Report and Recommendation of the President to the Board of Directors

Project Number: 36455 September 2008

Proposed Loan People’s Republic of : Central Roads Development Project

CURRENCY EQUIVALENTS (as of 15 August 2008)

Currency Unit – yuan (CNY) CNY1.00 = $0.1457 $1.00 = CNY6.862

The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00 = CNY7.14 (the rate prevailing at project loan appraisal) was used.

ABBREVIATIONS

ABS – asset-backed securities ADB – Asian Development Bank CBRC – China Banking Regulatory Commission CBTA – Cross-Border Transport Agreement CO – carbon monoxide CO2 – carbon dioxide CSRC – China Securities Regulatory Commission EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environmental management plan EMDP – ethnic minority development plan FIRR – financial internal rate of return FYP – five-year plan GDP – gross domestic product GMS – Greater Subregion HC – hydrocarbon HIV/AIDS – Human immunodeficiency virus/acquired immunodeficiency syndrome ICB – international competitive bidding IEE – initial environmental examination ITS – intelligent transport system Lao PDR – Lao People’s Democratic Republic LIBOR – London interbank offered rate MOC – Ministry of Communications NCB – national competitive bidding NH – national highway NOx – nitrogen oxides O&M – operation and maintenance PADO – Poverty Alleviation and Development Office PBOC – People’s Bank of China pcu – passenger car unit PMO – project management office PPMS – project performance management system PPP – purchasing power parity PRC – People’s Republic of China QCBS – quality- and cost-based selection SPM – suspended particulate matter TA – technical assistance toe – ton of oil equivalent

VOC – vehicle operating cost WACC – weighted average cost of capital WKEC – Wukun Expressway Company Limited YDRC – Yunnan Development and Reform Commission YEPB – Yunnan Provincial Environmental Protection Bureau YHIC – Yunnan Provincial Highway Development and Investment Company Limited YPCD – Yunnan Provincial Communications Department YPG – Yunnan Provincial Government YPSD – Yunnan Provincial Public Security Department

NOTES

(i) The fiscal year of the Government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 31 December 2008. (ii) In this report, "$" refers to US dollars.

Vice-President C. Lawrence Greenwood, Jr., Operations Group 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director C. S. Chin, Officer-in-Charge, Transport Division, EARD

Team leader X. Yang, Senior Transport Economist, EARD Team members R. Butiong, Senior Regional Cooperation Specialist, Southeast Asia Department (SERD) A. K. Djusupbekova, Senior Counsel, Office of the General Counsel S. Ferguson, Senior Social Development Specialist (Resettlement), EARD A. Kunth, Infrastructure Specialist, SERD E. Masaki, Young Professional, EARD S. Noda, Transport Specialist, EARD M. Ojiro, Country Director, Tajikistan Resident Mission, Central and West Asia Department X. Peng, Principal Counsel, Office of the General Counsel Y. Qian, Principal Economist (Financial Sector), EARD L. Cuevas-Arce, Administrative Assistant, EARD

CONTENTS

Page

LOAN AND PROJECT SUMMARY i MAPS

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2

III. THE PROPOSED PROJECT 8 A. Impact and Outcome 8 B. Outputs 9 C. Special Features 9 D. Project Investment Plan 12 E. Financing Plan 13 F. Implementation Arrangements 13

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 16 A. Traffic Forecast 16 B. Economic Analysis 16 C. Financial Analysis and Projections 16 D. Poverty Reduction and Social Strategy 17 E. Environmental Assessment 18 F. Land Acquisition and Resettlement 19 G. Risks 19

V. ASSURANCES AND CONDITION 19 A. Specific Assurances 19 B. Condition for Disbursement 23

VI. RECOMMENDATION 24

APPENDIXES 1. Design and Monitoring Framework 25 2. Road Sector Policy Reform Matrix 28 3. External Assistance to the Road Sector 30 4. Local Road Safety Enhancement Program 33 5. Rural Access and Rural Road Maintenance 37 6. Strategic Vehicle Emission Reduction Plan 40 7. Regional Cooperation in the Greater Mekong Subregion 42 8. Detailed Cost Estimates by Financier 44 9. Implementation Schedule 45 10. Procurement Plan 46 11. Traffic Forecast 48 12. Economic Analysis 50 13. Financial Analysis and Projections 53

14. Summary Poverty Reduction and Social Strategy 58 15. Summary Ethnic Minority Development Plan 61 16. Summary Resettlement Plan 64

SUPPLEMENTARY APPENDIXES (available on request)

A. Organization Charts of Yunnan Provincial Communication Department and Yunnan Provincial Highway Development and Investment Company Limited B. Outline Terms of Reference for Consultants C. Monitoring of Socioeconomic and Poverty Impacts D. Financial Management Assessment E. HIV/AIDS Prevention for the Road Transport Sector F. Stakeholder Participation and Consultations

LOAN AND PROJECT SUMMARY

Borrower People’s Republic of China (PRC)

Classification Targeting classification: General intervention Sector: Transport and communications Subsector: Roads and highways Themes: Sustainable economic growth, regional cooperation Subthemes: Promoting economic efficiency and enabling markets, cross-border infrastructure

Environment Category A. An environmental impact assessment was undertaken, Assessment and the summary was circulated to ADB’s Board of Directors and uploaded to the Asian Development Bank (ADB) website on 3 May 2007.

Project Description The Project is located in Yunnan Province, one of the poorest areas in the PRC. It has one of the lowest levels of per capita gross domestic product in the PRC, at only 56% of the national average in 2006. The Project is designed to promote inclusive sustainable economic growth in central Yunnan, preparing it to cope with an increasingly important role in regional cooperation and trade with Greater Mekong Subregion (GMS) countries.

The Project will develop an integrated road transport network in central Yunnan by (i) constructing a 64-kilometer (km) Wuding– Expressway and associated facilities, (ii) upgrading local roads in the project area with a total length of 190 km, (iii) improving traffic safety on the local road network in the project area, and (iv) strengthening the technical and management capacity of Yunnan Provincial Communications Department (YPCD), its related agencies, and Wukun Expressway Company Limited (WKEC).

Rationale The Project reflects ADB’s transport sector strategy, which focuses on (i) financing new roads that connect major growth centers, supported by a system of local roads; (ii) promoting road safety, cutting vehicle emissions, and raising energy efficiency; (iii) improving the commercial orientation and efficiency of expressway organizations; and (iv) strengthening regional cooperation in transport. The Project was formulated in line with the PRC Western Region Development Strategy, which aims to reduce development disparities between the western and coastal regions.

Underdeveloped roads and associated high transportation costs are major barriers to the reduction of poverty in Yunnan. Rural poverty incidence is high in the project area, particularly in the minority counties. Existing transport infrastructure is congested, creating high transport costs for producers and consumers. This transport bottleneck needs to be removed to facilitate the movement of goods and people within Yunnan, between Yunnan and other parts of the PRC, and between the PRC and GMS countries.

ii

The Project will improve an important section from Wuding to Kunming of the –Kunming corridor, a high priority western development corridor in the PRC. The Project will be the fourth road project for ADB financing in Yunnan, and will complement ADB assistance in developing the Chengdu–Kunming corridor and three GMS corridors: (i) North–South Economic Corridor to (via northern Lao People’s Democratic Republic), (ii) Eastern Corridor to Ha Noi/Hai Phong in Viet Nam, and (iii) Northern Corridor to Nanning/Fangcheng in (Map 1).

The Project will support a local road safety enhancement program to establish an efficient and sustainable mechanism to manage road safety. Its findings will be used to develop policy and strategies to reduce traffic accidents on local roads. It will be the first ADB loan to assess and finance the local road safety issues in the PRC.

Impact and Outcome The impact of the Project is a well-functioning integrated road transport system in Yunnan Province and the rest of the GMS. This will be achieved by developing an efficient, safe, and environmentally sustainable regional transport system to facilitate the movement of goods and people within Yunnan, and between the PRC and GMS countries.

Project Investment Plan The investment cost of the Project is estimated at $745 million, including taxes and duties of $31 million. Of the $200 million ADB loan, $6 million will finance the local road safety enhancement component.

Financing Plan ($ million) Source Amount Asian Development Bank 200.0 Domestic Bank Loans 211.5 Ministry of Communications 98.6 Yunnan Provincial Government 234.9 Total 745.0

A loan of $200 million from ADB’s ordinary capital resources will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan will have a 24-year term including a grace period of 4 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft Loan and Project Agreements.

Allocation and Relending The ADB loan proceeds will be made available by the PRC Terms Government to Yunnan Provincial Government (YPG) on the same terms and conditions as ADB loan. YPG will apply $6 million to local road safety enhancement program, and onlend $194 million to WKEC on the same financial terms and conditions as those of the ADB loan. WKEC will bear the interest rate variation and foreign exchange risks.

iii

Period of Utilization 30 June 2013

Estimated Project Completion Date 31 December 2012

Executing Agency Yunnan Provincial Communications Department (YPCD)

Implementation YPCD will be responsible for overall implementation of the Project. Arrangements WKEC will be responsible for the expressway and capacity building components. YPCD through the project management office will implement the local road improvement and local road safety enhancement components.

Procurement Goods and works financed by the ADB loan will be procured in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time). Contracts and mode of procurement envisaged under the Project are indicated in the procurement plan. ADB approved advance contracting on 16 May 2007.

Consulting Services The ADB loan will finance 36 person-months of international consulting services for supervising construction; providing advice on highway design, bridge, tunnel, road safety, and the intelligent transport system. The international consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time).

The Project will also finance national consulting services for the local road safety strategy study at an estimated cost of no more than $100,000. The national consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants. In addition, YPCD will engage and finance 5,500 person-months of national consulting services. All national consultants not financed by ADB will be recruited in accordance with government procedures acceptable to ADB.

Project Benefits and The Project was identified as a high priority project under the GMS Beneficiaries Transport Sector Strategy, which was endorsed by the six GMS governments in 2006. The Project will help operationalize the strategic priority of strengthening connectivity and facilitating cross- border movement and tourism under ADB’s Regional Cooperation Strategy and Program for the GMS. It will have a significant positive impact on the economic development of the GMS.

The expressway will reduce travel time between Wuding and Kunming by at least 1 hour and shorten the travel distance by 20 km. Improved local roads will link villages to the road network and national highways, and hence to the national and regional economy. Improved local road safety will reduce traffic accidents. A developed and efficient transport network will integrate poor isolated regions with the centers of economic growth.

iv

The Project will directly benefit about 1.93 million people living in the project area, of whom 61% live in rural areas. Some 25% of rural people live on less than $1 per person per day. The Project will also benefit other people living in Yunnan and neighboring provinces, as well as GMS countries.

The Project will directly benefit road users (e.g., passengers, traders, transport providers, and bus and truck operators), as well as labor, the local economy, and the private sector. It will help reduce traffic accidents, vehicle emissions, and traffic noise in the corridor. The Project will also boost tourism. Rural households will be important beneficiaries—from increased incomes through better access to roads, services, markets, and other off-farm opportunities.

The Project is economically and financially justifiable and sustainable. The economic internal rate of return for the Project is estimated at 17.1%. The financial internal rate of return for the expressway component is 4.3%, which is higher than the real weighted average cost of capital.

Risks and Assumptions Overall, the project risk is rated modest. The Project is formulated to reduce technical, financial, safety, and social risks. These have been assessed and mitigating measures have been provided.

The main technical risks are associated with the construction of tunnels and bridges. To avoid delays in construction and increased cost, the Project will ensure (i) selection of competent contractors by thorough prequalification, (ii) engineering design based on sufficient geological investigations, and (iii) adequate quality and safety assurance. The financial risks associated with construction and operation of the expressway will depend on the level and composition of traffic, construction costs, ability of the commercial management, and appropriate tolls. To mitigate the financial risks, WKEC will build up a commercial business environment for operations, the Project will receive substantial equity from the Government, and an appropriate toll structure will be adopted. The social risks include resettlement and HIV/AIDS infection. Appropriate mitigation measures are in place in the resettlement plan. HIV/AIDS issues are addressed under stand-alone technical assistance Fighting HIV/AIDS in Asia and the Pacific.

The preparation team worked closely with YPCD to ensure that mitigation measures are in place. YPCD has experience, and has shown satisfactory performance, in implementing internationally financed projects.

Map 1

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North-South Corridor Northern Corridor I N D I A Myitkyina Dali Hexian 24 o 00'N Kunming Chuxiong Wuzhou GUANGXI ZHUANG AUTONOMOUS REGION 24 o 00'N Tamu YUNNAN PROVINCE Tonzang PEOPLE’S REPUBLIC OF CHINA

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CENTRAL YUNNAN ROADS DEVELOPMENT PROJECT

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I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the People’s Republic of China (PRC) for the Central Yunnan Roads Development Project. The design and monitoring framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

2. The PRC has made remarkable progress in economic growth and poverty reduction since 1978. Its record of 30 years with more than 9% average annual growth has led millions of people out of poverty. However, many people remain poor, and millions more have low incomes or are living just above the poverty line. 1 Moreover, the distribution of income is highly imbalanced between eastern coastal and interior provinces, and between urban and rural areas. Poverty is more widespread in the western region.2 Infrastructure bottlenecks and lack of access to outside markets are the major constraints on the reduction of poverty. Thus, developing economic infrastructure in key corridors to connect the western and coastal regions is essential to promote trade and reduce regional development disparities in the long run.

3. Yunnan is the sixth largest province in PRC. It is located on the most southwest boundary of the PRC, neighboring and Guangxi to the east, Chongqing and Sichuan in the north, Autonomous Region and Myanmar to the west, and the Lao People’s Democratic Republic (Lao PDR) and Viet Nam to the south. Yunnan encompasses 394,000 square kilometers and 94% of the total provincial area is covered by mountains and hills, with terrain ranging from tropical rainforest to high mountains. Yunnan has a population of 44 million, of which 36% are minority nationalities. Its geographical, environmental, and cultural diversity has made it an extremely popular tourist attraction.

4. Like other parts of the PRC, Yunnan’s economy has grown rapidly. Nevertheless, it still lags the coastal provinces and the country as a whole. Yunnan is one of the least-developed provinces, with a gross domestic product (GDP) per capita ranked 29th among all the provinces, ahead of only Guizhou and Gansu. GDP per capita in 2006 was about 56% of the national average. The lack of an efficient and effective transport system is an important constraint for the sustainable growth of Yunnan. The proposed Project forms the last missing link in the Chengdu–Kunming corridor connecting two growth centers—Chengdu, the capital of Sichuan, and Kunming, the capital of Yunnan Province—in southwestern PRC. Together, the two provinces (Yunnan and Sichuan) have a population of 126 million, about 10% of the country’s total. Support for developing the proposed corridor will extend the benefits of increased accessibility to the western region, where average incomes are the lowest in the PRC.

5. More than 90% of the poor in the PRC live in rural areas. Roads are usually the only mode of transport that can help the poor reach markets and services. Recognizing the role of rural roads in reducing poverty, the Government has accelerated rural road improvement to

1 The World Bank recently published a revision of the PRC’s purchasing power parity (PPP) estimates. These revised estimates decrease the estimated size of the PRC economy in PPP terms, but do not significantly change real economic growth rates. The World Bank predicts that, under its new PPP estimates, the PRC’s $1 per day (PPP) poverty rate will go up modestly. See World Bank. Quarterly Update February 2008. . 2 For recent data on the PRC’s economic growth, poverty, and social development, see ADB. 2008. Key Indicators 2007. Manila. See also ADB. 2008. PRC Country Partnership Strategy (2008–2010). Manila.

2 close the development gap between urban and rural areas.3 During the 10th Five-Year Plan (FYP) 2001–2005, investment in rural roads totaled CNY418 billion, three times that in the previous 5 years. In accordance with the Rural Road Construction Program approved by the State Council in February 2005, improvement of rural roads will be carried out nationwide within the next 20 years. In the 11th FYP 2006–2010, CNY100 billion of central government funding is allocated for new rural road projects and CNY40 billion for the accessibility program, representing 18% of the total budget of CNY800 billion. By 2010, it is expected that all townships in the western region will be accessible to a paved road network.

6. The Yunnan Rural Road 11th FYP is to construct and upgrade 53,300 kilometers (km) of a rural road accessibility program. To achieve this, Yunnan Provincial Communications Department (YPCD) envisages investment in rural roads to reach about CNY16.8 billion from 2006 to 2010. Of this, the Ministry of Communications (MOC) will provide CNY9 billion, representing 54% of the total investment; YPCD will provide CNY3.5 billion, 21% of the total; and the remainder will be raised by lower levels of government. The overall objective is to provide paved roads to all the townships by 2010, and paved roads to all the administrative villages by 2020.

B. Analysis of Key Problems and Opportunities

1. Challenges

7. Despite rapid economic growth, the PRC has suffered from imbalanced growth among the provinces. In 2006, the GDP per capita of the western provinces was about half of the national average and only one third of that in the eastern coastal region. The road network still does not provide adequate access to the poorer inland region; vast distances and difficult mountainous terrain isolate it from local, regional, and national markets. Most exports and imports reach major markets through other provinces, meaning that regional transport development is an important determinant of growth and development.

8. Yunnan has made significant progress in poverty reduction since the 1980s as a result of economic growth and concentrated development efforts. Nevertheless, it remains one of the most underdeveloped regions in the PRC. Currently, Yunnan has 73 national poverty-stricken counties, accounting for 45% of the total counties in the province. Yunnan has a population of 44 million, of which 84% are rural. Annual per capita rural income was CNY2,250 in 2006, which is one of the lowest levels in the PRC. More than 6.7 million people are poor, defined as living below the Government low-income line of CNY958 per capita per year (which is below the international poverty line of $1 per person per day). Rural poverty incidence in Yunnan is 20%.

9. Road transportation is the main mode in Yunnan’s transportation system. In 2006, road traffic in Yunnan accounted for 79% of total passenger traffic in passenger kilometers (km) and 60% of total freight traffic in ton-kms. From 1990 to 2006, road passenger traffic grew by 9.3% and freight traffic increased by 6.3% annually. However, road infrastructure is still underdeveloped. Based on MOC’s statistical yearbook, class II and above roads comprised 3% of all roads in 2006, significantly lower than the national average (10% of the road network). Unclassified roads comprised 50% of the road network in 2006, much higher than the national average (34% of the road network). Less than 17% of the total road length in the province was paved; the remaining 83% (165,425 km) was unpaved, although 14,000 km of this had a macadam (stone-set) surface. Of the total 13,198 administrative villages, about 50% did not

3 In 2007, the annual per capita net income of rural households was CNY4,140 ($591), while the annual per capita disposable income of urban households was CNY13,786 ($1,969). Engel coefficients in rural and urban households were 43.1% and 36.3%, respectively.

3 have all-weather road access at the end of 2006. Poor roads have led to inadequate and costly transport services in Yunnan. About 6,500 administrative villages have no direct access to licensed bus services as bus operators are unwilling to use poor roads because of high costs and danger. Transport demand is usually met by various informal transport services such as bicycles, dual-purpose pickups, and agricultural tractors. During the 11th FYP 2006–2010, YPCD formulated plans to provide sealed roads and organized bus services to all townships.

10. The project area includes one district and four counties, of which two are nationally designated poverty counties.4 About 25% of rural residents are poor and the highest rural poverty incidence is 37% in Wuding County. Furthermore, because of mountainous terrain, most of the rural population is scattered in 6,996 natural villages that lack basic infrastructure, especially roads. Poor roads and associated high transportation costs are a significant constraint to promoting higher value cash crops. The project preparation survey revealed that villagers are aware of the clear linkages between road access and poverty. The villages along the road plant vegetables and fruits, and it is easier for them to transport to Kunming market, while remote villages mainly plant potatoes and corn. Without good access to markets, villages are unable to integrate into the market economy, their income level remains low, and economic growth is not achievable or sustainable. The counties with the greatest accessibility problems also have limited financial resources, so they need the most support from national and provincial governments. An important aim of the Project is to reach out to the poor remote villages through improved rural transport and associated services.

11. The PRC faces great challenges in road safety. During 2000–2005, around 600,000 people were killed and over 3 million injured in road traffic accidents in the PRC, equivalent to 1 fatality every 5 minutes. These had serious social and economic implications. It is estimated that road accidents in the PRC have impacted on the lives of more than 20 million people, either as victims of accidents or as family members of those involved in the accidents. A road accident can take a family from self-sufficiency to poverty especially if the victim is the family’s main breadwinner, as it is often the case. The Government is committed to improving road safety. It created a 17-ministry committee5 under the State Council and introduced the first Road Traffic Safety Law in the PRC, which took effect on 1 May 2004. Since then, MOC has been implementing the National Highway Safety Enhancement Project, aiming to eliminate road safety risks and save lives on national highways. The road safety situation had improved steadily but it remains challenging as the level of motorization increases. Road safety risks on low-grade roads remains severe because most of them were built at a time when few resources were used for road safety facilities. In the project area, safety is of great concern to villagers. Comments received during field surveys centered on the need to install “Go Slow” signs at the entrance to villages located along national highway (NH) 108. Other concerns were that poor road conditions undermined safety, such as roads with sharp turns, steep grades, and poor line of sight. Good practice and policies must be in place at present in order to reduce the number of fatalities and injuries on the roads before vehicle fleet expand.

12. National highway (NH) 108, which runs parallel to the project expressway, is mainly composed of class II roads with insufficient shoulders, poor alignment, and limited capacity. It was congested at peak hours, with average daily traffic of about 6,000 vehicles in 2005. The average travel speed is less than 40 km per hour. Traffic congestion is growing and will exceed the road’s capacity by 2012, and several sections are already approaching their capacity. The road is dangerous as it has many road side frictions caused by the high incidence of slow-

4 The project area is defined as ; and Fumin, Wuding, Luquan, and Lufeng counties (Map 3). 5 The committee includes MOC, Ministry of Public Security, National Development and Reform Commission, Ministry of Construction, Ministry of Agriculture, National Quality Control Bureau, and National Safety Bureau.

4 moving traffic and substantial ribbon development on most of its length. The Project will help to ease severe congestion, reduce accidents and traffic-induced air pollution in the corridor.

2. Government and Asian Development Bank Strategies

13. The Government’s 11th FYP, 2006–2010, concentrates on an all-inclusive and sustainable growth strategy, with increased focus on environmental protection, and a strong commitment to raising living standards in rural areas, especially in western provinces. The Government pledges to promote a “harmonious society” by raising public spending on rural infrastructure and services in the west. Road development is one of the priorities of the 11th FYP for developing the service sector and reducing poverty; it is also important for integrating the domestic economy and balancing regional development. To reduce regional disparities, the Government aims to link the western region with central and eastern regions, provide western region access to trade outlets at sea and land , and promote regional cooperation with neighboring countries.

14. The strategy for the PRC road sector of the Asian Development Bank (ADB) gives high priority to removing infrastructure constraints, and supporting policy and institutional reforms. ADB supports (i) financing new roads that connect major growth centers, supported by a system of local roads; (ii) developing and improving urban transport and rural roads; (iii) promoting road safety, cutting vehicle emissions, and raising energy efficiency; (iv) improving the commercial orientation and efficiency of expressway organizations; and (v) strengthening regional cooperation in transport. ADB assistance for roads targets the poor western provinces and regional economic corridors. The Project is consistent with PRC development priorities and ADB strategy. The road sector policy reform matrix is in Appendix 2.

3. Opportunities

15. Yunnan has great potential to foster sustainable economic growth and social development. The Government is committed to the development of transportation to strengthen its competitiveness of west region and regional integration. The provincial social and economic development plan for the 11th FYP emphasized the development of infrastructure and further reform and opening up to improve people’s living standard. Some targets have been set for the province, e.g., GDP will grow at 8.5% annually on average; energy consumption will decrease by 12% by the end of 2010 compared with 2005; disposable income of urban residents and pure income of rural residents will increase by 6% annually. The 11th FYP of YPCD has brought it forward, and underlined the need for (i) improved high-grade access to key cities and international ports; (ii) improved local road access to markets and services; and (iii) improved road operation and maintenance, safety, and transport services.

16. Over the past 15 years, transportation has been improved to strengthen economic and trade cooperation among Greater Mekong Subregion (GMS)6 countries. However, more needs to be done to reach poor areas and link rural residents with growth centers and neighboring countries. Because of its geographic location, Yunnan has advantages in border trade with GMS countries. The Wuding–Kunming Expressway is an important section of the Chengdu (Sichuan) to Kunming (Yunnan) national high-priority western development corridor. It will support three GMS corridors: (i) North–South Economic Corridor to Bangkok (via northern Lao PDR), (ii) Eastern Corridor to Ha Noi/Hai Phong in Viet Nam, and (iii) Northern Corridor to Nanning/Fangcheng in Guangxi (Map 1).

6 The GMS comprises , Lao PDR, Myanmar, Thailand, Viet Nam, and PRC. With ADB assistance, the six member countries launched the GMS Program in 1992.

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17. ADB has provided support in financing three transport projects 7 in the Chengdu– Kunming–Hai Phong corridor to spread economic and social benefits to the poor region (Map 2). By 2012, when the Chengdu–Kunming and Kunming–Hai Phong Transport Corridor is completed, cars, buses, and trucks will be able to speed people and goods between northern Viet Nam and southern PRC, opening the prospect of a significant new economic development zone in Asia. The corridor, one of the strategic transport corridors that integrate the economies of northern Viet Nam with southwest PRC, is seen by the PRC and Viet Nam governments as a vital spur to the region’s growth, lifting the pace of development. The corridor will help implement Viet Nam’s socioeconomic development plan in its poor northern provinces. It will also assist PRC in carrying out its strategy to "open up" the west.

18. Yunnan Province abounds in natural resources. It has over 600 rivers and lakes that provide an annual water supply of 200 billion cubic meters, as well as abundant mineral resources. Yunnan’s reserves of aluminum, lead, zinc, and tin are the largest in PRC. There are also major reserves of copper and nickel. The province is also famous as the kingdom of animals and plants. It is a major tourist attraction both for domestic and international visitors.8 Over the years, the economic structure of Yunnan Province has significantly improved with rapid growth. In 1990, primary industry accounted for 43% of Yunnan’s GDP, but by 2006 this had fallen to 19%. Secondary industry accounted for 43% of GDP in 2006, more than the level of 40% in 1990. Tertiary industry contributed 38% of GDP in 2006 compared with only 17% in 1990. Agriculture has been experiencing a gradual evolution from subsistence farming to commercial production. Yunnan’s five pillar industries are tourism; foodstuffs (tobacco, sugar, and ); development of bio-resources; mining; and hydroelectric industry. Horticulture, natural medicines, biotechnology, and cash crops have become new economic growth points. Improved transport infrastructure will be a catalyst for investment in the project area. It will increase the production and export of mineral products, reduce the transport cost for cash crops, and promote tourism.

19. External assistance to the PRC road sector has come mainly from ADB, Japan Bank for International Cooperation, and World Bank. Since 1991, ADB has extended 37 loans totaling $7.5 billion to finance 5,206 km of expressways and 11,004 km of associated local road networks. Project completion reports prepared for 20 road projects conclude that 19 were “highly successful” or “generally successful” and 1 “partly successful”.9 ADB has also supplied 68 technical assistance (TA) projects totaling $36.6 million to the road sector. The advisory TA projects have addressed policy and institutional issues, including highway planning, road safety, socioeconomic assessment, transport pricing, and mobilization of nongovernment financial resources. The World Bank has provided about $7.1 billion and the Japan Bank for International Cooperation about ¥219 billion to finance road investments (Appendix 3). ADB coordinates with these organizations to ensure that each major development partner focuses on different corridors, and information related to policy advice is shared across the development community.

7 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of China for the Southern Sichuan Roads Development Project. Manila; ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of China for the Central Sichuan Roads Development Project. Manila; and ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Socialist Public of Viet Nam for the Kunming–Hai Phong Transport Corridor–Noi Bai-Lao Cai Highway Project. Manila. 8 Tourism is becoming one of the five pillar industries. Tourism income reached CNY50 billion or 12.5% of the total provincial GDP in 2006. 9 The “partly successful” rating is mainly due to inadequate safety facilities and enforcement. Remedial actions were taken to rectify the issues. The Project was subsequently rated “successful” in the project performance audit report.

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4. Lessons

20. The evaluation of ADB assistance for roads and railways in the PRC10 concludes that ADB’s program for roads was successful overall, and ADB has the potential to formulate new focus and priorities to continue playing a significant role in the road sector. Under the Project, ADB formulated the following new foci at the project level: (i) increasing private sector participation in investment, provision of services, and operations; (ii) greater involvement in road safety issues; (iii) improving axle load enforcement; (iv) improving vehicle emissions; and (v) rationalizing and reforming transport services.

21. YPCD has experience in implementing internationally financed projects without major problems. Of the three ADB financed road projects, two have been completed, and one is under implementation. The two completed projects were rated “highly successful”11 and “successful” 12 respectively. Lessons from previous road projects in Yunnan and elsewhere in the PRC suggest the need for, among others, (i) adequate and timely funding for land acquisition and resettlement, and closer supervision of its implementation; (ii) conducting sufficient geological investigations for projects located in difficult, mountainous terrain to ensure assessment of designs and costs; (iii) formulating a well-prepared design and monitoring framework with baseline and target values established at the outset of the project; (iv) strengthening local communications bureaus for road maintenance; (v) integrating the local road component into expressway development to enhance the poverty impact; and (vi) separating expressway construction and operations from the provincial government function to improve corporate governance.

22. These lessons guided the design of the Project. Under the proposed Project, YPCD has agreed to (i) provide more attention and resources to land acquisition and resettlement and closer supervision of its implementation; (ii) ensure that supplemental geological investigations will be carried out during the detailed design stage, especially in the tunnel and bridge portions of the proposed highway; (iii) contribute, in a more proactive manner, to a design and monitoring framework with baseline and target values; and (iv) implement the new provincial rural road maintenance reform. Due attention has been given to the local road improvement component to ensure its timely implementation. The project company will be the implementing agency to implement the project expressway.

5. Policy Dialogue

23. Developing an Integrated Corporatization Approach. The dialogue on institutional arrangements with YPCD helped raise awareness of the importance of developing an integrated corporatization approach. In May 2006, a separate corporate entity, Yunnan Provincial Highway Development and Investment Company Limited (YHIC) was established by Yunnan Provincial Government (YPG). YHIC was incorporated under the new Company Law of the PRC with initial equity capital of CNY5 billion, legally separated from YPCD. The primary objective of YHIC is to construct, develop, maintain, and operate toll roads in Yunnan. YPG authorized YHIC rights to (i) collect tolls from road users; (ii) retain toll and non-toll revenue in the business; (iii) maintain full financial accounts of its assets, liabilities, revenues, and expenses; and (iv) engage in developing and operating other infrastructure projects such as toll roads, bridges, tunnels, and ancillary facilities along toll roads. The establishment of YHIC opened the way for diversified financing, as it can tap possible capital markets and invite private equity investment in YHIC.

10 ADB. 2007. Sector Assistance Program Evaluation of the Asian Development Bank Assistance for Roads and Railways in the People’s Republic of China. Manila. 11 ADB. 2001. Project Completion Report on the Yunnan Expressway Project in the People’s Republic of China. Manila. 12 ADB. 2006. Project Completion Report on the Southern Yunnan Road Development Project in the People’s Republic of China. Manila.

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24. Facilitating Private Sector Participation. YPG plans to construct and upgrade approximately 800 km of expressways at the estimated cost of CNY40 billion, according to the 11th FYP. YPG has been exploring options to finance part of the investment requirements from private sources because of limited public financing. Establishment of YHIC in 2006 facilitated private sector participation on a strategic basis. YHIC has since been making extensive efforts to engage the private sector and is now in the process of engaging strategic investors for the Kunming–Shilin expressway. YHIC will explore various options with potential private investors in close consultation with ADB. At least 6 months prior to the opening of the project expressway, YHIC will analyze the feasibility of accessing financing from financial markets for future road sector investments, and possible private sector participation in operation and maintenance (O&M) of the project expressway. It will report its conclusions to ADB.

25. Supporting Asset-Backed Securitization Initiative. ADB has been exploring alternative ways for funding expressway projects, particularly in western regions of the PRC, to provide additional options for provincial governments. YPCD and YHIC showed a strong interest in pursuing a proposal for ADB to facilitate private sector funding. One option is through issuance of asset-backed securities (ABS) against future net toll revenues,13 with the possible backing of an ADB partial credit guarantee. ADB has financed three toll road projects in Yunnan, two of which are completed and operational. These projects are generating toll revenues, which can serve as collateral for YHIC to issue ABS to private investors to finance future road investments in Yunnan. Structured finance, such as ABS against future net toll revenues, is an efficient alternative for infrastructure finance. ABS will be a useful tool for YHIC to raise long- term financing efficiently from the capital market, and correspondingly streamline the debt structure to reduce funding requirements from banks. It will also be a good fixed income investment tool for institutional investors in the capital market, and its development will contribute to overall balanced development of capital markets in the PRC. In the long run, it will be beneficial to the development of local authority capacity to finance infrastructure, and to the development of ABS market.

26. China Securities Regulatory Commission (CSRC) piloted 10 ABS issuances raising CNY26 billion under the collective asset management plan structure since August 2005. There have been no new ABS issuances after September 2006. To expand the scope of the regulations and establish a well-structured legal framework, some fundamental issues remain to be addressed. Specifically, any future legislation will need to address the issues of true sale and bankruptcy-remote status. CSRC considers future toll road projects in Yunnan good candidates for pilot testing, and ADB involvement will have demonstration effects to push forward legal and regulatory reforms. The major challenges are (i) fragmented regulatory authorities;14 (ii) lack of the bankruptcy-remote status of a special purpose vehicle to the overall structuring of an asset- securitization transaction; (iii) no agreed timetable given by CSRC for relaunching the ABS products; (iv) a more volatile stock market; (v) a small investor base for such instruments, and regulatory restrictions on some institutional investors (e.g., insurance companies) for ABS investments; and (vi) the need to restructure YHIC’s existing debts to free up cash flows and pledged collaterals.

27. For the potential ABS transaction, external credit enhancement options 15 should be considered to achieve the maximum support for the transaction’s objectives. For external credit enhancement, ADB has a unique advantage to provide a partial credit guarantee to attract

13 Net revenues arrived at after meeting debt servicing, O&M costs, dividends, and necessary periodic capital costs. 14 Since 2005, there have been two major types of securitization transactions in the PRC, all on an experimental basis, carried out under the supervision of two sets of regulatory authorities: (i) CSRC, and (ii) People’s Bank of China (PBOC) and China Banking Regulatory Commission (CBRC). 15 This refers to credit support provided to a securitization from a third party, “external” to the transaction, in a manner such that the credit rating of the securitization is enhanced.

8 institutional investors. Moreover, ADB has been assisting the central bank, People’s Bank of China (PBOC), and legislators to improve the legal framework.16 A small-scale TA project17 has been developed to support the ABS initiative in Yunnan to (i) study and prepare the suggested private sector financing through an ABS proposal with ADB’s partial credit guarantee, (ii) review the legal and regulatory framework, and (iii) help structure the appropriate financing instrument for CSRC consideration. YHIC is committed to (i) pursuing this financing scheme for the construction of future roads; and (ii) coordinating with relevant government agencies to facilitate the structuring process, including domestic approval procedures.

6. Rationale for ADB Support

28. Constraints and Opportunities. Rural poverty incidence is high in the project area. Roads and transport services are underdeveloped, which is a major constraint on poverty reduction. The existing national highway is poor, dangerous, and congested and winds through towns, creating high transport costs for producers and consumers. This transport bottleneck needs to be removed to facilitate moving goods and people between rural and urban areas, and between Yunnan and neighboring provinces. At the national level, the Project will contribute to attain the full benefits of network integration by connecting two growth centers (Kunming and Chengdu) in southwest PRC. At the regional level, the Project was identified as a high priority project under the GMS Transport Sector Strategy,18 endorsed by the six GMS governments in Vientiane, Lao PDR in 2006. It will support three GMS transport corridors (para. 16) and was included as a loan project for 2008 in ADB’s GMS regional cooperation operations business plan (2008–2010). 19 The Project helps operationalize the strategic thrust for strengthening connectivity and facilitating cross-border movement and tourism with Viet Nam under ADB’s regional cooperation strategy and program for the GMS.20

29. Value Added by ADB. Over the past 15 years, ADB has become Yunnan Province’s long-term development partner. YPG has requested the continued support of ADB to help it develop vital transport infrastructure while strengthening its relevant institutions. In addition to financing, ADB involvement will contribute to (i) institutional strengthening activities to promote sound corporate governance and private sector participation, (ii) continued strengthening of YPCD to manage the road network effectively, and (iii) management of sector externalities (safety, environment, and social safeguard issues). ADB also contributed to the integrated design of the Project by working closely with YPCD and Yunnan Provincial Public Security Department (YPSD) on the design of local road safety enhancement, which will be an integral part of the Project. Overall, ADB’s involvement accelerates institutional and policy reforms to private sector participation and road safety enhancement.

III. THE PROPOSED PROJECT

A. Impact and Outcome

30. The impact of the Project is a well-functioning integrated road transport system in Yunnan Province and the rest of the GMS. This will be achieved by developing an efficient, safe, and environmentally sustainable regional transport system to facilitate the movement of goods and people within Yunnan, and between the PRC and GMS countries.

16 ADB. 2005. Technical Assistance to the People’s Republic of China for the Development of Asset-Backed Securities and Restructuring of Asset Management Companies. Manila. 17 ADB. 2008. Asset-Backed Securitization for Expressway Financing and Corporate Debt Restructuring in Yunnan Province. Manila. 18 ADB. 2007. Greater Mekong Subregion Transport Sector Strategy. Manila. 19 ADB. 2007. Greater Mekong Subregion Regional Cooperation Operations Business Plan (2008–2010). Manila. 20 ADB. 2004. Greater Mekong Subregion Regional Cooperation Strategy and Program (2004–2008). Manila.

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B. Outputs

31. The project outputs are as follows:

(i) Component A. Construction of a 64-km Wuding–Kunming expressway and associated facilities. (ii) Component B. Upgrade of local roads in the project area with a total length of 190 km. (iii) Component C. Improvement of traffic safety on the local road network in the project area. (iv) Component D. Strengthening of the technical and management capacity of YPCD, its related agencies, and Wukun Expressway Company Limited (WKEC).

C. Special Features

32. Enhancing Road Safety. Road safety is a serious issue in the PRC, including Yunnan. In 2006, there were 378,781 traffic accidents with 89,455 fatalities and 431,139 injuries. The PRC recorded 6.2 road accident fatalities per 10,000 vehicles in 2006, much higher than the developed countries (1-2 deaths per 10,000 vehicles). Ministry of Public Security, MOC, National Development and Reform Commission, Ministry of Construction, and Ministry of Agriculture are the key road safety related agencies in the PRC. In the past, lack of cooperation and discussion between ministries hampered efficient road safety improvement. The Government established the first national interministerial road safety committee in 2003. The first Road Traffic Safety Law in the PRC took effect on 1 May 2004. The Government is paying growing attention to road safety and formulated a National Science and Technology Action Plan for Road Safety on 20 February 2008. The action plan set measurable targets to reduce the number of road fatalities, severe road accidents, and the rate of fatalities per 10,000 motor vehicles to levels in other middle-income countries. The action plan will be implemented jointly by Ministry of Science and Technology, Ministry of Public Security, and MOC. Dedicated resources will be allocated to implement the action plan.

33. There were 5,425 traffic accidents, 2,323 fatalities, and 6,248 injuries in Yunnan Province in 2007. Yunnan recorded 7.2 road accident fatalities per 10,000 motor vehicles in 2006, higher than the national average of 6.2. The main reasons cited for road traffic accidents in Yunnan are improper driving, poor road safety facilities, inadequate traffic management, poor road safety behavior of road users, and vehicle mechanical failures. Careful analysis of all road accidents has shown that accidents are often the result of a combination of several factors, rather than a single main cause. Therefore, it is vital to enhance safety facilities and establish better road management system. YPG recognizes the urgency of this issue and is willing to work with ADB to formulate solutions. A road safety interagency committee will be established in Yunnan to facilitate the project implementation.

34. ADB is committed to increasing its attention and expanding its role to road traffic safety. A Local Road Safety Enhancement Program (the Program) has been integrated to the Project. The Program will: (i) formulate a local road traffic safety strategy, (ii) strengthen interagency collaboration and partnership, (iii) include road safety audits in road building and upgrading projects, (iv) formulate low-cost safety remedial measures and design, (v) improve hazardous spots on existing local roads, and (vi) conduct training. The total cost of the Program is estimated at CNY106 million, of which 40% ($6 million) will be financed by ADB.21 This is the first ADB loan to assess and address the local road safety issues in PRC. It aims to establish an efficient and sustainable mechanism for managing road safety. The findings will be used to

21 ADB. 2005. Technical Assistance to the People’s Republic of China for Road Safety Improvement. Manila.

10 develop policy and strategies to reduce road traffic accidents on local roads. The sponsorship and support from ADB are highly appreciated by the government and local people in Yunnan. Further details on local road safety enhancement program are in Appendix 4.

35. Introducing Weight-Based Tolls. In May 2004, an interministerial committee22 was established to develop and implement special measures to enforce regulations nationwide on overloaded trucks, including putting in place axle load limits on the roads. To control overloaded vehicles, YPCD will implement weight-based tolls before opening the project expressway. The principle behind weight-based tolling is that goods-carrying vehicles pay a rate per ton-km based on the weight class of the vehicle plus a penalty rate per excess tonnage. Experiences from other provinces show that this is an effective way to manage overloaded vehicles if complemented with rigorous control measures. For example, after introducing weight-based tolls, overloaded vehicles were reduced from 40% to 17% in Shandong Province.

36. Improving Rural Road Maintenance. Adequate maintenance is crucial to ensure the sustainability of rural roads. There have been problems with rural road maintenance resulting from underfunding of maintenance activities, inadequate engineering standards, inappropriate design, and poor axle load control. To improve rural road maintenance, the State Council issued a new policy for financing and management of rural road maintenance in October 2005. In July 2007, YPG issued a Rural Road Maintenance Policy Reform Announcement. In line with this policy, YPG established an annual subsidy mechanism for rural road maintenance of CNY7,000/km for county roads, CNY3,500/km for township roads, and CNY1,000/km for village roads. YPCD has implemented the new policy since 1 January 2008. Given the asset base size of Yunnan rural road network, substantial benefits will be obtained from a more scientific and cost-effective approach to road maintenance expenditure allocation, including the prioritization of works and the evaluation of alternative interventions based on a life-cycle analysis of costs and benefits. The Project will provide training on operating the Highway Development and Management (HDM-IV) system to enhance YPCD and its local communications bureaus’ capacity of maintenance planning and prioritization (Appendix 5).

37. Promoting Rural Transport Services. Poor road condition is a key factor restraining road transport services development. Road transport authorities tend not to issue bus route licenses on unclassified roads. To serve the needs of the majority of rural residents, Yunnan Transport Administration Bureau agreed to organize safety inspection and management, together with traffic police and road administration agencies, to carry out field surveys on unclassified roads to determine the possibility of service. Passenger transport vehicles will be allowed to provide service on unclassified roads after comprehensive evaluation and approval, and with special administrative dispensation. Variations in demand and different types of operation will also be considered. This will allow some flexibility for operators to adjust their services in line with passenger needs, and use their vehicles and drivers more productively. Some of the recommendations of ADB’s Sustainable Rural Transport Services TA23 will be adopted in the project area (Appendix 5).

38. Controlling Vehicle Emissions. The Government has pledged to lower energy consumption per unit of GDP by 20% and cut emissions of major pollutants by 10% during the 11th FYP (2006-2010). It has taken several steps to control emissions—expanding public transportation, imposing regulations on the automobile industry, requiring an annual vehicle test,

22 The interministerial committee is coordinated by MOC and includes Ministry of Public Security, National Development and Reform Commission, National Quality Control Bureau, National Safety Bureau, National Industry and Commerce Bureau, and the State Council’s Law and Regulation Office. 23 ADB. 2006. Technical Assistance to the People’s Republic of China for Sustainable Rural Transport Services. Manila (TA 4806-PRC).

11 and improving the vehicle inspection and maintenance program. The new measures included using taxation policies as a tool to achieve its energy efficiency goals, such as raising taxes on big cars, 24 and offering tax incentives for manufacturers of more environment-friendly cars. Yunnan follows national vehicle emission control strategies. By 2012, before the project road opens, Yunnan is expected to have adopted stricter emission standards for both new and used vehicles. The Project will significantly contribute to control of vehicle emissions because it offers better road roughness value, lower congestion, and more efficient operation. In the first year of the project operation, fuel savings are expected to be 25% lower than without the Project. The Strategic Vehicle Emission Reduction Plan is in Appendix 6.

39. Regional Cooperation and Integration. Yunnan Province is strategically located in the PRC’s southern border with the other GMS countries. Kunming is recognized as the northern terminal of the three GMS corridors (Map 1). To facilitate trade with GMS countries, an expressway link is being developed between Kunming and Hekou, the border town with Viet Nam. The first section between Kunming and Shilin is under operation while Shilin to Mengzi is under preparation and Mengzi to Hekou being constructed. On the Viet Nam side, Lao Cai (border province with Yunnan)–Ha Noi are being developed as highway with ADB support (Map 2). The Project, which starts in Kunming and extends northward to Chengdu via Wuding, is envisaged to serve as an important trade link between the PRC and other GMS countries by 2015.

40. Trade volume between the PRC and Viet Nam has increased dramatically with annual increases of 25% in volume and 30% in value recorded in recent years. In 2005, the PRC was Viet Nam’s second largest trading partner. Hekou has handled the largest volume of cross- border trade in Yunnan since 2003. The annual trade volume in Hekou reached 2.3 million tons in 2007—1.69 million tons by road and 0.57 million tons by rail—with a value of $1.1 billion, and it has potential to grow in the foreseeable future. The main commodities carried by road are agricultural products, machinery, and mining equipment. Imports from Viet Nam have increased faster than exports.

41. To help reduce nonphysical barriers to the cross-border movement of goods and people along GMS road corridors, ADB has been supporting implementation of the GMS Cross-Border Transport Agreement (CBTA). The CBTA is a multilateral instrument for facilitation of the cross- border transport of goods and people. Leaders from the six GMS countries committed to expedite implementation of the CBTA at their third GMS Summit held in Vientiane, Lao PDR on 30–31 March 2008. Subsequently, some GMS governments, including the PRC and Viet Nam ratified the 20 implementing annexes of the CBTA, thus providing the legal basis for the CBTA’s full implementation. Pilot implementation of the CBTA has also taken place at some of the border crossing points, including the Hekou–Lao Cai border crossing along the GMS Eastern Corridor (Map 1). With the ratification of the CBTA’s implementing annexes by the PRC and Viet Nam, the ministries of transport of the two countries are discussing the expansion of the current limited exchange of traffic rights arrangements25 governed by an existing bilateral road transport agreement, to cover the entire corridor from Kunming to Ha Noi and further to Hai Phong. Further details on regional cooperation in the GMS are in Appendix 7.

42. Intelligent Transport System. An intelligent transport system (ITS)26 on expressways is being introduced in accordance with the national ITS architecture prepared by the National

24 Effective 1 September 2008, owners of vehicles with engines above 4-liter will pay 40% tax (double the previous tax rate). The tax for vehicles with engines between 3-4 liters will be up from 15%-25%. 25 Starting in November 2006, PRC trucks can be operated beyond the border into Viet Nam’s northern Province, and Vietnamese trucks are allowed to operate in Hekou County under a bilateral road transport agreement. 26 The application of information technology to transport is referred to as ITS, which provides the ability to gather, organize, analyze, use, and share information about transport systems and their efficient use.

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ITS Center. Yunnan has built up some of the ITS capacities under previous projects. The ITS applications were discussed and it was recommended that YPCD considers inclusion of the following features in the design of electrical and mechanical work: (i) traveler information services to facilitate traveler decision making before and during a trip, and (ii) traffic management service to manage traffic flow and safety on project expressway.

43. Two specific proposals will be implemented under the Project: (i) developing electronic toll collection services to allow automatic electronic payment of tolls and fees on the expressway, such as allowing road users to use their integrated circuit cards or saving cards to pay the toll; and (ii) enhancing safety measures including an emergency phone and video monitoring throughout the whole section. To enhance safety, the following measures will be put into service: (i) lighting transition adjusted with daylight in tunnel; (ii) incident detection via closed circuit television with full tunnel coverage; (iii) fire detection using video, sensors, fire alarms, etc.; (iv) communication with users via loudspeakers, variable message sign, and lane signals; and (v) an emergency response system. It was agreed that use of the ITS be built into the Project through procurement of electrical and mechanical work.

44. Technical Assistance. Two TA projects are being implemented on a stand-alone basis in conjunction with the Project. A HIV/AIDS Prevention TA for the Transport Sector financed under a regional TA 27 will help create awareness among construction workers and local residents on HIV/AIDS and other communicable diseases, as well as strengthening YPCD’s ability to execute efficient disease prevention programs on its projects. A small-scale TA, on Asset-Backed Securitization for Expressway Financing and Corporate Debt Restructuring in Yunnan Province (footnote 17), will help to broaden long-term financing sources through wider selection of fixed-income investment tools for YPG to tap into capital markets.

D. Project Investment Plan

45. The project investment cost is estimated at $745 million, including taxes and contingencies (Table 1). Detailed cost estimates are in Appendix 8.

Table 1: Project Investment Plan ($ million) Item Amounts A. Base Cost a 1. Expressway 474.4 2. Equipment 15.7 3. Land Acquisition and Resettlement 47.2 4. Consulting Services, Environment Protection, Training, and Project Management 43.2 5. Local Road Improvement Program 14.7 6. Local Road Safety Program 14.8 7. Taxes and Duties 31.0 Subtotal (A) 641.0 B. Contingencies b 56.7 C. Financing Charges During Implementation c 47.3 Total (A+B+C) 745.0 a In 2008 prices. Includes taxes of $31 million. b Physical contingencies are computed at 5% of expressway base costs. Price contingencies computed at 0.8% per year on foreign exchange costs, and at an average 3% per year on local currency costs. c Includes interest and commitment charges. Financial charges have been computed at the 5-year forward London interbank offered rate plus a lending spread of 0.2% and commitment charges of 0.15%. Source: Asian Development Bank estimates.

27 ADB. 2006. Technical Assistance for Fighting HIV/AIDS in Asia and the Pacific. Manila (subproject 7 of TA 6321-REG).

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E. Financing Plan

46. The Government has requested a loan of $200 million from ADB’s ordinary capital resources to help finance the Project. The loan will have a 24-year term, including a grace period of 4 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the draft Loan and Project Agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The ADB loan will finance 27% of the total project cost. The remaining cost will be financed by MOC, YPG, and cofinancing through loans from the Industrial and Commercial Bank of China, which has appraised the Project and provided a commitment letter to YPCD (Table 2). MOC and YPG have made budgetary provisions for the counterpart funds. The PRC will be the borrower of the loan. The ADB loan proceeds will be made available to YPG on the same terms and conditions as ADB loan. The Government shall cause YPG to (i) apply a portion of the proceeds of the Loan in an amount of $6,000,000 for Component C (para. 31); and (ii) onlend a portion of the proceeds of the Loan in an amount of $194,000,000 to WKEC under an Onlending Agreement upon terms and conditions satisfactory to ADB.

Table 2: Financing Plan ($ million) Source Amounts % Asian Development Bank 200.0 27 Domestic Bank Loans a 211.5 28 Ministry of Communications 98.6 13 Yunnan Provincial Government 234.9 32 Total 745.0 100 a 15-year terms with 5-year grace period at the commercial rate. Source: Asian Development Bank estimates.

F. Implementation Arrangements

47. Project Management. YPCD will be the Executing Agency, responsible for overall implementation of the Project. Project activities will be implemented by the Implementing Agency, WKEC, which was established in March 2007 as a subsidiary of YHIC. The project management office (PMO) established within YPCD will be responsible for overall project implementation. Under the overall direction of the PMO, (i) WKEC will be responsible for direct implementation of Components A and D of the Project; and (ii) YPCD, through the PMO, will be responsible for direct implementation of Component B and Component C of the Project. The PMO will coordinate and oversee project implementation, submit progress, audit and other reports to ADB, and coordinate with ADB review missions. Organization charts are in Supplementary Appendix A.

48. Implementation Period. The Project will be implemented over about 4 years from January 2009 to December 2012. The implementation schedule is in Appendix 9.

49. Procurement. All ADB-financed procurement will follow ADB’s Procurement Guidelines (2007, as amended from time to time). The expressway works will be divided into 18 packages, 15 of which will be financed by ADB and procured under international competitive bidding procedures. ADB-financed equipment will be procured under international competitive bidding procedures. All other packages—including equipment for tolling, telecommunications, traffic monitoring and lighting, landscaping works, buildings, and ancillary facilities—will be financed by

14 the Government and procured under national competitive bidding (NCB) procedures. Various thresholds for procurement and the contract packages are set out in the procurement plan in Appendix 10.

50. All road safety enhancement works estimated to cost $200,000 or more will be procured through NCB procedures in accordance with the PRC Tendering and Bidding Law, 1999, including clarifications agreed with ADB. All local road safety enhancement contracts expected to cost less than $200,000 will be procured using shopping procedures. Given the nature of the local road safety enhancement works, force account may be employed for works valued at less than $100,000 when size and location make it unsuitable to adopt shopping procedures (this may include work such as warning posters and signs on local roads, minor poster painting works, and other small and remote scattered works).

51. Consulting Services. The Project will finance 36 person-months of international consulting services, including 15 person-months for the team leader of the international consultants; 6 person-months each for (i) bridge, and (ii) tunnel specialists; and 3 person- months each for (i) road safety, (ii) highway design, and (iii) ITS specialists. A program for overseas training, including 85 person-months, will be included in the Project. A consulting firm will be engaged based on a full technical proposal through the quality- and cost-based selection (80% quality and 20% cost) procedures in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). The Project will also provide $100,000 to finance a local road traffic safety strategy study. Given the very small contract values and the intensive relevant experience of the national firm28 proposed by YPCD in the areas of the study, the firm will be selected using the single source selection method in accordance with ADB’s Guidelines on the Use of Consultants. In addition, YPCD will engage and entirely finance 5,500 person-months of national consultants. The national consultants, not financed by ADB, will be recruited in accordance with government procedures acceptable to ADB. The chief supervision engineer will be responsible for overall project supervision, assisted by two deputies, one of whom will be the team leader of the international consultants. Outline terms of reference for consultants are in Supplementary Appendix B.

52. Advance Contracting and Retroactive Financing. Given the high priority accorded to the Project, the Government requested ADB to approve advance contracting for civil works. The advance contracting was approved by ADB on 16 May 2007, and covered the prequalification of contractors, bidding, bid evaluation, and contract awards. The advance contracting will be undertaken in accordance with ADB’s Procurement Guidelines. The Government also requested ADB to approve retroactive financing and ADB advised that retroactive financing for eligible expenditures should not exceed $20 million incurred before loan effectiveness, but not earlier than 12 months before the signing of the Loan Agreement. The Government has been advised that approval of the advance contracting and retroactive financing does not commit ADB to financing the Project.

53. Anticorruption Policy. ADB’s Anticorruption Policy was explained to and discussed with the central and local government officials. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the Executing Agency and the

28 Yunnan Provincial Traffic Science Research Institute.

15 implementing agency, and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

54. YPCD and WKEC will ensure, during project implementation, that (i) officials from the Discipline and Inspection Bureau will monitor bidding, construction, and operations; (ii) an internal audit unit will be established in WKEC; (iii) a two-contract system will be adopted where the winner of a civil works contract will also sign an anticorruption contract with the employer; (iv) periodic inspection of contractors will be undertaken to ensure that fund withdrawal and settlement procedures are followed; and (v) the status of procurements and awards of contracts will be published on YPCD’s website in accordance with ADB’s Procurement Guidelines. YPCD and WKEC will initiate liaison meetings with relevant agencies, as needed, to discuss any warnings about, or information on, any corrupt, fraudulent, collusive, or coercive practices.

55. Disbursement Arrangements. All disbursements under the ADB loan will be carried out in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). Since most payments will be made for large contracts, direct payment and commitment procedures will be used to withdraw the loan funds. If the government funds are used first for eligible expenditures, ADB’s reimbursement procedure will be used. The statement of expenditures procedure may be used for reimbursement of eligible expenditures in respect of individual payments not exceeding the equivalent of $200,000 in accordance with ADB’s Loan Disbursement Handbook and detailed arrangements agreed upon between the Government and ADB.

56. Accounting, Auditing, and Reporting. YPCD and WKEC will maintain separate accounts for the Project and related financial statements, and will have them audited annually in accordance with appropriate auditing standards consistently applied by independent auditors, whose qualifications, experience, and terms of reference are acceptable to ADB. YPCD and WKEC will submit to ADB within 6 months of the end of each related fiscal year, certified copies of audited project accounts and financial statements, and an auditor’s report on the Project, in both English and Chinese. A separate audit opinion on the use of statement of expenditures, if any, will be included as part of the auditor’s report. During project implementation, YPCD and WKEC will submit quarterly progress reports. YPCD and WKEC will provide ADB with a completion report within 3 months of the end of the Project.

57. Project Performance Monitoring and Evaluation. Project performance management system (PPMS) indicators, their relevance, and monitoring practicalities were confirmed and agreed with YPCD during project preparation. Baseline socioeconomic and transport indicators are also updated. The key indicators and assumptions outlined in the design and monitoring framework (Appendix 1) and monitoring of socioeconomic and poverty impacts (Supplementary Appendix C) will form the core data required for this assessment. The socioeconomic data include macro-level indicators and micro-level indicators for 2006. The micro-level data refer to six representative townships in the project area, and six sample villages (one from each township). YPCD will measure the indicators and report the key findings to ADB on project inception, at completion, and 3 years thereafter. It was agreed that a qualified local institute will be engaged by WKEC to carry out the social monitoring.

58. Project Review. ADB and the Government will review project implementation jointly at least once a year. In addition, ADB and the Government will undertake a comprehensive midterm review 2 years after the start of project implementation. This will include a detailed review of the scope, implementation arrangements, resettlement, achievement of scheduled targets, and progress on the local road safety, private finance, and capacity building measures. Feedback from the PPMS activities will be analyzed.

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59. Institutional Strengthening. In addition to the two stand-alone TAs (para. 44), the Project also provides for institutional development and capacity building to ensure effective implementation of the Project and sustainable O&M of the project facilities. The capacity building component of $2 million will finance project supervision consulting services and 85 person-months international training during the project implementation. This will help YPCD, its related agencies, and WKEC to (i) become efficient in road planning, design, operation and management; (ii) develop and implement a corporate development plan; (iii) develop sound O&M plans and adopt good practices; (iv) strengthen road safety and environmental protection; and (v) improve the efficiency of road transport services.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Traffic Forecast

60. The project expressway is an important section of the Chengdu–Kunming corridor, one of the eight western development corridors. The traffic volume on the project expressway is expected to grow from 8,150 passenger car units (pcu) per day in 2013 to 22,350 pcu per day in 2023 and 42,670 pcu per day in 2032. The traffic forecast is in Appendix 11.

B. Economic Analysis

61. The project’s economic internal rate of return (EIRR) was estimated by comparing scenarios with and without the Project. The project’s economic costs reflect (i) the capital cost of construction including physical contingencies, land acquisition, and resettlement; (ii) O&M costs, which include replacing depreciated equipment and periodic maintenance; and (iii) environmental mitigation costs. The economic benefits are (i) savings in vehicle operating costs as a result of reduced road length, and improved traffic and road conditions; (ii) time savings for road users; (iii) savings in road accident costs as a result of fewer accidents; and (iv) benefits from generated traffic. The Project is economically viable. The EIRR for the whole Project is 17.1%. The EIRR is 16.9% for the expressway and 23.5% for the local road component. Sensitivity analysis confirms the robustness of the project’s economic viability. The economic analysis is in Appendix 12.

C. Financial Analysis and Projections

62. The proposed toll rates29 for the project expressway are considered reasonable to attract sufficient traffic to meet the criteria for the economic and financial internal rates of return. Financial projections have been prepared in accordance with ADB’s Guidelines for the Financial Management and Analysis of Projects (2005). Projected financial statements indicate that its internal financial revenues will be sufficient to cover O&M costs and debt service from the eighth year of full operation. The expressway financial internal rate of return is estimated at about 4.3% after taxes—better than the weighted average cost of capital of 3.5%, net of taxes. Sensitivity analysis indicates that the financial internal rate of return is adequate under adverse conditions. The Project is considered financially viable and sustainable. Financial management assessment found that the Project meets the financial management requirements, and can provide accurate and timely information on its status in the reporting format agreed with ADB (Appendix 13 and Supplementary Appendix D).

29 The proposed toll rates are CNY0.40–CNY2.03 per vehicle-km. Under the Yunnan provincial “green passage” regulations, local vehicles carrying fresh agricultural produce or livestock are exempt from tolls.

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D. Poverty Reduction and Social Strategy

63. Socioeconomic Profile. The project area includes a diverse range of social groups, poor and nonpoor, Han and ethnic minorities, urban and rural populations. Out of the five project counties and districts, two are nationally identified poverty counties. Of the 1.93 million residents in the project area, 61% live in rural areas and about 478,000 or 25% belong to ethnic minority groups.30 Of the rural population, 290,000 or 25% are poor. The poverty incidence rises to 37% in Wuding at the northern end of the project area. In addition, 26,700 urban residents or 10% are poor. Poverty in the project area is due to low education levels and limited technical skills, remote and isolated locations, limited farmland, disease, and disability. Since the poor are less educated, they are less likely to gain employment opportunities. Poor education, limited technical skills, and limited migrant employment caused by remoteness have a direct linkage with road access.

64. Social Benefits. Construction of the expressway will shorten travel distance and travel time, and expand the capacity to transport agricultural produce more efficiently to Kunming (especially high value crops such as fruit, vegetables, and other cash crops). The expressway will promote industrial development in Fumin, Luquan, and Wuding counties. Localized off-farm job opportunities will be available for local people, especially the poor. Improving local roads and transport services will be of direct benefit in providing improved access to markets and services for the poor. Some 345,500 people will benefit from improved local roads, of which 83,000 are classified as poor, and 115,000 as ethnic minorities. Improved road access will help farmers purchase agricultural inputs in a cheaper and more timely manner, thus helping to improve crop yields and facilitate the provision of agricultural extension services. Upgrading local roads will improve accessibility, making it easier for villagers to seek off-farm employment. There will be improved (quicker, smoother, and cheaper) access to schools, health care services, and local markets. In addition, construction and operation of the project roads will generate significant employment benefits for people along the alignment, including the provision of services to labor construction sites. The project local safety enhancement program will help reduce traffic accidents. The summary poverty reduction and social strategy is in Appendix 14.

65. Ethnic Minorities and Gender Development. This is an indigenous peoples category A project. Ethnic minorities in the project area comprise 25% of the beneficiaries. Mitigation measures will address potential social risks, including resettlement, environmental disturbance, and transmissible diseases; these risks are mainly focused along the project expressway corridor. Enhancement measures (such as local roads, local road safety, small business development, tourism promotion, and skills training) have been targeted in poor counties in the project area, which have high concentrations of ethnic minorities and poverty villages, especially the Miao and Lisu nationalities. Special measures will be targeted at women. The summary ethnic minority development plan (EMDP) is in Appendix 15.

66. HIV/AIDS Prevention. Yunnan Province has a large number of HIV/AIDS cases, accounting for one quarter of the nation’s total. The HIV/AIDS incidence appears to be very low in rural parts of the project area. However, improved transport and greater population mobility has an impact on the spread of HIV/AIDS in and out of the province. During construction, a large number of construction workers will be engaged on the various worksites. Many resident communities near the construction sites might have increased risk of HIV/AIDS transmission. During operation, the Project will likely increase the migration of poor and seasonal workers to Kunming, where there is higher risk of contracting HIV/AIDS. Separate measures to prevent HIV/AIDS and other communicable diseases are included in the project design. Health, awareness, screening, and treatment requirements are stipulated in the ADB standard contract

30 With the inclusion of the local road safety enhancement component, the Project will benefit more people.

18 bidding document and compliance will be monitored regularly. A separate TA (footnote 27) will develop measures and tools to address HIV/AIDS issues in the transport sector and support implementation of effective HIV prevention measures for transport projects in Yunnan and Guangxi. YPCD will implement the TA in Yunnan. The TA will involve (i) operational support for integrated HIV prevention in transport projects, (ii) implementation of prevention measures to mitigate the risks of spreading HIV/AIDS among construction workers and communities near the project’s construction sites, (iii) capacity building of YPCD for systematic integration of HIV/AIDS prevention programs into transport projects; and (iv) development of a monitoring and evaluation system (Supplementary Appendix E).

67. Small Business Development. Given the close proximity to Kunming, the project area has potential for small businesses to grow rapidly. Improved transportation links with Kunming will stimulate the demand for goods and services in towns along the expressway corridor. Potential small business development includes (i) agricultural trading and agro-industry such as organic vegetables, chicken, pork, and herbs; (ii) tourism resorts, services, and local handicrafts; (iii) road passenger and freight transport services; and (iv) commercial services such as restaurants and shops. In , the Rural Credit Cooperative has been successful in supporting small business development. Close to the Fumin Interchange, ADB requested that consideration be given to the inclusion of a local product market to provide the opportunity for the local community to sell local products and produce, and thus contribute to the local economy. YPCD agreed to consider the proposal at the detailed design stage.

68. Stakeholder Consultations. Over 2,430 people were interviewed during preparation of the feasibility study, environmental assessment, social assessment, resettlement planning, and EMDP consultations. For the assessments on environment, resettlement, and ethnic minorities, consultations were held with representatives of affected counties, townships, and villages. Both rural and urban people were familiar with the Project, and public support for it was high. The consultation and participation process has influenced the project design and alignment, and the formulation of the environmental management plan (EMP), resettlement plan, and EMDP. To ensure equal benefit from the Project, the poor, ethnic minority groups, and other vulnerable groups (such as women) were consulted separately. Their needs and comments were considered in the design of project components such as the local road improvement and the local road traffic safety enhancement programs (Supplementary Appendix F).

E. Environmental Assessment

69. This is an environmental category A project. The environmental impact assessment (EIA) for the expressway was prepared by YPCD and approved by the Ministry of Environmental Protection in April 2007. A major environmental issue is erosion control. A soil erosion prevention plan was prepared and approved by the Ministry of Water Resources in December 2006. A summary initial environmental examination for the local roads was conducted during project preparation, which concluded that this component would not require an EIA, given that the civil works are for pavement, drainage installation, and slope protections. On the basis of the EIA, social erosion prevention plan and the field survey, a summary EIA has been prepared and endorsed by YPCD, circulated to ADB’s Board of Directors, and made public through ADB’s website on 3 May 2007. The EIA and summary EIA assessed the environmental impact of the Project and prescribed environmental protection and mitigation measures costing CNY57.6 million. To ensure that all the potential adverse environmental impacts of the Project are mitigated, YPCD will implement the environmental management plan as specified in the EIA and summary EIA. The EMP will be incorporated in the bidding documents and contracts for civil works; it will be monitored and reported on to ADB semiannually.

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F. Land Acquisition and Resettlement

70. This is an involuntary resettlement category A project. YPCD has prepared a resettlement plan for the expressway and a short resettlement plan for the seven local roads. The land use pre-examination was approved by the Ministry of Land and Resources on 24 January 2008. The Project will require the permanent acquisition of 400 hectares of land; about 7,600 people will be partially affected. The Project will also temporarily occupy 27 hectares of land during construction activities. Land acquisition and resettlement impacts were minimized by aligning the expressway away from towns, village centers, and paddy lands, where possible; the urban section will be elevated to reduce impacts and disturbance. YPCD will prepare and submit an updated resettlement plan to ADB prior to commencement of civil works. There are 183,445 square meters of buildings to be demolished, most of which is storehouse, factory field, workshop, and shops in the urban section. There are 219 households with 1,251 persons to be relocated. The seven local roads for upgrading include roads only require resurfacing within the existing alignment, so no resettlement will be necessary, but the short resettlement plan will provide the basis for due diligence. The summary resettlement plan is in Appendix 16.

G. Risks

71. Overall, the project risk is rated modest. The project design has considered potential technical, financial, and social risks. The main technical risks are associated with the construction of tunnels and bridges. To avoid delays in construction and increased cost, the Project will ensure (i) selection of competent contractors by thorough prequalification, (ii) engineering design based on sufficient geological investigations, and (iii) adequate quality and safety assurance. The financial risks associated with construction and operation of the expressway will depend on the level and composition of traffic, construction costs, ability of the commercial management, and appropriate tolls. To mitigate the financial risks, WKEC will build up a commercial business environment for operations, the Project will receive substantial equity from the Government, and an appropriate toll structure will be adopted. Social risks include resettlement and HIV/AIDS infection. Appropriate mitigation measures are in place in the resettlement plan. Measures to address HIV/AIDS issues are included in the project design and will be supported by a stand-alone TA for preventing HIV/AIDS in Asia and the Pacific.

72. The preparation team worked closely with YPCD to ensure that mitigation measures are in place. YPCD has experience and has shown satisfactory performance in implementing internationally financed projects. YPCD demonstrated high ownership in preparing and committing to implement these action plans; and these risks will be closely monitored by YPCD, WKEC, local government agencies, external monitors, and ADB during project implementation.

V. ASSURANCES AND CONDITION

A. Specific Assurances

73. In addition to the standard assurances, the Government and YPG have given the following assurances, which are incorporated in the legal documents.

74. Construction Quality. YPG, through YPCD, will ensure that (i) the project expressway, local roads, and local road safety enhancement program are constructed in accordance with MOC’s technical standards and requirements; and (ii) the project construction supervision, quality control, and contract management are conducted in accordance with national standards and internationally accepted practices.

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75. Counterpart Financing. YPG and WKEC will ensure that all counterpart financing necessary for the Project is provided in time, and that YPG, through YPCD and WKEC, make available all funds and resources necessary for construction, O&M, and management of the Project on a timely basis.

76. Road Safety. Prior to construction and operation of the project expressway and implementation of the local road safety enhancement program, YPG will (i) establish a road safety interagency committee to facilitate the project implementation, and (ii) ensure that the independent road safety audits are carried out and the recommendations of these audits are taken into account during project construction and operations, and control of “overload” and “overlimit” vehicles. YPG will strengthen road safety enforcement and education, including (i) vehicle maintenance and inspections; (ii) enforcement of proper driver behavior; and (iii) road safety education for the public on road safety matters, taking into consideration special categories such as drivers and schoolchildren. At least 6 months prior to the opening of the project expressway, YPG will (i) develop and implement a safety and emergency response plan to ensure safe operation of road infrastructure facilities; and (ii) establish a sufficient number of teams of traffic police personnel, in accordance with the national law and relevant requirements, to patrol the project expressway and local roads and enforce the national regulations.

77. Rural Transport Services. YPCD will ensure that the rural transport services are provided to the rural people in the project area. In particular, YPG, through YPCD, will adopt, as applicable, recommendations made under ADB-financed TA for sustainable rural transport services in the project area (footnote 23).

78. Private Sector Development. YPG will cause YHIC and/or WKEC to explore the possibility of attracting private sector investment by potential investors in close consultation with ADB. Furthermore, 6 months prior to the opening of the project expressway, YPG through YHIC and/or WKEC will analyze the feasibility of tapping the financial markets for financing future road sector investments, including possible private sector participation in O&M of the project expressway, and report its conclusions to ADB.

79. Corporate Governance. YPG will ensure that WKEC prepares a corporate development plan by 31 December 2009 to assure high standards of corporate governance, management practices, and financial reporting.

80. Rural Road Maintenance. YPG shall cause YPCD to (i) implement the Rural Road Maintenance Policy Reform as approved by YPG (effective as of 1 January 2008), (ii) establish an efficient prioritization and monitoring system as specified in the Rural Road Maintenance Policy Reform, and (iii) provide a training program to strengthen the capacity of local government maintenance units and local communities. YPG shall cause the local governments to ensure adequate funding and effective management of the project’s rural roads.

81. Financial Ratios. YPG will ensure that WKEC maintains (i) a debt-equity ratio of not more than 65:35 for the project expressway; (ii) a working ratio (annual O&M cost, but excluding periodic maintenance cost, to revenue) of not more than 15% from the first year of full operation of the project expressway; and (iii) a debt service coverage ratio of not less than 1.2 from the eighth year of the project expressway's full operation.

82. Tolls. In determining the toll level, YPG will take into consideration the levels sufficient to satisfy the project expressway’s minimum debt-service coverage ratio of 1.2. At least 6 months prior to the opening of the project expressway, YPCD through WKEC will submit to ADB for review the proposed toll structure and levels before seeking YPG’s approval. For the first

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5 years of operation of the project expressway, YPCD through WKEC will annually review the toll structure and levels, and submit a report to ADB for review in the event of the toll level adjustment, before seeking YPG approval.

83. Capacity Building. YPG will ensure that YPCD prepares a human resource development plan before undertaking international training for ADB’s concurrence, which will include a program of workshops to be delivered at WKEC and YPCD’s bureaus by the people trained internationally to strengthen their domestic training programs.

84. Environment. YPG, through YPCD and WKEC, will ensure that (i) the Project is designed, constructed, implemented, and operated in accordance with environmental laws and regulations of the Government, ADB’s Environment Policy (2002) and the EIA; (ii) the EMP and the mitigation measures included therein, as specified in the EIA and as applicable, are properly and promptly implemented; (iii) the EMP and mitigation measures included therein are updated at engineering design stage, and incorporated into the bidding documents and civil works contracts; (iv) any adverse impact on the environment that may arise from project implementation activities is promptly mitigated or minimized in accordance with the EMP; (v) any major accidents, including any safety breaches, violation of environmental standards, and corrective measures taken thereto, are reported forthwith to ADB; (vi) at least semiannual reports on the implementation of the EMP are submitted to ADB, and that ADB is allowed to conduct annual environmental reviews; and (vii) reports and information are provided to ADB on request to enable it to verify that the goods, works, and services financed out of the proceeds of the loan have been produced in a responsible manner with a view to resource efficiency, waste minimization, and other environmental considerations.

85. Vehicle Emissions. At least 6 months prior to the opening of the project expressway, YPG will ensure that the national vehicle emission standards are enforced, and the requirements of the policies and regulations of the Government on vehicle emissions are fulfilled.

86. Land Acquisition and Resettlement

(i) YPG through YPCD shall, and shall cause WKEC to, ensure that (a) the resettlement plans for the Project are implemented in accordance with their terms; (b) all land and rights-of-way required by the Project are made available in a timely manner; (c) the provisions of the resettlement plans, including compensation and entitlements for affected persons, are implemented in accordance with all the Government’s applicable laws and regulations and ADB’s Involuntary Resettlement Policy (1995); (d) compensation and resettlement assistance is given to the affected persons prior to dispossession and displacement; (e) the timely provision of counterpart funds is made for land acquisition and resettlement activities; (f) any obligations in excess of the resettlement budget estimates are met in consultation with the relevant government agencies; and (g) the affected persons are at least as well off as they would have been in the absence of the Project.

(ii) YPG shall ensure that YPCD and WKEC (a) update the expressway resettlement plan upon the completion of the project detailed design and detailed measurement survey and obtain ADB approval prior to commencement of civil works; and (b) as necessary, reflect any significant material changes in the project scope or other causes, and submit any such changes to ADB for its approval. YPG shall ensure that YPCD discloses such updated resettlement plan to affected persons. YPG shall cause YPCD and WKEC to (a) ensure that civil works contractor specifications include requirements to comply with the resettlement plans and

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entitlements for permanent and temporary impacts to affected persons; (b) supervise the contractors to ensure compliance with requirements of the resettlement plans, the Government’s applicable laws and regulations, and ADB’s Involuntary Resettlement Policy; and (c) ensure that contractors are required as a priority to provide employment to affected people with equal access to women and the aforesaid requirement is monitored and reported to ADB.

(iii) YPG shall cause YPCD and WKEC to ensure that (a) adequate staff and resources are committed to supervising and monitoring the implementation of the resettlement plans and providing to ADB quarterly reports on implementation and a resettlement completion report; (b) an independent national consultant acceptable to ADB is engaged by WKEC to carry out investigations to monitor progress semiannually and to evaluate results through annual survey updates for 2 years after completion of resettlement, and forward reports to ADB and YPCD; (c) data are disaggregated by gender and ethnicity, where applicable, and monitoring includes impacts on gender, ethnicity, and vulnerable groups; and (d) a summary of the final government audit of resettlement disbursements and expenditures is provided to ADB.

87. Ethnic Minorities Development. YPG shall cause YPCD and WKEC to ensure that (i) the EMDP be implemented in accordance with its terms, (ii) targeted ethnic minorities benefit from the Project at least equitably and in accordance with ADB’s Policy on Indigenous Peoples (1998), and (iii) civil works contractor specifications include requirements to comply with the EMDP and as a priority to provide employment to ethnic minority people. YPG shall cause YPCD and WKEC also to ensure that (i) adequate staff and resources are committed to supervising and monitoring the implementation of the EMDP and report progress to ADB quarterly; (ii) an independent consultant acceptable to ADB is engaged by YPCD and WKEC to carry out investigations to monitor and evaluate progress annually, and forward reports to ADB and YPCD; and (iii) data are disaggregated by gender, and monitoring includes gender impacts.

88. Poverty Reduction. YPG through YPCD shall, and shall ensure that WKEC, cause the contractors involved in the project implementation to maximize the employment of local poor people, including the ethnic minorities, who meet the job and efficiency requirements for construction and maintenance of the project roads. Such workers shall be provided with adequate on-the-job training. YPG shall through YPCD monitor the project’s impact on poverty in accordance with guidelines set forth in the project performance management system.

89. Labor Standards. YPCD shall cause the concerned local communications bureaus and WKEC to ensure that under the Project, all the employment and labor standards provided in the applicable laws and regulations of the Government be complied with, and in particular, that all civil works contractors engaged under the Project (i) provide timely payment of wages on at least a monthly basis and safe working conditions to all workers including male and female workers, with such requirements being included in the civil works contracts and monitored by the construction supervision consultants; (ii) provide employment opportunity to women and ethnic minorities, where appropriate, and pay equal wages to the male and female employees for equivalent works; and (iii) not employ child labor in the project works.

90. Gender and Development. YPG through YPCD shall and shall cause WKEC to, follow ADB’s Policy on Gender and Development (1998) during project implementation and take necessary steps to encourage women living in the project area to participate in planning and implementing the Project, including causing the contractors to maximize their employment of women in connection with the Project. YPG through YPCD will monitor, as set out in

23 resettlement plans and EMDP, the effects of the Project on women during project implementation.

91. Health Risks. YPCD and WKEC shall in coordination with the local health bureaus cause the civil work contractors to disseminate information on the risks of socially and sexually transmitted diseases, including HIV/AIDS, to their employees, temporary laborers and family members, and subcontractors during project implementation. YPCD and WKEC shall cause the appropriate agencies to disseminate similar information to transport operators and to local communities living in the project area during project implementation and operation of the project facilities. YPCD and WKEC shall cause the contractors to monitor health risk control in accordance with the relevant laws and regulations of the Government and relevant clause of ADB’s Standard Bidding Document; and methods specified in the EMDP.

92. Project Performance Management System. YPG, through YPCD will ensure that WKEC monitors and evaluates impact of the Project. YPG will cause YPCD and WKEC to (i) hire a qualified national consultant prior to project implementation to carry out the monitoring activities; (ii) collect the qualitative data to measure the indicators contained in the PPMS prior to, and during implementation of the Project, at completion of the Project, and 3 years thereafter; and (iii) submit to ADB the reports summarizing the key findings of monitoring.

93. Axle Loads. YPG through YPCD will ensure that WKEC installs vehicle axle-weighing equipment on the project expressway before opening the project expressway and implements weight-based tolls on the project expressway.

94. Change in Ownership. In the event that (i) any change in ownership or operation of the project facilities, or project expressway; or (ii) any sale, transfer, or assignment of YPG’s and YPCD’s shares or interest, or WKEC’s interest in the project expressway is contemplated, YPG, YPCD, and WKEC will consult, through the Government, with ADB at least 6 months prior to the implementation of such a change. YPG, YPCD, and WKEC will ensure that such change is carried out in a lawful and transparent manner.

95. Anticorruption Measures. YPG through YPCD and WKEC will ensure that ADB’s Anticorruption Policy (1998) is followed along with the Government’s regulations and requirements in relation to anticorruption. YPCD through WKEC will also ensure, during the project implementation, that (i) the officials from the Discipline and Inspection Bureau will monitor bidding, construction, and operations; (ii) an internal audit unit will be established in WKEC; (iii) a two- contract system will be adopted where the winner of a civil works contract will also sign an anticorruption contract with the employer; (iv) periodic inspection of contractors will be undertaken to ensure that fund withdrawal and settlement procedures are followed; and (v) the status of procurements and awards of contracts will be published on YPCD’s website in accordance with ADB’s Procurement Guidelines. YPCD and WKEC will initiate liaison meetings with the relevant agencies, on a need basis, to discuss warnings about, or information on, any corrupt practices.

B. Condition for Disbursement

96. Before disbursement for components A and D, the Government shall have certified to ADB that the onlending agreement, which shall include the terms and conditions required under the Loan Agreement, shall have been duly executed and delivered on behalf of YPG and WKEC and shall have become fully effective and binding upon the parties thereto in accordance with its terms.

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VI. RECOMMENDATION

97. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve the loan of $200,000,000 to the People’s Republic of China for the Central Yunnan Roads Development Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a term of 24 years, including a grace period of 4 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board.

C. Lawrence Greenwood, Jr. Vice President

3 September 2008

Appendix 1 25

DESIGN AND MONITORING FRAMEWORK

Data Design Summary Performance Targets/Indicators Sources/Reporting Assumptions and Risks Mechanisms

Impact Integrated road Road traffic is forecast to increase Provincial and county Assumptions transport system in during 2013–2023 at 6–7% per statistical data • Government investment Yunnan and the rest annum for passenger traffic and projects on road sector of GMS countries 5–6% per annum for freight traffic in are implemented as function well Yunnan planned • Good economic growth in Yunnan and GMS countries is sustained

Per capita rural income in Wuding Provincial and county Assumption County increases from CNY1,791 statistical data • The Government is in 2005 to CNY3,000 in 2015 committed to implement the Western Development Rural poverty incidence in Wuding Poverty alleviation Strategy County reduced from 37% in 2005 and development to 20% in 2015 offices

Trade between Yunnan and GMS Government statistics Assumptions countries increases by 10% per and accounts • Continued growth in GMS annum during 2008–2015 countries and increased trade with the PRC • Streamlined cross-border operation and reduction of barriers to trade and mobility

Outcome An efficient, safe, Traffic volume on the expressway Traffic volume data Assumptions and environmentally increased to 8,150 pcu in 2013, and collected at the • Transport operators and sustainable regional on national highway 108 increased expressway toll booth drivers realize the benefits transport system is to 5,200 pcu in 2013. Traffic on the by the expressway of using the expressway developed in the project corridor increased by 8% per company • Build up a commercial project area year during 2006–2013, 7% per business environment for year during 2013–2023, and 6% per operations year during 2023–2032. • Adopt an appropriate toll structure Travel time for the expressway is Travel time survey for reduced by 1 hour, and travel the expressway by distance by 20 km in 2013 YPCD

Expressway capacity is increased PCR by 25,000–45,000 pcu per day for the Wuding–Fuming section; and by 35,000–50,000 pcu per day for Fuming–Kunming at opening

Vehicle operating costs for a PCR passenger car are reduced from CNY1.61 per vehicle-km without the Project to CNY1.37 with the Project in 2013

26 Appendix 1

Data Design Summary Performance Targets/Indicators Sources/Reporting Assumptions and Risks Mechanisms

Corporate governance and PAMs, audited Risk efficiency improved by (i) obtaining financial statement, • YPCD may interfere in the autonomy in operation and and PCR management and management, and (ii) appointing operations of the project an external auditor to audit expressway WKEC’s financial reports annually

Public-private partnership in toll PAMs and PCR Risks road development is facilitated and • Legal and regulatory additional private sector funds are framework may not be in raised by 2015 place to allow this form of public-private partnership • There may be less than anticipated appetite among private investors for toll roads investment

Fuel savings of 6,000 toe in 2013 Yunnan Provincial Assumptions and 61,000 toe in 2033; and CO2 Environmental • A proportion of vehicles on emissions reduced by 22,000 tons Protection Bureau the existing roads are in 2013 and 231,000 tons in 2033. diverted to the project CO2 emissions reduced by expressway as anticipated 2.3 million tons over 20 years in the • Vehicle emissions project corridor standards are enforced on Yunnan roads

Outputs Assumptions 1. Expressway 1.1 64 km of expressway opened WKEC, PAMs, and • Selection of competent infrastructure and to traffic as scheduled and PCR contractors by thorough associated effectively operated by 2012 prequalification facilities between • Engineering design based Wuding and 1.2 Electrical and mechanical WKEC, PAMs, and on sufficient geological Kunming are works and other facilities are PCR investigations operational procured and functioning by • Adequate quality and 2012 safety assurance Progress reports and 1.3 Road safety enhanced PCR through improved road safety facilities by 2012

2. Local roads in 2.1 190 km of local roads YPCD, PAMs, and Assumptions the project area upgraded by 2012 PCR • Counterpart resources are are upgraded made available on time. 2.2 Reduction of travel time on YPCD and PCR project local roads by 2012.

3. Traffic safety on Traffic accident rate, measured by Accident statistics Assumption local road road accident fatalities per from Public Security • Effective traffic law network is 10,000 vehicles in Yunnan Department enforcement improved province, reduced by 20% in 2013. • Greater public awareness • Good road user behavior • Strong ownership from YPCD to promote road traffic safety

Appendix 1 27

Data Design Summary Performance Targets/Indicators Sources/Reporting Assumptions and Risks Mechanisms

4. Technical and 4.1 36 person-months of Report by consultants Assumptions management international consulting on the capacity • The performance of capacity of YPCD, services and 85 person- building component, consultants is good in its related months of international including participants, providing consulting agencies, and training are provided for subject areas, services WKEC is capacity development by feedback from • Trainees apply in their strengthened 2012 participants, and new daily work what they have skills applied by learned 4.2 Survey techniques are trainees adopted to assess changes in work practices and behavior to measure the effectiveness of the capacity building component

Activities with Milestones Inputs 1. Expressway civil Civil works contracts awarded by June 2009 and completed • Asian Development Bank: works by December 2012 $200 million

2. Equipment Equipment procured by June 2012 • Ministry of Communications: $98.6 million 3. Consulting and Consultants recruited by June 2009 and work completed by training services December 2012 • Domestic Bank loans: $211.5 million 4. Local roads Civil works completed by December 2012 • Yunnan Provincial 5. Local road Work completed by December 2012 Government: $234.9 million safety

6. Institutional Activities completed by December 2012 capacity Building

7. Environmental Environmental mitigation measures implemented during mitigation project implementation and operation, according to the environmental impact assessment

8. Resettlement Implement resettlement plans throughout the implementation period

9. Ethnic minorities Mitigation and enhancement measures implemented during project implementation according to the ethnic minorities development plan

10. HIV/AIDS Prevention measures for HIV and other communicable prevention diseases implemented by YPCD and supported by regional TA of fighting HIV/AIDS in Asia and the Pacific

CO2 = carbon dioxide, GMS = Greater Mekong Subregion, km = kilometer, PAM = project administration mission, PCR = project completion report, pcu = passenger car unit, PRC = People’s Republic of China, toe = ton of oil equivalent, WKEC = Wukun Expressway Company Limited, YPCD = Yunnan Provincial Communications Department.

28 ROAD SECTOR POLICY REFORM MATRIX

Actions Taken by ADB and the 2 Appendix Initiative Issues Government Actions Taken under the Project Outcomes/Status 1. Poverty impact The geography of the Promoting pro-poor equitable and To enhance development impact, the The 11th Five-Year Program People’s Republic of inclusive growth has been the Asian project scope includes (i) local road (FYP) of Yunnan Provincial

China (PRC) poses great Development Bank’s (ADB’s) primary improvement component, and (ii) local Communications Department obstacles to providing goal in the PRC. Projects financed by road safety program. The local road safety (YPCD) emphasizes new basic road access ADB are focused in poorer central enhancement program aims to reduce the countryside development and throughout the country, and western regions. severity of injuries and make the road support for the local road safety particularly in inner and safer. enhancement program. low-income provinces. 2. Rural road Rural roads are largely in Rural road development strategy has To reduce time and cost to access YPCD set a 2010 target: paved development poor condition. been formulated under the Rural economic opportunities and social road will reach 50% villages in Road Development Strategy technical services in the rural area, the Project Yunnan. Central and local assistance (TA).a includes upgrading 190 kilometers (km) of governments will invest local roads. CNY16.8 billion to upgrade local road from 2006 to 2010 in Yunnan. 3. Rural road Low vehicle utilization, The Ministry of Communications To improve rural transport services, YPCD YPCD will ensure that the Rural transport high operating costs, and (MOC) concurred with the rural road will (i improve rural road conditions, and Transport Services Eleventh services inefficient bus routes transport service reforms proposed (ii) adopt applicable recommendations of Plan (2006–2010) is because of restrictive under the Sustainable Rural the Sustainable Rural Transport Service implemented. regulations. Transport Services TA.b TA. 4. Road design Highway design standards Assistance was provided in To ensure engineering standards more The development plans of standards and are not always adequate developing the previous standards, closely fit the travel demand and pattern Kunming City were incorporated construction for vehicle mix and road including transport efficiency, road on the project roads, alternative analysis early in the project design to quality conditions. safety, and environmental was conducted for all project roads. For ensure good linkages to the considerations, under the Review of example, the alignment of the expressway expressway Highway Design Standards TA.c New interchange with Kunming Outer Ring MOC design standards were applied Road was revised. The revised alignment in 2004. reduced the length and cost by CNY61 million ($8.5 million). 5. Road safety Poor safety design, lack of Assistance is being provided to The Project will address safety issues by Road accidents in 2007 show sufficient attention to improve the safety and efficiency of including a local road safety enhancement improvement over 2006. In safety, and inadequate road transport operations and to program component. It aims to establish Yunnan, 5,425 road accidents traffic enforcement and strengthen traffic law enforcement an efficient and sustainable mechanism were recorded in 2007 (down driver training contribute to under the Road Safety Improvement for managing road safety. 18% from 2006); 2,323 fatalities poor safety record. TA.d (13% less than in 2006); and 6,248 injuries (down 27% from 2006).

a ADB. 2005. Technical Assistance to the People’s Republic of China for Rural Road Development Strategy. Manila b ADB. 2006. Technical Assistance to the People’s Republic of China for Sustainable Rural Transport Services. Manila. c ADB. 1996. Technical Assistance to the People’s Republic of China for the Review Design Standards. Manila. d ADB. 2005. Technical Assistance to the People’s Republic of China for Road Safety Improvement (Cofinanced by the Global Road Safety Partnership). Manila.

Actions Taken by ADB and the Initiative Issues Government Actions Taken under the Project Outcomes/Status The National Science and The findings of the program will be used Further improvement is expected Technology Action Plan for Road to develop policy and strategies to reduce after implementing the local road Safety was formulated in February road traffic accidents on local roads. safety program. 2008. 6. Overloading of Overloading of trucks has An interministerial committee To control overloaded vehicles, YPCD will Vehicle overloading has been trucks adverse impacts on coordinated by MOC was established implement weight-based tolls before reduced significantly through pavement condition, traffic to develop and implement special opening the project expressway. strict enforcement. Further flow, vehicle emissions, measures to enforce regulations on reduction is expected after and safety. overloaded trucks nationwide. implementing weight-based tolling. 7. Vehicle Vehicle emissions are Vehicle testing and monitoring were The Project will contribute to reduced Adopt performance standards emissions becoming a primary promoted under the regional TA: vehicle emissions because it offers better equivalent to Euro IV by 2010. source of air pollution in Action Plans for Reducing Vehicle road roughness value, lower congestion, By then, vehicle emissions will major cities. Emissions.e and more efficient operation. be reduced by 30%. 8. Road pricing High toll rates deter users The toll diversion manual was The impact of the proposed toll charges Six months prior to the opening from diverting from other disseminated under the Chongqing– under the Project was reviewed to satisfy of the expressway, YPCD will roads to the toll Guizhou Expressway TA in 2000. The the following criteria: (i) cost recovery, and submit to ADB for review the expressway and affect the manual will be updated by December (ii) that they do not deter potential users proposed toll structure and rates. toll road economic and 2008. and compromise economic objectives. After that, the toll rates will be financial viability. reviewed annually. 9. Corporatization Expressway construction • Assistance was provided through • Yunnan Provincial Highway Expressway construction and and operations were the Corporatization, Leasing, and Development and Investment operation has been separated undertaken by separate Securitization in the Road Sector Company Limited (YHIC) was from the Government. expressway companies. TA.f established in May 2006, which • Chuda, Yuanmo, and Baoshan consolidated all separate expressways expressway companies were previously set up by various projects. established to be responsible for Corporate governance will be further three ADB-financed projects. improved through introducing private sector capital contribution, external audit, and training. 10. Private sector The PRC needs to attract Private sector financing of road • YHIC is actively encouraging private Establishment of YHIC will participation more private sector infrastructure investment accounts for sector participation in the road sector, facilitate private sector financing of road 10% of the PRC’s total commitment and is now in the process of engaging participation in the Yunnan road infrastructure to free up to road sector since the 1980s. ADB- strategic investors for the Kunming to sector on a strategic basis. public resources for other financed Northeast Expressway Shilin expressway. purposes. Company and Changyong • A small scale TA has been developed

Expressway Corporation were to support the ABS initiatives in 2 Appendix securitized as part of stock listing Yunnan. since 1999. Source: Asian Development Bank estimates. 29 e ADB. 2000. Technical Assistance for Action Plans for Reducing Vehicle Emissions. Manila. f ADB. 1997. Technical Assistance to the People’s Republic of China for Corporatization, Leasing, and Securitization in the Road Sector. Manila.

30 Appendix 3

EXTERNAL ASSISTANCE TO THE ROAD SECTOR

Table A3.1: Asian Development Bank-Financed Loans Loan Express- Local Loan Date PCR PPAR No. Number Loans way Road Amount Approved Rating Rating (km) (km) ($ million) 1 1082-PRC Nanpu Bridge — — 70.0 28 May 1991 S GS 2 1168-PRC – Highway 75 — 50.0 2 Jul 1992 GS S 3 1188-PRC Shanghai Yangpu Bridge — — 85.0 17 Nov 1992 HS — 4 1261-PRC Expressway 52 — 74.0 9 Nov 1993 GS — 5 1262-PRC Jilin Expressway 133 — 126.0 9 Nov 1993 GS HS 6 1324-PRC Heilongjiang Expressway 350 — 142.0 29 Sep 1994 PS S 7 1325-PRC Yunnan Expressway 200 — 150.0 29 Sep 1994 HS — 8 1387-PRC Hebei Expressway 200 179 220.0 28 Sep 1995 HS — 9 1388-PRC Liaoning Expressway 110 203 100.0 28 Sep 1995 GS — 10 1470-PRC Chongqing Expressway 89 — 150.0 27 Sep 1996 S — 11 1483-PRC Shenyang–Jinzhou Expressway 192 291 200.0 19 Nov 1996 HS — 12 1484-PRC Expressway 134 253 150.0 19 Nov 1996 S — 13 1617-PRC Hebei Roads Development Project 140 340 180.0 18 Jun 1998 HS HS 14 1638-PRC Chengdu–Nanchong Expressway 208 300 250.0 10 Nov 1998 S S 15 1641-PRC – Expressway: Hashuang Expressway 101 — 170.0 27 Nov 1998 S S 16 1642-PRC Changchun–Harbin Expressway: Changyu Expressway 161 — 220.0 27 Nov 1998 S HS 17 1691-PRC Southern Yunnan Road Development Project 147 540 250.0 24 Jun 1999 S — 18 1701-PRC Shanxi Road Development Project 176 418 250.0 30 Sep 1999 S — 19 1783-PRC Chongqing–Guizhou Roads: Leichong Expressway 50 122 120.0 21 Nov 2000 — — 20 1784-PRC Chongqing–Guizhou Roads: 200.0 Chongzun Expressway 127 704 21 Nov 2000 — — 21 1838-PRC Shaanxi Roads Development 176 627 250.0 30 Aug 2001 — — 22 1851-PRC Guangxi Roads Development 179 507 150.0 30 Oct 2001 S — 23 1918-PRC Southern Sichuan Roads Development 160 558 300.0 20 Sep 2002 — — 24 1967-PRC Shanxi Road Development II Project 65 70 124.0 12 Dec 2002 S — 25 2004-PRC Ningxia Roads Development Project 182 400 250.0 11 Sep 2003 — — 26 2014-PRC Western Yunnan Roads Development Project 77 294 250.0 28 Oct 2003 — — 27 2024-PRC Xi'an Urban Transport Project 71 16 270.0 27 Nov 2003 — — 28 2089-PRC Hunan Roads Development II Project 173 517 312.5 9 Sep 2004 — — 29 2094-PRC Guangxi Roads Development II Project 188 750 200.0 21 Oct 2004 — — 30 2125-PRC Gansu Roads Development Project 231 470 300.0 13 Dec 2004 — — 31 2181-PRC Central Sichuan Roads Development Project 244 678 600.0 22 Sep 2005 — — 32 2219-PRC Hunan Roads Development III Project 64 129 208.0 15 Dec 2005 — — 33 2247-PRC Heilongjiang Road Network Development Project — 598 200.0 26 Jul 2006 — —

Appendix 3 31

Loan Express- Local Loan Date PCR PPAR No. Number Loans way Road Amount Approved Rating Rating (km) (km) ($ million) 34 2295-PRC Southern Gansu Roads Development Project 134 357 300.0 18 Dec 2006 — — 35 2339-PRC Eastern Sichuan Roads Development Project 143 430 200.0 17 Jul 2007 — — 36 2345-PRC Western Guangxi Roads Development Project 177 1,060 300.0 14 Aug 2007 — — 37 2393-PRC Regional Road Improvement Project (Korla– Kuqa Section) 297 193 150.0 13 Dec 2007 — — Total 5,206 11,004 7,521.5 — = not available, GS = generally successful, HS = highly successful, km = kilometer, No. = number, PS = partly successful, PCR = project completion report, PPAR = project performance audit report, PRC = People’s Republic of China, S = successful, U = unsuccessful. Source: Asian Development Bank estimates.

Table A3.2: Asian Development Bank-Financed Technical Assistance Amount Date No. TA No. Technical Assistance Type ($’000) Approved 1 1049-PRC Huangpu Bridge PP 95 24 Oct 1988 2 1152-PRC Design Review of the Nanpu Bridge PP 100 26 Apr 1989 3 1509-PRC Ningguolu Bridge PP 100 18 Apr 1991 4 1517-PRC Toll Bridge Operation and Management AD 760 28 May 1991 5 1533-PRC Design Review of the Yangpu Bridge AD 100 10 Jul 1991 6 1664-PRC Shenyang–Benxi Highway PP 100 22 Jan 1992 7 1533-PRC Design Review of the Yangpu Bridge (supplementary) AD 416 28 Apr 1992 8 1724-PRC Institutional Strengthening for Highway Operation and Management Improvement AD 500 2 Jul 1992 9 1725-PRC Jilin Province Highway Network Study PP 600 2 Jul 1992 10 1728-PRC –Xiangtan Expressway PP 100 9 Jul 1992 11 1785-PRC Comprehensive Toxic and Hazardous Chemicals Transport Management Plan in the Huangpu River Basin AD 600 17 Nov 1992 12 1940-PRC A study of Efficiency Improvements in Road Transport AD 550 25 Aug 1993 13 1972-PRC Institutional and Policy Support in the Road Sector AD 1,200 9 Nov 1993 14 1975-PRC Policies for Strategic Development of Transport and Communications Infrastructure AD 100 11 Nov 1993 15 1981-PRC Heilongjiang and Yunnan Expressways PP 320 16 Nov 1993 16 2155-PRC Sichuan Expressway PP 350 16 Sep 1994 17 2177-PRC Preparation of a Road Safety Program AD 600 29 Sep 1994 18 2178-PRC Provincial Highway Network Planning AD 600 29 Sep 1994 19 2195-PRC Hebei and Liaoning Expressways PP 560 31 Oct 1994 20 2212-PRC Beijing Urban Transport AD 715 28 Nov 1994 21 2302-PRC Symposium on Urban Transport AD 100 22 Feb 1995 22 2409-PRC Appraisal Methodologies and Restructuring Highway Financing in Hebei Province AD 740 28 Sep 1995 23 2482-PRC Liaoning and Jilin Expressways PP 400 18 Dec 1995 24 2486-PRC Jingxi Highway PP 250 20 Dec 1995 25 2573-PRC Review of Highway Design Standards AD 420 24 May 1996 26 2649-PRC Facilitating the Build-Operate-Transfer Modality in the Highway Sector AD 1,100 27 Sep 1996 27 2663-PRC Hebei Roads Development PP 600 16 Oct 1996 28 2777-PRC Chengdu to Nanchong Expressway PP 600 7 Apr 1997 29 2846-PRC Changchun–Harbin Expressway PP 600 22 Aug 1997 30 2952-PRC Corporatization, Leasing, and Securitization in the Road Sector AD 1,000 17 Dec 1997 31 3033-PRC Shanxi Expressway PP 570 24 Jun 1998 32 3039-PRC Yunnan Road Environmental and Social Analysis PP 150 7 Jun 1998 33 3086-PRC Regional Road Sector Study AD 1,180 13 Oct 1998 34 3102-PRC Preparing the Chongqing–Guizhou Expressway PP 900 26 Nov 1998

32 Appendix 3

Amount Date No. TA No. Technical Assistance Type ($’000) Approved 35 3220-PRC Preparing the Guangxi Highway PP 540 7 Jul 1999 36 3248-PRC Preparing the Shanxi and Shaanxi Roads PP 640 30 Aug 1999 37 3341-PRC Capacity Building Safety, Planning, and Management AD 600 14 Dec 1999 38 3546-PRC Preparing the Southern Sichuan Roads Development PP 800 16 Nov 2000 39 3569-PRC Jiangsu Highway BOT Project AD 555 12 Dec 2000 40 3642-PRC Preparing the Western Yunnan Roads Development PP 770 20 Mar 2001 41 3376-PRC Preparing the Ningxia Roads Development PP 600 16 Nov 2001 42 3900-PRC Socioeconomic Assessment of Road Projects AD 250 12 Aug 2002 43 3907-PRC Preparing the Xi’an Urban Transport Project PP 750 27 Aug 2002 44 3929-PRC Preparing the Hunan Roads Development PP 600 23 Sep 2002 45 4119-PRC Preparing the Guangxi Roads Development II PP 500 23 May 2003 46 4142-PRC HIV/AIDS on Road Projects in Yunnan Province AD 800 28 Oct 2003 47 4211-PRC Preparing the Gansu Roads Development PP 500 5 Nov 2003 48 4274-PRC Preparing the Central Sichuan Roads Development PP 700 18 Dec 2003 49 4322-PRC Poverty Impact of Area Wide Road Networks AD 1,000 26 Mar 2004 50 4351-PRC Policy Reform in Road Transport AD 500 24 Jun 2004 51 4384-PRC Preparing the Hunan Roads Development III PP 500 2 Sep 2004 52 4592-PRC Preparing the Heilongjiang Road Network Development PP 500 2 Jun 2005 53 4639-PRC Preparing the Western Roads Development PP 800 30 Aug 2005 54 4650-PRC Evaluating Poverty Impacts of Transport Projects SS 150 21 Sep 2005 55 4671-PRC Rural Road Development Strategy AD 350 21 Oct 2005 56 4698-PRC Road Safety Improvement AD 1,000 24 Nov 2005 57 4773-PRC Preparing the Xinjiang Regional Road Improvement PP 600 21 Mar 2006 58 4782-PRC Preparing the Central Yunnan Roads Development PP 500 28 Apr 2006 59 4792-PRC Preparing the Guangxi Longlin–Baise Expressway Project PP 500 26 May 2006 60 6321-REG Fighting HIV/AIDS in Asia and the Pacific (Subproject 7: HIV/AIDS Prevention and Road Transport Sector) RETA 500 5 Jun 2006 61 4806-PRC Sustainable Rural Transport Services AD 400 28 Jun 2006 62 4877-PRC Resource Optimization in Road Sector AD 600 29 Nov 2006 63 4970-PRC Western Yunnan Roads Development II Project PP 500 28 Sep 2007 64 4991-PRC Transport Information System AD 400 15 Nov 2007 65 4995-PRC Sustainable Urban Transport PP 800 23 Nov 2007 66 7052-PRC Asset-Backed Securitization for Expressway Financing and Corporate Debt Restructuring in Yunnan Province AD 150 11 Jan 2008 67 7117-PRC Heilongjiang Road Development II Project (Yichun–Nenjiang) PP 600 22 Aug 2008 68 7119-PRC Anhui Road Network Development Project PP 600 29 Aug 2008 Total 36,630 AD = advisory, km = kilometer, No. = number, PP = project preparatory, PRC = People’s Republic of China, REG = regional, RETA = regional technical assistance, SS = small scale, TA = technical assistance. Source: Asian Development Bank estimates.

Table A3.3: Other Funding Sources No. of Road Length Loan Amount Loans Organization (km) Unit Total 40 World Bank 10,598 $ million 7,780 16 Japan Bank for International Cooperation 1,695 Yen million 219,036 km = kilometer, No. = number. Source: Asian Development Bank.

Appendix 4 33 LOCAL ROAD SAFETY ENHANCEMENT PROGRAM

A. Overview

1. Road traffic safety is a serious issue in the People’s Republic of China (PRC). In 2006, there were 378,781 traffic accidents with 89,455 fatalities and 431,139 injuries, which meant more than 240 lives were lost and more than 1,100 people were injured on the PRC’s road every day. It was estimated that the total economic cost of traffic accidents is approximately 1.5–3.0% of the country’s gross domestic product. Beyond the enormous economic loss, poor road safety has a substantial social impact. It is estimated that road accidents in the PRC have impacted on the lives of more than 20 million people, either as victims of accidents or as family members of those involved in the accidents. Victims’ families suffer from an increased burden of care while facing reduced income and higher medical expenses. Consequently, loss of labor and increased medical costs often lead to poverty for affected families.

2. In relation to traffic flow and vehicle ownership, road traffic accident rates in the PRC are very high compared with accident rates in developed countries. Although the accident rate per head of population is relatively low, this reflects the low vehicle ownership rates and low motorization in the PRC. Comparing the fatality rate per 10,000 vehicles, the rate for the PRC overall and Yunnan is particularly high—almost eight times higher than figures for Japan and the United Kingdom. This indicates the scale of the problem, which is likely to emerge with increased vehicle ownership and mobility. Good practice and policies must be in place at present in order to reduce the number of fatalities and injuries on the roads before vehicle fleet expand. An overall comparison of accident data is given in Table A4.1.

Table A4.1: Comparative Accident Data of the PRC and Other Countries (2005) Total Road No. of Motor Fatalities Network Length Vehicles No. of Road per 10,000 Country (km) (million) Fatalities vehicles PRC 3,345,185 126.40 98,738 7.6 Yunnan 167,637 3.28 2,901 8.8 Japan 1,192,972 82.82 7,931 1.0 Australia 810,624 13.92 1,627 1.2 US 6,430,351 245.64 43,443 1.8 UK 398,350 33.28 3,201 1.0 km = kilometer, no. = number, PRC = People’s Republic of China, UK = United Kingdom, US = United States. Source: International Traffic Safety Data and Ministry of Public Security of the PRC.

3. Most fatalities occur in nonurban areas. Based on information provided by Yunnan Provincial Public Security Department (YPSD), the total number of nonurban highway accidents in 2007 was 3,112—with 1,901 fatalities and 3,835 injuries—accounting for 57% of the total accidents, 82% of total fatalities, and 62% of total injuries. On a per vehicle-kilometer (km) basis, expressways are the safest road category because of the separation of traffic in opposing directions, access control, and restrictions on slow-moving vehicles. However, when accidents occur on expressways, the outcome can be more serious (with higher fatality rates per accident) because of increased speeds. This issue has been addressed separately.1 Of the total road accidents in 2007, 61% of accidents occurred on the low class roads (class III/IV/unclassified) with 1,076 fatalities and 2,383 injuries. Of the 103 serious accidents in Yunnan in 2005 that caused more than 3 fatalities, 61 happened along the low class roads—causing about 240 fatalities and 140 injuries in total. The Project will prioritize low class roads. An analysis of nonurban road accidents by road classification is given in Table A4.2.

1 It was agreed that a road safety audit will be carried out during final design, construction, and before opening the expressway. Provision of escape lanes on long down gradients will be considered during the final design stage.

34 Appendix 4 Table A4.2: Analysis of Nonurban Road Accidents by Road Classification (2007) Length No. of No. of No. of Item (km) % Accidents % Fatalities % Injuries % Expressway 1,549 0.8 403 12.9 299 15.7 483 12.6 Class I 279 0.1 198 6.4 87 4.6 249 6.5 Class II 3,696 1.9 614 19.7 439 23.1 720 18.8 Class III 9,513 4.8 891 28.6 577 30.4 998 26.0 Class IV 84,797 42.7 570 18.3 352 18.5 784 20.4 Below Class 98,662 49.7 436 14.0 147 7.7 601 15.7 Total (nonurban) 198,500 100.0 3,112 100.0 1,901 100.0 3,835 100.0 km = kilometer, no = number a Analysis excludes accidents on urban roads. Source: Yunnan Provincial Public Security Department

B. Causes of Road Accidents

4. The major direct reasons cited for road traffic accidents in Yunnan are improper driving, poor road conditions, inadequate traffic management, poor road safety behavior of road users, and vehicle mechanical failures. Careful analysis of all road accidents have shown that accidents are often the result of a combination of several factors, rather than a single main cause. Improper driving is often compounded by poor road conditions. Lack of basic road safety facilities often contribute to conditions where driver error occurs. In 2005, 17 serious accidents caused more than 5 fatalities in Yunnan, 7 of which were caused by vehicles leaving the road and falling down a steep slope or cliff with 44 fatalities and 28 injuries. Road condition is one of the most important factors that increases the risk and severity of accidents.

5. Yunnan Province has a total of 198,500 km of road, 97% of which are low class roads (class III and below). Most of the low-grade roads were built at a time when few resources were used for road safety facilities. Moreover, 94% of the total provincial area is mountains and hills. Poor roads undermined safety, such as roads with sharp turns and steep grades, poor sight distance, and roadside hazards. It is vital to enhance safety facilities and establish better management mechanism. In 2003, about 3,500 km road sections were identified by YPSD as “blackspots or black segments”2 on national highways.

C. ADB and Government Strategy

6. The Asian Development Bank (ADB) has been implementing a series of road safety initiatives and strategies in the PRC to highlight and address the growing road safety problem. It has funded advisory technical assistances3 to provide guidance on the national road safety strategy and strengthen capacity building in traffic safety. In addition, road safety audits have been incorporated in all road transport projects financed by ADB.

7. The PRC Government is taking steps to address road safety issues. In the past, lack of cooperation and discussion between ministries hampered efficient road safety improvement. The establishment of the first national interagency road safety committee in 2003 involving multiple ministries, and the introduction of the first Road Traffic Safety Law in the PRC which took effect on 1 May 2004 are important steps in the coordination of road safety. The Government is paying growing attention to road safety and formulated a National Science and Technology Action Plan for Road Safety on 20 February 2008. The action plan set measurable targets including (i) reducing the number of road fatalities, (ii) reducing severe road accidents,

2 The “blackspots” and “black segments” were identified based on the number of accidents, deaths, injured persons, and economic loss. 3 ADB. 1999. Technical Assistance to the People’s Republic of China for Capacity Building in Traffic Safety, Planning, and Management. Manila; and ADB. 2005. Technical Assistance to the People’s Republic of China for Road Safety Improvement. Manila

Appendix 4 35 and (iii) achieving a similar rate of fatalities per 10,000 vehicles as in other middle-income countries. Dedicated resources will be allocated to address road safety.

D. The Proposed Local Road Safety Enhancement Program

8. Objective. Yunnan provincial government recognizes the urgency of this issue and is willing to work with ADB to formulate solutions. A Local Road Safety Enhancement Program (the Program) has been incorporated as a component of the Project financed by ADB. The outcome of this Program is to establish an efficient and sustainable road safety mechanism for managing road safety. The Program will (i) formulate a local road traffic safety strategy, (ii) strengthen interagency collaboration and partnership, (iii) include road safety audits in road building and upgrading projects, (iv) formulate low-cost safety remedial measures and design, (v) improve hazardous spots on existing local roads, and (vi) conduct training.

9. Institutional. Yunnan Provincial Communications Department (YPCD) and YPSD are the main agencies involved in the road safety. YPCD is responsible for all aspects of road safety related measures, while the Traffic Police General Team of YPSD handles driver and pedestrian education, law enforcement, traffic surveillance, and administration. It was agreed that a road safety interagency committee will be established in Yunnan to facilitate the project implementation.

10. Proposed Program. Experience has shown that, to be effective, joint action is required by the traffic police and Communications Department. The Program consists of (i) a study to formulate policy and strategies, (ii) a pilot program for treatment of blackspots, and (iii) provision of institutional strengthening and training. The Program will strengthen partnership and collaboration at both the provincial and low government level. Specifically, the Program includes:

(i) analyzing the factors contributing to accidents on roads, including factors and interactions between road users, vehicles, and road conditions; (ii) identifying the most dangerous local roads based on the number of accidents, deaths, injuries, and economic loss; making proposals to reduce accidents through the “black segments” and “blackspots” treatments on these roads; (iii) determining low-cost improvements in geometric alignments to provide better sight distances and curves, drainage, and skid-resistant pavements; and establishing better maintenance systems; (iv) identifying the improvements required on roads through cities, townships, and villages, such as intersection changes, traffic controls, barriers, signs, and markings; (v) formulating a strategy to strengthen traffic safety on local roads by harmonizing regulations, treatment standards, and procedures; (vi) preparing and implementing the road safety action plan for 4 years, 2009–2012; (vii) monitoring progress each year, setting new goals, and amending plans and implementation as required; and (viii) institutional strengthening and training.

11. Funding. The Program focuses on the safety enhancement of the local roads network comprising mostly class III, IV, and unclassified roads. It was agreed that YPCD will allocate CNY64 million in counterpart funds from 2009 to 2012 to this Program. The total cost of the component is estimated at CNY106 million ($14.8 million), of which $6 million will be financed by ADB (Table A4.3).

36 Appendix 4

Table A4.3: Local Road Safety Enhancement Project Cost Estimates (CNY million) Year YPCD ADB Total ADB Percentage 2009 16.0 0.0 16.0 0 2010 16.0 14.0 30.0 47 2011 16.0 14.0 30.0 47 2012 16.0 14.0 30.0 47 Total 64.0 42.0 106.0 40 ADB = Asian Development Bank, YPCD = Yunnan Provincial Communications Department. Sources: YPCD and ADB estimates.

12. Cooperation is Essential. To achieve success, YPSD and YPCD must cooperate and work together with the local community. Yunnan Provincial Government is committed to strengthening road safety enforcement and education, including among others (i) vehicle maintenance and inspections; (ii) enforcement of proper driver behavior; (iii) public road safety education to general public on road safety matters; and (iv) control and prevention of “overload” and “overlimit” vehicles. YPCD is committed to mobilizing funds and carrying out the Program, which will include the following actions (Box A4).

Box A4: Actions to Recognize and Disseminate Good Practice and Experiences

• YPCD will implement local road safety enhancement program with close coordination with YPSD. • Each prefecture will prepare and submit the implementation plan annually for YPCD approval. • YPCD will prioritize the implementation plan based on the agreed selection criteria, including road class, function, traffic, accident history and reasons, bus route, treatment, and cost, etc. • YPCD will invest CNY16 million in 2009 to selected prefectures based on the approved annual plan. • Construction supervision engineers will be engaged to control the quality and cost, and monitor progress. • Selected prefecture will prepare an annual evaluation report in accordance with the agreed standard, evaluation criteria, and improved accident rates. • YPCD will determine the best performing prefectures. • YPCD will submit to ADB an annual implementation plan, by the end of March of each year, beginning in 2009 through 2012. • ADB will finance the best performing prefectures annually with the total funding of $6 million. • YPCD will submit to ADB an annual report on the program within 3 months of the close of each fiscal year. • YPCD will disseminate good practice, especially solutions at a relatively low cost.

ADB = Asian Development Bank, YPCD = Yunnan Provincial Communications Department Sources: YPCD.

13. Local Road Traffic Safety Strategy Study. A national institute will be engaged by YPCD to help prepare (i) the road safety implementation plan to be implemented under the Project, (ii) a good practice manual of making low-cost improvement on local road network, and (iii) a recommended strategy to strengthen traffic safety on local roads. The findings will be used to develop policy and strategies to reduce road traffic accidents on local roads.

14. Training Workshops. Training program will cover a range of subjects which include (i) accident investigation and prevention, (ii) identification of hazardous sites, (iii) design of low- cost safety facilities, and (iv) monitoring and evaluation. The study and training cost is estimated at $100,000, to be financed by ADB as part of institutional capacity building component.

Appendix 5 37

RURAL ACCESS AND RURAL ROAD MAINTENANCE

A. Yunnan Road Network

1. Yunnan Province has a total of 198,500 kilometers (km) of road, of which less than 3% (5,500 km) is class II or above. Most of the roads in the province are class IV (84,800 km, 42.7%) and unclassified (98,700 km, 49.7%). Less than 17% of the total road length in the province is paved; the remaining 83% (165,425 km) is unpaved, although 14,000 km of this has a macadam (stone-set) surface. Rural roads are defined as county roads, township roads, and village roads. The composition of Yunnan Road network is summarized in Table A5.1.

Table A5.1: Composition of Yunnan Road Network (2006) By Classification (Standard) By Road Type (Function) Item Length (km) % Item Length (km) % Expressway 1,549 0.8 National 7,260 3.7 Class I 279 0.1 Provincial 9,308 4.7 Class II 3,696 1.9 County 48,317 24.3 Class III 9,513 4.8 Township 97,848 49.3 Class IV 84,797 42.7 Village 31,115 15.7 Subtotal 99,834 50.3 Special 4,652 2.3 Unclassified 98,666 49.7 Total 198,500 100.0 Total 198,500 100 km = kilometer. Source: Yunnan Provincial Communications Department Yearbook.

B. Rural Road Improvement

2. The Project will improve seven rural road sections totaling 190 km in the project area (Table A5.2). These were selected based on a set of criteria: population served, socioeconomic characteristics of the area (including poverty indices and incidence of minority populations), economic potential (both agricultural and nonfarm activities), access to basic services, etc. They will connect remote townships and minority villages to national highway 108 and/or the project expressway. More than 345,500 people will benefit directly from the improvement. The project local roads serve to demonstrate proper construction planning and implementation methods in an environmentally and socially sound manner. Yunnan Provincial Communications Department (YPCD) and local governments ensured that the project’s local road improvement will be completed by 2012. With these seven roads, YPCD will demonstrate that its current 11th Five- Year Plan (FYP, 2006-2010) for local roads is being well-implemented to ensure that transport benefits reach rural people, even in remote poverty areas.

3. The seven rural roads will be upgraded to all-weather links from unclassified to class IV. These local roads would only require improving the subgrade and pavement within the existing right-of-way, so there would be no land acquisition or resettlement. A short resettlement plan and a summary initial environmental examination was prepared by YPCD and approved by the Asian Development Bank (ADB) in May 2007. The benefits of local road improvement to local villagers were clearly evident and highly appreciated. These benefits will be monitored as part of the social monitoring.

C. Rural Bus Service Access

4. There are a total of 1,313 townships and 13,198 administrative villages in Yunnan. Based on data provided by YPCD, 93% of townships and 50% of administrative villages have a bus service; the rest rely on informal bus services, whose services are unreliable, erratic, and potentially unsafe. Poor road condition is a key factor restraining road transport services development.

38 Appendix 5

5. YPCD committed those administrative villages without basic all-weather access will be prioritized and upgraded in its 11th FYP. Road transport authorities tend not to issue bus route licenses on unclassified roads. Yunnan Transport Administration Bureau agreed that some of the recommendations of ADB technical assistance (TA) for sustainable rural transport services will be adopted in the project area. To serve the needs of the majority of rural residents, Yunnan Transport Administration Bureau agreed to organize safety inspection and management, together with traffic police and road administration agencies, to carry out field surveys on unclassified roads to determine the possibility of service. Passenger transport vehicles will be allowed to provide service on unclassified roads after comprehensive evaluation and approval, and with special administrative dispensation.

6. Consideration will be given to variations in demand and different types of operation: (i) varying daily, weekly, and market-day schedules for routes that are not suitable for regular daily operation; (ii) extending or adjusting existing routes on a more flexible basis; and (iii) allowing flexible operations in a specified region, recycling operations, rolling-up departures, on-call operations, or bundling profitable and unprofitable routes, and integrating rural transport and municipal public transport services. This will allow some flexibility for operators to adjust their services in line with passenger needs and use their vehicles and drivers more productively.

D. Rural Road Maintenance

7. Adequate maintenance is crucial to ensure the sustainability of rural roads. County governments are responsible for rural road maintenance, and the quality of rural roads is periodically checked by the city and provincial highway administration. There have been problems with rural road maintenance resulting from poor road quality, insufficient funding and inadequate planning, limited implementation capacity, and lack of market-oriented approaches and framework. To improve rural road maintenance, the State Council issued a new policy for financing and management of rural road maintenance in October 2005. Yunnan provincial government issued a Rural Road Maintenance Policy Reform Announcement in 2007. In line with this policy, YPCD established an annual subsidy mechanism for rural road maintenance of CNY7,000/km for county roads, CNY3,500/km for township roads, and CNY1,000/km for village roads. YPCD has implemented the new policy throughout the province from 1 January 2008.

8. Given an asset base size of the Yunnan Rural Road Network, substantial benefits can be obtained from a more scientific and cost-effective approach to road maintenance expenditure allocation. To manage maintenance effectively, a comprehensive inventory database system comprising all key parameters needs to be assembled. The key parameters include road condition (surface type, roughness, surface distress, etc.); construction and maintenance history data; and traffic volumes (including proportions of heavy trucks and likely growth rates).

9. The evaluation and prioritization of maintenance requires a comprehensive analysis of the overall life-cycle costs and benefits of the potential improvement and investment options. This can be best achieved through the operation of the Highway Development and Management (HDM-IV) system capable of predicting pavement deterioration and performance; and comparing this with maintenance costs, improvement costs, and overall vehicle operating cost across the network. The Project will provide training on operating an HDM-IV evaluation program to enhance YPCD’s maintenance planning and prioritization capacity.

Table A5.2: Local Road Improvement under the Project

Sub- Investment Objective of Road Population Poverty Minority Estimated Estimated project Road Name, Length Cost Cost/km Improvement Served Incidence Share Traffic EIRR No. County (km) (CNY (CNY (thousand (< 944 (% of (passenger (%) million) million) persons) CNY/year) population) car unit per day) 1 Shalaqing– 51.0 14.3 0.28 all-weather connection to 50.0 38% 64% 150 23.4 Dongpo, Wuding NH108 for 2 townships County

2 Chadian–Fawo, 45.0 22.5 0.50 all-weather connection to 56.0 58% 58% 200 24.7 Wuding County NH108 for 3 townships

3 Jiuchang–Maojie, 33.3 13.3 0.40 all-weather access for 102.2 23% 23% 400 28.8 Wuding County three townships and connections to Wuding– Kunming Expressway

4 Kuinan-Maiyidian, 10.0 3.9 0.39 all-weather link from 18.7 5% 9% 450 29.0 Fumin County remote township to NH108/Wuding– Kunming Expressway

5 Dongyuan– 22.0 39.2 1.78 all-weather connection to 45.4 6% 9% 150 20.4 Sandan, Fumin NH108/Wuding– County Kunming Expressway for 4 townships, linkage Wuhua District and Fumin County

6 Wagong–Kunxiao 7.2 5.3 0.74 all-weather section of 26.8 7% 10% 50 26.5 Road, Wuhua Sandan connector, District linkage between Wuhua District and Fumin

County 5 Appendix

7 Changpo– 21.5 6.5 0.30 all-weather linkage 46.4 5% 40% 500 22.6 Maomaoqing– between Anning City and Tuomu, Xishan Xishan District of District Kunming City, 39 2 townships

Total 190.0 105.0 345.5

EIRR = economic internal rate of return. Sources: Project preparation consultants and Asian Development Bank estimates.

40 Appendix 6

STRATEGIC VEHICLE EMISSION REDUCTION PLAN

A. Overview

1. Increasing the number of vehicles and vehicle-kilometers traveled has raised concern about local air pollution and global warming. Major vehicle emission are carbon monoxide (CO), carbon dioxide (CO2), hydrocarbon (HC), nitrogen oxide (NOx), sulfur oxide (SOx), and suspended particulate matter (SPM). These emissions cause local air pollution and health issues, and CO2 increases global warming and causes climate change. Improvement of traffic efficiency and vehicle quality could decrease all vehicle emissions. The major pollutants to be measured by the Project are CO, CO2, HC, SOx, NOx, and SPM. The amount of reduction of CO, CO2, HC, NOx, and SPM at project level were assessed.

B. Project Benefits

2. Reduction of CO, CO2, HC, NOx, and SPM was estimated by comparing the case with and without the Project. Without the Project, traffic would continue to use the existing road, which will be more congested; engines will consume more fuel and produce more pollutants by decelerating, accelerating, and driving at very slow speed. With the Project, traffic will benefit from a shorter distance, optimal alignment, and less congestion. Vehicles will operate efficiently at high speed with less stop-and-go, which will result in lower fuel consumption and less emission of pollutants. The estimation of vehicle emissions is based on the relationship of fuel consumption, emission of pollutants, and vehicle average speed.

3. For the first operating year, fuel conservation for passenger and freight vehicles in the corridor is estimated at more than 6,000 ton of oil equivalent (toe) with a total saving of 726,000 toe over the 20-year forecast period, or 25% lower than without the Project. In addition, it will result in the reduction of 22,000 tons of carbon dioxide (CO2) pollutant emission, with a total reduction of 2.3 million tons of CO2 over the 20-year forecast period. Yunnan Provincial Environmental Protection Bureau will monitor emissions on project roads (Table A6.1).

Table A6.1: Estimated Vehicle Emission Reduction in the Project Corridor (ton of oil equivalent) Item/Year 2013 2032 2012–2032 Fuel Savings 6,000 61,000 726,000 Reduced CO2 Emission 22,000 231,000 2,300,000 CO2 = carbon dioxide. Sources: Yunnan Provincial Environmental Protection Bureau and Asian Development Bank estimates.

4. Yunnan Province adheres to national vehicle emission control strategies, including (i) enforcing national emission standards for new vehicles, (ii) improving conventional fuels, (iii) legislating the use of alternative or cleaner fuels, (iv) increasing vehicle inspection and maintenance programs, and (v) using the national regulated requirement for the retirement of obsolete polluting vehicles. Vehicle emission enforcement administration for operating vehicles requires good coordination among agencies: Yunnan Provincial Environmental Protection Bureau and Yunnan Provincial Public Security Department. Table A6.2 provides an integrated plan developed to help agencies in reducing vehicle emissions in Yunnan and the project area.

Appendix 6 41

Table A6.2: Strategic Vehicle Emission Reduction Plan: Targets and Expected Outputs Expected Responsible Target Proposed Action Schedule Output Agency A. Vehicle Emission Standard and Vehicle Technology Implement new Adopt PRC phase-III standards equivalent to By 2009 Vehicle emissions YEPB PRC emission Euro III reduced by 50% standards Adopt PRC phase-IV standards equivalent to By 2010 Vehicle emissions YEPB Euro IV further reduced by 30% Retire obsolete Force retirement of vehicles that are more than Ongoing Retirement of all YPSD vehicles 8–10 years old and have failed the emission obsolete vehicles inspection test three consecutive times. will be timely Encourage retirement of old vehicles through subsidy and enforcement. B. Fuel Use taxation Owners of vehicles with engines above 4-liter Effective 1 Reduced sales of Ministry of policies capacity will pay 40% tax, double the previous September cars with big Finance rate. The tax for vehicles with engines 2008 engines. between 3 and 4 liters will be up from 15–25%. Improve For diesel vehicles, reduce sulfur levels to MEP and conventional <500 parts per million. Impose further YEPB fuels reductions on sulfur levels upon adoption of new stricter vehicle emission standards as proposed by MEP. Introduce Encourage production of alternative fuel By 2015 Kunming has a YEPB alternative or vehicles or modification of existing vehicles to program to cleaner fuels dual-fuel engine vehicles, utilizing new Yunnan convert buses and gas pipelines and refinery. Promote taxi to run on establishment of CNG stations in Yunnan. CNG Develop economic incentives for investment in Ongoing YDRC and gas-filling stations. YEPB Develop economic incentives for encouraging Ongoing YDRC and the use of clean fuels. YEPB C. Inspection and Maintenance Program Improve • Strengthen the capacity of relevant Ongoing Adequate YEPB annual vehicle agencies to provide efficient services. inspection and testing and • Emission-violating vehicles should be maintenance certification repaired to meet the required standards system will be in before going on-road. place before 2010 • Upgrade the vehicle testing facilities to meet new vehicle inspection requirement according to the new standards. • Develop a quality audit system for assuring the quality of vehicle emission tests and preventing fraud and corruption. Stations found with corruption or unreliable results will be penalized. Initiate on-road Initiate a random on-road check program for By 2015 YPSD and spot check vehicle emissions to complement testing in YEPB fixed stations. D. Monitoring Strengthen Engage a qualified environmental monitoring During YPCD environmental institution to monitor ambient air quality along operation monitoring the expressway, particularly at sensitive receptors such as schools, hospitals, and residential sites; and be ready to take immediate action if standards are exceeded on more than two consecutive tests. CNG = compressed natural gas, MEP = Ministry of Environmental Protection, PRC = People’s Republic of China, YPCD = Yunnan Provincial Communications Department, YDRC = Yunnan Development and Reform Commission, YEPB = Yunnan Provincial Environmental Protection Bureau, YPSD = Yunnan Provincial Public Security Department. Sources: Ministry of Environmental Protection and Yunnan Provincial Government.

42 Appendix 7

REGIONAL COOPERATION IN THE GREATER MEKONG SUBREGION

A. Overview

1. The Central Yunnan Roads Development Project (the Project) has been identified as a priority project in the Greater Mekong Subregion (GMS) Plan of Action (2008–2012), which was endorsed by the governments of the six GMS countries at the Third GMS Summit in Vientiane, Lao People’s Democratic Republic (PDR) on 30–31 March 2008. The Project will contribute to expanded trade and economic exchange between Yunnan and its GMS neighbors. Yunnan lies at the focal point of trade and commerce in the southwest People’s Republic of China and is the natural conduit for business with GMS countries. Export and import trade has grown rapidly in recent years between Yunnan Province and other countries (see Table A7). With average annual growth rates of 20% for total trade with the world as well as with the Association of Southeast Asian Nations countries during 2000–2006, the GMS countries have accounted for a steady 20–30% share of total value. Trade with Viet Nam has increased most dramatically since 2000 and now comprises over half of the cross-border trade with neighboring countries. Trade with Lao PDR has grown rapidly in recent years (albeit from a small base) reflecting the improved road connections and increased interaction between GMS countries.

Table A7: Yunnan Total Export-Import Trade, 2000–2006 ($ million) Year Region 2000 2001 2002 2003 2004 2005 2006 Total (All Countries) 1,812.8 1,989.1 2,226.4 2,667.7 3,747.8 4,738.2 6,231.7 Total (Asia) 1,249.7 1,430.9 1,583.4 1,836.3 2,432.1 3,068.8 3,589.3 ASEAN 628.1 708.8 824.0 1013.0 1,276.7 1,556.9 2,174.5 GMS 514.7 573.9 630.8 822.9 1,054.4 1,150.3 1,403.0 ASEAN = Association of Southeast Asian Nations, GMS = Greater Mekong Subregion. Sources: Yunnan Statistical Yearbooks.

2. Trade between Yunnan Province and Viet Nam is growing rapidly, with annual increases of 25% in volume and 30% in value recorded in recent years. Hekou has handled the largest volume of cross-border trade in Yunnan since 2003. In 2007, the total volume amounted to 2.25 million tons—1.69 million tons by road and 0.57 million tons by rail—with a value of $1.1 billion. The volume carried by rail has been relatively constant (three trains per day) because of capacity constraints, whereas the road-based volume has increased by around 45% in the past year. The main commodities carried by road are agricultural products, machinery, and mining equipment. Imports have increased faster than exports.

3. A new cross-border bridge over the Hong He (Red River) is presently under construction. A major new customs checking and transshipment facility is being developed. Discussions are ongoing between the People’s Republic of China and Viet Nam to extend customs clearance hours from 15 hours opening to 24 hours. Starting November 2006, PRC trucks have been able to be operated beyond the border into Viet Nam’s Northern Province, and Vietnamese trucks can be operated into Hekou County under a bilateral road transport agreement.

4. Kunming is recognized as the northern terminal of the three GMS corridors: North–South Economic Corridor to Bangkok (via Northern Lao PDR); Eastern Corridor to Ha Noi/Hai Phong in Viet Nam; and Northern Corridor to Nanning/Fangcheng in Guangxi (Map 1). By 2012, the highway segment from Shilin–Mengzi will be completed, which will provide the last link in the national expressway system from Kunming to the Viet Nam border.

Appendix 7 43

5. The Project was identified as a high priority project under the GMS Transport Sector Strategy, which was endorsed by the six GMS governments in 2006 (Box A7).

Box A7: GMS Transport Sector Strategy (2006–2015)

Strategy Theme: Toward Seamless Transport Services on a Fully Connected and Integrated GMS transport network. Five Goals: Goal 1: Exploit synergies in the GMS transport system Goal 2: Move toward an open market for transport services Goal 3: Facilitate economic efficiency to reduce transport costs Goal 4: Complete the GMS network and improve links with South Asia Goal 5: Encourage multimodalism. GMS = Greater Mekong Subregion. Source: Asian Development Bank. 2006. Greater Mekong Subregion Transport Sector Strategy. Manila.

B. Cross-Border Transport Facilitation in the Greater Mekong Subregion

6. The GMS governments have recognized that providing subregional physical infrastructure is a necessary but not sufficient condition for increased connectivity among the six GMS countries. Mitigating nonphysical barriers to the cross-border movement of goods and people is important to increase efficiency, reduce costs, and maximize the economic benefits of improved subregional transport infrastructure. Nonphysical barriers impeding the free movement of vehicles, goods, and people across international borders in the subregion include (i) restrictions on the entry of motor vehicles, often causing costly and time-consuming transshipment; (ii) different standards pertaining to vehicle size, weight, and safety requirements, and driver qualifications; (iii) inconsistent and difficult formalities related to customs procedures, inspections, clearances, and assessment of duties; and (iv) restrictive visa requirements. To mitigate nonphysical barriers to the cross-border movement of goods and people in the GMS, the six countries have negotiated, signed, and ratified a cross-border transport agreement (CBTA) framework agreement in 2003. Full implementation of the CBTA is targeted to commence in 2010.

7. The GMS CBTA is a multilateral instrument for the facilitation of the cross-border transport of goods and people. Formulated under the auspices of a series of ADB technical assistance projects, the CBTA provides a practical approach to streamline regulations and reduce nonphysical barriers in the GMS. It incorporates the principles of bilateral or multilateral actions, and flexibility in recognition of differences in procedures in each of the GMS countries.

8. The CBTA covers all the relevant aspects of cross-border transport facilitation in one document. These include (i) single-stop/single-window customs inspection; (ii) cross-border movement of persons (i.e., visas for persons engaged in transport operations); (iii) transit traffic regimes, including exemptions from physical customs inspection, bond deposit, escort, and agriculture and veterinary inspection; (iv) requirements that road vehicles will have to meet to be eligible for cross-border traffic; (v) exchange of commercial traffic rights; and (vi) infrastructure, including road and bridge design standards, road signs, and signals. The CBTA will apply to selected and mutually agreed routes and points of entry and exit in the signatory countries. Pilot implementation of the CBTA commenced at some of the border crossing points, including the Hekou–Lao Cai border crossing along the GMS Eastern Corridor. With the ratification of the CBTA’s implementing annexes by the PRC and Viet Nam, the ministries of transport of the two countries are discussing the expansion of the current limited exchange of traffic rights arrangements governed by an existing bilateral road transport agreement, to cover the entire corridor from Kunming to Ha Noi and further to Hai Phong.

DETAILED COST ESTIMATES BY FINANCIER 44 ($ million)

Provincial and Central Appendix 8 ADB Domestic Bank Loans Cost Cost Government Item (CNY million) ($ million) % of Cost % of Cost % of Cost $a $$ Categoryb Category Category A. Base Cost c 1 Earthwork 339.1 47.5 19.8 42 15.5 33 12.2 26 2 Pavement 208.2 29.2 0.0 0 9.5 33 19.7 67 3 Structures 1,519.3 212.8 88.9 42 69.3 33 54.6 26 4 Tunnels 856.3 119.9 50.1 42 39.1 33 30.7 26 5 Interchanges and Facilities 463.8 65.0 27.2 42 21.2 33 16.6 26 Subtotal Expressway Civil Works 3,386.8 474.4 186.0 39 154.5 33 133.9 28 6 Environmental Protection 54.6 7.6 0.0 0 0.0 0 7.6 100 7 Equipment and Office Furniture d 111.9 15.7 6.0 38 9.7 62 0.0 0 8 Land Acquisition and Resettlement 337.2 47.2 0.0 0 0.0 0 47.2 100 9 Consulting Services and Training 14.3 2.0 2.0 100 0.0 0 0.0 0 10 Project Design and Supervision e 198.4 27.8 0.0 0 0.0 0 27.8 100 11 Local Roads Improvement Program 105.0 14.7 0.0 0 0.0 0 14.7 100 12 Local Roads Safety Enhancement Program 106.0 14.8 6.0 41 0.0 0 8.8 59 13 Project Management f 41.6 5.8 0.0 0 0.0 0 5.8 100 14 Taxes and Duties 221.1 31.0 0.0 0 0.0 0 31.0 100 Subtotal Base Cost (A) 4,576.8 641.0 200.0 31 164.2 26 276.8 43 B. Contingencies 1 Physical Contigency g 155.7 21.8 0.0 0 0.0 0 21.8 100 2 Price Contigency h 248.9 34.9 ` 0.0 0 0.0 0 34.9 100 Subtotal (B) 404.6 56.7 0.0 0 0.0 0 56.7 100 C.Interest i and Other Charges During Implementation 336.6 47.3 0.0 0 47.3 100 0.0 0 Total Project Costs 5,318.0 745.0 200.0 27 211.5 28 333.5 45 % Total Project Cost 100 27 ADB's share 28domestic loan's share 45 government's share ADB = Asian Development Bank. a Amount of ADB loan proceeds allocated to the cost category. b The amounts disbursed by ADB for eligible expenditures under a cost category will be subject to the ceiling set by the allocation of loan proceeds for such cost category. c At 2008 prices, inluding taxes. d Includes $6 million under ADB financing for procurement of equipment. e Includes design cost and supervision cost. f Project management cost includes research, testing and quality control cost. g At 5% of expressway base cost. h At 3% per annum for 2009–2012 for local currency costs and 0.8% per annum for foreign exchange costs during 2009–2012. i Interest rate computation is based on the prevailing US dollar 5-year swap rate plus a lending spread of 0.2% for the ADB loan and prevailing interest rate for the domestic bank loans. It also includes a commitment charge of 0.15% per annum for ADB loan. Source: Asian Development Bank estimates. IMPLEMENTATION SCHEDULE 2008 2009 2010 2011 2012 Activity I II III IV I II III IV I II III IV I II III IV I II III IV A. Project Processing 1. Appraisal 2. Feasibility Study Approval by NDRC 3. Loan Negotiations 4. Board Consideration 5. Loan Effectiveness B. Land Acquisition and Resettlement 1. Preparation of Updated RP 2. Approval of Updated RP by ADB 3. Land Acquisition Process 4. Transfer Land 5. Relocate Housing and Enterprises 6. Livelihood Rehabilitation C. Expressway Civil Works 1. Design Preparation and Approval 2. PQD Preparation to PQD Approval 3. PQD Issuance to PQ Approval 4. BD Preparation to BD Approval 5. BD Issuance to Bid Submission 6. Evaluation to Contract Award 7. Construction D. Expressway Pavement and Equipment 1. BD Preparation and Approval 2. BD Issuance to Contract Award 3. Construction and Installation E. Monitoring and Capacity Building Consultants 1. RFP Preparation 2. RFP Issuance to Contract Award 3. International Consulting Services

4. National Consulting Services Appendix 9 F. Local Road Civil Works 1. Contract preparation to Contract Award 2. Site Implementation G. Local Road Safety Enhacement 1. Black Spots Identification 2. Design for Improvements

3. Treatment 45 4. Training and Evaluation ADB = Asian Development Bank, BD = bidding documents, NDRC = National Development and Reform Commission, PQ = prequalification, PQD = prequalification document, RFP = request for proposal, RP = resettlement plan. Source: Yunnan Provincial Communications Department. 46 Appendix 10

PROCUREMENT PLAN

1. This procurement plan shows the thresholds and particular contracts required to carry out the Project. Project information for the procurement plan is in Table A10.1.

Table A10.1: Project Information Procurement Method Threshold ($) Country People’s Republic of China Name of Borrower People’s Republic of China Project Name Central Yunnan Roads Development Project Executing Agency Yunnan Provincial Communications Department Amount $200 million Period Covered by this Plan 2008- 2012

2. Goods and works financed under the loan will be procured in accordance with ADB’s Procurement Guidelines (2007, as amended from time to time) and follow ADB procedures. Necessary thresholds for all contract packages envisaged for this Project are shown in Table A10.2.

Table A10.2: Threshold for Procurement Procurement Method Threshold ($) International Competitive Bidding (ICB) Works ICB Works ≥ $10,000,000 National Competitive Bidding (NCB) Works $200,000 ≤NCB for Local Road Safety Works <$10,000,000 Shopping Works Shopping for Local Road Safety Works only <$200,000 ICB Goods ICB Goods ≥ $1,000,000 NCB Goods $100,000 ≤NCB Goods <$1,000,000 Shopping Goods Shopping Goods <$100,000 Quality- and Cost-Based Selection (QCBS 80:20) QCBS ≥ $200,000 Consultants Qualifications Selection (CQS) CQS ≤$200,000 Single Source Selection (SSS) SSS ≤ $100,000 Force Account Not applicable

Table A10.3: Contract Packages

Part A: ADB-Financed Contracts Expected No. Description Length Procurement ADB Date of (km) Method Review Advertisement A. Subgrade, Bridges, Tunnels C1 K0+000~K9+000 9.0 ICB A Oct-08 C2 K9+000~K14+500 5.5 ICB A Oct-08 C3 K14+500~K18+000 3.5 ICB A Oct-08 C4 K18+000~K22+800 4.8 ICB A Oct-08 C5 K22+800~K27+600 4.8 ICB A Oct-08 C6 K27+600~K33+400 5.8 ICB A Oct-08 C7 K33+400~K39+600 6.2 ICB A Oct-08 C8 K39+600~K45+600 6.0 ICB A Oct-08 C9 K45+600~K49+200 3.6 ICB A Oct-08 C10 K49+200~K51+980 2.8 ICB A Oct-08 C11 K51+980~K54+700 2.7 ICB A Oct-08 C12 K54+700~K56+960 2.3 ICB A Oct-08 C13 K56+960~K59+000 2.0 ICB A Oct-08 C14 K59+000~K61+300 2.3 ICB A Oct-08 C15 K61+300~K63+600 2.3 ICB A Oct-08 Total 63.6

Appendix 10 47

B. Equipment Procurement ADB Expected No. Description Method Review Date of Advertisement 1 Tunnel Jet fan ICB A April-10 2 Maintenance Vehicles, etc. ICB A April-10 3 Heavy Vehicle Simulator ICB A April-10 4 Engineering Emergency Rescue Vehicles ICB A April-10 5 Pavement Recycling Machine ICB A April-10 6 Tire Rollers, Pavement Recycle Mills, etc. ICB A April-10 Total

C. Local Road Safety Enhancement Program 1 Small Works, in 20 contracts Shopping C N/A 2 Very Small Works, in 50 packages FA N/A N/A

D. International Consulting Services No. Description Selection Method Type of Proposal ADB Review 1 Construction Supervision and training QCBS FTP A 2 Local Road Safety Strategy SSS BTP A

Part B. Government Financed Contracts No. Description Length Procurement ADB (km) Method Review A. Pavement A1 Pavement 25.0 NCB NR A2 Pavement 20.0 NCB NR A3 Pavement 19.0 NCB NR B. Traffic management Facilities B1 Road Safety Facility K00+00–K37+41 NCB NR B2 Road Safety Facility K37+41–K63+60 NCB NR C. Toll Collection, Monitoring, and Communication Systems C1 Communication, Toll, Monitoring K00+00–K37+41 NCB NR D. Building and Ancillary Facilities D1 Buildings and Ancillary Facilities K00+00–K63+60 NCB NR E. Landscaping Works E1 Greening Works for Expressway K00+00–K9+000 NCB NR E2 Greening Works for Expressway K9+000–K22+800 NCB NR E3 Greening Works for Expressway K22+800–K39+600 NCB NR E4 Greening Works for Expressway K39+600–K51+980 NCB NR E5 Greening Works for Expressway K51+980–K59+000 NCB NR E6 Greening Works for Expressway K59+000–K63+600 NCB NR F. Electromechanical Works F1 Electromechanical Works K00+00–K63+60 NCB NR

ADB = Asian Development Bank, BTP = biodata technical proposal, FA = Force Account, FTP = full technical proposal, ICB = international competitive bidding, km = kilometer, N/A = not applicable, NCB = national competitive bidding, No. = number, QCBS = quality- and cost-based selection method, SSS = single source selection, STP = simplified technical proposal.

Notes: ADB Review: A = Prior review and approval by ADB of procurement documents, bid evaluation reports, and proposed awards of contracts is required. B = The first draft English language version of the procurement documents should be submitted for ADB review and approval regardless of the estimated contract amount. ADB-approved procurement documents should be used as a model for all NCB procurement financed by ADB for the Project, and need not be subjected to further review. ADB will review the bid evaluation report and award of contract on a post- review basis. C = ADB will review the award of contract on a post-review basis. NR = ADB review not required.

Sources: Yunnan Provincial Communications Department and ADB estimates.

48 Appendix 11

TRAFFIC FORECAST

1. The Project is located in the mountainous area of central Yunnan Province. The Wuding–Kunming Expressway (WKE) constitutes a 64-kilometer (km) access-controlled four- lane expressway with a design speed of 80–100 km/hour. The WKE provides five interchanges to connect other parts of the road network and provide services to local population. Compared with the parallel existing national highway (NH108), the WKE will be about 20 km shorter and offer time savings of at least 1 hour.

2. The WKE is the last missing link in the Chengdu–Kunming corridor, a priority Western Development Corridor in the People’s Republic of China. The total length of the Chengdu– Kunming corridor is 805 km—213 km in Yunnan and 592 km in Sichuan. It connects two growing centers (Chengdu and Kunming) through underdeveloped areas in southern Sichuan and central Yunnan.1 With the completion of the Western Development Corridor and National Highway Trunk system by the end of 11th Five-Year Plan, Kunming’s role as a growth pole on the north–south corridor will be strengthened. By 2015, the Kunming–Ha Noi–Hai Phong section of the Greater Mekong Subregion Corridor will be completed. Regional economic and trade growth will hence be a significant driver of interprovincial and international traffic with the Greater Mekong Subregion.

3. The WKE will be built parallel to the existing NH108, which was class IV but the section between Kunming to Wuding was upgraded to class II in 1998. The pavement is generally fair but the road alignment is very poor, with sharp curves and steep grades. Its technical standard confines the average speed on the road and road capacity. Average daily traffic in 2005 was about 6,000 vehicles and the average speed on the road was less than 40 km/hour. The existing road cannot meet the rapidly increasing traffic demand.

4. Estimated traffic on the project road is based on routine traffic counts and the comprehensive origin and destination surveys carried out in January 2005 and calibrated and updated by project preparatory technical assistance consultants at six selected observation stations on the NH108 and other roads. According to the surveys, daily traffic in 2006 was about 5,500–11,000 passenger car units (pcu) by road sections—56% passenger vehicles and 44% freight vehicles.

5. Traffic forecasts have been based on an analysis of economic growth, population, and vehicle ownership. A traffic demand model was made on the basis of a conventional growth model. Traffic demand was projected separately for passenger and freight vehicles for 2013, 2023, and 2032—from origin and destination matrixes and demand elasticity of 1.0 and 0.9. Average traffic growth rates in the project corridor are estimated to be 8% per year (2006–2013), 7% per year (2013–2023), and 6% per year (2023–2032).

6. The traffic forecasts also allow for potential generated and diverted traffic as a result of (i) additional traffic generated by the Project because of lower trip costs in the corridor, (ii) potential diverted traffic from other road networks because of the corridor capacity enhancement; and (iii) non-model local intrazonal traffic in the existing road networks. Generated traffic is estimated using price elasticity of minus 0.3 for passenger traffic and minus 0.2 for freight traffic, and is projected to be 11.4% of normal passenger traffic and 9.8% of normal freight traffic in 2013.

1 In Yunnan, the WKE will connect the expressway from Yongren (Yunnan border) to Wuding (149 km, completed in 2007). In Sichuan, it will further connect from the border to Chengdu (total 592 km). Chengdu–Ya’an (130 km) is functioning well; Ya’an–Xichang (245 km) is to be completed by 2010; Xichuang–Panzhihua (160 km) opened to traffic in 2006; and Panzhihua to Yunnan border (57 km) was completed in 2007.

Appendix 11 49

7. Traffic is assigned between every pair of traffic zones. Vehicles moving from one zone to another make a choice of link paths based on their perceptions of generalized costs of travel on the WKE and its parallel route—a function of travel time, distance, associated toll cost, and affected by road conditions and traffic congestion. The diverted traffic from existing roads is calculated using the Asian Development Bank’s toll diversion model. The results of the analysis indicate that an average of 59% of vehicles may be diverted to the expressway in 2013. The traffic diversion rate is expected to increase to 79% by 2023 and stabilize thereafter.

8. Ramp-up, a phenomenon on several recently opened expressways, is when traffic does not transfer immediately from the existing road to the expressway, but takes a few years for the full potential traffic to be realized. To estimate this effect, the following assumptions are made: 75% of the expected flow for 2013 and 90% for 2014. The resulting traffic projection, by section, is summarized in Table A11. The forecast traffic volume on the WKE is expected grow from an average of 8,150 pcu in 2013 to 22,350 pcu in 2023, to reach 42,670 pcu in 2032.

Table A11: Average Annual Daily Traffic on Project Corridor by Sections (passenger car units) Wuding– Fumin– Wuguishan– Weighted Item Fumin Wuguishan Xiaotun Average A. Traffic Without the Project

1. On the Existing Corridor 2006 5,682 10,990 10,990 7,586 2013 9,127 17,606 17,606 12,168 2023 18,214 34,915 34,915 24,204 2032 33,210 63,699 63,699 44,146

B. Traffic With the Project

1. On the Existing Corridor 2013 3,075 8,894 9,401 5,200 2023 3,265 11,524 12,876 7,100 2032 4,581 20,805 23,287 11,340

2. On the Project Expressway 2013 6,901 9,940 9,360 8,150 2023 18,963 27,203 25,627 22,350 2032 36,190 51,919 48,906 42,670

3. Normal Traffic Growth Rate 2006–2013 8% 8% 8% 8% 2013–2023 7% 7% 7% 7% 2023–2032 6% 6% 6% 6%

4. Traffic Diversion Rate 2013 66% 49% 47% 59% 2023 82% 67% 63% 79% 2032 85% 67% 63% 80% Sources: Yunnan Provincial Communications Department and Asian Development Bank estimates.

50 Appendix 12

ECONOMIC ANALYSIS

1. General. The economic internal rate of return (EIRR) of the Project, as the indicator of economic analysis, was estimated by comparing the situation with and without the Project. Without the Project, traffic will continue to use the existing road network, national highway (NH) 108, which will be more congested and expensive to maintain because of rapidly increasing traffic volume—causing delays and resulting in increased travel time, vehicle operating cost (VOC), and road accidents. With the Project, traffic will benefit from faster, cheaper, and safer travel because of a rapid reduction of congestion along the corridor. Some additional trips will be generated as the economy responds to lower transport costs and better services. Some traffic will be diverted from other road networks in the corridor.

2. Assumptions. The economic analysis incorporates 4 years of implementation and 20 years of operation. Economic evaluation was undertaken using 2008 prices, expressed in yuan (CNY), using the domestic price numeraire with a shadow exchange rate factor of 1.013 for foreign exchange effects. Unskilled labor is valued using a shadow wage rate factor of 0.7, considering the low productivity and unemployment in the area. The economic costs of the expressway include (i) capital costs, including physical contingency, land acquisition and resettlement, and environmental mitigation costs; and (ii) operation and maintenance (O&M), including replacing depreciated equipment and periodic maintenance. The economic costs were derived from financial costs by (i) excluding taxes and duties, (ii) converting the cost of imported items to domestic prices using the shadow exchange rate factor, and (iii) converting unskilled labor costs using the shadow wage rate. Using the domestic price numeraire, a conversion factor of 0.962 was used for project capital cost. The economic benefits include (i) savings in VOC resulting from reduced travel distance and improved road conditions, (ii) savings in the value of passenger time tied up in transit, (iii) savings resulting from fewer accidents, (iv) benefits to generated traffic, and (v) savings in capital and O&M costs for NH108.

3. Expressway Component. The project expressway will shorten the route by 20 kilometers. The calculations of VOC savings allow for differences in roughness, terrain, speed, and congestion; as well as a changing vehicle mix for both passenger and freight vehicles, and improvements in vehicle performance. The typical economic VOCs are shown in Table A12.1. Travel time savings are valued for passengers in vehicles only, as the time of crew members is valued in the vehicle operations cost. The time values of passengers are valued at 25–75% of the average wage of passengers on the project expressway. The values used per person-hour are CNY5.83 for car passengers and CNY1.17 for bus passengers. The economic costs of accidents are estimated in terms of direct property damage and forgone income on the basis of national data for 2006. The average economic cost of an accident is estimated at CNY108,800 on expressways and CNY84,000 on national highways. The benefits of generated traffic are estimated at half the VOC and time savings of normal traffic as a proxy for willingness to pay. In addition, savings in capital and O&M costs for NH108 are calculated on the basis of maintaining a volume-to-capacity ratio of 1.0 without the Project. The EIRR for the expressway component is estimated at 16.9%, indicating that the Project is economically viable, with a net present value of CNY2,130.5 million.

4. Local Road Component. The local roads for upgrading under the Project were chosen based on the effect on overall road network efficiency and benefit-cost analysis, economic development potential, and population density. The local road costs include capital costs and O&M costs. The principal benefits of the local road improvement are identified as (i) VOC savings (Table A12.1), (ii) benefits to generated traffic, and (iii) savings in O&M costs. The rural roads have a combined EIRR of 23.5% per annum with a net present value of CNY105.6 million.

Appendix 12 51

Table A12.1: Estimated Economic Vehicle Operating Cost, 2013 (CNY per kilometer, 2008 prices) Vehicle Expressway Existing Road Car 1.37 1.61 Medium-Sized Bus 2.19 2.84 Small Truck 1.45 1.95 Medium-Sized Truck 2.04 2.70 Heavy Truck 2.31 2.95 Articulated Truck 3.00 3.75 Sources: Asian Development Bank and Yunnan Provincial Communications Department.

5. The Whole Project. The Project as a whole generates an estimated EIRR of 17.1% (Table A12.2). The EIRR is 16.9% for the expressway and 23.5% for local roads. The VOC savings from the expressway are the major economic benefit (69.2%) followed by passenger time savings (17.8%). Avoided accident costs, savings to generated traffic, and other benefits are all relatively small. The benefits of the local roads, while important to the communities concerned, account for 3.6% of the total benefits. The results of sensitivity analysis confirm the robustness of the project’s economic viability (Table A12.3). The capital cost would have to be 76% higher than estimated for the EIRR to fall to the cutoff rate of 12%. Considering the experience of the Asian Development Bank in the People’s Republic of China, such an increase in capital cost is unlikely. A distribution analysis was conducted to determine the project effects for various beneficiaries, including road users, labor, and government. Road users will receive the largest share of net benefit, accounting for 84% (51% for passenger traffic and 33% for freight traffic) of the total net benefits.

Table A12.2: Sensitivity Analysis NPV Item EIRR (%) (CNY million) Switching Valuea (%) 1. Base Case 17.1 2,236.1 2. Benefits Decreased by 10% 16.0 1,712.9 42.7 3. O&M Costs Increased by 10% 17.0 2,221.0 1,480.9 4. Capital Cost Increased by 10% 16.1 1,944.7 76.7 5. Combination of 2, 3, and 4 15.1 1,406.4 27.0 6. Construction Delay of 1 Year 16.7 1,776.1 NPV declines by 21% 7. Combination of 2, 3, 4, and 5 14.7 1,062.1 NPV declines by 53% EIRR = economic internal rate of return, NPV = net present value, O&M = operation and maintenance. a Switching value indicates the percentage increase in a cost item (or decline in a benefit item) required for the NPV to become zero. Source: Asian Development Bank estimates.

52 Table A12.3: Economic Internal Rate of Return (CNY million) 12 Appendix Without With Project Costs Year Project Local Total VOC Cost Time Accident Generated Local Total Net Costs Capital O&M Roads Cost Savings Savings Savings Traffic Roads Benefits Benefits

2009 0.0 540.3 0.0 47.5 587.8 0.0 0.0 0.0 0.0 0.0 0.0 (587.8) 2010 0.0 1,370.3 0.0 47.5 1,417.7 0.0 0.0 0.0 0.0 0.0 0.0 (1,417.7) 2011 0.0 1,263.4 0.0 0.7 1,264.1 0.0 0.0 0.0 0.0 18.2 18.2 (1,246.0) 2012 0.0 1,174.2 0.0 0.7 1,174.9 0.0 0.0 0.0 0.0 19.7 19.7 (1,155.2) 2013 36.3 0.0 11.6 0.7 (24.0) 214.3 48.2 24.0 22.6 21.3 330.3 354.3 2014 38.2 0.0 11.9 0.7 (25.6) 284.4 65.1 31.2 23.9 23.0 427.7 453.3 2015 40.1 0.0 12.3 0.8 (27.1) 363.6 86.4 37.4 25.3 24.9 537.7 564.7 2016 42.1 0.0 12.6 0.8 (28.7) 419.8 103.2 40.2 26.7 26.8 616.8 645.5 2017 44.2 0.0 13.0 0.8 (30.4) 481.2 118.8 43.0 31.0 29.0 703.0 733.3 2018 46.3 0.0 13.4 0.8 (32.1) 551.5 136.7 46.1 35.9 31.3 801.5 833.7 2019 48.6 0.0 13.8 0.8 (34.0) 632.0 157.3 49.5 41.7 33.8 914.3 948.3 2020 51.0 0.0 14.1 0.9 (36.0) 724.4 181.0 53.0 48.3 36.5 1,043.2 1,079.2 2021 53.5 0.0 14.6 0.9 (38.0) 830.2 208.3 56.8 56.0 39.4 1,190.8 1,228.9 2022 56.1 0.0 15.0 0.9 (40.2) 951.5 239.8 60.9 65.0 42.6 1,359.7 1,399.9 2023 58.9 88.7 15.4 1.0 46.2 1,090.5 275.9 65.3 75.3 44.7 1,551.8 1,505.6 2024 61.8 0.0 15.9 1.0 (44.9) 1,211.0 310.6 69.3 82.8 47.0 1,720.6 1,765.5 2025 64.8 0.0 16.3 1.0 (47.5) 1,344.7 349.5 73.6 91.0 49.3 1,908.2 1,955.7 2026 68.1 0.0 16.8 1.0 (50.2) 1,493.2 393.4 78.2 100.0 51.8 2,116.6 2,166.8 2027 71.5 0.0 17.3 1.1 (53.1) 1,658.2 442.8 83.0 109.9 54.4 2,348.2 2,401.3 2028 75.1 0.0 17.8 1.1 (56.2) 1,841.3 498.4 88.2 120.7 57.1 2,605.7 2,661.8 2029 78.8 0.0 18.3 1.1 (59.4) 2,044.7 560.9 93.6 132.7 59.9 2,891.9 2,951.2 2030 82.7 0.0 18.9 1.2 (62.7) 2,270.6 631.4 99.4 145.8 62.9 3,210.1 3,272.8 2031 86.9 0.0 19.4 1.2 (66.3) 2,521.4 710.6 105.6 160.2 66.1 3,563.8 3,630.1 2032 91.2 0.0 20.0 1.2 (70.0) 2,799.9 799.8 112.1 176.1 69.4 3,957.2 4,027.2 2033 0.0 (2,608.9) 0.0 0.0 (2,608.9) 0.0 0.0 0.0 0.0 0.0 0.0 2,608.9 Economic Net Present Value 2,236.1 Economic Internal Rate of Return 17.07%

O&M = operation and maintenance, VOC = vehicle operating cost. Source: Asian Development Bank estimates.

Appendix 13 53

FINANCIAL ANALYSIS AND PROJECTIONS

1. The financial analysis of the Project was undertaken in accordance with the Guidelines for the Financial Management and Analysis of Projects (2005) of the Asian Development Bank (ADB). To ensure financial sustainability, the financial analysis measured the project’s ability to generate sufficient revenues from operations to meet all costs, including operation and maintenance (O&M), financial costs, depreciation, and a reasonable rate of return on investment.

A. Financial Projections

2. A flat set of toll charges per kilometer (km) will apply to the entire expressway. Base year tolls at 2008 prices are shown in Table A13.1. The toll charges are assumed to increase once every 5 years to keep up with inflation. Under current Yunnan “green passage” regulations, to reduce the burden for the poor, local vehicles carrying fresh agricultural produce or livestock are exempted from tolls. Poor communities will benefit from the exemption. It is assumed that 10% of such vehicles are exempted from tolls. Other income (from fuel sales, rental income, etc.) amounts to 5% of toll revenue.

Table A13.1: Base Year Tolls at 2008 Prices (CNY per vehicle-km) Vehicle Class 1 2 3 4 5 6 Passenger vehicles ≤10 seats 10–30 seats >30 seats Goods vehicles ≤1 ton 1–3 ton 3–6 ton 6-9 tons > 9 tons Toll rate 0.40 0.62 0.76 1.10 1.66 2.03 Sources: Yunnan Provincial Communications Department and Asian Development Bank estimates.

3. Annual incremental O&M costs were calculated at 2008 prices as follows: (i) toll operation cost was estimated at CNY800,000 per toll plaza; labor costs will rise at a growth rate of 3% in real terms; (ii) routine maintenance cost was estimated at CNY80,000 per km, and it will increase at a growth rate of 3% in real terms. Tunnel O&M cost was estimated at CNY600,000 per km for an extra-long tunnel, CNY300,000 per km for a long tunnel, and CNY200,000 per km for a medium or short tunnel; and (iii) environmental monitoring costs at CNY500,000 per annum. All incremental O&M costs are projected to increase annually in line with domestic inflation rates. In addition, periodic maintenance cost would be required after 10 years of operation at a cost of CNY1.4 million per km in 2008 prices.

4. The Project will be funded at 45% by equity or grants, 55% by long-term loans. The domestic bank loans will be repayable over 15 years, including a 5-year grace period at the commercial rate. For the ADB loan, a 24-year maturity is assumed, including a 4-year grace period, a US dollar London interbank offered rate-based loan plus a lending spread of 0.2% and commitment charge of 0.15%. Applicable business taxes at a rate of 5.6% are charged on revenue. Corporate income tax at 25% is paid on income after deducting business taxes, depreciation and interest charges, operating expenses, and any prior year losses carried forward. Projected financial statements are in Table A13.2. The forecast revenue under the base assumptions are sufficient to cover annual recurrent costs, depreciation, and debt repayments on the ADB and domestic bank loans from the expressway operation from the eighth year of full operation.

B. Financial Analysis

5. The major assumptions used for calculation of the financial internal rate of return (FIRR) are as follows: (i) all calculations are made in 2008 prices, covering 2008 to 2032; (ii) capital costs include all incremental capital expenditures related to the construction and equipment for

54 Appendix 13 the expressway, but exclude price contingencies and interest during construction; (iii) O&M costs include all annual incremental expenses incurred in operating the expressway, but exclude depreciation and debt repayment provisions; (iv) operating revenues from toll used in financial projections are also adjusted to 2008 prices; and (v) the residual value equal to un- depreciated value of capital investment is included as a benefit of the FIRR calculation.

6. The estimated weighted average cost of capital, after tax, in real terms was calculated using estimated capital mix and costs of funds. Costs have been considered as follows: (i) the applicable 10-year fixed swap rate plus a provision for ADB’s spread is used for ADB debt, (ii) the estimated interest costs of 7% per annum are used for the domestic loan funds, and (iii) the cost of equity was assumed to be 8%. The cost of debt is adjusted to reflect the impact of income tax of 25%. The nominal cost of debt is converted to the real cost of debt by applying domestic (for domestic currency denominated debt) and international average inflation rates (for foreign currency denominated debt). The FIRR computed on an after-tax basis, is 4.3%. This compares favorably with the weighted average cost of capital, also computed on an after-tax basis, of 3.5% (Table A13.3). The Project is considered both financially viable and sustainable. The sensitivity analysis is shown in Table A13.4.

C. Impact of Toll Rate

7. The toll rate setting needs to satisfy two criteria: (i) generates enough revenue to obtain a higher financial return on investment, and (ii) does not deter potential users and compromise economic objectives. These criteria can be contradictory. The analysis for this Project shows that overall average revenue from tolls will be about CNY0.72 per passenger car unit (pcu)/km, which should generate sufficient funds to service the loan while involving little sacrifice of the economic internal rate of return (EIRR). The sensitivity test for the toll rate, taking into account traffic elasticity to tolls, shows that even at a toll of CNY0.90/pcu/km, the FIRR would reach 4.8% but the EIRR would remain in an acceptable range (15.6%). Beyond the toll rate of CNY0.90/pcu/km, the EIRR would fall rapidly while the FIRR levels off. Beyond the toll rate of CNY1.08/pcu/km, both the EIRR and FIRR fall rapidly (Figure A13).

Figure A13: Sensitivity of EIRR, FIRR, WACC, to the Toll Rates 20.0% 18.0% 16.0% 14.0% 12.0% EIRR 10.0% FIRR 8.0% WACC 6.0%

EIRR, FIRR, and WACC and FIRR, EIRR, 4.0% 2.0% 0.0% 0.36 0.54 0.72 0.90 1.08 1.26 1.44 Toll Rate (CNY/pcu-km)

Source: Asian Development Bank estimates.

Table A13.2: Projected Financial Statements (CNY million) Item 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Income Statement Toll Revenue 0.0 0.0 0.0 0.0 150.8 195.5 237.2 261.5 290.3 322.2 357.7 397.0 Non-Toll Revenue 0.0 0.0 0.0 0.0 7.5 9.8 11.9 13.1 14.5 16.1 17.9 19.9 Interest Income on Cash Balance 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.2 Less: Taxes on Turnover 0.0 0.0 0.0 0.0 8.7 11.3 13.7 15.1 16.8 18.6 20.7 23.0 Total Net Gross Revenue 0.0 0.0 0.0 0.0 149.7 194.1 235.4 259.6 288.1 319.8 355.0 395.1 Total Operating Costs 0.0 0.0 0.0 0.0 13.5 14.3 15.1 16.0 17.0 18.0 19.1 20.2

Depreciation Expenses 0.0 0.0 0.0 0.0 114.7 112.1 109.6 107.2 104.7 102.4 100.1 97.8 Interest Charge: Long-term Debt 0.0 0.0 0.0 0.0 161.8 157.4 152.8 147.9 142.7 137.1 131.3 125.1 Interest Charge: Short-term Debt 0.0 0.0 0.0 0.0 7.2 11.7 13.7 14.2 12.8 9.1 3.7 0.0 Corporate Income Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 13.3 25.2 38.0 Appropriations of Net Income 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Retained Earnings (Loss) 0.0 0.0 0.0 0.0 (147.5) (101.5) (55.8) (25.7) 11.0 39.9 75.6 114.0

Balance Sheet Assets Current Assets 0.0 0.0 0.0 0.0 3.4 3.6 3.8 4.0 4.2 4.5 4.8 60.9 Net Fixed Assets 589.5 2,126.3 3,631.2 5,106.2 4,991.4 4,879.3 4,769.7 4,662.6 4,557.9 4,455.4 4,355.3 4,257.5 Total Assets 589.5 2,126.3 3,631.2 5,106.2 4,994.8 4,882.9 4,773.5 4,666.6 4,562.1 4,459.9 4,360.1 4,318.4 Liabilities and Equity Current Liabilities 0.0 0.0 0.0 75.1 190.6 264.2 299.6 312.5 296.7 260.3 196.6 159.3 Long-term Liabilities 302.5 1,167.0 1,968.9 2,652.1 2,572.7 2,488.6 2,399.7 2,305.5 2,205.9 2,100.2 1,988.5 1,870.1 Equity 287.0 959.3 1,662.3 2,379.0 2,231.5 2,130.1 2,074.2 2,048.6 2,059.5 2,099.4 2,175.0 2,289.0 Total Liabilities and Equity 589.5 2,126.3 3,631.2 5,106.2 4,994.8 4,882.9 4,773.5 4,666.6 4,562.1 4,459.9 4,360.1 4,318.4

Cash Flow Statement Sources of Funds Total Internal Cash Generation 0.0 0.0 0.0 0.0 145.6 191.1 234.0 258.7 288.0 320.5 356.7 397.9 Total External Financing 589.5 1,536.9 1,504.9 1,475.0 109.8 178.5 208.8 216.3 194.8 139.0 56.9 0.0 Total Source of Funds 589.5 1,536.9 1,504.9 1,475.0 255.4 369.6 442.8 475.0 482.8 459.5 413.6 397.9 Application of Funds Total Construction of Project 589.5 1,536.9 1,504.9 1,475.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Debt-Service 0.0 0.0 0.0 0.0 244.0 358.4 429.1 459.8 465.9 440.8 379.5 293.8 13 Appendix Total Distributions 0.0 0.0 0.0 0.0 8.0 11.1 13.5 15.0 16.6 18.5 33.8 48.0 End of Year Cash 0.0 0.0 0.0 0.0 3.4 3.6 3.8 4.0 4.2 4.5 4.8 60.9

Ratio Analysis

Debt-Service Coverage Ratio — — — — 0.56 0.50 0.51 0.53 0.58 0.68 0.89 1.28 55 Debt to Equity Ratio 51% 55% 54% 53% 55% 56% 57% 56% 55% 53% 50% 46% Working Ratio — — — — — 9% 7% 6% 6% 6% 5% 5%

Sources: Yunnan Provincial Communications Department and Asian Development Bank estimates.

56 Appendix 13

Table A13.3: Financial Internal Rate of Return (CNY million) Capital O&M Project Business Corporate Net Cash Flow Year Investment Cost Revenues Tax Income Tax After Income Tax 2009 561.9 0.0 0.0 0.0 0.0 (561.9) 2010 1,424.9 0.0 0.0 0.0 0.0 (1,424.9) 2011 1,313.7 0.0 0.0 0.0 0.0 (1,313.7) 2012 1,221.0 0.0 0.0 0.0 0.0 (1,221.0) 2013 0.0 12.1 140.7 7.9 0.0 120.7 2014 0.0 12.4 177.0 9.9 0.0 154.7 2015 0.0 12.8 208.4 11.7 0.0 183.9 2016 0.0 13.1 223.1 12.5 0.0 197.5 2017 0.0 13.5 241.2 13.5 0.0 214.2 2018 0.0 13.9 260.9 14.6 7.3 225.1 2019 0.0 14.3 282.1 15.8 10.2 241.9 2020 0.0 14.7 305.1 17.1 18.7 254.6 2021 0.0 15.1 329.9 18.5 27.4 268.9 2022 0.0 15.6 356.8 20.0 35.9 285.3 2023 92.3 16.0 385.8 21.6 44.6 211.3 2024 0.0 16.5 411.6 23.0 52.4 319.6 2025 0.0 17.0 439.0 24.6 61.0 336.5 2026 0.0 17.5 468.4 26.2 69.9 354.8 2027 0.0 18.0 499.6 28.0 79.0 374.6 2028 0.0 18.5 533.0 29.8 88.6 396.1 2029 0.0 19.0 568.6 31.8 98.5 419.2 2030 0.0 19.6 606.5 34.0 108.9 444.1 2031 0.0 20.2 647.0 36.2 119.7 470.9 2032 (2,712.9) 20.8 690.2 38.7 131.1 3,212.6 FIRR before corporate tax 5.0% FIRR after corporate tax 4.3% WACC 3.5% ( ) = negative, FIRR = financial internal rate of return, O&M = operation and maintenance, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

Table A13.4: Sensitivity Analysis FIRR WACC NPV Item (%) (%) (million) Base Case 4.3 3.5 541.1 1. Revenues decrease by 10% 4.2 3.5 484.7 2. O&M increase by 10% 4.3 3.5 521.8 3. Capital Cost increase by 10% 3.8 3.3 265.8 4. Construction delay of 1 year 4.1 3.5 337.9 5 Worst case (1+2+3+4 above) 3.4 3.3 79.0 FIRR = financial internal rate of return, O&M = operation and maintenance, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

D. Fiscal Impact Analysis of Yunnan Provincial Communications Department

8. The revenue and expenditures of Yunnan Provincial Communications Department during the Tenth Five-Year Plan, 2001–2005, are given in Table A13.5. Over the Tenth Five- Year Plan, the expenditures were financed by vehicle purchase tax, Ministry of Communication’s subsidy and provincial budget (26%), road maintenance fee and other road user charges (22%), toll revenues (14%), bank loan (36%), and other funds (2%). New construction accounted for about 75% of total revenue while maintenance expenditure accounted about 10% of total revenue. Yunnan Provincial Communications Department has the fiscal capacity to mobilize sufficient counterpart funds for project implementation and ensure overall sustainability.

Appendix 13 57

Table A13.5: Fiscal Impact Analysis: Yunnan Highway Revenue and Expenditure (CNY billion) Item 2001 2002 2003 2004 2005 Total Revenue Road maintenance fee 2.07 2.24 2.52 3.07 2.67 12.57 Toll revenue 1.16 1.41 1.87 2.33 2.80 9.57 Surcharge on passenger tickets 0.36 0.39 0.42 0.43 0.45 2.05 Surcharge on freight tickets 0.20 0.21 0.22 0.24 0.27 1.14 Provincial budget allocation 1.17 3.14 1.08 0.76 0.90 7.05 Ministry of Communications grant 1.56 2.00 2.78 2.78 2.35 11.47 Bank loan 5.55 3.85 4.57 6.18 5.67 25.82 Others 0.38 0.37 0.00 0.36 0.00 1.11 Total 12.45 13.61 13.46 16.15 15.11 70.78

Expenditures New construction and rehabilitation 9.49 8.71 10.26 12.88 12.08 53.41 Major and medium maintenance 0.17 0.84 0.52 0.97 0.90 3.40 Routine maintenance 1.07 0.45 0.85 0.45 0.60 3.43 Traffic safety supervision 0.02 0.02 0.03 0.03 0.03 0.13 Taxes 0.10 0.11 0.17 0.27 0.29 0.94 Repayment of interest and principal 1.60 3.48 1.63 1.55 1.21 9.47 Total 12.45 13.61 13.46 16.15 15.11 70.78 Source: Yunnan Provincial Communications Department.

58 Appendix 14

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

Country/Project Title: People’s Republic of China/Central Yunnan Roads Development Project

East Asia Department/ Lending/Financing Modality: Project Department/Division Transport Division

I. POVERTY ANALYSIS AND STRATEGY A. Linkages to the National Poverty Reduction Strategy and Country Partnership Strategy Contribution of the sector or subsector to reduce poverty in the People’s Republic of China (PRC): The proposed Project involves the construction of an expressway of 64 kilometers (km) from Wuding county of Chuxiong Yi to Wuhua District of Kunming Municipality in Yunnan Province, upgrading 190 km of local roads and traffic safety on local road network. The Project is included in the PRC’s Western Development Strategy and will facilitate (i) economic growth via interprovincial trade between Yunnan and Sichuan provinces and international trade in Greater Mekong Subregion, (ii) travel time reduction to the major cities from rural towns, (iii) industrial development and urbanization in Fumin county, and (iv) poverty reduction through induced agricultural commercialization and nonfarm employment opportunities. B. Poverty Analysis Targeting Classification: General intervention 1. Key Issues The proposed Project will directly benefit 1.93 million local residents, of which 24.9% are poor and 24.8% comprise ethnic minorities (including Yi, Bai, Miao, Lisu, Dai, Hui, and Hani). The northern part of the project area includes Wuding and Luquan, two national poverty counties. Poverty in the project area is due to low education levels and limited technical skills, remote and isolated locations, limited farmland, disease, and disability. Since the poor are less educated, they are less likely to gain employment opportunities. Poor education, limited technical skills, and limited migrant employment caused by remoteness have a direct linkage with road access. 2. Design Features. Improve Road Conditions at Township Level. The Project will involve 190 km of local road improvement, out of which 130 km are in Wuding county. This will benefit 8 townships in Wuding, 3 townships in Fumin, 1 township in Wuhua, and 2 townships in Anning and Xishan. Together with Kunming Municipality and Chuxiong Prefecture road development programs in Luquan and Lufeng county, the project area will have improved paved road access to all townships and all-weather roads to all administrative villages by 2010. The proposed expressway and local roads will play a key role in solving traffic bottlenecks and contribute to the strengthening of the road networks. The direct beneficiaries of the local roads will be 345,500 people, of which 24% are poor and 33% are ethnic minorities. Facilitate Economic Growth in the Project Area. The project area is very close to Kunming, rich in agriculture products, hydropower (Luquan and Lufeng), coal mining (Lufeng), tourism, and the cement industry. The Project will speed up industrial development in Fumin, which will be more integrated into Kunming City urban and industrial development plans, and in the longer term will similarly benefit Wuding and Luquan counties. With training and other support, such as microcredit, at least one third of rural families will benefit from off-farm jobs. Create Employment Opportunity under the Project. It is estimated that a total of 393,134 person-months of unskilled workers are required under the Project and each worker is estimated to earn CNY450 per month. Out of the unskilled workforce, 70% of work will be prioritized for local people, particularly the poor and ethnic minorities. Assuming each household has one person who works for 4 months each year, the Project will directly benefit approximately 17,200 households each year. Annual net additional income from this employment is approximately CNY1,800 per household. II. SOCIAL ANALYSIS AND STRATEGY A. Findings of Social Analysis A poverty and social assessment has been prepared for the Project. This includes a poverty profile of beneficiaries and clientele groups, and a social assessment. The beneficiaries of the Project have been identified through survey, consultative fieldwork, and secondary sources. The construction of the expressway will shorten the travel distance and travel time, and expand the capacity to transport agricultural produce to Kunming more efficiently, especially high value crops such as fruit, vegetables, and other cash crops. The expressway will promote industrial development in Fumin, Wuding, and Luquan counties. Localized off-farm job opportunities will be available for local people, especially the poor. Upgrading of local roads will be of more direct benefit in providing improved access for the poor to markets and services. Some 345,500 people will benefit from improved local roads, of which 83,000 are classified poor and 115,000 minorities. Improved road access will assist farmers to purchase agricultural inputs in a cheaper and timelier manner, help improve crop yields, and facilitate the provision of agricultural extension services. Improved access as a result of upgrading local roads will also encourage more people to take advantage of off-farm labor. There will be improved (quicker, smoother, and cheaper) access to schools, health care services, and local markets. In addition, the expressway construction and operation will generate significant employment benefits for people along the alignment, including the provision of services to labor construction sites.

Appendix 14 59

B. Consultation and Participation 1. Stakeholder consultation and analysis was done through three major methods during project preparation which sampled the rural and urban population, bus passengers, transport operators, enterprises, and local governments as project stakeholders. Positive and negative effects on these groups caused by the Project were analyzed by the social survey. Some 2,430 people from different stakeholders were consulted during project preparation. To finalize the alignment, local government officials and villagers were consulted to minimize losses of high-quality land and structures, and to consider local preferences for interchanges. Many changes were made based on the consultation. Project information related to resettlement and environment will be further disclosed before the Project starts. Local people will have an opportunity to participate in the project construction. A clearance form will be prepared for the village leaders to sign before the construction company demobilizes. Details of consultation and participation plans for implementation are included in the resettlement plans and ethnic minority development plan.

2. What level of consultation and participation (C&P) is envisaged during the project implementation and monitoring? Information sharing Consultation Collaborative decision making Empowerment

3. Was a C&P plan prepared? Yes No The resettlement and ethnic minority safeguard processes include consultation and participation of the community as a key step in identification of impacts and mitigation measures. Ongoing participation of beneficiaries in the project development will be offered through use of local people, especially the poor and women, during civil works.

C. Gender and Development 1. Key Issues.

Improved local roads, traffic safety and transport services will benefit women in particular. The poverty and social assessment indicated that women strongly support the Project and anticipate benefits such as an improved living environment, new employment opportunities, information on outside markets, skills training, and reduced travel time. Project assurances prioritize women for employment and skills training. While women stand to be beneficiaries of the Project, they are also likely to be more exposed to the risk of communicable diseases; for this reason, the project will give special attention to women for HIV/AIDS prevention.

III. SOCIAL SAFEGUARD ISSUES AND OTHER SOCIAL RISKS Plan or Other Significant/Limited/ Strategy to Address Issue Measures Issue No Impact Included in Design Involuntary The Project will require Resettlement plans for the expressway Resettlement 400 hectares of land to be and local roads have been prepared in Full Plan permanently acquired, of which accordance with government regulations Short Plan 65% is farmland, causing partial and Asian Development Bank’s Resettlement land loss for about Involuntary Resettlement Policy (1995). Framework 1,800 households. In addition, The resettlement plans have been No Action 219 households and up to disclosed to the public and affected 50 enterprises will be relocated. persons. Internal and external monitoring arrangements will be put in place.

Of the project beneficiaries, 25% Related mitigation measures are included Indigenous Plan are minorities (Yi, Bai, Miao, Lisu, in the resettlement plan. Other social risk Peoples Dai, Hui, and Hani) who live in mitigation and enhancement measures Other Action harmony with the Han. About 18% are included in the ethnic minority Indigenous of affected persons are ethnic development plan. The resettlement plans Peoples Framework minorities. have been disclosed to the public. Internal and external monitoring arrangements will No Action be put in place.

60 Appendix 14

Plan or Other Significant/Limited/ Strategy to Address Issue Measures Issue No Impact Included in Design There are no significant labor Yunnan Provincial Communications Labor issues associated with the Project. Department will ensure that all the Employment The Project will maximize benefits employment and labor standards, as Plan opportunities for the poor and women by provided in the applicable laws and Other Action Labor promoting local employment and regulations, are complied with. Use of (refer to retrenchment ensuring that all labor laws and local labor will be encouraged for project EMDP) Core labor regulations are adhered to by construction and related basic training will No Action standards contractors. Employment be supported by government. The Project provisions are included in the will create 12 million person-days of local ethnic minority development plan, employment amounting to 210 million in which will be monitored during wage payment during construction. project implementation. Current bus fare ranges from With improvement of the project roads Affordability CNY0.20 to CNY0.35 per and traffic safety, better transport services Action passenger per km. This level of at lower cost will be available to the poor. No Action bus fare is considered affordable.

Other Risks The major risk will be the influx of The Project will take preventive actions by and/or workers during construction, and disseminating information to staff, Plan Vulnerabilities controlling the diseases and workers, their families, and the local Other Action HIV/AIDS behavior of workers. Lack of communities. Screening will be conducted (refer to EMDP Human awareness contributes to the for all workers and further tests and and RETA trafficking vulnerability of the poor and treatment will be supported by employers 6321) Others(conflict, women. In Yunnan, there were and health bureaus. Technical assistance No Action political instability, 57,358 people living with HIV at the funds are available to strengthen etc), please specify end of 2007 of which 7,630 have awareness, prevention, training, and developed AIDS. However, the formulate guidelines for similar transport HIV/AIDS incidence appears to be projects. very low in rural parts of the project area. Based on the experience of These measures will be supported by another expressway constructed in subproject 7 of the regional TA of Fighting the project area (Yongren– HIV/AIDS in Asia and the Pacific (TA Wuding), the risk of communicable 6321-REG). These measures and their diseases is considered low. In the effectiveness will be monitored by an project area, human and drug external agency under the ethnic minority trafficking is not prevalent and the development plan. proposed Project will have no negative impact on this issue.

IV. MONITORING AND EVALUATION

Are social indicators included in the design and monitoring framework to facilitate monitoring of social development activities and/or social impacts during project implementation? Yes No

SUMMARY ETHNIC MINORITY DEVELOPMENT PLAN

Lead and Supporting Funding Proposed Actions Target Group(s) Timing Monitoring Indicators Agencies Requirements A. Project Benefits and Enhancement Measures 1. Improved access to transport and transport Rural households L: YPCD, WKEC 2008–2012 • CNY105 • Length of project roads services in the project area million project upgraded • Upgraded 7 sections of local road totaling S: Local CAB, and budget • Length of construction 190 km local governments • CNY5.1 billion connector roads improved • Completed Wuding–Kunming project budget • Passenger fares expressway and its connector roads • CNY106 • Freight rates • Completed safety measures for local million project • Frequency of travel roads budget • No. of road accidents 2. Improved transport services Rural households L: YPCD, WKEC 2008–2012 From YPCD • No. of improved township • Built township passenger stations in the project area and local bus stations • Built a local product market close to S: Local TAB, and governments • No. of service providers Fumin interchange local governments • No. of passengers • Improved rural transport services • No. of new bus routes 3. Local employment for construction work Over 68,800 L: YPCD, WKEC 2009–2012 Included in • No. of local people and other services people throughout project cost employed • Priority to local labor in general. Targets: the project S: Contractors, local and paid by • No. of local women ¾ 70% local labor for unskilled work implementation, EMAB, ACWF, contractors employed ¾ 50% women for unskilled labor in including 27,500 and local • No. of ethnic minorities landscaping minorities and governments employed ¾ 40% minority for unskilled work 34,400 women • Wages paid to local people • Use of local construction materials, • Value of construction e.g., rock, gravel, clay, cement materials supplied • Seedlings exclusively from local nurseries • Value of seedlings supplied B. Mitigation Measures to Address Social Risks (Responsibility of YPCD and WKEC) 4. Control of HIV/AIDS and sexually Over 10,000 L: YPCD, WKEC and 2009–2012 Included in • No. of posters transmitted infections (STIs) workers every CDC project costs • No. of posters in minority • Provide training to worksite safety year, mostly rural and 0.2 million language or drawing promoters by CDC poor, at peak S: Contractors, from subproject • No. of training program • Provide training to all workers and times ACWF, and local 7 of ADB TA and trainees managers by trained worksite safety governments. (6321-REG) • No. of tests promoters Over 5,000 • No. of HIV/AIDS cases

• Provide training to service providers and service providers • ADB TA case studies 15 Appendix villagers by CDC • ADB TA reports • HIV/AIDS and STI counseling program and voluntary testing by health agencies • Conduct participatory monitoring and evaluation by CDC 61 • Provide posters and drawings in minority language

Lead and Supporting Funding 62 Proposed Actions Target Group(s) Timing Monitoring Indicators Agencies Requirements 5. Protect local communities from construction Over 18,000 L: YPCD, WKEC 2009–2012 Included in • No. and resolution of

disturbances and ensure safe construction people close to project cost complaints 15 Appendix practices the road S: Contractors and (refer to EIA) • Length of irrigation and • Prohibit nighttime construction and alignment in local governments drainage canals, adhere to proposed noise standards 21 villages • No. of other facilities • Reconstruct irrigation and drainage, • Percentage of recovery electricity systems and other facilities ratio 6. Special support to resettlement AP Resettlement AP, L: YPCD, WKEC 2009–2012 Included in Refer to RP • Provide full compensation including and after project cost • Provide pension insurance (for old) and vulnerable groups S: Local LSSB, (refer to RP) social insurance (minimum living ACWF, LMB, and standard) local governments • Special funds for vulnerable group 7. Income recovery for AP (refer to RP) Resettlement L: YPCD, WKEC 2009–2012 Project and • No. and kind of training • Training on non-farming employment affected and after local sessions, and no. of skills households, at S: Local LSSB and government participants • Training of women in employment skills least 50% female local governments (refer to • No. of training sessions resettlement and participants plan) C. Enhancement Measures (Responsibility of Local Governments) 8. Integrate other poverty reduction projects Miao, Lisu, and Yi L: Local PADO 2009–2012 CNY3 million – • No. of and types projects through “Integrated Village Development ethnic minorities in ethnic minority implemented Program” to remote ethnic minority villages Lufeng, Wuding, S: WKEC, local development • No. of beneficiaries in the to benefit from the Project. Luquan, and EMAB, and local funds project area by gender and Fumin counties governments nationality • Annual per capita rural income in the project area • Rural poverty incidence in the project area 9. Integrate road improvements with Ethnic minority L: Local CAB, PADO 2008–2012 5-year local • No. of meetings held government poverty alleviation programs people in poverty government • Length of road improved • Road improvements in and connecting villages S: WKEC, and local plan in minority villages administrative villages and natural governments • No. of participatory villages community meetings • Equipment and training for upgrading • No. of trainings provided and maintaining village roads • Other facilities improved 10. Microcredit Minority L: Local PADO, 2009–2012 Ongoing • Amount of credit disbursed • Provide loan to poor ethnic minority households and ACWF government • No. of villages covered households poor women project with • No. of minority households • Provide loan to poor women S: WKEC, local RCC, priority on benefited and local minorities and • Type of activities governments women

Lead and Supporting Funding Proposed Actions Target Group(s) Timing Monitoring Indicators Agencies Requirements 11. Special support to minority villages includes Miao and Lisu L: Local EMAB 2009–2012 Ongoing • Length of road improved preserving cultural heritage and other villages in the government and/or constructed in facilities mountainous area S: WKEC, local project with minority villages of Wuding and PADO and local priority on Miao • Other facilities improved in Luquan counties governments and Lisu ethnic minority villages minorities 12. Tourism promotion Minority villages L: Local tourism 2009–2012 Government • Minority festival celebration • Minority cultural protection and cultural with tourism bureau and tourism • No. of advertisements and ecotourism development development sector • No. of tourists (local and • Advertising of tourism sites on potential. S: WKEC, local outside tourists) expressway sign boards just prior to Tourists and governments highway opening tourism agents

13. Special support to minority villages includes Focused on Miao L: Local EMAB 2009–2012 Ongoing • No. of projects approved preserving cultural heritage and other and Lisu villages and after government • No. of projects facilities with special S: WKEC, local project implemented cultural heritage in PADO and local the mountainous governments area of Wuding and Luquan counties 14. Provide technical and management training Minority villages L: Local bureaus of 2009–2012 Ongoing • No. of types of organic • Provide organic farming related training and households agricultural, and after government products • Provide small business development forestry, animal project • Total value of organic training husbandry, and products • Establish Farmers Union Cooperative local associations • No. of Farmers’ Union Associations of science and Cooperative Associations technology established • Benefit from the Farmers’ S: Local PADO and Union Cooperative local governments Associations 15. Promote non-farming employment Ethnic minority L: Local LSSB 2009–2012 Ongoing • No. of non-farming jobs • Provide information on non-farming jobs; households and government created focus on women and young generation individuals S: Local PADO, project • No. of migrant laborers • Promote practical training to ethnic EMAB, ACWF, increased

minority households and local • No. of employers 15 Appendix • Provide education to migrant laborers on governments coordinated labor law, contract, and right issues • No. of migrant laborers trained ACWF = All-China Women’s Federation, ADB = Asian Development Bank, AP = affected person, CAB = communications administration bureau, CDC = Centre for Disease Control, EIA = environmental impact assessment, EMAB = ethnic minority affairs bureau, km = kilometer, L = lead, LMB = Land Management Bureau, 63 LSSB = labor and social security bureau, PADO = Poverty Alleviation and Development Office, RCC = Rural Credit Corporation, RP = resettlement plan, S = supporting, TA = technical assistance, TAB = transport administration bureau, WKEC = Wukun Expressway Company Limited, YPCD = Yunnan Provincial Communication Department. Sources: Asian Development Bank and Yunnan Provincial Communications Department estimates.

64 Appendix 16

SUMMARY RESETTLEMENT PLAN

1. The proposed expressway connects to the ending point of the Yongren (Yunnan border)–Wuding Expressway in Wuding County of Chuxiong Yi Minority Autonomous Prefecture, and passes through Fumin County and Wuhua District of Kunming Municipality, linking with Kunming Northwest Ring Road before entering Kunming City. The expressway is 64 kilometers (km) long, with 4.2 km of connector roads. The Project will also include upgrading 190 km of local roads in Wuding, Fumin, Xishan, and Wuhua counties/districts.

2. The expressway will affect 21 villages and 8 townships. The field survey indicated that the project expressway and connector roads will require 400 hectares of land to be permanently acquired, of which 32.8% is paddy, 26.8% dry land, 2.3% vegetable plot, 3.0% orchard, 8.5% forestland, 20.9% shrubbery land, 2.1% barren, and 3.6% house plot. Based on the People’s Republic of China (PRC) standard for impact assessment, the equivalent of 1,524 persons would lose all their land and agricultural livelihoods. However, since the expressway will cross many parcels of scattered farmland, it is estimated that the average loss of land per household would be 20%, which means the number of partially affected people would be about 7,600 persons. The Project will also temporarily occupy 27 hectares during construction activities. There are 183,445 square meters of buildings to be demolished, most of which is storehouse, factory, workshop, and shops in the urban section. There are 219 households with 1,251 persons to be relocated; 50 enterprises will also be affected. The exact number of affected enterprises and workers has not been calculated yet, pending detailed design. About 18% of the affected people are ethnic minorities and about 11% are poor or vulnerable. The upgrading of the seven local roads will require no land acquisition or displacement of housing; a short resettlement plan has been prepared to address any temporary impacts.

3. The two resettlement plans were prepared by the Yunnan Provincial Communications Department (YPCD). The expressway resettlement plan is based on the feasibility study, draft preliminary design, and socioeconomic surveys of resettlement covering 302 households and 15 village-level interviews. Consultations were conducted with the affected people, and their comments and suggestions were reviewed to ensure that any concerns were addressed. After the preliminary and detailed design approval by YPCD, a detailed survey will determine the precise number of people and assets affected. Changes and related cost adjustments will be included in an updated resettlement plan and submitted to the Asian Development Bank (ADB) for approval prior to the commencement of civil works.

4. The resettlement plans are based on the Land Administration Law, 2004; Forest Law 1998; Regulations on Administration of Dismantlement of Urban Housing, 2001, and related policies; Decision to Deepen Reform and Strictly Enforce Land Administration (Document [2004] No.28); Circular on Strengthening the Land Control (Document [2006] No.31); and related policies of Yunnan Province. The resettlement plans were prepared in compliance with ADB’s Involuntary Resettlement Policy (1995) and Policy on Indigenous Peoples (1998). Based on the above policies and through consultation with local governments and affected persons, the resettlement principles for the Project are established as follows:

(i) that compensation and entitlements provided to affected persons are adequate to at least maintain their “without project” standard of living, with prospect of improvement; (ii) all affected persons, titled or non-titled landholdings, are taken into account for compensation and resettlement assistance; (iii) where requested by affected persons, ensure per capita minimum cultivated landholding in post-resettlement period to maintain livelihood standards;

Appendix 16 65

(iv) where land is not sufficient to maintain livelihood, compensation in cash or kind for replacement land or other income-generating activities will be provided for; (v) all affected persons will be adequately informed of eligibility, compensation rates and standards, livelihood and income restoration plans, project timing, and will be involved in resettlement plan implementation; (vi) no land acquisition will take place prior to satisfactory compensation for resettlement of affected persons; (vii) the executing agency and independent and/or third party will monitor compensation and resettlement operations; (viii) vulnerable groups should receive special assistance or treatment to ensure they are better off; (ix) resettlement affected people should have opportunities to benefit from the Project; and (x) the resettlement plan should be combined with the overall county/city/district or township planning.

5. Based on these principles, YPCD will ensure that the resettlement entitlements are provided to the affected persons prior to ground clearance and commencement of demolition. Land compensation and resettlement subsidies will be paid to affected village groups or individuals. Housing compensation and compensation for young crops and other assets will be provided directly to people losing those assets. YPCD will be responsible for general administration of the Project. A project resettlement office has been set up within Wukun Expressway Company Limited to coordinate, monitor, and supervise land acquisition and resettlement. Project resettlement offices will be established in each affected district, county, and township level. Resettlement and land acquisition costs for the Project are estimated at CNY337.2 million. Some adjustments in the budget are expected, following the detailed measurement survey.

6. At various stages, affected people have been consulted about the likely impacts of the Project. The stakeholders consulted include (i) heads of households that will be affected, (ii) village heads and villagers’ representatives, (iii) local government agencies and departments, and (iv) women and vulnerable groups. Consultation will continue throughout the implementation period. YPCD organized public consultation meetings in the affected villages. Key findings indicated full support for the Project. Some of the concerns raised have been addressed by adjusting the design and improving compensation entitlements and resettlement measures. Those affected were provided with a Resettlement Information Booklet on 26 April 2007. In the case of grievances, all complaints will be processed based on Government Regulation No. 431 on Grievance and Redress (May 2005).

7. The resettlement plans include internal and external monitoring systems. The Project Resettlement Office and local resettlement offices will be responsible for internal monitoring to ensure the timely and satisfactory implementation of land acquisition and resettlement activities according to the resettlement plans. Progress reporting will be quarterly and a resettlement completion report will be prepared by Wukun Expressway Company Limited. The reports will be sent to ADB in a timely manner to keep ADB closely informed of progress and any substantive changes. An independent institute or organization will be contracted to carry out the external monitoring and evaluation. The tasks include (i) verifying the compensation payments and disbursement procedures; (ii) assessing the grievance procedure; (iii) determining affected persons’ satisfaction with the entitlements and compensation; and (iv) assessing the efficiency, effectiveness, impact, and sustainability of the resettlement to draw lessons for future resettlement implementation, formulation, and planning. The external monitoring and evaluation reports will be sent to YPCD and ADB.