China - Hunan Power Development Project

Document of The World Bank Report No: 17367-CHA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$300 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HUNAN POWER DEVELOPMENT PROJECT May 21, 1998 Energy and Mining Development Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS Currency Unit = Yuan Yuan 1.00 = US$0.12 US$1 = Yuan 8.3 FISCAL YEAR January 1, December 31 WEIGHTS AND MEASURES gms/kWh = Grams per Kilowatt-hour GWh = Gigawatt hour (= 1,000,000 kilowatt hours) kcal = Kilocalories km = Kilometer (= 0.62 miles) kV = Kilovolt (1,000 volts) kW = Kilowatt (=1,000 watts) kWh = Kilowatt hour (= 860.42 kcal) m = Meter m3/s = Cubic meters per second MVA = Megavolt-ampere (1,000 kilovolt-amperes) MW = Megawatt (1,000,000 watts) MWh = Megawatt hour (= 1,000 kWh) s = Second TWh = Terawatt hour (= 1,000,000,000 kilowatt hours) Vice President: Jean-Michel Severino, EAP Country Director: Yukon Huang, EACCF Sector Manager: Yoshihiko Sumi, EASEG Task Manager: Elaine Sun, EASEG  ABBREVIATIONS AND ACRONYMS BOT - Build-Operate-Transfer CAS - Country Assistance Strategy CCEPGC - Central China Electric Power Group Corporation CCPG - Central China Power Grid CEPPDI - Central Electric Power Planning & Design Institute CIF - Cost, Insurance, Freight CRISPP - China Reform Institutional Support and Preinvestment Project EIA(R) - Environmnental Impact Assessment (Report) EMP - Environmental Management Plan FGD - Flue Gas Desulfurization GDP - Gross Domestic Product GEF - Global Environment Facility HEPC - Hunan Electric Power Company HPEPDI - Hunan Provincial Electric Power Design Institute HPG - Hunan Provincial Government ICB - International Competitive Bidding LIB - Limited International Bidding MOEP - Ministry of Electric Power MOF - Ministry of Finance NPC - National People's Congress NEPA - National Environmental Protection Administration NEPRI - Nanjing Environmental Protection Research Institute NO, - Nitrogen Oxide RAP - Resettlement Action Plan SDB - State Development Bank SDPC - State Development Planning Commsision SETC - State Economic and Trade Commission SO2 ^ Sulfur Dioxide SOEs - State-Owned Enterprises SP - State Power Corporation SPC - State Planning Commission T&D - Transmission and Distribution TOR - Terms of Reference  CHINA HUNAN POWER DEVELOPMENT PROJECT CONTENTS A: Project Development Objective ..............................................................2 1. Project development objective and key performance indicators ..........................................................2 B: Strategic Context ..............................................................2 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project ...............................2 2. Main sector issues and Government strategy ..............................................................2 3. Sector issues to be addressed by the project and strategic choices .......................................................5 C: Project Description Summary ..............................................................6 1. Project components ..............................................................6 2. Key policy and institutional reforms supported by the project .............................................................6 3. Benefits and target population ..............................................................7 4. Institutional and implementation arrangements ..............................................................7 D: Project Rationale ..............................................................8 1. Project alternatives considered and reasons for rejection .............................................................. 8 2. Major related projects financed by the Bank and/or other development agencies ...............................9 3. Lessons learned and reflected in the project design ..............................................................9 4. Indications of borrower commitment and ownership ............................................................. 10 5. Value added of Bank support in this project ............................................................. 11 E: Summary Project Analysis ............................................................. 11 1. Economic ............................................................. 11 3. Technical ............................................................. 13 4. Institutional ............................................................. 14 5. Social ............................................................. 14 6. Environmental assessment ............................................................. 15 7. Participatory approach ............................................................. 16 F: Sustainability and Risks ............................................................. 16 1. Sustainability ............................................................. 16 2. Critical Risks ............................................................. 17 3. Possible Controversial Aspects ............................................................. 18 G: Main Loan Conditions ............................................................. 18 1. Effectiveness Conditions ............................................................. 18 2. Agreements to be reached with the Government ............................................................. 18 H. Readiness for Implementation ............................................................. 19 I. Compliance with Bank Policies ............................................................. 20  - jj - ANNEXES Annex 1: Project Design Summary ........................................................................ 21 Annex 2: Project Description ........................................................................ 22 Annex 3: Estimated Project Costs ........................................................................ 28 Annex 4: Background on China's Power Sector Reforms ...................................................................... 31 Annex 5: Hunan Electric Power System-Reform Implementation Plan . . 33 Annex 6: Organizational Charts .............................. Error! Bookmark not defined. Chart Al: Organization Chart of the Institutional Arrangement During Project Implementation ......... 40 Chart A2: Organization Chart of Construction Management of Leiyang Power Plant II Project .......... 41 Chart A3: Organization Chart of Construction Management of Power Transmission Project ............... 42 Annex 7: Cost Benefit Analysis Summary ........................................................................ 43 Annex 8: Financial Summary ........................................................................ 51 Annex 9: Procurement and Disbursement Arrangements ...................................................................... 57 Table A: Project Costs by Procurement Arrangements ........................................................................ 59 Table Al: Consultant Selection Arrangements ........................................................................ 60 Table A2: Procurement Plan and Implementation Schedule .................................................................. 61 Chart 1: ICB Procurement Schedule ........................................................................ 62 Chart IA: Consulting Services Schedule ............................ 74 Table A3: Estimated Annual Contractual and Other Payments ............................................... 77 Table A4: Key Construction Dates ............................................... 78 Table B: Thresholds for Procurement Methods and Prior Review ............................................... 79 Table C: Allocation of Loan Proceeds ............................................... 79 Annex 10: Land Acquisition and Resettlement .................................................. 80 Annex 11: Environmental Management Program .................................................. 84 Annex 12: Project Processing Budget and Schedule ................................................. 96 Annex 13: Documents in the Project File ................................................. 97 Annex 14: Statement of Loans and Credits ................................................. 98 Annex 15: Country at a Glance ................................................. 101 MAP IBRD 29405 Hunan Power Grid in 2002  China Hunan Power Development Project Appraisal Document East Asia and Pacific Regional Office Energy and Mining Development Sector Unit Date: May 21, 1998 Task Manager: Elaine Sun Country Director: Yukon Huang Sector Manager: Yoshihiko Sumi Project ID: CN-PE-35698 Sector: Energy Program Objective Category: Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [] Yes [x] No Project Financing Data [x] Loan [] Credit [] Guarantee [] Other [Specify] For Loans/Credits/Others: Amount (US$M/SDR M): US$300.0 Proposed terms: [] Multicurrency [x] Single currency, US Dollar Grace period (years): 5 [] Standard Variable [] Fixed [x] LIBOR-based Years to maturity: 20 Commitment fee: 0.75% Service charge: n/a Financing plan (US$M): 747.2 Source Local Foreign Total Government - - - HEPC 138.8 10.9 149.7 IBRD - 300.0 300.0 IDA Construction Bank of China/State Development Bank 275.8 21.7 297.5 Total 414.6 332.6 747.2 Borrower: People's Republic of China Guarantor: Responsible agency(ies): Hunan Electric Power Company Estimated disbursements (Bank FY/US$M): 1999 2000 2001 2002 2003 2004 Annual 18.0 57.0 105.0 75.0 36.0 9.0 Cumulative 18.0 75.0 180.0 255.0 291.0 300.0 For Guarantees: [] Partial credit [] Partial risk Proposed coverage: Project sponsor: Nature of underlying financing: Termns of financing: Principal amount (US$) Final maturity Amortization profile Financing available without guarantee?: [] Yes [] No If yes, estimated cost or maturity: Estimated financing cost or maturity with guarantee: Project implementation period: Expected effectiveness date: 12-31-1998 Expected closing date: 12-31-2004 OSD PAD Form: July 30, 1997  Page 2 A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The main objective of the project is to alleviate power shortages in Hunan by providing efficient, reliable and environmentally sound power supply. Progress toward the project development objective would be monitored according to quantifiable performance indicators developed during project preparation with the assistance of the Beneficiary. These mainly include the high availability of Leiyang II generating units, improved reliability of transmission network, reduction in load shedding, improved fuel efficiency, and reduction in overall specific emission rates (gms/kWh) of air pollutants (SO2, NO,, TSP) (see Project Design Summary in Annex 1). B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): The project supports the CAS objectives to alleviate the infrastructure bottlenecks in interior provinces to foster integrated economic development, as noted in the CAS (Document No. 16321-CHA, February 25, 1997) discussed with the Board on March 18, 1997, and reaffirmed in the CAS Progress Report to be discussed with the Board on May 28, 1998. Hunan, where the proposed project is located, remains one of the poorest provinces in China. In 1996, its per capita GDP was 4,118 yuan, 27 percent lower than the national average. Electricity consumption per capita was 530 kWh, about one third less than the national average. Hunan's economic development has been constrained by acute power shortages, estimated at about 3 TWhb in 1995. The project linkage to the CAS objectives would be achieved directly by the physical and institutional components of the project. The physical components of the project will strengthen/reinforce the power supply infrastructure and improve the environment by (a) developing two 300 MW anthracite-fired thermal units; (b) reinforcing critical transmission infrastructure to improve overall system reliability and ensure delivery of generated power to end-users; and (c) retiring a number of small, inefficient, aging, and polluting generating units, and avoiding further proliferation of inefficient and more polluting small plants. The institutional component of the project will increase the commercial orientation and the efficient operation of the provincial system by (a) unbundling the system (generation separate from transmission) and increasing competitive procurement of long-term power supply; and (b) developing and implementing efficient wholesale generation tariffs. 2. Main sector issues and Government strategy: Despite the progress achieved during the last decade, China's power sector still faces the following technical, financial, and institutional constraints: 1. Inadequate Financing of Power Infrastructure. Adequate electricity supply in China requires annual additions of more than 15,000 MW of generation capacity, an investment of about $15-20 billion per year. Despite the government's efforts to develop innovative financing schemes through joint venture, BOT and multiple domestic joint investment projects, the sector is still facing severe capital constraints and difficulties in channeling domestic savings to meet the investment needs of the sector. Further efforts are required to broaden and mainstream power sector financing. Moreover, development of private and nonutility projects is constrained by the lack of a commercial framework for power trade and the weakness of transmission networks.  Page 3 2. Transmission Bottlenecks. Transmission infrastructure in China has not been adequately developed to allow for efficient system operation and minimization of supply cost: (a) plants are not optimally located to minimize supply cost and ensure environmental sustainability. For example, some of the large plants constructed in areas close to load centers requiring the transport of large quantities of coal on an overextended transport system were not economically and/or environmentally justified; and (b) about half of the added capacity is in small inefficient units (100 MW and less) built close to the load centers to minimize upfront capital costs and minimize transmission investments. The transmission bottlenecks continue to contribute to investment inefficiencies (untapped economies of scale), location inefficiencies (overburdening of the railway system), environmental inefficiencies (heavy pollution burden on densely populated areas with limited local absorption capacity), and operational inefficiencies (uneconomic dispatch, higher losses). 3. Inadequate Wholesale Electricity and Transmission Pricing Systems. There are two significant shortcomings of the pricing system in the power sector in China. The first relates to the pricing of wholesale/bulk capacity and energy sales/purchases from generating plants. The second relates to the inadequate recognition of power transmission as a separate service that needs to be accounted for in electricity tariffs. The inadequacies of wholesale electricity entail operation of old and/or small and high operation cost coal-fired plants in lieu of modern, more efficient plants. The nonrecognition of the importance of transmission service hampers utilities' ability to recover costs and invest in transmission. Both problems are slowing the implementation of the purchasing agency model, and progress toward competition at the generation level. 4. Unclear Corporate Relationships between Power Sector Entities. Currently, power companies in China operate at three main levels: provincial/municipal, regional, and national: (a) the provincial/ municipal power companies are responsible for generation and transmission within a province or municipality; (b) the regional power entities hold the central Government's ownership stakes in provincial power companies in their territory and are responsible for interprovincial power transfers; and (c) the national power entity holds the central government's ownership stakes in the regional entities. However, unclear ownership rights and not fully commercial relationships between different power entities still impede: (a) full corporatization of power entities to meet the requirements of the new Company Law; (b) financial independence, and profit orientation of the sector entities; and (c) sector and especially transmission financing. 5. Heavy Reliance on Coal. China's heavy reliance on coal (especially for power generation) is expected to continue over the next two to three decades. There is, however, a growing recognition of health impacts and air quality deterioration due to extensive coal use. Recently, the Chinese Government initiated serious efforts to curb air pollution related to utilization of coal in the power sector. In June 1994, the Government announced that it would spend about $2 billion over seven years to keep SO2 emissions at 15 million metric tons per year. An SO2 emissions tax (from Yuan 0.15 to 0.2/kg of SO2) is being experimented with in several provinces and municipalities and a penalty of Yuan 0.04/kg of SO2 is being applied to all emissions exceeding the 1982 standards in all provinces. More stringent air quality and emission standards have been issued at the national level in January and March 1996. Several provinces and municipalities, followed up with local environmental regulations. A recently issued regulation in Shanghai requires the use of flue gas desulfurization on all new coal-fired power plants. However, enforcement and adequate implementation of these standards require greater attention and continued efforts. 6. Low Efficiency of Electricity Supply and Use. China has over 10 years of experience in the active promotion of electricity conservation, with a solid record of achievement. The strength of its program lies in the well developed institutional framework. The success is clearly indicated by the sustained low ratio of elasticity demand to GDP growth of 0.86 during 1980-95. However, energy/ electricity conservation programs have always been based on centrally designed policies and heavily subsidized administrative programs. Faced with constrained fiscal revenues, the government is now  Page 4 promotinig programs to reduce losses on the supply side and market-based initiatives to improve electricity use. The Chinese approach to reform encourages experimentation with different reform options and institutional forms. This gradual approach permits the Chinese to examine the relevance and applicability of specific reforms and also to fine-tune reform implementation for broader dissemination or replication in other parts of the country. (During the last few years, the Bank's technical assistance program for the sector has focused on helping the Chinese in assessing reform options, defining implementation strategies, exploring options for mobilizing domestic and foreign private funds to meet the capital needs of sector development and developing a regulatory framework. The study entitled "Strategic Options in Power Sector Reform in China," 1993, sector report entitled "China Power Sector Reform: Towards Competition and Improved Performance," Report 12929-CHA, 1994, and discussion paper entitled "China: Power Sector Regulation in a Socialist Market Economy", 1997, which summarized the latest reform emphasis, provide vehicles for dialogue between the Bank and Chinese institutions. Another discussion paper, No. 377 entitled "Mobilizing Domestic Capital Markets for Infrastructure Financing: International Experience and Lessons for China," was prepared based on a seminar held in November 1996 in Beijing on the subject. The Bank is now assisting the Government to examine institutional structures to develop power markets in China. The intention is to facilitate increased power exchange between regional and provincial power systems to economize resource utilization. This assistance is being provided through an IDF grant.) The Government's future reform agenda includes: * At the institutional level: - Dissolution of the Minister of Electric Power (MOEP) and transfer of its regulatory functions to the State Economic and Trade Commission (SETC) and the State Development Planning Commission (SDPC) and its commercial functions to the State Power Corporation (SP). This decision made by the State Council was recently confirmed by the National People's Congress. In parallel, the Government is gradually developing rules to more efficiently regulate the sector; * Corporatization and commercialization of the SP which has been established to hold the State's ownership interest in the subordinate regional and provincial power companies. It is expected that the SP will access long-term international and domestic bond markets for sector financing; * Gradual implementation of regional power markets to facilitate economic power exchange, trade between provincial systems, and competition at the generation level; * Rationalization of power tariffs particularly at the wholesale generation and transmission levels; and * Continued focus on increasing the domestic and foreign equity participation in newly formed generation enterprises. (By end-1997, there were at least 25 power generation companies in China that had been publicly listed in domestic and international markets.) * At the technical/operational level: * Achievement of economies of scale in thermal power production, through expanded development of large and efficient generating units;  Page 5 * Promotion of conservation technologies and introduction of market-based incentives for electricity conservation; * Development of renewable energy technologies, especially wind power; and * More adequate enforcement of environmental protection standards. 3. Sector issues to be addressed by the project and strategic choices: * Infrastructure bottlenecks (investment components for power plant and transmission network) * Inadequate wholesale electricity pricing systems (wholesale contractual arrangements under TA component) * Unclear ownership rights and lack of commercial orientation of power entities (HEPC's restructuring plan under TA component) * Inadequate financing of transmission projects. (pricing principles agreed between HEPC and the Hunan Provinical Government for the transmission component) The project will indirectly address the following sector issues: * Development of private power projects (transmission component to support Changsha BOT project) * Improving local air quality by replacing about 10 small polluting generating units operating in the provincial power network (300 MW total) with a large efficient plant utilizing local anthracite fuel (alleviating pressure on coal supply and transportation and reducing transportation cost) and modem environmental control systems There are several reasons why the decision to undertake this project as a Bank-financed public project has been made: * The project will through separation of generation from transmission and distribution help in: (a) setting a more predictable and transparent commercial framework; (b) establishing a sector structure that will allow for the competitive bidding for power purchases; and (c) encouraging investment in transmission and distribution. This will ultimately lead to the development of fully competitive markets. - Leiyang II will be the first thermal power project in Hunan with a double-arch downshot designed boiler using 100 percent local anthracite and avoiding transfer of coal over long distance. Technically, it is more risky and less attractive to private investors. For example, the BOT Changsha power plant has been designed to use a mix of bituminous coal imported from Shanxi (60 percent) and local anthracite (40 percent) and to use conventional subcritical boilers. * Without the involvement of the World Bank the above technical and institutional improvements are likely to be delayed by three to five years.  Page 6 C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Component Category Cost Incl. % of Bank % of Bank Contingencies Total financing financing (US$M) (US$M) 1. Leiyang Power Plant Component: Physical 463.37 68.3 255.31 55.0 The supply and installation of two additional 300 MW anthracite-fired generating units at the Leiyang Power Plant to alleviate power shortage, improve the generation mix in a system dominated by seasonal hydropower, and facilitate the retirement of 10 small, aging, inefficient, and polluting generating units in the provincial power grid. 2. Transmission Component: Physical 204.90 30.2 39.19 19.1 Reinforcement of the existing 220 kV transmission systems-supply and installation of about 794 km of 220 kV lines and 1,920 MVA of transformer substations capacity. The component will connect Leiyang Power Plant Phase II and competitively bid BOT Changsha Power Plant (2x300 MW) to the Hunan Provincial Grid and reinforce the transmission system in order to supply the increasing demand in a reliable, economic and efficient manner. 3. Technical Assistance for engineering services for Project 9.56 (for the 1.4 4.50 (for the 47.1 construction management Management whole TA whole TA component) component) 4. Technical assistance for implementation of HEPC's Policy (Sector restructuring plan: (a) incorporation of generation and Reform) transmission/distribution companies; (b) incorporation of the future Leiyang power plant; (c) preparation of contractual agreements and other commercial documentation 5. Technical assistance for improvement of the financial Institutional management system. Building (Sector Reform) 6. Training Institutional 1.00 0.1 1.00 100.0 Building Total 678.83 100.0 300.00 52.0 2. Key policy and institutional reforms supported by the project: * Unbundling of generation from transmission and distribution: This will lead to the implementation of a purchasing agent structure (a) allowing limited competitive bidding by generator to minimize cost  Page 7 of supply; (b) encouraging investments in transmission and distribution; and (c) easing the transition to a fully competitive market in the longer term (see Annex 5). * Development of efficient wholesale generation tariffs: A revised system of wholesale power pricing will be introduced to facilitate systemwide economic dispatch and ensure optimal utilization of resources. * Corporatization and Commercialization of power companies: HEPC would be restructured and incorporated into one transmission/distribution company, one thermal generation company, one hydro development company, and Leiyang Power Generation Company in accordance with the Company Law. In addition, the accounting and financial management systems of HEPC would be upgraded to facilitate the commercialization process. 3. Benefits and target population: The project would have a marked impact on the economic development of Hunan Province. The direct benefits attributable to the project are: (a) reduction in the value of lost production due to power rationing and load shedding; (b) improvements in quality of supply in terms of reduced interruptions and recognized but difficult to quantify service parameters, such as, more stable frequency and voltage, and (c) improvements in local air quality with retirement of older polluting generating units (generally located in urban and populated areas). The other major benefit of the project is the implementation of the sector reform plan and increased commercial orientation of HEPC. The development of a competitive commercial framework for purchase of power from all generating units on the system will be conducive to economic dispatch and overall generation efficiency. The clear separation of the generation from transmission and distribution will provide a framework to promote competition at generation level and private investments in power generation. The proposed project would therefore benefit all power consumers in Hunan Province. 4. Institutional and implementation arrangements: Implementation Period. Five years, from December 1998 to December 2003 Executing Agency. HEPC is the beneficiary of the proposed loan and the executing agency of the project. The overall management of the project would be carried out by HEPC, which would be responsible for project preparation, implementation and operation, including procurement, construction supervision, and disbursement of funds. HEPC has been operating the Hunan provincial grid for more than 20 years and has had operating experience of anthracite fired units (200 MW and below) for more than 10 years. It has the organization and key staff required for project and construction management. The detailed arrangements are presented in Chart A1-A3 of Annex 6. To facilitate effective project implementation according to the planned timetable, HEPC has established a Project Implementation Unit (PIU) with full-time staff, headed by the Deputy Chief Engineer (reporting to HEPC Management), to carry out the project preparation and construction management. Hunan Provincial Electric Power Design Institute has been appointed to assist HEPC in carrying out engineering, procurement, and project implementation. HEPC and its PIU will also be assisted by an international consulting firm and a local expert group.  Page 8 Project Oversight and Policy Guidance. The institutional reform elements of the proposed project will be supervised by SP, SETC, and SDPC (SP in particular). SP will be responsible for obtaining the State Council approvals on major reform issues. The concerned provincial government agencies will oversee the planning and implementation of resettlement. Onlending and Auditing Arrangements. The proposed Bank loan of $300 million will be made to the People's Republic of China represented by the Ministry of finance (MOF) at the Bank's standard interest rate for LIBOR-based US dollar single currency loans, with a maturity of 20 years, including a five-year grace period. Proceeds of the loan will be onlent from the Borrower (MOF) to HEPC on the same terms and conditions as the Bank loan with SP as the guarantor. HEPC agreed to maintain and provide the Bank with semiannual progress report, with unaudited project accounts to reflect project expenditures for the period under report compared with the original project cost estimates. Moreover, HEPC will furnish the Bank with the audited accounts for the project, statement of expenditures, and financial statements within six months of the end of each fiscal year. In this regard, HEPC will also implement any changes to its accounting practices as recommended by the financial management consultants, require the auditors to comply with international auditing practices and provide an audit plan prior to each audit. The proposed project will be audited by the representative office in Hunan of the State Audit Administration (SAA). This office has prepared audit reports in connection with other Bank financed projects in the province in accordance with Chinese audit principles and standards, which are generally consistent with international practices. Finally, HEPC will furnish to the Bank by June 1 of each year, a rolling eight-year financial plan including projected income statements, fund flow statements, and balance sheets. D: Project Rationale 1. Project alternatives considered and reasons for rejection: A least-cost study was carried out by HEPC, with the assistance of local consultants, covering the period 1998-2025 and focusing on 1998-2010. The study was carried out using an optimization model that determines the optimal capacity and generation mix to meet the demand with the minimum cost (net present value of investment and operating costs), given a predetermined reliability criteria. It considered all potential (technically feasible) candidates including: extension of existing hydropower plants, new hydropower plants, thermal power units using local anthracite, thermal power units using bituminous coal from other provinces, combined cycle units using distillate and imports of power from neighboring provinces. The proposed project remains the first investment of the optimal (least cost) power development program under various scenarios. In the without project case, the new development program remains based on greenfield 300 MW units using local anthracite. System reliability in terms of loss-of-load probability will also benefit from the addition of thermal capacity. The present power generation system has substantial hydro capacity (about 55 percent of total capacity) with relatively little storage capacity and generation is thus highly dependent upon hydrological conditions.  Page 9 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing andplanned): Latest Supervision (Form 590) Ratings (Bank-financed projects only) Sector issue Project Implementation Development c-completed; o-ongoing; p-planned Progress (IP) Objective (DO) Bank-financed Issues: 1, 3 Tianhuangping Hydroelectric Project-o HS HS Issues: 1, 3, 4, 5 Waigaoqiao Thermal Power Project-o Issues: 1, 3, 4, 5, 6 Tuoketuo Thermal Power Project-o Issues: 1 Wujing Thermal Power Project-c HS HS Issues: 1, 5, Yangzhou Thermal Power Project-o S S Issues: 1, 4, 5 Zhejiang Power Development Project-o HS HS Issues: 6 Energy Conservation Project-o Issues: 2, 3, 4, 6 East China/Jiangsu Transmission Project-o Issues: 5 Renewable Energy Promotion Project-p Other development agencies Issues: 3, 4 ADB (TA No. 2169-PRC) Hunan Electric Power Company Institutional Strengthening Study Issues: 1, 5 ADB (Loan No. 1318-PRC) Hunan Lingjintan Hydropower Project Issues: 1, 5 ADB (TA No. 2739-PRC) BOT Changsha Power Project IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: * Limited and Achievable Objectives of Power Sector Reform. Setting specific and achievable reform goals in the two latest projects (Waigaoqiao and East China/ Jiangsu Power Transmission) proved to be more effective and better understood approach by the beneficiaries. International experience shows that even in countries with strong legal systems and open economies, the time needed to build consensus on the reform decisions, establish a new regulatory framework, and implement structural changes can be very long. In the UK, the pioneer country in implementing power sector reforms, it took about 10 years for consensus building and laying out the reform options, and two more years for drafting the law and the licenses, and another two for designing the mechanisms to introduce competition. It is clear that the power sector reform agenda in China is far reaching and can be achieved only gradually. It is important to avoid the broad brush reform approach and define clear priorities and focus on specific and limited areas of reform for each project. * Better Preparation of Procurement Packages. Procurement of transmission component features numerous small packages in comparison with generation projects. Each package requires very specialized technical knowledge. Inadequate project management caused significant delays of  Page 10 procurement and hence delays of project implementation; noncompliance with the Bank Procurement Guideline due to a lack of awareness, and poor quality of evaluation report have required excessive amount of time for clarification and resulted in delays. Learning from recent experience, the Beneficiary has: (a) established a procurement management group within the organization of the implementing agency from the inception of the project. This group will be part of the project management team and will be responsible of management and coordination of all procurement activities; (b) organized a one-week training course on Bank Procurement Guidelines and a study tour to other Bank financed projects in China to learn from their experience. Experienced procurement specialists from the leading tendering companies in China and staff of the Resident Mission assisted in designing and carrying out the training sessions; and (c) involved independent international consultants to improve the quality of the bidding documents and bids evaluation. * Need for Early Government Approval of Project. In the recent Tuoketuo and Waigaoqiao thermal power projects there were delays in project processing stemming from delayed internal Government approvals. These delays were due to the fact that while the Bank has shortened the project processing period significantly (about six months) under the streamlined operations procedures the government internal approval procedures remain unchanged. The approval process for the proposed project has been closely monitored and special efforts were made by the Beneficiary, MOEP, and MOF to have secured all necessary government approvals before project negotiations. Moreover, the CMU in Beijing has started discussions with the relevant government agencies on how to synchronize both sides' procedures. * Phased Approach to Resettlement. Following the identification mission and in coordination with LEGEA and ASTHR, it is clear that most of the detailed engineering, the routing of the transmission line and siting of transmission towers and substations will not be finalized until early 1999 (which is after the implementation has already begun), two years before the power plants scheduled for trial operations. The agreement with the Borrower, therefore, is that the project will be implemented in two phases. As a result, the Beneficiary should prepare RAP in two phases. The Phase I RAP, submitted to the Bank in February 1998, included: (i) the relevant resettlement policies and regulations, the institutional arrangements and implementation procedures governing all resettlement actions to be carried out under the proposed project; (ii) detailed resettlement action plans for the power plant component, and three substations and two transmission lines under the transmission component; and (iii) a preliminary sample census survey for the second phase. A second-phase RAP, to be submitted to the Bank for approval by March 1999, would include the same policy framework and detailed action plan for the remaining six substations and 18 sections of transmission lines. * Supply of coal with consistent quality. Following a serious boiler accident at Beilungang due to uneven coal quality and start up problem in the Yanshi project, particular attention was given to the boiler design and specifications, coal specifications, and "check coal" specifications, and intensified coal monitoring. A complementary coal study has been prepared by HEPC on coal sampling and analyses. 4. Indications of borrower commitment and ownership: The Beneficiary's commitment and sense of ownership for the proposed project is very high. HEPC has been actively consulting with the relevant government agencies at central and local levels on the required approvals. The approval by MOEP for HEPC's restructuring plan required for the Bank to issue invitation for negotiation of the proposed project was received in March 1998. Contract for consulting service for preparation of detailed reform implementation plan was signied with an international reputable firm on May 1, 1998. Feasibility studies have been submitted to SPC by MOEP. Bid documents for boiler and turbine generator are being prepared with assistance provided by HEPC's  Page 1 1 international engineering consultants and expected to be submitted to the Bank kor review and clearence in June 1998. Final report for the least cost study was received by the Bank in November 1997. The EIA report has been finalized with the assistance of HEPC's international consultants and submitted to the Bank. 5. Value added of Bank support in this project. World Bank Involvement in this project, the first power project in Hunan, is designed to address the technical, financial, and institutional issues by taking into account successful international experiences. The Bank's participation in the project will add value by: * Contributing to the economic development in Hunan to help address the issue of uneven development and widening gap between the coastal and inland areas in the country. * Facilitating implementation of a single buyer market structure in Hunan. The restructuring of HEPC will avoid excessive fragmentation of the sector while setting a framnework for competition at the generation level through: (a) creation of two major generation companies; (b) consolidation of Leiyang Phases I and II into a single generation corporation; and (c) incorporation of HEPC into a transmission and distribution company. * Deepening ongoing policy dialogue to address the institutional aspects of wholesale electricity pricing which are critical to the implementation of the power purchasing agency model. Power sales to the transmission and distribution company will be based on adequate contractual arrangements. * Developing a modern environmental management program for the Leiyang power plant, which will serve as a model for other new thermal power plants in Hunan. * Strengthening HEPC's corporate governance, and management capacity through (a) upgrading the financial management system; (b) incorporating the to-be-created companies according to the Company Law; and (c) implementing an intensive training program. * Supporting technology transfer in the construction and operation of 300 MW units using local anthracite resources. Since the project is the first with the design of double arch downshot boiler in Hunan, Bank's participation will help ensure the quality of implementation. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 13) 1. Economic (supported by Annex 7): [xl Cost-Benefit Analysis: Leiyang Power Plant: NPV = US$191.2 million; IERR = 19.4 percent HEPC's overall Investment program: NPV = US$246.8 million; IERR = 13.6 percent Generation A least-cost study was carried out by the Beijing Research Institute for Water Resources and Electric Power (BERI), in conjunction with the Hunan Electric Power Company (HEPC), using a planning model that determines the optimal capacity and generation mix to meet the demand in the most cost effective way (minimum net present value of investment and operation costs). The study covered the development of the system during 1997-2025, study period, with special focus on the investment required during 1997-2010, planning period. The detailed report, "Economic Analysis for Leiyang Coal Fired Thermal Power Plant" (November 1997), prepared by BERI and HEPC is in the project files. A cost benefit analysis was carried out to confirm the economic viability of the project. The analysis was carried out based on the economic cost of the project and the revenues generated by power sales valued  Page 12 at the bulk price of 29.1 fen/kWh (1997 prices), based on existing policies for pricing of power output from new power plants and fully passed on to the consumers. The calculation yielded an IERR of 19.4 percent. A risk analysis was also carried out to confirm the robustness of the project. It yielded an expected IERR of 14.8 percent (with a standard deviation of 4.2 percent). The possibility of the expected IERR to be lower than 12 percent is 26 percent. Transmission The strengthening of the transmission system is imperative. The load flow and stability analyses carried out by HEPC show that the need and timing of the proposed lines and substations are justified. The design parameters of the proposed lines and substations has been optimized to ensure that transmission services would be provided in the most cost effective way. To complement the cost-effectiveness approach, a cost-benefit analysis was carried out on HEPC's entire investment program. It yielded an IERR of 13.6 percent. A risk analysis was carried out and yielded an expected IERR of 12.4 percent (with a standard deviation of 4.2 percent). The possibility for the expected IERR to be less than 12 percent is 40 percent. 2. Financial (see Annex 8): Leiyang Power plant: NPV = US$ 2.4 million; FRR = 12.11 percent Transmission investment: NPV = US$27 million; FRR = 14.86 percent Leiyang Power Plant The financial rate of return for the proposed power plant investment is estimated at 12.11 percent based on pricing principles agreed by the Pricing Department of Hunan Provincial and determined as follows: * Prior to the retirement of domestic debts (from 2002 to 2012): full debt service requirements; O&M cost (including depreciation not used for debt repayments); taxes related to the proposed project; and an annual return of not less than 15 percent on the funds invested by HEPC for the proposed component. * After retirement of domestic debts (from 2013 to the end of the life of the project): full debt service requirements for the Bank loans; O&M cost (including depreciation not used for debt repayments); taxes related to the project; and an annual return of not less than 18 percent on the funds invested by HEPC for the proposed component. The estimated average tariff for the proposed power plant component over the life of the project would be 59.71 fen/kWh in current terms and 29.05 fen/kWh in 1997 prices. Fiscal Impact. The proposed power plant investment is expected to generate tax revenues in a total amount of about $694.2 million equivalent during the project life, of which $89.9 million duties, $286.1 million VAT, $28.7 million surcharges, and $289.5 million income taxes. Based on a discount rate of 12 percent, the net present value of the tax revenues generated by the proposed investment is estimated to be $123.9 million, of which $7.8 million duties, $51.3 million VAT, and $9 million surcharges, and $55.8 million income taxes. Transmission Component The financial rate of return for the proposed transmission investment is estimated at 14.86 percent based on the pricing principles agreed by the Pricing Department of the Hunan Provincial Government and determined as follows:  Page 13 * Full debt service requirements; O&M cost (including depreciation not used for debt repayments); taxes related to the proposed component; and an annual return of not less than 15 percent on the funds invested by HEPC for the proposed component. The estimated average tariff increases for the proposed transmission component over the life of the project would be 0.55 fen/kWh in current terms and 0.32 fen/kWh in 1997 prices. Fiscal Impact. The proposed transmission investment is expected to generate tax revenues in a total amount of about $409.7 million equivalent during the project life, of which $16.5 million duties, $182.7 million VAT, $18.3 million surcharges, and 192.2 million income taxes. Based on a discount rate of 12 percent, the net president value of the tax revenues generated by the proposed investment is estimated to be $143.8 million, of which $1.4 million duties, $62.4 million VAT, and $6.2 million surcharges, and $73.8 million income taxes. Assessment of HEPC's Financial Management System. The project team reviewed HEPC's financial management system, including accounting standards and internal control and audit policies/practices, and the accounting arrangements for the proposed project and found them satisfactory. Technical assistance and training provided under the proposed project will upgrade HEPC's financial management capabilities, introduce modem financial management practices, and strengthen the financial and accounting staff skills. 3. Technical: The Feasibility Study for the Leiyang Thermal Power Plant, prepared by the Hunan Provincial Electric Power Design Institute (HPEPDI), has been reviewed by the Central Electric Power Planning and Design Institute (CEPPDI) and approved by the MOEP. A follow-up review of the Leiyang Plant boiler island conceptual design, especially on the coal analysis and boiler selection, has been carried out by Black and Veatch of USA (Engineering Consultants for HEPC). The review confirmed successful burning of the local very low volatile anthracite requires a furnace design that provides adequate residence time for the char particle in a high temperature combustion zone. The recommended arch-firing combustion system (downshot furnace) is the proper technology for the Leiyang power plant. Studies for strengthening Hunan transmission system were also reviewed by CEPPDI and MOEP. The studies concluded that reinforcement of the existing 220 kV transmission system is essential to the supply of increasing energy demand in a reliable, economic and efficient manner. The reinforced 220 kV system would integrate planned and under construction large size power stations especially the proposed Leiyang thermal power and the Changsha BOT plants. Load flow, fault level and transient stability analyses were performed for the Hunan Provincial Grid at the voltage level of 220 kV and above including the 500 kV AC tie line linking the Hunan Provincial Grid to the Central China Power Grid. Both steady state and transient stability criteria can be satisfied. The above studies, including environmental impacts and mitigation measures, were reviewed by the Bank and found adequate. The project's technical design is appropriate to the needs of Hunan Provincial Power Grid and conforms to required standards. HEPC has been operating the Hunan Provincial Grid for more than 20 years and has had operating experience of anthracite coal fired units for more than 10 years. It has the capability to successfully carry out the implementation of the proposed project. Post-engineering works, including the balance of the engineering, design, preparation of equipment specifications and tender documents, and interface with the contractors will be performed by HEPC and HPEPDI, assisted by the Consultants Black and Veatch, International. Cost estimates for components of generation and transmission facilities were defined based on studies and engineering designs carried out by HEPC and HPEPDI. The cost estimates reflect end-1997 prices  Page 14 and are based on the latest international tendering information available for similar equipment and works, which are realistic. Physical contingencies are calculated at 5 percent for foreign costs and 10 percent for local costs. The price escalation for costs expressed in terms of foreign exchange is calculated according to anticipated international price movements of the price escalation for costs expressed in terms of foreign exchange is calculated according to anticipated international price movements of 2.5 percent per year for 1998, 3.1 percent for 1999, 2.9 percent for 2000, 2.8 percent for 2001, and 2.7 percent for 2002, and 2.6 percent for 2003. The price escalation for costs expressed in local currency is calculated according to projected inflation rate for China of 2 percent for 1998, 4.8 percent for 1999, 5 percent for 2000 and 5.5 percent for 1999-2003. The allowances for physical contingencies and price increases during implementation are deemed to be adequate. 4. Institutional: As a new beneficiary of a Bank project, HEPC is not familiar with the Bank procedures, particularly the procurement procedures. Therefore, a project management unit was established based on the Bank mission's recommendation with full-time staff. Furthermore, a procurement group was organized and trained by the Bank procurement specialists. International consultants experienced with power project procurement has been engaged to assist HEPC in procurement of major equipment. To strengthen the institutional and managerial capabilities of HEPC, a comprehensive technical assistance and training program is included under the proposed project and described in details in the PIP. The program, initiated during project preparation, includes technical assistance and training in: (a) preparation of detailed reform implementation plan; (b) development and implementation of modern accounting and financial management system, and (c) development of wholesale power purchase pricing methodology and contractual arrangements between the restructured HEPC and generation entities. 5. Social: The resettlement for the proposed project will be carried out in two phases. The first phase includes: (a) policies and regulations, institutional arrangements, implementation procedures that would be applied to all components of the proposed project; and (b) detailed resettlement plans for (i) Leiyang Power Plant; (ii) four 220 kV substations (Furong, Dongfenghu, Hengbei, and Wangcheng); and (iii) two sections of 220 kV transmission lines (Huaneng Power Plant to Dongfenghu, and Macha to Hengbei). The second phase includes resettlement activities related to five 220 kV substations and 18 sections of 220 kV transmission lines. A Resettlement Action Plan (RAP) has been prepared for the first phase. The RAP for the second phase will be prepared by March 1999 following the completion of the design of routing and siting of these subcomponents. The Bank carried out full review of the RAP and the assessment found that the resettlement needs and PAPs are well analyzed and mitigating measures of adverse social impacts are thoroughly formulated and adequate. The second phase RAP and any unforeseen resettlement associated with the project will be carried out according to the policy and procedures established in the Phase I. Minimization of the scope of resettlement was, and will continue to be a high priority throughout the planning, design and implementation of the proposed project. Where land acquisition and demolition are unavoidable, the resettlement plans provide for replacement of housing, alternative employment opportunities, infrastructure, services and other resources to improve, or at least restore, the living conditions and income of the project affected persons (PAPs). Special attention was given to the most vulnerable groups (household headed by women, senior people, and poorest households).  Page 15 The project (including two phases) would (a) require acquisition of 1,097.5 mu (about 73 ha) of land; (b) affect 396 persons due to land loss; (c) demolish 100,145 square meters of floor spaces in rural and urban areas; and (d) relocate 266 households or 1,418 persons. The first phase components require acquisition of a total of 438.5 mu land area, affecting 108 people; demolishing 15,941 square meters of floor spaces, and relocating 175 households or 993 individuals. Based on a preliminary estimate, the remaining project components will require acquisition of 659.0 mu land area, affecting 289 farmers, removing 84,204 square meters structures, and relocating 91 households or 425 individuals. In order to effectively implement the resettlement program, resettlement offices were established at the provincial, city, county, and power supply bureaus levels. To strengthen the resettlement offices' implementation capabilities, a resettlement policy and implementation workshop was conducted for staff involved in the resettlement activities in May 1998. 6. Environmental assessment: Environmental Category [x] A []B []C In accordance with OD 4.01 (Environmental Assessment), the project has been assigned Category A. The Environmental Assessment (EA), was prepared as two separate reports: Part A the Leiyang Power Plant, and Part B the Transmission System. Both Parts were prepared by a team consisting of international consultants specializing in environmental issues related to thermal power plants and transmission lines and the Nanjing Electric Power Research Institute (NEPRI). For the power plant, the international consultant took the lead role in EA preparation and for the transmission line, NEPRI assumed the lead role. The EA document has been approved by the National Environmental Protection Administration (NEPA) and has been reviewed and approved by the World Bank; it is considered that all environmental aspects of the project are satisfactorily addressed and in compliance with all Chinese and World Bank environmental policies and procedures. Because of the unusual characteristics of the fuel to be used, some exceedance to existing World Bank nitrogen oxides (NOx) emission guidelines will occur. Additionally, a variance to Chinese NOx emission standards was established by NEPA. Thermal discharges from once through cooling water also exceed World Bank Guidelines, but comply with Chinese standards. However, the EA analysis determined that the environmental consequences of these exceedances were insignificant. A monitoring program will be incorporated into the project to ascertain and verify these conclusions on a sustained basis. Should additional mitigation be required, the Borrower has agreed to take the appropriate measures. The power plant is located in the southeastern part of Hunan Province in Xinhe and Luqi villages on the right bank of a meandering section of the Leishui River. The plant is the second phase adjacent to an existing (2x200 MW) power station. Alternative locations were not considered practical, since the existing site could take advantage of the available infrastructure (cooling system, ash disposal system, etc.) and would not involve any resettlement. Modern pollution control technologies will be incorporated into the design of the power plant, such as high efficiency electrostatic precipitators. The plant site has sufficient space to accommodate additional pollution control systems if required as a result of future changes to Chinese standards and/or technological developments. Annex 11 provides a summary of key environmental issues associated with the project and their anticipated impacts, the mitigating plan to assure that these impacts are minimized to acceptable levels, and the monitoring program with which environmental impacts will be measured to compare to EA predictions. Further strengthening of HEPC is included in the project design. It will include both training and acquisition of appropriate environmental monitoring equipment (see Annex I1). Mitigation measures identified in the EA and included in the project design for the transmission component include: appropriate routing to minimize exposure to sensitive receptors, a 50 m corridor and  Page 16 sufficient height of the line span to avoid interference with traffic (highway, navigational, and air) and communications and sufficient height to maintain Chinese public health and safety standards for ground level electric field intensities. Environmental issues associated with the project (power station and transmission line) and addressed in the EA included all concerns expressed by affected parties in a series of public meetings. Local public and local authorities support the project and the recommended mitigating measures presented in the EA reports. the mitigating and monitoring plans presented in the EAs (see Annex 11) will be fully implemented. Key issues addressed in the EAs included: air pollution (dust, sulfur dioxide, nitrogen oxides), water pollution (primarily thermal pollution impacts to aquatic ecology in the Leishui River), ash management, worker health and safety (including the mine supplying the coal), electric field, noise, losses in land productivity, interference with communications and bird flight patterns, and influences of construction and operational labor forces on the local infrastructure. Furthermore, the proposed project (2 units of 300 MW each) is the second phase of what might be a three phase program at the Leiyang site. To avoid future adverse environmental consequences, the EA examined both the immediate impacts of the subject project (600 MW) as well as cumulative impacts including a possible third phase (2x600 MW). Mitigating measures for air, water, and solids management (coal, ash) are designed to meet appropriate Chinese requirements and/or World Bank guidelines whichever is stricter. In the absence of either, international codes of practice will be used (as is the case for nitrogen oxides emissions). For the cooling water discharge the exceedance of World Bank temperature guidelines was determined to have insignificant environmental impact, and was within Chinese environmental standards. 7. Participatory approach [key stakeholders, how involved, and what they have influenced; if participatory approach not used, describe why not applicable]: a. Primary beneficiaries and other affected groups: - SP and the Central China Electric Power Group Corporation (CCEPGC) as HEPC's parent/holding company, they have been involved in some key decision making process, such as the restructuring plan of HEPC and investment strategy of HEPC, for the proposed project. * Hunan provincial government has also been involved in policy issues, including tariffs, resettlement, environment, and coal supply. * Leiyang community has been consulted on the resettlement plan through interviews and public meetings. b. Other key stakeholders: F: Sustainability and Risks 1. Sustainability: The financial sustainability will be achieved through suitable financial covenants to ensure full cost recovery and modest profitability. The existing pricing policy in China warrants that project costs will be passed on to the consumers. Given HEPC's operating experience with the first phase of anthracite fired units in Leiyang, the operational sustainability should not be a problem.  Page 17 2. Critical Risks (reflecting assumptions in thefourth column of Annex 1): Risk Risk Rating Risk Minimization Measure Annex 1, cell "from Outputs to Objective" Completion of Leiyang plant delayed Modest International consultants will be engaged to assist HEPC in construction management and procurement. Equipment deficiency for the plant Modest Major equipment will be procured through ICB and bid documents, bid evaluation, and interface will be assisted by international consultants. Leiyang plant and transmission systems poorly Low Technical training will be provided. maintained Coal quality different from designed coal Substantial Coal supply contracts with penalties will be signed between coal mines and HEPC one year before trial operation of the first unit. Delays in the construction of BOT Changsha plant Modest First pilot BOT Laibin B project has included severe penalties for delays in the concession agreement. Financial closure for Laibin B was only three months behind the planned schedule. With the experience in Laibin, further improvement in Changsha is expected. Change in government commitment to market- Modest Effective policy dialogue will be continued with both oriented sector reform. central and local government levels. Annex 1, cell "from Components to Outputs" Inadequate procurement resources, slow Modest * A procurement group within the organization has been procurement decisions established * Training on Bank procurement guidelines has been provided * International consultants has been recruited to assist in bid document preparation and bid evaluation. Delays in retirement of aging and polluting plants Substantial * Retirement plan for about 10 units with 300 MW (total) installed capacity has been agreed with HEPC and included in the Project Agreement. * Intensified monitoring and supervision will be planned. Delays in resettlement implementation due to (a) Modest * An executable resettlement plan was prepared with delays in approval of resettlement budgets; (b) cost assistance of experienced resettlement specialists who overrun, and (c) poor coordination have worked in a number of similar Bank financed power projects. * Adequate contingencies for resettlement costs have been budgeted. * The resettlement implementation agency at the provincial level will be strengthened. Delays in implementation of restructuring plan due Modest * Policy dialogue will be continued with HEPC's parent to (a) delays in approval of detailed steps by State companies and local governments. Power Corporation and Central China Group, and * Basic framework of measures has been agreed. (b) lack of qualified staff * Relevant training will be provided. Overall Risk Rating Modest Risk Rating-H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)  Page 18 3. Possible Controversial Aspects: None. G: Main Loan Conditions 1. Effectiveness Conditions: Execution of the subsidiary loan agreement between the Government and HEPC, satisfactory to the Bank, and approval of the Loan Agreement by the State Council would be conditions for loan effectiveness. 2. Agreement has been reached with the Government: The Borrower will ensure that the proceeds of the Loan are onlent to the Beneficiary under a subsidiary loan agreement on the same terms and conditions as the Bank loan, and that the Beneficiary bears the foreign exchange risk. 3. Agreements have been reached with the Beneficiary: Financial Performance * HEPC shall not incur any debt unless a reasonable forecast of the revenue and expenditure shows that the estimated internal cash generation would provide a debt service coverage of no less than 1.5 times at all times; and * HEPC shall take all necessary measures, including but not limited to tariff adjustments, to earn a return of not less than 8 percent of the equity (paid-in capital plus retained earnings) in 1999-2000, 10 percent in 2001-2002, and 12 percent in 2003 and thereafter. Financial Reporting, Monitoring and Auditing * maintain and provide the Bank with semiannual progress reports, with unaudited project accounts to reflect project expenditures and original project cost estimates for the implementation period; * furnish to the Bank audited accounts for the project, statements of expenditures, and financial statements within six months of the end of each fiscal year; implementing any changes to its accounting practices as recommended by the financial management consultants to meet international accounting standards; and require auditors to comply with international auditing practices and provide audit plans for each audit; and * by June 1 of each year, furnish to the Bank a rolling eight-year financial plan containing projected income statements, fund flow statements, and balance sheets. Power Sector Reform * carry out the reform implementation plan according to the timetable agreed with the Bank and detailed in Annex 5. * carry out and complete technical assistance programs for assets restructuring, incorporation of restructured HEPC and other power generation entities, and development of wholesale power purchase agreement by December 2000.  Page 19 Institutional Building * carry out the organizational restructuring and financial management systems studies according to the schedule agreed with the Bank; and implement the recommended organizational improvements, and accounting and financial management systems, taking into account Bank comments; and * carry out the management development and training programs as agreed with the Bank. Environment * carry out the Environmental Management Program in a manner satisfactory to the Bank. Resettlement * carry out the resettlement program in accordance with the agreed Phase I RAP; prepare a satisfactory the Phase II RAP following completion of the detailed engineering studies for remaining components of the project no later than March 31, 1999. Prior to commencing the second phase activities, carry out the compensation, resettlement, and rehabilitation of PAPs in accordance with the Phase II RAP as shall have been approved by the Bank. H. Readiness for Implementation [x] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [ ] Not applicable. [ ] The procurement documents for the first year's activities are complete and ready for the start of project implementation. [x] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [xj The following items are lacking and are discussed under loan conditions (Section G): Phase II RAP  Page 20 I. Compliance with Bank Policies [ ] This project complies with all applicable Bank policies. [x] [The following exceptions to Bank policies are recommended for approval: The project complies with all other applicable Bank policies.] NO,, emissions will not meet current World Bank Guidelines because these guidelines were not formulated for anthracite coals. Task Manager: Elaine Sun Sector Manager: YoshhikoSu  Page 21 ANNEX I ANNEX 1: PROJECT DESIGN SUMMARY Narrative Summary Key Performance Indicators Monitoring and Critical Assumptions Evaluation Sector-related CAS Goal: I. Reduction in value of lost production due to Hunan Provincial Govern- (Goal to Bank Mission) Economic development by power rationing in Hunan Province (billion ment statistics. reducing infrastructure yuan) bottlenecks 1996 2000 2002 2004 2.3 5.7 1.5 1.5 2. Increased value of production attributed to increased power supply (Leiyang power plant) 2002 2003 2004 2005 3.6 12.4 18.0 19.5 Project Development Objective: I. Availability of Leiyang Units Monitoring and Supervi- * Other barriers to growth Remedy of power shortages by 2002 2003 2004 2005 sion removed providing efficient, reliable and Unit 1 78% 83% 85% 88% * Lower voltage level are environmentally sound power Unit 2 78% 83% 86% optimally developed to ensure supply 2. Improved reliability of transmission network reliable supply to end users (faults/100 km/year on 220 kV system) * Units on the system expansion 1996 2000 2001 2002 2004 plan put into operation on 0.99 0.8 0.76 0.73 0.7 schedule 3. Reduction in load shedding 1996 2000 2001 2002 2004 19,239 25,000 650 580 520 4. Improved fuel efficiency (coal consumption: g/kWh) 1996 2000 2001 2002 2004 434 388 386 383 380 5. Reduction in overall specific emission rates for air pollutants (coal-fired plants: gms/kWh) 1996 2000 2001 2002 2004 SO2 5.27 4.74 4.27 4.00 3.64 NO, 5.37 5.21 5.16 5.06 4.95 TSP 9.18 9.16 8.50 7.06 5.32 Outputs: (Outputs to Objective) * 2x300 MW thermal genera- two 300 MW thermal generation units Site inspection and com- * Construction of Leiyang tion units constructed and constructed by December 2002, missioning documentation power plant on schedule operational * Good quality of equipment for Leiyang plant * Reinforcement of transmis- * 794 km of 220 kV transmission lines con- * Both Leiyang plant and trans- sion system completed and structed to reinforce the network, including mission system maintained operational connection of Leiyang and Changsha units to and operated in accordance the grid, by December 2002 with good industry practice * 9 new 220 kV substations constructed with a . Coal quality maintained as total transformer capacity of 1,680 MVA by designed 2002 and extension of 2 existing substations * BOT Changsha plant put in completed with added capacity of 240 MVA operation on schedule by 2002 * Timely retirement of the aging, inefficient, and pollut- . Retirement of small, aging, . Retirement of about 10 (300 MW) old units Monitoring and supervi- ing units inefficient, and polluting by 2003 sion * Continued commitment to power plants 1998 2000 2002 2003 power sector reform of rele- 4x25 4x25 Ix50 IxS0 vant government agencies and power entities * HEPC's reform plan * Separation of all generation units from Monitoring and supervi- implemented transmission and distribution by December sion of TA and policy 2000 dialogue * HEPC converted into a limited liability company engaged in transmission, distribution and dispatching by December 2000 * Formal incorporation of Leiyang Power Generation Plant by December 1999 * Formal signing of PPA between Leiyang and restructured HEPC by December 2000 * Implementation of efficient wholesale generation tariffs by March 2001 * Financial management system * Financial management systems designed, upgraded and operational automated, implemented and staff trained in use by 2001 * Training program * 407 staff trained and skill upgraded uimplemented  Page 22 ANNEX 2 ANNEX 2: PROJECT DESCRIPTION PROJECT COMPONENT 1 Leiyang Thermal Power Plant-US$463.37 million (excluding IDC) The component is the expansion of the existing Leiyang thermal power plant, located on the bank of Leishui River and at the Baisha coal mines area, about 3 km south of Leiyang city. The plant is being developed in two phases. When completed it will have a total installed capacity of 1,000 MW. The layout provides possibility for further expansion in the future. The Phase I , consisting of two generating units of 200 MW each, became operational in 1988-89. The Phase II development of 2x300 MW is proposed to be financed by the Bank loan under the proposed project. The target dates for the commercial operation will be June 30, 2002 for the first unit and December 31, 2002 for the second unit. The feasibility study and the conceptual design for the project component have been completed by the Hunan Provincial Electric Power Design Institute (HPEPDI), in April 1997 and September 1997 respectively, and reviewed by the Central Electric Power Planning and Design Institute of the Ministry of Electric Power. The plant is located near the major load centers of Hengyang, Zhuzhou and Changsha, which have experienced acute power shortages. It is also situated close to the coal mine areas, reducing both transmission and fuel transportation costs. The infrastructure such as site development, access roads, housing complex, construction facilities, has already been completed in Phase I. Coal transportation facilities, coal handling equipment and circulation water pump house have all been constructed in Phase I. The adjacent mines already supply coal to the First Phase development. The greenfield site for the Second Phase Development has been leveled and the geological condition is favorable. The plant will supply a major part of the power requirements for south Hunan. Coal Supply. The second phase development is designed to bum entirely local anthracites containing of about 24.9 percent ash, 8.1 percent of moisture, 6.2 percent of volatile matter and 0.3 percent of sulfur, and with a heating value of 5,070 kcal/kg and a grindability index of 68 (HGI scale). It is estimated that about 1.53 million tons of anthracite will be consumed annually by the two units of the Phase II development. The anthracite coal will be sourced from the Baisha, Jiahe and Xifengdu three mines, which are adjacent to the plant. A total of 1.67 million tons of coal is available from these three coal mines per year for the project. The coal will be transported from the mines by train to the plant. The existing railway system is capable of delivering about 2.7 million tons of coal per year to the plant for both first and second phase development. Boiler. The local anthracites are dense and homogeneous coals with a relatively higher heating value. However, these coals are difficult to ignite since they consist almost entirely of fixed carbon with the very low volatile matter. The options for burning this kind of coal are limited to circulating fluid bed (CFB) combustion technology furnaces and pulverized coal combustion using a special furnace design known as arch-fired combustion system (downshot furnace). A key parameter to successfully burning anthracite is a furnace design that provides 3 to 4 seconds of residence time for the char particle in a high-temperature combustion zone. Both CFB and arch-firing designs provide the residence time required. Because of the limited operating experience with large capacity CFB steam generating units, CFB combustion technology is not recommended for this project. The selected boiler design is an arch- firing furnace, subcritical, single reheat, balanced draft, and outdoor. The boilers are rated at 284.7 kg/s continuous output at a superheater outlet pressure of 183 Bars and 540