Report and Recommendation of the President to the Board of Directors Project Number: 36455 September 2008 Proposed Loan People’s Republic of China: Central Yunnan Roads Development Project CURRENCY EQUIVALENTS (as of 15 August 2008) Currency Unit – yuan (CNY) CNY1.00 = $0.1457 $1.00 = CNY6.862 The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00 = CNY7.14 (the rate prevailing at project loan appraisal) was used. ABBREVIATIONS ABS – asset-backed securities ADB – Asian Development Bank CBRC – China Banking Regulatory Commission CBTA – Cross-Border Transport Agreement CO – carbon monoxide CO2 – carbon dioxide CSRC – China Securities Regulatory Commission EIA – environmental impact assessment EIRR – economic internal rate of return EMP – environmental management plan EMDP – ethnic minority development plan FIRR – financial internal rate of return FYP – five-year plan GDP – gross domestic product GMS – Greater Mekong Subregion HC – hydrocarbon HIV/AIDS – Human immunodeficiency virus/acquired immunodeficiency syndrome ICB – international competitive bidding IEE – initial environmental examination ITS – intelligent transport system Lao PDR – Lao People’s Democratic Republic LIBOR – London interbank offered rate MOC – Ministry of Communications NCB – national competitive bidding NH – national highway NOx – nitrogen oxides O&M – operation and maintenance PADO – Poverty Alleviation and Development Office PBOC – People’s Bank of China pcu – passenger car unit PMO – project management office PPMS – project performance management system PPP – purchasing power parity PRC – People’s Republic of China QCBS – quality- and cost-based selection SPM – suspended particulate matter TA – technical assistance toe – ton of oil equivalent VOC – vehicle operating cost WACC – weighted average cost of capital WKEC – Wukun Expressway Company Limited YDRC – Yunnan Development and Reform Commission YEPB – Yunnan Provincial Environmental Protection Bureau YHIC – Yunnan Provincial Highway Development and Investment Company Limited YPCD – Yunnan Provincial Communications Department YPG – Yunnan Provincial Government YPSD – Yunnan Provincial Public Security Department NOTES (i) The fiscal year of the Government and its agencies ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 31 December 2008. (ii) In this report, "$" refers to US dollars. Vice-President C. Lawrence Greenwood, Jr., Operations Group 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director C. S. Chin, Officer-in-Charge, Transport Division, EARD Team leader X. Yang, Senior Transport Economist, EARD Team members R. Butiong, Senior Regional Cooperation Specialist, Southeast Asia Department (SERD) A. K. Djusupbekova, Senior Counsel, Office of the General Counsel S. Ferguson, Senior Social Development Specialist (Resettlement), EARD A. Kunth, Infrastructure Specialist, SERD E. Masaki, Young Professional, EARD S. Noda, Transport Specialist, EARD M. Ojiro, Country Director, Tajikistan Resident Mission, Central and West Asia Department X. Peng, Principal Counsel, Office of the General Counsel Y. Qian, Principal Economist (Financial Sector), EARD L. Cuevas-Arce, Administrative Assistant, EARD CONTENTS Page LOAN AND PROJECT SUMMARY i MAPS I. THE PROPOSAL 1 II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 2 III. THE PROPOSED PROJECT 8 A. Impact and Outcome 8 B. Outputs 9 C. Special Features 9 D. Project Investment Plan 12 E. Financing Plan 13 F. Implementation Arrangements 13 IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 16 A. Traffic Forecast 16 B. Economic Analysis 16 C. Financial Analysis and Projections 16 D. Poverty Reduction and Social Strategy 17 E. Environmental Assessment 18 F. Land Acquisition and Resettlement 19 G. Risks 19 V. ASSURANCES AND CONDITION 19 A. Specific Assurances 19 B. Condition for Disbursement 23 VI. RECOMMENDATION 24 APPENDIXES 1. Design and Monitoring Framework 25 2. Road Sector Policy Reform Matrix 28 3. External Assistance to the Road Sector 30 4. Local Road Safety Enhancement Program 33 5. Rural Access and Rural Road Maintenance 37 6. Strategic Vehicle Emission Reduction Plan 40 7. Regional Cooperation in the Greater Mekong Subregion 42 8. Detailed Cost Estimates by Financier 44 9. Implementation Schedule 45 10. Procurement Plan 46 11. Traffic Forecast 48 12. Economic Analysis 50 13. Financial Analysis and Projections 53 14. Summary Poverty Reduction and Social Strategy 58 15. Summary Ethnic Minority Development Plan 61 16. Summary Resettlement Plan 64 SUPPLEMENTARY APPENDIXES (available on request) A. Organization Charts of Yunnan Provincial Communication Department and Yunnan Provincial Highway Development and Investment Company Limited B. Outline Terms of Reference for Consultants C. Monitoring of Socioeconomic and Poverty Impacts D. Financial Management Assessment E. HIV/AIDS Prevention for the Road Transport Sector F. Stakeholder Participation and Consultations LOAN AND PROJECT SUMMARY Borrower People’s Republic of China (PRC) Classification Targeting classification: General intervention Sector: Transport and communications Subsector: Roads and highways Themes: Sustainable economic growth, regional cooperation Subthemes: Promoting economic efficiency and enabling markets, cross-border infrastructure Environment Category A. An environmental impact assessment was undertaken, Assessment and the summary was circulated to ADB’s Board of Directors and uploaded to the Asian Development Bank (ADB) website on 3 May 2007. Project Description The Project is located in Yunnan Province, one of the poorest areas in the PRC. It has one of the lowest levels of per capita gross domestic product in the PRC, at only 56% of the national average in 2006. The Project is designed to promote inclusive sustainable economic growth in central Yunnan, preparing it to cope with an increasingly important role in regional cooperation and trade with Greater Mekong Subregion (GMS) countries. The Project will develop an integrated road transport network in central Yunnan by (i) constructing a 64-kilometer (km) Wuding– Kunming Expressway and associated facilities, (ii) upgrading local roads in the project area with a total length of 190 km, (iii) improving traffic safety on the local road network in the project area, and (iv) strengthening the technical and management capacity of Yunnan Provincial Communications Department (YPCD), its related agencies, and Wukun Expressway Company Limited (WKEC). Rationale The Project reflects ADB’s transport sector strategy, which focuses on (i) financing new roads that connect major growth centers, supported by a system of local roads; (ii) promoting road safety, cutting vehicle emissions, and raising energy efficiency; (iii) improving the commercial orientation and efficiency of expressway organizations; and (iv) strengthening regional cooperation in transport. The Project was formulated in line with the PRC Western Region Development Strategy, which aims to reduce development disparities between the western and coastal regions. Underdeveloped roads and associated high transportation costs are major barriers to the reduction of poverty in Yunnan. Rural poverty incidence is high in the project area, particularly in the minority counties. Existing transport infrastructure is congested, creating high transport costs for producers and consumers. This transport bottleneck needs to be removed to facilitate the movement of goods and people within Yunnan, between Yunnan and other parts of the PRC, and between the PRC and GMS countries. ii The Project will improve an important section from Wuding to Kunming of the Chengdu–Kunming corridor, a high priority western development corridor in the PRC. The Project will be the fourth road project for ADB financing in Yunnan, and will complement ADB assistance in developing the Chengdu–Kunming corridor and three GMS corridors: (i) North–South Economic Corridor to Bangkok (via northern Lao People’s Democratic Republic), (ii) Eastern Corridor to Ha Noi/Hai Phong in Viet Nam, and (iii) Northern Corridor to Nanning/Fangcheng in Guangxi (Map 1). The Project will support a local road safety enhancement program to establish an efficient and sustainable mechanism to manage road safety. Its findings will be used to develop policy and strategies to reduce traffic accidents on local roads. It will be the first ADB loan to assess and finance the local road safety issues in the PRC. Impact and Outcome The impact of the Project is a well-functioning integrated road transport system in Yunnan Province and the rest of the GMS. This will be achieved by developing an efficient, safe, and environmentally sustainable regional transport system to facilitate the movement of goods and people within Yunnan, and between the PRC and GMS countries. Project Investment Plan The investment cost of the Project is estimated at $745 million, including taxes and duties of $31 million. Of the $200 million ADB loan, $6 million will finance the local road safety enhancement component. Financing Plan ($ million) Source Amount Asian Development Bank 200.0 Domestic Bank Loans 211.5 Ministry of Communications 98.6 Yunnan Provincial Government 234.9 Total 745.0 A loan of $200 million from ADB’s ordinary capital resources will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. The loan