China - Third Henan Provincial Highway Project

Document of The World Bank Report No: 20193-CHA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A THIRD HENAN PROVINCIAL HIGHWAY PROJECT April 15, 2000 Transport Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December 1999) Currency Unit = RMB Yuan RMB Yuan 100= US$ 0.12 US$ 1 = 8.26 RMB Yuan FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS BZE - Beijing-Zhuhai Expressway IRR - Internal Rate of Return CAS - Country Assistance Strategy LGTS - Leading Group for Traffic Safety CPMS - Chinese Pavement Management System LRIPC - Local Roads Improvement in the Poor Counties EA - Environmental Assessment MOC - Ministry of Communication EAP - Environmental Action Plan NTHS - National Trunk Highway System EIA - Environmental Impact Assessment PCD - Provincial Communications Departments EMW - Electro-Mechanical Works PEO - Project Execution Office ENPV - Economic Net Present Value PIP - Project Implementation Plan ES - Executive Summary QCBS - Quality and Cost Based Selection FCUO - Foreign Capital Utilization Office QCMC - Quality Control and Monitoring Center GOVAI - Gross Output Value of Agriculture and RAP - Resettlement Action Plan Industry HAB - Highway Administration Bureau RDB - Road Data Bank HPCD - Henan Provincial Communications RIPA - Roads Improvement for Poverty Department Alleviation HPCDHQ - Henan Provincial Communications TSS - Traffic Safety Secretariat Department Head Office HPSPDI - Henan Provincial Survey, Planning and VOC - Vehicle Operating Cost Design Institute IEE - Initial Environmental Evaluation ZXE - Zumadian-Xinyang Expressway Vice President: Jemal-ud-din Kassum Country Manager/Director: Yukon Huang Sector Manager/Director: Jitendra N. Bajpai Task Team Leader/Task Manager: Jacques Tollie  CHINA THIRD HENAN PROVINCIAL HIGHWAY PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 8 3. Benefits and target population 8 4. Institutional and implementation arrangements 9 D. Project Rationale 1. Project alternatives considered and reasons for rejection 9 2. Major related projects financed by the Bank and other development agencies 10 3. Lessons learned and reflected in proposed project design 10 4. Indications of borrower commitment and ownership 11 5. Value added of Bank support in this project 11 E. Summary Project Analysis 1. Economic 12 2. Financial 12 3. Technical 13 4. Institutional 13 5. Social 14 6. Environment 15 7. Participatory Approach 16 F. Sustainability and Risks 1. Sustainability 17 2. Critical risks 17 3. Possible controversial aspects 18  G. Main Loan Conditions 1. Effectiveness Condition 18 2. Other 18 H. Readiness for Implementation 20 I. Compliance with Bank Policies 21 Annexes Annex 1: Project Design Summary 22 Annex 2: Project Description 24 Annex 2.1: Institutional Development and Reform in Henan Highway Sector 30 Annex 2.2: Summary of Training Program 36 Annex 3: Estimated Project Costs 38 Annex 4: Cost Benefit Analysis Summary 40 Annex 5: Financial Summary 50 Annex 6: Procurement and Disbursement Arrangements 61 Annex 7: Project Processing Schedule 67 Annex 8: Documents in the Project File 68 Annex 9: Statement of Loans and Credits 70 Annex 10: Country at a Glance 73 Annex 11: Major Related Projects Financed by Development Agencies 75 Annex 12: Environmental Assessment and Action Plan Summary 76 Annex 13: Review of Financial Management System 81 Annex 14: Road Management Improvement 90 MAP(S) IBRD 30686 National Trunk Highway System IBRD 30687 Henan Highway Transport System IBRD 30688 Zhumadian-Xinyang Expressway  CHINA Third Henan Provincial Highway Project Project Appraisal Document East Asia and Pacific Region EASTR Date: April 15, 2000 Team Leader: Jacques M. Tollie Country Manager/Director: Yukon Huang Sector Manager/Director: Jitendra N. Bajpai Project ID: P058844 Sector(s): TY - Other Transportation Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: N Project Financing Data Z Loan [l Credit Dg Grant OI Guarantee D Other (Specify) For Loans/Credits/Others: Amount (US$m): 150 Proposed Terms: Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% LFfha L " lA. n1. ,,,,, -g ,,,,,,,,,a , . . GOVERNMENT 210.00 0.00 210.00 IBRD 0.00 150.00 150.00 IDA Total: 210.00 150.00 360.00 Borrower: THE PEOPLE'S REPUBLIC OF CHINA Responsible agency: HENAN PROVINCIAL COMMUNICATIONS DEPARTMENT HPCD Address: No.91, Zhongyuan Avenue, Zhengzhou, Henan 450052, China Contact Person: Mr. Shi Faliang, Deputy Director Tel: 86-371-7449770 Fax: 86-371-7449862 Email: wwgg@public2.zz.ha.cn Estimated disbursements (Bank FY/US$M): FY 2001 - - - 005 2Q6. Annual 4.0 40.0 45.0 40.0 16.0 5.0 Cumulative 4.0 44.0 89.0 129.0 145.0 150.0 Project implementation period: June 2000-June 2005 Expected effectiveness date: 07/31/2000) Expected closing date: 12/31/2005 OCS PAD FPn- Rev. -0h. 2,Oa  A. Project Development Objective 1. Project development objective: (see Annex 1) 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 reduced and mobility enhanced 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 through institutional and management measures in support of improved asset maintenance, safety and construction quality, while preparing the sector for commercialization opportunities. 2. Key performance indicators: (see Annex 1) The principal outcome/impact indicators selected for monitoring progress towards the above development objectives are: 1. Reduction in transport costs. 2. Gross output value of agriculture and industry in affected counties. 3. Balance of provincial expenditures programs (i) between new construction, rehabilitation and maintenance, and (ii) between classes of roads. 4. Percentage of road maintenance expenditures put out to competitive tender, and responsiveness and effectiveness of maintenance programs. 5. Traffic accident rates on new and existing highways. 6. Financial performance of expressway company in terms of debt repayment and O&M expenditures. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R98-107 (CAS Progress Report) 05/06/98 Date of latest CAS discussion: 05/28/98 The CAS, which reflects the Bank's strategic objectives of fostering growth, reducing poverty, supporting better governance, and improving the environment, has identified infrastructure improvement as a key area of China's development agenda to be supported by the Bank. The sector-specific goals supported by the project are: * contribution to growth through removal of highway bottlenecks, thus facilitating inter-provincial trade and commerce; * contribution to poverty reduction through improving rural accessibility in poor counties of Henan, which is a transition province between the coastal areas and the western provinces; * better governance through improved sector management and rationalized road expenditures; and * improving environment through continuous attention to traffic safety and environmental/social impacts. -2 -  2. Main sector issues and Gover nment strategy: 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) OED Report on China Transport (1998); and (iv) Review of Highway Technical Assistance (1999). 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 note on "China Highway Sector Issues" of February 1999, as well as in more recent discussions on an updated highway sector strategy, as follows: 1. 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. 2. 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 recent regional crisis and a fragile local financial sector are severe constraints on borrowings, specifically in the intemational markets while the potential for private fnancing remains limited under the current economic and regulatory environment. China has had only limited success in attracting debt finance for,the provision of highways. It has had much more success in attracting equity finance. Most of this finance come from the listing of existing operating companies on both local and intemational stock markets and the sale of minority shareholding (some of these transactions have involved Bank-financed assets). 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 (see D. 1.1 below). 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. 3. 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. -3 -  4. 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. 5. 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 strict construction quality standards, control and enforcement in future Bank highway loans. Government Strategy. In the medium term, the main concerns of the central 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 (1996-2000) were identified as follows: 1. high priority was given to developing rapidly the National Trunk Highway System. The Ministry of Communication (MOC) has identified about 35,000 km of highways throughout the country that would constitute a network of modem 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. According to MOC's estimates the entire 17,000 km 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; 2. development of provincial and rural roads that would feed into the NTHS was planned simultaneously in order to maximize the benefit of NTHS investment; 3. high priority was also given to providing all-weather access roads to remote/low income areas in the poor counties; and 4. policy and regulation reforms to be intensified with priority attention given to financing issues and to ensuring efficient utilization of funds. -4 -  This strategy has already succeeded in some respects. Of the identified 17,000 km of NTHS Phase I, construction of about 7,500 km have been completed and another 4,500 km more will be completed by the end of 2000. On the poverty a]leviation front, substantial achievements are also to be noted; in the case of Henan, the provincial government has made substantial investments to rural roads, providing basic all-weather accessibility to most counties and villages by the end of 1998 (see C. 1 .B below). However, policy reforms have lagged. The plan to introduce a fuel tax to replace the old system of road maintenance would represent an important step in establishing a stable road user, fee-based financing framework, along with increasing the decentralization of investment decisions from the central to provincial levels. However, this plan, approved by the People's Congress on November 1, 1999, is still awaiting final promulgation by the State Council. Under the Tenth Five-Year Plan (2001-2005) under preparation, highway reforms are expected to intensify in the context of the country's move towards a more open and competitive economy. 3. Sector issues to be addressed by the project and strategic choices: The project, which is the fourth highway project in the province, will address most of the issues mentioned above. Each of the previous projects (Henan Highway Project, National Highway Project, and Second Henan Highway project, all ongoing and at different stages of implementation) has attempted to tackle some of these issues, and one important task during project preparation was to take stock of past achievements, clarify/confirm the policy and institutional goals, and agree on the remaining steps to meet these goals. Building sector institutions. The project will pursue efforts in three main areas: * Road safety: a study of "Factors Contributing to Road Accidents" has just been completed under the Second Henan Highway Project, and recommendations regarding improved data collection and preparation of a blackspot program are being implemented. More needs to be done, regarding in particular safety audits, overloading and driver behavior. The crucial role of the "Leading Group" bringing together Henan Provincial Communications Department (HPCD) and the Traffic Police will formally continue under the project. * Commercialization of toll highways: the province has invested heavily in high-grade toll highways which, as revenue-generating infrastructure assets, lend themselves to more commercialized and corporatized forms of operation and management. The project will support the province's move in that direction, drawing from the study of "Organization, Management and Mainitenance of Toll Highways", just completed under the Second Henan Provincial Highway Project. * Trade facilitation: two studies were completed with generally satisfactory results: (i) the Trucking Industry Study (1994/95) under the Henan Highway Project, and (ii) the Traffic Facilitation Study (1995196) under the National Highway Project. There is now much less involvement from government in the trucking industry, and good harmonization of traffic/toll rates between Henan and Hebei in the north. Problems which remain are the extent of overloading and the less-than-expected use of larger trucks. The project will ensure that interprovincial trade is also facilitated towards Hubei in the south. Strengthening Resource mobilization. The potential for private sector involvement in the investments contemplated under the project is minimal as explained in para. D. 1. 1 below, so the strategic choice here is clearly for a public provision of the infrastructure. Once completed, the expressway will be under the management of the provincial Expressway Management Company, whose further commercialization will be supported under the project. The project will also create the conditions for an easier implementation in the province of the fuel tax reform when it is enacted. - 5 -  Enhancing accessibility to remote/low income areas. Under the Second Henan Provincial Highway Project, a program of Road Improvement for Poverty Alleviation aimed at improving accessibility to the poorest counties in the province is under implementation, and results so far are encouraging. The project will pursue this objective, by complementing the important efforts made by the provincial government in terms of social infrastructure. Sustaining road maintenance. The earlier Bank dialogue on this issue with the province has been useful to raise awareness and understanding of the extent of the problem. The province is supposed to maintain a Road Data Bank (RDB) that would feed into the provincial version of the Chinese Pavement Management System (CPMS), but neither of these systems are fully operational. Currently planning of maintenance operations is done without much scientific support and cannot easily compete with the program of network expansion. The project will support the operationalization of both the RDB and the CPMS so that the province can establish a sound and balanced expenditures program. This will also be crucially important when the fuel tax reform will be implemented in the province. The project will also support HPCD's efforts for maintenance contracting, by ensuring that an increasing proportion of maintenance works will be contracted out during the project period. Improving construction quality. In addition to ensuring that all safeguard policies are enforced in terms of procurement and selection of contractors, the project will focus on three aspects. Firstly to improve the engineering design, the project will provide technical assistance for a research study on the optimal design of pavements on heavy-loaded roads. This is required because most trunk roads in the province suffer from heavy traffic, especially with the expansion of trade. Secondly construction supervision needs to be strengthened, and the project will focus on optimizing the involvement of the foreign partner in the joint local-foreign supervision team. Thirdly, both the Design Institute and the Quality Control and Monitoring Center (QCMC), which are crucial links at both ends of the construction quality chain, have been targeted under the Institutional Strengthening/Training program (the QCMC was established by HPCD in mid-1997, in the wake of a few incidences of road and bridge failings which had occurred earlier that year in other provinces). C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): To meet the three outputs mentioned in para. A. I above, the project includes the following components: A. Increased capacity in main north-south corridor. This component includes: i) construction of an expressway on the Zhumadian-Xinyang section which is part of the 2,600 km long Beijing-Zhuhai Expressway (BZE). The length of BZE in Henan province is about 525 km, and except for the project section, all other parts of BZE in Henan are either completed or under construction; ii) five linking roads to maximize the impact of the expressway; and iii) to facilitate the operational phase, provision of buildings/service areas, traffic engineering, and equipment for O&M. B. Improved accessibility in poor counties. In Henan, there are 18 prefectures, 11 8 counties, 2,148 townships and 47,000 villages. Of these 118 counties, 34 counties have been designated as "poor counties" (28 by the state and an additional 6 by the province). In 1995, these poor counties of Henan had 21,800 km of roads, of which only 40% were -6 -  all-weather roads. Six of the townships and 11,000 villages did not have road access. HPCD has been making substantial investments in rural roads in recent years, with the result that by the end of 1999, HPCD expects to complete the provision of all-weather roads to all but 650 villages which will be left with seasonal roads. These are mostly in the remote mountain areas. The remoteness of these villages, their small population size, and the costly mountain terrain make it a major challenge for HPCD, which expects to complete the program by the end of 2000. The Bank contributed under the Second Henan Highway Project, through the "Roads Improvement for Poverty Alleviation (RIPA)" program consisting of 30 RIPA road systems in 29 poor counties. This involved rehabilitating, upgrading and new construction of 1,667 km of roads, costing about US$70.2 million. The implementation of this RIPA component is scheduled for completion by the end of year 2000. The initial thrust of the project was to increase the all-weather accessibility for those poor villages in the two project prefectures that do not have such access now. However it became clear during project preparation that this basic concept was already satisfactorily dealt with by HPCD at the province level. To show their commitment, HPCD agreed to formally commit to complete the basic accessibility program in Zhumadian and Xinyang prefectures by the end of 2000 using their own funds; this commitment relates to the remaining 98 villages in the eight poor counties in the influence area of the project (see para. D.4 below). Given these conditions, the project now concentrates on enhancing the economic activity in the two prefectures through a program of Local Roads Improvement in the Poor Counties (LRIPC). This program consists of rehabilitating/improving about 400 km of local roads in the eight poor counties, using selection procedures similar to the ones used under the RIPA program. C. Enhanced sector management. This component will further strengthen provincial highway planning and design, contract management, traffic and transport information management, computer network technology and application, highway operation management and research agencies through (1) training of technical and managerial personnel to strengthen / foster their capabilities for their current jobs / future careers; (2) provision of hardware and equipment necessary for performance of new functions; (3) expansion of the roles of scientific research and quality control agencies within the province and across the country; (4) assistance in implementation of the action plans for (i) road management improvement, (ii) commercialization of toll highways, (iii) road safety and (iv) trade facilitation; and (5) establishment of a Provincial Conceptual Framework for Traffic Engineering Systems on Expressways in the province. The relevant institutional and policy actions are described in Annex 2.1 which provides an outline of the various action plans that would be consolidated into an "Institutional Development and Reform Plan" (para. G.2.2.f. below). Annex 2.2 provides a summary of the trainirng programs that will be carried out under the project. -7 -  A. Increased capacity in main Highways north-south corridor: A.1 expressway 235.74 65.6 119.00 79.3 A.2 linking roads 24.43 6.8 9.69 6.5 A.3 construction supervision 10.13 2.8 2.33 1.6 A.4 equipment for O&M 1.84 0.5 1.50 1.0 A.5 land acquisition/resettlement 24.01 6.7 0.00 0.0 B. Improved accessibility in poor Rural Roads 42.58 11.8 13.60 9.1 counties C. Enhanced sector management: Institutional Development C.1 institu. strengthening/training 0.59 0.2 0.38 0.3 C.2 traffic safety, road manage- 1.20 0.3 0.70 0.5 ment, pavement study C.3 specialized equipment 1.71 0.5 1.30 0.9 Total Project Costs 342.23 95.2 148.50 99.0 Interest during construction 15.80 4.4 0.00 0.0 Front-end fee 1.50 0.4 1.50 1.0 Total Financing Required 359.53 100.0 150.00 100.0 2. Key policy and institutional reforms supported by the project: One key policy reform which would have a positive impact on project sustainability is the establishment of the fuel tax which would replace several existing road user fees. Once enacted, such reform would lead to improved resource mobilization, sustainable road maintenance, and more balanced provincial road expenditures programs, but this may take some time. To reap these benefits in as short a timeframe as possible, the province needs to be well prepared. Although for obvious reasons this reform is not a project conditionality, the project is designed to support its implementation in the province through the Road Management Improvement Program. Another key institutional reform is the drive from traditional road agencies towards commercialization and corporatization of toll highways in the province. The options for improved forms of organization and management were analyzed under a recently completed study, an action plan based on the study's recommendations has been developed, and HPCD is committed to implement this action plan under the project (see Annex 2.1). 3. Benefits and target population: The major quantifiable benefits of the project are the reduction of vehicle operating costs and time costs for road users. The expressways will have shorter lengths, improved surface conditions and riding comfort, improved geometry, reduced traffic interference, and better safety facilities than the existing roads. Therefore, most of the long-distance traffic and some of the local traffic is expected to divert from the existing roads to the new expressways. In parallel, there will be a reduction in the current congestion levels on the existing roads. -8 -  The project will also benefit residents of poor counties in the province, through improved access to health, education and other social services as well as to markets. The total affected population in the expressway corridor between Zumadian and Xinyang is estimated at about 1.85 million, and the affected population in poor counties is estimated at 4.6 million (see Annex 2, LRIPC Table). Other benefits which are non-quantifiable, would include strengthening the capabilities of the provincial agencies and their related institutions which are responsible for the planning, design, financing, supervision, construction, operation and maintenance of highways in Henan. Also, the project is expected to result in lower traffic accident rates on the highway network through the implementation of the traffic safety component. Furthermore, the proposed project should lead to improvements in the quality of construction of highways through the continuing introduction of improved technology and stricter arrangements for supervision of construction. The project would also foster improved practices in the areas of environment, land acquisition and resettlement of affected people and participatory approaches to project preparation and implementation. 4. Institutional and implementaticon arrangements: The Henan Provincial Commnunications Department (BPCD) 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 studies, traffic safety and training components and the procurement of equipment would be executed by the Highway Administration Bureau (HAB) and the Foreign Capital Utilization Office (FCUO) under HPCD. The project would be implemented during 2000- 2005. Overall direction of the project at the central level would rest with the MOC. MOC will assume an oversight role and provide some technical support. The Bank loan would be granted to the Borrower, the People's Republic of China, which in turn would onlend the loan proceeds to Henan Province on the same conditions. D. Project Rationale 1. Project alternatives considered and reasons for rejection: 1.1 Public/private provision: Private sector development and fnancing for the Zumadian-Xinyang Expressway (ZXE) was considered but not retained for two main reasons: (i) China is still developing an appropriate policy, legal and regulatory framework for the private provision of toll highways. Work in this area has been ongoing for several years with Bank and IFC support, and at the recent request of SDPC, the Bank Group is presently undertaking a new private infrastructure TA which will review, and recommend improvements to, China's existing framework for private participation in infrastructure. (ii) The second reason, is the growing evidence on a worldwide scale that greenfield toll road projects are difficult to develop and (mance from private sector sources, due to the risk profile of such projects. Besides the country risk (legal and regulatory) and the commercial risk (traffic demand), there are substantial construction and completion risks which most private toll road developers and their commercial lenders are not prepared to accept. MAany private toll road projects around the world (e.g. Dulles Greenway in Virginia; MI/15 Motorways in Hungary; or the Mexican Toll Road Program, among others) which have been built during the 1990s are failing to generate sufficient revenues to enable timely debt service and therefore need complex restructuring, often connected with substantial government bailouts. Therefore a strategic choice was made to (i) provide the infrastructure from public funds and (ii) work with the -9-  province on an improved framework for commercialization of the agency that would operate ZXE once completed. This is consistent with the goal of asset securitization or concessioning which is currently the preferred method from the government for involving the private sector in investment funding/managing. 1.2 Route alternatives: Considering the existing and future socio-economic development and growth potential in the area of influence of the project, and the existing and future volumes and composition of traffic in the corridor as well as the capacity of the existing modes of traffic (rail and road), the proposed ZXE has been selected as the most economical way of meeting existing and future needs in the Zhengzhou-Wuhan corridor. The option of improving the existing 4-lane national highway was considered and rejected based on the findings in the prefeasibility studies. The selection of the ZXE alignment as analyzed in the prefeasibility and feasibility studies has also taken into account potential environmental and resettlement impacts, thus allowing to avoid or at least minimize these impacts in the final selection of the ZXE alignment. 1.3 Design standards: Alternative technical standards (lane number/width, bridge types, staging, etc.) have been considered as part of the optimization of the engineering design. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Lates uevso Secto!r Issue Project, (PR 0 0 :f ;atg..09 000 L{iSwi~ngs Implementation Development Bank-financed Progress (IP) Objective (DO) (Please refer to Annex I 1) Other development agencies (Please refer to Annex 11) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: While the overall performance of the large Bank highway portfolio is by and large satisfactory, a number of problems have occurred, which have been considered 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 of some projects and necessitated the extension of the closing date of several Bank loans), and slow pace of policy and institutional reforms, specifically relating to road financing (resource mobilization and balance of expenditures), 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, the focus was on engaging HPCD in a continuing policy dialogue which had 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 enjoy 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 - 1 0 -  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. Regarding the drive towards commercialization of toll highways, recent experience from other countries which have gone through the same process shows that it takes a substantial amount of time to establish and make operational such corporations and to change the management style and systems of traditional road agencies. This is mainly due to the fact that the implementation has to go hand in hand with education, training, purchasing of equipment and the adaptation of existing systems and techniques to the new demands. In the Henan case, the analysis of options, discussion of recommendations and development of the action plan were carried out under the Second Henan Highway Project, and implementation of the agreed action plan will take place under the proposed project. Hence this process has been designed to span two projects, which provides better likelihood for satisfactory achievements. 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-weather 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. 4. Indications of borrower commitment and ownership: There is strong support from the various levels of Government, firstly on the physical component. The Zumadian-Xinyang Expressway is the central element of the much larger Beijing-Zhuhai Expressway Corridor (Jing-Zhu) which, with a tolal length of some 2,600 kmn, constitutes China's highest priority highway investment. Since the province has already secured funding for the section between Xinyang and Hubei Border, the project's ZXE is thte last gap in the Jing-Zhu corridor. HPCD has completed project preparation in a relatively short period of time. Secondly, the borrower has shown strong ownership of the poverty alleviation objective, by formally committing to achieve 100% accessibility to villages in the poor counties of Zhumadian and Xinyang prefectures. Finally, the borrower is committed to achieving concrete results in terms of capacity building, by agreeing to follow through on recommendations of recently completed studies in the areas of road safety (a "Policy Statement on Traffic Safety" was approved in February 2000), commercialization of toll highways (a five-year Action Plan has been agreed which will be monitored under the project), and trade facilitation (a "Memorandum of Understanding for Coordination with Hubei province" was signed on "December 16, 1999). The Institutional Development and Reform matrix in Annex 2.1 provides details on such commitments. 5. Value added of Bank support in this project: 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 become effective. The continued involvemenit of the Bank would result in the removal of highway bottlenecks and increased traffic capacity in this high priority transport corridor. But more importantly, it would accelerate policy, institutional and manpower development in highway planning, design, supervision, construction, operation and maintenance, and create the conditions for improved resource mobilization (preparing the province for the introduction of the fiuel tax and further commercialization of road agencies). Bank involvement would also contribute to improving the design and construction quality of the roads under the project. - 1 1-  E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$200.2 million; ERR = 20.5 % O Cost effectiveness O Other (specify) This economic evaluation covers two project components that account for most of the project costs: (a) construction of Zhumadian- Xinyang Expressway (ZXE) including construction or upgrading of five linking roads, and (b) upgrading of ten local roads under the Local Road Improvement in Poor Counties (LRIPC) Program to help the poor areas in the project counties. The principal measured benefits of the project are savings in vehicle operating costs, time savings to vehicle occupants and enhanced road safety. The estimated overall economic internal rate of return (EIRR) for the project is 20.5%, with those for ZXE and LRIPC being 19.0% and 30.9%, respectively. The overall economic net present value (ENPV), based on 12% discount rate is estimated at Yuan 1,661.5 million, of which ZXE is estimated to contribute Yuan 1,246.5 million and Yuan 415.0 million for LRIPC. An analysis of the evaluation results and a description of the method used to derive them are provided in Annex 4 and summarized as follows: Summary of Economic Evaluation Results EIRR (in %) ENPV (Yuan million, 12%) a) Zhumadian - Xinyang Expressway: Zhumadian - Queshan 16.0 134.6 Queshan - Minggang 25.0 787.0 Minggang - Xinyang 15.9 324.9 Subtotal 19.0 1,246.5 b) Local Roads Improvement in Poor Counties 30.9 415.0 Total 20.5 1,661.5 2. Financial (see Annex 5): NPV=US$ 111.6 million; FRR = 9.2 % Construction of ZXE is the main component of the project and the only one that would generate revenues. All the ten local roads to be upgraded under the project are toll free. The province is planning to use the toll revenue from ZXE to cover the loan amortization charges. Although the highway will generate enough total revenue over the loan period, with a standard amortization schedule, there will be cash deficits in the early years (2006 and 2012) when ZXE starts to repay the loan. These annual deficits can be met by transferring the reserve funds from previous years. The FIRR for ZXE is expected to be 9.2 percent. The expected financial NPV of excess revenue, once all maintenance, operating and loan repayment have been met, is positive for the province and equivalent to Yuan 923.9 million (at 6 percent discount rate). For non revenue earning entities (the toll free roads), the financial evaluation is focused on the availability of sufficient counterpart funds and the operating expenses include the financial risks for the project roads. All the indicators show that the financial risks for these toll free roads are modest. A detailed assessment is provided in Annex 5. - 12 -  Fiscal Impact: The expenditures on road construction and maintenance for the "toll-free" roads included in the project constitute only a small fraction of HPCD fund flow. Therefore the fiscal impact would be minimal. Based on the HPCD plan, the capital: investment for the LRIPC program is less than 2.4 percent of annual total HPCD revenue. In addition, the required maintenance expenditure for LRIPC is less than 0.7 percent of total maintenance expenditure of HPCD. These low ratios indicate that the project presents a modest financial risk regarding availability of counterpart fund for construction and maintenance of the project roads (see Section F.2 below). 3. Technical: A thorough review of the engineering design has been planned in two phases. The first, which is to review the preliminary design, took place in October 1999. The second phase, to review the final design and bidding documents, is expected to take place in May-June 2000. The findings of the first review indicated that the quality of design was generally satisfactory but could be improved on two counts: i) need to increase the number of surveys/testing for road materials and on sites of bridges foundations; and ii) the designer made extensive use of underpasses for grade separation, to accommodate the local governments wishes to avoid any hindrance to the local population in respect of crossing the expressway with their means of transport. The results are very high embankments and huge quantities of fill in the first half section which is running in flat terrain. Recommendations were made to lower the vertical alignment to the maximum extent possible. These recommendations have been considered by BPCD in the final engineering design. 4. Institutional: a. Executing agencies: The main executing agency is HPCD, assisted by the Project Execution Office (PEO) of the Foreign Capital Utilization Office which will coordinate all project activities. A Project Construction Command Post will be in charge of construction of the expressway. Upon completion, the expressway will be operated by the Henan Expressway Administration Bureau or an operation company which may be established by then. Construction of other highways under the project will be handled by the Highway Administration Bureau. The IST component including procurement of equipment will be managed by HPCD. b. Project management: All the above agencies are fiilly familiar with Bank procedures after managing three Bank projects. Full ownership has been taken by HPCD management of the project objectives, especially the institutional components which will require continued strong commitment from HPCD. PEO have carefully prepared the Project Implementation Plan (PIP) where all implementation arrangements and responsibilities have been clearly defined. Two ongoing projects will be completed in July 2000, when the proposed project is expected to become effective. There-fore no capacity problem is expected for HPCD and PEO to manage all these projects concurrently. - 13 -  c. Financial Management and Disbursement: An assessment of the adequacy of the project financial management system is provided in Annex 13: Review of Financial Management System. The results of the review and corresponding Action Plan to address the measures needed to improve capacities are included in Attachment I of the Review. In terms of disbursement technique, the project will be utilizing the traditional disbursement technique as opposed to using the PMR-based disbursement system. Issues were raised with the borrower's and the project implementing entities about compliance with audit covenants in the ongoing Bank-financed projects. These issues have been properly dealt with during the October 1999 supervision mission and the appraisal mission (see Annex 13 Section V: Intemal Controls for details). Also see Section VII: Project Reporting Requirements, for details regarding agreements reached with the borrower on standards and formats for audited financial statements and timetable for their submission. 5. Social: The impact of the project can be summarized as follows: Component Permanent land Temporary land Houses Persons affected costs (hectares) (hectares) (sq.m) (RMB m.) Expressway 605 92.3 31752 4920 218.75 Linking roads 45.3 45.8 11941 3666 23.45 LRIPC - - I I - - Total 650.3 138.1 43693 8586 242.20 A Resettlement Action Plan (RAP) has been prepared for each of the expressway and the linking roads, in accordance with the requirements of OD 4.30. The RAP contains a summary of socio-economic data and impact of the project, a list of applicable laws and rules, the estimated compensation costs, the institutional arrangements for resettlement implementation, the public consultation and grievance procedures, and terms of reference for monitoring the impact of the project on the social environment. For the LRIPC program, there will be no change in alignment and no land acquisition and resettlement are anticipated. Nevertheless, a Resettlement Policy Framework has been prepared; and in the event any acquisition of land, temporarily or permanently, becomes necessary, prior to commencing work, Henan will prepare and implement a resettlement action plan in accordance with the Resettlement Policy Framework. Preparation of the RAP has benefited from the experience gained under previous projects and in particular from the findings of the thematic (resettlement) supervision missions, such as: * crucial role of the Resettlement Coordination Group to harmonize the work of: (i) the various units dealing with RAP preparation in HPCD and (ii) the provincial and local units dealing with RAP implementation; * thorough planning of all implementation activities that have to take place once the RAP has been issued, including training of local implementation units; and * need for clear mechanisms for defining compensation rates based on replacement costs. These lessons have been incorporated in the RAP. In addition there has been extensive consultation with affected people as well as with local governments that will have to manage the resettlement activities. Public participation in the process was adequate throughout RAP preparation starting from the initial surveys in mid 1998 up to November 1999 when the document was finalized. Project information was provided through newspapers, posters and public meetings. Focus groups were - 14 -  held and interviews were conducted extensively with local officials and the communities to: (a) further disseminate project information, (b) identify residents' concerns, and (c) consult those affected about resettlement and rehabilitation strategies. As a result, the project impact could be minimized, considering that the percentage of land required permanently vis-a-vis the total land of affected villages is less than 4%. Consequently, all affected people are expected to receive replacement land within the same community, and to be able to maintain their current activities. The RAP and the Resettlement Policy Framework were made public locally in the HPCD offices in December 1999, and following receipt of a letter of agreement on release from HPCD, these documents were sent to the PIC in December 1999. 6. Environmental assessment: Environment Category: A Environmental assessment activities took place from mid 1998, when surveys were carried out, up to December 1999 when documents were finalized. An environmental assessment (EA) was carried out for the ZXE and its linking roads. During its preparation and evaluation, Chinese national procedures as well as those required by the Bank in OP 4.01, were thoroughly followed. The EA documents such as Environmental Impact Assessment (EIA) Report, Environmental Action Plan (EAP) and Executive Summary (ES) were reviewed by the Bank and discussed with HPCD during the Preparation Mission in March 1999 and the Pre-Appraisal Mission in October 1999. The draft final EA documents of ZXE and its linking roads were submitted to the Bank in November 1999, and found satisfactory. A sectoral environmental assessment approach was applied to LRIPC. The sectoral environmental action plan (composed of the Initial Environmenlal Examination (IEE) and EAP report) was submitted to the Bank in December 1999. The major findings and discussions in these documents are summarized below. More detailed information on the EA of ZXE, its linking roads and LRIPC components is attached as Annex 12 to this document. A. Zhumadian-Xinyang Expressway (ZXE) and its Linking Roads Potential Impacts. Major potential environmental impacts include noise and air pollution during the construction and operation phases, water pollution during the construction phase. There are no natural habitats and environmentally protected areas along the project sites and no protected fauna and flora observed either. There are no cultural relics found. Mitigation Measures. The ],AP specified the appropriate mitigation measures, environmental monitoring plans, institutional arrangements to implement the EAP, training, and the cost estimate of implementation of EAP. Major mitigation measures include adequate selection of alignment; watering to prevent dust during the construction phase; and noise protection measures including relocation of villages and school, and construction of noise barriers. The engineering design and technical specifications for the ZXE and its linking roads have incorporated appropriate measures required for environmental protection. It was ascertained that the proposed highway would not affect ecologically sensitive areas, and that its construction and operation would have no significant adverse impacts on the environment through the implementation of the EAP. The HPCD would fumish to the Bank by January 31 of each year starting in 2001, an annual environmental monitoring report during the construction phase and for each of the first three years following completion of construction. - 15 -  B. Local Roads Improvement in the Poor Counties (LRIPC) No new construction will be included in the LRIPC Program. There are no natural protection zones and no cultural property in the project areas. Since the construction works are small in size, no significant potential impacts of the projects are envisaged. Appropriate mitigation measures have been integrated in the sectoral EAP and found satisfactory to the Bank. C. Public Consultation and Information Disclosure Public Consultation and Feedback. During the EA work, the local people have been intensively consulted. The following approaches have been adopted for public consultation under this project: (i) Consultation meetings with local people, council representatives, local governments and enterprises; and (ii) Questionnaire analysis of public opinion supplemented by interviews. The public showed concerns about irrigation disruption, community separation and environmental protection during construction, and requested to take adequate mitigation measures. These feedback has been reflected in the engineering designs (for instance, there is a high density of underpasses to accommodate the local population) and in the EAP. Information Disclosure. Final EIA, EAP and ES were submitted to the Bank in December 1999. These environmental documents were made public locally at HPCD also in December 1999. Following receipt of a letter of agreement on release from HPCD, these documents were sent to the PIC and to the Board on December 29, 1999. 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence; if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: The affected communities were involved in the formulation and comparison of alternative alignments as well as the location of interchanges, underpasses and grade separations. During the EIA preparation, the local people were intensively consulted through meetings with local government representatives and public opinion questionnaires supplemented by interviews. The environmental documents for the project were made public locally. Special attention was given to the consultation with affected people and their representatives during the preparation of the resettlement action plans. Implementation of the resettlement program is proposed to be a highly participatory exercise. A resettlement information booklet, including detailed entitlements of each household, main contents of the RAPs, compensation and entitlement policies and grievance procedures will be distributed to the affected people prior to resettlement implementation. Both internal and external (by independent monitors) monitoring of the resettlement program will be conducted. b. Other key stakeholders: The HPCD and its related institutions, as well as the Provincial Finance Offices, were heavily involved in all aspects of project preparation. They had a major influence on project design, especially the institutional strengthening and training components contained in the project. 16 -  8. Safeguard Policies The following safeguard policies which apply to the project have all been complied with under the project: Policy Applicability El Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 3 Yes E No El Natural habitats (OP 4.04. BP 4.04, GP 4.04) El Yes M No El Forestry (OP 4.36, GP 4.36) O Yes No El Pest Management ( E4i09 Yes No El Cultural Property fOPN 11.03' -li Yes'Z No El Indigenous Peoples (OD 4.20) El Yes 3 No El Involuntary Resettlement (OD 4.30) | Yes El No El Safety of Dams (OP 4.37, BP 4L7) [I Yes IZ No El Projects in International Waters (OP 7.50, BP 7.50 GP 7.50) E Yes 3 No El Projects in Disputed Areas f(P 7.60. BP 7.60, GP 7.60) l Yes IZ No F. Sustainability and Risks 1. Sustainability: Traffic volumes on highways are expected to continue to grow. Experience from completed and ongoing Bank-financed highway projects in China shows a high commitment for implementation of the physical components of the project which account for the majority of the project cost. In addition, HPCD has shown strong commitment to the institutional objectives of the project. 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. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure From Outputs to Objective Internalization of improved procedures for M Detailed TOR for all services, and close sector organization, management, and supervision from Bank missions. operation. Continued commitment to implement TA's M HPCD demonstrated a high level of ownership final recommendations. in the preparation of the various action plans. Reorganization of HPCD not disruptive, S Assurance was obtained on stability of core staff instead taken as an opportunity to involved in project management. improve efficiency. From Components to Outputs Counterpart resources available in timely M Strong commitment from Provincial manner Government. Also, MOC is providing a substantial contribution. - 17 -  Incentives are adequate to obtain good S HPCD took strong measures to reinforce performance from the selected contractors accountability in 1997. Careful review of and consultants procurement awards and strict contract supervision. Political pressure do not interfere with S PIP was carefully prepared by HPCD; should be realistic implementation plan and quality maintained as main tool for project management. requirements. Opportunities are opened to trainees to M Demand is high for skilled staff and is likely to apply new skills in workplace. remain so. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: The most likely controversial aspect of project implementation between Bank supervision missions and the HPCD could derive from the extent and speed of implementation of difficult institutional and policy reforms such as organizational changes, creation of new highway entities along commercial lines, increasing road maintenance funding, etc. Another controversial aspect would relate to disagreements among contractors, supervision engineers and the owners regarding construction quality (or lack thereof) of expressway civil works. This makes foreign construction supervision personnel in a mediating role necessary. G. Main Loan Conditions 1. Effectiveness Condition Issuance of acceptable legal opinions. 2. Other [classify according to covenant types used in the Legal Agreements.] 1. Agreement Reached with the Government: The borrower will ensure that the proceeds of the loan are onlent to the Beneficiary (Henan Province) on the same terms and conditions as the Bank loan, with the Beneficiary bearing the foreign exchange risk. 2. Agreements Reached with the Beneficiary: Highway Expenditures a) Henan Province shall provide basic all-weather accessibility to the 98 villages in 8 counties of Zhumadian and Xinyang Prefectures which are missing all-weather access, in a manner satisfactory to the Bank, by December 31, 2000; b) A condition of disbursement for LRIPC subprojects shall be the submission, for each LRIPC package, of technical, economic, social and environmental justifications satisfactory to the Bank; - 18 -  c) Henan Province shall undertake, complete and furnish to the Bank for its review and comments, an analysis and recommendation for the toll rates on the Zhumadian-Xinyang expressway (ZXE) by MAarch 31, 2003 taking into consideration the results of the similar studies on toll rates conducted under other Bank-financed highway projects in China and the experience with toll rates on major roads in China; d) Henan Province shall, by March 31 of each year commencing in 2001 and ending in 2005, furnish an annual highway expenditure report for the Bank's review and comments for the previous year, which would: (i) show the length of each class of highway by condition (excellent, good, fair and bad) as of December 31 of the previous year; (ii) show the completed physical works and actual expenditures of the previous year against the planned physical targets and budgeted funids of that year, for new construction, upgrading/improvement, rehabilitation, periodic inainte-nance, and routine maintenance; and (iii) show the targets of the highway program for the current year, including new construction, upgrading/ improvement, rehabilitation, periodic maintenance, and routine maintenance, in terms of planned physical works and planned expenditures. Policy and Institutional Reform and Road Traffic Safety Programs, and Training e) Henan Province shall: (i) by September 1, 2000, complete an institutional development and reform plan for the next 5 years for its respective highway sector, such plan to cover the areas of, inter alia, road safety, organizational development and strengthening, pavement design, training needs, equipment needs, management systems development, and trade facilitation; and (ii) furnish said plan to the Bank for its review and comments; f) Henan Province shall: on the basis of the institutional development and reform plan referred to in sub-paragraph (f) above, (i) by October 1 of each year, commencing on October 1, 2000, prepare and provide to the Bank for its review and comments an annual program of implementation; and thereafter (ii) take all appropriate actions to implement said annual program, taking into consideration the Bank's view thereon.; g) Henan Province shall: (i) carry out the training, in accordance with training programs acceptable to the Bank; and to that end (ii) by October 1 of each year, commencing in 2000, furnish to the Bank for its prior approval a rolling two-year training program; h) Henan Province shall: (i) by December 31, 2000, complete a study on a Provincial Conceptual Framework for Traffic E,ngineering Systems on Expressways, that would ensure a reasonable degree of compatibility between the various systems operating in the province, under terms of reference acceptable to the Bank; (ii) furnish said study to the Bank for its review and comments; and thereafter (iii) implement the recommendations of said study, taking into consideration the Bank's; view thereon; i) Henan Province shall: (i) by December 31, 2003, complete a study on long-term performance of asphalt pavements, under terms of reference acceptable to the Bank; (ii) furnish said study to the Bank for its reviewv and comments; and thereafter (iii) implement the recommendations of said study, taking into consideration the Bank's view thereon; j) Henan Province shall maintain the Leading Group for Traffic Safety and the Traffic Safety Secretariat. - 19 -  Environment, LandAcquisition and Resettlement k) Henan Province shall carry out the EAP and RAP in a manner satisfactory to the Bank and furnish any proposed revision of these plans to the Bank for its approval; 1) Henan Province shall maintain policies and procedures adequate to enable them to monitor and evaluate on an ongoing basis, in accordance with indicators acceptable to the Bank, the carrying out of EAP and RAP; and m) Henan Province shall prepare and furnish the Bank with: (1) by January 31 of each year starting in 2001, an annual environmental monitoring report during the construction phase and for each of the first three years following completion of construction; and (2) by November 30, 2000, and thereafter by March 31 and September 30 of each year starting in 2001 and extending until two years after the resettlement is completed, internal monitoring reports prepared by Henan agencies; and (3) by June 30 and December 31 of each year, commencing on December 31, 2000 and for the same time period mentioned above, reports prepared by an independent agency acceptable to the Bank, about the implementation and impact of the resettlement activities during the previous six months. Reporting, Monitoring and Auditing Henan Province shall prepare on the basis of guidelines acceptable to the Bank and submit to the Bank: a) a monthly progress report on the civil works of ZXE; b) a quarterly progress report on project implementation, covering all components and assessing the extent to which various implementation and development objectives have been met in the course of project execution and operation; c) within six months of the closing date of the Bank loan to the project, an implementation completion report in a format acceptable to the Bank; and d) the audited accounts for the project, statements of expenditures, and special accounts by independent auditors acceptable to the Bank within six months of the close of each fiscal year. H. Readiness for Implementation Z 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. IF 1. b) Not applicable. Z 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. Z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. a 4. The following items are lacking and are discussed under loan conditions (Section G): -20 -  1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Jacques M. Tollie Jitendra N. Bajpai Yukon Huang Team Leader Sector Manager/Director Country Manager/Director - 21 -  Annex 1: Project Design Summary CHINA: Third Henan Provincial Highway Project Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank MIissio n) Increase economic activity Gross Output Value of Province annual economic Increased economic activity along the high-priority Agriculture and Industry reports/statistics. and accessibility to all areas in corridors and in remote areas (GOVAI) in affected counties the province enhance through continuing and in a few control counties. Country economic reports opportunities in all sectors, infrastructure development and contribute to sustainable and equitable development. Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: Provide a more efficient and 1. Balance of provincial Annual review of sector Other projects in transport and effective transport expenditures programs: allocations and expenditures. rural development sectors infrastructure in support of * between new contribute successfully to social and economic construction, Review of functional performance of the economy. development in Henan rehabilitation and classification. Province. maintenance; and * between classes of roads. Annual report on expressway 2. Reduction in transport operation. costs. 3. Percentage of road expenditures put out to competitive tender. 4. Responsiveness and effec- Project performance tiveness of maintenance monitoring reports on programs. outcome indicators. 5. Traffic accident rates on new and existing highways. 6. Financial performance of expressway company re. debt repayment and adequate O&M. Output from each Output Indicators: Project reports: (from Outputs to Objective) component: A. Traffic congestion relieved A. I Average daily traffic on Project performance Internalization of improved and mobility increased in new expressway and existing monitoring reports on output procedures for sector main corridor Zhengzhou to road No. 107. indicators. organization, management, Hunan. A.2 Average vehicle speed. and operation. -22 -  B. Accessibility to poor areas B. 1 Average daily traffic on Continued commitment to in the province improved. rural roads in affected areas. implement TA's final B.2 number of days roads are recommendations. closed to traffic. C. Efficiency and C. 1 Qualitative evaluation trainees reports. Reorganization of HPCD not effectiveness in public sector reflecting sharing of new disruptive, instead taken as an management of the road knowledge and exercising new reports on implementation of opportunity to improve network enhanced. skills by staff trained under studies recommendations. efficiency. the project, as well as improvement of performance in specific functions and activities. C.2 ActuaL operation of RMS. monitoring of the 2 specific PI for Road Management. C.3 Quality of construction and maintenance as measured QCMC annual surveys on IRI, by selected indices. deflection, CBR. Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Increased capacity in main (in US$ mil]lion): Progress reports and Counterpart resources north-south corridor: disbursement reports. available in timely manner 1.1 expressway 235.7 1.2 linking roads 24.4 incentives are adequate to 1.3 works supervision 10.1 obtain good performance 1.4 equipment for O&M 1.8 from the selected contractors/consultants. 1.5 land acquisition & 24.0 resettlement. 2. Upgrading and 42.7 political pressure do not improvement of local roads in interfere with realistic poor counties. implementation plan and quality requirements. 3. Capacity building: 3.5 3.1 training 0.6 opportunities are opened 3.2 studies 1.2 to trainees to apply new 3.3 specialized 1.7 skills in workplace. equipment. Total project costs 342.2 - 23 -  Annex 2: Project Description CHINA: Third Henan Provincial Highway Project By Component: Project Component 1 - US$296.16 million The first output is Increased Capacity in the Main North-South Corridor. To meet this objective, five sub-components are designed as follows: Al. Construction of Zhumadian-Xinyang Expressway (ZXE): US$ 235.74 million The proposed expressway is an important part of the National Trunk Highway System as well as of the main North-South corridor in Henan Province. The project zone of influence covers the two prefectures of Zhumadian and Xinyang, which are important economic centers in the southern region of Henan with a total area of 33,998 square km and a total population of 15,49 million. Between the two cities of Zhumadian and Xinyang, the existing national highway 107 is one of the busiest highways in the province and the only north-south trunk road through the middle part of Henan, traversing through the cities of Zhumadian, Queshan, Minggang, Xinyang and Sedian as well as many industrial and mining areas along the route. The existing road is Class II, with a 9-15 m wide pavement, which does not allow for separation of the fast and slow-moving traffic along a significant length of the road, with the ensuing safety hazards. The existing road carries about 7,800-10500 medium truck equivalent (mte) per day (or about 15600-2 1000 passenger car units (pcu) per day). With the rapid economic growth and particularly with the completion and opening to traffic of the Xuchang-Lehe Expressway and the Lehe-Zhumadian Expressway, the road can obviously not meet the demand at an acceptable level of service. The widening of the existing road is not feasible as most of the roadside had been extensively developed with a consequent high number of people to be resettled and the related high construction costs. The recommended alignment is located to the east of the Beijing-Guangdong Railway and generally parallel to the existing national road 107 (see Map I). It is generally about 5-7 km away from the main cities along the existing road, thus reducing the number of people to be resettled and providing space for such cities to expand in future, and also reducing the lengths of linking roads (to ZXE) to be constructed or improved. The proposed expressway would be about 95 km long, consisting of four paved lanes, each 7.5 m wide with a full width of subgrade of 28 m and a 4.5 m wide median, according to the national geometric standards for highways. In addition to minimizing the use of land and resettlement of people, the alignment was selected to avoid mining areas and a natural conservancy area. Detailed studies of such areas were conducted as part of the environmental assessment of the expressway. Six interchanges would be provided along the proposed expressway. In addition to roadway construction, the ZXE includes: (a) one service area that provides facilities for parking, rest area, vehicle maintenance, fuel refilling, restaurant and commercial centers; (b) two facilities for administration and maintenance of the expressway; and (c) electric, electronic and mechanical supply and installation required for toll collection, telecommunication, traffic monitoring, road safety and lighting of toll plazas and interchanges. A2. Linking roads: US$ 24.43 million The opening of ZXE will bring a significant increase in traffic to the feeder roads connecting to the existing network. For a proper interconnection between the interchanges and the cities, five linking roads with a total length of 50.6 km were identified for new construction or improvement (Map 2). This will improve the functional performance of the road network system within the project influential area and facilitate local economic development. - 24 -  A3. Equipment for operation and maintenance of ZXE: US$ 1.84 million) Under previous projects in ifhe province, equipment was provided for the operation and maintenance of the Zhengzhou-Luo yang, Anyang-Xinxiang, and Luoyang-Sanmenxia expressways. In view of similar needs for the ZXE, some equipment will be procured for the operation and maintenance of the expressway. The agreed list is in the Project Files. Equipment procured for environmental monitoring purposes during construction of previous expressways will continue to be used on the ZXE. A4. Construction supervision: US$ 10.13 million Supervision of the ZXE will be carried out by a Joint Supervision Team (JST) which is an association between a foreign firm, which will be short-listed and selected according to terms of reference and procurement schedule agreed with the Bank, and a local firm selected according to MOC regulations. The JST will act as the Engineer under FIDIC terms. It will be headed by a chief engineer and each of the nine contract sections will have a resident engineer. The required level of consulting services to be provided by foreign firms is about 178 person-months. The foreign partner is expected mobilize in August 2000, provide training to the local partner during August-September, and start actual supervision activities in October 2000 (see appendix on "Implementation Schedule" in the PIP). A5. Land acquisition and resettlement: US$ 24.02 million Constmction of the ZXE wil.l require permanent use of about 650 hectares of land, and will affect 8586 persons, who need to be relocat:ed. Another 138 hectares of land would be required to be leased temporarily in the course of construction, generally at sites of big bridges, thus with no affect on the population. Along the alignment, no enterprise will be affected. Project impacts were identified through a detailed investigation of affected persons and properties conducted by Henan Communications Planning, Survey and Design Institute. A baseline social-economic survey of the affected people will be carried out before the actual implementation of resettlement to determine their existing income levels and standards of living. Project Component 2 - US$42.58 million B. The second output is Improved Accessibility in Poor Counties. To meet this objective, the project includes a Local Roads Improvement in Poor Counties (LRIPC) program, which would cover about 400 km of local roads in eight poor counties in the two project prefectures. These local roads would be rehabilitated or improved without change in alignment. Priority will be given to rural road segments that, through related road systems, explicitly enable local people to have an easier access to education, health and other social activities, and facilitate production and operation of business and benefit the improvement to the living environment of the local people. Such roads would be selected using criteria and procedures similar to the ones adopted for the selection of the RIPA program under the Second Henan Highway Project, as follows: * First-stage screening of poor counties: the counties selected by HPCD being based upon overall access improvements and linkages, and considered as complete systems, are deemed appropriate. It is therefore not necessary to screen further all the 14 poor counties for priorities. * Second-stage screening of road systems: the systems are to be analyzed for cost effectiveness using the system cost ratio (SCR) or the cost of proposed investments per population served in the influence area of the system. Given the types of roads envisaged under the LRIPC program, the SCR should be less than 250. In addition, the selection priority would consider another index for the number of days the road is closed. - 25 -  * Third-stage screening of sub-projects: this consists of an analysis of the economic and social benefits of each sub-project proposed at the end of the second screening. In view of the improvements considered under LRIPC, the expected minimum EIRR is 12%. The above steps have been undertaken and a preliminary LRIPC program has been identified. Annually, Henan would provide the Bank with a proposed annual implemention plan for its review and prior approval. As part of this plan, following a detailed survey, Henan would identify the specific roads to be covered, indicate whether there has been any revision in the results of the economic-social and technical analyses previously undertaken. In the event Henan proposes for inclusion in the program a road not previously identified, or the detailed survey results in revisions of the previous data, Henan would update the economic-social and technical analyses, or canry out new analyses, as the case may be, to ensure that the criteria for selection of the local roads have been met. In addition, Henan would prepare a supplemental environmental action plan and, if necessary, a supplemental resettlement action plan, in accordance with the sectoral environmental action plan and the Resettlement Policy Framework. The tentatively agreed LRIPC program is shown in the table below. Local Road Improvement in Poor Counties Program County System _ Road Section Influence System Prefecture Name No Cost RMB No Length Existing Proposed Pavement area Cost million (km) Road Class Road Class width (m) population ratio * Zhumadian Shangcai 1 45.0 1-1 43 IV 1I 9.0 600,000 75 Pingyu 2 45.0 2-1 31 III I1 9.0 430.000 54 Xinvang 3 50.4 3-1 34 III II 12.0 250.000 202 Xixian 4 54.0 4-1 43 III 11 12.0 300,000 180 Luoshan 5 ; 36.1 5-1 11 IV II 12.0 250,000 145 5-2 49 IV gravel III 7.0 , Xinyang Guangshan 6 9.6 6-1 32 IV III 7.0 750 000 12.8 Shangcheng 7 9.0 7-1 45 Unclassified IV 6.0 670,000 13.5 Xinxian 8 23.0 8-1 48 Unclassified Unclassified 7.0 700,000 32.9 Xinvang 9 28.6 9-1 36 Unclassified Unclassified 7.0 6500 44 _Luoshan 10 35.9 10-1 28 II Total 8 336.0 _ 400 4,600,000 i: Cost per person in the influence area Project Component 3 - US$ 3.50 million The third output is Enhanced Sector Management. To meet this objective, the project includes three sub-components as follows (Annex 2.1 below provides an outline and monitoring plan of the various tasks): Cl. Institutional Strengthening/Training: US$ 0.59 million Several departments of HPCD have been strengthened and extensive training programs have been undertaken under the provisions of previous projects. In particular, most offices dealing with Bank projects were strengthened substantially and have benefited from the various training programs. It is now proposed to target (i) HPCD Head Office (HPCDHQ), (ii) the Henan Provincial Survey, Planning and Design Institute (HPSPDI) and (iii) the QCMC. In particular, HPSPDI and QCMC are crucial links at both ends of the construction quality chain, and experience under previous projects has shown that important quality gains can be obtained through the strengthening of these units. - 26 -  In addition, comprehensive training (in China and abroad) is also included in the areas of environmental protection, constructi[on and maintenance technology and management, highway network planning and operations management, for senior professionals. Comprehensive study tours abroad are planned for senior management personnel in the areas of highway administration and management, highway network planning, financing, management and regulatory policy, and post-project evaluation. A summary of both training programs is provided in Annex 2.2. C2. Studies and Technical Assistance: US$ 1.20 million a) Asphalt Pavement Perfturmance Study. The purpose of the study is the improvement of performance of asphalt layers in heavily trafficked pavements, in order to increase the cost-effectiveness of heavy-duty pavement design and performance. The perfornance of asphalt pavements on previous expressway projects has revealed different types of deterioration including loss of friction, deformation under heavy loading and reflection cracking, related in part to the different design and materials approach used. The designs have resulted in a wide range of asphalt thickness from 100 mm to 320 mm and the associated wide range in cost. The study includes detailed performance analysis of a sample of existing expressway pavements in China in order to obtain early feedback from the research, and to recommend improvements to the national design guide. The construction of test sections for long-term pavement performance (LTPP) monitoring on the Zhumadian-Xinyang Expressway is also included as a means of long-term verification. Detailed TOR are available in the Project Files. b) Road Management Impgrovement The purpose is to provide HPCD with a modem tool for managing the road assets and making optimal use of funds in the road sector. Specifically the two objectives are i) to institutionalize computer-based support for network management; and ii) to improve maintenance strategies and programs to make the most effective use of budget allocations. The task would: a) Establish a regular survey of the 12,000 km national and provincial network - measuring key properties at different rates and frequencies according to the class of road, so that the cost is affordable and can be sustained after completion of the project; b) Upgrade the present database and computer systems - to produce good executive information, extend and adapt the application of CPMS to all the N/P network, install a computer network, and train staff in road management and use of the system; and c) Prepare the 2003 annual program and new 5-year plans using the new system. The tasks would be implemented by HAB and QCMC. Background and details of the component are given in Annex 14. c) Continuous Support to Other Critical Sector Issues. Under previous projects, three critical areas were identified: Road Safety, Traffic Facilitation, and Organization/Management of Toll Highways. Assistance was provided in the form of studies, which are now all completed. The studies recommendations were thoroughly discussed, and action plans have been prepared to implement the agreed recommendations. The project will now assist in the implementation of these action plans. * Road Safety. Traffic safety in China is substantially lower than in many of the fully motorized developed countries. During 1994, there were 24.3 fatalities per 10,000 motor vehicles, compared to 1.3 in Japan, 1.5 in the UK, 1.9 in Canada, and 2.2 in Germany. The situation is much worse in Henan than in China as a whole, with 38.2 fatalities per 10,000 vehicles. The proposed traffic safety component will assist to addressing this challenge, based on the recently completed Study of Factors Contributing to Highway Traffic Accidents (HTA Study) which showed that the problem is complex, involving the design and maintenance of highways, driver education and behavior, loading and balancing of trucks, vehicle condition and maintenance standards, education and enforcement, and institutional arrangements. This is not a single agency problem, and experience has shown that tackling it is fraught with difficulties (jurisdictional, cost sharing, non-physical elements). Hence tie design of the component: -27 -  i) In view of their importance for effective results in this area, the multi-agency Leading Group for Traffic Safety (LGTS) as well as the Traffic Safety Secretariat (TSS) established under Henan II will continue under Henan III. ii) The TSS has prepared a draft Policy Statement as the basis for action plans for enhancing traffic safety. Such Policy Statement was formally approved by the LGTS by February 14, 2000. iii) Two Traffic Safety Action Plans have been prepared: the first dealing with infrastructural elements would be under the control of HPCD; the second dealing with all other elements would be under the purview of the LGTS. Implementation of these Action Plans will be closely monitored under the project. * Commercialization of toll highways. HPCD prepared a report on "Reform Action Plan for Toll Highway Institution" whose primary purpose is to propose an action plan to implement the recommendations made in the recently completed Study of Organization, Management and Maintenance of Toll Highways. The Action Plan includes (i) improving data collection system, (ii) developing level-of-service standards, (iii) modemizing toll collection system, (iv) improving policy and regulatory framework for toll highways, and (v) implementing recommended organizational structure towards corporatization. The overall implementation would cover the period October 1999-October 2005. It was agreed that (i) monitoring of the Action Plan will be continued under the Second Henan Highway Project until the loan closing date of December 2002, and (ii) beyond the latter date, monitoring of the Action Plan would be pursued under the Third Henan Highway Project. * Tradefacilitation. HPCD prepared a report on "Proposed Trade Facilitation Action Plan" providing the current status of implementation of the recommendations made under the two completed studies (Trucking Industry Study and Traffic Facilitation Study), along with an action plan to deal with the remaining issues. The latter include (i) establishment of the Henan Provincial Highway Transportation Information Center, (ii) completion of and follow-up on HPCD's Overloading Study, and (iii) Henan/Hubei traffic facilitation. Following the good experience under the National (Henan/Hebei) Highway Project, a Memorandum of Understanding for Coordination between Henan and Hubei was prepared based on the draft proposed in HPCD's report, and signed by the two parties on December 16, 1999. It was agreed that (i) monitoring of the Action Plan will be continued under the National Highway Project until the loan closing date of June 2000, and (ii) beyond the latter date, monitoring of the Action Plan would be pursued under the Third Henan Highway Project. d) Study on a Provincial Conceptual Frameworkfor Traffic Engineering Systesn on Expressways. Various electrical and mechanical systems (EMS) have been -or are being- installed in the province for each of the expressways. To ensure a reasonable level of compatibility between these systems, it was agreed that a Provincial Conceptual Framework for EMS supply and installation on expressways in the province would be prepared under the project, providing a set of parameters and specifications for the design and implementation of such systems. This Framework would be prepared in the first year of the project to maximize its benefits to all planned expressways in the province. - 28 -  C3. Equipment for Institutional Strengthening: US$ 1.71 million The project will provide specialized equipment for institutional strengthening of the head office of HIPCD, the Construction Quality Control Center and the Design Institute, as well as equipment needed for the study of Asphalt Pavement Performance and the Road Management Improvement component. The agreed lists of equipment, available in the Project Files, have taken account of the equipment that were procured under the previous highway projects financed by the Bank as well as the equipment that were procured by HPCD over the past few years for the strengthening of the capabilities of relevant agencies. Equipment utilization ratios will be used as performance indicators. - 29 -  Annex 2.1: Institutional Development and Reform in Henan Highway Sector CHINA: Third Henan Provincial Highway Project I. PLAN OUTLINE A. Institutional Development and Reform Plan End-results: - Institutionalization of sector management improvement through continuing dialogue and development process over five years. - A successful organizational reform in HPCD. Outputs: - A five-year "Institutional Development and Reform Plan" integrating the various action plans for development of the Henan highway sector. - Annual core documents to serve as a dash-board for HPCD management. Indicators: - Annual update and progress report to be discussed at the joint review mission. - Reports on process and implementation of organizational reform in HPCD. Implementation - Foreign Capital Utilization Office, HPCD Agency/Period: - 2000/2005 B. Traffic Safety End-results: - Improved road safety and decreased traffic accident rates as a result of multi-disciplinary efforts. - Through evaluation of the provincial road safety, the validity of control measures will be assessed, and lessons will be taken stock of for further improvements. Outputs: - Leading Group for Traffic Safety fully operational to implement the Traffic Safety Action Plans (TSAP) in accordance with the Traffic Safety Policy Statement. - Improvement of the 19 black-spots identified already, identification and analysis of new road black-spots in the province under TSAP I. - Improvement of traffic safety management and traffic volume counting system, development and implementation of measures to improve behavior of drivers and pedestrians, improvement of traffic safety education under TSAP II. Indicators: - The annual progress report on the implementation of Henan TSAP I and II. - Henan Province Yearly Traffic Accidents Evaluation and Economic Losses Analysis Report. - Traffic safety evaluation indices: fatalities/10000 vehicles-year, accidents/10000 vehicles-year, injuries/10000 vehicles-year. Implementation - HAB/HPCD assisted by Henan Communications Scientific Research Institute Agency/Period: - 2000/2005 - 30 -  C. Trade Facilitation End-results: - Interprovincial traffic facilitation measures lead to improved utilization rates on the expres,sways, increased revenues from tolls and enhanced economic exchanges between Hernan and adjacent provinces. - The Hernan-Hubei trade facilitation coordination group plays an active role in accordance with the MOU signed by the two provinces on December 16, 1999. Outputs: - Establishment of the Henan-Hubei trade facilitation coordination group. - Analysis. of the interprovincial highway transportation conditions and recommendations for improvement. - Control of the extent of overloading. - Establishment and effective operation of the Henan Provincial Highway Transport Information Center. Indicators: - The study progress reports and a final study report. - Progress in implementation of study recommendations in the areas of technology, regulation and policy. - Annual implementation report on trade facilitation. Implementation - Foreign Capital Utilization Office, HPCD, assisted by Henan Communications Agency/Period: Scientific Research Institute. - 2000/2005 D. Institutional Strengthening and Staff Training End-results: - Improved efficiency in HPCD functions through introduction of new technology and advanced management skills. Outputs: - Improvement in staff professional calibers. - Institutional strengthening; - Equipment used in support of above objectives. Indicators: - Utilization of new knowledge and skills by trained staff in their daily work. - Utilization ratio of the equipment in institutional strengthening. - Annual updating of the two-year rolling training program. Implementation - Foreign Capital Utilization Office, HPCD Agency/Period: - 2000/20D3 - 31 -  E. Commercialization of Toll Highways End-results: - Increased efficiency in toll-road organization and management in the province. - Increased potential for future private sector involvement, through asset securitization or other means. Outputs: - Development of (i) a data collection system and (ii) a Level-of-Service rating system for toll highways. - Recommendations for improved design of central median, shoulder width and guardrail in the province. - Development and implementation of Maintenance Safety Regulations, establishment of a Maintenance Service Center; criteria for maintenance quality inspection and evaluation including improved equipment management. - Enhancement of toll collection system. - Formulation of policies and regulations for expressway management. - Reform of expressway management structures. Indicators: - Yearly Traffic Volume Survey Reports. - Progress in rationalization of maintenance management system. - Progress in implementation of enhanced toll-collection system. - Progress of Expressway Management and Organization Reform. Implementation - HECAB, assisted by the Henan Communications Scientific Research Institute. Agency/Period: - 2000/2005 F. Quality Improvement End-results: - Institutionalization of an effective quality supervision and control system. Outputs: - Focus on the key factors in quality assurance. - Strengthened organizational setup at provincial and local levels. - Systematic assessment of quality in HPCD operations including the performance evaluation of international consultants. Indicators: - Annual report presented by March 31 of each year. - Number of operations under monitoring and control. - Utilization rate of specialized resources (personel, equipment, budget). Implementation - Quality Control Institute, HPCD Agency/Period: - 2000/2005 - 32 -  G. Road Management Improvement Program End-results: - Improved efficiency of highway maintenance management in Henan Province. - Rationalized allocation of maintenance resources - Province better prepared for the introduction of fuel tax reform so that benefits are reapecL as soon as reform is enacted. Outputs: - Periodic automatic road condition surveys on the trunk highway network. - Improvement to the current PMS and RDB so that it can meet the actual demand of road management. - Maintenance programs based on PMS and RDB. Indicators: - Percentage of contracting out of maintenance works. - Road co ndition survey report every two year. - Progress report on enhanced maintenance planning and programming. Implementation - Highway Administration Bureau (HAB) of HPCD Agency/Period: - 2000/2005 H. Asphalt Pavement Performance Study End-results: - Improved pavement design for high-grade highways based on optimal thickness of semi-rigid structures and use of locally produced asphalt suitably modified. Outputs: - Guidelines for modification of locally produced asphalt. - Guidelines for designs of semi-rigid pavement structures and full-depth asphalt pavement structures. - Guidance for analyses of pavement life cycle and pavement damages. - Development of an asphalt and asphalt mixtures evaluation system. Indicators: - Presentation of progress reports at all phases. Implementation - Quality Control Institute, HPCD Agency/Period: - 2000/2003. - 33 -  I. MONITORING PLAN COMPONENT 2000 2001 2002 2003 2004 2005 A. Institutional A 5-year Institutional An integrated progress An integrated progress An integrated progress An integrated progress An integrated Development Development and report to be presented report to be presented report to be presented report to be presented progress report to be Reform Plan, a report at the joint review at the joint review at the joint review at the joint review presented at the joint and Reform Plan on the process and mission in October. mission in October. mission in October. mission in October. review mission in implementation of October. HPCD reform, and the first annual reporl to be presented at the joint review mission. B. Traffic Safety Progress reports: on Progress reports: on Progress reports: on Progress reports: on Progress reports: on A progress report on 7 black-spots improvement of 5 improvement of 4 improvement of 3 implementation of implementation of improvement, on black spots, on TSAP black spots, on TSAP black spots, on TSAP TSAP tt, on Henan TSAP II, a report on implementation of 11, and on 2000 lI,and on 2001 tI, and on Henan 2002 2003 HAEEL Henan 2004 HAEEL the Traffic Safety HAEEL Analysis; HAEEL Analysis; and HAEEL Analysis; and Analysis,and on the Analysis ,and a final Action Plan It, on the data on trafic new black spots a progress report on new black spots report of the black 1999 Highway accidents in 2000 to improvement plan to the new black spots improvement. spots improvement Accidents Evaluation be collected and new be developed. improvement, program. and Economic highway black spots Losses (HAEEL) study analysis to be Analysis; and data undertaken. collection on 98/99 traffic accidents. C. Trade Establishment of the The study's final Report on Report on Report on Report on Facilitation. Henan-Hubei Trade report to be presented. implementation of the implementation of the implementation of the implementation of the Facili-tation Coord- studies recommen- studies recommen- studies recommen- studies recommen- ination Group, start dations. dations. dations. dations. of the study and data collection, progress report. D. Institutional Domestic: 168, an Domestic :60, Domestic: 55; A final report on Report on IST Report on IST Strengthening equipment overseas: 12, study overseas: 13; study training programs and outcomes to be outcomes to be Strengthen . procurement plan to tour: 12, equipment tour: 16; an annual institutional integrated in integrated in and Training be prepared, an procurement report to be presented; strengthening to be Component A Report. Component A Report. annual progress completed, a progress and a two-year rolling submitted. report to be report to be presented, training program to be presented, and a two- and a two-year rolling updated. year rolling training training program to program to be updated. updated. E. Toll-Highway Traffic Survey Progress in traffic Progress in traffic Progress in traffic Progress in traffic Progress in improved commerciali- report, progress in survey, in improved survey, in improved survey, in improved survey, in improved data collection incl. maintenance maintenance maintenance maintenance maintenance fixed traffic survey zation management management including management includin management including management including stations, improved including equipment equipment equipment equipment equipment maintenance incl. management, and a management, in management, in management, in management, in equipment, enhanced computer controlled enhanced toll- enhanced toll- enhanced toll- enhanced toll- toll-collection system, toll-collection system collection system, and collection system, and collection system, and collection system, and and in institu-tional to be designed. in institu-tional in institu-tional in institu-tional in institu-tional reform. reform. reform. reform. reform. -34-  COMPONENT 2000 2001 2002 2003 2004 2005 F: Project A progress report on A progress report on A progress report on A progress report on A final report Quality quality management quality management quality management quality management including experiences to be presented by to be presented by to be presented by to be presented by lessons, Improvement March 31. March 31. March 31. March 31. recommendations. G. Road A progress report on A progress report on A progress report on A progress report on A progress report on Final Implementation Management PMS Study, and PMS Study, PMS Study, overseas PMS Study to be PMS Study, automatic Report, including Management automatic road comparison analysis training to be presented, automatic road condition PMS Study Final Improvement condition surveys to of maintenance plan completed, automatic road condition surveys, an improved Report Program be carried out. again:st actual plan, road condition surveys, and proposal maintenance plan, and and a data base to be surveys, and for an improved domestic training to established. intemational TA to be maintenance plan. be completed. completed H. Pavement A report regarding An exaluation system A design proposal on A progress report on Use of studies results Use of studies results structural study data collection from of asphalt and asphalt optimal thickness of asphalt modification, to be reported in to be reported in trial pavement and mixtures to be pavement to be and study of optimal Component A Report. Component A ReporL data process. preliniinarily established. pavement thickness, established. to be presented. - 35 -  Annex 2.2: Summary of Training Program Paae 1 of 2 No. Desciption Local Trainir Overseas Trai ing Overseas Tour Total Cost Estimate (0000 Y) No.of person - RMBy No.of person - Dollar Noof person - Dollar Converted person month (Y ) person month ($'0000) peson month ($'o000) RMBY Dollar to US Part I Trainmg for Institutional Serengthening 53 53 33.02 15 15 13.5 33.02 13.5 17.48 A. HPCD headoffice 20 20 12.46 11 11 9.9 1246 9.9 11.4 1, Computer network technology 10 10 6.23 3 3 2.7 6.23 2.7 3.45 ighway Prqect Dedson-maldng & 2. Management 4 4 3.6 3.6 3.6 3. Prject Monitoring 10 10 6.23 4 4 3.6 6.23 3.6 4.35 B. Traininm Needs of Henan Cornunications Design 13 1 3 8.1 4 4 3.6 8.1 3.6 4.58 1. Road & Bridge Surve, & Engtineering 3 3 1.87 1.87 0.23 2 Matenal Tesbng & Research 2 2 1.25 1.25 0.15 3. Project Management 1 1 0.9 0.9 0.9 Economic Analysis & Cost-Benefit 4. Esbmation 5 5 3.11 2 2 1.8 3.11 1.8 2.17 5. Traffic Forecasting 3 3 1.87 1.87 0.23 6. Contract Management & Oualitv Control _ 1 1 0.9 0.9 0.9 C. Quality Control Station 20 20 1246 12.46 1.5 1. Equipment Operabon 6.23 0.75 2 Trouble Shooting of the Ewunment . _ _ 6.23 0.75 Note: 1) Local training: unit cost-$750/person-month; overseas training: unit cost-$9000/person-month; overseas study tour unit oast-$1 1000/person month 2) exchanae rate: $1.0=RMBY8.3 - 36 -  Annex 2.2: Summary of Training Program Page 2 of 2 No. Description = Local Trainini OV eas Trainine _ )versea- 'T our Total Co! t Estimate ('0000 Y) No.of person - RMBY No.of person - Dollar No.of person - Dollar Converted person_ month (Y 0000) person month fV000ol person month (Moo=00 RMBY Dollar to US$ Part It Comprehensive Training/Study Tour 230 230 143.18 10 10 9 28 14 15.4 143.18 24.4 41.65 A. Training 230 230 143.18 10 10 9 143.18 9 26.25 1. Environmental Protection 30 30 18.68 4 4 3.6 18.68 3.6 5.85 2. Construction Technology & Equipment 30 30 18.68 2 2 1.8 18.68 1.8 4.05 3. Maintenance technology & equipment 60 60 37.35 37.35 0 4.5 4. Highway safety management 20 20 12.45 12.45 0 1.5 5. Construction & Operation/Maintenance 30 30 18.68 4 4 3.6 18.68 3.6 5.85 Management Information System 6. Highway Network Planning 20 20 12.45 12.45 0 1.5 7. Operation Manazement 40 40 24.9 _ 24.9 0 3 B. Study Tour 28 14 15.4 15.4 15.4 1. Highway Administration 4 2 2.2 2.2 2.2 2. Road/Highway network planning 6 3 3.3 3.3 3.3 3. Financing Management 6 3 3.3 3.3 3.3 4. Management System & Regulation 6 3 3.3 3.3 3.3 5. Project Post-Appraisal 6 3 3.3 3.3 3.3 Total 283 283 176.2 25 25 22.5 28 14 15.4 176.2 37.9 59.13 - 37 -  Annex 3: Estimated Project Costs CHINA: Third Henan Provincial Highway Project Two tables provide project costs by component (Table A) and by category (Table B): A. Project Costs by Component <1 Total Local Foreign Total RMB million US$ million US$ million US$ million Increased Capacity in Main Corridor: Zhumadian-Xinxiang Expressway<a 1647.70 103.23 95.29 198.52 Electr. & Mechan. works<b 131.10 2.84 12.95 15.80 Linking roads<c 193.12 13.96 9.31 23.27 Eciuioment for O&M of extresswav<d 14.55 0.29 1.46 1.75 Construction supervision 76.45 6.88 2.33 9.21 Land Acquisition & Resettlement 199.33 24.02 0.00 24.02 Sub-total Increased Capacity: 2262.25 151.22 121.34 272.56 Improved Accessibility in Poor Counties: Rural roads Program 336.60 27.58 12.98 40.55 Enhanced Sector Management: Training 4.92 0.21 0.38 0.59 Asphalt Pavement Performance Study 3.40 0.00 0.40 0.40 Road Mana2ement Improvement 5.81 0.40 0.30 0.70 Action Plans for Road Safety, Trade Facilitation & Toll Hwv Management 0.80 0.10 0.00 0.10 Eauinment for IST<d 13.47 0.33 1.29 1.62 Sub-total Caoacitv Building: 28.40 1.04 2.37 3.41 Total baseline cos 2627.25 179.84 136,69 316.53 Physical contingency <2 119.25 7.65 6.71 14.37 Price contingencv 94.16 6.04 5.30 11.35 Total Project Costs 2840.66 193.54 148.70 3142.24 Interest during construction 131.10 15.80 0.00 15.80 Front-end fee 12.45 0.00 1.50 Total Financine Reouiredi 2984.21 209.33 150.20 358.03 Note 1: The figures include tax and duties amounting to RMBY131. 1 million for <a; to RMBY21.9 m for <b; to RMBYI 1.64 m for <c; and to about RMBY3. 0 m for <d . Note 2: Physical contingency was calculated at 5% of civil works and construction supervision costs; and price contingency was calculated on civil works, supervision and equipment, using (i) the most recent MUV projections for international inflation rates of 1.6% for 2000 and 2.5% beyond, and (ii) lowered domestic inflation rates of 1% for 2000 and 2% beyond (as experienced in the sector in the Past several vears). - 38 -  B. Project Costs by Category <3 Total ___LoalU _ Foreign Total RMB million US$ million US$ million US$ million Civil Works Zhumadian-Xinxiang Expressway<a 1812.47 113.55 104.82 218.37 Electr. & Mechan. works<b 144.21 3.13 14.25 17.37 Linking roadcc 202.78 14.66 9.77 24.43 Rural roads Program 353.43 28.96 13.63 42.58 Sub-total Works: 2512.89 160.29 142.46 302.76 Goods Equipment for O&M and IST<d 29.42 0.71 2.83 3.54 Services Construction supervision 84.10 7.80 2.33 10.13 Training and studies 14.93 0.71 1.08 1.79 Sub-total Services: 99.03 8.51 3.41 11.92 Land Acauisition & Resettlement 199.33 24.02 0.00 24.02 Total I rojget Costs 2840.66 193.54 148.70 342.24 Interest durine construction 131.10 15.80 0.00 15.80 Front-end fee 12.45 0.00 1.50 1.50 Total FinancinReauired 2984.21 209.33 150.20 359.53 Note 3: Costs include contingencies. - 39 -  Annex 4: Cost Benefit Analysis Summary CHINA: Third Henan Provincial Highway Project Preface I. The economic evaluation of the project covers the following two project components: a) new construction of a 95.2 km Zhumadian- Xinyang Expressway (ZXE) including the construction and/or upgrading of five linking roads (total 50.6 km), and b) upgrading of ten local roads (total 400 km) in the poorest areas under Local Roads Improvement in the Poor Counties (LRIPC). 2. The analysis is based on the actual and forecast operating data on traffic, vehicle operating cost (VOC), economic project cost and transport user benefits. The main inputs to and assumptions for the evaluation are: a) capital investment and maintenance costs, revised to reflect January 2000 prices; b) the benefit stream, also reflecting January 2000 prices, comprising of savings in VOC, travel time savings through reduced congestion on the existing route, and reduction accident costs; c) an assumed project life of 20 years, the capital investment period during 2000-2007, depending on the road; being evaluated and d) full benefits starting to accrue on ZXE in 2003, for the ten local roads from 2002 to 2003 (depend on the roads being considered). 3. This Annex is comprised of three parts. Part I is the economic evaluation of ZXE (includes five linking roads). Part II is the economic evaluation of the ten local roads under LRIPC; and Part m is the overall economic evaluation of the project, including probabilistic risk analysis. PART I: ZHUMADIAN - XINYANG EXPRESSWAY 4. For purpose of evaluation, the ZXE been further divided into three sections: Length of the Length of the main Existing road (km) Expressway (km) Zhumadian - Queshan 20.0 19.0 Queshan - Minggang 41.0 32.4 Minggang - Xinyang 43.0 42.0 Total 104.0 95.2 Highway Expansion Plan -Justification for Investment 5. Overview. The province is a land transport hub located in the center part of China serving (a) east - west bound transport for linking the landlocked provinces to the coastal provinces, and (b) north - south bound transport for connecting the northem (Yellow River basin) and the southern (Yangtze River basin) in China. The terrain in the west region of the province is mountainous. The central and east regions are the plain. The Yellow River crosses from west to east covering the north part of the province. Basically, Henan is an agricultural province with over 90 million residents, with many rural areas still being classified as an poor counties. - 40 -  6. Currently, GOA is planning to build two vertical highway routes, two horizontal highway routes and three main highway corridors beiore 2010. One of the vertical highway routes passes through the province from north to south - Beijing / Zhuhai Expressway (BZE). The total length of BZE is about 2,600 km. The length of BZE in Henan province is about 525 km. Except for the project section, all other parts of BZE in Henan are either corrmpleted or under construction. Given its import role of the highway corridor to the provincial economy and in the near completion of other sections, the proposed project has the highest priority in the provincial highway development plan. Level and Timing of Investment 7. For this highway corridor, motorized traffic on the road has been increasing about 28.0 percent per year between 1990-1998, and by 1998 had reached 10,600-14,000 motorized vehicles per days throughout its length. Non motorized and other traffic (bicycles, animal carts, small farm tractors, motorcycle etc) adds an equivalent of about another 600-1,000 motorized vehicles per day. Even with a modest projected 8.1 percent annual growth, motorized traffic alone in this highway corridor would reach between 15,800- 20,800 vehicles per day by 2003, the proposed full opening year. This, depending on the section, would reach or exceed the capacity of the existing road. An economic assessment of the optimum opening year of the highway shows that part section of the road has almost reached to its capacity, so the optimum timing is now to construct the road as quickly as possible. Section I Section 2 Section3 Zhumadian - Queshan Queshan - Minggang - Minggang Xinyang Road Class (old road / new road) Super 11 / Expressway Super II / Expressway Super II/ Expressway Road Condition (old road / new road) Fair / Good Fair/ Good Fair/ Good Terrain Flat Flat Hilly Capacity (AADT/day) (old road / new 15,000/ 55,000 15,000! 55,000 15,000! 55,000 road) Motorized Traffic - 1998 (AADT/day) 12,900 10,600 14,000 Year for Capacity 2000 2003 1999 Optimum Opening Year 1999 2002 1998 Proposed Opening Year 2003 2003 2003 Highway Corridor Traffic 8. Estimates of base year traffic were made on the basis of routine traffic counts and a comprehensive origin and destination (O/D) survey that took place in September 3, 1998. Projection of base, generated and diverted traffic were made for 19 zones on the basis of a conventional growth model. A regression analysis was used to derive a relationship between economic growth and road transport demand. Based on the expected continued but declining local economic growth, it is estimated that traffic growth in the project corridor will be overall 8.1 percent per year between 1998-2003, 6.7 percent between 2003- 2013, and 5.2 percent between 2013- 2023. The overall traffic growth rates are summarized as follows: -41 -  Annual Traffic Growth Rate Car Bus & Truck Average Actual: 1990-1998 27.4% 28.1% 28.0% Projection: 1998-2003 8.0% 8.2% 8.1% 2003-2013 6.5% 6.8% 6.7% 2013-2023 5.0% 5.3% 5.2% 9. Alternatives. In the feasibility study, three alternative route alignments were considered, i.e. the west alignment, central alignment and east alignment. Each alternative was compared on the basis of costs, benefits, service to local cities and relationship to future economic development. The east alignment was selected on the basis of least overall cost and without having any additional environmental or resettlement consequences compared with the other two alternatives (details are available in the feasibility study reports). Traffic on the Highway 10. The new expressway is planned to become operational in the beginning of 2003. Based on the information provided by the O/D survey and the feasibility study, the diversion ratios were calculated by using fnancial VOC for the road users as an independent variable, with the impacts of the level of proposed tolls on the new highway, the tolls on the existing road, travel distance, and experience from other recently Bank financed highways in China. The results of the potential division of traffic to the new road show that between 58-63 percent of motorized corridor traffic may be diverted to the new highway, depending on the road section and for the opening year of ZXE. Sensitivity tests with lower diversion rates show that the ZXE would still be justified with an average division rate of about 50%, a rate exceeded on most of the toll highways so far financed by the Bank in China. 11. Traffic generated is assumed to be 10 percent of the basic traffic. Although there is an existing railway line between Zhumadian and Xinyang (96 km), no diversion of traffic from the railway to the new highway has been taken into account. The railway undertakes mainly on long distance bulk cargo transport with different O/D and average transport distance for railway in 1998 is 1,277 km. Most bulk cargo presently carried by the railway would not be attracted by its faster times because of much higher tariffs of the expressway (rail tariffs are about 6.2 Fen per ton-km compared with about 40 Fen per ton-km for road transport). The highway corridor traffic forecast, by sections, is summarized as follows: Nonrmal Traffic, bv Sect ions (AADT) Section 1 Section 2 Section 3 Zhumadian - Oueshan Oueshan - Minegang Minggang - Xinvang The existinsz road: 1990 1,899 1,546 1,767 1995 8,571 7,164 7,909 1996 10,682 7,801 9,489 1997 8,901 1,637 10,851 1998 12,902 10,654 14,002 2003 7,812 6,050 9,026 2013 13,964 10,870 16,357 2023 21,597 16,903 25,682 ZXE: 2003 11,266 9,775 11,776 2013 22,345 19,534 23,620 2023 38,443 33,888 41.121 -42 -  Economic Costs 12. Financial costs have been converted to economic costs by the elimination of price contingency, interest and fee payments during the construction, taxes and custom duty on imported materials by the application of shadow prices to each section of the new highway. The overall average shadow price is 1.025 and the resulting overall econornic cost is 88.2% of the financial cost. Economic Benefits 13. The economic analysis includes the benefits derived from: (a) VOC ( summarized as below) savings on the new highway for normal and generated traffic, (b) time savings through relieved congestion on the existing road, and (c) lower accident costs. The benefits resulting from the lower level of congestion were quantified. The value of passenger time savings was estimated at Y 1.0 per passenger-hour, based on updated values from a report on feasibility study methodology for highways in China (Rust PPK. Australia Feasibility Study Methodology Report, March 1996). The same source was also used for vehicle accident rates on different class of road. The benefits of generated traffic were calculated using the standard demand curve analysis and an assumed linear relationship between demand and travel cost over the relevant cost range. Economic Vehicle Operating Costs (Yuan per 1000 vehicle-km) Section 1 and II Section III The expressway The old road The expressway The old road Car 581 659 607 685 Medium bus 1,076 1,299 1,250 1,488 Large bus 2,3115 2,794 2,823 3,365 Small truck 1,069 1,261 1,336 1,541 Medium truck 1,355 1,543 1,670 1,897 Large truck 1,950 2,206 2,389 2,681 Tractor/trailer 2,941 3,334 3,879 4,339 -43 -  Sample of Economic VOC Calculation for Section I and II (Expressway) (Yuan per 1,000 veh.-km) Medium Large Smal Medium Large Trailer/ Car Bus Bus Truck Truck Truck Container Fuel 253 338 672 460 563 609 672 Tires 21 35 130 50 130 480 1,073 Maintenance 223 311 638 466 529 526 646 Crew 10 22 25 22 22 22 25 Depreciation 41 120 279 71 111 277 525 Subtotal 548 826 1 744 1 069 1 355 1.950 2,941 Time value of passengers 33 250 571 Total 581 1076 2.315 1.069 1,355 1,950 2,941 Economic Evaluation and Sensitivity Analysis 14. Total costs and benefits streams, Economic Internal Rate of Return (EIRR) and Net Present Value (NPV), for each section of the expressway were calculated. The overall EIRR for ZXE is estimated to be 21.5 percent with the following results for each road section and summarized as follows: Economic Evaluation of ZXE NPV (12%, Extra children Extra people attending EIRR (%) million attending school health services ('000) Yuan) ('000)" Zhumadian-Queshan 16.0 134.6 3.0 1.6 Queshan - Minggang 25.0 787.0 5.5 3.0 Minggang-Xinyang 15.9 324.9 6.8 3.6 Whole Route 19.0 1,246.5 15.3 8.2 1/ The quantified benefits of the ZXE represent only proportion of the total, the benefits coming from improved access to education and health, which can be quantified but not valued. 15. The basic evaluation of the project, by section and on the whole, indicates that the selected alignment is economically viable, and the sensitivity tests with respect to higher cost, lower transport demand, zero value of time and zero generated traffic benefit to the new highway maintain this position. The analysis of the optimum year for opening of the road showed that delaying the completion by two years would reduce the EIRR by about 4.0 percent. -44 -  Sensitivity Tests on the Economic Evaluation of ZXE (Yuan million) EIRR(%) NPV (12%) Delay the completion by one year (to 2004) 16.9 874.3 Zero value of time 17.9 999.3 Zero generated traffic 18.6 1,163.2 Lower traffic projection 15.1 458.5 Switching values % increase Cost increase to reduce EIRR to 12% 195 % Benefit reduction to reduce EIRR to 12% 52 % 16. In addition, the sensitivity of the evaluation resulting to variations in the costs and benefits of the project indicate that the conditions for the project's viability to fall below the minimum acceptable, that is, a NPV of less than zero by using 12 percent discount rate or an EIRR of less than 12 percent, are unlikely to occur. The benefits would have to fall to less than 52 percent of those in base case with no change in costs, the costs would have to increase to more than 1.95 times those of the base costs, or the costs would have to increase by 130 percent and the benefits fall to 67 percent at the same time. PART II: LOCAL ROAD IMPROVEMENT IN THE POOR COUNTIES (LRIPC) Selection of Highways and their Traffic 17. The LRIPC consists of ten local roads, classified by HPCD as among the worst roads in Zhumadian and Xinyang areas. The main objective of rehabilitation program is to upgrade existing local roads to Class II or Class III roads and improvement of two existing unclassified roads. The total length is 400 km as listed below: Length (km) 1. Shangcai - Zhoukou road 43 2. Runan - Pingyu road 31 3. Shilihe - Zhengjiatuchen road 34 4. Guanjin - Huabu Bridge road 43 5. Jiangwan Bridge- Gongjiapeng road 60 6. Guangshan - Mafan road 32 7. Shengcheng - Changzhuyuan road 45 8. Xinxian - Hepu road 48 9. Dongjianhe - Tangjianhe road 36 10. Zhengyang - Jiangwan road 28 Total 400 -45 -  18. Since all the ten local roads are located in the same area, the local economic development and traffic pattern are quite similar. Based on the actual traffic levels and local economic growth rates, traffic growth rates have been estimated 4 percent from 1998-2005, 3 percent from 2005-2010, 2 percent from 2010-2015 and 1 percent thereafter. Economic Costs and Benefits 19. Financial costs have been converted to economic costs using the same method and factors as for the ZXE, with the following results: Financial and Economic Cost for LRIPC (Yuan million) Financial Economic 1. Shangcai - Zhoukou road 45.0 39.8 2. Runan - Pingyu road 45.0 39.8 3. Shilihe - Zhengjiatuchen road 50.4 44.4 4. Guanjin - Huabu Bridge road 54.0 47.7 5. Jiangwan Bridge- Gongjiapeng road 36.1 31.8 6. Guangshan - Mafan road 9.6 8.4 7. Shengcheng - Changzhuyuan road 9.0 7.9 8. Xinxian - Hepu road 23.0 20.2 9. Dongjianhe - Tangjianhe road 28.6 25.2 10. Zhengyang - Jiangwan road 35.9 31.7 Total 336.6 296.9 20. The principal evaluated benefits of the local roads would be reduced VOCs through providing a better road surface, and the associated upgrading of road Class which would also result in higher traffic speeds. Together these effects would result in some generated traffic, assumed to be 5 percent of the normal traffic. Economic Evaluation and Sensitivity Analysis 21. The best estimates of EIRRs for the ten local roads range from 16.2 percent to 46.2 percent. The overall EIRR and NPV for the entire Local road is 30.9 percent and 415.0 million Yuan, respectively. -46 -  EIRR and NPV Summary for LRIPC NPV Extra children Extra people EIRR (12%, attending school attending health (in %) mil. Y) ('000)" services ('000)" 1. Shangcai - Zhoukou road 41.0 76.01 9.0 45.0 2. Runan-Pingyu road 46.2 91.06 8.1 30.0 3. Shilihe-Zhengjiatuchen road 35.3 86.68 9.0 57.0 4. Guanjin - Huabu Bridge road 27.3 56.22 13.5 63.0 5. Jiangwan Bridge- Gongiiapeng; road 40.1 77.69 12.9 42.0 6. Guangshan - Mafan road 35.6 18.17 7.5 42.0 7. Shengcheng - Changzhuyuan road 32.5 14.35 9.3 48.0 8. Xinxian - Hepu road 16.2 5.35 5.3 33.0 9. Dongiianhe - Tangiianhe road 16.4 7.11 3.4 24.0 10. Zhengyang-Jiangwan road 35.8 40.96 8.0 30.0 Total 30.9 414.98 86.0 414.0 1/ The quantified benefits of the LRIPC represent only proportion of the total, the benefits coming from improved access to education and health, which can be quantified but not valued. 22. The risk associated with evaluation of the local roads are that traffic will grow more slowly than projected, and that the civil works wi[ll be more expensive than projected and that the savings in VOC will be less than expected. All these risks were analyzed through sensitivity tests and the evaluation results found to be robust to all of them. For the project component to be non-acceptable (i.e. EIRR of less than 12% or NPV of zero), traffic growth would have to be negative, or civil works cost would have to increase by more than 283 percent or the VOC would have to reduce to about 35.3 percent of their expected value. PART m: THE OVERALL ECONOMIC EVALUATION OF THE PROJECT Overall Economic Internal Rate or Return (EIRR) 23. The overall EIRR of the project (including ZXE and the ten local roads ) is 20.5 percent and the NPV (12%) is about 1.66 billion Yuan. Project Risks 24. In all sections of the ZXE and LRIPC show acceptable and robust economic returns. The province has rich experience in the construction and operation of expressway and local road projects so the technical risks of implementing the project are minimal. Physically, the only remaining tangible risks are that prolonged delays may occur in dhe course of implementation due to very tight construction schedule. This will be addressed through training and technical assistance for the staffs in the early stage of the project. -47 -  Probabilistic Risk Analysis for Economic Evaluation of ZXE 25. The sensitivity test has a number of limitations. The test, for example, can not determine the degree of uncertainty. Thus, a probabilistic risk analysis using Monte Carlo techniques was carried out. In a Monte Carlo analysis, each factor is followed to vary at random between set limits and all factors are allowed to change simultaneously. Monte Carlo simulation provides probability distributions of the potential outcomes of decisions. By analyzing these distributions, we can assess the risk associated with making various decisions. The product of the analysis is a judgment on the possible range of the decision variable, and on the likelihood of each value within this range. 26. For the ten local roads, the sum of capital investment constitutes only 11.3 percent of total capital investment. In view of their higher EIRR and lower capital investment, the probabilistic risk analysis for the project is focused instead on the construction of ZXE. The factor with the most uncertainty associated with the economic evaluation of ZXE have been identified in the following: (a) traffic growth rate, (b) traffic diversion ratio to the new highway, (c) the value of vehicle operating costs, and (d) delay the new expressway opening year to 2004. The results of probabilistic risk analysis shows that the EIRR for the mostly likely scenario is 21.2%. The low scenario is 14.4% and the high scenario is 30.6%. The standard error of the mean is 0.7%. The detailed results of Monte Carlo test and probabilistic risk analyses are shown in Appendix A and summarized as follows: Summary of ZXE Risk Analysis Range of EIRR Most likely EIRR Standard Error of the Mean Section 1 12.6% - 28.2% 19.2% 0.6% Section 2 17.0% - 34.3% 24.3% 0.7% Section 3 13.0% - 29.6% 20.2% 0.7% Total 14.4%-30.6% 21.2% 0.7% -48 -  APPENDIX A HENAN: ZHUMADIAN- XINYANG EXPRESSWAY (2004) EIRR SIMULATION AND PROBABILISTIC RISK ANALYSIS Summary: Display Range is from 0.0% to 8C.0% EIRR (in%) Entire Range is from 0.4% to 135.3% EIRR (in%) After 825 Trials, the Std. Error of the Mean is 0.7% Statistics: Value Percentiles: Trials 825 Percentile EIRR (int) Mean 25.2% 0% 0.4% Median 21.2% 10% 5.3% Mode --- Low Scenario 20% 10.3% Standard Deviation 18.6% 30% 14.4% Variance 3.5% MostLikely 40% 17.6% Skewness 1.57 50% 21.2% Kurtosis 7.15 HighScenario 60% 25.1% Coeff. of Variability 0.74 70% 30.6% Range Minimum 0.4% 80% 38.0% Range Maximum 135.3% 90% 48.9% Range Width 135.0% 100% 135.3% Mean Std. Error 0.65% Forecast: Zhumadian- Xinyang Expressway (2004) 825 Trials Frequency Chart 12 Outiebrs .030 25 .023 18.75 C- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~1 = .015 12.5 e =8~~~~~~~~~~~ 0.0% 20 0% 40.0% 60 0% 80.0% EBRR (tn%) Assumntions Traffic Growth Rate Traffic Diversion Ratio Normal distribution with parameters: Normal distribution with parameters: Mean 100.0% Mean 100.0% Standard Dev. 10.0% Standard Dev. 10.0% Selected range is from -Infinity to +Inf,nity Selected range is from -Infinity to +Infinity Mean value in simulation was 99.9% Mean value in simulation was 99.8% Voc Triangular distribution with parameters: Minimum 90.0% Likeliest 95.0% Maximum 100.0% Selected range is from 90.0% to 100.0% Mean value in simulation was 95. 1% -49 -  Annex 5: Financial Summary CHINA: Third Henan Provincial Highway Project Preface 1. The financial evaluation of the project is comprised of two parts. Part I is for revenue earning entity; and Part II is for non-revenue earning entity. Since ZXE is designed as a toll road and is the only road in the project which generates the revenue (the total cost of ZXE constitute about 88 percent of total project cost) and there is no revenue for the ten local roads under LRIPC, Part I will focus on ZXE and Part II will focus on LRIPC. For financial cost of capital, considering that around 40.0 percent of the investment will be financed by the World Bank with at 7 percent interest rate and the opportunity cost of capital is 5 percent for local financing, the weighted average cost of capital is 6 percent. PART I: THE FINANCIAL EVALUATION OF ZXE 2. ZXE is planned to be put into operation in 2003. HIPCD is expected to form an expressway company before 2003 in charge ZXE. The company will responsible for day to day management, operation, maintenance, and development of the expressway. The company will also bear the financial obligations and its own development including the repayment of the loans. The main financial revenue of the company would be the toll income from the road users and the toll charge is strictly controlled by the government. The Financial Objective 3. HPCD has clearly indicated that the purpose of toll collection on ZXE is to repay the Bank's loan, to cover operating and non-operating expenses and routine medium and major maintenance, instead of to maximize the financial rate of return on the investment. The toll charges are therefore on the low side (about average 0.55 Fen per vehicle-km) with a low annual growth assumption. The toll charges forecast has been assumed to be increasing once in every four years (15 percent or average 3.6 percent p.a.) which is lower than the current estimation of 5 percent domestic general price escalation. Financial Forecast 4. The toll is charged on the basis of vehicle size (small passenger cars, large buses, small trucks, medium trucks, large trucks and trailers) and distance traveled. Some toll exempted vehicles (police, ambulance and military) are expected to be 1 percent of total traffic. Based on the current toll rate, a toll charge table for ZXE is established as follows: Toll Charges (Yuan/ vehicle-km) Small Medium Large Small Medium Large Tractor car bus bus truck truck truck - trailer 0.25 0.25 0.50 0.25 0.50 0.75 1.00 5. Based on the actual operating practice of the existing three provincial toll expressways, the operating costs of ZXE can be categorized as follows: working cost (a. wage and benefits, b. maintenance, c. operating materials and supplies, d. administration, e. others), and operating cost (working cost + - 50 -  depreciation). All other expenses e.g. taxes, interest payments of the loan and others, are also included in the calculation of the profitability of ZX5E. The results show, except for 2012 when the major maintenance would take place, that ZXE would be able to pay all expenditures, including operating, non-operating expenses and routine, medium and major maintenance, for operation of the expressway (Income statement, Appendix A). 6. The low toll charges policy on vehicles may not affect the daily operation of the expressway company. The capital requirements for the project investment, however, would generate cash pressure on the company, particularly during the first year of operations (2003). It is expected that the cash pressure of the company would be fully relieved after 2004 (Sources and applications of funds, Appendix A). 7. The shortage of cash in 2003 would affect current ratio (the liquidity of the company) in that year which estimated to be -0.2 ( to avoid short-term solvency problems, the current ratio should be more than 1.0). Also, debt! equity ratio and debt/ capital ratio (the financial leverage of the company) would not be sound until 2009 due to the debt, which would erode the equity of the company (Balance sheet, Appendix A). To guarantee financial viability of the ZXE operation, HPCD has released an official document to the Bank for full financial support to the company. The major assumptions for financial evaluation are shown in Appendix B. 8. The result of the financial evaluation shows that the financial internal rate of return (FIRR) on equity would be 12.6 percent. The FIRR for the total investment cost is expected to be 9.2 percent. If the delay of ZXE opening to 2004, the FIRR would be 12.0 percent and 8.9 percent for equity and entire project, respectively. For the financial probabilistic risk analysis, the four most uncertain factors which may affect the financial evaluation have been identified: (a) traffic growth, (b) toll charges, (c) total working costs, and (d) delay in opening the highway to 2004. The result reveals that the most likely FIRR would be 8.8 percent, while the worst and the best FIRR would be 8.4 percent and 9.3 percent, respectively. The detailed is in Appen dix C and summarized as follows. Summary of Financial Sensitivity and Probabilistic Risk Analysis Financial Sensitivity Test Financial Simulation and Risk Analysis FIRR (2003) FIRR (2004) Range of Most Likely Std. Error of To the project On equity To the project On equity FIRR / NPV FIRR / NPV The Mean FIRR 9.2 % 12.6% 8.9 % 12.0 % 8.4 % - 9.3 % 8.8 % 0.0 % NPV (6%, million Yuan) 923.9 1,341.9 849.2 1,267.1 699.3 - 975.7 839.5 7.8 Impact on Level of the Toll Charge 9. The level of tolls need to satisfy 2 objectives to: (a) generate enough revenue to obtain the higher financial rate of return on investrnent, but (b) not deterring potential users and compromise economic objectives. These objectives can be contradictory, since the former requires a higher toll while the latter a lower one. The analysis shows that the overall toll for 2003 would be about 0.55 Yuan/veh-km, which should generate the minimum sufficient funds to serve the repayment of the loan. Sensitivity tests to the level of tolls (see the table below) showed that even at a toll of 2.0 Yuan/veh-km, both EIRR and FIRR are still justified. Beyond this rate, the EIRR falls rapidly while the FIRR almost reaches its maximum. Further, if all construction costs were privately financed instead of being covered by a 60% government grant, average tolls would need to be over 2.0 Yuan/veh-km to generate optimal FIRR to providers of both debt and equity, and this toll level would substantially reduce the project's economic benefits. - 51 -  Sensitivity of Evaluation Results to Variations in Toll Charges Average Toll charges (Yuan/veh-km) EIRR (%) FIRR (%) 0.25 23.6 -- 0.55 19.0 9.2 1.00 16.7 23.0 2.00 14.6 32.9 3.00 6.2 29.1 PART II: THE FINANCIAL EVALUATION OF LRIPC 10. The ten local roads under LRIPC are toll free roads. The financial evaluation of these non-revenue earning roads should ensure that HPCD should maintain a sound financial practice to minimize the financial risks, i.e. the lack of counterpart funds for the construction including the future operating expenses to the project roads. 11. HPCD has provided the financing plan for total revenue and expenditure of HPCD for the Ninth Five Year Plan (9th FYP, 1996 - 2000) and the 10th FYP (2001 - 2005). Based on the provincial highway development plan, HPCD has acquired sufficient funds to cover the funds demand on new roads construction and the existing road network maintenance. In addition, a sound self-financing ratio of HPCD would ensure the implementation of the development plan. In 1998, the latest actual data, revealed about two third of HPCD total revenue are generated from the internal cash flow. The detailed source and expenditure for 1996 - 2005 is shown in Appendix D of this Annex. 12. Following the increases in length of the provincial road network every year, HPCD also provides additional resources for maintenance of the existing road networks. During the 8th FYP and the 9th FYP, the increases in rate of an average unit road maintenance expenditure is much faster then the increases rate of road network. It is estimated that increases of road network and average unit maintenance expenditure for the 8th FYP and the 9th FYP are 3.3 percent vs. 11.1 percent and 1.3 percent vs. 3.4 percent, respectively. The soundness of these allocation in terms of (i) level of retums and (ii) distribution across types of works will be reviewed as part of the Road Maintenance Improvement Program. Suffice it to say here that the expenditures on road construction and maintenance for the "toll-free" roads included in the project constitute only a small fraction of HPCD fund flow. Therefore the fiscal impact would be minimal. Based on HPCD plan, the capital investment for the LRIPC program is less than 1.5 percent of annual total HPCD revenue. In addition, the required maintenance expenditure for LRIPC is less than 0.6 percent of total maintenance expenditure of BPCD. These low ratios indicate that the project presents a modest financial risk regarding availability of counterpart fund for construction and maintenance of the project roads. The details are shown in Appendix D of this Annex and summarized as follows: - 52 -  IHPCD: Average Increase in the Road Network and Roadl Maintenance Expenditures (in %) 9th FYP 10th FYP Average annual increase in the road network 3.3 1.3 Average annual increase in maintenance expenditures 11.1 3.4 BIPCD: Investments, Revenue and Maintenance Expenditures (million Yuan) 2000 2001 2002 Total Investments and Revenue: LRIPC Investments (a) 66.10 166.40 110.10 336.60 Total HPCD Revenue (b) 10,958.05 11,282.93 11,000.12 22,283.05 Ratios (a)/(b) 0.5% 1.5% 1.0% 1.0% Maintenance Expenditures: 2002 2003 2004 2005 LRIPC (c) 4.98 12.78 13.59 14.28 Total HPCD Maintenance Expenditure (d) 1,933.22 2,028.83 2,184.46 2,321.23 Ratios (c)/(d) 0.3% 0.6% 0.6% 0.6% - 53 -  APPENDIX A Page I of 3 HENAN HIGHWAY PROJECT ZXE Income Statement (million Yuan, year ending 31, December) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Traffic (million veh-km) 418.75 446.89 476.96 511.69 548.93 588.88 631.74 677.78 727.16 780.17 837.04 884.33 934.38 Revenue Tolls 228.58 244.10 292.58 322.87 346.64 372.17 447.44 493.36 529.72 568.77 684.33 743.05 785.72 Operating Taxes Business tax 11.43 12.21 14.63 16.14 17.33 18.61 22.37 24.67 26.49 28.44 34.22 37.15 39.29 City tax 0.80 0.85 1.02 1.13 1.21 1.30 1.57 1.73 1.85 1.99 2.40 2.60 2.75 Education levy 0.34 0.37 0.44 0.48 0.52 0.56 0.67 0.74 0.79 0.85 1.03 1.11 1.18 Total 12.57 13.43 16.09 17.75 19.06 20.47 24.61 27.14 29.13 31.28 37.65 40.86 43.22 Net Revenue 216.01 230.67 276.49 305.12 327.58 351.70 422.83 466.22 500.59 537.49 646.68 702.19 742.50 Operating Costs Wages and benefits 13.00 13.65 14.33 15.05 15.80 16.59 17.42 18.29 19.20 20.16 21.17 22.23 23.34 Maintenance 12.38 12.99 13.64 14.33 109.34 15.79 16.59 17.42 18.29 465.21 20.15 21.16 22.23 Operating materials and supplies 27.23 28.59 30.02 31.52 33.09 34.75 36.49 38.31 40.23 42.24 44.35 46.57 48.9 Administration& management 7.80 8.19 8.60 9.03 9.48 9.95 10.45 10.97 11.52 12.10 12.70 13.34 14.00 Others /_1 4.57 4.80 5.04 5.29 5.55 5.83 6.12 6.43 6.75 7.09 7.44 7.82 8.21 Totalworkingcosts 64.98 68.22 71.63 75.22 173.26 82.91 87.07 91.42 95.99 546.80 105.81 111.12 116.68 Depreciation 35.52 46.01 53.49 60.32 70.61 70.72 70.83 70.94 71.06 74.13 74.27 74.41 74.55 Total operating costs 100.50 114.23 125.12 135.54 243.87 153.63 157.90 162.36 167.05 620.93 180.08 185.53 191.23 Operating Profit 115.51 116.44 151.37 169.58 83.7 198.07 264.93 303.86 333.54 (83.4) 466.60 516.66 551.27 Financial charges: IBRD - - - 49.14 52.64 56.38 60.41 64.70 69.31 74.25 79.54 85.20 91.27 Others - - - - - - - - - - - - Other income (expenses) (19.58) (19.57) (19.57) (19.57) (19.57) (19.58) (19.57) (19.58) (19.57) (19.57) (19.58) (19.57) (19.57) ProfitBeforeTaxes 95.93 96.87 131.80 100.87 11.50 122.11 184.95 219.58 244.66 (177.26) 367.48 411.89 440.43 Irrigation Fund (to 2009)/_2 6.86 7.32 8.78 9.69 10.40 11.17 13.42 - - NetProfitAfterTaxes 89.07 89.55 123.02 91.18 1.10 110.94 171.53 219.58 244.66 (177.26) 367.48 411.89 440.43 /_1: Other: Including highway research and miscellaneous /_2: Irrigation fund: The contract between the provincial government and HPCD indicating irrigation fund will be ended in 2010. - 54 -  APPENDIX A Page 2 of 3 HENAN HIGHWAY PROJECT ZXE Sources and Applications of Funds (million Yuan, year ending 31, December) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: Netprofits - - - 89.07 89.55 123.02 91.18 1.10 110.94 171.53 219.58 244.66 (177.26) 367.48 411.89 440.43 Depreciation - - - 35.52 46.01 53.49 60.32 70.61 70.72 70.83 70.94 71.06 74.13 74.27 74.41 74.55 State contribution 32.54 54.24 119.33 .30.18 37.97 75.94 32.54 59.66 - - - - - - - - Provincial contribution 51.51 85.86 188.88 206.05 60.10 120.20 51.51 94.44 Borrowing: IBRD - 74.79 124.65 274.23 299.16 87.25 174.51 211.91 - - - - - - - - Local Others - - - - - - - - - - - - - - - - Total 84.05 214.89 432.86 '735.05 532.79 459.90 410.06 437.72 181.66 242.36 290.52 315.72 (103.13) 441.75 486.30 514.98 Avulications: Capital expenditure 79.45 211.84 423.66 608.91 410.28 278.03 264.71 370.58 6.08 6.38 6.70 7.03 7.38 7.75 8.14 8.55 Other expenditure 14.01 23.36 43.73 67.20 76.67 89.74 105.91 - - - - - - - - - Loan repayment: IBRD - - - - - - 49.14 52.64 56.38 60.41 64.70 69.31 74.25 79.54 85.20 91.27 Local Changew/capital - - - - (L53) (4.80) (3.01) (2.35) (2.53) (7.45) (4.54) (3.61) (3.87) (11.45) (5.80) (4.24) Total 93.46 235.20 467.39 676.11 485.42 362.97 416.75 420.87 59.93 59.34 66.86 72.73 77.76 75.84 87.54 95.58 Net Funds Flow (9.41) (20.31) (34.53) 58.94 47.37 96.93 (6.69) 16.85 121.73 183.02 223.66 242.99 (180.89) 365.91 398.76 419.4 Open balance - (9.41) (29.72) (64.251 (5.31) 42.06 138.99 132.3 149.2 270.88 453.90 677.56 920.55 739.66 1105.57 1504.33 Closingbalance (9.41) (29.72) (64.25) (5.31) 42.06 138.99 132.30 149.2 270.88 453.90 677.56 920.55 739.66 1105.57 1504.33 1923.73 D/S Cover 308.3 136.2 322.2 401.2 449.0 455.5 (138.9) 555.4 570.8 564.2 Note: The expressway will only start operations in 2003. - 55 -  APPENDIX A Page 3 of 3 HENAN HIGHWAY PROJECT ZXE Balance Sheet (million Yuan, year ending 31, December) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Assets: Fixed Assets At cost 1076.29 1394.19 1621.03 1828.02 2139.83 2142.99 2146.31 2149.79 2153.45 2246.49 2250.52 2254.75 2259.20 Less: Depreciation 35.52 81.53 135.02 195.34 265.95 336.67 407.50 478.44 549.50 623.63 697.90 772.31 846.86 Netfixedassets 1040.77 1312.66 1486.01 1632.68 1873.88 1806.32 1738.81 1671.35 1603.95 1622.86 1552.62 1482.44 1412.34 Current Assets Inventory 0.14 0.15 0.18 0.19 0.21 0.22 0.27 0.30 0.32 0.34 0.41 0.45 0.47 Receivable 0.09 0.10 0.12 0.13 0.14 0.15 0.18 0.20 0.21 0.23 0.27 0.30 0.31 Cash (5.31) 42.06 138.99 132.30 149.15 270.88 453.90 677.56 920.55 739.66 1105.57 1504.33 1923.73 Subtotal (j.) 42.31 139.29 132.62 149.50 271.25 454.35 678.06 921.08 740.23 1106.25 1505.08 1924.51 Other Assets - - - - - - - - - - - - Total Assets 1035.69 1354.97 1625.30 1765.30 2023.38 2077.57 2193.16 2349.41 2525.03 2363.09 2658.87 2987.52 3336.85 Liabilities & Equitv State funds- Equity 539.16 557.73 735.96 747.56 843.99 952.01 1120.48 1336.84 1578.13 1486.53 1850.29 2258.27 2694.60 L/T loans: IBRD 473.67 772.83 860.08 985.45 1144.72 1088.34 1027.93 963.23 893.92 819.67 740.13 654.93 563.66 Local - - - - - - - - - - - - Subtotal 473.67 772.83 860.08 985.45 1144.72 1088.34 1027.93 963.23 893.92 819.67 740.13 654.93 563.66 Current Liabilities 22.86 24.41 29.26 32.29 34.67 37.22 44.75 49.34 52.98 56.89 68.45 74.32 78.59 Other Liabilities - - - - - - - - - - - - - Total Liabilities & Equity 1035.69 1354.97 1625.30 1765.30 2023.38 2077.57 2193.16 2349.41 2525.03 2363.09 2658.87 2987.52 3336.85 Debt: Capital ratio 46.8 58.1 53.9 56.9 57.6 53.3 47.8 41.9 36.2 35.5 28.6 22.5 17.3 Debt/ equity ratio 48/52 59/41 55/45 58/42 58/42 54/46 49/51 43/57 38/62 37/63 30/70 24/76 19/81 Currentratio (0.2) 1.7 4.8 4.1 4.3 7.3 10.2 13.7 17.4 13.0 16.2 20.3 24.5 Fixed assets: 80% of capital investment and 20% of maintenance. Equity = Total asset - Total Liabilities. Current liabilities = 10% of toll revenue. - 56 -  APPENDIX B Henan: Zhumadian - Xinyang Expressway Assumptions for Financial Forecasts 1. Traffic (normal, AADT): Small Medium Large Small Medium Large Tractor car bus bus truck truck truck -Trailer Total Section 1: Zhumadian - Queshan 2003 1,804 1,011 794 500 3,737 1,563 1,857 11,266 2005 2,046 1,147 900 567 4,239 1,807 2,106 12,812 2013 3,530 1,976 1,552 976 7,314 3,360 3,637 22,345 2023 5,983 3,344 2,628 1,653 12,399 6,266 6,170 38,443 Section 11: Queshan - Minggang 2003 1,063 602 312 571 3,950 2,301 976 9,775 2005 1,206 683 354 648 4,480 2,659 1,107 11,137 2013 2,076 1,174 609 1,114 7,716 4,938 1,907 19,534 2023 3,513 1,983 1,030 1,881 13,058 9,193 3,230 33,888 Section III: Minggang - Xinyang 2003 2,032 1,118 366 616 3,080 2,796 1,768 11,776 2005 2,305 1,268 415 699 3,493 3,231 2,006 13,417 2013 3,979 2,188 718 1,205 6,037 6,022 3,471 23,620 2023 6,751 3,708 1,218 2,040 10,251 11,251 5,902 41,121 2. Toll Rates (Yuan/ veh-km): Increase 15% every four year. Small Medium Large Small Medium Large Tractor car bus Bus truck truck Truck -Trailer 2003 0.25 0.25 0.50 0.25 0.50 0.75 1.00 3. Operating Taxes: a. Business Tax 5% Of total revenue. b. City Tax 7% Of business tax. c. Education levy 3% Of business tax. 4. Operating Cost: a. Wages and benefits: Y 26,000/ staff, 100 staffs/ station, 5 stations; increase 5% pa. b. Maintenance (million Yuan/ km): Increase 5% pa. Routine Medium Major Maintenance Maintenance Maintenance (annual) (/5 years) (1/10 years) 0.13 0.90 3.0 c. Operating materials and supplies 0.286 Million Yuan per km. d. Administration 60% Of wage and benefits. e. Other 0.048 Million Yuan per km. f. Depreciation 30 Years straight-line method. 5. Irrigation Fund 3.0% of total revenue to 2009. 6. Borrowing: IBRD 7.0% On 20 year maturaties, LIBOR US$ based single currency including 5 years grace period. - 57 -  APPENDIX C Henan: Zhumadian - Xinyang Expressway FIRR Simulation and Probabilistic Risk Analysis Summary: Display Range is from 6.5% to 11.0% FIRR on total investment (in %) Entire Range is from 6.8% to 10.8% FIRR on total investment (in %) After 1,000 Trials, the Std. Error of the Mean is 0.0% Statistics: Iie Percentiles: Trials 1000 FIRR on total Mean 8.8% Percentile investment (in %) Median 8.8% 0% 6.8% Mode --- 10% 7.8% Standard Deviation 0.8% Low Scenario 20% 8.1% Variance 0.0% - 30% 8.4% Skewness -0.02 Most Likely 40%. 8.6% Kurtosis 2.41 50% 8.8% Coeff. of Variability 0.09 High Scenario 60% 9.0% Range Minimum 6.8% 70% 9.3% Range Maximum 10.8% 80% 9.6% Range Width 3.9% 90% 9.8% Mean Std. Error 0.02% 100% 10.8% Forecast Zhumadian - Xinyang Expressway (2004) 1,000 Trials Frequency Chart 0 Outliers .029 29 .022 21.75 .007 72 .000 4 6.5% 7.6% F .8% 9.9% 11.0% FIRR on total investment (in %) Assumptions Assumption: Total Revenue Assumption: Total Working Costs Triangular distribution with parameters: Triangular distribution with parameters: Minimum 90.0% Minimum 90.0% Likeliest 100.0% Likeliest 100.0% Maximum 110.0% Maximum 110.0% Selected range is from 90.0% to 110.0% Selected range is from 90.0% to 110.0% Mean value in simulation was 99.9% Mean value in simulation was 99.9% Assumption: Traffic Growth Normal distribution with parameters: Mean 100.0% Standard Dev. 10.0% Selected range is from -Infinity to +Infinity Mean value in simulation was 100.1% - 58 -  APPENDIX D Page I of 2 Henan Province: Highway Revenue and Expenditure (Ninth Five Year Plan) (Yuan million) 1996 1997 1998 1999 2000 Total Revenue I Roadmaintenancefee 1,572.97 1,707.25 1,710.00 1,812.60 1,921.36 8,724.18 2 Tolls 1,307.23 1,439.76 1,707.30 2,070.00 2,167.50 8,691.79 3 Surcharge on passenger tickets 66.95 61.00 68.00 71.40 74.97 342.32 4 Surcharge on freight 84.60 83.00 89.00 93.45 98.12 448.17 5 Vehiclepurchasefee 30.00 130.00 130.00 135.00 140.00 665.00 6 Financial allocation - - 470.00 - - 470.00 7 Local financial allocation 50.00 50.00 200.00 180.00 220.00 700.00 8 MOC subsidy 444.83 398.38 544.00 600.00 900.00 2,887.21 9 State allocation 45.00 45.00 71.40 80.00 80.00 321.40 10 Enterprise bond - 100.00 600.00 70.00 200.00 970.00 11 Bankloan 420.00 956.00 2,490.00 3,950.00 4,341.10 12,157.10 12 Fund-raised by enterprise 205.00 - 210.00 300.00 250.00 965.00 13 Other funds 544.00 546.00 1,000.00 560.00 565.00 3,215.00 Total 4.870.58 5.516.39 9.289.70 9922.45 10,958.05 40.557.17 Expenditure: I New construction 3,675.20 3,877.00 7,227.72 7,541.91 8,265.98 30,587.81 2 Taxes 71.90 177.92 201.13 235.27 247.07 933.29 3 Traffic safety supervision 10.00 20.00 33.63 31.00 31.00 125.63 4 Major maintenance 121.30 295.60 386.00 462.00 510.30 1,775.20 5 Medium maintenance 112.02 176.35 262.10 276.00 310.00 1,136.47 6 Routine maintenance 397.86 409.63 425.30 436.61 440.23 2,109.63 7 Administration and study 353.38 386.69 427.10 491.76 517.26 2,176.19 8 Repayment of interest and principle 128.92 173.20 326.72 447.90 636.21 1,712.95 Total 4,870.58 5.516.39 9.289.70 9922.45 10.958.05 40,557.17 Total RoadNetwork (km) -(a) 50,907 55,015 57,172 58,700 60,000 281,794 Average annual increase -- 8.1% 3.9% 2.7% 2.2% 3.3% Total maint. expenditure (million Yuan) -(b) /_- 631.18 881.58 1,073.40 1,174.61 1,260.53 5,021.30 Average unit maint. expenditure ('000 Y/km)- (b)/(a) 12.40 16.02 18.77 20.01 21.01 17.82 Average annual increase (in %) -- 29.2% 17.2% 6.6% 5.0% 11.1% I_1: Sum of major, medium and routine maintenance. Actual :1996-1998; estimates: 1999-2000. - 59 -  APPENDIX D Page 2 of 2 Henan Province: Highway Revenue and Expenditure (Tenth Five Year Plan) (Yuan million) 2001 2002 2003 2004 2005 Total Revenue 1 Road maintenance fee 2,036.64 2,158.84 2,288.37 2,425.67 2,571.21 11,480.73 2 Tolls 2,328.38 2,768.79 3,429.73 3,716.22 3,902.03 16,145.15 3 Surcharge on passengertickets 78.72 82.65 86.79 91.13 95.68 434.97 4 Surcharge on freight 103.03 108.18 113.59 119.27 125.23 569.30 5 Vehicle purchase fee 145.00 150.00 155.00 160.00 165.00 775.00 6 Financial allocation - - - - - - 7 Local financial allocation 310.00 420.00 366.62 500.00 400.00 1,996.62 8 MOC subsidy 1,000.00 800.00 700.00 600.00 500.00 3,600.00 9 State allocation 80.00 80.00 80.00 80.00 80.00 400.00 10 Enterprise bond 300.00 400.00 500.00 500.00 500.00 2,200.00 11 Bank loan 3,981.00 3,106.30 2,805.00 2,550.00 2,350.00 14,792.30 12 Fund-raised by enterprise 350.00 350.00 128.40 50.00 - 878.40 13 Other funds 570.16 575.36 580.36 585.35 590.37 2,901.60 Total 11.282.93 11.000.12 11,233.86 11.377.64 11.279.52 56.174.07 Emxenditure: I New construction 7,905.53 7,007.00 5,994.46 5,447.77 4,952.00 31,306.76 2 Taxes 264.46 305.84 366.19 394.96 415.44 1,746.89 3 Traffic safety supervision 32.00 35.00 40.00 40.00 40.00 187.00 4 Major maintenance 732.00 786.00 840.00 932.00 1,021.00 4,311.00 5 Medium maintenance 512.50 537.50 562.50 587.50 630.00 2,830.00 6 Routine maintenance 595.77 609.72 626.33 664.96 670.23 3,167.01 7 Administration and study 552.92 631.20 743.30 800.00 842.43 3,569.85 8 Repayment of interest and principle 687.75 1,087.86 2,061.08 2,510.45 2,708.42 9,055.56 Total 11.282.93 11000.12 11,233.86 11,377.64 11279.52 56174.07 Total Road Network (km) -(a) 61,000 62,500 63,500 64,300 65,000 316,300 Average annual increase 1.7% 2.5% 1.6% 1.3% 1.1% 1.3% Total maint. Expenditure (million Yuan) -(b) /1 1,840.27 1,933.22 2,028.83 2,184.46 2,321.23 10,308.01 Average unit maint. Expenditure ('000 Y/km)- (b)/(a) 30.17 30.93 31.95 33.97 35.71 32.59 Average annual increase - 2.5% 3.3% 6.3% 5.1% 3.4% /_1: Sum of major, medium and routine maintenance. Forecast 2001-2005. - 60 -  Annex 6: Procurement and Disbursement Arrangements CHINA: Thirdl Henan Provincial Highway Project Procurement This Annex is based on a review conducted during project preparation of the agencies capacity in procurement and financial management. The Project Procurement Capacity Assessment (PPCA) is in the Project Files, and its findings are summarized below. The Financial Management Review is presented in Annex 13. Both assessments have (i) concluded that the capacity is generally adequate in view of the extensive experience of the agencies gained under previous projects, and (ii) recommended some improvements (mostly additional training of concemed staff, and preparation of manuals to guide provincial and local units involved in day-to-day implementation of project tasks). These improvements have been accepted and acted upon by HPCD. Summary of PPCA's findings The assessment confirmed that the provincial agencies have managed, in a generally satisfactory manner, the ongoing three highway projects (two of which are nearing completion and the last is about at mid-term); regarding the new project, HPCD provided assurances that the core staff involved in previous projects will be maintained . On the other side, some shortcomings have been identified: * lack of consolidated national procurement law: this is a country-wide issue being addressed as part of the ongoing dialegue between Central Government and the Bank; * lengthy review process by MEIEAD on imported mechanical and electrical equipment; to mitigate this risk, a two-stage bidding procedure will be used for the supply and installation of the electrical and mechajnical systems along the expressway, and procurement planning will incorporate additional time for the review process. In addition, to facilitate the design, a Provincial Conceptual Framework for E&M works will be prepared in the first year of the project; and X deviations of intemal NCB procedures from Bank NCB procedures (mostly: use of bracketing, limitation of number of applicants in some instances, short period allowed for bid preparation). These will be waived in favor of World Bank NCB procedures in a supplemental letter to the Loan Agreement. In this letter, Henan agrees to pay particular attention to ensure that the following procedures are followed with respect to NCB procurement: a) all invitations to prequalify or to bid shall be advertised in a newspaper of national circulation in the Borrower's country; b) such advertisement shall be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their responses; and in any event a minimum of 30 days shall be given to bidders between the date of advertisement in such newspaper and the deadline for submission of bids, and the advertisement and bidding documents shall specify the deadline for such submission; c) qualification requirements of bidders and the method of evaluating the qualification of each bidder shall be specified in detail in the bidding documents; d) all bidders shall be required to provide security in an amount sufficient to protect Henan in case of breach of contract by the contractor, and the bidding documents shall specify the required form and amount of such security; e) the time for opening of all bids shall be the same as the deadline for receipt of such bids; f) all bids shall be openied in public; all bidders shall be afforded an opportunity to be - 61 -  present (either in person or through their representatives) at the time of bid opening, but bidders shall not be required to be present at the bid opening; g) no bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by Henan; and h) each contract shall be awarded to the lowest evaluated bidder, that is to say, the bidder who meets the appropriate standards of capability and resources and whose bid has been determined (i) to be substantially responsive to the bidding documents and (ii) to offer the lowest evaluated cost. The winning bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. An action plan has been devised to strengthen HPCD units mostly through preparation of a Project Procurement Manual and additional procurement training. Furthermore, a Procurement Plan using computerized project management software has been prepared, and attached to HPCD's Project Implementation Plan. Based on the above considerations, the assessment concludes that: 1. the proposed project can safely apply the same thresholds (in terms of procurement methods or prior review) as the ones used under the previous projects, and 2. the general risk is rated "Low". Procurement methods (Table A) 1. Procurement would be carried out as shown in Table A. Procurement under the project will be carried out in accordance with the Bank's "Guidelines for Procurement under IBRD Loans and IDA Credit" (January 1995, and revised in January, August 1996, September 1997 and January 1999) as well as the "Guidelines for Selection and Employment of Consultants by World Bank Borrowers" dated January 1997, revised September 1997 and January 1999. The documentation for procurement, which covers the prequalification of contractors, ICB and national competitive bidding (NCB) for civil works, and ICB for goods and consultant services was standardized for Chinese conditions by the Chinese government and the Bank on the basis of model documents which would be used for all relevant procurement processes under the project. Where no agreed model documents exist, Bank standard documents would be used. The General Procurement Notice (GPN) for the project was published in the UN Development Business issue No.510 of May 16, 1999. 2. Works (US$302 M). Civil works for Zhumadian-Xinyang Expressway (ZXE) would be divided into 9 contracts, with an average size of about US$23 million including contingencies. Electro-mechanical works (EMW) would be handled as one contract of about US$17 million equivalent. The 9 civil works contracts and the EMW contract for ZXE would be procured under ICB procedures. There would be one tender call for the civil works contracts which would be bid on a slice-and-package basis; qualified firms would be allowed to bid for more than one contract as so to attract international contractors and large Chinese contractors. The EMW contract would be procured under a two-stage bidding procedure which is appropriate for the supply and installation of E&M systems. 3. Contractors bidding for civil works under ICB would be prequalified. For all civil works and EMW contracts estimated to cost over $10 million, in addition to advertisement in at least one newspaper of national circulation in the Borrower's country, invitations for prequalification will be advertised as Specific Procurement Notices in the UN Development Business and/or well-known technical magazines, newspapers, and trade publications of wide international circulation. Each contract for works estimated to cost US$50 million or more will include provisions for a dispute review board set forth in the standard bidding documents for works referred to in para.2.42 of the above-mentioned Guidelines. -62 -  4. Other works, including facilities along the expressway (estimated at US$9 million), construction of linking roads (US$24.4 million), and some of local roads improvements (with a cost of US$31.2 million), would be awarded following NCB procedures acceptable to the Bank. These works would involve contracts estimated to cost generally less than US$5 million each. Since these contracts will be relatively small, scattered throughout the province and implemented over four years, ICB would neither be justified nor practical, but foreign firms would not be precluded from bidding. Prequalification will be conducted for NCB civil works related to the expressway and the linking roads. 5. Based on experience with previous rural roads programs, generally not more than three bids are received for contracts costing less than US$2 million. Moreover most of the bidders come from the immediate area of the contracted worlcs, since remote larger contractors generally do not wish to mobilize for small contracts. In recognition of this, and in order to reduce unnecessary administrative overhead while ensuring sufficient competition., local roads contracts costing less than RMB 10 million (US$1.2 million) up to US$11.4 million in aggregate may be awarded under simplified procurement procedures, whereby a minimum of three bids would be invited from qualified contractors and bids would be opened in public. This has the advantage of time savings in the bidding process as well as creating more job opportunities for the poor during construction. Power supply for traffic engineering and facilities along ZXE is obtainable only from one source, since the local electricity companies are monopolies; therefore contracts for power supply will be procured by direct contracting, up to US$2 million in aggregate. 6. Equipment (US$3.5 million ). Generally, contracts for goods and equipment of more than US$250,000 equivalent would be awarded under ICB. To the extent possible, these contracts would be grouped in bid packages estimated to cost at least US$1 million. Domestic manufacturers competing under ICB would be eligible for a margin of preference in the comparison of bids of 15% for goods, or the prevailing customs duties, whichever is lower. Other items or groups of items covering maintenance equipment, laboratories, research and environmental protection purposes estimated to cost under US$250,000 per contract package, with an aggregate amount not exceeding US$1.0 million, would be procured following intemational shopping procedures on the basis of comparison of price quotations solicited from at least three suppliers firom two countries eligible under the Bank Guidelines for Procurement. 7. Consultants services (US$3.4 million, Table Al). All consultants required for construction supervision, staff training, technical assistance and studies, would be selected and employed under terms and conditions acceptable to the Bank. The Standard Request for Proposals, dated July 1997 and revised in April 1998 and July 1999, will be used. Consultants for construction supervision will be selected using the Quality and Cost Based Selection (QCBS) method. QCBS would also be used for training contracts each costing more than US$100,000. Selection based on Consultants' Qualifications would be used for contracts costing less than US$100,000 each related to training, pavement research, and road management TA. Individual consultants would be used for pavement research and road management TA, for an amount not exceeding US$ 100,000 in each case. Both for the pavement research and road management consultancies, local expertise available from the various provincial universities and institutes, which is critical to project implementation, would be used as much as possible, under terms and conditions acceptable to the Bank. All consultants services above US$200,000 must be advertised in the UN Development Business. The arrangernents by selection method and aggregate value for each category are shown in Table Al below. - 63 -  Table A: Project Costs by Procurement Arrangement (in US$ million, and including contingencies) Works Expressway civil works 207.37 207.37 (99.50) (99.50) Linking roads 24.43 24.43 (9.69) (9.69) Facilities along expressway 9.00 2.00 11.00 (4.29) (0.96) (5.25) E&M works 17.37 17.37 (14.25) (14.25) Local roads improvement 31.22 11.36 42.58 (9.97) (3.63) (13.60) Equipment 2.54 1.00 3.54 (2.00) (0.80) (2.80) Construction supervision 2.33 7.80 10.13 (2.33) (2.33) Training and studies 1.08 0.71 1.79 (1.08) (1.08) Land acquisition & resettlement 24.02 24.02 Interest during construction 15.80 15.80 Front-end fee 1.50 1.50 (1.50) (1.50) Tnaal 227.28 64.65 19.27 48.33 359.53 (115.75) (23.95) (10.30) (150.00) (a) Figures in parentheses are the amounts to be financed by the Bank loan. (b) Other includes direct contracting, simplified procedures for small works, international shopping, consulting services and training, and the front-end fee. Table Al: Consultant Selection Arranqements (in US$ million, and includinq continqencies) Supervision 2.33 7.80 10.13 (2.33) (2.33) Training 0.20 0.18 0.21 0.59 (0.20) (0.18) (0.38) Pavement Research 0.30 0.10 0.40 (0.30) (0.10) (0.40) Road Management 0.20 0.10 0.40 0.70 (0.20) (0.10) (0.30) Other Action Plans 0.10 0.10 Tota 2.53 0.68 0.20 8.41 11.92 (2.53) (0.68) (0.20) (3.41) Note: QCBS = Quality- and Cost-based Selection CQ = Selection based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Guidelines) - 64 -  Prior review thresholds (Table B) Prior review procedures would be used for: (a) civil works contracts with an estimated cost of US$ 2 million or more; also, the first three contracts under the Local Roads component, as well as the contracts for power supply, will be subjecty to prior review; (b) equipment with an estimated cost of more than US$250,000 per contract; and (c) consulting services with an estimated contract cost of more than US$100,000 for firms and US$50,000 for individuals. Regarding consultant contracts, terms of reference and single-source selections, regardless of the value of the contract, will be subject to prior review. Prior review will thus apply to an estimated 90%, 70% and 90% of the total contract values of works, goods and services financed by the Bank, respectively. For contracts below the above-mentioned limits, post-review procedures would be followed. The sampling ratio for contracts not subject to prior review is expected to be no less than 20%. Table B: Thresholds for Procurement Methods and Prior Review' -Conrit Valuie Contacts Subei 0 T!6e6;-h6td Prcwurement P- -. Ex~pendtture Category: (U$06Uns et* 1. Works More than 10.00 ICB 10 contracts/$234m More than 2.00 NCB 8 contracts/$33m Less than 2.00 NCB First 3 LRIPC contracts and power supply contracts/$5m. 2. Goods More than 0.25 ICB 2 contracts/$2.5m Less than 0.25 Shopping 3. Services More than 0.10 for firms or QCBS Scontracts/$3.lm 0.05 for individuals 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous Total value of contracts subject to prior review: US$ 277.6 m Overall Procurement Risk Assessment Low Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-review/audits) 1Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 65 -  Disbursement Allocation of loan proceeds (Table C) Table C: Allocation of Loan Proceeds Works: (in %, Fforeign, L=local) Expressway construction 96.00 48 Linking roads 9.50 40 Rural roads 13.00 32 Traffic engineering 13.00 82 Goods: Equipment 2.80 IOOF or 75L Services: Works supervision 2.30 1 OOF Training and studies 1.08 10OF Unallocated: 10.82 Total Project Costs 148.50 Interest during construction 0.00 Front-end fee 1.50 Total 150.00 Use of statements of expenditures (SOEs): Withdrawal from the loan account would be made on the basis of SOEs for expenditures for: (a) civil works in contracts of less than US$2.0 million, (b) goods in contracts of less than US$250,000, (c) services provided by consulting firms in contracts of less than US$100,000, and (d) services provided by individual consultants in contracts of less than US$50,000 and (e) training. Special account: To facilitate disbursements, a special account would be opened with an authorized allocation of US$10 million equivalent, the estimated average expenditures for a four-month period. Financial Management Assessment: A review of financial management systems has been conducted and is presented in Annex 13. - 66 -  Annex 7: Project Processing Schedule CHINA: Third Henan Provincial Highway Project Time taken to prepare the project (months) 12 12 First Bank mission (identification) 01/11/99 01/11/99 Appraisal mission departure 01/10/2000 01/17/2000 Negotiations 02/21/2000 03/27/2000 Planned Date of Effectiveness 07/01/2000 07/31/2000 Prepared by: Henan Provincial Communications Department Preparation assistance: Italian Consultant Trust Fund for the technical review of engineering design. Bank staff who worked on the project included: Name Speciafity Jacques Tollie Task Team Leader/Engineering/Institutional Robin Carruthers Economics Hank Yen Eco/fmancial analysis Claude Salem Institutional development Youlan Zou Resettlement Soichiro Seki Environment Lutfallah Tueni Engineering William Paterson Road management systems Maria Luisa Juico Program assistant Setty Pendakur Rural roads, traffic safety, and institutional strengthening Yang Dawei (RMC) Procurement asssessment Youhua Yu (RMC) Financial management HPCD Team Shi Faliang, Liu Zhangtu Deputy Directors Zhu Liping Planning and coordination Chen Hou He Engineering design team Xu Qiang EIA and RAP Tang Guangming PIP Zhang Heshui, Niu Yongliang Implementation action plan -67 -  Annex 8: Documents in the Project File* CHINA: Third Henan Provincial Highway Project A. Project Implementation Plan Project Implementation Plan- HPCD, January 2000 Performance Monitoring Indicators, September 1999 B. Bank Staff Assessments Project Procurement Capacity Assessment, December 1999 Financial Management Capacity Assessment, December 1999 Review of Engineering Designs and Bidding Documents: -Phase I Final Report, November 1999 -Phase II Final Report C. Other Feasibility Studies Feasibility Study Report, March 1999 Revised Traffic Projections, June 1999 Land Acquisition and Resettlement Resettlement Action Plans for ZXE and Linking Roads, November 1999 Resettlement Policy Framework for LRIPC, November 1999 Environment (EIA, EAP, Summary) EIA, EAP, Summary for ZXE, December 1999 EIA, EAP for Linking Roads, November 1999 Initial Environmental Examination and EAP for LRIPC, November 1999 Institutional Strengthening and Training Report, September 1999 Equipment Procurement Report, January 2000 Institutional Development Action Plans IDRP outline, January 2000 Proposal for research study on Pavement Performance, July 1999 Proposal for Road Management Improvement, December 1999 Highway Quality Improvement Program, September 1999 Action Plan for Toll Highway Commercialization, December 1999 Action Plan for Trade Facilitation, December 1999 Memorandum of Understanding for Henan/Hubei coordination, December 1999 Traffic Safety Study on Economic Losses due to Road Traffic Accidents, August 1999 Traffic Safety Action Plans, November 1999 Traffic Safety Policy Statement, February 2000 - 68 -  Consultant's Services for Supervision of Construction Selection of supervision mode, February 1999 Draft RFP, Februarv 2000 Local Roads Improvement in Poor Counties Program Details, September 1999 Summary Tables, January 2000 Prequalification Document for Civil Works, May 1999 *Including electronic files -69 -  Annex 9: Statement of Loans and Credits CHINA: Third Henan Provincial Highway Project Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd CN-PE-3653 1999 PEOPLE'SREPUBLICOFCHIN CONTAINERTRANSPORT 71.00 0.00 o.o0 71.00 0.00 0.00 CN-PE-36953 1999 PRC HEALTH IX 10.00 50.00 0.00 59.25 0.92 0.00 CN-PE-4126B 1999 MINISTRY OF FINANCE NAT.HWY4-HUBEIIHUNAN 350.00 0.00 o.0o 350.00 0.00 0.00 CN-PE-41890 1999 PEOPLES REPUBLIC OF CHIN LIAONING URB TRANSP 150.00 0.00 0.00 150.00 10.00 0.0o CN-PE-42299 1999 GOC TEC COOP CREDIT IV 10.00 35.00 0.00 44.39 0.00 0.00 CN-PE-43933 1999 PRC SICHUAN URB. ENV. I 150.00 2.00 0.00 152.01 0.00 0.00 CN-PE-46051 1999 PRC HIGHER EDUC. REFORM 20.00 50.00 0.00 69.25 1.00 0.00 cN-PE-46564 1999 PRC WESTERN POVERTY RED 60.00 100.00 0.00 158.76 13.30 o.0o CN-PE-46829 1999 PRC RENEWABLE PROJECT 100.00 0.00 0.00 100.00 0.00 0.00 CN-PE-49665 1999 PEOPLE'SREPUBLICOFCHIN ANNINGVALLEYAG.DEV 90.00 30.00 0.00 118.64 10.80 0.00 CN-PE-50036 1999 MINISTRY OF FINANCE ANHUI PROVINCIAL HWY 200.00 0.00 0.00 198.00 12.90 0.00 CN-PE-51705 1999 MINISTRY OF FINANCE FUJIAN IIHWY 200.00 0.00 0.00 200.00 0.00 0.00 CN-PE-51556 1999 PRC ACCNTG REFORM & DEV 27.40 5.61 0.00 32.89 3.40 0.00 CN-PE-51s88 1999 PRC GUANZHONG IRRIGATION 80.00 20.00 0.00 99.67 8.00 0.00 CN-PE-56216 1999 CHINA LOESS PLATEAU II 100.00 50.00 0.00 149.38 0.00 0.00 CN-PE-57352 1999 PEOPLE'SREPUBLICOFCHIN 4THRURALWATERSUPP 16.00 30.00 0.00 45.71 0.00 0.00 CN-PE-58308 1999 PRC PENSION REFORM PJT 0.00 5.00 0.00 4.95 0.00 o.0o CN-PE-63123 1999 PRC YANGTZE FLOOD EMERGY 40.00 40.00 0.00 78.67 10.00 o.00 CN-PE-3539 1998 PRC SUSTCOAST RES DEV 100.00 0.00 0.00 93.23 -1.77 0.00 CN-PE-3566 1998 PRC BASIC HEALTH 0.00 85.00 0.00 79.62 0.58 0.00 CN-PE-35698 1998 GOC HUNAN POWER DEVELOP. 300.00 0.00 0.00 300.00 18.00 0.00 CN-PE-3591 1998 PEOPLES REPUBLIC OF CHIN STATE FARMS COMMERCI 150.00 0.00 0.00 94.93 -32.57 0.00 CN-PE-3606 1998 MINISTRY OF FINANCE ENERGY CONSERVATION 63.00 0.00 0.00 63.00 3.80 0.00 CN-PE-3614 1998 CHINA GUANGZ. CITY CRT.TRP 200.00 0.00 0.00 192.00 10.14 0.00 CN-PE-3619 1998 PEOPLES REPUBLIC OF CHINA 2ND INLAND WATERWAYS 123.00 0.00 0.00 123.00 23.00 0.00 CN-PE-36414 1998 PRC GUANGXI URBAN ENV. 72.00 20.00 0.00 88.60 -0.70 0.00 CN-PE-36949 1998 PEOPLE'S REPUBLIC OF CHIN NAT.HWY 3-HUBEI 250.00 0.00 0.00 225.97 0.97 0.00 ON-PE-40185 1998 PRC SHANDONG ENVIRONMENT 95.00 0.00 0.00 90.08 25.98 0.00 CN-PE-45788 1998 PRC TRI-PROVINCIAL HWY 230.00 0.00 0.00 220.50 41.70 0.00 cN-PE-46563 1998 PRC TARIMBASINII 90.00 60.00 0.00 137.14 7.22 0.00 CN-PE-46952 1998 GO FOREST DEV. POOR AR 100.00 100.00 0.00 190.46 1.50 12.00 CN-PE-49700 1998 PRC IAIL-2 300.00 0.00 0.00 280.00 15.30 0.00 CN-PE-51736 1998 PRC E. CHINAIJIANGSU PWR 250.00 0.00 0.00 250.00 123.16 0.00 CN-PE-56491 1998 PRC HEBEI EARTHQUAKE 0.00 28.40 0.00 5.59 -10.45 0.00 CN-PE-34081 1997 PRC XIAOLANGDI MULTI. II 430.00 0.00 0.00 304.10 99.95 0.00 CN-PE-3590 1997 PRC QINBA MTS. POVTY RED 30.00 150.00 o.o0 140.82 27.81 0.00 CN-PE-3635 1997 PRC VOC. ED. REFORM PROJ 10.00 20.00 0.00 9.08 -2.77 0.00 CN-PE-3637 1997 PRC NATL RUR WATER III 0.00 70.00 0.00 60.51 13.89 -0.01 CN-PE-36405 1997 GOC WANJIAZHAI WATER TRA 400.00 0.00 0.00 313.20 23.19 0.00 GN-PE-3643 1997 PRC XINJLANG HIGHWAYS II 300.00 0.00 0.00 230.72 72.72 0.00 CN-PE-3650 1997 PRC TUOKETUO POWERJINNER 400.00 0.00 0.00 379.68 155.88 17.19 ON-PE-3654 1997 PRC HUNAN/GUANG HWY2-NH2 400.00 0.00 0.00 313.08 93.06 0.00 CN-PE-36952 1997 PRC BASIC ED. IV 0.00 85.00 0.00 37.56 -25.47 0.00 CN-PE-38988 1997 GO HEILONGJIANG ADP 120.00 0.00 0.00 89.02 11.32 0.00 CN-PE-44485 1997 PRC SHANGHAI WAIGAOQIAO 400.00 o.0o 0.00 361.84 15.45 0.00 CN-PE-34618 1996 P.R.C. LABORMARKETDEV. 10.00 20.00 0.00 22.35 22.19 0.00 CN-PE-3507 1996 PRC ERTAN HYDRO II 400.00 0.00 0.00 21.59 -17.07 0.00 CN-PE-3563 1996 ANIMAL FEED 150.00 0.00 0.00 136.59 118.80 26.60 CN-PE-3569 1996 SHANGHAI-ZHEJLANG Hi 260.00 o.0o 7.75 100.25 35.02 26.02 CN-PE-3589 1996 DISEASE PREVENTION 0.00 100.00 0.00 67.07 61.61 0.00 -70 -  Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd CN-PE-3594 1996 PRC GANSU HEXI CORRIDOR 60.00 90.00 0.00 124.68 31.12 0.00 CN-PE-3599 1996 YUNNAN PROV. GOV. YUNNAN ENVIRONMENT 125.00 25.00 0.00 137.81 25.42 0.00 CN-PE-3602 1996 PRC HUBEI URBAN ENV. PRO 125.00 25.00 0.00 123.89 84.30 0.00 CN-PE-3638 1996 PRC SEEDS SECTOR COMMER. 80.00 20.00 0.00 73.10 25.66 0.00 CN-PE-3646 1996 PRC CHONGQING IND POLCT 170.00 0.00 77.99 91.61 114.09 1.19 CN-PE-3648 1996 SHANGHAI MUN. GOVT SECOND SHANGHAI SEWE 250.00 0.00 0.00 148.15 83.34 0.00 CN-PE-3649 1996 CHINA SHANXI POVERTY ALLEV 0.00 100.00 0.00 30.96 -4.68 0.00 CN-PE-3652 1996 PRC 2ND SHAANXI PROV HWY 210.00 0.00 0.00 139.29 67.28 0.00 CN-PE-36950 1996 PRC BASIC ED. POOR l!I 0.00 100.00 0.00 6.39 -18.67 0.00 CN-PE-40513 1996 PRC 2ND HENAN PROV HWY 210.00 0.00 0.00 165.73 55.72 0.00 CN-PE-3493 1995 PRC INLAND WATERWAYS 210.00 0.00 0.00 51.72 -13.39 0.00 CN-PE-3571 1995 PRC RAILWAYS VIl 400.00 0.00 29.00 337.89 218.88 3.69 CN-PE-3585 1995 GOC SHENYANG IND. REFORM 175.00 0.00 0.00 93.69 54.69 0.00 CN-PE-3596 1995 PRC YANGTZE BASIN WATER 100.00 110.00 0.00 24.26 -14.78 0.00 CN-PE-3598 1995 PRC LIAONING ENVIRONMENT 110.00 0.00 0.00 64.64 57.53 0.00 CN-PE-3600 1995 PRC TECHNOLOGY DEVELOPME 200.00 0.00 O.0O 117.40 49.30 0.00 CN-PE-3603 1995 MOF ENT. HOUSING SOC. SE 275.00 75.00 20.00 189.23 155.89 9.87 CN-PE-36041 1995 PRC FISCAL & TAX REF. & 25.00 25.00 0.00 41.08 42.10 0.00 CN-PE-3612 1995 PRC XINJIANG HIGHWAY I 150.00 0.00 0.00 35.46 30.48 0.00 CN-PE-3634 1995 PRC MATERNAL CHILD HEALT 0.00 90.00 0.00 14.30 8.18 0.00 CN-PE-3636 1995 PRO BASIC EDUC IN POOR & 0.00 100.00 0.00 3.14 0.84 o.o0 CN-PE-3639 1995 GOC SOUTHWEST POV. REDUC 47,50 200.00 0.00 81.40 30.95 0.00 CN-PE-3642 1995 PRC ZHEJIANG POWER DEVT 400.00 0.00 0.00 120.10 -40.04 0.00 CN-PE-36947 1995 MOH SICHUAN TRANSMISSION 270.00 0.00 0.00 132.50 123.20 91.29 CN-PE-37156 1995 PRC IODINE DEF. DISORDER 7.00 20.00 7.00 1.75 11.44 0.36 CN-PE-3502 1994 PRC RUR HEALTH MANPOWER 0.00 110.00 0.00 23.11 17.92 0.00 CN-PE-3504 1994 PRO HEBEUHENAN NATIONAL 380.00 0.00 0.00 39.36 20.34 0.00 CN-PE-3540 1994 PRC LOESS PLATEAU 0.00 150.00 0.00 21.43 -24.42 0.00 CN-PE-3557 1994 PRC FOREST RESOURCE DEV 0.00 200.00 0.00 31.38 9.41 -35.98 CN-PE-3562 1994 PRC XIAOLANGDI MULTIPURPOSE 460.00 0.00 0.00 0.43 0.43 0.00 CN-PE-3586 1994 PRC SHANGHAI ENVIRONMENT 160.00 0.00 0.00 58.50 54.71 0.00 CN-PE-3593 1994 GO SONGLIAO PLAIN ADP 0.00 205.00 0.00 23.97 -8.90 0.00 CN-PE-3595 1994 SHANGHAI MUNICIPAL GOVT RED SOILS II DEVELOP 0.00 150.00 0.00 39.81 19.95 0.00 CN-PE-3609 1994 GOC SICHUAN GAS DEV& 255.00 0.00 0.00 116.34 70.85 0.00 cN-PE-3622 1994 PRC CONSERVATION 150.00 0.00 0.00 7.36 7.37 0.00 CN-PE-3626 1994 PRC SHANGHAI MTP II 140.00 0.00 0.00 58.63 44.62 16.70 CN-PE-3641 1994 PRC FUJIAN PROV HIGHWAY 350.00 0.00 0.00 65.19 54.12 0.00 CN-PE-3644 1994 PRC YANGZHOU THERMAL POW 0.00 110.00 0.00 22.84 10.22 0.00 CN-PE-3518 1993 PRC XIAOLANGDI RESETTLEMENT 240.00 0.00 0.00 2.08 2.06 0.00 CN-PE-3533 1993 PRC GUANGDONG PROV. TRANSPORT 150.00 0.00 40.35 11.59 43.93 5.00 CN-PE-3559 1993 PRC TIANJIN IND. II 0.00 115.00 0.00 6.87 -3.95 0.00 CN-PE-3561 1993 PRC AGRIC. SUPPORT SERVI 0.00 147.00 0.o00 5.41 0.00 0.00 CN-PE-3567 1993 PRO SICHUAN ADP 0.00 100.00 0.00 4.46 2.93 2.99 GN-PE-3570 1993 PRC EFFECTIVE TEACHING S 420.00 0.00 0.00 83.23 83.24 -10.54 CN-PE-3580 1993 PRC RAILWAY VI 250.00 0.00 0.00 4.15 2.04 0.00 CN-PE-3581 1993 PRC SO.JIANGSU ENVIRON. PROTECT. 120.00 0.00 0.00 8.25 8.25 0.00 CN-PE-3592 1993 PRC HENAN PROV. TRANSPORT 0.00 50.00 0.00 16.55 16.80 0.00 CN-PE-3597 1993 PRC REF. INSTL.& PREINV 100.00 100.00 0.00 47.41 43.08 0.00 CN-PE-3616 1993 ROC TAIHU BASIN FLOOD CO 300.00 0.00 0.00 69.67 56.19 0.00 CN-PE-3623 1993 PRC TIANHUANGPING HYDRO 0.00 60.00 0.00 17.68 17.18 0.00 CN-PE-3627 1993 PEOPLE'S REPUBLIC OF CHIN FINANCIALSECTORT.A 325.00 165.00 0.00 314.28 315.24 125.24 CN-PE-3632 1993 RO.C. GRAIN DISTRIBUTION P 0.00 50.00 0.00 10.57 11.06 0.59 CN-PE-3534 1992 ENVIRONMENTTECHASS 220.00 0.00 0.00 19.75 19.76 18.56 CN-PE-3544 1992 ZHEJLANGPROVTRANSP 0.00 130.00 0.00 1.46 -3.20 0.00 CN-PE-3568 1992 EDUC DEV IN POOR PRO 0.00 100.00 0.00 15.29 12.42 -1.75 TIANJIN URB DEV & EN Total: 14,926.90 4,078.01 182.09 10,601.37 3,084.26 309.01 - 71 -  CHINA STATEMENT OF IFC's Held and Disbursed Portfolio 3 1-Jul-1999 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic o Pacific Ports 0.00 0.00 3.64 0.00 0.00 0.00 3.64 0.00 1987/92/94 China Bicycles 8.50 0.00 3.39 0.00 8.50 0.00 3.39 0.00 1993 Shenzhen PCCP 3.76 0.00 0.99 0.00 3.76 0.00 0.99 0.00 1993 Yantai Cement 12.47 0.00 1.95 6.66 12.47 0.00 1.95 6.66 1994 China Walden Mgt 0.00 0.00 0.01 0.00 0.00 0.00 0.01 0.00 1994 China Walden JV 0.00 0.00 5.40 0.00 0.00 0.00 4.17 0.00 1994 Dynamic Fund 0.00 0.00 12.35 0.00 0.00 0.00 10.08 0.00 1994 Dalian Glass 19.36 0.00 2.40 36.89 19.36 0.00 2.40 36.89 1994/97 PTP Leshan 11.20 0.00 1.00 14.00 11.20 0.00 1.00 14.00 1995 Dupont Suzhou 21.81 0.00 4.15 41.60 21.81 0.00 4.15 41.60 1995 Newbridge Inv. 0.00 0.00 7.19 0.00 0.00 0.00 3.89 0.00 1995 Suzhou PVC 22.00 0.00 2.48 22.20 22.00 0.00 2.48 22.20 1996 Beijing Hormel 4.64 0.00 0.50 4.95 4.64 0.00 0.50 4.95 1996 Nanjing Kumho 15.03 0.00 3.81 42:73 12.66 0.00 3.81 35.98 1996 Jingyang 40.00 0.00 0.00 100.00 40.00 0.00 0.00 100.00 1996 Tianjin Kumho 11.17 0.00 0.00 33.00 0.00 0.00 0.00 0.00 1996 Weihai Weidongri 3.97 0.00 0.00 0.00 3.97 0.00 0.00 0.00 1997 Ningbo 0.00 0.00 2.00 0.00 0.00 0.00 2.00 0.00 1997 Orient Finance 13.33 0.00 0.00 16.67 13.33 0.00 0.00 16.67 1997 PTP Hubei 12.63 0.00 0.00 25.38 10.96 0.00 0.00 22.04 1998 Chengdu Chemical 0.00 0.00 3.20 0.00 0.00 0.00 0.00 0.00 1998 Caltex Ocean 21.00 0.00 0.00 45.00 18.77 0.00 0.00 40.23 1998 Chengxin-IBCA 0.00 0.00 0.36 0.00 0.00 0.00 0.00 0.00 1998 CIG Port Holding 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 1998 Leshan Scana 6.10 0.00 1.35 0.00 3.00 0.00 1.35 0.00 1998 Rabobank SHFC 2.75 0.00 0.00 2.75 2.25 0.00 0.00 2.25 1998 WIT 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Zhen Jing 0.00 0.00 2.00 0.00 0.00 0.00 2.00 0.00 Total Portfolio: 234.72 0.00 59.67 391.83 208.68 0.00 47.81 343.47 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic Total Pending Commitment: 0.00 0.00 0.00 0.00 -72 -  Annex 10: Country at a Glance CHINA: Third Henan Provincial Highway Project East 912199 POVERTY and SOCIAL Asia&& Low China Pacific Income Development diamond 1998 Pooulation. mid-vear (m/llions) 1.238.6 1.817 3.515 Life expectancy GNP oer caoita (Atlas method. US$1 750 990 520 GNP (Atlas method. USS billionsl 928.9 1 802 1.844 Averaue annual arowth. 1992-98 Pooulation /%) 1.0 1.2 1.7 Labor force 1%) 1.3 1 6 1 9 GNP Gross per primary Most recent estimate flatest vear available. 19924981 capita /nrnllment Povertv t% of ooDutation below national ooverfv i/nei 6 Urban ooDulation (% of total oooulttion) 33 35 31 Life exDectanev at birth (veers) 70 69 63 Infant mortalitv (oer 1. 000 ive birthsl 32 37 69 Child malnutrition (% of children under 5) 16 20 Access to safe water Access to safe water 1% of Dovulation) 83 77 74 Uiliteracy (% ofoooulation aOe 15+) 17 15 32 Gross orimarv enrollment (%aofschool-aea ooulalion) 120 117 13 China Low-income group Mate 120 119 113 Female 120 118 103 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1977 1987 1997 1998 Economic ratios' GDP fUSS billions) 172.3 268.2 902.0 960.9 Gross domestic investment/GDP 28.5 36 1 38.2 38.8 Trade Exoorts of ooods and services/GDP 4,8 13 6 23.0 19.1 Gross domestic savinas/GOP 29.0 36 2 42.6 43.4 Gross national savinos/GDP 29 0 36 2 41.5 41.4 Current account balance/GDP 0.2 0.1 3.8 3.4 Domestic Investment Interest Davments/GDP .. 0.4 0.6 0.7 +aings Total debt/GDP .. 13.2 16.3 16.2 Total debt servie/exoorts . 9.6 9.8 9.5 Present value of debt/GDP . 14.9 Present value of debtlexoorts . 62.7 Indebtedness 1977-87 1988-98 1997 1998 1999-03 (averaoe annual orowth) GOP 9.8 10.3 8.8 7.8 70 Chmna -0Low-incomegroup GNP oer cacita 8.