PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB2791

Project Name

/ China: Shi-Zheng Railway
Region / EAST ASIA AND PACIFIC
Sector / Railways (100%)
Project ID / P099062
Borrower(s) / MINISTRY OF FINANCE
Implementing Agency
Ministry of Finance (MOF)
Sanlihe, Xicheng District
China
100820
Tel: 86-10-6855-3166 Fax: 86-10-6855-1125

Ministry of Railways, Foreign Capital & Technical Import Center
10 Fuxing Road
China
Tel: 86-10-51841895 Fax: 86-10-51841845
Environment Category / [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / January 30, 2007
Date of Appraisal Authorization / February 6, 2007
Date of Board Approval / October 9, 2007
  1. Country and Sector Background

The railway sector is vital to the economic and social development of China, its international trade, its continued economic growth, and its ability to extend the benefits of development to people living in the more remote regions of the country. China is a vast country where people and goods move over long distances, for which railways provide a lower cost means of transport than road or air transport. Railways also are more energy efficient, environment friendly and consume less land space than highways of comparable capacity.

For the last 10-15 years, the Chinese railway industry has been pursuing two key objectives. One is to reform the industry to become more responsive to the market economy. The second is to achieve an order of magnitude change in the capacity and quality of infrastructure and services in a system that is already the busiest, by a wide margin, of any in the world; and which is still facing rapidly growing demand. Pursuing these two goals at the same time adds up to perhaps the most daunting rail industry challenge facing any government in the world.

Between 1995 and 2005 traffic on the China Rail network grew very rapidly. Passenger traffic (measured in passenger-km) grew by 70% and freight (in ton-km) grew by 60%. Traffic growth accelerated in the past five years (2000-2005), averaging 6.5% per year for passengers and 8.5% for freight. In response the network was expanded but was unable to keep pace; the route length was increased by only 26%. Today, China Railways carries a quarter of the world’s traffic on 6% of the world’s track length. Much of the system, already intensively used a decade ago, now operates close to capacity and traffic is diverted to other modes. The problems caused by lack of capacity are compounded by the public service obligations undertaken by the railway on behalf of the Government. For several years the Ministry of Railways (MOR) has managed to balance these conflicting responsibilities and requirements, but the point has been reached where both rolling stock and infrastructure are fully utilized as conventionally measured. It is clear that, if the railway is not to be a brake on the future economic growth of China, it rapidly needs to create additional capacity.

In 2004 the State Council approved MOR’s ‘Mid and Long-Term Railway Network Plan’, which sets out the investments required through 2020 to keep pace with the demand. The large investment needed will require structural changes in the rail industry to ensure the most efficient use of resources and the mobilization of external funding to complement public sources. In response to strategic goals set by the national leadership, the National Development and Reform Commission (NDRC) has decided the framework for such reform of the rail industry, among others, and set out the underlying policy principles in “State Development and Reform Commission: China’s Key Reforms in Seven Fields in 2004”.[1] This document has identified three such principles to underpin the reform process in China:

·  separation of Government administration of the railways from enterprise management

·  introduction of competition where suitable; and

·  effective industry regulation

It falls to MOR to specify actions and timing that will implement the principles set by NDRC. MOR has undertaken many reforms over the past two decades and is committed to changes that will enable it to meet the challenge of functioning in a market economy amid growing competition from other modes. Reform will also help it access capital from the private sector, as it makes itself more investor-friendly. It has already taken several major steps to facilitate subsequent structural and organizational reforms, including separation of non-core units, accounting separation of passenger transport business, concessioning of some 100 branch lines, establishment of regulations to permit foreign investment, and establishment of special-purpose subsidiaries. It has also eliminated an entire administrative level, the sub-region, reducing administrative costs, allowing for more efficient programming of locomotives and crews throughout the network and streamlined asset utilization generally. These measures are essential for coping with the sharp increase in traffic.

Through its 15-year history of support the Bank has been influential in establishing the direction of the transformation of China Railways. This has allowed the Bank, through an agreed dual track approach of policy dialogue and investment to offer MOR independent advice based on international experience on railway policy options and issues and to support management with specific items of technical assistance that have improved business performance. At the same time it has made a modest but effective contribution to project financing for China Rail’s infrastructure development program.

This loan provides a platform of continued high-level engagement between the Bank, MOR and NDRC, while simultaneously supporting operational development of the Chinese railway network and the introduction of an alternative financing and operational mechanism through the use of project companies.

  1. Objectives

The development objective of the Project is to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers.

  1. Rationale for Bank Involvement

The principles cited above –separation of regulatory functions from the enterprise, the introduction of competition, and the regulatory system-- require MOR to continue policy reform in the upcoming years, though the timing and pace has yet to be announced. NDRC has requested the Bank’s advice regarding international experience on these issues. Simultaneously, MOR (with State Council approval of the 11th five-year plan (2006-2010)) is planning to increase the annual rate of investment in railways by as much as 300%, costing approximately US$23 billion in 2007 alone, and seeks Bank financing and technical advice to deliver this additional capacity. NDRC, MOR and the Bank all recognize that progress in implementing the reforms will be driven by internal political developments largely independent of the capital investment program but necessitated by the need to generate new sources of financing.

The Project will support innovative efforts of China Railways to attract new sources of financing into rail investment using methodology previously proposed by the Bank through its policy dialogue. The Bank’s involvement continues an opportunity for the Bank to inform China Railways on international experience in this regard.

  1. Description

The project consists of the construction of a new 355 km dedicated high-speed passenger rail line between Shijiazhuang in Hebei province and Zhengzhou in Henan province (ShiZheng line). In addition to the physical construction of the ShiZheng line the component will include related technical assistance.

The existing double track electrified line between Beijing and Guangzhou is badly congested. In order to handle the projected growth in passenger and freight traffic by rail, it is proposed to build a double track electrified, 2,100 km Beijing-Guangzhou dedicated high-speed passenger line (JingGuang line).The proposed ShiZheng line forms part of the JingGuang line.

This project aims to provide a major boost in rail transport capacity by increasing the number of train paths to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou. This will be achieved by dedicating the new high speed line exclusively to passenger services, concentrating the freight services on the freed-up capacity of existing lines, and increasing train services and performance standards in both market segments.

The dedicated passenger line, capable ultimately of maximum train speeds of 350 km/h, is planned to be constructed by 2010 in four sections (Beijing- Shijiazhuang, Shijiazhuang-Zhengzhou, Zhengzhou-Wuhan and Wuhan-Guangzhou). The travel time for passengers between Beijing and Guangzhou will be reduced from present 24 hours to less than 10 hours and between Shijiazhuang and Zhengzhou from 3.3 hours to 1.3 hours. The capacity freed up on the existing slow lines will provide the freight train paths necessary to handle growing demand.

This new ShiZheng line will consist of two tracks that run broadly parallel with the existing JingGuang railway line but at some distance from it. In order to enable a high operating speed it will have a relatively straight alignment with large radius curves of 9,000m or more. The terrain is flat and has low seismicity. This line will be electrified.

Two types of trains would operate on the line. Type A trains shall have a maximum speed of 300km/h while Type B trains shall operate at a maximum speed of 200 km/h. It is planned to commence construction of this line in the first half of 2007 and commission the line by December 2010.

  1. Financing

Source: / ($m.)
BORROWER / 4,200
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT / 300
Total / 4,500

Retroactive financing is being considered for this project

  1. Implementation

As with past Bank-financed railway projects in China, the central Ministry of Railways (MOR), through their Foreign Capital and Import Center (FCTIC), will be responsible for procurement of all Bank-financed goods and services, through an independent procurement agent (tendering company). The ShiZheng line passes through the territory of two regional railway administrations: Beijing and Zhengzhou. Project management offices in these Administrations will manage procurement, at least initially (see below) of those contracts (works and goods) wholly finance by MOR. Among other contracts, they will, through competitive bidding, hire independent contractors to carry out the civil works and to install all equipment, including that financed by the Bank. The regional PMOs will also be responsible for supervising the construction and installation.

  1. Sustainability

Sustainability in transport systems has financial, economic, operational, environmental and social dimensions.

In financial terms, the project will be sustainable if the transport services it facilitates are able to earn a positive contribution above long-run marginal costs; if so, they will make a positive financial contribution to China Rail’s financial performance and not be an increasing financial drain that could threaten their survival. The financial analysis indicates that the project financial benefits will indeed recover 18% percent margin above long-run marginal costs. There is therefore little risk that after services have been implemented, China will not be able to afford to keep them going.

The economic sustainability of the project will be strengthened over time because the unit values of the main external economic benefits of the project: passenger time savings, value of accident cost savings and value of reduced greenhouse gases compared to alternative modes are all expected to increase in the future. In other words, the surplus of economic benefit over pure financial benefit will tend to widen, increasing economic sustainability.

There are no obvious threats to operational sustainability. The technical requirements for maintaining high speed train services are well known and China will be using established technologies. High speed train systems have been operated and maintained at very high levels of reliability and safety in Japan, Germany and France for many years and more recently in Italy and UK. In all those countries there has been no degradation of service over time and there is no reason to expect that China will not be able properly to sustain the services. Indeed, as the high speed network is extended, local skills, expertise and capacity to maintain and improve will increase.

The upgraded railway system will contribute to greater environmental sustainability of China’s transportation systems as a whole because they will be (a) more energy efficient and (b) generate lower greenhouse gas emissions, than the alternatives of road or air transport that would be used if the additional capacity were not provided.

The social sustainability of the project will depend mainly on the affordability of the services it offers. To gauge this, Ministry of Railways has carried out detailed passenger attitude surveys. These have established a strong willingness to pay a surcharge of 50 percent on high speed services compared to conventional rail. Indeed the overall impact will be to encourage more rather than less passengers to rail. Inter-city railway services in China are in any event used by a very wide range of the population: more so than either private cars or airlines, which tend to serve higher income groups. To this extent the impact of railway improvements tends to be more equitable, and so more socially sustainable.

  1. Safeguard Policies (including public consultation)

Safeguard Policies Triggered by the Project / Yes / No
Environmental Assessment (OP/BP 4.01) / [X] / [ ]
Natural Habitats (OP/BP 4.04) / [ ] / [X]
Pest Management (OP 4.09) / [ ] / [X]
Physical Cultural Resources (OP/BP 4.11) / [ ] / [X]
Involuntary Resettlement (OP/BP 4.12) / [X] / [ ]
Indigenous Peoples (OP/BP 4.10) / [ ] / [X]
Forests (OP/BP 4.36) / [ ] / [X]
Safety of Dams (OP/BP 4.37) / [ ] / [X]
Projects in Disputed Areas (OP/BP 7.60)[*] / [ ] / [X]
Projects on International Waterways (OP/BP 7.50) / [ ] / [X]
  1. List of Factual Technical Documents

·  Feasibility Study Reports in both Chinese and English;

·  Environment Assessment Reports both in English and Chinese dated Oct. 2006

·  Resettlement Action Plan both in English and Chinese dated Oct. 2006

·  Official Reply of State Development & Reform Commission on Project Proposal of Greenfield Shijiazhuang-Wuhan Railway Line for Passenger Transport

·  Regulation for Handling Railway Accidents issued by Ministry of Railway

·  List of People from Shareholder Organizations Participating the Shareholders’ Meeting, Board of Directors and Board of Supervisors

·  Resolution of the 3rd Shareholders’ Meeting—Shitai Railway Passenger Transport Special Line Co., Ltd

·  Methods for Compilation and Implementation of Financial Budget (Draft) issued by Shitai Railway Passenger Transport Special Line Co., Ltd