Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 37490 June 2007

Proposed Loan People’s Republic of China: Eastern Sichuan Roads Development Project

CURRENCY EQUIVALENTS (as of 31 May 2007)

Currency Unit – yuan (CNY) CNY1.00 = $0.1308 $1.00 = CNY7.6458

The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00 = CNY7.73, the rate prevailing at the consultation mission for the Project, was used.

ABBREVIATIONS

ADB – Asian Development Bank BOT – build-operate-transfer EARD – East Asia Department EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return HIV/AIDS – human immunodeficiency virus/acquired immunodeficiency syndrome ICB – international competitive bidding ITS – intelligent transport system JBIC – Japan Bank for International Cooperation LIBOR – London interbank offered rate MOC – Ministry of Communications NCB – national competitive bidding O&M – operation and maintenance PCR – project completion report PRC – People’s Republic of China SDAP – social development action plan SDEC – Sichuan Dashaan Expressway Company Limited STI – sexually transmitted infection PPMS – project performance management system SPCD – Sichuan Provincial Communications Department SPG – Sichuan provincial government TA – technical assistance VOC – vehicle operating costs

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. C. Rayner, Transport Division, EARD

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

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 C. Policy Dialogue 4 D. Lessons 6 E. Rationale 7 III. THE PROPOSED PROJECT 8 A. Impact and Outcome 8 B. Outputs 8 C. Special Features 8 D. Project Investment Plan 9 E. Financing Plan 10 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 13 A. Traffic Forecast 13 B. Economic Analysis 14 C. Financial Analysis and Projections 14 D. Poverty Reduction and Social Strategy 15 E. Environmental Assessment 16 F. Land Acquisition and Resettlement 16 G. Risks 17 V. ASSURANCES 18 VI. RECOMMENDATION 20 APPENDIXES 1. Design and Monitoring Framework 21 2. Road Sector Analysis 24 3. Sichuan Road Sector Revenue and Expenditures: 2001–2010 28 4. External Assistance to the Road Sector 29 5. Rural Road Development and Local Road Component 31 6. Rural Road Maintenance 33 7. Detailed Cost Estimate by Financier 36 8. Implementation Schedule 37 9. Summary Procurement Plan 38 10. Monitoring of Socioeconomic and Poverty Impacts 40 11. Traffic Forecast 42 12. Economic Analysis 44 13. Financial Analysis and Projections 48 14. Summary Poverty Reduction and Social Strategy 52 15. Small Business Development in the Project Area 54 16. Social Development Action Plan: 2006–2010 56 ii

17. Stakeholder Participation and Consultations 58 18. Summary Resettlement Plan 59

SUPPLEMENTARY APPENDIXES (available on request) A. Draft Concession Framework Agreement B. Private Sector Involvement in the PRC Road Sector C. Road Safety and Vehicle Emissions D. Transport Services E. Intelligent Transport System and Asset Management F. Financial Management Assessment G. Organization Charts of the Executing Agency H. Procurement Plan I. Terms of Reference for Consultants J. Poverty Reduction and Social Strategy K. Environmental Review and Assessment Procedures for Local Roads L. 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, a summary of which was circulated to the Asian Development Bank’s (ADB’s) Board of Directors and uploaded to the ADB website on 16 May 2006.

Project Description The Project is in Sichuan province in the poor southwestern region of the PRC. In 2005, the per capita gross domestic product of Sichuan was only 61% of the national average. The Project will support the Government’s strategy by building an important section of the western region corridor connecting two growth centers—Chongqing and Xi’an—by (i) constructing an expressway across mountainous terrain; (ii) improving the local roads that service poor counties and townships; and (iii) providing consulting services and training to build capacity at the local communications bureau and improve construction quality, road safety, and project monitoring and evaluation.

Rationale Despite considerable investments in the road sector, the PRC road network still does not provide efficient transport to large parts of the country—particularly to poorer inland regions like Sichuan. Better transport links are necessary to (i) improve economic efficiency, (ii) foster domestic and international trade, (iii) facilitate interregional integration, and (iv) reduce poverty. The provinces of western PRC lack high-class road infrastructure. The road network must be improved to facilitate sustainable economic development and ensure that the social and economic benefits of investments in the region reach poor rural areas. To enhance economic development and reduce poverty in western PRC, the Government is implementing the Western Region Development Strategy, which aims to reduce development disparities between the western and coastal regions. The Project will support this strategy. It will be the fourth road project in Sichuan to be financed by ADB. It will complement three completed or ongoing ADB- financed projects in Sichuan that likewise concentrate on developing the Xi’an-Kunming road corridor. iv

Impact and Outcome The impact of the Project is to develop an integrated road transport system that supports sustainable economic growth in Sichuan province. The outcome of the Project is improved road transport efficiency and safety in the project area. The Project will (i) reduce traffic accidents and vehicle operating costs; (ii) improve access between Chongqing and Xi’an, two major growth centers in western PRC; (iii) provide additional transport capacity to accommodate growing traffic volume; and (iv) provide improved access to markets and social services in a poor area. The Project has the following outputs: (i) construction of a 143-kilometer (km), four-lane, access-controlled toll expressway from Dazhou to Wanyuan, including access roads, interchanges with toll stations, tunnels, bridges, administrative stations, and service areas; (ii) upgrading of 430 km of local roads to improve access to poor remote areas; (iii) promoting corporate governance by separating expressway construction and operations from the provincial government; and (iv) building capacity in project management, quality control, road safety, and monitoring and evaluation. To realize these outputs, the following key activities are needed: civil works for the expressway and local roads, equipment, resettlement, consulting services, and training.

Project Investment Plan The investment cost of the Project is estimated to be $1.425 billion, including taxes.

Financing Plan Financing Plan ($ million) Source Total % Asian Development Bank 200.0 14 China Development Bank 556.0 39 Ministry of Communications 229.0 16 Sichuan Provincial Government 440.0 31 Total 1,425.0 100 Source: Asian Development Bank estimates.

A loan of $200 million from the ordinary capital resources of ADB 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 0.35% 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 Sichuan provincial government (SPG), and through SPG, to the Sichuan Dashaan Expressway Company Limited (SDEC) on the same financial terms and conditions as those of the ADB loan. The SDEC will bear the interest rate variation and foreign exchange risks.

v

Period of Utilization Until 31 December 2012

Estimated Project 30 June 2012 Completion Date

Implementation The Sichuan Provincial Communications Department (SPCD) will Arrangements be responsible for overall implementation of the Project while SDEC will be responsible for the physical implementation activities on a day-to-day basis, including the ADB-financed portion of the local road component. The SPCD will provide guidance to the local communications bureaus for carrying out the local roads component of the Project.

Executing Agency SPCD

Procurement Goods and services financed by the ADB loan will be procured in accordance with ADB’s Procurement Guidelines. Main civil works for the expressway will be procured through international competitive bidding. On 24 May 2006, ADB approved advance contracting for procurement of civil works.

Consulting Services The Project will provide 51 person-months of international consulting services to (i) help with project management during the construction period, (ii) provide expertise in tunnel construction, (iii) conduct a safety audit of the project design and make safety recommendations on the completed construction works, (iv) help set up and implement quality control procedures, (v) monitor the environmental impact of the Project and provide guidance on environmental mitigation measures, (vi) assist with formulating a human resource development and training program, and (vii) help establish and implement a project performance management system. The team leader will be in the field during the construction period and will act as assistant chief supervision engineer. In that capacity he or she will (i) help the chief supervision engineer certify variation orders, contractors' monthly payments, and subcontracting documents; and (ii) help establish a contracts management system. All consultants to be financed under the ADB loan will be selected and engaged based on the quality- and cost-based selection method in accordance with ADB’s Guidelines on the Use of Consultants. The national consultants for construction supervision will be financed by SPCD and will be recruited in accordance with government procedures.

vi

Project Benefits and By developing an integrated expressway and complementary local Beneficiaries road network, the Project will help improve access to markets and social services for the rural poor residents in the project area. The Project will reduce transport time and costs, and thereby encourage investment, create jobs, and increase incomes. The economic internal rate of return for the Project is estimated to be 14.1%. The financial internal rate of return for the expressway component is 4.1%, which is higher than the real weighted average cost of capital. About 137,800 people, or 6.5% of the rural population in the project area, are considered rural poor (i.e., they have annual per capita incomes of less than CNY900). The main project beneficiaries of the local road component will be (i) households in poor counties and townships in the project area; (ii) providers of rural transport and industrial and agricultural businesses; (iii) agriculture-based households producing grains and vegetables for local markets; (iv) people living in the project area, who will have easier access to long-distance transport; and (v) transport operators and their customers for transit traffic. The Project will also help reduce traffic accidents, vehicle emissions, and traffic noise on the existing roads.

Risks and Assumptions The Project was formulated to reduce potential technical, economic, financial, and social risks. The main technical risks are associated with extensive tunnels and bridges. To mitigate the risks, selection of contractors focuses on their financial and technical capability to handle complex works. SPCD has experience, and has shown satisfactory performance, in implementing internationally financed projects. Economic performance in the project-influenced area would have to deteriorate substantially for the Project to lose its economic viability. The financial risks associated with construction and operation of the expressway will depend on the level and composition of traffic, construction costs, the skill of the expressway's commercial managers, and tolls. To mitigate the financial risks, (i) SDEC will build up a commercial business environment for expressway operations, (ii) the project expressway will receive substantial equity from the government, and (iii) an effective toll structure will be adopted. For projects that generate revenue in domestic currency, there are risks associated with exchange-rate fluctuations; these risks are partly accounted for in the base-case calculations for the Project. The social risks include resettlement and HIV/AIDS 1 infection risks. Mitigation measures are in place in the resettlement plan and in the social action development plan.

1 Human immunodeficiency virus/acquired immunodeficiency syndrome. 100o 00'E 106o 00'E

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I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the People’s Republic of China (PRC) for the Eastern Sichuan Roads Development Project. The main features of the proposed Project are summarized in the design and monitoring framework (Appendix 1).

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Performance Indicators and Analysis

2. The PRC’s economic growth since the 1980s has substantially increased the demand for transport services. The changing and increasingly diverse economy has altered the pattern of transport demand. The demand for road transport has outpaced demand for other transport modes. Movement of goods and passengers by road—which is more flexible and responsive than other transport modes to the needs of a market economy—is rapidly increasing. The shift in transport demand also reflects the loosening of anticompetitive restrictions in the road transport industry. From 1990 to 2005, passenger road traffic grew 8.8% per annum, reaching 929.9 billion passenger-kilometers (km), while freight road traffic grew 6.4% per annum, reaching 857.4 billion ton-km. In Sichuan over the same period, road passenger traffic grew 6.5% per annum, to 55.2 billion passenger-km, and road freight traffic grew 4.3% per annum, to 28.6 billion ton-km. In 2005, road traffic accounted for 53% of the country’s total passenger traffic, and 11.0% of the total freight traffic; the corresponding figures for Sichuan province were 65.3% and 33.6%. The vehicle fleet will continue to expand in light of the country’s rapid economic growth, low current vehicle ownership rates, increasing access to loans to finance automobile purchases, and large investment in automotive manufacturing. Total vehicle ownership in Sichuan went from 765,000 in 2000 to 1,268,000 in 2004—a 65.8% increase.

3. To meet the growing demand for improved transport infrastructure and services, the Government spent about CNY1.9 trillion on building new roads during the 10th Five-Year Plan period (2001–2005). By the end of 2005, the total length of roads in the PRC amounted to 1.92 million km, of which about 17% were class II or higher standard. The density of the road network was still low—20.0 km per 100 km2. The Government’s policy for the road sector, as reflected in its 11th Five-Year Plan (2006–2010), calls for (i) construction of 380,000 km of new roads to expand the total road network to 2.3 million km; (ii) 25,000 km of that 380,000 km to be expressways,1 increasing the total length of expressways to 65,000 km by 2010; (iii) completion of the national trunk highway system by 2007; (iv) completion of interprovincial western development corridors by 2010; and (v) completion of 65–70% of the proposed national expressway network, with the total length reaching 55,000–60,000 km by 2010. In Sichuan, 29,000 km of new highways were completed in the 10th Five-Year Plan, of which 759 km were expressways. The provincial government plans to build 19,000 km of highways during the 11th Five-Year Plan, with 1,401 km of expressways.

4. While the national trunk highway system is being developed, accessibility in most of rural PRC is still low: 75 townships and 38,426 villages, mostly in the western regions, had no access to all-weather roads in 2005. Many townships and villages still depend on earth tracks that are not suitable for motorized traffic and become impassable during the rainy season. Even where all-weather rural roads have been built, the standard is low, maintenance is poor, and many roads need rehabilitation. Since 2003, the Government has been investing about CNY20 billion in rural road development annually. About 50,000 km of rural roads have been built and 150,000

1 The PRC had 41,005 km of expressways in 2005, second only to the United States. 2 km of rural roads have been upgraded annually. By the end of 2005, the Government had built 494,276 km of county roads and 981,430 km of township roads. As a result, about 99.8% townships and 94.3% villages were connected by all-weather roads and 81.1% townships and 55.5% villages were connected by paved roads. In February 2005 the PRC Government's State Council approved the Rural Road Development Plan, which aims to invest CNY800 billion in developing rural roads under the 11th Five-Year Plan (2006–2010). By 2010, plans call for connecting all townships and villages in the PRC with all-weather roads, and connecting 90% of townships and 80% of villages with paved roads. In the eastern region, 100% townships and villages would be linked with paved roads; the same target will be applied to all townships and 88% villages in the central region, and to 90% of the townships and 50% of the villages in the western region.

5. By the end of 2005, the Sichuan Provincial Communications Department (SPCD) had built 240,167 km of rural roads, of which 36,047 km were county roads, 49,735 km were township roads, and 154,385 km were village roads. Based on the Sichuan Province Rural Road Development Plan, the SPCD plans to build 30,000 km of township roads and 20,000 km of village roads during the 11th Five-Year Plan, which targets completion of 11,250 km of county-to- township roads, ensuring that 80% of the province’s townships are connected by paved roads. The Dazhou city government invested CNY50 million in 2004 and CNY20 million in 2005 in rural road development. The city government’s development plan calls every township and village in Dazhou prefecture to be connected by paved roads to either a county center or a nearby trunk highway.

6. The significant road sector development in the PRC during the 9th Five-Year Plan (1996– 2000) resulted in road investments totaling CNY924 billion, or CNY185 billion per year. Road sector investment grew at an average annual rate of 16% during that time. During the 10th Five- Year Plan, total road investment was about CNY1.9 trillion—more than double the figure of the 9th Five-Year Plan. The vehicle fleet totaled 43.3 million motor vehicles. Details of the road sector analysis are in Appendix 2. The SPCD invested about CNY16.2 billion in the road sector in 2004, of which CNY12.9 billion was allocated to construction and CNY1.4 billion to maintenance. During the 10th Five-Year Plan, road investment was about CNY71 billion. SPCD plans to increase road investment to CNY78 billion during the 11th Five-Year Plan (Appendix 3).

B. Analysis of Key Problems and Opportunities

7. Sichuan is in southwestern PRC, surrounded by mountains. Its isolation has been reduced by improved navigation on the Yangtze River, railway construction, and the construction of several major highways. The bulk of the population is concentrated on the flat, fertile plain in the east and central east, but the province contains several poverty-stricken areas in its mountainous periphery, where the Project is located. Despite rapid economic development in recent years, Sichuan ranks seventh lowest of all provinces in terms of gross domestic product per capita—CNY8,440 in 2005, or 61% of the national average. The per capita rural income was CNY2,803, or 86% of the national average. About one-third of Sichuan's counties are officially designated as poor. There are 137,800 people considered rural poor (i.e., have annual per capita incomes of less than CNY900) in the project area, equivalent to 6.5% of the total provincial population.

8. Based on the findings of a feasibility study undertaken under an ADB-financed technical assistance (TA),2 one reason for high poverty in the project area is slow economic growth, which

2 ADB. 2005. Technical Assistance to the People’s Republic of China for Preparing the Western Roads Development Project. Manila. 3 in turn is partially a result of inadequate infrastructure. Despite having received considerable investments, the road network in the project area is still inadequate and does not provide efficient transport access to markets and social services such as education and health. While 61% of the townships in the project area are accessible via unpaved roads, only 39% are connected with paved roads. Not all the villages in the project area are served by public bus. The local governments have upgraded some rural roads to improve access to several townships and villages, which are now served by bus as a result of these road improvements. Because vehicle ownership in the project area is low, bus services are a vital element of the transport system. Despite these improvements, the quality of access to many villages remains unsatisfactory, with low-standard and poorly maintained roads often closed by landslides, flooding, and snowfall.

9. The impact of road investments on poverty reduction is supported by the results of studies and evaluations of several completed road projects financed by ADB3 and the World Bank. 4 Well-integrated road development helps ensure that the benefits derived from the expressway filter down to the poor. Benefits—which include transport cost savings, time savings, and an increase in incomes—will be passed on through the transport chain to townships and villages. These results affirm the relevance of ADB’s strategy in the PRC road sector. A case study in Shaanxi Province found a correlation between improved roads and poverty reduction; specifically (i) 3.2 poor people are lifted out of poverty for every CNY10,000 invested in roads; and (ii) for every 1% increase in road-kilometers per capita, household consumption increases by 0.08%.5 Benefits for rural poor areas include lower transport costs; lower input costs; expanded agricultural support services; improved farming practices; greater access to urban jobs; and better access to health, education, and social services.6

10. To help the Government develop its road sector strategy and investment projects, external assistance has been provided mainly by ADB, the Japan Bank for International Cooperation (JBIC), and the World Bank (Appendix 4). Since 1991, ADB has provided 33 loans, totaling nearly $6.6 billion, to finance 4,455 km of expressways, together with 8,964 km of associated local road networks. Since 1995, local roads have been included in the scope of road projects to make ADB’s interventions in the road sector more pro-poor. Of the ADB-financed projects, 18 have been completed and are open to traffic. ADB has also provided 60 TAs, totaling $32 million, to the road sector. The advisory TAs have addressed policy and institutional reforms, poverty impact of road projects, rural road development strategy, rural transport services, road safety,7 human resource development, transport pricing, commercialization and corporatization, and the mobilization of private financial resources. The World Bank has provided about $6.8 billion and JBIC has provided about ¥219 billion to finance road investments. ADB coordinates with the World Bank and JBIC. Each major development partner focuses on different corridors, while information related to policy advice is shared across the development community.

3 In Sichuan and Yunnan provinces, construction of expressways complemented by upgrading local roads was associated with a significant increase in rural incomes in the project area. (ADB. 2004. Project Completion Report on the Chengdu-Nanchong Expressway Project in the People’s Republic of China. Manila; and ADB. 2006. Project Completion Report on the Southern Yunnan Road Development Project in the People’s Republic of China. Manila.) 4 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. 5 ADB. 2000. Technical Assistance for Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction. Manila. 6 Hettige, Hemamala. 2006. When Do Rural Roads Benefit the Poor and How? An In-Depth Analysis Based on Case Studies. Operations Evaluation Department. Manila: ADB. 7 In January 2001, ADB’s Operations Evaluation Department completed a performance audit report on traffic safety TAs. The two road safety TAs involving the PRC were rated highly successful.

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C. Policy Dialogue

11. Integrated Design and ADB Financing of the Local Road Component. The rural poor have limited mobility beyond their immediate communities because of their geographical isolation and the high cost of motorized transport. As a result, they generally view local roads as a key infrastructure investment priority. Better roads promote the transition from a subsistence-farming rural economy to a cash-crop and more diversified economy with a higher and more stable income flow to rural households. Better integration of the local roads into the trunk highway system will help bring benefits to the poor more effectively.

12. The dialogue with the Government focused on the need to integrate a local road component into the Project, with ADB financing, to establish a credible linkage between poverty reduction and ADB’s assistance based on the experience of the ongoing and completed ADB- financed road projects since 1995.8 The SPCD agreed to integrate a local road component comprising 430 km of local roads (Appendix 5). The target areas for this component were selected from the Sichuan Provincial Rural Road Development Plan based on population density, poverty incidence, and road network efficiency. These roads are often in poor condition and are not passable during the rainy season. Upon completion, they will connect the poor townships and villages in the Project’s hinterland with the main trunk highway. The SPCD further agreed to allocate $8.0 million from the ADB loan to the 10 local roads (28 km) that are directly linked to the project expressway, thereby establishing a direct linkage between ADB’s assistance and poverty reduction. The local road component, together with the expressway, will serve 2.1 million people in the project area, of whom about 137,800, or 6.5%, are considered rural poor (i.e., have annual per capita incomes of less than CNY900). A TA 9 is being provided to help the Government strengthen a road network planning capacity that better integrates expressways and local roads to meet communities’ needs, and that improves road-agency personnel's cross- disciplinary skills and tools.

13. Rural Road Development. Rural roads (1.48 million km of county and township roads are classified as rural roads in the PRC10) play an important role in socioeconomic development and poverty reduction in the countryside by providing basic accessibility to jobs, markets, and social services for 745 million rural residents. However, the PRC's rural road network is largely underdeveloped in terms of both quality and coverage, and does not provide adequate access to large parts of the hinterland. Furthermore, most rural roads are in poor condition because of problems in planning, design and construction, maintenance, and financing. The Ministry of Communications (MOC) is aware of the issues and is responding to rural areas' need for improved accessibility (see para. 4). While ADB’s assistance to development of the trunk highway has so far been significant, its impact on secondary- and tertiary-road development has been limited. During a high-level dialogue meeting with the Government in March 2006, the Government agreed to explore ways to extend ADB assistance to rural roads. An ongoing ADB- financed TA for Rural Road Development Strategy, which is formulating a rural road development strategy to enhance the effectiveness of rural road investments, will provide a useful guide on this initiative.

8 Since 1995, the scope of ADB-financed road projects has been expanded to enhance their impacts on poverty reduction by integrating local road improvements to benefit poor communities. The local road components of these projects are being implemented or have been completed successfully, helping improve living standards of the poor in the project area. 9 ADB. 2004. Technical Assistance to the People’s Republic of China for Poverty Impact of Area-Wide Road Networks. Manila. 10 In addition, there are some 1.54 million km of village roads that are not included in the Ministry of Communications' official statistics because they do not meet its technical standards. 5

14. Policy Reform in Road Transport. The operating efficiency of the road transport industry is low partly because the policy and regulatory framework is not yet suitable for a market economy. Also, operations, management, and maintenance practices of road transport operators need to be improved. To improve the situation, assistance was provided under a recently completed TA11 for Policy Reform in Road Transport, which reviewed the current issues in road freight and passenger transport and prepared a road transport action plan, recommending policy and regulatory measures to improve its efficiency, such as deregulation in passenger fare control and bus-route selection. The road transport action plan is being considered by the Government for pilot testing in selected provinces, including Gansu and Yunnan. This would help enhance the impact of road infrastructure development efforts conducted under ADB-financed road projects.

15. Corporate Governance. In Sichuan, expressway construction and operation were separated from the provincial government under previous ADB-financed road projects. This corporatization has promoted corporate governance and improved the operational efficiency of expressways. The SPCD established on 3 August 2006 the Sichuan Dashaan Expressway Company Limited (SDEC), which will be responsible for construction and operations of the project expressway. It will be entitled to collect tolls and retain toll revenue and will repay the proposed loan. SPCD and SDEC will enter into a concession framework agreement (Supplementary Appendix A) by 31 December 2008 to ensure autonomy of operations, encourage the establishment of road performance indicators, and facilitate contracting out of operations and maintenance. The SDEC will prepare a corporate development plan by 31 December 2009 to assure high standards of corporate governance, management practices, and financial reporting. The corporatization process will be guided by the model documents 12 developed under an earlier ADB-financed TA.13 To help with the process of corporatization, training will be provided under the loan to the staff of SDEC.

16. Private Sector Participation. In the PRC, the private sector has been involved in the road sector through cooperative joint ventures, securitization through initial public offerings, revenue bond financing involving the sale of rated notes backed by a pledge of an entity’s cash- flow sources, and the build-operate-transfer method (Supplementary Appendix B). For this Project, in line with ADB’s private sector development strategy,14 consideration was given to various approaches to highway financing recommended under an ADB-financed TA (footnote 13). 15 Capacity to attract private financing, particularly equity capital, for road projects such as the project expressway—with low initial demand and low financial returns but high long-term economic returns—is limited. Therefore, project construction will be financed from public sources. Private sector financing options, including contracting out operation and maintenance (O&M) to the private sector, will be examined before operations start. SPCD has involved the private sector in four expressways,16 raising about CNY4 billion, including securitization of the Chengdu– Chongqing expressway on the Hong Kong stock exchange.

11 ADB. 2004. Technical Assistance to the People’s Republic of China for Policy Reform in Road Transport. Manila. 12 Available: http://www.chineseinfrastructure.com. 13 ADB. 1997. Technical Assistance to the People’s Republic of China for Corporatization, Leasing, and Securitization in the Road Sector. Manila. The main findings of the TA were disseminated to the public through The New Frontier—Investing in Toll Roads, published by ADB and the State Development Planning Commission (2003, Manila). The TA was rated successful in the TA completion report. 14 ADB. 2003. Private Sector Assessment and Strategy in the People’s Republic of China. Manila. 15 ADB. 1993. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the People’s Republic of China for the Hunan and Jilin Expressways Projects. Manila. Under the two projects, the expressways' future toll revenues were securitized through initial public offerings in August 1999 and January 1999. 16 Chengdu–Chongqing, Chengdu–Mianying, Chengdu–Leshan, and Leshan–Emei expressways.

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17. Road Safety. Road safety is a serious issue in the PRC, and Sichuan is no exception. In 2005, there were 567,753 road accidents, causing 451,810 injuries and 99,217 fatalities, in the PRC; in Sichuan province the figures were 29,528 reported accidents, 30,906 injuries, and 4,415 fatalities. The Ministry of Public Security, which is responsible for enforcement of traffic laws and regulations, is committed to reducing accidents through improved safety of vehicles, driver training, and improved traffic management. ADB is assisting the Ministry of Public Security in improving road safety through an ongoing TA.17 The Sichuan road traffic safety ordinance was made effective on 1 March 2006, providing detailed provincial implementing regulations for the 2004 Road Transport Safety Law. Under the Project, the Sichuan expressway traffic police will establish a team to patrol the new expressway, enforce traffic regulations, and maintain smooth traffic flow. To address road safety issues, the Project will include the following: (i) vehicle- weighing stations, (ii) road safety training for staff of SPCD, (iii) safety audit during design and construction, (iv) public awareness and education campaigns geared toward accident prevention, and (v) a traffic enforcement program. Road safety for the local roads will be the responsibility of the local traffic police. An integrated action plan has been drawn up to help agencies concerned improve road safety in the project area. These will be carried out with the assistance of a road- safety specialist financed under the loan (Supplementary Appendix C).

18. Vehicle Emissions. With the rapid increase in vehicle ownership, vehicle emissions will damage the environment if mitigation measures are not taken. Fragmented responsibility, lack of interdepartmental coordination, and an inadequate database and monitoring system prevent the formulation of specific targets for a reduction in vehicle emissions. SPCD, in coordination with Environmental Protection Bureau and with assistance from an international consultant, will take the following measures to control the vehicle emissions in the project area: (i) motor vehicle emissions control provisions will be included in the tendering documents for gas stations along the expressway; (ii) similar provisions will be included in the tendering documents for bus companies and transport service providers using the expressway services; (iii) implementation of an air-quality monitoring system along the expressway; and (iv) conducting a capacity-building and training program to strengthen staff skills in relevant aspects of motor vehicle emissions control. Help will be provided under the international consulting services program (Supplementary Appendix C).

D. Lessons

19. The SPCD has carried out four internationally financed road projects18 without major problems. The safeguard policies on environment, involuntary resettlement, and indigenous people have been met. Lessons learned from the Chengdu–Nanchong expressway project19 include the following: (i) more detailed geological investigations should be conducted before finalizing bidding documents; (ii) the local road component should be integrated into the expressway development component to enhance poverty impact; (iii) a detailed resettlement plan should be drawn up, implemented, and then assessed through a detailed measurement survey; (iv) expressway construction and operations should be separated from the provincial government function to improve corporate governance; and (v) local communications bureaus should be

17 ADB. 2005. Technical Assistance to the People’s Republic of China for Road Safety Improvement. Manila. 18 ADB. 1998. Report and Recommendation of the President (RRP) to the Board of Directors on Proposed Chengdu– Nanchong Expressway Project for the People’s Republic of China (PRC). Manila; ADB. 2002. RRP to the Board of Directors on Proposed Southern Sichuan Roads Development Project for the PRC. Manila; ADB. 2005. RRP to the Board of Directors on Proposed Central Sichuan Roads Development Project for the PRC. Manila; and the Chengdu–Chongqing expressway financed by the World Bank. 19 ADB. 2004. Project Completion Report on the Chengdu–Nanchong Expressway Project in the People’s Republic of China. Manila. 7 strengthened in road maintenance. These lessons were brought to the attention of the Government and SPCD and reflected in the project design.

20. Performance reviews20 of completed ADB-financed road projects elsewhere in the PRC indicate that, in general, the projects facilitated economic growth and poverty reduction as envisaged during project preparation. Completed projects show that (i) ADB’s safeguard policies were met; (ii) loan covenants were generally complied with; (iii) people’s living standards have been improved through better access to markets, jobs, and social services; (iv) O&M of ADB- financed roads were generally satisfactory as reported in an evaluation report; 21 (v) corporatization strengthened corporate governance and raised funds for road development in Hunan and Jilin provinces; and (vi) recent projects helped raise awareness among policy makers of the importance of addressing key issues concerning road safety and vehicle emissions. Project completion reports prepared for 17 road projects concluded that 16 were highly or generally successful and 1 partly successful.22 The project performance audit reports for eight road projects rated the projects as either highly successful or successful. A development impact study 23 of the 1,867 km Beijing–Tongjiang expressway route, for which ADB provided loans totaling $1.2 billion, showed that the improved road network significantly helped develop northeastern PRC.

E. Rationale

21. ADB's operational strategy24 in the road sector supports (i) construction of roads that connect major growth centers and link the hinterland economies; (ii) integration of the network so that the national trunk highway system is supported by a system of local roads, particularly roads that provide access to poor areas; (iii) promotion of road safety and reduction of vehicle emissions; (iv) institutional strengthening to increase the commercial orientation and efficiency of expressway organizations; (v) improvement of highway planning and evaluation techniques; (vi) adoption of pricing policies to ensure optimum use of road transport capacity; and (vii) use of alternative methods of investment financing, including private sector participation. ADB road sector assistance targets the less developed central and western provinces, where most of the poor live. The proposed Project is consistent with the PRC’s development priorities and ADB’s strategy.

22. Despite considerable investments in the road sector, the PRC road network still does not provide efficient transport to large parts of the country—particularly to poorer inland regions like Sichuan. Better transport links are necessary to improve economic efficiency, foster national and international trade, facilitate interregional integration, and reduce poverty. The provinces of western PRC lack high-class road infrastructure. The road network must be improved to facilitate sustainable economic development and ensure that the social and economic benefits of investments in the region reach poor, rural areas. To enhance economic development and reduce poverty in western PRC, the Government is implementing the Western Region Development

20 ADB. 2001. PRC Procurement Review 2001. Manila; and ADB. 2002. PRC Portfolio Performance Review in the Road Sector. Manila. 21 ADB. 1998. Special Evaluation Study on the Operation and Maintenance of Road Facilities and their Impact on Project Sustainability. Manila. 22 ADB. 1999. Project Completion Report on the Heilongjiang Expressway Project in the People’s Republic of China. Manila. This lower rating was mainly due to inadequate safety facilities and enforcement, as well as partial compliance with environmental mitigation measures. Remedial actions were taken by rectifying the infrastructure deficiencies, enforcing harsher penalties for traffic violations, and implementing the environmental mitigation measures. As a result, the project was rated successful by the project performance and audit report. 23 ADB. 2002. Road Sector Impact Study: Beijing–Tongjiang Expressway Route in the People’s Republic of China. Manila. 24 ADB. 2006. Country Strategy and Program Update (2007–2008): People’s Republic of China. Manila.

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Strategy, which aims to reduce development disparities between the western and coastal regions. The Project will support this strategy. It will complement three completed or ongoing ADB-financed projects in Sichuan that likewise concentrate on developing the Xi’an-Kunming road corridor.

23. During the 2007 Country Programming Midterm Review Mission, the Government reconfirmed its request for ADB assistance for the Project. A feasibility study was completed by SPCD in November 2004. An environmental impact assessment (EIA) was prepared in October 2005, and a resettlement plan in March 2006. ADB provided TA (footnote 2) to supplement the government studies. Fact-finding was undertaken from 28 February to 16 March 2006, and appraisal from 30 May to 14 June 2006. The Project was formulated on the basis of the findings of ADB missions, information provided by the Government, stakeholder consultations, discussions with other funding agencies, and recommendations of the feasibility study and TA consultants.

III. THE PROPOSED PROJECT

A. Impact and Outcome

24. The impact of the Project is to develop an integrated road transport system that supports sustainable economic growth in Sichuan province. The outcome of the Project is improved road transport efficiency and safety in the project area. The Project will (i) reduce traffic accidents and vehicle operating costs; (ii) improve access between Chongqing and Xi’an, two major growth centers in western PRC; (iii) provide additional transport capacity to accommodate growing traffic volume; and (iv) provide improved access to markets and social services in a poor area.

B. Outputs

25. The Project has the following outputs: (i) construction of a 143 km, four-lane access- controlled toll expressway from Dazhou to Wanyuan, including access roads, interchanges with toll stations, tunnels, bridges, administrative stations, and service areas; (ii) upgrading of 430 km of local roads to improve access to poor remote areas; (iii) promoting corporate governance by separating expressway construction and operations from the provincial government; and (iv) capacity building in project management, quality control, road safety, and monitoring and evaluation. The key activities needed to realize these outputs are civil works for the expressway and local roads, equipment, resettlement, consulting services, and training.

C. Special Features

26. Public Transport Services. Efficient transport services, including passenger transport stations and logistic centers, are important components of a well functioning transportation system. Dazhou is one of the eight provincial transport hubs in Sichuan. Since 2002, five passenger stations and five freight stations have been established in the project area. These stations, together with the existing and proposed local roads, will form an integrated transportation network. Rural passenger stations are crucial to improving the mobility of rural residents and the accessibility of rural areas. In the city’s 11th Five-Year Plan, 50 new rural passenger stations are to be built or renovated; this will complement the proposed Project. An assessment of transport services is in Supplementary Appendix D.

27. Rural Road Maintenance. Rural roads in Sichuan province are not always well maintained, mainly because both funds and skills are lacking. To improve rural road maintenance, the State Council issued a new policy for financing and managing village road 9 maintenance in October 2005. In line with this policy, the Dazhou prefecture government has allocated special budget that will increase the annual maintenance budget from over CNY70 million in 2005 to about CNY120 million in 2006. As part of the Project, a plan to strengthen rural road maintenance (Appendix 6) was prepared. The plan includes (i) engineering measures to help Dazhou Municipal Communications Bureau in designing sustainable rural roads, with functional classification and standards, to optimize the use of resources, and prioritize maintenance programs; (ii) maintenance measures to facilitate implementation; (iii) operation measures to establish a monitoring system and promote a preventive maintenance approach; (iv) capacity building to enhance local skills; and (v) adoption of efficient rules for access to and use of the scarce maintenance funds, and identification of innovative ways of mobilizing further funds. The international consultants will help in the implementation of this plan during project implementation.

28. Intelligent Transport System. An intelligent transport system (ITS)25 on expressways is being introduced in accordance with the national ITS architecture prepared by the National ITS Center. For the proposed Project, an ITS action plan has been developed to (i) reduce toll payment delay; (ii) facilitate integration of an advanced toll payment system with the province- wide expressway toll system; (iii) introduce variable message displays to improve road-user information; (iv) assist with emergencies and promote information sharing with health, ambulance, and relevant agencies; (v) improve traffic enforcement, infrastructure maintenance, and computerized management of urgent incidents; (vi) improve safety through enhanced monitoring and detection of black-spot and property damage locations and overloaded vehicles; and (vii) coordinate the activities of emergency service agencies. The ITS will be designed to produce monitoring reports on traffic composition, road-accident frequency, and other key indicators. The use of an ITS will be built into the Project through procurement of equipment and training (Supplementary Appendix E).

29. Asset Management. Expressway companies in Sichuan do not make significant use of modern techniques in their asset management and road maintenance programs. The SDEC will use a computerized database which will: (i) enable more robust decision making based on a greater pool of data, (ii) enable the sharing of information and experiences with external agencies, (iii) enhance professional skills, and (iv) produce more accurate data that encourages policy makers to prioritize asset management and maintenance. Various measures will be introduced with the help of the international consultants to facilitate implementation in three phases: (i) immediate: measures for implementation when SDEC’s organizational structure is put in place, (ii) short-term: measures for implementation before expressway completion, and (iii) medium-term: measures for implementation within the first 2–3 years of expressway operations (Supplementary Appendix E).

D. Project Investment Plan

30. The project investment cost is estimated to be $1.425 billion, including taxes (Table 1). Detailed cost estimates are in Appendix 7.

25 The application of the information technology to transport is referred to as ITS. It provides the ability to gather, organize, analyze, use, and share information about transport systems and their efficient use. ITS for developing countries was prepared by the World Bank (World Bank. 2004. ITS for Developing Countries. ITS Technical Note 1. Washington, DC) and will be used as a guide.

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Table 1: Project Investment Plan ($ million) Item Amounta A. Base Costb 1. Expressway 986.7 2. Equipment 25.2 3. Land Acquisition and Resettlement 42.8 4. Consulting Services, Project Management, and Training 77.1 5. Local Roads 27.2 Subtotal (A) 1,159.0 B. Contingencies 137.6 C. Financing Charges During Construction 128.4 Total 1,425.0 a Includes taxes. b In 2007 prices. Source: Asian Development Bank estimates.

E. Financing Plan

31. The Government has requested a loan of $200 million from ADB’s ordinary capital resources to help finance the Project. The PRC will be the Borrower of the loan. 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 0.35% per annum, and such other terms and conditions set forth in the draft loan and project agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB’s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The loan will finance 14% of the total project cost. The remaining cost will be financed by the MOC, the Sichuan provincial government (SPG), and cofinancing through a loan from the China Development Bank, which has appraised the Project (Table 2). The MOC and SPG have made budgetary provisions for the counterpart funds. The ADB loan proceeds will be made available to SPG and through SPG, to SDEC on the same financial terms and conditions as those of the ADB loan, with SDEC bearing the exchange rate and interest rate variation risk and undertaking the obligations in the Project Agreement to the extent applicable to it.

Table 2: Financing Plan ($ million) Source Total % Asian Development Bank 200 14 China Development Bank 556 39 Ministry of Communications 229 16 Sichuan Provincial Government 440 31 Total 1,425 100 Source: Asian Development Bank estimates.

F. Implementation Arrangements

32. Project Management. The SPCD will be the Executing Agency responsible for overall implementation of the Project and direct implementation of the project expressway, and provide guidance to the local communications bureaus for carrying out the local roads component of the Project. The SPCD has sufficient experience, having already implemented three ADB-financed road projects in Sichuan. A financial management assessment of SPCD has shown that the 11

Project will have an adequate financial management system in place. The financial management assessment has been completed (Supplementary Appendix F). SDEC will be responsible for carrying out the construction and operation of the project expressway and the local roads financed by the ADB loan. It will be responsible for the physical implementation activities on a daily basis and the preparation of the progress reports of the Project as well as for the O&M of the project expressway and the above mentioned local roads. The general manager of SDEC will act as the Project Director responsible for implementation of the above mentioned project components, including approval of contracts and payments. Organization charts for SPCD and SDEC are in Supplementary Appendix G.

33. Implementation Period. The Project will be implemented over about 5 years, from January 2008 to June 2012 (Appendix 8).

34. Procurement. All ADB-financed procurement will follow ADB’s Procurement Guidelines (2007, as amended from time to time). The earthworks contracts will be divided into 16 packages, which will be procured using international competitive bidding. International competitive bidding will be handled by a tendering company that is well qualified to perform these tasks. All other packages—two expressway pavement, one maintenance equipment, one expressway earth work, two traffic management facilities, two planting and landscaping contracts, two ancillary facilities, and one tunnel facility—will be financed by the government and procured under national competitive bidding (NCB). The relevant sections of ADB’s anticorruption policy will be included in all documents and contracts related to the bidding for and implementation of the Project. To help facilitate procurement process, a procurement plan, showing details of each contract, method of procurement, schedule, and ADB procedures, has been prepared (Appendix 9 and Supplementary Appendix H).

35. Consulting Services. Construction supervision, which will be financed by the Government, will be overseen by a chief supervision engineer and will involve 2,752 person- months of national consulting services. National consultants will also be engaged to prepare bidding and bid-evaluation documents, a project performance management system, and environmental monitoring systems.

36. The Project will provide 51 person-months of international consulting services under the loan financing to (i) help with project management during the construction period; (ii) provide expertise in tunnel construction; (iii) conduct a safety audit of the project design, and make safety recommendations on the completed construction works; (iv) help set up and implement quality- control procedures; (v) monitor the environmental impact of the Project and provide guidance on environmental mitigation measures; (vi) assist with formulating a human resource development and training program; and (vii) help establish a project performance management system. The team leader will be in the field during the construction period and will act as assistant chief supervision engineer, (i) helping the chief supervision engineer certify variation orders, contractors' monthly payments, and subcontracting documents; and (ii) helping establish a contracts management system. All consultants to be financed under the ADB loan will be selected and engaged based on the quality- and cost-based selection method using a quality- cost ratio of 80:20 in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). Outline terms of reference for consultants are in Supplementary Appendix I.

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37. Advance Contracting. Given the high priority of the Project, ADB approved on 24 May 2006 an advance contracting for civil works. 26 The advance contracting covers the prequalification of contractors, bidding, and bid evaluation, but will not include contract awards. The advance contracting will be undertaken in accordance with ADB’s Procurement Guidelines. The Government has been advised that approval of the advance contracting does not commit ADB to financing the Project.

38. Anticorruption Policy. During project preparation, ADB’s Anticorruption Policy (1998, as amended from time to time) was explained to and discussed with central and local government officials. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate 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 documents and the bidding documents for the Project. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the Executing Agency and all contractors, suppliers, consultants, and other service providers as they relate to the Project.

39. Specifically, the following actions will be taken to prevent corruption in the Project: (i) officials from the Discipline and Inspection Bureau will be resident in project offices to oversee bidding, construction, and operations; (ii) an internal audit unit will be established in SDEC; (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; (iv) liaison meetings between SPCD, SDEC, and the Prosecutor's Office will be initiated to discuss warnings or information on corrupt practices; and (v) records and accounts of the contractors related to the Project will be periodically reviewed to ensure that fund withdrawal and settlement procedures are being followed.

40. Disbursement Arrangements. All disbursements under the ADB loan will be carried out in accordance with ADB’s Loan Disbursement Handbook (2007). Since most payments will be made for large contracts well above $100,000, direct payment and commitment procedures will be used to withdraw the loan funds. If the government funds are used first for eligible expenditures, ADB's reimbursement procedure will be used. Statement of expenditures will be applied to reimburse eligible expenditures for any individual payment not exceeding $100,000 to expedite fund flows. Before disbursement, the PRC Government will certify to ADB that the on-lending agreement, which will include the terms and conditions required under the loan agreement, will have been executed on behalf of SPG and SDEC and will have become effective and binding in accordance with its terms.

41. Accounting, Auditing, and Reporting. SPCD and SDEC will maintain separate accounts for the Project and related financial statements. Independent auditors whose qualifications, experience, and terms of reference are acceptable to ADB will audit their accounts annually in accordance with appropriate and consistently applied auditing standards. SPCD and SDEC 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 the English language. 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 project implementation, SPCD and SDEC will submit quarterly progress reports. To facilitate project post-evaluation, SPCD and SDEC will furnish ADB with a completion report within 3 months of the end of the Project.

26 Advance contracting was reported in the May 2006 internet edition of ADB Business Opportunities. 13

42. Project Performance Monitoring and Evaluation. To demonstrate the impact of its operations on development and to be accountable to stakeholders, ADB uses the project performance monitoring system (PPMS). SPCD agreed to use the proposed set of indicators for monitoring and evaluating to what extent the Project met its goals and objectives. The key indicators and assumptions outlined under the impact, outcome, and outputs in Appendix 1 (design and monitoring framework) and Appendix 10 (monitoring of socioeconomic and poverty impacts) will form the core data required for assessment. SPCD will refine the baseline values for impact indicators prior to project implementation and will update them during project implementation. Where relevant, indicators will be disaggregated by gender. SPCD will measure the indicators for project evaluation and report the findings to ADB on project inception, completion, and annually for 3 years after completion. The level of effort for the PPMS tasks will include: 1 person-month of international expertise to design and set up the PPMS and train national consultants on monitoring methodology; and 8 person-months of national expertise to manage the database and carry out village-level surveys, analysis, and reporting, for which SPCD will recruit an independent local institute. To facilitate the assessment of the Project’s socioeconomic impact, the terms of reference to monitor and evaluate project impacts are included among the consulting services to be provided under the Project.

43. Project Review. In 2009, SPCD, SDEC, and ADB will carry out a midterm review of the Project, covering all institutional, administrative, organizational, technical, environmental, social, poverty reduction, resettlement, economic, financial, and other relevant aspects that may have an impact on the Project’s performance and continuing viability.

44. Capacity Building. Based on the PPTA findings, SPCD and SDEC need to build their capacity to manage road sector development and expressway operations more effectively in order to cope with increased road construction activities. A human resource development plan will be drawn up with the help of the international consultants. The plan will identify training requirements and determine staff needs based on a survey of skill levels in key areas. It will involve 35 person-months of international training, covering expressway commercialization, highway operations and management, tunnel operation and management, intelligent transport system, financial management, highway maintenance and asset management, tunnel construction and technology, traffic engineering and road safety, and construction risk management. Findings from the training will be disseminated in Sichuan through a local institute. The SDEC will, with the help of the international consultants, launch a 50 person-month training program through the Sichuan Communications and Technology Management College to enhance the local communications bureau staff’s skills in road maintenance and traffic management, and thus ensure sustainable operation of the local road component.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Traffic Forecast

45. The project expressway is an important section of the Chongqing–Xi’an line, one of the eight Western Development Corridors. Other sections of this corridor are either completed or are being targeted for completion by 2011. Traffic volume on the project expressway is expected to grow from 7,800 passenger car units per day in 2012, to 19,000 units per day in 2022, and to 42,400 units per day in 2032 (Appendix 11).

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B. Economic Analysis

46. To meet growing transport demand in the project area, an analysis was undertaken of the various options for transport modes, alignments, technical designs, timing of investments, and financing modalities as part of the national and provincial transport network plan. It was concluded that road transport should be improved through construction of an expressway supported by complementary local road improvements. The economic internal rate of return (EIRR) was calculated by comparing situations with and without the Project. Without the Project, the traffic volume would exceed the optimum capacity of the existing National Highway 210, which would become congested, thereby increasing travel time, vehicle operating costs (VOC), and the number of accidents. With the Project, (i) travel time would decline because travel distances would be shorter and travel speeds would increase; (ii) VOC would decline because of faster and smoother travel on the expressway; and (iii) the accident rate would decline because congestion would decrease, road safety features would increase, and fast- and slow-moving traffic would be separated. If local roads are not upgraded, the mainly poor inhabitants of the Project's remote areas will be less mobile and less able to participate in mainstream economic activities. The economic costs of the expressway reflect the resource costs for construction and O&M, as well as the loss of agricultural production from land lost permanently to the Project. The economic benefits generated by the expressway include (i) savings in VOC as a result of reduced road length and improved traffic conditions, (ii) time savings for road users, (iii) savings from avoided accidents, and (iv) benefits from generated traffic. The benefits from the local roads were projected by taking into account VOC savings and producer surplus.

47. The project EIRR is projected to be 14.1%, indicating that the Project is economically viable (Appendix 12). Results of sensitivity analysis confirm the robustness of the Project's economic viability. Changes in the key variables, such as a 10% reduction in traffic volume, do not significantly impact economic viability. The capital cost would have to increase by 23.9% from the projected EIRR to fall below the cutoff rate of 12%. The traffic level would have to decrease by 20.5% to cause the same result. In light of experience in the PRC road sector, variations of such magnitude are unlikely. The EIRR was calculated separately for the expressway (13.5%) and for local roads (32.6%). The economic analysis was extended to examine the distribution of project net benefits by determining the project effects for various beneficiaries, including road users (passengers and freight), labor, and the Government. Road users will receive 86% of the total net benefits (Appendix 12).

C. Financial Analysis and Projections

48. The proposed toll rates 27 for the expressway are considered reasonable to attract sufficient traffic to meet the criteria for economic and financial rate of return. The SDEC will undertake a toll analysis before opening the expressway, and each year for 5 years thereafter, to confirm that the toll rate is optimal, and it will submit the results for ADB’s concurrence. If an adjustment of the toll rate is required, SDEC will submit its toll adjustment plans for ADB approval before getting approval from SPG.

49. Financial projections have been prepared for SDEC in accordance with ADB's Financial Management and Analysis of Projects28 to assess the financial viability and sustainability of the

27 The proposed toll rates are CNY0.35–CNY1.75 per vehicle-km. To reduce the burden of the toll charges on low- income local residents, local vehicles carrying fresh agricultural produce or livestock are exempt from tolls. The poor local residents, who may not directly use the project expressway, will indirectly benefit from reductions in freight rates. 28 ADB. 2005. Financial Management and Analysis of Projects. Manila. 15

Project (Appendix 13). The projected financial statements indicate that financial revenues will be sufficient to cover O&M costs, income taxes, and debt service. Incremental costs and revenues were derived by evaluating the financial position of SDEC. The financial internal rate of return for the expressway, computed after taxes, is 4.1%. This compares favorably with the weighted average cost of capital of 3.1%. Sensitivity analysis indicates that the financial internal rate of return is robust under adverse conditions. Based on the financial projections and financial evaluation of the expressway component, the Project is considered financially viable and sustainable (Appendix 13).

D. Poverty Reduction and Social Strategy

50. The project area includes Tongchuan district, Xuanhan county, and Wanyuan county—all within Dazhou city in the mostly mountainous northeastern part of Sichuan. Tongchuan district is the urban center of Dazhou city while the other two counties are mostly rural. The population of the project area is 2.12 million, of whom 137,800 million, or 6.5%, are considered rural poor (i.e., have annual per capita incomes of less than CNY900). Gross domestic product per capita is CNY10,991 in Tongchuan, CNY4,134 in Xuanhan, and CNY4,556 in Wanyuan. The rural poverty incidence is 7.7% for Wanyuan, 6.8% for Xuanhan, and 1.5% for Tongchuan. There are no ethnic minority villages in the project area. The Project will bring benefit to the project area by (i) improving road conditions at the township level through the local road component, (ii) facilitating economic growth in the project area through the expressway component, (iii) improving vehicle transportation services to the major cities, and (iv) creating opportunities for employment under the Project. A summary poverty reduction and social strategy is in Appendix 14, and a full poverty reduction and social analysis is in Supplementary Appendix J.

51. Small Business Development. There is potential for small business to grow rapidly in the project area. However, given the region's major growth centers' lack of connectivity with efficient transport systems, small business development in the project area has been constrained. A strategy was prepared under the TA to help spur the growth of small businesses. The strategy focuses on: (i) agricultural trading and industry in agricultural products such as fruit, processed fruit products, mushrooms, liquor, beer, and herbs; (ii) community-based tourism and ecotourism; (iii) distribution facilities (for the local market) and transport; and (iv) service-oriented businesses, such as restaurants, catering, gift shops, car repair, and carwashes (Appendix 15).

52. Roadside Stations. Road projects have traditionally focused on expanding transport capacity to maximize economic impact. Achieving the Millennium Development Goals requires innovative approaches that diversify the benefits of transport infrastructure investment. With that in mind, roadside stations 29 will be developed to link roads with community activities and encourage safe driving. Roadside stations normally provide parking areas and ancillary facilities such as bus terminals; gasoline stations; information centers about roads, road safety, and tourism; local specialty markets; restaurants; and agro-processing facilities.

53. Impact on HIV/AIDS. There is a risk of possible increases of HIV/AIDS cases during project construction through sexual transmission and drug abuse by construction workers. To prevent the risk of HIV/AIDS associated with the Project, the local Centers for Disease Control will extend their preventive measures to communities in the project area, particularly to areas

29 The concept of roadside stations was developed in Japan to link road users and communities, thereby facilitating local economic development. They are different from ordinary service areas because they (i) are designed with the involvement of local communities; (ii) link road users and local communities; (iii) provide business opportunities for local people; and (iv) can provide public services, including health care, education, and cultural activities, in addition to the normal restaurant and commercial services.

16 around construction sites. Measures will focus on construction workers and will include provision of HIV test kits, contraceptives, education, posters, leaflets, and regular services such as monitoring and surveillance. In carrying out the civil works contracts, the implementation methods of epidemic prevention law will be followed. These mitigation measures will be carried out in collaboration with local health agencies and an anti-AIDS program funded by the United Kingdom’s Department for International Development in the project area. The SPCD agreed to implement a social development action plan (SDAP) to extend the project benefits to the poor along the project roads and the broader project area (Appendix 16). Regarding women and HIV/AIDS, the social survey shows that most of the participants are aware of the risks of the HIV/AIDS and its preventative measures. Women have been encouraged to participate as construction laborers. It is targeted that woman should perform at least half of the landscaping work.

54. Stakeholder Consultations. Throughout the feasibility study, EIA, resettlement planning, and TA implementation stages, consultations were conducted with 3,627 representatives of local government agencies, civil society, and project-affected people to discuss the various project options, environmental concerns, land acquisition and resettlement issues, and economic development potential. The consultations indicated that local residents supported the Project because it would improve their access to jobs, markets, and social services. Consultations enabled local stakeholders to express their opinions, including on alignment selection, resettlement, and compensation, and to make suggestions to improve project design and implementation (Appendix 17).

E. Environmental Assessment

55. ADB has classified the Project as environmental category A. The EIA has been prepared by the National Environmental Science Research Institute and the Sichuan Communications Design and Research Institute, and it was approved by the State Environmental Protection Administration on 1 August 2006. A summary EIA for the Project was circulated to ADB’s Board of Directors and posted on its website on 16 May 2006. The EIA has assessed the environmental impacts of the project expressway and prescribed environmental protection and mitigation measures. The proposed expressway passes about 100 m from protection area of Huae Nature Reserve, and therefore special measures will be taken to minimize the potential adverse impacts to the reserve. Another environmental issue is erosion control. For this purpose, a soil erosion prevention plan was prepared. For the local road component, an environmental assessment and review procedure was prepared to ensure mitigation of possible environmental impacts (Supplementary Appendix K). To ensure that all potential adverse environmental impacts of the Project are mitigated, SPCD will implement an environmental management plan. The environmental management plan will be incorporated in the bidding documents and contracts for civil works.

F. Land Acquisition and Resettlement

56. This is an involuntary resettlement category A project. The SPCD has prepared a draft resettlement plan (Appendix 18 and Supplementary Appendix L) based on its feasibility study, investigations of 49 villages, household surveys, and consultations with local officials, village leaders, and affected households. The full resettlement plan addresses impacts caused by the proposed construction of the 143 km expressway and 28 km of link roads. SPCD also plans to upgrade 402 km of existing local roads (township to village roads) using domestic funds. These roads will involve little or no land acquisition or resettlement. SPCD has prepared a short resettlement plan for these roads and assured ADB that any affected persons will receive the 17 same compensation standards. Since the resettlement plans are based on the SPCD feasibility study, it will be necessary for SPCD, prior to commencement of land acquisition, to prepare and submit to ADB for approval updated resettlement plans based on detailed design and measurement surveys.

57. The project expressway will cross 49 villages in 2 counties and 1 urban district from Dazhou city to the border with Shaanxi province. An estimated 779 ha of land will be permanently acquired, of which 40% is non-irrigated farmland, 10% is irrigated farmland, 1% is orchard, 2% is housing plots, and 47% is woodland or wasteland. Based on the PRC’s standard for impact assessment, land acquisition is equivalent to the complete loss of farmland for 9,141 persons. Since the expressway will actually cross many parcels of scattered farmland, it is projected that the average loss of land per household will be 13%, which means the number of partially affected people will be about 55,000 persons. The Project will also temporarily occupy 240 ha during construction activities. An estimated 137,700 m2 of houses will be demolished, which will require the relocation of 1,148 households with 5,279 persons.

58. The SPCD and SDEC, in conjunction with the local land administration bureaus, will be responsible for resettlement. Affected people were consulted about the likely impacts during the feasibility study, and resettlement information booklets were distributed to affected villages. SPCD and SDEC will be responsible for internal supervision and monitoring. Progress reports will be prepared and submitted to ADB on a quarterly basis until resettlement is completed. SPCD will then prepare a resettlement completion report for submission to ADB. In addition, an independent monitor will be contracted by SPCD to carry out external monitoring and evaluation and prepare monitoring reports for submission to SPCD and ADB every 6 months until the completion of resettlement activities; thereafter, annual evaluation investigations will be conducted for at least 2 years and reported to SPCD and ADB.

G. Risks

59. The Project was formulated to reduce potential technical, economic, financial, and social risks. The main technical risks are associated with extensive tunnels and bridges. To mitigate the risks, international consultants reviewed the proposed design and construction methods. Selection of contractors will focus on their financial and technical capability to handle complex works. During construction, monitoring and contract management information systems will be set up and implemented, with the assistance of the international consultants, for timely identification of technical problems and implementation of corrective measures. SPCD has experience, and has shown satisfactory performance, in implementing internationally financed projects. Economic performance in the project-influenced area would have to deteriorate substantially for the Project to lose its economic viability. Regarding construction and operation of the expressway, there will be financial risks associated with the level and composition of traffic, construction costs, skill of the commercial managers, and tolls. To mitigate the financial risks, SDEC will build up a commercial business environment for expressway operations; the project expressway will receive substantial equity from the government, and an optimal toll structure will be adopted. For projects that generate revenue in domestic currency, there are risks associated with fluctuating exchange rates; these fluctuations are partially accounted for in the base-case calculations. An adverse exchange rate change of 30% would have only a small effect on the financial return. Potential social risks are associated with resettlement and HIV/AIDS infection; the resettlement plan and social action development plan include measures to mitigate those risks.

18

V. ASSURANCES

60. In addition to the standard assurances, the Government, SPG, and SPCD have given the following assurances, which are incorporated in the legal documents.

61. Construction Quality. SPCD and SDEC will ensure that the Project is constructed in accordance with the relevant Government standards. The international consultant designated as the team leader and assistant chief supervision engineer will review and help the chief supervision engineer certify variation orders and contractors’ monthly payments before submission to the chief supervision engineer.

62. Road Safety. Before project construction and operations, SDEC will carry out road safety audits, the recommendations of which will be implemented before project construction and operations. For the project expressway, SPCD and SDEC will implement the road safety signage, communications, hazard barriers, traffic monitoring, and vehicle weighing in accordance with MOC regulations and standards of other concerned government authorities. The SDEC will cooperate closely with the Sichuan Public Security Bureau to implement road safety measures. Before the project expressway opens, SPCD will submit a report on the emergency response plan to ADB for review.

63. Corporate Governance. SPCD and SDEC will enter into a concession framework agreement by 31 December 2008 to ensure autonomy of operations, encourage the establishment of road performance indicators, and facilitate refinancing of road sector assets. The SDEC will prepare a corporate development plan by 31 December 2009 to assure high standards of corporate governance, management practices, and financial reporting.

64. Private Sector Development. Six months before the project facilities open, SPG through SDEC 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.

65. Tolls. The tolls for the project expressway will be set by SPG. In determining the toll level, SPG will take into consideration the levels sufficient to satisfy SDEC’s minimum debt service coverage ratio of 1.2. Six months before the expressway opens, SPCD through SDEC will seek ADB’s concurrence on the proposed toll structure and levels before seeking SPG approval. For the first 5 years of operation, SPCD through SDEC will annually review the toll structure and levels, and submit a report to ADB. SPCD through SDEC will seek ADB’s concurrence on toll level adjustment before seeking SPG approval.

66. Financial Ratios. To ensure financial sustainability, SDEC 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% from the first year of operation; and (iii) a debt service coverage ratio of not less than 1.2 from the fifth year of full operation.

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

19

68. Environment. SPCD and SDEC will ensure that the Project is designed, constructed, and operated in accordance with government regulations and ADB’s policy on environment (2002). SPCD and SDEC will implement the EMP to mitigate any adverse environmental impacts arising from the Project, and submit a semiannual report to ADB; mitigation measures specified in the EMP will be incorporated into the bidding documents and civil works contracts. SPCD through the local government will assess the environmental impact on the local roads in accordance with the Government regulations and the environmental assessment and review procedures.

69. Vehicle Emissions. SPG will (i) at least 6 months before the opening of the expressway, provide to ADB the national emission standards and the penalties for infringement of such standards, and (ii) ensure that Sichuan Environmental Protection Bureau, Sichuan Public Security Bureau, and other agencies enforce the national vehicle emission standards, and fulfill the requirements of the government strategies.

70. Land Acquisition and Resettlement. SPG and SPCD will ensure through SDEC that land acquisition and resettlement are carried out promptly and efficiently following the resettlement plans agreed on with ADB, in line with relevant laws and regulations of PRC and ADB's policies on involuntary resettlement. SPG and SPCD will ensure through SDEC that implementation of the resettlement plans is monitored and evaluated and reported to ADB as required in the plan.

71. Poverty Reduction. SPG will implement the SDAP in a timely manner. The SDEC will cause the contractors to maximize the employment of local poor people who meet the job and efficiency requirements for construction of the project roads. Such workers will be trained on the job. SPG will extend the coverage and quality of public utilities, basic health, and basic education in the project area to enhance the Project’s poverty reduction impacts. The Poverty Alleviation Office, in consultation with SDEC, will monitor the impacts on poverty with the assistance of a designated local institute acceptable to ADB based on a set of indicators as outlined in the SDAP, and will submit annual monitoring reports to ADB.

72. Labor Standards. SPCD and SDEC will ensure that all the employment and labor standards as 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, 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 construction supervision consultants); (ii) provide employment opportunities to women, where appropriate, and pay equal wages to the male and female employees for equivalent work; and (iii) not employ child labor in the project works.

73. Gender and Development. SPG, through SPCD, and SDEC will ensure implementation of the Project in accordance with ADB’s Policy on Gender and Development (1998). SPCD will ensure the effective implementation of measures aimed at increasing project benefits and impacts on women in the project areas, which are included in the SDAP.

74. Health Risks. SPG, through the Department of Health and SDEC, together with the appropriate authorities, will ensure that contractors disseminate information on the risks of HIV/AIDS and sexually transmitted infections to those employed during project implementation. SPG, through the Department of Health and SPCD, will also ensure that similar information is disseminated to transport operators and local communities, and other high-risk groups living in the project area during project operation, at roadside stations, and other suitable facilities. SPG,

20 through SPCD, will cause contractors to monitor health risk control according to the Implementation Methods of Epidemic Prevention Law of the PRC (1991).

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

76. Change in Ownership. If any change in ownership of the project facilities, or any sale, transfer, or assignment of SPCD’s interest in the project expressway is anticipated, the Government, SPG, and SDEC will consult ADB at least 6 months before the change.

77. Anticorruption Measures. SPG, through SPCD and SDEC, will ensure that ADB’s and the Government’s anticorruption policy will be followed. SPG, through SPCD and SDEC, will also ensure, in accordance with the Government’s regulations and requirements, that during project implementation: (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 SDEC; (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. SPCD and SDEC will initiate liaison meetings with the Prosecutor's Office, on a needed basis, to discuss warnings about or information on corrupt practices.

VI. RECOMMENDATION

78. I am satisfied that the proposed loan would comply with the Articles of Agreement of ADB and recommend that the Board approve the loan of $200,000,000 to the People’s Republic of China for the Eastern Sichuan Roads Development Project from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB's 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

21 June 2007 Appendix 1 21

DESIGN AND MONITORING FRAMEWORK

Data Sources/Reporting Design Summary Performance Targets/Indicators Assumptions and Risks Mechanisms Impact Assumptions An integrated road Gross domestic product in the Statistics office at the • Government investment projects transport system supports project area increased from 9% to provincial and county are implemented as planned sustainable economic 11% from 2010 to 2020 levels • Complementary activities are growth in Sichuan implemented province Per capita rural income in the project Project performance • Sichuan Provincial area increased from CNY2,564 in management system Communications Department’s 2004 to CNY5,000 in 2015 (PPMS) at inception, (SPCD’s) and local completion, and 3 years government’s thereafter, with emphasis investment in the road sector is on socioeconomic implemented as planned improvement impacts Bus fare and freight charges reduced Monitoring of fares and • High transport costs constrain by 5% by 2015. rates by SPCD economic activities

Road accidents and fatalities in the Accident statistics from • A better traffic enforcement and project area are reduced by 30% by the Public Security effective public awareness 2015. Bureau and hospitals campaign promotes road safety Risk Proportion of villages with paved Monitoring of accessibility • Local communications bureaus road access increases from 55% to by local communications may not have sufficient budget 100% by 2015 bureaus funds to implement the road development plan Assumption Bus service availability increases to Bus service data to be • Rural road infrastructure is 100% by 2015 monitored by SPCD improved according to the Government’s plan The road system in Sichuan Annual reporting by the comprises expressways (1,759 SPCD kilometers [km]), class-I to class-IV roads (74,643 km), and unclassified (36,642 km) roads. The road network expands by 4% annually Outcome Assumptions Road transport efficiency Traffic volume for the expressway Collection of actual traffic • Projected economic growth and safety improved in will be 7,800 passenger car units volume data at the rates materialize. Transport the project area for the (pcu) per day at opening in 2012 expressway through its operators and drivers realize expressway and local auto-monitoring system the benefit of using roads by SPCD expressways Travel time for the expressway is Travel-time survey for the • SPCD demonstrates the halved from 3 hours before Project to expressway by SPCD capacity to implement the 1.5 hours after Project. Project An economic internal rate of return is Reevaluation of the • Demand forecast materializes maintained at 14.1% economic internal rate of and there is no cost overrun return in midterm review report and project completion report (PCR) Outputs Risk 1. Road infrastructure and Road capacity increases to 50,000 PPMS and PCR • Construction of tunnels may be associated equipment pcu per day at opening in 2012 by delayed because of their and facilities improved building a 143 km expressway. complexity along the expressway Assumption between Dazhou and Vehicle operating cost savings Direct measures of • Vehicle operating cost savings Wanyuan account for 57% of the total vehicle operating costs by are passed onto road users economic benefits SPCD

22 Appendix 1

Data Sources/Reporting Design Summary Performance Targets/Indicators Assumptions and Risks Mechanisms Risk Safety audits are implemented during Progress reports and • SPCD may not implement the project design and construction PCR safety audit recommendations Assumption Equipment is procured and installed Project administration • Equipment procurement and for road safety, toll collection, memoranda, progress installation are completed at communications, traffic reports, and PCR project opening management, and vehicle-weighing stations Risk Vehicle emissions are reduced by • The emission reduction benefits about 20% for the vehicles diverted may be offset by an overall from the existing road to the project increase in traffic in the expressway transport corridor Assumption Social development action plan, PPMS and PCR • SPCD has the capacity to including micro-credit schemes, is coordinate implementation of implemented to facilitate poverty social development action plan reduction with local governments

The small business development plan is implemented by the local government to take advantage of road improvements in the project area Risk Awareness on HIV/AIDS and health Monitoring by the Health • The capacity and resources of risks for construction workers and Bureau the Health Bureau may not be service providers are raised. sufficient to implement Indicators include number of clinics, mitigation measures number of patients, number of posters, and number of tests Assumption 2. Road infrastructure and 430 km of local roads are upgraded PPMS and PCR • SPCD has the capacity to associated facilities in the project area coordinate with local improved for the local governments the timely roads in the project area implementation of local roads Risk Road capacity is increased to 400– PPMS and PCR • Adequate transport services 2,000 pcu per day for class IV roads, may not be available in rural and to 500–15,000 pcu per day for areas class II roads when the local roads open 3. Corporate governance Expressway operations were Midterm review missions promoted in expressway separated from provincial and PCRs operations in Sichuan government functions for the Project on 3 August 2006 Risk The concession framework Midterm review missions • SPCD may interfere in agreement is signed by 31 and PCR expressway operations December 2008, and a corporate development plan prepared by 31 December 2009 Appendix 1 23

Data Sources/Reporting Design Summary Performance Targets/Indicators Assumptions and Risks Mechanisms Assumption The debt–equity ratio does not Financial statements of • The revenue forecast exceed 65:35; the working ratio is not the expressway, midterm materializes as envisaged, and more than 15% from the first year of review, and PCR the Project is implemented operations; the debt service without cost overrun or coverage ratio is not less than 1.2 implementation delays, from the fifth year of full operations; including approval of project toll and the financial internal rate of rates return, on an after-tax basis, is 4.1%.

Risk 4. SPCD and national 35 person-months of international A report by international • Trainees may leave SPCD consultant capacity training will be provided for SPCD consultants on the soon after the training program strengthened in project staff by December 2011. capacity-building is over to join private management, quality component based on the companies control, road safety, and survey method to assess monitoring and evaluation changes in work practices and behavior to measure its effectiveness. Activities with Milestones Inputs 1. Expressway civil works Civil works contracts awarded by December 2007 and completed Asian Development Bank: by December 2011 $200 million, of which: 2. Equipment Equipment procured by June 2012 $165.8 million for civil works 3. Resettlement Resettlement completed by December 2007 $1.5 million for consultants 4. Consulting and training Consultants recruited by December 2007 and their work $32.7 million for interest and services completed by June 2012 other charges 5. Local roads Civil works contracts awarded by December 2007, and completed Ministry of Communications: $229 by December 2011 million SPCD: $440 million China Development Bank: $556 million

24 Appendix 2

ROAD SECTOR ANALYSIS

A. Road Network

1. The road network of the People’s Republic of China (PRC) was 1.93 million kilometers (km) in 2005, an increase of 59,900 km from 2004. Of this, 1.59 million km were classified. Roads of class II and above accounted for 325,800 km, or 16.9%, of the total length. Road density increased from 12.1 km per 100 square km (km2) in 1995 to 20.0 km per 100 km2 in 2005. With a total length of 117,000 km, Sichuan’s road network accounted for 6.1% of the country’s total roads. Of this, 1,759 km was expressways (1.5%); 14,000 km was of class II or higher classes (12.0%). Road density was 23.9 km per 100 km2 in Sichuan, slightly higher than the national average, but the proportion of roads above class II was significantly lower.

B. Vehicle Fleet and Traffic

2. In 2005, the PRC vehicle fleet consisted of 43.3 million trucks, cars, buses, and other motorized vehicles (motorcycles and agricultural vehicles). The amount of privately owned motor vehicles increased more than 79 times during 1985–2005, from 0.3 million to 23.7 million. Despite the rapid increase in total vehicles, vehicle ownership was only 3.3 vehicles per 100 people in 2005, which was lower than in many other Asian countries. The PRC’s accession to the World Trade Organization has increased investment in the automobile industry, reduced the tariffs on imported vehicles, and contributed to making motor vehicle financing more accessible. These factors, along with rapidly growing urban incomes, underpin the growth in road traffic. The modernization of the vehicle fleet will improve vehicle safety and reduce vehicles’ fuel consumption and emissions. In 2004, 833,000 passenger vehicles and 407,000 freight vehicles were registered in Sichuan. Road passenger traffic in the province grew by more than 37.4% between 2000 and 2005, reaching 55.2 billion passenger-km; road freight traffic grew by 24.0% during the same period, reaching 28.6 billion ton-km in 2005.

C. Road Administration

3. The Sichuan Provincial Communications Department (SPCD) is responsible for regulating the road transport industry by licensing intercity bus services. Freight transport is essentially deregulated; however, interprovincial bus routes require Ministry of Communications’ approval. Because of trucking reforms, private operations have increased, improving transport efficiency and quality of services and increasing competition. The Asian Development Bank (ADB) is supporting this process through a technical assistance,1 which aims to help improve the performance of the road transport industry by formulating policy reforms in road freight and passenger services. Road administration is decentralized. Road transport tariffs are allowed within a range of plus or minus 20% of advisory tariffs set by the local government. This flexibility, coupled with ease of market entry, will facilitate the passing on to transport users of cost reductions resulting from improved road conditions.

D. Road Sector Revenue and Expenditures

4. Expenditures in highway infrastructure are financed from (i) dedicated user charges and government grants, (ii) domestic bank loans and bonds, and (iii) foreign loans and investments. Two dedicated user charges, the road maintenance fee and the vehicle purchase fee, have provided a majority of the financing for the road sector. During the 9th Five-Year Plan of 1996– 2000, the road maintenance fee provided 53% of total road investments, while the vehicle purchase fee provided 13%. Government grants provided 2%, mainly to construct or improve

1 ADB. 2004. Technical Assistance to the People’s Republic of China for Policy Reform in Road Transport. Manila. Appendix 2 25 rural roads in poor areas. The rest was financed from domestic loans and bonds (9%); other domestic investments, including financing from local governments and state-owned enterprises (12%); foreign loans (8%); and foreign direct investment (3%). During the 10th Five-Year Plan of 2001–2005, central government investment accounted for 14%, investment other than central government input (e.g., provincial and local governments’ grants and private sector investment) accounted for 42%, and domestic loans and foreign funds accounted for the remaining 44%.

5. As part of a tax reform to bring off-budget revenue and expenditures within the national budget, the National People’s Congress amended the Highway Law on 31 October 1999, laying the foundation for legislation replacing provincial and local fees with national taxes. The vehicle purchase fee was replaced by the vehicle purchase tax effective January 2001, and a fuel tax is being considered to replace the road maintenance fee. Based on findings of an ADB-financed technical assistance,2 the fuel tax is likely to improve financing of the road sector.

6. SPCD invested about CNY16.2 billion in the road sector in 2004: CNY12.9 billion for construction and CNY1.4 billion for maintenance. During the 10th Five-Year Plan (2001–2005), total investment is expected to be about CNY71 billion, with an annual average growth rate of 5.0% during this period. SPCD plans to increase road investment to CNY78 billion during the 11th Five-Year Plan.

E. Road Engineering, Construction, and Maintenance

7. Road projects are designed by planning and design institutes at the provincial, prefecture, and county levels. The design institutes are staffed with experienced, qualified personnel. The Ministry of Communications reviews the designs of expressways, high-standard roads, and associated structures. The city and county highway bureaus have their own construction units to carry out minor projects within their administrative districts. Drawing on the experience gained under ADB- and World Bank-financed projects, competitive bidding practices were mandated by the 1999 Tendering and Bidding Law.3 Many of the largest provincial and urban construction units are being reorganized into financially independent companies and have been awarded contracts individually or as partners in joint ventures on several ADB- and World Bank-financed in-country or overseas projects. Road maintenance is well organized by the expressway companies and the highway administration bureaus. Maintenance mainly involves labor-intensive techniques but is becoming increasingly mechanized. Although maintenance expenditures have increased significantly in absolute terms in the past decade, maintenance expenditures have not increased as a percentage of total road expenditures.

F. Policy Dialogue

8. ADB has been undertaking policy dialogue on the PRC road sector since 1991. The principal issues include (i) the poverty impact of road projects, (ii) highway design standards, (iii) construction quality, (iv) road safety, (v) vehicle emissions, (vi) pricing policies, (vii) commercialization and corporatization, and (viii) nongovernment financial resources. The status and achievements of policy reform are summarized in the following table.

2 ADB. 1998. Technical Assistance to the People’s Republic of China for Regional Road Sector Study. Manila. 3 ADB helped develop the implementing regulations. ADB. 1997. Technical Assistance to the People’s Republic of China for Establishment of National Procurement Regulations for the Public Sector. Manila.

26 Appendix 2 Table A2: Roads Sector Policy Reform Plan

Initiative Current Status Actions Target Date 1. Poverty impact All projects financed by Project identification and design was Recommended investment the Asian Development assisted through technical assistance (TA) packages taken up for the 11th Bank (ADB) in the 3086-PRCa Five-Year Plan People’s Republic of China (PRC) country strategy and program are in poorer central and western regions. Local road components ADB loans for expressway projects finance Being implemented since 1995 are included in all the local road component expressway projects Poverty impact of transport projects was Results of TA published in July assessed through TA 5947-REGb 2005

Monitoring framework and indicators Completed in 2004 prepared under TA 3900-PRCc Results of the TA adopted for designing poverty monitoring system for ADB-financed road projects.

Assistance is being provided to develop To be completed in 2007 integrated road network planning under TA 4322-PRCd 2. Rural road Rural roads are largely in Rural road development strategy is being To be completed in 2007 development poor condition formulated under TA 4671-PRCe 3. Road transport Low vehicle utilization, Road transport action plan prepared under Being implemented in 2006– services high operating costs, and TA 4351-PRCf is being considered for pilot 2010 inefficient bus routes testing in Gansu and Yunnan because of restrictive regulations 4. Road design Highway design Ministry of Communications (MOC) New design standards applied standards and standards inappropriate engineering standards were revised and from 1 March 2004. construction quality for vehicle mix and road reissued on 1 March 2004. conditions Assistance in developing the previous Completed in 1998. standards, including transport efficiency, road safety, and environmental considerations, was provided through TA 2573-PRCg A highway design manual was produced to Highway design manual complement MOC standards in areas such adopted by selected executing as identification of accident black spots agencies and design consultants 5. Road safety High fatalities in 2005: Public awareness in road safety was raised The Traffic Safety Law became 98,738 in the PRC, and the Ministry of Public Security’s effective on 1 May 2004. including 4,415 in capacity strengthened in traffic safety, Among other things, it Sichuan. planning, and management under TA 3341- mandates the use of seat belts. PRCh

Poor safety design, lack Safety audits to be carried out with Before construction and of attention to safe assistance from the consultants. opening of the Project roads, inadequate traffic enforcement and driver Assistance is being provided to improve Being implemented in 2006– training, and limited use safety and efficiency of road transport 2008 of seat belts contribute to operations and strengthen traffic law poor safety record enforcement under TA 4698-PRCi 6. Overloading of Overloading of trucks is An inter-ministerial committee, coordinated Implemented in 2004–2006 trucks common, with adverse by the Ministry of Communications, impacts on pavement established to develop special measures to conditions, traffic flow, enforce regulations nationwide on Appendix 2 27

Initiative Current Status Actions Target Date and safety. overloaded trucks 7. Vehicle emissions Vehicle emissions are Leaded fuel banned for motor vehicles Completed in 2002 becoming a primary source of air pollution in European vehicle emissions standards were Implemented by vehicle size in major cities. adopted for all new vehicles. 2001–2005

Vehicle testing and monitoring were Implemented in 2002–2005 promoted under TA 5937-REG.j A vehicle inspection and Chongqing municipal vehicle emission- Recommendations being monitoring program is reduction guidelines were prepared and considered in Sichuan ongoing. action plans developed. 8. Road pricing Tolls structured so that Toll levels were set for ADB projects to Annual review of tolls users pay for full cost ensure cost recovery. recovery for toll roads in most provinces The toll diversion manual was disseminated Adopted by MOC and applied under TA 3102-PRC.k to ADB-financed road projects in the PRC 9. Corporatization There is no legal A model concession framework agreement A concession framework agreement between was prepared under TA 2952-PRC.l agreement will be signed provincial between the Sichuan Provincial communications Communications Department departments and and Sichuan Dashaan expressway companies. Expressway Company Limited by 31 December 2008 Expressway construction Assistance was provided through TA 2952- Main findings published in The and operations are PRC (footnote l). New Frontier: Investing in Toll undertaken by the Roads (2003) Sichuan Provincial Expressway operations were separated Completed on 3 August 2006 Communications from the provincial government function for Department. this Project. 10. Commercialization Present practices do not Commercialization of operations will be 31 December 2009 and private sector take full advantage of required by the Corporate Development development possible revenues from Plan. expressway operations Private sector financing Build-operate-transfer (BOT) guidelines and A pilot BOT road project being of road infrastructure a feasibility study for a pilot project were implemented by the investment accounts for prepared under TA 2649-PRC.m Government a fraction of the total financing. Assistance was provided through TA 2952- ADB’s Private Sector PRC (footnote l). Department actively looking for a road BOT project ADB-financed Northeast 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 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.

SICHUAN ROAD SECTOR REVENUE AND EXPENDITURES: 2001–2010 28 (CNY billion)

10th Five Year Plan 11th Five Year Plan Appendix 3 Appendix Item 2001 2002 2003 2004 2005 Total 2006–2010 A. Revenue 1. Road maintenance fee 2.07 2.24 2.52 3.07 2.67 12.57 11.30 2. Toll revenue 1.16 1.41 1.87 2.33 2.80 9.57 16.78 3. Surcharge on passenger tickets 0.36 0.39 0.42 0.43 0.45 2.05 2.90 4. Surcharge on freight tickets 0.20 0.21 0.22 0.24 0.27 1.14 1.30 5. Provincial budget allocation 1.17 3.14 1.08 0.76 0.90 7.05 5.00 6. Ministry of Communications subsidy 1.56 2.00 2.78 2.78 2.35 11.47 12.50 7. Bank loan 5.55 3.85 4.57 6.18 5.67 25.82 24.12 8. Others 0.38 0.37 — 0.36 — 1.11 4.53 Total 12.45 13.61 13.46 16.15 15.11 70.78 78.43

B. Expenditures 1. New construction and rehabilitation 9.49 8.71 10.26 12.88 12.08 53.41 55.34 2. Taxes 0.10 0.11 0.17 0.27 0.29 0.94 1.40 3. Traffic safety supervision 0.02 0.02 0.03 0.03 0.03 0.13 0.16 4. Major maintenance 0.11 0.73 0.37 0.58 0.50 2.29 3.19 5. Medium maintenance 0.06 0.11 0.15 0.39 0.40 1.11 2.49 6. Routine maintenance 1.07 0.45 0.85 0.45 0.60 3.43 5.45 7. Repayment of interest and principal 1.61 3.48 1.63 1.55 1.21 9.47 10.40 Total 12.45 13.61 13.46 16.15 15.11 70.78 78.43 — = not available. Source: Sichuan Provincial Communications Department estimates.

Appendix 4 29

EXTERNAL ASSISTANCE TO THE ROAD SECTOR

Table A4.1: 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 HS 14 1638-PRC Chengdu–Nanchong Expressway 208 300 250 10 Nov 98 S S 15 1641-PRC Changchun–Harbin Expressway: Hashuang 101 — 170 27 Nov 98 S S Expressway 16 1642-PRC Changchun–Harbin Expressway: Changyu 161 — 220 27 Nov 98 S HS 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 — — 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, 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 A4.2: 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 Operations 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

30 Appendix 4

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, PRC = People’s Republic of China, PP = project preparatory, SS = small scale. Source: Asian Development Bank estimates.

Table A4.3: Other Funding Sources

Road Loan Amount No. of Loans Organization Length (km) Unit Total 37 World Bank 6,903 $ million 6,789 16 Japan Bank for International Cooperation 1,695 ¥ million 219,036 km = kilometer, PRC = People’s Republic of China. Source: Asian Development Bank estimates. Appendix 5 31

RURAL ROAD DEVELOPMENT AND LOCAL ROAD COMPONENT

1. Since 2003, the Government of the People’s Republic of China has been investing about CNY20 billion in rural road development annually. About 50,000 kilometers (km) of rural roads have been built each year and about 150,000 km of rural roads upgraded. The State Council approved the Rural Road Development Plan in February 2005. The objective of the plan is that, by 2010, all the townships in the country and all the villages in eastern and central regions will be connected by paved roads. With the tight budget, however, the central Government and many provincial and local governments are short of funds to implement the plan; thus the central Government supports Asian Development Bank (ADB) initiatives to integrate local roads in expressway construction projects. The newly enacted Rural Road Construction and Management Regulations were made effective on 1 March 2006. These regulations highlight the Government’s commitment to building rural roads.

2. In January 2003, the Sichuan Provincial Rural Road Development Plan 2001–2020 was approved as a guideline for rural road development in the province. By the end of 2005, Sichuan Provincial Communications Department (SPCD) had built 2,059 km of local roads connecting 50 townships that had no road access before, and 25,908 km of rural roads connecting 5,261 villages in the province’s rural areas. SPCD plans to expand township road networks to 8,500 km and expand village road networks to 32,000 km by 2010. In the project area, the city government of Dazhou invested CNY50 million in local and rural road development in 2004 and CNY20 million in 2005. Following the Ministry of Communication’s new rural road development plan, the city government’s plan is to ensure that paved roads connect each township or village in Dazhou prefecture with either a county or district center or a nearby trunk highway.

3 The project area is among the poorest in Sichuan, with more than 6.5% of the population living under the poverty line of an annual per capita income less than CNY900. The social and poverty analysis conducted under the project preparatory technical assistance showed that the rural poor are concentrated in remote, mountainous areas with relatively high transportation costs. Better road access is necessary to reduce transportation costs and improve market access for agricultural produce, thereby stimulating trade and investment. In selecting proposed local roads, priority has been given to improving access to poor townships and villages by providing them with all-weather roads linked to major economic centers and/or national and provincial highway networks.

4. The Project will upgrade 40 local roads with a total length of 430 km. Of those, 30 roads (Table A5.1) with a total length of 402 km were identified by SPCD from the local government’s rural road development plan, which aims to build or upgrade 1,940 km of local roads in Dazhou prefecture. Of the 30 selected roads, 18 roads will be upgraded to class III and 12 will be upgraded to class IV. All of the roads will be paved. The total cost is projected to be CNY210.5 million. In addition, the Project will include 10 link roads connecting the proposed expressway with the cities of Xuanhan and Wanyuan. The total length of these 10 roads will be 27.6 km, with an estimated total cost of CNY98.2 million (Table A5.2), to be partially financed by the ADB loan. The selection of these local roads was based on population density, poverty incidence, and road network efficiency. During the selection process, township and village roads were ranked separately, with the top two-thirds in each category proposed for the Project. A road survey following the initial selection confirmed that targeting the local roads proposed by SPCD will directly reduce poverty in the project area. All the local roads will be implemented concurrently with the project expressway.

32 Appendix 5 Table A5.1. Local Roads under Government-financing

County Road Class III Class IV Cost Beneficiary

Name Section (km) (km) (CNY million) Town/Village 1 Daxian S201 Beimiao–Jinshi 19.0 9.5 Jinshi 2 Xuanhan Pingxikou–Baimagonglu 9.0 4.4 Baima 3 Xuanhan Dongxiang–Qingxi 13.9 7.0 Qingxi 4 Xuanhan Tuzhu–Puguang 3.8 1.9 Puguang 5 Xuanhan G210 Shuanghe–Liuchi 8.0 4.0 Liuchi 6 Xuanhan Fankuai–Santun 8.0 4.0 Santun S201 Shangsanhe– 7 Xuanhan 4.0 2.0 Huangshi Huangshi 8 Xuanhan G210 Dacheng–Hongling 13.3 6.6 Hongling 9 Xuanhan Hongling–Mingyue 9.0 4.5 Mingyue 10 Xuanhan Mingyue–Juntang 8.5 4.3 Juntang 11 Xuanhan Qili–Paishu 10.0 5.0 Paishu 12 Xuanhan Santun–Qishu 13.0 6.5 Qishu 13 Xuanhan Xuanhan–Donglin 12.0 6.0 Donglin 14 Xuanhan Tianbao–Miao'an 14.8 7.4 Miao'an 15 Xuanhan Qili–Tianbao 8.5 4.3 Tianbao 16 Xuanhan Nanba–Tahe 7.0 3.5 Tahe 17 Xuanhan Tahe–Chahe 11.5 5.8 Chahe 18 Wanyuan Wulangxi–Shirengonglu 18.0 12.9 Shiren 19 Wanyuan Baisha–Batai 25.0 18.2 Batai 20 Wanyuan Zhongping–Dasha 12.0 6.0 Dasha 21 Wanyuan Dasha–Chaoba 20.0 10.0 Chaoba 22 Wanyuan Chaoba–Weijia 6.0 3.0 Weijia 23 Xuanhan Huangjin–Xinhua 20.0 10.0 Xinhua 24 Wanyuan G210 Changba–Shatan 19.0 9.5 Shatan 25 Wanyuan Dasha–Shiwo 16.3 8.1 Shiwo 26 Wanyuan G210 Qinghua–Guanba 18.0 9.0 Guanba 27 Wanyuan G210 Shiankou–Zengjia 9.0 9.8 9.4 Zengjia 28 Wanyuan S302 Zhuyu–Kangle 13.0 6.5 Kangle 29 Wanyuan S302 Dazhu–Linhe 15.5 7.8 Linhe 30 Wanyuan G210 Shiankou–Hekou 27.0 13.5 Hekou Total 243.3 158.6 210.5 CNY = yuan, km = kilometer. Sources: Sichuan Provincial Communications Department and Asian Development Bank estimates.

Table A5.2: Local Roads under ADB-financing

Road Section Length (km) Technical Standard Cost (CNY million) 1 Xuanhan Interchange 1.8 Class II 6.4 2 Xuanhan Link Road 13.5 Class II 48.7 3 Puguang Interchange 0.5 Class III 2.0 4 Huangjin Interchange 0.9 Class III 3.1 5 Xinhua Interchange 1.2 Class III 4.2 6 Tiekuang Interchange 0.5 Class III 1.6 7 Basha Interchange 0.8 Class III 3.0 8 Wanyuan Interchange 0.3 Class II 1.0 9 Wanyuan Link Road 7.7 Class II 26.8 10 Guandu Interchange 0.4 Class III 1.5 Total 27.6 98.2 ADB = Asian Development Bank, CNY = yuan, km = kilometer. Source: Sichuan Provincial Communications Department estimates. Appendix 6 33

RURAL ROAD MAINTENANCE

A. Institutional Framework

1. The Sichuan Provincial Communications Department (SPCD) currently applies a province-wide road maintenance scheme. The SPCD develops management plans, policies, regulations, and the annual budget allocation scheme, while its various bureaus deal with the implementation of these measures (Table A6.1).

Table A6.1: Road Maintenance Framework in Sichuan

National Provincial County/ Township Village Item Expressway Highway Road Prefecture Road Road Road Length 1,759 km 6,605 km 11,984 km 36,411 km 51,942 km 175,000 Responsibility EAB HAB HAB HAB LCB LCB LCB Budget CNY200,850 CNY22,000 CNY22,000 CNY18,000 per CNY6,000 CNY4,500 per km (R), per km (R), per km (R), km (R), and per km per km and and and CNY200,000 CNY441,700 CNY300,000 CNY300,000 per km (P) per km (P) per km (P) per km (P) Fund Source Toll Toll, Toll, Maintenance Maintenance Maintenance maintenance maintenance Fee fee fee fee fee Equipment Very Good Good Good/ Good/Moderate/ Very Poor Very Poor Conditions Moderate Poor EAB = Expressway Administration Bureau, HAB = Highway Administration Bureau, km = kilometer, LCB = Local Communications Bureau, P = periodic maintenance, R = routine maintenance. Source: Sichuan Provincial Communications Department.

B. Current Conditions of the Project Area

2. The existing road network has a total length of 8,013 km in Dazhou prefecture. There are also 5,544 km of village roads in addition to the formal road network. There are 72 townships that are accessible only by unpaved roads and 29 villages that are not accessible by road at all. Much of the network is underdeveloped, structurally weak, poorly maintained, and largely deteriorated. Most villages rely on rough earth tracks that are unsuitable for motorized traffic and practically impassable during the rainy season. Vehicle operating costs tend to be high for vehicles that use these roads. The lack of roads has led to a situation where an estimated 10–20% of agricultural produce goes to waste because it can't be transported expediently to markets and/or processing centers. Current road-maintenance obstacles include (i) weak rural road maintenance planning; (ii) insufficient funds; (iii) insufficient equipment; (iv) lack of skilled staff; and (v) lack of access to suitable software and database technology.

C. Strengthening Rural Roads Maintenance of the Project Area

3. The Dazhou Municipal Communications Bureau is in charge of maintenance and management of all roads in the prefecture. The Project’s rural road component—targeting around 402 km of class III–IV roads in 30 townships and villages—will improve this situation. The Project also includes 28 km of connecting roads linking the expressway interchanges with the surrounding network. Selection criteria were based on population density, poverty incidence, and road network efficiency. A road maintenance framework for Dazhou prefecture was prepared; the local roads targeted by the Project will be maintained as part of this framework (Figure A6).

34 Appendix 6

Figure A6: Road Maintenance Framework in the Project Area

Dazhou Municipal Communications Bureau

Dazhou Municipal Highway Administration Bureau Other Departments - 4,100 employees - CNY70 million maintenance expenditures per annum (excluding central Government subsidy) - 8,013 km roads (class I-IV and unclassified roads) - 5,544 km village roads

Local Communication Bureaus - County, City, and District

- 260 km national highway (annual maintenance costs = CNY28,000 per km) - 570 km provincial roads (annual maintenance costs = CNY28,000 per km) - 2,657 km county roads (annual maintenance costs = CNY7,000 per km + CNY7,000 per km new Government subsidy as of 2006) - 4,276 km township roads (annual maintenance costs = CNY6,000 per km+ CNY4,000 per km new Government subsidy as of 2006) - 5,544 km village roads (annual maintenance costs = CNY4,500 per km+ CNY1,000 per km new Government subsidy as of 2006) - 250 km special roads

km = kilometer. Source: Sichuan Provincial Communications Department and Asian Development Bank.

D. Rural Roads Maintenance Plan

79. During project preparation, an action plan (Table A6.2) was prepared to help SPCD and Dazhou Municipal Communications Bureau strengthen the sustainability of rural roads.

Table A6.2: Rural Roads Maintenance and Operation Action Plan of the Project Area

Activities Requirements Engineering • Vertical profile of the road designed so that the required minimum Measures stopping sight distance is available • Scientifically designed horizontal curves; paved roads should be widened at curves • Passing places at convenient locations, particularly on hill roads • Strictly enforced low speed limits where the roads pass through inhabited areas and schools • Scientifically designed rural road–main road junctions; these are always potential points of conflict • Ramps in place where field paths and animal crossings intersect the road Appendix 6 35

Activities Requirements • Warning and regulatory signage erected to enhance road safety and efficiency • Hazard markers such as reflectorized delineators erected at dangerous locations • Rural roads built according to high safety design standards • A functional classification of rural roads must be developed as a basis for establishing a road condition system and costs.

Maintenance • Advance warning of road users clearly and sufficiently, and Measures provide clear guidance • Safe and clearly marked buffer zones and work zones • Careful, safe use of construction machinery • Minimal obstruction to road users • Provision of temporary detours as necessary • Avoid conflict of parking machine and traffic

Operation • An effective maintenance management system, periodic road Measures condition surveys and accurate traffic counts • Determine bill of qualities and prepare cost estimates. • A maintenance strategy with defined priorities • Routine maintenance of rural roads carried out regularly and properly addressing all road-safety issues • Preventive maintenance and safety measures • Strong contract administration and quality assurance • An effective monitoring and evaluation system • Road safety and maintenance awareness campaigns, relevant agencies, and community groups • An equipment maintenance and utilization scheme

Capacity Building • An ongoing training program to enhance staff skills • Overseas training (a component of the Project) to strengthen staff capacity and encourage adoption of best practices • Provision of short-term international consultants to enhance local capacity; the team leader should develop a sustainable maintenance system, including a budget plan

Funding • An ongoing maintenance budget to ensure steady operation of road networks after project launch • Sufficient and continuous funds for road maintenance • Proper use of the Government’s subsidy program • Effective monitoring and auditing Sources: Sichuan Provincial Communications Department and Asian Development Bank estimates.

DETAILED COST ESTIMATE BY FINANCIER 36 ($ million)

ADB China Development Bank Government Cost 7 Appendix Item % of Cost % of Cost % of Cost $ a $ $ Category b Category Category A. Base Costc 1. Earthwork 95.4 18.6 20 43.3 45 33.5 35 2. Pavement 63.2 0.0 0 28.7 45 34.5 55 3. Structures 309.1 60.2 20 140.3 45 108.6 35 4. Tunnels 347.6 67.7 20 157.8 45 122.1 35 5. Interchanges 99.0 19.3 20 44.9 45 34.8 35 6. Buidlings and Ancillary Facilities 37.0 0.0 0 16.8 45 20.2 55 7. Enviromental Protection and Landscaping 4.4 0.0 0 2.0 45 2.4 55 8. Construction Tax 31.0 0.0 0 14.1 45 16.9 55 d Subtotal Civil Works 986.7 165.8 17 447.7 45 373.1 38 9. Equipment 25.2 0.0 0 12.6 50 12.6 50 10. Land and resettlement 42.8 0.0 0 0.0 0 42.8 100 11. Consulting Services and Training 1.5 1.5 100 0.0 0 0.0 0 12. Project Design and Supervision e 59.4 0.0 0 0.0 0 59.4 100 13. Local Roads 27.2 0.0 0 0.0 0 27.2 100 14. Project Management f 16.2 0.0 0 0.0 0 16.2 100 Subtotal (A) 1,159.0 167.3 14 460.3 40 531.4 46 B. Contingencies g 1. Physical Contigency 54.5 0.0 0 0.0 0 54.5 100 2. Price Contigency h 83.2 0.0 0 0.0 0 83.2 100 Subtotal (B) 137.6 0.0 0 0.0 0 137.6 100 C.Interest i and Other Charges During Construction 128.4 32.7 25 95.7 75 0.0 0 Total Project Cost 1,425.0 200.0 14 556.0 39 669.0 47 % of Total Project Cost 100% 14%ADB's share 39%CDB's chare 47% Government's share ADB = Asian Development Bank, CDB = China Development Bank. a Amount of ADB loan proceeds allocated to the cost category. b The amount disbursed by ADB for eligible expenditures under a cost category will be subject to the ceiling set by the allocation of loan proceeds for such cost category. c At 2007 prices, including taxes. d Includes $8 million for local roads financed by ADB. e Includes $40.6 million for design and survey cost and $18.8 million for supervision cost. f Project management cost includes research, testing, and quality control cost. g At 5% of base cost. h At 2.8% for 2008, and 3% per annum for 2009–2012 for local currency cost and 1.2% per annum for foreign exchange cost during 2008–2012. i 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 Development Bank. Source: Asian Development Bank estimates.

IMPLEMENTATION SCHEDULE

2006 Activities 2007 2008 2009 2010 2011 2012 II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III A. Project Processing 1. Appraisal 2. Loan Negotiations 3. Board Consideration 4. Loan Effectiveness

B. Land Acquisition and Resettlement

C. Civil Works Contracts 1. Prequalification 2. Bidding 3. Mobilization of Contractors 4. Construction

D. International Consultants 1. RFP Preparation 2. RFP Issuance to Contract Award 3. Mobilization of Consultants 4. Consulting Services

E. Equipment 1. BD Preparation and Issuance Appendix 8 Appendix 2. Bid Evaluation and Contract Award 3. Installation

37 BD = bidding documents, RFP = request for proposal. Source: Sichuan Provincial Communications Department and Asian Development Bank estimates.

38 Appendix 9

SUMMARY PROCUREMENT PLAN

Table 9.1: Civil Works Contract Packages (ADB Financing)

Package Length Procurement Descriptiona Number (km) Mode CW01 K0+000-K3+060 3.1 ICB CW02 K3+060-K7+610 4.6 ICB CW03 K7+610-K15+900 8.3 ICB CW04 K15+900-K22+930 7.0 ICB CW05 K22+930-K32.32+500 9.4 ICB CW06 K32.32+500-K38+961.708 6.6 ICB CW07 K40+462-K48+000 7.5 ICB CW08 K48+000-K61+450 13.5 ICB CW09 K61+450-K69+550 7.9 ICB CW10 K69+550-K79+350 9.8 ICB CW11 K79+350-K91+861.97 12.4 ICB CW12 K92+500-QK104+100 11.6 ICB CW13 QK104+100-RK113+050 9.0 ICB CW14 RK113+050-RK120+200 7.2 ICB CW15 RK120+200-K130+550 9.6 ICB CW16 K129+780-K142+700.452 12.2 ICB CW = civil works, ICB = international competitive bidding, K = kilometer. a Local roads comprising 27.6 km for Asian Development Bank-financing are included in these contract packages. Source: Sichuan Provincial Communications Department.

Table 9.2: Contract Packages (Government Financing)

Package Description Procurement Mode

A. Expressway Earthworks K142+700.45-K146+257.57 NCB B. Expressway Pavement 1. K0+000-K79+350 NCB 2. K79+350-K142+700.452 NCB C. Traffic Management Facilities 1. A1K0+000-E84+300 NCB 2. EK84+300-AK145+420 NCB D. Planting and Landscape 1. A1K0+000-EK84+300 NCB 2. EK84+300-A1K145+420 NCB E. Building and Ancillary Facilities 1. Control Center 1, Branch Center 1, Tool Station 5 NCB 2. Control Center 2, Office 1, Tool Station 4 NCB F. Maintenance Equipment Maintenance Vehicles (16), Machine for Maintenance (3) NCB Appendix 9 39

Package Description Procurement Mode

G. Tunnel Facilities Lighting, Ventilation, emergency, and Fire Fighting NCB H. Local Roads 30 Sections of Local Roads GP NCB = national competitive bidding, GP= government procedure. Source: Sichuan Provincial Communications Department.

Table 9.3: International Consulting Services (ADB Financing)

Package Description Mode A. International Consulting Services A01 Construction supervision and related services QCBS Total QCBS = quality- and cost-based selection. Source: Sichuan Provincial Communications Department.

Table 9.4: Threshold for Procurement

Procurement Method Threshold ($) ICB Works Equal or more than 10 million NCB Works Equal or more than 0.1 million and less than 10 million ICB Goods Equal or more than 1 million NCB Goods Equal or more than 0.1 million and less than 1 million ICB = international competitive bidding, NCB = national competitive bidding. Source: Sichuan Provincial Communications Department.

Table 9.5: Selection Method Threshold for International Consulting Services

Selection Method Threshold ($) Quality- and Cost-Based Selection Equal or more than 0.2 million. (quality-cost ratio of 80:20) Consultants Qualifications Selection Equal or more than 0.1 million and less than 0.2 million Least Cost Selection Less than 0.1 million Source: Sichuan Provincial Communications Department.

40 Appendix 10

MONITORING OF SOCIOECONOMIC AND POVERTY IMPACTS

1. The Project will, over time, result in economic development in the project area and gradually lead to structural changes in production patterns, consumption patterns, and the labor market. Lower transport costs reduce the costs of traded farm inputs, thereby raising agricultural productivity and profitability. Better roads improve farmers' access to markets and technology inputs, leading them to shift to higher-value crops. Road improvements tend to increase off-farm job opportunities, drive up average wages, and stimulate commercial activities by reducing transaction times and costs. In turn, higher incomes boost local people’s demand for transport and increase the movement of local goods and services. Even rural poor people who rarely use roads will benefit from improved roads, as goods and services will become cheaper and economic opportunities will increase.

2. The Sichuan Provincial Communications Department (SPCD) concurred with the proposed set of monitoring indicators for the project performance monitoring system (PPMS) of the Project (Table A10.1). Table A10.2 contains a list of key indicators that will comprise the core data required for impact assessment. SPCD will refine the baseline values for indicators prior to project implementation and update them during project implementation. Where relevant, indicators will be disaggregated by gender. SPCD will measure the indicators and report the findings to ADB on project inception, completion, and annually for 3 years after completion. SPCD, together with the external monitoring agency, will also select the monitoring villages according to actual needs. The resource requirements for the PPMS tasks will include: 1 person-month of international expertise to design and set up the PPMS and train national consultants on monitoring methodology; and 8 person-months of national expertise to mange the database and carry out village-level surveys, analysis, and reporting (for which SPCD will recruit an independent local institute). To facilitate the assessment of the Project’s socioeconomic impact, the terms of reference to monitor and evaluate project impacts are included among the consulting services to be provided under the Project. Reports summarizing the key findings of monitoring at inception, completion, and annually for 3 years thereafter will be submitted to the Asian Development Bank.

Table A.10.1: Monitoring Framework

Items Monitoring Indicators Monitoring Mechanism A. During Construction 1. Employment of local laborers (included Number of local laborers, work time Contractor’s records in SDAP) HH survey 2. Use of local construction materials Quantity of construction materials Contractor’s records (included in SDAP) 3. Taxes to local government Tax revenue Contractor’s and government’s records 4. Implementation of SDAP Various indicators in the SDAP Progress report 5. Implementation of resettlement plan No. of people affected and resettled, Resettlement monitoring area of land acquired, amount of compensation paid B. 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 Local statistics corridor Village survey 2. Improved transport services Bus and freight fares Village survey Villages with bus services Village survey Bus frequency to villages Household survey 3. Changes in producer prices Fertilizer prices Village survey 4. Increased economic activities Vehicle ownership Household survey Transport expenses Household survey

Appendix 10 41

Items Monitoring Indicators Monitoring Mechanism Frequency of visits to markets Local statistics Increased trade in the region Village survey 5. Increased access to social services Travel time to the nearest school Village survey and clinic Village survey Middle school dropout rates

D. Medium-Term (within 3–5 years) 1. Developed nonfarm sector Income from nonfarm sector Household survey Number of small business Village survey enterprises County statistics Number of tourists in the area Household survey Cash crops (percentage of total Village survey crops) 2. Increased agricultural extension Frequency of visits by agricultural Village survey services technicians Statistics/village survey 3. Increased rural incomes New or renovated houses Village level Rural income 4. Reduced poverty incidence Poverty incidence HH = household, resettlement plan = resettlement plan, SDAP = social development action plan. Source: Sichuan Provincial Communications Department.

Table A10.2: Indicators and Baseline Values

Project counties Category Indicator Unit Dazhou Tongchuan Xuanhan Wanyuan Economic Per capita GDP Yuan 10,991 4,134 4,556 8,114 GDP from primary sector % 12.2 38.2 39.3 21.3 GDP from industrial sector % 44.4 32.3 33.9 41.0 GDP from service sector % 43.4 29.5 26.8 37.7 Per capita rural income Yuan 3,768 2,403 2,488 2,722 Per capita fruit output Kg 163 20 16 61 Per capita meat production Kg 201 129 148 135 Raw coal output Ton 1,900,000 1,000,000 6,000,000 — Cement output Ton 325,600 67,900 702,000 2,063,000 Social Urban population % 57.8 13.8 15.4 16.6 Rural telephone connection HH% 42 21 21 23 Enrollment ratio: middle/primary Number 0.79 0.60 0.54 0.61 Doctor per 1,000 people Number 11.29 1.65 1.79 3.47 Reported HIV/AIDS Number 7 5 3 n.a. Rural poor (under CNY900) % 1.5 6.8 7.7 n.a. Poverty Rural poor (under CNY1,800) % 9.1 27.8 31.7 n.a. Urban poor (under CNY1,800) % 8.8 8.6 14.9 n.a. Road density per 100 km2 km 114.1 39.34 28.9 48.3 Transport Road density per 10,000 km 13.16 14.35 21.02 12.56 population Density village roads per 100 km 39.98 78.86 49.20 km2 Townships with paved road % 90 40 28 access Highway passenger volume Person 46,220,000 8,700,000 7,080,000 Average distance per passenger km 27.3 44.6 20.3 trip Interprovincial bus routes Number 11 2 5 Intercounty bus runs Number 70 5 12 Traffic accidents Number 136 125 463 — = not available, GDP = gross domestic product, HH = household, km = kilometer, km2 = square kilometer. Sources: Sichuan, Dazhou, and county statistics bureaus.

42 Appendix 11

TRAFFIC FORECAST

1. The proposed project expressway originates in Luojiang, Dazhou city, and terminates at the Sichuan–Shaanxi border to the north. The total length is 143 kilometers (km). It is an important section of the Xi’an–Chongqing expressway, which is part of the Arongqi–Beihai line, one of the eight Western Development Corridors approved by the People's Republic of China Government in 2001. For the construction schedule of the Xi’an–Chongqing corridor, the Dazhou–Chongqing expressway has been already completed and opened to traffic; the Xi’an– Ankang expressway is under construction and will be open to traffic before this Project; the section from Ankang to the Shaanxi–Sichuan border is expected to be completed about the time this Project is completed, which means the entire corridor will be open to traffic when the project expressway is completed.

2. Currently National Highway 210 connects Dazhou and the Sichuan–Shaanxi border; its total length is 142 km, of which 121 km, or about 85%, is a class 4 road. The subgrade width ranges from 6.5 meters (m) to 7 m and the radius of horizontal curve is generally 15–20 m. Because of the difficult geographic characteristics and poor road conditions, the average annual daily traffic on National Highway 210 was 1,467 vehicles per day in 2004. However, after the project expressway is completed, it is expected that traffic will increase rapidly on this route. As a reference, traffic at the Dazhou toll collection station on the Dazhou–Chongqing expressway grew by 17.7% per year from 2001 to 2004. Traffic on the Wuhan–Yichang expressway in neighboring Hubei Province grew at 15% after the transport corridor was completed. These cases point to potentially rapid traffic growth on the proposed expressway. That growth could accelerate as a result of Dazhou city’s road development plan: from 2006 to 2015, the city is planning to build 230 km of expressways, 440 km of class 2 highways, 480 km of class 3 highways, and 600 km of class 4 highways in the project area and neighboring counties.

3. Origin-to-destination data was derived from a 24-hour survey conducted at seven locations along National Highway 210 in September 2001. Forty-two origin-to-destination zones cover most areas of northeastern Sichuan, southern Shaanxi, and northeastern Chongqing. The survey showed that traffic on National Highway 210 consisted of 25% small trucks, 25% medium trucks, 15% large trucks, 26% small cars, 7% large cars, and 3% trailers. Coal accounted for 31% of the total freight volume, followed by construction materials (12%), cement (7%) and other products (31%). Based on the origin-to-destination matrix derived in the feasibility study, the forecast model was refined and a traffic forecast was developed for both passenger and freight vehicles in 2012, 2022, and 2031. This forecast was based on the projected gross domestic product (GDP) and estimated elasticities of traffic demand with respect to GDP growth. GDP growth rates were projected to be 12.3% for 2004–2012, 10.3% for 2012–2021, and 7.8% for 2021–2031. Relevant socioeconomic data, such as projected industrial restructuring and travel behavior changes resulting from increased incomes, were also incorporated into the forecasts.

4. Traffic on the proposed project expressway comprises diverted traffic from existing roads and generated traffic because the willingness to pay is greater than the travel cost. Passengers and freight moving from one zone to another choose their route based on the route’s generalized travel cost, which was defined as a function of travel distance, travel time, vehicle operating costs, toll costs, and other perceived costs. Through the traffic forecast period, the vehicle fleet composition is also expected to change, with the share of private cars increasing steadily. The results of the traffic forecast are shown in Table A11. The forecast traffic volume on the expressway is expected to grow from an average of 7,800 passenger car units per day in 2012, to 19,000 passenger car units per day in 2022, and to 42,400 units per day in 2032. The

Appendix 11 43 traffic on the proposed local roads will grow more slowly because of projected slow growth in the project area.

Table A11: Average Annual Daily Traffic on Project Expressway (passenger car units)

Annual Annual Road Sections 2012 2022 Growth Rate 2032 Growth Rate (%) (%) Xujiaba–Xuanhan 9,323 26,472 11.0 56,101 7.8 Xuanhan–Puguang 9,140 23,279 9.8 53,121 8.6 Puguang–Huangjin 8,701 20,038 8.7 46,575 8.8 Huangjin–Xinghua 7,677 17,340 8.5 37,437 8.0 Xinghua–Tiekuang 7,449 16,998 8.6 36,023 7.8 Tiekuang–Baisha 7,426 16,636 8.4 35,916 8.0 Baisha–Wanyuan 7,447 16,613 8.4 38,970 8.9 Wanyuan–Guandu 7,105 17,769 9.6 44,440 9.6 Guandu–Border 3,480 8,624 9.5 19,680 8.6 Weighted Average 7,769 18,993 9.4 42,364 8.4 Sources: Asian Development Bank and technical assistance consultants estimates.

44 Appendix 12

ECONOMIC ANALYSIS

1. The proposed Project comprises a 143-kilometer (km) access-controlled expressway between Dazhou and the Sichuan–Shaanxi border, and 430 km of local roads. The economic analysis covers 5 years of the project implementation from 2008 to 2012 and the subsequent 20 years of full operation from 2013 to 2032. The economic internal rate of return (EIRR) of the project expressway was estimated by comparing the situation with and without the Project. Without the Project, traffic will use the existing road network, principally National Highway 210, which will be congested and expensive to maintain because of the rapidly increased traffic volume. Some travel may not take place because of the congestion and the resulting increased travel times and vehicle operating costs (VOC). With the Project, congestion on the existing roads will be reduced, and traffic on the proposed expressway and the existing roads will benefit from faster, cheaper, and safer travel. Additional trips will be generated as the economy responds to lower transport costs and better services.

2. Analysis of Alternatives. Eight alternative alignments of the project expressway were reviewed based on geologic and topographic conditions, construction and maintenance costs, and the potential for integration with national and local transport networks. The expressway technical design was proposed after consideration of consistency in the standards of contiguous sections at each end of the project expressway with the national highway network and forecast traffic. The final plan was selected by systematically considering all the relevant technical, financial, environmental, and socioeconomic factors. Various financing modality alternatives were also considered, including private sector investment. Because of risks associated with construction, uncertainties in the long-term forecast horizon, and an expected low financial rate of return, public financing was considered the best option for the Project.

3. General Parameters. Economic evaluation was undertaken using constant 2007 prices. The project costs and benefits were converted to the economic price by separating the cost items into tradable materials and equipment and non-tradable materials, labor, and land. The prices were expressed in local currency (CNY) using the domestic numeraire with a shadow exchange rate factor of 1.013 for foreign exchange effects. A shadow price factor of 0.67 was used to estimate the opportunity cost of unskilled labor.

4. Costs. Economic costs of the expressway include (i) the capital cost, including physical contingencies, land acquisition and resettlement costs, and environmental mitigation costs; and (ii) costs of operating and maintaining the expressway, including costs of replacing depreciated equipment, routine maintenance costs, and the cost of a major maintenance operation expected to be needed 10 years after the expressway becomes fully operational. The land acquisition and resettlement costs were based on their opportunity costs—i.e., the value of agricultural output forgone and the costs of resiting displaced activities.

5. Benefits. The economic benefits include (i) savings in VOC resulting from reduced travel distances and improved road conditions, (ii) savings in the value of passenger and freight travel time, (iii) savings resulting from lower accident and fatality rates, (iv) benefits to generated traffic, and (v) savings in capital and operation and maintenance (O&M) costs for the existing National Highway 210 and other alternative routes. A reduction in VOC is the main source of economic benefits for the project expressway. Traffic diverted to the expressway would travel shorter distances at higher, more economical speeds on a smoother road, with better vertical and horizontal alignment and less congestion. Traffic remaining on the National Highway 210 route would also benefit from a reduction in traffic volume and congestion. All these changes affect vehicles speeds and VOC—both of which were projected for all vehicle types likely to use Appendix 12 45 the corridor. Savings in travel time will be observed both on the project expressway and on existing roads. Work-related travel time was evaluated for private vehicles and buses; inventory cost savings were projected for freight traffic. The economic cost of accidents was projected in terms of direct property damage and forgone income.

6. Local Roads. About 430 km of local roads will be improved concurrently with the expressway component. The costs of this component include capital costs and O&M costs. The principle benefits of the local road improvements were identified as (i) VOC savings for existing traffic and normal growth of future traffic on the improved roads, (ii) benefits to generate traffic, and (iii) savings in O&M costs. Currently farm–gate prices for agricultural produce are low since only traders with tractors or small trucks can visit villages to purchase produce. Improved local roads will allow farmers to go directly to markets to sell their produce at higher prices, and thus the benefits to generated traffic will account for a large proportion of the total benefits.

7. Result and Conclusion. The EIRR for the Project, including the expressway and local road components, is 14.1% (Table A12.1). VOC savings from the expressway are the major economic benefit, accounting for 56.9% of the total benefits, followed by generated traffic (18.7%) and time savings (9.4%). Accident cost savings (accounting for 5.5% of benefits) and O&M savings (2.2%) are relatively small. The benefits of the local roads also account for a small proportion (7.4%); without local roads, the expected EIRR for the expressway project is 13.5%. The EIRR for the local road component alone is 40.8%.

8. A sensitivity analysis (Table A12.2) was conducted to test the robustness of the EIRR by changing the values of the key variables—capital cost, traffic volume, and implementation schedule. The capital cost would have to be 23.9% higher than projected, or traffic volume 20.5% lower than projected, for the EIRR to fall below the cutoff rate of 12%. Considering the experience of the Asian Development Bank in the People’s Republic of China, neither scenario is likely. A project implementation delay would also have a negative impact on the expected EIRR, which would decline to 12.6% if implementation was delayed by 1 year. In order to determine the degree of uncertainty of the Project, a risk analysis was carried out. Each key variable—i.e., capital cost, toll rate, and traffic growth—was assigned a random value within defined limits based on assumed probability distribution functions. The Monte Carlo analysis based on the statistical method was carried out to generate the probability distribution of the EIRR. The results show that the probability that the EIRR will fall below 12% is less than 4%; the EIRR is thus robust and the Project is economically viable. A distribution analysis was conducted to gauge the project-related effects on various beneficiaries, including road users, labor, and government. The results (Table A12.3) show that road users, including passengers and freight users, will receive the largest share (85.8%) of the Project's net benefits.

Table A12.1: Economic Internal Rate of Return 46 (constant 2007 prices, domestic price numeraire, CNY million) Costs Benefits Operation Net Year Capital Local VOC Time Accident Generated O&M Local 12 Appendix and Total Total Benefits Investment Roads Savings Savings Savings Traffic Savings Roads Maintenance 2008 862.1 39.5 901.7 (901.7) 2009 1,465.7 26.8 1,492.5 (1,492.5) 2010 2,155.4 32.4 2,187.8 (2,187.8) 2011 2,845.1 72.7 2,917.8 82.5 82.5 (2,835.3) 2012 1,293.2 19.3 1.5 1,314.0 265.5 43.0 15.8 107.7 16.0 83.1 531.1 (782.9) 2013 40.8 1.5 42.3 531.0 86.0 31.6 215.3 31.9 81.9 977.9 935.6 2014 41.9 1.5 43.4 574.9 93.3 37.1 230.7 32.4 80.8 1,049.3 1,005.9 2015 43.0 1.5 44.5 622.5 101.3 43.6 245.3 33.2 79.6 1,125.4 1,080.8 2016 44.2 1.5 45.7 674.1 109.9 51.1 259.1 33.9 78.4 1,206.5 1,160.7 2017 45.4 1.5 46.9 729.9 119.3 60.0 272.2 34.8 77.2 1,293.3 1,246.4 2018 46.7 1.5 48.2 790.3 129.4 70.4 284.6 35.8 76.0 1,386.5 1,338.2 2019 48.0 1.5 49.5 855.7 140.5 82.6 296.3 36.7 74.8 1,486.6 1,437.1 2020 49.3 1.5 50.9 926.5 152.4 96.9 307.3 37.8 73.6 1,594.7 1,543.8 2021 50.7 1.5 52.2 1,003.2 165.4 113.8 330.1 39.0 91.2 1,742.7 1,690.5 2022 52.2 1.5 53.7 1,086.3 179.5 133.5 357.4 40.2 108.8 1,905.7 1,852.1 2023 301.8 53.6 1.5 356.9 1,194.9 197.9 159.1 384.2 41.5 126.5 2,104.1 1,747.2 2024 55.1 1.5 56.6 1,307.9 217.1 167.3 406.9 42.8 144.1 2,286.1 2,229.5 2025 56.6 1.5 58.1 1,431.6 238.2 175.8 428.9 44.1 161.7 2,480.2 2,422.1 2026 58.1 1.5 59.6 1,566.9 261.3 184.8 450.0 45.3 179.3 2,687.7 2,628.1 2027 59.7 1.5 61.3 1,715.1 286.7 194.3 480.1 46.5 196.9 2,919.7 2,858.4 2028 61.4 1.5 62.9 1,916.1 321.0 208.4 510.4 47.8 214.6 3,218.3 3,155.4 2029 63.1 1.5 64.6 2,140.6 359.5 223.6 541.0 49.0 232.2 3,545.9 3,481.2 2030 64.9 1.5 66.4 2,391.4 402.5 239.9 571.9 50.2 249.8 3,905.7 3,839.3 2031 66.7 1.5 68.3 2,671.5 450.8 257.3 603.0 51.5 267.4 4,301.6 4,233.4 2032 (4,311.3) 68.6 (84.2) (4,326.9) 2,984.5 504.8 276.1 634.5 52.7 285.1 4,737.6 9,064.6 Economic Net Present Vale = 1,391 Economic Internal Rate of Return = 14.1% ( ) = negative, O&M = operation and maintenance, VOC = vehicle operating cost. Source: Asian Development Bank and TA consultants estimates.

Appendix 12 47

Table A12.2: Sensitivity Analysis

EIRR NPV Switching Value Scenarios (%) (CNY million) (%) Base Case 14.1 1,391 1. 10% increase in construction cost 13.1 810 23.9 2. 10% decrease in traffic volume 13.1 714 (20.5) 3. 1-year implementation delay 12.6 406 NPV declines by 70.8 4. Combination of 1 and 2 12.1 43 NPV declines by 97.1 ( ) = negative, CNY = yuan, EIRR = economic internal rate of return, NPV = net present value. Note: Switching value indicates the percentage increase in construction cost (or decrease in traffic volume) for the NPV to become zero. Sources: Asian Development Bank and technical assistance consultants' estimates.

Table A12.3: Distribution of Project Benefits (present values at 12%, CNY million)

Financial Economic Item Present Present Difference Passenger Freight Labor Government Value Value Traffic Traffic A. Benefits 1. Toll Revenue 3,048 (3,048) (1,509) (1,539) 2. VOC Savings 4,286 4,286 1,474 2,812 3. Time Savings 707 707 543 165 4. Accident Cost Savings 412 412 141 271 5. Generated Traffic 1,407 1,407 483 924 6. O&M Savings 168 168 168 7. Local Roads 555 555 189 366 Subtotal (A) 3,048 7,535 4,487 1,321 2,999 168

B. Costs 1. Capital and O&M 5,702 5,529 173 173 2. Labor 668 614 53 53 3. Tax 322 322 322 Subtotal (B) 6,692 6,143 548 53 495

Net Benefits (3,644) 1,392 5,035 1,321 2,999 53 663 ( ) = negative, O&M = operation and maintenance, VOC = vehicle operating cost. Sources: Asian Development Bank and technical assistance consultants' estimates.

48 Appendix 13

FINANCIAL ANALYSIS AND PROJECTIONS

A. General

1. The projected financial statements of the proposed Eastern Sichuan Road Development Project have been prepared in current terms for the period 2008–2032. Construction will be completed by June 2012, and the operation will start after that. The assumed foreign inflation rate is 1.2% during 2009-2012 and the assumed local inflation rate is 2.8% for 2008, and 3% for 2009–2012 The cost projections 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 forecasts of future traffic and a base toll rate of CNY0.35 per passenger car per kilometer. Corresponding tolls for other vehicle types are (i) CNY0.70 for a small bus or light truck, (ii) CNY1.05 for a medium bus or medium truck, (iii) CNY1.4 for a large bus or large truck, (iv) CNY1.75 for a light articulated truck and a trailer.1 It is assumed that the toll charges will increase in current terms to keep up with inflation, so there will be no real increase in project toll rates over the project lifespan. Other income (from fuel sales, rental income, etc.) amounts to 2.5% of toll revenue. It is assumed that 10% of vehicles are exempted from tolls.2

3. Operating costs have been projected based on an assessment of labor requirements (270 permanent employees) and present labor costs in Sichuan. The cost of utilities and office space is projected to be about 40% of labor costs. Annual routine maintenance costs are projected to be CNY50,000 per km. The environmental monitoring cost is projected to be CNY800,000 per annum. Periodic maintenance costs are projected to be CNY1.25 million per kilometer, and equipment replacement costs are projected to be 35% of equipment costs.

4. Operating and maintenance costs for the tunnels are based on (i) installed kilovolt amperes in the longer tunnels, and (ii) operating hours per day and staffing requirements. Assumptions include: (i) electricity costs of CNY0.50 per kilowatt per hour; (ii) labor costs of CNY15,000 per annum; and (iii) regular maintenance costs of CNY250,000 per km.

5. Depreciation is calculated using a straight-line depreciation method, with the average life about 50 years for the main expressway structure, 20 years for the pavement component, and 15 years for equipment. Applicable business taxes at a rate of 5.5% are charged on revenue. Corporate income taxes of 33% are paid on income after deducting business taxes, depreciation and interest charges, operating expenses, and any prior-year losses carried forward.

6. The Project will be funded 47% by equity or grants and 53% by long-term loans. The China Development Bank loan will be repayable over 25 years, including a 5-year grace period. The ADB loan is assumed to have a 25-year term, including a 5-year grace period and a 0.35%

1 The toll rates proposed and their structures are consistent both with trends in Sichuan and with tolls on the existing, adjacent stretch of expressway. In addition to expressway tolls, Sichuan Provincial Communications Department proposes to impose tunnel tolls. The proposed rate for a car is CNY2.5 per kilometer of tunnel for every tunnel longer than 1 kilometer. 2 Under the Sichuan provincial “green passage” regulations, local vehicles carrying fresh agricultural produce or livestock are exempt from tolls.

Appendix 13 49 commitment charge. It will be denominated in US dollars, with interest to be determined in accordance with ADB's LIBOR-based lending facility.

7. The summary financial statement is presented in Table A13.1. The projected financial statement indicates that the forecast revenue under the base assumptions are sufficient to cover annual recurrent costs, depreciation, and debt repayments on the ADB and China Development Bank loans. It is projected that the Project will generate reasonable profits from expressway operation after the fifth year of full operation.

C. Financial Analysis

8. The major assumptions used for calculation of financial internal rate of return (FIRR) are: (i) all calculations are made in 2007 prices, covering a period from 2008 to 2032; (ii) capital costs include all incremental capital expenditures related to the construction and equipment for the expressway, but exclude price contingencies and interest during construction; (iii) operation and maintenance includes all annual incremental expenses incurred in operating the expressway, but excludes depreciation and debt repayment provisions; (iv) operating revenues from tolls used in financial projections are also adjusted to 2007 prices; (v) the residual value equal to undepreciated value of capital investment is included as a benefit of the FIRR calculation.

9. The projected weighted average cost of capital (WACC), after taxes and in real terms, was calculated using estimated capital mix and expected capital cost 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 6.16% per annum are used for the domestic loan funds; and (iii) the cost of equity was assumed to be 8%. The cost of debt is also adjusted to reflect the impact of a 33% income tax. The nominal cost of debt is converted to the real cost of debt by applying domestic and international average inflation rates for domestic and foreign currency-denominated debt.

10. The FIRR for the Project, computed on an after-tax basis, is 4.1%. This compares favorably with the WACC, also computed on an after-tax basis, of 3.1% (Table A13.2). The Project is considered both financially viable and sustainable. Sensitivity tests indicate conditions causing the project's viability to fall below WACC are unlikely to occur. The sensitivity of the Project's financial indicators to cost and revenue variations is shown in Table A13.3.

Table A13.1: Projected Financial Statements

(CNY million) 50

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 A. Income Statement

Tolls 0.0 0.0 0.0 0.0 229.2 487.5 518.6 551.7 586.8 756.5 804.7 13 Appendix Non-toll revenue 0.0 0.0 0.0 0.0 7.6 16.3 17.3 18.4 19.6 23.9 25.4 less: business taxes 0.0 0.0 0.0 0.0 13.3 28.2 30.0 31.9 34.0 43.7 46.5 Total revenue 0.0 0.0 0.0 0.0 223.5 475.6 505.9 538.1 572.4 736.7 783.6 Total operating expenses 0.0 0.0 0.0 0.0 26.7 28.7 48.7 52.4 56.4 60.8 65.5 Depreciation 0.0 0.0 0.0 0.0 278.5 278.5 278.5 278.5 278.5 278.5 278.5 Interest charges: long term 0.0 0.0 0.0 0.0 0.0 339.1 334.5 329.5 324.3 318.7 312.8 Interest charges: short term 0.0 0.0 0.0 0.0 0.3 11.2 18.0 24.5 29.9 33.9 33.9 Income Tax 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 (82.0) (181.9) (173.8) (146.8) (116.6) 44.8 93.0 B. Balance Sheet Assets Current assets: 0.0 0.0 0.0 6.7 7.2 12.2 13.1 14.1 15.2 94.9 216.3 Fixed assets: 820.5 2,612.9 5,091.4 7,819.2 10,338.7 10,060.3 9,781.8 9,503.4 9,224.9 8,946.4 8,668.0 Total Assets 820.5 2,612.9 5,091.4 7,825.9 10,345.9 10,072.5 9,794.9 9,517.5 9,240.1 9,041.3 8,884.2 Liabilities and equity Current liabilities 0.0 0.0 0.0 6.7 216.8 349.3 474.3 577.2 655.3 656.2 656.5 Long term debt 530.9 1,644.0 3,114.9 4,652.6 5,954.2 5,752.0 5,537.5 5,310.1 5,069.0 4,813.3 4,542.2 Equity 289.7 968.9 1,976.4 3,166.6 4,174.8 3,971.2 3,783.2 3,630.1 3,515.8 3,571.8 3,685.6 Total Liabilities and Equity 820.5 2,612.9 5,091.4 7,825.9 10,345.9 10,072.5 9,794.9 9,517.5 9,240.1 9,041.3 8,884.2 C. Cash Flow Statement Sources of funds Internal cash generation 0.0 0.0 0.0 0.0 198.2 448.1 457.5 485.9 516.2 676.7 718.4 External financing 820.5 1,792.3 2,478.5 2,734.6 3,204.9 579.4 582.1 588.7 594.1 676.7 718.4 Total sources of funds 820.5 1,792.3 2,478.5 2,734.6 3,403.1 1,027.5 1,039.6 1,074.5 1,110.3 1,353.5 1,436.8 Application of funds Construction of expressway 820.5 1,792.3 2,478.5 2,727.9 2,797.9 0.0 0.0 0.0 0.0 0.0 0.0 Debt service 0.0 0.0 0.0 0.0 406.5 574.4 581.2 587.7 593.0 597.0 597.0 Distributions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total application of funds 820.5 1,792.3 2,478.5 2,727.9 3,204.4 574.4 581.2 587.7 593.0 597.0 597.0 End of Year Cash 0.0 0.0 0.0 6.7 7.2 12.2 13.1 14.1 15.2 94.9 216.3 Debt service coverage ratio — ————0.8 0.8 0.9 0.9 1.2 1.3 Debt to equity ratio (%) 65.0 63.0 61.0 59.0 58.0 57.0 57.0 56.0 55.0 53.0 51.0 Working ratio (%) — ————6.0 10.0 10.0 10.0 8.0 8.0 Return on average assets (%) — ————1.7 1.8 2.1 2.5 4.4 5.0 — = not applicable. Source: Asian Development Bank estimates.

Appendix 13 51 Table A13.2: Financial Internal Rate of Return (CNY million)

Operation Capital and Project Business Corporate Net Cash Year Investment Maintenance Revenues Tax Income Flow Cost Tax 2008 (778.5) (778.5) 2009 (1,632.3) (1,632.3) 2010 (2,157.1) (2,157.1) 2011 (2,255.0) (2,255.0) 2012 (2,190.0) (23.6) 209.1 (11.7) (2,016.1) 2013 (24.6) 432.7 (24.2) 383.9 2014 (40.7) 447.8 (25.1) 382.0 2015 (42.6) 463.4 (25.9) 394.8 2016 (44.6) 479.5 (26.9) 408.0 2017 (46.8) 600.2 (33.6) 519.9 2018 (49.0) 621.1 (34.8) 537.3 2019 (51.3) 642.7 (36.0) 555.4 2020 (51.9) 665.0 (37.2) 575.9 2021 (52.5) 688.2 (38.5) 597.1 2022 (282.5) (53.2) 817.5 (45.8) (108.7) 327.4 2023 (53.8) 843.1 (47.2) (138.3) 603.8 2024 (54.5) 869.5 (48.7) (156.0) 610.4 2025 (55.2) 896.7 (50.2) (205.6) 585.7 2026 (55.9) 924.8 (51.8) (220.5) 596.6 2027 (56.7) 1,095.0 (61.3) (279.7) 697.3 2028 (57.5) 1,129.3 (63.2) (296.4) 712.1 2029 (58.3) 1,164.6 (65.2) (311.9) 729.2 2030 (59.2) 1,201.1 (67.3) (327.6) 747.0 2031 (60.1) 1,238.7 (69.4) (343.7) 765.5 2032 4,450.0 (61.0) 1,466.7 (82.1) (419.1) 5354.4 FIRR before corporate tax 5.1% FIRR after corporate tax 4.1% WACC 3.1% ( ) = negative, FIRR = financial internal rate of return, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

Table A13.3: Sensitivity Analysis

FIRR WACC Scenario (%) (%) Base Case 4.1 3.1 1. Revenues decrease by 10% 3.5 3.1 2. O&M increase by 10% 4.1 3.1 3. Capital cost increase by 10% 3.7 3.0 4. Construction delay of 1 year 3.6 3.1 5. Combination of 1, 2, 3, and 4 3.1 3.0 FIRR = financial internal rate of return, O&M = operation and maintenance, WACC = weighted average cost of capital. Source: Asian Development Bank estimates.

52 Appendix 14 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 Yes priority in country poverty analysis? national priority in country poverty No partnership agreement? No Contribution of the sector or subsector to reduce poverty in the People’s Republic of China: The proposed Project involves constructing an expressway of 143 kilometers (km) from Dazhou to the Sichuan–Shaanxi border at Wanyuan county, and upgrading (from unpaved class III–IV to paved class III– IV) 430 km of local roads. The Project will (i) facilitate economic growth by increasing interprovincial trade among Sichuan, Shanxi province, and Chongqing; (ii) reduce travel times to the major regional cities from rural towns; and (iii) reduce poverty by increasing agricultural commercialization and nonfarm employment.

B. Poverty Analysis Targeting Classification: General intervention What type of poverty analysis is needed?

Improve Road Conditions at Township Level. Wanyuan county has the poorest roads in the project area. As of 2004, 29 villages in Wanyuan county were accessible by unpaved road only, while 38 townships were completely inaccessible by road. In Xuanhan county, 33 townships lacked paved road access, as did 1 township in Tongchuan county. The Project will enable 21 townships in Xuanhan county and 19 townships in Wanyuan county to have paved road access. The Project will improve the township roads from unclassified standard to Class 3 or 4 standard.

Facilitate Economic Growth in the Project Area. The project area's main industries are coal mining, natural gas extraction, hydropower, tourism, steel, and cement. The above-mentioned industries accounted for 44.4% of gross domestic product (GDP) in Tongchuan, 32.3% in Xuanhan, and 33.9% in Wanyuan in 2004. The project area has 21 tourist spots, which attracted 1.35 million people in 2005. It is projected that the Project will contribute an additional 1-2% to the GDP of Xuanhan and Wanyuan counties during construction; GDP in each country is projected to maintain an annual growth rate of 13–15% for more than 5 years after the project completion.

Improve Vehicle Transportation Services to the Major Cities. Eighteen interprovincial bus routes (14 to Chongqing and four to Shanxi) existed in the project area as of 2005, with 70 daily buses servicing these routes. There were also 87 intercounty routes (3 to Chengdu) supporting 509 daily bus services. Most rural people travel to township centers for marketing, shopping, and medical care. It is expected that these routes will provide 20% more trips for passengers after project completion.

Create Employment Opportunity under the Project. It is projected that 56,421 person-months of unskilled work will be required under the Project (54,411 for the expressway component, 2,010 for the local road component); each worker is projected to earn CNY500 per month. Assuming each household in the project area works 4 months per year over a 4-year period, the Project will directly benefit about 6,250 households. The annual income from this employment will be about CNY2,000 per household, which is twice the average annual income per capita for poor households. The Project aims to provide locals with 60% of this work.

C. Participation Process Is there a stakeholder analysis? Yes No Rural and urban population, bus passengers, transport operators, local enterprises, and local governments are identified as project stakeholders. Positive and negative effects to these groups caused by the Project were analyzed in the social survey.

Is there a participation strategy? Yes No 3,627 people representing various stakeholders were consulted during the project preparation stage. Local people will have an opportunity to participate in project construction.

Appendix 14 53

D. Gender Development Strategy to enhance impacts on women:

Six villages in Xuanhan and Wanyuan counties were selected and 45 women participated in the focus- group discussions. In terms of mobility, women make 5 to 10 trips per month to a township center for business, shopping, or visiting the hospital. The proportion of female migrant workers in sample population is 32%; many of them work in garment factories in coastal provinces. In terms of women and human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS), most participants were aware of HIV/AIDS and understood the preventative measures. During the discussion, many women expressed their needs on health issues such as family planning, health check-ups, and medical insurance.

Has an output been prepared? Yes No Refer to SDAP

E. Social Safeguards and Other Social Risks Significant/ Plan Item Not Significant/ Strategy to Address Issues Required None A resettlement plan for the expressway and a short Significant resettlement plan for the local roads have been Full Resettlement prepared in accordance with Government Not significant regulations and ADB’s Policy on Involuntary Short Resettlement (1995). The plans have been None disclosed to the public and affected people. Internal None and external monitoring arrangements will be put in place.

Poor people spend about CNY32 per capita per Significant Yes year on travel, according to the social survey. Affordability Current bus fares range from CNY0.25 to CNY0.35 Not significant No per passenger per kilometer. These fares are

considered affordable. None

Significant Yes The Executing Agency will ensure that all the Labor employment and labor standards, as defined in the Not significant No applicable laws and regulations, be complied with.

None

Indigenous Significant Yes Peoples There are no ethnic minorities in the project area. Not significant No

None 15 HIV/AIDS cases have been reported in the Other Risks/ Significant project area. The cause of infection was from drug Yes Vulnerabilities abuse (11 cases) and sexual transmission (4 Not significant cases). To prevent the risk of HIV/AIDS associated No with the Project, the local centers for disease control None (CDCs) will extend their preventive measures to the communities in the project area. These mitigation measures will be carried out in collaboration with local health agencies and an anti-AIDS program funded by the United Kingdom’s Department for International Development in the project area.

54 Appendix 15

SMALL BUSINESS DEVELOPMENT IN THE PROJECT AREA

1. Background. The project area is economically active because of its large population, continuous development activities, and proximity to Chongqing. Consequently, small businesses are quite active in the project area. A wide assortment of businesses has been established to provide basic necessities to local communities and travelers. The project preparatory technical assistance field survey found that there are about 0.37 establishments with 1.43 employees per kilometer of the road, excluding the numerous establishments in township centers. These establishments, concentrated in settlement areas, include hostels, car repair shops, carwashes, grocery shops, and restaurants.

2. Small Business Opportunities in the Project Area. The project area is near the center of the third largest gas field in the People’s Republic of China. Xuanhan and Wanyuan are major coal mining counties in Sichuan, while Dazhou city is the second largest steel production base in Sichuan. The project area also has large thermal- and hydropower-generation and cement industries. In addition, there are about 21 tourist spots in the project area. Unfortunately, as a result of the transport bottleneck, these industries, especially the natural gas development and natural gas-based chemical industries, are operating far below their potential. The project expressway and local roads will support Dazhou city’s 11th Five-Year Plan, which includes a component to expand these industries significantly. As a result of this expansion, nonfarm employment, urban population, passenger traffic volumes, and freight transport volumes will all increase, creating further opportunities for small business development along the expressway and local roads.

3. Small businesses could focus on the following areas: (i) agricultural trading and industry in agricultural products such as fruits, processed fruit products (e.g., dried fruit, jam), mushrooms, local liquor, beer, and herbs; (ii) community-based tourism and ecotourism; (iii) distribution (for the local market) and transport; and (iv) service-oriented businesses, such as restaurants, catering, gift shops, car repair, and carwashes.

4. Prerequisites for Establishing Businesses. There are various factors that influence the viability of small businesses in the project area, including: (i) entrepreneurship, (ii) access to information and networking, (iii) access to the market and bargaining power against existing businesses, (iv) access to formal credit services, (v) access to basic business training services─accounting, (vi) support from government─tax, business licensing, and (vii) local infrastructure─water, road, and electricity.

5. Constraints. As for entrepreneurship, the field survey found that 15 out of the 98 households surveyed expressed desire to establish small businesses—including transport businesses. This indicates that many people are willing to assume the risks involved in starting a business.

6. Many people in the project area have a good grasp of market prices from both buying and selling goods at their local market. However, they know little about larger markets because of their limited mobility, which is partly caused by poor current road conditions.

7. People are allowed to sell their produce in their nearest market during the market day only for their petty trading (selling agricultural produce) with minimum tenant fee. The physical condition of markets at the township level is often poor without any permanent facilities. Under these conditions, bad weather often disrupts market activities, especially during the raining season. Bad weather also exacerbates the already poor road conditions leading to the markets. Since most individual traders don't have a great variety of products, they do not have much

Appendix 15 55 bargaining power with customers. So it is difficult for them to compete with established businesses. There are also no business-based collective groups, such as farmers' cooperatives, to improve their position in the market.

8. People have several ways of accessing credit services in the project area. The China Bank of Agriculture has offices located in each of the townships, as do Rural Credit Cooperatives. People can borrow money to buy agricultural inputs (such as fertilizer, seeds, etc.) or to start up animal husbandry or cottage businesses. They can borrow the money for short- term loans without collateral.

9. Government organizations such as the agricultural bureau, small- and medium-sized enterprise bureau, poverty reduction office, women’s association, and labor bureau provide different kinds of training to people in the project area. However, it is often mass training designed to appeal to a broad audience, rather than more targeted training tailored for individual businesses. Also, most training lacks the involvement of educational institutions such as universities. Such institutions have a wealth of accumulated knowledge on business administration to share.

10. To open a formal business, currently one must obtain business licenses and pay taxes. Obtaining licenses, dealing with the large amount of paper work, and paying the associated fees make it extremely difficult to start a business. The paperwork requirement is particularly cumbersome and not widely understood by many people.

11. People in the project area have good access to water and electricity, but the road infrastructure linking villages with townships is still poor, especially during the rainy season. This poor road infrastructure has been one of major barriers to developing small businesses in the area.

12. Proposed Actions in the Project Counties. Based on the above-mentioned constraints, the following measures will be taken to develop small businesses and commercial activities in the project area:

(i) Improve the condition of roads linking village and townships (ii) Facilitate provisions (regulations, trainings, and working capital) by the local government to form the farmers' cooperatives (iii) Establish permanent market at the township level; if local government lack funds to construct markets, additional funding sources will be sought from external sources. (iv) Enhance credit services with technical trainings. (v) Involve local universities and business schools in community economic development. The Government may create a partnership program to enhance cooperation between educational institutions and local communities. (vi) In cooperation with local government agencies, educational institutions, and nongovernment organizations, disseminate information on the required procedures for opening a formal business. (vii) Establish small business incubators specifically targeting small businesses nearby some interchanges. (viii) Promote local tourist spots and restaurants along the highways through advertisements on highway maps, billboards, and signs.

SOCIAL DEVELOPMENT ACTION PLAN: 2006–2010 56

Funding Proposed Actions Target Group(s) Agencies Involved Timing Monitoring Indicators Requirements 1. Protecting communities from 16 Appendix construction disturbances and ensuring Included in project safe construction practices Villages cost (refer to • Number and resolution • Prohibiting nighttime construction and (approximately Executing Agency and 2007– environmental of complaints

ensuring adherence to proposed noise 100) crossed by the contractors 2010 impact assessment • Length of irrigation and standards road and environmental drainage canals • Reconstruction of irrigation and management plan) drainage systems 2. Controlling transmissible infections and health conditions More than 10,000 Executing Agency, • Human immunodeficiency workers, mostly contractors, and local virus/acquired immunodeficiency rural poor, each public health agency • Number of posters 2007– Included in project syndrome (HIV/AIDS) and sexually month (refer to environmental • Number of program 2010 cost transmitted infections (STI) prevention impact assessment and • Number of tests posters More than 5,000 environmental • HIV/AIDS and STI counseling program service providers management plan) • HIV/AIDS and STI voluntary testing 3. Promoting tourism • Number of • Advertising tourist sites on expressway advertisements Tourists and Local governments and 2008– Government and sign boards just prior to highway • Number of tourists tourism agents their tourism bureaus 2010 tourism sector opening. (local and outside • Increasing promotion of key sites tourists) 4. Resettlement and income recovery for • Number of training Two persons from affected people sessions, kind of every household Executing Agency, local Project and local • Training on urban employment skills training, and number losing more than labor and social 2007– government Training of women on employment skills of participants • 10% of their security bureaus, other 2008 (refer to • Number of training farmland (at least agencies resettlement plan) sessions and number 50% female) of participants 5. Ensuring the hiring of local people for Villages crossed by • Number of local construction work and other services roads people (male and • Priority given to local labor in general. Executing Agency, 2007– Included in project female aggregated Targets: Population affected contractors, ADB 2010 cost data) (i) 80% female employment for by land loss and • Source of construction landscaping work resettlement materials (based on

Funding Proposed Actions Target Group(s) Agencies Involved Timing Monitoring Indicators Requirements (ii) 75% local labor for unskilled work. interviews with • Use of local construction materials, e.g., Population in poor contractors) rock, gravel, clay, cement villages along • Source of seedlings • Seedlings exclusively from local project roads (based on interviews nurseries with contractors) 6. Improving road safety • Speed-limit signs on G210 at sections Communities along crossing rural towns and villages Executing Agency, local No additional cost, • Number of warning NR108 and other • Strict implementation and enforcement public security bureau, 2007– included in local signboards provincial roads of traffic regulations on NR108 and local transport ongoing government budget • Road accident

• Safety awareness programs in schools bureau statistics Drivers • Improved driver training and testing in Dazhou city 7. Enhancing poverty reduction Microcredit for • Amount of credit interventions more than 10,000 Covered by poverty disbursed, number of • Microcredit to farmers for income- households, with reduction borrowers, and type of generating activities minimum of 20% Agricultural Bank of programs. activities (male and • Technical training on fruit and vegetable female borrowers China, poverty female disaggregated 2007– production reduction office, county Indicative annual data) 2010 • Business opportunities near Over 250,000 rural and township expenditure— • Number of training interchanges and at other locations residents governments CNY10 million per sessions year • Number of businesses Local businesses after opening prioritized expressway Source: Sichuan Provincial Communications Department.

Appendix 16 Appendix 57

58 Appendix 17

STAKEHOLDER PARTICIPATION AND CONSULTATIONS

No. of Main Issues Time Participants Purpose(s) Participants Discussed/Concerns Nov 2001– Environmental protection 2,700 • Project engineering preliminary • Avoiding villages and Nov 2003 bureau, forest bureau, feasibility study. Preparation of buildings, and water resource bureau, environmental impact minimizing farmland agricultural bureau, etc.; assessment framework and villagers along the • Requests for socioeconomic possible alignment information Nov 2004– Expressway Company 15 • Understanding the company’s • Role of the Expressway Jan 2005 structure, experiences, and Company in project financial status preparation • Participation of the company in resettlement survey Nov–Dec Municipal and county level 50 • Introduction of the Asian • Role of expressway in 2005 officials from different Development Bank (ADB) project promoting local sectors, including county and its objectives development government, transportation • Understanding the development • Roadside stations bureau, poverty reduction programs, including poverty • Possible risks from the office, women’s federation, reduction, women's development, project development and reform local road planning, and human committee, statistics immunodeficiency virus/acquired bureau, civil affairs bureau, immunodeficiency syndrome public health bureau, prevention education bureau • Understanding public transport services Nov–Dec Township-level officials 80 • Introduction of the ADB Project • Role of expressway in 2005 and its objectives promoting local • Understanding the general development socioeconomic situation of the • Possible impacts of the affected townships Project • Considering more sample • Role of townships in villages for further surveying implementing resettlement plan • Role of townships in organizing unskilled labors Dec 2005 Village leaders 40 • Group interviews • Social and poverty Farmer representatives 200 • Household questionnaire surveys assessment Individual households 400 for both resettlement plan and • Preparing resettlement Female farmers 60 social and poverty assessment plan Bus passengers 10 • Passenger survey Drivers 10 • Driver survey Jan 2006 Officials of municipal and 12 • Environmental impact survey • Local people’s county environmental • Public awareness perceptions on protection bureaus • Construction disturbance environmental protection and Villagers 50 construction disturbances

Total 3,627

Source: Sichuan Provincial Communications Department.

Appendix 18 59

SUMMARY RESETTLEMENT PLAN

1. The resettlement plan addresses impacts caused by the expressway component, including link roads, based on the project feasibility study. Since the local road program involves upgrading existing roads, this will involve little or no land acquisition and resettlement; a short resettlement plan has been prepared for this component. Affected persons will receive the same compensation standards for both components. Prior to commencement of land acquisition, Sichuan Provincial Communications Department (SPCD) will update the resettlement plans based on detailed design and detailed measurement survey, and submit the resettlement plans to the Asian Development Bank (ADB) for approval. During project construction, if there are significant material changes in project scope or other causes, an updated resettlement plan will prepared, disclosed to affected persons, and submitted to ADB for approval prior to commencement of such changes.

2. The proposed expressway will permanently require 779 hectares (ha) of land. It is projected that another 240 ha of land will be occupied temporarily during the construction phase. Based on People's Republic of China (PRC) standards for impact assessment, the equivalent of 9,141 persons would lose all their land and agricultural livelihoods. Since the expressway will actually cross many parcels of scattered farmland, it is projected that the average loss of land per household will be 13%, which means the number of partially affected people will be on the order of 55,000 persons (or 13,000 households).

3. Along with land acquisition, 137,700 square meters (m2) of houses will be demolished, necessitating relocation of 1,148 households (5,279 persons), which is an average of 23 houses per village. 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 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 television cable.

4. For the local road component, 30 sections of existing low-class roads (totaling 402 km) will receive road-bed and surface upgrades within the existing alignment. The width of affected local roads will remain the same and no new bridges or significant realignments are planned. Therefore, land acquisition and resettlement can be avoided or at least minimized. The local roads will be upgraded over 5 years, with a few sections upgraded each year. Three roads will be constructed in 2007; the design work for these has been completed and has confirmed that there will be no land acquisition or resettlement required. Since the design work is done each year, there are no such projections yet for the other 27 sections. However, in order to make budgetary provisions for minor impacts, it is projected that permanent land acquisition could amount to 2 ha, but will not cause any significant (i.e., equivalent to full land loss for 40 persons) impacts on households. Cash compensation will be provided to affected persons. Similarly, some provisions have been made for temporary land occupation, affected trees, and some structures.

5. For people unavoidably affected, the resettlement objective is to achieve equal or better income and living standards, in line with the PRC Land Administration Law (1998) and ADB’s Policy on Involuntary Resettlement (1995). The SPCD will ensure that any people losing land, housing, or other assets or income sources will be supported to fully restore their income and living standards. The Sichuan provincial government in 2004 issued a special decree concerning land compensation. For the draft resettlement plan, the estimated compensation rates (inclusive of land compensation, resettlement subsidies, and young crops) in Tongchuan district and Xuanhan county are CNY33,600 per mu (0.067 ha) for irrigated farmland;

60 Appendix 18

CNY21,000 per mu for dryland and house plots, and CNY12,000 per mu for woodland. In Wanyuan County the rates are CNY31,500 per mu for irrigated farmland; CNY19,900 per mu for dryland and house plots, and CNY12,000 per mu for woodland. 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. Their land will also be restored to its original condition by the contractor.

6. For structures to be demolished, replacement value will be provided to the affected rural households based on compensation rates adopted in Dazhou city, which range from CNY350 to CNY450/m2 for brick-and-concrete structures, CNY280 to CNY320/m2 for brick-and-wood structures, and CNY260/m2 for earth-and-wood structures. Those losing housing will be able to acquire new housing sites within their current village group or administrative village; these sites will have access to electricity and water services and will be near a road. There will be no reduction for depreciation factored into house compensation rates, and people will be allowed to salvage materials from their old houses.

7. SPCD will assume overall responsibility for implementing resettlement according to the approved resettlement plan. A resettlement office within Sichuan Dashaan Expressway Company Limited (SDEC) will be directly responsible for coordinating the planning, implementation, financing, and reporting of land acquisition and resettlement for the expressway and connector roads. Within local governments, leading groups and resettlement offices, each comprising six to eight staff members, will be established in Dazhou city and the three affected counties (districts). The county land and resources offices will take primary responsibility for resettlement consultation, implementation, and timely delivery of entitlements, with assistance from townships and villages concerned. The same arrangements will apply to the local roads, except that SDEC will not have a role.

8. The 1998 Land Law requires disclosure and consultation with affected persons. Meetings and interviews have been held to notify them about the key elements of the resettlement plan. A resettlement information booklet was distributed to all affected villages in April and May 2006. During detailed resettlement planning, there will be further consultations to discuss specific impacts on each village and how these impacts will be addressed. The county, township, and village officials will ensure that any concerns raised by the people affected are quickly addressed. In case of grievances, all complaints will be processed based on the Government Regulation Number 431 on Grievance and Redress. People affected will submit their oral or written complaint first to the village committee or township resettlement office. If their complaint is not settled in 2 weeks, they can seek redress at the county resettlement office within 1 month. If still unresolved within additional 2 weeks, SDEC will try to achieve a solution. The final redress would be sought, if necessary, in the civil courts, in accordance with the Civil Procedures Act.

9. The plan for internal and external monitoring and evaluation is included in the resettlement plans. SPCD will engage a qualified domestic monitor to carry out independent resettlement monitoring and evaluation. The monitor will conduct a baseline survey prior to resettlement, semiannual investigations during resettlement, and annual survey updates for 2 years after the completion of resettlement. The monitor will provide ADB and SPCD with copies of the monitoring and evaluation reports twice a year during resettlement implementation and once a year after resettlement completion. An internal monitoring and reporting system will be established in the resettlement division of SDEC and will report to ADB on the progress of land acquisition and resettlement through quarterly progress reports and a resettlement completion report.