Document of The World Bank Report No: 67925 v1 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE THIRD NATIONAL RAILWAY PROJECT LOAN TO THE PEOPLE’S REPUBLIC OF CHINA March 27, 2012 ABBREVIATIONS AND ACRONYMS USD United States Dollar Regional Vice President: Ms. Pamela Cox, EAPVP Country Director: Mr. Klaus Rohland, EACCF Sector Director: Mr. John Roome, EASSD Sector Manager: Mr. Paul Kriss, EASCS Task Team Leader: Mr. John Carter Scales, EASCS CHINA THIRD NATIONAL RAILWAY PROJECT P093963 CONTENTS Page A. SUMMARY ........................................................................................................................... 1 B. PROJECT STATUS ............................................................................................................. 1 C. PROPOSED CHANGES ...................................................................................................... 1 D. APPRAISAL SUMMARY ................................................................................................... 2 THIRD NATIONAL RAILWAY PROJECT RESTRUCTURING PAPER A. SUMMARY 1. The Ministry of Railways, through the Ministry of Finance, requests (i) an extension of the loan Closing Date and (ii) the reallocation of proceeds between two loan categories. The Bank team has appraised the request, found it appropriate, and proposes acceptance of the request. B. PROJECT STATUS 2. The Bank Board approved a USD 200 million loan for the Third National Railway on January 23, 2007 and it became effective on May 16, 2007. The project will electrify, double track, and raise the speed (primarily through alignment revisions) of a 254 km existing railway. The objective of the Project is to assist the Borrower in expanding the capacity of its railway system to meet the growing demand for transport of people and goods between Guizhou and Yunnan provinces. The project lies in two of the China’s 18 railway administration. The Kunming Railway Administration portion of the project (44% of the line by length), mostly in Yunnan Province, opened for traffic in December 2012 and the operations of this portion of the line have been successful. The entire Chengdu Railway Administration portion of the project, mostly in Guizhou Province, is expected to open to traffic by September 2012 with the critical path being the construction of the 12.24 km SanLian Tunnel (Contract W4). Sections of the Chengdu portion have already opened to traffic and operation has been successful. With the completion of the SanLian Tunnel the entire line is expected to open to traffic by December 31, 2012. 3. The Bank’s financing is used for civil works, equipment, and material together with technical assistance. There are nine civil works contracts which four are financed by the Bank. Of the four financed by the Bank, three have been successfully completed and the loan disbursed. The one remaining civil works contract (Contract W4) includes the SanLian Tunnel. The technical assistance is complete and expenditure against the goods contracts is approximately 70% complete. The Bank financed disbursement has for most of the project been ahead of projection but has slowed in recent months. Disbursement is currently at 87% against the loan of $200 million with a two month lag (approximately 10%). 4. The project implementation status for the project is currently satisfactory. Issues that arose during implementation that were related to social safeguards have since been resolved. Compensation rates that were originally deemed to be less than those specified in the Resettlement Action Plan have been augmented and are now considered acceptable to the Bank. Remedial compensation measures were completed in early 2011 for the Yunnan Province part of the project and in early 2010 for the Guizhou Province portion of the project. C. PROPOSED CHANGES 5. The following changes were requested by the Ministry of Finance in a letter dated January 4, 2012 (see attachment). Please note that the request from the Ministry of Finance failed to show -1- the correct amount of the loan allocated to the ‘(4) Interest and other charges during construction’ Category. It should be $431, 113.84 not zero. This has been discussed with the Ministry of Finance and they agree.  Extension of the Closing Date. The Closing Date has been requested to be extended by one year from June 30, 2012 to June 30, 2013. The extension is needed to complete the remaining civil works contract (Contract W4) and complete related contract expenditures. It is proposed that paragraph 2 in Part B of Section IV of Schedule 2 to the Loan Agreement be amended to read as follows: “The Closing Date is June 30, 2013.�  Reallocation between Categories. As the Loan is approaching closure, it is requested that a reallocation of funds between Categories be undertaken to move remaining funds in Categories where expenditures are complete or nearing completion to the Works category where the civil works is still under construction. Civil works not financed through the loan will be financed through counterpart financing including debt raised through commercial borrowing. Specifically, the proceeds of the Loan are requested to be reallocated by increasing to $164,368,886.16 the amount allocated to Category (1) “Works�, by decreasing to $35,000,000 the amount allocated to Category (2) “Goods�, by decreasing to $200,000 the amount allocated to Category (3) “Consultants’ services�, and by decreasing to zero the amount allocated to Category (5) “Unallocated�. It is proposed that the table following paragraph 2 in Part A of Section IV of Schedule 2 to the Loan Agreement be amended to read as shown below under the header “Proposed Revision�. Category Current as amended1 Proposed Revision Amount of the Loan Proposed Amount of the Allocated Loan Allocated (USD) (USD) (1) Works 137,568,886.16 164,368,886.16 (2) Goods 56,000,000.00 35,000,000.00 (3) Consultants’ services 1,000,000.00 200,000.00 (4) Interest and other charges during 431,113.84 431,113.84 construction (5) Unallocated 5,000,000.00 0.00 Total: 200,000,000.00 200,000,000.00 1 The Loan was amended by letter to China’ Ministry of Finance dated July 25, 2008 and countersigned by the Ministry of Finance on July 31, 2008. The amendment increased the percentage of expenditures to be financed in Category (1) “Works� to 100%. In addition, the proceeds of the Loan were reallocated by increasing to $137,568,886.16 the amount allocated to Category (1) “Works�, by decreasing to $56,000,000 the amount allocated to Category (2) “Goods�, by decreasing to $431,113.84 the amount allocated to Category (4) “Interest and other charges during construction� and by decreasing to $5,000,000 the amount allocated to Category (5) “Unallocated�. -2- D. APPRAISAL SUMMARY 6. The Bank team has undertaken an appraisal of the proposed restructuring and confirms that with this request the Loan continues to be used for approved purposes. In addition, the Bank team confirms that the Project, as proposed to be modified, remains justified in accordance with the project documents, the requirements of relevant Bank policies are met, and the implementing arrangements are satisfactory. 7. The Bank team has also concluded that this request will not modify the project’s development objective nor affect the achievement of the objective. It also does not involve a change in the safeguard category, and it will not trigger a new safeguard category. Further, this request is not a request for use of Project Cost Savings as defined in the Bank’s Operational Policy 13.25 as there has not been an unexpected drop in the overall portion of the project financed by the Bank and there has been no change in project scope. As the project scope has not change there is no change to the project Procurement Plan. The Bank team has confirmed that there are neither outstanding financial management issues nor other outstanding project related issues that may cause this proposed restructuring not to be approved. Financial reports and statements required by the Loan Agreement have been received by the Bank and deemed acceptable. Nonetheless, the request to reallocate between loan categories and extend the closing date does constitute a Level Two restructuring in accordance with the Bank’s Operational Memoranda, Project Restructuring: New Procedures (Revised), dated November 18, 2009. -3-