Document of The World Bank Public Disclosure Authorized Report No. 15428-CHA STAFF APPRAISAL REPORT Public Disclosure Authorized CHINA SECOND NATIONAL HIGHWAY PROJECT Public Disclosure Authorized November 12, 1996 Public Disclosure Authorized Infrastructure Operations Division China and Mongolia Department East Asia and Pacific Regional Office HPDI - Highway Planning and Design Institute HPDIPS - Hunan Provincial Design Institute of Planning and Survey HRI - Highway Research Institute HSDI - Highway Survey and Design Institute ICB - International Competitive Bidding IFC - International Finance Corporation IRP - Interconnecting Roads Program IS - Institutional Strengthening IST - Institutional Strengthening and Training ITC - International Tendering Company Jingzhu - Beijing-Zhuhai Expressway JST - Joint Supervision Team LA&R - Land Acquisition and Resettlement LAB - Levying Administration Bureau LGTPA - Leading Group for Transportation for Poverty Alleviation LLH - Loudi-Lianyuan Highway MAAP - Microcomputer Accident Analysis Package MIGA - Multilateral Investment Guarantee Agency MOC - Ministry of Communications MOF - Ministry of Finance mte - Medium truck equivalent mvpd - Motor vehicles per day NCB - National Competitive Bidding NH - National Highway NPV - Net Present Value NR - National Road NTHS - National Trunk Highway System PAPs - Project-Affected People pcu - Passenger car unit PHRD - Project and Human Resources Development PIC - Public Information Center PIP - Project Implementation Plan PMO - Project Management Office PMS - Pavement Management System PR - Provincial Road PSB - Public Security Bureau PTS - Provincial Traffic School PTTS - Provincial Traffic Technical School RAP - Resettlement Action Plan RDB - Road Data Bank REO - Resident Engineer's Office RIPA - Roads Improvement for Poverty Alleviation RMF - Road Maintenance Fee RO - Resettlement Offices SAA - State Auditing Administration SOE - Statement of Expenditures SPC - State Planning Commission SSSRI - Shanghai Ship and Shipping Research Institute STC - Staff Training Center TCU - Technical Coordination Unit TES - Traffic Engineering Society ton-km - Ton-kilometer TOR - Terms of Reference TRL - Transport Research Laboratory VS - Vocational School XGE - Xiaotang-Gantang Expressway XLE - Xiangtan-Leiyang Expressway XZH - Xiangtan-Zhuzhou Highway CHINA SECOND NATIONAL HIGHWAY PROJECT LOAN AND PROJECTSUMMARY Borrower: People's Republic of China Beneficiary: Hunan and Guangdong Provinces Poverty Category: Not applicable Amount: $400 million Terms: 20 years, including 5 years of grace, at the standard interest rate for LIBOR-based US dollar single-currency loans Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver Financing Plan: See para. 4.47 Economic Rate of Return: 22.4 percent for the project overall 22.1 percent for the two Bank-financed expressway sections 19.6 percent for the Guangzhou-Changsha corridor Maps: IBRD 27557, 27558 Project ID Number: CN-PE-3654 CONTENTS 1. HIGHWAY DEVELOPMENT AND REFORM . .......................................................1 A. Highway Strategy and Policy ........................................................... 1 B. Linkage to Country Assistance Strategy ........................................................... 1 C. Bank Group Participation........................................................... 2 D. Lessons From Previous Bank Operations ...........................................................3 2. THE EVOLVING FRAMEWORK FOR PRIVATE TOLL HIGHWAY FINANCE .......................................................... 4 A. Current Status of Private Project Finance .......................................................... 4 B. Issues in Project Finance in China .......................................................... 6 C. Regulatory Framework and Investment Environment ........................................ 9 D. Role of the World Bank Group ......................................................... 10 3. THE TRANSPORT SECTOR IN GUANGDONG AND HUNAN ... 12 A. Geography and Transport.......................................................... 12 B. Traffic Growth and Road Safety .......................................................... 14 C. Highway Administration, Planning and Financing ........................................... 15 D. Engineering, Construction and Maintenance .................................................... 18 E. Highway Development Program 1996-2000..................................................... 18 4. THE PROJECT ......................................................... 22 A. Origin and Formulation.......................................................... 22 B. Objectives and Rationale for Bank Involvement .............................................. 22 C. Project Monitoring ......................................................... 24 D. Project Components .......................................................... 25 E. Civil Works Construction and Supervision....................................................... 26 The project was prepared and appraised by Alfred Nickesen (Transport Specialist, Task Manager), Jean-Marie Braun (Highway Engineer, Consultant), Ms. Alla Weinstein (Transport Specialist), Rodrigo Archondo (Transport Economist), Dick Jonsson (Institutional/Traffic Safety/Training Specialist, Consultant), Katsunori Suzuki and Anil Somani (Environmental Specialists) and Tosun Aricanli (Resettlement Specialist). Ms. Tomoko Matsukawa (Project Finance Specialist) and Mitchel Stanfield (Private Infrastructure Consultant) prepared the chapter on private highway finance in China. Mr. Liu E of the Bank's Resident Mission in China also contributed to the preparation of the project. The peer reviewers of the project were Jose Irigoyen (Engineering), Anttie Talvitie (Transport Economics), Stein Lundebye (Institutional Strengthening, Traffic Safety and Training), and Jeff Ruster (Private Highway Finance). - 11 - F. Institutional Capacity Building.................................................. 31 G. Environmental Assessment .................................................. 35 H. Land Acquisition and Resettlement .................................................. 37 I. Cost Estimates ................................................... 38 J. Financing ................................................... 40 K. Implementation ................................................... 42 L. Procurement .................................................. 44 M. Disbursements.................................................. 47 N. Auditing .................................................. 48 0. Project Supervision, Monitoring, and Reporting .............................................. 49 5. ECONOMIC EVALUATION................................................... 51 A. Evaluation of the Expressways .................................................. 51 B. Evaluation of Other Highways.................................................. 56 C. Overall Project Economic Evaluation ................................................... 57 6. AGREEMENTS REACHED AND RECOMMENDATION................................... 58 TABLES Table 3.1: Hunan and Guangdong: Comparison of Freight and Passenger Volumes by Mode, 1985 and 1994........................................ 62 Table 3.2a: Hunan Highway Revenues and Expenditures, 1986-95.63 Table 3.2b: Guangdong Highway Revenues and Expenditures, 1986-95.64 Table 3.3a: Hunan: Highway Revenues and Expenditures, 1986-2000 .65 Table 3.3b: Guangdong: Highway Revenues and Expenditures, 1986-2000 .66 Table 3.4a: Highway Construction Plan During 9FYP in Hunan .................................... 67 Table 3.4b: Highway Construction Plan During 9FYP in Guangdong............................ 68 Table 4.1 a: Interconnecting Roads Program in Hunan ................................................... 69 Table 4. lb: Interconnecting Roads Program in Guangdong ............................................ 69 Table 4.2a: Project Cost Summary-Hunan Component ................................................ 70 Table 4.2b: Project Cost Summary-Guangdong Component ........................................ 71 Table 4.3a: Financing Plan-Hunan Province Portion................................................... 72 Table 4.3b: Financing Plan-Guangdong Province Portion............................................ 72 Table 4.4a: Hunan Project Procurement Arrangements................................................... 73 Table 4.4b: Guangdong Project Procurement Arrangements........................................... 74 Table 4.5: Estimated Disbursement Schedule.75 Table 5.1: Vehicle and Maintenance Data .76 Table 5.2: Road Sections Data .77 Table 5.3: Typical Road User Costs .78 Table 5.4: Excel Economic Evaluation Model Sample .79 Table 5.5: Economic Evaluation and Sensitivity Results .80 Table 5.6: Risk Analysis Methodology.81 - 111- FIGURES Figure 3.1: Hunan Highway Revenues and Expenditures, 9FYP..................................... 17 Figure 3.2: Guangdong Highway Revenues and Expenditures, 9FYP............................. 17 GRAPHS Graph 5.1: Diverted Traffic to the Expressway in 2000 ................................................. 82 Graph 5.2: Distance Savings (%) ............................................................. 82 Graph 5.3: Construction Costs per Kilometer............................................................. 83 Graph 5.4: Internal Rate of Return (%) ............................................................. 83 Graph