Document of The World Bank Report No: 23766-CHA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR INNER MONGOLIA HIGHWAY PROJECT April 30, 2002 Transport Sector Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective July 2001) Currency Unit = RMB Yuan RMB1.00 = US$0.12 US$1.00 = RMB8.30 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS CAS = Country Assistance Strategy CBMS = China Bridge Management System CPMS = China Pavement Management System CREMA = Contract for Rehabilitation and Maintenance EA = Enviromnental Assessment EAP = Environmental Action Plan EIA = Environmental Impact Assessment E&M = Electrical and Mechanical HNIP = Highway Network Improvement Program IST = Institutional Strengthening and Training IMCD = Inner Mongolia Communications Department LACI = Loan Administration Change Initiative LJH = Laoyemiao-Jining Highway MMS = Maintenance Management System MOC = Ministry of Comrnunications MOF = Ministry of Finance NTHS = National Trunk Highway System PAD = Project Appraisal Document PCD = Provincial Communications Department PIC = Public Information Center PMO = Project Management Office RAP = Resettlement Action Plan RDB = Road Data Bank SDPC = State Development and Planning Commission VOC = Vehicle Operating Cost Vice President: Jemal-ud-din Kassum, EAPVP Country Director: Yukon Huang, EACCF Sector Director: Jitendra N. Bajpai, EASTR Task Team Leader/Task Manager: Supee Teravaninthom, Senior Transport Economist, EACCF CHINA INNER MONGOLIA HIGHWAY PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 6 C. Project Description Summary 1. Project components 7 2. Key policy and institutional reforms supported by the project 9 3. Benefits and target population 9 4. Institutional and implementation arrangements 9 D. Project Rationale 1. Project alternatives considered and reasons for rejection 10 2. Major related projects financed by the Bank and other development agencies 11 3. Lessons learned and reflected in the project design 12 4. Indications of borrower commitment and ownership 13 5. Value added of Bank support in this project 13 E. Summary Project Analysis 1. Economic 13 2. Financial 14 3. Technical 14 4. Institutional 14 5. Environental 15 6. Social 17 7. Safeguard Policies 19 F. Sustainability and Risks 1. Sustainability 19 2. Critical risks 19 3. Possible controversial aspects 20 G. Main Loan Conditions 1. Effectiveness Condition 20 2. Other 20 H. Readiness for Implementation 21 I. Compliance with Bank Policies 22 Annexes Annex 1: Project Design Summary 23 Annex 2: Detailed Project Description 26 Annex 3: Estimated Project Costs 30 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 31 Appendix A 39 Annex 5: Financial Sunmmary for Revenue-Earning Project Entities, or Financial Summary 41 Appendix A: Laoyemiao-Jining Highway Income Statement 45 Appendix B: Laoyemiao-Jining Highway Assumptions for Financial Forecasts 48 Appendix C: Laoyemiao-Jining Highway FIRR Simulation and 49 Probabilistic Risk Analysis Appendix D: Highway Revenue and Expenditure During Ninth Five-Year Plan 50 Annex 6: Procurement and Disbursement Arrangements 52 Annex 7: Project Processing Schedule 61 Annex 8: Documents in the Project File 62 Annex 9: Statement of Loans and Credits 63 Annex 10: Country at a Glance 67 Annex 11: Summary of Financial Management System 69 Annex 12: Environmental Assessment and Action Plan Summary 74 Annex 13: Summary of the Resettlement Action Plan 81 Annex 14: Strengthening and Reforming Highway Maintenance 85 Annex 15: Implementation Plan 91 MAP(S) 1. IBRD 31682 2. IBRD 31683 3. IBRD 31684 CHINA Inner Mongolia Highway Project Project Appraisal Document East Asia and Pacific Region EASTR Date: April 30, 2002 Team Leader: Supee Teravaninthom Country Director: Yukon Huang Sector Manager/Director: Jitendra N. Bajpai Project ID: P070459 Sector(s): TH - Highways Lending Instrument: Specific Investment Loan (SIL) Theme(s): Poverty Targeted Intervention: N Project Financing Data [X] Loan [ ] Credit [] Grant [ Guarantee [ Other: For Loans/Credits/Others: Amount (US$m): $100.00 Borrower Rationale for Choice of Loan Terms Available on File: OI Yes Proposed Terms (IBRD): Variable-Spread Currency Loan (VSL) Front end fee (FEF) on Bank loan: 1.00% Financing Plan (USSm): Source Local Foreign Total BORROWER 168.73 0.00 168.73 IBRD 0.00 100.00 100.00 Total: 168.73 100.00 268.73 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsible agency: INNER MONGOLIA COMMUNICATIONS DEPARTMENT Address: No. 68 Saihan District, Dizhiju South St. Hohhot, Inner Mongolia, Post code 010020, China Contact Person: Mr. Bao Jianshe, Deputy Director of IMCD Tel: (0471) 6968813 Fax: (0471) 6967588 Email: Estimated Disbursements ( Bank FY/US$m): ::IFY. 2003 2004 2005 2006 2007 2008 Annual 7.00 16.00 30.00 18.00 13.00 16.00 Cumulative 7.00 23.00 53.00 71.00 84.00 100.00 Project implementation period: April 2002 to September 2007 Expected effectiveness date: 09/01/2002 Expected closing date: 03/31/2008 A. Project Development Objective 1. Project development objective: (see Annex 1) The project aims to improve the efficiency, safety, and cost-effectiveness of the transport infrastructure to support the social and economic development of the Inner Mongolia Autonomous Region, and to improve accessibility to its poorer areas thus reducing social and economic disparity within the region. To meet this development objective, the project will produce the following outputs: a. Increased transport capacity and promoted market integration in the most important east-west corridor of Inner Mongolia linking its key industrial, administrative, and hub cities in Inner Mongolia b. Improved accessibility to poor areas in Inner Mongolia through the Highway Network Improvement Program (HNIP) c. Enhanced public sector management of the road network in Inner Mongolia by strengthening institutional and management measures and introducing a pilot program for road maintenance by contract d. Improved road safety. 2. Key performance indicators: (see Annex 1) The principal outcome or impact indicators selected for monitoring progress toward the project development objective are: a. Reduction in the time spent for interprovincial and intraprovincial trips through lower costs and shorter distances on a more efficient highway system b. Reduction in the number of days that the road network is closed to traffic c. Reduction in traffic accident fatality rates d. Strengthened capacity for managing road maintenance. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 16321-CHA dated 1997/02/25, and Progress Report R-98-107 dated 05/28/1998 Date of latest CAS discussion: May 28, 1998 A new CAS is being prepared and is scheduled to be discussed by the Board in Spring 2002. The Bank's strategic objectives include promoting sound macroeconomic management and a market-oriented institutional and social-services delivery system, addressing regional inequalities, and making development sustainable. To reach these strategic objectives, the CAS identifies transport infrastructure development as a key area for Bank support. The sector-specific goals supported by the project, in line with the CAS objectives, are to: a. Promote macroeconomic growth and regional market integration by financing a key link to the National Trunk Highway System (NTHS), thus facilitating intraprovincial and interprovincial trade and commerce, especially in the Westem Region, where economic development lags far behind the country's average b. Address regional inequalities and reach the absolute poor through effective investment in improving accessibility to low-income counties c. Provide support to the introduction of market-oriented mechanisms for infrastructure construction, operation, and maintenance -2 - d. Promote a sustainable agenda in this sector through continued attention to traffic safety and environmental and social considerations in highway design, construction, operation and maintenance. 2. Main sector issues and Government strategy: Main Sector Issues The Bank recently completed several key sector works on China, including: A Strategy for the Transport Sector (Forward with One Spirit, 1997/98) * China Review of Highway Technical Assistance (1998/99) * OED Report on China Transport (1998/99) * China Highway Sector Strategy Review (2001). The most recent work, the China Highway Sector Strategy Review, was completed and discussed with the Government in late 2001. This review identified the main challenges faced by China's highway sector: sector management, managing road expenditures, managing road revenues and financing, enhancing accessibility to remote/low income areas, and traffic safety. Sector management. Transforming the Government into a market-supporting institution is one of the largest transition issues facing China today. In the highway sector, the Government's role in providing infrastructure (construction and maintenance) and transport services is shifting gradually from that of owner, investor, and manager to one of regulator. As regulator, the Government must oversee and encourage the development of more independent enterprises (in some cases, not owned by the state) that can provide cost-effective civil works and services. The pace of such a transformation varies widely with the level of development of the provinces, especially between coastal and interior provinces. Managing road expenditures. The sector should strive to increase efficiency and minimize the costs of providing infrastructure. Efforts of the Provincial Communications Departments (PCD) to improve their operations, while rationalizing and minimizing the cost of operations, should cover all activities of a road administration, from planning to design, construction and maintenance of roads at all levels. Planning. There is a need for more discriminating investment analysis, starting with planning. It will be necessary for the country to be more selective when planning its road expenditures, even though there is still a strong demand for additional investments in the road network. The allocation of funds between maintenance and new construction remains a major problem. Balance of expenditures. At present, the NTHS consumes 60 percent of the resources of the highway sector. With the high-priority NTHS nearing completion, this balance of expenditures between classes of roads should be reviewed carefully to detennine whether it continues to be an efficient allocation of resources to support economic development. The need for careful analysis of future investments will be especially important for projects proposed in the westem provinces, where the types and scale of investments are likely to differ from those in the eastern provinces. Construction quality. Highway construction quality remains a serious concem. Incidences of bridge and road failings and premature wear and tear on highway pavement have raised high-level Government officials' awareness of the issue. The problem has both technical and administrative roots. Under some Bank-financed highway project, contractors, mostly domestic, are not always well managed, frequently receive payments irregularly, and often come under pressure to shorten construction periods. Although the central government values the Bank's involvement in improving the supervision of design reviews and construction quality, there is still a need for construction quality standards and their enforcement under future Bank loans. - 3 - Managing road revenues and financing. Traditional resources are inadequate to meet the increasing demands placed on road infrastructure by a growing economy. Road user charges. At present, the main road user charge is the road maintenance fee, which brings in revenues of around RMB 30 billion a year. Other charges, including the vehicle tax, contribute probably half as much as the maintenance fee. Road users thus bear a relatively large portion, about one quarter, of annual road expenditures in the last two years. In addition, the road maintenance fee is inefficient because it is expensive to administer yet easy to evade and it generates less than 40 percent of its potential revenues. Fuel tax. China has discussed introducing a fuel tax for some years, and although the National Congress passed the Fuel Tax Resolution in November 1999, its implementation has been deferred indefinitely. Securitization. The sale of highway equity through initial public offerings (IPO) and private placements has been an innovative feature of mobilizing private resources for the highway sector. Unlike with build-operate-transfer projects, the securitization of highways already opened to traffic greatly reduces investors' risks. The question is: How long can the securitization of existing road assets continue, given the proliferation of road companies in all provinces? The number of highway projects that can be marketed to private investors (those with strong traffic revenue potential) is insignificant compared to the sector's resource requirements. Under these conditions, the Govenmuent should focus on building a reliable and stable road user fee-based financing framework. At the same time, regulatory reforms are necessary to open opportunities for different modes of public-private partnerships, to mobilize domestic savings through the issuance of bonds and to broaden the investor base. Enhancing accessibility to remote and low-income areas. The geography of China creates great difficulties in providing basic road access throughout the country, particularly in inner and low-income provinces. Although the role of transport access in integrating the national economy, stimulating growth in remote areas, and ensuring the basic mobility needs of the poor has been emphasized, providing this access is an enormous task that requires significant public resources. The Bank's provincial highway program in China aims to have a favorable impact on poverty levels through targeted interventions in low-income areas. However, it is also understandable that government agencies often refrain from borrowing for this purpose because no dedicated revenue source for loan repayment is easily identified (unlike for toll roads). The Bank recommends a renewed effort to support road development in low-income areas as part of its future lending and non-lending services for the sector. Traffic Safety. Traffic safety remains a major issue. Although the death rate from traffic accidents has decreased from 100 per 10,000 vehicles in the late 1970s to about 57 deaths per 10,000 vehicles in 1994, the rate remains one of the highest in the world. In 1999, 83,500 people were killed and 286,000 injured in more than 400,000 accidents. Besides deaths and injuries, accidents cause property damage, and their overall economic and social costs are high. Improving road safety requires coordinated action in engineering, education and enforcement. However, the current diffusion of responsibilities in these different areas makes it difficult to address the problem in a comprehensive manner. MOC and the PCDs must continue working on the engineering aspects of road safety, which fall under their responsibility. MOC is planning systematic safety audits as part of project design, and a manual is being prepared that will be circulated to the provinces soon. PCDs should improve their collecting and analyzing of accident data and extend improvement programs for black spots (road sections with high accident rates). The Bank's role so far has been confined largely to matters under the jurisdiction of its project executing agencies, namely the engineering aspects of road safety. For traffic safety to improve dramatically, the matter must be elevated to the highest levels of Government. - 4 - Government Strategy The main concem of the central and provincial highway authorities is to ensure that the highway system helps integrate China's national economy and facilitates the mobility of goods and services. This concem corresponds to the comparative economic and technological advantages of highways vis-a-vis other modes of transport and available financial resources. The investment priority for the highway subsector during the Ninth Five-Year Plan (1996-2000) was to develop the NTHS rapidly, and to develop some 130,000 km of provincial and rural roads that feed into the NTHS. Policy and regulatory reforms focused on financial issues aiming to ensure the efficient utilization of funds. Under the Tenth Five-Year Plan (2001-2005), apart from continuing the unfinished agenda of NTHS construction, the emphasis has moved toward economic development in the Westem Region. The 12 provinces making up the Westem Region cover 6 million square kilometers, about 60 percent of the country's total land area, and accounts for 25 percent of the population. In 1995, 66 percent of industrial output came from the east but only 10 percent from the west, with the remainder from central China. By 1998, per capita income in the east was three times that in the west. The west continued to be primarily a supplier of raw material. It is estimated that in this century, 60 percent of raw materials and 50 percent of the energy needs of the east will come from the west. There is great potential for processing primary material and agriculture products in the west. Massive investment in transport infrastructure is a key factor for realizing the economic potential of those provinces and integrating them into the national market. The Govemment is developing a long-term, three-pronged plan for the road sector: * East-west connections--MOC plans to develop eight corridors totaling about 15,000 km to link the Westem Region with eastem China. * Network improvements within the Western Region-This will include rehabilitating and upgrading the technical standards of about 180,000 km of the road network in the western areas. * Rural access--To alleviate poverty in rural towns and villages, about 150,000 km of rural roads have been identified for improvement This plan involves different types of works on 300,000 km of roads of various standards and classes and will require US$84 billion over 10 years. The Govemment is exploring opportunities for mobilizing funds for this plan, including ways to channel contributions from the eastem region and related budget transfer mechanisms. Because of low population densities, low incomes and generally difficult topographic and climatic conditions, costs of road development in the west will be high, and the potential for cost recovery will remain limited for some time. Highway sector institutional reforn is expected to intensify during the Tenth Five-Year Plan as the country moves toward a more open and competitive economy. The reform agenda should include the following features: * Adjust the role of govemment from that of highway builder and operator to one of effective regulator by increasingly relying on contracted works and services and introducing technologies and standards to improve supervision and control * Strengthen management efficiency in the decentralization process and reorganize the sector to maximize the use of scarce resources through planning and programming (including greater use of road databases, pavement management systems, and bridge management systems) * Identify highway financing methods to mobilize new sources of user charge-based revenues and promote public/private financing mechanisms, including asset securitization and the mobilization of national savings (bond issues) - 5 - * Improve traffic safety while minimizing environmental and social impacts on people affected by highway development. 3. Sector issues to be addressed by the project and strategic choices: In addition to expanding highway capacity in the main east-west corridor of the province, the strategic focus of the proposed project is to work in the relatively underprivileged areas of the country, stimulate their economic growth and address trade and market integration by providing a cost-effective transport network with improved access to seaports. The institutional development and policy initiatives focus on improving the balance between road maintenance and new construction; introducing the market-oriented system of road maintenance by contract; construction quality assurance; poverty relief; environmental and resettlement requirements; and developing institutional capacity in provincial and local transport departments. The project will address sector issues described in Section B.2. Sector management. The project will pursue efforts to strengthen and modemize the institutional capacity of the implementing agency, the Inner Mongolia Communications Department (IMCD), and its affiliated agencies. The institutional strengthening and training (IST) component of the project aims to prepare institutions and build their human capacity in line with the emerging role of the govenmment according to national strategy. The IST component includes support for outsourcing, balancing of capital and maintenance budgets, planning and management framework, improving construction quality, and managing externalities such as environment and safety concems. It will help IMCD to establish a sound and balanced expenditures program by making its Road Data Bank (RDB) and its Chinese Pavement Management System (CPMS) operational. The full integration of both systems will make them more efficient management instruments. Improving construction quality. Strategic objectives of the physical construction components are to improve engineering designs during project preparation and to strengthen construction supervision during project implementation. These objectives will be met through the further enforcement of independent supervision, following more strictly the FIDIC conditions of contract management. They also will ensure the enforcement of all safeguard policies, including for the efficient procurement of works and services. Sustaining road maintenance. The Bank's dialogue with IMCD on road maintenance under the previous projects has raised awareness and understanding of the extent of the problem. The project will include a pilot program of road maintenance by contract that has the strategic dimension of supporting IMCD policy in changing its role in infrastructure works from direct execution to managing contracts. Under the pilot activities, contractors will become responsible for the overall maintenance of a road over a multi-year period. The pilot is expected to provide key insights to contract design and management issues and to set the conditions for expanding maintenance by contract. Enhancing accessibUity to remote and low-income areas. The project, through its Highway Network Improvement Program (HNIP) component, will assist in improving road access to selected areas in Inner Mongolia through maintenance, rehabilitation, upgrading and other improvements. Road Safety. The highway safety component will continue and intensify safety efforts launched under the ongoing Tri-provincial Highway project. The highway safety program under the Tri-provincial Highway project includes: (i) a study of the effect of highway design features; (ii) development of a highway design safety manual; (iii) a study of the factors contributing to traffic accidents; and (iv) a black-spot treatment pilot program. Lessons leamed from the Tri-provincial Highway project will be analyzed and applied to the proposed project. The black-spot treatment program will be institutionalized and standardized under the proposed project. -6 - C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): All components under the project have been designed to address the sector issues described in Section B.3. Expansion of highway capacity. The construction of Laoyemiao-Jining Highway (L1H), an approximately 90-km section of the NTHS, will link Laoyemiao and Jining in Inner Mongolia. The proposed highway will become part of the most important east-west corridor of Inner Mongolia linking its major industrial, administrative, and hub cities of Baotou, Hohhot, and Jining. Opening this section of the NTHS will link Beijing to the northwestem region of China via Hebei and Inner Mongolia, and from there to Ningxia, Gansu and Qinghai and will help accelerate economic growth in Inner Mongolia by integrating its regional market to the national economy. HNIP. Inner Mongolia is one of the poorest regions in China and is sparsely populated (see table below). With road density one-third the national average, and only 25 percent of roads all-weather roads, Inner Mongolia must increase its investment in lower road classes and all-weather roads. The HNIP component aims to provide poor counties and townships with reasonable access to other villages and to provincial and national highway systems. Of the 41 road sections that IMCD proposed, five were selected according to a set of economic and social criteria defined by the Bank and IMCD to be financed under the project. The selection criteria are summarized in Annex 2. The remaining road sections will be financed from domestic resources. Inner Mongolia China National Comparison Total Land Area (thousand kln ) 1,183 9,600 Third-largest Total Population (million) 23.6 1,242 2% of total (ranks 23rd) Population Density (person/kIn2) 20 130 28th GDP per capita (Yuan) in 1999 5,350 7,060 16th (25% below national average) Highway Network (Iam) 63,824 1,400,000 4.5% of country's network Road Density (km/100 In 2) 5.4 14.6 One-third of country average All-Weather Roads (kIn) 15,900 (25% of all One-fourth of country average roads in Inner Mongolia) Road safety improvement. Traffic safety in Inner Mongolia, as elsewhere in China, is an issue. The number of people killed per 10,000 vehicles is at least 10 times higher than the rates of Western Europe and North America, and traffic safety is expected to worsen unless action is taken to improve it. This project will build on road safety data, studies, and manuals prepared under the ongoing Tri-provincial Highway Project. This project also includes a more extensive program of black-spot. - 7- Institutional strengthening and training (aST). The large increase in highway investment in recent years, which is expected to continue, and the reform agenda that IMCD envisages, require that IMCD substantially strengthen its institutional capacity. The IST component, designed with input from IMCD and the Bank during project preparation, combines technical assistance, training, and technology equipment upgrading into a program designed to continue the IST activities under the Tri-provincial Highway project. External funding arrangement for the IST activities will come from two sources: * IBRD loan under the project will be used for staff training activities, and * Technical Cooperation Credit 4 (TCC-4) will be used for the Technical Assistance (T/A) activities to be implemented in parallel with the project. The most challengingfeature of the T/A activities is the development of the maintenance management system aiming to improve the maintenance budgeting and planing process of IMCD, and the pilot program for maintenance-by-contract. This pilot program will take a road length of 100 kilometers that IMCD has identified in Ulanchabu League, of which 40 lan requires rehabilitation. A multi-year contract will require the contractor to rehabilitate this 40-km road section and carry out routine maintenance for the entire 100-km length. The contract will be awarded competitively. The pilot is tentatively scheduled to be launched during 2003. The timing is intended to ensure that the pilot is well prepared and the timing does not affect other project activities. Before launching competition, IMCD, with consulting assistancefinanced under the TCC-4, will need to carefully study the characteristics of the contract, including its terms, performance targets, penalties, financing approach, and other details. Indicative Bank- % of Component Sector Costs % of financing Bank- (USSM) Total (US$M) financing 1. Expand highway capacity by Highways 185.84 69.2 77.85 77.9 constructing approximately 90 km of the NTHS, connecting the major cities of Inner Mongolia and its interconnecting roads 2. Improve the highway network Rural Roads 61.08 22.7 20.00 20.0 system, including the rehabilitation and maintenance of the lower-class highway network in poor areas 3. Improve road safety by upgrading Transportation 2.10 0.8 0.63 0.6 selected dangerous key sections of road Adjustment network 4. Strengthen highway management Institutional 0.77 0.3 0.52 0.5 capacity of IMCD through training./Il Development Total Project Costs 249.79 93.0 99.00 99.0 Interest during construction 17.94 6.7 0.00 0.0 Front-end fee 1.00 0.4 1.00 1.0 Total Financing Required 268.73 100.0 100.00 100.0 /I The indicative cost in the above table does not include the T/A program totaling US$1.5 million to be financed under the TCC-4 financing arrangement and implemented in parallel to the project. - 8 - 2. Key policy and institutional reforms supported by the project: Reform of road maintenance management, financed in parallel to the project but under TCC-4 funding arrangement. The most interesting and challenging feature of the project is support to policy reform, on a pilot basis, by the practice of maintenance by contract mentioned above. This practice recently has been promoted by MOC and has already commenced in some provinces. In Inner Mongolia, contract works has been limited to road rehabilitation and covers only 10-15 percent of the network. The pilot program of maintenance by contract parallelly financed under the TCC-4 could help speeding up the implementation of MOC's policy. The policy is in line with the recommendations of the recent Highway Sector Strategy Review, which indicated that reform in maintenance management is currently one of the most critical aspects of highway sector reform. 3. Benefits and target population: The project will accelerate economic growth and thus improve living standards in Inner Mongolia and the neighboring Ningxia Autonomous Region and Gansu Province, which are among China's lowest-income areas. The major quantifiable benefits are reductions in vehicle operating costs (VOC) and time costs of road users. The estimated distribution of the project benefits shows that traffic that diverts to LJH constitutes the majority of the road user's benefits (61.4 percent), and that car and truck traffic will benefit the most from the project (73.5 percent). The nonquantified benefits include a reduction in traffic accidents and improved accessibility to poorer areas of Inner Mongolia (summary in Annex 4). Improved accessibility, in turn, will generate both direct and indirect benefits of improved access to job opportunities, education and health-care facilities. It is estimated that an additional 20 percent of school age children will be able to attend school following the rehabilitation of the roads under the HNIP component. Furthermore, the project aims to improve the quality of construction by introducing improved technology and stricter supervision of construction. The project also will foster improved practices in environmental protection, land acquisition, resettlement of affected people, and participatory approaches to project preparation and implementation. 4. Institutional and implementation arrangements: IMCD has overall responsibility for project preparation and implementation. It will be directly responsible for formulating and implementing institutional and policy reforns, including training and the road traffic safety program. It will oversee the overall development and implementation of the environmental and resettlement components. A Project Management Office (PMO) has been established under IMCD and is headed by deputy director of IMCD. The PMO will assume overall implementation and coordination responsibility for all components and every aspect of the project, especially the preparation and implementation of the LJH component, including its design, procurement, construction, supervision, environmental and resettlement aspects. The PMO will also assume the leading role in the implementation of the HNIP component, although day-to-day responsibilities of HNIP execution will lie with the Baotou Municipal Communications Bureau and the Ulancabu Prefecture Communications Bureau where the five HNIP road sections are located. The project will be implemented during 2002-2007. Overall direction of the project at the central level will rest with the Ministry of Communication (MOC) in Beijing. The Bank loan will be lent to the Borrower, the Ministry of Finance (MOF), which in tum will on-lend the loan proceeds to Inner Mongolia Autonomous Region on the same conditions as the Bank loan. -9- D. Project Rationale 1. Project alternatives considered and reasons for rejection: Main highway component The feasibility study considered four alternatives: doing nothing, upgrading the existing main road (NRI 10) to a Class I highway, building an expressway in two stages, and building an expressway in one stage. The altematives were compared on the basis of costs, benefits, services to rural cities, and relationship to future economic development. NRI 10 is a two-lane Class II road that runs parallel to the proposed highway alignment and connects Inner Mongolia and Hebei province, with a hazardous traffic mix including slow-moving farm vehicles and heavy industrial trucks. With the rapid growth of traffic in recent years, the existing Class II road is expected to be congested by 2006, and so the doing nothing option was rejected. Upgrading NRI 10 to a Class I four-lane was one alternative considered. This altemative offered the lowest cost, but could not meet transportation capacity needs, would have required more resettlement, and would have caused more environmental impacts on residential areas than the expressway alignment. Furthermore, because both sections adjacent to the project expressway section are planned as four-lane expressways, and the proposed section is part of the NTHS, maintaining continuity was considered important from a technical viewpoint. For these reasons, the expressway standard was considered more appropriate. Building the expressway in one or two stages offered no distinct difference in terms of environmental impact, but because the total cost of two-stage construction would be higher, one-stage expressway construction was the alternative selected. The proposed expressway alignment was chosen primarily on the basis of topographical and geological conditions after the review of five alternatives. An intemational expert was hired to review the technical justifications for the selected alignment and found them satisfactory. HNIP component. IMCD proposed 41 road sections totaling about 2,300 km as candidates for Bank financing under the HNIP component. After the 41 road sections were screened through these criteria: (i) linkage to poverty areas; (ii) engineering classification; (iii) traffic volume; (iv) economic rate of retum; and (v) special circumstances such as a high accident rate (see Annex 2 for details), about 15 percent of them were accepted as top-priority candidates to be financed under the project. IST component. The Contract for Rehabilitation and Maintenance Approach (CREMA) was considered the most suitable model for the maintenance-by-contract pilot after other models were reviewed during project preparation and specific IMCD conditions were taken into account. The training program and its objectives and focus are based on IMCD's analysis of its weaknesses and takes into account the training program under the ongoing Tri-provincial Highway project as well as the need to prepare IMCD personnel for the organizational reform currently envisaged. Priority training topics include transport planning and budgeting, project management, construction quality, maintenance management, environmental protection, and highway safety. -10- 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings l (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) 1. Remove highway capacity Shanghai-Zhejiang Highway S S bottleneck (ongoing) 1-3, 5 2. Institutional strengthening & Second Shaanxi Provincial S S training Highway (ongoing) 14, 6 3. Rural road and poverty alleviation Second Henan Provincial S S Highway (ongoing) 1-6 4. Highway Safety Second Xinjiang Highway S S (ongoing)1-5 5. Operation and maintenance of Second Nat'l S S high-grade highways Hwy:Guangdong/Hunan (ongoing)l, 2,4-6 6. Cost recovery Fujian Provincial Highway S S (ongoing) 1-6 Third Nat'l Hwy: Hubei S S (ongoing)l, 2, 4-6 Tri-Provincial Highway S S (ongoing)1-6 Anhui Provincial Highway: S S (ongoing)1, 2,4-6 Forth National Highway: S S HubeilHunan (ongoing) 1, 2, 4-6 Second Fujian Highway S S (ongoing)1, 2,4-6 Third Henan Provincial S S Highway (ongoing)1-6 Guangxi Provincial Highway S S (ongoing)1-6 Second Jiangxi Highway S S (ongoing)1-6 Xinjiang mU Highway (planned)1-6 Hubei Highway Project (planned) 1-6 . Other development agencies Asian Development Bank ONGOING PROJECTS Hebei and Liaoning Expressways Liaoning and Jilin Expressways - 11 - Hebei Roads Development Chengdu-Nanchang Expressway Chanchun-Harbin Expressway Shanxi Roads Development Southem Yunnan Road Development Chongqing-Guizhou Roads Development PLANNED PROJECTS Shanxi Expressway Chongqing-Guizhou Expressway Guangxi Highway Development Shanxi and Shaanxi Roads Westem Yunnan Road Development Southem Sichuan Roads Development Japan Bank for International ONGOING PROJECTS Cooperation (formally Overseas Hainan Development Economic Cooperation Fund of Japan Qingdao Development Guiyang Xinzhia Highway Hangzhou-Quzhou Expressway Wanxian-Liangping Highway Liangping-Changshou Highway Hainan East Expressway Xinxiang-Zhengzhou Highway IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Although the overall performance of the Bank highway portfolio in China has been satisfactory, a number of issues that have arisen during the implementation of earlier projects have been taken into account in the design of the proposed project. These issues include rushing to bid with preliminary engineering designs, resulting in sizable variations during project implementation; lack of quality control of construction; and starting the construction of electrical and mechanical facilities late. The project design also attempts to ensure that the highway network is balanced between high-growth areas and high-poverty areas by apportioning a substantial share of investment to lower classes of roads. The project design also attempts to spur policy and institutional reforms of road maintenance in line with a 1999 OED assessment of the China portfolio, and the recommendations of the recent Highway Sector Strategy Review. It includes a pilot maintenance-by-contract program, financed under the TCC4 funding arrangement. - 12 - 4. Indications of borrower commitment and ownership: Discussions between the Bank and the Borrower indicate that national, provincial, and local governments support the proposed highway because it is the main artery linking Beijing and China's northwestern region and is also the most important east-west corridor of Inner Mongolia The government of Inner Mongolia has shown an especially strong commitment to this project. The project is an integral and key component of the master plan that calls for connecting Hohhot and Inner Mongolia's secondary cities. For their part, MOC and the government of Inner Mongolia have already approved RMB 728 million (US$88 million) and RMB 672 million (US$81 million), respectively, as the state and provincial contributions to the project. 5. Value added of Bank support in this project: Through our continued involvement in project investment, the Bank can maintain and elevate policy dialogue and accelerate the pace of policy reform for the highway sector. It can build up-front client ownership, develop human resources, demonstrate quick but risk-free results through pilots, and improve dialogue by bringing consistency between national and provincial policies. Under the proposed project in particular, the added value of Bank support to Inner Mongolia includes, besides the physical investment, its experience with highway reform elsewhere and the know-how the Bank has gained in over 15 years of working on other relevant projects in China. Some of these projects have been in areas that were in the same stage of development that Inner Mongolia is in now, which means that the Bank can give due consideration to Inner Mongolia's stage of development and the level of sophistication and appropriate know-how the project should transfer to strengthen the management of IMCD. Bank experience with outsourcing highway maintenance will be valuable in this project. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$118 million; ERR = 17.9 % (see Annex 4) O Cost effectiveness O Other (specify) This economic evaluation covers the two project components that account for 95 percent of project costs: (a) construction and upgrading of the Laoyemiao-Jining Highway, totaling 91.3 km and (b) upgrading of five rural roads under the HNIP, totaling 343.0 km. The principal measured benefits of the project are savings in vehicle operating costs (VOC), time savings to vehicle occupants, and enhanced road safety. Motorized traffic in the proposed LJH corridor increased rapidly, at an average of 15.8 percent per year between 1990 and 2000. By 2000 it had reached 6,000 AADT, while nonmotorized and other traffic added another 800 AADT equivalent. With a projected 8 percent annual growth, motorized traffic alone will reach about 10,000 AADT by 2006, the proposed opening year of the project. This would exceed the capacity of the existing Class II road. On the basis of this traffic growth estimate, the estimated overall economic internal rate of return (EIRR) for the project is about 18 percent--15 percent for LJH and 28 percent for HNIP. The overall economic net present value (NPV), based on a 12 percent discount rate, is estimated at RMB 979.7 million, RMB 429.6 million of which comes from LJH, and RMB 550.1 million from HNIP. An analysis of the evaluation results and a description of the method used to derive them are provided in Annex 4 and the results are summarized as follows: - 13 - Summary of Economic Evaluation Results EIBR (in%) NPV (12%, million RMB) LaoYemiao- Jining Highway (LJHI: Jining - Xinghe 14.1 220.9 Xinghe - Laoyemiao 17.6 194.7 Subtotal 15.1 429.6 Highway Network Improvement Program (HNIP) 30.2 550.1 Total 17.9 979.7 2. Financial (see Annex 4 and Annex 5): NPV=US$ 16.5 million; FRR = 5.8 % (see Annex 4) The construction of LJH is the main component of the project, and only LJH will generate revenue. All five rural roads to be upgraded under the HNIP are toll free. IMCD plans to use the toll revenue from LJH to cover the loan amortization charges. The highway will generate enough total revenue over the loan period with a standard amortization schedule. With the toll at the proposed level, LJH may not need any external cash injection. The FIRR for LJH is expected to be 5.8 percent, with an NPV (at 5.0 percent) of RMB 135.1 million. For non-revenue-earning entities (the five toll-free roads under HNIP), the financial evaluation focused on the availability of sufficient counterpart funds and operating expenses, including the financial risks for the project roads. All the indicators show that the financial risks for these toll-free roads are modest. A detailed assessment is provided in Annex 5. Fiscal Impact: The project may significantly affect Inner Mongolia's budgets and capital investment programs during its implementation years. The counterpart fund issue has been discussed fully with the Inner Mongolia government to ensure that maintenance funds will not be sacrificed for capital construction. Tolls for different types of vehicles using the proposed LJH will be carefully detenrnined. However, for the purpose of evaluation, assumptions were conservatively set on a relatively low level of toll rates and a slow adjustment of the rates. Although the highway will generate enough revenue over the loan period, the low toll charges and the low toll growth assumption will lead to some impact on the FIRR. 3. Technical: The issues that need special attention from a technical point of view are: * The need for a proper review of selected design standards especially to take into consideration traffic safety on high speed road. * The need for adequate geological investigations at the design stage to minimize the risk of encountering major problems at the construction stage, as has occurred in other highway projects in China * An appropriate level of electrical and mechanical works at the opening of the highway to traffic 4. Institutional: All institutional issues related to capacity building will require special attention, in particular the strengthening of maintenance management systems and associated organizational arrangements. The successful implementation of the institutional components will require a continuing strong commitment from IMCD and its associated road sector agencies. - 14 - 4.1 Executing agencies: IMCD has been an executing agency for the Inner Mongolia component of the Tri-provincial Highway project for three years. It is familiar with Bank requirements and thus will not have problems executing the proposed project. 4.2 Project management: Overall project management will be handled by IMCD. IMCD also will be pimanrily responsible for the institutional and policy components as well as for the traffic safety components. PMO will be responsible for the construction management of both the LJH and HNIP components, including construction, supervision and quality control. PMO also will undertake environmental and resettlement aspects of the project. 4.3 Procurement issues: A project procurement capacity assessment was conducted during project preappraisal. The procurement capacity assessment report is available in the project files (see Annex 6 for a summary). The assessment confirmed that the provincial agencies are generally capable of managing highway projects. Although some shortcomings were identified, an action plan to overcome them has been drawn up. 4.4 Financial management issues: A financial management assessment was conducted during project preappraisal. The Financial Management Assessment Report is available in the project files (see Annex 11 for a summary). The assessment followed guidelines issued by the Financial Management Sector Board on June 30, 2001, and concluded that the project meets minimum Bank financial management requirements as stipulated in BP/OP 10.02. In the team's opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on project status in the reporting format agreed with the project and as required by the Bank. 4.4.1. Funding for the project comes from the Bank loan and counterpart funds. The Bank loan will be signed between the Bank and the PRC through its Ministry of Finance (MOF), and on-lending arrangements for the Bank loan will be signed between the PRC through its MOF and the Inner Mongolia Autonomous Region through its Finance Bureau of Inner Mongolia Autonomous Region (FBIMAR), and between FBIMAR and IMCD. The Bank loan proceeds will flow from the Bank into the special account maintained by FBIMAR for the project in respect of reimbursable expenditures incurred, or to contractors or suppliers through bank accounts with major commercial banks acceptable to the Bank. The project will disburse using traditional disbursement techniques and will not use PMR-based disbursements, in accordance with the agreement between the Bank and MOF. The counterpart funds will come from two sources: appropriations by the Ministry of Communication (MOC) and capital and domestic loan proceeds from IMCD, and will be contributed by MOC and IMCD directly to the project. 4.4.2. No outstanding audits or audit issues exist with the implementing agency. The task team, however, will continue to be attentive to financial management matters and audit covenants during project implementation. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. - 15 - Preparation of EIA and EAP. After the feasibility study report was completed by Inner Mongolia Transport & Traffic Design Institute, environmental assessment works started in January 1999 with the appointment of Chang'an University as Environmental Assessment (EA) consultant. For the HNIP component, a sector environmental assessment approach was implemented. Inner Mongolia Environmental Science Institute was entrusted with the task of conducting the EA according to Chinese national procedures and the World Bank's OP 4.01. The Bank reviewed the Environmental Impact Assessment (EIA), Environmental Action Plan (EAP), and EA Summary reports for the main highway component and the Initial Environmental Examination and Environmental Action Plan (IEE & EAP) for the HNIP and discussed them with IMCD, Chang'an University, and Inner Mongolia Environmental Science Institute during the preappraisal mission in September 2001. The second draft EIA, EAP, EA Summary, and IEE & EAP were submitted to the Bank in November 2001. Further comments from the Bank were provided and the final draft report was submitted to the Bank in January 2002. During the EA, local people in the project area received information and documents about the project and were intensively consulted. Their opinions are reflected in the project design and environmental mitigation measures, in particular the number of underpasses were increased. The draft EA reports were disclosed locally in January 2002 with an advertisement in the local newspaper and was sent to the World Bank's InfoShop for disclosure on January 28, 2002. The major findings on the two components are summarized below. More detailed information is given in Annex 12. a. Main Highway Component Potential Impacts. Major potential impacts during the construction phase include noise, dust, and soil erosion. The major potential impact during the operation phase will be noise. The alignment of the proposed highway is parallel to an existing Class II highway, an area that has been exposed to human activity for many decades. Agricultural land use prevails. There appear to be no environmentally protected areas, cultural relics, or critical natural habitats for precious fauna or flora found along the alignment. Mitigation Measures. The EIA recommended several mitigation measures, including resettlement, construction of green belts, barriers for noise mitigation, water-spraying and material covers for dust control, and appropriate allocation and rehabilitation of borrow pits for preventing land erosion. b. HNIP The HNIP includes no new construction or land acquisition. There appears to be no ecologically protected area in the program areas. The ecological and cultural environments were surveyed, and no important natural habitat or cultural property was found. The air and acoustic environments were monitored, and potential impacts were projected. Because construction works are made up of a limited scope of rehabilitating existing roads, no significant impacts are envisaged. To minimize the environmental impacts of the project, a variety of mitigation measures have been integrated into the EAP, including soil and vegetation protection; noise, air, and water pollution protection; and mitigation measures for borrow pits and construction camps. 5.2 What are the main features of the EMP and are they adequate? The EAP comprises an environmental protection plan and an environmental monitoring plan. Both plans specify responsible parties and supervising parties for their implementation at the design stage, construction stage, and operation stage. The protection plan involves practical and cost-effective measures necessary to mitigate project-related impacts, such as the construction of green belts totaling an area of 5,000 m'. The - 16 - EAP, to ensure its implementation, includes training, institutional arrangements, an implementation schedule, and a budget. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: January 2002 The terms of reference (TOR) of the EIA, EIA report, and EAP were submitted to the Bank and were reviewed during the preappraisal mission in September 2001. The Bank reviewed the second draft of the EA reports in November 2001. The Bank received the third and final draft of the EIA, EAP, and EA Summary in January 2002. They were sent to the Bank's InfoShop for disclosure at the same time. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? A two-stage public consultation was carried out according to World Bank guidelines: (a) shortly after environmental screening and before the terns of reference for the EA were finalized (March and July 1999 respectively); and (b) after the draft EA report was prepared (August 2001 and February 2002 respectively). Meetings were held with local people at project-affected towns and surveys were conducted through questionnaires. Project-affected individuals, organizations of concemed villagers, and village committees were intensively consulted. Local government officers and other institutions such as NGOs also were consulted. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? During the construction and operation phases, environmental monitoring will be carried out to verify the project's actual impacts on the environment, identify unexpected environmental problems at an early stage, and adjust environmental measures as appropriate. Environmental monitoring will be conducted by Envirommental Protection Office of IMCD at the construction stage. At the operational stage, environmental monitoring will be entrusted to local environmental monitoring centers. The results of the monitoring will be reported to the Bank and local environmental authorities. The environmental monitoring plans are provided in Annex 12, Table 2. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The project targets one of the poorest areas of hner Mongolia. The project will complement the government's ongoing poverty alleviation efforts, particularly in agricultural development and rural roads, by providing easier, more efficient and less costly means of transportation. The HNIP component is designed as a poverty-reduction intervention to benefit the rural areas of the region. The major social issues of the project relate to land acquisition and resettlement. The project management office (PMO) carried out a census of the affected people, an inventory of affected assets, a socioeconomic survey and a social assessment within an extended corridor of about 10 km along the proposed LJH alignment to assess the general social and economic impacts of the project. The project will acquire 7,866 mu of land for the LJH component, including 3,871 mu of cultivated land. This will affect 12,693 people in 3,568 households. The project will need to relocate 37 people in 12 households. The HNIP will be implemented within existing road bases and will not require any land acquisition or house demolition. The PMO has developed a RAP, which details the census, inventory, project resettlement policy, compensation - 17 - rates and budget, compensation and rehabilitation programs, and institutional and monitoring arrangements. The RAP is available in the project file and will be deposited in the Bank's Public Infonnation Center (Its summary is in Annex 13). One objective of the social assessment was to identify any ethnic minority population, develop an understanding of their socioeconomic situation, assess the impact of the project on them, and integrate their concems and suggestions into the project design. The social assessment found that there is a small Mongolian population in the project areas that makes up less than 4 percent of the local population. Unlike the Mongolian population in grassland areas in Inner Mongolia, they are scattered among the Han population and are well integrated into the Han culture. There is no distinctive difference between them and their Han neighbors in their social and economic activities. The project will affect 123 Mongolian farmers in 29 households. Based on the findings of the social assessment, it was concluded that the Mongolian households in the project area do not meet Bank criteria on indigenous people and therefore OD 4.20 does not apply. The alignment of the LJH runs along an existing highway, actually using parts of the existing highway. During the field surveys for the feasibility study and preliminary technical designs, the entire alignment was screened for cultural properties and relics. No above-ground cultural relics were identified as affected by the project. Consultations with cultural relics department and local govemments revealed no historical underground sites along the project aligrnent. The Chinese Cultural Relics Protection Law will be followed if underground historical relics are found during project construction. 6.2 Participatory Approach: How are key stakeholders participating in the project? All affected households and villages were identified through the census and social assessment. Project information was provided to the affected villages and local governments through newspaper announcements, posters, and public meetings. The consultation strategy used focus-group discussions and key informant interviews to disseminate project information, consult affected people about the resettlement and rehabilitation strategy, and note people's concerns and needs so that they could be incorporated into the project design. Information dissemination and consultations will continue during project implementation. A resettlement information booklet, including detailed entitlements for each household, compensation and entitlement policies, and grievance procedures will be distributed to affected people before resettlement implementation. The affected communities will play a key role in finalizing and implementing livelihood-restoration programs. Both intemal monitoring and independent monitoring of the resettlement program will be conducted regularly during project implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? China Resettlement Research Centre was contracted to head the social assessment exercise. Village commlittees and farmer groups have also been consulted and have participated in the resettlement planning process and the preparation of the project. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The institutional arrangements for resettlement implementation are detailed in the RAP. East China Science and Engineering University, which is independent of the Inner Mongolia government and the project office, will serve as the independent monitoring agency for the resettlement program. The project will be monitored and the living standards of project-affected people will be evaluated throughout project implementation. The monitoring results will be reported regularly and, if and when needed, remedial actions will be designed. - 18 - 6.5 How will the project monitor performance in terms of social development outcomes? The borrower, the Bank, and the external monitoring institutions will supervise and monitor project implementation and the realization of the stated objectives. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Policy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) 0 Yes 0 No Pest Management (OP 4.09) 0 Yes 0 No Cultural Property (OPN 11.03) 0 Yes * No Indigenous Peoples (OD 4.20) 0 Yes * No Involuntary Resettlement (OP/BP 4.12) * Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. For OP 4.01, Environmental Assessment, see Section E.5. For OD 4.30, Involuntary Resettlement, see Section E.6. F. Sustainability and Risks 1. Sustainability: Experience with completed and ongoing Bank-financed highway projects indicates a strong cormnitment among Chinese officials to implement the physical components of the project. Generally, counterpart funds are mnade available on time. However, the policy of speeding up investment in the sector tends to cause funds to be diverted from maintenance to construction. To ameliorate this situation, about 20 percent of project funds are allocated to improving and maintaining existing roads, especially those in poorer areas. The level of tolls must be reviewed periodically so that the project proves to be financially and economically viable and the province can repay the Bank loan and carry out maintenance when required. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective The government lacks the commitment to M Maintain an effective dialogue with the central implement the final recommendations and Inner Mongolia governments from technical assistance. Trained staff lack the opportunity to apply M Continue dialogue with IMCD and coordinate acquired skills in the workplace. the work among the agencies There is insufficient accountability for the M Monitor resource utilization practices use of internal and external resources. frequently through regular supervision audits -19 - From Components to Outputs Counterpart resources are not available in N Follow up regularly on all required budgets, a timely manner. which are already identified and committed Political pressures interfere with M Prequalify contracts properly to ensure that the implementation and adversely affect the best contractors are selected, ensure the proper quality of construction. external supervision of construction, and provide frequent Bank supervision Land acquisition and resettlement suffer M Provide frequent supervision, with a particular delays. focus on resettlement during the first year of implementation Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: N/A G. Main Loan Conditions 1. Effectiveness Condition Issuance of acceptable legal opinions. 2. Other [classify according to covenant types used in the Legal Agreements.] 2.1 Agreement Reached with the Government: The borrower will ensure that the proceeds of the loan are on-lent to the beneficiary, Inner Mongolia Autonomous Region, on the same terms and conditions as the Bank loan, with the beneficiary bearing the foreign exchange risk. 2.2 Agreement Reached with the Beneficiary: (a) Laoyemiao-Jining Highway. IMCD shall undertake, complete and furnish to the Bank an analysis and recommendation for toll rates on LJH by June 30, 2005, taking into account the findings of studies about this issue under other Bank-financed highway projects in China, and the experience with toll rates on major roads. (b) Highway NetworkImprovementProgram. IMCD shall prepare and furnish to the Bank an annual monitoring report by May 15 of each year starting 2003, until two years after the program is completed. (c) Highway Safety. IMCD shall complete the black-spot improvements works by December 31, 2005. (d) Institutional strengthening and training. By November 15 of each year, beginning in 2002, IMCD will furnish to the Bank an annual IST report covering progress in implementing the IMCD maintenance reform program and training, including a training schedule for the future year and a description of the training carried out during the year of the report. - 20 - IMCD will carry out the studies and maintenance-by-contract pilot financed under TCC-4 in the manner specified in the TCC-4 document, and will discuss with the Bank the conclusions and recommendations of the studies and report to the Bank on the implementation of the pilot and share the lessons learned from it. (e) Environment, Land Acquisition and Resettlement. IMCD shall carry out the EAP and RAP, in a manner satisfactory to the Bank, and furnish any proposed revision of these plans to the Bank for its prior approval. IMCD also shall maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with indicators acceptable to the Bank, the implementation of EAP and RAP. Under terms of reference acceptable to the Bank, IMCD will prepare and furnish to the Bank: (i) a quarterly report and an annual environmental monitoring report through the period of implementation, with the first report submitted by February 15, 2004; (ii) by May 15 and November 15 of each year, starting May 15, 2003 until two years after completion of the project, an internal resettlement report prepared by agencies of Inner Mongolia Autonomous Region responsible for resettlement activities on the implementation and results of such activities during the preceding six-month period; and (iii) by February 15 and August 15 of each year, starting February 15, 2003 until two years after completion of the project, an external resettlement report prepared by an independent entity acceptable to the Bank, on the implementation and results of the resettlement activities during the same six-month period referred to in clause (ii) above. (f) Reporting, Monitoring and Auditing Using guidelines acceptable to the Bank, IMCD shall prepare and submit to the Bank: * A monthly progress report on the civil works of LJH * A quarterly progress report on implementation of all project components * An annual monitoring report, in a form satisfactory to the Bank, that assesses the degree to which implementation and development goals were achieved for all components, by February 15, of each year, beginning in 2004, through 2007 * An implementation completion report, in a format acceptable to the Bank, within six months of the closing date of the Bank loan * Audited accounts for the project, statements of expenditures and special accounts prepared by independent auditors acceptable to the Bank, within six months of the close of each fiscal year. * Unaudited project financial statements on a semi-annual basis within 45 days of the close of each reporting period (i.e. prior to August 15 and February 15 of the following year based on a calendar year) H. Readiness for Implementation 1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. I 1. b) Not applicable. 1 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. D 4. The following items are lacking and are discussed under loan conditions (Section G): - 21 - 1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. upee Teravthom Jitendra N. Bajpai ukon Huang Team Leader Sector Manager/Director Country Director - 22 - Annex 1: Project Design Summary CHINA: Inner Mongolia Highway Project Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Support social and economic Increase in Gross Output Annual economic reports and Increased economic activity development in Inner Value of Agriculture and statistics on Inner Mongolia and accessibility to all areas Mongolia Autonomous Industry (GOVAI) in affected in Region through effective counties and in a few control Country economic reports the region enhance infrastructure investment counties along the project opportunities in all sectors corridors and contribute to sustainable and equitable development. Project Development Outcome / Impact ProJect reports: (from Objective to Goal) Objective: Indicators: The project aims to improve Reduced time spent on Travel speed and average Economic conditions in the the efficiency, safety, and interprovincial trips through a daily traffic (ADT) on country and provinces remain cost-effectiveness of the more efficient highway system existing highway robust. transport infrastructure to involving lower costs and support the social and shorter distances Progress on network Counterpart funds are not economic development of the rehabilitation and over-stretched and Inner Mongolia Autonomous Reduction in number of days maintenance maintenance is sustained. Region, a poor, land-locked road network is closed to region in northwestern China, traffic Progress on traffic safety Results of the highway safety thus reducing social and TA are fully applied. economic disparity within the Lower traffic accident fatality region. rate, especially on the heavily traveled corridor Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: 1. Approximately 90 km of - ADT on new expressway Project performance Sector organization, the Laoyemiao-Jining and existing road. monitoring reports operation, and management highway (LJH) constructed - Average vehicle speed on improve. the new expressway and existing road. 2. Existing road network, - ADT on local roads in Project performance Commitment to implement especially in relatively poor affected areas. monitoring reports TA's final recommendations areas, properly maintained - Number of days local on highway maintenance and improved roads are closed to traffic. management is sustained. 3. Traffic safety on existing - Number of traffic accident Report of traffic safety Commitment to implement network improved fatalities and their severity analysis TA's final recommendations on the traffic safety audit is sustained. -23 - 4. Technical and management - Qualitative evaluation Reports on implementation of Training programs prove capacity of IMCD and its reflecting sharing of new study recommendations, and relevant and managers willing related departments knowledge and exercising trainees' report to give opportunities to strengthened new skills by staff trained trainees to apply new skills. under the project, as well as Progress reports on social and improvement of performance environmental monitoring in specific functions and activities activities - Quality of project management of social and environmental aspects Project Components Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Construction of LJH US$ 179.4 million Monthly reports for civil Political pressures do not works interfere with implementation and adversely affect the quality of construction. Highway Network US$ 61.1 million Quarterly progress report for Counterpart resources are Improvement Program the entire project made available in a timely manner. Highway safety component US$ 2.1 million Annual reports of traffic Traffic safety audit is safety analysis implemented. Strengthening of highway US$ 0.8 million Report on implementation of Opportunities are opened to management capacity through study recommendations trainees to apply new skills in training workplace. Provision of road maintenance US$ 6.4 million Disbursement progress report equipment Total Project Cost US$ 249.8 million Interest during construction US$ 17.9 million Front-end fee US$ 1.0 million Total Financing Required US$ 268.7 million -24 - Annex 1-1 Ke Performance Indicators & Development Indicators Attainment of Project Monitoring Indictors 2001 2004 2006 2008 objectives Provide a more efficient, ADT on LJH(veh./day) safe and cost effective Laoyemiao-Xinghe 5,700 6,200 transport infrastructure Xinghe-Jining 5,500 5,900 NHI I0 ADT on existing class II Road Laoyemiao-Xinghe 6,600 8,300 4,000 4,200 Xinghe-Jining 6,500 8,200 3,900 4,100 NHI 10 accident rates on existing road (times/km) Laoyemiao-Xinghe 0.027 0.035 0.047 0.059 Xinghe-Jining 0.019 0.027 0.056 0.069 routine maintenance expenditure (million yuan/km) 6,000 8,000 12,000 20,000 Periodic maintenance (million yuan/lkn) 330,000 360,000 400,00 600,000 0 ADT on road under HNIP (AADT) (1) Huade-Anye 1,000 1,100 1,200 1,300 (2) Zuozishan-Liangcheng 900 1,000 1,100 1,200 (3) Kebuer-Baiyinchagan 900 980 1,030 1,070 (4) Bailinmiao-Xilamuren 2,070 2,390 2,600 2,830 (5) Tumuertai-Shangdu 860 1,000 1,090 1,180 Number of days road closed to traffic (1) Huade-Anye 10 3 (2) Zuozishan-Liangcheng 12 3 (3) Kebuer-Baiyinchagan 8 4 (4) Bailinmiao-Xilamuren 9 3 (5) Tumuertai-Shangdu 12 5 Tonnage of goods transported to coastal 2,350 3,608 4,655 7,227 provinces (100 t/yr) Average GDP in the project affected areas 9,100 10,290 14,410 16,280 (million yuan) Implementation Indicators 2003 2004 2005 2006 2007 2008 Total % of civil works completed on LJH 20 30 30 10 10 100 % of highways improve/rehabilitated under HNIP 30 40 20 10 100 Highway safety:% of improved blackspots 25 25 30 20 100 Number of person-month of completed training (%) 20 23 22 18 17 100 % of road under maintenance by contract (TCC-4) 60 80 100 100 100 - 25 - Annex 2: Detailed Project Description CHINA: Inner Mongolia Highway Project By Component: Project Component I - US$185.80 million Highway Capacity Expansion ConstructionoftheLaoyemiao-JiningHighway: USS174.6million Construction of the approximately 90-krn Laoyemiao-to-Jining Highway (LJH) is the project's main component. The LJH is a divided, four-lane, access-controlled toll highway. The proposed LJH is a critical part of the national trunk highway system (NTHS) and of the east-west corridor of Inner Mongolia connecting its key industrial, administrative, and hub cities of Baotou, Hohhot, and Jining. The LJH will operate as a closed toll highway. It will include two interchanges, three toll stations, two service areas, and a facility for highway administration and maintenance. The component will also supply and install electrical and mechanical facilities (tolling, monitoring, telecommunications, and lighting systems). Equipment: US$6.4 million Equipment will be used to maintain national and provincial highways (including expressways) and other lower-class roads. Equipment needed for control of construction quality and environmental monitoring will be procured or supplied before commencement of civil works and will be locally financed. The equipment list, which includes cost estimates, is available in the project file. Supervision of construction: US$4.8 million Based on the experience gained from ongoing Bank-financed highway projects in China, a combined team of local engineers, technicians, and other personnel and international consultants will be created to supervise the construction of the LJH. The foreign engineers will be integrated with the supervisory organization and will help establish procedures at all levels, including on-site inspections and laboratory testing. They also will train local staff through formal sessions and on-the-job training. Three intemational experts for a total of about 72 person-months are envisaged to supervise construction, of which four person-months will be for training and five for contingencies. To supervise six ICB civil works contracts, one ICB contract for electrical and mechanical facilities, and three NCB contracts for buildings, two resident engineers offices will be created with 100 staff including site engineers. The estimated domestic supervision input will come to about 2,800 person-months. Project Component 2 - US$61.10 million Highway Network Improvement Program (HNIP) for Poverty Areas Inner Mongolia is one of the poorest regions in China by every standard of measurement. Inner Mongolia has 101 banners and counties, half of which are classified as poor (31 counties and banners are classified as national-level poverty and 19 as provincial-level poverty), and only 25 percent of total roads are all-weather roads. The need to increase investment in lower-class, all-weather roads in Inner Mongolia was therefore considered indisputable. - 26 - IMCD proposed 41 road sections totaling about 2,300 km as possible candidates for the HNIP component. Five road sections were selected on the basis of the following criteria established by the Bank and IMCD: * The sections should link the poor to the developed areas of the province. * The engineering classification of these roads should be between Classes IV and II. * The sections must carry no fewer than 200-500 vehicles a day, depending on the proposed class of upgrade. * The economic rate of return on investment should be no less than 12 percent. * Special circumstances, such as a high accident rate also should justify consideration. The program includes roads totaling about 343 km, of which 85 km will be Class II highways and 258 km will be Class III. The EIRR ranges from between 18.1 percent and 40.6 percent. Feasibility reports on the five road sections as well as their EA reports are available in the project file. Implementation. Road sections will be packaged into 16 contracts with an average length of about 16 km and a total cost of about US$61.1 million, of which the Bank loan will finance 39 percent. All contracts will use the NCB procurement method. A group will be established in the PMO to supervise implementation. The sections will be improved from 2002 through 2005. The details are shown in Table A. Monitoring and performance indicators. Monitoring values will be estimated. The Bank and IMCD will review the implementation of the program during the yearly supervision missions, and results will be compared with those agreed the previous year. The monitoring indicators include the following: * Average daily traffic in MTE * Number of days the road is closed and not available for use * Increase or decrease in the county per capita GOVAI. Table A: Summary of Hlghway Network mprovement Program (HNIP) No. Location Highway Class of Highway Construction Total Cost Contract Class 2 Class 3 period (million yuan) package Total 85 258 429 16 1 Huade County Huade-Anye 85 2003-2005 160 5 2 Zuozi/Liangcheng Zuozishan- 48 2003-2004 54 2 County Liangcheng 3 Chayouzhong Kebuer- 70 2002-2004 75 3 Banner Baiyinchagan Chayouhou Banner 4 Damao Banner Bailinmiao- 86 2002-2004 86 4 Xilamuren 5 Shangdu County Tumuetail- 54 2002-2003 54 2 _ Shangdu Project Component 3 - USS 2.10 million Highway Safety Component (Black-Spot Improvements) 1MCD has undertaken a highway safety component under the ongoing Tri-provincial Highway project. The implementation of the ongoing highway safety component was reviewed and the review found that the current diffusion of responsibilities in different areas makes it difficult to address the problem in a comprehensive manner. Both MOC and the PCDs need to continue working on the - 27 - engineering aspects of highway safety, which are within their area of responsibility. It was agreed that the proposed highway safety component would expand the black-spot improvement work under the ongoing project. Selection of black spots. The proposed black-spot improvement program will include 15 locations and be caried out within the existing right-of-way. The locations were selected on the basis of the following criteria: * Accidents are frequent and serious. * Local authorities had not planned improvements for the next few years. * Before and after analyses could be easily conducted. * Traffic volume is high (more than 2,000 veh/day). Implementation. Engineering solutions for the black-spot improvement works are estimated at RMB 15 million. Detailed designs of the first batch of civil works, including installing traffic safety facilities, will be completed by December 2002, and the entire program will be implemented from 2003 to 2006. Work on the 15 locations will be grouped into about seven contract packages and procured through NCB. Project Component 4 - US$0.80 million Institutional Strengthening and Training The IST component of the proposed project was designed to help IMCD strengthen its management of the road system, especially of maintenance activities. Although the major part of the IST component will be financed in parallel by the Technical Cooperation Credit 4 (TCC-4) and local counterpart funds, it was designed to complement the staff training financed by IBRD loan under the project. The IST component in a broader sense, therefore, includes the following: A. Training (financed by IBRD loan under the project ) B. Technical Assistance (T/A) Program financed in parallel under the TCC-4 financial arrangement a. Projectpreparation-feasibility study reports, Environmental Impact Assessment, Resettlement Action Plan, etc. b. Maintenance Strengthening Program * Software and hardware support for the Maintenance Management System (MMS) * Road expenditure allocation study * Pilot maintenance-by-contract program c. Research and engineering study * Design and construction of road under severe winter conditions to reduce parallel reflecting crack The total cost of the IST program including the T/A activities is US$4.6 million, of which US$1.5 million will be covered by TCC-4, US$ 0.5 million by IBRD loan under the project and the remaining US$2.6 million equivalent from counterpart funds. Details of the IST component are discussed in Annex 14. - 28 - Table B: Overall Implementation Schedule 2001 2002 2003 2004 2005 2006 2007 GENERAL PROCUREMENT NOTICE (1013112001) Works 1. Laoyemiao-Jining lghway . - Civil Works - Buildings - Supply and 7-I-_-_-_-_- _-_-r Installation (E & M) 2. Highway Network Improvement (HNIP) - First Package _ - Second Package 3. Black Spot Improvements - First Package _ I Supervision of Construction - Laoyemiao-i Jining Highway Procurement of qulpment - Maintenance _ for National and Provincia Hlghways i ~ Pregualification/DreDaration of biddinq documents/rOR _ Construction/suDervision/deliverv/execubon of studies Bidding Drocesslcomoetition amona consultants Defects liabilitv oaerod 29 - Annex 3: Estimated Project Costs CHINA: Inner Mongolia Highway Project Local Foreign Total Project Cost By Component US $million US $million US $million A. Works: 1) Civil works for LJH 78.89 53.70 132.59 2) Building for LJH 2.34 1.00 3.34 3) Electrical and mechanical facilities 1.49 3.49 4.98 4) HNIP 33.64 18.12 51.76 5) Black-spot improvement 1.24 0.54 1.78 6) Environmental Protection 0.47 0.47 Subtotal 118.07 76.85 194.9 B. Construction supervision: 1) LJH 3.12 1.44 4.56 2) HNIP 0.73 0.73 3) Environmental Protection 0.09 0.09 Subtotal 3.94 1.4 5.38 C. Equipment 0.00 6.00 6.00 D. IST /1 0.24 0.49 0.73 Total Baseline Cost 122.25 84.78 207.03 Physical Contingencies 11.76 7.7 19.46 Price Contingencies 9.97 6.52 16.49 Subtotal 21.73 14.22 35.95 Land Acquisition 6.81 6.81 Total Project Costs' 150.79 99.00 249.79 Interest during construcion 17.94 17.94 Front-end fee 1.00 1.00 Total Financing Required 168.73 100.00 268.73 Local Foreign Total Project Cost By Category US Smillion US $million US $million Goods 0.00 6.42 6.42 Works 139.48 90.52 230.00 Services 4.25 1.54 5.79 Training 0.25 0.52 0.77 Resettlement 6.81 0.00 6.81 Total Project Costs 150.79 99.00 249.79 Interest during construcdion 17.94 0.00 17.94 Front-end fee 0.00 1.00 1.00 Total Financing Required 168.73 100.00 268.73 1. This does not includes T/A totaling 51.5 million being arranged from TCC-4 to finance project preparation, technical assistance for Maintenance Management System and pilot program for maintenance by contract. - 30 - Annex 4: Cost Benefit Analysis Summary CHINA: Inner Mongolia Highway Project [For projects with benefits that are measured in monetary terms] Present Value of Flows Fiscal Impact Economic Financial Analysis' Analysis _ Taxes Subsidles Beneflts: 15,256.8 10,317.9 2,784.0 RMB million Costs: 2,495.7 2,526.8 RMB million . Net Benefits: 12,761.1 7,791.1 2,784.0 RMB million IRR: 17.9 5.8 In %__________________ ________ 1 The value of financial benefits is lower than that of econornic benefits because of controls on the toll charges for the expressway and the non-revenue-eaming roads under the HNIP. If the difference between the present value of financial and economic flows is large and cannot be explained by taxes and subsidies, a brief explanation of the difference is warranted, e.g. "The value of financial benefits is less than that of economic benefits because of controls on electricity tariffs." Summary of Benefits and Costs: The overall EIRR of the project (including LJH and BNIP) is estimated to be 17.9 percent and the NPV (at 12 percent) is estimated to be RMB 979.7 million. The result is summarized as follows: Summary of Economic Evaluation Results EIRR (in%) NPV (12%, mnillion RMs) Laoyemiao- Jining Highway (LJH: Jining-Xinghe 14.1 220.9 Xinghe - Laoyemiao 17.6 194.7 Subtotal lai 4296 Highway Network Improvement Program (BNIP) 30.2 550.1 Total 17.9 979.7 Main Assumptions: 1. The economic evaluation of the project covers the following two project components: a. Construction of the 91.3-km Laoyemiao-Jining Highway (LJH) b. Upgrading and improvement of five rural roads (345 kIn) in the poor areas of Inner Mongolia under the Highway Network Improvement Program (HNIP) component 2. The analysis is based on the actual and forecasted operating data on traffic, vehicle operating cost (VOC) savings, project economic cost and transport user benefits. The main inputs and assumptions for the evaluation are: a. Capital investment and maintenance costs, revised to reflect February 2002 prices - 31 - b. The benefit stream, also reflected in February 2002 prices, comprises savings in VOC, travel time savings through reduced congestion on the existing route, and reduction in accident costs c. An assumed project life of 20 years, a capital investment period of 2002-2007, depending on the road being evaluated d. Full benefits starting to accrue for LJH in 2007 and for the five rural roads from 2002 to 2005 (depending on the road). 3. This annex comprises three parts. Part I is the economic evaluation of L1H; Part H is the economic evaluation of the five rural roads under the HNIP component; and Part III is the overall economic evaluation of the project, including probabilistic risk analysis. PART I: LAOYEMIAO - JINIG HIGHWAY (LJH) 4. For purposes of evaluation, LJH has been divided into two sections: Length of the Length of the new eistIng road (km) expressway (Ian) Section 1: Jiing - Xinghe 69.29 70.00 Section 2: Xinghe - Laoyeniiao 21.27 21.27 Total 90.56 91.27 Highway Expansion Plan-Justification for Investment 5. Overview. Inner Mongolia Autonomous Region (IMAR) has a vast land area (1.18 million kmn). The IMAR is an inland transport hub in the north of China serving the east-west transportation needs and linking China's western provinces to the coastal areas in the east. The average altitude of this roughly rectangular region, which stretches about 2,500 km from east to west and 1,700 km from north to south, is 1,100 meters. Deserts, mountains, and plateaus constitute 90 percent of the terrain. Oasis and river basin land constitutes 10 percent of terrain, and more than 70 percent of the total population of 24.0 million inhabits this 10 percent. The National Road 110 crosses the southern part of the region, linlking Beijing and Tianjin port (on the east) to the westem provinces of China. About one-third of IMAR's population lives along the NR1 10 and produces about two-thirds of GDP of the region. Basically, the entire IMAR is classified by the Government as a poverty region. 6. The Government of China plans to build five north-south and seven east-west corridor highways, the National Trunk Highway System (NTHS), before 2010. NR110 (Dantong-Lhasa Highway, or DLH) is one of the seven east-west NTHS highways. The total length of DLH is about 4,669 km, of which about 20 percent (or 837 kIn) is in Inner Mongolia. Except for the project section, all other parts of DLH in Inner Mongolia are either completed or under construction. The proposed highway is not only a key section of the NTHS, it is also part of the crucial east-west corridor of Inner Mongolia linking its major industrial, administrative and hub cities of Baotou, Hohhot and Jining. Given the important role of this corridor in the rural economy, the proposed project has the highest priority in Inner Mongolia's regional highway development plan. Level and Timing of Investment 7. For the proposed highway conidor, motorized traffic increased an average of 15.8 percent per year between 1990-2000, and by 2000 had reached 6,000 motorized vehicles per day throughout its length. Non-motorized and other traffic (e.g., bicycles, animal carts, small farm tractors, and motorcycles) add the - 32 - equivalent of 700-800 more vehicles per day. With a projected 8.0 percent annual growth, motorized traffic alone on this highway corridor will reach 9,400-9,800 vehicles per day by 2006, the proposed opening year for LJH. This would exceed the capacity of the existing road, which is about 4,500 vehicles per day. An economic assessment of the optimum opening year of the highway shows that all sections of the road reach capacity before 2000. When the more convenient highway connection from Gansu through Ningxia and Inner Mongolia to the seaport of Tianjin is completed, high traffic growth resulting from the Western Region Development Initiative of the government is anticipated. Section 1 Section 2 Jining - Xinghe Xinghe - Laoyeminao Road Class (old road / new road) II / Expressway I1/ Expressway Road Condition (old road / new road) Fair / Good Fair / Good Terrain Flat Mountain Capacity (AADT/day) (old road / new road) 5,000/30,000 4,000 / 25,000 Motorized Traffic - 2000 (AADT/day) 6,000 6,100 Year for Capacity Before 2000 Before 2000 Proposed Full Opening Year 2007 2007 Highway Corridor Traffic 8. Estimates of base-year traffic were made on the basis of routine traffic counts and a comprehensive origin and destination (O/D) survey that took place in October 1998 and was updated in November 2000 and July 2001). Projections of base, generated, and diverted traffic were made for 25 zones on the basis of a conventional growth model. A regression analysis was used to derive a relationship between economic growth and road transport demand. Rural economic growth and traffic demand indicate that traffic in the project corridor will grow an average of 8.0 percent per year between 2000 and 2006, 6.0 percent per year between 2006 and 2015, and 4.1 percent per year between 2015 and 2025. The overall traffic growth rates are summarized as follows: Annual Traffic Growth Rate Car Bus & Truck Average Actual: 1990-2000 18.2% 15.2% 15.8% Projection: 2000-2006 9.3% 7.6% 8.0% 2006-2015 7.3% 5.6% 6.0% 2015-2025 5.3% 3.7% 4.1% 9. Alternatives. The feasibility study considered three alternative alignments, i.e. the full expressway, staged expressway construction, and a Class I highway. Each alternative was compared on the basis of costs, benefits, services to rural cities, and relationship to future economic development. The full expressway was selected on the basis of cost and environmental and resettlement consequences (details are in the feasibility study reports available in project files). Traffic on the Highway 10. The new expressway should start operations in October 2006. Based on the information in the O/D survey and the feasibility study, the diversion ratios were calculated by using financial VOC for the road users as an independent variable, with due consideration given to the impacts of the proposed toll rates and travel distances, as well as experience from other recent Bank-financed highway projects in China. Calculations indicate that about 60 percent of motorized traffic on the corridor may divert to the new highway, depending on the road section and vehicle type, during the opening year of LJH. Sensitivity tests - 33 - with lower diversion rates show that the LJH would still be justified with an average diversion rate of about 50 percent, a rate exceeded by most of the toll highways financed by the Bank in China. 11. Generated traffic is assumed to be 10 percent of basic traffic. There is no railway line between Jining and Laoyemiao, so no diversion of traffic from railway to the new expressway has been taken into account. The highway corridor traffic forecast, by section, is summarized as follows: Normal Traffic, by Sections (AADT) Section 1 Section 2 Jining - Xinghe Xinghe - Laoyemiao The Existine Road: Actual 1990 1,436 1,380 1995 2,851 2,880 1998 4,396 4,572 1999 5,195 5.262 2000 6,086 6,126 Forecast 2006 3,947 4,031 2015 5,800 6,110 2025 7,375 8,042 The Expresswav: Forecast 2006 5,598 5,782 2015 10,131 10,795 2025 16,071 17,729 Economic Costs 12. Financial costs have been converted to economic costs by eliminating price contingency, interest payments during construction, and taxes and customs duty on imported materials, and by applying shadow prices. The overall average shadow price is 1.07, and the resulting overall economic cost is 89.3 percent of the financial cost. Economic Benefits 13. The economic analysis includes the benefits derived from: (a) VOC savings on the new expressway for normal and generated traffic (as summarized below); (b) time savings through relieved congestion on the existing road, and (c) lower accident costs. The benefits resulting from the lower level of congestion were quantified. The value of passenger time savings was estimated at RMB 1.5 per passengir-hour, on the basis of updated values from a report on feasibility study methodologies for highways in China (Rust PPK. Australia Feasibility Study Methodology Report, February 1996). The same source was used for vehicle accident rates on different classes of roads. The benefits of generated traffic were calculated using the standard demand-curve analysis and the assumption of a linear relationship between demand and travel cost over the relevant cost range. Economic Vehicle Operating Costs (RMB per km, February 2002 prices) Section I Section 2 Old road New road Old road New road Car 0.929 0.764 1.073 0.837 Medlumnbus 1.661 1.362 2.117 1.493 Large bus 3.499 2.923 4.391 3.192 Small truck 1.705 1.385 1.890 1.512 Medium truck 2.095 1.785 2.305 1.938 Large truck 2.774 2.344 2.995 2.503 Tractor/trailer 4.257 3.643 4.507 3.824 - 34 - Sample of Economic Vehicle Operating Cost Calculation (RMB per 1,000 veh.-km, February 2002 prices) Medium Large Small Medium Large Traller/ Car bus bust ruck Truck truck container The Existina Road Fuel 408 544 1,125 800 928 990 1,140 Tires 39 40 149 61 140 540 1,188 Maintenance 367 490 1,013 720 835 891 1,026 Crew 22 45 45 45 45 45 45 Depreciation 29 113 310 79 147 308 858 Subtotal 865 1,232 2,642 1.705 2.095 2.774 4,257 Time value of passengers 64 429 857 Total 929 1,661 3.499 1.705 2.095 2.774 4.257 The New Exnresswav Fuel 306 416 900 576 736 750 840 Tires 35 35 130 55 130 480 1,073 Maintenance 330 441 912 648 752 802 923 Crew 17 35 35 35 35 35 35 Depreciation 26 102 279 71 132 277 772 Subtotal 714 1,029 2,256 1.385 1.785 2.344 3.643 Time value of passengers 50 333 667 Total 764 1362 2.923 1,385 1.785 2,344 3.643 Economic Evaluation 14. The overall EIRR for LJH is estimated to be 15.1 percent, with the results for each road section summarized as follows: Economic Evaluation of LJH NPV (12%, Extra children Extra people attending EIRR (in %) million RMB) attending school /i health services /_i Jining-Xinghe 14.1 220.9 370 850 Xinghe - Laoyemiao 17.6 194.6 205 590 Whole route 15.1 429.6 575 1,440 /1: Information was collected to establish baseline data on the indirect benefits derived from improved access to education and health care services. However, its quantifiable benefits were not included. 15 The estimated distribution of the project benefits shows that traffic that diverts to LJH constitutes the majority of the road user's benefits (61.4 percent), and that car and truck traffic will benefit the most from the project (73.5 percent). A summary of the breakdown of the benefits is as follows: Distribution of the Project Benefits (million RMB) Road user Road agency Society Total project 1,615.3 (1,185.7) 429.6 Of which: Road user a. By traffic: Diverted traffic Generated traffic Existing road traffic Road safet Total 991.2 49.6 527.0 47.5 1,615.3 61.4% 3.1% 32.6% 2.9% 100.0% b. By vehicles: Buses Trucks Trailer Total 428.1 254.5 758.4 174.3 1,615.3 26.5% 15.8% 47.0% 10.8% 100.0% - 35 - Sensitivity Analysis 16. The basic evaluation of the project, by section and on the whole, indicates that the selected alignment is economically viable. The sensitivity tests with respect to higher costs, lower benefits and traffic projections, zero value of time, and zero generated-traffic benefits for LJH mnaintain this position. The analysis of the optimum year for opening the road shows that delaying the completion by two years would reduce the EIRR by about 3.6 percent. Sensitivity Tests on the Economic Evaluation of LJH EIRR (%) NPV (12%, million RMB Delay the completion by oneyear 13.3 184.4 Higher capital cost (+15%1a) (a) 13.6 237.6 Lower benefits (-15%) (b) 13.3 174.3 Combine (a) and (b) 12.0 -- Zero value of time 14.3 313.2 Zero generated traffic 14.7 365.1 Lower traffic projection 12.2 17.9 Switching values % increase Cost increase to reduce EIRR to 12% 136% Benefit reduction to reduce EIRR to 12% 73.0 % 17. The sensitivity evaluation also indicates that the conditions for the project to fall below the minimum acceptable level for viability, i.e., an NPV of less than zero at a 12 percent discount rate or an EIRR of less than 12 percent, are unlikely to occur. The benefits would have to fall to less than 73.0 percent of those in the base case, or the costs would have to increase to more than 1.36 times those of the base costs, or a combination of costs increased by 1.15 percent and benefits fallen to 85 percent simultaneously. PART II: HIGHWAY NETWORK IPROVEMENT PROGRAM (HNIP) Selection of Highways and Its Traffic 18. The HNIP component consists of the following five rural roads totaling 343 km. The main objective of the HNIP is to upgrade existing rural roads to Class II or Class III paved roads. Length Traffic Road width (m) Pavement (km) (AADT, 2000) (Old / new) (Old / new) 1. Huade- Anye 85.0 966 8.5/ 12.0 Yes / Yes 2. Kebuer - Baiyingzhagan 70.0 875 7.5 / 8.5 No / Yes 3. Tumuertai - Shangdu 54.0 823 8.5/ 8.5 No / Yes 4. Bailingmiao - Xilamuren 86.0 1,971 8.5/ 8.5 Yes /Yes 5. Zuozi - Liangcheng 48.0 906 7.0/ 8.5 No /Yes Total 343.0 19. Because all five roads are in the same region, the rural economic development and traffic pattems are quite similar. On the basis of actual traffic levels and rural economic growth rates, traffic growth rates have been estimated, depending on the location of the roads, to be 3 percent to 5 percent from 2000-2005, reduced by 1 percent for each year between 2005 and 2025. - 36 - Economic Costs and Benefits 20. Financial costs have been converted to economic costs using the same method and factors as for the LJH, with the results given in the following table. Financial and Economic Cost For HNIP (million RMB) Financial Economic Construction cost cost period I . Huade - Anye 200.00 178.60 2003- 2005 2. Kebuer- Baiyingchagan 80.00 71.44 2002- 2004 3. Tumuertai - Shangdu 55.00 49.12 2002- 2003 4. Bailingniao - Xilamuren 100.00 89.30 2002-2004 5. Zuozi - Liangcheng 70.00 62.52 2003 - 2004 Total 505.00 450.98 21. The principal evaluated benefits of the rural roads would be VOC savings due to better road surfaces. The associated upgrading of road class would also result in higher traffic speeds and an improvement in the road roughness index. In most of these sparsely populated areas, it is assumed that there is no generated traffic. Economic Evaluation and Sensitivity Analysis 22. The best estimates of EIRRs for the five rural roads range from 19.3 percent to 37.8 percent. The overall EIRR for HNIP is 30.2 percent and the NPV is RMB 550.1 million. EIRR and NPV for EINIP NPV (12%, Extra children Extra people attendlnj EIRR (in %) million RMB) attending school /_i health services /I 1. Huade - Anye 19.3 73.7 450 120 2. Kebuer - Baiyingchagan 33.5 110.0 450 130 3. Tumuertai - Shangdu 34.6 90.0 450 120 4. Bailingmiao - Xilamuren 37.8 190.4 180 55 5. Zuozi - Liangcheng 33.4 86.0 450 110 Total 30.2 550.1 1.980 535 LI: Information was collected to establish baseline data on the indirect benefits derived from improved access to education and health care services. However its quantifiable benefits were not included. 23. The risks associated with the evaluation of the rural roads are that traffic may grow more slowly than projected, thus making VOC savings lower than expected, and construction cost may be higher than projected. These risks were analyzed through sensitivity tests, and the results were found acceptable. For the project component to be non-acceptable (i.e., an EIRR of less than 12 percent, or zero NPV), construction costs would have to increase by more than 280 percent, or the benefits would have to be reduced to about 35.7 percent of their expected value, or a combination of costs increasing by 152 percent and benefits falling to 54 percent of expected values. PART III: THE OVERALL ECONOMIC EVALUATION OF THE PROJECT Overall Economic Internal Rate of Return (EIRR) 24. The overall EIRR of the project (including LJH and HNIP ) is estimated to be 17.9 percent and the NPV (12 percent) is estimated to be RMB 979.7 million. - 37 - Project Risks 25. All sections of the LJH and the rural roads under HNIP show acceptable economic returns. IMCD has experience in building and operating high-grade highways as well as in rural road projects, so the technical risks of implementing the project are minimal. Physically, the only tangible risk during implementation is a very tight construction schedule and budget. Probabilistic Risk Analysis for Economic Evaluation of LJH 26. To determine the degree of uncertainty for the project, a probabilistic risk analysis using Monte Carlo techniques was carried out. In a Monte Carlo analysis, each uncertainty factor is allowed to vary at random between set limits and all uncertainty factors are allowed to change simultaneously. Monte Carlo simulation provides probability distributions of the potential outcomes of decisions. By analyzing these distributions, we can assess the risk associated with making various decisions (or probabilistic risk analysis). The product of the analysis is a judgment on the possible range of the decision variable and on the likelihood of each value within this range. 27. For the five rural roads, the sum of capital costs constitutes only about 20 percent of the total capital investment. In view of their higher EIRR and lower capital investment, the probabilistic risk analysis for the project focused instead on the construction of LJH. The factors with the most uncertainty associated with the economic evaluation of LJH have been identified as follows: (a) traffic growth rate; (b) traffic diversion ratio to the new expressway; (c) the value of VOC, (d) capital investment; and (e) delaying the new highway opening to 2008. The results of the probabilistic risk analysis shows that the EIRR for the mostly likely scenario is 13.6 percent. The low scenario is 12.6 percent and the high scenario is 14.4 percent The standard error of the mean is 0.1 percent. The detailed results of Monte Carlo test and probabilistic risk analyses are shown in Appendix A and summarized as follows: Summary of LJH Probabilistic Risk Analyses Range of EIRR Most Hkely EIRR Standard Error of the Mean Jining-Xinghe 11.9%-13.7% 12.2% 0.1% Xinghe - Laoyeniiao 14.9% 16.8% 15.9% 0.1% Total route 12.6% -14.4% 13.6% 0.1% - 38 - APPENDIX A INNER MONGOLIA: LAOYEMIAO- JINING HIGHWAY EIRR SIMULATION AND PROBABILISTIC RISK ANALYSIS Summary: Display Range is from 8.0% to 19.0% (in%) Entire Range is from 6.8% to 19.7% (in%) After 1,000 Trials, the Std. Error of the Mean is 0.1% Statistics: Value Percentiles: Trials 1000 Mean 13.5% Percentile (in°/04 Median 13.6% 0% 6.8% Mode - 10% 11.1% Standard Deviation 1.8% Low Scenario 20% 12.1% Variance 0.0% '- 30% 12.6% Skewness -0.03 Most Likely 40% 13.1% Kurtosis 3.29 50% 13.6% Coeff. of Variability 0.13 High Scenario 60% 14.0% Range Minimum 6.8% 70% 14.4% Range Maximum 19.7% 80% 15.0% Range Width 13.0% 90% 15.8% Mean Std. Error 0.06% 100% 19.7% Fcrecw ERR - JLE (PMO4 1,000 Tials Frsuicy Chat 7 Oulia -5- =j .000 0 1 - 8.0% 108% 1jsa; 1.3% 110 O(hN) Assumutions Traffic Growth Rate Traffic Diversion Ratio Normal distribution with parameters: Normal distribution with parameters: Mean 100.0% Mean 100.0% Standard Dev. 15.0% Standard Dev. 10.0% Selected range is from -Infinity to +Infnity Selected range is from -Infmity to +Infinity Mean value in simulation was 100.2% Mean value in simulation was 99.6% VOC Capital Cost Triangular distribution with parameters: Triangular distribution with parameters: Minimum 95.0% Minimum 100.0% Likeliest 100.0% Likeliest 110.0% Maximum 110.0% Maximum 120.0% Selected range is from 95.0% to 110.0% Selected range is from 95.00% to 120.0% Mean value in simulation was 101.8% Mean value in simulation was 109.9% -39 - Sensitivity analysis I Switching values of critical items: Sensitivity Tests on the Economic Evaluation of LJH EIRR (%) NPV (12%, million RMB) Delay the completion by oneyear 133 184.4 Higher capital cost (+15%) (a) 13.6 237.6 Lower benefits (-15%) (b) 13.3 174.3 Combine (a) and (b) 12.0 -- Zerovalueoftime 14.3 313.2 Zero generated traffic 14.7 365.1 Lowertrafficprojection 12.2 17.9 Switching values % increase Cost increase to reduce EIRR to 12% 136% Benefit reduction to reduce EIRR to 12% 73.0 % -40 - Annex 5: Financial Summary CHINA: Inner Mongolia Highway Project 1. The financial evaluation of the project comprises two parts. Part I is for the LJH, a toll revenue-earning component; and Part II is for the rural roads network investment under the HNIP component, a non-financial-revenue-earning entity. 2. The financial cost of the project is calculated using the weighted average cost of funds from various sources. The opportunity cost of capital for the local grants as well as for the Bank loan are assumed at an average of 5 percent, and thus the average financial cost of capital for the project is estimated to be 5.0 percent. PART I: THE FINANCIAL EVALUATION OF LJH 3. The project calls for LJH to start trial operations in October 2006 and full operations in January 2007. IMCD will establish a Program Management Office in charge of operating LJH. The PMO, on behalf of IMCD, will be responsible for the day-to-day management, operation, maintenance, and development of the highway. The PMO also will bear the financial obligations and its own development including the repayment of the loans. The main financial revenue of LJH will come from toll charges, which are strictly controlled by the govermment. Financial Objective 4. IMCD has indicated that the purpose of toll collection is not to maximize the financial rate of return on the capital investment, but to repay the Bank's loan and to cover operation and maintenance expenses. The intended toll charges are quite reasonable (the toll charges for 2007 are at a level similar to the average toll charged by coastal provinces in China in 2000). The upward adjustment of toll rates was assumed to be slow, about 3.7 percent per year. Financial Forecast 5. Toll. The toll is based on vehicle size (small passenger cars, medium bus, large buses, small trucks, medium trucks, large trucks and trailers) and distance traveled. Some toll-exempted vehicles (police, ambulance and military vehicles) are expected to make up about 10 percent of total traffic. The proposed toll charges for LJH are as follows: Toil Charges (RMB / vehicle-km) Small Medium Large Small Medium Large Tractor- car bus bus truck truck I truck trailer 0.412 0.634 0.948 0.412 0.634 0.948 1.240 6. Operations. Based on current practice elsewhere in China, the operating costs of LJH shall include: (i) wages and benefits; (ii) maintenance; (iii) operating materials and supplies; (iv) administration; (v) others, and (vi) depreciation. All other expenses such as interest payments of the loan and others are included in the calculation of the profitability of LJH. 7 Profitability. Total operating revenue is estimated on the basis of traffic and toll charges. It is estimated that the total operating revenue of the LJH would be sufficient for IMCD to pay all its -41 - expenditures, including operating expenses, nonoperating expenses, routine maintenance, and expenditures for major maintenance when it takes place (see the income statement, page I of 3, Appendix A). 8. Cashflow. It is estimated that net income after taxes will be at least RMB 70 million after the opening of the LJH in 2007. The annual cash injection plus the depreciation reserves (about RMB 50 million per year) would further strengthen the cash-flow capacity of LJH. The LJH will have no difficulty meeting its financial obligations, which are estimated to be about 80 million RMB per year. It is expected that the low toll charges on vehicles will not affect the daily operations of the highway over the entire loan period (see Sources and Applications of Funds table, page 2 of 3, Appendix A). 9. Leverage and liquidity. The high portion of the Bank's loan will affect the financial leverage of the LJH, which will erode part of the equity and'affect the debt/equity ratio and debt/capital ratio (the financial leverage of the LJH) until 2010. However, the strong cash injections (see paragraph 8) will cause the current ratio (the liquidity of the LJH) to be healthy over the life of the loan. The current ratio of LJH will reach about 2.3, which is far from the critical ratio for short-term solvency problems of 1.0. (see Balance Sheet, page 3 of 3, Appendix A). The major assumptions for financial evaluation are shown in Appendix B. 10. Financial Internal Rate of Return (FIRR). The low toll charges and the low toll growth assumptions will have a great financial impact on the FIRR The results of the financial evaluation show that the FIRR for LJH is expected to be 7.9 percent for the equity and 5.8 percent for the entire project In addition, the FIRR will not change much if the project completion date is delayed by one year, as summarized below: FIRR (in %) and Net Present Value ( 5.0%, million RMB) On Equity Total Investment FIRR NPV FIRR NPV Base case 7.9 416.1 5.8 135.1 Delayoneyear(to2008) 7.7 381.1 5.7 100.0 11. Financial Probabilistic RiskAnalysis. The financial condition of LJH may face risks of uncertainty if the major financial assumptions (or the factors) are not borne out. To measure the degree of uncertainty for these factors, a probabilistic risk analysis using Monte Carlo techniques was carried out. The five most uncertain factors that may affect the financial evaluation have been identified as: (a) traffic growth rate, (b) toll charges, (c) total working costs, (d) capital investment, and (e) a delay in opening the new expressway by one year. The result (financial simulation and probabilistic risk analysis) reveals that the most likely FIRR would be 5.0 percent, while the worst and the best FIRR would be 3.9 percent and 6.0 percent, respectively. A sample of the analyses is in Appendix C and summarized below. Summary of Financial Simulation and Probabilistic Risk Analysis I Range of FIRR / NPV | Most Likely Case | Std. Errr of the Mean | FIRR (in %) 3.9 - 6.0 5.0 0.1 NPV (5.0%, million RMB) -267.5 - 265.5 4.1 15.8 Impact on the Level of the Toil Charge 12. Adequate toll charges are very important for the financial viability of the highway project. The level of tolls must generate enough revenue to obtain the higher financial rate of return on investment, but not deter potential users and compromise economic objectives. These objectives can be contradictory, -42 - because the former requires a higher toll while the latter requires a lower one. The analysis shows that the overall average unit toll revenue for 2007 will be about RMB 0.69/veh-km, which should be able to generate the sufficient funds to serve the repaymnent of the loan. Sensitivity tests on the level of tolls showed that at a toll of RMB 2.0/veh-km, both EIRR and FIRR are still justified. Beyond this rate, the EIRR falls rapidly while the FIRR almost reaches its maximumn. Furthermore, if all construction costs were privately financed instead of being covered by government grant (about 60 percent of the total capital cost), average tolls would need to be over RMB 3.0/veh-kmn to generate an optimal FIRR to providers of both debt and equity, and this toll level would substantially reduce the project's economic benefits. Sensitivity of Evaluation Results to Variations in Toil Charges Average toll charges (RMB /vehicle-hn) EIRR (%) FIRR (%) 0.35 15.5 -1.0 0.69 15.1 5.8 1.00 14.1 9.2 2.00 13.2 16.3 3.00 10.9 18.0 4.00 8.2 16.5 PART II: THE RNANCIAL EVALUATION OF HNIP 13. The five roads under the HNIP are toll-free roads. The financial evaluation of these non-revenue-earning roads should ensure that IMCD maintains sound financial practices to minimize financial risks (i.e., a lack of counterpart funds for construction and operating expenses for the project roads). 14. IMCD has provided a financing plan for its total revenues and expenditures for the Ninth Five-Year Plan (1996-2000) and the Tenth Five-Year Plan (2001-2005). Based on the Inner Mongolia highway development plan, IMCD has acquired sufficient funds to cover new road construction and the existing road network maintenance. In addition, a moderate self-financing ratio would ensure the implementation of the development plan. The latest actual data, from 2000, reveal that about 43 percent of IMCD's total revenues are generated from internal cash flow. The detailed source and expenditure for 1996-2005 are shown in Appendix D of this annex. 15. Following the increases in the length of the provincial road network every year, IMCD also provides additional resources for maintenance on the existing road network. During the Ninth Five-Year Plan, expenditures for maintenance increased by 20 percent in total. During the same period, the road network increased about 47 percent in total length. As a result, the unit maintenance expenditures were reduced by an average of 4 percent each year, dropping from RMB 9,350 per km in 1996 to RMB 7,630 per year in 2000. This indicates that the level of expenditure on road maintenance during the Ninth Five-Year Plan was not sufficient to maintain the road network in a stable condition. In the Tenth Five-Year Plan, IMCD decided to increase financial inputs to road maintenance. Road maintenance for 2001 is budgeted at 8 percent higher than in 2000 (RMB 8,250 per km vs. RMB 7,630 per kIn). On top of this increase, the road maintenance budget increases every year to RMB 10,890 per km in 2005-an average increase of 5.7 percent per year. 16. The overall program shows that the expenditures and road construction and maintenance for the toll-free roads included in the project constitute only a small fraction of IMCD's fund flow. Therefore the fiscal impact would be minimal. Based on the IMCD plan, the capital investment of HNIP is less than 4.8 percent of total annual IMCD revenue. In addition, the required maintenance expenditure for HNIP is less -43 - than 0.5 percent of the total maintenance expenditure of IMCD. These low ratios indicate that the project presents a modest financial risk regarding the availability of a counterpart funds for construction and maintenance of the project roads. The details are shown in Appendix D of this annex and summarized below: IMCD: Average Increase in the Road Network and Road Maintenance Expenditures (in %) 9th 10th Five-Year Five-Year Plan Plan Average annual increase in the road network 8.0 2.0 Average annual increase in maintenance expenditures -4.0 5.7 IMCD: Investments, Revenue and Maintenance Expenditures (million RM 2002 2003 2004 2005 Investments and Revenue: HFnP Investments (a) 70.00 200.00 160.00 80.00 Total IMCD Revenue (b) 3,323.00 4,166.54 4,214.45 4,504.05 Ratios (a)/(b) 2.10/ 4.8% 3.8% 1.8% Maintenance Expenditures: HNIP (c) 2.00 3.75 Total IMCD Maintenance Expenditure (d) 636.0C 900.00 779.80 827.97 Ratios (c)/(d) -- 0.3% 0.5% - 44 - APPENDIX A Page I of 3 Laoyemiao- Jining Highway Income Statement (milion RMB , year ending 31 December) 2007 2008 2009 2010 2011 2012 2013 2014 2015 Traffic (million veh-km) /L 308.01 329.58 352.66 377.35 403.78 432.05 462.31 494.68 529.32 Revenue Tolls 213.32 228.26 244.24 261.34 279.64 358.60 383.71 410.58 439.33 Others - - - - - - - - - Total 213.32 228.26 244.24 261.34 279.64 358.60 383.71 410.58 439.33 Overatine Taxes Business tax 10.67 11.41 12.21 13.07 13.98 17.93 19.19 20.53 21.97 City tax 0.75 0.80 0.85 0.91 0.98 1.26 1.34 1.44 1.54 Education levy 0.32 0.34 0.37 0.39 0.42 0.54 0.58 0.62 0.66 Total 11.74 12.55 13.43 14.37 15.38 19.73 21.11 22.59 24.17 NetRevenue 201.58 215.71 230.81 246.97 264.26 338.87 362.60 387.99 415.16 Overatine Costs Wages and benefits 2.52 2.65 2.78 2.92 3.07 3.22 3.38 3.55 3.73 Maintenance /2 9.58 10.07 10.56 11.10 11.64 12.23 12.84 13.48 184.07 Operatingmaterialsandsupplies 23.96 25.16 26.41 27.73 29.12 30.58 32.11 33.71 35.40 Administration & management 1.51 1.59 1.67 1.75 1.84 1.93 2.03 2.13 2.24 Others 3.83 4.03 4.23 4.44 4.66 4.89 5.14 5.39 5.66 Total working costs 41.40 43.50 45.65 47.94 50.33 52.85 55.50 58.26 231.10 Depreciation 48.18 48.18 48.19 48.26 48.34 48.42 48.50 48.59 49.81 Total operating costs 89.58 91.68 93.84 96.20 98.67 101.27 104.00 106.85 280.91 OneratineProfit 112.00 124.03 136.97 150.77 165.59 237.60 258.60 281.14 134.25 Financial charges: IBRD - 41.02 39.09 37.05 34.90 32.66 30.30 27.83 25.22 Local Other expenses (income) - 5.35 5.35 5.35 5.36 5.35 5.35 5.35 5.35 Profit Before Taxes 11200 77.66 92.53 108.37 125.33 199.59 222.95 247.96 103.68 Income tax 37.30 25.86 30.81 36.09 41.73 66.46 74.24 82.57 34.53 Net Profit After Taxes 74.70 51.80 61.72 72.28 83.60 133.13 148.71 165.39 69.15 /1: The highway is planned to start the trail operation in October 2006 and the full operation in January 2007. /2: Major maintenance: once for each 10 years -45 - APPEN)DIX A Page 2 of 3 Laoyemiao- Jining Highway Sources and Applications of Funds (mfllion RMB, year ending 31 December) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Net profits - - 74.70 51.80 61.72 72.28 83.60 133.13 148.71 165.39 Depreciation - - - - - - 48.18 48.18 48.19 48.26 48.34 48.42 48.50 48.59 State contribution 36.40 72.80 109.20 145.60 145.60 109.20 72.80 36.40 - - - - - Local contribution 16.46 32.90 58.76 84.65 89.34 68.19 47.03 25.86 Borrowing: IBRD - 83.00 166.00 207.50 166.00 124.50 83.00 Local Others - - - - - - - - - - - - - - - Total 528 105702 2509 39622 42& 3 244f33 268.14 229 1 122 120.54 131.94 181.55 197.21 2139 AnDlicsfons; Capital expenditure 52.86 105.70 250.96 396.25 442.44 343.39 244.33 145.24 1.01 1.06 1.11 1.16 1.22 1.28 1.35 Other expenditure - - - - - - - - - - - Loau repayment: IBRD - - - - - - - - 38.29 40.22 42.26 44.41 46.65 49.01 51.48 Local - - - - - - - - - - - - - - Change w/ capit - - - - (3.67) (3.92) (4.19) (4.49) (19.36) (6.15) (6.59) Total 52.86 105.70 250.96 396.25 442.44 343.39 244.33 145.24 35.63 37.36 39.18 41.08 28.51 44.14 46.24 Net Fonds Flow 12290 64.35 72.55 8L39i 2 153.04 153.7 MM I 74 Open balance - - - - - - - - 122.90 187.25 259.80 341.16 432.02 585.06 738.13 aosing balance - - - - - - - 122.90 187.25 259.80 341.16 432.02 585.06 738.13 905.87 D/S Cover 1.73 1.82 1.92 2.03 2.S9 2.75 2.92 -46 - APPENDIX A Page 3 of 3 Laoyemiao - Jining Highway Balance Sheet (million RMB , year ending 31 December) 2007 2008 2009 2010 2011 2012 2013 2014 2015 Assets; Fixed Assets At cost 1460.01 1460.10 1460.20 1462.42 1464.75 1467.20 1469.77 1472.47 1509.28 Less: Depreciation 92.52 140.70 188.89 237.15 285.49 333.91 382.41 431.00 480.81 Net fixed assets 1367.49 1319.40 1271.31 1225.27 1179.26 1133.29 1087.36 1041.47 1028.47 Current Assets Inventory 1.07 1.14 1.22 1.31 1.40 1.79 1.92 2.05 2.20 Receivable 0.86 0.86 0.86 0.86 0.86 0.86 0.86 0.86 0.86 Cash 122.90 187.25 259.80 341.16 432.02 585.06 738.13 905.87 976.36 Subtotal 124.83 189.25 261.88 343.33 434.28 587.71 740.91 908.78 979.42 Other Assets - - - - - - - - - Total Assets 192 5558C 1555 . 1613.54 1121.0 182827 1950.25 2007.8 Liabilties & Eaultv State funds- Equity 608.99 659.87 720.63 794.02 878.79 1013.15 1163.15 1329.89 1434.43 UL/ loans: IBRD 830.00 791.71 751.49 709.23 664.82 618.17 569.16 517.68 463.59 Local - - . - - - - Subtotal 830.00 791.71 751.49 709.23 664.82 618.17 569.16 517.68 463.59 Current Liabilities 53.33 57.07 61.07 65.35 69.93 89.68 95.96 102.68 109.87 Other Liabilities - - - - - - - - Total LIabilfties & Equity 1492.2 1508.6 153J2 1.0 1613.4 50Q 122 1950.25 2007.89 Debt: capital ratio 57.7 54.5 51.0 47.2 43.1 37.9 32.9 28.0 24.4 Debt/ equity ratio 59/41 56/44 53/47 49/51 46/54 41/59 36/64 32/68 29/71 Current ratlo 2.3 3.3 4.3 5.3 6.2 6.6 7.7 8.9 8.9 Fixed assets: 80% of capital investment and 20% of maintenance. Equity - Total asset - Total Liabilities. Current liabilities 10% of toll revenue. -47 - APPENDIX B Laoyemiao - Jining Highway Assumptions for Financial Forecasts 1. Traffic (normal, AADT): Small Medium Large Small Medium Large Tractor car bus bus truck truck truck -Trailer Total Section 1:Jining - Xinghe 2006 1,328 614 306 419 1,439 508 984 5,598 2015 2,652 1,129 561 704 2,636 930 1,519 10,131 2025 4,665 1,806 895 1,019 4,205 1,485 1,996 16,071 Section 2:Xinghe- Laoyemiao 2006 1,390 594 245 437 1,852 805 459 5,782 2015 2,894 1,138 469 766 3,250 1,539 739 10,795 2025 5,336 1,909 786 1,162 4,940 2,577 1,019 17,729 2. Toll Rates (RMB I veh-km): Increase 20% every five year. Small Medium Large Small Medium Large Tractor car Bus bus truck truck truck -Trailer 0.412 0.634 0.948 0.412 0.634 0.948 1.240 3. Operating Taxes: a. Business Tax 5% of total revenue. b. City Tax 7% of business tax. c. Education levy 3% of business tax. 4. Operating Cost: Increase 5.0 % pa. a. Wages and benefits: Y 20,000/ staff/ year, 40 staffs/ station and 3 stations. b. Maintenance (million RMB / kmn): Routine Major maintenance maintenance (annual) (/10 years) 0.100 1.300 c. Operating materials and supplies 0.25 million RMB per Ion. d. Administration 60.0% of wage and benefits. e. Other 0.04 million RMB per km. f. Depreciation 30 years straight-line method. 5. Income tax 33.3% of total profit before taxes. 6. Loan: IBRD 5.0% on 20 year maturities, LIBOR US$ based single currency, including 5 years grace period. -48 - APPENDIX C INNER MONGOLIA: LAOYEMIAO - JINING HiGHWAY FIRR SIMULATION AND PROBABILISTIC RISK ANALYSIS Summary: Display Range is from -2.0% to 10.0% FIRR (IN %/o) Entire Range is from -2.4% to 10.9% FIRR (IN %) After 999 Trials, the Std. Error of the Mean is 0. 1% Statistics: Value Percentiles: Trials 999 Mean 4.9% Percentile FIRR (in %) Median 5.0% 0% -2.4% Mode -- 10% 2.2% Standard Deviation 2.1% Low Scenario 20% 3.2% Variance 0.0% . 30% 3.9% Skewness -0.37 Most Likely 40% 4.5% Kurtosis 3.26 50% 5.0% Coeff. of Variability 0.43 High Scenario 60% 5.6% Range Minimum -2.4% - 1 70% 6.0% Range Maximum 10.9% 80% 6.6% Range Width 13.3% 90% 7.4% Mean Std. Error 0.07% 100% 10.9% Forecast J:ANNLAOYEMIAO EXPRESSWAY 999 Trials Frequency Chart 5 Outitero .025 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~25 .r 2 |21 l-sll lllllllii l1_t < - D14 1 Za% CM1. 4.0% 7.0% 100 F0N %) Assumptions Trafflc Growth Toll charges Normal distribution with parameters: Normal distribution with parameters: Mean 100.0% Mean 100.0% Standard Dev. 15.0% Standard Dcv. 10.0% Selected range is from -Infinity to +Infinity Selected range is from -Infinity to +Infinity Mean value in simulation was 99.1% Mean value in simulation was 99.9% Total working cost Capital Investment Triangular distribution with parameters: Triangular distribution with parameters: Minimum 90.0% Minimum 100.0% Likeliest 100.0% Likeliest 100.0% Maximum 110.0% Maximum 120.0% Selected range is from 90.0% to 110.0% Selected range is from 100.0% to 120.0% Mean value in simulation was 100.0% Mean value in simulation was 106.6% - 49 - APPENDIX D Page I of 2 Inner Mongolia: Highway Revenue and Expenditure During Ninth Five Year Plan (million RMB) 1996 1997 1998 1999 2000 Total Revenue I Road maintenance fee 659.21 706.00 720.00 773.90 853.00 3,712.11 2 Road construction fee 95.41 103.00 105.00 114.00 126.00 543.41 3 Vehicle purchase fee 81.51 82.50 86.63 92.00 100.00 442.64 4MOC subsidy 449.65 321.36 507.20 570.26 680.00 2,528.47 5 MOF subsidy 1.14 1.14 1.14 1.14 1.14 5.70 6 Road maintenance for car 54.54 65.00 68.00 70.00 78.00 335.54 7Tolls 25.06 25.00 26.00 31.00 32.00 139.06 8 Bank loan - 300.00 1,070.00 970.00 870.00 3,210.00 Total 1.366.52 1.604.00 2.58397 2.622.30 2.740.14 10.916.93 Expenditure: I New construction 745.65 1,004.00 1,806.90 1,611.35 1,828.48 6,996.38 2 Routine maintenance 95.22 90.90 105.51 147.41 158.46 597.50 3 Rehabilitation maintenance 179A8 171.30 198.90 120.40 136.27 806.35 4Local roads maintenance 152.87 153.80 178.19 373.02 219.28 1,077.16 SAdministrationandstudy 137.39 127.58 152.20 135.35 153.20 705.72 6 Management 36.10 36.00 41.00 46.11 52.25 211.46 7 Other expenditures 19.81 20.42 20.77 27.46 31.00 119.46 8 Repayment of interest and principle - - 80.50 161.20 161.20 402.90 Total 1.366.52 1.604.00 2.583.97 2.622.30 2.740.14 10.916.93 Total Road Network (kIn) -(a) 45,744 49,992 58,430 63,824 67,346 285,336 Average annual increase - 9.3% 16.9% 9.2% 5.5% 8.0% Total maintenance expenditure (million RMB )-(b)/l 427.57 416.00 482.60 640.83 514.01 2,481.01 Average unit maintenance. expenditure ('000 Y/km)- (b)l(a) 9.35 8.32 8.26 10.04 7.63 8.70 Average annual increase -- -11.0% -0.7% 21.6% -24.0% -4.0% I_1: Sum of routine, rehabilitation and local roads maintenance. Actual :1996-2000. - 50 - APPENDIX D Page 2 of 2 Inner Mongolia: Highway Revenue and Expenditure During Tenth Five Year Plan (milion RMB) 2001 2002 2003 2004 2005 Total Revenue 1 Road maintenance fee 944.60 1,058.00 1,196.00 1,305.00 1,440.00 5,943.60 2 Road construction fee 140.00 157.00 177.00 193.00 212.00 879.00 3 Vehicle purchase fee 110.70 124.00 140.00 153.00 168.00 695.70 4 MOC subsidy 750.00 840.00 950.00 1,035.00 1,140.00 4,715.00 5 MOF subsidy 1.14 1.14 1.14 1.14 1.14 5.70 6 Road maintenance for car 85.00 95.00 106.40 116.00 127.00 529.40 7Tolls 39.56 44.86 51.46 56.86 61.86 254.60 8Bank loan 1,370.00 1,003.00 1,544.54 1,354.45 1,354.45 6,626.44 Total 3.441. 3.323.00 4 . 214.45 4,504.45 19649.44 Expenditure: I New construction 2,343.00 2,103.60 2,580.34 2,676.45 2,863.45 12,566.84 2 Routine maintenance 175.50 197.00 222.00 242.00 265.00 1,101.50 3 Rehabilitation maintenance 151.00 169.00 169.00 184.00 203.00 876.00 4 Local roads maintenance 242.64 270.00 509.00 353.80 359.97 1,735.41 5Administration and study 169.86 191.00 215.50 235.00 259.00 1,070.36 6 Management 58.00 65.00 73.50 80.00 88.00 364.50 7 Other expenditures 34.00 38.00 43.00 49.00 54.00 218.00 8 Repayment of interest and principle 267.00 289.40 354.20 394.20 412.03 1,716.83 Total 3A4100 3.323.00 4,16.54 4.214.45 4.504.45 19.649.44 Total Road Network (kIn) -(a) 69,000 70,700 72,500 74,000 76,000 362,200 Average annual increase 2.5% 2.5% 2.5% 2.1% 2.7% 2.0% Total maintenance expenditure (million RMB )-(b) /j 569.14 636.00 900.00 779.80 827.97 3,712.91 Average unit maintenance. expenditure ('000 Y/km)- (b)/(a) 8.25 9.00 12.41 10.54 10.89 10.25 Average annual increase 8.1% 9.1% 38.0% -15.1% 3.4% 5.7% /_1: Sum of routine, rehabilitation and local roads maintenance. Estimate:2001. forecast: 2002-2005 - 51 - Annex 6: Procurement and Disbursement Arrangements CHINA: Inner Mongolia Highway Project Procurement Summary of PCAR's Findings 1. A procurement capacity assessment of the project executing agencies was carried out during preparation of the project, and the Procurement Capacity Assessment Report of March 2002 is in project files. The overall assessed risk was "average". This annex summarizes its findings and assessment of the report. 2. IMCD will be responsible for all project related procurement activities. IMCD has implemented the first Bank-financed Tri-Provincial Highway Project (Inner Mongolia component), and proven its procurement capacity by handling procurement in accordance with the Bank procurement guidelines. IMCD expanded the existing Hohhot East Exit Expressway Project Management Office (PMO), established in October 1999 to cover the Hohhot-Jining-Laoyemiao Highway (HJLH) in March 2001. About 10 experienced staff versed in Bank procurement processes and procedures will be in charge of the project procurement. The implementing agencies for the road network improvement component are Baotou Municipal Conimunications Bureau and Ulancabu Prefecture Communications Bureau, which are directly under the control of PMO. 3. IMCD has appointed China Intemational Tendering Company of China National Technical Import and Export Corp. Ltd. (ITC of CNTIC) for intemational competitive bidding (ICB) civil works and goods. ITC of CNTIC has extensive experience in carrying out ICB under Bank-financed projects as well as under other intemational financial institutions and domestically financed projects. It is also familiar with national competitive bidding on Bank-financed projects. Procurement arrangements are generally the same as in Tri-Provincial Highway Project. 4. The assessment confirmed that IMCD is capable of satisfactorily managing procurement activities of the project. IMCD staff have been involved in Tri-Provincial Highway Project and have enhanced their knowledge of Bank's requirements for procurement and selection of consultants during the project preparation. 5. As outlined in the assessment, while China's domestic procurement procedures fail to fully comply with the Bank's procurement guidelines, for example by permitting bracketing and merit point system for bid evaluation, Inner Mongolia Govemment and IMCD are fully committed to strictly follow the Bank guidelines. Any incompatibilities between Chinese procedures and the Bank's procurement principles and guidelines will be addressed in the Procurement Supplemental Letter to be signed with the Legal Agreements. 6. The Procurement Supplemental Letter will specify the following NCB procedures: (a) all invitations to prequalify or to bid shall be advertised in a newspaper of national circulation in China; (b) such advertisement shall be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their response; and in any event a minimum of 30 days shall be given to bidders between the date of advertisement and the deadline for submission of bids, and the advertisement and the bidding document shall specify the required form and amount of bid security; (c) qualification requirements of bidders and the method of evaluating the qualification of each bidder shall be - 52 - specified in detail in the bidding documents; (d) the time for opening of all bids shall be the same as the deadline for receipt of bids; (e) all bids shall be opened in public; all bidders shall be afforded an opportunity to be present, if they so desire (either in person or through their authorized representatives) at the time of bid opening; (f) no bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin, or bracket of average bids established by Inner Mongolia region; and (g) each contract shall be awarded to the lowest evaluated responsive bidder, that is to say, the bidder who meets the appropriate standards of capacity and resources and whose bid has been determined (i) to be substantially responsive to the bidding documents issued to bidders and (ii) to offer the lowest evaluated price. The winning bidder shall not be required, as condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. Procurement methods (Table A) 7. Procurement would be carried out as shown in Table A. Procurement under the project will be carried out in accordance with the Bank's "Guidelines for Procurement under IBRD Loans and IDA Credit" (January 1995, and revised in January, August 1996, September 1997 and January 1999) as well as the "Guidelines for Selection and Employment of Consultants by World Bank Borrowers" dated January 1997, revised September 1997 and January 1999. The documentation for procurement, which covers the prequalification of contractors, ICB and national competitive bidding (NCB) for civil works, and ICB for goods, was standardized for Chinese conditions by the Chinese government and the Bank on the basis of model documents which would be used for all relevant procurement processes under the project. Where no agreed model documents exist, Bank standard documents would be used. The General Procurement Notice (GPN) for the project was published in the UN Development Business issue No. 569 of October 31, 2001. As GOC is yet to finalize the NCB guidelines, the incompatibilities with Bank procedure as stated in para. 6 above will be addressed in the procurement Supplemental Letter to be signed with the project legal agreements. For ICB, any differences between the Chinese MBDs and the Bank SBDs will be addressed through the preparation and issuance of a change list that will be included in the bidding documents. 8. Works (US$230.0 million). Civil works for Laoyemiao-Jining Highway (LJH) would be divided into 6 contracts, with an average size of about US$24 million. The 6 civil works contracts for LJH would be procured under ICB procedures. There would be one tender call for the 6 civil works contracts which would be bid on a slice-and-package basis; qualified firms would be allowed to bid for more than one contract so as to attract international contractors and large Chinese contractors. Contractors bidding for civil works under ICB would be prequalified. The Specific Procurement Notice (SPN) for the civil works and consulting services required to supervise the LJH was published in the UN Development Business on January 16, 2002. Each contract for works estimated at US$50 million or more will provide for a dispute review board set forth in the standard bidding documents (referred to in para.2.42 of the above-mentioned Guidelines). For contract estimated below US$50 million, a dispute review expert will be used. Electro-mechanical works (EMW) would be handled as one contract and will be also procured through an ICB procedures acceptable to the Bank. 9. Other works, including buildings (estimated at US$3.8 million with three contract packages), highway network improvements (US$59.5 million with sixteen contract packages) and the highway safety program (US$2.0 million with fifteen contract packages), each contract to cost below US$10 million, will be awarded following NCB procedures acceptable to the Bank. Since they will be relatively small, scattered throughout the province and implemented over four years, ICB will not be justified or practical; however, foreign firms will not be prevented from bidding. - 53 - 10. Equipment (US$ 6A million). Contracts for goods and equipment estimated to cost US$200,000 equivalent or more up to a total amount of US$6.2 million will be awarded under ICB. Domestic manufactures competing under ICB will be eligible for a margin of preference in the comparison of bids of 15% for goods, or the prevailing customs duties, whichever is lower. Other items or groups of items covering maintenance and laboratory equipment estimated to be under US$100,000 per contract package, with an aggregate amount not exceeding US$0.2 million, will be procured following intemational shopping procedures on the basis of comparison of price quotations solicited from at least three suppliers, from two countries, eligible under the Bank Guidelines for Procurement. 11. Consultants (US$6.6 million). Consultants required for construction supervision, and staff training to be implemented under the IST component will be selected and employed under terns and conditions acceptable to the Bank according to Guidelines on the "Selection and Employment of Consultants by World Bank Borrowers" (January 1997, revised in July 1997 and January 1999). For consultant services, the Standard Request for Proposals (July 1997, revised in April 1998 and in July 1999), will be used. Consulting services with an estimated contract cost of US$100,000 or more to a total value of US$1.5 million for finm will be procured through Quality and Cost Based Selection (QCBS). With Bank's prior agreement, single source selection for contracts not expected to cost more than US$100,000 (aggregate at US$0.1 mnillion in total) may be used in accordance with provision of paras. 3.8 through 3.11 of the Bank Guidelines for selection of consultants. Individual consultants for contract amount less than US$50,000 per contract for an aggregate amount not exceeding US$0.1 million will be selected according to paras. 5.1 through 5.3 of the Guidelines. Services which are estimated to cost less than the above threshold per contract, may, with the Bank' prior agreement, be procured by Consultant's Qualification (CQ) in accordance with the provisions of paragraphs 3.1 through 3.7 of the Consultant Guidelines. CQ procedure was proposed for training contracts for which the need for preparing and evaluating a competitive proposal is not justified. The estimated aggregate amount under CQ procedure is US$0.5 million. Local experts from various independent provincial universities and institutes will be used as much as possible. All consultant services above US$200,000 will be advertised in the UN Development Business. Prior review thresholds (fable B) 12. Prior review procedures will be used for: (a) civil works contracts with an estimated cost of US$2 million or more; (b) equipment with an estimated cost of over US$200,000 or more per contract; and (c) consulting services with an estimated contract cost of US$ 100,000 or more for firms and US$50,000 or more for individuals. 13. Regarding consultant contracts, terms of reference and single-source selections, regardless of the value of the contract, will be subject to prior review. This will apply to 97% each of the total contract values of works and goods financed by the Bank. For contracts below these limits, post-review procedures will be followed. The sampling ratio for contracts subject to post review will be 33.3 percent. - 54 - Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other N.B.F.' Total Cost Works Expressway Civil Work 158.5 158.5 (61.9) (61.9) Buildings 3.8 3.8 (1.1) (1.1) E & M facilities 5.7 5.7 (4.0) ~~~~~~~~~~~~~~~~~(4.0) Highway Network (23.0) (293.50 Improvement 2.0 2.0 2.0 2.0 Highway Safety Program (0.6) (0.6) Environmental Protection 0) 0.0 (0.0) (0.0) Sub Total 164.2 65.3 0.5 230.0 (65.9) (24.7) (0.0) (90.6) Goods Equipment 6.2 0.2 6.4 (6.2) (0.2) (6.4) Services Construction 1.5 4.3 5.8 (1.5) (0.0) (1.5) Training 0.5 0.3 0.8 (0.5) (0.0) (0.5) Sub Total 2.0 4.6 6.6 (2.0) (0.0) (2.0) Miscellaneous Land acquisition & 6.8 6.8 resettlement (0.0) (0.0) Interest during construction 17.9 17.9 (0.0) (0.0) Front-end fee 1.0 1.0 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (1.0) _ _ _ _ _ _ (1.0) Total 170.4 65.3 3.2 29.8 268.7 (72.1) (24.7) (3.2) (0.0) (100.0) a/ Other includes intemational shopping, and consultants and training. b/ N.B. F. = Not Bank-financed c/ Selection of consultants according to the Bank's Guideline for Use of Consultants. Note: (1) Figure in pareatheses are the amount to be financed by the Bank loan (2) All figures are rounded and include estimated physical and price contingencies but exclude the cost of land acquisition and resettlement which is shown as a separate component - 55 - Table Al: Consultant Selection Arrangements (US$ million equivalent) Selection Method Consultant Services Expenditure Category .QCBS QBS SFB LCS CQ SS Other N.B.F. Total Cost A. Firms 1.5 0.3 0.1 4.6 6.5 (1.5) (-) (-) (-) (0.3) (0.1) (-) (0.0) (1.9) B. Individuals - 0.1 0.1 _________ _______(____ -) (-) (-) (-) (-) (-) (0.1) (-) (0.1) Total 1.5 0.3 0.1 0.1 4.6 6.6 (1.5) (-) (-) (-) (0.3) (0.1) (0.1) (0.0) (2.0) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants'Qualifications SS = Single Source Selection Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed (Figures in parenthesis are the amounts to be financed by the Bank Loan) Table A2: Procurement Schedule for Consulting Services Activity Firm/lndividuals Method of Selection Estimated Cost Procurement Schedule 1. Construction Firm QCBS US$1.5 million Jan. - Nov. 2002 Supervision (Interrational) 2. Training Program Firm CQ US$0.3 million 2003 - 2007 (29 subjects) 3. Training Program Firm SS US$0.1 million 2003 - 2007 (3 subjects) Individual Qualifications US$0.1 million - 56 - Prior review thresholds (Table B) Table B: Threshold for Procurement Methods and Prior Review Conlract Value Threshold Contracts Subject to (US$ thousands) Procurement Prior Review Expenditure Category Nlethod (USS million) 1. Works a) highway works More than 10,000 ICB 6 contracts US$158.5 million/I More than 2,000 but NCB 34 contracts Less than 10,000 US$65.3 million/I b) E&M facilities ICB 1 contract ________________________ _ _ US$5.7 million/i 2. Goods More than 200 ICB 4 contracts US$6.2 million/2 Less than 200 IS 2 contracts 3. Services More than 100 QCBS Construction supervision (1 contract, US$1.5 million)/3 Less than 100 CQ Training (total 29 contracts, US$0.3 million) Less than 100 (firmns) or SS Training (US$0.1 million) less than 50 (individuals) Qualifications Training (US$0.1 million) Total value of contracts US$237.2 million subject to prior review: Total value of contracts subject to prior review: US$237.2 million Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-review/audits) 1/ Prior review for all civil works contracts costing US$2.0 million or more 2/ Prior review for all goods contracts costing US$200,000 or more 3/ Prior review for one construction supervision contract estimated to cost about US$ 1.5 million - 57 - Disbursement Allocation of loan proceeds (Table C) 1. The proposed loan of US$100 million would be disbursed over a period of 5.75 years, up to the closing date of March 31, 2008. The allocation of loan proceeds according to expenditure category is outlined in Table C. 2. Retroactive financing of up to US$ 2.5 million would be applied to expenditures made after March 1, 2002 for civil works under HNIP, the training under construction supervision and the purchase of equipment. Table C: Allocation of Loan Proceeds Expenditure Category Amount In USSmlllIon Financing Percentage Works Civil Works 57.0 43% of total expenditures Building 1.0 30% of total expenditures E & M facilities 3.5 70% of total expenditures Highway Network Improvement 20.0 39% of total expenditures Highway Safety Program 0.5 30% of total expenditures Construction supavision 1.5 91% of expenditures Equipment 6.0 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 75% of local expenditures for other items procured locally Training 0.5 100% of total expenditures Front-end fee 1.0 Unallocated 9.0 Total 100.0 Table C-1: Estimated Disbursement Schedule (US$ million) Bank FY Annually Cumulative % Disbursement profile of transport projects in China FY 2003 7 7 7 16 FY 2004 16 23 16 22 FY 2005 30 53 30 22 FY2006 18 71 18 18 FY 2007 13 84 13 22 FY 2008 16 100 16 -58 - Table C-2: Flnancing Plan (USS million) (S1.00-Y8.3. January 2002 prices) Government Bank Total Bank Province Central Financing (%) A. Works: 1. Civil Work (LJH) 0 75.5 57.0 132.5 43 2. Building (LJH) 2.3 1.0 3.3 30 3. E & M Facilities 1.5 3.5 5.0 70 4. HNIP 31.8 20.0 51.8 39 5. Highway safety 1.3 0.5 1.8 30 6. Environmental Protection 0.5 0 0.5 0 Sub Total 37.4 75.5 82.0 194.9 B. Construction Supervision: 1. LJH 3.1 1.5 4.6 32 2. HNIRP 0.7 0 0.7 3. Environmental Protection 0.1 0 0.1 Sub Total 3.9 1.5 5.3 C. Equipment 0 6.0 6.00 100 D. IST 0.2 0.5 0.7 Total (Base cost) 41.5 75.5 90.0 207.0 Contingencies: 14.8 12.2 9.0 36.0 Land Acquisition 6.8 0 6.8 Total (project) 63.1 87.7 99.0 249.8 Interest During Construction 17.9 0 17.9 Front-end Fee 1.0 1.00 100 Total (Financing) 81.0 87.7 100.0 268.7 37 Use of statements of expenditures (SOEs): 3. Reimbursement will be made on the basis of Statements of Expenditures for the following: (i) civil works in contracts under US$2.0 million; (ii) goods in contracts under US$200,000; (iii) services provided by consulting firms in contracts under US$100,000; (iv) services provided by individual consultants in contracts under US$50,000; and (v) training. -59- 4. Documentation will be made available for the required audits as well as to the Bank supervision mission, and will be retained by PMO for at least one year after receipt by the Bank of the audit report for the year in which the last disbursement was made. All other disbursements from the loan would be against full documentation. The processing, disbursement and monitoring of the allocations of the proceeds of the Loan and Borrower counterpart financing will be managed by PMO and IMCD in coordination and consultation with Finance Bureau of Inner Mongolia Autonomous Region and MOF. Special account: 5. To facilitate disbursement under this project, one Special Account will be established and Finance Bureau of Inner Mongolia Autonomous Region will be directly responsible for the management, monitoring, maintenance and reconciliation of the Special Account activities of the project. The Special Account will be established in US dollars, in a commercial bank acceptable to the Bank and on terms and conditions satisfactory to the Bank. The Special Account would be used for all eligible foreign and local expenditures. Applications for replenishment of the Special Account would be submitted monthly or whenever the Account has been drawn down by about 50 percent of the deposit, whichever comes first. The authorized allocation of the Special Account is USD7.0 million. The initial deposit will be limited to USD3,500,000 until the total amount disbursed and committed equals USD14,000,000. - 60 - Annex 7: Project Processing Schedule CHINA: Inner Mongolia Highway Project Project Schedule Planned Actual Time taken to prepare the project (months) 18 21 First Bank mission (identification) 07/01/2000 07/01/2000 Appraisal mission departure 11/01/2001 02/24/2002 Negotiations 01/01/2002 04/15/2002 Planned Date of Effectiveness 09/01/2002 Prepared by: Inner Mongolia Communication Department Preparation assistance: Japanese Trust Funds Bank staff who worked on the project Included: Name Speciality Supee Teravaninthom, EASTR Task Team Leader Yasuhiro Kawabata, EASTR Highway Engineer Chaohua Zhang, EASES Social/Resettlement Naoya Tsukamoto, EASES Environment Han-Kang Yen, EASTR Econonic/Financial Analysis Tony Shen, EACCF Financial Management Bertrand Ah-Sue, EACCF Procurement Dawei Yang, EACCF Procurement Nina Masako Eejima, LEGEA Legal Clifford Garstang, LEGEA Legal Simon Bradbury, LOAG3 Disbursement Boping Gao, EASTR Highway Engineer Xin Chen, EACCF Program Assistant Maria Luisa Juico, EASTR Program Assistant Hernan Levy, Consultant Institutional and Highway Maintenance Issues - 61 - Annex 8: Documents in the Project File* CHINA: Inner Mongolia Highway Project A. Project Implementation Plan * Project Implementation Plan * January 2002 B. Bank Staff Assessments * Project Procurement Capacity Assessment * October 2001 * Project Financial Management Assessment * November 2001 C. Other * Feasibility Report (Laoyemiao-Jining-Hohhot Highway) May 2000 * Revised Feasibility Report (Laoyemiao-Jining-Hohhot Highway) May 2001 * Traffic volume at each interchange and road crossing (Laoyemiao-Jining) October 2001 * Implementation Organization Structure October 2001 * Feasibility Study Report for Huade-Anye Road Improvement Program September 2001 * Feasibility Study Report for Zouzishan-Liangcheng Road Improvement Program September 2001 * Feasibility Study Report for Kebuer-Baiyinchagan Road Improvement Program September 2001 * Feasibility Study Report for Bailinmiao-Xilamuren Road Improvement Program September 2001 * Feasibility Study Report for Tumuetai-Shangdu Road Improvement Program September 2001 * Concept report on Road Safety Implementation Program October 2001 * Enviromnental Impact Assessment TOR for Laoyemiao-Jining Highway (LJH)* October 2001 * Environmental Assessment Sumnmary for LJH * October 2001 * Resettlement Action Plan * October 2001 * Financial Manual January 2002 * Strengthening and Reforning Highway Maintenance (a background note) November 2001 *Including electronic files - 62 - Annex 9: Statement of Loans and Credits CHINA: Inner Mongolia Highway Project 02-May-2002 Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig Frm Rev'd P071147 2002 Tuberculosis Control Project 104.00 0.00 0.00 0.00 0.00 104.00 0.00 0.00 P058846 2002 National Railway Project 160.00 0.00 0.00 0.00 0.00 160.00 33.33 0.00 P064729 2002 SUSTAINABLEFORESTRY DEVELOPMENT 93.90 0.00 0.00 0.00 0.00 93.90 0.00 0.00 P056596 2001 PROJECT 100.00 0.00 0.00 0.00 0.00 99.00 27.57 0.00 P058645 2001 Shijiazhuang Uroan Transport 200.00 0.00 0.00 0.00 0.00 193.00 2.67 0.00 P056516 2001 Jiangsi It Hwy 74.00 0.00 0.00 0.00 0.00 63.17 3.07 0.00 P056199 2001 WATER CONSERVATION 100.00 0.00 0.00 0.00 0.00 99.00 1.00 0.00 P051859 2001 Third Inland Waterways 100.00 0.00 0.00 0.00 0.00 100.00 2.53 0.00 P047345 2001 CH-LLAO RIVER BASN 105.50 0.00 0.00 0.00 0.00 104.45 -1.05 0.00 P045915 2001 CHHUAI RiVER POLLUTION CONTROL 100.00 0.00 0.00 0.00 0.00 71.22 7.70 0.00 P045910 2000 Urumqi Urban Transport 150.00 0.00 0.00 0.00 0.00 142.06 20.73 0.00 P056843 2000 CH-HEBEI URBAN ENVIRONMENT 200.00 0.00 0.00 0.00 0.00 172.34 35.01 0.00 P058844 2000 Guangxi Highway 150.00 0.00 0.00 0.00 0.00 126.40 13.07 0.00 P056424 2000 3rd Heran Prov Hwy 320.00 0.00 0.00 0.00 0.00 308.14 40.41 0.00 P045264 2000 TONGBAI PUMPED STCRA 93.50 0.00 0.00 0.00 0.00 59.75 27.05 0.00 P049436 2000 SMALLHLDR CATTLE DEV 200.00 0.00 0.00 0.00 0.00 192.62 19.32 0.00 P064730 2000 CN-CHONGOING URBAN ENVIRCNMENT 210.00 0.00 0.00 0.00 0.00 192.44 81.61 0.00 P042109 2000 Yangtze Dike Strengthening Project 349.00 0.00 0.00 25.00 0.00 351.47 82.14 0.00 P049665 1999 CH-BEIJING ENVIRONMENT II 90.00 30.00 0.00 0.00 0.00 58.10 9.76 0.00 P050036 1999 ANNINGVALLEYAG.DEV 200.00 0.00 0.00 0.00 0.00 96.60 16.84 0.00 P051705 1999 Anhui Provincial Hwy 200.00 0.00 0.00 0.00 0.00 141.64 65.14 0.00 P046829 1999 Fujiang II Highway 100.00 0.00 0.00 0.00 0.00 12.67 74.87 0.00 P041890 1999 RENEWABLE ENERGY DEVELOPMENT 150.00 0.00 0.00 0.00 0.00 79.31 47.78 0.00 P042299 1999 Liaoning Urban Transport 10.00 35.00 0.00 0.00 0.00 38.59 -3.58 0.00 P043933 1999 TEC COOP CREDiTi V 150.00 2.00 0.00 0.00 0.00 100.47 31.34 5.50 P003653 1999 CH-SICHUAN URBAN ENMRONMENT 71.00 0.00 0.00 0.00 3.13 42.25 45.02 0.00 P036953 1999 ContaherTransport 10.00 50.00 0.00 0.00 0.00 43.55 9.58 0.00 P046051 1999 CN-HEALTH IX 20.00 50.00 0.00 0.00 0.00 30.56 27.86 0.00 P046564 1999 CN-HIGHER EDUC. REFCRM 60.00 100.00 0.00 0.00 0.00 99.39 32.90 0.00 P051856 1999 Gansu & Inner Mongola Poverty Reduction 27.40 5.60 0.00 0.00 0.00 22.44 21.47 0.00 P041268 1999 ACCOUNTING REFORM & DEVELOPMENT 350.00 0.00 0.00 0.00 0.00 201.79 53.46 0.0 P057352 1999 Nat Hwy4/Hubei-Hunan 16.00 30.00 0.00 0.00 0.00 35.01 14.59 0.00 P058308 1999 CN-RURAL WATER SUPPLY IV 0.00 5.00 0.00 0.00 0.00 2.60 2.76 0.00 P060270 1999 CN-PENSION REFORM PJT 0.00 5.00 0.00 0.00 0.00 4.61 6.66 0.00 P063123 1999 CN-ENTERPRISEREFORM LN 40.00 40.00 0.00 0.00 0.00 0.29 1.26 1.26 P036121 1999 YANGTZE FLOOD EMERGY 0.00 0.00 0.00 35.00 0.00 27.05 12.42 0.00 P056216 1999 RENEWABLE ENERGY DEVELOPMENT 100.00 50.00 0.00 0.00 0.00 100.54 59.70 0.00 P051888 1999 LOESS PLATEAU II 80.00 20.00 0.00 0.00 0.00 64.32 26.63 0.00 P003566 1998 GUANZHONG IRRIGATION 0.00 85.00 0.00 0.00 0.00 43.87 21.87 0.00 P035698 1998 CN-BASIC HEAL1H (HLTH8) 300.00 0.00 0.00 0.00 100.00 179.92 222.42 12.53 P037859 1998 HUNAN POWER DEVELOP. 0.00 0.00 0.00 22.00 0.00 6.44 21.40 0.00 P036414 1998 EGY CONSERVATIDN PRO 72.00 20.00 0.00 0.00 0.00 79.10 45.89 0.00 P051736 1998 CH-GUANGXI URBAN ENVIRONMENT 250.00 0.00 0.00 0.00 0.00 165.82 164.82 152.70 P036949 1998 E. CHINANJIANGSU PWR 250.00 0.00 0.00 0.00 0.00 67.91 0.42 0.00 P003591 1998 Nat Hwy3-Hubei 150.00 0.00 0.00 0.00 80.91 8.45 76.29 0.13 P045788 1998 STATE FARMSCOMMERCI 230.00 0.00 0.00 0.00 0.00 89.62 46.49 0.00 P046563 1998 Tri-Provincial Hwy 90.00 60.00 0.00 0.00 2.67 75.79 53.00 0.00 P003619 1998 TARiM BASIN II 123.00 0.00 0.00 0.00 0.00 86.14 66.98 0.00 P003614 1998 2nd Inland Waterways 200.00 0.00 0.00 0.00 0.00 130.81 124.67 0.00 P046952 1998 Guangzhou City Transport 100.00 100.00 0.00 0.00 0.00 95.63 -23.53 53.22 P003539 1998 FOREST. DEV. POOR AR 100.00 0.00 0.00 0.00 2.31 53.25 32.23 0.00 P040185 1998 SUSTAINABLE COASTAL RESOURCESDEV. 95.00 0.00 0.00 0.00 0.00 34.09 26.79 0.00 P049700 1998 CH-SHANDONG ENVIRONMENT 300.00 0.00 0.00 0.00 0.00 63.33 10.77 0.00 WL-2 - 63 - Difference between expected Original Amount in US$ Millions disbursements' Project ID 1Y Purpose IBRD IDA SF GEF Cancel. Undisb. Orig Fnfn Rev~d P003606 ian8 ENERGY CONSERVATION 63.00 0.00 0.00 22.00 0.00 50.51 13.23 0.00 P04448.5 1997 SHANGKAi WAIGAOOIAO 400.00 0.00 0.00 0.00 0.00 242.53 128.33 37.07 P038988 1997 HIEILCNJGJIANG ADP 120.00 0.00 0.00 0.00 0.00 28.72 25.00 0.00 P003654 1997 Net Hwy2/Hunan-Guengdong 400.00 0.00 0.00 0.00 0.00 135.54 125.88 0.00 P003650 1997 TUOK(ETUO POWERIINNER 400.00 0.00 0.00 0.00 102.50 149.88 221.66 14.31 P003643 1997 Xinjiang Hwy II 300.00 0.00 0.00 0.00 60.00 26.77 64.77 1.77 P003637 1997 COH-NATIONAL RURAL. WATER III 0.00 70.00 0.00 0.00 0.00 21.12 18.67 17A40 P003635 1997 CN-VOC. ED. REFORA PROJ 10.00 20.00 0.00 0.00 0.00 1.70 2.83 0.00 P003590 1997 OHNBA MaiJNTAINS POVERTY RED3JCTION 30.00 150.00 0.00 0.00 0.00 72.45 75&30 0.00 P034081 1997 XLAOLANGDI MULTI. II 430.00 0.00 0.00 0.00 0.00 83.63 120.85 0.00 P036405 1997 WANJIAZHAJ WATER TRA 400.00 0.00 0.00 0.00 75.00 53.69 115.36 53.69 P035693 1997 FUEL EFFICIENr IND. 0.00 0.00 0.00 32.50 0.00 9.06 32.61 0.00 P036952 1997 ON-BASIC ED. IV 0.00 85.00 0.00 0.00 0.00 2.56 5.45 0.00 P003599 1996 CH-YUJNNAN ENVIR(NMENT PROJECT 125.00 25.00 0.00 0.00 0.00 92.14 61.69 40.10 P003589 1996 ON-DISEASE PREVENTION (HLTH7) 0.00 100.00 0.00 0.00 0.00 17.16 25.16 0.00 P003638 1996 SEEDS SECTOR COMMER. 60.00 20.00 0.00 0.00 9.40 19.89 28.67 0.00 P003602 1996 CH4HUBEI URBAN ENVIRON'MENT 125.00 25.00 0.00 0.00 28.32 59.00 89.24 37.97 P003594 1996 GANSU HEXI CCRRIDOR 60.00 90.00 0.00 0.00 0.00 92.19 59.83 0.00 P034618 1998 ON-LABOR MARKCET DEV. 10.00 20.00 0.00 0.00 0.00 9.04 11.35 0.00 P003652 ian6 2nd Sheanxd Prov Hwy 210.00 0.00 0.00 0.00 0.00 30.03 30.03 0.00 P003649 1996 SHANXI POVERTY ALLEV 0.00 100.00 0.00 0.00 0.00 6.20 14.22 0.00 P003648 ian6 CH-SI4ANGHAI SEWERAGEII1 250.00 0.00 0.00 0.00 0.00 91.13 50.26 0.00 P040513 1996 2nd Henan Proy Hwy 210.00 0.00 0.00 0.00 0.00 72.77 70.77 -13.89 P003646 1996 CN-CHONGCONG IND PCa CT 170.00 0.00 0.00 0.00 164.82 3.00 167.00 3.00 P003585 1995 SHENYANG IND REFORM 175.00 0.00 0.00 0.00 0.00 41.52 41.52 0.00 P003598 1995 CH-LLAONING ENVIRONMENT 110.00 0.00 0.00 0.00 0.00 19.70 19.70 7.29 P003571 1995 RAILWAYS VII 400.00 0.00 0.00 0.00 109.00 78.96 150.32 6.00 P003603 1995 CH-ENTERPRISE HOUJSING & SOC SEC REF 275.00 75.00 0.00 0.00 20.00 102.11 120586 40.29 P003600 1995 ON-TECHfNOLOGY DEVELOPMENT 200.00 0.00 0.00 0.00 3.02 29.58 32S58 0.00 P003596 1995 YANGTZE BASIN WATER 100.00 110.00 0.00 0.00 0.00 2.63 5.20 1.44 P003647 1995 ECONOMIC LAW REFORM 0.00 10.00 0.00 0.00 0.00 4.20 5.11 0.00 P036041 1995 FISCAL &TAX REF. & 25.00 25.00 0.00 0.00 0.00 1.11 3.64 3.64 P003642 1995 ZHE.JIANG POWER DEWr 400.00 0.00 0.00 0.00 0.00 63.35 67.97 0.00 P003639 1995 SOUTHWEST POV. REDUC 47.50 200.00 0.00 0.00 0.00 15.86 40.50 27.93 P036947 1995 SICHUAN TRANSMISSICN 270.00 0.00 0.00 0.00 95.00 14.42 1099A2 22.41 P003634 1995 ON-MATERNAL CHLD HEAL1IHLTH6) 0.00 90.00 0.00 0.00 0.00 3.49 6.81 0.00 P003402 1995 NATURE RESERVE MGMT 0.00 0.00 0.00 0.00 0.00 0.63 2.08 0.00 P003586 1994 OH-SHANGHAI ENVIRCNMENT PROJECT 160.00 0.00 0.00 0.00 0.00 29.65 29.65 29.85 P003593 1994 SONGLiAD PLAIN ADP 0.00 206.00 0.00 0.00 0.00 6.66 1A2 -1A46 P003595 1994 RED SOILS 11 AREA DEVELOPMENT PROJECT 0.00 150.00 0.00 0.00 0.00 7.35 3.27 -0.93 P003644 1994 XLAOLANGDI RESETTLEMENT 0.00 110.00 0.00 0.00 0.00 6.15 4.43 0.00 P003641 1994 YANGZHOU THEIEvAL POW 350.00 0.00 0.00 0.00 11.50 3.66 15.18 0.69 P003404 1994 SIOHUAN GAS DEV. CON 0.00 0.00 0.00 10.00 0.00 0.02 0.78 0.00 P003626 1994 Fujian Pray Highway 140.00 0.00 0.00 0.00 18.1 1 12.94 31.05 31.013 P003540 1994 LOESS PLATEAU 0.00 150.00 0.00 0.00 0.00 2.09 -1.67 0.00 P003609 1994 SICHUAN GAS DGBV & CONSERVATION 258.00 0.00 0.00 10.00 0.00 56.81 56.81 0.00 P003632 1993 ON-ENVIRONMENT TECH ASS 0.00 50.00 0.00 0.00 0.00 6.67 7.62 7.30 P003627 1993 GRAIN DISTRIBUriON P 325.00 185.00 0.00 0.00 0.00 41.24 42.06 38.75 P003623 1993 FINANCIAL SECTOR TA 0.00 60.00 0.00 0.00 0.00 2.41 -3.08 -3.06 P003592 1993 REF. INSTL.& PREINV 0.00 50.00 0.00 0.00 0.00 3.45 4.08 1.24 P003616 1993 TIANNIANGPING HYDRO 300.00 0.00 0.00 0.00 17.00 21.87 35.87 0.00 P003624 1992 ON-INFECTIOUS DISEASES (HLTHS) 0.00 129.60 0.00 0.00 0.00 2.44 -1.11 -1.15 Total: 14,069.60 2,972.20 0.00 156.50 902.66 6,970.82 4,372.35 627.79 - 64 - CHINA STATEMENT OF IFC's Held and Disbursed Portfolio Jan - 2002 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 Sino-Forest 25.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1995 Suzhou PVC 0.00 2.48 0.00 0.00 0.00 2.48 0.00 0.00 1998 WIT 5.00 0.00 0.00 5.00 0.00 0.00 0.00 0.00 1996 Weihai Weidongri 2.02 0.00 0.00 0.00 2.02 0.00 0.00 0.00 1993 Yantai Cement 11.69 1.95 0.00 0.00 11.69 1.95 0.00 0.00 1998 Zhen Jing 0.00 2.00 0.00 0.00 0.00 2.00 0.00 0.00 1999/00 Barnk of Shanghai 0.00 3.84 0.00 0.00 0.00 3.84 0.00 0.00 1996 Beijing Honmel 2.86 0.50 0.00 2.20 2.86 0.50 0.00 2.20 1998/00 CIG Holdings PLC 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Caltex Ocean 19.76 0.00 0.00 32.73 19.76 0.00 0.00 32.73 1998 Chengdu Huarong 7.40 3.20 0.00 8.60 3.70 3.20 0.00 4.30 1998 Chengxin-IBCA 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 1987/92/94 China Bicycles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994 China Walden Mgt 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 1994 China Walden Ven 0.00 0.77 0.00 0.00 0.00 0.77 0.00 0.00 1994 Dalian Glass 0.00 2.40 0.00 0.00 0.00 2.40 0.00 0.00 1999 Dujiangyan 25.59 0.00 0.00 30.00 13.81 0.00 0.00 16.19 1995 Dupont Suzhou 14.02 4.15 0.00 15.60 14.02 4.15 0.00 15.60 1994 Dynamic Fund 0.00 9.75 0.00 0.00 0.00 8.09 0.00 0.00 1999 Hansom 0.00 16.10 0.00 0.00 0.00 16.10 0.00 0.00 1996 Jingyang 32.50 0.00 0.00 69.23 32.50 0.00 0.00 69.23 1998 Leshan Scana 6.10 1.35 0.00 0.00 4.50 1.35 0.00 0.00 2002 NCCB 0.00 26.58 0.00 0.00 0.00 0.00 0.00 0.00 1996 Nanjing Kumho 7.79 3.81 0.00 22.14 7.79 3.81 0.00 22.14 2001 New China Life 0.00 30.70 0.00 0.00 0.00 23.32 0.00 0.00. 1995 Newbridge Inv. 0.00 2.04 0.00 0.00 0.00 2.04 0.00 0.00 1997 Orient Finance 10.48 0.00 0.00 13.10 10.48 0.00 0.00 13.10 1997/00 PTP Holdings 0.00 0.03 0.00 0.00 0.00 0.03 0.00 0.00 1997 PTP Hubei 11.72 0.00 0.00 23.29 11.72 0.00 0.00 23.29 1996 Pacific Ports 0.00 2.54 0.00 0.00 0.00 2.54 0.00 0.00 2001 Peak Pacific 0.00 0.00 17.00 0.00 0.00 0.00 5.53 0.00 1998 Rabobank SHFC 1.13 0.00 0.00 1.13 1.13 0.00 0.00 1.13 2000 SSIF 0.00 6.00 0.00 0.00 0.00 0.45 0.00 0.00 1998 Shanghai Krupp 30.00 0.00 0.00 68.80 13.66 0.00 0.00 31.34 1999 Shanxi 19.00 0.00 0.00 0.00 16.45 0.00 0.00 0.00 1993 Shenzhen PCCP 3.76 0.99 0.00 0.00 3.76 0.99 0.00 0.00 Total Portfolio: 235.82 124.55 17.00 291.82 189.85 80,38 5.53 231.25 - 65 - Approvals Pending Comnmitment FY Approval Company Loan Equity Quasi Partic 2001 AACI 0.00 0.00 2.00 0.00 2002 Advantage 0.00 0.00 0.25 0.00 2002 BOS RI 2 0.00 0.00 24.70 0.00 2000 CIG Zhapu 6.00 5.00 0.00 0.00 2000 CIMIC Tile 15.00 5.00 0.00 15.00 2001 Daning Coal 13.00 0.00 2.00 15.00 2002 Darong 10.00 0.00 1.50 8.00 2002 Huarong AMC 50.00 0.00 0.00 0.00 2001 Maanshan Carbon 9.00 0.00 2.00 5.00 2000 Meijing 9.00 0.00 0.00 7.30 2001 Minsheng 0.00 23.50 0.00 0.00 2002 Narada Battery 6.60 0.00 0.00 0.00 1998 PTP Hubei BLINC 0.00 0.00 0.00 1.50 2000 Wan Jie Hospital 15.00 0.00 0.00 0.00 Total Pending Comnmitnent: 133.60 33.50 32.45 51.80 - 66 - Annex 10: Country at a Glance CHINA: Inner Mongolia Highway Project East Lower- POVERTY and SOCIAL Asia & middle- China Padfic Income iOvelopmentdlamofnd 2000 Pooulation. mid-year (inltions) 11262.5 1.653 2046 Life expectancy GNI Cer caoita (Alas method. USS) 640 1.060 1.140 GNI (Atlas method, USS bilbns) 1,061.2 1.964 2,327 Average annual growth, 1994-00 Population f%J 1.0 1.1 1.0 G Laborforce (X) 1.2 1.4 1.3 GNI Gross per prirnary Most recent estmate (latest year available, 1994-00) capta enrolment Poverty (f of populaton below natinal Poverty line) 5 Urban population ( of total population) 36 35 42 itfeexPectancv at birth i(Years) 70 69 69 Infant nmortalitv (per t,000 live births) 30 35 32 Child malnutbion (6 of children under 5) 9 13 11 Access to knproved water source Access to an improved water source (% of Population) 75 75 80 litteracy (6 ofpopulation aes 15+) 16 14 15 Grossprlmarvenroltment (3 ofschodi-aeePooulatton) 123 119 114 Male 123 121 116 Lower-mdde-lncome group Female 123 121 114 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1980 1990 1999 2000 Ecanemic ratios' GDP (USS billions) 216.2 363.0 997.5 1,076.9 Gross domestic investmenUGDP 35.2 34.7 37.2 37.3 Trade Exports of aoods and servIces/GDP 7.6 17.5 22.0 25.9 Gross domestc savincslGDP 34.9 37.9 40.1 39.9 Gross natonal savinasvGDP 34.9 38.3 38.7 39.2 Current account balance/GDP -0.4 3.8 1.6 1.9 Domesfic Investnent Interest payments/GDP 0.2 0.7 0.6 0.7 sav+gs Total debt/GDP 15.2 15.5 13.9 Total debt servioeexDorts 8.0 9.9 9.0 7.4 Present value of debUtGDP 113.5 Prasent value of debtlexDorts 58.7 Indebtedness 1980-90 1990-00 1999 2000 2000-04 (average annual growth) GDP 10.1 10.3 7.1 7.9 7.4 China GDP per capita 8.5 9.2 6.1 7.2 6.7 - Lwar -nidde-/nromne group Exports otg oods and servAs 11.0 16.5 13.9 32.0 11.1 STRUCTURE of the ECONOMY 1980 1990 1999 2000 GrowthoflnvstmentandGDP(%) (X of GDP) Aarculture 30.1 27.0 17.6 159 Industrv 48.5 41.6 49.4 50.9 ' ManufacturIna 40.5 32.9 33.6 34.5 - Services 21.4 31.3 32.9 33.2 Private consumption 50.5 49.9 47.4 47.0 9 s9 o 7 Be es oo General govemment oonsumpton 14.6 12.1 12.5 13.1 Imports of ooods and services 7.9 14.3 19.1 23.2 - I G 1980-90 1990-00 1999 2000 Grwth of sxports and Imports (%) (average annua growt4h) Agriculture 5.9 4.1 28 2.4 o Industry 11.1 13.7 8.1 9.6 30 . Manufacturing 11.1 13.4 8.3 9.7 20 Services 13.5 9.0 7.S 7.8 !s Prtvate consumption 9.4 8.8 2.6 6.0 General goverrment oonsumpton 9.8 9.4 84 12.0 -10 r5 go 97 Be 99 00 GrossdomesticInvestment 10.8 11.6 3.2 7.9 - Exr ts -impe rs Imports of goods and services 9.1 16.1 22.3 24.8 Note: 2000 data are prelirmnary estmatas. 'The diamonds show four kev indicators In the countrv tin bold) comoared wih Its Income-oroup averae. If data are missin. the diamond vill be Inoomplte. - 67 - China PRICES and GOVERNMENT FINANCE 19t0 1990 1999 2000 Inflation(%) Ns cham.7) 30; Consumer prices 6.0 3.1 -1.4 0.4 20 lmpldt GDP deflator 5.6 5.5 -2.2 0.9 10. Govenment flnance 1 ( of GDP, indLudes current grants) Current revenue 25.7 19.7 15.0 15.3 -10 Current budaet balance .. 3.0 1.3 0.6 -GDP deflator e CPI OveraDl surolus/defidt -1.5 -0.8 -4.0 -3.6 TRADE (USSn'ilons) 1 1 2000 Export and Import levels (USS mill.) Total exports (fob) 18.270 6Z091 194,931 249,210 3soDO Food 2,985 6,609 10,458 12,282 Fuel 4,280 5.237 4,659 7,851 ooo 0 Manufactures 9,005 46,205 174.990 223,752 Total imports (df) 20.017 53.345 165.699 225.097 _ _ Food 2,927 3.335 3,619 4,758 , Fuel and energv 203 1.272 8,912 26,037 Capital goods 5,119 16.845 69,469 91.934 o R O N * 94 or, or, 97 99 99 00 Export price Index (1995=100) 25 78 69 67 lIrportpriceindex(1995=100) 22 80 71 75 *EPor5 *Impon3t Temis of trade (1995=100) 116 97 98 90 BALANCEof PAYMENTS (USS m/llions) 1980 1999 1999 2000 Currant account balance to GDP (%) Exports of goods and services 20,167 67,971 218.496 279.561 s Imports of goods and services 20,859 55,537 189,799 250.688 4 Resource balance -692 12.433 28.697 28,873 Net inoome -100 1.055 -17.973 -14,666 3* Net current transfers ,. 274 4,943 6,311 2f.* Currant account balance -792 13.762 15,668 20.519 t f. flf - -fl FInandng Items (net) .. -7,673 -7.163 -9,971 o Changes In net reserves .. -6.089 -8,505 -10.548 94 9f Be 97 BB 90 r9 Memo: Reserves Induding gold (US$ mllins) .. 16,963 161.404 171,753 ConversIon rate (DEC, locallUSS) 2.1 5.1 8.2 8.3 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ milions) ComposItton of 2000 debt (USS mill.) Total debt outstandIng and disbursed .. 55.301 154,223 149,800 IBRD .. 2,865 10,400 11,118 IDA . 3.016 8,907 8,771 B: 8,771 Total debt service 1.652 7,057 20.655 21.728 D 2,55E IBRD , 416 1.142 1,291 A IDA 19 117 131 Comnposilon of net resource flows E:28.510 Official grants 7 143 201 147 Official creditors 1,727 1,706 1.928 Private creditors .. -1,854 1.985 Foreign direct nvestment 57 3,487 41.015 42,096 Portolbo ecuitv 0 0 1,806 7,814 . ,s7 World Bank roram Coammnitments .. 953 2,097 1,536 A - 16PD E - Bilaterai Disbursenients , 1,098 1,756 1,907 B - IDA D- Other mul81atral F - Prate Prncina repayments .. 216 558 644 C - IMF G- Short-term Netfiows .. 882 1.198 1,263 Interest payments ,, 219 701 778 Net transfers ., 663 497 485 DevelopmentEconorrucs 91i/01 -68 - Additional Annex 11 Summary of Financial Management Assessment CHINA: Inner Mongolia Highway Project Executive Summary and Conclusion 1. The task team has conducted an assessment of the adequacy of the project financial management system of the proposed Inner Mongolia Highway Project (the Project). The assessment, based on guidelines issued by the Financial Management Sector Board on June 30, 2001, has concluded that the project meets minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the team's opinion, the project will have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information on the status of the project in the reporting format agreed with the project and as required by the Bank. 2. The assessment also concluded that there are no outstanding audits or audit issues exist with implementing agency involved in the proposed project. The task team however will continue to be attentive to financial management matters and audit covenants during project implementation. The financial Management Assessment Report is available in the project files and is summarized below. Country Issues 3. To date, no CFAA has been performed for China, but dialogue with the Government of China in respect of the CFAA exercise has been initiated and is currently underway and hopefully will be carried out in the near future. Though no CFAA was conducted in FY01 for China, the Bank has been relying on a similar exercise carried out by the Asian Development Bank in year 2000. 4. However, based on observations of developments in the areas of public expenditures, accounting and auditing, and Bank experience with China projects for the past few years, we noted that substantial achievement in the aforementioned areas has been made and further improvement is expected in the next few years. As the economic reform program unfolds, the Government of China has come to realize the importance of establishing and maintaining an efficient and effective market mechanism to ensure transparency and accountability, and to minimize potential fraud or corruption. 5. Due to the rather unique arrangement with the Government of China, funding (in particular the Bank loan) of Bank projects is controlled and monitored by the Ministry of Finance (MOF) and its extension, i.e., finance bureaus at provincial, municipal/prefecture and county levels. However, project activities are usually carried out by implementing agencies in a specific industry or sector. This arrangement usually requires closer coordination on the project, because the multilevel management of the funding and implementation mechanism sometimes works to the detriment of smooth project implementation. Strengths and Weaknesses 6. Strengths. The proposed project is the second highway project to be implemented in the region (the first one is the Tri-provincial Highway Project). Project personnel identified to assume financial or accounting positions have adequate relevant work experience and educational backgrounds. The head of the financial department of the Project Management Office (PMO) of the proposed project - 69 - also participated in the financial management of the first highway project, and therefore experience gained therefrom will benefit the proposed project. 7. FBIMAR is also expected to play a major role in the financial aspects of the project, including financing arrangement, procurement, and financial management. FBIMAR has managed financial aspects of several Bank projects, including the Tri-provincial Highway Project, and records indicate that FBIMAR has been performing satisfactory work in the areas of withdrawal applications and financial management assistance. 8. Weaknesses. The following significant weakness and its resolution have been identified: Significant weakness Resolution Experience from the first highway project A training program, including an overseas study indicates that accounting treatment of some tour, has been proposed by the project and project activities and cash management need found by the task team to be acceptable. further strengthening and improvement. Further assistance from FBIMAR is critical in terms of withdrawal application procedures. The Bank task team will provide training in financial management (including disbursement procedures) as and when needed. Implementing Entity 9. Project leadinggroup (PLG) A project leading group chaired by Vice-Chairman of Inner Mongolia Autonomous Region and including representatives from line departments of the Inner Mongolia Autonomous Region government, such as Development and Planning Commission, State Land Resources Administration and Inner Mongolia Communication Department, has been formed to provide overall guidance and coordination and monitor project implementation. 10. Project Management Office Project Management Office (PMO), directly under IMCD and headed by Deputy Director of IMCD has been established. PMO will assume overall implementation and coordination responsibility and directly implement every component of the project. A financial division has been set up under the PMO with the following positions: financial manager, project accountant, cashier, basic infrastructure accountant, budgeting, payment accountant and intemal audit. 11. In addition, the Foreign Fund Division of FBIMAR will play a major role in project implementation, including overall monitoring, financing arrangements, and financial management. FBIMAR will also be responsible for maintaining, monitoring and reconciling the special account to be established for the project, and reviewing, verifying and approving withdrawal applications prepared by the project before submitting them to the Bank for disbursement processing. The division has extensive experience with Bank projects and is familiar with Bank disbursement procedures. Consequently, for smooth and successful project implementation, close cooperation and coordination between FBIMAR and PMO is critical. Funds Flow 12. One special account for the project will be set up at and managed directly by FBIMAR and on-lending agreements will be signed between MOF and FBIMAR, between FBLMAR and IMCD. - 70 - The Bank funds will flow from the Bank to the project special account, and then to PMO for reimbursement of expenditures incurred for the project and advanced by the PMO, or directly to contractors or suppliers. The funds flow is illustrated in the following diagram. World Bak --I Special account managed M W *s * +~~~~b FBIMAR _ Cxntractr 13. Counterpart funds will flow from MOC and IMCD directly to the project. Staffing 14. Adequate project accounting staff with educational backgrounds and work experience commensurate with the work they are expected to perform is one of the factors critical to successful implementation of project financial management. Based on discussions, observation and review of educational background and work experience of the staff identified for financial and accounting positions, the task team notes that adequate and qualified staff have been recruited for the project and are considered appropriate for the positions they are to assume. The project financial manager participated in financial and accounting work for the Tri-provincial Highway project and experience gained therefrom will benefit the proposed project. 15. However, most of the financial and accounting staff identified and recruited for the project have no experience with Bank-financed projects. A well-focused training program to strengthen project staff's understanding and knowledge of Bank policies and procedures should be provided by PMO and FBIMAR prior to project effectiveness. 16. In addition, in order to strengthen financial management capacity, standardize accounting procedures, achieve consistent quality of accounting work, and provide easy reference to accounting treatment, the task team has suggested that a project financial management rnanual be prepared. The manual will provide detailed guidelines on financial management, intemal controls, accounting procedures, fund and asset management, and withdrawal application procedures. PMO has already prepared and submitted to the Bank a draft manual, which the task team found satisfactory and appropriate to the project. A finalized copy will be available to all relevant project staff before project effectiveness. Accounting Policies and Procedures 17. The project will adopt accrual accounting and double-entry bookkeeping. The administration, accounting and reporting of the project will be set up in accordance with the following regulations/circulars issued by MOF: a. Circular No. 127, Temporary Regulations on Financial and Accounting Management for Projects Financed by the World Bank, issued in 1993, as a basis for bookkeeping and preparing project financial statements and management reports (in line with other Bank-financed projects in China). b. Circular No. 12, Regulation for the Submission of Withdrawal Applications, issued in December 1996, which includes detailed procedures for preparing and submitting withdrawal applications and retaining supporting documentation. c. Circular No. 13, Accounting Regulations for World Bank Financed Projects, issued in January 2000, which provides in-depth instructions on the accounting treatment of project activities and covers the following: - 71 - * Chart of account * Detailed accounting instructions for each project account * Standard set of project financial statements * Instructions on the preparation of project financial statements. 18. The standard set of project financial statements mentioned above has been agreed to between the Bank and MOF and applies to all Bank projects appraised after July 1, 1998 and includes the following: * Both Circulars No. 127 and No. 13 are simplified versions of the Accounting Standards for State-owned, Infrastructure Oriented Projects (the "Standards"), taling into consideration the unique characteristics of Bank projects. The Standards are modeled after the principles of International Accounting Standards and provides detailed guidelines to accounting for activities of an infrastructure project. * PMO will manage, monitor, and maintain project accounting records, and will retain original supporting documents for project activities. In addition, PMO will prepare project financial statements and submit them to the Bank for review and comment on a regular basis. Internal Audit 19. An internal department under IMCD will assume the internal audit function for the project. The task team will evaluate work performed by such internal auditors and determine the degree of reliance on their work in respect of project implementation and Bank supervision missions. External Audit 20. The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank financed projects in China, the project will be audited in accordance with the Governnent Auditing Standards of the People's Republic of China (1997 edition). The Inner Mongolia Autonomous Region Audit Bureau (IMARAB) has been identified as auditor for the project. Annual audit reports will be issued in the name of IMARAB and subject to review by the China National Audit Office (CNAO). The Bank currently accepts audit reports issued by CNAO or provincial or regional audit bureaus for which CNAO is ultimately responsible. 21. Audit reports on annual project financial statements will be due to the Bank within 6 months of the end of each calendar year, with a separate opinion on statements of expenditures and the special account. Reporting and Monitoring and Format of Financial Statements 22. The fornat and content of the following project financial statements represent the standard project reporting package agreed to between the Bank and MOF, and have been discussed and agreed with the project. The project financial statements will be submitted as part of the Financial Monitoring Report (FMR) to the Bank on a semi-annual basis (prior to August 15 and February 15 of the subsequent year) and include the following four statements: - Balance Sheet - Summary of Sources and Uses of Funds by Project Component - Statement of Implementation of Loan Agreement - Statement of Special Account - 72 - Information Systems 23. A computerized financial management system has been in place in the PMO, and a widely accepted accounting software, Yongyou, will be used to keep track of project activities. Yongyou has been a mature financial software and widely used in the business community in China, and is considered appropriate for the financial and accounting work of the project. However, the task team will closely monitor accounting work, particularly at the initial implementation stage, to ensure proper setup and recording. Impact of Procurement Arrangements 24. The impact of procurement arrangements of the project on financial management is considered to be minimal. The threshold set for procurement post-review will be consistent with that set for SOEs for disbursement purposes. Action plan 25. The following represents a time-bound action plan required of the project that is not considered serious enough to withhold project preparation: Action Responsible person Completion Date 1. Project financial management FBsMAR, PMO Before effectiveness training provided to relevant project staff _ 2. Financial management PMO Before effectiveness manual finalized and issued Financial Covenants 26. There is no specific financial covenant for the project other than the standard ones, e.g. maintaining project accounts in accordance with sound accounting practices, audit requirement and SOE, as described in the legal document. Supervision Plan 27. More frequent supervision missions (such as every six months) are recommended at the initial implementation stage to ensure proper accounting setup and operations and to assess the needs of further assistance or training. From project mid-point on, annual supervision missions for financial management aspects may be sufficient. In addition, to maximize efficiency and effectiveness of supervision missions, procurement and FM/SOE/disbursement reviews should be carried out simultaneously. - 73- Additional Annex 12 Environmental Assessment and Action Plan Summary CHINA: Inner Mongolia Highway Project A. Background 1. The Environmental Assessment (EA) for this project was carTied out by Xi'an Highway University (XHU). The draft EA documents were reviewed by the Bank and discussed with Inner Mongolia Communications Department (IMCD) during the preappraisal mission in September 2001. The final draft Environmental Impact Assessment Report (EIA), Environmental Action Plan (EAP) and EA Summary were submitted to the Bank in January 2002. 2. The local people in the project area were intensively consulted during the EA work, and their opinions are reflected in the project design and environmental mitigation measures. 3. The national policy and administrative requirements for environmental assessment of development projects in China were satisfied during preparation and evaluation of the EA, as was the Bank's OP 4.01 on Environmental Assessment. The following major laws and regulations applied to the EA of Inner Mongolia Highway Project: * Environmental Protection Law of the Peoples' Republic of China (PRC) * Water Pollution Control Law of PRC * Water and Soil Conservation Law of PRC * Atmospheric Pollution Control Law of PRC * Environmental Noise Control Law of PRC * Cultural Relics Protection Law of PRC * Circular on Strengthening Environmental Impact Assessment Management for Construction Projects Financed by International Financial Organizations. B. Brief Project Description 4. The proposed Inner Mongolia Highway project includes two physical components: the construction of the LJH, which is a key section of the NTHS, and the Highway Network Improvement Program (HNIP), which will improve five rural road sections of a total length of about 350 km. 5. The LJH comprises about 90 km of high-grade highway from Jining to Laoyemiao on the border of Hebei province. This highway is part of the second east-west artery of the National Trunk Highway System (NTHS) connecting North China, Inner Mongolia, Ningxia, Gansu, Qinghai, and Tibet, all of which are poor provinces. The proposed highway will form part of the most important east-west corridor of Inner Mongolia, linking the major industrial, administrative, and hub cities of Baotou, Hohhot, and Jining. The opening of this stretch of NTHS will help accelerate economic growth in Inner Mongolia by integrating its regional market into the national economy. C. Baseline Environmental Description 6. Geography and Meteorological Conditions. The projected alignment is situated on the south edge of the Inner Mongolian Plateau. The section between Laoyemiao to Yushuwang is in a hilly loess area with severe wind erosion. The section between Yushuwang to Taigou is typical lava bench land. Soil erosion is - 74 - caused by both wind and hydraulic erosion. Wind erosion occurs everywhere, but especially in the dry grasslands from March to May. Hydraulic erosion occurs mainly in hilly loess areas from July to September when it rains often. The rivers at the highway alignment crossings are all seasonal, with no water in dry seasons, but floods occur frequently in rainy seasons. The major rivers in the study area are the Bawang, the Toutao, the Niuming, and the Yinzi rivers. 7. The project area is in a continental temperate monsoon zone with plentiful sunshine. It is dry and windy and rarely rains. The mean annual precipitation is 365 mm-404 mm, which falls mainly July through September. The average evaporation, however, is more than 1,400 mmn, and sandstorms occur frequently in spring. The average wind speed is 3.4-3.6 m/s. There are great temperature differences in the various seasons. The average annual temperature is 3.6-4.8, but in winter the temperature can be as low as -33.8-, and in summer as high as 35.7. 8. Socioeconomic Situation. The proposed highway will have impacts on Xinghe County, Jining City, Chaharyouyiqian County, and Zhouzi County, as well as the urban areas of Hohhot and Baotou. The total project area is 19,000 kmi, and the affected population is 4 million. The population density is 190 persons/krn2, much higher than the average in Inner Mongolia. Hohhot, the capital and the center of politics, economy, and culture of Inner Mongolia, also has developed into the center of industry and trade. The major industries are textiles, electronics, machinery, food processing, petrochemicals, building materials, metallurgy, and wool. Jining is one of the largest fur markets and fur processing bases in the country. In the project area, 3 percent of the population is ethnic minority, mainly Hui and Manchurian. 9. Ecological Environment. The project area lies mainly in grasslands and in agricultural land where grain and vegetable production is dominant. The natural pastures have deteriorated because of scarce rainfall, strong winds and plenty of sand, and human activities. The alignment of the proposed highway runs parallel to an existing Class II highway. This area has been exposed to human activities for many decades. The EA has ensured that there are no critical natural habitats, no enviromnentally protected areas, and no rare flora or fauna in the project area. No big wild animals are observed in the project area. 10. Noise and Air Quality. The noise level is generally low near the proposed alignment. In residential areas, a Class IV standard is satisfied, and at the only school along the alignment, a Class 1 standard is satisfied. Air quality is good and meets the standards. 11. Water Quality The existing water quality along the route is fairly good and meets the water quality standards of Class m claimed by Inner Mongolia Environmental Protection Bureau. The water quality of the Yinzi River satisfies even Class I standard. 12. Soil Erosion. There are varieties of soil erosion, among which are wind erosion and hydraulic erosion. Wind erosion occurs everywhere, but especially in dry grasslands from March to May. Hydraulic erosion occurs mainly in hilly loess areas from July to September, the rainy season. Ablation of exposed rocks occurs because of sunshine and temperature difference. 13. Cultural Relics. According to a survey by experts at Inner Mongolia Archeological Institute, the EIA states that there are no important cultural relics along the project alignment. - 75- D. Potential Environmental Impacts and Their Mitigation Measures Main Highway Component Design Phase 14. Alternatives Analysis. During project preparation, three alternatives were studied: (i) upgrading the existing highway to Class l; (ii) making a new expressway in one construction stage; and (iii) making a new expressway in two construction stages. The latter two alternatives have no distinct difference in terms of enviromnental impact, but the total cost of the third alternative would be higher. The first alternative, with the lowest cost, will not provide sufficient transportation capacity and it needs more resettlement and will cause more environment impacts to residential areas because of traffic concentration. Accordingly the second alternative, new expressway, was recommended. 15. Analysis of the no-project option indicates that although highway construction has some adverse impact on the acoustic environment and air quality, the highway also brings benefits: accelerating economic growth by promoting the integration of the regional market with the national economy, and relieving congestion on the existing highway, thus improving the environment along the existing highways by diverting its rapidly increasing transport. 16. Social Disruption. In order to prevent the expressway from causing social disruption, 70 passageways, eight large bridges, and 26 middle-size or small bridges will be constructed along the 90-km alignment. 17. Noise. Construction of three green belts totaling 5,000 m in the project area is included in the design. The design calls for the green belts to be developed at environmentally sensitive spots where the alignment is near residential areas. 18. Borrow Pits. The places to make borrow pits will be carefully chosen so that construction works do not cause a soil erosion problem. Construction Phase 19. Noise. Heavy mnachinery operation and other construction activities will cause adverse impacts on the acoustic environment in the populated project areas. Strict regulations on the schedule of construction works will be implemented to minimnize such adverse impacts. Heavy machinery operation will be prohibited between 10:00 p.m. and 6:00 a.m. 20. Air Pollution. Dust during the construction works was identified as a major environmental impact. Asphalt-mixing plants will be located at least 300 m from residential areas on the leeward side of the alignment. Material sites and mixing sites will be situated at least 100 m from residences. Construction sites and mixing sites will be sprayed regularly with water. 21. Water Pollution. Wastewater from construction sites and camps will be discharged into the river after being adequately treated. Domestic solid wastes from construction sites and camps will be regularly collected and disposed of in an appropriate manner. Waste soil and stones in construction sites will be removed to the designated waste yards where sedimentation facilities will be installed. - 76 - 22. Vegetation and Soil Erosion. Construction will occupy 500 ha of land. As much efforts will be made as possible to make sure that dry land or wasteland will be acquired instead of forests or cultivated land. After the completion of construction, temporarily occupied lands and temporary construction roads will be leveled and planted with trees and grasses to minimize soil erosion. The final design of the alignment was optimized so as to reduce the number of tree-cutting from initially estimated 136,000 to 68,000. In addition, about 260,000 trees are planned to be planted along the highway. 23. Cultural Relics. No cultural relics are expected to be found, but if any cultural relics are found during construction, excavation will be stopped irmmediately, and the local cultural authority will be informed of the discovery. Construction will not resume until the cultural relics have been identified by the authorized institution and necessary preservation measures have been taken. Operation Phase 24. Noise. In order to reduce noise impacts at environmentally sensitive spots, three green belts totaling 5,000 m2in area will be planted. No new residential houses will be allowed to be built within 100 m of the highway, and no schools or hospitals will be built within 150 n. 25. Water Pollution. Wastewater from service centers or toll stations will be discharged into the river after being adequately treated. Domestic solid wastes from there will be canned and regularly collected. 26. Vegetation and Soil Erosion. Land for temporary use will be cleaned up after construction. After cleaning, grass seeds will be sown both on temporarily used land and at borrow pits. These sites will be covered by straw so that vegetation can recover easily and quickly. Highway Network Improvement Program (HINIP) 27. There is no new construction, nor will land acquisition be included in the program. There appears to be no ecologically protected area in the program areas. The ecological and cultural environments were surveyed and no important natural habitat or cultural property was found. The existing air and acoustic environments were monitored, and potential impacts were projected. Because construction works are limited to the rehabilitation of existing roads, little environmental impact is expected from the program. 28. As a result of environmental screening, major potential environmental impacts are identified as noise and dust pollution during the construction. In order to minimize the environmental impacts of the project, a variety of mitigation measures have been integrated into the EAP, including noise and air pollution protection, soil and vegetation protection, mitigation measures for borrow pits, construction camps. E. Environmental Monitoring 29. During the construction and operation phases, environmental monitoring will be carried out to verifIy the project's actual impacts on the environment, identify unexpected environmental problems at an early stage, and adjust environmental measures as appropriate. Environmental monitoring will be conducted by the Environmental Protection Office of Inner Mongolia Communication Departnent at the construction stage. At the operational stage, monitoring will be entrusted to local environmental monitoring centers. The results of monitoring will be reported quarterly to the Bank and local environment authorities. The environmental monitoring plans are provided in Table 2 to this annex. - 77 - F. Institutional Arrangements and Training 30. IMCD will set up an Environmental Protection Office (EPO) at its headquarters and an Environmental Protection Group (EPG) for the Laoyemiao-Jining sections at Jining. Each office will have four staff members. The EPO and EPG are responsible for environmental supervision of the construction activities, implementation of appropriate mitigation measures, environmental monitoring, and coordination and management of the environmental protection during construction and operation phases. 31. To enhance environmental protection knowledge and skills, key enviromnental protection staff will receive intensive training. The training program includes lectures by experts, site visits to similar projects, and periodic national or international training. A taining budget of US$ 52,000 has been allocated, including US$ 33,000 for three person-months of overseas training. H. Public Consultation and Information Disclosure 32. Public Consultation and Feedback A two-stage public consultation was carried out according to the World Bank's guidelines: shortly after environmental screening and before the terms of reference for the EA were finalized (March and July 1999 respectively); and after the draft EA report was prepared (August 2001 and January 2002, respectively). The consultation included meetings with local people at project-affected towns and surveys through questionnaires. Project-affected individuals, organizations of concemed villagers, and village committees were intensively consulted. Besides resettlement-related issues, the public expressed concems about social disruption from the expressway and environmental protection during construction and requested that adequate mitigation measures be taken. The public's feedback is reflected in the engineering designs and the EAP, in particular the number of underpasses were increased. 33. Information Disclosure. The final draft EIA, EAP, EA Summary, and EEE & EAP were submitted to the Bank in January 2002. The final EA reports was disclosed locally in January 2002 with an advertisement in the local newspaper and was sent to the World Bank's InfoShop for disclosure at the same time. - 78 - Table 1: Summary of Potential Impacts and Mitigation Measures Potential Impacts Mitigation measures Design Phase _ Ecological environment Careful consideration was given to the design so that: (a) major sensitive locations will be avoided; (b) farmland and arable land will be acquired as little as possible; and (c) borrow pits and material sites will be designed to avoid farmland, forest land, and riverbanks. Soil erosion The design of subgrade and highway landscapes will satisfy anti-flood requirements. Social disruption 70 passageways, 8 large bridges ,and 26 middle-size or small bridges will be constructed along the 90-km alignment. Others Environmental protection designs at the construction phase will be completed simultaneously with construction design. Construction Phase Noise No high-level noise-producing machinery will be allowed to operate from 10:00 pm to 6:00 am at sensitive places such as Dajing and Bashixiang villages. Air pollution * To prevent fugitive dust at construction sites, water will be sprayed at constructi on and mixing sites. * Materials sites and mixing sites will be 100 m and 300 m, respectively, from env ironmentally sensitive points. No asphalt mixers will be placed in the vicinity of Dajing and Bashixiang villages. Asphalt mixing will be conducted in enclosed equipment to comply with emission standards. * No bulk haulage will be allowed for cement and lime and they will be muffled. No spills of sand, earth, or other materials will be allowed during hauling. Water pollution Septic tanks will be provided for sewage at construction camps. Domestic garbage will be canned and carried away regularly or treated properly in garbage pits (one for each bit section). Waste and garbage will be collected regularly. Soil erosion In rainy seasons, mud settlement tanks and textiles will be provided for embankments at filling and mixing sites. No blasting will be allowed for excavating on earthy hillsides. Ecological environment As few trees as possible will be cut. Contractors will be required to protect and rehabilitate vegetation. Good farmland will not be used for temporary land use. Farmland used for temporary purposes will be restored for rehabilitation. Borrow sites will be cleared up for rehabilitation on completion of the project. Operadion Phase Noise In order to reduce noise impacts at environmentally sensitive spots, three green belts totaling 5,000 m' will be constructed. No new residences will be built within 100 m of the highway, and no schools nor hospitals within 150 m. Environmental monitoring will be conducted at villages, and when noise exceeds relevant standards, mitigation measures will be identified. Water pollution Sewage from service centers, toll stations, and administrative sections will be treated by using septic tanks. Garbage from service centers, toll stations, and administrative sections will be canned and carried away regularly. Ecological environment Land for temporary use and borrow pits will be cleared by placing straw squares for I vegetation restoration. - 79- Table 2: Summary of Environmental Monitoring Plans Stage Monitoring Site Monitoring Items Monitoring Frequency Noise Construction Gaomiaozi Once a month for I day, 2-3 Phase (K285+450) times a day Dajing Vilage (K333+300) Noise Operation Gaomiaozi Twice a year for 1-2 days Phase Dajing Vilage Dagong School Erixiaxiang Bajing Village Bayintala township Yiwutang Bashixiang Village Air Quality Construction Gaomiaozi TSP, Dust TSP: fbur times a year, 2-3 Phase (K285+450) days in succession each time. Dajing Vilage (K333+300) Dust: once a month or depends Operation TSP, N02 Once a year, 3 days in Phase succession, 4 samplings a day Surface Construction Yinzi river pH, SS, COD, Oil Twice a year Water Phase (K279+880) Background levels will be monitored one month before the cormmencement of construction. Operation Two times a year Phase Ecological Construction Construction Vegetation, soil erosion, Ad hoc and others Phase sections, borrow implementation of EAP etc., pits, construction camps, etc. Table 3: Independent Implementation Costs for EAP* Mitigation Measures RMB 10,000 (1) Design of EP 40 (2) Water spray for preventing TSP (dust) 140 (3) Waste water treatment 31 (3) Garbage treatment at construction campus 8 (4) Safety signals and warning lights 10 (5) Clearing up of temporary land 150 (6) Tree plantation for reducing noise 5 (7) Garbage treatment at administrative section and toll station 6 (8) Environmental monitoring 35 (9) Maintenance of EP facilities 40 Total 465 *The table shows independent implementation costs, which are not included in the costs for construction civil works or supervisions in general. - 80 - Additional Annex I3: Summary of the Resetr.i , \ A:R CHINA: Inner Mongolia Project Background 1. The project will construct about 90 km of expressway along with 34 bridges of difierent sizes, 145 culverts, 16 overpasses, a connecting road of 5.22 km, and service areas. The project also has identified five sections of township-to-county roads and county-to-county roads of a total lengt' of 336 km for rehabilitation in Ulanchabu Prefecture and Baotou Municipality. Resettlement planning was conducted on the basis of the preliminary technical design completed in April 2001, including a census of the affected population, an inventory of affected assets, a socioeconomic survey, a social assessment, and consultations with the affected population. Much consideration has been devoted tc mEiniizing adverse impacts, particularly in the finalization of the alignment. Census, Inventory and Social Assessment 2. From May to July 2001, Inner Mongolia Highway Department set up a team. tc start the field work. The Land Resources Administration Department and local governments also participated in the census and inventory. The populations and various categories of impacts were identified anc recorded in tabular format for each affected household and village. Village leaders, heads of households, and the investigation team verified and signed off on them. 3. The project office conducted a socioeconomic survey in the project areas to analyze the project impacts, understand the socioeconomic background in the project areas as the basis for resettlement planning, and consult the affected people for their feedback on the resettiement planning. The National Resettlement Research Center based in Nanjing also conducted a sociai assessment in the project areas. The assessment used focus-group discussions and key informant interviews, focusing partLicularly on ethnic minority groups and feedback from the affected groups. Project Area Background 4. The project lies in the east of Inner Mongolia Autonomous Region. Agriculture is the dominant economic activity. The average yield is low, and land holding per capita is abouL five mu per capita, five times the national average. In the past two decades, Inner Mongolia's non-farm sector experienced last development and farmers' non-farn income is relatively high. Almost all interviewed households have at least one laborer engaged in non-farm employment. 5. Iner Mongolia is a Mongolian autonomous region. Unlike the Mongolian population in the grassland areas who are mainly herdsmen, the Mongolian people in the project areas are engaged mainly in agriculture and are distinctly different in their customs and productive activities. Ailer centuries of coexistence in the agriculture area, the Mongolian population is much integrated into the dominant M-an culture. Project Impacts 6. This project will affect 23 villages in seven townships in three counties and banner. The project will require land acquisition and the demolition of houses. The project will recuire 7,866 mu of land, including - 81 - 3,871 mu of cultivated land. The project also will require the demolition of 2,396 m of houses, including 962 m' of brick-tile houses, 589 m' of earth-timber houses, and 845 m' of simple structures. About 12,693 people in 3,568 households will be affected by land loss and 37 people in 12 households will be affected by house demolition. The project also will affect some public facilities, including power and communication lines, wells, and irrigation canals. Legal Framework 7. The project followed the following policies in its resettlement planning: * World Bank Operational Directive 4.30 on Involuntary Resettlement * Constitution of the PRC * Regulation on Self-autonomy of Ethnic Minority Regions in PRC * Land Administration Law of PRC * Implementation Regulations of the Land Administration Law of PRC * Grassland Law of PRC and its Implementation Regulation 8 The following policy principles were followed in developing the Resettlement Action Plan: * All possible measures should be explored to mipimnize adverse impacts, including engineering, technical and economic measures. * The objective of resettlement planning is to improve or at least restore the living standard of the affected population. * All affected assets should be compensated at replacement cost without depreciation. * Compensation fund should be paid before the acquisition of the assets. * Resettlement will be land-based. * The affected people and the host population should be encouraged to participate in resettlement planning. * Resettlers should try to be relocated within existing communities. Resettlement Budget And Disbursement 9. The RAP contains detailed compensation rates for all affected assets. They were calculated based on the above principles and after consultation with local governments and the affected people. Land compensation rate was estimated at 13 times of the average output value per mu. Detailed unit rate analysis was conducted to deternine the replacement costs for different types of houses in different project counties. Compensation for affected public facilities was estimated at reconstruction cost. 10. A detailed resettlement budget has been developed on the basis of the inventory and the developed compensation rates. This budget includes the base cost, management fees, and contingencies. The base cost includes compensation for land, standing crops, houses, attached structures, facilities, land acquisition tax, resettlement subsidy, fund for land leveling, training, and monitoring. The management fee is estimated at 4 percent of the base cost. Contingency is estimated at 15 percent of the base cost respectively for physical and price. The total resettlement budget is RMB 49.37 million, about 3.5 percent of the total project budget. Resettlement will be financed entirely through counterpart funds. 11. Resettlement funds will be disbursed from the project office to the various entitled units through the resettlement offices at prefecture, county and township offices. Land compensation will be paid to the -82 - villages, while compensation for standing crops, houses, and other private assets will be paid to the affected farmers. Compensation for affected public facilities will be paid to the owning government agencies. Livelihood Restoration 12 Relocation of households. Given the linear nature of the project, the average number of relocating households in one village is three. All relocating households plan to build their replacement houses within their existing village. The villages will provide new residential plots and the specific house sites will be finalized through consultation with the affected households. All relocating households will be serviced with existing public facilities and infrastructure. 13 Rehabilitation ofpublic facilities. The affected infrastructure facilities are mainly power and telecommunications lines and water conservancy and transport facilities. For these facilities, compensation based on the replacement cost will be paid to the owners. The owners of the facilities will be responsible for their reconstruction. 14 Livelihood restoration. Livelihood restoration for farmers losing agricultural land will follow a land- and agriculture-based strategy. All affected farmers will receive cultivated land through the redistribution of collective village land. Land compensation will be paid to the villages for collective investment. Consultations with the affected villages on livelihood development have identified the areas of need and potential development, including cash crops, improving existing irrigation systems, reinforcing extension services, farmer training in science and technology, agroprocessing, reclamation of barren mountain and land, and development of non-farm sectors on the basis of local resources. For villagers who lose more than 25 percent of their land, further consultations have resulted in village-specific strategies for livelihood development, and village-specific income-generating measures will be developed. Institutional Arrangement 15 The Inner Mongolia Autonomous Region (IMAR) has established a multilevel organizational framework to plan and implement resettlement. This framework has resettlement offices at different levels of government, including project, prefecture/city, county/banner, and township. These offices have been staffed with experienced experts and their responsibilities are specified in the RAP. Other government agencies are also involved, including planning, finance, communications and land administration at different levels. A detailed training program for capacity building in the project offices has been developed and is described in the RAP. Implementation Schedule 16 Resettlement will follow the following principles for scheduling implementation (a detailed implementation schedule is developed in the RAP): * Civil works cannot start before the relocating households move into their new houses. * Demolition notice must be served at least three months before relocation and relocating households will be given at least three months for new house construction. * Civil works can't start before land compensation payment and land acquisition is completed * Redistribution of land should be carried out during the season-breaks * Village-specific livelihood restoration measures should be developed the same time of land redistribution * Reconstruction and rehabilitation of affected public facilities and infrastructure should be completed before civil works start - 83- Public Consultation and Grievance Redress 17. The RAP was prepared with the active participation of the affected population. Local governments, village leaders, and the affected population participated in the census, inventory, the finalization of the alignment, the compensation rates, the relocation, and livelihood development schemes. Project information and resettlement policies were disseminated before and during the consultation process. The affected population was systematically consulted through a social assessment and their feedback was incorporated into the RAP. The final draft RAP has been placed in local libraries and its availability was announced in local newspapers. The project office will prepare a Resettlement Information Booklet and distribute it to all affected households after project appraisal. 18. The project office has designed a grievance redress mechanism. Any grievances will be redressed through the resettlement management at different levels. The RAP contains detailed procedures and time frame for grievance redress. This mechanism will be described in the Resettlement Information Booklet. Resettlement Monitoring 19. To ensure the smooth and successful implementation of the RAP, the project office has designed both internal and independent monitoring mechanisms for RAP implementation. Intemal monitoring will be conducted through the resettlement offices at various levels of govemment. It will focus mainly on the physical progress of the RAP implementation. Independent monitoring will be conducted by East China Science and Engineering University every six months. It will evaluate physical progress and livelihood restoration efforts and their effectiveness. The RAP describes in detail the monitoring purpose, responsibility, indicators, methodology, procedures, and reporting requirements. Social Safeguard works on the non-Bank financed contiguous road sections 20. An issue was raised during the pre-decision safeguard review meeting whether paragraph 4 of the new OP 4.12 applies to the project. A few follow up meetings were convened to discuss the issue. Finally the issue was discussed at the Resettlement Committee Meeting on March 22, 2002. The meeting decided that paragraph 4 of the new OP 4.12 does not apply because the PCD meeting for the project was held prior to January 2002, the trigger date for the new policy to apply. The Resettlement Committee asked for confirmation regarding the due diligence aspect of the Hebei Province road section and the task team subsequently provided the necessary confirmation (see paras. 21 and 22 below). 21. On the western connecting section from Jining to Hohhot (126 kmn), it was confimned that IMCD had contracted the Chang'an University to conduct environmental impact assessment according to domestic environmental laws and standards, and the results of the EIA was approved by SEPA. Land acquisition on the section was cleared by the Land Administration Bureau of Inner Mongolia Autonomous Region and resettlement on this section has been completed. It followed the same policies as the Jining - Laoyemiao section section, to be financed by the Bank. The compensation rates are the same except areas near Hohhot, where the rates are higher. 22. On the eastem connecting section from Laoyemiao to Zhangjiakou (73 Ian) in Hebei province, authorities in Hebei Communications Department confirmed that its environmental impact assessment was done according to domestic standards and approved by SEPA last year. Required land acquisition was also cleared by the Land Administration Bureau of Hebei Province, and resettlement has been completed as construction is about to start with the starting of new construction season in April 2002. - 84 - Additional Annex 14 Strengthening and Reforming Highway Maintenance CHINA: Inner Mongolia Highway Project 1. Road transport is vital for iner Mongolia. Highways carry about 86 percent of all passenger movement and 79 percent of all freight. Inner Mongolia has increased its investment in highways from RMB 2.68 million in the Eighth Five-Year Plan to RMB 14.8 million in the Ninth Five-Year Plan. Such a large investment in the highway system will in turn increase maintenance needs. Inner Mongolia will need to ensure that adequate funding is provided to maintain the expanded highway assets, and that planning and execution of maintenance is as efficient as possible, and is supported by modem management instrments and techniques. 2. IMCD received assistance from the Bank's Technical Cooperation Credit #4 (TCC4) to help IMCD launch studies, conduct pilot activities, and train its staff with a view to reforning and modernizing the management of Inner Mongolia's highway system. Such reforms and modernization are essential to allow Inner Mongolia to meet the increasing demands on its transport system, and are in line with MOC's directives for introducing market-oriented reformns in the highway sector. TCC4 assistance was fornulated during preparation and is an integral part of this highway project. Organization, Planning and Execution of Maintenance 3. Organization. IMCD's maintenance organization follows the administrative organization of the Autonomous Region. At the top is the Hohhot-based provincial-level Highway Bureau, and below that highway management bureaus in leagues and cities, and road maintenance units at the level of the banners. Total IMCD staff is about 30,000. According to estimates by maintenance officials, at least 20 percent of staff could be cut without affecting the execution of maintenance. I Administrative Level Agency No of Administrative Units Provincial IMCD Highway Bureau I Leagues and Cities Highway Management Bureau 12 Banners Road Maintenance Unit 101 4. Planning and budgeting. For routine maintenance, IMCD uses standard MOC guidelines for unit costs in RMB per kilometer, and allocates the corresponding funding to the road maintenance units at the various administrative levels. Work priorities are decided by each unit. For major maintenance, including rehabilitation and periodic maintenance, priorities are decided by IMCD, which provides additional funding for these works. IMCD has installed software developed by MOC, such as China Pavement Management System (CPMS) to help identify priorities and type of work to be done. However, this software is not presently operational on a systemic basis, and it needs to be tested further, refined, and adapted to allow identification of an optimal maintenance work plan under budget constraints. 5. Road Sector Revenues and Maintenance Expenditures. The table below summarizes road sector revenues for 1996-2000, estimates for 2001, and projections for 2002-2005. According to the table, while new road construction will have increased 2.6 times during 1996-2005, road rehabilitation and maintenance expenditures will have increased only 1.7 times. - 85 - IMCD - Road Sector Revenues and Expenditures (in million RMB) Actual Estimate Projection __ l Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Revenues 1,367 1,304 1,513 1,652 1,870 2,071 2,320 2,622 2,860 3,150 Expenses 1,367 1,304 1,513 1,652 1,870 2,071 2,320 2,622 2,860 3,150 of which: - New Construction 746 704 807 803 1,120 1,240 1,390 1,390 1,716 1,903 - Rehabilitation and 274 262 395 267 294 326 366 389 426 468 Maintenance I I I_I_II 6. Road Expenditures and Road Condition. These figures show that road expenditures are expected to increase significantly over the next 5 years. However, the gap between funding for new construction and funding for road rehabilitation and maintenance is growing. Roads that are newly built, widened, or improved will call for increased maintenance, but funding for road maintenance will increasingly fall short. As a result, road conditions are likely to deteriorate unless additional funding is secured and the management of maintenance operations is made more efficient. 7. Maintenance Management System. MOC's standard China bridge management system (CBMS) was installed in Inner Mongolia in 1994 and the China pavement management system (CPMS) was installed in 1998. MOC's road data bank is being installed. CPMS can operate without the road data bank because CPMS and CBMS contain fairly detailed infonnation on national and provincial roads, including numerical data and photographs and videos of individual sections of roads and bridges. However, the various maintenance offices reporting data to the center presently are not interconnected. IMCD would like to solve this problem, and financing for equipment, software, and technical assistance is being provided by the project loan and TCC4 funds. 8. Execution. IMCD does almost all periodic and routine maintenance work by force account through its various maintenance units. In recent years, IMCD has tried the following new ways of executing maintenance by introducing competition: * IMCD now executes 15 percent of road rehabilitation work under competitive contracting. However, the proportion of outsourced work has not increased in the last 2-3 years. * IMCD also has launched pilots whereby road maintenance units (10-20 per league) bid for rehabilitation works inside their leagues. * For routine maintenance, IMCD has launched a process whereby staff in a road maintenance unit bid for the position of team leader, who in turn can select team members. Teams are composed of six or seven people. The better teams receive a salary supplement as an incentive. This limited competitive approach encourages better use of manpower and better quality of work within the local maintenance unit. - 86 - Execution of Maintenance on National and Provincial Roads in Inner Mongolia (in_ ercent) 1998 1999 2000 2001 Rhb Prd Rtn Rhb Prd Rtn Rhb Prd Rtn Rhb Prd Rtn Force Account 8 100 100 90 100 100 90 100 100 90 100 100 Competitive Contracts 1 o O10 0 0 10 O O 10 O O Rhb=rehabilitation; Prd=periodic; Rtrnroutine Note: a/ Walachalu League and Chifeng City. Bidding for rehabilitation works within the league. b/ Contracting took place in Zhelimi league (now Inglian city) and in Yikezhao league. Contract winners were mostly construction units of the league. 9. Until 1978, Inner Mongolia had one road construction company that did all new construction work in the province. IMCD later created one construction company in each of the 12 leagues, and now has 31 road construction companies. These companies, which do only road construction, do not receive any direct funding from the provincial government, but are self-financed through contract work. In contrast, maintenance units receive their budgets from the Inner Mongolia government. These units are overstaffed, and their management generally does not allow construction companies to cany out road rehabilitation or other maintenance work. 10. Role of the Maintenance Units. The maintenance unit in Hua De County is a typical rural maintenance unit. It is responsible for maintaining 135.6 km of national and provincial roads, which is the distance that workers can cover by bicycle. About 50 percent of the roads have traffic of about 500 veh/day. About 15 percent of the roads are paved with asphalt and the remainder with gravel. The unit has 100 staff members, including management and field personnel. This staffing level is based on MOC's guideline of 1.5 staff per kilometer of road for routine maintenance. The annual budget for routine maintenance is based on RMB 8,000/kilometer, or about RMB 1 million annually. The unit receives additional funding for rehabilitation and periodic maintenance works. All maintenance work is carried out by the unit's staff. Unit personnel also inspect road conditions, conducting visual assessments and using equipment to take measurements of roughness and other indicators. 11. The unit plans to downsize. About 20 percent of the staff will be made redundant and will receive assistance in launching their own businesses not related to road work. Reduction in personnel would need to be accompanied by the purchase of equipment. At present, efficiency is being encouraged by competition and comparing quality of work among the various maintenance teams inside the unit. 12. IMCD 's Highway Construction Company. The Inner Mongolia Engineering Bureau is a construction company currently under the IMCD. The company is expected to become corporatized during 2002, when it will change its name to Highway and Bridge Construction Company and will become a construction enterprise under the rules and guidelines of MOC. The company has a staff of 1,400, and 400 more receive a pension from the company. IMEB is certified by MOC and by the Ministry of Construction as a Class I contractor. 13. Inner Mongolia Engineering Bureau has some experience in highway rehabilitation. In 1999-2000, it won a contract for RMB 40 million to rehabilitate about 40 km of National Road 110. The company might bid on contracts that package rehabilitation and routine maintenance, depending on the size and location of the works. For road resurfacing, contracts for less than 40 km would not be attractive. Also, they would need to subcontract the routine maintenance part of the contract. - 87 - IMCD Reform Agenda and Constraints 14. Tentative reform program. IMCD has prepared a tentative reform program that would drastically transform the way IMCD manages the road sector by approximately 2005. The proposed reform would reduce if not eliminate the work done by force account and make extensive use of competitive contracting. IMCD has issued a report entitled Implementing Highway Maintenance Under Market Management Mode and Maintenance Pilot Program. The reform program proposes separating execution of maintenance from management of maintenance and reducing permanent staff from 30,000 to about 1,000 to 2,000 in a core management group. Significant numbers of non-management personnel would become staff of new road construction or maintenance enterprises, and the remaining personnel would either be retrained or retire. 15. IMCD tentatively envisages carrying out the reform in the following stages: * In 2002, under the general direction of IMCD, the expressway system will be managed by the province, national and provincial roads will be managed by the leagues and cities, county roads by the county communications bureaus, and township roads by township governments. * In 2003-2004, all IMCD divisions involved in highway maintenance will be separated into a new, autonomous legal entity. Maintenance districts will retain only managerial personnel. Maintenance works will be allocated through bidding. * In 2005 and beyond, the autonomous legal entities and their staffs will be encouraged to buy shares to transform these entities into stockholding (or limited partnership) maintenance enterprises. 16. Carrying out the intended reforms in four to five years is an ambitious undertaking. During early implementation, IMCD will need to define many more steps and stages in the reform program than presented in the current program, with more time for full implementation, and launch pilots for the various steps and stages rather than proceeding immediately to province-wide reform as the program suggests. IMCD has agreed to keep the Bank informed on a regular basis of its progress with the planning and implementation of the reform. 17. IMCD already is experimenting with separating maintenance staff, but in a limited way that applies only to staff in support functions. For example, in Xingan League, maintenance unit services such as transportation or food are being hived off to new enterprises. 18. Reform constraints. The main constraint to enacting reform, especially moving from force account to contract maintenance, is the social cost it would entail. Many IMCD staff members would be taken off the payroll and would work for new enterprises that would not receive government funding. Some staff members would be declared redundant. Experience in other countries indicates that the reform process could be smoothed by guaranteeing the new enterprises maintenance work during a short initial period, after which maintenance work would be allocated to enterprises under competitive contracting. 19. A second constraint to reform is the financial cost to IMCD. Enterprises pay income and profit taxes, and until the new enterprises function more effectively than they did as government units, contracted work would be more expensive for IMCD than work under force account. A third constraint is Inner Mongolia's long distances, scattered population, and limited transportation means for maintenance personnel. These factors especially hinder the introduction of competition for routine maintenance, a low-cost activity that would not justify the expense of motorized transportation for maintenance personnel. - 88 - Project Support for Modernizing, Reformning and Preparing a Cost-Effective Annual Maintenance Programs. 20. The project will support IMCD's plan to modernize and reform highway maintenance. The project design takes full account of IMCD's own objectives and proposals, current weaknesses, and priority areas for improvement. Project support, provided by the loan and TCC4 funds, will finance consultants and equipment and cover the following areas: * IMCD Vision. Preparation of a document outlining IMCD's vision for reforming highway management according to market-oriented principles. * Pilot Maintenance by Contract. Introduction of outsourcing maintenance operations on a pilot basis using a model that combines road rehabilitation and routine maintenance in a single multi-year contract (a model known as Contract for Rehabilitation and Maintenance, CREMA). IMCD, assisted by consultants as needed, will select the pilot road section, determine performance targets, prepare the contract and bid documents, conduct seminars on the pilot with potential contractors, and monitor implementation of the pilot. * Maintenance Management System. Preparation of a study to integrate various maintenance management tools, (such as a road database and pavement management system), to provide the necessary interconnection of the various units entering data and using such tools, and prepare a multi-year maintenance program. The study would be carried out by consultants working closely with IMCD personnel. * Software and Hardware Support. Provision of essential telecommunications, hardware, and software to support the highway management system, with an emphasis on the interconnection among the maintenance units and IMCD. Consultants will assist IMCD in this task. * Training. The training program complements the training started under the Tri-provincial Highway project and will help prepare IMCD for designing and implementing a reform program for the agency, and upgrade the technical, managerial, economic, financial, and environmental skills of its staff. About 800 staff-months would be spent on regional, domestic, and overseas training courses, and overseas study tours. The training program will benefit staff from IMCD central office, the Hohhot-Jining-Laoyemiao Highway Project Office, the Design and Research Institute, IMCD Highway Bureau, IMCD Transport Management Bureau, Wulanchabu League Communications Bureau, and Baotou Communications Bureau. Total training costs are estimated at about US$0.5 million and RMB 2.2 million. Unit costs are expected to be realistic because they are based on experience from the Tri-provincial Highway project. As is customary with training programs in highway projects, the proposed training will be reviewed, approved and partially organized by MOC in Beijing. A summary of the program is in the following tables. - 89- Training Program, Summary by Institution Regional Training Domestic Training Overseas Training Overseas Study Tours Total Cost Unit P PM RMB P PM RMB P PM US$ P PM US5 RMB US$ (000) _ (000) (000) (000) (000) (000) I IMCD 475 475 950 25 25 200 4 31 2 1 10 115 13 2 HJ-PO 15 152 36 44 48 384 4 2 1 14 74 185l 3 D&R lnstitute 2 24 192 - - 1 3 _ 3 19 48 4 Highway Bureau __12 12 96 2 :_ 1 1 . 2 21 91 38 5 Transport Bureau 4 __4 40 6 Wulanchabu LCB _4 , 2( 20 7 Baotou LCB I 1 1 10 Total 621 60 19q 874 1 4 117 3 36 8 47 D&R: Design and Research LCB: League Communications Bureau Training Program, Summary by Training Area IMCD HJL - PO D&R Institute Highway Transport Wulanchabu Boataou Bureau Bureau LCB LCB Hwy layout and planning x Hwy transport org & mgmt x x Organization and personnel x _ Economics, Planning, Mgmt x Financial Management x Administration x Technology and Education x Management Hwy Supervision x x x Employer Management x Communications engineering x x Human Resource Develop't x Construction Technology x Testing and Inspection x Construction MIS x_ Environmental Protection x x Hway construction, financing x and management Bridge design x Highway alignment design x Subgrade and pavement design x CAD technology x Special subgrade design x Survey and Design-new x technologies Tunnel design _ Maintenance technology and x equipment Maintenance MIS x Evaluation pavement and x bridges Hwy communications mgt x Hwy Control _ x Toll collection x Management service areas x Operations MIS x Construction Management x x -90 - C3 3F . ................ . . . . ............ . . ...... . ...... 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W 1! 1:2 1' N C14 CM CM N N CM 94 Cn fn e) Cn V, r) M IT I I& I I i I I I I IF, IN 1- k 1A 1- 1- 1- 1- IT---: Annex 15 Page 2 of 2 l l l 2CO1 1 20m 1 ~~~~~~~~~~2003 1 2004 i 2005s 200i ID Task Name Duration Start Finish Hi H2 Hl H2 HI H2 HI I H2 I H2 42 4. Construction Suparuision 12S3 days W sdil6102 Sat 9830f08 43 Spcciifc procurmn3ra netic (UMDOB) 0 days Wa3d 1/1MUM2 iWaed 11510k2 j)I1M6 44 Io objuction of Ban!rto TOR. LOI at Shortli 44 days WAd 1/10f02 Fri if60 3i 45 Issue inviations to consutnts 0 O days Fi 3d l/1162 j Fri 3/1ii32 j l I 46 Lact data to rucoivn proposals I dryf Wad 6i/162 i Waid Sfl6i02 i s, 47 Evaiustron ri thc rtiusity achnisai pmeposa 47 days - Thu 5/101i032 1 iisbn 7i15f02 I * i 45 BEnak rviaus avauatIon ript4ch) &no objnc 23d days Tu:2 7/151 2 Thu i'161i2 49 Notify cornstultmast n tha opaning data of 1djy Frn 3d i 6W15/02 I ni 1i2 48t6 i i 50 Opening of financial prop2s21s 1 day Sat 0131102 Sat MI011j2 811 i' 51 Complca coambYnAd cu:iIy at cost ct'aiuzti 22 drys lvhn MM2102 iMn 0100102 52 Bannk rovica prmpoi avaluatirsr t Łno ci. 2i days Tui 1i0/12 Thu i10i1012 53 Negatiarions r4th censulzmr & sign cerstrza 24 days Men I 14ii2. Sat 1i3d |02 54 Pmpara trainignratcrial bvy cnsultamn CS days Sun 12iki Frlif 11 103 1 55 Train local staff 032 days Wad /i12il3 Fn313;ifi i 55 Sup3rvision of construction Q140 days Wed 40103 Sat 000108 H i I 57 5. Highway Nctrmrh improurrmimt (First ftak 751 days or, lOtirOl Wad M/3D0=0 _E 58 Revis bidding decoumctcntcos IOC 23 days Fian 3102i Fi ied 6/02 59 Review bidding documrants by Isans nt 24 days lihu t10ii d ii)-i|ii FiO Sell bidding does to eorltraetoni I D ri il1ziFli Fdi iXiii j1L i 51 Last data to rmeciva bid documartas I day tue 30102 Tue 413002 ii 62 Bid evaluation rspert and reirica by bOC t days Wiad 6/1i2 Fr d11002 hii 63 Sank navisar avauation mpen rnd no obja3 days i a si3 1. i la iDn 1/Do2i 54 Notify suecassful bidd3r 0 days M1 n 0110/D2 ,sbn ai1Dm2 I SAO6i 0 65 Nagotiae and sign contraets i1 days tue /i;112 Tue i i i i/61 65 Consitruction pariod 543 days S n 7110A2 Wad 8100/04 Ei7 6. iack spots irrproaciromt (Firrst Pac!isrg--l 2S5 day7s Llon 9iJ2 !h ijI 5bl Complete b!dding documrnnts I day Mfon Q/3i2iD n 030D12 69 Review bidding documanrts by MDC 23 days Tua 0l1o 2 j Tiu i13i Di2 70 iReriaw bidding documnnt by thi Bank 24 dayzs !Man 1 ii/4I/ Sati 1113i 2 j D-i2 71 teli bidding docs to contractors 34 days j Sun 1210; Wed 11103 | ; 72 Last date to racaiva bid documratrs i daiys ! Thu iiiiiŁ 1Thu iii1 6 3 i 73 Bid evaluation rapcrt and ravic-n bVy S;OC 24 days Tlhu 1/16133 Sat 2ii il3 ji 74 Biank ruviza eveluation mapan znd no obj3c 1 22 days Sun illblQ3 i at 3i1 6di3 ' - i 75 NQegotiate and sign comrcts 13 days; Eun 1/b18,3 ion 3131103 i 75 Construction period 163 days Tue 4To i |3 Thu id13010 I . - 92 - MAP SECTION IBRD 31682 70- \ 80 90 10 110-- 120 130' 5) RUSSIAN FEDERATION -i j'7 \_r.t\, KAZAKHSTAN J j i j HEILONGJIANG UZBEKISTAN - ) . r HA R I IN _ . r> / f gi M O N G O LIA A 0 N G 0 L f A A -,KYRGYZ * C J /191 N ,, REPUBLIC - -- - N I X I N J I A N G; * _ t. ' E - j _ (_Q IN G-H ,;^: _- ANL ., ŁN$ ) + ) j XIZANG N p ~ s' p rfr.a d* d oGSL \ , -E t 1 J a p i C, N 1~~~~~~GAN5L scJbis~~30 'vovmloS in .aI NGH-WAI ,>s t/I'11- | cny C her btiahon whw R _ *00 * - I L S' A N j > ' \ II . or any endorjemermt o1 - / ~ )$ -J CICI / Ni;laG *, ., AC XIZAN?uGrK@ --' TiAN- UNDER / COSRATO N ATOA CA PA 'I. I % t . w . - |' Ai N INNER MONGOLIA HIGHWAY PROJECT (l ;- ,1^ PLANNED BTERE 2003 ' ' - PINTERNA NO TOINTAIES 2 t ' I.II,v - - r. MCSC S-' J - _ ___ _ _ ' ' T 1AILAN rI NAN IE 'iv THAILAND 5'E-IAI4NAiN ''''.11 I-IT V _ _ I 9~~~~~~~~~~~~~~~~~~~~00 J _' IBRD 31683 _ PROPOSED LAOYLMIAO - JINING HIGHWAY SECONDARY ROADS CHINA _ PLANNED/PROPOSED EXPRESSWAYS PROVINCE HIGHWAYS INNER MONGOLIA HIGHWAY PROJECT j PROPOSED INTERCHANGES -< NATIONAL HIGHWAYS HNIP EXISTING EXPRESSWAYS LAOYEMIAO - JINING HIGHWAY AND RAILROADS HIGHWAY NETWORK IMPROVEMENT PROGRAM O I'nII-H I iI'II '''I *^ | l TOWNORVILLAGE HNIP K.b,'er tE BR,( nhnnn - COUNTY _ __ __ . I _ _. Th. fof.l leng 70 Lm, *iA5 1 ._- '1, m 8d 1lr , 7 n,Cl-s,I,I S t *I 01 1 | i -,,1,', .- ' -. d I l. I .1 1 1 ., ... z < . , MONGOLIA .. -. __~~ ~~ ,i:,,,,,,,, '.". ;""'-" -' " I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r -_ _ _ _' _I ':, -. ."::::: " ''. Jd' - 0~~~~~~~~~~~~~~ Uc J~ ~ ~ ~ ~ ~ ~ ~~ t ~ # v v \ _ , CEu-ll. _ _ 4. r , ''~ ~~~UrJ 's- j. 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" '~~~~~~~ 'Li ....,; .1-..{- I. .Elnhr I ,_ ~ ~ ~ ~ - .,, ,; 'I 'i-:# ,, j5H4NVj| _ _ _ | 1'''I ' 1|5 '2':,, ,~ ~~~~~~ 'at a-_/ ', \J L |A ;: CHINA KAZ INNER MONGOLIA HIGHWAY PROJECT LAOYEMIAO - JINING HIGHWAY PROPOSED LAOYEMIAO - JINING HIGHFWAY ) CAPITAL OF LEAGUE 0 PROPOSED INTERCHANGES 0 COUNTY - EXISTING NATIONAL HIGHWAYS - - PROVINCE BOUNDARIES EXISTING PROVINCE HIGHWAYS RURAL ROADS RAILROAD S.~~~~~~~~~~ ~~ ~~~~~~~~~~~~~~~~~~~~~~ _,,., , ,, I, ', '' N EI MONGOL Xinghe ~~~~~~~Start of Laoyemiao to Jining Highway hf m on his map do ter Imp:y, m eh Sxed I XTh nao/er Interc\ange End of Laoyemiao to Jining Highway aharouQinqr Qah-r YouyiianX InEI M O Nange sFf \A~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/ / "---._,,~ N~~~~~~~~~~~~~~~~~~~~~~X ARL2002