Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: November 2010 Proposed Loan People s Republic of China: Yunnan Integrated Road Network Development Project

2 CURRENCY EQUIVALENTS (as of 1 November 2010) Currency Unit yuan (CNY) CNY1.00 = $ $1.00 = CNY6.673 The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00 = CNY6.828, the rate prevailing at project loan fact-finding, is used. ABBREVIATIONS ADB Asian Development Bank CCB county communication bureau DPCB Dehong Dai and Jingpo Autonomous Prefecture Communication Bureau EIA environmental impact assessment EMDP ethnic minority development plan EMP environmental management plan GDCF gender and development cooperation fund GMS Greater Mekong Subregion HAPP HIV and AIDS prevention plan km kilometer LIBOR London interbank offered rate LRE Longling Ruili Expressway LREC LongRui Expressway Company NCB national competitive bidding NENP national expressway network plan PAM project administration manual pcu passenger car unit PRC People s Republic of China TA technical assistance WACC weighted average cost of capital YHIC Yunnan Provincial Highway Development and Investment Company YPDOT Yunnan Provincial Department of Transport YPG Yunnan provincial government YPHB Yunnan Provincial Highway Bureau NOTE In this report, $ refers to US dollars.

3 Vice-President C. Lawrence Greenwood, Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director T. Duncan, Transport Division, EARD Team leader Team members Peer reviewer X. Yang, Principal Transport Economist, EARD I. Ahsan, Counsel, Office of the General Counsel L. Athukorala, Principal Staff Development Specialist, Budget Personnel and Management Systems Department C. Chu, Project Management Officer, PRC Resident Mission, EARD R. Elfving, HIV and AIDS Coordination Specialist, Regional and Sustainable Development Department (RSDD) S. Ferguson, Principal Social Development Specialist (Safeguards), EARD S. Handayani, Senior Social Development Specialist, RSDD S. Lewis-Workman, Transport Economist, EARD S. Noda, Transport Specialist, EARD M. Tsuji, Principal Environment Specialist, RSDD A. Veron, Transport Economist, EARD Y. Zhang, Senior Regional Cooperation Specialist, EARD E. Infante, Assistant Project Analyst, EARD J. Macrohon, Administrative Assistant, EARD O. Norojono, Resident Representative, Azerbaijan Resident Mission, Central and West Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 CONTENTS Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 4 C. Outputs 4 D. Investment and Financing Plans 5 E. Implementation Arrangements 6 III. TECHNICAL ASSISTANCE 7 IV. DUE DILIGENCE 7 A. Economic and Financial 7 B. Governance 8 C. Poverty and Social 8 D. Safeguards 9 E. Risks and Mitigating Measures 10 V. ASSURANCES AND CONDITION 10 VI. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents 14

5 PROJECT AT A GLANCE 1. Project Name: Yunnan Integrated Road Network Development Project 2. Project Number: Country: People's Republic of China 4. Department/Division: East Asia Department/Transport Division 5. Sector Classification: Sectors Primary Subsectors Transport, and information and Road transport communication technology 6. Thematic Classification: Themes Primary Subthemes Economic growth Promoting economic efficiency and enabling business environment Regional cooperation Trade and investments 6a. Climate Change Impact No Climate Change Indicator available. 6b. Gender Mainstreaming Effective gender mainstreaming (EGM) Gender equity theme (GEN) No gender elements (NGE) Some gender benefits (SGB) 7. Targeting Classification: General Intervention Geographic dimensions of inclusive growth Targeted Intervention Millennium development goals Income poverty at household level 8. Location Impact: National Regional Rural High Low High 9. Project Risk Categorization: Complex 10. Safeguards Categorization: Environment Involuntary resettlement Indigenous peoples A A A 11. ADB Financing: 12. Cofinancing: 13. Counterpart Financing: Sovereign/Nonsovereign Modality Source Amount ($ Million) Sovereign Project loan Ordinary capital resources Sovereign Capacity development Technical Assistance Special Fund.2 technical assistance Total Financier Category Amount ($ Million) Administration Type Bank of China Commercial-Loan Not ADB Administered China Construction Bank Commercial-Loan Not ADB Administered Total Source Amount ($ Million) Others Total Aid Effectiveness: Parallel project implementation unit Program-based approach No No Generated Date: 11-Nov :46:14 AM

6 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 Yunnan Integrated Road Network Development Project. 1 II. THE PROJECT A. Rationale 2. The road network in Yunnan is relatively dense but only provides low levels of service to the population. 2 This situation limits the contribution of roads to income earning, employment creation, and poverty reduction. To overcome this problem, the existing road infrastructure must be improved and upgraded. The proposed project will be the last in a series of five Asian Development Bank (ADB) interventions to develop the National Expressway Network Plan (NENP) in Yunnan. 3 It will also finance the rehabilitation of national and provincial highways, and introduce new ways of maintaining rural roads. The project was included in the country partnership strategy, and the Greater Mekong Subregion (GMS) regional cooperation operations business plan, It is designed to address both investment needs and sector performance issues, including road asset management. 3. Yunnan is a mountainous landlocked province in southwestern PRC with a population of 45.3 million. In 2008, its per capita gross domestic product was 55% of the national average; and it ranked third lowest among the country s administrative areas. Because of its remoteness, investment and expansion of nonfarm employment opportunities have lagged other provinces. Rural poverty incidence is 15.2%. The lack of an efficient and effective transport system is an obstacle to inclusive growth in Yunnan. 4. Road is the most widely used transport mode in Yunnan, 5 and is therefore a central enabling factor in economic development and reduction of poverty. The total road network reached 203,753 kilometers (km) in 2008, of which less than 4% were class II or above (compared with 10.7% nationally), 5% were class III, and the remaining 91% were class IV and unclassified. High class tolled highways of class I and above (1% of the network) are managed by Yunnan Provincial Highway Development and Investment Company (YHIC). The remainder of the core network (12%) 6 is managed by the Yunnan Provincial Highway Bureau (YPHB). The rural road network (87%) is managed at the local level by prefectural and county communication bureaus (CCBs). 5. Need to expand road network capacity and quality. In accordance with the State Council s NENP approved in 2004, Yunnan is committed to improving its expressway network. One section remains to be built to complete the NENP in western Yunnan and to realize the full benefit of the sections already financed by ADB. This is the Longling Ruili Expressway (LRE), 7 the final The design and monitoring framework is in Appendix 1. Sector Assessment (Summary): Transport, and Information and Communication Technology (accessible from the list of linked documents in Appendix 2). The Problem Tree of the Project is accessible from the following weblink: Development Coordination (accessible from the list of linked documents in Appendix 2). ADB Country Partnership Strategy: People s Republic of China, Manila; and ADB Regional Cooperation Operations Business Plan: Greater Mekong Subregion, Manila. The 2008 modal share for passenger-kilometers (km) was 66.3% for roads, 16.2% for railways, 0.3% for inland waterways, and 17.2% for aviation. The modal share for freight ton-km was 57.8% for roads, 41.4% for railways, and 0.8% for inland waterways. The core road network refers to the non-tolled ordinary national and provincial highways, which carry most of the traffic in Yunnan. This project will link the western part of Yunnan province with Kunming and then Hangzhou (2,500 km in total). It will also link with other GMS countries through the GMS Northern Corridor.

7 2 section of the Hangrui (Hangzhou Ruili) corridor, one of the key east west corridors connecting the PRC s lagging regions with its more prosperous eastern and coastal provinces. The existing Longling Ruili highway (G320), which passes through some hilly and mountainous terrain, carried an average traffic volume of 8,530 passenger car units (pcu) per day in The traffic volume varies along this highway from above 14,600 pcu per day around Mangshi, where traffic congestion is growing and the highway is likely to reach capacity by 2012, to about 5,000 pcu per day west of Ruili. The poor technical standard of the existing highway limits the average travel speed to less than 40 km per hour, which cannot meet the rising transport demand and leads to a high incidence of road accidents. The LRE will complement two successfully completed ADBfinanced projects 8 that implemented adjacent sections of the Hangrui road corridor. When completed, it will reduce travel time and transport costs considerably, help ease congestion, reduce traffic accidents, provide increased opportunities for profitable farm and nonfarm economic activities along the project road, and allow more efficient vehicle running speeds that will reduce traffic-induced air pollution in the project corridor. The LRE is critical to reducing income disparities and achieving more balanced growth between the western and coastal regions. 6. Need to sustain road assets. As in other parts of the PRC, funding of maintenance for tolled highways is generally adequate. However, there have been funding shortfalls for non-tolled roads. In the past, the budgets for secondary and tertiary road networks were insufficient to meet their maintenance requirements and the maintenance backlog increased steadily, reflected in a growing share of roads measured to be in poor or very poor condition. 7. The national fuel taxation reform has been applied in Yunnan since 1 January Six local fees levied were abolished. Tolls on new class II roads are no longer allowed, and tolls on existing class II roads are being phased out. In their place, the central government has introduced a national fuel surcharge of CNY0.8 per liter for diesel and CNY1.0 per liter for gasoline since As the central government collects the fuel tax, there is a need to establish mechanisms and distribution channels for allocating these tax revenues to different users within the transport sector at the provincial level to ensure that funding is available for maintenance of the road network and debt servicing for class II roads. Through ongoing small-scale technical assistance (TA), 10 ADB is assisting the government to improve the PRC s road financing and distribution system after the fuel tax reform. 8. In Yunnan, much remains to be done to address limitations in the approach to maintenance. A pavement condition assessment carried out in 2009 of most of the 23,473 km nontolled core network administered by YPHB found that only 35% of roads are in good-to-excellent condition, which is low even for western provinces. As much as 31% of the assessed network was found to be in very poor condition. 11 This reflects a backlog in the financing of periodic maintenance and rehabilitation. On average, only 16% of the estimated annual required rehabilitation is carried out and little periodic maintenance is performed. This lack of funding arises partly because the core road network is deteriorating faster than foreseen due to overloading and 8 9 ADB Completion Report: Yunnan Expressway Project. Manila; and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Western Yunnan Roads Development Project. Manila. This will bring the pricing system for roads closer to a pay-as-you-go mechanism. The additional fuel tax revenues are being used in part to maintain and manage roads and waterways. It is an efficient mechanism to collect road user fees, and provides an incentive to lower fuel consumption and promote vehicle fuel efficiency. 10 ADB Technical Assistance to the People s Republic of China for Financing Road Construction and Maintenance after Fuel Tax Reform. Manila. 11 Areas with degraded roads (with average speed of km per hour) also produce large amounts of dust in Yunnan s dry climate, resulting in significant environmental and health risks for people living near the roads.

8 substandard road design and construction. 12 In addition, there are problems of insufficient maintenance budget allocation by Yunnan Provincial Department of Transport (YPDOT) and overexpenditure on establishment and overhead costs (less than 50% of the budget is spent on maintenance works), although funding is expected to improve significantly over the next few years as a result of expected increases of 10% per annum in maintenance funding from YPDOT, 13 most of which will go directly to maintenance implementation. There are also limitations in the approach to the planning and prioritization of maintenance works, and inefficient execution of maintenance works results in high costs, especially for routine maintenance. 9. Need to improve accessibility to remote poor areas. About 94% of the province s land area is covered by mountains and hills. This poses a great obstacle to providing basic rural road access, particularly in the province s western region. Rural roads account for 87% of the total network, of which county roads comprise 22%, township roads 56%, village roads 19%, and special roads 3%. Over 98% are class IV or unclassified. The majority (81%) are unpaved, with 40% being gravel roads and 41% being earthen roads. Some 8% have cobblestone paving and the remaining 11% have asphalt or concrete pavement. At present, the condition of rural roads is poor, especially unpaved township and village roads. In Dehong, the main prefecture benefiting from the proposed LRE, only 40% of county roads, 27% of township roads, and 19% of village roads are in good condition. 10. The government is committed to meeting the basic access needs of the poor. As a result of the rural road maintenance reform policy that was approved by the State Council in 2005, the CCBs are entitled to receive a subsidy based on the length of their rural road network (CNY7,000 per km for county roads, CNY3,500 per km for township roads, and CNY1,000 per km for village roads). However, the subsidy levels are insufficient for roads in mountainous areas, and the actual subsidy payment has often been less than the prescribed level. Moreover, a reliable system is not in place for implementation of rural road maintenance, especially for routine maintenance and minor repairs of low-volume unpaved roads, which make up a large part of the rural road network. 11. For township and village roads, routine maintenance is carried out by local people on a voluntary basis once a year, with households from the communities concerned contributing a few workdays annually. This system is unreliable and has not significantly improved road conditions. Its voluntary nature results in low productivity and motivation and, often, required maintenance activities are not carried out in a timely manner, as labor input is provided based on availability rather than need. Furthermore, the technical skills of the maintenance workers are limited, resulting in poor quality works. 12. For the low-volume unpaved rural roads, a more effective community-based maintenance system needs to be introduced, including (i) payment of remuneration to ensure timely input of labor, (ii) training for community members who can act as supervisors, and (iii) provision of tools and safety equipment. This is being pilot tested in Dehong prefecture with a $200,000 grant from ADB s Gender and Development Cooperation Fund (GDCF), and will be replicated in the community-based rural road output of the project. This output will focus on the maintenance of 650 km of township roads in Dehong (half the township road network) for a period of 4 years. It has potential for wider replication as it will introduce a practical means of implementing cost-effective and efficient maintenance while the labor-intensive maintenance approach will generate local employment opportunities for the poor, including women, which will contribute to poverty 3 12 Most of the damaged sections were designed between 1930 and 1970 when heavy axleloads were rare. Pavement design continues to be based on road class instead of on traffic volume and load, even though many of the roads are carrying much higher traffic than intended for the respective road class. 13 Figure 2 of the Sector Assessment (Summary): Transport and ICT (accessible from the list of linked documents in Appendix 2).

9 4 alleviation. The capacity of CCBs and maintenance groups will be strengthened to ensure sustainability. 13. Lessons. The project design benefited from lessons identified in ADB s 2008 sector assistance program evaluation of ADB assistance for roads and railways in the PRC, 14 as well as from the lessons from four prior ADB-financed road projects in Yunnan. 15 YPDOT has experience as executing agency for implementing four ADB-funded road projects. Out of the four, one was rated highly satisfactory; one was satisfactory; one was recently completed (not yet rated); and one is under implementation. Lessons learned from previous projects were reflected in the project design by (i) undertaking careful review of technical designs, traffic projections, economic and financial analyses; (ii) providing guidance to the executing and implementing agencies on ADB policies, guidelines, and procedures on environmental protection, land acquisition and resettlement, and procurement; and (iii) introducing an appropriate project performance and monitoring system at the project design phase. B. Impact and Outcome 14. By supporting comprehensive improvement on the road transport system in Yunnan, the impact of the project will be sustainable economic and social development in Yunnan Province. The project outcome will be an efficient, safe, sustainable, and environment-friendly road transport system developed in the developed in the project area. C. Outputs 15. The project will have four outputs, as detailed below. 16. Output 1: Constructed new Longling Ruili highway corridor. The project will expand the road capacity in western Yunnan by constructing a new 135 km, four-lane, access controlled LRE and a new 23 km of class II highway from Ruili to Nongdao 16 with a design speed of 80 km per hour. The output is estimated to cost $1,649 million, of which ADB will finance $228 million. The output will be managed by YHIC through LongRui Expressway Company (LREC). 17. Output 2: Improved local road network conditions in Yunnan. 17 This will reduce the maintenance backlog, resulting in large benefits at relatively low cost. A total of 605 km of local roads 18 will be rehabilitated and improved in nine prefectures and cities (Chuxiong, Dali, Dehong, and Honghe prefectures; Baoshan, Kunming, Lijiang, Lincang, and Qujing cities). These roads were selected based on pavement condition, with priority given to sections in poor to very poor condition. By prioritizing rehabilitation and maintenance through this output, ADB will contribute to province-wide improvement in road asset management. Traffic safety facilities, maintenance planning, and management practices will also be improved. The output is estimated to cost $100 million, of which ADB will finance $20 million. The output will be managed by YPHB. 14 ADB Sector Assistance Program Evaluation: Roads and Railways in the People s Republic of China. Manila. 15 ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Yunnan Expressway Project. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Southern Yunnan Road Development Project. Manila; ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Western Yunnan Roads Development Project. Manila; and ADB Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People s Republic of China for the Central Yunnan Roads Development Project. Manila. 16 Considering that the 23-km section from Ruili to Nongdao is located on flat terrain and has lower traffic, through careful alternatives analysis and dialogue, it was agreed to limit the scope of construction to a two-lane highway. 17 Local Road Maintenance and Rehabilitation is provided in Appendix 3 of the Project Administration Manual (accessible from the list of linked documents in Appendix 2). 18 Non-tolled ordinary trunk roads managed by YPHB.

10 18. Output 3: Improved rural roads conditions in Dehong prefecture. A total of 650 km of rural roads will be improved in Dehong prefecture following a pilot phase funded by a $200,000 GDCF grant, which focuses on rural road maintenance using local labor to generate employment opportunities, and with additional attached TA support to extend the activity to border areas. Public transport bus services on these roads will also be improved. The government will finance the estimated cost of $1.5 million to replicate the pilot phase activity and improve transport services. The output will be managed by CCBs of DPCB. 19. Output 4: Enhanced performance by capacity building. This will include (i) improving maintenance planning, funding, and execution; and (ii) providing on-the-job training to YPHB, LREC, CCBs of DPCB staff, and project road maintenance groups. The capacity building support for maintenance will include improving maintenance execution through the introduction of competitive bidding, strengthening pavement design, and discouraging overloading through a combination of enforcement intensity and traffic load monitoring by weigh-in-motion, and introducing more objective systems for programming maintenance through continuous dialogue with the government under this project. 19 The training will cover road safety, construction and supervision, maintenance management, road financing, public transport services, private sector participation, environment management, social safeguard planning and monitoring, and project monitoring and evaluation. ADB will finance the estimated output cost of $2 million. D. Investment and Financing Plans 20. The project is estimated to cost $1,753 million, including financing charges during construction of $117.5 million and taxes and duties of $44 million (Table 1). 20 Table 1: Project Investment Plan ($ million) Item Amount a A. Base Cost b 1. Constructed new Longling Ruili Highway Corridor 1, Improved local road network conditions in Yunnan Improved rural road conditions in Dehong prefecture Enhanced performance by capacity building 2.00 Subtotal (A) 1, B. Contingencies c C. Financing Charges during Implementation d Total (A+B+C) 1, a Includes taxes and duties of $44.0 million financed by ADB and counterpart financing. b c d In January 2010 prices. Physical contingencies computed at 5.5% of the base cost of the expressway output and 2.5% of the base cost of the rehabilitation output. Price contingencies computed at 3.5% for 2010, 4.0% for 2011, 3.6% for 2012, 4.1% for 2013, and 4.0% for 2013 and thereafter on local currency costs; and 1.5% for 2010, 0.7% for 2011, and 0% for 2012, and 0.5% thereafter on foreign exchange costs. Includes interest and commitment charges. Interest during construction for the Asian Development Bank (ADB) loan(s) has been computed at the 5-year forward London interbank offered rate (LIBOR) plus a spread of 0.3%. Commitment charges for the ADB loan are 0.15% per year to be charged on the undisbursed loan amount. Source: Asian Development Bank estimates. 21. The government has requested a loan of $250,000,000 from ADB s ordinary capital resources to help finance the project. The loan will have a 25-year term, including a grace period of 5 19 ADB also expects to support measures for ensuring adequate financing of road maintenance through a follow-on policy and advisory TA to support implementation of the fuel tax reform that is to be submitted for ADB Management approval during ADB agreed to finance taxes and duties under this project, after due consideration and upon finding that the amount of taxes and duties does not constitute an excessive share of project costs.

11 6 5 years, an interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per annum, and such other terms and conditions set forth in the 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 government will finance contingencies and financing charges during implementation. 22. The ADB loan will finance 14.3% of the project cost, including taxes and duties on expenditures financed by ADB. 21 The remaining cost will be financed by the Ministry of Transport, Yunnan provincial government (YPG), and cofinancing through loans from Bank of China and China Construction Bank, which have appraised the project and provided commitment letters. The Ministry of Transport and YPG have made budgetary provisions for the counterpart funds. The financing plan is in Table 2. Table 2: Financing Plan Source Amount ($ million) Share of Total (%) Asian Development Bank Domestic bank loans Ministry of Transport Yunnan provincial government Total 1, Source: Asian Development Bank estimates. 23. The PRC will be the borrower. The ADB loan proceeds will be made available to YPG on the same terms and conditions as the ADB loan. The government will ensure that (i) YPG onlends the ADB loan proceeds to YPDOT; (ii) YPG causes YPDOT to apply a portion of the loan proceeds in an amount of $20 million for output 2 (to be executed by YPHB); and (iii) YPG causes YPDOT to onlend a portion of loan proceeds in an amount of $230 million to YHIC for output 1 (to be executed by LREC through YHIC) and output 4. The government will ensure that all onlending agreements will be executed upon terms and conditions satisfactory to ADB. YPDOT and LREC through YHIC will bear the exchange rate and interest rate variation risks on the ADB loan. All onlending under the project will be on the same financial terms and conditions as those of the ADB loan. E. Implementation Arrangements 24. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM) Based on a procurement capacity assessment undertaken for the executing and implementing agencies, it was confirmed that, using a procurement agency and with assistance from ADB and consultants, the executing and implementing agencies could appropriately conduct procurement work including advance contracting. A procurement agency that is familiar with ADB s procurement procedures will be engaged to conduct the procurement of all works and goods under the project on behalf of the executing and implementing agencies. 21 The following principles have been used to determine the amount of taxes and duties to be financed in the project: (i) the amount of taxes and duties financed by the ADB loan does not represent an excessive share of the project investment plan, (ii) the taxes and duties apply only with respect to ADB-financed expenditures, and (iii) the financing of the taxes and duties is material and relevant to the success of the project since the percentage of some ADBfinanced expenditures needs to be 100%. 22 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

12 Table 3: Implementation Arrangements Aspects Arrangements Implementation Period January 2011 December 2015 Estimated project 31 December 2015 completion date Expected loan and grant 30 June 2016 closing date Project Management (i) Oversight body Yunnan provincial government (ii) Executing agency Yunnan Provincial Department of Transport (iii) Key implementing agencies (a) LongRui Expressway Company, a wholly owned subsidiary company of Yunnan Provincial Highway Development and Investment Company (YHIC) (b) Yunnan Provincial Highway Bureau (YPHB) (c) Dehong Dai and Jingpo Autonomous Prefecture Communication Bureau (DPCB) (iv) Project implementation YHIC, YPHB, DPCB (one PIU each) units (PIUs) Procurement (ADB- ICB for civil works 7 contracts $299.6 million financed contract packages) ICB for pavement 5 contracts $137.9 million ICB for equipment 1 contract $3 million NCB for rehabilitation 7 contracts $32.6 million Consulting services (ADBfinanced contract packages) Retroactive financing and advance contracting QCBS (80:20) - 80 person-months capacity building - 42 person-months international consulting services $2.0 million Advance contracting approved. Retroactive financing will apply up to $40 million, with respect to expenditures incurred prior to loan effectiveness but not earlier than 12 months before signing of the loan agreement. Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. ADB = Asian Development Bank, ICB = international competitive bidding, NCB = national competitive bidding, QCBS = quality- and cost- based selection. Source: Asian Development Bank. III. TECHNICAL ASSISTANCE 26. The project is located in an area where most of the rural population is poor. Following successful GDCF pilot testing, the government requested ADB to provide a small-scale TA to enhance the project benefits to the poor, especially to poor women from ethnic minorities living in the border area. 27. Small-scale TA of $200,000 will be provided to support community-based rural road maintenance. This will be matched by a government counterpart in kind contribution of $40,000. The TA will finance on-the-job training, safety equipment and supplies, and consulting services. It will have two outputs: (i) rural road maintenance capacity building and skill enhancement programs for the poor, vulnerable groups, and ethnic minorities; and (ii) preparation of a strategy and action plan for gender mainstreaming and support for livelihood opportunities. The TA will be financed on a grant basis from ADB s Technical Assistance Special Fund (TASF-Other Sources). Details of the terms of reference, cost estimates and financing plan, and implementation arrangements are in the small-scale TA. 23 IV. DUE DILIGENCE 7 A. Economic and Financial 28. The economic internal rate of return was estimated by comparing scenarios with and without the project. The estimated economic benefits are (i) savings in vehicle operating costs as a result of reduced road length, and improved traffic 24 and road conditions; (ii) time savings for road users; (iii) savings in road accident costs as a result of fewer accidents; and (iv) savings in carbon 23 Small-Scale Technical Assistance on Community-Based Rural Road Maintenance by Women Ethnic Minority Groups in Western Yunnan (accessible from the list of linked documents in Appendix 2). 24 Summary Traffic Analysis is provided in Appendix 2 of the Project Administration Manual (accessible from the list of linked documents in Appendix 2).

13 8 dioxide emissions. The project is economically viable. The economic internal rate of return is 15% for the LRE, and 52% for the rehabilitation and maintenance output. Sensitivity analysis confirms the robustness of the project s economic viability. 29. The financial analysis measured the LRE s ability to generate sufficient revenues from operations to meet all costs, and achieve a reasonable rate of return. The weighted average cost of capital, based on project funding assumptions, is compared with the financial internal rate of return to ascertain the financial viability of the project. The financial internal rate of return after income tax is 4.7%, greater than the weighted average cost of capital of 3.0%. The project is financially viable. The fiscal impact of counterpart funding for implementation of nonrevenueearning outputs will be insignificant compared with total provincial and local fiscal revenues. The government is taking steps to provide additional funds for maintenance of local and rural roads. B. Governance 30. All procurement to be financed under the ADB loan will be carried out in accordance with ADB s Procurement Guidelines (2010, as amended from time to time). The relevant sections of the ADB s Anticorruption Policy (2000, as amended to date) will be included in all procurement document and contracts. 31. ADB s Anticorruption Policy was explained to and discussed with the Government of the PRC and YPG. The specific policy requirements and supplementary measures are described in the PAM. C. Poverty and Social 32. The project will benefit about 9.7 million people, of whom 70% are rural residents. The project has nine distinct locations, including nine prefectures and 23 counties and districts. The Project will reduce average travel time by at least 40%. It will also reduce vehicle operating costs by 38%. The Project will (i) stimulate sustainable economic and social development, promote trade and tourism development; (ii) ensure the connecting parts of the transport network operate efficiently, which will benefit both rural and urban people in nine prefectures across Yunnan province; and (iii) provide remote villages with improved access to schools, health care services, and markets. The labor-intensive approach to maintenance will create employment opportunities, benefitting local people in Dehong prefecture, especially women, among the poor and ethnic minorities living in the border area. 33. Rural poverty incidence is 15.2% in Yunnan. 25 The project will contribute to poverty reduction in the project area through (i) immediate job opportunities created through project-related works, especially for the unskilled and poor (the project will create an extra 5.5 million work days, with an additional remuneration of at least $47 million); and (ii) improved access to education, extension services, healthcare, rural credit, and other government social development programs. The project will accelerate socioeconomic development through higher land values, construction of new houses, and other new businesses and jobs. By providing rural people with access to higher priced markets for agricultural products and reducing the costs of inputs, there will be incentives for agricultural processing activities and other high-value crops (such as flowers, tropical fruits, vegetables, sugar cane, rubber, and tea) in the project area s rural townships and villages. 34. Gender. In January 2010, ADB approved a grant 26 in the amount of $200,000 for piloting support for community-based rural road maintenance, which targets poor women and ethnic 25 Using the PRC poverty line of CNY1,196 per capita per year; that is well below the international poverty line of $1.25 per person per day (in 2005 purchasing power parity and measured in terms of consumption). 26 This was financed under ADB Technical Assistance for Promoting Gender Equality and Women Empowerment. Manila (subproject: Community-Based Rural Road Maintenance by Women Ethnic Minority Groups in Yunnan Province).

14 minorities. The objectives of the pilot project are to (i) improve the road access of selected ethnic minority villages in Dehong Prefecture, (ii) establish and strengthen women s groups for rural road maintenance, and (iii) provide technical and entrepreneurship skills to women s rural road maintenance groups. It will facilitate economic and social empowerment of poor women by providing access to financial resources from maintenance activities, and capacity building in household livelihood development. The Project will result in integrating gender into the routine maintenance provision in Yunnan Province and has potential to replicate the approach in GMS. A gender action plan 27 and two knowledge products 28 have been prepared to facilitate the implementation. 35. HIV and AIDS. Recognizing the potential social risk that the road construction may cause in the project areas, a comprehensive HIV and AIDS Prevention Plan (HAPP) 29 has been prepared as part of the road project design. The HAPP will consolidate and scale up good practices gained from previous investments in Yunnan and Guangxi, and in the GMS. An additional $200,000 grant was provided to implement the HAPP. 30 D. Safeguards 36. Environment. The project is classified environmental category A. A consolidated environmental impact assessment (EIA) 31 was prepared in compliance with the PRC regulatory framework and ADB s Safeguard Policy Statement (2009). The EIA summarized the findings of a domestic EIA for the LRE, an environmental assessment and review framework for other outputs, and a due diligence assessment of the environmental impact of the project. The EIA, including an environmental management plan (EMP) for the project, which was discussed and endorsed by YPDOT, was circulated to ADB Board of Directors and made public through the ADB website on 7 May The EIA requires environmental protection and mitigation measures costing CNY146 million. To ensure that all the potential adverse environmental impacts of the project are mitigated, YPDOT will implement the EMP as specified in the EIA. The EMP will be incorporated in the bidding documents and contracts for civil works; they will be monitored and semiannual reports submitted to ADB. 37. Land acquisition, resettlement, and indigenous peoples. The project is classified category A for resettlement and for indigenous peoples. YPDOT prepared a resettlement plan 32 for the LRE output. Resettlement information booklets have been distributed to affected villages. The project will affect 35 administrative villages of 12 townships in Longling county of Baoshan city, Luxi city and Ruili city of Dehong prefecture. Some 770 hectares of land will be permanently acquired and 74,000 square meters of houses will be demolished. About 27,500 persons will be affected and the estimated resettlement cost is CNY552 million to be financed by counterpart financing. About 1 million people are expected to benefit directly in the LRE influence area, of which 38% are ethnic minorities. The village and household surveys indicated that ethnic minority communities support the project. Some of these ethnic minorities could face negative impacts or social risks, including through land acquisition and resettlement, communicable diseases, and changes to traditional culture and value systems. To address these risks, a number of mitigation and enhancement measures have been designed and targeted at the most vulnerable groups Gender Action Plan (accessible from the list of linked documents in Appendix 2) 28 A Guide for Communications Bureaus and A Manual for Maintenance Groups have been prepared for Community- Based Routine Road Maintenance by Women s Groups. 29 HIV and AIDs Prevention Plan is provided in Appendix 4 of the Project Administration Manual (accessible from the list of linked documents in Appendix 2). 30 This was financed under ADB Technical Assistance for Fighting HIV and AIDS in Asia and the Pacific. Manila (subproject: HIV/AIDS Prevention in Transport Sector in Guangxi and Yunnan). 31 Environmental Impact Assessment (accessible from the list of linked documents in Appendix 2). 32 Resettlement Plan (accessible from the list of linked documents in Appendix 2).

15 10 These measures are included in the ethnic minority development plan 33 to be implemented by the project company and the local governments. E. Risks and Mitigating Measures 38. Major risks and mitigating measures are summarized in Table 4 and described in detail in the Risk Assessment and Risk Management Plan. 34 Risks Insufficient financing made available for road maintenance Ineffective approach to road maintenance Ability to handle ADB s safeguard requirements Prevention of communicable diseases Table 4: Summary of Risks and Mitigating Measures Mitigating Measures Assurance from YPDOT to provide sufficient funding to the project local and rural roads (i) Better technical solutions and open bidding procedures will be applied to increase the economic life of local roads (ii) Capacity building activities to help YPHB, CCBs and maintenance groups build effective maintenance systems Risks will be mitigated by implementing the agreed EMP, resettlement plan, and EMDP, external monitoring and annual supervision missions by ADB. Risks will be mitigated by implementing the agreed HAPP and EMDP, external monitoring, and annual supervision missions by ADB. (e.g., HIV and AIDS) ADB = Asian Development Bank, CCB = county communication bureau, EMDP = ethnic minority development plan, EMP = environmental management plan, HAPP = HIV and AIDS Prevention Plan, YPHB = Yunnan Provincial Highway Bureau, YPDOT = Yunnan Provincial Department of Transport. Source: Asian Development Bank. V. ASSURANCES AND CONDITION 39. The Government of the PRC and YPG have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and conditions of disbursement as described in detail in the PAM and loan documents. 40. Before disbursement for outputs 1 and 4, the government shall have certified to ADB that the onlending agreement, which shall include the terms and conditions required under the loan agreement, shall have been duly executed and delivered on behalf of YPG and LREC through YHIC and shall have become fully effective and binding upon the parties thereto in accordance with its terms. VI. RECOMMENDATION 41. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $250,000,000 to the People s Republic of China for the Yunnan Integrated Road Network Development Project, from ADB s ordinary capital resources, with interest to be determined in accordance with ADB s London interbank offered rate (LIBOR)-based lending facility; a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board. 11 November 2010 C. Lawrence Greenwood, Jr. Vice-President 33 Indigenous Peoples Plan (Ethnic Minority Development Plan) (accessible from the list of linked documents in Appendix 2). 34 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

16 Appendix 1 11 DESIGN AND MONITORING FRAMEWORK Data Sources and Design Summary Performance Targets and Indicators Reporting Mechanisms Impact Sustainable economic and social development in Yunnan Province Percentage of road network in Yunnan that is paved increased from 19% in 2008 to 25% in 2020 Percentage of primary industry's a contribution to Yunnan's GDP decreased from 18% in 2008 to 15% in 2020 Provincial statistical data Assumptions and Risks Assumptions Government investment on other upgrading and preserving road network projects are implemented as planned Projected GDP growth materializes Outcome An efficient, safe, sustainable, and environment-friendly transport system development in the project area Rural poverty incidence b in Dehong prefecture reduced from 15% in 2008 to 10% by 2020 Average travel time on project roads is reduced by at least 40% (travel time by road from Longling to Ruili is reduced from 4 hours in 2010 to 2 hours in 2016; average travel speed on improved local road is increased from km per hour in 2010 to km per hour in 2016) Percentage of non-tolled ordinary roads managed by YPHB in good condition (pavement quality index superior to 80) increased from 35% in 2009 to 50% by 2016 Road accident fatalities per 10,000 registered vehicles in Yunnan (4.8 per 10,000 registered vehicles in 2008) are reduced by 10% in 2016 Percentage of township roads in Dehong prefecture in good condition increased from 27% in 2008 to 50% by 2016 Provincial and county statistical data Travel time survey for the expressway and local roads YPHB annual road condition surveys YPSD PCR, DPCB Assumptions YPDOT raises maintenance budgets by 10% per annum Effective adoption and use of RAMS Risk Insufficient financing made available for road maintenance Assumptions Effective traffic law enforcement Greater public awareness Good road user behavior YPDOT is committed to rural road maintenance. Outputs 1. Constructed new Longling Ruili Corridor km of expressway and 23 km of highway opened to traffic by Landscaping along the road right of way planted by Road safety facilities standards applied on project expressway by 2015 YHIC, progress reports, and PCR Assumptions Axle load standards are enforced. Strong road safety ownership from YPDOT 2. Improved local road network conditions in Yunnan km of local road network rehabilitated by Road safety remedial measures for potential accidents-prone sites (number of sites to be determined after detailed design) taken by At least 200 trees per km along improved local road right of ways suitable for planting trees YPSD, progress reports, and PCR Good cooperation from YPSD to promote road traffic safety

17 12 Appendix 1 Data Sources and Design Summary Performance Targets and Indicators Reporting Mechanisms 3. Improved rural road conditions in Dehong Prefecture km township and village roads maintained 3.2 Share of rural population with access to all-season road in Dehong increased from 60% in 2010 to 80% by road maintenance women groups established undertaking routine road maintenance by Four CCBs contracted 55 village maintenance groups (40% of group members are women) for routine road maintenance by 2015 DPCB and household survey Assumptions and Risks Assumption Commitments by YPDOT and local governments to implement new regulations 4. Enhanced performance by selected road agencies and road maintenance groups 4.1 YHIC managed the project expressway on time and within budget by YPHB applied road maintenance good practice (such as contracting out periodic road maintenance work) on roads other than the project roads by Four CCBs in Dehong prefecture applied planning, performance-based contracting, and inspection of the maintenance work based on Community-Based Routine Road Maintenance by Women s Groups Guide for Communications Bureaus by road maintenance women groups trained and capable undertaking the routine road maintenance activities based on the Community-Based Routine Road Maintenance by Women s Groups Manual for Maintenance Groups by % of road maintenance group members established household income generating activities by 2015 Progress reports, and PCR DPCB and household survey Assumption Trainees have opportunity to apply in their daily work what they have learned Activities with Milestones 1. Expressway 1.1 Detailed design of the expressway approved by Land acquisition and resettlement planning completed by September Construction of expressway completed by Equipment purchased and installed by Landscaping works completed by Toll booth and road safety facilities installed by Local Road Rehabilitation 2.1 Detailed design conducted to prepare safety remedial measures by July Detailed design documents approved by Phase 1 road rehabilitation work completed by Phase 2 road rehabilitation work completed by Tree planting and safety measures completed by 2015 Inputs Loan, ADB: $250 million Item Amount ($ million) 1. Civil works Mechanical and equipment Capacity development 2.0 Loan, Domestic Banks: $983.3 million Item Amount ($ million) 1. Civil works Mechanical and equipment Contingencies 200.7

18 Appendix 1 13 Activities with Milestones 3. Rural Road Maintenance 3.1 Rural roads maintenance model finalized and approved by Local rural roads maintenance groups for first year implementation contracted by Maintenance contracting process on project road sections repeated in project years 2, 3, and Progress and quality monitored at regular intervals from 2011 to Institutional Development and Capacity Building 4.1 Consultants provided training to YHIC, YPHB, DPCB, and construction workforce from 2010 to Dehong local government submitted the community-based road maintenance recommendations to YPDOT for consideration and replication by At least 1,000 poor trained in rural road maintenance of which 40% are women under the community-based rural road maintenance output from 2010 to More than 10,000 workers aware of HIV and AIDS risks by Survey techniques adopted to assess changes in work practices and behavior to measure the effectiveness of the capacity-building output by 2015 Inputs Ministry of Transport : $179.9 million Item Amount ($ million) 4. Civil works Environment and social mitigation Project administration Contingencies 14.1 Yunnan provincial government: $339.8 million Item Amount ($ million) 8. Civil works Land acquisition Project administration Contingencies Financing charges during implementation ADB = Asian Development Bank, DPCB = Dehong Dai and Jingpo Autonomous Prefecture Communication Bureau, GDP = gross domestic product, ICB = international competitive bidding, km = kilometer, NCB = national competitive bidding, PAM = project administration manual, PCR = project completion report, RAMS = road asset management system, YHIC = Yunnan Provincial Highway Development and Investment Company, YPDOT = Yunnan Provincial Department of Transport, YPHB = Yunnan Provincial Highway Bureau, YPSD = Yunnan Public Security Department. a Mainly agriculture, forestry, and mining. b Using the PRC poverty line of CNY1,196 per capita per year; that is well below the international poverty line of $1.25 per person per day (in 2005 purchasing power parity and measured in terms of consumption). Source: Asian Development Bank.