Taiyuan-Zhongwei Railway Project Financed by the Asian Development Bank

Technical Assistance Consultant’s Report

Project Number: PPTA PRC 4577 March 2006

People’s Republic of China: Taiyuan-Zhongwei Railway Project Financed by the Asian Development Bank

MAIN REPORT

Prepared by TERA International Group, Inc. Sterling, Virginia, United States of America In association with TERA Beijing Consulting Co. Ltd., Beijing, China and Third Survey and Design Institute, Tianjin, China

For: Ministry of Railways

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. All the views expressed herein may not be incorporated into the proposed project’s design.

Asian Development Bank

CURRENCY EQUIVALENTS (as of 15 February 2006)

Currency Unit – yuan (CNY) CNY1.00 = $0.1238 $1.00 = CNY8.08 The exchange rate of the yuan is determined under a floating exchange rate system. In this report, the rate used is the rate prevailing at the above date.

ABBREVIATIONS

AAOV average annual output value ACWF All China Women’s Federation AOLS assets operation liability system ATC automatic train control ADB Asian Development Bank CCB China Construction Bank CCEC China Civil Engineering Corporation CDB China Development Bank CO2 carbon dioxide Contract contract for PPTA consulting services CPI consumer price index CR China Railway CR-TEM CR Transport Evaluation Model of TERA CRCC China Rail Communications Co. Ltd CRCI China Railway Construction Investment Company CRCTC China Railway Container Transport Company CREC China Railway Engineering Corporation CRMS customer relations management system CRMSC China Rail Materials and Supplies Co. Ltd CRTSC China Railway Telecom and Signaling Corporation CSY China Statistical Yearbook CWR continuous welded rails DECO diversified economy companies DFR draft final report EA executing agency ECS economic contract system EIA environmental impact assessment EIP information program-website of enterprise EIRR economic internal rate of return EMM economic marketing management system EMP environmental management plan EMU electric multiple unit ERP economic resources programming system RCF Railway Construction Fund FCTIC Foreign Capital and Technical Import Center FIRR financial internal rate of return FR final report FRA Federal Railroad Administration FYP five year plan GDP gross domestic product Ha hectare HIV/AIDS human immunodeficiency virus/acquired immune deficiency IA implementing agency ICB international competitive bidding IDMIS integrated dispatching management information system

IRR internal rate of return IS international shopping JBIC Japan Bank for International Cooperation JVC joint venture company Km kilometer LIBOR London interbank offered rate LOC lines of communication LORIC China Railway Locomotive and Rolling Stock Industry Corporation LPG leading preparatory group M2 square meter MOR Ministry of Railways (PRC) Mu unit of land measurement; 15 mu=1 ha NAO National Audit Office (PRC) NDRC National Development and Reform Commission (PRC) NPV net present value NTSB National Transportation Safety Board (United States) OAS office automation system O-D origin-destination OHL overhead lines PFS preliminary feasibility PIA project impact area PKM passenger kilometer PMIS passenger-ticket management information system PPTA project preparation technical assistance PRS project resource statement PSA poverty and social analysis PSIS passenger service information system PSO public service obligations PRC People’s Republic of China RA railway administration RIS railway investment strategy model (MOR) RIS-TAM railway investment study—traffic assignment model RP resettlement plan RSO Railway Support Office SARS severe acute respiratory syndrome SASAC State Owned Assets Supervision and Administration Commission SCE standard coal equivalent SDAP social development action plan SEIA summary environmental impact assessment SEPA State Environmental Protection Administration (PRC) SERF shadow exchange rate factor SIA social impact assessment SOE state-owned enterprise SP Southern Pacific Railroad (United States) SPRSS summary poverty reduction and social strategy STI socially transmitted infection Sub-RA railway sub-administration TA technical assistance TERA TERA International Group, Inc. TKM freight ton kilometer TMIS transportation management information system TOR terms of reference TSDI Third Survey and Design Institute (Tianjin) TU traffic unit TVE town and village enterprise TZR Taiyuan Zhongwei Railway UIC Union Internationale Des Chemins De Fer (France)

UP Union Pacific Railroad (United States) US United States of America WACC weighted average cost of capital WTO World Trade Organization ZXR Zhengzhou Xi’an Railway

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2005 ends on 31 December 2005.

(ii) In this report, “$” refers to US dollars.

CONTENTS

I. BACKGROUND ...... 1 A. Study Objectives and Scope ...... 1 B. Description of the Project ...... 1 C. Overview of the Transport Sector...... 4 D. Railway Sector ...... 8 E. External Assistance to the Railway Sector ...... 11 II. PROJECT FRAMEWORK AND RATIONALE ...... 11 A. Description of the Project ...... 11 B. Project Rationale ...... 13 C. Design and Monitoring Framework ...... 14 III. TRAFFIC FORECASTS ...... 14 A. Introduction...... 14 B. Approach to traffic Forecasting ...... 18 C. Freight Traffic Projections...... 19 D. Passenger Traffic Projections...... 24 IV. TECHNICAL CHARACTERISTICS ...... 25 A. Introduction...... 25 B. Technical Characteristics ...... 27 C. Train Operations And Capacity Considerations ...... 37 D. Associated Facilities...... 39 E. Cost Estimating Approach...... 39 F. Implementation Arrangements ...... 39 V. ENVIRONMENTAL ASSESSMENT ...... 43 A. Introduction...... 43 B. Description of the Project ...... 44 C. Alternatives...... 44 D. Anticipated Environmental Impacts and Mitigation Measures ...... 45 E. Public Consultation and Information Disclosure...... 49 F. Environmental Management Plan ...... 49 VI. POVERTY AND SOCIAL ANALYSIS...... 53 A. Introduction...... 53 B. Main Characteristics of the Project Impact Area ...... 53 C. Poverty Analysis and Vulnerable Groups...... 55 D. The Potential Impact of TZR on Poverty ...... 60 E. Stakeholder Process and Monitoring and Evaluation...... 63 VII. RESETTLEMENT ...... 63 VIII. INSTITUTIONAL CONSIDERATIONS ...... 72 A. Overview of Railway Reforms ...... 72 B. Government’s Program of Economic Reform...... 73 C. Reforms in the Railway Sector ...... 74 IX. FINANCIAL ANALYSIS ...... 81 A. Introduction...... 81 B. Financial Internal Rate of Return...... 81 C. Willingness to Pay...... 92 X. ECONOMIC ASSESSMENT ...... 92 A. Introduction...... 92 B. General Assumptions ...... 93 C. Project Resource Statement ...... 93 D. With and Without Project Conditions...... 102 E. Sensitivity and Risk Analysis...... 103 1. APPENDIX 1: SOCIAL DEVELOPMENT ACTION PLAN ...... 105 2. APPENDIX 2: SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY (SPRSS) 109 I. BACKGROUND

A. Study Objectives and Scope

1. This Technical Assistance Consultant’s Final Main Report is prepared by TERA International Group, Inc. (TERA) pursuant to the terms and conditions of the Contract for Consulting Services dated 25 August 2005 (Contract), between the Asian Development Bank (ADB) and TERA in association with the Third Survey and Design Institute (TSDI) of Tianjin, PRC and TERA Beijing Consulting Co. Ltd. The Foreign Capital and Technical Import Center (FCTIC), Ministry of Railways (MOR), PRC is the Executing Agency (EA).

2. The Report is prepared as part of the technical assistance in the preparation of the contemplated Taiyuan–Zhongwei Railway (TZR) Project. In May 2005, and updated in September 2005, the TSDI prepared a Feasibility Study Report for the project.1 Funded by the MOR, a Project Environmental Impact Assessment (EIA) and Resettlement Plan (RP) have also been prepared.2 Approval by the National Development and Reform Commission (NDRC) of PRC for ADB financing has been issued on January 17, 2006. This Report is based on the updated design of September 2005.

3. This Report includes a discussion of the Project’s background in this Section 1, followed by Project framework and rationale in Section 2, and traffic forecast in Section 3. Sections 4 through 9 cover each functional area of Consultant’s evaluation: Section 4, technical assessment; Section 5, environmental impact assessment; Section 6, poverty and social assessment; Section 7; land acquisition and involuntary resettlement; Section 8, institutional assessment; Section 9, financial evaluation; and Section 10, economic evaluation. Supplementary information is provided in the Consultant’s Supplementary Final Report Volumes I, II, and III.

B. Description of the Project

1. Government’s Policy on Railway Development

4. The Government’s policy on railway development is focused on (i) removing constraints and expanding the system; (ii) encouraging joint ventures with local governments and other establishments to promote the development of local economies; (iii) improving efficiency by using new technology and modern management tools in planning and operation; (iv) reducing operating subsidies through appropriate pricing and commercialization of services; (v) implementing institutional and structural reforms to increase MOR’s autonomy and accountability; and (vi) encouraging non-government investment in infrastructure and related services.

5. In 2004, the Government approved the Railway Network Development Plan for 2020 (2020 Plan) that will expand the railway network from the present 73,000 km to 100,000 km by 2020. The 2020 Plan identifies the need to have separate passenger and freight-dedicated lines on the busy trunk routes in order to mitigate the endemic capacity constraints. The route length of the passenger-dedicated network will reach 5,000 km by 2010 and 12,000 km by 2020. While the TZR is not designed to be a dedicated passenger railway, it is designed for a maximum speed of 200 km/hr and will be a critical element of MOR’s policy of increasing speeds of passenger trains on major routes throughout the country.

1. The Third Railway Survey and Design Institute prepared the Use of Asian Development Bank Loans for Chinese New Railway Construction Project Taiyuan–Zhongwei–Yinchuan Line Feasibility Study Report; May 2005 and September 2005. 2. The Third Survey and Design Institute of China Railway, Tianjin, China, Taiyuan–Zhongwei–Yinchuan Line Environmental Impact Assessment, May 2005; and Taiyuan–Zhongwei–Yinchuan Railway Immigration Resettlement Plan, May 2005. 2

2. The Project

6. Within the context of the Government’s Eleventh Five Year Plan (2006-2010) and the 2020 Plan, the proposed Project envisages the construction of a 939.89-km electrified railway (mostly double-track with some single-track sections) between Taiyuan and Dingbian, with a line from Dingbian to Zhongwei and Dingbian to Yinchuan (Figure 1-1). The line will be built to standards suitable for speeds of up to 200 km/hour.

7. The rationale for the Project reflects (i) railway network development; (ii) capacity enhancement; (iii) meeting the needs of the new railway development plan consistent with the western region development strategy; and (iv) promotion of pro-poor economic growth along the line and in the region, thereby reducing poverty. The proposed TZR will provide low-cost rail transport for coal, as well as other commodities at line stations. It will also reduce the distance for transit traffic significantly between northeast China and the west. Absent the new line, traffic between Beijing and the west must travel on the Jingbao Line passing through Hohhot, or on the Longhai Line via Xian. The proposed line provides a short-cut route between these two existing lines, reducing the distance by between 107 and 569 km, depending on the origin and destination. The proposed railway line will connect with the Shijiazhuang–Taiyuan Railway and the Baotou– Lanzhou Railway.

8. Traffic on both the existing Jingbao Line and Longhai Line is close to capacity. There are improvements planned to increase capacity on these existing lines, but these improvements will likely be sufficient only to accommodate expected traffic growth. Construction of the proposed TZR will relieve the congestion pressure on these existing lines as well as generate additional traffic due to the reduction in transport costs and the shortening of distances between the eastern and western regions of China.

3. Strategic Concept of the Project

9. ADB’s strategy for the PRC includes (i) expansion of the railway network in less developed areas that do not have rail access; (ii) develop commercialized rail operations in order to sustain efficient operations; (iii) modernize and increase capacity on key routes and improve efficiency; and (iv) increase railway competitiveness through restructuring and policy reform. Specific railway policy issues to be addressed include corporatization, marketing and business development and tariff setting for improved cost recovery.

10. The construction of the TZR is consistent with ADB’s country operational strategy and will support the Government’s strategic policy objective of greater developmental emphasis on the interior and areas not served by adequate rail service.

11. Implementation of the proposed rail project will help open up a previously underdeveloped region that is rich in coal reserves, chemical products and steel. It will also provide a short–cut for transit traffic between the major cities of northeast China and the main rail lines linking western China. The historical lack of accessibility has constrained the development of this region in spite of its rich natural resources; as a result of this underdevelopment, about 27.4 percent of the rural population in the Project Impact Area (PIA) lives below the poverty line with net income per capita of CNY 965.3

3. The poverty incidence of 27.4 percent is based on the Consultant’s socioeconomic and resettlement survey of 2,387 households (8,131 people) conducted in Oct.-Nov. 2005. 3

Figure 1-1: General Alignment of TZR

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12. The TZR will be an important and strategic transportation artery providing connectivity between the western/central regions of the country and the more prosperous eastern and coastal regions. The capacity and transportation efficiency of this corridor would determine to a large extent the competitiveness of goods produced in western regions in major domestic markets in the east as well as for export. The consequent logistics advantages will foster economic growth in western regions for improving incomes and the lives of people in those regions.

C. Overview of the Transport Sector

13. The Government recognizes transport infrastructure to be an important driver of economic development. There is an increasing awareness that the cost of transport inefficiency can threaten the economy of the country, either through the high cost of uncompetitive transport or the macroeconomic burden of inefficient railway operations. For supporting economic growth and effectively participating in the world economy, it is imperative that goods and passengers move rapidly and economically. Inadequate transport infrastructure will increase cost of moving goods and people, and the citizens will pay more for locally produced goods as well as for imports and for travel. Exports will be less competitive and inefficient passenger travel will constrain people’s effective participation in the activities needed to promote the economy and social welfare. The overall impact will be to reduce the country’s well-being.

14. The primary objectives of the transport sector in PRC are to help enhance economic growth, increase PRC’s ability to compete successfully in world markets, and reduce inequalities in living standards throughout the nation. An efficient transportation infrastructure is necessary, but not sufficient in itself, to achieve these goals. For example, further industrial and economic development in the poverty areas is a prerequisite to reducing inequalities in living standards. Development in poverty areas requires an efficient transport infrastructure effectively serving the needs of businesses for low-cost access to raw materials and product markets. It also requires sufficient human and natural resources to achieve sustainable growth.

15. As at the end of 2004, the PRC’s transport infrastructure comprised about 74,408 route kilometers (km) of the railway network; 1.87 million km of paved and unpaved state, provincial, and local roads; 123,300 km of navigable inland waterways; 2.05 million km of civil aviation routes; and 29,766 km of petroleum and gas pipelines.

16. Transportation infrastructure improvements will be best achieved by establishing a framework whereby customers can satisfy their transportation service requirements at a cost that will allow them to maintain their competitive advantage in the marketplace. Bringing this about will require: (i) removing constraints on competition; (ii) alleviating capacity bottlenecks; and (iii) implementing institutional reforms that improve the efficiency and responsiveness of individual modes and of the transport sector as a whole.

1. Freight Transportation

17. Between 1952 to 2004, the load on China’s freight transportation infrastructure has grown from 315 million to 17.06 billion tons4 and from 76.2 billion ton-kilometers (TKM) to 6,944.5 billion TKM. This represents an annual 8.0% and 9.1% increase, respectively, for the 52-year period. The 52-year trend shows an impressive growth rate. However, there are some significant variations. In the case of total tons, for example, growth from 1952 to 1970 averaged 9.1% per year; in the 20-year period from 1970 to 1990 it averaged 9.8% per year; and in the 1990s it averaged 3.4% per year. The corresponding annual growth rates in TKM were 10.5%, 9.1%, and 5.4%, respectively.

18. From 1985 to 2004, the annual growth rate in total freight transportation (which increased from 1,836.54 billion TKM to 6,944.5 billion TKM) averaged 7.3%, whereas current GDP growth

4. Throughout this report “ton” is used to designate a metric tonne of 2,240 lbs. 5

(from $108.28 billion in 1985 to $1,649.33 billion in 2004) averaged 15.41% per year. During the same period, freight intensity5 declined from 16.96 to 4.21 TKM per dollar of GDP, or by 75%. This overall decrease in freight intensity is expected, as the share of the service sector in the overall economy increases.

19. There have been freight transportation mode shifts during the last 52 years, with road and waterway modes showing a generally upward trend, while pipelines and civil aviation account for a negligible share of total freight traffic.6 Rail freight traffic from 1952 to 2004, expressed in tons and TKM, increased on average every year by 5.8% and 6.9%, respectively. During this period the average length of haul increased from 455 km to 775 km or 70%. It appears that railways will maintain a stable market share of 13%-14% in tons and 33%-35% in TKM.

20. Table 1-1 compares the growth rates of freight transport by mode with growth in GDP. It illustrates that the growth rate in railway has not been keeping pace with inland waterway and coastal freight transport during most of the period since 1985. One main reason is that for most of the period between 1985 to the present, the growth in rail traffic has been constrained by capacity, not by demand for rail transport. During the more recent two years, however, railway TKM growth exceeded inland waterways (in 2002) and roads (in 2003 and 2004). As additional railway capacity is developed, the railway traffic in both absolute and relative terms will experience consistent growth.

Table 1-1: Freight Transport versus GDP* Annual Average Growth Rate (%) Period Growth in Total Total Freight Rail Freight Waterway Freight Highway Freight GDP Growth in TKM Growth in TKM Growth in TKM Growth in TKM 1985 to 2001 15.97 6.1 3.6 7.8 8.1 1985 to 1992 16.8 6.9 5.2 8.0 10.2 1992 to 2001 15.1 5.4 2.3 7.6 6.3 2002 9.6 6.2 6.5 5.9 7.1 2003 11.1 6.6 11.2 4.4 4.7 2004 9.5 28.9 11.8 44.3 10.4 Volume of Freight by Mode (TKM) and Total GDP Total GDP (billion Total Freight TKM Rail Freight TKM Waterway Freight Highway Freight Years $) per GDP $ per GDP $ TKM per GDP $ TKM Per GDP $ 1985 108.30 16.96 7.50 7.14 1.76 1992 418.18 6.99 2.77 3.17 0.90 2000 1,080.74 4.09 1.26 2.20 0.57 2001 1,175.72 4.05 1.24 2.21 0.54 2002 1,266.05 3.99 1.23 2.17 0.54 2003 1,409.85 3.82 1.22 2.04 0.50 2004 1,653.69 4.2 1.17 2.51 0.47 Source: Transport data reported in the PRC Statistical Yearbook 2005; PRC National Bureau of Statistics; PRC Statistics Press; Beijing: 2005 and earlier years. For current GDP World Development Indicators-2004, World Bank, 2004 (*) GDP figures are expressed in billions of current US Dollars. The exchange rate of RMB 8.277 per US Dollar is used to express GDP for 2004.

2. Passenger Transportation

21. During the 1952-2004 period, the annual growth rate in passenger traffic (all modes) was 8.6%; between 1985 and 1992 it was 4.8% (compared to GDP growth of 16.8% per year); and between 1992 and 2004, it was 6.2% (GDP growth of 14.6% per year). This is in contrast to data from other nations which shows that typically overall passenger traffic grows faster than the economy as a whole.

5. Freight intensity is expressed in TKM per $ of GDP expressed in current US Dollars. The exchange rate used is $ 1 = RMB 8.277 until July 2005 and 8.083 from July 2005. 6. Although civil aviation traffic has increased substantially, it still accounts for a negligible share of total freight traffic. 6

22. Due to increased competition from the airlines and the bus companies, railway’s passenger traffic has not been increasing as rapidly as the freight business. In fact it declined by 7.9% in 2003 (due to SARS-related travel restrictions), though by 2004 the passenger ridership increased by nearly 15%. Since 1991, the number of rail passengers increased to the highest level of the decade in 1994, and afterwards declined until 1997. Rail passenger traffic grew by only 2.5% annually between 1997 and 2002. Despite the increased competition from the airlines and bus companies and the decline in 2003, it appears that railway’s passenger traffic will continue growing moderately in the foreseeable future in absolute terms – particularly for rail lines that serve the less developed provinces and as the dedicated high speed passenger network is completed.

23. As shown in Table 1-2, PRC’s 2004 rail passenger trips was 0.86 per capita. This represents a 13% increase over 2003.

Table 1-2: Population and Passenger Trips (2004) Population Passenger Trips Annual Trips Modal Distribution Description (000) (000) per Capita (%) Total PRC 1,296,500 17,694,000 13.64 100.00 By Rail - 1,117,640 0.86 6.32 By Road - 16,245,260 12.53 91.81 By Waterway - 190,400 0.15 1.07 By Air - 121,230 0.09 0.68 Source: Population data obtained from the World Bank web site; passenger travel statistics from the MOC annual statistical summary booklet.

24. From 1988 to 2004, railway passengers decreased by 9.7% but traffic volume in passenger-kilometers (PKM) increased by 75.2%, which is due to an increase of 92% in the average trip length from 266 km to 511 km. During the same period, the local railways have seen a greater than four–fold increase in the number of passengers. In terms of PKM, local railway traffic increased by a factor of more than 66 times, with an annual growth rate of 30%.

25. During the same 16-year period, road passenger traffic increased by 150% (passengers) and 246% (PKM), with roads accounting for 92% of the overall passengers transported in 2004. This high rate is mainly due to the counting of short urban trips in road transport statistics, which are not compatible with railway transport of passengers in China. It is also due to the significant road construction efforts going on in the PRC, which enhances the competitiveness of road transport due to flexible service, faster travel times, and lower operating expenses. The national statistics for road transport by both Ministry of Communications (MOC) and non-MOC operators indicate, however, that average trip length for passenger road transport is 54 km, which only increased by 38% since 1988, compared to a 92% increase in the railways. This relatively low figure for road transport reflects the local nature of the mode.

26. Passenger transport on inland waterways and coastal ships reached its peak level in 1987 and has decreased by over 51% since then. A similar trend is also observed in PKM, which reached its peak in 1988 and decreased by 66% since then, mainly due to a decrease in the average trip length from 75 km in 1992 to 35 km in 2004. Contrary to freight transport, this trend confirms the lack of preference to this mode of transport by passengers, where the flexibility and frequency of service provided by other modes are more important criteria than price.

27. A closer analysis of recent trends shows that, excepting the unusual decline in 2003 due to SARS, PRC railways have successfully abated the declining general trend in passenger transport, particularly during the 5-year period from 1997 to 2002 and in 2004. This was again accomplished largely due to significant reform and restructuring measures implemented by MOR in order to create an efficient market-oriented railway, which is more responsive to passenger needs and requirements. Such improvements as speed increases on high density passenger lines; computerized passenger ticketing and reservation system; improved on-board services, 7

and providing 8-hour, 12-hour and 24-hour service between large city pairs have resulted in increased ridership and passenger preference for the railways.

28. Table 1-3 provides a comparison of the development of MOR’s revenues from freight and passenger transportation business. During the 19-year period from 1985 to 2004, passenger revenues recorded an average annual growth of 14.5 percent compared with 9.9 percent for freight revenues.

Table 1-3: Growth of National Railway Freight and Passenger Revenues and Traffic Revenue Total Traffic Average Unit Revenue (CNY) (CNY billion) (billion) Year Per PKM Per TKM Passenger Freight PKM TKM (index)(growth) (index)(growth) 0.0189 0.0194 1985 4.55 15.76 241.30 811.16 (100)(%/Y) (100)(%/Y) 0.0425 0.0257 1990 11.09 27.21 261.0 1,060.11 (225)(17.6) (132)(5.8) 0.0569 0.0279 1995 20.15 35.76 354.26 1,283.60 (301)(14.8) (144)(4.1) 0.0837 0.0425 2000 36.93 56.66 441.47 1,333.61 (443)(8.0) (219)(8.8) 0.0996 0.0483 2001 46.16 68.86 463.66 1,424.98 (527)(19.0) (249)(13.6) 0.1034 0.0467 2002 49.68 70.47 480.31 1,507.82 (547)(3.8) (241)(-3.3) 0.1031 0.0476 2003 47.67 78.40 462.28 1,647.56 (545)(-0.29) (245)(1.9) 0.1076 0.0516 2004 59.29 94.37 551.20 1,829.50 (569)(4.4) (273)(8.4) Average Annual Growth 14.5% 9.9% 4.4% 4.4% 9.6% 5.3% Rate (1985- 2004) 8.0% 6.5% Average Annual Growth Rate of Nominal Tariff (1985-2001) (1983-2001) Source: Compiled by Consultant from MOR data.

29. The PRC railways are essentially a freight-predominant operation although passenger transport remains an important line of business. However, the gap between freight and passenger revenues is fast closing. In 2004, passenger revenues were 38.8% of total freight and passenger revenues, compared with 22.4% in 1985. With rapid growth of passenger traffic and higher average unit revenue per PKM, the gap between passenger revenues and freight revenues is expected to narrow further. This will have important implications for planning future expansion of rail transportation services and investments.

30. During the period from 1985 to 2004, the growth rate of average unit passenger revenue was 9.6%, which exceeded the growth rate of average nominal passenger tariff of 8.0%. Also on a PKM basis the ratio of average unit revenue to nominal tariff increased from 1.11 in 1985 to 1.43 in 2004. This buoyancy in passenger revenues reflects the impact of increased demand for improved value-added rail passenger services provided by MOR.

31. A reverse trend is seen for freight traffic. From 1985 to 2004, the growth rate of average unit freight revenue of 5.3% was less than the growth rate of 6.5% for average nominal freight tariff per TKM. On a TKM basis the ratio of average unit freight revenue to nominal freight tariff declined from 1.31 in 1985 to 1.05 in 2004. This trend shows that in rail freight business, the proportion of goods which attract low tariffs is increasing on the national railway. Thus the railway is losing higher tariff traffic to competing transport modes, and eroding overall rail profitability. MOR needs to adapt rapidly to competitive conditions, improve the quality of rail freight services and adopt demand sensitive pricing in rail freight transport services.

D. Railway Sector

32. In the PRC, the railways remain the preferred mode of medium- to long-distance intercity transport. This, combined with economic growth and technological improvements for the railways, ensures a continuing role for railway transport in the future. The railway's competitive advantage is in the transport of bulk and semi-bulk commodities over medium to long distances, long- distance passenger traffic, and containerized freight.

33. The railway system in the PRC encompasses a nationwide standard gauge (1.435 meter wide) rail network totaling 74,400 route-km at the end of 2004.7 This includes 61,015 route-km of the state-owned national railway and 13,385 route-km of local and joint-venture railways.8 As a result of MOR’s modernization efforts, as at the end of 2004, some 18,243 route-km (or 29.9% of the national network) were electrified routes; double tracking covered 24,894 route-km (or 40.8% of the national network); and electrified and dieselized routes comprised more than 97% of the total route length. These routes accounted for over 99.6% of the total gross TKM hauled.9

34. The state-owned national railway is administered by the Government through MOR. On March 18, 2005, MOR implemented a reform assigning direct management of stations and depots to the Regional Railway Administrations (RA). The 41 railway sub-administrations were therefore disbanded. There are now a total of 18 RAs (formerly, there were 14), including three new administrations for Taiyuan, Xi’an and Wuhan plus the Qinghai–Tibet Railway Company.

35. In 2004, the PRC railways handled 2.49 billion tons of freight and 1.18 billion passengers. Total transportation volume was 1,929 billion TKM and 571.2 billion PKM. The freight volume handled was more than two-thirds of that on US Class 1 railroads (2,506 billion TKM). The average length of haul was 775 km compared with 1,394 km in the US. This volume of freight throughput together with an additional 571 billion PKM, were transported on a national railway network about one-third the size of the US network. This was a significant achievement. 10

36. An important characteristic of the PRC railways is its high modal share (almost one-third) in either of the freight (TKM) and passenger (PKM) segments of transportation. Thus both the Chinese economy and the life-style of its citizens are highly dependant on the railway’s availability and its efficient operation. In this background MOR is facing new challenges as the country progresses to a market economy. Rapid economic growth has induced strong growth of freight and passenger traffic, which is growing beyond the capacity of the network. In addition, air and road traffic are offering more alternatives to railways, which constitutes the most important competitive pressure on railways.

1. Capacity Constraints

37. As traffic increases with economic growth, it is becoming more difficult to accommodate both freight and passenger traffic on saturated rail infrastructure. The traffic density11 of PRC’s railway network is about three times the density of traffic of the US Class 1 railroads and seven times the traffic density of important European railways such as the French and the German railways. While the high density underscores a good record of performance and asset utilization, it is indicative of the relative scarcity of railway infrastructure.

7. The PRC’s railway network (in terms of route length) ranks third worldwide after the US and Russian Federation. 8. National Railways are funded and constructed by the Central Government and managed by MOR, the Local Railways are financed and constructed by the provincial governments, municipalities, or the autonomous regions, and the Joint Venture Railways are financed and built by MOR, provincial governments, municipalities, autonomous regions or enterprises. Local Railways are operated by enterprises independent of MOR, but their success largely depends on MOR routing decisions and train paths. 9. China Statistical Yearbook 2005; published by the China Statistics Press; Beijing, 01 September 2005. 10. The comparison with U.S. Class I railways is not intended to imply that the railways between the two countries are similar. It is intended to show only the relatively high railway traffic density in PRC. 11. Traffic density is the number of converted traffic units (consisting of the sum of TKM and PKM) per km of the railway network. 9

38. The railway network currently is operating close to or at capacity, and there are already indications that transport capacity is becoming a binding constraint on further growth (Figure 1-2). Further liberalization under the WTO regime is expected to increase China’s international trade, resulting in increasing strains on the domestic transport infrastructure. According to MOR officials, during 2004, the average number of daily requests for freight cars increased 88 percent to nearly 300,000 cars (it averaged 160,000 freight cars daily in 2003), yet the railway system can only provide around 100,000 cars per day, or less than 35% of the demand.12 In July and August 2004, priority movement of coal for power generation seriously affected the transportation of other commodities.

39. Also in the summer of 2004, lack of rail transportation resulted in piling of coking coal stocks in the industry. The benchmark coking coal price dropped from CNY 1,150 per ton to CNY 1,000 per ton. Some suppliers shifted to trucks, but this was limited to short hauls because the transport hikes made longer deliveries uneconomic. Shortage of rail transportation resulted in truck charges being increased from CNY 0.40 per TKM to CNY 0.67 per TKM. Therefore, the railway’s inability to move freight resulted in loss of production, increased logistics costs, and recourse had to be taken to uneconomic highway transportation, which is also environmentally less sound and inefficient in energy use. Based on traffic projections, a significant portion of TZR’s traffic will be coal. As the line will also reduce transport distances for existing coal movements, as well as enable the shipment of coal by lower – cost rail transport, it will be consistent with the goal of reducing congestion on existing railway lines as well as reducing the delivered cost of China’s primary energy source.

40. TZR offers the shortest railway route along the east-west direction in north central China. Reducing railway transport distance means delivery of the same amount of traffic (freight tons and passengers) at a reduced cost to the freight shippers and passengers, thus resulting in significant national productivity benefits. Further discussion of this benefit is provided in Sections 3 and 10.

2. Railway Development Plans

41. Since the 1990s, China is in the middle of the biggest rail build-out since Europe's great expansion in the years before World War I, a track-laying performance on par with North America's in the 19th century.13 During the 10th FYP (2001-2005) about 1,500 kilometers of new lines have been added each year at an annual cost of about $ 7 billion. The 11th FYP (2006-2010) envisages an annual investment of $ 37 billion in the national railway, which represents a more than 4-fold increase over the last 5-year period. MOR is in the process of expanding capacity by constructing new lines, improving existing lines with double tracking and electrification, increasing containerization capacity, developing a dedicated high speed passenger network, and upgrading locomotives and rolling stock.

42. These efforts appear to be adequate for alleviating congestion particularly on the high density east-west and north-south routes (Figure 1-2). It may be mentioned that expansion of the rail network in the west will invariably need capacity enhancement on the busy trunk routes, so that there is enough capacity on the existing network to carry the traffic generated on the new lines. If this is not done, then the efficiency of the whole network including the new investments will be adversely affected. In view of the large scale capacity constraints that have become endemic on the national railway trunk lines network, the investment program for railway’s development needs to be greatly expanded.

12. Chinese Railways Bursting at the Seams. http://singleplanet.blogs.com/single_planet/2004/05/chinese_railway.html 13. http://www.time.com/time/asia/features/journey2002/chinaboom.html 10

Figure 1-2: Congested Railway Lines as of April 2004

Lines with capacity utilization of more than 90%.

Source: Consultant from MOR train timetable and utilization data. Note: Map is not drawn to scale.

43. It must be ensured that railway capacity and capability are contributors to, rather than constraints on, both overall economic growth and the wider sharing of the benefits of that growth. To insure this, the system capabilities and capacity must stay ahead of the demand for transportation. The Government and MOR is undertaking a program for accelerated expansion of railway capacity on the high density routes with constructing a dedicated passenger railway network and other infrastructure and operational improvements in the national railway system. The goals should be: firstly, to remove capacity constraints, and secondly, to ensure that the line capacity stays ahead of the transportation demand on the main corridors. In this background the proposed Project is a step in the right direction.

E. External Assistance to the Railway Sector

44. The Japan Bank for International Cooperation (JBIC), the World Bank Group, and the ADB have been active supporters of the railway sector in PRC since 1980. External assistance mainly focused on expanding the capacity of the railways. JBIC’s assistance totaled 578 billion Yen for 15 railway projects mainly to expand capacity in principal coal transport corridors. Since 1984 the World Bank provided 10 loans totaling $ 2.4 billion. During the last 15 years ADB loans totaled $ 2.64 billion

II. PROJECT FRAMEWORK AND RATIONALE

A. Description of the Project

45. The Project includes the construction of 939.89 km of electrified Class I railway. The line is designed for maximum speeds of 160 to 200 km/hour. General track construction material will utilize 60 kg/m continuously welded rail (CWR), Type III concrete sleepers, and Grade I crushed stone ballast with a minimum depth of 30 cm below the bottom of sleepers. These and other track materials and component design selected by TSDI appear to be consistent with the China Railway14 (CR) Grade I design standards applied earlier to similar projects.

46. The TZR alignment begins at two points in the east and ends at two points in the west. The first point in the east is the center of the Yuci marshalling yard (Shitai Rail Line K208+695, which is TZR CK000+000). The double-track line from Yuci via Xirong Junction (CK14+400) to Dingbian (CK511+550) is 508.338 km. The second point in the east is a single-track route segment (reserved for double-track) between Xirong Junction and Taiyuannan (south) Station that consists of 19.55 km of new construction, but this section is not included in the TZR route length. Rather it is treated as part of the Taiyuan-Yuci-Xirong terminal area construction, and its track, bridge and other infrastructure costs are included in the TZR project investment cost.

47. From Dingbian the line diverges into two single-track lines. Dingbian to Huangyangwan (CK716+040 = Baolan K659+313.39) is 223.016 km. This represents the end of the TZR “line”; however, an additional 16.18 km of new single-track construction on the Baolan line between Huangyangwan and Zhenluopu is included in the investment cost of the TZR project. Therefore, the total route length from Yuci to Zhenluopu, excluding the Xirong-Taiyuannan segment and the Baolan segment is 731.354 km. The single-track connecting line from Dingbian to Pingjipu (LCK718+000 = Baolan K537+750) is 192.355 km. There is no additional TZR investment cost associated with the Baolan line between Pingjipu and Yinchuan.

48. As summarized in Table 2-1, the estimated cost of the Project is CNY 30.32 billion ($ 3.75 billion). The China Development Bank (CDB) is committed to provide a loan of CNY 13.00 billion for Project construction or 42.9 percent of the Project cost; the China Construction Bank will provide a loan in the amount of CNY 4.30 billion or 14.2 percent of the Project cost, the three provinces (Ningxia, Shanxi and Shaanxi) will provide CNY 1.2 billion or 4 percent of the Project cost; and the ADB will provide a loan of CNY 2.42 billion or 8 percent of the Project cost. The

14. China Railway (CR) is used as a term to designate the operating entities of the MOR, i.e. the 18 RAs. 12 remaining CNY 9.4 billion (31 percent) will be provided from MOR through the Railway Construction Fund.

Table 2-1: Estimated Project Cost (CNY Million) Item No. Cost Component Shanxi Shaanxi Ningxia Total Route Length (km) 216.55 347.41 375.87 939.89 A Ba se Cost Land Acquisition and 1 540.00 580.00 360.00 1,480.00 Resettlement Civil Works (sub-grade, tunnels, 2 3,117.09 5,000.63 5,410.35 13,528.06 and bridges) 3 Railway Trackwork(a) 883.10 1,278.82 770.77 2,932.68 4 Buildings and Facilities 76.18 67.25 91.14 234.57 5 Signaling and Communications 396.88 456.56 418.91 1,272.35 6 Electric Power and Traction 576.62 639.43 488.19 1,704.25 7 Vehicles(b) 0.00 0.00 0.00 0.00 8 Safety Components 32.96 35.66 35.93 104.55 9 E-governance and MIS 54.93 59.44 59.88 174.24 10 Other Equipment and Facilities 21.97 23.78 23.95 69.70 Administration, Consulting 11 355.46 402.82 282.36 1,040.64 Services, and Miscellaneous Environmental Protection, 12 266.36 427.31 462.33 1,156.00 Mitigation, and Monitoring Temporary Facilities and 13 77.31 173.31 65.47 316.09 Transitional Works Subtotal (A) 6,398.86 9,145.00 8,469.27 24,013.13 B Contingencies 0.00 0.00 0.00 1 Physical Contingency(c) 358.34 512.12 474.28 1,344.74 2 Price Contingency(d) 305.24 436.24 404.00 1,145.48 Subtotal (B) 663.58 948.35 878.28 2,490.21 C Interest During Construction(e) 1,018.34 1,455.37 1,347.83 3,821.54 D Front End Fee(f) 0.00 0.00 0.00 0.00 Total Cost 8,080.78 11,548.72 10,695.38 30,324.88

(US$ Million) Route Length (km) 216.55 347.41 375.87 939.89 A Ba se Cost Land Acquisition and 66.81 71.76 44.54 183.10 1 Resettlement Civil Works (sub-grade, tunnels, 385.63 618.66 669.35 1,673.64 2 and bridges) 3 Railway Trackwork(a) 109.25 158.21 95.36 362.82 4 Buildings and Facilities 9.43 8.32 11.28 29.02 5 Signaling and Communications 49.10 56.48 51.83 157.41 6 Electric Power and Traction 71.34 79.11 60.40 210.84 7 Vehicles(b) 0.00 0.00 0.00 0.00 8 Safety Components 4.08 4.41 4.44 12.93 9 E-governance and MIS 6.80 7.35 7.41 21.56 10 Other Equipment and Facilities 2.72 2.94 2.96 8.62 Administration, Consulting 43.98 49.84 34.93 128.74 11 Services, and Miscellaneous Environmental Protection, 32.95 52.87 57.20 143.02 12 Mitigation, and Monitoring Temporary Facilities and 9.57 21.44 8.10 39.11 13 Transitional Works Subtotal (A) 791.64 1,131.39 1,047.79 2,970.82 B Contingencies 1 Physical Contingency(c) 44.33 63.36 58.68 166.37 2 Price Contingency(d) 37.76 53.97 49.98 141.71 Subtotal (B) 82.10 117.33 108.66 308.08 C Interest During Construction(e) 125.99 180.05 166.75 472.79 D Front End Fee(f) 0.00 0.00 0.00 0.00 Total Cost 999.72 1,428.77 1,323.19 3,751.69 (a) Including rails, sleepers, ballast, bridge beams, track laying, and bridge erection. (b) Vehicles w ill be purchased by MOR under separate funding and w ill be leased to TZR on a f ixed charge per train-km basis based on full cost recovery. Initial cost of vehicles is not included in the Project costs since these are associated facilities, but costs associated w ith their use by TZR are included in financial and economic evaluation. (c) Physical contingency is estimated at 5.6% of base cost on average. (d) Price contingency for local currency costs from ADB, Domestic Cost Escalation Factors based on ADO 2005 inflation data for PRC (3.3% for 2006, 3.2% for 2007, and 3% thereafter). For foreign exchange components from ADB International Cost Escalation Factors 2005-2009 based on Manufacturer's Unit Value Index of exports from the G-5 countries to developing countries (2.8% of 2006 and 1.9% thereafter). (e) Interest rate is 5.32% w hich assumes a 5-year fixed sw ap rate of 4.92% w ith a spread of 60 basis points and a rebate on spread of 20 basis points (from ADB Indicative Lending Rates for Loans Under the LIBOR-based Loan Facility as of December 1. 2005). Import taxes and duties are w aived under this Project. IDC includes commitment fee of 0.75%. (f) Front end fee of 1% is assumed as w aived. Source: Compiled and adjusted by Consultant from data provided by TSDI and ADB.

B. Project Rationale

49. The rationale for the Project is to (i) increase the efficiency of the railway network, (ii) improve line capacity, and (iii) meet the needs of the new railway development plan consistent with the western regional development strategy. In addition, the construction of the TZR will promote pro-poor economic growth along the line and in the region, thereby reducing poverty. The proposed TZR will provide low-cost rail transport for coal, which is in abundance along the proposed alignment, as well as other commodities, and these will generate income and jobs for local businesses. It will also reduce significantly the distance for transit traffic between regions of northeast China and the west. Without the new line, traffic between Beijing and the west must travel on the Jingbao Line passing through Hohhot, or on the Longhai Line via Xian. The proposed line provides a short-cut route between these two existing lines, reducing the distance by between 107 and 569 km, depending on origin and destination points. The proposed railway line will connect with the Shijiazhuang–Taiyuan dedicated passenger railway and the Baotou– Lanzhou Railway.

50. Traffic on both the primary alternatives to TZR, the Jingbao Line and Longhai Line, is close to capacity. There are improvements planned to increase capacity on these existing lines, but these improvements will likely be sufficient only to accommodate expected traffic growth; congestion will remain, absent TZR. Construction of the proposed TZR will relieve the congestion pressure on these existing lines as well as generate additional traffic due to the reduction in transport costs and shortened distances between eastern and western regions of China.

51. By facilitating the integration of the poor and underdeveloped western provinces and regions with the developed parts of the PRC, the Project will play an important role in supporting the Government’s strategic objective of accelerating economic development in western China. The economic development of western China is an important national policy objective, and is key to alleviating poverty in one of China’s poorest regions. 15 The Project will also directly and indirectly provide employment opportunities for the population along the alignment, with roughly 50 percent of the construction jobs (130,500 person-years) available for unskilled workers.

52. The benefits of the project will go beyond the immediate project influence area. Capacity enhancement through the TZR corridor will help to develop traffic on numerous other links emanating from the region, for example on the Baoxian Line, linking Baoxi with Xi’an as well as the existing CR lines at the eastern and western end points of the TZR. The impact of the Project will improve transportation efficiency and productivity on a significant part of the national railway network. This efficiency improvement is borne out by one of the significant results of the Project, the reduction of total CR ton kilometers by 0.32 percent and passenger kilometers by 0.13 percent. These represent a significant national productivity improvement and complement the Project’s economic robustness.

53. The new electrified double line to be built under the Project will be designed for operation of passenger trains at speeds of up to 200 km/hour. This will reflect upgrading of railway technology in line with achievements in more advanced countries, such as Japan, France, and Germany. This will help provide improved railway passenger services that will effectively compete with other modes. As experience in other countries has shown, technological advancement in the railway sector will benefit the domestic manufacturing base and create opportunities for new businesses to implement cutting edge technologies and pursue technically advanced production methods.

54. The Project places special emphasis on safety during railway construction and operation. Safety will be enhanced through the introduction of safe and reliable technology and installation of technically advanced safety monitoring equipment and appropriate training of staff.

15. Reference: “Go West Policy” of the Government. 14

55. The TZR line passes through areas that are not well served by railways and most local transport is by road. Roads in the area are congested and the area experiences high accident rates, with associated costs. The economic benefits of the TZR project include a significant savings in accident costs and the resulting losses to human productivity and earning potential of victims.

56. TZR is a component of the new phase of institutional development of CR. The Project railway will be built and operated by an autonomous joint venture company established under the Chinese Law. The joint-venture company will have substantial managerial and financial autonomy, including the freedom to set tariffs for full cost recovery. In due course the joint venture shareholding company may be listed on the stock exchange. This will provide an opportunity for the operating company to interact with investors and raise future investment needs through market mechanisms. A new era of market based investment financing is expected to be ushered, thereby helping to diversify sources for financing railway development, and reducing dependence on self-generated financing and financing from government sources and lenders.

C. Design and Monitoring Framework

57. The primary goal of the Project is to create the conditions that would foster economic growth particularly in the less developed and poorer provinces and regions in west China. This goal will be achieved mainly by developing network capacity in a region where existing rail routes in nearby regions are being operated at or beyond design capacity; which represents a serious constraint to increased transportation of goods and passengers vital for further economic development of western China. Removal of the transportation constraints and bottlenecks will help in the rapid development of the natural resources and industries, and give impetus to the service sector that will generate employment, increase peoples’ incomes, and help to reduce poverty.

58. Table 2-2 presents the Design and Monitoring Framework for the Project. It provides the basic design of the project in terms of its intended goal, purpose, outputs and activities (or inputs). The framework clearly identifies the goals and purposes of the Project. It also allocates measurable and/or tangible performance indicators. The framework also identifies the outputs of the Project and the necessary activities that will enable achievement of the proposed immediate purpose, which in turn lead to longer-term objectives or goals.

III. TRAFFIC FORECASTS

A. Introduction

59. Implementation of the proposed rail project will help open up an underdeveloped region that is rich in coal reserves, chemical products and steel. It will also provide a short–cut for transit traffic between the major cities of northeast China and the main rail lines linking western China. The historical lack of accessibility has constrained the development of this region.

60. The TZR will be an important and strategic transportation artery providing connectivity between the western/central regions of the country and the more prosperous eastern and coastal regions. The proposed TZR Project is a critical missing link in the east-west national railway network, and when complete will provide improved access to some of the poorest areas of the PRC. At present, no east – west rail line links Shanxi, Shaanxi and Ningxia Provinces. The project area has large coal reserves as well as many other industries and tourism potential. While the area is rich in resources, it has lacked adequate transport, which has constrained economic development.

Table 2-2: Design and Monitoring Framework Design Summary Performance Targets/Indicators Data Sources/Reporting Mechanism Assumptions and Risks Impact 1. Increase in constant GDP per capita in beneficiary 1. Provincial and county/city statistics Assumption Improved transport system in the provinces: (i) Shaanxi from CNY 6,500 in 2003 to offices. 1. Government investment projects region supporting socioeconomic CNY 10,400 in 2010 and CNY 27,000 in 2020 (2010- implemented as planned. development and the 2020 growth rate of 10%/year); (ii) Shanxi from CNY 2. PPMS at inception, completion and 3 Complementary activities are development strategy of western 7,413 in 2003 to CNY 11,900 in 2010 and CNY years thereafter, with emphasis on implemented. China. 30,900 in 2020 (2010-2020 growth rate of 10%/year) socioeconomic improvement impacts. 2. The Government is committed to and Ningxia from CNY 6,562 in 2003 to CNY 10,500 reducing poverty in the western region, in 2010 and to CNY 27,000 in 2020 (2010-2020 3. Annual reporting by the Project based on the Western Development growth rate of 10%/year). Company. Strategy.

2. Major socioeconomic indicators in the project area 3. Investments of the MOR and and West China provinces and regions. Reduce provincial governments and local poverty in counties along the Project Impact Area. government s in the railway sector are implemented according to plans. 3. Official poverty incidence in the project impact area reduced from 32.35% to 15% in Shaanxi Risk province; from 19.83% to 9% in Ningxia province Inequitable development impact and and from 6.81% to 3% in Shanxi province. widening of income disparities. Outcomes Assumptions 1. An efficient, safe and 1. Maintain the Project’s economic rate of return of 1. Reevaluate the EIRR at mid-term review 1. Demand forecasts materialize; no affordable railway transport approximately 18%. and at project completion. major cost overruns. system is developed in the region. 2. Develop the freight and passenger train operating 2. MOR statistics and operating data before 2. Assumed economic growth rates and pattern as per the train paths projected by TSDI on and after the project implementation. traffic growth rate for TZR materialize. 2. Technological advancement in the TZR. the railway sector, and improved 3. Passenger and freight operators safety in railway operation. 3. Substitute rail for road transport for the transport 3. Statistics of: (i) trade between western realize the benefits of using the new of most commodities within the region as well as China provinces and domestic/ foreign railway. 3. Local economic development between the region and the rest of China. Reduction markets, (ii) railway container traffic, and with emphasis on tourism is in the accident rate along the national road 307 as a (iii) tourists visiting the project area. 4. Local governments undertake the implemented. result of traffic diversion to rail. planned tourism and local area development. 4. International traffic between PRC and Central 4. Accident statistics from the Public Asia and Europe to increase from 59 million tons in Security Bureau and hospitals. Risks 2004 to 400 million tons by 2020. Local governments may not have sufficient financial resources to implement the tourism and local area developments. 16

Design Summary Performance Targets/Indicators Data Sources/Reporting Mechanism Assumptions and Risks Outputs 1.1. Physical completion of the Project railway 1. Project administration missions (PAM) Risks 1. Railway infrastructure and complete (974 track kilometers) with facilities as per and Project Completion Report (PCR). Construction may be delayed dur to associated facilities along the the implementation schedule and adhering to the complexity. TZR alignment are implemented. physical completion date and date of start of commercial operation. Procure necessary equipment Assumptions and facilities to enable efficient operation and Completion of equipment procurement management of the line. and installation by project opening. 1.2. Transport a total of 58 million tons of freight in 2015; 80 million tons by 2020 and 118 million tons in 2030. 1.3. Transport a total of 6.23 million passengers in 2015, 8.94 million by 2020 and 14.87 million in 2030. 1.4. Implementation of the land acquisition and 1.4. Regular resettlement monitoring by an Assumptions resettlement plan. A total of 79,707 mu of land will independent institute engaged by the Adequate land for new house sites is be required for the construction of the TZR with an Project Company. available within villages for resettlement. additional 26,170 mu temporarily required during construction. A total of 26,074 residents will lose Risks buildings on their property on account of the TZR 1.4.1. Relocation may not be done construction. satisfactorily. 1.5. Environment at the project site is protected and 1.5. Environmental monitoring reports, 1.4.2. Viable alternative employment adverse environmental impacts minimized through PAM’s, and PCR. may not be found for affected people. mitigation measures as included in the environmental impact assessment (EIA) and Assumptions. summary EIA. Mitigation measures included in the 1.5. Mitigation measures are adequate civil works’ contracts. to address environmental impacts. 1.6. Any adverse impacts on the poor, physically 1.6. Monitoring reports of the social impaired, women, children, and ethnic minorities are development action plan, PAMs and PCR. Assumptions minimized by implementation of the social All--Commitment of MOR/Project development action plan. Company and contractors to 1.7. Control of HIV/AIDS and health risks for 1.6, 1.7. Monitoring by the Health Bureau. implementation of mitigation measures. construction workers and service providers, Risk indicators include number of clinics, number of 1.6, 1.7. The capacity of the Health patients, number of posters, and number of testing Bureau may not be sufficient to 2. Employment opportunities are laboratories. implement mitigation measures. generated for poor and 2. Of the estimated 435,000 person-years generated All—Progress Reports. vulnerable groups to increase in construction related employment, the poor, All—Monitoring by the Project Company Assumptions incomes and living standards, including women, capture at least 50% of these and external monitoring agency. 2. The poor are qualified to capture thus reducing poverty. unskilled labor positions. these job opportunities. 17

Design Summary Performance Targets/Indicators Data Sources/Reporting Mechanism Assumptions and Risks 3. Corporate governance 3.1. An effective marketing effort is developed to 3.1. PAM’s, progress reports and PCR. Assumptions promoted. attract passenger and tourists along the TZR. Provincial government approval wil be given in a timely manner.

Risks 3.2. PAM’s, progress reports and PCR. Adequate funds are not invested in 3.2. TZR operations separated from MOR marketing. operations. 3.3. Financial statements of the Project MOR may interfere in the Project Company, mid term review and PCR. Company operations return on 3.3. A debt-equity ratio of not more than 65:35 an investment may not be realized. operating ratio of not more than 72%; a debt-service coverage ratio of not less than 1.0 (three years after operations start-up) and a financial rate of return of Assumptions minimum 7.0% before tax and 5.6% after tax. Revenue forecast materializes as originally projected and Project implemented without serious cost overrun or implementation delays, Consultant’s reports. including approval of projected tariff rates. 20 person-months of international consulting services will be provided for business development Progress reports. Consultant recruitment is timely and 4. Institutional capacity of the and marketing, and institutional strengthening. performance of the consultant is Project Company strengthened. satisfactory in providing services to the Project Company. Activities with Milestones: Inputs: • 1. Civil Works: Contracts awarded by Jul 2006 and completed by Jun. 2011. ADB: $300 million 2. Materials and Equipment: Procured by June 2011. China Development Bank: $ 1,608 million 3. Resettlement: Completed by Apr. 2008. China Construction Bank: $ 532 million 4. Consulting: Consultants recruited by Jun. 2006; work completed by Jun. 2011. Ningxia, Shanxi, Shaanxi Provinces: $ 148 million 5. Track Laying: Started by Mar. 2008 and completed by Sep. 2010 MOR: $ 1,163 million 6. Telecommunications: Telecommunications and signaling completed by Apr. 2011. Source: Consultant

61. Shaanxi and Ningxia have comparatively low densities of railways in comparison with land area. Table 3-1 shows the railway density expressed in route-km per square km compared with other selected provinces in PRC. The proposed TZR project will not only provide a shorter route between east and western regions of the country, it will also improve railway density that has caused many railway lines in the country to be operated in excess of designed carrying capacity.

Table 3-1: TZR and Other Provinces: Railway Density

Railway Other Other Railway TZR Provinces Railway Density Density Provinces Provinces Density

Shaanxi 0.0158 Hebei 0.0246 Henan 0.0200 Shanxi 0.0198 Shandong 0.0213 Liaoning 0.0286 Ningxia 0.0113 Anhui 0.0169 Jilin 0.0190 Source: Consultant from data provided by MOR.

62. Both economic and financial analyses depend heavily on traffic forecasts. The financial analysis requires a forecast of traffic on the Project line. The economic analysis requires a forecast of all the traffic flow changes that will result from the existence of the Project. Such changes may occur, not only on the Project line, but on other railway lines and on other modes of transport. This Section describes the approach to and presents the results of freight and passenger traffic forecasts for TZR.

B. Approach to Traffic Forecasting

63. The following general approach has been used to forecast freight and passenger traffic associated with the operation of TZR:

a. Project future passenger and freight traffic separately.

b. For freight traffic, project national transport demand based on economic parameters and trend analysis and CR traffic demand based on commodity specific trends for major commodities expected to use the proposed railway. Use TERA’s China Railway Traffic Evaluation Model (based on an updated version undertaken by TERA of MOR’s Railway Investment Strategy (RIS-III) Model) as a tool for projecting future transit traffic on the TZR.16 Project local and interline freight and passenger traffic using results of field surveys.

c. Project passenger traffic by use of the TERA CR Traffic Evaluation Model (CR- TEM) and based on estimated propensity to travel. Use passenger preferences based on information collected in field surveys.

d. Project future traffic in three categories, accounting for distinct economic impacts depending on the type of traffic:

i. Diverted rail traffic from other rail lines to TZR.

ii. Traffic that would move by road in the absence of the Project (diverted traffic) based on an assessment of the relative service and cost competitiveness of and passenger/shipper preferences for the TZR. Air

16. The earlier RIS version of the model has been updated in 2004 by the Consultant under a contract with MOR. The CR-TEM incorporates passenger traffic (including high speed trains on the dedicated passenger railway network) into the network optimization module, treats trains rather than tons and passengers as traffic inputs, and substantially improves the objective function and constraint equations in the overall optimization algorithms. Detailed information on CR-TEM is provided in TERA Beijing Consulting Co. Ltd., Final Report Volume 1: Railway Investment Study (RIS) Model Version III, prepared for MOR under Contract No. 2003KFEQA-13005US; May 14, 2004. A summary of CR-TEM’s key features is presented in Supplementary Final Report Volume II, Appendix 3-A. 19

transport was not considered viable within the corridor as air service is limited and traffic diversion would be insignificant.

iii. Traffic that would not move at all in the absence of TZR (generated traffic) based on field market research on the nature and extent of economic, commercial, and industrial development in the project impact area and in outlying areas that is clearly attributable to the TZR.

C. Freight Traffic Projections

1. Overall PRC Freight Transport Projections

64. Table 3-2 shows PRC freight traffic projections which imply an annual growth rate of 4.2% and 5.1% for tons and TKM, respectively. These rates are somewhat lower than the government’s estimate of GDP growth of 6.5% per annum during the period 2005 to 2020 and between 4% and 5% thereafter. A lower growth rate in the overall PRC freight transport sector demand is expected as it reflects the increasing importance of the tertiary sector in PRC’s GDP. The higher growth rate in TKM compared to tons implies that the average length of haul (which increased from 246 km in 1985 to 407 km in 2004) will continue to increase, reaching 443 km in 2020 and 467 km in 2031). This reflects the overall impact of commercial and industrial development in inland China particularly in central and western PRC. It also reflects the need for improved productivity in the sector in order to maintain PRC’s competitiveness in export markets since higher distances would escalate transport cost.

Table 3-2: Freight Tons and TKM for PRC and Rail Constant GDP PRC Transport Rail Tons Rail Share of PRC Transport Rail TKM Rail Share of Year (CNY Billion) (Million Tons) (Million) Tons (%) (Billion TKM) (Billion) TKM (%) 2005 5,247.93 17,574.80 2,630.00 14.96 6,525.48 2,104.00 32.24 2006 5,694.01 18,468.67 2,728.72 14.77 6,987.95 2,214.21 31.69 2007 6,149.53 19,381.47 2,827.45 14.59 7,460.21 2,324.43 31.16 2008 6,610.74 20,305.68 2,926.17 14.41 7,938.37 2,434.64 30.67 2009 7,073.49 21,232.97 3,024.89 14.25 8,418.13 2,544.86 30.23 2010 7,568.64 22,225.17 3,123.61 14.05 8,931.47 2,655.07 29.73 2011 8,098.44 23,286.82 3,240.87 13.92 9,480.74 2,791.84 29.45 2012 8,665.33 24,422.80 3,358.12 13.75 10,068.46 2,928.60 29.09 2013 9,271.91 25,638.29 3,475.37 13.56 10,697.33 3,065.36 28.66 2014 9,920.94 26,938.86 3,592.62 13.34 11,370.21 3,202.12 28.16 2015 10,516.19 28,131.67 3,709.87 13.19 11,987.34 3,338.89 27.85 2016 11,147.17 29,396.05 3,828.05 13.02 12,641.50 3,574.27 28.27 2017 11,816.00 30,736.29 3,946.23 12.84 13,334.91 3,809.65 28.57 2018 12,406.80 31,920.18 4,064.41 12.73 13,947.42 4,045.03 29.00 2019 13,027.14 33,163.25 4,182.58 12.61 14,590.56 4,280.42 29.34 2020 13,678.49 34,468.48 4,300.76 12.48 15,265.85 4,515.80 29.58 2021 14,362.42 35,838.97 4,437.76 12.38 15,974.91 4,709.51 29.48 2022 15,080.54 37,277.99 4,574.76 12.27 16,719.42 4,903.21 29.33 2023 15,834.57 38,788.95 4,711.76 12.15 17,501.15 5,096.92 29.12 2024 16,626.29 40,375.47 4,848.76 12.01 18,321.98 5,290.63 28.88 2025 17,457.61 42,041.31 4,985.76 11.86 19,183.84 5,484.34 28.59 2026 18,155.91 43,440.61 5,144.58 11.84 19,907.81 5,774.64 29.01 2027 18,882.15 44,895.89 5,303.40 11.81 20,660.73 6,064.94 29.35 2028 19,637.44 46,409.38 5,462.22 11.77 21,443.77 6,355.24 29.64 2029 20,422.93 47,983.41 5,621.04 11.71 22,258.13 6,645.54 29.86 2030 21,239.85 49,620.40 5,779.86 11.65 23,105.07 6,935.84 30.02 2031 22,089.44 51,322.87 5,964.82 11.62 23,985.89 7,290.95 30.40 Source: Consultant.

2. Existing Transport Infrastructure and Traffic Conditions in the Project Area

65. At its east end, the TZR begins near Taiyuan, Shanxi’s provincial capital, intersecting the existing railway south of the capital at Yuci. The existing Shijiazhuang – Taiyuan Line and the Southern Tongpu Line join the TZR at Yuci; these lines are the major sources of TZR traffic at the eastern end of the alignment. At the western terminus of Yinchuan, there is a connection with the Baotou-Lanzhou Line and at Zhongwei, there is a connection with the Baoji – Zhongwei Line. At 20

Suide, located approximately in the middle of the TZR alignment, there is a connection with the Baoutou-Xian Line.

66. Table 3-3 shows a summary of basic transport sector statistics in the three provinces (Shanxi, Shaanxi and Ningxia) in comparison with China. Currently the main transport infrastructure consists of the National Highway 307; expressways which are completed at each end, with construction planned for the middle section; and existing railway lines. Inland waterway transport in the three provinces is not significant.

Table 3-3: Basic Transport Statistics in Shaanxi, Shanxi and Ningxia, 2003 Percent of Percent of Percent Description National Total Shaanxi Shanxi Ningxia PRC PRC of PRC Population (million) 1,292.27 36.90 2.86% 33.14 2.56% 5.88 0.46% Area (million sq.km) 9.6 0.2 2.08% 0.16 1.67% 0.07 0.73% Length of Transportation Routes (km) Railways in Operation 73,002 3,151 4.32% 3,144 4.31% 792 1.08% Electrified Railways 18,100 1,931 10.67% 1,148 6.34% 669 3.70% Highways 1,809,828 50,019 2.76% 63,122 3.49% 12,456 0.69% Navigable Inland Waterways 123,964 1,100 0.89% 0.00% 26 0.02% Total Civil Aviation Routes 1,749,500 485,438 27.75% 0.00% 28,627 1.64% International Routes 715,300 48,491 6.78% 0.00% 0.00% Petroleum and Gas Pigelines 32,600 n/a 0.00% 0.00% Total Passenger Traffic (1000 persons) 15,873,540 312,070 1.97% 371,890 2.34% 59,042 0.37% Railways 972,600 25,000 2.57% 28,610 2.94% 2,770 0.28% Highways 14,643,350 281,590 1.92% 343,280 2.34% 56,050 0.38% Waterways 170,000 3,210 1.89% 1,080 0.64% 0.00% Civil Aviation 87,590 2,270 2.59% 0.00% 349 0.40% Total Passenger-Kilometers (million pass 1,381,210 41,543 3.01% 24,681 1.79% 5,517 0.40% Railways 478,860 20,784 4.34% 8,460 1.77% 1,955 0.41% Highways 769,560 17,426 2.26% 16,221 2.11% 3,351 0.44% Waterways 6,310 53 0.84% 0.00% 0.00% Civil Aviation 126,320 3,280 2.60% 0.00% 381 0.30% Total Freight Traffic (1000 tons) 15,614,220 358,470 2.30% 1,054,830 6.76% 78,785 0.50% Railways 2,211,780 75,680 3.42% 377,840 17.08% 25,285 1.14% Highways 11,599,570 281,650 2.43% 676,710 5.83% 50,480 0.44% Waterways 1,580,700 1,100 0.07% 260 0.02% 0.00% Civil Aviation 2,190 40 1.83% 12 0.53% 2 0.08% Petroleum and Gas Pigelines 219,970 n/a 0.00% 0.00% Total Freight Ton-kilometers (million tons 5,385,900 86,780 1.61% 119,010 2.21% 26,632 0.49% Railways 1,724,700 68,610 3.98% 85,366 4.95% 19,684 1.14% Highways 709,950 18,079 2.55% 33,620 4.74% 6,309 0.89% Waterways 2,871,600 30 0.00% 0 0.00% 0.00% Civil Aviation 5,790 61 1.05% 24 0.42% 0.00% Petroleum and Gas Pigelines 73,900 n/a 0.00% 0.00% Number of Road Transport Vehicles (100 23,829 540 2.27% 738 3.10% 124 0.52% Passenger Vehicles 3,522 40 1.14% 407 11.56% 60 1.70% Trucks 5,725 96 1.68% 319 5.57% 58 1.01% Source: China Statistical Yearbook 2004; statistical yearbooks for Shaanxi, Shanxi and Ningxia

67. In terms of population density all three provinces show a higher concentration of people per sq. km than the national average. As described earlier, each of these provinces also has a comparatively low density of railway lines per square kilometer of area. The trips per person are lower for all three provinces, compared with PRC total figures. This confirms one effect of the low railway density.

68. Shaanxi’s population is 2.86% of total PRC population. On the other hand freight carried by railways in Shaanxi represent 3.42% of total railway tons and 3.98% of TKM in the nation. In the case of Shanxi tons carried by the railways are 17% of the national total while tonnage of Nigxia is only 1.14% of the national total. These comparisons indicate that Shanxi has a very high proportion of the national rail tonnage; yet a relatively small proportion of the ton kilometers, indicating very short rail hauls. The construction of the TZR will provide a healthy injection of transit traffic over the line, which should increase Shanxi’s proportion of national rail ton kilometers.

3. Freight Traffic on the Proposed TZR

69. The freight traffic forecast for the proposed TZR line is composed of (1) transit traffic diverted from other railway lines; (2); Local/interline traffic diverted from road and (3) generated 21 interline traffic. Transit diverted traffic from rail was estimated using the TERA CR-TEM and interline/local diverted and generated traffic was estimated using results of our industry surveys conducted under this project. Details regarding these industry surveys are described more fully further in the Supplementary Final Report, Volume I, Section 3.

70. The TERA CR-TEM searched all of MOR rail traffic for 2004 moving over all CR O-D pairs in 225 zones throughout China for traffic that would possibly be diverted to TZR. A total of 45.6 million tons was found to move between these 225 zones, with more than 88% of this tonnage moved between 73 zones. This is primarily east-west traffic moving between eastern China and the west.

71. The TZR line crosses Ningxia, Shanxi and Shaanxi, creating a short cut route between east and west of China. The region through which the TZR passes has few railway connections and is an important coal, iron ore and natural gas producing area; the TZR’s additional transport capacity will stimulate industrial development in the region. Traffic on the TZR is projected to be heaviest on the eastern section, between Suide and Yuci. At Suide some traffic is routed to the north and south along the Baoxi Railway, and the two western termini connect the TZR with the Baolan and Longhai Railway lines. There is an imbalance of traffic, with about 13.8 million tons of transit traffic moving to the east between Suide and Yuci and only about 8.6 million tons moving west. Primary transit traffic commodities include containers, steel, fertilizer and coal traffic.

72. Transit traffic diverted to the TZR from other railway lines will come primarily from the Baolan and Longhai lines with some additional traffic from the Baoxan Line. There would be significant distance and transport cost savings as the TZR provides a more direct route for many of the O-D pairs between eastern and western China. This diversion of traffic improves the productivity of the Chinese rail system, as the same tonnage can be moved using significantly fewer ton kilometers, and therefore lower costs. Table 3-4 summarizes these productivity improvements as calculated using the TERA CR-TEM. Based on our evaluation of total CR traffic for all O-D pairs for which traffic routing would be affected by TZR, diversion to TZR would save an average of 241 kilometers.

Table 3-4; Productivity Improvements Attributable to TZR (million ton/km) W/Out TZR With TZR Savings All CR 1,716,794 1,711,293 5,501 (0.32%) Source: Consultant based on TERA CR-TEM runs for 2004 traffic.

73. It can be seen that with the TZR, total ton kilometers on CR for all origin-destination pairs the savings in million ton km is 5,501; or 0.32% of the CR total. This means that if TZR existed as an operating line in 2004, the same number of tons could have been transported during 2004 with 0.32% fewer ton kilometers. This is a significant productivity improvement with considerable positive impacts on the national economy. It will also free up CR line capacity to carry more traffic.

74. The Baolan Line lies approximately 200 km north of the TZR alignment, connecting Baotou and Lanzhou. The Baolan line connects directly with the JIngbao line which connects Baotou with Beijing.. Without TZR, this represents the shortest route between Beijing and northeast China and the West. The Jingbao/Baolan lines are at present carrying nearly 60 million tons of freight and 6.4 million passengers annually. The TERA CR-TEM searched the entire railway traffic data base for 2004 to identify traffic for those O-D pairs that use the Baolan Line. A total of 2,555 O-D pairs were found and a total of 12.1 million tons would be diverted to the TZR if the line existed in 2004. Approximately 75% of this diverted traffic or 9.0 million tons, was diverted from 240 O-D pairs.

75. The Longhai Railway is located approximately 200 km to the south of the TZR alignment and connects Lianyungang and Lanzhou, passing through Xian. This line carries 39 million tons of freight and 25.7 million passengers and several sections are operated in excess of design capacity. Taizhong part of TZR has a total distance of 720 km. It forms a shortcut route between 22 the northwest as one part and the north and northeast as another. As compared with the present transport distance, more than 500 km are saved in specific O-D pairs.

76. Two separate surveys were conducted by the Consultant in October/November 2005. The first survey was focused on shippers in the 6 prefectures and 22 districts along the alignment of TZR. 160 companies responded and provided information. The purpose of the shipper survey was to identify current production and plans for expansion of production capacity for 2010 and 2015, current transport modes used for shipping output to clients and raw materials to the plant, and current and future employment levels. The respondents were also asked the effects on production and modal preference if the TZR were constructed.

77. While we used much of the information provided by these industry surveys to estimate future diverted traffic from road as well as generated traffic, growth rates used were those of the total nation-wide CR freight traffic, by commodity. The implied growth rates from 2004 – 2010 as provided in the industry surveys were much higher than the national growth rates. For example, from the industry surveys the average annual growth rate for outbound coal traffic was 5.3%, for inbound coal more than 25%. National commodity growth rates showed 3.5% and 1%, respectively, during the period 2005-2020 and beyond 2020, respectively. Growth rates for iron & steel were more than 16% outbound and 9.9% inbound, respectively, from the survey; the national average growth rates were 5% during the period 2005-2020 and 4% per year after 2020. Overall, the surveys indicated average annual growth rates of 6.5% for outbound traffic and 25.9% for inbound traffic. We consider our use of the national commodity growth rates to be a more appropriate method as a conservative approach to traffic forecasts.

78. The second survey was of truck drivers (and bus drivers). It was undertaken during early November 2005 along the National Highway #307 at Suide, Dingbian and Liulian. This information included the load they are carrying, fuel consumption, tolls, and particulars about the vehicle such as ownership, type of vehicle and engine, odometer reading, age, etc. The data provided by truck drivers gave the following general characteristics of truck transport in the region:

a. 23% of the trucks are small, 2-axle vehicles; 20% are medium size of 3 and 4 axles; and 57% are large (more than 4 axles). Trucks in the sample average 3.1 axles.

b. 95% of trucks are diesel powered.

c. The average age of trucks is 4.5 years and average use is 35,380 km per year.

d. 8% of the trucks are owned by the driver; 23% by another person; and 68% by a company.

e. Average capacity of trucks is 8 tons and average load is 8.9 tons.

f. 46% of the trucks in the sample were overloaded.

g. The average fuel cost and tolls are CNY 1.17 and CNY 0.28 per vehicle-km, respectively.

h. The average distance for the trip is 294 km and the travel time 8.8 hours (approximately 33 km/hour).

79. Based on the information provided in the survey of truck drivers and other publicly available information, operating costs of truck transport in the region have been estimated. The ton-km truck cost ranges from CNY 0.65 for a 25-ton truck to CNY 0.97 for a 10-ton truck. Compared to the railway tariff, these costs are 8 to 11 times higher.

80. Results show significant modal shifts from road to rail transport with the completion of the TZR. Many towns along the TZR line are far from railway lines and typically rely on high cost road transport to move their products. During the field investigations, the local governments indicated that new railway lines are under consideration and have been included in the provincial and prefecture level 11th FYP (2006-2010). In particular, a spur line from the Luliang station (Shanxi Province) on TZR will be built to Sanjiao to connect large coal mines. This line will be expanded to Lianxian for a total of 55 km. Also in Shanxi 2 spur lines will be built in Fenyang and 4 in Wenshui connecting large enterprises to TZR. Additional rail lines planned for construction from 2006 to 2020 in Ningxia by the provincial government include 500 km of branch lines and 197 sidings.

81. Based on responses from the 160 companies, a total of 77 million tons of outputs were produced using 46.2 million tons of raw materials. This production is estimated to increase to 116.4 million tons by 2015. Shown separately from normal growth of production, these companies have expansion plans to increase output by 18.7 million tons in 2015, if the TZR is constructed. This represents generated traffic attributed to the construction of the TZR. We understand that in any survey, there may be tendencies to overstate future traffic on the part of some respondents, so we have reduced the projected traffic on TZR based on our industry survey results by 50%. We feel this is an appropriate step to ensure a reasonable result of our evaluation.

82. With regard to modal preference, during 2004 some 21.3% of the total output of the 160 companies surveyed was moved by rail based on ton kilometers; by 2010 the rail share would increase to 51%, without TZR. With TZR, the rail share in 2010 would be 78%. The reason for a large increase in the rail share between 2004 and 2010 is due to the large investments the coal mining companies (a large portion of the surveyed businesses) are making. Analysis of the transport of inbound raw materials shows a similar pattern. Existing market share for rail is 42%; with the TZR constructed, by 2010 the rail share would increase to nearly 70%. These results indicate that there is a strong traffic base from industries long the TZR alignment.

83. Table 3-5 presents the summary freight traffic projections for TZR from 2012 to 2031. Generated traffic was estimated by examining the traffic growth projected by the respondents to the industry survey between 2010 and 2015. This time period generally is equivalent to the opening of the TZR line and represents traffic growth that absent the TZR, would not take place. This traffic amounted to approximately 24% of diverted traffic from road transport and was assumed to be phased in over a 5-year period from 2012 to 2016. In 2012 approximately 35% of total TZR traffic is coal. Containers comprise the next largest component of the forecast with 23%; iron & steel amounts to 9.2% of total traffic, oil is 5.4%, fertilizer 3.4% and other traffic 24%.

Table 3-5: Diverted and Generated Freight Traffic Million Tons Billion TKM Diverted Diverted Year Generated Total Generated Total Rail Truck TotalRail Truck Total 2012 19.37 22.93 42.31 2.26 44.57 13.40 8.03 21.42 0.79 22.21 2013 20.39 24.12 44.51 5.65 50.16 14.10 8.44 22.54 2.77 25.31 2014 21.50 25.42 46.92 7.34 54.26 14.87 8.90 23.77 5.34 29.10 2015 22.73 26.83 49.56 8.19 57.75 15.72 9.39 25.11 8.20 33.31 2016 24.07 28.39 52.46 11.72 64.18 16.65 9.94 26.58 12.30 38.89 2017 25.56 30.10 55.65 12.06 67.71 17.67 10.53 28.20 12.74 40.95 2018 27.19 31.98 59.17 12.41 71.59 18.80 11.19 30.00 13.21 43.21 2019 29.01 34.05 63.06 12.78 75.84 20.06 11.92 31.98 13.70 45.68 2020 31.02 36.35 67.37 13.16 80.53 21.45 12.72 34.17 14.23 48.40 2021 32.36 37.64 70.00 13.27 83.28 22.38 13.17 35.55 14.53 50.08 2022 33.79 39.02 72.81 13.39 86.20 23.37 13.66 37.02 14.76 51.79 2023 35.32 40.48 75.81 13.51 89.32 24.42 14.17 38.59 15.01 53.60 2024 36.95 42.06 79.00 13.64 92.64 25.55 14.72 40.27 15.27 55.54 2025 38.69 43.74 82.42 13.76 96.18 26.75 15.31 42.06 15.54 57.60 2026 40.54 45.53 86.08 13.88 99.96 28.03 15.94 43.97 15.83 59.79 2027 42.52 47.46 89.98 14.01 103.99 29.40 16.61 46.01 16.12 62.14 2028 44.63 49.52 94.16 14.14 108.30 30.86 17.33 48.20 16.44 64.63 2029 46.89 51.74 98.63 14.27 112.90 32.43 18.11 50.53 16.77 67.30 2030 49.31 54.11 103.42 14.40 117.82 34.10 18.94 53.03 17.12 70.15 2031 51.89 56.65 108.54 14.53 123.07 35.88 19.83 55.71 17.48 73.19 Source: Consultant estimates.

D. Passenger Traffic Projections

84. The passenger traffic projections for PRC summarized in Table 3-6 imply an annual growth rate of 7.2% and 6.1% for passengers and PKM, respectively, for the 2010-2020 period. The passenger and PKM growth rates after 2020 are assumed at 5% and 5.5%, respectively. The higher growth rate for PKM after 2020 assumes the improved competitiveness of the dedicated high-speed railway network after the national passenger network is completed. These growth rates in passengers and PKM are somewhat similar to the government’s estimate of GDP growth of 7% per annum during the period 2005 to 2020 and between 4% and 5%, thereafter.

Table 3-6: Passenger Traffic Projections for PRC and CR, 2005-2031 Projected PRC Passengers CR Passengers CR Share PRC PKM CR Share PRC Year Population CR PKM (Billion) (Million) (Million) (%) (Billion) of TKM (%) Trips/Person (Million) 2005 1,307.56 17,738.18 1,190.34 6.71 1,681.06 596.35 35.47 13.57 2006 1,313.89 18,352.81 1,320.51 7.20 1,794.26 645.19 35.96 13.97 2007 1,319.63 18,963.99 1,464.92 7.72 1,915.08 698.04 36.45 14.37 2008 1,324.77 19,570.99 1,625.12 8.30 2,044.03 755.22 36.95 14.77 2009 1,329.31 20,173.11 1,802.84 8.94 2,181.67 817.07 37.45 15.18 2010 1,333.26 20,769.61 2,000.00 9.63 2,328.58 884.00 37.96 15.58 2011 1,336.61 21,359.79 2,143.55 10.04 2,485.37 938.03 37.74 15.98 2012 1,339.37 21,942.93 2,297.40 10.47 2,652.73 995.37 37.52 16.38 2013 1,341.54 22,518.30 2,462.29 10.93 2,831.36 1,056.22 37.30 16.79 2014 1,343.11 23,085.20 2,639.02 11.43 3,022.01 1,120.78 37.09 17.19 2015 1,344.08 23,642.89 2,828.43 11.96 3,225.50 1,189.29 36.87 17.59 2016 1,344.47 24,190.67 3,031.43 12.53 3,442.69 1,261.98 36.66 17.99 2017 1,344.25 24,727.81 3,249.01 13.14 3,674.51 1,339.12 36.44 18.40 2018 1,343.44 25,253.60 3,482.20 13.79 3,921.94 1,420.98 36.23 18.80 2019 1,342.04 25,767.31 3,732.13 14.48 4,186.03 1,507.83 36.02 19.20 2020 1,340.04 26,268.24 4,000.00 15.23 4,467.90 1,600.00 35.81 19.60 2021 1,337.45 26,755.66 4,220.00 15.77 4,768.75 1,688.00 35.40 20.01 2022 1,334.26 27,228.85 4,431.00 16.27 5,089.86 1,780.84 34.99 20.41 2023 1,330.48 27,687.10 4,652.55 16.80 5,432.59 1,878.79 34.58 20.81 2024 1,326.10 28,129.69 4,885.18 17.37 5,798.40 1,982.12 34.18 21.21 2025 1,321.13 28,555.90 5,129.44 17.96 6,188.85 2,091.14 33.79 21.61 2026 1,315.56 28,965.01 5,385.91 18.59 6,605.58 2,206.15 33.40 22.02 2027 1,309.40 29,356.30 5,655.20 19.26 7,050.38 2,327.49 33.01 22.42 2028 1,302.64 29,729.06 5,937.96 19.97 7,525.12 2,455.50 32.63 22.82 2029 1,295.29 30,082.57 6,234.86 20.73 8,031.84 2,590.55 32.25 23.22 2030 1,287.34 30,416.10 6,546.61 21.52 8,572.67 2,733.03 31.88 23.63 2031 1,278.80 30,728.95 6,873.94 22.37 9,149.92 2,883.35 31.51 24.03 Source: Consultant estimates.

85. Passenger projections for TZR were made for transit passengers, now traveling on other rail lines as well as local/interline passengers that now travel by bus. In addition, we have projected that there will be some generated passenger traffic, composed of local and interline passengers. The estimates of the transit passengers were made using the TERA CR-TEM and for local/interline passengers we utilized results from the survey of bus passengers at the main bus stations at Yinchuan, Yulin, and Taiyuan.

86. Based on results of the TERA CR-TEM the total passenger kilometers for all O-D pairs affected by the TZR would be 7,131 thousand compared to 7,863 thousand without TZR. This amounts to nearly a 10% reduction in passenger kilometers. The total reduction in CR passenger kilometers amounts to 0.13 percent based on total CR passenger kms without TZR in 2004 (546,132 million PKM); and if TZR existed during 2004 (545,400 million PKM). Similar to the productivity improvements due to the reduction in freight ton kilometers, this is an important productivity improvement for CR.

87. Based on the TERA CR-TEM’s results, the average distance saved by each passenger diverted from other rail lines to TZR is 205 kilometers. While we consider that the passenger forecasts produced by the model as a reasonable estimate of the potential of TZR, we realize that there are always margins of error in any prediction of the future. There may be other factors that would impact the number of passengers diverted from other CR routes, such as line congestion, traffic diversion to other modes, etc. In order to minimize the negative impact of these possible 25 variations in projected traffic on TZR, we have reduced the forecasted traffic from the model by 30%, for the purpose of our evaluation of the project.

88. The Consultant conducted passenger surveys at bus stations in Taiyuan, Yinchuan and Yulin during early November, 2005. Based on these interviews, information was obtained regarding travel routes, preferences, economic and employment status. The survey revealed that bus passengers travel relatively long distances, likely a reflection of the fact that the region is not well served by railways. For example, bus passengers at Taiyuan travel an average of 118 km per trip, those at the Yinchuan terminal travel and average of 333 km, while those in Yulin travel 358 km per trip. The average of these three locations is 270 km.

89. Based on our forecast of passenger traffic, a total of 6.23 million passengers are projected for 2015. The distribution of this traffic for TZR is 41% diverted from rail (transit), 59% local and interline. Details of these projections for each of the years, including PKM, is shown in Table 3- 7.It should be emphasized that our passenger traffic projections are not solely based on passenger survey data. Modal choice by passenger was only one input we used in addition to the survey of business establishments (which provided the basis of generated passenger traffic projections), and analysis of rail passenger traffic patterns in the region through use of the CR- TEM (which provided the basis of diverted traffic projections from other rail lines).

IV. TECHNICAL CHARACTERISTICS

A. Introduction

1. General Evaluations of TZR

90. TSDI has been responsible for the route survey and design of the TZR. The Feasibility Study (FS) was completed by TSDI in May 2005. A revised FS was completed in September 2005 and is the basis of this report. The September 2005 FS was approved by the NDRC on January 17, 2006. The route alignment centerline staking for the preliminary design was completed on November 6, 2005. The initial design has been completed by TSDI and is under review by MOR.

91. The TSDI examined several basic route alignments and selected the proposed alignment based on construction cost, environmental and socio-economic considerations, including such factors as cultural relics, historical sites, ancient trees, wetlands, land use, preservation of agricultural land, access to mineral resources, and resettlement impacts. While TSDI identified as many as 80 route alternatives, the FS addresses 8 major alternatives that have the greatest technical and cost impact on route selection: (i) Taiyuannan/Yuci to Qingxu; (ii) Fenyang to Liulin North; (iii) Wangyingzhuan to Yihezhen; (iv) Wupu to Suide; (v) Zizhou to Dijian; (vi) Dingbian to Niumaojing; (vii) Hongjingzi to Honggouyao; and (viii) Zhongning to Liujiazhuang (near Zhongwei). These alternatives are discussed in greater detail in the Consultant’s Supplementary Final Report, Volume I, Section 4.3.

92. The technical design takes into consideration that the majority of TZR traffic will be freight trains, although a significant number of trains will serve passengers. The route location, track alignment and design standards take into account the importance of integrating TZR train operations with other railway lines in the region. This includes not only the existing mixed freight and passenger lines but also the dedicated high-speed passenger lines which will be constructed. The Consultant has conducted a comprehensive review of project documents (Feasibility Study Reports and Preliminary Designs) made available by TSDI, and a series of meetings have been conducted with the relevant engineers and managers involved in the planning and implementation of the TZR Project. Additional data was collected through a series of meetings with county, prefecture, and provincial government officials, as well as Railway Administration officials. All technical details provided in this report are essentially derived from the September 2005 FS and have been reviewed and clarified with TSDI and MOR. 26

Table 3-7: Passenger Traffic Projections for TZR Passengers (Million) PKM (Million) Diverted Diverted Year Total Total Generated Total Generated Total PKM Rail Road Passengers Rail Road Diverted Diverted 2012 2.05 2.60 4.65 0.13 4.78 1,442 426 1,868 21 1,888 2013 2.20 2.79 4.99 0.25 5.24 1,545 457 2,002 41 2,043 2014 2.36 2.99 5.35 0.38 5.72 1,657 489 2,146 62 2,208 2015 2.53 3.20 5.73 0.50 6.23 1,776 525 2,301 83 2,383 2016 2.71 3.43 6.14 0.63 6.77 1,904 562 2,466 103 2,569 2017 2.91 3.68 6.58 0.67 7.26 2,041 603 2,644 111 2,754 2018 3.11 3.94 7.06 0.72 7.78 2,188 646 2,834 119 2,953 2019 3.34 4.23 7.57 0.78 8.34 2,345 693 3,038 127 3,165 2020 3.58 4.53 8.11 0.83 8.94 2,514 743 3,257 136 3,393 2021 3.84 4.86 8.70 0.89 9.59 2,695 796 3,492 146 3,638 2022 4.03 5.10 9.13 0.94 10.07 2,830 836 3,666 153 3,819 2023 4.23 5.36 9.59 0.98 10.57 2,971 878 3,849 161 4,010 2024 4.44 5.62 10.07 1.03 11.10 3,120 922 4,042 169 4,211 2025 4.66 5.91 10.57 1.08 11.65 3,276 968 4,244 178 4,422 2026 4.90 6.20 11.10 1.14 12.24 3,440 1,016 4,456 186 4,643 2027 5.14 6.51 11.65 1.19 12.85 3,612 1,067 4,679 196 4,875 2028 5.40 6.84 12.24 1.25 13.49 3,792 1,120 4,913 206 5,118 2029 5.67 7.18 12.85 1.32 14.17 3,982 1,177 5,159 216 5,374 2030 5.95 7.54 13.49 1.38 14.87 4,181 1,235 5,416 227 5,643 2031 6.25 7.91 14.17 1.45 15.62 4,390 1,297 5,687 238 5,925 Source: Consultant estimates. 27

2. Basic Approach to TZR Design

93. MOR has a comprehensive series of railway design standards that cover a full range of infrastructure and operating criteria. These standards are updated on an “as needed” basis and are based on current PRC railway technology. These standards are used by all MOR design institutes and by any organization that is designing track over which CR trains will operate. Should the design organization determine a need to deviate from these standards, there is an exemption process for obtaining a waiver. In its design approach TSDI has complied with national government regulations for environmental and cultural protection, land acquisition and resettlement. The principal requirements of the TZR include the following general characteristics.

94. High-Speed. The maximum design speed for TZR will be 200 km/hr. While this does not approach the 350 km/hr design speeds of the dedicated high-speed passenger lines in China, it nevertheless will be sufficiently high that, when combined with frequency of service and relatively low cost, will appeal to the general passenger transport needs of the region. The design of bridges, tunnels, and stations will allow for passenger trains to operate at the maximum speed of 200 km/hr throughout the route. The design speed is also more than adequate for the needs of freight service.

95. Safety and Reliability. The track geometry will have long, sweeping curves both horizontally and vertically with moderate super-elevation favorable to operating both freight and passenger trains on the same track. These mild transitions will provide a comfortable as well as safe ride for passengers without compromising transit time. Train operations will utilize automatic and semi-automatic block control systems incorporated within a CTC command and control system. This type of signaling is a common and proven system for safe train operations throughout much of the CR network.

96. High Capacity for Mixed Operations. Train traffic on TZR will be predominantly in freight service. The priority order of train scheduling is: passenger trains, coal trains, container trains (future), and general freight. With this in mind, it is important that TZR is designed not only for optimum line capacity but also for train passing capability to keep the overall traffic flow fluid while maintaining the schedules for high-priority trains.

97. Adjacent Railway Lines. The TZR design integrates smoothly with the operations of adjacent rail lines in the region. The TZR will link Yinchuan and Zhongwei at the west end with Taiyuan and Yuci at the east end. The interface, including physical connection, signaling and communications between TZR and adjoining rail lines is designed to be smooth and seamless to provide uninterrupted transit for both freight and passenger trains.

B. Technical Characteristics

1. Topography and Land Forms

98. The TZR route will pass through three provinces: Shanxi, Shaanxi and Ningxia. From Taiyuan to Zhongwei the line will pass successively, east to west, through three major geomorphic regions: the Central Shanxi Basin, the middle south section of the Luliang Mountain Range, and the Shaanxi-Gansu Basin. The section from Taiyuan to Wenshui falls into the Central Shanxi Basin where most of the topography is flat and vast, and includes alluvial plains, foothill dip plains and river valleys. At the west perimeter of the basin are eroded loess hills with gullies.

99. The section from Wenshui to Wangjiahui falls into the south section of the Luliang Mountain Range where there are mainly medium and low eroded mountains and hills with scattered gully development. The line segment of Wangjiahui-Yingshuiqiao-Yinchuan falls into the Shaanxi-Gansu-Ningxia Basin. This portion of the basin consists mainly of low mountains and hills in the Loess Plateau of North Shaanxi with occasional gully development. At the margin of the Maowusu Desert the landform features lakes and marshes. In the Yellow River alluvial plain and river valley terrace the landform is gentle with some distribution of salt ponds and lakes. 28

100. The areas along the line from Taiyuan to Zhongwei and Yinchuan belong to climatic zones that range successively from warm sub-humid to mild sub-arid to hot and arid. Subject to the control of monsoon circulation, the seasons are distinct with short summers and long winters. For most of the route summers are hot and humid, while winters are cold and dry. In terms of overall effect of climate on railway engineering, these areas are considered to be cold zones.

2. Engineering Geologic Features

101. The Consultant’s Supplementary Final Report, Volume I, Section 4 includes a comprehensive discussion on formation lithology, geomorphic characteristics, and engineering geology along the alignment. The following poor geologic conditions are observed along the TZR route:

102. Blown Sand. The blown sand along the route is mainly distributed in the vast areas west of Jingbian with altitude from 1000 to 1300 m. The landform presents a hypsographic feature with relative difference of altitude from 5 to 20 m. The sand dunes mainly appear in the shape of new moon and chain and are fixed, semi-fixed and a small amount of wandering sandlots and sand dunes. The windward slopes of sand dunes are 10o -15o and the leeward slopes are 30o - 60o. The extent of hazard of the blown sand is from light to medium. The route bypasses wandering sand dunes and sandlots. Adequate wind breaking and sand fixing measures are incorporated in the design in critical areas.

103. Coalmine Exhausted Areas. There are coalmines and coal pits at a number of places along the route. Passing through in the vicinity of these, the route is subject to the problem of exhausted areas and overstock of coal. There are coalmine exhausted areas distributed in the areas of Lishi and Liulin, in the Taiyangshan (Taiyang Mountain) Development Area of Ningxia, and Ciyaopu (Yinchuan Connecting Line) of Ningxia. And there are coal pit exhausted areas distributed along the banks of Dali River and Xiaoli River but the route circumvents the exhausted areas except for the section near Lishi that passes through the coal pit exhausted area of Gaoyawan, requiring proper treatment on the exhausted area.

104. The section of the route that passes through the Luliang Range and North Shaanxi Loess Plateau encounters the development of adverse geologic features including land slip, land fall, collapse, dislocation, karst and loess caving in, etc. which influence the stability and safety of the route. Although the route circumvents such adverse geologic features, proper treatment has been incorporated in the design in areas close to the route.

105. Earthquake Liquidation. There are seismic areas with seismic peak ground acceleration greater than 0.10g (Richter VII-VIII) along the route of which there is the problem of earthquake liquidation in the fine sand, silt sand and silt soil layers in part of the areas from Yuci to Wenshui, Hongliugou and west of Yujiayuan. Proper measures have been taken in the design of the Project according to specific conditions at each site.

106. Karst. There is karst phenomenon in part of the limestone and dolomite of medium and low mountains and it is serious in a few locations where there are broken rock masses and solution cavities with diameters of greater than 7.5 m which are filled with hard to hard-plastic cohesive soil with gravel inclusion. Proper treatment measures have been taken in the design of the Project according to specific conditions at each site.

107. Young Loess. There is a wide distribution of young loess with collapsibility along the route. In terms of regional attribute, the young loess can be classified into young loess in the Shanxi region, young loess in the north Shaanxi region and the young loess in the north marginal areas.

i. Young loess in the Shanxi region. Mainly distributed in the area west of Central Shanxi Basin and east of Mucun 29

ii. Young loess in the Shaanxi region. Mainly distributed in the area west of Mucun and east of Luhe River. Mostly aeolian deposit (Q3eol) of loess with self-weight collapsibility. The thickness of the collapsible loess is normally greater than 10 m with collapsibility of δs=0.015 - 0.081. The grade of foundation collapsibility is normally II and III, sensitive wet sink that influences the construction of the railway.

iii. Young loess in the northern marginal areas. Mainly distributed in the area west of Luhe River, mostly aeolian deposit (Q3eol) of loess with non-self-weight collapsibility. The thickness of the collapsible loess is normally smaller than 5 m with collapsibility of δs=0.032 - 0.124. The grade of foundation collapsibility is normally I, II and partially III.

108. The section of route passing through the collapsible loess land block has been provided with water discharge measures and embankment protection measures in the design.

109. Soft soil. Soft soil is mainly distributed in the Central Shanxi Basin, from Taiyuan- Changzhi Expressway to Datong -Yuncheng Expressway. The thickness is 2.2 - 4.1 m and burial depth 10.3 - 18.3 m. It is characterized by high water content, high porosity ratio, high compaction, poor water permeability and low strength. Proper measures have been taken according to engineering conditions at each site.

110. Salinized soil. Sporadically distributed along the route, mainly distributed in the vicinity of Yanchi of Ningxia. It has influence on the roadbed works and has been considered in the design.

111. Expanded soil (rock). This is only partially distributed in the form of mainly cohesive soil of the lower series of Quaternary System and cohesive layer and mudstone of Tertiary System. In addition, the gypsum-containing layer of the Tertiary System has the property to expand when absorbing water and to contract when losing water. Consideration of this and its influence on the roadbed works have been incorporated in the design.

112. Spongy soil. This is mainly distributed in the Central Shanxi Basin and the area west of Jingbian. The lithology of the spongy soil in the Central Shanxi Basin is mainly cohesive soil with basic bearing capacity of surface layer generally lower than 150 Kpa. The lithology of the spongy soil in the area west of Jingbian is mainly surface aeolian sand which is mostly loose and has been included in the design.

113. Gypsum formation. This is mainly distributed in the vicinity of Hongjingzi, being the bottom layer of the Oligocene Series of the Tertiary System. Consideration of its affect on the roadbed works has been incorporated in the design.

3. Hydro Geologic Features

114. The rivers along the line mainly belong to the water system of the Huanghe River and its branch Weihe River, Yihe River and Luohe River, only the Jialuhe River and Suoxuhe River between Xingyang and Zhengzhou belong to the Huaihe River Water System. Surface water in the rivers is developed, and the water quality in all the rivers has no erosion on concrete.

115. Groundwater types along the line mainly are loose-rock-soil type pore pyretic water and pore pressure water; its main sources are atmospheric precipitation, river water, vertical permeation of artificial surface water body and side supply of basic rock crevice water. Due to the difference of the geomorphic units, the hydro geologic condition of the bearing stratum of pyretic water is also different. For the surface water and groundwater along the line, water quality generally belongs to heavy calcium carbonate-type, calcium-magnesium-type and calcium- sodium type water, its mineralization is less than 0.5 g/l, so it is classified as fresh water, which has no erosion on concrete. Local area is polluted by industrial wastewater, water and soil has weak to medium sulfate erosion. 30

4. Stations and Segment Lengths

116. An alignment map is provided in Section 1. Table 4-1 lists all stations related to the TZR project whether located on the newly constructed TZR line or on an adjoining existing railway line. Table 4-2 summarizes the route length by section.

Table 4-1: Stations by Type and Location along the Mainline No. Station Name Km Post Type of Station 1 Taiyuannan ShiDk 220+500 Existing Station-Expansion 2 Yuci CK0+000 Existing Station-Expansion 3 Xirong CK14+400 New Freight & Passenger 4 Qingxu CK48+050 New Freight & Passenger 5 Jiaocheng CK61+150 New Freight & Passenger 6 Wenshui CK72+400 New Freight & Passenger 7 Fenyang CK86+250 New Freight & Passenger 8 Chujiagou CK103+100 Passing 9 Wucheng CK137+450 Passing 10 Lüliang CK166+800 New Freight & Passenger 11 Liulinbei CK190+500 New Freight & Passenger 12 Wupu CK226+000 New Freight & Passenger 13 Yihezhen CK241+500 New Freight & Passenger 14 Suide CK264+392 Existing Station-Expansion 15 Zizhou CK294+700 New Freight & Passenger 16 Zhoujiajian N/A Passing 17 Weijialou CK330+150 New Freight & Passenger 18 Dijian CK365+850 New Freight & Passenger 19 Yangqiaoban CK382+850 Passing 20 Jingbian CK406+500 New Freight & Passenger 21 Ningtiaoliang CK436+900 Passing 22 Anbian CK463+600 Future 23 Zhuanjing CK494+700 Passing 24 Dingbian CK511+550 New Freight & Passenger 25 Gengerzhuang CK521+900 Future 26 Banyao CK531+300 Passing 27 Hongliugou CK544+000 New Freight & Passenger 28 Hongjingzi CK557+000 Passing 29 Songjiapu CK570+000 New Freight & Passenger 30 Zhuxinzhuang CK578+000 Passing 31 Wangshuikang CK591+800 Passing 32 Laoyanchi CK603+600 Future 33 Taiyangshan CK614+300 New Freight & Passenger 34 Honggouyao CK626+000 New Passenger 35 Shitao CK640+000 Passing 36 Maotoudun CK649+500 Passing 37 Hongsipu CK661+050 New Freight & Passenger 38 Xiaoyanchi CK671+500 Passing 39 Shuangjingzi CK685+800 Future 40 Zhongnindong CK695+600 New Passenger 41 Pangying CK707+000 Passing 42 Huangyangwan CK659+313.39 Existing-Relocate 43 Liujiazhuang BaolanK669+184.32 Existing-Relocate 44 Zhenluopu BaolanK675.490.43 Existing-Demolish 45 Zhongwei BaolanK688+825 Existing 46 Yingshuiqiao BaolanK696+741 Existing 47 Wangerzhuang LCK528+000 Future 48 Dougou LCK533+800 Passing 49 Yanchi LCK546+200 New Freight & Passenger 50 Tianjizhang LCK553+000 Future 51 Niumaojing LCK594+100 New Freight & Passenger 52 Jijiajuan LCK606+800 Future 53 Shijiamiaozi LCK617+600 Passing 54 Hezhuangzi LCK630+000 Future 55 Guyaozi LCK639+500 New Passenger 56 Lijiaxinzhuang LCK651+600 Future 57 Yuejiagou LCK665+200 Passing 58 Xinyuan LCK673+000 Future 59 Lingwu LCK689+000 New Freight & Passenger 60 Yongning LCK695+900 New Passenger 61 Xianfeng LCK705+800 Future 62 Pingjipu BaolanK537+750 Existing Station-Expansion 63 Shuangqukou BaolanK530+372.7 Existing 64 Yinchuan BaolanK524+514 Existing Source: Compiled by the Consultant from data provided by TSDI.

Table 4-2: Summary Route Length for TZR Single-track route length (Taiyuannan to Xirong) = 19.55 Km (excluded in route mileage summary) Double-track route length (Yuci to Xirong) = 14.40 Km Double-track route length (Xirong to Dingbian) = 493.938 Km Single-track route length (Dingbian to Zhenluopu) = 239.196 Km Single-track route length (Dingbian to Pingjipu) = 192.355 Km Total route length of new construction included in the cost of the TZR project = 508.338 Km (double-track) + 431.551 Km (single-track) = 939.889 Km Source: Consultant based on data provided by TSDI.

117. Originating at Taiyuan and Yuci in the east and terminating at Zhongwei and Yinchuan in the west, the TZR will be the first east-west rail line connecting the three provinces of Shanxi, Shaanxi, and Ningxia. This route is a logical addition to the north central CR network. At Yinchuan and Zhongwei TZR connects with the Baotou-Lanzhou (Bao-Lan) line. At Taiyuan TZR connects with two southerly lines, Taiyuan-Jiaozuo and Taiyuan-Fengling Du (which dead ends at the Yellow River); one northerly line, Taiyuan-Datong; and one existing east-west line, Shijiazhuan-Taiyuan (Shi-Tai line). TZR will also have a future linkup to the dedicated high-speed passenger line between Shijiazhuan and Taiyuan.

5. Main Technical Standars

118. The main technical standards governing the design of TZR are as follows:

i. Configuration of mainline tracks: double-track east of Dingbian and single- track west of Dingbian. Axle loading will be 25 tons. ii. Maximum design speed: 200 km/h. iii. Spacing between centerlines of double mainline tracks: 4.4 m, including bridges and tunnels. iv. Maximum grade: 0.6 percent on route segments operated with 1 locomotive per freight train; 1.3 percent on route segments operated with 2 locomotives per freight train. v. All passenger trains will operate with 1 power unit on all segments. vi. Minimum radius of curve: For general route sections – 3500 m; for difficult route sections – 2800 m. Minimum length of curve: 140 m in normal conditions; 110 m in difficult conditions. vii. Effective length of station arrival/departure tracks: 1050 m at Suide and east (reserving 1080 m for twin locomotives), 850 m west of Suide (reserving 880 m for twin locomotives) and reserving 1050 m for the future (reserving 1080 m for twin locomotives). viii. Initially, maximum train length will be 850 m, with possible future operation of 1050 m trains. ix. Design Traction Power: Electric AC 27.5 KV (peak load). x. Type of locomotive: 6-axle, SS7 for freight trains; 6-axle, SS9 for passenger trains; and possible limited use of EMU trains in the future. Design traction tonnage is 4,000 tons (reserved for 5000 tons) for the routes west of Suide and 5000 tons for Suide and east.

xi. Train operation method: Centralized Traffic Control (CTC) with Automatic Block Signals (ABS) on double-track main lines; Semi-Automatic Block Signals (block to block control) on single-track lines. 32

a. Line

119. The total route length of new construction included in the investment cost of the TZR project is 939.889 km. At the east end the TZR begins at the center of station at Yuci marshalling yard (Shitai K208+695 = TZR CK000+000) and at the Taiyuannan Station. The double-track line from Yuci via Xirong Junction (CK14+400) to Dingbian (CK511+550) is 508.338 km. There is an additional single-track route segment (reserved for double-track) between Xirong Junction and Taiyuannan (south) Station that consists of 19.55 km of new construction, but this section is not included in the TSDI route length. Rather it is treated as part of the Taiyuan-Yuci-Xirong terminal area construction, and its track, bridge and other infrastructure costs are included in TZR costs.

120. From Dingbian the line diverges into two single-track lines. Dingbian to Huangyangwan (CK716+040 = Baolan K659+313.39) is 223.016 km. This represents the end of the TZR “line”; however, an additional 16.18 km of new single-track construction on the Baolan line between Huangyangwan and Zhenluopu is included in the investment cost of the TZR project. Therefore, the total route length from Yuci to Zhenluopu, excluding the Xirong-Taiyuannan segment and the Baolan segment is 731.354 km. The single-track connecting line from Dingbian to Pingjipu (LCK718+000 = Baolan K537+750) is 192.355 km. There is no additional TZR investment cost associated with the Baolan line between Pingjipu and Yinchuan.

121. The total route length, double-track and single-track, associated with TZR investments is therefore 939.889 km. The line will consist of 69.2 percent tangent track, and 30.8 percent curved track. Of the track in curved sections approximately 67 percent will have minimum radius curves.

122. The TZR route will have 388 bridges with a combined length of 188.16 km, which represents 20 percent of the entire route length. Additionally, there are 2,073 culverts totaling 60,815 transverse linear meters and 153 highway overpasses (flyovers) totaling 96,750 m2 of surface area.

123. There will be 184 new tunnels on TZR with a total length of 190.89 km. Of these, 158 tunnels are in double-track line and 26 are in single-track line. The total tunnel length is 20.3 percent of the total route length. Tunnels and bridges combined total 40.3 percent of the length.

124. The TZR route is to be closed off or fenced throughout its entire length as a protection for the general population. Total fence length for the project will be 1,103 km. Some sections of the route, including bridges, tunnels, and remote and mountainous areas not generally accessible to the public will not require fencing.

125. To satisfy the maximum train running speed of 200 km/h and improve passenger comfort, the plan and profile of TZR are designed by using large radius curves, longer grade lengths, large radius spirals, and minimum track super-elevation. Additionally, within reduced-speed route segments and through connecting lines, the design standards used will correspond to the actual train running speed.

b. Track

126. The mainline route of the TZR will be constructed with four main categories of line structure: (i) normal Class I ballasted track on subgrade (560.84 km); (ii) ballasted track on bridges (188.16 km); (iii) ballasted track in tunnels (109.2 km); and (iv) non-ballasted slab track in tunnels (81.69 km). The track design tonnage specifications for TZR are:

i. Average total weight per freight car: 78.998 tons

ii. Average net tonnage of lading: 56.865 tons

iii. Design maximum axle loading: 25 tons 33

127. Rail: TZR mainline track will be constructed with 60 kg/m continuously welded rail (CWR). In tunnels greater than 1 km rail is to be 60 kg/m corrosion resistant, hardened-steel CWR. All non-CWR rail will be joined with Grade 10.9 high-strength joining bolts and Grade 10 high- strength nuts and plain washers at rail joints. Insulated joints will be of the cementing type; the rail on each side of the joint shall be the same type and made with the same steel, meeting the requirements in “Technical Specification of Cementing Insulating Joint Steel Rail” (TB/T2975).

128. Sleepers: Sleepers shall be type III reinforced concrete with backing shoulder. The length is 2.6 m. Elastic sleepers, with or without backing shoulder, shall be used at bridge sections that require high demand damping and noise reduction. Sleepers will be spaced at the rate of 1,667 sleepers per kilometer (600 mm center to center sleeper spacing). At the crotch, 2.6 m-long, Type III reinforced concrete crotch sleepers with backing shoulders shall be used for a distance of 50 rail lengths before and after the crotch. Type II elastic fasteners shall be used for crotch sleepers.

129. Fasteners: These shall be type II and the cushioning pad under rails shall be the rubber cushion type (10 mm thick) with static stiffness of 50~80 KN/mm.

130. Ballast: The bed of the railway shall meet the following requirements: Material shall be grade I crushed stone. Materials shall meet the national standard “Crushed Stone Ballast on Railways” (TB/T2140) and “Crushed Stone for Bedding of Railways” (TB/T2897). The ballast bed under sleepers shall be 30 cm thick. For single line railway, the top width shall be 350 cm with a shoulder 15 cm high and a slope of 1:1.75. The top width of double line railway shall be designed as two singles. For track sections with type III sleepers, the top surface of bed shall be at the same level as the middle sleeper. For sections with crotch sleepers or bridge sleepers the top surface of bed shall be 3 cm lower than the top of the sleeper

c. Turnouts and Crossovers

131. All mainline turnouts will be 60 kg/m, No.12. Marshalling yards and non-mainline station tracks will utilize 60 kg/m, No.9 turnouts. Crossover tracks between double-track main lines will be located only at designated stations. There are no intermediate crossover tracks between stations, and there are no high-speed turnouts on either single track or double track lines.

d. Subgrade

132. The largest proportion of the TZR line is located in mountainous areas. The section between Yuci and Wenshui lies in the Fenhe plain, and a small section west of Yangqiaoban is in an area of severe wind drift sand. The subgrade is characterized by large quantities of cut and fill, much of which is in rock sections, as would be expected due to the long route length through mountains. Total earthwork is 81.98 million cubic meters, excluding work at stations, bridges and tunnels. A summary of the type, number and combined length of various types of slope protection are listed in Table 4-3.

Table 4-3: Type and Length of Subgrade Protection Type of Subgrade Number of Locations Total Length (m) Embankment slope 371 158,069 High embankment 29 5,388 Immersed embankment 6 1,430 Cut slope 470 12,054 Wind drift sand 296 226,150 Saline soil 5 3,289 Gypsum soil 2 4,283 Soft subgrade soil 3 1,844 Seismic liquefaction 64 55,214 Retaining walls 55 15,914 Source: TSDI

e. Bridges and Culverts

133. Table 4-4 shows the total number and combined length of railway bridges on the TZR route by size of bridge. The total bridge number includes the two sub-sections of the TZR route: Taiyuan-Zhongwei and Dingbian-Yinchuan. The table also distinguishes between the single-track and double-track route segments. In addition to the railway bridges, there are 153 highway bridges with a combined surface area of 96,750 square meters that will cross TZR tracks. Drainage structures under TZR tracks include 2,073 culverts with a combined transverse length of 60,815 linear meters. Design against flooding is in accordance with MOR’s “General Design Specification for Railway Bridges and Culverts”, and the frequency of 1/100 years is used except for bridges over the Yellow River, which will use a frequency of 1/300 years.

134. There will be no “at-grade” road crossings of the TZR tracks. All crossings will be grade separated in the form of overhead bridges or underpass bridges. All roads in parallel with the TZR alignment that interfere with construction, or cause difficult crossing conditions will be relocated, when feasible. Existing highways will be relocated at 6 locations totaling 13.85 km.

Table 4-4: Distribution of Bridges on TZR (Number - m) Route Number of Bridges / Total Length (m) Ratio of Item Section Length 20m < L ≤ 100m < L ≤ Bridge to Line No. L > 500 m Total (km) 100 m 500 m (percent) 1 Taiyuan~Zhongwei 747.534 145-12,310 133-33,022 66 -100,320 344 -145,652 19.5 Yinchuan 2 192.355 13 - 1,328 17 – 4,918 14 - 36,264 44 - 42,510 22.1 Connecting Line Total TZR 939.889 158 -13,638 150 -37,940 80 -136,584 388 -188,162 20.0 Source: TSDI.

f. Tunnels

135. Table 4-5 provides a summary of the combined number and lengths of various size tunnels for both single and double track lines on the TZR route. Tunnels greater than 6,000 meters in length will be constructed with non-ballasted slab track. There are two “super long” tunnels (greater than 10,000 m): the Luliangshan Tunnel (CK120+675) is designed as two separate single tunnels each 20,710 m in length; and the Yihezhen Tunnel (CK233+985) is designed as a double-track tunnel 11,830 m in length. There are three “long tunnels” (less than 10 km but greater than 6 km) that require slab track construction: Lishi tunnel (9,480 m double- track), Dianping #1 tunnel (8,000 m double-track), and Qingshuigou tunnel (6,130 m double-track). All slab-track tunnels are located east of Dingbian in double-track line.

Table 4-5: TZR Tunnels Length of Number Length (m) No. Remarks tunnel (L) Single track Double track Single track Double track 1 L ≤ 0.5km 1 104 220 24,280 Short tunnel 2 0.5km < L ≤ 3km 2 45 1,170 49,367 Medium tunnel 3 3km < L ≤ 10km 2 5 9,485 27,550 Long tunnel 4 L > 10km 1 × 2 1 20710 × 2 11,830 Super long tunnel Total 7 155 52,295 113,027 Source: Consultant from information provided by TSDI.

g. Sound Barriers

136. In locations where the TZR line passes near residential areas, commercial areas, and institutional areas such as schools and hospitals, sound reducing walls will be constructed on one or both sides of the railway line as dictated by environmental conditions. The walls, constructed of synthetic sound-absorbing materials, will be 3.0 meters high and 0.2 meters thick. 35

h. Stations and Marshalling Yards

137. The designation of TZR stations and the distance between stations is based on the alternative route decisions and recommendations of TSDI in the September 2005 Feasibility Study. The stations for the TZR route are listed in Table 4-1. The TZR station spacing distances are:

♦ The greatest distance between any two TZR stations is 38.20 km.

♦ The least distance between any two TZR stations is 5.14 km.

♦ The average station spacing for the entire TZR route is 19.20 km.

♦ The average station spacing on the double-track line from Yuci to Dingbian is 26.00 km.

♦ The average station spacing for the single-track line from Dingbian to Yingshuiqiao is 15.40 km, and for the single-track line from Dingbian to Yinchuan is 15.24 km.

138. The location of stations within communities will strive to comply with each city’s codes for planning, construction and development. The depot facilities will be as close as possible to the station’s central urban district, thus providing maximum convenience for the greatest number of passengers. The selection of route alternatives and station locations were partially based on the routes and stations that would serve the greatest number of people in each region.

139. Typical track configuration at stations will have 1 or 2 mainline tracks, depending on the route segment, and 2 or 3 receiving and departure (R/D) tracks of which 1 or 2 will be designated for freight trains. At some stations an additional track may be constructed for connection to industrial tracks, commercial tracks for loading and unloading local freight, and branch lines. Shunting of freight trains will occur at four major marshalling yards on the TZR route: Yuci, Suide, Yinchuan and Yinshuiqiao.

i. Electrification

140. Traction power supply for the TZR line will be AC single phase industrial frequency (50Hz) with 25kV rated catenary system. The power traction will be class 1 load with centralized power supply for traction substations. Each substation will be powered by two reliable sources of 110kV. The wiring of the traction transformer will be VV with fixed standby. Required power and consumption by province is shown in Table 4-6.

Table 4-6: Required Power and Consumption 2020 2030 Province and Annual Annual Required Required Power region Consumption (100 Consumption Power (10000 kW) million kWh) (100 million kWh) (10000 kW) Shanxi 3.75 6.3 5.03 8.4 Shaanxi 3.36 5.6 4.58 7.6 Ningxia Hui 1.37 2.3 1.93 3.2 Autonomous Region Total 8.5 14.2 11.5 19.2 Source: Consultant from information provided by TSDI.

j. Electric Traction Locomotives: Operation and Maintenance

141. Two types of electric traction locomotives are planned for operation on the TZR: SS7 for passenger trains and SS9 for freight service. Both types are equipped with 6 powered axles. All passenger trains on the TZR will operate with a single SS7 unit regardless of gradient conditions. Freight trains will operate with a single SS9 locomotive west of Suide and two SS9 locomotives east of Suide.

142. TZR will manage, operate, maintain and service all electric traction locomotives on the TZR route. Locomotive inspection, servicing and repair will be performed at Taiyuanbei, Yucibei (turnaround point), Suide (pusher locomotives at the turnaround point), Zhongwei (locomotive sub-depot), Yingshuiqiao depot, and Yinchuan depot. Initially passenger service on the TZR will operate with conventional electric traction locomotives and rolling stock. At some future time consideration will be given for the operation of EMU passenger trains.

k. Rolling Stock Inspection and Maintenance

143. Passenger car repair and maintenance will occur at the existing facilities in Taiyuan and Yinchuan/Shizuishan. A small facility at Suide will have both freight car inspection and passenger car inspection but will perform only minor repairs. Taiyuan has 12 repair tracks with platforms and 18 tracks for technical servicing and preparation of passenger coaches.

144. The Taiyuanbei depot has 15 freight car repair platforms and the Taiyuanbei station has 24 freight car repair platforms. Shizuishan depot has 12 freight car repair platforms and the Shizuishan station has 6 freight car repair platforms. Yingshuiqiao Marshalling Yard has 6 repair platforms; Yuci Marshalling Yard has 10 freight car repair platforms; the new Guyaozi station will have 6 repair platforms. Initially, two alternatives were considered for car repair at Yingshuiqiao - a station repair facility (minor repairs) and a depot repair facility (major repairs). The decision was made to utilize a station repair facility (minor repairs) at Yingshuiqiao.

145. In addition to freight car repair and maintenance tracks, the following stations, one at each end of the TZR line, have freight car inspection points: Yuci has two freight inspection points at Yuci Yard I and Yuci Yard II. Yingshuiqiao has three freight inspection points (the up direction yard, the down direction yard, and the R/D yard before hump). Details are provided in the Consultant’s Supplementary Final Report, Volume I, Section 4.

l. Rolling Stock Safety Systems

146. A comprehensive plan for safety and passenger convenience will be installed as part of the TZR line project. This plan includes the following systems:

147. Passenger Inquiry Service. Allows passengers to inquire about purchase of tickets, train schedules, status of arrivals and departures, various on-train services, etc.

148. Train Fault Detection System (TFDS). This system detects internal train electrical/mechanical system problems and will be installed at Yuci station (one set) and Yingshuiqiao station (two sets).

149. TADS System. An infrared “hot box” detection system that protects against the overheating of rolling stock wheel bearings and journal boxes. Hot box detectors are spaced approximately 30 km apart, depending on the exact location of stations and inspection points.

150. Train Protection (ground safety) Detection System (TPDS). This is a locomotive/train on-board system, which protects trains against electrical malfunctions between the pantograph and the catenary infrastructure. All trains will be equipped with TPDS. 37

m. Water Supply and Treatment

151. All stations with depot or passing loop buildings will be supplied with potable water meeting the National Standards for Drinking Water Quality, GB5749-85 and Standard for Drinking Water Resource Water Quality (CJ/T3025-93). The cost of constructing and operating water treatment facilities and the civil works associated with water supply to station buildings is the responsibility of MOR.

n. Domestic Sewage and Industrial Wastewater Disposal

152. Stations that have inspection, repair, maintenance or other facilities that generate industrial-type wastewater containing oils and petrochemicals will be equipped with oil-water separators. Septic tanks will be used for domestic sewage. All types of sewage will be collected into treatment stations, and treated according to where the treated water is discharged, i.e., river, lake, ditch, or farm, and the sanitary zone requirements where the treatment plant is located. All discharges will conform with Integrated Wastewater Discharge Standard (GB8978-1996).

o. Fire Fighting Systems

153. Low pressure fire fighting systems and common water supply systems are used at most stations. At stations with no water tower, portable high pressure fire fighting equipment and water tanks are used for fire fighting at station platforms or freight yards with warehouses. Portable high pressure fire fighting equipment and 300 m³ water tanks are also used at tunnels longer than 5 km.

p. Signaling and Train Control

154. The TZR signal system conforms to MOR Class I design standards. The double-track lines will have CTC command (via radio) and control (train protection) using Automatic Block Signaling (ABS). The double-track ABS system is fully-automatic with 4-aspect signals that allow more than one following train within a block between two stations. This system requires intermediate wayside signals between passing loops for protection of following trains. Train movements on double-track lines are single-direction (and opposite direction) on each of the two tracks. Single-track lines will be operated with CTC command (via radio) and semi-automatic (block to block) control. The semi-automatic signal system permits only one train at a time to occupy a block, does not allow following trains within the block, and requires that train movement be physically controlled by operators at each station.

C. Train Operations and Capacity Considerations

1. TZR Train Operations

155. Train crew labor pools for TZR train operations will be located at Taiyuan, Dingbian and Yinchuan. All TZR trains will operate with two crews on board. One crew rests/sleeps while the other is on duty.

156. TZR trains will operate under three different speed designations: very fast, fast, and moderately fast. Very fast denotes train speeds up to 200 km/hr. Fast denotes train speeds up to 160 km/hr, and moderately fast denotes train speeds up to 120 km/hr. Under initial commercial operations, no TZR train will exceed fast speed (160 km/hr), although the line structure is designed for 200 km/hr. Table 4-7 is the forecasted train pairs per day.

2. Carrying Capacity – All Trains

157. Table 4-8 illustrates the TZR design carrying capacity versus the required carrying capacity (train pairs per day) based on traffic studies for the line. This table reflects both passenger and freight train operations. Note that “needed” carrying capacity in this table differs 38

from “forecasted” traffic in Table 4-7 because Table 4-7 reflects “average” daily trains operating and Table 4-8 reflects the maximum or peak operation on any given day. From the table, it is clear that TZR can meet the needs of passenger and freight transportation for many years into the future.

Table 4-7: Forecasted TZR Freight & Passenger Trains (pairs/day) 2015 2020 2030 Year Local & Local & Local & Freight Passenger Freight Passenger Freight Passenger Section Work Work Work Train Train Train Train Train Train Trains Trains Trains Pingjipu~Guyaozi 2 1 5 2 1 7 3 1 11 Guyaozi ~Dingbian 5 1 5 8 1 7 10 1 11 Huangyangwan~ Dingbian 12 1 5 14 1 8 18 1 12 Dingbian ~Suide 18 2 10 23 2 15 30 2 23 Suide ~Wupu 19 2 10 25 2 15 33 2 23 Wupu ~Liulinbei 26 2 10 33 2 15 43 2 23 Liulinbei ~Luliang 27 2 10 34 2 15 44 2 23 Luliang~Fenyang 31 2 10 39 2 15 51 2 23 Fenyang ~Xirong 39 2 10 48 2 15 63 2 23 Sanjiao~Luliang 7 N/A 8 N/A 10 N/A Source: Prepared by Consultant from data provided by TSDI.

Table 4-8: Design vs. Actual Carrying Capacity of the TZR (pairs/day) Year 2015 2020 2030 Needed Needed Needed Carrying Carrying Carrying carrying carrying carrying capacity capacity capacity Line Section capacity capacity capacity Pingjipu~Guyaozi 22.0 12.0 22.0 15.5 33.0 23.0 Guyaozi ~Dingbian 24.0 16.0 24.0 22.5 35.5 31.0 Huangyangwan~ 25.0 24.0 35.5 31.5 120.0 61.0 Dingbian Dingbian~Jingbian 120.0 67.0 133.0 91.0 171.0 125.0 Jingbian ~Suide 68.0 93.0 129.0 Suide ~Wupu 76.0 102.0 140.0 Wupu ~Liulinbei 77.0 103.0 142.0 120.0 133 171.0 Liulinbei ~Luliang 82.0 109.0 150.0 Luliang ~Fenyang 91.0 119.0 163.0 Fenyang ~Xirong 91.0 118.0 162.0 Sanjiao ~ Tuanshuitou 48.5 48.5 48.5 Tuanshuitou~Dawuzhen 40.0 8.5 40.0 10.0 40.0 12.0 Dawuzhen ~ Luliang 40.0 40.0 40.0 Source: Prepared by Consultant from data provided by TSDI.

3. Connecting Railway Lines

158. There are two significant existing provincial and industrial lines that were evaluated for their impact and potential contribution to the TZR line: The Da-Gu Railway is owned by the Ningxia Province. This line, located between Guyaozi and a connection with the Baolan line at Qinglongxia (south of Yinchuan), serves the coal mining region north of the Baijitan National Protection Area. At this time, whether or not a connection will be constructed between TZR and the Da-Gu Railway has not been determined. If the connection is made, eastbound coal traffic can be delivered by Da-Gu Railway train crews to Guyaozi for interchange with TZR. TZR crews will not operate trains on Da-Gu Railway. The Da-Gu line was visited as part of the November 2005 field trip and appears to be constructed to relatively high standards of design and is in good condition near a potential TZR connecting point in Guyaozi. This line is currently operated by steam locomotives with plans for future conversion to diesel.

159. The existing Shanxi Provincial railway between Jiexiu and Liulin is the first rail line in China to receive ADB funding for construction. This line was initially considered by TSDI as a potential route alternative for the TZR, but was eliminated. 39

160. All industrial tracks will connect to the TZR main line indirectly by way of local station tracks rather than by direct connection through mainline turnouts. Industrial tracks are not allowed to connect with TZR at intermediate points between designated stations.

161. The MOR adjacent railways to TZR include Baotou-Lanzhou Line, Baoji-Zhongwei Line, Daba-Guyaozi Local Railway, Baotou-Xi’an Line, Southern Tongpu line, and Shijiazhuang- Taiyuan Line.

D. Associated Facilities

162. Construction access roads will be built for the purpose of ingress and egress to the construction work areas of the Project. These roads are the means by which labor, material and equipment can be brought to and from the work site. Once the project is completed these roads will be turned over to the local and provincial governments to use as they see fit. Not all of these access roads are expected to be used by the local communities, but those that are selected for use will require long-term maintenance by the local governments.

163. Station access roads to the nearest existing local road and/or municipal area will be built by local governments up to the railway station boundary. The portions of the roads within the station boundary will be built under the supervision of the TZR construction management, and the costs for these roads are included in the TZR Project cost estimates. Access roads between the nearest local road and the station boundary will be constructed by the local governments. The existing road network is relatively well developed along most of the alignment and the region has a functioning network of rural roads, which link remote villages with town and urban centers. There will be a total of 39.17 km of new station access roads connecting 24 new stations to the existing road networks. In many cases the length for the station link roads is less than one km. In seven locations, particularly in the sparsely settled areas of the alignment the length of the station link road is 3 km or more with the longest in Jingbian at 5.15 km.

E. Cost Estimating Approach

164. Table 2-1 (see Section 2) provides a summary of investment costs for the TZR.TSDI has provided both an investment cost summary and a detailed line-item project cost estimate. Unit costs, quantities of materials, and total investment costs provided by TSDI compare reasonably with other evaluations of MOR railway projects; and the investment levels accurately reflect the MOR standards selected for the TZR. For example, the ZXR dedicated passenger line has an average cost of $ 9 million/km, while the TZR has an average cost of $ 4 million/km. This seems reasonable in light of the ZXR’s much higher design standards, e.g., 350 km/hr speeds compared with TZR’s 200 km/hr speeds.

165. Since the detailed engineering design is on-going, the costs given in this report should not be viewed as final. They are subject to change based on new findings and actual cost experience. However, unless design standards, route alignment, and/or route length are changed, it is expected that final cost estimates will not be substantially altered.

F. Implementation Arrangements

166. Implementation Schedule. The basic construction schedule for the TZR route is estimated to be 5 years. It is expected that initial construction will begin in mid-2006. Completion of construction is, therefore, estimated by mid-2011, and another one year is required for testing and trial operations. Commercial operations will begin in mid-2012. The overall implementation schedule, including the construction schedule is presented in Figure 4-1.

167. Project Management. MOR will be the Executing Agency (EA) responsible for overall management and implementation of the Project. MOR has a wealth of experience in all facets of railway construction, including building subgrade, bridges, tunnels, and associated works. Since the second half of 1990s, MOR also gained experience with the construction of technologically 40 upgraded fast speed railway lines. The Foreign Capital and Technical Import Center (FCTIC)17 under MOR shall coordinate the project management activities, supervise the procurement of the goods and services to be financed by the ADB under the Project, monitor utilization of the proposed ADB loan, and review the reports to be submitted to ADB.18 FCTIC has well-qualified and experienced staff who have undertaken similar tasks satisfactorily in the past. MOR has established the Taiyuan-Zhongwei Railway Leading Preparatory Group (LPG), which is coordinating the completion of detailed project design that is expected to be completed by early 2006. LPG is also taking necessary preparatory actions, particularly for land acquisition and resettlement to be initiated by the local governments, engagement of supervisory consulting services for the Project, and setting up of a joint venture company between the MOR and the 3 provinces.

1. Joint Venture Company for Project Construction and Operation

168. MOR has established the LPG and preparations are currently underway to set up an autonomous joint venture company (JVC) with the three provinces under the Chinese law to build the Project railway, and on completion of construction to operate and manage the Project facilities. MOR will hold the majority of shares. After establishment, JVC will be responsible for managing all aspects of Project implementation, including; financing; contract planning, bidding, contract award and supervision; quality control; and liaison with the government and concerned agencies; and for operation and management of the Project facilities. JVC is expected to be the ‘legal person’ with full property rights with regard to the Project railway facilities, and have sole responsibility for its operating profits or losses.

169. Based on experience with previous railway projects, establishment of an autonomous JVC sooner rather than later, is important for Project ownership and future success of the enterprise. JVC should take part and be responsible for all decisions that affect its future operations and should also be accountable for the same to its shareholders.

2. Project Supervision Arrangements

170. For ensuring adequacy of technical design standards and satisfactory quality control, MOR proposes to hire consulting services for review of the final design, supervision of all aspects of Project construction and trial operation. LPG will invite proposals from qualified domestic consulting companies for providing consulting services for undertaking review of detailed design engineering, general construction supervision, monitoring and construction of site construction units, and supervising trial operation of the Project railway. The IA and the general consulting company will engage site supervision consultants.

17. FCTIC is an entity that is wholly owned and administered by MOR. However, it does not form a part of the Ministry of Railways which is an arm of the Government. 18. The Government’s planning for financing for the project includes a loan of $ 300 million from ADB. 41

Figure 4-1: Project Implementation Schedule 2005 2006 2007 2008 2009 2010 Item JFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJ 1 Preliminary & Detailed Design, Engineering, and Documentation

2 Prequalification and Tendering

3 Land Acquisition, Removal, and

Resettlement/Relocation 3A Resettlement Planning and Preparation 3B Disclosure of RP and RIB 3C Implementation of RP 2011 2012

4 Subgrade (Earthwork)

5 Bridges and Culverts

6 Tunnels

7 First Ballast

8 Track Laying

9 Second Ballast

10 Environmental Protection Works

11 Electrification and Power Supply

12 Signaling and Communications

13 Operational Buildings and Associated Works

14 Terminal Operating Facilities

15 Operating Equipment

16 Safety Monitoring System

17 Testing

18 Trial Operations

19 Commencement of Commercial Operations

Source: Consultant 42

171. The availability of experienced domestic consultants will help refine detailed design engineering and ensure quality control during construction. Consultants will enable introduction of modern project management concepts for timely construction of the Project facilities. During trial operation the presence of consultants will help in trouble shooting, analysis and debugging of facilities and technologically advanced equipment as well as ensuring timely completion and commercial operation of the Project railway.

3. Procurement

172. ADB-Funded Components. In consultation with MOR, a list of project components is suggested for financing out of the $ 300 million loan from ADB. The list of ADB components is provided in the Consultant’s Supplementary Final Report, Volume II, Appendix 4-E and include modern materials and technical equipment that will help meet the technical performance requirements for operation of trains at speeds of 200 km/hour, ensuring comfort, safety and environmental protection. The list of the contract packages is shown in Table 4-9.

173. All ADB-financed procurement will follow ADB’s Guidelines for Procurement. The materials and equipment will be procured under international competitive bidding (ICB) or international shopping (IS) procedures. Contracts valued in excess of $ 1,000,000 will be procured through ICB. Any supply contracts not exceeding $ 1,000,000 will be procured through IS and contracts not exceeding $ 100,000 will be procured through direct purchase. Tendering companies, selected by the EA on a competitive basis, will handle the international bidding. In view of the composition of the contract packages to be financed under the ADB loan, which will need to be procured after the MOR-financed civil works make progress, no need for advance procurement action is envisaged.

174. Consulting Services. Qualified domestic consultants will be engaged and financed by MOR for (i) preliminary and detailed project design; (ii) international procurement; (iii) environmental supervision and management; (iv) monitoring and evaluation of the resettlement plan; and (v) socioeconomic impact assessment, evaluation of poverty reduction, and project performance monitoring. In addition, qualified domestic consultants will be engaged and financed by MOR for (i) review of detailed design engineering, (ii) construction supervision and construction quality assurance, and (iii) supervision of trial operation on the Project railway.

175. Disbursement Arrangements. All disbursements under the ADB loan will be carried out in accordance with ADB’s Loan Disbursement Handbook. Since most of the payments will be made for large contracts well above $ 100,000, direct payment and commitment procedures will be used to withdraw the loan funds. The statement of expenditure procedure will be used for reimbursement of eligible expenditures for any individual payment not exceeding $ 100,000.

176. Accounting, Auditing and Reporting. The Project EA will maintain separate accounts for the Project and have such accounts and related financial statements audited annually by an independent auditor and in accordance with auditing standards that are acceptable to ADB. The EA is also required to submit to ADB within 6 months after the end of each fiscal year certified copies of such audited Project accounts and financial statements and auditor's reports, all in English. The audit of such financial statements will include: (i) an assessment of the adequacy of accounting and internal control systems with respect to Project expenditures and other financial transactions; and (ii) an assessment of compliance with loan covenants that may be agreed under the Project and ADB's requirements on Project Management. Within the Project company (TZRC) an internal audit unit will be established to ensure that an effective internal control system and a checks and balances mechanism are put in place. The unit will independently test financial transactions to ensure the safe custody of the Project-financed assets and will report directly to TZRC’s management/board of directors and external auditors. FCTIC will make satisfactory arrangements for reporting the progress of Project implementation to ADB by submitting quarterly progress reports. 43

Table 4-9: ADB-Financed Contract Packages Item Amount (US$ Procurement Description No. million) Method Supply and installation of catenary for railway electrification 1 76.17 ICB/IS (various packages) Supply and installation of traction substation equipment 2 31.73 ICB/IS (various packages) Telecommunication equipment, including optic fiber cable, 3 6.51 ICB/IS power supply system, etc. (various packages) Equipment for power supply including insulator cleaning car, elevated operation car, catenary installation car, track lifting 4 4.76 ICB/IS car, high voltage test car, trcak flat car, catenary extender car, etc. (various packages) Signaling equipment of various types, including cable laying, 5 intelligent power supply panel, train control and blocking 33.76 integrated system, track circuits, etc. (various packages) ICB/IS Power supply assemblies and equipment including high 6 voltage switchboard, 10 kV single pole transformer, single and 13.82 3-phase high voltage cable (various packages) ICB/IS Infrared equipment including repeating equipment, detection 7 3.01 equipment, central system (various packages) ICB/IS 8 107.90 Track materials including rail and turnouts (various packages) ICB/IS 9 Concrete sleepers (various packages) 22.32 ICB/IS Total 300.00 Source: Consultant from information provided by MOR ICB = International competitive bidding; IS = International shopping

4. Project Performance Monitoring and Evaluation, and Project Review

177. For evaluating Project performance in relation to the Project’s goals, purposes, outputs the following set of indicators and conditions will be used. The indicators will be reviewed at the start of Project implementation and include (i) economic development and socioeconomic indicators, (ii) transport costs and times for passenger and freight services, (iii) transport services offered and transport charges, (iv) accident rates, (v) financial sustainability, (vi) county/village incomes, (vii) access to social services, and (viii) jobs created in construction and operation. At the beginning of Project implementation, a baseline and target values for the indicators will be established. The indicators will be measured at Project inception, completion, and 3 years later, and compared with the baseline. Where relevant, indicators will be disaggregated by gender. MOR shall require qualified consultants for monitoring and evaluation to help establish the monitoring and evaluation system, and train staff of the TZRC in its use. The main sources of data include (i) secondary data from government sources, (ii) household socioeconomic sample survey, and (iii) participatory rapid appraisal.

V. ENVIRONMENTAL ASSESSMENT

A. Introduction

178. This Section presents the key potential environmental impacts and mitigation measures resulting from TZR construction and operations. The full Summary Environmental Impact Assessment (SEIA) Report that describes the physical environment and includes the environmental monitoring budget and program, is available on the ADB website. The SEIA was prepared by the Consultant based on an Environmental Impact Assessment (EIA) developed by 44 the TSDI in May 2005 and revised in September 2005. The EIA is being assessed by the State Environmental Protection Administration (SEPA) and is expected to be approved in March 2006.

B. Description of the Project

179. As described in Section 4, the Project consists of an electrified Class I railway linking major the north-central cities of three provinces. The total length of the Project line is 939.889 km. The Project will require substantial civil works, as shown in Table 5-1. A total of 80 extra large (greater than 0.5 km in length) bridges, and 308 large and medium bridges (over 20 m) will be built. The rivers crossed include the Yellow (three times), the Wudinghe, Dalihe, and Mayihe. The construction of TZR will also require 11 tunnels over 3 km in length and 152 shorter tunnels.

Table 5-1: Major Work Quantities Item Unit Total Track Length Main Line km 939.89 Cut 103 m3 53,124 Earthworks Fill 103 m3 65,960 Masonry (with mortar) m2 2,821,635 Masonry (dry) m2 58,593 Accessories of Geotextile Cloth m2 8,675,027 Subgrade and Soil Geotextile Grids m2 6,748,665 Stabilization Retaining Walls m2 646,584 Planting Trees 103 52,862 Extra Large Bridge No. and Bridge Length (m) 80/136,584 Bridge and Culvert Large and Medium Bridge No. and Bridge Length (m) 308/51,578 Culvert No. and Culvert Length (m) 2073/60,815 Under 3 km No. and Tunnel Length (m) 152/75,037 Tunnel 3-6 km No. and Tunnel Length (m) 5/21,425 Over 6km No. and Tunnel Length (m) 6/68,860 Construction Roads Km 655 Major Temporary Construction Camps Sites 26 Work Borrow Pits Sites 42 Construction Period 5 years Total Investment CNY 30.32 billion ($3.75 billion) Source: Third Survey and Design Institute, Preliminary Feasibility Study, September 2005

C. Alternatives

180. Do-Nothing Option. Prior to designing the Project, several different options were considered, including “do nothing”. Given that the current transport network is severely overloaded, the “do nothing” option was not considered viable.

181. Alternative Transport Systems. Increasing air service as an alternative was assessed as not being viable because conveying large volumes of coal and crude oil, for example, cannot be economically achieved by plane. With respect to passenger traffic, use of air service is rejected because of the greater operating costs and higher price per ticket. It should be noted that air transport is not generally preferred in PRC by either domestic or foreign travelers at distances of less than 600-800 km. Increasing the use of roads and expanding the highway system was considered. Expanded electrified railways are considered preferable to road networks, due to:

♦ Improved Safety. The level of deaths and accidents attributable to rail transport in PRC are a fraction of the level for roads. An estimated 300 people are killed on PRC highways every day, and the highway death toll per 10,000 automobiles is eight times that of the United States. The World Health Organization (WHO) estimates that highway traffic accidents will rank as the third largest cause of death in PRC by 2020 (currently it is ninth). Therefore, expansion of the rail system is a safer transport option than roads. 45

♦ Land Conservation. Construction of railway networks require significantly less land surface area than road networks. To carry the projected TZR traffic volume in 2012 (44.5 million tons and 4.8 million passengers) would require 4 double lane roads or 3 times the land required for TZR.

♦ Pollution. The use of electrified freight trains as opposed to an equivalent freight volume transported by trucks results in considerably less air pollution. It is estimated that trucks generate 420 times as much carbon monoxide (CO) per freight TKM than electrified trains. Trucks also generate significantly more NOx, total hydrocarbons (THC), and CO2. Emissions from coal fired electricity generation is progressively decreasing due to tightening emission regulations.

♦ Energy Efficiency. Rail is considerably more energy efficient than equivalent truck transport. For freight transport in PRC, the energy intensity for rail is 0.35 megajoules (Mj) per TKM and for truck transport it is 2.1 Mj/TKM. For passenger transport in PRC, the energy intensity for rail is 0.3 Mj/PKM and for bus transport it is 0.39 MJ/PKM19.

182. Alternative Alignments. The designers used a number of guidelines in assessing alternative alignments, including (i) known historical, archaeological and cultural sites were avoided where possible, (ii) environmentally sensitive sites were avoided where possible, (iii) bridges were preferred to high embankments, and tunnels were selected in preference to deep cuts, (iv) land with lower economic productivity was used as much as possible, and (v) the areas designated for future stations, yards, and other facilities would be utilized by the contractor for temporary storage of materials and equipment. TSDI analyzed a total of 80 alternative alignments, including 8 major route alternatives. Each alternative is presented in the Consultant’s Supplementary Final Report, Volume I, Section 4 and in the SEIA. Environmental considerations were reflected in the analysis of each alternative.

D. Anticipated Environmental Impacts and Mitigation Measures

183. The following anticipated environmental impacts and mitigation measures are fully elaborated on in the EIA and the SEIA: soil, water, air, noise, vibration, electromagnetic radiation, solid wastes, hazardous materials, seismic activity, flora and fauna, land acquisition and resettlement, public safety and health, and induced impacts. This section presents only soil erosion, sand dune migration, environmentally sensitive areas, and historical, cultural and archeological sites because of their significance.

184. Soil Erosion. There is significant existing erosion in certain sections of the alignment, particularly the loess regions with deep gullies as well as in the mountainous regions in the center of the line. The Project has the potential to increase the levels of erosion, particularly in areas where the soil types and topography are susceptible to erosion. A Soil Erosion Prevention Plan (ErPP) has been prepared for the Project and has been submitted to the Water Resources Ministry in November 2005. Approval of the ErPP is anticipated early in 2006. The ErPP has been prepared using the Feasibility Study data. The ErPP will be updated to match the detailed design, such that erosion protection actions match the construction activity planned during construction. The ErPP identified a number of mitigation measures, as summarized in Table 5-2.

185. Sand Dune Migration. There is a potential that sand dune migration may impact the TZR infrastructure. There has been a number of successful dune stabilization techniques developed and tested in the area. At Shapotu in NHAR, railroad engineers initiated a sand stabilization project which has received a number of UN environmental awards. The method used in this 55 km by 80 km experimental area begins with covering the ground with small pebbles, and then

19. Fulton, L. and Eads, G: IEA/SMP Model Documentation and Reference Case Projection, IEA, July, 2004. 46 selected shrubs are planted in square meter plots, and irrigated with water from the adjacent Yellow River to anchor the sand. Further north in NHAR is the Baijintan Nature Protection Area, a 75,000 hectare area established to address desertification. The method used here is aerial seeding of several specific shrubs during the rainy season (June-July) each year. The shrubs are protected by low wire fence barriers. For the TZR, these two methods shall be modified and combined. A large quantity of selected shrubs and bushes will be planted and watered. Specifically, a 20-meter zone on each side of the railway roadbed will be leveled and covered with impervious clay before planting. On the outlying sides of these areas, a windbreak will be planted. The width of this line of trees will range, depending on the seriousness of the sand problem, from 55 to 200 meters on the windward side, and 25 to 125 meters on the leeward side. Table 5-2: Soil Conservation Management Framework Potential Erosion Problem Mitigation Measure All available spoil will be used for structural fill for access roads, stations, Use of spoil/borrow pits and embankments before borrow pits are excavated. Locating borrow pits Borrow pits will be centrally located to serve more than one site. Sites for spoil and borrow pits will be a long way from industrial, Location of spoil/borrow pits agricultural, residential, historic, and ecological sites. Soil and borrow pit sites will be at least 1 km from historic relics. Topsoil from the borrow pits will be removed and set aside. When the project is completed, the areas will be regraded, the topsoil replaced, Topsoil from borrow pits and the area reseeded. Intercepting ditches will be constructed on the high side of the restored pit to prohibit surface scouring by storm runoff. Tunnel muck Muck will be spread and dried before it is used for embankments. Spoil disposal Spoil will be spread on the lowest yield/least productive land available. When soil is spread on slopes for permanent disposal, it will be buttressed at the toe by a retaining wall. The surface of the slopes, if Soil disposal necessary, will be stabilized by shotcreting, riprapping, or laid rubble prior to seeding. Steep cuts All steep cuts will be flattened and benched. Watercourses will not be blocked and temporary soil and rock stockpiles Natural watercourses will be designed so runoff will not induce sedimentation of waterways. Source: ErPP

186. Environmentally Sensitive Areas. The TZR Project has the potential to impact a number of environmentally sensitive areas. Specific mitigation measures are detailed in the construction approval documents and are summarized below and shown in Figure 5-1: 187. Great Wall. The TZR, which crosses the Great Wall alignment twice, has the potential to impact the structure. The alignment will cross the Great Wall at the following locations:

♦ Hequan town, Dingbian County, where the crossing will occur in a break (approximately 10km) in the Great Wall. The minimum separation between the TZR and the Great Wall will be approximately 5km. There is no visible remnants of the Great Wall at the location where the TZR passes the historical site of the Great Wall. The TZR has the potential to impact remaining Great Wall foundations. Mitigation measures will include archaeological inspection of the alignment to ensure that there are no Great Wall foundations remaining at the crossing. If foundations are identified, measures will be taken to protect its original state.

♦ Yangercun in Jingbian County, where the crossing will be by a bridge spanning the Great Wall. The TZR has the potential to impact the Great Wall during the construction period. Mitigation measures will include engineering design and monitoring to ensure that construction traffic and construction vibration will not impact the Great Wall. All construction workers will receive training on methods to avoid impacting the Great Wall. The intersection of the TZR will reduce the local aesthetic value of the Great Wall. However, the aesthetic impacts are anticipated to be minor as the TZR does not intersect the Great Wall at a tourist viewing area. 47

Figure 5-1: Project Alignment Showing Environmentally Sensitive Areas

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i J Porvincial Water Source Xuegongling Nature Zichang Yushe Qingjian 109 Protection Area Tongxin Jiaokou Shilou

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Source: Consultant.

188. Dingjiagou-Shilipu Water Source. The TZR crosses this protected area by bridge. One bridge pier is located near the gallery pit and partially obstructs the flow of the underground water. To mitigate this impact, a new gallery will be dug and linked to the pump and distribution system.

189. Beijao Water Source Protection Area (Prefecture), Haba Lake Nature Protection Area (Provincial) and Liulin Spring Area.

♦ The Beijao Water Source Protection Area, a 200m deep aquifer in Xixia District, Yinchuan City, was identified early as an environmentally sensitive area and an alternative route was selected to avoid the area. The nearest point of the TZR to the Beijao Water Source Protection Area is 1.5 km. The TZR is not anticipated to have any negative impact on the site.

♦ The Haba Lake Nature Protection Area is a provincial level protected area established to protect endangered flora species. The TZR does not intersect the protected area. At its closest point the TZR is 2 km from the protected area. Engineering measures will ensure that the natural hydrology of the Haba Lake is not disturbed by the TZR construction.

♦ The Liulin Spring Area is a series of mountain fed springs located along a river bed. In order to avoid impacting the Liulin Spring Area, which is an important potable water source, the TZR will cross the area by bridge. Engineering design will ensure that the springs are not blocked and spring flow is incorporated in the hydrological design.

190. Baijintan Nature Protection Area. The TZR will intersect approximately 15 km of the Test Zone of national level Baijintan Nature Protection Area, a 75,000 hectare sand control demonstration area. The TZR has the potential to impact ongoing stabilization works. To minimize impacts to the protected area and ongoing stabilization efforts, (i) no spoil sites, borrow pits and work camps will be allowed in the test zone, (ii) environmental impact prevention training will be given to each worker employed on construction in this area, including explanation of stabilization efforts and access limitations, (iii) vehicular movement in this area will be restricted to designated access roads, and (iv) all disturbed areas will be rehabilitated after completion of construction.

191. Xuegongling Nature Protection Area. The provincial level Xuegongling Nature Protection Area was established in order to protect endangered fauna and flora such as the Crossoptilon Mantchuricum (pheasant), the Chinese pine and Chinese birch. The TZR will be built within the Test Zone between stations CK 129+230 to CK 131+280, a distance of approximately 2 km. In order to minimize the impact on the protected area, the TZR crossing in the Test Zone is executed 88% in tunnels and 12% on bridges. To minimize impacts to the protected area, (i) no spoil sites, borrow pits and work camps will be allowed in the protected area test zone, (ii) construction contracts will include provisions stating that workers may not trap or hunt, log, take crops/foliage, or otherwise damage any areas in the test zone, (iii) environmental impact prevention training will be given to each person employed for construction work in the test area, including explanation of fines for hunting, wild food harvesting, tree cutting for fuel, and accessing restricted areas, (iv) (vehicular movement in this area will be restricted to designated access roads, and (v) all disturbed areas will be rehabilitated after completion of construction.

192. Historical, Cultural, and Archeological Sites. With the exception of the Great Wall (discussed above), there are no identified historical, cultural, or archaeological sites which will be destroyed or directly impacted by the TZR. In the event that a relic having historical or archeological value is unearthed during construction, an established procedure will immediately go into effect. First, construction ceases. The local official with responsibility for cultural relics is then contacted by the contractor, and appropriate experts are brought in to examine the site. From this point on, the local official works with the contractor to ensure objects and/or sites are 49 preserved. If excavation and removal of relics are necessary, it will be done under the supervision of the County Relics and Antiquities Bureaus. Local officials have experience applying the regulations and best practices for historical and cultural sites, and these will be strictly followed during construction. It should also be noted that no borrow pits, spoil dumps or work camps will be located within one kilometer of a known historic, cultural or archaeological site.

E. Public Consultation and Information Disclosure

193. Pre-EIA Public Meetings. In conformance with ADB guidelines, TSDI personnel conducted a series of environmental focused meetings (details are provided in the SEIA) to elicit input from stakeholders including officials and affected persons prior to the completion and publication of the EIA. These meetings targeted rural areas, towns and smaller cities, with a total of 60 meetings held along the length of the alignment over a 15-day period (25 April-10 May 2005). The meetings were advertised and attended by a wide range of participants, including workers from businesses, hospitals, and schools. Specifically invited to the meetings were officials from Environmental Protection, Forestry, Land Use and Cultural Relics Bureaus.

194. At the meetings, the Project was described in such detail that the people became aware of the location and expected impacts on the area. Then questionnaires to 485 individuals (120 officials and 365 residents from the Project Area) were distributed, collected, and analyzed. A good cross section was achieved, with representations from different age groups, different educational levels, and occupational classifications: farmer, worker, and career/professional.

195. Post-EIA Consultations with Officials and Stakeholders. During the field trip in November 2005 and following publication of the EIA, the Consultant conducted numerous meetings with 60 environment and related officials (e.g., Forestry, Tourism, Cultural Relics, Water Resources Bureaus) along the entire length of the alignment (Zhongwei, Yinchuan, Dingbian, Suide, Lishi, and Taiyuan). All 60 are fully supportive of the project on environmental issues.

196. In November 2005 the Consultant conducted 10 small community meetings in 8 villages on the alignment (Lingwu and Yanchi counties in NHAR, Zizhou and Suide counties in Shaanxi, and Lishi and Wenshui counties in Shanxi). About 75 community members and leaders participated in the meetings, and were asked to identify potential benefits and costs TZR, including issues relating to the environment. All of the participants generally supported the TZR, although noise pollution and waste thrown from the train were identified as potential environmental problems. In November 2005, the Consultant surveyed 1,319 households (4,336 people) in the most affected villages on a range of concerns, including environmental issues. A total of 82.7 % supported TZR, 12.4 % were indifferent to it, and 5 % opposed TZR. In terms of environmental benefits and costs, 40 % felt that there could be safety problems associated with TZR. The major concern of the most affected villagers was that they would lose their arable land.

F. Environmental Management Plan

197. A summary EMP is presented in Table 5-3. The EA will translate the SEIA, including the summary EMP, into Chinese and provide copies to relevant parties, including local authorities and bidding contractors. MOR and IA will ensure that the summary EMP is included in all bidding documents and operating contracts. The successful contractor will be responsible for preparing a comprehensive EMP, based on the summary EMP. The EPMO will be responsible for reviewing and approving the comprehensive EMP, and ensuring that the contractors comply with the provisions of the EMP during the construction and operation phases. The EMPO will be responsible to ensure that the EMP is updated periodically during the construction period. The SEIA is based on the Draft EIA which is currently under review by SEPA. The EA will ensure that any changes required by SEPA are reflected in the Project Final Design. 50

Table 5-3: Environmental Management Plan for TZR Responsibility Environmental Mitigation Measures Location Time Frame Impact/Issue Implemen- Super- tation vision CONSTRUCTION PHASE Soil Disposal of excess Earthworks cut will be used in embankments where possible. Throughout Project During Contractor EPMO, excavated Residual spoil will be placed in storage areas with containment Corridor at all Construction WRB. earthworks walls. Residual spoil will be disposed according to the Erosion construction sites. Prevention Plan (ErPP). Loss of Topsoil The topsoil from all areas to be permanently covered shall be Throughout the During Contractor EPMO, stripped and stored in stockpiles. Topsoil will be used for Project Corridor, all Construction. WRB, revegetation works. Construction vehicles, machinery and borrow and spoil equipment shall move or be stationed in designated areas. areas. Access to adjacent agricultural land will be minimised. Impact to All temporarily acquired land will be rehabilitated after completion Throughout the During Contractor EPMO, temporarily of construction. Project Corridor Construction. WRB. acquired agricultural land Failure to All borrow pits shall be rehabilitated after use. All borrow areas. During Contractor EPMO, rehabilitate Borrow Construction. WRB. Pits Soil Erosion and On road embankment slopes, slopes of cuts, etc., soil erosion Within construction During Contractor EPMO, Siltation mitigation and siltation prevention measures will include, on a corridor and all Construction. WRB case by case basis, planting shrubs and grass, appropriate construction and compaction, placement of geo-synthetics, construction of berms, work sites dikes, sediment basins, fibre mats, mulches, grasses and slope drains Contamination by • Oil separators shall be installed at wash down and refuelling Throughout Project During Contractor EPMO hazardous waste areas. Corridor Construction with and materials, • Fuel storage and hazardous waste/materials storage sites and assistanc including shall have adequate secondary containment to contain Operation. e from hydrocarbons spills. All spilled materials and contaminated earth shall be local collected and disposed off according to EPB guidelines. EPBs. Sand dune Erosion mitigation measures will include planting a large quantity Areas where sand Construction Contractor EPMO, migration of selected shrubs and bushes. Specifically, a 20-meter zone on dune migration is an and operation EPBs each side of the railway roadbed will be levelled and covered issue with impervious clay before planting. On the outlying sides of these areas, a windbreak will be planted. The width of this line of trees will range, depending on the seriousness of the sand problem, from 55 to 200 meters on the windward side, and 25 to 125 meters on the leeward side. These measures will be supplemented by 1-meter high fences. Seismic activity Mitigation measures include extending slopes, widening Yuci to Wenshui, in Construction Engineering EPMO, subgrade surface, and adding dual-direction geotechnical the vicinity of and operation Designers EPBs gratings in the crushed stone layer. Hongliug and west of and Yujayuan contractors WATER RESOURCES Siltation into Water Erosion prevention measures will be conducted in accordance Throughout Project During Contractor EPMO Bodies with the ErPP and the EIA, including construction settling ponds. corridor Construction and local EPBs Disposal of septic • Maintenance workshop wastewater will treated to PRC Maintenance During Contractor EPMO waste and discharge standards. Where possible, wastewater will be Workshops and Construction and local maintenance discharged to municipal treatment systems. Construction camps and operation EPBs workshop • The sewage system for the construction camps shall be wastewater into properly designed, built and operated to prevent pollution to waterways ground or adjacent watercourses. • The wastewater from the battery room will undergo electrodialysis. Contaminated Solid hazardous and non-hazardous waste shall be appropriately Storage areas for During Contractor EPMO runoff from stored to prevent contaminated runoff to adjacent waterways. hazardous materials Establishment and local inappropriately and solid wastes Operation and EPBs stored hazardous (hazardous and non Dismantling material and solid hazardous) storage areas waste

AIR QUALITY Generation of Dust • All earthworks vehicles shall be covered to avoid spillage. Throughout Project During Contractor EPMO • Material storage site should be 300m away from residential Corridors, all access Construction. and EPBs areas. roads, sites • Water will be sprayed on the construction sites and major temporarily acquired feeder roads twice a day during dry season. and all borrow areas. • The concrete batching plants and crushing plants shall be sited at least 500m from the nearest habitation and fitted with dust extraction units in compliance with PRC and local standards. Emission from Discharge emission standards. All vehicles, equipment and Throughout Project During Contractor EPMO Construction machinery used for construction shall be regularly maintained Corridor Construction and EPBs Vehicles, and correctly operated (including the use of dust filters or hoods). Equipment and Machinery

Responsibility Environmental Mitigation Measures Location Time Frame Impact/Issue Implemen- Super- tation vision NOISE AND VIBRATION Noise and vibration • Blasting shall be carried out according to relevant PRC All Blasting Sites During Contractor EPMO from blasting safety standards. (Cuts, rock quarries, blasting and EPBs operations • Blasting schedules shall be publicly disseminated in areas tunnels etc.). activities where residences will be impacted by the blasting noise. • Potential structures which may be impacted from blasting vibration will be identified prior to blasting and monitored during blasting. Appropriate safety measures will be implemented. Noise from • Plant and equipment used in construction shall strictly Throughout Project During Contractor EPMO vehicles, plant and conform to the PRC and local noise standards. Corridor, all access Construction and EPBs earthmoving • Within 200m of the nearest habitation, construction work roads, sites equipment such as crushing, concrete mixing and batching, mechanical temporarily acquired compaction, etc., will be stopped between 2200 and 0600 and all borrow areas. hours. SOLID WASTE AND HAZARDOUS MATERIALS Storage and • Disposal of domestic waste (hazardous and non-hazardous) Construction sites, Construction Contractor EPMO disposal of and construction waste will occur regularly to approved construction camps, and operation (construction and local hazardous and municipal disposal sites. stations and period) and EPBs non-hazardous • There will be no on-site development of landfills. maintenance IA (operation waste and • Hazardous waste and hazardous materials will be stored on- workshops. period) hazardous site in approved facilities according to relevant standards, materials including secondary containment. Hazardous waste will be removed from site to approved hazardous waste disposal facilities by licensed contractors. IMPACT ON FLORA Loss of or damage • All works shall be carried out in a manner such that damage Entire Project Site. During Contractor EPMO to vegetation or disruption to vegetation is minimized. Trees or shrubs will Construction. and local only be felled or removed if they impinge directly on the EPBs permanent works or necessary temporary works. • A 30m greenbelt will be developed on both sides of the railway. • Trees will be planted at all station and depot areas, with an average coverage of 70 percent. The trees to be planted will be selected for adaptability to the local soil and climate. • Along the alignment, additional land will be seeded for grass, and intercepting drainage systems will be constructed to prevent rainstorms from excessive erosion in the grasslands. • Environmental training of construction staff will include training on limitations and penalties on cutting of firewood and poaching. • There will be no ancient trees cut down or impacted by the construction or operation of the TZR. IMPACT ON FAUNA Impact to aquatic Mitigation measures will include appropriate engineering design Bridge sites Construction Contractor EPMO biology at bridge to minimize increases in suspended solids. and WRB construction. Loss of habitat Minimize habitat clearance during construction operations. Throughout the Construction Contractor EPMO Rehabilitation of temporarily occupied sites. Corridor, in particular and EPB the mountainous areas. ENVIRONMENTALLY SENSITIVE AREAS Great Wall • Engineering design and monitoring will ensure that Great Wall Crossings Construction Contractor EPMO construction traffic and construction vibration will not impact and Relics the Great Wall. Bureau • All construction workers will receive training on methods to avoid impacting the Great Wall. • An archaeological inspection will be conducted at the crossing to ensure that there are no residual Great Wall foundations. If foundations are identified, measures will be taken to protect its original state. • Construction activities near the great wall will be supervised by representatives from the Relics Bureau. Dingjiagou-Shilipu In order to replace the partially impacted water source, a new Dingjiagou-Shilipu Construction Contractor EPMO Water Source gallery will be dug and connected to the pump and distribution Water Source and WRB system. Baijintan Nature • No spoil sites, borrow pits and work camps will be allowed in Baijintan Nature Construction Contractor EPMO Protection Area the test zone Protection Area and EPB • Environmental impact prevention training will be given to each worker employed on construction in this area, including explanation of stabilization efforts and access limitations • Vehicular movement in this area will be restricted to designated access roads • All disturbed areas will be rehabilitated after completion of construction. 52

Responsibility Environmental Mitigation Measures Location Time Frame Impact/Issue Implemen- Super- tation vision Xuegongling Nature • No spoil sites, borrow pits and work camps will be allowed in Xuegongling Nature Construction Contractor EPMO Protection Area the protected area test zone Protection Area and EPB • Construction contracts will include provisions stating that workers may not trap or hunt, log, take crops/foliage, or otherwise damage any areas in the test zone • Environmental impact prevention training will be given to each person employed for construction work in the test area, including explanation of fines for hunting, wild food harvesting, tree cutting for fuel, and accessing restricted areas • Vehicular movement in this area will be restricted to designated access roads • All disturbed areas will be rehabilitated after completion of construction. The Haba Lake Engineering measures will ensure that the natural hydrology of The Haba Lake Construction Contractor EPMO Nature Protection the Haba Lake is not disturbed by the TZR construction. Nature Protection and EPB Area Area HISTORICAL, CULTURAL AND ARCHAEOLOGICAL Encounter sites Should a historical, cultural or archaeological be encountered Throughout Project Construction Contractor EPMO during construction during construction, all activities will halt and an established Corridor and Relics action plan will be enacted. Bureau SOCIAL IMPACT Accidents due to Along the majority of the alignment there are no existing railways Throughout Project Construction Contractor YLEC/SP unfamiliarity with and the public is unfamiliar with safety issues associated with Corridor CD railways railway crossings. A public education campaign will be Transport undertaken to minimize accidents at grade crossings and other & Security locations. Furthermore, all road crossings will be grade- Dept. separated to increase public safety. OPERATION PHASE Contamination by • Oil separators shall be installed at wash down and refuelling Throughout Project Construction IA EPMO hazardous waste areas. Corridor and Operation with and materials, • Fuel storage and hazardous waste/materials storage sites assistanc including shall have adequate secondary containment to contain e from hydrocarbons spills. All spilled materials and contaminated earth shall be local collected and disposed off according to EPB guidelines. EPBs. Wastewater • Wastewater will be treated to appropriate PRC discharge Maintenance Operation IA Local disposal from standards. Workshops and EPBs maintenance • All wastewater will be directed to municipal treatment where stations facilities and possible. stations • The wastewater from the battery room will undergo electrodialysis. Air emissions from • All boilers will conform to GB 13271-2001. Boilers with a Maintenance Operation IA Local boilers at stations capacity equal or greater than 1 ton/hour shall be equipped Workshops and EPBs and maintenance with multi-purpose dust traps. Boilers of 1.4 MW or greater stations workshops shall be equipped with wet desulfurization dust traps. • Boilers will be regularly inspected to ensure that they are operating efficiently and emission standards are met. Noise from • Noise from maintenance workshops shall strictly conform to Maintenance Operation IA Local maintenance the PRC and local noise standards. workshops EPBs workshops Noise from • Noise control measures will be installed for noise sensitive Along entire Operation IA Local operation of the points within 60m either side of the tracks. alignment EP’s railway • Sound barriers, 3m in height with high absorbing capacity will be installed in noise sensitive communities with over 50 households. • Sound insulation windows will be installed in noise sensitive communities with less than 50 households. • Approximately 1,800m2 of sound insulation windows and 13,650m of sound barriers will be installed. • Monitoring will be conducted during the operational phase to confirm modelling results. Electro-magnetic • Affected residents will be assisted in obtaining cable TV. Along entire Operation IA Local radiation impact on • Overhead catenary system will be well maintained to alignment EPBs TV reception minimise impact. Source: Consultant

VI. POVERTY AND SOCIAL ANALYSIS

A. Introduction

198. The proposed TZR Project will provide a strategic east-west link that will relieve traffic congestion along key transport corridors, and enable access to goods, services and markets for areas that have been largely excluded from China’s recent and continuing economic expansion. Experience from other recent railway projects indicates that there will be significant opportunities for local communities to directly benefit from the Project through job creation, skills development, market access, poverty alleviation, and improved access to social services. Experience from other recent railway projects also indicates that these projects serve as key catalysts for the induced benefits that are similar to the impacts of the direct benefits and often exceed them. However, for these opportunities to be optimized, substantial effort will need to be given to targeting opportunities and matching local populations with them. This Section presents a summary of the separately bound Supplementary Final Report, Volume III on Poverty and Social Analysis (PSA).

B. Main Characteristics of the Project Impact Area

199. The PIA is defined as the counties, districts and cities through which the alignment passes, and includes 3 provinces, 7 prefecture cities, and 22 counties and districts. Figure 6-1 shows the prefectures and counties along the alignment, and highlights the poverty counties designated by the national and provincial governments. A comprehensive presentation of socioeconomic characteristics are provided in the Supplementary Report on Poverty and Social Analysis.

200. The PIA includes areas that contain abundant mineral resources and farming. Northern Shanxi has already developed a strong industrial base including mining, power generation, iron and steel manufacturing, and chemicals. Northern Shaanxi also has abundant mineral resources but these have not been fully exploited, and TZR will facilitate their development. Northern and middle NHAR have similar resources that have not been fully exploited. It is likely that coal, oil and natural gas exploitation as well as power generation will become important growth industries. Although southern Shanxi and especially Shaanxi’s capital Xi’an, receive substantial numbers of tourists, the PIA is still relatively undeveloped in terms of tourism despite containing considerable historical and natural scenic sites. Tourism could become another future growth engine and TZR will assist with its development. Agriculture will remain the key activity for the rural population in the PIA. TZR will enable increased access to markets, and rural incomes will increase as a result. The PIA prefectures are discussed below.

201. In terms of rural net incomes per capita and as shown in Figure 6-2, all of the PIA provinces remain below the national average, but Shanxi and NHAR have been moving towards the average. Shaanxi on the other hand, appears to be lagging. The county data show that Shanxi’s PIA counties average CNY 2,927 per capita versus CNY 2,299 for the total province in 2004; Shaanxi’s PIA counties average CNY 1,231 versus CNY 1,676 for the total province; and NHAR’s PIA counties average CNY 2,671 versus CNY 2,043 for the total province. However, there are considerable variations between counties. For example, the counties in Wuzhong City, NHAR have rural net incomes per capita of CNY 975 and CNY 985, while those in Yinchuan City averaged over CNY 3,000. In Shanxi, Lishi has a rural net income per capita of CNY 946 while the counties in Taiyuan City have averages between CNY 4,600 and CNY 5,000. Shaanxi PIA counties were all well below the other provinces and the national average, ranging from CNY 975 to CNY 1,564. 54

Figure 6-1: Prefectures and Counties along the TZR Alignment

Yinchuan Wuzhong

Yinchuan Yinchuan

Yongning Yulin Luliang Taiyuan Jinzhong

Taiyuan Lingwu Zhongwei Taiyuan Hengshan Yuci Jiaocheng Yanchi Dingbian Jinzhong Wupu Luliang Qingxu Zizhou Suide Wenshui Zhongwei Zhongning Jingbian Liulin Zhongwei Dingbian Fenyang

Tongxin

Ningxia Hui Autonomous Region Shaanxi Shanxi TZR Route km (375.928) (347.408) (216.553) Legend: Nationally Designated Poverty Counties Provincially Designated Poverty Counties TZR Line 55

Figure 6-2: RURAL NET INCOME PER CAPITA

7000 National 6000 Average 5000 Beijing

4000 Shanxi

YUAN 3000 Shaanxi 2000 Ningxia 1000 0 1990 1995 2000 2001 2002 2003 2004 YEAR

Source: China Statistical Yearbook 2005.

202. Transportation is a key ingredient to economic development and poverty alleviation. Areas of the PIA with a comprehensive transport network have higher incomes and less poverty. For example, Taiyuan and Yinchuan have expressways, rail connections, and airports. Zhongwei has expressways and rail connections. The areas between these eastern and western termini of TZR do not have the same level of transport network development. These areas are poorer, with high incidences of poverty in some counties, and rely on a two-lane paved road, National Highway #307. An expressway is being constructed across these counties, and a north-south rail line has recently opened that provides access at Suide. TZR will enable further development across the PIA counties.

C. Poverty Analysis and Vulnerable Groups

203. The primary causes of poverty in the PIA include the following:

♦ Natural calamities. The PIA is subject to periodic droughts, periods of high rainfall and flooding, hail storms, cold waves, high winds and sand storms.

♦ Poor soil. There are areas in the PIA with notoriously deficient soil and sparse vegetation.

♦ Undeveloped Infrastructure. As discussed, some isolated areas lack access to highways, electricity, safe drinking water, telephones, and are considerably far distance from social services.

♦ Lack of water. In some areas, there is very little water available (few rivers and limited aquifers) for irrigation and livestock raising.

♦ Limited Income Sources. Isolated rural areas are generally dependent solely on agricultural activities for income, which are vulnerable to natural calamities.

♦ Limited Savings. Because of the extent of poverty in the PIA, many poor households lack savings or access to relatives and friends with savings that could be utilized to support the household in the event of a natural calamity or personal mishap or illness. 56

♦ Low levels of Economic Development. There are few employment opportunities other than farming or migratory labor in isolated rural areas.

♦ Limited Technology and Best Practices. Because of their isolation, farming households may not be using the best technologies or practices that could increase their yields.

♦ Health Problems. There are a number of households with disabled or chronically infirmed members. This means that there are added medical expenses, and more mouths to feed.

♦ Climate. In addition to the natural calamities described above, some areas in the PIA are quite arid, and there is little rain or moisture for productive farming.

204. The population, number of minorities, persons in poverty, and the number of poverty villages for the PIA counties are shown in Table 6-1. As the table indicates, minorities, almost all of whom are Hui, are concentrated in NHAR. Poverty is more widely dispersed but clearly significant in the western Shanxi counties (Lishi and Liulin), Shaanxi and the eastern NHAR counties (Yanchi, Tongxin, and Hongsipu). Overall, the number of persons in poverty account for 17.15 percent of the total population, and poverty villages account for 29.67 percent of all villages.

Table 6-1: Population of Affected Counties, 2004 Persons in Number # of % Province/ Population Minorities % Poverty % Poverty of Poverty Poverty % Rural County (000) (000) Minority (000) Villages Villages Villages SHANXI Xiaodian 503 5 0.99% 7 1.39% 89 0 0.00% 29.22% Qingxu 337 0 0.00% 3.5 1.04% 193 0 0.00% 82.49% Yuci 542 0 0.00% 0 0.00% 289 0 0.00% 33.76% Jiaocheng 220 0 0.00% 52.8 24.00% 169 70 41.42% 74.09% Wenshui 418 0 0.00% 0 0.00% 211 0 0.00% 89.71% Fenyang 397 0 0.00% 18.8 4.74% 289 0 0.00% 81.23% Lishi 244 0.016 0.01% 53 21.72% 193 155 80.31% 49.59% Liulin 301.2 0 0.00% 70 23.24% 257 73 28.40% 81.34% Subtotal 2962.2 5.016 0.17% 205.1 6.92% 1,690 298 17.63% 63.21% SHAANXI Wupu 82.9 0.009 0.01% 26.4 31.85% 221 98 44.34% 78.77% Suide 345 0.092 0.03% 75.6 21.91% 661 297 44.93% 88.12% Zizhou 310 0 0.00% 110 35.48% 550 160 29.09% 89.84% Hengshan 334 0 0.00% 82 24.55% 358 100 27.93% 89.82% Jingbian 277 0 0.00% 158 57.04% 209 107 51.20% 89.89% Dingbian 317 1.362 0.43% 87 27.44% 334 158 47.31% 84.54% Subtotal 1665.9 1.463 0.09% 539 32.35% 2,333 920 39.43% 85.29% NHAR Yanchi 161 3.691 2.29% 52 32.30% 99 51 51.52% 70.19% Tongxin 325 271.418 83.51% 80 24.62% 221 58 26.24% 74.15% Hongsipu 141 86.634 61.44% 122 86.52% 85 60 70.59% 88.65% Zhongning 294 49.424 16.81% 41 13.95% 134 25 18.66% 65.31% Zhongwei 347 5.966 1.72% 22.9 6.60% 149 0 0.00% 63.98% Lingwu 237 111.6 47.09% 20.3 8.57% 76 28 36.84% 51.48% Yongning 204 37.406 18.34% 24 11.76% 86 14 16.28% 76.96% Jinfeng 138 46.768 33.89% 4 2.90% 28 0 0.00% 30.46% Subtotal 1847 612.907 33.18% 366.2 19.83% 878 236 26.88% 65.73% TOTAL 6475.1 619.386 9.57% 1110.3 17.15% 4,901 1,454 29.67% 69.72% Source: County Statistical data.

205. A total of 2,387 households with a population of 8,131 were surveyed by the Consultant. About 37.5 percent of the total sample households were classified as poverty households by the local governments. The Consultant used net income of CNY 965 per capita to estimate the 57 poverty incidence in the sample. Some 604 households out of 2,387 households surveyed or 25.3% have net income of CNY 965 or less per capita.

206. Geographic location along the alignment is a crucial factor in determining poverty. The western termini of TZR in NHAR and the eastern counties in Shanxi are the most developed areas, and provide people with more and higher wage-earning opportunities, and as these areas are more affluent, business activities will also tend to produce higher incomes. For the western Shanxi and eastern NHAR counties as well as for all of the Shaanxi counties, these opportunities are far more limited, and the result is lower incomes and considerable poverty. In terms of poverty alleviation, all of the local governments in the PIA have active programs. In Wupu for example, the major thrusts include: 1) development of targeted poverty reduction villages based on improved living conditions and upgraded infrastructure; 2) active implementation of village relocation in areas with more and better land and access to water; 3) provision of micro-credit for the development of farm production and small processing industries; and 4) implementation of poverty reduction projects financed by CNY 1.81 million from the ADB.

207. The ACWF in Luliang City Prefecture (Jiaocheng, Wenshui, Fenyang, Lishi, and Liulin counties) has recently implemented a World Bank micro-credit program targeting poverty alleviation that has been assessed as highly successful, and could provide a useful model in implementing income restoration strategies for women during the Project.

208. Shaanxi has a very positive village development program that provides funds for roads, water, electricity, and other services to villages plus the establishment of village enterprises, and its funding is going to roughly double during the next 5-year plan. This will be of considerable benefit to those villages that have significantly higher number of AP.

209. NHAR recently implemented a program aimed at relocating villages. The villages are provided with a range of services including new houses with higher standards, land use planning that enables increased amounts of arable land, secure drinking water, telephones, electricity, television access (cable or satellite), roads, and as appropriate schools and clinics. The province and counties provide up to 50% of the funding, and the villages the remaining 50%. Officials indicated that any village that is affected by TZR land acquisition and decides to participate in this program will be able to apply their compensation funds (providing their 50% contribution). This could be an extremely valuable mechanism leveraging the compensation received for TZR with another funding source and facilitating resettlement and income restoration.

210. With respect to gender development, the following recommendations are made to ensure that women fully benefit from the construction of TZR:

211. Women heads of household, if qualified, should receive priority treatment in obtaining suitable jobs during the construction. The target of 35 percent should be included in the construction contracts. Women should be encouraged to seek jobs in the restaurants and hostels that spring up to accommodate the work camps as well as jobs such as selling food and basic supplies to the work crews and laundry services. Most of these jobs are somewhat flexible in their timing, thus allowing women to earn money while caring for children and elder relatives. The local government employment office can assist in this regard. Women when appropriate should receive small loans and counseling to set up businesses that serve the construction sites. ACWF and PAOs have some micro-finance loans and women business mentors.

212. The railway should be encouraged by MOR to hire at least 25 percent women for their operations and provide training as required. It should involve local people (including half women) in the design of the stations and set aside special areas for sale of handicrafts, food and other items. The loan program should continue to assist women entrepreneurs to set up small businesses in the station or adjoining it. Local governments should fully involve women and other vulnerable groups in planning for development around the stations, so that opportunities are generated for both men and women, poor and non-poor. Women should be actively involved in the planning for further tourism. This sector opens many opportunities for women and their 58 creative energy needs to be engaged as well as men. Women should have full opportunity to take part in sustainable activities so that businesses formed by women are transitioned for the long- term and income generated is turned into sustainable assets for poor or vulnerable households.

213. An active HIV/AIDS public awareness program that reaches women and men must be established as indicated below. The provincial governments have indicated that their health departments have well-established programs. It is critical that they specifically reach out to the alignment communities and work camps. Women must also be warned about the increasing prevalence of human trafficking so that they can protect themselves and their children.

214. The Project is not anticipated to have adverse impacts on women. The Project is anticipated to benefit women through increased employment and income opportunities through direct, indirect and induced impacts. It is also anticipated that women will benefit through improved access to markets, goods and services, and reduced transport costs.

215. Of the 6.475 million people living in the PIA counties, 619,386, or 9.6 percent, are ethnic minorities, almost all of whom are Hui. However, the Hui are largely concentrated in NHAR, where they account for 33.2 percent of the population. The Hui have a long history of living and working throughout China. As such, they are fully integrated with the majority Han, and have not been excluded from political, economic, and social systems in China. The TSDI’s Immigration Resettlement Plan for the Project (May 2005) found that there are no significant income differentials between ethnic minority households and Han households. This corroborates the finding from a recent ADB project “that there is no correlation between nationalities and income level” (The Resettlement Plan, Ningxia Road Development Project, Tongxin-Yanchuanzi Expressway, November 2002, pp. 46). As such, it is anticipated that the Hui and other minority groups will be beneficiaries of the Project to an extent similar to Hans through increased income and employment opportunities, improved access to markets, reduced transport costs, and improved access to goods and services. The TSDI surveys determined that the ethnic minorities will not become disadvantaged as a result of the Project, and special mitigation measures will not be necessary. There is no information that the Consultant has received or been made aware of that indicates in any manner that Hui or other minorities will be adversely affected by the Project. In fact, minorities are anticipated to benefit from TZR’s development through job creation and increased access to markets, schools and clinics via a safer and relatively cheaper mode of transport. Poor areas with minorities such as Tongxin and Hongsipu will greatly benefit because TZR will give them rail access that they have previously lacked. Collectively, these data indicate that Hui and other minorities will gain from TZR. Therefore, an Ethnic Minority Development Plan is not necessary.

216. The Consultant’s survey identified 124 households, or 5.2 percent of the total sample, having a disabled or chronically infirmed member. As with women-headed households, the number of poor households reflects the poverty around them. In NHAR, 11.8 percent of the households with a disabled or chronically infirmed member have net incomes per capita below CNY 965, 40.5 percent in Shanxi, and 62.5 percent in Shaanxi. Beyond income levels and economic opportunities, those households in areas close to urban centers such as Taiyuan and Yinchuan, also have better access to medical facilities and other social services that are not available or more limited in the less developed areas. Thus, TZR will provide an important vehicle to access services that would otherwise be difficult to obtain.

217. The Project should result in reduced transport costs for goods and services both for those utilizing the railway as well as from the ensuing competition between rail and road transport modes for customers. The Project will utilize tariffs that will benefit the entire PIA, thus affordability should not be an issue affecting people’s livelihood. Base passenger tariffs will be about one-half bus tariffs, and freight tariffs will be about one-ninth current road transport charges.

218. The introduction of a railway into a previously isolated area will have substantial benefits by improving access to markets, employment opportunities, and improved access to goods, services, and social infrastructure. However, there could also be negative impacts on vulnerable 59 persons and groups, and it may also increase health risks to PIA residents if they are not aware of issues to which they could become vulnerable. These are outlined below.

219. The most vulnerable groups during the transition are households that lose housing, land or both during resettlement. Since they are facing loses as a result of the construction, they should also be given an opportunity for work during construction as well as during the operation of the train service. When planning is done for developing commercial centers in the vicinity of the train stations, they should be offered an opportunity to participate as workers or business owners. It is critical that they are consulted regarding their interests in adapting to a new location or means of earning a living. They should also be given access to other available resources that will facilitate reducing if not eliminating the potential negative impacts resulting from resettlement. Monitoring their adjustment is part of the monitoring process for the resettlement plan, but should also be integrated into the monitoring program for the socio-economic and poverty impact.

220. A train running through an area poses a danger to livestock and people if they cross the tracks. Importantly, all crossings will be grade separated and the entire alignment will be fenced except in areas with difficult terrain, in tunnels and on bridges. In addition, a community safety awareness program will be implemented by the railway. A particularly effective community awareness model has been implemented in the ADB-funded Dawan Railway Project (Loan 1439- PRC, approved June 4, 1996), with the result that there have been no accidents involving PIA residents in two years of operations that could be used as a basis for a similar program by TZR.

221. Construction work sites always require careful monitoring both for food safety and sanitation and for safe operating practices. Food and sanitation are the responsibility of the county health department in the jurisdiction where construction is taking place. Health department inspectors are required to visit the work camp site on a regular basis to insure that basic health and sanitation regulations are being followed. This has been done for previous MOR projects. The system of team leaders organizing labor from their home area makes the leaders more aware of providing adequately for the team. MOR has a set of safety regulations that apply to the work site. MOR and the construction company monitor these sites.

222. A major danger is the spread of disease as a result of bringing a mobile population of construction workers and/or mobile professionals into the alignment communities. At the same time, there may be communicable diseases in the local communities that are spread to other areas as workers and professionals return home. Probably the greatest danger is HIV/AIDS. While HIV/AIDS does exist along the alignment, the incidence is relatively low. In 2004, there were 263 cases of HIV/ AIDS in Shaanxi Province, 917 in Shanxi, and 36 cases in NHAR. All three provinces have active public information programs for HIV/AIDS awareness. They distribute leaflets and posters and feature radio and TV ads, and schools have also have awareness and prevention programs. In addition to these ongoing awareness programs, it will be important to have an awareness program within the camps. This should include health workers coming to the camp to talk with workers in their work teams and to offer testing and counseling as requested. The same active HIV/AIDS awareness program will need to be conducted in the villages, towns and cities near the construction sites. In addition to the awareness, testing and counseling program, there should also be a program for condom availability in the work camps, in the hotels and restaurants that the workers frequent, and in entertainment centers. If possible, they should be distributed free. If not, they should be distributed at cost.

223. Another issue is whether, during construction or because the trains will bring more outsiders to the area, human trafficking will become more of a problem. Human trafficking particularly in women and children is a major problem in China. According to a recent Xinhua article, the public securities agencies rescued 5,461 abducted women and 3,488 abducted children nationwide in 2004. According to the article, the nature of abduction has changed in the past few years. In the past, the objective was to obtain wives and illegal adoptions. Increasingly, the objective is to obtain forced labor, prostitutes, beggars and thieves. Wives and sons of migrant laborers have become targets. Gangs and criminal syndicates have become more involved using more violent tactics. The problem is also increasingly cross-borders. According to 60 the Public Security Vice Minister, law enforcement agencies need to emphasize prevention, address the causes of trafficking and cooperate internationally to stop these groups. An additional aspect of the problem is poor families that send their girls to the sex trade for income. Domestically, women and children are trafficked for marriage and forced labor. Chinese women are also trafficked to Australia, Burma, Canada, Malaysia, Japan, the Philippines, Europe and the United States for forced prostitution. Women from Burma, Malaysia, North Korea, Nepal, Russia, Vietnam and Mongolia are trafficked to China for prostitution as well. China has not signed the UN Protocol to Prevent, Suppress and Punish Trafficking in Persons Especially Women and Children, but it has increased law enforcement activity and works with NGOs and international organizations to improve law enforcement training and victim support services.

224. There are laws in place protecting minors and women from this abuse, however, they are not easy to enforce. Law 1992 on the Protection of Rights and Interests of Women specifically outlaws trafficking, kidnapping of women and coercion into prostitution. The death penalty is imposed for traffickers who coerce girls under 14 into prostitution. Between 2001 and 2003, the Chinese Government investigated 20,360 cases in which 43,215 women and children were rescued and 22,018 traffickers were arrested. While the police report a 27% decline in investigations in 2003, there were 3,999 suspects arrested and 774 traffickers punished. During the construction period, the local governments along the alignment should raise awareness on this issue, so as to minimize the impact. Increased awareness as the railway becomes operational will be an important factor in identifying criminals that have come from larger cities to set up illegal operations in the area. There should also be a heightened awareness on the part of public security forces to apprehend offenders. Training, programs and information materials exist. MOR and the PIA jurisdictions should work with NGOs and the public security services proactively to insure that TZR does not lead to an increase in dangers to women and children in the PIA. They should also share information in the work camps to alert women who are working on the project, but also men so that they inform their wives at home to exert caution. Because the poor are more vulnerable, the PAOs should also be actively involved in the campaign. .

225. Appendix 1, the Social Development Action Plan, outlines proposed actions, targets, agencies, funding sources and monitoring indicators that have been described above and in the following two sections. Significantly, there is tremendous opportunity to realize the targets through focused programs developed by the various stakeholders. The Summary Poverty Reduction and Social Strategy is shown in Appendix 2.

D. The Potential Impact of TZR on Poverty

226. The PIA includes parts of China that have been well developed such as Taiyuan and Yinchuan, as well as other areas such as Wupu that have remained relatively isolated from the nation’s recent economic growth periods. The household surveys show that most households do not depend on agriculture for the majority of their livelihood in the well developed areas but almost exclusively on agriculture in the less developed parts. Most of the poverty is in the more isolated areas where productive land is scarce, soil is poor, water is in short supply, resources are relatively undeveloped, and transportation, communication and other infrastructure is very limited. The very fact that many of these households rely heavily on less productive agricultural resources condemns them to a very low standard of living and limits their opportunities for rising above poverty. Poor families are at risk of any natural disaster, serious illness or other challenge to their precarious survival-balancing act. Therefore, access to job opportunities is essential to poor households and preferably job opportunities that do not require traveling to another part of China.

227. The most direct economic benefit of the Project is specific jobs created during the construction and operation of the railroad. They are the easiest benefits to quantify and monitor. The jobs created by the Project are of three types: direct, indirect and multiplier effects. Direct jobs are the hires for TZR’s construction and operation. A construction worker hired by a civil works contractor for TZR, for example, is a direct job during construction. A station worker hired to serve TZR passengers needs is a direct job associated with the operation of TZR. Indirect jobs 61 are those created by suppliers of goods and services to TZR during construction and operation. It is customary to use the term “multiplier effects” to refer to the broader benefits (in this case jobs) created throughout the economy as a whole as those benefits or jobs created by the increased production triggered by the direct and indirect benefits. An estimate has been provided to indicate the sizeable contribution TZR will have on the broader Chinese economy.

228. Some of the railway construction will require highly skilled and moderately skilled workers with railway experience. These positions will be provided by the contractor. There is, however, a considerable amount of work that is unskilled and can readily be done by members of the local community and local poverty households. We estimate that approximately 60 percent of the jobs will be unskilled and that it will be possible to hire more than 50 percent of the unskilled workers from poverty households. A total of 435,000 person years of unskilled labor will be hired in the PIA over the construction period as shown in Table 6-2. If hiring preferences (50 percent) are given to the workers from poor households, then 217,500 person years will be available, and provide poor households with a total of CNY 1,631 million based on wage rates of CNY 25 per day and 300 working days per person year. Actual rates and days worked may vary but this is indicative of the considerable benefits that TZR will provide poor households along the alignment.

229. In addition to the direct construction jobs, a substantial number of unskilled jobs will be created by the industries that supply the building materials. Major quantities of sand, rock, brick, gravel, ballast, and cement will be used to construct TZR, and these materials are produced by industries in the PIA and other parts of China. Based on the quantity estimates, the number of unskilled jobs that are required to produce construction materials totals 161,385 unskilled person years. Estimating that 50%t of these jobs will be in companies currently producing construction materials in the PIA, there will be nearly 81,000 person years required. If preference (50%) is given to hiring workers from poor households, a total of 40,000 person years will be required.

Table 6-2: TZR Direct Unskilled Construction Jobs and Wages 2006 2007 2008 2009 2010 2011 Total Total Unskilled Jobs 41,325 138,330 154,860 60,465 33,495 6,525 435,000 (person years) Total Unskilled Jobs for 20,663 69,165 77,430 30,233 16,748 3,263 217,500 Poor HHs (person years) Total Unskilled Wages 309,938 1,037,475 1,161,450 453,488 251,213 48,938 3,262,500 (CNY 000) Total Unskilled Wages for 154,969 518,738 580,725 226,744 125,606 24,469 1,631,250 Poor HHs (CNY 000) Source: Consultant.

230. Combining the direct and indirect unskilled jobs, indicates that TZR will require a total of nearly 600,000 person years, of which about 515,000 will be in the PIA. With hiring preferences for poor households, roughly 255,000 person years will be available in the PIA. This number is about one-fourth of the total estimated persons living in poverty in the PIA counties, and suggests that many of the poverty households living near the alignment will have considerable opportunity to increase their incomes during construction. At an annual wage rate of CNY 7,500, TZR construction will provide a significant opportunity for unskilled low-income workers in the PIA to increase their household incomes well above the poverty line. Roughly CNY 5,000 million will be paid to unskilled workers, of which nearly CNY 4,000 million will be in the PIA.

231. Following construction of the railway, jobs are created for operating the new train service. The total number of jobs is 8,954 in 2012 and rises to over 14,000 in 2031 as shown in Table 6-3. Of these jobs, an estimated 2,225 low and unskilled workers will be required for maintenance, cleaning, errands, and a range of other activities in 2012, and this rises to over 3,500 jobs in 2031. At an annual average of CNY 10,000, a considerable number of PIA poor households will have the opportunity to permanently escape poverty. While many of the construction jobs tend to be filled by men, a significant number of the operations jobs and train station jobs are filled by women. They provide an opportunity for women to add to family income and particularly assist women head of households who depend on paid employment to provide for education, medical 62 care and all the other expenses incurred in operating a household alone. Station areas generally become job creation centers. Passengers to and from the train require services such as taxis, hotels, restaurants and a variety of retail sales outlets. All of these businesses require workers, many of them unskilled. Creating jobs in the PIA means that households can remain intact. Expanding job availability will enable more people from marginal rural areas to find employment to supplement and/or replace their meager agricultural income.

232. The PIA also has trade and manufacturing activity. The Consultant conducted a survey of ten major industries in each of the PIA counties. Based on responses from 160 companies regarding the impact of TZR on future production levels and job creation, about 52,437 jobs will be created by leading industries in the PIA within the first 3 to 5 years of TZR’s operations.

233. The PIA has areas of natural beauty as well as historic and cultural sites. Tourism development has been relatively limited because of the lack of access that TZR will provide. This suggests that tourism development has considerable potential for development and job creation. Assuming that 15 percent of generated passenger traffic is by tourists (domestic and international), the number of tourists increases from 19,000 in 2012 to nearly 218,000 in 2031. This results in a low level of job creation (172 jobs) in 2012 that increases to nearly 2,000 in 2031.

234. The induced impacts of TZR will be substantial in terms of job creation. The revenues from generated freight revenues will result in expenditures by TZR in other economic sectors, and these expenditures will create jobs. Moreover, the generated freight traffic reflects the development and growth of companies that take advantage of the construction of TZR, and this creates additional jobs. Based on the revenues from generated freight traffic and utilizing the most recent (2000) national input-output tables, TZR induced job growth in various economic sectors has been estimated for 2012, 2020, and 2030. The CNY 1.4 billion in generated freight revenues in 2012 will lead to direct expenditures of CNY 161 million in the broader economy, and this will create 11,543 jobs. The CNY 4.7 billion in generated freight revenues in 2030 will cause direct expenditures of CNY 508 million, and this will create 36,454 jobs.

235. Generated freight traffic is based on the development of new or expansion of existing industries. As noted, the PIA has considerable resources such as coal that have not been fully exploited because of the lack of the low cost transport that only a railway can provide. As these resources become more fully exploited and other industries develop, there will be additional inputs required, including food and banking services, and workers will purchase consumer goods such as televisions. The impact of this economic expansion is considerable. Generated freight job creation will result in over 100,000 jobs in 2012, and rise to about 455,000 jobs in 2031 as shown in Table 6-4. These are not all low or unskilled jobs, reflecting the overall structure of a particular economic sector. Low and unskilled jobs are included, as are executives and accountants.

236. In total, about 124,000 jobs will be created because of TZR in 2012, and this will rise to over 500,000 in 2030 as shown in Table 6-5. Aside from directly providing a safer and cheaper mode of transport serving millions of people, job creation is the next largest impact of TZR, and it will be felt beyond the PIA and throughout China.

237. If roughly 25 percent of the 500,000 jobs are in low or unskilled categories, then about 125,000 jobs will be available to poor households in 2030. Whether wage rates are CNY 7,500 or 10,000 per year, these households will escape poverty. However, there are also broader issues that have to be addressed. There is a great deal of job creation during the construction period that is short term. This fact raises the question of sustainability. Does the worker use the money to satisfy immediate family demands, or plan to save part of it to weather the transition until the station opens presenting new job opportunities, or save the money to start a business venture connected to the train service or other downstream opportunities? Local governments will have additional tax revenue from Project civil works and will have a further stream of tax revenue from the stations, industrial expansion and other business formed to meet the increased market for goods and services. It is recommended that a portion of that revenue be set aside for a program to foster long term sustainability for keeping the construction workers’ households out of poverty 63

238. As the above discussion indicates, TZR will have a major impact on job creation, and thus poverty alleviation. Strategies have been recommended to further exploit the opportunities created by TZR, and the prefectures and counties in the PIA need to be prepared to gear up and maximize them as a vehicle for targeted poverty alleviation. The local governments have developed sound poverty alleviation programs that can utilize TZR as the vehicle to facilitate and accelerate social and economic development in the PIA.

E. Stakeholder Process and Monitoring and Evaluation

239. The stakeholder process has been well developed during the initial field work carried out by TSDI and by the PPTA team during its project preparation work. A list of consultations including surveys, during the preparation for the TZR Project is in the PSA report and a total of 15,150 persons have participated. Further consultations will occur as the Project is developed.

240. A comprehensive monitoring and evaluation regime is presented in the PSA report that complements the monitoring and evaluation activities listed in the SEIA and Resettlement reports.

VII. RESETTLEMENT

241. This section presents the Summary Resettlement Plan, the Resettlement Budget (Table 7- 1) and the Entitlements Matrix (Table 7-2). The Resettlement Plan is available on the ADB website. TZR will cross 3 provinces, 7 prefecture level cities, and 22 counties and districts. The areas near the eastern and western termini are developed urban centers with considerable commercial, administrative and industrial activities. These areas have rail lines and expressways that provide access to China’s national transportation network and the national economy. The areas between these economic centers have relied on the limited capacity of a two-lane paved road for their access to China’s economy. This limited capacity has severely constrained the development of and investment in the western part of the Shanxi Province, the northern part of the Shaanxi Province, and the eastern part of Ningxia Hui Autonomous Region. As a result, there are relatively high incidences of poverty in these areas. However, there are considerable natural resources awaiting development that will be triggered by TZR. For example, there are substantial proven coal reserves in Shanxi and Shaanxi that are not competitive with coal deposits in other regions because of high cost road transport. Similarly, the area’s agricultural production has been limited by lack of water for irrigation and the heavily congested two-lane road, which presents a serious hurdle in accessing markets.

242. An estimated 69,845 mu of land will be permanently acquired, of which 42 percent is cultivated dry land, 36 percent paddy land, 8 percent orchard, 3 percent vegetable plots, 3 percent woodland, and 7 percent wasteland. About 41 percent of the land is in Ningxia, 37 percent in Shaanxi, and 22 percent in Shanxi. Along the alignment, the eastern part of Ningxia and the western and central parts of Shaanxi are sparsely populated and very arid. The Project will also temporarily acquire 28,074 mu for TZR construction activities and access. An estimated total of 428,395 square meters (m2) of structures will be affected, of which 81 percent are residential units and other farm structures; 18 percent are factory buildings, workshops, and other industrial structures; and 1 percent school buildings. Based on the Chinese standard for impact assessment, the equivalent of 11,803 would lose all their land and agricultural livelihoods and 11,956 will have their houses demolished. Since the alignment is a narrow strip of land, land acquisition will affect a much larger number but most of the AP will only lose a small part of their land holding. Based on other railway projects and the low population density in the Project area, it is estimated that the average loss of land per household would be 15%, which means the number of partially affected people would be in the order of 78,687, of which those losing more than 25% would be about 8,000 (i.e., 2,000 households having a significant loss of livelihood). A more accurate account of the number of AP will be available after completion of the detailed measurement surveys. Land acquisition and resettlement impacts will be lessened by aligning the railway away from the most densely populated areas, and avoiding villages, cultivated land, and facilities, where possible, based on consultations with communities. 64

Table 6-3: TZR Operations Jobs, 2012-2031 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Fixed Cost Employees Head Office and Other Offices 900 900 900 900 900 900 900 900 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Station Employees 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 Civil Works Maintenance 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Power and Signaling & Communication Facilities 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 500 Maintenance Total 3,650 3,650 3,650 3,650 3,650 3,650 3,650 3,650 4,300 4,300 4,300 4,300 4,300 4,300 4,300 4,300 4,300 4,300 4,300 4,300 Avg Cost/person-year (CNY) 30,000 30,900 31,827 32,782 33,765 34,778 35,822 36,896 38,003 39,143 40,317 41,527 42,773 44,056 45,378 46,739 48,141 49,585 51,073 52,605 Total Labor (million CNY) 109.50 112.79 116.17 119.65 123.24 126.94 130.75 134.67 163.41 168.32 173.37 178.57 183.92 189.44 195.12 200.98 207.01 213.22 219.61 226.20 Passenger Variable Cost Employees Drivers 88 93 97 103 108 114 120 126 132 138 144 150 157 164 171 178 186 194 202 211 Conductors 176 185 195 205 216 227 239 252 265 276 288 301 314 327 341 356 371 387 404 421 Train Daily Inspection/Maintenance 440 463 487 513 540 568 598 629 662 691 721 752 784 818 853 890 928 968 1,010 1,053 Train Overhaul/Repair 220 232 244 256 270 284 299 315 331 345 360 376 392 409 426 445 464 484 505 526 Station Employees 800 842 886 933 982 1,033 1,087 1,144 1,204 1,256 1,310 1,367 1,426 1,487 1,551 1,618 1,687 1,760 1,836 1,914 Total workers 1,724 1,814 1,910 2,010 2,115 2,226 2,343 2,466 2,596 2,707 2,824 2,945 3,072 3,204 3,342 3,486 3,636 3,792 3,956 4,126 Avg Cost/person-year (CNY) 30,000 30,900 31,827 32,782 33,765 34,778 35,822 36,896 38,003 39,143 40,317 41,527 42,773 44,056 45,378 46,739 48,141 49,585 51,073 52,605 Labor Cost (CNY million) 51.72 56.07 60.78 65.89 71.43 77.43 83.94 90.99 98.64 105.97 113.85 122.31 131.40 141.17 151.66 162.93 175.04 188.05 202.02 217.03 Freight Variable Cost Employees Drivers 384 394 405 416 427 438 450 462 474 486 498 511 524 537 550 564 578 593 608 623 Other Train Crews 576 591 607 623 640 657 675 693 711 729 747 766 785 805 826 846 868 889 912 935 Train Daily Inspection/Maintenance 960 986 1,012 1,039 1,067 1,095 1,124 1,155 1,185 1,215 1,246 1,277 1,309 1,342 1,376 1,410 1,446 1,482 1,520 1,558 Train Overhaul/Repair 960 986 1,012 1,039 1,067 1,095 1,124 1,155 1,185 1,215 1,246 1,277 1,309 1,342 1,376 1,410 1,446 1,482 1,520 1,558 Station and Yard Employees 700 719 738 758 778 799 820 842 864 886 908 931 955 979 1,003 1,028 1,054 1,081 1,108 1,136 Total workers 3,580 3,676 3,774 3,875 3,978 4,084 4,193 4,305 4,420 4,531 4,645 4,762 4,882 5,005 5,131 5,260 5,392 5,528 5,667 5,809 Avg Cost/person-year (CNY) 30,000 30,900 31,827 32,782 33,765 34,778 35,822 36,896 38,003 39,143 40,317 41,527 42,773 44,056 45,378 46,739 48,141 49,585 51,073 52,605 Labor Cost (CNY million) 107.40 113.58 120.11 127.01 134.32 142.04 150.21 158.85 167.99 177.38 187.29 197.76 208.82 220.49 232.82 245.84 259.58 274.09 289.42 305.60 Total Employees 8,954 9,140 9,333 9,534 9,743 9,961 10,187 10,422 11,316 11,539 11,769 12,008 12,254 12,509 12,773 13,046 13,328 13,620 13,922 14,235 Total Labor Cost (CNY million) 268.62 282.43 297.06 312.56 328.99 346.41 364.90 384.52 430.04 451.67 474.51 498.64 524.14 551.10 579.60 609.74 641.62 675.36 711.05 748.83 Low and Unskilled Workers 2,225 2,268 2,312 2,358 2,406 2,457 2,509 2,564 2,896 2,948 3,001 3,056 3,113 3,173 3,234 3,298 3,364 3,433 3,504 3,578 Wages for Low & Unskilled (CNY million) 22.25 22.68 23.12 23.58 24.06 24.57 25.09 25.64 28.96 29.48 30.01 30.56 31.13 31.73 32.34 32.98 33.64 34.33 35.04 35.78 Source: Consultant.

Generated Freight By Commodity (Million Tons) Item # Commodity 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 1 Coal 1.44 3.60 4.68 5.22 8.60 8.90 9.21 9.53 9.86 9.96 10.06 10.16 10.26 10.37 10.47 10.57 10.68 10.79 10.90 11.00 2 Crude Oil & Petroleum 0.02 0.04 0.06 0.06 0.07 0.07 0.07 0.07 0.07 0.07 0.08 0.08 0.08 0.08 0.08 0.09 0.09 0.09 0.09 0.09 3 Iron & Steel 0.03 0.08 0.10 0.11 0.12 0.12 0.13 0.14 0.14 0.15 0.16 0.16 0.17 0.18 0.18 0.19 0.20 0.21 0.21 0.22 4 Fertilizer 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Table 6-4: 0.00 TZR Generated 0.00 Freight Impacts 0.00 on Job Creation 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5 Containers 0.15 0.39 0.50 0.56 0.59 0.59 0.60 0.61 0.61 0.62 0.62 0.62 0.62 0.63 0.63 0.63 0.63 0.64 0.64 0.64 6 Other 0.62 1.54 2.01 2.24 2.35 2.38 2.40 2.43 2.46 2.47 2.48 2.49 2.50 2.51 2.52 2.53 2.54 2.55 2.56 2.57 Total 2.26 5.65 7.34 8.19 11.72 12.06 12.41 12.78 13.16 13.27 13.39 13.51 13.64 13.76 13.88 14.01 14.14 14.27 14.40 14.53

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 1 Coal 532.68 1331.70 1731.21 1930.96 3181.38Generated 3292.73 Freight Market 3407.98 Output Value 3527.26 By Commodity 3650.71 (CNY Million) 3687.22 3724.09 3761.33 3798.94 3836.93 3875.30 3914.06 3953.20 3992.73 4032.66 4072.98 Item # Commodity 2 Crude Oil & Petroleum 36.00 90.00 117.00 130.50 137.25 142.05 147.02 152.17 157.49 157.49 163.86 167.13 170.48 173.89 177.36 180.91 184.53 188.22 191.98 195.82 3 Iron & Steel 163.10 407.76 530.09 591.26 621.84 652.93 685.58 719.85 755.85 786.08 817.52 850.23 884.23 919.60 956.39 994.64 1034.43 1075.81 1118.84 1163.59 4 Fertilizer 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5 Containers 2777.21 6943.03 9025.94 10067.40 10588.13 10704.60 10822.35 10941.39 11061.75 11106.00 11150.42 11195.02 11239.80 11284.76 11329.90 11375.22 11420.72 11466.40 11512.27 11558.32 6 Other 7405.90 18514.76 24069.18 26846.40 28235.01 28545.59 28859.59 29177.05 29497.99 29615.99 29734.45 29853.39 29972.80 30092.69 30213.06 30333.92 30455.25 30577.07 30699.38 30822.18 Total 10,914.90 27,287.25 35,473.42 39,566.51 42,763.60 43,337.90 43,922.52 44,517.72 45,123.80 45,352.78 45,590.34 45,827.10 46,066.26 46,307.88 46,552.02 46,798.75 47,048.13 47,300.23 47,555.13 47,812.90

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 1 Coal 6,487 16,218 21,083 23,516 38,744 40,101 41,504 42,957 44,460 44,905 45,354 45,807 46,265 46,728 47,195 47,667 48,144 48,625 49,112 49,603 2 Crude Oil & Petroleum 119 297 386 431 453 469 485 502 520 520 541 552 563 574 586 597 609 622 634 647 3 Iron & Steel 1,016 2,540 3,302 3,682 3,873 4,067Generated Freight 4,270 Job Creation 4,483 By Commodity 4,708 4,896 5,092 5,295 5,507 5,727 5,957 6,195 6,443 6,700 6,968 7,247 Item # Commodity 4 Fertilizer00000000000000000000 5 Containers 26,044 65,111 84,644 94,411 99,294 100,387 101,491 102,607 103,736 104,151 104,567 104,986 105,406 105,827 106,251 106,676 107,102 107,531 107,961 108,393 6 Other 69,452 173,629 225,718 251,763 264,785 267,698 270,642 273,619 276,629 277,736 278,847 279,962 281,082 282,206 283,335 284,468 285,606 286,749 287,896 289,047 Total Jobs 103,118 257,795 335,134 373,803 407,150 412,720 418,392 424,169 430,053 432,207 434,401 436,602 438,823 441,063 443,323 445,603 447,904 450,227 452,570 454,936

Source: Consultant.

Table 6-5: TZR Total Jobs Created, 2012-2031 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 TZR Direct Jobs 8,954 9,140 9,333 9,534 9,743 9,961 10,187 10,422 11,316 11,539 11,769 12,008 12,254 12,509 12,773 13,046 13,328 13,620 13,922 14,235 TZR Induced Jobs 11,543 13,244 14,945 16,646 18,348 20,049 21,750 23,451 25,152 26,291 27,431 28,570 29,709 30,849 31,988 33,127 34,266 35,406 36,545 37,684 Generated Freight Jobs 103,118 257,795 335,134 373,803 407,150 412,720 418,392 424,169 430,053 432,207 434,401 436,602 438,823 441,063 443,323 445,603 447,904 450,227 452,570 454,936 Tourism Jobs 172 344 516 688 860 922 988 1,059 1,135 1,217 1,278 1,342 1,409 1,479 1,553 1,631 1,713 1,798 1,888 1,983 Total Jobs 123,787 280,523 359,929 400,672 436,101 443,651 451,317 459,101 467,656 471,254 474,878 478,522 482,195 485,900 489,637 493,407 497,211 501,051 504,926 508,838 Source: Consultant.

Table 7-1: Total Budget for Three Provinces

Average Total Amount of Total Land Item Compensation Compensation (mu) Rate (CNY/mu) (CNY million) Compensation for Land Acquision: Dry Land 29,265.0 7,498.5 219.4 Orchards 5,583.5 25,885.8 144.5 Paddy Land 24,936.7 20,962.1 522.7 Vegetable Plots 2,414.0 22,890.6 55.3 Woodland 2,234.0 8,159.4 18.2 Waste Land 4,527.5 695.1 3.1 Spoil Disposal Land 884.5 300.0 0.3 Fruit Trees and Other Trees 28.91 (20% of orchards) New Farmland Development 32.19 Cost Sub-total 69,845.2 1,024.7 Compensation for Standing Crops: Dry Land 25,939.4 410.5 10.6 Orchards 5,583.5 1,398.6 7.8 Paddy Land 23,070.0 761.2 17.6 Vegetable Plots 2,414.0 2,493.4 6.0 Woodland 2,234.0 697.7 1.6 Sub-total 59,240.9 43.6

Compensation for Temporary Land Acquisition: Dry Land (total rate for 3 years) 9,386.0 2,908.6 27.3 Waste Land (total rate for 3 18,688.0 1,317.7 24.6 years) Sub-total 28,074.0 51.9 Compensation for Building Demolition (sq.m) House with Tile Roof 48,912.0 458.3 22.4 Brick/Wood Building 269,090.0 403.9 108.7 Cave Dwelling 29,200.0 300.7 8.8 Factory Building 20,638.0 496.9 10.3 School Building 5,000.0 488.5 2.4 Appurtenances (green houses and other structures) and 55,553.0 567.2 31.5 Compensation for Moving Expenses Sub-total 428,393.0 184.1 Relocation of Infrastructure and Utilities 106.75

Administrative Fee (5%) 68.94 Total Estimated LAR Budget (excluding taxes and fees) 1,480.0 Source: Compiled from Resettlement Plan Report Appendix 7-A.

243. MOR in consultation with provincial and local governments prepared the initial Resettlement Plan (RP) with the assistance of TSDI in May 2005, including a survey of 1,100 potentially affected households. The initial RP was revised in September 2005 and updated by the Consultant following field surveys completed in November 2005. This RP is based on the first stage of a preliminary design study, village surveys of 79 somewhat affected villages, 1,319 additional household surveys, provincial, prefecture and local government statistics, and consultations with provincial, prefecture, county/district and local officials, village leaders, and affected households. The RP will be updated based on the detailed measurement survey and the final alignment, and full disclosure of the RP to affected persons will occur prior to Project Appraisal that is expected in March 2006. Based on this schedule, the Resettlement Information Booklet has been provided to all AP in March 2006. The updated RP will be disclosed to AP and submitted to the ADB for concurrence prior to the commencement of land acquisition. 67

Table 7-2: Entitlement Matrix for Land Compensation Entitled Type of Application person/ Compensation policy Compensation Entitlement Implementation issues loss group

Permanent Arable land a) Land- • Land compensation and • Full compensation for land-owning groups and land loss • Village meetings to be held to decide the allocation of loss of land. located in the owning resettlement subsidies. households, the share between land owning group and funds, whether there is land redistribution, and how to right-of-way of villages • Replacement land and/or cash households will be determined by villagers’ meeting. In utilize collective funds for investment in income generating railway and (550) and payments and/or income Shanxi, at least 80% will be paid to AP. Compensation activities such as improved cultivation techniques/ associated groups. restoration measures sufficient to standards are in Table 5-3. irrigation/ small business development/ training. facilities ensure. Maintenance of existing (3502 ha). b) Farmers economic and social conditions. • If no replacement land is allocated to the AP, at a minimum, • Higher level authorities to approve and monitor village who use the all of the resettlement subsidy will be paid to the AP in cash. level proposals and to facilitate training programs. land (11,803 people/ 3,252 HHs).

a) Land- • In addition to the above • Based on the lost cultivated land and vegetable land, NHAR • Local government and affected villages will prepare owning entitlements, NHAR has agreed to has agreed to pay an additional CNY 32.19 million for new detailed plans for new farmland development. villages in provide additional compensation to farmland development. Ningxia. affected villages for creating new farmland

Forest land Local forest • Cash compensation to forest • Refer to Table 5-3 for standards. • Compensation will be paid by the provincial forest within ROW bureau / bureau according to standards and bureaus, which are responsible for reforestation.. (149 ha). Forestry regulation of provincial by-laws Farm.

Non-cultivated Land- • Cash compensation. • All affected villagers’ groups • Compensation based on provincial by-laws land within owning ROW (1005 groups. ha).

Temporary Arable land Farmers • Who lose crops will receive full • Cash compensation based on AAOV for each year land is • Village Committee/farm owners must be notified in loss of land. adjacent to who use the compensation according to not available, plus reinstatement to pre-construction advance and paid accordingly. The land administration ROW for land. compensation standard. condition (see Table 5-4). offices must approve sites, duration, compensation construction payments and restoration after use. purposes (626 ha).

Wasteland Villages • Lump sum cash compensation • Compensation paid to village collective. adjacent to who own based on wasteland, plus ROW and the land reinstatement to pre-construction other borrow condition. and disposal sites (1246 ha.) 68

Entitled Type of Application person/ Compensation policy Compensation Entitlement Implementation issues loss group

Crops losses Permanent All owners • Crops losses will be compensated • Full payment direct pay to the crop and tree owners and Tree land loss and who lose at a rate equal to the market value losses. temporary standing of the harvested crops. use. crops and • Trees will be compensated based trees on project standards.

Loss of Rural house Households • Cash compensation at replacement • Direct compensation to affected households or owners. • Sub-villages and the AP to decide on location of new residential demolition. (3,417) and rates for all types of houses. Compensation standards are in Table 5-5. The village will residential plots. Contractors will provide fill and level the housing and collectives • Allocation of house plot or cash assign a new house plot to affected households. The Project sites for house construction and make connections to attachments. a) Collective who lose compensation for house plot will pay moving and transition allowances of CNY 200/sq.m. existing public utilities. losses houses and purchase • Households moving to nearby towns would receive urban villages, other plots. • Transition allowances – allowance registrations and privileges for housing, schooling and units (5,000 Of which for transportation and temporary other social services. 2 m ) 586 are housing. b) Private poverty • Poverty households will receive at losses households. least the minimum standard Owner of the housing and assistance with building or construction and moving houses (347,203 m2).

Urban house Households • Cash compensation or exchange • Cash compensation paid to owner or provision of exchange • Housing will be provided or reconstructed in accordance demolition, if and housing, based on urban housing housing, plus moving and transition allowances. with urban planning regulations. any. collectives. market appraisal.

Loss of Establishment School • Cash compensation for land or • Full compensation based on compensation standards. • Assistance in finding new site if relocation of institutional sited in or (one) and replacement site provided. establishment is unavoidable. buildings. affected by any other • Cash compensation for buildings. • New school must be ready prior to relocation, if any ROW. public • Construction of new school by EA affected. buildings. or by local government in consultation with beneficiary groups.

Business State or Affected • Compensation for lost assets will • Compensation for structures is based on Table 5-5, but • The business losses allowance will be based on the total losses. Collective enterprises be negotiated and paid to the subject to appraisal and negotiation. post-tax profit during the six months prior to relocation as enterprises. (15), and owner, along with business losses, • Business/salary losses will be paid on a monthly basis for up declared in the tax receipts. workers- moving and transition allowances. to 6 months after relocation. (permanent Local government will assist to find • Salaries for workers will be paid for up to 6 months, or in • Local government will assist enterprises with the and contract a new site, if required. accordance with contracts. relocation and will ensure workers are re-employed. Any staff). • Compensation for lost wages will laid off workers will be given priority for training, job be provided directly to workers. assignments and/or income subsidies. 69

Entitled Type of Application person/ Compensation policy Compensation Entitlement Implementation issues loss group

Small private Owners and • Cash compensation for relocation • Compensation for structures is based on Table 5-5. • Informal shops will be treated the same as registered shops. workers – of shops (materials, moving, shops. They will be assisted by local government to set up Legal and damage to goods). • Compensation for loss of profit and wages paid for up to 3 in a better location. informal. • Assistance to identify new site and months. get a business license.

Vulnerable Households/ Those who • Special assistance will be provided • Construction contracts specify hiring preferences. • Relevant government sectors provide guidance and groups. persons live below by local government (e.g., hiring • TZR to set aside low and unskilled operations jobs. supervision on buying insurance where it is feasible. directly the poverty preference for TZR construction • Training programs. • Each community establishes a “vulnerable group affected by the line, and operations jobs, skills and • Access to grants and loans to start businesses. assistance team” headed by township and village leaders. Project (Hui: landless, livelihood management training, • House site selection preferences. The team will collect and feed back the needs of 2010 aged, grants/loans) for income vulnerable groups and provide assistance in a timely • Assistance with relocation, construction. people/586 women, restoration, either to remain in manner. • Preference to obtain new farmland. HHs; other children, farming or to start a sideline • Support and monitoring by Poverty Alleviation Offices, vulnerable minority, business • Utilize benefits from provincial and county village ACWF, RCSOs. groups: 3035 long time • Provision of “free” labor to assist development programs, including improved house people/858 sickness with relocation, house construction, standards. HHs). with heavy and land reclamation. burden for • Refer to Section 6.6. children’s education fees, etc.

Households Seriously Seriously • Special assistance will be provided • If the AP prefers, an equal amount and quality of • These household will be identified during DMS and closely with income affected affected by local government (e.g., hiring replacement land will be provided, either from reserve land monitored until sustainable restoration is achieved restoration households/ households preference for TZR construction or voluntary land adjustment; • Funds and other special measures will be allocated from hardships. persons or and operations jobs, skills and • if the AP prefers to start a sideline business, local officials the contingency funds (see Table 9-2). directly households livelihood management training, will provide advice and support to identify feasible activities affected by the with grants/loans) for income and invest the compensation wisely; Project inadequate restoration, either to remain in • in special circumstances, the local government or village capacity for farming or to start a sideline collective will assist to arrange micro-credit through the self- business. Poverty Reduction Office and/or the ACWF; rehabilitatio • Two household members will receive skills training (farm n to be or non-farm), of which at least one person must be female. determined during DMS. Source: Consultant.

244. The resettlement objective is to ensure that compensation and entitlements provided to AP are adequate to at least maintain their "without-project" standard of living, with prospects of improvement, in line with the Land Administration Law (1998) of the PRC and with ADB's Policy on Involuntary Resettlement (1995), and Policy on Indigenous Peoples (1998). In addition, affected people that are poor or vulnerable should be made better off, either as direct beneficiaries or through special measures to safeguard and enhance their living conditions. People losing land, housing, other assets, or other means of production will be compensated at replacement cost and assisted in restoring their incomes and living standards. In 2004, the PRC Constitution was amended to ensure that people are compensated according to law for land expropriated for public projects. The State Council (SC), China’s highest policy making body, issued its Decision on Further Reform to Strictly Implement Land Administration, State Document No.28 (2004), which requires public consultation with all AP prior to approval of projects, maintenance of the living standard of AP, strengthened monitoring procedures, and public accounting of the receipt and distribution of resettlement funds. Payments will be made to the village collectives, and they will determine the allocation of funds in conjunction with AP and local government officials. At the minimum income restoration plans will be prepared for seriously affected villages with particular emphasis on long-term sustainable income enhancement strategies.

245. The RP stipulates eligibility/entitlement provisions for AP. SC Document No. 28 establishes that the level of maximum compensation rates for land acquisition and resettlement subsidy of up to 30 times the Average Annual Output Value (AAOV) may be increased if it is not adequate for income restoration of AP. The provinces are utilizing the revised implementation methods in accordance with the Land Administration Law and SC Document No. 28. Compensation for temporary land loss will be paid directly to the AP and the land will be restored to its original state after use. Compensation for rural housing losses will be paid directly to the AP at replacement cost, free of depreciation, demolition expenses and salvaged materials. In general, rural households will rebuild their own houses within the same village and at the standard of being as good as, if not better than their existing houses. Crop and tree losses will be directly paid to the AP. Factories, schools and other institutions and enterprises will be compensated at replacement value for relocation and reconstruction, using the latest market prices of materials and labor.

246. The 79 villages surveyed by the Consultant are on the alignment and have been identified as being “somewhat affected” by TZR. The 1,319 households with a population of 4,336 people surveyed by the Consultant were selected by local officials as being the most affected by TZR. The average net income per capita for the surveyed population is CNY 3,291. About 20.3 percent of the total surveyed households had net incomes per capita below CNY 965, which is the national poverty line for 2005. 20 Special assistance such as free labor for building houses, materials, and additional funds will be provided to the vulnerable households that include orphans, widows, and the disabled, and are largely dependent on agricultural production for their income.

247. Households headed by women represent only 0.8 percent of the total surveyed households. While this may seem a low representation, it should be noted that in these rural areas, it is generally uncommon for a woman not to live with a family. Although there were very poor households in the small sample of women-headed households, there were also ones with net incomes well above the poverty line, especially in or near urban areas, where there are more opportunities to earn income from wages or business. Households with a disabled or infirmed member constitute 4.9 percent of the surveyed households. As with women-headed households, there are very poor as well as wealthier households in this group. Special assistance will be provided to the vulnerable households by local governments on a case-by-case basis consistent with the needs of the household.

20. The 2004 poverty rates in the counties/districts crossed by the alignment are: 6.81 percent in Shanxi, 32.35 percent in Shaanxi, and 19.83 percent in Ningxia. The average poverty in all counties/districts crossed by the alignment is 17.09 percent. 71

248. Hui minority households constitute 16.7 percent of the surveyed households, and all are concentrated in Ningxia. While there are 7 poor Hui households in the sample, there are also wealthier ones, such as in Jinfeng, where the average net income per capita is CNY 5,343 for the 17 Hui households in the sample. The poor Hui households have often been relocated over the last 15 years along with poor Han from mountainous areas to the south of the Project under a provincial program to improve living conditions. Some of the relocated households have successfully transitioned into China’s economy, while others have remained poor albeit with improved living conditions. Thus, the Hui reflect income levels of their respective areas and living conditions. In Jinfeng, they are successful business persons, and have incomes reflecting their success. Where they are poor, this is due to the limited resources available in the area to all residents and inability to take advantage of opportunities, which reflects root causes of poverty rather than ethnicity. The Hui have been politically and economically integrated into Chinese society for centuries and their customs and practices are respected and protected.

249. Each village will utilize the land compensation and resettlement subsidy for income restoration. In accordance with the requirements of SC Document No. 28, compensation for loss of land will be principally distributed to AP although the method of distribution will be determined by the village in conjunction with government officials. In this process the AP will be consulted through consultative meetings to obtain their preferences. Local officials expect that schools, factories and enterprises will rebuild locally and that these organizations and their employees will be fully compensated for any and all losses and costs associated with relocation.

250. MOR, local governments, and prefecture and county-level land acquisition and resettlement offices and land administration bureaus, will be responsible for implementing and delegating resettlement activities to township officials and village committees. The estimated resettlement cost, exclusive of taxes, fees, and physical and price contingencies, is CNY 1.48 billion, ($ 183.1 million), which constitutes 6 percent of the Project’s base cost. The resettlement budget shoiwn in Table 7-1 above will be adjusted based on the actual measurement of physical losses.

251. AP have been and will continue to be informed and consulted about the likely impacts of the Project at various stages. Stakeholders consulted include heads of affected households, village heads and representatives, local government agencies and departments, and vulnerable groups, including women and ethnic minorities. Before March 10, 2006, resettlement information booklets will be distributed and local resettlement plans made available to the public, including all AP. Affected households will also be consulted and will participate in resettlement activities, including compensation standards, allocation and utilization of compensation, detailed measurement surveys, location of underpasses, new housing sites, and grievance redress. During the actual implementation of land acquisition and resettlement, the AP and affected enterprises can appeal any problems or grievances regarding land acquisition, housing demolition and relocation, compensation and resettlement to five levels: the local land administration, local government, the owners of the project, the external monitoring agency, and/or the courts. In addition, there will be frequent opportunities for AP to interact with representatives of the various organizations involved in the implementation and management of the Project through public meetings and hearings, consultations, and site visits to discuss issues related to compensation and resettlement.

252. MOR and prefecture-level land acquisition and resettlement offices, in collaboration with the county resettlement offices, will be responsible for internal supervision and monitoring of compensation payments, house rebuilding/relocation for AP, land redistribution, and grievance redress. Progress reports will be prepared by MOR and submitted to ADB on a quarterly basis, until resettlement is completed. MOR will then prepare a resettlement completion report for submission to ADB. In addition, an independent monitor will be contracted by MOR to carry out the external monitoring and evaluation work. The tasks include: baseline survey, review and verification of the compensation payments, status of land acquisition and compensation payments, appraisal of grievance redress procedures, AP's reaction/satisfaction with entitlements and compensation, assessment of the restoration of livelihoods of AP, and drawing lessons 72 learned for future resettlement planning. The external monitor will prepare monitoring and evaluation reports for submission to MOR and ADB every 6 months until the completion of resettlement activities; thereafter, annual evaluation investigations will be conducted for 2 years and reported to MOR and ADB.

253. The Project will displace a large number of people. However, this could also be to their benefit because, under SC Document No. 28 regarding resettlement policies, compensation payments will be substantial and could provide the basis to invest in income generating activities. Affected households will receive training and skills development assistance that will facilitate income-generating activities. Other assistance such as preferential hiring of AP by construction companies, and access to capital will also be provided. Local poverty alleviation programs provide a valuable source of additional assistance to vulnerable groups and they will be targeted during the implementation of the Resettlement Plan. In addition, the provinces have established programs that directly benefit affected villages and persons. Shaanxi has a very active village development program that provides infrastructure and funds for enterprise development that will be doubled from the 10th to the 11th 5-Year Plan. Ningxia has implemented a village relocation program that provides new and higher standard housing, infrastructure and access to services such as health clinics. The province and counties provide 50 percent of the funding for the relocation program and the village 50 percent. Officials stated that affected villages will be allowed to leverage their compensation funds from TZR towards their 50 percent contribution to the program. Thus, AP could greatly benefit from the TZR provided the resettlement and income restoration activities are properly planned and implemented. If these are successful, TZR could serve as a model for other large projects.

254. MOR and local agencies have extensive experience in land acquisition and resettlement (LAR), including responsibility for LAR for the expressway now under construction that parallels TZR, and other roads and bridges in the area. This experience will facilitate appropriate LAR under this Project. As is the normal procedure, the local government will provide training in LAR procedures to the relevant county and township officials and village leaders who are directly involved with implementation. This will also provide an opportunity to explain ADB resettlement policy and requirements. ADB has agreed to provide support to increase local understanding of ADB policy and requirements set out in this RP.

VIII. INSTITUTIONAL CONSIDERATIONS

255. This Section summarizes the reforms in China’s railway sector since the 1980s. The Consultant’s Supplementary Final Report, Volume I, Section 8 includes a comprehensive review and analyses of these reforms. Reform is a continuing process, and every reform or change highlights additional aspects that need to be further addressed in a rapidly growing and liberalizing economy.

A. Overview of Railway Reforms

256. Since the opening up and liberalization of the economy, the situation in China has been one of continuous change. It is widely recognized that one of the key determinants of China’s ability to continue its economic growth into the Twenty-first Century and to distribute the benefits of that growth to a broad spectrum of the population will be the further development of its railroad system. CR has long been dominated by a monolithic organization that has been traditionally administering the national railway as a government department, performing responsibilities in pursuance of policy mandated by the government, which may invariably not make good commercial sense. This is affecting the sustainability of operations of the national railway.

257. The MOR is in the process of expanding capacity by constructing new lines, improving existing lines with double tracking and electrification, increasing container transport capacity, and upgrading locomotives and rolling stock. Most new line constructions are aimed at addressing regional disparities in development. Whereas these efforts must continue for implementing basic 73 capacity improvements, systemic and structural reforms need to be continued with a view to further improving productivity and efficiency.

258. Because of China’s size and spatial distribution of resources, manufacturing facilities and commercial/trading centers, rail transport is critical for the country’s economy and social interaction of the people. There may be problems and difficulties in making rapid changes without the risk of severe social disruption. Therefore, the government through MOR has been engaged in a continuous and gradual process of economic reform touching all aspects of railway operation and management.

259. The objectives of railway reform are to modernize and improve the efficiency of the railway system and to compete effectively by improving the quality of service to meet the demands of a market economy. The main thrust of the reform efforts has been to: (i) improve productivity; (ii) lower costs and increase transparency of operations by unbundling or divesting non-transportation activities from transportation functions; (iii) commercializing of operations; (iv) improving service quality; (v) separation of social and staff welfare activities; (vi) introducing flexibility in setting tariffs, particularly for new investments; (vii) packaging of railway services that may be operated as independent businesses with private sector participation, such as transportation of containers, transportation of special heavy goods, and transportation of parcels and luggage.

260. Improved performance of CR operations in the past few years, and CR’s success in abating the declining trend in market share of rail have shown the success of MOR’s reforms. In order to keep pace with the rapid economic growth envisaged in the future and the changing market conditions, a continuation of the reform process is inevitable.

B. Government’s Program of Economic Reform

261. China began opening its doors to the outside world in the second half of the 1970s, and as a result, embarked on a course of economic reform. At that time the Chinese economic system was based on traditional central planning for all segments of the economy and direct government financial management of major institutions. The Government not only owned all the economic entities, such as CR, but also was directly responsible for operating these entities. All revenue produced by these entities flowed to the Government, which also provides funding for all expenditures, such as wages, materials, and capital equipment.

262. By 1978, the Government became generally dissatisfied with the speed and level of economic development. It became increasingly apparent that the state-managed entities (particularly the factories) were not producing the desired results to support economic growth. As a result, PRC began introducing a wide range of institutional and economic policy reforms. A fundamental decision was made to introduce the concept of establishing separate state-owned enterprises (SOEs) responsible for managing institutions of economic production that were previously managed by the government. This was done under policy guidelines established by the State Council and monitored by the State Planning Commission (now renamed National Development and Reform Commission-NDRC).

263. The results of economic reforms implemented since 1979 have been impressive. During the 20-year period from 1959 to 1978, GDP growth averaged 5.3 percent per year, whereas during the 23 years from 1981 to 2004 the corresponding figure was 9.6 percent at constant prices (15.6 percent in current prices). This sustained high level performance is unparalleled by any other country on this planet.

264. The rapid economic growth and transformation to a market economy has changed the ground rules for the railways, which under government control remained largely insulated from market pressures. Policy development and institutional restructuring of the railway sector are necessary to respond better to emerging market needs, thereby meeting demand and improving financial results. 74

C. Reforms in the Railway Sector

265. The objective of railway reforms is to modernize and improve the efficiency of the railway system and to compete effectively by improving the quality of services to meet the demands of a competitive market economy.

266. Concurrent with the Government’s program of economic reforms, MOR has been engaged in a process of gradual economic reform touching all aspects of railway operation and management. MOR has participated in these reform programs by introducing many of the institutional and structural approaches, operating practices, and management tools of market economy railways. Though desirable, the reform is not always without its problems. Because of the high modal share of CR for both passengers and freight and its vital economic role, any mismanagement of the reform, in a context of general transportation capacity scarcity could put at risk the rapid economic development of the country. In addition, the swift development of air, road, and water transport has led to competition with rail.

267. In the last few years the pace of reform has accelerated, although it has remained a slow and generally gradual process because of certain characteristics some of which are as follows:

♦ CR is the largest railway under one management in the World. CR transports almost the same amount of freight traffic and more than 16 times the amount of passenger traffic as all of the railroads in the United States combined, including commuter lines.

♦ The national railway has a high turnover of traffic and is among the world leaders in terms of track and equipment utilization rates for both passenger and freight transport. Traffic density exceeds all other major railways in the world. Operation on all routes of the national railway is by electric and diesel-electric locomotives. Wagon and passenger coach utilization also exceeds, or compares favorably with, other railways. Labor productivity in terms of traffic units per employee compares favorably with leading railways in Europe and Asia, but is still substantially below the railways in North America.

♦ Prior to the divestiture of non-rail transport entities (non-core establishments) in 2000, MOR had 3.2 million employees. Less than half of these employees worked on the transportation business. The remaining worked in or were associated with several major construction companies, design institutes, about 40 large and hundreds of small manufacturing companies, 10 major universities, 140 technical schools, and 5600 hospitals and clinics. Divestiture of all these entities was an arduous process.

♦ CR is faced with the problems of extreme shortages of rail transport capacity in terms of fixed infrastructure (railway lines and facilities) and rolling stock, and a shortage of capital to address these problems. CR’s traffic density per route kilometer (32.0 million TUs per route-km in 2004)21 was about 2.5 times greater than on US Class 1 railroads (13.7 million TUs per route-km).

♦ As in the past, in the foreseeable future, CR will experience heavy transportation demands while being constrained with limited railway capacity. Thus, CR will continue to experience transportation constraints, which are likely to affect future economic development.

268. In sum, because of the size of the organization and CR’s critical importance to the overall economy of China, MOR management has implemented major reforms after extensive study and

21. Traffic Unit = Ton-kilometers + Passenger kilometers. TU is also referred to as Converted TKM. 75

numerous pilot programs. Based on the lessons learned on other railway systems a pilot tested and graduated approach is considered more appropriate than a rapid change. The experience of the merger of the Union Pacific Railroad (UP) and the Southern Pacific Railroad (SP) in the US illustrates the intrinsic danger of introducing rapid change to a rail network. The relative importance to the US economy of the combined UP-SP railroad is small compared to the economic importance of CR to the Chinese economy. Also, the traffic density of the UP-SP is small compared to CR, and the changes that were implemented following the UP-SP merger were minor compared to the fundamental changes in the structure of CR that have been implemented or are planned for the next several years. Yet, because of restructuring mistakes in the UP-SP merger, there were significant economic dislocations – particularly in the southwest US that took more than a year to rectify. Experiences with reforms on the erstwhile British Rail and New Zealand Railway have not been without major problems. CR and the Chinese economy can ill-afford to repeat these mistakes and cause the national economy face consequent problems.

269. The matrix in Table 8-1 presents an outline of the reforms undertaken by MOR since 1978. The matrix gives a brief description and purpose of the major reforms initiated by MOR, their implementation status and the results or lessons learned.

Table 8-1: Outline of Reforms on the Chinese Railway Year Brief Description and Purpose Status Results Started Structural Reforms 1978 – 1985 Allowing CR to retain up to 5% of total Replaced in Initial experiment with the principle of 1980 wages for employee bonuses and welfare 1981 better work, better pay. programs. Allowing CR to retain up to 21% of CR Initial experiment of treating CR as a Replaced in 1981 profits for employee bonuses and welfare quasi-profit center rather than as a cost 1983 programs. center. Delegating 53 MOR management Initial steps of decentralized functions, e.g., wage setting, human Expanded 1982 management implemented resource management, materials purchase since 1982 successfully. to Railway Administrations (RAs) Allowing CR to retain all CR profits for Replaced by Initial experiment of treating CR as a capital expenditures and for employee the Economic separate enterprise from a financial 1983 bonuses and welfare programs, and Contract viewpoint, although many management making CR liable for taxes to the System in decisions required government Government. 1986. approval. Structural Reforms 1986-1990 Replaced by Very successful in the early years. As Economic Contract System (ECS) to Assets the Chinese economy became more increase employee and overall CR Operation market-oriented, shortcomings 1986 productivity and to place with MOR the Liability appeared since ECS was production responsibility for supervising rail System in oriented and did not focus on transportation and construction projects. 1999 profitability in a market environment. Very successful. As of end-2003, some Diversified Economy Program to help CR 6,603 diversified enterprises were set evolve towards a market economy by up which absorbed over 407,000 setting up new Diversified Economy 1986 Continuing surplus staff. These enterprises Companies (DECOs) and to provide produced CNY 69.36 billion in employment for surplus railway revenues and CNY 2.35 billion in transportation employees. profits in 2003. Structural Reforms 1991-2005 Branch Line Reform covering 100 loss- At end of 2002, operating revenue of making branch lines to increase revenues Continuing 100 branch lines increased to CNY 1993- reduce operating costs and increase with 1.766 billion (an increase of 16.4% 2004 profitability. considerable over 2001). Deficit was reduced by MOR Document No. Tiezhengfa 64(2002) success. 6.6% compared with 2001. Staff for titled ‘Suggestions for Innovative Reform of railway transport decreased by 3.4% to 76

Year Brief Description and Purpose Status Results Started Branch Lines’ provided various options for 38,172. Transfer of the following experimental diversification of branch line branch line assets is under assets: (i) all assets were to be transferred consideration: (i) Li-Bi line of Harbin to local governments free, or (ii) line would RA, (ii) Luo-Ci and Dong-Chuan lines be closed or operation stopped, or (iii) line of Kunming RA, Tong-Hua line of would be operated as joint venture with Shenyang RA, and Fu-Qian line of local government or a local enterprise. Harbin RA. In 1993, MOR reorganized the Guangzhou Railway Administration into the Guangzhou Railway (Group) Corporation (100% owned by MOR), as Partially a pilot program. Institutional Reform Pilot Programs to successful. Starting 1994, MOR initiated seven evaluate alternative approaches for Valuable additional pilot enterprise programs on 1994 managing RAs and sub-RAs. The lessons experience CR, i.e., in 1995, the Dalian Railway learned from the pilot programs have been and lessons Branch Administration was reorganized detailed in Appendix 8-D. were learnt. into the Dalian Railway Limited Liability Company, and in 1996, the Guangshen Railway Company was reorganized into a limited liability company, which successfully issued stock. The results of assessment of AOLS in 2003 show that all RAs had achieved AOLS has integrated rating varying from 91.77 been Starting with pilot program in 4 RAs in points (Harbin and Guangzhou) to successful for 1998, the Assets Operation Liability 106.36 points (Urumqi RA). The performance System (AOLS) was extended to all RAs in performance of all RAs was rated as assessment 1999. This has replaced the earlier ECS. Excellent. Out of 14 RAs, 5 RAs were and 1998 - Safety of operation has been made a able to reduce their deficits and the accountability. 1999 determining factor for integrated remaining 9 RAs increased profits Implemented performance assessments under AOLS. during the year. in all RAs, RAs are very heavily penalized for railway AOLS has been extended to joint and has been accidents. venture railway companies and extended to transportation enterprises with state- the field level owned railway capital. Assessment will organizations. be on the basis of rate of return on joint railway static assets (capital). In August 1998, MOR streamlined its internal organization by separating its regulation and enterprise functions. Reform of MOR’s administrative 1998 Completed The number of departments and structure. bureaus was reduced from 23 to 16; division level structures from 133 to 74, and staff from 809 to 400. Staff reduction reforms for reducing traditional overstaffing in CR. In 1991 there MOR has focused on staff reduction in were more than 342,000 employees of the CR mainly through: normal attrition; national railway including the production transferring personnel to existing or units. Of these about 203,600 were new diversified economy companies employed in railway operation. The staff of (DECOs) and outside companies who 1998 – manufacturing units was separated from Continuing need employees; introducing an early 2004 MOR when the facilities were divested by retirement program for employees MOR in 2000. falling within 2 to 3 years of retirement Given the socio-economic conditions and age; and encouraging employees to to avoid increasing general unemployment, return to school to increase their MOR had to come up with approaches for professional capabilities. reducing transportation staffing levels that would be socially acceptable. 77

Year Brief Description and Purpose Status Results Started Separation of non-transportation entities from MOR. (i) 1998. The reorganization of (i) Completed (i) 1998. MOR reorganized several companies was successful.

companies within its system, including the (ii) 2000. MOR transferred its six non-

2nd and 12th Engineering Bureaus which transportation entities, along with their

became limited liability companies known associated assets and debt to the

as the China Railway Second Bureau State Large Enterprises Working

(Group) and the China Railway Twelfth Committee: China Railway Engineering

Bureau (Group); China Railway Locomotive Corporation (CREC), China Railway

and Rolling Stock Industry Corporation Construction Corporation (CRCC),

(LORIC) became two competitive China Railway Telecom and Signaling

companies, i.e., North LORIC and South Corporation (CRTSC), China Civil

LORIC (re-named CRN and CRS Engineering (Group) Corporation

subsequently); Guiyang Rolling Stock (CCEC), South LORIC (CRS), and 1998 – Factory became South Huitong Ltd. North LORIC (CRN). 2004 Company, which issued shares on the (iii) China Railway Container Transport

domestic stock market in 1999; and Company Ltd., China Railway Special

Qiqihaer Rolling Stock Factory became a Goods’ Transport Co. Ltd., and China (ii) Transfer limited liability company. Rail Baggage and Luggage Express Completed. (ii) 2000: Establishment of 6 major non-rail Co. Ltd., were set up under Chinese Institutional companies as independent enterprises and Law. These companies are expected to development publicly listing the shares of one. be listed on the stock market. continuing. (iii) 2004: Setting up three specialized (iv) In Jan. 2004, CRCC and CRMSC (iii) companies for transportation of containers, were transferred from MOR to SASAC Completed special goods, and baggage and luggage together with CNY 46.8 billion in assets

(iv) 2004: Transfer of China Railway and 84,000 employees. CRCC and (iv) Communications Co. Ltd. (CRCC) and CRMSC will function as independent Completed China Rail Materials and Supplies Co. Ltd. entities with budgets allocated by MOF. (CRMSC). Initially the passenger transport companies were set up as self sufficient units, including performing the functions of car maintenance and management of passenger stations. The absence of specialized management by the car maintenance and traffic departments of the The pilot respective assets created operational Reform of RA’s internal management of program problems. passenger transport. Initially, passenger started in In accordance with 2003 directive of 1999 – transport companies were established in 1999, and MOR titled ‘Guiding Suggestions for 2004 four RAs under a pilot program. By Oct was extended Perfecting Reform of the Passenger 2002, internal passenger transport to other RAs Transport Companies within the companies were set up in all RAs. in stages. Railway Administration’, the passenger transport companies are responsible for management of station passenger services and marketing passenger transport services. The car maintenance and management of passenger train operation have been handed over to the Car and Traffic departments. Transferring the administration of CR’s 19% of wages are now paid to local 1999 social security and retirement plans to Completed social security organizations for local social security organizations. carrying out social security functions Under the Railway Network Development Plan, MOR has planned Separation of Passenger and Freight 2004 In process to build 12,000 km of passenger traffic dedicated lines (PDLs) by 2020. PDLs will be largely parallel to the existing 78

Year Brief Description and Purpose Status Results Started lines on the national network, and it will operate only high speed EMU passenger services. The intention is to segregate passenger and freight operations on to their own exclusive tracks in the principal corridors. MOR has decided that the PDLs will be managed by entities separated from MOR, thereby laying the groundwork for separation of passenger and freight transportation, and commercial operation of passenger transportation in a competitive market environment. Introduction of New Management Tools Experience with the RIS-TAM (1992) RIS-TAM analysis tool led to the development of (1992) and its Phase 2 version RIS-Network Design Reform of Railway Investment Analysis. successor Model (RIS-ND) in 1999. This was Based on a joint study by MOR and World versions RIS- followed by development of an 1989- Bank a computerized decision support ND (1999) improved analytical tool-RIS III in 2004. 1991 – system - Railway Investment Study –Traffic and RIS III The RIS analysis system has helped 2004 Assignment Model (RIS-TAM) was (2004) have MOR identify a multi-period, medium developed for analysis of railway been in term investment plan that minimizes investment proposals (See Appendix 8-F). continuous the cost of satisfying railway demands, use duly considering the cost of unsatisfied demands. A pilot management information system Completed, Successful as a first attempt to install was implemented on Harbin RA to gain functions a computer based management 1992 experience with collecting accounting data have been information based– particularly as a using PC-based network. (See Appendix 8- taken over by precursor to the development of F) TMIS TMIS. After the success of pilot implementation of first phase of the Transportation Management Information system in Shanghai RA, expansion of System (TMIS) initial feasibility study to TMIS to cover all other RAs was Completed 1994 – evaluate whether CR could use this type of completed in 2001. TMIS provides a and is under 2001 system. Followed by extensive set of tools that have helped in the use. development effort and field test pilot efficient management of rail testing. (See Appendix 8-F) transportation. MOR is further expanding and improving TMIS to meet the changing needs. The system is being used for booking Development of a new computer-based Implemented and issuing passenger tickets via 1996 passenger ticketing system. (See and in use. computer. It is a major service Appendix 8-F) improvement for passengers. Implemented in 2000. Will provide a Completed. better understanding of the profits Costing Reform and implementation of an MOR’s and losses associated with various 1994 – extensive Point-to-Point Costing System. Finance elements of passenger and freight 2000 (See Appendix 8-F) Department is operations that will help strengthen operating the marketing and provide a realistic system basis for separation. Study has Testing results have been positive been and the new system is expected to be Reform of the Inter-Administration 1998 – completed completed in 2005. This will provide a Revenue Settlement System. (See 2005 and software more equitable system for Appendix 8-F) is being apportioning freight revenues among tested RAs. 79

Year Brief Description and Purpose Status Results Started A new computer-based Financial Under study Management Information System to by the TMIS will provide a significant portion 2000 support enterprise decision-making. (See Computer of the data input for this system. Appendix 8-F) Center Reform of Passenger Ticket and MOR is giving consideration to Study was Freight Waybill analysis system for upgrading and integrating the existing 2004 completed in improving information and analysis. (See Passenger Ticket and Freight Waybill Sep 2004. Appendix 8-F) Data Analysis Systems. Other Major Reforms MOR has implemented five rounds of speed increases covering some 20,000 The km on existing routes of the national successive network. The five rounds of speed rounds of increases implemented during 1997- Improving service quality by speed 2004 have reduced travel times, e.g., increasing train speeds. Experience has increases the travel time of trains between Beijing shown that it is possible to raise have been and 33 other major cities was reduced passenger train speeds to 140–160 implemented from total of 778hr-58m to 541hr-05m, km/hour on existing lines with marginal . a reduction by 237hr-53m or 30.5%. improvements in infrastructure and The 6th This increased the competitiveness of 1995 – operational strategy. This is being Round of rail passenger transport. Between 1996 2005 exploited by CR. speed and 2002, passenger traffic volume 1st Round 1 Apr 1997 increase growth was an average of 6.3% per 2nd Round Oct 1998 planned for rd year, while the growth in revenue was 3 Round Oct 2000 October on average 13.7% per year, primarily 4th Round May 2001 2005 has th because of value added high speed 5 Round Apr 2004 been passenger services. The railway is now (See Appendix 8-G) postponed effectively competing with other modes because of of passenger transport. technical The speed of operation of freight trains reasons. has also been increased on many routes of the national railway. Several reforms were introduced to increase revenue and to compensate CR for special services. These include: (i) general construction surcharges for nearly all freight traffic (1991); (ii) a 50% tariff surcharge for fully air- conditioned passenger trains (1992); (iii) an additional surcharge for freight shipments moved on electrified lines Freight and Passenger tariff Reforms, (1993); the new line, new tariff concept 1983 – covering numerous fares and tariff Continuing for freight traffic on the Da-Qin line 2004 increases. (1993); (iv) a 30% increase in (See Appendix 8-H) passenger fares during vacation periods such as the Spring Festival (1995); and (v) a separate fixed charge (ranging from CNY 4.6 to 10.7 per ton, depending on the commodity class) for all freight traffic to cover loading and unloading activities (1999). Essentially all tariff changes must be approved by the State. The Railway Law has played a significant role in providing a legal Legal Reforms. In 1990, the National foundation for rail transport and for Peoples’ Congress approved the PRC Continuing 1989 safeguarding the rights of all concerned China Railway Law, which became to evolve parties. Since 1996, studies have been effective in May 1991. undertaken to amend the Law to meet the changed requirements of a market- 80

Year Brief Description and Purpose Status Results Started based economic system. RAs have reviewed the utilization and need of assets such as stations and maintenance depots many of which had Rationalization of productive Assets 2000 - become nonfunctional because of with a view to reduce redundant and less Continuing 2005 technological improvements and productive assets. operational changes. In this manner the number of stations/depots has been reduced by 30%. Ten railway universities and some polytechnic schools, technical secondary schools, and adult education schools have been transferred to the Transfer of educational facilities from Ministry of Education or the local 2000 RAs to the Ministry of Education and local Completed governments. By 2004, MOR almost governments. completed the transfer of all education units, of which, 826 middle schools and primary schools were transferred to local governments. By 2004, MOR almost completed the transfer of all health and medical units, 2000 – Transfer of hospitals and medical Continuing including 208 hospitals transferred to 2004 facilities from RAs to local governments. local governments.

CR container traffic has grown by more than 50% since 1996 as a result of several marketing, pricing, and management reforms. Nevertheless, CR still transports only about 2% of the maritime containers handled by the Reforms in Railway Intermodal ports. Container Transportation. As a first step Under the 2020 Long-Term Railway China Railway Container Transport Development Plan 18 central container 2003 – Company (CRCTC) was established in Continuing terminals are to be established 2005 Jan. 2004 as a domestic company under throughout China. As of Sep. 2005, Chinese Law, with responsibilities MOR intends to seek private covering for all aspects of rail container participation on a joint venture basis to transport(See Appendix 8-I). build and operate the 18 terminals. In view of the complexity of the project the parties involved have engaged an international consultant to study the commercial and financial viability of the project. In 2004, the State Council issued State Council 20, which clearly marked the Reform of Investment and Financing direction of speeding up the railway with a view to diversifying investment investment and financing system reform sources to meet the increasing resource 2004 - and establishment of a market oriented requirements for expanding rail transport Continuing 2005 financing system. MOR has developed capacity to meet demand, and to improve the guidelines on implementation of the overall efficiency of investment utilization. State Council’s decision and facilitating (see Appendix 8-J) the investment and financing system reform. MOR’s Provisional Regulations provide WTO Policy Reform. Market access for the conditions for approval and rail freight transportation services on the administration of Chinese-Foreign joint 2000- national network committed under the Continuing ventures who undertake rail freight 2005 WTO Accession Agreement will have far transportation business. Regulations for reaching implications in the railway sector fully foreign owned operators who will (see Appendix 8-L). be permitted unrestricted access to the 81

Year Brief Description and Purpose Status Results Started market in December 2007 are still to be issued. The conditions for market access, access charges, safety requirements need to be prepared in detail so as to complement the existing capacity without detriment to the high intensity operations of CR that are critical for the national economy and social and regional integration. On 27 Dec. 2004, the State Council issued Directive 40 on “Railway Transport Safety Protection Measures”, Reform of Railway Safety for providing a 2004 - which came into force on April 1, 2005. legislative basis for enhancing safety of Continuing 2005 The new measures provide important railway operations. legislation guarantees for creating a stable environment for railway transportation safety. Source: Compiled by TA Consultant from data provided by MOR and CR statistical references. AOLS = assets operation liability system, CR = Chinese Railways, DECO = diversified economy company, ECS = economic contract system, EMU = Electric Multiple Unit, MIS = management information systems, PDL = Passenger Dedicated Line, PRC = People’s Republic of China, RA = railway administration, SASAC = State Owned Assets Supervision and Administration Commission, TMIS = transportation management information system, RIS = Railway Investment Strategy Model.

IX. FINANCIAL ANALYSIS

A. Introduction

270. The financial assessment of TZR has been undertaken using ADB Guidelines for Preparation and Presentation of Financial Analysis. The Financial Internal Rate of Return (FIRR) of TZR and sensitivity analysis are described in this Section. More detailed analysis is provided in the Consultant’s Supplementary Final Report, Volume I, Section 9.

B. Financial Internal Rate of Return

271. The financial analysis covers the 5-year construction period from mid-2006 to mid-2011, one-year trial operations from mid-2011 to mid-2012, and 20 years of commercial operations starting from mid-2012 and ending in 2031, the last year of the term for the ADB loan. Details of the financial analysis, including assumptions and findings are presented below.

272. FIRR of TZR is calculated based on financial costs, which include all capital costs, operating expenses and business and income taxes. Revenues are estimated based on forecast traffic for freight and passenger traffic detailed in Section 3. FIRR has been estimated for net cash flows before and after income tax collected by the state on net income.

273. It is expected that TZR will be owned and operated by a joint venture company (TZRC) to be established with shareholding by MOR and the three provinces. TZRC is, therefore, the Implementing Agency (IA) and MOR the Executing Agency (EA). The Project will be built jointly by MOR and the three provinces. The three provinces shall be responsible for the work on and cost of land acquisition and resettlement, and the payment for land acquisition and resettlement made by the three provinces will be counted as their equity in TZRC.

274. The total equity capital of TZRC will be CNY 10.62 billion ($ 1.314 billion equivalent) of which the cost for land acquisition and resettlement is initially estimated at CNY 1.2 billion ($ 148.46 million equivalent) broken down by the three provinces as follows: Shanxi Province CNY 0.54 billion ($ 66.81 million), Shaanxi Province CNY 0.30 billion ($ 37.11 million), and NHAR CNY 82

0.36 billion ($ 44.54 million). The balance of the equity in the amount of CNY 9.40 billion ($ 1.163 billion equivalent) will be provided by MOR through the RCF.

275. NDRC approved the project on January 17, 2006 with the above composition of equity. Negotiations between the four prospective shareholders of TZRC are currently underway and the company is expected to be established by mid-2006 as a shareholding enterprise under the PRC Company Law. The estimation of FIRR and financial feasibility analysis described in this Section are made for TZRC as the owner and operator of the Project.

1. General Assumptions

276. All costs and revenues are expressed in 2005 constant domestic prices in CNY. An exchange rate of CNY 8.083 per U.S. Dollar is used, where applicable. The valuation period for the Project is 26 years, covering a 5-year period for construction, one year trial operations and testing, and a 20-year operating period from 2012 to 2031. The last year of the 6-year grace period for the ADB loan is 2011. Construction is assumed to commence in mid-2006 with preliminary grounds clearing and setting up of construction camps.

2. Revenue Projections

a. Freight Revenue

277. Given the recommended nationwide average freight tariff of 6.67 fen/TKM in 2012 (based on operating cost experience indexed with the CPI) and the application of the ‘New Line New Tariff’ concept, it is assumed that the average base freight tariff on TZR will be 7.67 fen/km by 2012 and the RCF surcharge of 3.3 fen/TKM will remain unchanged. This results in an average tariff of 10.97 fen/TKM for TZR in 2012. Compared to the unit freight revenue (including RCF) of 8.19 fen/TKM in 2004 for CR, the TZR rate represents a 3.7 percent increase per year, slightly above the 3.1 percent annual average inflation forecast by ADB for the 6-year period from 2006 to 2011 (see Table 9-4). An annual increase of 1% is assumed in the TZR average base tariff after 2012 (with tariff adjustments to take place every 5 years).22

b. Passenger Revenue

278. Since September 1989, the basic passenger tariff of 3.861 fen/PKM (for hard seat, standard train, and within 200 km) has been increased only once in October 1995 to 5.861 fen/PKM. This amount of adjustment of basic passenger fare during the period 1990 to 2005 reflects an average increase of 2.82 percent per year. This may be compared with the actual growth in passenger revenue of 6.86 percent per year and CPI increase of 5.46 percent per year during the 1990-2004 period. Passenger transport cost has been increasing almost four times the rate of increase of the basic passenger fare. The basic passenger fare has not kept pace with inflation. It has declined in real terms. Also the base passenger fare has substantially lagged behind the unit transport cost, which is a matter for concern.

279. The passenger tariff is based on multiples of the hard seat rate. The actual revenue is always higher than this because of the mix of passengers paying a premium for soft seats, sleeping beds, as well as for express train service and travel during the holiday season. The actual revenue to base tariff conversion factor has been increasing, reflecting the changing life styles and standards of living in China.

280. Table 9-1 shows the passenger train pairs on TZR for 2012, 2020, and 2030. During the initial years from 2012 to 2019 TZR will have 8 pairs of very fast passenger trains per day: three in interline service, four in transit service, and one in local service. The modal choice expressed by respondents to the Consultant’s passenger survey confirms that transit and interline very fast

22. TSDI assumes a base freight tariff of 9.7 fen/TKM which is higher than the tariff assumed for financial analysis. 83 trains, which can operate at speeds of up to 200 km/hr, will be in direct competition with air travel for distances of 800 km or more (for example, Yinchuan-Beijing, Yinchuan-Shanghai, Yinchuan- Guangzhou, Lanzhou-Beijing, Urumqi-Beijing) and with road transport for distances of more than 200 km (for example, Suide-Taiyuan).

Table 9-1: Passenger Train Pairs on TZR Speed (Km/hour) 2012 Type of Train Design Operating Interline Local Transit Total Very Fast 200 160 3 1 4 8 Fast 160 140 1 1 Moderately Fast 120 120 2 2 Total 61411

Speed (Km/hour) 2020 Type of Train DesignOperating Interline Local Transit Total Very Fast 200 160 4 2 6 12 Fast 160 140 2 2 Moderately Fast 120 120 2 2 Total 82616

Speed (Km/hour) 2030 Type of Train Design Operating Interline Local Transit Total Very Fast 200 160 6 3 9 18 Fast 160 140 3 1 4 Moderately Fast 120 120 3 3 Total 1231025 Source: Consultant from data reported by TSDI.

Table 9-2: Passenger Tariffs on TZR (CNY/Passenger-kilometer) Speed (Km/hour) 2012-2016 Type of Train Design Operating Interline Local Transit Very Fast 200 160 0.30 0.10 0.35 Fast 160 140 0.25 N/A 0.30 Moderately Fast 120 120 0.20 N/A 0.25

Speed (Km/hour) 2017-2021 Type of Train Design Operating Interline Local Transit Very Fast 200 160 0.32 0.11 0.37 Fast 160 140 0.26 N/A 0.32 Moderately Fast 120 120 0.21 N/A 0.27

Speed (Km/hour) 2022-2026 Type of Train Design Operating Interline Local Transit Very Fast 200 160 0.33 0.11 0.39 Fast 160 140 0.28 N/A 0.33 Moderately Fast 120 120 0.22 N/A 0.28

Speed (Km/hour) 2027-2031 Type of Train Design Operating Interline Local Transit Very Fast 200 160 0.35 0.12 0.41 Fast 160 140 0.29 N/A 0.35 Moderately Fast 120 120 0.23 N/A 0.29 Source: TA Consultant. CNY = yuan, TZR = Taiyuan-Zhongwei Railway, N/A = Service Not Available. Designations for type of train provided by MOR. Existing bus fare in the project area averages CNY 0.24 per passenger-km which would increase to CNY 0.30 per p

281. The very fast train would be able to charge a fare similar to the current 39.5 fen/PKM tariff for soft sleeper express trains, which is considerably lower than the existing average air fare of CNY 1.166/PKM. As shown in Table 9-2, the 2012 fare for intercity long-distance very fast train service is thus assumed at 35 fen/PKM for transit traffic where the competition is primarily with air transport. For the relatively lower distance interline traffic the 2012 fare is assumed at 30 fen/PKM, which is comparable to the existing bus fare of 28 fen/PKM. Considering the difference in speed between a very fast train and bus (operating speed of 160 km/hr versus 35 km/hr), a 25% premium for very fast (and considerably safer and comfortable) train service is reasonable. In the short distance local transport, TZR should establish an aggressive pricing strategy in direct competition with bus transport. It is assumed that in 2012 the local very fast train service will be priced at 10 fen/PKM, 58% lower than the current bus fare. This will allow TZR to quickly gain market share and maintain a predominant position as a comfortable, safe, and modern mode of 84 transport. The low-fare structure for local service will also substantially benefit the people living in the PIA.23

282. Fast trains on TZR will be somewhat slower than very fast trains. At operating speeds of upto140 km/h these trains are similar to the current fast train service across CR, where the tariff ranges from 23 fen/PKM to 37 fen/PKM. A 2012 tariff of 30 fen/PKM is assumed for fast trains in transit service, and 25 fen/PKM in interline service. There will be no fast trains in local service. This aggressive pricing strategy will help TZR gain and maintain market share as well as maximize benefits to the people in the PIA.

283. The passenger train paths prepared by TSDI also allow for moderately fast train operations in interline traffic. For both 2012 and 2020 two pairs of trains (Yinchuan-Yan’an and Baotou-Taiyuan) are included. By 2030 a third pair is added for Yinchuan-Yulin. These trains will operate at a speed of up to 120 km/hour and will be priced at 20 fen/PKM, or 20 percent lower than the existing bus fare. All passenger fares are assumed to increase 1 percent per year with tariff adjustments to take place every five years.

3. Expense Projections

a. Project financial costs

284. Financial costs of the Project expressed in nominal 2005 prices are summarized in Table 9-3 (in the following two pages) by major project components and by year. These costs are estimated by the Consultant, principally based on data provided by MOR. Price contingency is calculated by applying inflation rates shown in Table 9-4 for local currency and foreign exchange components.

285. Rolling stock costs are not separately estimated by MOR. This equipment consists of a fleet of locomotives, coaches, and wagons which will not be specifically assigned to TZR. MOR will separately finance the procurement of rolling stock and charge a fee based on train-km to TZR and other railways. The per-km rate will be based on dry-lease terms and will include depreciation charges and 8% return on investment. The estimated cost of dry lease per train-km is CNY 7.89 for freight trains and CNY 10.60 for passenger trains. Train maintenance and operating costs are separately included in the financial evaluation.

286. The total project cost is CNY 30,324.89 million, inclusive of all costs. The estimated capital costs for evaluation of financial feasibility (excluding price contingency, IDC, and working capital) is CNY 25,357.86 million. Capital costs during the construction period for FIRR calculation include all incremental outlays related to the Project, but exclude interest during construction, price contingency and working capital. Annual capital cost outlay for civil works during the construction period is assumed at varying rates depending on the cost component. Land acquisition and resettlement and subgrade are components which will be implemented first. Signaling, telecommunications, and track works will be implemented during the later years of the construction period.

287. During the operation period of TZR major line overhaul expenditures are expected on civil works, particularly for bridges and tunnels. In addition, replacement and upgrading of electrical systems and signaling would be needed. These costs are expected to recur every seven years (in year 2019, and 2027) and would amount to 5% of the initial capital investment for civil works (subgrade, tunnels, and bridges), track, buildings and facilities, signaling and communications facilities, and electric power (substations, transmission, and catenary) or CNY 869.13 million inclusive of physical contingency.

23. TSDI assumes a base passenger tariff of 15 fen/PKM, which translates to an average revenue of 24.15 fen/PKM under the existing ratio of revenue to tariff (1.61 to 1). The passenger revenues assumed by Consultant for different types of trains and service described above result in a weighted average revenue of 32.1 fen/PKM, which reflects the high proportion of very fast trains in interline service. 85

Table 9-3: TZR Project Cost (CNY Million) Item 2006 2007 2008 2009 Cost Category % Domestic No. Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total A Base Cost 1 Land Acquisition and Resettlement 100% 815.5 0.00 815.52 639.66 0.00 639.66 23.72 0.00 23.72 0.40 0.00 0.40 Civil Works (sub-grade, tunnels, and 2 946.96 405.84 1,352.81 3,787.86 1,623.37 5,411.23 3,787.86 1,623.37 5,411.23 662.88 284.09 946.96 bridges) 70% 3 Railway Trackwork(a) 53% 155.43 137.84 293.27 466.30 413.51 879.80 466.30 413.51 879.80 388.58 344.59 733.17 4 Buildings and Facilities 95% 22.28 1.17 23.46 66.85 3.52 70.37 66.85 3.52 70.37 55.71 2.93 58.64 5Signaling and Communications 42% 0.00 0.00 0.00 0.00 0.00 0.00 213.75 295.19 508.94 213.75 295.19 508.94 6 Electric Power and Traction 58% 0.00 0.00 0.00 0.00 0.00 0.00 197.69 143.16 340.85 296.54 214.73 511.27 7 Vehicles(b) 60% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 8Safety Components 47% 0.00 0.00 0.00 0.00 0.00 0.00 9.83 11.08 20.91 19.65 22.16 41.82 9E-governance and MIS 47% 8.19 9.23 17.42 16.38 18.47 34.85 20.47 23.09 43.56 24.57 27.70 52.27 10 Other Equipment and Facilities 47% 3.28 3.69 6.97 3.28 3.69 6.97 9.83 11.08 20.91 9.83 11.08 20.91 Administration, Consulting Services, and 11 221.14 39.02 260.16 132.68 23.41 156.10 132.68 23.41 156.10 132.68 23.41 156.10 Miscellaneous 85% Environmental Protection, Mitigation, and 12 115.60 0.00 115.60 231.20 0.00 231.20 346.80 0.00 346.80 289.00 0.00 289.00 Monitoring 100% 13 Temporary Facilities and Transitional Works 47.41 0.00 47.41 79.02 0.00 79.02 79.02 0.00 79.02 79.02 0.00 79.02 100% Subtotal (A) 2,335.82 596.80 2,932.62 5,423.22 2,085.97 7,509.20 5,354.81 2,547.40 7,902.21 2,172.61 1,225.90 3,398.51 B Contingencies 1 Physical Contingency(c) 130.81 33.42 164.23 303.70 116.81 420.52 299.87 142.65 442.52 121.67 68.65 190.32 2 Price Contingency(d) 111.43 28.47 139.90 258.71 99.51 358.22 255.45 121.52 376.97 103.64 58.48 162.12 Subtotal (B) 242.23 61.89 304.12 562.41 216.32 778.73 555.31 264.18 819.49 225.31 127.13 352.44 C Interest During Construction(e) 0.00 0.00 0.00 203.55 28.05 231.59 561.13 77.32 638.45 781.42 107.68 889.10 D Front End Fee 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Cost 2,578.05 658.69 3,236.75 6,189.18 2,330.34 8,519.52 6,471.26 2,888.90 9,360.16 3,179.34 1,460.70 4,640.04 Capital Investment (f) 2,466.63 630.22 3,096.85 5,726.92 2,202.79 7,929.71 5,654.68 2,690.06 8,344.73 2,294.28 1,294.55 3,588.82 Fixed Assets Formulation (g) Civil Works 2,466.63 630.22 3,096.85 5,726.92 2,202.79 7,929.71 5,654.68 2,690.06 8,344.73 2,294.28 1,294.55 3,588.82 Subtotal 2,466.63 630.22 3,096.85 5,726.92 2,202.79 7,929.71 5,654.68 2,690.06 8,344.73 2,294.28 1,294.55 3,588.82

(a) (b) Including rails, sleepers, ballast, bridge beams, track laying, and bridgeVehicles erection. will be purchased by MOR under separate funding and will be leased to TZR on a fixed charge per train-km basis based on full cost recovery. Initial cost of vehicles is not included in the Project costs since these are associated facilities, but costs associated with their use by TZR are included in financial and economic evaluation. (c) Physical contingency is estimated at 5.6% of base cost on average. (d) Price contingency for local currency costs from ADB, Domestic Cost Escalation Factors based on ADO 2005 inflation data for PRC (3.3% for 2006, 3.2% for 2007, and 3% thereafter). For foreign exchange components from ADB International Cost Escalation Factors 2005-2009 based on Manufacturer's Unit Value Index of exports from the G-5 countries to developing countries (2.8% of 2006 and 1.9% thereafter). (e) Interest rate is 5.32% which assumes a 5-year fixed swap rate of 4.92% with a spread of 60 basis points and a rebate on spread of 20 basis points (from ADB Indicative Lending Rates for Loans Under the LIBOR-based Loan Facility as of December 1. 2005). Import taxes and duties are waived under this Project. IDC includes commitment fee of 0.75%. (f) For FIRR ca l

86 Table 9-3: TZR Project Cost (CNY Million) 2010 20112012 Summary Cost Category

Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total A. Base Cost 0.40 0.00 0.40 0.30 0.00 0.30 1,480.00 0.00 1,480.00 Land Acquisition and Resettlement 284.09 121.75 405.84 0.00 0.00 0.00 9,469.64 4,058.42 13,528.06 Civil Works (sub-grade, tunnels, and bridges) 77.72 68.92 146.63 0.00 0.00 0.00 1,554.32 1,378.36 2,932.68 Railwa y Trackwork (a) 11.14 0.59 11.73 0.00 0.00 0.00 222.84 11.73 234.57 Buildings and Facilities 106.88 147.59 254.47 0.00 0.00 0.00 534.39 737.96 1,272.35 Signaling and Communications 395.39 286.31 681.70 98.85 71.58 170.42 988.46 715.78 1,704.25 Electric Power and Traction 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Vehicles (b) 17.20 19.39 36.59 2.46 2.77 5.23 49.14 55.41 104.55 Safety Components 8.19 9.23 17.42 4.09 4.62 8.71 81.89 92.35 174.24 E-governance and MIS 3.28 3.69 6.97 3.28 3.69 6.97 32.76 36.94 69.70 Other Equipment and Facilities Administration, Consulting Services, and 132.68 23.41 156.10 132.68 23.41 156.10 884.55 156.10 1,040.64 Miscellaneous Environmental Protection, Mitigation, and 115.60 0.00 115.60 57.80 0.00 57.80 1,156.00 0.00 1,156.00 Monitoring 31.61 0.00 31.61 0.00 0.00 0.00 316.09 0.00 316.09 Temporary Facilities and Transitional Works 1,184.16 680.90 1,865.06 299.46 106.07 405.53 16,770.08 7,243.05 24,013.13 Subtotal (A) B. Contingencies 66.31 38.13 104.44 16.77 5.94 22.71 939.12 405.61 1,344.74 Physical Contin gency(c) 56.49 32.48 88.97 14.29 5.06 19.35 800.00 345.52 1,145.52 Price Contin gency(d) 122.80 70.61 193.41 31.05 11.00 42.06 0.00 0.00 0.00 1,739.12 751.13 2,490.26 Subtotal (B) 884.03 122.12 1,006.15 928.29 127.92 1,056.21 0.00 0.00 0.00 3,358.42 463.09 3,821.50 C. Interest Durin g Construction (e) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 D. Front End Fee 2,190.99 873.63 3,064.62 1,258.80 244.99 1,503.79 0.00 0.00 0.00 21,867.62 8,457.27 30,324.89 Total Cost (f) 1,250.47 719.03 1,969.50 316.23 112.01 428.24 0.00 0.00 0.00 17,709.20 7,648.66 25,357.86 Capital Investment Fixed Assets Formulation (g) 1,250.47 719.03 1,969.50 316.23 112.01 428.24 0.00 0.00 0.00 17,709.20 7,648.66 25,357.86 Civil Works 1,250.47 719.03 1,969.50 316.23 112.01 428.24 0.00 0.00 0.00 17,709.20 7,648.66 25,357.86 Subtotal

Table 9-4: Annual Escalation in Price Contingency Description 2006 2007 2008 2009 2010 2011 Domestic currency components 3.3% 3.2% 3.0% 3.0% 3.0% 3.0% Foreign exchange components 2.8% 1.9% 1.9% 1.9% 1.9% 1.9%

Source: For local currency components from ADB, Domestic Cost Escalation Factors based on ADO 2005 inflation data for PRC. For foreign exchange components from ADB International Cost Escalation Factors 2005- 2009 based on Manufacturer's Unit Value Index of exports from the G-5 countries to developing countries.

288. The catenary is assumed to have an economic life of 15 years. Therefore, a replacement cost for catenary is included at the end of its economic life in 2027 in the amount of CNY 1,704.3 million. By 2031 the 20-year economic life for signaling, communications, safety, and other equipment and facilities will end and these assets will need replacement at an estimated cost of CNY1,711.6 million.

289. Details on depreciation rates and working capital requirements utilized in the analysis are provided in the Consultant’s Supplementary Final Report, Volume I, Section 9.

b. Operating expenses

290. Operating expenses include fixed costs, freight variable costs, passenger variable costs, and other non-operating costs. The assumptions underlying each cost category are described below:

i. Fixed Costs

291. By definition fixed costs are incurred regardless of the traffic volume on TZR. As such they are a function of time rather than the level of traffic. Fixed costs include fixed labor, fixed power, fixed maintenance materials, and other fixed costs. Fixed labor costs represent the staffing at the headquarters and regional offices of TZR for administrative overhead and other basic support services. Fixed labor costs is estimated for administrative staff at TZR offices, a minimum complement of support staff at stations, and a similar minimum complement of maintenance crews for civil works (right-of-way, tunnels and bridges), power lines and facilities, and signaling and communications network. Total employment at TZR is based on MOR’s estimate of 8900 employees during the initial year of operations.24 This estimate includes fixed as well as variable labor. Approximately 20 percent of the total workforce is assumed for administrative labor with one-half as fixed and one-half as variable administrative labor. The fixed portion of administrative labor during the first 8 years of commercial operation from 2012 to 2019 is, therefore, assumed at 900 employees. From 2020 to 2031 the fixed administrative labor force is assumed to increase to 1000 employees.

292. Fixed station employees are assumed at 1250 until 2019 for 25 new passenger only or mixed passenger-freight stations (50 employees per station) and 1800 thereafter as 11 new stations are constructed and put to service. Fixed station employees include guards, cleaning staff for basic maintenance of station buildings and other facilities, office workers, and station management staff. The minimum maintenance crew size for civil works is assumed at 1000 employees (approximately one employee per route km). For fixed maintenance of signaling, communications, power lines, and other equipment the minimum work force size required is 500 (approximately one employee for every 2 route km).

293. During the first year of TZR operations the total fixed labor is 3650 employees or 41 percent of the total work force for TZR. The average annual labor cost inclusive of all taxes,

24. In 2012 the employee productivity of TZR is 2.7 million TUs/employee compared to the average 2004 CR productivity of 1.5 million TUs. 88 pension fund payments, and fringe benefits is assumed at CNY 30,000 per employee for 2012. The average annual labor cost is assumed to escalate at a rate of 3 percent per year.

294. The fixed power requirements of TZR are 120 million KWh. Even without traffic this power is needed for the catenary and other fixed facilities. The power cost is assumed at 55 fen/KWh. The fixed maintenance materials cost is assumed at CNY 100,000 per route km per year for the first four years, escalating at an annual rate of 6 percent for three years thereafter. At the end of the 7th year, line and facilities overhaul and upgrade will be undertaken at a cost of 5 percent of the initial capital investment in civil works (subgrade, tunnels, and bridges), track, buildings and facilities, signaling and communications facilities, and electric power (substations, transmission, and catenary) or CNY 869.13 million. This large investment will reduce the need for maintenance materials costs for 4 years to CNY 100,000 per route km. Beginning with the 5th year following completion of the overhaul and upgrade of fixed facilities, the annual maintenance materials cost will increase by 6 percent annually until the next overhaul/upgrade.

295. Based on the assumptions described above, the fixed costs of TZR are estimated at CNY 344,069 per route km in 2012, increasing to CNY 412,903 per route km in 2021 or by 2.2 percent per year. From 2021 to 2031 the average cost per route km increases to CNY 507,900 or by 2 percent annually.

ii. Passenger Variable Costs

296. By definition variable costs are incurred as a result of the traffic carried. As such they are a function of the level of traffic. The principal assumptions underlying variable cost estimates for passenger traffic are described below. Variable maintenance costs are separately estimated for civil works, electric power and facilities, rolling stock (passenger trains), and other facilities. These costs are estimated on the basis of passenger train km on TZR. The passenger train km estimates are based on the passenger train diagrams included in the Consultant’s Supplementary Final Report, Volume I, Section 4, in particular Table 4-32 and Figures 4-24 to 4-26, which provide information on passenger train OD pairs for 2012, 2020, and 2030. Based on this data passenger train km on TZR for 2012, 2020, and 2030 have been estimated as 4.1 million, 6.17 million, and 9.4 million, respectively. Unit maintenance costs per passenger train km for variable maintenance costs are CNY 1.75 for civil works and rolling stock, CNY 2 for electric power system including catenary and substations, and CNY 1.5 for other facilities including signaling and communications.

297. Variable labor costs for passenger transport also include train crews (locomotive engineers, safety personnel, conductors, and other on-board staff serving passenger needs), routine daily inspection/maintenance personnel for trains, train overhaul and service employees at workshops and depots, and station employees supporting passenger transport services.

298. During the first year of TZR operations the total variable labor for passenger transport operations is 1,724 employees or 19 percent of the total work force for TZR of 8,900. The average annual labor cost inclusive of all taxes, pension fund payments, and fringe benefits is assumed at CNY 30,000 per employee for 2012. The average annual labor cost is assumed to escalate at a rate of 3 percent per year.

299. Variable electric power cost is assumed as a linear function with a fixed intercept of 120 million KVA to maintain power at the catenary and a slope of 13.59 KVA per 1000 PKM. When the passenger traffic for 2012 is compared with the train diagram, the average occupancy per train is 50%. Therefore, variable electric power per passenger train km is 8.15 KVA for a passenger train of 1200 seats (16 coaches of 75 seats each). In 2020 the occupancy is 65% and variable electric power use is 10.6 KVA per passenger train km. The corresponding figures for 2030 are 70% and 11.41 KVA.

300. Other variable costs for passenger transport are assumed at 5 percent. Based on these assumptions, the average variable cost for passenger transport is estimated at 5.37 fen/PKM in 89

2012 gradually increasing to 6.03 fen/PKM by 2031. These average costs, however, do not include rolling stock lease costs since they are separately estimated and included in the financial evaluation.

iii. Freight Variable Costs

301. The approach used in estimating these costs is similar to the one described above for passenger transport variable costs. Variable maintenance costs are separately estimated for civil works, electric power and facilities, rolling stock (freight trains), and other facilities. These costs are estimated on the basis of freight train km on TZR. The freight train km estimates are based on the freight train OD data included in the Consultant’s Supplementary Final Report, Volume I, Section 4, in particular Table 4-33, which provides information on freight train OD pairs for 2012, 2020, and 2030. Based on this data freight train km on TZR for 2012, 2020, and 2030 have been estimated as 12.91 million, 15.95 million, and 20.44 million, respectively. Unit maintenance costs per freight train km for variable maintenance costs in 2002 are CNY 7 for civil works and other facilities, CNY 8 for electric power system including catenary and substations, and CNY 6 for rolling stock. These estimates are higher than for passenger trains because of the heavier weight for freight trains moving at the same speed. These costs are increased annually on the basis of the freight traffic expressed in TKM.

302. Variable labor costs for freight transport include train crews (locomotive engineers and other on-board personnel), routine daily inspection/maintenance personnel for trains, train overhaul and service employees at workshops and depots, and station and yard employees supporting freight transport services.

303. During the first year of TZR operations the total variable labor for freight transport operations is 3,580 employees or 40 percent of the total work force for TZR of 8,900. The average annual labor cost inclusive of all taxes, pension fund payments, and fringe benefits is assumed at CNY 30,000 per employee for 2012. The average annual labor cost is assumed to escalate at a rate of 3 percent per year.

304. Variable electric power cost is assumed as a linear function with a fixed intercept of 120 million KVA to maintain power at the catenary (included in the fixed cost estimate detailed in Table 9-7 above) and a slope of 13.59 KVA per 1000 TKM.

305. Other variable costs for freight transport are assumed at 5 percent. Based on these assumptions, the average variable cost for freight transport is estimated at 3.06 fen/TKM in 2012 gradually increasing to 3.74 fen/TKM by 2031 as operating costs increase with the traffic growth. These average costs, however, do not include rolling stock lease costs since they are separately estimated and included in the financial evaluation.

iv. Non-Operating Costs

306. Other non-operating costs are assumed at 0.25 fen/TU based on overall MOR costs for these items.

c. Projected traffic volume

307. The passenger freight traffic that will go through TZR including generated and diverted traffic is provided in Section 3.

d. Other cash outflows

308. In addition to the operating expenditures above, TZR also needs to pay business tax, city construction tax, and education surcharge. The effective business tax in PRC is 3% of the total revenue. City construction tax and education surcharge are 7% and 1%, respectively, of the 90 amount paid for business tax. Income Tax is imposed on the net taxable profit at 33% with net loss cumulatively carried forward for up to five years from the first year of profit realization.

e. Cash inflows

309. Tariff setting for the new line will be based on the new-line-new-tariff cost recovery principle. The proposed tariff for very fast, fast, and moderately fast trains described above is not yet approved by the Government. Other revenues, including revenues from parcel service, mail, baggage, freight origin-destination charges, and accessorial transportation services, represent 4.5% of the total TZR passenger and freight revenues. Residual value is estimated as economic value at one-half of the net book value.

f. Weighted Average Cost of Capital

310. The estimated weighted average cost of capital (WACC), after tax, in real terms was calculated based on the capital mix and costs of funds (Table 9-5). Costs have been considered as follows: (i) ADB debt at 5.32% during repayment period with no front end fee; (ii) Domestic bank loans at 5.508% for China Development Bank (CDB) and 5.12% for China Construction Bank (CCB); (iii) Cost of equity at 8% (based on the opportunity cost of capital for MOR). The WACC computation reflects the impact of income tax at 33%. International and domestic inflation rates of 2% and 3%, respectively have been assumed for foreign and domestic currency denominated debt for the share of each source of financing for the Project. The WACC at 3.27% is higher than the WACC of 3% for the Zhengzhou-Xian Railway (ZXR) Project approved by ADB on December 10, 2004 because the equity in TZR at 35% is lower than the equity of ZXR at 50%.

Table 9-5: Weighted Average Cost of Capital Domestic Loans Shanxi, Item ADB Loan MOR Equity Ningxia, and Total CDB CCB Bond Shaanxi Amount (CNY Million) 2,424.90 13,000.00 4,300.00 0.00 9,400.00 1,200.00 30,324.90 Weight 7.9964% 42.8691% 14.1798% 0.0000% 30.9976% 3.9571% 100.0000% Nominal cost 5.3200% 5.5080% 5.1200% 6.1200% 8.0000% 8.0000% Tax rate 33.0000% 33.0000% 33.0000% 33.0000% 0.0000% 0.0000% Tax adj nom cost 3.5644% 3.6904% 3.4304% 4.1004% 8.0000% 8.0000% Inflation rate 2.0000% 3.0000% 3.0000% 3.0000% 0.0000% 0.0000% Real cost 1.5337% 0.6703% 0.4179% 1.0683% 8.0000% 8.0000% Weighted component 0.1226% 0.2873% 0.0593% 0.0000% 2.4798% 0.3166% Source: Consultant. WACC 3.266%

4. Financial Internal Rate of Return

311. Table 9-6 presents two calculations of the FIRR, distinguishing between before and after tax. It is common practice to perform both calculations. In both cases the net cash flow includes RCF. RCF is collected for the explicit purpose of financing railway construction projects, a purpose similar to retained earnings or government capital distribution for facility investments.

312. The FIRR results are as follows:

♦ After Income Tax: 8.04%

♦ Before Income Tax: 8.95%

313. The FIRR of the Project is higher than the WACC of 3.27%. The financial viability of the Project is considered satisfactory.

Table 9-6: FIRR Calculations for TZR Taxes Net Cash Flow Residual Working Working Operating Year Capital Cost RCF Business Income Value of Capital Expenses Revenue Before Income Tax After Income Tax Tax Tax Fixed Assets

2006 (3,096.85) 0.00 0.00 0.00 0.00 0.00 0.00 (3,096.85) (3,096.85) 2007 (7,929.71) 0.00 0.00 0.00 0.00 0.00 0.00 (7,929.71) (7,929.71) 2008 (8,344.73) 0.00 0.00 0.00 0.00 0.00 0.00 (8,344.73) (8,344.73) 2009 (3,588.82) 0.00 0.00 0.00 0.00 0.00 0.00 (3,588.82) (3,588.82) 2010 (1,969.50) 0.00 0.00 0.00 0.00 0.00 0.00 (1,969.50) (1,969.50) 2011 (428.24) 0.00 0.00 0.00 0.00 0.00 0.00 (428.24) (428.24) 2012 0.00 (109.41) 656.44 1,206.72 366.52 51.56 0.00 0.00 755.83 755.83 2013 0.00 (127.94) 1,424.08 2,711.65 835.18 116.25 0.00 0.00 1,878.55 1,878.55 2014 0.00 (20.95) 1,549.79 3,069.06 960.36 132.09 0.00 0.00 2,326.59 2,326.59 2015 0.00 (23.32) 1,689.71 3,463.18 1,099.21 149.58 0.00 0.00 2,699.77 2,699.77 2016 0.00 (28.68) 1,861.78 3,970.74 1,283.23 172.28 163.41 0.00 3,191.24 3,027.83 2017 0.00 (24.77) 2,010.41 4,411.72 1,351.32 188.88 276.79 0.00 3,538.97 3,262.18 2018 0.00 (27.56) 2,175.80 4,671.14 1,425.81 199.82 327.85 0.00 3,693.77 3,365.92 2019 (869.13) (98.21) 2,330.47 4,953.90 1,507.48 211.76 391.10 0.00 2,951.82 2,560.72 2020 0.00 34.64 2,557.16 5,265.84 1,597.23 224.92 400.24 0.00 4,115.64 3,715.40 2021 0.00 (34.41) 2,763.65 5,492.79 1,652.62 234.16 431.23 0.00 4,113.19 3,681.95 2022 0.00 (15.99) 2,859.59 5,991.15 1,708.98 252.22 668.56 0.00 4,572.33 3,903.76 2023 0.00 (18.06) 2,967.95 6,222.32 1,768.94 261.75 726.78 0.00 4,743.50 4,016.72 2024 0.00 (19.14) 3,082.77 6,467.39 1,832.77 271.86 788.40 0.00 4,926.40 4,138.00 2025 0.00 (20.29) 3,204.48 6,727.31 1,900.76 282.59 853.66 0.00 5,120.72 4,267.06 2026 0.00 (16.58) 3,303.95 7,003.10 1,973.22 293.99 932.56 0.00 5,361.80 4,429.24 2027 (2,668.81) (243.80) 3,432.37 7,668.03 2,050.49 318.16 1,163.10 0.00 3,055.37 1,892.26 2028 0.00 199.68 3,568.70 7,994.79 2,132.93 331.55 1,185.64 0.00 6,427.15 5,241.50 2029 0.00 (24.13) 3,713.50 8,341.96 2,220.93 345.79 1,251.66 0.00 6,479.46 5,227.80 2030 0.00 (26.77) 3,874.13 8,533.40 2,314.91 355.19 1,262.88 0.00 6,592.22 5,329.34 2031 (1,711.60) 645.69 4,044.88 9,076.66 2,415.34 376.21 1,383.27 11,381.30 17,386.30 16,003.02 Source: Consultant estimates FIRR 8.95% 8.04% NPV @ WACC 27,991.99 21,687.92

5. Sensitivity Analysis

314. Sensitivity analyses were performed to test the effects of possible unfavorable scenarios with respect to changes in the key parameters that determine costs and revenues. The results of this analysis are summarized in Table 9-7.

Table 9-7: Sensitivity Analysis

FIRR of Project Scenario Before Income Tax After Income Tax Base Case 8.95% 8.04% Passenger Traffic Decrease by 20% 8.49% 7.52% Freight Traffic Decrease by 20% 6.29% 5.00% Passenger Transport Cost Increase by 20% 8.85% 7.93% Working Expenses Increase by 10% 8.46% 7.50% Resettlement Cost Increase by 100% 8.46% 7.56% Project Cost Increase by 10% 8.18% 7.27% Freight Traffic Decrease by 20%; Project Cost Increase by 10% 5.57% 4.28% Delay Implementation by 1 year 8.33% 7.48% Reduce Revenue by 20% 6.01% 4.68% Reduce Revenue by 10% 7.58% 6.49% Reduce Revenue by 10%, Increase Working Expense by 10% 6.63% 5.51% and Capital Overrun by 10% Reduce Revenue by 20%, Increase Working Expense by 20% 4.19% 2.76% and Capital Overrun by 20% Reduce Revenue by 10%, Increase Working Expense by 10%, 6.20% 5.16% Capital Overrun by 10%. 1 Year Implementation Delay Reduce Revenue by 20%, Increase Working Expense by 20%, 3.93% 2.59% Capital Overrun by 20%, and 1 Year Implementation Delay

Source: Consultant estimates

315. The sensitivity analysis indicates that the Project’s financial viability would be dependant on the tariff applied and the traffic realized. Decrease in the freight traffic by 20% would reduce FIRR to 6.29% and 5.00% for income before tax and after tax, respectively. 92

316. Due to the recent changes in the compensation rates for land acquisition and resettlement under State Regulation No. 28, the three provincial governments finalized their implementation guidelines. The new guidelines potentially increase the compensation multiplier. The final resettlement costs will be fixed when the resettlement census is completed in early 2006. To account for this uncertainty, a sensitivity test was made assuming a 100% increase in resettlement costs. Under this assumption TZR’s FIRR is reduced to 8.46% and 7.56% for before and after tax, respectively, indicating that the Project’s financial viability is not sensitive to a substantial increase in resettlement costs.

317. In the case of TZR passenger operations, a 20% decrease in traffic (akin to a decrease of revenue of the same extent, assuming no change in tariff) will reduce the after tax FIRR to 7.52%. On the other hand, a 20% increase in passenger transport costs would reduce the after-tax FIRR to 7.93%, indicating that the Project’s financial viability is more sensitive to traffic variation than to cost variation. Therefore, tariff setting principles and marketing the new railway are key for the sustained viability of the Project.

318. On the cost side, a 10% increase in the Project costs will not pose a potential risk for the Project’s financial viability. TZR opens a significant benefit to MOR. In every scenario included in Table 9-7, except worse case scenarios involving multiple unfavorable developments such as reduce revenue by 20%, increase working expense by 20% and capital overrun by 20% or reduce revenue by 20%, increase working expense by 20%, capital overrun by 20%, and 1 year implementation delay, FIRR does not reach below WACC.

C. Willingness to Pay

319. The passenger surveys conducted by the Consultant included questions on the respondent’s willingness to pay for the very fast, fast, and moderately fast railway service offered by TZR. On the average the respondent’s willingness to pay is 16.7 fen/PKM. The average revenue per PKM estimated by the Consultant based on the proposed tariff structure described in Section 9.2.2 is 32.1 fen/PKM in 2012. Compared to the passenger preference in 2005, this represents an annual increase of 9.8%, higher than the expected inflation between 2005 and 2012. On the other hand, it should be recognized that buyers indicate a willingness to pay which is consistently lower than the market rate or the rate suppliers are willing to accept. Therefore, a realistic comparison must be made with existing fares in competing modes of transport.

320. Based on field surveys conducted, the current bus fare in the PIA is 24 fen/PKM. Assuming an inflation of 3%, the bus fare in 2012 would be 29.52 fen/PKM which is only 8.8% lower than the average fare for TZR. The existing air fare is CNY 1.16/PKM, which corresponds to CNY 1.43/PKM in 2012 assuming 3% inflation. The air fare would thus be more than 4.4 times more expensive. The existing express train service fare between Shanghai and Beijing is 39.5 fen/PKM, which is 23% more than the average fare for TZR. Considering the same speed on TZR, the proposed rate structure is considerably more attractive than bus or comparable express train service. The pricing structure for TZR represents a realistic market price which assures a high market share and customer preference in terms of safety, speed, comfort, and cost.

X. ECONOMIC ASSESSMENT

A. Introduction

321. This Section describes the economic assessment conducted by the Consultant for the Project railway. The approach used follows ADB’s Guidelines for the Economic Analysis of Projects dated February 1997 and is based on the forecast freight and passenger traffic summarized in Section 3, and presented in detail in the Consultant’s Supplementary Final Report, Volume I, Section 3. 93

B. General Assumptions

322. For all quantifiable project costs and benefits, the unit of account used is the domestic price level expressed in national currency (CNY). The price level used for all project costs and benefits is constant 2005 prices. The shadow exchange rate factor (SERF) of 1.01 has been used from the RRP for the recently approved ZXR Railway Project (Zhengzhou-Xi’an Railway Project; RRP PRC-37487 approved 10 December 2004) for converting foreign costs to domestic cost equivalents.

C. Project Resource Statement

323. The TZR Project Resource Statement (PRS) expressed in domestic prices in CNY million is presented in Table 10-1. The PRS consists of the following six parts and are discussed below:

♦ A. Initial Investment Schedule; ♦ B. Additional Investment Schedule; ♦ C. Working Capital; ♦ D. Annual Costs; ♦ E. Benefits; and ♦ F. Net Benefits.

324. Part A, Initial Investment Schedule, of the PRS includes the initial project costs to be incurred during the 6-year implementation period including the 5-year construction period from mid-2006 to mid-2011 and one year trial operations and testing until mid-2012. It should be noted that even though MOR may start to implement the project earlier than mid-2006, these activities will mainly consist of obtaining the required government approvals, completing the detailed design, and preparatory works for construction. The construction activities for ADB-funded components will start when the ADB loan is approved. This Part lists costs under four categories: Resettlement Costs, Environmental Control Costs, Initial Civil Works, and Physical Contingency.

325. Part B, Additional Investment Schedule, of the PRS presents the costs associated with additional investments. It consists of rehabilitation and overhaul of fixed facilities every 7 years, station access roads, residual value of fixed assets at the end of the valuation period, and replacement of fixed assets which reach their economic life. These facilities are necessary for the attainment of Project objectives. The cost of rehabilitation and overhaul of these fixed facilities will be borne by TZR. Therefore, their costs are included in both economic and financial evaluation.

326. The cost of station access roads will not be borne by the Project, but by local governments. Therefore, their cost is not included in the Project’s financial evaluation. Their cost is included in the economic evaluation, however, since these are considered associated facilities. The station access roads in nominal CNY are included in the PRS Part B. The local governments are undertaking these investments in road transport facilities in the Project Impact Area of TZR as improvements on local transport accessibility and mobility to support the economic and social needs of the people. They are important for generating broad socioeconomic and poverty reduction benefits for all inhabitants in the PIA.

327. Part C of the PRS presents the working capital requirements of the Project. The Consultant’s Supplementary Final Report, Volume II, Appendix 10-E presents the detailed computation of working capital needs. In computing the change in annual working capital requirements both operating costs and initial and incremental investments are included. All costs are expressed in economic terms and the balance remaining at the end of the Project’s economic evaluation is treated as a residual value. 94

Table 10-1: TZR Project Resource Statement (Economic Prices), CNY Million Years 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Initial Amount Item (CNY Million) Replacement Economic Period (Years) Prices A. INITIAL INVESTMENT SCHEDULE 1. Resettlement Costs: Temporary Use of Land 51.92 28.61 22.44 0.83 0.01 0.01 0.01 Building Replacement 184.09 101.44 79.57 2.95 0.05 0.05 0.04 Other Facilities 106.75 58.82 46.14 1.71 0.03 0.03 0.02 Compensation for Standing Crops 43.60 24.02 18.84 0.70 0.01 0.01 0.01 Administration Costs 68.94 37.99 29.80 1.11 0.02 0.02 0.01 Subtotal 455.31 - 250.89 196.78 7.30 0.12 0.12 0.09 2. Environmental Control Costs: Project environmental control costs 1,030.40 103.04 206.08 309.12 257.60 103.04 51.52 Environmental Monitoring - Construction phase only 5.03 1.16 0.97 0.97 0.97 0.97 0.48 Subtotal 1,035.43 30 104.20 207.05 310.09 258.57 104.01 52.00 3. Civil Works (Initial): Civil Works (sub-grade, tunnels, and bridges) 12,345.02 65 1,234.50 4,938.01 4,938.01 864.15 370.35 Railway Trackwork 2,685.06 10 268.51 805.52 805.52 671.27 134.25 Buildings and Facilities 216.39 45 21.64 64.92 64.92 54.10 10.82 Signaling and Communications 1,160.16 20 464.06 464.06 232.03 Electric Power and Traction 1,561.97 15 312.39 468.59 624.79 156.20 Safety Components 94.56 20 18.91 37.82 33.10 4.73 E-governance and MIS 168.32 20 16.83 33.66 42.08 50.50 16.83 8.42 Other Equipment and Facilities 64.30 20 6.43 6.43 19.29 19.29 6.43 6.43 Administration, Consulting Services, and Miscellaneous 996.93 249.23 149.54 149.54 149.54 149.54 149.54 Temporary Facilities and Transitional Works 291.60 43.74 72.90 72.90 72.90 29.16 Subtotal 19,584.31 30 1,840.88 6,070.98 6,887.62 2,852.22 1,607.30 325.31 4. Physical Contingencies: 1) On Land Acquisition & Resettlement 78.86 43.45 34.08 1.26 0.02 0.02 0.02 2) On Environmental Control Costs 57.70 5.77 11.54 17.31 14.43 5.77 2.89 3) On Initial Civil Works: 1,097.39 Civil Works (sub-grade, tunnels, and bridges) 691.32 65 69.13 276.53 276.53 48.39 20.74 Railway Trackwork 150.36 10 15.04 45.11 45.11 37.59 7.52 Buildings and Facilities 12.12 45 1.21 3.64 3.64 3.03 0.61 Signaling and Communications 64.97 20 25.99 25.99 12.99 Electric Power and Traction 87.47 15 17.49 26.24 34.99 8.75 Safety Components 5.30 20 1.06 2.12 1.85 0.26 E-governance and MIS 9.43 20 0.94 1.89 2.36 2.83 0.94 0.47 Other Equipment and Facilities 3.60 20 0.36 0.36 1.08 1.08 0.36 0.36 Administration, Consulting Services, and Miscellaneous 55.83 13.96 8.37 8.37 8.37 8.37 8.37 Temporary Facilities and Transitional Works 17.00 2.55 4.25 4.25 4.25 1.70 Subtotal 1,233.95 152.41 385.77 404.45 174.34 95.87 21.12 Section A Total Initial Investment 22,309.00 2,348.38 6,860.58 7,609.46 3,285.25 1,807.30 398.52 B. ADDITIONAL INVESTMENT SCHEDULE 1. Fixed Assets Overhaul and Renewal 30 2. Residual Value of Fixed Assets Subtotal 2. Associated Facilities: A. Roads: 1) Station Access Roads 260.85 50 130.42 130.42 Subtotal 260.85 130.42 130.42 Section B Total Additional Investment 260.85 130.42 130.42 95

Table 10-1: TZR Project Resource Statement (Economic Prices), Million CNY (Continued) 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Item

A. INITIAL INVESTMENT SCHEDULE 1. Resettlement Costs: Temporary Use of Land Building Replacement Other Facilities Compensation for Standing Crops Administration Costs Subtotal 2. Environmental Control Costs: Project environmental control costs Environmental Monitoring - Construction phase only Subtotal 3. Civil Works (Initial): Civil Works (sub-grade, tunnels, and bridges) Railway Trackwork Buildings and Facilities Signaling and Communications Electric Power and Traction Safety Components E-governance and MIS Other Equipment and Facilities Administration, Consulting Services, and Miscellaneous Temporary Facilities and Transitional Works Subtotal 4. Physical Contingencies: 1) On Land Acquisition & Resettlement 2) On Environmental Control Costs 3) On Initial Civil Works: Civil Works (sub-grade, tunnels, and bridges) Railway Trackwork Buildings and Facilities Signaling and Communications Electric Power and Traction Safety Components E-governance and MIS Other Equipment and Facilities Administration, Consulting Services, and Miscellaneous Temporary Facilities and Transitional Works Subtotal Section A Total Initial Investment B. ADDITIONAL INVESTMENT SCHEDULE 789.95 2,439.39 1,570.62 1. Fixed Assets Overhaul and Renewal -10,414.09 2. Residual Value of Fixed Assets 789.95 2,439.39 -8,843.47 Subtotal 2. Associated Facilities: A. Roads: 1) Station Access Roads Subtotal 789.95 2,439.39 -8,843.47 Section B Total Additional Investment 96

YearsTable 10-1: TZR Project Resource Statement (Economic Prices), Million CNY (Continued) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Capacity Utilization (%) Item Initial Amount (CNY Million) Replacement Economic Period (Years) Prices C. WORKING CAPITAL 1. Change in Working Capital 109.41 127.94 20.95 23.32 28.68 24.77 27.56

D. ANNUAL COSTS 1. Fixed and Semi-Fixed Costs 323.39 327.33 331.39 335.57 346.65 358.26 370.43 2. Variable Costs Passenger Transport 95.77104.33111.98120.20129.03138.41148.49 3. Variable Costs Freight Transport 631.99 710.95 802.35 905.11 1,027.33 1,134.71 1,255.73 4. Other Non-Operating Costs 60.25 68.38 78.27 89.23 103.64 109.26 115.40 5. Train Dry Lease Costs 137.78 142.53 147.46 152.58 157.90 163.43 169.17 6. Land Opportunity Cost 30.53 51.38 49.40 49.88 50.36 50.85 51.34 51.84 52.35 52.86 53.38 53.91 54.44 7. Environmental Monitoring Costs 0.48 0.48 0.48 0.48 0.48 0.48 0.48 Section D Total Annual Costs 30.53 51.38 49.40 49.88 50.36 50.85 1,301.00 1,405.83 1,524.28 1,656.04 1,818.41 1,958.45 2,114.14 TOTAL COSTS 22,569.85 2,378.91 6,911.96 7,789.29 3,465.55 1,857.66 449.37 1,410.41 1,533.77 1,545.23 1,679.36 1,847.09 1,983.22 2,141.70 E. BENEFITS 1. Transport Cost Savings to Passengers: A. Passenger Cost Savings: 1) Diverted Traffic (CNY Million): a) From Air b) From Road 16.88 18.10 19.40 20.80 22.30 23.90 25.62 c) From Rail 79.85 85.60 91.76 98.37 105.45 113.05 121.19 2) Generated Traffic (CNY Million): 0.33 0.65 0.98 1.31 1.63 1.75 1.88 B. Travel Time Savings: 1) Diverted Traffic (CNY Million): a) From Air b) From Road 3.79 4.06 4.36 4.67 5.01 5.37 5.75 c) From Rail 1.41 1.51 1.62 1.73 1.86 1.99 2.14 Total Passenger Transport Benefits 102.26 109.93 118.12 126.88 136.25 146.06 156.58 2. Freight Transport Cost Savings to Shippers: A. Diverted Traffic (CNY Million): 1) From Rail 576.91 607.20 640.39 676.81 716.88 761.05 809.83 2) From Road 1,532.31 1,611.60 1,698.13 1,792.81 1,896.65 2,010.78 2,136.52 B. Diverted Traffic Travel Time Savings 3.41 3.66 3.94 5.09 4.15 5.16 5.51 Total Diverted Freight Transport Benefits 2,112.63 2,222.46 2,342.46 2,474.72 2,617.68 2,776.99 2,951.85 3. Generated Freight Transport Benefits 938.84 2,394.05 3,174.52 3,611.62 4,057.85 4,198.84 4,345.05 4. Avoided Costs and Other Benefits A. Avoided Road Infrastructure Investment 727.81 37.66 41.10 44.97 49.32 54.21 59.72 B. Avoided Road Maintenance Costs 60.77 63.97 67.47 71.29 75.47 80.06 85.11 C. Shipper Savings due to Increased Railway Competition 779.24 818.20 859.11 902.06 947.17 994.53 1,044.25 D. Avoided Road Accident Costs 514.48 541.62 571.21 603.55 638.95 677.81 720.54 E. Tourism Benefits 1.40 2.80 4.20 5.61 7.01 7.51 8.05 F. Pollution Savings Benefits 3.03 3.35 3.73 4.15 4.65 4.94 5.25 G. Energy Savings Benefits 114.49 120.47 126.99 134.12 141.93 150.52 159.98 H. National Productivity Benefits 905.82 950.13 994.96 1,040.34 1,112.13 1,184.53 1,257.59 Total Avoided Costs and Other Benefits 3,107.04 2,538.21 2,668.78 2,806.08 2,976.62 3,154.11 3,340.50 TOTAL BENEFITS 39,590.17 6,260.78 7,264.65 8,303.87 9,019.30 9,788.40 10,275.99 10,793.98 NET BENEFITS 13,778.98 -2,378.91 -6,911.96 -7,789.29 -3,465.55 -1,857.66 -449.37 2,425.19 5,730.88 6,758.64 7,339.94 7,941.31 8,292.77 8,652.27 18.068% IRR 13,778.98 NPV @ 12% (CNY Million) 97

Table 10-1: TZR Project Resource Statement (Economic Prices), Million CNY (Continued) 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Item

C. WORKING CAPITAL 98.21 -34.64 34.41 15.99 18.06 19.14 20.29 16.58 243.80 -199.68 24.13 26.77 -645.69 1. Change in Working Capital D. ANNUAL COSTS 353.59 388.08 393.97 400.02 413.03 426.63 440.86 426.14 433.16 440.40 447.85 462.29 477.37 1. Fixed and Semi-Fixed Costs 159.34 171.01 183.06 194.44 206.57 219.49 233.26 247.94 263.60 280.29 298.09 317.08 337.33 2. Variable Costs Passenger Transport 1,392.23 1,546.32 1,710.74 1,772.83 1,838.81 1,908.95 1,983.55 2,062.94 2,147.47 2,237.50 2,333.45 2,435.75 2,544.86 3. Variable Costs Freight Transport 122.12 129.49 134.29 139.02 144.04 149.37 155.05 161.09 167.53 174.38 181.69 189.48 197.79 4. Other Non-Operating Costs 175.14 181.34 187.02 192.89 198.96 205.23 211.72 218.42 225.35 232.52 239.93 247.59 255.52 5. Train Dry Lease Costs 54.98 55.53 56.08 56.65 57.21 57.79 58.38 58.97 59.57 60.17 60.79 61.41 62.05 6. Land Opportunity Cost 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 7. Environmental Monitoring Costs 2,257.88 2,472.25 2,665.65 2,756.33 2,859.10 2,967.95 3,083.29 3,175.98 3,297.15 3,425.74 3,562.28 3,714.09 3,875.40 Section D Total Annual Costs 3,146.03 2,437.61 2,700.06 2,772.32 2,877.16 2,987.08 3,103.58 3,192.56 5,980.34 3,226.06 3,586.41 3,740.86 -5,613.75 TOTAL COSTS E. BENEFITS 1. Transport Cost Savings to Passengers: A. Passenger Cost Savings: 1) Diverted Traffic (CNY Million): a) From Air 27.47 29.44 31.56 33.14 34.80 36.54 38.37 40.28 42.30 44.41 46.63 48.97 51.41 b) From Road 129.91 139.27 149.29 156.76 164.60 172.83 181.47 190.54 200.07 210.07 220.57 231.60 243.18 c) From Rail 2.01 2.16 2.31 2.43 2.55 2.68 2.81 2.95 3.10 3.26 3.42 3.59 3.77 2) Generated Traffic (CNY Million): B. Travel Time Savings: 1) Diverted Traffic (CNY Million): a) From Air 6.17 6.61 7.09 7.44 7.82 8.21 8.62 9.05 9.50 9.97 10.47 11.00 11.55 b) From Road 2.29 2.45 2.63 2.76 2.90 3.05 3.20 3.36 3.53 3.70 3.89 4.08 4.28 c) From Rail 167.85 179.93 192.89 202.53 212.66 223.29 234.46 246.18 258.49 271.41 284.99 299.23 314.20 Total Passenger Transport Benefits 2. Freight Transport Cost Savings to Shippers: A. Diverted Traffic (CNY Million): 863.81 923.66 963.71 1,006.37 1,051.84 1,100.34 1,152.07 1,207.28 1,266.23 1,329.19 1,396.47 1,468.38 1,545.28 1) From Rail 2,275.33 2,428.91 2,514.91 2,606.76 2,704.92 2,809.87 2,922.15 3,042.33 3,171.03 3,308.91 3,456.70 3,615.18 3,785.18 2) From Road 6.74 7.23 8.60 9.09 10.68 11.32 12.00 12.74 13.53 14.39 15.32 16.33 17.42 B. Diverted Traffic Travel Time Savings 3,145.89 3,359.81 3,487.22 3,622.22 3,767.45 3,921.52 4,086.22 4,262.35 4,450.79 4,652.50 4,868.49 5,099.89 5,347.88 Total Diverted Freight Transport Benefits 4,496.69 4,653.99 4,771.93 4,893.36 5,017.77 5,145.44 5,276.48 5,410.96 5,549.00 5,690.68 5,836.12 5,985.41 6,138.68 3. Generated Freight Transport Benefits 4. Avoided Costs and Other Benefits 65.94 72.95 40.85 43.63 46.62 49.85 53.33 57.08 61.13 65.49 70.20 75.27 80.75 A. Avoided Road Infrastructure Investment 90.67 96.81 100.43 104.18 108.18 112.44 117.00 121.88 127.09 132.67 138.63 145.02 151.87 B. Avoided Road Maintenance Costs 1,096.46 1,151.29 1,208.85 1,269.29 1,332.76 1,399.40 1,469.37 1,542.84 1,619.98 1,700.98 1,786.02 1,875.33 1,969.09 C. Shipper Savings due to Increased Railway Competition 767.63 819.63 850.31 882.02 915.86 951.99 990.59 1,031.86 1,075.98 1,123.19 1,173.72 1,227.83 1,285.79 D. Avoided Road Accident Costs 8.63 9.25 9.92 10.42 10.94 11.48 12.06 12.66 13.29 13.96 14.66 15.39 16.16 E. Tourism Benefits 5.59 5.96 6.28 6.55 6.83 7.12 7.43 7.76 8.11 8.48 8.87 9.28 9.72 F. Pollution Savings Benefits 170.42 181.96 188.65 195.70 203.23 211.27 219.87 229.07 238.92 249.45 260.74 272.83 285.79 G. Energy Savings Benefits 1,331.36 1,405.86 1,468.88 1,532.57 1,596.98 1,662.13 1,728.09 1,820.17 1,913.13 2,007.02 2,101.90 2,197.82 2,311.80 H. National Productivity Benefits 3,536.70 3,743.72 3,874.16 4,044.34 4,221.38 4,405.69 4,597.75 4,823.31 5,057.63 5,301.24 5,554.75 5,818.78 6,110.97 Total Avoided Costs and Other Benefits 11,347.13 11,937.45 12,326.20 12,762.46 13,219.25 13,695.95 14,194.90 14,742.80 15,315.90 15,915.83 16,544.34 17,203.32 17,911.73 TOTAL BENEFITS 8,201.09 9,499.84 9,626.14 9,990.13 10,342.09 10,708.87 11,091.32 11,550.24 9,335.56 12,689.77 12,957.93 13,462.46 23,525.48 NET BENEFITS 98

328. Part D of the PRS includes recurring annual costs of the Project. The Consultant’s Supplementary Final Report, Volume II, Appendix 10-F presents the detailed computation of annual fixed and variable costs. For converting financial variable costs to economic costs, electric power and other material inputs are assumed to constitute 55% of the variable cost per PKM. Untraded materials for both passenger and freight traffic are assumed to be 20%. Skilled and unskilled labor for passenger transport are 30% and 3% (cost basis), respectively. The corresponding figures for freight are 24% and 5%. Equipment cost for both types of traffic is assumed to be 5%. This cost does not include rolling stock since costs associated with rolling stock are separately accounted for in the PRS (see Part D.5 of PRS). The dry lease cost for freight trains is estimated at CNY 7.89 per km and for passenger trains at CNY 10.60 per km.

329. The annual costs included in the PRS also account separately for land opportunity cost and environmental monitoring cost. The latter is a small cost item explicitly treated in the PRS because it is a needed cost of monitoring, which is explicitly treated in the Project’s Summary EIA.

330. The calculation of the economic value (opportunity cost) of land is detailed in the Consultant’s Supplementary Final Report, Volume II, Appendix 10-B and takes into account productivity increases of cultivated land by different types of land use. These assumptions are also included in Appendix 10-B.

331. Part E of PRS details the benefits of TZR and is separated into the following 5 categories.

332. Passenger Transport Benefits are based on traffic forecasts summarized in Section 3, and are used to estimate the benefits of the Project for passenger transport for local, transit, and interline traffic, respectively. The Consultant’s Supplementary Final Report, Volume II, Appendix 10-G includes the detailed assumptions and methodology used for this purpose. Basically, passenger transport benefits are grouped under the following two categories:

333. (A) Part E.1.A: Transport Cost Savings to Passengers. These savings are estimated for diverted and generated traffic separately. Cost savings to passengers are estimated for diverted traffic from road and from other CR routes. In the case of diverted passenger traffic from road, and average road fare is assumed as the composite of bus fare at CNY 0.24/PKM (based on bus passenger surveys at Taiyuan and Yinchuan bus stations) and auto travel at CNY 0.76/PKM weighed at 70% and 30%, respectively. TZR passenger rate is derived from total TZR passenger revenue estimated in Section 9 for 2012. This is a composite rate applying different tariffs to different train classes (very fast, fast, and moderately fast) and services (local, interline, and transit). The cost for fuel has been removed to avoid double counting of energy benefits described below. Full nominal cost for road and rail were CNY 0.396/PKM and CNY 0.32/PKM, respectively. To express these costs in economic terms, value added for road transport services is assumed at 51.52% of total revenue with 3.2% for net taxes and 8.12% for operating surplus. These coefficients are taken from the Input-Output table of the Chinese economy for 2000 (China Statistical Yearbook 2005, p. 76). From audited financial statements of MOR for the same year, the corresponding values for rail are 50.4%, 3.45%, and 0.79%, respectively.

334. Based on these values, the economic cost of road transport per PKM is estimated at CNY 0.16 and for rail at CNY 0.12. The rail economic cost is net of power costs in order to avoid double counting of energy benefits. From the financial section’s calculations the power cost is estimated at 19% of the operating cost for TZR. When this cost is added the economic cost of rail passenger transport is CNY 0.15/PKM which is slightly less than the CNY 0.167/PKM estimated as the willingness to pay from passenger surveys conducted by the Consultant.

335. Another test of reasonableness of the estimated economic cost of rail and road passenger transport is to compare the difference between road and rail transport nominal and economic costs. This difference in nominal terms is 7.6 fen/PKM (39.6 fen/PKM for road versus the weighted average fare of 32 fen/PKM for TZR) and in economic terms 4 fen/PKM (16 versus 12 fen/PKM). The nominal price reflects the market price and as the railway sector is subsidized in PRC, it would be expected that the cost difference between the two modes in financial terms 99 would be somewhat higher than the difference in economic terms. In other words, if an adjustment is needed in market price for rail due to an incomplete market, the adjustment would be upward from the average tariff of 32 fen/PKM, resulting in a difference of 4 fen/PKM between road and rail economic cost.

336. A similar approach was used for diverted traffic from other CR routes. The TZR passenger tariff is estimated at nominal CNY 0.32/PKM, reflecting a composite rate based on the assumed passenger fares detailed in Section 9 of the Report for very fast, fast, and moderately fast trains operating on TZR. The computation of benefits followed the procedure summarized below:

337. For traffic diverted from road, the benefits are the difference in passenger economic fare between road and rail transport (CNY 0.04/PKM). For traffic diverted from other CR routes to TZR, the benefit is the difference of route distance applied to the economic cost of rail passenger travel. This is calculated by multiplying the average CR passenger revenue of CNY 0.12 per kilometer by 46%, the computed economic cost portion of passenger fares. This calculation results in CNY 0.0554/PKM as the benefit of rail diversion to TZR.

338. For generated traffic (both local and interline) the estimated passenger-kilometers are multiplied by one-half of the average economic cost savings to passengers of road versus rail, and other rail versus TZR.

339. A portion of the generated passenger traffic is tourists. An alternative approach to estimating the generated passenger benefits for tourists attributable to TZR is through use of net economic value. During the first year of operation, the number of generated interline passengers is 0.10 million. Tourists would be a part of interline, rather than local passengers. Of these, assuming that 15% constitute tourist traffic, it is estimated that earnings to the economy would be CNY 8.39 million in 2012 based on average expenditure of CNY 559 per tourist in 2004 (China Statistical Yearbook 2005, p. 663). From the direct input coefficient of the input-output table of the Chinese economy, the operating surplus and net taxes portion of the value added is 16.5% in the commerce and catering trade sector. Therefore, the tourism benefit attributable to the TZR generated traffic would be CNY 1.44 million in 2012. A downward adjustment is made to eliminate double counting in generated transport cost savings to passengers. The computational details of the approach used for the period 2012 to 2031 appear in the Consultant’s Supplementary Final Report, Volume II, Appendix 10-K.

340. (B) Part E.1.B: Travel Time Savings. These savings are computed only for diverted traffic. Due to frequent stops and congestion, an average speed of 35 kmph was used for road transport (assumed to be a composite of bus and car equally weighed), as opposed to 180 kmph for transport by TZR. The average speed of road transport has been confirmed by the data collected in the passenger survey. The average net income/capita of CNY 2,259 is used as the rural net income average in the three PIA provinces with a shadow wage rate factor of 1. Annual leisure and work time of 5,840 hours is used to represent the productive time per person. Using these assumptions, incremental values of time between road and TZR and other CR routes and TZR were derived. These values are applied to the diverted traffic from road and other CR routes to TZR.

341. Freight Transport Cost Savings to Shippers for Diverted Traffic. Freight traffic forecasts are used to estimate the benefits of the project for incremental freight transport along the TZR. The Consultant’s Supplementary Final Report, Volume II, Appendix 10-H includes the detailed assumptions and methodology used for this purpose. Freight transport benefits are grouped under two categories:

342. (A) Part E.2.A: Shipper Cost Savings. Appendix 10-H details the estimated shipper cost savings for freight traffic. Shipper cost savings are estimated for diverted traffic from road and from other CR routes. For diverted traffic from trucks an average truck tariff of CNY 0.58/TKM was used as nominal financial value. Truck transport service value added is assumed as 51.52% of total revenue with 3.2% for net taxes and 8.12% for operating surplus. Based on these values, 100 the economic cost of truck transport per TKM is estimated at CNY 0.234. A similar approach was used for diverted traffic from other CR routes. The economic cost of CR freight traffic is estimated at CNY 0.0431/TKM based on nominal financial cost to shippers of CNY 0.0933/TKM (including RCF); value added of 50.4%, net taxes of 3.45%, and operating surplus of 0.79%. These figures are derived from MOR’s audited financial statements for 2003. For traffic diverted from trucks, the economic benefit is the difference in shipper economic costs between truck and rail transport (CNY 0.191/TKM) with the same distance between truck and rail. For traffic diverted from other CR routes to TZR, the benefit is the rail diverted TKM applied to the same economic rate of CNY 0.0431/TKM.

343. (B) Part E.2.B: Travel Time Savings. These savings are computed only for diverted traffic. The Consultant’s Supplementary Final Report, Volume II, Appendix 10-I presents the details for this estimate. An average speed of 50 kmph was used for truck transport, as opposed to 80 kmph for transport by rail. The adjusted economic value for each type of commodity was used to estimate the total value of diverted traffic from road and other CR routes to TZR. An opportunity cost of capital of 5% per annum was assumed. For traffic diverted from truck the difference in travel time for the same length of haul was computed. For the traffic diverted from other CR routes the travel time difference was based on the difference in the length of haul between the TZR route and the alternative CR route, which is estimated by the TERA China Railway Traffic Evaluation Model run to be 241 km in this case, indicating an average time savings of 3 hours at 80 kmph.

344. Generated Freight Transport Benefits. As presented in the Consultant’s Supplementary Final Report, Volume II, Appendix 10-J, an adjusted economic value added for the six commodity groups was computed based on current financial value, non-tax elements, SERF, percent value added, percent net taxes, depreciation and operating surplus for each commodity. The adjusted economic values per ton represent the net economic value, i.e. the value of output at economic prices less the costs of production (sum of all intermediate input costs, wages, and annualized investment costs). The Direct Input Coefficients of the Input-Output Table of China for 2000 were used in this computation as this is the most recent data. The value added section of the Table separately itemizes fixed asset depreciation (in the absence of better data, this is used as a basis for annualized investment costs), wages, taxes on production, and operating surplus. Since generated traffic benefits represent producer’s surplus, one-half of the product of per ton value of operating surplus and taxes multiplied by estimated generated freight tons is taken in the computation of the estimated value of the triangle created by the shift in the demand curve.

345. Avoided Costs and Other Benefits. The construction of TZR will help avoid some costs that would otherwise be not possible. As presented in the Consultant’s Supplementary Final Report, Volume II, Appendix 10-K, four categories of avoided costs are included in this Part of PRS.

346. The first one is the avoided highway investment costs. The without project condition assumes that normal investments will be made by both national and local government agencies to accommodate increasing traffic volumes due to the general economic growth. Some road and rail segments would be congested and additional investments would be needed to relieve congestion and improve safety. If TZR is not built, the freight and passenger traffic in the catchment area is estimated to increase. Since without TZR, there would be no increase in freight transport by rail, the bulk of this traffic will be handled by roads. The cost of road improvements necessary to accommodate the growth of traffic was estimated by use of China Statistical Yearbook 2005 reporting data for 2004. The estimated value is CNY 31.74/ton.

347. The second category is the avoided highway routine and periodic maintenance costs. In 2004, the government spent CNY 11.9 billion for maintaining PRC’s road network. Given that the converted highway TUs (highway TKM + PKM) in China for 2004 was 1.66 trillion, an annual maintenance cost of CNY 0.007 per converted km is calculated. Multiplying this figure by traffic diverted from highway to TZR yields an economic benefit of CNY 60.77 million in 2012 in terms of avoided road maintenance costs. The cost of road improvements to accommodate the increase in 101 traffic is CNY 727.81 million in 2012, with lesser annual incremental investments to accommodate the increased traffic every year.

348. The third category is the avoided truck shipping charges by freight shippers. It is estimated that truck charges in the Project area are going to decrease after TZR commences its operations to stay competitive with the railway. For the purposes of the economic analysis, the truck TKM tariff is estimated to decrease by a conservative 10%, from CNY 0.7 /TKM to CNY 0.63 /TKM, in the Project area once TZR starts operating. Using the average length of haul by trucks in PRC of 59 km, this price decrease represents a savings of CNY 4.13 per ton to the shipper. This saving will apply to all the local highway traffic estimated in the Project Impact Area.

349. A static general-equilibrium approach is implied in the estimation of avoided truck shipping charges. It should be recognized, however, that the gross economic benefit estimated for diverted and generated traffic described above relate only to the incremental and nonincremental output of TZR. On the other hand, avoided truck shipping charges estimated here relate to non-TZR traffic in the PIA. In a dynamic sense, it can be argued that reduced truck charges would reduce demand for TZR. Given, the inherent weakness of truck competition in heavy bulk commodities such as coal and iron ore, cross-elasticity of demand for truck transport is low. On the other hand, given rail’s capability to carry a wide variety of goods, the cross-elasticity of demand for rail transport is relatively high, resulting in reduced truck tariffs without a significant shift of rail traffic to trucks.

350. The fourth category is the avoided highway accident costs (see the Consultant’s Supplementary Final Report, Volume II, Appendix 10-N). According to data provided by MOR, the railway financial losses in 2004 due to major railway accidents were CNY 45.63 million. Using the TU figure for railways for 2004, a railway financial loss per TU was calculated. Estimates by the ADB indicate the total cost of road accidents in China is on the order of $12.5 billion, or CNY 101 billion during 2004. This estimate includes costs of vehicle and property damage, medical costs as well as estimates of loss of earning potential of the victim. Accident costs have been expressed in terms of highway TUs with the result of CNY 0.06088 CNY per TU for passengers and freight diverted from highway to railway. As shown in the Consultant’s Supplementary Final Report, Volume II, Appendix 10-K, annual accident cost savings for traffic diverted from highway to railway is CNY 539.76 million in 2012.

351. With the diversion of significant amounts of freight and passengers from road to rail, there will be benefits to the country due to reduced pollution from trucks, buses, and cars as well as less energy used by the transport sector. Based on recent research conducted by the 25 International Energy Agency , the number of tons of carbon dioxide (CO2) per traffic unit for road and rail were estimated for China. These savings for rail compared with road were found to be 13.65 tons of CO2 per million PKM and 0.9486 tons of CO2 per million TKM. Under provisions of the Kyoto Protocol, certified emission reductions are presently valued in China26 at approximately $8 per ton of CO2 reduced. This value has been included in the benefit stream for the TZR project. It should be noted that in addition to savings in the emissions of CO2, there will be significant savings in other emissions, such as carbon monoxide, nitrogen oxides, hydrocarbons, as well as suspended particles. However, only the CO2 reductions have a readily – identifiable market value and was the only harmful emission included in the Project benefit stream. Clearly, there are more pollution reduction benefits attributable to the TZR, though not quantified.

352. In addition, the savings to the national economy of reduced total fuel consumption as a result of diverting traffic from both road and other CR routes to TZR has been computed and

25. IEA/SMP Model Documentation and Reference Case Project July, 2004. The IEA has worked with the Sustainable Mobility Project to develop a global transport spreadsheet model that is useful for conducing projections and policy analyses. The spreadsheet provides data for all modes and vehicle types, projects vehicle stocks, travel, energy use and other indicators through 2050 for a number of countries (including China) and regions of the world. 26. Discussion with Qian Yiwen Senior Project Manager, Beijing IT Power Ltd. (UK), December 2005. 102 included in the benefit stream. Unit operating costs for both road and rail transport have been adjusted to exclude fuel cost savings in order to avoid any double counting of this benefit.

353. National GDP Benefits. Transport is a critical element for many sectors of the Chinese economy; continued strong economic growth is dependent, in part, on a strong and efficient transport sector. Based on the 2000 Input-Output Tables for China27 (most recent data available) the transport component of the economy amounted to 6.9% of the construction industry, 5.4% of building materials and 2.7% of mining. As described in Section 3, adding the TZR to the national railway network will reduce total CR system-wide TKM by 0.32% for moving the same number of tons. This productivity savings would be translated into transport cost savings to each of these and other economic sectors, reducing the transport cost component and effectively increasing the country’s overall productivity and competitiveness. The corresponding productivity improvement in passenger transport in 0.13% of overall CR system-wide PKM. This is quite a significant productivity savings due to the construction of only one railway line. One method to quantify these productivity benefits to the national economy is to calculate the amount of freight and passenger revenue saved by rail transport customers if the TZR is constructed and these productivity savings are realized. The average CR revenue in 2004 was shown to be 8.18 fen per TKM and 10.76 fen per PKM. Applying these figures and the projected reduction in overall CR traffic results in a national savings of more than CNY 900 million in 2012.

354. PRS Part F: Net Benefits are the last part in the PRS. This, simply, is the difference between the total Project costs and total Project benefits. In 2012 the net benefits is recorded for the second half of the year since TZR is assumed to commence commercial operations in mid- 2012. As shown at the bottom of Table 10-1, the EIRR is 18.07%. The NPV at 12% is positive CNY 13,779 million. Under the above conditions, the Project is economically feasible.

D. With and Without Project Conditions

355. If the TZR is not built, the traffic diverted from highway and other CR routes would not be diverted, but carried over roads and other CR routes. As shown in Table 10-1, the absence of TZR in 2012 will mean an additional net burden to the economy in the amount of CNY 2.4 billion. By the year 2031, this amount increases to more than CNY 23.5 billion.

356. More importantly, if the Project is not built, the generated benefits will not materialize. The economic effects of these in 2012 (from Table10-1) are significant. Since multiplier effects are not included in the computation of Project benefits, these estimates should be viewed as conservative. Most significant, which directly relates to the Project’s objectives, is the jobs that are expected to be created. As described in Section 6, during the 5-year construction period and during operation of TZR significant contribution is expected in terms of jobs creation and poverty reduction.

357. Table 10-2 presents the distribution of net project benefits to passengers, freight shippers, labor, state and local government, and national and local economy. The net economic benefits included in Table 10-2 (CNY 26,044 million) is reconciled with the net benefits included in the economic analysis detailed in Table 10-1 (CNY 13,779 million) in the last two columns. The difference between the two tables is mainly due to the inclusion of nominal passenger and freight revenue (CNY 20,817 million) in the distribution of net project benefits. Also Table 10-1 includes economic costs for the Project, whereas the distribution of net economic benefits includes the difference between economic and financial costs of the Project which results is a downward adjustment of CNY 7,271 million in the net project benefits.

27. China Statistical Yearbook 2005. 103

Table 10-2: Distribution of Net Project Benefits (CNY Million) Financial Economic Government Economy Freight Total Net Value in Description Present Present Difference Passengers Labor (National/ (National/ Shippers Benefits PRS Value Value Local) Local) Benefits: Passenger Revenue 3,731.9 0.0 -3,731.9 -3,731.9 -3,731.9 0.0 Freight Revenue 17,085.2 0.0 -17,085.2 0.0 -17,085.2 -17,085.2 0.0 Passenger Transport Cost 579.0 579.0 579.0 579.0 579.0 Savings Freight Transport Cost 11,341.1 11,341.1 11,341.1 11,341.1 11,341.1 Savings Time Savings Passengers 30.8 30.8 30.8 30.8 30.8 Time Savings Freight 25.5 25.5 25.5 25.5 25.5 Shippers Generated Freight Traffic 14,436.0 14,436.0 14,436.0 14,436.0 14,436.0 Benefits Other Benefits 13,177.8 13,177.8 3,195.3 6,709.8 11.0 829.2 2,432.6 13,177.8 13,177.8 Total Benefits 20,817.1 39,590.2 18,773.1 73.2 991.2 11.0 829.2 16,868.6 18,773.1 39,590.2 Costs: Capital 19,129.7 16,513.7 -2,616.0 -2,616.0 -2,616.0 16,513.7 Maintenance 8,962.1 8,200.4 -761.6 -190.4 -114.2 -457.0 -761.6 8,200.4 Labor 5,738.9 5,251.2 -487.7 -487.7 -487.7 0.0 Taxes 3,405.6 -3,405.6 -3,405.6 -3,405.6 0.0 Total Costs 37,236.3 29,965.4 -7,270.9 0.0 0.0 -678.1 -6,135.9 -457.0 -7,270.9 24,714.2 Net Benefits -16,419.2 9,624.8 26,044.0 73.2 991.2 689.1 6,965.0 17,325.5 26,044.0 13,779.0 Source: Consultant. CNY = yuan.

E. Sensitivity and Risk Analysis

358. Table 10-3 summarizes the results of selected sensitivity tests made on the data included in Table 10-1. A 10% increase in total costs reduces the EIRR to 16.74%, and a 10% decrease in freight transport benefits reduces the EIRR to 17.10%. The switching value for total costs is reached at +55.75% and for freight transport benefits at -53.40%.

Table 10-3: Sensitivity Indicators and Switching Values Reference Revised Sensitivity Switching NPV @ 12% (CNY Change By Parameter Value EIRR Indicator Value (%) million) EIRR 18.07% 13,778.98 Resettlement Costs 100% 17.80% 0.03 3567.19% 13,392.71 Civil Works Costs 10% 17.47% 0.68 147.96% 12,847.69 Fixed and Variable Costs 20% 17.45% 0.60 168.03% 12,138.89 Total Costs 10% 16.74% 1.79 55.75% 11,307.57 Generated Freight Benefits -80% 17.51% 0.10 -990.15% 12,665.70 Total Freight Benefits -10% 17.10% 1.87 -53.40% 11,198.73 Passenger Transport Benefits -50% 17.96% 0.04 -2259.72% 13,474.10 NPV Delay Implementation by 1 Year N/A 16.18% 31.68% 9,414.19 declines by Reduce Benefits by 20%; Increase Costs by 10% -20%; +10% 13.58% 3.77 -26.52% 3,389.54 Reduce SERF by 20% -20% 17.69% 0.14 -696.07% 13,383.07 Source: TA Consultant. CNY = yuan, EIRR = economic internal rate of return, NPV = net present value at 12%, SERF = shadow exchange rate factor.

359. Costs for resettlement, civil works, and annual fixed and variable costs carry relatively less risk during Project implementation. The sensitivity tests shown in Table 10-3 indicate that the NPV for these cost categories is positive within the plausible range of variability for these costs. As for resettlement costs, the sensitivity indicator shows insensitivity of the EIRR. Past experience of the EA in controlling costs and completing railway infrastructure projects at less- than-budgeted cost provides sufficient assurance that costs will remain within budget in this Project.

360. The Project’s EIRR is less sensitive to passenger and generated freight projections (switching values of -2259.72% and -990.15%, respectively) than total freight benefits (switching value of -53.40%). 104

361. Reducing SERF by 20% causes a reduction in EIRR to from 18.07% to 17.69% (switching value of -696.07%, a numerically unrealistic variation in SERF). For civil works costs the switching value is 147.96%. A one-year delay in Project implementation reduces EIRR to 16.18% and NPV by 31.68%. Given the experience of MOR in constructing large scale rail infrastructure and estimating project costs in a realistic manner, it is unlikely that any risk associated with cost overruns will cause an EIRR of less than 12%. Given the detailed analysis made by the Consultant benefiting from the experience of the TSDI and other MOR units, it is equally unlikely that any risk associated with reduced project benefits would make TZR infeasible.

362. A stochastic simulation of variability in key Project parameters was made by use of the @RISK software. Project costs and benefits were assumed to change following a uniform distribution so that variability in parameter estimates will have an equal likelihood of occurrence. A uniform distribution of variability provides a higher probability of the occurrence of a wide range of parameter values than a normal distribution. The parameters which were allowed to change include civil works costs, LAR costs, annual fixed and variable costs, freight and passenger benefits, avoided costs and other benefits. A Latin Hypercube type random sampling was used to run the simulation with 500 iterations. The results are summarized in Figure 10-1 for EIRR and NPV.

363. As shown in these figures and accompanying statistical data, the likelihood of EIRR reaching 12% or below is zero. None of the 500 iterations showed an EIRR of less than 12% or a negative NPV at 12%. The minimum value of EIRR in the 500 iterations is 15.84% and the maximum 19.26% with a mean of 17.39% and standard deviation of 0.68%.

Figure 10-1: @RISK Output Details Report Output Statistics

Outputs EIRR for TZR NPV@12% for TZR Distribution for EIRR for TZR/A100 Simulation 1 1 60 Statistics / Cell $A$100 $A$101 Mean= 0.1738527 Minimum 15.837% 9,904.99 50 Maximum 19.255% 17,684.48 40 Mean 17.385% 13,627.84 Standard Deviation 0.681% 1,433.47 30 Variance 4.63347E-05 2054827.885 Skewness 0.173748785 0.065478877 20 Kurtosis 2.590141912 2.619070899 10 Number of Errors 00 Mode 17.201% 14,341.47 0 5.0% 16.329% 11,434.76 0.155 0.165 0.175 0.185 0.195 10.0% 16.529% 11,822.91 5% 90% 5% 15.0% 16.673% 12,074.35 .1633 .1855 20.0% 16.785% 12,362.27 25.0% 16.867% 12,586.23 Distribution for NPV@12% for TZR/A101 30.0% 16.972% 12,821.74 3.000 35.0% 17.076% 12,987.60 Mean= 13627.84 40.0% 17.167% 13,132.18 2.500 45.0% 17.234% 13,350.72 2.000 50.0% 17.319% 13,642.40 55.0% 17.445% 13,822.08 1.500 60.0% 17.593% 13,996.94 1.000 65.0% 17.695% 14,212.74 Values in 10^in Values -4 70.0% 17.752% 14,386.83 0.500 75.0% 17.861% 14,576.49 0.000 80.0% 17.951% 14,894.76 9 12 15 18 85.0% 18.107% 15,195.80 Values in Thousands 90.0% 18.286% 15,542.54 95.0% 18.550% 16,044.02 5% 90% 5% 11.4348 16.044 Source: Consultant @RISK Model Version 4.5.3 Run January 9, 2006

Appendix 1 105

Appendix 1: Social Development Action Plan Agencies Funding Proposed Actions Targets Timing Monitoring Indicators Involved * Requirements I. DIRECT PROJECT BENEFITS 1. Job creation during construction: At least 60% of unskilled labor EA, IA, 2006– No additional funds • Number of local unskilled labor • Use of local unskilled labor including those force hired locally (at least contractors, 2011 required other than employed by gender and ethnic group. from poverty villages in remote areas 261,000 12-month jobs), 25% poverty from Project. • Number of local labor employed by especially women, other vulnerable and of them women, if qualified. alleviation Local government gender and ethnic group. ethnic groups. More than 50% of unskilled offices, ACWF programs for poverty • Number of workers from poverty • Assistance with school fees for children of labor from poverty households and other local alleviation, training, households by gender and ethnic women heads of households to enable the (at least 130,500 12-month government and assistance for group. women to work on the Project, especially jobs). agencies. ethnic minorities. • Number of women workers which women from ethnic minority groups. At least 35% of unskilled jobs received school fees. • Priority given for local sellers in providing in NHAR from ethnic minorities • Number of local sellers provisioning services and supplies at the service areas if willing to work. the work camps by gender and ethnic and construction camps. group. • Pre-training by local governments. • Appropriate contract clauses. 2. Use of local materials for construction: All materials locally available EA, IA, 2006– Included in • Amount and source of supplies from • Purchase of local construction materials. sourced locally. contractors and 2011 Contractor’s Budget local area. • Use of workers from poverty households 80,000 person years for local for Civil Works. • Number of local workers by gender for sourcing materials especially women unskilled workers sourced governments. and ethnic group. and ethnic minorities. locally in the provision of • Condition of work sites at conclusion of • Borrow pits and quarries returned to their construction supplies. each contract. natural state or developed as fish ponds 40,000 person years of • Appropriate contract clauses. or other beneficial use. unskilled or more than 50% of workers sourced from poverty, ethnic minority or women- headed households. 3. Business Development. By 2012: EA, IA, TZRC, 2008 Training provided by • Number of workers hired and trained in Jobs related to railway operations: • Total 8,900 direct jobs. poverty onward TZRC to workers. total, by gender, poor and ethnic • Use of the poor, women, ethnic minorities 20% of railway workers alleviation ACWF loan program group. and other vulnerable people for railway from vulnerable offices, ACWF, for business start- • Number of new businesses started and operations and providing appropriate households. and other local ups, poverty sustained in stations. training. • 2,200 low and unskilled government alleviation offices • Number of workers from vulnerable • Design of stations to allow for handicraft workers trained and agencies. program, including groups hired and trained. shops, gift shops, restaurants, book and employed in railway tax revenue of local newspaper shops, etc. operations. governments from • Service businesses meeting passengers’ • 550 women hired and construction of the needs. trained (25%). Project. • Local governments design commercial By 2012 at stations: areas adjoining the stations for businesses • 100 small businesses and small manufacturing units to develop. established. Provision of microfinance and other • 100 businesses serving appropriate assistance. passengers established Appendix 1 106

Agencies Funding Proposed Actions Targets Timing Monitoring Indicators Involved * Requirements Generated Jobs during operations: by vulnerable groups. • Induced Jobs (11,543 in 2012 to 37,684 in By 2015, 10,000 workers 2031). from poverty households, at • Generated Freight Jobs (103,118 in 2012 least 1,500 women workers, to 454,936 in 2031). and 1,500 from Hui and other • Tourism Jobs (172 in 2012 to 1,983 in minority households. 2031). II. SOCIAL SAFEGUARDS RELATED TO PROJECT 4. Control of HIV/AIDS/STIs and human All workers informed about EA, IA , 2006– Project and local • Number of health workers. trafficking (see also SEIA) dangers of HIV/STI and contractors, 2012 governments, • Incidence of HIV/AIDS and human • Health testing, counseling and referrals in human trafficking. County Health including tax revenue trafficking cases. construction camps and availability of Testing and medical referral Departments, of local governments • Number of patients with STIs condoms at work camps or entertainment service available to workers, and civil affairs from the Project. • Types of media program aired by TV centers. women, and local residents. bureaus. and radio stations. Awareness and prevention on HIV/AIDS/STIs • Number of individual tests. and human trafficking campaigns through posters and pamphlets at construction sites and service centers, radio and TV messages and public meetings. 5. Construction and Operations Safety (see Minimum 300 work days of EA, IA 2006 No additional cost • Appropriate contract clauses. also SEIA). fatality free construction per (construction), onward during construction. • Number of inspections. • Ensure the safety of contractors and year. contractors. Cost for safety • Number of safety infractions. campsites through the guidelines TZR train operation accident TZRC campaign during • Number of fatalities. developed and incorporated into contracts rates less than 60% of overall (operations). operations from TZR • Number of accidents. with all contractors. CR accident rates. internal budget. • Publicize safety measures to area residents through media, schools, communities along the railway, and posters in stations and public buildings. • Periodic inspections by MOR. 6. Protection of communities from Full compliance with all EA, IA and 2006– Project’s • Working hours and locations (records). construction and operation disturbances and actions listed. contractors. 2011 Environmental • Number of under path crossings. damages (see also SEIA). Protection Budget. • Length of irrigation and drainage • Prohibition of night time construction and canals restored/built. adherence to noise standards. • Fences established along the railway. • Building of under path crossings where necessary. • Reconstruction of damaged irrigation and drainage systems as needed. • Building of fences along the railway. 7. Income restoration for resettlement of See Targets in Items 1, 2, 3, EA, IA, local 2006– Resettlement Plan • Income level of affected people affected people, especially vulnerable people and 4 above. government, 2010 budget. (before/after). Appendix 1 107

Agencies Funding Proposed Actions Targets Timing Monitoring Indicators Involved * Requirements and women (also see Resettlement Plan). RCSOs, village • Number of people trained. • Readjustment of land. committees, • Amount of land adjusted. • Training. and external • Number of people resettled. • Special assistance (e.g., free labor for monitoring • Number of people receiving special households lacking capacity) as needed. agency. assistance. • Use of land reclamation funds for income • Amount of reclaimed land. restoration. 8. Income restoration for resettlement of Hui The number of Hui in NHAR EA, IA, local 2006- Resettlement Plan • Income level of affected Hui and other and other minorities (also see Resettlement PIA counties is 613,000; government, 2011 budget. County and minorities (before and after). Plan and #15 below). number of Hui and other RCSOs, village provincial budgets for • Number of Hui and other minorities • Readjustment of land. minorities to be hired under committees, village resettlement trained. • Training. Items 1,2, 3, and 4 above is and external and poverty • Amount of land adjusted for Hui and • Special assistance (e.g., free labor for at least 15,000. monitoring reduction, e.g., other minorities. households that lack capacity) as needed. agency. Ningxia Five Year • Number of Hui and other minorities • Use of land reclamation funds for income Plan for Farmers New resettled. restoration. Residences. • Number of Hui and other minorities receiving special assistance. • Amount of reclaimed land for Hui and other minorities. 9. Environmental Protection. 50% of unskilled workers EA, IA, local 2006- Project, local • Number of people hired and number of • Hire poor unskilled workers for planting hired from poverty government 2011 governments, and poor hired for environmental and other environmental protection tasks. households. offices, and contractors. protection. external monitoring agency.. III. COMPLEMENTARY ACTIONS TO BE TAKEN BY LOCAL GOVERNMENTS 10. Enhancing poverty reduction programs, One-half of unskilled workers Local 2007 Use a portion of the • Reduction in number of poor by gender especially for women and ethnic minorities, from poverty households government onward civil works tax (3-4%) and ethnic group. post-TZR construction. hired during construction agencies revenue to local • Number of workers counseled by • Provide assistance in alleviating poverty. remain above the poverty concerned with governments to hire gender and ethnic group. • Provide counseling on livelihood line. poverty 1-2 people per county • Training received by gender and ethnic sustainability. One-half of women hired alleviation. to coordinate group. • Provide training for post-construction during construction remain . between existing • Number of poor workers assisted in employment. gainfully employed. programs managed starting a business by gender and • Assist in preparation of business plans for One-half of minorities hired by local agencies, ethnic group. starting businesses once the construction during construction remain and to monitor SDAP • Number of women which received work is done. above poverty line. implementation. tuition assistance by ethnic group. • Tuition assistance to women heads of household. 11. Tourism development, especially for Additional international tours Tourism 2007 Tour companies, local • Increase in number of international the poor, women, ethnic minorities and to the area. bureaus, onward businesses and local tourists in area. other vulnerable people. 50 new tourist based poverty governments. • Increase in number of tourist facilities Appendix 1 108

Agencies Funding Proposed Actions Targets Timing Monitoring Indicators Involved * Requirements • Link local communities with international businesses. alleviation and revenue to local government and tour companies to develop historical Cultural and village tours let offices, ACWF people. cultural package tours at existing sites or by two poverty and two minority affairs • Number of the poor, women, ethnic open new ones. minority villages. bureaus. groups and other vulnerable people • Develop local handicrafts for sale by participated in tourism services and women, ethnic minorities and poor handicrafts. households at stations and tourist sites. • Provide start up funding for restaurants and guest houses near scenic and historical sites. • Develop posters on environmental and cultural relics protection. • Promote tourism in the region. Encourage involvement of local poor, women and vulnerable people, including ethnic minorities. 12. Village development. All villages without access to EA, IA, 2006- Project funds for • Number of villages with road access. • Construction access roads converted to road, safe drinking water, provincial and onward construction access • Number of villages with safe drinking local roads. telephone, schools and local roads. water. • Station access roads built. clinics will have access. governments. Ningxa, Shaanxi, and • Number of villages with telephones. • Village infrastructure development (safe All stations will have access Shanxi provincial and • Number of villages with power. drinking water, telephones, power, roads built. local governments for • Number of villages with schools. schools and clinics built). infrastructure. • Number of villages with clinics. • Km of access roads converted to local use. 13. Investment in livelihood programs for Develop at least 50 NHAR, 2006 NHAR, development • Number of businesses created. Hongsipu and Taiyangshan Development businesses in station areas development onward zone agencies, and • Number of Hui and other minorities Zones. and other businesses that will zone agencies, private sector. employed. utilize TZR, which will employ and private • Number of Hui and other minority 1,000 Hui from poverty sector. poverty households positively affected. households in the zones. 14. Local railway development. Spur lines developed and Provincial and 2010 Ningxa, Shaanxi, and • Number and length of spur lines. linked to TZR. county onward Shanxi provincial and agencies and local governments, private sector. and the private sector. 15. Urbanization including micro- Rural-urban migration (from Provincial and 2006 Ningxa, Shaanxi, and • Number of people migrating to local urbanization: Encourage development of new poor rural areas to urban county onward Shanxi provincial and urban areas. or expansion of existing enterprises in urban areas): target numbers to be government local governments. • Number of migrants employed. areas along TZR alignment. determined after approval of agencies. • Number of poverty households th local 11 5-Year Plan. positively affected. Source: Consultant. * The agency(ies) marked in BOLD designate lead agency(ies). Appendix 2 109

Appendix 2: Summary Poverty Reduction and Social Strategy (SPRSS) A. Linkages to the Country Poverty Analysis Is the sector identified as a Is the sector identified as a national Yes Yes priority in country poverty analysis? No national priority in country No poverty partnership agreement? Contribution of the sector or subsector to reduce poverty in the People’s Republic of

China (PRC):

Development in the Project Impact Area (PIA) has been constrained by limited transportation infrastructure, which is one factor contributing to the relatively high incidence of poverty in some areas. Out of the 22 counties/districts in the PIA, 8 are nationally- designated and 3 are provincially-designated poverty counties. Railway transport will provide an enabling condition for poverty reduction through improved access to markets, employment, education and medical facilities, new knowledge and information, families working or studying in other regions, and other social and economic services and facilitation of economic development. Improved access to markets opens up opportunities for new enterprises and expansion of existing ones. Construction and operation of the railway generates additional employment in local communities, providing a new source of income for people, including poor households in the PIA. Incoming passengers and tourists generate additional demand for locally produced goods and services. In addition, construction access and connector roads for the railway as well as development of local roads by the local government from the stations to all levels of road network and poor villages will help to extend the project benefits and opportunities to the rural, poor communities by improving local infrastructure, reducing transport costs, increasing access to markets, employment and other economic and social services, and improving conditions for economic growth. B. Poverty Analysis Poverty Classification: General Intervention What type of poverty analysis is needed?

Areas along the alignment range from relatively well-off to some of the poorest in China. The well-off areas near the termini of the alignment have benefited from China’s recent economic growth. At the same time, many villages located towards the center of the alignment have been isolated from these developments, and these are where the very poor live. The links between poverty, topography, and transport systems are apparent in the PIA. Most people living near the termini have diversified sources of livelihood and a sustainable standard of living. People living in the mountains or in isolated areas have too little unfertile land and insufficient means of livelihood. They also live in areas prone to drought, frosts, erosion and uncertainty. The main causes of poverty in the project areas are: (i) natural calamity; (ii) lack of infrastructure; (iii) very limited and unsustainable sources of livelihood; (vi) uneven economic development; and (v) poor health. The Project will benefit about 6.5 million people in the project area. Of them, about 70% are rural and 17.15% are poor with a rural net income per capita of less than CNY 900 in 2004 (nearly $1 per day using purchasing power parity exchange rate). The railway passes through three provinces, seven prefectures and 22 counties. There are 1,454 designated poverty villages, or about 30% of all villages in the PIA. About 9.57% of the people in the PIA are ethnic minorities, almost all of them are Hui whom live in the Ningxia Hui Autonomous Region.

About 435,000 unskilled person-years of work will be created during the construction of the railway. Half of the unskilled work will be targeted for the poor, totaling 217,500 person years at total wages of CNY1,631 million or CNY 7500 per-person year, more than 8 times the poverty line of annual income at CNY 924 per capita. Hiring priority will be given to women, resettlement-affected people, ethnic minorities and other vulnerable people. In addition, during the construction, 80,693 person-years of local unskilled jobs will be created in the provision of construction materials with total wages of CNY 605.2 million, of which 40,346 person years will be for the poor, with total wages of CNY 302.6 million. When the operation of the new railway starts in 2012, approximately 8,954 additional jobs will be created with total wages of CNY 107.4 million annually, that will increase to 13,922 job and CNY 289.4 million in wages in 2030. This will add revenue to local governments that will be used for the range of poverty reduction and social activities including mitigation of negative impacts on HIV/AIDS/STIs, human trafficking and environment, with special attention to resettlement-affected groups, women, ethnic groups and other vulnerable people in the PIA, including a program of income sustainability for the poor after the project implementation, especially those hired under for construction jobs.

The 63 railway stations, which will be connected to all levels of road network accessible by all villages including the poor, will create various jobs, and help distribute the benefits in the PIA. There will be sufficient space in and around the stations for local area development, and the poor, women, ethnic groups and other vulnerable people will be supported by local governments to sell local specialties and other goods and services. Expecting more efficient and cheaper freight transport and business travels on the Project railway, many enterprises in the PIA have been planning to expand outputs and increase labor; about 52,437 jobs have been estimated by PIA companies as a result of TZR. From TZR’s revenues, it will purchase a range of inputs from other economic sectors that will result in 11,543 jobs created in 2012, and increase to 37,684 jobs in 2031. The jobs created by the generated freight will total 103,118 jobs in 2012, and increase to 454,936 jobs in 2031. Increased tourism will result in 172 jobs created in 2012, and increase to 1,983 jobs in 2031. All of these direct, indirect and generated impacts will provide conditions to meet the PRC goal of micro-urbanization for poor families to (i) move away from unsustainable, mountainous and isolated farmlands, (ii) have better access to markets, and advanced educational and health facilities especially for women and (iii) build a sustainable future in new centers of economic activity, and complement the poverty reduction activities by the local governments to achieve the goal, such as assisting the poor with urban migration, relocations, employment, local economic development, farmer-based rural tourism, agricultural product development, and health and physical infrastructure improvement. These concerted efforts will promote further progress in achieving Millennium Development Goals in PIA. In addition to providing cheaper transport, TZR will offer a safer means of travel than roads, which have high incidences of accidents, including for fatalities. Appendix 2 110

C. Participation Process Is there a stakeholder analysis? Yes No Various public consultation and participation activities for the Project have been carried out since 2004 and the roles for each stakeholder have been identified. The Ministry of Railway (MOR), Third Survey Design Institute, the PPTA Consultant and ADB missions have had formal and informal consultations with local communities and government agencies through meetings, surveys, household interviews, written communications, and workshops. MOR is the executing agency (EA) and is responsible for overall supervision and implementation of construction activities. The local county and township governments and communities will assist the EA in land acquisition, implementation of the resettlement plan (RP) and the organization of local labor for the construction and local development including the station areas to ensure the participation and benefit of the poor, women, ethnic minorities and other vulnerable people. Initial issues discussed included the selection of the alignment. Further public consultation occurred during various field surveys among local residents and government officials, tourists, passengers using all modes of transport, industries in the PIA and other stakeholders. Nearly 200 village surveys and over 4,000 households surveys were conducted for the environmental impact assessment (EIA), poverty and social assessment, and resettlement plan (RP).

Is there a participation strategy? Yes No

The participation of local people will be central for improving their opportunities to benefit from the Project. Local groups and relevant government agencies will continue to be involved in the consultation and participation process, especially during the implementation of the EIA and RP. Railway Construction Support Offices (RCSO) have been set up in each PIA county, and will have copies of all relevant documents. During construction, they will serve as a key coordinating point to enhance stakeholder participation, including the poor, women, ethnic and other vulnerable people. A leading group will be formed in each prefecture in the PIA among the relevant agencies at different levels down to the village levels, including poverty reduction offices, All China Women’s Federation (ACWF), health, civil affairs and ethnic affairs bureaus to continue the process of consultation and participation, and to coordinate activities by various agencies to ensure the local benefits. Leading groups will work closely with RCSOs and help support the implementation of the SDAP, EIA and RP.

D. Gender Development Strategy to maximize impacts on women:

During project preparation, analyses of gender-disaggregated data and discussions with representatives of the ACWF indicate that women will need some assistance to fully benefit from the project. Data collected for the poverty and social assessment and the RP indicate the following: (i) women comprise 48% of the total population in the project area; (ii) women primarily engage in agricultural activities; and (iii) male members from poor households tend to travel further for migrant labor opportunities than non-poor males. The construction of the railway will create opportunities for local area development by (i) facilitating flow of materials and information into the area; and (ii) accelerating development of local industries. Many of the service sector jobs that will be created by the railway development and in the tourism sector seek women employees. The ACWF will provide business management and financial assistance to women interested in setting up small businesses that serve the construction crews. In addition, as women will have a greater exposure to the risk of HIV/AIDS/STIs28 and human trafficking, the mitigation measures will pay special attention to women.

Poverty and social enhancement measures have been built into the project design, and special mitigation (or protection) actions have been included in the RP. For example, members of the community will collectively decide where schools will be relocated. Women, especially female heads of household, will be consulted as schools provide an informal source of daycare for their children. Poor women heads of household will receive assistance so that their children can remain in school, thereby helping to break the cycle of poverty while at the same time freeing women’s time during the day to work. Women-headed households and widows will be eligible for special assistance, if necessary, during land acquisition and resettlement. Women will be given priority for project- generated employment during construction and operation of the railway. The rise in female participation in the labor force will increase women’s net income, thus improving overall family welfare, and increasing the status of women. Has an output been prepared? Yes No

28. AIDS = acquired immune deficiency syndrome, HIV = human immunodeficiency virus, STIs = socially transmitted infections. Appendix 2 111

E. Social Safeguards and other Social Risks Significant/Not Plan Item Strategy to Address Issues Significant/None Required Significant The draft RP has been prepared and MOR will distribute a resettlement Full information booklet to affected people. An updated RP will be prepared to Resettlement Not significant Short incorporate new regulations that will strengthen to rights of affected people, None increase compensation and improve implementation of resettlement None The proposed railway will provide cheaper, safer and faster transport along a Significant key East-West connection. Passenger tariffs will be about one-half current Yes Affordability Not significant bus fares, and freight tariffs will be about one-ninth current road tariffs. No None Congestion on the rail network will be reduced, and facilitate further economic expansion. Railway construction and operations will generate considerable employment Significant for the poor in the PIA. During operation, economic development in the PIA will generate additional employment opportunities. Priority for these Yes Labor Not significant employment opportunities will be given to the poor, resettlement-affected No None people, ethnic minorities, women and other vulnerable groups. Local agencies will assist the local government in identifying these priority groups. 9.57% of people in the Project area are ethnic minorities, nearly all of whom Significant Indigenous are Hui and some will be affected by land acquisition. Other ethnic groups Yes Not significant include Zhuang, Mongol and Man but they are not adversely affected. Peoples No None Impacts and special measures for the Hui are addressed in the RP, and enhancement measures for all groups are included in the SDAP. HIV/AIDS and Human Trafficking Awareness and Prevention: The railway will increase the mobility of goods and people along the route, which could increase risks of HIV/AIDS/STIs and human trafficking among mobile populations and local communities especially for women. The local Other Risks Significant departments of health, civil affairs bureaus and other relevant agencies will coordinate with the construction contractors in delivering HIV/AIDS/STIs and Yes and/or Not significant human trafficking prevention information, voluntary counseling and testing No Vulnerabilities None (VCT), condoms, HIV testing kits and STI treatment packages. The relevant PRC laws and regulations on these issues will be strictly followed. The provincial governments have active HIV/AIDS awareness and prevention programs, they and and MOR have experience in implementing the necessary safeguard measures. Source: Consultant.