China - Zhejiang Power Development Project

Document of The World Bank Report No:29194 IMPLEMENTATION COMPLETION REPORT (CPL-38460 SCL-3846A SCL-3846B SCPD-3846S) ON A LOAN IN THE AMOUNT OF US$400 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE ZHEJIANG POWER DEVELOPMENT PROJECT April 23, 2004 Energy and Mining Sector Unit East Asia and pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December 2003) Currency Unit = Yuan (Y) Y 1 = US$ 0.12048 US$ 1 = Y 8.28 Exchange Rate During Project Years Year Average 1994 --- Y 8.62 1995 --- Y 8.35 1996 --- Y 8.31 1997 --- Y 8.29 1998-2003 --- Y 8.28 FISCAL YEAR January 1 --- December 31 ABBREVIATIONS AND ACRONYMS BERI Beijing Economic Research Institute for O&M Operation and Maintenance Water Resources and Electric Power PPA Power Purchase Agreement CAS Country Assistance Strategy QAG Quality Assurance Group CPSB County Power Supply Bureau RAP Resettlement Action Plan DSCR Debt Service Coverage Ratio SAR Staff Appraisal Report ECIDI East China Investigation and Design Institute SEPA State Environment Protection Agency ECO Expanded Cofinancing Operation SPC State Power Corporation EIA Environmental Impact Assessment T&D Transmission and Distribution EMP Environment Management Plan VAT Value Added Tax ERR Economic Rate of Return ZBFPGC Zhejiang Beilun First Power generation Company Ltd. FMIS Financial management Information System ZBPGC Zhejiang Beilun Power Generation Company FRR Financial Rate of Return ZPEPB Zhejiang Provincial Environment Protection Bureau GOC Government of China ZETC Zhejiang Economic and trade Commission HV High Voltage ZPEPC Zhejiang Provincial Electric Power Company HMEPB Hangzhou Municipal Electric Power Bureau ICB International Competitive Bidding GWh giga watt hour ICR Implementation Completion Report ha hectare IDC Interest During Construction m meter IPP Independent Power Producer m2 square meter LV Low Voltage m3 cubic meter MOEP Ministry of Electric Power km kilo meter MOF Ministry of Finance kV kilo volt NEPB Ninbo Electric Power Bureau MVA million volt ampere OED Operation Evaluation Department MW mega watt Vice President: Jemal-ud-din Kassum Country Director Yukon Huang Sector Manager Junhui Wu Task Team Leader/Task Manager: Barry Trembath  CHINA ZHEJIANG POWER DEVELOPMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 7 6. Sustainability 9 7. Bank and Borrower Performance 10 8. Lessons Learned 11 9. Partner Comments 12 10. Additional Information 13 Annex 1. Key Performance Indicators/Log Frame Matrix 22 Annex 2. Project Costs and Financing 32 Annex 3. Economic Costs and Benefits 34 Annex 4. Bank Inputs 49 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 51 Annex 6. Ratings of Bank and Borrower Performance 52 Annex 7. List of Supporting Documents 53 Annex 8. Beneficiary Survey Results 54 Annex 9. Stakeholder Workshop Results 55 Annex 10. Implementation of Environment Management Plan 63  Project ID: P003642 Project Name: ZHEJIANG POWER DEVT Team Leader: Barry Trembath TL Unit: EASEG ICR Type: Intensive Learning Model (ILM) of ICR Report Date: April 28, 2004 1. Project Data Name: ZHEJIANG POWER DEVT L/C/TF Number: CPL-38460; SCL-3846A; SCL-3846B; SCPD-3846S Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: Power (100%) Theme: Other urban development (P); Pollution management and environmental health (P); Other financial and private sector development (P); Climate change (P); Regulation and competition policy (P) KEY DATES Original Revised/Actual PCD: 09/23/1993 Effective: 08/23/1995 Appraisal: 03/24/1994 MTR: Approval: 02/28/1995 Closing: 12/31/2002 12/31/2003 Borrower/Implementing Agency: PRC/ZPEPC Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Russell J. Cheetham Country Director: Yukon Huang Nicholas C. Hope (Dept Director) Sector Manager: Junhui Wu Richard S. Newfarmer (Division Chief) Team Leader at ICR: Barry Trembath Barry Trembath (Task Manager) ICR Primary Author: Yves J. Albouy; Yuling Zhou; Jie Tang 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: HS Sustainability: HL Institutional Development Impact: H Bank Performance: HS Borrower Performance: HS QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objectives of the project are to: (a) help meet rapidly expanding electricity demand in Zhejiang Province in a least cost manner; (b) promote power sector reform including commercialization and corporatization of the provincial power enterprise; (c) upgrade management capabilities and systems to enable the enterprise to operate efficiently in a commercial environment; (d) promote competition at the generation level through establishment of market-oriented commercial arrangements between power generation and marketing entities; (e) encourage alternative financing strategies for power development; (f) improve supply-side efficiency through reduction of transmission and distribution losses; and (g) reduce environmental impacts of new generation. 3.2 Revised Objective: The objectives of the project were not revised. 3.3 Original Components: Major components of the project costs were: (1) a time-bound implementation plan of power sector reform including commercialization and incorporation of the power company; (2) Beilungang Phase II (3 x 600 MW coal-fired units); (3) transmission network expansion and reinforcement; (4) reinforcement of distribution networks in Hangzhou and Ningbo Municipalities; (5) engineering and construction management service for Beilungang Phase II; (6) technical assistance. 3.4 Revised Components: The transmission component was expanded to utilize cost savings. 3.5 Quality at Entry: The Quality at Entry was not rated by the Bank's Quality Assurance Group (QAG). Using the same criteria, and on the basis of the Staff Appraisal Report (SAR), the Implementation Completion Report (ICR) rates it as satisfactory. The relevance of the objectives and components is satisfactory. The objectives were responsive to the Government strategy of modernizing the sub-sector and improving its efficiency. Power shortages were acute then in the area and were still significant at project completion. The Project was and remains a priority. It was consistent with the Bank's Country Assistance Strategy (CAS), which emphasized support to economic reform, regulatory framework development and corporatization of enterprises in parallel with environmentally responsible infrastructure development. It was also in line with the strategy set out for power at appraisal time, which recommended direct support to power companies in their transition to autonomous and business-oriented enterprises. The project objectives were demanding particularly from a sector reform perspective but they were realistic. The technological requirements were complex. Power sector and tariff reforms involved the interplay of several government agencies and institutions. Interventions for other objectives involved a wide-range of stakeholders. With its past success in Beilungang I and other Bank financed projects, the Zhejiang Provincial Electric Power Company (ZPEPC) had demonstrated its capacity to undertake major projects, absorb offshore technology and make the institutional adjustments needed with the help of international consulting services. - 2 -  The components were geared to achieving the objectives and all the objectives were component-supported. ZPEPC had adequate capacity as the implementing agency; it had built up adequate administrative capacity for physical implementation through appointment of managerial staff with successful experiences in Phase I projects. Relevant lessons learned in prior projects in the country were applied in project design, procurement and through continuity in staffing and hiring of experienced staff and consultants. The financial management capacity of ZPEPC was rightly assessed as adequate. Physical components design was under-pinned by adequate technical studies. The design was technically sound and met all applicable safeguard policies. The economic analysis established that the project was the least-cost solution to meet power demand. Environmental analyses properly assessed adverse impacts and led to a well-defined Environment Management Plan (EMP). Public participation was satisfactory before major decisions on environmental and resettlement issues were made. Implementation preparedness was satisfactory in that all the tasks on the first segment of the critical path had been well defined. The SAR foresaw the risks of delay due to project management or shortcomings in regulatory and tariffs reforms. Mitigation measures, where possible, were clearly defined. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: All the originally stated objectives were achieved. The overall outcome is rated highly satisfactory. (a) Help meet rapidly expanding electricity demand in Zhejiang Province in a least cost manner. The outcome is rated highly satisfactory. Beilungang Phase II was, and still is, the most economic investment in the least-cost expansion program prepared by the Beijing Economic Research Institute for Water Resources and Electric Power (BERI) in 1994. The commissioning ahead of schedule of 3 x 600 MW in 2000 generated fuel savings and, above all, it helped meet an unexpected and spectacular demand growth (16.7% in 2000-02 vs. 10.5% in 1996-2000) though it could not prevent reserve margins at peak to reduce from a 9.5% in 1999 to 4.8% in 2001 and 2.9% in 2002. (b) Promote sector reform including commercialization and corporatization of the provincial power enterprise. The outcome is rated satisfactory. Due to hesitations in Beijing, the reform of the Provincial regulatory bodies only started in April 2002 with a far reaching Government of China (GOC) directive on nationwide sector restructuring and regulation. Price reform for bulk sales is still underway. The unification of the three-tier retail tariffs was completed four years behind schedule but reform went beyond the objectives when all but one of several tariff surcharges were eliminated. ZPEPC and its affiliates were restructured and corporatized and their status and organization reflect a strong commercial orientation. A rationalization and modernization of rural distribution is underway, with ZPEPC playing a major role (paragraph 4.2 (a)). (c) Upgrade management capabilities and systems to enable the enterprise to operate efficiently in a commercial environment. The outcome is rated highly satisfactory. The management capabilities of ZPEPC were upgraded following a major study and extensive training; a new financial MIS was established and, with the use of savings, its scope was broadened and extended throughout the utility, well beyond original plans. ZPEPC streamlined its corporate structure, organized more efficiently its business activities, and became a lead power marketer in China. TA improved its capacity in project construction, environmental protection, resettlement management, legal affairs and network planning. For the latter, the impact was greater than expected: the new - 3 -  methods and software were used intensively and for distribution, after their utilization in Ningbo and Hangzhou, they were disseminated throughout the province. (d) Promote competition in generation through market-oriented commercial arrangements between power generation and marketing entities. The outcome is rated highly satisfactory. Model documents for cogeneration projects inspired power sales agreements between ZPEPC and all power plants in the province. ZPEPC went beyond the action plan by separating generation from transmission, spinning off 12 IPPs by end 1999 and launching a competitive pool market. Participants in that pool represented 58.6 % of system output in 2000, 75% in 2001, spot sales 14% of their output in 2000, 20% in 2001. As a result, in 2000-01, bulk prices were cut by about Y50/MWh, saving Y420 million without adverse impact on labor. (e) Encourage alternative financing strategies for power development. The outcome is highly satisfactory. ZPEPC contributed about 40% of the project cost, exceeding the 20-25% guidelines set by the GOC and the ratio covenanted with the Bank. Beside loans by IBRD and Chinese state controlled banks, ZPEPC borrowed offshore commercial loans with the Bank guarantee for about 27 % of foreign exchange requirements. In addition, ZPEPC built up a subsidiary around its Taizhou generating plant and successfully listed it on the Shanghai and London stock exchanges; It also set up a Joint Venture generating company to channel some $150 million in foreign direct investments. Lastly, though the model agreements prepared for the Wangjiangmen co-generation plant had no direct use after the project was dropped, the TA gave ZPEPC a better understanding of international practice and helped in drafting purchase agreements with all its supplier independent power producers (IPP). (f) Improve supply-side efficiency through reduction of transmission and distribution losses. The outcome is highly satisfactory. The 500 kV investments had more impact than planned because of their early commissioning and expanded scope. Technical losses in transmission dropped from 5.76% in 1995 to 4.3% in 2001 (total losses in the Province from 9.64% to 8.04%). They dropped 50% at 220 kV and 15% at 110 kV but they increased at lower voltages. In Ningbo and Hangzhou where sales almost doubled in 4 years, losses were contained to around 3%. Since 1998, the occurrence of unacceptable voltage dropped to less than 1% from 4.6% in Ningbo and 2.6% in Hangzhou and outages at 10 kV transformer level were eliminated. (g) Reduce environmental impacts of new generation. The outcome is highly satisfactory. All objectives were met and achievements went well beyond original objectives. Adverse impacts were mitigated or reduced to acceptable levels as specified in the EMP. In Beilungang, wastewater quality meets standards and emissions are 20% less than comparable plants in China. Coal consumption decreased in ZPEPC dispatched plants from 364 g/kWh in 1998 to 347 g/kWh in 2001 a drop of 1.55 million tons with the attendant reduction in pollutants. With regard to people displaced by generation and transmission components, their living conditions improved and their per capita income increased on average by 43 percent. ZPEPC was responsive to cultural sensitivities as shown by the site selection for the Yuyao substation. 4.2 Outputs by components: All components were successful completed as defined and output often exceeded the expectations in the SAR. (a) Time-bound plan for sector reform including commercialization and incorporation of the - 4 -  power company. The output is rated highly satisfactory. ZPEPC restructured all its generation assets into shareholding companies by end 1999. Its logistic, material supply and fuel supply functions were restructured into three limited liability companies and other functions re-organized to allow commercial-oriented operation. Further separation of government functions and divestures of generation assets are now underway following a GOC decree. Distribution restructuring consisted of the following: (i) ZPEPC took over the management of County Power Supply Bureaus (CPSB); (ii) collectively owned distribution assets (typically portions of 10 kV and low voltage (LV) lines) were transferred to the 78 CPSBs on a voluntary basis; and (iii) in return, CPSBs will invest, operate and maintain the rural network and provide electricity services to individual customers, that until now was a function of small village crews. New financial management information systems (FMIS) were implemented for ZPEPC headquarters and extended to distribution branches as well as generation companies [more details are provided in para. (g) below on Techncial Assistance and Training]. Retail tariff reform, initiated in 1995, was deepened by a GOC directive to (i) eliminate all local surcharges; (ii) include in the tariff the allowances for distribution investments; and (iii) provide an uniform tariff for all consumers on the same grid. A ZPEPC tariff with all the above changes was applied on January 1, 2000. The level of sector revenue Y0.595/kWh was less than the 1999 average of Y 0.618/kWh. (b) Beilungang Phase II consisting of the addition of three 600 MW coal-fired units. The output is highly satisfactory. Unit #3 was first synchronized in December 1998, unit #4 in November 1999, unit #5 in May 2000. All were in full commercial operation by October 5, 2000, more than eight months ahead of schedule, after overcoming major technical problems with the equipment as supplied. Technical performance is good (availability rate is 89.4%, and coal consumption 323 g/kWh); efficiency and maximum output are now close to or above design benchmarks. (c) Transmission network expansion and reinforcement. The output is rated highly satisfactory. The original scope of works was completed in November 1999, six months ahead of the date required by unit 3 commissioning, more than a year ahead of schedule and with savings that funded additional works. The extra line and four additional substations (two new and two extensions) are all in full operation. (d) Reinforcement of distribution networks in Hangzhou and Ningbo Municipalities. The output is satisfactory. The components were completed slightly behind schedule but all Bank-financed substations, 10 out of 24 included in the project, are now in operation. (e) Engineering and construction management service for Beilungang Phase II. The output is satisfactory. The service was provided as needed and defined at appraisal in a timely manner. It facilitated the resolutions of the countless issues that arose during construction and commissioning while keeping up with the accelerated schedule. (f) Technical Assistance in preparing the security package for the Wangjiangmen cogeneration plant. The output is satisfactory. City planners dropped the project but a set of model documents for the private financing of cogeneration projects was prepared. The model text prepared for power sales was used in drafting agreements with all generators although they were ultimately amended to comply with local laws. - 5 -  (g) Technical Assistance and Training This component is rated highly satisfactory. All the six technical assistance components were successfully completed as defined in the Staff Appraisal Report (SAR). For the FMIS, the output exceeded plans: with cost savings, its scope was expanded through the inclusion of additional modules and its scope was expanded to all ZPEPC headquarters, generation and distribution "sites" to cover its installation throughout ZPEPC and add modules. Methods and software for transmission and distribution planning were installed and disseminated. The environmental monitoring system was accepted by the State Environment Protection Agency (SEPA) in March 2001; data requirements were reviewed in terms of future development and existing installations and a monitoring strategy was formulated taking into account the lack of baseline and pollution data before the system was set up. TA output for the competitive pool was complex and varied providing assistance in relation to: (i) preparation of a Market Code; (ii) design of vesting contracts for differences to hedge price risks; (iii) establishment of a fully computerized power trading center; (iv) design of upgrades in metering automatic generation control for each market participant unit; and (v) formation of a single buyer entity, a market liaison and coordination group and a special unit in the Zhejiang Economic and Trade Commission (ZETC). Training touched about 600 staff. Covenants. All covenants were complied with. Consolidated financial statements are still prepared to monitor ZPEPC performance. After about two years of project completion, ZPEPC is on sound footing: the share of debt in the capital structure is now less than 60% and decreasing, the rate of returns on the historical value of operating assets will remain above 8%, the debt service coverage ratio is expected to oscillate between 1.4 and 2.3, that is close to or above the 1.5 value covenanted with the Bank. 4.3 Net Present Value/Economic rate of return: For Beilungang II, the economic benefits are quantified as the value of the output with a conservative capacity utilization of 5,500 hours/year. The environmental benefits or costs are deemed negligible. The actual willingness to pay is reflected in the bulk price including VAT of Y359.5/MWh; the updated ERR is 20 percent. It meets the appraisal estimate even though at appraisal, the projected utilization was 6,000 hours and the assumed price some Y430/MWh in Yuans of 2002 because of lower than expected plant and coal economic costs (12% and 25% respectively). For ZPEPC transmission investment plan of 1995-2002, the costs are taken to include all facilities down to and including 110 kV and benefits are the incremental sales in 1996-2003; they are valued at the willingness to pay which is 492.5/MWh, the average tariff paid to ZPEPC including VAT at that high voltage (HV) level. The main expenditure is the purchase of incremental generation priced at Y307.3/MWh because it is mostly coming from Beilungang II or similar new plants and the VAT is reimbursed. The updated ERR is then 17 percent. Again it meets the appraisal target even though the more favorable sales tariff assumptions of the appraisal have not materialized; this is because incremental demand has been much higher and was met with a comparable amount of investment thanks to higher efficiency in procurement as exemplified in the transmission and distribution (T&D) component of the Project. 4.4 Financial rate of return: For Beilungang II, the real FRR (ignoring inflation) is 13.54 percent before taxes and 11.2 percent after all taxes. It falls to 9.8 percent if operation and maintenance (O&M) costs grow at 2% p.a. but without tariff increase; if all future costs and prices are escalated at the same rate, the FRR after taxes increases to 12.2 - 6 -  percent. For transmission, with the above Y185.2/MWh margin on incremental HV sales and zero inflation, the FRR is 13 percent before taxes and 10.1 percent after all taxes. It can fall to zero if only O&M costs are allowed to grow; but if all future costs and prices are escalated at the same 2% inflation rate, the FRR after taxes increases to 11.5 percent. 4.5 Institutional development impact: The impact on institutional development is rated high. It was substantial on tariff reforms, network planning and on utility restructuring and corporatization. With respect to the competitive pool experiment, the impact was clearly high because it was immediate and yet far-reaching. The outcome demonstrated that this step, while complex, was within the reach of local reformers and engineers and that market liberalization and unbundling was also politically desirable and feasible in China; it was key to the GOC's launching of the nationwide restructuring in April 2002 which puts China ahead of most developing countries; it also underlined the critical areas for improvements in the reform blue print in particular independent regulation and network and market operators. The human resources developed under the Project are now playing essential roles in various government bodies in spearheading the nation wide sector reform in China, and in enabling ZPEPC to operate and grow more efficiently in this changing environment. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The impact of outside factors is mixed. The devaluation of the Japanese Yen against USD generated savings. An event which had a major effect on implementation of Beilungang, was the need to carry out field reinforcement of overstressed boiler structure. Erection of the structure commenced in 1997, and it became evident after commencement of filling of the first boiler that several structural members were overstressed. After investigations , the contractor agreed to take full responsibility for the cost of modifications which had to be done in site since a large proportion of the structures had already been installed. The reinforcement involved an additional 450 tons for each unit and took a year to complete. 5.2 Factors generally subject to government control: Clearance delays for importing 500 kV transmission and substation equipment postponed completion dates; delays in approving the Feasibility Study Report and Preliminary Design Report postponed counterpart funds disbursement early on, but their timely provision afterwards helped meet physical and financial targets. Competition in the pool was blunted by the lack of incentives for generators to cut costs, continuing changes to the terms of the vesting contracts, control on which generators can compete and access to new entrants. A root cause of those market restraints is the lack of regulatory mechanism to allocate network congestion costs and allow ZPEPC to pass its costs to end-users. On the plus side, GOC gave clear signals and inducement to reform particularly the pool experiment; its well publicized determination to see it through and learn from it created the enabling environment to meet or surpass objectives. 5.3 Factors generally subject to implementing agency control: - 7 -  Strong commitment by the implementing agency enabled the project to exceed SAR expectations in human resource development, project coordination, design and construction management, and cost control. Staff continuity ensured that experience and skills accumulated in Phase I of Beilungang Plant benefit Phase II, e.g. in procurement packaging. That required a conscious effort in light of the restructuring in 1997 of the owner Zhejiang Beilun Power Generation Company (ZBPGC). Training was a key factor contributing to successful project completion and high institutional development impact. Extensive training was provided under the project. Under the special management training program alone, at least 2500 staff-day of advanced managerial training was accomplished overseas (Australia, France, Japan) in the areas including sector management, human resources development, power plant, distribution and finance. In addition, training was provided under various consulting services assignments and main electrical & mechanical equipment supply contracts in the following areas: engineering & design, operations & maintenance, system planning, construction planning & scheduling, budgeting, cost control, schedule control, quality control, documents control, contract management, project management, computer network, material/equipment/fuel supply & control, financial management information system, environmental impact assessment, environmental monitoring & management, power sector reform, and power market development. Several technical shortcomings in boiler operation also became apparent after the first unit commenced operations. The Supplier agreed to modify the design at no cost to the Buyer. However, it was necessary to shut down each unit for two to three months to incorporate design modifications. The problems could be attributed to the fact that the boiler design was innovative and had not been tested in previous installations. While the Supplier accepted contractual responsibility, ZPEPC accepts some moral responsibility since, during negotiations, they had asked the manufacturer to modify his tested design to ensure avoidance of problems which had led to a major boiler related accident during operation of the second unit of Beilungang Phase I. The controversies on boiler and turbine performance -- and the contrast with T&D procurement-- stresses the need to understand the legal obligations in the technical sections, e.g. testing procedures, of suppliers' contracts in order to improve the terms and timeliness of dispute resolution. Involving legal counsel in negotiating liquidated damages helped but it is best to enlist their help in the preparation of bidding documents and contract negotiations. The Owner considers that technical performance may be adversely affected through the Bank-imposed bidding procedure: too often, the lowest evaluated responsive bidder reduces costs for a minimum though barely meets technical requirements confident that in case of shortcomings, it can negotiate the application of its performance guarantee and minimize the amount of liquidated damages. Was this unit size and technology the right choice at the right time? The question should be raised after three Bank projects to help build Beilungang I and II and so many procurement and construction difficulties. The answer is yes. It was big leap forward especially in the 1980s but the growth and plant location conditions in Zhejiang demanded units of large size and high efficiency; the excellent operating experience indicates that the technology is sound and that ZPEPC has mastered it. In doing so, it has benefited from both economies of scale and series by building 5 units of that type. At 2000 prices, the average capital cost for the 5 units is about $550/kW, remarkably low for this level of coal plant technology. Cost analysis indicates that the learning that occurred in Beilungang was the main source of project cost savings. - 8 -  5.4 Costs and financing: The appraisal cost excluding interest during construction (IDC) but including the new transmission component (financed partly by Bank loan savings) was $1,574.1 million equivalent (including $1284.1 million as stated in SAR, plus $290.0 million estimated at appraisal of the new transmission extension), of which $619.9 million ($573.9 million as stated in indicated in SAR, plus $46.0 million for the transmission expansion) (39.4 percent of total cost) was foreign cost. The actual cost was $1,493.8 million equivalent, of which $532.3 million (or 35.6 percent) was foreign cost. The overall cost savings are about 5.1%, while the savings in foreign exchange is higher (about 14.1 percent). Savings are significant for Beilungang II, the major component of the project. After netting out price inflation, the actual cost (excluding IDC) at 1994 prices is $815.4 million, compared to $950 million for the appraisal base cost plus physical contingencies, resulting in a 16.6 percent saving. Cost savings net of inflation originate from: (i) intense international competition for supply of mechanical and electric equipment; (ii) efficient contract and funds management especially for foreign contract claims; and (iii) an optimized design that minimized change orders. The devaluation of the Japanese Yen also contributed to cost savings in dollar terms. Financing departed from the appraisal plan mostly because prices of procurement packages through international competitive bidding (ICB) were lower than appraisal estimates (resulting in Bank loan savings). But with the additional transmission component, the Bank and the ECO contributed almost all that was planned which was sufficient to cover all the foreign cost, thus the local financiers did not need to finance any foreign exchange. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is rated highly likely. All physical components were constructed in a technically sound manner and all necessary conditions for their operation and maintenance are likely to be achieved. The project is financially sustainable; ZPEPC has a comfortable debt coverage ratio. Beilungang II generates substantial cash surpluses: by June 30, 2002, ZBPGC had repaid Y1,561 million in loans and accumulated a profit before tax of Y2,154 million; its FRR is not only high but also robust in so far as power supply is tight, demand growth is high and the plant very competitive. However, the separation of the most profitable generating plants from ZPEPC may adversely impact ZPEPC's financial performance. In spite of a recent increase, the share of tariff revenue allocated to T&D including LV distribution is only Y183/MWh; as suggested by the above FRR estimates, this order of magnitude easily covers for HV transmission, but it is inadequate to enable ZPEPC to service debt and raise new funding for T&D investments below 110 kV. Environmental and resettlement sustainability is highly likely. Negative impacts were mitigated and minimized all within acceptable levels, monitoring is continuing. The results of the competitive pool experiment are likely to be sustained. The next wave of reforms announced in 2002 gives the model a powerful boost. How it will evolve is more uncertain. A 2001 review by the consultants who assisted in its establishment recommends several improvements. Market participants have wishes of their own e.g. moving to multiple buyers, increasing the size of the market by - 9 -  including other provinces and having the strike price in the vesting contracts negotiated by the parties. But, because electricity supply is tight, many want to continue capping market prices. 6.2 Transition arrangement to regular operations: The last three units of the Beilungang Power Plant (financed under the project) are managed by ZBPGC controlled by ZPEPDC; the two Phase I units are managed by Zhejiang Beilun First Power Generation Company Ltd (ZBFPGC) controlled Guodian Group (one of the five big Gencos in China). ZBPGC is staffed with 19 persons in three departments who have performed well so far (the routine O&M of the three units are contracted out to ZBFPGC). After the unbundling, ZPEPC will continue to own and manage the transmission facilities financed under the project. The only unfinished business under the Project as of the original closing date (December 31, 2002) was the TA for expanded scope of FMIS. At the request of the borrower, the Bank granted an one-year partial extension to the loan closing date. The FMIS component has been satisfactorily completed. The performance indicators to watch are: (i) for ZBPGC, the sales tariff as practiced, the revenue from energy sales, the debt service coverage ratio (DSCR), the resettlement and environment impact indicators as defined in the plans; and (ii) for ZPEPC, the T&D margin as practiced, the revenue, DSCR and self financing ratio. All monitoring systems to that effect are in place except that financial covenants applicable to the relevant parts of ZPEPC after its unbundling need to be agreed on as replacements to existing dispositions. Since this issue affects all World Bank power projects, it is being dealt with at sector level. 7. Bank and Borrower Performance Bank 7.1 Lending: Bank performance is rated satisfactory. Project identification and design were satisfactory: During preparation, the Bank provided adequate expertise in helping the Borrower work out sound action plans. It foresaw the high demand placed on local skills in the areas of sector reform, environment and resettlement management and it worked well with ZPEPC in preparing the EIA, EMP and RAP and the program to strengthen its capacity. Loan approval was timely. 7.2 Supervision: Bank supervision was highly satisfactory. It was regular and proactive with a focus on development impacts and the Bank's safeguard policies and fiduciary duties. The Bank worked effectively with the Borrower in detecting and tackling issues, modifying the components as soon as needed to spend the savings in the most meaningful manner. It facilitated or provided world-class advice to ZPEPC for catching up on construction delays and improving contract management and unit performance. Last but not least using ZPEPC a willing and long trusted counterpart, it seized 2 years into the project the opportunity to pilot the competitive pool, a complex affair even for industrialized countries and only the second such case of assistance by the Bank. It gave guidance and facilitated world class advice for that component while avoiding the "purist's" overreach that even in more sophisticated markets led to paralysis (Thailand) or failures (California). 7.3 Overall Bank performance: Overall performance is rated highly satisfactory. The Bank was sure footed in pitching the Project as an institutional stretch. While blameless in the procurement problems, it was resourceful in helping resolve - 10 -  them while at the same time not substituting for the Borrower in making decisions but facilitating capacity building in all the involved local parties. Borrower 7.4 Preparation: The Government's performance is rated highly satisfactory. The central and local governments were very responsive to all comments made by the Bank missions; ZPEPC assumed full responsibility for all the design and preparation and tapped foreign consultants as needed. ZPEPC invested a considerable amount of resources to complete the EA, EMP and RAP in a timely and satisfactory manner. 7.5 Government implementation performance: Government performance is rated satisfactory. The provincial government were very responsive to all comments made by the Bank for implementing the EMP. GOC support was key to tariff unification and competitive pools but it was late and still is a bit slow on the reform of regulatory institutions at the provincial and central levels. 7.6 Implementing Agency: ZPEPC performance was highly satisfactory. Project management effectiveness was high especially for scheduling, costing, and financial and quality controls. The lines of accountability and tasks assignments were clear. Responses to construction delays and equipment defects were prompt and effective. Local financing, the options to use cost savings were provided in a timely and adequate way. ZPEPC demonstrated commitment to national and international standards for resettlement and environmental management. It never wavered in its innovations, i.e. sector unbundling and liberalization, and it made good use of TA. The progress and implementation reports were timely and well documented. 7.7 Overall Borrower performance: Overall Borrower performance is rated highly satisfactory. It met the covenants and showed a steady commitment to both the physical and institutional objectives, achieving and often surpassing them with high cost effectiveness while following strictly the Bank procedures. Above all, it demonstrated openness to experimentation in institutional reform. 8. Lessons Learned The following are the main lessons learned from the Project and other Bank financed thermal generation projects in China as per the Bank's Operation Evaluation Department (OED) audit of those projects, but with some changes for lessons (a) and (d) : (a) ZPEPC's initial difficulties in managing the interface between a large array of contracts for Phase I in contrast with the experience for Phase II points to the advantage of larger and better defined lots, rather than to the need for construction assistance by international consultants. (b) The higher quality of environmental monitoring at Beilungang is largely correlated, with the Bank agreeing to finance the installation by and for the owner's own station through Phase I and II. (c) The remarkable leaps in industry structure pioneered by Zhejiang over three projects and the acknowledged demonstration effect it has had on the sector nationwide vindicates the Bank and - 11 -  GOC strategy of picking a leader and staying with it over the long haul. (d) The long awaited tariff unification, the stalemate in the reform of regulatory institutions point to the need for strong and enlightened GOC involvement at the highest level to achieve progress in price rationalization; since the "new plant new price" policy of 1986, all the bold moves occurred at that level in contrast with the tinkering at the provincial level that lead to the creation of surcharges and that is too ad-hoc to make economic sense. The lessons drawn from this specific project are: (e) Reforms in the industry structure and market organization require strong commitment by the central government. Commitment by provincial government and public participation are key to successful environmental management and people resettlement. Both ingredients were present throughout in this project. (f) Participation of lawyers from bidding document preparation through contract execution and termination can be very beneficial, especially when something goes wrong during implementation. Legal support was called upon after claims against steam turbine island suppliers arose. It took much more time and resources than expected to settle the claim due to lack of legal advice in drafting the terms and conditions in the bidding documents and contracts. (g) Departure from a proven technology is risky: in spite of excellent references, the boilers manufacturer provoked costly delays and modifications by trying for the first time design options that proved to be unsatisfactory. (h) Pre-qualification should demand proven references for similar equipment, not just general experience. Inexperience of the supplier for the coal conveying/feeding system caused suspension of contract execution and major delays. (i) Implementation lapses and their cost in money and delays underline the importance of the following elements: