ASIAN DEVELOPMENT BANK RRP:PRC 33175

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR THE

HEFEI-XI’AN RAILWAY PROJECT

July 2000

CURRENCY EQUIVALENTS(as of 1 July 2000)

Currency Unit – Yuan (Y)Y1.00 = $0.1208$1.00 = Y8.2799

ABBREVIATIONS

ADB – Asian Development BankAOLS – assets operation liability systemCDB – China Development BankEA – executing agencyEAC-CARS – Environmental Assessment Center of the China

Academy of Railway SciencesEIA – environmental impact assessmentEIRR – economic internal rate of returnEPB – environmental protection bureauFCTIC – Foreign Capital Technical Import CenterFCUO-SJU – Foreign Capital Utilization Office of the

Southwest Jiatong UniversityFFSDIs – First and Fourth Survey and Design InstitutesFYP – Five-Year PlanGDP – gross domestic productha – hectareHXR – Hefei-Xi’an RailwayJBIC – Japan Bank of International Cooperationkm – kilometerm – meterMOR – Ministry of RailwaysPCR – project completion reportppp – purchasing power parityPRC – People’s Republic of ChinaRCF – Railway Construction FundRCMC – Railway Construction Management CenterRCSO – railway construction support officesRP – resettlement planTA – technical assistanceTMIS – Transport Management Information System

NOTES

(i) The fiscal year (FY) of the Government ends on 31 December.(ii) In this report, "$" refers to US dollars.

CONTENTS

Page

LOAN AND PROJECT SUMMARY ii

MAPS v

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. BACKGROUND 2

A. Sector Description 2B. Government Policies and Plans 6C. External Assistance to the Sector 6D. Lessons Learned 7E. ADB’s Sector Strategy 9F. Policy Dialogue 9

IV. THE PROPOSED PROJECT 11

A. Rationale 11B. Objectives and Scope 12C. Technical Justification 13D. Cost Estimates 15E. Financing Plan 15F. Implementation Arrangements 16G. The Executing Agency 22H. Environmental and Social Measures 24

V. PROJECT JUSTIFICATION 27

A. Financial and Economic Analyses 27B. Social Dimensions 28C. Impact on Poverty 29D. Risks 30

VI. ASSURANCES 31

VII. RECOMMENDATION 34

APPENDIXES 35

LOAN AND PROJECT SUMMARY

Borrower The People’s Republic of China (PRC)

Project Description The Project is designed to promote economic growth, in anarea that includes 16 poverty counties in 4 poor inlandprovinces (Anhui, Henan, Hubei, and Shaanxi) in thewestern and central parts of the PRC, by constructing a954-kilometer (km) railway linking Hefei and Xi’an.

Classification Primary: Economic Growth1

Environmental Category AAssessment An environmental impact assessment was undertaken; the

summary was circulated to the Board on 6 April 2000.

Rationale Lack of economic transportation in the western and centralprovinces of the PRC has impeded economicdevelopment, and the people are poor. About 5.7 millionpeople, comprising 31 percent of the rural population in theproject area, live below the international poverty line of $1per capita per day. The Project will provide a more directand efficient transportation corridor from the four poorinterior provinces to the coastal regions. In particular it willserve as an efficient outlet for large quantities of high-grade, low-sulfur coal from Shaanxi. Using this coal willhelp reduce the environmental emissions associated withthe use of high-sulfur coal. Increased transport capacityand reduced transport costs will encourage developmentof natural resources and establishment of industriesincluding agroprocessing. The Project will contribute topoverty reduction by addressing the impediments to broad-based economic growth, creating employment, andenhancing incomes.

Objectives and Scope The goal of the Project is to promote economic growth inpoor interior provinces to raise living standards and reducepoverty. This will be achieved by providing railwayinfrastructure that facilitates economic transportation ofgoods and people, and improves access of the poor toemployment opportunities and income generationactivities. The project scope comprises (i) construction of a954 km single-track, standard-gauge railway betweenHefei and Xi’an, including subgrades, bridges, and tunnels;(ii) laying of railway track; (iii) construction of 52 newrailway stations; (iv) electrification of the 407 km Xi’an toNanyang section; (v) provision of modern technology and

1 Based on draft classification criteria to be applied under ADB’s Poverty Reduction Strategy from 2001 onwards,

the Project would qualify as a poverty intervention.

iii

equipment for signaling, telecommunications, yardoperation, and mechanized maintenance of track; (vi)training of staff; (vii) environmental protection andmitigation of adverse environmental effects; (viii) landacquisition and resettlement of affected persons; (ix)consulting services for design, construction supervision,environmental monitoring, and monitoring of resettlement;and (x) institutional strengthening of marketing andbusiness development capabilities.

Cost Estimates The total cost of the Project is estimated at $2,835 millionequivalent, consisting of a foreign exchange cost of $913million and a local currency cost of $1,922 millionequivalent.

Financing Plan ($ million)

Source ForeignExchange

LocalCurrency

TotalCost

ADB Loan 300.0 0.0 300.0

Ministry of Railways 313.0 1,000.0 1,313.0China Development Bank 300.0 922.2 1,222.0

Total 913.0 1,922.0 2,835.0Percentage 32.2% 67.8% 100%

Loan Amount and Terms A loan of $300 million from ADB’s ordinary capitalresources will be provided. The loan will have a front-endfee of 1 percent of the loan amount, an annualcommitment charge of 0.75 percent, interest ratedetermined in accordance with ADB’s pool-based variablelending rate system for US dollars loans, and anamortization period of 25 years, including a 5-year graceperiod.

Period of Utilization Until 30 December 2005

Executing Agency Ministry of Railways (MOR)

ImplementationArrangements MOR’s Railway Construction Management Center will be

responsible for project implementation, resettlement,construction, and commissioning. For the procurement ofADB-financed components, assistance will be provided bythe Foreign Capital Technical Import Center of MOR. Asteering committee has been set up for centralcoordination and resolution of conflicts, and to ensureimplementation as per schedule.

Procurement Procurement of ADB-financed components will be done inaccordance with ADB’s Guidelines for Procurement. Otheritems will be procured following Government procedures

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for local competitive bidding. Advance action forprocurement of civil works was approved on 13 March2000.

Consulting Services Consultants financed under the ADB loan for the marketingand business development component of the Project willbe recruited internationally in accordance with ADB’sGuidelines on the Use of Consultants. Consulting servicesfor construction supervision, procurement, monitoring andevaluation of resettlement, and monitoring ofenvironmental management will be undertaken bydomestic consultants financed by MOR.

Estimated ProjectCompletion Date 30 June 2005

Project BenefitsAnd Beneficiaries Construction and operation of the railway will accelerate

economic growth by lowering transport costs which, in turn,should lead to the development of new industries,exploitation of natural and agricultural resources, anddevelopment of associated businesses and commerce.New employment opportunities and income-generatingactivities will be created that will benefit people in general,and the poor in particular. The resulting increased incomeand employment opportunities will improve living standardsand decrease the number of people living below thepoverty line. During the five-year construction period, theProject will generate about 352,000 person-years of directemployment and 194,000 person-years of indirectemployment. Industrial activities induced by the railway areexpected to create 196,000 person-years of employment in2005, the first year of its operation, increasing to 497,000person-years in 2024. By 2005, project effects will raise theincomes of 236,000 people above the international povertyline. By 2015, this will increase to 366,000 people. TheProject’s poverty impact ratio is 25 percent, which indicatesthat the Project will help generate pro-poor economicgrowth. Other quantifiable benefits from the Project includetransport cost savings and net production value addedresulting from the transport capacity made available underthe Project. The economic internal rate of return isestimated at 15.8 percent, and the financial internal rate ofreturn at 7.0 percent.

I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on a proposed loanto the People's Republic of China (PRC) for the Hefei-Xi’an Railway (HXR) Project.

II. INTRODUCTION

2. Experience with completed railways in the PRC, particularly the Yaogu-MaomingRailway,1 the Guang-Mei-Shan Railway,2 the Hefei-Jiujiang Railway,3 and the Jing-Jiu Railway4

shows that the construction of railways can contribute significantly to stimulating economicgrowth in relatively poor areas. These projects, together with the developments and activitiesinduced by the reduced cost of transport, have stimulated rapid economic growth and dramatictransformations of local economies, enhanced the investment environment in the project areas,enabled access to wider markets and better prices for local products, improved labor mobility,and generated large-scale employment for local people. Consequently, these projects havesignificant impacts on improving the incomes and living standards of people in general andreducing poverty in particular.

3. The proposed Project involves the construction of a new railway from Hefei to Xi’an,traversing 27 counties, including 16 poverty counties, in four poor interior provinces (Anhui,Henan, Hubei, and Shaanxi) (Maps 1 and 2, pages v and vi). It will provide an east-westtransport corridor linking the underdeveloped western and central parts of the PRC with themore developed eastern regions. The 27 counties have a population of 22.4 million, of which18.4 million people, or 82 percent, are rural. Over 5.7 million people or 31 percent of the ruralpopulation are living below the international poverty line of $1 per capita per day (measured in1985 international prices and adjusted to local currency using purchasing power parities[footnote 71]). This incidence of poverty is nearly double the national average of 16.5 percent.Given the high incidence of poverty in the influence area, the Project is considered to be apoverty intervention as defined in the Poverty Reduction Strategy of the Asian DevelopmentBank (ADB). The lower transportation costs made possible by the HXR will accelerate economicgrowth by developing industries, and natural and agricultural resources. New employmentopportunities and income-generating activities will be created that will benefit the population ingeneral, and the poor in particular. This will improve living standards and raise the incomes of asignificant number of poor people above the poverty line. Without the Project, transportconstraints would continue and the economic development necessary to reduce poverty wouldnot take place.

4. During the 2000 Country Programming Mission, the Government reconfirmed its requestfor ADB assistance for the Project. A feasibility study5 and an environmental impact assessment

1 Loan 1087-PRC:Yaogu-Maoming Railway Project, for $67.5 million, approved on 20 June 1991 (completed).2 Loan 1167-PRC:Guang-Mei-Shan Railway Project, for $200 million, approved on 25 June 1992 (completed).3 Loan 1221-PRC: Hefei Jiujiang Railway Project, for $110 million, approved on 30 March 1993 (completed).4 Loan 1305-PRC:Jing-Jiu Railway Technical Enhancement Project, for $200 million, approved on 14 July 1994

(completed).5 The feasibility study was approved by the PRC’s State Council on 11 March 2000.

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(EIA) were prepared by the First and the Fourth Survey and Design Institutes (FFSDIs)6 of theMinistry of Railways (MOR). MOR prepared a resettlement plan (RP). ADB provided technicalassistance (TA)7 to supplement the Government studies. In addition to TA supervision missions,ADB missions8 visited the PRC from 1-18 December 1999 (fact-finding) and from 28 March to11 April 2000 (appraisal). Loan negotiations were conducted in Manila from 19-21 June 2000with authorized representatives of the Government. Formulation of the Project is based on thefindings of the ADB missions, information provided by the Government, beneficiaryconsultations, discussions with other funding agencies, and recommendations of the feasibilitystudy and TA consultants. A project framework that outlines the goal, purpose, outputs, andinputs or activities is in Appendix 1.

III. BACKGROUND

A. Sector Description

1. Transport

a. Infrastructure and Traffic

5. The implementation of the Government's economic reform policies since 1978 hasresulted in rapid growth of the PRC economy, and a sharp increase in the demand fortransportation services. Despite the Government's efforts to increase transport capacity, seriousconstraints and bottlenecks remain. The land transport system comprises about 68,000 route-kilometers (km) of railways, 1.34 million km of highways, and 113,100 km of inland waterways.In addition, there are 1.47 million km of civil aviation routes. The density of the transport networkranks among the lowest in the world relative to either population or geographic area.9 Althoughinfrastructure grew rapidly in the past decade, it did not keep pace with the demand generatedby the country's economic growth. Inadequate transportation is one of the most seriousconstraints to the sustained and efficient growth of the PRC economy.

6. Between 1985 and 1999, passenger transport (in passenger-km) in all modes grew by6.9 percent per annum. Freight transport (in ton-km) grew by 5.7 percent per annum. Theserates would have been higher were it not for capacity constraints for all transport modes. In1999 road traffic accounted for 54.7 percent of total passenger-km, railways for 36.7percent,civil aviation for 7.6 percent, and coastal and inland waterways for 1.0 percent. The modal splitfor freight transport (in ton-km) was coastal and inland waterways 53.2 percent, railways 31.2percent, roads 14.1 percent, pipelines 1.4 percent, and civil aviation 0.1 percent. Between 1985and 1999, railway freight traffic increased from 813 billion ton-km to 1,258 billion ton-km (anincrease of 55 percent, equivalent to an annual growth rate of 3.2 percent). During the sameperiod railway passenger traffic increased from 242 billion passenger-km to 405 billionpassenger-km (an increase of 67 percent, equivalent to an annual growth rate of 3.7 percent).

6 The feasibility study and EIA for the section from Xi’an to Nanyang were prepared by the First Survey and Design

Institute and for the remaining section from Nanyang to Hefei, by the Fourth Survey and Design Institute.7 TA 3251-PRC: Hefei-Xi’an Railway Project, for $665,000, approved on 3 September 1999 (completed).8 The missions comprised R. Soin, Senior Project Engineer/Mission Leader; H. Sakurai, Financial Analyst; M. Gatti,

Senior Programs Officer; J. Miller, Project Economist; S. Price, Senior Social Development Specialist; E.Brotoisworo, Senior Environment Specialist; and X. Peng, Senior Counsel.

9 In terms of density per square km of land area, the PRC's transport network is one sixth of India's network andone fifth of that of the Republic of Korea.

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Although freight and passenger traffic moved by the railway has been increasing, its share ofthe total traffic moved by all transport modes declined from 46.2 percent in 1985 to 33.1 percentin 1998, similar to trends in other developing market economies.

b. Investments

7. Investment in transport infrastructure as a percent of the gross domestic product (GDP)more than doubled from 0.8 percent in 1990 to 1.9 percent in 1999. A World Bank study10

indicates that total transport investment should be increased to at least 3 percent of GDP toavoid the economic costs associated with transport constraints. To meet the increase intransport demand, more infrastructure investments are needed. As part of its efforts to stimulateeconomic growth through domestic demand, the PRC has been implementing a Y10 trillioninfrastructure investment program for 1998-2000. This program includes a substantial increasein investments in the railway and road sectors. Financing of such large investments on asustainable basis is beyond the funding capability of the Government and official developmentassistance. An increasing proportion of financing will have to come from both domestic andinternational private sector sources.11 Further reforms are needed in transport policy, regulation,and pricing to encourage financing from such sources, to improve efficiencies, and to capturethe benefits of a more balanced intermodal transport system. Besides mobilizing investment,efficiency in the provision and operation of infrastructure will be improved by adjusting prices,encouraging competition, and commercializing management. All of these issues are elements ofADB’s transport policy dialogue.

c. Institutions

8. At the national level, the State Development Planning Commission formulates the five-year development plans, and establishes transport priorities and targets in consultation with theadministrative units responsible for the various transport sectors, and with representatives oftransport users. MOR is responsible for the national railway system; the Ministry ofCommunications for national highways, inland waterways, coastal shipping, and major ports;and the Civil Aviation Administration for air transport and airports.

2. Railway System

9. The PRC’s railway system comprises 58,000 route-km of the state-owned nationalrailway and 10,000 route-km of local railways.12 The national railway is operated as anintegrated system under the administrative control of MOR. Local railways are those constructedunder the sponsorship of provincial governments and others, and are operated by enterprisesindependent of MOR. These railways serve local needs and provide connections to the nationalrailway. Given the spatial dispersion of population, natural resources, and industries in the PRC,

10 World Bank. 1995. Infrastructure Development in East Asia and the Pacific: Towards a New Public-Private

Partnership. Washington: World Bank.11 ADB has promoted the Asian Infrastructure Fund, China Asset Holdings Ltd., and the Asian Infrastructure

Mezzanine Capital Fund to help tap private sector resources for investment in infrastructure development. TheAsian financial crisis has made it more difficult to mobilize private sector financing for large infrastructure projects.The implications of the Asian financial crisis for the PRC have provided an added justification for ADB assistancefor infrastructure development.

12 In terms of route length, the PRC’s railway network ranks fourth worldwide after the United States (US), RussianFederation, and India; and in terms of passenger and freight traffic carried it ranks second after the US..

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the current size of the railway network does not provide adequate coverage.13 There are vastinland areas in the central and western parts of the country that do not have any rail transport.

10. The Railway Law provides the framework for railway regulation.14 It covers the operationof railway transport, railway construction, safety and protection of railways, service quality, andlegal liability. The law also specifies the rights and obligations of the Government, MOR, localgovernments, other railway operators, shippers, and railway users.

11. Fourteen railway administrations are responsible for day-to-day operation andmanagement of the national railway lines in their respective geographic jurisdictions. Thenational railway has a high turnover of traffic and is among the world leaders in terms of trackand equipment utilization rates for both passenger and freight transport. Traffic density exceedsall other major railways in the world. Electric and diesel-electric locomotives perform more than97 percent of the transportation work. Wagon and passenger coach utilization also exceeds, orcompares favorably with, other railways. Labor productivity in terms of traffic units per employeecompares favorably with leading railways in Europe and Asia, but is still substantially below therailways in North America.15

12. Since 1985, as part of the Government’s countrywide reform program, MOR hasimplemented a variety of reforms to improve the efficiency of railway operation andmanagement (Appendix 2). The first was the economic contract system that was implemented in1985. Under this system, employee and overall railway productivity improved substantially. Inthe 1990s, however, as the PRC moved toward a market economy, weaknesses in this systembegan to emerge. The productivity targets alone were not sufficient to operate profitably in amarket environment. In 1999 after a series of pilot projects and experimentation withmanagement and compensation methods, MOR introduced an assets operation liability system(AOLS). Under the AOLS, MOR entered into management contracts with the railwayadministrations to improve profitability.16 MOR is divesting its existing production facilities forlocomotives, passenger coaches, freight wagons, signaling and communications equipment,and track components,17 and is implementing a staff reduction program to reduce overstaffing.Operation and maintenance are being modernized to increase productivity. To provideemployment for many of the redundant employees, MOR set up many diversified businesses(independent of the core transportation business) to supply equipment, goods, and services tothe railway industry.18 MOR has also taken several measures to improve management

13 Railway network density in terms of route-km per square km of land area is one third that of India and one tenth

that of Japan.14 The Railway Law was promulgated by the National People's Congress on 7 September 1990 and became effective

on 1 May 1991.15 In 1997, railway traffic density in traffic units (freight ton-km plus passenger-km) per route-km in the PRC was

28.4 million compared with 10.2 million in India and 5.2 million in the US. Freight ton-km per wagon in the PRCwas 3.0 million compared with 1.2 million in the US and 1.0 million in India. Passenger-km per coach was 9.7million in the PRC compared with 11.0 million in India and 4.5 million in Germany. Employee productivity in trafficunits per employee was 1.0 million in the PRC compared with 5.9 million in the US and 0.5 million in Germany.

16 The performance of railway administrations will be evaluated by using agreed AOLS-targets for improvingprofitability, while maintaining and increasing fixed assets and having a good record of operating safety.

17 By 2001, MOR will divest five large non-transportation entities, such as the (i) Locomotives and Rolling StockIndustries Corporation, (ii) Railway Communications and Signaling Corporation, (iii) General Railway ConstructionCorporation, (iv) General Railway Engineering Corporation, and (v) China Railway Civil Engineering ConstructionCorporation.

18 These enterprises have provided alternative employment to 0.4 million surplus employees of the national railway.In 1998, the total revenue of these companies was Y32 billion, and annual profits Y2 billion. This program is aneffective and socially acceptable approach for reducing staffing levels.

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information systems, including the point-to-point costing system,19 a revised revenue settlementsystem,20 and a transportation management information system (TMIS).21 These measures willimprove service quality and traffic costing, help focus on more profitable traffic, ensure efficientutilization of assets, and improve overall efficiency and profitability of the national railway.

13. The Government, through the State Council, exercises final authority for setting basetariffs for the national railway. For premium and value-added services, the railway chargesadditional passenger fares, and for freight it negotiates special rates with shippers, which arehigher than the base rates. The Government is cautious when considering railway tariffincreases because of the perceived adverse impact on inflation and other sectors of theeconomy. For 16 years, from 1967 to 1982, there was no change in the tariff rates. Between1983 and 1985 there were major tariff adjustments, including a rate increase for bulk cargo,doubling of the minimum chargeable distance to 100 km, a Y4 per ton surcharge on freighthauls of under 200 km, and a 37 percent increase in passenger fares of under 100 km. Thesechanges were designed to discourage short-haul traffic on railways in favor of more economicroad transport. Since 1991, a construction freight surcharge (currently Y0.033 per ton-km) hasbeen added to most commodity freight tariffs.22 The proceeds of this surcharge—over Y39 billion($4.7 billion equivalent) in 1999—are credited to a separate railway construction fund (RCF)account with the Ministry of Finance, which is used for railway construction.23 Although therewere further selective tariff increases in the 1990s, the current tariffs of Y0.0771 per ton-km andY0.08 per passenger-km are still low by comparison with other transport modes in the PRC andby world standards.

14. The selective tariff increases helped augment revenue, but they did not cover increasedcosts resulting from the phase-out of subsidies on materials and energy after 1992, thusaffecting profitability of the national railway. This was reversed in the second half of the 1990s.Between 1996 and 1998, unit operating costs remained virtually constant, while both freight andpassenger unit revenues increased that improved the financial situation of the national railway.Setting tariffs to achieve full cost recovery and to reflect market conditions has been a constanttheme of the policy dialogue under ADB-financed railway projects. ADB helped MOR toundertake a study24 to formulate a special tariff for the Jing-Jiu Railway (footnote 4). In June1997, based on the conclusions of this study, the Government approved a special higher tarifffor the Jing-jiu Railway and the Beijing-Guangzhou Railway, both lines provide services in thenorth-south corridor.

19 The point-to-point costing system is based on research that began in 1992. In 1998, MOR decided to implement a

full costing system for 1,200 locations nationwide, which will be operational by December 2000. This system willprovide marketing management tools to evaluate the costs and profitability of individual traffic movement.

20 The existing revenue settlement system will be improved by helping railway administrations to evaluate interlinerevenue taking account of the commodity carried and the tariff rate.

21 Since 1994, MOR has been developing the TMIS and the associated telecommunications network. Followingsuccessful pilot implementation by the Shanghai Railway Administration, the TMIS will be installed to cover allrailway administrations by the end of 2000. When completed, the national railway will have a set of managementinformation tools that have been successfully used for railways in the US and Canada. Significantly, the TMIS willbe connected to the Internet. When completed, the shippers will be able to order freight wagons and monitorshipments on the Internet. Passenger train schedules will be provided on the Internet for the benefit ofpassengers. The TMIS will improve customer services and ensure more efficient utilization of assets.

22 Agricultural fertilizer and yellow phosphate are exempt from the construction surcharge, and a lower surcharge isapplied to (i) rock phosphate and cotton at Y0.0224 per ton-km, and (ii) pesticides at Y0.0192 per ton-km.

23 Since 1993, the RCF has also been used to pay interest on debt incurred for capital investments.24 TA 2122-PRC: Policy Support to the Ministry of Railways, for $600,000, approved on 14 July 1994, was completed

on July 1996.

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B. Government Policies and Plans

15. The lack of railway capacity to meet the increasing demand for transportation services isconstraining economic growth. The Government’s ambitious Railway Development Plan for1998-2004 gives priority to unserved areas, particularly railway lines that would improve linksbetween the poor inland provinces in the western and central PRC and the more prosperouscoastal areas. The plan is focused on (i) expanding rail network and removing constraints tonational economic development; (ii) encouraging construction of joint venture railways todevelop local economies; (iii) improving the efficiency of the existing system by using newtechnology and modern management tools; (iv) reducing subsidies for infrastructure throughappropriate pricing and commercializing services to increase cost recovery and reliance on user-funded investment; (v) implementing institutional and structural reforms to provide autonomy torailway entities by matching responsibility with accountability, and (vi) encouragingnongovernment investment25 in infrastructure and related services.

16. The Ninth Five-Year Plan (FYP), covering 1996-2000, gives priority to (i) constructingnew railway lines, (ii) electrifying key lines to permit the use of heavier and faster trains, (iii)converting heavily trafficked single-track sections into double-track sections to reducetransportation bottlenecks, and (iv) increasing train speeds to improve service quality. The NinthFYP envisages total investment of Y330 billion ($40 billion equivalent), including Y250 billion forcapital construction26 and Y80 billion for rolling stock, or three times the Y110 billion investedduring the Eighth FYP (1991-1995). About half of the investment in the Ninth FYP has beensourced from the RCF. The remaining has been arranged from domestic capital markets27 andforeign sources. The Tenth FYP (2001-2005), which is under preparation,28 will continue to givepriority to rail transportation, particularly the construction of new lines in the unserved areas ofpoor inland provinces in the western parts of the PRC. An outlay of Y350 billion is envisaged inthe Tenth FYP, consisting of Y270 billion on capital construction and Y80 billion on rolling stock.By 2005, the railway network is expected to be 74,000 route-km.

C. External Assistance to the Sector

17. Japan is the major source of external financing in the railway sector, followed by theWorld Bank and ADB (Appendix 3). Japan and the World Bank have been mainly involved inexpanding the capacity of the national railway. In the past 20 years, the Japan Bank ofInternational Cooperation (JBIC)29 has provided ¥557 billion (about $5.5 billion equivalent) for 15railway projects to expand rail transport capacity, particularly in major coal transport corridors.Japan has also financed the development of new sections of the national railway network ininland provinces. Since 1984, the World Bank has provided loans totaling $2.2 billion for sevennational railway projects and one local railway project.

18. ADB has focused on railway development in less-developed inland provinces to promotegrowth and reduce poverty. Since 1989 ADB has provided eight loans totaling about $1.1 billionto finance the construction of 1,754 km of new railway lines under seven local railway projects

25 The Guangshen Railway Company, operating between Guangzhou and Shenzhen, raised $200 million through a

worldwide offering of shares to finance investments.26 During the first four years of the Ninth FYP, the actual investment on capital construction totaled Y200 billion.27 During 1995-1999, Y17 billion was raised from domestic capital markets by issuing railway bonds.28 The Tenth FYP is expected to be approved in March 2001.29 On 1 October 1999, the Export-Import Bank of Japan and the Overseas Economic Cooperation Fund were

merged to form JBIC.

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and the 2,530 km national Jing-Jiu Railway (footnote 4). These projects have financed theconstruction of important provincial railway lines in less-developed areas, introduced moderntechnology, and improved the efficiency of railway operations through institutional strengtheningand reforms. As a part of its policy dialogue ADB has promoted the commercial operation ofrailways to ensure cost recovery without the need for subsidy. ADB has helped improve themanagement of railways by enhancing their knowledge of (i) commercial organization andmanagement, (ii) market-oriented business planning and strategies, (iii) financial management,efficient resource allocation, and pricing decisions; and (iv) modern management tools. ADB issupporting the transformation of the railway sector to provide efficient, safe, and qualitytransport services; maintain financial self-sufficiency; and enhance subregional cooperation withcentral Asia (covering Kazakhstan, Kyrgyz Republic, and Uzbekistan) and south-east Asia(covering Lao People’s Democratic Republic, Myanmar, and Viet Nam).

19. ADB closely coordinates with JBIC and the World Bank to ensure complementarity ofinvolvement in the railway sector. During the processing of the proposed Project, discussionswere held with JBIC and World Bank staff regarding their operational experience and ongoingrailway programs. The proposed Project is in line with the priorities for the development of therailways and ADB's strategy in the sector, and complements the investments and policydialogue of JBIC and the World Bank. The location of the Project in less-developed areas offour inland provinces is in line with ADB’s strategy of promoting economic growth in poor areasto create employment, improve living standards, and reduce poverty.

D. Lessons Learned

20. ADB experience shows that the implementation capabilities of the railway sectorexecuting agencies (EAs) are strong. Contract awards, disbursements, and speed ofimplementation have generally exceeded the expectations at the time of appraisal. Five ofADB’s eight railway projects are complete, and three30 are under implementation. The majoraccomplishments and lessons learned under completed railway projects are summarized inAppendix 4.

21. An exception to the generally good performance in the railway sector is the 44 km XiaoliuRailway in Shaanxi Province, ADB’s first railway project in the country.31 At postevaluation,32 thisproject was classified as unsuccessful because of the failure to achieve the forecast traffic andthe resulting low economic internal rate of return. This poor performance is attributable toinstitutional weaknesses and operational constraints on the adjoining Government-fundedsection due to its inadequate design. Since postevaluation, freight traffic has increased but it isstill substantially below appraisal levels. This project has demonstrated the need to (i) have afully functioning EA responsible for construction and operation established early in the projectprocessing stage, (ii) prepare realistic traffic forecasts considering potential problems associatedwith the assumed development of industries and natural resources that would use the railway,and (iii) consider the capacity constraints on adjoining lines that may affect traffic on the projectline.

30 Loan 1439-PRC: Daxian-Wanxian Railway Project, for $100 million, approved on 4 June 1996; Loan 1553-PRC:

Shenmu-Yanan Railway Project, for $200 million, approved on 29 September 1997; and Loan 1626-PRC: GuizhouShuibai Railway Project, for $140 million, approved on 18 August 1998.

31 Loan 948-PRC: Shanxi-Xiaoliu Railway Project, for $39.7 million, approved on 31 January 1989 (completed).32 PPA: PRC 22105:Shanxi-Xiaoliu Railway Project, March 1998.

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22. The 232 km Yaogu-Maoming Railway, constructed under ADB’s second railway project(footnote 1), was completed in 1994. The project completion report (PCR)33 concludes that theproject was successfully completed, and the objective of facilitating economic growth achieved.Originally, Guangdong Province owned the EA, and the project was 100 percent debt financed,which resulted in debt-servicing problems. In 1997, the EA was incorporated into a joint stockshareholding company with five shareholders, including one from the private sector. The debt-servicing problems were addressed by converting some debt into equity. The EA hassuccessfully operated and managed the railway ensuring full cost recovery.

23. The 1995 socioeconomic impact assessment indicates that the Yaogu-Maoming Railwayfacilitated rapid economic growth, resulting in substantial socioeconomic benefits for residents ofthe project area. Investment in the area increased and secondary and tertiary industrydeveloped rapidly. Many jobs were created, particularly for women. The resulting increase inwomen's income improved their social status. The financial revenues of local governments weresubstantially increased, allowing them to provide more social services such as health and basiceducation for the poor. During the initial years of railway operation, real income in the projectarea doubled. The railway contributed to a dramatic transformation of the local economy, andsignificantly raised living standards and reduced poverty.

24. ADB's third railway project, the 479 km Guang-Mei-Shan Railway (footnote 2), wassatisfactorily completed in 1995, ahead of the appraisal schedule. The PCR34 concludes that theproject was being operated well, and rated it as successful. The EA mobilized nongovernmentfunding for the construction of railway facilities such as station buildings and freight yards, andthe management of infrastructure services on a profit-sharing basis. The project was initially 100percent debt financed. Because of delays with long-term financing, part of the cost overrun wascovered by short-term loans, which resulted in debt-servicing problems. These were addressedby incorporating the company and converting some debt into equity. Important lessons of thisand the Yaogu-Maoming Railway are that railway projects cannot be 100 percent debt financed,and an appropriate mix of equity and long-term loans is necessary for successful financialoperation.

25. The 1997 socioeconomic impact assessment of the Guang-Mei-Shan Railway35 indicatesthat the resettlement of affected persons was satisfactorily completed. Improved transportationresulted in the growth of secondary and tertiary industry that increased employmentopportunities. The shift in employment from agriculture to agroprocessing, light industry, andservices increased employment opportunities for women whose incomes and social status thenimproved. The tourism industry developed rapidly. In 1996, after the project was completed, percapita GDP in the project area was more than five times that of 1990, before the project. In twodistricts of the project area, the number of people living below the national poverty line wasreduced from 347,520 in 1992, to 56,318 in 1996. The project helped to raise living standardsand reduce poverty.

26. ADB's fourth railway project, the 335 km Hefei-Jiujiang Railway (footnote 3), wassatisfactorily completed and operations started in 1996. The PCR36 reports that traffic growthwas less than forecast. Transit traffic did not materialize because it was moved via the Jing-Jiu 33 PCR: PRC 21228: Yaogu-Maoming Railway Project, June 1994.34 PCR: PRC 23043 Guang-Mei-Shan Railway Project, June 1998.35 Evaluation study under TA 1721-PRC: Institutional Strengthening of Guangdong Planning Commission, for

$250,000, approved on 25 June 1992 (completed).36 PCR: PRC 22276 Hefei-Jiujiang Railway Project, February 2000.

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Railway. Generated traffic did not reach appraisal levels because an economic slowdowncaused by the Asian financial crisis delayed the development of industries and naturalresources. As a result, the projected levels of physical and financial performance were notachieved. Because performance was below expectations, the project was rated partlysuccessful. This project has demonstrated the need to review the effects of alternative railwayroutes (both existing and planned) on economic and financial viability.

27. The Jing-Jiu Railway Technical Enhancement Project (footnote 4), ADB's fifth railwayproject, was completed satisfactorily and has been in operation since 1997. The PCR37

concluded that the project objectives were achieved, and the project was rated as successful.The Jing-Jiu Railway accelerated economic growth in the project area. Jiangxi, a less-developedprovince, benefited the most from the Jing-Jiu Railway. The per capita income in the povertycounties increased substantially after project completion in 1996 compared with before theproject in 1992. The living standards of people improved and poverty was reduced. The slowerthan envisaged development of freight traffic during the first two years of operation hasunderlined the need for more realistic traffic forecasts.

E. ADB’s Sector Strategy

28. ADB’s strategy for the PRC emphasizes three broad objectives: (i) improve economicefficiency; (ii) promote growth in poor inland provinces to reduce poverty; and (iii) protect theenvironment and manage natural resources. In pursuit of these three broad objectives, thestrategy supports developing efficient and integrated transport networks to meet the needs of agrowing market economy and to contribute to reducing poverty through investment coupled withpolicy and institutional reforms.

29. Recognizing the continuing importance of railways in providing cost-effectivetransportation for large volumes of goods and people over long distances, ADB’s railway sectorstrategy focuses on (i) expanding the railway system by constructing new lines, particularly inthe poorer areas of inland provinces; (ii) modernizing and increasing the capacity on key routesof the national railway system; and (iii) commercializing railway operation. With povertyreduction as ADB's overarching goal, preference will be given to projects located in poorer partsof the country and those that connect poor isolated areas to the economic mainstream. The goalis to reduce the costs of transport to and from rural areas and between growth centers, andincrease access of the poor to employment, markets, education, and health care. The proposedProject is fully consistent with this strategy.

F. Policy Dialogue

30. Policy dialogue has been a significant component of ADB assistance to the railwaysector and has effectively complemented the lending operations. The issues addressed includecommercializing operations, supporting autonomy in management of railway operation,developing human resources, and improving financial management and accounting systems.Under the Project, the policy agenda has been expanded to strengthen the poverty reductionfocus and ensure integrated infrastructure development. A description of the main topicscovered during the policy dialogue with the Government and MOR follows.

1. Poverty Reduction

37 PCR: PRC 26462 Jing-Jiu Railway Technical Enhancement Project, April 2000.

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31. The main purpose of the Project is to create the conditions for pro-poor economic growthto help reduce poverty in the project area. To improve access for the poor, railway stations havebeen located in poor areas, including the 16 poverty counties. The Project will be supported byassociated facilities such as access and link roads connecting railway stations to counties andinterior areas so that the benefits of the HXR are spread in the poor hinterland. The projectdesign also incorporates measures to facilitate transfer of benefits to poor people duringconstruction and operation of the HXR by creating employment, increasing the demand forlabor, and expanding economic opportunities. The poverty reduction effects of the Project arediscussed in detail in paras. 99 to 103.

32. The areas around the HXR are overwhelmingly rural with their inhabitants working inagriculture. With farmland averaging between 0.04 hectare (ha) and 0.12 ha per householdmember, there is significant rural underemployment. The Project will generate employment thatwill increase the income of people, thereby reducing poverty. Poor people living in the projectarea will be encouraged to participate in the construction activities. MOR will ensure that localpoor people are employed for at least half of the unskilled labor jobs during construction.38

Subject to meeting the required technical standards, and consistent with economy and efficiencyof construction, materials such as sand, stone, and aggregates will be procured locally; this willprovide additional employment to local poor people. Higher worker productivity and wages willraise the living standards of poor households and reduce poverty.

33. The Project will reduce transport costs, thus facilitating the development of naturalresources, industry, tourism, and services in the project area. These associated developmentswill also create new employment and generate income opportunities that will benefit theunderemployed rural poor. To ensure that project benefits are widely spread, provincial andlocal governments will (i) provide road links between the railway and interior areas to improvedelivery systems and support economic and social development; (ii) coordinate the necessaryinvestments in agriculture, health, education, communications, electricity, and water supply insupport of the Government’s program to reduce poverty; and (iii) take necessary measures toimprove access for poor people, particularly women, to basic services.

2. Pricing Policies and Cost Recovery

34. Tariff reform has been a key element of the policy dialogue to ensure full cost recovery,and establish pricing policies that facilitate economic modal choices and enable optimal use ofthe railway system. Through the policy dialogue and TAs, ADB has supported adjustments tofreight tariffs to improve cost recovery. MOR will apply the principle of new line-new tariff to theproject railway, duly considering the price elasticity of traffic. Freight tariffs will be based on thecost recovery principle as well as the findings under TA 2122 (footnote 24). Cost recovery andthe efficiency of investment will be monitored by preparing pro forma financial statements ofHXR operation (para. 64).

3. Marketing and Business Development

38 Through the application of this measure under the ongoing Guizhou Shuibai Railway Project (footnote 30), almost

1 million person-days of new employment were provided for local poor people during 1999, the first year ofconstruction.

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35. Under central planning, the Government determined the location for the construction of anew industrial development or manufacturing facility. With market-based reforms, this functionhas moved to the investor or manufacturer. The HXR must ensure that it offers a service thathas a competitive advantage over other transport modes, and launch information campaigns toencourage new facilities to locate where the HXR can serve them efficiently. Railway staff havelimited experience with planning rail service to be complementary to industrial developmentsplanned by individual enterprises. Assistance will be provided under the Project to organize andprovide training for proactive marketing and results-oriented staff who will be responsible forpublicizing the HXR and encouraging enterprises to expand existing or locate new facilities inthe area served by the HXR.

36. The railway, which had a captive clientele under the centrally planned system, has tocompete with other transport modes under the increasingly liberalized economy. The newmarket environment will require significant change from the traditional approaches to marketingand providing client-oriented services. To be competitive with road transport, the railway needsto efficiently compete for all types of nonbulk goods in all respects, including door-to-doorservice, time, service reliability, and cost. Under the Project, MOR will be assisted in definingHXR’s services, planning its future operations, justifying further necessary investments, andcreating appropriate customer-oriented services.

4. Mobilizing N ongovernment Financing

37. A key element of ADB’s policy dialogue in the PRC railway sector has been to encouragethe use of funds from sources other than the Government. MOR has mobilized domesticcofinancing for the Project from the China Development Bank (CDB). Under previous localrailway projects, the EAs successfully mobilized financing from local governments and othersources for the construction of selected railway facilities such as railway stations and freightyards, as well as for their operation. This enabled commercial management of the facilities in amarket environment. This experience will be replicated under the Project. MOR will continue itsefforts to attract such financing for the construction of railway facilities, such as station buildings,and freight and container yards, and also for providing infrastructure services on a cost-benefitsharing basis.

IV. THE PROPOSED PROJECT

A. Rationale

38. The HXR is an east-west rail transport corridor traversing 27 counties, including 16poverty counties. The counties in the project area are overwhelmingly rural, with 22 countieshaving more than 80 percent rural population, compared with 70 percent nationwide. The percapita GDP in these counties ranges from 19 percent to 69 percent of the national average.Using the international poverty norm of $1 per capita per day, 31 percent of the rural populationin the project area live below the poverty line compared with 16.5 percent nationwide. TheProject is a key intervention for catalyzing pro-poor growth and creating employment andincome-generating activities necessary for reducing poverty. Under the Government’s programto reduce economic disparity between inland and coastal provinces, the Project has beenaccorded high priority in the Ninth FYP (1996-2000) and the Railways Development Plan (1998-2004).

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39. In the largely rural project area, value-added agroprocessing and manufacturingindustries are essential for creating employment. Such industries usually require a large laborforce, low-cost energy, and efficient and low-cost transport for both raw materials and finishedproducts. Without the HXR, the project area offers little attraction to a potential investor in anindustry that would generate employment. The HXR will provide low-cost and efficienttransportation. As a consequence, new agroprocessing will be able to develop and bring moreincome to the local community. Further, cost-effective transportation will create the businessopportunities for energy-intensive industries such as cement, fertilizers, and variousmanufactured goods.

40. In addition to increasing transport capacity in the east-west corridor,39 the HXR’sconnections with four major north-south railway lines40 will improve overall rail efficiency in thecentral PRC. This will have a significant impact on the poor areas west of Xi'an, particularly inGansu and Qinghai provinces, and the autonomous regions of Ningxia and Xinjiang. The Projectwill thus support the Government's strategic objective of accelerating development of the centraland western regions of the PRC by improving transportation links to the coastal regions.

B. Objectives and Scope

41. The goal of the Project is to promote economic growth in poor interior provinces to raiseliving standards and reduce poverty. This will be achieved by providing railway infrastructure thatfacilitates economic transportation of goods and people, and improves access of the poor toemployment opportunities and income-generating activities.

42. The project scope comprises (i) constructing a 954 km single-track, standard-gaugerailway between Hefei and Xi’an, including subgrades;41 407 major bridges with a total length ofabout 88 km; 42 4,732 minor bridges and culverts; and 83 tunnels with a total length of about 81km;43 (ii) laying railway track consisting of rails and accessories, concrete sleepers, and stoneballast; (iii) constructing 52 new railway stations complete with facilities; (iv) electrifying the 407km Xi’an to Nanyang section including power supply arrangements; (v) providing moderntechnology and equipment for signaling, telecommunications, freight yard operation, andmechanized maintenance of track; (vi) providing training on the use and maintenance of modernequipment; (vii) protecting the environment and mitigating adverse environmental effects; (viii)acquiring land and resettling affected people; (ix) providing consulting services for design,construction supervision and quality control, procurement, environmental monitoring, andmonitoring of resettlement and social impact; and (x) strengthening marketing and businessdevelopment capabilities.

C. Technical Justification

1. Project Area

39 Traffic on the existing Lianyungang to Xi’an railway line has increased rapidly, and capacity constraints are

impeding economic growth in this region.40 The four major north-south railway lines are Taiyuan-Huaihai Railway at Nanyang, Beijing-Guangzhou Railway at

Xinyang, Jing-Jiu Railway at Huangchuan, and Shanghai-Guangzhou Railway at Hefei (Map 1, page v).41 The subgrade includes retaining walls, protection of side slopes in cuttings from erosion, protection against

scouring, and drainage, and other works that, besides having an engineering function, support environmentalprotection.

42 The longest is a 2.76-km bridge over the Huang River in Henan Province.43 The longest is a 12.3-km tunnel through the Qinling Mountains in Shaanxi Province.

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43. The HXR will start from the west at Xinfeng in Shaanxi Province; cross the QinlingMountains, traverse Henan Province, and after crossing the north tip of Hubei Province,terminate at Hefei in Anhui Province (Map 1, page v). From the west, numerous tunnels throughmountainous terrain characterize the alignment with patchy forest and grassland areas rooted inmountain rocky soil. From Nanyang to Hefei, the surrounding areas are mainly open, cultivatedplains alternating with mildly undulating topography, with a number of major rivers to be crossed.The land supports grain and industrial crops including rice, winter wheat, and cotton. About 82percent of the population in the project area lives in rural areas and are engaged in mainlyagricultural activities.

2. Traffic Forecast

44. The HXR will be the shortest railway line linking the prosperous eastern and coastalregions with the vast western regions across the heartland of central PRC. The existing Xi’an-Lianyungang Railway, located north of the HXR, is congested and operating at 108 percent ofthe design capacity. The HXR will provide a shorter route for a significant volume of traffic andmitigate congestion on the existing route. The traffic forecast for the HXR is based on a modeldeveloped under the TA using the origin-destination data for existing routes. The comparison ofwith and without project traffic scenarios validated this model. The forecast for locally generatedtraffic was based on field studies by the FFSDIs. Two sets of freight traffic forecasts (i.e., highand low) were prepared for the HXR.44 Considering the lessons learned on previous railwayprojects the lower forecast was used for the financial and economic analyses. The passengertraffic forecast includes (i) transit passengers, (ii) passengers diverted from buses becausetrains provide a higher level of comfort and safety at competitive prices, and (iii) new passengersgenerated in the project area. The traffic forecasts are summarized in Table 1 and details aregiven in Appendix 5.

Table 1: Summary of Traffic Forecasts(million)

Type of Traffic 2005 2009 2014 2019 2024Freight (tons )Transit 13.057 15.150 23.041 28.619 29.556Other than Transita 5.676 6.586 10.016 12.441 12.849

Total (tons) 18.733 21.736 33.057 41.061 42.405Total (ton-km) 19,546 22,679 34,492 42,843 44,246Passenger (number) 14.910 22.940 39.309 43.097 47.250Total (passenger-

km)4,266 6,565 11,251 12,649 14,219

a Includes originating, terminating, and local traffic.Source: Staff estimates.

45. Freight turnover on the HXR is forecast to increase from 19.5 billion ton-km in 2005 to44.2 billion ton-km in 2024, i.e., at 4.4 percent per annum. Passenger traffic is forecast toincrease from 4.3 billion passenger-km in 2005 to 14.2 billion passenger-km in 2024, i.e., at 6.5percent per annum. These growth rates are lower than the actual and forecast growth rates forthe Jing-Jiu Railway (7.1 percent for freight and 8.0 percent for passengers), and compare with

44 The difference between the two forecasts is 33 percent in 2005 (the first year of operation) and 10 percent in 2014

and 2024.

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the 5.3 percent average GDP growth rate45 during the same period. Given the priority accordedby the Government to developing the central and western inland regions, these growth rates areconsidered realistic. Transit traffic, utilizing the shorter distances and the higher efficiency thatthe HXR will provide to the national network, accounts for about two thirds of the total traffic,and generated traffic accounts for the remainder. The major commodities to be transported arecoal, steel, grain, fertilizers, pesticides, coking coal, construction materials, nonmetallic ores,and petroleum. Freight turnover of coal is projected to increase from 6.6 billion ton-km in 2005 to17.5 billion ton-km in 2024 accounting for 34 percent to 39 percent of the total freight. However,these quantities represent only 19 percent and 40 percent of the forecast coal production in thecentral Shaanxi coal mines46 in 2005 and 2024. Such low proportions provide a sufficient marginto cover the risks associated with any unforeseen decline in coal production. A breakdown of thetraffic by direction shows that 70 percent of the freight turnover is expected to be movedeastward from Xi’an to Hefei, while 30 percent would be moved westward. This traffic patterndemonstrates the HXR’s role in opening up markets and ports in the east for production facilitieslocated in the central and western PRC.

46. Considering the growth potential of the region and the Government’s priority foreconomic development, as well as the shorter transportation route provided by the HXR, thefreight and passenger traffic forecasts are considered conservative.

3. Design Standards

47. The alignment of the HXR was selected from various alternatives based on technicalfeasibility, and minimization of involuntary resettlement and environmental impacts. The TAconsultants reviewed the alignment and concluded that it was an optimal solution for meetingthe transportation and economic needs of the central PRC. The line is designed for eventualdouble tracking. Consistent with the traffic forecasts, it will initially be built as a single-trackrailway, except for 70 km in three stretches in mountainous and difficult sections built withdouble track to avoid traffic bottlenecks.

48. The HXR’s design will follow MOR’s Class I technical standards. For track facilities, 60kilogram per meter (m) rail will be used on concrete sleepers (with a density of 1,760 sleepersper km) layed on stone ballast. The gradient will generally be 0.6 percent and the minimumcurvature 1,200 m, except in the mountainous sections where the maximum gradient will be 1.3percent and the minimum curvature 600 m. Crossing lines at stations will have a length of 850m. The 407 km Xi’an to Nanyang section will be electrified to ensure high operational efficiencygiven the expected traffic densities and gradients. On this section, electric locomotives will beused. Diesel locomotives will work the remaining 547 km Nanyang-Hefei section. For traincontrol, a semiautomatic block relay signaling system with electric interlocking and color lightsignals will be used. Most bridges will be designed on the basis of 100-year floods, but 300-yearfloods will be used as the basis for large bridges.

45 CER: PRC 99029, Country Economic Review; People’s Republic of China, December 1999.46 Coal produced in the north Shaanxi coal mines is transported on the Shenmu-Baotou Railway and the Shenmu-

Shuoxian Railway, while that produced in central Shaanxi coal mines is transported via the Yanan-Xi’an Railway.Low- sulfur Shaanxi coal is in strong demand because of the Government’s environmental goals. The planning ofcoal production in central Shaanxi is based on the nationwide demand estimates of coal. Coal production in 2005is forecast 12 percent below the 1998 level. This reflects the lower forecast economic growth rate, the effects ofindustrial restructuring and fuel substitution, the stockpile of coal currently estimated at 300 million tons, and theclosure, for environmental reasons, of small mines and those producing coal of inferior quality. However, in thelonger term, the consumption of coal is forecast to increase as the economy grows.

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D. Cost Estimates

49. The total cost of the Project, including provision for physical and price contingencies,interest and other charges during construction, and front-end fee of 1 percent of the loanamount is estimated at $2,835 million. This comprises $913 million (32 percent) in foreignexchange cost and $1,922 million (68 percent) in local currency cost. The cost estimates arebased on quantities derived from the technical designs and market prices for goods andmaterials, and include the costs of land acquisition, resettlement, compensation, environmentalprotection, and measures to mitigate adverse effects and provide resettlement andenvironmental monitoring.47 The project cost estimates are summarized in Table 2 and detailedin Appendix 6. The HXR’s construction cost of $3.0 million per km compares well with the $2.4million per km for the Shenmu-Yanan Railway (footnote 30) and $3.2 million per km for theGuizhou Shuibai Railway (footnote 30).

Table 2: Cost Estimates ($ million)

ItemForeign

ExchangeLocal

CurrencyTotalCost

A. Base Cost1. Railway Works, Facilities, and

Equipment783.9 1,203.1 1,987.0

2. Administration, Land Acquisition,Resettlement, Consulting Services, andEnvironmental Protection

6.7 365.1 371.8

Subtotal (A) 790.6 1,568.2 2,358.8B. Contingencies

1. Physical Contingencies 45.5 101.5 147.02. Price Contingencies 45.0 101.1 146.1

Subtotal (B) 90.5 202.6 293.1C. IDC and Front-End Fee 31.9 151.2 183.1

Total 913.0 1,922.0 2,835.0IDC = interest and other charges during construction.Source: Staff estimates.

E. Financing Plan

50. The Government has requested a $300 million loan from ADB's ordinary capitalresources to help finance the Project. The loan will finance a portion of the foreign exchangecost of equipment, materials, and civil works, and the front-end fee of 1 percent of the loanamount. MOR and CDB will finance all other project costs, including interest and other chargesduring construction on the loan amount. A summary of the financing plan is given in Table 3.

47 The cost estimates do not include the costs of marshaling yards to be constructed at the intersection points of

existing north-south lines with HXR at Xingfen, Nanyang, Xinyang, and Hefei. These costs, financed by MOR fromown resources, have been considered in the economic and financial analyses.

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Table 3. Financing Plan($ million)

SourceForeign

ExchangeLocal

Currency Total Percent

MORCDBADB

Total

313.0300.0300.0913.0

1,000.3 921.7

0.01,922.0

1,313.31,221.7 300.02,835.0

46.3 43.1 10.6

100.0

ADB = Asian Development Bank, CDB = China Development Bank, MOR = Ministry of Railways.Source: Staff estimates.

51. The Borrower of the ADB loan will be the PRC. The loan will be provided in US dollarswith a repayment period of 25 years, including a grace period of 5 years, a front-end fee of 1percent of the loan amount, a commitment charge of 0.75 percent per annum, and an interestrate determined in accordance with ADB's pool-based variable lending rate system for US dollarloans. These terms are consistent with the average estimated economic life of the projectfacilities and the implementation period.

52. MOR financing will consist of $1,313.3 million equivalent of self-generated funds fromthe RCF. CDB will provide a long-term loan of $1,221.7 million equivalent, to be disbursed overthe 5-year construction period.48 CDB has approved the loan proposal, and is negotiating theloan agreement with MOR. The CDB loan will have a repayment period of 15 years, including agrace period of 6 years and an interest rate of 6.21 percent per annum. This is one of thelongest loan maturities extended by CDB and recognizes the developmental and povertyreduction impacts of the Project. MOR will cover any cost overrun, including cost increasesarising from higher than projected inflation and any exchange rate variations. The Governmentand MOR have agreed to make timely provision of sufficient funds to complete the Project asscheduled.

F. Implementation Arrangements

1. Project Implementation

53. MOR, through its Railway Construction Management Center (RCMC), will implement theProject. RCMC has set up offices along the project route for on-site supervision. MOR, throughthe Foreign Capital and Technical Import Center (FCTIC), will undertake procurement of theADB-financed components. FCTIC will monitor utilization of the ADB loan and maintain liaisonwith ADB. Both RCMC and FCTIC have well-qualified and experienced staff who haveundertaken similar tasks satisfactorily in the past. 49 MOR has also set up a steering committeecomprising members from MOR, RCMC, FCTIC, provincial governments, concerned railwayadministrations, and other agencies as necessary, for central coordination and resolution of anyconflicts between the various agencies involved in project implementation.

48 The Mission confirmed that CDB has the resources to provide the committed financing. In each of the past five

years, CDB lent more than $1 billion for railway projects.49 RCMC sucessfully completed the 653 km Datong-Qinhuangdao Railway, the 858 km Nanning-Kunming Railway,

the 409 km Hengshui-Shangqiu, and the 540 km Fuyang-Jiujiang sections of the Jing-Jiu Railway, and isimplementing the Xi’an-Ankang Railway. FCTIC successfully completed procurement under Loan 1305 (footnote4).

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54. Preliminary arrangements for construction will start in mid-2000 followed by constructionof key works on the critical path for project completion, such as civil works for long tunnels. Thiswill be followed by construction of the other civil works and track laying, which will generallyproceed from both ends of the Project. The Project will have a five-year construction period andbe physically completed in June 2005. The project implementation schedule is given inAppendix 7.

2. Procurement

55. Civil works and goods to be financed by ADB will be procured following internationalcompetitive bidding or international shopping procedures, in accordance with ADB's Guidelinesfor Procurement, and using ADB’s standard bidding documents. Each supply contract estimatedto cost less than $500,000 equivalent may be awarded on the basis of international shopping.ADB-financed civil works contracts will be packaged on the basis of vertical slicing.50 A list ofcontract packages to be financed by ADB is given in Appendix 8. MOR, through FCTIC, willundertake procurement of the ADB-financed contract packages with the assistance ofinternational tendering companies selected in accordance with competitive national procedures.MOR-financed civil works contracts will be procured following the new Law on Tendering andBidding and the standard bidding documents approved by the Government.51 MOR has agreedto include the relevant sections of ADB’s Anticorruption Policy52 in all bidding documents andcontracts.

56. The Government’s request to undertake advance action for procurement of civil workswas approved by ADB on 13 March 2000.53 Advance action will enable MOR to makepreparations to start construction of civil works according to the schedule. Delayed constructionwould delay the start of commercial operation and the accrual of project benefits. Timelyconstruction is important because the Project is part of the Government’s policy to expandinfrastructure investment to stimulate domestic demand and incomes when economic growth isdeclining. The advance action includes issuing a general procurement notice, prequalifyingbidders, issuing invitations to bid, opening and evaluating bids, and completing related activitiesup to the stage of contract award. The Government and MOR were advised that approval of theadvance procurement action would not commit ADB to finance the Project. To facilitate projectimplementation an imprest account will be established; the modality of its operation will beagreed to by MOR and ADB after the award of ADB-financed contracts. MOR has sufficientcapabilities to establish accounting, internal control, and auditing procedures to ensure efficientoperation and use of the imprest account.

3. Consulting Services

50 To ensure homogeneity of civil works, each contract will include subgrade, bridges, tunnels, and other works, but

will exclude track, signaling, telecommunications, electrification, and electric power supply.51 The new Law on Tendering and Bidding was adopted by the Ninth National People’s Congress on 30 August 1999

and took effect on 1 January 2000. It prescribes bidding conditions for all large-scale infrastructure constructionprojects that are fully or partially financed by the Government or by international financing organizations. The newlaw is based on the principles of openness, fairness, impartiality, and good faith. ADB provided assistance underTA 2845-PRC: Establishment of National Procurement Regulations for the Public Sector, for $565,000, approvedon 20 August 1997, for preparing the standard bidding documents for domestic procurement.

52 ADB.1998. Anticorruption Policy (On-line). Available: http://www.adb.org/work/Policies/Anticorruption.53 Advance procurement action was reported in the April 2000 edition of ADB Business Opportunities.

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57. The FFSDIs will provide consulting services for project design and environmentalassessment. MOR, through FCTIC and RCMC, will engage and finance suitable additionaldomestic consultants for international procurement, construction supervision and quality control,monitoring of environmental management, monitoring and evaluation of the implementation ofthe resettlement plan and socioeconomic impact assessment, and evaluation of povertyreduction. Past experience with similar projects confirms the availability of adequately qualifiedand experienced domestic consultants to undertake these tasks satisfactorily. MOR will financethe services of domestic consultants.

58. The ADB loan will be used to finance six person-months of international consultingservices to strengthen MOR’s marketing and business development functions, and projectmanagement. Terms of reference for the international consultants who will be recruited inaccordance with ADB’s Guidelines on the Use of Consultants, are given in Appendix 9. Theprovisions of ADB’s Anticorruption Policy will be included in all invitation documents andcontracts for international consultants.

4. Land Acquisition and Resettlement

59. The railway route was selected based on the evaluation of several alternative alignmentswith the objective of minimizing acquisition of cultivated land and houses. A total of 4,205hectares (ha) will be acquired for the Project. In addition, 1,034 ha will be borrowed fortemporary use during construction. About 935,900 square meters of buildings will bedemolished. The HXR construction will affect a total of 76,500 people, including 53,300 affectedby loss of land, 48,700 by loss of housing, and 3,800 by loss of business (with some affected byloss of both land and housing).

60. MOR has prepared a resettlement plan (RP) that will ensure that project-affectedpersons receive assistance so that they will be at least as well off as they would have been inthe absence of the Project. The RP, which was refined by the TA consultants to address ADB’sconcerns, is based on the results of a socioeconomic sample survey, and incorporatescompensation entitlement as agreed to by MOR and the four provinces on the route of the HXR,within the framework of the 1998 Land Administration law. Where necessary, affected persons,particularly poor households and households headed by women will be given additionalassistance as provided in the law. The RP will help restore the incomes of affected persons afterresettlement, with as little disruption as possible in their economic and social environment. Alongthe HXR route, affected people will be relocated near to where they currently live, andcommunities will not be broken up. The RP takes account of the results of township-level datacollection, field observations, meetings with various stakeholders undertaken by the TAconsultants, and further observations made by ADB missions. A summary of the RP is given inAppendix 10.

61. MOR will assume lead responsibility for implementing the RP through RCMC. Theinstitutional responsibility for implementing land acquisition and resettlement will rest with theprovinces, prefectures, and counties traversed by the HXR, on the basis of prior arrangementswith MOR. For this purpose, the concerned provinces, prefectures, and counties have set uprailway construction support offices (RCSOs). The total cost of land acquisition and relocation isestimated at $232 million equivalent and will be financed by MOR. MOR has assured that fundswill be made available in a timely manner, including cost overruns, if any.

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62. Copies of the agreed RP (in Chinese) have already been provided to the county localgovernments and RCSOs for the information of the affected persons. The RCSOs areresponsible for receiving the comments of the affected people and addressing their concerns.The consultation with affected persons will continue during RP implementation. MOR will reportprogress on land acquisition and resettlement to ADB through the quarterly progress reports onproject implementation. MOR will engage the Research Institute of the Foreign Capital UtilizationOffice of the Southwest Jiaotong University (FCUO-SJU)54 to monitor RP implementation,conduct annual survey updates during resettlement implementation, report on completion of theresettlement, and evaluate the resettlement process two years after completion of resettlement.MOR will provide these reports to ADB. MOR has given assurance that the resettlement will becompleted satisfactorily as per the agreed RP, and that all land and rights-of-way required forproject implementation will be made available in a timely manner.

5. Reports, Accounts, and Audit

63. MOR has agreed that arrangements satisfactory to ADB will be made for reporting onproject implementation progress. MOR will submit to ADB quarterly progress reports on projectimplementation covering progress of procurement, civil works, environmental management, landacquisition, compensation, and resettlement. The progress reports will compare the originalimplementation schedule with the actual progress during the period under review; providecontract award and disbursement projections; assess compliance with loan covenants; provideinformation on operations, problems, or difficulties that would affect the implementationschedule, together with action taken or proposed to be taken; and include a program of activitiesduring the following quarter. They will also document the progress of connecting railway lines,and access and link roads. A midterm review of the Project will be undertaken by ADB inconsultation with the Government and MOR during the third year of project implementation.

64. MOR, through RCMC, will maintain separate project accounts for all project expendituresfinanced from the ADB loan and domestic sources.55 Within nine months of the end of eachrelated fiscal year, MOR will submit to ADB the audited project accounts, MOR’s auditedfinancial statements including income statement, cash flow statement and balance sheet, andthe auditor's report in English. The project accounts and financial statements of MOR will beaudited by the PRC’s National Audit Office, which in its audit report will incorporate observationsrelating to implementation of ADB’s Anticorruption Policy. To monitor the efficiency of HXRinvestment, MOR will prepare pro forma financial statements for HXR operation using the point-to-point costing system (footnote 19). These statements will be provided to ADB for the first fiveyears of operation of the HXR. To facilitate postevaluation of the Project, MOR will furnish toADB within three months of the physical completion of the Project, a report on the execution ofthe Project, in such detail as ADB may require.

54 The Research Institute of FCUO-SJU has the necessary experience and qualified personnel to undertake

resettlement monitoring; it has completed similar assignments satisfactorily under World Bank projects.55 The Mission confirmed that RCMC has the expertise to prepare accounts and conduct internal auditing in

accordance with the Government’s standards for railway accounting.

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6. Implementation of Related Facilities

a. Connecting Lines

65. Realization of the traffic forecasts requires the timely development of capacity onconnecting lines of the national network that will provide traffic to, or receive traffic from, theHXR. At its western end, the Xi’an-Ankang Railway (financed by JBIC) and the Shenmu-YananRailway (footnote 30) (Map 1, page v), are progressing on schedule and are expected to becompleted by 2000 and 2003. As traffic develops on the HXR, the Xi’an terminal area will needimprovements to avoid capacity constraints. MOR is aware of this and will improve this terminalarea, as necessary. MOR has assured that construction of the marshaling yards (footnote 47) atthe intersections of the HXR with the existing north-south railway lines will be completed in atimely manner. MOR will construct, using its own resources, a connecting railway line from theLishan station in Hubei Province, on the existing Chengdu-Wuhan Railway, to Xiaolin on theHXR (Map 1, page v). The progress of the connecting lines will be monitored by MOR andreported to ADB through the quarterly progress reports on project implementation. Extension ofthe HXR from Hefei to Nanjing would facilitate traffic growth on the project railway. MOR plansto construct this railway link after completion of the HXR, consistent with traffic demand.

b. Industrial Sidings

66. Industrial sidings improve transport efficiency by linking the railway and the premises ofpotential major shippers thereby removing the need for additional handling and road transportfor local delivery. Providing industrial sidings to handle large volumes of freight will improve thecompetitiveness of railway services. The study under the TA identified potential industrial sidingswhose construction would open up resource-rich areas for development. MOR has givenassurance that potential major shippers along the HXR will be encouraged and assistance willbe provided as necessary to construct and operate industrial sidings.

c. Service, Access, and Link Roads

67. About 550 km of service roads will be built to facilitate the construction of civil worksalong the HXR route. These service roads will be laid out in consultation with local governmentsto provide access to villages and communities in the interior that have no access at present. Oncompletion of railway construction, the service roads will be handed over to local governmentsfor use by local people.

68. About 51 access roads (with total length of about 407 km) that will connect the newrailway stations on the HXR route with the nearest county/township, and 13 link roads (with atotal length of 1,122 km) that will connect the railway to the hinterland will be built (Appendix 11).These roads will maximize the benefits of the HXR to the hinterland and provide wider marketaccess for people living in rural areas. Local governments will construct the access and linkroads concurrently with the Project using their own resources. MOR will report constructionprogress on link roads to ADB through the quarterly progress report on project implementation.

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7. Operation and Maintenance

69. The HXR route will fall under the jurisdiction of MOR’s three existing railwayadministrations based at Zhengzhou, Nanchang, and Shanghai.56 HXR operation will beintegrated with that of these railway administrations, which will be responsible for themanagement, operation, repair, and maintenance of the HXR facilities. MOR has assured that asufficient quantity of rolling stock (locomotives, freight wagons, and passenger cars) will beprovided for railway operation and that sufficient trained staff will be made available to meet theoperational needs of the HXR.

8. Public Safety

70. The Railway Law requires that railway enterprises ensure the safety of passengers andfreight transport. MOR has the management and organizational capability to monitor thecondition of the railway infrastructure and its operation, and ensure the safety of passengersand freight. Upon completion, the HXR will be operated and maintained efficiently ensuring thesafety of freight and passengers as per the regulations for the national railway network. Railwaytravel is much safer than travel by road transport, particularly in mountainous areas.Consequently, there are net traffic safety benefits associated with the Project.

71. Since a part of the project railway will be electrified, people living in the adjoining areaswill need to be familiarized with the relevant safety issues. MOR will coordinate with localgovernments and community leaders, and devise appropriate campaigns through media, publicannouncements, household contacts, and schools to integrate railway safety education intoschool curricula and local living practice.

9. Tariffs

72. Tariff restructuring has helped MOR achieve a higher degree of financial autonomy,commercialize its operations, and raise needed funds to finance railway capacity expansion andefficiency improvements. Appropriate tariff structure is also important so that tariffs can be usedas a marketing mechanism. Based on the policy dialogue under the Project, MOR will set tariffsfor the HXR to ensure full cost recovery57 and sustainable financial operation. Before the start ofcommercial operation, MOR will carry out a study considering various tariff alternatives,including (i) a new tariff for the HXR, (ii) a new tariff for the east-west corridor comprising theHXR and the existing Xi’an-Lianyungang Railway, and (iii) a new tariff for the national railway,and will analyze the impact of the proposed tariff on the price elasticity of traffic. The results ofthis study will be provided to ADB for comment.

10. Project Performance Management System

73. A set of indicators to estimate project impact in relation to goals, purposes, outputs, andconditions has been agreed to by MOR. The main items include (i) economic development andpoverty indicators in the project area, (ii) financial performance of MOR, (iii) financialsustainability of the Project, (iv) employment created during construction and operation, and (v)

56 Zhengzhou railway administration will operate 700 km of the HXR route, Nanchang 100 km, and Shanghai 154

km.57 Considering operation and maintenance costs, depreciation, debt service charges in excess of depreciation, taxes,

and a reasonable profit.

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operational indicators (e.g., freight traffic in tons and ton-km by major commodity, and averagehaul; number of passengers, passenger-km, and average trip length; employee productivity inconverted ton-km per employee; and unit revenue and costs for freight and passengers). MORwill prepare and maintain records of such information for five years, starting from the first fullyear of commercial operation. MOR will provide this information to ADB within nine months ofthe end of each fiscal year. Baseline figures and target indicators will be established by MORthrough the Research Institute of FCUO-SJU at the beginning of project implementation.

11. Anticorruption Measures

74. During project processing ADB's Anticorruption Policy was explained to MOR. MOR,through its supervision and inspection bureau, ensures that the policies, laws, and regulations ofthe Government are followed to reduce corruption and foster a corruption-free environment. Thisbureau investigates all complaints and charges to detect corrupt practices, and action is takenas necessary. ADB’s program for the PRC includes assistance to improve governance andreduce the incidence of corruption. For example, support was provided to prepare standardbidding documents for national procurement (footnote 51). In 1998 ADB approved assistance tothe Government to develop detailed guidelines for the selection and engagement of consultantsthat would increase transparency, take account of ADB's anticorruption policy, and provide forequal opportunity competition.58 ADB is also providing assistance to help strengthen theGovernment's auditing system to conform with the requirements of the Audit Law, and as far aspracticable, international auditing standards.59 This involves reformulating Government auditingstandards and procedures, and designing and implementing an audit-training program topromote full and consistent adherence to such auditing standards and procedures byGovernment auditors. When completed, this work will strengthen the Government's ability todetect fraud and corruption. In 2000, agreement was reached with the National Audit Office tostrengthen the audit format used for all ADB-financed projects. The Government and MOR haveindicated their commitment to creating and sustaining a corruption-free environment.

G. The Executing Agency

1. Organization

75. MOR will be the EA responsible for overall implementation of the Project. MOR hasexperience with the ADB-financed Jing-Jiu Railway (footnote 4) that was completedsatisfactorily. MOR will ensure compliance with loan documents, report on implementationprogress to ADB, and coordinate between the Government organizations implementing theProject.

2. Financial Performance of the HXR

76. Developing a framework that would allow the HXR to be operated in a commercialmanner and achieve satisfactory levels of financial performance was an important element ofthe Mission’s policy dialogue. The financial projections of HXR operation are based on the trafficforecasts and assumed tariffs. The results are summarized in Table 4 and details are given inAppendix 12.

58 TA 3138-PRC: Regulatory Framework for the Engagement of Consultants, for $700,000, approved on 22

December 1998.59 TA 3103-PRC: Strengthening the Government Auditing System, for $700,000, approved on 26 November 1999.

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Table 4: Financial Performance of the Hefei-Xi’an Railway(Y million)

Year ending 31December

2005 2006 2007 2008 2010

Operating Revenuea 4,559 4,787 5,059 5,362 6,113Operating Expense 3,064 3,035 3,160 3,291 3,663Operating Profit 1,335 1,585 1,721 1,884 2,237Operating Ratio (percent) 69.6 65.7 64.7 63.6 62.1Debt-Service Ratio 1.2 1.6 1.6 1.7 1.9

aBased on tariffs of Y0.0988 per ton-km and Y0.0824 per passenger-km applied on a corridor basis to the Hefei-Xi’an Railway and the Xi’an-Lianyungang Railway.

Source: Staff estimates.

77. The HXR will maintain an operating ratio of not more than 70 percent during commercialoperation. With this level of financial performance, the HXR will be able to cover operating costsand interest expenses, and generate sufficient funds for future capital investments. MOR will settariffs for the HXR to ensure full cost recovery (footnote 57). The tariff levels will be reviewedfrom time to time taking into consideration the actual traffic levels and costs, and adjustmentswill be made as necessary to achieve the operating ratio target. Because of the small portion ofthe total cost financed by the ADB loan, the HXR will have limited exposure to foreign exchangerisk. The high debt service ratio mitigates the interest rate risk.

3. Financial Performance of MOR

78. MOR’s financial projections were prepared for 1999 to 2010, taking into considerationthe actual investments in the first four years of the Ninth FYP, and planned investments in thelast year of the Ninth FYP and during the Tenth FYP. The results are summarized in Table 5and details are given in Appendix 12.

Table 5: Financial Performance of the Ministry of Railways(Y million)

Year ending 31December

2000 2002 2004 2005 2008 2010

Operating Revenuea 142,941 156,717

172,326 180,574

207,553

223,831

Operating Expense 97,859 106,158

115,804 120,877

137,714

147,539

Operating Ratio (%) 71.470.6

70.069.7 69.0 68.5

Debt Service Ratiob 1.11.1

1.01.1 1.3 1.3

a Including proceeds of the RCF.b Based on cash flow net of the RCF proceeds.Source: Staff estimates.

79. MOR’s operating ratio is expected to steadily improve because of revenue growth basedon the adjustment of tariffs for inflation, improvement in service quality, and increase inproductivity. MOR is pursuing organizational restructuring and management reforms to improveoperational efficiency, increase productivity, and reduce costs. The measures include

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management contracts under the AOLS (footnote 16) that are expected to improve the financialperformance of the railway administrations, establishment of passenger transportationcompanies with better marketing and customer services, and application of management toolssuch as the point-to-point costing system (footnote 19) and the TMIS (footnote 21). Given therobustness of MOR’s financial base, and the expected positive effects of the ongoingrestructuring and business reengineering, MOR is expected to show satisfactory financialperformance.

H. Environmental and Social Measures

1. Environment

80. The Project is classified as environmental category A. The EIA was prepared by theFFSDIs (footnote 6). The overall conclusion of the EIA, which was confirmed by the TAconsultants and the Mission, was that the adverse environmental impacts arising from theconstruction and operation of the HXR can be mitigated to acceptable levels by implementing aset of clearly identified mitigation measures. A summary EIA was circulated to ADB’s Board ofDirectors on 6 April 2000. The EIA (in Chinese) will be provided to the RCSOs of Anhui, Henan,Hubei, and Shaanxi provinces for the information of the public and other interested parties.

81. Adverse environmental impacts were minimized by the selection of appropriatealignment. In the western section, potential impacts on forests in the Qinling Mountains will bereduced by construction of a 12.3 km tunnel, and at Sishan National Forest Park (in XixiaCounty) by the construction of a 1.8-km tunnel, instead of adopting the less costly option ofpassing through forested areas. In the eastern section, potential impacts on the Huaiyuanscenic area in Tongbai County will be avoided by locating the railway line more than 2 kmoutside of the area. Similarly, impact on the Taibading Natural Preservation Zone will be avoidedby locating the railway line at a distance of 1.4 km. Areas along the railway line will be plantedwith trees and vegetation. The HXR will pass through several secondary forests/plantations andorchards totaling 29.2 ha and 51.6 ha. MOR will comply with the PRC Forestry Law as well asADB’s forestry policy60 by undertaking compensatory planting of at least the equivalent area.The affected forests do not have any wildlife of significance.

82. The potential environmental impacts of the Project include (i) soil erosion from tunnel andexcavation spoils and stockpiled material; (ii) noise from construction and railway operation; (iii)smoke and air pollutants primarily from boilers at stations, and dust during the loading, transit,and unloading of coal; (iv) contamination of water bodies by temporary workers’ camps andwater from tunnel construction; (v) solid waste from temporary workers’ camps, passengertrains, and slag from boilers at stations; (vi) clearing of forests; and (vii) possible impact onunexplored historical sites, if any. A summary of the environmental impacts and mitigationmeasures is presented in Appendix 13. The environmental protection and mitigation measuresare estimated to cost $39.4 million equivalent; these are included in the project cost estimates.Monitoring will be undertaken to ensure that environmental impacts will be minimized toacceptable levels and meet ADB requirements, as well as the Government’s environmentalstandards and provincial regulations.

83. MOR has assured that the environmental mitigation measures identified in the EIA will beincorporated in the design and construction stages of the Project. Environmental measures, on

60 ADB. 1995. The Bank’s Policy on Forestry. Manila.

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which action needs to be taken by civil works contractors, will be incorporated in the biddingdocuments for the civil works to ensure implementation of such mitigation measures bycontractors. Compliance with these measures will be monitored by the EnvironmentalAssessment Center of the China Academy of Railway Sciences (EAC-CARS)61 to ensure that allapplicable national, provincial, and local environmental laws, regulations, guidelines, andstandards are met during project implementation and operation. Monitoring of such measureswill be reported in the quarterly progress reports on project implementation.

84. During the Mission’s field visit, it was learned that the area near the route of the railwayin Huangchuan County might have unexplored underground archeological sites. MOR assuredthat if archeological sites are discovered any impact on them will be minimized by takingappropriate measures, including (i) inspection of the site, prior to starting construction, by anadvisory team consisting of officials from MOR, local cultural bureau, contractor, universityacademics, and archeologists as necessary; (ii) identification of artifacts that might beunearthed, and their proper care as proposed by the advisory team; and (iii) careful relocationof the tombs discovered.

85. The HXR will facilitate economic activity, including the development of mining andindustrial projects. All such activities will have to comply with national, provincial, and localgovernment environmental regulations. The Mission confirmed that as part of the approvalrequirements of all projects that are likely to have impacts on the environment, a comprehensiveEIA will be prepared. In supervising development activities, the concerned provincial, prefecture,city, and county environmental protection bureaus (EPBs) adhere to the Governmentenvironmental policies, laws, and regulations. 62 In compliance with the Government policy formonitoring the level of pollution by the end of 2000 at the 1995 level, several large cities alongthe railway line with high industrial concentration are establishing comprehensive wastewatertreatment plants.63 Consequently, environmental impacts of induced development projects areexpected to be addressed properly. The provincial EPBs have assured that all forthcomingprojects, including induced activities, will follow the same procedure, and that the Government’senvironmental laws and regulations will be followed during the construction and operation ofsuch projects. The Mission’s review of the institutional capacity of provincial EPBs has confirmedthat they are capable of undertaking the tasks.64

2. Social Analysis

86. A social analysis undertaken by the TA consultants examined the broader social trendsin the project area, as well as the needs of affected people and their ability to benefit from the

61 EAC-CARS carried out environmental monitoring satisfactorily on the Jing-Jiu Railway (footnote 4).62 As of the beginning of 1998, enforcement of the environmental laws and regulations resulted in the closure of

65,224 town and village enterprises countrywide, including 9,330 in Shaanxi, 10,413 in Hebei, 17,117 in Henan,and 772 in Anhui provinces. Fines were imposed on some large industries for noncompliance with theGovernment’s standards. Also the construction of some industries was suspended when the EIA was not prepared(e.g., a chemical factory in Gushi County, Henan). In the Chow Lake basin, the Henan provincial government hastargeted 109 polluting industries to reach the Government’s environmental standards by 2000, or face closure.

63 For instance wastewater treatment plants are being built/expanded in Nanyang with a capacity of 200,000 m3 perday, in Xinyang with a capacity of 100,000 m3 per day, and in Hefei being doubled in capacity to 300,000 m3 perday by 2002.

64 The number of EPB staff in the provinces along the HXR is 250-300 at the provincial level, about 100 at theprefecture/city levels, about 70 at the county level, and 2-10 at the township level. This varies depending on thescale of economic development in the area. Over half of all staff of the EPBs are university graduates and about30-40 percent are college graduates. Many staff have received training in the PRC and overseas.

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Project. Gender issues were taken into account in the analysis. In the field trip through countiesin the west part of the alignment, the Mission noted many villages located close together withsmall, intensively cultivated fields. The small size of a household’s farmland, averaging 0.04 hato 0.12 ha per household member, provides only part-time employment for some adults. Theresult is that there is not enough farm work for these marginal farmers. There is significantunderemployment and poverty in the rural areas.

87. Adequate consultations were held with people living in the project area, as described inthe RP, the EIA, and in the report of the TA consultants. MOR through RCMC, the FFSDIs, andlocal governments followed an effective process in this regard, including formal and informalinterviews and meetings with leaders and residents of local communities. The intensive workdone is reflected in widespread knowledge and information about the Project among the peopleliving in the area. The TA consultants and the Mission confirmed this during visits along theproject route. The consultative process will be intensified before the start of construction, withvisits to each affected household. These visits will be preceded by the preparation of moredetailed field-level programs by local governments. The experience with resettlement and socialimpact under previous ADB-assisted railway projects has been generally favorable, withimplementation satisfactorily undertaken.

88. The Project will have major direct and indirect social and poverty reduction impacts thatsignificantly strengthen its justification (paras. 99 to 103). Formulation of the Project has soughtto maximize positive social impacts, and avoid and mitigate the negative ones. This is reflectedin the choice of the alignment, the approach to detailed design, and the implementation strategythat focuses on improving the distribution of benefits to poor people. The positive social impactsare expected to substantially outweigh the negative ones. The main positive impacts attributableto increased income and employment generation will be improved standard of living and qualityof life, and reduced poverty in the project area.

89. The TA consultants and the Mission reviewed the impact of the Project on women.Women are employed in the operation of railways in several different types of jobs, includingsignaling operators, station management staff, and security guards. During HXR operation,women will occupy a range of positions. Labor-absorbing growth and the resulting expansion inemployment opportunities will bring many women into the labor force. PRC law gives equalrights to women in employment. The All-China Women's Federation exists in all counties on theroute of the HXR and actively protects the rights of women down to the village level.Opportunities exist for the redress of gender-related employment grievances. The rise in femaleparticipation in the workplace during the construction and operation of the HXR, and increase inwomen’s income, will have important consequences for poverty reduction and improving thestatus of women.

90. Negative secondary gender impacts are not anticipated with the construction andoperation of the HXR. HXR construction and the developments facilitated by it will employ locallabor, at a wage rate of Y20 per day. Given the extent of rural underemployment, the demandfor local labor will increase worker productivity and wages. The wages paid to poor local peoplewho are provided employment will increase family incomes, and considerably improve theireconomic situation. When monitoring and evaluating the Project’s socioeconomic benefits,special attention will be given to households headed by women. Representatives from the All-China Women’s Federation at the prefecture and county levels will take part in resettlementimplementation and advise on wider social and economic development impacts on women. The

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Government and MOR will ensure that ADB’s policy on gender and development65 is followedduring project implementation.91. No indigenous peoples are known to live along the HXR route. People belonging to theHui ethnic minority live in five villages within 35 km of Nanyang City in Henan Province. The Huido not live in separated communities or cultural or ethnic groupings, and are economically andsocially integrated with the majority population. The TA consultants found no record of economicor social discrimination against the Hui.66 The Hui are better economically off than the Hanmajority because of their aptitude for business. Since the Hui are not disadvantaged in anymanner, no particular measures under the indigenous peoples’ policy67 were considerednecessary. MOR has assured that ADB’s policy on indigenous peoples will be followed, asnecessary.

V. PROJECT JUSTIFICATION

A. Financial and Economic Analyses

1. Financial Evaluation

92. The financial internal rate of return, estimated at 7.0 percent, was computed for theProject on the basis of capital, operating, and maintenance costs, and revenues resulting fromthe forecast traffic and freight tariff of Y0.0988 per ton-km and passenger unit revenue ofY0.0824 per passenger-km applied on a corridor basis to the HXR and the alternative Xi’an-Lianyungang Railway, and after deducting corporate tax of 33 percent (Appendix 14). Thefinancial internal rate of return exceeds the weighted average cost of capital (i.e., 6.5 percent).The projected level of traffic and assumed tariffs will result in sufficient revenues to fully meetthe project costs. Therefore, no financial subsidy will be required during construction andoperation. Sensitivity analysis shows that the Project has sustainable financial viability in thetested adverse scenarios.

2. Economic Evaluation

93. The EIRR was calculated by comparing the with-project and without-project scenarios.Without the Project, the available alternatives include the Xi’an-Lianyungang Railway and theexisting Highway 312 (Class 2) that runs parallel to the HXR for most of its length. With theProject, counties and townships along its 954 km route will have access to railway transport, thatwill be less expensive than the existing road transport. Freight and passenger traffic diverted tothe HXR from the existing road will yield substantial cost savings. The Project will provide thenational railway network with travel time and distance savings by offering shorter traveldistances for east-west traffic as well as improved connections for existing north-south lines.Economic transport provided by the Project will induce new industrial and natural resourcesproduction that will generate significant economic development in the project area.

94. The Project’s economic costs include the resource costs for construction (including civilworks, access roads, industrial sidings, rolling stock, resettlement, and environment measures),operation and maintenance, and the value of agricultural production from land lost permanently.

65 ADB. 1998. The Bank’s Policy on Gender and Development. Manila.66 The Hui people, as an ethnic minority under the PRC Law, are entitled to certain preferences, such as favorable

admission standards for higher education.67 ADB. 1998. The Bank’s Policy on Indigenous Peoples. Manila.

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The main economic benefits generated by the Project were quantified in terms of (i) avoidedinvestment in other railway lines (mainly the Xi’an-Lianyungang Railway) that would benecessary without the Project to handle growth in existing traffic, (ii) net economic value addedthrough envisaged expansion of industrial and natural resources production induced by theProject, (iii) transport cost savings for freight and passenger traffic diverted from longer railwayroutes and more costly road transport, (iv) time savings for transport of freight and passengers,and (v) environmental benefits from reduced soil erosion and air pollution.68

95. The EIRR for the Project is estimated at 15.8 percent (Appendix 15). Sensitivity analysisshows that the Project will maintain its economic viability under adverse scenarios, includingincreased costs, decreased benefits, and implementation delays. The Project is consideredfeasible from an economic point of view.

96. In previous railway projects, higher levels of production of perishables such as fruits andvegetables, and expansion of service activities were achieved along the route of the railway.Increased access to economic transport services improved the access to social services,provided more employment to women, and improved their status in society. For the HXR,substantial benefits are anticipated from increased employment opportunities, market access,improved living conditions, and benefits from associated economic developments other thanthose already planned (which are included in the net economic value added category ofbenefits). Because they are difficult to quantify, such benefits and those resulting from theinherently higher safety of railway transport compared with road transport69 were not included inthe EIRR analysis.

B. Social Dimensions

97. Experience with the Yaogu-Maoming Railway (footnote 1), the Guang-Mei-Shan Railway(footnote 2), the Hefei-Juijiang Railway (footnote 3), and the Jing-Jiu Railway (footnote 4)confirms that such projects catalyze a rapid expansion of economic activities. The influenceareas of these projects have seen accelerated economic growth with increased income levelsand sharp declines in poverty. Similar development is expected to be replicated in the projectarea, as described in Appendix 16.

98. The four provinces traversed by the HXR have a population of approximately 250 million,or about 20 percent of the PRC’s total population. Using per capita GDP as an indicator ofproductive economic activity, people in these four provinces produce less than the people in thePRC as a whole. The per capita GDP in all four provinces is lower than the average for thePRC, ranging from 60 percent in Shaanxi to 92 percent in Hubei. The project area comprising 27counties traversed by the HXR, including 16 officially declared poverty counties,70 has a totalpopulation of 22.4 million, of which 18.4 million (or 82 percent) live in rural areas. Over 5.7million people, or 31 percent of the rural population, live below the international poverty line, 68 Railway transport is more energy-efficient than road transport. Studies indicate that it takes six times the amount

of fuel to move 1 ton of freight by truck as it takes by railway. A shift of freight traffic from trucks to railway willtherefore reduce pollution by 83 percent, assuming equal output of pollutants per unit of fuel.

69 The HXR will be safer than the road. On some sections of the existing Highway 312, congestion is quite seriousand the accident rate is high. Transfer of some of the passengers and freight to the HXR will improve overallsafety, and positively contribute to road safety by reducing congestion.

70 The poverty counties include 14 national-level poverty counties, i.e., Danfeng, Lantian, Shangnan, Shangzhou Cityin Shanxi Province; Guangshan, Gushi, Luoshan, Pingqiao District (in Xinyang City), Shangcheng, Tongbai, Xixiain Henan Province; and Huoqiu, Jinzhai and Lu’an City in Anhui Province; and two provincial-level povertycounties, i.e., Huangchuan and Xixian in Henan Province (see Map 2, page vi).

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compared with 16.5 percent nationwide. 71 Sixteen of the 27 counties have per capita GDP lessthan half that of the PRC. In terms of poverty incidence, three counties (Shangnan, Danfeng,and Shangzhou) in Shaanxi stand out as pockets of extreme poverty with 97 percent, 91percent, and 80 percent, respectively, of their rural residents living below the internationalpoverty line. The major reason for the lack of economic output in these provinces, prefectures,and counties is that they are overwhelmingly rural. Lack of transport access has constraineddevelopment, and the creation of employment and income-generating opportunities.

C. Impact on Poverty

99. The poorest counties on the HXR route are the most isolated and most remote, areresource poor, and lack basic infrastructure. Agriculture, the predominant means of livelihood inthese counties, by itself cannot generate incomes that would raise the resource-poor farm-based families above the poverty line. The amount of farmland per household is too small toadequately support a family. Families must have other sources of income to escape poverty.The isolation and high transport costs of these counties inhibit industrial development and smallbusiness development. The Project is a key intervention and part of a broader Governmentstrategy to develop industrial production, create employment, and reduce poverty in the projectarea.

100. Access to economic transport provided by the HXR will benefit the people in thefollowing ways: (i) lower fares for passenger transport when people travel beyond their county;(ii) reduced cost of goods brought from elsewhere; (iii) lower delivered costs for goods producedlocally and shipped elsewhere, increasing the competitiveness of local products in existingmarkets, and opening up additional markets; and (iv) increased economic development due tothe multiplier effects of railway construction and operation, leading to more available resourcesfor schools, health care, sanitation, and local roads. Beneficiaries of the HXR will include peoplein the following categories: construction companies and construction workers; suppliers ofmaterials used in construction and their employees; passengers, and shippers and receivers offreight and their employees; businesses patronized by railway passengers; consumers whopurchase goods where transportation is a significant component of the selling price, andemployees of enterprises selling such goods; railway workers and their families, and businessespatronized by railway workers; local governments and their employees who benefit fromincreased tax collection; and residents of counties benefiting from the programs funded by localgovernments.

101. The direct and indirect employment creation effects of the Project both duringconstruction and operation were analyzed by the TA consultants. During the five-yearconstruction period, the Project will create 352,000 person-years of direct employment inprimary construction activities. In addition, 195,000 person-years of indirect employment will becreated.72 When HXR operation starts in 2005, about 10,000 employees of the national railwaywill be redeployed and assigned to operate the HXR and its associated facilities. In line with

71 The commonly used standard for the international poverty line is $1 per capita per day measured in 1985

international prices and adjusted to local currency using purchasing power parities (ppp). In 1999, this wasequivalent to Y1,120 per capita per annum. This is based on $1 (July 1985) inflated to $1.51 (July 1998) times 8.3(current exchange rate) divided by 4.233 (the ppp adjustment for the PRC) divided by 0.967 (the ppp adjustmentfor the United States) times 365 days.

72 An example of indirect jobs is labor hired by a crushed stone processor selling crushed stone to the Project. Thisestimate of indirect employment does not include the indirect employment created throughout the economy by themultiplier effects of direct benefits.

30

MOR's staff reduction program there will be no new hiring. Local communities will benefit fromthe consumption and investment spending of railway employees and their families, which isestimated by the TA consultants at about Y62 million per year. This spending will have multipliereffects that will be beneficial to the local economies. Operation of the HXR will generate trafficfrom additional production of new industries and expanded existing industries. Such additionalproduction will create 196,000 person-years of employment during 2005, the first year of HXRoperation, increasing to 497,000 person-years in 2024.

102. By the end of 2005, construction activities related to the Project are likely to raise theincomes of 236,000 people above the international poverty line.73 By 2015, the additional effectof production of goods moved as generated traffic and the accompanying multiplier effect willraise the incomes of 366,000 people above the international poverty line. The distribution ofproject benefits was analyzed to determine the extent to which the Project directs benefits to thepoor. This was done by disaggregating the financial and economic impacts of the Project onpoor people in the project area. The poverty impact ratio of the Project is 25 percent, which isconsidered satisfactory. This analysis highlights the Project’s effects on generating pro-pooreconomic growth.

103. The Project will increase the income level of rural households, and help improve theirquality of life. The HXR will provide the essential infrastructure upon which local authorities planto build a wider range of social and economic services such as public utilities, and health andeducation services. Local people will be able to travel more easily to seek health care,education, and jobs outside their villages. Railway travel will facilitate speedier referrals of moreserious health cases to urban centers, and local people will be increasingly able to afford moreadvanced medical treatments than currently accessible to them. This will have positive impactson life expectancy and mortality reduction in the project area. Based on experience with theHefei-Jiujiang Railway and the Jing-Jiu Railway, the developments in mining, industry, tourism,and related secondary and tertiary sectors will strengthen the revenue base of localgovernments, thus allowing the provision of improved social services. In summary, the Projectwill contribute to achieving the goal of increasing incomes and reducing poverty. The Project’spoverty reduction impact will be monitored with the assistance of the Research Institute ofFCUO-SJU. This institute will prepare annual monitoring reports and an evaluation report oneyear after the start of operation covering all relevant parameters. These reports will be providedto ADB.

D. Risks

104. A potential risk is delay in implementation, which would delay the realization of benefitsto the economy of the project area. MOR successfully built railway lines such as the Nanning-Kunming Railway and the Jing-Jiu Railway over difficult terrain and completed them onschedule. The support that the Project has from the Government, MOR, and the provinces; thethorough preparation of the Project; the approval of advance procurement action; and the factthat land acquisition and resettlement are well planned all contribute to reducing the potentialrisk of delays in implementation. There are no major environmental risks that cannot beaddressed through the mitigation and monitoring mechanisms built into the Project. Given thelarge number of people affected by land acquisition, resettlement problems are a potential risk.Considering that land acquisition and resettlement are well planned; have the support of MORand the four provinces on the HXR route; are adequately budgeted in the project cost estimates;

73 Assuming that each fully employed poor person will raise a household of 4.2 persons out of poverty.

31

and will be implemented by RCMC and the local governments, which have extensive priorexperience in resettlement implementation, the potential risk of resettlement problems isconsidered low. Appropriate coordination and monitoring mechanisms will be put in place inaccordance with the RP.

105. The Project was designed to minimize potential risks. Based on experience with someprevious railway projects where traffic growth was slower than anticipated, the forecast of freighttraffic was realistically estimated and is considered conservative. There would have to besubstantial changes in economic circumstances for the Project to lose its economic viability. Fora project generating revenue in domestic currency there is a risk related to exchange ratechanges. Because of the small portion of the total cost financed by the ADB loan, the foreignexchange risk is minimal. Sensitivity tests indicate that a yuan depreciation of as much as 30percent would have negligible effect on the FIRR.

106. There is a risk of underachievement of the poverty reduction objective if the opportunitiesfor related developments in health, education services, agricultural production, and incomegeneration fail to be implemented in ways that are accessible to the poor. This risk has beenminimized by the strong commitment of the Government and the four provinces to povertyreduction in the poor project areas. The provinces traversed by the HXR will closely monitorsocial developments.

VI. ASSURANCES

107. The Government and MOR have given the following assurances, in addition to thestandard assurances, which have been incorporated in the legal documents:

(i) Connecting Railway Lines. MOR will ensure that the connecting railway lines,including the Xi’an-Ankang Railway, and the Lishan-Xiaolin Railway, as well asthe marshaling yards, are built and the capacity constraints in the Xi’an areaalleviated in a timely manner.

(ii) Construction Quality . MOR will ensure that the HXR is constructed inaccordance with the national technical standards, and that constructionsupervision, quality control, and contract management are performedsatisfactorily.

(iii) Counterpart Financing . MOR will provide, on a timely basis, all funds andresources necessary for construction, and operation and maintenance of theHXR. MOR will cover any project cost overrun.

(iv) Environment . MOR will ensure that the HXR is constructed and operated inaccordance with the national laws and provincial and local governmentregulations. MOR will also ensure that any adverse environmental impacts arisingfrom construction and operation of the HXR are minimized by implementing themitigation measures, environmental monitoring program, and otherrecommendations presented in the EIA. MOR, together with the provincial andcounty EPBs, will ensure that the connecting railway lines, and access and linkroads are constructed in accordance with the appropriate national and localgovernment environmental procedures and guidelines. EAC-CARS will carry out

32

environmental monitoring in accordance with the EIA. The results ofenvironmental monitoring will be reported by MOR to ADB through the quarterlyprogress reports on project implementation, annual reports on environmentalmonitoring, and an evaluation report one year after completion of construction.The Government through Anhui, Henan, Hubei, and Shaanxi provinces willensure that any project-induced economic activities, particularly mining andindustrial developments, will undergo appropriate environmental assessment andreview under the national and provincial regulations, to ensure minimal adverseenvironmental impact.

(v) Financial Performance and Tariffs. MOR will monitor the operational andfinancial performance of the HXR. Pro forma financial statements of the HXR willbe provided to ADB for the first five full years of its operation within nine monthsafter the end of the fiscal year. The HXR will maintain an operating ratio of notmore than 70 percent during commercial operation. The Government and MORwill ensure that the tariffs are set at levels sufficient to ensure full cost recovery,including operation and maintenance costs, depreciation, debt service in excessof depreciation, taxes, and a reasonable profit. Six months prior to opening of theHXR for commercial traffic, MOR will carry out a tariff study to determine the tariffstructure and levels to be applied. This study will be provided to ADB forcomment.

(vi) Gender and Development . MOR, through RCMC, and Anhui, Henan, Hubei andShaanxi provinces, will follow ADB’s policy on gender and development duringproject implementation, and will take all necessary actions to encourage womenliving in the project area to participate in planning and implementing the Project.MOR, with the assistance of the Research Institute of FCUO-SJU, will monitoreffects on women during project implementation, through gender-disaggregateddata in the resettlement plan and the project performance monitoring system, inconsultation with the All-China Women’s Federation.

(vii) Industrial Sidings. MOR will ensure that potential major shippers along the HXRwill be encouraged and assistance will be provided as necessary to construct andoperate industrial sidings.

(viii) Land Acquisition and Resettlement. MOR will assume the lead responsibilityfor implementing the RP through RCMC. The institutional responsibility forimplementing land acquisition and resettlement will rest with the provinces,prefectures, and counties traversed by the HXR, on the basis of priorarrangements with MOR. For this purpose, the concerned provinces, prefectures,and counties have set up RCSOs. MOR will ensure that all land and rights-of-wayrequired for the Project are made available in a timely manner. MOR throughAnhui, Henan, Hubei, and Shaanxi provinces will ensure that the RP agreed towith ADB is carried out promptly and efficiently in line with the PRC LandAdministration Law 1998, the provincial guidelines, other relevant Governmentregulations and ADB’s policy on involuntary resettlement. MOR will ensure that allpersons are compensated and assisted prior to displacement from their houses,land, and assets in accordance with the RP such that they are at least as well offas they would have been in the absence of the Project. The Government throughAnhui, Henan, Hubei, and Shaanxi provinces will ensure that, for the connecting

33

railway lines, and access and link roads, the provinces will provide the samecompensation and assistance as set out in the RP. MOR will ensure that fundsfor land acquisition and resettlement are provided as scheduled in the RP, andMOR will meet any obligations in excess of the cost estimate to meet the RPobjectives. MOR will ensure that the Research Institute of FCUO-SJU carries outindependent monitoring and regular reporting during resettlement implementation,and evaluates resettlement achievement two years after completion. Independentmonitoring and evaluation will include a baseline socioeconomic survey ofhouseholds before the land is acquired, and annual survey updates duringresettlement implementation as required in the RP. MOR will report to ADB on theprogress of land acquisition and resettlement through the quarterly progressreports, and a report to be submitted on completion of the resettlement, and twoyears thereafter.

(ix) Monitoring and Evaluation . MOR will monitor and evaluate project impactsthrough a project performance management system to ensure that the projectfacilities are managed effectively and the benefits are maximized. MOR willcollect data agreed to by ADB prior to implementation, at completion, and oneyear and five years after completion.

(x) Poverty Reduction. MOR, through RCMC, will ensure that local poor persons fillhalf of the unskilled labor jobs required for project construction. For the remainingjobs, RCMC will follow a pro-poor policy for engaging workers subject to poorworkers meeting the job and efficiency requirements. Such workers will beprovided on-the-job training. The Government will cause Anhui, Henan, Hubei,and Shaanxi provinces to extend the quality and coverage of public utilities, basichealth, basic education, and agricultural extension in the project area to maximizethe poverty reduction impacts. MOR will monitor the impacts on poverty with theassistance of the Research Institute of FCUO-SJU. MOR will provide annualmonitoring reports to ADB and an evaluation report will be submitted one yearafter the start of operation.

(xi) Railway Operation. MOR through the relevant regional railway administrations

will ensure (a) efficient and economic management, day-to-day operation, andrepair and maintenance of the HXR; (b) provision of adequate trained staff tomeet HXR’s operational needs; and (c) provision of a sufficient quantity of rollingstock (locomotives, freight wagons, and passenger cars) to meet the demand fortransportation on the HXR. MOR will ensure the safety of passengers and freight.To familiarize people living along HXR’s route with safety issues related tooperation of the electric railway, MOR will devise and implement appropriatepublic safety campaigns through the media, public announcements, householdcontacts, and schools; and erect prominent advance warning signs at allintersections.

(xii) Access and Link Roads. The Government will cause Anhui, Henan, Hubei, andShaanxi provinces to take all measures to construct the access and link roads ina timely manner to maximize the benefits of economic transport to the poorpeople.

34

(xiii) Worker Safety and Health. MOR through RCMC will ensure that measures aretaken to ensure the safety of workers during construction, and contractorsdisseminate information on the risks of socially transmitted diseases to thoseemployed during construction.

VII. RECOMMENDATION

108. I am satisfied that the proposed loan would comply with the Articles of Agreement ofADB and recommend that the Board approve the loan of $300 million to the People's Republicof China for the Hefei-Xi’an Railway Project from ADB's ordinary capital resources, with interestto be determined in accordance with ADB's pool-based variable lending rate system for USdollar loans and with an amortization period of 25 years, including a grace period of 5 years, andsuch other terms and conditions as are substantially in accordance with those set forth in thedraft Loan Agreement presented to the Board.

Tadao Chino President

20 July 2000

35

APPENDIXES

Number Title Page Cited on (page, para.)

1 Project Framework 36 2,4

2 Reforms in the Railway Sector 38 4,12

3 External Assistance to the Railway Sector 40 6,17

4 Lessons Learned from ADB-Financed Railway Projects 42 7,20

5 Traffic Forecasts 45 13,44

6 Cost Estimates and Financing Plan 46 15,49

7 Implementation Schedule 47 17,54

8 ADB-financed Contract Packages 48 17,55

9 Terms of Reference for International Consulting Services 49 18,58

10 Summary Resettlement Plan 51 18,60

11 List of Access and Link Roads 56 20,68

12 Financial Performance 57 22,76

13 Summary of Environmental Impacts and Mitigation Measures 61 24,82

14 Financial Evaluation 63 27,92

15 Economic Evaluation 65 28,95

16 Poverty Reduction 68 28,97

SUPPLEMENTARY APPENDIXES(Available on request)

A Summary Environmental Impact Assessment

B Resettlement Plan

36

Appendix 1, page 1PROJECT FRAMEWORK

Design Summary PerformanceIndicators/Targets

Monitoring Mechanisms Risks/Assumptions

Goal• To promote economic

growth and reducepoverty in the four inlandprovinces traversed bythe Hefei-Xi’an Railway(HXR)

• To increase per capitaincomes

• To reduce the numberof people living belowthe poverty line

• Surveys and statisticsregarding the projectarea at preproject,postproject, and oneand five years afterproject completion

• Contents: Grossdomestic product percapita, rural net income,number of people livingbelow poverty line, andperformance of the HXR

• Planned development ofnew coal mines in centralShaanxi

• Industrial developmentalong the HXR route

• Completion of theinfrastructure on time andwithin budget

• Supporting socialprograms

Purpose• Develop a rail transport

corridor for freight andpassenger transportationservices to helpintegrate the westernand central provinceswith the coastal region.

• Reduce transportationcosts for domestic andinternational shippers.

• Trends in freight andpassenger volumes forthe HXR, for the Xi’an-Lianyungang Railway,and for Highway 312after completion of theProject

• Trends in railway androad freight tariffs

• Trends in passengertariffs by trains andbuses

• Financial performanceof the HXR based onthe new point-to-pointcosting system

• Progress reports• Project administration

(PA) missions

• Progress reports

• Realizing traffic forecastsfor the HXR

• Implementation of theplanned point-to-pointcosting system

• The HXR can competesuccessfully with othertransport modes for freightand passengers

Outputs1. Land acquisition,

compensation, andresettlement

• Final location survey,land acquisition, andresettlement to becompleted as per theresettlement plan

• Progress reports• Monitoring by the

Research Institute ofForeign CapitalUtilization Office of theSouthwest JiatongUniversity (FCUO-SJU)

• Strong implementationcapacity of localgovernments

• Adequate compensationas per agreed resettlementplan (RP)

• Adequate funds forresettlement

2. Construction of the 954km HXR line

• Start of constructionpreparation in mid-2000

• Completion ofconstruction by June2005

• Contract awards• Progress reports• PA missions• Construction contracts

awards

• Advance action forprocurement

• Strong implementationcapacity of RailwayConstruction ManagementCenter (RCMC)

• Adequate counterpartfunds

3. Construction of access roads between HXR stations and township, link roads, and industrial sidings

• Completion of roadsand industrial sidings inaccordance withagreed upon schedules

• Progress reports• PA missions

• Funding is forthcoming forindustrial sidings and linkroads

4. Procurement ofequipment for operationand maintenance

• Equipment procuredduring 2002 to 2004

• Contract awards• Progress reports• PA missions

• Strong implementationcapacity of RCMC

• Provision of adequatecounterpart funds

37Appendix 1, page 2

Design Summary PerformanceIndicators/Targets

Monitoring Mechanisms Risks/Assumptions

5. Minimization of adverseenvironmental impacts

• Agreed uponenvironmentalmeasures inenvironmental impactassessment ( EIA)

• Surveys during and postconstruction

• Monitoring ofenvironmentalindicators in the EIA bythe EnvironmentalAssessment Center ofthe China Academy ofRailway Sciences(EAC-CARS)

• Strong commitment ofGovernment andprovinces

• Commitment andexperience of provincialenvironmental protectionbureaus

6. Institutionalstrengthening

• Development of aneffective marketingprogram to attract newindustry along the HXR

• Surveys of newindustrial location in theproject area

• Progress reports

• Suitable consultant input

7. Additional employment • Creation of 350,000person-years ofconstruction-relatedemployment

• Socioeconomic surveys • Implementation as perschedule and commitmentof local governments

Inputs1. Land acquisition • To be completed by

September 2002• Progress reports • Adequate compensation

as per the agreed RP.

2. Resettlement of affectedpersons

• Complete resettlementprior to starting ofconstruction, section-wise.

• Monitoring by theResearch Institute ofFCUO-SJU

• Local governments’ abilityto complete resettlementprior to the start ofconstruction

3.Technical design • To be completed byDecember 2001

• Progress reports • Strong technical capabilityof the First and FourthSurvey and DesignInstitutes

4. Civil works • To be completed byJune 2004

• Progress reports• PA missions and project

completion report

• Strong implementationcapability of RCMC

• Availability of counterpartfunds

5. Communication,signaling, and power

• To be completed byDecember 2004

• Progress reports • Strong implementationcapability of RCMC

• Availability of counterpartfunds

6. Completion of buildingsand other associatedworks

• To be completed byDecember 2004

• Progress reports • Strong implementation capability of RCMC• Availability of counterpart funds

7. Implementation ofenvironmental protectionand mitigation measures

• Comply with the EIAand summary EIA

• To be completedconcurrently with theproject works

• Progress reports• Annual monitory reports

during operation

• Technical capability ofEAC-CARS

• Supervision capability oflocal environmental projectbureaus

8. Construction ofassociated facilities,including link roads,access roads, andindustrial sidings

• To be completed byJune 2005

• Progress reports • Commitment of localgovernments

• Availability of local funds

Source: Staff assessment.

38Appendix 2, page 1

REFORMS IN THE RAILWAY SECTOR

YearStarted

Purpose Status Remarks

1985 Economic contract system to increase employeeand overall productivity of the national railway.

Successfullyimplemented.Replaced by theAOLS.

Very successful in the earlyyears. Shortcomingsappeared as the PRCevolved toward a marketeconomy.

1985 Diversified economy program to set up newbusinesses to provide alternative source ofemployment for surplus railway employees.

Continuing Very successful. Absorbedover 400,000 surplusemployees of the nationalrailway. Produced Y32billion in annual revenueand Y2 billion in annualprofits in 1998.

1992 Tariff reform for full cost recovery Being implemented Successfully implementedon local railways as well ason some new railway linesof the national networksuch as the Jing-JiuRailway.

1992 Harbin Administration pilot managementinformation system to gain experience withcollecting accounting data via a PC-basednetwork.

Continuing but willpartially bereplaced by theTMIS.

Successful — particularlyas a precursor to the TMIS

1992-2000 Research and development of the point-to-pointcosting system

Continuing; to beoperationalized bythe end of 2000

An important marketingmanagement tool toevaluate the costs andprofitability of individualrailway lines and trafficmoves.

1993 Commercialization of railway operation Ongoing Successfully implementedon local railways, and isbeing adopted on thenational railway.

1993-2001 Revised Interline Settlement System Continuing; to beimplemented bymid-2001

Will remove the inadequacyin the existing revenuesettlement system, takinginto account the commodityand tariff rate of goodstransported.

1994 Corporatization of local railway operations Successfullyimplemented

This model is beingfollowed on the nationalrailway by providing moreautonomy to managementwith responsibility andaccountability.

39 Appendix 2, page 2

YearStarted

Purpose Status Remarks

1994 Seven pilot reform projects were started toevaluate alternative approaches for theorganization of the regional railwayadministrations.

Discontinued Partially successful.Valuable information wasgained for restructuring.

1994-2000 Development of TMIS for efficient management ofassets, improving service quality, and improvingefficiency of operation.

Developmentcompleted. Underimplementation

Basic system will be fullyimplemented by the end of2000.

1995 Reform of passenger and freight stationoperations based in part on the experience gainedfrom the seven pilot reform projects.

Programs arecontinuing

Successful in rationalizingstation operations andincreasing efficiency.

1999 Devolution of railway operation and managementby MOR to the regional railway administrations onthe basis of management contracts under theAOLS.

Fully implemented Successful. Performance isevaluated by reference toagreed to AOLS-targetsfocused on (i) improvingprofitability, (ii) maintainingand (iii) increasing fixedassets, and a good recordof operating safety.

1999 Divestment of all nontransportation entities exceptbusinesses set up under the diversified economyprogram.

In the planningstage; scheduled tobe completed nolater than 2001

Will enable MOR to divestnon-transportation entitiesand concentrate on themain business of transportoperation.

1999 Establishing passenger companies in Hohhot,Kunming, Liuzhou and Nanchang regional railwayadministrations.

Started in October1999

Will enable to focus onpassenger business in anincreasingly competitiveenvironment. Profitability ofpassenger business isexpected to improve.

AOLS=assets operation liability system, MOR=Ministry of Railways, TMIS=transportation management informationsystem.Source: Staff assessment.

40

EXTERNAL ASSISTANCE TO THE RAILWAY SECTOR

A. World Bank

No. Loan Project/Component Length Administrative Approval IBRD(IDA) Total(km) Region Date ($ million) ($ million)

1. Railway I 27 Jun 1984 220.0 220.0a. Construction of a single track between Xinxiang and Heze 165.0 Henan, Shandongb. Upgrading of the existing Heze-Yanzhou line 139.5

c. Double-tracking of certain sections of the Datong-Taiyuan line 127.0 Shanxid. Electrification of the Datong-Taiyuan line 355.0 Shanxie. Zhuzhou Electric Locomotive Factoryf. Traffic costing study

2. Railway II 14 May 1985 235.0 235.0a. Upgrading and electrification of Zhengzhou- Wuhan line 547.0 Henan and Hubei

b. Technical assistance to the Changchun Passenger Coach Factoryc. Technical assistance to the China Academy of Railway Sciencesd. Management information system study

3. Railway III 15 Apr 1986 160.0(70.0) 230.0a. Upgrading and electrification of the Chongqing-Guiyang line 456.0 Sichuan and Guizhou

b. Upgrading and electrification of the Yingtan-Xiamen line 704.0 Jiangxi and Fujianc. Maintenance of permanent way d. Traffic costing study (second phase)

4. Railway IV 23 Jun 1988 200.0 200.0a. Double-tracking of the Yueshan-Xiangfan section 492.0 Henan and Hubei b. Partial electrification of the Yueshan-Luoyang section 113.0 Henan

c. Expansion and modernization of three locomotive androlling-stock factories

d. Strategic plan study in the areas of telecommunicationsand computerization

5. Inner Mongolia Local Railway Project 12 May 1989 70.0(80.0) 150.0a. Single-track railway construction between Jining and Tongliao 948.0 Inner Mongolia

b. Acquisition and installation of operational equipmentc. Recruitment and training of staff to operate the railway

6. Railway V 24 Sep 1991 330.0 330.0a. Double-tracking of the Zhegan (Zhuzhou-Hangzhou) line 594.0 Zhejiang, Jiangxi, andb. Capacity expansion at the Xuzhou marshaling yards and Hunanc. Strengthening of MOR's long range track upgrading Jiangsud. Improvement of locomotive and rolling stock maintenance

program e. Planning studies: Permanent way maintenance and rehabilitation,

locomotive and rolling-stock maintenance and rehabilitation,system electrification, system telecommunications, andrailway investment

7. Railway VI 25 Mar 1993 420.0 420.0 a. Electrification and modernization of double-track

Beijing-Zhengzhou line 694 Hebei and Henanb. Electrification and modernization of a single-track

Chengdu-Kunming line 1,094.0 Sichuan and Yunnan c. Systemwide technological modernization

- Mechanizing track maintenance- Modernizing parts manufacture for locomotives and rolling stock- Upgrading the telecommunications network, and implementing a computerized transport management information system

d. Pilot container transport 8. Railway VII 1 Jun 1995 400.0 400.0

a. Policy component: railway enterprise reform, tariff reform, Hubei, Hunan, and labor productivity Guangdong

b. Investment component:- Electrification of Wuhan-Guangzhou line, modernization of 1,044.0 information system, telecommunications, containerization, environmental protection, and electric locomotivesa

c. Planning studies: railway investment, information system,telecommunications system, high speed rail betweenBeijing and Shanghai, diesel engine design, MOR Treasuryfunctions, and restructuring railway manufacturing sector

9. National Railway (Proposed in 2000)a. Policy component: Establishment of a dedicated passenger

operation entity in Nanchang Railway Administrationb. Investment component: Qinghuangdong-Shenyang new double line 905.0 Hebei, Shandong, FY 2000 300.0 300

(405 km) dedicated for passenger traffic; Baoji-Lanzhou double Shaanxi and (planned)tracking and electrification (500 km) Gansu

Total 2,335.0(150.0) 2,485.0

IBRD=International Bank for Reconstruction and Development, IDA=International Development Agency, MOR=Ministry of Railways.a The electric locomotives component was canceled in 1999.

Appendix 3, page 1

41Appendix 3, page 2

B. Japan Bank of International Cooperation

No. Loan/Project Length Administrative Year Amount

(km) Region Approved a(¥ million)

First Package of Loans (1979-1983)

1. Yangzhou-Shijiusuo Railway Construction 310.0 Shandong 1980-1983 39,710.0

2. Beijing-Qinhuangdao Railway Construction 337.0 Beijing, Tianjin, Hebei, 1980-1983 87,000.0

and Liaoning

3. Hengyang-Guangzhou Railway/Transportation Reinforcement 514.0 Hunan and Guangdong 1980 3,320.0

Subtotal 130,030.0

Second Package of Loans (1984-1989)

3A. Hengyang-Guangzhou Railway Transportation Reinforcement 541.0 Hunan and Guangdong 1984-1987 70,294.0

4. Zhengzhou-Baoji Railway Electrification 684.0 Shaanxi and Shanxi 1984-1988 69,191.0

5. Datong-Qinhuangdao (East Section) Railway Construction 337.0 Beijing, Tianjin, Hebei, 1988-1989 18,410.0

and Liaoning

6. Beijing-Subway Construction 1.4 Beijing 1988-1989 4,000.0

Subtotal 161,895.0

Third Package of Loans (1990-1995)

7. Shenmu-Shouxian Railway Construction 269.0 Shaanxi and Shanxi 1991-1993 26,985.0

8. Baoji-Zhongwei Railway Construction 502.0 Shaanxi, Gansu, and 1991-1993 29,800.0

Nigxia

9. Hengshui-Shangqiu Railway Construction 384.0 Hebei and Henan 1991-1993 23,603.0

10. Nanning-Kunming Railway Construction 800.0 Guangxi and Yunnan 1991-1994 57,696.0

11. Fujian Province Zhang Quan Railway Construction 145.7 Fujian 1993 6,720.0

12. Beijing Subway Second Phase Construction 10.6 Beijing 1991-1994 15,678.0

Subtotal 160,482.0

Fourth Package (1996-1998)

13. Shouxian-Huanghuagang Railway Construction 599.0 Shanxi, Hebei 1996-1997 60,420.0

14. Xian-Ankang Railway Construction 246.7 Shaanxi 1996-1997 35,039.0

15. Guiyang-Loudi Railway Double Tracking 807.0 Guizhou, Hunan 1996-1997 29,960.0

Subtotal 125,419.0

Total To t 577,826.0a Year of approval of loan agreement.

C. Asian Development Bank

No. Loan Project Length Administrative Approval Amount

(km) Region Date ($ million)

1. 948 Shanxi-Xiaoliu Railway 44.0 Shanxi 31 Jan 1989 39.7

2. 1087 Yaogu-Maoming Railway 232.0 Guangdong 20 Jun 1991 67.5

3. 1167 Guang-Mei-Shan Railway 480.0 Guangdong 25 Jun 1992 200.0

4. 1221 Hefei-Jiujiang Railway 335.0 Anhui and Hubei 30 Mar 1993 110.0

5. 1305 Jing-Jiu Railway Technical Enhancement 2,537.0 Beijing, Tianjin, Hebei, 14 Jul 1994 200.0

Henan, Shandong, Anhui,

Hubei, Jiangxi,

and Guangdong

6. 1439 Daxian-Wanxian Railway 156.0 Sichuan 4 Jun 1996 100.0

7. 1553 Shenmu-Yanan Railway 386.0 Shaanxi 29 Sep 1997 200.0

8. 1626 Guizhou Shuibai Railway 121.0 Guizhou 18 Aug 1998 140.0

Total 1,057.2

Approval Amount

No. TA Advisory Technical Assistance Date ($ '000)

1. 1117 Institutional Assistance to Provincial Railway Operations 31 Jan 1989 450.0

2. 1523 Institutional Strengthening of Guangdong Sanmao Railway Company 20 Jun 1991 965.0

3. 1524 Regional Railway Sector Study 20 Jun 1991 275.0

4. 1720 Institutional Strengthening of Guang-Mei-Shan Railway Company 25 Jun 1992 250.0

5. 1721 Institutional Strengthening of Guangdong Planning Commission 25 Jun 1992 250.0

6. 1861 Strengthening Business and Commercial Practices of the Hefei-Jiujiang Railway Company 30 Mar 1993 600.0

and Anhui Province

7. 2122 Policy Support to the Ministry of Railways 14 Jul 1994 600.0

8. 2578 Insitutional Strengthening of Local Railways in Sichuan 4 Jun 1996 400.0

9. 2878 Institutional Strengthening of Local Railways in Shaanxi 29 Sept 1997 400.0

Total 4,190.0

TA= technical assistance.

Appendix 4, page 142

LESSONS LEARNED FROM ADB-FINANCED RAILWAY PROJECTS

Loan and TA Project Objectives Policy Agenda Major Accomplishments andLessons Learned

Shanxi-Xiaoliu Railway

(Loan 948-PRC)

EA: Shanxi-XiaoliuRailway Company

Institutional Assistance toProvincial RailwayOperations

(TA 1117-PRC)

To (i) promote efficient andeconomic transport of coal,mineral, industrial, andagricultural outputs; (ii) facilitateindustrial development in thepoor project area; and (iii)provide efficient passengerservices linking the Project areato national railway system

To strengthen management andrecord systems of the railwaycompany especially in terms offinancial management,accounting systems,management informationsystems, and tariff setting

• Establish a transportationcorporation

• Protect the environment • Improve railway

management • Set tariffs

Loan: The project is classified asunsuccessful due to shortfall in traffic andresulting low EIRR, due to poor institutionaldevelopment and operational constraints on theadjacent locally funded section. The projectexperience highlighted the need for (i) having afully functional EA responsible for constructionand operation at the project planning stage; (ii)preparing realistic traffic forecasts; and (iii)ensuring adequate institutional set-up.Following ADB interventions and changes inthe EA’s management, there is someimprovement in freight traffic. Performance isstill below appraisal forecast.

TA: Part 1 of the TA assisted the EA inconstruction management. Part 2 helped toaddress the areas of concern for improvingoperation.

Yaogu-Maoming Railway

(Loan 1087-PRC)

EA: Guangdong SanmaoRailway Company

Institutional Strengtheningof Guangdong SanmaoRailway Company

(TA 1523-PRC)

Regional Railway SectorStudy

(TA 1524-PRC)

To (i) permit efficient andeconomic rail transport of awide range of finished productswithin the project area and toother regions; (ii) improveconnections to the nationalrailway network; and (iii)improve transport links to threespecial economic zones inHainan, Zhuhai, and Shenzhen

To computerize financial andoperational systems and studyways to introduce market-basedreforms to enhance efficiency

To assist in railway planningwith particular emphasis onlocal railways in the south andsoutheast

• Reform tariffs• Establish autonomous

railway companies• Improve operational

technologies• Improve route capacity

and rolling stock• Effect social impacts

- create employment-reduce transport costs-increase foreigninvestment

• Diversify ownership• Spin off business

activities for private sectorparticipation

• Improve the regulatoryframework andmanagement structure

Loan: The PCR concludes that the projectwas successful. Traffic forecast was achievedand commercial operation is continuingsuccessfully. This railway resulted in rapideconomic growth and substantial socialchanges in the project area. Tertiary industrywas promoted with more jobs and cash incomefor women that improved their social status.The railway company was restructured into ajoint stock shareholding company. An importantlesson of this project was that suchinfrastructure projects cannot be 100 percentdebt financed; an appropriate level of equityinvestment is necessary.

TA 1523: The TA supported the establishmentof a management that is profit conscious andmarket-reactive. The organizational structurewas rationalized, corporate profitabilityobjectives established, and associatedmanagement policies implemented.Computerization component aidedmanagement decision making and financialreporting.

TA 1524: The TA helped to identify railwayprojects for development of unserved areas.Some of these projects have been built.

EA=executing agency; EIRR=economic internal rate of return; MOR=Ministry of Railways; PCR=project completion report; TA=technical assistance.

Appendix 4, page 243

Loan and TA Project Objectives Policy Agenda Major Accomplishments andLessons Learned

Guang-Mei-Shan Railway

(Loan 1167-PRC)

EA: Guang-Mei-ShanRailway Company

To (i) permit efficient andeconomic rail transport of awide range of finished productswithin the project area and toother regions; and (ii) establishthe essential transportinfrastructure to develop mining,industry, agriculture, andtourism in the project area

• Promote financial andmanagerial autonomy oflocal railway companies

• Coordinate intermodallinkages

• Provide operationalefficiency and financialself-sufficiency in amarket environment

Loan: The PCR concludes that this projectwas successful. Commercial operation wasstarted one year ahead of the appraisalschedule. Actual traffic and revenues exceededthe forecast. The railway had substantialsocioeconomic impact. Incomes and livingstandards in the project area were raised andpoverty was reduced. A shift in employment outof agriculture to light industry and servicesincreased the opportunities for women. Therailway company had problems servicing debtdue to overreliance on debt financing. This wasaddressed by restructuring and diversifyingownership of the EA.

Institutional Strengtheningof Guang-Mei-ShanRailway Company

(TA 1720-PRC)

EA: Guang-Mei-ShanRailway Company

Institutional Strengtheningof Guangdong Planning

Commission

(TA 1721-PRC)

EA: Guangdong ProvincialPlanning Commission

To (i) improve managementinformation and financialsystems throughcomputerization; and (ii)undertake a study onintroducing additional market-based reforms to enhanceefficiency and accountability

To develop and implement asustainable monitoring systemtransferable to other projectsand provinces

TA 1720: Finance and marketing functionswere strengthened; computer applications forimproving MIS were extended. The TAdeveloped an action plan to establish the EA asa commercial entity, focusing on corporate andorganizational structural reform, commercialconsiderations, and effective information flow.Sectorwide transfer of knowledge waspromoted through the participation of otherlocal railways.

TA 1721: Socioeconomic evaluation ofresettled families was undertaken. The studyshowed that the project facilitated thedevelopment of tertiary industry, whichgenerated employment and promoted theshifting of rural people. Living conditions wereimproved, and the income of resettledhouseholds was increased.

Hefei-Jiujiang Railway

(Loan 1221-PRC)

Strengthening Businessand Commercial Practices

of the Hefei-JiujiangRailway Company and

Anhui Province

(TA 1861-PRC)

EA: Hefei-JiujiangRailway Company

To (i) foster economicdevelopment by completing partof the second national north-south railway between Beijingand Kowloon; (ii) provideessential transportinfrastructure in the landlockedproject area; and (iii) improveaccess to less-developed inlandprovinces and thereby supportthe extension of economicreform to these areas

To (i) promote commercialdiscipline in local railwaycompanies; and (ii) examine thefeasibility of local railwaycompanies’ diversifyingownership by restructuring thecapital base with broader equityparticipation

• Broaden reforms in localrailways such as market-oriented businessplanning, commercialorganization andmanagement, financialmanagement, andmarketing

• Diversify sources offinancing and stockexchange listing

• Enhance intermodallinkages

Loan: The PCR concludes that the projectwas partially successful due to lower thanexpected traffic. The lessons learned were (i)the EA was undercapitalized and relied toomuch on debt financing; (ii) traffic forecastsneed to be prepared considering alternativeroutes and transport modes; and (iii) tariffsshould consider those on alternative railwaylines, and market conditions. The EA is makingefforts to increase traffic and improveperformance.

TA 1861: The TA helped the railway companyto enhance commercial orientation andknowledge of market-oriented businesses. Therailway company was assisted in forecastingfinancial performance during 1999-2003. TheEA was helped to assess year 2000 readinessof the project facilities and take remediationmeasures.

Appendix 4, page 344

Loan and TA Project Objectives Policy Agenda Major Accomplishments andLessons Learned

Jing-Jiu Railway TechnicalEnhancement

(Loan 1305-PRC)

EA: Ministry of Railways

To (i) enhance operationalefficiency of the Jing-JiuRailway (JJR) by acquiringmodern railway technology, andhuman resource development;and (ii) support MOR informulating and implementingreforms to improve efficiencyand commercialize operationsof JJR

• Reform Enterprises • Reform tariffs

Loan: The PCR concludes that the projectwas successful. MOR acquired moderntechnology and implemented organizational andtariff reforms that improved productivity andefficiency. The project helped to stimulateeconomic growth in its areas, particularly in thepoverty counties in Jiangxi Province. Per capitaincome of people was substantially increasedand poverty reduced. This project alsohighlighted the need to forecast freight trafficmore realistically.

Policy Support to theMinistry of Railways

(TA 2122-PRC)

To (i) develop recommendationsfor organizational arrangementsto operate and manage JJR in acommercial manner; (ii)formulate a tariff policy givingdue consideration to alternativeroutes and other transportmodes; and (iii) developsystems for financialmanagement, accounting, andfinancial settlements

TA: The study under the TA concluded that (i)a separate entity for commercial operation ofJJR is not desirable as it would place the JJRat a competitive disadvantage and (ii) theoperation should be integrated with the nationalnetwork. The study proposed a higher tariff forthe north-south corridor including JJR. The TArecommendations were accepted andimplemented

Daxian-Wanxian Railway

(Loan 1439-PRC)

EA: Sichuan DawanRailway Company

To provide an economic meansof transportation for themovement of natural resourcesand industrial products, thusfacilitating economicdevelopment in northernSichuan; and to reduce povertyin that region

• Reform management• Set tariffs• Commercialize operations• Develop infrastructure for

poverty reduction

Loan: After a delayed start due toadministrative separation of Sichuan Provinceand Chongqing Municipality, physicalimplementation is progressing satisfactorily.

Institutional Strengtheningof Local Railways in

Sichuan

(TA 2578-PRC)

EA: Sichuan ProvincialPlanning Commission

To (i) convert the railway bureauinto a corporate legal entity toundertake financially viablecommercial operations; and (ii)promote organizational structurefor commercial management,corporate and financialmanagement, and accounting,MIS, market-based tariffs,system computerization, andHRD plans

TA 2578: The study under the TA identifiedexcessive staffing, undercapitalization, andunderutilization of assets as current problemsof local railways in Sichuan. Organizationalcommitment was found lacking to meetcustomer needs. The study recommended anaction plan for reforms in local railways todevelop the required business environment.These recommendations are beingimplemented.

Shenmu-Yanan Railway

(Loan 1553-PRC)

EA: Shaanxi XiyanRailway Company

To promote economicdevelopment and reducepoverty in the northern regionsof Shaanxi Province byproviding economictransportation

• Reform enterprises andprovide institutionaldevelopment

• Implement pricing policies• Improve access to poor

interior areas• Mobilize nongovernment

financing

Loan: Implementation of project started in1997, and is progressing satisfactorily.

Institutional Strengtheningof Local Railways in

Shaanxi Province

(TA 2878-PRC)

EA: Shaanxi ProvincialPlanning Commission

To convert Shaanxi LocalRailway Company (SLRC) intoa corporate entity and helpShaanxi Xiyan RailwayCompany (SXRC) and SLRCdevelop financially commercialoperations

TA 2878: The study made recommendationsfor efficient commercial operation of SXRC andSLRC, including corporatization of SLRC.Other areas covered include managementinformation systems, traffic costing and tariffs.Implementation of the action plan proposedunder the TA is in progress.

Guizhou-Shuibai Railway

(Loan 1626-PRC)

EA: Guizhou ShuibaiRailway Company

To promote economic growthand to create conditionsnecessary to reduce endemicpoverty

• Improve institutional set-up

• Improve cost recovery• Reduce poverty through

strategically locatedinfrastructure

Loan: Implementation of the project started in1998, and is progressing satisfactorily.

HRD=Human Resource Development.Source: Staff assessment.

Item 2005 2009 2014 2019 2024Freight (tons thousands) 18,733 21,736 33,057 41,061 42,405Freight (ton-km)Westbound

Xian-Nanyang 1,539 1,785 2,715 3,373 3,483Nanyang-Xiaolin 730 847 1,288 1,599 1,652Xiaolin-Xinyang 406 471 716 889 918Xinyang-Huangchan 904 1,049 1,595 1,981 2,046Huangchuan-Hefei 1,858 2,156 3,279 4,073 4,206Xiaolin-Lishan 388 451 685 851 879 Subtotal 5,824 6,758 10,278 12,766 13,184

EastboundXian-Nanyang 5,205 6,040 9,185 11,409 11,783Nanyang-Xiaolin 2,026 2,351 3,576 4,442 4,587Xiaolin-Xinyang 834 967 1,471 1,827 1,887Xinyang-Huangchan 2,561 2,972 4,520 5,614 5,798Huangchuan-Hefei 2,784 3,230 4,913 6,102 6,302Xiaolin-Lishan 311 361 549 682 705 Subtotal 13,722 15,921 24,214 30,077 31,062

CombinedXian-Nanyang 6,744 7,825 11,901 14,782 15,266Nanyang-Xiaolin 2,756 3,198 4,863 6,041 6,239Xiaolin-Xinyang 1,239 1,438 2,187 2,716 2,805Xinyang-Huangchan 3,465 4,021 6,115 7,595 7,844Huangchuan-Hefei 4,642 5,386 8,191 10,175 10,508Xiaolin-Lishan 700 812 1,235 1,534 1,584Total 19,546 22,679 34,492 42,843 44,246

Passengers (number) 14.910 22.940 39.309 43.097 47.250

Passenger-km 4,266 6,565 11,251 12,649 14,219

Commoditywise Freight (ton-km)Coal 6,562 7,683 12,137 16,511 17,453Petroleum 208 321 454 526 536Coking Coal 1,043 1,059 1,340 1,427 1,428Nonmetallic Ores 561 698 1,016 1,216 1,246Steel 1,750 1,977 3,943 5,148 5,277Construction Materials 961 1,094 1,304 1,421 1,439Grain 1,111 1,313 1,724 1,923 1,949Fertilizer/Pesticides 849 1,099 1,626 2,051 2,128Other 6,502 7,437 10,949 12,620 12,789 Total 19,546 22,679 34,492 42,843 44,246

Source: Staff estimates.

TRAFFIC FORECASTS(millions)

45Appendix 5

Appendix 6

ADB

Item

A. Base Cost

1. Civil Works

(a) MOR-Financed 311.1 726.0 1,037.1 0.0 311.1 726.0

(b) ADB-Financed 76.7 179.0 255.7 76.7 0.0 179.0

2. Railway Trackwork 150.6 120.3 270.9 119.6 31.0 120.3

(including rails, sleepers, ballast)

3. Signaling, Telecommunications 72.7 36.6 109.3 31.0 41.7 36.6

4. Electrification, Electric Power 85.3 45.9 131.2 25.3 60.0 45.9

5. Operational Equipment 70.2 30.2 100.4 21.3 48.9 30.2

6. Buildings and Facilities 17.3 65.1 82.4 0.0 17.3 65.1

7. Land acquisition, Compensation, 0.0 211.2 211.2 0.0 0.0 211.2

and Resettlement

8. Environmental Protection, Mitigation, 6.5 32.0 38.5 3.4 3.1 32.0

and Monitoring

9. Administration, Consulting Services, 0.2 121.9 122.1 0.2 0.0 121.9

and Miscellaneous Costs

Subtotal (A) 790.6 1,568.2 2,358.8 277.5 513.1 1,568.2

B. Contingencies

1. Physical a 45.5 101.5 147.0 11.2 34.3 101.5

2. Price b 45.0 101.1 146.1 8.3 36.7 101.1

Subtotal (B) 90.5 202.6 293.1 19.5 71.0 202.6

C. Interest and Other Charges During 31.9 151.2 183.1 3.0 28.9 151.2

Construction and Front-End Fee c

Total 913.0 1,922.0 2,835.0 300.0 613.0 1,922.0

ADB=Asian Development Bank, CDB=China Development Bank, MOR=Ministry of Railways.a Physical contingencies vary from 5 percent to 12 percent based on the type of work and status of preparation of the Project, except track,

signaling/telecommunications, and electrification, for which 2 percent is provided. b Based on an international price escalation factor of 2.5 percent during 2000-2005.c

Source: Staff estimates.

Front-end fee is 1 percent on the ADB loan.

COST ESTIMATES AND FINANCING PLAN($ million)

Cost Estimates Financing Plan

Foreign Exchange Currency

Local TotalCost

Foreign Exchange

MOR/CDBForeign

Exchange Local

Currenc y

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

1. Detailed Design, Engineering,and Documentation

2. Prequalification and Tendering

3. Acquisition of Land, Compensation,and Resettlement

47

4. Civil Works and Buildings

5. Track Laying

6. Telecommunications, Signaling,

and Electrification

7. Test Operations

Source: Staff estimates.

Appendix 7

IMPLEMENTATION SCHEDULE

200520042000 2001 2002 2003

48

Appendix 8

ADB-FINANCED CONTRACT PACKAGES

DescriptionCost

($ million)Mode of

Procurement

A. Materials

Rails, sleepers, and accessories (various packages) 128.0 ICB

B. Equipment

1. Communications equipment (various packages) 21.8 ICB/IS

2. Signaling equipment (various packages) 12.0 ICB/IS

3. Electrification, overhead line, power supply andpower equipment, electrical cables, and equipment(various packages)

28.0 ICB/IS

4. Water treatment equipment (2 packages) 4.0 ICB

5. Operational equipment (various packages) 24.0 ICB/IS

C. Civil Works a

(11 packages) 79.0 b ICB

D. Consulting Services 0.2 c d

Total 297.0

ICB = international competitive bidding, IS = international shopping.a The civil works packages are divided into two groups by location. One group has five packages and the

other has six packages. Bids for civil works packages in each group will be invited at the same time andbidders will be free to bid for any combination of one or more packages of civil works.

b The total cost of the 11 civil works packages will be about $275 million, of which $79 million will be financedfrom the ADB loan.

C The total cost of consulting services is expected to be $0.30 million, of which $0.10 million will be financedby the Ministry of Railways from own resources.

d International consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants.Source: Staff estimates.

49

Appendix 9, page 1

TERMS OF REFERENCE FOR INTERNATIONAL CONSULTING SERVICES

A. Rationale and Objective

1. The Ministry of Railways (MOR) is planning to construct a new 954-kilometer (km)railway line between Hefei and Xi’an across the central regions of the People’s Republic ofChina (PRC). One of the important purposes of the Hefei-Xi’an Railway (HXR) is to help createthe conditions necessary to reduce poverty in the areas it serves. To achieve this, high value-added and labor-intensive industries must be attracted to the project area. In addition, the HXRmust build up revenue as rapidly as possible after completion for successful financial operation.To accomplish this, institutional strengthening must be provided in marketing and businessdevelopment. Strengthening of project management for day-to-day coordination of activities isalso needed to support project monitoring and reporting activities using modern managementtools.

B. Backgr ound

1. Industrial Development

2. Historically, with central planning, it was the Government that determined the location forconstruction of a new industrial development or manufacturing facility. Following the economicreforms it is the investor or manufacturer that selects the location for a future facility. Usually,there are many communities competing for the investment. It is often the community with themost appropriate incentive program and proactive officials that is selected as the site for thenew facility. The railway must be proactive to ensure that it provides a service that has acompetitive advantage over trucks and to ensure that the new facility is located where therailway can serve it efficiently, including the provision of an industrial siding as necessary. Thisduality between the industrial decision making and the railway assures a low-cost transportationalternative, which allows the industry to maintain its competitive advantage in the domestic andinternational marketplace.

3. The railway has limited experience in marketing its services to promote industrialdevelopment. The purpose of this assistance will be to organize and train, at strategic locationsalong the project route, results-oriented and proactive industrial development marketing staffwithin the operating entities of MOR. These individuals will be responsible for encouragingcompanies to expand existing, or locate new, facilities in the area served by the new railway.

2. Market Development

4. MOR’s freight marketing is in transition from a monopoly to that of a transport provider inan increasingly competitive market. This new market environment will require significantchanges from the existing approaches that are being used. For example, currently containertransportation primarily uses containers as “small covered wagons” with the stuffing andunstuffing taking place in the railway freight yard. This is partly due to the lack of suitablehighway tractors and trailers to move containers to and from shippers’ facilities. This lack ofequipment is resulting in delays, and/or high cost of the road component. Most of the containerwagons are handled as conventional wagons, moving in mixed freight trains. The existingintermodal facilities are small, inconvenient for road access, and not efficient from thestandpoint of train handling. Few intermodal terminals have sufficient traffic to offer appropriatededicated point-to-point trains.

50

Appendix 9, page 2

5. The railway must be competitive with the road for all types of non bulk goods particularlyfor door-to-door service, time, service reliability, and cost. The purpose of this consultingassistance will be to assist the railway in defining what the service should be, plan it’s futureoperation, justify any necessary investment, and assist in creating appropriate customer-oriented services initially for the project line, with possible future implementation on other lines.

3. Project Management

6. Externally funded projects are currently managed by the Foreign Capital TechnicalImport Center (FCTIC) of MOR. FCTIC is comprised of a small and dedicated staff experiencedin project management for a multitude of projects funded through multilateral and bilateralorganizations. Staff training is a continuous need and must be addressed to ensure projectmanagement functions, consisting of coordination with operating and supervisory units,reporting, and project monitoring, can be improved.

C. Approach

7. The consultants will initially determine the level of industrial and market developmentexpertise in the three relevant regional railway administrations and the existing stations alongthe alignment. They will also determine the level of expertise and the programs available forattracting industry at the county, prefecture, and province levels. The consultants will also, inconjunction with MOR, undertake a limited survey of the potential shippers located along thealignment or planning to locate along the route of the new rail line. This survey will include adetermination of traffic and the shipper service requirements.

8. Based on these findings the consultants will develop suitable training programs in thePRC and out-of-country where there are successful industrial and railway marketing programs.On-the-job training will be augmented by site visits to other selected program offices. Theinternational training program will be for approximately eight persons selected from the railwayadministrations. The railway trainees will be trained in both industrial and market development.After training, the consultants with the assistance of the trainees, will undertake an educationalprogram for other staff of the relevant railway administrations.

9. The railway industrial and market development staff, in conjunction with the consultants,will develop a comprehensive plan to provide future service to the companies along the route.The plan will pay specific attention to developing a comprehensive intermodal service. Furtherconsulting assistance will be made available to the project railway for review and assistance indeveloping and implementing a comprehensive shipper service plan.

D. Expertise and Cost Estimates

10. About six person-months of international consulting services will be engaged inaccordance with the ADB’s Guidelines on the Use of Consultants. The international consultantswill have expertise in industrial development and marketing, and project management.International training for eight person-months is included in the cost estimates.

51

Appendix 10, page 1

SUMMARY RESETTLEMENT PLAN

A. Status of the Resettlement Plan

1. The Ministry of Railways (MOR) has overall responsibility for land acquisition andresettlement for the Hefei-Xi’an Railway (HXR), working through the Railway ConstructionManagement Center (RCMC) and the Anhui, Henan, Hubei, and Shaanxi provincialgovernments. The First and Fourth Survey and Design Institutes of MOR have completed thetechnical design and right-of-way survey, and have marked the railway center alignment withsurvey pegs. The detailed and final technical design is in progress and is due to be completedin July 2000. The Resettlement Plan (RP) is based on the results of the socioeconomic samplesurvey and incorporates the findings of consultants under the project preparatory technicalassistance.1

B. Scope of Land Acquisition and Resettlement

2. The HXR will involve the acquisition of 4,205 hectares (ha) for railway right-of-way,yards, stations, service roads, and associated facilities. An additional 1,034 ha will betemporarily borrowed for construction purposes. Eighty-seven percent of the permanent landand 78 percent of the temporary land borrow is agricultural land. Approximately 935,900square meters of buildings (mostly houses) will be removed. About 53,300 people will beaffected by loss of land and about 48,700 will be affected by loss of housing. Since somepeople lose both, the total number affected will be about 76,500. In addition, some people willbe affected by construction of access and link roads.

3. While many people are affected, this population constitutes less that 0.5 percent of the18.4 million rural population living in the 27 counties and districts along HXR’s route. In 25 ofthese counties, per capita rural incomes are below the average for the country. A third of the

population have incomes below the international poverty line.2 Average farm size in the

traversed provinces ranges from 0.04 ha to 0.12 ha per household member. To subsist,households need to supplement their farm income with nonfarm work.

C. Policy Framework and Entitlements

4. As a result of the consultations with local governments and village leaders at thefeasibility stage, changes in alignment were made that reduced the total number of peopleaffected. For people unavoidably affected, the resettlement objective is to ensure attainment ofequal or better livelihoods and living standards than without the Project, in line with the 1998Land Administration Law, the provincial guidelines, and ADB’s Policy on InvoluntaryResettlement. The executing and implementing agencies will ensure that people losing land,housing, or other assets due to the Project will be assisted in restoring their incomes and livingstandards.

1 TA 3251-PRC: Hefei-Xi’an Railway Project, for $665,000, approved on 3 September 1999.

2The international poverty line is $1 per capita per day in constant 1985 dollars, purchasing power parityadjusted. In 1999 prices, this is equivalent to Y1,120 per capita per annum.

52Appendix 10, page 2

5. The land compensation standards, which are payable to the peasant economiccollectives, are being negotiated with provincial governments to reflect the 1998 LandAdministration Law’s compensation rates. Agricultural land, both irrigated and nonirrigated, iscompensated in the range of 6 to 10 times the annual average output value (AAOV) over thepast three years. The resettlement subsidy is calculated at 4 to 6 times the AAOV for differenttypes of agricultural land, and can be increased by the provincial government if this level is

insufficient to restore living standards.3 Other entitlements include serviced house sites,

compensation for housing, other buildings, roads, power and telecommunication poles, trees,and agricultural fixtures, together with income restoration, moving expenses, and incomesupport during enterprise transfer. Those losing land temporarily for borrow sites will becompensated for lost income for the period of loss (two to five years). The borrowed land willbe returned to the users in its original form. The full entitlements agreed with the provincialgovernments will be set out in the RP. The same entitlements will also apply to people affectedby access and link road construction.

D. Resettlement Strategy

6. The resettlement strategy encompasses the replacement of housing, infrastructure,and incomes. Both short- and long-term strategies are being developed to provide access toland and employment so that people affected can regain and improve their livelihoods in thepostresettlement period. Where the proposed alignment unavoidably passes through towns,provisions were made for under- and overpasses to minimize adverse impacts on the nearbycommunities. A liberal provision of culverts under the track was made to enable farmers toirrigate their fields as necessary.

7. People losing housing will receive direct compensation, based on the provincialguidelines for housing replacement. Because the railway is relatively narrow (about 41 meterswide for single track sections), most of these people can be reabsorbed back into their originalvillage, which will provide a replacement house site, free of tax, with road, electricity, andwater. There will be no depreciation for housing, and people affected will be allowed to salvagematerials from their old houses. People can choose to construct their own house, or to requestthe township or village to arrange this for them.

8. More than 90 percent of the people living on the acquired areas are agriculturalworkers. The average amount of land loss along the railway alignment is 4.6 percent pervillage, with a maximum of 25 percent. The cash compensation for land and the resettlementsubsidy will provide badly needed capital to improve irrigation facilities and intensify agriculturalproduction. This contribution to improved productivity will help to compensate for the loss ofland. Up to 20 percent of the rural workers may have to shift to nonfarm work, mostly invillages where larger amounts of land are required for stations and yards. Alternative income-generating options, including project construction work, enterprise employment, and self-employment, are being developed, and will include retraining in new skills. The railwayconstruction will provide new employment opportunities in businesses in the vicinity of railwaystations. Civil works contractors will be required to give priority to resettlement-affectedhouseholds when allocating unskilled jobs for construction and operation. Consistent witheconomy and efficiency, construction materials will be locally sourced from cooperatives ofvillage workers thereby providing employment and sources of income for poor unskilledworkers. 3 According to the 1998 Land Administration Law, the total land compensation fee and the resettlement subsidy

shall not exceed 30 times the average yearly output value of the land in question over the preceding three years.

53Appendix 10, page 3

E. Institutional Arrangements

9. Under signed agreements with MOR, the provincial governments will assumeresponsibility for implementing resettlement according to the agreed resettlement plan. MOR,through RCMC, will be responsible for coordinating the planning, implementation, financing,and reporting of land acquisition and resettlement along the railway. By the end of 1999,railway construction support offices (RCSOs) had been established in all provinces,prefectures and counties affected. Most RCSOs include staff experienced in resettlement. Thelocal governments have recent experience in resettlement, for example with constructing

Highway 312, which parallels much of the HXR.4 At the prefecture level, the RCSOs have a

supervisory role. The county RCSOs take the main responsibility for resettlement assetvaluations, consultation, implementation, and delivery of entitlements. The county landmanagement bureaus work together with the RCSOs to record and classify specific landholdings, and approve the land acquisitions. The township resettlement officials areresponsible for the payment of entitlements, the selection of housing sites and replacementland, the provision of livelihood support, and monitoring. The resettlement offices at all levelswill consult with the All-China Womens’ Federation branches in providing resettlemententitlements for women, especially households headed by women.

10. MOR, through RCMC, will ensure that the RCSOs and local government officials arebriefed on the RP, that resettlement budgets are delivered on time to the provinces, thatpayments are made directly to the collectives, enterprises, and individual affected, and thatany shortfalls required to meet resettlement objectives are made good. The resettlemententitlements will be provided to people affected before ground leveling and demolitioncommence, or else income support will be provided for the period of dislocation. Housingcompensation, compensation for young crops and other assets, and the resettlement subsidywill be directly provided to the people affected. The house compensation payment will bemade in full before the commencement of ground leveling and demolition.

F. Vulnerable Groups

11. Vulnerable households, including the poor, those headed by women, people withdisabilities, and elderly, will receive special attention. The vulnerable households will receiveassistance for house construction, to be organized by the township committee and financed byRCMC. They are also entitled to basic welfare support provided by the village, and are eligiblefor preferential job provision at the Project’s construction and operation sites. Thesocioeconomic survey will refine the strategies for income replacement and assistance tothese groups.

G. Consultation and Grievance Redress

12. The 1998 Land Administration Law provides for disclosure and consultation with peopleaffected. People affected generally know about the HXR and its general impacts through thesurvey activities, the marker pegs, and village meetings. They will be advised of thecompensation rates, the relocation sites, and income restoration strategies. Copies of the draftRP, in Chinese, were provided to the RCSOs before appraisal for the information of theaffected people. MOR has assured that copies of the agreed RP will also be made available tothe RCSOs after appraisal. The RCSOs are responsible for receiving the comments of the

4

Officials in Henan and Shaanxi have recently completed resettlement work on other railway projects.

54Appendix 10, page 4

affected people and addressing their concerns. There will be intensive consultation with allpeople affected during the period of asset inventory and valuation at the household level. MORwill ensure that written agreements are signed with each affected collective, household, andenterprise before construction begins.

13. Under the 1998 Land Administration Law, the land management bureaus at theprovincial, prefecture, and county level have increased powers to protect the interests ofpeople affected by land acquisition and resettlement, including ascertaining whether land hasbeen rightfully acquired, and that compensation and other measures are fair and timely. Thegrievance redress arrangements are set out in the RP, which will be made available to allaffected peasant economic collectives.

14. In the case of grievance, people affected submit an oral or written complaint first to thevillage committee. If their complaint is not settled within two weeks, they can go to the countyland administration office within one month for redress. If still unresolved within two weeks, theclaimant can turn to the correspondence departments of other local government agencies andto the RCSO. The final redress will be sought, if necessary, in the civil courts, in accordancewith the Civil Procedure Act.

H. Monitoring and Evaluation

15. A systematic procedure for internal supervision, reporting, and evaluation of keyresettlement activities will be developed. MOR will engage the Research Institute of theForeign Capital Utilization Office of the Southwest Jiaotong University to monitor andindependently evaluate resettlement implementation and to assess the extent to which theresettlement strategy restores incomes and living standards. The Research Institute willconduct a baseline survey (with sample size not less than 1,000 households), annual surveyupdates for the period of resettlement implementation, prepare reports annually duringimplementation and on completion of resettlement, and evaluate the resettlement process twoyears after completion. The baseline survey will be conducted before people begin to movefrom their houses and agricultural lands, and will be completed before September 2000.

16. MOR will report to ADB on progress in land acquisition and resettlement through thequarterly progress reports on project implementation. The independent resettlement monitoringand evaluation reports will also be submitted to ADB.

I. Finance and Implementation Schedule

17. The total cost of land acquisition and resettlement, including contingencies, isestimated at $232 million equivalent. This includes the costs of asset compensation, otherassistance, income restoration, land occupation taxes, temporary land borrow, landmanagement supervision, management, monitoring and evaluation, and contingencies. Annualadjustments in the cost estimates, including compensation rates, will be made based on theinflation rate for the previous year. The land acquisition and resettlement costs are included inthe project cost estimates.

55

Appendix 10, page 5

18. The key points for the implementation schedule are the finalization of detailedengineering design, the finalization of the list of affected persons and assets, the negotiationand signing of contracts and the consultation on RP arrangements (August-November 2000);and the conduct of a baseline household survey (by September 2000). The compensationpayments will be disbursed by November 2000. The new housing construction, the acquisitionand handover of land for construction purposes, and the demolition and ground leveling willproceed sequentially in sections, and precede the commencement of construction workinvolving land acquisition. Supervision, auditing, monitoring, and evaluation will be continuousthroughout the Project.

56

Station

Shangzhou-Shanyang 55.0 80.0Luonan-Hangzhou 35.0 216.0Shangzhou-Luonan 44.0 220.0Shangzhou-Zhashui 94.0 75.0Shanyang-Danfeng 186.0 93.0Danfeng-Luoshan-Shangnan 150.0 600.0Liangtian* 6.0 13.7Hexi* 6.0 13.7Qiaonanzheng* 6.0 13.7Houzhizheng* 6.0 13.7Bayuan 6.0 13.7Yanchuan 5.0 2.5Shangzhou 2.0 5.5Shanzen 1.2 0.6Danfeng 0.5 0.3Tieyupu 1.2 0.6Qingyouhe 2.5 1.3Shangnan 3.0 0.5 186.0 93.0Xiping 0.7 1.4Dinghe 0.5 1.0Xixia 2.0 6.4Danshui 0.5 1.0Neixiang 2.3 9.9Qutun** 30.0 9.0Zhenping 10.0 4.0Nanyang West+ 37.1 7.1Nanyang East 5.0 2.5Nanyang Suburb Station 39.0 7.8Baiqiu 8.0 2.4Tanghe+ 14.1 69.9Bidian 1.8 2.0Anpeng 4.8 9.6Huaiyuan 2.4 6.0Tongbai 2.0 6.0Yuehedian 2.3 5.8Xiaolin 4.5 6.0Xingyang West* 6.0 13.7Xingyang East* 6.0 13.7Wujiapo* 6.0 13.7Luoshan 3.0 6.0Suntiepu* 6.0 13.7Xixian+ 39.0 78.0Huangchuan North* 6.0 13.7Huangchuan* 6.0 13.7Shengying* 6.0 13.7Shangcheng+ 18.0 36.0Gushi 36.0 72.0Xhushimiao* 6.0 13.7Yeji** 31.0 131.0Meishan-Jinxhai-Yeji 25.0 92.0Zhongxinji-Yeji 31.0 131.0Yaolimiao* 6.0 13.7Fenglukou* 6.0 13.7Lu'an+ 18.8 181.0Lu'an-Shou County 107.0 278.0Lu'an-Shucheng 110.0 167.0Zaoshudian* 6.0 13.7 60.0 216.0Guanting* 6.0 13.7Changanji* 6.0 13.7Chaodian 1.0 2.0Yindian 2.6 4.5Gaocheng 6.0 8.0

Total 406.8 926.4 1,122.0 2,268.8

Notes: (*) estimated length and cost, (**) secondary road, (+) partly surfaced road.Source: TA consultants.

Length (km) Cost (Y million) Length (km) Cost (Y million)

Appendix 11

LIST OF ACCESS AND LINK ROADS

Link RoadsAccess Roads

57

Appendix 12, page 1

FINANCIAL PERFORMANCE

1. The projected financial statements of the Hefei-Xi’an Railway (HXR) and the nationalrailway operated by the Ministry of Railways (MOR) were prepared at current prices reflectingdomestic inflation of 1.8 percent for 2000, 2 percent for 2001, 3 percent for 2002, and 4 percentfor 2003 onward; and an international inflation rate of 2.5 percent. The exchange rate of$1=Y8.3 was adjusted according to the difference between the international and domestic ratesof inflation.

A. Projected Financial Statements of the HXR (Table A12.1)

2. The major assumptions include the following:

(i) Operating revenues were derived from freight, passenger, and other transportbusinesses. A total of 3.5 percent of business and other taxes/levies wereimposed on aggregate revenues. Other revenues derived fromloading/unloading, parcel services, and warehousing were estimated at 10percent of the total transport revenues.

(ii) The base case uses a freight tariff of Y0.0988 per ton kilometer (km) applied tothe east-west corridor, comprising the Xi’an-Lianyungang Railway and the HXR.The passenger tariff used is the same as at present providing unit passengerrevenue of Y0.08 per passenger-km. Tariff rates were adjusted for inflation. Theactual unit revenue from freight is slightly lower than the average tariff due to thereduced tariff applicable to certain types of commodities under the nationalpolicy. Average freight tariff availability was taken at 97.5 percent. Unit revenueof passenger transport was 103 percent of the average passenger tariff. Therailway construction fund (RCF) surcharge was assumed at the present level ofY0.033 per ton-km, but due to exemptions on some commodities, a RCFsurcharge availability of 95 percent was applied.

(iii) Variable operating costs were Y0.03436 per passenger-km and Y0.02369 perton-km. Fixed costs were Y440,000 per km per year. Expenses for maintenanceand repair were taken at Y0.025 per converted ton-km of the value of the netfixed asset in operation. Some start-up expenditure was taken into account forthe early years of the operation. Non-operating expenses were calculated atY0.003 per converted ton-km.

(iv) The balance of receivables were 1.5 months of the gross revenues, whereaspayables and inventory were 2 months and 0.5 month of the total workingexpenses, respectively.

(v) The depreciation period was 45 years for tunnels, bridges, and track; 17 years forlocomotives and coaches; and 11 years for other fixed assets on a weightedaverage basis.

(vi) The acceptance and takeover of the assets occurs every year during theconstruction period.

58Appendix 12, page 2

B. Projected Financial Statements of MOR (Table A12.2)

3. The major assumptions include the following:

(i) The figures from 1996 to 1998 are actual figures, those for 1999 are based ontentative actual results of operation, and from 2000 onward are based on thetraffic forecast assuming an average increase of 1.5 percent per year for freighttraffic and 3.5 percent per year for passenger traffic. Tariffs were taken at thecurrent level of Y0.0771 per ton-km for freight and Y0.08 per passenger-km forpassenger traffic, which were adjusted for inflation. The RCF surcharge remainedat the current level of Y0.033 per ton-km.

(ii) Working expenses were linked to annual inflation ranging from 60 to 95 percentdepending on the variable and fixed components of each cost element. Provisionfor major repair was 12 percent of the annual net revenue. Depreciationexpenses were taken at 2.2 percent of fixed assets on average. Business taxwas taken as 3.24 percent of gross revenue, and income tax was taken at 33percent of the annual net profit, if any.

(iii) The growth of the profit (loss) from subsidiaries, long-term investment, and otherassets and liabilities was calculated based on the historical figures and thegrowth prospects provided by MOR.

(iv) Unit freight revenue was taken as 97.5 percent of freight tariff and unit passengerrevenue 105 percent of passenger tariff; a RCF surcharge availability of 95percent was applied.

(v) The number of MOR staff was decreased by 1.25 percent annually.

(vi) Other revenue was taken as 45 percent of the passenger revenue.

59

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Operational Statistics Freight Ton-Km (million) 0 0 0 0 0 19,546 20,232 20,978 21,792 22,679 23,649Passenger-Km (million) 0 0 0 0 0 4,266 4,841 5,415 5,990 6,565 7,312Converted Ton-Km 0 0 0 0 0 23,812 25,073 26,393 27,782 29,244 30,961Average Freight Tariff /Ton-Km (Y) 0 0 0 0 0 0.0988 0.1028 0.1069 0.1111 0.1156 0.1202Average Freight Unit Revenue /Ton-km (Y) 0 0 0 0 0 0.0963 0.1002 0.1042 0.1084 0.1127 0.1172Average Passenger Tariff /Pas-Km (Y) 0 0 0 0 0 0.0800 0.0832 0.0865 0.0900 0.0936 0.0973Average Passenger Unit Revenue /Pas-Km (Y) 0 0 0 0 0 0.0824 0.0857 0.0891 0.0927 0.0964 0.1003Average Nominal RCF Surcharge / Ton-Km (Y) 0 0 0 0 0 0.0330 0.0343 0.0357 0.0371 0.0386 0.0401Average actual RCF Surcharge / Ton-km (Y) 0 0 0 0 0 0.0314 0.0326 0.0339 0.0353 0.0367 0.0381Pararell Line Traffic Volume Net Ton-Km (million) 78,138 78,372 78,607 78,843 79,080 75,126 72,121 69,957 67,858 65,823 64,506MOR Network Ton-Km (billion) 1,277 1,296 1,315 1,335 1,355 1,375 1,396 1,417 1,438 1,460 1,482

Proforma Income Statement RevenuesFreight 0 0 0 0 0 2,495.6 2,686.6 2,897.0 3,129.8 3,387.5 3,673.7Passenger 0 0 0 0 0 351.5 414.8 482.6 555.2 632.8 733.0Other 0 0 0 0 0 285.5 316.2 350.6 389.1 432.2 481.9Gross Revenue of the HXR 0 0 0 0 0 3,132.7 3,417.6 3,730.3 4,074.1 4,452.5 4,888.5Incremental Revenue (from alternative line) 0 0 0 0 0 1,426.4 1,369.4 1,328.3 1,288.5 1,249.8 1,224.8Incremental Revenue (distribution from network) 0 0 0 0 0 0 0 0 0 0 0Total Gross Revenue 0 0 0 0 0 4,559.1 4,787.0 5,058.6 5,362.5 5,702.3 6,113.4Less : Business Tax and associated levies 0 0 0 0 0 159.5 167.5 177.0 187.6 199.5 213.9Net Revenue 0 0 0 0 0 4,399.6 4,619.5 4,881.6 5,174.9 5,502.8 5,899.4Working Expenses 0 0 0 0 0 1,932.6 1,857.9 1,936.2 2,018.0 2,103.5 2,203.9Depreciation Expenses 130.2 281.7 469.4 820.2 1,052.4 1,131.6 1,176.8 1,223.9 1,272.9 1,363.9 1,458.9Operating Expenses 130.2 281.7 469.4 820.2 1,052.4 3,064.1 3,034.7 3,160.1 3,290.9 3,467.5 3,662.8Operating Profit (Loss) (130.2) (281.7) (469.4) (820.2) (1,052.4) 1,335.4 1,584.8 1,721.4 1,884.0 2,035.3 2,236.6Less : Other Expenses 101.3 303.9 303.9 202.6 101.3 71.4 75.2 79.2 83.3 87.7 92.9Profit (Loss) before Interest, RCF and Tax (231.5) (585.6) (773.3) (1,022.9) (1,153.7) 1,264.0 1,509.6 1,642.3 1,800.7 1,947.6 2,143.8Less : Interest Expenses 14 41 73 117 151 783.7 753.2 720.9 686.5 650.0 611.1Profit (Loss) before RCF and Tax (245.5) (626.9) (846.6) (1,140.2) (1,304.8) 480.3 756.3 921.4 1,114.2 1,297.6 1,532.6Transfer of RCF Surcharge 0 0 0 0 0 480.3 638.3 688.3 743.6 804.8 872.8Pre-Tax Profit (Loss) (245.5) (626.9) (846.6) (1,140.2) (1,304.8) 0.0 118.0 233.1 370.6 492.8 659.8Income Tax (33%) 0 0 0 0 0 0.0 39.0 76.9 122.3 162.6 217.7Net Profit (Loss) for the Year (245.5) (626.9) (846.6) (1,140.2) (1,304.8) 0.0 79.1 156.2 248.3 330.2 442.1

Operating Ratio (%) including RCF Surcharge 0% 0% 0% 0% 0% 69.6% 65.7% 64.7% 63.6% 63.0% 62.1%Working Ratio (%) including RCF Surcharge 0% 0% 0% 0% 0% 43.9% 40.2% 39.7% 39.0% 38.2% 37.4% Proforma Balance Sheet Assets Cash, Bank 0 0 0 0 0 315.7 1,015.9 1,821.4 2,730.1 3,129.1 3,684.6Receivables 0 0 0 0 0 569.9 598.4 632.3 670.3 712.8 764.2Inventory 0 0 0 0 0 80.5 77.4 80.7 84.1 87.6 91.8Total Current Assets 0 0 0 0 0 966.1 1,691.6 2,534.4 3,484.5 3,929.6 4,540.6Gross Fixed Assets 1,985.8 5,155.1 9,391.1 16,555.8 22,297.3 24,856.2 25,850.5 26,884.5 27,959.9 29,720.3 31,555.7Less : Accumulated Depreciation 130.2 411.9 881.3 1,701.5 2,753.9 3,885.5 5,062.3 6,286.3 7,559.1 8,923.0 10,381.9Net Fixed Assets in Operation 1,855.6 4,743.2 8,509.8 14,854.3 19,543.4 20,970.7 20,788.2 20,598.3 20,400.8 20,797.3 21,173.8Construction in Progress 743.5 1,225.7 1,576.7 1,963.4 1,603.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Tangible Fixed Assets 2,599.1 5,968.9 10,086.6 16,817.6 21,146.3 20,970.7 20,788.2 20,598.3 20,400.8 20,797.3 21,173.8 Total Assets 2,599.1 5,968.9 10,086.6 16,817.6 21,146.3 21,936.9 22,479.8 23,132.7 23,885.3 24,726.9 25,714.4Capital and Liabilities Payables 0 0 0 0 0 322.1 309.6 322.7 336.3 350.6 367.3Current Liabilities 0 0 0 0 0 322.1 309.6 322.7 336.3 350.6 367.3Borrowing from ADB 430.1 838.8 1,410.4 2,136.7 2,520.8 2,462.7 2,394.0 2,320.7 2,242.7 2,159.5 2,070.8Borrowing from CDB 0.0 1,548.7 4,073.4 7,245.5 10,014.0 9,590.6 9,141.0 8,663.3 8,156.1 7,617.3 7,045.1Long-Term Debt 430.1 2,387.6 5,483.7 9,382.2 12,534.9 12,053.4 11,534.9 10,984.1 10,398.7 9,776.8 9,115.9Paid-In Capital (Counterpart Funds) 2,414.5 4,397.1 6,130.0 9,687.8 11,438.5 11,438.5 11,438.5 11,438.5 11,438.5 11,438.5 11,438.5Retained Earnings (245.5) (815.8) (1,527.2) (2,252.4) (2,827.1) (1,877.1) (803.3) 387.4 1,711.7 3,161.0 4,792.7 Total Capital 2,169.0 3,581.4 4,602.8 7,435.4 8,611.4 9,561.4 10,635.2 11,825.9 13,150.2 14,599.5 16,231.2 Total Capital and Liabilities 2,599.1 5,968.9 10,086.6 16,817.6 21,146.3 21,936.9 22,479.8 23,132.7 23,885.3 24,726.9 25,714.4

Proforma Cash Flow Statement Funds from Operation (101.3) (303.9) (303.9) (202.6) (101.3) 1,587.0 1,971.4 2,076.8 2,179.9 2,312.3 2,473.3Funds from Financing 2,844.5 3,942.2 4,830.2 7,432.6 4,892.8 0 0 0 0 0 0Injection of Counterpart Funds 2,414.5 1,982.7 1,732.9 3,557.8 1,750.7 0 0 0 0 0 0Drawdown (ADB) 430.1 410.9 572.7 702.7 373.5 0 0 0 0 0 0Drawdown (CDB) 0.0 1,548.7 2,524.6 3,172.1 2,768.6 0 0 0 0 0 0

Total Sources of Funds 2,743.2 3,638.3 4,526.2 7,230.0 4,791.5 1,587.0 1,971.4 2,076.8 2,179.9 2,312.3 2,473.3Capital Expenditure 2,729.3 3,597.0 4,453.0 7,112.6 4,640.4 0.0 0.0 0.0 0.0 642.0 646.6Debt Service 14 41 73 117 151 1,271.2 1,271.2 1,271.2 1,271.2 1,271.2 1,271.2

Total Application of Funds 2,743.2 3,638.3 4,526.2 7,230.0 4,791.5 1,271.2 1,271.2 1,271.2 1,271.2 1,913.3 1,917.8Net Cash Position 0 0 0 0 0 315.7 700.1 805.6 908.7 399.0 555.5Cash at the beginning 0 0 0 0 0 0.0 315.7 1,015.9 1,821.4 2,730.1 3,129.1Cash at the end 0 0 0 0 0 315.7 1,015.9 1,821.4 2,730.1 3,129.1 3,684.6

Debt Service Ratio 1.2 1.6 1.6 1.7 1.8 1.9ADB = Asian Development Bank, CDB = China Development Bank, RCF= Railway Construction Fund, Pas-km=passenger-km.Source: Staff estimates.

Appendix 12, page 3Table A12.1: Projected Financial Statements of HXR

(Y million)

60

Actual Actual Actual Estimate Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2008 2010

Operation Statistics Freight Ton-Km (billion) 1,292 1,305 1,226 1,258 1,277 1,296 1,315 1,328 1,342 1,347 1,361 1,362 Passenger-Km (billion) 332 354 369 405 419 433 449 464 474 477 488 489 Converted Ton-Km (billion) 1,624 1,659 1,595 1,662 1,695 1,729 1,764 1,793 1,815 1,824 1,849 1,852 Average Freight Tariff/Ton-km (Y) 0.0610 0.0660 0.0760 0.0771 0.0767 0.0782 0.0799 0.0831 0.0864 0.0898 0.1010 0.1093 Average Unit Revenue /Passenger-Km (Y) 0.0748 0.0765 0.0789 0.0840 0.0848 0.0865 0.0883 0.0909 0.0946 0.0983 0.1106 0.1183 Railway Construction Fund (RCF) Surcharge (Y/Ton-Km) 0.0280 0.0280 0.0330 0.0330 0.0330 0.0330 0.0330 0.0330 0.0330 0.0330 0.0330 0.0330 MOR Entire Network Route-Km 56,007 56,899 56,917 57,923 58,600 59,480 60,360 61,240 62,120 63,000 64,800 66,000Number of Employees - 1,556,497 1,568,171 1,556,409 1,544,736 1,533,151 1,521,652 1,510,240 1,498,913 1,465,440 1,443,541

Income Statement RevenuesFreight 75,422 81,196 84,663 88,606 93,346 96,684 100,240 104,609 109,979 114,934 130,955 140,516Passenger 23,716 26,093 28,677 33,285 35,493 37,469 39,595 42,214 44,781 46,945 54,003 57,879Others 12,866 13,994 14,702 15,768 14,103 15,389 16,881 17,483 17,566 18,696 22,596 25,436Increment of new line 0 0 0 0 0 0 0 0 0 0 0 0 Gross Revenues 112,004 121,283 128,042 137,659 142,941 149,543 156,717 164,307 172,326 180,574 207,553 223,831Less: Business Tax 3,629 3,958 4,153 4,460 4,631 4,845 5,078 5,324 5,583 5,851 6,725 7,252Less: Irrigation Funds 0 985 985 1,091 1,201 1,219 1,237 1,243 1,255 1,260 1,274 1,265 Net Revenues 108,375 116,340 122,904 132,108 137,109 143,479 150,402 157,741 165,488 173,463 199,555 215,314ExpensesWorking Expenses 60,769 69,910 72,457 80,097 81,195 82,954 85,617 88,417 91,347 94,156 103,060 109,054Depreciation Expenses 9,684 11,316 12,379 12,900 16,664 18,709 20,541 22,756 24,458 26,721 34,654 38,484 Operating Expenses 70,453 81,226 84,836 92,997 97,859 101,662 106,158 111,173 115,804 120,877 137,714 147,539Operating Profit (Loss) 37,922 35,114 38,068 39,111 39,251 41,816 44,244 46,568 49,683 52,586 61,841 67,775Non-operating Income (Espenses) (4,090) (4,310) (4,614) (4,960) (5,059) (5,159) (5,263) (5,349) (5,416) (5,443) (5,518) (5,525)Profit (Loss) from subsidiaries (1,036) (453) 1,993 2,084 1,132 1,217 1,308 1,407 1,512 1,626 2,019 2,334Profit (Loss) before Interest, RCF and Tax 32,796 30,351 35,447 36,235 35,324 37,874 40,290 42,626 45,779 48,768 58,342 64,585Less : Interest Payable 10,819 11,252 12,814 15,456 15,537 15,799 17,513 20,669 22,356 23,868 26,501 26,974Less: RCF appropriation 34,176 32,964 33,636 34,101 38,727 39,308 39,897 40,084 40,485 40,647 41,075 40,786Pre-Tax Profit (Loss) (12,199) (13,865) (11,003) (13,322) (18,940) (17,232) (17,121) (18,127) (17,062) (15,747) (9,233) (3,175)Less : Income Tax Payable 0 0 546 0 0 0 0 0 0 0 0 0Net Profit for the Year (12,199) (13,865) (11,549) (13,322) (18,940) (17,232) (17,121) (18,127) (17,062) (15,747) (9,233) (3,175)

Working Ratio 56.1% 60.1% 59.0% 60.6% 59.2% 57.8% 56.9% 56.1% 55.2% 54.3% 51.6% 50.6%Operating Ratio 65.0% 69.8% 69.0% 70.4% 71.4% 70.9% 70.6% 70.5% 70.0% 69.7% 69.0% 68.5% Balance SheetAssetsCurrent AssetsCash and Bank Deposits 26,469 32,570 46,702 34,152 20,713 4,508 2,776 2,277 3,805 5,752 11,281 18,607Inventories 7,244 6,944 10,313 9,833 10,100 10,467 10,855 11,386 11,898 12,341 13,750 14,662Receivables 33,116 34,504 56,010 45,709 37,578 44,718 49,525 53,224 58,035 60,704 69,359 74,398Others 0 0 0 0 0 0 0 0 0 0 0 0 Total Current Assets 66,829 74,018 113,025 89,694 68,391 59,692 63,156 66,887 73,738 78,798 94,390 107,666Fixed / Deferred AssetsGross Tangible Fixed Assets 417,235 449,942 510,215 647,810 757,464 850,392 933,687 1,011,385 1,087,001 1,161,797 1,386,168 1,539,379Less: Accumulated Depreciation 129,304 139,388 153,468 166,368 183,032 201,741 222,282 245,038 269,496 296,217 392,668 467,716Net Fixed Assets in Operation 287,931 310,554 356,747 481,442 574,432 648,652 711,405 766,346 817,505 865,580 993,500 1,071,663Construction in Progress 149,942 174,809 200,068 124,534 89,767 72,384 63,192 58,096 55,548 54,274 53,159 53,040Long-Term Investment 40,043 51,879 65,320 70,219 75,485 81,147 87,233 93,775 100,808 108,369 134,627 155,578Other Long-Term Assets 15,293 13,501 18,810 20,696 22,825 24,890 26,843 28,688 30,477 32,213 40,018 46,246 Total Fixed Assets 493,209 550,743 640,945 696,891 762,509 827,072 888,673 946,906 1,004,339 1,060,436 1,221,304 1,326,527 Total Assets 560,038 624,761 753,970 786,585 830,901 886,764 951,829 1,013,792 1,078,077 1,139,234 1,315,694 1,434,193Liabilities & EquityCurrent LiabilitiesShort-Term Debt 14,489 13,251 16,792 16,700 15,000 18,000 25,000 26,000 26,000 25,000 20,000 10,000Payables 53,924 64,030 93,664 85,997 88,295 90,054 92,517 95,117 98,047 100,856 109,760 115,854 Total Current Liabilties 68,413 77,281 110,456 102,697 103,295 108,054 117,517 121,117 124,047 125,856 129,760 125,854Long-Term DebtBorrowing and MOR Bond s 121,277 141,491 170,003 189,378 207,542 227,570 248,347 270,825 293,899 313,530 347,864 359,990Total Long-Term Debt 121,277 141,491 170,003 189,378 207,542 227,570 248,347 270,825 293,899 313,530 347,864 359,990Equity Paid-In Capital 369,347 402,562 455,915 490,016 528,743 568,050 607,948 648,032 688,517 729,164 852,143 933,805Reserves 19,074 26,436 42,545 42,765 48,533 57,533 69,581 83,510 98,368 113,184 163,908 202,560Retained Earnings (18,073) (23,009) (24,949) (38,271) (57,211) (74,443) (91,564) (109,691) (126,753) (142,500) (177,982) (188,017) Total Equity 370,348 405,989 473,511 494,510 520,064 551,140 585,964 621,850 660,132 699,848 838,070 948,348 Total Liabilities and Equity 560,038 624,761 753,970 786,585 830,901 886,764 951,829 1,013,792 1,078,077 1,139,234 1,315,694 1,434,193

Cash Flow Statement Sources of Funds Funds from Operation 48,862 54,801 51,989 60,592 68,822 62,609 75,107 75,294 78,879 85,706 102,503 104,720Loans (Domestic & Foreign) & Bond issue 31,549 20,214 28,512 30,000 30,000 33,000 35,000 38,000 40,000 38,000 28,000 28,000Increase in paid-in capital 0 6,120 19,717 0 0 0 0 0 0 0 (0) 0Funds from Financing 31,549 26,334 48,229 30,000 30,000 33,000 35,000 38,000 40,000 38,000 28,000 28,000 Total Sources 80,411 81,135 100,218 90,592 98,822 95,609 110,107 113,294 118,879 123,706 130,503 132,720Applications of Funds Capital Expenditure 47,309 45,845 67,176 59,000 71,000 71,000 69,000 67,000 67,000 67,000 67,000 68,000Equipment Replacement 8,572 7,809 9,500 3,061 3,887 4,545 5,102 5,602 6,068 6,522 7,867 8,775Expenses for Major Repair 9,578 13,905 3,280 15,000 10,000 7,500 6,000 5,000 5,000 6,000 6,000 6,000Debt Services 16,417 17,499 20,200 26,081 27,374 28,770 31,737 36,190 39,283 42,237 47,825 49,107 Total Applications 81,876 85,058 100,156 103,142 112,260 111,815 111,839 113,793 117,351 121,759 128,692 131,882Net Cashflow for the Year (1,465) (3,923) 62 (12,550) (13,439) (16,206) (1,732) (499) 1,528 1,947 1,811 838Cash at the beginning 19,057 26,469 32,570 46,702 34,152 20,713 4,508 2,776 2,277 3,805 9,470 17,768Cash at the end 26,469 32,570 46,702 34,152 20,713 4,508 2,776 2,277 3,805 5,752 11,281 18,607

Debt Service Ratio (excluding RCF) 0.9 1.2 0.9 1.0 1.1 0.8 1.1 1.0 1.0 1.1 1.3 1.3 Source: Staff estimate.

Table A12.2: Projected Financial Statements of MOR (Y million)

Appendix 12, page 4

61Appendix 13, page 1

SUMMARY OF ENVIRONMENTAL IMPACTS AND MITIGATION MEASURES

Environmental Impacts Mitigation Measures Action By

Groundwater Contamination :Construction: Oil and fuel leaksfrom vehicle parking andmaintenance areas

Manage carefully and follow construction specifications.a Ministry ofRailways (MOR)and civil workscontractors

Earth Works/Erosion :Construction: Excavation quantity:53,819.2 x 103 cubic meters (m3)fill quantity of 96,210.1x103 m3,spoil and muck from tunnel works:5812 x 103 m3. Potential soilerosion from spoil and stockpiledmaterial

Choose areas for deposition of spoils and muck carefully. Adhereto good engineering practice and specifications, such as subgradeslope to be protected by retaining walls, slope protection, andantiskidding piles at areas with deep excavation or high fill,providing drainage systems (gutters and side ditch), reclaimingareas formerly farmlands, avoiding disposal to forested land,revegetating spoil heaps.

MOR and civilworkscontractors

Operation: Soil erosion duringoperation from steep cuts andembankments

Concrete face and landscape all unstable cuts. Replantembankments and provide adequate drainage.

MOR and civilworkscontractors

Noise:Construction: Pile driving,blasting, and use of heavyequipment

Meet with local officials to (i) schedule operating hours ofequipment, (ii) locate all heavy machinery at least 1 km fromsensitive areas, (iii) use new and well-maintained equipment, and(iv) equip operators with ear protection.

MOR and civilworkscontractors

Operation: Noise from passingtrains and use of shop equipment

At source, follow relevant regulations. At receptors, apply mitigationmeasures as follows: (i) plant trees between railway and theschools; (ii) install soundproof windows and ventilation equipmentin the classroom; (iii) change the function of the 4-floor building andraise the height of the enclosure; (iv) change the function of the 4-floor students’ hostels; (v) install noise barrier; (vi) change thefunction and relocate schools as per the environmental impactassessment.

MOR

Atmospheric Pollution :Construction: Dust and pollutionfrom borrow pits, excavationareas, and haul roads

Use modern machinery, wet down roads, and regularly maintainvehicles.a

MOR and civilworkscontractors

Operation: Smoke, dust, sulphurdioxide, and nitrogen oxide fromequipment at stations, primarilyboilers at each station and depotalong the line for the productionand steam supply

Install new boilers at each station and depot. The boilers will be ofmodern design featuring dust and pollutant removal. For boilerswith tonnage of more than 1 ton/hour, the polytube sulfur-removalor water lash type dust and sulfur remover will be adopted. Smoke,dust, sulfur dioxide, and nitrogen oxides will meet Class II Standard(GB 13271-91: Discharge Standard for the Atmospheric Pollutantfrom Boilers).a

MOR

Operation: Dust during theloading, transit, and unloading ofcoal

Apply water sprinkling and provide cover during transportation asappropriate

MOR

Surface Water Quality :Construction: Contamination oflocal and downstream watersupplies by temporary workcamps; and turbid water fromtunnel construction

Wastewater from large (more than 500 workers) camps to betreated by series of stabilization ponds (minimum of 1 anaerobic).

MOR

a MOR will include appropriate requirements in the bidding documents to ensure compliance by contractors.

62

Appendix 13, page 2

Environmental Impacts Mitigation Measures Action ByOperation: Total discharge ofwastewater is 23,746 m3/day,comprising domestic refuse19,737 m3/day, and productionwastewater 4,009 m3/day.Contamination of watercourses byrailroad personnel or equipment

Develop mitigation measures specific for each station, but includeone of the following measures: (i) extend the existing wastewatertreatment plant and new installation of oxidation ditch; (ii) build newcomprehensive wastewater treatment facilities, (iii) rebuild thewastewater treatment facilities to also accommodate domesticrefuse; and (iv) pretreat wastewater using the existing wastewatertreatment facilities and thereafter by the urban wastewatertreatment plant.

MOR

Solid Waste:Construction: Overloading localdump capability by wastes fromlarge temporary contractor'scamps for workers

Where camps are large (>500 workers), contractor will operatesanitary landfill.a

MOR and civilworkscontractors

Operation: Disposal of solidwastes from passenger trains(estimated at 4,796 ton/year)

Equip passenger trains with garbage cans and bags. The garbagewill be consolidated with station wastes.

MOR

Domestic refuse (estimated at8,464 ton/year)

Domestic refuse from stations will be collected and treated by thelocal environmental sanitation department.

MOR

Slag from the boilers (estimated at12,305 ton/year)

Slag will be collected and recycled for other uses (e.g. forconstruction and road paving materials)

MOR

Plants, Wildlife, and PreciousEcology :Construction and Operation:There are extensive forest areasof the Qinling Mountain and theXixia National Forest Park inShaanxi Province, and theTaibading Natural PreservationZone at Tongbai Mountain inHenan Province.There are spotty secondaryforests (about 29.2 ha in total) thatwill be affected by the railway line.The wildlife population at theaffected forest has been depleted

To minimize impact on forests, the design includes constructing along tunnel (12.3 km) at Qinling Mountains, and a 1.8 km longtunnel at Xixia National Forest Park (instead of passing throughforested areas), and locating the railway line outside the TaibadingNatural Preservation Zone (1.4 km from the boundary of thePreservation Zone). The area along the railway line will be plantedwith trees and vegetation to harmonize with the environment.MOR will comply with the Forestry Law of the PRC as well as theADB’s forestry policy by compensating the affected forest areas byundertaking compensatory planting at least with equivalent area.The railway line will not cause significant impact on wildlife and itshabitat.

MOR andProvincialForestry Bureau

Historical/Archeological Sites:Construction and Operation:Three alternatives of alignmentwere identified in HuangchuanCounty: (i) through two locallyimportant reservoirs, i.e., LaoLonggeng and Shi Xianxing; (ii)across the Huangguo ancienttown; and (iii) through unexploredarea that might containunderground archeological sites.

Alternative (iii) is considered to have the least impact and theaction to be taken will include the following: (i) a team of officials ofMOR, Xinyang City Cultural Bureau, contractor, and universityacademics/archeologists as necessary, will inspect the site prior torailway construction; (ii) artifacts, if unearthed, will be identified andwill be taken care of as suggested by the team; and (iii) tombs, ifany, will be carefully relocated.

MOR, CityCultural Bureau,contractors, anduniversityacademics.

MOR-Ministry of Railways.Source: Staff assessment.

63

Appendix 14, page 1

FINANCIAL EVALUATION

1. The financial internal rate of return for the Hefei-Xi’an Railway (HXR) Project wascalculated in constant 1999 prices, and covers the period from 2000 to 2024 (Table A14.1). It isbased on the estimated incremental revenues and costs resulting from the operation of theHXR. The major assumptions used are as follows:

(i) Capital costs consist of investment in the Project, cost of provision/expansion ofterminals and yards, and purchase of locomotives and coaches. The capitalcosts associated with double-tracking for capacity expansion during 2009-2014were also included in the capital costs.

(ii) Freight and passenger revenues are based on the forecast traffic and freight tariffof Y0.0988 per ton-km applied on a corridor basis to the HXR and the alternativeXi’an-Lianyungang Railway, and unit passenger revenue of Y0.0824 perpassenger-km.1

(iii) Residual value was calculated according to the economic life of each asset.

(iv) The weighted average cost of capital of 6.48 percent for the HXR and 6.6 percentfor MOR, was calculated based on the interest rate of each after tax borrowingand the coupon rate of the benchmark Government bond with a rollover premiumand the inflation effect. The benchmark rate is considered to be the marginal costof funding for the Railway Construction Fund.

(v) A range of sensitivities was run to determine the financial viability from variousaspects as shown in Table A14.2. The corridor approach for determining tariffsfor the Project would result in sustainable financial operations.

1 To achieve the objective of full cost recovery, covering operation and maintenance costs, depreciation, debt

service changes in excess of depreciation, taxes, and a reasonable profit, MOR will have a range of options fordetermining the freight tariff, including (i) a new tariff for the HXR; (ii) a new tariff for the east-west corridor; and(iii) a new tariff for the national network. The actual tariff to be applied at the start of commercial operation will bebased on a study to be undertaken by MOR six months before the start of operation.

Corridor Basis Freight Tariff : Y0.0988Year Taxes Paid2000 2,704.9 100.4 0.0 0.0 0.0 (2,805.3)2001 3,495.0 295.3 0.0 0.0 0.0 (3,790.3) 2002 4,237.7 289.3 0.0 0.0 0.0 (4,527.0) 2003 6,508.5 185.4 0.0 0.0 0.0 (6,693.9) 2004 4,082.9 89.1 0.0 0.0 0.0 (4,172.0)2005 0.0 1,695.4 3,857.1 (277.8) 135.0 1,748.9 2006 0.0 1,572.5 3,894.1 (30.8) 168.0 2,122.92007 0.0 1,576.4 3,956.8 (18.9) 198.6 2,162.92008 0.0 1,580.5 4,033.2 (20.9) 233.1 2,198.82009 464.3 a 1,584.7 4,123.8 (23.0) 261.9 1,789.92010 449.6 a 1,597.1 4,251.0 (27.0) 300.2 1,877.22011 2,749.6 a 1,656.0 4,537.9 (42.0) 359.8 (269.5)2012 5,249.6 a 1,721.4 4,867.7 (47.7) 412.1 (2,563.1)2013 5,148.6 a 1,793.8 5,245.7 (54.2) 467.4 (2,218.3)2014 3,300.0 a 1,873.9 5,677.7 (61.5) 550.7 (108.5)2015 0.0 1,927.4 6,103.1 (65.9) 654.6 3,455.12016 0.0 1,895.4 6,238.8 (41.0) 716.2 3,586.22017 0.0 1,868.4 6,391.1 (43.6) 781.6 3,697.52018 0.0 1,841.1 6,548.7 (45.1) 848.6 3,813.9

2019 0.0 1,816.7 6,724.9 (48.0) 919.9 3,940.3

64

2020 1,660.8 1,793.9 6,919.1 (51.0) 961.8 2,451.62021 (66.4) 1,736.7 6,956.0 (36.5) 997.1 4,252.22022 0.0 1,681.4 6,998.0 (37.3) 1,032.1 4,247.22023 0.0 1,628.0 7,045.4 (38.2) 1,068.3 4,310.82024 (18,443.5) 1,576.5 7,098.7 (39.2) 1,106.0 22,820.5

FIRR 7.0%a Indicates cost of double tracking . Source: Staff estimates.

Item Project MOR (Covenant Compliance Year)Corridor Basis (Freight Tariff : Y 0.0988, Passenger Unit Revenue: Y 0.0824)

7.0 6.3 n/a 6.3 5.5 0.103506.9 6.2 0.099306.3 5.4 0.104205.5 4.5 0.110006.6 5.8 0.101405.9 5.0 0.106706.6 5.8 0.101706.4 5.7 0.103106.8 6.0 0.100207.2 4.0 n/a5.2 1.7 0.11100

ADSCR = Average debt service coverage ratio, DSCR = Debt service coverage ratio, FIRR = Financial internal rate of return, MOR = Ministry of Railwaysa Average operating ratio for the first five years of the operation, namely from 2005 to 2009b ADSCR for the first five years of operation, namely from 2005 to 2009c Break-even freight tariff is the tariff level required to achieve the same project FIRR as in the base case, which is 7.0 percent, indicated at nominal price in 2005

0.92 (0.66)75.6 (2013)

1.57 (1.21)1.51 (1.15)

1.58 (1.21)1.10 (0.81)

1.43 (1.09)1.47 (1.08)1.40 (1.03)

1.61 (1.21)1.52 (1.15)

67.2 (2006)69.5 (2006)69.3 (2006)71.2 (2007)

Table A14.1: Financial Internal Rate of Return (Y million)

Capital Cost Operating Cost Gross Revenue Working Capital Net Cash Flow

Table A14.2: Sensitivity Analysis FIRR (%) ADSCRb Break-Even TariffOperating Ratioa(%)

for Freightc

Base case Decrease in freight traffic by 10%Decrease in passenger traffic by 10%

65.3 (2005)67.2 (2006)65.3 (2005)

(Minimum DSCR)

1.58 (1.21)1.52 (1.16)

Decrease in freight and passenger traffic by 10%(a)Decrease in freight and passengertraffic by 20%Working expenses increase by 10%(b)

Loan interest rate rise up to 13 % for each loan (e)

Appendix 14, page 2

Combined downside (a) + (b) + ( c) + (d) + (e) above

Combination of (a) and (b) aboveDevaluation of Yuan by 30% in 2000 (c)Increase of initial construction costs by 10% (d)Delay of completion for 1 year

66.9 (2006)67.7 (2006)65.3 (2005)65.3 (2005)

65

Appendix 15, page 1

ECONOMIC EVALUATION

A. General

1. The economic internal rate of return (EIRR) for the Hefei-Xi’an Railway (HXR) Projectwas calculated based on a comparison of with- and without-project scenarios. Without theProject, the only mode of mechanized transport in the project area would be by using theexisting Class 2 road, and railway traffic would have to be routed via the network consisting ofexisting routes and those currently under construction. Due to the constrained capacity ofexisting east-west railway lines, some investment would be required on the existing railway linesto handle the increases in normal traffic without the Project.

B. Costs

2. The economic costs of the Project include the resource costs of civil works (includingprovision/expansion of terminals and yards, and access roads), rolling stock, resettlement,environmental measures, operation and maintenance, and the value of agricultural land lostpermanently. Economic costs exclude price contingencies, taxes, duties, and interest duringconstruction. The economic costs associated with double-tracking for capacity expansion during2009-2014 were also included. A standard exchange rate factor of 1.08 was applied to thefinancial costs of nontradable inputs to calculate economic prices, which are expressed in thedomestic price numeraire in 1999 yuan. The opportunity cost of unskilled labor is valued at 0.75,while the shadow wage rate for skilled labor is 1.0.

C. Benefits

3. The main quantifiable economic benefits of the Project include (i) avoided investment inthe railways that would be necessary without the Project to handle growth in existing traffic,(ii) the net economic value arising from major planned expansions of industrial and naturalresources production that would not occur without the Project, (iii) transport cost savings forfreight traffic diverted from longer railway routes and more costly road transport, (iv) transportcost savings for passenger traffic diverted from longer railway routes and more costly roadtransport, (v) time savings for freight transport, (vi) time savings for passengers, and (vii)environmental benefits from reduced soil erosion and air pollution.

4. Benefits from the net economic value of generated production are the largest source ofbenefits. These benefits are based on detailed surveys conducted by the First and FourthSurvey and Design Institutes of the Ministry of Railways (MOR). The net economic value addedincludes generated production for several different commodity groups. To calculate the benefitsfrom the net value of industrial production, financial prices for each commodity were convertedto economic prices and the portion of the price representing the net economic value for eachcommodity was calculated based on commodity-specific input-output data. The allocation of theeconomic value was based on the share of railway investment in the total investment required togenerate the additional production. Coal from the Shaanxi coalfields comprises a significantportion of the generated production. Due to the other infrastructure investments necessary todevelop these coal fields, only the share of the economic value added attributable to the Project,estimated to range from 10 to 20 percent, was included in the project benefits.

66

Appendix 15, page 2

5. Transport cost savings for diverted rail freight traffic were calculated separately for trafficdiverted from other rail lines and traffic diverted from road. The savings were calculated bymultiplying the estimated reduction in ton-kilometers on the national network resulting fromusing the shorter HXR route by the economic costs for railway transport, which were estimatedto be Y0.025 per ton-km. Savings from traffic diverted from roads were estimated by multiplyingestimated ton-km of diverted traffic by the difference between the economic costs of railwaytransport and road transport. Economic costs for road transport were estimated to be Y0.157per ton-km. 1

6. Transport cost savings for passenger traffic were estimated separately for traffic divertedfrom other railway lines, traffic diverted from road transport, and generated passenger traffic.For traffic diverted from other railway lines, the estimated savings in passenger-km from usingthe HXR were multiplied by the economic cost for railway transport of Y0.02 per passenger-km.For passenger traffic diverted from buses, the estimated number of passenger-km wasmultiplied by the difference between rail and road transport costs. The economic cost for bustransport was Y0.12 per passenger-km.1 Generated passenger traffic was estimated by usinghalf the value of transport cost savings as a proxy for willingness to pay.

7. Time savings for freight and passenger traffic were estimated separately for trafficdiverted from railway and traffic diverted from roads. Diverted freight-km and passenger-kmfrom other railway lines and from roads were multiplied by the time saved per kilometer for railand road transport respectively. Environmental benefits comprise benefits from reduced soilerosion and from reduced air pollution. Environmental mitigation measures taken as part of civilworks construction will also reduce soil erosion from sources not related to project construction.Diversion of traffic from road transport to the HXR will reduce air pollution compared with thewithout project case as train operation results in lesser air pollution than trucks and buses.

D. Economic Internal Rate of Return

8. The EIRR for the Project was estimated at 15.8 percent, with a net present value ofY5,866 million, demonstrating that the Project is feasible from an economic point of view (TableA15.1). The Project will also have substantial poverty reduction benefits, through increasedemployment opportunities, market access, and economic activity at new railway stations,although these are not reflected in the EIRR calculation. Sensitivity analysis was conducted totest the effect on the EIRR of adverse changes in key variables (Table A15.2). The sensitivityanalysis indicates that it would take an increase in costs of 23.5 percent or a decrease in totalbenefits of 19 percent to reach the cutoff EIRR of 12 percent. Changes of this magnitude areconsidered unlikely given MOR’s experience in railway construction and the conservative natureof the traffic forecast.

1 In Table A15.1, transport cost savings for freight and passengers reflect corresponding road transport costs, as

railway operating costs are included in the total costs.

Table A15.1: Economic Internal Rate of Return(Y million)

Costs Benefits

Project PassengerInvest- Operating Time

Year ment Costs Savings

2000 2,196 68 2,265 (2,265)2001 3,609 103 3,712 (3,712)2002 4,887 99 4,987 (4,987)2003 6,318 100 6,418 (6,418)2004 6,443 101 6,544 (6,544)2005 0 1,039 1,039 2,075 2,783 1,157 138 360 15 123 6,651 5,6122006 0 1,068 1,068 2,075 3,044 1,226 145 409 17 128 7,043 5,9762007 0 1,097 1,097 0 3,331 1,301 152 456 19 136 5,395 4,2982008 0 1,129 1,129 0 3,647 1,383 161 502 21 151 5,864 4,7352009 464 1,161 1,626 0 3,995 1,471 170 548 23 175 6,383 4,7572010 450 1,220 1,670 0 4,379 1,568 180 611 25 223 6,986 5,3162011 2,612 1,304 3,916 0 4,488 1,607 205 678 28 228 7,233 3,3172012 4,987 1,393 6,380 0 4,602 1,647 233 755 31 232 7,500 1,1202013 4,891 1,487 6,379 0 4,720 1,689 267 838 35 236 7,785 1,4062014 3,135 1,589 4,724 0 4,839 1,733 306 923 39 240 8,080 3,3562015 0 1,659 1,659 0 4,962 1,779 353 942 40 244 8,319 6,660

67

2016 0 1,681 1,681 0 5,075 1,810 363 964 41 249 8,502 6,8212017 0 1,704 1,704 0 5,195 1,844 374 984 42 253 8,691 6,9872018 0 1,728 1,728 0 5,312 1,873 385 1,007 43 257 8,877 7,1492019 0 1,754 1,754 0 5,436 1,906 397 1,028 44 261 9,070 7,3162020 1,661 1,782 3,443 0 5,564 1,939 409 1,052 45 265 9,273 5,8302021 (66) 1,783 1,717 0 5,564 1,939 409 1,073 46 269 9,299 7,5822022 0 1,784 1,784 0 5,564 1,939 409 1,099 47 273 9,330 7,5452023 0 1,785 1,785 0 5,564 1,939 409 1,121 48 277 9,357 7,5712024 (15,047) 1,787 (13,260) 0 5,564 1,939 409 1,148 49 281 9,389 22,649

EIRR = economic internal rate of return, NPV = net present value.

Source: Staff estimates.

TableA15. 2 : Sensitivity Analysis

Scenario EIRR Switching(%) Values (%)

1. Base Case 15.8 -

2. Increase in total costs (10%) 14.1 23.53. Increase in operating costs (10%) 15.4 99.0

4. Decrease in total benefits (10%) 13.9 19.05. Decrease in generated traffic (10%) 14.7 33.06. Decrease in diverted traffic (10%) 15.2 58.07. Decrease in total traffic (10%) 14.1 21.08. Decrease in net economic value added (10%) 14.7 33.59. Decrease in freight transport cost savings (10%) 15.4 78.0

10. Implementation delay by one year 13.6 -Source: Staff estimates.

TotalCosts

TotalBenefits

CostSavings

NetBenefitsPassenger

Transport

Benefits

NetEconomic

ValueAdded

FreightTransport

CostSavings

Appendix 15, page 3

= 5,866; EIRR = 15.8%

AvoidedRailway

Investment

FreightTime

Savings

Environ-mental

68

Appendix 16, page 1

POVERTY REDUCTION

A. Introduction

1. The objective of the 954-kilometer (km) Hefei-Xi’an Railway (HXR) Project is to promoteeconomic growth in poor interior provinces to raise living standards and reduce poverty. This willbe achieved by providing railway infrastructure to facilitate economic transportation of goods andpeople, and improve access of the poor to employment opportunities and income generationactivities. The HXR will pass through 27 counties in the four inland provinces of Anhui, Henen,Hubei, and Shaanxi. The project area in these 27 counties has a total population of 22.4 million,of which 18.4 million or 82 percent live in rural areas. The Project, together with the plannedaccess and link roads between the HXR and the hinterland, will improve transport access for therural population to nearby markets and social services, and help develop industry, naturalresources, and agroprocessing creating new employment and income-generating opportunitiesfor the people.

B. Economic Situation

2. The four provinces crossed by the HXR have a population of approximately 250 million,or roughly 20 percent of that of the People’s Republic of China (PRC). Using per capita grossdomestic product (GDP) as an indicator of productive economic activity, people in these fourprovinces produce less than the people in the PRC as a whole. The per capita GDP in all fourprovinces is lower than the average for the PRC, ranging from 60 percent of that of the PRC inShaanxi to 92 percent in Hubei. The important economic indicators for the provinces andcounties in the project area are summarized in Table A16.1. A description of the economicsituation follows.

3. Anhui Province . With an average per capita GDP of Y4,682 in 1998, or 73 percent ofthe national average. Anhui ranked 11th poorest of 31 provinces in the PRC. The Projecttraverses five counties. Except for the Hefei urban area, the other four counties had per capitaGDP ranging from 34 to 51 percent of the national average. In 1998, the average rural incomein the counties traversed by the HXR was Y1,724, ranging from Y1,872 in Feixi County toY1,358 in Jinzhai County, as compared with Y1,863 for Anhui and Y2,162 for the PRC. About 6million people (10 percent of Anhui’s population) live in the project area, of which 75 percent arerural, compared with 70 percent nationwide. The incidence of poverty below the internationalpoverty line1 of $1 per capita per day was 29 percent of the rural population.

4. Henan Province. With an average per capita GDP of Y4,677 in 1998, 73 percent of thenational average, Henan ranked 13th poorest of 31 provinces in the PRC. In Henan, the HXRtraverses 14 counties in the two prefectures of Nanyang City and Xinyang. The per capita GDPof the counties along the railway was Y3,439, 54 percent of the national average. In 1998, theaverage rural income in the counties was Y1,716, ranging from Y2,077 for Zhenping County toY1,331 in Tongbai County, as compared with Y1,864 for Henan and Y2,162 for the PRC. InHenan about 11 million people (12 percent of Henan’s population) live in the project area, ofwhich 86 percent are rural. Using the international poverty line the incidence of poverty was 26percent.

1 The commonly used standard for the international poverty line is $1 per capita per day measured in 1985international prices and adjusted to local currency using purchasing power parities (ppp). In 1999 prices, this wasequivalent to Y1,120 per capita per annum. This is based on $1 (July 1985) inflated to $1.51 (July 1998) times 8.3(current exchange rate) divided by 4.233 (ppp adjustment for the PRC) divided by 0.967 (ppp adjustment for theUnited States) times 365 days.

Province/ County (000) (% of Total)

People's Republic of China 1,248,100 6,382 100 868,680 70 143,332 16.5

Anhui 61,840 4,682 73 — — — —1. Hefei Urban 1,229 13,813 217 258 21 39 152. Feixi County 970 3,050 48 866 89 185 213. Lu'an City 1,705 3,003 47 1,428 84 298 214. Jinzhai County 628 2,624 41 562 90 219 395. Huoqiu County 1,581 2,192 34 1,446 91 197 14Henan 93,150 4,677 73 — — — —6. Gushi County 1,498 2,169 34 1,351 90 509 387. Shangcheng County 686 2,302 36 625 91 206 338. Huangchuan County 758 3,118 49 657 87 166 259. Guangshan County 768 2,457 38 680 89 197 29

10. Xi Xian County 889 2,076 32 819 92 258 32

69

11. Luoshan County 716 2,772 43 644 90 197 3112. Pingqiao District (Xinyang) 1,030 3,090 48 915 89 263 2913. Shihe District (Xinyang) 307 8,417 132 66 21 18 2714. Tongbai County 422 4,055 63 344 81 135 3915. Tanghe County 1,257 3,222 50 1,153 92 300 2616. Wolong District (Nanyang) 810 5,707 89 577 71 178 3117. Zhenping County 944 5,384 84 812 86 219 2718. Neixiang County 625 3,666 57 559 89 153 2719. Xixia County 412 4,389 79 368 89 109 30Hubei 58,730 5,899 92 — — — —20. Suizhou County 1,619 7,514 118 1,291 80 49 4Shaanxi 35,960 3,841 60 — — — —21. Shangnan County 233 1,202 19 215 92 209 9722. Danfeng County 292 1,289 20 273 93 249 9123. Shangzhou City 530 1,354 21 460 87 368 8024. Huaxian County 360 3,087 48 293 81 161 5525. Linwei District (Weinan) 830 3,451 54 628 76 345 5526. Lantian County 613 1,859 29 555 90 333 6027. Lingtong District (Xi'an) 646 3,582 56 542 84 159 29 — = not available.Source: TA 3251-PRC: Hefei-Xi'an Railway Project. February 2000.

Table A16.1: Economic Indicators of the Project Area (1998)

Population NumberRural People Below International Poverty Line

Per Capita GDP Rural Population(000) (Yuan) (% of PRC)

Appendix 16, page 2

(000) (% of Total Rural)

Province/ County (000) (% of Total)

People's Republic of China 1,248,100 6,382 100 868,680 70 143,332 16.5

Anhui 61,840 4,682 73 — — — —1. Hefei Urban 1,229 13,813 217 258 21 39 152. Feixi County 970 3,050 48 866 89 185 213. Lu'an City 1,705 3,003 47 1,428 84 298 214. Jinzhai County 628 2,624 41 562 90 219 395. Huoqiu County 1,581 2,192 34 1,446 91 197 14Henan 93,150 4,677 73 — — — —6. Gushi County 1,498 2,169 34 1,351 90 509 387. Shangcheng County 686 2,302 36 625 91 206 338. Huangchuan County 758 3,118 49 657 87 166 259. Guangshan County 768 2,457 38 680 89 197 29

10. Xi Xian County 889 2,076 32 819 92 258 32

69

11. Luoshan County 716 2,772 43 644 90 197 3112. Pingqiao District (Xinyang) 1,030 3,090 48 915 89 263 2913. Shihe District (Xinyang) 307 8,417 132 66 21 18 2714. Tongbai County 422 4,055 63 344 81 135 3915. Tanghe County 1,257 3,222 50 1,153 92 300 2616. Wolong District (Nanyang) 810 5,707 89 577 71 178 3117. Zhenping County 944 5,384 84 812 86 219 2718. Neixiang County 625 3,666 57 559 89 153 2719. Xixia County 412 4,389 79 368 89 109 30Hubei 58,730 5,899 92 — — — —20. Suizhou County 1,619 7,514 118 1,291 80 49 4Shaanxi 35,960 3,841 60 — — — —21. Shangnan County 233 1,202 19 215 92 209 9722. Danfeng County 292 1,289 20 273 93 249 9123. Shangzhou City 530 1,354 21 460 87 368 8024. Huaxian County 360 3,087 48 293 81 161 5525. Linwei District (Weinan) 830 3,451 54 628 76 345 5526. Lantian County 613 1,859 29 555 90 333 6027. Lingtong District (Xi'an) 646 3,582 56 542 84 159 29 — = not available.Source: TA 3251-PRC: Hefei-Xi'an Railway Project. February 2000.

Table A16.1: Economic Indicators of the Project Area (1998)

Population NumberRural People Below International Poverty Line

Per Capita GDP Rural Population(000) (Yuan) (% of PRC)

Appendix 16, page 2

(000) (% of Total Rural)

70Appendix 16, page 3

5. Hubei Province. The average per capita GDP in Hubei was Y5,899 in 1998, or 92percent of the national average. The HXR will traverse the northern tip of Suizhou Countythrough two townships. In 1998, the per capita GDP of Suizhou County was Y7,514. Theaverage rural income was Y2,790, as compared with Y2,172 for Hubei Province and Y2,162 forthe PRC. The incidence of poverty using the international norm was 3 percent.

6. Shaanxi Province. With an average per capita GDP of Y3,841 in 1998, Shaanxi is thepoorest of the four provinces in the project area. The HXR traverses seven counties anddistricts in Shaanxi. The per capita GDP ranged from Y1,202 in Shangnan County to Y3,582 inLingtong District (Xi’an), which was only 19 percent and 56 percent, respectively, of the nationalaverage. In Shaanxi, about 3.5 million people (10 percent of Shaanxi’s population) live in theproject area, of which 85 percent are rural. By the international norm, 62 percent of the ruralpopulation live below the poverty line.

7. Project Area . The 27 counties traversed by the HXR are mainly rural with theagricultural population accounting for 82 percent of the total population compared with 70percent nationwide. The main agriculture products are wheat, rice, corn, cotton, tobacco, andwalnuts. Industry is underdeveloped, and some enterprises producing oil, iron, steel, andcement are concentrated in the large and medium-sized cities at the prefecture level. Richnatural resources, including mineral ores and building materials, have potential for development.The development of these resources has been constrained by inadequate transportinfrastructure.

8. From west to east, the HXR crosses three main mountain ranges, i.e., the Qinling,Tongbai, and Dabie. These mountainous areas are largely inaccessible and the people livingthere are very poor. The Qinling and Dabie mountain areas are among the 18 remaining poorestregions in the PRC. In these areas agriculture production is severely constrained by adversegeographic conditions and there is almost no industry.

9. In the 27 counties on the HXR route (including 16 poverty counties) over 5.7 millionpeople, or 31 percent of the rural population, live below the international poverty line. Thisincidence of poverty is nearly double the 16.5 percent for the PRC. Sixteen of the 27 countieshave per capita GDP less than half of that of the PRC. The four poverty counties in Shaanxihave per capita GDP of less than 40 percent of the national average. In terms of both theincidence of poverty and absolute numbers of poor, the poverty counties in Shaanxi stand outas a pocket of extreme poverty. Lack of transport access has constrained development, as wellas employment and income-generating opportunities.

10. In project area, the amount of farmland, averaging 0.04 hectare (ha) to 0.12 ha perhousehold member, is too small to adequately support a family. To avoid poverty, householdsmust have other sources of income. The isolation and current high transport costs in the projectarea inhibit the development of industries and natural resources, which is necessary for creatingemployment. The HXR will provide economic transport and play an important role in economicdevelopment in the region by creating additional employment and enhancing the incomes ofpeople; this will improve living standards and reduce poverty.

C. Government’s Policies for Poverty Reduction

11. The Ninth Five Year Plan (FYP) (1996-2000) envisages an integrated, comprehensiveapproach to production, education, health, family planning, and transport infrastructure. Inconjunction with this FYP, the seven-year Poverty Alleviation Plan for 1994-2000 wasformulated to coordinate measures to reduce rural poverty. Implementation of poverty reduction

71Appendix 16, page 4

plans by the four provinces on the HXR route began in 1994. These plans use an integratedapproach across administrative levels (provincial, prefecture, county, and township) as well ashousehold level. In 1999, total Government funding for poverty reduction programs was Y24.8billion; this has been increased to Y26 billion in 2000.

D. Poverty Reduction Impact

12. The construction of the Project and lower transport costs during operation will benefitpoor people in the following ways: (i) direct benefit from employment during construction of therailway, and access and link roads; (ii) lower fares for passenger transport; (iii) reductions incosts for goods brought to the project area from elsewhere; (iv) lower delivered costs for localgoods, increasing their competitiveness, and opening up new markets, thereby increasingincome and employment; and (v) increased economic development due to the multiplier effectsof railway construction and operation, leading to more available resources for schools, healthcare and sanitation facilities, and local roads. The Project’s effects and their impacts on poorpeople are summarized in Table A16.2.

Table A16.2: Poverty Reduction Impact of the ProjectProject Phase/Measure Action By Impact1. Objective: Promote economic growth to raise living standards

and reduce poverty.Ministry ofRailways(MOR)

Employment will be created,incomes increased and povertyreduced.

2. Design: Alignment traverses poor areas in 27 counties,including 16 poverty counties and very poor mountainousareas; it avoids areas with high population.

MOR,designinstitutes

Benefits to the poor will bemaximzed, involuntary resettlementminimized.

3. Resettlement: Implement as per the agreed resettlementplan.

Provincesand localgovernments(LG)

About 76,500 people will beresettled and their income restoredto at least the level before theProject.

4. Construction: At least half of the construction-related jobs forunskilled labor will be offered to local poor people.

MOR People will be employed resultingin increased family incomes andreduced poverty

Construction materials will be sourced locally. MOR Employment and income-generating activities will be created,

After construction, temporary facilities, such as offices andworkers' quarters will be turned over to LGs.

MOR, LG accommodation for local activitiesprovided at township level, access

Service roads built for construction will be turned over to LGs. MOR, LG to remote areas improved. Multiplier effects of construction MOR, LG A large number of service centers

will be set up, providingemployment to poor people.

5. Operation: Basic passenger tariff Y0.08 per passenger-km ischeaper than bus fare (Y0.2 to Y0.3 per passenger-km).

MOR Poor people will be able to usecheaper and affordable railwaytransport more often.

At least one passenger train per day will provide access tosmall stations

MOR Farmers will be able to carryperishables to bigger markets andget higher prices.

Poor people will be given preference for setting up businessesat stations and in adjacent commercial areas.

MOR, LG Income of poor people will increaseand poverty will be reduced.

Contracts for loading and unloading freight at stations will beawarded to cooperatives of local poor people.

MOR, LG Employment for poor unskilledlabor will increase.

Industrial products will have access to economic transport. MOR,Provinces,and LGs

Industries and natural resourceswill develop and createemployment.

Access to economic transport will open up wider markets foragricultural produce.

MOR Farmers will get higher pricesresulting in increased ruralincomes.

Financial revenues of the LGs will increase due to expandedeconomic activity.

MOR, LG More funds will be available forsocial programs that will benefitpoor people.

72Appendix 16, page 5

E. Employment Effects of the HXR

1. During Construction

13. During construction, the HXR will generate direct and indirect employment.2 Theconstruction of the HXR will require 189,400 person-years of unskilled labor and 162,900person-years of skilled labor (Table A16.3). This amount of employment will involve wages inexcess of Y1.1 billion.3 As these wages are paid to local people, the result will be an increase inper capita income, and increases in spending and savings. The resulting spending will havemultiplier effects in every county. In addition, about Y5 billion will be paid in wages to skilledlaborers during HXR construction. If 20 percent of that amount is spent by workers in localcommunities along the HXR, another Y1 billion will be added to local economies.

14. Construction of the HXR requires a large investment over a five-year period. Based onthe input-output coefficients estimates for the PRC economy for 1997, indirect employment wasestimated. This was based on the percent share of the Project’s investment in the constructionsector, the construction sector’s contribution to the employment in key economic sectors, andthe Project’s contribution to employment in each sector. The Project will create 194,600 person-years of indirect employment during the five-year construction period from 2000 to 2005.4 Thetotal wages for these jobs amount to Y287 million per year.

15. Based on the project component costs for construction materials such as stone, sand,and cement, which will be most likely sourced from local suppliers, about 55,700 person-yearsof employment will be created.

16. Employment for unskilled labor will be created (11,850 person-years) in building accessroads and link roads. It is estimated that during construction the multiplier effects of the HXR willgenerate 127,000 person-years of employment in the rest of the PRC.

Table A16.3: Employment Created during HXR Construction(person-years)

Employment 2000 2001 2002 2003 2004 TotalConstruction - Direct: 39,522 63,421 85,217 94,544 69,558 352,262 Unskilled 21,250 34,100 45,819 50,834 37,399 189,402 Skilled 18,272 29,321 39,398 43,710 32,159 162,860Construction - Indirect 38,919 38,919 38,919 38,919 38,919 194,595Supply of Materials 6,250 10,030 13,477 14,952 11,000 55,709Construction – Accessand Link Roads

3,291 4,471 3,139 951 11,852

Rest of the PRC 29,378 24,418 22,303 23,016 27,919 127,034HXR = Hefei-Xi’an Railway, PRC = People’s Republic of China.Source: TA consultant’s Final Report.

2 Direct employment will be created to support the tasks and functions related to the Project’s construction andoperation. A construction worker hired by a civil works contractor for the HXR, for example, is a direct job duringconstruction. A station worker to load/unload freight cars along the HXR line is a direct job associated with theoperation of the HXR. Assuming that direct employment is primary to the HXR, indirect employment of the Projectcan be further divided into secondary and tertiary. Indirect (secondary) employment will be provided by those jobscreated to support the Project’s activities. A worker hired by a crushed stone processor selling crushed stone tothe Project would be an indirect (secondary) job during construction of the HXR. Direct (primary) and indirect(secondary) jobs create tertiary jobs.

3 The average wage is Y20 per day for 300 days or Y6,000 per year.4 The secondary indirect jobs include those created in agriculture, mining and quarrying, manufacturing, electric

power, coking coal, gas, petroleum, construction, transportation, post and communication, banking and insurance,and other services.

73Appendix 16, page 6

2. During Operation

17. For the operation of the HXR, MOR will not hire new staff. About 10,000 employees willbe redeployed to communities on the HXR route to operate the HXR. All employees will betransferred from elsewhere as part of MOR’s staff reduction program. The additional wages andspending of railway employees will have a considerable impact on local communities. Out of therailway payroll of Y77 million, an estimated Y62 million will be spent locally by railwayemployees. This spending will have multiplier effects in local economies.

18. Among the categories of freight traffic carried by the HXR is generated traffic, whichwould not move without the HXR. This traffic originates at production facilities along the HXRroute. This generated traffic consists of goods that would not have been produced without theHXR. The additional production generated5 by the HXR is estimated to create 195,900 person-years of employment in 2005—the first year of operation, which will increase to 496,560 person-years of employment in 2024.

F. Poverty Reduction Effects

19. The wages from employment will increase family income, raise living standards, andreduce poverty. By the end of construction in 2005, the incomes of about 236,000 people will beraised above the international poverty line.6 The effects by province are summarized in TableA16.4.

Table A16.4: Poverty Reduction during Construction and Operation

During Construction During Operation

Province

PeopleRaisedAbove

InternationalPoverty Line

PercentReduction

PeopleRaisedAbove

InternationalPoverty Line(From 2005)

PercentReduction

Shaanxi 69,536 5.3 57,770 3.1Henan 113,621 3.6 60,659 2.0Hubei 18,363 30.4 60,659 2.0Anhui 34,280 3.3 11,590 1.2

Total 235,801 3.8 130,108 2.2 Source: TA 3251-PRC: Hefei-Xi’an Railway Project, Final Report. February 2000.

2. During Operation

20. The creation of additional employment during the first year of HXR operation (2005), isexpected to raise the incomes of 130,100 people above the international poverty line. By 2015,the incomes of a total of 366,000 people are projected to be raised above the internationalpoverty line.

5 Some of the effects are from new industries and others are from the expansion of existing industries. In eithercase, additional workers are needed to produce additional goods. The approach used to estimate the secondaryindirect jobs is similar to the approach used for estimating secondary indirect jobs for the construction phase. Thewage component of the value added for each commodity included in the generated traffic forecast was estimatedfirst; followed by the number of jobs needed to produce each ton of output of the specific commodity; and the totaljobs created to produce the tons of generated traffic.

6 These estimates assume that half of unskilled railway construction jobs go to poor people, with first preferencegiven to those below the national poverty line and second preference to those below the international povertynorm. In other unskilled jobs, poor people are assumed to benefit in proportion to their share of the total countypopulation. Secondary job creation is estimated at 4.5 secondary jobs for every 10 construction jobs. Further,each full-time job held by a poor person will raise a household containing 4.2 people out of poverty.

74Appendix 16, page 7

G. Distribution of Project Benefits

21. The distribution of project benefits was analyzed to determine the extent to which theProject directly benefits poor people. This was done by disaggregating the financial andeconomic impacts of the Project on poor people in the project area. The net financial return toMOR and the distribution of the difference between net economic benefits and net financialbenefits are given in Table A16.5. The Project’s poverty impact ratio is estimated to be 25percent.

Table A 16.5: Poverty Impact Ratio of the HXR(Y million)

Beneficiaries MOR Government LaborProjectUsers Economy Total

Net Economic Benefits 1,727.8 90.9 8,293.1 24,167.7 34,279.5Financial Benefits to MOR 5,387.0 5,387.0Net Benefits 5,387.0 1,727.8 90.9 8,293.1 24,167.7 39,666.9Proportion of Poora 0.2 0.3 0.2 0.2 0.28Benefits to Poor 915.8 466.5 21.8 1,990.3 6,670.3 10,064.7Poverty Impact Ratio 0.2537

HXR = Hefei-Xi’an Railway, MOR = Ministry of Railways.a The following proportion of poor is used(i) for MOR = the national average of people below the international poverty line; (ii) for the

economy = the percent of poor people living under the international poverty line in the counties in the project area; (iii) for theGovernment = the portion of the Government’s expenditures in 1997 for social, cultural, and educational development programs; and(iv) for labor and project users = the incidence of poor people with rural net income below the international poverty line in the fourprovinces traversed by the HXR, weighted by the percent of route kilometers of the HXR passing through the province.Source: Staff estimates.

H. Conclusion

22. The construction of the HXR over a five-year period will result in the creation of about741,450 person-years of employment. It is estimated that by the end of construction in 2005,236,000 people will be raised above the international poverty line. The operation of the HXRwill generate additional production that will create 195,900 person-years of employment in 2005,increasing to 496,560 person-years by 2024. By 2015, this additional employment during theoperation of the HXR is projected to raise the incomes of 366,000 people above theinternational poverty line. The Project’s poverty impact ratio is 25 percent. Next to the economy(which is the largest beneficiary), poor people, as a category, will be the second largestbeneficiaries of the Project. The Project and the economic developments facilitated by it willhave significant poverty reduction impacts.