China - Second Xiaolangdi Multipurpose (Stage II) Project

Document of The World Bank Report No: 29173 IMPLEMENTATION COMPLETION REPORT (SCL-42000 SCL-42001) ON A LOAN IN THE AMOUNT OF US$430 MILLION EQUIVALENT TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE XIAOLANGDI MULTIPURPOSE PROJECT: STAGE II June 28, 2004 Rural Development and Natural Resources Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective January 2004) Currency Unit = Yuan (Y) Yuan 1.00 = US$ 0.12107 US$ 1.00 = Y 8.26 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AS - Antiepidemic Station BCM - Billion Cubic Meters CAS - Country Assistance Strategy CCPN - Central China Power Network CPLG - Central Project Leading Group CUM - Cubic Meter CUMEC - Cubic Meter per Second DRB - Disputes Review Board DSP - Dam Safety Panel EIA - Environmental Impact Assessment EMO - Environmental Management Office EMP - Environmental Management Plan EPMs - Environmental Protection Measures EPP - Emergency Preparedness Plan GOC - Government of China GWh - Gigawatt hours ICB - International Competitive Bidding IDA - International Development Association LRM - Lower Reach Model MCM - Million Cubic Meters MWR - Ministry of Water Resources NCB - National Competitive Bidding NCPN - North China Power Network NCHEI - North China Hydroelectric Institute PAB - Provincial Audit Bureau PAD - Project Appraisal Document POE - The International Panel of Experts on Environment and Resettlement PRO - Provincial Resettlement Office QAG - Quality Assurance Group RPDI - Reconnaissance Planning and Design Institute SAA - State Audit Administration SBD - Standard Bidding Document SEPA - State Environment Protection Administration SOE - Statement of Expenditures WRPI - Water Resources Protection Institute XECC - Xiaolangdi Engineering Consulting Company  XLD - Xiaolangdi Project YRCC - Yellow River Conservancy Commission YRCCRO - Yellow River Conservancy Commission Resettlement Office YRCHU - Yellow River Central Hospital Unit YRWHDC - Yellow River Water and Hydropower Development Corporation YRWHIDCRO - YRWHDC Resettlement Office Vice President: Jemal-ud-din Kasum Country Director: Yukon Huang Sector Director: Mark D. Wilson Task Team Leader: Xiaokai Li  CHINA XIAOLANGDI MULTIPURPOSE PROJECT: STAGE II CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 20 6. Sustainability 23 7. Bank and Borrower Performance 25 8. Lessons Learned 26 9. Partner Comments 28 10. Additional Information 38 Annex 1. Key Performance Indicators/Log Frame Matrix 45 Annex 2. Project Costs and Financing 47 Annex 3. Economic Costs and Benefits 49 Annex 4. Bank Inputs 51 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 53 Annex 6. Ratings of Bank and Borrower Performance 54 Annex 7. List of Supporting Documents 55 Annex 8 . Compliance with Loan Covenants 58 Annex 9 . Operation and Maintenance Plan and Emergency Preparedness Plan Summary 59 Annex 10. Loan Allocation and Disbursements 64  Project ID: P034081 Project Name: CN - XIAOLANGDI MULTI. II Team Leader: Xiaokai Li TL Unit: SASRD ICR Type: Core ICR Report Date: June 28, 2004 1. Project Data Name: CN - XIAOLANGDI MULTI. II L/C/TF Number: SCL-42000; SCL-42001 Country/Department: CHINA Region: East Asia and Pacific Region Sector/subsector: Power (98%); Central government administration (2%) Theme: Other urban development (P); Rural services and infrastructure (P); Water resource management (P) KEY DATES Original Revised/Actual PCD: 02/28/1997 Effective: 10/31/1997 01/12/1998 Appraisal: 02/28/1997 MTR: 07/31/1999 06/11/2002 Approval: 06/24/1997 Closing: 12/31/2003 12/31/2003 Borrower/Implementing Agency: PRC/YELLOW RIVER COMM. Other Partners: STAFF Current At Appraisal Vice President: Jemal-ud-din Kassum Jean-Michel Severino Country Director: Yukon Huang Yukon Huang Sector Director: Mark D. Wilson Geoffrey Fox Team Leader at ICR: Xiaokai Li Daniel Gunaratnam ICR Primary Author: Daniel Gunaratnam 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: HS Sustainability: HL Institutional Development Impact: SU Bank Performance: S Borrower Performance: HS QAG (if available) ICR Quality at Entry: HS HS Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The objectives of the project were: A. to provide flood protection for 103 million people in the North China Plain in rural areas, B. to control sediment accretion in the lower reach of the Yellow River for a period of about 20 years; C. supply water to several large and medium cities and major industrial centers, cities and industries; D. to supply irrigation water (and increase the reliability of irrigation) for some 2 million hectares and ensure more stable water supplies for downstream and E. to generate much needed hydropower to meet the peak power requirements in the Henan Grid. 3.2 Revised Objective: The above objectives remained relevant through out the entire project. 3.3 Original Components: The total Xiaolangdi multipurpose investment was supported by the Bank in two project stages. This report is concerned with the second stage project. (Stage I Project 12329-CHA). In considering the implementation completion of this stage II project, it is logical to consider as appropriate, both stages together, because the civil works and all other major contracts continued and were financed across both stages. Therefore, the objectives for both stages remained primarily the same. Project Component 1--Dam and Appurtenant Structures and Hydropower Plant, including hydropower plant (turbine and generators), administration, engineering and consultants. The main features of this component were: l construction of Xiaolangdi rock-fill dam, 154 m high, with a crest length of 1,370 m; l construction of a common intake structure, feeding nine large diameter tunnels and surface spillway for river diversion, flood handling and sediment management, discharging into a common plunge pool; and l construction of a power station with six associated power tunnels with turbine and generators with an installed capacity of 1,800 MW (6 x 300 MW) and associated switchyards, and transformers. This component contained the major investment under the project and supported all five project objectives (A-E) above. This component was completed well ahead of schedule and the quality of construction was excellent and is therefore rated highly satisfactory Project Component 2--Training for Operation. The main emphasis of this component was to complete the training on construction management commenced under the previous stage 1 project and proceeded more intensified training for the post construction, management and operation skills required by YRWHDC. The main objectives of this component were: l to enable YRWHDC to function as a autonomous body in the efficient development and operation of water and hydropower projects, and be capable of exploiting opportunities expected to arise from the current wave of enterprise reform in China; and l to staff YRWHDC with appropriately skilled personnel, capable of handling the planning, general management, and financial management in order to run YRWHDC as a proper business enterprise. This component supported component 1 and contributed heavily to the sustainability of the project. This component was fully completed ahead of schedule and has therefore been rated highly satisfactory. Project Component 3--Environmental Management Plan Implementation. A salient feature of the environment protection program in the stage 1 project was the implementation of an Environment Management Plan. The Plan included the setting up of an Environmental Management Office (EMO) - 2 -  which, had the lead and coordinating responsibility for implementing all needed environmental protection measures including: l Management of continuing periodic monitoring for assessing the actual impact of the project; l Planning and implementation of the needed correction measures identified through the monitoring program; l Preparation of routine periodic reports (and special reports, when needed) for distribution to concerned Government agencies and to the Bank; and l Long-term monitoring of the downstream river hydrology and sediment flows and deposition. The stage II project continued the detailed monitoring through the EMO to ensure the environmental management plan was implemented. There were five new areas of monitoring introduced: l Construction Site Monitoring. l Public Health. l Seismic Monitoring l Downstream catchment hydrology, sedimentation , etc l Special Studies and monitoring This component supported project sustainability, addressed one of the Bank's key safeguards areas and added to the overall quality of completed works under component 1. It was completed ahead of schedule and was very thoroughly performed and is being adopted as a model for other projects and is rated highly satisfactory Project Component 4--Flood and Sediment Forecasting and Water Dispatching System. The objective of this component was to upgrade the old flood management system to a modern integrated MIS for flood, drought, sediment and ice flow management and at the same time to establish modern institutional arrangements consistent with this integrated water resource management approach. Institutional reforms redefined the roles of the existing institutions of the YRCC for (a) data collection; (b) data base development and management; (c) model building and operation; and operation of decision support systems. The component also included the upgrading of existing facilities, computer networks, and communications systems. The component was supported by both international and national technical assistance for MIS design, modelling, training etc. This component supported the 4 objectives A-D. The outcomes and impact go well beyond those documented in the PAD and is therefore rated highly satisfactory. Project Component 5--Water Institutional Reform. This component consisted of reforming the water institutions to ensure that water management of the lower reach of the Yellow River is sustainable. In particular, there was a separation of the primary regulatory and operational functions and rationalization and amalgamation of both the existing functional responsibilities and the many existing institutions with responsibilities for managing the lower Yellow River. The important issues of water pricing across sectors and services, cost recovery and regulation were also address. This component supported project sustainability and was successfully completed for the lower reach with a new management structure operating on a business basis and is therefore rated satisfactory. The outcomes were the establishment of a new agency to coordinate the Lower Yellow water distribution operations covering two of the largest provinces in China (Henan and Shandong with over 200 million people) and the successful agreement on water tariff reforms, involving the interplay of several government agencies and institutions, both at GOC and provincial level. - 3 -  3.4 Revised Components: The components of this project were not revised in the course of implementation. 3.5 Quality at Entry: 1. The Quality at Entry was independently assessed and rated by the Bank's Quality Assurance Group (QAG) in 1997/1998 as highly satisfactory. The relevance of the objectives and matching of components in support these objectives is considered to be an important part of the quality at entry. The project objectives were consistent with GOC strategy, policy and priorities relating to flood control and management and water shortages for urban and irrigation. Therefore, the flood control objective of the project, including the requirements for sediment control to stabilize the lower reach of the River and to improve the environment and the safety of the river was the main feature of the project. The other objectives relating to water supply and irrigation stabilization were seen as very important priorities, as part of project. The generation of hydropower was an integral part of the multipurpose nature of the project. The project was consistent with the Bank's Country Assistance Strategy (CAS), which emphasized support to environmentally responsible infrastructure development and is consistent with the Country Water Resources Assistance Strategy which emphasizes a combination of infrastructure development and institutional reforms for better water resource management. In addition, and to ensure sustainable utilization of water resources, the Government, in October 2002 issued the new national Water Law and a series of other laws/regulations that provided a legal and policy basis for the sustainable management by water management agencies and water projects. These clearly define the responsibility, duty, function and role of water management agencies and provide specific measures for the long-term development of such agencies. 2. The components were geared to achieving the objectives and all the objectives were component-supported. YRWHDC had adequate capacity as the implementing agency. It had built up its administrative capacity for physical implementation through appointment of managerial staff with successful experiences in the XLD Stage I project. Relevant lessons learned during the stage I project were applied in the stage II project design, procurement and through continuity of experienced staffing, supplemented by the hiring of experienced staff and consultants. The financial management capacity of YRWHDC had been built up during the stage I project and was operating at an adequate level for stage II. The project management arrangements set up under stage I, comprising a corporatized enterprise (YRWHDC) rather than as a government agency where already in place and functioning at a high level. 3. A feature of the design of the physical components was the support provided by timely and adequate technical studies. World-class experience was tapped through a Special Panel of Consultants throughout the design and construction process. As a result the designs were technically sound and met all applicable safeguard policies and contributed to the quality at entry assessment. The economic and financial analysis was established using river basin optimization models, which used a full 70 years series of hydrologic sequences and gave a detailed picture of the possible risks under different hydrology. The project preparation also anticipated the need for a Disputes Review Board (DRB) to resolve any disputes that arose between the international contractors and the owner. This DRB, consisted of consultants funded by the credit, proved to be very effective in dealing with complex contract variations and claims over the course of civil construction. 4. The design of the project addressed the Bank's safeguard polices for Dam Safety and the Environment. A international panel of Dam safety experts (DSP) was established to oversee the design and construction activities. The environmental analyses properly assessed adverse impacts and formed the basis of a well-defined Environment Management Plan (EMPs). Based on the experience and outputs of - 4 -  the stage I project, the Environmental Impact Assessment (EIA) was revised and upgraded and presented to the Bank's Board. The recommendation in the EIA and PAD to split the Environmental Management Office (EMO) into two functional areas, one for the Multipurpose Dam Project and the other for the Resettlement Project, which proved to be most effective. Public participation mechanisms before major decisions on environmental and resettlement issues were made, worked satisfactory. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project achieved or exceeded all the objectives before the loan was closed in December, 2003. Most of the components were completed 12-15 months ahead of schedule. Therefore, the overall outcome is rated highly satisfactory. The main objectives of the project and achievements under each of the main components are presented below: Objective A: Introduce flood control in the lower reaches of the Yellow River Basin to protect major infrastructure and 103 million people. Achievements: Starting from year 2000, the flood protection level downstream of Xiaolangdi Dam had been increased to 1:1000. The downstream ice flood hazards are eliminated. All the common floods, in particular those very frequent floods that could inundate the vast flood plains where over 1.3 million people live, are brought under control avoiding the enormous possible flood damage of the past. As an illustration prior to the completion of the dam, the 1996 flood event caused the following: (a) 251,000 ha of land (including 200,000ha farmland) was inundated; (b) 2.4 million people affected with 800,000 people entrapped; (c) estimated economic losses of Y6.46 billion. Starting from 2000 this type of damage has been avoided with the completion of the Xiaolangdi Dam. The dam is now capable of regulating the flows of the Yellow River during the flood and dry seasons. The flood forecasting system has been significantly enhanced and institutions are now in place to undertake flood forecasting. The reservoir is capable of completely reducing flood losses downstream between Huayuankou (Henan) and Lijin (Shangdong), and between Lijin and the estuary to a lesser extent. The reservoir is also capable of regulating flows so that ice floods can be completely avoided. During the 2000 winter, ice appeared on the piers in the river in Shandong, but there was no freezing of the river because adequate flow was released from the reservoir to prevent it from happening. Objective B. Sediment Control for Downstream River Channel Siltation. Achievements: By end August 2003, a total of some 1 BCM of silt (see figure 1 below), about 14% of the storage reserved for sediment deposit (7.55 BCM), has been trapped in Xiaolangdi reservoir preventing siltation of downstream river course. In addition, an in-situ sediment-flushing test was conducted centered at Xiaolangdi July 4-15, 2002, resulting in erosion of the downstream river course with some 36.2 million tons of silt flushed into the sea. A total of 1.036 BCM of silt has been prevented from deposition in the downstream channel of the river. This level of silt control in the 3 years of operation clearly demonstrates that silt control by the dam is working very well. Silt control is extremely important because the river flow capacity has decreased from 22,000 cumecs in 1958 to 7,000 cumecs in 1996 at Huayuankou. The riverbed has been aggrading during this period and has lost 65 percent of its flow capacity. With the Xiaolangdi dam it will be possible to recover some of these losses in capacity in the river channel because the dam will release water to flush out the silt from time to time and also prevent further aggregation of silt in the channel. - 5 -  Figure 1 Sediment Trapped in Reservoir 2000-2003 1200 1000 Resevoir 800 in 600 Trapped Tons 400 Million 200 0 May-97 Sep-97 Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Objective C: Supply Water to several large cities and stabilize water for 2 million ha of irrigation. Accomplishments: Since early 2000, Xiaolangdi Project has played a critical role in increasing the water supply for each user sector in the downstream areas. The downstream provinces are now able to be supplied with regulated water for urban and irrigation use when they most need it. In 2000 there was a significant drought (1/ 200 year) in the downstream areas and it affected all the North China Plain, covering some 300 million people of whom 50-70 million are urban residents. The only source of water was from Xiaolangdi Reservoir and the Government realized the strategic importance of using the reservoir to supply municipal and industrial water under severe drought, and consequently it has become the main objective of the project in the dry season above generating hydropower. Some 800 MCM of water were released from the reservoir in 2000 to supply key cities such as Tianjin to meet current demands. Table 1 for the incremental total and M& I water supplied with project. Table 1 PAD ICR Analysis Of Water Supplied ICR Municipal and Industrial Water Supply 2020 (BCM/Yr) without Proj with Project Henan Shandong Total Henan Shandong Total Incremental Supply AVE 2.48 2.74 5.22 2.66 2.78 5.44 0.22 MAX 3.00 2.82 5.82 3.00 3.00 6.00 0.18 MIN 2.25 1.70 3.95 2.25 2.47 4.72 0.77 ICR Agriculture Water Supplied AVE 2.33 3.22 5.55 1.91 5.27 7.18 1.63 MAX 6.98 10.43 16.56 8.11 12.87 20.98 4.42 MIN 0.53 3.05 3.58 0.09 5.06 5.15 1.57 ICR Total Water Supplied AVE 4.81 5.959 10.768 4.57 8.06 12.62 1.86 MAX 9.975 13.244 22.377 11.11 15.86 26.97 4.60 MIN 2.784 4.742 7.526 2.341 7.525 9.866 2.34 PAD Municipal and Industrial Water Supply 2020 (BCM/Yr) AVE N/A N/A 4.67 N/A N/A 4.78 0.11 PAD Agriculture Water Supplied AVE 4.39 8.79 13.18 4.78 8.95 13.73 0.55 It can be observed that, with the project, an average of 220 MCM increment of M & I water per annum can be made available to cities and in a dry year up to 770 MCM will be made available. - 6 -  Objective D: Supply Irrigation Water to stabilize some 2 million ha irrigation. Achievements: For agriculture, an average of increment of 1.63 BCM/year will be made available. This will help stabilize the irrigation water supply for some 2.0 million ha. For the 75% probability hydrologic sequence for which all the irrigation schemes are designed, a total of 2.4 BCM (see figure 2) is made available for irrigation. This would give 1200 cum/ha of additional water, which is crucial for stabilizing and increasing agricultural yields. (e.g. Wheat by as much as 1.0 tons/ha). Figure 2 Additional water supplied with Project 7 6 BCM/Yr 5 in 4 water 3 2 1 Additional 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative Probability % The analysis based on the 90-year hydrologic record simulation shows that the incremental water supply and grain production will increase grain production by 2.4 million tons per year respectively (see Figure 2 and 3 ). Figure 3 Incremental Grain Production 3.5 3 2.5 MT/yr 2 1.5 Million 1 0.5 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative Probability - 7 -  The efficiency of water use also increases because of better regulation from the reservoir. Water is supplied at the time when plants need water. Figure 3a shows that for 1 kg of grain production, an average of 5-6 % less water is used. Analysis shows that without the project, water use is 1.7 cum per 1 kg of grain production. With the project the water use is 1.6 cum per kg of grain production. Figure 3a. Grain Production Efficiency with and without Project 2.1 1.9 1.7 water 1.5 With project 1.3 without project 1.1 Kg/cum0.9 0.7 0% 20% 40% 60% 80% 100% Cumulative Probability Objective E: Power Generation to supply peak power to the Henan Grid. Achievements: Power generation facilities were commissioned in January 2000, ahead of schedule. However, due to the prevailing serious drought conditions (1:200 year), the high priority given to urban water supply, power production was at a much lower level (30 percent) of power production for the first year and for the three years subsequently. Yellow River flows showed a consistent decline from 1990 to 2000. Figure 4 shows a significant decline of 30% in measured and natural flows due to a long-term drought in the 1990's. After 2003 the flows have picked up and are more normal because of a large flood in the Wei River in 2003. - 8 -  Figure 4 River Fows Upstream at Sanmenxia (1980-2000) 800.0 700.0 600.0 cum 500.0 400.0 million 300.0 100200.0 100.0 0.0 1980 1983 1986 1989 1992 1995 1998 Natural Measured It is expected that in normal years much more water will flow in the Yellow River such as in 2003/2004 and power production will increase to almost the appraisal levels of power production (see Table 2). Table 2 ICR and PAD Power Generation Total PAD 90% PAD Power % of PAD Income Prob Average % of Pad Year Generation note for Average ( million GWH GWH 90% Prob ( GWH) Condition Yuan) Energy Energy 2000 613 175 actual 1651 2275 37% 27% 2001 2109 566 actual 2257 3679 93% 57% 2002 3272 910 actual 2282 4231 143% 77% 2003 3690 1021 actual 2812 5115 131% 72% 2004 4982 1365 projection 3218 5115 155% 97% The table shows that power production is consistent with production when probability of flow is 90% exceedance flow (see Annex 4 Table A4.3 of the PAD). Other Achievements: The dam started to regulate water flows in 2000 and managed to keep water flowing in the lower reaches with no days when the river dried up. In contrast the river dried up for up to 180 days in 1990. The continuous flow of the Yellow River will have significant impact on the estuarial ecology. For the first time for many centuries the water below Xiaolangdi is clear and silt free. This will significantly reduce the cost of water treatment for urban and agricultural use. It will also enhance freshwater ecology in the river since most freshwater fish cannot normally survive in highly silted water. - 9 -  4.2 Outputs by components: All components were successful completed as defined and outputs often exceeded the expectations in the PAD. Output: Dam, Inlet and Outlet Works, Power station (turbines and generators) including administration, engineering and consultants (see photographs in Other Information) Dam, Inlet and Outlet Works. All these works were completed ahead of schedule and to very good quality of construction standards. The preliminary work involved the construction of the main access roads, pilot tunnels for the diversion, and resettlement of the dam site resettlers. All these works were undertaken by local contractors and were completed in June 1994 before the international contractors undertook the major civil works for the dam, inlet and outlet works and the power station. The resettlement of 10,000 resettlers was also completed prior to the start of the major contracts. Resettlers at the dam site were resettled in 15 new villages and the work was professionally done. The major works on the dam, inlet and outlet construction and hydropower plant started in July 1994 by international contractors and despite some delay due to poor geological conditions in the tunnels, all works were completed 12-15 months ahead of schedule in 2001. The interim completion dates for the diversion of the river in November 1997 were also maintained by the inlet and outlet works contractor. The quality of works were exceptionally good as remarked by many senior international and Chinese experts. The Dam Safety Panel (DSP) of experts was established in June 1994 with 8 international experts. The aim of this panel was to review specific design and construction issues and to ensure that implementation of the project was of the highest possible standards, using the most appropriate and up-to-date techniques. The panel had nine meetings throughout the project design and construction phases. In the panel's 9th report they commented on the completed works. Essentially they indicated that the dam construction quality was satisfactory and built to a high standard; the slope in the intake and outlet were safe; the underground works quality was satisfactory. Overall rating of this set of outputs is highly satisfactory. Turbine and gates , generator and switchyard supply and installation . The turbines (6x 300 MW Francis Type), and some high voltage cabling were supplied by international suppliers and all other parts (generators (6x 330 MVA), switchyards) were all supplied by local suppliers. The turbines were funded by export credit by USEXIM Bank. All the works as part of this component were completed by December 1999 for the first turbine to go into operation. The other five units went into operation by December 2001. For the last 3 years the operation of the turbines, gates and generators have been very satisfactory. Generation of power has been limited by the lack of water as stated above because of a prolong drought in the Yellow River. Overall these activities are rated highly satisfactory. Administration, Engineering and Consulting Services. The administration of the project was performed by the owner Yellow River Water Hydropower Development Corporation (YRWHDC). The Engineer for the project was Xiaolangdi Engineering Consulting Company (XECC). The Reconnaissance, Planning and Design Institute (RPDI) of YRCC was the designer. Throughout the project design and implementation, YRWHDC used the services of international consulting firms to assist XECC and RPDI in design, construction management, contract administration and quality assurance. About 1200 person-months of consulting services were contracted for the Project. All these services were financed through the Bank's loan. This TA performed satisfactorily throughout and made a major contribution to efficient project management. - 10 -  The same TA services were also retained for this stage II Project and an agreement was signed in January 1998. The services covered: (i) the core advisory group providing general support and consultation on contractual matters; (ii) the DRB; (iii) specialists in civil, underground, mechanical and electrical engineering; (iv) establishment of a cost control system; and (v) start-up coordination during the commissioning stage. Since major problems were encountered with claims from the main contractor (change of ground conditions), a specialist claims management consultant was also hired. International consultants carried out training. YRWHDC also employed several local experts to review issues as they arose. Some 288 experts met on 27 separate occasions to review and discuss different technical issues. Input of consultants and the competence level of staffing are considered to be appropriate. This component is rated as highly satisfactory because of the high quality of works and there was a saving of time of 12-15 month to implement the project and there was also costs savings. Output: Training for Operation Training was an important aspect for the Project. As planned, training for YRWHDC staff during the period of 1997 to 2002 was implemented in two phases. Local training was undertaken by the international consultants for construction supervision, which included such topics as inspection of works, quality control, and construction scheduling using computer aided software, claims management, project management information systems. Some 100 staff was also trained in financial management. Specialized training of 107 staff was done overseas in the United States, Switzerland, France, Italy, Germany, England and Hong Kong SAR. Phase 1. During the 1997-1998 period, most of the training was focused on the overall qualities and financial management skills of senior and middle-level managers, as well as on the training of power operation staff. In addition, more efforts for international project management and technology, training in the field of foreign languages, driving skills, business administration, project operation management and power plant O&M was arranged, including 440 person-months intensified training, 90 person-months counterpart professional training, and 81 person-months overseas training on financial management, project management and information management. Phase 2. The main emphasis in the second phase from 1999 to 2000 was on institution administration, project management, project supervision, and document processing, with continued efforts devoted to the training on project operation and power plant O&M. This part of training included 329 person-months local training, 110 person-months counterpart professional training, and 145 person-months overseas training, study tour and technical exchange in the field of turbine, human resources administration, reservoir and water resources management. Although in retrospect some of the courses should have had a longer duration, it is considered that considerable training was done during the Project and that it had a significant impact on improving the capabilities of the staff. Overall this component is rated as Satisfactory. Output: Environmental Protection Measures Environmental Impacts and Environmental Protection Measures. As described in the Environmental Impact Assessment (EIA) , the major adverse impacts due to the project included resettlement of some 200,000 people, risks due to reservoir-induced earthquake, and impact on cultural relics and potentials of public health disasters. Corresponding environmental protection measures (EPMs) were developed in the - 11 -  EIA to compensate, mitigate or minimize the impacts. The EPM are internalized as part of the construction contract. All these EPMs have been implemented during project implementation as described below (see chart of organization in Other Information). Resettlement. The implementation of EPMs for resettlement program was carried out separately by Environmental Management Office for Resettlement (EMO/RS) in a separate IDA project: Xiaolangdi Resettlement Project (P003644). By the end of 2003, a total of 172,487 people have been successfully relocated. Detailed discussions on this activity are covered in the ICR for the Xiaolangdi Resettlement Project. (Report No. 29174-CN) Dam Safety. All dam safety measures including establishment of a panel of experts, set-up of earthquake monitoring network, all earthquake resistance design measures have been implemented and all are working effectively. In addition a dam safety program, including an Emergency Preparedness Plan (EPP) has been prepared to ensure safe operation of the dam and that in event of any emergency. (See Annex 9 for details) Cultural Relics. This activity was closely managed by the EMO. Excavation and preservation of cultural relics sites was carried out by Henan and Shanxi Provincial Archaeological Bureaus in accordance with the program plan with a budget of some Y 30 million. The program for excavation and preservation of identified relics below EL275 has been completed as planned. Two summary reports (books) have been prepared and published separately in book form by Henan and Shanxi provincial archaeological bureaus in 2000. Public Health. Effective measures on public health, including provision of safe drinking water, food sanitation, medical screening, rat and mosquito control, and vaccination were continuously taken by all contractors and the project owner. Regular physical examinations were conducted for all workers at the construction sites. EPMs at Construction Sites Worker Safety. Surveillance of safety in construction areas was the responsibility of the XECC through the special Safety Department (SD/XECC). Each contractor had a corresponding safety division with responsibilities of safety management. All possible measures were taken to reduce working accidents. According to statistical safety report of YRWHDC, the number of accidental deaths was within the range of 0.5% [publications from FIDIC indicate statistical incidence of accidents in such types of projects], considering the total number of workers involved, near 10,000 at peak, and the duration, 6 years, in such a complicated project, with over 100 tunnels and a huge underground power house." Solid Waste Management. All solid waste, including production waste such as construction spoils and wastes from camps was collected and transferred to designated disposal sites. Water Pollution Control. All wastewater discharged from all the project construction areas and camp areas basically met the standards and continuous monitoring results have showed that the impact of the waste water discharge on the Yellow River water quality was negligible. Dust and Noise Control. Responsibilities for dust control in all construction areas and roads was assigned to different contractors and the project owner. Regular road watering was conducted by contractors and the owner (YRWHDC) on their responsible roads. Noise due to construction was monitored and controlled at an acceptable level. Measures were taken for those noise sources with impact - 12 -  on local residents. As an example, the Heqing Village School near the construction area was relocated due to noise impacts with fund provided by the corresponding contractor and YRWHDC. Environmental Monitoring A complete environmental monitoring system was established and functioned well for the duration of the project. Environmental monitoring tasks related to Xiaolangdi dam site such as water quality, public health, air quality, water pollution control were assigned to and carried out periodically by different monitoring institutes. Systematic and large amounts of monitoring data was generated and necessary actions taken during project implementation to resolve environmental issues identified by monitoring such as Heqing School relocation and use of wastewater treatment facilities by one of the principal contractors to name two. Comparison of Environmental Activities The following table shows a comparison between the environmental activities required in the project appraisal document and those actually implemented during project implementation. It is clear that all the activities required have been implemented with satisfactory results and some even with highly satisfactory results. A Comparison of PAD Requirements on Environmental Management and Implementation PAD Requirements Implementation Evaluation 1. Establishment of EMO Established from 1994 to now Satisfactory with Competent Staff 2. Employment of Employed from 1994 to now Highly International Panel of Experts Satisfactory 3. Environmental Protection 3.1 All measures planned have been Satisfactory Measures on implemented Highly 3.1 Dam Safety 3.2 Planned program has been completed Satisfactory 3.2 Cultural Relics 3.3 All measures taken with excellent Highly 3.3 Public Health results Satisfactory 4. Resettlement Some 200,000 people have been Highly successfully Satisfactory relocated (A separate IDA project) 5. Measures to Mitigate An effective environmental management Highly adverse impacts cause by system Satisfactory project construction established and been functioned well with minimized impacts 6. Timely EMP EMP implemented with project progress Satisfactory Implementation 7. Review of detailed action Yes Satisfactory plans by Panel and Bank 8. Ensure YRCC, Henan, Yes Satisfactory Shanxi participation Review Reports of Panel of Experts The International Panel of Experts on Environment and Resettlement (POE) was established in June 1994 under the stage I project and it continued for the duration of stage II. One of the objectives of the panel was to ensure implementation of the Environmental Management Plan and minimize adverse environmental impacts caused by the implementation of the project. By the end of March 2001, the panel was convened 12 times. Review of the panel reports indicates that the panel played a very important role in the whole process - 13 -  of environmental management in Xiaolangdi Project, especially on establishment, improvement, and effective function of the environmental management system mentioned above. Xiaolangdi experience has suggested that such a panel was necessary to ensure successful implementation of EMP especially for those large-scale projects with significant environmental management risk. Overall rating of this component is highly satisfactory. Output: Flood, Sediment, Ice and Drought Management According to the Government laws/regulations and MWR stipulations, flood, sediment, ice and drought management in the whole Yellow River basin (including Xiaolangdi reservoir area) is under the control of YRCC. Institutional reforms were initiated by YRCC in the course of project implementation. Organizations and their responsibilities for planning, allocation and management of water resources, including water supply, flood, sediment, and ice and drought management are summarized as follows: Chief Engineer's Office. Assist the chief engineer and the deputy chief engineer in performing the overall technical responsibility of YRCC; make arrangements for the study of the Yellow River management strategies and significant technical issues, undertake the "Digital Yellow River" project planning and construction management; and fulfill the routine duties of YRCC Commission of Science and Technology. Water Resources Management and Allocation Bureau. Organize investigation and assessment of basin-wide water resources, develop trans-province water distribution schemes, annual schedules and water resource allocation options for the purpose of unified water allocation; organize and/or steer justification of important water developments in the basin; organize the implementation of the water extraction permits as authorized; direct water saving activities in the basin; and publish basin-wide water resources communiques. Flood Control Office. Make arrangements for or take part in developing basin-wide flood control schemes and supervise the implementation thereof; perform flood/drought management of important water projects as required and authorized; direct and supervise the management and compensation of flood detention basins; and organize and direct the justification of important water projects in respect of flood control. Flood, Sediment, Ice and Drought Management Information System. As part of the Project an automatic water regime forecasting system consisting of data collecting subsystem, data transmission, data processing and flood forecasting subsystem was developed. This system comprises 54 precipitation stations, 11 hydrologic stations and 7 water level stations, with data automatically collected and then transmitted via ultra-short wave and satellite communication. There are 2 central stations, one in Zhengzhou and the other at Xiaolangdi, with PCs connected to satellite terminals and databases developed using Foxpro. This system was implemented by YRCC Hydrology Bureau in 1997 and completed in 2001 at a total cost of Y 13.37 million. At the same time, YRWHDC has invested Y 54 million and US$ 390,000 in hydrological and sediment survey since 1997, with a considerable amount of measuring equipment purchased for these purposes. The survey provides some baseline data for establishing the database of the Yellow River flood, sediment, and ice and drought management information system. This part of work was completed and taken over in early 2002. - 14 -  To improve sediment management, YRWHDC has also provided Y 41.72 million for YRCC to study the Xiaolangdi reservoir operation mode. This study was completed in 2001, with findings already applied to the recent water/sediment regulation tests. This provides a new solution to the problem of sediment in the Yellow River. In addition, YRCC is now developing the "Digital Yellow River", which, when completed, will qualitatively improve the flood, sediment, ice and drought information system of the whole middle and lower Yellow River reaches in respect of technology and management (see chart of the network in Other Information). Overall evaluation of this component is satisfactory. Output: Institutional Support to YRCC For the institutional support the YRCC which was the executing has undertaken two items: First, YRCC has set up a water dispatch office within YRCC, which monitors and collects charges at 90 points downstream. This water dispatch office coordinates with the YRCC's Henan and Shandong River Bureaus. For efficient distribution of water, the following is now being contracted with the lower reach water users: l Contracts are in process of being signed between YRCC's River Bureau's and the relevant Irrigation districts at each diversion point along the Lower Yellow River. Contracts will also be signed with all irrigation areas within the dikes. l The contracts will contain the timing and quantity of water to be delivered. It will be the responsibility of YRCC's River Bureaus to ensure that there is no siltation of the entrances to the diversion points. l Measuring devices with continuous recording instruments will be installed at each diversion point to ensure that water delivered will be accurately measured. l Communications by computer data connections will transmit the water data diverted each week to YRCC's headquarters for computation of charges. l Charges will be imposed on all water diverted from the river based on the following principles: a) All charges will be on a volumetric basis. Municipal and Industrial (M&I) water will be charged much higher rates than irrigation water; b) water charges will recover all operation and maintenance costs and capital costs allocated for irrigation and M&I; c)Charges will be based on the scarcity of water according to the seasons: dry-season water will be charged much higher than wet-season water; and discounts will be provided when water has very high silt content, and d) Penalties will be imposed for late payment by irrigation districts. Cost recovery would cover, among others, flood and sediment control. A system of rationing has been agreed between YRCC and the irrigation districts for water delivery during periods of drought. A monitoring system has been established to indicate water deliveries and charges collected on a real-time basis to measure efficiency of delivery( see chart of the procedures in Other Information). The implementation of this component has clearly had significant impact on the downstream flows and the availability of water. The lower reach up to 800km from the estuary was drying up. After the implementation, it was found that even under extreme drought conditions continuous minimum flows could be regulated through a rational dispatching arrangement. (see Figure 5). Overall assessment of this component is satisfactory. - 15 -  Figure 5. Drying up of Yellow River from Lijin (river mouth) 800 250 700 200 600 500 150 dry 400 Dry 100 days km 300 of No 200 50 100 0 0 -100 1972 1974 1975 1976 1978 1979 1980 1981 1982 1983 1987 1988 1989 1991 1992 1993 1994 1995 1996 1997 1998 2000 2001 2002 -50 Year km of river dry Days dry 4.3 Net Present Value/Economic rate of return: The economic benefits were determined based on the value added to agriculture, M & I water, Flood Control, Sediment Control and hydropower as described in the PAD. The basic analysis to evaluate the benefits for added values used a simulation program using a 70 year hydrologic series (1919-1989). The PAD analysis did not capture the 1990-2000 period when a major drought occurred and all the major benefits for irrigation and power production declined significantly. Incremental Production: Irrigation. Figure 6 shows that incremental production of grain increased to 1.84 million tons in 2000, but declined to 1.46 million tons. Since the water flows vary from year to year the variation showing the highs and lows is presented on the graph. The details of M & I water supplied is given in Table 1 above and is 0.22 BCM for an average year and 0.77 BCM for a dry year. However, the benefits are integrated over the whole probabilistic flow supply. For power the incremental power production follows the actual production from 2000-2004 from the table 2 and it levels off to 5800 Gwh forecasted after 2008. Detailed scenarios were looked at and 5800Gwh was the most likely production that could be sold to the Henan grid. - 16 -  Figure 6 Incremental Production of Grain with Project 2.50 2.00 Tons 1.50 Expon. (Average 1.00 52%) Million Expon. (98% Prob) 0.50 Expon. (33% 0.00 Probability) 1990 2000 2010 2020 2030 Incremental benefits. The net incremental benefits have been worked for the five sets of benefits streams using the simulation model also used for the PAD economic analysis: (a) flood control; (b) Sediment control; (c) Irrigation; (d) hydropower; and (e) municipal and industrial water. The incremental benefits are incremental production multiplied by the economic prices. The price methodology is similar to that used in the PAD, but updated. The prices used to develop the flood control is essentially the damage reduced with the project in areas between the dikes, detention basins and losses when the dikes breach. Sediment benefits were estimated based on the cost foregone in raising the dikes because the reservoir will radically reduce the sediment downstream of the dam. Irrigation benefits have been updated using economic farm gate prices for all outputs and inputs, including labor based on the latest border prices as proxy for economic prices. M & I water was valued conservatively based on present tariffs of water for M & I water of Y1.2/cum. Hydropower was valued on the present tariffs (equivalent to willingness to pay) from the Power Purchase Agreement of Y0.3/Kwh. Since peak power is valued the same as the base power the average tariff undervalues the hydropower. Based on this methodology the discounted benefits are as indicated in Table 4. Economic cash flow is presented in Annex 7. Table 4 Discounted benefits ICR PAD % of Total ICR/PAD Bil Y Bil Y Agriculture 9.87 12.089 30% 82% M & I 1.94 1.717 6% 113% Hydropower 6.17 16.536 19% 37% Flood Control 11.39 7.345 35% 155% Sediment 3.40 2.817 10% 121% Total 32.77 40.50 100% 81% - 17 -  Figures 7 PAD and ICR Project Benefits PAD Benefit Estimation ICR Benefits Sediment, 2.817, Sediment, 3.40, 7% 10% Agriculture, Agriculture, 9.87, Flood Control, 12.089, 30% 30% 7.345, 18% Flood Control, 11.39, 35% M & I, 1.717, 4% M & I, 1.94, 6% Hydropower, Hydropower, 6.17, 16.536, 41% 19% Based on Table 4 and Figure 7 it is clear that the benefit structure is similar, but hydropower share has declined (41% to 19%) because of the lower tariffs and lower generation rates due to lower flows. The tariffs declined from 0.52 fen/Kwh to 0.275 fen/Kwh. There was a surplus of power in China between 2000-2002 and it was impossible to negotiate higher rates. However, with the growth of China pushing upwards and the power sector reforms for a two part tariff it is expected that tariffs will not remain low for long. The share of flood control has increased (18%-35%) especially after a Y 6.5 billion damage in the downstream areas of the 1996 floods. Sediment benefits have also increased because of the constrictions in the channel due to sedimentation in the 1990's and these costs have been updated. The agriculture benefit declined because of lower flows (90-year series shows lower averages). M & I benefits essentially remain the same. Decline in benefits due to several factors is Y 8.73 billion or 21%. However, Y32.8 billion in benefits is still very large for the project Economic Costs. Economic cost includes the cost of the dam and all the associated structures and the cost of compensation for resettlement (proxy for benefits foregone). All interest and transfer payments were remove to obtain the economic costs. Resettlement cost have increased by about $200 million. The discounted costs are Y29.0 billion in 1997 which have increased from Y21.7 billion (33%), all due to resettlement cost increases. Economic Rate of Return Analysis: Detailed economic cash flow streams are shown in the Annex 3. The EIRR for the base case is 13.2%, which is down from 20.8% in the PAD because of the 21% decline in benefits and 33 % increase in costs. However, an ERR of 13.2% for such a large project is still considered to be good. Risk Analysis. Risk analysis was performed examining the effects of decline in agricultural prices, hydropower decline in generation or tariff rates or decline in M & I water rates and values. The EIRR shows that the project is robust and declines in prices or tariffs only cause a decline in EIRR of less than 1% (see table 6) despite 20% decline in the benefits. In addition to the economic benefits, the project delivers huge social benefits arising from the protection of more than a 100 million people from floods, enhanced security and water supply to 40 million people in urban areas, and enhanced stability and supply to some 25 million farmers. - 18 -  Table 6 Risk Analysis ICR PAD Base case 13.2% 20.8% -20% Agriculture value 13.0% 19.7% -20% in Power Price 12.6% n/a -20% in generation 12.6% 17.8% -20% in M& I valuation 13.1% n/a 4.4 Financial rate of return: Detailed financial analysis was performed for the YRWHDC. It can be observed that the financial covenants for the project have been met fully in terms of debt service coverage and current ratio, but the rate of return on revalued assets for power will be satisfied only in 2010 and that for the whole company by 2020. This essentially would mean that the Xiaolangdi Project, with water charge collection and subsidies for flood and sediment operation, can have funds to pay back the loan and meet its obligations for operation and maintenance. However, the Rate of Return on Assets of the entire project will not be met until 2020. The project is reasonably healthy since all such public utility projects with large flood control, irrigation and sediment control components in the UK and US only achieve rates of return of 2-4%. Table 7 shows essentially all the financial requirements as required by the Bank at appraisal have been satisfied. The analysis at ICR was based on the 2002 financial statement. The 2003 statement should have much higher power revenues and therefore should show a better financial situation. Table 7. Financial Ratio's for YRWHDC Year 2002 2005 2010 2015 2020 2021 Rate of Return(%) Net Revalued Fixed Assets 0.4 0.5 3.0 4.1 5.0 5.2 Bank Covenant 2.0 2.0 5.0 5.0 5.0 5.0 Rate of Return on Power(%) Return On Net Fixed Assets - Power 7.5 7.9 13.9 17.6 20.8 21.5 Bank Covenant 5 10 10.0 10 10 10 Current ratio Current Ratio 2.2 2.1 3.3 5.1 7.8 8.4 Bank Covenant 1 1 1.0 1 1 1 Debt Service Ratio Debt Service Coverage Ratio 1.4 1.1 2.7 6.8 29.7 30.2 Debt Service Coverage Ratio (considering DSRF) 1.4 1.5 3.6 8.8 38.1 38.7 Bank Covenant 1.3 1.3 1.6 1.6 1.6 1.6 4.5 Institutional development impact: The impact on institutional development is rated high. Under the total project (stages I and II), the Ministry of Water Resources, for the first time formed a corporate entity to manage the project and to ensure that the management entity had the right training so as to be financially self-sustaining into the future. Because of the strategic nature of the project, the YRWHDC is still under the supervisory control of YRCC for its strategic operations for floods and water supply to cities. However, YRWHDC is the first attempt to create - 19 -  a water resources entity, which will be essentially be financially autonomous for it's commercial undertakings (except for the flood and sediment control-considered public goods). YRWHDC is also paying back the World Bank Loans, including the IDA Credit for the resettlement project and also the other local and foreign loans. With the construction of the Qijiayuan re-regulating dam, the power production capability and supply more peak power to the Henan Grid should increase. The second most important institutional impact is the development of the institutional arrangement for water dispatching to the lower reach. No other major river basin has this type of dispatching system with solid contractual arrangement with water users in the two downstream provinces. This arrangement will also ensure that the that water is released for environmental purposes and the flow in the Yellow River will reach the estuary (see Figure 5). Thirdly, institutional rearrangements now ensure the integrated management of the water resources of the lower river, including the complex arrangements for flood, ice flood, sediment and drought forecasting and management will be undertaken properly. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Since many of the large contracts were with international contractors - German, French and Italians the exchange rate fluctuations which caused initial losses to the US$. In early 1995, the RMB Yuan depreciated by some 50% against the US$. In 1996-1997 the exchange rate of the DM versus the RMB Yuan was considerably increased. All these factors have largely increased the budget funds of Xiaolangdi Project at the time of budget adjustment in 1997. In the earlier stages of the Project the Employer had foreign exchange losses of up to US$30 million, but with the DM 2.0 = US$ 1.00 between 1998 and 2001, it subsequently recovered most of these losses. The final status is that $70 million dollars was cancelled from this loan because of the foreign exchange saving which occurred in the later part of the project 2000-2002. 5.2 Factors generally subject to government control: Strong commitment by the implementing agency MWR enabled the project to be completed on time with all interim dates of completion being kept. When problems resulted the MWR committed a Vice Minister to be in charge of the Corporation. Other factors: a) In 1993-1995, the yearly increase of commodity prices in the domestic market rose quickly 10-14%% due to inflation. This considerably increased some of the Project components cost. Most cost increases could have been prevented by Government by reducing the tariffs on imported goods so that imported goods could substitute for local goods, especially for some construction materials such as timber and steel. This would have prevented the price hikes. b) In the course of economic transformations, the Government made changes to some legislation in 1993 and promulgated some new laws such as Tax Law, Labor Law amongst others. All these new laws had a great impact on the contractors and gave rise to the contractors' claims and increased the Project costs components to some extent. 5.3 Factors generally subject to implementing agency control: Strong commitment by the implementing agency, YRWHDC, enabled the project to exceed PAD expectations in human resource development, project coordination, design and construction management, and cost control. - 20 -  The implementation of such a large project with all sorts of technical complexities was a real challenge. Changes in scope due to underground geological changes created problems. This was the first time that YRWHDC executed a major set of international contracts. The entire FIDIC conditions of contract was new. The need for the "Engineer" to be independent according to FIDIC conditions of contract was also new. So initial stage of the implementation the implementation agency was on a learning curve, which took about two years. In addition some of the international contractors were also new to such large contracts in China. After this initial stage things seem to settle down and work moved very rapidly and was completed 12-15 months ahead of schedule. In addition except for one major claim (changed of ground conditions), which dragged on for 2 years before being settled all other claims were expeditiously settled. The international consulting services working along side the Chinese staff greatly assisted not only the technical aspects of the project but also the contractual and claims aspects of the project implementation. The appointment of the Disputes Review Board (DRB) helped considerably to solve a lot of the claims issues. Training was key to success of the construction implementation. The stage I training (see section on training) which included contract management and claims management proved to be extremely useful. In early 1995, construction progress of Lot II was seriously delayed due to several tunnel collapses, which cast a shadow over the river diversion objective. One of the main reasons for the delay was that one Contractor failed to obtain qualified local techniques and labor. As recommended by the Employer, the Contractor agreed to introduce a new subcontractor and take active acceleration measures. Measures were set in place by the Employer and by the MWR, to ensure that the River Diversion interim completion date was achieved. YRWHDC's major effort resulted also in the completion of the inlet and outlet tunnels, plunge pool and spillway construction by September 2000, some 6 months ahead of schedule. The same applies to the civil works of the underground facilities (power house cavern, power tunnels, the main transformer chamber, the valve chamber, tailrace tunnels and outlet structures), which were completed in September 1999, 7 months ahead of schedule. Power conduits and penstocks were also completed in advance of the date required. During the implementation of the Project, many additional reinforcement measures were adopted in design for underground excavations and high slopes particularly for safety reasons and long-term stability. Whilst this did not affect the timing it nevertheless became design adjustments resulting in variations and hence in the increase of some of the Project components costs. 5.4 Costs and financing: In considering the costs and financing for the whole project covering both stage I and stage II, it is logical to consider both stages together because the civil works and all other major contracts continued and were financed across both stages. The total project appraisal cost, excluding interest during construction (IDC) was US$2855.8 million equivalent, of which $1307.2 million (46%) was foreign costs. The actual competed cost was US$2,688.8 million equivalent, of which US$843 million (31.3%) was foreign costs. The total savings in foreign cost ($464.2 million) came mainly from project investments because the government decided to finance many small items totalling US$121 million and another US$343 million saved in IDC because government directly funded all local costs, instead of borrowing from local banks. - 21 -  Overall cost savings, net of inflation originated from: (i) sharp local competitive bidding for mechanical and electric equipment , (ii) efficient contract and funds management, especially for foreign contract claims; (iii) a design that minimized change orders; and (iv) savings due to the devaluation of the Deuch Mark against the US dollar. Figure 8. Cost Comparison of Major Items 900 800 700 $ 600 500 Estimated 400 Actual Million300 200 100 0 1 2 3 Lot Lot Lot Electrical Mechanical Admin/Eng Since the loan financed the second stage of the total project, it is necessary to look at the total financing picture, including both stage 1 and stage 11 project loans and the role they played in the overall financing. All funds provided are shown in table below. Government resources from budget were Y15014 million; Local loan funds from China Development Bank and Construction Bank amounted, $2,723 million All the funds needed for the construction of Xiaolangdi Project were in place on time, which greatly assisted project implementation according to the planned schedule. The total available foreign funds were US$ 999 million of which Bank loan Stage I was $460 million and Stage II Loan of $430 million equivalent and export Credit and loan funds of $109 million. Funds used were, Y12.555 billion from the central government; Y2.523 billion from China Development Bank; Y200 million from China Construction Bank; US$459.78 million from World Bank stage I loan; US$216 million (US $ portion) and $91.6 million equivalent (DM portion) from World Bank stage II loan ; and export credits totaling US$74.00, US$55.84 million from American Import and Export Bank and US$18.16 million from Tokyo Mitsubishi Bank. There were a saving totaling US122.4 million for in Bank the Bank loan (US$108.4 million equivalent and US $14 million) from stage II and this amount was cancelled. The actual sources and uses of funds for the whole Xiaolangdi Multipurpose Dam project is summarized in the table below. Details of loan allocation and disbursements for the stage I and II loans are shown in Annex 10. - 22 -  Xiaolangdi Project Financing Arrangements (Unit: million US$ and Y or RMB) Financial Source Estimated Actual Percentage RMB $ RMB $ RMB $ Funds from Government 15,014.00 12,555.00 83.6% China Development Bank 2,523.00 2,523.00 100.0% China Construction Bank 200.00 200.00 100.0% World Bank Stage I Loan\a 460.00 459.58 99.9% World Bank Stage II Loan($)\b 230.00 216.00 93.9% World Bank Stage II Loan (DM)\c 200.00 91.60 45.8% Export Credit\d 109.00 74.00 67.9% Total 17,737.00 999.00 15,278.00 841.18 86.1% 84.2% \a Pooled currency loan $430million for project and $30 million for IDC capitalized \b Single Currency Loan in $ and DM \c The DM single currency loan was DM 346.5 million and equivalent to $200 million \d From US EXIM Bank At the completion of the project, the actual total expenditure of funds was less than the estimate. The was due mainly to the active and effective management measures to control project investment costs, favorable exchange rate variations and some changes of commodity prices used in construction. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is rated highly likely. All physical components were constructed in a technically sound manner and all of the components have been operating for 3 years with all operating targets achieved, i.e. all six units hydro generation units are operational and functioning well; the operation of sediment tunnels and flushing test indicate that these work well; the main outlet tunnels have been operated and erosion on these tunnels is very minimal. MWR has done a detailed evaluation of the project through a panel of experts and has accepted the project in terms of quality and functionality of all the elements of the project. The international panel of experts from Norway, Italy, Brazil, USA and Canada made a final inspection and prepared their final report and indicated that all safety measures on the dam and the structures have been complied with and are thoroughly satisfied with the project quality. All dam safety requirements in terms of future monitoring of the structures are operational and working well. Some 3500 gauges are in place to monitoring the deflections, pore pressures, settlement etc of the dam and structures. Emergency power to the gates have been completed so that gates and other structures can be operated even if the main and secondary line power fails. In addition a set of seismographs telemeter via microwave stations the micro-seismicity due reservoir induced seismic activities. Many of the reservoir banks are also being monitored for stability. The major dam safeguards of an Emergency Preparedness Program has been prepared and will be operated by YRCC in event of any emergency in Sanmenxia or Xiaolangdi Dams. Organization for Operation : The YRWHDC has been reorganized and reoriented from construction management to undertake operation of the dam and powerhouse and ensure full financial accountability. All staff (524) are in place in the new organization and all departments had been established and are functional. About 107 staff have gone through intense financial management training. - 23 -  Implementation of flood, sediment, ice and drought systems has improve the level of project management and boosted the project benefits. The Project Operator has formulated various rules and regulations, including operation specifications, project maintenance procedures, operation systems, and system of responsibilities, to ensure well-organized management and smooth operation of the Project. Adequate rules and regulations are the legal basis of adequate project operation. To ensure sustainable utilization of water resources, the Government has recently issued the new Water Law and a series of other laws/regulations that provides a legal and policy basis for the sustainable management by water management agencies and water projects. These clearly define the responsibility, duty, function and role of water management agencies and provide specific measures for the long-term development of such agencies. In May 2000 YRWHDC signed an agreement with the Henan Power Bureau for sales/purchase of power generated by Xiaolangdi to the provincial grid. This agreement will allow YRWHDC to cover all operating costs, portion of repayment of loan principal and interests. The Government of China (GOC) recognizes that Xiaolangdi is a strategic project for water supply as well as flood and sediment control, all of which have economic benefits that cannot necessarily derive financial revenues directly from the beneficiaries. Hence the GOC will compensate the operation of the dam, if it cannot meet its financial obligations. 6.2 Transition arrangement to regular operations: As a State-Owned Enterprise, YRWHDC owns and operates all of the project facilities, and has a well trained staff complement of 524. It has three profit centers, namely, Hydropower, Irrigation and M&I Water Supply, and Flood Control. The following Departments are considered key to operation Hydropower Station. The Hydro-Power Station is responsible for the entire operation and maintenance aspects of the Project. There is 111 staff at the station. The organization chart indicates a good set-up of the offices and workshop units. The station carries out cost calculations for the various activities related to power generation and the release of water. Hydropower production is based on the presently installed capacity of six units of 300 MW each. Finance Department. The Finance Department is headed by a Chief Accountant and two Finance Directors and has a total staff of 10 distributed in 4 units. The Department is responsible for all accounting and computerization of financial information. The staff has received the necessary training on how to operate the system. One unit, the "Investment Settlement Section" is responsible of the raising, disbursing, monitoring and repayment of the World Bank Loans. The unit is headed by a competent and trained accountant and has a total staff of three. Business Management Department. The Business Management Department is the planning and commercial center and is responsible for the marketing and sales of the outputs from the XLD, i.e. hydropower, irrigation and M & I water. The Department plans and establishes the overall YRWHDC budgets for the operation, together with the Finance Department and the Power/Water Management Department. The Business Management Department, together with the Chief Economist and the Hydropower Station Director, is responsible for negotiation of contracts with the main clients, YRCC, the power distribution companies (Henan Electricity Power Company) and the Henan and Shandong Municipal authorities. The Department is headed by two directors and with staff of 9. Operation and Maintenance. The technical operation and maintenance rules and procedures formulated and followed by YRWHDC for the dam/power plant operators are satisfactory and in line with the pertinent codes/specifications and regulations of the Chinese Government. As for the O & M Plan specified in the - 24 -  legal agreement for this project, a document entitled "Management and Maintenance Program for the Operation of the Power Plant" was prepared together with the "Operation, Maintenance and Surveillance Manual for Xiaolangdi Dam Safety" and some related guidelines developed with the assistance of an international consultant team (see Annex 9). Emergency Preparedness Plan (EPP). The YRCC has prepared the EPP for both Xiaolangdi and Sanmenxia Dams, as required by the Loan Agreement, with the assistance of YRWHDC. These procedures will be activated in terms of emergency procedures in event of an emergency and a plan to evacuate people and to provide for all necessary shelter, food and public heath until the emergency is averted (see Annex 9). 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank performance from Project preparation to implementation was highly satisfactory. This started during the Project preparation for stage I and continued in the stage II project. The Bank assisted in the following aspects via technical assistance credits: (i) Inviting foreign experts and consultants to review the Project; (ii) Establishing a system to identify the duties and responsibilities of the Employer, Engineer and Contractor; and (iii) Determining procurement of the civil works by lots and the relationship between foreign and local contractors, to enable technical transfer and good international practices. The Bank also exerted special influence on developing a separate resettlement project and in defining the environmental requirement; and the Bank also supported the establishment of YRWHDC as a commercially independent entity responsible for construction of the Project, instead of Central Government Project Office as was the practice at that time in China. In addition, during the preparation, considerable effort, were focused on works quality and institutional development for sustainability of the project. 7.2 Supervision: The Bank had 6 supervision missions for Stage II to review the Project. The Bank performance during project supervision was satisfactory. QAG undertook a review of the supervision arrangements and found it essentially satisfactory. The Bank regularly supervised the Project and attached high priority to implementation issues related to technical, quality control, and financial and environmental aspects. These supervision missions, provided many valuable comments and recommendations on implementation of the Project. Clear and prompt responses to the questions raised by the Implementing Agency were given. A close cooperation with the Implementing Agency prevailed. All these contributed greatly to a successful Project implementation. In the initial phases the Bank's supervision focused on technical and implementation issues. In the later phases the focus was more on technical and environmental and financial matters. This included promoting the creation of a Dispute Review Board and providing a workshop on claims. Overall the Bank supervision brought significant added value to YRWHDC in ensuring the Project was on track on all aspects. (financially, quality, schedule wise, solution to disputes, etc.) 7.3 Overall Bank performance: The Bank's overall performance is rated as satisfactory. It was able to guide and assist the YRWHDC in a timely manner which resulted in the completion of such a large and complex Project ahead of schedule and below budget. The project involved a lot of technically challenging aspects, but the Bank was able to maintain the cooperation with the Borrower and the Implementing Agency throughout. The Bank was also effective in providing adequate coordination for all parties involved the project that lead to the completion of such a large project. - 25 -  Borrower 7.4 Preparation: The Government and the Implementing Agency's performance in preparation of the Project were highly satisfactory. The Government was very responsive to all comments made by the Bank missions and independent panels. YRWHDC was fully responsible for all the design and tender document preparation with the assistance of foreign consultants. Most preparation work was done in record time of two years to ensure timely start-up of the Project. YRWHDC invested considerable amounts of funds and prepared the resettlement and environmental plans to very high quality, which was highly favorable to the Bank Project appraisal and the implementation of the Project 7.5 Government implementation performance: MWR, who represented the Government for this Project played a leading role at all stages of the Project preparation and implementation, and successfully coordinated the understanding of various ministries and provinces and strongly supported the Project implementation effort. The Borrower (MOF) and MWR have fully complied with all the loan covenants (See Annex 8) except for the water charge covenant, which is partially complied with as it is still under negotiation with the provinces. They do however collect water charges, but do revenues do not to cover all the O & M costs at this stage. Since 1996 when there were delays of 11 months in the critical interim completion date with potential serious consequences, MWR took critical measures to coordinate all parties and stationed a vice-minister at the site to ensure that the Project problems were solved and adequate counterpart funds were made available. This ensured the achievement of river diversion by October 1997, as scheduled. MWR organized 27 meetings to review the Project at different stages to ensure that any special issue that arose from design or implementation was solved. Overall MWR's performance was highly satisfactory. 7.6 Implementing Agency: The Implementation Agency, YRWHDC was established as agreed at the time of Project appraisal of the stage I project in 1993. The stage II, YRWHDC remained fully responsible for the Project implementation, guided and coordinated by MWR and other relevant ministries. YRWHDC has successfully implemented both phases of the Project. Its primary achievement was to meet all the milestone dates of the physical construction and to ensure that the quality of works was excellent. The Project has been essentially completed one year ahead of schedule and to high international quality standards. YRWHDC has been open to new technologies and construction management techniques and able to adopt the best practice in terms of organization and Project management systems. YRWHDC has successfully incorporated foreign and local panels of experts into project management, which greatly contributed to successful implementation management. When delays occurred at various stages of construction, YRWHDC was able to promptly identify the problems on the critical path and take measures to solve them. 7.7 Overall Borrower performance: The Borrower's performance was highly satisfactory because it demonstrated strong ownership of the Project, completed all the project activities well ahead of schedule, below budget and to high quality standards. 8. Lessons Learned The Xiaolangdi project (stages I and II) is the largest Bank-financed project in China to date. On the international scale, it was a very challenging project because of its huge size, predominantly large underground caverns, high degree of technical difficulties, and complex subsurface conditions. Principal - 26 -  lessons learned from the Project include the following: a) High risk/high reward projects can be effectively implemented with the right skills on the Bank side, and high commitment by the client to good organization and competent management, combined with the judicious use of international technical assistance and review. b) Implementing a project of the magnitude and complexity of Xiaolangdi will be greatly assisted if the implementation organization is in place prior to the start of the project. It should be independent, have full decision-making authority and be accountable and responsibility for implementation performance. c) The separation of the large and complex technical and civil works construction activities from large resettlement activities into two separate project operations worked very well and contributed to the effective and successful implementation of both. It allowed both the Bank and the implementation agencies to concentrate their resources and efforts on the two activities, as separate operations. This provides a valuable lessons for the Bank on how to manage large-scale resettlement associated with a major infrastructure investment. d) The establishment and maintenance of effective forum for communications amongst various parties (owner, engineer, designer, advisors and contractors) should be actively pursued from the onset, to avoid misunderstandings that could cause delays and /or losses to the project. Communication difficulties were perhaps the most difficult to resolve in construction of the Xiaolangdi scheme. This issue is not simply of translation between different languages, but of communicating ideas and concepts across international boundaries of training and culture. Most of the communication issues seem to decrease substantially in the second stage project because of the judicious use of consultants to interface between the contractor and the owner and there seemed to be significant communication between the various parties. e) The use of the International Panel of Experts substantially reduced the time for resolving conflicts in understanding technical problems. The POE for Xiaolangdi finally rested on 4 international experts and one Chinese Leader/Coordinator and this arrangement worked well. (f) Experience suggests that an International Panel of Experts for environmental management was necessary to ensure successful implementation of EMP, especially for large-scale projects with significant environmental management risk. g) The use of the Environment Supervising Engineer (ESE) and International Environmental Panel clearly demonstrated that all environmental issues were observed early and corrective actions were taken. The ESE in the second phase of the project ensured that the contractors followed all environment requirements to offset negative impacts. h) The use of Disputes Review Board (DRB) to resolved claims issues proved to be extremely useful and resulted in most claims being expeditiously resolved. i) Training of staff on all aspects of implementation prior to the start of the project - scheduling, construction supervision, contract management, claims management and cost control averted many of the problems and issues encountered in the project, especially with the international contractor; j) Training of staff prior to completion of the project in financial management, business management and tariff negotiations added significantly the sustainability of the project. - 27 -  9. Partner Comments (a) Borrower/implementing agency: Borrower's Project Evaluation Summary (by YRWHDC, February 2004) I. ACHIEVEMENTS OF PROJECT OBJECTIVES The project objectives are all achieved as planned and explained as follows: a) Flood Control Flood Control Objective Achievement The objective was to introduce flood control in the lower reaches of the Yellow River Basin and to protect major infrastructure as well as some 103 million people.With the completion of the Xiaolangdi Dam in early 2000 the dam is now capable of regulating floods for return periods up to 1/1000 years as planned as well as regulating water during the dry seasons. Flood forecasting systems have been significantly strengthened and the institutions are in place to undertake forecasting. Further, ice flooding can be completely avoided and ice formation avoided downstream by adequate and controlled water release from the reservoir as was e.g. achieved in the winter of 2002. b) Sediment Reduction Sediment Reduction Objective Achievement Control siltation in the 800 km downstream channel of the Yellow River and prevent further aggradation. The reservoir began storage in the year 2000. The reservoir stored some 233 million tons of silt and a further 19 million tons of was eroded in the downstream river channel totaling 252 million tons in its first year of operation. This is in itself a remarkable achievement. It is estimated that for an average year some 300 million tons of sediment will be controlled. In the past 3 years some 900 million tons of silt were trapped by the Dam c) Water Supply Water Supply Objective Achievement The objective was to provide water for guaranteed irrigation and more reliable water supplies for downstream urban areas and industries The reservoir began supplying water for irrigation, industries and cities in the year 2000, one year ahead of the original schedule. Some 2 billion m3 were supplied during one of the worst droughts of the last 100 years. As such Tianjin received some 860 million m3 , whilst the remainder was supplied downstream for irrigation, industry, such as the Shengi Oil fields, and urban areas. Some 21 billion m3 of additional water from the Xiaolangdi reservoir has been supplied to the downstream areas in the past 3 years. d) Power Generation Power Generation Objectives Achievements The objective was to generate hydropower for supplementing the base load of thermal power stations in Henan and the Central China Power Network Power generation started in February 2000, albeit on a reduced scale, since first priority has been given to use of water to offset the serious drought conditions, with a total water release of 48 billion m3 and a power output of 550 Gwh by the end of 2000 compared to the 1650 Gwh anticipated. This change in priority deprived the system of water supply and water heads for power generation. However, from January 2001 until December 31, 2001 power generation was 2112 Gwh, compared to 2257 anticipated or 93 % and from January 2002 until December 30, 2002 power generation was 3280 Gwh. - 28 -  e) Other benefits The Xiaolangdi Dam Project managed to keep water flowing to the lower reaches of the river with no days when the river dried up. This continuous flow has a significant impact on the ecology of the estuary. Further, reduced silt content of or silt free water will greatly enhance the freshwater ecology in the river since most freshwater fish cannot normally survive in highly silted water. In addition, silt free water will significantly reduce the cost for water treatment for urban or agricultural use. On environmental management, to minimize or mitigate the impacts environmental protective measurers were put into place and organizations established by YRWHDC according to the EIA/EMP. With joint efforts made by the Employer, Contractors, Engineer and local governments, significant environmental damage and diseases prevalence were never encountered during the construction period, the environment in the project and beneficiary areas have been protected to the extent possible. The government's environmental authority, SEPA, is planning to make the environmental protection implementation at Xiaolangdi a model for infrastructure projects in China. II. MAJOR FACTORS AFFECTING IMPLEMENTATION AND OUTCOME Factors outside the Control of Government or Implementing Agency The factors outside the control of Government or Implementing Agency mainly include: a. Change of geological conditions A number of large tunnels and complex geological structures are the features of Xiaolangdi Project. The rock formation consists of mudstones, siltstones and sandstones with widespread clay intercalations. These complex geological conditions created considerable difficulties to the construction process and lead to some collapses of significant size. This was the main reason for implemented design changes. All these factors have given rise to contractor's claim and increased the Project costs component at that stage. b. Contract Management Some contractors were relatively new to China and were in the earlier stages of the Project implementation not necessarily familiar with China's labor market and its way of management. At the early stages of the Project, some contractors hired a number of unqualified labors from the free labor market and managed them with foreign management method which failed to achieve expected results. All these factors impacted the progress of the Project at that stage. c. Exchange rate In early 1995, the RMB Yuan was depreciated by some 50% against the US$. In 1996-1997 the exchange rate of the DM versus the RMB Yuan was considerably increased. All these factors have largely increased the budget funds of Xiaolangdi Project at the time of budget adjustment in 1997. In the earlier stages of the Project the Employer had foreign exchange losses of up to US$30 million, but with the DM 2.0 = US$ 1.00 between 1998 and 2001, it subsequently recovered most of these losses. - 29 -  Factors Generally Subject to Government Control a. During the implementation of the Project, the central government, some related ministries and the government of two provinces have attached great importance to the Project. Their great care and support have been the guarantees for the successful implementation of the Project. Moreover, the direct leadership of MWR, the active participation and effective work of some departments has laid a solid foundation for the smooth implementation of the Project. Also for the same reason, the Project has never been impacted by the unavailability of funds. b. The Government at high level has placed great confidence in YRWHDC and fully empowered it, in order for it to make timely and effective decisions. YRWHDC was given the authority to make independent decisions with regard to some problems directly related to project quality and progress such as technical, financial and management issues. YRWHDC was also empowered to fully deal with claims and contract disputes. c. In 1993-1995, the yearly increase of commodity prices in the domestic market was as high as 6-10% due to inflation. This considerably increased some of the Project components costs. d. Inflation for local materials and labor was originally clear and payments were made which were acceptable to the contractors. Subsequently, it was established that local escalation figures were computed such as it created a considerable dispute between the contractors and the Employer. The local labor escalation particularly created a major problem. e. In the course of economic transformations, the Government made changes to some legislation in 1993 and promulgated some new laws such as Tax Law, Labor Law amongst others. All these new laws had a great impact on the contractors and gave rise to the contractors' claims and increased the Project costs components to some extent. Factors Generally Subject to Implementation Agency Control a. Implementation Organization In accordance with the requirements of the World Bank and FIDIC, the Project Employer grouped a capable and effective management organization and appointed the Xiaolangdi Engineering Consulting Company (XECC as the Engineer. XECC was formed from staff from several design institutes and construction companies. The Employer has fully empowered XECC in field supervision, management and certification for payment. The technical commission composed by the Employer's Canadian consulting experts and domestic experts has given valuable advice to the Employer in management. The Yellow River Commission Design Institute Xiaolangdi Branch, Reconnaissance Planning and Design Institute (RPDI) was responsible for the design of the Project and ensured timely and full communication between various parties. RPDI in China has been responsible for the design of several large dam projects and is highly qualified. A Dispute Review Board (DRB was set up in 1998 to facilitate prompt resolution of dispute related to the ICB civil works contracts. Both the Employer and the Contractors selected each one member of the DRB and the two elected members selected the chairman of the DRB. - 30 -  The institutional setup for project implementation at Xiaolangdi proved to be one of the key successful factors for this project. b. Implementation Schedule The implementation schedule as established in the Staff Appraisal Report (SAR) established the commencement of the civil works in July 1994, river diversion by November 1997, commissioning of the first unit in January 2000 and the last unit by December 2001. Project competition was scheduled by the middle of 2002. This schedule therefore required building this complex scheme in 7 years instead of the originally planned 12 years; a very big challenge for all involved indeed. With joint efforts, reorganizations and other measures implemented by the different parties, inclusive by the Employer and by the MWR, the first objective of