Document of

The World Bank

Report No: 25234

IMPLEMENTATION COMPLETION REPORT(SCL-39860)

ONA

LOAN

IN THE AMOUNT OF US$ 210.0 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

SECOND SHAANXI PROVINCIAL HIGHWAY PROJECT

February 10, 2003

Transport Sector UnitEast Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2002)

Currency Unit = yuan (Y)Y1.00 = US$ 0.12082

US$ 1.00 = Y8.2768

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

AADT - Annual average daily trafficADB - Asian Development BankE&M - Electrical and mechanicalEAP - Environmental Action PlanEIRR - Economic intemal rate of returnFIRR - Financial intemal rate of returnFJTH - Famen-Jiangzhuang-Tangyu HighwayGOVAI - Gross output value of agriculture and industryICB - International competitive biddingLTWMH - Lintong-Terra Cotta Warriors Museum HiglhwayLXH - Lantian-Xiaoshangyuan HighwayMOC - Ministry of CommnunicationsMTE - Medium truck equivalentNPV - Net present valuePEO - Project Execution OfficeRAP - Resettlement Action PlanRIPA - Roads Improvement for Poverty AlleviationSHGHAB - Shaanxi High-Grade Highway Administration BureauSPTD - Shaanxi Provincial Transport DepartmentTHH - Tongchuan-Huangling HighwayVOC - Vehicle operating costsWTE - Weinan-Tongguan ExpresswayXSH - Xian-Sanyuan Highway

Vice President: Jemal-ud-din Kassum, EAPVPCountry Manager/Director: Yukon Huang, EACCF

Sector Manager/Director: Jitendra N. Bajpai, EASTRTask Team Leader/Task Manager: Yasuhiro Kawabata, EASTR

CHINASecond Shaanxi Provincial Highway Project

CONTENTS

Page No.1. Project Data I2. Principal Performance Ratings I3. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 35. Major Factors Affecting Implementation and Outcome 96. Sustainability 117. Bank and Borrower Performance 128. Lessons Learned 149. Partner Comments 1510. Additional Information 22Annex 1. Key Performance Indicators/Log Frame Matrix 23Annex 2. Project Costs and Financing 25Annex 3. Economic Costs and Benefits 29Annex 4. Bank Inputs 51Annex 5. Ratings for Achievement of Objectives/Outputs of Components 53Annex 6. Ratings of Bank and Borrower Performance 54Annex 7. List of Supporting Documents 55

Map 1: Transport System in Shaanxi Province (EBRD27047R)Map 2: High-Grade Highways in the Project (IBRD27048)

Project ID: P003652 | Project Name. Second Shaanxi Provincial Highway

Teain Leader: Yasuhiro Kawabata TL Uniit: EASTRICR Type: Core ICR Report Date: February 10, 2003

1. Project Data

Name: Second Shaanxi Provincial Highway Proj. LICITF Number. SCL-39860Cozntry/Department: CHINA Region: East Asia and Pacific

RegionSector/subsector: Roads & highways (84%); Other social services

(15%); Sub-national government administration(1%)

KEY DATESOriginal Revised/Actual

PCD: 12/13/1994 Effective: 07/16/1996 07/16/1996Appraisal: 07/10/1995 MTR:Approval: 03/21/1996 Closing: 12/31/2001 12/31/2002

Borrower/lnIplementingAgencv: PEOPLE'S REPUBLI(C OF CHINA/SHAANXI PROVINCEOther Partners:

STAFF Current At AppraisalVice President: Jemal-ud-din Kassum Russell J. CheethamCountiy Manager: Yukon Huang Nicholas C. HopeSector Manager: Jitendra N. Bajpai Richard G. ScurfieldTeam Leader at ICR: Yasuhiro Kawabata Hatim M. HajjICR Prima?y Auzthor: Yasuhiro Kawabata

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely. HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N-Negligible)

Outcome: S

Sustainability: L

Instituitional Development Impact: SU

Bank Pemformance: S

Bor r ower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

The project had the following objectives: (i) support continuing development of road infrastructure torelieve congestion, improve access to important archeological and tourist sites, facilitate mobility, andincrease the efficiency of road transport; (ii) assist in the implementation of policy to alleviate poverty inthe poor areas of the province; (iii) promote development of institutional capabilities of Shaanxi ProvincialTransport Department (SPTD); and (iv) increase the safety of road transport.

The project objectives were clear and were accorded very high priority by the Government to meet itslong-term development target. The project objectives were also in line with the Bank's Country AssistanceStrategy (CAS) for China presented to the Board on May 10, 1995. The Bank strategy supports continuedinstitutional development and sectoral reforms aimed at modernizing the highway system and itsmanagement, as well as investment for high-priority links of the National Trunk Highway System and theprovincial road network that feeds into it.

3.2 Revised Objective:

Project objectives remained the same throughout project implementation.

3.3 Original Components

The following seven components comprised the project:

a. construction of the following five high-grade highways:

i. Weinan-Tongguan Expressway (WTE) -- a 78.1 kn four-lane expressway between Weinanand Tongguan at the border with Henan Province;

ii. Tongchuan-Huangling Highway (THH) -- a 73.6 km four-lane Class I highway betweenTongchuan and Huangling and doubling of the existing 18.4 km two-lane Class I highwaybetween Yaoxian and Tongchuan;

iii. Lantian-Xiaoshangyuan Highway (LXH) - a 48.3 km two-lane Class II auto-only highwaybetween Lantian and Xiaoshangyuan;

iv. Lington-Terra Cotta Warriors Museum Highway (LTWMH) -- a 5.9 km two-lane Class IIauto-only highway connecting Lintong and the Terra Cotta Warriors Museum; and

v. Famen-Jiangzhuang-Tangyu Highway (FJTH) -- a 34.8 km two-lane Class II auto-onlyhighway between Famen Buddhist Temple and Jiangzhuang, and between Jiangzhuang andTangyu;

b. upgrading of the 32 kmn, Class I Xian-Sanyuan Highway (XSH) by providing full control ofaccess, traffic safety devices, and installation of a telecommunications system;

c. construction, rehabilitation, and upgrading of three linking roads with a total length of about 8.2km to interconnect and feed traffic to the proposed high-grade highways at interchanges;

d. improvement and new construction of about 4,100 km of rural roads in a program to help alleviatepoverty (RIPA) in poor counties;

e. provision of equipment for:

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i. control of construction quality and monitoring of the environment during the construction ofthe high-grade highways and their linking roads;

ii. operation and maintenance of the high-grade highways;

iii. maintenance of the Shaanxi provincial highway network (other than the high-grade highways);

iv. institutional strengthening of SPTD and related institutions and the traffic police;

f. a road safety component to help reduce accidents on Shaanxi's highways; and

g. institutional strengthening and training of the staff of SPTD and its related agencies and institutesby enhancing capabilities in the high-grade highway construction supervision and operations;highway investment planning, including a study of alternative locations for the Xian bypass;maintenance of high-grade highways and other roads, including a study of highway maintenance;and implementation of RIPA and highway traffic components of the project.

3.4 Revised Components:

Two subprojects under the component for upgrading the 32 km XSH were cancelled. The construction ofthe Jinhe interchange was delayed when SPTD had difficulty in reaching agreement with the localgovernment authority on the interchange design concept. When it appeared that the interchange work couldnot be completed by the original closing date, SPTD decided to do this work using local funds.

It was agreed during the October 1999 supervision mission that the telecommunications system under XSHwould be included in the electrical and mechanical (E&M) systems for the THH. During the September2002 mission, however, it was agreed that the Bank would not finance the E&M component for the THHbecause of a delay in procurement and a cost overrun for civil works.

3.5 Quiality at Entry:

Quality at entry is rated satisfactory overall. The assessnment was based on: (i) the consistency of project

objectives with China's priorities for the sector; (ii) attention given during project preparation to lessons ofexperience, including the past performance of the implementing agencies; (iii) the importance given to

following Bank policy, particularly those related to environmental, resettlement, and road-safety aspects;and (iv) technology transfer and quality assurance. As with most Bank-financed projects of that period, the

performance indicators were not explicitly developed (no baseline and benchmark figures established); theywere retrofitted in the project later, however, during project implementation.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

Despite some delay in implementation, the project objeclives were substantially met, and the achievement ofthe project objectives is assessed as satisfactory.

A. Support the continuing development of road infrastructure

The physical components -- construction of five high-grade highways and the upgrading of a highway -have been achieved. The congestion along the project-targeted corridors was relieved, and accessibility to

important archeological and cultural sites improved greatly. However, the economic return of one of thehighways, the THH, is much lower than anticipated at appraisal because the traffic volumes are muchlower than expected and the construction costs much higher. Three highways, WTE, LXH and LTWMH,have a lower economic return than expected because of cost overruns. FJTH has achieved the economicreturn as expected.

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B. Assist in aleviating poverty in poor areas

The RIPA component -- improvement and new construction of about 3,900 km of rural roads -- hasenhanced the economic development in poor rural areas. The gross output value of agriculture and industry(GOVAI) per capita in the affected counties increased from Y 1,770 in 1992 to Y 2,730 in 2002(approximately a 35 percent increase).

C. Promote development of institutional capabilities

The capacity of highway sector institutions has improved. Through overseas training and study tours andparticipation in studies and supervision during project implementation, the SPTD's staff receivedsatisfactory exposure to new concepts and incentives to leam new practices and technical approaches. Thefindings of the Xian Bypass Study were useful and were incorporated into the Asian Development Bank(ADB)-funded Xian Urban Development Project. The findings of the highway maintenance study also werefound to be useful and helped the province modernize its maintenance management and operation.

D. Increase the safety of road transport

The road safety component had six subcomponents, including a pilot program of blackspot improvements.The road safety program raised awareness of the importance of road safety and contributed to itsimprovement. However, much remains to be done so that measures to reduce traffic accidents areimplemented in a sustainable manner.

4.2 Outputs by components:

A. Construction of five high-grade highways (US$304.0 million, Staff Appraisal Report ISARI;US$364.4 million, Implementation Completion Report [ICRI)

This component is rated as satisfactory overall. Field inspection at completion showed that the constructionquality of the five high-grade highways is above average. Finishing details, including landscaping andenvironmental improvement along the routes, received adequate attention.

WTE (US$105.3 million, SAR; US$97.8 million, ICR). The WTE opened to traffic on October 1, 1999.The easternmost 6.1 km section connecting Shaanxi and Henan provinces, which was considered criticalfor achieving the full economic benefits of the project, was completed and opened to traffic on December19, 2001. The delay in completion was due to the delay in project implementation on the Henan side.Buildings for toll plazas at six interchanges were completed at the same time that civil works werecompleted (October 1, 1999). However, rest areas and administration offices were completed later, inDecember 2002. The original designs for telecommunications and toll collection systems for WTE werecompleted in 1995. SPTD, however, taking into consideration the recent development of technology forthese systems, decided to integrate these systems into the provincial high-grade highway network as onecomprehensive system, and designs were revised. The installation of telecommunications and tollingsystems commenced in October 2002 and will be completed by August 2003.

THH (US$149.6 million, SAR; US$196.6 million, ICR). THH included construction of a 73.6 kmfour-lane highway between Tongchuan and Huangling and the doubling of the existing two-lane highwaybetween Yaoxian and Tongchuan (18.4 km). Civil works for THH commenced in March 1998 and werecompleted in April 2001, when the highway was opened to traffic. Building works, including four tollstations and two administration offices, also were completed in April 2001. Two parking areas (Zhifongand Yijun) and a service area (Huang ling) were completed in October 2001. The installation of lights andventilation systems in tunnels was included in the original civil works contracts and was completed when

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civil works were completed. The installation of telecommunications, tolling, and monitoring systems willcommence in June 2003 and will be completed in June 2004.

LXH (US$30.4 million, SAR; US$41.9 million, ICR). LXH opened to traffic in June 1999. The buildingworks included the Lantian toll station, Helongkou maintenance office, and Muhuguan tunnel managementoffice; all were completed by June 1999.

LTWMH (US$2.3 million, SAR; US$4.1 million, ICR). LTWMH was completed in March 1998 but wasnot opened to traffic until October 1999. The installation of toll collection and lighting systems, which was

not completed until September 1999, delayed the opening of the highway. The telecommunications andtolling systems are covered under the contract for WTE and also commenced in October 2002 to be

completed by August 2003.

FJTH (US$16.4 million, SAR; US$24.0 million, ICR). The highway was opened to traffic in April 1999.Additional works, including overpass bridges, were completed by end-April 2000. Building works,

including two toll stations at both ends of FJTH, commenced in August 1998 and were completed in April

1999. Works for telecommunications and toll collection systems commenced in August 2000 and werecompleted by April 2001.

B. Upgrading of XSH (US$13.7 million, SAR; US$ 12.7 million, ICR)

The upgrading of XSH to an access-controlled expressway originally included 26 subprojects. Twenty-four

of these were completed by December 1998, and Bank funding for two components (Jinhe interchange andtelecommunications) was dropped. Construction of the Jinhe interchange commenced in November 2001

and was completed in November 2002. Works for telecommunications will be carried out together with

E&M works for THH.

C. Construction, rehabilitation and upgrading of three linking roads (costs included in the mainhigh-grade highway component)

Because these roads were short, they were included under the contracts of the related sections of the

high-grade highways. These roads were completed at the same time that the main carriageways werecompleted.

D. Construction supervision of high-grade highways (US$103 million, SAR; US$11.5 million, ICR)

The construction supervision of the high-g,rade highways was satisfactory. It was carried out by a jointsupervision team of local engineers and international consulting engineers. The joint supervision team

approach, with international consulting engineering firns playing a catalytic role, proved effective inimproving quality and helped the local counterparts appreciate the importance of quality control andassurance.

E. RIPA (US$65.1 million, SAR; US$111.9 million, ICR)

The RIPA component consisted of the improvement and new construction bf 31 roa(d systems in 32

counties with a total length of 3,919 km. The general assessment is that the improvement of rural roads hassignificantly improved access to remote areas and expanded growth opportunities in poor areas of the

province. The impact of this component was rated as highly satisfactory by local officials, who stressedthat the communities served by the roads have seen their living standards improve and access to educationand health and social services enhanced.

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F. Provision of equipment (US$15.8 million, SAR; US$13.7 million, ICR)

Equipment required for the operation and maintenance of the high-grade highways, construction qualitycontrol, highway research, environmental monitoring, maintenance of the existing highway network,institutional strengthening, and equipment for highway safety were procured satisfactorily. All theequipment purchased under the project has been fully utilized.

G. Road safety (US$1.3 million, SAR; US$6.2 million, ICR)

The five-area approach that the road safety component adopted (institutional set-up, training, study,equipment, and blackspot improvement program) was implemented satisfactorily. The accident analysisstudy was completed by December 2001. An accident analysis computer program was completed andinstalled by July 2001. The highway safety audits and implementation report were completed by July 2001.The program is being implemented gradually by the Shaanxi High-Grade Highway Administration Bureau(SHGHAB) and the HAB. The blackspot remedial program, consisting of civil works, signs and markingsat 15 locations, was completed by December 2001. The driver training study was completed in 1998 andhas been implemented fully. The final report of an independent evaluation of the implementation of thetraffic safety component was completed in November 2002, and it is confinned that the road safetycomponent was completed satisfactorily.

H. Institutional strengthening and training (US$ 2.4 million, SAR; US$ 2.1 million, ICR)

Training. The overseas and domestic training programs were completed satisfactorily. The trainingprogram proved to be a very effective tool in transferring technology and management know-how and gavestaff exposure to new concepts and modem construction procedures. A total of 3,162 persons received2,782 person-months of domestic training. One hundred six persons received 106 person-months of trainingabroad, and 45 persons participated in the study tour abroad (for 30 person-months). The training covereda wide range of subjects related to planning, design, supervision management and operation of highways,environmental monitoring, financial management, and road safety. On-the-job training and technologytransfer were provided during the construction period by the foreign supervision engineers.

Xian Bypass Study. The study was completed in July 1997. It investigated the various altemativealigmnents and recommended the preferred alternative. The findings of the study served as a basis for thedevelopment of the second Xian Ring Road, which is now under construction.

Highway Maintenance Study. This study, covering the organization of highway maintenance,mechanization of highway maintenance operations, improved collection and analysis of traffic volume data,and a pavement management system, was completed in February 2001, with assistance from an Australianconsulting firm. The study made recommendations for improving maintenance methods and techniques inthe province. Some of the recommendations have been implemented and have contributed to theintroduction of market mechanisms in highway maintenance.

Additional technical studies. At SPTD's request, the following four additional teclnical studies wereconducted during project implementation:

* Loess embankment treatment by dynamic compaction* Management system for high-grade highway construction projects* Comprehensive treatment for landslides* Stability of high slopes in loess and rock conditions and their treatment measures.

All four studies were completed in June 2002. They helped SPTD enhance its technical capabilities anddesign of highways in mountainous terrain.

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I. Safeguard policy

Environmental protection. Major environnmental impacts of this project include noise and air pollutionduring construction and operation. Impacts also includecd the alteration of hydrological regimes, soil erosionand its impacts on the local ecology, impacts on cultural relics, and the problems associated with thehaulage of construction materials during construction. During construction, mitigating measures wereimplemented for air, noise, and water pollution and soil erosion. Considerable efforts were made to protectthe environment and minimize social disruption and accidents during the haulage of construction materials,as agreed in the Environmental Action Plan (EAP).

Because highway construction for the THH, which is in a mountainous area, involved many cuttingsections, slope protection and the disposal of excavated soil were of serious concemn for SPTD and the localcommunities. Four kinds of grasses were chosen carefully through an on-site experiment of 15,000 squaremeters and were planted along the highway alignment. The huge amount of soil that was excavated wasused to create 1,000 mu of land for local farmers' use. No unforeseen adverse environmental problemarose. Monitoring of air and water quality, noise, lead content of soil, and crops and herbage according tothe EAP was carried out regularly. The latest monitoring report confinned that the noise levels in theresidential areas were lower than the standards required both during the day and at night; air quality did notworsen and that it met standards; and the highways did not cause any significant negative impact on waterin rivers along the highways.

The protection of cultural heritage was handled well. For example, during the subgrade excavation alongWTE, cultural relics of the Old Stone Age were found. The contractor, in accordance with the EAP andlocal regulations, suspended construction immediately and informed the relevant cultural relics authority ofthis discovery. Construction was resumed after the authority preserved the relics.

Land acquisition and resettlement. The six high-grade highways (including XSH) had to meet landacquisition and resettlement requirements, for which ten external monitoring reports were submitted to theBank. The final monitoring report states that the land acquired exceeded the estimated figures in theResettlement Action Plan (RAP) by 9.5 percent, the floor space of demolished houses exceeded estimatesby 13 percent, and the total resettlement cost exceeded the estimate by 1 percent. The resettlementassessment undertaken in 2002 found that despite minor issues with reduced compensation payments, thelivelihood of all the project-affected people have been r estored or improved. The compensation rates thathad been reduced were later adjusted to take account of the Bank's comments.

The 152 segments of rural roads, a total of 3,919 kn, are scattered in 249 townships in 32 counties inShaanxi Province. Although no monitoring was done during implementation, a resettlement assessment wasundertaken by an independent monitor in 2002. The results indicated that minor adverse impacts on theproject-affected people have been rectified and the benefits of the RIPA program were appreciated by therural population, including those adversely affected.

All resettlement objectives -- restoration or improvement of income, livelihood, and productivity of theaffected people -- have been met. All activities in the RAP, including the rehabilitation program, have beencompleted. The Banks resettlement policies were followed during resettlement implementation and the taskteam was satisfied with the outcome of the resettlement assessment. The impacts of the high-gradehighways and RIPA are summarized in the following table.

Major Items High-Grade Highways RIPAPlanned Actual Planned Actual

Land acquisition (mu) 14,818 16,229 5,806 4,767

House demolition (sq. m) 59,955 67,531 24,848 23,316Project-affected people 17,730* 14,226 3,780 3,040

Total resettlement cost (Y million) 394.63 399.65 30.62 26.51*The number of project-affected people was estimated on the high side on the basis of 1.08 mu per capitabefore land acquisition in the project area, while the land-holding capacity after land acquisition is now 1.35mu per capita.

4.3 Net Present Valte/Economic rate of return:

The economic evaluation comprised two components: the high-grade highways (six subcomponents,

including XSH) and RIPA (152 subcomponents carried out in four phases). The economic evaluation

covers all subcomponents as well as the entire project. The detailed economic analysis is in Annex 3.

The economic internal rate of return (EIRR) of the high-grade highways is estimated at 13.1 percent,

compared to the SAR estimate of 16.0 percent; the net present value (NPV), at a discount rate of 12

percent, is estimated at Y 408.2 million. The recalculated EIRR and NPV are lower than anticipated at

appraisal mainly because of substantial increases in project costs and lower traffic for one of the six roads

than projected in the SAR. The results are summarized in the following table.

EIRR (in %) AND NPV (12%, Y million) OF HGHSAR ICR

EIRR NPV EIRR NPV1. Weinan-Tongguan Expressway 16.7 -- 15.6 465.52. Tongchuan - Huangling Highway 16 3 -- 8 7 (515 2)3. Lantian -Xiaoshangyuan Highway 14.3 -- 12.6 25.94. Lintong -Warriors Museum Highway 14 7 -- 13 0 5.25. Famensi - Tangyu Highway 12 6 -- 18.4 197 56. Xian - Sanyuan Highway -- -- 290 168 1

Total 16.0 -- 13.1 408.2

The EIRR for RIPA is estimated at 16.7 percent compared to the SAR estimate of 15.0 percent, and the

NPV, at a discount rate of 12 percent, is estimated to be Y 531.6 million. The EIRR stated in the SAR

covered only phase 1 of the program, while the EIRR for the ICR covers all four phases. The results are

summarized in the following table.

EIRR AND NPV OF RIPA

EIRR (in %) NPV (12%, Y million)SAR ICR SAR ICR

Phase 1 15.0 16.2 -- 34.3

Phase2 -- 15.1 -- 218.0

Phase 3 -- 24.7 -- 502.8

Phase 4 -- 9.2 (36.4)

Total - 16.7 - 531.6

The EIRR for the entire project (high-grade highways and RIPA) is estimated at 14.1 percent, compared

with 15.8 percent estimated in the SAR. The NPV is Y 939.8 million. The following tables summarizes the

results.

EIRR (in %) and NPV (12%, Y billion) Total ProjectSAR ICR

EIRR NPV EIRR NPVHGH 16.0 -- 13.1 408.2RIPA 15.0 -- 16.7 531.6

Total 15.8 - 14.1 939.8

4.4 Financial rate of return:

The financial evaluation of the project comprises three sections. Section 1 assesses the revenue-earningentity (high-grade highways, tolled roads); Section 2 assesses the non-revenue-earning entity (RIPA,non-tolled roads), and Section 3 assesses the financial capacity of SPTD to sustain highway activities. Thedetailed financial analysis is in Annex 3. There was no financial evaluation in the SAR.

For the revenue-earning entity, the results of the financial evaluation show that the FIRR for the high-gradehighways, which constitute about 62 percent of the total project investment, is expected to be 3.7 percent.The NPV (at a 5.0 percent discount rate) would be Y 696.9 million.

For the non-revenue-earning entities (i.e., RIPA -- about 38 percent of total project investment), thefinancial evaluation, given the nature of financial risks on those investments, focuses on the availability ofsufficient counterpart funds and the operating expenses. All the indicators show that the financial risks aremodest.

4.5 Institutional developnment impact:

The overall institutional development impact was positive. A significant transfer of klowledge andtechnology took place during project implementation. Significant numbers of staff were trained throughforeign and domestic studies and tours. Local engineers, with foreign experts, supervised the constructionof high-grade highways using the FIDIC (Intemational Federation of Consulting Engineers) contractualapproach. This implementation arrangement helped raise the quality of the civil works and enabled thetransfer of know-how. Experience with competitive bidcling was enhanced through the use of contractingfirms. The findings and recommendations of the highway maintenance study promote the introduction ofmarket mechanisms into highway maintenance operations, primarily through maintenance by contract, inShaanxi and enhance the mechanization of maintenance operations to improve the quality and efficiency ofmaintenance work.

5. Major Factors Affecting Implementation and Outcome

5. 1 Factors outside the control of governmentt or implementing agencv:

Adverse climate conditions. In 1998, exceptional flooding caused serious damage to RIPA roads insouthern Shaanxi. This was especially serious in the five counties of Shang Lou Prelecture. In Dang FangCounty, 2,000 mm of rain fell in 6 hours -- a world record. About 42 km of roads partially disappeared,with nothing left of the alignment. Damage to the RIPA road systems was estimated at about Y 166million. The Bank agreed to allocate additional sums of US$5.3 million in 1999 and US$7.0 million in2000 for rehabilitation, repairs and reinforcement.

Landslide-prone areas. At the design stage, it was foreseen that construction in the mountainous sectionsfor THH would be extremely difficult because of the many long tunnels and long bridges and a viaduct.When construction commenced, the proposed alignment was discovered to traverse two landslide-prone

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areas. Thus, substantial changes to the design of protection works were made. The Bank provided noobjection to the variations due to geological conditions that could not reasonably have been expected to beforeseen according to FIDIC Clause 12.

5.2 Factors generally suibject to governnzent countrol:

Coordination between SPTD and traffic police. Outcomes for the road safety component were mixed.The expected reduction in traffic accidents subsequent to the opening of the two-lane Class 2 highways(FJTH and LXH) did not materialize. However, accidents on the divided four-lane highways (THH andWTE) were reduced by about half. Improving road safety requires coordinated action in engineering,education, and enforcement. The Provincial Communication Departnent can work only on what falls underits responsibility - the engineering aspects. With the guidance of higher levels of goverrunent, goodcooperation between the Provincial Communication Departnent and the traffic police, who are in charge ofenforcement and education, needs to be established.

Coordination between Shaanxi and Henan Provinces. The completion of construction of theYangjin-Baijiazhui connection in Henan Province, originally scheduled for end-1999, was delayed.Therefore, although WTE opened to traffic on October 1, 1999, the connection with the Henan section wasdeferred until December 2001.

5.3 Factors generally suibject to implementing agentcy control:

Insufficient geotechnical investigation and inadequate design. A huge number of major design changesand variations were made, particularly in the mountainous sections with adverse geological conditions,which contributed to cost overruns. The main reasons for these design changes and variations are: (i)insufficient geotechnical investigations and boring tests at the design stage; (ii) insufficient and inaccuratedetailed topographical surveys; and (iii) inadequate designs based on the inaccurate infonnation and data.

Delay in implementation of THH. Commencement of the THH project was delayed by eight monthsbecause of the late approval of the bid evaluation and the late completion of resettlement activities. In spiteof the remarkable volume of earthworks and number of long tunnels, SPTD tried to complete the project bythe original target date (December 31, 2000). However, because of landslides during construction, SPTDsucceeded in shortening the construction period by only three months. THH opened to traffic on April 29,2001. Because withdrawals from the loan were not expected to be completed by the original closing date,the closing date was extended by one year to December 31, 2002.

Most E&M works deleted from Bank financing. The Bank loan originally covered E&M works forWTE, THH, LXH, and XSH. However, during implementation the Bank and SPTD agreed that the Bankwould not finance the E&M work component, except for those for FJTH, for the following reasons: (i)SPTD decided to integrate the telecommunications and tolling system for WTE into one comprehensivesystem for the provincial high-grade highway network and the timing of procurement did not fit SPTD'stime frame; (ii) because the cost overruns for civil works for THH and XSH were substantial, SPTDpreferred that the Bank finance the cost overruns rather than E&M works, which could not be completed bythe loan closing date; and (iii) SPTD could not afford to spend two years to procure and install the E&Mworks for LXH. The monitoring system in a tunnel was installed after the civil works were completed.

Lower compensation rates. As discussed in section 4.2, lower compensation rates were paid to farmersfor acquired land than agreed to in the RAP. The Bank requested SPTD to correct the noncompliance withthe RAP. SPTD accepted the Bank's recommendations and the Bank agreed with the revised compensationrates and SPTD's follow-up actions.

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Two implementing agencies. The Bank recommended early during implementation that SPTD assign onechief engineer to the entire project to preserve uniformity in supervision procedures and enhance theefficiency of supervision services, as well as to ease the management of foreign experts, and speed andquality of reporting to the Bank. However, SHGHAB was in charge of THH and XSH, and ProjectExecution Office (PEO) was in charge of four other high-grade highways. During the supervision missions,each office separately submitted a summary progress report on its own responsibility, and weakcoordination between these two agencies was observed.

5.4 Costs andfintanicing:

At appraisal, the total project cost was estimated at US$5:56.5 million (including contingencies of US$90.5million), of which US$210.0 million equivalent was from the Bank loan. The total actual cost of the projectis estimated at US$ 574.0 million. The civil works for the five high-grade highways, including E&M workand buildings, were estimated to cost US$304.0 million at appraisal, whereas the actual cost isapproximately US$364.4 million -- an increase of about 20 percent. Because of the substantial increase inthe cost of civil works, and the expansion of the RIPA component, the total actual cost of the projectincreased by 23 percent over the estimated cost at appraisal without contingencies.

Substantial cost overruns in civil works for the five high-grade highways were incurrecl because of adversegeological and geographical conditions in mountainous areas. However, it is understood that if moredetailed geotechnical investigations (including boring tests for tunnels) and detailed topographical surveyshad been conducted, the design changes could have been minimized. Consequently, the expected Bankfinancing ratio of 37.7 percent at appraisal was reduced to 36.6 percent at completion.

6. Sustainability

6.1 Rationale for sustainability rating:

The project is likely to be sustainable when the achievements made under each of the components areconsidered, and sustainability is enhanced by the continued efforts of SPTD.

* The completion of five high-grade highways has supported the development of road infrastructureto relieve congestion, improve access to important archeological and cultural sites, and improve theefficiency of road transport in the province. The quality of the civil works of the five highways wassatisfactory;

* The RIPA component greatly contributed to alleviating poverty in the poor areas. The criteria,screening, and selection process for the RIPA program will be used by the local authorities as areference for future programs;

* The Highway Maintenance Study has led to a remarkable transfer of technology to local staff. Thestudy provided important input for the introduction of market mechanisms in highway maintenanceoperations, especially through maintenance by contract; and

* Under a pilot program of blackspot improvements, 15 locations were improved. Blackspotimprovement will become routine work for the highway authority. The procedures established foridentifying and analyzing blackspots, the criteria for selecting improvement measures, andimplementation programming will be good for SPTD's future programs. However, efforts must bepursued in pedestrian and driver education and traffic enforcement, which recluire morecoordination between PCD and the traffic police.

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6.2 Transition arrangement to regular operations:

The five high-grade highways were opened to traffic on the following dates:

WTE October 1999THH April 2001LXH June 1999LTWMH October 1999FJTH April 1999

The operation and maintenance of these highways have been generally satisfactory except for the slowerthan expected increase in traffic on LXH and THH.

Under the Driver Training Study, completed in December 1998, senior- and middle-level driver trainingcourses were developed in cooperation with the Shaanxi Provincial Traffic Training School and theShaanxi Provincial Skills Training School. These courses have become popular in China and are used inother provinces such as Anhui, Fujian, and Shanxi. More than 10,000 drivers have taken these coursessince June 1999.

7. Bank and Borrower Performance

Bank7. 1 Lending:

At the identification stage, the task team ensured that the project objectives and scope were consistent withboth the government's priorities and the Bank's assistance strategy. In particular, the sector issuesaddressed under the project were selected from among the priorities identified in a Bank sector strategyreport, Highway Development and Management Issues, Options, and Strategies (February 1994).

Bank assistance in project preparation was highly satisfactory. The Bank assigned a highly qualified teamto the project with an appropriate skill mix, including experts in areas of engineering, environment,resettlement, road safety, highway maintenance, procurement, institutional development, training, and otherfields of specialization. The preparation of the project served to transfer teclnical knowledge to the Chinesecounterparts.

Appraisal was satisfactory. The SAR assessment of the Government's commitment to the project and of theimplementing agencies' capacity during negotiations was on the mark. The economic analysis indicated thatit would be economically feasible to construct five highways as proposed and to operate them as toll roads,with the exceptions of LTWMH and FJTH, with lower traffic growth. The main risks were identifiedcorrectly: (i) a delay in completing the connection between Shaanxi and Henan provinces; (ii) a delay incompleting highways as a consequence of design changes; and (iii) nonrealization of traffic projections,with less diversion to the new highways from existing roads. Although a comprehensive monitoring plan forproject objectives and implementation was established, indicators to measure these (baseline andbenchmark figures) were not developed during project preparation.

7.2 Supervision:

During the first four years after project launch in June 1996, the task manager changed four times, and thecontinuity of staff was not maintained. However, Bank supervision performance during implementationwas consistent and satisfactory. The project had a very ambitious scope. Every time the task teamsupervised the project, it had to recruit consultants to supervise the RIPA project and look after the

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technical studies and the road safety component. Bank involvement was critical to the technical studies, forwhich staff provided useful advice in improving their quality. Resettlement and environment staff providedspecialized reviews during the critical phases of the project.

The task team showed responsiveness and flexibility in approving needed design changes andmodifications. During the construction of the high-grade highways, many variation orders were issued. Thetask team regularly invited a construction expert to participate in missions. It reviewed the proposed designchanges and variations and helped the client divide them into three categories -- provisional sum, day work,and variations.

7.3 Overall Bank perjbormance:

Overall, the Bank's performance was satisfactory. The supervision team paid adequate attention to projectcompliance with Bank policies on resettlement and environment. The flexibility of Bank supervision staffhelped to enrich the quality of the project by allowing the desired variations.

Borrower7.4 Preparation:

The Borrower's preparation was highly satisfactory. Both the central government and the implementingagencies were highly committed to the project from the start. Their commitment was evidenced in theirwell-documented preparation work for this very complex project. Recognizing the importance of sectorreforn, SPTD cooperated well with foreign assistance to develop the RIPA, highway maintenance, androad safety components.

7.5 Government implementation performance:

The central government supported the project throughout its implementation. SDPC and the Ministry ofCommunications (MOC) supported the inclusion of a very challenging RIPA component of about 3,900 kmto alleviate poverty in the province. The RIPA component made remarkable achievements, especiallyconsidering that the central government was reluctant to borrow from the Bank for a component that didnot raise revenue. MOC helped implement capacity building measures by coordinating training activities,particularly the overseas training and study tours.

7.6 Implementing Agency:

Overall project management was satisfactory. SPTD swiftly adapted the project to changing circumstancesand suggested changes accordingly. THH, one of the five high-grade highways, was implemented bySHGHAB, and the other four highways by PEO. The coordination between the two implementing agenciescould have been improved with stronger leadership from the management of SPTD. The most noteworthyachievement of this project was the timely completion of the 3,900-km RIPA component.

7.7 Overall Borrower performance:

Overall, the borrower's performance is rated as satisfactory. Both beneficiaries and the central governmentshowed their commitment to the project and followed through to ensure its suiccessful implementation andoperation.

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8. Lessons Learned

A. Complexity of project scope

The major project components included five high-grade highways (totalling 240 km) in five locations; theupgrading of a 32 km class 1 highway; the improvement and new construction of about 3,900 km ruralroads; a road safety program with six subcomponents; and institutional strengthening and trainingconsisting of two technical studies (Xian Bypass Study and Highway Maintenance Study) and a trainingprogram. The project tried to address all the key transport sector issues in China. During preparation phasein 1994 and 1995, SPTD was keen to develop the proposed components, but soon it was overwhelmed withother projects funded by ADB, Japan Bank for International Cooperation, Kuwait Fund, and other financialinstitutions. The agency was overstretched in its capacity to implement various projects and experiencedsevere shortage of qualified staff. Most of the technical studies and software components were entrusted tooutside consulting firms and hence did not help to strengthen the institutional capacity of SPTD. Policyreforms remained focused on specific subjects, and were scaled up for a broader impact.

B. Success of RIPA program

The RIPA program demonstrated positive contribution towards poverty alleviation and in providing a basic(all-weather) road access for social services and markets. A report prepared by SPTD and ShanglaoPrefecture Communications Bureau described the lessons learned from the implementation of the RIPAcomponent and documented its social and economic benefits, as sumunarized below:

Social Beneflt 1995 2001 (at completion)

Regular bus service to 200 townships 81 % 100 M.Road accessibility to 2,858 villages 72 % 95 '%,Average annual per capita income Y 450 Y 1,066Rate of timely accessible health service 40 % 85 %Rate of entrance to middle school 45 % 81 "M,

Other provincial govemment agencies, however, have refrained from borrowing for RIPA-like componentsin succeeding Bank projects because no dedicated revenue source for loan repayment can easily beidentified, unlike for toll roads. The Bank continues to support road development in low-income areasunder future lending and non-lending services , but is should be recognized that a RIPA-type componentdemands extensive supervision. The supervising of almost four thousand kilometers of rural roads spreadover 32 counties was a difficult task. Procurement for these road works was through 218 contractsrepresenting national competitive bidding procedures (33), small works (96), and force account (89).Signed contracts were post-reviewed except for two contracts for each procurement method at the initialstage of implementation.

C. Number of design changes and variations

The technical complexity of highway construction and operation was underestimated. This componentexperienced substantial cost overruns. Design changes and variations could have been avoided orminimized if designs had been based on more accurate topographic maps and results of geotechnicalinvestigations and boring tests during the project preparation. Because of cost increases for civil works (aswell as the delayed procurement for E&M works), a large share of the loan was used to cover civil works

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components than was planned. As a result, Bank funds intended for the proposed E&M works werediverted to WTE and THH construction..

D. Monitoring indicators

During appraisal, a number of monitoring indices for implementation progress and project objectives wereestablished for seven project components. However, these indicators were not suppoited by baseline and/orbenchmark numbers. During project implementation, the task team discussed with SPTD the indicators thatcould be easily measured and sustained, and established a new set of indicators.

9. Partner Comments

(a) Borrower/inzplenzenting agency:

A. General

1. This report summarizes the implementation experience of the Second Shaanxi Highway Projectpartly financed by an IBRD Loan.

B. Project description

2. Project objectives are to:

a. Support continuing development of road infrastructure to relieve congestion, improve accessto important archeological and tourist sites, facilitate mobility and increase the efficiency ofroad transport in the interest of stimulating economic activity in Shaanxi.

b. Assist in the implementation of policies to alleviate poverty in the pooIr areas of the province;

c. Promote development of institutional capabilities of SPTD, through training and other means;and

d. Increase the safety of road transport.

3. The scope of the project includes:

a. Construction of five high-grade highways comprising:

i. A 78.1 km four-lane expressway between Weinan and Tongguan (WTE);

ii. A 73. 6 km four-lane Class I highway between Tongchuan and Huangling (THH) anddoubling of the existing two-lane Class I highway between Yaoxian and Tongchuan(18.4 km);

iii. A 48.3 km two-lane Class II auto-only highway connecting Lantian and Xiaoshangyuan(LXH);

iv. A 5.9 km two-lane Class II auto-only highway coinecting Lintong and the Terra CottaWarriors Museum (LTWMH); and

v. A 34.8 km two-lane Class II auto-only highway between Fameii Buddhist Temple andJiangzhuang; and between Jiangzlhuang and Tangyu (FJTH).

b. Upgrading of Xian-Sanyuan Class I highway (XSH) through providing access control, andinstalling traffic safety devices, etc.;

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c. Improvement and new construction of about 3,900 km of rural roads to help alleviate poverty(RIPA) in poor counties in Shaanxi;

d. Provision of equipment for:

i. Control of construction quality and for monitoring of the environment;

ii. Operation and maintenance of the high-grade highways;

iii. Maintenance of the Shaanxi provincial highway network; and

iv. Institutional strengthening of SPTD and related institutions and the traffic police.

e. A road safety component to help reduce accidents on Shaanxi's highways; and

f. Institutional strengthening, training and two studies (Xian Bypass and highway maintenancestudies).

C. Achievement of the objectives

4. The project has attained all major objectives through successful implementation of the projectcomponents:

a. Five high-grade highways with a total length of 259 km and three linking roads with a totallength of 8.2 km were satisfactorily completed. The number of domestic tourists who visitedthe Terra Cotta Warriors Museum increased from 1,738,000 in 1992 to 2,942,000 in 2001,while the intemational tourists increased from 357,000 in 1992 to 1,795,000 in 2001. Thus,the project has basically reached expected targets. The construction according to FIDICconditions was undertaken in 1985 when the XSH, the first World Bank-financed highwayproject in Shaanxi was constructed. This construction management has been expanded andadopted for other highway projects in Shaanxi. This became common practice in managementof highway construction in Shaanxi.

b. The upgrading of the XSH was satisfactorily completed, which resulted in a remarkabledecrease in traffic accidents from 29 times in 1995 with the casualty of 23 persons and theeconomic loss of Y 128,000 to 16 times in 2000 with the casualty of 13 persons and theeconomic loss of Y 63,000.

c. The RIPA program with a total length of 3,919 km has been satisfactorily completed. Theinfrastructure in the poor area appears to be obviously improved and the social and economicbenefits were enhanced.

d. The intemational construction supervision services totaled 162.11 person-months and localsupervision services totaled 12,432 person-months. By jointly working with foreign experts,local engineers' awareness of construction quality was enhanced.

e. Environmental monitoring was undertaken 60 times in total during the construction period(twice a month), and 30 times during the operation period (once a month). The assessment ofenviromnental aspects has been rated the project satisfactory.

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f. The implementation of subprojects under the road safety study has been satisfactorilycompleted. The outcomes of the subprojects such as driver training, improvement ofblackspots, preparation of a road safety manual, development of software dealing with trafficaccidents management and analysis contributed greatly to reducing the traffic accidents on theupgraded and newly constructed roads. The software on traffic accidents management andanalysis developed became standard in Henan, Xinjiang, and Jiangxi.

g. A total of 17 overseas training and study tours courses totaling 131.2 person-months wereimplemented. Through overseas study/training, the local managerial and technical staff gainedexperience in expressway planning, design, construction, financing, financial auditing, andmaintenance management.

h. The procurement of equipment for a central laboratory and highway operation andmaintenance for the related agencies was successfully completed. With this equipment, themechanized maintenance of the expressways has been improved and the capacity of checkingand testing was enhanced.

i. The study on Xian Bypass was completed by the end of 1997. The outcomes of the studycontributed a lot to the route selection of the Xian Bypass and promoted the implementationof the bypass project.

j. The study of highway maintenance was successfully completed. The outcomes of the studyplayed a very important role in development of modem highway maintenance methods, theacceleration of the mechanized maintenance, the improved data collection and analysis oftraffic volume, development of pavement management system, and the reformn of the highwaymaintenance system.

D. Project formulation and preparation

5. By April 5, 1995, SDPC and Shaanxi Provincial Planning Commission approved the projectproposal for the Second Shaanxi Highway Project. By October 28, 1996, SDPC and MOC approved aprefeasibility study for the project.

6. Starting with the Bank's identification mission in October 1994, the World Bank was involved inthe preparation of the project. In March/April 1994, the World Bank preparation mission reviewed thefeasibility study reports, environmental evaluation reports, and the regional traffic anid econiomicinformation.

7. In July 1995, the Bank's appraisal mission reviewed and discussed additional documents providedduring the preappraisal mission. Experts funded by the Italian Trust Fund were also invited to review thedesigns and bidding documents.

8. . In January 1996, the loan was negotiated in Washington. The Loan Agreement and the ProjectAgreement for the Second Shaanxi Highway Project for US$210 million were signed on April 17, 1996.

E. Project implementation

9. The loan became effective on July 16, 1996, and the experience gained during the implementationof the project is summarized below by component.

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10. High-grade highways and linking roads. The construction of total 259 km high-grade highwaywas implemented using 17 international competitive bidding (ICB) civil works contracts and theconstruction of three linking roads was included in corresponding contracts. Construction of high-gradehighways commenced in March 1997, except that of THH (commenced in March 1998) and was completedby October 1999 except THH (completed in April 2001). During the construction, the employer paid muchattention to important nodes and quality control. The employer, together with the designer and foreign andlocal engineers carried out construction supervision and approved variation orders including thereplacement of the embankment material from the loess to the sand gravel; lime earth treatment for theupper course of the sub grade; anchorage works to stabilize side slopes of the THH and LXH; the designchange from at-grade intersection to grade separations, additional underpasses, slide treatment works anddrainage works to the FJTH. In addition, efforts were made to replace the back-filling materials atabutment of all bridges, culverts and underpasses.

11. XSH. The upgrading works of a total of 32 km of highway was divided into 26 contract sections,of which 24 sections commenced in October 1997 and were completed by the end of 1998. Because ofchange of design concept, two contracts including an interchange and telecommunications system were notimplemented together with other 24 contracts. SPTD decided to finance these contracts by domestic funds.Construction of an interchange started in November 2001 and completed in November 2002. Installation oftelecommunication system commenced in August 2002 and will be completed in October 2003.

12. RIPA. The RIPA program consists of 31 road systems with 152 road sections, divided into 218contracts located in 32 counties. Works started in October 1996 and were completed in October 2000. Thetotal length covered under RIPA was 3,919 km with an investnent of Y 645.96 million. In 1998 and 1999,Shaanxi province was stricken by severe flooding, and some sections of completed roads were washedaway. The Bank approved additional financing for rehabilitation of the damaged roads.

13. Equipment procurement The equipment procurement was implemented in two stages: the firststage started in 1996 and was completed in 1998 with total costs of US$8.31 million (of which US$1.44million was used for imported equipment). The second stage started in December 2000 and was completedby March 2002. The cost of procurement totaled US$4.058 million. The equipment procured was forhigh-grade highways operation and maintenance.

14. Ventilation and illumination system for tunnels. THH has seven tunnels, and the longest one is1,700 m. LXH has six tunnels, and the longest one is 1,670 m. Supply and installation of ventilation andillumination system were included in the contracts for civil works, and were completed at the same timethat the civil works were completed.

15. E&M work. The original design for telecommunications and the toll system were completed in1995. However, considering the technical development in this field, SPTD decided to combine the E&Msystems for high-grade highways as a complete comprehensive system. Original designs were revised.Because of the delay of revision of design and the bidding procedure, it was expected that the E&M workswould not be completed by the loan closing date. SPTD decided in 1999 that the E&M works of the project(excluding FJTH) were locally financed. Installation of telecomununications systems for WTE commencedin October 2002 and will be completed by August 2003. Upon approval by the Bank, thetelecommunications and toll system for FJTH was procured through direct shopping.

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16. Construction supervision. Italconsult provided a total 162.1 person-months input for constructionsupervision, including 4 person-months of training service.

17. Staff training. SPTD and MOC conducted a total 131.2 person-months of overseas training andstudy tours with a total cost of US$900,000. The training subjects involved project management,construction supervision, traffic engineering, environrment. protection, highway planning, maintenance ofhigh-grade highway, and traffic safety. SPTD also organized 2,782 person-months of domestic trainingduring the project implementation. The training enriched staff with modem management knowledge ondesign, construction, operation, and maintenance for high-grade highways.

18. Environment monitoring and training. Environmental protection was a key aspect of the projectimplementation. The project involved 11 person-months oversees training. The employer entrusted ShaanxiProvincial and Xi'an Municipal Monitoring Stations with conducting quarterly environmental monitoringfor each subproject.

19. Land acquisition and resettlement. Land acquisition and resettlement were completedsatisfactorily. In accordance with the RAP, external monitoring was executed by the Shaanxi ProvincialAcademy of Social Sciences. The RAP was followed as planned, and living standards and income of peopleaffected were both improved and increased. Under the six high-grade highways, a total of 16,229 mu landwas acquired, affecting directly 2,947 households covering 14,226 people, in which 503 households wereremoved and 2,143 population was resettled. A total of 39 enterprises were affected (no removal occurred).The total compensation for land acquisition and resettlement reached Y 399.6 million, a Y 5 millionincrease compared with the originally estimated Y 394.6 million in RAP, or an increase of 1.0 percent.Under the RIPA program, a total of 4,767 mu land was acquired, about 18 percent less than the estimatedat appraisal. The number of people affected was 3,040, about 20 percent less than estimated at appraisal.The total costs for land acquisition and resettlement was Y 26.51 million, about Y 4 million less thanestimated.

F. Operation of high-grade highways and RIPA program

20. Although the traffic volume was not as expected on some highways, the operation of high-gradehighways is generally satisfactory. Traffic accidents on the divided highways (WTE and THH) weresubstantially reduced.

a. WTE: WTE was opened to traffic in October 1999. The annual average daily traffic(AADT) in 2000 reached 9,999 medium truck equivalent (MTE), and 10,114 MTE in 2001,and is estimated to be 11,438 MTE in 2002. The toll revenue in 2000 was Y 58.59 million,while that of 2001 stood at Y 58.98 million.

b. THH: THH was opened to traffic in April 2001. The AADT in 2001 reached 3,159 MTE,and in 2002 is estimated to reach 4,000 MTE. The toll revenue in 2001 was Y 29.96 million.

c. LXH: LXH was opened to traffic in June 1999, with the AADT of 2,231 MTE in 1999.AADT increased to 3,423 MTE in 2000,3,623 MTE in 2001, and 3,393 MTE in 2002. Tollrevenue was Y 11.75 million in 1999, 29.46 million in 2000, and 30.61 million in 2001.

d. LTWMH: LTWMH was opened to traffic in October 1999. The AADT reached 1,896 MTEin 2000, and 2,394 MTE in 2001 and is estimated at 2,528 MTE in 2002. Toll revenue was Y27.61 million in 2000, and Y 26.87 million in 2001.

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e. FJTH: FJTH was opened to traffic in April 1999. The AADT reached 2,172 MTE in 1999,2,620 MTE in 2000, and 2,863 MTE in 2001 and is estimated at 3,168 MTE in 2002. Tollrevenue was Y 24.05 million in 2000, and Y 24.94 million in 2001.

f XSH: The upgrading works were completed in October 1998. Traffic safety was enhancedand traffic conditions were improved. The AADT reached 14,158 MTE in 1999, 16,871MTE in 2000, and 17,887 MTE in 2001. The AADT in 2002 is estimated at 18,500 MTE.Toll revenue was Y 69.53 million in 2000 and Y 65.68 million in 2001.

21. The RIPA program significantly contributed to improving access to the remote areas andexpanding growth opportunities in poor areas in Shaanxi. The local officials and people confirmed thatliving standards in communities served by rural roads have been substantially improved and they appreciatethe improved access to education, health, and social services. Since these newly improved roads areall-weather, much less maintenance works are required.

G. Works by contractors and consultants

22. Civil works. The civil works of five high-grade highway were divided into 17 contracts andprocured through ICB procedures. Contractors implemented the construction according to the contractscondition, specifications and the design/drawings. Their works were in general satisfactory. Through effortsof the employer, the engineer and the contractors, all five high-grade highways were completed and openedto traffic on due date, with good quality, meeting requirements in the specifications and the contractagreement. Construction quality of the highways passed the government standards.

23. Consultant supervision by consultants. The international consultant firn, ItalConsult. S.P.A.fielded 7 consultants with 162.11 person-months for construction supervision of the high-grade highways.The consultants together with local engineers paid frequent site visits to ensure the works quality andprogress of the project. They also reviewed payment orders and variation orders and prepared supervisionreports. The finn also carried out domestic training for 75 local engineers, and overseas training for 30local engineers. Local supervision teams were recruited through bidding among firms with soundqualifications and good reputations. About 296 local supervision engineers were involved in constructionsupervision services for five high-grade highways. All these supervision engineers carried out all-roundmanagement and control for quality, progress, measurement, and payment based on FIDIC conditions.

H. Works by implementation agency

24. Project preparation and implementation arrangement. Taking into account the complexity ofthe project components and the number of subcomponents involved, SPTD formally formed the ProjectExecution Office financed by the World Bank under SPTD in January 1996. PEO consisted of severaldepartments such as the engineering management, finance and planning, equipment procurement, landacquisition and resettlement, and comprehensive administration and was responsible for bidding,examination of major variations and claims, land acquisition and resettlement, payment according to thechief engineer's measurement, reporting to the World Bank, and monitoring the works of the contractor.Designs of all highways under the project were made by Shaanxi Highway Survey and Design Institute.During the construction phase, representatives of the design institute were fielded to be responsible forclarifications of drawing and variations.

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25. Environmental Impact Assessment. Shaanxi Provincial Scientific Institute for EnvironmentalProtection and Xi'an Highway Transportation University conducted an environunental impact assessme,ntfor each highway according to the state environmental assessment regulations and envirornental protectionmethod. These regulations and methods required that environmental protection be implemented throughdesign, construction, and operation phases. hI 1994/1995 the PEO submitted three times the proposedenvironmental impact assessment reports and the environmental action plan (EAP) for all six high-gradehighways to the World Bank. In December 1995, the Bank confirmed the EAP. The environmental impactassessment and EAP of RIPA were submitted to the Bank in October 1995 and cleared by the Bank. TheEmployer paid much attention to environmental protection at the designing phase, in the aspects ofalignment selection, road crossing, bridge and culvert, drainage, slope protection, and greening work. At theconstruction phase, contractors were requested to properly manage environmental protection, particularlyon waste yard, drainage works, planting, and greening work. The total greening area reached 1,999,700square meters.

I. Main factors affecting the project

26. Inaccurate geological investigation and higher cost. Because of the poor geological investigationat the design stage, numerous unexpected slope collapses and landslides occurred during the construction ofTHH, especially at 19 spots, which cost an extra Y 110 million for treatment.

27. Unfavorable weather conditions. Heavy flooding happened in 1998 and 1999 and exerted seriousdamage to the already built RIPA roads in southern Shaanxi. The disaster brought forth serious damage infive counties, where 42 km of roads washed out completely. Damage resulting from the flood reached Y166 million. The Bank agreed to finance additional US$5.3 million in 1999 and US$7 million in 2000 forthe rehabilitation and reconstruction of works washed out by floods.

28. Inadequate designs and higher cost. LXH was the first high-grade highway through heavymountainous areas in the province. Because of lack of design experience for mountainous highways, theside slope treatment was not properly designed, so that geological faults often occurred during construction.To ensure the highway safety during the operation period, additional protection works were undertaken,which caused costs.

J. Works by the Bank

29. Preparation of the project. From March 1993 to July 1995, the Bank dispatched four fieldmissions to Shaanxi to assist in preparing the proposed project. In February 1996, the Bank approved theproject. The appraisal report analyzed the background information and supported the proposed scope of theproject. The Bank reviewed the RAP, EAP, designs and bidding documents, procurement plans, and atraining program.

30. Project implementation. After the loan agreement became effective in July 1996, the Bankdispatched two missions a year to supervise the project and monitor the progress on each projectcomponent. The missions were generally satisfied with the perfonnance of SPTD.

31. Cooperation between the implementing agency and the Bank. Cooperation between theimplementing agency and the Bank was well done. The Bank helped the Employer deal withl the variationorders and claims raised. The Bank agreed with the increase of side (cut) slope protection works andreinforcement works, the addition of rehabilitation works under RIPA, and the loan relocation. Under the

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guidance of Bank staff from the Bank headquarters and its Beijing office, the project was completedsatisfactory to the Bank.

K Planning

32. At present, the Chinese government is implementing the Great Western Development Strategy toexpedite development of the mid and western parts of the country. One of the most significant tasks is toexpedite especially the construction of infrastructure and highway transportation. SPTD has developed aplan to expand the highway network in the province covering trunk highways, branch highways, and ruralroads, and connecting with those in surrounding provinces and regions. By 2010, the highway mileage ofthe province shall reach 52,000 kIn, in which expressways shall be 3,010 km. The class 1 highway shall be178 km, the class 2 highway shall be 7,300 km. With the completion of the provincial highway network,the "one-day-driving transportation circle" shall be formed to link Xi'an with Taiyuan, Beijing, Zhengzhou,Wuhan, Chongqing, Chengdu, Lanzhou, Yinchuan, Boatou, and other central cities. Over 70 percent ofcounties in the province shall be connected with expressways, and each county will be within five hoursdriving to reach major cities in the province.

33. In 2002, SPTD started to implement the tolling system with one toll card applicable to the wholeexpressway network in the province. Four highways, including WTE, THH, FJTH, and LTWMH, shallfirst be equipped with such tolling system in 2003.

(b) Cofinanciers:

(c) Other partners (NGOs/prihate sector):

10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome i Impact Indicators:

Indicator/Matrix Projected in last PSR Actual/Latest Estimate

High-Grade Highways: Estimate at appraisal As of December 2002

1. Congeston on existing roads reduoed -average daily traffic (ADT) on high-gradehighways:

FJTH (34.8 km) 3,000 veh/day 3,000 veh/dayLXH (48.3 km) 3,600 3,300THH (73.6 km) 7,200 3,800WTE (78.1 km) 8,200 11,000

ADT on existing parallel roads:FJTH corridor 1,600 veh/day 800 veh/dayLXH 700 900THH 3,000 3,000WTE 3,500 1,500

2. Economic activities promoted:GOVAI Per Capita in affected countiesincreased:

FJTH corridor Y 5,671 Y 5,735LXH 3,195 3,299THH 5,217 5,422WTE 4,487 4,503

3. Road safety improved: Fatalities/injurescaused by accidents reduced:

FJTH corridor 10 per 10,000 veh. 26 per 10,000 vehLXH 12 16THH 17 9WTE 29 12

RIPA:1. ADT increased:

1 st package 250 veh/day 490 veh/day2nd package 290 2603rd package 280 3404th package 390 310

2. GOVAI per capita in affected countiesincreased:

1 st package Y 865 Y 9932nd package 845 9743rd package 847 9234th package 855 949

3. Number of closed days reduced:1st package 7 days 5 days2nd package 8 83rd package 6 94th package. 6 |

Institutional capacity strengthened:Training program successfully completed: 2,633 2,913

person-months

Note: During the implementation of the project, the Bank and SPTD agreed that indicators to measure the achievement of the projectobjectives would focus more on direct and easily measurable and sustainable ones. This table covers only major indicators.

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Annex 1. Key Performance Indicators

Output Indicators:Indicator/Matrix Projected In last PSR Actual/Latest Estimate

Estimate at Appraisal

1. Five high-grade highways completed:FJTH (34.8 km) November 1998 (100%) April 1999 (100%)LTWMH (5.9 km) October 1997 (100%) March 1999 (100%)LXH (48.3 km) December 1998 (100%) June 1999 (100%)

1 HH (73.6 km) December 2000 (100%) Apnl 2001 (100%)WTE (78.1 km) December 1999 (100%) October 1999 (100%)

2. 32 km of Xian-Sanyuan Highway upgraded December 1997 (100%) March 2000 (100%)

3.4,100 km of rural roads improved or newly December 2000 (100%) October 2000 (100%)constructed

4. Pilot blackspot program completed December 2000 (100%) December 2001 (100%)

5. Planned training program completed June 2001 (100%) December 2001 (100%)

End of project

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Annex 2. Project Costs and Financing

Project Cost by Component(in US$ million equivalent)

Project Cost by Component Appraisal Actual/Latest Percentage ofEstimate Estimate ApriaUS$ million US$ million Appraisal

High-grade highwaysCivil works 282.8 344.6 121.9E&M supply and installation 8.5 9.3 109.4Buildings 12.7 10.5 82.7

Xian-Sanyuan highway 13.7 12.7 92.7RIPA 65.1 111.9 171.9Highway safety 1.3 6.2 476.9

Subtotal 384.1 495.3 129.0

Supervision 10.3 11.5 111.7Equipment 15.8 13.7 86.7Training 1.2 1.4 116.7Studies 1.2 0.7 58.3Contingencies 90.5 -

Land acquisition 53.4 51.5 96.4

Project Total 556.5 574.0 103.1

Percent of total 100.0

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Project Costs by Procurement Arrangements (Appraisal/Estimate)(US$ million equivalent)

Procurement Method

TotalProject Cost by Component ICB NCB Other/a NBF/b Project

________ Cost

High-grade highways and linkingCivil works 345.5 15.7 361.2

(143.2) (5.7) (148.9)E&M supply and installation 11.0 11.0

(8.8) (8.8)Xian-Sanyuan Highway 4.3 12.2 16.5

(1.9) (5.3) (7.2)RIPA 39.7 39.7 79.4

(14.7) (14.8) (29.5)Traffic accidents (black spots) 1.6 1.6

(0.0) (0.0)Equipment 8.5 4.1 5.1 17.7

(5.9) (3.2) (0.0) (9. 1)

Consultants and training/CSupervision of construction 12.9 12.9

(4.7) (4.7)Training 1.4 1.4

(1.1) (1.1)Studies 1.4 1.4

(0.7) (0.7)Land acquisition and resettlement 53.4 53.4

(0.0) (0.0)

365.0 59.7 73.3 58.5 556.5Total (157.9) (22.3) (29.8) (0.0) (210.0)

/a Other includes force account, international shopping, and limited international bidding, and consultantsand training./b NBF means not Bank-financed./c Selection of consultants according to the Bank's Guidelines for Usc of Consultants.

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Project Costs by Procurement Arrangements (Actual/Latest Estimate)(US$ million equivalent)

Procurement Method

Project Cost by Component TotalICB NCB Other/a NBF/b Project

CostHigh-grade Highways and Linking

Civil works 347.9 3.9 3.3 355.1(151.7) (1.7) (0.0) (153.4)

E&M supply and installation 0.9 8.4 9.3(0.7) (0.7)

Xian-Sanyuan Highway 4.7 8.0 12.7(2.1) (3.5) (5.6)

RIPA 35.8 76.1 111.9(1:3.2) (28.2) (41.4)

Traffic accidents (blackspots) 0.0 6.4 6.2(0.0) (0.0)

Equipment 3.2 2.3 8.2 13.7(3.2) (2.3) (0.0) (5.5)

Consultants and training/CSupervision of construction 2.3 9.2 11.5

(2.3) (0.0) (2.3)Training 0.9 0.5 1.4

(0.9) (0.0) (0.9)Studies 0.2 0.5 0.7

(0.2) (0.0) (0.2)Land acquisition and resettlement 51.5 51.5

(0.0) (0.0)

351.1 44.4 90.7 87.8 574.0Total (t54.9) (170) (38.1) (0.0) (210.0)

/a Other include force account, international shopping and limited international bidding, and consultants andtraining.

/b NBF means not Bank-financed.

/c Selection of consultants according to the Bank's Guidelines for Usc of Consultants.

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Project Financing by Component(in US$ million equivalent)

: ,. -fP 5bl~:Estin~aten. iActuallLatest Estimnate P-iercentag of AppComponent;.. F *:.,* - ; o A, raisal.

~~en ank,Sfhaanxi "C'e'iral Bank- Shaa'nii :C-entral k

High-grade highways

Civil works 40.8 118.6 123.4 86.2 106.7 151.7 211.3 90.0 122.9E&M works 1.7 6.8 8.6 0.7 505.9 10.3Buildings 7.1 5.6 8.8 1.7 123.9 30.4

Xian-Sanyuan 7.7 6.0 7.1 5.6 92.2 93.3highwayRIPA 15.2 26.0 23.9 39.2 31.3 41.4 257.9 120.4 173.2Highway safety 1.3 6.2

Subtotal 73.8 144.6 165.7 156.1 138.0 201.0 211.5 139.0 121.3

Supervision 6.6 3.7 9.2 2.3 139.4 62.2Equipment 7.5 8.3 8.2 5.5 109.3 66.3Training 0.3 0.9 0.5 0.9 166.7 100.0Studies 0.6 0.6 0.5 0.2 83.3 33.3Contingencies 59.7 30.8Land acquisition 53.4 51.5 96.4

Project Total 201.9 144.6 210.0 226.0 138.1 210.0 111.9 95.5 100

Percent of total 36.3 26.0 37.7 39.4 24.1 36.6

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Annex 3. Economic Costs and Benefits

1. The economic evaluation of the project covers the following two components:

a. construction of five high-grade highways and upgrading a highway, totaling 291 km in Shaanxiprovince, and

b. construction and/or improvement of 152 rural roads and bridges in the poor counties of Shaanxi,totaling about 3,919 km, under the Road Improvement in Poor Areas (RIPA) program.

2. The economic analysis is based on the re-evaluation of data on traffic, operational performance,costs and benefits of project components. The methodology used was similar to that employed by the SARand is summarized as follows:

a. capital investment and maintenance costs were revised to reflect December 2002 prices and areincluded in the cost stream;

b. the benefits, also reflected in December 2002 prices, consist of savings in vehicle operating costs(VOC), travel time savings, reduced traffic congestion on existing roads, and enhanced road safety;

c. a project life of 20 years has been assumed, and the capital investment periocl for all componentswas from 1995 to 2001, depending on the construction phases; and

d. for the costs for rural roads under RIPA, the additional costs required for reconstruction ofdamaged sections due to severe floods incurred in 1998 and 1999 are included.

3. During project implementation, some project components were modified. The economic analysisreflects the final implementation outcomes of the project.

4. This annex comprises four parts: the economic evaluation of high-grade highways; the economicevaluation of RIPA; the overall economic evaluation of the project, including the probabilistic risk analysis;and the financial evaluation of the project.

ECONOMIC EVALUATION OF HIGH-GRADE HIGHWAYS

5. The high-grade highways consist of six roads for economic evaluation.

Length (kim) Length (km) OpeningExisting Roads HGH Date

1. Weinan - Tongguan Expressway 87.00 78.10 Oct. 19992. Tongchuan- Huangling Hwy 97.00 91.97 Apr 20013. Lantian -Xiaoshangyuan Hwy 51.20 48.30 Jun. 19994. Lintong -Warriors Museum Hwy 6.30 6.02 Oct. 19995. Famensi - Tangyu Hwy 40.90 34.80 Apr. 19996. Xian - Sanyuan Hwy 32.00 32.00. Dec. 1998

Total 314.40 291.19

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Corridor Trafflc

6. The first newly constructed highway was opened to traffic in April 1999 and the last one wasopened in April 2001. The traffic volume of six highways for 1999-2001 and its distribution among theexisting and new highways are shown in Table 1.

7. LXH and FJTH ware opened to traffic in June and April 1999, respectively. The actual corridortraffic of these highways in 1999 was much higher than estimated at appraisal. The diversion rates from theexisting roads to the new highways were 49 percent and 67 percent, respectively. The actual corridor trafficincreased greatly in 2000 -- 80 percent and 38 percent higher than the estimates. The diversion rates alsoincreased to 63 percent and 73 percent, respectively. Even in 2001, the actual corridor traffic of thesehighways was still much higher than the estimates, with higher diversion rates as well.

8. WTE and LTWMH were opened to traffic in October 1999. The actual corridor traffic of thesehighways in 2000 was 69 percent and 182 percent higher than the estimates. However, the diversion rate onWTE was lower than expected (66 percent against 70 percent). The corridor traffic of LTWMH tripled in2001, but with a lower diversion rate.

9. THH was opened to traffic in April 2001. The actual corridor traffic during the remaining eightmonths in 2001 was much lower than expected (35 percent lower) with a lower diversion rate as well. Thelower corridor traffic is considered to be due to the fact that the inmnediate northem section of THH wasunder construction.

Traffic Projection

10. The increase of traffic on a new expressway, particularly when it is operated as a toll facility, isgradual in the initial operational years and then the diversion accelerates. The average traffic growth rates(during 1999-2002) on six highways were between 7 and 23 percent. Despite the increasing diversionfactor ratio and fast traffic growth rates in the initial operational years, the long-term traffic growth rateson the new highways were estimated to be slightly lower than the SAR's forecast in general. The trafficforecast for the six highways is summarized in the following table.

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TRAFFIC FORECAST COMPARISON FOR NEW HIGHWAYS (in AADT)

Weinan - TonaRuan Expresswav Tongchuan - Huaneline Hwv Lantian -Xiaoshanovupn HwvTotal MTE Total MTE Total MTE

SAR1999 - - -- -

2000 - 6,256 - 6,583 -- 2,6062001 - 6,782 - 6,961 -- 2,8102002 -- 7,353 - 7,360 -- 3,0302010 -- 14,036 - 11,498 -- 5,5332020 - 26,065 - 17,656 -- 9,890

Avcrage growth p.a.2000-2020 7.4% 5.1% 6.9%

ICR1999 12,667 9,691 - 4,024 2,2312000 13,174 9,999 3,867 - 4,334 3,4232001 13,174 10,114 3,867 3,159 4,334 3,6322002 14,761 11,438 4,773 4,000 4,130 3,3932010 25,264 19,577 9,310 7,802 7,491 6,1542020 43,291 33,546 18,815 15,767 14,429 11,854

Avcragc growth p.a.2000-2020 6.1% 6.2% 8.7/o 8.8%/_I 6.2% 6.4%

/_1: Average annual growth rate during 2001-2020.

TRAFFIC FORECAST COMPARISON FOR NEW HIGHWAYS (in AADT)

Lintona -Warriors Museum Hwy Famcrns - Tangvu Hwy Xian -Sanvuan HwyTotal MTE Total MTE Total MTE

1999 - - --2000 -- 1,969 -- 1,581 -- --

2001 - 2,086 - 1.7252002 - 2,210 - 1,8832010 - 3,700 -- 3,794 -- --

2020 -- 8,019 - 6,767 -- -

Avcrage growth p.a.2000-2020 - 7.3% -- 7.5% -- -

ICR1999 - - 3,230 2,172 18,847 14,1582000 3,045 2,394 3,895 2,620 21,893 16,8712001 3,330 2,526 4,228 2,863 21,741 17,8872002 3,619 2,761 4,642 3,168 22,983 18,5002010 6,433 4,908 8,789 5,998 48.634 39,1482020 12,574 9,593 17,095 11,666 1(08,986 87,728

Avcrage growth p.a.2000-2020 7.3% 7.2% 7.7% 7.8% 8.4% 8.6%

Sources: SPTD and the Bank staff.

11. Actual traffic data were used for 1999-2001, and for subsequent years, the following growth rateswere assumed:

a. the normal traffic growth rates for new highways were estimated to be within a range of between 5to 10 percent during 2002-2010, depending on the type of vehicle and road. Growth rates during2010-2020 were assumed to be in the range of between 3.5 and 8.5 percent; and

b. it was assumed that there would be no generated traffic.

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Economic Costs

12. Financial construction costs were converted to economic costs by applying shadow prices for eachof the input items. The total economic cost of six highways at the end of project implementation in constantDecember 2002 prices was 20.8 percent higher than the SAR's estimate.

Economic Cost Comparison (Y million)ICR/ SAR

SAR/i ICR (in%)1. Weinan -Tongguan Expressway 1,159.30 1,464.14 26.3%2. Tongchuan - Huangling Hwy 1,645.95 1,990.64 20.9%3. Lantian -Xiaoshangyuan Hwy 334.91 431.00 28.7%4. Lintong - Warriors Museum Hwy 25.97 44.99 73.2%5. Famensi -Tangyu Hwy 180.56 251.27 39.2%6. Xian - Sanyuan Hwy 150.35 43.08 -71.3%

Total 3,497.04 4,225.12 20.8%

/_1. The April 1995 prices (in SAR) were updated to December 2002 pnces.

Economic Benefits

13. Project benefits were estimated by using the VOC equation that was developed in the HighwayDesign and Maintenance Standards Model (HDM-lI). The economic analysis includes the benefits derivedfrom: (a) VOC savings on the new highways (summarized in the following tables); (b) time savings throughrelieved congestion on the existing roads; and (c) lower accident costs. The VOC savings includes the netVOC savings of the vehicles using the new highways. The time savings include the benefits resulting fromlowered congestion on existing roads. The value of passenger time savings was estimated at Y 2.0 perpassenger-hour, on the basis of updated values in a report on the feasibility study methodology forhighways in China (Australian Feasibility Study Methodology Report, March 1996). The same source wasused for vehicle accident rates on different classes of roads.

Economic Vehicle Operating Costs(Yuan per km, December 2002 prices)

Good - Fair- - PoorFlat Hill Mount. Fiat Hill Mount. Flat Hill Mount.

Car 0.788 0823 0.849 0.825 0.857 0881 1.067 1.099 1 123Medium bus 1.130 1.312 1.470 1.629 1.866 2.058 2.147 2.354 2.546Large bus 2.004 2.444 2.835 3.045 3 667 4 178 3 689 4.289 4 800Small truck 0919 1.149 1.321 0.974 1 190 1.352 1.190 1.379 1 568Medium truck 1.068 1 316 1.564 1.097 1 348 I 577 1 326 1.577 1 828Large truck 1.522 1.865 2.208 1.620 1.968 2 276 1.927 2.276 2.604Tractor/trailer 2.206 2.909 3.517 2.332 3.035 3 627 2.776 3.442 4.053

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Example of Economic Vehicle Operating Cost Calculation(Yuan per 1,000 veh.-kn, December 2002 prices)

Medium Large Small Medium Large Trailer/- Car bus bus Truck truck truck container

New Hi0hwavs:Fuel 325 383 714 575 630 651 840Tires 59 57 182 94 195 620 1,150Maintenance 339 345 419 680 567 602 680Crew 26 26 26 26 26 26 26Depreciation 45 19 85 233 59 III 231

Subtotal 774 927 1.835 1.321 1 564 2 208 2.517Time value of passengers 75 500 1,000

Total 849 1I470 2.835 1,321 1.564 2.208 3I.7Existine Roads:Fuel 425 518 840 700 743 840 1,(50Tires 63 64 208 101 221 680 1,265Maintenance 305 383 466 756 630 669 756Crew 60 71 71 71 71 71 71Depreciation 41 21 94 258 66 124 257

Subtotal 252 [.213 ;L2 .156a 182 2.04 4.053Time value of passengers 171 1,333 2,667

Total 1.123 . 4.800 1.568 1.828 2.604 4,053

Sources: SPTD and the Bank staff.

Economic Evaluation

14. The economic internal rate of return (EIRR) of the high-grade highways was estimated at 13.1percent, which is lower than the 16 percent estimated in the SAR. The lower EIRR is primarily due tomuch lower traffic volume on the Tongchuan-Huangling Highway and a substantial cost overrun. EIRRsand net present values (NPV) are summarized in the following table.

EIRR (in %) and NPV {12%, Y million)SAR ICR

EIRR NPV EIRR NPVl. Weinan - Tongguan Expressway 16.7 -- 15.6 465.52.Tongchuan-HuanglingHwy 16.3 8.7 (515.2)3. Lantian -Xiaoshangyuan Hwy 14.3 -- 12.6 25.94. Lintong- Warriors Museum Hwy 14.7 -- 13.0 5.25. Famensi -Tangyu Hwy 12.6 -- 18.4 197.56. Xian - Sanyuan Hwy -- -- 29.0 168.1

Total 16.0 -- 13.1 408.2

Sensitivity Analysis

15. The EIRRs with different scenarios show that the changes in assumptions to be made in theevaluation could alter the yield on the investment. Because operation and maintenance costs of thehigh-grade highways are.relatively small in the investment, any variation in these costs would haveminimum discernible impact on EIRR. The impact of changes in traffic volume was analyzed under twotraffic growth scenarios. The results of the sensitivity test show that the reduction of passenger timesavings by 50 percent has the greatest impact while the reduction of road congestion has the least impact onthe EIRR.

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SENSITIVITY TESTEIRR (in %) NPV(12%, Y million)

VOC savings reduced by5% 11.2 (268.3)Passenger time savings reduced by 50% 10.6 (485.0)Congestion savings reduced to zero 12.9 339.3Total benefits reduced by 15% 11. (297.2)

Scenario Analysis

16. Besides the normal traffic growth scenario, two traffic growth alternatives have also beenconsidered: a lower traffic growth projection (25 percent lower than normal traffic) and a higher trafficgrowth projection (25 percent higher than normal traffic growth). The traffic growth and average annualgrowth rate under these two scenarios are as follows:

EXPRESSWAY TRAFFIC FORECAST SCENARIOSHigh Growth Rate Low Growth Rate

Average growth rate p.a. 7.9% - 10.6% 4.3% - 6.8%

17. The overall EIRRs for the different traffic growth scenarios are summarized in the following table.It shows that the overall EIRR for a higher traffic growth rate is 15.0 percent and for a lower traffic growthrate 11.3 percent.

TRAFFIC GROWTH RATE SCENARIO TESTNPV (12%, Y

EIRR (in%) million)High traffic growth rate scenario 15.0 1,211.4Low traffic growth rate scenario 11.3 (236.8)

ECONOMIC EVALUATION OF RIPA

Background and Traffic

18. In the SAR, 4,068 km of rural roads was to be implemented in phases. The SAR specified that thefirst phase would cover five roads (for 321 kin). During implementation, the RIPA was carried out in fourphases with 152 subcomponents covering the rural roads and bridges. The RIPA program commenced inOctober 1996 and was completed in December 2000.

RIPA PRPGRAMSAR ICR

Length (kn) Subcomponent Length (km) Subcomponent Completion DatePhase 1 321 5 319 8 March 1998Phase 2 -- -- 2,105 89 December 1998Phase 3 -- -- 1,081 36 December 1999Phase 4 -- -- 414 19 December 2000Total 4068 152

Sources: The SAR and SPTD

19. The main work under RIPA was repairing the existing roads and bridges in the poorest areas of

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Shaanxi province, particularly in the central and northeni parts of the province. Because all the RIPAsubcomponents were in the same region, the economic development and traffic patterns were very similar.Based on traffic performance, traffic growth rates were assumed to be 5.0 percent per year for motorvehicles and 3.5 percent for tractors for 2002-2010, to be reduced by 1 percent for the next 10 yearsbeyond 2010. In the SAR, the vehicle traffic growth rate was assumed to be 7.0-10 percent per yearbetween 1995 and 2015 for all types of vehicles.

Economic Costs

20. Financial costs were converted to economic costs using a methodology similar to that applied to thehigh-grade highways. All input items were evaluated in constant December 2002 economic prices. Theoverall economic cost is about 96 percent of the financial cost. During the project implementation, theproject area was hit by a very severe flood disaster. The disaster destroyed not only most of the newly builtroads and bridges, but also damaged the road bed, bridge piers, and the foundation of earth work. Therepair work started in 1999, and the repair costs were even higher than the original budget for the project.All these repair costs were included in the economic evaluation. It is estimated that about two-thirds of totalRIPA costs were for repair work.

21. Because of the major repair works, the total actual economic cost of RIPA at December 2002constant prices was about 4.55 times higher than the SAR's estimate.,

RIPA COST (Y million, December 2002 prices)SAR (A) ICR (B) (B)/(A) in %

Phase 1 108.53 148.62 36.9%Phase 2 -- 1,420.99 --Phase 3 -- 730.78 --Phase 4 -- 267.25 --Total 462.80 Li 2,567.64 +454.8%

LI. The April 1995 prices (in SAR) were updated to December 2002 prices.

Economic Benefits

22. The economic benefits of RIPA were derived mainly from VOC savings due to shorter distances (ifapplicable), nonnal traffic, and generated traffic.

23. As a result of the project, the road classifications of all 152 subcomponents were upgraded. Thebetter surface pavement reduced.VOC and yielded the major portion of the project benefits. Generatedtraffic was assumed to be 5 percent of normal traffic. In addition, the better paved roads and bridgesincreased vehicle speed and reduced congestion. These benefits were quantified also as a part of operatingcost savings.

Economic Evaluation and Sensitivity Analysis

24. The EIRRs of the four phases range from 9.2 percent to 24.7 percent. The overall EIRR for theRIPA is 16.7 percent. If there had been no flood disaster, the EIRR of the RIPA could have been as high as47.6 percent (ranging from 29.7 percent to 55.9 percent).

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EIRR AND NPV OF RIPAEIRR (in %) NPV (12%, Y million)

SAR ICR SAR ICRPhase 1 15.0 16.2 -- 34.3Phase2 -- 15.1 -- 218.0Phase 3 -- 24.7 -- 502.8Phase 4 -- 9.2 -- (36.4)Total -- 16.7 -- 531.6

25. The risks considered for sensitivity analysis are: (a) slower than projected growth of traffic, (b) nogenerated traffic, and (c) fewer than expected benefits. The results of the sensitivity test show that thereduction of total benefits by 25 percent has the greatest impact, while no generated traffic has the leastimpact on the EIRR.

SENSITIVITY TEST FOR RIPA --

EIRR (in %) NPV(12%, Y million)Slower than projected growth of traffic (-25%) 15.7 390.0No generated traffic 16.4 502.3Reduction of total benefit (-25%o 12.3 31.1

THE OVERALL ECONOMIC EVALUATION OF THE PROJECT

Overall EIRR

26. The overall EIRR of the entire project (including high-grade highways and RIPA) is 14.1 percent,and the NPV (12 percent) is about Y 896.0 million. In the SAR, the EIRR for the entire project wasestimated to be 15.8 percent.

EIRR (in %) and NPV (12%, Y million)SAR ICR

EIRR NPV EIRR NPVHGH 16.0 -- 13.1 408.2RIPA 15.0 -- 16.7 531.6

Total 15.8 = 14.1 896.0

Project Risks

27. The overall EIRR of the project is economically justifiable despite the high repair costs for theRIPA due to the natural disaster. The lower EIRR for the high-grade highways was mainly due to costoverruns on most of the highways and less traffic demand on the high-grade highway that constitutes about31.6 percent of the total length and 47.1 percent of the total cost of the high-grade highways. It is suggestedthat the project should have had better cost estimates for traffic origin-destination and construction duringthe feasibility study stage.

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Probabilistic Risk Analysis

28. To determine the degree of uncertainty for the project, a probabilistic risk analysis using MonteCarlo techniques was carried out. In a Monte Carlo analysis, each uncertainty factor is allowed to vary atrandom between set limits, and all uncertainty factors are allowed to change simultaneously. The MonteCarlo simulation provides probability distributions of the potential outcomes of decisions. By analyzingthese distributions, it is possible to assess the risk associated with making various decisions (orprobabilistic risk analysis). The product of the analysis is a judgment on the possible range of the decisionvariable and on the likelihood of each value within this range.

29. For the RIPA, the sum of capital costs constitutes only about 38 percent of the total capitalinvestment. In view of the higher EIRR and lower capital investment of the RIPA, the probabilistic riskanalysis for the project focused on the construction of the high-grade highways. The most uncertain factorsassociated with the economic evaluation of high-grade highways were identified as the traffic growth rateand the value of VOC. The results of the probabilistic risk analysis for the project show that the EIRR forthe most likely scenario is 13.7 percent. The worst-case scenario of the analysis is 9.2 percent and for thebest-case scenario, 18.5 percent. The standard error of the mean is 0.3 percent. The results of the MonteCarlo test and probabilistic analyses (Appendix 1) are summarized in the following table.

Summary of Probabilistic Risk AnalysisMost likely Standard error

Range of EIRR EIRR of the mean1. Weinan - Tongguan Expressway 11.4% - 21.5% 16.5% 0.3%2. Tongchuan - Huangling Hwy 7.5% - 16.5% 11.6% 0.3%3. Lantian -Xiaoshangyuan Hwy 10.7% - 20.0% 15.2% 0.3%4. Lintong - Warriors Museum Hwy 11.0% - 20.9% 15.7% 0.3%5. Famensi - Tangyu Hwy 17.7% - 19.1% 18.4% 0 0%6. Xian - Sanyuan Hwy 27.8% - 30.4% 29.0% 0.1%'Y

Total 9.2% - 18.5% 13.7% 0.3%

FINANCIAL EVALUATION

30. The financial evaluation of the project comprises three sections: an assessment of therevenue-earning entity (the high-grade highways), focusing on consolidated financial statements; anassessment of the non-revenue-earning RIPA, focusing on financial risk in terms of construction, operation,and maintenance; and an assessment of the financial capa.city of SPTD to sustain highway activities,focusing on the adequacy of the funding allocations in the provincial road development plan. For thehigh-grade highways, the financing structure consists of the Bank loan (34 percent) and grant capital (66percent). The financial cost of capital was assumed to be 5 percent for both sources. The SAR had nofinancial evaluation for the project.

FINANCIAL EVALUATION OF TOLL HIGHWAYS

31. Operating entities have been established by SPTI) to operate high-grade highways. The entities areresponsible for the day-to-day management, operation, maintenance, and development of the highways,including the repayment of the loan. The toll charges are strictly controlled by the provincial government.The toll charges were assumed to be increased once (15 percent) every five years (or an average of 2.8percent per year).

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Financial Assessment

32. Tolls. The toll is charged on the basis of vehicle size (small vehicle, medium vehicle, large vehicleand extra large vehicle) and distance traveled. The current toll charges for the six highways are differentand listed in the following table.

Toll Charges (Yuan/ Vehicle km)Small Medium Large Extra-

vehicle vehicle vehicle large1. Weinan - Tongguan Expressway 0.431 0.689 0.819 1.1212. Tongchuan - Huangling Hwy 0.338 0.540 0.675 0.9463. Lantian -Xiaoshangyuan Hwy 0.293 0.440 0.733 1.0264. Lintong - The Warriors Museum Hwy 0.625 1.250 1.875 2.5005. Famensi - Tangyu Hwy 0.294 0.441 0.588 0.7356. Xian - Sanyuan Hwy 0.412 0.619 0.825 1.031

33. Operations. The operating costs of the high-grade highways can be divided into working costs(wages and benefits; maintenance; operating materials and supplies; administration; others) anddepreciation. All other expenses, including interest payments on the loan, are also taken into account in thecalculation of the profitability of high-grade highways.

34. Profitability. The high-grade highways will generate enough revenue over the project life.However, lower profits may take place in 2002-2004. The main reason is that repayment of the Bank loanstarts in 2002 and it will create financial pressure on the high-grade highways. In addition, because of thelow toll growth assumptions, the rate of return on average net fixed assets for the early years of operationis low. It is anticipated that a negative profit may take place in 2009 because major maintenance work isplanned in that year (see Table 2.1.)

35. Cash flow. The low toll growth assumption may cause lower profit, but it will not affect the cashflow of the high-grade highways. This is because of the large sum of depreciation reserves. In 2002 , forexample, the total depreciation reserve (Y 124.13 million) contributed about 86.1 percent of the totalfinancial obligations (Y 144.15 million), or equivalent to 6.5 times of total working costs in that year. Thestrong internal cash generation will be able to provide sufficient funds to support the operations, loanrepayments, and even major maintenance expenditures. On the basis of the revenue forecast, it is estimatedthat the high-grade highways will not need any external cash injection over the life of the project (see Table2.2).

36. Leverage and Liquidity. The low profit in the early years of operation will not affect the financialleverage of the high-grade highways because of the high proportion of equity (government contributionsweighted at about 66 percent of the total project cost), which will support a healthy debt-to-equity ratio anddebt-to-capital ratio (the financial leverage of the company) throughout the life of the project. Because ofthe strong cash flow status, except for 1999, the current ratio will be in the sound range of 2.9 and higher(to avoid short-term solvency problems, the current ratio should be at least 1.0) (see Table 2.3). The majorassumptions for financial evaluations are shown in Table 2.4.

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Financial Internal Rate of Return

37. Based on the current financial status, the high-grade highways may not need any external financialassistance. However, the low profit margin produces a negative impact on the financial internal rate ofreturn (FIRR). The result of the financial evaluation for the high-grade highways shows that the FIRR forthe high-grade highways will be 3.7 percent with an NPV (5 percent) of Y 696.9 million.

Scenario Analysis

38. The financial sensitivity analysis tested two scenarios: the higher traffic growth rate and the lowertraffic growth rate for the high-grade highways. The results for the traffic growth scenarios are shown inthe following table.

FINANCIAL SCENARIO ANALYSISFIRR (in %) NPV (Y million, 5.0%)

Higher Traffic Growth Rate (+25) 5.8 492.7Lower Traffic Growth Rate (-25%) 1.2 -1,641.4

Project Risks

39. SPTD completed the project on time within the acceptable range of cost overruns. The field visitconfirmed that SPTD can provide quality services to road users while maintaining the roads in goodcondition. The only remaining tangible risks are the unforeseeable mixed factors (or degree of uncertainty)that will affect the results of the financial evaluation. This will be discussed in the on probabilistic riskanalysis.

Probabilistic Risk Analysis (Financial Simulation)

40. To determine the degree of financial uncertainty for the project, a probabilistic risk analysis usingMonte Carlo techniques was carried out. The three most uncertain factors that may affect the financialevaluation have been identified as traffic growth rate, the growth rate of toll charges, and the growth rate oftotal working costs. The risk analysis revealed that the most likely FIRR would be 3.5 percent, while theworst and the best FIRR would be 0.8 percent and 5.9 percent, respectively. Details are in Appendix 2 andsummarized in the following table.

Financial Sensitivity and Probabilistic Risk AnalysisFinancial Simulation and Risk Analysis

Range of Most Likely Std. Error ofFIRR / NPV FIRR / NPV The Mean

FIRR (in %) 0.8 - 5.9 3.5 0.2NPV (5.0%, Yuan million) - 1,943 - 429 - 854 82.6

FINANCIAL EVALUATION OF RIPA

41. All the 152 subcomponents under RIPA are toll-free roads. The financial evaluation of thesenon-revenue-earning entities focuses on the SPTD's capacity to minirnize financial risks, i.e., the lack ofcounterpart funds for construction and repairs, including iuture operating expenses for the project roadsand bridges.

- 39-

42. SPTD's budget (actual and forecast) shows that the investment and maintenance expenditures forthe RIPA constitute only a small fraction of SPTD's fund flow. Therefore, the fiscal impact is minimal.Based on the SPTD plan, capital investment in RIPA is less than 6.0 percent of the totalannual SPTD revenue. In addition, the required maintenance expenditure of RIPA is less than 9.0 percentof the total maintenance expenditure of SPTD. These low ratios indicate that the project presents a lowfinancial risk regarding construction and maintenance of the project roads and bridges. Details are shown inTable 3 and summarized in the following table.

SPTD: Investments, Revenue and Maintenance Expenditures (Y million)2000 2001 2002 2003 2004 2005

Investmcnts and Rcvcnuc:RIPA Investmcnts (a) 443 05 506.45 521.59 - - -

Total SPTD Revenuc (b) 8,614.31 11,727.97 13,840.19 15,296.0 17,602.0 19,803.0Ratios (a)/(b) 5.1% 43% 38% 0.0% 0.0% 0.0%

Maintenance ExpendituresRIPA (c) 34.69 40 18 41 43 40.28 41.72 41 99Total SPTD Maintenancc Expcnditure (d) 525.00 464.17 488 90 483 0 511 () 525.0Ratios (c)/(d) 6.6% 8.7% 8.5% 8.3% 8.2% 8.0%

FINANCIAL EVALUATION OF SPTD

43. SPTD has provided its financing plan on total revenue and expenditures for the Ninth Five-YearPlan (1996-2000) and the Tenth Five-Year Plan (2001-2005). According to the Shaanxi highwaydevelopment plan, SPTD has acquired sufficient funds to finance yearly increases in the length of theprovincial road network and has allocated resources for the maintenance of the existing road network. Inaddition, a moderate self-financing ratio (34.7 percent for the tenth Five-Year Plan) will ensure theimplementation of the highway development plan. The sources of highway revenue and expenditures for1996-2005 are shown in Table 3.

44. To avoid a capital squeeze effect (i.e., limited annual capital resources forcing an emphasis on newroad construction and reduced maintenance on existing roads), SPTD has given special attention to roadmaintenance. As for the sustainability of road maintenance with the resources allocated to it, the averageyearly increase in maintenance expenditures during the Ninth Five Year Plan (6.9 percent) exceeded thegrowth of the road network (2.4 percent), which means an increase in average maintenanice expenditure perkilometer.

SPCD: Average Increase in the Road Network andRoad Maintenance Expenditures (in %)

9th FYP 10th FYP(1996 - 2000) (2001 - 2005)

Average annual increase in the road network 2.4 2 0Average annual increase in maintenance expenditures 6.9 1.I

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Table 1: NUMBER OF MOTORIZED VEHICLES PER DAY (1999-2001)Existing Roads New Hioliwawi Total Traffic Diversion

Total MTE Total MTE Total MTE Faictor (DF)(1) (2) (3) (4) (2) / (3)

1999 SARWeinan - Tongguan Expressway -- -- - -- -- 5,872 -Tongchuan - Huangling Hwy -- - -- -- 6,477Lantian -Xiaoshangyuan Hwy - _ _ .. 2,632Lintong - Warriors Museum Hwy . _ .--Famenst -Tangyu Hwy -- -- - -- -- 2,650Xian -Sanyuan Hwy .- -

ICRWeinan - Tongguan Expressway 12,228 10,159 11,980 9,691 24,2018 19,850 49%

Tongchuan - Huangling Hwy 6,158 5,151 - - 6,158 5,151 -

Lantian -Xiaoshangyuan Hwy 2,546 2,333 2,640 2,231 5,186 4,564 49%

Lintong - Wamors Museum Hwy 3,425 2,693 - - 3,425 2,693 -

Famensi -Tangyu Hwy 1,184 1,083 3,230 2,172 4.414 . 3,255 67%

Xian -Sanyuan Hwy/lI - . 18,847 14,158 18,847 14,158 10t0%Ratos (ICR/SAR)Weinan - Tongguan Expressway -- -. - -. 338% /Tongehuan - Huangling Hwy -- -- - -- -- 80%Liintian -Xiaoshangyuan Hwy .. .. 1 73%Lintong -Warriors Museum Hwy .- .. _ . -

Famensi -Tangyu Hwy .. 1. - -- -- I23% -

Xian -Sanyuan Hwy .. -

2000 SARWeinan - Tongguan Expressway -- 2,738 - 6,256 -- 8,994 70%

Tongchuan - Huangling Hwy -- 2,865 - 6,583 -- 9,448 70%

Lantian -Xiaoshangyuan Hwy -- 386 - 2,606 -- 2,992 R7%Lintong -Warriors Museum Hwy -- - - 1,969 -- 1,969Famensi -Tangyu Hwy -- 1,028 - 1,581 -- 2,009 61%

Xian -Sanyuan Hwy -- - - - -

ICRWeinan - Tongguan Expressway 6,648 5,242 12,667 9.999 19.315 15,241 66%

Tongchuan - Huangling Hwy 7,267 5,964 - -- 7,267 5,964 0%

Lantian -Xiaoshangyuan Hwy 2,357 1,968 4,024 3,423 6,381 5,391 63%

Lintong -Warriors Museum Hwy 4,029 3,167 3,045 2,394 7,1074 5,561 43%

Famensi -Tangyu Hwy 1,171 992 3,895 2,621) 5,066 3,612 73%

Xian- Sanyuan Hwy/LI - - 21,893 16,871 21,893 16,871 100%Ratios (ICR/SAR)

Weinan-Tongguan Expressway -- 191% - 160P/o -- 169P/n -

Tongchuan - Huangling Hwy 208% - (1% -- 63%

Lantian -Xiaoshangyuan Hwy -- 510% - 131% -- 18(n -

Lintong - Warriors Museum Hwy -- - -- 282%Famenst -Tangyu Hwy -- 96% - 166% -- 138%Xian -Sanyuan Hwy -- . _ .

-41-

Table 1: ContinueExisfina Roads New Hiuhwaw Total Traffic Diversion

Total MTE Total MTE Total MTE Factor (DF)(t) (2) (3) (4) =(2) / (3)

200!1 SARWeinan - Tongguan Expressway - 2,883 - 6,782 -- 9,665 70%Tongchuan - Huangling Hwy -- 2,993 - 6,961 9,954 70°h

Lanfan-Xiaoshangyuan Hwy -- 412 - 2,810 3,222 87%

Lintong -Warriors Museum Hwy -- - - 2,097 2,097 -

Famensi -Tangyu Hwy 1,088 - 1,725 2,813 61%Xian -Sanyuan Hwy - - -- - -

15BWeinan-Tongguan Expresway 1.617 1,386 13,174 10,114 14,791 11,500 88%Tongchuan - Huangling Hwy 3,995 3,300 3,867 3,159 7,862 6,459 49%Lantian -Xiaoshangyuan Hwy 732 604 4,334 3,632 5,066 4,236 86%Lintong- Warriors Museum Hwy 4,343 3,416 3,330 2,526 7,673 5,942 43%Famensi -Tangyu Hwy 1,336 899 4,228 2,863 5,564 3,762 76%Xian -Sanyuan Hwy /I - 21,741 17,887 21,741 17,887 100%Rasdos (ICR/SARC

Weinan - Tongguan Expressway -- 48% - 1491Y% -- 1191Y -

Tongchuan - Huangling Hwy -- 110% - 45% -- 65% -

Lantian-Xtaoshangyuan Hwy -- 147% - 129% -- 131% -

Lintong -Warriors Muaeum Hwy - 120% -- 283% -

Famensi-TangyuHwy -- 83% - 166% -- 134% -

Xian -Sanyuan Hwy - - -_ _ -

/1: Upgrading of the existing road.Sources: SAR and SPTD.

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Table 2.1: Income Statement- Consolidated(Y million, year ending 31 December)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Traffic (mIllion veh-km) 162.71 332.93 383.10 408.45 443.36 481.46 522.88 568.00 617.16 670.74 729.09

RevenueTolls * 80.97 203.60 208.25 225.57 243.92 263.90 327.83 354.71 383.88 415.53 449.85

Othcrs - 0.22 0.18 - - - - - - - -

Total 80.97 203.82 208.43 225.57 243.92 263 90 327.83 354.71 38388 415 53 449.85

Oneratdna TaxesBusincss tax 0.63 1.54 1.61 1.53 1.64 1 77 2.19 2.36 2.55 2.74 2.96Citytax 0.04 0.11 0.11 0.11 0.11 0.12 0.15 0.17 0.18 0.19 0.21Education lcvy 0.02 0.05 0.05 0.05 0.05 0.05 0.07 0.07 0.08 0.08 0.09

Total 0269 17 1.77 L69 180 1 94 241 2 60 281 301 3.26

NetRevenue 80.28 202.12 206.66 223.88 242.12 261.96 325.42 352.11 381.07 412.52 446.59

Oneradine CostsWagesandbcnefits 2.19 25.69 6.07 6.62 7.08 7.44 7.81 8.20 8.61 9.04 9.49Maintcnance 1.67 2.29 3.42 3.58 4.01 4.21 4.42 4.64 4.87 5.12 385.74Operatingmatcrialsandsupplies 0.17 0.39 0.33 0.39 0.41 0.43 0.46 0.48 0.50 0.53 0.55Administration & management 2.45 25.44 7.85 8.07 8.96 9.41 9.88 10.37 10.89 11.44 12.01

Others 0.18 0.15 0.26 0.44 0.46 049 0.51 0.54 0.56 0.59 0.62

Totalworkingcosts 6.66 53.96 17.93 19.10 20.93 21.98 23.08 2423 25.44 26.72 408.42Deprociation 15.82 63.94 121.89 124.13 124.44 124.78 125.13 125.51 125.90 126.30 194.90

Total operating costs 22.48 117.90 139.82 143.23 145.37 146.76 148.21 149.74 15134 153.02 603.32

Oneralne Proflt 57.80 84.22 66.84 80.65 96.75 115.20 177.21 202.37 229.73 259.50 (156.73)Financialchargcs: IBRD - - - 74.58 71.06 67.34 63.44 59.38 55.08 50.57 45.84

Local Bank - - - - - - - -

Othcr income (expenses) - - - (0.36) (0.36) (0.38) (0.36) (0.34) (0.35) (0.34) (0.34)

Proflt BeforeTaxes/I 57.80 84.22 66.84 5.71 25.33 47.48 113.41 142.65 174.30 208.59 (202.91)Incomc tax - - - - - - - -

NetProfitAfterTaxes 57g0 84.22 66.84 5.71 25.33 47.48 113.41 142.65 174.30 208.59 (202.91)

Rate of Retum on Avcrage NetFixed Assets 25.2 7.0 2.4 0.2 0.7 1.3 3.1 3.8 4.6 5.4 (5.0)

/1: The tax cxcmpted./2: Actual: before 2001; Bcst estimates: 2002; Forecast: 2003 thereaftcr.

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Table 2.2: Sources and Applications of Funds- Consolidated(Y million, year ending 31 December)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Sources:

Nct profits - - - 57.80 8422 6684 571 25 33 4748 11341 14265 174,30 20859 (20291) 358.05

Dcpreciation - - - 15.82 6394 121.89 12413 124.44 12478 125 13 12551 12590 126.30 194.90 127.17

Statc contribution 28 27 70 11 249.68 215 54 194 64 18.76 - - - - - - - - -

Provincialcontribution 131,00 302.85 677.08 443 99 524 79 50.41

Borrowing. IBRD - 282 59 376.20 524 47 261.37 63.89 - - - - - - - -

Local

Others - - - - - - - - - - - - - -

Total 15927 655.5 1302.96 1257.62 1128,96 321.79 129.84 149 77 17226 238 54 26816 300.20 33489 (8LQL) 48522

Applications:Capitalexpenditurc 159.27 65555 1302.96 118720 98923 153.76 3188 3348 3515 3691 3876 40)70 42.74 38574 47.12

Other cxpcnditure - - - - - - - - - - - -

Loan rcpaymcnt.

IBRD - - - - - - 6957 73109 7681 8071 8477 89(17 9358 98.31 10327

Local - - - - - - - -

Changc w/ capital - - - 68.93 10042 13209 7.09 (1.56) (1 15) (3671 (I 52) (I 66) (176) (1.91) (6.18)

Total 159.27 655.55 130296 1256.13 108965 28585 108.54 10501 11081 113.95 12201 128,11 134.56 482.14 144.21

NetFunds Flow 1.49 12 .31594 2I3 4476 6145 124.59 146.15 . 17209 20033 (49015 34.L01

Opcn balancc - 1.49 40.80 76 74 98 04 142.8(0 204 25 328 84 474 99 647 07 847.41 357 26

Closing balancc ) 49 40 80 76.74 98 04 142 80 2M4.25 328 84 474.99 647 07 847 41 357 26 698 27

D/S Cover - - - 1.87 2.05 2.24 2.96 3.16 3.37 3.58 (0.08) 4.70

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Table 2.3: Balance Sheet- Consolidated(Y million, year ending 31 December)

1999 2000 2001 2002 200)3 2004 2005 2006 2007 2008 2009

Assets:Fixcd Asscts

At cost 458.50 1934.46 3589.47 3621.35 3654.83 3689 98 3726.89 3765.65 3806.35 3849.09 4234.83

Lcss: Dcprociation 15.82 63.94 185.83 309.96 434.40 559.18 684 31 809.82 935.72 1062.02 1256.92

Nct fixod asscts 442.68 1870.52 3403.64 3311.39 322043 3 130.80 3042.58 2955.83 2870 63 2787.07 2977.91

Currcnt Assets

Invcntory 0.26 0.79 0.82 0.88 0.94 1.01 i 26 1.36 1.46 1.58 1.71

Rccoivablc 1.14 1.92 5.92 4.81 5 21 5.62 7.00 7.58 8 19 8.87 960

Cash 1.49 40.80 76.74 98.04 142.80 204.25 328.84 474 99 647 07 847.41 357.26

Subtotal 2.89 43.51 83.48 103.73 148.95 210.88 337 10 483.93 656.72 857.86 368.57

Othcr Asscts 11.70 6.39 10.28 4.29 4.50 4 73 4.97 5.22 i.48 5.75 6 04

Total Assets 45727 1920.42 3497.40 3419.41 3373.L8 3346.41 3384.65 3444.98 3532.8 3650.68 3352 52

Liabillties & Equity

State funds- Equity 244.76 1093.97 1964.40 1962.18 1987.72 2035.43 2149.08 2291.98 2466.53 2675.40 2472.78

L/T loans: IBRD 195.48 811.31 1508.52 1438.95 1365.86 1289.05 1208 34 1123.57 1034 50 940.92 842.61

Local - - - - - - - - - - -

Subtotal 195.48 811.31 1508.52 1438.95 136586 1289.05 1208.34 1123.57 1034.50 94092 842.61

CurrcntLiabilitics 17.03 15.14 24.48 18.28 20.30 21.93 27.23 29.43 31.80 34.36 37.13

Othor Liabilitics - - - - - - - - -

Total Liabilities & Equity 457.27 192042 3497.40 3419.41 3373.88 334641 1384.65 3444.98 353283 365068 335252

Debt: capital ratio 44.4 42.6 43.4 42.3 40.7 38.8 36.0 32.9 29.5 26.0 25.4

Debtt equity ratio 46/54 43/57 44/56 43/57 41/59 39/61 37/63 33/67 30/70 27/73 26/74Current ratio 0.2 2.9 3.4 5.7 7.3 9.6 12.4 16.4 20.7 25.0 9.9

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Table 2.4: Assumptions for Financial Forecasts

1. Normal Traffic (AADT):

Medium Large Small Medium Large Tractorbus bus truck truck truck -Trailer Total

Wcmnan -Tongguan Expressway4,684 1,261 1,689 456 3,416 367 107 11,9805,446 1,466 1,186 651 2,782 1,027 109 12,6676,242 1,680 1,237 271 3,108 515 121 13,1746,760 1,820 1,400 450 3,400 818 113 14,761

12,512 2,901 2,231 717 5,419 1,304 180 25,26423,487 4,505 3,465 1,113 8,416 2,025 280 43,291

Tongchuan -Huangling Hwy

1,476 398 120 175 1,259 379 60 3,8671,626 437 150 230 1,750 500 80 4,7733,485 809 278 426 3,239 925 148 9,3107,880 1,519 522 800 6,080 1,736 278 18,815

Lantian -Xiaoshangyuan Hwy

826 223 156 164 1,090 173 8 2,6401,212 326 221 289 1,684 281 1 1 4,0241,416 381 259 360 1,602 303 13 4,3341,482 399 300 365 1,302 275 7 4,1302,953 686 515 627 2,237 473 - 7,4916,677 1,172 880 1,071 3,821 808 - 14,429

Famensi -Tangyu Hwy2,122 571 68 171 259 32 7 3,2302,558 689 82 207 312 40 7 3,8952,740 738 105 260 331 43 1 1 4,2282,962 797 114 294 381 79 15 4,6425,902 1,369 196 505 655 136 26 8,789

12,164 2,338 335 863 1,119 232 44 17,095Xian - Sanyuan Hwy

9,484 2,554 1,223 1,851 3,252 378 105 18,84710,132 2,728 1,135 5,771 1,749 29(0 88 21,8937,822 2,106 1,243 9,199 932 324 115 21,7419,100 2,450 1,300 8,000 1,600 400 133 22,983

20,971 4,882 2,590 15,941 3,188 797 265 48,63451,971 10,062 5,338 32,855 6,571 1,643 546 108,986

Operating Taxes (only apply to Lantian -Xiaoshangyuan Hwy)Busincss Tax 5% of total revenue.

7% of business tax.Education lcvy 3% of business tax.

Operating Cost: Increase 5 % pa.Wages and benefits: 0.0232 million Yuan per km.

Maintenancc 0.0125 million Yuan per km.

Fuel and matenals 0.0014 million Yuan per km.

Administration 0.0283 million Yuan per km.

0.0016 million Yuan per km.

Depreciation 30 years straight-line method.

0%

The IBRD 5.00% on 20 year matunties, LIBOR USS based singie currency

including 5 years grace pcriod:

Capital maintenance (million Yuan/lkn) Routine (annual) Major (/10 year)

(Increasc 5 % pa.) 0.07 0.91

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Table 3.1: Shaanxi: Highway Revenue and Expenditure (Ninth Five-Year Plan)(Y million)

1996 1997 1998 1999 2000 Total

Rcvcnue

I Roadmaintenancefee 1,153.26 1,211.58 1,298.00 1,294.67 1,340.00 6,297.51

2 Toll revenue 363.10 449.07 517.14 774.23 820.01 2,923.55

3 Surcharge on passenger tickets 72.17 86.71 118.02 210.60 378.27 865.77

4 Surehargeon freighttickets 94.02 112.36 154.38 275.51 495.03 1,131.30

5 Financial allocation - - 41.00 118.00 159.00

6 MOC subsidy 40.00 110.00 305.00 340.00 250.00 1,045.00

7 Statc (SDPC) subsidy 150.00 :260.00 472.00 467.00 400.00 1,749.00

8 Bank loans 56.00 50.00 75.00 65.00 93.00 339.00

9 Fund-raised by enterpnse 239.00 924.00 2,867.00 3,488.00 3,992.00 11,510.00

10 Othcr funds 31.00 201.00 471.00 217.00 72800 1,648.00

Total 2,19855 3,404.72 6,277.54 7.173.01 8.614.31 27,668.13

Expenditure:I New construction and rehabilitation 1,305.00 2,107.00 4,969.00 5,853.00 7,000.00 21,234.00

2 Tax 64.92 58.38 65.24 61.44 61.25 311.23

3 Traffic safety supervision 44.06 39.33 45.07 45.50 45.85 219.81

4 Major maintenancc 101.33 157.42 170.81 158.77 180.39 768.72

5 Mcdiummaintcnance 81.15 114.12 120.33 102.42 123.36 541.38

6 Routinemaintenancc 89.50 121.04 157.24 78.45 87.72 533.95

7 Administration and study 54.47 67.36 77.57 116.13 123.00 438.53

8 Rcpaymentofinterestandprinciple 458.12 740.07 672.28 757.30 992.74 3,620.51

Total 2,198.55 3,404.72 6,277.54 7.173.01 8614.31 27,668.13

Total Road Network (cm) -(a) 40,200 41,202 42,303 43,212 44,225 211,142Average annual increase -- 2.5% 27% 2.1% 2.3% 2.4%

Total maintenance expenditure (million Yuan)-(b)/ l 271.98 392.58 448.38 339.64 391.47 1,844.05

Averageunitmaint.cxpenditurcCOOOY/km)-(b)/(a) 6.77 9.53 10.60 7.86 8.85 8.73Average annual increase -- 40.8% 11.2% -25.8% 12.6% 6.90%

1 : Sum of major, medium and routine maintenance.

Actual: 2001; best cstimate: 2002, forecast: 2003 thcreaftcr.

- 47 -

Table 3.2: Shaanxi: Highway Revenue and Expenditure (Tenth Five-Year Plan)(Y million)

2001 2002 2003 2004 2005 Total

Revenue

I Road maintenance fee 1,15326 1,420.00 1,506.00 1,59600 1,692.00 1,79300

2 Toll rcvcnuc 917.15 1,044.19 1,300.00 2,300 00 2,900 00 8,461.34

3 Surchargc on passcngcr tickets 72.17 86 71 822 21 820.00 820.00 820.00

4 Surchargc on frcight tickets 94.02 112.36 1,078.61 1,080.00 1,080.00 1,080.00

5 Financial allocation - 200.00 200.00 200.00 200.00 200.00

6 MOC subsidy 800.00 800.00 800 00 800 00 800.00 4,000 00

7 Statc (SDPC) subsidy 150.00 900.00 1,200.00 1,500.0() 1,600.00 1,800.00

8 Bank loans 90.00 90.00 10 00 110 00 110.00 500.00

9 Fund-raiscd by cntcrpnsc 239.00 4,000.00 4,300 00 4,600 00 5,000.00 5,500.00

10 Othcr funds 1,500.00 2,800.00 3,300.00 4,000.00 4,600.00 16.20000

Total 11.727979 13840 19 15,296.00 17,602.0 19,803 00 78,26916

Expcnditurc:

I New construction and rehabilitation 1,305.00 2,10700 9,010.00 1 1,070.0(0 12,492 00 14,618.00

2 Tax 69.93 77.66 78 00 79 00 81.00 385.59

3 Traffic safcty supervision 44.06 46.30 47.00 48.00 49.00 50 00

4Major maintcnancc 101.33 201.31 21240 214.00 22700 231.00

5 Mcdium maintcnancc 8115 150.71 158.00 15600 165.00 174.00

6Routinc maintenance 89.50 112.15 118.50 11300 119.00 120.00

7Administration and study 5447 137.57 156.63 195.00 345.00 435.00

8 Rcpayment of interest and principlc 458 12 740.07 2,000.00 2,000 00 2,000.00 2,000 00

Total 11,727.97 13.840 19 15,296 00 17,602.0 19,803.00 78,269.16

Total Road Nctwork (km) -(a) 45,273 46,250 47,000 48,000 49,000 235,523

Average annual incrcase 2.4% 22% 1.6% 2 1% 2.1% 20%Total maintenancc expcnditurc (million Yuan)-(b)/LI 464.17 488.90 48300 51100 525.00 2,472.07

Avcrage unit maint. cxpenditure ('000 Y/km)- (b)/(a) 10.25 10 57 10.28 10 65 10.71 10.50

Avcrage annual increasc 15.8% 3.1% -2.8% 3.6% 06% 1 1%

/_I. Sum of major, medium and routine maintenancc.

Actual: 2001; best estimate: 2002, forecast- 2003 thereafter.

-48-

APPENnlX 1

EIRR Simulation and Probabilistic Risk Analysis

Summary:Display Range is from -5.0% to 40.0% (EIRR in %)Entirc Range is from -0.9% to 53.3% (EIRR in %)After 937 Trials, the Std. Error of the Mean is 0.3%

Statistics: Value Pereentiles:Trials 937Mean 14.7% Pcrcentile (EIRR in

0/6)

Median 13.7% 0% -0.9°,bMode - 10%h 4.00%46Standard Deviation 8.6% Low Scenario 200/o 7.1 %Variance 0.7% 30% 9.2%Skewncss 0.72 Most Likely 40% 11.8%Kurtosis 3.64 - - 500/ 13.7%Cocff. of Variability 0.58 High Scenario 60% 15.9%/DRangc Minimum -0.9% 700% 18 5%.Range Maximum 53.3% 800% 21.5%Range Width 54.2% 900h 26.1%Mean Std. Error 0.28% 100% 53.3%

Forecast: Total 6 Main Highways

937 Trials Frequency Chart 8 Outliers030 ....... 28

e. |............ 214

0151

07_ 0'Z '''''''� ''.'''''''. ,.5O% 6 3% 17 5% 28 8% 40 0%

(EIRR c, %)

Value of the VOC Traffic growthTriangular distribution with parameters: Normal distribution with parametcrs:Minimum 90.0% Mcan 100.0%Likeliest 100.0% Standard Dcv. 10.0%Maximum 110.0% Selected rangc is from -Infinity to +InfinitySelected range is from 90.0% to 110.0% Mean value in simuilation was 100 1%Mean value in simulation was 100.2%

- 49 -

APPENDIX 2

FIRR Simulation and Probabilistic Risk Analysis

Summary:Display Range is from -12.5% to 17.5% (in %)Entire Range is from -15.6% to 17.6% (in %/6)Aftcr 968 Trials, the Std. Error of the Mean is 0.2%

Statistics: Valuc Pcrcentilcs:Trials 968Mcan 3.1% Pcrecntilc fjn %)Median 3.5% 0% -15.6%Modc -- 100/0 -3 5%Standard Deviation 5 1% Low Scenario 200/% -0.8%Variancc 0.3% 30%/o 0.8%Skewness -0.56 Most Likely 40% 2.3%Kurtosis 3.70 50% 3.5%Cocff. of Variability 1.65 High Sccnario 60% 4.6%Range Minimum -15.6% 700/% 5.9%Range Maximum 17.6% 80% 7.3%Range Width 33.2% 90%/u 9.1%Mean Std. Error 0.16% 100% 17.6%

Forecast: EIRR

968 Trials Frequency Chart 10 Outliers034 33

026 .. 1 i 1111 -24 75

Cl 017 16 5

.125% -6.0% 25% 10 0% 175%(in %)

Assumptidons

Traffic Growth Rate Toll ChargesNormal distribution with parameters: Normal distribution with paramctcrs:Mean 100.0% Mcan 100.0%Standard Dev. 10.0% Standard Dcv 10.0%Sciected range is from -Infinity to +Infinity Selected rangc is from -Infinity to +InfinityMean valuc in simulation was 99.9% Mean valuc in simulation was 99 6%

Total Working CostTriangular distribution with parametcrs:Minimum 90.0%Likelicst 100.0%Maximum 110.0%Sclected rangc is from 90.00/% to I 10.00/oMcan valuc in simulation was 100.00/o

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Perfonnance Rating

(e.g. 2 Economists, I FMS, etc.) Iniplementation Development

Month/Year Count Specialty Progress Objective

Identification/Preparation10/23/1994 5 TASK MANAGER (1),

ENGINEERING (1),INSI'ITUTIONALSTREINGTHENING ANDTRAINING (IST) (1),ENVIRONMENT (1),RESETTLEMENT (I)

04/01/1995 8 TASIC MANAGER (1),ENGINEERING (1), IST (1),ENVIRONMENT (1),RESETTLEMENT (1), RIPA(1), SAFETY(I), OPEROFFICER (1)

Appraisal/Negotiation07/10/1995 9 TASK MANAGER (1),

ENGINEERING (1), [ST(1), ECONOMIST(l),ENVIRONMENT (1),RESETTLEMENT (1),RIPA (1), SAFETY (1),OPER. OFFICER (1)

01/29/1996 5 TASK MANAGER (1),ENGINEERING (1),ECONOMIST (1), LAWYER(1), DISBURSEMENT (1)

Supervision

07/04/1996 3 OPER OFFICER, RMC (1); S SENGR/PROCU/ECONOMICS(1); EINVIRONMENT (1)

08/08/1997 3 ENGR/ECONOMICS (1); S SPROCUREMENT (1);DISB3URSEMENT (I)

07/27/1998 5 FORMER TASK MANAGER S S(I); IPROCUREMENT (1); NEWENGINEER (I); OPERATIONASSISTANT (I); CONS/SPNOF FLURAL RDS (I)

03/29/1999 3 TASK MANAGER (I); S SHIGHWAY ENGINEER (1);CONS/SPN OF RURAL RDS (1)

10/24/1999 2 TTL (1); TRAFFIC SYSTEMS S SEXPERT (1)

10/24/1999 2 HIGHWAY ENGINEER (I); S S

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RIPA ENGINEER (1)04/27/2000 3 TASK MANAGER (1); SR. S 5

HWY ENGINEER (2)09/16/2000 5 TASK MANAGER (1); ENV. S S

ENGINEER (I); E & MEXPERT (1); HIGHWAYMAIN./SAFETY (1); RIPACONSULTANT (1)

03/15/2001 3 TASK MANAGER (I); HWY S SENGINEER (I); HWYMAINTENANCE/SAFETY (I)

11/08/2001 3 TASK TEAM LEADER (1); S 5HWY ENGINEER (I); HWYMAINTENANCE/SAFETY (1)

04/10/2002 4 TASK TEAM LEADER (I); S 5HWY ENGINEER (I); HWYMAINTENANCE/SAFETY (I);PROCUREMENT (I)

09/14/2002 4 TASK TEAM LEADER (1); SHWY ENGINEER (I);DISBURSEMENT(1 );ECONOMICANALYSIS(I); RESETTLEMENT (I)

ICR11/13/2002 1 HWY ENGINEER S 5

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate

No. Staff weeks US$ ('000)Identification/Preparation 41.6 145.5Appraisal/Negotiation 37.9 101.7Supervision 92.4 366.4ICR 3.5 13.9Total 175.4 627.5

- 52 -

Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

2 Macro policies OH OSUOM ON O NA0 Sector Policies OH O SUO M ON O NA0 Physical OH, OSUOM ON O NA0 Financial OH O SUOM ON O NA2 Institutional Development O H 0 SU 0 M 0 N 0 NA

Environmental O H O SU O M O N O NA

SocialM Poverty Reduction * H O SU O M O N O NAM Gender O H C) SU O M O N * NAN Other (Please specify) O H O SU 0 M 0 N 0 NAResettlement

Z Private sector development 0 H C) SU 0 M 0 N 0 NAE Public sector management 0 H 0 SU 0 M 0 N 0 NAFII Other (Please specify) O H C) SU O M O N O NA

- 53 -

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Z Lending *HS OS OU OHUF Supervision OHS OS Ou OHUZ Overall OHS OS OU O HU

6.2 Borrowerperformance Rating

F Preparation *HS OS OU O HUZ Government implementation performance 0 HS O S 0 U 0 HUE Implementation agency performance O HS O s 0 u 0 HUF Overall OHS OS 0 U O HU

- 54 -

Annex 7. List of Supporting Documents

The World Bank, Staff Appraisal Report, Second Shaanxi Provincial Highway Project, February 5, 1996.

The World Bank, Loan Agreement, Second Shaanxi Provincial Highway Project Between The People'sRepublic of China and Intemational Bank for Reconstruction and Development, April 17, 1996

Shaanxi Provincial Transportation Department, Second Shaanxi Provincial Highway Project,Environmental Assessment Summary, September 1995.

Shaanxi Provincial Transportation Department, Second Shaanxi Provincial Highway Project,Resettlement Completion Report, September 2002.

Shaanxi Provincial Transportation Department, Second Shaanxi Provincial Highway Project, MonitoringIndicators for 2001, September 2002.

- 55 -

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