Completion Report

Project Number: 36433-013 Loan Number: 2274 June 2014

People’s Republic of China: Taiyuan–Zhongwei Railway Project

This document is being disclosed to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS

Currency Unit – yuan (CNY)

At Appraisal At Project Completion (6 February 2006) (20 December 2012) CNY1.00 = $0.1240 $0.1602 $1.00 = CNY8.0616 CNY 6.2414

ABBREVIATIONS

ADB – Asian Development Bank CO2 – carbon dioxide EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return FCTIC – Foreign Capital and Technical Import Center ICB – international competitive bidding MOR – Ministry of Railways NHAR – Ningxia Hui Autonomous Region O&M – operation and maintenance PRC – People’s Republic of China TA – technical assistance WACC – weighted average cost of capital TZR – Taiyuan–Zhongwei Railway TZYRC – Taiyuan-Zhongwei-Yinchuan Railway Company

WEIGHTS AND MEASURES km – kilometer p-km – passenger-kilometer ton-km – ton-kilometer km/h – kilometer per hour m2 – square meter m3 – cubic meter mu – a Chinese unit of measurement (1 mu = 666.67 m2)

NOTES

(i) In this report, "$" refers to US dollars, unless otherwise stated.

Vice-President S. Groff, Operations 2 Director General A. Konishi, East Asia Department (EARD) Director H. Sharif, People’s Republic of China Resident Mission, EARD

Team leader F. Wang, Senior Project Officer (Financial Management), EARD Team members Y. Gao, Project Analyst, EARD Z. Niu, Senior Project Officer (Environment), EARD W. Zhu, Senior Project Officer (Resettlement), EARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1 A. Relevance of Design and Formulation 1 B. Project Outputs 3 C. Project Costs 4 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 6 G. Conditions and Covenants 6 H. Consultant Recruitment and Procurement 7 I. Performance of Consultants, Contractors, and Suppliers 8 J. Performance of the Borrower and the Executing Agency 8 K. Performance of the Asian Development Bank 8 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Impact 11 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons 14 C. Recommendations 14 APPENDIXES 1. Design and Monitoring Framework 16 2. Chronology of Major Events 20 3. Project Cost and Financing Plan 21 4. Projected and Actual Contract Awards and Disbursements 22 5. Project Implementation Schedule 23 6. Organization Charts 24 7. Compliance with Loan Covenants 26 8. Contract Packages Financed by the Asian Development Bank 38 9. Economic Reevaluation 40 10. Financial Reevaluation 44 11. Social Impact and Poverty Reduction in the Project Area 47 12. Land Acquisition and Resettlement 54 13. Environmental Impact Analysis 61

BASIC DATA A. Loan Identification

1. Country The People’s Republic of China 2. Loan Number 2274-PRC 3. Project Title Taiyuan–Zhongwei Railway Project 4. Borrower People’s Republic of China 5. Executing Agency Ministry of Railways 6. Amount of Loan $300.0 million 7. Project Completion Report Number PCR: PRC 1449

B. Loan Data 1. Appraisal – Date Started 16 March 2006 – Date Completed 23 March 2006

2. Loan Negotiations – Date Started 24 October 2006 – Date Completed 25 October 2006

3. Date of Board Approval 23 November 2006

4. Date of Loan Agreement 24 May 2007

5. Date of Loan Effectiveness – In Loan Agreement 22 August 2007 – Actual 21 August 2007 – Number of Extensions 0

6. Closing Date – In Loan Agreement 31 December 2012 – Actual 20 December 2012 – Number of Extensions 0

7. Terms of Loan – Interest Rate ADB's London interbank offered rate-based rate – Maturity (number of years) 26 years – Grace Period (number of years) 6 years

8. Terms of Relending (if any) – Interest Rate Not applicable – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower

9. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval

13 November 2007 7 December 2012 61 months

Effective Date Original Closing Date Time Interval

21 August 2007 31 December 2012 64 months

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b. Amount ($) Last Original Amount Net Amount Amount Undisbursed Category Revised Allocation Canceled Available Disbursed Balance Allocation Equipment 113,900,000 28,090,825 0 28,090,825 28,090,825 0 Materials 157,400,000 271,509,175 0 271,509,175 271,509,175 0 Consulting services 400,000 400,000 400,000 0 0 0 Unallocated 28,300,000 0 0 0 0 0 Total 300,000,000 300,000,000 400,000 299,600,000 299,600,000 0 Source: Asian development Bank.

C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 1,080.2 299.6 Local Currency Cost 2,672.7 6,753.0 Total 3,752.9 7,052.6

2. Financing Plan ($ million) Cost Appraisal Estimate Actual Asian Development Bank 300.0 299.6 MOR, SPG, SAPG, NHARG and other 1,314.4 2,327.4 shareholders Domestic banks and bonds a 2,138.5 4,425.6 Total 3,752.9 7,052.6 MOR = Ministry of Railways, SPG = Shanxi provincial government, SAPG = Shaanxi provincial government, NHARG = Ningxia Hui Autonomous Region government. a Including China Development Bank, China Construction Bank, China Industrial and Commercial Bank, and bonds issued by the Ministry of Railways. Source: Ministry of Railways.

3. Cost Breakdown by Project Component ($ million) Appraisal Estimate Actual Component Foreign Local Total Foreign Local Total Exchange Currency Cost Exchange Currency Cost A. Base Costs 1. Railway civil works, track work, 717.2 1,523.6 2,240.8 271.5 4,498.8 4,770.3 and environmental protection 2. Telecommunications, 111.9 84.1 196.0 0.0 256.6 256.6 signaling, safety, e- Governance, and MIS 3. Electric power and traction 90.0 124.3 214.3 28.1 286.1 314.2 4. Buildings and facilities 1.4 27.6 29.0 0.0 78.4 78.4 5. Land acquisition and 0.0 183.1 183.1 0.0 794.3 794.3 resettlement 6. Administration, consulting 19.5 110.6 130.1 0.0 350.9 350.9 services, and training 7. Temporary facilities and 0.0 40.2 40.2 0.0 44.4 44.4 transitional works 8. Other equipment and facilities 4.7 4.2 8.9 0.0 140.9 140.9 Subtotal (A) 944.7 2,097.7 3,042.4 299.6 6,450.4 6,750.0

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Appraisal Estimate Actual Component Foreign Local Total Foreign Local Total Exchange Currency Cost Exchange Currency Cost B. Contingencies 1. Physical 52.9 117.5 170.4 0.0 0.0 0.0 2. Price escalation 34.7 112.4 147.1 0.0 0.0 0.0 Subtotal (B) 87.6 229.9 317.5 0.0 0.0 0.0 C. Interest During Construction 47.9 345.1 393.0 0.0 302.6 302.6 Total 1,080.2 2,672.7 3,752.9 299.6 6,753.0 7,052.6 ADB = Asian Development Bank, MIS = transport management information system. Sources: Asian Development Bank and Ministry of Railways.

4. Project Schedule

Item Appraisal Estimate Actual Date of contract with consultants Jan 2004 Jan 2005 Completion of engineering designs Dec 2006 Jul 2006 Civil works contract Date of award Dec 2006 Mar 2006 Completion of work Apr 2010 Dec 2010 Equipment and supplies Dates First procurement Jun 2008 Aug 2007 Last procurement May 2011 May 2011a Completion of equipment installation May 2011 Oct 2010 Start of operations Jun 2011 Jan 2011 a The last procurement was for additional material for stations and yards, while equipment installation for the main line was completed in October 2010. Source: Asian Development Bank.

5. Project Performance Report Ratings Ratings Implementation Period Development Objectives Implementation Progress From Nov 2006 to Jun 2008 Satisfactory Satisfactory From Jul 2008 to Jun 2009 Satisfactory Highly Satisfactory From Jul 2009 to May 2010 Satisfactory Satisfactory From Jun 2010 to Dec 2010 Satisfactory Highly Satisfactory From Jan 2011 to Dec 2012 Satisfactory Satisfactory Source: Asian Development Bank.

D. Data on Asian Development Bank Missions No. of No. of Specialization Name of Mission Date Persons Person-Days of Membera Fact-finding 16-25 Jan 2006 6 54 a, b, c, d, e, f Appraisal 16-23 Mar 2006 1 7 a Inception mission 15-19 Nov 2007 2 8 a, g Review mission 1 21-28 Oct 2008 2 14 a, g Midterm review and handover mission 17-24 Nov 2009 5 23 a, g, c, h, i, j Review mission 2 19-23 Oct 2010 3 12 g, i, j Review mission 3 29 Aug-2 Sep 2011 4 16 g, i, j, k Review mission 4 12-15 Dec 2012 2 3 i, j Project completion review 10-16 Sep 2013 2 12 i, j a a = transport specialist, b = project economist, c = resettlement specialist, d = financial specialist, e = environment specialist, f = counsel, g = project analyst, h = social development specialist, i = financial management officer, j = resettlement officer, k = environment officer. Source: Asian Development Bank.

I. PROJECT DESCRIPTION

1. Railways play an important role in transport in the People’s Republic of China (PRC) due to the country’s large size and population. The Government of the PRC has been increasing railway transport capacity to meet economic and social development needs. During 2001–2012, the rail network expanded by 40% from 70,057 kilometers (km) to 97,625 km. Passenger and freight railway traffic also grew substantially. From 2001 to 2012, passenger traffic increased by 105.8%, from 476.7 billion passenger-kilometers (p-km) to 981.2 billion p-km; and freight expanded by 96.6%, from 1,469.4 billion ton-kilometers (ton-km) to 2,889.2 billion ton-km. Despite such growth, railway capacity seriously lags behind demand. The government’s plan for railway development gives priority to expanding the railway network and constructing new lines in the central and western regions. The Taiyuan–Zhongwei Railway (TZR) project was included in the 11th Five-Year Plan (2006-2010) of the Ministry of Railways (MOR).

2. The TZR runs through the central part of Shanxi Province and the northwestern parts of Shaanxi Province and the Ningxia Hui Autonomous Region (NHAR). It crosses 7 prefecture level cities and 22 counties and districts. Eleven of these were designated national or provincial poverty counties in 2005. The project area is denominated by mountainous terrain and desert. It has abundant natural reserves of coal and other nonferrous materials and many manufacturing industries and tourism sites. Despite these natural resources and the area’s development potential, its economic growth had been limited by inadequate infrastructure and high costs for transport. The project was designed to remove transport constraints by providing efficient, affordable railway transport to create the conditions necessary for developing local resources and generating employment and income-enhancing opportunities.

3. Asian Development Bank (ADB) approved a loan of $300 million from its ordinary capital resources to finance the project on 23 November 2006.1 The loan agreement was signed on 24 May 2007 and became effective on 21 August 2007. The project loan was closed on 20 December 2012. At appraisal, the project was to comprise (i) construction of 520 km double track electrified standard gauge Class I railway from Taiyuan to Dingbian, 232 km electrified single track from Dingbian- Zhongwei, and 192 km electrified single track from Dingbian to Yinchuan; (ii) construction of 41 new railway stations complete with facilities; (iii) introduction of modern technology and equipment for enhancing safety; (iv) installation of a signaling, e- governance and management information system; (v) provision of training on the use and maintenance of modern equipment; (vi) land acquisition and resettlement; (vii) environmental protection and mitigation of adverse environmental effects; (viii) construction supervision, monitoring and evaluation, and marketing and business development; and (ix) strengthening of institutional capabilities. The project design and monitoring framework is in Appendix 1, and the chronology of major events is in Appendix 2.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The project supported the government’s development priorities and was consistent with ADB’s country strategy for the PRC.2 As a priority project included in the 11th five-year plan of MOR, the project contributed to the PRC’s western development strategy, which aims to narrow

1 ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of China for the Taiyuan-Zhongwei Railway Project. Manila. 2 ADB. 2005. Country Strategy and Program: People’s Republic of China, 2006–2008. Manila.

2 the socioeconomic disparities between the country’s western and coastal regions. 3 ADB’s country strategy for the PRC for 2006–2008 sought to promote pro-poor economic growth by enabling greater access of the poor to the benefits of economic prosperity. In the railway sector, it focused on (i) expanding the railway system by constructing new lines in unserved, less- developed, and poor areas; (ii) modernizing and increasing the capacity on key routes of the national railway system to improve transport efficiency; (iii) commercializing railway operations to sustain efficient operations; and (iv) increasing railway competitiveness in the transport sector through restructuring and reform. The project represented one of a series of programs and projects that ADB financed since 1989 to help expand and improve railways in less-developed inland provinces.

5. The project design was sound. The project railway’s alignment was decided during project preparation based on construction costs and environmental and socioeconomic considerations, such as the need to preserve cultural relics, historical sites, and protected areas; provide access to mineral resources; and limit impacts of land acquisition and resettlement. The design standards took into account the need to integrate the TZR with other railway lines in the region. The interface with the other rail systems, including the physical connection, signaling, and communications, was designed to provide uninterrupted transit for both freight and passenger trains. The design for train dispatching, ticket reservation, and other management information systems complied with national railway standards. The TZR’s operational performance during 2011–2013 confirmed that these elements were designed appropriately and were effective.

6. A project environmental impact assessment (EIA) was conducted by the Third Survey and Design Institute and approved by the PRC’s State Environmental Protection Administration in August 2006. A resettlement plan was prepared by the MOR and endorsed by ADB in March 2006. ADB provided project preparatory technical assistance (TA) to strengthen the project feasibility study.4 The TA drew lessons from completed railway projects. Constraints on traffic were analyzed on a network basis, and the impact of the existing and planned railway lines was reviewed to enable more realistic traffic forecasts for the TZR. Key considerations were incorporated in the loan covenants and were monitored during project implementation. These included covenants related to enhancing the capacity of connecting railway lines, construction of container terminals, tariffs, and the supply of locomotives and wagons.

7. However, the feasibility study’s estimate of the capital cost proved to be much too low, not only when compared with actual eventual project costs but also in comparison with the costs of other projects of similar complexity constructed during the same period. Several performance indicators proposed in the project framework were impractical or unverifiable in view of the existing reporting system, such as the ones on fuel savings and reduced carbon dioxide (CO2) emissions. Some targets were set without baseline information or without clear relevance or quantifiable attribution to the project activities. Examples included targets for a reduction of accidents and an increase in rural enterprises. These shortcomings, plus a lack of budget earmarked for such purposes, made the monitoring difficult.

3 State Council of the People’s Republic of China. 2000. Policies and Measures for Western Development. Beijing. 4 ADB. 2005. Technical Assistance to the People's Republic of China for Preparing the Taiyuan–Zhongwei Railway Project. Manila.

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B. Project Outputs

1. Railway Infrastructure and Associated Facilities

8. The completed project includes 941 km of electrified, standard gauge, Class I railway line, comprising 509 km of double-track line between Taiyuan and Dingbian; 239 km of single- track line between Dingbian and Zhongwei; and 193 km of single-track line between Dingbian and Yinchuan. The maximum design speed is 160 kilometers per hour (km/h), with reservation for upgrading to 200 km/h. The project railway has a design capacity of 40 pairs of passenger trains per day and 60 million tons of freight per year. The TZR runs 197 km in Shanxi Province, 277 km in Shaanxi Province, and 467 km in the NHAR. It has 347 bridges with a total length of 190 km and 109 tunnels with a total length of 180 km. The longest bridge is 7.4 km long, and the longest tunnel is 20.8 km long. Train operations utilize automatic block control systems for the double-track section and a semiautomatic block control system for the single-track section. The signal system utilizes centralized traffic control system. Equipment and facilities for power supply, signals, and telecommunication and train control systems were installed and fully commissioned. Safety technology and equipment were incorporated in accordance with the national railway standards. At appraisal 41 new stations were planned. The project actually built 40 new stations, and 3 existing stations connecting TZR with existing rail lines were expanded. All the new stations are open to freight traffic, and 18 stations are open to both freight and passenger traffic. A total of 191.3 km of station access roads were constructed by local governments. A total of 538.3 km of construction access roads funded by contractors were also built. Many of these roads have become the main roads in remote areas, benefiting the local communities.

9. The MOR issued its provisional acceptance of the project in December 2010 after verifying construction quality and completing a transportation safety assessment. Before the TZR was opened, public safety campaigns were conducted to familiarize people with safety issues related to the electrified railway. Local governments also established offices to assist in the safety efforts. Trial freight and passenger operations started on 11 January 2011. The design speed of 160 km/h has been achieved. Currently 15 pairs of freight trains and 17 pairs of passenger trains are operating on the TZR. During the project completion review, the telecommunications, signaling, electrification, and traffic control equipment were found to be in good operational condition.

2. Employment Opportunities Generated for Poor and Vulnerable Groups

10. At appraisal, it was anticipated that 453,000 person-years of construction-related employment would be generated and that the poor, including women, would capture 50% of the unskilled labor opportunities created. According to the external monitoring agency, the project provided employment opportunities of 365,480 person-years, of which 54,840 person-years, or 15%, came from the local labor market and were mainly in the form of unskilled labor. Of the unskilled labor employment generated, 46,960 person-years, or 86%, went to laborers from poor households and 6,200 person-years, or 11%, went to women. The smaller amount of employment actually created and the lower percentage of unskilled work can be attributed to better construction organization and greater use of mechanization in construction work. Average wages for unskilled workers increased from CNY60 per day in 2006 to CNY160 per day in 2011, significantly exceeding the 40% improvement anticipated. As a result, a total of CNY1.4 billion of wages was disbursed to poor households in the project area during the construction period, of which CNY124.0 million was paid to women. This helped reduce poverty and contributed to gender development.

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3. Corporate Governance

11. The project successfully diversified the financing sources by engaging strategic and private investors. Taiyuan-Zhongwei-Yinchuan Railway Company (TZYRC) is a limited liability company incorporated by the MOR, Shanxi, Shaanxi, and NHAR governments, and other 7 companies. The total shareholder equity represented 33% of the project cost. Of the total equity, the MOR contributed 34%, 5 the two provinces and the NHAR contributed 26%, and other investors contributed 40%. TZYRC has managerial and financial autonomy, and shareholders play their role through the board of directors and the board of supervisors. It is currently the largest joint venture railway company in operation in the PRC. More significantly, because of the government’s policy governing joint venture railways, TZYRC can set tariffs on a cost-recovery basis for freight transport, which allows it to charge higher tariffs than those of the national railways.6

12. Although TZYRC is an independent company, operation of the railway itself has not been separated from the MOR, even though this was envisaged at appraisal. Instead, TZR operations have been assigned to the MOR’s Taiyuan, Lanzhou, and Xi’an railway administrations, with each responsible for the section within its administrative boundaries. The arrangement is governed by an agreement between the MOR and TZYRC. Under this agreement, TZYRC owns the project assets, is responsible for debt repayment, and gains the revenues from TZR freight and passenger operations; while the three railway administrations are responsible for operation and maintenance (O&M) and are compensated by TZYRC for the costs they incur. According to TZYRC, this arrangement has worked smoothly and has been efficient operationally which is reflected in the financial ratios. For example, the operating ratio of TZYRC has been kept below 65%.

4. Institutional Strengthening of Project Company

13. A fourth output—institutional capacity of the project company strengthened—was part of the original design and monitoring framework, and the project was expected to enhance the company’s marketing and business development skills. This was based on the presumption that TZYRC would operate the railway itself. The activities envisaged were not undertaken because the MOR’s three railway administrations retained control of TZR’s O&M (para 12). Although marketing and business development functions remained with the railway administrations, TZYRC explored ways to increase its revenues and reduce the cost of its operations. These measures included refining the arrangements with the MOR’s railway administrations and installing equipment for traffic identification to facilitate revenue clearance with the administrations. This effort was supported by an across-the-board reform of the national railways that began on 15 June 2013 which aims to improve service quality and promote door- to-door freight delivery through such steps as streamlining procedures for shippers.

C. Project Costs

14. The project cost at completion was CNY44.0 billion, 45% higher than the appraisal estimate. The increase was mainly due to higher-than-estimated prices for construction materials, design changes to cope with topography and geological conditions, the addition of

5 This differs from the practice that the MOR follows in most joint-venture railway undertakings, which requires it to own at least 51% of the equity. 6 For passenger transport, uniformed national tariffs are applied.

5 bridges and tunnels to the original plans, provision of additional facilities for connecting with other railway lines at Taiyuan, Zhongwei, and Suide, enhanced measures for environmental protection and operational safety, and a 236% increase in the costs for land acquisition and resettlement. The total cost of consulting services, administration, and training increased by 9%. However, the average capital cost achieved at completion—about CNY46 million per km— represented efficient construction, based on comparison with other railway projects of similar scale and complexity. 7 The cost estimates in the feasibility study were significantly underestimated, which led to the very high ratio of increase over the original cost projection. The project cost in US dollars rose from the estimated $3,752 million to an actual $7,053 million due to the cost increases in local currency and an appreciation of the renminbi against the US dollar during implementation. The cost overrun was financed by additional equity contributions and loans from domestic banks, which were provided on time during implementation.

15. The original financing plan included an ADB loan of $300 million, representing 8% of the total project cost; loans of $2,138 million from domestic banks, representing 57% of the project cost; and equity inputs of $1,314 million, representing 35% of the project cost. Upon project completion, ADB had financed $299.6 million, representing 4% of the project cost. Actual counterpart funds included equity investment of $2,327 million (33% of project cost) and loans from domestic banks of $4,426 million (63% of project cost). Domestic loans included loans from China Development Bank, China Construction Bank, China Industrial and Commercial Bank, and bonds issued by MOR. The project costs and financing plan are in Appendix 3.

D. Disbursements

16. The ADB loan proceeds were disbursed from November 2007 to December 2012, using reimbursement, direct payment, and commitment disbursement procedures. Of the loan proceeds, $271.51 million was used for materials and $28.09 million for equipment. The loan account was closed on 20 December 2012. No extension to the loan closing date was made. The executing agency applied appropriate disbursement procedures, and ADB’s disbursement process was efficient. The projected and actual contract awards and disbursements are in Appendix 4.

E. Project Schedule

17. The project was implemented within the planned schedule. Prequalification and bidding were started and completed on schedule for the major items. Civil works construction started in May 2006 and was completed in December 2010, 8 months later than anticipated.8 Technical difficulties encountered during the construction of long tunnels were the main reasons for the delay, including time taken for measures to protect the tunnels from underground water. However, the late completion of civil works did not affect the schedule of other activities. The track laying for the main line commenced by sections in May 2008 and was completed in July 2010. Equipment installation for telecommunications, signaling, and electrification was completed in October 2010. Land acquisition and resettlement activities began in July 2006 and were largely completed by end of 2009, although construction of the resettlement sites took much longer than expected. Trial operation of the railway line began on 11 January 2011, 5

7 The feasibility study estimated the costs at only about CNY32 million per km. During implementation, both the executing agency and the design institute recognized this estimate to be much too low. A comparison can be made with the estimates for ADB-financed Lanzhou–Chongqing Railway Project, which projected an average cost of about CNY72 million per km in 2008, according to the report and recommendation of the President. 8 The construction of two extra-large bridges over the Yellow River and three long tunnels, which were the controlling works of the project, began before work on the main line.

6 months earlier than originally planned. A comparison of the appraisal schedule and actual project implementation is in Appendix 5.

F. Implementation Arrangements

18. The implementation arrangements were appropriate. The MOR was the executing agency for the project. A project coordination office consisting of key divisions under the MOR’s steering committee was established to provide overall guidance during project implementation. The Foreign Capital and Technical Import Center (FCTIC) of MOR coordinated the project management tasks and was responsible for the procurement of ADB-financed contracts, withdrawals of ADB loan proceeds, and reporting to ADB. TZYRC was the project implementing agency. The organization chart is in Appendix 6.

19. The resettlement and coordination office under the TZYRC was responsible for the coordination and internal monitoring for land acquisition and resettlement. Six full-time staff members worked in three construction headquarters of TZYRC, one office each in the NHAR and Shaanxi and Shanxi provinces. A provincial-level railway construction support office was established in each of the three regions, and corresponding offices were also established for implementing land acquisition and resettlement in the cities, counties, and districts along the railway. A grievance redress mechanism was set up for the project to ensure that issues and complaints were received and handled on a timely basis. One independent external agency was engaged to conduct external monitoring and evaluation of the land acquisition and resettlement for the project.

20. TZYRC was responsible for environmental management and supervision during the implementation. Effective institutional arrangements were established to implement the environmental management plan (EMP). During construction, the engineering management unit of TZYRC coordinated environmental management matters and supervised contractors to ensure that the project complied with the environmental safeguards required in the EMP. Two environmental engineers were positioned in the unit, and contractors and construction supervision companies designated staff within the site management team to deal with environmental issues. TZYRC issued and implemented environmental management rules and procedures. Monitoring and mitigation measures were included in the covenants of the civil works contracts. Local environmental monitoring stations were engaged to undertake onsite monitoring of noise and the quality of surface water and air. The Soil and Water Conservation Monitoring Center of the Yellow River Commission was engaged to monitor soil erosion induced by construction activities. An independent company was engaged to supervise the implementation of the soil erosion control plan, oversee the project environmental monitoring, and submit monitoring reports to the MOR and ADB.

G. Conditions and Covenants

21. The loan covenants were considered adequate, and major covenants were complied with. Adequate wagons and locomotives were provided. Comprehensive measures were taken to ensure operational safety. The capacity of connecting lines was significantly expanded during the implementation period through the capacity enhancement of existing railway lines or construction of new lines. Container terminals were completed in Qingdao, Lanzhou, and Taiyuan. Significant progress in the reform of the national railways was realized with the establishment of the China Railway Corporation in 2013. Freight tariffs for the TZR are CNY0.20 per ton-km for local traffic and CNY0.18 per ton-km for transit traffic. Both tariffs are higher than

7 the national rates of about CNY0.15 per ton-km. Details on compliance with loan covenants is in Appendix 7.

22. The project accounts were audited annually by China National Audit Office in accordance with auditing standards acceptable to ADB. Six good quality audit reports were submitted, all on time. No issues were found in the use of loan funds or compliance with financial covenants. However, the audits did find issues related to the management of contracts financed by counterpart funds with respect to supporting documents, works progress certification, and compliance with domestic regulations on procurement and subcontracting. Although resolved afterwards, these issues indicated weaknesses in TZYRC’s internal control system. TZYRC established an internal audit unit to independently check financial transactions for safe custody of assets and report directly to TZYRC's board of directors, but the audit findings showed that the unit’s capacity proved to be inadequate for the scale and complexity of the project.

23. The Loan Agreement required that TZYRC should maintain, beginning after the second full year of commencement of the commercial operations of the project railway, (i) an operating ratio of not more than 70%, (ii) a debt-service-coverage ratio of at least 1.2, and (iii) a debt-to- equity ratio of not more than 65:35 to ensure operating efficiency and financial sustainability. Based on TZYRC’s actual performance during 2011–2013 and projections over the operational period, the company will be able to comply with all the three ratio covenants, starting from 2015. The operating ratio will remain below 65%, benefiting mainly from the favorable freight tariff (para. 11) and the effective cost control exercised by the railway administrations operating the project railway. The debt-to-equity ratio will be reduced from the initial level of 67:33 to 65:35 in 2015. The debt-service-coverage ratio will remain above 1 over the operational period and is expected to reach 1.2 in 2014.

H. Consultant Recruitment and Procurement

24. Financed by counterpart funds, 25 national consulting firm were engaged under contracts with a total value of CNY886.5 million for detailed project design, preparation of technical specifications, engineering inspection, construction supervision of civil works contracts, environmental supervision, and resettlement and social development monitoring. The recruitment was on time and followed procedures acceptable to ADB. No international consultant recruitment occurred due to the cancellation of the project’s institutional strengthening component (para 13).

25. ADB-financed procurement packages followed the international competitive bidding (ICB) method and ADB's Procurement Guidelines (1999, as amended from time to time). Relevant sections of ADB's anticorruption policy were incorporated in the bidding documents and contracts. The FCTIC was responsible for procurement of ADB-financed contracts. Two national procurement agents were engaged by the FCTIC to assist with procurement activities. ADB financed 29 contracts of $299.6 million, including 20 contracts for materials and 9 contracts for equipment, all of which followed ICB procedures. Most of the contracts were entered into during August 2007–June 2009. Two contracts were approved in February and May of 2011 for additional beams and bearings for the stations and yards. Due to rising prices for materials and the appreciation of the renminbi against the US dollar, the costs for material contracts became significantly higher than estimated. As a result, ADB’s loan could not finance the procurement of all the planned equipment, and some equipment was procured using counterpart financing. All civil works were financed by the counterpart funds. This involved 31 contracts, comprising 24 for subgrade, bridge and culverts, tunnels, and track works; and 7 for communications, signaling,

8 electric power, and traction works. These were procured following the national competitive bidding process. All the bids were processed within the project implementation schedule. The ADB-financed packages are listed in Appendix 8.

I. Performance of Consultants, Contractors, and Suppliers

26. The overall performance of consultants, contractors, and suppliers was satisfactory. The engineering designs were completed on time and in accordance with national railway standards. On-site supervision, internal and external monitoring, and periodic inspections were conducted effectively. Civil works contractors performed well and constructed challenging tunnels and bridges successfully. Suppliers of construction materials coordinated well with contractors and provided materials on time. Risk management was exercised, and systematic measures were taken to ensure worker safety at construction sites, such as the use of geological detection technology and disaster alarm systems. Equipment suppliers also performed well, and all equipment was installed and commissioned as required. The project passed the MOR’s preliminary check on construction quality and the operational safety assessment. The TZR is now fully operational for both freight and passenger transport, and the design speed has been achieved. This indicates the work done by contractors and suppliers was of good quality. It was noted, however, that the findings of audit reports recommended that some contractors engaged under counterpart-fund-financed contracts should strengthen their internal controls to comply with domestic regulations related to procurement and contract management (para. 22).

J. Performance of the Borrower and the Executing Agency

27. The overall performance of the borrower and the executing agency was satisfactory. The borrower and the executing agency fulfilled their obligations during project implementation. The borrower government is strongly committed to railway sector development, and it provided adequate counterpart funds in a timely manner. The government is also committed to the reform of the railway sector. TZYRC was established in accordance with the loan agreement and became operational at the start of project implementation. The project was completed and became operational ahead of schedule. To remove capacity constraints, the executing agency—the MOR—constructed new railway lines to connect with the TZR and expanded the capacity of other existing connecting lines. MOR also constructed container terminals and container handling facilities to promote intermodal traffic and the development of private sector logistics enterprises. Compliance with major covenants, such as those relating to sector reform, participation of private sector, and the pioneering practices of the joint venture railway company, is contributing to the long-term sustainability of the project and the railway sector.

K. Performance of the Asian Development Bank

28. ADB’s performance was satisfactory. The processing team scrutinized the project design, assessed major risks, incorporated rigorous safeguard monitoring arrangements, and designed appropriate loan covenants. ADB demonstrated a strong commitment to the project and provided timely approvals. Procurement was processed efficiently, and the loan proceeds were disbursed in a timely manner. Contract variations and loan reallocation were processed to utilize the loan proceeds. Seven review missions were fielded during implementation, including one for a midterm review. ADB strengthened the safeguards supervision to make it effective and provided guidance through close review by safeguard specialists, site visits, focus group discussion, and consultative meetings with the executing agency and implementing agency and local governments to mitigate risk. ADB addressed major issues, such as the difficulties in constructing concentrated resettlement sites and discrepancies in the resettlement fund flow.

9

ADB monitored the project impact closely during the construction period and the impact of the railway on the local economy after project completion.

III. EVALUATION OF PERFORMANCE

A. Relevance

29. The project is rated highly relevant, both at appraisal and on completion. It was highly relevant to the government’s development strategy, ADB’s country partnership strategy, and sector priorities. The project responded to the need for the development and the capacity enhancement of the country’s railway network and made a sizeable contribution to the PRC’s railway development plan. The resource-saving and environment-friendly features of railways were emphasized by the new government leadership that took office in 2013, as was the importance of railway construction in the western region of the PRC. Before the project, Shanxi and Shaanxi provinces and NHAR were not connected by a direct rail link. The project established the shortest railway route between these regions and provided a strategic transport artery that has enhanced the connectivity between the comparatively poor western region of the country and the more prosperous eastern region. The rationale of the project was confirmed, because it has contributed significantly to pro-poor economic growth and poverty reduction along the railway line and in the region. The project represented a continuation of ADB’s sustained involvement in the rail transport sector.9 The project was in line with ADB’s country strategy and program for the PRC at the time of approval (footnote 1) and aligns with the priorities in ADB’s current country partnership strategy for 2011–2015 of inclusive growth and balanced development in the PRC.10

B. Effectiveness in Achieving Outcome

30. The project is rated effective in achieving the intended outcomes because it promoted significant economic development in the project area, increased transport capacity in the railway corridor, lowered transport costs, and provided a substitute for a considerable amount of road traffic.

31. The project supported local economic development directly by procuring local goods and services and providing jobs for local people. According to the social and poverty reduction monitoring report conducted by the external monitor, the project investment stimulated local industrial development during 2006–2011, particularly in the construction materials, energy, and services sectors. The project used local construction materials valued at CNY11,406 million. Construction workers spent about CNY630 million on consumption, about CNY485 million of which was provided by poor families. Both the supply of materials and the increase in public consumption stimulated local economic development and provided jobs. Shops, hotels, and restaurants are being developed in the vicinity of the new railway stations.

32. TZR greatly increased the region’s transport capacity. It has a design capacity of 40 pairs of passenger trains per day and can transport 60 million tons of cargo per year. Freight and passenger traffic has been robust since it began operations. TZR carried 16.6 billion ton-km of freight in 2011 (mainly coal, petroleum products, and minerals), and the amount increased by 32% to 21.9 billion ton-km in 2012. This was close to the appraisal estimates. Freight traffic is

9 By the end of 2012, ADB had provided 20 loans totaling $4.0 billion for the railway sector in the PRC, including two tranches under the multitranche financing facility for the Railway Energy Efficiency and Safety Enhancement Investment Program. 10 ADB. 2012. Country Partnership Strategy: People’s Republic of China, 2011–2015. Manila.

10 forecast to reach 42.9 trillion ton-km in 2031, representing an average 4% annual increase. TZR passenger traffic was 4.9 billion passenger-km in 2011 and 5.1 billion passenger-km in 2012. These volumes were 2.7 times the appraisal estimates. Passenger traffic is expected to reach 8.4 trillion passenger-km in 2031, representing an average 3% annual increase. These growth rate projections can be considered conservative, given TZR’s position as a major east–west railway corridor and the strong economic ties between the PRC’s eastern and western regions. These factors will lead to stable growth in the railway’s freight and passenger traffic. Details are provided in Appendix 9.

33. TZR provides the region with a low-cost transport alternative, since the cost of rail transport is one-third to one-half of that of the road transport. The shift from road to rail transport has been significant as a result, particularly by passenger traffic, and this has lowered the overall transport costs in the region’s economy. Rail transport is also recognized as safer and more reliable, particularly during the winter season when roads in the project region are often closed due to severe weather conditions. Surveys have indicated that demand is strong for more passenger trains, particularly on routes that originate in the region.

34. Among the freight traffic, it was however observed that transit traffic to and from outside of the project area makes up the predominant proportion of TZR’s overall traffic, since the TZR offers routes that are 100 km–500 km shorter than alternative routes. Local freight represents only a small part the overall freight traffic. Most of the freight moves from west to east, resulting in empty freight cars travelling in the opposite direction. Considering that the region is rich in coal and mineral reserves, steel, and chemical products, railway should be the most economic form of transport for these types of cargo. However the potential local freight traffic has not been materialized. This can be partly attributed to the fact that only 4 out of 16 planned industrial sidings have been constructed by local enterprises by the time of project completion due to the lengthy approval process. Lack of rail links between the TZR and large volume customers has limited the potential local traffic. Industrial sidings are to be financed and built by the industrial enterprises, but approval of the construction rests with the railway administrations. This has been delayed. The approval process should be streamlined, since construction of the industrial sidings will greatly increase local freight traffic and reduce the directional imbalance in traffic and the cost of running empty freight cars on return routes.

C. Efficiency in Achieving Outcome and Outputs

35. Based on an economic and financial reevaluation, the project is rated efficient.

36. The reevaluated economic internal rate of return (EIRR) is 16.4%, compared with the 18.2% estimated at appraisal. Actual capital costs that were significantly higher than the appraisal estimate are the main reason for the lower EIRR, while the fact that the capital cost was spread over a period 2 years longer than the period anticipated at appraisal undermined the effect of the increased capital cost to some extent. The result also benefited from the fact that the project started to generate benefits 1 year earlier than projected and that the benefits in the early years of operation were significantly higher than appraisal estimates due to high traffic from the beginning. The reevaluation noted the contribution of higher-than-expected passenger traffic and its economic benefits, as well as that of the cost savings for traffic diverted from longer and more expensive alternative rail routes. The project is considered economically viable. A sensitivity analysis was carried out to test the impact on the EIRR of (i) a decrease in forecast traffic, (ii) an increase in O&M costs, and (iii) a decrease in benefit valuation. According to this analysis, the project will continue to be economically viable under the conditions tested. In the

11 worst-case scenario considered—a 20% increase in O&M costs and a 20% benefit reduction— the EIRR fell to 13.9%. The economic reevaluation is in Appendix 9.

37. The financial internal rate of return (FIRR) after tax was recalculated as 6.4%, lower than the 8.4% estimated at appraisal. The difference was mainly due to the higher capital cost incurred despite such favorable factors as tariffs that were higher than estimated at appraisal, abundant traffic volumes, and the start of operations 1 year earlier than scheduled. The after-tax weighted average cost of capital (WACC) in real terms was calculated using the actual capital mix and costs of various financing sources. The WACC was recalculated as 2.3%, which is close to the appraisal estimate. The FIRR is higher than the WACC, and the project is considered financially viable. Sensitivity analysis conducted to test the impacts of variations in O&M costs and revenues indicated that the project remains financially viable under the test scenarios. The financial reevaluation is in Appendix 10.

D. Preliminary Assessment of Sustainability

38. The project is rated likely to be sustainable. The TZR is the shortest east–west railway route in the region and will attract robust freight and passenger traffic due to the benefits it offers in time and cost savings. The railway’s capacity and competitive advantages over road transport make it the preferred mode for passengers and for transporting raw material freight, such as coal and mineral ores. The capacity of connecting lines at both ends of the railway has been increased, and traffic flow onto and off the line is now unconstrained. The line’s design was based on proven technologies, the quality of construction was good, and the railway has the capacity to meet demand. TZR is integrated into the national railway network through the three established railway administrations that are in charge of its operation. They demonstrate the capacity to operate efficiently, provide adequate rolling stock, and maintain assets in good condition. As a joint venture railway, TZR enjoys a special freight tariff that is higher than the national rate. All these factors provide a reasonable assurance of the sustainability of the project outcome. To enhance sustainability further, it is important that more industrial sidings are constructed and connected to the TZR (para. 34). In addition, local freight shippers need better access to freight handling facilities, adequate tariff level needs to be maintained to ensure long- term cost recovery, and TZYRC needs to continue to pursue good corporate governance.

39. In early 2013, the PRC’s government announced institutional reform measures in the railway sector. The reforms included dissolution of the MOR and the merging the MOR’s functions of planning and policy making into the Ministry of Transport, establishment of a state railway administration responsible for railway standards development and supervision of rail transport safety, and the establishment of China Railway Corporation which succeeded MOR for other functions. The thrust of the reforms was to separate government functions from business operations, improve transport planning and railway safety, diversify the investment channels, speed up railway construction, and advance modern logistics development. These reforms will have a profoundly positive impact on the long-term sustainability of the project.

E. Impact

40. Socioeconomic impact. The project had a significant impact on regional socioeconomic development. The TZR passes through some of the poorest areas in the PRC. Statistical data shows that socioeconomic conditions in the project area have improved rapidly during the implementation period. From 2006 to2012, the gross domestic product growth rates in the project area ranged from 128% to 530% in prefecture level cities, and the government fiscal revenues grew 136%—533%. Along with the rapid economic growth and the increased

12 fiscal revenues, the livelihoods and incomes of local people, particularly the poor, have improved significantly. During the same period, the per capita income of farmers increased by 103%–265% in counties and cities along the railway. A trend analysis indicated that the rural incomes in poorer areas grew faster than those in better-off regions during the project implementation period. This narrowed the geographical development gap. With their stronger fiscal capacity, governments of all levels continue to invest in public infrastructure to provide road access to villages, drinking water, and telephone and electricity services. The TZR provides a cheaper, affordable, and much safer transport service than what was available before, particularly benefitting poor people. The better service has improved local mobility and changed the lifestyles and social behaviors of local people.

41. TZR has stimulated the development of industry and tourism in the region. While the project area is rich in resources, poor accessibility had constrained its development. Access to railway facilities was recognized as a precondition for external investment in the region. Since the project was implemented, external investment has increased significantly in those areas not served by railway connections before. They include Lvliang Prefecture, which attracted about CNY500 billion external investments in 2011 and 2012 after the TZR began operating. New industrial parks have been built close to the railway, and growing numbers of enterprises have started up or expanded operations along the line. Several railway stations were constructed specifically to serve large-scale industry zones, such as the Ningdong National Key Industrial Development Zone in the NHAR, which generated revenue of CNY48 billion in 2012. Bolstered by the TZR, tourism income in the region reached CNY82.4 billion in 2012, up 74% from 2010. These impacts generate jobs and long-term socioeconomic development for the region. A detailed assessment of the social and poverty reduction impacts is in Appendix 11.

42. Land acquisition and resettlement impact. The project permanently acquired 64,550 mu11 of land, which was 8% less than estimated in the resettlement plan.12 Of this total, 33,257 mu (52%) was farmland, 47% less than estimated. The reduction in expected land acquisition, particularly the reduced acquisition of farmland, was mainly due to the fact that some sections of the rail line’s subgrade were changed to bridges and more grasslands or wastelands were used than planned in an effort to minimize the use of farmland and the impact on access roads for local communities. As a result of the reduced farmland acquisition, the number of persons economically affected by permanent land acquisition—33,786—was only 43% of the original estimate. The actual number of affected persons was based on a detailed measurement survey during implementation, which captured all affected households, including those with partial land loss. A total of 929,197 square meters (m2) of buildings were demolished, which was 117% more than the estimate in the resettlement plan. This included 144,447 m2 of concrete or brick storied buildings, 288,188 m2 of wood or brick houses, and 388,671 m2 of cave dwellings and other simple buildings. The number of households physically displaced was 6,177. This affected 26,052 people, or 118% more than the original estimate. A total of 45 concentrated resettlement sites were constructed to resettle 4,149 households. The other 2,028 households opted to relocate themselves in scattered locations. A total of 30,493 mu of land was used temporarily during construction. Wasteland was used where possible. People affected were compensated for losses, and their land was restored and returned to them.

43. The land acquisition and resettlement costs totaled CNY4.97 billion, 236% more than the estimated figure in the resettlement plan. The increase was due to the fact that the costs for building concentrated resettlement sites were not in the resettlement plan budget, since they are

11 A mu is a Chinese unit of measurement (1 mu = 666.67 square meters). 12 The resettlement plan referred to here is the original prepared during loan processing.

13 normally paid for by local governments. It was also the result of more house demolition than projected and higher costs for rehabilitating irrigation infrastructure, water supply, and access roads. By considering different local conditions based on stakeholder consultation and participation, various measures were taken to restore the incomes of affected persons, including providing land for land, cash compensation, skills training and job opportunities, and social insurance. The physically displaced persons were given new houses with better access to social and community services. Among 45 concentrated resettlement sites, the last three sites for those relocated by railway stations occurred later are under construction. TZYRC was agreed to follow up actions to ensure resettlement has been completed successfully. Persons affected economically were helped to diversify their income sources during construction and afterwards. They became skilled laborers after working on railway construction. Some were engaged in the operation of the railway, and others had access to more distant jobs and a larger number of local industrial jobs that were opened up by the railway. An external monitoring agency recruited for the project submitted six resettlement monitoring reports during implementation. The final monitoring report concluded that most affected persons were satisfied with the resettlement work and that their living conditions and livelihoods have been fully restored. This project was designated category B for indigenous peoples, and local governments and the TZR central headquarters took specific measures agreed in the resettlement plan and the social development action plan to mitigate adverse impacts on minority communities and ensure that they received inclusive project benefits in a culturally appropriate way. In the NHAR, the railway passes through areas that had been developed for poverty reduction resettlement schemes for Hui people. The new railway will significantly benefit these people, and no adverse impacts have been experienced. The detailed evaluation of land acquisition and resettlement activities is in Appendix 12.

44. Environmental impact. The project was implemented with adequate compliance with the project EMP which was based on the domestic environmental impact assessment and the soil erosion protection plan. Environmental impacts from project construction have been mitigated and/or remedied effectively. Environment monitoring was conducted adequately and in line with the monitoring program stipulated in the project EIA. Ten environmental monitoring reports were prepared and submitted to ADB, all of which were disclosed on ADB’s website. Mitigation measures have been taken during the railway’s operation to safeguard the environment and to ensure compliance with relevant regulations. Forty-seven wastewater treatment facilities were built to make sure discharge from stations complies with national standards. The railway uses only electric locomotives and has no direct sources of air pollution. Forty-one coal-fired burners have been installed at 32 stations. All boilers conform to air quality standards prescribed in the project EIA. Boilers are regularly inspected to ensure operational efficiency and emission limit compliance. Noise from passing trains is mitigated by 22,557 m2 of sound barriers installed at 31 noise sensitive locations. The project is expected to generate environmental benefits from emission reduction and improved energy efficiency. The environmental impact analysis is in Appendix 13.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

45. The project is rated successful. It has also been rated (i) highly relevant to the government’s and ADB’s development strategy, (ii) effective in achieving outcomes, (iii) efficient in achieving outcomes and outputs, and (iv) likely to be sustainable (paras.29, 30, 35, and 38). The project was implemented successfully and became fully operational ahead of schedule. It has achieved its main objective of providing efficient and affordable railway transport in a less-

14 developed area in the PRC. It supported the PRC’s railway development plan and its western region development strategy. By providing efficient, safe, reliable, affordable, and environment- friendly transport infrastructure, the project has significantly promoted economic and social development in the project area. The growth in rural income and the narrowing of the income gap between poor counties and others has demonstrated the significant impact in poverty reduction. The external investment and tourist industry development attracted by the project railway will continue to be an engine of economic and social development for the region. The reevaluated FIRR (6.4%) and EIRR (16.4%), based on a conservative traffic forecast, confirm the project’s financial and economic viability. Sustainability is guaranteed by the robust traffic, the appropriate operational arrangements, the special tariff given to TZYRC, and the commitment of the government to the long-term development of the railway sector.

B. Lessons

46. Although the final cost of the project was much higher than the appraisal estimate, the increase was largely due to the unrealistic cost estimate at the feasibility study stage, which is evident even when other factors, such as price increase of construction materials, modification to the original design, and the addition of facilities, are considered. The completion review noted that many cost items in the original estimate were based on outdated cost quotas that were far below market prices. This significant underestimation of the project’s cost also affected the financial and economic evaluations made during project preparation.

47. The component for institutional strengthening was not implemented (para 13). The main reason was the change in the operational arrangement for the railway. The executing agency was unable to identify alternative areas for institutional strengthening. This affected the realization of value addition of ADB’s assistance. The executing agency needs to identify its priorities in the sector, as well as the project company that can benefit from the expertise of international or national consultants.

48. The project budget did not include adequate resources for resettlement and social impact monitoring. This resulted in difficulties in complying with the requirements for timely monitoring reports and reports on the project’s benefits and impact during the construction stage and after project completion.

49. Although generally sound, the project framework and the project performance management system designed at appraisal contained some impractical indicators, and the information required to monitor their achievement was not available from the executing agency’s normal reporting system (para 7). In addition, due to limited budget available, the project benefits and impacts were not reported adequately during implementation.

C. Recommendations

1. Project Related

50. TZR needs to explore ways to generate local freight traffic (para 34). One impediment is the delayed development of industrial sidings to capture local freight traffic from major industrial customers. The approval process that had caused this delay needs to be streamlined. Better access to freight handling facilities and larger capacities are needed at several stations, and the project company and the railway administrations should take the action necessary to improve this infrastructure. The service for freight shippers at stations also needs to be improved and to be coordinated with local transportation bureaus to form multimodal logistics chains.

15

51. The executing agency and TZYRC have agreed to follow the time-bound action plan for completing the three remaining resettlement sites (para. 7, Appendix 12). ADB will closely follow up the implementation of action plan through special review missions, external monitoring, and consultation with relevant parties.

52. TZYRC, as a joint venture company, should continue to improve its corporate governance. It should also closely monitor the operational and financial performance of the company and the implementation of the concession agreement with the three railway administrations. Operational and management costs should be controlled, and the tariffs should be maintained at a level adequate for cost recovery.

53. It is recommended that the project performance evaluation be conducted in 2017. By that time, the railway will have been fully operational for 5 years, and local freight traffic should be more fully developed. The project’s performance and impact can then be better assessed.

2. General

54. Rigorous verification of cost estimates based on feasibility study and preliminary design by design institute is necessary at project processing stage. The methodology for cost estimates and the quota items followed by design institutes should be updated. ADB can explore opportunities to help ensure this is done. Meanwhile, the control of construction expenditures and the need for contract variations have to be effectively undertaken in the railway sector.

55. Establishing an adequate capital structure up-front is critical to the good financial performance of a railway project. Enough equity should be provided, and debt must be kept at a reasonable level. The debt-to-equity ratio must be included in the covenants and closely monitored during implementation.

56. The project was successful in engaging private and strategic investors to help finance the railway’s construction (para.11). TZYRC, as the project company, spearheaded the diversification of equity financers and maintained a reasonable debt-to-equity ratio, which is contributing to its financial sustainability. This establishes a good model for financing capital- intensive railway projects. Future railway projects may learn from the experience of this project to ensure sustainable development of the railway sector.

57. Railway projects tend to have large land acquisition and resettlement impacts. Adequate budget and implementation arrangements must be in place for land acquisition and resettlement funding requirements in future railway projects, and these should be fully incorporated into the project’s overall budget financial management. The planning and preparation of resettlement sites should begin as early as possible, particularly for those sites close to railway stations. Since the external resettlement monitoring played a vital role in identifying key issues and major risks during implementation of land acquisition and resettlement for this project, the PRC domestic project management system may introduce a similar external monitoring mechanism for projects with significant land acquisition and resettlement impacts, particularly in the railway sector.

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Design Performance Indicators/Targets Monitoring Summary At Appraisal At Completion Mechanisms Impact Improved transport GDP is forecast to increase during GDP in the project area grew by 128%– Annual system in the region 2010–2020 at 6% per annum for 530% during 2006—2012 at prefectural economic that supports Shanxi, Shaanxi, and Ningxia city level or 15%–36% per annum. reporting at the socioeconomic provinces and 7–8 % per annum for local, provincial, development and the project area regional, and the western national level development Per capita rural income in the project Per capita rural income in the project strategy. area increased from CNY2,313 in area increased to CNY7,272 on Annual report 2004 to CNY3,281 in 2012 and average in 2012 and ranged by external CNY4,654 in 2020 CNY3,299–CNY12,022 by county. monitoring agency Poverty incidence in the project area The number of nationally designated reduced from 21.5% in 2005 to 6% in poverty counties in the project area Provincial 2015 (using poverty line of 1000 yuan decreased from 9 in 2006 to 6 in 2012. 1 transport per capita per year) department

All poverty villages along the Shanxi Province, Shaanxi Province, China Statistical alignment provided with road access and the Ningxia Hui Autonomous Yearbook (338), drinking water (1,573), Region reported in 2012 (i) village telephone access (1,197), and roads of 51,819 km, 104,331 km, and electricity (78) by 2010 11,094 km; (ii) telephone access rates of 87.6%, 98.6%, and 99.4%; (iii) electricity access of 97.7%, 97.8%, and 98.6%; and (iv) rural pipeline water access of 95%, 78%, and 81%, respectively.2 Outcomes An efficient, safe, EIRR maintained at about 18.2% Reevaluated EIRR was 16.4%, lower PPMS and PCR reliable, affordable, than the appraisal estimate mainly due and environmentally to higher actual capital costs. Statistics of friendly railway local transport system is Passenger traffic volume increased The project railway carried 4.9 billion governments developed in the from 4.78 million passengers in 2012 passenger-km in 2011 and 5.09 billion region to 15.62 million passengers in 2031 passenger-km in 2012. Traffic is News releases expected to reach 8.4 billion from various passenger-km in 2031. sources

Freight traffic volume increased from The project carried 16.6 billion ton-km Statistics of the 44.5 million tons in 2012 to 123 million in 2011 and 21.9 billion ton-km in 2012. Ministry of tons in 2020 Freight volume is expected to reach Railways 42.9 billion ton-km in 2031. CAREC: Interregional traffic between the PRC Interregional traffic between the PRC Midterm Review and Central Asia and Europe and Central Asia was 39.63 million tons of the Transport increased from 59 million tons in 2004 through border crossings in Xinjiang and Trade to 400 million tons in 2020 Uygur Autonomous Region and 34.73 Facilitation million tons through border crossings in Strategy and Inner Mongolia in 2012. Implementation Action Plan Travel time reduced from Travel time by rail was about 7 hours (i) Taiyuan to Zhongwei, from present from Taiyuan to Zhongwei and 8 hours

1 The poverty line of the PRC increased significantly in 2011. 2 The target indicators used at appraisal can’t be updated due to lack of information, instead relevant indicators that are available in public statistics are provided.

Appendix 1 17

Design Performance Indicators/Targets Monitoring Summary At Appraisal At Completion Mechanisms 15 hours to 8 hours; from Taiyuan to Yinchuan in 2012. (ii) Taiyuan to Yinchuan, from present 15 hours to 8 hours

Cost of travel reduced from 28 fen/km Transport cost by rail was CNY0.15/km to 10 fen/km in 2012 for passengers and from CNY0.20/ton- km to CNY0.18/ton-km for freight in 2012.

Number of accidents reduced by 10% About 60% of road passenger traffic in 2012 has been diverted to the railway since it opened, because railway travel is much safer and more reliable, given the region’s largely mountainous and desert terrain and cold climate. Based on the better safety record of the railway, accidents have been significantly reduced by the shift.

Fuel saving of 1.16 mtoe in 2012, and Average energy consumption by output 1.85 mtoe in 2020; and reduced CO2 of the railway sector in the PRC emissions by 34,000 tons in 2012, and declined by 23.7% from 2006 to 2010 56,000 tons in 2020 (from 6.48 to 4.94 tons standard coal/million converted ton-km). A further 5% reduction is expected during 2011– 2015. Energy savings lead to reduced CO2 emissions, but the amount cannot be calculated using the current monitoring mechanism.

Local economic By 2015, the number of shops, tourist By 2013, shops, tourist centers, hotels, PCR development— centers, hotels, and small businesses and small businesses were observed to PPMS results particularly small established in the vicinity of station have been developed or to be in business, industry, areas increased by 50% various stages of development in the Local and vicinity of the railway’s stations. government tourism—is statistic promoted By 2015, the number of rural Lvliang Prefecture reported a 52% bulletins enterprises increased by 50% increase in revenue from rural collective enterprises from 2011 to 2012.

By 2015, the number of large External investments for industrial and enterprises increased by 40% business development surged in the project areas in 2011 to almost 3 times the total amount for 2006–2010.

In the 5 years after construction starts, Employment was generated in the employment generated in enterprises involved in locally procured the project area is 20% higher than in construction materials and supplies; in 2005 the railway’s operation, businesses developed in station areas, the tourism industry; and through external investments.

By 2015, the average income per The per capita income of farmers rose farmer increased by 40% by 103%–265% in counties and cities along the railway.

Number of tourists visiting the project Tourism income grew by 74% during area increased by 30% in 2015 2010–2012 in the project area and by

18 Appendix 1

Design Performance Indicators/Targets Monitoring Summary At Appraisal At Completion Mechanisms 112%–154% in Lvliang and Yulin prefectures, where rail transport was not available before the project. Outputs 1. Railway Transport capacity expanded in the TZR is fully operational for passenger PPMS infrastructure and Taiyuan–Zhongwei corridor by and freight transport. TZR carried 16.6 associated facilities 22 billion ton-km for freight and billion ton-km of freight in 2011 and Loan review improved along the 1.89 billion passenger-km for 21.9 billion ton-km in 2012. Passenger missions and Taiyuan–Zhongwei passengers, in 2012 traffic was 4.9 billion passenger-km in MTR railway corridor 2011 and 5.1 billion passenger-km in 2012. PCR

944 km of railway line and 41 941 km of electrified, standard gauge, Quarterly stations are constructed; equipment Class I railway main line was built, progress report procured and installed for train comprising 509 km of double-track line operations between Taiyuan and Dingbian, 239 km Resettlement of single track between Dingbian and monitoring Zhongwei, and 193 km of single track reports between Dingbian and Yinchuan. 40 new stations were constructed. The Environmental project installed and commissioned monitoring equipment for power supply, signals, reports and telecommunication; and train control systems.

Implementation of land acquisition 4,108 ha of land were permanently and resettlement plan; about acquired, 930,787 m2 of residential 4,656 ha of permanent land and houses were demolished, 26,052 1,872 ha of temporary land acquired; persons were displaced, and 2,033 ha about 12,000 people are relocated and of land were used temporarily. 78,700 have partial land loss and will be compensated and rehabilitated by July 2009

Number of schools, enterprises, and 12 schools and 70% of the affected infrastructure replaced enterprises were replaced.

Environment at the project site is Proposed mitigations measures were protected and adverse environmental undertaken per the EIA and SEIA. impacts minimized by Relevant mitigation measures were implementing mitigation measures included in civil works contracts, with as included in the EIA and SEIA training provided. Mitigation measures included in civil works contracts

Project’s adverse impacts on the An external monitoring agency was poor, women, and ethnic minorities engaged to monitor the implementation is minimized by implementation of of the SDAP. Six monitoring reports the SDAP were submitted and concluded that the construction and operation of the TZR have greatly contributed to regional socioeconomic development, poverty reduction, gender development, as well as ethnic minority development.

Control of HIV/AIDS and health risks The TZR and contractors along rail for construction workers and service alignment provided health care for providers; indicators include number construction workers and took effective of clinics, number of patients, number measures to control potential infections

Appendix 1 19

Design Performance Indicators/Targets Monitoring Summary At Appraisal At Completion Mechanisms of posters, and number of of HIV/AIDs and ST people tested.

2. Employment 453,000 person-years of Direct employment generated totaled PPMS and PCR opportunities construction-related employment are 365,480 person-years, of which 54,840 generated for poor generated, of which the poor, person-years came from unskilled and including women, capture 50% of labor. This included 46,960 person- vulnerable groups to unskilled labor years of employment for workers from raise incomes and poor households and 6,200 person- living standards, and years for women. reduce poverty By 2012, average income per worker The workers’ daily wage increased from increased by 40% CNY50 in 2006 to CNY160 in 2011, or 220%. 3. Corporate Private sector participation increased Four industrial sidings were constructed Progress governance in provision of services and by local enterprises by 2012, and more reports and promoted development of associated were being planned. Private sector PCR Infrastructure engagement in the development of TZYRC’s businesses in the station areas and in financial tourism has been significant. statements

An effective marketing program is Passenger demand for the TZR is developed to attract passengers and promising, and more trains and better tourists along the TZR schedules are the key for satisfying the demand.

TZR operations separated from MOR TZYRC is an independent company operations with 11 shareholders. However, the TZR is integrated into the national railway system and is operated by three railway administrations that were part of the MOR and are now under the China Railway Corporation.

A debt-to-equity ratio of not more Based on projections of TZYRC’s than 65:35, an operating ratio of not financial performance, the company will more than 70%, and a debt-service be able to comply with the financial coverage ratio of not less than 1.2 ratio covenants from 2015, including the current ratio, the debt-service- coverage ratio, and debt-to-equity ratio.

4. Institutional 10 person-months of international Consulting services were cancelled at PPMS and PCR capacity consulting services will be provided the executing agency’s request. TZYRC’s of the Project for business development and TZYRC explored ways to increase the financial Company marketing, and institutional revenue and reduce operating costs, statements strengthened strengthening including through a refining of the agreements with three railway administrations and investing in equipment for traffic identification to facilitate revenue clearance. ADB = Asian Development Bank, CO2 = carbon dioxide, CAREC = Central Asia Regional Economic Cooperation, CNY = yuan, EIA = environmental impact assessment, EIRR = economic internal rate of return, fen/km = 0.01 yuan per km, GDP = gross domestic product, ha = hectare, km = kilometer, m2 = square meter, MOR =Ministry of Railways, mtoe = million ton oil equivalent, MTR = midterm review, PCR = project completion review, PPMS = project performance management system, SDAP = social development action plan, SEIA = summary environmental impact assessment, TZR = Taiyuan–Zhongwei Railway, TZYRC = Taiyuan-Zhongwei-Yinchuan Railway Company. a A mu is a Chinese unit of measurement (1 mu = 666.67 m2). Source: Asian Development Bank.

20 Appendix 2

CHRONOLOGY OF MAJOR EVENTS

Date Project Events 8 April 2005 Approval of project preparatory technical assistance (TA 4577- PRC) 22 June 2005 Project proposal approved by NDRC 16–25 January 2006 Fact-finding mission fielded 17 January 2006 Feasibility study report approved by NDRC 15 February 2006 Summary of environment impact assessment circulated to the ADB Board 13 March 2006 Management review meeting held 16–23 March 2006 ADB appraisal mission 24 April 2006 Staff review meeting held 24–25 October 2006 Loan negotiations 23 November 2006 ADB Board approval 24 May 2007 Signing of loan agreement 21 August 2007 ADB loan effectiveness 27 August 2007 First batch of materials contracts awarded 15–19 November 2007 ADB inception mission fielded 21–28 October 2008 ADB review mission fielded 12 June 2009 First batch of equipment contracts awarded 17–24 November 2009 ADB midterm review and project handover mission fielded. Project administration was handed over to People’s Republic of China Resident Mission 2 February 2010 First reallocation of loan proceeds approved 19–23 October 2010 ADB review mission fielded 11 January 2011 Trial operation started 29 August–2 September 2011 ADB review mission fielded 12–15 December 2012 ADB review mission fielded 18 June 2012 Second reallocation of loan proceeds approved 20 December 2012 Partial cancellation and loan account closed 10–16 September 2013 ADB completion review mission fielded ADB = Asian Development Bank, NDRC = National Development and Reform Commission Sources: Asian Development Bank and Ministry of Railways.

Appendix 3 21

PROJECT COST AND FINANCING PLAN Table A3.1: Project Costs ($ million) Component At Appraisal At Completion A. Base Cost 1. Railway civil works, track work, and environmental protection 2,240.8 4,770.3 2. Telecommunications, signaling, safety, e- governance, and MIS 196.0 256.6 3. Electric power and traction 214.3 314.2 4. Buildings and facilities 29.0 78.4 5. Land acquisition and resettlement 183.1 794.3 6. Consulting services, administration, and training 130.1 350.9 7. Temporary facilities and transitional work 40.2 44.4 8. Other equipment and facilities 8.9 140.9 Subtotal (A) 3,042.4 6,750.0 B. Contingencies 1. Physical contingencies 170.4 0.0 2. Price Contingencies 147.1 0.0 Subtotal (B) 317.5 0.0 C. Interest during Construction and Commitment Charge 393.0 302.6 Total (A+B+C) 3,752.9 7,052.6 MIS = management information system. Sources: Asian Development Bank and Taiyuan-Zhongwei-Yinchuan Railway Company.

Table A3.2: Financing Plan ($ million) At Appraisal At Completion Source Amount % Amount % Asian Development Bank 300.0 8 299.6 4 MOR, SPG, SAPG, NHAR, and other shareholders 1,314.4 35 2,327.4 33 Domestic banks 2,138.5 57 4,425.6 63 Total 3,752.9 100 7,052.6 100 MOR = Ministry of Railways, SPG = Shanxi provincial government, SAPG = Shaanxi provincial government, NHAR= Ningxia Hui Autonomous Region government. Domestic banks included China Development Bank, China Construction Bank, China Industrial and Commercial Bank, and bonds issued by MOR. Sources: Asian Development Bank and Taiyuan-Zhongwei-Yinchuan Railway Company.

22 Appendix 4

PROJECTED AND ACTUAL CONTRACT AWARDS AND DISBURSEMENTS

Table 4.1: Projected and Actual Contract Awards ($ million) Projected Awards Actual Awardsa Year By Year Cumulative By Year Cumulative

2007 200.000 200.000 204.764 204.764 2008 39.982 239.982 48.836 253.600 2009 50.000 289.932 38.969 292.569 2010 0.450 290.382 0.000 292.569 2011 9.218 299.600 7.031 299.600 2012 0.000 299.600 0.000 299.600 Total 299.600 299.600 a Includes approved variation orders. Source: Asian Development Bank.

Table 4.2: Projected and Actual Disbursements ($ million) Projected Disbursements Actual Disbursements Year By Year Cumulative By Year Cumulative

2007 20.000 20.000 24.724 24.724 2008 50.000 70.000 54.416 79.140 2009 90.000 160.000 90.011 169.151 2010 111.356 271.356 102.585 271.736 2011 26.514 297.870 26.515 298.251 2012 1.730 299.600 1.349 299.600 Total 299.600 299.600 Source: Asian Development Bank.

2006 20072008 2009 2010 2011 2012 Items

Detailed design, engineering, and 1 documentation

PROJECT IMPLEMENTATION SCHEDULE Prequalification and 2 tendering 2005 JA S O N D J F M AM JJ A S O N D J F M AM JJ A S O N D J F M AM JJ A S O N D J F M AM JJ A S O N D J F M AM JJ A S O N D J F M AM JJ A S O N D J F M AM JJ A S O N D

Land acquisition 3 and resettlement

Civil works and 4 buildings

Track laying 5

Telecommunication 6 and signalling

Trial operation 7 Appendix 5 Appendix plan actual

Source: Asian Development Bank. 23

24 Appendix 6

ORGANIZATION CHARTS

Figure 6.1: Organization of Taiyuan–Zhongwei Railway Project

Taiyuan–Zhongwei Railway steering committee headed by vice minister, Ministr y of Railways

Foreign Capital Technical Import Center of Ministry of Railways

Taiyuan–Zhongwei-Yinchuan Shanxi, Shaanxi, and Ningxia Railway Company provincial railway construction support offices

Beijing OASIS Environmental Soil and Water Conservation Protection Technology Monitoring Center of the Yellow Company for environmental River Commission monitoring

Local environmental protection bureau monitoring stations

Xi’an Yellow River Engineering Supervision Company

Southwest Jiaotong University, for land acquisition and resettlement, and social impact monitoring

Source: Asian Development Bank.

Appendix 6 25

Figure 6.2: Organization of Taiyuan-Zhongwei-Yinchuan Railway Company

Taiyuan-Zhongwei-Yinchuan Railwa y Company shareholders

Board of Directors Board of Supervisors

Management Team Finance Division Comprehensive Department Planning and Statistics Division

Planning and Finance Environmental Protection Division Department Revenue Division

Accounting Division Transportation Division

Electricity Division

Transportation Equipment and Vehicle Division Management Department Building and Facilities Division

Marketing Division

Engineering Management Division Engineering Equipment Management Division Management Department Land and Building Division

Equipment Safety Division

Safety and Quality Accident Analysis Division Control Department

Construction Safety Division

Equipment and Technology Division IT Department

Information Technology Division Taiyuan Support Office

Suide Support Office

Yinchuan Support Office

Source: Asian Development Bank.

26 Appendix 7

COMPLIANCE WITH LOAN COVENANTS

Covenant Reference Status of Compliance

1. Project Executing Agency & Implementing Loan Complied. TZYRC was Agency MOR shall be the Project Agreement established in accordance Executing Agency, responsible for overall Schedule 5 with the Loan Agreement implementation of the Project. The Project (LA), para 1 and became operational at Company shall be the Implementing the onset of project Agency, responsible for day-to-day implementation. The implementation of the Project through the operation is assigned to the on-site Construction Management Units Xian, Lanzhou, and Taiyuan set up along the route of the Project Railway Administrations for Railway. The Project Company shall the respective sections operate and maintain the Project Railway located in the territory of after completion of the construction, these three administration develop and implement adequate and bureaus. TZYRC has transparent business development developed and mechanisms and accounting and reporting implemented appropriate systems. The Project Company shall management, accounting, employ an adequate number of suitably and reporting systems qualified professional staff, well under its corporate experienced in railway engineering, governance structure. financial and administrative matters and Adequate staff have been with past experience in implementing engaged and operation is similar projects. smooth and normal.

2. Role of FCTIC. FCTIC shall coordinate LA, Schedule Complied. FCTIC has Project management activities, undertake 5, para 2 fulfilled the responsibilities the procurement of the goods and services as expected. financed under the Project, apply for withdrawals, monitor utilization of Loan proceeds, and report to ADB.

3. Counterpart Financing. Without prejudice LA, Schedule Complied. Funds from all to the generality of Section 4.02 of this 5, para 3 sources have been Loan Agreement, the Borrower shall cause provided timely. Cost MOR to provide on a timely basis all funds increase has been covered and resources necessary for construction, with additional equity inputs operation and maintenance of the Project and domestic loans and Railway and cover any Project cost railway bonds. overrun.

4. Change of Ownership. In the event the LA, Schedule Complied. The ownership of MOR and/or the Project Company plan to 5, para 4 project facilities rests with (a) make any change in the ownership of the project company. No the Project facilities, or of the Project transfer of asset ownership Company, or (b) make any sale, transfer, or any interest of the project or assignment of MOR's or the Project had ever happened. The

Appendix 7 27

Covenant Reference Status of Compliance

Company's direct or indirect interest in the operation of project railway Project Railway, or (c) lease out, or is assigned to the Xian, contract out, or otherwise modify the Lanzhou, and Taiyuan Project Company' s responsibilities for Railway Administrations. construction, operation and maintenance of The arrangement is the Project Railway, the Borrower shall, at governed by an agreement least six months prior to implementation of which defines that TZYRC such transaction, consult ADB and obtain owns the project assets, ADB's consent. The Borrower shall ensure assumes the responsibility that such transaction be implemented in a of debt payment, and gains legal and transparent manner. revenues from the freight and passenger.

5. Construction Quality. The Borrower shall LA, Schedule Complied. MOR’s cause MOR and the Project Company to 5, para 5 preliminary check on ensure that the Project Railway is construction quality was constructed in accordance with the made in December 2010 Borrower's national technical standards, and the railway functions and that construction supervision, quality well for both passenger and control and contract management are freight operation since carried out in a satisfactory manner. January 2011 and no accident was reported. The maximum design speed has been achieved.

6. Connecting Railway Lines. The Borrower LA, Schedule Complied. The capacity of shall cause MOR and the Project Company 5, several lines connecting to ensure (i) the capacity enhancement para 6 with the project have been operations for the connecting railway lines expanded, including are completed by commencement of the Shijiazhuang-Taiyuan commercial operations of the Project dedicated passenger line, Railway; and (iii) necessary measures are Baotou-Xi'an railway line, promptly taken to minimize any capacity and Datong-Xi'an Railway. constraint on such connecting railway lines, once identified during the operation of the Project Railway, in order to ensure smooth flow of the traffic generated by the Project Railway.

7. Container Traffic. The Borrower shall LA, Schedule Complied. cause MOR to construct three extra large 5, para. 7 Container terminals in container terminals at Qingdao, Lanzhou, Qingdao, Lanzhou, and Taiyuan and to provide container handling Taiyuan were completed facilities in Yinchuan by commencement of and have been put into the commercial operations of the Project operation. Facility.

8. Supply of Rolling Stock. The Borrower LA, Schedule Complied. Sufficient rolling

28 Appendix 7

Covenant Reference Status of Compliance

shall cause MOR and the Project Company 5, para. 8 stocks are provided to to provide sufficient rolling stock, at all ensure normal operation. times, for effective operation of the Project Actual traffic carried by the Railway. project railway were close to appraisal estimate for freight and exceeded the estimate for passenger transport.

9. Safety. The Borrower shall cause MOR LA, Schedule Complied. The project and the Project Company to ensure the 5, para. 9 railway is fully fenced off to safety on the Project Railway in ensure safety. No accident accordance with the relevant laws and was reported. regulations of the Borrower.

10. Safety Dissemination. The Borrower shall LA, Schedule Complied. Dissemination of ensure that the Project Company, in 5 para. 10 safety advices has been cooperation with the local governments at done before the the prefecture, city and county levels, commencement of formulate and implement appropriate operation via various public safety campaigns through media, means. public announcements, household contacts and schools to familiarize people living along the Project Railway route with safety issues related to railways

11. Station Access and Link Roads. the LA, Schedule Complied. (i)Station access Borrower, through, MOR shall cause the 5, para. 11 and link roads connecting local governments at the prefecture, city station and urban areas and county levels to (i) construct the have been constructed and station access roads in a timely manner public transport facilities are prior to the commencement of commercial provided for most stations. operations of the Project Railway; (ii) apply Local governments will ADB's Policy on Involuntary Resettlement continue to improve the and Policy on Indigenous Peoples in infrastructure and facilities construction of such roads, and (iii) carry consistent with the growing out any land acquisition and resettlement demand of passengers and activity in accordance with the resettlement freight shippers. (ii)-(iii) plan, as set out therein Complied. Station access and link roads were implemented following the principles and policy framework in the resettlement plan.

12. Tariffs. (a) The Borrower shall ensure that LA, Schedule Complied. The freight tariff MOR and the Project Company set the 5 applied on the project tariffs, with respect to the Project Railway, para 12 railway for trail operation

Appendix 7 29

Covenant Reference Status of Compliance

at rates sufficient to ensure compliance period is CNY0.18/tkm for with financial covenants stipulated in para transit traffic, and 13 of the Schedule 5, and full cost recovery CNY0.20/tkm for arrival including the management cost of the and departure traffic. For Project Company and the working passenger traffic, the (operation and maintenance) costs of the national tariff is applied. Project Railway, depreciation, debt service, taxes and a reasonable profit. (b) The Borrower shall also ensure that the Project Company, in consultation with MOR, carries out a tariff study six months prior to the trial operation of the Project Railway and advises ADB of the tariffs applied during such trial operation.

13. Financial Matters. (a) Except as ADB may LA, Schedule Complied. Based on the otherwise agree, the Borrower, through 5, projections of TZYRC’s MOR, shall cause the Project Company to para 13 financial performance, the maintain, for each of its fiscal years company will be able to commencing after the second fiscal year of comply with all the three commencement of the commercial ratio covenants staring from operations of the Project Railway, (i) an 2015. Specifically, the operating ratio of not more than 70%, (ii) a operating ratio will remain debt service coverage ratio of at least 1.2, below 65%. The debt to and (iii) a debt equity ratio of not more than equity ratio will be reduced 65:35 to ensure operating efficiency and from the initial level of 67:33 financial sustainability. to 65:35 in 2015 along with the scheduled debt repayments. The debt service coverage ratio remains above 1 over the operation period and can reach 1.2 in 2014. The Borrower shall cause MOR and/or the LA, Article IV, Complied. The project Project Company to (i) maintain, separate Section 4.05 accounts were audited accounts for the Project; (ii) have such annually by China National accounts and related financial statements Audit Office in accordance audited annually, in accordance with with auditing standards appropriate auditing standards consistently acceptable to ADB, and six applied, by independent auditors whose audit reports were qualifications, experience and terms of submitted, all on time and in reference are acceptable to ADB; (iii) good quality. Audit findings furnish to ADB, as soon as available but in highlighted issues related to any event not later than 6 months after the the management of end of each related fiscal year, certified domestic-funded contracts copies of such audited accounts and in areas of supporting financial statements and the report of the documents, works progress auditors relating thereto (including the certification, and

30 Appendix 7

Covenant Reference Status of Compliance

auditors' opinion on the use of the Loan compliance of domestic proceeds and compliance with the financial regulations relating to covenants of this Loan Agreement as well procurement and sub- as on the use of the procedures for imprest contracting. These issues account/statement of expenditures), all in were rectified or resolved the English language; and (iv) furnish to afterwards. ADB such other information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request.

The Borrower, through MOR, shall cause LA Schedule Partly Complied. TZYRC the Project Company to establish and 5, para established an internal audit maintain an internal audit unit, the 13(c) unit to independently check composition and terms of reference of financial transactions for which shall be acceptable to ADB, to safe custody of assets and undertake timely audit of Project accounts report directly to TZYRC's in accordance with generally acceptable board of directors. accounting principles. However, in view of the audit findings, the unit’s capacity appeared to be inadequate for the scale and complexity of the project.

14. Reform Measures. The Borrower shall take LA, Schedule Ongoing. On 10 March necessary measures to continue to 5, 2013, the PRC Government implement its national Railway para 14 announced institutional Development Plan (2004) including (i) reform measures in the separation of the core railway operations railway sector, including from non-core transportation business dissolution of the MOR and operations, (ii) rationalization of staff, and establishment of the China (iii) encouragement of the Project Railway Corporation. The Company to outsource some of its reform is to separate activities. government functions from business operations, improve transport planning and railway safety, diversify the investment channels, speed up railway constructions, and advance modern logistics development. Implementation of the reform agenda is still in the process.

Appendix 7 31

Covenant Reference Status of Compliance

15. Anticorruption Measures. The Borrower LA, Schedule Complied. (a) annual audit shall comply with and shall cause MOR 5, conducted by China and the Project Company to comply with para 15 National Audit Office ADB's Anticorruption Policy. The Borrower inspected contractors’ agrees that ADB reserves the right to activities and investigate, directly or through its agents, recommendations were any alleged corrupt, fraudulent, collusive or provided for necessary coercive practices relating to the Project. In actions taken by the particular, the Borrower shall (a) ensure executing agency and IA; that MOR and the Project Company (b) ADB-financed contracts conduct periodic inspections on the followed standard bidding contractors' activities related to fund documents provided by withdrawals and settlements, (b) ensure ADB and through ADB that all contracts financed by ADB in approvals; (c) the project connection with the Project includes company has 11 provisions specifying the right of ADB to shareholders and audit and examine the records and shareholders’ meeting is accounts of MOR and the Project held for decision-making for Company and all contractors, suppliers, its operation; (d) formal consultants and other service providers as procedure of MOR was they relate to the Project; (c) ensure that a followed for approval of supervisory body is established for procurement related prevention of undue interference in matters; and (e) all bidding business practices and adequate documents of ADB-finance resources are made available for its contracts included effective operation, (d) ensure that a provisions of ADB’s leading group of officials from the Anticorruption policy. Discipline Unit and Supervision Department of MOR is located in offices involved in the bidding, construction, and other operational activities under the Project, and (e) ensure that relevant provisions of ADB's Anticorruption policy are included in all bidding documents for the Project. The Borrower shall also cause MOR and the Project Company to initiate liaison meetings with the Prosecutor's Office on a needed basis, where warnings about or information on corrupt practices can be discussed.

16. Environmental Measures. The Borrower LA, Schedule Complied. The EMP shall cause MOR, SAPG, SPG, NHAR and 5 including the monitoring the Project Company to ensure that (i) the para 16 program has been Project is designed, constructed, operated implemented generally well and maintained in accordance with the during the project environmental laws and regulations of the implementation. No major Borrower and ADB's Environmental Policy, environmental harms were

32 Appendix 7

Covenant Reference Status of Compliance

(ii) the Environmental Management reported. Mitigations Program (EMP) and the mitigation measures have been measures included therein, as specified in undertaken as per the the Environmental Impact Assessment and project environmental the Summary Environmental Impact impacts assessment report. Assessment prepared for the Project, are Monitoring of gas emissions properly implemented, (iii) the EMP is from boilers installed at updated at engineering design state and stations, sound, and water incorporated into bidding documents and will be continued during civil works contracts, (iv) any operation. environmental permits, licenses and clearances are obtained in a timely manner, and (v) any adverse impact on the environment that may arise from the Project implementation activities is promptly mitigated or minimized in accordance with EMP.

17. Land Acquisition and Resettlement. The LA, Schedule (i) Partially Complied. Land Borrower shall cause MOR, SAPG, SPG, 5 acquisition and resettlement NHAR and the Project Company to ensure para 17 was implemented based on that (i) the Resettlement Plan (resettlement the resettlement plan and plan) is carried out promptly and efficiently the PRC relevant laws and in accordance with its terms, all applicable regulations. The domestic laws and regulations of the Borrower, and procedures are being ADB's Policy on Involuntary Resettlement, followed up for the final (ii) all affected people, including ethnic project acceptance and minorities, are given adequate opportunity TZYRC should closely to participate in resettlement planning and coordinate with local implementation, particularly in entitlements governments to follow up and income restoration measures as set the resettlement progress in out in the resettlement plan, (iii) affected three uncompleted people are compensated and assisted, in construction of resettlement accordance with the resettlement plan, sites as agreed in the action prior to displacement from their houses, plan. (ii) Complied. Equal land and assets such that they will be at opportunities were given to least as well of as they would have been in all affected people to the absence of the Project, (iv) adequate participate in land and appropriate support is provided for acquisition and resettlement enterprise relocation, (v) affected people activities. (iii) Complied. The receive priority for employment in Project average implemented construction, (vi) special measures are compensation rates are implemented for vulnerable groups, similar to or higher than including ethnic minorities, and (vii) civil those in the resettlement works contracts under the Project include plan. In addition, local requirements to comply with the governments and local resettlement plan, the applicable laws and communities also mobilized regulations of the Borrower and ADB's additional resources to

Appendix 7 33

Covenant Reference Status of Compliance

Policy on Involuntary Resettlement to the provide subsidies and extent applicable to such contracts. assistance to help affected households in house rebuilding. Various measures to help affected households to restore their income. Surveys conducted by external resettlement monitor indicated that the incomes of affected households were increased as compared with the situation before the project. (iv) Complied. The affected enterprises received full compensation and relocated to new sites with the assistance provided by local governments as required. (v) Complied. The local laborers in affected villages were given priority for employment in construction sites. (vi) Complied. Special measures including subsidies were provided to assist vulnerable groups in construction of new houses, etc. (vii) Complied. The civil works contracts included terms that TZYRC was responsible for land acquisition and resettlement, whose work was guided by the resettlement plan, ADB’s Policy on Involuntary Resettlement, and applicable laws and regulations in the PRC.

18. The Borrower shall cause MOR, SAPG, LA, Schedule (i) Complied. CNY4.97 SPG, NHAR and the Project Company to 5 billion of land acquisition ensure that (i) funds needed for land para 18 and resettlement costs were acquisition and resettlement, including disbursed, 236% higher those for cost overruns, are allocated and than the estimate in the

34 Appendix 7

Covenant Reference Status of Compliance

disbursed in a timely manner, (ii) the resettlement plan, (ii) (iii) resettlement plan is updated, disclosed to Complied. An updated the affected people, submitted to ADB for resettlement plan was its review and approval prior to land submitted to ADB in acquisition commencing, and (iii) ADB is February 2008, revised in promptly advised of any substantial February 2009, and revised changes in the resettlement impacts, and if again in February 2010 by necessary, a revised resettlement plan is incorporating the comments submitted to ADB for concurrence. from EARD resettlement specialists, and then submitted to RSDD for concurrence in April 2010. Although there was no formal concurrence due to RSES comments on survey methods, the updated information was disclosed to affected persons prior to their displacement

19. The Borrower shall (i) ensure that MOR, LA, Schedule (i) Complied. (ii) Complied. SAPG, SPH, NHAR and the Project 5 All local governments Company effectively supervise the para 19 established coordination resettlement plan, (ii) cause MOR and the office/working groups to Project Company to ensure that adequate supervise land acquisition staff and resources are committed to and resettlement. Six full- supervising and monitoring the time staff worked on land implementation of the Resettlement Plan, acquisition in the project (iii) ensure that an independent agency company. (iii) Complied. acceptable to ADB is engaged by the External monitoring agency Project Company to monitor progress submitted the baseline semi-annually and to evaluate results resettlement monitoring through annual survey updates during two report and six resettlement years after the completion of resettlement, monitoring reports during and forward reports to MOR, the Project implementation. (iv) Company and ADB, and (iv) ensure that Complied. Gender impacts data are disaggregated by gender, and and vulnerable groups were monitoring focuses on gender impacts and evaluated in the monitoring vulnerable groups are incorporated. reports, and some data were disaggregated by gender, such as employment.

20. Poverty Reduction. The Borrower shall LA, Schedule Complied. SDAP was ensure that MOR and the Project Company 5, para 20 monitored by external cause the contractors involved in the monitoring agency. Six Project implementation to maximize monitoring reports were employment of local poor persons, submitted and the

Appendix 7 35

Covenant Reference Status of Compliance

including ethnic minorities, who meet the conclusion is that the job and efficiency requirements for construction and operation construction of the Project Railway. Such of the railway have greatly workers shall be provided adequate on- contributed to regional the-job training. The Borrower shall ensure socioeconomic that MOR and the Project Company development, poverty implement the Project in accordance with reduction, gender the Social Development Action Plan development, as well as (SDAP) and monitor the Project's impact ethnic minority on poverty with the assistance of domestic development. consultants engaged under the Project.

21. Gender and Development. The Borrower LA, Schedule Complied. The project has shall cause MOR and the Project Company 5 promoted gender (i) to implement the Project in accordance para. 21 development in the project with SDAP and take all necessary actions area. A significant number to encourage women living the Project of laborers working on the area to participate in planning and project were women. More implementation of the Project, and (ii) to women are working in cause the contractors involved in Project nearby enterprises being implementation to comply with all engaged as migrant applicable laws and regulations of the laborers to work outside the Borrower concerning gender equality. The region, enjoying wages Borrower shall ensure that MOR and the equivalent to those of male Project Company monitor the effects of the employees. Project on women through collection and compilation of gender-disaggregated data, where relevant, including in the resettlement plan, the SDAP and the Project Performance Management System.

22. Health Concerns. The Borrower shall LA, Schedule Complied. TZYRC and cause MOR and the Project Company to 5, para. 22 contractors along alignment ensure that (i) contractors involved in provided health care for Project implementation disseminate construction workers and information on the risks of socially took measures to control transmitted infections, including HIV/AIDS, inflection of HIV/AIDs. No to the workers they employ under the significant issues were Project and to local communities, through reported during public awareness campaign and (ii) implementation. Railway adequate health and treatment facilities are operation workers are made available nearby. The Borrower shall covered by the public cause MOR, SAPG, SPG, NHAR and the healthcare scheme and Project Company to ensure that similar measures for prevention of information is disseminated, in consultation HIV/AIDs with the relevant Health Bureaus, to railway operators.

36 Appendix 7

Covenant Reference Status of Compliance

23. Project Performance Monitoring & LA Schedule Partly complied. Project Evaluation. The Borrower shall cause MOR 5, para 23 performance monitoring and the Project Company to monitor and system was established, evaluate the Project impact through a composed of quarterly project performance monitoring system to reports, annual audit be established, as agreed between the reports, monitoring reports Borrower and ADB, to ensure that the of external monitoring Project facilities are manage efficiently, agencies, and individual benefits are maximized and social impacts reports on specific issues. are monitored. The Borrower shall also However the project cause MOR and the Project Company to benefits and impacts were establish baseline and target values for a not reported adequately set of indicators for evaluating Project during implementation due performance, as agreed between the to limited budget available, Borrower and ADB, and measure the also some indicators were Project indicators, and compare to the impractical. baseline values, at the inception report implementation, at completion of the Project and three years thereafter. Where relevant, indicators shall be disaggregated by gender and ethnic group.

24. Project Review. ADB, MOR and the Project LA, Schedule Complied. Seven review Company shall jointly carry out a midterm 5, para 24 missions, including a mid- review of the Project in 2009, covering all term review mission were institutional, administrative, organizational, conducted. These missions technical, environmental, social, poverty resolved problems reduction, resettlement, economic, encountered during financial and other relevant aspects that implementation, may have impact on the performance of strengthened safeguards the Project and its continuing viability. The supervision, provided midterm review shall examine progress in guidance to mitigate risk sector reforms, policy development, and major issues. Project resettlement, environment, impact on impact during the ethnic minorities, vulnerable groups and construction period as well women, and compliance with the beyond project completion assurances stated in this Loan Agreement. was closely monitored.

Appendix 7 37

Covenant Reference Status of Compliance

25. Reporting Requirements. Without prejudice LA, Schedule (i) Ongoing. Audit reports to any other provision of this Loan 5, para. 25 have been submitted on Agreement, the Borrower, through MOR, time and in good quality shall submit to ADB: during implementation. For (i) The Project Company’s audited commercial operation accounts and financial statements period, TZYRC’s financial during construction and in the first statements for 2011-June three years of commercial 2013 were submitted. (ii) operations in the Project Railway, Complied. Environmental within six months from the end of external monitoring reports, each relevant fiscal year; external resettlement (ii) Semi-annual reports on the monitoring reports and implementation of the EMP, report on SDAP have been including any safety breaches, submitted on time. (iii)-(iv) violation of environmental Complied. Social and standards and corrective measure poverty reduction impact taken thereto, in a timely manner; was assessed with (iii) Semi-annual reports on the comparison with baseline implementation of the resettlement indicators.(v) Partly plan and a resettlement completion Complied for lacking report, in a timely manner; baseline information for (iv) Annual reports on the some indicators. implementation of the SDAP and the impact of the Project on poverty, in a timely manner; and (v) Reports summarizing the key findings of the measurement of the Project indicators against the baseline values carried out pursuant to paragraph 23 above, in a timely manner.

ADB = Asian Development Bank, CNY = yuan, EIA = environmental impact assessment, EMP = environmental management plan, FCTIC = Foreign Capital and Technical Import Center, IA = implementing agency, LA = loan agreement, PRC = People’s Republic of China, MOR = Ministry of Railways, NHAR = Ningxia Hui Autonomous Region government, resettlement plan = Resettlement Plan, SAPG = Shaanxi provincial government, SDAP = social development action plan, SPG = Shanxi provincial government, TZYRC = Taiyuan-Zhongwei-Yinchuan Railway Company. Source: Asian Development Bank.

CONTRACT PACKAGES FINANCED BY THE ASIAN DEVELOPMENT BANK 38

Cat PCSS Pro. Contract Contract Amount ADB Financing Disbursed Appendix 8 Contract Description Contractor/Supplier No. No. Mode Signing (CNY) (US$) (US$) I. Equipment 1 Electrification equipment - 110KV 0015 ICB 12-Jun-09 Beijing Century Splendor Trading 20,640,800.00 3,063,688.02 3,063,688.02 traction transformer Co. 2 Electrification equipment - 110KV 0016 ICB 12-Jun-09 China Heavy Machinery 17,949,200.00 2,650,199.61 2,650,199.61 traction transformer Corporation 3 Electrification equipment - 110KV 0017 ICB 12-Jun-09 Shandong Dachi Electric Co. 19,020,000.00 2,801,407.79 2,801,407.79 traction transformer 4 Electrification equipment - 110KV 0018 ICB 12-Jun-09 Jinmao Tech Engineering 5,016,509.00 747,386.81 747,386.81 SF6 circuit breaker 43 Sets (Wuhan)Corporation 5 Electrification equipment - 27.5KV 0019 ICB 12-Jun-09 Beijing Golden Fuli Electro- 7,041,200.58 1,059,988.78 1,059,988.78 vacuum circuit breaker 260 Sets Mechanics Devt Co. 6 Electrification equipment - 110KV 0020 ICB 15-Jun-09 Beijing Golden Fuli Electro- 4,738,558.00 714,988.93 714,988.93 27.5K motor operated Mechanics Devt Co. disconnector 7 Electrification equipment - 110KV 0021 ICB 12-Jun-09 Wenzhou E&T Foreign Trade Co. 2,452,650.59 366,663.39 366,663.39 27.5 -10KV manually 8 Electrification equipment - 0022 ICB 12-Jun-09 CCECC International Trading Co. 64,396,800.00 9,608,018.64 9,608,018.64 messenger cable (Jingbian East) 9 Electrification equipment - 0023 ICB 12-Jun-09 Wenzhou E&T Foreign Trade Co. 47,654,918.57 7,078,483.14 7,078,483.14 messenger cable (Jingbian West) Subtotal 188,910,636.74 28,090,825.11 28,090,825.11 II. Materials 10 Prestressed concrete beam 0001 ICB 27-Aug-07 China Railway 22nd Bureau Group 179,282,021.00 25,960,539.55 25,960,539.55 Corporation 11 Prestressed concrete beam 0002 ICB 27-Aug-07 China Railway 23 rd Bureau Group 475,967,200.00 68,710,607.60 68,710,607.60 12 Prestressed concrete beam 0003 ICB 27-Aug-07 China Railway 10th Group Co. 285,851,567.00 41,335,469.65 41,335,469.65 13 Prestressed concrete beam 0004 ICB 27-Aug-07 China Railway Materials I&E Co. 240,811,037.00 34,769,617.94 34,769,617.94 14 Concrete sleepers lot D1 0005 ICB 28-Sep-07 China Railway Materials I&E Co. 52,347,488.00 7,664,607.15 7,664,607.15 15 Concrete sleepers lot D2 0006 ICB 28-Sep-07 Consortium Of China Railway 53,696,963.00 7,857,326.18 7,857,326.18 Material Group Co./Beijing Golden Fuli Electro-Mechanics

Appendix 8 39

urement mode. (US$) (US$) ADB FinancingADB Disbursed 299,600,000.00 (CNY) 7,735,022.00 1,139,716.22 1,139,716.22 1,316,812.00 204,635.37 204,635.37 44,526,106.00 6,509,849.40 6,509,849.40 35,752,164.40 5,304,895.56 5,304,895.56 58,657,161.50 8,728,807.89 8,728,807.89 48,114,277.00 7,104,719.30 7,104,719.30 76,771,843.08 11,348,069.26 11,348,069.26 15,132,263.69 2,228,274.87 2,228,274.87 45,504,472.00 7,043,991.69 7,043,991.69 13,262,614.00 2,095,780.50 2,095,780.50 100,667,303.60 14,822,062.94 14,822,062.94 2,050,099,982.43 Contract Amount 8,603,500.90 8,603,500.90 299,600,000.00 1,861,189,345.69 1,861,189,345.69 271,509,174.89 271,509,174.89 Bureau Group Group Bureau th Contractor/Supplier Plastic Prod. Co. Prod. Plastic Export Co. Products Plastic Co. Bridge 10 China Railway Co. Plastic Products Co. Products Plastic Co. Co. Prod. Plastic Co. g, PCSS = procurement contract summary sheet, Pro. Mode = Pro. Mode proc sheet, summary procurement contract PCSS = g, Signing Contract Pro. Pro. Mode No. PCSS PCSS Total Contract Description Contract Subtotal Source: Asian Development Bank. number, international competitive biddin ICB = category = Cat no. 17 B3 Bearingslot 18 B4 Bearings lot 19sleepers 1lot Concrete 20sleepers 2lot Concrete 21 B1 bearings Rubber lot 22 0008 0010 B2 bearings Rubber Lot 0009 ICB ICB23 0011 ICB sleepers B3 Concrete Lot 24 25-Dec-07 09-Apr-08 Co. Industrial Tender beam World Concrete ICB & Import 27-Dec-10Electric China National 0012 & Rubber Longxiang Shandong 25 0013 09-Apr-08beam Concrete ICB Trading Splendor Century Beijing 0014 ICB26 07-May-08 beam Concrete Co.Industrial Tender World ICB 07-May-08 31,370,012.00 4,660,011.22 & Rubber 4,660,011.22 Longxiang Shandong 09-Jul-08 Co. Trdg Intl Jialihengye Beijing 0024 36,234,655.00 ICB 5,416,691.70 5,416,691.70 0025 58,188,363.42 01-Dec-09 ICB Group 22nd Bureau China Railway 0026 01-Dec-09 Road & ICB China Railway Guizhou 01-Dec-09 16sleepers D3lot Concrete 0007 ICB 28-Sep-07 Trading Splendor Century Beijing 29 Bearing 0029 ICB 06-May-11 and Rubber Longxiang Shandong 27 Bearing28beam Concrete 0028 0027 ICB ICB 16-Feb-11 01-Dec-09 Group 22nd Bureau China Railway and Rubber Longxiang Shandong No. Cat 40 Appendix 9

ECONOMIC REEVALUATION

A. General

1. The railway constructed under the Taiyuan–Zhongwei Railway Project was a 941- kilometer (km) electrified, standard gauge, Class I main line at project completion. The Taiyuan– Zhongwei Railway (TZR) comprised 509 km of double-track line between Taiyuan and Dingbian, 239 km of single track between Dingbian and Zhongwei, and 193 km of single track between Dingbian and Yinchuan. The railway traverses Shanxi Province (197 km), Shaanxi Province (277 km), and the Ningxia Hui Autonomous Region (467 km). Forty new stations were constructed, all are open for freight operation and 18 of them are open to both passenger and freight operation. The railway began freight and passenger operations on 11 January 2011. The reevaluation used with- and without-project scenarios, in accordance with the Guidelines for the Economic Analysis of Projects 1 of the Asian Development Bank (ADB). Under the without- project scenario, travelers and shippers would continue to rely on the parallel expressway and national roads in the corridor and on the alternative longer railway routes existing before the TZR project. This would result in growing traffic congestion, higher transport costs, and longer travel times. In the with-project case, the TZR would be used to take advantage of its lower transport costs, shorter travel distance, and improved service level. Congestion on the expressway and national roads is alleviated to some extent, and stress on the capacity of the alternative railway routes is also reduced by the diversion of traffic to the project railway. The reevaluation covered the 2006–2013 implementation period and an operation period of 2011– 2031.

B. Costs

2. The project costs consisted of capital costs, operation and maintenance costs, and the costs for equipment replacement and infrastructure rehabilitation to be undertaken during the evaluation period. The incremental cost of rolling stock was annualized and formed part of the unit operating costs. This was based on the experience of the Xian, Lanzhou, and Taiyuan railway administrations, which are responsible for operation and maintenance of the TZR. Financial costs were converted to economic costs following the same methodology used at appraisal.

C. Traffic

3. The traffic forecast was based on the actual performance of the TZR during 2011–2013, with consideration of the impacts of the expressway, the national roads, and alternative rail routes in the region. The impacts of the capacity expansions of other connecting rail lines were also considered. Other factors included expected economic growth, local investment plans, and the prospects for tourism development.

4. Located in the central part of Shanxi Province and the northwestern part of Shaanxi Province and the Ningxia Hui Autonomous Region, the TZR provides the shortest rail route between the eastern and western regions of the People’s Republic of China (PRC). At its eastern end, TZR begins in Taiyuan, Shanxi’s provincial capital. It connects with the existing Shijiazhuang–Taiyuan Line and the Southern Tongpu Line. At the western terminus of Yinchuan, TZR connects with the Baotou–Lanzhou Line. At Zhongwei, it connects with the Baoji–Zhongwei

1 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.

Appendix 9 41

Line. At Suide, located in the middle of the TZR alignment, TZR connects with the Baotou–Xi’an Line. These lines are the major sources of transit traffic for TZR.

5. The region is an important producer of coal, coke, iron ore, and natural gas. Few railway connections existed before the project, and freight shippers and travelers relied on high-cost road transport. In 2011, the first year of its operation, TZR carried 16.6 billion ton-kilometers (ton-km) of freight, which increased by 32% to 21.9 billion ton-km in 2012. Actual freight traffic was close to appraisal estimates. Transit traffic predominated, as shippers took advantage of the fact that the TZR is 100 km–500 km shorter than the alternative rail routes that were their only rail options before the project. Local freight took only a 10% share of the total freight traffic, and most of the freight moved from the west to the east, with wagons making the return run empty. This results from two issues. Freight loading and unloading facilities are still not available to shippers at several stations, and only four of the originally planned sidings to serve industries in the region have been constructed. A great deal of potential local freight traffic has not been tapped due to this lack of freight facilities and the delayed development of industrial sidings. Removing these constraints would significantly enhance local freight traffic and reduce the imbalance in two-way freight traffic that is costly for the TZR. Freight traffic is forecast to reach 42.9 trillion ton-km in 2031, representing an average 4% annual increase. These growth projections are considered conservative, given the TZR’s position as a strategic link between the PRC’s western and eastern regions.

6. Performance during 2011–2013 showed passenger demand growth to be promising. In 2011, the TZR’s passenger traffic was 4.9 billion passenger-km (p-km), which rose to 5.1 billion p-km in 2012, with the use of 17 train pairs per day. These volumes are 2.7 times the appraisal estimates. The shift by travelers from road transport to rail was significant due to the fact that costs for travel by rail that were one-third to one-half of those incurred covering the same distance by road. Moreover, travelers view rail service as much safer and reliable, particularly during the winter season when roads are often closed due to snow. Based on surveys conducted during completion review, it is estimated that 60% of the expressway and national highway passenger traffic has been diverted to the TZR. The surveys indicated that passengers wanted TZR to put more trains in service, particularly on routes that start in the region. Annual passenger volume is expected to increase to 8.4 trillion p-km in 2031, representing average increase of 3% a year.

Table A9.1: Traffic Forecast at Project Completion Appraisal Estimates Updated Forecast Item 2012 2022 2031 2012 2022 2031

Freight traffic (billion ton-kilometer) 22.2 40.9 73.2 21.9 32.2 42.9 Passenger traffic (billion passenger- kilometer) 1.9 3.8 5.9 5.1 6.4 8.4 Annual growth Rate (%) 6.5 6.5 6.5 5 4 3 Source: Asian Development Bank.

7. This growth rate projection is considered conservative, given that the TZR provides a major transport corridor between the country’s east and west and connects several economic centers. The strong economic ties between the eastern and western regions will continue to build freight and passenger traffic. Actual freight traffic in the TZR’s first years of operation has been close to appraisal estimates, and passenger traffic has been significantly higher than projected. However, the reevaluation applied lower growth rates than assumed in the appraisal

42 Appendix 9 estimate, which has resulted in the lower projections of freight traffic in the later years of the evaluation period. The updated traffic forecasts are presented in Table A9.1.

D. Benefits

8. The reevaluation quantified the economic benefits of (i) the operating cost savings from the diversion of freight and passenger traffic from roads and alternative rail routes to the TZR; (ii) the time savings of passengers diverted from the roads and alternative rail routes; (iii) the benefits of freight and passenger traffic generated, which were estimated to be one-half of the benefits of diverted traffic; and (iv) energy saving benefits.

9. These benefits were estimated separately for diverted and generated traffic. Significant cost savings result from the fact that the TZR provides a shorter, more direct route for much of the rail traffic between origin and destination points in the East and West of the PRC. Diversion of traffic to the TZR from these longer alternative routes thus improved the productivity of the national railway system, because moving the identical freight across the new railway involves significantly fewer ton-kilometers and therefore lowers costs. The estimates of cost savings from the diversion of traffic from roads to the TZR were based on the economic cost of road transport and rail transport. Time savings were calculated for passengers alone and based on the average per capita income in the two provinces and the Ningxia Hui Autonomous Region.

10. The diversion of freight and passengers from road to rail also generates benefits in reduced energy consumption. The research report of China Academy of Railway Sciences in 2011 concluded that diverting traffic from road to rail in the PRC resulted in energy savings of 169 kilograms of coal equivalent per 1,000 passenger-km for passenger transportation and 1,259 kilograms of coal equivalent per 1,000 ton-km for freight transportation. This value in economic terms was included in the benefit stream.

E. Economic Internal Rate of Return Reevaluation

11. The reevaluated economic internal rate of return (EIRR) is 16.4%, compared with the 18.2% estimated at appraisal. The significantly higher capital cost was the main reason for the lower EIRR, while the fact that the capital cost was spread over a period 2 years longer than the period anticipated at appraisal undermined the effect of the increased capital cost to some extent. The result also benefited from the fact that the project started to generate benefits 1 year earlier than the appraisal estimate and that the benefits in the first years of operation were higher than expected, due to abundant traffic from the beginning. The reevaluation noted the contribution of higher-than-expected passenger traffic and its economic benefits, as well as that of the cost savings for shippers able to divert traffic from longer and more expensive alternative rail routes. The appraisal significantly underestimated the passenger benefits in terms of both the passenger traffic and the value of time, which it based on rural income. The reevaluation used the per capita income of urban citizens of the two provinces and the NHAR, based on the features of the majority of passengers and travel purposes. The EIRR is higher than 12%, and the project is considered economically viable.

12. Sensitivity analysis was carried out to test the impacts of (i) a decrease in traffic from that forecast, (ii) an increase in projected operation and maintenance costs, and (ii) a decrease in benefit valuation (Table A9.3). According to this analysis, the project will continue to be economically viable under the conditions tested. Under the worst-case scenario considered—a 20% increase in operation and maintenance costs and a 20% benefit reduction—the EIRR falls to 13.9%.

Appendix 9 43

Table A9.2: Economic Reevaluation (CNY million) Capital O&M Benefits Net Year Cost Cost Passenger Freight Energy Total Benefits 2006 3,414.84 0.00 0.00 (3,414.84) 2007 5,691.40 0.00 0.00 (5,691.40) 2008 10,047.63 0.00 0.00 (10,047.63) 2009 5,800.39 0.00 0.00 (5,800.39) 2010 6,993.71 0.00 0.00 (6,993.71) 2011 1,870.47 1,144.49 1,909.33 3,080.28 358.54 5,348.15 2,333.19 2012 2,147.55 1,436.32 2,017.65 4,061.40 460.06 6,539.10 2,955.23 2013 1,347.60 1,402.45 1,993.86 3,973.07 449.59 6,416.52 3,666.48 2014 0.00 1,472.57 2,099.77 4,171.72 471.16 6,742.65 5,270.08 2015 0.00 1,546.20 2,217.20 6,740.10 493.77 9,451.06 7,904.86 2016 0.00 1,623.51 2,332.97 7,077.10 517.49 9,927.56 8,304.05 2017 0.00 1,704.69 2,461.21 7,430.96 542.36 10,434.53 8,729.84 2018 0.00 1,789.92 2,598.11 7,802.50 568.45 10,969.06 9,179.14 2019 0.00 1,879.42 2,744.26 8,192.63 595.81 11,532.69 9,653.28 2020 0.00 1,954.59 2,900.35 10,261.44 619.09 13,780.88 11,826.28 2021 1,656.00 2,032.78 3,067.13 10,671.89 643.29 14,382.32 10,601.54 2022 0.00 2,114.09 3,245.42 11,098.77 668.45 15,012.63 12,898.54 2023 0.00 2,198.65 3,436.08 11,542.72 694.59 15,673.39 13,474.74 2024 0.00 2,286.60 3,640.08 12,004.43 721.75 16,366.26 14,079.66 2025 1,288.00 2,355.19 3,858.41 12,364.56 743.41 16,966.38 13,139.18 2026 0.00 2,425.85 4,092.19 12,735.50 765.71 17,593.40 15,167.55 2027 0.00 2,498.63 4,342.61 13,117.56 788.68 18,248.85 15,750.22 2028 0.00 2,573.58 4,610.94 13,511.09 812.34 18,934.36 16,360.78 2029 0.00 2,650.79 4,898.57 13,916.42 836.71 19,651.70 17,000.90 2030 0.00 2,730.32 5,206.99 14,333.91 861.81 20,402.72 17,672.40 2031 (11,194.07) 2,812.23 5,537.83 14,763.93 887.67 21,189.43 29,571.28 EIRR = 16.4%, NPV at 12% = 12,902.75 ( ) = negative, O&M = operation and maintenance, EIRR = economic internal rate of return, NPV = net present value. Source: Asian Development Bank estimates.

Table A9.3: Sensitivity Analysis Change by EIRR NPV at 12% Scenario (%) (%) (CNY million) 1.Base case 16.4 12,903 2.Benefits (20) 13.6 4,368 3.O&M cost 20 16.0 11,419 4.Freight traffic (20) 14.4 6,645 5.Passenger traffic (20) 15.7 10,626 6.Combined 2+3 13.9 5,161 7.Without energy benefits 15.7 10,626 ( ) = negative, EIRR = economic internal rate of return, NPV = net present value. Source: Asian Development Bank.

44 Appendix 10

FINANCIAL REEVALUATION

A. Basic Assumptions

1. The financial internal rate of return (FIRR) for the Taiyuan–Zhongwei Railway Project was reevaluated on the basis of financial and operational information obtained from Taiyuan- Zhongwei-Yinchuan Railway Company (TZYRC) and several revenue and cost assumptions. The capital cost was based on actual expenditures incurred for the project, excluding interest and other financial charges during construction. All revenues and expenses were expressed in 2013 prices. The calculation period covered the construction period and the operation period, 2011–2031, as did the evaluation at appraisal. Costs of equipment replacement and infrastructure rehabilitation expected to occur during the evaluation period were included. Residual value was calculated based on the economic life of fixed assets.

2. Project revenues consisted of the freight and passenger revenues of the Taiyuan– Zhongwei Railway (TZR). Business tax of 3.24% of revenues and income tax of 25% were excluded from the net benefits. The TZR enjoys a special freight tariff of CNY0.20 per ton- kilometer (km) for local traffic and CNY0.18 per ton-km for transit traffic, approved by National Development and Reform Commission because it is a joint venture railway. The TZR is required to apply the national passenger tariff—CNY0.15 per passenger-km for conventional trains, and CNY0.35 per passenger-km for high-speed trains. These actual tariffs compare favorably with the appraisal estimates, which assumed tariffs of CNY0.1097 per ton-km. No increase in the current tariffs in real terms was assumed in the reevaluation.

3. The operation of the TZR is assigned to the Xian, Lanzhou, and Taiyuan railway administrations under the China Railway Corporation for the sections located in the territories in Shanxi and Shaanxi provinces and the Ningxia Hui Autonomous Region that these three administrations are responsible for.1 The operation is governed by an agreement between the China Railway Corporation and TZYRC under which TZYRC is the owner of the project assets, assumes the responsibility of debt payment, and gains revenues from and pays the costs for the freight and passenger operations conducted by railway administrations. The operating cost in the reevaluation was based on the actual costs for 2011–2013 provided by TZYRC. The operating cost covered all operation and maintenance costs, costs related to rolling stocks, and TZYRC’s management costs. Depreciation and interest cost were excluded from the FIRR calculation.

B. Financial Internal Rate of Return

4. The FIRR after tax was recalculated at 6.4%, compared with the 8.4% estimated at appraisal (Table A10.1). The difference is mainly due to a substantially higher capital cost than estimate at appraisal even though the tariffs are higher than the appraisal projected. The after- tax weighted average cost of capital (WACC) in real terms was calculated using the actual capital mix and costs of various financing sources, including (i) the applicable 10-year fixed swap rate, plus a provision for the spread of 0.6% used for Asian Development Bank (ADB) loans; (ii) the interest rates of 5.9% for the loans from domestic banks and 4.8% for the railway bonds; and (iii) the cost of equity of 8%. The WACC was recalculated as 2.3%, close to

1 The railway administrations were under the Ministry of Railways before the institutional reforms in the railway sector in 2013. After the reform, China Railway Corporation succeeded the Ministry of Railways in managing all railway administrations.

Appendix 10 45 appraisal estimate of 2.2% (Table A10.2). The FIRR is higher than the WACC, and the project is therefore considered financially viable.

Table A10.1: Financial Internal Rate of Return (CNY million) Year Capital Working Operating Business Income Net Cash Flow Before After Costs Expenditures Revenue Tax Tax Income Tax Income Tax 2006 3,711.78 (3,711.78) (3,711.78) 2007 6,186.30 (6,186.30) (6,186.30) 2008 10,921.34 (10,921.34) (10,921.34) 2009 6,304.77 (6,304.77) (6,304.77) 2010 7,601.86 (7,601.86) (7,601.86) 2011 2,033.12 1,244.01 3,964.80 125.56 562.11 562.11 2012 2,334.30 1,561.22 4,596.38 119.62 581.24 581.24 2013 1,464.78 1,524.40 4,734.27 153.39 1,591.70 1,591.70 2014 1,600.62 4,970.98 161.06 3,209.30 3,209.30 2015 1,680.65 5,219.53 169.11 26.92 3,369.77 3,342.85 2016 1,764.68 5,480.51 177.57 114.63 3,538.26 3,423.62 2017 1,852.92 5,754.54 186.45 177.54 3,715.17 3,537.64 2018 1,945.57 6,042.26 195.77 242.65 3,900.93 3,658.28 2019 2,042.84 6,344.38 205.56 310.08 4,095.98 3,785.89 2020 2,124.56 6,598.15 213.78 368.48 4,259.81 3,891.34 2021 1,900.00 2,209.54 6,862.08 222.33 427.28 2,530.21 2,102.93 2022 2,297.92 7,136.56 231.22 487.78 4,607.42 4,119.64 2023 2,389.84 7,422.02 240.47 550.05 4,791.71 4,241.66 2024 2,485.43 7,718.90 250.09 614.17 4,983.38 4,369.21 2025 1,600.00 2,559.99 7,950.47 257.60 667.75 3,532.88 2,865.13 2026 2,636.79 8,188.99 265.32 722.44 5,286.87 4,564.42 2027 2,715.90 8,434.65 273.28 778.30 5,445.47 4,667.18 2028 2,797.37 8,687.69 281.48 833.45 5,608.84 4,775.38 2029 2,881.30 8,948.33 289.93 887.95 5,777.10 4,889.15 2030 2,967.74 9,216.78 298.62 937.50 5,950.42 5,012.92 2031 (12,167.47) 3,056.77 9,493.28 307.58 982.12 18,296.40 17,314.28 FIRR = 7.1% 6.4% NPV at WACC = 27,714.73 22,249.83 ( ) = negative, FIRR = financial internal rate of return, NPV = net present value, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

46 Appendix 10

Table A10.2: Weighted Average Cost of Capital ADB Domestic Railway A. Financial Sources Loan Loans Bond Equity Total B. Amount (CNY million) 1,887.6 25,333.6 2,060.0 14,727.5 44,008.7 C. Weighting 4% 58% 5% 33% 100% D. Nominal cost 3.0% 5.9% 4.8% 8.0% E. Income tax rate 25% 25% 25% 0.00 F. Tax-adjusted nominal cost [D x (1 - E)] 2% 4% 4% 8% G. Inflation rate 1.6% 3.2% 3.2% 3.2% H. Real cost [(1+F) / (1+G) - 1] 2% 1% 1% 5% I. Weighted component of WACC 0.03% 0.68% 0.02% 1.56% Weighted average cost of capital 2.3% Source: Asian Development Bank.

5. Sensitivity analysis was conducted to test the impact of variations in traffic, in operation and maintenance costs, and in revenue levels (Table A10.3). The FIRRs remained higher than the WACC, and the project remained viable under the scenarios tested.

Table A10.3: Sensitivity Analysis Change FIRR Scenario (%) (%) 1.Base case 6.4 2. Passenger traffic decrease (10) 6.2 3. Freight traffic decrease (10) 5.3 4. Working expenses increase 20 5.5 5. Revenue decrease (10) 4.9 6. Revenue decrease (20) 3.2 ( ) = negative, FIRR = financial internal rate of return. Source: Asian Development Bank estimates.

C. Compliance with Financial Loan Covenants

6. Starting after the second full year of the project railway’s commercial operations, the loan agreement required that the TZYRC ensure operating efficiency and financial sustainability by maintaining (i) an operating ratio of not more than 70%, (ii) a debt-service-coverage ratio of at least 1.2, and (iii) a debt-to-equity ratio of not more than 65:35.

7. Based on the TZYRC’s actual performance during 2011–2013 and projections over the operational period, the company will be able to comply with all three ratio covenants beginning in 2015. The operating ratio will remain below 65%, mainly due to the favorable freight tariff granted to the TZR and effective cost control by the three railway administrations operating the railway. The debt–equity ratio will be reduced from an initial level of 67:33 to 65:35 in 2015 through the scheduled debt repayments. The debt-service-coverage ratio will remain above 1 over the operation period and can reach 1.2 in 2014.

Appendix 11 47

SOCIAL IMPACT AND POVERTY REDUCTION IN THE PROJECT AREA

A. Introduction

1. Construction of the Taiyuan–Zhongwei Railway (TZR) began in May 2006, and it was opened to traffic in January 2011. The TZR traverses 23 counties and districts in seven prefectural level cities in Shanxi province, Shaanxi province, and the Ningxia Hui Autonomous Region (NHAR). These counties and districts are in a less-developed and poor mountainous area. The social impacts and poverty reduction analysis conducted during preparation for the Taiyuan–Zhongwei Railway Project indicated that construction of the TZR would (i) provide an enabling environment for poverty reduction through improved access to markets, employment, advanced 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 and job creation, (ii) improve access to markets and open up opportunities for expansion of locally produced goods and services, (ii) generate additional employment opportunities in local communities, providing an additional source of income for people, including poor households in the project area, and (iv) generate additional demand for locally produced goods and services by incoming passengers and tourists. In addition, construction access roads, and local governments’ development of local roads from the stations to all levels of road network and poor villages will help extend the project benefits and opportunities to the rural, poor communities by (i) improving local infrastructure; (ii) reducing transport costs; (iii) increasing access to markets, employment, and other economic and social services; and (iv) improving conditions for economic growth shared by the poor. A social development action plan was also prepared and implemented to enhance the project benefits to local communities and people in the project area.

B. Sustainable Socioeconomic Growth in the Project Area

2. Construction of the TZR has contributed to regional socioeconomic development. Total project investments of CNY44 billion in the project area from 2006 to 2011 have stimulated local industrial development, particularly in the construction materials and energy sectors, as well as development in the services sector. Statistical data shows that socioeconomic conditions in the project area have improved rapidly. From 2006 to 2012, overall gross domestic product growth rates in individual project areas ranged from 128% to 530% (Table A11.1). Government fiscal revenues growth ranged from 136% to 533% over the same period (Table A11.2).

Table A11.1: Gross Domestic Product in the Project Area (CNY billion) Growth Province Prefecture/City 2006 2007 2008 2009 2010 2011 2012 2006-2012 Lvliang 38.2 50.0 63.0 61.2 84.6 113.1 123.0 222% Shanxi Jinzhong 38.5 47.0 56.8 63.7 76.4 89.0 98.6 156% Taiyuan 101.3 125.5 146.8 154.5 177.8 208.0 231.1 128% Shaanxi Yulin 43.9 67.2 100.8 130.2 175.7 229.3 276.9 530% Yinchuan 33.5 40.0 51.4 57.8 76.3 97.5 114.1 240% NHAR Wuzhong 11.6 14.4 17.5 19.0 21.7 27.2 31.2 169% Zhongwei 7.5 9.3 11.9 13.6 16.9 21.3 25.0 234% Total 274.7 353.5 448.2 500.0 629.4 785.4 900.0 228% NHAR = Ningxia Hui Autonomous Region. Sources: Shanxi Province Statistics Yearbook, 2012; Shaanxi Province Statistics Yearbook, 2012; Ningxia Hui Autonomous Region Statistics Yearbook, 2012.

48 Appendix 11

Table A11.2: Government Fiscal Revenues in the Project Areas (CNY billion) Province Prefecture/City 2006 2007 2008 2009 2010 2011 2012 Growth Lvliang 7.7 10.5 16.4 16.5 19.6 27.7 34.2 343% Shanxi Jinzhong 8.0 8.811.6 12.6 14.7 17.8 21.0 165% Taiyuan 19.2 24.0 30.7 27.9 32.2 39.3 45.4 136% Shaanxi Yulin 11.5 15.9 21.4 30.0 40.1 55.8 66.6 479% Yinchuan 3.0 5.4 6.5 9.3 13.8 18.0 18.7 525% NHAR Wuzhong 0.9 1.3 1.0 1.2 1.6 2.2 2.9 236% Zhongwei 0.5 0.6 0.9 1.3 1.6 2.8 3.0 533% Total 50.7 66.4 88.5 98.7 123.6 163.6 191.9 278% NHAR = Ningxia Hui Autonomous Region. Sources: Shanxi Province Statistics Yearbook, 2006-2012; Shaanxi Province Statistics Yearbook, 2006-2012; Ningxia Hui Autonomous Region Statistics Yearbook, 2006-2012.

3. The construction of the TZR and its operations have helped local governments significantly in attracting external investment. New industrial parks have been built close to the railway, and a growing number of enterprises have started up or expanded operations along the railway. Some of the railway stations were constructed specifically to serve large industry zones, such as the Ningdong National Key Industrial Development Zone in the NHAR. Investments particularly increased in the project areas that had no railway connections before. For example, Lvliang Prefecture attracted a total of about CNY 500 billion in outside investments in 2011 and 2012 (Table A11.3). In addition, the booming industrial parks play an important role in providing employment to local people.

Table A11.3: External Investments in the Project Areas (CNY billion) Province Prefecture/City 2006 2007 2008 2009 2010 2011 2012 Lvliang 15.83 12.18 10.02 0.80 1.50 308.82 191.20 Shanxi Jinzhong 0.64 1.35 0.53 0.55 0.73 4.23 0.74 Taiyuan 12.09 22.62 6.96 6.23 8.95 655.84 4.85 Shaanxi Yulin 9.56 53.50 86.62 ...... 197.30 215.90 Yinchuan 0.26 0.35 0.35 0.66 1.48 2.25 0.93 NHAR Wuzhong 2.41 ... 9.02 ... 16.81 ...... Zhongwei ...... 2.96 21.00 ... 15.90 14.50 …=no data available, NHAR = Ningxia Hui Autonomous Region. Source: Prefectural level city governments’ statistic bulletin, 2006-2012.

C. Increased Rural Income and Poverty Reduction

4. The rapid economic growth and increased fiscal revenues of the local governments has helped improve the livelihoods and incomes of local people, particularly the poor. According to government statistics for project counties, the per capita incomes of farmers in individual counties grew 103%—265% during 2006–2012 (Table A11.4). A trend analysis indicates that the rural income grew faster in those poorer areas than others from 2005 to 2012, which gradually narrows the gap and balances the development in the project area (Figure A11.1).

Appendix 11 49

Table A11.4: Rural Per Capita Income in Project Area (CNY/person) Province Prefecture/City 2006 2007 2008 2009 2010 2011 2012 Growth Lvliang 2,462 2,778 3,200 3,426 3,890 4,743 5,364 118% Shanxi Jinzhong 3,648 4,207 4,777 5,194 5,809 6,913 7,936 118% Taiyuan 4,917 5,561 6,355 6,828 7,611 8,888 10,079 105% Shaanxi Yulin 2,094 2,621 3,402 4,127 5,113 6,520 7,681 267% Yinchuan 3,800 4,302 4,917 5,389 6,161 7,070 8,068 112% NHAR Wuzhong 3,137 3,611 4,079 4,391 5,041 5,573 6,370 103% Zhongwei 2,762 3,124 3,572 3,853 4,439 5,178 5,927 115% NHAR = Ningxia Hui Autonomous Region. Sources: Prefectural level city l governments’ statistic bulletin, 2006-2012.

Figure A11.1: Rural Income Growth in Counties and Districts of Project Area

Xiaodian District Jinfeng District Qingxu County Yuci District Lingwu City Yongning County Jinzhong Development Zone Zhongning County Fenyang City Wenshui County Zhongwei urban area Yanchi County Jiaocheng County Suide County Liulin County Jingbian County Dingbian County Hengshan County Zizhou County Wubao County Hongsibao Development Zone Lishi District 2005 ‐ 2,000 4,000 6,000 8,000 10,00012,000 14,000 Δ(2012‐2005) Rural Income (CNY/person)

Sources: Local governments’ statistic bulletin, 2005, 2012.

D. Tourism Development

5. The project areas are rich in tourism potential. The opening of the TZR offers the basic condition for tourism development. The tourism resources along TZR include 58 national key cultural relics protection units, 13 national 4A and 5A tourist spots, and 2 national historic culture towns (Table A11.5). Local government statistics show that the tourism income in the project area reached CNY82.4 billion in 2011, 74% more than the CNY47.4 billion in 2010 before the

50 Appendix 11 railway opened. The increase was particularly great in Lvliang Prefecture and Yulin City, which had no major railway connections before the TZR. Tourism income increased by 112% in Lvliang and 154% in Yulin from 2010 to 2012 (Table A11.6).

Table A11.5: Tourism Resources along the TZR (Number) National National National National Key National National 4A and Industrial and Project Area Historic Cultural Relics Nature Forest 5A Agricultural Culture Protection Unit Reserve Park Tourism Tourism Town Spot Demonstrations Shanxi 40 1 5 0 9 8 Shaanxi 5 0 1 1 0 1 NHAR 13 42 1 4 3 Total 58 58 2 13 12 NHAR = Ningxia Hui Autonomous Region. Source: Han Ying. 2008. Study on Tourism Resources Development along TZR Alignment. Beijing.

Table A11.6: Tourism Income in Project Area (CNY billion) Growth, Province Prefecture/City 2010 2011 2012 2010–2012 Lvliang 5.2 7.7 11.0 112% Shanxi Jinzhong 11.4 13.5 21.6 90% Taiyuan 23.0 27.7 35.6 54% Shaanxi Yulin 2.3 3.0 5.9 154% Yinchuan 3.7 4.7 5.9 59% NHAR Wuzhong 0.8 0.9 1.1 36% Zhongwei 1.0 1.2 1.4 44% Total 47.4 58.7 82.4 74% NHAR = Ningxia Hui Autonomous Region. Sources: Prefectural level city local governments’ statistic bulletin, 2010- 2012.

E. Job Creation

6. The construction of the TZR generated local employment. According to the external monitor, railway construction had provided 365,480 person-years of work as of February 2012.1 A total of 54,840 person-years, or 15%, were provided by the local labor market, mainly for unskilled labor; and of this unskilled employment, 46,960 person-years (86%) went to laborers from poor households and 6,200 person-years went to women. Based on daily wages of CNY50–CNY160 from 2006 to 2011, CNY1.4 billion of wages was disbursed to local poor households during the construction period, and CNY124.0 million of this was paid to the women employed. The project thereby contributed to both poverty reduction and gender development in the project area.

7. The local procurement of construction materials and supplies also provided local opportunities for paid work. According to the social and poverty monitoring reports, expenditures

1 The figure was converted from the original statistic of 91.37 million person-days, based on the actual working days per year.

Appendix 11 51 on locally purchased construction materials totaled CNY11.4 billion, including CNY3.0 billion for sand, CNY1.2 billion for cement, CNY3.5 billion for stones, CNY2.2 billion for steel, and CNY1.4 billion for other construction materials. Meanwhile, the contractors and construction workers also spent about CNY630 million locally on personal consumption. Poor families sold about CNY420.0 million of construction materials and CNY 65.1 million of living goods due to the project. The material procurement and personal consumption also stimulated local economic development, provided indirect job opportunities, and increased the income of poor families in the project area.

8. Since the TZR opened to traffic in January 2011, local laborers have been hired to load and unload freight cars, as well as to work as security guards and maintenance staff for the stations and railways. With the growth of railway traffic, more direct, indirect, and induced employment opportunities will be generated for local laborers, particularly the poor.

F. Safe and Affordable Mobility

9. The TZR has provided a cheaper, more affordable, and much safer transport service for migrant laborers and local people, particularly the poor. This has also improved local mobility and consequently changed the lifestyles of local people and their social behavior. Train travel costs much less than travel by bus and, according to local officials in Lishi District in Lvliang Prefecture, the cheaper price, greater speed, and more convenience of using the TZR has resulted in many travelers choosing it over bus transport. According to a survey by the Taiyuan transportation administration, the passenger bus fares from Taiyuan to Lishi, Liulin, Wenshui, and Jiaocheng are CNY70, CNY72, CNY20, and CNY15 respectively, while the ticket price from Taiyuan to above counties/districts by train are only CNY28.5, CNY29.5, CNY12.5, and CNY10.5 respectively. Travel by the TZR is also much safer than bus travel, particularly in winter.

G. Gender Development

10. The construction and operation of the TZR has supported gender development in the project area. A significant number of laborers working on the TZR were women. They were typically engaged to clean and maintain trucks and other equipment, cook for construction teams, and do sanitation work at the construction sites. Female employees were paid wages equal to those of male employees for similar job types. The TZR project has also led to external investment and the establishment of enterprises in the project area, and a growing number of women are working in these enterprises. The availability of rail travel also enables women to work as migrant laborers outside the region and thereby increase their incomes.

H. Ethnic Minority Development

11. Ethnic minorities account for about 10% of the total population in the TZR project area. Nearly all are Hui. Some were affected by land acquisition. The few other ethnic groups in the area are located in urban centers and were not adversely affected. The socioeconomic status of rural Hui people is similar to that of the majority Han people. They are eligible for a series of preferential benefits provided to minority peoples by the People’s Republic of China government. Measures to mitigate adverse impacts of land acquisition on Hui people were included in the resettlement plan for the project, and project benefit enhancement measures were prepared in the social development action plan (SDAP).

52 Appendix 11

12. During construction of the TZR and implementation of the resettlement plan and the SDAP, local governments and the TZR central headquarters implemented the measures agreed in the resettlement plan and the SDAP to mitigate adverse impacts on minority communities and ensure that they received equal project benefits in a culturally appropriate way. These measures (i) reduced the amount of farmland acquisition by improving the project design to minimize adverse impacts on minority people whose livelihood depended mainly on agriculture, (ii) protected local ethnic minority communities from construction and disturbances, and rehabilitated the community facilities affected by project construction in a timely manner; (iii) Local Poverty Alleviation Office and the Women’s Federation carried out various skills training for the affected groups including ethnic minority people, (iv) increased compensation for affected schools to construct new school with better conditions, (v) provided job opportunities and use of local materials for construction, (vi) promoted awareness and prevention on HIV/AIDS/STIs in the ethnic minority communities, and (vii) opening of railway has promoted tourism development in project area and also benefited the economic development of their communities.

I. Health Care and Control of Communicable Diseases

13. The TZR and contractors along railway construction route provided health care and awareness campaigns for construction workers and took measures to control inflection by HIV/AIDs and sexual transactional diseases. The following steps were taken. (i) Construction companies organized annual physical examinations for all workers using the health resources of their staff hospitals or of a local hospital. Health files were maintained for all workers involved in construction during their employment. (ii) The TZR signed agreements with local hospitals close to the construction site to ensure that construction workers would receive timely medical care in case of emergency. (iii) The chefs in construction sites were required to have health certificates and receive physical examinations several times a year, and the cooking facilities were required to meet high sanitation standards. In general, all construction companies paid good attention to screening the health of workers and to the prevention of infectious disease, venereal disease, HIV/AIDs, and food poisoning. This prevented the spread of disease to the local population. No outbreaks of disease occurred during construction.

J. Monitoring and Evaluation

14. Southwest Jiaotong University (SJU) was engaged as the external agency to conduct monitoring and evaluation of implementation of the SDAP. The SJU submitted the first social monitoring report to the Asian Development Bank in October 2007. It submitted subsequent reports from 2008 to 2012 and a sixth report in September 2013. The reports concluded that the construction and operation of the TZR had greatly contributed to regional socioeconomic development, poverty reduction, gender development, and ethnic minority development.

K. Conclusions and Actions

15. In general, the construction and opening of TZR has had significant positive impacts on regional socioeconomic development and poverty reduction. These have included (i) its contribution to significant economic growth and government fiscal revenues in the project area; (ii) benefits to the poor and increased rural incomes in areas along the railway; (iii) job creation during railway construction and operation, as well as in booming industrial parks and in tourism, (iv) safer, faster, and more affordable mobility for local people and migrant laborers; and (v) improved gender development and ethnic minority development. Given that the development of expected freight traffic has not yet been fully achieved due to the delayed construction of

Appendix 11 53 industrial sidings and freight yards, the Taiyuan-Zhongwei-Yinchuan Railway Company should discuss ways to speed up this construction with local governments and enterprises. It is expected that the TZR will contribute further to socioeconomic development in the project area as its freight and passenger business serving local communities and local enterprises increases.

54 Appendix 12

LAND ACQUISITION AND RESETTLEMENT

A. Scope of Land Acquisition and Resettlement

1. The resettlement plan for the Taiyuan–Zhongwei Railway Project was prepared by the Ministry of Railways (MOR), the executing agency, during loan processing in March 2006. The resettlement plan addressed the permanent and temporary impacts expected to result from the project, including those related to the selection of the alignment and the construction of the Taiyuan–Zhongwei Railway (TZR), the station sites, station access roads, and related construction activities. The railway project was expected to involve land acquisition, demolition of buildings and houses, and resettlement of affected persons. Total land acquisition for constructing the railway line and railway stations was estimated to be 4,656 hectares (ha), or 69,845 mu1, of which 42% was cultivated dry land, 36% paddy land, 8% orchard, 3% vegetable plots, 3% woodland, and 7% wasteland. It was estimated that the average loss of land per household would be 15%, which meant that the number of people partially affected by land loss would be about 78,687 and those losing more than 25% of their land would total about 8,000. Building demolition was estimated to total 428,395 square meters (m2) and to require the relocation of 11,956 people. In addition, the temporary land acquired for construction purposes was estimated to be 1,872 ha (28,074 mu).

2. According to the Taiyuan-Zhongwei-Yinchuan Railway Company (TZYRC), most resettlement activities began in 2006 and those for the railway alignment were largely completed by the end of 2009. Land acquisition and resettlement for railway station sites occurred later and some house reconstruction is still ongoing for the last three resettlement sites, involving 526 households. In total, 64,550 mu of land was permanently acquired, which was 8% less than the estimate in the original resettlement plan. Of this, 33,257 mu (52%) was farmland, which was 47% less than estimated. This was due to the use of more bridges to replace subgrades and of more grassland or wasteland to minimize the amount of land use and the impact on the access roads of local communities. Consequently, a total of 33,786 persons were affected by land acquisition in 550 villages, which was 57% less than the estimate. A total of 929,197 m2 of buildings were demolished, which was 117% more than the estimate in the resettlement plan. The number of displaced persons was 26,052, which was 118% more than estimated. In addition, 30,493 mu of land were used temporarily during TZR construction, which was 9% more than the estimate. Table A12.1 shows the actual project impacts and those estimated in the resettlement plan approved in 2006.2

Table A12.1: Project Land Acquisition and Resettlement Impacts Resettlement Variation Item Unit Plan Actual Variation (%) A. Land permanently acquired mu 69,845 64,550 (5,295) (8%) of which, farmland mu 62,197 33,257 (28,940) (47%) B. Land used temporarily mu 28,074 30,493 2,419 9% C. Buildings demolished m2 428,395 930,787 502,392 117% D. Persons affected By land acquisition No. 78,687 33,786 (44,901) (57%) By house demolition No. 11,956 26,052 14,096 118% ( ) = negative. Sources: Taiyuan-Zhongwei-Yinchuan Railway Company and resettlement plan.

1 A mu is a Chinese unit of measurement (1 mu = 666.67 square meters). 2 The updated resettlement plan was prepared but was not formally cleared by ADB due to lack of agreement on survey method requirements from ADB.

Appendix 12 55

B. Resettlement Policy and Compensation Rates

3. Land acquisition and resettlement was implemented based on the resettlement plan, the PRC’s 1998 land administration law (amended in 2004), a 2004 decision of the State Council on deepening reformation and strengthening land administration, and the following agreements and government rules and regulations: (i) agreements on construction of the TZR between the MOR, the Ningxia Hui Autonomous Region (NHAR) government, the Shaanxi provincial government, and the Shanxi provincial government; (ii) the notice on construction of the Taiyuan-Zhongwei- Yinchuan Railway issued in 2006 by the Shaanxi provincial government office; (iii) notices of compensation standards for land acquisition and relocation for the Taiyuan-Zhongwei-Yinchuan Railway and the Yanchi–Zhongning Expressway issued in 2005 and 2006 by the Department of Land and Resources of the NHAR; (iv) documents issued by the Shanxi Development and Reform Commission in 2007 and the Shanxi Land and Resources Department in 2006; and relevant circulars issued by local governments during implementation of land acquisition and resettlement. Table A12.2 compares the actual land compensation rates under the project with the rates estimated in the original resettlement plan.

Table A12.2: Land Compensation Rates (CNY/mua) Shaanxi Shanxi Type of Land NHAR Province Province Dry Land RP 2,500 13,000 16,800 Actual 2,500-2,709b 12,000 14,400-17,100c Paddy Land RP 12,500 20,000 31,000 Actual 12,500-58,000b 19,000 21,600-32,000c Orchard RP 15,000 24,500 34,000 Actual ...... 25,650-40,000c Forest Land RP 12,000 7,000 7,000 Actual ... 6,000-8,600 4,000-12,000 Waste Land RP 300 800 800 Actual 300-800 ...... = no data available, RP = resettlement plan, NHAR = Ningxia Hui Autonomous Region. a A mu is a Chinese unit of measurement (1 mu = 666.67 square meters). b Higher compensation rates issued in 2010 were applicable to land acquisition for some railway stations in the NHAR. C The land compensation rates in suburban areas were higher than those in remote rural areas. Sources: Local governments’ implemented resettlement and compensation policies.

4. In general, the actual land compensation rates in the NHAR and Shanxi Province were similar to or higher than those in the resettlement plan. The compensation rates for dry land, paddy land, and orchards in Shaanxi Province were slightly lower than the estimate in the resettlement plan, while actual compensation rates for forest land were slightly higher on average. The difference between the actual rates and those in the resettlement plan were due mainly to the fact that the final rates to be applied for the TZR project had not yet been established for Shanxi and Shaanxi provinces during loan processing. The rates presented in the resettlement plan were based on the design institute’s estimates and information provided by officials to consultants during their field visits under the project preparatory technical assistance project. For this reason, the resettlement plan stipulated that the final rates would be fixed and disclosed to affected persons prior to land acquisition and demolition.

56 Appendix 12

5. The actual compensation rates for house demolition are provided in Table A12.3. These rates were similar to or slightly higher than those estimated in the resettlement plan. In addition to policy-based compensation, local governments and local communities mobilized additional resources to provide subsidies and assistance to help affected households in building new houses. For example, the house compensation rates in Shanxi Province were increased by CNY300–450 /m2 as a subsidy for house decoration, and the compensation rates for houses in suburban areas were increased by 20%-40%. The external report indicated that the house compensation rates reached CNY 1,300/m2 in Beige Town, Xiaodian District, and Taiyuan City. The compensation rate for a storied building was increased to CNY820–840/m2 in Lishi District and Luliang City. The compensation rate for cave dwellings was CNY500–680/m2 in Fenyang City after the house decoration subsidy was included.

Table A12.3: Building Compensation Rates Unit: CNY/m2 Type of Structure NHAR Shaanxi Shanxi Storied Building RP 450 500 550 Actual 450 600 400–700 Wood/Brick house RP 280 450 500 Actual 280–350 420 ... Cave dwelling RP ... 300 340 Actual ... 380 360 ... = not applicable, m2 = square meter, RP = Resettlement Plan, NHAR = Ningxia Hui Autonomous Region. Sources: Local governments’ implemented resettlement and compensation policies.

C. Resettlement Measures and Income Restoration

6. The three government shareholders of TZYRC—the two provinces and the NHAR— were responsible for funding the land acquisition and the resettlement implementation. They disbursed these funds to local railway resettlement support offices. All relocated households received compensation for buildings and attached properties from these offices. Displaced persons moved into new houses constructed either by themselves in the villages or by local governments in the concentrated resettlement sites. In addition to cash compensation for lost houses and properties, the affected households were provided with new housing plots in (i) the same village; or (ii) nearby concentrated resettlement sites, where public facilities were built by local governments. Affected households also received relocation subsidies, transitional allowances, and additional assistance in rebuilding new houses.

7. The resettlement approaches to house relocation and new house construction differed between localities. In the NHAR, only two concentrated resettlement sites were constructed, in Zhongning and Yongning counties. Since the affected villages were covered by the PRC’s New Countryside Program, all affected households, together with other villages, moved into new houses constructed by New Countryside Program. The costs of building the resettlement sites and their infrastructure were financed by the New Countryside Program. Due to limited land for new construction and the fact that the affected households were already living in close proximity, 27 concentrated resettlement sites were built for house relocation in Shaanxi Province in Wubao County, Suide County, Dingbian County, Zizhou County, and Hengshan County. A total of CNY143.84 million was spent on infrastructure for these resettlement sites. In Shanxi Province, 15 concentrated resettlement sites were constructed at a cost of about CNY65 million. The major sites are in Lishi District, Liulin County, and Luliang Prefecture. The planning and construction of concentrated resettlement sites were very time-consuming. They involved back-

Appendix 12 57 and-forth consultation with affected households to reach agreement with communities on resettlement site location, obtaining government approval on land use and design, tendering for contractors, and allocation of new houses or housing plots. A total of 45 concentrated resettlement sites were constructed to resettle 4,149 households, and 2,028 other households opted to self-relocate on scattered plots. By the end of 2013, most affected households had moved into new houses, but three concentrated resettlement sites for 300 households in Dingjiagou Village in Shaanxi and 190 households in Qianhouzhao Village and 36 households Chejiawan Village in Shanxi were still under construction. The members of these households were living in temporary resettlement sites that had water supply, electricity supply, access roads, and other necessary community facilities. ADB agreed with the executing agency and TZYRC on a time-bound action plan to speed up the construction progress and enable these affected households to move into new houses as planned (Table A12.4).

Table A12.4: Time-Bound Action Plan for Final Three Resettlement Sites Resettlement Activities Starting Time Completion Time Site Dingjiagou 1.Engineering acceptance 1 May 2014 31 July 2014 2.Allocation of homestead 1 May 2014 31 August 2014 3.Construction of new houses 1 September 2014 31 March 2015 4.Moving into new houses 1 April 2015 31 May 2015

Qianhouzhao 1.Construction of new apartments Ongoing 31 August 2014 and associated facilities 2.Allocation of new apartments 1 July 2014 31 August 2014 3.Moving into new apartments 1 October 2014 31 October 2014

Chejiawan 1.Construction of associated facilities 1 May 2014 31 July 2014 2.Allocation of new apartments 1 May 2014 31 July 2014 3.Moving into new apartments 1 August 2014 31 August 2014 Source: Asian Development Bank.

8. All affected villages were aware of the land compensation rates that had been implemented, and they received the full compensation according to resettlement policies in a timely manner. For those villages that still had sufficient land, the remaining lands were redistributed for all farmers within the village in a way that provide the affected persons with the same amount of farmland as those not affected. These villages used land compensation funds and resettlement subsidies for collective purposes or distributed the funds equally to all villagers. In those villages unable to readjust the distribution of farmland or where impacts were lower, the land compensation was paid directly to those farmers who lost land.

9. Local governments took various measures to help affected households restore the income lost due to land acquisition by the project. These mainly took the form of land-for-land exchanges, cash compensation, and social insurance by considering different local conditions on the basis of consultation and participation. In the NHAR, a few villages adjusted land distribution within the village to enable affected households to obtain land holdings equal to those of villagers not affected, but most affected villages adopted cash compensation on the basis of consultation, i.e. the land compensation funds were paid directly to affected villagers. In Shaanxi Province, all affected villages adopted the cash compensation approach, and the affected households in some seriously affected villages were also provided social insurance. These included the villages of Shilipu and Dingjiagou in Suide County. All affected persons in those two villages were classified as urban residents, which entitled them to more compensation that rural residents. They thus received resettlement allowances of CNY27,800 per person, a

58 Appendix 12 basic living allowance provided to urban residents in the PRC, and pension insurance. They also received skills training and were provided with job opportunities. In Shanxi Province, the local governments increased land compensation rates in some suburban areas, including Beige Town in Taiyuan City, Mocun Town in Liulin County, and urban planning areas in Lishi District. In addition to cash compensation and land adjustment in a few villages, the Shanxi provincial government also issued a policy on social insurance for land-loss farmers, and TZYRC paid a total of CNY83 million of social insurance fund to the Shanxi provincial social security department in July 2010. The affected persons in 15 villages are covered by this ongoing social insurance program. The sampling household survey conducted by the external resettlement monitor indicates that the overall average income of affected households has increased significantly from the levels before the project (117% from 2006 to 2012), which is in line with rural income growth (Table A12.5).

Table A12.5: Income Restoration in Sample of Affected Households (CNY/person) 2006 2012 Change Item Net income Share Net income Share 2006–2012 (CNY) (%) (CNY) (%) (%) 1. Agriculture 1,177.7 45.4 2,057.9 36.5 75 2. Forestry 256.8 9.9 236.8 4.2 (8) 3. Animal husbandry 264.6 10.2 315.7 5.6 19 4. Fishery 7.8 0.3 28.2 0.5 262 5. Other business 537.0 20.7 1,043.0 18.5 94 6. Local labor 280.2 10.8 772.4 13.7 176 7. Migrant labor 70.0 2.7 1,184.0 21.0 1,590 Annual net income 2,594.0 100.0 5,638.0 100.0 117 per capita ( ) = negative. Source: External Resettlement Monitoring Report.

D. Land Acquisition and Resettlement Cost

10. According to TZYRC, CNY4.97 billion of land acquisition and resettlement costs were disbursed, an increase of 236% on the CNY1.48 billion estimated in the resettlement plan. CNY1.24 billion was used for land acquisition and CNY1.32 billion for house compensation. The main reasons for the increase were the construction costs of concentrated resettlement sites, which were not included in the resettlement plan; more house demolition than expected; and costs for rehabilitating irrigation, water supply, and access road infrastructure. A mechanism under the project whereby the local governments’ resettlement costs were treated as an equity share in the railway company was unique, but it may encourage local governments to spend more on social and public facilities related to the resettlement. This is positive for affected persons, but such costs will need to be verified by a third party agency and the final equity share worked out by the Board of TZYRC.

Appendix 12 59

E. Institutional Arrangement

11. The resettlement and coordination office under TZYRC had overall responsibility for coordination and internal monitoring and evaluation of land acquisition and resettlement. Six full- time staff members worked in three construction headquarters established in the NHAR, Shaanxi, and Shanxi. In addition, local governments established resettlement and coordination offices to supervise implementation of land acquisition and resettlement. In the NHAR, a TZR railway construction support headquarters was established by the region’s government in May 2005, and county railway support leading groups were also set up in the cities, counties, and districts along the railway. In Shaanxi, the Shaanxi provincial railway construction leading group and the Yulin City coordination office were established. All cities, counties, and districts along the railway’s route were also asked to establish resettlement coordination offices or leading groups. Similar institutional arrangements were also made for resettlement in Shanxi Province to ensure smooth implementation.

F. Monitoring and Evaluation

12. Southwest Jiaotong University was engaged as the external agency to conduct external monitoring and evaluation for the project. They prepared and submitted the baseline resettlement monitoring report to ADB in January 2007 and submitted six resettlement monitoring reports during 2007–2013. ADB has requested that two subsequent resettlement monitoring reports be prepared to monitor and evaluate the progress in construction of the three unfinished concentrated resettlement sites. These reports will be submitted to ADB in December 2014 and June 2015.

G. Participation and Information Disclosure

13. Consultation and participation activities have been conducted during preparation and implementation of land acquisition and resettlement. These have involved (i) project information disclosure and consultation, (ii) resettlement policy disclosure and consultation through local media and posters, (iii) participation in detailed measurement survey and social economic survey, (iv) consultation on compensation standards with affected communities and affected people, (v) selection of resettlement sites, (vi) house rebuilding, (vii) job opportunity and income restoration, and (viii) participation in allocation of land compensation fund within the community or village. In general, the three issues that most concerned affected people were the use and allocation of land compensation funds, gaining job opportunities and restoring their incomes, and the selection of resettlement sites or housing plots for their resettlement. A grievance redress mechanism was set up at various levels to ensure that resettlement issues and complaints were received by local governments and TZYRC and handled in a timely basis.

14. Villagers met in each affected village to fully discuss the allocation of land compensation funds, the use of the compensation fund for community resources and facilities, and the selection of resettlement sites. A village financial watchdog was elected to monitor the use of collective compensation funds. The detailed expenditures were disclosed within the village. These measures ensured full participation by all villagers in discussions of how to use the compensation funds, as well as the security of the funds themselves. The external monitor did not receive complaints of misuse of community funds. In terms of job opportunities and income restoration, the affected villagers in remote areas expressed more concerns about land adjustments than those in suburban areas, where most had jobs or opportunities for employment in enterprises or the services sector. Resettlement of surplus laborers due to land loss was conducted on a voluntary basis by considering the specific skills and needs of affected

60 Appendix 12 people. The affected households expressed serious concerns in both urban and rural areas about the locations of resettlement sites and housing plots. These related to the long distances to farmlands, highways, and markets, as well as the condition of such facilities as water supply, electricity, heating, and access roads. Concentrated resettlement sites were constructed on the basis of consultation and participation. However, the time consumed on participation and consultation on location of resettlement sites delayed in resettlement implementation. Overall, affected persons appreciated the transparency of the process and the participatory and consultative processes used and were satisfied that resettlement was carried out properly and in a fair manner.

H. Lessons and Follow Up Actions

15. The lessons learned from the implementation of the complex land acquisition and resettlement requirements of this project can benefit future railway projects The first is that the land acquisition and resettlement costs should be adequately budgeted and fully incorporated in the project overall financial management. Second, the planning and preparation of concentrated resettlement sites should start as early as possible, particularly for those sites close to railway stations.

16. Given the remaining resettlement issues identified during the project completion review, the executing agency and TZYRC have agreed to coordinate closely with local governments to implement the time-bound action plan for the three uncompleted resettlement sites in Shanxi and Shaanxi provinces (para. 7). ADB will continue to follow up and monitor the implementation of the action plan through regular meetings with relevant parties, external monitoring investigation and reports, and special review missions in 2014 and 2015.

Appendix 13 61

ENVIRONMENTAL IMPACT ANALYSIS

A. Introduction

1. The Taiyuan–Zhongwei Railway Project constructed a 941 kilometer (km) electrified, Class I railway through Shanxi and Shaanxi provinces and the Ningxia Hui Autonomous Region (NHAR) in the People’s Republic of China (PRC). The construction included 347 bridges, with a total length of about 190 km; and 109 tunnels, with a total length of 180 km. The project also built 40 new stations, all are open to freight operation and 18 stations are open for passenger service.

2. The Asian Development Bank classified the project as category A for the environment. A summary environmental impact assessment (SEIA) was prepared based on a domestic environment impact assessment (EIA) and a soil erosion protection plan (SEPP) in February 2006. The SEIA concluded that the project would have environmental benefits by mitigating air pollution and improving energy efficiency. Potential adverse environmental impacts were to be minimized to acceptable levels by implementing adequately funded environmental management activities.

3. The domestic EIA report was approved by the State Environmental Protection Administration of the PRC in August 2006. The SEPP was approved by the government’s Ministry of Water Resources in March 2006.

B. Environmental Protection and Management

4. During construction, Taiyuan-Zhongwei-Yinchuan Railway Company (TZYRC) coordinated the implementation of the project environmental management plan (EMP). TZYRC issued a set of rules and procedures on environmental management. All contractors had a unit or office responsible for environmental protection. Supervision contractors oversaw environmental protection works at the construction sites. Xi’an Yellow River Engineering Supervision Company was engaged to supervise the SEPP implementation. Training on environmental management was conducted for project management staff, contractors, and engineers.

5. Now that the Taiyuan–Zhongwei Railway (TZR) is operating, environmental management mainly requires the maintenance of protective structures, the treatment of wastewater and solid wastes from stations and maintenance facilities, and environment monitoring. These tasks are coordinated by the engineering management unit of TZYRC. Mitigation measures have been undertaken to remedy adverse environmental impacts detected in the monitoring results.

6. At appraisal, it was estimated that the total cost of environmental protection and mitigation measures would be about CNY1.16 billion. According to TZYRC’s completion report, the actual total investment for environmental protection was CNY1.35 billion, which included investments for slope stabilization, ecological rehabilitation, embankment protection, and planting vegetation along the railway.

C. Environmental Monitoring

7. Environment monitoring was carried out adequately and in accordance with the monitoring program stipulated in the project EIA. A detailed monitoring plan developed at the

62 Appendix 13 early stage to guide the implementation of monitoring activities included the monitoring parameters, the required contents and frequency, and institutional responsibilities. Environmental monitoring was undertaken at two levels: (i) regular monitoring of on-site project impacts by contractors and construction supervision companies; and (ii) periodic environmental compliance monitoring by external monitors, who took samples for analysis in accordance with environment standards and technical codes.

8. During implementation, local environment monitoring stations undertook compliance monitoring of noise pollution, ambient air quality, and surface water quality along the railway alignment. The Soil and Water Conservation Monitoring Center of the Yellow River Commission was engaged to monitor soil erosion. Beijing OASIS Environmental Protection Technology Company was engaged as the external environmental monitor to oversee the EMP implementation, including the environmental monitoring plan. The external monitor visited work areas regularly and inspected environmental mitigation measures. The external monitor prepared 10 environmental monitoring reports, all of which were disclosed on the Asian Development Bank website.

D. Environmental Impacts and Mitigation Measures

1. Ambient Air Quality

9. The impact on air quality during construction came mainly from dust from construction traffic, and this was mitigated through frequent wetting of roads, as required in the EMP. Gas emissions from transport vehicles were minor and temporary. The TZR has no immediate mobile sources of air pollution because it uses electric locomotives in its operations. Forty-one coal-fired burners have been installed at 32 stations. All boilers conform to air quality standards of GB 13271-2001, in line the project EIA. Boilers will be inspected regularly to ensure that they are operating efficiently and emission standards are met.

2. Noise, Vibration, and Electromagnetic Radiation

10. During construction, noise impacts came mainly from (i) maintenance workshops; (ii) blasting in tunnels or quarries; and (iii) the operation of vehicles, plants, and earthmoving equipment. The impacts were limited due to the remote locations of major construction activities. Noise from blasting machinery and earthmovers were mitigated by using low-noise equipment during designated working hours. Construction vibration affected 107 households, which have been resettled with the necessary compensation in accordance with the resettlement plan. The noise from passing trains now that the TZR is operating is mitigated by 22,557 square meters of sound-insulating windows, as well as sound barriers, which have been installed at 31 noise sensitive locations. To minimize potential electromagnetic radiation impacts on television reception for those residents along the alignment, cable television has been installed where geographic conditions allow.

3. Surface and Ground Water

11. During construction, adverse impacts on surface water were mainly from siltation and wastewater from construction sites and workers’ camps. All the mitigation measures proposed were undertaken appropriately. The gushing of water caused by construction of the Lvliang Shan Tunnel affected the water supply of villages downstream. With protective measures, water discharge has been stabilized at 200–400 cubic meters (m3) per hour. A dam was built to store water flow from the tunnel and to secure water supply in the region. Alternative water supply

Appendix 13 63 facilities were also constructed for local villages. The major potential pollution source from the TZR’s operations is wastewater from shops, maintenance facilities, and stations. Forty-seven wastewater treatment facilities were built for wastewater treatment to make sure that all discharges comply with national standards.

4. Solid Wastes

12. During construction, construction disposal was the main source of solid waste. The project used 170 borrow pits for 52.1 million m3 of soil and used 289 spoil or disposal sites for a total of 51.5 million m3 of construction disposals. The borrow pits and disposal sites have been restored and rehabilitated through retaining structures, drainage systems, and the vegetative measures. After restoration, 8 borrow pits or grounds and 52 disposal sites have been reused for resettlement sites, animal husbandry, or industrial plants. Domestic solid wastes from stations during operation will be collected and disposed of according to domestic regulations.

5. Soil Erosion

13. Soil erosion during construction was caused by runoff during rainfall seasons and occurred mainly at terrain cuts and embankments along the rail route, at borrow and disposal sites, and at temporary access roads. Erosion control measures were undertaken effectively and according to the specifications in the SEPP. Protective engineering structures included retaining walls, drainage systems, intercepting ditches, topsoil management, and slope stabilization works. Vegetative cover measures were also applied to enhance the effectiveness of engineering structures. All borrow pits and disposal sites have been restored and rehabilitated.

6. Sand Dunes

14. The project SIEA indicated that sand dune migration had the potential to impact the TZR’s infrastructure in the NHAR section. Stabilization measures were undertaken to prevent sand dunes from moving. These included the planting of shrubs and positioning of low wire fencing. A 20-meter zone was created on each side of the railway’s roadbed using these measures. Windbreaks were planted on the outlying sides of these areas. The effects of these measures will be monitored continuously by the local forestry agency responsible for desertification control.

7. Nature Reserves

15. The TZR passes through two national nature reserves in the NHAR—the Habahu National Nature Reserve and the Baijitan National Nature Reserve—as well as a provincial nature reserve in Shanxi—the Xuegongling Nature Reserve. The railway intersects 17.15 km of the test zone and 2.5 km of the buffer zone of the Habahu National Nature Reserve. The alignment passes through 13.7 km of the test zone of Baijitan National Nature Reserve. In Shanxi, the TZR cuts across the test zone of Xuegongling Nature Reserve about 2,050 meters by the Lvliang Shan Tunnel. All government approvals were obtained for construction activities within the nature reserves. Construction was undertaken and managed strictly in accordance with the EMP to minimize adverse impacts on the natural landscape and ecosystems. No disposal sites and borrow sites were set in the nature reserves. All construction sites in the nature serves have been rehabilitated. The 30-meter wide greenbelt was planted on both sides of the railway in Baijitan Nature Reserve and Habahu Nature Reserve to mitigate potential impacts to flora and fauna, as planned by the SEIA. The impact on water resources in

64 Appendix 13

Xuegongling Nature Reserve, described in para. 11, is being monitored closely by the local water resources management body. Regular monitoring of nature reserves are conducted by local forestry administration bureaus.

8. Other Impacts

16. The engineering design has considered potential impacts from seismic activities. Mitigation measures included slope extending, subgrade surface widening, and dual-direction geotechnical gratings in the crushed stone layer. Exhaust fans are installed in tunnels to lower interior gas level. Tunnel gas is regularly monitored to ensure a good tunnel safety.

E. Conclusions

17. During construction, all the contractors fulfilled their obligation to protect the environment and to implement mitigation measures. The adverse effects of the project construction on the surrounding environment were thus minimized. No rare natural resources were affected as a result of the project. During operation, the impacts on the ambient environment have been minor. The operation of the railway will provide environmental benefits from emission reduction and improved energy efficiency. A recent research indicated that diverting traffic from road to rail in the PRC resulted in energy savings of 169 kilograms of coal equivalent per 1,000 passenger-km transportation and 1,259 kilograms of coal equivalent per 1,000 ton-km of freight transportation. The project has triggered significant shift from road to rail transport and generated energy saving benefits and reduction in air pollution.