ASIAN DEVELOPMENT BANK

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1 ASIAN DEVELOPMENT BANK RRP: PRC REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE S REPUBLIC OF CHINA FOR THE GANSU ROADS DEVELOPMENT PROJECT November 2004

2 CURRENCY EQUIVALENTS (as of 1 November 2004) Currency Unit yuan (CNY) CNY1.00 = $ $1.00 = CNY The exchange rate of the yuan is determined under a floating exchange rate system. In this report, a rate of $1.00 = CNY8.28, the rate prevailing at fact-finding for the Project, was used. ABBREVIATIONS ADB Asian Development Bank EIA environmental impact assessment EIRR economic internal rate of return EMP environmental management plan FIRR financial internal rate of return GDP gross domestic product GEPB Gansu Environmental Protection Bureau GLEC Gansu Luoding Expressway Company GPCD Gansu Provincial Communications Department GPG Gansu provincial government ha hectare JBIC Japan Bank for International Cooperation km kilometer LIBOR London interbank offered rate m 2 square meter MOC Ministry of Communications O&M operation and maintenance PCR project completion report pcu passenger car unit PRC People s Republic of China PPAR project performance audit report RRP report and recommendation of the president TA technical assistance VOC vehicle operating cost NOTES (i) (ii) The fiscal year (FY) of the Government ends on 31 December. In this report, "$" refers to US dollars. This report was prepared by the project team comprising M. Ojiro (team leader), S. Ferguson, T. Fujino, A. Jain, N. Toba, M. Tsuji, X. Yang, and V. You.

3 CONTENTS Page LOAN AND PROJECT SUMMARY MAP iii vii 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 3 D. Lessons Learned 5 E. Rationale 6 III. THE PROPOSED PROJECT 7 A. Objectives 7 B. Components and Outputs 7 C. Special Features 8 D. Cost Estimates 9 E. Financing Plan 9 F. Implementation Arrangements 10 IV. PROJECT BENEFITS, IMPACTS, AND RISKS 13 A. Traffic Forecast 13 B. Economic Analysis 13 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 17 VI. RECOMMENDATION 20 APPENDIXES 1. Project Framework Road Sector Analysis Gansu Road Sector Revenue and Expenditures: External Assistance to the Road Sector Outline Concession Framework Agreement and Corporate Development Plan Road Safety and Vehicle Emissions Transport Services in the Project Area Stakeholder Participation and Consultations Cost Estimates and Financing Plan Implementation Schedule Contract Packages Traffic Forecast Economic Analysis 47

4 ii 14. Financial Analysis and Projections Summary Poverty Reduction and Social Strategy Summary Resettlement Plan 59 SUPPLEMENTARY APPENDIXES (available on request) A. Concession Framework Agreement and Corporate Development Plan B. Private Sector Involvement in the PRC Road Sector C. Financial Management Assessment Questionnaire D. Organization Charts of Gansu Provincial Communications Department and Gansu Luoding Expressway Company E. Outline Terms of Reference for Consultants for Project Implementation F. Poverty Reduction and Social Strategy G. Social Development Action Plan H. Resettlement Plan

5 LOAN AND PROJECT SUMMARY Borrower Classification Environment Assessment Project Description Rationale Objectives The People's Republic of China (PRC) Targeting Classification: General intervention Sector: Transport and communications Subsector: Roads and highways Theme: Sustainable economic growth Subthemes: Promoting economic efficiency and enabling markets, and fostering physical infrastructure development Category A. An environmental impact assessment was undertaken, and the summary was circulated to the Board and made public through the ADB web site on 30 July The Project is located in Gansu province in the poor northwestern region of the PRC. In 2003, the per capita gross domestic product of Gansu was only 55% of the national average. The Project will support the Government s strategy by building an important section of the national trunk highway system connecting the two growth centers of Lanzhou, the capital of Gansu province, and Xi an, the capital of Shaanxi province by (i) constructing an expressway across hilly to mountainous terrain (where the poverty incidence is high); (ii) improving local roads servicing poor counties and townships; and (iii) providing consulting services and training to enhance construction quality, road safety, and project monitoring and evaluation. Despite considerable investment in the road sector to date, the PRC road network is still inadequate, and does not provide efficient access to large parts of the country, particularly in the poorer inland regions, including Gansu province. Better transport links are necessary to improve economic efficiency, foster domestic and international trade, facilitate interregional economic integration, and facilitate efficient economic growth, thereby reducing poverty. Western PRC lacks high-class road infrastructure. The road network must therefore be developed, thus spreading economic and social benefits widely. To enhance economic development and reduce poverty in the western region, the Government is implementing the Western Region Development Strategy, the key theme of the 10th Five-Year Plan ( ). The strategy aims to reduce development disparities between the western and coastal regions. The Project will support this strategy. Gansu provincial government (GPG) has identified the Project as a priority investment, which will also complement ADB s assistance in developing the Lanzhou-Xi an- Taiyuan section of the national trunk highway system. The principal objectives of the Project are to promote economic growth and thus reduce poverty in eastern Gansu province by lowering the cost of transport, relieving traffic congestion, and improving access in the project area. The Project aims to

6 iv improving access in the project area. The Project aims to (i) reduce traffic accidents and vehicle operating costs; (ii) improve access between Lanzhou and Xi an, two major growth centers in northwestern PRC; (iii) provide additional transport capacity to accommodate growing traffic; and (iv) provide improved access to markets and social services in poor areas. The Project will also support reforms relating to poverty reduction, corporate governance, private sector development, and road safety and vehicle emissions. The Project comprises the following components: (i) construction of a 231- kilometer (km), four-lane access-controlled toll expressway from Luohandong to Dingxi, including access roads, interchanges with toll stations, tunnels, bridges, administrative stations, and service areas; (ii) the upgrading of 470 km of local roads to improve access to remote poor areas, and of roadside stations; (iii) procurement of equipment for road maintenance, toll collection, surveillance and communications, tunnel operation facilities, vehicle weigh stations, road safety, and office administration; (iv) land acquisition and resettlement; and (v) consulting services for construction supervision, road safety audit, monitoring and evaluation, and capacity building. The key inputs needed to implement the Project include civil works, consultants, equipment, and staff of Gansu Provincial Communications Department (GPCD). Cost Estimates Financing Plan Loan Amount and Terms The total cost of the Project, including physical and price contingencies and interest during construction, is estimated at $882 million equivalent, of which $394 million (45%) is in foreign exchange and $488 million equivalent (55%) is in local currency. ($ million) Source Foreign Exchange Local Currency Total Cost Asian Development Bank Ministry of Communications Gansu Provincial Government China Development Bank Total % 45 Source: Asian Development Bank estimates A $300 million loan from ADB s ordinary capital resources will be provided under ADB s London interbank offered rate (LIBOR)- based lending facility. The loan will have a 25-year term including a grace period of 5 years, an interest rate determined in accordance with ADB s LIBOR-based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft Loan and Project Agreements.

7 v Allocation and Relending Terms The ADB loan proceeds will be re-lent by the Borrower to GPG on the same financial terms and conditions as those of the ADB loan. GPG will bear the interest rate variation and foreign exchange risks. Period of Utilization Until 30 June 2010 Estimated Project Completion Date Implementation Arrangements Executing Agency Procurement Consulting Services Project Benefits and Beneficiaries 31 December 2009 The project implementation unit established within GPCD will be responsible for the expressway. GPG will implement the local road component through local government communications units. Gansu Provincial Communications Department (GPCD) Goods and services financed by the ADB loan will be procured in accordance with ADB s Guidelines for Procurement. Civil works for the expressway will be procured through international competitive bidding. Civil works for local roads will be procured through local competitive bidding procedures acceptable to ADB. On 15 July 2004, ADB approved advance action for procurement of civil works for the expressway and local roads. ADB further approved retroactive financing in principle in an amount not exceeding $5 million equivalent for the local roads. Equipment will be procured through international competitive bidding. The Project will provide 61 person-months of international consulting services to (i) help with project management during the construction period; (ii) provide expertise in tunnel and bridge 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 as well as help develop capacity in vehicle emissions; (vi) help implement the corporate development plan; (vii) assist in formulating a human resource development and training program; and (viii) help establish and implement a project performance management system, including assessing the impact on poverty reduction. About 6,370 person-months of domestic consulting services will be required for construction supervision. The international consultants will be financed from the ADB loan and will be recruited based on the quality- and cost-based selection method in accordance with ADB s Guidelines on the Use of Consultants. The domestic consultants for construction supervision will be financed by GPCD and will be recruited in accordance with government procedures. By developing an integrated expressway and complementary local road network, the Project will help improve access to market opportunities and social services for the rural poor residents in

8 vi opportunities and social services for the rural poor residents in the project area. The Project will reduce transport time and costs, thereby helping develop an enabling environment for investment, create employment opportunities, and enhance incomes. The economic internal rate of return for the Project is estimated at 16.6%. The financial internal rate of return for the expressway component is 6.1%, which is higher than the real weighted average cost of capital. There are 1.6 million poor people, or 36% of the total population in the project area, living below the income levels of CNY900 in rural areas and minimum living standards in urban areas. The main project beneficiaries of the local road component will be households in poor counties and townships in the project area, providers of rural transport services, industrial and agricultural businesses, agriculture-based households producing grains and vegetables for local markets, people living in the project area who will have easier access to long-distance transport services, people visiting historical sites along the expressway, and 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 keep to a minimum the potential technical, safety, economic, financial, and resettlement risks. The main technical risks, which could result in implementation delays and cost overruns, are associated with the tunnel and bridge structures. To mitigate the risks, international consultants reviewed the proposed design and construction methods. Prequalification of contractors focuses on their financial and technical capability in handling 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. Given the safety hazards associated with bridge works, the contractors will be required to strictly enforce working safety rules and measures. GPCD has proven 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 economic viability. The financial risks associated with construction and operation of the expressway will depend on the actual construction costs, ability of the commercial management, and appropriate tolls. To mitigate the financial risks, the Gansu Luoding Expressway Company will build up a commercial business environment for expressway operations, the project expressway will receive substantial equity from the central and provincial governments, and an appropriate toll structure will be adopted. Appropriate coordination and monitoring mechanisms will be put in place to mitigate resettlement risks.

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10 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation (RRP) on a proposed loan to the People s Republic of China (PRC) for the Gansu Roads Development Project. 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 economy s changing structure and increasing diversification have altered the pattern of transport demand. The demand for road transport has outpaced that of other transport modes. There is a rapidly increasing movement of goods and passengers by road, which is more flexible and responsive than other modes to the needs of a market economy. The shift in transport demand also reflects the loosening of anticompetitive restrictions in the road transport industry itself. Between 1990 and 2003, road traffic grew by 9.6% per annum (p.a.) for passenger traffic, reaching billion passenger kilometers (km); and by 5.7% p.a. for freight, reaching 708 billion ton km. In 2003, road traffic accounted for 55.7% of the country s total passenger traffic and 13.2% of the total freight traffic. With the country s rapid economic growth, low vehicle ownership rates, lower automobile prices after World Trade Organization accession, increasing access to loans to finance automobile purchases, and large investment in automotive manufacturing, the rapid expansion in the vehicle fleet will continue in the coming years. 3. To meet the growing demand for improved transport infrastructure and services, the Government s policy for the road sector, as reflected in its 10th Five-Year Plan ( ), calls for (i) accelerating the construction of the network of highways and national roads, with a focus on five north-south and seven east-west sections of the national trunk highway system; (ii) starting construction of eight new highways in the western region (total 18,000 km); and (iii) by 2005, having approximately 1.95 million km of highways open to traffic, with expressways 1 accounting for 35,000 km. In 2003, the Government announced plans for 5,300 rural road projects with a total length of 78,000 km. A total of 176,000 km of rural roads was slated for construction in the following 3 years, with an investment of CNY50 billion provided by the central Government. Currently, 184 towns and 54,000 villages, most of which are in the western region, have no access to roads. The plan is to develop a road network that will reach 99.8% of towns and 96.0% of villages by By the end of 2010, all towns and villages will be connected to roads. This major program will be a pro-poor initiative since in many surveys the poor ranked improved roads as one of their high infrastructure development priorities. The Government s commitment to reducing poverty through transport infrastructure investment is reflected in the poverty partnership agreement between the Government and ADB. The project framework summarizing the main features of the proposed Project is in Appendix The significant road sector development during the 9th Five-Year Plan ( ) resulted in road investments totaling CNY924 billion, or CNY185 billion per year. The road sector investment grew at an average annual rate of 16% during this period. During the 10th Five-Year Plan, the total investment is expected to reach about CNY1,800 billion, almost double that in the previous 5 years. A road sector analysis is given in Appendix 2. In Gansu province, Gansu Provincial Communications Department (GPCD) invested about CNY4.9 billion in the road sector 1 The People s Republic of China s (PRC s) expressway length reached 29,745 km in 2003, the second longest in the world after the United States.

11 2 in 2003, of which 65% was allocated to construction and 9% to maintenance. During the 10th Five-Year Plan, road investment is expected to be about CNY24 billion. GPCD plans to increase the road investment to CNY44 billion during the 11th Five-Year Plan. Road sector revenues and expenditures in Gansu province are given in Appendix 3. B. Analysis of Key Problems and Opportunities 5. Gansu province is one of the PRC s five northwestern provinces. Remote and isolated with harsh natural conditions, it is one of the least developed provinces. The key problem in Gansu province is poverty: the per capita gross domestic product (GDP) of the province in 2003 was CNY4,984, only 55% of the national average of CNY9,057. Per capita rural income was CNY1,673, or 64% of the national average of CNY2,622. There are 1.6 million poor people in the project area, equivalent to 36% of the total population, living below the income levels of CNY900 in rural areas and the minimum living standards in urban areas. One of the reasons for high poverty incidence is slow economic growth, partly because of inadequate infrastructure. Despite the considerable investments, the road network is still inadequate, and does not provide efficient transport access to markets and social services, such as education and health. 6. The impact of road investments on poverty reduction is supported by the results of studies and evaluations of several completed road projects financed by ADB 2 and the World Bank. 3 Wellintegrated road development helps ensure that the benefits derived from the expressway filter down to the poor. These results affirm the relevance of ADB s strategy in the road sector (paras. 8 9). A technical assistance (TA) 4 will help the Government formulate a road network strategy that promotes better integration of expressways and local roads to meet communities needs and support economic growth, and that provides road agencies with cross-disciplinary skills and tools through capacity building. A case study in Shaanxi province found that improved roads were correlated with poverty reduction. 5 Benefits for rural poor areas include lower transport costs; lower cost of inputs; expanded agricultural support services; improved farming practices; greater access to employment opportunities in urban areas; and better access to health, education, and social services To help the Government develop its road sector strategy and investment projects, external assistance has been provided mainly from ADB, Japan Bank for International Cooperation (JBIC), and World Bank (Appendix 4). Since 1991, ADB has provided 29 loans, totaling nearly $5.3 billion, to finance about 3,900 km of road development, together with 7,100 km of associated local road networks. Since 1995, local roads have been included in the scope of road projects to make 2 In Liaoning and Yunnan provinces, construction of expressways complemented by upgrading local roads was associated with a significant increase in rural incomes in the project area. This is reported in ADB Project Completion Report on the Liaoning Expressway Project in the People s Republic of China. Manila; and ADB Project Completion Report on the Yunnan Expressway Project in the People s Republic of China. Manila. 3 Hajj, Hatim, and V. Setty Pendakure Roads Improvement for Poverty Alleviation in China. Working Paper No. 1. Transport Sector Unit. East Asia and Pacific Region. World Bank, Washington, DC. 4 ADB Technical Assistance to the People s Republic of China for Poverty Impact of Area-Wide Road Networks. Manila. 5 ADB Technical Assistance for Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction. Manila. 6 Ali, I., and E. Pernia Infrastructure and Poverty Reduction. What is the Connection? Economics and Research Department Policy Brief No. 13. Economics and Research Department. Manila: ADB; and Yao, Xianbin Infrastructure and Poverty Reduction Make Markets Work Better for the Poor. Economics and Research Department Policy Brief No. 14. Economics and Research Department. Manila: ADB; and ADB Paving the Way to Poverty Reduction Through Better Roads. Operations Evaluation Department Assessing Development Impact Series No. 3. Manila.

12 3 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 50 TAs, totaling $26.9 million, to the road sector. The advisory TAs have addressed poverty impact of road projects, policy and institutional issues, including highway planning, road safety, 7 human resources development, transport pricing, commercialization and corporatization, and the mobilization of private financial resources. The World Bank and JBIC have provided about $6.1 billion and 111 billion respectively 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. C. Policy Dialogue 8. Targeting Poor Beneficiaries. Since 1995, complementary local road improvement has been integrated into the design of road projects to improve access to markets and social services. 8 The integrated approach will help target the poor in terms of bringing them benefits. Better integration of the local roads into the trunk highway system will help rural agricultural produce reach markets. As reliable transport to markets becomes more readily available, cash crop farming in remote areas is stimulated and the access to off-farm employment opportunities is broadened. 9. Five sections of the local roads of 470 km were selected as part of the broadly defined Project, on the basis of population density, poverty incidence, and road network efficiency from the Gansu Provincial Rural Road Development Plan for The Project will upgrade the roads from Class IV to III, costing about $53 million, of which $10 million from the ADB loan will help finance the two road sections: Guochengyi-Houjiachuan (118 km) and Dingxi-Longxi (80 km). This will complement the expressway component in benefiting about 1.6 million poor people living in the project area. This component will (i) be implemented concurrently with the expressway component and will be maintained by the county governments under the guidance of GPCD, 9 (ii) use the Ministry of Communications (MOC) technical designs and standards, (iii) follow the local competitive bidding procedures acceptable to ADB, and (iv) be monitored and evaluated to ensure that their poverty impacts are enhanced Corporate Governance. GPCD currently manages expressway construction and operations. Based on ADB s experience in the road sector, 11 separation of expressway operations from the government functions will promote corporate governance. GPCD has agreed to establish a corporation, by 31 December 2007, tentatively called the Gansu Luoding Expressway Company (GLEC). GLEC will be responsible for operating and managing the project expressway. At least 1 year before commencement of operations, the project expressway will be transferred to GLEC, 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. 8 Since 1995, the scope of the 17 ADB-financed road projects has been expanded to enhance their impacts on poverty reduction by integrating local road improvements to improve the accessibility of poor communities. The local road components of these projects are being implemented or have been completed successfully, helping improve living standards of the poor people in the project area. 9 They have sufficient capacity and financing for maintenance works. The road maintenance expenditures in Gansu province were CNY479 million in 2003 and this is expected to increase in the next 5 years by 4 5% annually. 10 While improving infrastructure is important, competition in providing road transport services is also important to ensure that some of the savings in transport costs are passed onto local farmers through reduced tariff. 11 ADB has been involved with road projects in 14 provinces since 1992, and corporatization has been implemented in most of the provinces by separating expressway construction and operations from the provincial government. The experience is generally positive in improving corporate governance.

13 4 which will be entitled to collect and retain tolls and will repay the proposed loan for the expressway. Details of the creation of GLEC and the transfer of assets and debt service obligations from GPCD to GLEC, including GLEC s financial statements for the Project, will be submitted for ADB s approval 6 months prior to establishment of GLEC. GPCD and GLEC will enter into a concession framework agreement (outlined in Appendix 5 with the full agreement in Supplementary Appendix A) by 30 June 2008 to ensure autonomy of operations, encourage the establishment of road performance indicators, and facilitate future refinancing of road sector assets. GLEC will implement a corporate development plan (also outlined in Appendix 5 with the full plan in Supplementary Appendix A) by 31 December 2008 to assure high standards of corporate governance, management practices, and financial reporting. These agreements and plans will be implemented with the help of the loan-financed consultants during project implementation. The model documents needed for such process were developed under ADBfinanced TA 12 and are available from a web site. 13 To help with the process of corporatization, training will be provided under the loan to the staff of GPCD and GLEC. 11. Private Sector Development. 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, 15 including securitization. 16 The potential for pursuing these options for financing the project expressway were examined. 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 with high long-term economic returns, is limited. Therefore, the construction of the Project will be financed from public sources. Private sector financing options will be examined before operations start. ADB will favorably consider such refinancing for the Project, provided that advance notice is received and the proposal meets ADB s standards of good governance, transparency, and project viability. GPCD is pursuing private sector participation in developing the road sector, and has offered three existing highways for lease concessions with a total length of 330 km, costing about CNY7.5 billion. An overview of private sector involvement in the PRC road sector is given in Supplementary Appendix B. 12. Road Safety and Vehicle Emissions. Road safety is a serious issue in the PRC, and in Gansu province. In 2003, there were 667,507 accidents, involving 104,372 fatalities and 494,174 injuries in the PRC. This is equivalent to a fatality rate of 43 deaths per 10,000 vehicles, which is very high by international standards. 17 Gansu province had 13,403 accidents, involving 1,837 fatalities and 7,833 injuries. 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. The road traffic safety law was made effective in May ADB maintains a dialogue with the Ministry, based on the findings of the 12 ADB Technical Assistance to the PRC 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. 13 Available: 14 ADB Private Sector Assessment and Strategy in the People s Republic of China. Manila. 15 See footnote ADB Report and Recommendation of the President on Proposed Loans to the PRC for the Hunan and Jilin Expressways Projects. Manila. Under the two projects, the expressways' future toll revenue was securitized through an initial public offering in August 1999 and January 1999, respectively. 17 Comparative figures for other countries in deaths per 10,000 vehicles are 26.5 for India, 11.8 for Indonesia, 8.5 for Thailand, 2.3 for Australia, and 1.9 for Japan.

14 5 completed TA, 18 and will strengthen its involvement through a planned TA for improving road safety. Also in May 2004, an interministerial committee, coordinated by MOC, involving seven ministries, 19 was established to develop and implement special measures to enforce regulations nationwide on overloaded trucks. In Gansu province, this program is being implemented by an interdepartmental task force under the governor. Road safety issues are being addressed through (i) setting up an accident prevention division in the Gansu Public Security Bureau to analyze accident data to help draw up prevention measures; (ii) strengthening driver training and police patrols on the roads to enforce traffic laws and regulations; and (iii) promoting a road safety campaign, including the use of seat belts and infant seats and warning against intoxicated and dangerous driving, using pamphlets, posters, and other communications means. To address road safety issues, the Project will include the following measures: (i) vehicle weighing stations; (ii) road safety training for staff of GPCD; (iii) safety audit during design and construction; and (iv) public awareness campaigns and signage, promoting road safety and accident prevention. These will be carried out with the assistance of a road safety specialist financed under the loan (Appendix 6). 13. With a rapid increase in vehicle ownership, vehicle emissions have become a serious issue in the PRC. They will have an adverse impact on 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. Gansu provincial government (GPG) has an annual program for testing vehicle emissions. Roadside testing is also carried out along the major national and provincial roads. To address the motor vehicle emissions issue, international consultants will provide training to staff of the environmental protection bureau involved with vehicle emissions inspection and testing in light of the findings of the ADB-financed TA 20 on vehicle emissions (Appendix 6). D. Lessons Learned 14. GPCD has experience in preparing and implementing three internationally financed road projects. 21 These projects were prepared well and are being implemented or operated without major problems. The relevant safeguard policies have been met. Performance reviews 22 of completed ADB-financed road projects elsewhere in the PRC indicate that, in general, the projects have been or are being implemented to meet development objectives of facilitating economic growth and poverty reduction as originally envisaged during project preparation. Completed projects show that (i) ADB s safeguard policies were met; (ii) loan covenants were generally complied with; (iii) poverty reduction impact is evident as people s living standards have 18 ADB Technical Assistance to the People s Republic of China for Capacity Building in Traffic Safety, Planning, and Management. Manila. The main findings of this TA, including training materials, are available in the road safety section of ADB s web site, available: The TA was rated highly successful in the TA completion report. 19 These are Ministry of Communications, Ministry of Public Security, National Development and Reform Commission, National Quality Control Bureau, National Safety Bureau, National Industry and Commerce Bureau, and State Council s Law and Regulations Office. 20 ADB Technical Assistance for Action Plans for Reducing Vehicle Emissions. Manila. Under this TA, the Action Plan for Strengthening Vehicle Inspection and Maintenance for Chongqing municipality was developed. Available: 21 These are Liugouhe-Zhonghe expressway (completed in 2002) and Xujiamo-Jiepaicun highway (completed in 2001) financed by the World Bank. These projects have shown positive cash flow at the beginning of operations based on the strong initial traffic build up. The ongoing Liuzhaike-Baiyin expressway is financed by the Japan Bank for International Cooperation. 22 ADB PRC Procurement Review 2001 and PRC Portfolio Performance Review in the Road Sector. Manila.

15 6 been improved through better access to markets, jobs, and social services; (iv) operation and maintenance (O&M) of ADB-financed roads were generally satisfactory as reported in an evaluation report; 23 (v) corporatization was an effective option to strengthen corporate governance and to raise funds for future road development in Hunan and Jilin provinces; and (vi) recent projects helped raise awareness among policy makers of the importance of addressing key sector issues on road safety and vehicle emissions. Project completion reports (PCRs) prepared for 10 road projects concluded that nine of them 24 were highly or generally successful, and one 25 was partly successful. The project performance audit reports (PPARs) for four road projects 26 rated the projects as either highly successful or successful. The lessons learned from previous ADBfinanced road projects are reflected in the project design. A development impact study 27 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 contributed to the development of the northeastern part of the PRC. Some lessons from these projects have been brought to the attention of GPCD, particularly with reference to implementation-related matters. To avoid delayed loan effectiveness due to delays in the procurement process, a tendering company has been recruited to prequalify the civil works contractors. ADB s procurement guidelines and requirements were discussed extensively during missions. Emphasis was put on the need to (i) strictly follow ADB s mandatory bidding documents, (ii) evaluate bids according to ADBapproved evaluation criteria, and (iii) substantiate clearly the conclusions of the bid evaluation. E. Rationale 15. ADB's operational strategy 28 in the road sector supports (i) construction of roads that connect major growth centers and promote linkages with hinterland economies; (ii) integration of the network so that the national trunk highway system is supported by a system of local roads, particularly those that provide access to poor areas; (iii) promotion of road safety and vehicle emission reduction; (iv) institutional strengthening to increase the commercial orientation and efficiency of expressway organizations; (v) improvement of highway planning and evaluation techniques; (vi) adoption of appropriate pricing policies to ensure optimum use of road transport capacity; and (vii) use of alternative methods of investment financing, including private sector participation. ADB is targeting its assistance in the road sector to the less developed central and western provinces where the majority of the poor live. The proposed Project is consistent with the PRC s development priorities and ADB s strategy. 23 ADB Special Evaluation Study on the Operation and Maintenance of Road Facilities and their Impact on Project Sustainability. Manila. 24 ADB PCR on the Shenyang-Benxi Highway Project in the PRC. Manila; ADB PCR on the Jilin Expressway Project in the PRC. Manila; ADB PCR on the Hunan Expressway Project in the PRC. Manila; ADB PCR on the Liaoning Expressway Project in the PRC. Manila; ADB PCR on the Yunnan Expressway Project in the PRC. Manila; ADB PCR on the Shenyang-Jinzhou Expressway Project in the PRC. Manila; ADB PCR on the Shanghai Nanpu Bridge Project in the PRC. Manila; ADB PCR on the Shanghai Yangpu Bridge Project in the PRC. Manila; ADB PCR on the Hebei Expressway Project in the PRC. Manila. 25 ADB PCR on the Heilongjiang Expressway Project in the PRC. Manila. This lower rating is mainly due to inadequate safety facilities and enforcement, as well as partial compliance with environmental mitigation measures. Remedial actions were subsequently 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 audit report (PPAR) (footnote 26). 26 ADB PPAR on the Shanghai Nanpu Bridge Project in the PRC. Manila; ADB PPAR on the Shenyang- Benxi Highway and Jilin Expressway Projects in the PRC. Manila; ADB PPAR on the Heilongjiang Expressway Project in the PRC. Manila. 27 ADB Road Sector Impact Study: Beijing-Tongjiang Expressway Route in the People s Republic of China. Manila. 28 ADB Country Strategy and Program Update ( ): the PRC. Manila.

16 7 16. Despite the considerable investments in the road sector, the PRC road network is still inadequate, and does not provide efficient transport access to large parts of the country, particularly in the poorer inland regions, including Gansu province. Transport and logistics costs in the western region are high. Western PRC lacks high-class road infrastructure in and out of the region, and between and within provinces in the region. The road network must be developed to lower transport costs and facilitate sustainable economic development. The Government is implementing the Western Region Development Strategy, which is the key theme of the 10th Five-Year Plan. The strategy aims to reduce development disparities between the western region and the coastal region. The Project will support this strategy, and will connect the two growth centers of Lanzhou and Xi an. GPG has identified the Project as a priority investment, which will also complement ADB s assistance in developing the Lanzhou-Xi an-taiyuan section of the national trunk highway system During the 2004 Country Programming Mission, the Government reconfirmed its request for ADB assistance for the Project. 30 A feasibility study was completed by GPCD in May An environmental impact assessment (EIA) was prepared in July 2004, and a resettlement plan in September ADB provided TA 31 to supplement the government studies. A final TA tripartite meeting-cum-loan fact finding for the Project was held from 21 June to 2 July 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. Objectives 18. The principal objectives of the Project are to promote economic growth and reduce poverty in eastern Gansu province by lowering the cost of transport, relieving traffic congestion, and improving access in the project area. The Project aims to (i) reduce traffic accidents and vehicle operating costs, (ii) improve access between Lanzhou and Xi an, two major growth centers in northwestern PRC, (iii) provide additional transport capacity to accommodate growing traffic, and (iv) provide improved access to markets and social services in poor areas. The Project will also support reforms relating to poverty reduction, corporate governance, private sector development, and road safety and vehicle emissions. B. Components and Outputs 19. The Project has the following components: (i) construction of a 231 km, four-lane access- 29 The Lanzhou-Xi an-taiyuan section is a priority section of the national trunk highway system for ADB assistance, which includes the Shanxi Road Development Project (Qixian-Linfen), approved in 1999; Shaanxi Roads Development Project (Yanliang-Yumenkou), approved in 2001; Shanxi Roads Development II Project (Yumenkou- Houma), approved in 2002; and Xi an Urban Transport Project, approved in These loans total $895 million. 30 The Project has been processed as a pilot test designated by the Strategy Working Group on Infrastructure and Utility Finance Initiative with the objective of achieving improved processing efficiency, greater responsiveness to the Government s needs, and better cost-effectiveness while ensuring project quality and safeguarding policy compliance. 31 ADB Technical Assistance to the People s Republic of China for Preparing the Gansu Roads Development Project. Manila.

17 8 controlled toll expressway from Luohandong to Dingxi, 32 including access roads, interchanges with toll stations, tunnels, bridges, administrative stations, and service areas; (ii) the upgrading of 470 km of local roads to improve access to remote poor areas, and of roadside stations; (iii) procurement of equipment for road maintenance, toll collection, surveillance and communications, tunnel operation facilities, vehicle weigh stations, road safety, and office administration; (iv) land acquisition and resettlement; and (v) consulting services for construction supervision, road safety audit, monitoring and evaluation, and capacity building. The key inputs needed to implement the Project include civil works, consultants, equipment, and staff of GPCD. C. Special Features 20. Roadside Stations. Road projects have traditionally focused on expanding transport capacity to maximize economic impact. To contribute to achieving the Millennium Development Goals through transport development, innovative approaches are needed to enhance multisector and multipurpose dimensions of infrastructure investment. The Project will introduce roadside stations 33 to facilitate community development along the Project local roads by linking roads with community activities and to provide a conducive environment for safe driving for road users. Roadside stations normally provide parking areas and ancillary facilities, such as bus terminals, gasoline stations, information centers about roads, road safety, tourism, and HIV/AIDS, local specialty markets, restaurants, and agro-processing facilities. Details of facilities will be firmed up during project implementation. The Project will develop four roadside stations along the project local roads. 21. Transport Services. To enhance the benefit flow to local communities through infrastructure improvement, efficient and safe transport services should be widely available in the project area. Current constraints and opportunities were reviewed under the TA. The main findings are provided in Appendix 7. One of the issues relates to the nonavailability of bus stops on the expressways. As the interprovincial expressway system is developed, long-distance public transport services are becoming available. However, bus stops are unavailable on the expressways primarily for safety reasons, given that expressways are access controlled. MOC s new highway design standards, effective 1 March 2004, provide for installing bus stops. During project implementation, GPCD will review the possibility of providing bus stops on the project expressway in consultation with bus operators, keeping in view the safety issues. Other issues include a lack of competition in the transport services market, and regulations on tariffs and routes for bus and trucking services. MOC is addressing these aspects of road transport, with assistance from a recently approved TA, 34 which aims to develop a road transport policy reform action plan by reviewing the policy and regulatory framework in the road transport industry and factors affecting efficiency and safety of the industry. 32 The project expressway is divided into two parts by the section in Ningxia Hui Autonomous Region, which is not part of the Project for reasons of administrative jurisdiction. The eastern part of this section (37 km) is being implemented by an ADB-financed Ningxia Roads Development Project, approved in 2003, while the western part (30 km) will be constructed in accordance with the same technical standards as those of the project expressway by the Ningxia Communications Department during The concept of roadside stations was developed in Japan to link the road users and communities, thereby facilitating local economic development. They are different from ordinary service areas provided along the roads because (i) they are designed through the involvement of local communities, (ii) they provide links between road users and local communities, (iii) they provide business opportunities for local people, and (iv) they can possibly provide public services, including health care, education, and cultural activities in addition to the normal restaurant and commercial services. This experience was replicated in Thailand with assistance from JBIC and is being pilot tested in the PRC (Anhui, Gansu, and Hunan provinces) as well as Kenya with assistance from the World Bank and JBIC. Guidelines for Roadside Stations have been prepared by the World Bank, and will be used by GPCD as a guide. 34 ADB Technical Assistance to the People s Republic of China for Policy Reform in Road Transport. Manila.

18 9 22. Stakeholder Consultations. During the feasibility study, EIA and resettlement planning, consultations were conducted with representatives of local government agencies, civil society, and affected people to discuss project alternatives, environmental concerns, land acquisition and resettlement issues, and economic development potential. The findings of the consultations are available in Appendix 8. During TA (footnote 31) implementation, about 6,700 people were interviewed in public opinion surveys, social assessments, and for resettlement planning, which helped raise the level of awareness and gain local support. These processes enabled local stakeholders to express their opinions and to make relevant suggestions for project design and implementation. Consultations with the rural poor, women, minority population, and other vulnerable groups were carried out during the socioeconomic survey on project impact and during local road selection. The participatory activities are an ongoing process that will continue during project implementation. D. Cost Estimates 23. The total cost of the Project is estimated at $882 million, with a foreign exchange cost of $394 million (45%) and a local currency cost of $488 million (55%) (Appendix 9). The total costs include physical contingencies, price contingencies, and interest and other charges during construction. Table 1: Cost Estimates ($ million) Foreign Local Total Item Exchange Currency Cost A. Base Costs 1. Expressway Civil Works Equipment Resettlement Consulting and Training Services Local Roads Subtotal B. Contingencies 1. Physical Contingencies Price Contingencies Subtotal C. Interest and Other Charges during Construction Total Source: Asian Development Bank estimates. E. Financing Plan 24. The Government has requested a $300 million loan 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 years, an interest rate determined in accordance with ADB s London interbank offered rate (LIBOR)- based lending facility, a commitment charge of 0.75% per annum, and such other terms and conditions set forth in the draft Loan and Project Agreements. The Government has provided ADB with (i) the reasons for its decision to borrow under ADB s LIBOR-based lending facility on the basis of these terms and conditions, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. A financing plan for the Project is in Table 2.