Report No. 10592-CHA

China's Railway StrategyFebruary 25, 1993

Transport Operations DivisionChina and Mongolia DepartmentEast Asia and Pacific Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(As of January 1993)

Currency name = RenminbiCurrency unit = Yuan (Y) = 100 Fen

$1.00 = Y 5.75$0.174 = Y 1.00

FISCA'. YEAR

January 1 - December 31

WEIGHTS AND MEASURES

ctkm = converted t"m or traffic unit (1 pkm = 1 tkm)km - kilometer [- 0.621 mile (mi)]mp = million passengersmpkm = million passenger-kilometersmppy 5 million passengers per yearmt million tonsmtkm - million ton-kilometersmtpy = million tons per yearntkm = net ton-kilometerpkm = passenger-kilometer (= 0.621 passenger-mile)tkm = ton-kilometer (= 0.621 ton-mile)

A1BREVIATIONS AND ACRONYMS

6FYP - Sixth Five-Year Plan (1981-85)7FYP - Seventh Five-Year Plan (1986-90)8FYP - Eighth Five-Year Plan (1991-95)9FYP - Ninth Five-Year Plan (1996-2000)ECO - Expanded Cofinancing OperationGDP - Gross Domestic ProductGNP - Gross National ProductMIS - Management Information SystemMOF - Ministry of FinanceMOR - Ministry of RailwayMPT - Ministry of Post and TelecommunicationsOECF - Overseas Economic Cooperation FundPSO - Public Service ObligationRIS - Railway Investment StudySPC - State Planning CommissionTMIS - Transport Management Information SystemUNDP - United Nations Development Program

FOR OFFICIAL USE ONLY

CHINA'S RAILWAY STRATEGY

Table of Contents

Page No.

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . v

I. TRANSPORT DEMAND AND SUPPLY . . . . . . . . . . . . . . . . . . 1

A. Past Trends of Transport Demand . . . . . . . . . . . . . . 1Traffic . . . . . . . . . . . . . . . . . . . . . . . 1Unsatisfied Demand . . . . . . . . . . . . . . . . . . . 2Total Demand . ...... . . . . . . . .. . . . 4

B. Future Demand for Transport . . .. . . . . . . . . . . . . 4Total Transport Demand .... . . . . . . . . . . .. 4Railway Transport Demand .way.ra..o . .t.D ..m.a.n.d. 5

C. Development of the Transport System . . . . . . . . . . . 5Size of the Transport System . . . . . . . . . . . . . . 5System Bottlenecks . . . . . . . . . . . . . . . . . . 6

D. Transport Demand and Supply Management . . . . . . . . . . 7

II. THE RAILWAY SYSTEM TODAY ...... 9

A. Traffic and Traffic Allocation . . . . . . . . . . . . . . 9B. Management and Relationship with the Government . . . . . . 10

Organization . . . . .. . . . . . . . . . 10Role of the Government . . . . . . ...... . . . 10

C. Finance, Tariffs, and Investment . . . . . . . . . . . 11Profitability and Tariffs . . . . . . . . . . . . . . . 11Planning and Investment . . . . . . . . . . . . . . . . 12

D. Maintenance . . . . . . . . . . . . . .. . . . 14E. Comparison with Other Railway Systems . . . . . . . . . . . 15

System Size and Transport Output . . . . . . . . . . . . 15Productivity of Track, Equipment, and Labor . . . . . . 16Transport Management Structure . . . . . . . 16

This report is based on extensive discussions between the Ministry of Rail-ways' staff and the Bank's railway team during an October 1991 identificationmission, a March 1992 preappraisal mission, and a June/July 1992 appraisalmission for the proposed Sixth Railway Project. The missions membersincluded: Victor Alalouf, Philip Anderson, David Butcher, Peter Cook, HennieDeboeck, William Harris, Nikola Holcer, Omar Jung, Emile Karman, Udo Marggraf,Robert McAfee, Mohammed Rasheed, Louis Thompson, W.H. Thompson, Lee Travers,Shunso Tsukada, Thawat Watanatada, and Huikang Xu. The report was writtenprimarily by Thawat Watanatada (Task Manager) and Peter Cook (RIS TechnicalLeader), with contributions from Louis Thompson (Railway Advisor), and others(see Contributions). The Division Chief is Daud Abmad, the Lead Economist isShahid Yusuf, and the Director is Shahid Javed Burki.

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. I

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Paxe No.III. PROGRESS SINCE THE 19809

A. Improving Railway Management . . . . . . . . . . . . . . . 18Railway Law . . . . . . . . . . . . . . . . . . . . 18Economic Contract ................ ......... 18Decentralization in the Railway System . . . . . . . . . 18Incentive Pay Systems . . . . . .......... 19

B. Diversifying into Nonrail Activities . . . . . . . . . . . 19C. Coping with Inflation . . . . . . . . . . . . . . .9 . v 20D. Accommodating Past Traffic Growth . . . . . . . . . . . . . 20E. Meeting Future Expansion Needs . . . . . . . . . . . . . . 22

IV. FUTURE ROLE OF THE RAILWAY .................. 25

A. Major Challenges . . . . . . . . . . * . . . . * * . . . . 25MOR's Transport Businss e . .. . . . ... 25MOR's Nontransport Business . . . . . . . . . . . . . . 26

B. Strengths and Weaknesses of the Railway System . . . . . . 26C. General Strategy for MOR's Transport Business . . . . . . . 27D. Government's Supportive Actions . . . . . . . . . . . . . . 28

V. KEY TASKS FOR MOR'S TRANSPORT BUSINESS . . . . . . . . . . . . 29

A. Achieving More Effective Railway Regulation . . . . . . . . . . 29Promoting Competition ....ti.on . . .................. . 29

Improving the Government's Control of MOR . . . . . . . 30Creating an Independent Regulatory Agency . . . . . . . 31Reforming the Railway Tariff System . . . . . . . . . . 31

B. Bolstering Transport Management . . . . . . . . . . . . . . 33Enhancing Organizational Structure . . . . . . . . . . . 33Rationalizing the Railway System Through Divestiture . . 34Developing Railway Human Resources . . . . . . . . . . . 34Implementing a Management Information System . . . . . . 34

C. Strengthening Railway Investment and Finance . . . . . . . 35Buttressing Investment Planning . . . . . . . . . . . . 35Choosing the Best Means to Expand Railway Capacity . . . 35Improving Railway Financial Management . . . . . . . . . 36Expanding the Scope of Financial Resource Mobilization . 37

D. Enhancing the Quality and Efficiency of Railway Servicesthrough Modern Technology and Techniques . . . . . . . . . 38

Improving Service to Shippers . . . . 38Modernizing Container Transport Service . . . . . . . . 38Upgrading Passenger Service . . . . .. .. . . . . . . 39Raising Operating Efficiency through Better Maintenance 39Boosting Environmental Protection . . . .. . . . . . . 40

VI. MEDIUM-TERM BANK ASSISTANCE STRATEGY . . . . . . . . . . . . . 42

A. The Bank's Contributions in the Past . . . . . . . . . . . 42B. Objectives and Scope of Bank Assistance . . . . . . . . . . 42

CONSRBUTIONS . ... . .... ...... ... .... ... .... .... .... ....... .... 44

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Page No.

TABLE-S

1. China: Freight Traffic by Mode . . . 452. China: Passenger Traffic by Mode . . . . . 463. Transport Investment vs. Economic Output in China . . 474. Number of frOR Staff by Activity Type . . . . .. 485. A.-tual Revenues and Expenses, 1986-91 . . . . . . 496. International Comparison of Selected Railways . . 50

1. Future Demand for Transpor t 51

2. Railway Organization and Staffing Policies . . . 583. Railway Law of the People's Republic of China . . . . . . . . . 624. Railway-Government Relationship . . . . . . . . . . . . . . . . 655. RIS Analysis System . .. . . . . . . . . . . . . . .. . . .- . 67

6. Result of RIS Aoflysi na lysis.... . . . . 737. Railway Track Maintenance n.c. .. .... .. .. 858. Railway Equipment Maintenance . . . . . . . . . . . . . . . . 869. Selected Information on Railway Policy Reforms in the 1980. . . 8710. Su-nary of Ongoing and Proposed Programs of Technical Cooperation

between MOR and the Bank ................... 9111. Possible Contents of Future Railway Projects . . . . . . . . . 9512. Suummary of Objectives of Components of MOR-Bank

Railway Projects . . . . . . . . . . . . . . . . . . . . . . . 9713. Timing of Possible Actions Under MOR-Bank Cooperation . . 98

CHARTS

C.1 General Organization Chart of the Ministry of Railways . . . . 99C.2 General Organization Chart of the Government of China . . . . . 100

TABLES IN TEXT

TI International Comparison of Government-sponsored TransportInvestment a & * 7

T2 Percentage Breakdowns of Alternative Railway Investment Programsfor 8FYP (1991-95) . . ................... 22

FIGuS in TEXT

Ti Trends for Satisfied Demand, Unsatisfied Demand, and TotalDemand for Freight Transport (All Modes) . . . . . . . . . . . 2

T2 Trends for Traffic by Mode .................. 3T3 International Comparison of Land Transport Networks . . . . . . 6T4 Trends in Utilization of Chinese Railway Assets (1980-91) . . . 21

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MAPS

M.1 Total Freight Traneport Demand Between Regions in 1989 (IBRD 24531)1.2 Total Freight Transport Demand Bet:ween Regions in 2000 (IBRD 24532)M.3 China Railway System (IBRD 24578)M.4 Railway Bottlenecks in '989 (IBRD 23817R)M.5 Railway Organization (IBRD 23792)M.6 RIS Preferred Railway Investment Package (Low Inventmernt) (IBRD 23816R)4.7 RIS Preferred Railway Investment Package (Higi. Investment) (IBRD 24618)M.8 Railway Bottlenecks in 2000 Under RIS Preferred Package (IBRD 24624)

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CHINA'S RAILWAY STRATEGY

Executive Summary

i. The main objectives of this paper are: first, to contribute to theMinistry of Railways' strategies for the 1990ss and second, to provide a basisfor Bank assistance to China's railway system in the next five years. Thepaper provides a background on the transport sector, with a primary focus onthe railway system, describing the system as it stands today and the progressit has made since the 1980s in modernization and reforms. As China is rapidlyevolving into a market economy, the paper discusses the main challenges therailway system now faces, as well as the major tasks that need to be done tomeet these challenges, and how the Bank plans to assist the Ministry of Rail-ways in performing these tasks.

ii. Intercitv Transiort Problems. The capacity of the intercity trans-port system in China has become increasingly insufficient slnce the mid-1980sto handle the volume of intercity freight and passenger trafiic, as evidencedby the growth of bottlenecks on the transport system, the rationing of trans-port capacity on railway lines, and the poor quality of service experienced byshippers and passengers. The inadequacy of transport capacity is mainlycaused by two factors: (a) the rapid growth of traffic since the onset ofeconomic reforms in 1979 (averaging 8 percent per year for freight and 12percent per year for passengers during 1979-89)s aud (b) past underinvestmentin transport infrastructure.

iii. The Railway System. Given its vital role in the country's economicand social fabric, the railway system is often regarded by the Chinese as "thebackbone of China." For both economic and historical reasons, the railwaysystem is the dominant mode of intercity transport in the nation: it carriesmore traffic than all other modes combined. Economically, the Chinese rail-ways enjoy economies of scale that result in low costs of rail transport perpassenger-km and ton-kl compared with road transport and some river transport.Historically, the competitiveness of the Chinese railways has been reinforcedby decisiono of the national government before 1978 to allocate more invest-ment funds to railways than to highways and waterways. However, from 1978 to1991, the government moved its emphasis away from the railways in favor ofother modes. Since 1992, the government has shifted the emphasis back to therailways and given top priority to railway development.

iv. Despite its size, the Chinese railway network provides little cover-age for China's population and land area. The network's coverage, be it mea-sured in terms of total route length per capita or total route length per unitof arable land area, is one of the lowest in the world--lower than the cover-age provided by railway networks in Russia, India and Brazil. The railwaysystem is intensely used and ranks only second to Russia in the amount ofcombined freight and passenger traffic per route-km of track.

v. The Ministry of Railways is charged with administering the nationalstandard-gauge railway network, comprising about 53,000 km of main routes.MOR employs about 3.4 million persons. It is a profitable operation, respon-

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sible for financing all of its operating and capital expenditures (throughboth self-go-nerated funds and borrowings on market terms). Although NORemploys relatively old technology, its equipment and plant utilization isamong the world's highest. MOR is well managed and has a disciplined workforce.

vi. Since the early 1980s, MOR has undergone a number of changes to:(a) make its relationship with the government more effective, through enact-ment of a Railway Law to provide a framework for railway regulation and intro-duction of an economic contract compr.sing (i) a financial responsibilitysystem that gives MOR a higher degrec of financial autonomy; and (ii) anincentive system tl.at ties staff salaries to their productivity; (b) boost itsinvestment and financial planning capability; (c) strengthen its internalmanagement through decentralization of executive powers; and (d) modernize itstrack, equipment, and information technology. These changes have helped MORserve the economy more b_,ectivel,.

vii. MOR's General Market Strategy. The next decade is likely to seehighway, waterway, and civil aviation mount increasingly serious competitionagainst the railway system in both price and service. Highway transport isexpanding rapidly with more high-quality roads and more modern trucks andbuses, which provide competitive services over short to medium distances.Waterway transport is modernizing to include container transport in thecoastal and river delta areas where it is highly competitive in servingimport/export traffic. Air transport is growing fast with more modern air-craft and the birth of regional airlines to encourage competition. As aresult, the railway system will likely lose some of its traffic. Some long-distance railway passenger traffic is likely to divert to civil aviation,while short- and medium-distance traffic comprising both passenge-7s and lightmanufactured products are likely to shift to highways and waterways, espe-cially in coastal areas or where modern highways run parallel to railways.

viii. Yet, the present dominance of the railway in the Chinese transportsystem, combined with the expected strong growth of the Chinese economy andrecent technology gains in railways, ensures a continuing major role for rail-way transport over the next 20 years and beyond, particularly for bulk andsemi-bulk commodities over medium to long distances and for long distancepassenger traffic. To fulfill its role as a provider of public transportservices, MOR should strive to (a) provide a range of safe and adequate trans-port services that meet customer needs on a commercial basis; (b) controlcosts and refrain from exercising its monopoly power at the expense of thepublic; and (c) maintain financial self-sufficiency, i.e., being able tofinance all of its operating costs and capital investments, the latter mostlythrough self-generation of cash but also through capital market borrowing.

ix. In so doing MOR should focus on the categories of traffic where therailway has a comparative advantage:

(a) medium- to long-distance bulk traffic, especially in unit trainloads or multiple carloads (and at the same time let truck transportpick up more of short- to medium-distance general merchandise traf-fic, with less-than-carloads or single-carload);

- vii -

(b! container traffic, with door-to-door services in full cooperationwith other modes5

(c) medium- to long-distance passenger traffic (potentially incluidingsome with high-speed services); and

(d) high-volume suburban rail commuter service.

x. Key Issues. To effectively serve the broad tiansport markets out-lined above, MOR must successfully meet new challenges in a rapidly changingmacroeconomic environment. Among the major issues facing MOR in the 1990s,the two most important ones relate to expansion and regulation/management ofthe ,ailway system. These issues are becoming more urgent as China's movetoward a market economy is being accelerated by the current new surge of eco-nomic reforms.

xi. A first issue is the concern that the planned expansion of railwecapacity will not satisfy the growth of railway transport demand through th,year 2000. Although the Chinese government hac recognized the vital impor-tance of expanding the railway to support future economic growth, the cur-rently planned railway network capaclty still may not close more than half ofthe anticipated gap between railway transport demand and supply in the year2000, if China's economy grows at a rate similar to that in the 1980s (8 to9 percent per year). This is expected to cause a loss in economic output of0.5 to 1 percent of GNP. The supply problems have two sources: first, thereis less than optimal use of the existing capacity of the railway system due tothe lack of modern operating and planning tools; and, second, an inadequatelevel of capacity expansion inveetment (Y 40-60 billion below needs) is now inthe plans supported by the national government. These problems have been com-pounded by an inadequate level of railway tariffs and surcharges, which evenafter a major increase in July 1992 is still barely enough to finance themodest railway investment program currently planned. This situation isimproving as a result of recent actions taken by the government and MOR in:(a) developing and applying a decision support analysis system (with WorldBank support) under a Railway Investment Study (RIS); (b) raising the economicgrowth rate for planning from 6 percent per year to 8 to 9 percent; and(c) boosting a surcharge on freight traffic to build up an earmarked RailwayConstruction Pund. However, the threat of growing economic 1088 still existsif more essential actions are not taken to meet the growing needs.

xii. The RIS analysis syst6m has shown that there is significant acopefor improvement in system throughput: about 10 percent through improvedfreight routing procedures and another 10 percent through optimization of thescale, location and timing of investments for rail capacity expansion. RISresalts have also suggested that a different mix of investment from currentlyplanned would yield better results; specifically, they show substantial bene-fits for a shift of resources from new line construction to electrificationprojects which yield twice as much capacity per yuan of investment.

xiii. A second issue is the concern that the existing framework of railwayregulaticQ and the existing system of railway transport management do not giveNOR enough flexibility to price and market railway transport services inresponse to increasing competition from other modes and to changing customer

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needs. Government controls currently restrict MOR's ability to price servicesand its ability to provide new services in response to demand. These controlswill only conetrain MOR's scope of action in responding to market conditions.

xiv. Rev Tasks for MOR's Trans2ort Business. To resolve the two keyissues raised above, as well as other issues related to policy and managementreforms and to systemwide technological modernization, MOR needs to undertaketasks in four major areas--railway regulation, internal management, investmentand finance, and railway technology and techniques.

xv. Achieving more effective railway regulation deals with measures fort

(a) promoting competition--by rationalizing transport pricea acrossmodes, relaxing controls of market entry, developing infrastructurenetworks equitably for all modes, and encouraging competiticn withinthe railway system;

(b) improving the government's control of MOR--by enhancing the economiccontract between MOR and the government with (i) more emphasis onquality of railway service, (ii) closer integration of the contractwith the railway strategic plan tied to the country's macroeconomicpolicy and forecasts, and (iii) reinforcement of the contract withgovernment actions such as improving the materials distributionsystem in order to enable MOR to fulfill its economic and socialrole in a more cost-effective way;

(c) creating an independent regulatory agency--mainly to monitor andpublish MOR's performance statistics in areas that are important tothe government and the public, including profitability, safety, andservice quality; and

(d) reforming the railway tariff system--by (i) raising the railwaytariffs and surcharges to a level needed for MOR's financial self-sufficiency, (ii) removing distortions in the tariff system throughproper costing of rail services, and (iii) allowing MOR the neededflexibility to set rail tariffs (within constraints) ir. response tomarket conditions.

xvi. Bolsterina transport management involves measures for:

(a) enhancing the organizational structure of MOR's transport business--by sharpening the financial accountability of railway managers, andfocusing personnel incentive systems less on meeting physical outputtargets and more on meeting service quality standards (while ensur-ing that MOR's already high physica:: efficiency of operations willnot be jeopardized);

(b) rationalizing the railway system through divestiture, to improvemanagement efficiency and foster competition--by spinning offselected nontransport functions, potentially including railway con-struction and manufacturing, "diversified economy" activities, andhealth, education, and housing functions;

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(c) developing railway human resources--by providing (i) compensationpolicies, and (ii) further training of railway staff to meet theneeds of a market-economy railway; and

(d) implementing a railway management information system--Dy providingrailway managers at different level3 with the right kinds of finan-cial, operating, and service performance information needed to moni-tor and control railway operations and to make well-informed deci-sions.

xvii. Stretnathening railway investment and finance covers measures for:

(a) buttressing railway investment planning--by employing more exten-sively modern analytical tools and adopting transport demand fore-^asts that match more closely the economic growth prospects;

(b) choosing the best means to expand tAilway capacity--by (i) bettermatching the scale, timing, and location of railway investment tofuture traffic patterns, (ii) adopting more cost-effective operatingpolicies and technologies for track and rolling stock, and(iii) improving freight routing patterns to decrease the totalton-km volume of freight traffic to be carried by the railway system(para. xii);

(c) improving vailway financial management--by (i) revamping MOR'saccounting system to make it conform better with international prac-tices, (ii) estaslishing a costing system for proper tariff settingand financial controls, (iii) strengthening financial planning andreporting to foster accountability, and (iv) improving the use ofscarce foreign exchange; and

(d) expanding the scope of financial resource motilization to fundneeded railway investment--by tapping funding sources other thantariff revenues and current creditors, for example, by making jointinvestments with other investors, and through borrowing from foreigncapital markets (e.g., through the Bank's Expanded Cofinancing Oper-ations (ECOs)].

xviii. Enhancina the gualitv and efficiency of railway services throughmodern technologv and techniques entails measures for:

(a) improving service to shippers--by providing more responsive and morereliable service to shippers, with the help of a computer-basedTransport Management Information System (TMIS) currently underimplementation;

(b) modernizing container tran port service--by providing a morecustomer-oriented, door-to-door service with higher frequency,faster travel times, and greater reliability, in close coordinationwith other modes;

(c) upgrading passenger services--by (i) installing a computer-basedpassenger reservations system on a networkwide basis, (ii) monitor-

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ing and enforcing customer service standards, (ii) providing cus-tomer information systems for customers, and (i:) improvingon-ground and on-train services;

(dj raising operating efficiency through better maintenance--by improv-ing the design and manufacturing technology for critical equipmentparts, reducing the number of designs and models of locomotives,modernizing trar monitoring technology and mechanizing track main-tenance, etc.;

(e) boosting railway environmental protection--by (i) btrengtheningMOR's capability for environmental assessment, monitoring, and con-trol, and (ii) developing strategies and action plans for solvingrailway pollution problems (e.g., pollution related to passengertrains).

xix. ?edium-Term Bank Assistance Stratezy. Since 1983, the Bank hasassisted the government through five national railway operations and one localrailway operation, totaling $1,365 million in loans and credits. The primaryobjectives of the first four national operations were to finance railway con-struction to expand traffic capacity in high-priority corridors and to intro-duce new technology for improving railway operating efficiency. The fifthnational operation began a new approach of supporting railway policy reformsand technological modernization on a systemwide basis. Future railway opera-tions in the medium term (i.e., the next five years) are intended to implementthe new "policy-technology" approach more extensively.

XX. Under this approach, the Bank would support MOR in four major areas.First, the Bank would help MOR formul&te and implement a variety of policyinitiatives, such as to strengthen railway investment planning, reform therailway tariff system, and revamp the railway accounting system. Second, itwould help MOR undertake institutional development of the railway system,potentially in the areas of manpower development and rationalization, divesti-ture of nontransport functions, corporate strategies for railway constructionand manufacturing, etc. Third, it would help MOR finance investment programsto expand railway capacity (determined on an economic basis). And fourth, theBank would continue to help MOR modernize its technology on a systemwide basisrelated to management information systems, computer and telecommunicationsequipment, plant and equipment maintenance, and environmental protection.

CHINA'S RAILWAY STRATEGY

I. TRANSPORT DEMAND AND SUPPLY

1.1 Over the past decade, transport demand has grown faster than thesupply of transport services and infrastructure in all modes in China, therebycreating major bottlenecks in the transport system. The explosive growth ofthe Chinese economy has been reflected in the demand for transport while theexpansion and modernization of the transport infrastructure and services havebeen proceeding at a slower pace. This chapter first discusses the evolutionof transport demand, then the growth of supply, followed by the implicationsof system bottlenecks fv, the railways.

A. Past Trends of TransDort Demand

1.2 Traffic represents the part of demand that is satisfied by thetransport system. In a situation of transport system shortages, there is alsounsatisfied demand in locations where potential shippers and passengers areunable to find a means of transport. This has been a problem particularly formedium- to long-distance transport in China. As discussed below, the growthof total demand for transport can be estimated by combining the data on growthof traffic (i.e., satisfied demand) with information on unsatisfied demand.

1.3 Traffic. Since 1979, despite supply constraints, China has experi-enced very rapid growth of traffic, consistent with the rapid expansion of theeconomy, which averaged about 8.8 percent par year in real GDP terms during1979-91. In this same period, total freight traffic (in ton-km) on all modesincreased by 7.3 percent per year and passenger traffic (in passenger-km) grewby 10 percent per year 1/ (Figure Ti; Tables I and 2). This growth trendtapered off in later years as the supply constraints became more severe,transport prices were increased, and the growth of the economy slowed tempo-rarily during the stabilization period of 1989-91. Increases in passenger andfreight traffic flows between provinces represent a large portion of thegrowth in interprovincial trade and related transport demand in the pastdecade. The fastest growth in demand for transport has been between therapidly growing provinces along the east coast (especially Guangdong provinceand those provinces that surround Shanghai) and along the routes connectingthese areas with the other regions of the country and the outside world. Theflows of coal from the provinces in the Coal Base (Shanxi, Shaanxi, and InnerMongolia) represent the largest of these flows (Map M.1) and have been growingthe fastest of all longer-distance freight traffic flows (about 50 percentfaster than average rail freight growth). Linkages for input materials andindustrial products from the northeast and southwest have also increased sig-nificantly9 along with manufactured goods shipped from the high growth areasto other regions. Because these freight flows travel relatively long dis-tances, the demands on the capacity of the interprovincial transport system

I/ Both freight and passenger traffic includes transport by railway, high-way, inland and coastal waterways, and air; freight traffic also includestransport by pipeline.

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have been increasing significantly and have a significant impact on a largepart of the national transport system.

Figure TI: TRENDS FOR SATISFIED DEMAND, UNSATISFIED DEMAND, AND TOTALDEMAND FOR FREIGHT TRANSPORT (ALL MODES)

2,400 -

S2,200- nsatisfied .1,00 -DemandC~2,00O-OO .+H+PH

E

0110

| 1,600-* S~~~~atsfied

1,2000- -| , - --

1985 1986 1987 1988 1989 1990 1991 1992

Year

1.4 Railway freight and passenger traffic grew rapidly during 1979-88,

averaging annual rates of 6.3 percent for freight and 11.6 percent for passen-

gers, but experienced setbacks during 1989-91 that temporarily prevented the

bottlenecks from worsening (Figure T2). However, the growth of railway trans-

port demand is expected to increase again in the future. The growth of rail-

way freight traffic dropped to 3.6 percent per year during 1989-91, as a

result of two factors: first, a series of rate increases during 1990-91

totaling about 40 percent; and, second, bottlenecks on key railway lines

blocking additional traffic flows between many distant pairs of crigins and

destinations that did not have alternative routes with available capacity.

Railway freight traffic is expected to grow faster as railway tariffs stabi-

lize and the key bottlenecks are removed. In 1992, a year in which railway

tariffs went up 35 percent in July, railway freight traffic grew an estimated

5.5 percent. Railway passenger traffic dropped by 7.3 percent in 1989 and a

further 16.2 percent in 1990, following the introduction of administrativecontrols on personal travel in mid-1989, as well as sharp fare hikes in Sep-

tember 1989 that averaged 112 percent. Intercity passenger travel by railway

is expected to regain its higher growth in the future as suppressed demand is

released from administrative controls and per capita income increases. In

1992, railway passenger traffic rose an estimated 10.7 percent.

1.5 Unsatisfied Demand. The less visible aspects of the gap between

transport supply and demand are: (a) the unsatisfied rail transport demand

over medium to long distances that was estimated conservatively at a total of

-3-

Fi&ure T2: TRENDS FOR TRAFFIC BY MODE

ailion ton-km

1,000i

400600

| ,m Pipelines T Road N Inland waterway a] Railway

eIl:bn Passenger-km

100

50:

/1~~~~~~' Pasege Traffic

Year

| CPvi Aviation InWaterway teRoad LRailway]

.lion tons of freight in 1989 (9.8 percent of the total potential railtrnsnport demand in tons) 2/ and up to 30 percent of the passenger

ke Annexc 6 for furthetr discussion of unlsatisfied deand. The unstis-.ed demand as a percentage of ton-kin is slightly higher du. to largerLan average haul distances for the unsatsfied dend.

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traffic served for some services; and (b) losses to the economy estimated atup to Y 22 billion per year, equivalent to about 1 percent of 1991 GDP.3/This gap has grown from a very small proportion of total traffic in the early1980G (less than 2 percent of total demand in 1985) to its present level(9.8 percent) at a rate roughly proportional to the growth in the number ofbottlenecks on the national transport network (para. 1.12; Figure Ti).

1.6 Total Demand. The growth in total demand for transport (actualtraffic plus unsatisfied demand) is rising significantly faster than trafficgrowth. The above estimate of unsatisfied demand implies that total demandfor freight transport has grown at a rate approximately 15 percent faster thantraffic (i.e., 8.3 percent per year over the period 1979-91 for total demandcompared with 7.3 percent for traffic). Total demand faded from 1989 to 1991,but returned to its long-term growth trend in 1992 as economic growthincreased (Figure T1). Based on trends in the past 10 years, the elasticityof total demand for freight with respect to GNP is estimated at 0.95 (i.e., itgrows at 95 percent of the GNP growth rate) (Annex 1). The faster increase inpassenger transport demand combined with the greater supply constraints onpassenger trains resulted in a greater increase in unsatisfied demand forpassenger transport than for freight, at least since 1985. The past growthrate of total passenger transport demand is estimated to be in the range of 12to 15 percent per year, i.e., in the same range as growth for relativelyunconstrained road transport (13.9 percent per year from 1979 to 1991). Thisimplies that total passenger transport demand may be growing 30 to 40 percentfaster than passenger traffic growth and that the main constraints are fromrail transport shortages. The elasticity of total demand for intercity per-sonal travel is roughly estimated at 1.5 (i.e., total demand grows at 150percent of the growth of GNP per capita) (Annex 1).

B. Future Demand for TransDort

1.7 Total TransDort Demand. There are both positive and negative fac-tors that determine future total demand for intercity transport. For freighttransport, the major positive factors are growth of the economic output,improvements in the quality of transport service in the aggregate, and growthin interprovincial trade (para. 1.3). The major negative factors for freightare expected increases in the prices of transport and commodities, and ratio-nalization of the commodity distribution system. For passenger transport, themajor positive factors are growth of the per capita personal income, growth ofthe population, an increase in the share of services in the economic output,improvements in the quality of transport services, and relaxation of thetravel restriction policy. The major negative factor for passenger traffic isan expected increase in railway passenger fares.

1.8 Because of the lack of knowledge on the precise relationship betweenthe demand for transport and these factors, future transport demand can onlybe imprecisely predicted. Based on an analysis of these factors with a likely8 percent per year rate of GNP growth, future growth of total transport demand

3/ China Railway Investment Study, Volume II, Yellow Cover version, Ministryof Railways and World Bank, February 14, 1992, pages 8 and 84, andAnnex 6 of this report.

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in the 1990. is expected to be only slightly less rapid than in the 1980.,i.e., about 6 to 8 percent per year for freight and 12 to 13 percent per yearfor passengers. Light industry and manufactured goods are likely to have thehighest growth rates; bulk freight (coal, grain, fertilizers, etc.) has grownat sustained rates of about 6 percent per year, on average, since the start ofeconomic reforms and is expected to continue to grow at slightly lower ratesthan in the past. These growth rates imply that the transport system as awhole will still require substantial expansion of capacity to meet the demand.A large portion of the projected growth in total transport demand is derivedfrom the growth in transport demand between provinces and regions which isincreasing faster than intraprovincial traffic (Maps M.1 and M.2).

1.9 Railway TransDort Demand. Future demand for railway transportdepends on the above factors, as well as on the prices and quality of railwaytransport services relative to those of the other modes. The next decade islikely to see highway, waterway, and civil aviation mount increasingly seriouscompetition against the railway system in both price and service. Highwaytransport is expanding rapidly with more high-quality roads and more moderntrucks and buses, which provide competitive services over short to mediumdistances. Waterway transport is modernizing to include container transportin the coastal and river delta areas where it is highly competitive in servingimport/export traffic. Air transport is growing fast with more modern air-craft and the birth of regional airlines to encourage competition. As aresult, the railway system will likely lose some of its traffic. Some long-distance railway passenger traffic is likely to divert to civil aviation.Some passengers and some light manufactured products by rail over short tomedium distances are likely to shift to highway and waterway, especially incoastal areas or where modern highways run parallel to railways.

1.10 On the other hand, the railway system is generally superior to theother modes with respect to safety, energy efficiency, use of land, and costeffectiveness. It is likely to retain its competitive edge with its low-costservices, particularly for bulk and semi-bulk commodities over medium to longdistances, where in-transit time and service reliability are not a criticalfactor. These commodities account for about 75 percent of railway freighttraffic at present and are expected to sustain a high share in the foreseeablefuture. Also the railway system can guard against much of its high-valuedfreight traffic switching to the competition, by improving its services, espe-cially through the provision of door-to-door container transport services thatuse the railway for line haul transport and the highway for pickup and deliv-ery. The railway system is also likely to be the preferred mode of transportfor passenger traffic over a wide range of medium distances that are too shortfor the airplane to take advantage of its speed and too long for the bus to becompetitive with respect to travel time. Taking these various factors intoaccount, future railway transport demand is forecast to be in the range of4 to 6 percent per year for freight and 10 to 12 percent per year for passen-gers (Annex 1).

C. Development of the Transport System

1.11 Size of the Transport System. The transport system in China hasgrown considerably over the past four decades but it is still relativelysparse. Between 1952 and 1992, the length of the highway network increased

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ninefold to 1,014,000 km, and the length of the railway network more than dou-bled to 53,000 route-km, to cover a large part of China (Map M.3). Despitethis progress, China has one of the sparsest transport networks in the world(Figure T3).

Figure T3: INTERNATIONAL COMPARISON OF LAND TRANSPORT NETWORKS

Railway Networks1,200z .Track Length (km)

per million

3,000 . . . ... ...... Population800 . . l...r7

6...... Track Length ......

20 (km) per 1 0 sq

km arable land.

100

0

Thousands

s tRoad Networks40,

. ~~~~~~Road length (km). ~~~~~~~per million

30 . 7 Population. .. . . . . . . . . .. . . .. . . . . . . .. .. .. . . .

. _ > f ~~~~Road Length. _ ~~~~~~~(km) per 10 sq

20 klin rbeln

1.12 System Bottlenecks. Past growing demand on Chinas's relativelysparse transport network has widened the Sap between the supply and demand for

transport infrastructure and services. The visible manifestations of this gapare: (a) the lack of sufficient, reliable transport service in some regions(especially for heavy goods and bulk commodities such as coal); (b) the exis-tence of transport bottlenecks; and (c) administrative rationing of limitedtransport capacity. Bottleneck links on the railway network, where traffic inat least one direction reaches 95 percent of the design capacity or more,leaped from 7 percent of the network in 1985 to 37 percent in 1989 (Map M.4).While improvements to management and organization in the provision of trans-port services can alleviate the bottlenecks to some extent, the major reasonfor these bottlenecks is the lack of stable, reliable sources of investmentfunds, resulting in underinvestment in transport, which averaged only 1.3 per-cent of GNP during 6FYP (1981-85) and 7FYP (1986-90) (Tables TI, 3) comparedwith 2.0 to 3.8 percent for several other countries with economic growth simi-lar to or slower than China's. An important consequence of this underinvest-ment was that the railway system did not acquire sufficient financing to meetthe demand for its services.

Table T1.1: INTERNATIONAL COMPARISON OF GOVERNMENT-SPONSORED TRANSPORT INVESTMENT

(As a Percentage of GNP)

Transportinvestment

Country Period as percent of GNP

Japan 1964-73 3.5-3.8Korea 1979-81 2.0Brazil 1979-81 2.4India 1980-89 2.4Soviet Union (former) 1980-89 2.8China 1981-85 (6FYP) 1.3

1986-90 (7FYP) 1.3

1.13 Since the administrative rationing of medium- and long-distancetransport capacity in China gives a higher priority to freight than to passen-gers, Chinese travelers have been limited to one of the lowest levels of per-sonal mobility for intercity travel in the world, with about 550 km traveledper capita per year compared with 800 km per capita for India in 1989. Thissituation has improved somewhat for the higher income and business travelers,with expanded air transport capacity since 1990, but it has not improved fastenough to alter the gap between transport supply and demand.

D. Transport Demand and Supplv Management

1.14 There is little doubt that to bridge the gap between transportdemand and supply by the year 2000, the GNP share of transport investment inChina needs to be increased significantly, from the present 1.3 percent to2 percent or more. Without this increase there will be losses to the economydue to congestion costs and lost production--to the tune of 1 percent of GNPor more. This explains why investments to expand the capacity of bottlenecked

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railway lines tend to have very high economic rates of return, often more than30 percent.

1.15 If total transport investment as a share of GNP were to be increasedfrom, say, 1.3 to 2.3 percent, how should the increment be allocated betweenthe railway and the other modes? This question cannot be answered with anydegree of precision without undertaking a large exercise of multimodal invest-ment analysis on a nationwide basis. However, a rough indication may beobtained from the observation that annual railway investments since 1981 haveaveraged about 50 percent of total investment in transport in China. The factthat many key bottlenecks have developed in the railway network suggests thatrailway investments designed to eliminate these bottlenecks may have highereconomic rates of return than investments in other modes of transport. Thisimplies that perhaps more than 50 percent of the investment increment shouldbe made in the railway system.

1.16 Because of the scarcity of capital in China, the investment toexpand transport capacity must be made at minimum possible cost. This shouldbe done through both demand and supply management measures. As to demandmanagement, the government has taken major strides in the last two years byraising the prices of transport services close to their economic long-r-inmarginal costs, so that only relatively small additional adjustments arerequired ln the future. Regarding other demand management measures, the gov-

erument is considering actions to:

(a) rationalize the administrative commodity distribution system toreduce total transport requirements (e.g., by better matching supplyand demand centers, mainly through an expanded role of the market)(para. 4.13); and

(b) improve efficiency in the use of existing rail transport capacity,according to the economic priorities of different types of traffic(where capacity is rationed) (para. 4.14).

Regarding supply management, the government could:

(a) minimize the cost of capacity expansion (per ton-km per year of newcapacity) on a given rail line or yard, by improving operating poli-cies or upgrading transport technology (e.g., by increasing the axleloads on rails) (para. 5.24(a));

(b) maximize the economic benefits of network capacity expansion, byoptimizing the scale, location, and timing of capacity expansionprojects under budget constraints (paras. 2.18-2.19, 5.24(b)]; and

(c) improve freight routing patterns in order to utilize networkcapacity more efficiently, which could add some 10 percent to systemthroughput (paras. 2.18-2.19, 5.24(c)).

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II. THE RAILWAY SYSTEM TODAY

2.1 Given its crucial role in the country's economic and social fabric,the railway system is frequently regarded by the Chinese as "the backbone ofChina." The railway system today encompasses a nationwide, interconnectedstandard-gauge system comprising 4,400 route-km of local railways and 53,000route-km of the national railway network, which is administered by the Minis-try of Railways (NOR) (Map M.3). The national railway system has a locomotivefleet of about 13,800 units, comprising about 5,900 steam, 6,100 diesel, and1,800 electric units. With 1989 being their final year of production, MOR'ssteam locomotives are being phased out by attrition. The railway system alsohas a rolling stock fleet of 27,600 passenger coaches and 370,000 freightcars. Despite its use of relatively old technology, the Chinese railway sys-tem is a physically efficient operation compared to most other railways in theworld. The Ministry of Railways is a profitable operation and receives nocash subsidies from the government. It is responsible for funding all of itsoperating costs and capital investments--through both self-generated funds andborrowings on market terms. With the help of the government, the Ministry hasundergone a number of changes in the past decade, in a long-term process totransform itself from a government organization into a market-oriented entity.This transformation process has resulted in improvements in its regulatory andcontractual relationship with the government; its capability for investmentand financial planning and financial resource mobilization; and the technologyfor its information, track, and locomotive and rolling stock systems. How-ever, the railway system still faces formidable challenges in completing thetransformation.

A. Traffic and Traffic Allocation

2.2 The total volume of combined freight and passenger traffic carriedby MOR ranks third in the world. Coal is the largest item (accounting for40 percent of total tonnage handled by the railway) and a critical source ofenergy for the economy (accounting for 75 percent of all energy consumed inChina). Major commodities that make up the bulk and semi-bulk traffic (coal,grain, petroleum, construction materials, iron and steel products, etc.)account for about three quarters of total freight traffic. The remainingquarter is classified as "miscellaneous." This miscellaneous categoryincludes general merchandise and the types of traffic that can be moved incontainers. Between 1980 and 1990, bulk and semi-bulk traffic on the railwaygrew at 5.9 percent per year, while miscellaneous traffic grew at the higherrate of 7.9 percent per year.

2.3 Despite its great potential, however, container traffic still is aminuscule part of railway traffic. At 10 million tons in 1990, the totalfreight tonnage carried in containers by rail is less than one percent oftotal rail freight tonnage. The Ministry has launched a program to modernizeand expand container transport services in cooperation with other modes.

2.4 The majority of railway freight traffic is planned and contracted onan annual basis at the national level. The State Planning Commission (SPC)specifies the total volume of freight traffic to be hauled and the volume ofcoal traffic to be transported out of the energy base in northern China. SPC

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also issues guidance on the number of passengers and the amounts of certainfreight traffic to be carried. The State Council (China's cabinet) on occa-sions directs MOR to provide certain emergency services.

B. Management and Relationship with the Government

2.5 Organization. The Ministry of Railways employs 3.4 million individ-uals, of whom 51 percent work on rail transport. The remaining 49 percentwork on nonrail transport activities: 17 percent on construction; 13 percenton manufacturing; 8 percent in a wide variety of diversified ventures suck aslocal truck pick-up and delivery companies and retail outlets; and the remain-ing 11 percent on other activities including attending to the welfare andhigher education needs of railway staff and their dependents (Table 4; Annex2; Chart C.1). Through control measures exercised by MOR, the 3.4 millionwork force is expected to remain roughly constant between 1991 and 1995. Therail transport function is carried out by 12 regional administrations thatoperate as separate profit centers with a considerable degree of autonomy (MapM.5). These administrations are empowered to (a) make day-to-day operatingdecisions; and (b) manage small construction projects, retain part of theoperating profit, and staff their organizations (paras. 3.4-3.5). MOR's head-quarters retains authority over several key functions, such as selecting andmanaging large construction projects, determining the traffic targets of theregional administrations, and scheduling trains (except local trains).

2.6 The nonrail transport part of MOR is a conglomerate of companiesengaged in a variety of activities that are mostly railway-related. MOR's ownfactories (about 75 of them) produce the bulk of MOR's requirements for loco-motives, passenger coaches, freight cars, signaling and communications, andparts. Most construction for the railways is carried out by some 20 MOR con-struction companies. Design, engineering, and architectural services also areprovided in-house, by special institutes and bureaus. Furthermore, the Minis-try operates 11 universities, 20 staff colleges, and more than 60 vocationalschools, as well as over 4,000 hospitals and other medical service facilities.

2.7 Finally, there is a group of more than 300,000 MOR nonrail transportstaff who undertake a range of business activities, including trucking ven-tures that provide delivery and pickup services for shipments to and fromrailway stations. This so-called "diversified economy" group is becoming moreimportant as a means to absorb surplus rail transport personnel that resultfrom improvements in the efficiency of railway transport operations. During1991-95, while the railway transport and construction staff are subject to a20 percent cut in size, the diversified economy group is expected to increasethe size of its personnel by about 150 percent.

2.8 Role of the Government. The national Railway Law lays down theresponsibilities of the national and local governments, MOR, railway custom-ers, and the public at large with respect to the construction, management, andoperation of railways in China (para. 3.1; Annex 3). For the national rail-ways, the 12 regional railway administrations (para. 2.5) are charged with theresponsibility for providing railway transport services under the managementof MOR's headquarters.

2.9 According to the Railway Law, the overall responsibility for railwayregulation rests with the State Council. The State Council, through its coor-dinating agencies, especially SPC, the Ministry of Finance (MOF), and theState Price Bureau, and in cooperation with special-function agencies (e.g.,the National Construction Bank), exercises its authority to (a) direct MOR'sdevelopment plans, based on the long- and medium-term development plans at thenational level; and (b) approve a number of decisions including the following(Annex 4; Chart C.2):

(i) the total size of railway investment in a Five-Year Plan,

(ii) major railway capital construction and upgrading projects,

(iii) changes in railway tariffs,

(iv) the total level of MOR's borrowings in each year and each Five-Year Plan, and

(v) wage levels of railway employees.

2.10 Under an economic contract set up with the national government, theMinistry of Railways is responsible for financing all of its operating andcapital costs (through both cash from its operations and borrowings on marketterms). In return, the Ministry is allowed to keep all of its net incomeafter paying a 5.3 percent sales tax on gross revenues and a lump sum tax ofY 2,000 million per year (4.3 percent of 1991 gross revenues). This financialresponsibility, however, should be seen in the context of distorted prices inChina (paras. 2.11-2.12). In addition, the contract provides the Ministrywith incentives in the form of an annual pay per employee that varies withstaff productivity. Staff productivity for a given year is measured in termsof the volumes of freight and passenger traffic per employee, the totallengths of different types of railway capacity expansion projects built peremployee, and the numbers of locomotives and rolling stock produced peremployee (para. 3.3).

C. Finance. Tariffs, and Investment

2.11 Profitability and Tariffs. The Ministry of Railways runs a finan-cially profitable operation with its gross revenues well above its operatingexpenses (Table 5). However, its profitability is distorted in two opposingdirections. In one direction, its profitability is overstated by two factors:(a) underreporting of depreciation expenses; and (b) credit subsidies due tolower-than-market interest rates on some of its borrowings and price subsidieson some of the materials, fuels, and electricity it purchases. MOR's account-ing procedures tend to underreport depreciation expenses because they valueassets on a historical basis and because they depreciate assets at predeter-

mined low rates (e.g., 4 percent for fixed assets). However, these factorsare being tempered by the following measures: First, the Ministry is begin-ning to revamp its accounting system (with Bank assistance). Second, theimplicit credit and price subsidies are being phased out: between 1990 and

1992 the level of these subsidies was reduced from 20-25 percent to 13-18 per-cent of railway operating costs.

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2.12 In the opposite direction, the Ministry's profitability has beenunderstated because of a chronic problem with its tariff systems the pricesit charged for railway freight transport services (base tariffs plussurcharges) were until 1992 kept well below their economic long-run marginalcosts ("economic costs" means costs calculated with the effects of deprecia-tion understatement and implicit subsidies removed). This underpricing situa-tion has improved recently: in July 1992 a freight surcharge for an earmarkedRailway Construction Fund was raised from 0.2 to 1.2 per/tkm, thereby increas-ing railway freight revenues by about 35 percent. This increase has broughtfreight transport prices to 95 to 115 percent of their average economic long-run marginal costs on a systemwide basis,1/ and at the same time, enabledNOR to fund 80 to 85 percent of the planned investment program of Y 116 bil-lion for the Eighth Five-Year Plan (8FYP) (1991-95). The Ministry expects toobtain further increases in base tariffs and surcharges in the next few yearsto close the existing funding gap and to finance expected increases in invest-ment resulting from higher economic growth expectations (paras. 3.16, 5.21).MOR is also likely to raise additional funds from both domestic and interna-tional borrowings.

2.13 The underpricing problem aside, the railway tariff system has twomajor deficiencies. First, the tariff system does not sufficiently accountfor (a) the sensitivity of the traffic being served to the tariffs, (b) theunderlying costs of the services, and (c) the existence of competition. Amajor reason for this is that MOR does not yet have a functional railway cost-ing system (it is implementing one). And second, control of MOR's tariffs bythe national government (through the State Price Bureau) does not give MORenough flexibility to adjust its tariffs to reflect varying cost and marketconditions across its vast network.2/ With Bank assistance MOR plans topropose a revision of its tariff system, among other things, to remedy thesedeficiencies.

2.14 Planning and Investment. The Ministry carries out three types ofplans: (a) the long-term strategic plan, which focuses on strategic issuesover a horizon of more than five years, such as what kinds of passenger ser-vices are to be provided; (b) the five-year plan, which basically identifiesspecific railway investment projects proposed for implementation during theplan period (as part of the national government's five-year planning process);and (c) the annual plan, which basically specifies a yearly program for con-struction of the projects approved for implementation under the Five-YearPlan, as well as a yearly program of rehabilitation of track and equipment.Under the five-year plan, capital construction and upgrading projects costingY 50 million or more must be approved by SPC and those costing Y 200 millionor more must be approved by both SPC and the State Council. In addition, thetotal amount of MOR's capital expenditure each year must not exceed a ceilingopecified by MOF.

Il/ The economic long-run marginal costs vary considerably according to thetype of railway construction, from building new lines to double-trackingor electrifying existing lines.

2/ MOR is allowed, however, to set higher tariffs up to certain limits fornewly constructed lines, as a way to recover their investment costs.

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2.15 To sustain China's rapid economic growth, the government must ensurethat its scarce capital resources are deployed in the most efficient way,especially for large investment programs such as for the railway system.However, until recently the railway investment planning process had two short-comings as recognized by MOR stafft (a) it underestimated future trafficvolumes and therefore investment needs, and (b) it lacked analytical tools.

2.16 The past tendency of the government to adopt relatively low trafficforecasts as a basis for sizing its future investment programs is reflected inthe current plan for railway investment in the 1990s, which is based on traf-fic growth rates that are significantly lower than actual rates during the1980.. For freight, the annual growth rate adopted for the period 1991-2000of 4.2 percent is much lower than the rate of 6.4 percent realized during1981-90 under severe capacity constraints. For passengers, a growth rateslightly higher than that for freight (4.5 to 5.0 percent per year) has beenadopted, which is also well below the actual rate of 6.6 percent realizedduring 1981-90, when railway passenger demand was heavily suppressed. Thisshortcoming in planning seems to have resulted from a combination of the fol-lowing factors:

(a) Forecasts of economic growth (and related railway traffic targetsfor MOR) were based on the goal of quadrupling GNP during 1980-2000--rather than on macroeconomic conditions that were expected to pre-vail in the 1980. or are likely to prevail in the 19909 (i.e., aneconomic forecast that takes into account the likely impacts ofrecent and prospective economic reforms).3/

(b) The size of future railway investment was estimated on the basis oftraffic forecasts that were determined on the assumption that rail-way traffic in future years would be constrained by limited railwaycapacity.

2.17 An undesirable consequence of using low traffic forecasts may becharacterized as a "vicious circle" in railway investment planning: a lowtraffic forecast would likely lead to a capacity expansion investment programthat is too small for future traffic. This in turn tends to result in inade-quate railway tariffs and therefore inadequate railway revenues, which in turnwould likely cause insufficient funding of railway investment and hence inade-quate expansion of future railway transport capacity and subsequent con-straints on economic growth. Recognizing this problem, the government and MORhave recently taken initial steps to address it (paras. 3.13-3.20 and 5.21-5.23).

2.18 Compounding the effects of this vicious circle are the resultscaused by the lack of analytical tools for network analysis. Until recently,MOR did not have computer software to determine the optimal location, scale,

3/ The goal of quadrupling GNP between 1980 and 2000 implies an averageannual growth rate of 7.2 percent over the 20-year period. To meet thequadrupling GNP goal, given that GNP already grew at a relatively highannual rate of 8.9 percent during 1981-90, it needs to grow at a lowerrate of 5.5 percent per year during 1991-2000.

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and timing of railway capacity expansion investments. Therefore, MOR has hadto select the location and timing of network capacity expansion projects in asuboptimal manner. Due to the interdependence of traffic on different linksin the railway network, the implementation of a suboptimal set of projects hasplaced unnecessarily low limits on the annual throughput of the railway systemas a whole.

2.19 Recognizing this deficiency, MOR decided in 1989 to develop a com-puterized decision-support system for investment planning under the RailwayInvestment Study (RIS) in cooperation with the Bank (Annex 5). Now developedand functional, the RIS decision-support system has been used, in a prelimi-nary analysis, to show that (a) potential gains of roughly 10 percent or pos-sibly more in total traffic throughput (about 120 billion ton-km or 110 mil-lion tons per year) could be achieved by optimizing the sequence and timing ofcapacity expansion improvements through 1995, and (b) an additional 10 percentpotential gain in capacity could be obtained by better routing of freighttraffic (Annex 6), all with approximately the same total investment bud-get.4/

D. Maintenance

2.20 Maintenance and rehabilitation of the track system are carefullydone. But because manual methods and small tools are used, the quality ofmaintenance and rehabilitation tends to be compromised (Annex 7). The lack ofmechanization in track maintenance, the relatively low weight of much of therails used, and the poor design of the concrete sleepers and fasteners--thesefactors contribute to the relatively large magnitude of maintenance and reha-bilitation MOR must provide. To keep up with incraases in train speeds,traffic densities, and axle loads, with Bank assistance the Ministry is mecha-nizing maintenance and rehabilitation of the heavily trafficked lines andimproving the standards and design of track components. These actions willresult in not only lower train operating costs but also higher utilization ofscarce track capacity.

2.21 MOR's fleets of locomotives, passenger coaches, and freight cars aregenerally well maintained and their availability has been kept high by worldstandards. For instance, MOR's DF4 diesel locomotives are available for ser-vice about 89 percent of the time, compared to the average availability ratesfor diesel locomotives of about 82 percent in India and 91 percent in theUnited States. However, MOR's approach to maintenance of its equipment isrelatively inefficient for a variety of reasons (Annex 8). For all equipment,scheduled overhauls and inspections are time-consuming. The 18 differentdesigns of diesel locomotives make it difficult to get parts. Passengercoaches and freight wagons are maintained at several hundred depots, whichoften perform activities similar to those of the factories. The factories, onthe other hand, are not specialized by function. This situation prevents therealization of production economies from the use of modern machinery and pro-

4/ The optimization used by the RIS team was based on a heuristic methodthat yields a conservative estimate of the potential gain. Optimizationusing a more exact metixod based on integer programming would tend toyield a larger gain in traffic throughput.

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ceases. With Bank assistance, MOR is preparing and implementing action plansto solve these problems.

E. ComRarison with Other Railway Systems

2.22 MOR is one of the world's most remarkable railways in many respects.A good appreciation of the Chinese railway may be obtained from Table 6, whichcompares MOR with railway systems in five other countries--France, India,Poland, the United States, and the former USSR--on the basis of (a) systemsize and transport output; (b) productivity of track, equipment, and labor;and (c) structure of the transport management system.5/ 61 7/ At thisgeneral level of comparison, a useful measure of transport output that com-bines both passenger and freiglt traffic into one index is the "converted ton-km," or ctkm, defined as the sum of passenger-km of personal travel and netton-km of freight.

2.23 System Size and Transport Output. MOR is among the largest rail-ways in the world. At 1.7 million employees, its rail transport work forceranks second, and at 53,000 km, its route length ranks fifth. MOR's combinedfreight and passenger transport output (at 1,321 billion ctkm in 1990) isthird behind the former USSR (at 4,262 billion ctkm in 1989), whose land massis more than twice as large as China's, and the United States (at 1,614 bil-lion ctkm in 1988), whose economy is more than twelve times as large.

2.24 Although it handles mixed passenger and freight traffic, MOR catersmuch more to freight than to passengers: its passenger share of combinedfreight and passenger traffic is only 20 percent, compared with 55 percent forIndia, 53 percent for France, and 34 percent for Poland. The countries thathave a smaller passenger share of combined rail traffic are the United States(1 percent), which relies much more on other modes of transport for intercitypersonal travel than on the railways, and the former USSR (10 percent), whichused to severely restrict the mobility of its citizens.

5/ The comparisons must be made with care, for the following reasons.First, the statistics for different countries are not entirely consistentand therefore are not entirely comparable. Second, different countrieshave inherent differences that must be taken into account in explainingthe contrasts between their railways.

6/ The statistics for the United States include Class I railroads, whichcarry 96 percent of rail freight traffic, and Amtrak and commuter lines,which carry virtually all of intercity rail passenger traffic. Class Irailroads represent about 80 percent of total rail route length in theUnited States. The remainder belongs to regional and local railroads.The statistics for China exclude local railways (4,400 km of total routelength).

7/ The term "transport management system" is used to distinguish the part ofMOR that deals with the provision of transport services (both rail andnonrail) from the part that deals with the other a-sivities, such asmanufacturing and construction.

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2.25 Productivity of Track. Equipment, and Labor. Despite seriousadministrative and technological limitations, MOR is able to maintain a highlevel of operating efficiency on the railway system. This efficiency is evi-dent in the high productivity rates of its track and equipment. The produc-tivity of railway track, at 24.8 million ctkm per route-km in 1990, is secondonly to that of the former Soviet Union (at 28.9 million ctkm/route-km in1989) and is much higher than those of India (at 6.5 million ctkm/route-km in1988), the United States (at 7.9 million ctkm/route-km in 1988), and the othercountries.

2.26 Similarly, in the productivity of wagons, at 2.9 million tkm offreight hauled per wagon in 1990, China is about on par with the former USSR(at 2.8 millon tkm in 1989) and again is well above the other countries.Indeed, China and the former USSR are in a class by themselves as far as trackand wagon productivity is concerned. China's locomotive productivity, at 97.1million ctkm per locomotive in 1990, ranks second behind the former USSR (at129.2 million ctkm/locomotive in 1989). MOR is recognized for having the bestturnaround time for freight cars in the world (four days for a 990-km averageturnaround distance).

2.27 The Chinese railway is able to achieve these feats of operatingefficiency despite the relatively olc technology it employs. For example,42 percent of the locomotives being used by NOR are still steam-powered,whereas no steam locomotives have been used in the United Staites or the formerUSSR for a number of years.

2.28 MOR's productivity of labor, at 777 ctkm per thousand employees in1990, is moderately higher than those of the French, Indian, and Polish rail-ways, but is much lower than those of railways in the United States (at6,232 ctkm per thousand employees in 1988) and the former Soviet Union (at2,350 ctkm per thousand employees in 1989). The comparison indicates thatthere is significant room for MOR to improve its labor productivity. Thisproblem is not the most urgent, however, because currently the wages receivedby the railway employees in China seem much lower than in other countries. Atpresent, staff payroll and health and other welfare costs represent about 22percent of total railway operating costs--a low proportion by world standards.

2.29 Transport Manazement Structure. The structure of MOR's transportmanagement may be called a "monolith," which is similar to those of railwaysin former command economies such as in Poland and the ex-USSR, and also thoseof railways in market economies some 50 years ago, such as in France or theUnited States. In the monolith structure, each functional department exer-cises total and undifferentiated responsibility over all services.8/ Forexample, a department may control the maintenance of all coaches, wagons, andlocomotives, or another department may control the running of all trains.Given that NOR has been accountable largely for maximizing the quantity andefficiency of transport output, this structure has served MOR well in thepast--in an environment where NOR, as the dominant mode of transport, has beenable to dictate the services it wishes to provide with little regard to pref-erences of customers. The monolith structure, however, would be less suitable

8/ See Moyer and Thompson, "Options for Reshaping the Railway," Infrastruc-ture and Urban Development Department, The World Bank, March 1992.

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when China becomes a market economy, because it does not give enough flexibil-ity for MOR to make changes in its services in response to emerging competi-tion and changing customer needs.

2.30 In contrast to the monolith structure, many railways in market econ-omies have undergone organizational transformation into a more modular,market-oriented structure in the past 20 years, to enable them to serve cus-tomers better and compete more effectively with other modes, especially trucksand waterways. Typical market-oriented structures may be classified as"lines-of-business," "wholesaler," "competitive access," "toll-rail enter-prise," or a combination thereof.9/ The French rail:iay has a dominantlines-of-business structure, while the railways in the United States--thefreight railways, Amtrak, and the commuter railways--have a combination of allfour market-oriented structures (Table 6). The railways under a market-oriented organizational structure tend to share the following traits:

(a) They make extensive use of modern information technology and manage-ment tools--including computerization of transport operations,passenger reservation systems, freight and passenger informationsystems, financial controls, investment planning systems, and man-agement information systems.

(b) They use outside suppliers and service providers to perform a vari-ety of tasks such as infrastructure maintenance, administrative, andmarketing functions--for example, to maintain wagons and coachesunder contract; provide payroll and employee welfare services; andprovide special passenger transport over certain routes. The choiceof options is dictated primarily by economic considerations.

(c) They are market-focused in that: (i) for the markets they serve,they have well-defined accountability (with the government or share-holders) with respect to financial profitability and service qual-ity; and (ii) in designing and pricing their services, they have arelatively clear view of the markets being served, with rec -ct tothe competition, the customer preferences, and the financial impact.

2.31 Although the above-mentioned characteristics are common among rail-ways with market-oriented structures, they can be developed at least to someextent within a monolithic structure. Injecting such traits into a monolithicrailway should facilitate its transformation into a market-oriented railway.Indeed the Ministry of Railways has alraady started the process of injection:it has (a) begun (with Bank assistance) to modernize railway information tech-nology such as digitalizing its telecommunications network and installing acomputerized Transport Management Information System (THIS) (para. 5.30);(b) parceled out railway-related activities from rail transport units to sepa-rate entities such as to trucking ventures in the diversified economy group(para. 3.8) and through "labor contracts" (para. 3.7); and (c) evolved minis-terial bureaus into railway manufacturing and construction companies withincreased autonomy.

9/ See Moyer and Thompson, op. cit.

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III. PROGRESS SINCE THE 1980s

A. Improving Railway Management

3.1 Railway Law. In the past ten years, China has taken a number ofsteps to improve railway management. One of the government's landmark stepshas been to issue the Railway Law in 1991 (Annex 3; paras. 2.8-2.9). TheRailway Law authorizes the State Council to set forth detailed regulations forrailway operations; and the MOR headquarters to set forth "technical regula-tions" such as design standards for track and equipment, plan and constructnational railway projects, and set railway tariffs subject to approval by theState Council. The Law entrusts the 12 regional administrations not only toprovide railway transport services, but also to meet safety and on-time stan-dards, provide basic amenities and services to passengers, and safeguardagainst environmental pollution along the railway lines. The Law also empow-ers the MOR headquarters in Beijing to manage the regional administrations.

3.2 The Railway Law's regulatory aspect is important because, beforeenactment of the Law, there had been no legal framework for the operations ofthe railways, and therefore no formal allocation of authorities and account-ability between various parties existed.

3.3 Economic Contract. In 1986, the government took a landmark step indecentralizing the administration of the national railway system: it createdthe economic contract between MOR and the government (para. 2.10). The eco-nomic contract hat expanded MOR's financial responsibility and autonomy, aswell as provided MOR's staff with a powerful set of incentives to improvetheir productivity by various means, including through control of the size ofrailway work force. Before 1981, MOR had little financial responsibility orautonomy: it paid a 15 percent sales tax on gross revenues and turned overall its net income to the government. The government then allocated budgetsto the Ministry for capital investment. This arrangement gave MOR little con-trol of railway capital budgets. Neither did it provide MOR with incentivesto control the costs of railway operation and construction, or to allocaterailway investment in an efficient manner. The 1986 economic contract and its1991 successor have removed most of these deficiencies.

3.4 Decentralization in the Railway System. The decentralizationefforts in the past ten years, including a new set of policy changes announcedin July 1992, have resulted in not only a shift of powers from the nationalgovernment to the Ministry, but also from the Ministry headquarters to theregional administrations and the construction and factory companies. Thesecond type of decentralization has occurred in the management of projects,the use of profits, and the administration of personnel, to improve productiv-ity and accountability of the regional administrations (Annex 9):

(a) Proiects. Previously, the Ministry headquarters managed virtuallyall railway capital construction projec*s. Now, the headquartersgives the regional administrations budgets to manage rehabilitation,upgrading, and small-scale construction projects. The Ministryheadquarters still retains the power LO manage large-scale capitalconstruction projects and projects which have systemwide impacts.

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(b) Profits. Previously, the regional administrations were not allowedto retain any profit in excess of a specified level. Now, theregional administrations are allowed substantial discretion in usingtheir profits, such as investing in diversified economy activities,paying out bonuses provided the over-ll salary caps are notexceeded, etc.

(c) Personnel. Previously, detailed staffing decisions were made at theMinistry headquarters. Now, as part of the evolving enterprisestructure within MOR, some of the design institutes and bureausrecently have been restructured into companies with some freedom(e.g., the Locomot4ve and Rolling Stock Company). These semi-autonomous units can decide not only on their internal organiza-tional structures but also on their total staff size, compositionand pay incentives, to serve their own needs. Furthermore, theseunits can promote their professional staff up to the level of DeputyDirector.

3.5 In addition, the decentralization has resulted in policy changesthat permit the administrations and companies the powers to: (a) make andsell their products, provided that they meet their quotas in, say, traffic tobe carried; and (b) export and import goods and services (up to the level offoreign exchange earned from their exports).

3.6 Incentive Pay Systems. In 1986 the Ministry introduced a monthlyincentive pay system to improve the management of profits and personnel of theadministrations. This system ties the total wage payment of the staff of anadministration to the performance of the unit as a whole for the month inquestion according to a fixed formula (Annex 9). The concerned administra-tion, then, distributes the total wage payment it receives to its staffaccording to an incentive formula which is devised at its own discretion (butstill must be consistent with the railway's wage policy). The total monthlywage payment for the staff of an administration is primarily geared to a pro-ductivitv index. In the case of an administration, this productivity index isthe "converted ton-km" handled by the administration in the given month(defined earlier as the sum of passenger-km and net freight ton-km). Thisprimary productivity-index payment is modified by rewards or penalties accord-ing to: (a) the number of times freight wagons are loaded, unloaded or dis-patched; (b) the number of times trains are disassembled or assembled at bot-tleneck yards; (c) the extent to which operating costs are reduced (d) theextent to which the total revenue and coal transport targets are met; and(e) the safety records (Annex 9).

3.7 In 1986 the Ministry introduced a labor contract system to booststaff incentives. Under the system railway workers are contracted to performspecific tasks for specific pays. Between 1980 and 1990 the number of railwayworkers under labor contracts went up from zero to 310,000, or about 9 percentof the total MOR work force.

B. Diversifying into Nonrail Activities

3.8 In 1986, MOR began a major program to divert a portion of its trans-port staff to a wide variety of ventures. Since then these ventures have been

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growing rapidly, now producing about $200 million in operating profits in1990, compared with $40 million in 1986. About 50 percent of the profits areattributable to trucking ventures that move freight traffic between customers'warehouses and rail stations. The size of MOR personnel engaged in thisdiversified economy grew from zero in 1985 to about 300,000 in 1990. The sizeof NOR personnel engaged in manufacturing and several other nonrail transportactivities also grew during 1985-90. As a result, MOR now projects that theshare of nonrail transport personnel will increase from 50 percent in 1990 to60 percent in 1995. This means that the share of rail transport staff willdecrease to about 40 percent by 1995 (Annex 2), thus greatly improving thestaff productivity in railway operations as the total MOR staff size isexpected to remain constant during 1991-95.

C. Covina with Inflation

3.9 During the 1980., MOR's profitability and its ability to financefuture capital investments were threatened by inflation, as well as byincreases in subsidized prices of fuels and materials for the railway. Theseprice increases raised the costs of operating the railway, laying new track,and acquiring new locomotives and rolling stock. To remedy the situation, thegovernment took two actions during 1989-91. First, it permitted MOR to raisepassenger fares by 112 percent in 1989, and base tariffs for freight by24 percent in 1990 and 7 percent in 1991. Second, in 1991 the governmentauthorized the railway to set up an earmarked Railway Construction Fund, to beraised by levying a surcharge on freight traffic. That year, the governmentalso approved an initial surcharge of 0.2 fen/ton-km, representing an averageincrease of about 7 percent. Despite these increases, NOR stayed just aheadof inflation by end-1991: During 1981-91 the consumer price index in Chinawent up 93 percent, while combined freight and passenger revenues per con-verted ton-km (passenger-km plus net ton-km of freight traffic) went up110 percent. During that period MOR had difficulties in raising self-gener-ated funds to finance its investment. It was only in July 1992 when the Rail-way Construction Fund surcharge was increased from 0.2 to 1.2 fen/ton-km thatMOR became able to stay significantly ahead of inflation and to generate morefunds to meet its investment needs. Still, the current level of base tariffsand surcharges is expected to enable MOR to fund only 80 to 85 percent of itsY 116 billion 8FYP investment plan, which at present is considered to beinadequate for the planning economic growth rate of 8 to 9 percent per year(paras. 3.16-3.17).

D. Accommodating Past Traffic Growth

3.10 During 1981-91 railway freight traffic vent up 92 percent and rail-way passenger traffic 90 percent. MOR was able to accommodate a large part ofthese enormous traffic increases by substantially raising the utilization ofits track, wagons and locomotives. During this period, MOR raised: (a) theproductivity of railway track (measured as ctkm per route-km) 79 percent;(b) the productivity of wagons (measured as ton-km of freight traffic handledper wagon) 43 percent; and (c) the productivity of locomotives (measured asctkm per locomotive) 43 percent (Figure T4). During the same period, thetotal route length of MOR's network went up only 7 percent.

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Fiaure T4: TRENDS IN UTILIZATION OF CHINESE RAILWAY ASSETS(1980-91)

100-- 4 CTKMIROUTEUKM + NTKMIWAGON OWNED * CTKMILOCO. OWNED

3E8 0-. . .. ...... ..... . .. . . . .. ........ .. . .. .. .

E0

o 6 0 -. ....... ........ ... ........ ....../

''y 40 - ..

200 . ... . .......... ................. . .C0 _

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991Year

3.11 The more intense utilization has its dark side, however, in the formof line and yard congestion,, which translates into more delays and loes reli-able services to customers, and also in the form of more frequent breakdownsin railway track and equipment. Indeed, the railvay has increased its trans-port capacity by raising its operating efficiency at the expense of service toits customers: it exercises close control of wagon allocation to shippers andimposes limits on passeuger service availability. More than 40 percent ofmonthly wagon requests vere denied in 1990. Furthermore, many of- MOR's heav-ily trafficked lines need rehabilitation sand upgradingo, the backlog of trackthat requires rehabilitation is accelerating, and the capacities of two thirdsof major railway yards are expected to be reached by 2000 (Annex 6).

3.12 MOR's achievements in railway asset utilization have been helped bythree factors that are expected to wane in the future: (a) aome initial slackof transport capacity in the system; (b) relatively simple technologicalupgrading (e.g., double tracking) sand (c) stringent requirements on shippers(e.g., to order a wagon the shipper must give between 18 to 48 days advancenotice, and vhen a vagon arrives the shipper is permitted only some four hoursto load or unload it). As the volume of traffic increases faster than invest-ment to expand railway capacity, the scope for MOR to achieve additionalcapacity by raising the utll4zation of its existing assets is getting smaller,for the following reasons. First, there will be less slack in the transportcapacity of railway system. In Just four years, from 1985 to 1989, the numberof bottlenecked railway links vent up from only 7 percent of the total numberof railway links in the network to 37 percent (par&. 1.12). Secont, futuretechnological modernization vill become more sophisticated and require a

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longer lead time to implement. And, third, railway customers will requiresignificantly better quality of service.

E. Meeting Future Expansion Needs

3.13 To handle railway transport demand in the 1990s, MOR prepared in thelate 19809 a capital investment program of Y 116 billion for 8FYP. This pro-gram comprises an array of capital expenditures, with a percentage breakdownshown in Table T2. About 30 percent of the Y 116 billion program representsprojects that have been extended from 7FYP. The new line construction in the8FYP can be divided into three categories (Map M.3): (a) recently initiatednew line construction on the periphery of the network that both creates accessto new areas and increases rail network connections (Nanning-Kunming,Zhongwei-Baoji, Jining-Tongliao and Guangzhou-Shantou); (b) new lines in thecenter of the network, comprising sections of a new north-south corridor(Beijing/Tianjin-Wuhan/Jiangjiu-Hong Kong) between the heavily congestedBeijing-Guangzhou and Beijing-Shanghai corridors; and (c) some relativelyshort east-west corridors intended to ease bottlenecks on coal routes runningfrom the Coal Base (Shanxi, Shaanxi, and Inner Mongolia) to major industrialcenters along the east coast (including Yuangping-Shijuazhung and Yangguan).The electrification projects in the program are planned for sections of theintensely trafficked, double-tracked Beijing-Shanghai and Beijing-Guangzhoulines, and for rail lines in mountainous regions where diesel power is rela-tively inefficient and double-tracking is expensive as a means to expand linecapacity. Parallel track construction projects (double or triple tracking)are concentrated in bottleneck areas, connecting Beijing to the Northeast(e.g., Qir'tit-agdao-Shenyang); Guangzhou to Shanghai; and the resource-richSouthwest t, tha center of the country.

Table T2: PERCENTAGE BREAKDOWN OF ALTERNATIVERAILWAY INVESTMENT PROGRAMS FOR 8FYP (1991-95)

Original RIS Preferred Packaseprogram Low High

New line construction 36 26 26Double tracking of existing lines 13 14 15Electrification of existing lines 7 12 12Terminal upgrading 4 4 4New 1-.^zomotives and rolling stock 26 32 33Track rehabilitation and maintenance 7 6 5Other categories 7 6 5

Total 100 100 100

3.14 The RIS system was employed to assemble two alternative railwayinvestment packages, by means of: (a) a heuristic procedure for optimizingthe scale, location, and timing of railway projects; and (b) an efficienttraffic-routing procedure (Annex 6). Of these two "RIS Preferred Packages,"one is of similar size to the original Y 116 billion program (Low Investment)

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(Map M.6) and the other is 30 percent larger in the 8FYP and 50 percent largerover the period 1991-2000 (High Investment) (Map M.7). The percentage break-downs of the RIS Preferred Packages are shown in Table T2 in comparison withthe breakdown of the original program (see Table A6.5 for details). Whileneither of the RIS Preferred Packages suggests a significant change in theshare of double-tracking from the original program, both packages suggestthat: (a) the share of new line construction be decreased (from 36 percent inthe original program to 26 percent); and (b) the share of electrification beincreased (from 7 percent to 12 percent) (Table T2). The large changes in thashares of new line construction and electrification suggested by the RIS anal-ysis is not surprising. This is because the unit cost of capacity expansionby electrification is only 50 to 60 percent of that by the construction of anew single-track line.

3.15 Both RIS Preferred Packages suggest that the share of new locomo-tives and rolling stock be increased, from 26 percent in the original programto 32 or 33 percent. Because the expenditures on locomotives and rollingstock are roughly proportional to the projected traffic throughput of therailway system, the 32 and 33 percent shares of expenditures on locomotivesand rolling stock under the RIS preferred investment packages imply that, forthe same level of budget, the RIS methodology may help MOR design a railwaynetwork that offers 23 or 27 percent more traffic carrying capacity than theoriginal program. The capacity augmentation reflects two major kinds of sys-tem improvement: (a) about 10 percent more throughput from more efficientsystemwide traffic routing; and (b) about 10 percent more throughput if thescale, location and timing of investment are optimized for the currentlyplanned investment (Annex 6). This suggests that there is scope for moreaction by MOR to increase railway network capacity in a more cost-effectiveWay.

3.16 Although the Y 116 billion investment program is about 70 percentlarger than the 7FYP in real terms, it is still based on a relatively loweconomic growth rate of 6 percent per year, compared to the 8.9 percentachieved during 1981-90. The resumption of economic growth, from 7.0 percentin 1991 to 12.0 percent in 1992, together with the new drive for further eco-nomic liberalization that began in early 1992, caused Chinese planners torevise their future economic growth expectations steeply upwards. In mid-1992the government decided to adopt for planning purposes GNP growth rates in therange of 8 to 9 percent through the year 2000. The new economic growth ratehas raised the expected annual growth rate of railway transport demand from3.4 percent to 4.4 percent for freight and from 7.8 percent to 10.0 percentfor passengers. This has enormous implications on suture railway investmentneeds: the current level of planned investment probably will meet only twothirds of the higher expected growth in railway transport demand (Annex 6).

3.17 To accommodate future growth of railway transport demand under the8 percent economic growth scenario through the year 2000, an order-of-magni-tude analysis has estimated that investment in railway capacity would have tobe increased 40 to 60 percent over the current level of planned railwayinvestment (Annex 6). If only the currently planned investment is made, therailway will experience many bottlenecks, amounting to an estimated 31 percentof the railway network in 2000 (Map M.8), compared to 37 percent in 1989 (MapM.4). If rail capacity investment is increased by 30 percent (i.e., Y 25-

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35 million) in conjunction with improved traffic routing procedures as in theHigh Investment Package, MOR could expect to reduce the extent of bottlenecksto about 25 percent of the railway network. Investment of a further Y 20-30 billion in constant 1992 prices by the year 2000 would be needed toincrease expected throughput to about 98 percent of demand and eliminate allcritical bottlenecks (Annex 6).

3.18 The above estimate is conservative for two reasons. First, itassumes that a set of accelerated reforms will be undertaken that willdecrease the growth of rail transport demand or increase railway networkcapacity. The reforms include two major demand management measures:(a) rationalization of bulk commodity distribution; and (b) increases in railfreight tariffs (both base tariffs and surcharges), which would significantlycheck demand for rail transport (Annex 1). The reforms also include two sup-ply management measures: (a) to improve freight traffic routing; and (b) tooptimize the scale, location, and timing of railway investments (para. 3.14).These two measures together are estimated to yield a 20 percent increase innetwork throughput capacity. A second reason is that the estimate is based onthe simplifying assumption that passenger transport demand grows at the rateof growth of freight transport demand. In reality, passenger transport demandhas been growing and is expected to grow at a much faster rate than freighttransport demand (paras. 1.6, 1.9).

3.19 Recent increases in the tariff surcharge and planned increases inbase tariffs have eliminated most of the potential gap in financing for 8FYP,but they do not cover the gaps in 8PYP and 9FYP that will result from thelarge railway investment level needed to support the currently expected 8 to9 percent per year economic growth rate (para. 3.17). An analysis of finan-cial self-sufficiency of MOR's rail transport business concludes that if therailway investment requirements increase 50 percent in real terms from thecurrently planned level through 2000, the base tariffs, freight surcharge.,and borrowings must be raised substantially in real terms in order to bridgethe potential funding gaps.

3.20 Besides the question of MOR's ability to fund the investment pro-grams, the question also has been raised as to MOR's absorptive capacity tocarry out the programs. This is because the investment program for 8FYP isabout 70 percent larger in real terms than the program for 7FYP (Y 51 billion)(para. 3.16). NOR's response to this question is that it should have morethan ample capacity to execute the investment programs, by mobilizing a work-force of some 30,000 for engineering design, 600,000 for the construction ofrailway infrastructure, and 430,000 for the manufacture of locomotives,freight wagons and passenger coaches.

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IV. FUTURE ROLE OF THE RAILWAY

4.1 The main focus of this chapter is the transport function of MOR,1/but it will cover briefly MOR's nontransport functions, including railwaymanufacturing, construction, and other activities.

4.2 In the ongoing process of transforming the Ministry of Railways intoa market-oriented entity (para. 2.1), the major goals for its transport func-tion should be for the Ministry to:

(a) provide a range of safe and adequate transport services that meetcustomer needs and compete with other modes on a commercial basis;

(b) control costs and refrain from exercising monopoly power at theexpense of the public; and

(c) maintain financial self-sufficiency, i.e., being able to finance allof its operating costs and capital investments, the latter mostlythrough self-generation of cash but also through capital marketborrowing.

A. Maior Challenges

4.3 MOR'g Transport Business. To meet the goals mentioned above, theMinistry munt successfully meet new challenges in a rapidly changing macroeco-nomic environment as China moves toward a market economy. MOR's two mostimportant challenges are:

- first, to accommodate future traffic growth in the most cost-effective way, by breaking the "vicious circle" in railway invest-ment planning (para. 2.17) by choosing the best means of capacityexpansion; and

- second, to provide a wider variety and better quality of railwayservices in the face of growing customer needs and increasingcompetition from other modes, mainly through more effective regula-tion of MOR's transport function and improvement in MOR's tranaportmanagement system.

There are also other major challenges which include the tasks of: (a) copingwith the financial burden resulting from the removal of implicit price andcredit subsidies; (b) implementing more efficient operating policies and tech-nologies; (c) developing manpower resources to meet future needs of the rail-way; and (d) protecting the environment resulting from railway-related pollu-tion.

J/ The transport function of MOR comprises both rail transport activities(involving 1.7 million MOR staff) and nonrail transport activities(involving local pick-up and delivery services, which are treated as partof the "diversified economy" ventures.

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4.4 MOR's NontransRort Business. The nonrail transport business may hedivided into four major groups: (a) construction companies; (b) manufacturingcompanies; (c) diversifi'%d economy companies; and (d) welfare-related unitsthat comprise hospitalh, zlinics, universities, schools, railway housing agen-cies (para. 2.6). These groups, together with the 12 regional administrationswhich perform the transport function, make the Ministry of Railways a highlydiversified organization. With continued expansion of the diversified economygroup, MOR will be even more diversified (pare. 2.7).

4.5 Two major challenges confronting MOR in the context of its nontrans-port business relate to the questions of possible divestiture of some of thesenonrail transport companies and units, as well as the question of labor ratio-nalization, i.e., how best to deal with MOR staff, especially the rail trans-port staff who are being made redundant by improvements in staff productivity.The question of possible divestiture should be addressed in the context ofreadiness of candidate companies and units to be divested, e.g., transferabil-ity of the railway welfare systems outside of the railway system, corporatestrategies for these divestiture candidates, possible forms of ownership andfinancial controls for them, possible consolidation of some divestiture candi-dates, actions required to make some divestiture candidates more profitableand more ready for divestiture, etc. (para. 5.16). The question of laborrationalization should be addressed in the context of the prospects for theirretraining and reassignment and the absorptive capacity of the diversifiedeconomy group which has served as the primary means of absorbing redundant MORstaff. MOR plans to address these issues with Bank assistance (paras. 5.16,5.18).

B. Strengths and Weaknesses of the Railway System

4.6 From the standpoint of meeting its challenges in the 1990., theChinese railway has main strengths and weaknesses which may be summarized asfollows:

4.7 Main strengths:

(a) The railway is an efficient, well-functioning system, run by a capa-ble and disciplined staff.

(b) Its utilization of locomotives and rolling stock rivals most otherrailways in the world.

(c) It is financially viable, with strong potential to increase revenuesfurther as needed to pay for the cost of network expansion.

(d) It is a dynamic organization, which is adapting to the needs of theeconomy (albeit slowly).

(e) It serves industrial and export development in the interior of Chinawith less harm to the environment than a large highway and truckinginfrastructure.

(f) It is more energy-efficient than truck transportation for medium tolong distances.

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(g) Through expanded use of technology and organizational restructuring,the railway has excellent long-term growth and market retentioncapabilities.

4.8 Main weaknesses:

(a) Because of the fast-growing demand and capacity constraints, manage-ment attention has focused on maximizing operational efficiencies asopposed to improving customer service.

(b) Since there is no competition within the railway subsector and onlylimited competition from other modes, there is little external pres-sure for the railway to innovate and modern.ze.

(c) Because it does not have a marketing group within the railway, itdoes not adequately monitor its competing modes of transport or thelong-term needs of its customers.

(d) Despite recent improvements, it employs some outdated technology,which not only makes the costs of operation and capacity expansionhigher than necessary, but it also makes improvement in the qualityof customer service a more difficult task.

(e) There are few, if any, policies in place to coordinate the railway'stransport services with those of other transportation modes, partic-ularly trucks.

C. General Strategv for MOR's Transport Business

4.9 To fulfill its role as a provider of transport services, MOR shouldadopt a general strategy that will respond to the challenges and opportunitiesin ways that capitalize on its strengths and minimize its weaknesses. Thisstrategy must respond to market forces as well as government demands, on thebasis of a clearly defined relationship between the railway and the govern-ment.

4.10 The evolving macroeconomic environment with more emphasis on eco-nomic reforms will progressively lead to increased market competition in thenext decade. Consequently, the role of the railway will inevitably change,and the railway will need to be more responsive to the needs of freight andpassenger customers. Quality and cost of service will become more icnportantin deciding whether the railway or its competitor satisfies transport demand.The railway will need to provide more economic door-to-door transport andbecome more specialized in order to respond effectively to the needs of eachtransport market that it faces.

4.11 Although the railway must ultimately decide on a specific strategyto face each transport market, there are broad areas of specialization thatrespond to the general market trends. In particular, the railway should focusmore on the following major categories of traffic:

(a) medium- to long-distance bulk traffic in unit train loads or multi-ple-car loads (and at the same time let the truck pick up more of

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short- to medium-distance general merchandise traffic, with less-than-car loads or single-car loads);

(b) container traffic, with door-to-door services in full cooperationwith other modes; and

(c) medium- to long-distance passenger traffic (potentially includingsome with high-speed services).

Conversely, the railway should gradually containerize less-than-car-load traf-fic and phase out single-car, short-haul traffic by substantially increasingtariffs for these services or making policy decisions to discourage the ser-vices or both.

4.12 For certain services that are being performed at a financial loss(e.g., some lightly trafficked lines and possibly suburban commuter services),unless tariffs can be adequately raised the government should considerchanging MOR's role from being a subsidizer back to its core role as being atransport provider. In this context, the railway should carefully examine itscore functions in order to identify those functions that are provided at afinancial loss, but that are gublic service obligations (PSOs) and thereforerequire proper compensation from the government. By specifying contractualterms for these services with the government, the railways role can then &hiftfrom that of a subsidizer to that of a transporter receiving direct subsidiesfor each PSO on a contractual basis.

D. Government's Supportive Actions

4.13 Once the desired roles for MOR are agreed, it is critical for thegovernment to take actions in areas that are beyond MOR's control to help MORplay its role in the most effective way. These actions include the shift tocontractual, direct subsidies, the rationalization of railway transport demandby improving the commodity distribution system and restructuring of railwaytariffs and prices of major commodities (especially coal) to reduce excessiveuse of transport (para. 5.8(c)].

4.14 Until the demand for railway transport is entirely met, a possibil-ity that may not be realized before the year 2000, the government has noalternative but to ration scarce railway transport capacity. In rationingrailway capacity, a key question is: How should the limited capacity be allo-cated between passengers and freight? When railway capacity is severely lim-ited, as is the case of the Chinese railway system at present, the choicebetween passengers and freight is a difficult one: giving too little capacityto passengers means continuation of the policy of restricting intercity mobil-ity of Chinese citizens, as well as interprovincial trade; giving too littlecapacity to freight, on the other hand, means restriction on China's economicgrowth. The choice should therefore be made carefully. One possible approachis to base the choice on the relative economic priorities of different typesof freight traffic and different purposes of passenger travel. This type ofanalysis requires knowledge of the willingness-to-pay for travel of differentkinds of passengers. Such knowledge can be obtained from some research andanalysis.

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V. KEY TASKS FOR MOR'S TRANSPORT BUSINESS

5.1 Within the broad corporate strategy for the transport business out-lined above, the railway must carry out tasks, with support of the government,in a variety of areas related to regulation, internal management, investmentand finance, and systemwide technological modernization.

A. Achievina More Effective Railway Regulation

5.2 Regulation of MOR should aim at helping MOR as China's largest pro-vider of transport services to achieve the following objectives:

(a) to structure tariffs and other charges in order to improve theeconomic efficiency of railway operations;

(b) to provide safe transport services of adequate quality to the publicat the lowest possible cost; and

(c) to maintain financial self-sufficiency without making unnecessarilyhigh profits.

5.3 The issues of appropriate regulation of railways are complex, andobviously cannot be solved by simple formulas. However, one key lesson hasemerged from experience with successful deregulations of transport enterprisesin market economies since the mid-1970s: no matter how sincerely motivated oradequately empowered they may be, regulatory agencies inherently restrict therailway's ability to compete effectively with the other modes. In otherwords, the least possible regulation is the best.

5.4 With the above lesson in mind, an effective approach to regulatingthe railway system should be to minimize its control where applicable and tofoster competition where possible. Within this broad approach, the existingrailway regulatory system should be enhanced by four key measures: first, bypromoting competition; second, by improving the government's control of MOR;third, by establishing an independent regulatory agency, not to constrain MORbut mainly to monitor MOR's performance; and fourth, by reforming the railwaytariff system.

5.5 Promotina Competition. Competition in the provision of transportservices will progressively become keener in the 19909 as the other modesdevelop. This process will be accelerated as more economic reforms are imple-mented in parallel. By the late 1990. or perhaps the early 2000s, the Chineserailway may well have to face market situations similar to those faced byother railways: a variety of traffic MOR has been handling, including lightmanufactured goods, may progressively shift to truck transport. The newmacroeconomic environment will encourage not only intermodal competition andbut also more demand for high quality and specialized transport services.

5.6 The government should not only welcome emerging competition in thetransport sector but also promote it. Competition should be promoted fromoutside as well as within the railway system. External competition is alreadyoccurring mainly from the truck and waterway modes for freight and from the

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bus and airline modes for passengers.l/ It should be further encouraged--mainly through rational pricing, further relaxation of market entry and con-trols, more extensive development of highway and waterway infrastructure net-works and greater modernization of trucks, vessels, and barges. Internalcompetition is beginning, as seen in an example in which railway staff workingin the diversified economy group is permitted to offer local pick-up anddelivery services to the public (Annex 2). This appears to be a good exampleof internal competition provided that the private sector is given an equalopportunity to compete. Internal competition through participation of theprivate sector should be strongly encouraged wherever possible--for example,by permitting private individuals or companies to bid for the provision ofrailway transport services on certain routes.

5.7 Competition, however, does not apply everywhere in China. Becauseof the present lack of development in the competing modes, the national rail-way system still has a monopoly or a near-monopoly in many if not most of therailway transport markets. For these markets, the railway system should beregulated, but a less strict form of regulation than the existing one could bemore effective, as discussed below.

5.8 ImRroving the Government's Control of MOR. This could be achievedby augmenting the economic contract system for MOR through three basicmeans:2/

(a) Generation of a Strategic Plan. This task would be carried outjointly by MOR, SPC, and the State Council. Its main purpose wouldbe to prepare a long-range plan for the railway that relates China'smacroeconomic policy and forecasts to NOR's marketing plans. Themarket plans involve identification of the major market segments tobe served by the railway. This task, which could be carried out aspart of MOR's 10-year strategic plan, would identify all policyissues that affect the railway, such as issues related to an overallplan for financial self-sufficiency including cost recovery fromusers as well as public services; freedom for MOR to set railwaytariffs (paras. 5.11-5.13); public service obligations (PSOs) of therailway; and policy for treating railway staff (reassignment,retraining, etc). It then would analyze options for dealing withthe issues, and recommend policy decisions.

(b) Enhancement of the Economic Contract. This task, which should becarried out jointly by MOR, SPC, and the State Council, would buildup the existing economic contract (para. 2.10). It would recommenda formal statement of expectations, authorities, and obligations ofMOR and the government over a period of time (say, 5 years), relatedto the fulfillment of the railway's economic and social role. This

1/ The provision of truck and waterway transport by collectives and individ-uals is lightly regulated with respected to pricing and entry and exit(Guangdong Transport Study Report, 1990).

2/ Adapted from Techniques for Railway Restructuring by L.W. Huff and L.S.Thompson, Railway International, October 1990.

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task would be consistent with the Railway Law with respect to therights and obligations of the railway. It would address the ques-tion of how best to provide MOR with incentives to improve qualityof transport services.

(c) Develonment of an Enabling Action Plan. This task would recommend alist of actions that SPC and the State Council should agree to taketo enable MOR to fulfill its social and economic role in the mostcost-effective way. Such actions may include the rationalization ofrailway transport demand (including the restructuring of prices ofmajor commodities), rationalization of the administrative system ofmaterials distribution, and rationing of scarce railway capacitybetween passengers and freight (paras. 4.13-4.14).

5.9 MOR is interested in conducting an exercise along the line sketchedabove through a cooperative program with the Bank under a future railwayoperation. Moreover, MOR is interested in reinforcing this exercise with aprogram to strengthen its transport management system (paras. 5.14-5.20).

5.10 Creating an Independent Regulatorv Agencv. Under the present regu-latory system, MOR carries out a significant amount of self-regulation: MORheadquarters enforces the newly issued Railway Law as well as monitors on adaily basis the performance of the regional administrations in terms of:(a) the level of transport output; (b) the efficiency of the equipment andplant; and (c) the on-time and safety records of train operations.3/Although MOR seems to carry out these functions well, an independent regula-tory agency should be more effective in monitoring and publishing MOR's per-formance statistics in areas that are important to the government and thepublic, such as profitability, efficiency, safety, and service quality(including the degree of customer satisfaction). This arrangement would alsohelp avoid any appearance of conflict of interest. To avoid overburdening MORwith unnecessary constraints, the regulatory powers for this kind of agencyshould be kept to a minimum.

5.11 Reforming the Railway Tariff System. Deserving a special emphasisis reform of the railway tariff system, because of its critical role in threeareas: first, raising needed funds to finance railway capacity expansion;second, enabling MOR to market and price its transport services to competewith the other transport modes and to meet the needs of railway customers; andthird, boosting economic efficiency by reducing excess transport demand on therailway system and by encouraging MOR and shippers to increase mutual gainsthrough contract pricing. The railway tariff reform should consider incorpo-rating the following principles, which have been adapted from successful buthard-won experience of many railways in market economies:

(a) Unless the government is prepared to pay the difference directly,railway tariffs should not be less than the increase in cost associ-ated with the addition of the traffic in question and the increase

3/ These performance statistics are wired to MOR Headquarters at 18:00 hoursevery day from the regional administrations. Hence the name "the 1800report.'

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due to inflation and/or the removal of subsidies. In other words,railway tariffs (including surcharges) at replacement cost shouldnot be below full variable costs, including deprecietion at currentprices.

(b) If the government does not intend to pay for fixed costs A/ (i.e.,the difference between variable costs and total costs) or to injectfunds for future capacity expansion, then railway tariffs mustexceed variable costs by an amount sufficient to cover the totalcosts and the amount of financing needed (in the form of debt ser-vice coverage and/or in the form of direct funding of the capitalinvestment program). This is accomplished efficiently by a railwayrate structure which deviates the most from variable cost wheredemand is the least sensitive to price (the "inverse elasticity"rule).5/

(c) Except for the three rules discussed below, the railway should beallowed almost total flexibility in setting tariffs--to meet compe-tition, serve the needs of its customers, and meet the financialtargets set for it. This flexibility includes quality of serviceguarantees backed by rate rebate provisions, nonpublic contractrates, and rates based on the provision of capital investment(wagons, unloading facilities, specialized equipment, etc.) by theshipper or customer. The flexibility is subject to the followingboundaries:

(i) The regulatory agency should see that total revenues of therailway do not exceed its total needs, including investment;

(ii) The regulatory agency should ensure that individual rates donot rise so high as to reflect an abuse of market power by therailway;

(iii) The regulatory agency should set rules that will promote theefficiency of the railway and counteract the influence of itsstrong market position.

5.12 Implementation of these rules is not easy, and is subject to abuseon the part of both the railway and the regulatory authority. Success dependson the exercise of restraint by both. Increasing competition, possibly in thenext 5 to 10 years, should make rules (i) and (ii) less important. Rule (iii)has been hard to implement. The best approach to emerge has been to set an

A/ Virtually all governments in market economies, just as the Chinese gov-ernment, have decided not to do so.

S/ In the Western economies, this has led in some cases to highly complextariff structures distinguishing among users with respect to time of day,season, direction, commodity or class of service, size of shipment orgroup, quality of service required, and many other factors. In China,the tariff structures should be kept simple, initially by applying thisrule to broad groups of commodities by service type.

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arbitrary but reasonable margin (roughly 200 percent in the United States andCanada) by which the proposed tariff may exceed variable cost without suggest-ing abuse of market power, and thereby requiring specific government approval.Proposed rates beyond this threshold may be reviewed--but not necessarilyoverturned if the regulatory agency decides that the rate does not undulyrestrict the flow of the traffic involved.

5.13 The government and NOR have recently agreed to some increase intariff flexibly for new lines and new services. However, more flexibility isneeded to allow MOR to better serve the economy. With Bank assistance, MORhas launched a tariff study with three main objectives: (a) to ensure MOR'sfinancial self-sufficiency; (b) to reduce structural distortions in the tariffsystem; and (c) to give MOR enough flexibility in pricing and marketing itsservices. The study is expected to propose tariff reform recommendationslater this year.

B. Bolstering TransDort Management

5.14 Although there is commitment by top MOR management and by higherlevels of the government to adapt MOR to China's changing needs, because ofits size MOR is slow to change. As China evolves further into a market econ-omy, the railway management and staff need to gain a deeper appreciation ofthe ways in which freight customers' production and distribution costs areinfluenced positively as well as negatively by the railway's rates and servicecharacteristics, particularly its reliability. They also need to gear theirorganization, financial controls, performance goals, and personnel incentivesystems to ensure that the future market-oriented role of the railway will befulfilled. The performance standards and personnel incentive systems shouldfocus less on meeting transport output targets and more on meeting servicequality standards. It is important to ensure that the high physical effi-ciency of railway operations MOR now enjoys will not be sacrificed in thequest to boost service quality. Both physical efficiency and service qualitycould be achieved through an enhanced economic contract between MOR and thegovernment (para. 5.8(b)], as well as an adequately structured transport man-agement system that is supported by properly trained staff and modern informa-tion technology.

5.15 Enhancing Organizational Structure. MOR should examine its owninternal organizational structure and effect the necessary changes to make therailway more effective in fulfilling its role. A particular issue that shouldbe addressed is the appropriate structure of the transport management systemto be adopted by MOR as it enters a new phase of market-oriented management.The current transport management system of MOR may be characterized as a"monolith" (para. 2.29). This structure allows MOR to produce transport out-put at high physical efficiency, but does not provide enough flexibility foiMOR to respond sufficiently to growing competition and changing customerneeds. Even within the monolithic structure, however, it is possible for MORto take concrete steps to sharpen its competitive edge and market orientationto some extent (para. 2.31). To advance further would require the nationalrailway system to evolve a different organization structure. Depending on theobjectives set for MOR, and on the trends expected for the development in theChinese economy, various structural options, including "lines-of-business" and"wholesaler" options in particular, deserve consideration.

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5.16 Rationalizing the Railway System through Divestiture. A potentialmear.s to improve efficiency of the railway system is to reduce its size andmake it less vertically integrated--by spinning off into separate enterprisessome selected railway units that do not perform the core railway transportfur.ction, namely, the railway construction, and manufacturing companies, aswell as the diversified economy ventures (para. 2.7) and those units thatperform welfare functions. Such a divestiture has the potential to generatecash for financing much needed railway capacity expansion investment (para.5.27(e)). It also should improve economic efficiency by (a) relieving theonus of management on the railway system; (b) encouraging stronger competitionamong divested units (e.g., allowing divested railway construction companiesto compete more freely for construction projects); and (c) permitting thedivested companies and the remaining railway transport units to separatelydevelop recruitment and compensation policies that suit their own needs, unen-cumbered by the weight of a larger bureaucracy. MOR plans to launch a cooper-ative program with the Bank to address the Dossibility of divesting nonrailtransport functions.

5.17 Developing Railway Human Resources. Manpower development is anintegral part of the possible modernization of MOR's transport managementsystem. The Chinese railway system needs to upgrade the skill levels of itstechnical staff in order to fully exploit the advanced technologies that arebeing introduced. The railway also needs to train its management staff inorder to meet stronger competition from other modes. Fresh recruits should becarefully screened and their numbers weighed against the needs to contain orreduce staff levels.

5.18 As part of the modernization exercise, MOR would forecast the opti-mal size and composition of its staff targeted to be achieved in the nextdecade. It then would examine the existing staffing and all major personnelpolicies, and prepare a manpower development plan to achieve the staff tar-gets. The manpower development plan would address the compensation policies,including the pay scale, performance incentives, employee benefits, reassign-ment and retraining of railway staff, and recruitment of new employees. Theplan would also address the question of how to deal with redundant railwaystaff (para. 4.5).

5.19 Fostering MOR's human resources would enable the railway to achievestronger management, with flexibility in hiring, firing, and rewarding of per-formance. MOR plans to cooperate with the Bank in this effort.

5.20 Implementing a Management Information System. Efficient and effec-tive management of a vast transport organization such as MOR requires care-fully designed management information systems. Such systems would providerailway managers at different levels with the right kinds of financial, oper-ating and service performance information needed for them to monitor and con-trol railway operations, and to make well-informed decisions. The Bank hassupported MOR's quest to develop an MIS capability. MOR has completed testingits pilot MIS project at the Harbin regional administration and is developinga plan to implement a networkwide MIS in conjunction with the computer-basedTransport Management Information System (TMIS) being installed (para. 5.30).To benefit from this MIS on a large-scale basis, MOR is taking actions to:

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(a) complete implementation of the pilot MIS in the Harbin administra-tion;

(b) undertake a MIS study at the MOR headquarters level that would com-plement the system being installed in the Harbin administration; and

(c) develop plans for revising the MIS in conjunction with the creationof an interface between it and the TMIS, and implemerting therevised MIS in the regional administrations.

C. Strengthening Railway Investment and Finance

5.21 Buttressing Investment Planning. To accommodate the traffic growthin the 1990s, the vicious circle in investment planning must be broken (para.2.17). To this end, two major steps have been taken recently. First, thegovernment has since mid-1992 officially adopted for planning purposes a morerealistic economic growth rate of 8 to 9 percent per year, compared to 6 per-cent employed previously (para. 3.16). As a result, infrastructure investmentplans, including railway investment plans, are expected to be revised upwards.Second, with Bank assistance the Ministry of Railways has carried out fore-casting of railway transport demand under a scenario in which GNP is assumedto continue to grow at 8 percent per year through the year 2000.

5.22 This scenario has been adopted by the RIS decision support systemto: first, prepare an investment program that would be used as a basis forsetting railway tariffs and forecasting MOR's borrowing needs; and, second,predict the consequences of not having enough budget to finance the neededinvestment program. The results of this RIS analysis exercise indicate that:(a) the level of railway investment program for capacity expansion needed toaccommodate the forecast traffic level will be some 40 to 60 percent largerthan the currently planned level; (b) if the currently planned level of rail-way investment is implemented, then the level of unsatisfied demand for rail-way transport will be 80 percent higher than currently projected; and (c) thetotal economic loss associated with the unsatisfied demand will be 0.5 to1 percent of GNP (Annex 6).6/ Thus, the investment to expand capacity wouldreduce unsatisfied demand and thereby lessen economic losses due to bottle-necks. The benefits from this reduction are on the same magnitude as theexpansion investment itself. RIS analysis has also been carried out to assesstraffic flows and determine priority investments under budget constraints.

5.23 At present, MOR is discussing with SPC the possibility'of enlargingthe railway investment plans in response to the new planning economic growthrate.

5.24 Choosing the Best Means to Expand Railway Capacity. The Ministry isfaced with the task of expanding railway network capacity at a much fasterrate than in the 1980s. This is a major challenge because MOR is alreadyhaving difficulty in financing the capital program from its borrowings and

6/ This loss will be twice as large if MOR does not achieve the increase inthroughput due to improved routing efficiency assumed in the RISanalysis.

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internally generated funds (paras. 2.12, 3.9). Therefore, MOR should striveto stretch its financial resources as far as possible by more aggressivelychoosing the most cost-effective means to expand rail transport capacity.There are three main approaches:

(a) Adopt a rigorous means to identify high-priority investments anddevelop an economically optimal investment plan under budget con-straints. An order-of-magnitude RIS analysis has indicated thatoptimization of the location, scale, and timing of railway invest-ments could yield gains of 10 percent or perhaps more in systemwiderail traffic throughput. The 10 percent gain represents some $4-5billion of savings in railway construction cost through the year2000 (Annex 6; para. 2.19).

(b) Implement technological measures and operating methods aimed atincreasing railway capacity at lower capital and operating costs(e.g., by running more unit trains, introducing bypass-blockingconcepts, allowing heavier axle loads, reducing the dead weight ofwagons, and the like). The results of the capacity simulation studyconducted by NOR in cooperation with the Bank suggest possible keymeasures that can be taken to increase railway capacity by as muchas 30 percent at relatively small incremental costs (including mea-sures such as increasing the train length further than being imple-mented now, boosting the power-to-weight ratio of the train,decreasing minimum headways and increasing the train stopping dis-tance).71 In addition to this capacity simulation study, the Bankis supporting a new study by MOR aimed at determining and imple-menting cost-effective technological measures and operating methodson a comprehensive basis.

(c) Improve the routing patterns of freight traffic in order to accommo-date more long distance traffic on the railway system. This actionwould thereby increase the total ton-km of freight traffic to becarried by the railway system. A preliminary analysis conductedwith the RIS system has produced results that seem to indicate thatimprovements in freight routing patterns can potentially increasethe total ton-km of railway freight traffic by about 10 parcentwithin current line capacities (paras. 2.19, 3.15). With someenhancements the RIS system can be used to carry out a more rigorousanalysis of freight routing patterns.

5.25 Improving Railwav Financial Manaxement. Besides reforming the tar-iff system, MOR needs to implement other financial reforms, in order to pro-vide proper management of its operating performance and financial conditionand to lay down a foundation for longer term capital and operational planningfor the railway as a transport enterprise. Specifically, the railway needsto:

7J1 As summarized in World Bank Infrastructure Note No. RW-3, "How to ImproveCapacity: The Case of China Railway," by E.P. Anderson, L.C. Davis, andC.D. Van Dyke (April 1992).

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(a) prepare all financial statements according to guidelines establishedby MOF (including income statements, balance sheets, and fund flowstatements);

(b) revamp the railway accounting system, to make it uniform throughoutand conform better with international practices;

(c) establish a costing system for determining the variable and fixedcosts of its transport services to guide investment planning, costcontrol, selection of alternative railway services, and tariff set-ting;

(d) institute more effective financing plans and internal control sys-tems, to enhance the financial accountability of various railway andnonrailway units; and

(e) improve the use of scarce foreign exchange, by focusing more on theacquisition of foreign know-how, equipment, machinery, and the like,for which there are no domestic substitutes, as distinguished fromitems such as rails and other steel products that are available inChina.

5.26 The Bank will continue to support MOR's efforts to improve itsfinancial management. Under ongoing railway operations the Bank has supporteda railway costing study. Under a future railway operation the Bank would besupporting MOR's efforts to prepare and implement action plans to improve(a) the railway accounting system, (b) the railway tariff system, and(c) MOR's capability for financing its investments. Additionally, a futureBank operation could support MOR's efforts to augment its cost control.

5.27 ExRanding the Scope of Financial Resource Mobilization. MOR shouldconsider using as many means as possible to obtain funds to finance its vastinvestment requirements. Besides raising railway tariffs and surcharges, MORshould consider:

(a) sharing the cost of installing fiber-optic cables with other users(para. 5.30);

(b) entering into joint ventures with other investors (domestic andforeign) to provide specialized transport services (e.g., import-export container transport services);

(c) letting major coal mines, coal users, or other railway customers ownfreight wagons;

(d) taking advantage of the new economic liberalization policy byjointly investing with foreign investors on new railway constructionprojects;

(e) divesting nonrail transport functions and using proceeds from thedivestiture to finance capacity expansion (para. 5.16); and

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(f) expanding the scope of borrowing, both domestically and internation-ally, for example, by raising more domestic bonds, and borrowingfrom international capital markets [e.g., through an Expanded Cofi-nancing Operation (ECO) supported by the Bank].

5.28 Regarding international funding, the major existing sources, namely,the Overseas Economic Corporation Fund (OECF) of Japan and the World Bank, arealready approaching their lending limits for the Chinese railway system.Since these two sources combined contribute no more than 10 percent of MOR'scapital investment requirements, MOR should consider expanding the scope ofinternational borrowing into private capital markets. A potential first stepwould be for MOR to undertake an ECO with a future Bank loan. This wouldenable MOR to borrow hard-currency funds from a private capital market under aguarantee of government-related risks provided by the Bank. Such an ECO wouldhelp attract new funding sources to MOR, reduce costs of borrowings, andextend maturities (up to 15 years) by tempering political risks to lenders.

D. Enhancing the Qualitv and Efficiency of Railway Services throughModern Technology and Techniques

5.29 Improving Service to ShiDpers. With its existing technology, MORhas made significant gains in (a) expanding network capacity, (b) increasingthe utilization of locomotives and rolling stock, and (c) reducing the costsof operation. Some of these improvements in freight operations, however, havebeen at the expense of the shipper that has to place its order for wagonsbetween 18 to 48 days in advance of the loading date, to accept a wagon thatis not ideal for the commodity, and to load the wagon within four hours afterit arrives. Shippers in a modern market economy would not be able to competesuccessfully within these rigid constraints. As China becomes a market-oriented economy, Chinese shippers will require a more flexible transportsystem to react efficiently to dynamic market forces. This will require theintroduction of modern computer-based, transport management informationsystems (THIS) that will enable the railway to make substantial, rapid changesto its transport plans without hurting MOR's excellent utilization of locomo-tives and rolling stock. A major upgrade of the railway's telecommunicationssystem is of course a prerequisite to the implementation of a TMIS. The for-mation of marketing groups at the administration level might also be helpful.The objectives would be to increase revenue and operating profits in the nearterm and to develop closer relationships with shippers in the longer term.

5.30 The Bank has supported the Ministry's evaluation of alternativeapproaches to developing and implementing a TMIS with an associated telecommu-nications system. A future Bank operation proposes to finance implementationof a THIS and associated telecommunications system. To capitalize on theirlarge economies of scale, and make more capital available to railway telecom-munications, the Bank is encouraging MOR and the Ministry of Post and Telecom-munications (MPT) to jointly install fiber-optic cables along railway corri-dors.

5.31 Modernizing Container Transport Service. Given the importance forthe railway to adapt itself to changes in transport demand in the future, par-ticularly the needs of higher-value cargo for better quality service, and theinternational trends toward containerization of imported and exported cargo,

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the railway is giving higher priority to container service. Container servicerequires a different approach from the traditional approach to rail transportservice in China. This type of service must be more customer-oriented, withhigher frequency, faster travel times, and greater rel4a1illity than regularfreight service, and it should be closely coordinated X 31 other modes, aswell as with MOR's own local pick-up and delivery servic-s. These require-ments necessitate changes in train operations, organization, and staff atti-tudes. The Bank is providing technical assistance to MOR's container trans-port study that addresses all these issues. Also, the Bank is helping MORinitiate a pilot project to test and demonstrate the effectiveness of a moderncontainer transport service. Based on the recommendations of the action plandeveloped under the container transport study, the Bank could help MOR estab-lish a nationwide network of container service.

5.32 Upgrading Passenger Service. As the economy is becoming more marketoriented, railway passengers will require higher standards of service. Tomeet these increasing requirements, MOR must address several areas of qualityimprovement, including:

(a) the provision of more passenger capacity at full cost, where thereis substantial unmet demand;

(b) the installation of passenger reservations systems on a networkwidebasis;

(c) the setting up, monitoring, and control of standards of customerservice;

(d) the provision of customer information systems for passengers;

(e) the improvement in both on-ground and on-train services, includingthe provision of more amenities at passenger stations, the contract-ing out of catering services on trains, the answering of customerqueries, etc.; and

(f) the improvement in passenger and pedestrian safety.

5.33 The Bank is encouraging MOR to undertake a feasibility study for apassenger reservations system in the near future. The cost of implementingsuch a reservation system will be relatively small compared with the cost ofthe ongoing upgrade to the telecommunications system.

5.34 Raising Operating Efficiency through Better Maintenance. Despitethe care given to their maintenance, MOR's plant and equipment tend to wearout faster or fail more often than usual, because of: (a) the heavy utiliza-tion of plant and equipment; (b) the inadequate designs of some critical com-ponents; and (c) the heavy reliance on manual methods, hand tools, and anti-quated machine tools that lowers the quality of maintenance. These threefactors tend to cause disruptions in railway operations, which in turn reduceboth the operating efficiency and transport capacity of the railway.

5.35 As an example, the maintenance of the track system, while generallygood, is vulnerable to the problems mentioned above. First, although the

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design of NOR's rails is basically sound, the rails are often too light forthe traffic, causing them to deteriorate relatively fast. Second, inadequatedesigns of concrete sleepers and fasteners are causing added rail wear. And,third, the poor drainage of much of the rock ballast is shortening the life ofthe rails, sleepers, and fasteners. To solve these problems MOR has takensteps with Bank assistance to: (a) install mechanized on-track machinery toclean ballast and restore track alignment and surface; (b) replace existingtrack with heavier and more durable rails; tc) improve the designs of concretesleepers and fasteners; and (d) develop better methods of track maintenancethat rely on the use of advanced on-track machinery, track recording cars, andother inspection equipment. Also, with Bank assistance MOR plans to improvetrack maintenance management and to acquire modern machinery for mechanizedtrack maintenance.

5.36 As another example, the maintenance of the diesel locomotive fleet,while generally good, also needs to be more efficient. The key measures thatneed to be taken by MOR include: (a) improving the design and manufacture ofequipment parts; (b) consolidating the maintenance functions and work loads ofrepair shops; (c) reducing the number of designs of locomotives and rollingstock; and (d) achieving better standardization of equipment parts. The Bankhas helped MOR improve the maintenance of locomotives, freight cars andpassenger coaches, through a variety of measures including the provision ofcritical components, and the establishment of a unit exchange maintenancesystem for foreign locomotives. The Bank will also help MOR modernize thedesign of several components as well as the machine tools for making them.

5.37 Boosting Environmental Protection. Since the setting up of adepartment within MOR for public health and environmental protection in 1972,MOR's environmental activities have been strengthened through the establish-ment of environmental training schools, rules and regulations, and a series ofinvestments to correct environmental problems. By not using modern technologyand techniques of environmental protection, however, NOR's environmental man-agement and control activities have not been as effective as they should be.MOR needs to:

(a) familiarize its environmental staff with modern technology formonitoring and control of air and noise pollution and of solid andliquid waste;

(b) upgrade the capability of its environmental staff for assessingenvironmental impact and for developing strategies and prioritiesfor tackling environmental problems; and

(c) conduct studies of its current problems with passenger health, wastefrom trains, litter along the railway track, air and noise pollutionin railway factories and workshops, and industrial waste, to developand implement action plans for remedying the problems.

5.38 A first cooperative program for railway environmental protectionbetween MOR and the Bank has been undertaken, with funding available fromUNDP. The main objective of this program is to prepare an action plan toalleviate some of MOR's most pressing environmental problems, namely, pollu-tion related to passenger trains and noise pollution caused by passing trains.

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This progr,a is bolng followed by a second program designed to strengthenORX's capability in performing environmental protection activitie, a. well as

In devoloping medium- and long-term strategies for alleviating railway envi-ronmental pollution. These action plans are intended to be implemented undera future bank railway project.

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VI. MEDIUM-TERM BANK ASSISTANCE STRATEGY

A. The Bank's Contributions in the Past

6.1 Since 1983, the Bank has assisted the government through fivenational railway operations and one local railway operation, totaling$1,365 million in loans and credits. The primary objectives of the first fournational operations were to finance railway construction to expand trafficcapacity in high-priority corridors (Map M.3) and to introduce new technologyfor improving railway operating efficiency. The fifth national operationbegar a new approach of supporting railway policy initiatives and tech-nological modernization on a systemwide basis. Future railway operations inthe next five years are intended to implement the new "policy-technology"approach more extensively.

6.2 In the course of assisting MOR the Bank has tried to expose MOR tonew ideas on systemwide modernization, but, to the extent possible, to assistNOR only with initiatives that the railway believes to have strong potentialfor a high payoff. At the beginning of the Bank's railway operations inChina, MOR was unfamiliar with most modern management techniques andtechnology, and therefore was reluctant to embark upon programs of technicalcooperation whose benefits it did not see clearly. Since then, the dialoguebetween MOR and the Bank has bren enriched through a range of such programs.A summary of these programs and newly proposed programs is given in Annex 10.Now, MOR has become more convinced about the potential benefits of such tech-nical cooperation with the Bank, and it is much more receptive to technicalassistance from the Bank and others in a wide variety of subjects ans disci-plines.

6.3 A recent audit by the World Bank's Operations Evaluations Depart-ment, which reviewed the First Project in the context of the subsequent fouroperations, supports the Bank's "policy-technology" approach. It makes amajor observation: Significant gains in economic efficiency can still be madeby increasing operating efficiency, but larger gains are likely to be made ona broader basis, by alleviating transport bottlenecks through capacity expan-sion, or by reducing freight traffic intensity, or by providing higher qualitytransport services.

B. Objectives and Scope of Bank Assistance

6.4 Future Bank railway operations in China in the medium term (i.e.,next five years or so) would help MOR deal with the issues discussed inChapter V on the basis of the policy-technology approach mentioned above.Specifically, these operations would support four of MOR's objectives:

(a) Policv initiatives, in railway investment planning, tariff settingand regulation, economic contract, staff compensation and incen-tives, financial management, financial resource mobilization, etc,;

(b) institutional develoDment of the railway system, potentially withrespect to manpower development and rationalization; development ofcorporate strategies for rail transport units, railway construction

- 43 -

and manufacturing companies, and diversified economy ventures;divestiture of nontransport functions; and modernization of railwaywelfare functions (including health, education and housing);

(c) capacitv expansion investment on a rational economic basis; and

(d) svstemwide technological modernization, covering management informa-tion systems, computer and telecommunications technology, service-quality improvement, plant and equipment maintenance, and environ-mental protection.

6.5 The Bank's support would be provided through (a) technical assis-tance financed by the Bank's own resources or under bilateral or multilateralgrants (e.g., from the Japan Grant Facility or UNDP); and (b) Bank operations.Possible contents of these operations are listed in Annex 11. Annex 12 summa-rizes the key issues or objectives that ongoing and future railway projectcomponents are intended to address. Annex 13 shows an approximate time framefor implementation of possible actions under these components.

- 44 -

CONTRIBUTIONS

Apart from those mentioned on page (i), the following people havecontributed to this report:

* Robert Burns (Reviewer: White Cover)* Pedro Geraldes (Reviewer: White CoverJ* Tariq Hassan (Railway Law]* Frida Johansen (Reviewer: Green Cover)* Hernan Levy (Reviewer: White, Green and Gray Caversl* Kang-Ning Xu (Graphics, Statistics)

-45 - Table 1

Table 1 CHIMNA: FreiLht Traffic bv Mode

Domestic Pipe- civil OceanRail Road watety Une aviation Total Shiogint

Traffic (bilion ton-km)

1952 60.2 L4 11.8 - 0.032 73.4 2.8

1977 456.9 25.1 102.1 387 0.076 622.9 174.1

1979 559.9 74.5 139.3 47.6 0.123 8214 317.11980 571.7 76.4 m1l 49.1 0.141 849.4 353.21981 57L.2 78.0 L50.7 49.9 0.170 850.0 364.31982 612.0 94.9 170.8 50.1 0.198 9280 376.91983 664.7 1084 181.1 53.4 0.229 L007.7 397.71984 724.8 153.6 V6.1 57.2 0.311 1,132.0 437.41985 812.6 169.3 237.1 60.3 0.415 1,279.7 532.91986 876.5 21L8 270.0 61.2 0.481 1,419.9 594.81987 947.1 26M0 288.9 62.5 Q650 L565.2 657.61988 987.8 322.0 310.4 65.0 0730 1,686.0 696.61989 1L039.4 337.5 349.8 62.9 0690 L790.2 768.91990 1,062.2 335.8 345.1 62.7 0.820 L806.6 814.11991 1,097.2 342.8 396.5 62.1 L010 L899.6 899.0

Mode Split (%)1952 82.0 2.0 16.0 - - 100.0

1977 73.4 4.0 16.4 6.2 - 100.0

1979 68.2 9.1 17.0 5.8 0.0 100.01980 67.3 9.0 17.9 5.8 0.0 100.01981 67.2 9.2 17.7 5.9 0.0 100.01982 65.9 10.2 184 5.4 0.0 100.01983 66.0 10.8 18O 53 0.0 100.01984 64.0 13.6 17.3 5.1 0.0 100.01985 63.5 13.2 18.5 4.7 0.0 100.01986 61.7 14.9 19.0 4.3 0.0 100.01987 60.5 17.0 18.5 4.0 0.0 100.01988 58.6 19.1 18.4 3.9 0.0 100.01989 5&1 18.9 19.5 3.5 0.0 100.01990 588 1&6 19.1 3.5 0.0 100.01991 57.8 18O 20.9 3.3 0.1 100.0

G;rowth rate % 0..

1952 -7 8.4 12.1 9.0 - 15.7 89 18.0

183 - 84 41.7 8.3 7.1 35.8 12.3 10.01984 -85 12.1 10.2 20.9 5.4 33.4 13.0 2L81985 -86 7.9 25.1 13.9 L5 15.9 1L0 11.6986 - 87 8. 25.6 7.0 2.1 35.1 10.2 10.6

1987 - 88 4.3 2L0 7.5 4.0 123 7.7 5.91988 - 89 5.2 4.8 127 (3.2) (5.5) 6.2 10.41989 - 90 2.2 (5) (1.3) (0.3) 18.8 0.9 5.91990 - 91 3.3 2.1 14.9 (L0) 23.2 5.1 10.4

1982 - 91 6.7 153 9.8 2.4 19.8 8.3 10.1* tauiU.omlYs- aahm,t. 9r

Sowm SnihUmd Yesbaoct-IW.TmW. Lt-LpSl)

- 46- Table 2

Table 2 CHINA: Passenger Traffic by Mode

avilRailway Road Waterway aviation Total

Trafric (biion gassenter-km)

1952 20.0 2.3 2.5 0.024 24.8

1977 102.3 44.8 9.8 1.834 158.7

1979 121.6 60.3 11.4 3.499 196.81980 138.3 73.0 12.9 3.956 228.21981 147.3 83.9 13.8 5.016 250.01982 157.5 96.4 14.5 5.950 274.41983 177.6 110.5 15.4 5.896 309.41984 204.6 133.7 15.4 8.350 362.11985 241.6 172.5 17.9 lL7UO 443.71986 258.7 198.2 18.2 14.600 489.71987 284.3 219.0 19.6 18.205 541.11988 326.0 , 252.8 20.4 21.700 620.91989 303.7 266.2 18.8 18.679 607.41990 261.3 262.0 16.5 23.408 563.21991 282.8 287.1 17.7 30.132 617.7

Modal split (%)1952 80.6 9.3 10.1 0.1 100.0

1977 64.4 28.2 6.2 12 100.0

1979 61.8 30.6 5.8 1.8 100.01980 60.6 32.0 5.7 L7 100.01981 58.9 33.6 5.5 2.0 100.01982 57.4 35.1 5.3 2.2 100.01983 57.4 35.7 5.0 L9 100.01984 56.5 36.9 4.3 2.3 100.01985 54.5 38.9 4.0 2.6 100.01986 52.8 40.5 3.7 3.0 100.01987 52.5 40.5 3.6 3A 100.01988 52.5 40.7 3.3 3.5 100.01989 50.0 43.8 3.1 3.1 100.01990 46.4 46.5 2.9 4.2 100.01991 45.8 46.5 2.9 4.9 100.0

Growth rate % p.a.

1952 - 77 6.7 12.6 5.6 18.9 7.7

1983 - 84 15.2 21.0 0.0 41.6 17.01984 - 85 18.1 29.0 16.2 40.1 22.61985 - 86 7.1 14.9 L7 24.8 10.41986 - 87 9.9 10.5 7.7 24.7 10.51987 - 88 14.7 15.4 4.1 19.2 14.71988 - 89 (6.8) 5.3 (7.8) (13.9) (2.21989 - 90 (14.0) (1.6) (122) 25.3 (7.31990 - 91 8.2 9.6 7.3 28.7 9.7

1982 - 91 6.7 12.9 2.2 19.8 9.4* Excudeac-gangguupai.S StatilYesYmbookctfbns-9Tbl.e2-a.p513

I _SZU?u(~,

- 47- Table 3

Table 3 Transport Investment vs. Economic Output in China(Y billion)

Annual GNP Transporttransport (current investment

Year investment prices) as % of GNP

1966 -70 3FYP 15.0 /_1 935.0 1.61971 -75 4FYP 31.8 /_1 1,323.0 2.41976 -80 5FYP 30.2 /1 1,758.0 1.71981 -85 6FYP 41.9 3,130.5 1.31986 -90 7FYP 89.1 6,875.3 13

1980 5.9 447.0 1.31981 3.6 4773 0.81982 5.2 519.3 1.01983 7.2 580.9 121984 10.0 696.2 1.41985 15.9 856.8 1.91986 16.7 969.6 1.71987 17.4 1,130.1 1.51988 19.0 1,406.8 1.41989 18.0 1,599.3 1.11990 18.0 1,7695 1.01991 30.0 1,9855 1.5

1980 - 1991 average 13/_1: Investment of FYPs includes Post and Telecommunications

(about 4% of total).

Source: Statistical Yearbook of China- 1992, Table 5-22, p. 162, table2-12, p. 31

Statistical Yearbook of China- 1991, Table 5-22, p. 160

Other data based on SAR of China Sixth Railway Project, table 1.05, p. 88

Vilu'hI3kwlh1&ftlV6

Table 4

- 48 -

Table 4: NUMBER OF MOR STAFF BY ACTIVITY TYPE(thousands at year end)

1980 1985 1990No. 2 No. 2 No. S

Rail transport 1,556 60 1,861 60 1,709 50

Diversified economy /aTruck 0 0 0 0 140 4Other 0 0 0 0 160 5

Subtotal O 0 O 0 300 9

Industry 356 14 405 13 430 13

Construction 501 19 628 20 571 17

Others 191 7 229 7 371 11

Total 2.615 100 3.124 100 3.381 100

La Includes all "diversified services" such as trucking services (seeAnnex 2).

Table 5- 49 -

Table 5: ACTUAL REVENUES AND EXPENSES, 1986-91(in Yuan million)

Average annual1986 1987 1988 1989 1990 1991 growth rate (2)

OperatinR Revenue 23.911 26.212 28.062 31.607 41.105 46.704 14

Oneratnax Expenses 15.154 17.290 20.272 24.982 27.807 32.509 16Of which: Working expenses 12,161 13,976 16,858 21,058 23,451 27,645 18

Depreciation 2,993 3,314 3,414 3,924 4,356 4,864 10

Net Oneratina Income 8.757 8.922 7.790 6.625 13.298 14.195 10

Nonoperating income la 849 999 865 479 200 49 -43

Interest expense * 992 754 1,871 1,940 2,115 21Business tax - 1,389 1,487 1,675 2,188 2,499 14Lump-sum tax - - - - 2,000 2,000

Net Income 8.341 7.540 6.414 3.55a 7.370 7.630 -1

Working ratio Lk 542 562 612 682 582 602Operating ratio /c 672 662 72Z 792 682 702

Unit operating revenue 2.12 2.13 2.14 2.36 3.14 3.43 622 increase(fenlctkm) since 1986

Unit operating expenses 1.34 1.41 1.55 1.86 2.13 2.39 782 increase(fen/ctkm) since 1986

a Revenues from railway manufacturing and construction companies.1 Operating expenses, less depreciation, expressed as a percentage of operating revenue.! Operating expenses, expressed as a percentage of operating revenue.

Table 6- 50 _

Table 6s INTERNATIONAL COMPARISON OF SELECTED RAILWAYS

China France India Poland US USSR1990 1987 1988 1988 1988 1989

Comparison of System Size and Transport Output

System Size:Route length (km) 52,700 43,600 76,200 26,600 204,088 147,500Staff size (thousands) 1,700 222 1,624 360 259 1,814Locomotive fleet size 13,600 4,266 8,810 4,795 19,755 33,000Wagon fleet size 364,900 169,400 345,800 137,000 1,239,000 1,371,000Coach fleet size 27,300 10,310 27,700 6,324 2,232 56,200

Transport Outputs:vreight traffic (billion ton-km) 1,060 50 230 110 1,594 3,852ssenger traffic (billion pass-km) 261 60 264 56 20 411-ibined traffic (bil converted ton-Ian) 1,321 110 494 166 1,614 4,262)senger share of traffic (2) 20 55 53 34 1 10

Comparison of Productivity of Track. Equipment and Labor

Track:Freight ton-km/route-km (million) 20.1 1.4 3.0 4.1 7.8 26.1Passenger-km/route-km (million) 5.0 1.4 3.5 2.1 0.1 2.8Converted ton-km/route-km (million) 25.1 2.5 6.5 6.2 7.9 28.9

Equipment:Freight ton-km/wagon (million) 2.9 0.3 0.7 0.8 1.3 2.8Passenger-km/coach (million) 9.6 5.8 9.5 8.8 9.2 7.3Converted ton-km/locomotive (million) 97.1 25.7 56.1 34.6 81.7 129.2Steam share of locomotives (Z) 46 0 43 5 0 0Wagon turnaround time (days) 4.0 5.8 11.6 n.a. 19.0 6.6Wagon turnaround distance (km) 993 n.a. 1,270 n.a. 2,100 1,610

Labor:Converted ton-km/thousand employees 777 492 304 461 6,232 2,350Labor cost/revenues (2) 10 90 51 n.a. 41 43Labor share of operating costs (2) 15 n.a. n.a. n.a. 44 n.a.

Comparison of Transport Management Systems

Monolith Yes Yes Yes YesLines of business la Yes YesWholesaler /b YesCompetitive access /c YesToll-rail enterprise /d Yes

/a Different lines of business are set up among freight railways, Amtrak and commuter railwayauthorities.

lb US freight railways act as "wholesalers" providing train haulage services for "retailers"such as the American President Lines Corporation, which provides door-to-door containertransport services for a variety of end-users.

/c A US freight railway allows other freight railways to run trains on its system throughtrackage lights and joint terminal agreements.

/d Amtrak allows US freight railways to run their tralns on its track system along the NortheastCorridor for a fee.

Sourcest Ministry of Railways; Infrastructure Division, Infrastructure and Urban DevelopmentDepartment, World Bank.

- 51 - ANNEX 1Page 1

CHINA'S RAILWAY STRATEGY

Future Demand for Transport

Factors Affecting Future Total Demand for Transport

1. Several factors are acting on transport demand in China, with bothpositive and negative effects. For freight transport, the positive factorsare (i) economic growth and (ii) greater proportion of interprovincial flowsand the negative factors are (i) increasing prices, (ii) change in economicstructure, and (iii) increasing energy efficiency and rationalization oftransport flows. The increasing market orientation of the economy could haveboth positive and negative effects on transport flows. For passenger trans-port, the positive factors are (i) population growth, (ii) increasing percapita incomes, (iii) less restrictive government travel controls, and(iv) greater travel by entrepreneurs in a market-oriented economy, and thenegative factor is increasing prices.

2. Relationship to Economic Growth. The growth in freight transportdemand has been roughly proportional to the growth of GDP, and this relation-ship can be expressed in the form of an overall elasticity of demand withrespect to GDP. Based on performance over the last 10 years, the net elasti-city of demand with respect to GDP can be estimated at 0.95. Although thisshould not be perceived as a constant due to the influence of the other fac-tors mentioned above,l/ and the expected changes in regional transport pat-terns described below, it is a key predictor of future growth. Forecastgrowth in transport demand is related to the forecast growth rates in GDP (orGNP) through the use of the above elasticities, with modifications to reflectchanges in other significant factors (Table A1.1).

3. Greater Proportion of Interprovincial Flows. The growth in nationaltransport demand over the past ten years is closely linked to traffic flowsbetween provinces linked to the areas of rapid economic growth along the eastcoast (especially in the provinces surrounding Shanghai) and in the south ofChina (e.g., Guangdong Province). The fastest growth in demand for transporthas been either within these rapidly growing regions or along the routes con-

1/ An appropriate demand model would relate demand to a combination of fac-tors including GDP (or per capita income), population, relative price inreal terms, and administrative or structural factors. Estimates of pas-senger trip demand elasticities using a model with two independent vari-ables (price and per capita income) in the recent Yangtze Economic ZoneTransport Study (PPK Consultants, Travers Morgan and the YEZTS Comprehen-sive Transport Study Group, April 1992) gave elasticity values of 1.19 to1.47 with respect to per capita income, equivalent to an elasticity ofabout 1.3 to 1.6 for total passenger trips, if per capita income grows atthe same rate as GDP.

ANNEX 1_ 52 - Page 2

necting these areas with the other regions of the country and the outsideworld.2/ The flows of coal from the provinces in the Coal Base (Shanxi,Shaanxi and Inner Mongolia) represent the largest of these flows (Map M.1) andhave been growing the fastest of all longer-distance freight traffic flows(6.5 percent per year). Linkages for input materials and industrial productsfrom the northeast and southwest have also increased significantly, along withmanufactured goods shipped from the high growth areas to other regions.Because these freight flows travel relatively long distances, the demands onthe capacity of the interprovincial transport system have been increasingsignificantly. In the future, this increasing proportion of medium- to long-distance transport demand, which is based on the location of resources andexisting industrial plants relative to growth areas, will act to increase thetransport intensity of economic growth in China and counteract the measuresfor reducing transport intensity discussed above (Map M.2).

4. Transport Pricos. The effects of increased prices on traffic levelshave been much less than would be expected under conditions without transportsystem supply shortages and are expected to be even lower in the future.Railway freight traffic decreased by 6 percent compared with forecasts, fol-lowing rail tariff increases totaling 32 percent between 1989 and 1991. Thisimplies a price elasticity of -0.2 for traffic, which is lower than the priceelasticity for total demand, due to the effect of the large amount of unsatis-fied freight demand at current prices. Because the prices of all transportmodes have been increased to levels roughly similar to their long-run marginalcostS, future increases in transport prices are expected to be virtually zeroin real terms, reflecting only increases in costs due to inflation and there-fore no decrease in demand from this factor (with the exception of the railprice scenario for funding higher investments, which is described below).

5. Change in Economic Structure. Chiua is noted for its high intensityof freight traffic--measured as total freight traffic handled (in both tonsand ton-km) per US dollar of economic output. To produce one dollar ofGNP,31 China transports about five times as many tons of freight and handlestwice as many ton-km of traffic than India or Brazil (Figure A1.1), which havesimilar distributions of resources and activity centers. China's high freightintensity can be attributed to several factors--the dominance of coal as asource of energy (about 75 percent of all of China's energy consumption), therelatively small service sector and large heavy industry sector, many low-value products, low energy efficiency, and underpricing of energy, raw materi-als, and transport services. High freight intensity also is encouraged bydecisions not to preprocess raw materials before transportation and the lackof attention to logistics costs in the central planning of industry locationand distribution systems, all resulting in uneconomic transport of materials.

2/ The growth in total freight demand has been fastest in intraprovincialflows in the rapidly growing regions.

3/ GDP figures were adjusted by purchasing power to determine the most com-parable figures among countries with different foreign exchange ratepolicies. The adjustment is based on ratios of ICP adjusted GDP to offi-cial CDP calculated by World Bank staff for 1985 and applied to 1988 CUP.

- 53 -

Page 3

On the other hand, when measured in relation to population size instead ofeconomic output, China's freight traffic intensity per capita is one of thelowest in the world. This will change, however, with increasing per capitaGDP.

Figura Al.1t INTERNATIONAL CONPARISON OF FREIGHT TRAFFIC INTENSITY(per US$ of GNP--1987)

( *Tons/1,000 ICP G3DP [JTon-km/ICP GDP )

6. Enerav Efficiency and Rationalization of TransDort Flows. Thetransport intensity of the Ch4nese economy is already declining due to shiftstoward the market economy, in which shippers give more attention to minimizinglogistics costs and to the Use of modern energy-efficient technologies inpower generation and industrial production. This trend will undoubtedly con-tinue and will be reinforced by the rationalization of coal and 'other bulkcounodity dlstribution (Annex 6). If they are implemented, these rationaliza-tion policies, combined with incresaed prices for coal and grain, are expectedto reduce total ton-ke hauled for these coemodities by about S percent overforecasts by the year 2000, based on the present policies Market forces willlalso lead to more rational use of the transport system in the future throughmore cost-effective industry location decisions, but these effects will t-ke along time to be realized because current industrial and resource locationswill determine the majority of flows of goods into the twenty-first century.The effect of these forces will be to further lower the transport intensity ofthe power sector and some industrial sectors to a small extent. Most of thelowering effect will be more than compensated by increases in interregionalflows described above.

.............................................................. ~~~ ~~~ ~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ANNEX 1- 54 - Page 4

7. Passenger Demand. The factors influencing passenger demand are notas well known as those affecting freight in China and need more research byNOR. Different factors have different effects on business, commuter, and per-sonal travel and on tourism. However, the majority of trips for business andpersonal travel are related to population growth (forecast at 1 percent peryear), per capita income elasticity (estimated at 1.5 and increasing due togreater mobility in the future), and price elasticity (estimated at -0.2 fortraffic in shortage conditions and -1.2 for total demand).4/ The values ofthese factors indicate a growth rate for passenger demand that is signifi-cantly faster than for freight (Table A1.1).

Alternative Scenarios of TransRort Demand

8. There are four basic scenarios that are useful for transport demandforecasts: low or high GNP growth without rationalization of transport dis-tribution or rail transport price increases (called Base Case) and low or highGNP growth with rationalization of commodity distribution and rail transportprice increases. The implications of these different assumptions are given inTable AllI and discussed individually below.

9. GNP Growth Rates. The GNP growth rate targets for the Chinese econ-omy used in past planning for the Eighth and Ninth Five-Year Plans have beenlow compared with past performance, averaging less than 6 percent per year.Although this is one possible scenario, it appears increasingly less likely,because the current economic growth rate has accelerated past this level.Given the present thrust of economic reforms in China, it appears realistic toexpect the economy to grow at least as fast as 8 percent per year in the1990s, and possibly as fast as 10 percent per year. A growth rate of 8 to9 percent per year has now been adopted by SPC as a revised basis for fore-casting to the year 2000 and this is considered more realistic for China'sfuture by World Bank economic analysts. Therefore, an 8 percent GNP growthrate was adopted by the RIS team for investment analysis, as reported in Annex6. Both the 6 percent growth and 8 percent growth scenarios are considered inTable A1.1.

10. Rationalization of Bulk Commodity Distributions. The Base Casefreight demand forecast used by the RIS team includes an assumption of contin-

41 There was an increase in railway passenger fares of 112 percent in 1989that resulted in only a 23 percent decrease in total rail passenger-kmfrom levels forecast at constant price. These national-level figuresreflect a combination of two separate situations: saturated marketswhere there is substantial unsatisfied demand with a shortage of ser-vices, and unsaturated markets where there are adequate services tosatisfy demand. In the first case, traffic will change very little inresponse to price, while in the second case traffic decreases signifi-cantly in response to price increases. Saturated markets with low priceelasticity due to large amounts of unsatisfied passenger trip demand arefound for services between the larger cities in China. Total demand fortrips was reduced at higher price levels, but it still exceeded the sup-ply at the new higher prices for many intercity rail services.

ANNEX 1- 55 - Page 5

ued reform and incremental rationalization of transport flows. However, amore drastic rationalization of bulk commodity distribution was assumed forthe alternative transport demand scenario, which reduces demand for coal,grain, cement and fertilizer transport by 5 percent compared with the basecase (Table A1.1). This level of potential reduction has been suggested byrecent studies of coal and grain distribution (Coal Transport Study and GrainDistribution Study).5/

11. Rail Transport Price Increases. The Base Case assumes that baseuand tariffs increase with inflation (i.e., no real increase in economicterms). However, the alternative scenario assumes an increase in railwayprices in real terms (38 percent for freight tariffs and 10 percent for pas-senger fares) that would be enough to finance the accelerated railwayinvestment program needed to meet demand under the high growth scenario (TableA1.1). A lesser tariff increase for the low growth scenario was analyzed.

12. Forecasts using the above assumptions show that demand for railtransport can be expected to grow by 4 to 5.7 percent per year for freight and8.4 to 11.3 percent per year for passenger trips in the Base Case, and thatdemand growth would decline to 3.4 to 4.4 percent for freight and 8.3 to10.6 percent for passenger trips with the alternative scenario (Table A1.1).The consequences for railway investments are discussed in Annex 6.

Modal Choice Issues

13. The expansion and modernization of the different transport modes haschanged the relationships among them, especially in the sense of encouragingmore specialization of each mode in its area of relative advantage: (i) Roadtransport has expanded with more modern truck and bus vehicles that providefast local and medium-distance transport (up to 800 km or more where there aregood highways). (ii) Waterway transport has expanded to include containertransport and to utilize modern equipment in the coastal and river delta areaswhere export/import traffic make it is highly competitive, but it has remainedmore traditional in other inland areas. (iii) Air transport has grown rapidlywith the acquisition of new modern aircraft and the introduction of competi-tion through regional airlines, taking a larger share of the medium- to long-distance passenger traffic. Finally, (iv) new oil and coal slurry pipelinesare planned to be built in a few locations with a relative cost advantage, butthey have a very limited capacity compared with rail transport.6/

14. The more gradual expansion and modernization of tl-e railway modehave kept its costs low in comparison with the other modes, and have main-tained its competitive advantage despite the shortage of rail transport capa-

5/ It is expected that market-oriented activities will further reduce thetransport requirements in some cases but also increase the transportrequirement in cases where buyers diversify their sources to get the bestprices.

6/ See the White Cover Report on the China Coal Transport Study, EA2TP,June 5, 1992.

ANNEX 1- 56 - Page 6

city. The rail advantage is particularly evident for medium- to long-distancefreight and passenger transport and for commuter trains. But the shortage offreight cars and line capacity has placed it at some disadvantage in compari-son with other modes where they are in a position to take up the extra demandleft over from the railway and can provide more reliability of service toshippers who need guaranteed delivery times. Nevertheless, the railway systemin China will continue to be the dominant mode for medium- to long-distancetransport, due to its continuing price advantage, even with full cost pricing,including provision for investment in new capacity.7/ If the railway cankeep up with demand and provide a market-oriented service with its relativeprice advantage, it is assured a growing demand for its services, according tothe detailed analysis performed by the RIS team (Annex 6).

15. The potential rail demand shown in Table Al.1 has taken into accountthe increasing role of road transport in the future, which will attract cer-tain types of cargo and passengers away from rail, despite relatively low railprices. The proportion of potential rail traffic that will be carried by therailway in the future will be determined by the future availability of railservices, which is determined by the proposed expansion of railway capacity(Annex 6).

7/ This conclusion is supported by all four recent national and regionalstudies undertaken in China: the Guangdong Province Comprehensive Trans-Dort Study, the Yanatze Economic Zone Trans2ort Study, the Chiga Rajll1Investment Study and the China Coal Transgprt Studv.

- 57 - ANNXIPage 7

Table A1.1: DEMAND FOR TRANSPORT BY SCENARIO(billion pkm or tik)

$62 N rwh 8 GNP aMrowthlpkm tl pln tlhmir

1989 Base Case ^gTotal transport demandAll modes 710 2,040 710 2,040Rail demand lb 400 1,510 400 1,510

Total medium-long distance lcAll modes 380 1,420 380 1,420Rail demand /b 340 1,300 340 1,300

2000 Base Case Idtotal transport dand

All modes 2,030 3,750 2,720 4,570Growth rate (S) 10.0 5.7 13.0 7.6

Rail demand Lb 970 2,320 1,300 2,790Growth rate (2) 8.4 4.0 11.3 5.7

Total medium-long distance /eAll modes 1,080 2,610 1,460 3,180

Growth rate (2) 10.0 5.7 13.0 7.6Rail demand lb 870 2,090 1,170 2,510

Growth rate (2) 8.9 4.4 11.9 6.2

Base Case with Rationalization of BulkM Mt Distorlb..ution /

eotal tranSpOrt emandAll modes 2,030 3,660 2,720 4,460Growth rate (Z) 10.0 5.5 13.0 7.4

Rail demand lb 970 2,320 1,300 2,790Growth rate (2) 8.4 4.0 11.3 5.7

Total medium-long distance /cAll modes 1,080 2,550 1,460 3,100

Growth rate (Z) 10.0 5.5 13.0 7.4Rail demand /b 870 2,030 1,170 2,430

Growth rate (Z) 8.9 4.1 11.9 5.9

2000 Base Case with Rationalization of BulkIm dl DistribUtion and Rai iransoorte ncreanes l1fTotal transport demand

All modes 1,940 3,470 2,460 4,000Growth rate (Z) 9.6 4.9 12.0 6.3

Rail demand lb 910 2,170 1,140 2,420Growth rate (2) 7.8 3.4 10.0 4.4

Total medium-long distance leAll modes 1,030 2,420 1,320 2,780

Growth rate (2) 9.5 5.0 12.0 6.3Rail demand lb 820 1,900 1,030 2,110

Growth rate (2) 8.3 3.5 10.6 4.5

J& Assuming 16 percent unsatisfied demand for all passenger trips and 20 percent for long-distance passenger trips, 14 percent for all freight, and 16 percent for long-distancefreight shipments compared with present traffic levels.

lk idedium- to long-range transport demand for rail, waterway, and air, for which the rail is theleast-cost carrier (average haul distance was 900 km in 1989 and 1,000 km in 2000 for freightwhen unsatisfied demand is included). Total rail demand is assumed to be 116 percent ofmedium- to long-distance demand In tkic and pkm. See Annex 6 for more details.

le Demand modeled in greater detail by the RIS team, equivalent to interzonal freight demand inRIS analysis.

l4 Based on Base Case RIS analysis, which assumed no major additional price increases over pres-ent plans and no significant change in present distribution patterns. See Annex 6

e Assuming rationalization of coal, cement, fertilizer, and grain distribution, resulting inS percent less tlk in each case.

/£~ Assuming rail transport price increases of 38 percent for freight and 10 percent for passen-gers in real terms for the high-growth scenario and half of these increases for the low-growth scenario, with elasticities of -0.0 for coal, -0.2 for other bulk goods, -0.5 for*emibulks, and -1.2 for other goods and for passengers.

- 58 - ANNEX 2Page 1

CHINA'S RAILWAY STRATEGY

Railway Organization and Staffing Policies

A. MOR Organization

1. Chart C.1 shows the basic organizational framework for MOR, most ofwhich is self-explanatory. This form of organization reflects the scale ofMOR's operation and the nature of the task it has confronted in the past--therole of a producer of a service which is thoroughly planned and almost com-pletely specified from without: thus, its organization focuses on thequantity and efficiency of transport output. MOR's accountability is that ofa public agency, which explains its primarily ministerial, bureaucratic form.Because long-distance communications have been limited, MOR has necessarilybeen decentralized in its day-to-day operating management (approximately 50percent of the employees are in the 12 regional administrations alone, andanother 28 percent are in the diversified manufacturing and constructionagencies). Map M.5 shows the location of each of the 12 operating regionaladministrations.

2. A particularly significant aspect of NOR's organization is the rela-tionship between MOR and its 12 regional administrations. Certain major deci-sions are made at the center, including: (i) regional output quotas (tons andton-km, passengers and passenger-km); (ii) all capital construction projectsabove a certain size; (iii) scheduling of trains (except local trains) and ofmajor track outages for track work (administered by a team from all adminis-trations); (iv) appointment of regional directors and deputy directors; and(v) rolling stock specification and purchase.

3. Despite the powerful role of the center, the regional railways aremanaged as "profit centers," with most operating costs collected and reportedby region, and revenues allocated among regions (for traffic which crossesregional boundaries) in accord with a complex formula which attempts to mea-sure regional "effort" and not just tons or ton-km. The result is a kind ofannual profit or loss for each region. Although these arrangements providepowerful incentives for the regional staff to be productive, they appear tohave some undesirable side effects. Specifically the regional profit motivemeans that regional performance is affected by relatively arbitrary cost allo-cations (determined by lengthy discussions and negotiations by central commit-tees), and that the regions often have incentives to act in a way whichappears optimum for them, but is not necessarily optimum for the MOR as awhole. One example of this is the incentive to move wagons across regionalboundaries immediately before 18:00 hours because that it is the time at whicha day of wagon charges is billed to the region. Another clear example is thefact that, after central approval, investment is "free" to the regions, lead-ing to efforts by the regions to garner as much investment capital as possi-ble, even if the overall MOR rate of return is not thereby maximized. Thispractice, however, is being changed.

-59 - ANNEX 2- Page 2

4. In summary terms, MOR appears to be well adapted to its role as amassive organization, which is output oriented, bureaucratic, and decentral-ized. As these characteristics change, with increasing emphasis on response1.o market demands within a framework of broad financial accountability (withless emphasis on detailed reporting outside MOR), and with better communica-tions, the basic form of the organization will also evolve.

B. MOR Staffing Policies

5. It is MOR's policy to freeze total employment at present levels. Asthe following table illustrates, however, there has been an 8 percent growthin total employment levels between 1985 and 1990. This growth is caused, atleast in part, by three exceptions to the hiring freeze: (i) children ofMOR's employees, (ii) retirees from the armed forces and (iii) applicants withtechnical degrees. During the same period, there has been an 8 percent reduc-tion in railway transportation staff in spite of a 31 percent increase infreight ton-kilometers.

MOR STAFFING LEVELS (thousands)

1985 1990 1995 Differencetarget 1985-90 1990-95

Transportation 1,861 1,709 1,370 (152) (321)"Diversified Economy" 0 300 760 300 460Railway Manufacturing 405 430 430 25 0Railway Construction 628 571 460 (57) (111)Other Entities 229 371 380 142 9

Total 3.124 3,381 3.400 257 19

Notes: (1) Transportation comprises individuals assigned to the 12 adminis-trations who are not engaged in "diversified economy" ventures.MOR level staff are also not included.

(2) "Diversified economy" comprises individuals who are employed by aseries of new ventures that were formed by the 12 administra-tions. Individuals who work for these ventures are still countedas Transportation Department personnel by MOR.

(3) There are 75 railway equipment manufacturers.(4) There are 20 construction companies.(5) Other entities include MOR Headquarter staff plus the staff of

4,687 clinics and hospitals, 11 universities, 140 technicalschools, 14 research institutes, security forces and materialstores departments.

6. MOR has set targets for 1995 staffing levels which show a policy ofreducing transportation and construction staff, while allowing the staff as-signed to the "diversified economy" to expand. The target is for transporta-tion and construction staff to decrease by 20%, while maintaining constant

- 60 - ANNEX 2Page 3

total staff levels. This would result in an increase of over 502 for thestaff assigned to the diversified economy.

7. The diversified economy program was initiated in 1986. The 12administrations were given permission to retain part of their annual operatingprofits in a "Self-Production Development Fund." The administrations usedthis Fund to establish a wide variety of local ventures under the followingguidelinest

(a) the enterprise or company must be legal under the "economic law"n

(b) the company must pay taxes in accordance with the tax laws; (How-ever, so as to encourage the self-sufficiency of these ventures,they have recently been given an exemption from corporate incometaxes.)

(c) each company must maintain its own set of accounts; and

(d) each company must be responsible for its own losses and capitalreinvestment program.

S. In 1990 the combined sales of all these ventures totaled $1 billionwhich, according to MOR, produced operating profits of $200 million. Forearlier years, operating profits totaled: (i) 1986, $40 million; (ii) 1987,$80 million; (iii) 1988, $140 million; and (iv) 1989, $250 million. The fol-lowing table provides a breakdown of operating profits by type of venture.

PROPORTION OF 1990 PROFITS BY TYPE OF DIVERSIFIED-ECONOMY VENTURE

Railway service extensions (e.g. trucking companies, catering) 51.O0Retail stores 14.01Civil engineering and construction companies 8.31Food preparation factories, mainly for passenger trains 7.2ZHotel ventures 1.61Travel agencies and tourist bureaus 1.01Restaurants 1.01Other types of ventures 15.91

9. MOR believes that its diversification program into nonrailway activ-ities is beneficial because:

(a) there appears to be synergy between many of the ventvres and MOR'sexisting activities, and at least some of the ventures, e.g., truckdelivery companieu, increase railways traffic and improve customerservice;

(b) the program provides an effective mechanism to facilitate the reduc-tion of the administrations' transport staffs without destroyingemployee morale (Because of better housing allowances, medical careand other fringe benefits, most railway employees would rather

ANNEX 2- 61 - Page 4

remain with MOR than work for small, independent companies and havethese types of benefits provided by the provincial governments.);

(c) MOR uan more effectively manage these types of ventures because ofits tradition of profitability and organizational discipline; and

(d) MOR provides better management than most other large organizationsin China.

10. In the context of a market economy, it is difficult to argue that anenterprise should not pursue diversificatior. opportunities if these opportuni-ties (i) provide new and useful services to the existing customer base (e.g.,truck delivery companies and tourist bureaus) or (ii) offer the existingskills of the enterprise to a new customer base (e.g., civil engineering andconstruction companies) and (iii) appear to be highly profitable (e.g.,20 percent before tax average operating p-ofits in 1990 and approximately25 percent in 1989--although it is not clear whether these operating resultsinclude adequate allowances for depreciation).

11. However, because of its magnitude, MOR realizes that the currentdiversification program may cause problems unless appropriate corporate andfinancial plans and controls are developed. For example, MOR projects that ifcurrent policies and trends continue, by 1995 the level of employment in thediversified economy companies will approximate 500,000. As a result, about60 percent of MOR's total staff will be employed in other than railway trans-port activities. Thus, NOR is investigating a series of options, includingpartial or complete divestiture of some nonrail activities--perhaps throughsome program to issue stock for some of the nonrail entities to the generalpublic. Nembers of the MOR Headquarters staff who are responsible for devel-oping these corporate and financial plans have expressed an interest in get-ting Bank assistance in these planning efforts.

ANNEX 3- 62 - Page 1

CHINA'S RAILWAY STRATEGY

Railway Law of the People's Republic of China

1. General. The Railway Law (Law) of the People's Republic of Chinawas promulgated by the seventh National People's Congress on September 7, 1990and became effective on May 1, 1991. The purpose of the Law is to ensure thesmooth implementation of the operation of railway transport and railway con-struction. Composed of 74 sections in 6 chapters, the Law deals with theoperation of railway transport, railway construction, and railway safety andprotection. It also lays down the legal responsibilities of the state, localgovernments, the railway transport enterprises 1/ and its customers. TheLaw requires (i) the state to develop state-owned railways and to assist inthe development of locally owned railways, (ii) local governments to assistrailway transport enterprises in ensuring the safe passage of railway trans-port, good conduct in stations and on trains, full functioning of railwayfacilities, and uninterrupted progress of railway construction, (iii) railwaytransport enterprises to, inter alia, improve the quality of transport ser-vice, and (iv) the people to safeguard railway facilities. It encouragesresearch in railway science and technology and provides motivation through thepresentation of awards to individuals and units with outstanding researchresults.

2. This Law is important because there had been no legal basis for theoperation of the railways in the past and therefore no allocation of responsi-bilities between the government, MOR, and the shipper or the passenger. Theseareas are now specified for the first time in the Railway Law and certaindisputes can now be settled in courts of law. This Law is somewhat differentfrom laws in other countries in that it covers many areas that are treated asregulatory issues in other countries. It consequently covers more detailedaspects of railway operations in addition to basic responsibilities.

3. Regulation. The Law lays down the basic regulatory framework andempowers the State Council to promulgate detailed procedures for its implemen-tation.2/ It also empowers the Ministry of Railways and the local govern-ments to promulgate technical management regulations concerning state-ownedrailways and the locally owned and dedicated railways.

4. Ownership. The Law recognizes and covers four types of railways:state-owned, locally owned, dedicated and special-purpose railways owned by

1/ This term means and includes both railway administrations and subadminis-trations. See, supra note 3.

2/ The State Council has promulgated several such procedures in the form ofRules. These include: Rules of Transportation of Insured Goods; Rulesof Transportation of Luggage and Packages; Rules of Sundry Fee forFreight and Transportation; Rules of Sundry Fees for Passengers, Pack-ages, and Luggage; and Rules on Compensation for Accidents.

ANNEX 3-63- Page 2

railway administrations and subadministrations 3/ for their own transportservice. It encourages dedicated railways to handle passenger and freightbusiness from the public with the approval of the province, autonomous regionor municipality under which they operate. It also supports the sharing ofspecial-purpose railways on the basis of agreement between various railwaytransport enterprises.

5. Management. The Law entrusts the management of railways to the Min-istry of Railways (MOR) which consists of about 20 departments andbureaus.4/

6. Administration. The Law entrusts the administration of railways torailway administrations and subadministrations referred to therein as "railwaytransport enterprises."

7. ODeration. State-owned and locally owned railways are required toprepare freight traffic plans to facilitate flow of transportation.

(a) State. The Law empowers the Ministry of Railways to set the passen-ger ticket prices and tariff rates for goods, parcels and baggagesfor transport on state-owned railways. The said ticket prices andtariff rates are, however, required to be approved by the StateCouncil. All prices and tariffs, to be effective, are required tobe published. Participation by state-owned or locally owned rail-ways in international alliances are required to be approved by theState Council.

(b) Local Governments. The Law empowers provinces, autonomous regionsand municipalities to set tariffs (i) in conjunction with the Minis-try of Railways, for locally owned railways, and (ii) for dedicatedrailways providing passenger and freight services to the public.

(c) Railway Transport Enterprises. The Law requires railway transportenterprises operating railway transport to ensure the safety ofpqssenger and freight transport and the on-time arrival of trains.It prescribes penalties and compensation for late delivery and non-delivery of baggage/freight and also lays down the limit of recover-ies and reasons for exceptions allowed therefor. It further pro-vides for inspection and storage of baggage/freight and disposal of

3/ There are a total of 12 administrations and 56 subadministrations.

A/ General Affairs Department, Regulations and Restructuring Department,Planning Department, Financial Department, Personnel and Labor Depart-ment, Science and Technology Department, Education Department, ForeignAffairs Department, Construction Engineering Department, Sanitary andEnvironmental Protection Department, General Administration Department,Safety Supervision Department, Transport Bureau, Locomotive Bureau, Roll-ing Stock Bureau, Permanent Way Bureau, Signaling and TelecommunicationBureau, Public Security Bureau, Auditing Bureau, Supervision Bureau, andForeign Capital and Technical Import Office.

- 64 - ANNEX 3Page 3

unclaimed baggagelfreight. It also requires railway transportenterprises to provide basic amenities and services to passengers.It prescribes penalty charges for passengers traveling withouttickets and authorizes railway transport enterprises to crder thosewho refuse to pay to disembark.

(1) Environment. Railway transport enterprises are required totake measures to prevent pollution in the environment alongrailway lines. They are also required to forward unclaimedhazardous goods to public safety agencies.

(ii) Contractual Relationship. The Law establishes a contractualrelationship between railway transport enterprises and passen-gers/freight consignors through documents such as passengertickets, baggage slips, parcel coupons, and bills of ladingwhich specify the rights and obligations of railway transportenterprises and passengers/freight consignors.

(d) Passengers/Consignors. The Law requires passengers to purchase andhold valid tickets and enables passengers, unable to board trainsfor causes attributable to railway transport enterprises, to eitherrefund their ticket prices or to board the next train to the samedestination. It also allows passengers and consignors to obtaA ninsurance for transported goods from insurance companies whic:assume responsibility for compensation based on the terms of theinsurance contract. Insurance is, however, not compulsory. Passen-gers and freight consignors or recipients are required to compensaterailway transport enterprises for financial losses attributable tothem.

8. Construction. The Law provides for railway development planning,urban planning, land acquisition, and land use. It lays down technical stan-dards for railway tracks and guidelines for building intersections andbridges. Quality control is sought to be maintained through in-house inspec-tion of construction.

9. Safety and Protection. The Law regulates construction near railwaysand prescribes various rules for safety and protection of railways and preven-tion of and compensation for accidents. It requires railway transport enter-prises to maintain railways, undertake scheduled inspection, maintain andrepair railway transport facilities, ensure the functioning of railway trans-port facilities, and protect the safety of passengers and freight. Itentrusts the maintenance of peace and order on railway trains, at railwaystations and along the railway lines to public safety agencies of the railwaysand local governments.

- 65- AEX 4Page 1

CHINA'S RAILWAY STRATEGY

Railav-Government Relationship

1. The structure of the Chinese Government, and the role of MOR withinit can only be described in general terms. Chart C.2 shows the broad struc-ture of the relationships.

2. In the first instance, MOR reports and is managed through its posi-tion as one of the industrial sectors. It also has a series of "dotted line"relationships with many of the coordinating agencies and special-functionagencies:

(a) The State Planning Commission (SPC) has a particularly significantinteraction with MOR. SPC has the responsibility for preparinglong-term economic plans including the projection of future capacityand activity levels of MOR. Within this framework, SPC generallyreviews all of MOR's plans, and has approval authority of all sig-nificant capital projects. In MOR's phrase, SPC builds the "cage"within which MOR lives; within the cage, MOR has freedom to move.SPC helps to fill the cage by its approval of revenue targets, loans(foreign and domestic), issuance of bonds to individuals.

(b) The Ministry of Finance (MOP) does the actual budgeting within theChinese Government. MOF sets the year-to-year budget allocationswithin which MOR has to manage. The budget allocations will begenerally similar to SPC targets, but may not be identical asshorter-term priorities change. MOF is also responsible for settingthe broad rules of accounting (costing and depreciation) for allgovernment agencies. Within the broad budget levels set by NOF, MORexperiences very little day-to-day interference in operating deci-sions.

(c) MOR now has its own bank account at the Industrial Bank section ofthe People's Bank (previously, all revenues were received directlyby the People's Bank, and railway expenses were paid to the railwayas needed). In general, MOR controls this account much as a normalbusiness would control its operating accounts--it receives and con-trols its revenues, and it pays its own expenses and taxes.

(d) A portion of MOR's consttuction funding is borrowed from the Con-struction Bank section of the People's Bank. MOR pays an interestrate (currently 6.4 percent for MOR) which is different for eachborrower, and is calculated to encourage investment by favored agen-cies.

(e) Among the Special Functions, the most significant interlocutor isthe State Price Bureau (SPB) which oversees proposals by MOR tochange its fares, rates and surcharges. The standards historicallyused by SPB to review price changes (of which there have been very

- 66 - ANNEX 4Page 2

few) were those typical of a government organized on the socia.istmodel: the concerns were the impact of price changes on the plan,on inflation and on objectives being promoted in the plan; theimpact of a tariff proposal on MOR profitability and financial via-bility was, and is, not a matter of prime concern. Since SPB hashad to act in the absence of useful traffic costing information, andwith little or no knowledge of price elasticities, they could notmeasure impacts of tariff proposals on MOR or its customers, evenhad they wanted to do so.

3. Overall, MOR has clearly occupied the role of an industrial agency,producing a service at volumes and costs in accord with plans furnished fromoutside MOR (although MOR generally has an opportunity to make comments andsuggestions) and without the ability, or need, to make many of the "business"decisions typical of an industrial enterprise in a market economy. Equallyclearly, agencies of the Chinese government are routinely involved in deci-sions which impinge directly on MOR's ability to operate effectively. One ofthe more important objectives of the strategic planning process is to deter-mine whether there is a more appropriate relationship among government agen-cies and, with this new relationship, how MOR's role should change.

- 67 - Page 1

CHINA'S RAILWAY STRATEGY

RIS Analysis System

1. The Railway Investment Study (RIS), carried out jointly by the WorldBank and MOR from 1989 to 1992, has developed a computerized analysis systemfor the use of the Ministry of Railways. The RIS analysis system uses compu-terized databases and analysis tools to help evaluate strategies for railwaycapacity expansion and to prioritize projects on a systemwide basis in accor-dance with economic criteria and budget constraints. The RIS system performsthese functions by (i) forecasting rail transport demand; (ii) simulatingpresent and future traffic flows throughout the railway system, (iii) identi-fying the bottlenecks created by these flows and (iv) calculating the costsand benefits of potential improvements. It employs several analysis moduleswhich can be run independently, and a geographic information system forrapidly displaying the analysis results in a map format. It also supplies aframework for the use of economic tools such as shadow pricing and economicbenefits of induced traffic. Finally, the RIS analysis system allows MORplanners to consider the entire rail and waterway network in their investmentevaluation process in a quantitative, comprehensive manner which supersedesthe past system of project-by-project evaluation with only qualitative analy-sis of network impacts.

2. The RIS analysis system can help MOR managers and planners to evalu-ate the potential economic benefits of a project or development strategy inthe project decision stage, before large sums of money are spent on projectdesign or feasibility studies. With more accurate input data, the RIS systemalso can provide valuable inputs to detailed feasibility studies of proposedrailway construction projects (e.g., in the form of forecasts of line densi-ties and traffic diversions, economic benefits, financial profitability,etc.). It is designed to work with simplified forms of the output of moredetailed analysis methods used by MOR in project design and the output of thenew computerized technologies for analysis of line and yard capacities cur-rently being developed by MOR in the Beijing-Shanghai corridor. Finally, itcan be used to evaluate the systemwide economic and traffic effects of certainoperating policies.

3. The RIS analysis system is designed to answer the following kinds ofpolicy questions:

(a) What is the appropriate level of investment for capacity expansionin the railways and what would be the economic losses to the Chineseeconomy from underinvestment?

(b) What would be the most cost-effective strategy for staging thecapacity expansion of the railway network over the next 10-15 years?

(c) What are the economic costs of not having enough track capacity,locomotives, freight wagons and passenger coaches to accommodate thetraffic demand?

- 68 - ANX SPage 2

(d) What are the systemwide cost savings from changing priorities fortraffic allocation or routing for certain commodities?

4. Key Policy Variables. Policymakers and managers may use the RISanalysis system by manipulating the following sets of key assumptions andpolicy variables:

(a) Packages of railway capacitv expansion 2rolects, which are composedof projects currently proposed for the Eighth and Ninth Five-YearPlans, plus additional projects which are identified through RISnetwork analysis; these additional projects may incorporate futuretypes of technology which affect railway capacity (including mea-sures that increase track and yard capacity, reduce train headway.,increase train operating efficiencies or increase rolling stockavailability).

(b) Overatina nolicv variables which describe, for example: (i) thetraffic routing policies, (ii) the commodity priority policies,(iii) the average train loads which are related to planned increasesin efficiency, and (iv) the proportion of local freight and of pas-senger traffic demand which will be alloved on each railway line inthe future.

(c) Demand forecast assumntions concerning the rate and location ofgrowth of the economy and related demand for freight and passengertraffic, including the effect of tariffs or other factors on thedemand for rail transport.

Each RIS analysis run is designed to evaluate one or more changes in thesevariables in terms of their systemwide effects on transport costs and the neteconomic benefits of additional rail traffic.

5. Types of Capacitv Improvements. The RIS system provides a frameworkfor modeling a variety of capacity expansion improvements on a system level.However, it requires technical input in the terms of the operating parameterswhich determine capacity, unit operating costs, and transit times. The typesof line capacity indicators improvements that can be evaluated by the systeminclude: (a) construction of new lines; (b) addition of tracks on existinglines; (c) electrification of a line; (d) improvement of track components toallow faster trains; (e) lengthening of sidings to allow longer trains and toreduce delays due to train meetings on single track lines; (f) improvement ofsignals or train control system to allow closer headways; and, (g) upgradingof the track structure to allow heavier axle loads.

6. The types of improvements to terminal or yard capacity that can beanalyzed include: (a) expansion or upgrading of existing terminals;(b) building of additional terminals; and, (c) development of computerizedsystems for terminal management to improve the efficiency of terminal opera-tions. Although the RIS system can evaluate the potential effects of yardimprovements in a general way, it does not handle detailed analyses such asclassification and train makeup within yards, nor does it deal with improve-ments in operations planning.

-69 NEX 5Page 3

7. The RIS analysis system can also evaluate potential investments toincrease fleet capacity, including the following types: (a) rehabilitation ofexisting vehicles; (b) acquisition of additional vehicles to supplement exist-ing fleets; (c) improvement of maintenance facilities in order to reduce theaverage number of unserviceable wagons; (d) other actions to increase vehicleavailability.

8. RIS Analysis Procedure. The first step of RIS analysis is scenariodefinition, which specifies all data and assumptions needed for RIS analysis.A scenario is defined by five sets of data and assumptions on:

(a) the base transport network (set of traffic zones and nodes, railwayand waterway links, yards, and ports, with associated physicalattributes);

(b) the railway capacity expansion projects to be analyzed (related tospecific railway links or yards);

(c) transport demand forecast data (for each key year, i.e., 1995, 2000,2005 or 2015);

(d) railway operating policy (transport priorities and operationimprovement targets for the key years); and

(e) economic prices (e.g., investment costs, operating costs, shadowprice conversion factors, etc.).

9. The base transDort network mentioned above is specified in the RISas a set of railway and waterway links and a set of nodes which representrailway yards, major seaports, and ports on the Yangtze river and the GrandCanal. Approximately 100 of the nodes were selected to represent trafficorigins or destinations.

10. The RIS railway links, both existing and proposed, include all ofthe main lines, selected branch lines which serve ports and major trafficzones, and selected key connecting lines which handle significant trafficflows. A typical rail link is a 100-300 km long, relatively homogeneous seg-ment of a rail line, defined with a set of physical characteristics (number oftracks, traction type, etc.). The RIS waterway links provide connectionsbetween ports.

11. The railway capacity expansion Drojects are specified with data onthe type of improvement, location, construction cost, timing, effects oncapacity and operating costs and the complementary investments required toallow the project to realize its potential (e.g., investment in rolling stock,in electrical power generation facilities for electrification projects and incoal mines to increase coal production capacity in new traffic origin areas).The transport demand forecast data include traffic flows by origin-destinationpa4 r for each commodity group for the base year (1989), and a set of assump-tions on the rate of economic growth and the regional development pattern forChina over the period 1990-2010. The railway ogeratina Policv data are speci-fied on the basis of the present and possible future policies that will affect

- 70 - AMNEX 5Page 4

link capacity or traffic routing. The economic Rrices are concerned with the

shadow prices used to calculate the economic costs of transport operation and

investment and the economic value added for generated traffic.

12. Once a scenario is defined, the analyst carries out a complete round

of analysis by activating four modules in sequence to perform the following

tasks:

Module Task

1. Traffic Forecasting Module Forecast freight trafficwithin and between majororigin-destination (O/D)traffic zones and betweenprovinces (for each demandscenario)

2. Facility Performance Module Estimate the capacity, costsand transit times for exist-ing and proposed railwaylinks and yards, waterwaylinks and ports.

3. Traffic Assignment Module Assign forecast traffic tor.iodes and routes within thetransport network.

4. Benefit-Cost Analysis Module Estimate the economic andfinancial benefits and costsof proposed railway invest-ment alternatives under thecurrent scenario.

13. First, the Traffic Forecasting and Facility Performance Modules are

activated in parallel to prepare inputs to the Traffic Assignment and the

Benefit-Cost Analysis Modules.

14. The Traffic Forecastinz Module (TFM) forecasts passenger and freight

traffic to be assigned to each link of the RIS network for each key year

(i.e., 1995, 2000, 2005, etc.) under the scenario selected. Mainly because of

the lack of detailed passenger flow data, Passenger traffic was modeled in a

simple way, basically in terms of the number of pairs of passenger trains per

day forecast exogenously by MOR's planning staff.

15. For freiaht traffic, the TFM provides separate forecasts for inter..

zonal traffic (i.e., between traffic zones) and intrazonal traffic (i.e.,

within zones). Because intrazonal freiaht traffic represents only about

10 percent of total freight traffic a simple method based on extrapolation of

past traffic patterns was adopted to forecast intrazonal freight traffic and

to assign it to individual railway links. Interzonal freizht traffic is fore-

- 71 - ANNEX 5Page 5

cast in the form of a table of freight traffic flows between zones of originand zones of destination, i.e., an origin-destination (O-D) trip table, fortwm groups of commodities, coal and noncoal. The forecast freight trafficflows are sensitive to the level of economic activity in the traffic zones,but they also retain the geogrephic patterns of the flows in the base year(1989).

16. The Facility Performance Module (FPM) predicts for each key yearunder the selected scenario the performance of the links and nodes in the RIStransport network in terms of three indicators: traffic capacity, operatingcost, and travel time. The following assumptions are made: (a) the freighttraffic capacity is "planned capacitys" in that traffic is permitted to usethe link (e.g., a railway line) only up to a limit before congestion makes ituneconomical to add any more traffic; (b) the variable operating cost per tonof freight traffic on each link is constant.

17. Different methods are used to compute the performance indicators fordifferent types of transport facilities. For rail links, these indicators arecalculated using MOR's own analytical formulas in terms of characteristics ofthe terrain and the line, including the number of tracks, the signaling sys-tem, length of sidings, the minimum headway allowed. For rail yards, whichare modeled as transport nodes, the performance indicators are computted usingsimple formulas in terms of the total number of wagons entering the yard andthe percentage of wagons which are classified in the yard. Both rail line andyard capacity and cost data can also be derived from the simplified form ofmore detailed model results or detailed technical studies. For waterway andport links, the performance indicators are estimated simply as values obtainedfrom look-up tables which contain the results of technical analyses summarizedfor the RIS.

18. Once its inputs are prepared by the Traffic Forecasting and FacilityPerformance Modules, the Traffic Assignment Module (TAM) is activated toassign origin-destination traffic flows to all-rail or rail-cum-waterwayroutes or. the RIS network. The Traffic Assignment Module works in two basicsteps:

First, for each pair of origin and destination zones, 4.t identifies a setof potential paths. Each path is a series of railway or waterway orrailway-cum-waterway links running from the origin to the destination.The module tries to mimic actual shipping routes as closely as possible.Thus, some paths may go through one or more rail junction nodes; therebythey simulate intermediate classification of carlcad shipments.

Second, taking into account competing O-D flows for the same links andthe capacities of all links, the module assigns each flow to one or morepaths, according to a set of rules which simulate the decisions actuallymade by MOR staff. The. decisions attempt to minimize the total trans-port distances traveled by all freight flows on the network.

The traffic assignment rules currently empluyed in the TAM are based on mini-mu.n distance routing, which mimic the actual practice of MOR. The TAM, how-

- 72- ANNEX 5Page 6

ever, allows other, more efficient rules, e.g., based on minimum cost routing,to be tested.

19. With forecast traffic now assigned to the network by the TAM, andwith link and node operating costs estimated by the FPM, the Benefit-CostAnalysis Module (BCAM) is activated to compute the net present value (NPV) andthe economic internal rate of retuirn (ERR) of the set or "package" of railwayinvestment projects specified under the selected scenario in comparison with a"without project" scenario. The BCAM does economic evaluation as follows:

First, for each element of the network and for each year of the economiclife of the projects, the module computes the operating cost savings andother benefits of the with project scenario relative to the without proj-ect scenario.

Second, with those annual benefits and the investmert cost of the invest-ment package and the complementary investments (e.g., in coal mine con-struction), the module calculates the NPV and ERR of the railway invest-ment package. All costs used in the BCAM are shadow priced to reflecttheir net costs to the Chinese economy.

20. The RIS analysis system allows the Ministry of Railways to projectfive to fifteen years into the future with some degree of accuracy where inthe railway-waterway network bottlenecks are likely to occur and how cost-effective its options for railway capacity expansion, with respect to thelocation, scale, timing of investment, will help solve the bottlenecks. TheRIS system also helps the Ministry answer the questions of what will be therequired size of railway investment programs in the future and what will becosts to the economy if these required investment programs are not fullyimplemented.

- 73 - ANNEX 6Page 1

CHINA'S RAILWAY STRATEGY

Results of RIS Analysis

1. The results of the RIS analysis to date can be summarized undereight headings: (a) current rail system bottlenecks and unsatisfied demand;(b) traffic forecasts; (c) composition of the RIS preferred package of invest-ments; (d) the effects of budget-constrained investments on rail traffic, bot-tlenecks and unsatisfied demand; (e) the policy implications of bottlenecks;(f) losses to the economy; (g) investments to overcome capacity constraints;and (h) the institutional implications of the RIS.

2. Current Railway System Bottlenecks and Unsatisfied Demand. Trans-port bottlenecks and unsatisfied demand are two interrelated concepts employedin the RIS analysis. A railway bottleneck is a rail link or yard in the RISsystem whose forecast traffic equals at least 95 percent of its capacity. Theamount of freight that can not be shipped on the system or the number of pas-senger trips which can not be taken due to the lack of rail service availabil-ity is defined as unsatisfied demand for rail transport.l/ The RIS has esti-mated that approximately 37 percent of the Chinese railway system is currentlyin a bottleneck situation (much more than other countries' railways, exceptpossibly Russia), and that unsatisfied freight demand reached at least 200million tons or 9.8 percent of the total demand for railway freight transportin 1989.21

3. Unsatisfied demand for freight in 1989 was estimated by the RIS teamthrough (i) a survey of railway administrations and their expectations fordemand in 1990, based on discussion with major shippers and (ii) an analysisof requests for freight wagons that were not met by MOR during the year and(iii) an analysis by the officials of Shanxi Province of their unsatisfieddemand. To avoid double counting, the RIS team then made a conservativeassessment of the part of the expected demand and the portion of the unsatis-fied wagon requests that actually represented net unsatisfied demand for theyear.

4. Traffic Forecasts. The transport demand forecasts under the RISBase Case assume that GNP growth will average 8 percent per year over the nextdecade. This is lower than the GNP growth rate of 8.9 percent per yearachieved during 1981-90. In addition, the forecasts assume that the kinds of

1/ More precisely, unsatisfied demand occurs when total demand exceeds thecapacity of one or more railway links or yards on every available pathbetween a given pair of origin and destination in the rail and waterwaysystem.

2/ Unsatisfied demand for passenger transport was not studied by the RISteam and its amount is unknown. However, it is claimed to be a muchhigher percentage than for freight, as less rail capacity has been allo-cated to passenger transport than for freight, while the growth of pas-senger transport is faster than for freight.

- 74- ANNEX 6?age 2

changes in economic activities in the 1990s will be similar to those in the1980s, including the following:

(a) Energy efficiency will gradually improve (as in the 1980s), therebychecking the growth of coal transport demand to some extent;

(b) The transport tariffs will increase in-step with inflation;

(c) The prices of major commodities in the state plan, including coal,will be increased toward their market values;

(d) For out-of-plan economic activities, there will be some rationaliza-tion of the location of production facilities 3/ and the distribu-tion patterns of goods.4/ However, the existing distribution sys-tem for in-plan materials will remain largely unchanged.

(e) There will be a gradual shift of freight from rail to road as theroad system expands in the 1990s, but at a lower rate than in the1980s.5/

5. Under the above assumptions, the annual growth of rail transportdemand is estimated to be in the range of 6-7 percent for freight (ton-km) and11-12 percent for passengers (passenger-km). These growth rates are consis-tent with experience in the period 1981-90 when GNP grew at 8.9 percent per

^5/ The Chinese economy is expected to become more rational with respect totransport as decisions become more decentralized and the private sectorincreases its share of production and distribution activities. Boththese trends will lead to more explicit inclusion of logistics costs indecision-making and potentially less transport-intensive decisions willresult. This process is moving much more slowly in China than in othercentrally planned economies in transition to market economies and theeffects are expected to be significant but not dramatic by the year 2000,and only for those industries which are not linked to a natural resourcelocation.

4/ See discussion of these issues in Annex 1.

5/ The shift of the share of total transport (both passengers and freight)to road from rail has been particularly pronounced in the 1980s as eco-nomic development in the coastal areas and related road systems haveexpanded, while NOR has simultaneously raised short-distance rail tariffsin a successful effort to shed short-haul traffic and thereby increaseoverall system performance. This trend is expected to continue in caseswhere long-distance interprovincial expressways are constructed in rail-way corridors. See discussion in Annex 1.

- 75 - ANNEX 6Page 3

year, while rail transport demand in this period is estimated to have grown ata rate of 7-8 percent for freight and 11-12 percent for passengers.6/

6. Further analysis of RIS team assumptions was carried out by theWorld Bank to incorporate the effects of additional reforms (Annex 1). Thislowered the forecast rail demand growth rates to 4-5 percent for freight and10-11 percent for passengers.

7. Selection of Proiects and RIS Preferred Investment Packages. TheRIS analysis found that significant gains could be made in total networkthroughput by selecting projects with the aid of computer-aided netwo.k analy-sis and by including a wide range of potential improvements. In the initialRIS analysis, the planned candidate projects for the 8FYP were analyzed inselected combinations where the variations were limited to the central part ofthe Chinese railway network. Analysis of forecast suppressed demand indicatedthat a more optimal set of projects would give better results. This was veri-fied during a second phase of RIS analysis when an expanded set of candidateprojects and a computer-aided project selection process yielded a RIS-preferred investment package that could accommodate 10.4 percent more inter-zonal traffic (Table A6.1) than the best project set from the initial analysisin the medium term (1995/96) with the same amount of total budget.

8. The latest investment analysis carried out by the RIS team fromNovember 1991 through June 1992 focused on potential improvements to theentire RIS network, which comprises 38,091 route-km of existing lines and3,040 route-km of proposed new lines. This network includes all of the rail-way's most heavily trafficked corridors, several new lines using traditionalrailway technology (e.g., the Beijing-Jiujiar.g line), a proposed high-speedpassenger line between Beijing and Shanghai, and the 31 largest railway clas-sification yards.

9. Two levels of investment were analyzed by the RIS team: one whichcorresponds roughly to the current planned level of investment (called LowInvestment) and one with about 3 percent more investment (called High Invest-ment). The projects under both the RIS-preferred Low and High InvestmentPackages were selected thbrough an iterative process of computer-aided analysisusing the RIS software. This exercise had the primary aim of optimizing rail-way support to the economy by maximizing future combined railway-waterwaysystem freight throughput under budget constraints, and the secondary aims of(i) reducing transport costs on lines with both high transport costs andsevere capacity constraints on local traffic; (ii) serving poor and minorityareas; (iii) protecting the environment; and (iv) meeting local and nationwidedevelopment priorities (see Table A6.2 for more details on the projectsselected in the RIS analysis for initiation in the period 1992-95).

6/ Total railway transport demand includes the traffic actually carried onthe rail and waterway network (satisfied demand) and that traffic whichwould have used the network if there had been more capacity (unsatisfieddemand). See Annex l for more discussion.

- 76 - ANNEX 6Page 4

10. The projects selected under the RIS-preferred Low Investment Package(Map M.6) include improvements to the main north-south corridors (Harbin-Dalian, Shenyang-Tianjin, Beijing-Shanghai, Beijing-Guangzhou), several east-west lines with coal haulage potential, and certain peripheral lines with hightransport cost savings and other secondary benefits (e.g., Chengdu-Kunming).These projects complement the substantial number of railway capacity expansionprojects that are currently committed (i.e., under construction or withassured funding) as shown in Map M.6.

11. The projects selected under the RIS-preferred High Investment Pack-age (Map M.7) include all the investments in the Low Package plus electrifica-tion of an additional route out of the Coal Base (Taiyuan-Changzhi) and doubletracking or triple tracking of additional north-south and east-west bottlenecksections under the 9FYP. The parallel track construction includes links inthe Northeast, parts of the Beijing-Guangzhou line, east-west links to theCoal Base, a connection between the Southwest and the Center, reinforcement ofthe new north-south corridor (Beijing-Jiangjiu-Hong Kong) and a connection tothe west (Wuwei-Lanzhou) on certain single-track links as traffic increases.To achieve higher satisfaction of total demand, more investment would beneeded along the Beijing-Shanghai corridor on key bottleneck links along theother north-south lines and in corridors linking the Southwest to the Centerand the Northeast to the Coal Base.

12. The budget constraints for the Low Investment Package constructioncosts were set at Y 60 billion (January 1992 prices) for capacity cxpansionprojects in each of the Eighth and Ninth Five-Year Plan periods (out of theY 116 billion total MOR investment budget). This includes improvements to theprincipal railway line infrastructure only. It does not include branch lineimprovements or rolling stock investment which amounts to an additional Y 30billion per five-year plan. Brii.et constraints for the High Investment con-struction were set at Y 150 billion (65 billion in 8FYP and 85 billion in9FYP) in order to meet 94 percent of total demand. A third program was iden-tified by World Bank staff based on extrapolation from the two RIS investmentpackages and designed to meet almost all (98 percent) of potential demand,with a total construction budget of Y 175 billion for the 8FYP and 9FYPperiod.

13. Effects of Budget-Constrained Investments on Railway Traffic. Bot-tlenecks. and Unsatisfied Demand. The RIS system predicts that under theassumption of 8 percent annual GNP growth, leading to 6.3-7.6 percent annualgrowth rate for medium- to long-distance freight transport demand (TableAl.1), the railway capacity expansion investment of Y 60 billion (in constantprices) for each five-year plan period, combined with the best practicalchoice of investments, will still produce many bottlenecks and rising levelsof unsatisfied demand. The severe bottleneck situation will continue becausethe rate of growth of demand for rail transport services is larger than therate of capacity expansion, especially for passenger services.

14. The average growth rate of rail freight traffic (satisfied demand)forecast by the RIS team in tonnage terms (4.0 percent per year; see TableA6.3) is significantly higher than the rate achieved by MOR for 1981-91(3.3 percent per year) or the rate targeted by MOR for 1990-2000 (2.9 percent

Page 5

per year). However, the average annual growth rate of ton-km of rail freightto the year 2000 (6.4 percent per year)7/ is forecast to be slightly lowerthan the past average growth rate of traffic in ton-km from 1981 to 1991 8/(6.7 percent). Forecast passenger traffic is assumed to share the futureincrease in railway system capacity with freight in the same proportions asthe current shares of freight and passengers in total traffic. Therefore,passenger traffic will have the same growth in passenger-km as in ton-km(6.4 percent per year), even though this is significantly less than the fore-cast growth of demand and less than the past growth rate for pass-km of9.6 percent per year from 1980 to 1990.

15. A major implication of these constrained growth figures is that thelevel of unsatisfied freight transport demand is conservatively forecast toincrease to 80 percent more than its current level by the year 2000, and theunsatisfied passenger transport demand is expected to increase even faster dueto the higher growth in total passenger demand.9/ The RIS model resultsalso indicated that 20 out of the 31 major rail yards would require actions toincrease capacity (either investment or operating improvements). The highertraffic levels under the high investment program will require even more yardcapacity.

16. Policy Imnlications of Future Bottlenecks. These implications ofthe forecast bottleneck problem for the Ministry of Railways can be identifiedin four major areas: (a) there is strong interdependence between links in thefreight delivery chain that must be taken into account in future investmentplanning, (b) higher levels of unsatisfied demand are to be expected in thefuture, (c) there will be a need for even more severe rationing of capacityfor the railway in the future, and (d) this rationing will have the effect oflowering railway service levels in the future unless countervailing measuresare taken. The level of pent up transport demand is expected to rise for bothfreight and passengers under present railway operating and pricing policies,even with significant increases in capacity due to planned improvements. Itseems clear that railway capacity will still have to be severely rationed inthe future.

17. Losses to the Economy. The economic losses to the economy due tofuture capacity constraints on the railway system which prevent it from meet-ing all the forecast rail transport demand are estimated in the RIS to be inthe range of Y 50-110 per ton of unsatisfied demand or Y 10-22 billion forcurrent levels of unsatisfied freight demand. The RIS forecasts therefore

7/ RIS analysis assumes that 10 percent in throughput will be obtained byMOR through improvements in routing procedures.

PI The past growth in freight ton-km was achieved by moving traffic withshorter haul distances off of the main rail network by raising tariffs.This solution would be much less effective for the remaining traffic,although some form of demand management may also be effective.

9/ This level of unsatisfied demand would double if the improvements infreight routing procedures assumed by the RIS analysis are not realized.

- 78 - ANNEX 6

imply future losses of Y 14.0-30.8 billion/year in 1995, rising to Y 18.0-39.6billion/year by 2000, with the best investment package selected under forecastbudget constraints, and with significant improvements in freight routinig pro-cedures.

18. Investments to Overcome Capacity Constraints. As suggested inAnnex 1, it is possible to overcome future capacity constraints by a combina-tion of demand management measures, such as increasing tariffs and the ratio-nalization of commodity distribution patterns. Increasing the amount ofinvestment available for capacity expansion and by using more innovative typesof technology for capacity expansion (e.g., modern train control systems) canalso help. However, substantial additional investment will be required overthe amounts currently planned for the period 1992-2000 in order to meet thefuture level of forecast demand. Based on preliminary estimates for the tra-ditional technologies evaluated under RIS up to this point (i.e., in theabsence of improved supply technology measures), the additional investmentneeded to meet 98 percent of future demand is expected to range from Y 40-60billion, or 50 percent more than currently forecast over the next eightyears.10/ This program would require all the investments shown for the RISHigh Package (Map M.7) plus a further investment of Y 20-30 billion to elimi-nate all key bottlenecks and to satisfy 98 percent of expected future demandby the year 2000.

19. The Impact of RIS on Institution-Building. The two most significantcontributions of the RIS (and other recent computerized tools) to strengthen-ing MOR's planning and operations are that: (a) the railway managers now havea greater appreciation for the usefulness of modern management tools; (b) therailway technical staff now are capable of developing and applying advanceddecision-support systems.

20. Future applications of the RIS decision-support system (or refine-ments of this system) are expected to have a beneficial impact on MOR in thefollowing areas:

(a) Further Improvement in Systemwide Project Evaluation and InvestmentPolicy Analysis. The RIS model can be used to identify the bestcombinations of future projects from a system viewpoint and to fur-ther refine the selection of the timing and scope of capacity expan-sion investments in the railway and develop more realistic demandscenarios, to create a more cost-effective railway investment strat-egy. RIS results show that combinations of projects selected withcomputer-aided methods could improve forecast systemwide throughputsubstantially compared with manual selection methods (Table A6.1).

10/ This estimate is based on the calculation in Table A6.1 that additional300 billion ton-km would be accommodated on the railway network with anadded investment of Y 60 billion by the year 2000, or 5 ton-km per yuaninvested. Assuming a constant marginal productivity of investment, theinvestment needed for 200-300 million ton-km of unsatisfied demand wouldbe Y 40-60 billion. The amount would need to doubled if the assumedincrease in routing procedures are not realized.

- 79 - ANNEX 6Page 7

The RIS system will also aid engineers in the evaluation of combina-tions of projects as they are identified by NOR planners (TableA6.2).

(b) Im-provement in ODeratinft Policy Analysis. The RIS model could beextended to create a more detailed model and data base for the anal-ysis of the effects of traffic routing and capacity rationing deci-sions and other traffic management decisions.

(c) Improvement in Tariff Policy Analysis. The RIS system could beadapted to the analysis of pricing options for different routes andcommodity groups.

(d) Documenting the Need for a Hither Investment Budget. A report tothe State Planning Commission (SPC) could be prepared based on RISresults, describing and quantifying the economic advantages of addi-tional high-priority railway investments as suggested by RIS analy-sis.

(e) Im3roving Coordination with Port Planning. The RIS analysis systemcould be used as technical input for coordination with the Ministryof Communications for planning the scale and timing of connectionsto ports and waterways expansion projects.

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Table A6.1: COMPARISON OF EXPECTED SYSTEM PERFORMANCEWITH OR WITHOUT INVESTMENT PACKAGE OPTIMIZATION

Initial RIS "Pre- DifferenceRIS PackageLa ferred Package" Amt. X

Improvements Due to Package0ttimization (1995)

Total system tonnage carried(mln tons) (Interzonal only)/b 1,376 1,486 110 8.0

Railway ton-km (billion)(Interzonal only) 1,193/c 1,317 124 10.4

Improvements due to PackageOptimization Plus AdditionalInvestment (2000) /d

Total system tonnage carried(mln tons) (Interzonal only)/b 1,601 1,846 245 15.3

Railway ton-km (billion)(Interzonal only) 1,375/c 1,818 443 32.1

- due to optimization 1,375 1,519 144 10.4- due to added investment /e 1,375 1,675 300 21.7

/a This is a combination of the best performing investment packages presentedin the RIS Yellow Cover Report: Package 3 for 1995 and Package 5 for theyear 2000.

/b Including railway and waterway shipments./c Adjusted for changes in the base network, which increased the base

ton-km by 4.3 percent in the RIS Phase II analysis./d Optimization is assumed to yield the same percentage increase as in

1995.Le The additional investment of Y 60 billion accounts for the remaining dif-

ference in ton-km (21.7 percent) between the RIS "Preferred Package" andthe initial RIS package. In other words, the Y 60 billion additionalinvestment has been determined with RIS optimization. Without RIS optimi-zation, the additional investment would be Y 60 x (21.7 - 10.4)/21.7 bil-lion or Y 89 billion.

Table A6.2, PRIORM REIG OF PRYJECTS O RAUIAS VI

Eug. Poor or State Local Tech. Service

NPVICC Induced Traffic _FYBCC Design Minority Support Support Iuprov. QualityProtect.Rank Line Project Location Type Value Rate Tons TonslCC Rate Value Rate Statue Rating Rating Rating Rating Rating

(a) (b) (c) (d) (a) (f) (g) 'S) Cg) (g)(gi

I Jihng Beijing - Zbehgsou la ELIS 2.79 A 13.63 42.7 A 47.72 A A A A A AA

2 Jimagun VubAn Zbusbou la EL 1.93 A 12.09 49.9 A 49.92 A 3 A A A AA

3 Bade Barbla . Sheag ELIS 3.80 A 40.46 37.1 A 32.92 A A A A A A

4 Cbhegbk h Cbhdu - Ku-in ja ELIS 1.16 3 5.85 17.1 a 47.82 A A A A A A U

5 Jimghm Bijing - Zusbou EL 2.28 A 20.26 64.8 A 6.32 C B A A A U

6 Qlnebhe Qin8uangdao - Shenyang 3TS4 5.40 A 134.37 196.2 A 39.62 A A B B U

7 Bada Shenyang . Dcalin EL 2.18 A 6.42 34.0 A 7.52 C A A A A

8 X1Sigu Liurh - Litang Dr 3.92 A 6.12 5.7 C 39.62 A B B U

9 Tongpu BDou-ang Sbuo-Tai ELUD 7.13 A 0.00 0.0 C 101.92 A C A

10 Jinj1iu Beijing Jiujlang NL 1.27 B 31.86 21.6 8 7.82 C A A A B

11 Jingeban Tianjin - Qinbuangdao EL 4.85 A 19.76 195.6 A 10.72 a C A h

12 Jingu uxsbou - Shagbai EL+H 1.40 B 34.09 25.6 B 15.12 8 B B A

13 Beocbg BJaji * Cbengdu DT 0.77 C 21.75 27.7 B 30.72 A B A B

14 Souhal Goub zngrl - Daicheng EL 4.21 A 0.00 0.0 C 7.92 C C B U

15 Eenbaso meulgo - Boofeng VT 1.S8 a 0.00 0.0 C 22.12 a C

16 wanVn %* - luanchen VT 0.39 C 0.00 0.0 C 4.12 C C

La Selected for World B3k fundig.

Noteeo Bumrlcsl reulto are frm ItI6 nlysls of beet packae under Be" Cae forecat A.IL * electrificaton. DS * double-tracking. IL - nov Ilne. EL/S * electriication ad lding*xt*sia, SrT con*truction of tbird track. - b*ig eped

(a) 21.5 * A, 1.0-1.5 - B. *1.0 - C.(b) niUloc1 eyatea..ide In year 2000 with otber projects bult.Ic) a40 * A, 10-40 - 3, <10 - C.Cd) b.302 * A, 10-302 - S. 4102 -C.(e) sculeted * A. preliminary S. pla1nd - C.If) serves tb es groups * A.(g) above aerae - A, aerage D. 3.

(DI

- 82 - ANNEX 6Page 10

Table A6.3: TRANSPORT DEMAND FORECASTS WITH 8 PERCENT GNP GROWTHAND LOW INVESTMENT

Traffic Forecasts by the RIS Model 1989 1995 2000

Total Railway Freight Demand(millions of tons) /a 1,678 2,120 2,540Of which: Satisfied Demand 1,478 1,840 2,180

Unsatisfied Demand /b 200 280 360

Unsatisfied Demand as Percent ofTotal Demand 11.9 13.2 14.2

Total Freight Satisfied Demand(billions of ton-km) /a 1,139 1,518 2,017Of which: Railway Freight 922 1,316 1,818Of which: Interzonal /c 797 1,156 1,618

Intrazonal /t 125 150 200

Growth Rates (1 per year) 1989-1995 1995-2000 1989-2000

Total Railway Freight Demand (tons), 4.0 3.7 3.8Of which: Satisfied Demand 3.7 3.4 3.6

Unsatisfied Demand 5.8 5.2 5.5

Total Satisfied Freight ton-km lc 4.9 (4.1) 5.8 5.3 (4.9)(Interzonal Traffic)

Satisfied Railway Freight ton-km /c 6.1 (3.2) 6.7 6.4 (4.8)(Interzonal Traffic)

Note: The above forecasts are estimates based on current RIS Base Case fore-cast results (see Annex 1) with low investment and constant real tar-iffs. The figures aptly to the RIS transport network which includesall the major rail lines in the Chinese railway system (i.e., excludingbranch lines which do not connect to a major port) plus major waterwayroutes.

/a Total freight includes current rail traffic plus medium to longdistance waterway traffic, for which rail is least cost mode oftransport. Forecast include rationalization of bulk commodity distri-bution but not the effects of rail transport price increases (seeAnnex 1). Total rail demand in tons is related to the ton-km figuresin the last column of Table A1.1 by average haul distance: 899 km in1989 and 910 km in 2000.

/b RIS estimates for all medium to long distance freight in 1989 was100 million which was increased to 200 million based on World Bankanalysis. See Annex ! for forecast basis.

/c Traffic between RIS zones. Includes improvements in traffic managementwhich can add up to 10 percent to present c-pacity. Numbers inparentheses indicate growth without improved traffic management.

/d Traffic within RIS zones.

Source: RIS analysis modified in part by World Bank.

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Table A6.4: TRANSPORT DEMW.ND FORECASTS WITH 8 PERCENT GNP GROWTH,HIGH INVESTMENT AND INCREASED TARIFFS

Traffic Forecasts by the RIS Model 1989 1995 2000

Total Railway Freight Demand(millions of tons) /a 1,678 2,050 2,420Of which: Satisfied Demand 1,478 1,850 2,270

Unsatisfied Demand /b 200 200 150

Unsatisfied Demand as Percent ofTotal Demand 11.9 9.8 6.1

Total Freight Satisfied Demand(billions of ton-km) /a 1,139 1,669 .2,191Of which. Railway Freight /c 922 1,495 1,998Of which: Interzonal /c 797 1,345 1,818

Intrazonal 125 150 180

Growth Rates (Z per year) 1989-1995 1995-2000 1989-2000

Total Railway Freight Demand (tons), 3.4 3.4 3.4Of which: Satisfied Demand 3.8 4.2 4.0

Unsatisfied Demand /a 0.0 -5.6 -2.6

Total Satisfied Freight ton-km /c 6.6 (5.8) 5.6 6.1 (5.7)(Interzonal Traffic)

Satisfied Railway Freight ton-km /c 8.4 (5.5) 6.0 7.3 (5.7)(Interzonal Traffic)

Note: The above forecasts are estimates based on current RIS Base Casa fore-cast results (see Annex 1) with high investment and increased tariffsto finance the additional investment. The figures apply to the RIStransport network which includes all the major rail lines in theChinese railway system (2..e., excluding branch lines which do not con-nect to a major port) plu.s major waterway routes.

/a Total freight includes current rail traffic plus medium to longdistance waterway traffic, for which rail is least cost mode oftransport. Forecast include rationalization of bulk commodity distri-bution and the affects of rail transport price increases (see Annex 1).Total rail freight demand in tons is related to the ton-km figures inthe last column of Table A1.1 by average haul distance: 900 km in 1989and 1,000 km in 2000.

.Lb RIS estimates for all medium to long distance freight in 1989 was 100million which was increased to 200 million based on World Bankanalysis. See Annex 1 for forecast basis.

Ic Traffic between RIS zones. Includes improvements in traffic managementwhich can add up to 10 percent to present capacity. Numbers inparentheses indicate growth without improved traffic management.

/Ld Traffic withini RIS zones.

Sourco: RIS analysis, July 1992.

Table A6.5: SUHMMRY OF ALTERNATIVE NOR INVESIlfNT PROGRAMS FOR 1991-2000(Y billion In constant 1992 prices)

Investment neededCurrent nlannint RIS Low Packate RIS Bish Package to meet demand8FYP 9FYP Total SFYP 9FYP Total 8PYP 9FYP Total SFYP 9FYP Total

A. Capacitv Exmansion

1. New Line Construction 41.5 41.5 31.5 31.5 31.5 30.5 37.8 36.92. Double/Triple Tracking of

existing lines 15.0 15.0 18.0 18.0 18.0 36.6 21.6 44.13. Electrificatlon 8.0 8.0 14.2 14.2 14.2 17. .6 17.0 21.5

Subtotal (Line Construction) 54.5 54.5 63.7 63.7 63.7 84.7 76.4 102.5

4. Terminal Upgrading 5.5 5.5 5.5 5.5 5.5 7.4 6.6 8.55. New Locomotives and Rolling

Stock 30.0 30.0 40.0 40.0 40.0 53.6 48.0 58.0

Subtotal 100.0 100.0 200.0 109.2 109.2 218.4 109.2 146.3 255.5 131.0 169.0 300.0 0

B. Other Investment

1. Track Rehabilitation andMaintenance 8.0 8.0 8.0 8.0 8.0 11.2 8.0 12.0

2. Other Categories 8.0 8.0 8.0 8.0 8.0 11.2 8.0 12.0

Subtotal 16.0 16.0 32.0 16.0 16.0 32.0 16.0 22.4 38.4 16.0 24.n 40.0

C. Total Investment 116.0 116.0 232.0 125.2 125.2 250.4 125.2 168.7 293.9 147.0 193.0 340.0

_.

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CHINA'S RAILWAY STRATEGY

Rai8WaY Track Naintenanze

1. Three factors are critical to the state of maintenance of MOR'strack systemt (i) the designs of some critical components such as concretesleepers are inadequate for MOR's service requirements causing the componentsto wear out faster than normal and have a shorter time to failure; (ii) MOR'srelatively high rates of track utilization, causing high rates of wear andearly failuret and (iii) the near-total dependence on manual methods, handtools, and unsophisticated testing equipment which lowers the quality of main-tenance. Because of these three factors, serious operational problems candevel± quickly and jeopardize MOR's transport capability.

2. The state of maintenance of MOR track, while generally good, illus-trates how these three factors join to produce serious probleme. MOR's designof rail is sound from the standpoint of its strength and metallurgy, but theweight of much of the rail used (51 kg/rI) is too low for achieving maximumeconomic rail life at high traffic levels (20-40 million tons per year). Inaddition, poor designs of concrete sleepers and fasteners are causing addedrail wear and maintenance cost (an estimated 60 percent of concrete sleepershave cracks). Finally, much of the rock ballast badly needs cleaning to allowproper drainage and over 70 percent of the roadbed material is soft limestonewith low wearability; the poor ballast condition is shortening the life of theother track components and increasing the maintenance workload.

3. Despite the improisment in some maintenance indicators, such as thenumbers of broken rails to be replaced, the total length of roadbed with iden-tified problems has increased by 3S percent in the last ton years and theamount of deferred maintenance is increasing. Temporary line closures due totrack faults are increasing by 1,000 hours per year on the system and thenumber of track sections with reduced speed limits (long-term slow orders) hasincreased from 80 to 115 over the last four years. NOR estimates that 500 kmof track replacement was deferred in each of the last two years (out of4,500 km per year required) and that this 1,000 km has added to the previous300 km of deferred maintenance to give a total 1,300 km of track that has notreceived its timely replacement and whose condition is deteriorating.

4. Both NOR and the Bank have recognized these problems starting InRailways III, and the Bank has therefore helped NOR to (a) install mechanizedheavy track mach:nery to clean ballast and restore track alignment and sur-face; (b) replace existing track with heavier and more durable rail andimproved designs of concrete sleepers, fasteners, and turnouts; and(c) develop new standards for construction and maintenance and better ways ofmanaging the track maintenance effort using high speed track recording carsand other inspection equipment. In a future operation the Bank will help NORpurchase more heavy-duty machinery for track repair and maintenance.

- 86 - ANNEX 8Page 1

CHINA'S RAILWAY STRATEGY

Railway Eauipment Maintenance

1. Maintenance of the locomotive and rolling stock fleets by MOR, whilegenerally good, is inefficient by modern railway standards for a variety ofreasons: too many models of locomotive, lack of specialization of workshops,lengthy scheduled overhauls and the poor quality of many spare parts, whichincreases the frequency of nonscheduled repairs. This situation has beencomplicated by the switch of motive power from steam to diesel and electricpower, with quite different maintenance needs for these locomotives. Longerhauls by the diesel and electric locomotives are also leading to a need firfewer, more centralized maintenance workshops.

2. The capacity of MOR's steam and electric locomotive maintenancesystem appears to be adequate, but the maintenance system for the diesel loco-motive fleet (5,680 or 42 percent of the total) needs much further improve-ment. Some of the older locomotive fleet (Dongfeng 2 and 3, Dongfenghong 3and the Beijing) with relatively high maintenance requirements is being phasedout slowly and the time between schedulec overhauls has been increased for thenewer fleet.

3. There has also been an increase in the number of repair workshopsfor wagons and coaches during the 19809, sufficient to meet the need for wagonmaintenance, but not enough to keep up with demand for coach maintenance.Consequently, the current backlog for maintenance has reached about 300coaches.

4. Although it is improving, the maintenance of locomotives is rela-tively inefficient due partly to poor component designs on locally-built loco-motives or by inadequate parts inventory for imported locomotives. In othercases the cause is poor maintenance procedures (which increase the time spentin workshops), and in some cases the maintenance standards are too restrictive(leading to unnecessary maintenance operations). The number of repairs thatare needed for rolling stock is also high compared with most modern railways.

5. Both MOR and the Bank have recognized these problems, and startingin the Fifth Railway Project, the Bank is helping MOR to prepare action plansfor improving the availability of locomotives, freight cars and passengercoaches. For example, an action plan has been established to allow diesellocomotives to double the distance they run between periodic overhauls andreduce the duplication of maintenance activities. The Bank also has helpedNOR buy additional critical components and ertablish a unit exchange mainte-nance system for foreign locomotives. In a future operation the Bank willhelp MOR import modern technology and machinery to improve the design andmanufacturir.g of several critical parts of locomotives and rolling stock.

- 87 - ANNEX 9Page 1

CHINA'S RAILWAY STRATEGY

Selected Information on Railway Policy Reforms in the 1980s

1. This annex provides additional information on policy reforms carriedout in the 1980s in the areas of (a) relationship between the railway and thegovernment, (b) decentralization of authority and (c) incentive structures forsalaries and bonuses.

2. Financial Relationships Between the Railway and the Government. Inaddition to changes in legal status, there has been a change in the financialrelationship in the last ten years, notably:

(a) Before 1981, MOR paid a business tax on gross revenues and turnedover all net profits to the government, while the governmentprovided all investment funds to MOR;

(b) From 1981 to 1985, MOR went through a transition period where itcontinued to pay a business tax but only turned over part of itsprofits to the government. At the same time the State phased outits direct investments in favor of loans to MOR; and

(c) From 1986 to the present, the government entered into an economiccontract with NOR, under which MOR paid a lower business tax to theState, while the income tax and profit were kept by NOR in a railwayinvestment fund. NOR was able to supplement this with loans fromboth domestic and international sources (also to be repaid by MOR).All investment is now funded by MOR from these sources.

3. Decentralization of Decision-makinQ. The decentralization effortsin the past ten years have resulted in not only the shift of powers from thecentral government to the Ministry, but also from the Ministry headquarters tothe regional administrations and the construction and factory bureaus, toimprove productivity and accountability. The second type of decentralizationhas occurred in the management of projects, use of profits and administrationof personnel, as detailed below.

4. Management of Caoital Proiects. These include funds for small-scaleprojects, rehabilitation funds, and upgrading funds which are not part ofmajor projects or which do not have system-wide impacts, specifically:

(a) Small-Scale Capital Construction Projects. The management of theseprojects is being transfered to the administrations in the case ofrail infrastructure modernization, to the Locomotive and RollingStock Industrial Company in the case of factory modernization and tothe Capital Construction General Bureau for larger capital construc-tion projects, except for projects requiring centralized coordina-tion which are centrally managed by MOR.

-88 - ANNEX 9Page 2

(b) Uipgradina 4ro1ects. The funds needed for the renovation of facili-ties under the management of the regional administrations are nowcalculated and managed by the administrations as a function of thespecific local requirements. In'1990 this amounted to 55 percent ofthe funds spent on upgrading by MOR. (NOR still controls funds forupgrading major corridors and marshalling yards, expansion of pas-senger platforms to accommodate longer trains, heavy haul ttainfacilities and new technology.) The upgrading funds for civil worksand factories have been transferred to the Capital ConstructionGeneral Bureau and the Locomotive and Rolling Stock Company, respec-tively.

(c) Rehabilitation Proiects. The funds for rehabilitation will be bud-'geted and managed annually by each administrition according to 'Mactual rehabilitation needs in the administration. This now totals':'one third of the MOR funds for rehabilitation. The remaining two I"thirds of these funds are used by NOR for raillreplacement, overhaul''of locomotives and rolling stock, container repairs and telecommunilcations system overhauls.

There have also been moves to decentralize operations planning, fiiancialplanning and staffing and remuneration decisions which are discussed below.

5. Retention of Remional Profits. The railway financial policy withrespect to the regional administrations has changed in the 1980s. Before 1980it was a centrally controlled system of revenue collection and allocation forexpenditures. Now, it allows each administration to negotiate with NOR forthe profit to be retained on the basis of planned traffic volume, operatingrevenues, and actual costs incurred. A percentage of the profits on out-of-plan shipments are also shared with MOR. MOR retains the welfare funds andcertain productive development funds for the administration until the planned 'targets are met.

6. Staffinm Decisions and Incentive Pay. With the advent of the enter-prise structure for certain NOR industrial and construction functions, eachsemi-autonomous unit of MOR (e.g., the Locomotive and Rolling Stock Company)can decide on its organizational structure according to the operating require-.'ments of each element of that organization within a total staffing quota.Also departments under MOR can reform their staffing system on the basis ofthe nature of the work and production needs. Decisions concerning bureauchief and deputy bureau chief personnel in each department are still made byMOR but other personnel are managed by the units concerned.

7. For construction units the number of permanent staff will not beallowed to increase. A new "labor contract" system is being introduced gradu-ally starting with minor works and moving on to major works. The past prog-ress for the labor contract system is summarized in the following table:

- 89 - Page 3

NOR STAFF UNDER "LABOR CONTRACT"

Number Percent

1980 0 0.01985 76,000 2.41990 311,000 9.2

8. The total wage payment for regional administration staff iscurrently based on a productivity index which is measured in terms of combinedpassenger-km and freight ton-km actually carried in each month. For capitalconstruction, total wages are set rccording to the actgal output value of theenterprise. Units under MOR can decide for themselves different wage levelsand the specific systems relating productivity to payment within the giventotal wage payment, according to overall railway wage policies and the princi-ple of more pay for more work.

9. Incentive Payments for the Administrations. To improve efficiency,NOR currently rewards each administration for loading and unloading wagons andreleasing empty wagons. The current amounts paid for these activities are:

Loading Y 8/wagonUnloading Y 24/wagonReleasing Y 60/wagon

There is also a demurrage charge to each administration for holding wagons formore days than a given base number of days. This charge is either Y 8 or Y 10per day depending on the location. If an administration releases wagons ear-lier than the base number of days, it is rewarded by a payment of Y 6 or Y 8per day depending on location.

10. For certain administrations that manage bottleneck yards, anotherincentive/penalty system has been created. For managing Anyang and Dezhouyards the responsible administration is paid Y 1,500 per train received overthe monthly standard and Y 1,000 per train delivered over the monthly stan-dard. Similarly, railway administrations operating Shanhaiguan, Pugi andFuliji yards are rewarded Y 1,000 per train received and Y 500 per traindelivered over the standard. The corresponding penalties for less than stan-dard performance are Y 500/train for receiving and Y 300/train for delivery.

11. Railway administrations are subject to an incentive/penalty systemfor meeting financial targets as well. If an administration reduces its costsby 0.5-1.0 percent for the year, it is rewarded Y 11/person and Y 12 per per-son if it is reduced by more than 1 percent. Correspondingly, the penalty fora cost increase is Y 4/person for up to 2 percent and Y 8/person if it is over2 percent.

12. Finally, each administration's total wage payment in a given monthIS modified by three considerations related to: (a) coal transport targets,

-0- ARNNEX 9Page 4

(b) total revenue targets and (c) safety. If the coal transport target fromShanxi has not been achieved, or the total revenue target has not becnachieved, all wage payments that incTease wages will be canceled. If there isa serious or large accident on the a.^ilway due to carelessness, the totalamount of wage compensation will be reduced by the amount of direct lossesincurred uD to 10 percent of the wage payment. If there are accidents involv-ing staff casualties, the total wage payment will be reduced by 50 percent.

CHINA RAILWAY STRATEGY

SummarY of Onsoina and Proposed Programs of Technical Cooneration Between NOR and the Bank

Onaoint Studies

Component Starting Objectiveslscope Funding sourceslforeign Statustopic pro;ect & exchange cost (approx.)ja

year

1. Costing Study Railways I To develop a costing system Total: $800,000 Ongoing effort bv NOR. Study, being1984 which provides detailed costs Railways I: $500,000 conducted by MOR, was initially

of railway transport for Railways III: $300,000 delayed due to Chinese hesitation tofreight by commodity and for tackle costing and pricing issues.passengers by class and type NOR now shows a greater willingnessof service. An important to expedite work: it has agreed withfollow-up is the task of the Bank through Railvays Vrevising the existing tariffs negotiations on an action plan to:to remove structural distor- (a) complete the study by Decembertions. See the Railway Tariff 1994; and (b) use study results toStudy below. formulate revision of tariff system.

Proposal for railway tariff reformswould be prepared under Railways VI.Since the identific-tion mission forRailways VI in October-November1991, MOR has prepared a simplifiedcosting model, yielding railway costestimates which provide a basis forinitial improvements of the railwaytariff system under the proposedrailway tariff reform study (seebelow).

2. Management Railways II To improve MOR's information Railvays II: $500,000 Ongoing effort by MOR. A pilotInformation 1985 system, through streamlining system for computerizing expenses,System (MIS) of information flow and use of revenues and way bills has beenStudy modern computer software. tested. NOR is begffining to develop

a comprehensive MIS for the entirerailway system. The comprehensiveMIS would employ the TransportManagement Information System (THIS)proposed under Railways VI toprovide key input.

ONGOING STUDIES (cont'd)

Component Starting Objectiveslscope Funding sources/foreign Statustopic project & exchange cost (approx.)/a

year

3. Strategic Plan Railways IV To improve operational manage- Total: $2,500,000 Ongoing effort by NOR. TrafficStudy 1988 ment and increase transport Railways IV:: $1,000,000 capacity modeling with ALK

capacity on the Beijing- JGF: $1,500,000 consultants has been completed andShanghai line, through three is being tested on a pilot basis.areas of technological modern- NOR has prepared, with the help ofliation: EDS (USA) and CARAC (Canada) consul-(a) traffic capacity modeling; tants, reports on the telecommuni-(b) tolecommunications; and cations substudy and with CANAC(c) THIS. consultants on the THIS substudy.

These reports provide a basis forthe proposed lnvestment subcomponentfor telecommunications and aTransport Management InformationSystem (THIS) for Bank financingunder Railways VI.

4. Railway Railways V To develop a decision-support Total: $550,000 Joint effort between MOR and Bank.Investment ;989 system for (a) forecasting World Bank: $200,000 Phase I (model development andStudy (RIS) traffic flows on railway net- JGF: $350,000 testing) was completed in June 1991.

work; (b) evaluating economic Computer tools are now available formerits of proposed railway applications by trained MNR staff.capacity expansion lnvest- RIS Phase II aims to apply decision-ments; and (c) selecting high- support system developed under RISpriority lnvestments and Phase I to determine economiciacreasing total system priorities of proposed railvaythroughput under budget con- investments on a systenuide basis;straints. to maximize system throughput under

budget constraints; and to slsefuture railway inve&zment plansunder different economlc growthscenarios. Tvo of these projectsvould be implemented under RlilwaysVI RIS results are also being usedby MOR In discusslons with SPCconcerning additional 4nvestmentsfor the Eighth Five-Year Plan.

5. Technical Railways V To develop action plans to: Total: $3,500,000 As agreed during Railvays VStudies 1989 (a) modernlze track mainte- Railways II: $3,500,000 negotiations, MOR has carried out

nance; (b) modernize locomo- the studies. The reports on (a)-(d)tive and rolling stock main- have been completed. These reportstenance; (c) modernize and have provided a basis for preparingexpand the railway telecomu- four investment aubcomponent ofnications system; nd (d) Railways VI.modernize railway electrifica-tion technology.

PROPOSED STUDIES

Component Starting Objectivesiscope Funding sourcesiforeign Status

topic project & exchange cost (approx.)Layear

6. Tariff Studs Railways VI To prepare a proposal to Total: $250,000 Originated from the ongoing -RaiIway1992 reform the railway's tariff MOR(Bank Loans)s:b$170,000 Costing Study," the study addresses

system in order to strengthen World Bank: $ 80,000 not only the issue of price dis-NOR's financial self-suffi- tortions, but also the issues ofciency, remove price distor- strengthening MOR's financial self-tions, and provide MOR with sufficiency and granting MDR greatermore flexibility to set tar- autonomy in price setting. A TORlffs to cost and market condi- was agreed with MOR and a Tarifftions. Study Committee and Working Cron

with representation of XOR, N)O, SPCand the State Council were created.A draft report has been prepared anddiscussed with Bank staff. Therevised report was received by theBank in December 1992.

7. Accounting Railways VI To prepare a proposal to Total: $300,000 MOR and the Bank agreed on TOR forStudy 1992 revise railway accounting MOR(Bank Loans):Lb$300,000 the study in July 1992. MOF has

standards to conform to inter- approved the study and treats it asnational GAMP, to underpin the a test case for the transport sec-revamping of MOR's accounting tor. The stuiy temm has done asystem. This study would be survey of all exsisng Chineseconducted under the umbrella accounting standards and Is doing aof NOP's current plan .o survey of accounting practices indevelop national accounting other countries.standards.

8. Regulation X Railways VI To improve (i) the efficiency Total: $1,700,000 Incorporation of thisManagement 1993 of MOR's internal management KOR(Bank loan'):$1,700,000 regulation/manag.ment subcomponent

and (ii) the contractual rela- into Railways VI was agreed duringtionship between NOR and the the appraisal t1ssion in July 1992.government, through technical The agreement requires ratificationassistance and on-the-job by MOR's top management.training of NOR staff. Thissubcomponent would help MORadapt itself to a new marketeconomy enviroment.

PROPOSED STUDIES (cont'd)

Component Starting Objectives/scope Funding sources/foreign Statustopic project & exchange cost (approx.)la

year

9. Study of Cost- Railways VI To iden_'fy rail technologies Total: $500,000 NOR prepared with Bank assistanceEffective Rail- 1992 which offer a cost-effective HOR(Bank Loans):/b$200,000 the Inception Report in August 1992.way Technology approach to expand transport JGF: $300,000 A Bank mission including a Panel ofEvaluation throughput capacity, reduce International Experts visited China(CETE) transport cost, and improve in late October/early November 1992.

the safety of train and yard An NOR delegation has visited otheroperations. railways overseas to review modern

technological measures in currentuse.

10. Rail-based Railways VI To develop immediate, medium- Total: $500,000 The iOR for the study was agreedContainer 1991 and long-term action plans to MOR(Bank Loans):/b$200,000 during the October/November 1991Transport Study modernize and expand railway JGF: $300,000 identification mission, and the MOR

container services. This container traasport study team wasaction plan aims to help China established. An immediate actionpromote its exports and spur pl&i detailing the contents of thedevelopments of enterprises in pil,t container cransport investmentthe hinterland, by exploiting component under Railways VI has beenthe still largely untapped prepared which pcovides a basis forpotential for rail-based con- launching a pilot containertainer transport in Chiua:s transport investment component to beinterior. implemented under Railways VI.

First overseas visit of MOR studyteam was conducted to the USA inMayfJune 1992. Revised studyschedule was agreed in July. Secondoverseas visit took place inDecember 1992.

11. Environmental Railways VI To strengthen MOR's capability Total: $350,000 The Bank has provided NOR with aProtection 1992 for environmental assessment, MOR(Bank Loans):/b$150,000 technical assistance program underStudy monitoring and control, and to UNDP: $200,000 UNDP funding to identify measures to

help solve MOR's environmental alleviate pollution on passengerproblems with primary focus on trains and noise along railwaypassenger trains and noise lines.pollution.

la Excludes Bank staff's time and travel costs./b Fuding for overseas visits and training for MOR staff.

- 95 - A%NX-1P.s. 1

CHINA'S RAILWAY STRATEGY

Possible Contbnts of Future Railway Pro1ects

1. Future railway projects in the next five years or so are expected tofocus increasingly on management and policy issues. Their possible contentsare listed below:

2. Policy Components:

(a) As follow-up actions to initiatives launched under previous railwayprojects:

(i) To help MOR apply the RIS decision-support system to improverailway investment efficiency;

(ii) To help MOR rationalize the railway tariff svatem; and

(iii) To help MOR revamp the railway accounting sYstem.

(b) As new initiatives:

(i) To help MOR prepare and implement an action plan to improverailway regulation;

(ii) To help MOR prepare and implement an action plan to modernizeMOR's transport management system;

(iii) To help MOR develop a market-oriented corporate strategy andplan for its nontransport business (including the "diversifiedeconomy" group);

(iv) To help MOR prepare and implement an action plan for railwaymanpower development and rationalization;

(v) To help MOR prepare and implement an action plan for cost con-trol, to strengthen internal financial accountability of therailway;

(vi) To help MOR prepare and implement sn action plan to expand thescope of railway borrowing, and

(vii) To help MOR prepare and implement an action plan for divestingnonrail transport functions.

3. Investment Components:

(a) As follow-up actions to initiatives launched under previous railwayprojects:

- 96 - ANE 11Page 2

(i) To help MOR implement a capacitv exoansion investment prcaram,which has been determined and updated with the help of the RISdecision-support system;

(ii) To help MOR implement an action plan to modernize trackmaintenance;

(iii) To help MOR implement an action plan to modernize andrationalize locomotive and rolling stock maintenance;

(iv) To help MOR implement an action plan to expand and modernizetelecommunications capacity;

(v) To help MOR implement cost-effective railway oDeratina policiesand technologies (now being determined under an MOR-Bankstudy);

(vi) To help MOR implement joint installation of fiber-oDtic cableebetween MOR and MPT;

(vii) To help MOR implement an action plan to expand and modernizerailway container services (now being prepared under an MOR-Bank study);

(viii) To help MOR implement an action plan to solve the railway'smost Dressing environmental problems (now being prepared underan MOR-Bank study); and

(ix) To help MOR implement an action plan to expand MOR's MIS andTHIS on a system-wide basis.

(b) As new initiatives:

(i) To help MOR prepare and implement an action plan to install arailway Passenger reservation svstem;

(ii) To help MOR prepare and implement an action plan to providehiah-sDeed rail Passenger service in a high-priority corridor;

(iii) To help MOR prepare and implement an action plan to install anadvanced train control system; and

(iv) To help MOR prepare and implem-nt an action plan to installpassenger and freight informat ion systems for customers.

AMEX 12

CHINA'S RAILWAY STRATEGY

Sumarv of Oblectives of Components of NOR-Bank Railvay Prolects

OblectivesExpanding Improving Improving Improving Boosting Improving Improving

railway operating service financial Improving environment organizational manpowerConFPONENTS capacity efficiency quality management MIS protection efficiency efficiency

Costlng tudy X XHIS study X XTraffic capacity s*muation

modeling X IElectrification technology study I XRailvay lvestmeat Study (RIS) XTariff study I XFinancial accounting revision X XCost-effective technology

evaluation (CETE) study La X XCapac.ty expanslon X %Track maintenance la X X XLocomotives 1 rolling ste omaintenance La X X

Telecomimuications Ia S X X XTransport MiS la X X X XContainer transport /a x x xPassenger reservatlon system La X X XBigh-speed rail passenger

service La x x xAdvanced train control system la X X XPassenger & freight infomation

systems X X XEnvironment protection study la X XManagement training X X X X XManagement system moderniza-

tion study X X X X XMbnpower developmuent and

rationalization study X X x XNontraneport corporate planning

study X X XCost control study X X XDivestiture study X X X X

la These components Include both the studyJpreparation and subsequent investment pbases.

fD M

N3X'-

ANNEX 13

CHINA'S RAILWAY STRATEGY

Timins of Possible Actions Under MOR-Bank Cooperation

8th Five-Year Plan 9th Five-Year Plan 10th Five-Year PlanActions Prep. Design Impl. Prep. Design Impl. Prep. Design Impl.

1. Costing system X X X X

2. MIS X X X X

3. Traffic capacity simalation modeling X X X X X

4. Electrification tecbnology modernization X X % X X

5. RIS investment improvement X X X X X

6. Tariff reform X X X X X X

7. Accounting system reform X X X

8. Implementation of cost-effective rail tech. (CETE study) X X X X X X

9. Capacity expansion X X X X X X X

10. Track maintenance modernization X X X X X

11. Modernization of locomotive and rolling stock maintenance X X X X X

12. Telecommanications modernization and expansion X X X X X X X

13. Transport HIS X X X X X X X

14. Container transport modernization and expansion X X X X X X

15. Passenger reservation system X X X X X

16. High-speed rail passenger service X X X X X X

17. Advanced train control system X X X X

18. Passenger and freight information systems X X X X X

19. Environmental protection X X X X X X X

20. Management training X X X X X X

21. Modernication of transport management system X X X X

22. Manpower development X X X X X X

23. Nontransport corporate planning X X X X X X

24. Cost control X X X X X

25. Divestiture of nontransport units X X X X

Prep. - project study/preparation; Desian - technical design/engineering; Iml. - implementation.

I-

Chart C.1 General Organization Chart of The Ministry of Railways

Minister

Security Bureau Secretariat

Systems Reforn Bureau Foreign Affairs Bureau

r ,.r,m I h VIC T TThrTL 'Igf. r IECHIEF ENGuNEER| VICE MINISTER E|MINISTER COIST VICE MINISTER VICE MINISTER

SC & Tech. DIRECTOR OF Planning & Statidics Capital Construetion Education BureauBureau TRANSPORT General Bureau Environnt Protection

Finance Bureau 5 Design Electrircation

Computer Transport Bureau Labor & Wages Bureau Coniussar_Cenipter HiospitalsCenter LocomotiLe

Rolling Stock Materials Managerent Constnction Roliloc Stock |Bureau Butreauf Company IndutRoialn CtompanAppraisal Signal & Telecom- IConmaittee munication Bureau

_ Transport Safety I Factories Bridge Factory 34 Loeomotive &Bureau Construction Construction Rolling StockForeign Capital Permanent Way Bureau Bureau Factories

& Technical BureauImport Oliee

(The World Dink CavilCounterpart) ~ 'ricEngineeringConsderpart) Factories Company

Railway Signal 12 Regional& Communications Administations

Conpany

0

rt

Chart C. 2 General Organization Chart of The Government (A China

State Council(1'rt-iicir and Vicec 11renniers)

I

State Operations and Industrial Sectors Coordinating Special-functionProduction Office Agencies Agcncies

|Ministry of Railways State Planning 1 State Price Bureau(MOR) Commission (SPC) | (SPB)

r oMinistions Ministry of Finance National Slatistical ]Communications j (MSOO) l Bureau |

I Ministry of r-ri ) iib of L1bor | Tax Bureau

Others People's Bank iGencal Customs

Others h | State AuditAdministration

lndt F; _ 1 _ _ _ ~~~~~~~~~~~Others Commercial Agriculture Bank of [ Cvnsdion

Bank Baak China g Bank | ' ! rC

MAP SECTION

TOTAL FREIGHTTRANS RUSSIAN FEDERATION FEDERATION

FLOW IN Mu CEANNORTHEAST

STAN URUMQIJAP1 - 2

21:D1 -50OrwEsrX < |f Xe

vcts O °n~~~~~~15 '~'''E'7L°' CO CO C O \w

1 neseeaf ~~~~~~~~~~~~0 ChIoN __ __ _ __ __ _ __ __ _ __ _ 0

3<FPAL~~~~~~CA BA HNDU% ECHNA ORTHWEST N 4AT

Th~~. d1 -2 ,GUNZO

W NOTE Des,red traff i. ncludes both actual traffic and unsatisfied demend as estimated fi ILAND DEM. RER£ S. s: /^ ,s x Dsc_-by the RIS tem(See Annex 7.-

?h. __ __ _ _d_ __ _ __ _ __ _ __ _ __ _ __ _ __ __ _ __ _ __ _ __ _ __ _ __ __h_ __ _

! KAZAKH~~~RSSTAN vFEDERATION SIUSSIA

KAZAKHSSIAN FEDERATION XRSIN C5

YRGY N MONGOLIA NORTHEAST Xg

EK S A U RUM; I _ g/ ^R

| |l aEeAL j CHENGDUt \ - X /-ZHANGHAj z~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

| BEtWEEN wxomNeso,s2soeooND t N S O UrH W E S T X 1 l // C O X !~~ ~ ~ ~ ~ ~ ~ ~ ~ ~

TAO NI 2A 1, (

K4RCII

>1 = 101 - 150 ||g J A N ux OAL B

~~~~~~~~~~~~~~~~~~~~~~G1 ,sOaiRw"ota>inrn¢lleosetdjE

E. 4>9>o*ee >s

by~ '=t NORTWES

IBRD 2457

ELECTRIFIED LINES IN OPERATION 120' 130-ELECTRIFIED LINES UNDER CONSTRUCTION RUSSIAN Gu CH INA

-4----- SINGLE TRACK RAILWAY LINES FEDERATION C- CH N-..--.- o- DOUBtE TRACK RAILWAY LINES ) Mongu. * RAILWAY SYSTEM 0. .. .4.DOUBLE TRACK RAILWAY LINES UNDER CONSTRUCTION MT

- TRIPLE TRACTION Mo,dago

DIESEL TRACTION /5W\ -50- X NATIONAL MARSHALLING YARDS W;yi ionl '

O REGIONAL MARSHALLING YARDS - / \ A/on@ OTHER MAJOR MARSHALLING YARDS Mon oz.i lo /

PORTS /,RIVER PORTS I haINTERNATIONAL BOUNDARIES Yinhi * _ - -h iqihor kih.o H.I. )

BANK FUNDED PROJECTS:o 0 e ELECTRIFICATION ,. >b t; Sonlresh,,

-~~ RAILWAY LINES (PROPOSED PROJECT) Boich. MdoniRAILWAY LINES ONGOING OR

A FACTORIES COMPLETED Tu I* TERn\INALS PROJECT / mJ

OECF FUNDED PROJECTS: 'ze* * ELECTRIFICATION

RAILWAY LINES E,cmho_ SeaPROJECT TIMING:

Jf

- - - - EIGHTH S YEAR PLAN PROJECT JapaoLONG TERM PROJECT / D f PEOPt i' Japan

>, tYinchuon J -~~~~~~~~~ kl n 9{ui Sh6< /Dodo E. O KOREA wWuwhi [ T o wDeIhou / /thhot i k

;t_<~~~~~~~~~~~~anzIr Yelljowu WC JAPANDa~~~~~~~~~~~~~~

XicIi t 0 Jiodtong jkifong _oihoo .,Ii n 0Loog n dn 0 P

YANMARi SouthR Chiona ea ico 200 t 30YnLR O

DEM. REP. t c o rodoo and Is cr jhS inaK nOR oEW

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)_~~~~~~~~ sor _, boondouins._

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200 - 1() ~ ~) f \ Soul China no ° 300 200

Chong cz ZJ onSece Iegol stolus d onr Eib r *r ony nrlor mrnt FrUArY 1993

L~~~~~~~~~~~~~ico Zhjo.9 I va >8. Lo guan hdorze 9 _/~~~~~~~~~~~~~~FBUR 1993ai

IBRD 2381 7R

I C6 110, 120' 130-

CHINA RUSSIAN

RAILWAY BOTTLENECKS IN 1989 FEDERATION

EXISTING RAILWAYS (RAILROADS):-50 ONE WAY BOTTLENECKS

_mo TWO WAY BOTTLENECKS _ Hailor 0l,v- i -- NO BOTTLENECKS/ ~ ,. I

RAILWAY (RAILROAD) PROJECTS UNDER CONSTRUCTION / I

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Q SEA PORTS _24Oilin ;s; RIVER PORTS _ / Tongliao

--- COASTAL SHIPPING ROUTES o -RIVERS OR CANALI - '

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IBRD 2379Z100 IhO 130I ._,_ 130-

CHINA RUSSIA so,

RAILWAY oaORGANIZATION ; ; ---.

JINAN RAILWAYADMINISTRATIONREGIONS(BYCOLOR)* RAILWAY ADMINISTRATION BOUNDARY STATIONS ! - , -

ELECTRIFIED LINES IN OPERATION S -t- - iZ - ELECTRIFIED UNES UNDER CONSTRUCTION -' . 'FG | --- i----- SINGLE TRACK RAILWAYS (RAILROADS) Q\

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0§ TR-PTRIPLE TRACTION h:°iC - ~~~~DIESEL TRACTION 0o\.% SX/

X NATIONAL MARSHALLING YARDS O,\l(0 REGIONAL MARSHALUNG YARDS 7' T c I \ Sn) ' '

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RIS PREFERRED RAILWAY INVESTMENT RUSSIANPACKAGE (LOW INVESTMENT) FEDERATIONRIS PROJECTS:

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RIS PREFERRED RAILWAY INVESTMENT RUSSIANPACKAGE (HIGH INVESTMENT) FEDERATION 5

RIS PROJECTS:

9 th FIVE YEARS PLAN50° 8 h FIVE YEARS PLAN

COMMITTED PROJECTSNEW LINESELECTRIFY amusiADD PARALLEL TRACK zqou DEM. PEOPLE'S

EXISTING RAILWAY LINES n,)\ BJ rEi OF R

13 OTHER NODES MONG angc u h n

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0

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t x - -' ~~~~~~~~~~~~~~~~~~~KILOMETERSO I 0 200 300 400 500

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10 -'CHINA"' 120 130

FORECAST RAILWAY BOTTLENECKS FERUSSIONIN 2000 UNDER RIS PREFERRED PROGRAM /EDERTON 50

EXISTING RAILWAYS (RAILROADS).50' ONE WAY BOTTLENECKS

_TWO WAY BOTTLENECKSNO BOTTLENECKS

- - RAILWAY' (RAILROAD) PROJECTS UNDER CONSTRUCTION /

NEW RAILWAY (RAILROADS) LINES* BOTTLENECK JUNCTIONO TRAFFIC NODES Horbin°l OTHER NODES MONGOLIA

6 SEA PORTS Jilin$ RIVER PORTS T g 7\ ^

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SJ \ S R \ I / \ \ \Xio~~~~~~~~~men"/ ~~~Kunsnn

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1 IET0'SZwiong MILE50 100 200 300

2LoTim ef d d is for theinternal us of The World> P.D.R. 9 ~~~~~~~~~Haikou South China Sea Bank Group. Thte denoonvnoioeJps"2utsed adthe bofdundGreshoup ny

THAILAND i .UdeennnOsb,Udo!s , WCo,ae ff _ S-< v, ,oo 12,~~1 ~- 1 0-

FEBRUARY 1993