ASIAN DEVELOPMENT BANK PPA: PRC 23032 PPA: PRC 24335

PROJECT PERFORMANCE AUDIT REPORT

ON THE

SHENYANG-BENXI HIGHWAY AND JILIN EXPRESSWAY PROJECTS (Loans 1168 and 1262-PRC)

IN THE

PEOPLE’S REPUBLIC OF CHINA

October 2000 CURRENCY EQUIVALENTS Currency Unit – Yuan (Y)

Shenyang-Benxi Highway (Loan 1168-PRC)

At Appraisal At Project Completion At Operations Evaluation (May 1992) (September 1998) (March 2000)

Y1.00 = $0.18 = $0.12 = $0.12 $1.00 = Y5.44 = Y8.34 = Y8.28

Jilin Expressway (Loan 1262-PRC)

At Appraisal At Project Completion At Operations Evaluation (October 1993) (October 1998) (March 2000)

Y1.00 = $0.18 = $0.12 = $0.12 $1.00 = Y5.70 = Y8.34 = Y8.28

ABBREVIATIONS

AADT – annual average daily traffic ADB – Asian Development Bank EA – Executing Agency EIA – environmental impact assessment EIRR – economic internal rate of return FIRR – financial internal rate of return ICB – international competitive bidding JPCD – Jilin Provincial Communications Department JPEAB – Jilin Provincial Expressway Administration Bureau JPEC – Jilin Provincial Expressway Corporation LCB – local competitive bidding LPCD – Liaoning Provincial Communications Department LPEMB – Liaoning Provincial Expressway Management Bureau MTU – medium truck equivalent units MOC – Ministry of Communications NECL – North East Corporation, Ltd. NTHS – National Trunk Highway System O&M – operation and maintenance OEM – Operations Evaluation Mission PCR – project completion report PPAR – project performance audit report PRC – People’s Republic of China SE – special engineering TA – technical assistance VOC – vehicle operating cost

NOTES

(i) The fiscal year (FY) of the Government and the Executing Agency ends on 31 December. (ii) In this report, "$" refers to US dollars.

Operations Evaluation Office, PE-553 CONTENTS

Page

BASIC DATA ii EXECUTIVE SUMMARY iv MAP vii

I. BACKGROUND 1 A. Rationale 1 B. Formulation 1 C. Purpose and Outputs 1 D. Cost, Financing, and Executing Arrangements 2 E. Completion and Self-Evaluation 2 F. OEO Evaluation 3

II. PLANNING AND IMPLEMENTATION PERFORMANCE 3 A. Formulation and Design 3 B. Cost and Scheduling 3 C. Consultants’ Performance, Procurement, and Construction 6 D. Organization and Management 7

III. ACHIEVEMENT OF PROJECT PURPOSE 8 A. Operational Performance 8 B. Performance of the Operating Entity 9 C. Economic Reevaluation 11 D. Sustainability 12

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 12 A. Socioeconomic Impacts 12 B. Environmental Impacts 13 C. Impacts on Institutions and Policy 14

V. OVERALL ASSESSMENT 15 A. Relevance 15 B. Efficacy 16 C. Efficiency 16 D. Sustainability 16 E. Institutional Development and Other Impacts 16 F. Overall Project Rating 17 G. Assessment of ADB and Borrower Performance 18

VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 19 A. Key Issues for the Future 19 B. Lessons Identified 19 C. Follow-Up Actions 20

APPENDIXES 21 BASIC DATA Shenyang-Benxi Highway Project (Loan 1168-PRC) Institution Building TA No. Project Title Type Consultant TA Amount Approval Date Person-Months 1724 Institutional Strengthening ADTA 14.1 $500,000 2 Jul 1992 for Highway Operation and Management Improvementa 1725 Jilin Province Highway PPTA 13.9 $600,000 2 Jul 1992 Network Studya a Associated technical assistance grant. Key Project Data ($ million) As Per ADB Loan Actual Documents Total Project Cost 166.0 201.38 Foreign Exchange Cost 62.3 79.74 Local Currency Cost 103.7 121.64 ADB Loan Amount/Utilization 50.0 50.00 Foreign Exchange Cost 50.0 50.00 Local Currency Cost 0.0 0.00 ADB Loan Amount Cancellation 0.0 0.00 Key Dates Expected Actual Fact-Finding 5-21 Aug 1991 Appraisal 16 Feb-3 Mar 1992 Loan Negotiations 25-26 May 1992 Board Approval 2 Jul 1992 Loan Agreement 5 Oct 1992 Loan Effectiveness 16 Dec 1992 16 Dec 1992 First Disbursement 15 Mar 1993 Project Completion 31 Dec 1996 30 Sep 1996 Loan Closing 30 Jun 1997 16 Dec 1997 Months (Effectiveness to Completion) 48 45 Key Performance Indicators (%) Appraisal PCR PPAR Financial Internal Rate of Return (%) 9.0 6.2 (0.5) Economic Internal Rate of Return (%) 17.6 13.6 4.9 Borrower People's Republic of China Executing Agency Liaoning Provincial Communications Department Mission Data Type of Mission No. of Missions Person-Days Fact-Finding 1 85 Appraisal 1 96 Project Administration: Inception 1 3 Review 3 20 Project Completion Review 1 36 Total 5 59 Operations Evaluationa 1 25 a Operations evaluation of Loans 1168-PRC and 1262-PRC. iii

BASIC DATA Jilin Expressway Project (Loan 1262-PRC) Project Preparation/Institution Building TA No. Project Title Type Consultant TA Amount Approval Date Person-Months 1725 Jilin Province Highway PPTA 13.9 $600,000 2 Jul 1992 Network Study 1972 Policy and Institutional ADTA 47.5 $1,200,000 9 Nov 1993 Support in the Road Sectora a Associated technical assistance grant. Key Project Data ($ million) As Per ADB Loan Actual Documents Total Project Cost 423.5 291.0 Foreign Exchange Cost 153.9 136.6 Local Currency Cost 269.6 154.4 ADB Loan Amount/Utilization 126.0 126.0 Foreign Exchange Cost 126.0 126.0 Local Currency Cost 0.0 0.0 ADB Loan Amount Cancellation 0.0 0.0 Key Dates Expected Actual Fact-Finding 17 May-4 Jun 1993 Appraisal 26 Jul-13 Aug 1993 Loan Negotiations 5-8 Oct 1993 Board Approval 9 Nov 1993 Loan Agreement 5 Jan 1994 Loan Effectiveness 5 Apr 1994 5 Apr 1994 First Disbursement 8 Jun 1994 Project Completion 31 Dec 1997 19 Sep 1996 Loan Closing 31 Dec 1998 16 Oct 1997 Months (Effectiveness to Completion) 44 29 Key Performance Indicators (%) Appraisal PCR PPAR Financial Internal Rate of Return (%) n.c. 7.5 10.4 Economic Internal Rate of Return (%) 19.7 21.0 12.5 n.c. = not calculated.

Borrower People's Republic of China

Executing Agency Jilin Provincial Expressway Corporation

Mission Data Type of Mission No. of Missions Person-Days Fact-Finding 1 114 Appraisal 1 42 Project Administration: Inception 1 9 Review 3 21 Loan Disbursement 1 2 Project Completion Review 1 56 Total 6 88 Operations Evaluationb 1 25 b Operations evaluation of Loans 1168-PRC and 1262-PRC. EXECUTIVE SUMMARY

Both expressway projects are located in the northeast provinces of Jilin and Liaoning of the People’s Republic of China. The Jilin Expressway Project from Changchun to Siping was part of the priority National Trunk Highway System program under the Eighth Five-Year Plan (1991-1995), which targeted highways where traffic congestion on the existing trunk roads was hindering regional economic activity. The Shenyang-Benxi Highway Project, located in Liaoning Province, was the first expressway financed by the Asian Development Bank in the People’s Republic of China. Classified outside of the first priority National Trunk Highway System, it aimed at providing infrastructure support for the continued economic and social development of Dalian-Shenyang and Shenyang-Benxi corridors and the adjacent hinterland. Both projects are reviewed in the same project performance audit report in light of their joint contribution toward the development of the country’s northeast transport corridor and of the common issues facing them. These issues relate to cost-recovery objectives through toll revenues, corporatization and asset securitization, and sustainability of operation and maintenance (O&M) as linked with the issue of the corporate management setup of the expressways.

The main objectives of the Jilin Expressway Project were to (i) reduce traffic on existing roads, (ii) improve access of the hinterland economy to Dalian Port, and (iii) reduce congestion on the overburdened railway by diverting traffic to the expressway. The Project comprised (i) construction of a 133.3-kilometer four-lane, limited-access toll expressway connecting the cities of Siping and Changchun; (ii) procurement of equipment and facilities for construction supervision, road maintenance, road safety, and communications; and (iii) consulting services for construction supervision and training. In addition, 32 person-months of technical assistance (TA) and 20 months of overseas training were provided to assist the Government formulate policy reforms and to assess the institutional support needs of the road subsector.

The Shenyang-Benxi Highway Project was designed to improve the efficiency and capacity of the road transport network in the area and the adjacent hinterland. The Project comprised (i) construction of a 75-kilometer, four-lane, controlled-access toll expressway from the provincial capital of Shenyang to Benxi and onward to Nanfen; (ii) procurement of equipment for road monitoring, road safety, and communication; and (iii) consulting services for construction supervision and training. Two TA grants comprising a total of 42 person-months were provided to (i) recommend improvements in the finance and operations of the expressways management bureau and assist in the development of more efficient vehicle inspection systems and weight regulation programs, and (ii) formulate a provincial highway network plan covering key aspects of highway and road transportation in Jilin Province.

The rationale for both projects was sound, taking into account the priority given to development of the northeast transport corridor to provide quick, efficient access to and from the northeast hinterland to major maritime ports at Dalian and Dandong. Both projects benefited from competent executing agencies, complemented by effective supervision of civil works implementation, and from capacity-building management related to timely execution of civil works projects.

The Jilin Expressway Project fully achieved its target in terms of cost-effective completion within budget (at $423.5 million equivalent) and 15 months ahead of schedule, all the while generating the anticipated benefits. Economic and social welfare gains associated with faster travel times, reduced vehicle operating costs, and enhanced economic progress all contributed to v generating a fairly robust economic return as per the reestimated economic internal rate of return of 12.5 percent. The corresponding financial performance at 10.4 percent is an acceptable measure of the degree of financial cost recovery attained through toll-based revenues.

Shenyang-Benxi Highway, with an economic internal rate of return of 4.9 percent, has not achieved an equivalent level of efficiency owing to higher capital costs ($166 million, 21.3 percent over budget) and lower-than-anticipated economic benefits arising essentially from a more modest traffic volume and lower rates of traffic diversion from either rail or competing alternative highway modes in the transport corridor. In financial terms, this expressway, with a marginally negative financial internal rate of return of –0.5 percent, has fallen considerably short of its objectives over the initial period of operations, given the lower-than-anticipated traffic base due partly to noncompletion of the projected expressway extension from Nanfen to the port of Dandong.

The physical and the financial sustainability of both projects are high. A sufficient flow of funds generated by toll revenues from both expressways, combined with the provincial communication departments (PCDs) commitments from other conventional user charges, can easily cover O&M and periodic/rehabilitation costs for the two projects, in addition to meeting debt service requirements. Both facilities constitute key elements of the northeast region’s primary infrastructure and, in recognition of their strategic economic importance, have clearly benefited from sustained O&M efforts. There is full institutional support and commitment to ensuring near-optimum physical performance of both expressways, the partial exception being the recurrence of transverse and longitudinal cracks along the surface pavement arising from thermal shrinkage.

The institutional strengthening of the respective provinces’ PCDs, responsible for expressway management enhanced management capabilities through on-the-job training in project management, contract administration, traffic engineering, and toll operation management. The TA outputs associated with the Jilin Expressway Project were instrumental in providing Jilin’s PCD with the skills and information that led to the successful launching of the corporatization initiative. On the other hand, corporatization was not an option pursued by the Liaoning PCD for the Shenyang-Benxi Highway Project. Other positive impacts include unintended socioeconomic impacts (such as tourism development) and the facilitation of high- speed containerized traffic (not mentioned in the appraisal reports).

On considerations of relevance, efficacy, efficiency, and sustainability, the Jilin Expressway Project is rated highly successful and the Shenyang-Benxi Highway Project successful.

There is virtually full compliance with loan covenants in both projects, except for the insufficient project benefit monitoring and evaluation of data collection. Although both Liaoning and Jilin PCDs have set up several separate information systems, there exist as yet no complete systems of project benefit monitoring and evaluation of data collection and monitoring in either Jilin or Liaoning PCDs.

Key issues for the future include corporatization and asset securitization, which are linked with the attainment of the full-cost-recovery objectives of the expressway management bureaus. Notably absent in current expressway management planning is the explicit tracking and earmarking of toll rate prices and associated revenues toward full cost recovery of highway development costs. Another related issue, germane to the Liaoning Expressway Management vi

Bureau, is the relative unattractiveness of corporatization as a vehicle for mobilization of capital funding for future expressway projects.

The lessons learned include the lack of a proper economic appraisal methodology applied to the Shenyang-Benxi Highway Project, an omission that was, however, corrected in the preparation of the follow-up Changchun-Siping Project, as well as benchmarking of indicators for project economic and social impact evaluation.

Pavement cracks and ice slab formation inside tunnels, which have occurred in the two project expressways, should call attention to the need for improved and adapted road pavement design when an expressway project is located in northern low-temperature areas. Likewise, the Operations Evaluation Mission has observed that there is no proper pavement management system currently used for the two expressways. As a follow-up action, a properly designed pavement management system, including data collection equipment, should be introduced by the Executing Agencies for the expressways’ management and maintenance.

vii

Map

I. BACKGROUND

A. Rationale

1. The Jilin Expressway Project from Changchun to Siping in Jilin Province was included in the priority National Trunk Highway System (NTHS) program under the Eighth Five-Year Plan (1991-1995), which targeted highways where traffic congestion on the existing trunk roads was hindering regional economic activity, particularly the export-oriented manufacturing industry and agriculture. The project road was designed as part of the Beijing-Harbin expressway program to enhance the development of the Dalian-Harbin corridor in the northeastern provinces by reducing road transportation costs.

1 2. On the other hand, the Shenyang-Benxi Highway Project in Liaoning Province, though under the Eighth Five-Year Plan, was classified outside the priority NTHS. It aimed at providing infrastructure support for the continued economic and social development of the Dalian-Shenyang and Shenyang-Benxi corridors and the adjacent hinterland.

3. Both projects form vital links of the road infrastructure in the northeast transport corridor (see Map) and are consistent with the Asian Development Bank’s (ADB) country operational strategy and country assistance program emphasizing infrastructure development as a primary vector of rapid, sustainable, and equitable economic growth.

B. Formulation

4. The two Projects were designed in response to an assessment of road development priorities carried out by the People’s Republic of China (PRC) State Planning Commission in collaboration with the Jilin and Liaoning provincial communications departments (PCDs), which are responsible for provincial highway planning and operation and maintenance (O&M) of the expressway networks. According to the appraisal report, formulation of the Shenyang-Benxi Highway Project was based on feasibility designs prepared by the Liaoning Provincial Communications Department (LPCD). However, no project preparatory technical assistance (PPTA) was carried out in preparing the Project. On the other hand, with the Shenyang-Benxi Highway Project, a PPTA was carried out to develop an integrated provincial highway network study for Jilin Province, including the Changchun-Siping expressway.

C. Purpose and Outputs

5. The purpose of the Jilin Expressway Project (also referred to as Changchun-Siping Expressway) is to relieve traffic congestion and link economic growth areas with consumer centers and foreign trade outlets. The main objectives of the Project are to (i) reduce traffic on existing roads in the Changchun-Siping corridor, (ii) improve access of the hinterland economy to Dalian Port, and (iii) reduce congestion in the overburdened railway by diverting traffic to the

1 The Project is officially referred to as a highway rather than an expressway in deference to a section going from Benxi to Nanfen, which is an undivided highway. For the most part, however, the road has been built to expressway standards and is therefore referred to within the text of the report as an expressway when commented on in tandem with the related Changchun-Siping expressway. 2 expressway. The main outputs of the Project are (i) a 133.3-kilometer (km) four-lane, limited- access toll expressway connecting the cities of Siping and Changchun; and (ii) procurement of equipment and facilities for construction supervision, road maintenance, road safety, and 2 communications. Also included under the loan was a technical assistance (TA) to assist the Government in formulating policy reforms and to assess the institutional support needs of the road subsector.

6. The purpose of the Shenyang-Benxi Highway Project was to improve the efficiency and capacity of the road transport link from Shenyang and the adjacent hinterland to the secondary port of Dandong. The outputs of the Project include (i) a 75-km, four-lane, controlled-access toll expressway from Shenyang (the provincial capital) to Benxi and onward to Nanfen; and (ii) procurement of equipment for road monitoring, road safety, and communication.

D. Cost, Financing, and Executing Arrangements

7. The total estimated cost of the Changchun-Siping Expressway Project at appraisal was $423.5 million equivalent comprising $153.9 million (or 36 percent) in foreign exchange cost and $269.6 million equivalent (or 64 percent) in local currency cost (refer to Basic Data Sheet for details). The Executing Agency (EA) for project implementation was the Jilin Provincial Expressway Corporation (JPEC), with assistance from the Jilin Provincial Communications Department (JPCD).

8. The total cost of the Shenyang-Benxi Highway Project, including contingencies and interest during construction, at appraisal was estimated at $166.0 million equivalent, of which $62.3 million was the foreign currency cost (38 percent) and $103.7 million equivalent (62 percent) the local currency cost. The financing envisaged at appraisal included a $50.0 million ADB loan to finance about 80 percent of the foreign exchange cost. The Government undertook to finance the remaining foreign exchange cost and local currency cost in the amount of $116.0 million. The EA is the LPCD.

E. Completion and Self-Evaluation

9. The project completion reports (PCRs) for the Jilin Expressway and Shenyang-Benxi Highway Projects were prepared by ADB’s Transport and Communications Division East and circulated to the Board in September and October 1998, respectively. The PCRs were based on a comprehensive assessment of completed works, providing a detailed account of the scope, costs, implementation, and operational aspects of the Project at that stage. The recalculated financial internal rate of return (FIRR) for the Shenyang-Benxi Highway Project was 6.2 percent, and the economic internal rate of return (EIRR), 13.6 percent. The corresponding estimates for Changchun-Siping Expressway were 7.5 percent and 21.0 percent, respectively. The PCRs rated both projects as generally successful. The Operations Evaluation Mission (OEM) found the PCRs to be straightforward in their assessment of the two projects’ implementation. Physical achievements were substantiated throughout and the underlying shortcomings during the loan processing and implementation cycle were brought out.

2 TA 1972-PRC: Policy and Institutional Support in the Road Sector, for $1.2 million, approved on 9 November 1993. 3

F. OEO Evaluation

10. The project performance audit report (PPAR) presents the findings of the OEM that visited project sites in Jilin and Liaoning provinces on 6-24 March 2000. The PPAR is based on a review of the appraisal reports (for both Changchun-Siping Expressway and Shenyang-Benxi Highway), the corresponding PCRs, materials from ADB’s files, and interviews, further supplemented by reports and documentation from the EAs. The two projects are reviewed jointly to highlight comparisons and draw lessons relevant for highway sector development in the PRC with regard to the issues of toll pricing, financial cost recovery, corporatization and asset securitization, and financial sustainability of O&M.

II. PLANNING AND IMPLEMENTATION PERFORMANCE

A. Formulation and Design

11. Both projects were designed to Ministry of Communications (MOC) standards with two 7.5-meter (m) carriageways and hard shoulders. The Liaoning Province Traffic Survey and Design Institute and the Second Highway and Design Institute of MOC undertook the survey and design for the Shenyang-Benxi Highway Project. Both project design and scope of work were reviewed by the OEM. The scope was found to be adequate in terms of achieving the anticipated outputs targeted for both projects and consistent with the developmental objectives pursued by ADB. The Mission deemed both expressways to be constructed to modern expressway design standards, considering both geometry and pavement design.

12. On request of the EA, ADB approved during implementation three additional contracts for the construction of a 15 km section of the link road to Leshan town, the enlargement of the Changchun interchange, and the construction of a new interchange to connect with the newly built Changchun-Siping Expressway. In addition, variations to the original contracts were approved to add access roads to the major cities served by the expressway and to provide a number of service areas and management stations. These changes in scope allowed for more effective achievement of the project objectives of providing access to new economic centers, improved access for vehicles entering industrial economic zones, and overall improvement of the level of service to project beneficiaries.

B. Cost and Scheduling

13. Jilin Expressway Project. The loan was approved on 9 November 1993, the Loan Agreement was signed on 5 January 1994, and the loan became effective on 5 April 1994 within the period specified in the Loan Agreement. Detailed designs were completed in September 1993. Preconstruction activities including prequalification of contractors, tendering, and awarding of contracts were completed by April 1994. Construction activities commenced in May 1994 and were carried out intensively during clement seasons. The Project was substantially completed on 19 September 1996, 15 months ahead of schedule (owing primarily to the accelerated construction program and, secondarily, to significant preconstruction mobilization and procurement tasks completed ahead of loan effectiveness). Toll operations commenced on 10 October 1996. The pace of construction exceeded appraisal estimates of scheduling, which were based on similar experiences in road construction drawn from other developing member 4 countries in the region. The initial appraisal schedule is nevertheless considered realistic, given the entire implementation cycle for a project of this scope and magnitude.

14. The actual costs for completion were 31 percent less than at appraisal owing primarily to devaluation of the yuan, shortened schedule, and lower than expected land acquisition and resettlement costs (Table 1 and Appendix 1).

5

Table 1: Jilin Expressway Project: Financing Arrangements ($ million)

Appraised Actual Source Foreign Local Total Foreign Local Total

ADB 126.0 0.0 126.0 126.0 0.0 126.0 Government 27.9 269.6 297.5 10.6 154.4 165.0

Total 153.9 269.6 423.5 136.6 154.4 291.0

ADB = Asian Development Bank. Source: Staff estimates.

15. Shenyang-Benxi Highway Project. Construction of part 1 of the Project started in November 1992, and the expressway from Shenyang to Benxi was completed and opened to traffic in September 1994, a year ahead of schedule, again for the same reasons alluded to in para. 13. Construction of part 2 commenced in May 1993, and the highway section from Benxi to Nanfen was completed in September 1996. The entire project road from Shenyang to Nanfen was opened to traffic on 18 October 1996, ahead of the scheduled date of 31 December 1996.

16. The actual project cost exceeded the appraisal estimate by $35.4 million equivalent, or 21.3 percent (Table 2 and Appendix 1). The actual cost of civil works for part 1 of the Project expressway, which was financed by the Government, was more than double the appraisal estimate. The main reasons were the construction of an additional interchange and unforeseen problems with unstable rock strata, necessitating changes in engineering designs. The changes raised the cost of civil works. Of the actual project cost of $201.4 million equivalent, ADB financed $50.0 million (24.8 percent), which was used to finance 62.7 percent of the foreign exchange cost. The remaining $151.4 million equivalent, including a cost overrun of $35.4 million equivalent, was financed by a Government grant. The OEM validates the reasons alluded to in the PCR for such cost overruns.

Table 2: Shenyang-Benxi Highway Project: Financing Arrangements ($ million)

Appraised Actual Source Foreign Local Total Foreign Local Total

ADB 50.0 0.0 50.0 50.0 0.0 50.0 Government 12.3 103.7 116.0 29.7 121.7 151.4

Total 62.3 103.7 166.0 79.7 121.7 201.4

ADB = Asian Development Bank. Source: Staff estimates.

6

C. Consultants’ Performance, Procurement, and Construction

17. Changchun-Siping Expressway. The plan at appraisal was to divide the works into 15 civil works contracts, each 5-12 km long. These contracts were tendered as planned, seven under international competitive bidding (ICB) and eight under local competitive bidding (LCB) procedures. Contracts 1-5 and 13-15 were bid under the Government’s LCB procedures, and contracts 6-12 under ICB procedures in accordance with ADB’s Guidelines for Procurement. Following ADB approval of an increase in project scope in January 1995, three additional contracts (16–18) were awarded under LCB procedures. China Machinery Corporation prequalified the civil works contractors, and ADB approved the prequalification between June and October 1993.

18. Twelve contracts for supply of construction and maintenance equipment were financed under the loan. Procurement followed ICB and international shopping procedures in accordance with ADB’s Guidelines for Procurement. Tender evaluation and awarding of contracts for the supply of equipment were completed on time, and no disputes or contractual difficulties were encountered.

19. Shenyang-Benxi Expressway. Consultants under the ADB loan and TAs were engaged in accordance with ADB’s Guidelines on the Use of Consultants. An international consulting firm, in association with a domestic consulting firm, was engaged by LPCD to assist in finalizing the design work (especially for the tunnels and large bridges), contract administration, project management, construction supervision, and training. Civil works (including material) and equipment financed by ADB were also procured in accordance with ADB’s Guidelines for Procurement. The four ICB contracts were the first in Liaoning Province to be competitively bid and administered under Fédération Internationale des Ingénieurs-Conseils 3 (FIDIC) Conditions of Contract for Works of Civil Engineering Construction. LPCD corroborated the PCR statements regarding delays incurred in its construction of the two twin-bore tunnels. The OEM also was able to confirm through two site visits the generally satisfactory standards of construction of the expressway and related civil works.

20. The Mission reviewed the issue of the very low participation of foreign firms in ICBs for 4 civil works contracts for both projects. Under the current framework of vertical slicing of civil works contract packages (required by ADB for quality control considerations), senior JPCD officials reported that bidding prices by the single foreign bidder were very high and not competitive relative to those of local bidders. Other factors that contribute to either low foreign participation and/or interest in civil works contracts include (i) bureaucratic rigidities underlying

3 This assertion (contained in the PCR) was confirmed in discussions with the EA, but the OEM was not in a position to verify the procedures used in Shenyang-Benxi Expressway to check their conformity with FIDIC procedures. According to ADB officials FIDIC imposes a requirement on all ICB contracts for expressway projects in the PRC, but apparently none of the contracts have been monitored thus far to ensure adherence to FIDIC procedures. 4 Vertical slicing refers to the apportioning of contracts by road section, which implies the integration of all components of civil works (pavement, bridges, structures, etc.) to be supplied within the same contract package for every road section out for tender. This practice contrasts with horizontal slicing which subdivides the packages according to the type of works to be carried out (pavement, structures, etc.), applicable across the entire length of the expressway. It is alleged that horizontal slicing would enable in principle foreign bidders on civil works to compete on a selective basis in view of their perceived competitive advantage (in terms of managerial and/or equipment/materials specialization) across specific components of highway construction (pavement materials being most often cited as an example of foreign level specialization). 7

5 both the bidding as well as contract implementation process; (ii) heavy discounting practices 6 routinely offered by local bidders for multiple bids; (iii) the comparatively small scale of contract packages up for bidding relative to the size observed for other public infrastructure civil works projects, and (iv) the lack of familiarity with market prices in the PRC, especially for equipment leasing and labor contract policies. It should be mentioned, on the other hand, that all of the major equipment used for road construction for both projects was foreign supplied.

D. Organization and Management

21. The Jilin Expressway Project was implemented in accordance with the arrangements envisaged at appraisal. As part of the Government’s policy of commercializing public utilities, JPCD incorporated JPEC in August 1993 to plan, implement, and operate the expressway network in Jilin Province. International and domestic consultants were engaged to assist JPEC with preconstruction activities and project implementation. Following completion of the Project, primary management of the expressway was turned over to the Jilin Provincial Expressway Administration Bureau (JPEAB), responsible for toll collection and O&M of the expressway. Revenues, assets, and loan liabilities pertaining to the expressway were divided between JPEAB and the North East Corporation, Ltd. (NECL), the holding company formed by Jilin and Heilongjiang provinces to raise additional funds for future expressways construction projects (Appendix 2 has details on the corporatization experience in Jilin and Liaoning).

22. The implementation arrangements for the Shenyang-Benxi Highway Project generally followed those envisaged at appraisal. Following completion of the Project, management of the highway was transferred to Liaoning Provincial Expressway Management Bureau (LPEMB). LPEMB now operates and manages five expressways in Liaoning Province, including the Shenyang-Benxi Highway. Management of the asset/debt portfolio, as well as cash flow pertaining to Shenyang-Benxi Highway, rests entirely with LPEMB, which, in turn, is overseen by LPCD.

23. There was virtually full compliance with the loan covenants, the exception being project benefit monitoring and evaluation of data collection. Although both PCDs have set up several separate information systems, there are no complete systems of project benefit monitoring and evaluation of data collection and monitoring in the Jilin and Liaoning PCDs when the Mission visited. These systems should ideally be set up before commencing a project, particularly following project appraisal. It is suggested that, in the future, a project performance assessment and monitoring system (currently under implementation within the ADB project monitoring framework) be used to facilitate loan project performance and PCR mission reviews.

5 E.g., requesting that bid documents be translated into Chinese (though not an official requirement), and conformity with other similar bureaucratic processes that may unduly complicate the bidding or contract implementation process. 6 While discounting could theoretically be offered by outside bidders, such practices are not mentioned in the bid documents supplied to bidders. Moreover, local bidders have the advantage of offering the discounts on LCB in combination with ICB bid. 8

III. ACHIEVEMENT OF PROJECT PURPOSE

A. Operational Performance

24. Expressway Conditions. The pavement appears adequate to carry the traffic loads predicted up to the time of the first overlays scheduled 10 years after opening. However, transverse cracks, 2-3 m wide at intervals of 10-20 m along the length of both expressways were noticed. The cracks will require additional and continuous maintenance throughout the life of the pavement. The EA was also advised to institute regular monitoring of the pavement, including deflection and temperature variations. Longitudinal cracks 1.5-centimeter wide and 20- 30 m long were also noticed during the Mission’s site visit. The longitudinal cracks were, again linked to thermal shrinkage. Notwithstanding these minor defects, the pavement overall was in good condition, reflecting quality construction.

25. Owing to the absence of weighbridges installed on the expressway, information on the level of truck loading had to be collected by visual assessment, supplemented by interviews with traffic engineers. It was found that more than 30 percent of the trucks (light, medium-size, and large) are routinely overloaded, and that the overload could reach 40 percent of the respective trucks’ capacity. Visual inspections data measured on the expressway indicated that the expressways’ pavement structure appears adequate to carry traffic loads with a certain amount of overloading.

26. Inspection of the tunnels along Shenyang-Benxi Expressway revealed that one has a drainage problem. Part of the drainage system in the Dayu tunnel has been blocked by ice, resulting in water spilling. Three water spill spots were noticed during the site visit. In cold weather, the spilled water on the pavement immediately became ice which forced one of the two lanes to be closed to traffic. The drainage problem occurred in winter of 1999, which was the coldest in the last 50 years. Cold weather was cited as the reason for the damage that caused the waterproof layer to be destroyed. However, further site testing will be required to determine the specific causes.

27. Traffic Levels. Actual data for traffic volumes on Changchun-Siping Expressway indicates that traffic on the expressway has increased rapidly since its opening. The traffic growth rate in 1998 was 14 percent and a further 21 percent increase was observed in 1999. However, information collected by the OEM regarding estimates of average annual daily traffic (AADT) flow observed in 1999 has led to a downward revision (from 14,250 to 10,132 medium truck units), or about 28 percent lower than that forecast at appraisal (Appendix 3). Based on actual data received from JPEAB, AADT for Changchun-Siping Expressway in 1999 was calculated as 5,540 medium truck units, or 38 percent lower than the equivalent AADT estimates (in vehicle per day units) forecast at appraisal.

28. The positive growth rate for the expressway and negative growth rate achieved on the parallel Highway 102 confirm that traffic diversion from the highway to the expressway has been steady and is projected to last until 2006 in line with the continued application of tolls (although at lower rates) for Highway 102 over this period. The diversion rate from Highway 102 to Changchun-Siping Expressway is estimated to be no less than 60 percent. The remaining 40 percent is due to diversion from the railway (especially the short distance transportation), and generated traffic due to improved road conditions (short distance, fast speed, and better accident reduction facilities). Sources of diverted traffic consists essentially of medium-distance passenger traffic, which registered the greatest increase among all traffic flows observed by 9

JPEAB, as well as medium- to high-value general cargo (especially containerized traffic), principally diverted from rail (Appendix 3).

29. The revised traffic volume for Shenyang-Benxi Expressway is also much lower than the feasibility estimates. The differences range from 40 to 71 percent and vary from section to section (Appendix 4). Traffic diversion has not been as robust owing in part to the absence of tolls levied on the competing Class II highway (in contrast with Changchun-Siping Expressway) and the relatively short distance of the expressway, which terminates at Nanfen and falls considerably short of Dandong port. The OEM's examination of traffic conditions along the expressway and the highway confirms, however, that the opening of the expressway has reduced congestion on the existing road.

30. The overall riding quality of both expressways is good and surface roughness, measured by the International Roughness Index, is estimated to be about 3.5 m/km (which is well within the allowable tolerance level) at the time of the site visit (Appendix 3).

B. Performance of the Operating Entity

31. The financial performance of the Jilin EA (specifically JPEC) appears largely satisfactory as reported in the PCR. Detailed financial statements pertaining to NECL, the newly corporatized holding company responsible for revenue management in the Jilin and Heilongjiang expressways, indicate a very comfortable position with very favorable indicators in terms of debt service and working ratios (Appendix 5). However, it should be mentioned that debt servicing of the ADB loan on Changchun-Siping Expressway is borne by JPEC and that, 7 only part of the assets pertaining to the two expressways are transferred to NECL. This apportioning of assets and liabilities among different corporate entities—JPEC, NECL, and JPEAB—makes for a convoluted financial structure that does not readily lend itself to tracking of expressway-specific cost-recovery objectives from toll revenues (singly or in combination with other conventional road user charges) by road planning authorities within JPCD or JPEC.

32. The financial performance of LPEMB is also described in Appendix 5. In contrast with the prevailing scenario described for Jilin Province, the noncorporatized LPEMB is the sole managing entity for expressways operating within Liaoning Province and the financial statements provided here are consolidated for the entire expressway network (including the Shenyang-Dalian Expressway) that is managed by LPEMB. Both the scale of operations and financial indicators of LPEMB appear favorable and indicate a more self-reliant profile when it comes to either self-financing or mobilization of external capital from domestic banking sources for future expressway projects. Given this reality, and the lack of proper incentives to incorporate (notably the imposition of a corporate income tax, according to the director of 8 LPCD), the view of senior management of LPEMB is to the effect that the status quo is preferable over the corporatization alternative when it comes to financing of future expressway 9 capital projects.

33. The FIRR of Changchun-Siping Expressway was reevaluated using a with- and without- Project comparison. The major assumptions in the recalculation are in Appendix 6. The

7 On the other hand, NECL assumes responsibility over debt servicing of the domestic loans pertaining to expressway capital costs. 8 The corporate tax rate is nominally set at 31 percent of taxable income. 9 A corollary factor is the wide availability of cheap capital from domestic banking sources in the economically depressed Shenyang region. 10 recalculated FIRR, in constant prices, is 10.4 percent compared with 7.5 percent in the PCR. The main reasons for the higher return are lower capital costs (in real terms) and higher than initially projected revenues (mainly due to the increased toll rates).

34. The recalculated FIRR for Shenyang-Benxi Expressway, in constant prices is -0.5 percent, compared with 9.0 percent at appraisal and 6.2 percent in the PCR (Appendix 7). The main reason for this remarkably lower return is the revised actual traffic volume that is much 10 lower than at projected at either appraisal or in the PCR. Sensitivity analysis of the FIRR tested the effects of possible unfavorable scenarios with respect to O&M costs and revenues. The result shows that the Project is not very sensitive to changes in O&M costs, but is somewhat sensitive to changes in toll revenues.

10 For instance, actual traffic volume in 1999 was 5,365 vehicles per day for the section of Tiaoxian-Benxi, or only 64 percent of the projected volume at appraisal and 58 percent of the estimate in the PCR for the same year. 11

C. Economic Reevaluation

35. The economic reevaluation of Changchun-Siping Expressway for the PPAR followed the methodology used at appraisal and the PCR: comparing the with-Project and without-Project situations. The without-Project case consists of minimum improvements to the existing road to maintain minimum vehicle speed. The analysis of the Project covers 23 years, from 1994 through 2016, and comprised 3 years of major construction and 20 full years of expressway operations. The methodology and data sources used for the economic and financial reevaluation are described in Appendix 6.

36. The economic cost of implementing the Project comprises the costs of initial construction and O&M costs. Benefits derived from the Project include (i) savings in vehicle operating costs (VOCs) for both diverted traffic and generated traffic; (ii) avoided maintenance investments on parallel Class II highways for both Changchun-Siping and Shenyang-Benxi; (iii) savings in passenger and freight time costs; (iv) savings in VOCs due to distance reduction; and (v) saving in time costs for the remaining vehicles on corridor-based Class II highways due to reduced traffic congestion.

37. The recalculated EIRR for Changchun-Siping Expressway is 12.5 percent, much lower than the appraisal estimate of 19.7 percent and the PCR figure of 21 percent. The EIRR for Shenyang-Benxi Expressway is now estimated to be 4.9 percent, compared with the appraisal estimate of 17.6 percent and PCR estimate of 13.6 percent. The primary factor responsible for the decrease in both EIRRs is the lower traffic volume (Appendix 7). The revised estimates of real traffic volumes are not as high as the estimates at appraisal and in the PCR owing primarily to statistical and methodological inaccuracies in the derivation of AADT volumes in previous analyses.

38. The results of the sensitivity analysis are summarized in Table 3. The recalculated base case EIRRs are 12.5 and 4.9 percent, the latter being less than the 12 percent opportunity cost of capital in the PRC.

Table 3: Results of Sensitivity Analysis

FIRR (%) EIRR (%)

Shenyang Shenyang Jilin -Benxi Jilin -Benxi

Item

Base Case 10.4 (0.5) 12.5 4.9 Incremental Revenues Less 10 percent 9.5 (0.8) 8.6 4.3

EIRR = economic internal rate of return, FIRR = financial internal rate of return.

12

D. Sustainability

39. The physical and the financial sustainability of both projects are high. A sufficient flow of funds generated by toll revenues from the two expressways, combined with the PCDs financial commitments drawn from other conventional user charges, can easily cover O&M and periodic/rehabilitation costs for the two projects. Maintenance expenditures have been higher than anticipated at appraisal owing in part to additional maintenance effects in response to special provisions imposed by MOC. There have been provincial governments’ ownership and commitment to the project objectives and provision of an appropriate framework of macro and sector policies in support of expressway management and development.

40. The approach adopted by the EAs for expressway management appears appropriate in respect of the available human resources and the EAs’ institutional capabilities. The OEM is nevertheless of the view that ADB could provide further support to the EAs by means of its ongoing project assistance to the PCDs to improve the efficiencies surrounding expressway management. In particular, the continued monitoring of (i) the socioeconomic setting of project beneficiaries, (ii) regulatory controls (such as vehicle axle overloading), and (iii) environmental mitigation measures would not represent any problem if there would be a computerized management information system with a group of suitable indicators for monitoring and evaluating project performance.

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS

A. Socioeconomic Impacts

41. Changchun-Siping Expressway. In general, the gross domestic product (GDP) and per capita income growth rates for the cities in the Changchun-Siping Expressway corridor (Changchun, Gongzhuling, and Siping) increased more than those for Jilin Province as a whole from 1994 to 1998 (Table 4). This relatively dynamic performance is testimony to the contribution of the expressway to the corridor cities’ relative prosperity.

Table 4: Average GDP Growth Rate and Per Capita Income Increase Rate, 1994-1998 (%)

Jilin Province Changchun Gongzhuling Siping Indicator

GDP 9.0 9.2 20.0 10.1 Income 12.8 16.4 21.2 15.3

GDP = gross domestic product. Source: Data from Jilin Provincial Statistics Bureau.

42. The case of Gongzhuling City is especially noteworthy as it has benefited from a local GDP growth rate double that of other cities from 1994 to 1998. Its various industries, including raw materials, agriculture, and tertiary services have developed quickly, owing mainly to improved accessibility of high-speed transport following the commissioning of the expressway.

13

43. Operation of the expressway provides direct employment opportunities for 1,300 people each year, including around 500 people working in service activities. During the construction period, more than 10,000 people were working at the site every year.

44. After a spot check, the OEM confirmed the PCR claims to the effect that the resettlement program was generally well implemented and received. Several representatives of the resettled people interviewed by the OEM expressed their satisfaction with the arrangements carried out under the project in tandem with local government support.

45. Shenyang-Benxi Highway. The general picture of local economic development from 1995 to1998 in Liaoning Province is shown in Table 5. Again, the table gives indirect evidence of the favorable impact of the Project on the affected corridor cities compared with the economic performance of the province as a whole.

Table 5: GDP and Income Growth Rate of Liaoning, Shenyang and Benxi (%)

Indicator Liaoning Province Shenyang Benxi

GDP 6.4 6.9 7.4 Citizen Income 7.7 7.8 6.6 Farmer Income 13.7 11.7 17.7

GDP = gross domestic product. Source: Data from statistic annual books of Benxi, Liaoning, and Shenyang.

46. Information obtained from a focus group meeting of beneficiaries indicated that Benxi had benefited by and large from the Project in three major respects. First, the expressway allowed rapid transport of farmers’ local mountain products, traditional medicines, and other planting goods, leading to increased farmers’ income. Second, since the expressway started operation, the tourism industry has developed quickly with tourist-related trips increasing from 800,000 to 1,800,000 per year. Third, in 1993, Benxi set up the Economic Development Zone in Shiqiaozi town, which is located by the expressway and is serviced by two entry ramps. The OEM interviewed managers of the zone. All the enterprises of the zone indicated their reliance on the expressway, not only for supply of raw materials and products, but also for staff movements to and from the workplace.

47. On the negative side of the benefits ledger, it should be mentioned that the absence of an expressway linkage connecting Benxi/Nanfen to the seaside port of Dandong constituted an important handicap in the use of the Shenyang-Benxi Highway as a link to the port. However, with the construction of the Nanfen-Dandong Expressway currently under way, in tandem with the development of Dandong port itself, prospects are good for full capture of project benefits into the future in line with the rationale that underscored the project’s initial justification.

B. Environmental Impacts

48. One year after following completion of Changchun-Siping Expressway, the Jilin Provincial Environment Evaluation Center carried out an environmental impact assessment (EIA) in August 1997. The purpose of the latest EIA was to assess the actual environmental impact when the expressway was fully operating. The EIA identified the major sources of 14 potential adverse environmental impacts of expressway operations: air pollution, surface water pollution, underground water pollution, noise pollution, and soil erosion. Site visits and interviews with environmental officials confirmed the EIA report that the operation of the expressway met current national standards.

49. The 1997 EIA report noted that in four villages close to the expressway and affected by traffic noise, noise walls 100-250 m long and 3.5-4 m high were created. Air pollution on the expressway was expected to be more serious than it was in the urban areas. This is in consideration of the fact that high vehicle speeds (beyond a range of 60-80 km/hour) consume greater amounts of fuel per km of travel and therefore increase the volume of emissions. However, site inspection found no immediate effect that could be seen from the vehicle emission due to the fact that emissions quickly disperse in open air.

50. The OEM interviewed local government officials of environmental protection agencies in Changchun, Gongzhuling, and Siping. The officials recognized Changchun-Siping Expressway was generally an environmentally benign project without tangible negative impact. According to the deputy director of Siping Environmental Protection Bureau, regular inspection has shown that dust and noise in the city center have significantly declined because much traffic has shifted to the expressway. After checking Jilin Provincial Environmental Protection Bureau’s acceptance of the reports, the OEM confirmed that dust control equipment has been installed on the boiler of service stations and other mitigation measures have been completed. However, tree planting has had no obvious effect as an antinoise instrument along the expressway and houses are located too close to the expressway in some places.

51. An EIA of the construction of Shenyang-Benxi Highway was conducted by the Liaoning Provincial Environment Evaluation Center in August 1997. The EIA identified the major negative physical impacts as air pollution (especially tunnel air pollution), surface water pollution, underground water pollution, soil erosion, noise, and agriculture. The project site visits, field interviews of environmental officials, and the EIA report all indicate that the expressway's operations meet current national environmental standards.

52. To reduce air pollution, mitigation measures were implemented through a computer- based air quality monitoring and controlling system. Traffic noises in the two tunnels were minimized by using noise reduction materials such as rough surface concrete. Noises in other sections of the expressway were addressed through migration measures, i.e, by removing the residents to places 200 m away from the expressway. Notwithstanding, the EIA report indicates that traffic noises in several places still exceed the nighttime standard.

C. Impacts on Institutions and Policy

53. There was no PPTA in support of Shenyang-Benxi Highway (the first highway to be built in the province and the first ADB-financed road project). The OEM concurs with the assessment made in the PCR to the effect that the substantial increase in the project cost and subsequent change in the project design were partly due to insufficient ADB involvement at the project 11 preparation stage. In contrast, TA 1725-PRC within the same Project did include a feasibility study for the ensuing Changchun-Siping expressway that was properly carried out.

11 TA 1725-PRC: Jilin Province Highway Network Study, for $600,000, approved on 2 July 1992. 15

12 54. Implementation of TA 1724-PRC, whose primary component was in developing a pavement management system, met with only partial success. The PCR alleges success as regards toll rate setting and collection, but the OEM considers that other components of the TA having to do with the pavement management and information system were not well implemented by the EA.

13 55. TA 1972-PRC implemented under the Jilin Expressway Project aimed at policy dialogue in the areas of transport planning, pricing policies, project financing, and commercialization. The OEM confirmed that the deliverables of the aforesaid TA were successfully carried out and were instrumental in providing JPCD with the appropriate managerial skills with which to successfully launch the corporatization initiative, that culminated in the creation of NECL. However, one possible drawback in the ensuing commercialization initiative involving JPEC, JPEAB, and NECL is the lack of transparency or accountability revolving around the disposition of assets/debts and corresponding cash flow management (with specific reference to toll revenue collection and disposal) within the fairly complex organization structure created by the corporatization process (Appendix 2). There does not appear to be explicit tracking of cost-recovery objectives through current toll pricing and no separate cost accounting practice is currently in place within the administrative framework set up by JPEC and NECL to specifically account for the disposition of toll revenues generated by Changchun-Siping Expressway.

56. The institutional capabilities of both the Jilin and Liaoning PCDs were considerably enhanced by the project, specifically through the consultancies and TAs providing for on-the-job training in project management, contract administration, traffic engineering, structural engineering, pavement quality control, and toll operation management. Training included overseas study tours to facilitate the transfer of technology for expressway construction and operations. Interviews carried out by the OEM with senior management staff of both PCDs confirmed the achievements noted in the PCR regarding value-added training and skills enhancement of PCD and Expressway Management Bureau staff in highway design, procurement and construction, operation, and toll management practices.

V. OVERALL ASSESSMENT

A. Relevance

57. The rationale for both projects was sound, taking into account the priority given to development of the northeast transport corridor to provide quick, efficient access to and from the remote hinterland of the region to major maritime ports at Dalian and Dandong. Without either project, both passengers as well as cargo traffic (especially containerized cargo) would have endured considerable delays associated with continued use of the congested highways and rail lines in the transport corridor that were clearly stretched to the limits of their operating capacity. This would have resulted in costly penalties and a consequent diminution in social and economic utility for the various transport user groups currently benefiting from the increased performance characteristics provided by both expressways. It is also likely that the superior

12 TA 1724-PRC: Institutional Strengthening for Highway Operation and Management Improvement Project, for $500,000, approved on 2 July 1992. 13 TA 1972-PRC: Policy and Institutional Support in the Road Sector, for $1.2 million, approved on 9 November 1993. 16 economic performance of the main urban centers located in the respective corridors (relative to the region as a whole) may not have fully materialized with the acute bottlenecks in transportation infrastructure that were clearly evident for Changchun-Siping and, to a lesser extent, for Shenyang-Benxi.

B. Efficacy

58. Both projects benefited from competent EAs, duly complemented by effective supervision of civil works implementation. Both projects benefited from capacity-building management related to timely execution of civil works projects. The less-than-satisfactory efficacy aspects include the cost overruns in Shenyang-Benxi Expressway, partly due to lack of thorough design, the need for auscultation of tunnel rock excavation at the outset of the Project, and underestimated capital costs for the Project as a whole.

C. Efficiency

59. Changchun-Siping Expressway fully achieved its target of cost-effective completion while generating the anticipated benefits. Economic and social welfare gains associated with faster travel times, reduced VOCs, and enhanced economic progress all contributed to generating a fairly robust economic return shown by the reestimated EIRR of 12.5 percent. The corresponding financial performance at 10.4 percent is an acceptable measure of the degree of financial cost recovery attained through toll-based revenues. Shenyang-Benxi Highway has not achieved an equivalent level of efficiency owing to higher capital costs and lower-than- anticipated economic benefits arising essentially from a more modest traffic volume and lower traffic diversion rates from either rail or competing highway modes in the transport corridor. In financial terms, this expressway has fallen considerably short of its objectives over the initial period of operations, given the lower-than-anticipated traffic base due in large part to noncompletion of the expressway extension from Nanfen to the port of Dandong.

D. Sustainability

60. Both projects are operationally sustainable, given the quality of civil works and the adequacy of maintenance effort. Both facilities constitute key elements of the region’s primary infrastructure and, in recognition of their economic importance, have clearly benefited from sustained O&M efforts. There is full institutional support and commitment to ensuring near- optimum physical performance of the expressways, the exception being the recurrence of transverse and longitudinal cracks on the surface pavement because of thermal shrinkage.

E. Institutional Development and Other Impacts

61. Institutional strengthening of the respective PCDs responsible for expressway management enhanced their management capabilities. They benefited form on-the-job training in project management, contract administration, traffic engineering, and toll operation management. The outputs of the associated TA in the Jilin Expressway Project were instrumental in providing JPCD with the skills and information that led to the successful launching of the corporatization initiative. Other positive impacts include unintended 17 socioeconomic impacts (such as tourism development) and the facilitation of high-speed containerized traffic (not mentioned in the appraisal reports).

F. Overall Project Rating

62. The ratings for the Jilin Expressway and Shenyang-Benxi Highway projects are given in Tables 6 and 7. The Jilin Expressway Project is rated highly successful, whereas the Shenyang- Benxi Highway Project is rated successful.

18

Table 6: Jilin Expressway Project: Assessment of Overall Project Performance

Rating Weight Criterion Assessment (0-3) (%) Weighted Rating

Relevance Highly Relevant 3 20 0.60 Efficacy Highly Efficacious 3 25 0.75 Efficiency Highly Efficient 3 20 0.60 Sustainability Most Likely 3 20 0.60 Institutional Moderate 2 15 0.30 Development

Overall Rating Highly Successful 100 2.85

Overall Rating: HS = highly successful > 2.5 LS = less than successful 0.6 < LS < 1.6 S = successful 1.6 < S < 2.5 U = unsuccessful < 0.6

Table 7: Shenyang-Benxi Highway Project: Assessment of Overall Project Performance

Rating Weight Criteria Assessment (0-3) (%) Weighted Rating

Relevance Relevant 2 20 0.40 Efficacy Efficacious 2 25 0.50 Efficiency Less Efficient 1 20 0.20 Sustainability Most Likely 3 20 0.60 Institutional Little 1 15 0.15 Development

Overall Rating Successful 100 1.85

Overall Rating: HS = highly successful > 2.5 LS = less than successful 0.6 < LS < 1.6 S = successful 1.6 < S < 2.5 U = unsuccessful < 0.6

G. Assessment of ADB and Borrower Performance

63. The OEM reviewed the issue of ADB performance with both EAs and was able to validate the statements in both PCRs to the effect that ADB performance was satisfactory. However, in the Shenyang-Benxi Highway, ADB did not carry out a thorough economic appraisal of the project insofar as it did not appear to fully reassess the data and/or methodology used for the initial evaluation carried out by the State Planning Commission. This omission is all the more significant in light of the fact that the Shenyang-Benxi Highway did not form part of the NTHS, which carries the implication that the economics of the project were probably considered marginal at best at the outset (compared with the Jilin Expressway Project and other major ADB-financed highway projects that are classified as priority NTHS initiatives). ADB’s performance in both projects is rated satisfactory.

64. Jilin Expressway Project. The OEM concurs with the reasons given in the PCR assessment in support of a favorable performance of JPCD for the Jilin Expressway Project. The Project was implemented following the arrangements envisaged at appraisal and the civil works were completed within the budget and ahead of schedule. All other issues pertaining to contracting, land acquisition, and resettlement were reviewed by the OEM and found to be satisfactory. The corporatization initiative undertaken by JPCD is also successfully pursued, 19 notwithstanding the organizational complexity surrounding the apportioning of asset and liabilities among JPEC, JPEAB, and NECL (Appendix 3). The performance of the EA is therefore rated highly satisfactory.

65. Shenyang-Benxi Highway Project. The OEM confirmed that LPCD generally fulfilled its obligations during project implementation. Nonetheless, the OEM considers that the components alluded to in the PCR regarding the pavement management system and the information system developed under TA 1724-PRC were not well implemented by the EA. The EA performance is rated satisfactory.

VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A. Key Issues for the Future

66. Corporatization. Corporatization and the pursuit of full cost recovery policies of the expressway management bureaus constitute an outstanding issue that was not fully addressed in the two different approaches adopted by the provincial highway authorities reviewed. Corporatization of the Expressway Management Bureau in Jilin Province has proceeded more or less according to expectations, but notably absent in expressway planning is the tracking of toll rates and associated revenues geared toward full cost recovery of highway development costs. Though the NECL by all accounts was able to successfully leverage funding through asset securitization, this has been rendered possible in large measure through “creative” accounting practices that do not allow for transparency in assessing the real level of profitability of the expressways in consideration of the full economic costs of development. The first “wave” of expressway corporatization as demonstrated in the Jilin example was successful insofar as it allowed for the financials to look attractive based primarily on a partial, if not distorted, view of the asset/liability profile of the expressways.

67. It still remains to be seen, however, whether future expressways can be entirely self- financing under a corporatization formula where the expected financial return to capital would typically be in the order of magnitude of 15 percent or above. Actual FIRRs on the existing expressway network in Jilin Province currently hover in the 5-10 percent range and call into question the long-term viability of asset securitization as a means of mobilizing additional funding on a commercial basis for ongoing expressway construction requirements.

68. Corporatization has never taken off the ground in Liaoning Province for reasons mentioned in para. 32. Though it is admitted that corporatization is not in doubt, its implementation in the Liaoning context is not immediately obvious in light of the penalties associated with it (notably the corporate income tax), and the relative ease of raising debt capital for new expressway construction in that province in today’s capital markets.

B. Lessons Identified

69. The need for a proper appraisal methodology initially in the Shenyang-Benxi Highway Project constitutes an important lesson that was rectified in the ensuing TA for Jilin Province.

70. Pavement cracks and ice slab formation inside tunnels, which have occurred in the two project expressways, should call attention to improved and adapted road pavement design 20 when an expressway project is located in northern areas with low temperatures. As a minimum, expansion joints installed on the expressway pavement would be required to correct for thermal shrinkage during periods of severe cold weather.

71. There should be standard indicators for evaluating project economic and social impacts. For example, there were no indicators of railway traffic data either at project appraisal or at project completion, for both Changchun-Siping Expressway and Shenyang-Benxi Highway; nor was there any socioeconomic baseline survey against which to gauge discernible impacts on the welfare of beneficiaries attributable to the expressways’ operation.

72. In future expressway projects, noise should receive more attention in project design and construction. Suitable antinoise mitigating measures should be considered before project construction.

C. Follow-Up Actions

73. The PPAR team encountered a problem in collecting information for project evaluation. It is recommended that an expressway information system (database) be set up by both JPEC and LPEMB to store valuable data for future use. The information may include traffic data, axle loading, vehicle speed, road conditions, maintenance and rehabilitation history, meteorological conditions, budgets and actual expenditures, accidents, toll revenues, equipment conditions, and environmental information.

74. It appears that there is no proper pavement management system currently used for expressways. All maintenance activities (requirements and budget allocations) were all based on the highway engineer’s experience. A pavement management system, including equipment for data collection, should be introduced by JPEAB and LPEMB for expressways management and maintenance. The pavement management system that is currently used very well on the Shenyang-Benxi parallel Highway 304 should be implemented by LPCD on the corresponding project expressway with some modification. Under this system all maintenance activities such as maintenance requirements and budget allocations could be produced in a more coherent way.

75. Again, as noted in the PCR, weighbridges should be installed at toll stations to monitor vehicle axle loading. Implementation of this policy should rest with the respective PCDs, although responsibility for this issue currently falls under the jurisdiction of the Ministry of Security. The data collected could be used to review axle-loading policies and upgrade pavement maintenance and design criteria.

76. All of the above follow-up actions should be carried out within two years and be jointly monitored by the respective PCDs as well as the Transport and Communications Division East within ADB, responsible for lending on current expressway projects in Jilin Province.

21

APPENDIXES

Cited on Number Title Page (page, para.)

1 Project Cost Summary 19 3,14

2 Corporatization in Jilin and Liaoning Province 20 6,21 Road Sectors

3 Jilin Expressway Engineering Report 23 7,27

4 Shenyang-Benxi Highway Engineering Report 38 7,29

5 Financial Performance and Projections 44 8,32

6 Methodology for Economic and Financial Reevaluation 51 8,33 of the Jilin Expressway Project

7 Methodology for Economic and Financial Reevaluation 56 8,34 of the Shenyang-Benxi Highway Project

19 Appendix 1

PROJECT COST SUMMARY

Table A1.1: Jilin Expressway Project ($ million)

Appraisal Costs Actual Costs Foreign Local Total Foreign Local Total Component Exchange Currency Cost Exchange Currency Cost

Civil Works 95.1 148.4 243.5 111.7 127.0 238.7 Equipment 14.4 0.0 14.4 11.3 0.0 11.3 Land Acquisition/Relocation 0.0 45.9 45.9 0.0 25.6 25.6 Consulting Services 1.8 8.7 10.5 0.4 1.8 2.2 Overseas Training 0.6 0.0 0.6 0.2 0.0 0.2 Physical Contingencies 14.2 22.3 36.5 0.0 0.0 0.0 Price Escalation 8.9 44.3 53.2 0.0 0.0 0.0 Interest During Construction 18.9 0.0 18.9 13.0 0.0 13.0

Total 153.9 269.6 423.5 136.6 154.4 291.0

Table A1.2: Shenyang-Benxi Highway Project ($ million)

Appraisal Costs Actual Costs Foreign Local Total Foreign Local Total Item Exchange Currency Cost Exchange Currency Cost

A. Base Costs 1. Civil Works 40.3 65.8 106.1 67.8 103.6 169.4 a. Part 1 12.4 24.8 37.2 28.5 57.2 85.7 b. Part 2 27.9 41.0 68.9 39.3 44.4 83.7 2. Equipment 4.3 0.0 4.3 4.5 0.0 4.5 3. Land Acquisition 0.0 14.2 14.2 0.0 18.7 18.7 4. Consulting Services and Training 1.5 1.1 2.6 1.3 1.4 2.7

Subtotal 46.1 81.1 127.2 73.6 121.7 195.3

B. Contingencies 1. Physical 4.1 6.7 10.8 0.0 0.0 0.0 2. Price 6.0 15.9 21.9 0.0 0.0 0.0

Subtotal 10.1 22.6 32.7 0.0 0.0 0.0

C. IDC and Other Charges 6.1 0.0 6.1 6.1 0.0 6.1

Total 62.3 103.7 166.0 79.7 121.7 201.4

IDC = interest during construction. Source: Staff estimates.

Appendix 2, page 1

CORPORATIZATION IN JILIN AND LIAONING PROVINCE ROAD SECTORS

A. Jilin Province

1. With an ambitious program of expressway development, the maximum anticipated capacity of Jilin Provincial Communications Department's (JPCD’s) existing funding sources to meet the capital requirements capital would be insufficient. Recognizing this limitation, Jilin Provincial Expressway Corporation (JPEC) in conjunction with Heilongjiang Provincial Expressway Company and Huajian Transport Development Center (a company controlled by the Ministry of Communications [MOC]) sponsored and set up a new shareholding company, the North East Corporation, Ltd. (NECL), for the purpose of raising additional funds for new expressway development. Following its initial launching, NECL successfully raised Y1,179.35 million of capital through the financing modality of initial public offering with price/earnings ratio of 18.7 times, and listed it’s A-share on the Shanghai Stock Exchange in July 1999.

2. As one of the three sponsors and shareholder entities, JPEC injected the Changchun-Siping Expressway assets as equity. This involved separation of the expressway’s assets and liabilities so as to make NECL attractive to public investors. On the assets side, only Y1,336.50 million of the project assets, accounting for 56 percent of the total project capital costs, were regarded as “preferred” assets and injected into NECL, with the balance remaining with JPEC. On the liability side, some short-term borrowings were transferred to NECL, but the long-term Asian Development Bank (ADB) loan liability still remains with JPEC (with financial guarantee provided by JPCD). NECL is entitled to operate the expressway and receives 100 percent of the toll revenues, while JPEC is responsible for servicing the debt to ADB. Since JPEC is not an autonomous entity but is fully controlled and backed by JPCD, it is JPCD that has de facto responsibility for servicing the debt to ADB. Similar arrangements occurred for two expressways in Heilongjiang Province. The Huajian Transport Development Center, on the other hand, took MOC’s paid-in capital (which it regarded as Central Government grants before corporatization) in the three existing expressways as its equity injection to NECL.

3. Equity structures before and after shares were issued to the public as follows:

Table A2: Equity Structures Before and After Issuing Shares

Share Before Share After Shareholder (%) (%)

HPEC 40.09 30.18 JPEC 33.21 25.00 HTDC 26.70 20.09 Public 0.00 24.73

Total 100.00 100.00

HPEC = Heilongjiang Provincial Expressway Company, HTDC = Huajian Transport Development Center, JPEC = Jilin Provincial Expressway Corporation.

Appendix 2, page 2

4. After the share offering to the public, NECL had total assets of Y3.65 billion and total liabilities of Y1.07 billion, with a liability ratio of 29 percent.

5. With respect to new project development, corporatization in the Jilin road sector has been successful in raising additional funds and has thus contributed significantly to the goal of government road development. For a Provincial Communications Department facing a huge funding shortfall with limited recurrent revenues as well as poor liquidity, corporatization was an effective option for resolving funding shortfalls and ultimately contributing toward financing further expressway development.

B. Liaoning Province

6. At the time of project completion, Liaoning Provincial Communications Department (LPCD) planned to transfer the Shenyang-Dalian expressway to a new company and float shares on a stock exchange. However, the attempt failed and corporatization in the Liaoning road sector is still under discussion.

7. It is the Operations Evaluation Mission team’s understanding from interviews with the director of LPCD that there are no incentives for LPCD or the Liaoning Provincial Expressway Management Bureau (LPEMB) to corporatize the expressways in the near future, for these reasons:

(i) With the development of the provincial expressway network in the last 15 years, the province has virtually completed the major sections of the trunk network and is likely to achieve the target completion of the full primary expressway network by 2005. The expressways would link all major cities and ports within the province as well as link neighboring provinces along national trunk highway corridors. This implies that the capital funding requirements for expressways into the future will not be huge.

(ii) The existing LPCD recurring revenue sources form a solid base for new expressway construction. They include mainly annual maintenance fees, MOC annual allocations to the province, and toll revenues from existing expressways. Total annual revenue allocations received by LPCD amounted to Y2.6 billion in 1999. Of these, around one third was used for new projects as is the normal LPCD practice. As shown in LPEMB’s financial statements (Appendix 5), toll revenues from the five existing expressways reached nearly Y1 billion in 1999. Revenues are anticipated to increase significantly over the next six years with completion of the Shenyang-Shanhaiguan expressway (361 kilometers, six lanes), and cumulative toll revenues are estimated to be Y10 billion from 2000 to 2005. The operating incomes from expressway operations are earmarked mainly for new expressway development and debt servicing.

(iii) On the question of funding shortfalls, LPCD prefers to seek domestic bank loans, as loan conditions are favorable. At present, the interest rate for a 15-year domestic loan is 6.21 percent. With such a low interest rate, LPCD or LPEMB would not find other financing modalities obtainable through asset securitization nearly as attractive. Under current Government regulations, the minimum ratio of equity capital to total project capital costs is 35 percent. In this scenario— 35 percent capital from Central and provincial government grants (or Provincial Communications Department’s revenues) and the remaining 65 percent from a bank at interest rate of 6.21 percent over 15 years—the weighted cost of capital would be only 4

Appendix 2, page 3

percent, assuming the cost of the government grants to be zero. This scenario is certainly attractive and readily acceptable, as in the People’s Republic of China (PRC). Most expressways have financial internal rates of return (FIRRs) ranging from 5 percent to 10 percent. Given the balance of Y5.3 trillion household savings in bank deposits at end-1998 and lower rates of return on investment in general industrial projects, domestic banks in the province are very much interested in lending to expressway entities, particularly to those with proven experience in managing a network of revenue-generating expressways. Therefore, borrowing money from domestic banks represents a relatively easy and attractive source of capital for expressway entities in the PRC at present.

(iv) Under current tax regulations in the PRC, LPEMB as a government institution is not required to pay a 33 percent income tax. However, if LPEMB corporatized, it will be required to pay this tax, although a three-year exemption is possible.

8. From lessons learned in other provinces, LPCD believes that the modality of “one expressway, one company” would not constitute a wise option with respect to either financing or operating of the expressways. Thus, if corporatization eventuates, it would likely involve the whole expressway assets of LPEMB rather than the transfer of a stand-alone expressway to the newly formed corporation. Clearly, the plan of transferring Shenyang-Dalian expressway to a new company will not be pursued in the future.

9. Notwithstanding the above, it is PRC Government policy to transfer most of the government is directly controlled institutions to corporations or fully autonomous entities. Corporatization, thus, will remain the likely direction in the future for institutions such as LPEMB.

Appendix 4, page 1

SHENYANG-BENXI HIGHWAY ENGINEERING REPORT

A. Traffic Flow, Composition, Growth Rate, and Traffic Diversion on Shenyang-Benxi Highway and Highway 304

1. Analysis of information collected by the Operations Evaluation Mission (OEM) shows that average traffic flow in 1999 for the Shenyang-Taoxian, Taoxian-Benxi, and Benxi-Nanfen road sections were 12,703, 7,145, and 3,530 vehicles per day, respectively. The road section leading to the airport was the busiest. Traffic flow was very low on the hilly section between Benxi and Nanfen; the volume is only half of the Taoxian-Benxi section and about a fourth of the Shenyang-Taoxian section.

2. The parallel Highway 304 generates an even lower traffic count. The volume of highway traffic for the three road sections corresponding to Shenyang-Benxi Highway were 2,679, 3,341, and 1,741 vehicles per day, respectively. Traffic data also indicate that 83 percent or the majority of the vehicles take advantage of Shenyang-Benxi Highway between Shenyang and Taoxian while 67 percent of the total vehicles use the expressway on the Taoxian-Benxi section.

3. The revised traffic volume is much lower than the feasibility estimates. The difference ranges from 40 to 71 percent and varies from section to section. Actual traffic volumes for both Shenyang-Benxi Highway and Highway 304 also show erratic growth rates. The growth rate of traffic flow on the Taoxian-Benxi section along Shenyang-Benxi Highway was -2.9 percent in 1997, 17 percent in 1998, and 0.4 percent in 1999. Meanwhile, traffic growth on the Taoxian- Benxi section of Highway 304 was -60.6 percent in 1996, -1.7 percent in 1997, 43.4 percent in 1998, and -65.1 percent in 1999.

4. Officials of the Liaoning Provincial Communications Department (LPCD) informed the OEM that the Nanfen-Dandong expressway is currently under construction. The road is scheduled to open in 2002. Therefore, traffic flow on Shenyang-Benxi Highway before 2002 is seen to remain within current levels but with slight increases (e.g., 3.1 percent as given at the proposal). Beyond 2002, LPCD officials project traffic flow to increase significantly. The high growth period may be 3-4 years; thereafter growth rates will return to normal levels as given at project appraisal. On the other hand, growth in traffic flow for Highway 304 will remain the same except for the period between 2002 and 2004, during which zero percent growth rate is expected.

5. Field interviews with traffic engineers indicate that traffic diverted from Highway 304 to Shenyang-Benxi Highway was about 60 percent for the Taoxian-Benxi section and 40 percent for the Benxi-Nanfen. The project completion report concluded that the indicated traffic diversion rate was due to the fact that the expressway currently ends at Nanfen. Hence, only travelers with destinations from the provincial capital city to either Benxi or Nanfen would tend to use the expressway. The balance is accounted for by the diversion from the railway (due to Shenyang- Benxi Highway transport efficiency) and generated traffic due to improved road conditions.

6. Traffic data indicate that annual variations in traffic composition on Shenyang-Benxi Highway and Highway 304 were insignificant. Traffic on Shenyang-Benxi Highway (Taoxian- Benxi) in 1999 comprised 67 percent small, 24 percent medium-size, 9 percent large, and 0 percent extra large vehicles. For the Benxi-Nanfen section, there was a change between small and medium-size vehicles, which was 64 percent, 30 percent, 6 percent, and 0 percent, respectively.

Appendix 4, page 2

7. OEM's examination of traffic conditions along Shenyang-Benxi Highway and Highway 304, combined with discussions with local officials, confirmed that the opening of the expressway reduced congestion on the existing Highway 304.

B. Toll Rates, Charges, and Revenues for Shenyang-Benxi Highway

8. The toll rate for small, medium-size, and large vehicles in 1995 was Y0.25/kilometer (km), Y0.30/km, Y0.35/km, and Y1.00/km, respectively. By 1999, road tariffs had been increased by about 20 percent, 33 percent, 43 percent, and 30 percent, respectively (Table A4).

9. Total revenues from Shenyang-Benxi Highway were Y43.03 million for 1998 and Y73.29 million for 1999. Revenue growth in 1999 was high at about 28 percent. As is the case for Jilin, the revenues are highest in October for all the years observed because that month is a busy season in the northeast provinces. The lowest revenues are usually recorded in February, during the long holiday season.

C. Maintenance Budget, Actual Expenditure, and Projections of Future Expenses for Shenyang-Benxi Highway

10. The maintenance budget of Shenyang-Benxi Highway covers routine maintenance and operation, periodic maintenance and rehabilitation (M&R), and special maintenance. The routine maintenance budget covers the sealing of cracks, cleaning of pavements, cutting grass and shaping trees, cleaning drainage, patching of potholes, and the salaries of toll and maintenance staff, etc. Actual expenditure for the Taoxian-Benxi expressway was about Y6.4 million in 1998 and Y9.3 million in 1999. Actual expenditure for the Benxi-Nanfen expressway was about Y5.9 million in 1998 and Y8.8 million in 1999.

11. Periodic M&R activities include periodic surface treatment, overlay, and reconstruction. Both the Taoxian-Benxi and Benxi-Nanfen road sections of Shenyang-Benxi Highway will require overlays in 2006 and 2016 as estimated by the highway engineers of LPEMB. The budget for the overlay of the whole expressway is estimated to be Y100 million in 2006 and Y150 million in 2016. The total budget estimate of Y247.8 million covers the analysis period.

D. Maintenance Budget, Actual Expenditure, and Projections of Future Expenses for the Parallel Highway 304

12. Highway 304 is a national road that links Shenyang to the port city of Dandong. The total length of the highway between Taoxian and Nanfen is 90.4 km. Actual maintenance expenditures for the highway amounted Y0.73 million in 1998 and Y0.74 million in 1999.

Table A4: 1995 Toll Charges

Cumulative Small Vehicles Distance (up to 2.5 tons) (km) 89 85 74 60 51 46 40 28 10 — 89 30 30 25 20 20 15 15 10 5 Nanfen 79 30 30 20 20 15 15 10 5 Qiaotou 5 61 20 20 15 10 10 5 5 Benxi/Xiaopu 5 10 48 15 15 10 5 5 5 Xiangshan 5 10 15 43 15 15 10 5 5 Shiqiaozi 5 10 15 20 38 15 15 10 5 Bianniu 5 5 10 15 20 28 10 10 5 Yangqian 5 5 10 15 20 25 14 5 5 Taoxian 5 10 10 15 20 25 30 4 5 Gaoxinqu 5 10 15 15 20 25 30 35 — Hunhe/Shenyang 5 5 10 15 15 20 25 30 35 Express- 0 Medium-Size Vehicles way Start (2.5-7.0 tons)

Cumulative Large Vehicles Distance (7.0-15 tons) (km) 89 85 74 60 51 46 40 28 10 — 89 45 45 35 30 25 25 20 15 5 Nanfen 79 40 40 30 25 20 20 15 10 Qiaotou 15 61 30 30 25 15 10 10 5 Benxi/Xiaopu 20 35 48 25 25 15 10 5 5 Xiangshan 20 40 50 43 20 20 15 5 5 Shiqiaozi 10 25 45 60 38 20 20 10 5 Bianniu 5 15 30 50 65 28 15 15 5 Yangqian 15 20 25 45 65 80 14 10 10 Taoxian 20 30 35 45 60 85 95 4 5 Gaoxinqu 20 40 50 55 65 80 105 115 — Hunhe/Shenyang 5 20 40 50 55 65 80 105 115 Special 1 (15-39 tons)

Cumulative Special 2 (40-79 tons) Distance (km) 89 85 74 60 51 46 40 28 10 — 89 230 230 190 155 130 120 105 70 25 Nanfen 79 205 205 165 130 105 95 80 40 Qiaotou 50 61 165 165 125 90 65 50 35 Benxi/Xiaopu 85 135 48 125 125 90 50 25 15 Xiangshan 75 155 210 43 110 110 75 35 10 Shiqiaozi 30 105 185 240 38 100 100 60 25 Bianniu 20 50 125 210 260 28 75 75 35 Yangqian 50 80 100 180 260 310 14 40 40 Taoxian 75 125 145 175 250 335 385 4 5 Gaoxinqu 80 150 205 225 255 330 410 465 — Hunhe/Shenyang 10 80 150 205 225 255 330 410 465 Special 3 (80 tons or more)

Note: Toll charges from Taoxian International Airport in Shenyang to Nanfen (88 km) effective 1 January 1996. Source: Liaoning Provincial Communications Department.

Appendix 4, page 5

13. Because of traffic diversion from Highway 304 to Shenyang-Benxi Highway, traffic composition has changed, with more light and slow speed vehicles using Highway 304. This has led to lower highway maintenance than was formerly required, since the reduced traffic flow prolongs the life of the pavement. OEM interviews with highway engineers in the Liaoning Provincial Highway Administration Bureau revealed that the average pavement service life of 4- 6 years can be extended due to the traffic diversion. Projections of future highway M&R expenses are given in Appendix 7. The avoided maintenance expenditure in the analysis period is Y76.0 million.

5. Assessment of Shenyang-Benxi Highway Conditions

14. Shenyang-Benxi Highway was constructed to central Ministry of Communications' expressway design standards, considering both geometry and pavement design. Safety facilities include continuous crash barriers in the median strip and paved hard shoulders. Emergency telephones are found at regular intervals. Adequate road signs and hazard warning lights have been installed. In the two tunnels, emergency telephones are already installed, and the areas are under surveillance through closed circuit television. Ocular inspection of the tunnel control center confirmed that all facilities including the monitoring of air quality, control of tunnel lighting and ventilation, and recording of the number of vehicles passing through the tunnels are working well. The systems are controlled by computers with three shifts of teams of three workers, ensuring 24-hour coverage.

15. However, inspection of the tunnels found that one had a drainage problem. Part of the drainage system in the Dayu tunnel was blocked by ice, resulting in water spillage. Three water spill spots were noticed during the site visit. Spilled water on the pavement immediately became ice in cold weather, which resulted in the closure of one of the two lanes to traffic. The drainage problem occurred in the winter of 1999, the coldest winter in the last 50 years. The problem was reportedly due to cold weather, which destroyed the waterproof layer. However, the real reason has to be provided by the site testing results, which will be conducted further on in the current year.

16. The Taoxian-Benxi and Benxi-Nanfen road sections of Shenyang-Benxi Highway have been opened to traffic for at least five and three years, respectively. Pavement conditions during the site visit showed that some settlement has occurred along Shenyang-Benxi Highway and there was some slight surface unevenness on the Taoxian-Benxi section. Traverse cracks, 1- 2.0 centimeter wide at intervals of 15-20 m along the expressway were also observed. Traverse cracks, as explained in the PCR on the Jilin Expressway Project, are a common phenomenon in the cold northern provinces of the People’s Republic of China. They appear during the winter and fully close during the hot summer. The reason for this, as explained in the PCR, is thermal shrinkage of the base surface course.

17. The overall riding quality of Shenyang-Benxi Highway was good and its surface roughness, by the International Roughness Index, is estimated to be about 3.5 m/km (which is well within the allowable tolerance level) at the time of the site visit.

F. Assessment of Highway 304 Conditions

18. A site visit to the parallel Highway 304 was also conducted by the OEM. Information received from the Jilin Provincial Highway Administration Bureau through the China Pavement Management System and sites visit indicated that the highway is a dual carriageway with a length of about 90 km. The highway is well maintained and is in good condition. Traffic Appendix 4, page 6 comprises a mixture of cars, light and medium-size trucks, minibuses, pickups, motorcycles, tractors, and horse carts. Data analysis indicates that although traverse cracks, longitudinal cracks, and crocodile cracks exist on the surface, the pavement is considered in good condition in terms of the pavement distress ratio.1 The average distress ratio is about 4.0 and the average International Roughness Index is estimated to be less than 6 m/km.

1 Distress ratio = weighted cracks divided by the area surveyed in percent. Appendix 5, page 1

FINANCIAL PERFORMANCE AND PROJECTIONS

A. North East Corporation, Limited

1. The founding of the North East Corporation Ltd. (NECL) has resulted in splitting up the project expressway fixed assets and liabilities of Jilin Provincial Expressway Corporation (JPEC). NECL receives 100 percent of toll revenues, while JPEC is responsible for long-term debt servicing of the Asian Development Bank (ADB) loan. The Jilin Provincial Expressway Administration Bureau (JPEAB) assumes responsibility for operation and maintenance (O&M) of the expressway. NECL’s operations have been going on for only about half a year since its founding: consequently, its accounting records up to now are insufficient to produce a realistic financial profile. Moreover, JPEC is an entity responsible for carrying out routine management and operation works for development of new expressways. From a financial point of view, JPEC is a nonautonomous company and is akin to a planning branch of Jilin Provincial Communications Department (JPCD). Financing and debt serving are in point of fact the responsibility of JPCD. Because of this financial limitation, JPEC does not set up an accounting system and prepare financial statements as a conventional corporation would. Financial statements as required and submitted to ADB were prepared on pro forma basis and derived from accounts of JPEC, JPEAB, and JPCD. However, to assess the project expressway‘s financial performance and viability, financial statements are revised on a pro forma basis.

2. All components of the financial statements pertaining to NECL (Table A5.1), are updated up to 1999 by using the actual data on the expressway O&M as well as debt servicing.

3. Revenues from tolls from 1997 to 1999 increased significantly at an annual average growth rate of 39 percent and reached Y189.1 million in 1999. Although toll rates increased in 1998 by 40 percent for small vehicles and 11 percent for medium-size vehicles, the actual revenues of 1998 and 1999, were lower by 25 percent, and 6 percent, respectively compared with those projected at project completion. This reflects in large part the lower-than-estimated, actual traffic volume. In comparison with projections at appraisal, the actual toll revenue in 1999 was nearly 60 percent higher, representing higher toll rates achieved. From 2000 onward, toll revenues were adjusted on the basis of revised traffic forecasts, assuming constant toll rates.

4. The actual O&M costs were Y26.1 million in 1999, lower than the project completion report (PCR) estimate of Y34 million, but higher than the appraisal projection of Y21 million. The actual O&M costs grew at 36 percent annually in the last two years. Of the actual O&M costs, maintenance costs accounted for about one third in 1998 and half in 1999, and went up sharply at an annual growth rate of 234 percent in the last two years. The main reason for this is that, in 1998 the Ministry of Communications’ (MOC’s) new specifications on expressway maintenance were introduced in the expressway; thus, apart from conventional routine maintenance, the so-called special engineering (SE) was carried out annually since its introduction. In fact, actual expenses of SE in 1998 and 1999 exceeded conventional routine maintenance costs. SE allows for relatively costly works such as

Appendix 5, page 2 resealing, remarking, rehabilitation at specific locations or sections to be timely undertaken. The O&M costs for 2000-2005 were estimated to increase in line with half the growth rate, in toll revenue and local inflation rates, which were assumed to be 4 percent per annum from 2000 to 2002 and 6 percent per annum from 2003 to 2005.

5. From 1999, the project expressway was required to pay a business tax of an additional 5.73 percent applicable to gross revenues.

6. The expressway entity is entitled to operate the expressway for a concession period of 30 years and receives 100 percent net revenue through toll collection. Therefore, the depreciation rate of the expressway fixed assets, based on straight-line depreciation, is assumed to represent an average life of 30 years. From 1997, additional capital expenditures were incurred each year to secure and improve operation services. The economic life of these assets directly controlled by the Jilin Provincial Expressway Management Bureau was assumed to be 10 years. These assumptions are also roughly consistent with the guidelines promulgated by the Ministry of Finance and MOC on accounting management for expressway companies. From 2000 onward, capital expenditure was estimated at 10 percent of the previous year’s fixed assets directly controlled by JPEAB.

7. The exchange rate was projected to grow in line with the difference between domestic and international inflation.

8. Receivables were assumed to increase in line with growth in revenues, while cash was estimated to increase in line with growth in O&M costs.

9. Accounts payable and other liabilities were assumed to rise in line with domestic inflation.

10. The working ratios in the last three years were all below 15 percent and the projected financial statement shows this level will be maintained over the next five years. This suggests that the project expressway has been successfully operating at very low working costs and achieved high financial and operational performance levels. Debt servicing coverage ratios were higher than 1.47 from 1997 to 1999. The ratio will also be maintained this level in the future. The cash inflow from the expressway will be sufficient to pay for the interest and principal of the ADB loan as well as meet O&M expenses.

Appendix 5, page 3

B. Liaoning Provincial Expressway Management Bureau

11. The Liaoning Provincial Expressway Management Bureau (LPEMB) now operates and manages five expressways in Liaoning Province, namely: Shenyang-Dalian Expressway (375 kilometers [km]); Shenyang-Benxi (Nanfen) Expressway (89 km), including the project expressway; the Shenyang (Taoxian)-Benxi (Nanfen) section (75 km); Shenyang-Siping Expressway (160 km), including the ADB-financed Tieling-Siping section (110 km); the Shenyang ring road (83 km); and Shenyang-Shanhaiguan Expressway (361 km), including the ADB-financed Shenyang-Jinzhou section (191 km), which is scheduled to open to traffic in September 2000. The Jinzhou-Shanhaiguan section was opened to traffic in September 1999. At PCR, the last expressway was not considered, while the first one was assumed to transfer to a new company and thus was not taken into account from 1998 onward. With failure of the plan to transfer the Shenyang-Dalian Expressway to the new company and to float shares on a stock exchange, the five expressways were included in the financial portfolio of LPEMB.

12. All components of the financial statements are updated up to 1999 by using actual data on operation of the expressways as well as debt servicing (Table A5.2).

13. Revenues from tolls for the past eight years increased significantly. By the end of 1999, the total revenues reached Y952.5 million, reflecting the increasing number of expressways opened to traffic in Liaoning Province. Toll revenues gained on the project expressway accounted for 7.7 percent or Y73.3 million of the total revenues. It should be noted that the annual growth of revenues received from each of the fully operational expressways was generally higher than 15 percent in a normal operation year. From 2000 onward, growth rates of toll revenues from each expressway were assumed as follows: for the project expressway, growth rate was adjusted on the basis of revised traffic forecast; for Shenyang-Dalian Expressway, the rates were assumed to be 10 percent each year for 2000-2005 and 6 percent per annum from 2001 to 2004 (reflecting the impact of periodic maintenance on traffic); for the Shenyang ring road, the rate was assumed to be 12 percent per annum; for Shenyang-Siping Expressway, revenues were based on the projections by the LPEMB at PCR; and for Shenyang-Shanhaiguan Expressway, the rates were assumed based on forecasts in the feasibility study. The Government again raised toll rates on 1 March 2000; these rates were assumed to remain constant into the future.

14. The actual O&M costs reached Y303.9 million in 1999. Of that amount, maintenance costs accounted for about 73 percent in 1999, reflecting the contribution of the so-called SE. Apart from conventional routine maintenance, the SE is annually carried out; actual expenses of SE in recent years exceeded the costs of conventional routine maintenance. SE allows for relatively costly works such as resealing, remarking, and rehabilitation at specific locations or sections to be timely undertaken. The O&M costs for the period 2000-2005 were estimated to increase in line with half the

Appendix 5, page 4 growth rate in toll revenues and local inflation rates, which were assumed to be 4 percent per annum from 2000 to 2002 and 6 percent per annum from 2003 to 2005. In the meantime, the O&M cost of Shenyang-Shanhaiguan Expressway in 2000 was adjusted to reflect full operation of the expressway, while the routine maintenance cost of Shenyang-Dalian Expressway was deducted on the basis of the length of the sections with periodic maintenance for the years 2001-2004.

15. Periodic maintenance for Shenyang-Dalian Expressway has been scheduled from 2001-2004, with total costs estimated to be Y1,200 million. The annual cost expenditure was added to the item of capital expenditures in the financial statements.

16. All the infrastructure assets (the expressway) remain with the government except for Shenyang-Dalian Expressway, and are not reflected in LPEMB’s financial statements. Items shown as fixed assets represent only those assets directly controlled by LPEMB. Shenyang-Dalian Expressway assets were transferred to LPEMB in 1998. This shows in the items of fixed assets from 1998, and accumulated depreciation on the asset in the past years was retrieved and added to the items of accumulated depreciation in the balance sheet. Depreciation of fixed assets was estimated based on the guidelines promulgated by MOF and MOC on accounting management for expressway companies. From 2000 onward, normal capital expenditure was estimated at 10 percent of the previous year’s fixed assets directly controlled by LPEMB.

17. The exchange rate was projected to grow in line with the difference between domestic and international inflation.

18. Receivables were assumed to increase in line with growth in revenues, while cash was estimated to increase in line with half the growth in O&M costs.

19. Accounts payable and other liabilities were assumed to rise in line with domestic inflation.

20. The working ratios in the past years were all below 40 percent, and the projected financial statement shows this level would decline to the level of around 30 percent in the next five years. This suggests that LPEMB has successfully operated expressways at low working costs and achieved good financial and operational performance.

21. LPEMB is not directly responsible for loan repayment and debt servicing. However, it must determine whether revenues from tolls would be sufficient to cover operating expenses and debt servicing. Repayments for principal and interest of ADB loans borrowed for the three expressways were included in the financial statements. At present, the sole outstanding loan comes from ADB, as the government financed the balance of the capital costs for the expressways. Debt servicing coverage ratios were higher than 6 from 1997 to 1999, and would be down to 4 or above in the next five years (mainly due to more debts to be serviced). The cash inflow from expressway operations will be sufficient to pay for the interest and principal of ADB loans as well as to cover O&M expenses.

Appendix 6, page 1

METHODOLOGY FOR ECONOMIC AND FINANCIAL REEVALUATION OF THE JILIN EXPRESSWAY PROJECT

A. Methodology

1. The economic reevaluation of Changchun-Siping Expressway followed the methodology used at appraisal and project completion, comparing the with-Project and without-Project situations. The without-Project case consists of minimum improvements to the existing road to maintain minimum vehicle speed. The analysis period covers 23 years, 1994-2016, comprising 3 years of major construction and 20 full years of expressway operations.

B. Unit Costs and Vehicle Speeds

2. Data on vehicle operating cost (VOC) and time value were collected from both the Highway Design and Planning Institute and the Highway Research Institute (RIOH) of the central Ministry of Communications. The RIOH has carried out a research study on road user costs including VOC for various vehicle types and road conditions (gradient, curvature, and roughness), time value for working hours and nonworking hours, and road accidents. Based on the information gathered, unit VOC for each of the small, medium-size, large, and extra large vehicles was estimated for level and hilly terrain, and for both Changchun-Siping Expressway and Highway 102. The results indicate that, for level terrain, VOC values applied in the Liaoning project can be adopted in recalculating VOC for Jilin (Table A6.1).

3. Table A6.1 provides a reestimation of vehicle speeds for both the expressway and Highway 102 across four vehicle groups. The average car speed for the expressway is about 110 kilometer per hour (km/h), and all other vehicles travel at a speed less than 80 km/h. Cars traveling on the highway were observed with less than 50 km/h average speed, other vehicles had slightly lower speed. Travel times are calculated using vehicle speeds and road lengths. The average time saving is about 1.6 h for cars and 2.0 h for other vehicles.

4. Time values are reestimated at Y3.5/h for cars, Y2.5/h for buses, and Y1.8/h/ton for trucks. Average passenger occupancy is 3 and 10 for cars and buses, respectively. The average loading of trucks is about 3.5 tons per vehicle.

Table A6.1: Value of VOC, Time Value, and Time Saved Item VOC Value (Y/km) Car BusLight Heavy Trailer Highway 1.89 2.57 0.97 1.66 2.79 Expressway 1.22 1.50 0.61 1.06 1.73 Average Speed (km/h) Car Bus Light Heavy Trailer Expressway 110.00 80.00 80.00 80.00 70.00 Highway 50.00 40.00 40.00 40.00 35.00 Time saved 1.59 1.83 1.83 1.83 2.10 Time Value Car Bus Freight Trucks Time Value Y3.50/h Y2.50/h Y1.80/h/ton Average load 3 persons 10 persons 3.50 tons/vehicle VOC = vehicle operating cost.

Appendix 6, page 2

C. Costs

5. The economic cost of implementing the Project comprises the costs of initial construction, maintenance, and operation.

D. Benefits

6. Benefits derived from the Project include (i) savings in VOC for both diverted traffic and generated traffic (ii) avoided maintenance investments on Highway 102, (iii) savings in passenger and freight time costs, (iv) savings in VOC due to distance reduction, and (v) savings in time costs for the remaining vehicles using Highway 102 due to reduced traffic congestion.

7. The recalculation of VOC and time costs are based on a traffic diversion rate of 60 percent from Highway 102 as estimated by Jilin Provincial Expressway Administration Bureau traffic engineers. Major VOC savings are due to improvements in road roughness, geometry standards (grade and curvature), vehicle speed, engine efficiency at a free-flow condition, and distance reduction. Significant time saving has been realized from higher vehicle speeds on the expressway than on the highway. Time costs are calculated for working hours and nonworking hours. Working hours take about 50 percent of the whole. Unit time value for non-working hours are about 33 percent of the working hours unit time value. VOC savings for traffic diverted from the railroad and generated traffic are about 50 percent of the unit VOC savings, which agrees with estimates at project completion. VOC savings also came from generated and diverted traffic from the railroad, reflecting increases in transport efficiency. Time cost saving for the remaining vehicle traffic on the highway is calculated by considering cases with- and without- Project. Time saving for Highway 102 is insignificant, but cannot be ignored. Table A6.2 illustrates the VOC and time costs calculation for the expressway. Table A6.2: Saving in VOC and Time Costs (Y) Year Total Passenger Freight

1996 96 75 76 49 6 302 5,453 4,325 1997 558 499 503 360 36 1,955 36,903 29,407 1998 682 576 581 423 43 2,304 47,085 34,148 1999 773 771 779 537 54 2,914 63,860 44,999 2000 927 926 934 644 65 3,497 82,762 53,998 2001 1,067 1,064 1,074 741 75 4,021 102,791 62,098 2002 1,173 1,171 1,182 815 82 4,423 122,115 68,308 2003 1,291 1,288 1,300 897 91 4,866 145,073 75,139 2004 1,420 1,417 1,430 986 100 5,352 172,347 82,653 2005 1,562 1,559 1,573 1,085 110 5,888 204,748 90,918 2006 1,718 1,714 1,730 1,193 120 6,476 243,241 100,010 2007 1,840 1,836 1,853 1,278 129 6,936 281,352 107,111 2008 1,970 1,966 1,985 1,369 138 7,429 325,434 114,715 2009 2,110 2,106 2,126 1,466 148 7,956 376,423 122,860 2010 2,260 2,256 2,277 1,570 159 8,521 435,401 131,583 2011 2,420 2,416 2,438 1,682 170 9,126 503,619 140,926 2012 2,592 2,587 2,611 1,801 182 9,774 582,526 150,931 2013 2,776 2,771 2,797 1,929 195 10,468 673,796 161,648 2014 2,973 2,968 2,995 2,066 209 11,211 779,367 173,125 2015 3,185 3,178 3,208 2,213 223 12,007 901,478 185,416 2016 3,411 3,404 3,436 2,370 239 12,859 1,042,722 198,581 VOC = vehicle operating cost.

Appendix 6, page 3

E. Economic Internal Rate of Return

8. The recalculated economic internal rate of return (EIRR) for the expressway is 12.5 percent (Table A6.3) compared with 19.7 percent at appraisal and 21 percent at project completion. The primary factor responsible for the decline in the EIRR is the traffic flow. Actual traffic flow generated was lower than the estimate at appraisal and project completion (Appendix 3).

F. Financial Reevaluation

9. The financial internal rate of return (FIRR) of the project expressway was reevaluated using a with- and without-Project comparison. The major assumptions in calculating the FIRR are as follows:

(i) All components of the FIRR calculations were expressed in constant 1999 prices and covered the period from 1994 to 2016.

(ii) Capital costs reflect actual costs incurred.

(iii) Operation and maintenance (O&M) costs were based on actual costs up to 1999. From 2000 onward, the costs were assumed to increase in line with half the growth rate of toll revenues, reflecting additional expenses required rather than the impact of inflation. The incremental costs for O&M are in line with projected increases in traffic volume. Periodic maintenance was assumed to take place every 10 years and estimated to be Y2.15 million/km on the basis of the actual relevant costs incurred during construction.

(iv) Incremental revenues beyond those documented for 1994-1999 were based on the revised forecasts for traffic volume until 2016. Toll rates were assumed to remain at 2000 levels.

(v) Residual value was based on a 40-year economic life of the project assets.

10. The recalculated FIRR in 1999 constant prices is 10.4 percent (Table A6.4), compared with 6.2 percent at appraisal and 9.0 percent at project completion. The main reasons for the higher return are lower capital costs (in real term) and higher revenues in the future (mainly due to higher-than-initially anticipated increases in toll rates).

11. Sensitivity analysis of the FIRR was carried out to test the effects of possible unfavorable scenarios with respect to O&M costs and revenues. The result shows that the project is not very sensitive to changes in O&M costs, but is sensitive to changes in toll revenues (traffic volume and toll rates). Under the worse case scenario (combination of 10 percent increase in O&M costs and 10 percent reduction in revenues throughout the analysis period), the FIRR would decline to 8.9 percent.

Appendix 7, page 1

METHODOLOGY FOR ECONOMIC AND FINANCIAL REEVALUATION OF THE SHENYANG-BENXI HIGHWAY PROJECT

A. Methodology

1. The economic evaluation of Shenyang-Benxi Expressway followed the methodology used at appraisal and project completion, which compares the with-Project and without-Project situations. The without-Project case consists of minimum improvements to the existing road to maintain minimum vehicle speed. The economic analysis covers 25 years, 1992-2016, comprising 5 years of major construction and 20 full years of expressway operations.

B. Unit Costs and Vehicle Speeds

2. Data on vehicle operating costs (VOC) and value time were collected from both the Highway Design and Planning Institute and the Highway Research Institute (RIOH) under the central Ministry of Communications. The RIOH has in the past carried out a research study on road user costs including VOC for various vehicle types and road conditions (gradient, curvature, and roughness), time value for working hours and nonworking hours, and road accidents. Based on the information gathered, unit VOC for each of the small, medium-size, large, and extra large vehicles is estimated for level and hilly terrain for the expressway and the parallel Highway 304. The results indicate that, for both level and hilly terrain, VOC values applied at the time of project completion can still be used in reestimating VOC.

3. The average car speed along the Taoxian-Benxi road section of the expressway is estimated at about 110 kilometers per hour (km/h). All other vehicles traverse the road at a much lower speed of less than 80 km/h. On the other hand, cars traveling on Highway 304 were observed to run at 50 km/h on average, while other vehicles move at slightly lower than this speed. Travel times were recalculated using vehicle speeds and road lengths. The average time saving for cars is about 1.1 h and 1.3 h for other vehicles.

4. As in the case of Jilin Province, the average time values are reestimated at Y3.5/h for cars, Y2.5/h for buses, and Y1.8/h/ton for trucks. The average occupancy is 3 passengers for cars and 10 passengers for buses. The average loading of trucks is about 3.5 tons per vehicle.

C. Costs

5. The economic cost of implementing the Project comprises the costs of initial construction, maintenance, and operation.

D. Benefits

6. Benefits derived from the Project include (i) savings in VOC for both diverted traffic and generated traffic, (ii) avoided maintenance investments on Highway 304, (iii) savings in passenger and freight time costs, (iv) savings in VOC due to distance reduction, and (vi) savings in time costs for the remaining vehicles using Highway 304 due to reduced traffic congestion.

Appendix 7, page 2

7. The recalculation of the VOC and time costs is based on a traffic diversion rate of 60 and 40 percent for the Taoxian-Benxi and Benxi-Nanfen road sections, respectively, from Highway 304 as estimated by traffic engineers from Liaoning Provincial Expressway Administration Bureau. Major VOC savings are due to improvement in road roughness, geometry standards (grade and curvature), vehicle speed, engine efficiency at a free flow condition, and distance reduction. Significant time savings were generated from the higher vehicle speeds achieved on the expressway than on the highway. Time costs were calculated for working hours and nonworking hours. Working hours account for about 50 percent of the whole. Unit time value for nonworking hours is about 33 percent of the working hours unit time value. VOC savings for generated traffic and traffic diverted from the railroad reflect gains in transport efficiency. VOC savings for traffic diverted from the railroad and generated traffic are about 50 percent of the unit VOC savings, which agrees with estimates at project completion. Time costs savings (for vehicle traffic using Highway 304) due to reduced traffic congestion were recalculated considering the with-Project and without-Project scenarios. While time saving for Highway 304 is insignificant, it cannot be ignored.

E. Economic Internal Rate of Return

8. The recalculated economic internal rate of return (EIRR) for the expressway is 4.9 percent (Table A7.1) compared with 17.6 percent at appraisal and 13.6 percent at project completion. The primary factors responsible for the decline in the EIRR is actual traffic flow, which is lower than expected relative to estimates of both appraisal and project completion.

F. Financial Reevaluation

9. The financial internal rate of return (FIRR) of the project expressway was reevaluated using with- and without-Project comparison. The major assumptions in calculating the FIRR for the Project are as follows:

(i) All components of the FIRR calculations were expressed in constant 1999 prices and covered the period 1992-2016.

(ii) Capital costs reflect actual costs incurred.

(iii) Operation and maintenance (O&M) costs were based on actual costs up to 1999. From 2000 onward, the costs were assumed to increase in line with half the growth of revenue, reflecting additional expenses required rather than impact of inflation. The incremental costs for O&M are assumed because of anticipated higher traffic volumes. Periodic maintenance was assumed to take place every 10 years, or in 2004 and 2014 for the Shenyang (Taoxian)-Benxi section and in 2016 for the Benxi-Nanfen section. The periodic maintenance costs were estimated to be Y2.12 million/km on the basis of the actual relevant costs incurred during construction.

(iv) Incremental revenues beyond those documented for 1996-1999 are based on the revised forecasts for traffic volume until 2016. Toll rates are assumed to remain at 2000 levels.

(v) Residual value was based on a 40-year economic life of the project assets.

Appendix 7, page 3

10. The recalculated FIRR in 1999 constant prices is -0.5 percent (Table A7.2) compared with 9.0 percent at appraisal and 6.2 percent at project completion. The main reason for this lower return is the lower traffic volume count than that at projected at either appraisal or in the PCR. For instance, actual annual average daily traffic in 1999 was 5,365 vehicles per day for the Tiaoxian-Benxi section, which represents only 64 percent of the projected volume at appraisal and 58 percent of the PCR estimates for the same year.

11. Sensitivity analysis of the FIRR was carried out to test the effects of possible unfavorable scenarios with respect to O&M costs and revenues. The result shows that the Project is not very sensitive to changes in O&M costs, but is sensitive to changes in toll revenues. With a 10 percent reduction in revenues, the FIRR would decline to negative.

12. The financial analysis suggests that the Project is only marginally successful in terms of financial viability. The FIRR of -0.5 percent is lower than the 1.6 percent weighted average cost of capital (by assuming the cost of government equity to be zero). The Project’s FIRR very much depends on changes in toll revenues and, in turn, the traffic if toll charges are constant; a 10 percent increase in toll revenues would cause the FIRR to drop to zero, and a 43 percent increase in toll revenues would make the FIRR equal to the weighted average cost of capital of the Project—other factors being held constant.