China - Tuoketuo Power/inner

 ICRR 12508 Report Number : ICRR12508 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 09/28/2006 PROJ ID :P003650 Appraisal Actual Project Name :Tuoketuo Power/inner Project Costs 1290.7 71 US$M ) (US$M) Country :China Loan /Credit (US$M) Loan/ US$M ) 400 28 Sector (s):Board: ): US$M ) EMT - Power (99%), Cofinancing (US$M) 571.5 43 Forestry (1%) L/C Number :L4172 FY ) Board Approval (FY) 97 Partners involved : Closing Date 07/31/2004 12/31/2005 Evaluator : Panel Reviewer : Division Manager : Division : Robert Mark Lacey Ridley Nelson Alain A. Barbu IEGSG 2. Project Objectives and Components a. Objectives The project’s development objectives were: (a) to increase the volume of electricity supply and trading in North China through the construction of two 600 MW thermal units at the mouth of a coalmine; this plant, which would be run by a newly created company, would supply the Beijing-Tianjin-Tangshan Regional Power Grid through long term contractual arrangements; (b) improve the efficiency of the supply and use of energy in the region through more modern technologies and loss reductions; (c) advance power sector reform through the facilitation of market oriented electricity trading in North China; (d) diversify financing through improved access to international financial markets and encouragement of private investment; and (e) promote economic development, improved soil conservation and desert control in Tuoketuo County, Inner Mongolia Administrative Region (IMAR). b. Components (or Key Conditions in the case of Adjustment Loans ): There were two main components: i) The construction of the first two 600 MW coal-fired thermal units in IMAR under the responsibility of the newly established Tuoketuo Electric Power Generation Company (TEPGC) (US$1,108.3 million at appraisal; US$636.5 million actual). There were a number of sub-components including environmental monitoring and management and divestiture of assets from both new and existing generation facilities (the latter belonging to the to the Inner Mongolia Electric Power Company – IMEPC) to the private sector. ii) The Beijing Transmission and Distribution component under the responsibility of the North China Power Group Company (NCPGC) (US$182.4 million at appraisal; US$82.7 million actual). Revisions. In 2001, the IMEPC decided, with the Bank’s concurrence, not to pursue the sub-component of the generation component related to divestiture of assets to the private sector. This was due to lower than expected demand growth, uncertainties regarding the power sector reform program, and dwindling interest from potential investors in the wake of the East Asian financial crisis. c. Comments on Project Cost, Financing, Borrower Contribution, and Dates Project Cost. Project costs at completion were US$719.2 million, 44 percent lower than the US$1,290.8 million financing requirement forecast at appraisal. Foreign exchange costs were, at US$316.9 million, 45 percent less than the US$571.6 million estimated at appraisal. The savings thus affected local and foreign exchange components equally. These substantial cost under-runs were caused by highly competitive bid prices from both foreign and – especially – local suppliers; conservative cost estimates at appraisal (though in keeping with prevailing Bank guidelines); design optimization; and efficient construction and financial management. The lower costs led to lower borrowing requirements, thereby saving on interest. Financing. The IBRD loan was to cover 31 percent of total project financing requirements as estimated at appraisal. The remaining 70 percent was to come from local borrowing (39 percent), counterpart financing (8 percent) and shareholder equity contribution (23 percent). Because of the lower than expected project costs, US$102.5 million of the original loan was cancelled in 2000, and a further undisbursed balance of US$7.2 million was cancelled at closure. Nonetheless, the substantial overestimate caused the Borrower unnecessarily high IBRD financing charges. Borrower Contribution. The reduced project cost had a greater impact on internal financing sources than on the Bank loan. While Bank financing, at US$286.9 million, was 72 percent of that foreseen at appraisal, local financing, at US$432.3 million, was just under half the appraisal estimate. This reflected the proportionally greater savings realized from competitive local bidding. Dates. The original closing date of July 31 2004, was extended by one-year-and-a-half until December 31, 2005. The main causes of the delays were: (a) the project did not become effective until December 1998, more than 18 months after approval (for reasons which the ICR does not make clear); (b) commencement of construction of the thermal power units was held up for about two years by the State Council because of its concern over slowing demand; (c) defective equipment was installed during the initial phase of the transmission and distribution component; and (d) the project was implemented during a period of major change and restructuring in China’s power sector. 3. Relevance of Objectives & Design : The project was responsive to the priorities of the Chinese Authorities, both national and local, and reflected the Bank’s strategic goals in China. It helped to meet soaring electricity demand in a more efficient and environmentally sensitive manner. Although project preparation and implementation coincided with major energy sector reforms in China, including the unbundling of transmission and distribution from energy, as well as with significant shifts in the overall economic and policy environment, it remains relevant. The project built upon three major ESW exercises carried out between 1993 and 1997. It was also relevant to two key themes of the 1997 CAS for China: infrastructure development and environmental protection. Moreover, project objectives remain consistent with at least two key goals stated in the 2003 CAS and 2006 Country Partnership Strategy: managing resource scarcity and environmental challenges; and strengthening public and market institutions. 4. Achievement of Objectives (Efficacy) : With the exception of the diversification of financing sources and private sector participation, the project achieved or exceeded all of its objectives. Once approval was obtained, construction of the two power plants proceeded efficiently and swiftly, and some of the earlier delay was recovered. The two generation units were in full commercial operation by the beginning of 2004, respectively 26 and 16 months behind the appraisal schedule, but five months ahead of the revised schedule. (a) Increasing power supply and electricity trading volume. Rating : Satisfactory . At project completion, the two generation units were both operating at 92 percent capacity, compared to an appraisal target of 85 percent. Total power sold in 2004-2005 was about 15 TWh, 12 percent higher than the end-of-project goal established at appraisal. Regarding trading volume, about 7,300 GWh were transferred from TEPGC to NCPGC in 2004 and 2005, 14 percent higher than the appraisal target. (b) Improved efficiency of energy supply. Rating : Satisfactory . The reinforced transmission and distribution networks and substations have resulted in improved reliability and loss reductions both in the grid system and in the heavy-loaded, high growth Beijing urban area. The improvements would have been even more noticeable had demand growth between 1998-2002 been at the levels predicted at appraisal. From 2003, rapid growth in demand had resumed. By the end of 2005, all project targets related to improved efficiency had been met or exceeded. (c) Advancement of power sector reform through market oriented electricity trading. Rating : Satisfactory . As part of the efforts to move towards a more market-oriented power sector, generation was unbundled from transmission and distribution. The original “take or pay