China - Ertan Hydroelectric Project

Document of The World Bank FOR OFFICIAL USE ONLY Lodv3 / 7 -C9 7 Report No. 8470-CHA STAFF APPRAISAL REPORT CHINA ERTAN HYDROELECTRIC PROJECT June 11, 1991 Industry and Energy Operations Division Country Department Asia Regional Office This doument ha a restlcted dsirbuton and may be used by redpint only in the perfonnance of their offic&a dies. Its contt may no otherwise be dblosed whout World Bank atolzaton  CURRENCY EQUIVALENTS (As of April 1991) Currency Yuan (Y) $1.00 Y 5.24 Y 1.00 $0.19 Y 1.00 100 fen FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES km - Kilometer (0.62 miles) kWh - kilowatt hour GWh - Gigawatt hour (1 million kWh) TWh - Terawatt hour (1 billion kWh) kW - Kilowatt (1,000 watts) MW - Megawatt (1,000 kW) GW - Gigawatt (1 million kW) kV - Kilovolt (1,000 volts) kVA - Kilovolt-ampere MVA - Megavolt-ampere (1,000 kilovolt-ampere) GVA - Gigavolt-ampere (1 million kVA) ton - 1,000 kg GLOSSARY AND ABBREVIATIONS CHIDI - Chengdu Hydro Investigation and Design Institute DRB - Disputes Review Board EEC - Ertan Engineering Corporation EHDC - Ertan Hydroelectric Development Corporation EP - Environmental Panel ETIC - Energy and Transport Investment Corporation (Sichuan Province) GNP - Gross National Product GOC - Government of China HIPDC - Huaneng International Power Development Corporation ICB - International Competitive Bidding LRMC - Long-Run Marginal Cost MOE - Ministry of Energy MWREP - Ministry of Water Resource.. and Electric Power SAA - State Audit Administration SBC - Special Board of Consultants SEIC - State Energy Investment Corporation SPC - State Planning Commission SWCEPB - Sichuan Water Conservancy and Electric Power Bureau SCEPA - Sichuan Electric Power Administration TCC - Technical Cooperation Credit toe - tons of oil equivalent WREPERI - Water Resources and Electric Power Economic Research Institute  FOR OFFICLAL VWE ONILY CHINA ERTAN HYDROELECTRIC PROJECT STAFF APPRAISAL REPORT Loan and Project Summary Borro-wer: People's Republic of China Beneficiaryt Ertan Hydroelectric Development Corporation (EHDC) Amount: $380.0 million Terms: 20 years, including a nine-year grace period, at the Bank's standard variable interest rate. The proceeds of the loan would be onlent from the Government through Sichuan Province to EHDC under subsidiary loan agree- ments with a 20-year term, including nine years grace and the standard variable interest rate for Bank loans. The foreign exchange risk and commitment charges would be .,orne by EHDC. Project Objectives: The main objectives of the project are tot (i) provide additional generation capacity to the power system in Sichuan Province (3,300 HW and 17 TWh a year) in order to alleviate an acute shortage of electricity; (ii) assist in the transfer of modern power technology and in the introduction of efficient dam construction methods to reduce the prevailing long gestation periods of hydropower projects; (iii) contribute to further improvements in the analysis of environmental and eco- logical impacts of hydroelectric resource development; (iv) enhance the institutional development of EHDC by strengthening its organization through a modern manage- ment training program and introducing principles of economic efficiency and pricing; and (v) provide tech- nical assistance in project design and implementation, and for the promotion of the optimal operation of the power system, prudent financial management, and man- power development. Project Description: The proposed project would include: (i) preparatory works; (ii) construction of a parabolic, double-curva- ture arch dam (240 m high) across the Yalong River together with an underground powerhouse complex, a log conveyance system, and appurtenant works and struc- tures; (iii) provision and installation of six 550-MW generating units and associated equipment; (iv) reset- tlement of about 30,000 people; (v) an environmental management program and science station; (vi) consul- tant's services for engineering, procurement, manage- of thek offlWduties. ts contents may not otherwise be disclosed without World ank authotization.  - ii . ment of construction, and preparation of future power projects; (vii) studies of power pricing and power plant and reservoir operation; and (viii) strengthening EIKDC's organization, technical assistance and staff training, together with related equipment and accesso- ries. Benefits: This very large project, based on renewable and nonpol- luting cost-effective hydropower, would greatly increase the generating capability of the Sichuan power system. According to economic analyses, the project is 40 percent less expensive than its best hydrolthermal alternatives in meeting future power demand. The development of :he project also would enhance indus- trial and agricultural production in nearby undeveloped areas. The project would help to improve the subsec- tor's institutional development, system operations, and management and staffing. Purthermore, the project will avoid mining, transporting, and burning of some ten million tons of raw coal a year in Sichuan Province vhich has the highest atmospheric pollution in China. The internal economic rate of return based on the cove- nanted tariff is about 15 percent. However, if based on the willingness to pay, this return would increase to 18 percent. Risks: Construction risks are within reasonable limits and would be manageable with the continuous supervision arrangements by foreign and Chinese consultants who have been retained for the construction phase. The consultants are already involved in reviewing possible physical risks and proposing means and procedures for their avoidance and mitigation. To minimize potential risks associated with the execution of the project and its resettlement program, assurances were obtained from the Government that it would ensure an adequate and timely flow of funds, and establish and maintain effec- tive project implementation management. No major envi- ronmental problems are expected under this project and the implementation of the proposed environmental man- agement program (including a monitoting process) would enhance the environmental quality in the project area.  - iii. - Estimated Costs Local Foreign Total --$-------- million ---------- Preparatory works 102.4 0.0 102.4 Resettlement 82.3 0.0 82.3 Land acquisition 7.1 0.0 7.1 Arch dam (lot no. 1) 217.8 284.3 502.2 Powerhouse (lot no. 2) 159.8 212.4 372.3 E&M equipment 54.6 139.9 194.5 Transformere 15.3 1.8 17.1 Gateslhoists, etc. 38.8 7.0 45.8 Contract administration 26.8 2.1 28.9 Engineering and technical assistance 25.5 17.3 42.8 Training 0.6 0.8 1.4 Environmental protection 1.6 0.3 1.9 Studies 0.6 1.1 1.6 Base Cost (early-1991 prices) 733.1 667.0 1,400.1 Contingencies: Physical 80.8 83.2 164.0 Price 107.9 120.8 228.7 Taxes and duties 67.3 25.5 92.8 Total Project Cost 989.1 896.4 1,885.5 Interest during construction 342.9 258.7 601.6 Total Fin&ncing Required 1,332.0 1,155.1 2,487.1 Project Financing Plan IBRD loan - 380.0 380.0 IDA (TCC) La - 3.3 3.3 US Exim Bank Credit - 30.0 30.0 Norwegian Grant - 5.0 5.0 GOC (through SEIC) 666.0 129.4 795.4 Sichuan Province (through ETIC) 666.0 129.4 795.4 Other Financing - 478.0 478.0 Total 1,332.0 1,155.1 2,487.1 Estimated Disbursements IBRD FY 1992 1993 1994 1995 -------------- million ------ Annual 110.0 103.0 73.0 94.0 Cumulative 110.0 213.0 286.0 380.0 Economic Rate of Return: 15Z la Credit 1664-CHA ($3.3 million used in 1989-91).  . iv - CHINA ERTAN HYDROELECTRIC PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE ENERGY SECTOR . . . . . . . . . . . . . . . 1 A. Overview . . . . . . . . . . . . . . . . . . . . . *. . . a1 Energy Resources . . . . . . . . . . . . . . . . . . . . 1 Coal . . . . . . . . . . . . . . . . . . . . I Hydroelectric Potential . . . . . . . . . . . . . . . 2 Crude Oil . . . . . . . . . . . . . . . . . . . . . 2 Natural Gas . . . . . . . . . . . . . . . . . . . . . 2 Biomass . . . . . . . . . . . . . . . . . . . . . . . 2 Nuclear Energy . . . . . . . . . . . . . . . . . . . . 2 Other Energy Resources . . . . . . . . . . . . . . . . 2 Institutions of the Energy Sector . . . . . . . . . . 3 Energy Investments . . . . . . . . . . . ... . . . . . . 3 B. Energy Sector Issues . . . . . , . . . . . . . . . . . 4 Intensity of Energy Use . . . . . . . . . . . . . . 4 The Dominmace of Coal and Related Enviromental Problems . . . . . . . . . . . . . . . . . . . . . . . 4 Scale and Technology in Energy Industries . . . . . . . 5 Coal Subsector . . . . . . . . . . . . . . . . . . . . 5 Electric Power Subsector . . . . . . . . . . . . . . . 5 Petroleun Subsector . . . . . . . . . . . . . . . . . 5 Energy Pricing . . . . . . . . . . . . . . . . . . . . 5 Investment Funding System . . . . . . . . . . . . . . . 7 C. Energy Sector Strategy . . . . . . . . . . . . . . . . . . 7 D. Bank Role in the Energy Sector . . .. . . . . . . 7 II. THE POWER SUBSECTOR . . . . . . . . . . . . . . . . . . . . . 9 A. Background . . . . . . . . . . . . . . . . . . . . . . . . 9 B. Institutions, Planning, and Technology Transfer . . . . 10 Institutions . . . . . . . . . . . . . . . . . . . . . 10 Power System Planning . . . . . . . . . . . . . . . . . 11 Modern Technology Transfer . . . . . . . . . . . . . . 11 C. Power Pricing . . . . . . . . . . . . . . . . . . . . . . 12 D. Subsector Issues and Strategy . . . . . . . . . . . . . 13 E. Role of the Bank in the Power Subsector . . . . . . . . . 13 This report was prepared based on the findings of an appraisal mission which visited China in December 1989, and an updating mission in February 1991. The appraisal mission consisted of V. Mastilovic (Task Manager), Y. Albouy (Prin- cipal Economist), S. Shum (Senior Financial Analyst), W. Partridge (Anthropol- ogist), and D. Graybill and C. Killoran (Consultants). Peer reviewers were A. Mejia (AS4TE), W. Cao (EM4EE), and K. Jechoutek (ASTEG). Division Chief is R. Stern and Department Director is S.J. Burki.  PaLe No. III. THE BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . 15 Introduction . . . . . . . . . . . . . . . . . . . . . . . . 15 Organization a ad M anagement .1.5... ... ... . . iS Staffing and Training . . . . . . . . . . . . . . . . . . . . 15 Planning, Budgeting and Control . . . . . . . . . . . . . . . 16 Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 17 Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Power Salesto SCEPA . . ... ........ . ..... . 18 Billing and Collection . . . . . . ... 8. . . . . i Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 19 IV. THE POWER MARKET AND THE PROGRAM . . . . . . . . . . . . . . 20 Background . . . . . . . . . . . . . . . . . . . . . . . . . 20 The Sichuan Power System . . . . . . . . . . . . . . . . . . 20 Demand Forecast . . . . . . . . . . . . . . . . . . . . . . . 21 Development Program . . . . . . . . . . . . . . . . . . . . . 22 V. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . 24 Project Objectives and Rationale for Bank Involvement . . . . 24 Project Description . . . . . . . . . . . . . . . . . . . . . 24 Project Origin and Investigations . . . . . . . . . . . . . 26 Project Cost Estimate . . . . 4 . . . . . . . . . . . 26 Financing Plan . . . . . . . .. . . . . . 28 Procurement . . . . . . . . . . . . . . . . . . . . . . . . . 29 Disbursements . . . . . . . . . . . . . 30 Project Implementation . . . . . . . . . . . . . . . . . . . 31 Engineering, Technical Assistance and Construction Supervision 32 Studies . . . . . . . . . . . . . . . . . . . . 3. Management Development and Training . . * . . . . . . . . 35 Resettlement and Rehabilitation Program . . . . . . . . . . . 35 Environmental Management Program . . . . . . . . . . . . . . 36 Project Risks . . . . . . . . . . . . . . . . 37 Monitoring and Reporting . . . . . . . . . . . . . . . . . . 38 VI. FINANCIAL ASPECTS . . . . . . . . . . . . . . . . . . . . . . 39 Background . . . . . . . . . . . . . . . . . . . . . . . . . 39 EHDC's Finances . . . . . . . . . .. . . . . . . 39 Financial Performance Targets . . . . . . . . . . . . . . . 39 Future Finances . . . . . . . . . . . . . . . . . . . . . . . 40 (a) Revenue Position . . . . . . . . . . . . . . . . . . . . 40 (b) Funds Flow . . . . . . . . . . . . . . . . . . . . . . . 41 (c) Capital Structure . . . . . . . . . . . . . . . . . . . 41 SCEPA's Finances . . . . . . . . . . . . . . . . 41 Past Finances and Current Financial Position . . . . . . . . 41 Future Finances . . . . . . . . . . . . . . . 42  - vI - Page No. VII. ECONOMIC JUSTIFICATION . . . . . . . . . . . ........ 43 Project as a Least-Cost Generating Alternative . . . . . . . 43 Project Size and Timing . . ................... 44 Project Benefits . . . . . . . . . . . . .. ................ 44 Sensitivity Analysis . . . . . . . . . . . . . . 45 VIII. AGREEMENTS AND RECOMMENDATIONS . . . . . . . . . . . . . . . 46 ANNEXES 2.1 Installed Capacity, Electricity Generation and Sales 2.2 Growth Index of Electricity Generation and Primary Energy Demand 2.3 Electricity Consumption by Sectors 2.4 Ongoing Major Hydro and Thermal Power Projects by External Financing 2.5 Electricity Rates 3.1 Staffing of EHDC 3.2 Management Development and Staff Training Program 3.3 SCEPA's Electricity Tariffs 4.1 Energy Balance in Sichuan Province 4.2 SCEPA's Generation Capacity and Transmission Network 4.3 Electricity Consumption and Generation in Sichuan Province 4.4 Forecast Energy and Power Demand of the Sichuan Grid 4.5 Power Generation Expansion Program 4.6 Development Program of 500 kV Transmission Network in Sichuan Province 5.1 Project Description 5.2 Project Cost Estimate 5.3 Local Cost Financing Plan (1991-95) 5.4 Procurement Schedule - 5.5 Schedule of Disbursements 5.6 Construction Management Services 5.7 Engineering and Construction Management Consultancy 5.8 Power Pricing Study 5.9 Study of Optimal Power Plant and Reservoir Operation 5.10 Resettlement and Rehabilitation Plan 5.11 Environmental Management Plan 5.12 Guidelines for Project Monitoring 6.1 Financial System Followed by Chinese Power Bureaus 6.2 Assumptions to EHDC's Financial Projections 6.3 EHDC's Income Statements (1998-2002) 6.4 EHDC's Balance Sheets (1991-2002) 6.5 EHDC's Funds Flow Statements (1991-2002) 6.6 SCEPA's Income Statements (1986-90) 6.7 SCEPA's Balance Sheets (1986-90) 6.8 Assumptions to SCEPA's Financial Projections 6.9 SCEPA's Income Statements t1991-200O) 6.10 SCEPA's Balance Sheets (1991-2000) 6.11 SCEPA's Funds Flow Statements (l991-2O00) 7.1 Economic Justification of the Project 7.2 Economic Rate of Return 7.3 Environmental Impact of Coal-Fired Alternative 8.1 Selected Documents and Data Available in the Project File  - vii - CHARTS 1. Organization of the Electric Power Industry within MOE 2. Organization of EHDC 3. Organization of EEC 4. Project Implementation Schedule MAPS General Layout of the Project (IBRD 21324) SCEPA's Power Network (IBRD 21308R) Resettlement Plan (IBRD 22093Rl)  CHINA ERTAN HYDROELECTRIC PROJECT I. THE ENERGY SECTOR A. Overview 1.1 China has made remarkable progress in developing its energy resources over the last four decades and became the third largest producer of commercial energy in the world. In that period, the output of coal has increased at an average annual rate of 9.1 percent, crude oil production at 19.3 percent, and electricity generation at 13.1 percent. In 1989, the coun- try's primary commercial energy supply amounted to 710 million tons of oil equivalent (toe). Coal is the most important source of commercial energy, accounting for about 74 percent of the total. Oil accounts for 19 percent of the total and provides about 7 percent of the country's export earnings. Hydroelectric power (4.3 percent), natural gas (2 percent), and small quanti- ties of shale oil and geothermal power make up the balance. Noncommercial energy, equivalent to about one-third of commercial energy production, is very important in rural China. 1.2 In 1989, China's final consumption of com*ercial energy was esti- mated to be about 680 million toe. The largest consumer of commercial energy is the industrial sector (62 percent), followed by households (24 percent), services (9 percent), and agriculture (5 percent). About 20 percent of oil and 2 percent of coal production currently are exported. Coal and its by- products meet 70 percent of the fuel requirements for industry and power gen- eration, provide 60 percent of the raw materials for chemicals, and satisfy 80 percent of the commercial energy needs of households. The country also is the third largest consumer of commercial energy =n the world. Still, energy consumption per capita is low--about 0.6 toe, or one-third of the world aver- age. Energy Resources 1.3 Coal. China has large coal deposits with recoverable reserves of about 900 billion tons, of which 30 percent are proven. There are now twelve provinces and autonomous regions with more than 10 billion tons of coal reserves; Shanxi and Inner Mongolia each have reserves of over 200 billion tons. In 1990, the country produced 1.1 billion tons of raw coal, of which it exported only 16 million tons. By the year 2000, China aims to produce 1.4 billion tons of coal a year. While coal is produced in many provinces, the amount and quality vary; for example, in Sichuan--where the proposed project is located--much of the local coal has a very high sulphur content (para. 4.2). The best quality coals are found in North China, which is also the region with the largest coal surplus. However, insufficient transport capa- city makes it extremely difficult to move coal from mines in North China to the large consuming centers in Southeast, Central, and East China. The safety and environmental problems associated with coal mining and utilization also are serious (paras. 1.17 and 1.19).  1.4 Hydzoelectric Potential. China is rich in water resources and has a long tradition of harnessing them for energy and other uses. The country's hydroelettric potential is estimated at 1,900 TWh a yeair, but only about 9 percent of it has been developed. Most of the potential is located in four major river basins in the Southwest (70 percent) and No-thwest (12 percent). about 1.500 km away from the main demand centers. The long gestation perlod for hydroelectric proiects also has inhibited the more rapid development and utilization of hydroe!ectric resources. 1.5 Crude Oil. China's ultimately recoverable reserves of crude oil have been estimated at some 80 billion tons, of which 16 percent are proven. The country produced 138 million tons of crude oil in 1990, and the target output for the year 2000 is 230 million tons. In view of the natural decline in production from existing aging fields, it seems unlii.sely that this produc- tion target can be met. China's refining capacity is the sixth largest in the world and allows it to produce a relatively high share of high and medium distillates. 1.6 Natural Gas. Chins's natural gas resources are estimated at 33 tri- llion Mi, of which 2.6 percent are proven. About 50 percent of the gas pro- duced is nonassociated gas. In 1990, China produced 15 billion cubic meters of natural gas. The target output for the year 2000 is 25 billion mi. Most of the gas is used as feedstock for fertilizers and petrochemicals. 1.7 Biomass. Firewood and crop stalks account for 57 percent of the 224 million toe of rural energy supplies. About 70 percent of all fuelwood is used for cooking. Some areas of the country have been suffering from serious deforestation, stemming primarily from fuelwood collection and land clearing for various purposes. The estimated offtake of fuelvood is 230 million tons (91 Mtoe), or 2.6 times the sustainable amount. The Government is taking various measures to address this problem, such as encouraging more efficient use of wood, planting trees, improving management of natural forests and wood lands, making greater use of charcoal, and substituting coal for wood. China also produces many agricultural residues which are used as fuel. 1.8 Nuclear Rnergy. Known uranium reserves in China are sufficient to sustain 15,000 MS of nuclear power capacity for 30 years. In 1991, China plans to commission Qinshan nuclear power plant (300 MM), located near Shanghai. In 1992193, Daya Bay nuclear power plant (2x900 MW) should be com- missioned; 70 percent of its output is intended for nearby Hong Kong. The construction of a few additional plants is planned before the year 2000, pri- marily in regions which lack coal and hydroelectric resources. 1.9 Other Energy Resources. Other energy resources play a small role in energy supply and are used mostly in remote areas. Geothermal energy has been found in more than 3,000 locations covering nearly all provinces and autono- mous regions. The Yangbajing geothermal power plant, located in Tibet, sup- plies about 50 GWh a year, or about 20 percent of the electricity consumption in Lhasa's power system. Although wind and solar energy have promising pros- pects (e.g., wind in Inner Mongolia), they are not expected to affect the overall supply of energy significantly during the next two decades. Unoffi- cial estimates of oil shale suggest that deposits are large, but little is exploited because of lack of technology.  - 3- Institutions of the Ener8g Sector 1.10 In 1988, the Ministry of Energy (MOE) was established to manage and develop the energy sector. Its formation was intended to reduce the duplica- tion and overlapping responsibilities of the former ministries in charge of coal, petroleum, and nuclear power. MOE also was given responsibility for electric power, formerly held by the Ministry of Water Resources and Electric Power (tMWREP). The new ministry has primary responsibility for planning and establishing policies and regulations to promote the rational development and use of energy resources. Under MOE arc various companies and administrations responsible for operations in individual energy industries. Chart 1 shows the organization of MOE. 1.11 The State Energy Investment Corporation (SEIC) was established dur- ing the same peri&od to handle project financing in the coal and electricity industries. SEIC is responsible for onlending funds for projects of national importance and representing the Government in the joint finanacing of projects with other parties; it is expected to operate as a revenue earning entity. Petroleum and nuclear power investments are covered under separate corpora- tions. Both MOE and SEIC operate under the purview of the State Planning C-ommission (SPC), which has ultimate authority for project approval, budget allocations, and financing arrangements. Energy Investments 1.12 Most investments in energy supply go to support projects with long gestation periods. Energy investments for the 1980s were planned based on an expected economic growth rate of 7.5 percent a year. Actual economic gzowth rates exceeded this target by an average of 2.5 percent a year, (4.5 percent in peak years). Also, indu-trial growth far exceeded what had been planned. The discrepancy between projected and actual growth rates has exacerbated the energy shortages that already existed at the start of the decade. China faces an additional difficulty in developing its relatively abundant energy resources, as many of the resources are located far from consumption areas and must be transported over long distances at high cost. In recent years, the Government has thus given priority to shifting resources into bottleneck sec- tors such as energ} and transport. 1.13 In 1989, China dedicated 3.4 percent and 1.3 percent of its Gross National Product (GNP), respectively, to develop infrastructure for energy production and transportation. It invested a total of Y 44.6 billion ($12 billion) in energy supply, representing 29 percent of state capital construc- tion. In the early 1980s, energy supply investments accounted for 21 percent of state capital construction. The shares of power and petroleum investmente' have increased since 1988 to 62 percent and 22 percent, respectively. State coal investment has declined (to 16 percent) but this decline has been offset by an increase in ii vestment by coal collectives. About 20 percent of the investment requirements of the Chinese energy sector are met by foreign loans and direct investments. Direct foreign investment has financed most offshore petroleum exploration to date, although recent trends indicate a decline in direct investment for this purpose. On the other hand, there has been an increase in suppliers credit and bilateral lending for the petrochemical and power industries.  -4- B. Energy Sector Issues 1.14 In addition to the already noted energy shortages, the main energy sector issues are: (i) the high energy intensity of the Chinese economy; (ii) the dominance of coal use and associated environmental problemss (iii) the need to improve scale and technology in energy industries; (iv) the inadequacy of energy pricing policies; and (v) the weak investment funding system. Intensity of Energy Use 1.15 In 1980, China's co.ssumption of commercial energy was estimated at 1.5 toe per $1,000 of GNP. That high a level of energy intensity was due to the emphasis placed on heavy industry, the small sca'e of industrial units, and the raw materials and technologies employed. In the late 19709, the Gov- ernment began to address the inefficiencies in the economy by instituting regulations on energy use, establishing conservation centers to provide tech- nical assistance, and allocating a larger share of investment funds for indus- trial modernization, particularly for projects which contributed to energy conservation. The elasticity of energy consumption with respect to GNP growth, which averaged 1.74 from 1952 to 1977, was reduced to 0.5 in the 1980s. In 1989, the country's energy intensity was 1.1 toe, a 27 percent reduction from the 1980 level. It is estimated that technical and operational improvements and the closure of some inefficient small-scale plants are responr M1e for about 70 percent of the energy savings, and the shift in the output mix of the economy for the other 30 percent. The efficiency gains have been evenly spread over heavy and light industry. Despite these improvements, China's energy intensity is still high. A target of the Eighth Five-Year Plan (1991-95) is to reduce it further by 10 percent. More energy could be saved by increasing the scale of operations, employing P-ore efficient operating practices, and using more modern technologies in energy intensive industries. The Dominance of Coal and Related Environmental Problems 1.16 Unlike the situation in most countries, the electric power nubsector is not the largest consumer of coal in China. Industrial use of coal is much greater. The growth of coal consumption in the household sector also has been strong, due to urban population growth and the increasing use of coal in rural areas. Moreover, there is considerable latent energy demand in the residen- tial sector, primarily for space 'leating, as present heating arrangements meet only miniasal needs. 1.17 Many of the environmental problems in China are related to the coun- try's heavy use of coal and the dispersed, small scale application of coal in industry and households. Environmental problems occur at every stage of the coal chains mining and disposal of mine waste, coal washing, transport and handling, processing and combustion, and ultiLately ash disposal. Water pol- lution occurs both in mining regions and in dense urban areas, caused by prob- lems in disposing of coal mining and processing wastes and the coal ash remaining after combustion. In many large cities, ambient concentrations of particulates and sulfur dioxide are very high. The concentration of particul- ates is the most serious proLlem; it is largely related to the extensive use of coals, their h.lgh ash content (20-30 percent), and the often incomplete combustion due to poor matching of coal qualities to boilers used. The aver-  - 5 - age sulfur content of the coal is relatively low (in the range of 1.2-1.7 per- cent), but because coal is used so extensively sulfur emissions are increas- ing. Moreover, some provinces, such as Sichuan, use coal which has a very high sulfur content. 1.18 The environmental implications of continued increases in coal use are sobering. They highlight the need for stronger regulatory enforcement and more resources devoted to investments to conserve coal and mitigate its envi- ronmental effects. In addition, v.ore resources should go to the exploration and development of cleaner fuels. In many industrialized countries, oil and natural gas have replaced coal in households. At the present time, however, China has limited scope for substituting cleaner and often more cost effective fuels in industrial and residential applications. The country has insuffi- cient confirmed natural gas resources; its production of oil is increasingly absorbed by transport and petrochemicals; and its large hydropower resources are located far away from major consuming centers. Scale and Technology in Energy Industries 1.19 Coal Subsector. Over half of the coal produced in China comes from small-scale mining operations which use traditional technologies such as hand hewing or drilling and blasting. A major problem common to coal mines is worker safety. China has considerable potential for developing medium-size mines capable of supporting investments in semimechanized or mechanized sys- tems, safety equipment, storage and handling systems, and washery plants, reducing safety and environmental problems while improving the quantity and quality of output. In the larger centrally-controlled mines, productivity and safety could be increased by making greater use of mechanized long wall sys- tems and employing more economic designs for mines and washeries. 1.20 Electric Power Subsector. Large-scale power development in China is beneficial from the standpoint of both energy conservation and environmental protection. Modern power plants, with unit capacities of 300 KW and 600 MW, are about 10 percent more efficient than smaller plants and consume about 150 grams of coal less per kWh. This means that the faster the pace of electric power development in China, the sooner the country will be able to reduce its consumption of coal to meet energy demand. The boilers of the modern utili- ties also support better pollution control equipment, raising the efficiency of particulate removal. 1.21 Petroleum Subsector. In the petroleum subsector, there is a need to employ more modern equipment and technology at all stages of exploration and development; seismic survey and related data processing, exploratory drilling, and enhanced oil recovery in order to increase production from aging fields. Improvements in operating and maintenance practices also are needed to increase the efficiency of the subsector. Moreover, better management of the oil and gas reservoirs would help to maximize ultimate recovery rates. Energy Pricing 1.22 Average energy prices have been rising in recent years because of the broadening of the free market. Coal prices have increased rapidly during the last five years, largely because the market has expanded to as much as 40- 50 percent of sales, depending on location. Indeed, free market prices for  - 6 - coal in East China are at or above the level of international prices. The administered price of coal, alth-.gh it has been raised in recent years, is still below domestic supply costs; just as importantly, the price structure does not fully reflect differences in quality, such as calorific value ane ash content. The dual pricing system (para. 1.25) creates various distortions; some high calorific value coals are still underpriced and may not be directed to their most economic uses. 1.23 While the average price levels of some light petroleum products are close to international prices, average prices of crude oil and heavy fuel oil are substantially lover. The pace of domestic oil price adjustments have remained slow, while extraction costs have risen sharply. Producer prices for natural gas are also distorted and should be adjusted to provide an incentive to find and develop more resources. 1.24 Electricity prices are largely based on tariffs set in 1976. Nei- ther the level nor the structure of tariffs reflects the differential cost of service arising from consumption during peak load periods anid power distribu- tion at various voltage levels. In 1987/88, revenue enhancements were intro- duced in order to improve funding of power development. In particular, a new plant, new price, policy guarantees that power prices will be sufficient to allow the power entities to fully service the debt on newly commissioned proj- ects. As a result of this policy, electricity prices are expected to rise subsfantially. Already a multitiered price system is emerging in some prov- inces- while most consumers are charged just a fraction of the long-run mar- ginal cost (LRMC) of supply, some industrial users are charged prices, at the margin, that are well above the LRMC (para. 2.13). 1.25 The recent increases in the price of coal and electricity and the initiation of energy rationing are helping to promote conservation and should positively influence investment and operating decisions in the sector. How- ever, the full benefits of these actions will not be realized as long as a dual pricing system for energy is not abandoned. Under this system, one set of prices applies to goods allocated under the plan and another set of prices applies to goods distributed by the market. Because allocated prices tend to be significantly lower than free market prices, the system encourages consum- ers to use fuels covered by allocated prices regardless of their suitability. Similarly, the system encourages energy suppliers to focus on markets offering free market prices and to neglect the economically legitimate requirements of other markets which offer allocated prices. For example, the low prices for town gas inhibit investments for supplying gas in forms suitable for household energy (natural gas, coal-based gas, and process gas) in an environmentally sound manner. The existing price structure still does not provide all neces- sary incentives for investment to improve coal quality and for electricity consumers to shift their demand to off-peak hours or to be connected to higher voltage. 1.26 China needs strong price incentives and rigorous enforcement stan- dards to encourage consumers to conserve energy. It must continue its program to raise energy prices, close the gap between administered and free market prices for coal, and begin to correct the most serious distortions in the pricing structures for coal, gas, and electricity. Energy price reform based on full recovery of supply costs also will help to remove anomalies in the funding of energy investments. The Government remains committed to its over-  - 7 - all price reform program. For example, in the last several months, the Gov- ernment hae implemented significant price increases and reduced the subsidies in a number of basic commodities, such as grains, cement, and steel. It also indicated its readiness to abandon dual pricing in coal and electricity. Investment Fundin& System 1.27 China has taken decisive steps recently in energy conservation, environmental protection, and fuel diversification. Improvements in the scale and technology of energy supply systems have multiplied in recent years, and the share of funds channeled into the energy sector is now approaching accept- able levels. However, the funding of investments has suffered as a result of distorted pricing policies that led to a haphazard and compartmentalized mobi- lization of resources, and an inefficient development of energy sources. To reduce financial pressures on the central government, responsibility for fund- ing of energy investments gradually has been shifting to the provinces, with mixed results. In the coal subsector, local production now exceeds state production but is not operating at the scale required to achieve higher effi- ciency or improve safety. Because of insufficient electric power supplies, some local enterprises are making their own investments in power plants. The investment approval system actually biases local investment in favor of less efficient small-scale plants, as these plants do not require clearance or any financial contribution by the central government. C. Energy Sector Strategy 1.28 The Government is working to eliminate energy shortages in an envi- ronment of rapid economic growth. The Government's principal objectives in the energy sector are to: (a) accelerate the expansion of electric power and oil/gas production; (b) expand and improve the scale of coal production; (c) increase the efficiency and change the forms of coal utilization; (d) minimize the environmental impact of energy use; (e) rationalize energy prices and investment funding; and (f) encourage the transfer of modern know- how and technology in energy industries. 1.29 Allowing the power subsector a larger share in final energy consump- tion will help to modernize the Chinese economy, reduce overall energy inten- sities, and curtail pollution through the harnessing of hydropower, more effi- cient technologies, and larger-scale plants. The same holds true for the oil and natural gas subsectors, both of which yield cleaner, more efficient fuels than coal. The continued development of coal mining is an inescapable neces- sity but it must occur under conditions of higher efficiency, safety, and environmental acceptability. D. Bank Role in the Energy Sector 1.30 The Bank has supported seven projects in electric power, five in petroleum (including one gas project), and one in coal. In all three subsec- tore, the objectives have been to support technology transfer, modern manage- ment practices, and the development of efficient, large-scale energy produc- tion. Through its sector work and project-related technical assistance, the Bank has assisted in studies to enhance improvements in energy pricing and investment policies. The power-specific aspects of the Government's strategy and the role of the Bank are covered in paras. 2.17-2.18.  1.31 With the Bank's assistance, the Chinese have done a good work in evaluating the economic costs of electric power and coal and in suggesting approaches for gradual price reform. With regard to electricity. LRMC and target tariffs were established for East China in 1988. Since then, the Bank has sponsored the formulation of action plans and adapted them to the specific conditions of each regional power grid, with the objective of promoting their execution under repeater projects. An action plan for power pricing reform in Sichuan is included under the proposed project (para. 5.29). For coal, the Chinese have set pricing guidelines for various types of coal nationwide, but the recent surge in inflation has prevented the Government from moving deci- sively along these lines. However, plans for a large increase in administered coal prices are still alive and the Bank will continue to promote the formula- tion and execution of a plan to rationalize the level and structure of coal prices, with special attention to the most sensitive coal users. 1.32 A Coal Transport Study, being conducted jointly by the Bank and various Chinese institutes, will develop a model to identify optimal invest- ments in infrastructure to move coal more efficiently, taking into consider- ation quality requirements and the impact of more efficient utilization in major consuming areas. A Coal Utilization Study has evaluated options to improve coal use and reduce its environmental impact both in industry and households. In regard to the petroleum subsector, two seminars have been organized in China over the past five years--one on gas utilization and ano- ther on petroleum subsector management. Improving the planniig of investments and operations for the power subsector has been the focus of many Bank-spon- sored activities (paras. 2.11 and 2.19). 1.33 Future Bank operations in the energy sector will continue to support rational energy development and technology transfer, energy efficiency and conservation, and improved environmental management. Through both project and sector work, the Bank continues to encourage policies which provide the proper incentives for sustainable energy development and conservation. Finally, the Bank will cor.tinue to promote modern enterprise management, greater autonomy and accountability, as well as improvements in the regulatory framework of the sector.  - 9 - 1I. THE POWER SUBSECTOR A. Background 2.1 Since the 1950s, China has grown to become the fourth largest pro- ducer of electricity in the world. In 1990, the country had a total installed capacity of 135.0 GW, 74 percent based on thermal power and 26 percent based on hydropower. That same year it generated 618 TWh of electricity, of which 126 TWh was from hydropower. Plant use and network losses accounted for 6.9 and 8.0 percent of generation, respectively. Fuel consumption in thermal plants has been reduced to about 400 gram of standard coal per kWh. These levels of electricity generation, losses, and fuel corsumption are close to those in industrialized countries. Power is mostly distributed through 16 major grids, 13 of which exceed 1 GW in capacity and account for about 90 percent of total capacity. By the end of 1989, the total length of the extra high voltage transmission lines reached 7,302 km and the capacity of substa tions amounted to 18.8 GVA. 2.2 The Government's rural electrification policy emphasizes the devel- opment of local energy resources. Therefore, as much as possible, mini hydro- power development is encouraged in isolated areas. In 1989, mini-hydro, small thermal, and diesel generating sets had a total installed capacity of 19 GW. Mini-hydro plants alone had a capacity of 12.4 GW and an annual generation of 34.3 TWh. The networks in rural areas are made up of 1,990,000 km of 110 kV lines, and 4,020,000 km of low-voltage lines (35 kV and below). These net- works have a transformer capacity of 85.9 GVA at high voltage and 142.5 GVA at low voltage. Approximately 94 percent of townships and 85 percent of villages are electrified. 2.3 The growth of installed capacity, electricity generation, and sales since '949 is depicted in Annex 2.1. Annex 2.2 shows the historical trend of electricity generation, primary energy demand, and the GNP. The target of quadrupling the GNP between 1980 and the year 2000 should result in average growth of 7.0 percent a year for power demand. On this basis, the Seventh Five-Year Plan (1986-90) called for an increase in generating capacity of about 35 GW (8 GW from hydropower) with an additional 120 GW planned between 1990 and 2000. Power generation capacity expansion during the period 1986-90 met the plan objectives for hydropower and surpassed those for thermal power by 80 percent. Various steps are being taken to satisfy power demand. Large thermal power stations are being constructed mainly near ports and major coal mines in Shanxi, Heilongjiang, Henan, Shaanxi, and Shandong. Major hydroelec- tric stations are planned at the middle and upper reaches of the valleys of the Yellow River, Yangtze River, and Hongshui River. Two nuclear power plants are being constructed in Guangdong and Zhejiang Provinces (para 1.8). A 500 kV transmission network is being built to integrate regional grids. The first high-voltage direct-current transmission link was commissioned in 1989 to transfer hydropower from Gezhouba in Hubei Province to Shanghai. 2.4 In 1990, China consumed 535 TWh of electricity; 80 percent was con- sumed by industry, 7.8 percent by agriculture, 6.2 percent by household, 2.0 percent by transportation/communications, and 4 percent by other services. Details of electricity consumption by sectors are given in Annex 2.3. Average  - 10 - per capita consumption in 1990 reached nearly 500 kWh; household use was about 85 kWh in cities and 20 kWh in rural areas. 2.5 Between 1986 and 1990, electricity demand increased faster than generating capacity. As a result, power shortages reached about 20 percent of industrial electricity requirements, which translated into the idling of indue's ial capacity for one or two days a week. Electricity is still allo- cated through quotas based on priorities set by local and central authorities and demands for new connections are closely screened; still, power cuts are frequent. The rapid growth of demand can be attributed both to the very high economic growth and to the increasing share of electricity in coimercial energy requirements: 13 percent in 1970, 18 percent in 1980, possibly 27 percent by the year 2000. Since 1986, residential, manufacturing, and trans- portation showed the highest growth rates: 20 percent for residential uses due to income growth and 19 percent for transportation due to railway electri- fication. The manufacturing sector is already a large electricity consumer and is expected to maintain its share in the future. Notwithstanding con- certed efforts at energy conservation, the growth of power supply should not be allowed to fall behind GNP growth. As economic growth is only targeted at 6 percent a year under the Eighth and Ninth Five-Year Plans, the power output is planned to grow at the commensurate rate of 5.8 percent a year to 1,100 TWh in the year 2000; however, such a figure may prove to be too conservative. Indeed, a faster pace of power system development would be justified in order to accelerate the retirement of the less efficient and more polluting small coal-fired plants. B. Institutions, Planning, and Technology Transfer 2.6 Institutions. HOE oversees all strategic aspects of power develop- ment (para. 1.10), includug six regional power administrations which coordi- nate the operations of the power systems and prepare long-term development programs for the approval of MOE. There are 22 provincial and municipal power bureaus under the regional administrations operating as part of the regional power systems and eight other bureaus which operate in isolation. A number of investigation and design institutions are affiliated with MOE, as are the 16 construction companies involved primarily in building power projects. Several universities, colleges, and research and training centers also fall under the auspices of MOE. 2.7 The Huaneng International Power Development Corporation (HIPDC) was created in 1985 as a financing arm of the former MWREP. It was designed to attract foreign capital and technology for power generating plants located mainly in the open cities of the coast. Unlike the provincial power bureaus (the beneficiaries of multilateral financing), HIPDC has a mandate to raise funds directly from the international financial market. The HIPDC has been active in tapping bilateral and suppliers' credits, and a few commercial bank loans. As a result, the power subsector in China has claimed a significant share of the country's external financing in recent years (Annex 2.4). 2.8 Separate corporations also have been created for developing major hydroelectric schemes as is the case with the proposed project. These new institutional arrangements are beneficial because such corporations are allowed to maximize their efficiency through specialization and economies of scale and to reinvest their earnings into future power development. However,  - 11 - in order to achieve maximum efficiency, this division of labor creates a need for coordination of investments and operations among the various power enti- ties in the eame region, including transfer pricing arrangements. 2.9 The power industry in China employs about 1.8 million people. Of these employees, fewer than 302 have received formal education beyond the junior secondary level. As a result, there is a shortage of trained manpower. particularly trained technical and administrative staff. MOE has initiated a long-term program to upgrade the skills of the staff at all levels. The pro- gram is carried out primarily by the provincial power bureaus and regional power administrations. The training component of the proposed project is designed to support the MOE program and assist in developing manpower to meet the project's human resource needs (para. 3.5). 2.10 Power System Planning. Power system planning in China is the responsibility of the Planning Department of MOE, which reviews the plans proposed by the regional power administrations and bureaus. For the expansion of thermal power plants and transmission networks, the research, planning and designs are carried out by the regional electric power design institutes. For major hydroelectric projects, the research, planning, and design are carried out by the regional hydroelectric investigation an design institutes and the MOE's Water Resources and Hydropower Planning Institute. 2.11 As planning for China's power development becomes increasingly com- plex, there is a compelling need for Chinese planners to adopt state-of-the- art system planning techniques. These techniques are particularly important for evaluating large-scale projects which have long lead times and for making decisions about generation mix, power plant locatiun, and grid configuration. Least-cost generation planning techniques were first introduced for thermal generation in East China through technical assistance from the International Atomic Energy Agency.l/ Under the Planning Support and Special Studies Proj- ect (Credit 1835-CHA), least cost planning techniques are being introduced for hydroelectric generation and transm'-sion network expansion plans for the Sichuan and East China power systems. Training in the use of these techniques is being provided to staff of the concerned power bureaus and the Water Resources and Electric Power Economic Research Institute (WREPERI). These staff, in turn, will be able to assist other power bureaus and regional power administrations. 2.12 Modern Technology Transfer. For China to achieve its ambitious goals for increasing power production, the development and transfer of appro- priate modern technologies will be crucial. Technology transfer is very important for thermal power plants, where increases in the steam parameters and size of units can reduce net fuel consumption. Since thermal generation from coal-fired units is expected to provide about three quarters of total generation until the end of the century, reducing the amount of fuel consumed for power generation would reduce pressures on both the supply and transport of coal, as well as on the environment. The Bank is helping to provide state- of-the-art t2chnology for the construction and operation of large coal-fired units (300 MW and 600 MW), including environmental assessments and impact mitigation. Technology transfer is also needed for large hydroelectric proj- 1/ Under the Bank's Second Power Project (Loan 2493-CHA).  - 12 - ects, particularly in connection with thq interpretation of geological data, the design of sophisticated structures and large underground works, the selec- tion of equipment, efficient construction management, and envlronmental assessments. Assistance in technology transfer is being provided under ongo- ing projects and will be continued under the proposed project Qara. 5.23). C. Power Pricing 2.13 The average official price of electricity has remained constant since the 1960s at around 7 to 10 fen/kWh. The basic tariff structure adopted in 1976, which is still largely in use, includes five categories of tariffs; one each for small industry and commerce, large industry, agriculture, bulk sales, and lighting. Lighting is metered separately for all consumers. Only the large industry category features a capacity charge (per kW) levied on the consumer's peak demand (or installed transformer capacity). The tariff does not reflect the higher cost of service associated with lower voltage levels and consumption during peak hours. In fact, the 1988 study for East China (para. 1.31) found rates to be 20 to 50 percent below the LRKC of supply. In 1987/88, following rulings by the State Council, revenue enhancements were superimposed on the basic tariff structure, as followst (a) across-the-board energy surcharges to industrial and commercial users for plants financed by provincial governments; and (b) higher prices for power purchased from new plants. Customer levies also are being used to finance an increasing share oi the distribution network. In several provinces, time-of-day tariffs have been recently introduced. Overall, the new pricing arrangements reflect a wide spread commitment to conserving electric power and to promoting the financial viability of power entities. 2.14 The price of electricity from plants commissioned after 1988 is 60 percent to 160 percent above the "old electricity' price. With the present growth rate of the subsector, this means that new plants will represent more than half of the total capacity by 1995, and at that time the average price may exceed the LRMC of power generation. Already some large industries with high growth rates end up paying, at the margin, prices higher than the LRMC of supply. However, the current pricing arrangements lack transparency and often create additional distortions in the price structure which encourage ineffi- ciencies and unfair treatment of customers. They also are so complicated as to slow down the introduction of effective structure improvements, such as time-of-day tariffs. MOE recently has begun to address these issues by intro- ducing a standard formula for applying the 'new plant, new price' policy. This formula not only will guarantee the debt servicing of new plants but also will "dilute' the new price into the retail sales tariff in order to avoid the problems of multitier pricing for final consumers. The average national electricity rates in the period 1973-89 are shown in Annex 2.5. 2.15 The Bank is engaged in a very active dialogue with the Government on the topic of power pricing. The financial covenants under Bank-financed proj- ects have long supported improvements in power price levels, and collaborative work on tariffs is now reinforcing the corrective actions already taken by MOE to adjust prices (para. 2.14). In a specific effort to support a systematic overhaul of power prices by the Government, the Bank financed a study covering East China under the Beilungang Thermal Power Project (Loan 2706-CHA). The primary recommendations of this study--to bring tariffs more in line with the LIMC--are gaining broad acceptance and will be used in formulating specific  - 13 - pricing reforms for power systems with predominantly coal-fired generation. However, this prototype study cannot be applied to grids with a predominance of hydroelectric generation such as in Sichuan. This is because in systems dominated by hydropower, the energy LRMC may vary according to the season and the fact that the peaking capacity cost is lower than in systems primarily fueled by coal. Therefore, a specific power pricing study is included in this project (para. 5.29). This study will be carried out within the next two years in two separate but related parts. Part A will serve to design a con- tract for the sale of the project output which the Government has agreed to structure on the basis of the LRMC of generation (para. 3.12). Part B will serve to formulate a plan for the reform of bulk purchase tariffs from small producers and tariffs for retail sales to final users. The terms of reference for the study are presented in Annex 5.8. D. Subsector Issues and Strategy 2.16 China faces the following major issues in the power subsector: (i) acute power shortages; (ii) inadequate power pricing and investment fund- ing; (iii) protracted implementation periods for large projects; (iv) environ- mental impacts of power supply; (v) weak interconnection within regional power systems; (vi) scarcity of skilled manpower; and (vii) outdated methods for planning, operation, and financial management. 2.17 The Government's basic policy for the power subsector is to modern- ize it, expand it, and increase its efficiency at a rate sufficient to meet the requirements of industrial development and improve the living conditions of the population. This policy translates into the following objectives: (a) expand coal-fired thermal capacity at mine-mouths or near ports and load centers in order to reduce the rail transportation requirements and use of lower grade coal in urban centers; (b) replace small- and medium-size thermal units with larger, less polluting, and more efficient units; (c) accelerate the pace of hydroelectric development; (d) construct extra high-voltage trans- mission lines; (e) introduce a more rational pricing system; and (f) adopt modern techniques in project design, environmental impact mitigation, and system planning. E. Role of the Bank in the Power Subsector 2.18 The Bank's participation in the power subsector in China has partic- ularly focused on institution building and the transfer of appropriate modern technology. The Bank has supported the Government's sectoral strategy through sector work, policy dialogue, and a series of lending operations in associa- tion with the regional power bureaus. The Bank has helped to introduce state- of-the-art system planning methodologies which identify cost-effective, sus- tainable development policies for the power subsector and, presently, it is participating in the formulation of the Five-Year Plans in Sichuan and East China (para. 2.11). Repeater projects allow the Bank to assist the Government in applying power tariff reforms based on the findings of earlier pricing studies (para. 2.15). Through the Second Beilungang Thermal Power Project (Loan 2955-CHA), the Bank is extending its policy dialogue to cover the reor- ganization, management, and regulation of power bureaus. 2.19 Since China has become a member of the World Bank Group, the Bank has helped to finance six large power generation projects (600 MW -  - 14 - 1,400 MW)--three thermal and three hydro operations--and one high-voltage transmission project. Through these operations, the Bank has successfully (i) introduced international competitive bidding (ICB) for civil works and equip- ment; (ii) supported the transfer of modern technology in project construction and management; (iii) helped to improve the efficiency of pollution abatement equipment; (iv) promoted the integration of a "egional power system in East China; (v) supported the development of master plans for modern distribution networks; and (vi) promoted operational efficiency and prudent financial man- agement. Under the Technical Cooperation Credit (TCC), the Bank assis,'ed in supervising and reviewing a feasibility study for the Three Gorges Prolect. 2.20 Most of the ongoing power proj3cts financed by the Bank are being implemented in a satisfactory manner, on schedule, and within budget. The first power-operation, Lubuge Hydroelectric (Loan 2382-CHA), is about to be completed. The second power operation, the? 500 kV Xuzhou-Shanghai Transmis- sion Project (Loan 2493-CHA), was put into service, as scheduled. The Yantan Hydroelectric Project (Loan 2737-CHA) is also progressing satisfactorily. Several problems were encountered early in the implementation of the Shuikou Hydroelectric Project (Loan 2775-CIA): project management was weak, and the original Government allocation was too low to cover large cost increases asso- ciated with the resettlement component. Among measures to resolve these prob.. lems, the Bank agreed to revise the loan allocation and finance the importa- tion of materials needed for resettlement; project management is also being strengthened. The project is now back on schedule. Furthermore, the Bank is involved in financing three thermal power projects--Beilungang (Loan 2706- C5A), Wujing (Loan 2852-CIA), and Beilungang Extension (Loan 2955-CHA). The Beilungang project encountered delays early on due to procurement problems and poor coordination among the suppliers of various islands. These problems have now been resolved, and construction is almost back on schedule. To minimize problems of coordination among suppliers for the Wujing project, procurement was carried out using a single responsibility contract. 2.21 The lessons learned from the previous power projects in China have been taken into account in preparing the proposed project. These lessons include: (i) proper assessment of resettlement costs; (ii) tightening techni- cal and financial criteria for the prequalification of bidders; (iMi) improv- ing procurement and contractual arrangements; and (iv) enhancing the role of project management and the use of engiriering consultants. Particular atten- tion was given to the satisfactory results achieved and lessons learned in connection with the resettlement of the population during the implementation of the first two Bank-financed hydroelectric projects in China--Lubuge and Yantan.  - 15 - III. THE BENEFICIARY Introduction 3.1 The beneficiary of the proposed loan would be the Ertan Hydroelec- tric Development Corporation (EHDC), an enterprise created in 1988 with the aim to accelerate the construction of large and economical hydroelectric proj- ects in Southwest China. EHDC is responsible for the development of hydro- electric resources of the Yalong, Jinsha, and Dadu rivers in Sichuan Province; the first of such schemes being the proposed project. EHDC is a separate legal and accounting entity under the jurisdiction of MOE with sole responsi- bility for procurement. A charter of EHDC acceptable to the Bank has been issued. 3.2 Prior to the creation of EHDC, project preparation activities were handled by the Sichuan Electric Power Administration (SCEPA). SCEPA is a state-owned enterprise which owns and operates a major portion of the genera- tion and transmission power system in Sichuan (para. 4.5). SCEPA will con- tinue to be responsible for the integrated operatior.s of the system; it will assist EHDC in implementation, and later operation, of the Ertan project. All the power generated by EHDC will be sold in bulk to SCEPA (para 3.12). Organization and Management 3.3 EHDC is governed by a Board of Directors whose members are appointed by the SEIC (2 members), Sichuan provincial authorities (3 members), MOE (1 member), SCEPA (1 member), and EHDC (2 members). EHDC is headed by a General Manager appointed by MOE and assisted by three Deputy General Managers. The organizational structure of EHDC is shown in Chart 2. Satisfactory results have been achieved in establishing EHDC and recruiting its management and staff. The organization of EHDC is suitable for managing major hydroelectric projects and appears to be appropriate for the current institutional setup in China. EHDC has a capable and experienced engineering staff. However, fur- ther enhancements are needed in managing EHDC's affairs and developing staff skills. Therefore, EHDC managerial staff will need to broaden and acquire the modern management knowledge and experience necessary for carrying out large and complex hydroelectric projects in an effective and timely manner. To this end, systematic management and staff training will be provided, in addition to seminars with foreign specialists and study tours abroad (para. 5.31). Staffing and Training 3.4 At present, EHDC has a total staff of about 200. For project site construction management, EHDC has created the Ertan Engineering Corporation (EEC) headed by the EHDC's Deputy General Manager and Chief Engineer (para. 5.22). EEC will have a staff of about 300 people. Many of the parsonnel are experienced staff transferred from other power agencies, including (a) Lubuge Project Construction Management Bureau; (b) Chengdu Hydroelectric Investiga- tion and Design Institute (CHIDI); (c) various hydroelectric construction bureaus in China; and (d) other electricity supply bureaus. Some 56 percent of the total staff are engineers and technicians. Details of EHDC and EEC staffing are shown in Annex 3.1.  - 16 - 3.5 EHDC does not yet have facilities to train its staff and until these facilities are available, it is dependent upon the training and education department of SCEPA. This department administers five schools and ten train- ing centers for technicians and skilled wrrkers. Many of the staff needed for Ertan can be trained in these schools and centers which specialize in welding, hoisting, metal processing, machine tooling, and maintenance of hydropower plants. In addition, some employees would be tra'ned by other training insti- tutions. The training component included in the proposed project is designed to meet EHDC staff development needs (para. 5.31). Planning, Budgeting, and Control 3.6 The power bureaus are responsible for developing annual and five- year production and investment plans which are integrated into the national plans and are approved, through HOE's auspices, by SPC. These plans have emphasized quantities of inputs and outputs. Financial planning was confined to attaching monetary values, predetermined by MOE, to the quantities being planned. A power bureau's plan might be revised to reflect changes in inputs or outputs arising from changed or unforesern circumstances; however, the plans would ordinarily not be revised merely to reflect differences between the prices assumed for planning purposes and those actually paid by a particu- lar power bureau. Further, under the present finanrial system in China, heavy emphasis is placed on the annual budget as a contx.L.ling tool and financial planning beyord one year is generally not undertaken. 3.7 The above planning system functioned satisfactorily in a highly centralized economy whereby controlled prices kept inflation rate negligible and investments were financed almost exclusively by grants. However, as part of the recently initiated economic reform, prices have begun to escalate, and government grants have been largely replaced by loans. In addition, the institutional framework is moving toward a reduction in centralized control with corresponding increase in financial autonomy and responsibility for deci- sion-making at the power bureau level. In earlier Bank-financed power proj- ects, the Bank had initiated significant steps toward strengthening financial management at the various project entities. The measures adopted include the extension of the financisl planning horizon and training in modern financial management, focusing in particular on modern techniques of cost and debt man- agement. This training is cer.trally managed by MOEISEIC in order to promote coordination and interaction among the various bureaus. A number of training seminars in China and overseas training were carried out and future training activities will build on these experiences. MOE/SEIC are in the process of designing a financial management training program over the next three years in consultation with the Bank. An oatline of this program is presented in Annex 3.2. 3.8 The proposed project will continue the process of strengthening financial management at the power entities. During preparation of the proj- ect, the Bank method of long-term financial forecasting was introduced to EHDC. An assurance was obtained from EHDC that it will furnish a rolling long-term financial plan to the Bank containing projected income statements, sources and uses of funds, and balance bheets for the project implementation period plus no less than five years of project operation period. The first rolling long-term financial Plan will be furnished to the Bank no later than April 30, 1992. Further, to help prepare EHDC for their increasing responsi-  - 17 - bility for the construction and subsequent operation of large and complex projects, including Ertan, a seminar focusing on project financial management (financed under TCC) was held in Chengdu. This was the first of a series of financial training activities managed by MOE/SEIC. Accounting 3.9 As in the case of all state enterprises in China, the power bureauq follow a unlfied Chinese accounting system in their financial reporting to the Government. The Chinese accounting system has largely been satisfactory in the context of a highly centralized and closed economy. However, while the recent economic reforms in the country have resulted in changes in the finan- cial system, corresponding changes in accounting practices are apparently lagging. For example, present Chinese practice uses historical rather than prevailing foreign exchange rates in reporting foreign loans. Hence, the impact of exchange rate fluctuations is not reflected in the enterprises' financial statements. With a view to promoting prudent financial management, including foreign debt management, a training seminar on selected aspects of international accounting practices was held in China. The financial training program for Bank-financed power bureaus is also attacted in Annex 3.2. 3.10 In accorcance with Chinese accounting practices, the power bureaus maintain two separate sets of accounts--one set for capital construction and the other for operation. Since these two sets of accounts are not being con- solidated, the balance sheet for operation does not include construction work- in-progress and the related financing. As in the case of earlier Bank- financed projects, EHDC would consolidate the capital cu.struction account with the operation accounts (if any) for the audited financial statements and rolling financial plans to be furnished to the Bank. Audit 3.11 As with other Bank-financed projects in China, the Foreign Invest- ment Audit Bureau of the State Audit Administration (SAA) will have overall responsibility for auditing EHDC's accounts. Under SAA's supervision, the actual auditing work will be conducted by the Audit Bureau of Sichuan Prov- ince. This arrangement is satisfactor;. However, mainly due to the special features of Chinese accounting, agreement was reached with SAA that for most Bank-financed projects, including power operations, there would be improved disclosure of accounting policies and supplementary financial information in order to provide an adequate illustration of the financial performance and status of projects/entities. Technical assistance for SAM and the provincial auditing bureaus will continue to be financed under IDA credits. An assurance was obtained from EHDC that it would maintain separate accounts for the prol- ect and that the audited proiect accounts and financial statements of EHDC would be furnished to the Bank within six months after the end of each fiscal ear. Power Sales to SCEPA 3.12 As noted above (para. 3.2), the Ertan Hydroelectric Project is being built by EHDC to exclusively serve the Sichuan power market through the net- work owned by SCEPA. The planned project output will provide 20-30 percent of SCEPA's sales to consumers over the years 2000-2010. A formal sales contract  - 18 - between EHDC and SCEPA will need to be entered into shortly before the Ertan plant begins operations in 1998. EHDC's future role and performance depends heavily on its ability to recover the cost to build and operate the plant. SCEPA's investment and operating policies would also be significantly affected by this contract agreement. There are understandings in this regard on the quantities and pricing principles that will govern the contract. Agreements have been reached with the Government regarding the following four principles: (a) the revenue generated by EHDC's sales would ensure its financial viability, as measured by the agreed financial performance indica- tors (para. 6.4); (b) the project's output must be fully dispatchable under the instruc- tions of SCEPA's control centers; (c) charges should be levied separately on a functional basis for peak- ing capability (kW) and energy output (kWh); and (d) the above cherges should not exceed SCEPA's avoided costs defined as the fuel and capacity costs that SCEPA would have to incur in the long run if the project output was not available. 3.13 An assurance was obtained from the Government that a contract sat- isfactory to the Bank would be entered into between EHDC and SCEPA not later than June 30, 1996 and that the Government would take the necessary steps to enable SCEPA to implement the above agreement. Principles of the said con- tract were discussed and agreed upon during negotiations. Billing and Collection 3.14 All the power generated by EHDC would be sold in bulk to SCEPA. The collection procedure would be simple and expeditious. Insofar as the grid is concet.ed, meter recording, billing, and collection activities are conducted by the t arteen power supply bureaus of SCEPA. All the major industrial con- sumers are charged in advance 2 to 5 times each month according to their planned consumption. At the end of the month, meters are read and adjustments to reflect actual usage are included in the first bill for the following month. Domestic consumers are charged once a month according to meter readings. SCEPA's electricity tariffs are given in Annex 3.3. 3.15 Consumers render payments to SCEPA's district offices usually within 3-5 days after the receipt of their bills. Fines are imposed on overdue pay- ments, which rarely happen. These arrangements have established a reliable cash flow from sales and maintained SCEPA's accounts receivable from owner sales at unusually low levels. During the past five years, they averaged less than 1 percent of SCEPA's annual sales. Insurance 3.16 EHDC will take necessary measures to insure all of its assets ade- quately against normal levels of risk. This would include both self-insurance and the purchase of commercial insurance. Contractors for the main construc- tion works will obtain insurance from insurance companies acceptable to EHDC. The related insurance arrangements for these works have been reviewed and  - 19 - found satisfactory. Agreements have been reached with M=DC that satisfactory insurance arrangements would be maintained.  - 20 - IV. THE POWER MARKET AND THE PROGRAM Background 4.1 In 1990, the population of Sichuan approached 110 million for an area of about 600,000 km2. Services, agriculture, light and heavy industries each represent about 25 percent of the provincial economic output; from 1980 to 1990, economic growth has exceeded 10 percent a year on average. The Gov- ernment's target is to double the GNP between now and the year 2000, and to increase real income per capita by 4.5 percent to 6.4 percent a year. 4.2 The province is endowed with abundant hydroelectric potential (para. 1.4) and natural gas (para. 1.6), both of which are underdeveloped. By con- trast, the recoverable coal deposits amount to only 8 billion tons (1.1 per- cent of the country's total). By 1990, 45 percent of it was exploited; coal production was about 70 million tons in chat year, however, this coal has a high content of sulfur (5 percent) and ashes (30 percent). The reserves of crude oil (about 10 million tons) are too small to be developed economically. 4.3 Sichuan has more than 19 million hectares (ha) of forestable land accounting for about one-third of the whole area of the province. Forests cover about 7 million ha (about 13 percent of the province). Sichuan has an estimated 1.13 million cubic meters of woods and produces 18 million tons of wood fuel a year. In order to actively develop the province's fuel forests, effective measures and the proper balance of energy resources have been instituted to eliminate energy shortages, particularly in its rural areas. Sichuan is also rich in raw materials for making biomass fuels and can produce about 600 million cubic meters of biomass fuels a year, from its more than 1,500 large- and medium-size biomass plants and about 1.5 million small pro- ducing units. At present, biomass fuels are mainly used in households for lighting and cooking. 4.4 In Sichuan, the consumption of commercial energy in 1990 was about 40 million toe, of which coal products amounted to 60 percent, electric power 22 percent, natural gas 12 percent, and petroleum products 5 percent. The province imports coal, petroleum products and electric power. Details of the energy balance for Sichuan Province in 1990 are given in Annex 4.1. The Sichuan Power System 4.5 By the end of 1990, the total installed capacity in Sichuan Province was 7,100 MW, of which hydro power amounted to 3,062 MW. The SCEPA power system represented about 65 percent of the total capacity, consisting of 1,463 HW of hydro and 3,339 HW of thermal generating plant; 28 percent of the installed capacity belongs to the Sichuan Water Conservancy Electric Power Bureau (SWCEPB) and 7 percent to self-producers. Most of the hydroelectric power stations belonging to SWCEPB (about 1,250 MW) are small and of the run- of-river type with little firm output in the dry season. These stations are scattered throughout the province; some are connected to the SCEPA network and supply about 1 TWh a year. Tle self-producer thermal power plants are also small (less than 12 MW each), outdated and inefficient.  - 21 - 4.6 SCEPA's electricity generation in 1990 amounted to about 21 TVh, or 73 percent of the total generation in the province. Further details on SCEPA's generating capacities are given in Annex 4.2. SCEPA's hydropower plants have small reservoir storages and their dry season firm output is 30 percent of the annual average. Most of the thermal power plants use coal and a few use natural gas, but their fuel supply is very limited. Units of 50 MW or less represent about 50 percent of installed thermal power capacity. As a result, coal consumption exceeds 550 g/kAh and plant use represents 10 percent of generation. The annual availability of thermal power plants is about 6,000 hours, which indicates proper maintenance and operatins practices. 4.7 The SCEPA's transmission network services about half of the 210 counties of the province. As of end of 1990, the 220 kV grid extended over 4,044 km, with a transformer capacity of 8,570 MVA; and the 110 kV grid 5,908 km with 6,718 WVA. Details of the transmission facilities are shown in Annex 4.2 and on Hap 21308R IBRD. The Power Dispatching Center of SCEPA is responsible for the unified operation of the system. Netvork losses are about 8 percent of generation. 4.8 Statistics on annual electricity consumption in the province are given in Annex 4.3. In the 19809, electricity intensity has decreased at the annual rate of 4 percent. It is now about 0.14 kWh per yuan of output value. Installed capacity has risen by about 3.8 percent a year, while electricity consumption, through an increase in power plant capacity factors, has grown by about 5.5 percent a year. This rate is lower than that for China as a whole (para. 2.3). The composition of power consumption in 1990 vas as follows: industry--83 percent, commercial and public services--7 percent, agriculture-- 5 percent, transport--2 percent, and others--3 percent. 4.9 The value of the industrial output foregone because of planned power outages has been estimated at Y 1 to Y 5lkVh. This value is 50 percent higher for unplanned blackouts or brown-outi. Finally, it is worth noting that new industrial investments are not approved unless electricity requirements can be met which is a serious impediment to economic growth. Demand Forecast 4.10 Demand forecasts for the Sichuan Province were prepared by applying statistical and analytical methods for each important consumer category. The demand forecasts presented in Annex 4.4 are based on the objective to quadru- ple industrial and agricultural production between the years 1980 and 2000. After having eliminated the most critical power shortages, this target could be obtained with an annual growth rate of 5.2 percent for the traditional electricity intensive industries (chemicals, metallurgy, energy), 3 percent for agriculture, 12.5 percent for the tertiary and residential sectors, and 8.5 percent for less electricity-intensive industries. Electricity intensi- ties are expected to stabilize or decrease. On this basis, industrial and agricultural output would increase at a rate of 6.8 percent a year, and elec- tricity demand at 6.6 percent a year between 1991 and 2000. System losses are planned to decrease with the introduction of larger, more efficient facili- ties. Residential consumption would reach 90 kWh per capita. The energy demand forecast is considered conservative, in view of the demographics, the relatively low level of residential consumption, and the potential for indus- trial sector development. For the same reasons, electric energy demand in the  - 22 - 19909, and to a lesser extent the peak load forecasts, are considered to be relatively insensitive to the increases in power prices that would be required to fully reflect the cost of supply in the retail sales tariff. Development Program 4.11 On the basis of the existing commitments for power subsector devel- opment, it would not be possible to eliminate electricity shortages before 1999. The capacity expansion should be accelerated in order to do this. Therefore, about 8,200 MW of generating capacity must be commissioned by that date, and about 450 MW of outdated thermal capacity should be retired. Table 4.1 shows the demand and supply forecast for the Sichuan Province grid (details are presented in Annex 4.4). The development programs for generation capacity are presented in Annex 4.5. The peaking capacity and firm energy requirements in a dry year will constitute the most difficult bottlenecks to be met. All planned hydro projects are part of the core development program that is obtained when overall expansion costs are minimized in a broad range of assumptions about load growth and coal prices. The amount of coal-fired capacity should be the first affected if actual load growth deviates from expectations. Table 4.1: DEMAND AND SUPPLY FORECAST FOR THE SICHUAN GRID (1991-2002) Net Energy Power Demand Capacity Capa- Average Output Of which Peak Energy Margin /a bility Thermal Hydro EHDC Year (MW) (GWh) (MW) (GWh) (GWh) (Glh) (GWh) 1991 4,748 29,443 -2,776 26,667 19,597 7,070 1992 5,065 31,394 -1,145 30,249 23,179 7,070 1993 5,395 33,489 -1,180 32,309 24,039 8,270 1994 5,771 35,777 -1,927 33,850 23,700 10,150 1995 6,144 38,164 1,953 40,117 28,377 11,740 1996 6,622 40,646 4,252 44,898 32,138 12,760 1997 7,164 43,713 4,810 48,523 34,163 14,360 2,900 1998 7,683 46,460 3,199 49,659 35,299 14,360 10,600 1999 8,213 49,541 8,818 58,359 35,299 23,060 14,560 2000 8,791 52,748 10,398 63,146 34,446 28,700 15,340 2001 9,344 55,532 8,129 63,661 34,446 29,215 16,800 2002 9,858 58,586 7,787 66,373 36,148 30,225 16,800 /a Defined as the difference between peak demand and peaking capability. 4.12 The role of coal-fired capacity will be limited by physical and economic factors: low availability and quality of local coal, crippling transport costs, and bottlenecks for coal from the Shanxi province 1,400 km away. It is anticipated that, by the year 2000, provincial coal requirements outside the power sector will reach the 80 million tons of raw coal that can  - 23 - be locally mined. The remainder will severely strain the railways capacity available for coal imports which is planned to expand from 3 to 15 million tons/year. Transport costs will raise the cost of Shanxi coal from about Y 100/ton of standard coal at minehead to just about the Lost of mining local coal (Y 210/ton). If fewer hydro projects were built, transport requirements would exceed feasible targets in the medium term and would be uneconomical in the longer run. 4.13 Hydropower for Sichuan Province, on the other hand, is inexpensive and has relativel7 benign impacts on the environment when compared to its thermal alternative or to hydropower in other parts of China. The least-cost expansion program under the base case calls for a sevenfold increase in hydro- electric capacity by the year 2005; at that date, hydroelectric generation would meet 75 percent of the provincial grid requirements as against 35 per- cent in 1988. Fuel requirements would peak at about 14 million tons of raw coal a year and thereafter fall below the 10 million tons as consumed by SCEPA in 1988. 4.14 The beneficiary of the proposed project, RHDC, would play a key role in developing hydro resources under the above plan. In addition to Ertan (3,300 KW), EHDC would also build Tongzilin (400 HW) and Pubugou (3,300 0W); construction of both projects would start by the mid-1990s to be commissioned from the year 2001 to 2005. A fourth project, Jin Ping (6,000 4W), would be started before the year 2000 and its first phase (1,600 MW) commissioned after Pubugou. 4.15 The expansion of the transmission network will be marked by the introduction of 500 kV technology. Six 500 kV substations will be built, with a total capacity of about 8.5 GVA. About 3,675 km of 500 kV transmission lines also will be constructed. Details on the construction program for the transmission network are given in Annex 4.6.  - 24 - V. THE PROJECT Prolect Objectives and Rationale for Bank Involvement 5.1 The main objectives of the proposed project are tot (a) provide additional generating capacity to the power system in Sichuan Province (3,300 KW and 17 TWh a year) in order to alleviate acute electricity shortages; (b) assist in the transfer of modern technology and in the introduction of efficient construction methods in order to reduce the cost and prevailing long gestation periods of large hydroelectric projects in China; (c) contribute to further improvements in the analysis of environmental and ecological impacts of hydroelectric resource development and in the design of related mitigation measures; (d) enhance the institutional development of EHDC by strengthening its organization through a modern management training program and intro- ducing of economic efficiency and pricing principles; and (e) provide technical assistance in project design and implementation, and for the promotion of optimal operation of the power system, prudent financial management, and manpower development. 5.2 The project objectives comply with the country's regional and sec- toral objectives and with the Bank's lending strategy. In particular, the proposed project is well-coordinated.with the policy of the Government to accelerate the development of the large and economic hydroelectric potential as well as to help achieve the Bank's specific goals regarding transfer of appropriate modern technology, staff training, least-cost investment planning, and modern utility practices. Large hydroelectric projects in China have had gestation periods of up to 15 years. Originally the proposed project was expected to require 12 years to complete. With encouragement from the Bank, the Chinese are actively working to reduce its gestation period to nine years by applying modern construction means and methods, critical path scheduling, involvement of competent engineering consultants, and accelerating preparatory activities. This project allows the Bank for the first time to assist in the start-up of one of the most important power development corporations and to further its sectoral objectives, including reduction in air pollution, the formulation of policies to improve electricity pricing, and training staff in modern utility management and financial planning. The Government fully sup- ports the project objectives as they would have a major effect on future power development and economic growth in Southwest China. Project Description 5.3 The proposed project consists of the following componentst  - 25 - (a) preparatory works, including access roads and bridges, water and electricity supply, communication links, and various construction plant and site facilitiest (b) construction of a parabolic, double-curvature arch dam (240 m high with a crest 775 m long) across the Yalong River together with an underground powerhouse complex, log conveyance system, and appurte- nant works and structures; (c) provision and installation of six 550-MW generating units and asso- ciated electrical equipment, including a 500 kV step-up substation; (d) resettlement of about 30,000 people affected by the project; (e) an environmental management program and creation of a science sta- tion for environmental monitoring and studies; (f) consulting services for engineering, procurement, management of construction, ant preparation of future power projects; (g) studies of (i) power pricing for Sichuan Province and optimal opera- tion of the power plant and reservoir, and (ii) investigations and tests related to safety of structures, monitoring of energy dissipa- tion facilities, and powerhouse ventilation; and (h) management and staff training, computers and application software, and accessories. 5.4 The Ertan hydroelectric project would constitute the first step in the long-term development of the hydroelectric potential of the Yalong River, one of the major tributaries of the Yangtze River in China. The Yalong River is 1,500 km long and has the potential to provide about 25,000 MW generating capacity. It represents one of the ten principal hydroelectric basins in China. A log-passing facility would be built to allow the passage of logs from the reservoir to the downstream river with capacity of 1.1 million mi of logs a year. The development of the project also would enhance industrial and agricultural production in the nearby underdeveloped Dukou(Panzhihua)-Xichang area. With a normal pool level at the dam site of 1,200 m above sea level, the Ertan reservoir will extend 145 km upstream. The active storage of the reservoir will be 3.4 km8, or about 6.4 percent of the average annual runoff. The regulating effect of the reservoir would be useful to downstream hydro- electric projects, particularly in increasing their firm output of electric energy. The upstream Jin Ping hydroelectric project (6,000 MW, 39 TWh a year), when constructed, will significantly increase the output of the Ertan project (para. 7.4). A detailed description of the project components is given in Annex 5.1. 5.5 The transmission network for connecting the Ertan hydroelectric station to the existing grid would require about 2,500 km of 500 kV transmis- sion lines. This network would be constructed by SCEPA as a part of its 500 kV transmission network development program before the project is commis- sioned. The Bank is actively involved in the study work that would assist SCEPA in determining the optimal configuration of the 500 kV transmission network in Sichuan and its implementation schedule. An assurance was obtained  - 26 - from the Government to (i) provide the Bank with an implementation schedule and a financing plan for the 500 kV transmission network connecting the Ertan hydroelectric station with the power system in Sichuan Province not later than June 30, 1993; and (ii) make or cause to be made arrangements satisfactory to the Bank to secure completion by SCEPA of this network not later than June 30, 1998. Project Origin and Investigations 5.6 The idea of developing the water resources of the Yalong River and constructing the Ertan dam and power plant originated in the early 1950s. Since 1973, intensive site investigations and geological explorations have been carried out. These include more than 500 exploratory drill holes (30,000 m in total length) and 40 exploratory adits (8,000 m in length). Such level of exploration is considered to be satisfactory in relation to the type and size of the project. The feasibility study for the project was completed in 1984 by the CHIDI (para. 5.23). In January 1985, this study and the pre- liminary design report were reviewed and approved by MWREP. The documents also were reviewed in March 1986 by the Special Board of Consultants (SBC), consisting of eminent international experts from Canada, France, Switzerland and the United States. SBC concluded that the design of the proposed project would adequately meet the conditions for development and was entirely satis- factory in its overall concept. Geologically, the Ertan site is considered to be ideally suited for the construction of the proposed parabolic, double- curvature arch dam and ancillary underground powerhouse complex. Neverthe- less, a number of recommendations for improving the project design, and for the accelerating its construction have been made and agreed with CHIDI, EHDC and SCEPA. These recommendations include, inter alia, the relocation of the axis of the dam, the decrease of the depth of excavation, a revised spillway concept, an increase in unit sizes from 500 MW to 550 MW, and an accelerated construction schedule. 5.7 In December 1986, at the request of SPC, the China International Engineering Consulting Corporation organized an appraisal of the proposed project with the participation of engineering specialists and various authori- ties. Finally, in July 1987, the State Council approved the construction of the project. Harza (USA) and Advisory Group of Norway (AGN) consultants have been appointed to assist EHDC, SWEPA, and CHIDI with procurement, preparation of cost estimates, scheduling, construction, and specific engineering aspects of the project. The services of these coniultants are being partially funded by the TCC (Cr. 1664-CHA). ProJect Cost Estimate 5.8 The total costs of the project are estimated to be $1,885.5 million equivalent, of which $896.4 million (48 percent) represents the foreign exchange component. Annex 5.2 contains, in detail, the estimated costs of the project, which are summarized in Table 5.1. 5.9 The project base costs are in early-1991 prices and are estimated as follows. The costs of preparatory works are based on the actual construction costs for works completed to date, and on contract prices for the remaining works, which are expected to be completed before the end of 1991. Land acqui- sition costs are based on the actual cost of land purchased at the construc-  - 27 - Table 5.1: SUMMARY OF PROJECT COST Foreign Local P@rQI_n Total Local Foreign Total as % of ------- Y will on -- --- S millon ---- Total Preperatory works 489.1 0.0 489.1 102.4 0.0 102.4 0.0 Reoettlemont 429.4 0.0 429.4 62.8 0.0 62.8 0.0 Land acquieltion 26.9 0.0 26.9 7.1 0.0 7.1 0.0 Arch dam (lot no.1) 1,140.8 1,460.8 2,029.0 217.8 264.8 502.2 68.6 Powarhouce (lot no.2) 886.7 1,112.0 1,640.7 159.3 212.4 872.8 67.6 E6M equipmont 285.7 782.6 1,018.2 64.6 189.9 194.6 71.9 Transformors 80.2 9.6 89.8 16.8 1.6 17.1 10.5 Oates/hoists etc 208.0 88.8 289.8 88.0 7.0 45.8 15.8 Contract adminIstration 188.6 11.0 147.6 26.8 2.1 28.9 7.8 Enineorlng a toch. coot, 120.8 87.8 207.7 26.5 17.8 42.0 40.4 TrainIng 8.1 4.0 7.1 0.6 0.7 1.4 50.0 Environmental protcetIon 0.8 1.6 9.9 1.6 0.8 1.9 16.8 Studles 8.0 6.5 8.6 0.0 1.1 1.6 00.8 Total Baso Cost S.712.0 8.450.9 7,201.4 7?8.1 607.0 1.400.1 47.0 Contingencies Physical 428.0 485.8 868.8 80.8 e8.2 164.0 60.7 Price 1,191.2 1,820.8 2,611.6 107.9 120.6 226.7 62.0 Toxes and duties 862.6 188.2 486.7 67.8 26.5 92.8 27.6 Total Project Cost 5.6879.2 5.W77.7 11.0EB.9 8.1 _.4 1.886.6 47.6 Interest during construction (IDC) 1,794.9 1,854.5 8,149.4 842.9 253.7 601.6 48.0 T*tWFl inancina 7.474.1 8.7?2.2 14.206.8 1.8B2. 1.166.1 2.487.1 48.4 RMauI red Note: Flgures may not total exoctly due to rounding. tion site. The arch dam and powerhouse costs are based on the lowest evalu- ated responsive bids for each lot. The costs of electrical and mechanical equipment, transformers and gates are based on recent quotations from manufac- turers and suppliers for similar equipment and materials involved. The costs of the remaining items are based on the consulting engineers' data for similar morks. Accordingly, the exchange rates that were applicable at respective points of transaction have been used. Physical contingencies are assumed as followss 20 percent for the underground powerhouse, 15 percent for the reset- tlement program, 10 percent for the remaining preparatory works, arch dam, engineering, contract administration, technical assistance, environmental management, studies and training, and 7 percent for the electromechanical equipment. These percentages are considered to be reasonable in view of the site features, the stage of design, and the status of contracts let to date. The price escalation for costs expressed in foreign exchange (US dollars) has been calculated in accordance with the anticipated international price escala- tion of 3.4 percent a year in the period 1991-2000. The price escalation for costs expressed in local currency is calculated according to the projected local inflation rates, 10 percent in 1991, 8 percent in 1992, 5 percent a year thereafter. EHDC has requested the exemption from taxes and duties as has all previous Bank projects in China. The total project costs also include actual expenditures incurred before 1991 (about $95 million) which are related to the preparatory works, resettle. ent, land acquisition, and engineering services.  - 28 . 5.10 The breakdown of the project costs into foreign and local components reflects the borrower's decision to hire foreign construction firms and to import appropriate modern construction equipment and technology, and to apply effective management methods so as to ensure efficiency in project construc- tion. Foreign exchange components would covers (a) the main civil works; (b) electromechanical equipment; and (c) the foreign expenses associated with engineering, technical assistance, environmental management, training, and studies. Financing Plan 5.11 Early on in the project preparation, the Government of China (GOC) indicated its preference for seeking Bank financing in two stages as it was done for the Shuikou Hydroelectric Project (Loan 2775-CHA). Since Ertan is a large project with a long gestation period (9-10 years), a phased financing approach would avoid tying up financial resources that could be used for other projects with more immediate needs. No problem is envisaged for the GOC in raising foreign exchange financing for the second phase of the project at a later date. In view of the foregoing, it was agreed that the proposed loan would be used to finance the first phase of project construction (1991 to mid- 1995). However, this would not prevent the GOC from seeking additional assis- tance from the Bank for this project. The GOC requested, and it has been agreed, that the second phase of the project would be included in the Bank's proposed pipeline of future projects. In addition, the Bank would assist EHDC to seek cofinancing for electromechanic:al equipment. To enable timely and effective implementation of the project. it is necessary to ensure an adequate flow of local funds, as shown in Annex 5.3. During negotiations, GOC's obli- gation to provide funding for the entire project, along with the yearly budget and details of local financing for the first phase of project implementation, was reconfirmed. 5.12 The financing plan for the project would be as shown in Table 5.2. Table 5.2: FINANCING PLAN ($ million equivalent) Local Foreign Total IBRD loan 380.0 380.0 IDA (TCC) 3.3 3.3 US Exim Bank Credit 30.0 30.0 Norwegian Grant _ 5.0 5.0 GOC (through SEIC) 666.0 129.4 795.4 Sichuan (through ETIC) 666.0 129.4 795.4 Other financing - 478.0 478.0 Total 1,332.0 1,155.1 2,487.1 5.13 Total financing requirements, including interest during construction (IDC) of $601.6 million, amount to $2,487.1 million. SEIC and Energy and  - 29 - Transport Investment Corporation of Sichuan Province (ETIC) would share the financing in equal amounts for the followings (a) 100 percent of local costs, including taxes ($1,014.6 million equivalent); (b) IDC on their loans ($342.9 million equivalent); and (c) Bank loan interest and principal repayments dur- ing the project construction period ($258.7 million). Of the total local financing, 40 percent will be in the form of equity. The balance (60 percent) will be in the form of loans, the terms of which are as follows: (a) 50 per- cent of the loans will have an interest rate of 3.6 percent a year, 15 years maturity; and (b) the balance (50 percent) of the loans will have an interest rate of 15.42 percent a year, 10 years maturity. The weighted average inter- est rate x suld amount to about 9.6 percent a year. This is in line with the prevailing interest rate for key national projects in China. 5.14 The US Exim Bank made a preliminary commitment in the amount of $30 million to cofinance the project for services of Harza Engineering Company (USA), which was selected to assist EHDC in managing project construction. Furthermore, Norway offered a grant to help finance the project in the amount of Norwegian Krone 35 million ($5 million equivalent), of which a major por- tion would be used to cofinance engineering services by AGN for the project. 5.15 The proposed Bank loan of $380 million would meet about 40 percent of the total financing requirements during the first phase period. Given the long implementation period noted above and the fact that EBDC would not be generating cash internally until after project commissioning (para. 6.8), the project circumstances justify extending the grace period of the Bank loan from five years (which is the standard period for China) to nine years, and substi- tuting level repayments of principal for annuity payments. The loan would be made to the GOC at the Bank's standard variable interest rate for a 20-year term including nine years of grace. The proceeds of the loan would be onlent from the GOC through Sichuan Province to EHDC with the same terms as the Bank loan. An assurance was obtained from the GOC that it would onlend the pro- ceeds of the Bank loan to EHDC, through Sichuan Province, under subsidiary lo-an sareements with a 20-year term, including nine lears grace and the stan- dard variable interest rate for Bank loans. EHDC would bear the commitment charges and foreign exchange risk. The execution of subsidiary loan agree- ments between the GOC, Sichuan Province, and EHDC, satisfactore to the Bank, would be a condition of effectiveness of the loan. Procurement 5.16 The main items to be procured are: (a) preparatory works; (b) the main civil works; (c) electrical and mechanical equipment; and (d) engineering and consulting services. Contracts for preparatory works, totalling about $100 million equivalent, have been awarded so far, following local competitive bidding procedures acceptable to the Bank. These contracts would be financed by local funds. The procurement of the main civil works, through ICB, has been divided into two lots, one for the dam and the other for the underground powerhouse and tunnels. These contracts would be partially financed by the proposed Bank loan. Bidding documents for the main civil works were reviewed and endorsed by the Bank, and prequalification of bidders for these works also was carried out in consultation with the Bank. Applications for prequalifica- tion were received in 1988 from 14 contractors (mostly joint ventures of for- eign and local firms), six of which were prequalified. Five out of six nrequ- alified joint ventures submitted their bids which were opened in public on  - 30 - October 25, 1989. Bid evaluation was carried out by EHDC, MOE, and their consultants. The signing of the contracts with the lowest evaluated bidders for the main civil works is expected to take place in July 1991. Certain innovative contracting procedures have been adopted for procurement of the main civil works, such as a Disputes Review Board (DRB) to be set up to help in prompt resolution of disputes. 5.17 The proposed Bank loan also would partly finance advance payments for the supply of the 550-MW generating units and associated equipment, including switchgear, cables, and instrumentation and control, which would be procured through ICB in accordance with the Bank's procurement guidelines. Qualified domestic manufacturers would be eligible for a 15 percent preference in bid evaluations or import duties, whichever is lower. Items or groups of items estimated to cost less than the equivalent of $200,000 per contract, up to an aggregate amount of $2 million may be purchased on the basis of at least three quotations from qualified suppliers eligible under the Bank's procure- ment guidelines. All contract packages for works and goods financed by the Bank and estimated to cost $5 million equivalent or more would be subject to the Bank's prior review (about 98 percent of the loan). Consultants financed under the loan would be selected in accordance with principles and procedures satisfactory to the Bank on the basis of the "Guidelines for the Use of Con- sultants by World Bank Borrowers." The procurement arrangements for the pro- posed project are summarized in Table 5.3. Disbursements 5.18 The Bank loan would be disbursed against: (a) 100 percent of for- eign expenditures for the main civil works; (b) 100 percent of foreign expen- ditures or 100 percent of local expenditures (ex-factory cost) of goods pro- cured through ICB; and (c) 100 percent for consulting services, studies and training. Furthermore, the proceeds.of the Bank loan will be used to finance 100 percent of foreign expenditures for advanced payments for the purchase of electromechanical equipment procured through ICB. For expenditures relating to training, and contracts for works, goods and services each costing less than $200,000 equivalent, reimbursements would be made on the basis of State- ments of Expenditure (SOEs). Documentation supporting the SOEs would be retained by EHDC and made a&.ailable for review by Bank supervision missions. To facilitate disbursements for some categorles under the project, a Special Account in US dollars, with an authorized allocation of $20 million, will be established in a bank on terms and conditions satisfactory to the Bank. Applications for replenishment would be submitted monthly or when the amounts withdrawn are equal to 50 percent of the authorized allocation, whichever occurs sooner. Retroactive financing in an aggregate amount of $38 million would be provided under the loan to cover payments made for expenditures of urgently needed civil construction works, consultant services, and training incurred before the date of loan, but after September 1, 1990. 5.19 The disbursement schedule for the proposed Bank loan is given in Annex 5.5. The disbursement period covers the first phase of the construction period. Because of the phased financing arrangements for this project (para. 5.11), it is not possible to compare its disbursement with that of other proj- ects, except to some extent for the Shuikou Hydroelectric Project. The dis- bursement schedule is based on the detailed project implementation program and  - 31 - Table 5.3: PROCUREMENT ARRANGEMENTS (In $ million) Procurement method Project cost ICB LCB Other N/A Phase 1 Total Preparatory works - 106.2 - - 106.2 106.2 Resettlement - - 104.1 - 94.8 104.1 Land acquisition - - 7.1 - 7.1 7.1 Arch dam (lot 1) 681.7 - - - 356.1 681.7 (15.0) (155.0) Powerhouse (lot 2) 530.6 - - - 393.7 530.4 (180.vl - - - (180.0) E&M equipment 275.5 - - - 53.0 275.5 (30.0) (30.0) Transformers - 23.4 - - 3.0 23.4 Gates/hoiste/cranes 8.0 52.6 1.0 - 10.8 61.5 (1.3) (0.7) (2.0) Contract admin. - - - 37.4 16.8 37.4 (1.0) (1.0) Engineering and - - 51.9 - 18.9 51.9 tech. assistance (11.0) (11.0) Training - - - 1.7 1.0 1.7 (0.5) (0.5) Environment - - - 2.4 1.5 2.4 (0.2) (0.2) Studies - - 2.2 0.6 2.2 (0.3) (0.3) Total 1,495.6 182.2 164.1 43.6 1,063.5 1,885.5 (366.3) (11.7) (2.0) (380.0) Notes: (1) Figures in parentheses are the respective amounts financed by the proposed Bank Loan. (2) Possible Second Bank Loan could help finance foreign exchange cost for the main civil works, electromechanical equipment, engi- neering, and training. expected procurement and contracting arrangements, taking into account spe- cific Chinese practices and their pace of utilizing Bank loan funds. Pro ect Implementation 5.20 The construction of preparatory works for the project began in July 1987 and is progressing well. These works include access roads, bridges over the Yalong River, power supply lines, water supply, communication links, con- struction camps, and health service facilities. Land acquisition for con- struction purposes (about 1,000 ha) has been completed and about 1,200 inhab- itants have been successfully relocated.  - 32 - 5.21 Bids for the construction of the arch dam and the powerhouse have been received and the evaluation of the bids was completed (para. 5.16) so as to enable the signing of the contr&.ct with the surcessful bidders immediately after the loan has been approved. The construction of the main civil works is scheduled to begin in September 1991, the diversion of the river for dam con- struction in December 1993, and the commercial operation of the first generat- ing unit in 1998. The remaining generating units would be completed in sequence with the last sixth unit installed in March 2000, and all remaining work completed by September 2000. Thus, the project completion date would be September 30, 2000. The proposed schedule is considered to be reasonable and attainable. Details on project implementation are shown in Annex 5.4 and Chart 4, and a more complete implementation schedule, including CPM networks, is available in the Project Files. With the two-phased financing of the proj- ect (para. 5.11), the closing date of this loan would be December 31, 1996. 5.22 Particular attention was given to the establishment and proper staffing of the project site unit and for this purpose EHDC has created EEC (para. 3.4), which will manage construction of the project. EEC, with the support from EHDC and MOE and assistance from consultants (para. 5.26), will have the capability needed to manage a large power project. The organization of EEC is shown in Chart 3. The project management would be encouraged to visit similar works in other countries and to exchange information with pro- fessional institutions and power utilities building and operating similar projects. An assurance was obtained from EHDC that, during the project imple- mentation period, it would maintain the project management unit with such responsibilities, resources and staff as shall be satisfactory to the Bank, along with adequate authority for resolving project problems. Engineering. Technical Assistance, and Supervision of Construction 5.23 CHIDI has been retained by EHDC to assist in designing and imple- menting the project. It is one of the most experienced design institutes in China, and in recent years it has Completed the design of several large hydro- electric projects. CHIDI has over 2,000 professional staff and is equipped with modern facilities and laboratories. Nevertheless, EHDC recognizes the very complex and delicate nature of the construction activities of this proj- ect, and therefore will continue to use foreign consultants during the imple- mentation of the project, as discussed in the succeeding paragraphs. Interna- tional engineering consultants have also been actively involved in reviewing project design and resolving specific technical matters related to the dam, powerhouse, electromechanical equipment, and log passing facilities. A number of technical delegations and prominent hydropower experts visited the project site, offered valuable suggestions, and shared their experience with the Chinese in building large and complex projects. 5.24 EHDC has set up SBC (para. 5.6) to assist in resolving particular project problems and in advising on major design and construction issues. SBC has been very active and effective in supporting the project preparation and procurement of the main civil works. The services of these consultants have been partially funded by the TCC (para. 5.7). SBC meetings would be regular, averaging twice a year. An assurance was obtained from EHDC that it would continue to employ SBC, independent of the designers of the project, for reviewing designs, technical specifications, and advising on unforeseen prob- lems that arise during project implementation.  - 33 - 5.25 The TCC also was used to cover the cost of consultants to assist EHDC with the preparation of cost estimates, scheduling, and the bid documents for the arch dam and the underground powerhouse. It will continue to be used for two groups of consultants to assist in the preparation of additional bid documents; one for the main generating units, and the other for the remaining electrical equipment. 5.26 Due to the magnitude and complexity of the project and the use of foreign construction contractors and equipment suppliers, as well as foreign financing sources, EHDC will appoint experienced and qualified international consultants who would play a key role in assisting EHDC in managing project construction. The scope of work for the consultants will include contract administration, cost control, scheduling, construction inspection and quality assurance, design engineering services, and construction site administration during the entire implementation period. A terms of reference for these ser- vices and details of the expected collaboration with EHDC/eEC and CHIDI are given in Annex 5.6. An assurance was obtained from EHDC that it would employ, prior to the award of the contract for the main civil works, construction management consultants whose qualifications, experience, and terms and condi- tions of employment shall be satisfactory to the Bank. The total cost of engineering services and technical assistance is estimated to be about $52 million, of which $21 million is in foreign exchange. These costs include about 1.000 staff-months of foreign consultants' services at the cost of about $20,000 per staff-month, which is considered reasonable for this kind of highly specialized services. A tabulation indicating the areas of expertise that will be covered, and the staff-months to be expended each year, are pre- sented in Annex 5.7. 5.27 In addition to the foregoing consulting services, there will be two other groups of specialists that will assist EHDC for a successful completion of the Ertan projectz (i) DRB (para. 5.16) and (ii) the Environmental Panel (EP). DRB will be set up for the two civil works contracts to enable prompt resolution of contract disputes and thereby enhance international competition, reduce bid prices, and expedite construction of the works at lowest cost. One member uf !hZZ will be appointed by EHDC, one by a contractor, and a third member will be selected by these two. The decision to create DRB alone is believed to have reduced bid prices for the main civil works possibly by as much as $100 million. EP will be made up of foreign and Chinese experts and is a response to the new Bank directive requiring establishment of such a panel. Although the EP is not mandatory in this project, EHDC recognizes the importance of the environment and will apply the Bank's new requirement to the Ertan project. 5.28 The procedures for inspecting, maintaining, and monitoring the safety of hydro works and high dams in China generally follow international practices and are considered to be appropriate for the proposed project. Nevertheless, in order to ensure the safety of the dam and other hydraulic structures, an assurance was obtained from EHDC that it would prepare, prior to completion of the dam, a satisfactory program of maintenance for the proj- ect works, and that it would undertake regular inspection of the dam and asso- ciated works and structures in accordance with sound engineetring practices.  - 34 - Studies 5.29 To complement efforts currently being undertaken under the Bank's Planning Support and Special Studies Project (para. 2.11), EHDC will carry out studies of power pricing, operation of the Ertan hydroelectric station and its reservoir, and preparation of future power projects. The basic objectives of these studies are as followss (a) Power Pricing Study. The purpose of this study is tot (i) deter- mine the cost of electricity generation in the Sichuan power system; (ii) design a contract for the sale of power and energy from EHDC to SCEPA; and (iii) formulate an action plan for the reform of tariffs to the ultimate consumer. The terms of reference for the study are given in Annex 5.8. (b) Optimization of Reservoir Operations. The object of this study is to determine how Ertan, with its large reservoir and ability to operate as a peaking plant, can be best integrated into the existing system containing many thermal and run-of-river hydro plants. The terms of reference for the study are presented in Annex 5.9. (c) Preparation of Future Power Projects. The aim of this project com- ponent is to help prepare EHDC's future power projects, including the resolution of specific engineering problems in related feasibil- ity studies. The scope of this work will be established in consul- tation with the Bank. The above studies are expected to be completed prior to the start of the sec- ond-phase. An assu.ance was obtained from EHDC that it would carry out the studies of power pricing and plant and reservoir operation by not later than June 30, 1993, in accordance with the terms of reference acceptable to the Bank. 5.30 To assist in establishing rules and criteria for project structures and facilities, EHDC will also undertake the following engineering investiga- tions and testst (a) Safety of Structures. This study work and related tests would establish rules and regulations for plant operations in order to comply with the assumptions used in the design of the structures and works. Inter alia, it will include establishing of survey monuments and recording devices so that any movement in the structures may be detected. (b) Monitoring of Energy Dissipation Facilities. This investigation will help to establish criteria for observing of any deterioration in the spillways and plunge pool downstream of the spillway, which may endanger the dam. (c) Powerhouse Ventilation System. Electrical losses may cause the air temperature to rise to w'acceptable levels in the underground power- house. Therefore, this Livestigation will help to establish crite- ria for designing suitable facilities which would allow operating personnel to work in comfort.  - 35 - Most of the work in the foregoing engineering investigations and tests will. b'a carried out by CHIDI with help from other Chinese consulting experts, together with specific and special advice from foreign experts, who may not only con- tribute to the studies, but also review the findings. Details of the scope and content of the above investigations and tests have been agreed with EHDC. Management Development and Ttaining 5.31 The newly formed EHDC does not have training facilities of its own, and to date has been dependant on the recruitment of qualified staff from other organizations. With the expectation of the need of a great increase in technical personnel, EHDC plans to establish its own training facilities, and a component of the proposed project will assist it in this regard. Foreign funds have been included to cover the cost of the followings 80 staff-months of training abroad, including visits to similar projects; 20 staff-months of foreign lecturers to various classifications of personnel; 120 staff-months of training in high schools and technical schools; and 106 staff-months of prac- tical training in similar power plants in China. Details on the EHDC training program are presented in Annex 3.2. The program also will include training for financial management and planning staff. To enhance its training capabil- ities, EHDC will purchase critical training equipment, including a hydropower station operation simulator, microcomputers, a closed-system television for student training, linguistic laboratories, and various essential equipment for high voltage and hydraulic laboratories. It should be noted that all the international contractors and consultants will have the obligation and duty to train EHDC engineers and administrators as a part of their services. An assurance was obtained from EHDC that it would carry out the training program in accordance with the timetable agreed with the Bank. Resettlement and Rehabilitation Program 5.32 A comprehensive resettlement plan and program have been prepared by EHDC and local government authorities who will be responsible for its imple- mentation. A complete description of the contents and costs of the plan is presented in Annex 5.10. The objective of the resettlement plan is to rees- tablish affected people to a better standard of living than before the proj- ect. 5.33 Approximately 30,000 people will be affected by inundation of the Ertan reservoir. Resettlement planning has been carried out by EHDC, CHIDI, the Government of Sichuan Provincial Land Bureau, and the County Land Bureaus, and City and County Construction Bureaus. Officials as well as private citi- zens from all affected areas have helped select the new sites and have inspected them, and development plans for the selected sites have been formu- lated in collaboration with authorities and representatives of the affected population. 5.34 The resettlement areas are of three types (see IBRD Map 22093R1). First, agricultural people in villages where all or most of the arable land will be inundated and who wish to continue in farming would be relocated to reclaimed farmlands at Hongge Receiving Area or Pinshan Receiving Area; other agricultural people would become coal miners at the Hongni Coal Mine. Second, agricultural people in villages where a few homes and small amounts of arable lands will be inundated would move to higher elevations away from the reser-  - 36 - voir in the same village, and arable lands would be reallocated and small land reclamation works would be undertaken to provide agricultural plots to them. Third, residents of Yanbian Town will move to the new townsite near Mishiqing where their places of employment (government offices, factories, businesses, etc.) will be relocated. Detailed development plans and layouts have been formulated for Hongge and Pinshan areas and are in progress for the other receiving areas, and these are described in greater detail in Annex 5.10. 5.35 The resettlement operation will begin with the reclamation, level- ing, and preparation of land in the new sites. The County Land Bureaus, local authorities and representatives, and the settlers themselves will collaborate in this work. The construction of houses and installation of public infra- structure, including irrigation works, schools, clinics, factories, and no forth, will follow the land preparation activities. During the construction of the new settlements the settler families will continue deriving their live- lihood from the old farms or jobs, and family members working on development of the new sites will receive a salary. It is expected that income during this transition period will be adequate. Regarding development opportunities over the long run, development plans were examined carefully and reviewed thoroughly with local officials and representatives of the settlers. With timely implementation, the plans indicate that settlers' livelihoods will be improved to above preproject levels within a period of two to five years fol- lowing resettlement. 5.36 EHDC has developed a staff development program for officials respon- sible for resettlement. Senior officials will participate in workshops and study tours of other resettlement operations in China and abroad, and then prepare short courses and workshops for delivery to County and local govern- ment officials who have responsibilities in the resettlement process. Imple- mentation of the resettlement program and the achievement of physical targets will be carefully monitored by EHDC and the Provincial Land Bureau, and the resultant reports will be discussed with the Bank supervision missions. In addition, EHDC will subcontract with an independent academic research institu- tion for monitoring and evaluation of the socioeconomic outcomes of the reset- tlement operations in the receiving areas. The latter reports will be reviewed with the Bank annually throughout the life of the project. An assur- ance was obtained from the Government that it would implement or cause to be implemented the agreed resettlement program. Environmental Management Program 5.37 Like all hydroelectric projects planned for Sichuan, the Ertan proj- ect has relatively benign environmental impacts when compared to thermal alternatives or to hydropower elsewhere in China; siltation problems are highly manageable and resettlement requirements are low. The project displaces about 2,000 people per 1 TWh of output as against 10,000 to 15,000 in Central and East China. Other comparative advantages relate to the avoid- ance of mining and use of some ten million tons a year of raw coal. First aspect of such 'avoidance" is the land use associated with coal mining (up to 1,000 ha/year) and second, the land use for thermal power plant estimated at 600 to 2,700 ha excluding the sludge ponds for solid wastes. Lastly, the project will avoid annually at least 260,000 tons of gaseous and particle emissions, 1.9 million tons of solid waste and 0.5 million tons of water con- sumption. If lower quality local coal was used instead of Shanxi coal, sulfur  - 37 - emissions could be three times as severe and would need to be cut through flue gas desulfurization costing an additional $500 million (Annex 7.3). 5.38 An Environmental Impact Assessment has been completed for the proj- ect. Annex 5.11 contains greater detail on the work accomplished to date and what which has been agreed for the future. The key issues investigated by the environmental impact assessmbnt include environmental health, catchment area land use trends and reservoir sedimentation, reservoir water quality and pol- lution, downstream effects, and impacts on fish and wildlife. Impacts identi- fied in these areas will either be mitigated through the application of exist- ing technologies (for example, pollution control measures at the Miyi Sugar Refinery which will affect water quality in the reservoir) or monitored closely during project implementation; chances of environmental risks are considered minimal. For example, schistosomiasis has been eradicated from the region, but will be systematically monitored by the environmental monitoring station to be financed under the project. 5.39 The key provision of the environmental management program is the establishment of the environmental monitoring station. This station will be charged with monitoring the reservoir and catchment areas including meteoro- logical, hydrological, water quality, sedimentation, biotic, sanitary and human health conditions. The EP (para. 5.27) overseeing the program will annually review the results of the work of the environmental monitoring sta- tion. An assurance was obtained from EHDC that it would carry out the envi- ronmental management program in a manner satisfactory to the Bank. Project Risks 5.40 Construction of the proposed project will be a very complex job due to the geological, hydrological, and physical features of the project and its location. The project is sited in a narrow gorge with steep slopes, highly jointed and faulted rock, and occasional landslides. Nevertheless, project construction risks are within reasonable limits and would be manageable given the continuous supervision arrangements, involving foreign and Chinese consul- tants, that have been put in place for the construction process. SBC (para. 5.24) is already involved in reviewing possible physical risks, and it is proposing means and procedures to mitigate or avoid them. The economic riske, if any, would be minimal (para. 7.10). Other potential risks could include the continuity of goods supply, funding shortages, contract management diffi- culties, and effective implementation of the resettlement program. To mini- mize these risks and enable timely and effective implementation of the reset- tlement program, assurances have been received from the Government that it would ensure an adequate flows of funds, and establish and maintain effective management of project execution. No major environmental problems are expected under this project, and the implementation of the proposed environmental man- agement program (including a monitoring process) would enhance the quality of the environment in the nearby areas. Monitoring and ReportinR 5.41 Satisfactory procedures for monitoring, evaluating, and reporting on the project have been agreed by EHDC. The Bank would be furnished with quar- terly project progress reports. A Project Completion Report would be submit- ted to the Bank no later than six months after the completion of the project.  - 38 - The timely implementation of the project is critical and depends on adequate financial resources being made available when needed. For this reason, the project progress reports would include, inter alia, EHDC's proposals regarding project costs and annual financing plan for the following year as well as the Government's approved budget allocation for the project. The scope and con- tent of the project progress reports have also been agreed. A framework for project monitoring and reporting is presented in Annex 5.12.  - 39 - VI. FINANCIAL ASPECTS BackAround 6.1 EHDC is a newly created corporation. In the foreseeable future, its activities would be dominated by the construction and subsequent operation of the proposed project. EHDC's operation and finances are interrelated with those of SCEPA; all the power generated by SHDC would be sold in bulk to SCEPA, accounting for about 30 percent of the grid's sales by the year 2000. As state-owned enterprises, EHDC and SCEPA are bound by the financial regula- tions established by the Government. Within this framework, the future finances of EHDC and its sole customer, SCEPA, are forecast to be satisfac- tory. 6.2 SCEPA, as in the case of most power bureaus in China, follows a highly centralized financial system (Annex 6.1). As part of the ongoing eco- nomic reforms, the Government is reassessing the present fiscal system, with particular focus on tax reform issues and options. Since details of such reforms are still being formulate3d, there are considerable uncertainties relating to the specific parame ers affecting the bureaus' future finances. Nevertheless, in keeping with nie spirit of the recently enacted Enterprise Law, the integrated measures b the economic reform would be directed at enhancing rather than impeding the commercial orientation of the state enter- prises. As a first step toward this direction, EHDC is allowed to retain its surplus funds to finance its future investments and build up the corporation's equity base. 6.3 One of the Government's sectoral objectives is to strengthen the enterprises' financial management so that the power bureaus could perform their increased fipancial role efficiently and effectively. Toward this end, the proposed project would continue the process of institutional building already initiated under previous Bank-financed projects, including (i) the extension of EHDC's financial planning horizon (para. 3.8); (ii) training in financial management for EHDC (para. 3.7); and (iii) agreements with EHDC on financial performance targets which would provide a framework for financial discipline (para. 6.4). EHDC's Finances Financial Performance Targets 6.4 Traditional indicators (such as rate of return on assets and self- financing ratio) have thus far had limited significance in measuring the per- formance of power entities operating in a highly centralized financial system. In particular, their surplus funds are largely remitted to the Government in the form of Adjustment Tax. Therefore, self-financing ratios have been largely "notional, for most of the power bureaus in China. On the other hand, EHDC's surplus funds would not be subject to Adjustment Tax and self-financing ratio is thus a meaningful indicator of its financial performance. With a view to promoting prudent financial management, assurances have been obtained from EHDC regarding-the following financial performance tarietst  - 40 - (a) it would take all measures, including but not limited to tariff adjustments, to ensure that its internal cash generation is suffi- cient to maintain a self-financing ratio of no less than 20 percent in 1999, 25 percent in 2000, and 35 percent thereafter; (b) it would maintain a debt service coverage ratio of no less than 1.3 times in 1999, and no less than 1.5 times thereafter; and (c) it would maintain a debtlequity ratio of no more than 82/18 in 1991-97, 80/20 in 1998-99, and 70/30 thereafter. Future Finances 6.5 As noted above (para. 3.12), agreements have been reached with the Government regarding the principles of transfer pricing and operating arrange- ments for the sales contract between MMDC and SCEPA, including allowance for financial viability of EHDC. Based on the assumptions detailed in Annex 6.2, including electricity tariff setting which would allow MMDG to achieve the above financial performance targets, projections of lHDC's finances for the period 1991-2002 are presented in Annexes 6.3-6.5. Salient features of EHDC's future finances are highlighted below. Table 6.1: EHDC'S PTUME FDK4CES (Ymil.) Is p.a. Avera r rate Yoar Ended 12/81 191 196 1996 1999 200 2002 1990-2002 (196-002) Energy eelon (Gl) 0 0 2,900 10,600 14,660 16,600 12,040 66 Average tariff/kh (too) 0 0 26 29 81 al 29 5 Wet sales revenues 0 0 690 2,956 4,844 5,012 8,617 64 Operating Income 0 0 566 2,641 8,65 4,404 8,0o6 67 Net Income 0 0 105 1,271 1,954 2,065 1,462 111 Annual capital oRpond. 77 1,916 1,978 1,745 1,681 2,242 1,958 Rate beo 0 0 4,686 9,267 11,466 14,268 10,00 82 Long-term debt (scem.) 684 6,018 12,204 12,456 11,952 12,700 12,m 1 Debt sorvlce 0 0 706 1,961 2,165 1,686 1,656 28 Ro" of roturn on eea (o M) 0.0 0.0 12 28 24 19 20 Self-financlig ratio 0 0 0 20 50 76 40 Operating ratio (U) 0.0 0.0 22 14 14 16 16 Debt/0quity ratio 72/26 79/21 80/20 74/26 65/8S 60/40 67/48 Debt service coverage 0.0 0.0 0.9 1.8 1.5 2.0 1.5 (a) Revenue Position 6.6 The first two units of the project are scheduled to be commissioned in 1998, and the remaining four units would become fully operational by the year 2000. In order to ensure the competitiveness of Ertan power, the finan- cial forecast has assumed that EHDC's tariff would be about 25 fen/kWh in 1998 (16 fen in end-1990 prices) which approximates the estimate of SCEPA's avoided cost of power generation; the consequent cash generation is projected to cover some 90 percent of the debt service requirements. During the first five years of its operations, the average tariff which would allow EHDC to achieve the  - 41 - agreed financial performance targets are estimated at 29 fen/kWh in current terms; this would allow Ertan power to remain competitive. 6.7 As is typical of hydro projects, Ertan hydropower plant is expected to have relatively low operating expenses. Thus, EHDC is expected to have a robust revenue position, with a low operating ratio estimated to be no more than 22 percent during its first five years of operation (1998-2002). Its average rate of return on net fixed assets is projected to be 20 percent a year during the same period, which is satisfactory. However, debt service requirements would be substantial. Specifically, debt service is forecast to account for an average of about 60 percent of EHDC's minimum revenue requirements during its first five years of operations. (b) Funds Flow 6.8 During the project implementation period (1991-2000), EHDC's finan- cing plan would be dominated by the proposed project. After commissioning of the project, EHDC is expected to generate substantial internal cash. This is attributable not only to its highly profitable position, but also its cost structure which is dominated by depreciation, a noncash expense and a major source of Special Funds retention. As SCEPA would be the sole customer and is expected to maintain a sound liquidity position (para. 6.11), no problem is envisaged rqgarding -,ollection of payments. However as noted above, the cor- poration would have a heavy debt service burden; debt service requirements are forecast to account for some 45 percent of its total uses of funds during its first five years of operation. Indeed, the projected minimum tariff require- ments are determined more by the agreed debt service coverage ratios than the self-financing ratios for future investments. (c) Capital Structure 6.9 During project implementation period, compliance with the agreed debt/equity ratio target would be achieved through Government equity contribu- tions. An assurance has been obtained from the Government that it would pro- vide. in a timely manner, the necessary equity to enable EHDC to achieve the agreed debt/equity ratios during project implementation. Within the first five years of project operations, EHDC is expected to improve its capital structure considerably through retention of after-tax profits, special funds and loan repayments. During the financial forecast period (1991-2002), its debt/equity ratio is forecast to be reduced from a peak of 81/19 in 1997 to 57/43 in the year 2002. SCEPA's Finances Past Finances and Current Financial Position 6.10 SCEPA's income statements and balance sheets for the five-year period 1986-90 are set out in Annexes 6.6-6.7. During this period, SCEPA's average sales growth and tariff adjustment were both 7 percent a year. The sales revenues, which increased by an average of 15 percent a year, were out- paced by the increases of operating costs of (20 percent a year). As a result, its rate of return on assets decreased from 10 percent in 1986 to 6.4 percent in 1990. During the same period, SCEPA's capital structure changed considerably as a result of sharp increases in debt-financed invest-  - 42 - ments. The company's debt/equity ratio increased from 11189 in 1986 to 59/41 in 1990. Its liquidity position 18 comfortable, as indicated by a current ratio of about 4 times in end-1990. Future Finances 6.11 Based on the assumptions detailed in Annex 6.0, including electric- ity tariff adjustments which would allow SCEPA to achieve similar debt-service coverage ratios (1.3-1.5 times) as EHDC, projections of SCEPA's finances for the period 1991-2000 are presented in Annexes 6.9-0.11. During this period, SCEPA's operating cost increases (averaging 7 percent a year) would continue to outpace the growth of electricity sales (6 percent a year). This is mainly due to sharp increases in both the quantity and costs of purchased powor from new and more costly thermal plants. Furthermore, its debt service require- ments would increase rapidly as debt-financed projects commence operations. In order to achieve the financial performance targets noted above, SCEPA's average tariff is projected to increase from 10.6 fenlkiWh in 1990 to about 36 fen/kWh in the year 2000, representing an average increase of 12 percent a year (or 4 percent a year in real terms). With a view to rationalizing both the levels and structures of electricity tariffs, the pricing study provided under this project would form the basis for electricity reform in Sichuan (para. 2.15). SCEPA's liquidity position is expected to remain sound, as indicated by its current ratio which is forecast to be no less than 4.4 times.  - 43 - VII. ECONOMIC JUSTIFICATION 7.1 The Ertan hydroelectric project ia an important element of the core expansion program for the power generating system of Sichuan (para. 4.11). Its size and timing are economically justified. The capacity expansion is also justified on the basis of the economic benefits associated with the elim- ination of power shortages and the increase in demand over the period 1998- 2000 when the project will be commissioned and its output used. 7.2 In this chapter, it will be first established that the project is superior to alternatives, and that its size and timing reasonably maximize economic benefits. Second, an estimate of the economic rate of return for the project will be provided. Benefits and costs are evaluated using constant end-1990 economic prices, net of taxes and subsidies. Tradable commodities are valued at border prices with a shadow exchange rate of Y 5.5 per US$. Project as a Least-Cost Generating Alternative 7.3 Least-cost expansion sequences have been planned by SCEPA for the period 1990-2020 with the help of CHIDI and WREPERI (Beijing). The Ertan project has been shown to be a part of these sequences under a broad range of adverse assumptions. increase of discount rate from 10 percent to 12 percent, 20 percent increase in project cost, and load growth reduced from 8.3 percent to 6.6 percent a year. A base case sequence is presented in Annex 4.5 and discussed in Chapter IV. In order to highlight and analyze the project's comparative advantages, an alternative least-cost expansion sequence has been optimized without Ertan. This alternative includes both hydroelectric plants and thermal units using Shanxi coal to substitute for Ertan but less transmis- sion investments because more generation is located close to load centers than in the base case. Discounted at 10 percent as of 1998, the date of the proj- ect's first commercial operation, the present value of costs for this alterna- tive without the project exceeds that of the base case by about Y 5 billion. The project comparative advantage corresponds to a net return of 35 US cents per dollar investeds after inclusion of operating costs, the project unit cost is 11.6 fen/kWh as compared with about 16 fen/kWh for the alternative. Details about this avoided cost are given in Annex 7.1 and in the Project Files. 7.4 Ertan displaces mostly other hydropower projects and those projects displaced by Ertan in turn allow the postponement of thermal power. By the year 2000, the project average output of 14.6 TWh will avoid burning annually some e million tons of raw coal, and 10 million tons when the full project output of 17 TWh is obtained. The environmental impacts of this substitution are discussed under para. 5.37. The contribution of Ertan to the firm power of the Sichuan system is 2,760 MW in the rainy season and 1,000 MW in the dry season (November to May); the peaking capability is about 3,000 MW in the rainy season, and 2,400 KW in the dry season. The average annual energy and firm energy of the project will increase by 20-30 percent when other dams are built upstream to regulate the strong seasonal variations of the Yalong river.  - 44 - Prolect Size and Timing 7.5 The project size has been economically optimized: the design head has been increased from 150 m in earlier designs to 165 m; as a result, the rated output has increased from 3,000 MW to 3,300 MW and an additional 840 GMh can be generated. This change, which costs about Y 50 million will bring about Y 500 million of fuel savings a year on the Sichuan power grid. Raising the water head further would not be economically attractive for two reasons: the reservoir backwater level would rise too high for the next upstream dam to be built and the number of people to be resettled would greatly increase. 7.6 The project schedule calls for the commissioning of all six units ovor the period 1998-2000. By themselves, units no. 1 to 3 will deliver all of the firm power and 10,000 GWh of average output. In present value, the corresponding supply cost savings amount to about 80 percent of the total, the costs till this partial commissioning amount to 90 percent of the total; putt- ing these three units on stream at the earliest possible time entails a net savings of about 25 US cents per dollar invested. 7.7 Units no. 4 to 6 will generate an additional 4,500 GWh and increase the peaking capability of the project by 1,200 MW. A postponement of these units would save lesii than Y 300 million a year in turbogenerators and trans- mission facilities, but it would translate into additional fuel costs of the same magnitude elsewhere on the grid; thus even if load growth was to fall well below expectations and additional peaking capacity was not immediately needed, the installation of the last three units would still be economically justified on the basis of fuel savings alone. Project Benefits 7.8 In appraising power projects, it is customary to value the project output on the basis vZ the consumer's minimum willingness to pay, as evidenced by existing or covenanted power tariff levels. However, this approximation generally underestimates the value of electricity because, for many customers, power demand is rather inelastic to prices. This is particularly the case in China; one manifestation of which is the economic cost of power rationing, which is imposed daily to industries in Sichuan, at an average level of about 150 fenlkWh. There are otherwise few power tariffs at the generating plant level to provide a benchmark of this willingness to pay. The tariff levels covenanted under this project result in an internal economic rate of return (IERR) of 14.9 percent. 'When project costs are not shadow pticed, the IERR is 15.4 percent. 7.9 A more representative measure of the project IERR can be obtained from the price level recently elicited by new thermal plants which were built as part of a special effort to alleviate power shortages in Sichuan. Such prices are a better reflection of the willingness to pay. This is the case of Jiangyou (660 MW) and Luohuang (720 MW) which in 1991 will start selling power in bulk at 21 fen/kWh (at early 1991 prices). On that basis, the project IERR is 17.5 percent. If the inputs are not shadow-priced, the IERR approaches 18 percent. Details of the calculations are given in Annex 7.2.  - 45 - Sensitivity Analysis 7.10 The major economic risks associated with the project can be based on either one of the following causess (a) the project suffers serious cost overruns; (b) commissioning of the first units is delayed significantly; and (c) some of the expected growth in power demand fails to materialize. The possible change in power demand has been shown not to affect the timing of all 98.x units, let alone the viability of the project. A one-year delay would postpone the project benefits, but also, some project costs. Assuming that this delay is combined with cost overruns equal to the 12 percent physical contingencies provisioned for the project as a whole, the IERR is reduced by one percentage point. The likelihood of further cost overruns is minimized by the advanced stage and selected method of procurement, and by the low share of resettlement in the total cost. If a 20 percent cost increase was to occur, the IERR would again be reduced by one percentage point.  - 46 - VIII. AGREEMENTS AND RECOMMENDATIONS 8.1 During negotiations, the following assurances have been obtained: (a) From the Government, that it woulds (i) enable SCEPA to enter into the contract with EHDC by June 30, 1996 for the sale of the project output (para. 3.13); (ii) (a) provide the Bank with an implementation schedule and a financing plan for the 500-kV transmission network connect- ing the Ertan Hydroelectric Station with the power system in Sichuan Province not later than June 30, 1993; and (b) make or cause to be made arrangements satisfactory to the Bank for securing the completion by SCEPA of this network not later than June 30, 1998; (para. 5.5); C iii) onlend the proceeds of the proposed Bank loan, through Sichuan Province, to EHDC on terms satisfactory to the Bank (para. 5.15); (iv) carry out or cause to be carried out the human resettlement program satisfactory to the Bank (para. 5.36); (v) provide the equity needed for EHDC to achieve the agreed debt/equity ratio during project construction period (para. 6.9); (b) From EHDC, that it woulds (i) furnish each year to the Bank a rolling long-term financial plan (para. 3.8); (ii) furnish to the Bank the audited project accounts and finan- cial statements within six months after the end of each fiscal year (para. 3.11); (iii) enter into the contract with SCEPA prior to the commission- ing of the project for the sale of project output in accord- ance with principles satisfactory to the Bank (para. 3.13); (iv) maintain during the project implementation period the proj- ect management unit with such responsibilities, resources, and staff as shall be satisfactory to the Bank (para. 5.22); (v) employ the Special Board of Consultants to assist in resolv- ing particular project problems and in verifying proposed solutions and specific designs (para. 5.24); (vi) employ, prior to the contract award for the main civil works, construction management consultants whose qualifica- tions, experience, and terms and conditions of employment shall be satisfactory to the Bank (para. 5.26);  47 - (vii) regularly Inspect project hydroworks and facilities, includ- ing the dam, in accordance with sound engineering practices (para. 5.28); (viii) carry out studies of power pricing and power plant and res- ervoir operation in accordance with the terms of reference and a schedule agreed with the Bank (para. 5.29); (ix) implement management development and staff training programs in accordance with the timetable agreed with the Bank (para. 5.31); (x) carry out the environmental management program agreed with the Bank (para. 5.39); (xi) take all measures, including but not limited to tariff adjustment, to ensure that its internal cash generation would be sufficient to maintain a self-financing ratio of no less than 20 percent in 1999, 25 percent in 2000, and 35 percent thereafter [para. 6.4(a)); (xii) maintain a debt service coverage ratio of no less than 1.3 times in 1999, and no less than 1.5 times thereafter [para. 6.4(b)1; and (ziii) maintain a debt/equity ratio of no more than 82/18 in 1991-97, 80/20 in 1998199, and 70/30 thereafter [para. 6.4(c)). 8.2 The execution of the subsidiary loan agreements between the Govern- ment, Sichuan Province and EBDC would be a condition of loan effectiveness (para. 5.15). Recommendation 8.3 Subject to the above assurances, the proposed project is suitable for a Bank loan of $380 million to the People's Republic of China for a term of 20 years, including a nine-year grace period, at the Bank's standard vari- able interest rate.  8 2 _a 'C~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~P _ *******---w-*'4aIb0w-d-- a t~~~~ Q,e 8X mb8 e We.'o-a 040 toOtOg Q 2., soee-.ieOmabb4 4wwototo|$!8 to t l . '0 n.... .f l . . . . - I.' fX82S S.'$lBe* g.. - 'lB U llsl*Xi