China - Guangdong Provincial Highway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 22319 IMPLEMENTATION COMPLETION REPORT (CPL-35300; SCPD-3530S) ONA LOAN IN THE AMOUNT OF US$240 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A GUANGDONG PROVINCIAL HIGHWAY PROJECT June 11, 2001 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective December 6, 2000) Currency Unit = Yuan (Y) Y 1.00 = US$ 0.12 US$ 1.00 = Y 8.30 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS BMS - Bridge Management System DF - Diversion Factor EA - Environmental Assessment E&M - Electrical and Mechanical EIRR - Economic Internal Rate of Return ENPV - Economic Net Present Value FKE - Foshan-Kaiping Expressway GP - Guangdong Province GPCD - Guangdong Provincial Communications Department GPFC - Guangdong Provincial Freeway Company GPED - Guangdong Province Expressway Development Company GPHAB - Guangdong Province Highway Administration Bureau HAB - Highway Administration Bureau ICB - International Competitive Bidding ICR - Implementation Completion Report LTE - Longgang-Tanxi Expressway MOC - Ministry of Communications NCB - National Competitive Bidding PAP - Project Affected People PHAB - Provincial Highway Administration Bureau RDB - Road Data Base RIP - Road Improvement Program PMS - Pavement Management System SAR - Staff Appraisal Report SPC - State Planning Commission VOC - Vehicle Operating Cost Vice President: Jemal-ud-din Kassum Country Manager/Director: Yukon Huang Sector Manager/Director: Jitendra N. Bajpai Task Team Leader/Task Manager: Michel Bellier  FOR OFFICIAL USE ONLY CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 8 6. Sustainability 9 7. Bank and Borrower Performance 10 8. Lessons Learned 12 9. Partner Comments 14 10. Additional Information 21 Annex 1. Key Performance Indicators/Log Frame Matrix 22 Annex 2. Project Costs and Financing 23 Annex 3. Economic Costs and Benefits 25 Annex 4. Bank Inputs 46 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 49 Annex 6. Ratings of Bank and Borrower Performance 50 Annex 7. List of Supporting Documents 51 Annex 8. Beneficiary Survey Results 52 Annex 9. Stakeholder Workshop Results 53 Annex 10. Securitization Operations 55 Maps IBRD23927R: Guangdong Province Highway Project IBRD 23928R: Foshan-Kaiping and Longgang-Tanxi Highway This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   Project ID: P003518 Project Name: GUANGDONG PROV. TRANSPORT Team Leader: Michel Bellier TL Unit: EASTR ICR Type: Intensive Learning Model (ILM) of ICR Report Date: June 26, 2001 1. Project Data Name: GUANGDONG PROV. TRANSPORT L/C/TFNumber: CPL-35300; SCPD-3530S CountryIDepartment: CHINA Region: East Asia and Pacific Region Sector/subsector: TH - Highways KEY DATES Original Revised/Actual PCD: 10/28/89 Effective: 03/16/93 03/24/93 Appraisal: 02/13/92 MTR: Approval: 11/17/92 Closing: 06/30/99 06/30/2000 Borrower/lmplementing Agency: PRC/GUANGDONG PROVINCIAL COMMUNICATIONS DEPARTMENT (GPCD) Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Gautam Kaji Country Manager: Yukon Huang Shahid Javed Burki Sector Manager: Jitendra N. Bajpai Daud Ahmad Team Leader at ICR: Michel Bellier Stephen Stares ICR Primary Author: Jacques G. Yenny; Hank Yen 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: HL Institutional Development Impact: M Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objectives of the project were the following: (i) relieve congestion in two major traffic corridors (Foshan-Kaiping and Longgang-Tanxi); (ii) improve other national and provincial roads carrying substantial volumes of traffic; (iii) promote the transfer of highway technology through training and provision of equipment; (iv) develop institutional capability in highway design, planning and prioritization; and (v) support reforms of the highway financing system in Guangdong Province. The objectives were clear and in line with the sector assistance strategy and the Government of China request to the Bank for continuous assistance in the highway subsector. In February/March 1990, the Bank undertook, jointly with the State Planning Commission (SPC) and the Ministry of Communications (MOC), a screening mission to make preliminary assessment of nine highways which had been proposed to the Bank for financing. Two of the nine highways were located in Guangdong Province (GP), and the mission concluded that they were among the highest priority of the screened projects in terns of the expected economic and first year rates of return, and should forn the basis for a provincial highway project for Bank financing. 3.2 Revised Objective: Project Objectives were not revised. 3.3 Original Components: Component Cost Rating CONSTRUCTION OF HIGH GRADE HIGHWAYS $594,000,000.00 S ROAD IMPROVEMENT PROGRAM $119,000,000.00 S PROCUREMENT OF EQUIPMENT $15,200,000.00 S CONSTRUCTION SUPERVISION $14,500,000.00 S HIGHWAY FINANCE STUDY $300,000.00 S ROAD SAFETY PILOT PROGRAM $400,000.00 S ROAD DATA BANK/PAVEMENT MANAGEMENT $200,000.00 S SYSTEM STAFF TRAINING $2,500,000.00 S LAND ACQUISITION/RESETTLEMENT $49,500,000.00 S Since the implementing agency was a first-time executing agency for a Bank project, there was a risk in implementing the major highway components of the project in a timely manner. However, the preparation of the project was assisted by the Bank's experience in previous provincial projects and by the more active involvement of MOC. -2 -  3.4 Revised Components: The components were not revised. 3.5 Quality at Entry: The quality at entry was satisfactory. The objectives were consistent with Government priorities and the Bank's sector strategy. Design and technical specifications were reviewed by Bank staff with the assistance of foreign consultants under a grant fund from the Danish Trust Fund. Because of the difficult subsoil conditions on the two highways, two test embankments were built in advance of the main works to investigate the extent and timing of necessary soft soil treatments. Safeguard policies on environment and resettlement were followed by the province and found satisfactory. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Despite some minor shortcomings during implementation, the project outcome is considered satisfactory and its objectives have been met. The two major highways, the Foshan-Kaiping Expressway (FKE) and the Longgang-Tanxi Expressway (LTE) were both opened to traffic in December 1996, as scheduled. The objective of reducing congestion in the corridors has been met with traffic on the highways taking from 27 to 67% of the total corridor traffic in 1999. Furthermore, the economic benefits are considered sustainable, without any predictable elements of risk, as traffic has been growing rapidly since opening. The rural Road Improvement Program (RIP) has had a very beneficial impact on the local communities served by the improved roads. These roads have provided immediate and substantial benefits to the affected communities by connecting remote areas to major centers. Increasing traffic and easier transport of local produce have enhanced the living standards of the populations served by the roads, according to evidence gathered by the Borrower. The re-estimated ERR confirms the expected level of viability of the investments made and highlights the high priority of investing in areas with economic potential but with poor road infrastructure. The impact of technology transfer through training is not easy to measure due to difficulties in defining baseline parameters. However, the training overseas and the study tours provided a satisfactory level of exposure to new concepts and incentives for adoption in the Chinese environment The acquisition of experience and technology transfer through acquisition of modem equipment for operation and maintenance of the Guangdong provincial highway network contributed to ensure that the Guangdong highways are adequately maintained. Institutional capabilities for planning and investment prioritization were developed through the successful introduction of road data base (RDB) and pavement and bridge management system (PMS and BMS) programs for the core arterial road network of the province. This was achieved through the adoption of the Chinese RDB, PMS and BMS programs, which were developed for nationwide application. All three management systems were in first stage operation by July 2000. There is still more development work to be done until these three systems can be integrated and used efficiently on both the provincial and city level for programming annual maintenance expenditures. Regarding reform of the highway financing system in the province, a study financed by the project was completed early on. The results were somewhat theoretical and attempts to seek trust funds to - 3 -  continue studying the matter were not successful. However, Guangdong province then proceeded with an innovative form of financing by securitizing the revenues of one of the project highways through share issues. In fact, because of the favorable prospects for continued strong economic activity in the influence area of the FKE, the Guangdong Provincial Government was able to raise RMB 484 million (US$62 million) in 1996 and RMB 528 million (US$65 million) in 1997 through the issuance of shares by GPED, securitized by revenues from the Highway (details in section 8.1), and issued on the Shenzhen stock exchange. 4.2 Outputs by components: Construction of High-Grade Highways Civil Works. Both the FKE and the LTE were successfully completed and opened to traffic on schedule in December 1996. Because of the pressure to complete the work on time, construction quality was an issue through the first years of construction, but eventually improved. The effect of settlement at the approaches to bridges have been well repaired and maintenance of both highways since opening to traffic has been good with repairs to infrastructure normally completed within 48 hours in emergency cases only, such as collapsed slopes. Electrical and Mechanical Works (E&M!. The two supply and install contracts for these works were delayed for a number of reasons described more fully in section 5.3. As a result, the loan closing date was extended by one year to June 30, 2000. Fortunately, the delays had no substantive adverse effect on the operation of the two highways. Traffic has been using the highways since December 1996, and tolls were collected using temporary toll collection facilities. Environmental Protection. Crossing fairly urbanized areas, the two highways did not affect ecologically sensitive areas and it was judged that with appropriate actions, the project would not have an adverse environmental impact. The environmental assessment (EA) report specified measures related to social disruption, air quality, noise control, water management, control of traffic, operation of quarries and waste disposal. The engineering design and technical specifications incorporated the mitigating measures required during implementation. During the construction of the highway, no adverse environmental problems emerged. Noise barriers were erected, shrubs planted in the median and slopes protected with shrubs, grass and trees. All the planting appears to be well protected, healthy and well tended and efforts are being made to landscape pockets of land along the highways. The overall impression is environmentally and aesthetically pleasing. Noise monitoring continued since the opening of the roads and the installation of an additional 212 m. of noise barriers along the FKE was decided. The only problem is that illegal residential construction very close to the highways, particularly the FKE continues to plague the Expressway Authority. Despite efforts by both FKE and LTE, they have been unable to persuade local governments to address the problem. Land Acquisition and Resettlement. Land acquisition, demolition of structures and relocation of utilities took somewhat longer than expected, particularly along the urban sections of the FKE. Resettlement action plans prepared for the two highways were implemented well and completed by February 1999. -4 -  Road Improvement Program (RIP) Civil Works. The original RIP comprised 86 subprojects with a total length of 1,260 km. The implementation of the program was to be phased with subproject packages prepared according to agreed criteria and procedures, and submitted to the Bank for approval. Projects were eventually grouped into three packages totaling 41 subprojects executed under 77 contracts. They were all completed by the end of 1997. The quality of construction has been good. Environmental Protection. Supervision missions have reported from selected field surveys of roads improved under the RIP that all roads were well constructed with proper drainage, pedestrian crossing facilities, etc.; that the drains were well maintained; that the grassed shoulders were well cared for; and that the local highway bureaus had carried extensive planting along the highways. As a result, the effect was striking and environmentally pleasing. Along some roads, the incidence of dust pollution, compared to the original dirt roads, had dropped so much that farmers reported 30 percent increases in crop yield. Resettlement. The Resettlement Action Plans for the RIP were not as thorough as those for the two highways. The Provincial Highway Administration Bureau (PHAB) delegated resettlement responsibilities to county administrations and they were carried out by the Township Land Bureaus according to local policies and local understanding of laws and regulation. Compensation rates were therefore low except for housing. However, since the RIP component consisted mostly of upgrading of existing roads, the impact of resettlement was generally low. Local administrations and project affected people (PAP) were eager to have RIP projects in their communities due to the expected benefits to the community and the individuals. Supervision missions found that there was a general improvement of livelihoods of the affected communities and PAP due to the projects and that no lasting negative impact of resettlement were encountered. Equipment. Equipment to be purchased under the project was to assist construction supervision and the general development of highway activities, in particular maintenance, in the province at large. The procurement of equipment went smoothly and was completed in October 1997. Highway Finance Study. The study was completed by the Xian Institute of Highways and GPCD's Science Research Institute and the World Bank Finance Office in December 1992. It was reviewed in Guangdong by two British consultants in April/May 1993. It was subsequently reviewed in the Bank and discussed during supervision missions. A revised draft was completed in September 1994. The report proposed 7 sources of financing with 19 methods of mobilizing such financing. The methods were not described in detail and the recommendations were theoretical. The Bank recommended that GPCD should develop some of the recommendations in a practical way and GPCD discussed five possible measures with the provincial authorities, but no concrete result was achieved. Then in 1996, GPCD innovated with the securitization of the FKE and share issues in Shenzhen, to mobilize funds from foreign and domestic investors. Road Safety Pilot Program. The Highway Administration Bureau (HAB) took some time to prepare a detailed implermentation program for this component. In fact, by mid-1995, some 40% of the black spots, originally identified and agreed as part of the program, had already been improved outside the program. A new program was - 5 -  submitted to the Bank at the end of 1995 and implementation started in 1996. Implementation was slower than expected due to a shortage of local funds and generally a lack of commitment from the HAB. Nevertheless, by mid-1998, all activities planned to remedy black spots were completed. Since then, no accidents have been reported at any of these locations. Road safety was discussed at meetings of the provincial Highway Traffic Engineering Association. Also in 1995, the HAB established a road safety unit and the staff of this unit has been actively cooperating with the police since then. More recently, the province has launched a Road Safety Information Campaign on TV and mass media to increase awareness about the road safety situation, help change the attitude toward safety and improve road user behavior. Road Data Bank/Pavement Management System. In October 1994, HAB received equipment for the RDB/PMS financed by the project. Canadian trust fund consultants visited Guangdong and other provinces with similar Bank financed components in early 1995 to assist with program start-up. By early 1996, there was a good deployment of the PMS to most cities in the Province. However, the system is limited to asphalt paved roads; but, in Guangdong province, many roads have a concrete surface and the Province is interested to develop a similar system for concrete roads. A Bridge Management System (BMS) was introduced also, which now covers all bridges with more than 10 m. length on national and provincial roads (except expressways and rural roads). The implementation of the RDB started in 1997 and already has data for some 4,000 km of main roads and 700 km of expressways. Data collection for county roads has been completed and is being integrated in the system. More work remains to integrate the three systems so that the whole set becomes an efficient planning tool. Training. Training under the project has been successfully completed. The number of persons trained overseas exceeds the number agreed at appraisal. The number trained domestically is somewhat less than originally planned, but with a greater number of man-months of training, as it was decided to send fewer people over longer periods. The training program covered many subjects, with a concentration on management of maintenance on other projects, expressway operation, and highway planning and design. 4.3 Net Present Value/Economic rate of return: Foshan-Kaiping Expressway The Economic Intemal Rate of Retum (EIRR) on the FKE is estimated to be 14.7% versus the SAR estimate of 21.4%, and the Economic Net Present Value (ENPV), at discount rate of 12%, is estimated to be Y 971 million versus Y 1,881 million. The recalculated EIRR and ENPV are lower than anticipated at appraisal mainly because of significant increases in the project costs. While the 1999 traffic levels already exceeded forecasts by more than 50%, this was not enough to compensate for the increase in costs in the economic evaluation. The detailed economic analysis is in Annex 3. Longgang-Tanxi Expressway (LTE) The EIRR for the LTE is estimated to be 14.8% versus the SAR estimate of 27.8%, and the ENPV, at discount rate of 12%, is estimated to be Y 1,062 million versus Y 3,841 million. The recalculated EIRR and ENPV are lower than anticipated at appraisal mainly because of significant increases in the project costs. As with the FKE, in 1999 traffic levels exceeded SAR forecasts by 50 to 100%, depending on the section, but not by enough to compensate for the increase in costs in the economic - 6 -  evaluation. The detailed economic analysis is in Annex 3. Road Improvement Program (RIP) The EIRR for the RIP as a whole is estimated at 42%. At appraisal, the economic analysis covered only a first package of 24 roads sections. The EIRR for this first package was estimated at 55%. During the project's implementation, the total RIP eventually improved 41 road sections. The total economic cost of RIP also increased from Y 293 million to Y 1.1 billion, at December 2000 prices. Since the project scope analyzed by this ICR and that of the SAR are substantially different, the returns cannot be compared directly. Details are in Annex 3. EIRR and NPV for the total project The EIRR and ENPV for the total project is estimated to be 17.7% and Y 4.52 billion, respectively, compared with 30% and Y 6.69 billion estimated in the SAR. 4.4 Financial rate of return: The financial evaluation of the project is comprised of two types of analyses. The first one is for the revenue eaming highways; and the second for the non-revenue earning roads. The two toll roads, FKE and LTE, are the only revenue earning roads in the project. The total cost of these two highways accounts for about 88 percent of total project cost. There is no revenue from the roads improved under the RIP, and the second type analysis focuses on the impact of the 41 road components under RIP on the finances of GPCD. There was no financial evaluation of the project in the SAR. The detailed financial analysis is in Annex 3. Revenue Earning Entity In December 1996, GPCD established two separate highway companies to operate the two new highways. The toll charges are the main revenue for the companies, and they are strictly controlled by the government. The net profit after tax is not expected to be high because of the rigid toll rates control and the project cost over run. Since FKE and LTE are operated as separate legal entities, there is no financial obligation between these two entities. The financial analysis has been done separately for each company. The FIRR to total investment on FKE and LTE are estimated at 5.7% and 4.5%, respectively. The FNPV is estimated to be Y 91 million for FKE and Y -504 million for LTE. Non-revenue Earning Entity All components under RIP are toll free. Since there is no revenue for RIP, the financial evaluation focuses on the impact of the program future operating expenses on the financial situation of GPCD. The analysis shows that the financial risks of not having enough revenues for supporting the maintenance of these roads would be minimal. The maintenance expenditures on these roads will constitute only a small fraction of GPCD budgets. Based on GPCD expenditures plan, the sum of the total maintenance expenditure required for RIP roads is less than 0.6% of the total maintenance expenditure of GPCD during the 9th and 10th FYP. These low financial requirements indicate a low financial risk that funds would be insufficient for the future maintenance of the project components. 4.5 Institutional development impact: Within the project, measures were taken to strengthen GPCD and its relevant institutions. The -7 -  experience with competitive bidding and having works done by contract rather than force account has been successfully integrated and all new construction and major maintenance works in the province are now done by contract. The project introduced Guangdong Provincial Communications Department (GPCD), Guangdong Provincial Freeway Company (GPFC), Guangdong Province Expressway Development Company (GPED), Guangdong Province Highway Administration Bureau (GPHAB) and the county highway departments to prequalification of contractors and competitive bidding for the first time in GP. While all expressway contracts for civil works and E&M works were under ICB, all RIP components were under NCB. GPCD and its sister organizations reported repeatedly to Bank supervision rnissions that Bank's requirement for competitive selection of civil works contractors helped improve construction quality, cost control, timeliness of contract completion and reduced opportunities for fraud and corruption. Contractor prequalification and competitive bidding is now the rule in GP for highway construction, including non-Bank financed projects. GPCD leadership has further reported to Bank missions that NCB procedures now applied in GP under provincial and county highway departments to eliminate unsuitable contractors from bidding, thus leading to longer contract sizes, more transparency, improved quality of works and lower construction costs. The staff training program financed by the project was successful and has been described above. Since 1996, some provinces including Guangdong have recognized the value of expressways with growing traffic volumes and toll revenues. The Chinese authorities found that, through the securitization of existing highway assets, they were able to raise large sums of new capital from foreign and local investors. The FKE was first securitized in 1996. Details are in section 8. 1. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Although contractors were prequalifled under the ICB procedures, some of the awarded local contractors lacked experience in carrying out major highway works of comparable magnitude and complexity. Their managerial skills were inadequate and their material and financial resources stretched. Quality was a constant problem and the Bank continuously insisted that the supervision team tighten quality control. Contractors on the FKE were generally better than those on the LTE. The construction supervision inputs were at the level estimated at appraisal, totaling about 229 person-month by foreign engineers and 10,800 man-month by domestic supervisors. The foreign engineering personnel helped establish the framework and procedures for the supervisory work and trained the GPCD staff, local engineers and technicians. Such training was not only a significant means of technology transfer but also an essential measure for trying to ensure effective control of the quality of expressway construction with adequately trained personnel. The performance of the supervision team was generally satisfactory and construction quality gradually improved. 5.2 Factors generally subject to government control: On contracts in urban areas, land acquisition, resettlement, demolition of structures and relocation of utilities proceeded slower than anticipated. The problem was less on rural sections. The delay in providing the work sites combined with the difficult start up for a number of contractors, for reasons given above, resulted in the civil works falling behind schedule in the first two years. Also more soft soils were encountered than anticipated and numerous design changes had to be made (section 5.4). This could have been avoided by further investigations at the design stage. There existed the phenomenon of catching up with the progress, despite exhortations of supervision missions to put quality first. As a result, some repairs became necessary shortly after opening to traffic. 5.3 Factors generally subject to implementing agency control: - 8-  The one-year project completion delay was predominantly due to the delay in the preparation, procurement and implementation of the E&M works. Together with the Zhejiang project (effective six months earlier than Guangdong) these were the first highway projects in China to include, from the early project preparation stage, all the required E&M facilities needed for operating the expressway, including: tolling, traffic monitoring, telecommunications and lighting. Bidding for the E&M contracts was originally scheduled to be completed in May 1995, with supply and installation to be completed in December 1996 when the roads were to open for traffic. However, because the Employer primarily focused on the timely completion of the civil works and lacked experience with the type of E&M works required for expressway operations, the formulation and design of this component was delayed. The bidding documents were issued only in November 1996, and further delays were encountered during ICB procurement procedures, so that the two E&M contracts for FKE and LTE were awarded in July and September 1998, respectively. Part of the delay resulted from the Bank's introduction of the two stage bidding method, which had not been used in China before and was controversial. The quality of implementation appears good and works were completed by the closing date of the project. However, the liability period of both ICB contracts will only occur later. 5.4 Costs andfinancing: The final costs of the two expressways were substantially higher than the bid prices. Total costs increased by 86% for FKE and 114% for LTE. The largest factor contributing to the cost increase was the large number of variation orders, of which there were over 1,200 on FKE, accounting for 45% of the cost increase, and almost 1,300 on LTE, accounting for 80% of the cost increase. The rest of the cost increase is due to adjustment of exchange rate, price escalation and various other factors. The reasons for the large number of variations included: a) changes in design due to worse than expected soil conditions (such as piles on some bridges, foundations of other bridges and new sections of soft soils), change in pavement structures, etc.; b) changes due to the booming local development, as about five years had passed between the design and the start of construction, this implied replacing embankments by viaducts to limit resettlement and adding new expressway crossings to maintain local communications; c) changes in construction methods drawing on experience gained since the original design was made; and d) effects of the typhoons requiring more slope protection, additional drainage and support for a better landscape. The Bank required GPCD to submit the justification of these variation orders on a contract by contract basis. GPCD's report was audited by the Bank and no objection was granted for variation orders fitting within the amount of financing available in the loan. There were no changes in disbursement rates. The Bank stayed involved in expressway construction until its end. The costs of other components were more in line with appraisal estimates. In the four fiscal years (FY94 to FY98), loan disbursements were either in line or ahead of the SAR forecast. However, because of the delay in procuring the E&M works, disbursements slowed down as the project was extended by one year. 6. Sustainability 6.1 Rationale for sustainability rating: During construction of the expressways, soil settlements and other construction problems were noticed and, to a large extent, immediately rectified. Since then, required repairs and maintenance are being done promptly. The operating rights granted to the public-private expressway development company provide incentives for the provision of a high level of service to road users, including adequate routine and -9-  periodic maintenance. The rapidly increasing traffic ensures sustainability of the project benefits. The sustainability of the Road Improvement Program under the project depends upon subsequent adequate routine and periodic maintenance of the roads. The management of maintenance of these roads is the responsibility of counties that have to rely on local revenues for the additional capital and recurring expenditures for the roads. Prospects for sustainability are high since high density rural populations exert strong pressures on county road departments to maintain all sections upgraded under the RIP. The equipment for maintenance and operation of highways procured under the project should provide adequate long-term service, since sufficient stock of essential spares have been purchased and naintenance facilities have been provided. The lessons and knowledge learned from the staff training program are expected to be disseminated within the provincial institutions involved, and have a long-term influence on provincial road administration and management methods and highway-specific technology. The methodology of the pavement evaluation and the application of the Chinese RDB, PMS and BMS programs have been deployed in all parts of the province that have asphalt roads. It is expected that, with the regularly collected input data and the full integration of the three components, the system will provide the necessary output information to help make better investment decisions for road imnprovement and maintenance. 6.2 Transition arrangement to regular operations: In 1996, part of the equity of the FKE was transferred to the Guangdong Province Expressway Development Company (GPED), prior to the opening of the expressway. There has been no particular problem in operating the two expressways since their opening to traffic. As mentioned above, the two expressways were operated in the first three years before installation of permanent E&M equipment and tolls had been collected with temporary facilities. With the completion of E&M equipment installation by mid year 2000 on FKE and LTE, all mechanical, electrical and electronic facilities are now operated on a permanent basis. Toll revenue leakage during the initial three years after opening of FKE and LTE was estimated to be in the order of 3-5%. 7. Bank and Borrower Performance Bank 7. Lending: The project was identified in a joint mission of the Bank and Govemment officials (section 3.1). The intensity of Bank resources during preparation was above average; about 566 person-days were spent on field preparation (missions) from the identification through appraisal stages of the project. The major risk identified during appraisal was a delay in the completion of the expressways and the quality of construction due to the difficult subsoil conditions along the project corridors. To counter this risk, two test embankments were built in advance of the main works to identify the extent and timing of soft soil treatment required. Furthermore, the institutional capacity of the implementing agency was considered to be a risk, since the implementing agency was a first-time borrower of Bank funds. To mitigate this risk, the project was designed with the assistance of foreign experts, prequalification of contractors was made particularly stringent, and supervision arrangements were carefully formulated to ensure regular monitoring and effective quality control. In spite of these well identified issues, it was difficult to obtain an adequate quality in the early stages of the project due to lack of attention to construction quality and pressures to - 10 -  open the highway early. 7.2 Supervision: The Bank mounted 11 supervision missions during 1992-2000, which is on average just slightly more than one mission per year. Continuity of staffing on the project was generally achieved, with only one change in project manager during construction, in 1995. The skill mix of missions was adequate and responsive to the need of the customer, in particular to review the applications for issuing shares for the FKE expressway. Resettlement and environment specialists participated in most supervision missions from the early stages of supervision. Specialized reviews were provided by the resettlement specialist who also conducted interviews of project affected persons several years after they had been resettled. Environmental specialists followed the project not only during the construction but also during operation of the two expressways. Since those were already opened to traffic at the end of 1996, they had a rare chance to monitor impacts, such as noise, for over three years until the project closing date. The Bank has shown flexibility in dealing with the many change orders mentioned in section 5.4. Regarding procurement, the Bank's insistence to use two stage bidding for the E&M works created problems for the borrower, since this had not been expected. It added substantial time to the procurement of this component of the project and had been reversed to one stage bidding, including prequalification for the follow-up project. In response to the Borrower's request to extend the loan closing date, the Bank concluded that a one-year extension of the project was reasonable for completing the still outstanding E&M works. Finally it gave three no objections to the sale and transfer of shares for the FKE. 7.3 Overall Bank performance. Despite the one year delay in implementing parts of the project, the overall Bank perfonmance is considered to be satisfactory. It should be recognized that the development of the provincial expressway network was in its early stages at the beginning of the 1990s and that GPCD was a first-time Bank borrower, not familiar with international business practices and FIDIC conditions of bidding, contracting and supervising major civil works. Borrower 7.4 Preparation: GPCD's preparation of the project was reasonable, considering the limited base of technical and managerial experience in developing large scale, complex highway projects. The experience under this project highlighted several deficiencies in the Chinese planning and preparation process, such as improper cost estimating methods; minimizing the technical complexity of the project; and not anticipating the difficulties of procuring major works, including timely land acquisition. 7.5 Government implementation performance: The Government was fully committed to the project, even pushing the pace of construction of the expressways beyond prudent practice. Counterpart funds were provided on time, except for the road safety component. However, the process for obtaining internal clearances for bidding documents and evaluation reports was slower than expected, due to the cumbersome internal process involving both provincial and central government agencies. 7.6 Implementing Agency: GPCD demonstrated strong commitment and effort to achieve the project's objectives, including both the physical objectives such as construction of the FKE and LTE and the RIP, and the institutional - 11 -  development objectives in road management (RDB/PMS/BMS) and staff training. Despite the problems encountered by contractors from time to time on account of a shortage of material supplies, lack of financial resources and contract administration skills, the Employer was able to help overcome such difficulties with the support of the supervision units. Since the experience with the supply and installation work of modem traffic monitoring, telecommunications and tolling systems in China was very limited in the early 1 990s, it is understandable that the Employer had problems in designing and procuring the proper E&M works for the two expressways. 7.7 Overall Borrower performance: The Borrower has complied substantially with the conditionalities of the loan and project agreements. The Bank's procedures and requirements were substantially followed. The cooperation between the Borrower and the Bank was cordial throughout preparation, appraisal and implementation of the project. Consequently, the overall Borrower's performance is rated as satisfactory. 8. Lessons Learned 8.1 Securitization of Bankfinanced assets This is the most innovative aspect of the project, described in detail in Annex 10. Main steps were as follows: 3 Realizing that their ambitious plan to develop a network of expressways in the province could not be achieved with budgetary allocations and domestic and foreign borrowing alone, the provincial authorities established in 1993 a new financing vehicle, the Guangdong Provincial Expressway Development Shareholding Company (GPED). The company was established to help mobilize foreign and domestic equity capital for highway construction. 3 In May 1996, MOF requested the Bank's no objection (given promptly in June 1996) for Guangdong's issuance of B shares on the Shenzhen Stock Exchange for overseas investors in order to mobilize additional counterpart funding of RMB 484 million (US$62 million) to fund the construction of FKE. Proceeds were applied up to RMB 334 million to that purpose, with GPED having acquired a 25% operating interest in the expressway. * A second operation was undertaken by GPFC and GPED in 1997, following approval by the Bank, with a RMB 528 million (US$65 million) share issue by GPED on the Shenzhen A share market, of which RMB 413, 550,000.00 (US$49,680,000.00) were applied to the acquisition from GPFC of an additional 10% participation in FKE. * Finally, Bank approval was sought again in February 1999 for the acquisition by GPED of another 16% ownership interest in FKE. Securitization operations contributed significantly to the financing of FKE without any liability to sovereign or sub-sovereign agencies for the repayment, since the funds raised through these transactions were in effect leveraged by the future traffic stream on FKE. They were completed with no effect on Bank policies regarding loan implementation, enhanced development objectives, and had the effect of involving the private sector in toll roads operations. They also offer a number of valuable lessons and experiences for the refinement and possible future application of this financing technique, on the following aspects: * Efforts to securitize existing revenue-producing assets such as toll roads with the involvement of credible international institutions, such as the World Bank, will continue to be an important capital-raising device for the country. * The level of project preparation and due diligence normally required by the Bank for leveraging its - 12 -  assets in the financial markets provides a needed level of security to commercial financial institutions and investors in China who would otherwise look to an established policy framework, which at present is still in the formative stages. The Guangdong experience illustrates the need for a close relationship between a thorough review of the transaction by the Bank and the timing established by the sponsoring agency and its underwriters to take the offering to market. * Exposure to the requirements of private investors was also a strong incentive for GPED to consistently strengthen management and compliance with strict financial standards, thereby improving the quality and efficiency of toll road operation. * An option to consider in the future is the issuance of fixed price bonds which are securitized by existing assets and priced at a rate and term in the credit markets, which may be preferable to the volatility which has characterized most equity markets around the world. 8.2 Relevant design of the expressway As discussed above, substantial cost overruns were encountered in the construction of FKE and LTE. A more in-depth preparation of the project, comprising detailed soil investigations in the technically difficult sections during engineering feasibility studies and prior to procurement of civil works, would be cost effective in securing the technical design and selecting suitable construction methods. Monitoring construction implementation The soil settlement problem needing further remedial works has already been mentioned. Since the problem had been identified during project preparation, the monitoring of embankment settlement rate should have been more strictly enforced, and pavement work should have been delayed until the settlement reached more stable condition. 8.3 Preparation and Execution of E&M Works for the Two Expressways The one-year delay of the completion of the project is mostly attributable to the delay in the E&M works (section 5.3). Sinilar delays occurred under other Bank-financed highway projects being implemented in the early 1990s and the Bank now ensures that: the bidding documents and engineering designs for E&M works are completed more or less at the same time as those for the civil works contracts; and the tendering activities commence at least two years before the civil works are expected to be completed. 8.4 Road Improvement Program The GPHAB had tentatively identified 86 subprojects for inclusion in the RIP, some of which were located in the less developed areas of the Province. The Bank's supervision missions visited a number of road sections built and improved under the project and confirmed that the significant expected benefits were accrued and the living standard of the population along the corridors improved. People living in the corridors directly expressed their appreciation to the Bank for its support and involvement in the poverty targeted projects. More involvement in construction and rehabilitation of lower class roads, which would directly help remote communities to alleviate poverty, should be encouraged in the Bank's future lending program. - 13-  9. Partner Comments (a) Borrower/implementing agency: 9.1 General (Contribution from GPCD) The Guangdong Provincial Highway Project was pre-appraised by World Bank in November 1991, and appraised in March 1992. The Loan Negotiation was held in Washington D.C. in September 1992, the UD$ 240 million Loan agreement and the Project Agreement were signed on December 26, 1992, and the Loan was declared effective on March 16, 1993. The original loan closing date was June 30, 1999, but it was extended to June 30, 2000. All tasks referred to in the Staff Appraisal Report, Loan Agreement and Project Agreement have been completed around the extended closing date. 9.2 Project Implementation ( Contribution from GPCD) In addition to the description of all project components and the general data on project implementation, which are covered in the Project QR No. 28 submitted to the Bank on July 5, 2000, some additional information are given as follows: * Since FKE and LTE were opened to traffic at the end of 1996, traffic flow and toll revenue have increased steadily. Traffic grew by 138.6% on FKE and 134.5% on LTE between 1997 and 2000, while toll revenue increased by 142.0% and 145.4%. * As there is no mainline toll station located between the Guangzhou-Foshan Expressway (GFE) and FKE, since the extension and reconstruction of the E&M equipment on GFE have been delayed, the main netting function of the two expressways cannot yet be implemented. The completion of Contract EKOS regarding E&M works is expected by June 2001. * The main Zhangcha complex, under Contract FK06 on annex works, has been completed by the end of 2000. * All loan amounts have been completely withdrawn and settled by October 2000. 9.3 Assessment of the Work ( Contribution from GPCD) Assessment of the work by the Bank Since the Bank project identification mission visited Guangdong in November 1989, many rnissions were sent to carry out, in close cooperation with SPC, MOC, GPPC, GPCD and GPWBO, project preparation, pre-appraisal and appraisaL. Subsequently, once the project implementation commenced, the Bank's supervision missions visited Guangdong at least once a year. The most recent mission discussed the lessons that can be drawn from the project. For years, the Bank's missions, composed of specialists in various fields, have completed numerous and fruitful tasks during their visits to Guangdong to identify, prepare the project, and promote its successful implementation. All these results were recorded in the mission Aide Memoires, which were confirmed by the Bank management, and won high opinion from the - 14 -  project Owner at all levels. The project Staff Appraisal Report, which is based on the findings of the Bank's appraisal Mission headed by Mr. Steven Stares, Senior Transport Specialist, described and evaluated in details all the project components; it forms an essential element of the project documentation and for the on-going project post-appraisal. During project preparation, the Bank assisted the project Owner to secure a grant from the Bank Consultant Trust Fund that financed consultant's services. An expert team was hired from Kampsax/DRD to review, in close collaboration with HSDI I, GHDI and ITC, the final design and the bid documentation of the FKE and LTE in July 1992. As the Bank-financed projects possess international, governmental, bilateral, reciprocal and cooperative features, the Bank missions carried out an effective project management throughout its implementation, in close cooperation with the project Owner and strictly in accordance with the terms of the Loan and Project Agreements and other relevant documents. The project Owner extends his general satisfaction to the Bank arrangements, methods and procedures, and to the results of the selection and employment of consultants, the procurement of works and of equipment under each project component. The Bank supported and assisted the project Owner in the conduct of a study about highway financing methods in Guangdong, which reached the objectives assigned by a TOR outlined in the SAR. In addition, the Bank paid a particular attention to the innovative securitizations of assets carried out by GPED through the issue of A and B shares, and assisted in the organization of a dedicated workshop. The workshop conclusions are annexed to the ILICR. The Bank also paid high attention to the Road Improvement Program and Road Safety Pilot Program and supervised their implementation. The Bank supported these programs to further promote the strengthening of and improvements in the Guangdong highway system, as forecasted in the SAR. Those improvements were very beneficial to the economics of the mountainous areas and to the people affected. The Bank provided its assistance to the procurement of equipment and instruments, the training program, the development and improvement of the Road Data Bank and Pavement Management System, and to their extension province-wide as a main supplemental tool used for project identification and for the prioritization of the RIP program. Since major variations and cost increases in expressway civil works and delays in the completion of expressway E&M works were incurred during project implementation, the Bank, in coordination with the project Owner and domestic governmental authorities, took timely measures to approve an adjustment of the amount of the Loan, and to extend the Loan closing date in order to ensure a smooth completion of the whole project. Assessment of the work by the Owner Since the project Owner was for the first time an executing agency and lacked experience in a Bank-financed highway project in Guangdong, he was prone to risks and difficulties in implementing the major highway components of the project in a timely manner. However, the project implementation was assisted by the Bank and by domestic experience in previous Bank-financed highway projects. SPC and MOC in the Central Government, and the Provincial Government extended a vigorous support to the project. To ensure a timely completion of the project preparation, of its appraisal and implementation, the project Owner (GPCD) took a series of measures as follows: - 15-  The World Bank Finance Office was founded in May 1991 as a united project management organization under the direction of GPCD. The executing organizations and procurement agencies were organized in accordance with project components. GPFC was the executing organization for the construction and management of FKE and LTE, and it was made responsible for reporting, disbursement, financing and auditing under the project. GPHAB was the executing organization of the RIP / RSPP program and responsible for the development of the RDB / PMS. The technical assistance regarding the highway financing and the staff training program were directly executed by divisions of GPCD. CITC was designated by GPFC as its procurement agency for ICB civil works contracts under FKE and LTE. CMC-ITC was designated by GPFC as its procurement agency for the ICB E&M works contracts of FKE and LTE and for the ICB equipment contracts under the project. During the project preparation and appraisal, domestic procedures fell behind the Bank's progress. In order to catch up and ensure simultaneous progress, the project Owner, under the leadership of ministerial and provincial government levels, worked out a meticulously organized schedule satisfying the procedural requirements of both the govemrnents and the Bank. It included the expedition of the project formulation approval, the review and approval of feasibility study reports and preliminary designs, the review and approval of engineering and bid documentation as well as the provision of numerous data and information needed by the Bank, particularly to conform to some new requirements on EA, EAP and RAP. By putting it into effect for each scheduled activity and in close collaboration with each partner, all the early stage works of the two key expressway project components and the first package of RIP sub-projects were finished and finalized within 2 years or less, keeping pace with the procedural requirements of Bank's project preparation and appraisal . The expressway project component was constructed in conformity with the state bidding system and used the international FIDIC contract model for the first time in Guangdong. The Employer's representatives (the FKE and LTE construction Preparation Offices), authorized by the Employer (GPFC), executed the Employer's obligations strictly in accordance with the contract terms; they also carried out land acquisition and resettlement, local coordination, fund raising, variations, payment, EAP's actions, etc. They provided a favorable construction climate for Contractors and, in coordination with the Engineer, supervised and controlled the progress, quality, safety and costs of contracted works. In spite of a delay in land acquisition and of damages suffered from a typhoon 3 years since commencement, the FKE and LTE mainlines were completed and opened to trial traffic in December 1996 with the support on every aspect and joint efforts of Contractors. Subsequently, after the other works, mainly the FK05 and FK07 E&M works, were basically completed, GPFC sent their completion reports to the Bank via WBFO, GPCD in March 2000. GPFC and the EO prepared and sent the completion report for civil construction of FKE and LTE to the Bank earlier in January 1997. Finally, MOC conducted the final acceptance of both expressways in January 2000. Moreover, all programmed RIP sub-projects were completed by the end of 1998. After final acceptance, the results for the highway strengthening and improvement in Guangdong were found to be satisfactory and consistent with the SAR. The work quality, assessed through final acceptance, was also generally satisfactory. Environmental protection and environmental monitoring The project Owner prepared an Environmental Action Plan (EAP) for both FKE and LTE in January 1991, which specified the measures required for mitigating the potential adverse effects on the environment during the construction and operation of the expressway, and the organizational and monitoring arrangements. Prior to Loan negotiation, the executing summaries of these EAPs were reviewed and approved by the SEAP and the Bank. GPHAB also prepared a sectoral EAP for the RIP sub-projects, - 16 -  specifying the environmental protection measures to be taken by sector during the construction and operation of sub-projects. These EAPs were completely executed throughout the project implementation. After project launching, GPFC established its Environmental Protection Division (EPD) and branch EPDs with the FKE and LTE Construction Preparation Offices in March 1993. It staffed them with professional and concurrent-posted personnel. All the residential supervision offices under the Engineer Office were also staffed with concurrent-posted environmental supervisors. The Environmental Monitoring Station, under EPD, GPFC was responsible for the environmental monitoring during the expressway construction, and the routine environmental monitoring during their operation was conducted directly by the Central Lab, GPFC. GPHAB, in cooperation with the environmental protection authorities of the affected counties, was responsible for the supervision and monitoring of the EAPs on the implemented sub-projects; the environmental supervisors of the construction supervision units conducted on-the-spot supervision. During the final acceptance, the verification of environment protection works was carried out with the local environmental protection authorities. As the construction and operation of FKE and LTE had a noise impact on the expressway surroundings, the Bank environmental supervision mission requested the owner to undertake a noise evaluation and forecast on selected sensitive locations, by using a noise model recommended by a Bank mission in July 1996. The measures to mitigate the adverse effects were taken into consideration according to the results of the evaluation. Through the follow-up routine monitoring at the eight monitoring locations selected after adjustment, appropriate mitigating measures were taken when results fell beyond the standards, in line with the local reality and potentialities. SEPA conducted and approved the final acceptance of the environmental protection works of LTE and FKE in August 1998 and December 1999. The Bank environmental supervision mission made an on-the-spot inspection of some RIP's sub-projects and extended its satisfactory assessment to completed environmental protection works. Resettlement According to the policies and procedural requirements regarding land acquisition and resettlement, specified by the Government and the Bank, the project Owner prepared a Resettlement Action Plan (RAP) for FKE, LTE and the RIP during project appraisal, and deternined the land and crop compensation and resettlement subsidy payment, established a land acquisition and resettlement organization as well as the general and independent monitoring of the project. The Resettlement Office, GPFC and the RIP authority under GPHAB separately signed agreements on land acquisition, house relocation and resettlement with the local construction headquarter. The annual resettlement report and social independent monitoring reports submitted to the Bank during years 1993-1998 and many site visits made by the Bank supervision missions indicated that the implementation of these RAPs has generally improved the living standards of the project-affected people, or at least restored them. The land acquisition and relocation compensation payments were granted to the affected persons, households and units through different channels. Highway financing technical assistance and staff training In order to prepare and implement an updated highway financing system in Guangdong, as outlined in the TOR of the highway financing TA, the project Owner in coordination with the Xi'an Highway Transport University and TECN ECON consultant conducted a study program stressing the current status of highway financing in Guangdong. As a result of the study, four effective financing methods, such as the issuance of stocks or bonds, the establishment of an overseas financing window, the transfer of operational rights, and BOTs were selected from nineteen exiting possible financing sources, to be further explored and implemented. Through an evaluation by experts and the Bank, the completed study report has reached the initial objectives. Regarding staff training, the project Owner prepared a series of training programs including general and construction supervision training at the stage of project appraisal. Apart from the construction supervision training which was essentially implemented according to the construction supervision consulting service contracts, the overseas study tours and training program were adjusted - 17-  annually through a rolling 2-year training plan and were successfully executed in coordination with the TCU of MOC. As compared with the original program, the overseas study tours and training increased both in terms of number of trainees and person-months; fewer people were trained in the domestic training program but the number of person-months exceeded what was planned. The completed training has generally reached the forecasted objectives. Trainees acquired abroad a much updated knowledge and management experience, which was of major importance for raising the highway construction level in Guangdong. Project equipment procurement According to the procedural requirements specified by the domestic authority and the Bank, the project Owner arranged the procurement method and schedule for the main equipment procurement list according to provisions prepared at appraisal, and an adjusted list was confirmed by the Bank. GPFC established an equipment procurement team, in cooperation with GPHAB, to be responsible for the procurement of project equipment; it was completed and put in use by October 1997. Expressway operation. maintenance and management As early as the trial traffic opening of FKE and LTE, the project Owner established GPFKE Co., Ltd to be responsible for the toll collection, loan repayment, operation, maintenance and management of FKE. Two expressway construction preparation offices were organized, and GPFC established the Shenzhen-Shantou (West section) Administration Division to be responsible for the routine tolling surveillance of LTE. Both expressway authorities set up and staffed expressway administration and maintenance teams to ensure the routine on-the-duty patrol, rescue and maintenance. The project Owner strictly followed the Loan and Project Agreements and relevant documents. All records and reports (including annual project audit reports, project quarterly reports, expressway construction monthly reports and summary reports as well as other reports and statements as required for various project components) were adequately prepared. Assessment of the work by the supervision engineers To ensure that project management and contractual management was made strictly according to the procedural requirements specified by domestic authorities and the Bank, the project Owner organized a Chinese / foreign joint supervision team for the construction of FKE and LTE. The foreign consultant was selected in a short list approved by the Bank in accordance with the "Guideline for the use of Consultants". Through procedural evaluation, the project Owner selected LBII, U.S.A. to form a Joint Supervision Team with the Guangdong Communications Research Institute responsible, which carried out a 3-level (EO-ERO-REO) supervision of construction. Each contract was staffed with on-duty qualified senior resident engineers and stand-by supervision engineers. The EROs under EO were made responsible for contract management and quality, progress and cost control as well as for the supervision of environmental protection during construction. Through the practice of JST, positive and promoting initiatives were taken with a view to modemize the management of expressway construction and standardize behaviors of all parties to the contract through studying, digesting and applying FIDIC's terms and conditions. Imnediately after the commencement of FKE and LTE, the EO and EROs ran at-the-post-training courses on the use of CPM. GPFC, in collaboration with the EO, successively carried out a computer supported management training for Primavera (P3) software (latest edition) aiming at channeling current contract management with computer support. Moreover, as required by MOF and the Bank in the new SBD, the project Owner authority - 18-  assigned capable supervision engineers, recommended by the domestic registered consultants, to the E&M works of the FKE and LTE. Similarly, the project Owner authority assigned qualified professional engineers to the supervision of contracts for expressway annex area works approved by the Government and the Bank. GPHAB established a special EO for the implementation of the RIP and RSPP. Considering that RIP sub-projects were spread over a province-wide area, each sub-project established at city level a supervision team and staffed its team leader with a concurrent-posted Engineer's representative assigned by the EO. For minor sub-projects, only a supervision engineer was directly responsible for the supervision of works. Through the use of this supervision system, the contractual management and quality, progress and cost control of the contracted works under the RIP and RSPP were found to be effective. Assessment of the work by the Contractors All the contractors, successfully selected through strict prequalifications and open competitive bidding procedures, generally followed the contracting terms and conditions, took initiative actions to deliver quality works, progress construction, and set up a cost guarantee system; they paid attention to set up their prestige and image. Particularly, the FIDIC's terms and conditions attach the same level of imnportance to the obligations and responsibilities of the Employer, Engineer and Contractor. The Contractors were encouraged to assume and enhance the risk management of construction works, according to their previous construction experience, site real situation, existing resources and market prices, and achieved their new experience. 9.4 Conclusions Project benefits The expressway construction project component comprises two key highway projects in Guangdong. FKE is an extension of the existing Guangzhou-Foshan Expressway, passing through Nanhai, Shunde and Heshan cities. LTE is the west section of the Shenzhen-Shantou coastal expressway, linking two Special Economic Zones in Shenzhen and Shantou. Both FKE and LTE are part of the Tongjiang-Sanya National Expressway and this expressway corridors are going through an extremely rapid economic development. The completion of both expressways has a promoting and pilot role in the formation of the future key frame of national and Guangdong provincial expressways. It helped to improve the investment climate and to mitigate the traffic congestion along the exit passage in west Guangdong and the Guangzhou-Shantou highway in east Guangdong, as well as to promote the region economic and social development in the Pearl Delta, west and east Guangdong, and even in the whole province. The project benefits mainly include: (a) average VOC savings due to improved standards and a shorter distance; (b) time savings through relieved congestion on existing roads; and (c) lower accident rates and costs due to the betterment of traffic safety facilities. Moreover, the completion of the RIP and RSPP brought major improvements to the existing highway network structure. Similarly, the project benefits include VOC and time savings, as well as benefits from traffic generated by the upgrading and rehabilitation of roads icluded in sub-projects. Many identified safety blackspots were improved. These sub-projects have benefited millions of people spread over 10 cities, 24 mountainous area counties (regions) and 72 townships in Guangdong; they played an important role in improving the economics of mountainous areas. - 19-  Experience and lessons With common efforts by all participants involved. the completed Guangdong Provincial Highway Project has achieved remarkable results. They encompass the emergence of numerous well-trained qualified managing and technical personnel, through project practice, learning, digesting and introduction of updated experience in intemational modem highway construction and management. It is a major contribution to the future development of the expressway and highway system in Guangdong. The following experience and lessons are proposed as reference for the preparation, launching and implementation of similar projects: * Early preparation works on the projects should be conducted in a more in-depth manner. The cost estimates from both the engineering feasibility study and the preliminary design need to be adequate enough and avoid missing major works items; that resulted in major variations and cost increases as well as caused construction funds to go beyond control. * Ensuring a better construction climate for project construction and improving a closer and more cooperative relationship with local govemments and authorities along the expressway and highway corridors would be a reliable guarantee for the successful implementation of the project and the completion of land acquisition and resettlement tasks. * The application of the Bank's Procurement Guidelines and FIDIC's terms and conditions need to be in line with the concrete situations of the project Owner's country and province as well as with the project reality. Further improvement may be made, such as enhancing prequalifications, implementing suitable bid evaluation methods, rationalizing bid package, excluding lowest bid price bid, strengthening performance supervision, etc. - The Bank-financed highway project benefited from equitable interest rate, longer repayment and grace periods, as well as other preferential conditions. However, the procurernent time was generally longer than forecasted due to more procedural management links and other circumstances. This would increase the so-called additional hidden costs disbursed for the project. The hidden costs problem has raised the project Owner's concem. But, it is a complicated problem and requires objective analysis by project participants in order to solve or improve it, through a close coordination aiming at ensuring that project benefits are achieved as forecasted at appraisal. Reference documents: 1. "Staff Appraisal Report", (October 1992), Transport Operations Division, Country Department n, East Asia and Pacific Regional Office, the World Bank. 2. "Quarterly Report No. 28" (Final), (July 2000), Guangdong Provincial Freeway Company, Guangdong Provincial Admninistration Highway Bureau, the World Bank Finance Office, GPCD. 3. ""Completion Report on Civil Construction of the FKE and LTE", (January 1997), GPFC, EO of the FKE and LTE. 4. "Completion Report on E&M Works of the FKE", (March 2000), Foshan-Kaiping Expressway Preparation Office, GPFC 5. "Completion Report on E&M Works of the LTF', (March 2000), Shenzhen-Shantou Expressway Preparation Office, GPFC (b) Cofinanciers: N/A (c) Other partners (NGOs/private sector): - 20 -  N/A 10. Additional Information - 21 -  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome I Impact Indicators: _ _. _,_,,_,_._._. In~IcatrIMtri Prcte inlast PR c/ts smt Not identified in detail at appraisal Output Indicators: L IndIcatortrI r ojeted in last PSR X tit/1a7.tEsti ,iit . Not identified in detail at appraisal End of project - 22 -  Annex 2. Project Costs and Financing Proect Cost by Component (in US$ million equivalent) ___ Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Project Cost By Component US$ million US$ million Foshan-Kaiping Highway 227.52 330.47 145 Longgang-Tanxi Highway 244.03 425.62 174 Road Improvement Program 96.74 119.07 123 Road Safety Pilot Program 0.40 0.57 143 Supervision of Construction 11.44 18.66 163 Equipment 13.78 14.04 102 Staff Training/Technical Assistance 2.18 2.82 129 Land Acquisition and Resettlement 49.46 89.23 180 Total Baseline Cost 645.55 1000.48 Physical Contingencies 58.01 Price Contingencies 91.56 37.96 42 Total Project Costs 795.12 1038.44 Total Financing Required 795.12 1038.44 Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) l ~~~~~~~~~Procurement Method Expenditure Category ICa NCB Other N.B.F. Total Cost 1. Works 511.09 119.58 66.48 0.00 697.15 (152.32) (36.04) (20.08) (0.00) (208.44) 2. Goods 25.40 0.00 5.96 0.00 31.36 (19.83) (0.00) (5.48) (0.00) (25.31) 3. Services 0.00 0.00 17.16 0.00 17.16 (0.00) (0.00) (6.25) (0.00) (6.25) 4. Miscellaneous 0.00 0.00 0.00 49.46 49.46 Land Acquisition (0.00) (0.00) (0.00) (0.00) (0.00) Total 536.49 119.58 89.60 49.46 795.13 __________ (172.15) (36.04) (31.81) (0.00) (240.00) - 23 -  Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1. Works 606.06 225.85 72.44 0.00 904.35 (190.97) (10.80) (22.84) (0.00) (224.61) 2. Goods 13.57 0.00 9.81 0.00 23.38. (6.04) (0.00) (4.37) (0.00) (10.41) 3. Services 0.00 0.00 21.48 0.00 21.48 (0.00) (0.00) (4.98) (0.00) (4.98) 4. Miscellaneous 0.00 0.00 0.00 89.23 89.23 Land Acquisition (0.00) (0.00) (0.00) (0.00) (0.00) Total 619.63 225.85 103.73 89.23 1038.44 (197.01) (10.80) (32.19) (0.00) (240.00 Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. D Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by C_mponent (in US$ million equivalent) _______________ 100glk i ____ 6CoP0 . I1UI GLfiS o ...... CoP. 3aufiik Got CP Major Highway Civil 144.41 314.12 178.28 550.78 123.5 175.3 Works E & M works 9.11 3.91 9.20 17.82 101.0 455.8 RIP Civil Works 30.68 66.07 36.93 82.14 120.4 124.3 Road Safety Civil Works 0.15 0.25 0.18 0.38 120.0 152.0 Major Highway 3.65 6.64 3.34 13.89 91.5 209.2 Supervision RIP Supervision 0.00 1.15 1.43 0.0 124.3 Equipment 12.72 1.06 10.41 3.63 81.8 342.5 Training and TA 1.64 0.54 1.64 1.18 100.0 218.5 Contingencies 37.64 11.92 37.96 0.0 318.5 Land and Resettlement 0.00 49.46 89.23 0.0 180.4 -24 -  Annex 3. Economic Costs and Benefits Preface 1. The economic evaluation of the project covers the following two components: (a) construction of the 80 km Foshan - Kaiping Highway (FKE) and the 146 km Longgang - Tanxi Highway (LTE); and (b) a Road Improvement Program (RIP) for the upgrading and rehabilitation of national and provincial highways in the province. 2. The economic analysis is based on the re-evaluation of data on traffic, operational performance, costs and benefits of project components. The methodology used was similar to that employed in the SAR and is summarized as follows: (a) capital investment and maintenance costs were revised to reflect December 2000 prices and are included in the cost streams; (b) the benefit streams, also in December 2000 prices, consist of savings in vehicle operating costs, ship operation costs, reduced traffic congestion on existing routes, and enhanced road safety; and (c) a project life of 20 years has been assumed and the capital investment period for all components was from 1992 to 2000, depending on the construction phases. 3. During the project's preparation, it was understood that the selection of road sections to be improved under the RIP (from Phase II to Phase V) would be finalized during the project implementation. The economic analyses for these components are included in the ICR. 4. This Attachment is comprised of four parts. Part I is the economic evaluations of FKE and LTE; Part II is the econornic evaluations of the 41 national and provincial roads and bridges under the RIP; Part III is the overall economic evaluation of the project, including probabilistic risk analysis, and; Part IV is the financial evaluation of the project. PART 1: FOSHAN - KAIPING HIGHWAY AND LONGGANG - TANXI HIGHWAY 5. As in the SAR, the highways were divided into a total of five sections for economic evaluation. Length of the Length of the New Old Road (kIn) Highway (km) FKE: Section 1: Foshan - Heshan 40.5 40.0 Section 2: Heshan - Shuikou (Kaiping) 54.6 40.0 Subtotal 95.1 80.0 LTE: Section 1: Longgang - Baiyun 72.0 54.6 Section2: Baiyun-Hounman 55.0 41.4 Section 3: Houman- Tanxi 63.0 50.6 Subtotal 190.0 146.6 - 25 -  Highway Corridor Traffic 6. The opening year of the highway was in 1997. The highway corridor traffic in 1997 and its distribution between the old and the new highways are presented in the following table, indicating SAR forecast and actual traffic census data. NUMBER OF MOTORIZED VEHICLES PER DAY FOR 1997 The Old Road The New Hishwav Total Corridor Diversion AADT PCU AADT PCU AADT PCU Factor (DF) (1) (2) (3) (4) (5)=(1+3) (6)=(2+4) (7)=(4)/(6) SAR Foshau- Kaiping Highway l. Foshan- Heshan -- 18,900 -- 12.700 - 31,600 40.2% 2. Heshan- Shuikou (Kaiping) -- 6,300 -- 8,600 -- 14,900 57.7% Longgang- Tanxi Highway 1. Longgang- Baiyun -- 11,200 -- 10.100 -- 21,300 47.4% 2. Baiyun- Houmen -- 11,800 -- 7,300 -- 19,100 38.2% 3. Houman- Tanxi -- 12.300 -- 6,500 -- 18,800 34.6% ICR Foshan- Kaiping Highway 1. Foshan- Heshan 53,960 63,503 20,302 25,427 74,262 88,930 28.6% 2. Heshan- Shuikou (Kaiping) 4,184 5,797 9,278 11,756 13,462 17,553 67.0% Longgang- Tanxi Highway 1.Longgang-Baiyun 8,232 12,603 10,453 13,544 18,685 26,147 51.8% 2. Baiyun- Houmen 8,252 12,452 10,025 13,056 18,277 25,508 51.2% 3.Houman-Tanxi 5,686 8,455 7,197 9,207 12,883 17,662 52.1% Ratios (ICR/SAR) Foshan- Kaiping Highway 1.Foshan-Heshan -- 236.0% -- 100.2% -- 181.4% -- 2. Heshan- Shuikou (Kaiping) -- -8.0% -- 36.7% - 17.8% -- Longgang- Tanxi Highway 1. Longgang- Baiyun -- 12.5% -- 34.1% -- 22.8% -- 2. Baiyun- Houmen -- 5.5% -- 78.8% -- 33.5% -- 3.Houman-Tanxi -- -31.3% -- 41.6% -- -6.1% -- Sources: GPCD and the Bank staff. 7. As shown above, the 1997 total traffic in the highway corridor (i.e., the sum of traffic on the parallel sections of the existing arterial road and on the new highway) on the two sections of FK corridor was higher than the SAR's forecast, and exceeded it by between 17.8% and 18 1%. In the LT corridor, the actual traffic in the first two sections exceeded the forecasts by 23 and 34 percent. However, in the third section, it was 6% less than forecasted. The traffic distribution in the corridor (i.e. between the existing arterial road and the new highway), shows that, except for section 1 of FKE, in the first opening year traffic diversion to the new road was higher than projected in the SAR. 8. Except for section 2 of FKE, the diversion factor (DF) has been increasing for all the five sections of the two highways over the three years of operation (1997 to 1999). The latest records show that the DF ratio for FKE has increased from about 29 - 67 percent to 31- 60 percent. For LTE, it has increased from about 52 percent to around 65 percent. The trend on DF ratio indicates that more and more road users in these highway corridors choose the new highways as their preferred route. - 26 -  Traffic Projection 9. The actual records confirm that the expected buildup of traffic on a new highway, particularly when it operates as a toll facility, is gradual in the early years, then the diversion of traffic accelerates. Therefore, the long term traffic growth rates on the two new highways are estimated to be slightly higher than the SAR's forecast. The traffic projections by section are summarized as follows: TRAFFIC FORECAST COMPARISON FOR THE NEW HIGHWAY BY SECTIONS Foshan- Kaini P- Hinhwav Lonm mn- Tanxi Hie wav 1. Foshan- 2. Heshan- 1. Longgang- 2. Baiyun- 3. Houman- Heshan Shuikou Baiyun Houmen Tanxi (Kaiping) I Total| Total | Total Total Total AADTI PCU AADT I PCU AADT PCU AADT PCU AADTI PCU SAR 1997 -- 12,700 -- 8,600 -- 10,100 -- 7,300 -- 6,500 1998 -- 13,450 -- 9,140 -- 10,714 -- 7,760 -- 6,902 1999 -- 14,245 -- 9,714 -- 11,366 -- 8,249 -- 7,328 2000 -- 15,086 -- 10,324 -- 12,058 -- 8,768 -- 7,781 2005 -- 20,100 -- 14,000 -- 16,200 - 11,900 -- 10,500 2007 -- 22,059 -- 15,352 -- 17,753 -- 13,026 -- 11,507 2015 -- 32,000 -- 22,200 -- 25,600 -- 18,700 -- 16,600 2017 -- 35,119 -- 24,344 -- 28,053 -- 20,469 -- 18.192 Average growth p.a. 1999-2017 - 5.1% -- 5.2% - 5.1% -- 5.2% 5.2% ICR 1997 20,302 25,427 9,278 11,756 10,453 13,544 10,025 13,056 7,197 9,207 1998 22,502 28,182 10,285 13,033 12,947 16,642 12,879 16,922 9,608 12,520 1999 25,875 32,406 11,827 14,986 13,693 17,415 13,382 17,267 9,803 12,638 2000 29,731 37,236 13,588 17,218 14,654 18,704 14,477 18,794 10,589 13,728 2005 43,181 53,468 18,756 23,502 20,378 26,077 21,191 27,592 16,226 21,097 2007 50,133 61,794 21,337 26,617 23,251 29,784 24,680 32,173 19,246 25,053 2015 84,063 102,968 33,031 40,920 35,239 45,334 40,654 53,254 34,145 44,660 2017 95,659 116,988 36,844 45,565 39,100 50,354 46,056 60,404 39,407 51,604 Average growth p.a. 1999-2017 7.5% 7.4% 6.5% 6.4% 6.0% 6.1% 7.1% 7.2% 8.0% 8.1% Sources: GPCD and the Bank staff. 10. From 1997 - 1999, actual traffic data have been used. For subsequent years, the following growth rates have been assumed: (a) the normal traffic growth forecast of the new highway is estimated to be within a range of 4.5 percent to 8.5 percent between 2000 - 2007, depending on the type of vehicles and sections of the two roads. Between 2007 - 2017, the growth rate is assumed to be in the range of 3.0 percent to 7.5 percent; and (b) it is assumed that there is no generated traffic. These estimates are more conservative than the hypothesis retained by GPFC in a report based on results from traffic forecasts originally prepared by Scott Wilson Ltd. (Hong Kong) and submitted to the Bank. As an example, in this ILICR a 7.5% pa traffic growth is assumed during the 2000-2005 period, whereas GPFC's report retains an average of 8% pa. - 27 -  Economic Costs 11. Financial construction costs have been converted to economic costs by shadow pricing for each of the input items. The overall economic cost of the project, at constant December 2000 prices, is 100.5 percent higher than the SAR estimates. Hiihwav Economic Cost Comparison (million Yuan) SAR ICR ICR] SAR (Dec. 1991) (Dec. 2000) (Dec. 2000) (in %) FKH: 1. Foshan- Heshan 1,399.00 1,540.57 2,994.08 94.3 2. Heshan- Shuikou (Kaiping) 464.00 510.95 819.76 60.4 Subtotal 1,863.00 2,051.52 3.813.84 85.9 LTH: 1. Longgang- Baiyun 600.00 664.07 1,703.91 184.0 2. Baiyun- Homan 606.00 670.71 1,291.24 113.1 3. Homan- Tanxi 730.00 807.96 1,599.46 119.1 Subtotal 1,936.00 2.142.74 4,594.61 114.4 Total 3,799.00 4,194.26 8,468.45 100.5 Sources: GPCD and the Bank staff. Economic Benefits 12. The economic analysis includes the benefits derived from (a) Vehicle Operating Costs savings (summarized below), (b) time savings from relieved congestion on the existing roads, 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 an updated value from a recent report on feasibility study methodology for highways in China (Rust PPK, Australia Feasibility Study methodology Report, March 1996). The same source was used for vehicle accident rates on different classes of road. Economic Vehicle Operating Costs (Yuan per km, Dec. 2000 prices) ---Good- - ---Fair----- - ---Poor---- Flat Hill Mount. Flat Hill Mount. Flat Hill Mount. Car 0.598 0.624 0.644 0.684 0.711 0.731 0.885 0.912 0.932 Medium bus 1.201 1.395 1.563 1.480 1.695 1.870 1.951 2.139 2.314 Large bus 2.601 3.172 3.680 3.194 3.847 4.383 3.870 4.499 5.035 Smalltruck 1.069 1.336 1.536 1.261 1.541 1.751 1.541 1.786 2.031 Medium truck 1.355 1.670 1.985 1.543 1.897 2.219 1.864 2.218 2.572 Largetruck 1.950 2.389 2.828 2.206 2.681 3.100 2.625 3.100 3.547 Tractor/trailer 2.941 3.879 4.690 3.334 4.339 5.186 3.969 4.922 5.795 Sources: GPCD and the Bank staff. - 28 -  Sample of Economic Vehicle Operating Cost Calculation (Yuan per 1,000 veh.-km. Dec. 2000 prices) Medium Large Small Medium Large Trailer/ Car Bus Bus Truck truck Truck Container The New ExDresswav Fuel 253 338 672 460 563 609 672 Tires 21 35 130 50 130 480 1,073 Maintenance 223 311 638 466 529 562 646 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 50 375 857 Total 598 1,.201 2.601 1,069 1355 1,950 2.941 The Existine Road Fuel 276 383 788 575 653 693 798 Tires 25 40 149 55 140 540 1,188 Maintenance 248 345 709 518 588 624 718 Crew 15 34 38 34 38 41 47 Depreciation 45 133 310 79 124 308 583 Subtotal 609 935 1g94 1,261 1.543 2,206 3.334 Time value of passengers 75 545 1,200 Total 684 1.480 3.194 1.261 1.543 2,206 3,334 Sources: GPCD and the Bank staff. Economic Evaluation and Sensitivity Analysis 13. The economic Internal Rate of the Return (EIRR) on the two highways is estimated to be about 15 percent, which is much lower than the 25 percent estimated in the SAR. The lower EIRR is primarily the result of the 100 percent project cost overruns. Total cost and benefit streams, EIRR and Net Present Value (NPV) for FKE and LTE are presented as follows. EIRR (in %) and NPV (12%. Y million) Summary The SAR The ICR FKH LTH Total FKH LTH Total EIRR 21.4 27.8 25.1 14.7 14.8 14.8 NPV 1,881.3/ 1 3,840.9/ 1 5.722.2 971.1 1.061.8 2,032.9 /_1: NPV has been updated to 2000 prices to take into account foreign and domestic inflation. 14. Besides the basic traffic growth scenario, two traffic growth alternatives have also been considered: e.g., a lower traffic growth projection (25 percent lower than the basic traffic) and a higher traffic growth projection (25 percent higher than the basic traffic growth). The traffic growth and annual average growth rate under these two scenarios are as follows: - 29 -  THE HIGHWAY TRAFFIC FORECAST SCENARIOS (AADT) FKE LTE Section 1 Section 2 Section 1 Section 2 Section 3 The Low Traffic Proiection: 1999 25,78511,82 7 13,693 13,382 9,803 2007 42,53818 ,074 19,701 20,946 16,357 2017 64,03724,56 5 26,059 30,821 26,466 Average growth per year 1999-2017 5.2% 4.1% 3.6% 4.7% 5.7% The Hieh Traffic Projection: 1999 25,875 11,827 13,693 13,382 9,803 2007 58,863 25,092 27,339 28,971 22,559 2017 141,579 54,742 58,126 68,189 58,134 Average growth per year 1999-2017 9.9% 8.9% 8.4% 9.5% 10.4% 15. The overall EIRR and NPV for the different traffic growth scenarios are summarized in the following table. It shows that even with the lower traffic projection, the overall EIRR would be 12.8 percent. The high traffic growth scenario The low traffic growth scenario Best estimate of EIRR 16.3% 12.8% NPV (12%, Y million) 3,659.2 514.4 Sensitivity Analysis 16. The EIRRs summarized below show the effects of possible changes in assumptions made in the evaluation. Since the costs of operation and maintenance of FKE and LTE are a relatively smnall portion of the investment, any variation in these costs would have a minimnum discernible impact on the EIRR. The impact of changes in traffic volumes was studied under the two traffic growth scenarios discussed in paras. 14 and 15 above. The results of the sensitivity tests show that the reduction in VOC savings by 25 percent has the greatest impact while the reduction in road congestion has the least impact on the EIRR. SENSITIVITY ANALYSIS EIRR (in %) NPV(12%, Y million) VOC savings reduced by 25% 12.0 (0.3) Passenger time savings reduced to zero 12.5 334.2 Congestion savings reduced to zero 14.4 1,741.2 Total benefits reduced by 20% 12.4 287.1 PART II: ROAD IMPROVEMENT PROGRAM (RIP) Background and Traffic 17. In the SAR, the Road Improvement Program (RIP) was designed to be implemented in three parts, of which the first one comprised a total of 24 components (total 374.8 kmn). During implementation, the RIP components were changed to 41 components into three packages (total 556.4 km). The main purpose of the RIP was to repave existing roads or bridges in Guangdong province. - 30 -  18. The first package (1993) covered the rehabilitation of nine roads and two bridges. The second package consisted of two groups. Group 1 (1994) covered the rehabilitation of twelve roads and Group 2 (1995-1997) covered the rehabilitation of ten roads and two bridges. The third package (1996-1997) covered the rehabilitation of six roads. Since all the components under RIP are located in the same province, the economic development and traffic pattems are quite similar for each road. Based on the actual traffic growth since project appraisal, the following assumptions have been made in economic analyses regarding future traffic growth for most of the roads: 3.5. percent per year for motor vehicles and 2.5 percent for tractors during 1998-2000, and 1 percent during the next ten years. By comparison, the projection on SAR's vehicle traffic growth was 8.0 per year between 1996-2000, reduced to 5 percent per year thereafter. The tractor traffic was assumed to grow at 2 percent until 2000 and grow no further thereafter. Economic Costs 19. Financial construction costs have been converted to economic costs. Just as for FKE and LTE, All input items have been evaluated to constant December, 2000 economic costs. Given the overall effect of shadow-pricing the financial cost of the sub-components, the economic cost is 12.1 percent higher than the financial cost. 20. Due to the major changes in project components (par. 17), the total actual economic cost of RIP in December 2000 constant prices is about 2.76 times higher than the SAR's estimate. RIP PROJECT COST COMPARISON (YUAN MILLION) Estimate (Yuan million)Ac tual (Yuan million) December 1991 pnices Dec. 2000 Financial Dec. 2000 (B)/(A) Financial Economic Economic (A) (Current) Economic (B) (in %) Total 229.8 265.5 293.1 /-a 988.30 1,102.8 +276.2 /_a: Economic cost (1991 constant prices), has been updated to 2000 constant prices to take into account foreign and domestic inflation. Economic Benefits 21. The economic analysis applies the methodology used in the SAR, i.e it is based primarily on benefits derived from: (a) VOC savings due to shorter distances (if applicable), (b) VOC savings due to normal traffic, and (c) benefits from generated traffic. 22. As a result of the project, the classifications of all 41 sub-components (roads, bridges and tunnels) were upgraded. The better pavements reduces VOC and yields the major portion of the project benefits. Generated traffic was assumed to be 5 percent of the normal traffic ( versus 10% assumed in the SAR). In addition, the better paved roads or bridges increase vehicle speed and reduce congestion. These benefits have been qualified also as part of operating cost savings. Economic Evaluation 23. The EIRRs, for the three packages, range from 28.5 percent to 61.2 percent. The overall EIRR for the RIP is 42.3 percent. The detailed summary of these results is as follows: - 31 -  EIRR AND NPV OF THE RIP EIRR (in %) NPV (12%. Yuan million) The SAR The ICR The SAR The ICR The First Package -- 55.0 -- 614.6 The Second Package Group I -- 28.5 -- 496.5 Group 2 -- 37.5 -- 796.9 The Third Package -- 61.2 -- 1,544.1 Total RIP 55.0 42.3 940.8 / a 2.793.1 /La: NPV was Y 871.9 million at 1991 prices and updated to 2000 prices to take into account foreign and domestic inflation. PART HII: THE OVERALL ECONOMIC EVALUATION OF THE PROJECT Overall Economic Internal Rate of Return (EIRR) 24. The overall EIRR of the project (including FKE, LTE and RIP) is 17.7 percent and the NPV is about 4.5 billion Yuan. In the SAR, the overall EIRR of the project was 30 percent and the NPV about 6.7 billion Yuan. The SAR The ICR EIRR NPV /_a EIRR NPV/_a Foshan - Shuikou (Kaiping) Highway 21.4% 1,881.7 /_b 14.7% 971.1 Longgang - Tanxi Highway 27.8% 3,840.8 Lb 14.8% 1,061.8 Total Highways 25.1 5,722.5 14.8% 2.032.9 Road Improvement Program 55.0% 962.6 Lb 42.3% 2,790.1 Total Project 30.0% 6.685.1 17.7% 4.524.0 /_a: Million Yuan, discount rate 12%. /_b: NPV was urdated to 2000 prices to take into account foreign and domestic inflation. The Project Risks 25. Although the overall EIRR of the project is still good and most sub-components under RIP also show very robust results, the EIRRs for the two major highways are below the SAR estimates due to the large amount of cost overruns (para. 11). It is suggested that Guangdong should in the future better estimate and control construction costs. Probabilistic Risk Analysis for Economic Evaluation of FKE and LTE 26. To determiine the degree of project uncertainty, a probabilistic risk analysis was carried out by using Monte Carlo techniques. In a Monte Carlo analysis, each uncertain factor is allowed to vary at random (between set lirnits) and all uncertain 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 (or probabilistic risk analysis). The product of the analysis is a judgment on the possible range of the decision variables, and on the likelihood of each value within this range. 27. For the RIP component, its high EIRR and low capital investment (the sum of capital cost for 41 - 32 -  roads and bridges under RIP constitute only about 11.3 percent of the total project capital investment), reveal that there is a low risk of uncertainty in the re-estimated EIRR. The probabilistic risk analysis for the project is focused on the construction of the two highways (FKE and LTE). The factors with the most uncertainty associated with the economic evaluation of FKE and LTE have been identified as follows: (a) traffic growth rate, (b) traffic diversion to the new highways, and (c) value of vehicle operating costs. The results of the probabilistic risk analysis for the five sections of the two highways show that the EIRR for the most likely scenario is 14.5 %. In the worst case scenario of the analysis the EIRR is 10.5% and 18.3% in the best case scenario. The standard error of the mean is 0.2 %. The results of Monte Carlo test and probabilistic analyses are surmmarized as follows: Summary of Probabilistic Risk Analysis Range of EIRR Most likely EIRR Standard error of the mean FKH: 1. Foshan-Heshan 7.2%-15.8% 11.7% 0.3% 2. Heshan - Shuikou (Kaiping) 20.1% - 26.8% 23.5% 0.2% Subtotal 10.8% - 18.5% 14.8% 0.3% LTH: 1. Longgang- Baiyun 11.4% - 18.9% 15.3% 0.2% 2. Baiyun-Houman 12.2%- 19.7% 16.1% 0.2% 3. Houman-Tanxi 8.3% - 16.1% 12.4% 0.3% Subtotal 10.6%-18.2% 14.6% 0.2% Total 10.5% - 18.3% 14.5% 0.2% PART IV: FINANCIAL EVALUATION Preface 28. The financial evaluation of the project is comprised of two sections. Section 1 regards the revenue earning entity; and Section II is for the non-revenue eaming entity. FKE and LTE are toll roads and the only two roads in the project which generates revenues (they account for 88 percent of total project cost); there is no revenue from the 41 sub components of the RIP. The financial cost of capital is based on the weighted average cost of the various sources of funds: a) for FKE, the weighted average is 5.5% (23% of the funding comes from the world Bank at a cost of 7% and 77% are local financing costing 5%/O), b) for LTE, the weighted average is 6.0% (20% from the Bank at 7%, 20% from local banks at 7.2% and the rest at 5%). There was no financial evaluation of the project carried out in the SAR. Section I: THE FINANCIAL EVALUATION OF FKE AND LTE The Highway Companies and the Toils 29. In December 1996, GPCD set up FKE and LTE as two highway operating companies. These companies are responsible for the day to day management, the operation, maintenance, and development of the highways. They also bear all financial obligations including the repayment of the debts. The main financial revenue of the companies is the toll income from the road users, but the toll charges are strictly controlled by the government. Therefore, the toll charges have been assuned to increase once every three years (10 percent or average 3.2 percent p.a.), which is lower than the estimated 5 percent domestic general price escalation. This is also a more conservative assumption than GPFC forecasts of a 27.6% increase every 5 years (5% pa). Financial forecast - 33 -  30. Revenue: The toll is charged on the basis of vehicle size and distance traveled. The current toll charges are as follows: Toil CharLes L/a Small Medium Large Small Medium Large Tractor car bus bus truck truck truck - trailer Yuan! veh-km 0.450 0.900 1.462 0.450 0.900 1.462 2.138 /La: Motorcycle and extra large truck ( > 20 ton) are Y 0.225 and Y 2.138, respectively. 31. Costs: The operating revenue and cost forecasts (the income statement ) are calculated on the bases of the current practice of the toll road. For operating revenue with associated traffic and costs, please see page 1 of 3, Table 1 and Table 2. For annual capital investment and cash flow statement, please see page 2 of 3, Table 1 and Table 2. The balance sheet statement is presented in page 3 of 3 in Table 1 and Table 2. The detail financial assumptions, please see Table 3. 32. Profitabilitv: As a consequence of our more conservative estimates of traffic growth and toll increases in the future, the revenue estimated in 2005 by GPFC is about 1/3 higher than the figure retained in this ILICR, and the net cash flow is about 25% higher this same year ($ 60 million vs $ 48 million). 33. Under these assumptions it is expected that LTE would not be able until 2002 to generate enough cash flow to cover its operating expenses and the repayment of the loan. However this situation is expected to improve from 2002 for FKE and 2003 for LTE, and both companies would have enough cash reserves to cover the losses from the early years' operations. Since GPCD has converted almost all construction costs as a loan to the FKE company, the equity of the FKE company is relatively low compared with its debt. The high debt! equity ratio also dilutes the financial leverage of the company, and based on the current repayment schedule of the loan it would not recover before 2008. For the LTE company, a large amount of long term debts also caused the high debt! equity ratio in 1997 and 1998. In 1999, GPCD converted about Y 1.4 billion domestic loan (or 47% of total long term debts) to equity. As a result, the financial leverage of the company has turned to a very health condition since 1999. 34. Financial Rate of Return. The results of the financial evaluation shows that the FIRR on equity would be 5.6 percent for FKE and 3.4 percent for LTE. The FIRR for the entire project investment is expected to be 5.6 percent for FKE and 4.4 percent for LTE. 35. Financial Probabilistic Risk Analysis. The three most uncertain factors which may affect the financial evaluation have been identified: (a) traffic growth rate, (b) growth of toll rates, and (c) increase in operating costs. The result of a financial probabilistic analysis reveals that (a) the most likely FIRR on equity would be 5.6 percent for FKE and 3.4 percent for LTE, (b) the most likely FIRR on total project investment would be 5.6 percent for FKE and 4.4 percent for LTE. The details for FRR and NPV in the worst and best cases are summarized as follows: - 34 -  Summary of Financial Probabilistic Risk Analysis On Equity Total Project Most Std. Most Std. Range of FIRR Likely EIRR Range of FIRR Likely EIRR & NPV FIRR of The & NPV FIRR & of fte & NPV Mean NPV Mean FKE: FIRR (in 0%) 4.3 - 6.5 5.6 0.1% 4.7 - 6.3 5.6 0% NPV (5.5%, Y million) -301.2 - 303.9 16.1 17.9 -275.2 - 329.9 42.2 17.9 LTE: FIRR(in%) 109-4.9 3.4 0.1% 3.1-5.7 4.4 0.1% NPV (6.0%, Y million) -1,140.3 - -366.3 -782.6 21.8 -904.4- -130.4 -546.7 21.8 Section II: THE FINANCIAL IMPLICATION OF RIP FOR GPCD BUDGET 36. This section analyses the impact of this program on the overall GPCD road budget, to ascertain that it will have no adverse effect on the construction and maintenance of the provincial road network. 37. GPCD has provided its financial plan of overall revenues and expenditures for the Ninth Five Year Plan (9th FYP, 1996 - 2000) and the 10th FYP (2001 - 2005). Based on the provincial highway development plan, GPCD has acquired sufficient funds to cover new roads construction and the maintenance of its existing road network. In addition, the higher self-financing ratio (road maintenance fee and provincial and local government authorities) of GPCD clearly ensures the future maintenance of RIP. In 1999, the latest actual data, revealed that about 74 percent of GPCD's total revenue are generated within the province. Detailed information on sources of funds and expenditures for 1996 - 2005 are shown in Table 4 of this Attachment. 38. Given the increases in the length of the provincial road network every year, GPCD also reserved the additional resources needed for the maintenance of the existing road networks and the preservation of the quality of road service. During the 9th FYP and the 10th FYP, despite the continuous increases in road network, the average unit road maintenance expenditures were constant at about 32,000 Yuan/Ian. 39. The financial risks of a lack of the revenues needed to support the RIP road maintenance would be minimal, as the expenditures on these activities constitute only a small fraction of GPCD flow of funds. Based on GPCD plan, the maintenance expenditures on RIP are less than 0.6 percent of the overall road maintenance expenditures in the province during the 9th and 10th FYP. These low financing ratios indicate that the project presents modest financial risk regarding the availability of counterpart funds for the future maintenance of the project components. Figures are summarized as follows: GPCD: Maintenance Expenditures (million Yuan) 9 FYP IOUIFYP Total RIP maintenance (a) 0.84 0.92 Total GPCD Maintenance Expenditures (b) 153.00 163.00 Ratios (a)/(b) 0.5% 0.6% - 35 -  Table 1: Guangdong: Foshan - Kaiping Highway Project Income Statement - The Expressway Company (million Yuan, year ending 31, December) Page I of3 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Traffic (million Veh.-km) 431.86 478.70 550.45 632.46 679.15 729.35 783.35 841.43 903.89 971.11 Operating Revenue 227.64 260.16 288.20 320.00 346.37 371.97 399.51 471.20 506.18 543.82 Operating Costs: WorldngCosts/_l 31.30 39.34 43.15 47.47 83.93 55.18 59.27 69.91 75.10 260.16 Depreciation 21.14 37.52 55.37 108.57 109.96 110.10 110.25 110.42 110.60 110.79 Subtotal 52.44 76.86 98.52 156.04 193.89 165.28 169.52 180.33 185.70 370.95 OperatingTaxes 1.36 14.31 15.87 17.60 19.05 20.46 21.97 25.92 27.84 29.91 Operating Profit 173.84 168.99 173.81 146.36 133.43 186.23 208.02 264.95 292.64 142.96 Less: Financial expenses: IBRD - - - - - - - - - - Domestic 270.62 243.83 160.58 138.46 144.00 137.00 130.00 122.00 115.00 124.49 Subtotal 270.62 243.83 160.58 138.46 144.00 137.00 130.00 122.00 115.00 124.49 Net Revenue (96.78) (74.84) 13.23 7.90 (10.571 49.23 78.02 142.95 1.64 18.47 Add: Non operating income - 12.95 5.34 7.75 8.14 8.55 8.98 9.43 9.90 10.40 Less: Nonoperatingexpenditure 2.04 4.08 0.16 0.10 0.10 0.10 0.10 0.10 0.10 0.10 Profit Before Taxes (98.82) (65.97) 18.41 15.55 (2.53) 57.68 86.90 152.28 187.44 28.77 Income tax - - - - - 19.03 28.68 50.25 61.86 9.50 Other payments - - - - - - - - NetProfitAfterTaxes (98.82) (65.97) 18.41 15.55 (2.53) 38.65 58.22 102.03 125.58 19.27 Operating ratio 23.0 29.5 34.2 48.8 56.0 44.4 42.4 38.3 36.7 68.2 The expressway opened in Dec. 8, 1996. Actual: 1997-1999. Best estimates: 2000. Forecast: 2001-2006 LI: Assumption was made 1.5 times for medium maintenance (every 5 year) and 3.0 times for major maintenance (every 10 years). The details are in Table 3. - 36 -  Table 1: Guangdong: Foshan - Kaiping Highway Project Sources and Applications of Funds- The Expressway Company (million Yuan, year ending 31, December) Page 2 of 3 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sources: Net profits - (98.82) (65.97) 18.41 15.55 (2.53) 38.65 58.22 102.03 125.58 19.27 Depreciation - - - - 21.14 37.52 55.37 108.57 109.96 110.10 110.25 110.42 110.60 110:79 State contribution 3.01 15.21 24.90 37.13 75.65 - - - - - - - - Provincial contribution 48.76 246.22 403.01 600.82 1,224.04 Borrowing: IBRD 16.04 81.00 132.58 197.66 402.69 Ll - Others - - - - - - 22.02 - - - - - - - - Total 67 8 342.43 5 1.702.38 (77.681 (6.43 73.78 112 107.43 148.75 16847 212.45 236.18 130.06 Am,lcadtlsns: Capital expenditure 67.81 342.43 560.49 835.61 1,702.38 - - 28.16 2.00 2.10 2.21 2.32 2.44 2.56 2.69 Other investment - - - - - - - 39.88 146.76 - - - - - - Loan repayments: IBRD Domestic - - - - - - - - - 100.00 100.00 100.00 100.00 100.00 100.00 Others - - - - - - Change w/capital - (12.53) (9.54) (15.50) (0.59) (4.61) (4.96) (12.91) (6.30) (6.76) Total 67.81 342.3 560.49 835.61 1.702.38 (12.53) 58.50 133.26 101.51 97.60 97.36 89.53 96.26 95.93 Net Funds Flow (-- 77,68) 6.10 15.28 (2 5.92 51.15 71.11 122.92 139.92 34.13 Open balance 95.44 17.76 23.86 39.14 30.00 35.92 87.07 158.18 281.10 421.02 Closing balance - - - - 17.76 23.86 39.14 30.00 35.92 87.07 158.18 281.10 421.02 455.16 DmS Cover 1.1 1.5 1.7 2.1 2.4 1.3 Actual: 1997-1999. Estimates: 2000. Forecast: 2001-2006 -37 -  Table 1: Guangdong: Foshan - Kaiping Highway Project Balance Sheet- The Expressway Company (million Yuan, year ending 31, December) Page 3 of 3 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Assets: Fixed Assets At cost 2,887.50 3,386.43 3,509.26 3,540.64 3,542.74 3,544.95 3,547.27 3,549.71 3,552.27 3,554.96 Less: Depreciation 21.14 58.66 114.01 222.58 332.54 442.64 552.89 663.31 773.91 884.70 Net fixed assets 2.866.36 3327.773.39525 3318.06 3.2 3102.31 2,994.382.886.40 2.778.36 2,670.2 Current Assets Cash 17.76 23.86 39.14 30.00 35.92 87.07 158.18 281.10 421.02 455.16 Inventory 0.65 - - - - - - - - - Account receivable 24.02 35.18 5.82 6.46 6.93 7.44 7.99 9.42 10.12 10.88 Subtotal 42.43 59.04 44.96 36.46 42.85 94.51 166.17 290.52 431.14 466.04 Other assets 462.73 120.25 19.09 20.00 20.78 22.32 23.97 28.27 30.37 32.63 Total Assets 3,371.52 3,507.06 3,459.30 3,374.52 3,273.83 3,219.14 3,184.52 3,205.19 3,239.87 3,168.93 Liabilities & Equity State funds- Equity 1,009.18 943.20 961.62 977.17 975.21 1,015.38 1,075.22 1,181.48 1,309.12 1,330.63 L/T loans: IBRD - - - - - - - - - - Domestic 2,313.11 2,485.86 2,445.33 2,328.86 2,229.00 2,129.00 2,029.00 1,929.00 1,829.00 1,729.00 Subtotal 2,313.11 2,485.86 2,445.33 2,328.86 2.229.00 2.129.00 2,029.00 1.929.00 1,829.0 1,729.00 Current Liabilities 48.85 71.89 52.07 68.21 69.27 74.39 79.90 94.24 101.24 108.76 Other Liabilities 0.38 6.11 0.28 0.28 0.35 0.37 0.40 0.47 0.51 0.54 Total Liabilities & Equity 3,371.52 3,507.06 3,459.30 3,374.52 3,273.83 3,219.14 3,184.52 3,205.19 3,239.87 3,168.93 Current ratio 0.9 0.8 0.9 0.5 0.6 1.3 2.1 3.1 4.3 4.3 Debt:equityratio 70/30 73/27 72/28 71/29 70/30 68/32 66/34 63/37 60/40 58/42 Actual: 1997-1999. Best estimates: 2000. Forecast: 2001-2006 - 38 -  Table 2: Guangdong: Longgang- Tanxi Highway Project Income Statement - The Expressway Company (million Yuan, year ending 31, December) Page 1 of 3 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Traffic (million Veh.-km) 492.57 629.87 655.90 706.12 760.74 819.62 883.09 951.60 1,025.45 1,105.27 Operating Revenue(a) 235.53 305.69 328.39 345.35 380.37 409.81 441.55 523.38 564.00 607.90 Operating Costs: WorkingCosts LI 31.14 38.06 30.59 38.61 63.81 46.67 51.00 55.55 60.33 196.03 Depreciation 171.54 194.02 198.27 205.27 215.50 226.93 226.86 232.52 238.61 245.12 Subtotal(b) 202.68 232.08 228.86 243.88 279.31 273.60 277.86 288.07 298.94 441.15 OperatingTaxes - 5.30 24.00 18.99 20.92 22.54 24.29 28.79 31.02 33.43 Operating Profit 32.85 68.31 75.53 82.48 80.14 113.67 139.40 206.52 234.04 133.32 Add: Profit transfer 3.16 4.13 0.41 4.00 4.41 4.75 5.12 6.07 6.54 7.05 Less: Management expenses 11.61 20.16 24.17 25.38 26.65 27.98 29.38 30.85 32.39 34.01 Financial expenses: IBRD 43.84 52.99 63.43 64.40 66.62 63.17 59.45 55.59 51.12 40.28 Domestic 112.72 141.04 34.24 22.82 24.20 19.08 12.10 10.00 2.57 - Subtotal 156.56 194.03 97.67 87.22 90.82 82.25 71.55 65.59 53.69 40.28 NetRevenue (132.16) (141.75) (45.90) (26.12) (32.92) 8.19 43.59 116.15 154.50 66.08 Add: fnvestment income - - - - - - - - - - Other income - - Non operating income 0.01 0.03 Less: Non operating expenditure 0.11 0.03 ProfitBeforeTaxes (132.26) (141.75) (45.90) (26.12) (3292) 8.19 43.59 116.15 154.50 66.08 Income tax - - - Other payments - - - NetProfitAfterTaxes (132.26) (141.75) (45.90) (26.12! (32.92) 8.19 43.59 116.15 154.50 66.08 Operating ratio (b/a) 86.1 75.9 69.7 70.6 73.4 66.8 62.9 55.0 53.0 72.6 Actual: 1997-1999. Estimates: 2000. Forecast: 2001-2006 Il: Assumption was made 1.5 times for medium maintenance (every 5 year) and 3.0 times for major maintenance (every 10 years). The details are in Table 3. - 39 -  Table 2: Guangdong: Longgang- Tanxi Highway Project Sources and Applications of Funds- The Expressway Company (million Yuan, year ending 31, December) Pose 2 of 3 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Sources: Net proftts (132.26) (141.75) (45.90) (26.12) (32.92) 8.19 43.59 116.15 154.50 66.08- Depreciaton - . - - 171.54 194.02 198.27 205.27 215.50 226.93 226.86 232.52 238.61 245.12 State contribution 3.35 13.73 19.91 31.86 94.05 - . - - - - - - Provincial contribution 46.09 188.78 273.62 437.91 1.292.63 - - - - - - - Borrowing: IBRD 17.08 69.98 101.43 162.34 356.91 84.65 16.88 20.75 Local - - 538.44 255.00 - 80.00 Others - - - - - 69.00 59.88 -- - - - - Total 6652 27224 394.96 632.11 L743.59 646.72 451Q 169.25 279.90 I182 235B2 2704 348.67 3 9 311 L AmsnUcations: Capital expenditure 66.52 272.49 394.96 632.11 1,743.59 520.73 342.51 125.75 43.11 67.89 47.53 49.90 52.40 55.02 Other investment . Loan repayments: IBRD - - - - - 15.29 32.33 34.88 37.57 40.48 43.63 47.00 50.65 68.17 Domestic - - - - - 74.00 65.00 147.00 228.00 76.00 83.50 109.00 89.00 9.00 Others , 7.53 - - - - Change wI capital - - - - - - (30.60) (71.56) 50.00 (13.06) (12.14) (13.06) (33.72) (16.73) (18.08) Total 66.52 222 94.% 62.1 159 60.2 322 233.52 22. 42 172.15 11 22 1251 Not Funds F1l MA: 22M (64,2 132.398) 218.6 55.2 = 1649 97.2 9 260 Open balance - - - - 11.16 55.62 115.22 50.95 17.97 56.93 112.32 195.67 392.16 689.95 Closing balance - - . - 55.62 115.22 50.95 17.97 56.93 112.32 195.67 392.16 689.95 896.04 D/S Cover 0.5 0.7 0.8 0.7 1.6 1.9 1.8 2.6 6.6 4.6 Actual: 1997-1999. Estimates: 2000. Forecast: 2001-2006 -40 -  Table 2: Guangdong: Longgang- Tanxi Highway Project Balance Sheet- The Expressway Company (million Yuan, year ending 31, December) Page 3 of 3 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Asset,: Fixed Assets At cost 3,430.96 3.967.14 4,105.39 4,105.39 4,148.50 4,216.39 4,263.92 4,313.82 4,366.22 4,421.24 Less: Depreciation 171.55 369.77 563.80 769.07 984.57 1,211.50 1,438.36 1,670.88 1,909.49 2,154.61 Net fixed assets 3,259.41 3,597.37 3541.59 3,336.3 3.163.9 3.04.8 2,825.56 2,642.99 2.456.73 2,266.63 Work -in -process 265.56 16.77 - - - - - - - - Subtotal 3.52497 3,614.14 3,541.59 332 3 3163.93 3.004.89 2,825.5 2,642.9 2.456.73 2.266.63 Current Assets Cash 55.62 115.22 50.95 17.97 56.93 112.32 195.67 392.16 689.95 896.04 Inventory 10.00 12.00 14.00 16.00 18.27 19.68 21.21 25.14 27.09 29.20 Account receivable 130.74 114.27 36.00 46.64 53.25 57.37 61.82 73.27 78.96 85.11 Subtotal 196.36 241.49 100.95 80.61 128.45 189.37 278.70 490.57 796.00 1,010.35 Other assets - - - - - - - - - Total Assets 3,721.33 3,855.63 3,642.54 3,416.93 3,292.38 3,194.26 3,104.26 3,133.51 3,252.73 3,276.98 Liabilities & Eouitv State funds-Equity 761.24 619.48 1,961.99 1.931.43 1,886.14 1,883.92 1,898.86 2,031.64 2,262.49 2,320.05 LUT loans: IBRD 997.35 982.06 949.73 914.85 811.52 773.95 733.47 689.84 642.84 592.19 Domestic 1,730.52 2,005.74 477.45 350.21 366.50 290.50 207.00 98.00 9.00 - Subtotal 2727.87 2.987.80 1,427.18 1,265.06 ,178.02 1.064.45 940.47 787.84 651.84 592.19 Current Liabilities 232.22 248.35 243.64 206.28 228.22 245.89 264.93 314.03 338.40 364.74 Total Liabiliffes & Equity 3,721.33 3,855.63 3,642.54 3,416.93 3,292.38 3,194.26 3,104.26 3,133.51 3,252.73 3,276.98 Current ratIo 0.8 1.0 OA 0.4 0.6 0.8 1.1 1.6 2.4 2.8 Debt:equityratio 80/20 84/16 46/54 43/57 43/57 41/59 39/61 35/65 30/70 29/71 In 1999, GPCD has converted about Y 1.40 billion domestic long term loan to equity. Actual: 1997-1999. Estimates: 2000. Forecast: 2001-2006 - 41 -  Table 3: Guangdong: Foshan - Kaiping Highway Project Assumptions for the Financial Forecasts Page 1 of 2 1 Traffic: Small Medium Large Small Medium Large Tractor- Car Bus Bus Truck Truck Truck Trailer Total Section 1. Foshan- Heshan 1997 7,454 3,509 338 4,970 2,339 1,351 341 20,302 1998 8,262 3,889 375 5,508 2,593 1,498 377 22,502 1999 9,500 4,472 431 6,334 2,982 1,722 434 25,875 2000 10,916 5,138 495 7,278 3,426 1,979 499 29,731 2007 19,323 7,984 769 12,883 5,324 3,075 775 50,133 2017 38,011 13,005 1,253 25,343 10,473 6,049 1,525 95,659 Section 2. Heshan- Shuikou (Kaiping) 1997 3,149 1,915 150 2,099 1,277 600 88 9,278 1998 3,491 2,123 166 2,327 1,415 664 99 10,285 1999 4,014 2,441 191 2,676 1,628 764 113 11,827 2000 4,612 2,805 219 3,074 1,870 878 130 13,588 2007 7,652 4,080 319 5,100 2,720 1,277 189 21,337 2017 13,704 6,039 472 9,133 4,871 2,287 338 36,844 2. Tariffincrease 10% everythreyears. Small Medium Large Small Medium Large Tractor- Car bus Bus truck truck truck Trailer YN-km 0.450 0.900 1.462 0.450 0.900 1.462 2.138 3. Ooramtit Costs and Based on the actual figures, including operating and depreciation, increase Management expenses: 5% every year. 4. OQcratini Taxes: 5.5% of total revenue (including business tax, city tax and education levy). 5. Income Tax Rate: 33.0% after the fifth positive profit year. 6. Maintenance Routine: Based on the actual figures and increase 5% annually. Medium: 1.5 times of total working cost for every five years. Major 3.0 times of total working cost for every ten years. 7. Desreciation- Based on: (a) civil works (annual traffic density), (b) housing (30 years) and (c) equipment (8 years). - 42 -  Table 3: Guangdong: Longgang- Tanxi Highway Project Assumptions for the Financial Forecasts Page 2 of 2 1. Traffic: Small Medium Large Small Medium Large Tractor- Car Bus Bus Truck Truck Truck Trailer Total Section 1. Longgang- Baiyun 1997 3,712 1,720 178 2,474 1,146 710 513 10,453 1998 4,608 2,222 200 3,073 1,480 805 559 12,947 1999 4,951 2,400 175 3,302 1,602 697 566 13,693 2000 5,153 2,741 192 3,436 1,829 764 539 14,654 2007 8,008 4,547 298 5,339 3,034 1,187 838 23,251 2017 13,044 8,143 485 8,697 5,433 1,933 1,365 39,100 Section 2. Baiyun- Houmen 1997 3,262 2,104 139 2,173 1,403 555 389 10,025 1998 3,816 3,176 178 2,543 2,116 712 338 12,879 1999 4,222 3,129 169 2,813 2,085 674 290 13,382 2000 4,394 3,572 184 2,928 2,381 741 277 14,477 2007 7,290 6,323 305 4,858 4,215 1,229 460 24,680 2017 13,055 12,438 546 8,700 8,292 2,201 824 46,056 Section 3. Houman- Tanxi 1997 2,475 1,426 88 1,651 952 350 255 7,197 1998 2,968 2,260 124 1,980 1,507 498 271 9,608 1999 3,134 2,247 118 2,088 1,497 467 252 9,803 2000 3,261 2,564 128 2,174 1,709 511 242 10,589 2007 5,772 4.840 227 3,848 3,226 905 428 19,246 2017 11,354 10,449 447 7,570 6,965 1,780 842 39,407 2. Tariff: Increase 10% every three years. Small Medium Large Small Medium LargeT ractor- Car bus Bus truck truck truck Trailer YN-km 0.450 0.900 1.462 0.450 0.900 1.462 2.138 3. Operating Costs and Based on the actual figures, including operating and depreciation, increase Manazement expenses: 5% every year. 4. Oweratine Taxes: 5.5% Of total revenue (inciuding business tax, city tax and education levy). 5. Income Tax Rate: 33.0% After the fifth positive profit year. 6. Maintenance: Routine: Based on the actual figures and increase 5% annually. Medium: 1.5 times of routine maintenance for every five years. Major: 3.0 times of routine maintenance for every ten years. 7. Depreciation: 30 Years straight-line method. - 43 -  Table 4: Guangdong Province: Highway Revenues and Expenditures during the Ninth Five Year Plan (Yuan 100 million) Page I of 2 1996 1997 1998 1999 2000Total Revenues I Road maintenance fee 44.0 41.0 47.0 47.0 46.0 225.0 2 MOC subsidy 5.0 5.0 5.0 5.0 5.0 25.0 3 Provincial allocation 23.0 22.0 25.0 25.0 25.0 120.0 4 Domestic loans 30.0 28.0 32.0 33.0 32.0 155.0 5 Foreign loans 19.0 18.0 20.0 20.0 20.0 97.0 6 Local financial allocation 85.0 81.0 91.0 93.0 90.0 440.0 Total 206.0 195.0 220.0 223.0 218.0 1.062. Expenditures: I New construction and rehabilitation 153.5 147.0 173.0 167.5 159.0 800.0 2 Maintenance 30.5 28.0 27.5 32.5 34.5 153.0 3 Others 22.0 20.0 19.5 23.0 24.5 109.0 Total 206.0 195.0 220.0 223.0 218.0 1062.0 Total Road Network (Ian) -(a) 89,631 91,862 92,960 94,070 95,200 -- Average annual increase -- 2.5% 1.2% 1.2% 1.2% 1.5% Total maintenance expenditure (100 million Yuan) -(b) 30.50 28.00 27.50 32.50 34.50 30.60 Average unit maint. expenditure ('000 Ylkm)- (b)/(a) 34 30 30 35 36 33 Average annual increase -- -10.4% -2.9% 16.8% 4.9% 2.1% Actual :1996-1998; estimates: 1999-2000. - 44 -  Table 4: Guangdong Province: Highway Revenues and Expenditures during the Tenth Five Year Plan (Yuan 100 million) Page 2 of 2 2001 2002 2003 2004 2005 Total Revenues I Road maintenance fee 48.0 50.0 50.0 51.0 51.0 250.0 2 MOC subsidy 3.0 4.0 4.0 4.0 3.0 18.0 3 Provincial allocation 29.0 30.0 30.0 30.0 31.0 150.0 4 Domestic loans 31.0 32.0 32.0 33.0 32.0 160.0 5 Foreign loans 15.0 16.0 16.0 16.0 17.0 80.0 6 Local financial allocation 78.0 78.0 79.0 81.0 84.0 400.0 Total 204.0 210.0 211.0 215.0 218.0 1.058.0 Expeditures: I New construction and rehabilitation 144.0 148.0 149.0 152.0 153.0 746.0 2 Maintenance 31.0 32.0 32.0 33.0 35.0 163.0 3 Others 29.0 30.0 30.0 30.0 30.0 149.0 Total 204.0 210.0 211.0 215.0 218.0 1,058.0 Total Road Network (km) -(a) 96,140 97,090 98,050 99,020 100,000 - Average annual increase -- 1.00/0 1.0% 1.0% 1.0% 1.0% Total maintenance expenditure (100 million Yuan) -(b) 31.00 32.00 32.00 33.00 35.00 32.60 Average unit maint. expenditure ('000 Y/km)- (b)/(a) 32 33 33 33 35 33 Average annual increase -- 2.2% -1.0% 2.1% 5.0% 2.1% - 45 -  Annex 4. Bank Inputs (a) Missions: Stagef of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 9/88 4 1 Transport Planner, 1 Transport Specialist, and 2 Transport Economists 10/89 3 1 Transport Planner, 1 Transport Specialist, and 1 Transport Economist 3/90 1 1 Transport Specialist 6/90 4 1 Transport Planner, 1 Highway Engineer, 1 Transport Specialist, and I Transport Economist 1/91 1 Engineer 3/91 4 1 Transport Specialist, 2 Highway Engineers, and 1 Operations Officer 7/91 6 2 Transport Specialists, 1 Transport Planner, 1 Highway Engineer, 1 Resettlement Expert, and 1 Operations Officer 11/91 7 2 Transport Specialists, 1 Transport Planner, 1 Environmental Specialist, 1 Resettlement Specialist, 1 Highway Maintenance Equipment Engineer and I Engineer Appraisal/Negotiation 3/92 7 2 Transport Specialists, 1 Transport Planner, 1 Environment Specialist, 1 Resettlement Specialist, 1 Road Safety Specialist, and I Operations Officer 8/92 5 2 Transport Specialists, I Transport Planner, 1 Procurement Engineer, and I Operations Officer 11/92 1 1 Transport Specialist Supervision 8/93 4 2 Transport Specialists, I HS S Environment Specialist, and I Operations Officer - 46 -  5/94 4 1 Transport Specialist, I HS S Resettlement Specialist, I Financial Specialist and 1 Road Improvement Program Specialist 10/94 6 1 Transport Specialist, 1 HS S Environment Specialist, 1 Resettlement Specialist, I Road Improvement Program Specialist, I Financial Specialist, and I Training Specialist 7/95 6 1 Transport Specialist, 1 HS S Training Specialist, I Highway Engineer, I Environment Specialist, I Resettlement Specialist, and I Road Improvement Program Specialist 5/96 5 1 Transport Specialist, I S S Highway Engineer, I Institutional and Traffic Safety Specialist, 1 Road Improvement Program Specialist, and I Resettlement Specialist 5/97 5 1 Transport Specialist, I S S Institutional and Traffic Safety Specialist, 1 Highway Engineer, 1 Private Highway Finance Specialist and 1 Road Improvement Program Specialist 10/97 1 1 Procurement Engineer 11/97 1 1 Environment Specialist 4/98 6 1 Transport Specialist, I S S Highway Engineer, 1 Institutional and Traffic Safety Specialist, 1 Environmental Specialist, I Resettlement Specialist, and I Operations Officer 3/99 2 1 Procurement Engineer, and I S S Highway Engineer 7/99 3 1 Transport Specialist, I S S Institutional and Traffic Safety Specialist, and I Resettlement Specialist 8/99 1 1 Resettlement Specialist 11/99 6 1 Transport Specialist, I S S Highway Engineer, I Institutional and Traffic Safety Specialist, 1 Resettlement Specialist, and 2 Environmental Specialists - 47 -  ICR 06/01 3 2 Transport Specialists,, and I1 Research Analyst (b) Staff: Stage of Project Cycle Actualaest Estimate No. Staff weeks US$ '000 Identification/Preparation 63.0 198.0 Appraisal/Negotiation 56.5 178.5 Supervision 100.1 379.0 ICR 11.0 62.5 Total 230.6 818.0 - 48 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Z Macro policies O H OSUOM O N * NA M Sector Policies O H OSUOM O N * NA I Physical * H OSUOM O N O NA M Financial O H *SUOM O N O NA Z Institutional Development 0 H * SU O M 0 N 0 NA IEnvironmental O H * SU O M O N O NA Social I Poverty Reduction O H *SUOM O N O NA