China - National Railway Project

Report No. PID8507 Project Name China-National Railway Region East Asia and Pacific Region Sector Railways Project ID CNPE58846 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Address MINISTRY OF RAILWAYS Address: Foreign Capital and Technical Import Center (FCTIC) Ministry of Railways, 10 Fuxing Road, Beijing, China Contact Person: Mr. Yang Haichang, Director, FCTIC Tel: 86-10-63248406 Fax: 86-10-63241845 Email: FCTICZH@ns.chinamor.cn.net Environment Category A Date PID Prepared November 30, 2001 Projected Appraisal Date November 27, 2001 Projected Board Date January 29, 2002 1. Country and Sector Background The Government of China (GOC) has committed itself to the reform of all State Owned Enterprises (SOEs), of which China Railway's is one of the largest. In the Outline of the Tenth Five-Years Plan For National Economic And Social Development ( Approved by the Fourth Session of the Ninth National People's Congress on March 15,2001), it is stated that the purpose of the government is"To accelerate the reform of transportation management system and operation mechanism with the core focus on the separation of the government functions and the enterprise functions, railways will "separate infrastructure from transport operations",...."MOR submitted a general plan for reform to the State Council in early 2000. This plan is still under discussion within government. The challenges faced by MOR are not dissimilar to those which have had to be addressed by other governments who have sought to reform their railway systems, these are: clarity of the government and enterprise functions, market focus, creation and management of competition, and the definition and reshaping of private/public boundaries. However, there are six major factors which make this task particularly challenging in China: First, China's large size and scarcity of infrastructure mean that rail services are a critical part of both the freight and passenger transport networks (56 percent of freight ton-km and 37 percent of passenger-km go by rail). Given the importance of the rail services, the transition will have to be conducted with great care to reduce the risk of disruption of service. Second, Chinese railways are still facing capacity shortages and surplus demand, so system expansion needs will remain important and regulatory issues will remain significant. Chinese railways generate the highest traffic density  in the world, and the needs for continuing expansion are well supported.Third, Government looks to rail revenues to pay for a significant portion of the required capital outlays. However, as some of the new lines are justified by social and/or strategic considerations, rather than by commercial needs, public funding may be required.Fourth, the railway face an increasingly competitive future. Despite the fact that China's Railways still carry a major share of freight and passenger traffic (measured in tonne kilometers and passenger kilometers, respectively), they are facing increased competition from all other modes of transport. In round figures they have lost 1% of their market share every year since 1978. Most obviously road traffic, both freight and passengers, is increasing very rapidly as the network of inter-city expressway expands, with about 15,000 km. already completed and a planned network of 35,000 km. due to be completed by 2010. MOR faces a particular challenge in the freight sector where their old-style production orientation has limited their ability to compete for higher value traffic. Moreover, the lack of demand sensitive pricing deprives MOR of the earnings needed to invest in better service capability. If MOR cannot rapidly adapt to the new competitive conditions, their market share for all but bulk cargos will continue to erode.Fifth, the financial position of the railways has deteriorated over the last decade. Between 1994 and 1998, the China Railways group (CR) recorded a Yuan 6.7 billion increase in operating income (revenues less operating expenses). However, this gain has been eliminated by the Yuan 9.3 billion growth in non-operating outlays. The bulk of this growth (88 percent) is associated with the rise in interest costs. Thus, the sharp jump in interest expenses has had the effect of dissipating whatever gains CR has been able to achieve from increased revenues and reducing the funds available for operational purposes. Sixth, the existing technical and managerial standards are below Western levels, with much of MOR's technology related most closely to 1960s and 1970s practices in the West. The restructuring effort will have to upgrade technical and managerial capabilities and information as well as commercial techniques. Fortunately, the establishment of the Transportation Management Information System (TMIS), financed under the Railway VI and VII project is being completed just as it will become critically important in supporting improved management and system analyses.In a similar vein, OED commented in a recent report (Transport in China - an Evaluation of World Bank Assistance", January 11, 1999) that: "Despite major capacity expansion and changes in market structure, the railways are still unable to meet the demands of a liberalized and decentralized economy. Many bottlenecks remain in the economically active coastal areas, and access to the railway system in the inner provinces is sparse. Capacity alone will not address these problems. Accelerating the institutional restructuring and policy development, which simultaneously increases system capacity and inter-model transport facilities and improves customer service, will be required to help China's railways compete with other modes of transport".The general approach to future reform of railways in China is expected to be based on two principles, the separation of government functions from enterprise functions, and the separation of infrastructure from operations. Change is likely to proceed in a number of stages: Separation of railway operations from the other businesses which were under the tutelage of MOR (now substantially completed);Establishment of passenger transport enterprises (PTE) in four "minor" Administrations (i.e. Administrations with no sub-Administrations) and; Extension the passenger enterprise separation at least on an -2 -  accounting basis to the other 10 Administrations of MOR and carry out accounting separation of infrastructure from freight;Regroup the PTEs in accord with criteria yet to be agreed to create between three and five viable enterprises;Regroup the FTEs in accordance with the lessons learned from the accounting separation of infrastructure and the establishment of the passenger enterprises. It is not clear how many FTEs will result, probably three to six; Full Separation of infrastructure from operations (known in China as "Up/Down" separation). This is likely to be accompanied by regrouping of the infrastructure entities into a limited number of asset management companies; In addition, at some stage, government must also clearly divorce itself from operations. More details on the reform process in the railways in China are included in Annexes 11 and 12.Some longer term implications for the diversified ownership of railway servicesThese are numerous but are likely to include:Spin-off of non-rail activities. MOR has spun off a number of manufacturing activities (manufacturing of locomotives, wagons, coaches, signals and other components) which had previously been operated within the MOR aegis. Though these have mostly been established as government owned enterprises, they will all eventually be privatized as none of them has a particularly critical policy function.Contracting-out of services. Many rail activities can be contracted more economically than they can be done in-house. Potential for contracting-out includes major activities such as track maintenance, locomotive, wagon and coach maintenance as well as smaller jobs such as station or office cleaning.Concessioning or Franchising. Concessioning and franchising will emerge as alternatives for a number of the operating functions on the separated infrastructure. For example, the potential system-wide freight (or passenger) companies could well be operated as concessions. If the FTEs are initially set up to operate over regional infrastructure agencies, they could take the form of franchises with limited territories (as in the U.K.), and the stock in the companies holding the franchises could eventually be sold in part or in whole.Private Ownership and or Management. At least some private operators will be allowed under license, as an alternative to franchising. In addition, worldwide there is emerging interest from railway companies in leasing assets from the private sector, with and without value added services such as maintenance. The rail system in China would be an enormous potential market. Two particularly promising and immediate opportunities will arise with the creation of the system-wide container company and a company which will own freight wagons and lease them for rail use. Both of these companies reflect MOR's growing sophistication and determination to look outside the public sector for capital: they also illustrate the difficulty in creating such institutions within the existing framework of MOR.For the record, China already has a partly privately held railway company which operates both freight and high speed passenger services between Guangzhou and Shenzhen (The Guangshen Railway Company - listed as GSH). There are also many smaller railways that are joint ventures between MOR and various Provincial or local government agencies. Several of these railways have attempted to sell some of their shares to private investors, and it is likely that either MOR or the local agencies will be even more interested in doing so in the future. 2. Objectives This project will have two objectives:(a) to increase the capacity of the railway network between eastern and western China; and (b) to support the - 3 -  reform program of China Railways 3. Rationale for Bank's Involvement The continuation of the Bank's dialogue with MOR on reform will be the major benefit of the project. We have extensive knowledge of the railway-reform activities in other countries that we can leverage for China's benefit. MOR knows that any mistakes could be very costly given the strategic importance of the railway. We can also assist MOR in developing analytical tools and information systems so that China's reform process can be planned and managed as effectively as possible. This also an investment project. In this regard, the Bank will provide financing to help remove an important bottleneck in the national railway system and increase traffic capacity between the eastern and western regions of China. 4. Description This project will improve access to transport, strengthen economic growth and reduce poverty in the northwest of China while supporting efforts to reform China Railways. There are two parts to the project: Expansion of railway capacity. This project will finance the expansion of a key east-west railway corridor between Baoji and Lanzhou (Bao-Lan line) by double-tracking and upgrading the existing line.Assistance with the reform of China Railways. MOR will use technical assistance provided under the project to carry out the following: -- A study to develop a cost model for the PTE in Kunming -- A study to establish pilot railway PTEs in larger administrations with sub-bureaus -- A study to establish a wagon-ownership enterprise -- The development of an integrated planning and costing tool to facilitate the establishment of line-of-business operations. 5. Financing Total ( US$m) IBRD 160.00 Total Project Cost 1302.24 6. Implementation Implementation period. Upgrading of the Bao-Lan line began in March 2001 and is expected to continue until March 2004. Some limited site-clearance activities have taken place, and certain civil engineering works on the line between Lanzhou and Tianshui were carried out in 2000. The policy reform studies will be implemented between 2002 and 2005. These time estimates are based on the draft implementation, procurement, and disbursement schedules for each component received by the Bank on June 19, 2001. Executing Agency. The Foreign Capital and Technical Import Center (FCTIC) in MOR has overall responsibility for project preparation, implementation coordination, and oversight. To fulfill this role, the FCTIC must work closely with the railway survey and design institutes, the railway construction bureaus, the tendering companies and several departments in MOR headquarters in Beijing and with the railway administrations. Finance. The Ministry of Finance (MOF) will on-lend World Bank funds to MOR on the same conditions as the Bank loan to the MOF. The loan type will be a LIBOR-based floating rate single currency (US$) loan (VSCL), with 20-year maturity, including a 5-year grace period. The 1 percent front-end fee will be financed from the loan.Financial management. - 4 -  Management of project finances will be the responsibility of the Finance Division of FCTIC and the finance divisions of the Zhengzhou and Lanzhou Railway Administration Bureaus. Specifically, FCTIC will be responsible for maintaining, monitoring and reconciling the special account to be set up for the project, preparing withdrawal applications and payment requests. While the Finance Department of MOR will oversee the counterpart fund arrangements for the project, the financial divisions of the two railway administrations will be responsible for collecting supporting documents, monitoring contract payments, maintaining accounts of project activities, and preparing project financial statements. Disbursements. The project funds will be disbursed using traditional (not PMR-based) techniques, in accordance with an agreement between the Bank and the MOF.Audit Arrangements. As with other Bank-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO) (established in 1983 as the State Audit Administration) will have overall responsibility for auditing the accounts of the project. The CNAO resident offices in Zhengzhou and Lanzhou will conduct the actual audits. The Bank currently accepts audits performed under the supervision and responsibility of CNAO. Audits of the financial statements of the project and MOR, and the audit of the special account and statements of expenditures will be submitted to the Bank within six months of the end of each financial year. Resettlement and environmental supervision and monitoring. As described in more detail in Section E5, the Zhengzhou and Lanzhou Railway Administration Bureaus will be responsible for the implementation of the environmental plans and policies. Oversight will be provided by the Shaanxi and Gansu Environmental Protection Bureaus (EPBs) and the State Environmental Protection Administration (SEPA). MOR has appointed a resettlement coordinator, and the local land administration bureaus in Shaanxi and Gansu Provinces will be responsible for implementing the agreed resettlement plans. Systematic monitoring of the implementation of the Resettlement Action Plan (RAP) will be undertaken by a qualified institute independent of the project owner and provincial implementing agencies. Progress reporting and planning. FCTIC will be responsible for preparing quarterly and annual progress reports, including annual implementation plans. The quarterly reports will focus on physical and financial progress, outline implementation problems for all components, and suggest corrective actions. The annual progress report will be used to review the progress achieved in the preceding year, update the Project Implementation Plan (PIP), and draw up the implementation plan for the following year. World Bank supervision arrangements. The project has been prepared by a team based in both Beijing and Washington and led from Beijing, and a similar team will supervise the project. The team includes specialists to supervise the financial management systems, procurement activities, disbursement, and the implementation of resettlement and environmental plans. The supervision plan includes a project launch workshop and two formal supervision missions every year, including an annual review mission. A mid-term review of the project is scheduled for the second half of 2004. 7. Sustainability The physical sustainability of this investment is not in doubt. Experience from completed and ongoing Bank-financed railway projects in China confirms MOR's commitment to the physical implementation of its projects. MOR has the ability to build and operated the asset and has provided timely and sufficient maintenance funding for its existing - 5 -  infrastructure.Traffic volumes on the railways in China are expected to continue to grow. EIRR calculations of completed railway projects in China at the time of loan closing--when the railway financed by the loan has been in operation for a few years--frequently show higher values than at the time of project appraisal. The impact of the Bank funded support for Railway reform in China is likely to be greater today than it has ever been. The momentum behind the reform effort and the thirst for knowledge are very great 8. Lessons learned from past operations in the country/sector The client and the Bank have drawn valuable lessons from preparing and implementing past railway projects, which have been taken into account in the preparation of this railway project. First, a project should not include components to which the client is not fully committed. This can lead to the restructuring of the project, as was the case with Railways VII. Second, including too many components in a project (as was the case in Railways VI and VII) affects implementation negatively because both the client and the Bank have limited resources for supervision and implementation.Third, when designing and implementing project components, the project office, railway staff in MOR in Beijing, and railway staff in the administrations need to work with each other very closely to implement the project efficiently. Fourth, the policy dialogue on reform and restructuring of the railways cannot include only staff in the project office. Senior MOR staff with decision-making responsibilities need to participate in these discussions. (Substantive discussions on reform have been held during project preparation with the minister, vice ministers and other senior management staff). 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : The initial Environmental Impact Assessment (EIA) for the project was undertaken by the China Academy of Railway Sciences (CARS), with assistance from the Ministry of Railway No. 1 Survey and Design Institute for the Bao-Lan line. In December 1999, MOR retained AGRA Earth and Environmental Limited (later renamed AMEC Earth and Environmental Limited), an independent consulting firm, to review and finalize the EA reports. The double-tracking and upgrading of the Bao-Lan line through difficult terrain will be challenging environmentally, with pockets of unstable material, and the possibility of landslides, erosion and safety concerns. Adverse impacts during the construction phase of the project include:Noise from construction equipment, transport vehicles, and construction operationsPublic health concerns from the disposal of solid wastesLand acquisition, resettlement and rehabilitation. Handling, transport and disposal of construction materials.During the operational phase, noise from trains (running wheels, whistles and shunting of locomotives) may have moderate to high residual impacts, as will an increased power demand from the potential development of the region. The selected route for the Bao-Lan line avoids settlements, populated areas and geologically unstable terrain as much as possible. To minimize and mitigate noise-related impacts during construction and operation, the EMP includes a number of measures such as: Limiting construction to between 8:30 a.m. And 6:00 p.m.Building temporary and permanent noise barriers at sensitive locationsRelocating families, schools, and hospitalsInstalling double-glazed windowsPlanting - 6 -  treesLimiting the use of train whistles and speed in built-up and sensitive areas.To minimize the potential for landslides, the Bao-Lan line will avoid areas of poor geology and incorporate bridges and tunnels to avoid making slope cuts. The project design also calls for appropriate drainage and retaining walls and other slope-stabilization techniques. Where possible, sewage will be discharged into existing municipal treatment systems; at other stations, sewage treatment plants will be installed. Selected boilers will be fitted with filters to remove particulates. In addition, the EMP provides for training and extensive monitoring during both construction and operation.The EA identified 29 cultural relic sites in the western section (Shaanxi) and 19 in the eastern section (Gansu). In the western section, 14 of the 29 sites were excluded by the local archeological authority (The Institute of Cultural Relics and Archeology of the Gansu Province) as being insignificant and the other 15 were excavated by the authorities before approval was given for construction. For the eastern section, of the 19 sites identified by the EA, 16 sites were avoided by shifting the alignment. The remaining three sites are being excavated by the Institute of Archeology of Shaanxi Province before approval for construction is given. 11. Contact Point: Task Manager Richard G. Scurfield The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202 458 8344 Fax: 202 522 3223 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending Dec. 21, 2001 - 7 -