Report No. PID10712 Project Name CHINA-Inner Mongolia Highway Project @ Region East Asia and Pacific Region Sector Highways Project ID CNPE70459 Borrower(s) PEOPLE'S REPUBLIC OF CHINA Implementing Agency Address INNER MONGOLIA COMMUNICATIONS DEPARTMENT Address: No. 11 Zhanbei Street, Hohhot, Inner Mongolia, Post code 010050, China Contact Person: Mr. Bao Jianshe, Deputy Director of IMCD Tel: (0471) 6968813 Fax: (0471) 6967588 Environment Category A Date PID Prepared September 15, 2001 and updated on January 22, 2002 Projected Appraisal Date February 25, 2002 Projected Board Date May 28, 2002 1. Country and Sector Background Main Sector IssuesRecently several key sector works were completed by the Bank, including: (i) A Strategy for the Transport Sector (Forward with One Spirit, 1997/98); (ii) Review of Highway Technical Assistance (1998/99); (iii) OED Report on China Transport (1998/99); and(iv) Highway Sector Strategy Review (2001).The most recent work on the Highway Sector Strategy Review has been completed and discussed with the Government in November 2001. This review has identified the following main challenges faced by China's highway sector. 1. 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 the provision of infrastructure (construction and maintenance) and of transport services, is shifting gradually from that of owner, investor and manager to one of regulator. As regular, the Government must oversee and encourage the development of more independent enterprise(in some cases, non-state), able to provide cost effective civil works and services. The pace of such transformation varies widely with the level of development of provinces, especially between the coastal and the interior provinces.2. Managing road expenditures. The sector should strive to increase efficiency and minimize the costs of infrastructure provision. Efforts of the Provincial Communications Departments (PCDs), to improve their operation while rationalizing and minimizing the costs of operations , should cover all activities of a road administration, from planning to design, construction and maintenance of roads at all level.Starting with planning, there is a need for more discriminating investment analysis. 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. Another issue is the balance of expenditures between various classes of roads. At present, the NTHS consumes 609 of the resources. With near completion of the priority NTHS, this allocation should be seriously reviewed to see whether it continues to be an efficient use of resources to support economic development. The need for careful analysis of future investments will be especially important in the case of projects proposed in the western provinces, where the types and scale of investments are likely to differ from that in the eastern provinces.Highway construction quality remains a serious concern of the sector. Incidences of bridge and road failings or premature wear and tear of highway pavements have raised awareness of the issue to high-level Government officials. The problem has both technical and administrative roots. Contractors, mostly domestic, are not always well managed, frequently face irregular payments, and often come under pressure to shorten the construction period. While the central government values Bank involvement in improving design reviews supervision and construction quality, there is still a need to construction quality standards, and thus 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 charge. At present, the main road user charge is the road maintenance fee, which brings revenues around Yuan 30 billion a year. Other charges, including the vehicle tax, probably contribute half as much as the maintenance fee. So, road users have covered about one quarter of annual road expenditures in the last two years which is clearly a heavy burden on the road user. In addition, the road maintenance fee is inefficient. It is expensive to administer, easy to evade and currently generates less than 40t of its potential revenues. Fuel tax. China has been discussing the introduction of a fuel tax for some years, but no implementation is decided yet. The matter is clearly political as the new road law of January 1998, which mandates the implementation of such a fuel tax, has been deferred once again to a no specific date. Securitization. The sale of highway equity through IPOs and private placements have been an innovative feature of mobilizing private resources for the highway sector. Unlike BOTs, securitization of highways already opened to traffic greatly reduces the risk of the investors. The question is how long could securitization of existing road assets be continued and developed given the proliferation of road companies in all provinces. The number of highway projects that can be marketed (those with strong traffic revenue potential) to private sector investors are insignificant compared to the sector's resource requirements. Under these conditions the focus should be on building a reliable and stable road user fee based financing framework as described above. In parallel, regulatory reforms would be necessary to open opportunities for different modes of public-private partnerships, to mobilize domestic savings through the issuance of bonds and to broaden the investor base.4. Enhancing accessibility to remote/low income areas. The geography of China poses heavy demand and difficulty on the provision of basic road access in various parts of the country, particularly in inner and low income provinces. Although the role of transport access to integrate the national economy, to stimulate growth in - 2 - remote areas and insure basic mobility needs of the poor has been emphasized, the task is enormous and requires significant public resources. The Bank's provincial highway program in China aims to favorably impact poverty levels, through targeted interventions in low income areas. But provincial and central government agencies often refrain from borrowing for this purpose since no dedicated revenue source for loan repayment is easily identified (unlike for toll roads). A renewed effort is recommended to support road development in low income areas as part of the Bank's future lending and non-lending services for the sector.5. Traffic Safety. Traffic safety remains a major issue when sector externalities are considered. Although death rate from traffic accidents has decreased from 100 per 10,000 vehicles in the late seventies 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 over 400,000 accidents. Besides deaths and injuries, accidents cause property damages and their overall economic and social costs are high. Improve road safety requires coordinated actions on "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. At the level of MOC and the PCDs, there is a need to continue working on the "Engineering" aspects of road safety, which are within their area of responsibility. MOC is planning the systematic use of safety audits as part of project design and a manual is under preparation, which is to be circulated to the provinces soon. PCDs should also continue and improve the collection and analysis of accident data and extend the programs of "black spot" correction. The role of the Bank so far has largely been confined to matters under the jurisdiction of its project executing agencies, namely the engineering aspects of road safety. For the situation to change dramatically, the matter needs to be elevated to the highest levels of Government. Government Strategy.The main concerns of the central and provincial highway authorities are to ensure that the highway system helps integrate China's national economy and facilitates mobility of goods and services. This concern corresponds to the comparative economic and technological advantages of highways vis-a-vis other modes of transport and to available financial resources. The investment priority for the highway sub-sector during the Ninth Five-Year Plan (9FYP, 1996-2000) was to develop rapidly the National Trunk Highway System (NTHS), 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 (lOFYP, 2001-2005), apart from continuing the unfinished agenda of NTHS construction plan, the emphasis is moving toward economic development in the Western Region. The 12 provinces making up the Western Region cover 6 million square kilometers, about 609 of the country's total land area and accounts for 25% of the population. In 1995, 66% of the industrial output came from the east but only 10% from the west, the remainder being from central China. By 1998, per capita income in the east was three times that in the western region. The west continued to be a primary supplier of raw material. It is estimated that in this century, 609 of the raw materials and 50% 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. which is identified as economically lagging region of the country. Massive investment in transport infrastructure linking to and within Western provinces is mentioned as one - 3 - of the key factors necessary for materializing the economic potential of those lagging provinces and to integrate them into the national market. The Government is developing a long-term plan, which involves actions at three levels:East-West connections: MOC plans to develop 8 corridors totaling about 15,000 km to link the Western region with East China.Network improvements within the Western Region: This will include rehabilitation and upgrading of technical standards of about 180,000 km of the road network in the western areas.Rural access: To alleviate poverty in the rural towns and villages, about 150,000 km of rural roads have been identified for improvement.The above plan involves different types of works over 300,000 km of roads of various standards and classes and would US$84 billion over 10 years. The Government is exploring opportunities for mobilizing funds for this plan, including ways to channel eastern region contributions 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 would remain limited for some time. Highway sector institution reform is expected to intensify during the 1OFYP as the country moves toward a more open and competitive economy. Adding to the reform agenda are the need to: 1. adjust the role of government from a highway builder/operator to one of effective regulator by increasingly relying on contract works and services, introduce appropriate technologies and standard to improve on supervision and control;2. strengthen management efficiency under the decentralization practice, and reorganization of the sector to maximize the use of scarce resources through planning and programming (including greater use of RDB, PMS, BMS); 3. identify appropriate highway financing methods aiming to effectively mobilize new sources of user charge based revenues and promoting public/private financing mechanisms including asset securitization, and mobilization of national savings (bond issues), etc; 4. improve traffic safety while minimizing environmental and social impacts on people affected by highway development. 2. Objectives The project aims to provide an efficient, safe, and cost effective transport infrastructure to support the social and economic development of the Inner Mongolia Autonomous Region (IMAR), a poor land-locked region in northwestern China, thus reducing social and economic disparity within the region. To meet the above development objective, the project will produce the following outputs:Increased transport capacity and promoted market integration in the most important east-west corridor of IMAR linking its key industrial, administrative, and hub cities of Baotou, Hohhot and Jining to the seaport of Tianjin. It is also the main artery linking Beijing, the capital of China, to its northwestern region of Inner Mongolia, Ningxia, Gansu and Qinghai, all of which are the poor northwestern part of China. Improved accessibility to the poor area in IMAR through the Highway Network Improvement Program (HNIRP).Enhanced public sector management of road network in IMAR by strengthening institutional and management measures and introducing a pilot program for road maintenance by contract. Improved Road Safety. 3. Rationale for Bank's Involvement Since the Bank's first involvement in highway investment in China in 1984, its contributions have been regarded as positive catalysts in the sector - both through direct transfer of financial resources and, more importantly, - 4 - by proposing policy reforms to upgrade the relatively primitive road system of the early 1980s to today's modern NTHS system. The Bank has so far financed about 3,500 km (about 20%) of the 17,000 km of high priority (Phase I) NTHS investment. Such investment effectively helped remove highway bottlenecks and increased traffic capacity in China's high priority national corridors. In parallel, Bank's involvement has helped accelerate policy, institutional and manpower development in highway planning, design, supervision, construction, operation, maintenance and finance at the provincial level. Particularly for the proposed project, value-added of Bank support to IMAR would include, apart from the physical investment, the relevant know-how the Bank had accumulated after over 15 years of experiences in other projects in China. Those projects had once been in the same stage of development as IMAR is currently in. Due consideration has been given to the stage of its development, the level of sophistication and appropriate know-how the project should transfer to strengthen the management of IMCD. 4. Description All components under the project has been designed to address the sector issues described above:(i) Highway Capacity Expansion and economic growth. The construction of Laoyemiao-Jinning Highway (LJH), a 92 km section of 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 of this Section of the NTHS will link Beijing to northwestern region of China via Hebei, Inner Mongolia, and on to Ningxia, Gansu and Qinghai, and will help accelerate economic growth in Inner Mongolia by integrating its regional market to the national economy. (ii) Highway Network Improvement Program (HNIRP). Inner Mongolia is one of the poorest regions in China by every standard of measurement (summarized in the table below). It is the third largest province in China sparsely populated and with road density of one-third of country average. With 50 counties and banners designated as poor but with only 25% of total road mileage in all-weather condition, the need to increase its investment in lower class, all weather road is indisputable. The primary objective of the component is to provide poor counties and townships with reasonable access to other villages and to provincial and national highway system. From the 41 road sections that IMCD proposed, five were selected according to a set of economic and social criteria to be defined by the Bank and IMCD to be financed under the project. ChinaInner MongoliaNational comparisonTotal Land Area (thousand km2)9,6001,1833rd largest in ChinaTotal Population (million) 1,24223.62 % of country's total (23rd in China)Population density (person/km2)1302028th in ChinaGDP per capita (RMB) in 19997,0605,35016th in China (259 below national average)Highway network (km)1,400,00063,8244.5% of country's networkRoad density (km/ 100km2)14.65.41/3 of country averageAll weather road (km)64,00015,900 (25% of total mileage in Inner Mongolia) 1/4 of country average(iii) Highway safety. Traffic safety in Inner Mongolia, as elsewhere in China has a poor record. 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 some appropriate actions are taken to improve it. The 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 - 5 - improvement and winter maintenance improvement. (iv) Institutional strengthening/capacity building/training (IST). 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, will be financed by a Technical Cooperation Credit 4 (TCC-4) funding arrangement. This component combines technical assistance, training, and technology equipment upgrading into a program designed to continue the IST activities under the Tri-provincial Highway project. The IST component aims to strengthen IMCD's management capacity and focuses on planning, design, supervision, project management, and environmental and resettlement plans. The most challenging feature of the IST component (and of the project) is the maintenance-by-contract pilot program. This pilot program will take a road length of 100 kilometers that IMCD has identified in Ulanchabu League, of which 40 km requires rehabilitation. A multiyear 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 conducted 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 assistance financed 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. 5. Financing Total ( US$m) BORROWER 193.90 IBRD 100.00 Total Project Cost 293.90 6. Implementation The Inner Mongolia Communications Department (IMCD) has overall responsibility for project preparation and implementation. It will be directly responsible for formulating and implementing institutional and policy reform, 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 Mr. Bao Jianshe, 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, operation, maintenance, 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 would be implemented during 2002-2007. Overall direction of the project at the central level would rest with the Ministry of Communication (MOC) in Beijing. The Bank loan would be lent to the Borrower, the Ministry of Finance (MOF), which in turn would onlend the loan proceeds to Inner Mongolia Autonomous Region on the same conditions as the Bank loan. -6- 7. Sustainability Experience with completed and ongoing Bank-financed highway projects indicate a strong commitment among Chinese officials to implement the physical components. Generally, counterpart funds are 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 20t of project funds were allocated to improve and maintaining existing roads, especially those in poorer areas;The level of tolls need to 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. 8. Lessons learned from past operations in the country/sector 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 component later. The project design also attempt to ensure a more balanced development of the highway network between the high-growth and the poverty areas by apportioning a substantial share of investment in the lower class roads. The project design also attempt to spur policy and institutional reforms of road maintenance in line with 1999 OED assessment of the China portfolio, and include a pilot program of maintenance-by-contract, financed under the TCC-4 funding arrangement. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : Based on the information available to date, significant environmental issues will be linked to the noise and dust pollution during construction and noise pollution during operation, which are common in most highway project in China. In addition, as desert prevails along the proposed alignment except in the vicinity of cities like Jining, attention will be paid to the protection of vegetation in the affected area. Inner Mongolia, in general, is facing the threat of desertification. The full EIA, EAP and RAP reports are available in the InfoShop. 11. Contact Point: Task Manager Supee Teravaninthorn The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 86 10 6554 3361 Fax: 86 10 6554 1686 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW - 7- Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending February 2, 2002 - 8 -