Southern Gansu Roads Development Project

Report and Recommendation of the President to the Board of Directors

Project Number: 38174 November 2006

Proposed Loan People’s Republic of China: Southern Gansu Roads Development Project

CURRENCY EQUIVALENTS (as of 20 October 2006)

Currency Unit – yuan (CNY) CNY1.00 = $0.1264 $1.00 = CNY7.9102

The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00 = CNY8.02, the rate prevailing at project appraisal, was used.

ABBREVIATIONS

ADB – Asian Development Bank EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return FYP – five-year program GCHC – Gansu Changda Highway Company Limited GEPB – Gansu Environmental Protection Bureau GPCD – Gansu Provincial Communications Department GPG – Gansu provincial government ITS – intelligent transport system LIBOR – London interbank offered rate MOC – Ministry of Communications NH – national highway NTHS – national trunk highway system O&M – operation and maintenance PCU – passenger car unit PPMS – project performance management system PRC – People’s Republic of China RP – resettlement plan SDAP – Social Development Action Plan TA – technical assistance VOC – vehicle operating cost WACC – weighted average cost of capital

NOTES

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

Vice President C. Lawrence Greenwood, Jr., Operations Group 2 Director General H. S. Rao, East Asia Department (EARD) Director N. Rayner, Transport Division, EARD

Team leader X. Yang, Financial Specialist, EARD Team members S. Ferguson, Senior Resettlement Specialist, EARD K. Jraiw, Senior Transport Specialist, EARD Y. Li, Young Professional (Economist), EARD S. Noda, Project Specialist, EARD T. Oi, Social Development Specialist, EARD M. Ojiro, Principal Project Specialist, EARD X. Peng, Principal Counsel, Office of the General Counsel CONTENTS Page

LOAN AND PROJECT SUMMARY iii

MAPS

I. THE PROPOSAL 1

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

III. THE PROPOSED PROJECT 7 A. Impact and Outcome 7 B. Outputs 7 C. Special Features 7 D. Project Investment Plan 9 E. Financing Plan 9 F. Implementation Arrangements 10

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Traffic Forecast 13 B. Economic Analysis 13 C. Financial Analysis and Projections 13 D. Poverty Reduction and Social Strategy 14 E. Land Acquisition and Resettlement 15 F. Environmental Assessment and Management Plan 16 G. Risks 16

V. ASSURANCES 17

VI. RECOMMENDATION 20

APPENDIXES 1. Design and Monitoring Framework 21 2. Road Sector Analysis 24 3. External Assistance to the Road Sector 28 4. Rural Transport Services and Policy Reform 30 5. Road Safety and Vehicle Emissions 33 6. Rural Roads Improvement Program 35 7. Rural Road Maintenance 36 8. Detailed Cost Estimates by Financier 38 9. Implementation Schedule 39 10. Asian Development Bank-Financed Contract Packages 40 11. Monitoring of Socioeconomic and Poverty Impacts 41 12. Traffic Forecast 44 13. Economic Analysis 46 14. Financial Analysis and Projections 49 15. Summary Poverty Reduction and Social Strategy 54 16. Social Development Action Plan 56 ii

17. Small Business Development in the Project Area 58 18. Summary Resettlement Plan 59

SUPPLEMENTARY APPENDIXES

A. Draft Concession Framework Agreement B. Intelligent Transport System and Asset Management C. Organization Charts of Gansu Provincial Communications Department D. Procurement Plan E. Outline Terms of References for Consulting Services F. Financial Management Assessment G. Stakeholder Participation and Consultations H. Resettlement Plans

LOAN AND PROJECT SUMMARY

Borrower People's Republic of China (PRC)

Classification Targeting classification: General intervention Sector: Transport and communications Subsector: Roads and highways Theme: Sustainable economic growth Subthemes: Promoting economic efficiency and enabling markets, fostering physical infrastructure development

Environment Category A. An environmental impact assessment was Assessment undertaken, and the summary circulated to the Board and made public through the Asian Development Bank (ADB) website on 31 May 2006.

Project Description The Project is located in southern Gansu province, one of the poorest areas in the PRC. With a per capita gross domestic product 45% of the national average, Gansu ranks 30th among the 31 administrative areas. The Project is designed to promote sustainable economic growth by constructing an important section of the high-priority Lanzhou–Haikou corridor and improving the local road transport system. The Project will (i) provide an integrated road transport network in southern Gansu by constructing the 134 kilometer (km) Wudu–Guanzigou expressway and upgrading its associated 357 km rural roads, (ii) improve road transport services by constructing 200 township bus stations and pilot-testing the road transport action plan, and (iii) improve corporate governance and strengthen institutional capacity through providing consulting services and training.

Rationale Remote and isolated with harsh natural conditions, the project area suffers from inadequate road infrastructure, which is a major cause of the high incidence of poverty. Within this area, the focal prefecture of the Project (Longnan) has rural poverty incidence of 42%, and 84% of the population lives in rural areas. About 57% of the 169 townships do not have all-weather roads, while 24% of the 3,237 villages have no road access and 25% lack bus service. National Highway 212 is in poor condition, and provides the only substantial link to Sichuan province, and there are no rail lines or other non-road transport modes. Residents have limited mobility beyond their localities. It takes 10–16 hours to reach Lanzhou, Xi’an, Chengdu, and Chongqing because of poor and worsening road conditions. Despite the region’s economic potential, weak road infrastructure impedes socioeconomic development. The road transport network in southern Gansu needs to be improved to ease access to essential services and to link this poor, isolated region to economic growth centers.

The Project reflects the ADB road sector operational strategy for the PRC, which includes removing infrastructure constraints and supporting policy and institutional reforms. The Project supports the Government’s Western Region Development Strategy, which aims to improve the investment environment and living conditions. The project expressway will reduce the trip length by 50% (from 270 km to 134 km) and cut journey time by 75% (from 6.5–9.0 hours to 1.5–2.0 hours). In addition, project interventions in rural road upgrading, township bus station construction, road transport action plan pilot-testing and training of local transport authorities will improve the availability, affordability, and efficiency of the road transport system; increase accessibility; and reduce poverty and isolation.

Impact and Outcome The Project will help promote sustainable economic growth and reduce poverty in southern Gansu. It will develop an efficient, safe, and reliable road transport system. It will also improve rural people’s access to markets, income-earning opportunities, education and health services, and social activities.

The Project will (i) construct a 134-km toll expressway from Wudu to Guanzigou, (ii) upgrade 357 km of rural roads, (iii) construct 200 township bus stations, (iv) pilot-test a road transport action plan, (v) improve corporate governance, and (vi) strengthen institutional capacity by providing consulting services and training.

Project Investment Plan The investment cost of the Project is estimated at $1,660 million equivalent. Of the $300 million ADB loan, $20 million will finance rural roads and township bus stations. Financing Plan ($ million) Source Amount % Asian Development Bank 300.0 18.0 Bank of Communications 712.6 43.0 Ministry of Communications 332.0 20.0 Gansu Provincial Government 315.4 19.0 Total 1,660.0 100.0 Source: Asian Development Bank estimates.

A loan of $300 million from ADB’s ordinary capital resources will be provided under ADB’s London interbank offered rate (LIBOR)- based lending facility. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB’s LIBOR-based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft loan and project agreements.

Allocation and Relending The ADB loan proceeds will be made available by the Borrower to Terms the Gansu provincial government (GPG), which will onlend the loan proceeds to Gansu Changda Highway Company Limited

(GCHC) with the same financial terms and conditions as those of the ADB loan with GCHC bearing the interest rate variation and foreign exchange risks.

Period of Utilization Until 30 June 2012

Estimated Project 31 December 2011 Completion Date

Implementation Gansu Changda Highway Company Limited will be the Arrangements implementing agency responsible for the project expressway. The Gansu Provincial Communications Department will implement the rural road and transport service components.

Executing Agency Gansu Provincial Communications Department (GPCD)

Procurement Goods and services financed by the ADB loan will be procured in accordance with ADB’s Procurement Guidelines. Civil works for the expressway will be procured through international competitive bidding, and the civil works for the rural roads and township bus stations through national competitive bidding and shopping. Equipment will be procured through international competitive bidding. Advance procurement action for civil works, and retroactive financing for eligible expenditures related to civil works, estimated at $30 million, were approved on 24 May 2006.

Consulting Services The ADB loan will finance 56 person-months of international consulting services for construction supervision; provide expertise in structure engineering, traffic safety engineering, and road maintenance; and formulate a capacity development program. The international consultants will be recruited through a firm, based on full technical proposals using the quality- and cost- based selection method in accordance with ADB's Guidelines on the Use of Consultants. GPCD will engage and finance 7,600 person-months of national consulting services, including 350 for rural roads and transport services, to ensure proper design, supervision, and project management, as well as to train county communications bureau staff; 320 for environmental protection; and 30 for monitoring socioeconomic and poverty impacts. The national consultants will be recruited in accordance with government procedures acceptable to ADB.

Project Benefits and The expressway will take 5–7 hours off travel time and shorten Beneficiaries 136 km traveling distance between Wudu and Guanzigou. Improved rural roads will link villages to the higher levels of the road network and hence to the regional and national economy. Improved rural transport services will link rural households with the wider economy through passenger and other motor vehicles operating on those roads. A developed transport network will integrate poor, isolated regions with the centers of economic growth. The economic internal rate of return for the Project is

17.9%. The financial internal rate of return is 4.6%, which is higher than the real weighted average cost of capital. The Project will benefit about 4.6 million people, of whom almost 37% are poor.

The Project will directly benefit road users (e.g., passengers, traders, transport providers, and bus and truck operators), as well as labor, local economy and the private sector. The Project will help reduce traffic accidents, vehicle emissions, and traffic noise in the corridor. The Project will also boost tourism. Rural households are also important beneficiaries, and will benefit from increased incomes through better access to markets, off-farm opportunities, and also from better access to social services. It will create about 56,000 person-years of unskilled jobs during construction and 1,700 full-time jobs during operation. Over 60% of the unskilled jobs will be filled by the poor, with an estimated total of CNY200 million in wage payments annually during construction, and another CNY15 million of wage payments expected to go to the poor annually after start of project operation. The ability and skills of local communities will be greatly enhanced as a result of several years of employment in the project-related activities. The improved local transport system will enhance the local investment climate to attract more investment to the region and act as a catalyst for future investment.

Risks and Assumptions The Project has been formulated to reduce technical, economic, financial, safety, and social risks. The main technical risks are associated with the construction of 61 tunnels, including one that is 8 km in length. Consultants have reviewed the proposed design and construction methods, and prequalification of contractors will focus on their financial and technical capabilities in handling similar complex works. During construction, monitoring and contract management information systems will be set up to quickly identify technical problems and correct them. The contractors will be required to strictly enforce working safety rules and measures. GPCD has experience and has performed satisfactorily in internationally financed projects.

The financial risk associated with construction and operation of the expressway will depend on levels of traffic, the capital cost, and toll rates. To mitigate the financial risks, the GCHC will build up a commercial business environment for expressway operations, the Project will receive substantial injections of equity from central and provincial governments, and a market-oriented toll structure will be adopted. The Project has no major environmental, resettlement, or HIV/AIDS infection risks, and has mitigation and monitoring mechanisms in place. GPCD demonstrated a high level of ownership in preparing the resettlement plan, environmental impact assessment, and social action development plan.

Map 1

96 o 00'E 106 o 00'E

SOUTHERN GANSU ROADS DEVELOPMENT PROJECT IN THE PEOPLE'S REPUBLIC OF CHINA XINJIANG MONGOLIA UYGUR AUTONOMOUS REGION to U ru m q i N

INNER MONGOLIA 0 50 100 150 200

Kilometers Anxi 40 o 00'N Jinta 40 o 00'N Dunhuang Jiayuguan t o h h Yumen Jiuquan o Gaotai H Linze to Yinchuan Zhangye Minqin

Jinchang Minle NINGXIA Wuwei Gulang Jingtai GANSU Tongxin Huan Xian Jingyuan Baiyin to Xining Xifeng LANZHOU u n o a t u QINGHAI Pingliang o iy a a

Dingxi B T to Linxia o Luohandong t u Lintao ngzho DINGXI to Zhe TIANSHUI Xi'an Lintan Tianshui Baoji Minxian Lixian LONGNAN SHAANXI Chengxian Liangshui Zoige Wudu Wenxian Jiouzhaigou Aba Guanzigou Guangyuan M Wanyuan i n J j i i a a l Bazhong n i n g g

R j Project Area i . a n g Dazhou Provincial Capital Mianyang R Deyang . Wanxian Dege City/Town Dazhu . R Wenchuan Nanchong g n ADB-Financed Road a i CHENGDU j g HUBEI n Proposed Project Road Jianyang Suining a h SICHUAN T C u Expressway o ji a n

g H Ya'an R ADB-Financed Expressway under . Chongqing U Rongchang Construction Neijiang CHONGQING N Y a Luding A l Batang o Expressway under planning n Hanyuan Leshan Zigong N g j or Construction i a XIZANG n Luzhou g Shimian National Highway Yibin R

i v

Local Road r Junlian Xuyong r Railway Lugu e GUIZHOU v i o R o River g Zunyi 28 00'N n 28 00'N a i Xichang j Prefecture Boundary a h s n Dechang i Provincial Boundary J Guiyang International Boundary Miyi g Yanbian in m

Boundaries are not necessarily authoritative. n

K Panzhihua o t

YUNNAN 96 o 00'E 106 o 00'E

06-1809a HR Map 2

o XINJIANG 96 o 00'E MONGOLIA 106 o 00'E 105 00'E UYGUR AUTONOMOUS REGION

INNER MONGOLIA

o o SOUTHERN GANSU 40 00'N Yumen 40 00'N ROADS DEVELOPMENT PROJECT Zhangye

PROJECT EXPRESSWAY AND LOCAL ROADS Wuwei NINGXIA IN THE Baiyin PEOPLE'S REPUBLIC OF CHINA QINGHAI LANZHOU Pingliang

Dingxi SHAANXI Tianshui o o 34 00'N Wudu 34 00'N

o 96 00'E SICHUAN 106 o 00'E

to u o L h z in n ta to Lanzhou a o L to Qingshui Zhuoni D I N G X I Wushan Gangu Tianshui Minxian Beidao Honghe T I A N S H U I to Xi'an Yongxin 6 Lixian Diebu Yanchang Kuanchuan Kihe Xihe o Liangdang o 36 00'N Jiangluo 36 00'N Er'lang 1 5 Zhouqu L O N G N A N Huixian Changheba Chengxian 2 Sijiaba Wangguan Liangshui Wudu 3 Kangxian Baihegou SHAANXI Tianchi 4 Piba Ganjiangba to Jiouzhaigou 7 Zhaojiaba Yangba N Yuhe Wenxian

Guanzigou to 0 25 50 C h o n g q in Kilometers g

SICHUAN

Proposed Local Roads Provincial Capital Railway 1 Wudu-Lixian Prefecture Capital River 2 Sijiaba-Changheba City/Town County Boundary Baihegou-Wangguan 3 County Seat Prefecture Boundary 4 Zhaojiaba-Tianchi Project Expressway Provincial Boundary 5 Chengxian-Er'lang 6 Honghe-Kuanchuan Project Local Road International Boundary 7 Yangba-Ganjiangba Existing Highway Boundaries are not necessarily authoritative. Expressway under Construction Existing Local Road

o 105 00'E

06-1809b HR I. THE PROPOSAL

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

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

2. The PRC has made remarkable progress in economic growth and poverty reduction. Gross domestic product (GDP) has grown more than 9% per annum since the late 1970s, and the poverty incidence declined from 33.0% in 1990 to 13.4% in 2003.1 Yet, the fight against poverty is far from over. The living standards of hundreds of millions of people, particularly in the western region, need to be raised. The inadequate road network, road transport bottlenecks, and the resulting high transport costs and poor transport services are a major constraint on efficient, sustainable economic growth and poverty reduction.

3. The change in the economy’s structure and increasing diversification has resulted in a shift toward road transport.2 In 2005, the PRC had 31.8 million vehicle fleet (trucks, cars, and buses), and 11.5 million other motorized vehicles (mainly motor-tricycle and agricultural trucks). The privately owned fleet increased from 0.3 million vehicles in 1985 to 23.7 million in 2005, or 24% per year on average. Given the low number of vehicles (2.4) per 100 people, large investments in automotive manufacturing, and reduced tariffs following the PRC’s accession to the Word Trade Organization, the vehicle fleet will likely continue to grow rapidly. Economic growth and the rising share of road transport will continue to place heavy demands on the road network and intensify the need for capacity expansion in the coming years.

4. Despite the massive investment in road infrastructure,3 the road transport sector still constitutes a serious obstacle to sustainable economic growth, particularly in the western region. The total PRC road network reached 1.93 million kilometers (km) in 2005, of which 1.59 million km were classified.4 Expressways and class-I highways accounted for 4% of the total length, and class-II highways for about 13%, while 83% (highways in class-III and below) are medium- to low-grade paved roads and gravel roads. With only 20 km of roads per 100 km2, and 1.47 km per 1,000 inhabitants, road network density is still among lowest in the world. The road network is mainly concentrated in east PRC, where road density is 50 km per 100 km2. Providing basic road access in vast regions, particularly in the interior provinces where incomes are low, remains a challenge. Details of the road sector analysis are in Appendix 2.

5. The rural road network is underdeveloped in extent and quality; 38,426 villages, mostly in the western region, have no road access at all. Nearly 10,000 townships and 300,000 villages

1 The number of poor living below the international standard of $1 per day (in purchasing power parity terms), fell from 377.3 million in 1990 to 173.2 million in 2003. Over the last 20 years, the People’s Republic of China (PRC) alone has accounted for over 75% of poverty reduction in the developing world (ADB. 2006. Key Indicators. Available: www.adb.org/statistics). 2 From 1990 to 2005, road traffic’s share of passenger traffic grew by 8.8% per annum, reaching 929.2 billion passenger-kilometer (km), and of freight, by 6.4% per annum, reaching 869.3 billion ton-km. In 2005, road traffic accounted for 53.2% of the country’s total passenger traffic and 11.0% of the total freight traffic. 3 The total investment during the Tenth Five-Year Plan (FYP) reached CNY1,900 billion, more than double that in the previous 5 years. 4 About 1.58 million km of rural roads in poor condition were not considered in the official statistics because they did not meet certain Ministry of Communications (MOC) technological standards. 2 have no paved road access. Of the 1.56 million km of total rural roads, 80% are in class-IV and unclassified, and 60% have some level of gravel surfacing or are unpaved. Most rural roads lack bridges and drainage systems and are often closed during the rainy and winter seasons. As a result, many rural poor in the west reside in either partial or full isolation.

6. Over 90% of the poor in PRC live in rural areas. Improving rural roads has substantially reduced poverty. The Government has accelerated rural road construction to close the development gap between urban and rural areas.5 During the Tenth Five-Year Plan (10th FYP, 2001–2005), investment in rural roads totaled CNY418 billion, three times that in the previous 5 years. By 2010, all villages will have road access, and all townships will have paved roads. Paved roads will link all eastern villages, 88% of central villages, and 50% of western villages.

B. Analysis of Key Problems and Opportunities

1. Problems and Constraints

7. Despite rapid economic growth, development in different provinces has been imbalanced. In 2005, the GDP per capita of the western provinces was less than half that of the coastal provinces.6 The road network still does not provide adequate access to the poorer inland region; vast distances and difficult mountainous terrain isolate it from local, regional, and national markets. Most exports and imports reach major markets through other provinces, meaning that inter-provincial transport development is an important determinant of growth and development.

8. Gansu is on the upper reaches of the Yellow River in northwestern PRC.7 Remote and isolated with harsh natural conditions, it is one of the least developed provinces. With a per capita GDP of CNY6,135 (45% of the national average), Gansu ranked 30th among the 31 administrative areas. Annual per capita rural income was CNY1,980, or 61% of the national average of CNY3,255. Of the population of 26.0 million, 7.6 million are poor, defined as living below the Government low-income line of CNY852 per capita per year (which is below the international poverty line of $1 per person per day). Rural poverty incidence in Gansu is 40%.

9. Inadequate infrastructure is the main reason for Gansu’s high poverty. Gansu’s road density is 9.1 km per 100 km2, significantly lower than the national average (20.0 km per 100 m2). The focal prefecture of the Project (Longnan) is isolated, suffers from poor infrastructure, and has only road transport. No expressway, class-I road, airport, or railway links Longnan to the outside world. It takes 10–16 hours to reach Lanzhou, Xi’an, Chengdu, and Chongqing. National Highway (NH) 212—a combination of class-II (8 km), class-III (180 km), and class-IV roads (82 km)—provides the only substantial link to Sichuan. Constructed in 1958, it is narrow with steep slopes, sharp turns, and low speed with certain sections impassible during the rainy and winter seasons. Traffic congestion is growing and will exceed the road’s capacity on several stretches by 2012. Residents have limited mobility beyond their localities because of higher transport costs. Poor access to transport constraints economic and social development and contributes to poverty.

5 In 2005, the annual per capita net income of rural households was CNY3,255 ($402), while the annual per capita disposable income of urban households was CNY10,493 ($1,306), three times more than that of rural households. 6 The average per capita gross domestic product (GDP) in 12 western administrative areas was about 47% the east PRC. 7 Gansu is landlocked, surrounded by Shaanxi in the east, Qinghai and Xinjiang in the west, Sichuan in the south, and Inner Mongolia and Mongolia in the north (Map 1).

10. Poor roads have led to inadequate and costly transport services in the project area. In Longnan, 820 villages have no direct access to bus services as bus operators are unwilling to use bad roads because of high costs and danger. Transport demand is usually met by various informal transport services such as motorized tricycles and dual-purpose pickups. Formal bus services are of better quality, but suffer from low rates of vehicle utilization, resulting in relatively high unit costs. To sell their products, the rural poor often rely on traders who purchase farmers’ goods directly in the villages but at prices well below those in urban markets. The technical assistance survey indicated that 75% of local farmers sell their livestock at farm-gate prices.8

2. Government and Asian Development Bank Strategies

11. The Government development strategy has shifted to the western region and rural areas to promote balanced growth.9 In the road sector, it will do the following: (i) Construct the national expressway network totaling 85,000 km to expand the national trunk highway system (NTHS) to link all cities with over 200,000 people. Much of this new construction directly supports the Western Region Development Strategy (a key theme of the 10th and 11th FYPs). (ii) Improve rural roads, with emphasis on rural road maintenance and rural transport service to ensure sustainability and efficiency. (iii) Promote regional cooperation. The Ministry of Communications (MOC) is investing in the road sector to (i) close network gaps in the western region, (ii) divert central budget (e.g., vehicle purchase tax) to the rural transport system, and (iii) formulate a rural road development framework to attract all sources of funding for rural road improvement.

12. ADB’s operational strategy in the PRC’s road sector gives high priority to removing infrastructure constraints and supporting policy and institutional reforms. ADB supports (i) building roads that connect major growth centers, and improving access in the western and central regions; (ii) integrating the network so that the NTHS is supported by a system of local roads, particularly those that provide access to poor areas; (iii) promoting road safety and reducing vehicle emissions; (iv) strengthening the corporatization and commercialization of expressway organizations; (v) adopting appropriate pricing policies to ensure optimum use of road transport capacity; and (vi) using alternative methods of investment financing, including private sector participation. ADB road sector assistance targets the poor western provinces. The Project is consistent with the PRC’s development priorities and ADB’s strategy.

3. Opportunities

13. The expressway from Liangshui town in Wudu (capital of Longnan [Map 2]) to Guangzigou (border with Sichuan) is an important section of the Lanzhou–Haikou national high- priority western corridor (2,570 km). The project expressway will eventually connect Gansu to the southern seaports of Beihai and Fangcheng in Guangxi, and Haikou in Hainan province, by traversing the poor interior provinces of Gansu, Sichuan, Guizhou, and Guangxi, and Chongqing municipality. The Project will promote inter-provincial trade integration and cooperation, provide better business opportunities, and stimulate economic growth within the project area, and between rural and large urban areas, thereby reducing regional disparities.

8 ADB. 2005. Technical Assistance to the People’s Republic of China for Preparing the Western Roads Development Project. Manila. 9 Sustained, rapid growth is a priority in the Government’s 11th FYP (which, unlike the 10th FYP, is a “program” rather than a “plan” as it avoids specific targets). Also important is creating a more harmonious society, reducing income inequalities, strengthening human resources, protecting the environment, and cushioning the social impacts of development.

14. Several studies and much evidence confirm that transport development reduces poverty and affirm the relevance of ADB’s strategy.10 The Project will upgrade rural roads and build township bus stations to connect poor rural areas to main artery roads. The integrated approach will largely remove the barriers to accessibility and foster growth.

15. The project area is predominantly agricultural. Food crops include wheat, maize, potatoes, and buckwheat. The area has more rain than the rest of Gansu, and the mild and slightly humid weather is good for certain cash crops, including Sichuan pepper, olive oil, fruits, walnuts, and medicinal herbs. Longnan possesses minerals (such as lead and zinc) and forests, and has the potential for ecological tourism. The main strategy for poverty reduction is economic diversification into cash crops, tourism, and establishment of industries, including agroprocessing and mineral production. Improved road transport will increase the production and export of mineral products, reduce the transport cost for cash crops, and promote tourism.

16. External assistance to the road sector has come mainly from ADB, the Japan Bank for International Cooperation, and the World Bank. Since 1991, ADB has extended 33 loans totaling $6.6 billion to finance 4,455 km of expressways and 8,964 km of associated local road networks. Of the ADB-funded projects, 18 have already been completed and are open to traffic. ADB has also supplied 60 technical assistance (TA) projects totaling $32 million to the road sector. The advisory TA projects have addressed policy and institutional issues, including highway planning, road safety, human resource development, socioeconomic assessment, transport pricing, and mobilization of nongovernment financial resources. The World Bank and JBIC have provided about $7.1 billion and ¥219 billion, respectively, to finance road investments. ADB coordinates with both these organizations to ensure that each major development partner focuses on different corridors, and information related to policy advice is shared across the development community (Appendix 3).

4. Lessons Learned

17. The assessment of ADB’s operation portfolio in the PRC road sector highlighted a high level of performance, both in efficacy and effectiveness.11 Project completion reports prepared for 18 road projects concluded that 17 were highly or generally successful and 1 partly successful (Appendix 3). The Gansu Provincial Communications Department (GPCD) has implemented three externally financed road projects well and without major problems.12 While the overall performance of highway projects is by and large satisfactory, a number of the most recent issues have been identified for consideration in the project design, including (i) insufficient geological investigation, leading to problems with tunnel construction; (ii) deficient resettlement planning and implementation;13 and (iii) insufficient reporting on project benefit monitoring and evaluation.

10 ADB. 2000. Technical Assistance for Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction. Manila; ADB. 2001. A Study of Rural Asia. Manila; The Quality of Life in Rural Asia. New York: Oxford University Press; ADB. 2005. Project Completion Report on the Southern Yunnan Roads Development Project in the People’s Republic of China. Manila; and Hajj, Hatim, and V. Setty Pendakure. 2000. Roads Improvement for Poverty Alleviation in China. Working Paper No. 1. Transport Sector Unit. East Asia and Pacific Region. Washington, DC: World Bank. 11 ADB. 1998. Country Assistance Program Evaluation; ADB. 2001. PRC Procurement Review 2001. Manila; and ADB. 2002. PRC Portfolio Performance Review in the Road Sector. Manila. 12 Tri-Provincial Highway Project financed by the World Bank (completed in 2002), Gansu Highway Construction Project (Liuzhaike–Baiyin Expressway) financed by JBIC (completed in 2005), and ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of China for the Gansu Road Development Project. Manila (construction started in 2005). 13 Some problems during resettlement were not resolved on time, so resettlement monitoring, reporting, and supervision must be strengthened to identify and quickly resolve issues.

18. To reduce the engineering risks, complementary geological and soil investigations are being undertaken during the design stage. A tunnel specialist was engaged during project preparation and confirmed that the design of tunnels generally conforms to MOC standards. Specific measures will be undertaken to mitigate the risks (para. 65). The Project will train domestic tunnel experts. As for resettlement, (i) ADB explained its safeguard requirements to the agencies early in project preparation, (ii) GPCD established the project resettlement organizations during the feasibility study stage to carry out comprehensive field surveys to prepare the resettlement plan, (iii) consultations with affected villagers started at the beginning of project preparation to reflect their concerns, and (iv) an external monitoring agency will monitor resettlement. To make benefit monitoring more effective and efficient, dialogues were held with a few key representative communities in the project area, baseline indicators were established, and monitoring indicators and measures were agreed with GPCD (para. 48).

5. Policy Dialogue

19. Policy Reform in Road Transport. Efficient transport services are as important as improving infrastructure to ensure that project benefits are passed on to road users at reduced cost. Gansu was selected as a case study in the recently completed ADB TA on policy reform in road transport.14 The TA reviewed issues in road freight and passenger transport and prepared a road transport action plan, recommending policy and regulatory measures to improve efficiency, such as easing bus fare control and bus route selection. As part of the Project, GPCD agreed to pilot-test some of the recommendations in Longnan. Experience from the pilot test will be replicated in other areas to enhance the impact of the physical infrastructure improvement under the Project (Appendix 4).

20. Promoting Corporate Governance. Gansu Changda Highway Company Limited (GCHC) was established on 16 February 2001 to construct and operate the first World Bank- financed highway. The registered capital of GCHC was CNY500 million. It has been an implementing agency for three internationally financed road projects, including the ongoing project financed by ADB. It will also be the implementing agency for the project expressway. GCHC has the corporate governance structure required by the Company Law and follows corporate governance practices acceptable to international financial institutes. To help achieve sound corporate governance standards, GPCD and GCHC will enter into a concession framework agreement by 30 September 2007 before project construction starts (Supplementary Appendix A). 15 The agreement will ensure autonomy of operations, encourage the establishment of performance indicators, and facilitate contracting out of operation and maintenance (O&M). GCHC will prepare a corporate development plan by 31 December 2008 to assure a high standard of corporate governance, management, financial reporting, and human resource development. The Project will train GCHC staff members to promote and strengthen corporate governance.

21. Facilitating Private Sector Participation. The private sector has been involved in the road sector through cooperative joint ventures, securitization through initial public offerings, revenue bond financing,16 and build-operate-transfer projects. In Gansu, its participation in road development, financing, and management remains embryonic, mainly because low traffic volumes and potential toll revenues are not financially attractive. However, GPCD is encouraging private sector participation in the road sector, and some potential private investors

14 ADB. 2004. Technical Assistance to the People’s Republic of China for Policy Reform in Road Transport. Manila. 15 The agreement to be signed will include ADB’s Gansu Roads Development Project and this Project. 16 Involving the sale of rated notes to institutional investors, accompanied by a pledge of an entity’s cash-flow sources, which could include toll road net revenues.

6 have shown interest. 17 Private sector financing options, including contracting out project expressway O&M, will be examined before project operations.

22. Promoting Road Safety. Road safety is a serious issue in the PRC; the fatality rate was 45 per 10,000 vehicles in 2004. The Road Traffic Safety Law took effect in May 2004. An inter- ministerial committee coordinated by MOC, involving 15 ministries, was established in May 2004 to develop and implement special measures to enforce regulations on overloaded trucks. The fatality rate gradually improved to 31 per 10,000 vehicles in 2005, which is still very high by international standards. The Project will (i) establish an inter-agency road safety committee in Gansu to facilitate project implementation; (ii) ensure, in collaboration with Gansu Public Security Bureau, a team of bureau personnel will patrol the project roads; (iii) adopt specific safety facilities, such as emergency stop lanes, reinforced pavement in tunnels, and reinforced traffic signaling; (iv) conduct independent road safety audits during design, construction and before start of operation; (v) install axle-weighing stations at expressway entrances; (vi) establish a traffic surveillance center to monitor operations; and (vii) raise public awareness and disseminate road safety knowledge by linking the GPCD website with the ADB road safety website. As part of the Project, a risk management plan will be prepared (Appendix 5).

23. Controlling Vehicle Emissions. With vehicles rapidly increasing, the Government has taken measures to control vehicle emissions, including regulating the automobile industry, and requiring an annual vehicle test, inspection, and maintenance program. The new measures set emission and fuel-efficiency targets, and offer tax incentives to manufacturers for production of more environmentally friendly cars. GPCD will (i) encourage gas stations along the expressway to provide clean fuels such as compressed natural gas, liquefied natural gas and reformulated gasoline in addition to normal gasolines, (ii) engage a qualified environmental monitoring institute to monitor ambient air quality along the expressway, and (iii) conduct a capacity- building and training program. Because of faster and shorter travel, when the project expressway opens in 2012, hydrocarbons, carbon monoxide, and nitrogen oxide emissions from vehicles are estimated to be at least 20% lower than without the Project (Appendix 5).

6. Rationale

24. Constraints and Opportunities. Rural poverty incidence in Longnan is 42%. Roads are the only transport mode in Longnan. Roads and transport services are underdeveloped, which is a major cause of poverty. This transport bottleneck needs to be removed to facilitate moving goods and people between rural and urban areas and between Gansu and Sichuan and beyond. The Project, a priority investment in the 11th FYP, will integrate the region with the centers of economic growth (Lanzhou, Xi’an, Chongqing, and Chengdu).18

25. Project Alternatives Considered. The option of constructing a road of lower technical class instead of the project expressway was considered but rejected for the following reasons: (i) The only road classes with the capacity to carry traffic up to 2020 are four-lane expressways or four-lane class-I roads; after 2020, an expressway standard would be required. (ii) The major difference between the expressway and class-I according to MOC design standard is that class-I may be only partly access-controlled whereas expressway class must be fully access-

17 GPCD has offered, for construction either as joint ventures or build-operate-transfer projects, three planned expressways as well as eight existing expressways for operation (toll right transfer). 18 In Sichuan, the project expressway will connect the planned expressway from Guanzigou to Guanguan (56 km, target completion: 2012). In Gansu, it will connect to the Minxian–Wudu (159 km) and Lintao–Minxian (156 km) sections (target completion: 2015). The Lintao–Lanzhou section has opened to traffic. Upon completion of the Project, it will connect people along the expressway to Lanzhou through class-II and above highways in Gansu.

7 controlled. Thus, the construction costs for the two options differ only in the number and types of access control by overpass or grade separation, which accounts for only 2.5% of the total cost. (iii) Reducing access control and grade separation reduces capacity and safety. Three alternative alignments were also studied and compared from technical, economic, social, environmental, and resettlement aspects. The proposed alignment has obvious advantages and was therefore selected. Further, rural roads and township bus stations were selected carefully from the 11th FYP.

26. Value Added by ADB. In addition to financing, ADB involvement would (i) strengthen GPCD and GCHC in institutional arrangement, human resource development, sound corporate governance, road maintenance, and management of sector externalities (safety, environment, and social dimensions); (ii) integrate rural roads that connect the national high-priority corridor and rural poor areas, supporting the Government’s “new countryside development” initiative; (iii) enhance social assessment of road transport design and implementation; and (iv) accelerate policy reforms to improve road transport services.

III. THE PROPOSED PROJECT

A. Impact and Outcome

27. The Project will promote sustainable economic growth and reduce poverty in southern Gansu. It will develop an efficient, safe, and reliable road transport system. The proposed expressway with the total length of 134 km will reduce the trip length from Wudu to Guanzigou by 136 km, and resulting of time savings of at least 5 to 7 hours. It will also improve rural access to markets, income-earning opportunities, education and health services, and social activities.

B. Outputs

28. The Project will (i) build a 134-km four-lane access-controlled toll expressway between Wudu and Guanzigou, and its tunnels (including one that is 8 km), bridges, interchanges with toll stations, connector roads, administrative stations, and service areas; (ii) upgrade 357 km of rural roads to improve access to 27 townships and 275 villages in poor areas; (iii) build 200 township bus stations to provide new bus services; (iv) improve transport services by pilot- testing a road transport action plan in Longnan; (v) promote corporate governance; and (vi) strengthen local transport authorities in construction supervision, road safety, asset management, and project management by providing consulting services and training.

C. Special Features

29. Enhancing Accessibility to Low-Income Areas. Lack of roads feeding into the main road networks has been identified as a serious constraint on economic development and poverty reduction in the project area. The Project includes a rural road improvement program, comprising seven road sections totaling 357 km, linking 27 townships and 275 villages. Rural roads were selected on the basis of road network efficiency, economic potential, and the surrounding poverty incidence and population density. These roads will connect to the expressway through the road network system. About 763,000 rural people, of whom 52% are poor, will directly benefit.

30. The rural roads will (i) be upgraded to classes-III–IV; (ii) use the MOC technical standards and follow national competitive bidding procedures that are acceptable to ADB; (iii) follow ADB’s social safeguard policies; and (iv) be monitored and evaluated to ensure proper design, supervision, and impact monitoring. Planning, improvement, and maintenance

8 will be highly consultative. Of the ADB loan, $15 million will finance the upgrading of the Wudu– Lixian section from unclassified or earth track to class-III or class-IV. The upgrading will include improved road subgrade, sealed pavement and improved drainage, rehabilitation of bridges, culverts, and traffic safety facilities. The improved road will reduce the distance from Wudu to Lixian by 23 km (from 164 km to 141 km), not only providing the shortest route for traffic from Tianshui, the second largest city in Gansu, to Wudu and beyond, but also improving transport services and stimulating other socioeconomic activities (Appendix 6).

31. Improving Rural Transport Service. Rural transport services are underdeveloped in Gansu. In Longnan, 129 townships do not have any bus stations. Currently, passengers board buses on roadsides or at temporary stops which is highly unsafe. The bus service is informal, charges are irregular and sometimes exorbitant, and the frequency is uncertain. The Project will build 200 township bus stations: 100 in Longnan, 50 in Tianshui, and 50 in Dingxi. The total investment is estimated at $10 million, of which $5 million will be funded from the ADB loan. The improved bus stations and rural roads will provide a more reliable, safe, convenient and regular bus service to the local residents. New and improved rural transport services will help the rural people raise their income (Appendix 4).

32. Sustaining Rural Road Maintenance. Building on new national policy for funding and managing rural road maintenance announced by the State Council in October 2005, GPCD has prepared a provincial regulation and submitted it to the Gansu provincial government (GPG) for approval. Under the Project, a rural road maintenance plan was prepared and agreed with GPCD to strengthen the sustainability of the rural network in the project area by (i) developing a functional core rural road network as a base for establishing a road maintenance management system and assigning priorities and budgets; (ii) compiling road inventories and basic-condition data, and assigning a sub-network manager for each road; (iii) enhancing rural road safety facilities in the mountainous region; (iv) preparing a rural road maintenance manual by the international consultant and providing on-the-job training to sub-network managers, small maintenance companies, and communities; (v) conducting a 200 person-months training program for sub-network managers during project implementation; (vi) improving the efficiency of use of existing funds; and (vii) promoting preventive maintenance, including control of overloading vehicles and timely maintenance during the rainy and winter seasons (Appendix 7).

33. Tendering for Road Maintenance. The Project will improve road maintenance operations by conducting competitive bidding for road maintenance with private sector participation. Maintenance works were previously done by GPCD through force account. For the sake of efficiency, the Project will develop standard bidding documents for procurement of performance-based road maintenance contracts with the help of international consultants. Private sector participation in bidding for road maintenance will enhance competition and improve quality (Appendix 7).

34. Adopting an Intelligent Transport System. An intelligent transport system (ITS)19 on expressways is being introduced in accordance with the national ITS architecture prepared by the National ITS Center. ITS objectives in Gansu during the 11th FYP are to (i) introduce a network-wide expressway tolling system; (ii) reduce toll payment delay; (iii) improve safety through better monitoring; (iv) improve traveler information; (v) assist in emergencies; and (vi) improve traffic enforcement, infrastructure maintenance, and computerized management of serious incidents. ITS equipment and training will be provided under the Project with the help of consulting services, including (i) integrated traffic control centers; (ii) advanced toll payment;

19 The application of information technology to transport is referred to as ITS, which provides the ability to gather, organize, analyze, use, and share information about transport systems and their efficient use.

(iii) variable message displays; (iv) use of surveillance technology; (v) detection of blackspot locations and weather conditions; and (vi) monitoring of speed limit, overloaded vehicles, toll payment, and road safety. The ITS will produce key monitoring reports, such as traffic composition and number of road accidents (Supplementary Appendix B).

35. Developing Asset Management. Proper asset management is fundamental to ensure road sustainability. During the project implementation, GPCD will prepare an asset management development plan, which will establish a computerized database system and promote the use of modern equipment, and provide a training program for provincial, county, and township employees. GPCD will assign the Gansu Communications Technical Vocational College to develop a training program to improve road asset management skills with the help of international consultants. Equipment for the computerized system is included in the project scope and will be financed by the Project (Supplementary Appendix B).

D. Project Investment Plan

36. The project investment cost is estimated at $1,660 million equivalent, including contingencies, interest, and other charges during construction (Appendix 8).

Table 1: Project Investment Plan ($ million) Item Amountsa A. Base Costsb 1. Expressway Civil Works 1,047.90 2. Equipment 26.7 3. Land Acquisition and Resettlement 48.3 4. Consulting Services, Training, and Project Management 78.4 5. Rural Roads and Township Bus Stations 39.2 Subtotal (A) 1,240.5 B. Contingenciesc 221.9 C. Financing Charges during Constructiond 197.6 Total (A+B+C) 1,660.0 a Includes taxes. b In 2006 prices. c Physical contingencies are computed at 10.0%. Price contingencies computed at 1.9% per year for foreign exchange costs, and at 3% per year for local currency costs. d Includes interest, commitment charges. Interest during construction has been computed at the 5-year forward London interbank offered rate plus a spread of 0.6%. Source: Asian Development Bank estimates.

E. Financing Plan

37. The Government has requested a loan of $300 million from ADB’s ordinary capital resources to help finance the Project. The Borrower of the loan will be the PRC. The loan will have a 25-year term, including a grace period of 5 years, an interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft Loan and Project Agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB.

38. The ADB loan will finance 18% of the total project cost. The remaining cost will be financed by MOC and GPG, and cofinancing through a loan from Bank of Communications (Table 2). MOC and GPG have made budgetary provisions for the counterpart funds. The ADB loan proceeds will be made available to GPG, which will, through GPCD, onlend the proceeds of the loan to GCHC under an onlending agreement on the same financial terms and conditions as those of the ADB loan, with the GCHC bearing the exchange rate and interest rate variation risks and performing the obligations applicable to it in the Project Agreement which are made an integral part of the onlending agreement.

Table 2: Financing Plan ($ million) Source Total % Asian Development Bank 300.00 18 Bank of Communications 712.60 43 Ministry of Communications 332.00 20 Gansu Provincial Government 315.40 19 Total 1,660.00 100 Source: Asian Development Bank estimates.

F. Implementation Arrangements

1. Project Management

39. GPCD will be the Executing Agency and responsible for the overall implementation of the Project. GCHC, the Implementing Agency responsible for the ongoing ADB-financed Gansu Roads Development Project, 20 will also be the Implementing Agency for the proposed expressway under the Project. GCHC’s general manager, acting as the project director, will be responsible for construction and operation of the expressway. GPCD will implement the rural road component through the Gansu Provincial Highway Administration Bureau and the transport service component through the Gansu Provincial Transport Administration Bureau. A project implementation unit established within GCHC will monitor and follow up implementation; facilitate land acquisition, resettlement, and environmental protection; and ensure that local concerns are addressed adequately. The unit will be headed by a project manager, who will oversee day-to-day physical implementation. Organization charts for GPCD and GCHC are in Supplementary Appendix C.

2. Implementation Period

40. The Project will be implemented over 5 years, from January 2007 to December 2011. The implementation schedule is in Appendix 9.

3. Procurement

41. All ADB-financed procurement will follow ADB’s Procurement Guidelines.21 A list of ADB- financed contract packages is in Appendix 10. The main civil works contracts will be divided into 24 packages, which will be procured using international competitive bidding (ICB). The four pavement packages and two equipment packages will also be procured through ICB. All other packages—four traffic management facilities; four afforestation and landscaping works; six building and ancillary facilities; and four tolling, monitoring, and communication systems—will be

20 ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the People’s Republic of China for the Gansu Roads Development Project. Manila. 21 ADB. 2006. Procurement Guidelines. Manila (as amended from time to time).

11 financed by the Government and procured under national competitive bidding (NCB) acceptable to ADB. The Wudu–Lixian section financed by ADB will be procured through NCB, for which ADB will require prior review of the bid evaluation report and award of contracts. The other sections financed by GPCD will be procured through Government procedures acceptable to ADB. Township bus stations financed by ADB will be procured through shopping. International bidding will be handled by a tendering company that is well qualified to perform these tasks. The relevant sections of ADB’s anticorruption policy will be included in all documents and contracts related to project bidding and implementation. A procurement plan is in Supplementary Appendix D.

4. Consulting Services

42. The Project will finance 56 person-months of international consulting services: 40 for supervision of the civil works, 6 each for bridge construction and tunnel construction, and 2 each for road safety and road maintenance. GPCD will engage and finance 7,600 person-months of national consultants, 350 of which will be allocated for rural roads and transport services, 320 for environmental protection, and 30 to monitor the socioeconomic and poverty impacts. The international consultants will be financed by the ADB loan and selected and engaged based on a full technical proposal using the quality- and cost-based selection method in accordance with ADB's Guidelines on the Use of Consultants.22 The national consultants will be financed from domestic resources and will be recruited in accordance with Government procedures acceptable to ADB. GCHC will establish two resident supervision engineer offices. The chief supervision engineer’s office will be responsible for overall project supervision. The chief supervision engineer will be assisted by two deputies, one of whom will be the team leader of the international consultants. The team leader will help the chief supervision engineer with project and contract management activities during project implementation. Outline terms of references for consultants are in Supplementary Appendix E.

5. Advance Action and Retroactive Financing

43. On 24 May 2006, ADB approved advance procurement for civil works and retroactive financing for eligible expenditures related to civil works up to $30 million incurred before the loan effectivity date, but not earlier than 12 months before the date of loan agreement signing. The advance action will be done in accordance with ADB’s Procurement Guidelines. The Government has been advised that approval of the advance action and retroactive financing does not commit ADB to financing the Project.

6. Disbursement Arrangements

44. The loan will be disbursed in accordance with ADB’s Loan Disbursement Handbook.23 Because most of the payments will be made for large contracts, direct payments, reimbursements, and commitment procedures will be used to withdraw loan funds. If government funds are used first for eligible expenditures, ADB’s reimbursement procedure will be followed. To expedite the flow of funds, the statement of expenditures procedure may be used to reimburse eligible expenditures for any individual payment not exceeding $100,000 equivalent. Before disbursement, the Borrower shall have certified to ADB that the onlending agreement, which shall include the terms and conditions required under the loan agreement, shall have been duly executed and delivered on behalf of GPG and the GCHC, and shall have become fully effective and binding upon the parties thereto in accordance with its terms.

22 ADB. 2006. Guidelines on Use of Consultants. Manila (as amended from time to time). 23 ADB. 2001. Loan Disbursement Handbook. Manila.

7. Accounting, Auditing, and Reporting

45. GPCD and GCHC will maintain separate accounts for the Project and related financial statements, and will have them audited annually in accordance with auditing standards consistently applied by independent auditors, whose qualifications, experience, and terms of reference are acceptable to ADB. GPCD and GCHC will submit to ADB within 6 months of the end of each related fiscal year, certified copies of audited project accounts and financial statements and an auditor’s report on the Project, all in English. A separate audit opinion on the use of the statement of expenditures, if any, will be included as part of the auditor’s report. During the project implementation, GPCD and GCHC will submit quarterly progress reports. To facilitate project post-evaluation, GPCD and GCHC will furnish ADB with a completion report within 3 months of the end of the Project.

8. Anticorruption Policy

46. ADB’s Anticorruption Policy 24 was explained to and discussed with the local and central governments. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of GPCD, GCHC, and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

47. GPCD will (i) establish a supervisory body to prevent undue interference in business practices and to ensure that adequate resources are made available for its effective operation; (ii) involve a leading group of officials from the Supervision Division of GPCD, located in GCHC, involved in bidding, construction, and other operational activities; (iii) hold regular briefings with GPCD, GCHC, and the prosecutor’s office to share information on or warnings about corrupt practices; (iv) periodically inspect contractors’ fund withdrawals and settlement activities; and (v) adopt a two-contract system whereby the winner of a civil works contract must also sign an anticorruption contract with the employer.

9. Project Performance Monitoring and Evaluation

48. To demonstrate the effectiveness of its operations and to be accountable for its performance to stakeholders, ADB uses the project performance management system (PPMS). The monitoring will use a combined macro and micro approach, the latter focusing on a few key representative communities. A basic monitoring framework was constructed for the Project to permit a more definitive assessment of the actual benefits. GPCD and GCHC have agreed with the (i) monitoring framework, (ii) set of indicators to be used to monitor and evaluate the project’s impacts, and (iii) representative villages. Indicators were selected based on the findings of the ADB-financed TA for the socioeconomic assessment of road projects 25 and project preparatory TA findings. The baseline values for the indicators were established, where available, during project preparation, and will be updated prior to and during project implementation, at project completion, and annually for 3 years thereafter. By 30 September 2007, GPCD will recruit an independent local institute to provide 30 person-months for surveys,

24 ADB. 1998. Anticorruption. Manila (as amended to date). 25 ADB. 2002. Technical Assistance to the People’s Republic of China for Socioeconomic Assessment of Road Projects. Manila.

13 analyses, and reporting. Reports summarizing the key findings will be submitted to ADB. GPCD, GCHC, and local governments have assured ADB that monitoring will be adequate in the project area and in selected communities (Appendix 11).

10. Project Review

49. Two years after the Project starts, GPCD, GCHC, and ADB will carry out a midterm project review, focusing on policy, institutional, administrative, organizational, technical, environmental, social, economic, financial, and other relevant factors that may have an impact on the project’s performance and its continuing viability. The review will examine progress in reform, resettlement, and compliance with assurances in the loan and project agreements.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Traffic Forecast

50. The project expressway will form part of the shortest route connecting northwest to dynamic southwest of the PRC. Gansu has coordinated with Sichuan and reached an agreement to implement the Guanzigou–Guangyuan expressway as it is planned in conjunction with the project expressway construction. The traffic volume on the expressway is expected to grow from an average of 5,500 passenger car units (pcu) in 2012 to an average of 11,200 pcu in 2022, a 7.4% average annual growth rate. It will grow at 7.2% per annum thereafter to reach an average of 22,500 pcu in 2032 (Appendix 12).

B. Economic Analysis

51. The project’s economic internal rate of return (EIRR) was estimated by comparing scenarios with and without the Project. Without the Project, traffic volume would exceed capacity of the existing NH212, congestion would worsen, causing delay, thereby increasing travel time, vehicle operating costs (VOCs), and accidents. With the Project, travel time and VOCs would be reduced because of higher speeds and shorter distances; the accident rate would be reduced by eliminating congestion, providing safety features, and separating fast and slow traffic. Similar benefits will also accrue to the traffic on the existing roads. The project’s economic costs reflect (i) the capital cost for construction, which include physical contingencies, land acquisition, and resettlement; (ii) O&M costs, which include replacing depreciated equipment; and (iii) environmental monitoring costs. The economic benefits are (i) savings in VOCs as a result of reduced road length and improved traffic and road conditions, (ii) time savings for road users, (iii) savings in road accident costs as a result of fewer accidents, and (iv) benefits from generated traffic.

52. The Project is economically viable. The EIRR for the whole Project is estimated at 17.9%. The EIRR was 17.5% for the expressway and 23.0% for the local road network. Sensitivity analysis confirms the robustness of the project’s economic viability. To determine the degree of uncertainty for the Project, a risk analysis was conducted. The results of the risk analysis show that the probability of the EIRR to be below 12% is 6.1% (Appendix 13).

C. Financial Analysis and Projections

53. In accordance with the Highway Law and Regulations on Toll Road Management in PRC, toll rates will be set based on various factors such as technical standard of highway, project cost, local price index, duration to pay the loans, traffic volume and affordability. The proposed toll

14 rates26 for the project expressway are considered reasonable to attract sufficient traffic to meet the criteria for EIRR and financial internal rate of return (FIRR). GCHC will undertake a toll analysis before opening the expressway, and each year for 5 years thereafter, to confirm the appropriate level of toll, and it will submit the results for ADB’s review and comments. If an adjustment of the toll levels is required based on this principle, GCHC will obtain ADB’s review and comments before finalizing and submitting it to GPG for approval.

54. Financial projections have been prepared in accordance with ADB's Guidelines for the Financial Management and Analysis of Projects to assess the financial viability and sustainability of the Project. The projected financial statements indicate that financial revenues will be sufficient to cover O&M costs and debt service from the six year of operation. The project’s cost estimates and financial projections in nominal terms were converted to real terms by adjusting for the projected effects of foreign and domestic inflation and currency fluctuations. The expressway FIRR is estimated at about 4.6% after taxes—better than the weighted average cost of capital of 3.4%, also net of taxes. The expressway is considered to be financially viable and sustainable. Sensitivity analysis indicates that the FIRR is robust under adverse conditions (Appendix 14). Financial management assessment found that the Project meets the minimum financial management requirements and can provide accurate and timely information on its status in the reporting format agreed with ADB (Supplementary Appendix F).

D. Poverty Reduction and Social Strategy

55. Socioeconomic Profile. The Project will benefit 2.7 million people in Longnan, of whom 2.4 million live in rural areas and 996,700 of these live on less than $1 per person per day.27 In addition, 50 township bus stations in each of Dingxi and Tianshui prefectures will benefit a further 1.9 million people. Of the more than 4.6 million project beneficiaries, 1.7 million are poor. The GDP per capita is CNY2,346 in Longnan, CNY3,619 in Tianshui, and CNY2,126 in Dingxi. Seven out of nine counties in Longnan, six out of seven counties in Tianshui, and all seven counties in Dingxi are nationally designated poverty counties. The incidence of rural poverty is 42% in Longnan, 29% in Tianshui, and 39% in Dingxi. There are 3,237 villages in Longnan, 75% of which are nationally designated poverty villages. Once linked to the major road networks, the improved rural transport system will spread the expressway’s benefits to the local economy and rural communities (Appendix 15).

56. Stakeholder Consultations. Over 5,000 people were interviewed during public opinion surveys, social and environmental assessment, resettlement planning, and social surveys (Supplementary Appendix G). Discussions have shown that support for the Project is strong because the area is isolated. The primary needs of the local people included jobs and better infrastructure. The Project will (i) ensure adequate and timely compensation for land acquisition; (ii) hire villagers for construction and source local materials during the Project; (iii) develop small business and tourism; (iv) enhance access to markets, jobs, schools and health care facilities; and (v) provide overpasses, underpasses, culverts, and interchanges to expressway facilities.28

57. Social Benefits. The Project will create 56,000 person-years of job opportunities during the construction and 1,700 full-time jobs during the operation. Over 60% of the jobs will be filled up by the poor with an estimated total of CNY200 million in wage payment annually during construction, and another CNY15 million in wage payment annually after start of project

26 The proposed toll rates are CNY0.35–CNY2 per vehicle-km. Under the current Gansu provincial “green passage” regulations, local vehicles carrying fresh agricultural produce or livestock are exempt from tolls (Appendix 14). 27 In Longnan, 321,000 absolutely poor people live below CNY625 per capita per year and 676,000 poor people live below CNY825 per capita per year (996,700 live below the international poverty line of $1 per year per day). 28 The Project will provide seven interchanges, including two interchanges in Wudu, with a minimum spacing of 5 km.

15 operation. Local procurement of the materials required for the Project is estimated value of CNY200 million, of which 60% is value added in labor. In addition, the construction tax revenue to be collected by local governments is estimated at CNY248 million. This additional revenue will be used for poverty reduction and social activities, with special attention to resettlement affected groups, women, and other vulnerable people. The improved road transport system will enhance the local investment climate to attract more investment to the region and act as a catalyst for future investment.

58. Capacity Building for Rural Communities. A reluctance among many residents to accept new ideas, low willingness to learn new skills, and lack of confidence are among key constraints to reducing poverty. The Project will (i) disseminate information widely to the general public via the mass media; (ii) motivate community interest, support, and participation; (iii) improve information flows regarding markets, jobs, government policies and initiatives, and aid programs; and (iv) develop and train local small contractors. Local skills are expected to be greatly enhanced as a result of several years of employment in project-related activities.

59. Control and Mitigation of Epidemic Diseases. Improved transport and greater population mobility might put the residents at risk of acquiring sexually transmitted infections, including HIV/AIDS. No HIV/AIDS cases have been reported in the project area. The Gansu Center for Disease Control implements preventive measures and adopts tight health and hygiene standards. Such measures include providing education programs; distributing condoms to local residents; monitoring any outbreaks and spread of disease; regularly inspecting construction sites; using advocacy and awareness programs; and providing voluntary counseling, testing kits, and education. In carrying out the civil work contracts, the Law on the Prevention and Treatment of Epidemic Diseases will be followed (Appendix 16).29

60. Ethnic Minorities and Gender Development. Ethnic minorities, predominantly Tibetan and Hui Muslims, account for 2% of the population in Longnan. They will not be negatively affected by the Project. They do not live along the expressway or rural road alignments, so they will not be affected by land acquisition and resettlement. However, special measures will be taken to include them as project beneficiaries (Appendix 16). The Project will also give women greater access to markets, information, jobs, education and health services. It will help them diversify into cash crops and agroprocessing. The Project will ensure equal job opportunities for women and ethnic minorities during project construction and operation.

61. Small Business Development. The project area has potential for small businesses to grow rapidly, but they have been constrained by an inefficient transport system. The Project will take initiatives to stimulate (i) export-oriented cash crops and agro-industry; (ii) community- based tourism and eco-tourism; and (iii) services (restaurants, kiosk, and car repair shops) at interchanges, along rural roads and next to township bus stations (Appendix 17).

E. Land Acquisition and Resettlement

62. This is an involuntary resettlement category A project. GPCD has prepared a resettlement plan for the project expressway and a resettlement plan for the rural roads and township bus stations (Appendix 18 and Supplementary Appendix H). The project expressway will cross 83 villages in Wudu district and Wenxian county in Longnan. An estimated 681 ha will be permanently acquired. Based on the PRC standard for impact assessment, 2,834 people will lose all their land and agricultural livelihood; since the actual impact will be about one-third loss,

29 GPCD will ensure that contractors disseminate information to their employees on the risks of sexually transmitted infections and HIV/AIDS. Local public health offices will disseminate similar information to transport operators, and local communities, especially women, in the project area.

16 an estimated number affected is 8,500 people. About 15,130 square meters of houses will be demolished, requiring the relocation of 151 households with 621 people. No factories or school buildings will be affected. The upgrading of 357 km of rural roads will require relocating about 100 households with 400 people, and another 500 people will be partly affected by land acquisition. The 200 township bus stations do not require land acquisition but will obtain land- use rights for existing construction land in each town.

63. GCHC, in conjunction with the local government land administration bureaus, will be responsible for resettlement for the project expressway. The estimated resettlement cost is CNY387 million ($48.3 million equivalent), including taxes and contingencies. The resettlement cost for the rural roads and township bus stations is CNY12.4 million ($1.55 million equivalent). Since both resettlement plans are based on feasibility studies, GPCD and GCHC must prepare and submit updated resettlement plans to ADB for approval before land acquisition and civil works. The resettlement budgets will be adjusted based on the actual measurement of physical losses and approved compensation rates. Affected persons (AP) were consulted during the preparation of feasibility studies, and resettlement information was disclosed to them by the media in April and May 2006. GPCD and GCHC will be responsible for internal supervision and monitoring. Progress reports will be prepared and submitted to ADB quarterly until resettlement is completed. GCHC will then prepare a resettlement completion report. GCHC will contract an independent agency for external monitoring and evaluation, and to prepare monitoring reports for submission to GPCD and ADB every 6 months until resettlement is completed. Thereafter, annual evaluation investigations will be conducted for at least 2 years and reported to GPCD and ADB.

F. Environmental Assessment and Management Plan

64. The Project falls under environmental category A. The environmental impact assessment (EIA) was prepared by GPCD and approved by the State Environmental Protection Administration on 3 July 2006. Initial environmental examinations (IEEs) for rural road and bus stations were also prepared. A summary EIA for the Project was prepared and circulated to the Board and made public through ADB's website on 31 May 2006. The EIA and IEEs assessed the environmental impact of the selected alignments of the expressway, the rural roads and the bus stations, and prescribed environmental protection and mitigation measures, which cost $85.6 million. The proposed alignment, rural roads, and bus stations do not cross or are not in any protected areas; there are no known rare or endangered species in the project areas. To ensure that all potential adverse environmental impacts are mitigated, GPCD will implement the environmental management plans (EMP) as specified in the EIA. The EMP will be incorporated in the bidding documents and contracts for civil works.

G. Risks

65. The project design has considered potential technical, economic, financial, and social risks. The main technical risks are associated with the design and construction of the many project tunnels, particularly the 8 km Myaziliang tunnel. To minimize technical risks, (i) the Project will be implemented by experienced staff members; (ii) preliminary design will focus on geotechnical investigations; (iii) an international tunnel consultant will help prepare a risk management plan; (iv) the prequalification of contractors will focus on their financial and technical capabilities in handling similar works; (v) a contract management information system will help identify technical problems and implement corrective measures on time; and (vi) given the safety hazards associated with tunnel works, the contractors will be required to strictly enforce working safety rules and measures. To control the financial risks, the Project will (i) strengthen contract and cost management to control potential cost overrun, (ii) inject more

17 equity into the Project, (iii) introduce a market-based approach to formulate toll pricing policy and regular review of toll levels to ensure cost recovery, and (iv) build a business environment to generate non-toll revenues along the expressway alignment. The social issues include resettlement and HIV/AIDS infection. Appropriate mitigation measures are in place in the resettlement plan, SDAP, and EMP. GPCD and GCHC demonstrated a high level of ownership in preparing and committing to implement these action plans.

V. ASSURANCES30

66. In addition to the standard assurances, the Government, GPG, GPCD, and GCHC have given the following specific assurances.

67. Counterpart Financing. The Government will, and GPG, through GPCD and GCHC, will, ensure that provision of all funds and resources necessary for construction, O&M, and management of the Project on a timely basis, and shall take all necessary measures, including the provision of additional funds, to ensure that the GPCD and GCHC can successfully implement the Project, and operate and manage it after completion.

68. Construction Quality. GPG, through GPCD will ensure that (i) the project expressway, rural roads and bus stations are constructed in accordance with the MOC’s technical standards; and (ii) the project construction supervision, quality control, and contract management are conducted in accordance with national standards and internationally accepted practices.

69. Transport Services. GPG, through GPCD will ensure that adequate transport services will be in place so that the project’s benefits will filter down to the rural poor in the project area. GPCD will coordinate with other agencies to implement the rural transport services development plan. In particular, GPG, through GPCD, will implement the planned public transport facilities in tandem with the Project.

70. Road Transport Policy Reform. GPCD will ensure that the road transport action plan prepared under ADB-financed TA for policy reform in road transport is implemented in Longnan prefecture, if necessary with suitable amendments in consultation with ADB, to improve the road transport efficiency.

71. Road Safety. Prior to construction and operation of the project expressway and rural roads, GPG will cause GPCD to (i) establish a road safety inter-agency committee to facilitate the project implementation, and (ii) ensure that the independent road safety audits be carried out and recommendations of these audits are taken into account during project construction and operations. At least 6 months prior to the opening of the expressway, GPG will, (i) through GPCD, develop and implement a plan to ensure safe operation of road infrastructure facilities; and (ii) establish a sufficient number of teams of traffic police personnel, in accordance with national law and GPG standards, to patrol the project expressway and rural roads and enforce the national regulations.

72. Tolls. In determining the toll level, GPG will take into consideration the levels sufficient to satisfy the GCHC’s minimum debt service coverage ratio of 1.2. Six months before the project expressway opens, GPCD through the GCHC will submit for ADB’s review and comment the proposed toll structure and levels before seeking GPG approval. For the first 5 years of operation, GPCD through the GCHC will annually review the toll structure and levels, and submit a report to ADB. GPCD through the GCHC will submit for ADB’s review and comment the toll level adjustment, if any, before seeking GPG approval.

30 The complete list of loan assurances is included in the loan and project agreements.

73. Financial Ratios. To ensure financial sustainability, GCHC will maintain (i) a debt-equity ratio of not more than 65:35; (ii) a working ratio (annual O&M cost, but excluding periodic maintenance cost, to revenue) of not more than 15%; and (iii) a debt service coverage ratio of not less than 1.2 from the sixth year of operation.

74. Corporate Governance. GPCD and GCHC will enter into a concession framework agreement by 30 September 2007 covering both ADB-financed Gansu Roads Development Project and this Project in a form and substance satisfactory to ADB to ensure autonomy of operations, encourage the establishment of road performance indicators, and facilitate refinancing of road sector assets. GCHC will prepare a corporate development plan by 31 December 2008 to assure high standards of corporate governance, management practice, and financing reporting.

75. Private Sector Development. Six months before the project facilities open, GPG through the GCHC will analyze the feasibility of attracting private sector investment funds for future road sector investment, including possible private sector participation in O&M of the project expressway, and report its conclusions to ADB.

76. Rural Road Maintenance. GPG shall cause that GPCD (i) implement the rural roads maintenance regulation as approved by GPG, (ii) establish an efficient prioritization and monitoring system as specified in the rural road maintenance plan, and (iii) provide a training program under the project implementation to strengthen the capacity of local government maintenance units and local communities. GPG shall cause the local governments to ensure adequate funding and effective management of project’s rural roads.

77. Capacity Building. GCHC, in consultation with GPCD, will prepare a human resource development plan. Before undertaking international training, the GCHC will prepare for ADB’s concurrence a training plan, a program of workshops to be delivered at the GCHC by the people trained internationally and a list of training equipment and aids to strengthen the GCHC’s domestic training programs.

78. Environment. GPG, through GPCD and GCHC will ensure that (i) the Project is designed, constructed and operated in accordance with environmental laws and regulations of the Government and ADB’s Environment Policy (2002), and the EIA; (ii) the EMP and the mitigation measures included therein, as specified in the project EIA are properly implemented; (iii) the EMP is updated, at engineering design stage, and incorporated into bidding documents and civil works contracts; (iv) any adverse impact on the environment that may arise from project implementation activities is promptly mitigated or minimized in accordance with the EMP; and (v) implementation of the EMP, including any safety breaches, violation of environmental standards, and corrective measures taken thereto, is reported semiannually to ADB.

79. Vehicle Emissions. At least 6 months prior to the opening of the expressway, GPG will (i) provide to ADB the national emission standards and the penalties for infringement of such standards; and (ii) ensure that Gansu Provincial Environmental Bureau, Gansu Public Security Bureau, and other agencies enforce the national vehicle emission standards, and fulfill the requirements of the government strategies.

80. Land Acquisition and Resettlement. GPG and GCHC will ensure that (i) the resettlement plan for the project expressway and the resettlement plan for rural roads and township bus stations be implemented in accordance with their terms and with all applicable government laws and regulations and ADB’s Policy on Involuntary Resettlement, (ii) all land and

19 rights-of-way required by the Project be made available in a timely manner, (iii) the timely provision of counterpart funds and compensation and resettlement assistance be made to the APs prior to dispossession and displacement, to ensure that APs be at least as well off as they would have been in the absence of the Project, (iv) the updated resettlement plans (RP) be approved by ADB prior to commencement of land acquisition and house demolition, (v) that civil works contractors implement the RPs in compliance with PRC laws and regulations and ADB's Policy on Involuntary Resettlement through contractual requirements and construction supervision, (vi) adequate staff and resources be committed to supervising and monitoring the implementation of the RPs and satisfaction of ADB's report requirements, (vii) an independent agency acceptable to ADB be engaged by GPCD and GCHC to monitor and evaluate results of implementation of RPs and forward reports to ADB and GPCD as required, and (viii) a summary of the final government audit of resettlement disbursements and expenditures submitted to ADB.

81. Poverty Reduction. GPG, through GPCD and GCHC will cause the contractors involved in the project implementation to maximize the employment of local poor people, including ethnic minorities, who meet the job and efficiency requirements for construction and maintenance of the project roads and township bus stations. Such workers will be provided with adequate on-the-job training. GPCD will (i) implement the Project in accordance with the SDAP; and (ii) monitor the project impact on poverty in accordance with the guidelines set forth in the project performance management system (PPMS).

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

83. Gender and Development. GPG, through GPCD and GCHC will follow ADB’s Policy on Gender and Development during project implementation and take necessary steps to encourage women living in the project area to participate in planning and implementing the Project, including causing the contractors on maximizing employment of women in connection the Project. GPCD will monitor the project’s effects on women during project implementation.

84. Health Risks. GPCD and GCHC, in coordination with the appropriate agencies identified by the Government and the Center for Disease Control of the GPG, will cause the contractors to disseminate information on the risks of socially and sexually transmitted diseases, including HIV/AIDS, to their employees during project implementation. GPCD will cause the appropriate agencies to disseminate similar information to transport operators and to local communities living in the project area during project implementation and operation of the project facilities. GPG, through GPCD, will cause contractors to monitor health risk control according to the Implementation Methods of Epidemic Prevention Law of the PRC (1991).

85. Axle Loads. GPCD through GCHC will install vehicle axle-weighing equipment at selected entry points of project expressway and make suitable arrangements for the operation of such equipment. Before opening the project expressway, the GCHC will submit to ADB the plan for operation of the vehicle weigh stations, including the prescribed axle-load limits and penalties for infringement.

86. Monitoring and Evaluation. GPCD through GCHC will monitor and evaluate project impacts, with the assistance of the consultants, as specified in the PPMS, to ensure that the project facilities are managed effectively and the benefits, particularly to the poor, are maximized. GPCD will (i) hire a qualified domestic institute to carry out the monitoring activities prior to project implementation; (ii) ensure that the local governments, including local statistics offices, collect the data to measure the indicators in the PPMS prior to and during project implementation, at completion, and annually 3 years thereafter, with the frequency as specified in the PPMS; and (iii) submit to ADB the reports summarizing the key findings of monitoring.

87. Asset Management. GPCD will (i) prepare an asset management development plan, with the assistance of consultants, which will establish a computerized database system and promote the use of modern equipment; and (ii) provide a training program to enhance staff skills at provincial, county, and township levels.

88. Change in Ownership. In the event that (i) any change in ownership of the project facilities, expressway, rural roads, or township bus stations; or (ii) any sale, transfer, or assignment of the Borrower’s and GPCD’s shares or interest or the GCHC’s interest in the project expressway is anticipated, the Government, GPCD, and the GCHC will consult with ADB at least 6 months prior to the implementation of such change. The Government, GPCD and the GCHC will ensure that such change be carried out in a lawful and transparent manner.

89. Anticorruption Measures. GPG through GPCD will ensure that ADB’s and the Government’s anticorruption policy will be followed. GPCD through the GCHC will also ensure, in accordance with the Government’s regulations and requirements, during project implementation that (i) officials from the Discipline and Inspection Bureau will be resident in project offices for bidding, construction, and operations; (ii) an internal audit unit will be established in GCHC; (iii) a two-contract system will be adopted where the winner of a civil works contract must also sign an anticorruption contract with the employer; and (iv) periodic inspection of contractors will be undertaken to ensure that fund withdrawal and settlement procedures are followed. GPCD will initiate liaison meetings with the Prosecutor's Office, on a needed basis, to discuss warnings about or information on corrupt practices.

VI. RECOMMENDATION

90. I am satisfied that the proposed loan would comply with the Articles of Agreement of Asian Development Bank and recommend that the Board approve the loan of $300,000,000 to the People’s Republic of China for the Southern Gansu Roads Development Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)–based lending facility; a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft Loan and Project Agreements presented to the Board.

Haruhiko Kuroda President

24 November 2006

Appendix 1 21 DESIGN AND MONITORING FRAMEWORK

Design Performance Targets/Indicators Data Assumptions Summary Sources/Reporting and Risks Mechanisms Impact Sustainable economic • GDP is forecast to increase per annum Gansu Statistics Assumptions growth and poverty by 7% to 8% for Gansu and 8% to 9% Yearbook • Government investment reduction in Gansu for the project area during 2010–2020. projects are implemented as province and the planned. project area • Per capita rural income in the project Gansu Statistics • Complementary activities are area will increase from CNY1,300 in Yearbook implemented. 2005 to CNY2,500 in 2015. • Poverty incidence in the project area is Provincial and county reduced from 37% in 2005 to 16% in statistics offices 2015. • Trade within and between Gansu and Provincial and county • The Government is committed Sichuan is forecast to increase by 10% statistics offices to reducing poverty in the during 2010–2015. western region based on the Western Development Strategy. Outcome 1. An efficient, safe, 1.1 Traffic volume on the expressway Actual traffic data on the Assumptions and reliable road increased from 5,500 passenger car expressway through its • Assumed economic growth transport system is units (pcu) in 2012 to 11,200 pcu in auto-monitoring system rates materialize. developed in the 2022 and 22,500 pcu in 2032 • Passenger and freight project area. operators realize the benefits of using the expressway. 1.2 Travel time reduced from 6.5–9.0 Traffic counts and • The contiguous section of hours to 1.5–2.0 hours travel time survey. expressway in Sichuan is completed in 2011. 1.3 Travel distance reduced by 50% PCR • GPCD demonstrates its (from 270 km to 134 km) capacity to implement the Project. 1.4 Road accidents and fatalities in the Accident statistics from Risks project area reduced by 20% by 2015 the Public Security • The nationwide road safety Bureau and the program may not be expressway traffic implemented effectively. police.

1.5 Emissions from vehicles estimated to Measurements by Assumptions reduce by 20% on the project roads PEPB • New standards are enforced on Gansu roads. 1.6 Townships with all weather roads Provincial and county Assumptions access increased from current 57% statistics offices • Government investment to 90% of the total by 2015 projects are implemented as planned. 2. Rural people will 2.1 Bus service becomes available to Monitoring of Assumptions have improved 90% of villages by 2015, from 75% in accessibility by local • Transport services improve access to markets, 2005. transport administration shortly after road access and income-earning bureaus and GPCD township bus stations are opportunities, improved, and transport education and policy reform is pilot-tested. health services, • Assumed economic growth and social 2.2 The number of vehicles in Longnan Prefecture and county rates materialize. activities. prefecture increases by 30% over the statistics offices next 5 years. 2.3 Reduced transport fares with better Household survey by quality of transport services consultants

22 Appendix 1

Design Performance Targets/Indicators Data Assumptions Summary Sources/Reporting and Risks Mechanisms 2.4 The number of small businesses Township and county Assumption grows by 25% by 2015. statistics offices, village • Government investment 2.5 Cash crop area increases from surveys by consultants projects are implemented as 0.1 mu (0.067 hectare)/person in planned. 2005 to 0.2 mu in 2015 in villages Assumption 2.6 An additional 10% of middle-school- • The Government’s “new age children will benefit from countryside development” improved access to schools. initiative is effectively 2.7. 30% more tourists visit the area by implemented. 2015.

Outputs 1. Road 1.1 Road capacity is increased from PAMs, and PCR Risk infrastructure and 25,000 to 55,000 pcu per day at • Construction of bridges and associated expressway opening in 2012 by tunnels may be delayed facilities improved building a 134 km expressway because of their technical and along the 1.2 Vehicle operating costs for a car are Measurement of vehicle engineering complexity. expressway reduced from CNY2.70 per vehicle- operating costs by km without the Project to GPCD CNY1.93 with the Project in 2012 1.3 Road safety enhanced through PRs and PCR Assumption improved surface quality, and • MOC technical standards on provision of shoulders, signs, the expressway are followed. markings, and black spots. Safety • Safety audit awareness is increased recommendations are implemented. 1.4 Equipment is procured and installed PAMs, PRs, and PCR Assumption for road safety, toll collection, • All equipment is procured and communications, traffic management, installed before the Project is vehicle weigh bridges, and office opened to traffic. administration. 1.5 The welfare of those affected by land RP will be updated Assumption acquisition and resettlement is • Affected people are able to restored to at least the same level as Regular monitoring by restore their living standards. before land acquisition. an independent institute

1.6 The project site environment is SEIA, environmental • Supervision consultants, protected and adverse environmental monitoring reports, contractors and operators are impacts are minimized by mitigation PAMs, and PCR committed to implementing measures. mitigation measures. 1.7 HIV/AIDS and health risks for Monitoring by the health Risk construction workers and service bureau • Health bureaus may not have providers are mitigated. the resources to implement mitigation measures. 2. Rural road 2.1 357 km of rural roads are upgraded PAMs, PRs, and PCR Assumption infrastructure 2.2 Road safety signs and markings are • GPCD can plan and improved in the displayed and safety awareness is coordinate with local project area increased governments to timely 2.3 Road capacity increases to 400– PAMs, PRs, and PCR implement the rural roads. 2,000 pcu per day for class-IV, and to • Facilities are of good quality 2,000–6,000 pcu per day for class-III and completed on time. when the rural roads open to traffic Risk 2.4 Rural roads in the project area are PAMs, PRs, and PCR • Funding for rural road effectively maintained. maintenance is not sufficient. 2.5 Social and environmental safeguards RP, IEEs, and PAMs for rural roads are complied with.

3. Additional rural 3.1 Township bus stations are built. PAMs, PRs, and PCR Assumption bus service made 3.2 Inter-provincial bus routes increase by • GPCD has the capacity to available in the 1.5 times, and inter-county bus routes plan and coordinate with local project area. increase by 2 times by 2015. governments to operate the township bus stations.

Appendix 1 23

Design Performance Targets/Indicators Data Assumptions Summary Sources/Reporting and Risks Mechanisms 4. Transport services 4.1 Implementation of bus route Approved action plan • GPCD will implement the improved in the licensing reforms under the pilot action plan. project area road transport action plan in Annual statistics, • GPCD approves Longnan prefecture. Action plan baseline implementation of route 4.2 Average daily bus utilization in kms surveys, and licensing changes. per day increased by 30% monitoring reports by 4.3 Expansion of Longnan experience to Gansu Transport other areas in southern Gansu. Administration Bureau

5. Corporate 5.1 Governance and efficiency are PAMs, and PCR Assumption governance improved by separating the policy • The provincial government promoted in and planning functions from the will promote corporate expressway construction and O&M functions. governance. operations. 5.2 Private sector participation is PAMs, and PCR Risk introduced through tendering of • Few private firms are highway maintenance. interested in expressway maintenance. 6. The capacity of 6.1 35 person-months of international Midterm review Assumption local transport training will be provided for GPCD mission, and PCR, • Consultants are recruited on authorities and staff. On-the-job training of national time and provide good national consultants will be provided by the training to local transport consultants international consultants. authorities. strengthened in • Local transport authorities at construction, 6.2 At least 200 person-months training A report by consultants provincial and subprovincial supervision, program will be provided for local on the capacity- levels are committed to project transport authorities at county and building component, implementing human management, township levels. including participants, resource development plan to road safety, subject areas, be prepared by 2008. monitoring and 6.3 Survey techniques are adopted to feedback from • Trainees apply in their daily evaluation. assess changes in work practices participants, and new work what they have learned. and behavior to measure the skills applied by effectiveness of the capacity- trainees building component.

Activities with Milestones Inputs

1. Expressway civil works Civil works contracts awarded by 2007 and completed by • Asian Development 2011 Bank: $300 million 2. Equipment Equipment procured by 2011 3. Resettlement Land acquisition and relocation commenced by October • MOC: $332 million 2007 and rehabilitation measures completed by December 2008 • GPG: $315.4 million 4. EIA and SDAP Implementation of EIA and SDAP 5. Strengthening rural road Implement rural road maintenance regulation as approved • Bank of maintenance by GPG Communications: 6. Consulting and training services Consultants recruited by 2007 and completed by 2011 $712.6 million 7. Rural roads Civil works contracts awarded by 2007 and completed by 2011 8. Township bus stations and pilot- Township bus stations completed and open to operator and testing policy reform in transport road users by 2011 service action plan An action plan prepared by June 2008 and implemented according to the plan

EIA = environmental impact assessment, GDP = gross domestic product, GPCD = Gansu Provincial Communications Department, GPG = Gansu provincial government, HIV/AIDS = Human immunodeficiency virus/acquired immunodeficiency syndrome, IEE = initial environmental examination, km = kilometer, MOC = Ministry of Communications, O&M = operation and maintenance, PAM = project administration missions, PCR = project completion report, PEPB = Provincial Environmental Protection Bureau, PR = progress report, RP = resettlement plan, SDAP = social development action plan.

24 Appendix 2

ROAD SECTOR ANALYSIS

1. Overview. Investment in road infrastructure during the Tenth Five-Year Plan (10th FYP, 2001–2005) reached CNY1,900 billion, more than double that in the previous 5 years. By the end of 2005, the road network reached 1.93 million kilometer (km). Road density increased from 12.1 km per 100 square kilometer (km2) in 1995 to 20.0 km per 100 km2 in 2005. However, the density of the road network ranks among the lowest in the world relative to either population or geographic area, particularly in the western region. With a total length of 41,330 km, Gansu’s road network accounted for 2.1% of the country’s total roads. Road density in Gansu was 9.1 km per 100 km2, significantly lower than the national average.

2. Road Transport. Despite efforts to increase transport capacity, serious constraints and bottlenecks remain, especially in the road sector. Expressways account for 2% of the total road network, class-I highways for 2%, and class-II highways for 13%. About 83% of the remaining roads are medium- to low-grade paved road and gravel roads. Because of rapid economic growth since 1978, demand for transport services has increased many times.1 The privately owned fleet increased nearly 80 times, from 0.3 million to 23.7 million during 1985–2005. Road passenger traffic in Gansu grew by 6.4% per annum during 1990–2005, lower than the national average of 9.0%. Road freight traffic, in ton-km, grew at 6.0% per year during the same period, compared with 6.2% per year for the People’s Republic of China (PRC) as a whole. In 2005, there were 457,700 trucks and passenger vehicles in Gansu, or 1.8 vehicles per 100 people, lower than national average of 2.4 vehicles per 100 persons. Privately owned vehicles in Gansu totaled 247,300 in 2005.

3. Government Sector Development Strategy. The Government key sector strategy during the 10th FYP is the development of a national trunk highway system (NTHS) to connect 12 provincial capitals with a population of 500,000 or more. By the end of 2005, 31,000 km of the NTHS had been completed and the total NTHS will be completed by 2007. In 2001, the Ministry of Communications (MOC) released plans to construct the western region corridor totaling 17,500 km. Much of the proposed construction is directed as part of the Government’s Western Region Development Strategy. By the end of 2005, 11,000 km of class-II and above highways had been completed and the remaining sections will be completed by 2010. In 2005, the State Council approved the National Expressway Network Program to expand the expressway network to 85,000 km by 2020. The program aims to connect all cities with a population of 200,000 or more. Priority will be given to developing expressways in poor, less developed interior regions that lack transport. By the end of 2005, 33,000 km of expressway had been completed and the rest will be constructed by 2020.

4. Rural Road Network. Rural roads are underdeveloped: 38,426 villages and 75 townships, most of which are in western region, are not connected with roads. Out of 1.56 million km of the total rural roads (county roads and below), 80% are class-IV and unclassified, and 60% of which have some level of gravel surfacing or are unpaved. Recognizing the importance of improved rural roads to poverty reduction and reducing the gap between rural and urban economy, the Government announced plans in 2003 for 5,300 rural road projects, with a total length of 78,000 km. The Government will accelerate the rural road improvement. In accordance with the National Rural Road Development Plan during 2006–2010, a total of 2.4 million km of rural roads will be upgraded with a total investment of CNY800 billion. Of this, CNY140 billion will be provided by the central government. The plan is that by 2010, paved roads will reach all of townships across the country, as well as all villages in eastern region, 88% of villages in the central region and 50% of villages in the western region. Villages in the western region will at least have access to roads by 2010.

1 Road freight traffic increased from 27.4 billion ton-km in 1978 to 869.3 billion ton-km (32 times) in 2005. Road passenger traffic increased from 52.1 billon passenger-km in 1978 to 929.2 billion passenger-km (18 times).

Appendix 2 25

5. Rural Transport Services. Poor road conditions have resulted in inadequate transport in rural poor areas. Because of poor roads, low demand, high operating costs, transport operators are unwilling to provide services or are not permitted to do so for safety reasons. Other issues are inadequate transport facilities, lack of competition in the transport service market, and regulations on tariff, routes, and schedules for bus services, which have led to inefficient use of vehicles. MOC has prepared the national rural transport services development plan for 2006–2010, under which township bus stations will connect all townships, and bus stops will connect all villages. This will further enhance benefit flowing to the rural poor.

6. Road Maintenance. Although maintenance expenditure increased significantly in absolute terms in the past decade, its share of road expenditures decreased. While highways are relatively well maintained, rural road maintenance remains a challenge. In 2005, the State Council called for reform of rural road maintenance. MOC is closely coordinating with provincial governments to implement the policy. MOC is organizing a nationwide rural road survey to develop the rural road database, which will be introduced in stages to all provinces.

7. Resource Mobilization. Despite massive investment in the road sector (3% of gross domestic product on average in 2001–2005), funding is still insufficient to meet the demand. During the 10th FYP, state subsidy and vehicle purchase tax provided 14% of the financing, and the rest was financed by provincial resources (42%), domestic loans (42%), and foreign loans (2%). The growing demand for transport infrastructure will require the sector to shift from the conventional financing modes toward the capital markets and private sector investment. Bond issues are also suitable for road projects because of their long-term and stable earning streams. However, any capital market instrument requires an adequate legal and regulatory framework, public disclosure, and strong credit standing. Further reforms are needed in policy, regulation, and pricing to encourage financing from diversified resources, reduce inefficiencies, and enhance governance.

8. Policy Reform. Asian Development Bank (ADB) has been undertaking policy dialogue on the PRC road sector since 1991. The status and achievements of policy reform are summarized in Table A2.

Table A2: Road Sector Policy Reform Plan

Initiative Current Status Actions Target Date 1. Poverty impact All projects financed by the Asian Project identification and Recommended investment Development Bank (ADB) in the design was assisted through packages taken up for the People’s Republic of China technical assistance (TA) 11th Five-Year Plan (PRC) country strategy and 3086-PRCa (11FYP). program are in poorer central and western regions Local road components are ADB loans for expressway Being implemented since included in all expressway projects finance the local road 1995. projects component The poverty impact of Results of the TA were transport projects was published in 2005. assessed through TA 5947- REG.b Monitoring framework and Results of the TA adopted indicators prepared under TA for designing poverty 3900-PRC.c monitoring system for ADB-financed road projects. Poverty Impact of Area Wide Results of the TA were Road Networks under TA published in 2006 4322-PRC.d

26 Appendix 2

Initiative Current Status Actions Target Date 2. Rural road Rural roads are largely in poor Rural road development To be completed in 2007 development condition strategy is being formulated under TA 4671-PRC.e 3. Road transport Low vehicle utilization, high Road transport action plan Results of the TA were services operating costs, and inefficient prepared under TA 4351- published in 2006. Results bus routes because of restrictive PRC.f of the TA adopted for pilot regulations testing the road transport action plan under the Project.

4. Road design Inadequate highway design Ministry of Communications New design standards standards and standards for vehicle mix and (MOC) engineering standards applied from 1 March construction road conditions were revised and reissued on 2004. quality 1 March 2004. Assistance in developing the Completed in 1998. previous standards, including transport efficiency, road safety, and environmental considerations, was provided through TA 2573-PRC.g A highway design manual was Highway design manual produced to complement MOC adopted by selected standards in areas such as executing agencies and identification of accident black design consultants. spots. 5. Road safety High fatalities in 2005: 98,738 in Public awareness in road The new Traffic Safety the PRC, of which 1,799 in safety was raised and the Law became effective on Gansu. Ministry of Public Security’s 1 May 2004. Among other Poor safety design, lack of capacity strengthened in traffic things, it mandates the use attention to safe roads, safety, planning, and of seat belts. inadequate traffic enforcement, management under TA 3341- driver training, and limited use of PRC.h seat belts contribute to poor Safety audits are to be carried Before construction and safety record. out with assistance from the opening of the Project. Enforcement, driver training, and consultants. limited use of seat belts Assistance is being provided to Being implemented during contribute to poor safety record. improve safety and efficiency 2006–2008. of road transport operations and strengthen traffic law enforcement under TA 4698- PRC.i 6. Overloading of Overloading of trucks has An inter-ministerial committee, Implemented in 2004– trucks adverse impacts on pavement coordinated by MOC, was 2006. conditions, traffic flow, and established to develop and safety. implement special measures to enforce regulations nationwide on overloaded trucks. 7. Vehicle Vehicle emission is becoming a Leaded fuel was banned for Completed in 2002 emissions primary source of air pollution in motor vehicles. major cities. European vehicle emissions Implemented by vehicle standards were adopted for all size in 2001–2005. new vehicles. Vehicle testing and monitoring Implemented in 2002– were promoted under TA 2005. A vehicle inspection 5937-REG. and monitoring program is ongoing. 8. Road pricing Tolls are structured so that users Toll levels were set for ADB Annual review of tolls pay for full cost recovery for toll projects to ensure cost roads in most provinces. recovery. The toll diversion manual was Adopted by MOC and disseminated under TA 3102- applied for ADB-financed PRC.k road projects in the PRC.

Appendix 2 27

Initiative Current Status Actions Target Date 9. Corporatiza- There is no legal agreement A model concession A concession framework tion between provincial framework agreement was agreement will be signed communications departments prepared under TA 2952-PRC.l between the Gansu and expressway companies. Provincial Communications Department and the Project Company by 31 September 2007. Expressway construction and Assistance was provided Main findings published in operations are undertaken by through TA 2952-PRC The New Frontier: Gansu Provincial (footnote l). Investing in Toll Roads Communications Department. (2003). Expressway operations will be separated from the provincial government function. 10. Commer- Present practices do not take full Commercialization of 31 December 2008 cialization advantage of possible revenues operations will be required by and Private from expressway operations the Corporate Development Sector Plan. Development Private sector financing of road Build-operate-transfer (BOT) A pilot BOT road project infrastructure investment guidelines and a feasibility being implemented by the accounts for a fraction of the total study for a pilot project were Government. financing prepared under TA 2649- PRC.m Assistance was provided ADB’s Private Sector through TA 2952-PRC Department actively (footnote l). looking for a road BOT project. ADB-financed Jilin expressway Stocks listed in 1999. company and Changyong expressway corporation were securitized as part of stock listing. a ADB. 1998. Technical Assistance to the People’s Republic of China for the Regional Road Sector Study. Manila. b ADB. 2000. Technical Assistance for Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction. Manila. c ADB. 2002. Technical Assistance to the People’s Republic of China for the Socioeconomic Assessment of Road Projects. Manila. d ADB. 2004. Technical Assistance to the People’s Republic of China for Poverty Impact of Area-Wide Road Networks. Manila. e ADB. 2005. Technical Assistance to the People’s Republic of China for Rural Road Development Strategy. Manila. f ADB. 2004. Technical Assistance to the People’s Republic of China for Policy Reform in Road Transport. Manila. g ADB. 1996. Technical Assistance to the People’s Republic of China for the Review of Highway Design Standards. Manila. h ADB. 1999. Technical Assistance to the People’s Republic of China for Capacity Building in Traffic Safety, Planning, and Management. Manila. i ADB. 2005. Technical Assistance to the People’s Republic of China for Road Safety Improvement. Manila. j ADB. 2000. Technical Assistance to the People’s Republic of China for Action Plans for Reducing Vehicle Emissions. Manila. k ADB. 1998. Technical Assistance to the People’s Republic of China for Toll Diversion Study. Manila. l ADB. 1997. Technical Assistance to the People’s Republic of China for Corporatization, Leasing, and Securitization in the Road Sector. Manila. m ADB. 1996. Technical Assistance to the People’s Republic of China for Facilitating the Build-Operate-Transfer Modality in the Highway Sector. Manila. Source: Asian Development Bank estimates.

28 Appendix 3

EXTERNAL ASSISTANCE TO THE ROAD SECTOR

Table A3.1: Asian Development Bank-Financed Loans Express- Local Loan Loan Date PCR PPAR No. Loans way Road Amount Number Approved Rating Rating (km) (km) ($ million) 1 1082-PRC Shanghai Nanpu Bridge — — 70 28 May 91 S GS 2 1168-PRC Shenyang-Benxi Highway 75 — 50 2 Jul 92 GS S 3 1188-PRC Shanghai Yangpu Bridge — — 85 17 Nov 92 HS — 4 1261-PRC Hunan Expressway 52 — 74 9 Nov 93 GS — 5 1262-PRC Jilin Expressway 133 — 126 9 Nov 93 GS HS 6 1324-PRC Heilongjiang Expressway 350 — 142 29 Sep 94 PS S 7 1325-PRC Yunnan Expressway 200 — 150 29 Sep 94 HS — 8 1387-PRC Hebei Expressway 200 179 220 28 Sep 95 HS — 9 1388-PRC Liaoning Expressway 110 203 100 28 Sep 95 GS — 10 1470-PRC Chongqing Expressway 89 — 150 27 Sep 96 S — 11 1483-PRC Shenyang-Jinzhou Expressway 192 291 200 19 Nov 96 HS — 12 1484-PRC Jiangxi Expressway 134 253 150 19 Nov 96 S — 13 1617-PRC Hebei Roads Development Project 140 340 180 18 Jun 98 HS — 14 1638-PRC Chengdu-Nanchong Expressway 208 300 250 10 Nov 98 S — 15 1641-PRC Changchun-Harbin Expressway: Hashuang 101 — 170 27 Nov 98 S — Expressway 16 1642-PRC Changchun-Harbin Expressway: Changyu 161 — 220 27 Nov 98 S — Expressway 17 1691-PRC Southern Yunnan Road Development Project 147 540 250 24 Jun 99 S — 18 1701-PRC Shanxi Road Development Project 176 418 250 30 Sep 99 S — 19 1783-PRC Chongqing-Guizhou Roads: Leichong 50 122 120 21 Nov 00 — — Expressway 20 1784-PRC Chongqing-Guizhou Roads: Chongzun 127 704 200 21 Nov 00 — — Expressway 21 1838-PRC Shaanxi Roads Development 176 627 250 30 Aug 01 — — 22 1851-PRC Guangxi Roads Development 179 507 150 30 Oct 01 — — 23 1918-PRC Southern Sichuan Roads Development 160 558 300 20 Sep 02 — — 24 1967-PRC Shanxi Road Development II Project 65 70 124 12 Dec 02 — — 25 2004-PRC Ningxia Roads Development Project 182 400 250 11 Sep 03 — — 26 2014-PRC Western Yunnan Roads Development Project 77 294 250 28 Oct 03 — — 27 2024-PRC Xi'an Urban Transport Project 71 16 270 27 Nov 03 — — 28 2089-PRC Hunan Roads Development II Project 173 517 312.5 9 Sep 04 — — 29 2094-PRC Guangxi Roads Development II Project 188 750 200 21 Oct 04 — — 30 2125-PRC Gansu Roads Development Project 231 470 300 13 Dec 04 — — 31 2181-PRC Central Sichuan Roads Development Project 244 678 600 22 Sep 05 — — 32 2219-PRC Hunan Roads Development III Project 64 129 208 15 Dec 05 — — 33 2247-PRC Heilongjiang Road Network Development Project — 598 200 26 Jul 06 — — Total 4,455 8,964 6,571.5 — = not available, GS = generally satisfactory, HS = highly satisfactory, km = kilometer, No. = number, PS = partly satisfactory, PRC = People’s Republic of China, PCR = project completion report, PPAR = project performance audit report, S = satisfactory, U = unsatisfactory. Source: Asian Development Bank estimates.

Table A3.2: Asian Development Bank-Financed Technical Assistance Amount Date No. TA Number Technical Assistance Type ($'000) Approved 1 1049-PRC Huangpu Bridge PP 95 24 Oct 88 2 1152-PRC Design Review of the Nanpu Bridge PP 100 26 Apr 89 3 1509-PRC Ningguolu Bridge PP 100 18 Apr 91 4 1517-PRC Toll Bridge Operation and Management AD 760 28 May 91 5 1533-PRC Design Review of the Yangpu Bridge AD 100 10 Jul 91 6 1664-PRC Shenyang-Benxi Highway PP 100 22 Jan 92 7 1533-PRC Design Review of the Yangpu Bridge (supplementary) AD 416 28 Apr 92 8 1724-PRC Institutional Strengthening for Highway Operation and Management Improvement AD 500 2 Jul 92 9 1725-PRC Jilin Province Highway Network Study PP 600 2 Jul 92 10 1728-PRC Changsha-Xiangtan Expressway PP 100 9 Jul 92 11 1785-PRC Comprehensive Toxic and Hazardous Chemicals Transport Management Plan in the Huangpu River Basin AD 600 17 Nov 92

Appendix 3 29 Amount Date No. TA Number Technical Assistance Type ($'000) Approved 12 1940-PRC A study of Efficiency Improvements in Road Transport AD 550 25 Aug 93 13 1972-PRC Institutional and Policy Support in the Road Sector AD 1,200 9 Nov 93 14 1975-PRC Policies for Strategic Development of Transport and Communications Infrastructure AD 100 11 Nov 93 15 1981-PRC Heilongjiang and Yunnan Expressways PP 320 16 Nov 93 16 2155-PRC Sichuan Expressway PP 350 16 Sep 94 17 2177-PRC Preparation of a Road Safety Program AD 600 29 Sep 94 18 2178-PRC Provincial Highway Network Planning AD 600 29 Sep 94 19 2195-PRC Hebei and Liaoning Expressways PP 560 31 Oct 94 20 2212-PRC Beijing Urban Transport AD 715 28 Nov 94 21 2302-PRC Symposium on Urban Transport AD 100 22 Feb 95 22 2409-PRC Appraisal Methodologies and Restructuring Highway Financing in Hebei Province AD 740 28 Sep 95 23 2482-PRC Liaoning and Jilin Expressways PP 400 18 Dec 95 24 2486-PRC Jingxi Highway PP 250 20 Dec 95 25 2573-PRC Review of Highway Design Standards AD 420 24 May 96 26 2649-PRC Facilitating the Build-Operate-Transfer Modality in the Highway Sector AD 1,100 27 Sep 96 27 2663-PRC Hebei Roads Development PP 600 16 Oct 96 28 2777-PRC Chengdu to Nanchong Expressway PP 600 07 Apr 97 29 2846-PRC Changchun-Harbin Expressway PP 600 22 Aug 97 30 2952-PRC Corporatization, Leasing, and Securitization in the Road Sector AD 1,000 17 Dec 97 31 3033-PRC Shanxi Expressway PP 570 24 Jun 98 32 3039-PRC Yunnan Road Environmental and Social Analysis PP 150 07 Jun 98 33 3086-PRC Regional Road Sector Study AD 1,180 13 Oct 98 34 3102-PRC Preparing the Chongqing-Guizhou Expressway PP 900 26 Nov 98 35 3220-PRC Preparing the Guangxi Highway PP 540 07 Jul 99 36 3248-PRC Preparing the Shanxi and Shaanxi Roads PP 640 30 Aug 99 37 3341-PRC Capacity Building Safety, Planning, and Management AD 600 14 Dec 99 38 3546-PRC Preparing the Southern Sichuan Roads Development PP 800 16 Nov 00 39 3569-PRC Jiangsu Highway BOT Project AD 555 12 Dec 00 40 3642-PRC Preparing the Western Yunnan Roads Development PP 770 20 Mar 01 41 3376-PRC Preparing the Ningxia Roads Development PP 600 16 Nov 01 42 3900-PRC Socioeconomic Assessment of Road Projects AD 250 12 Aug 02 43 3907-PRC Preparing the Xi’an Urban Transport Project PP 750 27 Aug 02 44 3929-PRC Preparing the Hunan Roads Development PP 600 23 Sep 02 45 4119-PRC Preparing the Guangxi Roads Development II PP 500 23 May 03 46 4142-PRC HIV/AIDS on Road Projects in Yunnan Province AD 800 28 Oct 03 47 4211-PRC Preparing the Gansu Roads Development PP 500 5 Nov 03 48 4274-PRC Preparing the Central Sichuan Roads Development PP 700 18 Dec 03 49 4322-PRC Poverty Impact of Area Wide Road Networks AD 1,000 26 Mar 04 50 4351-PRC Policy Reform in Road Transport AD 500 24 Jun 04 51 4384-PRC Preparing the Hunan Roads Development III PP 500 2 Sep 04 52 4592-PRC Preparing the Heilongjiang Road Network Development PP 500 2 Jun 05 53 4639-PRC Preparing the Western Roads Development PP 800 30 Aug 05 54 4650-PRC Evaluating Poverty Impacts of Transport Projects SS 150 21 Sep 05 55 4671-PRC Rural Road Development Strategy AD 350 21 Oct 05 56 4698-PRC Road Safety Improvement AD 1,000 24 Nov 05 57 4773-PRC Preparing the Xinjiang Regional Road Improvement PP 600 21 Mar 06 58 4782-PRC Preparing the Central Yunnan Roads Development PP 500 28 Apr 06 59 4792-PRC Preparing the Guangxi Longlin-Baise Expressway Project PP 500 26 May 06 60 4806-PRC Sustainable Rural Transport Services AD 400 28 Jun 06 Total 32,481 AD = advisory, km = kilometer, No = number, PRC = People’s Republic of China, PP = project preparatory, SS = small scale, TA = technical assistance. Source: Asian Development Bank estimates.

Table A3.3: Other Funding Sources Road Loan Amount No. of Loans Organization Length (km) Unit Total 38 World Bank 10,598 $ million 7,109 16 Japan Bank for International Cooperation 1,695 Yen million 219,036 km = kilometer, No. = number, PRC = People’s Republic of China. Source: Asian Development Bank estimates.

30 Appendix 4

RURAL TRANSPORT SERVICES AND POLICY REFORM

A. Nature of Transport Service

1. General. Rural roads and rural transport services form a rural transport system. In southern Gansu, rural roads are poor and transport services are inadequate. Passengers board buses on roadsides, which is dangerous, or at temporary bus stops. In Longnan, 129 townships do not have the lowest-class rural bus station, 820 villages have no direct access to a formal bus services as bus operators are unwilling to provide them because of poor roads, resulting in high operating costs and safety concerns. Transport demand is met by various informal transport services, typically motor-tricycles, agriculture tractors, and dual-purpose pickups. They provide local services between villages and townships for the villagers, and are more expensive than the regulated fare.1

2. Transport Demand. Social surveys reveal that the average household makes 48 trips per year, of which 56% were motorized for journey length over 6 km. More than 60% of trips take place close to the nearest town or markets. External trips are fewer. Vehicle ownership is low in the project area.2 Walking and bicycling are the major modes of transport for short trips. As the distance increases, so does the number of motorized trips.

3. Passenger Services. Bus fares and routes of the formal bus system are regulated, often resulting in inefficient services and low vehicle utilization. Bus fares depend on the type of bus and road conditions, with an increase of 20% allowed during holidays. The regulations provide a small variation between different road classes, e.g., an increase of 5% of base fare is allowed for classes-II–III roads and an increase of 8% of base fare for class-IV and unclassified roads, as against base fares set on class-I and expressways. Rural bus fares do not reflect opportunities for improving vehicle utilization and lowering unit operating costs through a relaxation of regulatory restrictions on operations and schedules. Average bus occupancy of around 65% for inter-prefecture and inter-county routes.

4. Importance of Rural Transport System. Improved rural roads provide the physical link from villages to the higher levels of the road network and hence to the regional and national economy. Since few rural farmers own motor vehicles and rural roads are the only means of transport in the project area, rural transport is the only way that rural households are linked to the wider economy. In Suzhou prefecture in Gansu, seven township bus stations were built in 2003. This resulted in: (i) per capita annual income increase of CNY100 in 2004, (ii) total freight traffic increased by 300,000 tons and passenger traffic increased by 200,000 people, and (iii) average daily passenger traffic per township bus station reached 300. Other social benefits are summarized in Table A4.1, which indicates strong empirical evidence to support the social and economic justifications for the provision of an efficient rural transport system.

1 Based on the social surveys, an average unit cost of CNY0.30 per kilometer (km) is paid for trips from a village to a township center (roughly about 15–20 km), which is much higher than regular bus fare for the same distance in periurban areas in Gansu (CNY0.20 and less per km). 2 Nearly 40% of households have bicycles, 23% of families own one motorcycle, 20% of families have one animal cart, and only 11% of households have one agricultural vehicle.

Appendix 4 31 Table A4.1: Benefits Resulting from Improved Transport Services

A. Short-Term Economic Benefits 1. Travel time savings (particularly during the rainy and winter seasons) 2. Improved traffic safety (buses will not block the main roads to pick up and unload passengers) 3. Generated more traffic (travel demands was suppressed because of unpredictable bus schedules) 4. Improved rural mobility and life quality (to access markets, schools, clinics, jobs, and service centers, etc.) 5. Convenient to sell agriculture products in the markets near to bus stations without the need for traders 6. More jobs (50 workers for 6 months to build a station and 4 regular staff members to work in each station during operation) 7. Improved access to health (most women travel into the townships to give birth) 8. Improved information exchange (a kiosk is provided in each bus station)

B. Long-Term Economic Benefits 1. Training farmers to adhere to bus service timetables 2. Increasing access to information and marketing opportunities 3. Allocating time savings to agriculture and other activities 4. Increasing level of middle school attendance (middle schools are only located at the township level) 5. Increasing trade and investment opportunities Sources: Gansu Transport Administration Bureau and Asian Development Bank estimates.

B. Proposed Transport Service Component

5. Rationale. The Project focuses on improvement of township-level transport services in southern Gansu where people lack mobility and have poor accessibility. The basic conditions for township bus station development are in place in the project area: relatively high population density (an average 20,000 people for each township), medium distance between townships (about 20 km away in the project area), irrigated agriculture, cash crops, and non-agriculture employment. The Project will (i) provide reliable, safe and more efficient bus services; (ii) promote an efficient marketing system—the township bus stations will be close enough to township markets that rural people can sell their products directly and in a timely manner in markets without the need for traders and wholesalers; (iii) improve information exchange by providing a kiosk in each station; and (iv) improve access to socioeconomic activities (education, health care, employment, and income generation). Local communities are enthusiastic about investing in bus stations because of their positive impacts on rural development, accessibility, and poverty reduction.

6. Township Bus Stations. The Project will include the construction of 200 class-V township bus stations,3 with 100 in Longnan, 50 in Tianshui, and 50 in Dingxi. This component will benefit 3.9 million people living in the 200 townships (1.96 million people in Longnan, 0.99 million in Tianshui, and 0.95 million in Dingxi). The unit cost of a class-V township station is estimated at CNY400,000 ($50,000 equivalent). The total cost of the transport service component would be CNY80 million ($10 million), of which $5 million will be financed by Asian Development Bank loan. The Project will encourage the active participation of local communities in planning, implementation, and monitoring. Local communities that invest in the bus stations will have priority in running the business and getting its profits. Gansu Provincial Communications Department (GPCD) agreed to ensure the bus stations construction are completed in tandem with the project local roads to ensure the efficient provision of services when the local roads are built.

7. Improve Rural Transport Service. Expanding rural transport services is an integral part of Gansu’s plan for improving rural transport system. A total of 318 township bus stations had been constructed and were being operated in Gansu by 31 May 2006: 157 are in southern Gansu, with 40 out of 169 townships in Longnan, 69 out of 119 townships in Dingxi, and 48 out

3 Bus centers are classified by design capacity into class-I–V bus stations and bus stops. The design capacity of a class-V station is less than 300 passengers daily with the average construction area of 250 square meters.

32 Appendix 4 of 113 townships in Tianshui. GPCD agreed to build all remaining township bus stations by 2010.

8. Pilot Policy Reform. Asian Development Bank provided assistance for a technical assistance on policy reform in road transport.4 The technical assistance reviewed the current status and issues in road freight and passenger transport, and prepared an action plan of policy reform, recommending policy and regulatory measures to improve its efficiency, such as easing the rules that confine buses to individual routes and fixed schedules, thereby reducing the potential for improved productivity, and allowing cost savings to be passed on to road users as lower fares. In Longnan, which is in difficult mountainous terrain, roads are the only means of transport. Main constraints facing Longnan includes low vehicle use rates and high vehicle operating costs. GPCD has agreed to pilot-test some recommendations listed in the action plan (Table A4.2). Experiences gained in Longnan will be expanded to other areas.

Table A4.2: Action Plan of Pilot Transport Policy Reform in Longnan Prefecture

No. Action By Whom Comments/Requirements 1 Form PPIC and assess the possible GPCD/GTAB Explain why Longnan was chosen and consequences of policy reform delivery of initial program

2 Identify affected provincial regulations/institutions GPCD/ Determination of more detailed GTAB/ regulations Identify bus routes affected Local government Operators serving the prefecture, Identify all participating operators and terminals whether based there or not

Identify other cities/provinces affected Destinations of routes from Longnan and terminals used by these routes 3 Rationalize vehicle inspection requirements and PPIC Incorporating with technical enforcement procedures improvements 4 Determine the degree of deregulation of bus PPIC To be determined based on results of operators, bus fares, bus routes, and vehicles 2, and 3. 5 Publicize pilot project PPIC Media announcements, presentations, workshops, etc. 6 Design procedures and criteria for operator GPCD Ensure disadvantageous groups, such licenses, route licenses, vehicle licenses, as poor residents in remote areas, are Introduce new operator and route permits and taken care of with at least minimum-level new bus licenses services, subsidized by the government, if necessary 7 Encourage formation of area-based operator GPCD Media announcement, presentations, associations for small operators workshops, etc. 8 Ease existing fare restriction GPCD Ensure market competition is fair and Introduce measures to prevent predatory negative externalities, such as undercutting environmental pollution are minimized or internalized by taxes and fees. 9 Relax categorization for existing operators GPCD Measures needed to prevent under- Ease restrictions on bus allocation to routes to supply of bus service at ”cold” hours improve vehicle and staff productivity Operators must obtain licenses for new routes 10 Ease market entry conditions GPCD Low fare rates are more likely to result from a competitive market, efficient operation, and pressure from users on local service operators. GPCD = Gansu Provincial Communications Department, GTAB = Gansu Transport Administration Bureau, No. = number, PPIC = pilot project implementation committee. Sources: Asian Development Bank estimates and technical assistance consultants.

4 ADB. 2004. Technical Assistance to the People’s Republic of China for Policy Reform in Road Transport. Manila.

Appendix 5 33

ROAD SAFETY AND VEHICLE EMISSIONS

A. Road Safety

1. Overview. Road safety is a serious issue in the People’s Republic of China (PRC). The World Health Organization estimates that road accidents cost the PRC economy from $12 billion to $21 billion each year, about 1.5% of the gross domestic product. 1 In 2005, 98,738 people were killed and 469,911 were injured in 450,254 road accidents.2 Unless urgent action is taken, road traffic fatalities in the PRC are predicted to increase to almost half a million per year by 2020. Main causes of the poor road safety are (i) lack of interdepartmental coordination and ownership; (ii) poor roads; (iii) a shortage of measures such as data systems and monitoring, road safety audit, inspection systems; (iv) shortage of skilled staff and resources; and (iv) weak enforcement.

2. Policy Framework. The Government thus created a 15-ministry committee under the State Council and promulgated the first Road Traffic Safety Law, which took effect in May 2004.3 The number of accidents dropped by 13.1% from 2004, the fatality rate decreased by 7.8%, and number of injured diminished by 2.3%. In 2005, Gansu had 5,414 accidents, involving 1,799 fatalities and 5,406 injuries, a decrease of 14.3%, 10.0%, and 2.7% from 2004. The reduction in accidents in 2005 is in part attributable to new road safety law, coordinated government efforts, and strengthened enforcement. For example, Gansu introduced a 10% increase in fines for overloaded vehicles leading to a major drop in the number of crashes attributable to overloading.4

3. Project Roads Safety. The Project will ensure that all the necessary safety measures are in place. An independent road safety audit of the project roads will be carried out during final design and construction as well as before the opening of the project expressway. Axle-weighing equipment will be installed on project roads to control vehicle overloading in the corridor. GPCD will concentrate on the engineering, road safety audit, blind-spot improvement, and operational issues, while the Gansu Provincial Security Bureau will deal with the traffic law enforcement. An integrated plan has been developed and will be included in the project administration memorandum to help the agencies to improve road safety in the region.

B. Vehicle Emissions

4. With the growing concern of vehicle emissions in the PRC, the Government is taking a series of measures to control emissions. The Gansu Environmental Protection Bureau (GEPB) is responsible for regulating vehicle emissions, in cooperation with the Gansu Provincial Security Bureau. Gansu follows the stricter national vehicle emission control standards (Table A5.1). By the time the Project is completed, hydrocarbons, carbon monoxide, and nitrogen oxide emissions from vehicles on the project roads are estimated to be at least 20% lower than without the Project because of faster and shorter travel. Under the Project, GPCD and GEPB will take the following recommended measures to further control vehicle emissions and air pollution (Table A5.2).

1 World Health Organization and Word Bank. 2004. World Report on Road Traffic Injury Prevention. 2 Ministry of Public Security Statistics. 3 ADB technical assistance paved the way for involvement of multisectoral groups (ADB. 1999. Technical Assistance to the People’s Republic of China for Capacity Building in Traffic Safety, Planning, and Management. Manila). 4 Gansu introduced the Provincial Roads Safety Ordinance, effective on 1 January 2006. The ceiling of financial penalty for overloading increased from CNY200 to CNY2,000. Overloading cases have substantially decreased.

34 Appendix 5

Table A5.1: Provincial Vehicle Emissions Control Strategy

Strategy Targets

Regulating emission standards Issue time-bound permits. Adopt performance standards equivalent to Euro II performance standards. Adopt performance standards equivalent to the Euro III by July 2007. Adopt performance standards equivalent to the Euro IV by July 2010. By then, vehicle emissions will be reduced by 30–50% Improving convention fuels For diesel vehicles, they need to use diesel with sulphur levels lower than 500 parts per million. Impose further reductions in sulphur levels upon adoption of new stricter vehicle emission standards. Encouraging alternative or cleane Encourage production of alternative fuel vehicle or modification of existing fuels vehicles to dual fuel engine vehicles. By 2005, a total of 1,916 buses and 1,546 taxies in Lanzhou had been converted. By 2005, 8 compressed natural gas filling stations for dual engine vehicle have been installed. Inspection/maintenance (I/M) GEPB has estimated a mandatory I/M program for vehicle emission control. program Light-duty vehicles that are less than 6 years old must be inspected every 2 years, and annually for other vehicles. Emission control devices are required to be repaired, updated, and installed if the vehicle cannot meet the required standards. In 2004, about 10,714 vehicles were selected for roadside testing. Retiring obsolete vehicles Forced retirement of vehicles that are more than 10 years old and failed the emission inspection test for three consecutive times. The state subsidizes the loss to the owner according to regulations. In 2004, Lanzhou retired 1,439 old vehicles that did not meet the standards. Sources: Gansu Environmental Protection Bureau.

Table A5.2: Recommended Measures in Vehicle Emissions Control

Item Recommended Measures Strengthen Gansu Environmental Launch training programs on vehicle emission control. Protection Bureau at Various Provide training in emission testing for staff working at testing centers and Levels roadside testing. Establish emission testing centers in all municipalities of the province. Introduce well-functioning audit and quality assurance system. Promote inspection and maintenance. Encourage Gas Stations along the Encourage gas stations to provide clean fuels, such as compressed natural Expressway to Provide Clean gas, liquefied natural gas and reformulated gasoline, in addition to normal Fuels gasoline. Encourage gas stations to install gasoline vapor capture equipment to reduce the noxious emissions. Strengthening Environmental Engage a qualified environmental monitoring institution to monitor ambient air Monitoring quality along the expressway, particularly at sensitive receptors, such as school, hospital, and residential sites. Capacity Building Conduct a capacity building and training program during project implementation to strengthen the local capacity. Sources: Gansu Provincial Communications Department and Asian Development Bank estimates.

Appendix 6 35

RURAL ROADS IMPROVEMENT PROGRAM

1. Overview. The road network in Longnan prefecture has a total length of 11,297 kilometer (km), mostly in poor condition; of this, 8,893 km (or 80%) is unclassified. There are no class-I and above roads and class-II roads account for only 3% of the total length. In Longnan, 787 villages are not connected with roads. Many villages rely on earth tracks that are unsuitable for motorized traffic due to poor riding quality, and which become impassable during the rainy and winter seasons. Bridges are of poor quality and take only light loads. Many smaller rivers are crossed by fording. Some sections of county roads are currently impassible because of landslides or mudflows. Where they are passable, vehicle operation costs tend to be high. Agricultural tractors and motor tricycles are the main form of motorized transport for both goods and people. It is estimated that the lack of roads has resulted in 10–20% of agricultural produce being wasted because of inability to transport it to markets and processing centers.

2. Paving the Unpaved Roads for the Poor. It is important to focus on the improvement of a core rural road network that would ensure a minimum connectivity for each township to a nearby main road. Gansu Provincial Communications Department agreed to integrate a local road component, comprising seven roads in total 357 km to be upgraded from unclassified to class-III or IV (Table A6). They were selected on the basis of road network efficiency from the provincial Rural Road Development Plan, economic development potential, and poverty incidence and population density. The existing roads are in very poor condition, sections are unpaved, and traffic on these roads has reached a certain level, so it is more economical to upgrade and pave them than maintain the unpaved roads to all weather condition. The total cost of the program is CNY233.8 million ($29.2 million), of which Asian Development Bank will finance $15 million of Wudu–Lixian road. The rest will be financed by the Government in conjunction of implementation of its Rural Road Development Plan by 2011.

3. Benefits. The rural roads have been evaluated. The major cost savings will be in the form of reduced vehicle operating costs which will ultimately convert to lower agricultural input costs and higher margins for agricultural output. The economic internal rate of return of rural roads network was satisfactory with an overall economic internal rate of return of 23% and a net present value of CNY285.6 million. Gansu Provincial Communications Department will start the construction of the project rural roads concurrently with the project expressway and be completed by 2011. The Program will directly benefit 763,000 people, about 52% of whom are poor beneficiaries, living below the Government low-income of CNY852 per capita per year.

Table A6: Rural Roads Improvement Program

Road Name Length Cost Towns Population Traffic Improvement (km) (CNY Served Served (AADT) million in pcu 1. Wudu–Lixian 141 128.7 10 300,000 1,020 Upgrade to class-III (101 km) Upgrade to class-IV (40 km) 2. Sijiaba–Changheba 47 28.2 4 150,000 364 Upgrade to class-IV (47 km) 3. Baihegou–Wangguan 49 25.6 4 105,000 978 Upgrade to class-III (41 km) Upgrade to class-V (8 km) 4. Zhaojiaba–Tianchi 28 12.6 2 28,000 350 Upgrade to class-IV 5. Chengxian–Er'lang 23 9.2 3 68,000 400 Upgrade to class-IV 6. Honghe–Kuanchuan 36 16.2 3 100,000 350 Upgrade to class-IV 7. Yangba–Ganjiangba 33 13.3 1 12,000 450 Upgrade to class-IV Total 357 233.8 27 763,000 AADT = average annual daily traffic, km = kilometer, NPV = net present value, pcu = passenger car unit. Sources: Gansu Provincial Communications Department and technical assistance consultants.

36 Appendix 7

RURAL ROAD MAINTENANCE

1. Existing Situation. Adequate and timely maintenance is important to ensure the sustainability of rural roads. With the increasing length of the road network, rapid increase in traffic volumes, and the trend toward using larger trucks with heavier axle loads, there is a growing concern about the accelerating maintenance requirements in the future. Road sector funding is still insufficient to meet demand of both construction and maintenance, particularly for the rural roads in the west region. In Gansu, local road administrative units in county governments are responsible for rural roads maintenance, and the quality of rural roads is periodically monitored by prefecture and provincial highway administration bureau. Main issues associated with rural road maintenance are: (i) insufficient funding, (ii) inadequate planning, (iii) limited implementation capacity, and (iv) lack of market-oriented approach and framework. Rural road maintenance is generally done by the road administrations, although it starts to experiment with maintenance by contracting out progressively.

2. Overall Road Maintenance Expenditure. In Gansu, the need for maintenance is increasingly recognized by various levels of the government. In terms of sustainability of overall road maintenance with the resource allocated, about 81–85% of the road maintenance fee was spent for road maintenance during 2001–2005, which met the standards in Box A7. The maintenance expenditures exceeded the growth rate of the road network and the road maintenance fee revenue, which means a net increase in the average maintenance expenditure per kilometer. In Gansu, roads with heavy traffic are receiving priorities for maintenance.

Table A7.1: Existing Road Network and Road Maintenance Financing in Gansu

Indicator 2001 2002 2003 2004 2005

1. Total Road Network (km) 39,844.0 40,224.0 40,293.0 40,751.0 41,330.0 Average annual increase (%) 1.0 0.2 1.1 1.4 2. Road Maintenance Fee Collected 838.0 966.0 1,027.0 1,048.0 1,063.0 Average annual increase (%) 15.0 6.0 2.0 1.0 3. Road Maintenance Expenditure (CNY million) 715.0 780.0 850.0 879.0 900.0 Average annual increase (%) 9.1 9.0 3.4 2.4 4. Expenditure Out of Fee Collection (%) 81.0 83.0 84.0 85.0 5. Average Unit Maintenance Cost (CNY1,000/km) 18.0 19.0 21.0 22.0 22.0 6. Average Annual Increase in Road Maintenance (%) 8.1 8.8 2.2 1.0 km = kilometer. Sources: Gansu Provincial Communications Department and Asian Development Bank estimates.

3. Rural Road Maintenance. The road maintenance fee is the main dedicated channel to core road network maintenance. Although maintenance is generally adequate for highways, there is an overall shortage of maintenance funds in Gansu, particularly for the lower class roads (class-IV and below). It is important to (i) get a strong commitment from provincial and local governments, (ii) ensure the timely and adequate fund allocation for rural road maintenance, and (iii) utilize the limited funds more effectively by adopting competitive approaches to reduce the whole life-cycle cost of rural road maintenance. The Project will (i) strengthen local road authorities’ capacity by developing rural road maintenance manual and providing on-the-job training, and (ii) encourage contracting out rural road maintenance to small- scale or community contractors through clear and transparent procurement procedures and a good monitoring system. Standard bidding documents will be developed under the Project.

4. Policy Framework. In 2005, the People’s Republic of China State Council launched the Policy Reform for Rural Road Maintenance. Under the new policy, construction and maintenance of rural roads will be of equal importance. Key points are summarized in Box A7.

Appendix 7 37

Box A7: State Council Rural Road Policy Framework (issued on 22 October 2005)

• Defining the roles and major responsibilities. County governments are responsible for rural road development and maintenance. Provincial governments will be mainly responsible for funding and supervision. • Providing adequate funding for the rural roads maintenance. Road maintenance shall receive a major share (typically not less than 80%) of the annual “road maintenance fee”. The central government funds will be allocated to prop the funding ability of local governments in the west. • Imposing a minimum level of funding for rural road maintenance. The allocation level shall not be lower than CNY7,000 per km per annum for county roads, CNY3,500 per km per annum for township roads, and CNY1,000 per km per annum for village roads. • Introducing “rewarding instead of subsidizing” criteria for funding allocation. Central government will allocate funds on the need-based (towards the west region). Performance indicators and proper conditionalities will be adopted. • Adopting more rigorous financial discipline. Using reimbursement procedure in lieu of biannual appropriation to provinces. Promote community consultations and disclosure of monitoring results to communities. • Introducing market-oriented mechanism. Introduce public bidding system, and cross-border participation is encouraged.

km = kilometer. Source: Ministry of Communications.

5. Rural Road Maintenance Plan. There is a need to turn the State Council policy into official regulations to provide a firm basis for their adoption. The policy dialogue about maintenance with Gansu Provincial Communications Department (GPCD) during project preparation helped raise awareness, and GPCD has prepared a rural road maintenance regulation and submitted to Gansu provincial government for approval. In addition, GPCD agreed to implement a rural road maintenance plan prepared during project preparation to strengthen rural road maintenance (Table A7.2).

Table A7.2: Rural Road Maintenance Plan

Activities Requirements and Current Progress Core rural road Develop a functional core rural road network plan (started and work is ongoing). network Establish a maintenance management system (work is ongoing). Conduct road condition survey and traffic counts to prepare cost (work is ongoing). Prepare maintenance master plan and assign a sub-network manager per each road. Prioritize and bring core network to all weather standards. Carry out preventive maintenance according to annual maintenance plan. Strengthen contract administration, quality assurance, monitoring and supervision Strengthen road safety and auditing.

Non-core rural road Develop a sustainable framework for non-core rural road network. network Provide technical advice to local communities and small maintenance companies. Provide basic materials and equipment to local communities and companies. Introduce preventive maintenance mechanism.

Capacity Building Assign a communications college to carry out and conduct on-the-job training. Develop rural road maintenance manual and on-the-job training by small contractors.

Financing Promulgate rural road maintenance regulation in line with the national policy. Adopt appropriate rules for access to and use of the maintenance funds. Tap nongovernment sources and local community participation. Improve the efficiency of use of funds and effective monitoring and auditing. Source: Asian Development Bank estimates.

DETAILED COST ESTIMATE BY FINANCIER 38

($ million) Appendix8

Asian Development Bank of Item Cost Bank (ADB) Communications (BOC) Government % of Cost % of Cost % of Cost $a Categoryb $$Category Category A. Base Costc 1. Earthwork 72.8 18.9 26 27.7 38 26.2 36 2. Pavement 32.3 8.4 26 12.3 38 11.6 36 3. Structures 470.7 122.4 26 178.9 38 169.4 36 4. Tunnels 385.7 100.3 26 146.6 38 138.8 36 5. Interchanges 32.2 8.4 26 12.2 38 11.6 36 6. Buildings and Roadside Facilities 31.3 0.0 0 11.9 38 19.4 62 7. Environmental Protection and Landscaping 22.9 0.0 0 8.7 38 14.2 62 Expressway Civil Works 1,047.9 275.1 26 395.2 38 377.6 36 8. Tunnel Equipment 23.6 0.0 0 11.8 50 11.8 50 9. Safety and Maintenance Equipment 3.1 3.1 100 0.0 0 0.0 0 10. Land Acquisition and Resettlement 48.3 0.0 0 0.0 0 48.3 100 11. Consulting Services and Training 1.8 1.8 100 0.0 0 0.0 0 12. Project Design and Supervisiond 58.5 0.0 0 0.0 0 58.5 100 13. Local Roads Financed by Asian Development Bank 16.1 15.0 93 0.0 0 1.1 7 14. Local Roads Financed by the Government 13.1 0.0 0 0.0 0 13.1 100 15. Township Bus Stations 10.0 5.0 50 0.0 0 5.0 50 16. Project Managemente 18.1 0.0 0 0.0 0 18.1 100 Subtotal (A) 1,240.5 300.0 24 407.0 33 533.5 43 B. Contingencies 1. Physical Contingencyf 118.6 0.0 0 60.7 51 57.9 49 2. Price Contingencyg 103.3 0.0 0 47.3 46 56.0 54 Subtotal (B) 221.9 0.0 0 108.0 49 113.9 51 C.Interesth and Other Charges During Implementation 197.6 0.0 0 197.6 100 0.0 0 Total Project Costs 1,660.0 300.0 18 712.6 43 647.4 39 % Total Project Cost 100% 18% ADB's share 43%BOC's sharei 39% Government's share a Amount of Asian Development Bank (ADB) loan proceeds allocated to the cost category. b The amounts disbursed by ADB for eligible expenditures under a cost category will be subject to the ceiling set by the allocation of loan proceeds for such cost category. c In 2006 prices, including taxes. Environmental protection included under civil works as $80.1 million, and costs for monitoring $5.5 million. d Includes $26.7 design cost. e Includes $11.3 research, testing, and quality control cost. f At 10% of base cost. g At 3% per annum for 2007–2011 for local currency costs and 1.9% per annum for foreign exchange cost during 2007–2011. h This is based on the prevailing United States dollar 5-year swap rate plus a spread for the ADB loan and prevailing interest rate for the China Construction Bank. i BOC = Bank of Communications in PRC. Source: Asian Development Bank estimates. IMPLEMENTATION SCHEDULE

Content 2006 2007 2008 2009 2010 2011 123456789101112123456789101112123456789101112123456789101112123456789101112123456789101112 A. Project Processing 1. Feasibility Study and Approval 2. Preliminary and Approval 3. Detailed Design and Approval 4. Advance Action Approval 5. Loan Approval 6. Loan Signing 7. Loan Effectiveness B. Land Acquisition 1. RP Preparation 2. RP Distribution 3. Preparation of Land Acquisition and ML&R Approval 4. Land Acquisition Activities C. International Consultants 1. RFP Preparation and Approval 2. RFP Issuance and Proposals Submission 3. Technical Evaluation and Approval 4. Financial Evaluation and Approval 5. Negotiation and Contract Award 6. Mobilization and Service D. Expressway Subgrade Contracts 1. BD Preparation and Approval 2. BD Issuance and Submission 3. Qualification Evaluation and Approval 4. Bid Evaluation and Approval 5. Negotiation and Contract Award 6. Preparation Works 7. Construction E. Expressway Pavement and Traffic Control 1. BD Preparation and Approval 2. BD Issuance and Submission 3. Qualification Evaluation and Approval 4. Bid Evaluation and Approval 5. Negotiation and Contract Award 6. Preparation Works 7. Construction F. Expressway Planting, Building 1. BD Preparation and Issuance 2. Bid Evaluation and Contract Award 3. Construction G. Expressway Equipment 1. BD Preparation and Issuance

2. Bid Evaluation and Contract Award 9 Appendix 3. Installing H. Local Roads 1. BD Preparation 2. Bid Issuance and Submission 3. Bid Evaluation and Contract Award 4. Construction

I. Township Bus Station 39 1. Implementation BD = bidding document, ML&R = Ministry of Land and Resources, RFP = request for proposal, RP = resettlement plan. Sources: Asian Development Bank estimates. 40 Appendix 10 ASIAN DEVELOPMENT BANK-FINANCED CONTRACT PACKAGES

Procurement No. Description Length Bidding ADB Advertise- Mode (km) Procedure Review ment A. Expressway Earthworks, Bridges, and Tunnels A01 K0+000~ K4+500 4.5 ICB 1S 2E Prior May-07 A02 K4+500~K13+500 9.0 ICB 1S 2E Prior May-07 A03 K13+500~K22+000 8.5 ICB 1S 2E Prior May-07 A04 K22+000~ K33+000 11.0 ICB 1S 2E Prior May-07 A05 K33+000~K40+000 7.0 ICB 1S 2E Prior May-07 A06 K40+000~K44+500 4.5 ICB 1S 2E Prior May-07 A07 K44+500~K51+000 6.5 ICB 1S 2E Prior May-07 A08 K51+000~K57+000 6.0 ICB 1S 2E Prior May-07 A09 K57+000~K61+200 4.2 ICB 1S 2E Prior May-07 A10 K61+200~K65+400 4.2 ICB 1S 2E Prior May-07 A11 K65+400~K71+000 5.6 ICB 1S 2E Prior May-07 A12 K71+000~K76+500 5.5 ICB 1S 2E Prior May-07 A13 K76+500~K82+000 5.5 ICB 1S 2E Prior May-07 A14 K82+000~K88+000 6.0 ICB 1S 2E Prior May-07 A15 K88+000~K93+000 5.0 ICB 1S 2E Prior May-07 A16 K93+000~K98+000 5.0 ICB 1S 2E Prior May-07 A17 K98+000~K102+000 4.0 ICB 1S 2E Prior May-07 A18 K102+000~K105+700 3.7 ICB 1S 2E Prior May-07 A19 K105+700~K110+000 4.3 ICB 1S 2E Prior May-07 A20 K110+000~K115+600 5.6 ICB 1S 2E Prior May-07 A21 K115+600~K120+000 4.4 ICB 1S 2E Prior May-07 A22 K120+000~K124+500 4.5 ICB 1S 2E Prior May-07 A23 K124+500~K129+000 4.5 ICB 1S 2E Prior May-07 A24 K129+000~K133+970 5.0 ICB 1S 2E Prior May-07 Subtotal (A) 134.0 B. Expressway Pavement B01 K0+000~K34+500 34.5 ICB 1S 2E Prior May-09 B02 K34+500~+K73+000 38.5 ICB 1S 2E Prior May-09 B03 K73+000~K107+500 34.5 ICB 1S 2E Prior May-09 B04 K107+500~K133+970 26.5 ICB 1S 2E Prior May-09 Subtotal (B) 134.0 C. Local Roads Financed by ADB (Wudu–Lixian) C01 K00+00~K50+00 50.0 NCB 1S 1E Prior Jan-07 C02 K50+00~K72+00 22.0 NCB 1S 1E Prior Jan-07 C03 K72+00~K105+00 33.0 NCB 1S 1E Prior Jan-07 C04 K105+00~K141+00 36.0 NCB 1S 1E Prior Jan-07 Subtotal (C) 141.0

D. Township Bus Stations No. No. of Stations Class Procurement Mode ADB Review T01 50 in Tianshui prefecture Class-V Shopping Post T02 50 in Dingxi prefecture Class-V Shopping Post T03 100 in Longnan prefecture Class-V Shopping Post

E. Testing, Training, Laboratory, and Maintenance Equipment No. Description Procurement Mode Bidding Procedure ADB Review M01 Testing Equipment ICB 1S 1E Prior M02 Training and laboratory ICB 1S 1E Prior

F. International Consulting Services No. Description Selection Method Type of Proposal ADB Review S01 Supervision and training QCBS FTP Prior ICB = international competitive bidding, km = kilometer, No. = number, 1S 1E = single stage one envelope, 1S 2E = single stage two envelopes, FTP = full technical proposal, QCBS = quality- and cost-based selection method. Source: Gansu Provincial Communications Department and Asian Development Bank estimates.

Appendix 11 41

MONITORING OF SOCIOECONOMIC AND POVERTY IMPACTS

A. Flow of Project Benefits

1. The Project will benefit road users and the rural poor. Together with other development interventions in the project area, the Project will contribute to the overall economic growth, social development, and poverty reduction.

B. Monitoring Framework

2. During project preparation, a standard monitoring framework and a set of monitoring indicators were designed to measure the actual benefits definitely (Table A11.1).

Table A11.1: Monitoring Framework: Indicators and Mechanism

Item Monitoring Indicators Monitoring Mechanism A. During Project Construction 1. Employment of local labors Number of local labors Contractor’s records (included in SDAP) Number of person-years Household survey 2. Use of local construction Value of construction materials Contractor’s records materials (included in SDAP) 3. Taxes to local government Tax Contractor’ and 4. Implementation of SDAP A set is included in SDAP government’s records 5. Implementation of RP A set is included in RP Progress report Resettlement monitoring B. Immediately Upon Project Completion Reduced travel time Travel time to county center Village survey C. Short-Term (within 1-3 years) 1. Lower transport costs Increased traffic volumes along the corridor Local statistics

2. Improved transport services Bus and freight fares Village survey Villages with bus services Village survey

3. Changes in producer prices Bus frequency to villages Village survey

4. Increased economic activities Fertilizer prices Household survey Vehicle ownership Village survey Transport expenses (of the total expense) Household survey Frequency of visits to markets Household survey

5. Increased access to social Increased trade in the region Local statistics services Travel time to the nearest school and clinic Village survey Middle school dropout rates (boys, girls) Village survey Frequency of visits by doctors Village survey D. Medium-Term (within 3–5 years) 1. Developed non-farm sector Income from non-farm sector Household survey Number of small business enterprises Village survey Number of tourists in the area County statistics Cash crops (percentage of total crops) Household survey

2. Increased agricultural extension Frequency of visits by agricultural technicians Village survey services Number of new or renovated houses Village survey

3. Increased rural incomes Rural income Village Survey 4. Reduced poverty incidence Rural poverty incidence RP = resettlement plan, SDAP = social development action plan. Source: ADB. 2002. Technical Assistance for Socioeconomic Assessment of Road Projects. Manila.

3. Monitoring will focus on a few representative communities in the project area, a useful exercise in accumulating knowledge on how benefits flow to local people. Because this pilot

42 Appendix 11 approach will greatly narrow down the scope of monitoring, local authorities are expected to undertake adequate monitoring more readily. During project preparation, three villages in three townships in Longnan prefecture were selected as the pilot sites: Dujialing (Anhua township), Loufang (Loutang township), and Jiudan (Pingya township).

C. Implementation of Monitoring

4. The Gansu Provincial Communications Department (GPCD) concurred with the monitoring framework and the set of indicators for monitoring the project’s performance. During project preparation, the baseline values for the indicators were specified to the extent available (Table A11.2) and will be further updated by GPCD, where necessary. GPCD will measure the indicators for project evaluation prior to and during project implementation at completion, and annually 3 years after project completion. GPCD will hire an independent, qualified institute for 30 person-months for surveys, analysis, and reporting. Reports will be submitted to the GPCD and Asian Development Bank.

Table A11.2: Baseline Data of Micro-Level Impact (2004)

Anhua Luotang Pingya Township Township Township Indicator TS DV HH TS LV HH TS JV HH Distance to township center 15 3 2.5 Villages with road access (%) 98 94 44 Villages with tap water (%) 83 91 22 Villages with access to telephone (%) 36 53 11 Number of telephones 795 10 423 18 8 0 Villages with bus services (%) 20 30 0 Bus frequency to county center (buses/day) 2 3 0 Fertilizer input (%) 6.7 8.2 7 Number of vehicles 6 15 6 Transport expenses (%) 7.4 5.6 8.2 Frequency of visits to county marketsa 0.5 1 0.5 Frequency of visits to township marketsa 3 4 2 Frequency of visits by doctors (number per 6 months) 1 1 0 Income from non-farm sector (%) 14 32 16 HH selling surplus grain (%) 14 0 60 HH selling animal products (%) 34 0 9 Frequency of visits by agricultural technicians (no. per 6 months) 1 1 1 Number of new or renovated houses 7 2 30 Number of long-term migrants (greater than 6 months) 60 30 60 Number of HH without large animals 6 9 10 Rural income (CNY) per year 1,450 550 1,190 850 821 770 Rural poverty incidence (%) 80 65 90 DV = Dujialing village, JV = Jiudun village, HH = household, LV = Loufang village, No. = number, TS = township. a time/household/month. Sources: Asian Development Bank and technical assistance consultants’ surveys.

5. Background macro-level baseline indicators were also collected to evaluate the overall economic growth and poverty reduction impact of the Project (Table A11.3).

Appendix 11 43

Table A11.3: Baseline Data of Macro-Level Impacts in 2004

Project Road Impact Area Broad Project Impact Area (County) (Prefecture) Category Indicators Wudu Wenxian Kangxian Longnan Tianshui Dingxi Economic GDP (million CNY) 919 542 369 6,338 7,629 6,323.6 Per capita GDP (CNY) 1,823 2,158 1,839 2,339 3,619 2,126 • Primary industry GDP

(%) 36 28 40 34 19 35 • Secondary industry

GDP (%) 18 37 19 31 47 27 • Tertiary industry GDP

(%) 46 35 41 35 44 38

Poverty Rural income (CNY/capita/year) 1,209 1,036 1,209 1,252 1,326 1,590 Villages 768 303 350 3,237 3,011 2,025 Designated poverty villages 561 212 238 2,433 1,619 989 Rural population 446,000 214,000 180,000 2,363,000 2,659,100 2,703,700 Population in poverty a 166,800 94,700 75,900 996,700 771,139 1,027,406 Poverty ratio (%) 37 44 42 42 29 38

Education Middle school enrollment rate (%) 62 68 61 67 95 69 Middle school dropout rate (%) 2 1.3 2.1 2.04 2.59 3.1

Health Reported HIV/AIDS cases 0 0 0 0 0 0

Transport National roads (km) 96 205 0 562 383 601 Provincial roads 212 15 82 720 318 593 County roads 205 226 298 1,620 1,233 1,508 Township roads 199 64 124 1,005 848 784 Village roads 2,041 595 579 7,127 4,459 5,465 Density (km/100 km2) 59 22 38 20 19 17 Villages with road access 650 187 280 2,460 2,050 1,828

Transport Passenger-km (million) 106 41 29 408 740 690 Services Passengers (million) 2 0.7 0.5 7.5 14 15 Average journey (km) 53 58 58 54.3 53 46 Inter-provincial bus routes 0 9 4 13 19 15 Inter-prefecture bus routes 7 2 2 45 99 90 Inter-county bus routes 31 25 29 85 180 147 Townships served by bus 35 20 27 169 113 119 Villages served by bus 562 202 245 2,602 1,434 1,693 Total registered trucks 555 285 193 2,382 4,421 5,420 Ton-km (million) 145 75.7 25.2 630.5 1,004 1,054 Average haul (km) 73.2 73.5 74.2 73.2 71 65 GDP = gross domestic product, km = kilometer. a People who live below the Government low-income line of CNY852 per capita per year (which is below the international poverty line of $1 per person per day. Sources: Gansu prefecture and county statistic yearbooks (2005), Gansu Yearbook 2005.

44 Appendix 12

TRAFFIC FORECAST

A. Overview

1. The project expressway, Wudu–Guanzihou (WuGuan), is an important section of the Lanzhou–Haikou artery, one of the nine north-south corridors of the National Expressway Network in the People’s Republic of China. The planned transport corridor starts from Lanzhou, runs through Lintao, Minxian, Wudu, and Guanzigou in Gansu province, then reaches Sichuan province to connect Chengdu and Chongqing, and ends at Haikou in Hainan province. This will form the shortest route between Lanzhou (capital of Gansu) and Chengdu (capital of Sichuan) and Chongqing municipalities in the western People’s Republic of China.

2. In Gansu, the Lanzhou–Lintao section is already open to traffic. The remaining sections from Lintao–Guanzigou will be constructed in three phases: Lintao–Minxian (156 kilometer [km]), Minxian–Wudu (159 km) and WuGuan (134 km). Considering the existing and future connectivity of road network, the WuGuan section is given the priority to construct to meet the needs of the corridor in most economical way. Road conditions between Wudu to Tianshui (via PH206 and NH316) and Tianshui to Lanzhou (NH45) are in general good condition (Map 2). In Sichuan, WuGuan section will connect to the planned expressway of Guanzigou to Guangyuan (56 km, target completion: 2012). The other expressways from Guangyuan further south in Sichuan are either under construction or already completed (Map 1). The main section of Chongqing to Beihai (seaport in Guangxi) will be completed by 2010. Therefore, upon completion of the expressway, local people along the expressway will be connected to all main cities of Lanzhou, Xi’an, Chongqing and Chengdu by class-II and above highways.

3. The project expressway will be built in parallel to existing national highway (NH212) and provincial highway (PH206). NH212, built in 1958 with a combination of classes-II–III and below standards, is in very poor condition. The length of NH212 from Wudu to Guanzigou is 270 km. All traffic takes a more roundabout route through the mountains, which increases the distance and slows down the average speed driven. The existing PH206, built in 1957, is below even class-IV standard, with steep slopes and sharp turns, resulting in a high safety risks. In addition, an unreliable ferry crossing over Bailong River is not always passable. NH212 and PH206 have become transport bottlenecks between project area and Sichuan province, impeding exchanges of people and goods. The proposed expressway with the total length of 134 km, will reduce the trip length from Wudu to Guanzigou by 136 km, and resulting of time savings of at least 5 to 7 hours.

B. Traffic Forecast

4. Future traffic on WuGuan was based on routine traffic counts and the comprehensive origin and destination (O&D) surveys that were made in May and June 2005 at eight observation stations under the feasibility study. These survey stations were located on NH212, PR206 and other roads in the project area. The traffic demand was projected separately for freight and passenger on the basis of expected increases in population, gross domestic product (GDP) and vehicle ownership. GDP growth rates were projected to be 9%, 8%, and 7% for the periods of 2005–2012, 2012–2022, and 2022–2032, respectively. The average demand elasticity was 1.1 for passengers and 0.9 for freight.

5. The traffic forecasts allow for potential generated and diverted traffic as a result of (i) the additional traffic generated by the Project through the lower cost of expressway travel; (ii) traffic diverted from the existing rail network from Lanzhou–Baoji–Chengdu because it is already run over its capacity; and (iii) potential divert traffic from other road corridors. The traffic projection also takes account of non-modeled local intra zone traffic on the road network.

Appendix 12 45

6. Assignment of traffic was made between every pair of traffic zones. The choice of route within the network was based on their perceptions of generalized travel costs, a function of travel time, distance and associated toll cost, affected by road conditions and traffic congestion. Without the Project, the existing roads will be very congested in 2012, resulting in expensive travel. With the Project, there will be significant improvement in terms of the performance and efficiency of the corridor. It will attract significant vehicle trips, especially of through traffic from other road corridors, which will reduce the number of accidents, vehicle operating costs, and travel time on these roads and thereby directly benefit the project area.

7. The diverted traffic from existing roads has been calculated using Asian Development Bank Toll Diversion Model. Depending on the trip length, 35% to 96% of traffic will divert to the project expressway. The higher diversion is for trips of over 200 km. Generated traffic, arising from the lower cost of expressway travel, will be related to the decrease in cost by price elasticity. Generated traffic was computed to be 12% for passenger and 9% for freight. Diverted traffic from the railway and other road corridors was assumed at 8% for passenger and 5% for freight.

8. The resulting traffic projection is given in Table A12 for the project expressway. The forecast traffic volume on the expressway is expected to grow from average of 5,500 passenger car units (pcu) in 2012 to an average of 11,200 pcu in 2022, a 7.4% average annual growth rate. It will then grow more slowly at 7.2% per annum thereafter to reach an average of 22,500 passenger car units in 2032.

Table A12: Average Annual Daily Traffic of Project Expressway (passenger car units)

Growth Growth Road Section 2012 2022 Rate (%) 2032 Rate (%) Shawan–Liangshui 8,257 15,699 6.6 29,978 6.7 Liangshui–Wudu 14,390 28,547 7.1 54,227 6.6 Wudu–Hanwang 8,575 17,610 7.5 36,564 7.6 Hanwang–Daánmiao 6,246 12,383 7.1 26,889 8.1 Daánmiao–Pipa 5,313 10,751 7.3 21,547 7.2 Pipa–Luotang 3,833 8,003 7.6 16,544 7.5 Luotang–Yujiawan 3,698 7,720 7.6 16,006 7.6 Yujiawan–Guanzigou 4,844 9,970 7.5 21,671 8.1 Weighted Average 5,500 11,200 7.4 22,500 7.2 Sources: Asian Development Bank and technical assistance consultants estimates.

46 Appendix 13

ECONOMIC ANALYSIS

1. General. The Project comprises a 134-kilometer (km), access-controlled expressway between Wudu and Guanzigou, upgrading of seven rural roads of total 357 km that connect to the expressway through the road network system, and 200 township bus stations. The economic analysis incorporates a 5-year implementation period and a 20-year operating period. The economic internal rate of return (EIRR) of the Project was estimated by comparing the situation with and without the Project. Without the Project, traffic will continue to use the existing road network, national highway (NH212) and provincial highway (PH206, which will be more congested and expensive to maintain due to rapidly increasing volume of traffic. Some travel may not take place because of the congestion and the resulting increasing travel time and vehicle operating costs (VOCs). With the Project, traffic will benefit from faster, cheaper, and safer travel due to the rapidly reducing of congestion. Some additional trips will be generated as the economy responds to lower transport costs and better services. There will also be some diversion of traffic from existing rail services in the corridor, mainly for fresh and consumer goods.

2. Expressway Component. Economic evaluation was undertaken using 2006 prices, which expressed in CNY using the domestic price numeraire with a shadow exchange rate factor of 1.013 for foreign exchange effects. A shadow price was used to put an economic value on the wages paid to unskilled labor, but not on the wage paid to skilled labor, because no skilled worker surplus exists. A shadow wage rate factor of 0.67 was used to convert the financial wage rate to an economic opportunity cost of labor. The economic costs of the expressway include (i) the capital cost, including physical contingence, land acquisition and resettlement, and environmental mitigation costs; and (ii) the costs of operation and maintenance (O&M) the expressway, including the costs of replacing depreciated equipment. The land acquisition and resettlement costs were based on their opportunity costs, that is, the agricultural output forgone and the re-siting of displaced activities.

3. The economic benefits include (i) savings in VOCs resulting from the reduced travel distance and improved road conditions; (ii) savings in the value of passenger time and freight tied up in transit; (iii) savings resulting from fewer accidents; (iv) benefits to generated traffic; and (v) savings in capital and O&M costs for NH212.

4. The project expressway will shorten the route by 136 km. The calculations of VOC savings allow for differences in roughness, terrain, speed, and congestion, and also allow for a changing vehicle mix for both passenger and freight vehicles and improvements in the vehicle performance. Travel time savings are valued for passengers in vehicles only as the time of crew members is valued in the VOCs. The values used per person hour are CNY6.93 for car passengers and CNY1.04 for bus passengers. The economic costs of accidents are estimated in terms of direct property damage and forgone income on the basis of national data for 2005. The average direct cost of an accident is estimated at CNY35,800 on expressways, CNY34,800 on class-II roads, CNY32,800 on class-III roads, and CNY28,500 on class-IV roads. The benefits to generated traffic are estimated at half the VOC and time savings of normal traffic as a proxy for willingness to pay. In addition, savings in capital and O&M costs for NH212 and PH206 are calculated on the basis of maintaining a volume-to-capacity ratio of 1.0 without the Project. The EIRR for the expressway component was estimated at 17.5%, indicating that the Project is economically viable, with a net present value of CNY5,161.5 billion.

5. Rural Road Component. The rural roads for upgrading under the Project were chosen based on the effect on overall road network efficiency and cost-benefit analysis, economic

Appendix 13 47 development potential and population density. The rural road costs include capital cost and O&M costs. The principal benefits of the rural road improvement were identified as (i) VOC savings, (ii) benefits to generated traffic, and (iii) savings in O&M costs. The seven rural roads have a combined EIRR of 23% per annum with a net present value of CNY285.6 million.

6. Rural Transport Service Component. Economic benefits of rural transport service include: (i) time savings, (ii) economic output from the economic and social activities that would be foregone due to the loss of passenger travels resulting from unpredictable bus schedules and/or poor weather conditions, (iii) economic output of the generated traffic resulting from improved passenger transport services, and (iv) traffic accident cost savings. In addition, the improved transport services are expected to generate substantial social values in the form of broadened socioeconomic opportunities for the rural people. Without the Project, lack of efficient transport services causes produce spoilage, delay of freight delivery, labor unemployed, road accident, and lower school attendance. The results from pilot projects undertaken in Gansu since 2003 provide strong empirical evidence to support the social and economic justifications for the provision of township bus stations to the rural poor (Appendix 4).

7. The Whole Project. The Project as a whole generates an estimated EIRR of 17.9% (Table A13.1). The VOC savings from the expressway are the major economic benefit (75%) followed by passenger time savings (13%). Avoided accident costs, savings to generated traffic, and other benefits are all relatively small. The benefits of the rural roads, while important to the villages concerned, account for 3.8% of the total benefits.

8. The results of sensitivity analysis confirm the robustness of the project’s economic viability: changes in the key variables—construction costs, 1-year delay in completion, and benefits do not significantly affect the economic viability (Table A13.2). The capital cost would have to be 68% higher than estimated for the EIRR to fall to the cutoff rate of 12%. Considering the experience of Asian Development Bank in the People’s Republic of China, such an increase in capital cost is unlikely. Asian Development Bank-financed road projects in the People’s Republic of China have not encountered major cost overruns.

9. A risk analysis was carried out to determine the degree of uncertainty on the Project. Each uncertainty factor (such as capital cost, traffic growth, gross domestic product growth, etc.) was varied at random within defined limits. The results of the risk analysis showed with these uncertainties, that the (i) expected EIRR, based on the weighted average of all simulated combination is 15.2% about 2.7% lower than the base case EIRR of 17.9% (without consideration of risks); (ii) EIRR associated with assumed probabilities range from a minimum of 11.9% to a maximum of 17.7%; and (iii) the probability of the EIRR to be below 12% is 6.1%.

10. The economic analysis of the Project was extended to analyze distribution of project net benefits by determining the project effects for various beneficiaries, including road users, labor, and local economy. It was found that road users will receive the largest share of net benefit, accounting for 93% (65% for passenger traffic and 28% for freight traffic) of the total net benefits.

Table A13.1: Economic Internal Rate of Return 48 (constant 2006 economic prices, domestic numeraire, CNY million) Year Without With Project Costs Total VOC

Project Cost Cost Time Accident Generate Freight Rail Rural Total Net 13 Appendix Capital O&M Rural Bus Cost Savings Savings Savings Traffic Savings Diversion Roads Benefits Benefits Roads Stations 2007 932.2 93.5 32.0 1,057.7 (1,057.7) 2008 2,627.6 70.1 24.0 2,721.8 (2,721.8)

2009 2,202.5 46.8 16.0 2,265.3 (2,265.3) 2010 2,054.6 11.7 4.0 2,070.3 (2,070.3) 2011 2,005.4 11.7 4.0 2,021.1 (2,021.1) 2012 38.5 43.2 1.8 5.0 11.5 1,075.6 178.4 35.2 30.0 4.6 68.4 82.1 1,474.3 1,462.8 2012 38.5 43.2 1.8 5.0 11.5 1,075.6 178.4 35.2 30.0 4.6 68.4 82.1 1,474.3 1,462.8 2013 40.4 44.2 1.9 5.2 10.8 1,193.1 200.3 38.0 32.9 5.4 72.9 86.1 1,628.7 1,617.9 2014 42.5 45.2 1.9 5.3 10.0 1,323.4 224.8 41.0 36.1 6.3 77.6 90.4 1,799.6 1,789.6 2015 44.6 46.3 2.0 5.5 9.1 1,467.8 252.3 44.3 39.6 7.4 82.6 94.8 1,988.8 1,979.7 2016 46.9 47.4 2.0 5.6 8.2 1,628.0 283.1 47.8 43.4 8.6 88.0 99.4 2,198.3 2,190.2 2017 49.3 48.5 2.1 5.8 7.1 1,805.5 317.6 51.6 47.6 10.0 93.7 104.3 2,430.4 2,423.2 2018 51.8 49.7 2.2 6.0 6.0 2,002.4 356.1 55.7 52.3 11.7 99.8 109.4 2,687.4 2,681.4 2019 54.4 50.9 2.2 6.1 4.8 2,220.6 399.3 60.1 57.3 13.7 106.3 114.8 2,972.1 2,967.3 2020 57.2 52.1 2.3 6.3 3.6 2,462.5 447.5 64.9 62.9 16.0 113.2 120.4 3,287.5 3,283.9 2021 58.0 53.4 2.4 6.5 4.2 2,730.8 501.5 70.0 69.0 18.6 118.3 126.4 3,634.6 3,630.3 2022 58.9 182.6 54.7 2.4 6.7 187.5 2,960.2 542.5 74.9 73.6 20.9 126.5 133.7 3,932.4 3,744.9 2023 59.9 56.0 2.5 6.9 5.6 3,208.8 586.7 80.1 78.5 23.5 135.4 140.5 4,253.5 4,247.9 2024 60.9 57.4 2.6 7.1 6.3 3,478.4 634.2 85.7 83.7 26.4 144.9 147.6 4,600.8 4,594.5 2025 61.9 58.9 2.7 7.3 7.0 3,770.5 685.3 91.6 89.3 29.6 155.0 155.0 4,976.3 4,969.3 2026 63.0 60.4 2.7 7.6 7.7 4,087.2 740.1 98.0 95.2 33.2 165.9 162.9 5,382.4 5,374.7 2027 64.2 61.9 2.8 7.8 8.3 4,430.4 798.9 104.7 101.6 37.2 177.5 171.1 5,821.5 5,813.1 2028 65.4 63.5 2.9 8.0 9.0 4,802.5 862.1 112.0 108.3 41.7 189.9 179.7 6,296.2 6,287.2 2029 66.6 65.1 3.0 8.3 9.7 5,205.7 929.7 119.8 115.6 46.7 203.2 188.8 6,809.4 6,799.7 2030 68.0 66.8 3.1 8.5 0.4 5,642.8 1,002.1 128.1 123.3 52.3 217.4 198.3 7,364.2 7,353.8 2031 69.4 (6,069.12) 68.5 3.2 8.8 (6,058.0) 6,116.5 1,079.5 137.0 131.5 58.6 233.2 211.0 7,967.1 14,025.1 Economic Net Present Value 5,655.9 Economic Internal Rate of Return 17.9% ( ) = negative, O&M = operation and maintenance, VOC = vehicle operating cost. Source: Asian Development Bank and technical assistance consultants estimates.

Table A13.2: Sensitivity Analysis Scenario EIRR (%) NPV (CNY million) Switching Valuea (%) 1. Base Case 17.9 5,655.9 2. Benefits reduced by 10% 16.8 4,400.7 43.9 3. Cost increased by 10% 16.9 4,962.0 78.1 4. Traffic decreased by 10% 15.5 3,388.5 24.9 5. Delayed opening of 1 year 16.2 3,961.5 NPV declines by 30% 6. Combination 2, 3, 4, and 5 14.3 2,194.9 NPV declines by 46% EIRR = economic internal rate of return, NPV = net present value. a Switching value indicates the percentage increase in a cost item (or decline in a benefit item) required for the NPV to become zero. Source: Asian Development Bank and technical assistant consultants estimates.

Appendix 14 49

FINANCIAL ANALYSIS AND PROJECTIONS

A. General

1. The projected financial statements of the proposed Project have been prepared in current terms for the period 2007–2031. Construction will be completed in 2011, and the first full year of operation will be 2012. The assumed foreign and local inflation rates are assumed at 1.9% and 3% during the projection period. The initial foreign exchange rate used for 2006 is CNY8.02 to $1. The cost estimates are presented in current terms taking into account the potential impacts of domestic and international inflation.

B. Financial Projections

2. Operating revenues from tolls are projected based on forecast of future traffic and a base toll rate of CNY0.35 per passenger car per kilometer (km). Corresponding tolls for other vehicle types are CNY0.55 for a small bus or a light truck; CNY0.80 for a medium-sized bus or truck; CNY1.25 for a large bus or truck; CNY1.60 for a light articulated truck; and CNY2.00 for a trailer.1 In addition to expressway tolls, Gansu Provincial Communications Department (GPCD) proposes to impose tunnel toll rate of CNY3.0 per passenger car per km for tunnels over 1 km in length.2 The toll rates are assumed to increase in current terms to keep up with inflation. There would be no real increase of project tolls over project life span. The main purpose of the toll collection is to repay loans, not to maximize the financial rate of return on the entire investment. Other income (from fuel sales, rental income, etc.) amounts to 2% of toll revenue.

3. Annual incremental operation and maintenance (O&M) costs are calculated based on 2006 prices as follows: (i) toll operation cost totaled an estimated CNY11.05 million in 2012 (300 staff members with annual wages of CNY30,000 per person, and other administration expenses). Labor costs will rise at a growth rate of 4% in real terms, and staff number will increase with traffic flows using an elasticity of 0.05; (ii) routine maintenance costs are estimated at CNY80,000 per km per annum; and it will increase in line with traffic flows using an elasticity of 0.3; (iii) tunnel O&M costs account for about 50% of total O&M expenses in the opening year. Assumptions include: electricity costs at CNY0.50 per kilowatt hour; labor costs at CNY15,000 per annum; and regular maintenance costs at CNY300,000 per km; and (iv) environmental monitoring costs at CNY800,000 per annum. All incremental O&M costs are projected to increase annually in line with domestic inflation rates. In addition, periodic maintenance cost would be required after 10 years of operation at a cost of CNY1.2 million per km in 2006 prices.

4. The Project will be funded at 39% by equity or grants, 61% by long-term loans. The Bank of Communications (BOC) loan will be repayable over 25 years, including a 5-year grace period. For the Asian Development Bank’s (ADB) loan, it is assumed as 25-year maturity, including a 5-year grace period, US dollar London interbank offered rate (LIBOR)-based loan. In addition, there is 0.75% commitment fee.

5. Applicable business taxes at a rate of 5.5% are charged on revenue. Corporate income tax at 15% is paid on income after deducting business taxes,3 depreciation and interest charges, operating expenses, and any prior year losses carried forward.

1 Under the current Gansu provincial “green passage” regulations, to reduce the burden for the poor, local vehicles carrying fresh agricultural produce or livestock are exempted from tolls. Poor communities will benefit from the exemption. It is assumed that 10% of such vehicles are exempted from tolls. 2 It is consistent with current practice in the west region and in accordance with the Toll Road Management Regulation announced by the State Council in September 2004. 3 Concessionary rate applied for qualifying western region companies (including expressway companies).

50 Appendix 14

6. Projected financial statements are presented in Table A14.1. Despite the low profitability, the forecast revenue under the base assumptions are sufficient to cover annual recurrent costs, depreciation, debt repayments on the ADB and BOC loans from the expressway operation from the six year of operation.

C. Financial Analysis

7. The major assumptions used for calculation of financial internal rate of return (FIRR) are: (i) all calculations are made in 2006 prices, covering a period from 2007 to 2031; (ii) capital cost include all incremental capital expenditures related to the construction and equipment for the expressway, but exclude price contingencies and interest during construction; (iii) O&M costs include all annual incremental expenses incurred in operating the expressway, but exclude depreciation and debt repayment provisions; (iv) operating revenues from toll used in financial projections are also adjusted to 2006 prices; and (v) the residual value equal to undepreciated value of capital investment is included as a benefit of the FIRR calculation.

8. The estimated weighted average cost of capital (WACC), after-tax, in real terms was calculated using estimated capital mix and costs of funds. Costs have been considered as follows: (i) the applicable 10 year fixed swap rate plus a provision for ADB’s spread of 0.6% is used for ADB debt, (ii) the estimated interest costs of 6.39% per annum is used for the domestic loan funds, and (iii) the cost of equity was assumed to be 8%. The cost of debt is also adjusted to reflect the impact of income tax of 15%. The nominal cost of debt is converted to the real cost of debt by applying domestic and international average inflation rate for domestic and foreign currency denominated debt, respectively.

9. The FIRR for the Project, computed on an after-tax basis, is 4.6%. This compares favorably with the WACC, also computed at after-tax basis, of 3.4% (Table A14.2). The Project is considered both financially viable and sustainable. The sensitivity of the project's financial indicators to cost and revenue variations is shown in Table A14.3.

C. Financial Evaluation of Gansu Provincial Communications Department

10. The actual revenue and expenditures of GPCD during the Tenth Five-Year Plan (10th FYP, 2001–2005) and projected Eleventh Five Year Plan (11th FYP 2006–2010) are given in Table A14.4. Over the 10th FYP, the expenditures were financed by vehicle purchase tax, Ministry of Communication’s subsidy and provincial budget (50%), road maintenance fee (8%), toll revenues (6%), transport service surcharges (12%), and bank loan (24%). New construction accounted about 70% of total revenue while maintenance expenditure accounted about 9% of total revenue.

11. Based on the budget forecasts, the financing of the Project will require about 8% of the projected annual total GPCD revenue during the 11th FYP. This ratio indicates the total investment cost of the Project constitutes only a small fraction of GPCD’s road expenses. During the 11th FYP, the funds’ allocation is expected to improve with the new construction budget projected to remain at the same level (70%) while the maintenance will increase to about 11% of the total revenue. GPCD has the capacity to mobilize sufficient counterpart funds for the construction and ensure overall sustainability of the project rural roads and township bus stations.

Table A14.1 Projected Financial Statements (CNY million)

Item 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

A. Income Statement Tolls 0.0 0.0 0.0 0.0 0.0 500.6 550.3 604.9 701.8 771.4 848.0 932.1 1,024.6 Non-toll revenue 0.0 0.0 0.0 0.0 0.0 8.6 9.5 10.4 11.4 12.5 14.2 16.8 20.3 less: business taxes 0.0 0.0 0.0 0.0 0.0 28.5 31.3 34.4 39.9 43.9 48.2 53.0 58.3 Total revenue 0.0 0.0 0.0 0.0 0.0 480.7 528.4 580.8 673.3 740.1 814.0 895.9 986.6 Total operating expenses 0.0 0.0 0.0 0.0 0.0 53.5 56.3 59.2 62.3 65.6 69.0 72.7 76.5 Depreciation 0.0 0.0 0.0 0.0 0.0 343.2 343.2 343.2 343.2 343.2 343.2 343.2 343.2 Interest charges: long-term 0.0 0.0 0.0 0.0 0.0 483.2 483.5 476.3 468.7 460.6 452.0 442.9 433.2 Interest charges: short-term 0.0 0.0 0.0 0.0 0.0 0.7 9.6 16.8 21.7 22.3 21.0 17.8 12.5 Income tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Operating Profit/(Loss) 0.0 0.0 0.0 0.0 0.0 (407.0) (364.2) (314.7) (222.7) (151.7) (71.4) 19.2 121.1

B. Balance Sheet Current assets: 0.0 0.0 0.0 0.0 13.4 14.1 14.8 15.6 16.4 42.8 105.2 208.3 348.0 Fixed assets: 1,641.8 4,863.3 7,779.1 10,685.2 12,993.5 12,650.2 12,307.0 11,963.8 11,620.6 11,277.3 10,934.1 10,590.9 10,247.6 Total Assets 1,641.8 4,863.3 7,779.1 10,685.2 13,006.9 12,664.3 12,321.8 11,979.4 11,637.0 11,320.1 11,039.3 10,799.2 10,595.6

Current liabilities 0.0 0.0 0.0 0.0 13.4 188.1 326.8 423.2 435.4 410.1 349.1 266.4 230.3 Long-term debt 750.3 2,865.3 4,638.1 6,291.9 7,906.0 7,795.8 7,678.8 7,554.6 7,422.8 7,282.9 7,134.4 6,976.9 6,809.6 Equity 891.5 1,998.0 3,141.0 4,393.3 5,087.5 4,680.5 4,316.3 4,001.5 3,778.8 3,627.1 3,555.7 3,555.7 3,555.7 Total Liabilities and Equity 1,641.8 4,863.3 7,779.1 10,685.2 13,006.9 12,664.3 12,321.8 11,979.4 11,637.0 11,320.1 11,039.3 10,799.2 10,595.6

C. Cash Flow Statement Internal cash generation 0.0 0.0 0.0 0.0 0.0 430.1 472.4 521.9 611.5 674.8 745.3 823.6 910.6 External financing 1,641.8 3,221.5 2,915.8 2,906.1 2,321.7 171.8 138.5 96.2 11.6 0.0 0.0 0.0 0.0 Total sources of funds 1,641.8 3,221.5 2,915.8 2,906.1 2,321.7 601.9 610.8 618.0 623.1 674.8 745.3 823.6 910.6 Construction of expressway 1,641.8 3,221.5 2,915.8 2,906.1 2,308.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt service 0.0 0.0 0.0 0.0 0.0 601.2 610.1 617.3 622.3 648.4 683.0 720.5 751.7 Distributions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25.6 61.5 102.2 157.9 Total application of funds 1.641.8 3,221.5 2,915.8 2,906.1 2,308.2 601.2 610.1 617.3 622.3 674.0 744.4 822.7 909.6 End of Year Cash 0.0 0.0 0.0 0.0 13.4 14.1 14.8 15.6 16.4 42.8 105.2 208.3 348.0 14 Appendix Debt to Equity Ratio 46% 59% 60% 59% 61% 62% 62% 63% 64% 64% 65% 65% 64% Debt-Service Ratio 0.72 0.79 0.87 1.02 1.12 1.24 1.37 1.52 Working Ratio (%) 11% 11% 10% 9% 9% 8% 8% 8% Source: Asian Development Bank estimates.

52 Appendix 14

Table A14.2: Financial Internal Rate of Return

Net Cash Flow Capital O&M Project Business Corporate After Income Year Investment Cost Revenues Tax Income Tax Tax 2007 1,004.5 0.0 0.0 0.0 (1,004.5) 2008 2,831.5 0.0 0.0 0.0 (2,831.5) 2009 2,373.4 0.0 0.0 0.0 (2,373.4) 2010 2,214.0 0.0 0.0 0.0 (2,214.0) 2011 2,161.0 0.0 0.0 0.0 (2,161.0) 2012 0.0 45.0 428.1 24.0 0.0 359.1 2013 0.0 46.1 457.8 25.6 0.0 386.1 2014 0.0 47.2 489.5 27.4 0.0 414.9 2015 0.0 48.3 552.0 30.9 0.0 472.8 2016 0.0 49.4 590.2 33.1 0.0 507.8 2017 0.0 50.6 631.1 35.3 0.0 545.2 2018 0.0 51.8 674.8 37.8 0.0 585.2 2019 0.0 53.1 721.5 40.4 0.0 628.1 2020 0.0 54.3 771.5 43.2 0.0 674.0 2021 0.0 55.7 843.9 47.3 0.0 740.9 2022 197.2 57.0 901.6 50.5 0.0 596.8 2023 0.0 58.4 963.2 53.9 37.4 813.4 2024 0.0 59.9 1,029.0 57.6 73.7 837.8 2025 0.0 61.4 1,099.4 61.6 86.8 889.6 2026 0.0 62.9 1,174.6 65.8 100.7 945.1 2027 0.0 64.5 1,254.9 70.3 133.8 986.3 2028 0.0 66.2 1,340.7 75.1 148.5 1,050.9 2029 0.0 67.9 1,432.3 80.2 163.7 1,120.5 2030 0.0 69.6 1,530.3 85.7 179.9 1,195.1 2031 (6,540) 71.5 1,683.7 94.3 203.8 7,854.1 FIRR before corporate tax 4.9% FIRR after corporate tax 4.6% WACC 3.4% ( ) = negative, FIRR = financial internal rate of return, O&M = operation and maintenance, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

Table A14.3 Sensitivity Analysis

FIRR WACC Maximum Return on Net Scenario % % Debt to Equity Assets (%) 1 Base Case 4.6 3.4 61:39 2.5 2 Revenues decreased by 10% 3.9 3.4 61:39 2.0 3 O&M costs increased by 10% 4.5 3.4 61:39 2.4 4 Capital cost increased by 10% 4.1 3.3 62:38 2.1 5 Construction delay of 1 year 4.3 3.4 61:39 2.2 6 Combination 2, 3, 4, and 5. 3.5 3.3 62:38 1.4 FIRR = financial internal rate of return, O&M = operation and maintenance, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

Table A14.4: Gansu Road Sector Revenue and Expenditures: 2001–2010 (CNY million)

2006–2010 Item 2001 2002 2003 2004 2005 Total Estimate

1. Road Maintenance Fee 838.4 966.0 1,026.9 1,047.5 1,063.2 4,942.0 6,613.5 2. Toll Revenue 434.7 575.0 806.2 886.8 1,204.1 3,906.8 6,548.7 3. Surcharges on Passenger Tickets 224.3 167.9 177.1 709.6 722.3 2,001.2 3,928.3 4. Surcharge on Freight Tickets 824.3 864.6 891.8 943.2 1,176.5 4,700.4 5,000.0 5. Transport Management Fee 63.5 71.5 82.4 94.3 93.0 404.7 516.0 6. Vehicle Purchase Feea 2,700.1 3,324.5 3,618.7 9,643.3 7. State Bonds and Subsidy 1,431.9 2,125.9 1,602.0 2,439.1 1,277.9 8,876.8 8,900.0 8. Ministry of Communications Subsidy 1,170.0 1,397.0 2,121.0 3,148.3 2,186.4 10,022.7 33,000.0 9. Provincial Budget Allocation 330.9 220.0 174.0 325.0 401.0 1,450.9 3,200.0 10. Bank Loan 1,158.8 998.7 1,322.4 3,904.1 7,248.1 14,632.1 22,000.0 Total 9,176.9 10,711.1 11,822.5 13,497.9 15,372.5 60,580.9 89,706.5

Expenditure 1. New Construction and Rehabilitation 6,044.7 6,733.6 7,747.70 10,193.9 11,528.0 42,247.9 63,000.0 2. Taxes 30.4 97.9 56.4 64.4 76.5 325.6 500.0 3. Traffic Safety Supervisionb 6.0 6.0 6.0 6.0 6.0 30.0 36.0 4. Major Maintenance 493.4 560.9 576.8 504.2 658.6 2,793.9 3,800.0 5. Medium Maintenance 469.4 537.6 551.5 374.3 491.4 2,424.2 3,500.0 6. Routine Maintenance 96.4 96.4 96.4 96.4 96.4 482.0 2,600.0 7. Road Administration and Study 68.8 57.0 62.8 72.3 79.3 340.2 469.4 8. Repayment of Interest and Principal 1,080.0 1,702.0 1,759.0 1,144.0 1,152.0 6,837.0 9,350.0 9. Transport Services Expenditure 887.8 919.7 965.9 1,042.5 1,284.3 5,100.1 6,451.1 Total 9,176.9 10,711.1 11,822.5 13,497.9 15,372.5 60,580.90 89,706.5 a Vehicle purchase fee was replaced by vehicle purchase tax, at present managed by Ministry of Communications. It is allocated to the provinces through Ministry of Communications subsidy. b Traffic Safety supervision is the budget allocated by Gansu Provincial Communications Department to supplement the traffic police budget.

Source: Gansu Provincial Communications Department. 14 Appendix

54 Appendix 15 SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

A. Linkages to the Country Poverty Analysis Is the sector identified as a national Yes Is the sector identified as a national Yes priority in country poverty analysis? priority in country poverty partnership No agreement? No

Contribution of the sector or subsector to reduce poverty in the People’s Republic of China:

Contributions will be through improved linkage to market and improved access to external jobs and social services for the poor; lower transport costs of agricultural inputs and products; better access to and interaction with other regions, and jobs during construction and after completion owing to increased economic activities. Specifically, the project’s local road component of 357 kilometer (km) and 200 township bus stations will help local people to break the transport bottleneck and, therefore, add economic values to their fruits, vegetables and animals that have been introduced by various poverty reduction and agricultural development programs. Expressway (especially interchange areas), local roads and township bus stations will speed up the development of mineral and tourism resources, and facilitate the formation of new local growth centers that will have greater impact on poverty reduction.

B. Poverty Analysis Targeting Classification: General intervention

What type of poverty analysis is needed?

Socioeconomic Profile. With a per capita GDP of CNY6,135 (45% of the national average), Gansu ranked 30th among the 31 administrative areas. Annual per capita rural income in Gansu was CNY1,980, or 39% lower than the national average of CNY3,255. Annual per capita rural income was CNY1,252 in Longnan, CNY1,326 in Tianshui and CNY1,590 in Dingxi, or 60%, 59% and 51% lower than the national average of CNY3,255. The incidence of rural poverty in Longnan, Tianshui and Dingxi are 42%, 29% and 38%, respectively, which indicates that project area is still an economically underdeveloped area in the PRC. The Project will benefit 2.7 million people in Longnan (focal prefecture of the Project). In addition, 50 township bus stations in Dingxi and 50 township bus stations in Tianshui prefectures will benefit additional nearly 2 million people (0.99 million in Tianshui and 0.95 million in Dingxi). In total, the Project will benefit 4.6 million people, of whom 37% are poor.

Social Benefits. It is estimated that total 56,000 person-years of unskilled jobs will be created during the project construction and each worker is estimated to earn CNY6,000 per year assuming one worker works 300 days/year and earn CNY20/day, which is 4.6 times higher than average annual income per capita in the Project impact areas (CNY1,300). Overy 60% of the jobs will be filled up by the poor with an estimated total of CNY200 million in wage payment annually during construction. Using local materials for the project construction will contribute CNY200 million. The Project will also create 1,700 full time jobs in which CNY15 million of wage payments will be received annually by the poor during operation. In addition, the estimated tax revenue from the expressway construction to the local governments is CNY248 million. This additional revenue will be used for poverty reduction and social activities, with special attention to resettlement affected groups, women, and other vulnerable people in the region.

Improved Rural Road Conditions at Township Level. In Longnan, there are total 11,297 km of roads, of which 8,893 km (79%) are unclassified, The Project will improve 357 km rural roads from unclassified standard to classes- III–IV standard, of which 99 km in Wudu district, 28 km in Wengxian county, 33 km in Kangxian county, 72 km in Chengxian county, and 125 km in Lixian county. It is estimated that 763,000 people of poor will benefit from it.

Improved Access to Other Off-farm Opportunities. The project road area is rich in minerals (lead, zinc, and vanadium), agricultural products, forestry, livestock, hydropower generation, and tourism resources. Longnan and Tianshui are hot tourists areas, had attracted over 2 millions tourists in 2005. The number of registered small business in Longnan is 27,232 (51% in rural area) in 2004 and it is expected to increase by 20% at project completion.

Improved Rural Transport Services. Currently, there are 13 inter-provincial bus routes and 85 inter-county bus routes in Longnan. Most of rural people travel to the township center for marketing, shopping, schooling and accessing to the hospital. It is expected to increase by 1.5 times more bus routes for inter-provincial and 2 times more bus routes for inter-county after the project completion. At present, the travel times from Wudu are 10 hours to Lanzhou, 12 hours to Xi’an or Chengdu, and 16 hours to Chongqing. It is expected to be half of travel times upon project completion.

C. Participation Process Is there a stakeholder analysis? Yes No

Rural and urban population, bus passengers (long distance and inter- and intra-county), transport operators (freight, bus, and drivers), enterprises (industry, tourism, and traders), and local government are identified as the project stakeholders. Positive and negative effects to these groups caused by the Project were analyzed by the social survey. Over 5,000 people from different stakeholders were consulted during the project preparatory stage.

Appendix 15 55 Is there a participation strategy? Yes No

Before the alignment was finalized, local government and communities were consulted to minimize losses of high quality arable land. The local people will have an opportunity to participate in the Project. It is estimated that the total 62 million unskilled worker-days is required under the Project—61,568,982 worker days for the expressway construction based on the feasibility study estimates and another 1,700 full-time jobs during operation.

D. Gender Development

Strategy to maximize impacts on women:

All participants interviewed during social surveys know the HIV/AIDS and 70% of them know some of the preventative measures. The Project will facilitate women to make more trips and save their travel time. Gansu already has a high rate of women involved in road construction and maintenance activities since they prefer local work to going outside. The Project owner will encourage contractors to provide equal opportunities for women. For example, about 60% of women will be engaged for the landscaping work.

Has an output been prepared? Yes No

Employment quota of women under the project construction is agreed with the Executing Agency and included in relevant sections of the RRP, the Social Development Action Plan, and loan covenant.

E. Social Safeguards and Other Social Risks

Significant/ Strategy to Address Issues Plan Item Not Significant/ Required None Significant A full resettlement plan (RP) for the expressway and connector Full roads and a short RP for the local roads and bus stations have Resettlement Not significant been prepared in accordance with the government regulations and Short ADB’s Policy on Involuntary Resettlement. Both RPs will be None updated and disclosed to the public and affected people. Internal None and external monitoring arrangements will be put in place. Significant The annual transport expenditure for the poor is about CNY37.8 per capita. Average fare per person per km is Yes Affordability Not significant CNY0.20 for long distance trip bus fare. Most people could afford the service. The “green passage” regulation allows that local No None vehicles carrying fresh agricultural produce or livestock are exempted from tolls. Significant Gansu Provincial Communications Department will ensure that civil work contractors comply with all applicable labor law and Yes Labor Not significant regulation. Contract documents will include clauses (i) prohibiting child labor for construction and maintenance activities, (ii) ensuring No None equal pay for men and women for work of equal value, and (iii) requiring timely payment for workers for on a monthly basis. Ethnic minorities accounts for 2% of total population in Longnan. Indigenous Significant They will not be negatively affected by the expressway and local Yes Peoples road components. They do not live along the expressway or local Not significant road alignments, so no households are affected by resettlement. No However, special measures will be taken to enhance their benefits None in accordance with Social Development Action Plan. No HIV/AIDS cases were reported from in the project area. The Other Risks Significant Project will take preventative measures by providing free condoms, Yes and/or conduct awareness raising program by putting posters and Vulnerabilities Not significant pamphlet, early identification activity by consultation at the No construction camp and conducting voluntary testing. These None activities will be carried out in collaboration with local health agency. In addition, each county has a center for diseases control which in charge of controlling and preventing HIV/STIs and laboratory for initial screening. Each village (average 100 households) has one officially licensed clinic for providing basic service including immunization, promotion of family planning, education on HIV/AIDS and STDs prevention, and childhood protection.

SOCIAL DEVELOPMENT ACTION PLAN 56

Agencies Funding

Proposed Action Targets Timing Monitoring Indicators 16 Appendix Involved Requirements Direct Project Benefits and Safeguard Actions 1. Job creation during construction: 70-80% of 56,000 person- GPCD, GCHC, 2007– Local government • Number of local laborers • Use of local unskilled labor including those years unskilled labor force contractors, 2011 programs for poverty employed by gender.

from poverty villages in project area hired locally including 40– poverty reduction, training, • Number of workers from poverty especially poor, women, vulnerable and 50% women. reduction and assistance for households by gender and ethnic minorities. offices, All- women and ethnic ethnic groups • Priority given for local communities in 60% of unskilled labor China Women’s minorities. • Number of local communities providing services and supplies at the from poverty households. Federation and laborers provisioning the (ACWF) and service areas and construction camps. Priority for affected work camps by gender other local • Priority given for households affected by households. • Number of laborers from land acquisition and resettlement. government affected households Labor from at least agencies. • Pre-training by local governments and on- 80 poor villages along the • Appropriate contract clauses. the-job training by contractors. alignment. • Owner and local government will encourage contractors to achieve hiring targets. 2. Use of local materials for construction: All materials locally GPCD, GCHC, 2007– Included in • Amount and source of supplies • Purchase of local construction materials. available sourced locally contractors and 2011 contractor’s budget from local area. • Use of workers from poverty households for (sand, stone, clay and local for civil works. • Number of local workers and sourcing materials especially women and some cement) with governments. workers from poverty ethnic minorities. estimated value of households by gender • Borrow pits and quarries returned to their CNY200 million, of which • Condition of work sites at natural state or developed for other 60% of value added in conclusion of each contract. beneficial use. labor. • Appropriate contract clauses. • Purchase of indirect services locally. 3. Control of transmissible diseases and All workers informed about GPCD, GCHC , 2007– Project and local • Number of health workers human trafficking dangers of HIV/STI and contractors, 2012 governments, • Incidence of HIV/AIDS and • Health testing, counseling and referrals in human trafficking. County Health including tax revenue human trafficking cases construction camps, and availability of Testing and medical Departments, of local governments • Number of patients with STIs condoms at work camps and entertainment referral service available to Center for from the Project. • Number of individual tests. centers. workers, women, and local Disease • Local health budgets • Awareness and prevention on HIV/AIDS/ residents. Control, and STIs and human trafficking campaigns civil affairs through posters and pamphlets at bureaus. construction sites and service centers, radio and TV messages and public meetings.

Agencies Funding Proposed Action Targets Timing Monitoring Indicators Involved Requirements 4. Income recovery for resettlement All affected persons, with GPCD, GCHC, 2007– Project and local • Income level of affected people, affected people special measures for local 2011 government especially vulnerable people, by • Identification of vulnerable people women and vulnerable government Covered by gender • Income restoration measures people resettlement resettlement plan • No. of people trained, by gender • Farmland development offices, and budget • Amount of land developed • Training and special assistance village • Affected people employed by • Preference for construction work committees contractors • Construction access roads for local use • Km of roads for local use

• Timely restoration of irrigation systems • Restored irrigation systems 5. Construction safety and disturbances All contractors and GPCD, GCHC 2007– Project’s • Signed contracts • Ensure the safety of construction areas and construction workers and contractors. 2011 Environmental • No. of workers injured campsites through the safety guidelines Protection Budget. • No. of accidents developed and incorporated into contracts • No. of inspections with all contractors. • No. and resolution of complaints • Prohibiting night-time construction and adherence to proposed noise standards • Periodic inspections by the GPCD • Community monitoring 6. Seven local roads and 200 township bus Rural townships in Gansu Highway 2006- Project budget for • No. of townships with transport stations. Longnan, Tianshui and Bureau and 2008 200 bus stations and centers • 800 permanent jobs for transport centers Dingxi, including bus local transport local roads. • No. of permanent workers • Direct transport benefits for local people station for Xincheng bureaus and • Improved transport services • Two of project local roads serve tourist Tibetan township. Gansu • Reduced travel time and cost areas in Wenxian county and Wudu district. Transport Administration Bureau 7. Improved Road safety Communities along NH212 GPCD, Local 2006 – No additional cost, • No. of warning signboards • Speed limited signboards on National and other provincial roads. public security 2010 included in local • Road accident statistics Highway (NH) 212 at sections crossing rural Drivers bureau and government budget. • No. of safety awareness towns and villages local transport programs • Strict implementation/enforcement of traffic bureau regulation on NH212 • Safety awareness programs in school • Improved driver training/testing in Longnan

Sources: Gansu Provincial Communications Department and Asian Development Bank estimates. 16 Appendix 57

58 Appendix 17

SMALL BUSINESS DEVELOPMENT IN THE PROJECT AREA

1. The focal prefecture of the Project (Longnan) is geographically isolated (surrounded by high mountain range and counties located in narrow valleys), and there are no rail line or other non-road transport modes. The economy is mainly supported by agriculture, labor migration, mineral extraction, and hydropower generation. Presently, it takes 10–16 hours to reach Lanzhou, Xi’an, Chengdu and Chongqing due to poor roads condition. 1 At present, It is extremely difficult to trade with larger markets at a competitive price (transportation cost and delivery time are high). The transport bottleneck has been a major barrier for both large and small businesses development.

2. The Project will provide better link to regional central markets (Lanzhou, Xi’an, Chongqing and Chengdu), which creates opportunities for local people to expand and start local produce export-oriented processing and trading. It is expected that the local produce export- oriented processing and trading business will also increase by 20% in about 5 years after construction completion. The Project will result in a booming development of tourism industry.2 In response to this booming growth, there will be high demand for provision of services of various types, including catering, handcraft production and trade, and local transport, etc. All together, the Project will result in an overall 25% growth of small business in the project area by 2015. Such a growth will benefit about 50,000 labors and their families.

3. The project area has potential for the small business to grow rapidly. Proposed initiatives to further develop small business and commercial activities are given in Box A17. These initiatives will be implemented by local government, in cooperation with local road authorities.

Box A17: Proposed Initiatives to Develop Small Business in the Region

• Improve road conditions from village to townships (direct project component). • Establish permanent markets at township level near the township bus stations (direct project component). • Establish small business incubator at expressway service areas and interchanges along rural roads and next to township bus stations. • Promote local tourist spots and restaurants along the expressways and local roads by advertising on road maps, billboards, and signs to attract more visitors. • Ease the restriction and barriers for farmers to access the micro-credit. • Provide legal advice, trainings, access to capital, and business licenses to form the farmer’s cooperatives. • Enhance credit services with technical trainings. • Involve local educational institution for community economic development. Government will create the partnership program between educational institutions and local community. • Disseminate information on procedures to start-up businesses in cooperation with nongovernment entities and educational institutions.

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

1 Certain sections of National Highway 212 are almost impassable at present. 2 Longnan has received 147,200 tourists during the 7-day holiday during 1–7 May 2006, a 121% increase over that of the same period of 2005. Also, Wenxian County is directly connected with the Jiuzhaigou National Nature Reserve Park in Sichuan Province.

Appendix 18 59

SUMMARY RESETTLEMENT PLAN

1. One resettlement plan addresses impacts caused by the expressway component, including connector roads, based on the project feasibility study. Another resettlement plan addresses the relatively small impacts caused by the rural road upgrading program and the construction of 200 township bus stations. Prior to commencement of land acquisition, Gansu Provincial Communications Department (GPCD) will update both resettlement plans based on detailed measurement survey and submit them to Asian Development Bank (ADB) for approval. During project construction, if there is significant material change in project scope or other causes, the resettlement plans will be revised, disclosed to affected persons (APs) and submitted to ADB for approval prior to commencement of such changes.

2. The proposed expressway will permanently require 681 hectares (ha) of land of which 12% is non-irrigated farmland, 30% is irrigated farmland, 12% is orchard, 6% is housing plots, and 40% is floodplain, shrub forest, grassland and wasteland. Another 33 ha of land is estimated to be occupied temporarily during the construction phase. Based on the Chinese standard for impact assessment, the equivalent of 2,834 persons would lose all their land and agricultural livelihoods. Since the expressway will actually cross many parcels of scattered farmland, it is estimated that the average loss of land per household would be 33%, which means the number of partially affected people would be in the order of 8,500 persons (or about 2,070 households). Along with land acquisition, 15,130 square meters of houses will be demolished, necessitating relocation of 151 rural households (621 persons), which is an average of 2 houses per village.

3. For the upgrading of seven rural roads, it is estimated that about 100 households with 400 persons would be relocated and another 500 persons would be partially affected by land acquisition. The 200 township transport centers do not require land acquisition; instead they obtain land use rights for existing state-owned construction land in each town. Each center will require 1,000–1,500 m2 of land, for a total of 26.6 ha; these sites have been selected and agreements have been signed between the Gansu Transport Administration Bureau and each township government.

4. For people unavoidably affected, the resettlement objective is to achieve equal or better income and living standards in line with the People’s Republic of China Land Administration Law (1998), State Council Document No. 28, and the ADB’s Policy on Involuntary Resettlement. The GPCD will ensure that any people losing land, housing, other assets or income sources will be assisted to fully restore their income and living standards. In July 2005, the Gansu provincial government issued Decree No. 48 which stipulates the regulations for land compensation, resettlement subsidies, young crop compensation, and other measures to carry out resettlement. According to the policy and basic socioeconomic conditions among project counties, land compensation standards have been established based on 16 times the average annual output value (AAOV). However, the AAOV are going to be updated based on detailed survey, so the actual compensation rates are not yet finalized. The estimated compensation rates in Wudu District and Wenxian County are estimated to range from CNY13,000 to 22,300 per mu for irrigated farmland; CNY8,300 to 15,500 per mu for dryland, cash forest, floodplain and house plots, CNY17,600 to 32,700 per mu for vegetable land, CNY5,000 to 9,300 per mu for shrub forest, CNY4,200 to 7,700 per mu for grassland and CNY1,000 for wasteland. If basic farmland is acquired, compensation will be calculated on the basis of 30 times AAOV. The land compensation rates for the rural roads will follow the same compensation principles. Green crops will be compensated based on 0.5 times AAOV. Those people losing land temporarily during construction will receive a payment equivalent to production value foregone for the period of loss, which is expected to be 2 years. The land used temporarily will also be restored by the contractor to the original condition; the contractors will deposit funds with Longnan Land and Resources Office to ensure this restoration is completed properly.

60 Appendix 18

5. For structures to be demolished, replacement value will be provided to the affected households based on compensation rates adopted in Longnan which range from CNY350 to CNY450 per square meter for brick-concrete structure, CNY250 to CNY350 per square meter for brick-wood structure, and CNY150 to 250 per square meter for earth-wood structure. The relocation will provide an opportunity to improve current housing conditions for relocated households. Most of these households will be moved a short distance to another site within their original group or village. Rural housing will either be built (i) in a scattered manner beside roadways, or (ii) in a clustered manner close to existing settlements; all sites will be provided with water supply, electricity, telephone, and TV cable. There will be no reduction in house compensation for depreciation, and people can salvage materials from their old houses.

6. GPCD will assume the overall responsibility for implementing resettlement according to the approved resettlement plans. For the expressway component, a Resettlement Division within the Gansu Changda Highway Company Limited (GCHC) will be directly responsible to coordinate the planning, implementation, financing and reporting of land acquisition and resettlement for the expressway and connector roads. A resettlement leading group and resettlement office was established in Longnan prefecture on 21 February 2006. Offices will also be set up in Wudu District and Wenxian County, and staff will be assigned in all affected townships and villages to implement resettlement. The county land and resources offices will take the primary responsibility for the resettlement consultation, implementation and timely delivery of entitlements, with assistance from townships and villages concerned.

7. The 1998 Land Administration Law requires disclosure and consultation with APs. Affected villages have been notified about the key elements of the resettlement plan during meetings and interviews. Resettlement information was disclosed through newspapers to all affected persons in April and May 2006. During detailed resettlement planning, there will be further notifications and consultations to discuss specific impacts and how they will be addressed. The county, township and village officials have ensured that any concerns raised by the people affected will be quickly addressed.

8. The plan for internal and external monitoring and evaluation is included in both resettlement plans. The GCHC will engage a qualified domestic monitor to carry out independent resettlement monitoring and evaluation. The monitor will ascertain whether APs have (i) received their full entitlements on time; and (ii) fully restored their livelihoods, income levels, and living standards. The monitor will conduct a baseline survey prior to resettlement, semi-annual investigations during resettlement and annual survey updates for two years after the completion of resettlement. The household survey will include a representative number of those severely affected by loss of land, those losing housing, and those classified as economically vulnerable. The monitor will provide ADB and GPCD with copies of the monitoring and evaluation reports twice a year during resettlement implementation, and once a year after resettlement completion for at least 2 years. For the expressway component, an internal monitoring and reporting system will be established in the Resettlement Division of GCHC and report to ADB on the progress of land acquisition and resettlement through quarterly progress reports and a resettlement completion report. For the other project components, internal monitoring will be done by GPCD and the land and resources bureaus; progress will be reported to ADB every 6 months.