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Xinjiang Regional Road Improvement Project (Korla–Kuqa Section)

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Report and Recommendation of the President to the Board of Directors Project Number: 39655 November 2007 Proposed Loan People’s Republic of China: Xinjiang Regional Road Improvement Project (Korla–Kuqa Section) CURRENCY EQUIVALENTS (as of 8 November 2007) Currency Unit – yuan (CNY) CNY1.00 = $0.1342 $1.00 = CNY7.451 The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00 = CNY7.60, the rate prevailing at the time of loan appraisal of the Project, is used. ABBREVIATIONS AAOV – annual average output value ADB – Asian Development Bank CAREC – Central Asia Regional Economic Cooperation EIA – environmental impact assessment EIRR – economic internal rate of return EMDP – ethnic minority development plan EMP – environmental management plan FIRR – financial internal rate of return FYP – Five-Year Plan GDP – gross domestic product HSEP – highway safety enhancement program IA – implementing agency ICB – international competitive bidding ICT – information and communication technology LIBOR – London interbank offered rate MOC – Ministry of Communications NCB – national competitive bidding NPV – net present value PPMS – project performance management system PRC – People's Republic of China PSB – public security bureau SEIA – summary environmental impact assessment TA – technical assistance XCCAB – Xinjiang Communications Construction Administration Bureau XCD – Xinjiang Communications Department XHAB – Xinjiang Highway Administration Bureau XUARG – Xinjiang Uygur Autonomous Regional Government WACC – weighted average cost of capital WRDP – Western Region Development Plan NOTES (i) The fiscal year (FY) of the Government and its agencies ends on 31 December. (ii) In this report, “$” refers to US dollars. Vice President C. Lawrence Greenwood, Jr., Operations 2 Director General H.S. Rao, East Asia Department (EARD) Director N. Rayner, Transport Division, EARD Team leader E. Oyunchimeg, Transport Specialist, EARD Team members S. Athukorala, Financial Analysis Specialist, EARD S. Ferguson, Senior Social Development Specialist (Resettlement), EARD H. Masood, Senior Transport Specialist, EARD A. Maxwell, Environmental Specialist, EARD S. Miah, Counsel, Office of the General Counsel X. Yang, Senior Financial Analysis Specialist, EARD T. Yokota, Transport Specialist, EARD S. Yoon, Transport Economist, 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 6 A. Impact and Outcome 6 B. Outputs 6 C. Special Features 6 D. Project Investment Plan 9 E. Financing Plan 10 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Traffic Forecast 13 B. Economic Analysis 13 C. Financial Analysis 13 D. Poverty Reduction and Social Strategy 14 E. Land Acquisition and Resettlement 15 F. Environmental Assessment 16 G. Risks 16 V. ASSURANCES 16 A. Specific Assurances 16 B. Condition for Disbursement 20 VI. RECOMMENDATION 20 APPENDIXES 1. Design and Monitoring Framework 21 2. Problems and Constraints Analysis 23 3. Road Sector Analysis and Policy Reforms Matrix 24 4. External Assistance to the Road Sector 29 5. Local Roads Development 32 6. Improvement of Freight Terminal Operations 34 7. Improving Rural Transport Services 36 8. Road Safety Improvement 39 9. Capacity Development of Xinjiang Communications Department 41 10. Detailed Cost Estimates by Financiers 43 11. Implementation Schedule 44 12. Procurement Plan 45 13. Economic Analysis 47 14. Financial Analysis and Projections 50 15. Summary Poverty Reduction and Social Strategy 56 16. Summary Ethnic Minority Development Plan 58 17. Summary Resettlement Plan 60 SUPPLEMENTARY APPENDIXES (available on request) A. Outline Terms of Reference of Consultants B. Financial Management Assessment C. Monitoring of Socioeconomic and Poverty Impacts D. Economic Analysis E. Ethnic Minority Development Plan F. Resettlement Plans G. Summary Environmental Impact Assessment 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 Assessment undertaken. The summary was circulated to the Board on 13 March 2007 and made public through the Asian Development Bank (ADB) website on 14 March 2007. Project Description The countries participating in the Central Asian Regional Economic Cooperation (CAREC) program are working together to improve the region’s transport infrastructure and reduce the cost of trade across regions. The Project is located in the Xinjiang Uygur Autonomous Region (Xinjiang), in the northwestern corner of the PRC. The Urumqi–Kashgar road in Xinjiang is part of a key CAREC transport corridor connecting Xinjiang with Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, and Pakistan. It also forms part of the Asian Highway 4 (AH-4) corridor designated by the United Nations Economic and Social Commission for Asia and the Pacific. The Korla–Kuqa section is part of the Urumqi– Kashgar road, which is becoming heavily trafficked. The Project will upgrade the 296.5 kilometer (km) Korla–Kuqa section of the existing two-lane, class II national highway (G314) to a four-lane, access-controlled tolled expressway to enhance the flow of goods and passengers through the region and reduce travel times and costs. The Project also includes (i) the improvement of three priority local roads totaling 193 km in Kuqa and Qiemo counties to class III or IV, as these provide access to remote and poorer areas of Xinjiang; (ii) improved efficiency in freight terminals by introducing a web-based transport logistics system in freight terminals in Urumqi; (iii) improved rural transport services by pilot testing of bus route licensing reforms in Kuqa county through the provision of consulting services; (iv) improved road safety through (a) conducting a safety audit for the project roads, (b) developing an action plan to ensure the safe operation of the expressway, (c) installing modern traffic safety devices along the project roads, (d) increasing public awareness through training, and (e) providing a traffic surveillance monitoring system for ensuring road safety during winter and for controlling speeds on the project expressway; and (v) enhanced capacity of the Xinjiang Communications Department (XCD) through the provision of consulting services, equipment, and training. ii Rationale The CAREC Transport and Trade Facilitation Strategy will support the CAREC goal of accelerating economic growth and poverty reduction by upgrading key transport corridors across the CAREC region. The strategy seeks to improve the region’s competitiveness and expand trade among the CAREC economies and with the rest of the world. Key elements of the strategy are coordinated improvements to transport infrastructure and logistics, and trade facilitation, including harmonized cross-border regulations, procedures, and standards along six priority transport corridors. The proposed Project will support this strategy. The Korla–Kuqa expressway will serve as an important transport corridor ensuring efficient and safe movement of goods and passengers, and will play a critical role in furthering trade and regional cooperation. The Project will foster economic development and promote interregional trade, thereby supporting the key objective of poverty reduction through sustainable development. The Project supports the Government’s Western Region Development Plan and National Expressway Development Plan of building expressways to provide stronger links with the eastern provinces and improve accessibility for the western region’s population, which is spread over a large area. The project expressway is part of one of eight major road corridors under the Western Region Development Plan and one of 34 expressways under the National Expressway Development Plan. The Project also supports the Rural Roads Construction Program and provides financing for the upgrade of selected rural roads in the poorest and remotest areas of Xinjiang. The Korla–Kuqa expressway will be connected to these local roads via recently completed highways, and will also serve as the main access for tourists visiting the historical sites in the project area. Impact and Outcome The impact of the Project is to develop a more efficient national and regional transport system which supports sustainable economic growth in Xinjiang. The outcome of the Project is to improve transport capacity and safety of the regional road corridor and the local roads in southern Xinjiang. Project Investment Plan The investment cost of the project is estimated at $594 million, including taxes and duties of $13 million. Financing Plan Total Source ($ million) % Asian Development Bank 150 25 Ministry of Communications 197 33 China Development Bank 188 32 Xinjiang Regional Government 59 10 Total 594 100 Source: Asian Development Bank estimates. iii A loan of $150 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 25-year term, including a grace period of 5 years, an interest rate determined in accordance
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