Document of The World Bank

Public Disclosure Authorized Report No: ICR0000633

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-46770)

ON A

Public Disclosure Authorized LOAN

IN THE AMOUNT OF USD250 MILLION

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR THE

HUBEI XIAOGAN-XIANGFAN HIGHWAY PROJECT Public Disclosure Authorized

June 27, 2008

Transport, Energy and Mining Sector Unit Sustainable Development Department Public Disclosure Authorized East Asia and Pacific Region

CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2007)

Currency Unit = Yuan (Y) Y 1.00 = USD 0.14 USD 1.00 = 7.32 Y

FISCAL YEAR January 1 to December 31

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance Strategy CPS Country Partnership Strategy E&M Electrical and Mechanical EAP Environmental Action Plan EIA Environmental Impact Assessment EIRR Economic Internal Rate of Return ENPV Economic Net Present Value FIDIC Fédération Internationale Des Ingénieurs-Conseils FIRR Financial Internal Rate of Return FNPV Financial Net Present Value GOVIA Gross Output Value of Industry and Agriculture ICR Implementation Completion and Results Report ISR Implementation Status and Results HPCD Hubei Provincial Communications Department m Million M&E Monitoring and Evaluation MOC Ministry of Communications NEN National Express Network (new name for the NTHS) NH3 Third National Highway Project NH4 Fourth National Highway Project NTHS National Trunk Highway System O&M Operations and Maintenance PAD Project Appraisal Document PAP Project Affected Persons PCD Provincial Communications Department PDO Project Development Objectives QEA Quality at Entry QSA Quality of Supervision PIP Project Implementation Plan PMO Project Management Office RAP Resettlement Action Plan RPF Resettlement Policy Framework RRIP Rural Road Improvement Program RMB Renminbi (Chinese Yuan) XXE Xiaogan-Xiangfan Expressway

Vice President: James W. Adams, EAPVP Country Director: David R. Dollar, EACCF Sector Manager: Junhui Wu, EASTE Project Team Leader: Christopher R. Bennett, EASTE ICR Team Leader: Christopher R. Bennett, EASTE

China Hubei Xiaogan-Xiangfan Highway Project

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 6 3. Assessment of Outcomes...... 14 4. Assessment of Risk to Development Outcome...... 21 5. Assessment of Bank and Borrower Performance ...... 22 6. Lessons Learned ...... 24 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...... 26 Annex 1. Project Costs and Financing...... 27 Annex 2. Outputs by Component ...... 28 Annex 3. Economic and Financial Analysis...... 31 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 39 Annex 5. Beneficiary Survey Results...... 41 Annex 6. Stakeholder Workshop Report and Results...... 42 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR...... 43 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders...... 44 Annex 9. List of Supporting Documents ...... 45 MAPS

A. Basic Information Hubei Xiaogan- Country: China Project Name: Xiangfan Highway Project Project ID: P070441 L/C/TF Number(s): IBRD-46770 ICR Date: 06/27/2008 ICR Type: Core ICR PEOPLE'S REPUBLIC Lending Instrument: SIL Borrower: OF CHINA Original Total USD 250.0M Disbursed Amount: USD 221.7M Commitment: Environmental Category: A Implementing Agencies: Hubei Provincial Communications Department Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 07/10/2001 Effectiveness: 02/27/2003 02/27/2003 Appraisal: 05/06/2002 Restructuring(s): Approval: 09/17/2002 Mid-term Review: Closing: 12/31/2007 12/31/2007

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Low or Negligible Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance: Performance:

i C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Satisfactory Closing/Inactive status:

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Roads and highways 90 90 Sub-national government administration 10 10

Theme Code (Primary/Secondary) Infrastructure services for private sector development Primary Primary Municipal governance and institution building Secondary Secondary Rural services and infrastructure Secondary Secondary

E. Bank Staff Positions At ICR At Approval Vice President: James W. Adams Jemal-ud-din Kassum Country Director: David R. Dollar Yukon Huang Sector Manager: Junhui Wu Jitendra N. Bajpai Project Team Leader: Christopher R. Bennett Michel Bellier ICR Team Leader: Christopher R. Bennett ICR Primary Author: Christopher R. Bennett

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The objective of Hubei Xiaogan-Xiangfan Highway Project is to provide a more effective, safe and efficiently managed transport infrastructure to sustain and support socio-economic development, trade, and regional integration in Hubei province and improve transport links to western lagging regions.

The project, when completed, will offer the following socio-economic benefits to Hubei province and other areas influenced by the project:

ii

* Increased transportation capacity and the consequent decrease in traffic congestion in the Xiaogan-Xiangfan corridor and regional and economic integration with the less developed western areas of Hubei province through the construction of Xiaogan- Xiangfan Expressway.

* Improved accessibility in low income areas in Hubei province through a program of rehabilitation and upgrading of rural roads in poor counties.

* Improved management and maintenance of roads and better road safety conditions through the provision of training, technical assistance and equipment to Hubei Provincial Communication Department (HPCD) and related provincial road agencies.

Revised Project Development Objectives (as approved by original approving authority)

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Ave. daily traffic on NR316 (A-B) Xiaogan-Yunmeng (B-C) Yunmeng-Anlu (C-D) Anlu-Fushui (D-E) Fushui-Suizhou Indicator 1 : (E-F) Suizhuo-Xinlong (F-G) Xinlong-Zaoyang (G-H) Zaoyang-Shuangguo (H-I) Shuangguo-Zhangwan (I-J) Zhangwan-Xiangfan (A-B) 10,120 3,867 (B-C) 9,756 4,013 (A-C) 5,111 (C-D) 7,668 4,581 Value (D-E) 7,159 4,342 (C-E) 4,856 quantitative or (E-F) 7,186 2,657 Qualitative) (F-G) 6,975 3,736 (E-H) 3,447 (G-H) 7,943 4,882 (H-I) 8,657 4,217 (H-J) 5,451 (I-J) 10,040 8,385 Date achieved 12/31/2000 12/31/2006 12/31/2007 The traffic on the existing roads is higher than forecast. This is due to the fact Comments that i) there is less traffic in the corridor than forecast; and ii) the diversion rate (incl. % for the corridor traffic is 55%, compared to the 50-68% forecast (see Table achievement) A3.3). Indicator 2 : Average daily traffic on XXE (veh/day)

iii (A-C) Xiaogan-Anlu (C-E) Anlu-Suizhou (E-G) Suizhou-Zaoyang (G-J) Zaoyang-Xiangfan (A-C) 0 7,171 5,794 Value (C-E) 0 6,953 5,507 quantitative or (E-G) 0 9,993 3,909 Qualitative) (G-J) 0 7,164 6,180 Date achieved 12/31/2000 12/31/2006 12/31/2007 Comments Target values are from traffic analysis in Annex 4. Traffic is lower than forecast, (incl. % reflecting a lower diversion rate & corridor traffic which on some sections was achievement) lower than forecast. Indicator 3 : Accident rates on NR316/NR316 and XXE (per 100m veh) Value quantitative or 65 45 45 Qualitative) Date achieved 12/31/2000 12/31/2006 12/31/2006 Comments (incl. % The accident rates were significantly reduced and the project met the target rate. achievement) Average daily traffic on RRIP road sections (1) Dunbao-Banqiao Indicator 4 : (2) Changwan-Shiyao (3) Quanxi-Xinmatou Value (1) 447 630 392 quantitative or (2) 339 528 451 Qualitative) (3) 362 547 350 Date achieved 12/31/2000 12/31/2006 12/31/2006 Comments As with the traffic for the main corridor, the traffic on the RRIP is lower than (incl. % forecast. Two of the roads are carrying less traffic than the baseline data. It was achievement) not possible to establish the cause of this. No. of days RRIP road sections are closed to traffic (1) Dunbao-Banqiao Indicator 5 : (2) Changwan-Shiyao (3) Quanxi-Xinmatou Value (1) 65 6 0 quantitative or (2) 75 4 0 Qualitative) (3) 60 0 0 Date achieved 12/31/2000 12/31/2006 12/31/2006 Comments All three target areas now have roads open all year, which exceeded the project's (incl. % goals. achievement) Average household income in areas served by RRIP road sections (RMB) (1) Dunbao-Banqiao Indicator 6 : (2) Changwan-Shiyao (3) Quanxi-Xinmatou Value (1) 5,810 8,970 8,876 quantitative or (2) 5,052 7,900 7,900 Qualitative) (3) 6,158 9,560 9,678

iv Date achieved 12/31/2000 12/31/2006 12/31/2006 Comments The household incomes in all areas increased, however, it is impossible to (incl. % confirm what portion of this was due to the project as opposed to the general achievement) development in Hubei. High school enrollment in areas served by RRIP road sections (% of teenagers) (1) Dunbao-Banqiao Indicator 7 : (2) Changwan-Shiyao (3) Quanxi-Xinmatou Value (1) 2.3 2.9 3.1 quantitative or (2) 3.5 4.3 4.1 Qualitative) (3) 3.9 4.4 4.3 Date achieved 12/31/2000 12/31/2006 12/31/2006 Comments All areas experienced an increase in enrollment. One area exceeded the target by (incl. % 0.2% while the other two areas were 0.1 - 0.2% lower than the target. achievement) No. of treated black spots: Indicator 8 : (1) LRIP Prefectures (2) Other Roads Value (1) 0 165 165 quantitative or (2) 0 60 45 Qualitative) Date achieved 12/31/2002 12/31/2006 12/31/2007 Comments The target was met for the selected prefectures, but was 25% lower for the other (incl. % roads due to funding limitations. achievement)

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1 : % of civil works completed on XXE Value (quantitative 0% 100% 100% or Qualitative) Date achieved 12/31/2000 12/31/2005 06/30/2006 Comments Although the expressway opened in 2005 as scheduled, some minor additional (incl. % works delayed full completion until June 2006. achievement) Indicator 2 : % of works completed under RRIP Value (quantitative 0% 100% 100% or Qualitative) Date achieved 12/31/2000 12/31/2007 12/31/2007 Comments (incl. % Completed on schedule. achievement)

v % of completed training (person/months): (1) Domestic Indicator 3 : (2) Overseas

Value (1) 0% 100% 100% (quantitative (2) 0% 100% 100% or Qualitative) Date achieved 12/31/2000 12/31/2004 06/30/2006 Comments The domestic training was fully achieved, although less overseas training than (incl. % planned was done. This was due to delays in the domestic approval process, achievement) outside of the HPCD control, and overlap NH4 project training. Indicator 4 : % of equipment procured Value (quantitative 0% 100% 100% or Qualitative) Date achieved 12/31/2000 12/31/2005 06/30/2006 Comments (incl. % All equipment was procured and put into operation. achievement) % of road pavement maintenance procured by contract (1) Expressways Indicator 5 : (2) Class 1 and 2 (3) Other Classes Value (1) 0% 100% 100% (quantitative (2) 0% 70-80% 70-80% or Qualitative) (3) 0% 30% 30% Date achieved 12/31/2000 12/31/2007 12/31/2007 Comments There has been a stronger trend than anticipated towards maintenance by contract (incl. % in Hubei. It is anticipated that the remaining Class I and II roads will also be achievement) under maintenance contracts in the near future. Indicator 6 : % of Institutional Strengthening activities completed Value (quantitative 0 100% 100% or Qualitative) Date achieved 12/31/2002 12/31/2007 12/31/2007 Comments (incl. % All institutional strengthening activities were completed on the project. achievement)

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 12/16/2002 Satisfactory Satisfactory 0.00 2 04/11/2003 Satisfactory Satisfactory 2.50 3 09/17/2003 Satisfactory Satisfactory 37.80 4 11/12/2003 Satisfactory Satisfactory 60.22

vi 5 06/14/2004 Satisfactory Satisfactory 96.16 6 12/23/2004 Satisfactory Satisfactory 133.67 7 05/12/2005 Satisfactory Satisfactory 152.92 8 01/24/2006 Satisfactory Satisfactory 198.20 9 12/18/2006 Unsatisfactory Unsatisfactory 208.29 10 05/21/2007 Satisfactory Satisfactory 214.45

H. Restructuring (if any) Not Applicable

I. Disbursement Profile

vii 1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

At appraisal, China’s road network—some 1.7 million km—was relatively low compared to its area and population. To address this issue, the Chinese government had been making major investments in road construction. As shown below, there were significant increases in the road network length for all road classes.

Percentage Increase in Road Length Period Total Express- Class I Class II Class III Class IV Length way 1980-1990 1.5% 29.6% 13.2% 4.6% 2.8% 1990-1995 2.4% 32.6% 29.6% 14.4% 4.1% 2.9% 1995-2000 7.7% 50.0% 21.4% 15.9% 8.1% 5.4% 2000-2003 2.5% 22.2% 5.8% 6.0% 2.1% 2.1% 1990-2003 4.4% 36.5% 20.6% 13.0% 5.1% 3.7% Source: People’s Republic of China: China Expressway Retrospective Study – June 2006

During the periods of the 8th, 9th and 10th Five-Year Plans (FYP), covering the years 1990 through 2005, China completed nearly 44,000 km of high-grade tolled expressways comprising the National Trunk Highway System (NTHS), or as it is now called the National Expressway Network (NEN). The NEN is also called the “7-9-18 Highway Network” and is to be completed by 2020. Incorporating and expanding the NTHS, this highway network will have some 85,000 km of high-grade expressways consisting of seven capital radials, nine north-south major highways, and 18 east-west corridors. The NEN design goal is to reach more than 1 billion people in China by connecting all provincial capitals and large cities of more than 500,000 inhabitants with cities of more than 200,000 inhabitants.

The Xiaogan-Xiangfan Expressway (XXE) is a key element of the NEN as part of the Shanghai-Wuhan-Xi’an-Urumqi corridor. Within Hubei, it provides access to the north-west region of Hubei province where there are major automobile manufacturing plants.

The investment was timely since China’s economy was growing by 8 to 10% annually, and has continued to do so. This economic growth generated high growth in transport demand and a rapid shift towards highway transport. The development of a road network linking lagging western areas with the rest of the country has accelerated economic development in these less developed areas.

The Bank’s sector work identified the following main challenges to the sector:

ƒ meeting investment needs to sustain economic development, trade and integration;

- 1 - ƒ improving accessibility to remote/low income areas; ƒ fostering sustainable road sector management; and, ƒ addressing road traffic safety issues.

The sector issues to be addressed by the project were: (i) promoting economic growth, improving regional and market integration, and facilitating trade; (ii) reducing poverty in low income western region and other remote areas of Hubei province by improving their accessibility; and (iii) strengthening provincial road institutions, supporting their transition towards market based road activities and improving the efficiency of highway management, especially road maintenance, traffic safety, and the environmental and social impacts of highway construction and operations.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

The project’s development objective was to provide a more effective, safe and efficiently managed transport infrastructure to sustain and support socio-economic development, trade, and regional integration in Hubei province and improve transport links to western lagging regions.

This would be done through the following outputs:

ƒ increased transportation capacity and the consequent decrease in traffic congestion in the Xiaogan-Xiangfan corridor and regional and economic integration with the less developed western areas of Hubei province through the construction of the XXE; ƒ improved accessibility in low income areas in Hubei province through a program of rehabilitation and upgrading of rural roads in poor counties; and ƒ improved management and maintenance of roads and better road safety conditions through the provision of training, technical assistance and equipment to Hubei Provincial Communication Department (HPCD) and related provincial road agencies.

A number of key indicators were established for the project and are in the Project Appraisal Document (PAD), Section A.2. The main indicators were: (i) average daily traffic on the XXE and the existing NR316; (ii) accident rates on NR316; (iii) average daily traffic on the rural roads in the Rural Road Improvement Program (RRIP); (iv) the number of days RRIP roads were closed; (v) the average household income in the RRIP road areas; (vi) the high school enrollment in the RRIP road areas; and (vii) the number of black spots treated.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

The PDO and the key indicators were not revised.

- 2 - 1.4 Main Beneficiaries

The major beneficiaries of the project were:

ƒ The communities along the expressway corridor and the local communities and road users in the areas served by the RRIP. As noted in the XXE PAD, there were some 36 million people in 1998 living in the cities and counties that would benefit to some extent from the expressway, with some 6.8 million directly served by the project. The major benefits include: (i) reduction in travel time and vehicle operating costs; (ii) improved road geometry making for a smoother and more comfortable ride; (iii) reduced traffic interference; and (iv) safer traffic conditions on existing roads. ƒ Residents of low-income counties benefit from improved local roads resulting in better access to markets, education, health, and other social services. ƒ In the longer-term, the province shall benefit as a result of the project due to development of a tourism industry and the resulting economic growth. ƒ The intercity traffic between cities in the corridor and beyond through reduced travel distances, travel time savings, vehicle operating costs, and reduced traffic accidents;. ƒ The HPCD and related institutions from institutional strengthening and training activities covered by the project.

1.5 Original Components (as approved)

Component 1: Increased Highway Capacity and Regional Integration: (USD611.3 million including contingencies)

Construction of the Xiaogan-Xiangfan Expressway (XXE): (USD505.6 million including contingencies)

The construction of the 243.5 km long XXE was the main investment. Providing access to the north-west area of Hubei Province, it linked several major industrial and hub cities including Wuhan (provincial capital), Yunmeng (250,000 pop.), Anlu (40,000 pop.), Suizhou (340,000 pop), Zaoyang (210,000 pop.) and Xiangfan (789,000 pop.)1.

Its eastern terminus is the Beijing – Zhuhai expressway which is a major north-south expressway in China. Designed according to Ministry of Communications (MOC) standards, the XXE was 2 x 2 lanes with a design speed of 100 km/h and a subgrade width of 26 m. It includes 14 interchanges, three management centers, three

1 All populations given are those at the time of appraisal.

- 3 - maintenance centers, four pairs of service areas, four pairs of parking areas, and necessary traffic management, operations and maintenance (O&M) equipment.

Construction of Interconnecting Roads: (USD15.6 million including contingencies)

This sub-component consists of three Class II interconnecting roads with a total length of 31 km. These link the XXE interchanges to Yunmeng, Suizhou and Zaoyang to ensure good connections to these three cities and accommodating the increased traffic levels.

Construction Supervision: (USD16.1 million including contingencies)

Supervision of construction activities was undertaken by a combined team of domestic engineers, technicians and other personnel, supported by international engineers integrated into the supervisory organization.

Land Acquisition and Resettlement (USD74 million including contingencies)

This sub-component consisted of establishing the framework for resettlement and undertaking all resettlement activities for the XXE and the interconnecting roads.

Component 2: Improved Accessibility in Poor Counties (RRIP): (USD66.2 million including contingencies)

This component was designed to improve accessibility to low-income areas. The activities consisted of rehabilitating and/or upgrading existing road sections to Class II, III, or IV levels. The objective was to ensure all weather road access in affected areas, linking them to townships and the provincial highway system, thereby improving population access to markets, facilities and social services.

Component 3: Institutional Development and Road Sector Management: (USD10.9 million including contingencies)

Capacity Strengthening (USD1.2 million including contingencies)

This sub-component included: (i) training program for government agencies on highway planning, design, supervision, road safety, and management and operation; and, (ii) the development of the provincial Road Training Center to improve training quality and knowledge dissemination.

- 4 - Highway Maintenance Management (USD0.3 million including contingencies)

The activities under this sub-component included: (i) further development of maintenance by contracts, including testing of the performance-based maintenance model as an alternative contractual scheme; and (ii) development and piloting of a policy to address vehicle overloading.

Establishment of a Shareholding Expressway Company (USD0.2 million including contingencies)

A shareholding company was to be established and the benefits of this approach in terms of increasing the efficiency of the toll network management to be assessed.

Road Traffic Safety (USD0.4 million including contingencies)

The road traffic safety sub-component included the development and implementation of a multi-pronged road traffic safety agenda based on an Accident Analysis System. This agenda included: (i) establishment of a Road Traffic Safety Unit; (ii) development of expertise, tools and processes to address road traffic safety issues; (iii) a scaling up of black spot treatment practices throughout the province; and (iv) identification and testing of a road safety village program.

Provision of Equipment (USD8.7 million including contingencies)

This sub-component consisted of procurement of equipment to monitor: (i) construction quality; (ii) environmental safety during construction; and (iii) ensure satisfactory traffic operations.

1.6 Revised Components

There were no formal revisions to the project components.

1.7 Other significant changes

The only major change to the project was the upgrading of the interconnecting roads from the two-lane roads agreed at the time of appraisal to four-lane roads. As discussed in Section 2.2, this had major implications on the safety of the roads. After consultations with the Bank, the HPCD retrofitted the roads to include the necessary safety features.

- 5 -

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

A. Preparation

The project was well prepared and designed with consideration of the experiences on previous highway projects in China. Various risks were considered in the design including: insufficient geotechnical investigations, inadequate designs, insufficient bid documents, resettlement delays, insufficient quality control, and late tendering of E&M facility components. These, along with other risks, were discussed with the HPCD who took the following active steps to mitigate them: (i) establishing the resettlement organization early on in the project and using public consultations to improve the designs; (ii) utilizing an international consultant to review the designs and advise HPCD on technical elements and bid documents; (iii) tendering the E&M works early on in the project; and (iv) supervising the project using FIDIC rules.

Particular attention was paid to institutional strengthening and policy dialog, which a 1999 OED assessment of the China portfolio had identified as an area of importance for the sector. As the third project in Hubei province, after the third and fourth national highway projects (NH3 and NH4), the outcomes from previous institutional strengthening activities were carefully considered during project design. The design was further enhanced by strengthening the preparation team with an experienced institutional and policy expert.

With regard to resettlement, as described below, the project design paid particular attention to minimize the impact on agricultural land and on communities along the alignment. The project undertook an inventory of affected assets, a socio-economic survey, and a social assessment during the preparation stages, supported by continuous consultations with the Project Affected Persons (PAPs). These consultations resulted in modifications to the project alignment in several places to reduce the impact of relocation and adverse environmental effect on the communities along the route. Compensation rates were established based on replacement costs for various affected assts, and land compensation rates based on the highest average annual output value. The project prepared a Resettlement Action Plan (RAP) as well as a Resettlement Policy Framework (RPF), for application on local roads in the event that land acquisition and resettlement was necessary. These materials were made available to PAPs for review and comment during the project’s preparation phase.

B. Project Design

The project design reflected lessons learned on other projects in China, particularly the NH3 and NH4 projects in Hubei where foreign consultants were used to review - 6 - the suitability of the designs. The following key issues were addressed in the project design: (i) selecting the optimal alignment, to avoid and minimize impacts on villages and communities along the alignment; (ii) minimizing the use of agricultural land; (iii) avoidance of environmentally sensitive areas; (iv) adopting appropriate design standards to reflect the traffic forecasts; and (v) strengthening geological reconnaissance and hydrological surveys.

The design teams carefully considered the options available to mitigate the negative impacts of the project on other existing infrastructure, reduce land acquisition and resettlement, and limit impacts to the environment. As an example of environmental consideration, the alignment was: (i) shifted by about 6 km to avoid a direct impact on the ancient Ginkgo forest near Anlu—one of the last remaining Ginkgo forests in Hubei, and, (ii) to avoid a direct impact on the Baizhoshan Natural Forest Park, passing 1.2 km north of the park2.

The design also mitigated smaller environmental impacts; for example, a surface water drainage collection system was fitted to the bridge passing over the Qingshuihe Reservoir to collect, test and, if necessary, divert surface water runoff from draining into the reservoir. Additionally, the Shuanggou Middle School and Yandian Community Hospital were fitted with double glazed windows to mitigate excess noise from the expressway.

The overall design approach was therefore viewed as thorough and technically sound.

C. Quality at Entry

There was no Quality at Entry rating by QAG for the project.

D. Project Risks

In the PAD all risks were identified as negligible (N) or modest (M). The overall risk was modest. This was based on the previous experience in the province and the commitment to implementing similar projects in China. The key risks, and how they were addressed in the design, were as follows:

ƒ Insufficient traffic (M): (i) careful review of traffic studies; and (ii) proper setting of toll rates.

2 As part of the discussions on the park, the HPCD agreed to finance a car park to be built about 300 m from the park entrance and to provide electric cars to ferry visitors. The HPCD also agreed to fund garbage receptacles, flush toilets, septic tanks, etc. However, these activities were not required as the local authority did not proceed with the overall development plan for the park.

- 7 - ƒ Poor quality engineering designs and cost estimates (M): (i) build on experience from NH3/NH4 projects; and (ii) review by international experts at an early stage of the project. ƒ Inadequate quality of construction (M): The design called for this to be minimized through: (i) quality tender documents; (ii) careful contractor selection; and (iii) adequate supervision arrangements. ƒ Delays in land acquisition and resettlement (M): Mitigation through: (i) early establishment of the resettlement management organization; (ii) staff training on resettlement; and (iii) frequent Bank supervision during early years of implementation.

As evidenced by the experiences through implementation and operation, the risk assessments were reasonable and the appropriate mitigation measures were put in place. In spite of the efforts of the task team during preparation to increase the cost estimates, the client insisted that the adopted values were appropriate. As shown by the cost table in Annex 1, and as discussed in Section 2.4, the actual construction costs (excluding resettlement) were about 32% higher than the estimates. However, in spite of the higher costs the HPCD did not have any problems with financing the project.

2.2 Implementation

Project implementation went smoothly and at no time in the project was there an ‘At Risk’ rating. No mid-term review was undertaken.

Several issues arose during implementation and were resolved satisfactorily:

ƒ Road safety on interconnecting roads: Changes were made to the designs of the interconnecting roads without proper consultation with the Bank. Originally planned to be two-lane roads, at the request of the local authorities they were upgraded to four-lane roads. The design of these roads was deficient from a safety point of view, especially with regard to slow moving and non- motorized traffic. At the Bank’s request, the HPCD retrofitted the roads with: (i) median barriers (to prevent dangerous overtaking); (ii) pedestrian and slow- moving traffic refuges for crossing the roads; (iii) turning bays for traffic exiting the roads; and (iv) improved signage and lane markings. ƒ Road safety at local road intersections: The designs of the intersections between the interconnecting roads and/or interchanges and local roads were considered by the supervision team to be unsafe, even if they were consistent with Chinese design standards. Eleven junctions were redesigned to improve the safety for pedestrians and motorized traffic. ƒ Noise impact: About 2,580m of noise barriers were designed and installed. After installation, it was noted that many were too short, poorly constructed, or used inadequate materials. The HPCD replaced and improved the barriers;

- 8 - the mission observed that the final barriers are fully functional and mitigate the noise at the village level. At the Yandian Hospital, new double glazed windows were installed to ameliorate the noise impacts. ƒ Construction quality on local roads: Early on, the RRIP roads had major problems with construction quality. These included: insufficient slope protection, poor drainage systems, and insufficient testing equipment to ensure engineering quality. After these were identified during a Bank supervision mission, remedial actions were taken and subsequent missions confirmed that the roads were of suitable quality and meeting their intended purpose. The Bank placed an emphasis on routine and periodic maintenance works as necessary for low standard rural roads.

Throughout the project, the Bank supervision team was very pro-active in identifying issues and seeing them through to a satisfactory outcome. This was particularly so for the issue of road safety where initially there was resistance from the construction team against undertaking the necessary improvements to address the Bank’s road safety concerns. The task team took the matter up with provincial and central authorities, downgraded the project’s overall implementation progress rating to ‘Unsatisfactory’ in the Implementation Status and Results (ISR) report, and actively worked with all involved towards to ensure that the necessary actions were taken to ensure road safety measures were implemented.

The institutional strengthening program presented a number of challenges to the project. While some studies, such as the establishment of the ‘Accident Information System’ and ‘Establishment of an Expressway Shareholding Company’ went relatively smoothly, others such as the ‘Maintenance by Contract’ study were problematic. The Bank team provided technical and other support to the activities to help facilitate a successful outcome.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

A series of physical targets for measuring progress were adopted in the project design. The M&E indicators were selected wherever the data was available or could be reasonably collected. In hindsight, better indicators could have been selected, particularly with regard to resettlement and institutional strengthening; for example, there was no performance indicator for resettlement in the expressway component.

Baseline, intermediate and end-of-project indicators were collected during construction by the HPCD and provided to the Bank. As shown in the Data Sheet, the traffic in the corridor was lower than forecasted as was the diversion rate. This led to less traffic on the expressway and more on the local road than expected. In spite of the lower traffic levels, the indicators confirm that the project achieved its development objective. The expressway is providing the necessary regional integration, improved accessibility in low income areas, improved road safety and management.

- 9 - 2.4 Safeguard and Fiduciary Compliance

Environmental Protection

During the early stages of construction, the implementation of the Environmental Management Plan (EMP) fell short of the requirements, as stated in the project agreements, in several key areas: (i) poor living conditions in labor camps; (ii) inadequate sanitation and hygiene facilities; (iii) dust from vehicular traffic; (iv) uncovered materials transport vehicles; (v) uncovered materials storage areas, and lime storage piles; and (vi) inadequate environmental monitoring staff. After discussions with the Bank missions, the HPCD diligently addressed the issues and they did not reoccur. Once the road was completed, the HPCD did a very good job of rehabilitating construction areas and reclaiming waste disposal areas.

EMP compliance was also a problem with the RRIP roads, for which the management of construction was done by local authorities as opposed to the HPCD. These issues included improper waste disposal sites, lack of an adequate system for drainage, and insufficient slope protection, which resulted in serious landslides along the alignment. Appropriate corrective measures were taken after these deficiencies were identified by the Bank. By the end of the works, borrow pits and proper waste disposal sites were reinstated, greening efforts and tree plantings were carried out in most road sections in order to minimize the negative environmental impact.

Two major environmental issues that arose on the XXE were with traffic safety and noise impacts. These are discussed in Section 2.2.

Land Acquisition and Resettlement

As shown in the table below, the total land area acquired was 1,399 ha, 7% higher than estimated in the Resettlement Action Plan (RAP). The difference is almost entirely accounted for by the widening of 32 km of interconnecting roads from two to four lanes. The area of homes acquired was 222,394 m2, 15.5% higher than the RAP estimate. The additional house acquisitions arose principally because: (i) the alignment was modified to avoid of agricultural land acquisition; and (ii) the interconnecting road land acquisition was not included in the RAP.

Land Area (ha) House Area (m2) Component RAP Actual RAP Actual XXE – Main alignment 1,278.4 192,427 1,298.0 192,489 XXE - Interconnecting Roads 59.8 29,967 RRIP 10.1 0.8 0 0 Total 1,308.1 1,339.0 192,489 222,394

- 10 - The HPCD has previous experience with resettlement for the NH3 and NH4 projects; they were therefore well prepared and experienced in these activities so resettlement proceeded relatively smoothly. The resettlement office was established during project preparation and there was staff continuity throughout the project. There was full information disclosure and transparency, and the compensation rates, quantities and compensation costs were made public. The compensation was paid through bank accounts to every impacted household in order to guarantee the PAPs received the funds promptly and in full accordance with the compensation rates stipulated in RAP. The work was audited by both the government and an independent monitoring consultant.

There were 18,493 PAPs (see below), an increase of 3.9%. These were associated with the interconnecting roads which had a resettlement policy framework so no PAPs were identified during preparation. The compensation for the main alignment was 12% higher than in the RAP mainly because of the effects of the alignment change. During the project only a few complaints were received, mainly due damages of village facilities such as roads and irrigation ditches during civil works. All complaints were addressed by the HPCD and resolved in a satisfactory manner.

Number of Compensation Number of PAPs Component Households (USD m) RAP Actual RAP Actual RAP Actual XXE – Main alignment 4,096 4,144 17,800 17,716 74.0 85.01 XXE - Interconnecting Roads1/ RPF 238 RPF 1,185 RPF 9.93 RRIP1/ RPF 9 RPF 45 RPF 0.02 Total 4,096 4,391 17,800 18,946 74.0 94.96

Notes: 1/ The interconnecting and RRIP roads had a resettlement policy framework (RPF) so there were no households identified at the time of the RAP preparation.

At the completion of the project, the independent monitoring consultant undertook a survey of the PAPs. The report concluded: “As a whole, the project has very limited negative impacts” with the main negative impacts “reduced land resource and decreased income” and “worsened traffic”. These were reported by 5 – 20% of the households, depending on their location.

However, the overall view of PAPs surveyed was that the project had many positive impacts on the traffic, non-agricultural employment, production conditions, housing conditions and the improved living standard of all the districts and counties. With regard to housing quality 76% indicated that they were better off than before the project, 22% reported their conditions were unchanged, and only 2% indicated they were worse off. With regard to compensation, 87% reported the compensation rates arrived in a timely manner. When asked for their views on their overall satisfaction with the resettlement process, 43% were very satisfied; 32% were satisfied and 25%

- 11 - were neutral/unsatisfied. Those unsatisfied were largely people who had previously had good housing and had not had a significant improvement in housing standards.

Financial Management

The overall financial management compliance was satisfactory. The financial management system during implementation had no significant changes from appraisal. The project continued to maintain the project financial management system that was acceptable to the bank. For audit compliance, the implementing agency complied with the legal agreement and submitted annual audit reports to the Bank in a timely manner. All the audit reports were reviewed by the Bank and considered to be acceptable. The implementing agency demonstrated its capacity in managing Bank loan disbursement which was consistent with the construction progress.

The HPCD had over USD28 million in savings which were cancelled at the end of the project. The HPCD had hoped to use these savings to undertake additional rural road improvements, but this was not permitted by the Ministry of Finance policy, in accordance with their national uniform standards of expenditures and regulations on public finance.

Procurement

The procurement under the project was executed following the Bank’s procurement guidelines, project legal documents, and the PAD, including the procurement plan. The procurement methods used on the project were ICB for 15 civil works contracts, one E&M contract, and some equipment contracts; NCB for building and annex areas, interconnecting roads and the rural roads. International consultants were hired for construction supervision using QCBS. The HPCD used tendering agencies to prepare the bidding documents and undertake the bidding. The procurement was completed on schedule and the cost overruns were mostly under 15%.

It will be noted from the costs in Annex 3 that the actual cost of the expressway was USD802.6 m, compared to the appraisal estimate of USD611.3 m. There are several reasons for the difference:

ƒ As mentioned earlier, during preparation the task team was concerned that the estimated construction costs were low and identified it as a project risk. However, the client insisted that the values were correct and so they were adopted for the project. At USD646 million, the bid prices were some 50% higher than the PIP estimate of USD430 million. ƒ There was a 13.3% devaluation in the USD against the Chinese RMB over the course of the project. Since most costs were in RMB, while the USD rate was used in the PAD this served to increase the difference between the estimated and actual costs.

- 12 - ƒ Design variations for activities such as: (i) reconstruction of noise barriers; (ii) improved safety facilities for interconnecting roads; (iii) accounting for soft subgrades; (iv) change in pavement design; and (v) change to type of guardrails.

As part of a portfolio exercise, a review was done in 2006 on how bitumen was procured for the Bank’s transport projects in China due to issues on some projects. This found that the procurement of bitumen on the XXE project was done in accordance with the Bank’s guidelines.

2.5 Post-completion Operation/Next Phase

The project was successful in that it met the project development objective of providing a more effective, safe and efficiently managed transport infrastructure to sustain and support socio-economic development, trade and regional integration in Hubei province and improve transport links to the western region. While the overall corridor traffic is lower than forecasted (see the Data Sheet), this does not detract materially from the project achieving its development objective. The following points summarize the program’s success in meeting its development objectives:

ƒ Since opening in late 2005, the expressway and the local roads have been successfully carrying traffic; ƒ The XXE carries significant volumes of long-distance truck traffic with markedly reduced travel times; ƒ Traffic has diverted to the XXE from the existing roads thereby improving safety, and the black spot investments have improved safety further; ƒ The equipment procured on the project is being actively used; ƒ The areas of the RRIP now have roads open all year, and have experienced increases in high school enrollments and household incomes; and ƒ The HPCD’s management and operations have been enhanced through the institutional strengthening program.

The expressway is currently being operated by the HPCD’s Hanshi Expressway Division. While the traffic levels are lower than forecast, the HPCD indicated that the income from tolls is sufficient to cover the ongoing maintenance costs. This is evidenced by their ability to satisfactorily address the issues identified above during the early operational stage.

The HPCD has applied the training from the project and other aspects of the institutional strengthening program, particularly with regard to traffic safety. The training benefited the two downstream projects: Hubei Shiman Highway Project and Hubei Yiba Highway Project.

- 13 -

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

The Government of China is committed to the continued development of the National Expressway Network (NEN). The NEN is also called the “7-9-18 Highway Network” and is to be completed by 2020. Incorporating and expanding the NTHS, this highway network will have some 85,000 km of high-grade expressways consisting of seven capital radials, nine north-south major highways, and 18 east-west corridors. The NEN design goal is to reach more than 1 billion people in China by connecting all provincial capitals and large cities of more than 500,000 inhabitants with cities of more than 200,000 inhabitants.

It is intended that people in eastern areas should have access to an expressway within half an hour, the central provinces within an hour, and the western areas within two hours. In addition, it will improve the communications between economically developed areas, such as the lower Yangtze in central China and the Pearl River Delta in the southeast, and the mid-west and north-east areas. The NEN will also enhance the connections with western China, and will promote the economic growth of central and south-eastern provinces.

Central provinces such as Hubei are considered to be particularly important since road investments here provide both a push and a pull effect on the adjacent western and eastern provinces resulting in the best overall net economic effect. While investment in the eastern and western provinces tends to stay local, investment in the central provinces benefits all regions. The focus is now on completing network connectivity—which the XXE is an important contributor to as part of the Shanghai- Wuhan-Xi’an-Urumqi corridor. By the end of 2008 the Hubei portion of this corridor will be completed and the isolated north-west areas of Hubei will be open to development.

As shown in the table below, the project directly addressed several areas identified in the Bank’s FY06-10 Country Partnership Strategies (CPS).

CPS Recommendation How Addressed by Project Reduce internal and external barriers to trade and Facilitates inter-provincial trade and commerce, investment. and improving regional and national integration, by removing highway bottlenecks. Reduce poverty, inequality and social exclusion Improve the road quality and accessibility to poor through expanding access to basic social and counties in the north-west of Hubei province infrastructure services Manage resource scarcity and environmental Improve (i) the efficiency of highway challenges maintenance management; (ii) traffic safety; (iii) ensure proper resettlement; and (iv) minimize the environmental impact of construction.

- 14 - 3.2 Achievement of Project Development Objectives

The project aimed to provide a more effective, safe and efficiently managed transport infrastructure to sustain and support socio-economic development, trade and regional integration in Hubei province and improve transport links to lagging western region. The project outcome is rated as satisfactory based on its having achieved satisfactory outcomes on most components of the project, including implementation of the road traffic safety component, quality of supervision, general borrower performance, and the overall successful achievement in meeting the project development objectives as outlined in the PAD.

The completion of the XXE provides a high-speed, reliable link between the capital Wuhan and the north-west area of Hubei, particularly the major truck manufacturing city of Shiyan. When the remaining links are completed it will form part of the Shanghai-Wuhan-Xi’an-Urumqi corridor. Travel times and distances have been reduced for travel to this part of Hubei Province, thereby reducing vehicle operating and transport costs. Since expressways are generally safer than local roads, traffic safety has been improved by diverting traffic from local roads, thereby lowering the accident rates on local roads, and by increasing travel on safer roads. Through the RRIP investments road closures on local roads went from two or more months per year to none. These local areas saw a reduction in poverty and an increase in school enrollments.

A. Increased Transportation Capacity and Decreased Congestion in the Xiaogan- Xiangfan Corridor With Improved Integration of the Western Areas of Hubei

The XXE and interconnecting roads opened to traffic in October 2005. The tolling and E&M equipment were fully operational, although during the defect liability period some repairs were required, for example to the traffic counting system.

The objective of reducing congestion was partially met insofar as the traffic levels in the corridor proved to be lower than forecast, and this was in spite of using relatively conservative values for traffic growth rates in the original analyses.

The XXE has significantly reduced the travel times in the Xiaogan-Xiangfan corridor, and in neighboring areas. Prior to completion, the expressway link to Shiyan city was opened and so, with the completion of the XXE, this major truck manufacturing center had full access to China’s expressway network.

The economic benefits of the project are considered sustainable, without any appreciable risk, as traffic—especially buses and heavy trucks—has been growing steadily since opening.

- 15 - B. Improved Accessibility in Low Income Areas Through Road Improvements

The project improved three roads located in poor counties in the province. Prior to the project, these roads experienced closures of 60 – 75 days per year due to the effects of inclement weather. After the improvements and upgrading to all-weather roads, there have been no closures. This has served to markedly improve the accessibility to services for the local residents, although the traffic flows are lower than forecast. The percentage of teenagers enrolled in high school grew by 10 – 35%, although the overall enrollment rate is still below 4.5%. The average household incomes in the area served by the RRIP roads increased by over 50% over the course of the project, although it should be noted that during the period 2000 – 2006 the Hubei Provincial GDP grew by 75%. It is unfortunately impossible to isolate the economic benefits due to the road investments from the overall economic development.

C. Improved Management and Maintenance of Roads, and Traffic Safety

The HPCD have benefited from the project and improved the management and operations of the network.

Training: Although less training than planned was undertaken, the HPCD reported that the training program was very useful and trainees are applying what they have learned. It would have been better to have some overseas training activities earlier in the project when the project would have benefited from the new skills. The delay was a result of the domestic approval process, something outside of the control of the HPCD. Additionally, because some overseas training occurred with the NH4 project, operating in parallel with the XXE efforts, the HPCD encountered difficulty executing overseas training under this project. The subsequent Bank financed Hubei Shiman and Hubei Yiba projects clearly benefited from the training programs.

Road Training Center: The center continues to function and improve the overall quality of training in the sector in Hubei. It was further strengthened through the Bank in 2007 obtaining a USD0.5 m grant from the ‘Global Safety Facility’ to create the ‘Hubei Road Traffic Safety Training Centre’. This will see additional resources and emphasis put on improving the road safety situation in Hubei.

Traffic Safety: As evidenced by their support for the establishment of the Hubei Road Traffic Safety Training Centre, the HPCD continues to have a strong commitment towards traffic safety. At the micro level, because of the project the accident rate on the national road adjacent to the XXE has fallen from 65 to 45/10 m vehicles.

As a result of the HPCD’s and others efforts, the number and severity of accidents in the province have decreased substantially since 2000, despite the rapid growth in vehicle registration and traffic, as shown in the following table.

- 16 - Year Number of Number of Number Injured Registered Accidents Fatalities Vehicles 2000 15,997 3,810 12,590 2,334,890 2001 18,302 3,042 14,883 2,736,850 2002 20,469 2,794 12,045 3,473,370 2003 20,047 2,729 14,251 3,827,773 2004 13,680 2,554 11,813 4,152,553 2005 9,585 2,417 10,555 4,336,446 2006 9,593 2,304 11,979 5,017,196 2007 8,986 2,142 11,355 5,791,035 Change in % - 44% - 44% - 10% + 148% 2007:2000

The project undertook three traffic safety activities under the institutional strengthening program, all of which had satisfactory outcomes:

ƒ Road Safety Village: This project reduced the number of accidents in the three sample villages to zero in 2005, from the 2002 levels of 17 accidents, seven fatalities and 18 injured in 2002. The HPCD have expressed an interest in expanding the work throughout the province, should funding permit. ƒ Accident Information System: In consultation with the Public Security Bureau, a computerized accident information system was established and as a pilot test used to analyze accident history on 596 km of NH107, NH316 and NH318. This led to physical works, for example, USD0.1 m was invested on one section which saw traffic accidents on the section drop by nearly 70%. ƒ Black Spot Identification: The black spot study undertook a detailed investigation on several roads. This identified safety deficiencies and undertook corrective civil works to address the problems. A reduction in accidents of 80% was reported, and the HPCD is considering expending the program province wide.

Maintenance by Contract: As part of the goal of “development of market based road management”, this study looked at introducing performance- (output-) based maintenance contracts on a pilot basis. It was supported by the Bank who arranged a seminar on performance based maintenance in 2005, as well as a Bank financed study in Hubei and Jiangxi provinces looking at the issues associated with introducing performance-based maintenance to China. The project developed Chinese bidding documents, established performance monitoring criteria, and identified a number of practical issues to overcome. It provided a foundation for future work, but there are a number of national level and other issues that need to be overcome before they can be fully introduced.

Expressway Management: The study reviewed the legal and policy framework associated with expressway ownership and the process by which expressways in Hubei could be corporatized. An important element of the study was the identification of policy and operational risks. The government created the ‘Hubei Chutian Expressway Corporation’ in 2004, which is listed on the Shanghai stock exchange.

- 17 - With a return on equity of 14%, this can be considered to be a successful project outcome.

Truck Overloading: The study on overloaded vehicles identified the impacts of overloaded trucks on the Hubei road network, both physical and economic, as well as countermeasures. Through pilot testing enhanced enforcement, they found that overloading was reduced from 90% to 15%. However, in spite of there being a policy framework in place, the commitment of governments at all levels to addressing overloading is still lacking.

Procurement of Equipment: The project procured USD12.6 m of equipment to help improve the quality and effectiveness of construction and maintenance. The equipment was employed by the maintenance bureaus to maintain the expressway and was implemented by June 2006.

3.3 Efficiency

Net Present Value and Economic Rate of Return

The economic evaluation covers the expressway section, the interconnecting roads and the RRIP. The results are summarized in the following table and the details are in Annex 3.

EIRR (in %) and ENPV (12%, in USD million)

PAD ICR Component ENPV USD ENPV USD EIRR % EIRR % million million Expressway (XXE) and 20.7% 585.0 23.8% 785.7 interconnecting roads RRIP 23.0% 16.6 25.5% 17.4 Total Project 20.7% 601.6 23.8% 803.1

It is recognized that there is an ‘optimism bias’ in China’s expressway projects wherein the demand is overestimated and the costs underestimated. A recent review of 41 projects with domestic and international funding found that 76% had a lower Economic Internal Rate of Return (EIRR) at opening than forecast, with an average return of 18.5% versus the 24.9% forecast3. Since the XXE had lower traffic and higher costs it would be anticipated that the ICR’s EIRR and NPV would be lower than the PAD rather than higher. As explained in Annex 3, the differences largely arise due to: (i) the much higher value of time in the ICR than when the PAD was

3 Lee, J. and Guangbin, Z. (2006). Toll Roads Corporatization Strategy – Towards Better Governance. Report to the Asian Development Bank.

- 18 - prepared: in the period 2002-2007 rural and urban incomes increased by over 60%; and (ii) a more detailed approach to valuing time (differentiating between trip purpose in ICR as opposed to a constant value in the PAD).

Financial rate of return

The expressway opened in October 2005 and the Hanshi Expressway Division assumed the day-to-day management, operations and maintenance of the expressway. As shown in Annex 3, the income is from tolls charges to the road users. The toll rates are set by the province and are uniform for all the expressways in the province, regardless to the form of management (public, joint-venture or private). Based on current toll rates, and traffic levels, the expressway section is generating enough revenues to finance operation and maintenance and to service the financial charges. It can be anticipated that when the remainder of the expressway links are completed and the corridor to Xi’an opened, there will be substantial increase in traffic and revenue. These are not fully reflected in the calculations in Annex 3.

The detailed financial analysis is presented in Annex 3 and summarized as follows:

PAD/1 ICR/1 Component FNPV FNPV FIRR % FIRR % million USD million USD Expressway (XXE) 4.6 -73 1.4 -373

Notes: 1/ The Financial Cost of Capital which was used to calculate the FNPV was 5.5% for both the ICR and the PAD.

Cost effectiveness

At appraisal, the total project cost, including contingencies and land acquisition, was estimated at USD688.4 million, of which USD250 million (36%) was to be financed by the Bank loan. The total actual project cost of USD860 million is 25% higher than the estimate. Detailed cost tables are in Annex 1.

The civil works for the construction of the expressway (excluding resettlement) increased from the estimate USD537 million to USD707 million. This accounted for 93% of the final total project costs, compared to only 87% of the estimated costs. As shown in the following table, the estimated cost per km was lower than for similar projects, while the actual cost was higher.

- 19 -

Length in Estimated Cost (USD m) Actual Cost (USD m) Project km Total per km Total per km Hubei XXE 244 537 2.2 707 2.9 Hubei (NH4) 110 349 3.2 241 2.2 Hunan (NH4) 183 438 2.4 457 2.5 Jiangxi II 130 397 3.1 271 2.1 Henan III 95 295 3.1 268 2.8

The costs of the RRIP were 30% lower than estimated—the cause of the differences could not be established. The institutional development program was more expensive than anticipated, due to the purchase of additional equipment.

3.4 Justification of Overall Outcome Rating

Rating: Satisfactory

The overall achievement of the project objectives is rated as satisfactory. The project has achieved its objective of providing a more effective, safe and efficiently managed transport infrastructure to sustain and support socio-economic development, trade, and regional integration in Hubei province and to improve transport links to the lagging western region. This assessment is based on the economic and financial returns and the cost management efficiency presented in Section 3.3 and a review of achievements of the three project components given in Section 3.2:

ƒ Although traffic in the corridor is lower than forecasted, the expressway is still carrying over 5,000 veh/day and generating sufficient revenue to cover its operating costs. The traffic enjoys significantly reduced travel times and operating costs over the previous roads, as well as enhanced traffic safety. ƒ The poorer western areas of Hubei province have been provided with enhanced accessibility through the expressway, and the roads improved in the RRIP have eliminated road closures from the previous levels of two or more months a year. ƒ The HPCD have enhanced their management and operations of roads, through enhanced capabilities, a strengthened road safety program, and activities such as establishing an expressway company listed on the Shanghai stock exchange.

Details on key indicators are in Data Sheet, Section F.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

One sector specific goal of the XXE project was reducing poverty in the low income western region and other remote areas of Hubei province by improving their accessibility. Indeed, both the central and local governments have emphasized the role

- 20 - of transportation in the integration of national economy, and in its ability to stimulate growth in remote areas. This was achieved by the expressway linking this area to the existing expressway network of China. Upon completion of the Hubei Shiman highway project, and a section in Shaanxi province, there will be a continuous expressway link between Shanghai, Wuhan and Xi’an.

The goal of the Rural Road Improvement Program (RRIP) component was to improve the socio-economic conditions in low-income areas of Hubei province. All investments were located in poor counties and selected for their potential to benefit the local development in these areas. Satisfactory completion of the RRIP has resulted in positive outcomes to poverty and social development in the project affected area through the elimination of road closures.

(b) Institutional Change/Strengthening

The institutional strengthening program contributed towards improving the overall operations of the HPCD. The department’s capacity for addressing road traffic safety was strengthened, and this led to the creation of the ‘Hubei Road Traffic Safety Training Centre’ to provide a vehicle to further improve the quality of training to ensure safer roads. This is located at the provincial ‘Road Training Center’, supported by the project, which continues to function. The training was used effectively, particularly to improve project preparation and implementation: as evidenced by the HPCD’s performance in the Hubei Shiman and Hubei Yiba highway projects.

(c) Other Unintended Outcomes and Impacts (positive or negative)

None.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

Not applicable.

4. Assessment of Risk to Development Outcome

Rating: Negligible to Low

The project aimed to provide a more effective, safe and efficiently managed transport infrastructure to sustain and support socio-economic development, trade, and regional integration in Hubei province and improve transport links to lagging western regions. The risk that the development outcome will not be realized and sustainable is low for the following reasons:

ƒ Both for the expressway and the rural roads, the physical investments have resulted in good transport infrastructure;

- 21 - ƒ Although the XXE traffic is lower than expected, it is still substantial and continues to grow. This shows demand for the investments; ƒ The provision of the high standard expressway has improved traffic safety over the previous existing roads; and ƒ The rural roads have had road closures eliminated.

There is evidence that routine maintenance activities have been initiated to protect and even improve the projects assets.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry

Rating: Satisfactory

The Bank performance during identification, preparation, and appraisal of the project was satisfactory. The Bank team had the requisite skills and experience from previous projects for successful preparation, and was supplemented by an institutional specialist to help maximize the impact of that component.

As noted in Section 2.1A, the risks were adequately considered in the design including: insufficient geotechnical investigations, inadequate designs, insufficient bid documents, resettlement delays, insufficient quality control, and late tendering of E&M facility components. These, and other risks, were discussed with the HPCD who took active steps to mitigate them.

The Bank’s Safeguard Policies were adequately addressed. A financial management review was undertaken to ensure compliance with the Bank’s financial management procedures.

To improve the overall quality, during preparation the engineering designs and technical bidding documents, including cost estimates for the proposed expressway and related roads, as well as E&M facilities, were reviewed by international engineering consultants under grant funding. As discussed elsewhere, the greatest weakness was in the cost estimates, which were significantly lower than the actual costs. The task team was unable to persuade the client to adopt alternative values which led to the actual expressway construction costs being 32% higher than the estimates.

- 22 - (b) Quality of Supervision

Rating: Satisfactory

The task manager who appraised the project also supervised it until early 2005, after which much of the major construction was completed. No other key staff changed during the course of the project.

Detailed attention was paid to all components of the project with supervision missions at least twice a year.

The financial management of the project was supervised in an effective manner, and the HPCD was provided financial management training by the Bank to improve their efficiency. Timely advice was provided to the client on treating undisbursed funds so as to use the loan funds efficiently, although the HPCD did not follow this advice.

The task team showed a proactive response to addressing issues when encountered, as evidenced by their work to improve the safety of the interconnecting roads and junctions. Through continued discussions with all parties involved, a downgrading of the project’s overall implementation progress rating to ‘Unsatisfactory’, and continued follow up on the issues, they helped ensure that the project’s roads were safe. A similar approach was used to ensure quality construction on the RRIP roads and to minimize the negative environmental impact of the project.

The quality of supervision is therefore rated as satisfactory.

(c) Justification of Rating for Overall Bank Performance

Rating: Satisfactory

The rating for overall Bank performance as satisfactory is based on the appropriate quality at entry and satisfactory quality of supervision.

5.2 Borrower Performance (a) Government Performance

Rating: Satisfactory

The central and provincial governments were fully committed to the project which was contributing to the completion of the Shanghai-Wuhan-Xi’an corridor. This was the third project in Hubei, so the government was familiar with the Bank’s requirements and procedures. This helped facilitate smooth project preparation. With the support of local governments, the land for the project was acquired in a timely

- 23 - manner so that construction was not delayed. The performance of the central and provincial government during the project implementation was therefore satisfactory.

(b) Implementing Agency or Agencies Performance

Rating: Satisfactory

The performance of the implementing agency was satisfactory. The HPCD demonstrated commitment towards achieving the project objectives in all areas of the project. The only area of major dispute was over the interconnecting roads, but once the HPCD appreciated the importance of the situation they provided their full commitment and the necessary resources to have a satisfactory resolution.

The HPCD has a strong commitment to many of the institutional strengthening activities, as evidenced by their request for Bank support with the Hubei Road Traffic Safety Training Centre and in the area of performance-based maintenance contracting. The successful listing of the Hubei Chutian Expressway Company on the Shanghai Stock Exchange is another example of their support for these activities.

(c) Justification of Rating for Overall Borrower Performance

Rating: Satisfactory

The project objectives were achieved and all loan conditions were met. There was effective cooperation between the borrower and the Bank throughout preparation and implementation of the project. There is evidence of continued support for project activities by the HPCD after completion of this project.

6. Lessons Learned

Regular supervision missions during construction are essential

It is important that the Task Teams allow sufficient time to properly inspect projects during the construction phase and that the team has the skills to cover all potential issues, especially road safety. With expressway projects such as the XXE, some 224 km long, it can take several days in the field to do a proper inspection. Budget and time constraints can lead to the temptation to reduce the time in the field, but this is to the detriment of the overall project. Through supervision visits, the Task Team helped identify a number of critical issues which, if left unresolved, would have potentially compromised the project’s ability to meet the PDO.

- 24 - Local road improvement programs pose major challenges

The practice on Bank-financed expressway projects in China has been to include a local road improvement program, typically on the order of 10% of the total project size. These have been included to help further ensure that the projects benefit the poor. The implementation of these local road programs presents major challenges for the Bank and our clients, in this case the HPCD, in several ways:

ƒ The repayment of the loan is done with revenue from the expressway tolls so the client objects to these being used to fund local roads which are non- revenue generating; ƒ The implementation under the responsibility of the local government and not the HPCD, although the Bank holds the HPCD liable for compliance with the Bank’s policies; ƒ Local contractors supervised by the local government are unfamiliar with the Bank’s safeguard policies and tend to opt for the less stringent domestic policies. This often leads to issues which need to be resolved during or after construction; ƒ The quality of construction is often lacking; and ƒ The proper supervision of these roads can be a challenge for the Bank where there are numerous sections scattered in different locations.

With the provincial government now undertaking major local road investment programs on their own—since 2005, some 20,000 km of village roads have been improved—it is necessary to consider whether or not the Bank should continue to insist that local roads be included as components on expressway projects. Further comments on this issue are provided by the client in Annex 7.

Improve designs to ensure safe roads

The need to redesign eleven junctions as well as the interconnecting roads in order to ensure traffic safety shows that there is a pressing need to improve the quality of designs. Even though a design may qualify based on Chinese standards, they may still be unsafe for motorists or pedestrians. Safety audits, from qualified independent consultants, are required on all final designs. It is vitally important to consider the impact of designs on pedestrian safety.

The Hubei Road Traffic Safety Training Center should go some way towards addressing this issue, but the HPCD needs to implement formal procedures to ensure proper safety audits are done.

- 25 - 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

The borrower notes that the Bank’s insistence of including local roads be included in all Bank financed projects creates difficulties for the implementation of the project. This is because the borrower is not directly in control of these activities—they are done by local government—and yet are responsible for their performance and compliance with safeguards compliance. Given that Hubei province has a major local roads program under separate financing, as noted above since 2005, some 20,000 km of village roads have been improved, it is no longer necessary to include these activities in Bank financed projects. For this reason, the Hubei Yiba Highway Project, under preparation at the time of ICR preparation, does not include a local roads component.

The borrower makes several observations with regard to the use of loan savings, adjusting amounts between categories, and the commitment fees. In most instances the issues were discussed during supervision missions, however, internal Chinese procedures and delays outside of the control of the project team precluded actions being taken in a timely manner.

(b) Cofinanciers

Not applicable.

(c) Other partners and stakeholders

Not applicable.

- 26 - Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Appraisal Actual/Latest 1/ Estimate Estimate Percentage of Components (USD million) (USD million) Appraisal2/,3/ Construction of Expressway, Interconnecting Roads, Construction Supervision, and Resettlement 562.41 802.61 142.7% Rural Road Improvement Program 60.00 42.00 70.0% Institutional Development and Road Sector Management 10.51 15.36 146.1% Total Baseline Cost 632.92 859.97 135.9% Physical Contingencies 33.80 N/A Price Contingencies 21.68 N/A Total Project Costs 688.40 859.97 124.9% Front-end fee IBRD 2.50 2.50 Total Financing Required 690.90 862.47 124.8%

Notes: 1/ The contingency costs are included with the actual/latest costs for each component. 2/ The percentage of appraisal costs are calculated by including the contingencies in the appraisal costs for each component. 3/ The exchange rate in the PAD was USD 1 = 8.29 RMB, compared to USD 1 = 7.32 RMB in the ICR. This exchange rate differential accounts for 13.3% of the 24.8% differential between the PAD and ICR costs.

(b) Financing Appraisal Actual/Latest Type of Estimate Percentage of Source of Funds Estimate Cofinancing (USD Appraisal (USD million) million) Borrower 440.90 640.74 145.3% International Bank for

Reconstruction and Development 250.00 221.72 88.7%

- 27 -

Annex 2. Outputs by Component

Component 1: Construction of the Xiaogan-Xiangfan Expressway, Interconnecting Roads and Construction Supervision: (PAD estimate USD505.6 million, ICR actual USD802.6 million - costs include contingencies)

The XXE opened as planned in 2005. Contract variations were under 15% for most of the contracts. The procurement and installation of the E&M system also proceeded smoothly and in a timely fashion, so that all equipment was operational when the expressway opened.

As described in Section 2.2, there were several issues which had to be addressed during the project implementation: (i) improvements to interconnecting roads to ensure that they provided appropriate levels of safety; (ii) redesigning of eleven intersections with local roads to improve road safety; and (iii) replacement and improvement of about 2580 m of noise barriers. These were effectively addressed by the HPCD and, at the time of writing the ICR, after over two years of operation the expressway is in good condition and performing effectively.

Supervision of works was carried out by domestic consultants supported by a small team of foreign consultants. The quality and overall performance of the expressway indicates that supervision was satisfactory.

The land acquisition and resettlement program was successfully executed. The 18,493 PAPs received their agreed compensation. When asked for their views on their overall satisfaction with the resettlement process, 43% were very satisfied; 32% were satisfied and 25% were neutral/unsatisfied.

Component 2: Road Rehabilitation and Improvement Program in Poor Counties: (PAD estimate USD66.2 million, ICR actual USD42.0 million - costs include contingencies)

The LRIP program consisted of six subprojects (five roads and 1 bridge) in three phases. By 2005, total of 402 km of rural roads were upgraded to Class III and IV standards and one 488 m bridge. All the subprojects were selected to fulfill the objective RRIP objective of upgrading and improving rural roads in low-income areas to increase the accessibility.

During the defect liability period the Bank inspections identified some minor improvements needed in terms of traffic safety measures, slope protection and flood repairs. These were addressed and the roads are performing as expected.

- 28 -

Component 3: Institutional Development and Road Sector Management: (PAD estimate USD10.9 million, ICR actual USD15.4 million - costs include contingencies)

Training: As shown in the table below, a comprehensive domestic and international training program was conducted. The skills acquired were put to use by the trainees.

Number of Number of Training Description Location Trainees Man-Months Operation Management 50 28 Management System 30 20 Resettlement 75 155 Quality Control 8 16 Road Safety 8 16 China Highway Maintenance Management 8 16 Project Construction Management 34 8 Traffic Engineering 8 16 Engineering Supervision 145 199 Teacher Training 6 6 Construction Quality Management USA, Canada 8 4 Financial Management Japan 6 3

Road Training Center: The goal of the provincial Road Training Center was to improve knowledge dissemination and training quality which was fully achieved by 2005. In 2007 the center received a grant of USD0.5 m from the Global Road Safety Facility and USD0.2m from the HPCD to establish the ‘Hubei Road Traffic Safety Training Centre’. This will strengthen safety training.

Road Safety Village: After its completion in 2005, the study reduced the number of accidents to zero from the 2002 levels of 17 accidents, seven fatalities and 18 injured in 2002.

Accident Information System: The study was completed in June 2006. It established a computerized accident information system which was pilot tested on several roads to identify accident areas requiring remedying.

Black Spot Identification: Completed in April 2007, the black spot study undertook a detailed investigation on several roads. This identified safety deficiencies and the HPCD undertook corrective civil works to address the problems.

Maintenance by Contract: This study was completed in 2006. The study developed Chinese based bidding documents, established performance monitoring criteria, and identified a number of practical issues to be overcome.

Expressway Management: The study on expressway management started in 2003. The government created the ‘Hubei Chutian Expressway Corporation’ in 2004 which is listed on the Shanghai stock exchange. In 2006 the study was completed.

- 29 -

Truck Overloading: The study on overloaded vehicles was completed in June 2005 and identified the causes and impacts of overloading. It has contributed towards the continuing policy dialog in this area.

Procurement of Equipment: The project procured USD12.6 million of equipment to help improve the quality and effectiveness of construction and maintenance. The equipment was implemented by June 2006.

- 30 - Annex 3. Economic and Financial Analysis

Tables A3.1 and Table A3.2 summarize the results of the economic and financial evaluation. The XXE has an EIRR of 23.8%, and an ENPV of USD785 million. Both of these values are higher than those in the PAD based on higher estimates of VOC and time savings. The FIRR of XXE is only 1.4% and FNPV is USD-373 million at a discount rate of 5.5%. For the RRIP the economic evaluation found that all roads had an EIRR greater than 20%, and positive NPV’s. The overall project economic performance is 23.8%.

Table A3.1: Economic Evaluation Summary PAD ICR ENPV ENPV Component Section (12%, (12%, EIRR EIRR USD USD million) million) 1. Xiaogan-Anlu 26.0% 181.4 21.3% 175.7 2. Anlu-Suizhou 18.4% 93.0 19.6% 161.0 XXE 3. Suizhou-Zaoyang 18.4% 114.5 22.9% 100.62 4. Zaoyang-Xiangfan 20.9% 127.4 33.9% 348.3 Total Expressway 20.7% 585.0 23.8% 785.7 1. Tunbao - Banquia 27.7% 5.6 28.1% 6.1 2. Changwan – Shihuiyao 18.5% 3.3 20.3% 3.5 RRIP 3. Quanxi – Xinmatou 25.4% 7.6 28.2% 7.8 Total RRIP 23.0% 16.6 25.5% 17.4 Total Project 20.7% 601.6 23.8% 803.1

Table A3.2: Financial Evaluation Summary PAD ICR Section FNPV(5.5%, FNPV(5.5%, FIRR FIRR USD million) USD million) Total Expressway 4.6% -73.7 1.4% -372.9

As shown in Table A3.3, for Sections 1 and 3, the traffic in the corridor, and on the XXE, are lower than forecast4. Sections 2 and 4 have traffic similar to the forecasts.

4 The PAD data are based on the table on page 57. Although the title of the table is ‘Normal Traffic by Sections’, the text indicates that this includes both normal and generated traffic. Given the context of the PAD discussion it is reasonable to assume that it is the total corridor traffic.

- 31 - Table A3.3: Number of Motorized Vehicle per Day (2005-2030)

The PAD The ICR Old New Diversion Old New Diversion Section Year Total Total road road Ratio road road Ratio (1) (2) (3=1+2) (4=2/3) (5) (6) (7=5+6) (8=6/7) 2005 - 9,760 - 9,760 - 2006 7,115 7,171 14,286 50.2% 4,742 5,794 10,536 55.0% Section 1 2007 7,320 7,716 15,036 51.3% 5,111 6,247 11,358 55.0% 2010 7,969 9,612 17,581 54.7% 5,917 7,653 13,570 56.4% Xiaogan 2015 9,183 13,863 23,046 60.2% 7,198 10,241 17,439 58.7% -Anlu 2020 11,552 17,414 28,966 60.1% 8,345 13,071 21,416 61.0% 2025 14,533 21,874 36,407 60.1% 9,214 15,902 25,116 63.3% 2030 9,684 18,435 28,119 65.6% 2005 - 9,276 - 9,276 - 2006 3,463 6,953 10,416 66.8% 4,508 5,507 10,015 55.0% Section 2 2007 3,511 7,446 10,957 68.0% 4,856 5,938 10,794 55.0% 2010 3,658 9,146 12,805 71.4% 5,621 7,274 12,895 56.4% Anlu 2015 3,918 12,885 16,803 76.7% 6,839 9,735 16,574 58.7% -Suizhou 2020 4,942 16,176 21,118 76.6% 7,929 12,424 20,353 61.0% 2025 6,233 20,307 26,540 76.5% 8,754 15,116 23,870 63.3% 2030 9,200 17,523 26,723 65.6% 2005 - 6,583 - 6,583 - 2006 3,283 6,993 10,276 68.1% 3,198 3,909 7,107 55.0% Section 3 2007 3,457 7,362 10,818 68.0% 3,447 4,214 7,661 55.0% 2010 4,034 8,588 12,623 68.0% 3,990 5,162 9,152 56.4% Suizhou 2015 5,219 11,104 16,323 68.0% 4,855 6,908 11,763 58.7% -Zaoyang 2020 6,442 13,701 20,143 68.0% 5,628 8,817 14,445 61.0% 2025 7,952 16,905 24,857 68.0% 6,214 10,727 16,941 63.3% 2030 6,531 12,436 18,967 65.6% 2005 - 10,407 - 10,407 - 2006 4,363 7,164 11,527 62.1% 5,056 6,180 11,236 55.0% Section 4 2007 4,419 7,631 12,049 63.3% 5,451 6,662 12,113 55.0%

2010 4,589 9,221 13,811 66.8% 6,310 8,161 14,471 56.4% Zaoyang -Xiangfan 2015 4,889 12,643 17,532 72.1% 7,677 10,922 18,599 58.7% 2020 5,892 15,222 21,114 72.1% 8,900 13,939 22,839 61.0% 2025 7,100 18,328 25,428 72.1% 9,826 16,959 26,785 63.3% 2030 10,328 19,660 29,988 65.6% Annual Average Growth Rate, AAGR (2006-2025) Section 1 3.8% 6.0% 5.0% 3.6% 5.5% 4.7% Section 2 3.1% 5.8% 5.0% 3.6% 5.5% 4.7% Section 3 4.8% 4.8% 4.8% 3.6% 5.5% 4.7% Section 4 2.6% 5.1% 4.3% 3.6% 5.5% 4.7% Sources: HPCD and the XXE PAD. PAD data of 2007, 2010 and 2020 are calculated based on AAGR.

- 32 - With generally lower traffic and higher costs there would be an a priori reason to expect that the economic performance of the XXE would be lower rather than higher than that in the PAD.

The differences arise due to the ICR using a more detailed methodology for the treatment of travel time than in the PAD. The PAD adopted a constant value of 1.5 RMB/h for all types of trips. For the ICR the value of time followed the more standard approach of differentiating by trip purpose: business vs. leisure travel, personal travel vs. commercial vehicles. Based on the Hubei GDP and employment level, as shown in Table A3.4 the 2006 value of business time was assumed to be 10.6 RMB/h, and leisure time at 10%, or 1.1 RMB/h. This was then increased over the analysis period to reflect the forecast growth in the Chinese economy and number of employees.

Table A3.4: Value of Time Estimation

GDP (2006 Prices) Employment Average Average GDP/ Time Year GDP Annual Number of Annual Employee Value Growth Employees Growth (RMB billion） (RMB) (RBM/h) Rate (million) Rate (%) (%) 2006 758.13 35.64 21,272 10.6 2010 1,109.98 10.0% 36.94 0.9% 30,048 15.0 2015 1,669.03 8.5% 38.44 0.8% 43,417 21.6 2020 2,340.90 7.0% 39.81 0.7% 58,807 29.3 2025 3,132.65 6.0% 40.81 0.5% 76,759 38.2 Source: Statistical Yearbook of Hubei and forecasts

The approach of increasing the value of time is supported by data on the income rates in Hubei province. In the period 2002 – 2007 urban incomes rose from 6789 RMB/y to 11,485 RMB/y, and rural incomes from 2,444 RMB/y to 3,997 RMB/y.

- 33 - Table A3.5: EIRR Summary of Xiaogan - Xiangfan Expressway (USD million)

Total Section1 Section2 Section3 Section4 Total Total Total Total Total Total Total Total Total Total Year Cost Benefits Net Cash Cost Benefits Net Cash Cost Benefits Net Cash Cost Benefits Net Cash Cost Benefits Net Cash 2003 165.3 -165.3 60.2 -60.2 42.6 -42.6 39.1 -39.1 23.4 -23.4 2004 213.6 -213.6 63.5 -63.5 74.0 -74.0 34.7 -34.7 41.5 -41.5 2005 135.7 -135.7 38.0 -38.0 63.5 -63.5 9.2 -9.2 25.0 -25.0 2006 112.6 91.4 -21.2 25.5 23.6 -1.9 50.1 23.0 -27.2 10.3 18.4 8.1 26.7 26.4 -0.3 2007 5.5 101.9 96.4 1.1 26.5 25.4 1.4 24.7 23.3 1.7 20.1 18.4 1.3 30.7 29.4 2008 5.7 117.2 111.5 1.1 30.7 29.6 1.5 28.3 26.8 1.7 22.0 20.3 1.4 36.1 34.8 2009 5.9 134.9 129.1 1.1 35.7 34.6 1.5 32.4 30.9 1.8 24.2 22.4 1.4 42.6 41.2 2010 6.0 160.1 154.0 1.2 42.9 41.7 1.5 39.4 37.8 1.8 26.9 25.0 1.5 50.9 49.4 2011 6.2 183.5 177.3 1.2 48.3 47.1 1.6 45.7 44.1 1.9 29.8 27.9 1.5 59.7 58.2 2012 6.4 210.7 204.3 1.2 54.5 53.2 1.7 53.1 51.5 2.0 33.0 31.1 1.6 70.0 68.5 2013 6.6 242.1 235.5 1.3 61.5 60.2 1.7 61.7 60.0 2.0 36.7 34.7 1.6 82.3 80.7 2014 6.8 278.7 271.9 1.3 69.5 68.2 1.7 71.7 70.0 2.1 40.7 38.7 1.7 96.7 95.1 2015 45.4 321.2 275.7 8.9 78.7 69.8 11.7 83.5 71.8 13.9 45.3 31.4 11.1 113.7 102.7 2016 45.4 368.0 322.5 8.9 89.5 80.7 11.7 95.5 83.8 13.9 49.6 35.7 11.1 133.3 122.3 2017 7.4 421.9 414.5 1.4 102.0 100.5 1.9 109.3 107.4 2.3 54.3 52.0 1.8 156.3 154.5 2018 7.6 484.2 476.6 1.5 116.2 114.7 2.0 125.2 123.2 2.3 59.5 57.2 1.9 183.3 181.5 2019 7.9 556.2 548.3 1.5 132.4 130.9 2.0 143.4 141.4 2.4 65.2 62.8 1.9 215.1 213.2 2020 8.1 639.4 631.3 1.6 151.0 149.4 2.1 164.3 162.3 2.5 71.6 69.1 2.0 252.5 250.5 2021 8.3 686.3 678.0 1.6 165.0 163.4 2.1 181.2 179.0 2.5 79.5 77.0 2.0 260.7 258.6 2022 8.6 737.7 729.1 1.7 180.3 178.6 2.2 199.8 197.6 2.6 88.4 85.8 2.1 269.2 267.1 2023 8.9 794.0 785.1 1.7 197.2 195.4 2.3 220.4 218.2 2.7 98.3 95.6 2.2 278.1 275.9 2024 9.1 855.7 846.6 1.8 215.7 213.9 2.3 243.3 241.0 2.8 109.3 106.5 2.2 287.4 285.2 2025 9.4 923.5 914.1 1.8 236.0 234.2 2.4 268.6 266.2 2.9 121.6 118.8 2.3 297.2 295.0 EIRR=23.8%, EIRR=21.3%, EIRR=19.6%, EIRR=22.9%, EIRR=33.9%, ENPV=785.7 ENPV=175.7 ENPV=161.0 ENPV=100.6 ENPV=348.3

- 34 - Table A3.6: Income Statement: Xiaogan – Xiangfan Expressway (USD million, year ending 31, December)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Traffic (million veh.-km) 64.9 468.2 504.8 540.1 578 618.4 655.5 694.8 736.5 780.7 827.6 869 912.5 958.1 1,006.00 1,056.20 Operating Revenue Tolls 0.9 51.6 55.8 59.7 63.9 68.3 83.5 88.5 93.8 99.5 105.4 127.7 134.1 140.8 147.8 155.2 Others ------Total 0.9 51.6 55.8 59.7 63.9 68.3 83.5 88.5 93.8 99.5 105.4 127.7 134.1 140.8 147.8 155.2 Operating Taxes * Total ------Net Revenue 0.9 51.6 55.8 59.7 63.9 68.3 83.5 88.5 93.8 99.5 105.4 127.7 134.1 140.8 147.8 155.2 Operating Costs Wages and benefits 0.0 1.1 1.2 1.2 1.3 1.4 1.8 1.9 2.0 2.1 2.2 2.7 2.8 3.0 3.1 3.3 Maintenance 0.1 4.9 5.0 5.2 5.3 25.2 5.7 5.8 6.0 6.2 75.9 6.6 6.8 7.0 7.2 33.9 Fuel & materials 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Administration 0.1 2.5 2.8 3.0 3.2 3.4 4.2 4.4 4.7 5.0 5.3 6.4 6.7 7.0 7.4 7.8 Others 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total working costs 0.2 8.4 9.0 9.4 9.9 30.0 11.6 12.1 12.7 13.3 83.4 15.6 16.3 17.0 17.7 44.9 Depreciation 22.7 22.8 22.8 22.8 22.8 22.8 22.8 22.9 22.9 22.9 22.9 22.9 23.0 23.0 23.0 Total operating costs 0.2 31.1 31.8 32.2 32.7 52.8 34.4 35.0 35.5 36.1 106.3 38.6 39.2 39.9 40.7 67.9 Operating Profit 0.8 20.4 24.0 27.5 31.2 15.5 49.1 53.5 58.3 63.3 -0.9 89.1 94.8 100.8 107.1 87.3 Financial Charges IBRD 0 0.0 0.0 0.0 0.0 0.0 11.4 11.1 10.7 10.2 9.8 9.2 8.7 8.0 7.3 6.5 Local banks 0 29.1 28.2 27.2 26.1 24.8 23.5 22.0 20.4 18.6 16.7 14.5 12.1 9.5 6.6 3.5

Profit Before Taxes 0.8 -8.6 -4.1 0.3 5.1 -9.3 14.2 20.5 27.2 34.5 -27.3 65.4 74.0 83.3 93.2 77.3 Income tax 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Profit After Taxes 0.8 -8.6 -4.1 0.3 5.1 -9.3 14.2 20.5 27.2 34.5 -27.3 65.4 74.0 83.3 93.2 77.3

Actual: 2006, best estimates: 2007, forecast: 2008 and thereafter. *Note: Xiaogan-Xiangfan Expressway is operated as Government project and no operating taxes are charged.

- 35 - Table A3.7: Sources and Applications of Funds: Xiaogan – Xiangfan Expressway (USD million, year ending 31, December)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Sources: Net profits - - 0.8 (8.6) (4.1) 0.3 5.1 (9.3) 14.2 20.5 27.2 34.5 (27.3) 65.4 74.0 83.3 93.2 77.3 Depreciation - - - 22.7 22.8 22.8 22.8 22.8 22.8 22.8 22.9 22.9 22.9 22.9 22.9 23.0 23.0 23.0 State contribution 28.5 41.4 20.3 26.5 ------Provincial contribution 47.0 68.3 33.5 43.6 ------Borrowing: IBRD 65.1 68.9 66.1 8.5 ------Local 90.8 131.9 64.5 84.2 ------Others ------

Total 231.4 310.6 185.1 176.8 18.6 23.1 27.9 13.5 37.0 43.3 50.1 57.3 (4.4) 88.3 97.0 106.2 116.1 100.3

Applications: Capital expenditure 231.4 310.6 184.4 162.7 4.6 4.7 4.9 5.0 5.2 5.3 5.5 5.6 5.8 6.0 6.2 6.3 6.5 6.7 Other expenditure ------Loan repayment:IBRD ------6.6 7.2 7.9 8.7 9.6 10.6 11.6 12.8 14.1 15.5 Local - - 11.7 12.9 14.1 15.6 17.1 18.8 20.7 22.8 25.1 27.6 30.3 33.3 36.7 40.4 44.4 Change w/ capital - - (0.1) (3.2) (0.6) (0.3) (0.3) (0.3) (1.1) (0.3) (0.4) (0.4) (0.4) (1.5) (0.4) (0.5) (0.5) (0.5)

Total 231.4 310.6 184.3 171.2 16.8 18.6 20.1 21.8 29.5 32.9 35.8 39.0 42.6 45.3 50.7 55.3 60.5 66.1

Net Funds Flow - - 0.8 5.6 1.8 4.5 7.8 (8.3) 7.5 10.4 14.3 18.3 (46.9) 43.0 46.3 50.9 55.7 34.2 Open balance - - - 0.8 6.4 8.2 12.7 20.5 12.2 19.7 30.1 44.4 62.7 15.8 58.7 105.0 155.9 211.6 Closing balance - - 0.8 6.4 8.2 12.7 20.5 12.2 19.7 30.1 44.4 62.7 15.8 58.7 105.0 155.9 211.6 245.8

D/S Cover ------1.8 0.8 1.5 1.6 1.6 1.7 (0.1) 2.2 2.2 2.1 2.1 1.7

- 36 - Table A3.8: Balance Sheet: Xiaogan – Xiangfan Expressway (USD million, year ending 31, December)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Assets: Fixed Assets At cost 550.7 633.7 682.6 683.1 683.6 684.1 684.6 685.1 685.7 686.2 686.8 687.4 688.0 688.7 689.3 690.0 Less: Depreciation 0.0 22.7 45.5 68.3 91.0 113.9 136.7 159.5 182.4 205.2 228.1 251.0 274.0 296.9 319.9 342.9 Net fixed assets 550.7 611.0 637.1 614.8 592.5 570.2 547.9 525.6 503.3 481.0 458.7 436.4 414.1 391.7 369.4 347.1

Current Assets Inventory 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 Account receivable 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cash 0.8 6.4 8.2 12.7 20.5 12.2 19.7 30.1 44.4 62.7 15.8 58.7 105.0 155.9 211.6 245.8 Total 0.8 6.5 8.3 12.8 20.6 12.2 19.7 30.2 44.4 62.7 15.8 58.8 105.1 156.0 211.7 245.9 Other Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Assets 551.5 617.5 645.4 627.6 613.1 582.5 567.7 555.8 547.7 543.8 474.5 495.2 519.2 547.7 581.1 593.0

Liabilities & Equity State funds- Equity 64.2 46.0 86.2 82.2 83.0 69.2 78.7 94.4 116.7 146.1 113.6 173.6 242.1 319.7 407.0 478.2

L/T loans: IBRD 200.1 208.5 208.5 208.5 208.5 208.5 202.0 194.7 186.8 178.1 168.5 157.9 146.3 133.5 119.4 103.9 Local 287.2 359.7 346.8 332.7 317.1 300.0 281.2 260.5 237.7 212.6 185.1 154.8 121.4 84.7 44.4 0.0 Total 487.2 568.2 555.3 541.2 525.6 508.5 483.1 455.2 424.5 390.7 353.5 312.6 267.7 218.2 163.8 103.9

Current Liabilities 0.1 3.3 3.9 4.2 4.5 4.8 5.8 6.2 6.6 7.0 7.4 8.9 9.4 9.9 10.3 10.9 Other Liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Liabilities & Equity 551.5 617.5 645.4 627.6 613.1 582.5 567.7 555.8 547.7 543.8 474.5 495.2 519.2 547.7 581.1 593.0

Debt- to- equity ratio 88/12 93/7 87/13 87/13 86/14 88/12 86/14 83/17 79/21 73/27 76/24 65/35 53/47 42/58 30/70 19/81 Current ratio 12.8 1.9 2.1 3.0 4.6 2.6 3.4 4.9 6.8 9.0 2.1 6.6 11.2 15.8 20.5 22.6

- 37 -

Table A3.9: Assumptions for Financial Forecasts: Xiaogan – Xiangfan Expressway 1. Toll and Traffic

Small Medium Large Small Medium Large. Tractor- Car Bus Bus Truck Truck Truck Trailer Total

Toll (Y/ vkm) /_1 0.40 0.75 1.00 0.40 0.75 1.00 1.50

Xiaogan(Wuhan)-Anlu 2006 3,305 162 105 1,099 860 782 96 6,409 2010 3,946 194 125 1,312 1,027 933 116 7,653 2015 5,280 259 167 1,756 1,374 1,249 156 10,241 2020 6,739 331 213 2,241 1,753 1,594 199 13,071 2025 8,199 402 260 2,726 2,133 1,940 242 15,902 Anlu-Suizhou 2006 3,106 155 100 929 962 1,108 153 6,513 2010 3,469 173 111 1,038 1,074 1,237 172 7,274 2015 4,643 231 149 1,389 1,438 1,656 230 9,735 2020 5,925 295 190 1,772 1,835 2,113 293 12,424 2025 7,209 359 232 2,156 2,233 2,571 356 15,116 Suizhou-Zaoyang 2006 3,444 179 116 1,245 1,849 1,855 205 8,893 2010 1,999 104 67 723 1,073 1,077 119 5,162 2015 2,675 139 90 967 1,436 1,441 159 6,908 2020 3,415 178 115 1,234 1,833 1,839 203 8,817 2025 4,154 216 140 1,502 2,230 2,238 247 10,727 Zaoyang-Xiangfang 2010 3,986 213 138 978 1,617 1,076 153 8,161 2015 5,335 285 185 1,308 2,164 1,439 205 10,922 2020 6,808 364 236 1,670 2,762 1,837 262 13,939 2025 8,283 443 288 2,031 3,360 2,235 318 16,959

/_1: Increase 0% every 5 years. 2. Operating Taxes : a. Business tax 0% of total revenue. based on Hubei PCD actural operation b. City tax 0% of business taxes. c. Education levy 0% of business taxes.

3 Operating Costs: a. Wages and benefits 2.10% of total revenue b. Maintenance 9.50% of total revenue c. Fuel and materils 0.00% of total revenue d. Administration 5.00% of total revenue e. Depreciation: 30 years straight-line method.

4. Maintenance (MY/km): Increase 3% pa.

Routine Medium Major maint./ year maint./ 5 years maint./ 10 years 0.15 0.750 1.950

5. Income Tax Rate: 0.0% of profit before tax. based on Hubei PCD actural operation

6. Loan: 5.5% , 20 year maturaties, LIBOR US$ based single currency including 5 years grace period. 7.8% , 10 year maturaties, flexiable principal payment.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Responsibility/ Names Title Unit Specialty Lending Task Team Leader/Lead Transport Michel Bellier EASTR Specialist Anil Somani Senior Environment Specialist EASES Zhefu Liu Resettlement/Social Assessment Spec. EACCF Dan Gibson Resettlement/Social Assessment Spec. EACCF Jean-Marie Braun Highway Engineering Consultant EASTR Institutional Strengthening and Road Dick Jonsson EASTR Traffic Safety Consultant Han-Kang Yen Research Analyst EASTR Robin Carruthers Economist EASTR Rodrigo Archondo-Callao Economist INFTD Dawei Yang Procurement Specialist EACCF R. I. Gopalkrishnan Procurement Consultant EAPCO Haiyan Wang Financial Management Specialist EACCF Senior Financial Management Simon Bradbury LOAG3 Specialist Yi-Ling Liu Disbursement Analyst LOAG3 Nina Masako Eejima Senior Counsel LEGEA Hoi-Chan Nguyen Senior Counsel LEGEA Teresita Ortega Team Assistant EASTR

Supervision/ICR Anil H. Somani Consultant EASTE Peer Reviewer/Lead Transport Aurelio Menendez EASTE Specialist Christopher R. Bennett Sr. Transport Specialist EASTE Dawei Yang Procurement Spec. EAPCO Emily Dubin Junior Professional Associate EASTE Esperanza Miranda Operations Officer EASSD Haiyan Wang Finance Officer LOADM Hong Chen Peer Reviewer/ Operations Officer EASOP Jean-Marie Braun Consultant EASTE Nurul Alam Senior Procurement Spec. EAPCO Pan Wen Consultant EASTE Wenlai Zhang Transport Specialist EASTE Wenling Chen Junior Professional Associate EASTE Yi Geng Financial Management Specialist EAPCO Zhefu Liu Senior Social Development Spec EASCS Teresita Ortega Program Assistant EASTE

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(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY01 7 43.59 FY02 45 237.50 FY03 7 38.05 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00 FY08 0.00

Total: 59 319.14 Supervision/ICR FY01 0.00 FY02 0.00 FY03 10 48.85 FY04 10 76.04 FY05 10 64.49 FY06 10 91.46 FY07 8 68.07 FY08 1 3.87

Total: 49 352.78

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Annex 5. Beneficiary Survey Results

Not applicable.

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Annex 6. Stakeholder Workshop Report and Results

Not applicable.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

The HPCD has the following major comments and suggestions.

ƒ The Bank should not include the irrelevant programs like rural roads into the project, and also should not consider it as one precondition for the loans. This causes difficulties for the implementation of the project. ƒ Strongly suggest the Bank cancel the 1% of the loan as a font-end fee. ƒ Suggest the Bank make comprehensive arrangements for the studies within the range of whole China, so as to avoid the same study recurring under different Bank-financed projects. ƒ In view of China's economy development, it is suggested that the procurement for equipment and consulting experts not only be limited to foreign procurement. ƒ The Bank should pay attention to the safety issues of connecting roads as early as possible when they review the project, so as to avoid additional financial cost for the reconstruction of safety facilities after its completion. ƒ Since the engineering procurement follow the principle of "wining the bid at the lowest price" from the Bank's procurement guidelines, it may cause the implemented contract price is low, but savings of loan. So the project undertakes the extra commitment, which increases the cost for financing. So it is suggested to deduct or exempt the extra increased commitment. ƒ It is suggested that the Bank establish a procedure to solve the use of loans savings. For example, increase the withdrawal percentage or adjust the loan amount among different catalogues, so as to ensure the loans can be fully and efficiently be used for the project. ƒ It is suggested to simplify the withdrawal application, and avoid the late replenishment to the special account causing the financial arrangement for constructions. ƒ The format of progress report is too complicated. It is hoped to simplify the content and reduce the numbers, so as to let the simple procedure improve the working efficiency of the client. ƒ It is hoped that the allocation of resettlement fund can consider the government network system. ƒ It is suggested to combine internal and external resettlement reports into one, which alllows the independent monitoring organization to do it, and reduce the numbers of resettlement report.

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Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

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Annex 9. List of Supporting Documents

1. The World Bank, Xiaoxiang Highway Project: Project Appraisal Document (No. 23909-CHA), August 19, 2002.

2. The World Bank, Xiaoxiang Highway Project: Loan Agreement (No. 4677- CHA), between the People’s Republic of China and the International Bank for Reconstruction and Development, December 17, 2002.

3. The World Bank, Fourth National Highway Project: Project Agreement (No. 4677-CHA), between the Province of Hubei and the International Bank for Reconstruction and Development, December 17, 2002.

4. The World Bank, Aide-Memoires of the Xiaoxiang Highway Project from 2002 to 2007.

5. Hubei Provincial Communications Department. Project Implementation Plan, May 27, 2002.

6. Hubei Provincial Communications Department, Resettlement Action Plan, June 2002.

7. Hubei Provincial Communications Department, Environmental Impact Assessment, June 2003.

8. Hubei Provincial Communications Department, Environmental Management Plan, June 2003.

9. Research Center for Involuntary Resettlement, Wuhan University, The World Bank Financed Xiaoxiang Expressway Project Post Evaluation Report of Resettlement. June 2006.

10. Hubei Provincial Communications Department, Project Progress Reports, 2002-2007.

11. Hubei Provincial Communications Department, Environmental Monitoring Reports, 2002-2007.

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