Document of The World Bank FOR OFFICIAL USE ONLY Report No: 71424-CN RESTRUCTURING PAPER ON A PROPOSED RESTRUCTURING FOR A SHIZHENG RAILWAY PROJECT LOAN IBRD 7557-CN (BOARD APPROVAL DATE: JUNE 24, 2008) TO THE PEOPLE’S REPUBLIC OF CHINA SEPTEMBER 5, 2012 China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS AND ACRONYMS FYP Five Year Plan KM Kilometer Km/hr Kilometer per hour MOR Ministry of Railways OCL Overhead Catenary Line RMB Chinese Yuan Renminbi Regional Vice President: Pamela Cox, EAPVP Country Director: Klaus Rohland, EACCF Sector Director: John Roome, EASSD Sector Manager: Mark Lundell, EASCS Task Team Leader: Gerald Ollivier, EASCS 2 CHINA SHIZHENG RAILWAY PROJECT P099062 CONTENTS Page   A.  SUMMARY ........................................................................................................................... 6  B.  PROJECT STATUS .............................................................................................................. 6  C.  PROPOSED CHANGES ...................................................................................................... 7  D.  APPRAISAL SUMMARY  .................................................................................................... 9    ANNEX 1: RESULTS FRAMEWORK AND MONITORING .............................................. 11  ANNEX 2: REALLOCATION OF PROCEEDS ...................................................................... 13  ANNEX 3: ECONOMIC ANALYSIS ........................................................................................ 14  3   CHINA SHIZHENG RAILWAY PROJECT DATA SHEET Restructuring Status: final Restructuring Type: Level one Last modified on date : 09/10/2012 1. Basic Information Project ID & Name P099062: CN-ShiZheng Railway Country China Task Team Leader Gerald Paul Ollivier Sector Manager/Director Mark R. Lundell Country Director Klaus Rohland Original Board Approval Date 06/24/2008 Original Closing Date: 12/31/2013 Current Closing Date 12/31/2013 Proposed Closing Date 11/30/2015 EA Category A-Full Assessment Revised EA Category A-Full Assessment EA Completion Date 06/01/2007 Revised EA Completion Date 06/01/2007 2. Revised Financing Plan (US$m) Source Original Revised BORR 6,200.00 6,244.00 IBRD 300.00 300.00 Total 6,500.00 6,544.00 3. Borrower Organization Department Location Ministry of Finance China 4. Implementing Agency Organization Department Location Ministry of Railways, Foreign China Capital and Technical Import Center 4 5. Disbursement Estimates (US$m) Actual amount disbursed as of September 10, 2012 173.74 Fiscal Year Annual Cumulative 2010 44.20 44.20 2011 81.93 126.13 2012 47.02 173.15 2013 12.00 185.15 2014 20.00 205.15 2015 30.00 235.15 2016 64.85 300.00 Total 300.00 6. Policy Exceptions and Safeguard Policies Does the restructured project require any exceptions to Bank policies? N Does the restructured projects trigger any new safeguard policies? If yes, please select N from the checklist below and update ISDS accordingly before submitting the package. 7a. Project Development Objectives/Outcomes Original/Current Project Development Objectives/Outcomes The development objective of the Project is to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers. 7b. Revised Project Development Objectives/Outcomes The development objective of the Project is to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers and to improve the maintenance of the catenary system on high speed rail lines. 5 CHINA SHIZHENG RAILWAY PROJECT RESTRUCTURING PAPER A. SUMMARY This Restructuring Paper seeks the approval of the Executive Directors to amend the Project Development Objective of the ShiZheng Railway Project by adding the following to the original Objective: “and to improve the maintenance of the catenary system on high speed rail lines�. The revised Project Development Objective will then become: “to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers and to improve the maintenance of the catenary system on high speed rail lines�. The following additional adjustments to the project will also be made simultaneously as a level 2 restructuring: (i) introduction of a new component called “catenary maintenance equipment� to finance such equipment using project savings; (ii) amendment of the results framework by adding a new outcome indicator and a new intermediate indicator to reflect the new component; (iii) reallocation of loan proceeds between expenditure categories; and (iv) extension of the project closing date by 23 months. The project restructuring has been requested by a letter dated June 14, 2012 from the Government of the People’s Republic of China. B. PROJECT STATUS The ShiZheng Project is a US$6.5 billion project supported by Specific Investment Loan in an amount of US$300 million. It was approved on June 24, 2008, signed on September 16, 2008 and became effective on November 18, 2008. The project supports the construction of a new 355 km high speed rail line and related stations between Shijiazhuang in Hebei Province and Zhengzhou in Henan Province. The project has been implemented in a satisfactory manner ever since it became effective and has been rated highly satisfactory on progress towards achieving the project development objectives for the past two years. As of September 10, 2012, disbursements reached US$173.74 million (58 percent of the loan amount). The project is in substantial compliance with the applicable loan agreement and project agreement. The project has not been restructured to date. Based on the latest implementation support mission in May 2012, the project is on schedule for an opening of this major high speed rail line between Shijiazhuang and Zhengzhou by December 2012, in line with the original target. Civil works, track laying 6 and most electrification and signaling works are completed. The next stage involves the completion of stations and static and dynamic testing of the various high speed rail sub- systems. This testing phase commenced in July 2012 and will last for about six months culminating in trial runs and commissioning of the new railway line. Over the past five years, China has developed the largest high speed rail network in the world. This network provides a competitive, energy efficient and low carbon alternative to its rapidly growing air and road transport. China is also implementing a high priority program to maintain a high level of service quality, safety and reliability on its high speed rail lines by strengthening maintenance and operation. This program includes the acquisition of advanced technologies to maintain the high speed rail catenary system. After the proposed restructuring is complete, the project would be able to support such acquisition. C. PROPOSED CHANGES Project Development Objective. The original Project development objective is “to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers�. The Project development objective would be adjusted as follows: “to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers and to improve the maintenance of the catenary system on high speed rail lines�. The adjustment to the development objective, underlined above, would represent an extension in the geographic scope of the project, since the catenary maintenance equipment purchased as a result of the restructuring would be used across the high speed rail network, while the original project was focused on a single line. Results/indicators. While original indicators would remain, one outcome indicator and one intermediate result indicator would be added to the result framework to reflect the impact of the new component. The introduction of new catenary maintenance equipment aims at ensuring a stable level of service. Accordingly the new outcome indicator would measure the evolution in the number of power failure incidents per operated high speed rail train (see Annex 1). Components. The original project had a single component: the construction of a new 355 km rail line with its stations. The implementation of this component has been satisfactory and it is expected to be completed in line with the original schedule. Procurement for the original project with the World Bank loan has been completed, leaving about US$115 million unused. The under-utilization of the loan was caused by: (1) savings derived from international tenders (US$28 million); (2) use of domestic financing instead of the loan for the signal system (US$44 million) to unify the signal system along the entire Beijing- Guangzhou line; (3) lower than anticipated price of raw materials used for bridge bearings (US$43 million). 7 While the original component has been successfully implemented, the experience from recently opened lines underlined the significance of catenary maintenance equipment to provide high levels of services to customers and achieve the original project development objective in the long term. Any failure in the catenary system can rapidly lead to negative perception on the overall quality of services and undermine the project impact. Accordingly, China developed a high priority program to strengthen the maintenance and operation of its high speed rail network. As part of the restructuring, a second component named “Catenary Maintenance Equipment� would be added to support China in addressing this aspect. The component would include the purchase of specialized catenary maintenance vehicles for high speed railway lines in operation. Such vehicles, estimated to cost US$115 million would undertake the physical inspection and maintenance of high speed rail lines. They would be able to travel to sites at a maximum speed of 160 km/hr, providing a fast response time to any incident or system failure on the high-speed network, as required by the current standards1. They would improve the system reliability by improving periodic maintenance and fault detection. The new maintenance vehicles would be more efficient than the existing equipment, much of which is now over 10 years old. They would be equipped with twin working platforms instead of single ones and an extending arm which would enable them to work on the adjacent line. This, combined with their higher maximum speed, will enable them to reach any incident much faster on the double-track passenger dedicated lines by travelling on the parallel line. Financing. The total amount of World Bank financing would be unchanged. The overall project costs including the Bank loan and the overall local funding would increase by the amount of the new component (US$115 million) minus savings achieved as part of procurement (US$71 million). Funds from the “Unallocated� Category would be allocated to the “Goods� Category as shown in Annex 2. Project Costs (US$m.) Components/Activities Current Proposed Estimated cost¹ 4902.25 4946.25 ¹ at original exchange rate Closing date. The procurement and delivery of catenary maintenance equipment is expected to take about 31 months, followed by a period of testing of seven months after which the final payment will be made. The restructuring includes accordingly an extension in the loan closing date by 23 months from December 31, 2013 to November 30, 2015. This will be the first extension of the project. 1 Guidance on Issues concerning the maintenance and management of fixed facilities on Passenger Dedicated Lines MOR (2009) No 36. 8 Implementation schedule. There would be no change to the implementation schedule for the original project component. The new project component has been appraised and the revised implementation schedule, prepared by MOR, has been found acceptable to the Bank. D. APPRAISAL SUMMARY Economic Analysis. The estimated Net Present Value of the new component, calculated over a 25-year period from 2012 with a 12 percent discount rate, is about RMB 271 million in 2011 prices, with an expected Economic Internal Rate of Return of 30 percent. The benefits include reduced routine inspection and maintenance costs and, if an incident does occur, faster response times and reduced costs to both the railway and passengers. The component is robust against a range of sensitivity tests concerning these factors, such as reducing the number of conventional vehicles saved by the new vehicles or excluding any reduction in incident costs, with the EIRR typically reduced to 15-20 percent and the NPV to RMB 40-100 million (see Annex 3). Technical Aspects. MOR plans to introduce a comprehensive program for inspection and maintenance of its overhead catenary system for the entire planned network of high- speed lines. The system would be based on six central repair depots, with 60 secondary depots (i.e. on about every 200-250 km of the network) responsible for dealing with failures of the system and 130 inspection and routine maintenance depots (i.e. about every 100 km). Each depot will have various sets of maintenance equipment, much of which will be procured during the current Twelfth Five-year Plan. This project would contribute to the initial steps in implementing this plan, providing catenary maintenance vehicles for existing depots that serve lines in operation. Procurement Aspects. The type of catenary maintenance vehicles that would be procured is produced by only a few international companies for other high speed railway countries. Only one company produces vehicles of this type operating at a maximum speed of 160 km/hr, but it is anticipated that at least one other company would be able to increase the speed of its existing model to match the MOR requirements. There will be no change in procurement implementation arrangements. Financial Management. The proposed changes have no impact on financial management arrangements. Social and Procurement. There is no environmental or social impacts associated with the new component to purchase catenary maintenance vehicles for high speed rail lines. These vehicles will be placed in existing maintenance bases. The safeguards implementation arrangements also remain unchanged, with overall responsibility at MOR level, with the involvement of Provinces. The Task Team has been regularly supervising the project by visiting the construction sites, and reviewing the external environmental monitoring reports during the project implementation (most recent mission in May 2012). The implementation of the existing project is satisfactory in terms of environmental and social safeguards performance. 9 There are no outstanding environmental safeguards implementation issues in the existing project. Risk. The original project is rated as low risk as the original project implementation is entering its final phase. The additional component would increase the current procurement risk to moderate, as the equipment to be procured is technologically complex, with a limited number of suppliers. Overall risk would remain unchanged. The project additional component has been appraised and the revised implementation schedule, prepared by the Ministry of Railways, has been found acceptable to the Bank 10 ANNEX 1: Results Framework and Monitoring CHINA: SHIZHENG RAILWAY PROJECT Project Development Objective (PDO): The development objective of the Project is to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers Revised Project Development Objective: The development objective of the Project is to meet growing freight and passenger market demand in the railway corridor between Shijiazhuang and Zhengzhou, while substantially improving the level of service offered to customers and to improve the maintenance of the catenary system on high speed rail lines. D=Dropped Cumulative Target Values** C=Continue N= New Core PDO Level Results Unit of Baseline Data Source/ Responsibility for R=Revised Frequency Indicators* Measure (2006) 2013 (3) 2015 2020 Methodology Data Collection Indicator One: Average C Pairs of 0 24 77 119 number of pairs of trains of trains maximum speed of 300 km/h operated per day on the Shijiazhuang and Zhengzhou section of the new line. Indicator Two: Average C Pairs of 0 12 23 19(2) On project number of pairs of trains of trains completion and MOR and Project maximum speed of 200 km/h once a year Companies operating MOR operated per day on the statistics. Shijiazhuang and Zhengzhou thereafter. section of the new line Indicator Three: Average C Minutes 0 85 85 85 travel time of 300km/h train between Shijiazhuang and Zhengzhou (minutes) on the same section of the new line. 11 Indicator Four: Average C Pairs of N/A 100 95 number of pairs of freight trains trains operated per day on the Xinxiang to Zhengzhou section of the existing railway line. (1) Indicator Five: Power failure N Index N/A 100 95 incident per operated train on HSR lines Index 100 in 2013 INTERMEDIATE RESULTS Intermediate Result (Component One): Construction of the ShiZheng Railway Revised Intermediate Result (Component One): No Revision D=Dropped Responsibility C=Continue Data Cumulative Target Values** for Data Core N= New Unit of Baseline Source/ Frequency Collection R=Revised Measure (2006) Methodolo 2009 2010 2011 2012 2013 gy Intermediate Result indicator Twice yearly Project MOR C Physical Progress One: % of civil works percentage 0 10 30 75 100 Report completed complete (physical % complete) Intermediate Result indicator Twice yearly Project MOR Two: % of original equipment C Percentage 0 5 15 50 100 Progress contracted (by value) Report Intermediate Result (Component Two): Not Applicable Revised Intermediate Result (Component Two): Delivery of Catenary Maintenance Equipment Intermediate Result indicator Project One: % of new equipment N Percentage 100 Once yearly Progress MOR contracted Report (1) Includes through luggage, container, and coupling trains. Data on the average number of pairs of freight trains operating per day on the existing line will be collected and reported on an annual basis in the project progress reports. (2) The decrease in the number of pairs of trains of maximum speed of 200 km/h in the later years reflects their expected replacement by higher speed trains. (3) Taken as the first full year of operation. 12 ANNEX 2: Reallocation of Proceeds China: ShiZheng Railway Project 1. Proceed for China ShiZheng Railway Project, IBRD7557-CN, P099062, will be reallocated as follow, through a reallocation from the category “Unallocated� to the category “Goods�: Category of Expenditure Allocation % of Financing Current Revised Current Revised Current Revise (1) Goods 277,500,000 298,250,000 100% No change (2) Consultants’ 1,000,000 1,000,000 100% No change services, training and study tours (3) Front-end 750,000 750,000 Amount No change Fee payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07(b) of the General Conditions (4) Unallocated 20,750,000 0 No change Total 300,000,000 300,000,000 13 ANNEX 3: Economic Analysis Update CHINA: SHIZHENG RAILWAY PROJECT This annex reviews the economic impact of the proposed catenary maintenance equipment to be purchased as part of this restructuring. This component forms part of the first stage of a comprehensive program for maintaining and inspecting overhead catenary lines (OCL) for the entire planned network of high- speed lines. The system would be based on six central repair depots, with 60 secondary depots (i.e. on about every 200-250 km of the network) responsible for dealing with failures of the system and 130 inspection and routine maintenance depots (i.e. about every 100 km). Each depot will have various sets of maintenance equipment, much of which will be procured during the current Twelfth Five-year Plan (FYP). This project component would contribute to the initial steps in implementing this plan, providing catenary maintenance vehicles for existing depots that serve lines already in operation. At the end of the 11th FYP, MOR had one 350 km/hr OCL inspection train and one 250 km/hr OCL inspection train. These will be expanded to 17 sets by the end of the 12th FYP, one per high-speed line expected to be in operation at that time. These trains will be supplemented by lower-speed (160 km/hr) inspection trains, consisting of 2-3 cars equipped with combined optical and physical equipment, which will inspect both high- speed and conventional electrified lines on a regular basis, every 3 months for conventional lines and every 10 days for high-speed lines, and will replace the existing inspection trains which currently operate at around 50 km/hr. The principal means of undertaking the actual physical inspection and maintenance will be new catenary maintenance vehicles, which will travel to site at a maximum speed of 160 km/hr, providing a fast response time to any incident on the high-speed network, as required by the current standards. They would improve the system reliability by improving periodic maintenance and fault detection. The new maintenance vehicles would be more efficient than the existing equipment, much of which is now over 10 years old. They would be equipped with twin working platforms instead of single ones and an extending arm that would enable them to work on the adjacent line. This, combined with their higher maximum speed, will enable them to reach much faster any incident on the double-track Passenger Dedicated lines by travelling on the parallel line. The economic evaluation considers two groups of incremental costs and benefits brought by the catenary maintenance equipment:  reduced routine inspection and maintenance costs; and  if an incident does occur, faster response and repair times and reduced costs to both the railway and passengers. 14 Reduced routine maintenance costs The daily maintenance and centralized check of Chinese high-speed power supply equipment is conducted at a fixed time each day, generally lasting for around 4 hours. Based on the experience with high-speed rail operation in the last three years, including the rectification of faults incurred during construction, this currently requires a full inspection of the catenary equipment. Currently, a full inspection of the catenary of 100 km of single-track high-speed line each year requires around 300 working days. The maximum travelling speed of the current catenary inspection vehicles is only 120km/h, with an average operating speed around 60km/h. The available maintenance time is thus limited to around 2 hours, with the other 2 hours used in travelling to and from the worksite. In addition, the current vehicles have only one inspection platform, so a full inspection of all the devices on a single catenary mast requires the platform to be moved, taking 20 minutes to complete the inspection. As the masts are about 50 meters apart, the current vehicles can inspect only about 300 meters of single track in a typical day. By contrast, the new vehicles have twin platforms, which should reduce the inspection time per mast to 10 minutes and allow about 600 meters of track to be inspected in a typical day, after allowing for travelling time between masts, and also after allowing for the reduced travelling time to and from the site (and hence greater time available for actual inspection and maintenance). The inspection time for 100 km of single-track high-speed line can thus be conservatively reduced to 150 working days (Table 1). The time freed-up by this could be used to expand services but this would also need track maintenance to be similarly sped-up, which is unlikely. For evaluation purposes, it has been assumed that the inspection areas would instead be expanded to about double the current length, with corresponding savings in vehicles and man-hours. Table 1 Comparison of Efficiency of current and proposed Catenary Maintenance Vehicles Item Current vehicle Proposed vehicle Maximum travelling speed 120 km/hr 160 km/hr Daily travelling speed 60km/h 120km/h Inspection time per mast 20 minutes 10 minutes Full inspection time for 100 4hours/day×300 days 4 hours/day×150 days km of single track Can only work on single Able to work on both Incident repairs line lines Improved response times to incidents When incidents occur, the new equipment will allow service to be restored much faster than is currently possible. For minor incidents, the new catenary vehicles capable of travelling at 160 km/hr should be able to reach the incident site within 30 minutes, as required by applicable regulations. As the new vehicles are able to work on adjacent lines, the repairs can be done without requiring the failed train to be removed, a process 15 often requiring a diesel locomotive to arrive after any intervening trains have been cleared (which can often take over two hours). For minor incidents, which are forecast to occur 5 times p.a. on a 1000 km double-track line, the new equipment should save at least 1 hour per incident compared to current procedures. Valuation of benefits Benefits associated with more efficient routine maintenance have been valued on the following basis:  the new dual-platform vehicles will require 10 men compared to 8 men on the current vehicles, at an average cost of RMB 35,000 per man per annum.  the current operating cost (excluding labour) of RMB 1.5 million per vehicle is 75% variable with usage and 25% fixed; the new vehicles will thus incur the same variable cost (as they are travelling further) but save the fixed cost component of the current vehicles they render surplus. Benefits associated with incident response and repair times have been valued on the following basis:  minor incidents occur 5 times p.a. per 1000 km of double-track;  major incidents occur 1 time per 5 years per 1000 km of double track;  the new equipment will save 1 hour of delay per minor incident and 12 hours of delay per major incident;  the delay will affect passengers travelling on the blocked line within 4 hours of a minor incident and within 12 hours of a major incident;  In practice, there will also be costs to the operating railway due to delays, which have been ignored in the benefits calculation; and,  The cost of delay is Rmb 30 per person-hour of delay Evaluation results Table 1 summarizes the results of the evaluation under the above assumptions. 16 Table 1 Economic evaluation (Rmb million) Capex Savings Net NPV Discount Growth factors Without With Accident Labour Labour Material Total benefits @ 12% factor Demand project project response /VOT 2012 582 730 -148 -148 1.0 1.00 1.00 2013 6 21 11 38 38 34 0.9 1.04 1.05 2014 6 21 12 39 39 31 0.8 1.08 1.10 2015 7 21 13 41 41 29 0.7 1.12 1.16 2016 7 21 14 42 42 27 0.6 1.17 1.22 2017 8 21 16 44 44 25 0.6 1.22 1.28 2018 8 21 17 46 46 23 0.5 1.27 1.34 2019 8 21 19 48 48 22 0.5 1.32 1.41 2020 9 21 20 50 50 20 0.4 1.37 1.48 2021 9 21 22 52 52 19 0.4 1.42 1.55 2022 10 21 24 55 55 18 0.3 1.48 1.63 2023 10 21 26 57 57 17 0.3 1.54 1.71 2024 11 21 29 60 60 16 0.3 1.60 1.80 2025 11 21 31 64 64 15 0.2 1.67 1.89 2026 12 21 34 67 67 14 0.2 1.73 1.98 2027 12 21 38 71 71 13 0.2 1.80 2.08 2028 13 21 41 75 75 12 0.2 1.87 2.18 2029 13 21 45 79 79 12 0.1 1.95 2.29 2030 14 21 49 84 84 11 0.1 2.03 2.41 2031 15 21 53 89 89 10 0.1 2.11 2.53 2032 16 21 58 95 95 10 0.1 2.19 2.65 2033 16 21 64 101 101 9 0.1 2.28 2.79 2034 17 21 70 108 108 9 0.1 2.37 2.93 2035 18 21 76 115 115 8 0.1 2.46 3.07 2036 19 21 83 123 123 8 0.1 2.56 3.23 2037 20 21 91 131 131 8 0.1 2.67 3.39 IRR 30% 271 NPV The ‘without-project’ case assumes that the railway purchases replacement vehicles similar to the existing fleet. The ‘with-project’ case assumes the high-speed twin- platform vehicles are purchased. The benefits are substantial with an EIRR of 30% and an NPV at 12% of Rmb 271 million. The results are robust to changes in assumptions (Table 3). Table 3 Economic evaluation sensitivity tests Test EIRR (%) NPV (Rmb million) Base 30 346 1 No maintenance benefits 14 36 2 No incident benefits 19 87 3 1 new vehicle replaces 1.5 current ones 13 37   17