Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15230

PROJECT COMPLETION REPORT

CHINA

SECOND RAILWAY PROJECT(LOAN 2540-CHA)

DECEMBER 29, 1995

Transport Operations DivisionChina and Mongolia DepartmentEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(As of April 1985)

Currency = Renminbi (RMB)Currency Unit = Yuan (Y)

Y 1.00 = 100 Fen$1.00 = Y 2.84

Y 1.00 = $0.35

FISCAL YEAR

January 1 to December 31

WEIGHTS AND MEASURES

m = meter (= 3.281 feet)m 2 =square meter (= 10.764 square feet)m3 cubic meter (= 35.315 cubic feet)km kilometer (= 0.621 mile)tkm ton-kilometer (= 0.621 ton-mile)pkm passenger-kilometer (= 0.621 passenger-mile)mu 0.1647 acre = 0.0667 hectare (ha)

kWh kilowatt hour (= 860.42 kcal)ctk Converted tkm, traffic unit (1 pkm = 1 tkm)Mt million tons

Mtpy million tons per year

ABBREVIATIONS AND ACRONYMS

CARS China Academy of Railway SciencesCPCF Changchun Passenger Coach FactoryERR Economic Rate of ReturnFCTIO Foreign Capital and Technical Import OfficeMIS Management Information SystemMOR Ministry of RailwaysOECF The Overseas Economic Cooperation Fund of JapanPCR Project Completion ReportRERR Reevaluated Economic Rate of ReturnRIS Railway Investment StudySAR Staff Appraisal ReportSPC State Planning CommissionTMIS Transportation Management Information System

The VIiiorld Bank FOR OFFICLAL USE ONLYThe World Bank

Washington, D.C. 20433U.S.A.

Office of the Director-GeneralOperations Evaluation

December 29, 1995

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on ChinaSecond Railway Project (Loan 2540-CHA)

The Project Completion Report (PCR) on the China: Second Railway Project (Loan 2540,approved in FY85) was prepared by the East Asia and Pacific Regional Office, with Part II contributedby the Borrower. The loan for US$235 million equivalent was approved on May 14, 1985 and closedon June 30, 1994, two years behind schedule. A balance of US$15 million of the loan amount wascanceled.

The project was prepared at a time when the transport system was becoming increasinglybottlenecked as a result of China's high and sustained economic growth and its inadequate transportinfrastructure. The project's main objective was to help the Ministry of Railways (MOR) finance theexpansion of railway capacity. To this end, the project comprised: (a) upgrading the Beijing-Guangzhouline, a key transport artery; (b) modernizing a railway car factory; (c) building new laboratories formaterials and equipment testing; (d) conducting a management information system (MIS) study; and(e) providing technical assistance to MOR's railway universities.

Although the project progressed slowly in the first 5 years and its completion was delayed due toprotracted procurement and to a general retrenchment on investments in China during that period, theproject's physical components, which comprised 96 percent of project costs, were satisfactorily executed.The line upgrading and the modernization of the railway car factory were completed. Theimplementation of the institutional components was less successful. Conduct of the managementinformation system study was hampered for lack of computer equipment; funds were reallocated topurchase such equipment, and, in the end, the MIS study was not done. The laboratory component wascompleted but with a reduced scope. Modernization of MOR universities was not implemented due toGovernment's reluctance to utilize technical assistance for this purpose. Four technical studies dealingwith MOR's infrastructure and equipment were added to the project's scope during its implementation,and helped to prepare a subsequent project. The economic rate of return for the project's physicalinvestments, comprising 96 percent of total project costs, is estimated at 16 percent, compared to 25percent estimated at appraisal. On completion of the project, the financial condition of the railway wassatisfactory as anticipated at appraisal.

The Operations Evaluation Department rates the project's outcome as satisfactory, itsinstitutional development as negligible and its sustainability as likely.

This document has a restricted distribution and may be used by recipients only In the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

The PCR is good. It offers a candid assessment of the project and contains a substantial amountof supporting tables and annexes. An important lesson noted is that Borrower's reluctance to utilizeproject's funds for the recruitment of outside consultants substantially hindered the institutionaldevelopment component.

The project may be audited, together with other China railway projects currently nearingcompletion.

Attachment

FOR OPFICIAL USE ONLY

PROJECT COMPLETION REPORT

CHINA

SECOND RAILWAY PROJECT(LOAN 2540-CHA)

CONTENTS

Preface .............................................. iEvaluation Summary ..................................... ii

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE ... ....... 1

Project Identity .................................... 1Background ...................................... IProject Objectives and Description ......................... 2Project Design and Organization .......................... 3Project Implementation ................................ 3Project Results ..................................... 7Project Sustainability ................................. 13Bank Performance .................................. 13Borrower Performance ................................ 14Project Relationship ................................. 15Consulting Services .................................. 15Project Documentation and Data .......................... 15

PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE . . 16

PART III: PROJECT STATISTICAL INFORMATION ................ 17

Table 1: Related Bank Loans and/or IDA Credits ..... .. ........ 20Table 2: Project Timetable ........... .. ............... 21Table 3A: Cumulative Estimated and Actual Disbursements ... ...... 21Table 3B: Disbursements by Category ........ .. ............ 22Table 4: Project Implementation .......... .. ............. 22Table 5A: Project Costs ...... ......... ................ 23Table SB: Project Financing ........... .. ............... 23Table 6: Project Results .. 24Table 7: Status of Covenants .. 25Table 8: Use of Bank Resources .. 26

A. Staff Inputs .26B. Missions .26

Annex 1 Income Statements ...... .......... ................. 27Annex 2 Economic Reevaluation of Zhengzhou-Wuhan Track Upgrading . .. 32

and ElectrificationAnnex 3 Economic Evaluation of the Changchun Passenger Coach Factory ... . 42

ModernizationAnnex 4 Project Review from Borrower's Perspective ...... .. ......... 48

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed wiihout World Bank authorization.

I

PROJECT COMPLETION REPORT

CHINA

SECOND RAILWAY PROJECT(LOAN 2540-CHA)

PREFACE

This is the Project Completion Report (PCR) for the Second Railway Projectin China, for which Loan 2540-CHA in the amount of $235 million was approved onMay 14, 1985. The loan was closed on June 30, 1994, two years later than originallyplanned. Disbursements amounted to $219.668 million. A total of $15.0 million wascanceled from the loan effective April 22, 1991. Final disbursement was made onNovember 3, 1994, and the balance of $332,178 was canceled on November 3, 1994.

The PCR was prepared by U. Marggraf (Task Manager), H. Deboeck(Financial Analyst), M. Rasheed (Financial Analyst), and H. K. Yen (Research Analyst)of the Transport Operations Division, China and Mongolia Department of the East Asiaand Pacific Region and reviewed by Messrs. Richard Scurfield (EA2TP Division Chief)and Yo Kimura (EA2 Project Advisor). The Borrower provided comments that areincluded as Part II of the PCR.

Preparation of this PCR was started during the Bank's completion mission.It is based on material in the project file. The Borrower contributed to preparation of thePCR by preparing its own evaluation of the project's execution and commenting on thedraft PCR.

.. ....:

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PROJECT COMPLETION REPORT

CHINA

SECOND RAILWAY PROJECT(LOAN 2540-CHA)

EVALUATION SUMMARY

Project Objectives

i. The Project's principal objective was to make a direct contribution to theGovernment's goal of increasing railway capacity to support economic growth by assistingthe Ministry of Railways (MOR) in financing urgently needed investments to expand itstransport and production capacity. To that end, the project was to increase railway linecapacity in central China on the important route between Zhengzhou and Wuhan and toincrease the production of passenger coaches. In addition, the project was to strengthenapplied research, continue the modernization of MOR's management techniques, and adviseon improvements in university curricula (para. 3.1).

Implementation Experience and Results

ii. The project became effective on November 22, 1985, about six months afterBoard approval on May 14, 1985. The loan was closed on June 30, 1994, two years laterthan originally planned.

iii. The Zhengzhou-Wuhan Upgrading and Electrification component (para.5.3) was well prepared at appraisal. Shortly after Board approval, however, MOR had toreduce investments for capital construction by at least 10 percent in order to meet a cost-cutting requirement by the Government. This action resulted in a complete revision ofboth the design and the implementation schedule, and a consequent delay of over twoyears. The component was essentially completed by December 1992. A few items, whichdid not affect the line capacity but did create safer train operations, remained unfinisheduntil early 1994. One of the project's principal objectives, the expansion of MOR'srailway capacity on an important route in China, was successfully met (para. 6.2).

iv. The Changchun Passenger Coach Factory (CPCF) component (paras. 5.4and 5.5) was approved as a first phase of factory modernization, which was intended toprovide careful preparation of the second phase, while the number and quality of coachesproduced at the factory were expected to increase moderately. The second phase toimplement consultants' recommendations and to equip the factory with machinery neededfor the more efficient production of a newly designed coach had been planned for a laterproject. Shortly after the successful completion of the foreign consultants' work in 1990,

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local management of the factory combined the two phases in order to maintain momentum.Originally, completion of the component was scheduled for the end of 1988. With thecoalescing of the two phases, installations were finished by the end of 1993. The objectiveof the project component was to increase coach production at the factory based onimprovement in production technology and better factory equipment and machinery. Thisobjective was fully achieved although differently than planned at appraisal (para. 6.3).

v. The China Academy of Railway Sciences (CARS) component (paras. 5.6and 5.7) consisted of equipment and instruments for two new laboratories to test rollingstock and track components, and consultant services to assist in the finalization of theirdesign, and setting up the facilities. During implementation, however, the Chinese sidefound that the cost of the consultancy was much higher than anticipated. After years ofdiscussions at all levels inside MOR, and with the Ministry of Finance (MOF) and theState Planning Commission (SPC), CARS decided not to build the mechanical laboratorybecause it was too expensive. Construction of the track-component testing laboratory,which began in 1991, was completed in early 1994. The project objective to strengthenapplied research was, therefore, only partially met (para. 6.4).

vi. The project's main technical assistance component (paras. 5.8 to 5.10) wasto carry out a Management Information System (MIS) study to improve MOR's qualityof management and railway operations with the help of a computerized information system.Quite ambitiously, the study was also to provide sufficient experience of the new MIS forMOR to decide how to extend it to other units. Due to a shortage of computers to collectdata, however, the allocated funds were used to purchase computer and telecommunicationscabling equipment for a different pilot project to computerize the existing expense andrevenue accounting systems of the whole Harbin Administration. Implementation of thiscomputerization was completed in June 1992 without achieving the MIS study's objectives(para. 6.5).

vii. Finally, the project component for the provision of technical assistance toMOR's universities (para. 5.11) to strengthen curricula and meet MOR's changingtechnology and management needs was not achieved because the component was neverimplemented (para. 6.6).

viii. Procurement. The Bank's procedures for procurement under internationalcompetitive bidding (ICB) were still very new to MOR when the project started. Theworkload for MOR was quite remarkable. Procurement administration was generallyunsatisfactory until early 1992, when a reorganization of the Foreign Capital and TechnicalImport Office (FCTIO) improved the progress of procurement activities. In retrospect,handling of procurement matters was the weakest part of project execution. The mainimpeding factors were: (a) a very cumbersome approval process, with repetitive controlsfrom other government organs; and (b) an inherent lack of knowledge and experience ofcontracting in a market economy (paras. 5.12 to 5.15).

ix. Disbursement. The total project cost was $546.1 million compared to theappraisal estimate of $569.1 million, 4 percent lower than originally calculated. This

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comes predominantly from the conversion of costs expressed in Yuan into US dollar atdevalued Yuan to US dollar exchange rates, which exceeded by far the price contingencyin US dollars. The overall result shows the Borrower's attempt to focus on physicalelements of the project with the emphasis on substituting foreign funds by local oneswherever possible (paras. 5.16 and 5.17).

x. Sustainability. The sustainability of this project is supported by the resultsof sensitivity analyses conducted for both components. In the case of the Zhengzhou-Wuhan Upgrading and Electrification component, increasing the project costs and minedevelopment costs by 20 percent, respectively, had only a minimal impact on theERR-lowering it from 16 to 15 percent. Similarly, for the passenger coach component,reducing the benefits by 50 percent resulted in an ERR of 18 percent compared to a basecase value of 25 percent.

xi. Bank Performance. Although the Staff Appraisal Report (SAR) identifiedthe risk from inadequate project implementation and operation as negligible, the project didnot progress well in the first five years. During those years, there were only small (onestaff member) Bank supervision missions, after an initial, fully-staffed mission in October1985. Beginning in 1990, systematic and in-depth supervision addressed outstandingissues, with an emphasis on agreeing with MOR and SPC that specific measures be takenby the railways to improve implementation performance. The missions appear to havesignificantly contributed to improved project progress. Since then, supervision reportsprovide a clear picture and assessment of project progress and the reasons for delays in thepast (para. 8.1).

xii. Borrower Performance. Overall, MOR's administrative performance wasquite good, except for procurement and regular reporting (para. 9.1). MOR had, however,some difficulty in coping with the requirements of being a project executing agency untilit belatedly installed the FCTIO to rectify the shortcomings. Reporting was weak,untimely and barely informative. Over the years, the Bank emphasized in supervisionmissions that reporting, especially quarterly reporting, had to be improved with regard tocontent and timing. Remedial steps take by FCTIO improved the situation somewhat butnot yet to a satisfactory level (para. 9.2).

Findings and Lessons Learned

xiii. The project achieved only some of its objectives (para. 6.1). It was to makea direct contribution to the Government's objectives of increasing railway capacity, tostrengthen applied research, continue the modernization of MOR's management techniques,and advise on improvements in university curricula. When the loan was closed, the projectresults were mixed: in essence, the objectives related to physical investments wereachieved, but not those connected to technical assistance.

xiv. The most important lessons (paras. 8.1 to 9.2) learned relate to the need for:(a) stronger ownership of future projects by the Borrower, (b) the Bank focusing onsupervision in the early years of the project, (c) the establishment with MOR of a

procedure to properly record the Bank's agreement to changes of the project scope afterappraisal, (d) an improvement of the Bank's administrative efficiency in procurement, and(e) MOR to realize that adequate emphasis on implementation of ongoing projects andfeedback to the Bank are essential for the successful preparation of new projects.Experience with subsequent projects demonstrates that these lessons are still valid. Mostimportant for achieving project objectives is the ownership aspect. The Bank, therefore,should establish at the beginning of project preparation a clear understanding with theBorrower of what should and can realistically be achieved in a given timeframe. A jointplanning meeting with high-level participants not only from MOR but also from SPC andother Government bodies, which are involved in policy refonn, could serve as a forum todiscuss the Bank's and the Borrower's objectives and possible scope of a new project andreach an early agreement on a common approach to its preparation.

PROJECT COMPLETION REPORT

CHINA

SECOND RAILWAY PROJECT(LOAN 2450-CHA)

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

1. Project Identity

Project Name Second Railway ProjectLoan No. 2450-CHARVP Unit East Asia and Pacific RegionCountry ChinaSector TransportSubsector Railways

2. Background

2.1 China's economy is transport-intensive, like most other centrally plannedeconomies. The transport system is heavily concentrated along the eastern seaboard andhistorically has been served mainly by railways, inland water transport and coastalshipping. It is also characterized by high-intensity freight traffic. Economic growth,especially after the Government adopted the open-door policy in 1978, continuouslyoutpaced capacity expansion. Although China's railway network more than doubled insize, and the length of the highway system increased ninefold between 1952 and 1983, thetransport network was and is one of the sparsest in the world compared with the area andpopulation it serves.

2.2 The surge in traffic occurred despite capacity constraints and relatedbottlenecks. By 1983, highway traffic had grown at the highest annual rate (15 percent)compared with 8 percent for railway traffic and over 9 percent for coastal and inlandwaterway traffic, reducing the railway's share of total traffic from 82 percent in 1952 to66 percent.

2.3 Over the period 1953-80, about 15 percent of all new investments undercentral government control went to transport. Compared to other countries, the annualinvestments in China's transport sector had been rather low. In the early 1980s, theGovernment prepared its Seventh Five-Year Development Plan (1986-90), whichrecognized the need for much larger investments in all modes of transport if bottlenecksto economic development were to be avoided. Individual modes were to be expanded and

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links established between them, together with the incorporation of new technology and thestrengthening of institutions.

2.4 By 1983, China's railway capacity was insufficient to meet traffic demands.Growth in freight traffic averaged 9 percent a year between 1952 and 1983, but slowed toaround 4.5 percent a year since 1978, as traffic saturated existing lines and rolling stockcapacity. The Government was aware of these impediments to growth and placed specialemphasis on developing the transport sector, as well as on the energy sector, which wasdependent on coal transport by rail.

2.5 In 1982, the Bank became involved in the transport sector for the first timewith the Three Ports Project (Loan 2207-CHA), followed, in 1984, by the First RailwayProject (Loan 2394-CHA). In 1985, further port and highway subsector projects wereunder preparation. This project, the second in the railway subsector, aimed to assist theGovernment in increasing railway transport capacity that was essential for sustainedeconomic development.

3. Project Objectives and Description

3.1 Project Objectives. As stated in the SAR, the project was to make a directcontribution to the Government's objective of increasing railway capacity to supporteconomic growth by assisting MOR in financing urgently needed investments to expandits transport and production capacity. To that end, the project was to increase railway linecapacity in central China on the important route between Zhengzhou and Wuhan and toincrease the production of passenger coaches. In addition, the project was to strengthenapplied research, continue the modernization of MOR's management techniques, and adviseon improvements in university curricula.

3.2 Project Components. The project comprised the following components:

(a) Additional line capacity on the 547 km Zhengzhou-Wuhan section of theBeijing-Guangzhou line, one of the most important transport arteries inChina;

(b) Improvements in the production technology and increases in coachproduction at the Changchun Passenger Coach Factory (CPCF);

(c) Assistance in development of the China Academy of Railway Sciences(CARS) with new laboratories for materials and equipment testing;

(d) A Management Information Study in a selected area of the Ministry ofRailways (MOR); and

(e) Technical assistance to MOR's universities to strengthen curricula and meetMOR's changing technology and management needs.

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3.3 In March 1991, the project scope was extended to include four studies on:(a) permanent way maintenance and rehabilitation; (b) locomotive and rolling stockmaintenance and rehabilitation; (c) system electrification; and (d) systemtelecommunications. The objectives of the studies were to deal better with systemwideissues that affect the quantity and quality of railway services and the utilization of assets,and to identify future investment needs. The studies were included in this project to assistin the preparation of the Fifth Railway Project.

4. Project Design and Organization

4.1 The concept and the scope of the project was proposed by MOR. Thetiming of the project was appropriate, as pressure continued to alleviate the growingcapacity constraints of the railways. In the context of the Government's special emphasison developing the transport sector, the project was designed along the lines established inthe first Railway Project but was innovative in providing technical assistance and trainingon a much broader basis than the first project.

4.2 The first Bank mission was sent in March 1984, and the project wasappraised in October 1984. It became effective on November 22, 1985, about six monthsafter Board approval on May 14, 1985 (Table 2).

5. Project Implementation

5.1 Although the Staff Appraisal Report (SAR) identified the risk frominadequate project implementation and operation as negligible, the project did not progresswell in the first five years. MOR had some difficulty in coping with the requirements ofbeing a project executing agency until it belatedly installed the Foreign Capital andTechnical Import Office (FCTIO) to rectify the shortcomings. Poor communication withthe Bank was symptomatic of a weak organization. There was no regular reporting, andwritten information on implementation provided to the Bank was barely informative.

5.2 After an initial mission in October 1985, there were only small Banksupervision missions until mid-1990 (Table 8B). After that, supervision started tosystematically tackle outstanding issues with an emphasis on agreeing with MOR and SPCthat specific measures be taken by the railways to improve implementation performance.In the end, the loan closing date had to be extended by two years to June 30, 1994.

Zhengzhou-Wuhan Upgrading and Electrification

5.3 This component was well prepared at appraisal time. Shortly after Boardapproval, however, MOR had to reduce investments for capital construction by at least10 percent in order to meet a cost-cutting requirement by the Government. This actionresulted in a complete revision of both the design and the implementation schedule, anda consequent delay of over two years. Some savings were found, such as phasinginvestments more gradually (e.g., lengthening the tracks of only every other station, in afirst phase. The project was essentially completed by December 1992. A few items,

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which did not affect the line capacity but did create safer train operations, remainedunfinished until early 1994, due to late provision of MOR funds and difficulties withsuppliers.

The Changchun Passenger Coach Factory

5.4 The project component was conceived as the first phase of a two-phaseprogram. Its primary objective was to provide careful preparation for the second phase,while some improvements in both number and quality of coaches produced at the factorywere expected to occur. The second phase was projected for the future, possibly withadditional Bank financing, to implement consultants' recommendations and to equip thefactory with machinery needed for the more efficient production of a newly designedcoach. Bank support under the project was for technical assistance to the factory coveringa feasibility study on the expansion of production, the development of a new coach design,training of factory staff in modem technical and managerial practices, as well as toincrease the current production and to improve coach quality. In addition, the projectprovided funds for the purchase of some factory equipment and machinery.

5.5 Shortly after the successful completion of the foreign consultants' work in1990, local management of the factory combined the two phases in order to maintainmomentum. Instead of waiting for the appraisal of another railway project, MOR decidedto reallocate funds from the China Academy of Railway Sciences component. The foreignfunding for equipment was raised by about $5 million after consulting the Bank's teamonly informnally, and the production program was changed accordingly. According to theoriginal SAR schedule, completion of the component was scheduled for the end of 1988.With the coalescing of the two phases, this schedule was revised to June 1992 andcompleted by the end of 1993.

The China Academy of Railway Sciences (CARS)

5.6 The plans for this component submitted to the Bank at preappraisal were notvery firm. After assistance was given by a foreign specialist to help the Bank with itsappraisal, the component was included in the project. It consisted of equipment andinstruments for two new laboratories to test rolling stock and track components; consultantservices to assist in the finalization of their design, carrying out of the purchaseprocedures, and setting up the facilities; and training of Academy staff in the fields relatedto the new laboratories.

5.7 The plan was that CARS would select a partner to carry out the design ofthe new facilities, which were to involve modem technology with which CARS was notfamiliar enough. A short list of firms was agreed. When the proposals were received,however, the Chinese side found that the cost of the consultancy was much higher thananticipated. Discussions at all levels inside MOR, and with MOF and SPC, lasted foryears. After five years of total inactivity, the component was believed to be dead.Finally, CARS came to the conclusion that building the mechanical laboratory would betoo expensive. When an agreement was reached to drop the mechanical laboratory from

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the project, the foreign exchange budget was reduced from $15.0 to $9.0 million. Thecomponent began moving ahead. Construction of the track component testing laboratory,which began in 1991, was completed in early 1994.

Management Information System (MIS) Study

5.8 The main purpose of this study was to improve MOR's quality ofmanagement and railway operations with the help of a computerized information system.The study's recommendations of streamlining and accelerating flows of information wereto be implemented in a pilot area of MOR and one of its factories. Quite ambitiously, thestudy was also to provide sufficient experience of the new MIS for MOR to decide howto extend it to other units.

5.9 Between 1985 and 1992, the project did not focus on conducting a MISstudy as originally envisaged. MOR was short of computers to collect needed data for thepilot testing of the MIS in the designated Harbin Administration, starting with theMudanjiang Subadministration. The allocated funds, therefore, were used to purchasecomputer and telecommunications cabling equipment for a different pilot project designedto computerize the existing expense and revenue accounting systems in the whole HarbinAdministration. Implementation of this computerization was completed in June 1992without achieving the MIS study's objectives.

5.10 In June 1992, MOR agreed to bring the narrower financial MIS study effortin line with the full scope as appraised. The objective of a new action plan was to developan integrated financial MIS system for China Railways as a whole, using a "top-down"approach. In addition, MOR decided to adopt a centralized database approach for aTransportation Management Information System (TMIS), which would significantly impactthe present MIS data flow, and not to proceed with the implementation of the MIS beyondthe Harbin Administration in its original concept. A new short-term action plan wasagreed, which focused on developing this type of information to complete these study tasksby early February 1993. The emphasis of the MIS work shifted to the TMIS, a YardInformation System and an Intermodal Information System under the Sixth and SeventhRailway Projects.

Technical Assistance to MOR Universities

5.11 The intention of the technical assistance was to assemble a group of high-level (expensive) experts in higher education, to study graduates' skill mix as comparedwith likely future needs, determine areas within MOR where new technology was mostrelevant, and recommend adaptations in curricula. There was not much enthusiasm withinMOR, and absolutely no support outside MOR, since the Ministry of Education (now aState Commission) was more interested in the institutes of higher education under its directcontrol, and did not favor Bank assistance to MOR's universities. During projectimplementation, it became quite clear that there was an extreme reluctance in China abouthiring outside technical assistance, because the going rate of 300 to 500 times the cost ofan equivalent Chinese staff looked prohibitive. The Government did not agree to allocate

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funds to this component, although it was listed as part of the project in both the SAR andthe Loan Agreement. The October 1991 supervision mission reported: "For all practicalpurposes, this component is dead"; it was never implemented.

Procurement

5.12 The project, approved by the Board only 14 months after the First RailwayProject, experienced the same difficulties as the earlier one. The workload for MOR wasquite remarkable: 292 items were procured through 255 contracts. Successiveauthorizations and checks at various levels inside and outside MOR were cumbersome andtime-consuming. Internal procedures for procurement under ICB were still very new andunsuitable to MOR when the project started. The various activities were carried out byseveral departments and were generally uncoordinated until 1987 when MOR assignedexternally-financed projects to a central department.

5.13 Procurement administration was generally unsatisfactory until early 1992,when a reorganization of the Foreign Capital and Technical Import Office (FCTIO) ofMOR improved the progress of procurement activities. Nevertheless, the closing date ofJune 30, 1992 could not be met; and the date had to be extended to June 30, 1994, due tothe two-year delay of procurement for the Zhengzhou-Wuhan line, which began after thenew designs and budget were finalized.

5.14 Procurement of a Central Traffic Control System started in 1987 illustratesbest the way procurement sometimes was dealt with. Bid evaluation took almost two yearsbecause of (a) the new technology involved and (b) the fact that an apparently ill-adaptedlocal firm was the lowest bidder. The two years were needed to clarify the many technicalspecifications involved in the technology, apparently not fully understood by the localbidder. After this was achieved, more than a year was spent on clarifying the terms andconditions of the contract. At the end of 1991, contract negotiations resulted in a newprice, half a million dollars (about 16 percent) higher. At that time, misprocurement withcancellation of the loan portion was proposed by the supervision team.

5.15 In retrospect, handling of procurement matters was the weakest part ofproject execution. The main impeding factors were: (a) a very cumbersome approvalprocess with repetitive controls from other Government organs; and (b) an inherent lackof knowledge and experience of contracting in a market economy.

Project Costs

5.16 The total project cost was $546.1 million compared to the appraisal estimateof $569.1 million, 4 percent lower than originally calculated (Table 5). This comespredominantly from the conversion of costs expressed in Yuan into US dollar at devaluedYuan to US dollar exchange rates, which exceeded by far the price contingency in USdollars. The overall result shows the Borrower's attempt to focus on physical elements ofthe project with the emphasis on substituting foreign funds by local ones whereverpossible.

5.17 The Zhengzhou-Wuhan line component was completed at $499 million, wellwithin the original budget ($535.8 million), mainly due to the cost cutting at the beginningof project implementation, although inflation over two additional years compensated forsome of the savings. Final costs of the Changchun Passenger Coach Factory component($22.5 million) were about twice the appraisal estimate of $11.3 million, mainly becausethey also contain the second phase, which was planned at appraisal but intended to becarried out under another Bank-financed project. The costs for the second phase had notbeen defined because its content was to be based on the consultants' recommendations.As a result, local costs in Yuan for civil works increased twelvefold and for equipmentsevenfold. The foreign exchange part of equipment was threefold in US dollar terms,while MOR had reduced the technical assistance and training element by about 25 percent.The CARS component was estimated at $21.5 million. Despite the substantial reductionof scope ($6 million), final costs were $18 million, actually exceeding the reduced costbase by about 16 percent. The expenditures originally allocated for the MIS studyexceeded substantially the costs estimate ($0.5 million) due to MOR's fundamental changeof approach and substance; $3.3 million were spent on this redefined component. Fourtechnical studies were added to the project to assist in the preparation of the Fifth RailwayProject, which cost $3.3 million.

Disbursements

5.18 As a consequence of the delays in procurement administration,disbursements were much slower than appraised. Table 3 summarizes the disbursementdevelopment, and compares the appraisal estimates with actuals. Effective April 22, 1991,$15 million were canceled because of ICB procurement delay for the Zhengzhou-Wuhanline section. Needed goods were purchased with local funds in order to suit theimplementation schedule. When the loan was closed on June 30, 1994, about $511,000remained unused, of which $332,177.71 were canceled on November 3, 1994.

Loan Allocation

5.19 The loan was allocated as established in the SAR. An amendment to theLoan Agreement was granted on March 21, 1991, creating a new category to financeadditional four studies included in the preparation of the Fifth Railway Project andallocating $3.5 million to it from the unallocated fund category.

6. Project Results

6.1 As stated in the SAR, the project was to make a direct contribution to theGovernment's objective of increasing railway capacity to support economic growth byassisting MOR in financing urgently needed investments to expand its transport andproduction capacity. To that end, the project was to increase railway line capacity incentral China on the important route between Zhengzhou and Wuhan, and the productionof passenger coaches. In addition, the project was to strengthen applied research, continuethe modernization of MOR's management techniques, and advise on improvements inuniversity curricula. When the loan was closed, the project results were mixed: in

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essence, the objectives related to physical investments were achieved, but not thoseconnected to reform of management through technical assistance.

6.2 One of the project's principal objective, the expansion of MOR's railwaycapacity to support economic growth on an important route in central China, wassuccessfully met by increasing traffic capacity through upgrading the 547 km Zhengzhou-Wuhan section of the Beijing-Guangzhou line.

6.3 Another main objective of the project was to increase coach production atthe Changchun Passenger Coach Factory based on improvement in production technologyand better factory equipment and machinery. This objective was fully achieved, althoughdifferently than planned at appraisal. The Bank-financed technical assistance of thiscomponent produced very good results, on both the design and the training aspects. Oneof the results was the design of a new type of coach using modern technology and bettermaterials. The time between major overhauls is now 10 years for the new coach comparedwith to 4 years for the traditional model. Actual capacity of 1,040 coaches per year isclearly beyond the appraisal target of 800 coaches per year for the first phase.

6.4 The project objective to strengthen applied research was to be achievedthrough assistance to CARS, although two new laboratories for materials and equipmenttesting had to be built and the kind of tests to be carried out in them were not very specificat appraisal. The mechanical laboratory was not built because it turned out to be tooexpensive, and consultants' input was rather limited. As a result, the objective was onlypartially met. A demonstration of the track component testing laboratory to participantsof the Heavy Haul Congress in 1993, however, was reportedly quite impressive.

6.5 The SAR stated as an other objective that the project was to continue themodernization of MOR's management techniques although no reference was made toongoing efforts. The original concept for the proposed MIS Study as a pilot study was thatMOR would: (a) form a study team, (b) develop a financial MIS with the assistance ofoutside consultants, and (c) then implement this system in the Harbin Administration,starting with the Mudanjiang Subadministration. Due to a shortage of computers to collectdata, MOR changed the study's whole focus and allocated funds to the purchase ofcomputer and telecommunications cabling equipment to computerize parts of the existingaccounting systems in the whole Harbin Administration. Although management of thisadministration reported that they were very pleased with the system, there were essentiallyfew direct, tangible benefits that could be claimed in terms of improved operations orreduced clerical staff. However, the MIS study's objectives-streamlining and acceleratingflows of information in a pilot area, and to provide sufficient experience for MOR todecide how to extend the system to other units-were not achieved.

6.6 The project objective of providing technical assistance to MOR's universitiesto strengthen curricula and meet MOR's changing technology and management needs wasnot achieved because the component was never implemented.

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6.7 During project implementation, no environmental or resettlement problemsarose.

Financial Performance

6.8 This section deals with MOR's financial results of the total operation, aswell as the Zhengzhou-Wuhan Upgrading and Electrification and the Changchun PassengerCoach Factory components as part of project. The evaluation of MOR's performanceshould be seen in the context of financial matters, described in Annex 1.

6.9 During 1984-92, MOR was profitable. In 1993, MOR reported a net lossof Y 0.7 million (after paying Y 3.2 billion interest from surcharge revenues); had thesurcharge revenues been included with base tariff revenues, MOR would have shown aprofit of Y 20.4 billion. Estimated net losses for 1994 and 1995 are Y 2.9 billion andY 4.4 billion, respectively; including surcharge revenues would result in a profit of Y 26.0billion and Y 24.3 billion in 1994 and 1995, respectively. These results are net of MOR'stransfers to the Government.

6.10 The income statements for the total operation of MOR is given in Annex 1,Table 1, showing the appraisal forecast for 1984 and 1985, the actual results from 1984to 1993, and the estimated results for 1994 and 1995. The improvement in the 1986 to1989 net income (compared to previous years) mainly reflects the introduction of theeconomic contract in 1986 by which MOR was exempted from paying income tax to theGovernment. The improvement in 1990 net income mainly reflects the increase in across-the-board freight tariffs that took place in that year. Since 1991, revenues from basetariffs are supplemented by revenues from a freight surcharge. Revenues from base tariffsare declining in the 1990s because these tariffs did not keep pace with inflation and thecomplete phasing out of input subsidies. This is also reflected in the working andoperating ratios that are increasing.

6.11 The actual working and operating ratios for 1984 and 1985 (see table below)were marginally better than the appraisal forecast for those years. However, one canquestion the relevance of these relatively low ratios as they were distorted by inputsubsidies. There were no forecasts for the ratios in the SAR beyond 1985.

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WORKING AND OPERATNG RATIOS(Percentages)

1984 1985 1986 1987 1988 1989 1990

Working RatioAppraisal Forecast /a 45 47Actual 40 40 51 53 60 67 57

Operating RatioAppraisal Forecast /a 56 58Actual 52 52 63 66 72 79 68

/a The ratios were recalculated to be consistent with the calculations in this PCR.

WORKING AND OPERATING RATIOS (CONTINuED)(Percentages)

Appraisal Estimate1991 1992 1993 1994 1995

Working RatioExcluding Surcharge Revenues 62 64 75 86 87Including Surcharge Revenues 59 54 52 55 58

Operating RatioExcluding Surcharge Revenues 73 75 85 97 99Including Surcharge Revenues 70 63 59 62 65

6.12 The statement of actual revenues and costs for 1993 for the Zhengzhou-Wuhan line is given in Annex 1, Table 2. A comparison is made between appraisalestimates for 1995 (SAR Table 5.9) and actual results in 1993 (Annex 1, Table 2) and theresults are as follows:

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Yuan Million1995 1993

SAR Estimate Actual

Traffic: (converted ton-km, billion) 56.3 65.3

Costs: (Yuan, million)Operations 247.9 483.9Stations and Terminals 29.7 109.8Maintenance of locomotives and rolling stocks 54.1 186.5

Subtotal 331.7 780.2

Infrastructure maintenance 203.2 558.3

Direct Cost 534.9 1,338.5

Overheads 42.8 144.7

Total Costs 577.7 1j483.2

Sales Revenues 894.7 3,241.1

Net Operating Revenues 317.0 1.757.9

Operating Ratios (%) 65 46

6.13 The Zhengzhou-Wuhan line's electrification and upgrading has given abetter-than-expected impact on its traffic carrying capacity. The converted tkm (pkm plusfreight tkm) of 65.3 billion for 1993 have already surpassed, by 16 percent, the appraisalestimate of 56.3 billion for 1995. The financial performance is also far better thantargeted. The operating ratio for 1993 has already improved to 46 percent as comparedto the appraisal target of 65 percent in 1995. The revenues of Y 3,241 million for 1993are Y 2,346 million higher than the appraisal estimate of Y 894.7 million in 1995, whilethe costs are only Y 905 million higher. Even though the financial performance is good,MOR and the Administrations of Zhengzhou and Wuhan should focus on improving thetariff structure in order to ensure that operating costs are appropriately reflected in rates.

6.14 The income statement for the Changchun Passenger Coach Factory is givenin Annex 1, Table 3. Although this table shows that the converted number of passengercoaches manufactured has increased by 10 percent from 1,159 in 1988 to 1,272 in 1992,these quantities are not reliable because the conversion factor used in quantifying theproduction of coaches in terms of standard units is not accurate. The factor appears to betoo high, which may understate number of coaches actually manufactured. The financialperformance of the factory has not been the same as expected during appraisal. The

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headquarters in Beijing control the prices, and the factory management has no freedom insetting the sales prices to reflect cost. Although the working and operating ratios havebeen positive, they have been on the high side. While the operating costs have beenincreasing rapidly, the sales price adjustments have not been adequate. The averagerevenues and manufacturing costs per coach were:

1988 1989 1990 1991 1992

Average Revenue/Coach (Y'000) 230 266 373 397 405Average Manufacturing Cost/Coach (Y'000) 209 287 330 353 382Profit/(Loss) per Coach (Y'000) 21 (21) 43 44 23

The above figures indicate that the profit margin per coach was not high enough togenerate sufficient profit for paying interest and other expenses. MOR has been notifiedthat the pricing policy for this factory should be carefully reviewed and adjustments shouldbe made to improve the financial condition.

Economic Reevaluation

6.15 The economic analysis presented in this report is based on a reevaluation ofdata on traffic, operational performance, economic cost and project benefits of each of theproject components since the SAR estimates were made. The methodology used is similarto that used in the SAR and is summarized below. Briefly:

(a) all the investments costs (capital, coal mine development, 110 kV powerline and rolling stock) have been revised to 1994 prices and included in thecosts stream;

(b) the benefit streams, also in 1994 prices, consist primarily of the value addedto the economy from the incremental freight and passenger traffic madepossible by these project components and, in the case of the ChangchunPassenger Coach Factory component, the savings in major passenger coachoverhaul outlays; and

(c) a project life of 20 years has been assumed for all railway constructionfacilities.

6.16 As detailed in Annex 2, the Economic Rate of Return (ERR) for theZhengzhou-Wuhan Upgrading and Electrification component is 16 percent. Thecomparable figure estimated in the SAR was 24 percent. The ERR for the ChangchunPassenger Coach Factory component is 25 percent. For the reasons set forth in Annex 3,this result is not comparable to the ERR reported in the SAR. The overall ERR for bothcomponents taken together is equal to 16 percent.

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6.17 Other Project Components. Some of loan amount (about 2.6 percent) wasallocated to the other two components, namely for CARS and the MIS Study forimprovement of its facilities, railway managerial and operational efficiency. The resultsof these improvements are not quantifiable in monetary terms and, consequently, cost-benefit analysis of these investments cannot be undertaken in the usual manner. However,the benefits are expected to be large.

7. Project Sustainability

7.1 The sustainability of this project is supported by the results of sensitivityanalyses conducted for both components. In the case of the Zhengzhou-Wuhan Upgradingand Electrification corilponent, increasing the project costs and mine development costs by20 percent, respectively, had only a minimal impact on the ERR-lowering it from 16 to15 percent. Similarly, for the Changchun Passenger Coach Factory component, reducingthe benefits by 50 percent resulted in an ERR of 18 percent compared to a base case valueof 25 percent.

8. Bank Performance

8.1 Although the project did not progress well in the first five years, the Bankprovided very inadequate budget resources for supervision during those years. After aninitial mission in October 1985, there were only small Bank supervision missions until mid-1990, always carried out as limited supervision by a single person or in connection withother projects where the emphasis was on project preparation or appraisal. There was littleof "an implementation culture .... -to enable us to get results on the ground" (quotedfrom: Office of the President, FYI to all staff of May 11, 1994). Beginning in 1990,systematic and in-depth supervision addressed outstanding issues with an emphasis onagreeing with MOR and SPC that specific measures be taken by the railways to improveimplementation performance. The missions appear to have significantly contributed to thebetter progress of the project. Since then, supervision reports provide a clear picture andassessment of project progress and the reasons for delays in the past.

Lesson: The Bank should focus on supervision in the earlyyears of the project. This would mean more and carefullyselected field visits to the implementation agencies of MOR(and not just accepting desk reports at MOR), and acommitment to follow up at regular intervals.

8.2 The project achieved only some of its objectives. This underlines the needfor stronger ownership by the Borrower of future projects.

Lesson: At the very beginning of project preparation, theBank should establish a clear understanding with theBorrower of what should and can realistically be achieved ina given timeframe. A joint planning meeting with high-levelparticipants not only from MOR but also from SPC and other

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government bodies, which are involved in policy reform,could serve as a forum to discuss the Borrower's and theBank's objectives and possible scope of a new project andreach an early agreement on a common approach to itspreparation.

8.3 The content of the Bank's files as well as the supervision reports wereexclusively concerned with recording events-with little explanation why changes weremade and without analysis of their benefits. A kind of a "credit line approach," which isstill prevailing on the Borrower's side in several subsequent projects, appears to have beenthe accepted attitude of the Bank. Outstanding examples are the MIS component and thebringing forward of second phase of the CPCF component.

Lesson: The Bank should establish with MOR a procedureto properly record the Bank's agreement to changes of theproject scope that will affect the project as appraised.

8.4 MOR had no access to foreign exchange except through Bank and OECFfunds. As a direct consequence, the Bank had to deal with a very large scope ofprocurement accepting also small items not produced in China. The loan amount of $220million was disbursed through 255 contracts (292 items) ranging from $1,850 to $22.6million, at high administrative costs for the Bank. Indicative is that about 85 percent byvolume of the Bank's files relate to procurement.

Lesson: In future projects, the Bank should try to increasethe administrative efficiency in procurement by agreeing withMOR on Bank-financing of fewer but larger contracts forgoods to be imported.

9. Borrower Performance

9.1 The Borrower was the People's Republic of China, the Ministry of Railwaysits project executing agency. Overall, MOR's administrative performance was quite good,except for procurement and regular reporting. The fact that the second railway projectfollowed quickly after the first explains why there was little institutional experience duringthe first years. An MOF telex dated June 11, 1992 summarized the situation: "Duringthe initial period of its implementation, Railways II faced a lot of difficulties, includinginexperience by MOR staff in the World Bank's procurement procedures, lengthy internalreview process, change of design and technical specifications, etc., and as theconsequences, the project was much delayed. The Chinese Government, and in particular,its MOR, has recognized the important implications the delay had for this project ... andhas been taking serious efforts to address the problems. As a result, the overall situationhas been considerably improved, and we are confident that in future implementations, thedelay of this kind would be avoided." SPC appeared to have been the major stumblingblock in MOR's decision-making. Sometimes, MOR's proposals were effectively beingput on ice for weeks and months until an "agreement" had been reached. SPC's role

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affected mainly procurement, but also implementation of components when cost revisionshad to be made.

9.2 While the Bank did not focus enough on supervision in the early years ofthe project, MOR had some difficulty in coping with the requirements of being a projectexecuting agency until it belatedly installed FCTIO to rectify the shortcomings. Reportingwas weak, untimely and barely informative. Over the years, the Bank emphasized insupervision missions that reporting, especially quarterly reporting, had to be improved withregard to content and time. Remedial steps take by FCTIO improved the situationsomewhat but not yet to a satisfactory level.

Lesson: MOR should realize that adequate emphasis onimplementation of ongoing projects and feedback to the Bankare essential for the successful preparation of new projects.Further strengthening FCTIO should be considered.

10. Project Relationship

10.1 The Bank relationship with the Government and MOR was good. Bank staffwere always well received and their comments were respected and acted upon by theirChinese colleagues, both at MOR and the project subunits, who were very receptive tosuggestions.

11. Consulting Services

11.1 A foreign firm was successfully employed in modernization of theChangchun Passenger Coach Factory. Other technical assistance, however, failed partially(the CARS component), to a greater degree (the MIS study) or completely (MORuniversities). Chinese reluctance to use foreign consulting services to be paid out of loanfunds was the main underlying cause for abandoning the university component.

12. Project Documentation and Data

12.1 The Loan Agreement was well prepared and served its purpose adequately.The few covenants were appropriate; they were all complied with.

12.2 The SAR was clearly written and provided a useful framework for all partiesduring project implementation.

12.3 Information for the preparation of the PCR was provided by MOR and theChangchun Passenger Coach Factory. Some additional information was also obtainedduring supervision missions in October 1993 and May 1994, through extensive discussionswith MOR personnel and representatives of the Changchun Passenger Coach Factory.

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PART II: PROJECT REVEEW FROM THE BORROWER'S PERSPECTIVE

A. ZHENGZHOU-WUHAN LINE

2.1 Objectives of the Project. The Zhengzhou-Wuhan Line surpassing Henanand Hubei provinces is one of the busiest section in the Beijing-Guangzhou RailwayCorridor which connects the south and north of China. The Zhengzhou-Wuhan Linestarting at the Zhengzhou North Marshalling Yard in the north, the biggest one in the Asiato the Wuhan Terminal in the south, with total length of 547 km, plays very important rolein the Beijing-Guangzhou Corridor and even whole national railway network. Theconstruction of the project has ensured the commodity exchange between the north and thesouth, and promoted the development of industry and agriculture in the central China andimproved the transportation capacity of the railway network as a whole.

2.2 Evaluation on Decision Correctness. Along with the reform and openingto the outside world, as well as the development of the national economy, the existing linecapacity of Zhangzhou-Wuhan had been saturated, especially of the section betweenXingyang and Guangshui with gradient of 12.5 per thousand and surpassing the DabishanMountain at the border of the two provinces. The diesel locomotive was used for this linewith yearly carrying capacity of only 37 mil. tons. However, the down bound traffic in1984 had reached 41 mil. tons. Thus, the line became a bottleneck in Beijing-GuangzhouRailway Corridor. After the normal operation of the electrification line at the end of 1992,the yearly traffic carried has been more than 60 mil. tons and 22 pairs of passenger trainsper day. The constraints of transportation for this line has been relieved. All the abovehas demonstrated that the decision of the project is correct.

2.3 Implementation of the Project. In order to respond the requirements bythe government for reducing the investment on the capital construction projects, theoriginal design of the project had to be revised in the early years of projectimplementation, so as to reduce the total cost of the project, which caused two years delayon project completion, and changed the closing date of the loan to June 30, 1994. Theelectrification of Zhengzhou-Wuhan line was open to the traffic at the end of 1992. Themajor objective of improving the capacity for the line has been achieved.

2.4 Procurement. In the early years of project implementation, the progressof the procurement was rather slow. The reasons for such slippage was that the most ofstaffs involved in the procurement and loan management in MOR were new hands to theBank operation and not familiar with the procurement procedures. Furthermore, therewere no sound management system and smooth working channels within MOR. Therefore,in order to address these kinds of problems, MOR made a timely organizationrestructuring, and set up the Foreign Capital and Technical Import Office composed of theexperienced people. As a result, the procurement progress was improved. However, theloan was extended by two years due to the serious delays in the beginning of the projectimplementation, which is a lesson for us to draw.

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2.5 Construction Quality Evaluation. The future development for heavy hauland density, and high speed was considered in the design of Zhengzhou-Wuhan Line.Therefore, the high technology and full scale technical upgrading were applied not onlyon the track, yard, signalling, interlocking and blocking system, but also on the tractionand power supply system for the electrification in which new technology and equipments,and testing devices with the state-of-art technology were imported, and new technology of"V" type reverse operation was introduced first time in China Railway. The design andconstruction of the line had been satisfactory.

B. CHANGCHUN PASSENGER COACH FACTORY (CPCF)

2.6 Objectives of the project was to improve the quality and quantity ofpassenger coaches by way of upgrading the manufacturing technology and machiningequipment for the CPCF. The objective was fully achieved when the project wascompleted at the end of 1993.

2.7 Implementation of the Project. Based on the SAR, the CPCF project wasto be implemented by two phases. The loan of the railway II was only to finance thePhase I of the project. At the Phase I, the CPCF signed a TA contract with an UN-basedcompany for a feasibility study aiming to address the expansion of the production andproduct quality. It was also required by the contract to design a new kind of coach, andtrain the people of the factory on modem technology and management method so as to helpimprove the quality and quantity for the factory in the quickest way. Soon after thecompletion of the TA and in order to implement the recommendations by TA consultantsas soon as possible, MOR consulted with the Bank for shifting 5 mil. USD from thecomponent of China Academy of Railway Science to the CPCF project so as to merge twophases originally planned into one. The whole project was completed at the end of 1993.Although it was two years delay for the completion of the CPCF component, the objectivesof the two phases have been achieved, realizing the manufacturing capacity with 1,500coaches of new type per year. The fact shows the decision of the project is correct.

C. CHINA ACADEMY OF RAILWAY SCIENCE (CARS)

2.8 The purpose of construction of the track dynamic lab was to provide anecessary means of testing for China Railway to analyze and address the lower loadingcapacity of track structure, severe damage of components, too fast deterioration of trackgeometry, short service life of rail and switches, too often overhaul and scheduledmaintenance of the track, all which are the problems for the railway transportation withheavy haul, high density, heavy axle load and high speed. The project also aims toprovide a basis for the preparation of related technical policies, and revision andoptimization of the technical rules and criteria for track management.

2.9 The construction of the track dynamic lab has greatly enhanced thecapabilities of research and experiment on dynamics of track and rolling stocks for ChinaRailway, with a significance on research and improvement of the loading capacity of the

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track, skills of track maintenance, optimization of the technical rules and criteria for thetrack management, and enhancement of the technical level of the track.

2.10 A demonstration of the lab, just after its completion, was held in 1994 forthe foreign experts during then the International Railway Heavy Haul Conference inBeijing. The demonstration made impression on everyone.

2.11 The construction of computer aided simulation testing lab for locomotive androlling stocks has played an important role on improvement of design skill of locomotivesand rolling stocks, acceleration of the research time for developing rolling stocks with newmodels, upgrading of the old type locomotives and rolling stocks, so as to meet theincreasing demands for the transportation.

D. MANAGEMENT INFORMATION SYSTEM (MIS)

2.12 The purpose of the component was to help MOR set up a financial MIS atthe Mudanjiang Railway Subadministration as a pilot test and do some preparatory worksfor MOR's modernization of the transportation dispatching and operation management.After the completion of the component, Mudanjiang Subadministration, starting from theinformation management of transportation, finance and statistics and expanded tolocomotive, wagons, track maintenance, signalling and telecommunication, personnel andwages, education and office automation, has preliminarily possessed a cross-subadministration MIS.

2.13 Evaluation of the Lending Policy and Performance. The focus of theBank policies in terms of the medium and long term lending to the member countries arealways to help member countries improve the infrastructure on the energy andtransportation and develop their economy, which are compatible with China'srequirements. The implementation of the Bank financed railway project shows the Bank'spolicies are viable. However, the way of commitment charges needs to be furtherimproved so as to reflect some flexibilities. For example, the Bank could charge thecommitment fee just for the amount equivalent to 15 % of the total undisbursed amount ofthe loan for the first year after the effectiveness of the loan; 45% of the total undisbursedamount of the loan in the second year; 85% of the total undisbursed amount of the loanin the third year and 100% of the total undisbursed amount of the loan in the fourth year.The different commitment charges should be applied for the different projects withdifferent construction cycles. In this way, the charging system for commitment fee couldbe more reasonable.

2.14 Evaluation of the Bank Staff. The staffs sent by the Bank for thepreappraisal, appraisal, supervision and post evaluation all are diligent and hard-working,and sometimes the Bank staffs concerned their work more than their health, which won thehigh praise from MOR.

2.15 The World Bank missions came to China for supervision at least twice ayear, and often went to the construction site. The fact shows that the supervision did help

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the progress of the project implementation, bidding and procurement, implementation ofthe contract, project management and disbursement.

2.16 There were no issues related to the environment and resettlement in thecourse of the project impl'ementation.

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PART III: PROJECT STATISTICAL INFORMATION

Table 1: RELATED BANK LOANS AND/OR IDA CREDITS

[_Loan/Credit __Purpose _ Year of |_Status Comments| Tide I I Approval I I

Ln. 2394-CHA Construction of a 165 km single track from Xinxiang to Heze; 1984 Completed Closed 12/31/90First Railway capacity increase of the existing 140 km Heze-Yanzhou sec-Project tion; track doubling of a 127 km section of the Datong- PCR of 06/24/91

Taiyuan line; electrification of the 355 km Datong-Taiyuanline; doubling the production capacity of the Zhuzhou ElectricLocomotive Factory; technical assistance and training for thefactory staff; and undertaking a costing study (phase 1).

Cr. 1680-CHA/ Provision of additional capacity on the 456 km Chongqing- 1986 Completed Closed 06/30/95Ln. 2394-CHA Guiyang line and the 704 km Yingtan-Ziamen line; improve-Third Railway ment of technology and increase of production of the Xi'anProject Railway Signaling Factory; provision of track maintenance

equipment for better permanent way maintenance; and continu-ation of the traffic costing study started under the FirstRailway Project.

Ln. 2968-CHA Track doubling and panlial electrification of the 492 km 1988 In progress Current closingFourth Railway Yueshan-Xiangfan line; capacity expansion and quality date: 06/30/96Project improvement of three locomotive and rolling stock factories;

and development of a strategic plan for the capacity expansionof the Beijing-Shanghai line.

Cr. 2014-CHA/ Construction of a 937 km single track line; acquisition and 1989 In progress Current closingLn. 3060-CHA installation of operational equipment; and recruitment and date: 12/31/96Inner Mongolia training of staff to operate the line.Railway Project

Ln. 3406-CHA Rehabilitation and maintenance of 500 km of track, 200 loco- 1991 In progress Current closingFifth Railway motives and 6,000 rolling stock; double tracking of 594 km of date: 12/31/98Project the Zhengan line; expansion of the Xuzhou terminal; and car-

rying out an action program of implementation of the railwaycost accounting system.

Ln. 3581-CHA Electrification and modemization of the 694 km Beijing- 1993 In progress Current closingSixth Railway Zhengzhou line and the 1,094 km Chengdu-Kunming line; sys- date: 06/30/99Project temwide technological modemization for track maintenance

mechanization, telecommunications and a transport manage-ment information system, and container transport. The policycomponent comprises improvement of the efficiency of railwayinvestments, and the formulation and improvement of measuresto rationalize railway tariffs, modemization of MOR's account-ing standards and improvement of railway management andregulation. Technical assistance comprises the preparation andimplementation of action plans for expanding and modemizingcontainer transport, implementing more cost-effective railwaytechnology for capacity expansion, and strengthening MOR'senvironmental protection. .

Seventh Rail- Policy reform and institutional development to provide techni- 1995 /a Negotiated Current closingway Project cal assistance to implement railway restructuring reform, tariff date: 12/31/01

reform, and labor productivity enhancement. Investment com-ponents entail: electrification and modernization of the1,044 km Wuhan-Guangzhou line; expanding capacity system-wide (purchase of three-phase AC electric locomotives);upgrading telecommunications systems; modernizinginformation systems; commercializing container transport(purchase of equipment and technical assistance to establishand operate two or more container transport corporations); andprotecting the environment (polit-testing environmentalprograms and upgrading MOR's environmental managementsystem).

aScheduled for Board approval on June 1, 1995.

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Table 2: PROJECT TIMETABLE

Item Planned Revised Actual

First mentioned in files 03/11/82Government's application N/AProject Brief 03/13/84Preappraisal mission 00/04/84 03/28/84Appraisal mission 00/09/84 00/10/84 10/09/80Loan negotiations completed 04/05/85 04/12/85Board approval 05/20/85 05/14/85Loan signature -- 08/26/85Loan effectiveness -- 11/22/85Loan closing 06/30/92 06/30/94 06/30/94Loan completion 12/31/91 06/30/94 06/30/94

Source: Bank staff.

Table 3A: CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS($ millions)

IBRD FY 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Appraisal estimate 3.8 45.4 112.9163.4 214.0 235.0

Actual 14.6 24.9 41.4 76.4 115.2 146.0 181.3 213.6 219.5 219.7

Actual as % ofestimate 384.1 54.8 36.6 46.8 53.8 62.1 NA NA NA NA

Notes: (1) $15.00 million cancelled effective 04/22/91.(2) $332,177.71 canceled effective 11/03/94.(3) The final disbursement was made on 11/03/94.

Source: Bank staff.

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Table 3B: DISBURSEMENTS BY CATEGORY($ millions)

Allocation Actual AmountCategory at Appraisal Disbursed

Equipment and materials /a 208.00 216.41Consultant's services

and training 7.00 3.26Consultant's services

and overseas tours /b 0.00 0.00Unallocated 20.00 0.00

Total 235.00 219.67

/a $15.00 million cancelled effective 04/22/91; $332,177.71 canceled effective11/03/94.

/b This category was added on 03/21/91.

Source: Bank Staff.

Table 4: PROJECT IMPLEMENTATION

[ Appraisal Estimate] Revised Date J Actual or PCR Estimate

Zhengzhou-Wuhan 12/91 Essentially completed in 12/92. A fewUpgrading and items remained unfinished until early 1994.Electrification

Changchun 12/88 06/92 Completed by 12/93. Revised date due toPassenger Coach coalescing of the two phases.Factory

Chinese Academy 12/89 03/94of Railway Sciences

MIS study 12/88 02/93 Different pilot project completed by 11/92.Continuation of the MIS under the Sixthand Seventh Railway Projects.

MOR universities Not defined Not implemented

4 studies under N/A 12/91 04/92Railways V

Source: Staff Appraisal Report, MOR and Bank staff.

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Table 5A: PROJECT COSTS($ million)

Appraisal ActualLocal Foreign Total Local Foreign Total

Zhengzhou - Wuhan Line 224.2 180.0 404.2 310.9 188.1 499.0Changchun Coach Factory 1.3 7.2 8.5 7.2 15.3 22.5Academy 4.3 11.6 15.9 8.3 9.7 18.0MIS study 0.0 0.5 0.5 0.0 3.3 3.34 studies under Railways V 0.0 0.0 0.0 0.0 3.3 3.3

Total Base Costs /a 229.8 199.2 429.0 - - -

Physical Contingencies 19.8 4.8 24.6 - - -

Price Contingencies /a 71.4 43.9 115.4 - - -

Total Project Costs /a 321.1 248.0 569.1 326.4 219.7 546.1

/a Totals may not add up due to rounding.

Source: Staff Appraisal Report and MOR.

Table 5B: PROJECT FINANCING

Appraisal ActualGovernment Bank Government Bank

(Y mln) ($ mln) (Y mln) ($ mln)

Zhengzhou - Wuhan Line 1,086.3 176.2 1,464.7 188.1Changchun Coach Factory 21.6 7.2 29.1 15.3Academy 41.0 11.6 44.4 9.7MIS study 0.0 0.5 0.0 3.34 studies under Railways V 0.0 0.0 0.0 3.3Contingencies 184.9 39.5 - -

Total /a 1333.8 235.0 1,538.2 219.7

/a Totals may not add up due to rounding.

Note: 0.35 is exchange rate of 1 Yuan at appraisal.

Source: Staff Appraisal Report and MOR.

- 24 -

Table 6: PRoJEcr RESULTS

Economic Impact

Economic Rate of Return - %

AppraisalBase Estimate Actual

Zhengzhou - Wuhan Line Best estimate 24 161 /a 23 152 /b 23 153 /c 25 18

Changchun Coach Factory /d Best estimate 47 254 /e 37 18

Overall ERR 25 16

/a 20% increase of project costs.

/b 20% increase of coal mine development costs.

/c 20% decrease of coal mine development costs.

/d For reasons set forth in Annex 3, the actual ERR is not comparable to the ERRreported in the SAR.

/e 50% per year reduction of benefits.

- 25 -

Table 7: STATUS OF COVENANTS

[ Covenant | Subject Compliance Status

Section 3.03 Commence MIS study 1/31/1986 Complied with.The scope wasexpanded to includetransportation. Thework is now beinginterfaced with theproposed Seventh

l___________________________________________ ____________ R ailw ay Project.

Section 3.04 Carry out the training in accordance with a Complied withprogram agreed with the Bank except for TA for

MOR Universities.

Section 3.05 Carry out four studies (added on March 21, 12/31/1991 Complied with by1991) and furnish reports on those studies 04/92.

Section 4.01 (a) Maintain records and accounts adequate to Complied with.reflect, in accordance with sound accountingpractices, the operations and financial condi-tions of each of the Project Subunits

Section 4.01 (b) In respect of the accounts:

(i) have them, including Special Accounts, Annually Complied withaudited each fiscal year by independent auditors commencing since 1987.using appropriate auditing principles consis- 1986tently applied;

(ii) furnish, not later than six months after the 6/30/1986 Complied withend of each fiscal year, a certified copy of the and annually since 1987.audit report; thereafter

(iii) furnish other information concerning the Complied with.accounts as shall be from time to timerequested

Section 4.01 (c) For all expenses made on the basis of state-ments of expenditure:

(i) maintain separate records and accounts; Complied with.

(ii) retain all records until one year after the 6/30/1995 Not yet due.Closing Date;

(iii) enable the Bank's representatives to exam- Complied with.ine such records;

(iv) include the separate accounts in the annual Complied with.audit and submit a separate opinion by the audi-tors as to whether the proceeds of the Loanhave been used for the purpose for which theywere provided

Source: Bank staff.

- 26 -

Table 8: USE OF BANK RESOURCES

A. Staff Inputs

FY 1985 1986 1987 1988 1989 199(0 1991 1992 1993 1994 Total

Preparation/Preappraisal 21.8 21.8

Appraisal 71.1 71.1

Negotiations 7.0 7.0

Supervisioni 0.5 11.7 5.2 10.7 8.2 9.7 14.9 13.5 10.9 8.6 93.9

B. Mission Data

Stage of Month/ No. of Days in Specialization Performance Types ofProject Cycle Year Staff Field Represented /a Rating Status /b Problems /c

Preparation Oct 1982 5 8 EGR,ECN,FNA, 2CPreparation Jul 1983 9 10 EGR,ECN,FNA, 4CPreappraisal Apr 1984 9 20 EGR,ECN,FNA, 5CAppraisal Oct 1982 7 30 EGR,ECN,FNA, 3C

Supervision1. Oct 1985 3 7 EGR/FNA I ---2. Oct 1987 1 6 C [EGRJ n/a ---3. Mar 1988 1 5 C [EGRI n/a ---4. May 1989 1 3 EGR n/a ---5. Oct 1989 1 2 C IEGR] n/a ---6. Jun/Jul 1990 2 7 EGR/FNA 2 T, M, F7. OctVNov 1990 2 6 FNA,C [EGRI 2 T, M, F8. FebiMar 1991 2 5 FNA,C [EGRI 2 T, M, F9). Oct 1991 3 3 EGR/FNA/C [EGR] 2 T, M, F

10). May/Jun 1992 3 4 FNA,Cx2 [EGRI 2 T, M, F11. Nov 1992 3 5 FNA,Cx2 [EGRI 2 T, M, F12. Apr 1993 3 4 EGR/FNA/C [EGRI 2 T, M, F13. Oct 1993 3 5 EGR/FNA/C [EGRI 2 T, M, F14. Mav 1994 3 5 FNA,Cx2 [EGRI n/a M, F

/a C - Consultant, EGR = Engineer, ECN = Economist, FNA = Financial Analyst, ESP Environmental Specialist,MEC = Mechanical Engineering Consultant, MISC = MIS Consultant.

/6 I Problem-free of Minor Problems, 2 Moderate Problems.

/c T - Technical, M = Management. F = Financial, 0 = Other.

- 27 - ANNEX 1

INCOME STATEMENTS

1. The evaluation of MOR's financial performance should be seen in thefollowing context:

(a) Transfers to the Government consisted in 1984 and 1985 of an incometax of 55 percent on net revenues and a business tax of 5.35 percentapplied on gross operating revenues from base tariffs [see (b)]; from1986 to 1989 the transfer was a business tax only; from 1990 to 1993,transfers consisted of the business tax and an annual lump sum paymentof Y 2.0 billion; from 1991 [when the freight surcharge wasintroduced-see (b)] a 0.24 percent business tax on surcharge revenueswas applied in addition to the 5.35 percent business tax and the annuallump-sum transfer; since 1994 transfers are the two kinds of business taxand an income tax of 33 percent applied to net operating revenues frombase tariffs [see (b)];

(b) Railway revenues are, by Government decree, divided into two parts: thefirst is from base tariffs, which covers operating expenses and contributesto the net income of the railway's transport operation; the second comesfrom a Railway Construction Fund freight surcharge introduced in 1991,which is earmarked for capital investments and cannot be used to meetoperating expenses. This separation has served the Government's effortto control MOR's operating costs;

(c) Tariff increases consist of across-the-board increases and selectiveincreases. Until MOR became responsible for financing all of itsexpenditures in 1986, its tariffs had changed little since the mid-1960s.On September 1, 1989, average passenger fares were increased by 112percent; average freight rates were increased by 24 percent in March1990. On March 15, 1991, MOR was allowed to introduce a freightsurcharge of 0.2 fen per tkm; the surcharge was increased to 1.2 fen and2.7 fen per tkm on July 1, 1992 and July 1, 1993, respectively.Selective increases in freight rates (for example, new rates for new lines)and passenger fares (for example, higher fares during periods of highdemand in selected administrations) have taken place in 1994 and 1995;no across-the-board tariff increases were implemented since 1994;

(d) In 1986, the Government and MOR entered into an economic contractunder which MOR must finance all of its operating and capitalexpenditures (until 1984, capital expenditures were financed from the

- 28 - ANNEX 1

State budget as a grant; in 1985 the financing was a budget loan). Inreturn, MOR is allowed to keep its net income after transfers to theGovernment [see (a) above];

(e) In 1991, a Railway Law was enacted that lays down the powers andobligations of the central and local governments, MOR, the railwaycustomers (shippers and passengers), and the public at large, pertainingto railway construction, ownership, management, tariff-setting, andoperations (including service quality, passenger safety, and environmentalprotection). With regard to tariffs, adjustments of the base tariffs andfreight surcharge require approval from SPC/State Council. MOR'sflexibility in tanif setting is thus limited.

2. In July 1993, MOF issued new national accounting guidelines with theobjective to bring China's accounting system closer to international accountingstandards. In response to these new guidelines, MOR revised its accounting guidelines,classification of accounts and reporting in financial statements. MOR is developingaccounting policies for the railways, with the assistance of consultants, under RailwaysVI.

3. MOR has undertaken studies and developed tools to introduce financialand technical reforms in its operations. In the costing area, the costing manual hasbeen prepared under Railways V and a costing model was developed under RailwaysVI. This model has been used to underpin requests in tariff increases to SPC in 1994and 1995. In the area of investment planning, the initial Railway Investment Study wascompleted under Railways V and has been used to prioritize future investments in therailways; these results also supported the Government's decision in 1992 to raise theeconomic growth rate for infrastructure investment planning from 6 percent a year to 8-9 percent. In the technical area, six studies funded under Railways IV, V and VIfocused on technical improvements with systemwide implications, including itstelecommunications and information systems, maintenance and rehabilitation of tracksand locomotives and rolling stock, electrification, and heavy haul operations. MORapplied their findings in modernizing the railways.

4. Finally, several studies were launched under Railways VI to deal withtariffs and costing, accounting issues, as well as regulations, management concerns, andrestructuring. They provided a basis for: (a) rationalizing tariffs in the marketframework; (b) redefining the Government-railways relationship; (c) restructuring themonolithic railway organization into a number of profit-oriented, market-focusedenterprises; (d) bolstering the railways' treasury capability; (e) improving its laborproductivity; (f) rationalizing its diversified businesses; (g) reforming its housingsystem; and (h) enhancing its human resources. Some of the studies' results supportthe Bank's reform assistance under Railways VII.

Table 1: AcTuAL AND FORECAST CONSOLIDATED INCOME STATEMENTSFOR THE TWELVE MONTHS ENDING DECEMBER 31

(in Y million)

1984 1984 1985 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995Appraisal Actual Appraisal Actual Actual Actual Actual Actual Actual Actual Actual Actual Forecast Forecast

VOLUTMEt're-gnt (tkm bil.) 693 724 724 809 870 946 986 1,037 1,048 1,081 1,141 1,192 1,241 1,303Passenger (pkm bil.) 190 203 203 241 258 284 326 303 260 281 313 348 360 380

Total (ctkm bil.) 883 927 927 1,050 1,128 1.230 1,312 1.340 1.308 1,362 1,454 1,540 1,601 1.683

REVENUESPREITlT 11647 13.215 12 171 15:773 17.707 19,186 19,925 22,007 27.213 31,139 39.229 58,402 68.876 72 317

From rates fft-47 T2,Zl 7 IZ,1/1 TT7952/ I7h213 14i JUt52 3 5 33U3 9 0 3,LTFrom surcharge - - - - - - - - - 1,996 8,604 24,347 33,507 35,181

PASSENGERS 3,377 3,663 3,613 4,545 4,999 5,563 6,381 7,665 11,090 12,180 13,814 15,882 17,172 25,726

OTHER 742 871 764 1,072 1,205 1,463 1,756 1,935 2,802 3,385 3,428 6,010 6,280 6,594

TOTAL OPERATING REVENUES 15.766 17,749 16,548 21,390 23,911 26,212 28.062 31,607 41.105 46,704 56.471 80.294 92,328 104,637

EXPENSESUJFERATING EXPENSES

Payroll 1,286 1,291 1,404 1,571 2,582 2,897 3,444 3,905 4,277 5,566 7,400 9,500 11,487 13,555Materials 1,060 1,067 1,113 1,361 1,553 1,820 2,598 2,870 3,258 3.772 4,825 6,777 7,209 8,002Energy. 1,763 1,781 1,955 2,253 2,596 2,644 3,075 3,383 3,846 4,351 5,393 8,513 10,597 13,246Electi ciy - - - - - 389 530 740 897 1,023 1,290 2,285 3,259 4,497Major Repairs 2,103 2,159 2,226 2,510 2,993 3,314 3,414 5,874 6,527 7,277 8,085 8,915 11,435 13,207De1reciation 1,803 2,159 1,908 2,510 2,993 3,314 3,414 3,924 4,356 4,864 5 402 5,943 6,448 7 996Oither 678 721 738 943 2.437 2,912 3,797 4,286 4,646 5,656 3,416 5,708 6,711 7 986 k)Inflation 143 - 319 - - - - - - - - - - -

TOTAL OPERATING EXPENSES 8,836 9,178 9.663 11,148 15,154 17.290 20,272 2 27, 32,509 35,811 47.641 57146

OPERATING INCOME 6 930 8 571 6.885 10,242 8.757 8,922 7790 6,625 13.298 14,195 20.660 32.653 35.182 36.148

Nonoper,ati,ng Income from 263 (506) 271 (478) 849 992 865 479 200 49 237 399 400 410subsidiaries & factories

NONOPERATING EXPENSESInterest - - - - - 992 754 1,871 1,940 2,115 1,763 3 092 4 534 6,448Nonoperating expenses 686 - 747 - - - - - - - 3,815 4,445 3,080 3,480

INCOME BEFORE TAXES 6.507 8.065 6 a49 9.764 9.606 8.922 7.901 5,233 11.558 12,129 15,19 25.515 27,968 26,63Business tax 2,365 2,662 2,482 3,368 1,265 1,382 1,487 1,675 2,188 2,499 2,693 3,130 (1,005) (1,055)Income tax 2,278 2,971 2,160 3,517 - - - - - - - - - -Transfers to gov't 765 - 780 - - - - - 2,000 2,000 2,000 2,000 - -

NET INCOME 1,099 2.432 987 2,879 8,341 7,540 6.414 3,558 7 370 7.630 10,626 20,385 28,973 27.685

Of which allocated to:Retained Profits 1,099 2,432 987 2,879 8,341 6,121 4,952 2,258 5,870 4,111 3,907 (734) (2,911) (4,355)SpeiLal Fund for Health & Welfare-- - - - 1.419 1,462 1,300 1,500 1,630 ----Cway Construction Fund - - - - - - - - - 1,889 6,719 21,119 31,884 32,040

Working Ratio:Netl oTSurcharge Revenues 45% 40% 47 40% 51% 53% 60% 67% 57% 62% 64% 75% 86% 87%Including SItrharge Revenues 45% 40% 47% 40% 51% 53% 60% 67% 57% 59% 54% 52% 55% 58%

Operatin tio: ZNetofSurcharge Revenues 56% 52% 58% 52% 63% 66% 72% 79% 68% 73% 75% 85% 97% 99% riIncluding Surcharge Revenues 56% 52% 58% 52% 63% 66% 72% 79% 68% 70% 63% 59% 62% 65%

Source. MOR and Bank staff, November 1994.

Table 2: LINE GROSS OPERATING REVENUE AND COST (1993)WITH AND WrrHoUr PROJECT

(Y million)

Salaries Energy Others Maior repairs Depreciation TotalW/out With W/out With W/out With W/out With W/out With W/out With

1. Operation:Steam locomotive P 0.67 0.67 0.89 0.89 0.06 0.06 - - 0.29 0.29 1.91 1.91

F 9.69 9.69 19.94 19.94 1.7 1.7 - - 1.57 1.57 32.9 32.9 IGross Operating Revenue Without WithDiesel locomotive P 3.44 8.26 86.4 2.46 1.4 0.07 - - 4.53 0.75 95.77 3.54

F 9.45 2.2 251.6 28.06 0.83 0.34 - - 21.42 3.04 283.3 33.64 JFreight traffic (bin tkm): 46.14 53.60Electric locomotive P - 2.62 - 25.38 - 2.02 - - - 3.73 - 35.75

F - 6.29 - 172.74 - 11.49 - - - 14.93 - 205.45 JUnit revenue (fen/tkm): 5.35 5.35Passenger coaches P 2.0 1.6 1.53 0.93 10.34 8.59 - - 13.41 10.67 17.28 21.79 lGross Freight RevenueFreight cars F - - - - 132.3 106.03 - - 45.6 33.52 177.9 139.55 1 (Y mln): 2,468.40 2,867.60Train operations P 10.3 9.76 0.7 0.5 0.34 4.88 - - - - 17.34 15.14

F 5.32 4.25 - - 12.53 9.93 - - - - 17.85 14.18 IPassenger Traffic (bin pkm): 8.97 11.67Power facilities P 0.31 2.06 1.51 10.36 0.8 2.29 - - 0.01 0.26 2.63 14.97

F 1.42 8.27 3.3 39.77 1.4 9.15 0.2 1.05 6.32 58.22 lUnit Revenue (fen/pkm): 4.43 4.43Subtotal - P 16.72 16.97 90.33 42.52 18.94 17.91 18.24 15.7 144.23 93.10 1

Operations F 25.88 30.7 274.84 260.49 I48.76 138.64 68.79 54.11 518.27 483.94 IGross Pass. Revenue (Y min): 397.30 56.9811. Stations & P 12.30 10.02 1.60 1.43 11.61 9.25 - - - 25.51 20.70 1Total freight & passenger

Thermals F 53.43 4.49 8.34 7.21 42.5 37.02 - - - - 104.27 89.13 Jrevenue (Y mmn): 2,865.70 3,384.58111. Maintenance

Steam locomotive P 0.38 0.38 0.03 0.03 1.13 1.13 - - - - 1.54 1.54F 4.77 4.77 0.23 0.23 4.54 4.54 1.55 1.55 - - 11.09 11.09 ISales tax (15%. Y mln): 121.51 143.51

Diesel locomotve P 4.51 2.80 20.68 0.19 26.4 11.21 5.45 3.83 - - 57.04 18.03F 9.43 6.65 21.83 1.02 66.8 44.8 21.37 15.33 - - 199.43 47.87 INet sales revenue (Y mln): 2.744.19 3,241.07

Electric P - 0.26 - - - 1.56 - 0.34 - - - 2.16locomotive F - 1.51 - - - 6.31 - 3.21 - - - 11.03

Operation P - - - - 2.3 10.62 - - - - 2.3 10.62facilities F - - - - 4.15 28.54 - - - - 4.15 28.54

Passengercoaches P 4.53 3.66 0.93 0.69 0.43 6.18 11.4 8.22 - - 25.29 18.75Freight cars F - - - - 3.54 2.36 42.3 34.47 - - 45.84 36.83Track & per- P 4.03 4.24 0.31 0.35 16.3 17.22 15.14 18.63 14.8 15.02 50.58 55.46

manent way F 18.93 21.24 1.34 1.82 65.4 68.89 63.51 74.53 65.31 69.87 214.49 236.35Teleconim. & P 1.91 1.95 0.54 0.69 4.1 4.47 1.1 1.3 1.02 1.22 8.67 9.63

signaling F 8.92 9.80 2.13 2.47 15.4 17.89 4.13 5.23 4.14 4.96 34.72 40.35Buildings P 0.7 0.95 0.07 0.09 1.43 2.23 2.45 3.39 2.1 3.28 6.75 9.94

F 2.84 3.21 0.31 0.42 5.32 11.05 8.31 13.61 9.4 13.13 26.19 39.35Miscellaneous P - - - - 13.43 12.49 5.15 4.72 1.36 0.89 19.94 18.10

F - - - - 21.31 19.27 15.76 14.06 2.93 2.61 40.0 35.94Subtotal - P 16.06 14.24 22.56 2.04 73.52 67.11 40.69 38.43 19.28 20.41 172.11 144.23

Maintenance F 44.89 47.18 25.84 5.96 186.46 201.65 156.93 161.99 81.48 90.47 495.90 507.25Overhead P 7.41 6.25 0.3 0.06 19.32 17.03 - 5.14 5.32 32.17 27.66

F 37.86 31.3 0.52 0.28 74.36 68.17 - - 24.23 17.31 136.97 117.06Total P 52.49 47.48 114.79 46.05 123.39 111.3 40.69 40.43 42.66 40.43 374.02 285.69

F 162.06 154.08 309.54 277.94 452.08 445.48 156.45 161.99 174.8 161.99 1,255.41 1,197.48Total Passenger &

Freight Cost 214.55 201.56 424.33 319.99 575.47 556.78 197.62 202.42 217.46 202.42 1,629.43 1.483 17Net Operating Revenue 1.114.76 1.757.90

Source: MOR, September 1994.

- 31 - ANNEX 1

Table 3: CHANGCHUN PASSENGER FACToRY:CONSOLIDATED INCOME STATEMENT, 1985-92

(Y million)

Item 1985 1986 1987 1988 1989 1990 1991 1992

No. of cars produced/a - - - 1,159 1,130 1,081 1,054 1,272Gross revenues 166.01 186.90 229.84 277.24 333.24 414.14 437.42 533.55Sales tax 8.27 9.25 9.46 10.66 12.43 10.86 18.17 18.11Net sales revenue 157.74 177.65 220.38 266.58 300.81 403.28 419.25 515.44Working expenses 126.17 144.67 190.61 231.29 312.93 343.43 356.49 468.91Other expense - 0.06 0.09 0.11 0.12 0.10 0.35 0.30Subtotal - Working expense 126.17 144.73 190.70 231.40 313.05 343.53 356.84 469.21Basic depreciation 8.18 9.13 9.72 10.41 11.32 13.48 15.41 17.80Total operating expense 134.35 153.86 200.42 241.81 324.37 356.99 372.25 487.01Net operating revenues 23.39 23.79 19.96 24.77 -3.56 46.29 47.00 28.43Nonoperating revenues - - - - - - - -

Other revenues - - - - - - - -

Total operating revenues 23.39 23.79 19.96 24.77 -3.56 46.29 47.00 28.43Nonoperating expenses 2.33 2.69 4.47 6.72 7.66 9.57 10.34 12.25Interest 0.55 1.04 2.44 3.04 7.50 14.45 9.37 8.05Profit before tax 20.51 20.06 13.05 15.01 -18.72 22.27 27.29 8.13Income tax - - - - - - - -

Profit after tax 20.51 20.06 13.05 15.01 -18.72 22.27 27.29 8.13Working ratio (%) 79.99 81.47 86.53 86.80 97.58 85.18 85.11 91.00Operating ratio (%) 85.17 86.61 90.94 90.71 101.11 88.52 88.79 95.00Net fixed assets 91.51 98.86 105.83 115.08 122.94 161.37 179.09 193.87Actual rate of return 26 24 20 22 -3 29 26 19Estimated rate of return (SAR) 21 25 30 32 25 29 34 42

/a Converted production.

Source: MOR, September 1994.

-32 - ANNEX 2

ECONOMIC REEVALUATION OF ZHENGZHOU-WUHANTRACK UPGRADING AND ELECTRIFICATION

Project Capital Costs

1. All capital costs have been revised to 1994 prices for both the PCR andSAR.

2. The development of a conversion factor for the PCR's project capitalcosts is shown in detail in Table 2.1. The foreign cost has been converted to Yuan byusing an 8.7 shadow exchange rate. The resultant conversion factor for this projectcomponent is 0.95.

3. The PCR economic project costs are 30.7 percent higher than thosereported in the SAR (adjusted to comparable 1994 prices levels). The details arereported in Table 2.2a and are summarized on a year-by-year basis as follows:

ECONOMIC PROJECT CAPITAL COST(Million Yuan)

SAR PCRYear 1984 prices 1994 prices 1994 prices

1986 164.2 288.1 76.51987 376.9 620.1 181.21988 278.3 412.2 246.41989 245.2 342.3 410.41990 221.2 290.9 564.31991 11.6 14.6 611.61992 - - 230.41993 82.91994 - - 168.6

Total 1.297.4 2,572.3 2,572.3

Difference + 30.7%

- 33 - ANNEX 2

4. The increased economic project costs are attributable to two majordevelopments: (a) subsequent changes and additions to the initial design that resulted ina scope of work considerably larger than the plan that was evaluated at appraisal (seeTable 2.2b); (b) budgetary constraints that precluded MOR from adhering to theoriginal implementation schedule-a factor that shifted the project to a later periodmarked by higher-than-anticipated cost inflation.

Other Capital Costs

5. This railway development is part of an integrated coal production anddistribution system. All coal transport-related capital costs, therefore, should beconsidered within the cost stream. The detail comparisons are in Table 2.2 andsummarized as follows:

(a) Coal Mine Investment Costs. The economic cost is calculated atY 653.0/ton/year, on the basis of an investment model described in theSixth Railway Project and updated to 1994 prices in the Seventh RailwayProject (December 1994). This value is about 60 percent higher than thecorresponding figure used in the SAR (Y 407.3/ton/year at 1994 prices).As in the SAR, coal mine development is assumed to be spread equallyover the five years prior to production increments. With respect tovolume, current projections call for incremental traffic on the line togrow to 33.83 million tons by 2015 or almost 30 percent less than the47.8 million tons indicated in the SAR. Taken together, the higher costof creating new production and lower volume estimate yields an overallamount for mine investment in the PCR that is 25.5 percent higher thanin the SAR. The detailed calculations are shown in Table 2.3 andestimated in Table 2.2a.

(b) 110 kV Power Line. Current costs in the SAR and the PCR have beenconverted to 1994 constant economic prices. The investment on this itemhas been delayed by five years, and the actual total investment is53.7 percent lower than the SAR estimate.

(c) Equipment and Rolling Stock. The financial and economic prices (as ofJanuary 1, 1994) for freight locomotives (electric and diesel) and forfreight wagons are presented in the table below (these data are reportedin the Seventh Railway Project). According to MOR, 114 electric unitshave replaced a comparable number of diesel locomotives on the projectroute. Consequently, only the difference in their respective economiccosts properly are attributed as a complementary cost to the project. Toaccommodate the incremental freight traffic, MOR indicates that 1,185wagons have been acquired. Since the project is not expected to result inaltering the volume the volume of passenger traffic, no complementaryequipment costs (or benefits) have been quantified for passenger coaches.

-34 - ANNEX 2

Taken together, equipment and rolling stock outlays are 81 percent lowerthan the SAR estimate (see Table 2.2a).

Financial Economic Unit Total cost-------- (Y million) -------- (net increase) (Y million)

Locomotives:1. Electric 5.7 7.42. Diesel 3.1 4.0

Net (1)-(2) 3.4 114 387.60

Wagons 0.133 0.159 1,185 187.94

Total 575.54

Project Benefits

6. Traffic. Actual traffic performance was lower than the SAR forecast(Table 2.4). The future growth of coal transport is also expected to be lower than theSAR estimate due to the completion of two other railways within the next three years(Jiaocheng railway in 1995 and Jingjiu railway in 1997). The total traffic of therailway, however, is expected to reach its designed capacity of 70 million tons per yearin the year 2011.

7. Coal Value-Added. All the coal transported by the railway over theproject route is for consumption by domestic users. Therefore, the economiccontribution of coal is considered to be much greater within the domestic economy thanas an export item. Utilizing the coal investment model referred to above, and allowingfor capital recovery (depreciation), the value of the induced traffic made possible bythis project is calculated at Y 131 per ton in 1994 prices (see Working Paper 24,Railways VII-China, p. 3 and Working Paper 22, Railways VI-China, p. 4). Thisfigure is applied to the incremental traffic delineated in Tables 2.2a and 2.3 to yield thebenefits reported in Table 2.5.

8. Nonquantified Benefits. Additional benefits-and hence a highereconomic rate of return-are associated with the lower operating and maintenance costsof electric as contrasted with diesel locomotives. Because adequate data are notavailable, these savings have not been quantified here (as well, theses benefits were notdocumented in the SAR). Furthermore, from an environmental perspective, thebenefits of electrification also are of consequence. This is particularly evident in

- 35 - ANNEX 2

maintenance shops where a serious environmental problem-the disposition of wastediesel oils-is avoided by the substitution of electric units.

Least-Cost Alternatives for Electrification

9. Without electrification of the existing railway, the congestion of therailway line will lead to the building or upgrading of a new nonelectrified railway lineto meet the traffic demand. The capital cost of such an alternative will be much higherthan electrification of the existing facility (see Railways VII SAR, Corridor ExpansionComponent).

Reevaluated Economic Rate of Return (RERR) and Sensitivity Analysis

10. Based on all the inputs stated above, the detailed RERR and sensitivityanalysis of this railway line, in comparison with the SAR, are shown on Table 2.5 andsummarized as follows:

SAR PCR

Best estimate 24% 16%

Project cost:20% Increase 23% 15%

Coal mine developmentcost:

20% Increase 23% 15%20% Decrease 25% 18%

-36 - ANNEX 2

Table 2.1: ZHENGZHOU-WUHAN LINE: PRICE CONVERSION FAcrOR(Y million)

Conver-sion Financial - Current Shadow priced Econornic - 1994factor Local Foreign Total Local Foreign Total Local Foreign Total

Land 0.80 189.63 0.00 189.63 151.70 0.00 151.70 222.79 0.00 222.79Labor:

Unskilled 0.54 106.67 0.00 106.67 57.60 0.00 57.60 84.59 0.00 84.59Semiskilled/Technician 0.80 105.18 0.00 105.18 84.14 0.00 84.14 123.57 0.00 123.57Supervisor 2.00 74.07 0.00 74.07 148.14 0.00 148.14 217.56 0.00 217.56

Materials:Steel 1.00 44.44 299.10 343.54 44.44 299.10 343.54 65.26 309.13 374.39Timber 1.00 19.26 31.09 50.35 19.26 31.09 50.35 28.29 32.13 60.42Cement 1.00 38.52 65.93 104.45 38.52 65.93 104.45 56.57 68.14 124.71Sand 0.80 5.93 0.00 5.93 4.74 0.00 4.74 6.96 0.00 6.96Stone 0.80 162.96 0.00 162.96 130.37 0.00 130.37 191.46 0.00 191.46Bitumen 1.00 1.48 0.00 1.48 1.48 0.00 1.48 2.17 0.00 2.17Others 0.80 103.70 1.61 105.31 82.96 1.61 84.57 121.83 1.66 123.49

Fuel:Diesel 1.00 10.37 0.00 10.37 10.37 0.00 10.37 15.23 0.00 15.23Gasoline 1.00 14.81 0.00 14.81 14.81 0.00 14.81 21.75 0.00 21.75Heavy oil 1.00 1.48 0.00 1.48 1.48 0.00 1.48 2.17 0.00 2.17Others 1.00 8.89 0.00 8.89 8.89 0.00 8.89 13.06 0.00 13.06

Electricity 2.00 37.04 0.00 37.04 74.08 0.00 74.08 108.79 0.00 108.79Water 1.00 14.81 0.00 14.81 14.81 0.00 14.81 21.75 0.00 21.75Construction 0.80 204.44 0.00 204.44 163.55 0.00 163.55 240.19 0.00 240.19Mechanical equipment 1.00 263.70 138.30 402.00 263.70 138.30 402.00 387.27 142.94 530.21Others 0.80 74.09 0.00 74.09 59.27 0.00 59.27 87.04 0.00 87.04

Total 1,481.5 536.0 2 017.5 1,374.3 536.03 1.910.3 2.018.3 554.0 2 572.3

Overall conversion factor 0.95

-37 - ANNEX 2

Table 2.2a: ZHENGZHOU-WUHAN LINE: COAL TRAFFIC ANDECONOMIC COST COMPARISONS

(Y million)

Traffic(million tons) Project Capital Cost Mine Investment 110 kV Power Line Rolling Stock

Incre- SAR PCR SAR PCR SAR PCR SAR PCRYear SAR PCR mental 1984 1994 1994 1984 1994 1994 1984 1994 1994 1984 1994 1994

1986 37.0 32.08 164.2 288.1 76.5 141.5 325.9 0.0 0.0 0.0 0.0 0.0 0.0 0.01987 37.0 33.80 376.9 620.1 181.2 187.7 432.3 0.0 21.2 48.8 0.0 23.6 54.3 0.01988 37.0 34.39 278.3 412.2 246.4 211.5 487.1 3.3 21.2 48.8 0.0 23.6 54.3 0.01989 37.0 36.01 245.2 342.3 410.4 235.4 542.1 344.8 21.2 48.8 0.0 23.6 54.3 0.01990 37.0 36.21 221.2 290.9 564.3 260.8 600.6 703.9 21.2 48.8 0.0 184.5 424.9 0.01991 45.9 33.81 11.6 14.6 611.6 144.7 333.2 743.1 0.0 0.0 0.0 0.01992 48.8 36.17 230.4 98.6 227.1 743.1 36.8 60.1 138.4 575.51993 50.3 36.27 0.10 82.9 74.7 172.0 818.2 54.1 35.0 80.6 0.01994 51.8 41.50 5.33 168.6 50.9 117.2 515.9 37.6 86.6 0.01995 53.4 47.00 10.83 25.4 58.5 197.2 39.7 91.4 0.01996 55.0 47.60 11.43 0.0 0.0 288.6 40.7 93.7 0.01997 52.8 48.20 12.03 0.0 0.0 417.9 16.4 37.8 0.01998 50.8 48.80 12.63 0.0 0.0 489.8 17.6 40.5 0.01999 48.8 49.40 13.23 0.0 0.0 587.7 18.8 43.3 0.02000 46.8 50.02 13.85 0.0 0.0 684.3 20.1 46.32001 45.8 52.02 15.85 33.4 76.9 666.1 21.5 49.52002 47.9 54.60 18.43 73.2 168.6 613.2 23.0 53.02003 50.0 56.30 20.13 116.1 267.4 621.0 24.6 56.72004 52.3 58.40 22.23 160.6 369.9 606.0 26.4 60.82005 54.6 60.50 24.33 208.3 479.7 594.2 28.8 66.32006 57.1 62.22 26.05 222.7 512.9 508.0 30.2 69.52007 59.6 63.99 27.82 233.8 538.4 392.5 32.3 74.42008 62.3 65.81 29.64 244.9 564.0 273.6 34.4 79.22009 65.1 67.68 31.51 256.1 589.8 151.5 68.7 158.22010 68.1 69.60 33.43 265.6 611.7 26.1 67.8 156.12011 71.1 70.00 33.83 217.9 501.8 0.0 70.0 161.22012 74.3 70.00 33.83 167.0 384.6 74.7 172.02013 77.7 70.00 33.83 112.9 260.0 79.0 181.92014 81.2 70.00 33.83 57.3 132.0 80.7 185.82015 84.8 70.00 33.83 0.0 0.0 87.3 201.0

Total 1,297.4 1,968. 2,572. 3,801.0 8,753.7 10,990. 84.8 195.2 90.9 1,290.7 2,972.0 575.5

Average growth,% p.a.

1993-2015 3.8 3.6

SARIPCR (1994 prices) 30.7 25.5 -53.4 -80.6

-38 - ANNEX2

Table 2.2b: ZHENGZHOU-WuHAN LiNE: QUANTrrY OF MAJOR WORIS(Y million)

SAR PCR ChangeUnit (Plan) (Actual) in %

Earthwork mln m3 1.67 2.40 +43.7

Masonries min m3 0.21 0.28 +33.3

Bridges and culverts meter 3,035 3,996 +31.7

Land mu 1,586 1,821 +14.8

Rails laid km 80.80 89.20 +10.4

Turnout laid set 170.00 225.00 +32.4

Ballast laid min m3 0.25 0.37 +48.0

Buildings miln m2 0.20 0.23 + 15.0

Table 2.3: ZHENGZHOU-WUHAN LINE: INVESTMENT iN COAL MINNG(Y million, 1994 prices)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ecn. coal mine dev. cost (Y/ttyr.): Distribution by years:1992 /a 500.0 1st. 2nd. 3rd. 4th. 5th1994 Lb 653.0 326.5 20% 20% 20% 20% 20% 1/2 yr.

Annual Traffic (million tons) 36.17 36.17 36.17 36.17 36.17 36.27 41.50 47.00 47.60 48.20 48.80 49.40 50.02 52.0254.60 56.30 58.40 60.50 62.22 63.99 65.81 67.68 69.60

Incremental Traffic (million tons) 0.00 0.00 0.00 0.00 0.10 5.23 5.50 0.60 0.60 0.60 0.60 0.62 2.00 2.58 1.70 2.10 2.10 1.72 1.77 1.82 1.87 1.92

Mining Investment (Y mln) 16.3 3.3 3.3 3.3 3.3 3.31,707.6 341.5 341.5 341.5 341.5 341.51,795.8 359.2 359.2 359.2 359.2 359.2

195.9 39.2 39.2 39.2 39.2 39.2195.9 39.2 39.2 39.2 39.2 39.2195.9 39.2 39.2 39.2 39.2 39.2195.9 39.2 39.2 39.2 39.2 39.2202.4 40.5 40.5 40.5 40.5 40.5653.0 130.6 130.6 130.6 130.6 130.6842.4 168.5 168.5 168.5 168.5 168.5555.1 111.0 111.0 111.0 111.0111.0685.7 137.1 137.1 137.1137.1 137.1685.7 137.1 137.1137.1 137.1 137.1561.6 112.3112.3 112.3 112.3 112.3577.9 115.6 115.6 115.6 115.6 115.6594.2 118.8 118.8 118.8 118.8 118.8610.6 122.1 122.1 122.1 122.1 122.1626.9 125.4 125.4 125.4 125.4 125.4130.6 26.1 26.1 26.1 26.1 26.1

0.0 0.0 0.0 0.0 0.0

Total (million Yuan) 3.3 344.8 703.9 743.1 782.3 818.2 515.9 197.2 288.6 417.9 489.8 587.7 684.3 666.1613.2 621.0 606.0 594.2 508.0 392.5 273.6 151.5 26.1

/a Railway 6, Vol. 2, Febnuruy 1993. Working Paper 22, p. 4./b Railway 7, Vol. 2, December 1994, Working Paper 24, p. 3.

-40 - ANNEX 2

Table 2.4: ZHENGZHOU-WUHAN LNE: ACTUAL FREIGHT TRAFFiC (1985-93)(Million tons)

Zhengzhou-bei Zhengzhou Mengmiao Luohe Xinyang Guangshui Jiang'an Mengmiaoto to to to to to to to

Zhengzhou Mengmiao Luohe Xinyang Guangshui Jiang'an Wuchang Pingdingshan

1985 Up 15.70 22.97 23.44 23.14 21.60 21.02 23.65 15.30Down 34.66 37.69 49.94 45.62 42.23 42.02 40.83 3.22

Coal 20.12 21.05 32.24 29.42 27.02 26.78 22.81 13.64

1986 Up 28.21 25.62 24.60 23.94 22.13 21.52 25.32 15.53Down 37.83 41.09 52.41 47.91 44.68 44.37 42.46 2.83

Coal 20.25 21.79 32.08 29.19 26.98 26.67 22.50 12.94

1987 Up 29.60 26.55 25.92 25.20 23.57 22.89 23.98 14.99Down 41.87 45.13 56.76 52.65 49.21 48.89 42.98 2.52

Coal 21.91 22.93 33.80 31.47 29.18 28.78 23.53 13.30

1988 Up 30.41 27.23 26.65 26.01 24.30 23.58 26.31 14.37Down 44.90 48.09 59.86 55.55 52.02 51.28 47.62 1.70Coal 21.83 23.03 34.39 31.07 29.36 28.99 24.48 13.38

1989 Up 33.12 29.69 28.76 28.72 27.12 26.50 29.57 14.62Down 46.46 50.15 62.23 57.67 53.74 53.50 50.07 1.68Coal 22.79 34.25 36.01 33.20 30.15 29.85 25.38 13.60

1990 Up 32.15 28.74 27.86 27.61 26.12 25.76 29.36 14.40Down 47.86 51.77 63.22 59.62 56.44 56.10 53.50 1.80Coal 23.59 25.24 36.22 34.03 31.58 31.25 26.98 13.49

1991 Up 34.84 30.76 29.59 29.25 27.81 27.37 31.20 14.49Down 46.84 50.69 62.35 59.48 56.97 56.69 54.70 1.48Coal 21.80 22.85 33.81 32.02 30.07 29.16 25.61 13.35

1992 Up 35.32 31.80 30.63 30.37 28.90 28.66 32.69 14.49Down 54.93 55.03 67.29 64.65 62.23 61.95 59.35 3.36

Coal 22.49 24.81 36.17 34.66 32.85 32.59 27.48 17.85

1993 Up 35.60 31.90 31.00 31.00 29.90 29.50 33.00 15.20Down 51.60 56.50 68.00 56.10 63.50 63.50 63.50 3.20

Coal 21.05 23.99 36.27 34.55 32.92 32.68 27.54 14.72

Source: Ministry of Railways.

-41- ANNEX 2

Table 2.5: ZHENGZHOU-WUHAN LINE: REEVALUATED ECONOMIC RATEOF REruRN (REER) AND SENSITIVITY ANALYSIS

(Y million, 1994 prices)

Best estimate Sensitivity AnalysisCosts Benefits Net Project

Project Mine 110 kV Rolling (value cash costs Mine develovment costsYear costs development line stock Total added) flow (+20%) (+20%) (-20%)

1986 76.5 0.0 0.0 0.0 76.5 (76.5) (91.8) (76.5) (76.5)1987 181.2 0.0 0.0 0.0 181.2 (181.2) (217.4) (181.2) (181.2)1988 246.4 3.3 0.0 0.0 249.7 (249.7) (298.9) (250.3) (249.0)1989 410.4 344.8 0.0 0.0 755.2 (755.2) (837.3) (824.1) (686.2)1990 564.3 703.9 0.0 0.0 1,268.2 (1,268.0) (1,381.0) (1,409.0) (1,127.0)1991 611.6 743.1 0.0 0.0 1,354.7 (1.355.0) (1,477.0) (1,503.0) (1,206.0)1992 230.4 743.1 36.8 439.5 1,449.9 (1,450.0) (1,496.0) (1,598.0) (1,301.0)1993 82.9 818.2 54.1 0.0 955.2 6.6 (948.7) (965.2) (1,112.0) (785.0)1994 168.6 515.9 0.0 684.5 698.2 13.7 (20.0) (89.4) 116.91995 197.2 0.0 197.2 1,418.7 1,221.5 1,221.5 1,182.1 1,260.91996 288.6 0.0 288.6 1,497.3 1,208.7 1,208.7 1,150.9 1,266.41997 417.9 0.0 417.9 1,575.9 1,158.0 1,158.0 1,074.4 1,241.61998 489.8 0.0 489.8 1,654.5 1,164.8 1,164.8 1,066.8 1,262.71999 587.7 0.0 587.7 1,733.1 1,145.4 1,145.4 1,027.9 1,262.92000 684.3 684.3 1,814.4 1,130.1 1,130.1 993.2 1,266.92001 666.1 666.1 2,076.4 1,410.3 1,410.3 1,277.1 1,543.62002 613.2 613.2 2,414.3 1,801.1 1,801.1 1,678.5 1,923.82003 621.0 621.0 2,637.0 2,016.0 2,016.0 1,891.8 2,140.22004 606.0 606.0 2,912.1 2,306.1 2,306.1 2,184.9 2,427.32005 594.2 594.2 3,1877.2 2,593.0 2,593.0 2,474.1 2,711.82006 508.0 508.0 3,412.5 2,904.5 2,904.5 2,802.9 3,006.12007 392.5 392.5 3,644.4 3,251.9 3,251.9 3,173.3 3,330.42008 273.6 273.6 3,882.8 3,609.2 3,609.2 3,554.5 3,663.92009 151.5 4,127.8 4,127.8 4,127.8 4,097.5 4,158.12010 26.1 4,379.3 4,379.3 4,379.3 4,374.1 4,384.52011 4,431.7 4,431.7 4,431.7 4,431.7 4,431.72012 4,431.7 4,431.7 4,431.7 4,431.7 4,431.72013 4,431.7 4,431.7 4,431.7 4,431.7 4,431.72014 4,431.7 4,431.7 4,431.7 4,431.7 4,431.72015 4,431.7 4,431.7 4,431.7 4,431.7 4,431.7

Total 2.572.3 10,990.0 90.9 439.5 13,915.0

RERR (%) 16 15 15 18NPV (12%) 2,000 1,704 1,403 2,596

- 42 - ANNEX 3

ECONOMIC EVALUATION OF THECHANGCHUN PASSENGER COACH FACTORY

MODERNIZATION

Introduction

1. As of the mid-1980s, the Changchun Passenger Coach Factory producednearly three-fifths of China's railway coaches. Given the pressing need for more andbetter-quality passenger rolling stock, this facility was selected as the most promisinglocation for upgrading and expansion.

2. At the time of appraisal, the modernization was to occur in two distinct andseparate phases. The primary objective of the first phase was to designate a suitableforeign partner for transfers of design and technology. Along with the appropriate localpersonnel, the partner also was to evolve recommendations for the second phase duringwhich most of the production of the new design would take place. (Included in the firstphase was a small amount of welding and surface treatment machinery and machine toolsto be used for any design that was likely to be selected for second-phase production.)

3. The objectives of the first phase were attained as planned. Therecommended new coach, designed with the assistance of British Rail Engineering Limited(BREL), was approved at all levels in China. Rather than wait for Bank evaluation andappraisal of a follow-on effort, the Chinese elected to proceed without additional Bankfunding.

4. In light of these developments, the two phases of this component asoriginally contemplated are indistinguishable. From the standpoint of economic evaluation,therefore, it is not possible to isolate the costs associated with the "first phase" from thetotal project outlays. Thus, the analysis, which follows, embraces the costs and benefitsof the overall Changchun Passenger Coach Factory modernization effort. As such, though,it is important to recognize that the results reported here are not comparable to the SARevaluation, which necessarily focused only on the first phase.

Project Capital Costs

5. The factors developed to convert financial prices into shadow prices areidentified in Table 3.1 Foreign costs have been converted to Yuan by using the shadowexchange rate of 8.7 Yuan per US dollar. The resulting overall conversion factor for allitems is 0.98. When restated at 1994 price levels, the economic project costs are 32.5

- 43 - ANNEX3

percent higher than the shadow costs. This is shown for the total project in Table 3.1 andon a year-by-year basis in Table 3.3.

Project Benefits

6. Because the new coach is far more durable than its predecessor, it is ableto accumulate more time in revenue service, thereby facilitating an incremental amount ofrailway passenger traffic volume. In addition, the newer rolling stock will require fewerand less costly major overhauls than the coach it replaces. Each of these factorscontributes to two discreet benefit streams, which are considered in turn.

(a) Value-Added to the Economy

7. Constructed of higher-quality and longer-lasting materials, the passengerequipment now being produced at the Changchun factory requires far less time for routinemaintenance compared with prior models. Older coaches on average spent 125 days peryear out of service for maintenance or 2.5 times as long as the 50 days for the new wagon.This means that the newer coach is in operating service 315 days per year compared withonly 240 days for the older version. Assuming that both coaches account for 56,000passenger-kilometers (pkm) per day (12.5 hours per day, 35 km per hour, and 128passengers per coach), the additional 75 days of inservice time enables the railway toachieve about 4.2 million incremental pkm for each coach annually.

8. As a consequence of this project, annual production at the Changchunfactory amounts to 1,040 coaches-or 240 more than the 800 units manufactured prior tomodernization. At 4.2 million pkm per additional coach, the project results in just over1 billion more pkm of railway capacity each year.

9. Railway passenger traffic has experienced rapid expansion in China. As of1993 (the most recent year for which data are available), the volume of intercity railwaypassengers approximated 1.0 billion persons per year-about 200 million more than in1980. Over the same time period, the average trip distance doubled, from 186 km in 1980to 372 km in 1993. In combination, these elements have produced a 2.5-fold increase inrailway pkm. Even allowing for the concurrent rise of the nonrailway modes, the volumeof passenger traffic by railway in 1993 was substantial, amounting to almost 345 billionpkrn.

10. This long-term increase in personal rail travel (as gauged by railway pkm)has been reflected by similar growth in the economy [as measured by gains in the realgross domestic product (GDP)]. Between 1980 and 1993, the correlation in the behaviorof these two indices is quite strong: a regression analysis of these two values for thisperiod yields an R-squared of 0.85. Even if this relationship should deteriorate somewhatdue to the enhanced roles of the nonrailway modes, the implication is that growth in railpassenger travel will continue to move in concert with real national economic output,especially in the near term.

-44 - ANNEX 3

11. Under these conditions, incremental growth in the output of the country'sgoods and services constitutes the major economic benefit of this project. Table 3.2reports the time series for real GDP and railway pkm used in this analysis. The data from1980 to 1993 are actual, while those from 1994 onward are estimates. In the "withoutproject" scenario, GDP is projected to increase at an average annual rate of 7.0 percentover the period 1994-2000 and at an average annual rate of 4.0 percent for the years 2001-2015. The values for railway pkm in the "without project" case are predicated on thisGDP forecast utilizing the regression relationship for the 1980-93 period noted in the priorparagraph. To develop a "with project" projection, the incremental pkm attributable to theadditional output of the Changchun factory are added to the "without project" pkm on anannual basis from 1994 through 2003 (it is assumed, conservatively, that all of the oldermodel coaches will have been replaced by this latter year). Using these "with project"pkm and the same regression relationship established earlier, a projection of "with project"real GDP is derived.

12. The differential pattern of real GDP growth in the "without project" and"with project" scenarios thus comprises the incremental real GDP benefits attributable tothe project. These values are detailed in Table 3.2 and replicated in Table 3.3.

(b) Major Overhaul Savings

13. An additional benefit is associated with the major overhaul savings madepossible by the lower maintenance costs and longer operating cycles of the newerequipment. Previously, the typical passenger coach required a major overhaul every 4years, but with the newer model, this period has been extended to 10 years. With unitmaintenance costs of Y 180,000 for the new coach (compared to Y 200,000 for thepredecessor model), the average annual overhaul outlay amounts to Y 18,000 over 10 years(Y 180,000/10) or 64 percent less than the comparable Y 50,000 figure (Y 500,000/10)for the older coach. With production of the new coach equal to 1,040 units per yearcontrasted with 800 coaches annually for the prior model, the per-year incremental savingsbenefit as shown in Table 3.3 amounts to Y 21.28 million.

Economic Rate of Return and Sensitivity Analysis

14. Based on the inputs stated above and as shown in Table 3.3, the net presentvalue (at 12 percent) for the overall Changchun Passenger Coach Factory modernizationproject is Y 180.2 million and the economic rate of return is 25 percent.

15. Three alternative scenarios are developed in the sensitivity analysis. In thefirst two cases, the two benefit streams are reduced by half, respectively. The effect ofthese assumptions are to lower the ERR to between 20 and 23 percent For the thirdscenario, both benefit streams are reduced by half simultaneously. Here, the ERR is equalto 18 percent.

- 45 - ANNEX 3

Table 3.1: CHANGCHUN PASSENGER COACH FACTORY:PRICE CONVERSION FACTORS

(Y million)

Conver-sion Financial - Current Shadow priced Economic - 1994factor Local Foreign Total Local Foreign Total Local Foreign Total

Land 0.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Labor:

Unskilled 0.54 0.43 0.00 0.43 0.23 0.00 0.23 0.30 0.00 0.30Semi skilled/Technician 0.80 0.72 0.00 0.72 0.58 0.00 0.58 0.77 0.00 0.77Supervisor 2.00 0.58 0.00 0.58 1.16 0.00 1.16 1.54 0.00 1.54

Materials:Steel 1.00 0.93 0.00 0.93 0.93 0.00 0.93 1.23 0.00 1.23Timber 1.00 0.21 0.00 0.21 0.21 0.00 0.21 0.28 0.00 0.28Cement 1.00 0.42 0.00 0.42 0.42 0.00 0.42 0.56 0.00 0.56Sand 0.80 0.03 0.00 0.03 0.02 0.00 0.02 0.03 0.00 0.03Stone 0.80 0.42 0.00 0.42 0.34 0.00 0.34 0.45 0.00 0.45Bitumen 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01Others 0.80 0.13 0.00 0.13 0.10 0.00 0.10 0.13 0.00 0.13

Fuel:Diesel 1.00 0.02 0.00 0.02 0.02 0.00 0.02 0.03 0.00 0.03Gasoline 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01Heavy oil 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01Others 1.00 0.01 0.00 0.01 0.01 0.00 0.01 0.01 0.00 0.01

Electricity 2.00 0.30 0.00 0.30 0.60 0.00 0.60 0.80 0.00 0.80Water 1.00 0.14 0.00 0.14 0.14 0.00 0.14 0.19 0.00 0.19Construction 0.80 0.22 0.00 0.22 0.18 0.00 0.18 0.24 0.00 0.24Mechanical equipment 1.00 14.97 44.51 59.48 14.97 44.51 59.48 19.84 58.99 78.83Others 0.80 9.51 0.00 9.51 7.61 0.00 7.61 10.08 0.00 10.08

Total 29.07 44.51 73.58 27.55 44.51 72.06 36.51 58.99 95.50

Overall conversion factor 0.98

-46 - ANNEX 3

Table 3.2: RAILWAY PASSENGER TRAFc AND REAL DomESIc PRODUCT,ACTUAL (1980-93) AND PROJECTED (1994-2015)

Railway Passenger Traffic (bln pkm) GDP (Y billion)Without With Incre- Without With Incre-

Year project project mental project project mental

1980 133.4 133.4 974.4 974.41981 142.4 142.4 1,022.1 1,022.11982 152.2 152.2 1,113.6 1,113.61983 172.1 172.1 1,226.3 1,226.31984 199.2 199.2 1,404.7 1,404.71985 237.1 237.1 1,572.6 1,572.61986 254.5 254.5 1,700.6 1,700.61987 280.1 280.1 1,881.4 1,881.41988 321.1 321.1 2,081.6 2,081.61989 299.0 299.0 2,173.5 2,173.51990 257.1 257.1 2,260.7 2,260.71991 279.5 279.5 2,442.2 2,442.21992 311.7 311.7 2,766.8 2,766.81993 344.9 344.9 3,138.0 3,138.01994 403.6 404.6 1.0 3,357.7 3,367.3 9.61995 428.3 430.3 2.0 3,592.7 3,611.9 19.21996 454.7 457.7 3.0 3,844.2 3,873.0 28.81997 482.9 486.9 4.0 4,113.3 4,151.7 38.41998 513.1 518.2 5.0 4,401.2 4,449.2 48.01999 545.5 551.5 6.1 4,709.3 4,766.9 57.62000 580.1 587.1 7.1 5,038.9 5,106.2 67.22001 601.2 609.3 8.1 5,240.5 5,317.3 76.82002 623.2 632.3 9.1 5,450.1 5,536.5 86.42003 646.1 656.2 10.1 5,668.1 5,764.2 96.02004 669.9 680.0 10.1 5,894.8 5,990.9 96.02005 694.7 704.7 10.1 6,130.6 6,226.7 96.02006 720.4 730.5 10.1 6,375.9 6,471.9 96.02007 747.2 757.3 10.1 6,630.9 6,726.9 96.02008 775.0 785.1 10.1 6,896.1 6,992.2 96.02009 804.0 814.0 10.1 7,172.0 7,268.0 96.02010 834.1 844.2 10.1 7,458.9 7,554.9 96.02011 865.4 875.5 10.1 7,757.2 7,853.3 96.02012 898.0 908.0 10.1 8,067.5 8,163.5 96.02013 931.8 941.9 10.1 8,390.2 8,486.2 96.02014 967.1 977.1 10.1 8,725.8 8,821.8 96.02015 1,003.7 1,013.8 10.1 9,074.9 9,170.9 96.0

-47 - ANNEX 3

Table 3.3: ECONOMIC RATE OF RETURN (EER) AND SENSITIVITY ANALYSIS:CHANGCHUN PASSENGER COACH FACTORY

(Y million, 1994 prices)

Sensitivity analysisBase case Case I Case 2 Case 3

Benefits Net Incremental Maintenance TotalCapital Incremental Maintenance cash GDP savings benefits

Year cost GDP saving flow (-50%) (-50%) (-50%)

1986 10.1 (10.10) (10.1) (10.1) (10.1)1987 15.9 (15.90) (15.9) (15.9) (15.9)1988 21.7 (21.70) (21.7) (21.7) (21.7)1989 16.1 (16.10) (16.1) (16.1) (16.1)1990 10.0 (10.00) (10.0) (10.0) (10.0)1991 9.7 (9.70) (9.7) (9.7) (9.7)1992 10.0 (10.00) (10.0) (10.0) (10.0)1993 2.0 (2.00) (2.0) (2.0) (2.0)1994 0.0 9.6 21.28 30.88 26.1 20.3 15.51995 0.0 19.2 21.28 40.49 30.9 29.9 20.31996 0.0 28.8 21.28 50.09 35.7 39.5 25.11997 0.0 38.4 21.28 59.69 40.5 49.1 29.91998 0.0 48.0 21.28 69.30 45.3 58.7 34.71999 0.0 57.6 21.28 78.90 50.1 68.3 39.52000 0.0 67.2 21.28 88.50 54.9 77.9 44.22001 0.0 76.8 21.28 98.11 59.7 87.5 49.02002 0.0 86.4 21.28 107.71 64.5 97.1 53.82003 0.0 96.0 21.28 117.31 69.3 106.7 58.62004 0.0 96.0 21.28 117.31 69.3 106.7 58.62005 0.0 96.0 21.28 117.31 69.3 106.7 58.62006 0.0 96.0 21.28 117.31 69.3 106.7 58.62007 0.0 96.0 21.28 117.31 69.3 106.7 58.62008 0.0 96.0 21.28 I17.31 69.3 106.7 58.62009 0.0 96.0 21.28 117.31 69.3 106.7 58.62010 0.0 96.0 21.28 117.31 69.3 106.7 58.62011 0.0 96.0 21.28 117.31 69.3 106.7 58.62012 0.0 96.0 21.28 117.31 69.3 106.7 58.62013 0.0 96.0 21.28 117.31 69.3 106.7 58.62014 0.0 96.0 21.28 117.31 69.3 106.7 58.62015 0.0 96.0 21.28 117.31 69.3 106.7 58.6

Total 95.5

ERR (%) 25 20 23 18NPV (12%) 180.2 91.4 147.5 58.5

ANNEX 4

- 48 -

P~Sf-APPRAISAL OF DOUBLE-TRACK ELECTRIFICATIONPROJECT BETWEEN ZHENGZHOU AND WUCHANG WITH

THE SECOND LOAN FROM THE WORLD BANK

1. Features of the Project

1.1 Name of the Project

Double-track electrification project between Zhengzhouand Wuchang

1.2 Loan Code for the Project

2540CH4

1.3 Dates Related to the Loan

1.3.1 Date of negotiation on agreement of the loan

April 8, 1985

1.3.2 Date of approval by the executive board ofdirectors of the World Bank

May 14, 1985

1.3.3 Date of signature by the two sides

August 26, 1985

1.3.4 Date of the agreement of the loan going into effect

October 22, 1985

1.3.5 Dead line for drawing money

June 30, 1992, and postponed to June 30, 1994

2. Basic Situation of the Project

2.1 Goal and Significance

The existing double-track railway line ofZhengzhou-Wuchang section, located in the south of Henanprovince and the north of Hubei province, is the middlesection of Beijing-Guangzhou Railway and has a total lengthof 547 kilometers. It extends up north to Beijing, and downsouth to Guangzhou. It intersects China's main line from

- 49 -

east to west - the Longhai Railway at Zhengzhou, joinsHankou-Danjiang Railway in the south, and links up watertransport of the Yangtze River. It is an artery runningthrough the south and north of China and connecting thenortheast, the north and middle west of China, and is astrategic passage of transporting coal of the north to thesouth, undertaking arduous passenger and freight transporttasks.

The section between Xinyang and Guangshui is the mostdifficult section, with the ruling grade of 12.5% andmaximum down grade of 17.7% . It is difficult for steam ordiesel locomotives to run upgrade in this section, and whenrunning down grade, locomotives can hardly run at limitedspeed required for safety operation. Therefore, theXinyang-Guangshui section is the controlling section of thewhole line. The carrying capacity of that section used to be37 million tons. However, the carrying capacity of downdirection has been over-saturated since 1984, and has becomethe "bottle neck" on Beijing-Guangzhou Railway. Thus, thesection must be upgraded technically, in order to meet therequirement of future passenger and freight traffic. Becauseof the long period required by easing the grade, largeinvestment, and large areas of farmland to be used, it isdecided to do technical upgrading in stations and yards andcarry out electrification. In this way, not only can thewhole existing track be used so that investment can be savedand construction speed will be fast, but also can theoperation problems of Xinyang-Guangshui section be solved.

2.2 Main Technical Specifications

2.2.1 Grade of railway: I-grade main line

2.2.2 Number of mainline: double-track

2.2.3 Ruling grade: 6% (single locomotive)12.5% (double locomotive)

2.2.4 Minimum radius of curve: 600m

2.2.5 Effective length of receiving-departure track:850m, 1050m

2.2.6 Type of locomotive: electric

2.2.7 Model of locomotive: SS4 (freight), SS3 (passenger)

2.2.8 Tonnage rating of locomotive: 5000t (freight)lOOOt (passenger)

- 50 -

2.2.9 Type of block: automatic block

2.2.10 Headway: signal arrangement 6 minutescomputation capacity 7 minutes

2.3 Designed Traffic Volume

The designed traffic volumes after revision in 1987 arelisted in the following table.

------------------------------------------------------------

Section Freight Traffic Volume Passenger Trainup down Pairs ( pairs/day)

------------------------------------------------------------

Zhengzhqu-Xinzheng 2630 5050 36------------------------------------------------------------

Xinzheng-Luohe 2290 5400 36------------------------------------------------------------

Luohe-Xinyang 2220 6150 30------------------------------------------------------------

Xinyang-Guangshui 2030 5630 26

Guangshui-Jiang'an West 1990 5620 32------------------------------------------------------------

2.4 Main Items of the Project ( including Zhengzhou-Wuchang,and Mengmiao-Pingdingshan east)

2.4.1 Electrification project and related signalling andcommunications project

2.4.2 Technical upgrading and expansion projects ofZhengzhou Terminal, Xinyang Marshalling Yard, Jiang'an WestMarshalling Yard, and Wuchang South Marshalling Yard.

2.4.3 construction project of New Hankou Passenger Station.

2.5 Main Engineering Volume

2.5.1 Electrification project

a. Traction sub-station: 8

b. District: 8

- 51 -

c. Open-close sub-station: 12

d. AT sub-station: 10

e. Electric locomotive depot: 2

f. Power supply station: 1

g. Contact wire gang: 27

2.5.2 Reconstruction and expansion project of Xinyang,Jiang'an West and Wuchang South Marshalling yards, andconstruction project of New Hankou Passenger Station.

a. Earthwork and stonework of subgrade: 2.4 million m3

b. One extra large bridge: 1221m

c. 14 medium-sized and small bridges: 391m

d. 103 culverts: 2384m

e. Rail laid: 89.2km

f. Turnouts laid: 225

g. Ballast paved: 366000m3

h. Industrial and residential buildings: 240000m2

2.5.3 Signalling and Communications Upgrading Project

a. Communications

No. Name of Project Unit Amount Remarks------------------------------------------------------------

1 8-core-single-model opticalcable km 579.01

2----------lon-distance---------cable-------km---583.77-----2 14x4x0.8 long-distance cable km 583.77

3 14x4xO.9 long-distance cable km 75.5------------------------------------------------------------

4 14OMbit/s photoelectric digi-tal transmission equipment system 1

5-------b---t-------photoelectric--------------d---git------5 8Mbit/s photoelectric digital

- 52 -

transmission equipment system 1------------------------------------------------------------

6 2Mbit/s cable digital trans- system 4 Luohe-mission equipment Pingdong

---------------------------------------------------------- __

7 2Mbit/s cable digital trans- system 5 Zhengzhoumission equipment area

------------------------------------------------------------

8 2Mbit/s cable digital trans- system 10 Wuhanmission equipment area

------------------------------------------------------------

9 program-controlled digital line 6100exchange

------------------------------------------------------------

10 signal-command change-over system 1equipment

------------------------------------------------------------

11 system 1multiplexer (including DCE)

12 air pressure monitoring system 1equipment

------------------------------------------------------------

13 measuring meter set 3 ZhengzhouXinyangWuchang

b. Signalling

(1) Block

986 sets of UM71 equipment575 point-type equipment215 TVM300 cab signal2000 kilometers of outdoor cable890 ground proceed signals120 sectional power supply panel

(2) Microcomputer interlocking

One main cabinet of interlockingOne multichannel transmission equipmentOne set of technical staff terminal for maintenance1.5 kilometers of data transmission cable5 outdoor equipment boxes8 microcomputer interlocking module frames at throat

(3) Centralized traffic control

- 53 -

Traffic control center are established one each inZhengzhou and Wuhan

8 control sections

93 stations are centralized controlled and supervised(76 foreign-financed, 17 local-financed).

Among them, 50 are CTC controlled (44 are divided into 2bureau-control areas, 5 are not specified, and one isdivided into 4 bureau-controlled areas); 43 are dispatchsupervised stations.

3. Strategic Decision of the Project

3.1. Process

3.1.1 In order to raise the traffic capacity ofZhengzhou-Wuhan section on Beijing-Guangzhou Railway andensure smooth traffic of the Beijing-Guangzhou main line, inSeptember, 1978, the Ministry of Railways sent to the StatePlanning Committee the "Report on Terms of Reference of theElectrification Project of Zhengzhou-Wuhan section ofBeijing-Guangzhou Railway with the number of (78)TJZ1499.

3.1.2 In December, 1982, the State Planning Committee sentto the State Council for approval the "Examination Report onTerms of Reference of the Electrification Project ofZhengzhou-Wuchang and Hengyang-Guangzhou sections ofBeijing-Guangzhou Railway" with the number of JJ(1982)1103.

3.1.3 In January, 1983, the State Planning Committee sentback to the Ministry of Railways the "Official Reply to theTerms of Reference of the Electrification Project ofZhengzhou-Wuchang and Hengyang-Guangzhou sections onBeijing-Guangzhou Railway' with the number of JJ(1983)14,which had been approved by the State Council, and requiredthe Ministry of Railways to carry out according to thedocument.

3.1.4 In 1983, the Ministry of Railways transmitted torelated construction and designing units the notice of the"Official Reply to the Terms of Reference of theElectrification Project of Zhengzhou-Wuchang andHengyang-Guangzhou sections on Beijing-Guangzhou Railway"with the number of (83)TJZ654.

According to the above reports, application and

- 54 -

approval, the project is officially listed among the stateconstruction projects.

3.2 Appraisal

The Beijing-Guangzhou Railway is a main transportlifeline running through the south and the north of China,and also one of the six busy main lines along the coast. TheZhengzhou-Wuhan section, located in the central plains, is asection of busy passenger and freight traffic volume on theBeijing-Guangzhou Railway, and is the key passage oftransporting coal of the north to the south. Apart fromreceiving large amount of coal from places further thanZhengzhou, the section has coal mines of Pingdingshan,Mixian and Yuxian in west Henan province along it. Thesection used to have a transport capacity of only 37 milliontons, but in 1985 the transport capacity reached 45.6million tons, which made the carrying capacityover-saturated. If electrification is not carried out, itwill be very difficult to meet the requirement of theever-increasing traffic volume.

After electrification of Zhengzhou-Wuchang section, thetransport capacity can reach 78 million tons. After thesection was open to traffic after electrification in 1992,the freight traffic volume has reached 64.6 million tons,and 27 pairs of passenger trains are run each day. Thetonnage rating of locomotives has been raised from 3700tbefore electrification to the current 5000t of SSd electriclocomotive. It is predicted that the freight traffic volumewill reach 74.7 million tons in the year of 2000, and thetransport task can still be completed. Real operation provedthat the electrification upgrading of railway in thissection can greatly raise transport capacity and meet theneeds of ever-increasing traffic volume. Therefore, thestrategic decision is completely correct.

3.3 Major Changes in the Design

According to the comments of the Appraisal Committee ofthe Ministry of Railways, the original design was changed inthe following aspects:

3.3.1 In order to meet the needs of "V"-type maintenancewindow on busy double-track electrified railway, equipmentfitted to opposite direction running of trains are added toelectrification and signalling and communication equipment.

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3.3.2 In the Jiang'an West Marshalling Yard, thesemi-automatic humps of the original design were changedinto automatic humps. The turnout at the tail of marshallingyard was changed from electric centralized control tomicrocomputer centralized control. The four tracks of thereceiving yard was extended to 1050m. One track was added tothe shunting yard. Two tracks were added to down directiondeparture yard. The Huangpu Cross-over with a span of 36m(8+10+10+8m) was added.

In Wuchang South Marshalling Yard, the mechanical humpof the original design was changed into automatic hump, andthe turnout at the tail of the marshalling yard was changedfrom the original electric centralized control tomicrocomputer centralized control.

3.3.3 Hankou Passenger Station is moved out of the site, anda new one is going to be built outside Jiang'an WestStation.

3.3.4 Add an infrared HB detection system.

3.3.5 In the original design, electronic shift frequencyautomatic block and shift frequency cab signal are appliedto the Zhengzhou-Wuchang double-track section, and exceptthe Zhumadian-Guangshui section which uses centralized shiftfrequency, other sections all use decentralized shiftfrequency. The total investment was 1.933 million yuan. Thenthe Ministry of Railways changed the design into importingthe French 4-aspect, non-insulation track circuit inelectrified sections, and cab signals with speedsupervision. The estimated investment is 181.88 millionyuan.

3.3.6 The effective length of tracks in stations is extendedto 1050m. In the preliminary design, it was planned toextend the effective length every one station. Then,according to the need of operation, all the stations except18 of them in the Zhengzhou-Wuchang section have theireffective length of tracks extended.

4. Implementation of the Project

4.1 Implementation Organization

4.1.1 Designing institute

Electrification Survey and Design Institute, ElectrificationBureau, MOR

- 56 -

Signalling and Communications Survey and Design Institute,Electrification Bureau, MOR

Fourth Survey and Design Institute, MOR

Zhengzhou, Xitan and Wuhan Survey and Design Institute,Zhengzhou Railway Administration

Mid-South Architecture Design Institute

4.2 Builder: Zhengzhou Railway Administration

4.3 Construction Unit:

Electrification Bureau, MOR

Signalling and Communications Engineering Corporation, MOR

Zhengzhou Railway Administration

Second Engineering Bureau, MOR

General Construction Corporation of Wuhan City

4.4 Units in charge of Inviting Tenders and Purchase

China National Technical Import and Export Corporation

China National Machinery Import and Export Corporation

China National Instrument Import and Export Corporation

China Railway Import and Export Corporation

- 57 -

POST APPRAISAL ON ZHENG-WU LINE

2. Purchase on bids

2.1. General descriptions

A total of US$188130 thousand foreign funds has been used inthis project for the purchase of the following materials andequipment(see table 6).

Table. 6-------------------------------------------------------------------

Serial Descriptions Amount Percentageno. (Thousand US$) (%)

-------------------------------------------------------------------

I Rails 3,915 2.08

2 Fishplates 1,503 0.80

3 Other steel 23,781 12.64

4 Cement 4,406 2.34------------------------------------------------------------------ _

5 Timber 9,566 5.08------------------------------------------------------------------ _

6 Non-ferrous metal 1,987 1.06------------------------------------------------------------------ _

Sub-total(material) 45,158 24.00---------------------------------------------------------------- __-

7 Communication cables 7,825 4.16------------------------------------------------------------------ _

8 Communication equipment 16,550 8.80

9 Signalling cables 6,800 3.60

10 Signalling equipment 34,363 18.27---------------------------------------------------------------- __-

11 Power cables 1,283 0.68

12 Power equipment 33,303 17.71---------------------------------------------------------------- __-

13 Insulators 1,351 0.72------------------------------------------------------------------ _

14 Miscellaneous wires 16,200 8.61----------------------------------------------------------------- __

15 Miscellaneous equipment 5,175 2.75------------------------------------------------------------------ _

16 Vehicles 6,408 3.41

17 Instruments 2,506 1.33

18 Design & constructionfacilities 11,208 5.96

Sub-total (equipment) 142,972 76.00--------------------------------------------------------------- __--

- 58 -

Sub-total 188,130

Reserve funds 610

Total 188,740

The materials and equipment listed in the table have beenpurchased through international competitive bidding or from themarkets in accordance with the agreements on loans and purchasinginstructions. 30 international bids have been invited in the periodof 1986 to 1992, with 129 manufacturers in 18 countries and regionswon the bids, among them 41 in P.R of China, 23 in USA, 18 inJapan, 13 in England, 7 in Germany, 7 in France, 6 in Switzerland,1 in Belgium, 1 in Austria, 1 in Australia, 2 in Sweden, 2 inDenmark, 1 in Brazil, 2 in Canada, 1 in Argentina, 1 in Italy, 1 inTaiwan and 1 in Hong Kong. 209 contracts with a total amount ofUS$188,130 thousand have been concluded. Of the contract amount,US$53,190 thousand are signed by Chinese manufacturers, takingaccount 28.27X of the total.

2.2 Comparisons between appraisal planning and actual fulfillment(annually)

The implementation of purchase has delayed due to fundamentalmodification of designs, increase of projects and update ofpurchasing lists, the last contract of this project was concludedin January, 1993. See table 7.

Table. 7-------------------------------------------------------------------

Year 1985 1986 1987 1988 1989 1990 1991 1992 1993

Planning------------------------------------------------------------------ _

Actual

2.3 Contract amount of purchases in the following years are shownin table 8.

Table. 8 Unit: One thousand US$

Year Contract amount Contract amount Percentage(one year) (accumulated) (accu.amount /total)

-------------------------------------------------------- __---------

1986 21,047 21,047 11.19------ _---------------------------------------------------------__-

1987 6,434 26,481 14.08---------------------------------------------------------------- __-

1988 37,767 62,428 33.18---------------------------------------------------------------- __-

1889 49,471 113,719 60.451990----------15,018-------------128-------737--------68.43----__--1990 15,018 128,737 68.43

- 59 -

-------------------------------------------------------------------

1991 27,838 156,575 83.22--------------------------------------------------------------- __--

1992 26,451 183,026 97.29--------------------------------------------------------------- __--

1993 5,104 188,130 100.00-------------------------------------------------------------- __---

2.4 Coefficient of purchase and payment

The accumulated contract amount and the actual payment in1986-1994 are shown in table 9.

Table. 9 Unit: One thousand US$---------------------------------------------------------------- __-

Year Contract amount Actual payment Percentage (t)(accumulated) (accumulated) (payment/purchase)

1986 21,047 13,464 63.97-------------------------------------------------------------------

1987 26,481 22,367 84.46---------------------------------------------------------------- __-

1988 62,428 33,166 53.13

1989 113,719 50,904 44.76---------------------------------------------------------------- __-

1990 128,737 96,313 74.81

1991 156,575 129,817 82.91--------------------------------------------------------------- __--

1992 183,026 151,374 82.70--------------------------------------------------------------- __--

1993 188,130 173,414 92.18--------------------------------------------------------------- __--

1994 188,130 183,130 100----------------------------------------------------------------- __

2.5 Experiences and lessons on purchases and contract negotiations

The purchases of this project have been implemented inaccordance with the agreements of the loan and the instructions ofpurchase. Supported by the State Planning Committee, Ministry ofFinance and the World Bank, the task group has been working hard toimplement the purchases and has obtained the following experiences:

1) Organization has been reformed and purchase managementimproved

Founded in March, 1987, the Foreign Capital and TechnicalImport Office, MOR, under the leadership of deputy minister andchief engineer, is empowered to carryout the centralized-managementof foreign capital, including project creation and implementation,purchase on bids and technology import. The implementationcapability has been improved since the centralized managementsuperseded the dispersed one. The task group, organized forpurchase management, has summed up some experiences in purchase

- 60 -

implementation, such as, international tendering, bidding documentsevaluation and contract negotiation, leading to improvement ofpurchase quality.

In the purchase process, a responsibility system combining thecentralized management and management by levels has been set up,which is organized by the Foreign Capital and Technical ImportOffice with the participation of project management departments andcustomers. Purchase implementation groups have been built up towork out bidding documents, to carry out the evaluation of bids,contract negotiations and project implementations. In the processof purchase , all of the designing departments, construction teamsand customers have played important role in individual links of theproject.

2) Competition between purchase agencies has been intensified

At the primary stage of implementing this project, theInternational Tendering Division, China National Technical Importand Export Corporation was the only agency for the purchase, since1987, the International Tendering divisions of China NationalMachinery Import and Export Corporation and China NationalInstrument Import and Export Corporation have become itscompetitors. Competition between agencies has led to a higherefficiency and better service.

3) Quality of bidding documents has been upgraded

With a view of upgrading the quality of bidding documents, atechnical consultation service was built up in 1990. Qualifiedtechnical personal have been employed to support the purchase, forexample, to work out technical specifications attached to thebidding documents. Computer-based management of the documents hasalso played a key role in speeding up documents preparation andshortening the purchase cycle.

4) Market investigations have been focussed

With the deepening and expanding of China's reform and openingto the outside world, fresh information on new products andtechnologies have been gathered from both home and abroad throughtechnical survey, design communication, technical training andtechnical exchanges. This has contributed a great deal to thebuilding up of project and working-out of bidding documents, bidsevaluation and contract negotiations. The "China Modern RailwayExhibition, 1992" attracted 55 foreign manufacturers, during theperiod of the exhibition, contracts amounted US$ 64million in totalhave been concluded.

5) Problems

a) Long purchase cycle due to complicated approving process;b) System equipment has been purchased from different

manufacturers by small separated items, which effects the operatingreliability of the system. For example, of the primary equipment

- 61 -

for the power sub-station in Zheng-Wu line, different items aresupplied by Alsthom, France, ABB, Sweden and Chinese manufacturers,and, of the secondary equipment, manufacturers are TUM, Japan, ABB,Sweden and Westinghouse, England. These multivendor-equipment havegiven rise a lot of difficulties in interfacing.

c) Software of the equipment could not meet the requirements ofthe Chinese Railway due to that the operation conditions of therailway have not been clearly specified in the contracts.

3. Evaluation of the equipment imported

The line, an important trunk channeling the North and SouthChina, is featured by high technical standard and therefore, thefollowing equipment with comparative advanced technologies havebeen imported:

1. Optical transmission equipment 1 set2. Program-controlled exchange 13100 lines3. Package switching network 4 joints4. Optical cables 600km5. Microcomputer interlocking device 1 set6 CTC 1 set7. Auto blocking system and Loco. Signalling 1 set

( 400 sets on the wayside, 31 sets on the loco.and 300 setsof point type)

8. Telecontrol 2 sets9. Traction power transformer 129 sets

10. Segment insulator 470 sets11. Failure points calibrating devices 2 sets12. Relay 1 set13. Rail flaw detecting car 1 set14. Track recording car 1 set15. Hi-rail cars 5 set16. Computer network system 1 set

These equipment are featured by advanced technology, finestructure and good quality, compact and light weight, easyoperation and maintenance, safety and reliability. Since theoperation of the system, very few failures have been discovered insegment insulator, relay, failure point calibrating andtele-control devices.

Most of the above equipment are introduced to China for thefirst time, therefore, the software used in computer-basedinterlocking system, CTC, etc. should be improved so as to meet theactual conditions of the Chinese Railway.

4. Comment on suppliers

Most of the suppliers have acted strictly according to thecontracts, including delivery date, product quality and after saleservice. Many of them have sent their technical personal to carryout the on-site installation and testing of equipment and trainingof operators. Some of them, such as ABB, Jisima, Birili, have senttheir experts now and then to visit end users and offer

- 62 -

consultations after the completion of guarantee period , and havesupplied some parts free of charge.

A few suppliers, however, have delayed their delivery,installation and testing date of the equipment, even asking for ahigher price. Sone quality problems have not been tacked on time.

IMAGING

DRAFTCONFIDENTIALReport No: 15230Type: PCR