dioxide MIS - Management Information Systems TA - Technical Assistance MPLG - Municipal Project Leading Group TEU - Twenty-foot Equivalent Unit MOC - Ministry of Communications THCC - Tianjin Harbor Container company MOF - Ministry of Finance TPA - Tianjin Port Authority MOR - Ministry of Railways TOR Terms of Reference Vice President: Jean-Michel Severino Country Director: Yukon Huang Sector Manager: Jitendra N. Bajpai Task Team Leader: Shunso Tsukada  China: Container Transport Project Project Appraisal Document CONTENTS Page No. Introduction ..........2 A. Project Development Objective ..3 1. Project development objective and key performance indicators .3 B. Strategic Context ..3 1. Sector-related CAS goal supported by the project .3 2. Main sector issues and Govenmment strategy .3 3. Sector issues to be addressed by the project and strategic choices .4 C. Project Description Summary .7 1. Key policy and institutional reforms supported by the project .7 2. Project components .9 3. Benefits and target population .9 4. 1 nstitutional and implementation arrangements ..9 D. Project Rationale .12 1. Project alternatives considered and reasons for rejection ...................... ............................. 12 2. Major related projects financed by the Bank and/or other development agencies ......... ..... 13 3. Lessons learned and reflected in proposed project design .................... ............................. 13 4. Indications of borrower commitment and ownership ................................ ........................... 14 5. Value added of Bank support in this project ........................................................................ 14 E. Summary Project Analysis .14 1. Economic .......................................................................... 14 2. Financial ........................................................................... 15 3. Technical .......................................................................... 15 4. Institutional .......................................................................... 15 5. Social .......................................................................... 16 6. Environmental assessment ........................ .................................................. 16 7. Participatory approach .......................................................................... 17 F. Sustainability and Risks .17 1. Sustainability .17 2. Critical risks .18 3. Possible controversial aspects .18 G. Main Loan Conditions .18 1. Conditions for project effectiveness .18 2. Conditions for other .................................................................... 18  China: Container Transport Project Project Appraisal Document Page No. H. Readiness for Implementation ...................... .............................................. 19 I. Compliance with Bank Policies .................................................................... 20 Annexes Annex 1: Project Design Summary .................................................................. 21 Annex 2: Project Description ................................................................. 22 Annex 3: Estimated Project Costs ................................................................. 24 Annex 4: Cost Benefit Analysis Summary .................... ............................................. 25 Annex 5: Financial Analysis ................................................................. 32 Annex 6: Procurement and Disbursement Arrangements ................................................................. 61 Table A: Project Costs by Procurement Arrangements ..65 Table Al: Consultant Selection Arrangements ..66 Table B: Thresholds for Procurement Methods and Prior Review . .67 Table C: Allocation of Loan Proceeds ..68 Annex 7: Project Processing Budget and Schedule .69 Annex 8: Documents in Project File .70 Annex 9: Statement of Loans and Credits .71 Annex 10: China at a Glance .74 Additional Annexes Annex 11: Action Plan for Facilitating Inland Movement of Seaborne Containers .76 Annex 12: Selection Process and Eligibility Criteria for ICSs .77 Annex 13 Framework for the Lending to Tianjin Port Authority .78 Annex 14: Description of the Technical Assistance (TA) .79 Annex 15: Evaluation of Project Financial Management System .82 Annex 16: Procurement Plan for Goods .86 Annex 17: Procurment Plan for Civil Works NCB .88 Annex 18: Main Features of Individual Project ICDs .89 Annex 19: Performance Monitoring Indicators .91 Charts Chart 1: Organizational Chart .92 Chart 2: llustrative Map of Two Pilot Corridors in China  Project Appraisal Document Page 1 China: Container Transport Project China Container Transport Project Project Appraisal Document East Asia and Pacific Region Transport Sector Unit Date: January 25, 1999 Task Team Leader: Shunso Tsukada Country Director: Yukon Huang Sector Manager: Jitendra N. Bajpai Project ID: CN-PE-3653 Sector: Transportation Program Objective Category: Environmentally Sustainable Development Lending Instrument: SIL Program of Targeted Intervention: Yes [ X] No Project Financing Data [X] Loan [ Credit [] Guarantee [ Other [Specify] For Loans/Credits/Others: Amount (US$m/SDRm): US$84 million Proposed terms: [] Multicurrency [X] Single currency, specify US$ Grace period (years): 5 [ Standard [ Fixed l X] LIBOR- Variable based Years to maturity: 20 Commitment fee: 0.75 % Front-end fee 1% Financing plan (US$m): Local Foreign Total Source Local govemments 10 10 20 Cofinanciers IBRD 71 71 Project enterprises 44 13 68 Other (specify) 5 6 11 Total 59 | 100 159 Borrower: People's Republic of China Guarantor: Not applicable Responsible agency(ies): Tianjin Municipality, Hebei Province, Zhejiang Province, Inner Mongolia Autonomous Govemment Estimated disbursements (Bank FYNUS$M): 1999 2000 2001 2002 2003 2004 Annual 21.1 41.3 8.0 0.4 0.2 0.1 Cumulative 21.1 62.4 70.3 70.7 70.9 71.0 Financing available without guarantee?: [X] Yes [ ] No If yes, estimated cost or maturity: Interest 9 %; and terms: less than 1 year Project implementation period: 5 years Expected effectiveness date: 06/18/1999 Expected closing date: 06/30/2005  Project Appraisal Document Page 2 China: Container Transport Project Introduction China's foreign trade has more than doubled in the last five years from US$109 billion in 1991 to US$274 billion in 1996 with associated changes in commodity mix from low value to high value cargo. However, this growth has been regionally unbalanced. Coastal regions have grown rapidly, while those in the interior have fallen progressively behind in export and import activities. Interior provinces account for 63 percent of population, but they account for only 17 percent of foreign trade. This inequality in foreign trade between interior and coastal regions has aggravated existing regional income disparities. Unless transport links connecting inland regions to coastal regions are improved, regional disparities are likely to grow further in the future. Containers offer a fast, safe and cost effective means of transportation in exporting and importing commodities; they are easily transferred from one mode of transport to another; they enable operators to offer door-to-door, land-sea through services, with predictable delivery times; and they reduce pilferage en route. For these reasons, world-wide, 80 percent of general cargo, measured in terms of value, and 50 percent in terms of weight, now move by containers. Thus, they effectively shrink economic distances between coastal ports and inland production centers, and can stimulate import and export industries in the hinterland. Many companies in developed countries are now unwilling to place orders with factories located in areas where there are no container services.. Over the last decade, China's international container shipping has grown rapidly with port throughput rising from 2.2 million TEUs in 1991 to 8.1 million in 1996 (See Annex 17 for overall container traffic in China). Still, most of the growth has been confined to the coastal provinces; only 24 percent of seaborne containers (which are mostly owned and handled by Cosco and Sinotrans) travel beyond port cities). Indeed, most are stripped in ports and their cargoes are carried in break- bulk to inland destinations. As a result, the benefits of container transport, as a means for door-to door or dock-to-dock transport, have yet to be realized in these localities. Recognizing the critical importance of developing an inland distribution system for seaborne containers, the Chinese Government and the Bank jointly undertook a sector study of transport logistics in 1994. This joint effort resulted in the production of the sector study, "Container Transport Services and Trade" (Gray Cover Report No. 15303-CHA, October 1996). This project responds to the study's principal recommendation to initiate a pilot project to develop intermodal container links along selected corridors between gateway ports and inland destinations.  Project Appraisal Document Page 3 China: Container Transport Project A. Project Development Objective 1. Project development objective and key performance indicators (see Annex 1):. The project is aimed at facilitating inland penetration of seabome containers from gateway ports to inland cities, thus contributing to reducing economic disparities between coastal and inland areas. Its developmental impact would be measured by four performance monitoring indicators: (i) the value of imports and exports to and from project cities; (ii) the number of containers handled at project inland container depots (ICDs) located at the ends of the pilot corridors; (iii) the number of containers handled at Tianjin Harbor Container Company (THCC); and (iv) number of boxes per vessel hour at THCC; and (v) average container cycle time between gateway ports and selected ICDs. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: R98-107 Date of latest CAS discussion: 05/28/98 A major objective of the CAS is to help alleviate infrastructure bottlenecks. This objective would be realized by increasing the productivity of existing infrastructure through: (i) facilitating transshipment between different modes of transport; (ii) improving service quality (less cargo damage and pilferage en route) by using containers; and (iii) reducing excessive concentration of container handling activities at port areas by moving them to less congested inland locations. The project would provide inland provinces with better access to seaports. This is in line with the Chinese Government's policy to alleviate the regional disparity between coastal and interior regions. The CAS has also stressed the importance of "assisting local governments to develop income generating programs in lagging provinces". 2. Main sector issues and Government strategy: A sector study carried out jointly by the State Economic and Trade Commission (SETC) and the Bank identified six major impediments to the efficient inland distribution of seaborne containers. (a) Uncoordinated Government responsibilities. Govemment agencies are structured along modal lines. Many deal with intermodal issues solely from their own perspective, passing laws and regulations without coordinating with the others. The result is an array of overlapping jurisdictions and fragmented legal structures. Compounding this problem is the government agencies' involvement in intermodal operations either in their own right or through their affiliate enterprises. Although efforts have been made to separate the regulatory and operational functions, quasi-collusive relationships between the state and enterprises still persist. (b) Lack of effective competition in intermodal markets. Intermodal service in China has been dominated by two state owned enterprises (SOEs), Sinotrans and Cosco groups. Although this dominance has been declining in the coastal areas, these two giant operators still enjoy more than three fourths of the market share in inland market, largely due to their nation-wide service network. For instance, Sinotrans has 56 subsidiaries, covering capital cities of all provinces and major port/air port cities, and 45 domestic joint ventures based in major load centers in China. In addition, these two operators have door-to-door service capability by offering combined services of freight forwarding, shipping agency and trucking services, allowing them to continually dominate the inland distribution markets. This dominance has, however, resulted in costly and less user oriented service provision.  Project Appraisal Document Page 4 China: Container Transport Project (c) tack of container handling facilities and equipment at inland locations. The lack of inland container handling facilities has made container transport to and from inland points costly. This does not allow containers to be kept at inland locations. In addition, the limited availability of customs clearance function does not permit container cargoes to be carried in bond, thus necessitating containers to be inspected again at seaports. Compounding this problem is the limited availability of empty containers and container trucks. Thus, shippers in these cities have to wait for empty containers and container trucks to be relocated from the coast to the interior, which adds to the time and cost. (d) Inadequate transport links leading to inland cities to ports. The shortage of transport capacity is a long-standing problem in China's transport sector. The lack of rail capacity has limited shippers' access to cost-effective long-distance service, the most critical element for moving cargo to inland destinations. Trucking service is also poor due to underdeveloped truck manufacturing technologies and the limited highway network system. (e) Lack of user orientation of port container terminals: Container terminals in Chinese ports have been traditionally operated by port authorities or their affiliate state-owned enterprises (SOEs), but recently an increasing number of ports have decided to get the private sector participate in terminal development and operation. These cases are found in Shanghai, Yantian, Xiamen and Shekou, but a common problem is that this has created another monopoly by the private sector operator, bringing little benefit to shippers (e.g. a sharp hike in container handling charges). The container operations at Tianjin Port are currently carried out by two SOE terminal operators. However, no genuine competition exists among them since both are 100% owned by Tianjin Port Authority (TPA), which has resulted in lack of user orientation. In addition, a recent Bank team's review of TPA's container operations has revealed relative low productivity of its container handling companies. This is due to several factors including the aged container handling equipment and the lack of practices of setting a cut-off time in accepting containers at port container yard (f) Onerous cross-border inspections. Although cross-border inspections have improved since the mid-1980s, they still delay containers at points of entry. Repeated inspections by different agencies often cause frustration to exporters and importers. The inconsistent application of regulations have confused foreign shippers and delays the process. Cumbersome customs procedures for bonded transit to inland destinations discourage importers to clear their cargo at inland locations, perpetuating the practice of opening containers for customs clearance both at port areas and again at inland destinations for discharging containers. 3. Sector issues to be addressed by the project and strategic choices: 1) The project addresses the above sector issues in such a manner as described below. (a) Closer coordination among relevant agencies and the establishment of arm's length relationships between the Government and intermodal operators: Responding to the recommendation of the sector study, the Chinese Government has established a vice-ministerial level group in January 1996 to improve coordination among different agencies with regard to policy issues associated with container transport and trade facilitation. In addition, the project would establish a users' group in which shipping lines, freight forwarders and govemment officials would meet to regularly discuss issues associated with intermodal operations. This would help resolve problems encountered. The project also requires the conversion of state- or collectively- owned enterprises into limited liability or stock companies so as to establish an arm's length relationship between regulatory agencies and inland container depot (ICD) operators. (b) Introduction of effective competition: The project will address this issue by enabling project ICDs to offer altemative service options to inland exporters or importers in inland distribution markets that has been dominated by Sinotrans and its affiliate enterprises. The project is also designed to bring in intra-port competition between two SOE terminal operators in Tianjin Port by establishing a level playing field for their activities.  Project Appraisal Document Page 5 China: Container Transport Project (c) Development of common-user ICDs at inland locations. The project would assist qualified enterprises to develop [CDs with custom clearance functions and to accept containers of all shipping lines. This would enable inland shippers to get their cargo transported to and from seaports in a safer and more cost effective manner. (d) Capacity expansion of transport infrastructure. Since this capacity issue has been and is being addressed by the other Bank projects in the transport sector, this project would not directly deal with this issue. It would, however, address the institutional issue by eliminating policy restrictions which impede smooth movement of cargoes along the existing infrastructure (such as elimination of miscellaneous charges often levied to highway container tractor trailers en route). (e) Enhancement of berth productivity: In order to increase berth productivity, the project would provide THCC with funds for upgrading the container handling facilities. The project would also address this issue by initiating a port efficiency enhancement study with the aim of reforming the current operational practices which lower productivity. (f) Streamlining of cross-border inspections: The project will help streamline cross-border inspections by initiating a pilot program to reduce the percentage of sample checking for customs clearance. In addition, CGA has decided to undertake pilot programs to simplify customs procedures for bonded transit of seaborne containers to inland destinations (for three sections from Tianjin to Beijing, from Dalian to Harbin, and from Yantian to Changsha)." 2) Strategic Choices: Three issues required conscious decision in designing the project structure: (a) experimental approach; (b) private versus public sector development; and (c) container haulage services as a part of ICD operations: (a) Experimental approach: Developing an efficient inland distribution system requires broad based policy reforms of the existing intermodal arrangements, together with the establishment of new operational systems. Many of these reforms and system development should be tested before the changes are adopted on a nation-wide basis. In this context, the Chinese Government and the Bank have agreed to launch a pilot project to experiment with the principal reform elements. Two pilot corridors were selected based on several selection criteria (see Section 8 for details, and Chart 2 for the location of the corridors). The major consideration in selecting pilot corridors were: (i) the pilot corridors should not be chosen from those which could arouse a strong interest among the private sectors investors (such as the Yangzhe River corridor and the Hong Kong-Wuhan-Zhengzhou-Beijing corridor), but at the same time: (ii) the pilot corridors should be financially and economically viable so as to demonstrate the commercial viability of intermodal operations in inland markets, and thus trigger the future investments by the private sector. There were not many corridors which met these two conflicting requirements, but two corridors, one extending from Tianjin Port through Hebei Provinces to Inner Mongolia Province, and the other, from Shanghai Port through Zhejiang Province to Jiangxi Province (Jiangxi Province later decided to withdraw its application for borrowing from the Bank, but still remain as a beneficiary of the technical assistance program?%), meet these criteria. (b) Private versus public sector provision of services: The possibility of the private sector involvement in the ICD operators was considered during the project design stage. However, it was concluded that the private sector approach is not effective in realizing the project objective at this stage of the development of the two pilot corridors. The main reasons are as follows: This CGA's pilot program was originally intended to be a part of the policy actions, but it was put out side of the project since it would be carried out regardless the progress of the proposed project. 2 Jiangxi Province would participate in TA activities without borrowing the money from the Bank.  Project Appraisal Document Page 6 China: Container Transport Project * Because of the commercially oriented nature of the private sector, their investment would most likely be concentrated on coastal areas. This would defeat the project objective of stimulating economic development of inland provinces. * Inland distribution of seabome containers is still at a very early stage of development in China. At this stage, emphasis should be placed on the development of proper institutional and policy framework. This would require extensive reform efforts by various line ministries, along with their strong institutional support to the project (e.g. the establishment of customs office in the project ICDs). Policy and institutional reforms could not be realized by the private sector investments. * Shipping lines or intermodal operators are interested in ICDs to handle their own containers, but not common user type facilities serving all shipping lines as envisaged in this project. * Those shipping lines and intermodal operators are interested in strategically located inland load centers with a large traffic potential such as Wuhan, but not in those small or medium size cities selected for this project for developmental purposes. * Given the current volume of container traffic, container handling businesses in the project cities are still risky and entail substantial uncertainties. * As to the port container terminal, Tianjin Port has been cautious in introducing the private sector in its development and operation. Extensive discussion with Port Authority indicated that the immediate and full fledged privatization of the container terminal operation is not a realistic nor viable approach. The introduction of the intra-port competition between two terminal operators, combined with the introduction of the private sector in one of the terminal operators, would present a gradual but more realistic solution towards the eventual goal of providing user oriented and cost effective container services. (c) Container haulage services as a part of ICD operations: SETC has requested the Bank to finance tractor trailers as an integral part of the ICD operations. In its view, the provision of container haulage services is an essential element of service operations of ICDs as required by design standards issued in 1990 by the State Technology Supervision Bureau (GBIT 12419-90). Because of the commercially oriented nature of the trucking services, the team has reserved its response until the following two questions being answered: (i) is there any justifiable reason for lCD to provide container trucking as an essential part of the ICD operations? and (ii) if yes, is there any other financing institution beside the Bank? * As to the first question, the team found two justifiable reasons for an ICD to provide trucking services as a part of its ICD operations. The first reason is the need for the project ICDs to provide competitive services over those currently provided by large state owned freight forwarding services which dominate internmodal operations in China, particularly inland operations. Sinotrans and Cosco have provided integrated services combining container handling and trucking together, which has set a norm of intermodal services in China. In order for project ICDs to effectively compete with those two dominant freight forwarders, lCD operators should be able to provide comparable services including container trucking services.  Project Appraisal Document Page 7 China: Container Transport Project The second reason relates to a unique feature of container traffic pattern In China, outgoing traffic (export) far exceeds inbound traffic (import) (typically 2/3 for export and 1/3 for import traffic). Given the limited availability of container trucks at inland location, inland shippers have to get tractor trailers relocated from the coastal regions to inland for exporting their cargo via sea-ports. If locally based ICDs have storage facilities of empty containers, together with haulage services, the needs of relocating empty containers would significantly be reduced. Regarding the second question, the team found that the type of ICDs envisaged in the proposed project would have virtually no chance to get loan from commercial banks. Interviews conducted with commercial banks revealed that, given a long queue of customers in front of bank offices, commercial banks do not have any incentive to make loans to small companies launching into new businesses. Loan officers prefer dealing with a large and high visibility company with a good prospect of generating a large amount of revenue which is likely to be deposited in his bank. Furthermore, commercial banks in China are very reluctant to finance longer term loans given the higher risks associated with it. They usually finance only working capital with the less-than-one-year payback period. The team also examined the possibility of leasing, but it was found that leasing companies are even less accessible for those companies such as project ICDs. Because of difficulty in enforcing rights and obligations of the lessors, leasing companies are extremely selective in choosing lessees. A joint venture leasing company which the team interviewed during the mission stated that it would finance only top 500 companies with high credit worthiness. These findings are indicating that the Bank and other international financing or bilateral aide agencies would be the only possible choice for the project ICDs. C. Project Description Summary 1. Key policy and institutional reforms supported by the project Policy framework. The successful implementation of the project requires the removal of policy impediments to the efficient container processing. An operational feasibility survey carried out by SETC in February 1997 identified a number of impediments existing along the two pilot corridors including those listed in the table below. Several actions have been taken to remove these impediments, still some more need to be taken as illustrated in the table below. For those actions to be taken in the future, action plans were prepared to ensure their implementation (See Annex 11).  Project Appraisal Document Page 8 China: Container Transport Project Institutional Impediments Actions already taken Action to be taken /a under the project Port There is no genuine * Introduce an intra-port Container competition between two SOE competition between two Terminals terminal operators at Tianjin SOE terminal operators Port. through private sector participation. Berth productivity is relatively * Initiate a study for low due to a number of factors, enhancing berth utilization both physical and operational, and user orientation including longer idle time. at [TPA]. berths. Line-Haul %M Rail tariffs for wagon load * Rail container tariffs were (Rail) cargoes are comparatively low, readjusted to narrow the gap resulting in slow shift from between container and wagon wagon load to container load tariffs ('97) [MOR]. transport. ; 45 days advance booking was * Advance booking required for securing rail wagons. requirement was reduced to less than I day ('96) [MORI. Line-Haul - Use of tractor trailers were not * A joint regulation by (Roads) allowed separated. SETC/MOC/PSB was issued to allow separate registration ('96) [MOR]. . ISO container transport was * A new Highway Law * Promulgate a regulation subjected to additional permits declassified ISO containers for implementing this and extra charges because they from being classified as heavy policy [MOC]. are regarded as heavy cargoes cargoes ('97) [MOC]. Inland Container handling facilities * Make customs Container with dry port functions are clearance available at Depots lacking at inland cities. project ICDs [Municipalities/Provincial Gateway Offices]. Lack of clear corporate * Convert the project ICDs into * Develop plans for governance for the ICD limited liability companies or private sector participation operations stock companies in for those ICDs with good accordance with the new financial performance Company Law ('98). (SETC) (ICDs). Customs _ Frequency of sampling check * Initiate a pilot program at & Other for customs clearance is higher Hangzhou for lowering the Inspection than international standards. sampling % from 10% to 5% [PPMO]. N.B. Agency in [ is an agency responsible for its implementation.  Project Appraisal Document Page 9 China: Container Transport Project 2. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Within the above policy framework, the project is structured to include two investment components. Cost Incl. % of Bank- % of Components Category Contingen Total financing Bank- cies (US$M) financing (US$M) A. Develop common-user ICDs with customs Physical & 85 54% 33 47% clearance function in two pilot corrdors. Institutional- Funds would be provided to qualified ICDs for: building (i) the construction of ICD facilities; (ii) the purchase of container handling equipment, container trucks and EDIIMIS; and (iii) technical assistance (TA) for enhancing operational and managerial capability. B. Upgrade container handling capacity at Physical & 73 46% 37 53% Tianjin Port. Fund would be provided to Tianjin Institutional- Port Authority for: (i) the purchase of gantry building cranes and other container handling equipment; and (ii) TA for enhancing berth productivity and for establishing 'a level playing field" for the intra-port competition between two terminal operators. Total 159 100 71 100 Note: The above are rounded-up figures. 3. Benefits and target population: The primary beneficiaries of the project would be export and import industries in project provinces, including land-locked provinces such as Inner Mongolia. If the project is successfully implemented, those beneficiaries would have better and more reliable access to foreign markets, which would, in turn, result in enhancing the international competitiveness of exports from these provinces. Establishment of intermodal links to seaports would also increase the attractiveness of these provinces as potential sites for foreign direct investments. Another group of beneficiaries would be foreign shipping lines and freight forwarders. Currently, most of these operators do not offer door-to-door transport services to inland load centers. The envisaged policy reforms would contribute to the creation of a more competitive business environment, which would eventually benefit shippers, both Chinese and foreign. 4. Institutional and implementation arrangements: Financial arrangements: The Bank would extend the loan to Ministry of Finance (MOF) which would, in turn, onlend to four provincial governments (Hebei Province, Zhejiang Province, Inner Mongolia Autonomous Region and Tianjin Municipality), more specifically their provincial finance bureaus (PFBs). PFBs would further onlend it to municipal finance bureaus (MFBs). MFBs would then onlend the money to selected project enterprises. The on-lending terms and conditions from MOF to PFBs, from PFBs to MFBs, and from MFBs to project enterprises, would be the same as the Bank's standard terms and conditions. Foreign exchange risks would be assumed by project enterprises. The project would be implemented over the five years, from January 31, 1999 to December 31, 2004. The loan will be closed on June 30, 2005. During this period, a mid-term review would be held in June, 2001.  Project Appraisal Document Page 10 China: Container Transport Project Project management: SETC would be responsible for the overall coordination, and for ensuring the smooth implementation of the project. It would: (i) formulate project management rules, and guide provincial govemments based on these rules; (ii) coordinate with central government agencies with regard to the implementation of policy reforms and project execution; (iii) liaise with the Bank on all aspects of the project implementation including the organization of project launch workshops; and (iv) supervise and evaluate the implementation of the project. These SETC's functions would be carried out through Central Project Management Office (CPMO), established in July 1997 by Government Decree. CPMO is headed by Deputy Director of Economic Operations Department of SETC with support of two deputies and full- time or part time staff including procurement experts, an economist, an engineer, a financial specialist and a EDI specialist. The arrangements for the project management differs from a ICD component to a port component. The ICD component would be managed at three levels: central, provincial and municipal/enterprise levels. At central level, CPMO would be involved in several activities including: (i) the management of procurement of goods, and provision of necessary guidance to the provincial govemments with regard to the procurement of civil works; (ii) the management of technical assistance programs including the procurement of consultancy services and organization of study tours/training; and (iii) the compilation of progress, financial and audit reports to be submitted to the Bank. At the provincial level, provincial governments would be involved in project specific activities including: (i) the administration of Special Accounts; (ii) the approval of withdrawal application of loan proceeds; (iii) the management of procurement of civil works and participation in the evaluation of procurement of goods; (iv) the selection of participants for foreign study tours and training in China; and (v) the compilation of progress, financial and audit reports to be submitted to CPMO. These functions would be carried out through Provincial Project Leading Groups (PPLGs) and Provincial Project Management Offices (PPMOs). PPLG is headed by Vice Governor (in Hebei, and Inner Mongolia), General Secretary of Provincial Government (Zhejiang) or Vice Major (Tianjin Municipality) and typically consists of representatives of provincial economy and trade commission, planning commission, finance bureau and communications department. PPMOs is headed, in most cases, by chief of provincial economic and trade commission and staffed by trained and capable full time and part time staffs. At the municipal/enterprise level, the sub-projects will be executed by the project enterprises under the supervision of the municipalities. Municipalities would establish Municipal Project Leading Groups (MPLGs) headed by vice-mayors of the municipalities and consisting of relevant departments in the municipalities. MPLGs would also be supported by a limited number of full-time and part time staff. Major functions of MPLGs include: (i) provision of assistance to enterprises for the mobilization of local counterpart funds; (ii) securing of the payback from the project enterprises from project enterprises; (iii) the compilation of progress, financial and audit reports to be submitted to PPMO; and (iv) the endorsement of withdrawal applications of loan proceeds to be submitted by project enterprises. Under the supervision of the MPLGs, the project enterprises will implement the sub-project. Their functions include: (i) the construction of ICD facilities through selected contractors; (ii) the purchase and installation of equipment through agreed procurement procedures; (iii) the withdrawal of the loan proceeds, (iv) the management of the project accounts, (v) the preparation of financial statements and securing audit service; (vi) the implementation of agreed actions; (vii) the preparation of progress reports; and (ix) maintaining an effective financial management system; and (x) the implementation of environmental mitigation plans. The port component would be carried out by TPA. TPA would be responsible for: (i) the administration of Special Account; (ii) the implementation of procurement under the guidance of CPMO; (iii) the withdrawals of loan proceeds and the management of the project accounts; (iv) the preparation of progress, financial and audit reports to be submitted to CPMO; (v) the selection of participants for study tours/training; (vi) implementation of technical assistance program with coordination with CPMO; (vii) implementation of policy actions; and (viii) maintaining an effective financial management system.  Project Appraisal Document Page 11 China: Container Transport Project Under the supervision of the TPA, THCC would implement: (i) the upgrading of container terminals; (ii) the installation of equipment; and (iii) the implementation of environmental mitigation plans. Procurement: Because of the involvement of many executing agencies, SETC has established a principle of "managing centrally and implementing locally" with regard to the procurement. Under this principle, CPMO coordinates the whole process of procurement. For goods to be procured under Intemational Competitive Bidding (ICB), CPMO will engage international tendering companies (ITCs) for processing documentation. Central Procurement Group (CPG) was established to make a joint decision by CPMO and provincial governments. CPG will approve bidding documents and evaluation reports. After its approval, CPMO will send them to the Bank for its review through ITCs. Contracts with suppliers will be signed by the ITC, and cosigned by project enterprises. For goods procured under National Competitive Bidding (NCB) and National Shopping procedures, the same arrangements would be applied except for the use of ITC which is not required for NCB and NS procurement in China. Since all civil works are small in scale and scattered in many provinces, and thus less likely to arouse interest of foreign contractors, civil works would be carried out in accordance with the National Competitive Bidding (NCB) procedures. Different from procurement of goods, PPMOs would be responsible for civil works procurement. PPMOs would engage qualified design institutes for the preparation of bidding documents. PPMO will send bidding documents to CPMO for its review. CPMO will then send them to the Bank's Resident Mission in China (RMC) which is authorized to issue no-objection. After bid opening, PPMOs will prepare evaluation reports, which would again be reviewed and approved by CPMO and later by RMC. Civil works contracts will be signed by project enterprises. Project enterprises will engage independent engineers to supervise the construction of ICD facilities. For services, CPMO will prepare a TA implementation plan by March 15, 1999 which will be submitted to the Bank for its review. Based on the approved TA implementation plan, CPMO will recruit consultants in accordance with the methods described in Annex 6. Procurement methods, model bidding documents to be used and thresholds to be applied are detailed in Annex 6. Disbursement: To facilitate disbursements under the project, four separate Special Accounts would be established in commercial banks satisfactory to the Bank and located in each of four provinces. These Special Accounts would be accessible by Provincial Finance Bureaus (PFBs). Detailed procedures would be explained in Annex 6. Project accounts, audit and reporting: Project enterprises will maintain complete project accounts, while MFBs and PFBs will keep simpler accounts which record only fund flow. These offices will be staffed by qualified accounting staff. Accounts and documentation to support the Statement of Expenditure (SOEs) will be maintained by project enterprises, and readily available for review by visiting Bank missions. Project accounts at each level would be audited by Local Audit Administrations, and audit reports will be sent to higher level PMOs. CPMO will compile all audited project accounts and audit reports, and send them to the Bank. In addition, project enterprises will prepare enterprise financial statements and get them audited by local Audit Administrations. These audited financial statements would be submitted to higher PMOs and sent to the CPMO. CPMO will then send them to MOF and the Bank for their review. Financial management system: The proposed project would be carried out by two types of executing agencies: (i) an existing entity-TPA; and (ii) new entities to be established in late 1998-ICD operators.  Project Appraisal Document Page 12 China: Container Transport Project As to the TPA, a Bank's financial expert has assessed its financial management capability in terms of its staffing, accounting system, the preparation of financial statements, internal control system and auditing. The financial management system of TPA was found adequate except for the arrangements for auditing. Although TPA's financial reports have not been audited by an independent auditor to date, TPA agreed to have its project accounts and corporate financial statements audited by an independent auditor satisfactory to the Bank. TPA also agreed to submit required progress reports on the financial status of the TPA to the Bank in accordance with the financial management reporting arrangements agreed between PRC and the Bank on January 12, 1999. Regarding the ICD, in consideration of the fact that the project ICDs are new entities, it was agreed that the project ICDs would: (i) recruit adequate numbers of qualified staff for the financial management; (ii) maintain adequate intemal control; and (iii) have their project accounts and financial statements audited by an independent auditor satisfactory to the Bank. As to the accounting standards, it was further agreed (iv) to use the accounting standards for the stock companies, developed by MOF in January 1998 which are much closer to internationally acceptable accounting standards (IAAS) than the previous Chinese standards. To facilitate the adoption of these new standards, the financial expert of RMC has provided assistance to CPMO in developing Model Financial Statements for ICDs and the Project Financial Management Manual (both of which was submitted at the end of 1998). Furthermore, in view of the importance of developing a strong institutional capability for the financial management, CIDA has agreed to provide extensive training to staff of the project ICDs on the financial management system. CIDA will also provide ICD operators with computer software for accounting and financial management, and train the staff of ICDs to get them familiarized with the use of the software. The results of the assessment was detailed in Annex 15. D: Project Rationale 1. Project altematives considered and reasons for rejection: In selecting pilot corridors, SETC applied two selection criteria: (i) linkage with major container ports with deeply penetrating hinterland; and (ii) difficulty in mobilizing financial resources other than from the Bank. Four gateway corridors extending from Shanghai, Tianjin, Qingdao, and Guangzhou fulfill the first selection criteria. These gateway corridors were further examined in light of the second criterion. The Qingdao corridor was excluded because SETC has already financed its development. The Guangzhou area was also excluded because of the relative ease with which it attracts foreign investments. There were four sub-corridors for the remaining two gateway corridors extending from Shanghai and Tianjin. Those subcorridors are: (a) Tianjin-Beijing-Hebei-Baotou, (b) Tianjin-Zhengzhou-Wuhan, (c) Shanghai-Jinan-Wuhan (Yangzhe River subcorridor), and (d) Shanghai-Zhejiang-Nanchang. These subcorridors were further examined on the basis of two additional criteria formulated by the Bank team: (iii) whether the corridors could be developed by private-sector foreign investors; and (iv) whether the corridors in question serve land locked provinces with low income levels. With regard to the third criterion, the Wuhan-Zhengjou-Tianjin sub-corridor has attracted strong interest from foreign investors (although still not yet realized) because of its location (Wuhan is often called the Chicago of China). The Yangzhe River subcorridor is attractive to foreign investors because of numerous industrial activities along the River. For these reasons, subcorridors (b) and (c) were excluded from the list. The remaining two eligible subcorridors, (a) and (d), are found consistent with the fourth criterion. Both serve two land locked provinces, Inner Mongolia Province (15th poorest in terms of per capita income among 30 provinces) and Jiangxi Provinces (5th poorest among 30 provinces).  Project Appraisal Document Page 13 China: Container Transport Project 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Latest Supervision (Form 590) Ratings (Bank-financed projects only) Sector issue Project Implementation Development Progress Objective (IP) (DO) Bank-financed: Development of pilot rail container services Railways VI S S Commercialization of rail container services Railways VII U U Promotion of containerization Three Ports S S Alleviation of port congestion Tianjin Port S S Alleviation of port congestion Ningbo & Shanghai S S Port Intemational Finance Corporation (IFC): Support of private sector financing of inland Wuhan Yangluo N.A. N.A. transshipment facilities Inland Port IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons leamed and reflected in the project design: