jing-jiu railway technical engineering project (loan 1305-prc)

7/31/2019 Jing-Jiu Railway Technical Engineering Project (Loan 1305-PRC)

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ASIAN DEVELOPMENT BANK PPA: PRC 26462

PROJECT PERFORMANCE AUDIT REPORT

ON THE

JING-JIU RAILWAY TECHNICAL ENHANCEMENT PROJECT(Loan 1305-PRC)

IN THE

PEOPLES REPUBLIC OF CHINA

December 2002


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CURRENCY EQUIVALENTS

Currency Unit yuan (CNY)

At Appraisal(6 March 1994)

At Project Completion(26 March 1999)

At Operations Evaluation(14 September 2002)

CNY1.00 = $0.19149 = $0.12080 = $0.12082$1.00 = CNY5.2221 = CNY8.2778 = CNY8.2770

ABBREVIATIONS

ADB Asian Development BankEIRR economic internal rate of returnFCTIO Foreign Capital and Technical Import Office

FIRR financial internal rate of returnFYP five-year planJJR Jing-Jiu Railwaykm kilometer MOR Ministry of RailwaysOEM Operations Evaluation MissionPCR project completion reportPPAR project performance audit reportPRC Peoples Republic of ChinaRA Railway AdministrationTA technical assistance

NOTE

In this report, "$" refers to US dollars.

Operations Evaluation Department, PE-614


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CONTENTS

Page

BASIC DATA iii EXECUTIVE SUMMARY iv

MAP vii

I. BACKGROUND 1 A. Rationale 1 B. Formulation 1 C. Purpose and Outputs 2 D. Cost, Financing, and Executing Arrangements 2 E. Completion and Self-Evaluation 3 F. Operations Evaluation 3

II. PLANNING AND IMPLEMENTATION PERFORMANCE 4 A. Formulation and Design 4

B. Achievement of Outputs 6 C. Cost and Scheduling 7 D. Procurement and Construction 7 E. Organization and Management 7

III. ACHIEVEMENT OF PROJECT PURPOSE 8 A. Operational Performance 8 B. Performance of the Operating Entities 10 C. Financial and Economic Reevaluation 11 D. Sustainability 11

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 12

A. Socioeconomic Impact 12 B. Environment and Safety Impacts 14 C. Impacts on Institution and Policy 15

V. OVERALL ASSESSMENT 16 A. Relevance 16 B. Efficacy 16 C. Efficiency 16 D. Sustainability 16 E. Institutional Development and Other Impacts 16 F. Overall Rating 17 G. Assessment of Asian Development Bank and Executing Agency Performance 17

VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 17 A. Key Issues for the Future 17 B. Lessons Identified 18 C. Follow-Up Actions and Recommendations 19


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APPENDIXES1. Project Cost Estimates and Actual Costs 212. Appraisal and Actual Implementation Schedules of the Project 223. Pro Forma Financial Statements of the Jing-Jiu Railway 234. Operational and Financial Performance of the Ministry of Railways 265. Financial and Economic Reevaluation 276. Socioeconomic and Environmental Impacts 35


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BASIC DATA

Project Preparation/Institution BuildingTA No. Technical Assistance Name Type Person-

MonthsAmount

($)Approval

Date1909 Jing-Jiu Railway PPTA 21 400,000 20 July 1993

2122 Policy Support to the Ministry of Railways ADTA 41 600,000 14 July 1994

Key Project Data ($ million)As per ADB Loan

DocumentsActual

Total Project Cost 532.0 552.5Foreign Exchange Cost 220.0 226.4

ADB Loan Amount/Utilization 200.0 193.9 ADB Loan Amount/Cancellation 6.1

Key Dates Expected Actual

Fact-Finding 22 Nov9 Dec 1993 Appraisal 21 Feb6 Mar 1994Loan Negotiations 68 Jun 1994Board Approval 14 Jul 1994Loan Agreement 27 Oct 1994Loan Effectiveness 27 Jan 1995 5 Jan 1995First Disbursement 15 Feb 1995Project Completion Dec 1996 Dec 1998Loan Closing 30 Jun 1997 26 Mar 1999Months (effectiveness tocompletion)

23 48

Appraisal PCR PPARRates of Return (%)Railway Project Railway Project Railway Project

Economic Internal Rate of Return 15.4 19.8 15.6 14.6 14.3 14.1Financial Internal Rate of Return 7.9 17.1 6.2 8.8 6.2 9.0

Borrower Peoples Republic of ChinaExecuting Agency Ministry of Railways

Mission Data No. of Missions Person-Days

Fact-Finding 1 108 Appraisal 1 98Project Administration

Inception 1 18

Review 5 89Project Completion 1 34Operations Evaluation 1 1 63

ADB = Asian Development Bank, ADTA = advisory technical assistance, PCR = project completion report, PPAR = projectperformance audit report, PPTA = project preparatory technical assistance, TA = technical assistance.1 The Operations Evaluation Mission comprised C.C. Yu, Evaluation Specialist and Mission Leader; Lorne Danchuk,

International Consultant; and Chen Ajiang, Domestic Consultant.


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EXECUTIVE SUMMARY

During the 1980s, economic reforms in the Peoples Republic of China (PRC) and theconsequent rapid economic growth, averaging 9% per annum, resulted in a significant increasein transport demand. Despite substantial investment, capacity constraints were evident in allmodes of transport. Railway operations, in particular, were constrained by obsolete track,equipment, and information technology, including signaling and railway telecommunications.

Transport bottlenecks contributed to the increasing shortage of some key bulk commoditiessuch as coal in the southern provinces. From 1980 to 1992, the railways carriage of freighttraffic, though growing at 6.1% per annum, experienced a decline from 67% to 57% in its marketshare, partly due to a policy that encouraged use of road transport to reduce pressure on theoverburdened railway network. The operational strategy of the Asian Development Bank (ADB)for the PRC at the time identified the removal of transport bottlenecks as a priority area for economy-wide efficiency improvement, through relaxing policy and institutional constraints, andintroducing modern technology and managerial practices. Another important dimension was tochannel assistance to the development of infrastructure in the poorer inland provinces so as tohelp create the conditions necessary to foster economic growth.

In January 1993, the Government started to construct the $3.5 billion, 2,539-kilometer

(km) Jing-Jiu Railway (JJR). JJR was to originate in Beijing, run through seven provinces(including four poorer inland provinces) and two municipalities, and terminate in Kowloon, HongKong Special Administrative Region. The Project, which formed an important component of JJR,aimed to (i) enhance the operational efficiency of JJR by acquiring modern technology, includingassociated training; and (ii) support the Ministry of Railways (MOR) in formulating andimplementing policy reforms to improve efficiency of, and commercialize, railway operations.The scope of the Project comprised (i) modernizing railway technology, including provision of modern equipment for signaling, telecommunications, railway operation systems, trackmaintenance, and special quality (heat-treated and hardened) rails, and training of staff in theadvanced technologies involved in the equipment; and (ii) improving JJRs organizational andinstitutional arrangements, tariff policy and tariff structure, and financial management andaccounting systems. To help achieve the second objective, an advisory technical assistance

(TA) grant of $600,000 was attached to assist MOR in (i) developing recommendations for appropriate arrangements to operate and manage JJR in a commercial manner; (ii) formulatingan appropriate tariff policy and tariff structure; and (iii) developing systems for financialmanagement, accounting, and financial settlements based on an appropriate distribution of revenues and expenses for JJR.

A loan of $200.0 million approved by ADB in July 1994 for the JJR TechnicalEnhancement Project became effective in January 1995. The total project cost was estimated at$532.0 million equivalent, including $220.0 million foreign exchange cost and $312.0 millionequivalent local currency cost. The foreign exchange cost was to be jointly financed by ADB($200.0 million) and MOR ($20.0 million for interest during construction), while the localcurrency cost was to be financed by MOR.

The Operations Evaluation Mission visited Beijing, and Jiangxi and Guangdong provinces,during August and September 2002, and confirmed that project components were generallyimplemented as envisaged at appraisal and the quality of implementation was satisfactory toexcellent, with some minor exceptions. Despite the complexities of JJR, its construction wascompleted in September 1996, 4 months ahead of schedule. For the ADB-financed components,the loan closing was extended by almost 2 years to allow procurement of additional trackmachines. The actual cost of the Project, at $552.5 million equivalent, was 4% higher than theappraisal estimate due to the additional procurement. Nevertheless, ADBs financing amount waskept at $193.9 million. The balance of $6.1 million was cancelled.


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JJRs operation and maintenance to date has been satisfactory. Passenger trafficincreased from 7.4 billion person-km in 1997 to 22.7 billion person-km in 2001. The latter wasalmost seven times the appraisal forecast of 3.3 billion person-km. Freight traffic increased lessrapidly from 28.1 billion ton-km in 1997 to 58.3 billion ton-km in 2001, 37% below the appraisalforecast of 92.3 billion ton-km.

The performance of the equipment financed by the Project has been generallysatisfactory. The expected life of the special quality rails is 30% to 50% longer than that of regular rails. The longer service life means cost savings in maintaining and replacing the rails,and fewer disruptions to train operations. The heavy on-track rail maintenance equipmentprocured has been used to equip one overhaul gang and two regular maintenance gangs. Inaddition, the equipment has been widely replicated throughout the MOR network as a domesticmanufacturer has gained the required technology know-how through a joint venture with aninternational manufacturer. The highly efficient equipment has been widely credited as a keyfactor in the significantly improved track quality and much faster train services. Expresspassenger trains are typically operating at 120140 km per hour and freight trains at 8090 kmper hour on JJR, compared to the MOR average speed of about 60 km for all trains in 1999.The new equipment is not only cost effective compared to the traditional manual or semi-automatic track maintenance equipment, but is also capable of achieving quality that wouldnever have been possible with the traditional methods. The signaling equipment, mainly thecomputer-based hump process control system, has mostly achieved its design purpose. Thesystem has been operating for approximately 7 years in Fuyang and Xiangtang marshalingyards, handling a much larger volume of wagons than was possible using the traditionaltechnology. However, there have been problems in procuring spare parts after the key supplier withdrew from the PRC market. MOR is seriously considering replacing the imported systemwith a domestic system. This implies that the imported system would only be used for half of itsdesign life if the issue of spare parts cannot be resolved. The digital telecommunicationssystems procured under the Project, which have higher capacities and require less maintenancethan the traditional relay systems, have also contributed to the efficient and safe operation of JJR.

JJR has had significant socioeconomic impacts in stimulating development and reducingpoverty in the adjacent provinces through (i) providing, at much lower cost, access to outsidemarkets for local agricultural and mining products, and to products from other regions; (ii) improvingthe environment for external investments; and (iii) enabling more migrant workers from ruralareas to work in Guangdong Province. As an example, key economic indicators for GanzhouPrefecture, a key beneficiary in Jiangxi Province, have exhibited a substantial upward trendsince 1992. This reflects both direct impacts from JJR in the form of demand for local products,services, and labor, and indirect impacts of foreign and domestic investments. Within Ganzhou,the seven counties along JJR have experienced faster economic growth than Ganzhou as awhole. The impact appears to have been more pronounced on urban income than rural income,reflecting greater economic opportunities in the urban areas. The construction of JJR involvedacquisition of 10,800 hectares of land and resettlement of more than 200,000 people, 10schools/clinics, and several factories. A socioeconomic survey and interviews withrepresentatives of affected families indicate that most of them were fairly compensated. Manyinterviewees reported better living and working conditions after resettlement. In general, theincome level of the affected families has increased or at least remained the same due to theunprecedented economic opportunities created by JJR and the fact that income from land hadalways been limited in the region due to very low arable land availability.

JJR and the Project have been highly relevant to achieving the development objectivesof the Government and ADB through providing a vital railway link between the inland provinces


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and the more developed coastal provinces. Since its commissioning, JJR has eased thecongestion on the alternative lines by capturing a significant amount of traffic, particularlypassengers. The technical enhancement components financed under the Project have achievedtheir purpose of improving operational efficiency and safety, as reflected by a much faster average train speed on JJR compared to the rest of the MOR network. The execution of JJRwas ahead of schedule despite its complexities. With economic internal rates of return of about14%, both JJR and the Project are efficient. They are likely to be sustainable in view of MORsproven record in track and equipment maintenance and the satisfactory financial internal ratesof return of 6% and 9%, respectively. By providing income-generating opportunities, JJR hashad a significant impact on the economic outlook of the inland regions it traverses. JJRsenvironmental impacts have been moderate. Through the attached advisory TA, the Project hasmade a limited contribution to the ongoing market-oriented reforms in the railway sector.Overall, JJR and the Project are rated successful, and the TA partly successful.

Several issues, related to reforms and restructuring, may affect the performance of JJRand the Project, including delayed implementation of a point-to-point accounting system, thecurrent mechanism of internal revenue allocation, and the need to separate MORs governmentfunction from its commercial function. The experience of JJR demonstrates that railways androads can be more mutually complementary than competitive, especially at early developmentstages. The principal lesson learned is the importance of strong government commitment andleadership as key to successful implementation of such a complex and huge investment project.

Along with its ongoing support for physical investments in the PRCs railway sector, ADBshould continue its policy dialogue and provide TA, as needed, for policy reforms and sector restructuring. Despite the noteworthy progress in improving its efficiency and the quality of itsservices, MOR needs to do more to meet increasing competition from road transport,particularly in the freight market. MOR should deepen the market-oriented reforms and sector restructuring, and address problems related to spare parts, traffic safety, and compensationprocedures for resettled families and enterprises.


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Map


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I. BACKGROUND

A. Rationale

1. During the 1980s, economic reforms in the Peoples Republic of China (PRC) andconsequent rapid economic growth, averaging 9% per annum, resulted in a significant increasein transport demand. Despite substantial investments, capacity constraints were evident in allmodes of transport. From 1980 to 1992, total freight transport by all motorized modes grew from849.4 billion ton-kilometers (ton-km) to 2,084.4 billion ton-km, at 7.8% per annum, while totalpassenger traffic grew at 9.7% per annum, from 214.0 billion passenger-km to 649.9 billionpassenger-km. During the same period, railway freight traffic, growing at 6.1% per annum,experienced a decline from 67.3% to 57.4% in its market share due to a combination of policyand economic factors that encouraged use of road transport to reduce pressure on theoverburdened railway system. Nevertheless, the railway sector was expected to maintain itsdominant role in freight transport, given the countrys large geographic area and the need totransport huge quantities of coal and other bulk commodities. Railway operations, however, hadbeen constrained by obsolete track, equipment, and information technology, including signalingand railway telecommunications. Transport bottlenecks had contributed to the increasingshortage of some key bulk commodities such as coal in the southern provinces.

2. During the Eighth Five-Year Plan (FYP) of 19911995, the Government continued toaccord high priority to transport development, including railways. The Governments strategy for the transport sector was mainly directed at infrastructure capacity expansion and efficiencyimprovement with an emphasis on structural reform and cost recovery. Large amounts of investment resources, approximately $10 billion, were allocated to the transport sector in theEighth FYP, a 46% increase over the Seventh FYP period. The operational strategy of the AsianDevelopment Bank (ADB) for the PRC at the time identified the removal of transport bottlenecksas a priority area for economy-wide efficiency improvement, through addressing policy andinstitutional constraints, and introducing modern technology and managerial practices. Another important dimension was to channel assistance to the development of infrastructure in the

poorer inland provinces so as to help create the conditions necessary to foster economicgrowth. For the railway sector, ADBs operational strategy at the time mostly focused onincreasing the capacity of provincial railways, which were organized and operated separatelyfrom the national railway system but filled key gaps that the national railway system could notreach. Improvement of the capacity of the national railway system itself was only supported by

ADB if it would significantly contribute to poverty reduction in the less-developed inlandprovinces.

B. Formulation

3. The Project was formulated as the fifth ADB-financed intervention in the PRCs railwaysector, and the first related to the national railway system. During the 1993 Country

Programming Mission, the Government requested ADB assistance for technical advancementand institutional reform components of the Jing-Jiu Railway (JJR). The 2,539-km JJR, thelongest railway ever to be built under a single project in the PRC with an estimated cost of over $3.5 billion, was identified as one of the top priority projects by the Government. JJR was tooriginate in Beijing, run through seven provinces (including four poorer inland provinces) andtwo municipalities, and terminate in Kowloon, Hong Kong Special Administrative Region.Connecting with major existing railway trunk lines and ADB-financed local lines (i.e., Guang-


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Mei-Shan Railway, 1 and Jiujiang-Hefei Railwaysee Map), it was designed to relieve thesignificant pressure on the existing north-south transport capacities (e.g., Jing-Guang and Jing-Hu lines, see Map), mainly resulting from demand for transport services between the energy-rich provinces in the north and industrialized but coal-deficient provinces in the southern andeastern coastal areas. By running through some of the least developed provinces, JJR was tohave significant repercussions in developing local mineral and other resources and stimulatingeconomic growth. ADB provided technical assistance (TA) to review the Governmentsfeasibility study for JJR and to strengthen project preparatory work. 2 A Fact-Finding Missionvisited the PRC during November and December 1993, followed by an Appraisal Mission duringFebruary and March 1994. The Appraisal Mission confirmed that the Government accorded avery high priority to JJR, the technical enhancement components identified by the Ministry of Railways (MOR) and the Fact-Finding Mission were suitable for ADB financing, and MOR wasthe appropriate Executing Agency. In July 1994, ADBs Board approved a loan of $200.0 millionfor the Project. 3

C. Purpose and Outputs

4. The objectives of the Project were to (i) enhance the operational efficiency of JJR byacquiring modern technology, including associated training; and (ii) support the MOR informulating and implementing policy reforms to improve efficiency of railway operations and tocommercialize them. The scope of the Project comprised (i) modernizing railway technology,including provision of modern equipment for signaling, telecommunications, railway operationsystems, track maintenance, and special quality (heat-treated and hardened) rails, and trainingof staff in the advanced technologies involved in the equipment; and (ii) initiatives for improvingJJRs operational efficiency. Under ADBs strategic development objectives, the Project wasclassified in the economic growth category. Poverty reduction, though implied, was not listed asa secondary objective.

5. In addition to the project preparatory TA to help validate MORs feasibility study anddesign (footnote 2), an advisory TA was attached to the ADB loan. 4 The TA was designed to

assist MOR in (i) developing recommendations for appropriate arrangements to operate andmanage JJR in a commercial manner; (ii) formulating an appropriate tariff policy and tariff structure; and (iii) developing systems for financial management, accounting, and financialsettlements based on an appropriate distribution of revenues and expenses for JJR.

D. Cost, Financing, and Executing Arrangements

6. Appendix 1 provides details of cost breakdown by project component. At appraisal, theproject cost was estimated at $532.0 million equivalent, including $220.0 million foreignexchange cost and $312.0 million equivalent local currency cost. The foreign exchange costwas to be jointly financed by ADB ($200.0 million) and MOR ($20.0 million to cover interestduring construction); the local currency cost was to be financed by MOR.

7. A project management office was established in MOR at the time of loan approval toimplement JJR. In addition, MORs Foreign Capital and Technical Import Office (FCTIO) was to

1 Part of Guang-Mei-Shan, between Changping and Longchuan, forms a section of JJR.2 TA 1909-PRC: Jing-Jiu Railway , for $400,000, approved on 20 July 1993.3 Loan 1305-PRC: Jing-Jiu Railway Technical Enhancement Project , for $200.0 million, approved on 14 July 1994.4 TA 2122-PRC: Policy Support to MOR , for $600,000, approved on 14 July 1994.


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act as the counterpart of ADB, responsible for all the administrative work for the ADB-financedcomponents in coordination with the project management office.

E. Completion and Self-Evaluation

8. The project completion report (PCR), circulated in April 2000, stated that the Project wasmostly implemented as envisaged at appraisal. There was only a minor overrun in the totalproject cost and a delay in completion, both due to procurement of equipment not envisaged atappraisal. As planned, modern equipment was provided on the JJR route. Special quality rails 5 were installed on a 600 km section of JJR, which passes through mountainous terrain in JiangxiProvince. Track maintenance teams were equipped with heavy on-track machines that haveimproved quality of track maintenance, safety, and operational efficiency, increased trainspeeds, and reduced train operating costs. A hump process control system, 6 using computer and electronic equipment for controlling and carrying out humping operations and formingfreight trains for various destinations, was installed in major marshaling yards at Fuyang andXiangtang. Both marshaling yards were equipped with microcomputer interlocking systems,automatic humping facilities, track occupation monitors, information management systems, andwagon monitoring systems. The new information management system facilitated decisionmaking for operation in the marshaling yards and helped improve the statistical database andoperational planning. Through these technological enhancements, the productivity of themarshaling yards had been increased the maximum capacity of the yards was 8,000 wagonsper day compared with 4,000 wagons per day before the Project. A centralized train controlsystem installed on a section of JJR north of Jiujiang enabled automatic control and supervisionof train operations. Significant improvements were made in telecommunications, which together with modern train operations equipment enhanced the efficiency and safety of operations.

9. The PCR was exceptionally comprehensive in addressing aspects not only related to theProjects implementation, as well as financial and economic analysis, but also to impacts of JJRin terms of environment and resettlement, socioeconomic development, and poverty reduction.The Project Completion Review Mission, which visited selected counties affected by JJR inJiangxi Province, found that improved housing and new employment opportunities had beenprovided for affected persons. As a result, living conditions and income for these people hadmostly increased. The PCR rated the Project successful and noted that the two related TAs(footnotes 2 and 4) had achieved their respective objectives.

F. Operations Evaluation

10. This project performance audit report (PPAR) will assess various aspects of projectformulation, design, implementation, and sustainability, as well as the Projects socioeconomic,environmental, and institutional impacts. The assessment is based on a review of ADBdocuments, discussion with ADB staff, and findings of the Operations Evaluation Mission (OEM),which visited Beijing, and Jiangxi and Guangdong provinces during 26 August15 September

2002. The OEM held discussions with MOR and the Ministry of Finance, and took the passenger train along JJR from Beijing to Guangzhou with stops in Nanchang, Ganzhou, and Longchuan.During the field trip, the OEM inspected the track and rail; visited Xiangtang marshaling yard; andheld discussions with Nanchang Railway Administration (RA) and Guangzhou Railway

5 These rails are heat-treated and can withstand more wear than the conventional rails. They also require lessmaintenance, have longer replacement cycles, and enhance safety.

6 The hump process is to regroup wagons according to their destinations at major marshaling yards (similar to air hubs in the civil aviation industry), through controlling the numerous turnouts (interlocking) below the hump track.


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Corporation (two key entities responsible for operating JJR), as well as with representatives of affected persons, relocated schools and factories, and local governments. A socioeconomicsurvey, carried out independently by the domestic consultant among affected persons, and atschools and factories, focused on issues related to resettlement and land acquisition. Copies of the draft PPAR were sent to the Government and the concerned ADB departments for review; allcomments received have been considered in finalizing the PPAR.

II. PLANNING AND IMPLEMENTATION PERFORMANCE

A. Formulation and Design

11. The rapid economic growth in the 1980s and the consequent explosive demand for transport services imposed severe stress on the PRCs transport system. Railways, despite thefast improving road network in the country, remained the backbone of the transport system.

ADBs operational strategy for the railway sector focused almost exclusively on buildinglocal/provincial railways to supplement the national railway system as ADB took the view thatthe former would have a strong impact on economic growth and poverty reduction. The decisionto partly finance JJR as the backbone of the north-south railway corridor was an exception tothis view. The main justification was the provision by JJR of badly needed transport access toseveral underdeveloped inland provinces it would traverse. Four of the seven provinces hadlower than national average per capita income, and parts of Jiangxi Province i n particular suffered from severe poverty due to its mountainous terrain and geographic isolation caused bypoor transport. From this point of view, the Project was considered consistent with the centraltheme of ADBs operational strategy, which was to assist the country to achieve economicgrowth in an efficient, equitable, and sustainable manner, and to channel increased assistanceto the development of infrastructure in the poor inland provinces.

12. The feasibility study for JJR was carried out by MORs Fourth Design Institute with theassistance of the Third Design Institute. The line was designed to MOR Class I standards. 7 Theconsultants under the project preparatory TA (footnote 2) reviewed and validated the design.

Their final report noted that JJR was to be within a geographically defined north-south corridor connecting Beijing and Kowloon, Hong Kong Special Administrative Region. The corridor liesbetween the existing Jing-Hu (Beijing-Shanghai) and Jing-Guang (Beijing-Guangzhou) railways.JJR was to be composed of a number of connected railway line segments, both existing andplanned. About 1,700 km of the proposed 2,539 km were to be newly constructed, and thebalance involved either upgrading existing MOR lines or local railway segments. The sectionfrom Beijing to Xiangtang was designed as double-track line with automatic block signaling. Thesection from Xiangtang to Longchuan was to have double-track substructure (subgrade,bridges, and tunnels) with single-track superstructure and semi-automatic block signaling. 8 Allstations on JJR were to be equipped with electric interlockings.

13. On the whole, the OEM regards JJR, including the civil works, as well designed. While

the northern section (Beijing to Shangqiu) and the southern section (south of Longchuan) arerelatively flat, the middle section from Shangqiu to Longchuan is characterized by more complex

7 MOR uses clearly defined infrastructure standards to govern the design of track, bridges, tunnels, and supportfacilities. The standards are rigorous and generally consistent with those of other Asian and North Americanrailways. MOR track design standards are based on the classification of lines using long-term traffic projections (upto 10 years): Class I (long-term tonnage >15 million tons/year), Class II (long-term tonnage >7.5 million tons/year),and Class III (long-term tonnage


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basis, the Project was classified as Category A in environmental impact, which called for fullenvironmental impact assessment to be carried out. Based on a review of MORs report, MORassumed the responsibility, under a loan covenant, for environmental monitoring during JJRimplementation. Furthermore, despite the fact that JJRs construction was well under way whenthe Project was formulated, ADB provided timely and needed assistance to MOR in carrying outland acquisition and resettlement in accordance with law and generally accepted practices(para. 37).

B. Achievement of Outputs

19. The ADB-financed technical enhancement components were scattered in differentlocations along JJR. Most of the special rails were installed in the southern half of JJR (on theborder of Jiangxi and Guangdong Provinces) on mountainous sections with numerous curves.

Access to the area by roads (necessary for the inspection) was not available at the time of OEMsvisit. Nevertheless, the train that the OEM took passed through the sections. These mountainoussections have many tunnels and bridges for which the special rails are well suited. An ultrasonicinspection carried out by MOR in August 2002 found no defects, no measurable wear on theinside or gauge face of the head of the rail, and no corrugation on the head of the rail. Themodern track maintenance machines procured under the Project were used to outfit one overhaulgang and two regular maintenance gangs. 10 The equipment has been assigned to the ShanghaiRA, which is responsible for operating a small portion of JJR. Although this specific equipmentwas not accessible, 11 the OEM visited an overhaul gang of Beijing RA with identical equipment.The OEM observed a ballast replacement program in operation where 500 meters of track wasundercut, re-ballasted, surfaced, lined, and compacted within a 3-hour work block (window). 12 Of the two sets of computer-based hump process control systems procured under the Project, onewas installed at the southern Xiangtang marshaling yard and the other at the northern Fuyangmarshaling yard. The OEM visited the former and observed that the equipment was generallyperforming well, handling a large volume of wagons. The system consisted of three maincomponents: (i) humping control, (ii) wagon dispatching indication, and (iii) wagon tracing andallocation. While the quality of the system was generally satisfactory and met operational needs,

the third component, wagon tracing and allocation, had never been functional due to sensor failure and other technical problems. The second component, wagon dispatching indication, hasalso experienced some critical software problems that were later solved. The digitaltelecommunications equipment procured under the Project was assigned to RailwayCommunication Corporation, which was recently separated from MOR. 13 The equipment consistsof (i) high-capacity transmission, (ii) digital switching, (iii) radio dispatching, and (iv) yardcommunication.

10 While the two types of track maintenance gangs have the same type of equipment, overhaul gangs have almost

twice as many large machines and about 50% more track workers. They take care of large, planned maintenanceprojects while regular maintenance gangs handle smaller planned projects and emergency works. Currently, MORhas over 300 track maintenance machines. There are 19 maintenance depots under MORs jurisdiction specificallyfor the maintenance of these track machines.

11 It is difficult to arrange visits to track maintenance machines because they are very heavily used, often across aRA rather than being confined to a particular line.

12 This was an impressive achievement in accordance with international standards of modern railways, and requiredgood planning and execution.

13 As part of MORs effort to spin off some of its non-core operations including telecommunications, railwayconstruction companies, equipment manufacturing, and universities. These separated entities continue to providethe same services to MOR but for a fee, just like any other supplier.


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C. Cost and Scheduling

20. As indicated in Appendix 1, the actual cost of the Project was $552.5 million equivalent,accounting for about 10% of the actual total cost for JJR of $5.3 billion. 14 The cost overrun of 4% relative to the appraisal estimate of $532.0 million was mainly attributable to procurement of additional track maintenance machines and higher interest during construction. Nevertheless,

ADBs financing was kept at $193.9 million, lower than the approved amount of $200.0 million,and the balance of $6.1 million was cancelled. 15

21. Despite the complexities of JJR, its construction, which commenced in January 1993, wascompleted in September 1996, 4 months ahead of schedule. For the ADB-financed components,completion was in December 1998, 2 years behind schedule, because of the procurement of additional maintenance equipment (Appendix 2).

D. Procurement and Construction

22. MOR engaged and financed, from its resources, domestic consultants for the design of facilities, construction supervision, environmental monitoring, and international procurement. For the implementation of TA 1909-PRC (footnote 2) and TA 2122-PRC (footnote 4), internationalconsultants were engaged in accordance with ADBs Guidelines on the Use of Consultants .MOR expressed satisfaction with the services of both the domestic and internationalconsultants.

23. The procurement of ADB-financed components was carried out in accordance with ADBsGuidelines for Procurement , with assistance from experienced procurement companies.Interviews and the OEMs field visit confirmed that the quality of equipment and installation wasgenerally satisfactory. Nevertheless, some problems were encountered with installation of certainequipment, and one component of the computer-based hump control system was never functionaldue to sensor failure and other technical problems (para. 19). The fact that the equipment wasprocured from suppliers in 20 different countries posed considerable challenge for maintenance

and procurement of spare parts (para. 27). The engineering and civil works were generally donein accordance with international standards or generally accepted practices, and in some casesexceeded them.

E. Organization and Management

24. MOR implemented JJR including the Project through its project management office.FCTIO was responsible for all the administrative work for the ADB-financed components incoordination with the project management office. JJR was highly complex and involved morethan 25 domestic design institutes, engineering/railway bureaus, and international agencies.The expeditious construction was mainly due to the high political importance attached to JJR for the return of Hong Kong, China to the PRC, strong leadership from the central Government, the

commitment by MOR and all participating parties and their strong expertise and experience inimplementing large complex railway projects. MOR recognized its limitation as a coordinatingagency for such a complex project involving many provinces and agencies. As a result, theState Council, under the leadership of a vice-premier, led the overall coordination and MOR

14 This was much higher than the initial estimate of $3.5 billion. The unit cost of about $2 million per km was twice theaverage cost of constructing railways in North America. This was partly due to the difficult geological conditionsand expensive slope-control measures.

15 This included $3.6 million for signaling equipment, which MOR financed from its own resources, and $2.5 million insurplus loan proceeds at loan closing.


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B. Performance of the Operating Entities

28. Under the present organizational structure of railways, the operations and maintenanceof JJR are integrated within five RAs? Beijing, Jinan, Zhengzhou, Shanghai, andNanchang? and one railway corporation? Guangzhou. This makes it difficult to assess JJRsimpact on one or all operating entities. The OEM visited Nanchang RA, which is responsible for 1,101 km of the 2,539 km JJR, and Guangzhou Railway Corporation (Group). The creation of Nanchang RA, from a subadministration under Shanghai RA, in August 1996 was largely due tothe commissioning of JJR. The 1,101 km section of JJR in Jiangxi Province accounts for 44% of the total 2,484 route-km railways operated by Nanchang RA. More than half of its total operatingrevenue in 2001, CNY3.6 billion, was accrued from JJR. The main outbound freight includedgrain, minerals, metals, and fertilizer, and the main inbound cargos included coal, metals,minerals, and construction materials. The establishment of a point-to-point accounting system in1999 at MOR 19 has allowed the separation of the passenger service from the rest of the RAsoperations. The Passenger Service Company was founded in 2000, and separation of thefreight service will start by the end of 2002. For 2001, Nanchang RA made an operating profit of CNY236 million (after deducting depreciation). However, in 2002, it is likely to run at a loss eventhough both freight and passenger traffic has been increasing. This is because the MORprocedure of revenue reallocation among different RAs 20 has been revised to reduce the crosssubsidies from richer RAs to poorer RAs.

29. Despite the fact that no single RA is responsible for operating JJR, Appendix 3 providesan income statement, balance sheet, and cash-flow statement for JJR on a pro forma basis.

Although a loan covenant called for furnishing such pro forma financial statements to ADB at theend of each fiscal year, it was not complied with by MOR due to the fact that the operation of JJR rests with five RAs and the point-to-point accounting system has not been fully functional.The results in Appendix 3 were estimated by ADB staff using financial models and the updatedtraffic and tariff information provided by MOR. Another loan covenant stipulated for JJR anoperating ratio (ratio of total operating expenses including depreciation to operating revenues)not higher than 70% from 1998 onwards. This target was met in 1998 and 1999. In 2000, the

operating ratio exceeded the target significantly and in 2001, marginally. The return on net fixedassets in operation, which was not covenanted, ranged between 3.1% and 6.8% during 19982001. The debt service coverage ratio, also not covenanted, was at comfortable levelsexceeding 2.5%.

30. Appendix 4 shows the operational and financial performance of MOR as the ultimateoperating entity of JJR. With a 68,000 route-km rail network (compared to 2,539 km for JJR),MORs performance has been improving steadily since 1994. The freight traffic has increased ata slower pace than the passenger traffic. In fact, due to the lower demand for transport causedby the Asian financial crisis and increasing competition from road transport (particularly in theshort-haul market), freight traffic declined slightly in 1998 and did not recover to the 1997 leveluntil 2000. In contrast, passenger traffic experienced a steady increase, as evidenced by the

19 MOR officials interviewed indicated that it was still in the experimental stage.20 The revenue reallocation procedure is designed to bring different RAs into parity in their revenues through cross

subsidies. Under this procedure, the revenues from passenger and freight transport of RAs are submitted to MOR,which reallocates them by applying a regionally adjusted coefficient, with poorer regions receiving higher revenuesfor the same traffic.


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average annual growth rate of 6.9% between 1997 and 2001. MOR has been making a netprofit after tax since 1998. In 2001, the net profit was CNY3.1 billion. 21

C. Financial and Economic Reevaluation

31. Appendix 5 contains a recalculation of the financial and economic internal rates of return(FIRR and EIRR) for both JJR and the Project. All financial costs and benefits are denominated inthe local currency at 2002 constant prices, while the economic costs and benefits are valued ateconomic prices using the world price numeraire. As summarized in Table 2 below, therecalculated FIRRs for JJR and the Project are 6.2% and 9.0%, respectively, in line with therespective PCR estimates but lower than the appraisal estimates. The FIRRs exceed therecalculated weighted average cost of capital of 5.8%. The recalculated EIRRs for JJR and theProject are 14.3% and 14.1%, respectively, below both the PCR and appraisal estimates but stillsatisfactory. JJRs main economic benefits are accrued from resource savings for the divertedtraffic (from buses and other alternative railway routes) and the net production values for thenewly generated traffic. By including only benefits of direct users of JJR, the recalculated EIRRdoes not capture indirect benefits to non-users, particularly in terms of stimulating local economicgrowth and reducing poverty by attracting investment and creating employment (paras. 3437).

For the Project, the main benefits, both financial and economic, are associated with resourcesavings in purchasing rolling stock and in operating capital that result from the higher train speedsachieved.

Table 2: Summary of Financial and Economic Reevaluation of Jing-Jiu Railway (%)

Appraisal PCR PPARItem JJR Project JJR Project JJR Project

FIRR 7.9 17.1 6.2 8.8 6.2 9.0EIRR 15.4 19.8 15.6 14.6 14.3 14.1

EIRR = economic internal rate of return, FIRR = financial internal rate of return, JJR = Jing-Jiu Railway,PCR = project completion report.

D. Sustainability

32. Proper and efficient maintenance is essential for JJRs operation and its long-termsustainability. MOR generally has a sound record of track and equipment maintenance. The OEMvisited an overhaul gang and observed that the work was done in accordance with internationalstandards. The OEM also observed that the tracks and equipment along JJR were in good toexcellent condition. The modern heavy-track maintenance equipment procured under the Project,together with 300 sets of such equipment throughout MOR, has helped improve both theefficiency and quality of track maintenance. The special quality rails and the digitaltelecommunications equipment have helped reduce the need for frequent maintenance. Apotential risk for the sustainability of the Project is the high cost and long waiting time for procuringadditional spare parts. Fortunately, domestically made substitutes are increasingly available atlower cost for the various components procured under the Project.

21 Although the amount is small relative to the vast network and total traffic, the fact that MOR has made a net profitat all (allowing for certain accounting errors and data inaccuracy) is commendable in view of the unsatisfactoryfinancial performance of many railways worldwide.


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33. With respect to financial sustainability, the recalculated FIRRs for JJR and the Project aresatisfactory. An area of concern is the potentially declining competitiveness of rail transportcompared to road transport for freight. Experience in other countries suggests that the truckingindustry will become more competitive, through its door-to-door services, as the road networkimproves and the industry itself consolidates. 22 The higher freight tariff for JJR and the Jing-Guang line than for the rest of the MOR network may exacerbate the situation by pushing morefreight traffic to competitors. On the other hand, JJRs own competitiveness will also improve asmore lines are connected to it, (e.g., the Ganzhou-Longyan line that is under construction). Thefinancial health of MOR is satisfactory. The strong commitment of the Government to railwaytransport in general and to JJR in particular suggests that JJR is likely to be sustainable.

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS

A. Socioeconomic Impact

34. The OEM investigated socioeconomic impacts of JJR through (i) site visits anddiscussions with various stakeholders in Jiangxi and Guangdong provinces, including localgovernment officials and representatives of JJR-affected families, schools, and factories; and(ii) a separate socioeconomic survey by the domestic consultant (Appendix 6). 23 This dualapproach allowed verification of the findings from discussions with official representatives andinterviews at the village level. The investigations found no negative impacts on indigenouspeoples or other social minority groups, and led to a clear conclusion that the socioeconomicimpacts of JJR, particularly in terms of stimulating economic development and poverty reductionfor the impoverished counties along the line, were rather significant. JJR has benefited theseregions through (i) providing access to outside markets for local products; e.g., agricultural andmineral products; (ii) providing access to products from other regions at a much lower cost;(iii) improving the environment for external investments; and (iv) enabling more migrant workersto work in Guangdong Province, which has greatly increased rural income levels.

35. Table 3 provides selected economic indicators for Ganzhou Prefecture, a key beneficiary

in Jiangxi Province. It indicates that, for both Ganzhou as a whole and the seven counties alongJJR, gross domestic product, government revenue, external investment, and income exhibited astrong upward trend. The growth rapidly accelerated during 19921995, which covered most of JJRs preparation and construction, and was typically around 30% per annum, reflecting directimpacts from JJR in terms of demand for local products (e.g., cement), services/tertiary industry(e.g., food, accommodation), and labor; and indirect impacts from surging external investments.

Although the growth rates slowed during 19952001, they continued to be remarkably highconsidering the larger base they were achieved from. The sectors that received major investments included fruit processing (orange juice), mineral development, and shoemanufacturing. According to officials interviewed, all this would not have happened without JJR.The orange juice production, for example, resulted from investment by a Beijing-based companyand was mainly targeted at the Beijing market.

36. With respect to different impacts within Ganzhou, the economy and income generallygrew faster in the seven counties than Ganzhou as a whole after 1992. JJR had morepronounced impacts on urban than rural income, reflecting greater economic opportunities in

22 Presently, the average number of trucks per company is only 1.4.23 A questionnaire survey was planned but proved to be unsuccessful due to the fact that most educated young and

middle-aged villagers were working in cities and elsewhere, and the people remaining in villages were mostlyelders and children. The consultant, however, was able to conduct a series of interviews and focus groupdiscussions, and gather statistics from various sources.


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urban areas. On average, the annual urban income growth after JJR was 3%4% higher thanbefore JJR. In contrast, the annual rural income growth rates after JJR were lower than beforeJJR, even though the increases in absolute terms were higher. Statistics provided by theGanzhou government indicate that the total poverty population 24 decreased from 380,000 in1997 to 240,000 in 2001, or by 37%. The decrease for the seven counties along JJR wasmarginally higher at 39% during the same period. In addition, data in Appendix 6, whichcontains more information on socioeconomic impacts of JJR, indicate that the rural income for Ganzhou Prefecture as a whole increased 4.0 times between 1990 and 2001, compared to theprovincial and national averages of 3.3 times and 3.5 times, respectively.

Table 3: Impact of Jing-Jiu Railway on Economic Developmentof Ganzhou Prefecture, Jiangxi Province

Average Annual Increase (%)Item 1990 1992 1995 2001 19901992 19921995 19952001

A. EconomyGDP for All Prefecture

(CNY million) 6,265 7,857 16,182 28,458 12.0 27.2 9.9Tertiary Industry for All Prefecture

(CNY million) 1,523 2,151 4,123 10,622 18.8 24.2 17.1GDP for 7 Counties Along JJR

(CNY million) 2,927 3,523 8,035 14,258 9.7 31.6 10.0Tertiary Industry for 7 Counties

(CNY million) 760 981 2,223 4,935 13.6 31.3 14.2

B. Government RevenueFor All Prefecture (CNY million) 517 606 1,431 2,335 8.3 33.2 8.5For 7 Counties Along JJR

(CNY million) 338 394 863 1,336 8.0 29.9 7.6

C. External InvestmentForeign Investment ($ 000) 1,249 11,024 64,780 106,450 197.1 80.5 8.6Domestic Investment (CNY 000) 20,039 49,480 249,930 3,100,000 57.1 71.6 52.1

D. Income Annual Urban Wages for All

Prefecture (CNY/person) 1,717 2,049 3,775 7,570 9.2 22.6 12.3 Annual Urban Wages for 7

Counties (CNY/person) 1,682 1,996 3,771 7,825 8.9 23.6 12.9 Annual Rural Net Income for All

Prefecture (CNY/person) 602 709 1,478 2,113 8.5 27.7 6.1 Annual Rural Net Income for 7

Counties (CNY/person) 605 714 1,511 2,199 8.6 28.3 6.5

GDP = gross domestic product, JJR = Jing-Jiu Railway. Source: Ganzhou Municipal Statistic Bureau.

24 The poverty line in Jiangxi is currently set at CNY685/year/person or $83/year/person, substantially less than thewidely used international standard of $1 per day. The main reasons provided by the officials interviewed for such alow poverty line were lower price levels and the subsistence nature of the economy.


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37. The construction of JJR involved the acquisition of 10,800 hectares of land andresettlement of 211,174 persons, 25 10 schools/clinics, and several factories. The PCR indicatedthat for most persons affected, the compensation provided resulted in better living/workingconditions and higher income (para. 9). Interviews conducted by the OEM with representativesof the persons and entities affected confirmed this observation. MOR had reportedly prepared awritten resettlement plan, but the OEM could not locate it. 26 However, available documentssuggest that, with assistance from ADB, MOR carried out land acquisition and resettlementactivities in accordance with the law and generally accepted practices. These included, amongothers: (i) careful selection of the railway route to avoid densely populated areas; (ii) ensuringthat resettled people were at least as well off as without JJR; (iii) land and housingcompensation based on market rates; and (iv) assistance in restoring their livelihood. Onaverage, a typical house in Ganzhou was compensated with CNY40,000CNY50,000, whichwas more than the amount that was needed to build a similar (often bigger and better) house.The relocated houses are often near their previous locations and the original villagecommunities were generally preserved. Farmers were compensated for their land acquired,priced at CNY6,000/ mu ,27 although payments were delayed in some cases. The income levelfor the affected families has mostly increased after resettlement. The reasons are twofold. First,due to the very low arable land availability of less than 1 mu per person, income from land hadalways been low and unreliable. Second, the economic opportunities presented by theconstruction and operation of JJR, including operating eateries, renting out houses for construction workers, working at railway stations as porters, and working in cities, are more thanenough to compensate for the loss of agricultural income.

B. Environment and Safety Impacts

38. As covenanted, MOR furnished annual environmental monitoring reports to ADB from1994 to 1999. The reports outlined key environmental issues during construction and operation,and mitigation measures adopted. Two main types of environmental issues were encounteredduring construction: (i) soil erosion control and slope stabilization, and (ii) pollution of soil byconstruction activities. Additional environmental and safety issues during operation included

sewage discharge (from various railway locomotive and equipment depots and service stations)and treatment, littering along the line, and potential traffic accidents for local people whencrossing the line. The monitoring reports and the OEMs own observation in traveling along JJRindicate that the engineering for slope stabilization and soil erosion control, mostly in themountainous Jiangxi section, is of very high quality. The expensive erosion control measuresare one of the main reasons for the relatively high cost of JJR (para. 20). The various sewageplants built as a part of JJR were reported to be operating well. Littering along JJR was evidentbut limited in scope. However, several villagers interviewed in the survey reported occurrence of traffic accidents, including fatal ones, due to either poorly designed or inadequate passages. Inaddition, although not mentioned in the monitoring reports, construction and operation of JJRmay have altered the drainage patterns and facilitated depletion of groundwater in somelocations. However, the adverse impacts appear to be limited in scope (Appendix 6). In general,

the environmental impacts of JJR have been moderate.

25 MOR confirmed that the total area of land acquired permanently and the total number of affected persons, asreported here, decreased slightly from the 11,732 hectares and 212,000 pers ons stated in the appraisal report andPCR.

26 At the time, ADB had yet to develop its policy on resettlement. Its R179-95: The Banks Policy on Involuntary Resettlement was issued in September 1995.

27 15 mu = 1 hectare.


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increased significantly for the counties along JJR visited by the OEM. In some villages, netincome for farmers nearly tripled in 10 years due to improved market access for their produce andincreased opportunities to work in cities. In terms of resettlement and land acquisition, availableinformation, albeit limited, indicates that most affected families, schools, and enterprises havebeen satisfied with the compensation received, and enjoy better living and working conditionsafter the resettlement. The resettled persons have been given top priority in employment relatedto construction and operation of JJR. Protection of the environment during construction was wellmonitored and managed. However, traffic accidents including fatal ones were reported by villagersdue to either poorly designed or inadequate passages. The Projects impact on institutionaldevelopment has been limited and mainly achieved through the attached advisory TA and aseries of training activities conducted by the suppliers on the use and maintenance of theequipment procured under the Project. In sum, JJR and the Project have had substantialsocioeconomic and moderate institutional and environmental impacts.

F. Overall Rating

47. Based on the above considerations, JJR and the Project are rated successful.

G. Assessment of Asian Development Bank and Executing Agency Performance

48. A total of nine missions were fielded by ADB related to project preparation,implementation, and completion. ADB provided assistance to MOR in validating the technicaldesign of JJR and the Project through the project preparatory TA, explaining ADBs policies oninvoluntary resettlement and environmental protection, implementing ADBs guidelines onprocurement, and bringing new technologies and managerial concepts to PRCs railwayconstruction and operation. MOR is highly appreciative of ADBs assistance in all of theseareas. In particular, the dedication of successive mission leaders and members for loanprocessing and implementation was credited by MOR as a key factor for the smooth workingrelationship. Despite the relatively small portion of ADBs financing in the overall JJR cost,

ADBs policies on resettlement and environmental compliance and continuous monitoring during

construction and after commissioning appeared to have played an important role insafeguarding the environment and the interests of the affected families. Overall, ADBsperformance was highly satisfactory. MORs performance was also highly satisfactory as JJRwas built in record speed in the PRC railway construction history with excellent to satisfactoryquality, and its operation and maintenance have been generally satisfactory as well.

VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A. Key Issues for the Future

1. Issues Related to Reforms and Restructuring

49. The much-anticipated point-to-point accounting system is still not fully operational. Sucha system is essential for tariff setting and making key management decisions on investmentsand planning. The current tariff structure and ways of internal settlement and reallocation of operating revenues have hindered the full commercialization of railway operations. For mostRAs, the revenues are not directly collected from customers, but rather from MOR through aninternal revenue reallocation mechanism, and the tariffs for both passenger and freight trafficare largely determined by the Government. Therefore, whether RA is profitable or not dependsnot only on the quantity and quality of its services, but also on the reallocation mechanism.


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50. The restructuring of MOR toward separation of its government function from itscommercial function and introducing more competition is currently being studied in a plan to besubmitted to the State Council. In this regard, the pioneering experience of Guangzhou RailwayCorporation (Group), which was corporatized from the formerly Guangzhou RA in 1993, may bevaluable for the extrapolation of commercial model to the entire MOR network. The group has acorporate structure with numerous subsidiary and holding companies. Guang-Mei-Shan RailwayCorporation is one of the holding companies, responsible for operating a section of JJR inGuangdong Province and the connecting Guang-Mei-Shan railway, financed by an ADB loan(footnote 1). The Corporation is capturing an increasing share of the growing passenger market(mostly migrant workers) in Guangdong Province and has been making an operating profit since2000.

2. Roads versus Railways or Roads with Railways?

51. There is a widely held view among development agencies that state-owned andoperated railways will eventually lose out in competition with road transport, which is oftendominated by private operators. While this may be true in some smaller countries, for larger continental countries like the PRC, properly managed railways have clear competitiveadvantages in long-haul bulk traffic. Furthermore, the experience of JJR demonstrates thatrailways and roads may be more complementary than competitive, especially in the earlydevelopment stage. This was best exemplified by the case of Ganzhou, where before JJR, inlandwaterway was the main mode of transport; however, the transport was seasonal and subject todestination and capacity constraints. After the commissioning of JJR, investments (including someby investors from Taipei,China which were previously located in the more developed southernprovince of Guangdong where labor is getting increasingly expensive) started to move north toGanzhou. To meet the increasing demand for road transport, many new roads are being built bythe various levels of government, and the trucking industry has also started to develop. Thecomplementarity of roads and railways implies that ADB should adopt a balanced policy inproviding support to both sectors.

B. Lessons Identified

1. Spare Parts during Equipment Procurement

52. MOR reported frustration with the high costs and long waiting time for procuring spareparts from some foreign suppliers. MOR also stated that, under the Project, ADB imposed amaximum amount of spare parts that could be procured with new equipment. 31 After thesespare parts are used up, it is expensive and difficult to purchase replacements. For thecomputer-based hump control system, lack of spare parts has threatened shortening its servicelife from 15 years to 78 years. Fortunately, in this particular case, a domestically producedsystem, perhaps less powerful, is available at much lower cost. For similar projects in the future,adequate amounts of spare parts should be procured with the equipment. Requests for such

procurement should be included in the procurement packages prepared by executing agenciesfor ADBs approval. In addition, the costs of additional spare parts and quality of after-saleservice should be taken better account of in evaluating bids.

31 According to ADBs Central Operations Services Office, there is no such limit in ADBs Guidelines for Procurement .


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2. Strong Central Coordination as a Key to Smooth Implementation

53. The PRC has long been known for its centralized project management style. Theconstruction of JJR best exemplifies the advantages of such a model in terms of speedyexecution of complex projects. The transferability of such a model to other developing member countries is debatable. However, an important lesson here is that strong commitment at the verytop is necessary to deliver a complex project on time.

3. Better Preparation and Implementation of Resettlement Program

54. Although the land acquisition and resettlement were generally carried out in accordancewith laws and generally accepted practices, several aspects call for further improvement. Theseinclude (i) lack of basic documentation, at ADB and MOR, of resettlement activities (e.g., writtenresettlement plan, and lists of persons and entities affected); (ii) greater participation by personsand entities affected in designing a resettlement program and transparency in compensationdistribution; and (iii) better monitoring of resettlement implementation.

C. Follow-Up Actions and Recommendations

1. Asian Development Bank

55. ADB has been providing significant support to the railway sector in the PRC. Along withphysical investments, it should continue its policy dialogue with MOR on sector restructuringand provide TA as needed in several key areas, including identification of the most suitablemodel based on other countries experience, introduction of competition without jeopardizingoperational safety and causing social disruptions, training of personnel, and accounting andtariff reforms.

2. Ministry of Railways

56. MOR has made notable progress in improving its efficiency and the quality of its servicesin the past decade, particularly in the passenger market. However, its freight services, whichaccount for about 60% in terms of revenue, lag behind in competitiveness. Further improvements in this area depend on deepening market-oriented reforms through restructuringand establishment of a customer-first business culture. The reform plan currently beingprepared should be submitted to the State Council for approval and implementation once thenew cabinet is formed in March 2003 with no further delays. Related to this, under a loancovenant, MOR is required to maintain an operating ratio less than 70% for JJR.Commercialization and reforms in the railway sector will help achieve this target.

57. At the wrap-up meeting held on 13 September 2002, MOR indicated that it would soonset up a team to study the problem of obtaining spare parts for the computerized hump control

system and to examine why the wagon tracing and allocation system had not been functionalyet. The OEM recommends that representatives from the railway design institutes alsoparticipate in such a study so that they are aware of the causes to these problems. With their involvement, the solutions can be used in future designs, thus avoiding the same problems inthe future. The study should be completed by March 2003.

58. Several issues and lessons have been identified regarding resettlement and landacquisition, as well as JJRs impacts on traffic safety, daily lives, and agricultural production of the villagers along the line. These include, among others, excessive intermediary links in


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compensation payments, occurrence of traffic accidents, and difficulty for villagers to traversethe railway due to inadequate or poorly designed passages. On resettlement and landacquisition, it should be noted that the legal framework has been significantly improved with thepassage of the 1998 amendments to the Land Administration Law, drafted with ADBsassistance. The new Law provides for higher compensation rates and requires publicconsultation, disclosure of the resettlement plan, and a grievance process. In compliance, MORhas adopted a more transparent approach in implementing land acquisition and resettlement inthe ongoing Ganzhou-Longyan Railway Project, and should continue to adopt such an approachin all of its subsequent railway projects. On the other issues, in addition to continuing itsinformation campaign on traffic safety, MOR should start to inspect all the passages along JJRand complete the inspection by March 2003. An action plan should be developed based on theinspection results, and implemented immediately to minimize or mitigate any further negativeimpact on peoples lives and production activities.


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PROJECT COST ESTIMATES AND ACTUAL COSTS($ million)

Appraisal Actual % Overrun (Underrun)Item Foreign Local Total Foreign Local Total Foreign Local Total

Special Rails 53.7 0.0 53.7 48.8 0.0 48.8 (9.1) 0.0 (9.1)

Track Machines 14.0 0.0 14.0 54.4 0.0 54.4 288.6 0.0 288.6

Signaling (Hump ProcessControl Systems) 50.0 144.7 194.7 33.3 165.5 198.8 (33.4) 14.4 2.1

Telecommunications andTrain Operations Equipment 65.0 134.4 199.4 57.4 153.1 210.5 (11.7) 13.9 5.6

Subtotal 182.7 279.1 461.8 193.9 318.6 512.5 6.1 14.2 11.0

Physical Contingencies 9.8 15.3 25.1 0.0 0.0 0.0 (100.0) (100.0) (100.0)

Price Contingencies 7.5 12.5 20.0 0.0 0.0 0.0 (100.0) (100.0) (100.0)Subtotal 17.3 27.8 45.1 0.0 0.0 0.0 (100.0) (100.0) (100.0)

IDC 20.0 5.1 25.1 32.5 7.5 40.0 62.5 47.1 59.4

Total 220.0 312.0 532.0 226.4 326.1 552.5 2.9 4.5 3.9

IDC = interest and other charges during construction.Source: Ministry of Railways.


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YearItem Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual

Operation StatisticsFreight tons (thousand) 39,868 29,585 48,383 35,990 58,718 44,664 71,254 45,471 74,342 48,147Passengers (thousand) 5,428 13,340 6,092 19,210 6,837 22,200 7,673 38,580 7,873 42,090Freight ton km (million) 47,127 28,106 58,066 41,570 71,549 53,150 88,170 54,565 92,323 58,258PKM (million) 1,723 7,377 2,485 12,547 2,831 15,141 3,226 19,128 3,321 22,690Converted ton km (million) 48,850 35,483 60,551 54,116 74,380 68,291 91,396 73,693 95,644 80,948

Average Freight Distance (km) 1,182 950 1,200 1,155 1,219 1,190 1,237 1,200 1,241 1,210

Average Passenger Journey (km) 317 553 408 653 414 682 420 496 422 539Unit Freight Revenue 0.0800 0.0710 0.0800 0.0770 0.0800 0.0830 0.0800 0.0841 0.0800 0.0841Unit Passenger Revenue 0.0650 0.0400 0.0650 0.0780 0.0650 0.0823 0.0650 0.0833 0.0650 0.0992TKM per Route-km (million) 18.6 11.1 22.9 16.4 28.2 21.0 34.8 21.5 36.4 23.0PKM per Route-km (million) 0.7 2.9 1.0 5.0 1.1 6.0 1.3 7.6 1.3 9.0Number of Staff 39,083 27,800 42,204 27,800 45,416 27,800 48,880 28,000 49,637 27,800

Operating RevenueFreight 3,770.2 1,995.5 4,645.3 3,200.9 5,723.9 4,411.5 7,053.6 4,588.9 7,385.8 4,899.5Passenger 112.0 295.1 161.5 978.7 184.0 1,245.7 209.7 1,594.1 215.9 2,250.0Other Businesses 310.6 0.0 384.5 146.8 472.6 249.1 581.1 318.8 608.1 450.0Gross Total Operating Revenue 4,192.8 2,290.6 5,191.3 4,326.3 6,380.5 5,906.3 7,844.4 6,501.9 8,209.8 7,599.5Transfer of Surcharge to Railway (1,272.4) 0.0 (1,567.8) 0.0 (1,931.8) 0.0 (2,380.6) (1,800.7) (2,492.7) (1,922.5)Incremental Revenue from Jing-Guang 0.0 1,399.0 n/a 1,454.9 1,513.1 1,573.7Net Operating Revenue 2,920.4 2,290.6 3,623.5 5,725.3 4,448.7 7,361.2 5,463.8 6,214.4 5,717.1 7,250.6

Operating ExpensesSalaries and Wages 236.8 454.9 273.2 418.5 313.1 422.6 358.0 435.3 385.4 776.7Materials 157.8 528.1 184.7 424.3 217.1 396.7 257.2 436.4 279.7 373.4

Fuel 207.4 357.6 274.7 390.1 359.4 447.6 469.2 514.8 520.4 338.7Utilities 44.7 58.2 54.6 58.8 66.8 87.0 82.2 104.4 90.1 510.4Others 133.7 493.0 154.1 587.8 178.4 609.1 208.1 626.7 225.5 333.5Provision for Major Repair 350.4 56.1 434.8 139.0 533.8 291.1 655.7 309.2 686.0 357.5Business tax 94.6 72.3 117.4 78.9 144.1 238.5 177.0 259.7 185.2 297.2Total Working Expenses 1,225.5 2,020.2 1,493.5 2,097.2 1,812.8 2,492.7 2,207.4 2,686.4 2,372.4 2,987.4Depreciation Expenses 1,075.8 863.3 1,300.1 1,667.5 1,300.1 2,051.1 1,445.0 2,082.9 1,456.7 2,116.6Total Operating Expenses 2,301.3 2,883.5 2,793.6 3,764.7 3,112.9 4,543.9 3,652.4 4,769.3 3,829.1 5,104.0Operating Profit (Loss) 619.1 (592.9) 829.9 1,960.6 1,335.8 2,817.4 1,811.4 1,445.1 1,888.0 2,146.7Non-Operating Income (Expenses) (67.6) (89.1) (79.6) (125.5) (96.3) (104.2) (118.1) (109.8) (123.1) (121.1)Profit (Loss) Before Interest and Tax 551.5 (681.9) 750.3 1,835.1 1,239.5 2,713.2 1,693.3 1,335.3 1,764.9 2,025.5Interest Payable 573.8 1,291.3 573.8 1,476.6 554.8 753.9 533.9 755.6 492.6 757.7Pre-Tax Profit (Loss) (22.3) (1,973.2) 176.5 358.5 684.7 1,959.3 1,159.4 579.7 1,272.3 1,267.9Income Tax (33%) 0.0 0.0 58.2 0.0 226.0 254.8 382.6 191.3 419.9 418.4

Net Profit for the Year (22.3) (1,973.2) 118.3 358.5 458.7 1,704.5 776.8 388.4 852.4 849.5 Operating Ratio (%) 78.8 125.9 77.1 65.8 70.0 61.7 66.8 76.7 67.0 70.4

= not available, PKM = passenger-kilometer, TKM = ton-kilometer.

PROFORMA FINANCIAL STATEMENTS OF THE JING-JIU RAILWAY(Y million)

Table A3.1: Proforma Income Statement

1997 1998 1999 2000 2001

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AssetsCurrent AssetsCash 574.8 16.0 1,742.1 155.1 1,198.6 2,862.6 2,083.4 5,079.1 2,475.5 7,706.1

Account Receivable 243.4 46.9 302.0 47.7 370.7 306.7 455.3 334.0 476.4 382.2Inventory 0.0 56.4 0.0 68.6 0.0 87.6 0.0 90.0 0.0 96.1

Others 0.0 2.7 0.0 4.4 0.0 4.5 0.0 4.5 0.0 4.6Total Current Assets 818.2 122.0 2,044.1 275.8 1,569.3 3,261.4 2,538.7 5,507.5 2,951.9 8,188.9Fixed AssetsGross Fixed Assets in Operation 34,908.4 19,992.5 34,908.4 41,476.0 36,933.0 51,539.7 37,446.4 52,068.9 38,487.3 52,630.4

Accumulated Depreciation 1,075.8 863.3 2,375.9 2,530.7 3,676.0 4,581.9 5,121.0 6,664.8 6,577.7 8,781.3Net Fixed Assets in Service 33,832.6 19,129.3 32,532.5 38,945.3 33,257.0 46,957.9 32,325.4 45,404.2 31,909.6 43,849.1Construction in Progress 0.0 28,382.5 0.0 8,925.1 0.0 0.0 0.0 0.0 0.0 0.0Total Tangible Fixed Assets 33,832.6 47,511.7 32,532.5 47,870.4 33,257.0 46,957.9 32,325.4 45,404.2 31,909.6 43,849.1Other Long-Term Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Assets 34,650.8 47,633.8 34,576.6 48,146.2 34,826.3 50,219.3 34,864.1 50,911.7 34,861.5 52,038.0Current Liabilities

Accounts Payable 45.3 639.7 55.7 599.6 68.5 282.0 84.7 303.3 93.0 336.3Others 0.0 536.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Current Liabilities 45.3 1,176.0 55.7 599.6 68.5 282.0 84.7 303.3 93.0 336.3Long-Term LiabilitiesForeign 3,476.0 2,684.1 3,438.9 3,275.4 3,399.3 3,251.2 3,357.1 3,224.6 3,245.5 3,111.0Local 5,136.7 15,797.6 4,971.0 15,797.6 4,788.7 15,797.6 4,075.6 15,797.6 3,324.0 15,797.6Total Long-Term Borrowing 8,612.7 18,481.7 8,409.9 19,073.0 8,188.0 19,048.8 7,432.7 19,022.3 6,569.5 18,908.6Other Long-Term Liabilities 0.0 56.1 0.0 195.1 0.0 477.9 0.0 787.1 0.0 1,144.6Total Liabilities 8,658.0 19,713.8 8,465.6 19,867.7 8,256.5 19,808.7 7,517.4 20,112.7 6,662.5 20,389.5Paid-In Capital 26 ,058.1 29,893.3 26,058.1 29,893.3 26,058.1 29,893.3 26,058.1 29,893.3 26,058.1 29,893.3Retained Earnings (65.3) (1,973.3) 52.8 (1,614.8) 511.7 517.4 1,288.4 905.7 2,140.9 1,755.2Total Capital 25,992.8 27,920.0 26,110.9 28,278.5 26,569.8 30,410.7 27,346.5 30,799.0 28,199.0 31,648.5Total Capital and Liabilities 34,650.8 47,633.8 34,576.5 48,146.2 34,826.3 50,219.4 34,863.9 50,911.7 34,861.5 52,038.0Return on Net Fixed Asset in Operation (%) 1.90 (6.20) 2.70 6.75 4.10 6.56 5.50 3.13 5.90 4.81

2000 2001

Table A3.2: Proforma Balance Sheet (Year ending on 31 December)

1997 1998 1999

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Source of FundsOperating Income 619.1 (592.9) 829.9 1,960.6 1,335.9 2,815.8 1,811.4 1,445.1 1,888.1 2,146.7Depreciation 1,075.8 919.4 1,300.1 1,806.4 1,300.1 2,334.0 1,445.0 2,392.0 1,456.7 2,474.1Change in Working Capital (198.1) 533.7 (48.2) (54.7) (56.0) (595.8) (68.3) (8.3) (12.9) (21.5)Funds from Operations 1,496.8 860.2 2,081.8 3,712.3 2,580.0 4,554.0 3,188.1 3,828.9 3,331.9 4,599.3Term Loan 0.0 4,668.7 0.0 613.4 0.0 0.0 0.0 0.0 0.0 0.0

Capital from Railway Construction Fund 2,093.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Working Capital Facility/Overdraft (285.0) 536.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other Short-Term Loan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Source of Funds 3,304.9 6,065.2 2,081.8 4,325.7 2,580.0 4,554.0 3,188.1 3,828.9 3,331.9 4,599.3Application of FundsCivil Works 0.0 3,497.9 0.0 1,621.8 0.0 645.8 513.4 0.0 232.4 0.0Purchase of Rolling Stock 2,093.1 1,170.8 0.0 940.7 2,024.7 65.1 0.0 529.2 808.5 561.5Interest during construction 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Capital Expenditure 2,093.1 4,668.7 0.0 2,562.6 2,024.7 710.9 513.4 529.2 1,040.9 561.5Interest of Foreign Loan 162.2 119.7 162.2 126.8 159.7 122.0 157.1 123.7 154.3 125.8Repayment of Foreign Loan 0.0 0.0 37.1 22.1 39.6 24.2 42.2 26.5 111.7 113.6Interest of Domestic Loan 411.7 1,133.0 411.7 1,311.2 395.1 631.9 376.9 631.9 338.4 631.9Repayment of Domestic Loan 0.0 0.0 165.7 0.0 182.2 0.0 713.1 0.0 751.6 0.0Interest on Short-Term and W/C Borrowing 0.0 38.6 0.0 38.6 0.0 0.0 0.0 0.0 0.0 0.0

Total Debt Service 573.9 1,291.3 776.7 1,498.7 776.6 778.1 1,289.3 782.1 1,356.0 871.3Non-Transport Cost 67.6 89.1 79.6 125.5 96.3 102.6 118.1 109.8 123.1 121.1Taxes paid 0.0 0.0 58.2 0.0 226.0 254.8 382.6 191.3 419.9 418.4

Total Application of Funds 2,734.6 6,049.1 914.5 4,186.7 3,123.6 1,846.4 2,303.4 1,612.4 2,939.9 1,972.3Net Cash Position 570.3 16.0 1,167.3 139.0 (543.6) 2,707.5 884.7 2,216.5 392.0 2,627.0Cash at the beginning of the Year 4.4 0.0 574.7 16.0 1,742.0 155.1 1,198.4 2,862.6 2,083.1 5,079.1Cash at the End of the Year 574.7 16.0 1,742.0 155.1 1,198.4 2,862.6 2,083.1 5,079.1 2,475.1 7,706.0

Debt Service Coverage Ratio 2.0 0.7 2.7 2.5 3.3 5.9 2.5 4.9 2.5 5.3

= not applicable, W/C = working capital.Source: ADB staff estimates.

Table A3.3: Proforma Cashflow Statement

1997 1998 1999 2000 2001

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26 Appendix 4

For the Year Ended 1994 1995 1996 1997 1998 1999 2000 2001

Traffic Volume

Freight ton-km (billion) 1,243 1,284 1,292 1,305 1,226 1,258 1,334 1,425 Passenger-km (billion) 363 354 319 355 369 405 441 464 Converted ton-km (billion) 1,606 1,638 1,611 1,660 1,595 1,663 1,775 1,889

Operating RevenueFreight Revenues 68,535 70,369 75,422 81,196 84,663 86,673 91,986 108,880

of which: Tariff Revenue 34,600 35,607 40,103 46,081 48,878 50,303 53,623 68,865Surcharge Revenue 33,935 34,762 35,319 35,115 35,785 36,370 38,363 40,015

Passenger Revenues 17,328 20,160 23,716 26,093 28,677 33,289 36,931 45,997Other Revenues 7,745 8,838 12,866 13,994 14,702 16,247 20,084 21,059

Total Gross Operating Revenue 93,608 99,367 112,004 121,283 128,042 136,209 149,001 175,936

Business Tax 3,033 3,220 3,629 3,958 4,153 4,413 4,828 5,701Other Contribution 0 0 0 985 985 1,091 1,151 1,200

Total Net Operating Revenue 90,575 96,147 108,375 116,340 122,904 130,705 143,022 169,035

Working ExpensesWages and Salaries 11,578 13,956 16,141 18,484 18,602 20,110 21,435 25,942Materials 7,011 8,553 8,048 9,039 8,957 9,039 9,354 10,824Fuel 9,764 10,108 10,598 12,132 10,496 11,003 14,198 15,670Electricity 3,003 3,218 4,038 4,833 5,173 5,571 6,285 7,388Provision for Major Repair 11,581 11,689 13,067 15,398 15,159 15,364 16,127 Others 7,569 9,159 8,877 10,024 14,070 16,468 17,145 43,733

Total Working Expenses 50,506 56,683 60,769 69,910 72,457 77,555 84,544 103,557

Depreciation Expenses 6,580 7,373 9,684 11,316 12,379 12,735 15,982 19,853

Operating Expenses 57,086 64,056 70,453 81,226 84,836 90,290 100,526 123,410Operating Profit (Loss) 33,489 32,091 37,922 35,114 38,068 40,415 42,496 45,625Nonoperating Expenses 3,564 4,011 4,090 4,310 4,614 5,582 5,288 6,635Profit (Loss) from Subsidiaries 0 (858) (1,036) (453) 1,993 2,589 3,369 3,121Profit (Loss) before Transfer of Surcharge 29,925 27,222 32,796 30,351 35,447 37,422 40,577 42,111Transfer of Surcharge 32,835 33,635 34,176 32,964 33,636 32,470 34,463 37,925Pretax Profit (Loss) (2,910) (6,413) (1,380) (2,613) 1,811 4,952 6,114 4,186Income Tax (4) (6) 0 0 546 786 985 1,059Net Profit (Loss) after Tax (2,914) (6,419) (1,380) (2,613) 1,265 4,166 5,129 3,127

Performance IndicatorsWorking Ratio (%) a 54.0 57.0 54.3 57.6 56.6 56.9 56.7 58.9

Operating Ratio (%) b 61.0 64.5 62.9 67.0 66.3 66.3 67.5 70.1

= not available.

b Gross operating revenues divided by operating expenses including depreciation.

OPERATIONAL AND FINANCIAL PERFORMANCE OF THE MINISTRY OF RAILWAYS(CNY million)

a Gross operating revenues from all operational sources divided by total operating expenses excluding depreciation and non-cash charges.


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Appendix 5 27

FINANCIAL AND ECONOMIC REEVALUATION

A. General

1. This appendix presents the financial and economic reevaluation of both Jing-Jiu Railway(JJR) and the related Project financed by the Asian Development Bank (ADB) for JJRstechnical enhancement. The reevaluation was carried out in terms of with- and without - projectscenarios. All prices and costs are expressed in the 2002 constant yuan values. The costs andbenefits incurred before 2002 were adjusted using the Peoples Republic of China consumer price index.

B. Jing-Jiu Railway

1. Financial Internal Rate of Return

2. Although JJR itself did not include purchasing of rolling stock, the analysis includes anallocation of costs for purchasing additional rolling stock for generated traffic. The data for costsof purchasing rolling stock were provided by the Ministry of Railways (MOR). A deduction of 20% from the MOR cost estimates was applied in the calculation to account for the benefits of the Project in savings of capital for purchasing rolling stock due to the higher average trainspeed achieved. Similarly, a 3% reduction of total operating capital cost was also assumed toaccount for the operating cost savings resulting from higher speeds (see para. 8). In addition,the following assumptions were used. Average unit revenue for 2002 is CNY0.0841 per ton-kilometer (t-km) for freight and CNY0.1011 per passenger-km for passengers. The unit revenueis assumed to increase in real terms by 2% annually from 2002 for passenger and by 0.1%every 3 years starting from 2003 for freight. These annual growth rates were estimated basedon the historical records for the past 15 years. 1 Based on the most recent traffic data obtainedby the Operations Evaluation Mission (OEM), the assumed annual growth rate of traffic volumewas adjusted downward compared with the forecast of the project completion report (PCR).Freight volume in tons is forecast to grow at 3% for 2002, 2% for 2003, 1.5% from 2004, 1.5%

from 2006, and 1% from 2012 onward. The number of passengers is assumed to grow at 4%from 2002 to 2007, 3% from 2008 to 2014, and 2% from 2015 onward.

3. Based on the above assumptions, the recalculated financial internal rate of return (FIRR)for JJR is 6.2% (Table A5.1), higher than the recalculated weighted average cost of capital for JJR at 5.8%. 2

2. Economic Internal Rate of Return

4. The economic internal rate of return (EIRR) was recalculated using the world pricenumeraire. In estimating the economic costs of constructing and operating JJR, the financialcosts were converted to border prices. For civil work, tax and duties were deducted. To estimate

the economic costs of rolling stock (traded goods), as virtually all of the rolling stock wasdomestically made, for which the price is assumed to be approximately the same as worldprices (or less in some cases), no adjustment was made, or the economic price is assumed tobe the same as financial price. For major rehabilitation, residual value, and operating costs

1 At appraisal and completion, the unit revenue was assumed to increase according to the domestic inflation rate.2 The weighted average cost of capital represents the cost incurred by the borrower in raising the capital necessary

to implement a project. Marginal costs of different sources of capital for JJR were used in the calculation, includingthose of the Railway Construction Fund, ADB, Japan Bank of International Cooperation, and the Government'sdomestic bonds.


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28 Appendix 5

(nontradable), the financial costs were multiplied by the standard conversion factor of 0.926 toobtain the economic costs.

5. The direct economic benefits of JJR are mainly derived from two sources: (i) resourcesavings for diverted traffic, and (ii) net production value by rail transport services for the newlygenerated traffic. The second type of benefits, net production value, can be approximated by thewillingness to pay of passengers and freight transport users. In the absence of detailed user survey information, the following assumptions were used in calculating the benefits. For passenger traffic, the nearly explosive growth indicates that most of the passenger traffic hasbeen newly generated. Specifically, a breakdown of 75% generated and 25% diverted (frombuses) was assumed. For freight traffic, the growth has been much slower and it is likely thatmost freight traffic has been diverted from alternative train routes of much longer distances. Areverse ratio of traffic breakdown was thus assumed: 75% diverted and 25% newly generated.Resource savings from diverted passenger traffic was the economic costs of operating buseswith approximately the same distance, which was estimated at 70% of the bus fare or CNY0.146/passenger-km (the other 30% being profit and tax). Resource savings from divertedfreight traffic was the economic costs of transporting the same freight using alternative railwayroutes. The unit economic cost per t-km was assumed to be 70% of the train freight tariff but theaverage distance traveled with alternative routes was assumed to be twice the distance of usingJJR. For the willingness to pay associated with the generated traffic, based on the informationobtained by the OEM on th