roads and railways in people's republic of china

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ASIAN DEVELOPMENT BANKOperations Evaluation Department

SECTOR ASSISTANCE PROGRAM EVALUATION

FOR THE

PEOPLES REPUBLIC OF CHINA

In this electronic file, the report is followed by Managements response and the Board ofDirectors Development Effectiveness Committee (DEC) Chairs summary of a discussion of thereport by DEC.


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Evaluation Study

Reference Number: SAP: PRC 2007-04Sector Assistance Program EvaluationApril 2007

Sector Assistance Program Evaluation ofAsian Development Bank Assistance forRoads and Railways in the Peoples Republic of China

Operations Evaluation Department

Asian Development Bank


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CURRENCY EQUIVALENTS

Currency Unit yuan (CNY)

At CountryOperational

Strategy

At Country Strategy

and Program

At Operations

Evaluation(April 1997) (October 2003) (September 2006)

CNY1.00 = $0.1210 $0.1208 $0.1258$1.00 = CNY8.2965 CNY8.2766 CNY7.9468

ABBREVIATIONS

ADB Asian Development BankADTA advisory technical assistanceCOS country operational strategyCSP country strategy and program

PRC Peoples Republic of ChinaBTOR back-to-office reportEARD East Asia DepartmentEATC East Asia Transport and Communications DivisionEFYP Eleventh Five-Year Plan, 20062010EIRR economic internal rate of returnEPRS enhanced poverty reduction strategyFIDIC Fdration Internationale des Ingnieurs ConseilsFIRR financial internal rate of returnGDP gross domestic productICAC Independent Contracts Against CorruptionICB international competitive bidding

LCB local competitive biddingLJVR local joint venture railwayLPP Local Peoples ProcuratorateMCD municipalities communication departmentMOC Ministry of CommunicationsMOF Ministry of FinanceMOR Ministry of RailwaysNDRC National Development and Reform CommissionNFYP Ninth Five-Year Plan, 19962000NTHS National Trunk Highway SystemOED Operations Evaluation DepartmentPCD provincial communications department

PCR project completion reportPPER project performance evaluation reportPPR project performance reportPPTA project preparatory technical assistancePRS poverty reduction strategyRRA regional railway administrationRRP report and recommendation of the PresidentSAPE sector assistance program evaluationSPC Supreme Peoples CourtSPP Supreme Peoples Procuratorate


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TA technical assistanceTCR technical assistance completion reportTFYP Tenth Five-Year Plan, 20002005TOR terms of referenceWTO World Trade Organization

NOTE

In this report $ refers to US dollars.

KEY WORDS

asian development bank, development effectiveness, peoples republic of china, sectorassistance program evaluation, railway, road, transport, sector strategy, value added

Director R.B. Adhikari, Operations Evaluation Division 2,Operations Evaluation Department (OED)

Team Leader T. Duncan, Principal Evaluation Specialist,Operations Evaluation Division 2, OED

Team Members R. Lumain, Senior Evaluation Officer,Operations Evaluation Division 2, OED

C. Roldan, Senior Operations Evaluation Assistant,Operations Evaluation Division 2, OED

Operations Evaluation Department, SE-6


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CONTENTS

Page

EXECUTIVE SUMMARY iii

MAPS xiii

I. INTRODUCTION AND BACKGROUND 1

A. Introduction 1B. Background 1C. Scope and Objectives 2D. Evaluation Methodology 3E. Organization of the Report 4

II. RETROSPECTIVE SECTOR ANALYSIS 4

A. Introduction 4B. Road Subsector 6C. Railway Subsector 7

III. ADB STRATEGY FOR SUPPORTING ROADS AND RAILWAYS 9

A. Positioning within ADB Country Strategy and Program 9B. ADB Sector Strategy and Program 10C. Comparison with other Donor Support 20

IV. PERFORMANCE OF PROJECTS AND TECHNICAL ASSISTANCE 20

A. Introduction 20B. Projects 21C. Technical Assistance 29

V. VALUE ADDED BY ADB OPERATIONS 32

A. Introduction 32B. Value Added by ADB Projects 32

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoidingconflict of interest in its independent evaluations were observed in the preparation of this report.As the Director General of OED managed ADBs operations in the Peoples Republic of China

from 1995 to 2004, he took no part in preparation or review of the evaluation.Approval of thisreport was delegated to Director, Operations Evaluation Division 2. The consultants whoassisted in the preparation of the report were Stein Hansen, Clell Harral, Guangbin Zhao, HuFangfang, Wu Guobao, and T. F. Jones, III. Although with the exception of T.F. Jones III, eachhad previous involvement in ADB-assisted transport projects in the Peoples Republic of China,none took part in the evaluation of projects they had been connected with. To the knowledge ofthe management of OED, there were no conflicts of interest among the persons preparing,reviewing, or approving this report.


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VI. OVERALL ASSESSMENT, CONCLUSIONS, LESSONS, 41AND RECOMMENDATIONS

A. Overall Assessment 41B. Conclusions 45

C. Key Lessons 46D. Recommendations 46

APPENDIXES

1. ADB Loans to the Peoples Republic of China for Roads and Railways, 48Approved in 19972005

2. ADB Technical Assistance to the Peoples Republic of China for Roads 50and Railways, Approved in 19972005

3. Retrospective Analysis of Road Sector, 19972005 524. Retrospective Analysis of Railway Sector, 19972005 62

5. Comparator Assessment 736. Evaluation Findings at Project Completion and Postevaluation 767. Assessment of How ADB Projects Addressed Poverty Reduction 888. Findings from Studies of Poverty Impacts of Road Projects 939. Poverty Reduction Contribution of Local Roads Attached to Projects 10210. Anticorruption System for Infrastructure Construction 11011. ADB Performance and Client Orientation 11512. Assessment of Ongoing ADB-Financed Road and Railway Projects 12213. Performance of Technical Assistance 12914. Approach to Comparison of Projects With and Without ADB Support 13715. Performance Assessment and Rating 140

SUPPLEMENTARY APPENDIX (available on request)

Poverty Impact of Shenmu-Yanan Railway Project

Attachments: Management ResponseDEC Chair Summary


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EXECUTIVE SUMMARY

Background

This sector assistance program evaluation (SAPE) examines the performance of AsianDevelopment Bank (ADB) assistance for roads and railways development in the Peoples

Republic of China (the PRC) over the period 19972005. It covers the entire period of the 1997country operational strategy (COS) that ran from 1997 to 2003, together with the first 2 years ofthe 2003 country strategy and program (CSP) that covers ADB support from 2004 to 2006.During this time, the PRC was ADBs largest client in terms of lending and technical assistance(TA). Much of the ADB support was for the transport sector, and most of this was for roads andrailways. An evaluation of this involvement is, therefore, of strategic relevance not only for futureADB support to roads and railways in the PRC but also for ADBs country strategy and overallADB operations. The timing of the SAPE was intended to enable its findings and lessons toinfluence preparation of the new ADB country partnership strategy (CPS) and program for thePRC in 2007both as a self-standing evaluation and as an input toward a country assistanceprogram evaluation (CAPE) for the PRC.

In 1992, the PRC had the lowest road density in the world relative to area or populationand a railway network experiencing severe capacity bottlenecks. Over the past two decades, thePRC implemented huge programs to expand and improve its road and railway transportationsystems. Between 1997 and 2005, the road network was expanded from 1.2 million kilometers(km) to 1.9 million km, including construction on the National Trunk Highway System (NTHS), a35,000 km arterial road network mostly comprised of expressways. The rail network wasexpanded from 65,970 km to 75,438 km, with capacity augmented by double-tracking andelectrification. In both the road and rail subsectors, a feature of the investment programs was theintroduction of modern technologies and project management methods. Investment wasaccompanied by a process of gradual but sustained reform of subsector policies and institutionalarrangements, including greater commercial orientation and new approaches to cost recovery.

Roads and railways accounted for 27 of the 58 ADB loans to the PRC approved from1997 to 2005, contributing $6.8 billion (66%) of the total of $10 billion of new ADB lending to thePRC. Some 41 of the 246 TAs approved over the period were for roads and railways. Thesecomprised 15 advisory technical assistance (ADTA) grants and 26 project preparatory technicalassistance (PPTA) grants, equivalent to 15% of total TA approvals by value. The share of roadsand railways within total ADB support to the PRC also increased over the period. By 2005 invalue terms, it accounted for about 82% of new ADB lending and 21% of new TA approvals forthe PRC. ADB support for roads was larger than for railways. On average, ADB provided abouttwo loans and three TAs per annum for roads, and about one loan and two TAs for railways.

ADB Strategy for Supporting Roads and Railways

Positioning within ADB Country Strategy and Program. Over the study period, ADBsupport to roads and railways was of central importance to its overall objectives and countrysupport strategies to the PRC. Of four major challenges identified by the 1997 COS, twodepended significantly upon improving the efficiency and connectivity of transportation. Thesewere identified as priority areas in the Ninth Five-Year Plan (NFYP) and reflected in two of thethree overall objectives under the COS: (i) improve economic efficiency, and (ii) promoteeconomic growth to reduce poverty in inland provinces. On the basis that infrastructurebottlenecks impede efficient growth, the COS allocated between half and two-thirds of ADBlending to the PRC in any year to infrastructure in particular for road and rail investments. In allsectors, including transport, the COS emphasized use of market-based approaches to improve


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iv

economic efficiency in sectors supported by ADB. Much of the focus of the COS was retained inthe 2003 CSP. By that time, ADB had adopted a poverty reduction strategy (PRS) thatestablished poverty reduction as its overarching goal. Some 84% of the proposed program was tobe spent in poor interior regions. Transport was to contribute 61% of lending, focusing mainly onthe central and western regions. Roads and railways were important in three of four areas ofstrategic focus of the CSP. The roads and railways support was again to focus mainly on

removing infrastructure bottlenecks, but with increased emphasis on policy and institutionalreform to improve cost recovery, governance, introducing competition, improving efficiency, andopening up opportunities for private sector participation.

While the COS offered little guidance on the strategy for nonlending assistance, the CSPrecognized that nonlending assistance would be increasingly important within ADB support. SinceADBs resources were small relative to the PRCs overall investment needs, ADB should focusmore on assisting the PRC through knowledge transfer and strategic and policy influence, ratherthan just focusing on financial transfers alone. The CSP also said that nonlending support,including TA, should concentrate on strategic niches for long-term ADB assistance that hadstrong Government commitment and ownership. These were closely linked with the overallcountry level objectives and priorities set by the COS and CSP, and changed little over the

period.

Link between ADB Strategy and Government Needs. ADBs strategic priorities forhighways were well aligned with the five challenges for roads subsector. Specifically, its focus onthe NTHS was consistent with the high priority attached to the NTHS by the Government of thePRC (the Government). The focus on interior provinces and later on central and westernprovinces also fitted with efforts under the Governments NFYP and Tenth Five-Year Plan(TFYP), as well as with the ADB PRS. The strategic priority ADB gave to linking the NTHS to asystem of local roads and feeder roads was in line with the increased importance the Governmentattached to improving other parts of road network hierarchy. The initial priority given to supportingtechnical standards met the need to get things right as it scaled up the NTHS. ADB emphasis onexpressway corporatization and commercialization, efficient pricing policies, and alternative

financing mechanisms, also fitted well with the Governments need to determine how to pay forthe NTHS investments. ADB was initially somewhat ahead of the Government in attaching priorityto road safety and vehicle emissions, and this provided an opportunity to influence areas thatreceived increased Government priority by the second half of the study period. Since ADBsupport was modest compared with the overall magnitude of the NTHS, it could not address allthe major challenges of the road subsector. ADB had relatively little involvement in the issue ofgearing up highway construction capacity at the sector level. In practice, the Government wasable to expand capacity without outside support. In the railway subsector, ADB strategic prioritieswere also well aligned with the PRC needs. Its overall focus of building new railways usingmodern railway technologies addressed needs to increase railway capacity and reduce thepersistent gap between demand and supply as quickly and efficiently as possible. ADB priority ofimproving efficiency and commercial orientation, and its emphasis on restructuring and reforming

policy, were well matched to evolving institutional reforms in railways.

Consistency between ADB Strategy and Program. In both road and railwayssubsectors, there was a high level of consistency between ADBs strategy and the actual programof loans and TAs it provided. ADB recognized the merits of the Governments well defined long-term programs and remained committed to assisting them throughout the study period. In theroad subsector, the ADB lending program focused on financing construction of new tolled,access-controlled expressways under the NTHS. Apart from civil works, road projects included anumber of additional features linked to ADBs subsector strategic priorities. In the road subsector,ADTAs were used to contribute to subsector policy and planning and to support capacity building.


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In the railways subsector, all ADB lending was focused on construction of new railways to extendthe rail network to poorer regions. This was consistent with the COS and CSP.

Some features were consistently followed by all road projects and embedded in the scopeand implementation model adopted for supporting expressways: (i) commercialization,corporatization, and private concessioning of expressway management and operations;

(ii) pricing and cost recovery; and (iii) inclusion of local roads to increase poverty reduction impactof expressways. The first two were important, especially earlier in the study period when the PRCwas still gaining familiarity and confidence with use of commercial approaches. The latterreflected attention ADB gave to further orienting its operations toward poverty reductionparticularly immediately before and during the first 2 years of the PRS approved in 1999.Expressways were a challenging case because their poverty reduction impacts are indirect anddifficult to quantify. The solution adopted in the PRCbut seldom in other developing membercountries (DMCs)was to attach local roads as these had more tangible, quantifiable povertyreduction impacts, and could be targeted at poor communities. Other special features were addedincrementally during the study period. These were (i) axle load testing, (ii) road safety at projectand provincial level, (iii) control of vehicle emissions at project and provincial level, (iv) povertymonitoring, (v) inclusion of roadside stations to enhance local development impact, and

(vi) support for improving competition and the regulatory framework for transport services.

The more recent inclusion of project features on competition and regulation in thetransport services industry sought to address transport sector issues at the provincial level. Thiswas an appropriate focus since transport services are regulated by provincial governments. It isalso a useful area for ADB support since the efficiency of transport services is an important factorin determining the benefits of transport improvements to users particularly the poor. While it is toosoon to judge the performance of these features, the small scope and short duration of thesupportmainly consulting servicesleaves it open to question whether an effective interventionstrategy is being pursued.

Four special project features were pursued by all ADB railways projects. These were

(i) use of full cost tariffs on project railways, (ii) support for commercial practices in railwaycompanies, (iii) new technology to improve efficiency, and (iv) development of link roads andstations to extend the impacts of railways. The first three were directly linked to ADBs subsectorpriorities. By consistently requiring project railways to incorporate full cost tariffs and improvedcommercial practices, ADB contributed to the gradual change in thinking by the PRC authoritiesthat led, by the end of the study period, to railways being run increasingly along commercial lines.Provision of improved technology was another feature of project design. As ADB support for theMinistry of Railways (MOR) gained momentum, two new themes emerged: (i) development ofseparate passenger and freight rail corridors, and (ii) introduction of elements of private sectorparticipation by providing container terminals for private logistics operations and outsourcing ofancillary services. These reflect an increasingly sophisticated agenda for railway developmentand reform under the Eleventh Five-Year Plan (EFYP).

Crosscutting and Safeguard Features. A significant crosscutting theme of ADB supportfor roads and railways was the need to provide safeguards for involuntary resettlement, andadverse project impacts on indigenous peoples and the environment, in accordance with ADBssafeguard policies. Mitigation measures for HIV/AIDS spread associated with road and railwayprojects were another important issue to be addressed. Many of the road and rail projectsinvolved land acquisition and resettlement on a large scale as well as environmental and socialassessments. Addressing these developmental issues were important which occupied asignificant portion of PPTA resources.


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More Efficient Strategic Use of TA. The SAPE found several issues over howstrategically and efficiently TA was used. First, the share of TA allocated within the countryprogram for roads and railways was far less than the share of roads and railways in total lending,given that there was an opportunity to make more value adding in terms of innovative ideas forimproving sector performance commensurate with its position as the leading outside lender toroads and railways in the PRC. Second, the majority of TA for the two subsectors was PPTA,

even though the PRC was increasingly able to prepare projects without much assistance. Asignificant proportion of the PPTAs went in to (i) addressing environmental and social safeguards,and public health issues; (ii) poverty; and (iii) strengthening economic analysis. By allocatingPPTA resources on the basis of carefully estimated project preparation requirements, ADB couldhave significantly saved TA resources and increased the ADTA it provided for roads and railways.This would have been more in line with the Governments intentions of using ADB as a source ofadvice on sector issues and international good practices, and with the CSP aim of developingstrategic niches for long term nonlending support. Third, while most road and railways ADTAsaddressed important subsector issues, the ADTA program as a whole had certain weaknessesthat limited its potential influence and impact in both subsectors. Neither the COS, CSP, reportsand recommendation of the President (RRPs), nor TA papers provided an overarching medium-term framework or road map to ensure that TAs fit together, linked to lending and advisory

requirements, to form a coherent, coordinated set of interventions that are sustained as long asneeded to have impact. Such a framework has been identified as a key requirement for effectiveTA support by successive reviews and evaluations of ADB TA and included in theirrecommendations and action plans.

ADB Staff Capacity. The expansion of the roads and railways program, as well aschanges in the types of sector activities supported by lending and TA required ADB to adjuststaffing. During the study period, staff expertise was strengthened to be able to support areassuch as analysis of poverty impacts, safeguard compliance, and road safety. Two main areas ofconcern were (i) ADB should have augmented its capacity and range of expertise to serve itsrailway operations more effectively, and (ii) ADB made only limited use of the potential to improveefficiency and client orientation by transferring responsibilities and staff positions to its PRC

Resident Mission (PRCM).

Comparison with Other Aid Agency Support. ADB support for roads and railways hadmuch in common with the support provided by the World Bank, except that (i) the World Banklending was more diversified between different sectors, with a lower proportion assigned to roadsand railways; (ii) the World Bank had less TA funding, although it provided in-kind advisory inputsthrough its staff; and (iii) more of the World Banks team based in the PRC had a strong transportbackground.

Performance of Projects and Technical Assistance

Overall Performance. A distinguishing feature of roads and railways projects in thePRCwhich contrasts with many other DMCsis that they have generally been implemented to

a high standard, within or close to their estimated cost, and within or ahead of schedule. In manycases, the projects involved complex construction work, including large numbers of tunnels andbridges often in difficult terrain, and in some cases extensive land acquisition and resettlement.The seven completed PRC road and rail projects approved during the study period have allperformed well, and compare favorably with similar ADB-financed projects in other DMCs. Sincemost of the other road and railways projects approved during the study period are still ongoing,their performance after completion is not yet known. Nevertheless, based on quick review of ADBproject documents with executing agencies, the SAPE would consider that there are goodprospects that they would achieve a degree of success similar to the seven sample projects


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An assessment of the performance of TA for roads and railways was conducted usingsurvey methods developed for the Operations Evaluation Departments ADB-wide specialevaluation study on TA performance. The overall performance of TAs in the sample was mixed,with ADTAs performing fairly well and PPTAs less satisfactorily. The main problem with PPTAswas that they duplicated the preparatory work already done by the Government without addingmuch value in technical areas. Value adding mainly was in the area of strengthening economic

analysis, poverty analysis, and safeguards compliance preparation.

Trickle-Down Effects and Poverty Reduction. The developmental role of the NTHS andrailway network expansion has been crucial for the provision of energy and raw materials frominland provinces to the rapidly growing central and coastal provinces and for bringing consumergoods and production input to the inland destinations quicker, more reliably, and at much lowercosts than before. While problems of methodological complexity make it difficult to proveempirically, it is likely that investments in the NTHS and railway network development played animportant role in this form of poverty reduction through trickle down. The investments inestablishing the NTHS and developing the railway network have helped to reduce bottlenecksthat would have constrained the rate of economic growth. From this perspective, investing inexpressways created a climate for workplace investments that facilitated migration from poor,

growth-constrained communities. This is likely to have been a highly cost-effective mechanism forpoverty reduction, even though it did not feature explicit geographical targeting.

Contribution of Local Road Components to Poverty Reduction. To the extent thatfunds are fungible at the provincial leveleven if only within the road transport subsectorbudgetone could perhaps argue that ADB could contribute more effectively to provincial ruralpoverty reduction by concentrating its financing on expressway components only. In this way,ADB would contribute to freeing up provincial resources from expressway financing, which couldthen be used to finance local and other road expenditures in keeping with provincial and countylevel priorities and plans. This would also be more consistent with ADBs strategy under theEPRS. Limited assessments of the poverty reduction impacts of the local and link roadscomponents found two things. First, in many cases, county and village roads components

generated high traffic growth, which reflected substantial development effects. Second, it wasvery likely that these roads would have been built even if ADB financing had not been providedgiven the sharp increase in Government spending on rural roads under the TFYP and EFYP.

Social and Environmental Impacts. Based on the findings of the project performanceevaluation reports and project completion reports of seven sample projects, and the opinionsexpressed by EAs during SAPE fieldwork, it would seem that social and environmental impacts ofADB-financed projects were generally addressed satisfactorily. This included environmentalprotection and mitigation measures, resettlement and land acquisition, indigenous peoples, androad safety. There was little evidence available regarding the outcome of vehicle emissioncomponents of projects. These were not monitored or measured.

Governance and Anticorruption. All ADB projects contributed to modernizing

institutional structures for building and operating roads and railways, and for doing some in atransparent manner along commercial lines. Consequently, these added value in improvingsector governance. Over the period, the Government substantially upgraded its anticorruptionmeasures and capacity, and these now appear to be sufficiently rigorous.

ADB and Borrower Performance. Based on evaluations of completed projects, Borrowerperformance was good. This reflects strong capacity, and diligent and timely implementation, onthe part of most EAs. The SAPE also conducted a separate survey of ADB performance andclient orientation. At the stage of project formulation, EAs were in most cases satisfied with ADBsperformance. The main exceptions were that EAs felt processing and approval of PPTA was a


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Key Lessons

The SAPE has shown that impressive development results can be achieved byconsistently supporting a sound development plan for sector/subsector over an extended period.It also showed a strong client ownership can lead to successful project outputs and valueaddition. Assimilation of international good practices in the roads and railways has been quick for

the same reasons.

Value addition of ADB assistance was largely in the area of finance mobilization,introducing standard provisions to strengthen sector/subsector governance, and special featuresto improve development effects including support to introducing market-based principles in roadand railway subsectors, public health, and poverty impact.

Rapid economic development and growing financial strength have drastically reduced theneed for external financing of infrastructure projects. Under changing circumstances of this kind,more attention is needed to address the question of value addition in strategic analysis andprogramming to justify continued financial support for roads and railways in the PRC.

Recommendations

Based on the evaluation findings, the following recommendations are made forconsideration by the Management for future ADB support for roads and railways in the PRC aspart of the new country partnership strategy and its implementation:

Recommendation Responsibility Timing

For ADB Consideration

1. Formulate new focus and priorities for lendingassistance to roads and railways sector takinginto account the Government priorities and ADBs

experience and resources; in doing so,(i) pursue further policy dialogue with the Governmentto identify areas for strategic focus, and valueaddition; and(ii) adopt special features and project componentscommensurate with project location, relatedgovernment and ADB priorities.

EARD As part of road andrailways sector roadmaps and CPS

preparation and duringits implementation.

2. Enhance performance of technical assistance toroads and railways sectors by(i) rationalizing resource allocation for projectpreparatory technical assistance in relation to carefullyestimated requirements and local conditions;(ii) adopting a longer term engagement and increasingallocation for advisory technical assistance to providestate-of-the-art knowledge products and services;(iii) making use of more inputs of high quality domesticconsultants;(iv) bringing in world class and PRC experiencedinternational consultants; and(v) providing necessary staff and incentives for projectdesign and supervision excellence.

EARD, COSO During CPSpreparation (2007) andits implementation.


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Recommendation Responsibility Timing

3. Increase responsiveness to client concerns by(i)pursuing further discussion with the Government toexplore how to make use of ADBs new lendingproducts and modalities;

(ii) simplifying business procedures to reducetransaction costs associated with ADB projectprocessing and administration procedures;(iii) move toward piloting country systems forenvironmental safeguard compliance where capacity ofexecuting agencies is evident in line with ADBsupdated safeguards policy, and assisting instrengthening country systems and capacity in othersafeguard areas;(iv) attaching local roads, link roads, and detailedpoverty monitoring frameworks to expressway projectsstrictly on a demand-driven basis and in line with ADBsenhanced poverty reduction strategy;(v) further strengthening the PRCM with transport

sector specialist and delegating to it to handle moreproject-related work and advisory services to theclients; and(vi) matching ADB staffing with the main areas itidentifies for adding value through roads and railwaysoperations in the PRC.

EARD, BPMSD,RSDD, COSO,SPD

During CPSpreparation andimplementation (20072010).

For Government Consideration

4. Assist in identifying new focus and priorities forADB road and railways support to enable ADB tooffer the PRC value addition. The Governmentshould enter into a dialogue with the ADB to identify

which areas of roads and railways should become thefocus of ADB value addition through lending andnonlending assistance over the next 35 years.

MOF, MOC;MOR, NDRC,ProvincialCommunications

Departments

During CPSpreparation (2007) andits implementation.

5. Reduce transaction costs. The Government shouldtake part in further dialogue with ADB to explore how tomake use of ADBs new lending products andmodalities and reduce project start-up delays andtransaction costs associated with ADB projectprocessing and administration procedures, andminimizing commitment fees.

MOF, MOC;MOR, NDRC

During CPSpreparation (2007) andits implementation.

ADB = Asian Development Bank; BPMSD = Budget, Personnel, and Management Systems Department; COSO =Central Operations Services Office; CPS = country partnership strategy; PRC = Peoples Republic of China; EARD =

East Asia Regional Department; MOC = Ministry of Communications; MOF = Ministry of Finance; MOR = Ministry ofRailways; NDRC = National Development and Reform Commission; PRCM = PRC Resident Mission; RSDD =Regional and Sustainable Development Department; SPD = Strategy and Policy Department.

Ramesh B. AdhikariDirectorOperations Evaluation Division 2Operations Evaluation Department


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Gulf ofTonkin

S o u t h C h i n a S e a

E a s t C h i n a S e a

Yellow Sea

Bohai Sea

Liaoning Expressway Project

Shenyang-Jinzhou Expressway Project

Yunnan Expressway Project

Fangcheng Port Highway

Hebei Expressway Project

Shenyang-Benxi Highway Project

Heilongjiang Expressway Project

Jilin Expressway Project

Shanghai Nanpu and

Shanghai Yangpu Bridges

Hunan Expressway Project

Jiangxi Expressway Project

GUANGXI ROADS II DEVELOPMENT PROJECT

GUANGXI ROADS DEVELOPMENT PROJECT

HUNAN ROAD IIIDEVELOPMENT PROJECT

HUNAN ROAD IIDEVELOPMENT PROJECT

WESTERN YUNNAN ROADSDEVELOPMENT PROJECT

CHENGDU-NANCHONG EXPRESSWAY PROJECT

CENTRAL SICHUAN ROADSDEVELOPMENT PROJECT

CHONGQING-GUIZHOU ROADS: CHONGZUN EXPRESSWAY

CHONGQING-GUIZHOU ROADS: LEICHONG EXPRESSWAY

CHONGQING EXPRESSWAY PROJECT

HEBEI ROADS DEVELOPMENT PROJECT

SHANXI ROAD DEVELOPMENT II PROJECT

XI'AN URBAN TRANSPORT PROJECT

SHAANXI ROADS DEVELOPMENT PROJECT

NINGXIA ROADSDEVELOPMENT PROJECT

GANSU ROADSDEVELOPMENT PROJECT

SHANXI ROAD DEVELOPMENT PROJECT

CHANGCHUN-HARBIN EX PRESSWAY: HASHUANG EXPRESSWAY

CHANGCHUN-HARBIN EXPR ESSWAY: CHANGYU E XPRESSWAY

SOUTHERN SICHUAN ROADSDEVELOPMENT PROJECT

SOUTHERN YUNNAN ROADSDEVELOPMENT PROJECT

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Jiamusi

Harbin

Changchun

Jilin

Siping

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BEIJING

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BaojiXi'an

Sanmenxia

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MianyangNanchong Wanxian

Chengdu

Wuhan

Hefei

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Xuzhou

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Lianyungang

Huaiyin

Yumen

Xining

Lanzhou

Ruili

BaoshanLongling

Dali

Yuanjiang

Mohei

Kunming

Chuxiong

QujingWuding

Panzhihua

Xichang

Ya'an

ShimianLugu

Guiyang

Zunyi

Leishendian

Zhaotong

Liuzhou

Guilin

Nanning

Fangcheng

Youyiguan

Baise

Hekou

BeihaiQinzhou

Chongqing

Hengyang

Xiangtan

Yongan

Nanchang

Jiujiang

Changsha

Changde

Jishou

Huayuan

Foshan

GuangzhouHuangpu

Tanxi

Longyang

Shantou

Zhangzhou

Xiamen

Quanzhou

Fuzhou

Zhanjiang

ZhuhaiKaiping

Haikou

Sanya

Shanghai

Ningbo

Jingdezhen

Wenzhou

Hangzhou

Nanjing

Shenzhen

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HEILONGJIANG

JILIN

LIAONING

NINGXIA

SHAANXI

SHANXI

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FUJIAN

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SHANGHAIANHUI

JIANGSU

SHANDONG

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INNER MONGOLIA

YUNNAN

GUANGXI

GUANGDONG

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HONG KONG SAR

MACAO SAR

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TIANJIN

CHONGQING

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M ONGOLI A

RUSSIAN FEDERATION

National Capital

Provincial Capital

City/Town

Major Port

Approved 1997--2005

Approved before 1997

Special Administrative Region

Priority Route

Long-Term Route

Provincial Boundary

International Boundary

National Trunk Highway System

Boundaries are not necessarily authoritative.

ADB-FINANCED ROAD PROJECTSIN THE

PEOPLE'S REPUBLIC OF CHINA

100 200 300 4000

Kilometers

N

06-3979 HR

Map 1

40 00'No

40 00'No

20 00'No

20 00'No

120 00'Eo

120 00'Eo

100 00'Eo

100 00'Eo


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South China Sea

Gulf of Tonkin

Yellow Sea

BohaiSe a

HuangHe(YellowRiver)

ChangJ

iang

(YangtzeRiver)

Jing-Jiu Railway

Hefei-Jiujiang Railway

Daxian-Wanxian Railway

Shanxi-Xiaoliu Railway

Yaogu-Maoming Railway

Guang-Mei-Shan Railway

HEFEI-XI'AN RAILWAY

DALI-LIJIANG RAILWAY

YICHANG-WANZHOU RAILWAY

ZHENGZHOU-XI'AN RAILWAY

GANZHOU-LONGYAN RAILWAY

SHENMU-YAN'AN RAILWAY

GUIZHOU-SHUBAI RAILWAY

Yuanping

Taiyuan

Yuci

Shijiazhuang

Tunilu

Linfen

Xiaoyi

YueshanHouma

XinxiangJiaozuo

Shehe

Hengshui

Fengteng

Dezhou

Tianjin

Huanghua

Shuoxian

Yanzhou

Heze LinyiZhengzhou

Tongguan

Xi'anBaoji

Zhongjiacun

Yanan North

Hancheng

Suide

Mucun

Shenmu North

Dongsheng

Zhongwei

Yulin

Gantang

LanzhouXining

YinchuanYumen

Qinhuangdao

Bazhou

BEIJING

HohhotJining

Datong

Baotou

Xinfeng

Jinan

Shijiusuo

Lianyungang

Qingdao

Yantai

Yangpingguan Tongbai Mountains

Dabie

Mou

ntains

HuaiyuanScenic Area

Qingling Tunnel

Daxian

Wanzhou(Wanxian) Yichang

Jingmen

AnkangGucheng

Xiangfan

Nanyang

Macheng

Huangchuan

XinyangXiaolin

Lishan

Shangnan XixiaDanjiangkou

Wuhan

Hankou

Changsha

ChongqingFuling

Lichuan

Guiding

Pingzha

Luocheng

Guilin

Hechi

SanchaLiuzhou

HeshanLaibin

Sanshui

Longchuan

HuaihuaZhuzhou

Henyang

Ji'an

Nanchang

XiangtangSanjiangcheng

Yingtan

Yiyang

NanpingFuzhou

LongyanDingnan

Ganzhou

Xiamen

Meizhou

Chaozhou

Zhangzhou

Wenzhou

ZhakouBeihai

Zhanjiang

Hechun

Yunfu YaoguZhuhai

Changping

Kowloon

Shenzhen

Haikou

SantangYangpu

ChaheNada

Basou

Sanya

Shilu

Loudi

Macao

Guangzhou Shantou

Ping Xiang

Nanning

Litang

Qinzhou

FangchengHepu

Maoming

FuyangChangfeng

Hefei

Lu'an

Wuhu

Anqing

Jiujiang

Yixing

Nanjing

HananBengbuYangping

Huaiyuan

Wuxi

Jiangyin

Changxing

Ningbo

Hangzhou

Shanghai

Nantong

Xinyi

Xuzhou

Shangqiu

DukuoLanping

Lijiang

Zhongdian

DaliBaoshan

Ruili

Lincang

Mohei

Jinghong

Chuxiong

ShipingKaiyuan

Kunming

Yiliang

Qujing

Zhanyi

Liupanshui

BaiguoHongguo

Weishe

Guiyang

Chengdu

Neijiang

Yibin

toUrumq

i

GUIZHOU

GUANGXI

HAINAN

GUANGDONG

JIANGXIHUNAN

ZHEJIANG

FUJIAN

HENAN

HUBEI

SHAANXI

GANSU

SHANDONG

HEBEI

TIANJIN

INNER MONGOLIA

JIANGSU

ANHUI

SICHUAN

CHONGQING

QINGHAI

XIZANG

YUNNAN

NINGXIA SHANXI

SHANGHAI

HONG KONG SARMACAO SAR

VIET NAM

M O N G O L I A

LAO PEOPLE'S

DEMOCRATICREPUBLIC

MYANMAR

National Capital

City/Town

Existing Railway

Planned Railway

Approved 1997-- 2005

Approved before 1997

River

Provincial Boundary

International Boundary

Boundaries are necessarily authoritative.

ADB-FINANCED RAILWAY PROJECTSIN THE

PEOPLE'S REPUBLIC OF CHINA

0 10050 150 200 250

Kilometers

N

06-3980 HR

35 00'No

120 00'Eo

120 00'Eo

100 00'Eo

100 00'Eo

25 00'No

25 00'No

35 00'No

35 00'No

Map 2


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I. INTRODUCTION AND BACKGROUND

A. Introduction

1. This sector assistance program evaluation (SAPE) examines the performance of the AsianDevelopment Bank (ADB) support for roads and railways development in the Peoples Republic of

China (PRC) over the period 1997-2005. During this time, the PRC was ADBs largest client,accounting for 19.0% of total ADB lending and 13.2% of technical assistance (TA). Much of ADBsprogram in the PRC, and nearly all of its support for the transport sector, was for roads andrailways. An evaluation of this support is, therefore, of strategic relevance not only for ADBs futuresupport for roads and railways in the PRC but also for ADBs country program in the PRC, and hasimplications at ADB corporate level for the scale and composition of overall ADB operations.

2. The Operations Evaluation Department (OED) included the SAPE in its 2006 work programso that its findings and lessons would be ready in time to help prepare ADBs next countrypartnership strategy (CPS) for the PRC in 2007. This SAPE will also form part of the overall countryassistance program evaluation for the PRC, which was likewise included in OED's 2006 workprogram. The SAPE examines the performance of ADB support for roads and railways over two

successive country strategies. It covers the entire period of the 1997 country operational strategy(COS)1 that ran from 1997 to 2003, together with the first 2 years of the 2003 country strategy andprogram (CSP), which covers ADB support from 2004 to 2006.2

B. Background

3. Over the past two decades, the PRC has implemented a large number of programs toexpand and improve its road and railway transportation systems. In 1992, it had the lowest roaddensity in the world relative to both geographical area and population. Its railway network wasexperiencing severe capacity bottlenecks. From 1997 to 2005, the road network grew from1.23 million kilometers (km) to 1.93 million km. This included construction of a National TrunkHighway System (NTHS), a 35,000 km arterial road network composed mainly of expressways.

By the end of 2005, some 31,900 km of the NTHS had been completed, with the remaining3,100 km due for completion by 2007. From 1997 to 2005, the rail network was expanded from65,970 km to 75,438 km, while capacity was augmented by double-tracking and electrification.Investment programs in both roads and railways featured the introduction of modern technologiesand project management methods. Investment was accompanied by a process of gradual butsustained reform of subsector policies and institutional arrangements. Reforms included greatercommercial orientation and new approaches to cost recovery.

4. Roads and railways accounted for 27 of the 58 ADB loans to the PRC approved from 1997to 2005, contributing $6.8 billion (68%) of the total of $10 billion of new ADB lending to the PRC. Ofthe 246 TA projects approved over the period, 41 were for roads and railways. These comprised15 advisory technical assistance (ADTA) grants and 26 project preparatory technical assistance

(PPTA) grants, equivalent to about 15% of total TA approvals by value. Roads and railways' shareof total ADB support to the PRC also increased over the period. At the end in 2005, roads andrailways accounted for about 82% of new ADB lending and 2% of new TA approvals.3

1ADB. 1997. Country Operational Strategy Study: Peoples Republic of China. Manila.

2ADB. 2003. Peoples Republic of China Country Strategy and Program (20042006). Manila.

3The lending share was 73% for roads and rails during 20012005, and in 2006, it was about 53% of the total lendingvalue in the PRC.


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5. ADB support for roads was larger than for railways. For roads, ADB provided 20 loans worth$4.85 billion,4 and 27 TA projects worth $17.3 million. For railways, it provided seven loans worth$1.92 billion, and 14 TA projects worth $5.8 million. On average, ADB provided about two loans andthree TA projects per annum for roads, and about one loan and two TA projects per annum forrailways. Additional details of approved loans and TA projects are in Appendixes 1 and 2.

6. The PRC has massive additional infrastructure investment requirements,5 particularly forroads and railways. From 2006 to 2010, the Ministry of Communications (MOC) has plans toexpand the road network from 1.9 million km to 3 million km, including (i) further expansion of theNTHS and other arterial networks to 85,000 km, and (ii) building or improving 1.2 million km ofrural roads to improve links between towns and villages. According to the Ministry of Railways'(MOR) railway development plan, the rail network will be increased to 85,000 km by 2010, and to100,000 km by 2020. Besides expanding the road and rail networks, the Government is pursuingoperational, institutional, and policy improvements to further increase the effectiveness,efficiency, and sustainability of transportation. In this context, ADB potentially can continue to playa significant role to support the Government in expanding and improving roads and railwaysunder the new CPS. Because the PRC now has much greater access to domestic andinternational sources of financing, and because its roads and railways are increasingly

sophisticated, ADBs continued relevance as a source of finance will depend on its ability toprovide high-quality services that match the changing requirements of these subsectors.

C. Scope and Objectives

7. The objective of this SAPE is to assess the performance (relevance, effectiveness,efficiency, sustainability, and impact) of ADBs support for roads and railways in the PRC over thestudy period, and to derive lessons for improving current and future support. The SAPE examinessix broad questions:

(i) Strategic direction. Did ADBs strategies for roads and railways provide a soundstrategic direction for ADB support, taking into account the PRCs needs andpriorities, other development partners support, and ADBs comparative advantages?

(ii) Alignment of program with strategy. Was ADBs program of loans, TA, andother sector work aligned with its strategies for roads and railways?

(iii) Performance of program. Were the results of the ADB program effective,efficient, and sustainable?

(iv) Influence of ADB support. Did ADB support contribute more broadly to helpingthe PRC address its key road and railway needs, priorities, and challenges?

(v) Performance of ADB. Was ADB an effective partner in terms of quality ofdialogue, advice and support, responsiveness to country needs, and consistency infollowing its mandate, objectives, and strategies?

(vi) Lessons. What lessons can be derived from ADBs road and railway projects inthe PRC?

8. The value addition of ADB support for roads and railways is a theme of the SAPE. To theextent that, over the study period, the PRC became increasingly able to prepare, finance, andexecute road and railway investment projects without ADB support, the justification for ADBscontinued involvement is contingent on ADB contributing additional value above and beyond thefinancing of investment projects. Examples of value addition include (i) transfer, dissemination,

4These financed 18 projects. In two projects, the scope extended across two provinces and separate loans wererequired to finance the works in each province.

5East Asia requires about $200 billion annually for infrastructure investment, of which 80% will be accounted for bythe PRCADB, World Bank, and Japan Bank for International Cooperation. 2005. Connecting East Asia: A NewFramework for Infrastructure.Manila, Washington, DC, and Tokyo.


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and adoption of technology and knowledge; (ii) enhancing the design and implementation ofADB-financed projects, for instance by introducing innovative features, safeguards, andanticorruption measures; (iii) spillover influences that enhance non-ADB-financed projects andumbrella programs; and (iv) identifying sector development issues and helping the governmentaddress them through reforms, institutional strengthening, etc. Since value addition was not anexplicit objective of the 1997 COS, the 2003 CSP,6 or the individual road and railway projects

approved during the study period, the SAPE did not rate the performance of ADB support againstthe yardstick of value addition. Nevertheless, the SAPE does identify areas where ADB mightpotentially add (or subtract) value. This could prove a useful input toward formulation of ADBstransport sector strategy for the next CPS for the PRC in 2007.

D. Evaluation Methodology

9. The SAPE was carried out in the PRC and at ADB Headquarters through a combination ofstudies, interviews, and document review. The main components were:

(i) Retrospective situation analysis of the road and rail subsectors. Literaturereview and interviews to identify the main policies, programs, priorities, challenges,and issues of the road and railway subsectors in the PRC over the study period

(paras. 7[i], 7[iv]).(ii) Comparator assessment. Literature review and interview program to compare

ADBs strategy for roads and railways with that of the World Bank and the otherinternational financial institutions that assisted roads and railways (para. 7[i]).

(iii) Analysis of strategic fit. Drawing upon the retrospective situation analysis andcomparator assessment, this examined (a) how closely ADBs strategies andpriorities match the priorities and challenges facing the PRC in the realm of roadsand railways, and whether ADB has a comparative advantage in its priority areasof support; and (b) how closely ADBs programs were aligned with these strategiesand priorities (paras. 7[i], 7[ii]).

(iv) Evaluation of completed ADB projects. As part of the SAPE, in 2006, OEDprepared project performance evaluation reports (PPERs) for four completed road

projects and one railway project. It also conducted an in-depth review of theproject completion report (PCR) for a railway project, and reviewed the reports andrecommendations of the President (RRPs) and PCRs for projects approved duringthe study period, and portfolio indicators and back-to-office reports of reviewmissions for ongoing projects (para. 7[iii]).

(v) Study of poverty reduction impact of railways. Using household survey dataavailable from the Shaanxi Provincial Government, and drawing on methodsdeveloped by regional TA 5947,7 a quantitative study was prepared of the povertyreduction impact of the Shenmu-Yanan Railway Project (para. 7[iii]].8

(vi) Existing studies of poverty reduction impacts of road projects. Desk review ofprevious studies (para. 7[iii]).

(vii) Assessment of the performance of TA. A semistructured questionnaire survey of

the executing agencies, project officers, and consultants for all completed policy-oriented ADTA projects and a sample of completed PPTA projects (para. 7[iv]).9

6 In discussing new challenges for ADB in the PRC, the 2003 CSP indicated that ADBs task is to select niches whereADB can add value.

7Cook, C. et al. 2005.Assessing the Impact of Transport and Energy Infrastructure on Poverty Reduction. Manila: ADB.

8ADB. 1997. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to thePeoples Republic of China for the Shenmu-Yanan Railway Project. Manila.

9This used survey instruments developed by the ADB. 2007. Special Evaluation Study on the Performance ofTechnical Assistance. Manila.


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(viii) Survey of ADB performance and client orientation. A semistructuredquestionnaire survey of the executing agencies for ADB-financed road and railwayprojects, conducted alongside a with-project and without-project comparison (para.7[iv], 7[v]).

(ix) Comparison of projects with and without ADB support. A semistructuredquestionnaire survey of a sample of the executing agencies for ADB-financed

projects and a matched sample of executing agencies for domestically financedprojects, selected on the basis of similarity in terms of scope, location, andtimeframe (paras. 7[iv], 7[v], 8).

10. The SAPE has the following limitations:(i) It covers public sector road and rail projects but not private sector or multisector

projects. ADB has not financed private sector road or railway projects in the PRC,or multisector projects with significant road or rail components.

(ii) Assessment of individual projects focused on projects approved and completedduring the study period. This covered five of the 18 road projects and two of theseven railway projects, all of which were approved from 1997 to 1999. A briefreview of ongoing projects approved after 1999 was also done.

E. Organization of the Report

11. Chapter II provides a retrospective analysis of the priorities, challenges, andaccomplishments in the road and railway subsectors over the study period. This establishes thecontext of road and railway development in the PRC against which to judge the performance ofADB support. Chapter III examines the suitability of ADBs strategy for assisting roads and railwaystaking into account (i) the role of road and railway support within the ADB country strategy, (ii) thestrategic fit between ADB support and the sector needs and Government priorities, (iii) thecoherence of ADBs strategy, (iv) how well ADB adapted to changing needs over the study period,and (v) how ADBs strategy compared with that of the World Bank. Chapter IV assesses theperformance of ADB projects and TA for roads and railways in terms of their design and

implementation, outcomes, and impacts. Chapter V presents the analysis of value added by ADBoperations, drawing on the results of the with-project and without-project comparison of ADB-financed and domestically financed road and railway projects. This provides a basis for consideringwhether ADB needs to adjust the type of support it provides in order to maintain relevance in thePRC's road and railway subsectors. Chapter VI provides the overall assessment of theperformance of ADB support, based on top-down and bottom-up assessments, and presents theoverall conclusions, lessons, and recommendations of the SAPE.

II. RETROSPECTIVE SECTOR ANALYSIS

A. Introduction

12. This chapter looks back at the priorities, challenges, and accomplishments in the road andrailway subsectors in the PRC during the study period. This helps to establish the context forevaluating ADB support in subsequent chapters of this SAPE. Further details of the retrospectivesector analysis are in Appendix 3 for roads, and in Appendix 4 for railways.

13. The period 19972005 was of historic significance for the development of roads andrailways in the PRC. It began with plans for continued growth in road and rail infrastructureinvestments to address well-known transport bottlenecks that had arisen as a result of a lack of


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investment in the past.10 Although the Government had stepped up investment over the previousdecade, the demand for transport had continued to grow rapidly as a result of economic growth.By 1996, transport investment was about 3% of gross domestic product (GDP). This was asignificant increase over the average of 1.3% during the 1980s. However, some studiessuggested that a level of 6% would be needed to match the standards of middle income countries(MIC) striving for international competitiveness.11

14. The Asian financial crisis that began in July 1997 had a profound effect on transportinvestment. Faced with a possible downturn in economic growth, the Government opted to pumpprime the economy by increasing investment in public works. Much of the additional investmentwent toward highways, in particular the NTHS. As Table 1 shows, investment in fixed transportassets jumped from $21.1 billion in 1996 to $37.5 billion in 1998. It then continued to rise steadilythroughout the period, reaching $69 billion in 2004. As a share of total transport investment,highway investments grew from 63% in 1996 to 72% in 1998, and reached 83% in 2004. Theinvestment share of railways steadily decreased, although the absolute level of railwayinvestment increased slightly over the period. One more point of significance was that the vastmajority of transport investment during the study period was financed from domestic sources. By2004, only 1.5% was foreign investment. The PRC, therefore, no longer had to rely on

international financial institutions such as ADB and the World Bank for investment financing.

Table 1: Investment in Transport Fixed Assets (%)

10From 1966 to 1994, transport sector investments as a share of gross domestic product (GDP) were less than halfthat of other large developing countries.

11World Bank. 1998. ChinaForward with One Spirit: A Strategy for the Transport Sector. Washington, DC.

YearInvestment

1996 1998 2000 2002 2004

A. Investment in Transport Fixed Assets ($ billion)a

21.1 37.5 40.5 53.7 69.0

B. Composition of Investment (% of total)

1. By Function

1.1 Ports and Other Coastal Construction 4.4 2.8 2.4 2.9 0.6

1.2 Inland Waterway Construction 4.6 3.1 2.7 2.0 0.9

1.3 Highway Construction 62.6 72.3 70.9 73.4 83.1

1.3.1 Trunk Highwaysb 0.0 34.5 32.3 29.1 30.6

1.3.2 Other Road Networks 0.0 23.7 27.6 32.0 29.9

1.3.3 County and Township Roads 0.0 11.9 9.2 11.1 21.7

1.4 Railways 26.7 20.5 23.3 21.4 14.6

1.5 Others 4.4 2.8 2.4 2.9 0.6

2. By Source of Funds (excluding railways, ports)

2.1 State Budget 12.3 13.4 12.4 16.3 13.4

2.2 Provincial Loans 64.6 68.0 69.7 66.7 67.8

2.3 Foreign Investmentc

7.7 5.1 3.7 2.7 1.5

2.4 Self-Financing and Othersd

15.4 13.4 14.3 14.3 17.4

a Converted from CNY using average annual CNY/$ exchange rates.b

Trunk highways are largely the national expressway network. However, a small number of class I and class II highways

are also included.cMainly international financial institutions including the Asian Development Bank.

d This consists of the contribution of provinces, counties, local townships, villages, the private sector, and debt taken on bythe secondary and tertiary levels of government. While hard data on the provincial and tertiary government debt levels forroad financing is not available, a rough estimate is that debt represents about 60% of that category of investment, whichleads to an overall debt-to-equity ratio of approximately 2:1.

Sources: Ministry of Communications. Statistical Yearbooks; Statistics on Investment in Fixed Assets of China, 19502000.


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B. Road Subsector

15. Over the study period, the PRC authorities faced five main challenges in the roadsubsector: (i) how much to spend on which road investments, (ii) how to pay for the proposedinvestments and their maintenance, (iii) what design and maintenance standards to employ,(iv) how to gear up highway construction capacity quickly to undertake a large highway

modernization program, and (v) setting government policy to facilitate the most economic use ofthe highway networks.

16. The focus was on questions (i), (ii), and (iii) when the study period began in early 1997.They were reflected in the subsector priorities of the Ninth Five-Year Plan 19962000 (NFYP),which sought to link all cities with populations over 500,000 through the NTHS, expand thesecondary road network, and build highways to border crossings. Questions (iv) and (v) resultedfrom the rapid expansion of highway construction following the Asian financial crisis.

17. As in all countries, there was a need to strike a balance between investment in thedifferent levels of the road network hierarchy, between regions, and among social groups. A largeportion of investment was for the NTHS (Table 1), much of which was concentrated on the more

economically advanced coastal and eastern provinces where traffic needs were greatest.

18. The NTHS grew rapidly after the Asian financial crisis. In the 7 years prior to 1997, anaverage of 607 km of expressways was completed each year; in the subsequent 7 years(1998-2004), the average was 4,217 km per year, and preliminary indications were that morethan 5,000 km were completed in 2005.

19. By the middle of the study period, increased emphasis was being given to improving thelower levels of the road network. Country and township roads experienced rapid growth from2000 onward. This reflected the objectives of the Tenth Five-Year Plan 20002005 (TFYP), andparticularly the Eleventh Five-Year Plan 20062010 (EFYP), to reduce inequalities of incomethrough, among other things, improving access to markets and services. During the second half

of the study period, increased emphasis was given to improving highway connectivity in thewestern part of the country. This reflected the Western Development Strategy, which wasintroduced by the Government under the TFYP. The goal of the strategy was to promote growthand development in the western region and reduce disparities between the West and the moreprosperous coastal areas.

20. The question of how to pay for the investments and their maintenance was an issuethroughout the study period. The NTHS was about 70% financed through provincial governmentborrowings against projected toll revenues; the central Government and the provincialgovernment each contributed 15%. Therefore, the central and provincial governments quickly hadto develop expertise in tolling and establish institutional arrangements to build and operate tollroads on a commercial basismainly through setting up public expressway companies. Other

options used were private sector participation through joint venture companies and securitizationof existing highways, although these declined toward the end of the study period. 12

21. Reliance on borrowing created another problem: debt burden. Some of the expresswaycompaniesparticularly in light-traffic central and western areasmay not be able to generatesufficient revenues to service their debt and finance their operational costs. By the end of thestudy period, it appeared likely that the Government would have to intervene, for example throughsome form of pooling or cross-subsidy arrangement.

12Joint ventures mobilized more than $9 billion from private sources, and asset securitization raised another $2 billion.


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22. By the beginning of the study period, the PRC had established its own highway designand maintenance standards. The NTHS was built fairly uniformly to expressway standard. Inlower traffic sectionsnotably in central and western areasthere might have been an economiccase for initially adopting lower geometric standards, although rapid growth of traffic levelseventually would have necessitated expansion. Throughout the study period, there were

problems of axle loads exceeding pavement design standards due to illegal overloading. This canlead to premature pavement failure and necessitate costly pavement strengthening andreconstruction works.

23. The rapid development of the NTHS required a massive expansion of the domestic road-design and construction industries. These industries had benefited from competitive biddingexperience gained through working with international financial institutions in the 1980s and1990s. Competitive bidding procedures of that time included exposure to the FdrationInternationale des Ingnieurs Conseils (FIDIC) system of separating client, engineer, andcontractorelements of which were adopted for domestic civil works procurement.

24. Another issue that emerged during the study period was the need to balance financial

considerations against economic efficiency when setting toll rates. The reliance on debt financingled to adoption of high toll ratesroughly on a par with those in the United Statesin order togenerate the revenues needed for debt service. However, due to high toll rates, a portion of trafficcontinued to use the older, congested, non-tolled facilities instead of diverting to the newexpressways. A related efficiency issue was that the policy of creating separate toll companies foreach section led to large numbers of toll stations, leading to higher time costs for traffic andhigher administrative costs for tolling. By the end of the study period, some provinces werebeginning to unify their tolling structures, but others had yet to address the issue.

C. Railway Subsector

25. During the study period, the PRC authorities faced five main challenges in the railway

subsector: (i) how to increase railway capacity to reduce the persistent gap between demand andsupply of rail services as quickly and efficiently as possible; (ii) how to pay for serviceenhancements and the expansion of railway capacity; (iii) how to modernize institutionalstructures in line with the move to an efficient socialist market economy; (iv) how to create strongincentives to constantly enhance performance (quality as well as quantity and efficiency) in whatwould remain, at least for the present time, a state-owned monopoly in the provision of mainlinerailway operating services; and (v) how to lay a basis for the subsequent introduction ofcompetition in mainline railway operations, including the necessary adaptations related to thePRCs entry into the World Trade Organization (WTO).

26. The first four questions had been on the agenda for two decades, with attention mostlyfocused on (i) and (ii). Institutional reform issuesas summarized in questions (iii)(v)began to

attract more attention under the NFYP, and assumed greater importance after the PRCsaccession to the WTO in 2001. At the beginning of the study period, the focus of railwaymodernization was on technology, but from 1999 onward the national railways began to introducefar-reaching institutional reforms. By the end of the period, both in terms of technology andinstitutional practices, the gap between the PRC's railways and international best practice hadnarrowed considerably.

27. Under the TFYP, the Government planned to develop separate passenger and freightdedicated lines on busy trunk routes, together with other technological improvements such as


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could be potential point-to-point competition in corridors served by two or more operatorssimilarto the model in the United States. As well as considering different models of competition, theMOR also has been considering the option of separating government regulatory functions fromrail operations, but a decision has yet to be reached.

III. ADB STRATEGY FOR SUPPORTING ROADS AND RAILWAYS

A. Positioning within ADB Country Strategy and Program

33. Over the study period, ADBs support for roads and railways was of central importance toits overall objectives and country support strategies in the PRC.

34. Of the four major challenges identified by the 1997 COS, two depended significantly uponimproving the efficiency and connectivity of transportation. These were (i) supporting sustainablegrowth by reallocating resources toward priority areas such as infrastructure, environmentalprotection, human resource development, and poverty reduction; and (ii) ensuring broad-basedgrowth and a relatively egalitarian distribution of its benefits between the coastal and the interiorprovinces."16 These challenges had been identified as priority areas in the NFYP. They were

reflected in two of the three overall objectives established for ADB support under the COS. Thesewere to (i) improve economic efficiency, and (ii) promote economic growth to reduce poverty ininland provinces.17

35. Recognizing that infrastructure bottlenecks impede efficient growth, the COS allocatedone-half to two-thirds of ADB lending to the PRC in any year to infrastructure investment. Roadand rail investments were expected to feature significantly within this.

36. In all sectors supported by ADB, including transport, the COS emphasized the use ofmarket-based approaches to improve economic efficiency. This included (i) improving policy,legal, and regulatory frameworks; (ii) using pricing mechanisms to provide market-based signals;(iii) encouraging competition and growth of the non-state enterprise or private sector; and

(iv) commercializing operators so that they would respond to market forces.

37. Much of the focus of the COS was retained in the 2003 CSP. By that time, ADB had adopteda poverty reduction strategy (PRS) that established poverty reduction as its overarching goal.18 Theoverall objective for ADB support under the CSP was to promote pro-poor economic growth byenabling greater access of the poor to the benefits of economic prosperity and opportunity to achieveit. Some 84% of the proposed program was to be spent in the poor interior regions. Transport was tocontribute 61% of lending, focusing mainly on the central and western regions.

38. Roads and railways were important in three of the four areas of focus of the CSP. Thesewere (i) promoting equitable and inclusive growth, (ii) making markets work better, and(iii) fostering regional cooperation.19 Support for roads and railways was again to focus mainly on

removing infrastructure bottlenecks, but with increased emphasis on policy and institutionalreform to improve cost recovery and governance, introduce competition, improve efficiency, andcreate opportunities for private sector participation.

16The other major challenges were (i) creating a stable and efficient macroeconomic environment to foster rapid,sustainable, and noninflationary growth; and (ii) developing the legal and regulatory framework needed for a marketeconomy.

17The third COS objective was to enhance environmental protection and natural resource management.

18ADB. 1999. Fighting Poverty in Asia and the Pacific: the Poverty Reduction Strategy. Manila.

19The fourth focus area was promoting environmental sustainability.


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39. While the COS offered little guidance on the strategy for nonlending assistance, the CSPrecognized that nonlending assistance would be an increasingly important element of ADBsupport. Since ADBs resources were small relative to the PRCs overall investment needs, ADBshould focus more on assisting the PRC through knowledge transfer and strategic and policyinfluence, rather than through financial transfers alone.20 The CSP also said that nonlendingsupport, including TA, should be aimed at strategic niches for long-term ADB assistance that had

strong Government commitment and ownership. This would require ADB to develop improvedmechanisms to disseminate findings and lessons to senior PRC leaders, developmentstakeholders, the private sector, and academia.

B. ADB Sector Strategy and Program

1. ADB Strategy and Priorities

40. ADBs seven priorities in the roads subsector were (i) constructing roads connectinggrowth centers with hinterland economies; (ii) strengthening and commercializing expresswayorganizations; (iii) improving highway standards (COS only); (iv) establishing efficient pricingpolicies; (v) introducing alternative investment financing mechanisms, including private sector

participation; (vi) improving road safety and lessening environmental impact (including reducingvehicle emissions); and (vii) integrating the NTHS with a system of feeder roads to provideaccess for the local population.

41. ADBs six priorities in the railway subsector were (i) constructing new railway lines in less-developed and poor areas (the COS focused specifically on provincial lines); (ii) increasingcapacity on existing routes (COS only); (iii) modernizing railway technology; (iv) improvingoperational and managerial efficiency and commercializing operations; (v) diversifying sources ofinvestment financing through private sector participation and other methods (COS only); and(vi) improving rail competitiveness by restructuring and reforming policy (CSP only).

42. There was a high degree of consistency in ADBs strategic priorities for roads and

railways over the study period. These were closely linked with the overall country-level objectivesand priorities set by the COS and CSP, and changed little over the period. A comparison ofpriorities in the road and railway subsectors under the COS and CSP is in Table 2.

20The Governments decision to establish an annual ceiling of $1.5 billion for ADB lending during the period covered bythe 2003 CSP provided an indication that it no longer required ADB financing but still valued ADB nonlendingassistance and recognized that, in order to receive such assistance, it needed to continue receiving a certain level ofADB lending.


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Table 2: ADB Strategic Priorities for the Roads and Railway Subsectors in the PRC

Country Operational Strategy 1997-2003 Country Strategy and Program 2004-2006

1. Road Subsector

(i) Construction of expressways and highways

connecting major growth centers and promotinglinkages with hinterland economies

(i) Constructing roads that connect major

growth centers and improve access in thewestern and central regions(ii) Institutional strengthening to increase the

commercial orientation and managerial efficiency ofexpressway organizations

(ii) Strengthening the corporatization andcommercialization of expresswayorganizations

(iii) Improvement of highway planning, evaluationtechniques, and safety standards

(iv) Adoption of appropriate pricing policies to ensureoptimum utilization of road transport capacity

(iii) Adopting appropriate pricing policies toensure optimum use of road transportcapacity

(v) Utilization of alternative methods of investmentfinancing, including private sector participation tomeet the huge financing requirements of thehighway development program

(iv) Using alternative methods of investmentfinancing, including private sectorparticipation

(v) Promoting road safety and vehicle emission

reductions

(vi) Promotion of road traffic safety and vehicle

emissions reductions(vi) Addressing traffic safety and environmental

issues(vii) Integration of the network so that the National

Trunk Highway System (NTHS) is supported by asystem of feeder roads that provide access for thelocal population to the main economic centers

(vii) Integrating the network so that the NTHS issupported by a system of local roads,particularly those that provide access to poorareas

2. Railway Subsector

(i) Expanding the railway system through theconstruction of important provincial lines, includingthose that will indirectly contribute to the reductionof poverty in the less developed inland provinces

(i) Expanding the railway system byconstructing new lines in unserved, less-developed, and poor areas

(ii) Increasing the capacity on key routes of thenational railway system

(iii) Modernizing railway technology, including use ofenergy-efficient and faster locomotives, improvedtelecommunications and signaling, and introductionof computerized reporting and record-keeping

(ii) Modernizing and increasing the capacity onkey routes of the national railway system toimprove transport efficiency

(iv) Improving the operational and managerial efficiencyand commercial orientation of railway companies

(iii) Commercializing railway operations tosustain efficient operations

(v) Diversifying sources of investment financing,including greater private sector participation

(iv) Increasing railway competitiveness in thetransport sector by restructuring and byreforming policy

Sources: ADB. 1997. Country Operational Strategy Study: Peoples Republic of China . Manila; and ADB. 2003.Peoples Republic of China Country Strategy and Program (2004-2006). Manila.

2. Link between ADB Strategy and Government Needs

43. ADBs strategic priorities for highways were well aligned with the five challenges for thePRCs highways subsector identified in Chapter II. ADBs overall focus on the NTHS wasconsistent with the high priority attached to the NTHS by the Government. By providing supportfor the NTHS, ADB was able to promote good practices in the process of deciding thecomposition of investments (although the quantity and choice of investments were generallybeyond ADBs influence). The focus on interior provinces and later on central and westernprovinces fit in with the Governments NFYP and TFYP, as well as with ADBs PRS. The strategicpriority ADB gave to linking the NTHS to a system of local roads and feeder roads was in line with


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the increased importance the Government attached to improving the secondary, tertiary, andquaternary road networks. The initial priority given to supporting technical standards was inkeeping with the PRCs need to get these right as it scaled up the NTHS. ADBs emphasis onexpressway corporatization and commercialization, efficient pricing policies, and alternativefinancing mechanisms also fit in with the Governments need to pay for the NTHS. ADB wasinitially somewhat ahead of the Government in attaching priority to road safety and vehicle

emissions; this provided an opportunity to influence areas that only started receiving Governmentattention by the second half of the study period.

44. As Figure 1 indicates, ADB support was modest compared with the overall magnitude ofthe NTHS. It, therefore, could not address all the major challenges of the road subsector. ADBhad relatively little involvement in the issue of gearing up highway construction capacity at thesector levelapart from the demonstration effect of using international competitive bidding (ICB)on ADB-financed investments. In practice, the Government was able to expand capacity withoutoutside support.

Figure 1: Comparison of ADB Roads Lending with Total Investment in Trunk Highways inthe Peoples Republic of China, 19982004

0

5

10

15

20

1998 1999 2000 2001 2002 2003 2004

$

billions

0%

1%

2%

3%

4%

5%

6%

7%

Trunk

highw ays

investment

ADB lending

as % of trunk

highw ays

investment

Source: Operations Evaluation Mission.

45. In the railway subsector, ADBs strategic priorities were also well aligned with the PRCsneeds. ADBs overall focus was on building new railways using modern railway technologies. Itsupported the Governments need to rapidly increase railway capacity in order to reduce thepersistent gap between demand and supply. ADBs priority of improving efficiency and commercialorientation, and its emphasis on restructuring and reforming policy, were well matched to the PRCsevolving institutional reforms in railways. Initially, under the COS, ADB focused on modernizingstructures and providing incentives by supporting LJVRs (this was the continuation of a previousstrategy). The idea was that LJVRs would become models for demonstrating the merits of applyingcommercial approaches to railways. Later, when the Government signaled its intention to pursuemajor reform of the national railways, ADB (through the CSP) redirected most of its railway supportfrom LJVRs to the national railways. ADB support in this area included efforts to lay the foundationsfor introducing competition in railway operations.

3. Consistency between ADB Strategy and ADB Program

46. In both the road and railway subsectors, ADBs strategy was consistent with the actualprogram of loans and TA projects it provided. This reflects that in both subsectors theGovernment had well-defined, long-term investment programs in place that were used as a basisfor proposing individual activities for ADB support. ADB recognized the merits of theGovernments programs and remained committed to assisting them throughout the study period.


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a. Roads

47. In the roads subsector, the ADB lending program focused on financing construction ofnew tolled, access-controlled expressways under the NTHS. Most of the road projects under theCOS and all of those under the CSP were located in the poorer central and western provinces.

48. Besides civil works, RRPs for road projects highlighted a number of additional featureslinked to ADBs subsector strategic priorities. These special features of road projects during thestudy period are summarized in Table 3.

Table 3: Special Features Highlighted in Reports and Recommendations of the Presidentfor ADB Road Projects in the PRC, 19972005

Approval

Year Project NameLoanNo.

ApprovedLoanAmount($ million) C

orpo

ratization

PricingandCost

Recov

ery

Link/L

ocalRoads

AxleL

oadTesting

RoadSafety

Vehicl

eEmissions

PovertyMonitoring

Roads

ideStations

TransportServices

1998 Hebei Roads Devt. 1617 167.1a

1998 Chengdu-Nanchong Expressway 1638 250.0a

1998 Changchun-Harbin Expressway 1641/2 233.3a

1999 Southern Yunnan Road Devt. 1691 250.0a

1999 Shanxi Road Devt. 1701 241.1a

2000 Chongqing-Guizhou Roads Devt 1783/4 320.0

2001 Shaanxi Roads Devt. 1838 250.0

2001 Guangxi Roads Devt. 1851 150.0

2002 Southern Sichuan Roads Devt. 1918 300.0

2002 Shanxi Road Devt. II 1967 124.0

2003 Ningxia Roads Devt. 2004 250.0

2003 Western Yunnan Roads Devt. 2014 250.0

2003 Xi'an Urban Transport 2024 270.0

2004 Hunan Roads Devt. II 2089 312.5

2004 Guangxi Roads Devt. II 2094 200.0

2004 Gansu Roads Devt. 2125 300.0

2005 Central Sichuan Roads Devt 2181 600. 0

2005 Hunan Roads Devt. III 2219 208.0

Devt. = development.Note: = significant; = minor.a

Actual loan amount at project completion.Sources: Asian Development Bank loan documents.

49. Some features were consistently followed by all projects. These were embedded in thescope and implementation model adopted for supporting expressways: (i) commercialization,corporatization, and private concessioning of expressway management and operations; (ii) pricingand cost recovery; and (iii) inclusion of local roads to increase the poverty reduction impact ofexpressways. Items (i) and (ii) generally involved establishing a separate toll corporation to buildand operate the expressway along commercial lines. These were important features, especially


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earlier in the study period when the PRC was still gaining familiarity and confidence with usingcommercial approaches. Item (iii) was a requirement from ADB to try to maximize the povertyreduction impact of expressways by including spur links and local roads feeding into the hinterland.This reflected the attention ADB was giving to further orienting its operations toward povertyreductionthis was particularly evident immediately before and during the first 2 years of the PRSapproved in 1999. Expressways were a challenging case because their poverty reduction impacts

are indirect and difficult to quantify. The solution adopted in the PRCbut seldom in otherdeveloping member countries (DMCs)was to attach local roads as these had more tangible,quantifiable poverty reduction impacts, and could be targeted at poor communities. On average, thelink- and local-roads component of ADBs PRC expressway projects accounted for about 5% ofbase cost.

50. Other special features were added incrementally during the study period. These were(i) axle load testing, (ii) road safety at project and provincial level, (iii) control of vehicle emissionsat project and provincial level, (iv) poverty monitoring, (v) inclusion of roadside stations toenhance the local development impact, and (vi) support for improving competition and theregulatory framework for transport services. Some of these features attempted to address issuesat the project level, particularly items (i), (ii), and (iii). These were consistent with ADBs subsector

strategic priorities, but were often short-lived and small in scope, so their effectiveness as astrategy repeated over successive projects was questionable. In most cases, the support for axleload testing and emission control was limited to procurement of a small amount of equipment forinstallation on expressways. Road safety support was usually limited to conducting a road safetyaudit of the project roadssomething that was becoming a standard feature of road PPTAprojects, and only required a short input for review by a qualified road safety engineer. For ADBto have had more influence on such issues would have required a provincial- or national-levelfocus, and a sustained commitment over an extended period.

51. The more recent inclusion into projects of features related to competition and regulation inthe transport services industry sought to address these issues at the provincial level. This was anappropriate focus since transport services are regulated by provincial governments. It is also a

useful area for ADB support because the efficiency of transport services helps determine thebenefits of transport improvements to users, in particular the poor. The small scope and shortduration of this supportwhich mainly takes the form of consulting servicesmeans that it is toosoon to determine whether an effective intervention strategy is being pursued. Reform oftransport services is complex and politically sensitive, and may require a sustained involvementover an extended period.

52. The project features for poverty monitoring and roadside stations again reflected theinfluence of the PRS. Faced with the difficulty of quantifying the poverty-reduction benefits ofexpressways, ADB built in other poverty-related features. Increasingly detai

roads and railways in people's republic of china

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