China - Yangzhou Thermal Power Project

rNTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT STAFF APPRAISAL REPORT I 3 n ao - C H A China: Yangzhou Thermal Power Project June 16, 1994 The above-captioned Staff Appraisal Report for China: Yangzhou Thermal Power Project is a revised version of the report prepared following the approval of the Project by the Executive Directors of the Bank and does not include information deemed confidential by the Government of the People's Republic of China.   STAFF APPRAISAL REPORT I 31 O- C H A CHINA YANGZHOU THERMAL POWER PROJECT February 22, 1994 Industry and Energy Operations Division China and Mongolia Department East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS (As of January 24, 1994) Currency = Yuan (Y) Y 1.00 = 100fen $1.00 = Y 8.7 Y 1.00 = $0.11 WEIGHTS AND MEASURES km = Kilometer (= 0.62 miles) kWh = Kilowatt hour (= 860.42 kcals) GWh = Gigawatt hour (1,000,000 kilowatt hours) TWh = Terawatt hour (1,000,000,000 kilowatt hours) kW = Kilowatt (1,000 watts) MW = Megawatt (1,000 kilowatts) GW = Gigawatt (1 million kilowatts) kV = Kilovolt (1,000 volts) kVA = Kilovolt-ampere (1,000 volt-amperes) MVA = Megavolt-ampere (1,000 kilovolt-amperes) mf = Milligram m = Cubic meter tce = tons of standard coal equivalent ABBREVIATIONS AND ACRONYMS USED BERIWREP - Beijing Economic Research Institute for Water Resources and Electric Power CNPC - China National Petroleum Corporation CRISPP - China Reform, Institutional Support and Preinvestment Project EAR - Environmental Assessment Report ECEPDI - East China Electric Power Design Institute ECO - Expanded Cofinancing Operation ECPG - East China Power Grid GEF - Global Environment Facility GNP - Gross National Product HIPDC - Huaneng International Power Development Corporation JPEPC - Jiangsu Provincial Electric Power Company JPIC - Jiangsu Provincial Investment Company JPG - Jiangsu Power Grid MOEP - Ministry of Electric Power MOF - Ministry of Finance SAA - State Audit Administration SEDC - Sunblast Energy Development Company SOEs - State-Owned Enterprises SEIC - State Energy Investment Corporation SPC - State Planning Commission YMIC - Yangzhou Municipal Investment Company FISCAL YEAR January 1 to December 31  - 1 - CHINA YANGZHOU THERMAL POWER PROJECT LoAN AND PRoJEcr SUMMARY Borrower: People's Republic of China Beneficiary: Jiangsu Provincial Electric Power Company (JPEPC) Amount: $350.0 million equivalent Terms: Twenty years, including a five-year grace period, at the Bank's standard variable interest rate. Onlending Terms: The proceeds of the loan would be onlent from the Borrower to JPEPC under a subsidiary loan agreement on the same terms and conditions as the Bank loan, with JPEPC bearing the foreign exchange risk. Project Objectives and Description: The main objectives of the proposed project are to: (a) support power subsector reforms at the provincial level, through development of JPEPC as an autonomous company; (b) contribute to further rationalization of power tariffs; (c) promote the use of modern financial management techniques in transforming JPEPC's accounting system; (d) provide cost-effective and environmentally sustainable generation capacity to alleviate an acute shortage of power and improve the quality of the power supply; (e) assist in transferring modem technologies for large coal-fired power plants, and in strengthening institutional capabilities for environmental management and monitoring; and (f) extend technical assistance in management development and staff training programs. The project consists of: (a) construction of a coal-fired thermal power plant with two 600-MW generating units and associated equipment; (b) erection of two 500-kV transmission lines (about 30 km long) and reinforcement of the existing power transmission network; (c) provision of engineering and construction management services; (d) extension of technical assistance for the development and implementation of improved accounting and financial management information systems; (e) carrying out of environmental management and resettlement programs; and (f) undertaking of management development and staff training.  - ii - Benefits and Risks: This large therrma] power plant will greatly increase the critically needed power generation capability of Jiangsu Province and the East China power grid as a whole. According to comprehensive analyses, the project is clearly part of the next sequence of the least-cost development program for meeting future power supply needs. Other intangible benefits are also important, such as institutional development, reduced air pollution through retirement of old small generating units, improvements in power grid operation, and the favorable influence on the social environment by helping many people to reduce excessive hardship caused by the acute power supply shortages. Also, through the project, the Bank will be able to support the Government's power subsector policy and further pursue its sectoral objectives in China. The technical and economic feasibility of the project has been well established. Potential project risks may include delays in implementation due to multiparty financing and JPEPC's lack of experience in managing the construction of similar projects. Necessary precautions and measures will be undertaken to avoid these risks. The project has been designed to comply with applicable Bank and Chinese standards in order to minimize the environmental impact. An environmental management program will be included under the project to prevent and reduce the possibility of developing any adverse environmental problems. The project risks, therefore, are considered to be minimal.  - 111 - Estimnated Costs: Local Foreign Total -------- ($ million) --------- Preparatory works 2.5 0.0 2.5 Land acquisition and resettlement 23.0 0.0 23.0 Civil works 69.7 0.0 69.7 Harbor works 17.2 0.0 17.2 Power plant equipment and materials 113.5 404.3 517.8 Transmission network 50.9 0.0 50.9 Construction administration 13.1 0.0 13.1 Engineering services 2.9 5.4 8.3 Environmental program 0.2 0.8 1.0 Management infornation systems 1.0 1.5 2.5 Training 0.6 2.8 3.4 Base Cost 294 414.8 270.4 Contingencies: Physical 27.2 20.8 48.0 Price 24.3 36.6 61.0 Taxes and duties 14.4 0.0 14.4 Total Project Cost 360.6 472.2 832.7 Interest during construction /a 182.1 66.5 248.6 Total Financing Required 542.7 538.7 1.081.4 Financing Plan: State Energy Investment Corporation (SEIC) 162.8 20.0 182.8 Jiangsu Provincial Investment Company (JPIC) 135.7 16.6 152.3 Yangzhou Municipal Investment Company (YMIC) 189.9 23.3 213.2 JPEPC 54.3 6.6 60.9 Expanded Cofinancing Operation (ECO) /b - 120.0 120.0 IBRD 350.0 350.0 IDA (CRISPP) /c - 2.2 2.2 Total 542.7 538.7 1.081.4 /a Interest during construction (IDC) is based on onlending rates for projected disbursements of loan proceeds. The foreign currency portion of IDC is based on the Bank's variable loan rate and the projected rates for ECO financing. lb $90 million syndicated loan from commercial banks (Tranche A), plus $30 million equivalent in Japanese yen from insurance companies (Tranche B). Lc China Reform, Institutional Support, Preinvestment Project-CRISPP (Credit 2447- CHA).  - iv - Estimated Disbursements: Bank FY 1995 1996 1997 1998 1999 2- --------------------- ($ million) ---------- Annual 34.3 46.4 120.0 99.1 39.1 11.1 Cumulative 34.3 80.7 200.7 299.8 338.9 350.0 Poverty Category: Not applicable. Economic Rate of Return: 14 percent Map: IBRD 25250  - v - CONTENTS 1 The Energy Sector ................................. 1 A. Overview ................................... 1 B. Energy Sector Issues ........ . . . . . . . . . . . . . . . . . . . . . 3 C. Energy Sector Strategy ....... . . . . . . . . . . . . . . . . . . . . 6 D. Bank Role in the Energy Sector ...................... 6 2 The Power Subsector ............................... 8 A. Background .................................. 8 B. Power Subsector Reform .......................... 9 C. Power Pricing ................................. 13 D. Electricity Conservation and Environmental Protection ... ..... 14 E. Power System Planning and Technology Transfer .......... . 15 F. Role of the Bank in the Power Subsector ................ 16 3 The Beneficiary ................................... 19 A. Legal Status and Organization of JPEPC ................ 19 B. Action Plan to Commercialize JPEPC ...... . . . . . . . . . . . . 20 C. Management . . . . . . . . . . . . . . . . 21 D. Staffing and Training .21 E. Planning, Budgeting and Control .22 F. Accounting .23 G. Audit .24 H. Billing and Collections .25 This report is based on the findings of an appraisal mission that visited China in October 1993. The report was prepared by V. Mastilovic (Task Manager), S. Kataoka (Senior Power Engineer), H.E. Sun (Financial Analyst), R. Taylor (Senior Economist), T. Hassan (Senior Counsel), K. Shimazaki (Senior Cofinancing Officer), B. Baratz (Principal Environmental Specialist), Y. Zhu (Resettlement Specialist), and K.C. Ling (Consultant). Peer reviewers comprised: K. Sheorey (technical), M. Layec (economic), P. Cordukes (institutional), and M. Costan (financial). The Division Chief is R. Newfarmer, and the Acting Department Director is Z. Ecevit.  -vi - 4 The Power Market and Program ........................ 27 A. The Jiangsu Power Grid ...................... 27 B. Load Forecast ..................... 28 C. Power Development Program .................... 28 5 The Project ..................................... 30 A. Project Objectives .30 B. Project Description .30 C. Cost Estimate .33 D. Financing Plan .33 E. Procurement .35 F. Project Implementation .36 G. Disbursement .36 H. Environmental Considerations .39 I. Resettlement Aspects .40 6 Fmancial Aspects .42 A. Introduction .42 B. JPEPC's Past and Present Financial Performance ..... . . . . . . 44 C. Financial Performance Targets ....... . . . . . . . . . . . . . . . . 45 D. Future Finances ......... . . .. . . . .. . . . . .. . . . .. . . . 46 E. Financing Plan ......... . . .. . . . .. . . . .. . . . . .. . . . 47 7 Economic Justfircation ........ . . . . . . . . . . . .. . . . . . . . . . 49 A. Role of Coal-Based Power in Jiangsu Province ..... . . . . . . . . 49 B. Least-Cost Studies .49 C. Economic Rate of Return .51 8 Agreements and Recommendation ..52 ANNEXES 1.1 Primary Energy Output in China (1949-92) .57 1.2 Total Production and Consumption of Energy vs. GNP Growth 58 2.1 Installed Capacity, Electricity Generation, and Sales in the Power Subsector. 59 2.2 Electricity Consumption by Sectors .60 2.3 Major Ongoing Power Projects with External Financing .61 2.4 Future Thermal Power Projects under BOT and BOO Arrangements .63 2.5 Power Pricing System in Jiangsu Province ...... . . . . . . . . . . . . 64  - vii - 3.1 Institutional and Legal Framework ........... . .. . . . . . . . . . 69 3.2 Action Plan for Commercialization of JPEPC .73 3.3 Performance Indicators for Jiangsu Power System .76 3.4 Staffing of JPEPC .77 3.5 Schools and Training Centers Under JPEPC . 79 4.1 Installed Generating Capacity of Jiangsu Power Grid (1985-92) 80 4.2 Major Power Generating Stations in Jiangsu Province .81 4.3 Transmission Network of JPEPC .84 4.4 Energy Generation of Jiangsu Power Grid (1985-92) .85 4.5 Energy Consumption by Category of Consumers in Jiangsu Province . 86 4.6 Energy Forecast for Jiangsu Power Grid .87 4.7 JPEPC's Power Development Program (1993-2002) .88 4.8 System Demand and Energy Balances for Jiangsu Power Grid 89 5.1 Project Description .90 5.2 Consulting Services (Terms of Reference) .93 5.3 Accounting and Financial Management System (Terms of Reference) . 102 5.4 Management Development and Training .106 5.5 Expanded Cofinancing Operation .............. . . ...111 5.6 Procurement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 5.7 Key Dates of Project Implementation .117 5.8 Disbursement Schedule .118 5.9 Environmental Management Program .119 5.10 Land Acquisition and Resettlement .132 5.11 Bank Supervision Input into Key Activities . ..... . ....... . . . . 144 5.12 Framework for Project Monitoring and R-porting .145 6.1 Actual Financial Statements of JPEPC (1989-92) .147 6.2 Forecast Financial Statements of JPEPC (1993-2002) .150 6.3 Major assumptions to JPEPC's Financial Projections .154 7.1 Economic Justification of the Project .156 7.2 Coal Use in Thermal Power Plants in Jiangsu Province .159 8.1 Selected Documents and Data Available in the Project File .163 CHARTS 1. Organization Chart of the Ministry of Electric Power .167 2. Organization Chart of the Jiangsu Provincial Electric Power Company 168 3. Organization Chart of the Project Construction Unit .169 4. Implementation Schedule .170  - viii - MAP IBRD 25250 ........................................ 173 TABLEs iN TExT 3.1 Electricity Consumption in Jiangsu Province ..... . . . . . . . . . . . . 25 4.1 Load Growth of Jiangsu Power Grid ...... . . . . . . . . . . . . . . . 28 4.2 Load Forecast for Jiangsu Power Grid ...... . . . . . . . . . . . . . . 29 5.1 Financing Plan for the Project ....... . . . . . . . . . . . . . . . . . . 34 5.2 Summary of Proposed Procurement Arrangements ..... . . . . . . . . 37 5.3 Implementation Schedule: Estimated Annual Contractual and Other Payments ............. .. .. ... .. .. .. ... .. .. .. .. . 38 6.1 JPEPC's Key Financial Indicators, 1989-92 ...... . . . . . . . . . . . 45 6.2 Key Financial Indicators, 1993-2002 ...... . . . . . . . . . . . . . . . 46 6.3 JPEPC's Financing Plan, CY1993-2000 ...... . . . . . . . . . . . . . 48  - 1 - 1. THE ENERGY SECTOR A. OVERVIEW 1.1 China has been remarkably successful in developing its energy resources and has become the third largest producer of energy in the world. In 1992, the country's primary commercial energy supply and consumption amounted to 1,075 and 1,090 million tons of standard coal equivalent (tce), respectively. Coal is the most important source of energy, accounting for about 74 percent, and oil for 19 percent of the total production. Hydroelectric power (4.7 percent), natural gas (2 percent), and small quantities of oil shale and geothermal power make up the balance. The largest consumer of energy is the industrial sector (70 percent), followed by households (14 percent), services (10 percent), and agriculture (5 percent). Details of the primary energy outputs are given in Annex 1. 1. Energy Resources 1.2 Coal. In 1992, China produced 1.1 billion tons of raw coal. By the year 2000, China aims to produce 1.4 billion tons of coal a year. The best quality coals are found in North China, where Shanxi and Inner Mongolia each have reserves of 200 billion tons. However, insufficient transport capacity makes it extremely difficult to move sufficient coal to the large consuming centers in Central and East China. 1.3 Hydroelectric Potential. China is rich in water resources and has a long tradition of harnessing them for energy and other uses. The country's hydroelectric potential is enormous, but only a small portion of it has been developed. Most of the potential is located in the Southwest (70 percent), about 1,500 km away from the main demand centers. The long gestation period for hydroelectric projects has also inhibited the rapid development and utilization of hydroelectric resources. 1.4 Crude Oil. China produced 142 million tons of crude oil in 1992, and the target output for the year 2000 is 200 million tons. China's refining capacity is the sixth largest in the world. 1.5 Natural Gas. In 1992, China produced 16 billion m3 of natural gas. About 44 percent of the current production is nonassociated gas, mostly from Sichuan Province. The remaining gas production is associated with onshore crude oil production. 1.6 Biomass. Noncommercial biomass energy use currently amounts to about one-quarter of total energy consumption in China. Fuelwood and agricultural residues are the chief biomass fuels, and they are consumed almost entirely by rural households. China is promoting a variety of measures to achieve environmentally sustainable biomass supply  - 2 - and consumption levels, including more efficient use of biomass, tree planting, and substitution of other fuels for traditional biomass fuels. 1.7 Nuclear Energy. Known uranium reserves in China are sufficient to sustain 15,000 MW of nuclear power capacity for 30 years. China commissioned its first commercial nuclear power plant (300 MW) in 1992. In 1994, Daya Bay nuclear power plant (2x900 MW) should be commissioned; 70 percent of its output is intended for nearby Hong Kong. The construction of a few additional plants is planned to start before the year 2000, primarily in regions that lack coal and hydroelectric resources. 1.8 Other Energy Resources. Other energy resources play a small role in energy supply and are used mostly in remote areas. Geothermal energy has been found in many locations covering nearly all the country. Although wind and solar energy have promising prospects, they are not expected to affect the overall supply of energy significantly in the near future. Oil shale deposits are large, but little is exploited because of lack of viable technology. Institutions of the Energy Sector 1.9 During 1988-92, the Ministry of Energy (MOE) maintained primary responsibility within the Central Government for policy, planning and regulations for the energy sector. In May 1993 MOE was disbanded during a broad govemment reorganization, and a new Ministry of Electric Power (MOEP) was established, along with a Ministry of Coal and the existing China National Petroleum Corporation (CNPC). Chart 1 shows the organization of MOEP. The State Energy Investment Corporation (SEIC), established in 1988, handles project financing in the coal and electricity subsectors. SEIC L responsible for onlending funds for projects of national importance and representing the Govemment in the joint financing of projects with other parties. The State Planning Commission (SPC), on behalf of the State Council, has the responsibility for review and approval of the strategic plans, investment programs and general pricing policy of the energy sector. Energy Investments 1.10 Energy investments in the 1980s were planned based on an expected economic growth rate of 7.5 percent a year. Actual economic growth rates exceeded this target by a significant margin, which has exacerbated energy shortages already existing at the outset. Under the Seventh Five-Year Plan (1985-90), the Govemment gave high priority to energy and also to the transport sector, a bottleneck in economic development. In 1992, China dedicated 3.3 percent and 1.9 percent of its Gross National Product (GNP), respectively, to develop infrastructure for energy production and transportation. It invested a total of Y 80.4 billion ($14 billion) in the energy sector, representing 27 percent of state capital construction, as against 21 percent in the early 1980s. The power subsector accounted for 61 percent of the total. About 20 percent of the investment requirements of the Chinese energy sector are met by foreign loans and direct investments.  - 3 - B. ENERGY SECTOR ISSUES 1.11 In addition to the already noted shortages, the main energy sector issues in China are: (a) the efficiency of energy supply and use; (b) the dominance of coal and associated environmental problems; (c) scale and technology in energy industries; (d) rationalization of energy pricing policies; and (e) institutional, regulatory, and enterprise reform. EfiTciency of Energy Use 1.12 China's energy consumption per capita is low, but consumption per unit of GNP is high compared with other countries. The high share in GNP of industrial output, the structure of industry, the use of inefficient technology, and inadequate energy management practices are major factors that contribute to this. Efforts to improve the efficiency of energy use have been a cornerstone of China's energy policy. Particular progress has been made in building a strong institutional framework for energy conservation. During 1980-92, China's energy intensity per unit of GNP fell by about 30 percent in real terms, and the elasticity of growth in total commercial energy use relative to GNP growth was about 0.57 (Annex 1 .2. Nevertheless, further improvements in energy efficiency are crucial. Energy supply targets for the 1990s imply that only about one-half of the increased energy services required will come from new energy supplies, while the other half must come from energy efficiency improvements. This will require major progress in addressing structural and systemic issues as well as still stronger programs to upgrade inefficient technology and strengthen energy management. Dominance of Coal and Associated Environmental Problems 1.13 Many of China's air pollution problems are related to the heavy use of coal and its dispersed, small-scale application in industry and households. Environmental problems occur at every stage of the coal chain; mining and disposal of mine waste, coal washing, transport and handling, processing and combustion, and ultimately ash disposal. The ambient concentration of particulates is the most serious problem; it is largely related to the dominant small-scale use of coal, its high-ash content (20-30 percent), and the often incomplete combustion. The average sulfur content of the coal is relatively low (about 1. 1 percent), but because coal is used so extensively sulfur dioxide emissions are increasing. 1.14 The environmental implications of continued increases in coal use highlight the need for the strict enforcement of environmental regulations and more investment to conserve coal and mitigate its environmental effects. Incorporation of modern technology, achievement of suitable scale economies, and elimination of backward small-scale capacity units is a key to improving coal utilization in many subsectors such as thermal power generation. The scope for substituting cleaner fuels remains limited. The country has insufficient proven natural gas resources; its production of oil is increasingly absorbed by transport and petrochemicals; and large hydropower resources are located far away from major consuming centers.  - 4- Scale and Technology in Energy Industries 1.15 Coal Subsector. Over half of the coal produced in China comes from small-scale mining operations. Exploitation of large coal reserves through uncoordinated small-scale mining has often led to inefficiencies in production and a waste of coal resources. In the larger mines, productivity and safety could be increased by making greater use of mechanized systems and applying more efficient designs and mining methods. 1.16 Power Subsector. Large-scale power development in China is beneficial from the standpoint of both energy conservation and environmental protection. Modern thermal power plants, with unit capacities of 600 MW, are far more efficient than smaller units (para. 2.30). The boilers of the modem utilities also support better pollution control, thus raising the efficiency of particulate removal. 1.17 Petroleum Subsector. In the petroleum subsector, there is a need to employ more modern equipment and technology at all stages of exploration and development; seismic survey and related data processing, exploratory drilling, and enhanced oil recovery in order to increase production from aging fields. Improvements in operating and maintenance practices are also needed to increase the efficiency of the subsector. Energy Pricing 1.18 Energy price reform has proceeded steadily during recent years, resulting in substantial increases in real energy prices. In the mid-1980s, dual-track energy pricing was developed, whereby energy supplies allocated under the national plan were priced at "in-plan" prices, at 'evels well below incremental production costs or border prices, while higher, market-based prices were charged for energy supplied through the market ('outside of the plan"). Over the years, in-plan prices have increased in real terms, and perhaps more importantly, the portion of energy allocated at in-plan prices has greatly declined. 1.19 The Government had declared its commitment to abolish low, in-plan prices for all the chief forms of energy by the end of 1995, with the exception of a few consumer categories (e.g., ammonia-based fertilizer producers). The country is now in the process of completing this transition to market-driven prices. In general, average consumer energy prices are now close to the economic costs of supply in the principal demand centers. Distortions remain, however, in both the structure of prices and inequitable treatment of different producers and consumers, requiring further concerted action to complete the transition to a truly efficient pricing system suitable for the emerging market economy. 1.20 Coal supplied at market-driven prices now accounts for over three-quarters of coal consumption. In January 1993, the Government announced its intention to decontrol in-plan prices over the next three years, and followed through by cutting the amount of coal supplied at in-plan prices by about one-half. Market prices are generally in line with the economic costs of domestic production and distribution, and in East China local market coal prices are close to or even above international price levels. Further  -5- action is required, however, to fully remove production subsidies and reduce the substantial losses still incurred by the coal industry. 1.21 While the average retail price levels of light petroleum products now generally are equal to or exceed border prices, average prices of crude oil and heavy fuel oil have been kept substantially lower. In 1992, however, the Government indicated that crude oil prices would be increased to international levels by the end of 1995. Although increases of 40% were implemented in 1992, producer prices for natural gas remain distorted and need to be adjusted further to provide better incentives to find and develop more resources. 1.22 Major progress has been made in increasing electriciry prices; in East China, for example, average consumer prices now approximate the long-run marginal costs (LRMC) of supply. Substantial improvements also have been made in producer prices in 1993. The principal remaining problems in the electricity pricing system lie with its structure, unnecessary complexity, lack of transparency, and continued inequitable treatment of different types of producers and consumers (para. 2.21). Economic System and Enterprise Reform 1.23 The process of transformation from a command economy to a market-based economic system has gained momentum in recent years, fueled by past successes and the strong economic performance of the more liberalized economy. Considerable progress has been made in the macroeconomic policy framework for the transition to a market economy; from trade to price liberalization, to encouragement of foreign investment and nonstate enterprise development, to decreased involvement of Government in the management and operations of state enterprises. Since mid-1992, efforts to reform state-owned enterprises (SOEs) have stepped up sharply, with the promulgation of new regulations granung greater autonomy to enterprises, and reorganization of the Government to reduce its role in enterprise operations. A wave of initiatives also has been launched to untie the social obligations that constrict SOEs and provide a more market-oriented operating environment, through reforms in the financial sector, fiscal system, pricing, housing and social security system. These reform efforts are indicative of the Government's resolve to gradually transform the SOEs' system into a structure of truly independent corporations. However, given the complexity and multidimensional nature of the enterprise reform, it will take time to complete the process. 1.24 System reform in the energy sector has been following the trends in the other parts of the economy. In the power subsector, the pace and depth of the reform program has increased especially since mid-1992; the Government is proceeding with a far- reaching program to commercialize the power companies, to revamp the regulatory and legal framework within which these companies operate, and to develop more diversified sources of financing, including private sector participation (paras. 2.20). In the oil and gas sector, recent achievements include the further opening of concessions to foreign firms, major price reforms, and the introduction of competition among the various newly created subsidiaries of CNPC. Emphasis is now being given to the commercialization and  - 6 - corporatization of CNPC, as part of the drive towards greater market orientation. In the coal sector, however, progress in reform has been slower. C. ENERGY SECTOR STRATEGY 1.25 Sector reform now plays a central role in China's energy development strategy. To reduce the prevailing energy shortages in today's environment of rapid economic growth will require further major improvements in the efficiency of the supply system, in domestic and foreign capital mobilization, and in energy use. The Government is committed to the reforms needed to make these improvements, including the commercialization of enterprises, the achievement of greater autonomy with respect to the government, regulatory and legal reforms to provide the framework for more market- oriented enterprises, promotion of competition, completion of price reforms, and adoption of a variety of new means to mobilize financing. 1.26 Efforts to improve the efficiency of energy use remain a cornerstone of China's energy policy; it is well recognized that China's economic development goals cannot be attained without further major efficiency gains. Focus on environmental issues in China's energy policy also has increased sharply in recent years. While heavy reliance on coal is an unescapable necessity in China, improvements in the efficiency of coal use and reduction of pollution from coal are recognized as critical. The Government's strategy in this area focuses on (a) strengthening environmental policy and regulation of emissions, (b) restructuring and renovation of inefficient, polluting industrial capacity, (c) achievement of greater efficiency and enhanced pollution control through development of large-scale power and industrial plants that properly capture scale economies, and (d) transfer and development of more efficient and cleaner industrial process and coal utilization technology. D. BANK ROLE IN THE ENERGY SECrOR 1.27 The Bank has supported 13 projects in electric power development, 5 in petroleum (including one natural gas project), and one in coal. In these projects, particular progress has been achieved in the Bank's support for transfer of modern technology, development of efficient large-scale energy production facilities, promotion of modern management practices, improvements in power system planning, rationalization of energy pricing, and greater attention to environmental issues. With the Bank's assistance, the Chinese have developed capabilities to properly assess the economic costs of electric power and coal, and set up their price reform strategies. In the case of electric power, a joint effort to establish LRMC and pricing principles for East China has been followed up through the development of provincial tariff reform action plans under recent power loans (para. 2.23). A strengthening in environmental and resettlement policies and programs has been achieved through Bank assistance to develop and systematically apply new methodologies and approaches for environmental impact assessments and resettlement planning, and adoption of environmental and resettlement procedures in strict conformity with Bank and national standards.  - 7 - 1.28 The Bank's assistance program for energy in China places special emphasis on energy conservation, improved coal utilization and sector reform. Through sector work, technical assistance and lending operations, the Bank is pursuing a multidimensional, sustained program of assistance to increase energy efficiency, improve coal utilization practices and reduce air pollution stemming from coal use. A continuing dialogue with the Govemment has been established through the completion of three joint studies; Efficiency and Environmental Impact of Coal Use (Report No. 8915-CHA, 1991), Environmental Strategy Paper (Report No. 9669-CHA, 1992), and the Energy Conservation Study (Report No. 10813-CHA, 1993). Further follow-up technical assistance and preinvestment work is currently under way with support from the Global Environment Facility (GEF). Because the issues involved concern the use of energy across the economy, assistance through the lending program involves operations in a variety of sectors. Investment and policy support will continue to be provided through industry and urban/environment operations, as well as operations in the energy sector. 1.29 The Bank is actively involved in providing assistance for China's reform efforts in the oil, gas and power subsectors. Following completion of a successful joint workshop in China on petroleum subsector reform in 1992, a major technical assistance effort has been launched with Japan Grant Facility assistance to review (a) establishment of an appropriate legal and regulatory framework for the oil and gas subsectors, (b) competition policy and petroleum market development, and (c) institutional restructuring of CNPC. The Bank's assistance program for power subsector reform includes the successful completion of technical assistance on reform options sponsored by the Bank's Institutional Development Fund (IDF) in 1993, sector work reviewing subsector reform implementation strategies, and reform-oriented lending operations. A Power Sector Strategy Paper for China is being completed, which will focus especially on China's power subsector reform and a program to support reform implementation (para. 2.38).   - 8 - 2. THIE POWER SUBSECTOR A. BACKGROUND 2.1 China is the fourth largest producer of electricity in the world. By the end of 1992, its total installed capacity reached 166 GW, with 75.6 percent based on thermal power and 24.4 percent based on hydropower (Annex 2.1). China has 13 power networks with capacities of 1 GW or more. They include five regional power grids (East China, North China, Northeast China, Central China and Northwest China), which coordinate the power systems of several provinces together, and eight major separate provincial grids. The total length of the extra high voltage transmission lines reached 8,638 km and the capacity of substations 30.9 GVA. Including all aspects of the power supply, regardless of ownership, transmission and distribution losses amounted to about 16 percent of generation. 2.2 Total power generation in China reached 754 TWh in 1992, of which thermal power accounted for 82.6 percent. The share of hydroelectric power has remained fairly stable over the last decade; Government has maintained a strong commitment to hydropower development, but the bulk of resources are relatively distant from the major load centers. In thermal power, coal-fired plants provide about 90 percent of generation. The share of oil-fired generation, which accounts for most of the balance, has declined sharply since the early 1980s. The share of natural-gas based generation is virtually negligible and is expected to remain so barring unforeseen major new natural gas discoveries. Natural gas currently accounts for only 2 percent of China's primary energy production. 2.3 Although China's current power development program emphasizes addition of 200-600 MW units, over one-half of China's thermal power capacity is still in units below 200 MW. Only about 15 percent is in units of 250 MW or more, compared to 60-80 percent in industrialized countries. The average gross conversion efficiency of thermal units over 6 MW has improved steadily over the 1980s, reaching 31.8 percent in 1992. This efficiency level is not unreasonable given the low average unit sizes in operation, but is substantially lower than the 36-37 percent typical of systems with larger units. 2.4 Industry continues to dominate electricity consumption in China, accounting for 77.1 percent of electricity use in 1992; 6.8 percent was consumed by agriculture, 8.5 percent by residential users, 5.8 percent by municipal and commercial consumers, and 1.8 percent in transportation/communications (Annex 2.2). Although service is of uneven quality, rural access to electricity is high; 96 percent of the nation's villages and about 80 percent of rural families now have access to electricity.  2.5 Power generation in China increased by two and one-half times between 1980 and 1992, an average increase of 8.0 percent a year over 12 years. Growth was particularly robust during 1985-88, it tapered off during 1989-90 when economic growth slowed, but picked up once again, with increases in generation of 9 percent in 1991, and over 11 percent in 1992. Industrial demand has continued to drive overall power demand; 74 percent of incremental electricity use between 1985 and 1992 was in the industrial sector. 2.6 Despite the strong growth in electricity output, most areas of China continue to suffer from severe power shortages. Given that GNP grew by 9.3 percent a year during the same period, the elasticity of electricity consumption growth relative to GNP growth during 1980-92 was only 0.86-an exceptionally low elasticity for any country over a sustained period, and particularly for an industrializing country such as China. The Chinese estimate that there is a shortfall between peak power demand and supply of 10-20 percent. Daily load curves tend to be relatively flat, as industries have had to respond to shortages of power during the peak daytime periods through rescheduling of work shifts. The load factor in the East China power grid in 1990, for example, was 72 percent. 2.7 China's GNP is expected to grow by at least 8-9 percent a year during 1993- 2000. This sustained rapid economic growth will put tremendous pressure on electric power industry to avoid yet worse shortages. Building further upon the gains achieved over the last 10 years, the country's programs to increase the efficiency of electricity use must be greatly intensified. Even so, China's electric power construction program for the 1990s will almost certainly be the largest in the world. Assuming that an intensive conservation effort can enable the country to sustain an electricity demand/GNP growth elasticity of 1.0, elctricity demand is expected tu grow at average rates of 8-9 percent per year during 1993-2000. This implies an increase in production from 621 TWh in 1990 to 1,380-1,480 TWh in 2000. Corresponding growth in installed capacity would amount to an increase from 138 GW in 1990 to 300-330 GW in 2000. To keep pace with this demand growth, China would need to add some 17-20 GW of capacity per year, compared to 13 GW added in 1992. To meet this demand, the Chinese are looking primarily towards more thermal projects which can be constructed as quickly as possible. 2.8 The principal issues which must be addressed in order to successfully meet China's development challenge in the power subsector are discussed in the sections below. B. PowER SuBsEcmoR REFORM Achievements 2.9 Reforms in China's power subsector during the 1980s involved a series of incremental adjustments, in large part due to pressing needs to mobilize increasingly large sums of investment capital, particularly from domestic sources. Taken together, however, these adjustments have resulted in a subsector structure that is in many ways unrecognizable from that of the previous three decades. In 1980, the power subsector was  - 10 - fully controlled, managed and funded by a hierarchy of Central Government departments, led by the Ministry of Water Resources and Electric Power. By the early l990s, however, the subsector had become much more decentralized and less vertically integrated. Although progress also has been made in all areas, particular progress has been made in diversification of financing sources, institutional restructuring, and electricity pricing reform (paras. 2.21-2.25.). 2.10 Diversification of Fmancing Sources. Following change in investment funding from Government grants to loans in the early 1980s, the Government has encouraged the development of multiple-channel financing for new projects, involving mobilization of funding through provincial and local govemments, independent corporations, and, in some cases, private foreign partners. Since the mid-1980s, the Govemment has allowed power produced from power plants financed through these noncentral government sources to be sold at prices which provide for adequate debt servicing and reasonable profit. The share of Central Govemment financing in total power subsector investment has fallen sharply, from 91 percent in 1980 to 30 percent in 1992. Empowered with rights to charge price surcharges to accumulate funds for investment in power construction, provincial and local govemments have become a key source of financing, providing about 40 percent of the investment funding for the subsector in 1992. 2.11 Newly formed corporations also have become important actors in the subsector. The Huaneng Intemational Power Development Corporation (HlPDC) was created in 1985 with the aim of attracting foreign capital and technology for power generating plants located mainly in the open coastal areas. HIPDC has a mandate to raise funds directly from the intemational financial market, and it has been active in tapping bilateral and suppliers' credits, and commercial bank loans. It is now also considering foreign equity participation as an option for the future. The Sunburst Energy Development Corporation (SEDC) is another window for the Government's investment in cofinancing with the local governments and foreign sources in energy projects, with three large thermal power projects now under implementation. 2.12 As an independent power producer, HIPDC operates its 15 plants (5800 MW total) under a build, own, and operate (B-O-O) framework. Build, own and transfer (B-O-T) schemes also have been introduced in China, most notably the privately-financed Shajiao B thermal power plant in Guangdong Province. Current Government policy encourages greater foreign direct investment in the subsector (see para. 2.20, and Annexes 2.3 and 2.4). 2.13 Institutional Restructuring. Provincial power companies have become the utilities in charge of management and operation of the bulk of the nation's power system. The newly created MOEP is charged with overall sector coordination and policy guidance (para. 1.9, and is no longer involved in enterprise management. Regional power entities are charged with responsibilities for regional grid coordination and dispatching. 2.14 The nature of the provincial power companies varies substantially, but few remain full monopolies of the power supply systems in their respective provinces. At the  - 11 - distribution level, about one-third of the country's urban distribution companies and five- sixths of the country's rural distribution utilities are separate economic entities. At the generation level, semi-independent joint-investment plants and fully independent power plants have been developed in many areas, with which the provincial power companies maintain written agreements. In coastal provinces where these arrangements have become particularly common, a structure conducive to competition in generation has been put in place. The Current Reform Agenda 2.15 In line with the step-up in national reforms to build a market economy begun in mid-1992, the Government has recently initiated a broad program of sector reforms in the electric power industry. Implementation of the program will require a concerted effort over a number of years. The agenda put forward for action now includes: (a) implementation of measures to further commercialize power companies, including achievement of greater enterprise autonomy from the Government, (b) further measures to simplify and rationalize power tariffs (paras. 2.21-2.25), (c) realignment of the regulatory and legal framework for the subsector, including the promulgation of a National Electricity Law, and (d) strong encouragement for further diversification in financing for power development, including private sector participation. While actions are occurring on all of the above fronts, implementation of measures to commercialize the provincial power companies is now a central linchpin in the overall effort. 2.16 Commercialization. The goal is to develop the power companies into more efficient, truly commercial utilities, autonomous and responsive to market forces. The most important steps required at this stage include the following, each of which will be undertaken by JPEPC in an effort supported through the proposed project (para. 3.6): (a) Separation of govemment functions from power company management, and reduction of government interference in power company activities. Some provinces have made progress by creating power companies, responsible for the day-to-day commercial operations of the provincial power system, alongside the longstanding power bureaus of the Government. In practice, however, the companies and bureaus have remained institutionally unseparated. For commercialization to properly proceed, government regulatory functions must be entrusted to agencies fully separate from the power companies, and the power companies should be given an autonomous position to operate as a business-oriented enterprise. (b) Strengthening of power company autonomy. In particular, provincial power companies need to be granted greater financial autonomy, including expanded rights to undertake investments and to raise funds. (c) Adoption of modem, commercial accounting and financial reporting practices. In line with the nation's efforts to adopt international accounting practices beginning in 1993, design and implementation of modern internal  - 12 - cost accounting and financial reporting systems in the provincial power companies is now absolutely necessary for power company managers to have the financial information needed to control costs and maintain financial accountability. 2.17 Following the reform implementation program for SOEs. as a whole, subsequent steps in the Government's program to commercialize power companies include: (a) taxation and profit remittance reforms in the subsector, following on from the new national reforms; (b) revaluation of assets and clarification of asset ownership rights-a process which has already begun in some provinces such as Jiangsu; (c) a narrowing in power company operations to core activities, and gradual elimination of social welfare responsibilities, initiated through current efforts to "spin off' peripheral operations, and deepened as reforms proceed in the social security system, unemployment insurance, etc.; and (d) corporatization in the form of limited liability or limited shareholding companies. 2.18 Legal and Regulatory Reform. China currently is in the process of developing an overall legal and regulatory framework for operations in the power industry. The existing legal framework includes of a series of incomplete and inconsistent regulations and rulings, developed over many years. There is a need to establish both the principles and model contracts for establishing more transparent and efficient economic relationships between the various entities now involved in the subsector, including different grids, semiautonomous joint-investment power plants and independent power producers. To meet the needs of the new market-oriented environment, the Central Government is preparing a new Electricity Law, which will provide the umbrella principles for the legal and regulatory system for the subsector. The Government also is preparing a series of more specific regulations, consistent with the principles of the proposed Law. 2.19 The emerging new regulatory system for the power subsector will include different govemment regulatory functions at central and provincial levels. At the provincial level, government oversight functions must first be separated from power company management (para. 2.16 (a)), and then regulatory responsibilities defined in tune with the overall national program. 2.20 Further Diversification of Fmancing Sources and Private Sector Participation. Financing of China's major power expansion program during the 1990s (para. 2.7) will require aggressive efforts to mobilize increased investment resources through all potential financing channels. Building further upon recent reforms and experiences (paras. 2.10-2.12), expanding financing sources include an increasing variety of domestic channels, foreign borrowings and direct foreign private investment. The Government recognizes that domestic sources of financing and borrowings from international multilateral and bilateral institutions will not be sufficient to meet the sector's financing needs. Accordingly, the Government is encouraging direct foreign investment in the power industry. Independent power production schemes which have already been developed and are slated for further expansion include fully privately-owned BOT projects and Chinese/foreign joint-venture BOO schemes. In Shandong Province, plans for the  - 13 - establishment of a substantial Chinese/foreign joint-venture power generation company also are in the advanced stages. C. POWER PRICING 2.21 Electricity price reform in China has involved a series of incremental changes taken over the last 10 years. In the mid-1980s, multiple-track pricing was introduced for both producers and for consumers, in line with the shift away from full vertical integration in the industry (para. 2.14). By the end of the decade, the power pricing system had become too complex and difficult to manage. Recent reforms have focused on simplification and rationalization of the system. The end results of price reform at this point include major achievements, especially compared with the situation in most other developing countries. 2.22 Producer Prices. A full overhaul was completed during the summer of 1993 of the state base prices charged for power produced by plants financed by the Central Government. Prices for the electricity produced from all new power plants are now set by contract to cover financing and operating costs, on a plant-by-plant basis, and rolled into the power tariff. Cost recovery through the tariff system is thus ensured. Prices also are similarly determined for existing plants financed through loans. The electricity tariff applied for plants built with grant financing before 1985 has been revised and rationalized, and now includes an improved mechanism for automatic adjustment in prices to reflect annual changes in fuel costs. 2.23 Consumer Prices. Consumer electricity prices include summations of the state base prices; the costs of the growing other sources of power supply not financed through the Central Government; and a series of local fees and surcharges. In Jiangsu Province, the average electricity prices now paid by consumers are now roughly at the level of the estimated LRMC of supply, in economic shadow prices. While the situation varies somewhat between regions, the nature of the existing pricing system is such that average consumer prices can now be expected to approximate LRMC levels in areas with rapid load growth, such as the coastal provinces. Average consumer prices in underdeveloped areas may still be somewhat below LRMC levels, but should be brought more and more into line with growth in new capacity. 2.24 The structure of consumer prices, however, remains too complex, lacks transparency, and is often inequitable. In most areas, including Jiangsu Province, unfair Hold" administered rates and "new" guidance rates continue to be applied to different consumers. Some consumers are protected from high cost electricity supply charges and certain local surcharges because they still hold 'in-plan' quota allocations, but other new or small consumers must pay high prices well above actual supply costs. 2.25 Directions for Further Reform. While the 1993 reforms brought major improvements, further reforms are still necessary to simplify and rationalize the power tariff system. One area for emphasis is to improve the pricing and dispatching contractual arrangements between provincial power companies and power producers. Another area is  - 14 - to rationalize the structure of consumer prices. Annex 2.5 provides a description of the pricing system in Jiangsu, and JPEPC's power pricing reform program to abolish the prevailing dual-track system of consumer prices. D. ELEcrmcrry CONSERVATION AND ENVIRONMENTAL PRoTEcnION Electricity Conservation 2.26 The industrial sector is the key to more efficient use of electricity (para. 2.4). At a macro level, the most important factors determining China's ability to produce more economic output with less electricity are the share of industry in future growth and changes in industrial structure. Other especially important issues include the rate of modernization in industrial process technology and China's ability to produce and disseminate high efficiency electricity-using equipment, such as transformers, motors, fans, pumps, and cooling equipment. 2.27 China has over 10 years of experience in the active promotion of electricity conservation, with a solid record of achievement. The strength of its program lies in the well developed institutional framework that has been gradually built up. Electricity conservation is handled by the network of Three Electricity Offices, with offices at central, provincial, prefectural and county levels throughout the country. These offices are under the leadership of local Economic Commissions, and coordinate their work with provincial power companies. They monitor electricity intensity and use patterns in all major enterprises, promote adoption of conservation technologies and electricity management improvements, and assist, at times, in organizing funding for efficiency improvements. 2.28 Further improvements in the efficiency of electricity use are imperative if China is to realize its economic growth goals. Three areas which are receiving increased attention in some provinces, such as Jiangsu, and deserve emphasis include: (a) improvements in coordination between industrial planning and electricity demand and supply planning at local levels; (b) expansion of programs to reduce losses in power distribution systems; and (c) development, production and dissemination of high efficiency equipment, including variable-speed motors and modern appliances. Environmental Protection 2.29 Thermal power production currently accounts for about one-quarter of China's coal consumption, and this share is expected to gradually increase. Improvements in the efficiency of coal use in this subsector not only alleviate pressure on the coal production and transportation system, but also have a major impact on particulate, and sulfur dioxide and carbon dioxide emissions. 2.30 The achievement of economies of scale in thermal power production, through expanded development of large generating units, is an issue of overriding importance. Particularly disturbing is the recent rapid growth of small coal-fired power plants, in unit sizes of 50 MW or less. While national policy emphasizes the addition of  - 15 - 300 MW and 600 MW units, new projects have lagged behind demand, largely due to difficulties in mobilizing the necessary large investment resources. As a consequence, local governments are continuing to invest in large numbers of new small plants. In Jiangsu, 35 percent of the incremental thermal power produced during 1985-92 camne from such small plants (see para. 7.8 and Annex 7.2). Compared with a state-of-the-art plant, such as the proposed Yangzhou thermal power plant, these plants consume over 60 percent more coal per unit of electricity produced. This results in at least 60 percent higher sulfur dioxide emissions (depending upon the coal used), and roughly 60 percent greater emissions of carbon dioxide. Particulate emissions from the small plants are proportionally even higher, due to use of inefficient particulate control technology. If a sufficient pipeline of large-scale projects cannot be brought on stream in a timely fashion, there is little doubt that this problem will worsen. 2.31 In terms of emission control in large and medium-scale plants, China has made substantial progress in particulate control, through deployment of electrostatic precipitator technologies of increasing efficiency. As the country is blessed with large reserves of low sulfur coal which can be used in most areas, China is just beginning to employ sulfur dioxide control devices in the power subsector. Top priority should be given to areas which have little choice but to rely on local high sulfur coal, such as in Southwest China. In these regions, thermal power plants often burn coal of over 4 percent sulfur content (e.g. 5-10 times the level typical through most of North and East China), and development of sulfur dioxide control strategies and corresponding investments are now urgent in these areas using coals with high sulfur content. E. POWER SYSMr PLANNING AND TECHNOLOGY IRANSFER 2.32 Power System Planning. As plaanning for China's power development becomes increasingly complex, there is a compelling need to apply state-of-the-art system planning techniques. This is particularly important for evaluating large-scale projects which have long lead times and for making decisions about generation mix, power plant location, and grid configuration. Support for strengthening domestic capabilities in least- cost generation planning techniques in both East China and Sichuan has been provided under previous Bank loans. Additional support, however, also is needed in the preparation of balanced generation, transmission, distribution and utilization plans, and to better incorporate increasingly important environmental concerns into the planning methodology. 2.33 Modern Technology Transfer. For China to achieve its ambitious goals for the power subsector, the transfer of appropriate modern technologies will be crucial. This is particularly important for thermal power plants, where increases in the steam parameters and unit sizes can reduce fuel consumption as well as pressures on both the supply and transport of coal, as well as on the environment. Technology transfer is also needed for large hydroelectric projects, particularly in connection with the project general layout, the design of sophisticated structures and large underground works, the selection of equipment, efficient construction management, and environmental assessments. Assistance in technology transfer for large coal-based thermal power projects will be provided under the proposed project (para. 5.7).  - 16 - F. ROLE OF TEXE BANK IN THE POWER SUBSECTOR 2.34 The Bank has supported the Government's efforts to foster efficient and sustainable development of the power subsector through sector work, policy dialogue, and a series of lending operations. In previous years, the Bank's participation in the power subsector in China has particularly focused on institution building, price reform, improvements in system planning, and the transfer of appropriate modern technologies. 2.35 The Bank has helped to finance 12 large power generation and load management projects (5 thermal, 7 hydro), and one transmission project. Through these operations, the Bank has successfully (a) introduced international competitive bidding (ICB) for works and goods; (b) supported the transfer of modern technologies in project construction and management; (c) helped to improve the efficiency of pollution abatement; (d) supported the rationalization of power tariffs; (e) promoted the integration of regional power systems; (f) supported the development of master plans for modem distribution networks; and (g) promoted operational efficiency and more prudent financial management. 2.36 Most of the power projects financed by the Bank are being implemented in a satisfactory manner, on schedule, and within budget. The first two operations, Lubuge Hydroelectric Project (Loan 2382-CHA) and the 500-kV Xuzhou-Shanghai Transmission Project (Loan 2493-CHA) have been successfully completed. The Yantan Hydroelectric Project (Loan 2707-CHA) is progressing satisfactorily and nearing completion. Several problems which were encountered early in the implementation of the Shuikou Hydroelectric Project (Loan 2775-CHA) have been resolved and the second loan for Shuikou Project HI (Loan 3515-CHA) was approved recently. The construction of the Ertan Hydroelectric Project (Loan 3387-CHA), Daguangba Multipurpose Project (Loan 3412-CHA and Credit 2305-CHA) and Tianihuangping Pumped-Storage Hydroelectric Project (Loan 3606-CHA) is now progressing well. Furthermore, the Bank is involved in financing five thermal power projects-Beilungang (Loan 2706-CHA), Wujing (Loan 2852-CHA), Beilungang Extension (Loan 2955-CHA), Yanshi (Loan 3433-CHA) and Zouxian (Loan 3462-CHA). Wujing was completed on schedule. Beilungang encountered delays due to procurement problems and poor coordination of goods supplies. Unit No. 1 was commissioned in 1991 and Unit No. 2 is expected for commissioning in 1993, about one year behind schedule. The implementation of Yanshi and Zouxian projects has started successfully. 2.37 The lessons learned from lending operations for the power projects in China have been taken into account in preparing the proposed project. These lessons basically include: (a) improving procurement and contractual arrangements; and (b) enhancing the role of project management and the use of engineering consultants. Particular attention has been given to the environmental aspects of the projects. The Current Bank Power Subsector Assistance Program 2.38 To support the Govemment's ambitious program in power subsector reform (paras. 2.9-2.19), and in keeping with the Bank's assistance policies in the power subsector, the Bank has developed a new power subsector assistance program in China  - 17 - which places central focus on reform. This program is discussed in detail, together with analysis of the related issues, in the forthcoming Power Sector Strategy Paper for China. 2.39 In line with the Bankwide power policy (The World Bank's Role in the Electric Power Sector, 1993) the Bank's power subsector assistance program in China includes an integrated package of sector work, technical assistance activities and lending operations, actively involving both central and regional/provincial levels. At the central level, a strong dialogue on reform has been developed through completion in 1993 of a collaborative technical assistance activity involving the Bank and key national agencies, with support from IDF, on Strategic Options in Power Sector Reform in China. Recently initiated follow-up includes a joint Chinese/Bank review of innovative options for financing power projects. The dialogue at the provincial level is being developed primarily through lending operations. While the concentration of each operation will vary, all new power subsector lending operations in China, including this proposed operation, are being designed to focus on implementation of key aspects of the overall program. 2.40 Supported through various combinations of sector work, technical assistance, and lending projects, the objectives of the Bank's program include active support for the Government's efforts in the following main areas: (a) Commercialization of power companies. To achieve true power company commercialization, main areas being supported include: (i) separation of government functions from power companies; (ii) strengthening of power company autonomy, particularly financial autonomy; (iii) conversion to modem, commercialized financial accounting and cost-and-profit reporting systems; and (iv) gradual conversion of power companies into shareholding companies. (b) Improvement in the regulatory framework. Key areas include: (i) the definition of a national regulatory framework for the power subsector at various levels, fully independent from the country's power enterprises; (ii) establishment of institutional capacity at provincial levels for power subsector regulation, following (i) the above and separation of government functions from provincial power companies; and (iii) codification of the umbrella principles for the legal and regulatory system for the subsector in the Electricity Law. (c) Further diversification of rfnancing sources. Primary focus is being placed on efforts to accelerate mobilization of external sources of financing, particularly from the private sector, and especially for independent power production. A pivotal point is development of an improved contractual framework for such projects. (d) Power pricing. Through previous lending operations, marginal cost pricing principles have gained wide acceptance in China, and a number of provincial power tariff reform action programs are now under  - 18 - implementation. Emphasis is now being placed on (i) effective supervision of the implementation of these programs, (ii) unification of consumer tariffs, and (iii) improvements in pricing contracts between power companies and independent producers. (e) Environmental protection. In addition to support for preparation of proper environmental impact assessments and for deployment of efficient, modem technology to ensure compliance with internationally accepted environmental standards, planned new assistance efforts include (i) support for institutional strengthening for assessment, planning and monitoring of resettlement and environmental impacts in both hydro and thermal power projects, (ii) technical assistance for development of a national strategy for pollution control in thermal power plants, and (iii) support for the reduction of sulfur dioxide emissions in thermal power plants in areas with high sulfur coal. (f) Electricity conservation (demand-side management). A strong program of technical assistance, launched with sector work and continued with support from GEF, focuses on means to improve the efficiency of electricity use through industrial restructuring and modernization, as well as through adoption of more efficient equipment and electricity supply management practices. Support for improving the efficiency of electricity use by reducing losses in power distribution, through industrial process change, and production and dissemination of high-efficiency electrical equipment also is planned in power and industry lending operations, and future GEF investment operations. (g) Power system planning. Building upon past achievements, emphasis in this area is being placed on incorporation of environmental issues and improving the transmission, distribution and utilization aspects of power system planning. 2.41 With its support for specific efforts in power system reform, the proposed project is a key element in the overall assistance program for China's power subsector. Although the project also provides other significant contributions as well, the most important contribution of the proposed project to the Bank's overall assistance program for power subsector reform lies in the effort to commercialize JPEPC. Through this project, the Bank will be able to work together with central, regional and provincial authorities to implement the nation's first program to develop a fully commercialized provincial power company, independent from the govemment power bureaus, and designed to operate according to modem utility commercial practices.   - 19 - 3. THE BENEFICIARY 3.1 China is in the process of reforming its state enterprise system through progressive development of a suitable corporate legal system. It has thus come a long way from carrying out its economic agenda through state enterprises wholly owned, controlled and operated by line departments and agencies of the Government. The Law of the People's Republic of China on Industrial Enterprises Owned by the Whole People enacted by the National People's Congress in 1988 has introduced the concept of semi-independent management and allowed more operational autonomy. Presently, the Government is actively promoting the restructuring of state enterprises as shareholding companies pursuant to its Regulations on Enterprises' Shareholding System Experiment issued in 1992. For this purpose, it has also issued its Views on Standards for Limited Share Companies and Views on Standards for Limited Liability Companies. A number of other related regulations have been issued on a provisional basis. All these efforts are indicative of the Government's resolve to transform the state enterprise system into a full-fledged independent corporate structure. A. LEGAL STATUS AND ORGANIZATION OF JPEPC 3.2 The Beneficiary of the proposed loan is the Jiangsu Provincial Electric Power Company (JPEPC), an independent economic entity that possesses the legal status of a limited liability company under its Charter (dated December 19, 1988), formulated pursuant to the Law on Industrial Enterprises (para. 3.1), and the Scheme of Structural Reformation of East China Power Network, approved by the State Council. JPEPC's Charter is a self-implementing legal instrument. 3.3 The registered capital of the JPEPC is Y 2.6 billion. The Charter empowers JPEPC to obtain funds from various sources such as: (a) investments from the state, the province, and local governments; (b) loans from financial sources such as banks and financial organizations both domestic and foreign; (c) electricity sales and charges for specific power use; (d) stocks and bonds; and (e) joint ventures with foreign companies. JPEPC is also authorized to use its retained profits for investment purposes. Although JPEPC has the corporate powers to invest and issue bonds, these activities are regulated and government approvals are required therefor at various levels. 3.4 JPEPC has been entrusted by central and provincial governments with the management and administration of generation, transmission, distribution and electricity supply in Jiangsu Province. The scope of JPEPC's business includes undertaking construction of power projects funded either by the state or by local finance. The functions and powers of JPEPC have been outlined in the Charter and further elaborated in a document regarding Confirmation of the Functions and Powers of JPEPC approved  - 20 - by MOE in 1992. Pursuant to these documents, JPEPC has the power to obtain loans from and to enter into contracts with various organizations including foreign institutions (with the permission of the concerned government authorities). 3.5 The Charter provides for the establishment of a Board of Directors ostensibly to manage the company, and JPEPC plans to develop a management system led by a Board of Directors as part of its overall reform program. Currently, however, the overall management and administration of JPEPC is entrusted to a General Manager (assisted by several deputy General Managers) appointed by MOEP in consultation and agreement with the Jiangsu Provincial Government and East China Electric Power Administrative Bureau. The General Manager is the legal representative of the company and responsible for its operations. The exercise of managerial and administrative powers (e.g., hiring and firing of staff and labor) is, however, controlled by "relevant state rules and regulations." JPEPC has pursuant to the Charter established various administrative rules and regulations including regulations on power grid management. JPEPC has adequately carried out its mandate and effectively coordinated power system development and operations in Jiangsu Province. JPEPC exercises control over the electric power enterprises operating in Jiangsu Province on the basis of contractual arrangements. These arrangements include only a general nonstandard formula for pricing that is based on the government's pricing policy. The actual prices are established by the State Pricing Bureau of SPC. JPEPC also has the requisite authority, under its Charter and the Confirmation Document, to receive the proceeds of the proposed Bank loan through the Central Government, to carry out the proposed project, and to enter into a project agreement in respect thereof with the World Bank subject, of course, to necessary government approvals. Details of JPEPC's institutional and legal framework are presented in Annex 3. 1. B. ACTION PLAN TO COMMERCLILIZE JPEPC 3.6 A key objective of the proposed project is to implement a series of reforms to fully commercialize JPEPC. In consultation with the Bank, JPEPC has prepared and agreed to implement an Action Plan for the Commercialization of JPEPC (Annex 3.2), which consists of an integrated, time-bound package of reforms, many of which would be implemented in China for the first time. The objective of the reform package is to develop JPEPC into a power company fully separate from Government, with autonomy in its own operations, accountability for its own profits and losses, and self sufficiency in its development. The principle features of this package include: (a) Separation of government regulatory functions from JPEPC and provision of these functions to authorities institutionally separate from JPEPC. Following reforms within JPEPC and other preparations during 1994, this reform will be implemented during 1995. (b) Provision of rights to JPEPC to undertake investments and raise funds, to enable JPEPC to achieve greater financial autonomy and self-sufficiency. This will be completed during 1994.  - 21 - (c) Unification of consumer tariffs. Following the model of Nantong Prefecture, two to three additional prefectures will implement uniform consumer tariffs in 1994, replacing the current system of different rates for planned and nonplanned power usage. Implementation will be completed in all prefectures in Jiangsu Province in 1997. (d) Completion of a package of accounting and financial system reforms within JPEPC by the end of 1996 to improve cost control and the accountability of subentities, and to provide a foundation for efficient commercial operation. (e) Completion of a review of options for corporatization of JPEPC as a shareholding company by the end of 1995. 3.7 Working together with other relevant agencies, JPEPC will prepare a detailed implementation program for the Action Plan during 1994, clarifying all details, including the specifics of required institutional changes. Following discussion with the Bank, the program will be submitted for approval to the Jiangsu Provincial Government and MOEP and its implementation will commence by early 1995. M O E P h a s provided a Policy Letter to the Bank, confirming the Government's support for the implementation of the Action Plan. JPEPC will finalize by December 31, 1994, in consultation with MOEP and the Bank, a detailed implementation program including timetable for carrying out the Action Plan, and thereafter carry out the Action Plan in accordance with the implementation program in a manner satisfactory to the Bank. Furthermore, the Borrower would cause JPEPC to carry out the Action Plan satisfactory to the Bank. C. MANAGEMENT 3.8 Recent performance indicators for the Jiangsu Power Grid reveal high plant capacity factors and rather low transmission and distribution losses (Annex 3.3). JPEPC prepares accounting information in a timely fashion and operates an effective billing and collection system (para. 3.24). However, the successful upgrading of management systems and procedures, and the strengthening of financial planning, deserve special attention as a critical aspect of JPEPC's commercialization reform program (para. 3.18). The proposed project includes specific training in utility management and financial planning for this purpose (para. 5.9). 3.9 JPEPC is capable of formulating its own expansion program and implementing power projects by itself. However, for a large project such as the one proposed, outside assistance will be required for the preparation of bid documents, bid evaluation, contract negotiations, and construction management (para. 5.7). D. STAFFNG AND TRAING 3.10 As of December 31, 1992, the company had a total staff of 67,268, of which about 10 percent were engineers and technicians, 9 percent administrative staff, 66 percent  2 2 - workers, and the rest others. Except for the core group of key technical and managerial personnel who are assigned by the State, almost all of JPEPC's employees are recruited locally. Most of the employees are hired on a permanent basis, except for laborers contracted for construction. The company is currently reforming is personnel policies to provide for improved performance-based review and accountability, and to reduce total staff levels. Total personnel is being reduced by 17 to 20 percent during 1993-94, followed by further planned reductions in 1995. JPEPC has 16 functional divisions and offices, and its organization structure is presented in Chart 2. Details of JPEPC's staffing are shown in Annex 3.4. 3.11 JPEPC is understaffed in engineering and technical areas, financial control and planning and management, especially in dispatching operations of large power grids. JPEPC runs three technical schools/training centers for skilled workers, one electric power institute for technicians, and one staff college. There are 1,255 teaching and administrative staff in all these training and educational centers, which have a total enrolment of over 5,000 students (details in Annex 3.5). This training capacity is basically sufficient to meet JPEPC's long-term needs. However, the skills of teaching staff and quality of teaching facilities need to be upgraded and modernized. Training needs to be designed to help senior managerial, financial and technical staff adapt to the new situations brought about by a larger and more complex power grid. The training component included in the proposed project is designed to meet these needs. It also covers upgrading and equipping of JPEPC's training institutions and project-related training for technical staff (paras. 5. 11- 5.12). E. PLANNNG, BUDGETING AND CONTROL 3. 12 Power bureaus and companies are responsible for developing annual and five-year production and investment plans that are integrated into the national plans and are approved, through MOEP's and SEIC's auspices, by SPC. In the past, financial planning was confined to attaching monetary values, predetermined by MOE, to the quantities being planned. Although a power bureau's plan might be revised to reflect changes, it would ordinarily not be revised to reflect differences between estimated prices and actual prices. 3.13 However, with the economic changes in the 1980s, prices have begun to move toward market levels and the Government has begun to finance more investments through loans rather than grants. Centralized control is being relaxed and replaced by greater financial autonomy and responsibilities for the power entities. To address these changes, JPEPC will need to adjust its planning system to include modem financial planning. 3.14 MOEP and SEIC recognize the importance of financial management in the power subsector in China and are organizing a comprehensive training program for all the power institutions under their control. Many of the power bureaus/companies have been equipped with computers and software for planning, budgeting, and accounting functions.  - 23 - Information from the bureaus/companies can be transferred to MOEP and consolidated into regional and national data. 3.15 The new systems represent a good first generation of automated management information; however, they still are not sufficiently flexible to take into account price changes at the local level or those associated with large-scale debt service obligations. Currently MOEP and SEIC, with assistance from the Bank, manage a number of seminars in China and overseas covering computer-based management information systems as well as tariffs, cost control, project financing, comparative accounting systems, and the organization and structure of financial management. After JPEPC installs the new financing management information system to be financed under the proposed project (para. 3.18), it will be able to significantly upgrade the existing financial planning, budgeting and control system. F. AccouNING Enterprise Accounting 3.16 JPEPC follows a uniform enterprise accounting system and detailed regulations established by the MOF. The accounting framework effective before July 1, 1993 was developed in the context of a highly centralized planned economy. With a view to complementing China's move towards a market-oriented economy and strengthening the financial management of enterprises, new regulations covering accounting rules and financial affairs are being introduced by MOF since July 1, 1993. These revised accounting principles are generally consistent with those of international accounting standards. Within this broad framework, specific accounting standards would be developed with the assistance of the Bank Group under the Financial Sector Technical Assistance Project (Credit 2423-CHA). 3.17 Currently, the main differences between JPEPC's accounting practices and international practices relate to: (a) the approach for determining and accounting for equity, and for separating those items now accounted for through special funds that relate to liabilities, such as provision for payments to employees; (b) the need for including construction in progress and related liabilities in the accounts (now only included after completion of construction); and (c) the introduction of the concept for provision against probable losses such as, provision for doubtful debts and for stating inventories at the lower of cost and net realizable assets. These differences have been generally addressed in the new regulations. Nevertheless, given the conceptual and practicable gaps between the old and new regulations, implementation of the new accounting system is a challenge to JPEPC. Most importantly, it is critical for JPEPC to introduce accounting and financial management systems that will recognize commercial practices in a market economy such as: (a) allocating costs to areas of responsibilities; (b) providing information for comparative analysis of actual cost with budgets; and (c) providing transparency of information for investors, authorities, lenders, and the public in general.  - 24 - 3.18 The proposed project would include a technical assistance component to support JPEPC making a speedy and smooth transition to the new accounting system, based on the principles promulgated by MOF in 1993 and upgrading its financial management system, including provision of software and hardware, as well as enhancement of its staff skills, would be included (para. 5.8 and Annex 5.3). Training in modem financial management, including intemational accounting practices, would also be provided to senior managers and financial staff of JPEPC (para. 5.10). Revaluation of Fixed Assets 3.19 The Chinese traditional accounting system has not required revaluation of fixed assets. In the past, the revaluation of assets probably would not have had a major impact on enterprises' financial status because of low inflation and low foreign content in existing assets. However, with recent inflation and the depreciation of the renminbi, the need to revalue assets is more compelling. Under the revised accounting principles, enterprises in certain categories such as joint ventures with foreign partners or merged enterprise will have to undertake asset revaluation. Regular revaluation of fixed assets is recognized in China as being essential for the future corporatization of power entities and for a better foundation for managing state assets. Following the guidelines for how to undertake asset revaluation issued by the State Council in 1993, all power entities in China are revaluing their fixed assets. A pro-forma revaluation of JPEPC's assets (using projected domestic inflation rates as indexes to revalue JPEPC's assets with a steep increase of 50 percent in 1993) was performed during appraisal of the proposed project. The resulting estimated average rate of return on assets for the period 1993 through 2002 fell to 12.3 percent, compared to 20.3 percent on a historically valued basis. G. AuDrr External Audit 3.20 The State Audit Administration (SAA) was established in 1983 and given the status of a ministry reporting directly to the State Council. In addition, provincial audit bureaus have been established in each province and large municipality. The audit regulations and standards prepared by MOF are based on international auditing practices and were promulgated by the State Council on October 21, 1988. Audits of Bank-financed projects have been conducted by SAA's Foreign Investment Audit Bureau or one of the Provincial Audit Bureaus (PAB) under its guidance. The audits have focused on enterprises with foreign participation in the form of equity or loan financing. SAA and PABs have been receiving training supported by the Bank Group-financed Technical Assistance Credit. 3.21 Under the proposed project, JPEPC's accounts will be audited by Jiangsu Provincial Audit Bureau under the supervision of SAA. This arrangement is satisfactory. Assurances were obtained from JPEPC that: (a) it would maintain and provide the Bank with semiannual progress reports with unaudited project accounts in a fonrat to reflect project expenditures of the period under report and accumulated to date,- and (b) it would  - 25 - furnish the Bank with the audited project accounts, statements of expenditures, and financial statements of JPEPC within sLx months after the end of each fiscal year. In addition, Jiangsu Provincial Audit Bureau would be required to: (a) include in the audited financial statements a summary of any differences in the basis of accounts due to the conversion to new accounting policies; (b) provide a management letter summarizing any significant errors that may have been discovered during the audit, and any major weaknesses in internal control; and (c) provide on request a copy of its audit plan. Internal Audit 3.22 JPEPC has developed an internal auditing section (staffed with qualified accountants) that periodically examine the accounts of each operating unit. The objective of these examinations is primarily to test for accuracy and compliance with MOF regulations. The internal auditing section is not expected to review the appropriateness of accounting regulations or procedures; such reviews are considered to be the responsibility of MOF and MOEP. However, the section will serve as liaison between extemal auditors and the project entity. The Bank will review the internal auditing function during project implementation with a view toward increasing its efficiency and usefulness to JPEPC. H. BLLING AND COLLECTIONS 3.23 As of December 31, 1992, electricity consumption in Jiangsu Province, distributed according to the consumer categories, is shown in Table 3.1. Details of the sales and average price by category of consumers are given in Annex 2.5. Table 3.1: ELECTRICrrY CONSuMPTION IN JIANGSU PROVINCE (1992) Customer category Consumption (GWh) 5 Heavy industry 27,953 55 Light industry 10,875 21 Agriculture 5,733 11 Residential 3,691 7 Commercial 601 1 Others 2,039 5 Total 501892 100 3.24 JPEPC conducts its billing and collection activities through twelve power supply units. All major industrial consumers receiving supply over 320 kVA are charged in advance three times per month at approximate 10-day intervals. The last two bills, rendered on about the sixteenth and twenty-fifth days of the month, are based on estimated usage derived from the consumer's contractual power consumption. The first bill,  - 26 - rendered on about the sixth day of the month, is also based on estimated usage but includes an adjustment to reflect the previous month's actual usage as computed from a meter reading. All other customers are billed once a month based on actual usage. 3.25 Industrial, commercial and bulk consumers pay their bills through direct debit from their bank accounts. Urban residential and low voltage agricultural consumers receiving power directly from JPEPC render payments to local branches of the National Bank. Payment is due within five days of receipt of the bill. Regulations stipulate that consumers who do not pay within this period are to be charged a fine of 0.03 percent per day of delay, and that after several notices those who still refuse to pay their bills are to be disconnected from the power supply. These billing and collection arrangements have established a reliable cash flow from sales. It is expected to bring JPEPC's accounts receivable down from an average collection period of 42 days in 1992 to within one month by 1995.  - 27 - 4. THE POWER MARKET AND PROGRAM A. THE JIANGSU POWER GRID 4.1 The proposed project would be located in Jiangsu Province, which is experiencing remarkable economic growth; its industrial output increased in 1992 about 27 percent in spite of acute power shortages. Many problems with power supply in the area have so far been averted by improved power subsector performance, especially energy conservation and load management measures. Also, increased capacity will be needed in view of the Government's open-door policy in the East China area and the consequent foreign investments and private sector developments, which require an adequate supply of high quality power. The East China area is expected to match, and in some respects surpass, the degree of market orientation that Guangdong Province already displays. 4.2 In 1992, the Jiangsu Power Grid (JPG) had a total installed generating capacity of 8,280 MW, almost all coal-based, and only 24 MW of hydropower (Annex 4. 1). The generating facilities include 16 thermal power plants owned by JPEPC and the Province, and a number of captive and other plants. Major power generating plants greater than 50 MW in installed capacity are described in Annex 4.2. The captive power plants total about 1,551 MW in installed capacity. Electricity generated in the province in 1992 amounted to 47,408 GWh. JPEPC's operated power plants produced 32,601 GWh, about 70 percent of the total. 4.3 The transmission system in Jiangsu Province in 1992 consisted of 740 km of 500 kV lines, 4,760 km of 220 kV lines, and 7,025 km of 110 kV lines. JPEPC owns and operates all 500 kV, 220 kV, and 110 kV lines. The system also includes transformer substations, with a total capacity of 28,659 MVA (Annex 4.3). 4.4 The growth of energy requirements in JPG between 1985 and 1992 is shown in Annex 4.4 and summarized in Table 4.1. JPG's peak demand has increased more rapidly than energy requirements. The system has a maximum daily load factor of about 88 percent and an annual load factor of 77 percent. The peak load usually occurs in August. 4.5 In 1992, electricity consumption of the JPG amounted to 50,892 GWh; of which industry, 76 percent; agriculture, 11 percent; residential, commercial and other municipal customers in the cities, 12 percent; and the transport/telecommunication sector, 1 percent. Energy consumption by consumer categories for JPG in the period 1987-92 is shown in Annex 4.5.  - 28 - Table 4.1: LoAD GROWrH OF JIANGSU POWvER GRID (JPG) Year Energy requirement (GWb) /a Peak demand (MW) 1985 27,800 4,033 1986 30,615 4,436 1987 33,677 4,880 1988 36,191 5,368 1989 37,437 5,905 1990 40,687 6,495 1991 44,866 7,145 1992 50,892 7,859 Average annual growth 9.61% 10.11% /a On a provincial basis, including generation and purchased energy. B. LOAD FoREcAsT 4.6 Load forecasts for the years 1993 through 2002 have been developed as part of the economic planning process carried out by JPEPC. The forecasts were obtained by applying a combination of statistical methods and planning targets to every major consumer category. In particular, industrial loads were estimated on the basis of a market survey and the projected industrial output growth and electricity intensities for different categories of industry. Rural loads were estimated based on past trends for drainage and irrigation, rural industries loa,ls, and lighting. Municipal loads were estimated based on market surveys of hotels, buildings, and government projects. Specific demand management and energy conservation measures have been fully incorporated in the load forecasts. Details of the energy forecasts for JPG are given in Annex 4.6 and summarized in Table 4.2. 4.7 The load growth forecasts appear to be on the high side. However, JPEPC claims that (a) power shortages have been occurring for a long time, so there is likely to be a lot of suppressed demand for electricity; and (b) Jiangsu Province has been one of the fastest growth areas in China. Its GNP increased by about 10 percent a year in real terms between 1985 and 1991 and is expected to continue to grow by about 11 percent a year over the next decade. To sustain this growth, electricity supply should expand at about the same rate (an elasticity coefficient of about 1.0). C. POWE DEVELOPMENT PROGRAM 4.8 East China is short of hydroelectric potential and the expansion of generating capacity, therefore, will be virtually entirely based on thermal power stations. A study of the least-cost investment program was made by the Beijing Economic Research Institute for Water Resources and Electric Power (BERIWREP) in 1992 and revised in 1993. The study is based on an optimization of the JPG, including least-cost expansion alternatives  - 29 - Table 4.2: LOAD FORECASr FOR JLANGSU PoElER GRID (JPG) L/ Year Energy requirement (GWh) Peak dernand (MW) 1993 57,000 8,900 1994 63,500 10,000 1995 70,200 11,200 1996 78,000 13,000 1997 88,000 14,500 1998 99,000 16,500 1999 110,000 18,400 2000 121,000 19,800 2001 133,000 21,500 2002 139,000 23,000 Average annual growth 11.1% 11.3% /a On a provincial basis. for the period 1993-2003. The analysis shows that the development program for JPG should be based primarily on the construction of large coal-fired base load thermal power plants. The study also confirms that there are no other alternatives better than the proposed project (para. 7.5) to meet the future power supply requirements. 4.9 A summary of the power development program (1993-2002) for the JPG system is given in Annex 4.7. The balances between power demand and supply are presented in Annex 4.8. They demonstrate that the power system will be short of energy supply and capacity up to the year 2002. Therefore, the system load growth would be controlled by the available generating capability. Under the presently proposed power development program, it can sustain a growth rate of about 10 percent a year over the next decade, instead of 11 percent under unconstrained power supply capability.   - 30 - 5. THE PROJECT A. PROJECr OBJECTIVES 5.1 The proposed project is consistent with the Government strategy of modernizing the power subsector and improving its efficiency. The main objectives of the project are to: (a) support the implementation of institutional and structural power subsector reforms at the provincial level, through development of JPEPC as an autonomous company; (b) contribute to further rationalization of the power tariff structure through implementation of a program to simplify the existing complex tariffs; (c) promote applications of more transparent and efficient financial management techniques to assist in transforming the provincial power company's accounting system; (d) provide cost-effective and environmentally sustainable additional generation capacity to alleviate a current acute shortage of power, meet the future power demand growth, and improve the quality of the power supply in Jiangsu Province and the East China power system by the construction of the Yangzhou thermal power plant and associated facilities; (e) assist in transferring new technologies for large coal-fired thermal power plants in China, applying modern power system operation methods, and strengthening institutional capabilities for environmental management and monitoring; and (f) extend technical assistance in management development and staff training programs. B. PROJECr DESCRIMON 5.2 The proposed project is located about 11 km from Yangzhou city in Jiangsu Province, and close to the major load centers in East China. Its site has favorable topographical conditions and easy access by railroads, highways and river navigation. In its initial phase the Yangzhou thermal power plant will have an installed capacity of 1,200 MW (2 x 600 MW). In the second phase, if and when developed, the site could reach an ultimate capacity of 2,400 MW. The power plant will consume up to four million tons of coal a year. Coal from the Shenfu-Dongsheng coal mines in Inner Mongolia will be supplied to the plant through a newly built railroad to a new port (Huang Hua) in North China, and then by sea and river transportation to the special coal jetty near the plant site. The basic coal characteristics are: low calorific value-about 5,100 kcal/kg, ash content- 15.5 percent, and sulfur content-0.31 percent. The plant site is very close to the Yangtze River, which can fully meet the water demand for the makeup and cooling requirements of the power plant. Two 500-kV transmission lines to the Jiangdu substation will connect the power plant with the East China power system.  - 31 - 5.3 The project consists of: (a) construction of a coal-fired thermal power plant with two 600-MW generating units and associated equipment and facilities; (b) erection of two 500-kV transmission lines (about 30 km long) and reinforcement of the existing power transmission network; (c) engineering and construction management services; (d) environmental management and monitoring program; (e) resettlement program; (f) assistance for the development and implementation of improved accounting and financial management information systems; and (g) management development and training. A detailed description of the project components is given in Annex 5. 1. Project Origin and Design 5.4 The proposed project was first brought to the attention of the Bank in October 1991 by the Government. An identification mission visited the project in October 1992. The project feasibility study and design report were prepared by the East China Electric Power Des:gn Institute (ECEPDI) in 1986, and revised and updated in 1992. The project was approved by the SPC in 1992. An Environmental Assessment Report (EAR) was prepared in 1993 by ECEPDI in accordance with the Chinese and Bank environmental review procedures and guidelines for thermal power projects. The EAR has been approved by all Government authorities, and its summary was distributed to the Executive Directors on May 6, 1993. The design of the project is at an advanced stage, and appears to be satisfactory in its overall concept. Consulting Services 5.5 ECEPDI has been retained by JPEPC to assist in detailed design and project implementation. It is one of the most experienced design institutes in China, and has completed the design of several large thermal power projects. ECEPDI has over 2,000 professional staff and is equipped with modem facilities and laboratories. International engineering consultants have also been selected in accordance with the Bank Guidelines for the Use of Consultants. The JPEPC's engineering staff have visited a number of large coal-fired thermal power plants and shared experience in building large and complex thermal power projects.  - 32 - 5.6 The consulting services for the project comprise two stages. For Stage I, the Government has approved $2.2 million out of the CRISPP (Credit 2447-CHA) funds for financing services of expatriate consultants for project preparation, implementation scheduling, and procurement of works and goods. In Stage II, the expatriate consultants will assist in the interfacing of engineering and design components for different power plant islands, in reviewing detailed drawings, technical documents submitted by the manufacturers of procured equipment, and will provide support in construction management of the power plant. 5.7 Due to the magnitude and complexity of the project and the expected use of various equipment suppliers, as well as foreign financing sources, JPEPC will continue to employ professional international consultants throughout the entire project implementation period to assist in managing project construction. The scope of work for the consultants will include contract administration, cost control, scheduling, construction inspection and quality assurance, design engineering services, and construction site administration. Terms of reference for these services are given in Annex 5.2. The total cost of engineering services is estimated to be about $11.6 million, of which $6.3 million is in foreign exchange. These costs include about 300 staff-months of foreign consultants' services. Accounting and Fmancial Management Information Systems 5.8 JPEPC will develop more modern computerized financial systems that would take account of the new accounting regulations introduced in China in July 1993. These would be eventually established on a computer network serving JPEPC's activities. JPEPC also plans to send its representatives to visit other countries to obtain a better idea of accounting and financial systems being used elsewhere. The scope of the assistance to develop the modern accounting and financial systems, together with the terms of reference, is given in Annex 5.3. Assurances were obtained from JPEPC that it would engage management consultants by December 31, 1994, to assist the development and implementation of improved accounting and financial management systens based on terms of reference agreed with the Bank. Management Development and Training 5.9 To meet the long-term needs of JPEPC's staffing requirements and to further develop JPEPC's management capability, a comprehensive training program is included under the proposed project. It consists of the following: (a) training in utility management and financial planning; (b) project-related training for technical staff; and (c) upgrading and equipping of JPEPC's training facilities. 5.10 High level management, planning and financial staff will receive training in modern management and decision-making techniques, particularly in utility management, planning of investments, engineering economics, power pricing, financial operations and management information systems. Engineering personnel will also receive training in their specific fields, especially related to large thermal power projects, such as construction management, plant operation, control and load dispatching of the power grid, etc. Part  - 33 - of the training will be carried out in China in the form of seminars, conducted by Chinese and foreign experts. This will then be followed by study tours and overseas training through visits to a few selected utilities and modern coal-fired power plants. 5.11 Project-related training will include: (a) on-the-job training for the engineering and construction management staff to be implemented by working together with the foreign consultants; (b) training of engineering staff under the contract for major plant equipment; and (c) training of operation and maintenance staff at other similar thermal power plants in China and abroad. The cost of such training will be included in the equipment contracts. 5.12 It is estimated that 384 staff in various fields, totalling 810 staff-months, will be trained abroad and in China. About 80 staff members, with total staff-months of 160, will be trained abroad, of which 20 staff-months are for senior management, 10 staff- months for legal staff, 60 staff-months for technical, 40 staff-months for financial, 20 staff- months for environmental staff, and 10 staff-months for training of trainers (see Annex 5.4 for details). In addition, 126 people will receive training by foreign suppliers of goods and services. Assurances were obtained from JPEPC that it would carry out the management development and training program as agreed with the Bank. C. CoST EsTIMATE 5.13 The total cost of the project is estimated at $832.7 million equivalent [excluding interest during construction (IDC)], of which $472.2 million (57 percent) represents the foreign exchange component. The detailed project cost estimates are available in the Project File. The cost estimates reflect early 1994 prices and are based on the recent tendering information available for similar projects, including prices of bids for major generating equipment and control systems. Physical contingencies are calculated at 10 percent for preparatory and other works, local cost of equipment and services, and 5 percent for the costs of plant equipment and materials, and transmission facilities. Price- contingency allowances for foreign costs estimated in US dollars are calculated according to anticipated intemational price increases of 2.5 percent a year on average for the period 1994-2000. The price escalation for costs expressed in local currency is calculated according to projected domestic inflation rates of 12.0 percent for 1994, 9.0 percent for 1995, 8.0 percent for 1996, 7.2 percent for 1997 and 6.5 percent thereafter. D. FINANCING PLAN 5.14 The total financing requirements (including IDC of $248.6 million equivalent), are estimated at $1,081.4 million equivalent. SEIC, Jiangsu Provincial Investment Company (JPIC), Yangzhou Municipal Investment Company (YMIC), and JPEPC would share the financing of the local costs, IDC, and principal repayments of the Bank loan during the project implementation period. Their contribution to the local project financing has been confirmed to be as follows: SEIC-30 percent of the total; JPIC- 25 percent; YMIC-35 percent, and JPEPC-10 percent. It has also been agreed that part of the total domestic financing (Y 300 million) would be in the form of equity, and the  - 34 - balance in the form of loans. The loans will have a variable interest rate (currently 11.16 percent a year) and 15 years maturity, including five years' grace. The equity contribution will enhance the capital structure of the project entity and represents an important step for enterprise reform in the power subsector. The local financial arrangements are acceptable to the Bank. 5.15 The proposed Bank loan of $350.0 million, together with ECO cofinancing of $120 million, will cover all foreign costs, excluding IDC. Details of the financing plan are summarized in Table 5.1. The Bank loan will be used to finance the following project items: (a) major power plant equipment, including boilers, turbine-generators, and instrumentation and control islands; (b) 500-kV electrical equipment; (c) construction equipment and materials; (d) consulting services for engineering and construction management; (e) environmental management program; (f) development of accounting and financial management systems; and (g) management development And training. Table 5.1: F'INANCING PLAN FOR THE PROJECT ($ million equivalent) Local cost Foreign cost Total cost State Energy Investment Corporation (SEIC) 162.8 20.0 182.8 Jiangsu Provincial Investment Company (JPIC) 135.7 16.6 152.3 Yangzhou Municipal Investment Company (YMIC) 189.9 23.3 213.2 Jiangsu Provincial Electric Power Company (JPEPC) 54.3 6.6 60.9 Expanded Cofinancing Operation (ECO) 0.0 120.0 120.0 IBRD 0.0 350.0 350.0 IDA (CRISPP) 0.0 2.2 2.2 Total 542.7 538.7 1.081.4 5.16 The proposed ECO is expected to meet one of the key objectives of the project, through establishing the beneficiary's direct access to the international financial markets. MOF and JPEPC have accepted the idea of two-tranche financing in US dollars and Japanese yen to take advantage of a wider participation from the markets and low fixed  - 35 - interest rates. Borrowing in two currencies would put JPEPC in a better position to deal with the foreign exchange risk during project implementation and operation period over 15 years. The floating rate dollar tranche provides the benefit of the low interest rate prevailing in the short-term dollar market (current six-month LIBOR is 3.25 percent). The yen tranche would be with a fixed interest rate for the initial 10 years (currently 3.8 percent). The tentative structure of ECO assumes that the Bank guarantee would be callable on an accelerating basis for the later maturity (from the tenth year onward). The Bank's exposure calculated on the present value basis under this assumption would be approximately $30 million equivalent, or 25 percent of the total ECO financing of $120 million. Details of the ECO cofinancing structure and the schedule for processing are given in Annex 5.5. 5.17 The proposed Bank loan will be made to the People's Republic of China at the Bank's standard variable interest rate for a 20-year term, including five years' grace. Proceeds of the loan would be onlent from the Government to JPEPC with terms and conditions satisfactory to the Bank. Assurances were obtained from the Government that it would onlend the proceeds of the proposed Bank loan to JPEPC under a subsidiary loan agreement with a term of 20 years, including a 5-year grace period, at the Bank's standard variable interest rate. JPEPC will bear the foreign exchange risk. Execution of the subsidiary loan agreement between the Government and JPEPC, and approval of the Loan Agreement by the State Council will be conditions of effectiveness for the loan. E. PRocuREmENT 5.18 In the past, the main issues in connection with procurement of works and goods in the power subsector in China included reluctance to use consulting services, delays in the procurement process and in domesuc contract approval, lack of coordination and clarity of responsibility among agencies involved in the procurement process, and very often inappropriate contract packaging. However, significant improvements have been made more recently in the sphere of procurement and these are expected to be continued under the proposed project. Expatriate engineering consultants will assist the Chinese in the procurement process, and the Model Bidding Documents following the Bank's Standard Bidding Documents, would contribute to efficient procurement. Necessary efforts are also being made to improve coordination and avoid undue delays in the procurement process. The project's civil construction works (not financed by the Bank) will be procured through local competitive bidding (LCB). Project circumstances justify the use of LCB for these works, since foreign bidders are not expected to be interested in civil works that are labor- intensive, contract values are not large enough, and local prices are well below the international market. Furthermore, Chinese contractors are well-experienced and competent in carrying out such construction works. If foreign firms wish to participate in LCB for these works, they would be allowed to do so in accordance with local procedures, which are acceptable to the Bank and considered appropriate for the efficient execution of the project. 5.19 Major equipment, including two 600-MW units, will be procured through ICB. Goods manufactured in China will be eligible for a preference in bid evaluation of  - 36 - 15 percent of the c.i.f. price or the actual import duty, whichever is lower. Some specialized equipment estimated to cost less than $300,000 per contract up to an aggregate amount of $6 million will be procured through limited international bidding (LIB) in accordance with the Bank's Procurement Guidelines. Goods, instruments and accessories needed for construction and operation of the power plant, including equipment for environmental monitoring and training, estimated to cost less than $300,000 per contract up to an aggregate amount of $3 million will be procured by shopping or through direct negotiations with suppliers. Consulting services will be obtained following the Bank's Guidelines for the Use of Consultants. The Model Bidding Documents for Procurement under ICB and LCB in The People's Republic of China would be used to the maximum extent possible. All procurement documents pertaining to bidding packages for goods financed by the Bank and estimated to cost more than $5.0 million equivalent will be subject to the Bank's prior review procedures (about 95 percent of Bank's funded purchases). Although the Bank will not finance the civil works (para. 5.18), they have to be carried out efficiently, on time, and within a budget that will satisfy the economic and financial parameters of the operation. The proposed procurement arrangements are summarized in Table 5.2, and the related procurement schedules for various packages are given in Annex 5.6. F. PO CtoA IMLEMENTAON 5.20 JPEPC will be responsible for project implementation and operation. A specialized construction unit has been established to manage site construction activities. Its organizational structure is shown in Chart 3. Preparatory works including access roads and construction power supply have been started in 1992 and are progressing satisfactorily. The bidding documents for the procurement of the main electromechanical equipment and control system were issued in December 1993 to be opened in April,1994. The commercial operation of the first generating unit is expected in late 1998, and the second unit by the end of 1999. Thus, the project completion date would be December 31, 1999 and the closing date of the Bank loan would be December 31, 2000. Chart 4 presents the implementation schedule for the various components of the project. Furthermore, key dates of project implementation are given in Annex 5.7, and estimated annual contractual and other payments are summarized Table 5.3. G. D uSBEmENT 5.21 The Bank loan will be disbursed against: (a) 100 percent of the foreign expenditures for directly imported equipment and materials quoted on a c.i.f. basis; (b) 100 percent of local expenditures ex-factory for locally manufactured items, and 75 percent of local expenditures for other items procured locally; and (c) 100 percent of the expenditure for consulting services and training. For expenditures pertaining to (a) training; and (b) contracts for goods and works valued at less than $400,000 equivalent, reimbursement will be made on the basis of Statements of Expenditures. Documentation supporting such expenditures would be retained in the JPEPC office and made available for review by the Bank's supervision mission. To facilitate disbursements under this project, a Special Account will be established with an authorized allocation of $15 million, representing  - 37 - Table 5.2: SUMTMLARY OF PROPOSED PROCUREMENT ARRANGEMENTS ($ million) Total Proposed Method project Project item ICB Other NBF /a costs Works Preparatory works - 2.5 2.5 Land acquisition & resettlement - 23.4 23.4 Civil works - - 87.4 87.4 Harbor works - - 21.3 21.3 Goods Plant equipment, materials & 591.5 9.0 - 600.5 systems (329.0) (9.0)L (338.0) Transmission network - - 64.2 64.2 Services Construction administration - - 15.6 15.6 Engineering services - 9.7 - 9.7/c (6.2) (6.2) Environmental program - 1.2 - 1.2 (0.9) (0.9) Accounting and financial MIS - 2.9 - 2.9 (1.7) (1.7) Training - 4.0 - 4.0 (3.2) (3.2) Total 591.5 26.8 214.4 832.7/c (329.0) (21.0) (0.0) (350.0) /a NBF = Not Bank Financed. fb LIB and shopping for minor equipment and instruments, and direct negotiations with suppliers for training and environmental monitoring equipment. /c Includes the CRISPP-related financing. Note: Figures in parentheses are the respective amounts financed by the Bank loan. approximately four months of average project disbursements. Applications for replenishment will be submitted monthly or when the amounts withdrawn equal 50 percent of the initial deposit, whichever comes sooner. Annex 5.8 presents the disbursement schedule for the proposed Bank loan as well as a standard profile of disbursements for all sectors in China. The disbursements are expected to be completed in six years, very close  Table 5.3: INIPLENIENTATI()N SCHEDULE: FsTIMATED ANNUAL CONTRACTUAL AND OTHER PAYMENTS ($ million equivalent) Project Year /a Total Project element 1993 1994 1995 1996 1997 1998 1999 2000 payments Remarks & before Works Preparatory works 2.5 - - - - - - 2.5 LCB Land acquisition and 19.3 4.1 - - - - - - 23.4 NBF resettlement Civil works - 6.4 17.0 19.0 18.1 12.4 9.0 5.6 87.4 LCB Harbor works 1.2 4.5 5.1 4.1 3.1 3.3 - - 21.3 NBF Goods Power plant equipment, - 44.5 37.4 151.9 198.0 1,05.5 52.3 11.1 600.7 [CB materials and systems (33.7) (5.9) (97.0) (127.5) (54.8) (19.0) (337.9) Transmission system - 4.8 13.6 15.3 12.4 9.3 8.8 - 64.2 NBF Services Construction management - 1.5 2.1 3.4 2.8 2.6 2.3 1.0 15.6 NBF Engineering services - 0.9 1.3 1.4 1.7 2.2 1.6 0.5 9.7/b Other (0.6) (0.8) (0.9) (1.1) (1.4) (1.0) (0.3) (6.2) Environrnental program - - 0.4 0.7 - - - 1.2 Other (0.3) (0.6) (0.9) Accounting and financial MIS - - 0.3 0.6 0.7 0.7 0.6 - 2.9 Other (0.2) (0.3) (0.4) (0.4) (0.6) (1.7) Training - - 0.4 0.8 0.9 0.9 0.7 0.3 4.0 Other (0.3) (0.6) (0.8) (0.7) (0.6) (0.2) (3.2) Total 23.0 66.7 77.1 196.7 238.5 136.8 75.3 18.7 832.7 (0.0) (34.3) (7.2) (99.2) (130.4) (57.3) (21.0) (0.7) (350.0) /a Based on calendar year. /b Includes the CRJSPP-related financing. Note: Figures in parentheses are the respective amounts financed by the Bank loan.  - 39 - to the standard disbursement profile for China. The last year is for payment of retention money. H. ENvIRONMENrAL CONSIDERATIONS 5.22 In accordance with OD 4.01 (Environmental Assessment), the project has been assigned to Category A. The EAR (para. 5.4) has been approved by the Environmental Protection Bureau of Jiangsu Province, MOEP and the National Environmental Protection Agency. The EAR has been reviewed by the Bank; it is considered that all environmental aspects of the project are satisfactorily addressed and in compliance with all environmental policies and procedures. The project has been designed and will be carried out in accordance with current technological practices and it is expected to cause minimum disturbance to the environment. 5.23 The project is a greenfield operation, located in a semirural agricultural area near the bank of the Yangtze River. Alternative locations for the power plant and ash disposal sites had been considered. The selected site requires the least amount of land, affects the least number of people, and offers the smallest impact on the natural and human environment. Also, appropriate technologies will be applied in the power plant design, such as low NO, burners. Furthermore, the power plant layout provides enough space to enable installation of additional pollution control devices if required in the future as a result of changes in standards and new technological developments. Annex 5.9 presents the environmental management program, including a summary of key environmental issues associated with the project and their anticipated impacts, the mitigating plan to assure these impacts are minimized, and the monitoring program with which environmental impacts will be measured and compared with the predictions in the EAR. Strengthening of JPEPC's institutional capabilities for environmental man4agement will be carried out under the JPEPC management development and staff training program (para. 5.12). Monitoring equipment in an amount of $0.8 million will also be provided under the proposed project. 5.24 Environmental issues associated with the project and addressed in the EAR have been discussed at public meetings that were held by the Yangzhou Municipality. The local public and authorities supported the project and the recommended mitigating measures offered in the EAR. The mitigation plan recommended in the EAR will be fully implemented. 5.25 Key issues investigated in the EAR include: air pollution (dust, sulfur dioxide, nitrogen oxides, and fluorides), water pollution (primarily thermal discharges and residual chlorine from the once-through cooling system), coal transport and handling, ash disposal management, worker health and safety, transmission line impacts (electric field, noise, and bird flight), barge collision risks, and the influence of the construction labor force on the local infrastructure. All mitigating measures for air, water, and land impacts are designed to meet appropriate Chinese requirements and/or World Bank environmental guidelines whichever is stricter. In the absence of either, international standards or codes of practice will be utilized.  - 40 - 5.26 All environmentally related issues considered were deemed manageable, and, with the mitigation plan offered in the EAR, should result in a minimum environmental impact by the project. Assurances were obtained from JPEPC that it would carry out the environmental management program in a manner satisfactory to the Bank. I. REsETrLETENT ASPECTS 5.27 The proposed project will require acquisition of about 179 hectares of farmland and relocation of 1,053 households, affecting about 4,500 people. According to the resettlement program and action plan the affected people and communities will be compensated generously according to both national and local regulations (up to 20 times of the gross output of land). A well-organized environmental and resettlement unit has also been set up by the Yangzhou municipality and JPEPC to handle the resettlement planning and implementation. Arrangements for relocation, which have been made through a participatory process with land users and local authorities, appear to be satisfactory. The Chinese have had extensive experience with World Bank policies and requirements for resettlement, and have, in the past, achieved good results in their implementation. A resettlement plan, including details of land acquisition is presented in Annex 5.10. 5.28 Institutional strengthening of the resettlement unit is included in the project. In addition, an experienced resettlement team from the National Research Center for Resettlement of the Hehai University in Nanjing has been actively involved in the preparation of the resettlement program and related action plan. The monitoring of progress in the resettlement and rehabilitation program will be subcontracted by JPEPC to this Center. Assurances were obtained that JPEPC would carry out relocation of persons affected by the project in accordance with a resettlement plan acceptable to the Bank. Project Risks 5.29 Project construction risks are within reasonable limits and would be manageable given the continuous supervision arrangements, involving foreign and Chinese consultants, that have been put in place. Particular attention will be given to safety aspects of the project, and to capabilities and performance of major contractors. The economic risks, if any, would be minimal (para. 7.10). The financial risks may result from joint financing. However, proper financial arrangements have been made to avoid these risks. The project's nonquantitative risks (including institutional) are considered to be minimal. The borrower and beneficiary will ensure the proper coordination of all project participants and delineation of authorities. Other potential risks could include the continuity of goods supply, funding shortages, contract management difficulties, and effective implementation of the environmental program. No major environmental problems are expected under this project, and the implementation of the proposed environmental management program (including a monitoring process) would assure the adequate quality of the environment at the project site and in the nearby areas.  - 41 - Monitoring and Reporting 5.30 Satisfactory procedures for monitoring, evaluating, and reporting on the project have been agreed by JPEPC. The Bank would be fumished with semiannual and annual project progress reports. The timely implementation of the project is critical and depends on adequate financial resources being made available when needed. For this reason, the annual project progress reports would include, inter alia, JPEPC's proposals regarding project costs and financing plan for the following year. The scope and content of the project progress reports have also been agreed. In view of the experience with similar power projects in China, regular project supervision would be required. Bank supervision input into key activities is presented in Annex 5. 11, and a framework for project monitoring and reporting in Annex 5.12.  - 42 - 6. FNANCIAL ASPECTS A. INTRODUCTION 6.1 JPEPC follows MOF financial regulations applying to state enterprises. Under the current system, JPEPC's operational budget and investment projects over Y 10 million require approval by the Government, its tariffs are largely set by and a significant share of its surpluses are remitted to the Government. The Govemment, for its part, provides a share of investment funds for approved projects. Historically, such funds were fully provided by the Government and were on a grant basis. Starting from the early 1980s, govemment grants have been replaced by loans through the People's Construction Bank of China, first at subsidized rates, and more recently at rates very close to commercial ones for new investments. These financial arrangements have a number of shortcomings, notably the inadequacy of resource mobilization for sector development and inadequate financial accountability and discipline in power entities. 6.2 Before the contract responsibility system was introduced in 1987, power entities had very little financial incentive to increase tariffs or improve their efficiency, because once a power entity had sufficient revenues to meet the costs charged directly to the operations and all special fund allocations and debt service, any additional revenues were remitted to the Govemment through sales (25 percent), income (55 percent after debt se-vice), and adjustment (28.5 percent) taxes as well as other levies. This system left power entities with almost no intemally generated funds to finance new investments other than small renovations. Consequently, a conservative and passive approach was taken by many power entities. Actual capital expenditures fell far short of requirements and severe shortages of electricity have been experienced. 6.3 However, this system has been evolving as part of the ongoing economic reforms. Beginning from 1987, the contract responsibility system was put in place to increase autonomy and accountability of enterprises. In the case of JPEPC, the existing contract that covers the period 1991-93 requires JPEPC to submit a fixed amount of income and adjustment tax to the Govemment each year, Y 115.9 million in 1992. In return, JPEPC has agreed to carry out all technology renovation projects at given costs in accordance with specific parameters, in particular, the unit coal consumption target. In addition, the compensation of JPEPC's employees is linked to electricity sales and production costs. Starting from 1992, power entities are allowed to accelerate depreciation of fixed assets by 20 percent to increase their self-financing capability and, by 1993, they are exempt from submitting 25 percent of the depreciation funds to the Government. However, power entities still have to rely on tax exemptions and lax debt repayment schedule to maintain their operations and only retain about 5-7 percent of their net income for future expansion program.  - 43 - 6.4 Compared with those newly established independent corporations, such as Huaneng, Sunburst, and others, the level of autonomy over planning, financing, and investment enjoyed by JPEPC and other provincial power companies is still very limited. Unlike provincial power companies, the former are permitted to set power prices at actual cost, including debt service at an accelerated amortization schedule, plus a reasonable profit, to retain their profits, and to reinvest them in new developments, and thus have more incentive to increase their efficiency. 6.5 The authorities are aware of the above systemic issues. In the absence of deepened enterprise and fiscal reforms, the gap in financing the required sector investment would continue to increase in the 1990s. As a first step, they are committed to including the power sector in the categories governed by the guiding principles of "regulation on transforming the operating mechanisms of stated-owned industrial enterprises" promulgated in July 1992 by the State Council that gives enterprises 14 management rights, including financing, investment, and assets management rights. Secondly, SPC and MOEP jointly issued in August, 1993 a set of detailed principles and regulations for setting 'the state based prices" by all provincial and municipal power entities. In principle, power entities are allowed to incorporate the principal and interest payments in their prices retroactive to April 1, 1993. In practice, there will be a phase-in period to have the full debt service requirements reflected in the prices. This new policy actually guarantees a breakeven position for power entities and leaves them with all the depreciation funds for new investments. Therefore, it will encourage power entities' managers to take a more aggressive approach in investments. In JPEPC's case, it calls for an increase of 9.1 percent per year in the average price of electricity during 1994-2002. JPEPC's projected depreciation fund (equivalent to 40 percent of its projected net income) is expected to meet about 16 percent of its projected capital expenditures during 1993-2002. 6.6 The new accounting principles and financial rules effective on July 1, 1993 will also have far-reaching impacts on the sector. First, they require power entities to clarify and separate debt from equity. This is an important step for power entities moving toward limited liability companies and eventually shareholding companies. Diversification of ownership is critical to mobilizing more resources to the sector. Secondly, under the new profit allocation system specified in the new financial rules issued by MOF, the adjustment tax and special fund allocations have been abolished. The management of power entities are given greater autonomy in making decisions on profit distribution. Thirdly, enterprises are permitted to design their own internal accounting and financial management system based on the business needs. Overall, the new financial rules together with other reforms, such as state assets management, fiscal and financial sector reforms, will lead the Government gradually to play a more limited and indirect role in the management of power entities. With new autonomy and increased accountability power entities will also have to improve their budgetary and cost controls as well as cash management in order to stay competitive in a market-oriented environment. 6.7 The Government is currently considering an overhaul of the fiscal policies, with particular focus on how to replace the contract responsibility system with a transparent and simplified tax system. At latest starting from January 1, 1996, a corporate  - 44 - income tax rate of 33 percent would be applied to the East China Power Group, including JPEPC. The Government will then only collect income tax from enterprises based on a unified rate and dividend distribution for Government equity contribution in enterprises would be decided by the management and Board of Directors. The new tax policy does not necessarily mean that the tax and remittance burden for power entities will be reduced. However, it eliminates the lengthy and complicated negotiations between enterprises and the Government. More importantly, it is really conducive to strengthening power entities' planning and financial management functions. 6.8 JPEPC's financial performance in the past was generally satisfactory. However, as the details of many critical reforms, such as property rights, investment, fiscal, financial, trade, are still being formulated, considerable uncertainties relating to the specific parameters would affect JPEPC's future finances. Therefore, strengthening the financial management holds the key for JPEPC to perform its increased financial role efficiently and effectively. Toward this end, the proposed project would continue the process of institutional building already initiated under previous Bank-financed projects, including (a) a component to improve and upgrade JPEPC's accounting and financial management system (para. 5.8); (b) training in financial management for JPEPC (para. 5.12); and (c) agreements with JPEPC on financial performance targets that would provide a framework for financial discipline (para. 6.11). B. JPEPC'S PAST AND PRESENT FINANCIAL PERFORMANCE 6.9 JPEPC's income statements, fund flow statements and balance sheets for the period 1989-92 are set out in Annex 6. 1. Salient points and features highlighting its past and present finances are summarized in Table 6. 1. 6.10 During the period 1989-92, JPEPC reported modest profits. Its operating revenue in 1992 doubled the level of 1989's due to the higher average tariff and vigorous growth in energy sales. Specifically, JPEPC's sales volume grew by about 32 percent over the three years, but operating revenues increased by more than 100 percent, as a result of an increase of about 52 percent in the average revenues, from 10.60 fen/kWh in 1989 to 16.08 fen/kWh in 1992. Despite these increases, the operating ratio deteriorated from about 74 percent to about 83 percent, indicating that the increase in JPEPC's operating cost, 110 percent in three years, outpaced the increase in average revenues. In particular, the cost for purchased power went up 246 percent in three years, an annual increase of about 51 percent, and accounted for close to one third of the operating costs in 1992 compared with 17 percent in 1989. Moreover, both the fuel and the operating and maintenance costs rose beyond the general price increases. The negative impacts on JPEPC's finances were only partially offset by the robust growth in energy sales and impressive increases in the average revenues. As a result, the rate of return based on historically valued assets also declined from over 10 percent in the mid-1980s to 6-7 percent.  - 45 - Table 6.1: JPEPC's KEY FINANCIAL INDICATORS, 1989-92 (Million Yuan) Growth Rate % p.a. Year ended December 31 1989 1990 1991 1992 (1989-92) Electricity Sales (GWh) 25,900 27,900 30,200 34,300 9.8 Average Revenues (fen/kWh) 10.63 12.83 14.12 16.08 14.8 Operating Revenues 2750 3,578 4,259 5,509 26.1 Operating Income /a 335 393 341 450 10.3 Net Income 242 279 256 317 9.4 Net Fixed Assets in Operation 3,947 4,400 4,480 4,832 7.0 Capital Expenditure 632 488 1,729 1,444 31.7 Operating Ratio (%) 74.3 78 81.8 82.6 Rate of Return (%) /b 6.7 6.7 5.8 6.8 Debt Service Coverage (times) 2.3 1.6 2.3 1.9 Current Ratio 1.8 1.8 2.1 1.9 Debt as % of Debt and Equity 33.2 27.4 31.9 28.4 /a Operating revenues less the aggregate of fuel, power purchases, administration, operation and maintenance, and depreciation. /b Based on histoncally valued average net fixed assets in operation. purchases, administration, operation and maintenance, and depreciation. C. FINANCIAL PERFORMANCE TARGET 6. 11 Traditional performance indicators (such as rate of return and self-financing ratio) have thus far had limited significance in measuring the performance of power entities operating in a centralized financial system. However, as the Government is taking steps to reform rules governing enterprise accounting and financial affairs and to increase the financial autonomy of enterprises, the self-financing ratio will become a very meaningful indicator. At present, the indicator serves as an effective tool to ensure adequate tariff levels. With a view to promoting prudent financial management, assurances were obtained from JPEPC that it would: (a) take all necessary measures, including but not limited to tariff adjustments, to ensure that its internal cash generation is sufficient to maintain a self- financing ratio of no less than 30 percent from 1994 onwards; (b) not incur additional debt unless a reasonable forecast shows its internal cash generation would provide a debt service coverage ratio of no less than 1.5 times at all times,- and  - 46 - (c) by April 30 of each year, commencing in 1995, furnish to the Bank a rolling eight-yearfinancial plan containing projected income statements, statements of sources and uses of funds, and balance sheets. D. FuruRE FINANCES 6.12 The projections of JPEPC's finances for 1993-2002 are presented in Annex 6.2, and the salient features of these finances are highlighted below in Table 6.2. The projections are based on the assumptions contained in Annex 6.3. The average prices shown depict the minimum tariff adjustments needed to allow JPEPC to achieve the above financial performance targets. Table 6.2: KEY FINANCiAL INDICATORS, 1993-2002 (Million Yuan) Year Ended December 31 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Energy Sales (100 GWh) 386 439 491 530 575 632 713 805 895 923 Average Price (fen/kWh) 25.00 27.17 30.91 34.98 37.58 40.92 45.57 50.47 54.32 54.84 OperatingRevenue 9,661 11,918 15,181 18,547 21,622 25,861 32,491 40,608 48,623 50,621 Operating Incorne 1.851 1,994 2,670 3,804 4,632 5.120 6,671 9,888 12,631 10,616 Annual Capital Expenditures 2,960 3,766 3,949 5,271 8,102 10,476 12,984 13,176 12,238 10,719 Rate B ae 10,736 14,019 18,312 22,288 28,607 36,860 43,654 51,289 63,067 75,787 Long-term Debt 3,510 5,332 6,945 9,341 13,862 19,100 25,033 29,655 32,342 33,945 Debt Service 302 440 695 988 1,079 1,024 1,795 3,157 3,972 4,357 Cash in Banks 2,042 2,371 2,863 3,266 3,680 3,920 4,227 5,393 5,687 6,165 Rate of Return on Revalued Aseu (%) 13.3 9.7 10.1 12U. 11.4 9.7 11.1 14.5 15.1 10.2 IHist. Valued Assetc (%) 27.0 19.3 19.3 22.7 19.9 15.7 18.0 23.5 23.7 17.0 Self Financing Ratio(%) 31.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 Operating Ratio (%) 71.0 74.4 73.9 71.1 70.2 72.1 71.7 68.0 66.5 71.5 DebLrTotal Capiul (S) 33.4 38.7 40.8 43.7 49.5 54.0 56.7 56.0 52.3 49.0 Debt Service Coverage 2.2 1.9 2.0 2.0 2.5 3.2 2.4 1.9 1.6 1.5 6.13 The mechanism for tariff adjustments to cover debt service requirements is already built into the existing power pricing system (Annex 2.5). Electricity generated from all new plants invested by JPEPC is being priced, on a plant-by-plant basis, at "debt repayment price" levels, allowing for full debt service based on 10-year payback period after commissioning of new power plants. For plants invested by independent investors, such as Huaneng and Sunburst, in addition to the debt repayment requirement based on even shorter payback period, seven years in Huaneng's case, the pricing formula further incorporates a reasonable level of profitability. These prices are included in the average tariff when the new plants are commissioned. In order to meet the expansion plan and projected cost increases in the future and comply with the financial performance targets set forth above, JPEPC's tariff has to increase by 9.1 percent in current terms or 2.8 percent in real terms a year from 1993 to 2002 and is expected to decline in real terms in 2002.  - 47 - 6.14 During the period 1993-2002, JPEPC is projected to maintain high rates of growth necessitated by the prospective robust economic growth in Jiangsu Province, one of the fastest-growing economies in China. Based on the latest demand forecast and expansion plan assumptions, energy sales are expected to increase by about 169 percent over 1992 levels, representing a compound annual growth rate of about 10.4 percent. JPEPC's annual investment program is expected to expand by more than ninefold over the period, an annual increase of 22 percent. Net fixed assets in operation are projected to grow by about 977 percent, an annualized growth rate of about 26.8 percent during the period. Moreover, to meet forecast acute power shortages, sharp increases in both the quantity and costs of purchased power are expected. It is now projected that the cost for purchased power will grow by more than 27 percent per annum and constitute over 41 percent of JPEPC's operating cost in 2002 compared with 29 percent in 1992. 6.15 From 1993 on, JPEPC's performance is anticipated to improve steadily as sales continue to grow, the tariff structure is further rationalized, and debt service requirements emerge as a dominant factor in pricing formulation. Based on the projected minimum tariff level, about 13 percent increase per annum from 1992 to 2002, both revenues and net income are expected to grow considerably over the period. Operational ratios are projected to revert from over 83 percent in 1992 to 67 percent by 2000. Moreover, the rate of return on historically valued assets and on revalued assets will also improve from single digit in 1989-92, to double digits, averaging 20.6 and 11.7 percent, respectively, over the period of 1993-2002. E. FINANCING PLAN 6.16 JPEPC's financing plan for the project implementation period (1993-2000) displayed in Table (.3. During the financial forecast period, JPEPC's planned investments would total Y 60.7 billion ($6.9 billion). The proposed project would account for about 15.7 percent of the company's total investment program and the proposed Bank loan together with the ECO financing would meet about 6.8 percent of JPEPC's total financing requirements.  - 48 - Table 6.3: JPEPC's FINANCING PLAN', CY1993-2000 Y million $ million Sources of Funds Internal cash generation 36,886 4,239 (less) increment in working capital 2,614 300 (less) repayment of loans 10,362 1,191 (less) interest charged to operation 5,303 609 Cash Available for Investment 18.607 2.139 Equity Contribution 300 34 Proposed IBRD loan 3,064 352 ECO financing 1,044 120 Other loans for proposed project 5,130 590 AU other loans 32,539 3,740 Total Borrowinzs 41.777 4.802 Total Sources of Funds 60.684 6.975 Arylication of Funds Proposed project 9,538 1,096 Other construction 39,767 4,571 Interest dunrir construction 7,176 825 Distribution improvements 4,203 483 Total Application of Funds 60.684 6.975   - 49 - 7. ECONOMIC JUSTIFICATION A. ROLE OF CoAL-BAsED POWER IN JLANGSU PROVINCE 7.1 Coal-fired thermal power is clearly the most economic means to provide additional electric power in Jiangsu Province to alleviate current shortages (para.4.9) and sustain the province's further economic development. The province produces some coal and a small amount of crude oil, but must rely on energy provided from other parts of China, primarily in the form of coal, to meet two-thirds of its energy needs. The province is devoid of natural gas resources, and there are no prospects for securing supplies from other parts of China, as natural gas supplies are scarce in the country as a whole. The province also is basically devoid of hydropower resources. Hydropower currently accounts for 0.3 percent of Jiangsu's total installed capacity, and there are no realistic opportunities for expansion. Further expansion of the provinces's small amount of oil-fired capacity, or development of power production based on imported liquefied natural gas, are technically feasible options in Jiangsu. However, recent studies completed for Shandong Province (see China: Zouxian Thermal Power Project SAR), a coastal province with similar conditions, show that large-scale coal-fired power is clearly more economic than either of these options. 7.2 In 1992, Jiangsu Province obtained about 7 percent of its total power use through purchases from other grids, outside of the province. Although JPEPC would like to purchase more supply in the future, the supplies available are likely to fall below current levels in the future. Other provinces in the East China regional grid also face severe shortages and have few alternatives to coal-based power. Tie-lines between East China and other regional grids will remain relatively weak through the end of the century, as power shortages are forecast in neighboring regions as well. 7.3 For Jiangsu, therefore, the question is not whether or not to develop coal- based power, but rather, what type of coal-based power to develop. B. LEAST-COST STUDIES 7.4 The Yangzhou Thermal Power Project clearly is part of the least-cost expansion program for the Jiangsu Provincial power grid. A variety of expansion sequences from 1993-2010 were prepared and analyzed in detail by JPEPC and BERIWREP. Commissioning of the two 600 MW units of the Yangzhou project in 1998 and 1999, the earliest dates now feasible, remains part of the least-cost sequence under a wide variety of assumptions. Discounted at 12 percent into 1996 terms, the present value cost of a "second best" expansion sequence-without the Yangzhou project-exceeds that of the with-project base case expansion program by about Y 1.4 billion (see Annex 7.1).  - 50 - 7.5 Aside from several expansion projects that also are in the pipeline for early commissioning (see Annex 4.7), the Yangzhou project is the least cost project among available coal-based alternatives. The Jiangsu power system is easily large enough to accommodate the project's two 600 MW units, which generate significant scale economies compared with 300 MW units. Compared with the proposed construction of two 600 MW units in the New Nanjing project, which is considered the next most attractive candidate, the Yangzhou project is about 5 percent less expensive. Key cost advantages in the case of the Yangzhou project include the plant's proximity to an existing 500 KV substation, the availability of an inexpensive ash disposal site near to the generating plant, and the plant's proximity to coal port facilities on the Changjiang River. 7.6 The planned timing for the Yangzhou project remains economically optimal under a variety of sensitivity tests. Commissioning of units in 1998 and 1999 remains part of the least-cost expansion even with a higher discount rate (16 percent), or a dramatic increase in coal prices (40 percent). 7.7 The commissioning schedule for the Yangzhou project also would not be affected by far more dramatic gains in the efficiency of electricity use than expected, or by some other factors leading to a much slower growth in power demand than projected. If electricity demand were to grow by 6.0 percent per year, as opposed to the 11.1 percent per year forecast by JPEPC, construction of the Yangzhou plant as planned for 1998/99 commissioning would still be required to meet power demand in the least cost manner. Environmental and Energy Efficiency Benefits 7.8 Construction of the Yangzhou project (and other 600 MW units) provides major benefits in co Jl conservation and associate' reductions in pollution, compared to the most likely altemative. The net coal consumption rate for the Yangzhou project is projected to be 310 grams of coal equivalent (gCE) per kWh. If the Yangzhou project, and other similar large-scale projects, do not proceed in a timely fashion, the expected result will be that local governments and enterprises will continue to make further investments in thermal plants of 50 MW or less. This is precisely what has occurred in recent years, as large-scale development has lagged behind demand. During 1985-92, 35 percent of incremental power demand in Jiangsu was met by small coal-fired plants, and this trend has been increasing. The unit coal consumption of these plants was 503 gCE per kWh in 1992-over 60 percent higher than in modem 600 MW units. This results in at least 60 percent higher sulfur dioxide emissions, and roughly 60 percent greater emissions of carbon dioxide. Particulate emissions from the small plants clearly are over 60 percent higher, as control technology is typically far less sophisticated. It is unlikely that development of small plants can be radically curtailed over the short term, given that power shortages are expected to increase during the next few years. For the medium and long term, timely construction of large plants is critical to supply of power in as environmentally sustainable manner as possible (see Annex 7.2).  - 51 - C. ECONOMIC RATE OF RETURN 7.9 The internal economic rate of return (IERR) for the project was calculated using the estimated economic costs of the project and associated investments in transmission and distribution (Annex 7.1). An economic price of 37 fen/kWh, in 1993 prices, was used as a minimum proxy for the economic value of electricity benefits. This economic price is equivalent to the estimated average price of electricity actually paid by consumers in Jiangsu Province in late 1993 (Annex 2.4). On this basis, the IERR of the project is about 14 percent. Using the current average guidance price that many consumers now pay in Jiangsu (42 fen/kWh) as a somewhat less conservative estimate of the economic value of electricity, the IERR is about 17 percent. Sensitivity Analysis 7.10 The IERR of the project remains robust when subjected to a variety of sensitivity tests: IERR (%) Base case 14.2 20 percent cost overrun 12.6 One-year delay in commissioning 12.7 20 percent increase in coal price 13.2 If the shadow exchange rate used in this analysis (Y 9.0/$1.0) is increased by 20 percent (to Y 10.8/$1.0), the IERR of the project would still be acceptable, at a rate of 12.3 percent. It is highly unlikely that project parameters will be yet more pessimistic than these sensitivity tesj assumptions.   - 52 - 8. AGREEMENTS AND RECOMMENDATION 8.1 The following assurances were obtained at negotiations: (a) From the Borrower that it would: (i) onlend the proceeds of the proposed Bank loan to JPEPC, on terms and conditions satisfactory to the Bank (para. 5.17). (b) From JPEPC that it would: (i) furnish the Bank with the semiannual progress reports, audited project accounts, statements of expenditures, and financial statements within six months of the end of each fiscal year (para. 3.21); (ii) engage management consultants to assist the development and implementation of improved accounting and financial management systems based on terms of reference agreed with the Bank (para. 5.8); (iii) carry out the management development and training program as agreed with the Bank (para. 5.12); (iv) carry out the environmental management program in a manner satisfactory to the Bank (para. 5.26); (v) carry out relocation of persons affected by the project in accordance with a resettlement plan acceptable to the Bank (para. 5.28); (vi) take all necessary measures to ensure that its intemal cash generation is sufficient to maintain a self-financing ratio of no less than 30 percent from 1994 onward [para. 6.11(a)]; (vii) not incur additional debt unless a reasonable forecast shows its intemal cash generation would provide a debt service coverage ratio of no less than 1.5 [para. 6.11(b)]; and (viii) fumish to the Bank, by April 30 of each year a rolling eight-year financial plan containing projected income statements, statements of sources and uses of funds, and balance sheets [para. 6.11(c)].  - 53 - 8.2 Execution of the subsidiary loan agreement between the Borrower and JPEPC, and approval of the Loan Agreement by the State Council would be conditions of effectiveness of the loan (para. 5.17). 8.3 Subject to the above agreements, the proposed project is suitable for a Bank loan of $350 million to the People's Republic of China. The loan would be for a term of 20 years, including a 5-year grace period, at the Bank's standard variable interest rate.  - 54 -   - 55 - ANNEXES  - 56 -  - 57 - ANNEX 1.1 PRIMARY ENERGY OUTPUT IN CBINA (1949-92) Year Raw Crude Natural Electricity coal oil gas Total of which: (106t) (106t) (108m3) output Hydropower (TWh) (TWh) 1949 32.0 0.12 0.07 4.3 0.7 1955 98.0 0.97 0.17 12.3 2.4 1960 397.0 5.20 10.40 59.4 7.4 1965 232.0 11.31 11.00 67.6 10.4 1970 354.0 30.65 28.70 115.9 20.5 1975 482.0 77.06 88.50 195.8 47.6 1980 620.0 105.95 142.70 300.6 58.2 1981 622.0 101.22 127.40 309.3 65.5 1982 666.3 102.12 119.30 327.7 74.4 1983 714.5 106.07 122.10 351.4 86.4 1984 789.2 114.61 124.20 377.0 86.8 1985 872.3 124.89 129.30 410.7 92.4 1986 894.0 130.69 137.60 449.5 94.5 1987 928.1 134.14 138.94 497.3 100.2 1988 979.9 137.05 142.64 545.2 109.1 1989 1,054.2 137.65 150.49 584.7 118.4 1990 1,079.9 138.31 152.98 621.3 126.4 1991 1,087.4 140.99 153.96 677.5 124.7 1992 1,115.0 142.10 157.90 754.2 131.5 Source: MOEP.  TOTAL PROD)UCTION AND CONSUMPTION OF ENERGY VS. GNP GROWTII 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Production (million tons of standard coal equivalent) 628 646 637 632 668 713 779 855 881 913 958 1,016 1,039 1,048 1,075 Proportion (7%) Coal 70.3 70.2 69.4 70.2 71.3 71.6 72.4 72.8 72.4 72.6 73.1 74.1 74.2 74.1 74.3 CrUde oil 23.7 23.5 23.8 22.9 21.8 21.3 21.0 20.9 21.2 21.0 20.4 19.3 19.0 19.2 19.0 Natural gas 2.9 3.0 3.0 2.7 2.4 2.3 2.1 2.0 2.1 2,0 2.0 2.0 2.0 2.0 2.0 Hydropower 3.1 3.3 3.8 4.2 4.5 4.8 4.5 4.3 4.3 4.4 4.5 4.6 4.8 4.7 4.7 Consumption (million tons of standard coal equivalent) 571 586 603 594 621 660 709 767 809 866 930 969 980 1,038 1,090 Proportion (%) 00 Coal 70.7 71.3 72.2 72.7 73.7 74.2 75.3 75.8 75.8 76.2 76.2 76.0 75.6 76.1 74.9 Crude oil 22.7 21.8 20.7 20.0 18.9 18.1 17.4 17.1 17.2 17.0 17.0 17.1 17.0 17.1 18.0 Natural gas 3.2 3.3 3.1 2.8 2.5 2.4 2.4 2.2 2.3 2.1 2.1 2.0 2.1 2.0 2.0 Hydropower 3.4 3.6 4.0 4.5 4.9 5.3 4.9 4.9 4.7 4.7 4.7 4.9 5.3 4.8 5. I GNP Index (constantprices) 100.0 107.6 116.0 121.2 131.8 145.4 166.9 188.2 203.5 225.7 251.2 262.1 272.7 295.0 333.4 Energy Intensity Index (consumption/GNP) 100.0 95.4 91.0 85.8 82.5 75.9 74.5 71.5 69.7 67.2 65.0 65.1 62.6 61.6 57.3 NoIes: (1) Excluding bio-energy, solar, geothermaI and nuclear energy. (2) All fuels are converted into standard coal with thermal equivalent of 7,000 kilocalorie per kilogram. The conversion factors are: I kg of coal (5,000 kcal) =0.714 kg of standard coal I kg of crude oil (10000 kcal) = 1.43 kg of standard coal I cubic meter of natural gas (9,310 kcal) = 1.33 kg of standard coal (3) The conversion of hydropower is based on the specific consumption of standard coal for thermal power generation of the year. SourCe: China Statistical Yearbook 199 1.. _  - 59 - ANNEX ' .1 INSTALLED CAPACITY, ELECTRICITY GENERATION AND CONSUMPTION IN THE POWER SUBSECTOR Installed Electricity Electricity CaRacity (MW) /a Generation (GWh) /a Consumption /b Year Hydro Thermal Total Hydro Thermal Total (GWh) 1949 163 1,686 1,849 710 3,600 4,310 3,460 1952 188 1,776 1,964 1,260 6,001 7,261 6,277 1957 1,019 3,616 4,635 4,820 14,515 19,335 16,407 1962 2,379 10,686 13,065 9,042 36,753 45,795 n.a. 1965 3,020 12,056 15,076 10,414 57,190 67,604 56,802 1970 6,235 17,535 23,770 20,450 95,420 115,870 n.a. 1971 7,804 18,478 26,282 25,060 113,300 138,360 101,274 1972 8,700 20,801 29,501 28,820 123,630 152,450 123,600 1973 10,299 23,626 33,925 38,900 127,860 166,760 135,106 1974 11,817 26,291 38,108 41,440 127,410 168,850 135,708 1975 13,428 29,978 43,406 47,630 148,210 195,840 156,969 1976 14,655 32,492 47,147 45,640 157,490 203,130 164,698 1977 15,765 35,686 51,451 47,670 175,740 223,410 181,691 1978 17,277 39,845 57,122 44,630 211,920 256,550 210,239 1979 19,110 43,906 63,016 50,120 231,827 281,947 233,577 1980 20,318 45.551 65,869 58,211 242,416 300,627 251,639 198i 21,933 4',069 69,002 65,546 243,723 309,269 258,976 1982 22,959 49,401 72,360 74,399 253,279 327,678 275,299 1983 24,160 52,280 76,440 86,450 264,990 351,440 297,126 1984 25,547 54,373 79,920 86,780 290,207 376,987 319,600 1985 26,120 60,373 86,493 92,374 318,315 410,689 348,353 1986 27,542 66,276 93,818 94,480 355,091 449,571 357,057 1987 30,193 72,704 102,897 100,229 397,092 497,321 420,019 1988 32,698 82,799 115,497 109,177 435,888 545,065 464,013 1989 34,570 92,060 126,637 118,475 466,200 584,675 495,135 1990 36,050 101,844 137,894 126,350 494,986 621,318 527,154 1991 37,884 113,589 151,473 124,845 552,649 677,494 575,219 1992 40,681 125,852 166,533 131,466 622,723 754,189 644,696 ia On a countrywide basis. Lk Energy consumption not including uses by stations and line losses. Source: MOEP.  - 60 - ANNEX 2.2 ELECTRICITY CONSUMPTION BY SECTORS /a Total Industrv Agri- Resi- Trans- Municipal consumption Sub- cul- den- porta- and Year (TWh) Heavy Light total tural tial tion commercial 1985 411.7 63.8 15.9 79.7 7.7 5.4 1.5 5.7 1986 456.7 64.9 15.8 80.7 7.1 5.5 1.5 5.2 1987 498.5 64.0 16.4 80.4 7.2 5.7 1.5 5.2 1988 546.7 62.8 17.0 79.8 6.9 6.3 1.6 5.4 1989 586.5 63.0 16.2 79.2 7.0 6.7 1.7 5.4 1990 623.0 62.2 16.0 78.2 6.9 7.7 1.7 5.5 1991 680.4 61.2 16.2 77.4 7.1 8.0 1.7 5.8 1992 745.5 61.2 15.9 77.1 6.8 8.5 1.8 5.8 /a On a countrywide basis, including station uses and line losses for power industry. Source: MOEP.  - 61 - ANNEX 2.3 MAJOR ONGOING HYDRO AND THERMAL POWER PROJECTS WITH EXTERNAL FINANCING /a Installed Construc- Loan capacity tion anount (Unit x MW) Location period Source of finance (S dn) A. HYDRO POWER East China Mianhuatan 4 x 150 Fujian 1995-2002 ADB 200.0 North China Shisanling pumped storage 4 x 200 Hebei 1990-95 OECF 100.0 Zhangjiswan 4 x 250 Hebei 1995-2001 ADB 250.0 Central China Gehehan hydro 6 x 200 Hubei 1988-93 Canada Supplier's Credit 108.0 Wuqiangqi hydro 5 x 240 Hunan 1988-96 OECF 200.0 ingjintan 8 x 300 Hunan 1994-99 ADE 100.0 Southwest China Tienshengqiao (ll) hydro 4 x 220 Guizhou 1984-93 OECF 478.5 Tienshengqiao (1) hydro 4 x 300 Guizhou 1992-2000/b OECF 160.0 Hongjiadu hydro 3 x 180 Guizhou 1995-2001/b ADB 180.0 South China Guangzhou Pumped Storage (1) 4 x 300 Guangdong 1988-94 France 200.0 Guangzhou Pumped Storage (11) 4 x 300 Guangdong 1994-98/b ADB 290.0 Joint finatncing 67.0 Subtotal 2220 2.303 .5 B. THERMAL POWER East China Shidongkou No. 2 (HIPDC) 2 x 600 Shanghai 1988-92 USA, Frnce, Japan, Sup- 380.0 plier's Credit Nanjing 2 x 300 Jiangsu 1989-93 Former USSR Barter Credit 241.0 Ligang I (SEDC) 2 x 350 Jiangsu 1988-93 Spain & Italy 245.0 North China Sanhe 2 x 300 Beijing 1993-96/b OECF 250.0 Hejin 2 x 300 Shanxi 1994-97/b OECF 250.0 Jlixian 2 x 500 Tianjin 1989-93 Formner USSR Barter Credit 430.0 Central China Ezhou 2 x 300 Hubei 1992-95/b OECF 250.0 Jiujiang 2 x 300 Jiangxi 1993-96/b OECF 250.0 Yahekou 2 x 350 Henan 1993-97 Spanish Export Credit 3S4.0 South Chins Shenzhen gsa turbines 2 x 90 Guangdong 1992-93 USA, France 101.0 Southwest Chin Chongqing gas turbines 66 Sichuan 1992-93 UK Credit 33.1 Nejiang I x 100 Sichuan 1993-95 Finish Government Credit 38.0 Subtotal 6,9300 2852. 1  - 62 - ANNEX 2.3 Installed Construc- Lan capacity tion arnount (Unit x MW) Location penod Source of finance (S rrln) C. NUCLEAR POWER South China Day& Bay 2 x 900 Guangdong 1986-94 U}K, France 2,500.0 Subtotal 1.800 2 500.0 D. TRANSMISSION & SUBSTATION Tienshengqiso (11) 1,050 km 1988-93 OECF 115.5 - Guangzhou 1,750 MVA Tienshengqiao (1)-Guiyang 285 km - 1988-92 OECF 24.1 Tienshengqiao (I)-Guangdong I,000krn - 1994-98/b OECF 140.0 (DC) Subtotal 2796 Total 20,950 MW in generating capacity 2.335.0 kn for 500-kV tansrnission line 7 935.2 I 750.0 MVA in aubaation capacity /s World Bank-f nnced projects are not included. /b Conmuissioning year. Source MOEP  -63 - ANNEX 2,4 FlTURE THERMAL POWER PROJECTS PLANNED TO BE FINANCED UNDER BOT OR BOO ARRANGEMENTS /a Installed capacity Construction Location (Province, Projects (No. x MW) period Municipality, Region) Waigaoqiao (phase 2) 2x800 or Shanghai 2xl,000 Jiaxing (phase 2) 4x600 Zhejiang Ligang (phase 2) 2x350 1993-98 Jiangsu Ligang (phase 3) 2x600 1998-2002 Jiangsu Yangcheng 4x600 Shanxi Tuoketuo No. 2 4x660 Inner Mongolia Daihai 4x600 Inner Mongolia Datong No. 2 2x600 Shanxi Shalingzi (phase 2) 2x600 Hebei Shuangyashan 2x600 Heilongjiang Zhuhai 2x660 Guangdong Beihai 2x350 Guangxi Xidu 2x660 Jiangsu Rizhao 2x350 Shandong Shiliquan 2x300 Shandong Laicheng 2x600 Shandong Shiheng (phase 2) 2x300 Shandong Heze (phase 2) 2x300 Shandong Meizhouwan 2x350 Fujian Songyu 2x350 Fujian Hanchuan (phase 2) 2x300 Hubei Pingu 2x600 Beijing Expansion of Liaoning 2x300 Liaoning Shenmu 2x350 Shaanxi Dalian (phase 2) 2x350 1995-99 Liaoning Dandong 2x350 1995-99 Jilin Nantong (phase 2) 2x350 1995-99 Jiangsu Fuzhou (phase 2) 4x660 1996-2000 Fujian Yueyang (phase 2) 2x350 1996-2000 Hunan Shi ongkou No. 2 (phase 2) 2x600 1996-2000 Shanghai Luohuang (phase 2) 2x350 1996-2000 Shantou (phase 2) 2x350 1996-2000 Guangdong Yingkou (phase 2) 2x600 1996-2000 Liaoning Shajiao C 3x660 1994-96 Guangdong LNG Combined Cycle 4x600 1997-99 Jiangsu Lg BOT: Build-Own (Operate)-Transfer BOO: Build-Own-Operate  - 64 - ANNEX 2.5 POWVER PRICING IN JIANGSU PROVINCE 1. The power pricing system in Jiangsu Province consists of three components: (a) the state base prices, (b) a guidance price differential, and (c) a schedule of additional fees and surcharges. These components are then added to form the "administered" (in-plan) consumer price tariff or the "guidance" (out-of-plan) consumer price tariff. Although explanations and the names for different components vary from region to region, as do the level and nature of specific fees, this basic system also is employed most other parts of China. State Base Prices 2. The state base prices (also referred to as "state catalog" prices) are the base prices charged for electricity generated by capacity financed by the Central Government and managed by provincial power companies such as JPEPC. This capacity includes (a) virtually all power plants constructed before 1985, with grant funding, and (b) plants, or shares of plants, constructed with loan funds allocated by the Central Government since 1985. In Jiangsu, this capacity now accounts for roughly one half of total installed capacity. 3. The state base prices provide the basis for the revenue of JPEPC and other provincial power cumpanies. (Prices for power from other generating plant discussed below and other fees and charges to not accrue to JPEPC.) 4. State base prices were fully revised throughout China during the summer of 1993, both in structure and level, for the first time since 1976. Compared with the old state base prices, the new system provides for an increase in the overall price levels and simplification. The new system allows for automatic annual price adjustments to fully reflect changes in fuel prices. It also allows for power from all capacity financed through loans to be priced at "debt repayment prices," calculated for each individual plant, to fully cover financing costs. This applies to all new plant, and to plant financed during 1986-92. In terms of structure, the new base prices include an increase in the demand charges for large industries, and separate prices for a new commercial sector consumer category. 5. State base prices in Jiangsu increased with the reform from an average of 18.5 f/kWh in 1992 to an average of about 26.0 f/kWh in 1993 (see Table 1). 6. The state base prices, together with various price markups from the schedule of fees and surcharges, form the administered price tariff for certain qualified consumers.  - 65 - ANNEX 2.5 Table 1: STATE BASE PRICES IN JLANGSU PROVINCE, SNEE R 1993 Demand charge Energv charge (f/kWh) Maximum Substation Low 35 kVA load capacity Consumer category voltage 1-10 kVA & above (Y/kW/mo) (Y/kVA/mo) Residences 26.0 25.0 Commercial sector 37.9 36.9 Regular industry 30.2 29.5 28.4 Large industry 21.3 20.2 15.00 10.00 Of which: special chemicals 20.3 19.2 15.00 10.00 Agriculture 25.0 24.2 22.9 Agricultural irrigation in poor areas 6.0 5.8 5.5 Source: JPEPC. The Guidance Price Differential 7. The guidance price differential (also referred to as the "local comprehensive price difference" or increased cost of out-of-plan supply) factors the cost of other, noncentral governnrent financed sources of powzr supply into the power pricing system. In Jiangsu, noncentral government-affiliated sources of power supply accounted for about one half of the total in 1993. The main supply sources in Jiangsu include: (a) Power from capacity financed by provincial and local governments, using the provincial and local government Power Construction Funds, usually as part of "joint-investment" plants. Prices are established by contract with individual plants, based on debt repayment principles. Prices for this type of power in Jiangsu were about 30-35 f/kWh in 1993. (b) Power from other, independent plants. These include plants owned and operated by the Huaneng Group. Prices for this power are also established by contract, based on debt repayment principles. (c) Power provided by various power plants above and beyond their contracted production quotas, at negotiated prices. This often involves local government agreement to supply coal from outside of the central coal allocation network.  - 66 - ANNEX 2.5 (d) Electricity provided to the grid from captive industrial plant, at negotiated prices. 8. The higher costs of these sources of power supply are added together and averaged into a price markup, which is then added to the state base price, with various price markups from the schedule of fees and surcharges, to form the "guidance price tariff" applicable to many consumers. In Jiangsu, this guidance price differential is calculated both at the prefectural level, based on the sources of supply obtained by the Prefectural Power Supply Bureaus, and then also at the county/urban district level, where additional sources of supply also may be factored in. In September 1993, the guidance price differential was 12.5 f/kWh in Nanjing Prefecture, and 9.0 f/kWh in Changzhou Prefecture and Changzhou City. Schedule of Fees and Surcharges 9. A variety of additional fees are now added to the prices paid by consumers. With the exception of a new 0.3 f/kWh levy on all consumers throughout the country to help finance the Three Gorges Hydroelectric Project, these charges are levied by provincial and local governments. In Jiangsu, about 70 percent of power sales is subject to both a 2.0 f/kWh surcharge for a Provincial Power Construction Fund (as in other provinces) and a 3.0 f/kWh surcharge for Local Power Construction Funds operated by prefectural govemments. Some other fees are earmarked to partially cover local distribution costs or street lighting. Although the bulk of the revenue collected through these additional fees is invested in the power sector, some portions may be used by local govemment for other purposes. Consumer Tariffs 10. Table 2 shows price buildup and final consumer prices charged in Changzhou City, a typical city in Jiangsu, in September 1993. (The consumer price buildup in Nanjing Prefecture is also similar.) The administered price tariff includes the state base prices and various fees and surcharges, whereas the guidance price tariff includes these two plus the guidance price differential. About one half of power sales in Jiangsu are priced at the administered price tariff, while the guidance price tariff applies to the remainder. The administered price tariff is generally applied to power allocated based on quotas reflecting consumption levels in 1983. In industry, factories are provided with power at administrative price levels for consumption up to their 1983 levels (if they existed then), but all additional consumption, stemming from new capacity, is priced at guidance price levels. Exceptions to this rule include urban residential consumption- which is all priced at administrative price levels-and a portion of post-1983 additional consumption in agriculture or certain protected industries, such as chemical fertilizer producers. 11. In Changzhou, the average state base price was about 26 f/kWh. Adding in the applicable fees and surcharges, the average administered price is estimated at about 33 f/kWh. The average guidance price is estimated at about 42 f/kWh. The overall  - 67 - ANNEX 2.5 Table 2: CONSUMiER ELEcrucrrv PRICES IN CHANGZHOU Crr, JIANGSU PROVINCE, SEPrEMIBER 1993 Lg (fen/kWh) Residential and commercial /b Urban Urban Urban Urban residences government commercial commercial Aericulture (LV) /c (LV) (LV) (1-10 MV LV l-10 kV State base price 26.0 37.9 37.9 36.9 25.0 24.2 Prov. power investment charge - - 2.0 2.0 - - Local power investment charge - 3.0 3.0 Distribution charge 0.7 - - - Urban construction fee 3.0 3.0 3.0 3.0 - - Three Gorges surcharge 0.3 0.3 0.3 0.3 0.3 0.3 Other local surcharges - 2.1 2.1 2.1 2.1 2.1 Administered Price 30.0 43.3 48.3 47.3 27.4 26.6 Guidance price differ- ential 9.0 9.0 9.0/c 9.0/c Guidance Price 57.3 56.3 36.4/c 35.6/c Laree industry Demand Energy charees charges/d Chemi- Other pref- Y/ Y/ 35 kV cal fer- erential Reaular industrv kVA kW 1-10 kV & above tilizers users /e 1-10 kV 35 kV State base price 10 15 21.3 20.2 15.2 19.2 29.5 28.4 Prov. power investment charge - - 2.0Lf 2.0/f - 2.0/f 2.0 2.0 Local power investment charge - - 3.01f 3.0/f - 3.0/f 3.0 3.0 Urban construction fec - - 0.7 0.-7 0.7 0.7 0.7Lg 0.7kg Three Gorges surcharge - - 0.3 0.3 0.3 0.3 0.3 0.3 Other local surcharges - - 2.1 2.1 2.1 2.1 2.1 2.1 Administered Price 10 15 29.4 28.3 18.3 27.3 37.6 36.5 Guidance pnce differ- ential - - 9.0 9.0 9.0 9.0 9.0 9.0 Guidance Price 10 15 38.4 37.3 27.3 36.3 46.6 45.5 /a Actual prices also include an additional temporary 3.6 fen/kWh charge for all consumers, except for residential users, to cover the cost of the state base pricc increase during July and August 1993, which had not yet been reflected on consumer bills for those months. As this fee is temporary, it has been omitied here. /b Only the main consumer categories are listed here. Tc Township governments may levy additional charges not included here. /d Large industries pay both a demand (capacity) charge and an energy charge. /e Includes selected chemical industries. /f Provincial and local power investment charges are waived for a few types of consumers. Lz Rural industries are exempt from this charge. Source: Changzhou Prefecture Electricity Supply Bureau.  -68 - ANNEX 2.5 average consumer pnce is estimated at about 37 f/kWh. (In Nanjing, power bureau officials estimate that the average consumer price is about 36 f/kWh.) These figures compare with an estimated long-run average incremental cost of supply, in economic shadow prices, of some 35-40 f/kWh. 12. As Table 2 shows, prices are highest for commercial consumers and regular industries. Among the general price categories, prices are lowest for urban residences and agricultural consumers. Within industry, however, certain consumers receive preferential prices. Chemical fertilizer producers receive particularly low rates as a matter of national policy. Certain other chemical consumers also receive somewhat lower rates than other industries. Not explicitly listed in the tariff table, enterprises with foreign investment (including joint ventures and wholly foreign-owned enterprises) also receive preferential treatment as a matter of provincial government policy, in that their electricity prices are set between administered and guidance price tariff levels. Consumer Price Reform 13. JPEPC is committed to abolition of the existing two-track, administered and guidance price system by the end of 1997. The existing system is too complex, unfair and inefficient. The two-track system already has been successfully collapsed into one, unified consumer price tariff in Nantong Prefecture. An additional 2-3 of the province's 11 prefectures will implement this reform during 1994. Arrangements will then be made with the various other prefectural governments to unify consumer tariffs during 1995-97. 14. Based in part on the results of a recent joint power tariff study by JPEPC and BERIWREP, JPEPC is also promoting expansion of time-of-day pricing among large consumers, and fuwiher increases in the ratio of demand charges to energy charges for large industries.  - 69 - ANNEX 3.1 INSTITUTIONAL ANI) LEGAL FRAMEWORK Institutional Framework 1. Legal Status. Jiangsu Provincial Electric Power Company (JPEPC) is an independent economic entity that possesses the legal status of a limited liability company under its Charter, dated December 19, 1988 (Charter), formulated pursuant to the Law of the People's Republic of China on State-owned Industrial Enterprises, promulgated by the National People's Congress in 1988, and the Scheme of Structural Reformation of East China Power Network, approved by the State Council, including implementation regulations thereof. The Charter is a self-implementing legal instrument. 2. Ownership and Funds. JPEPC is co-owned by the Central Government (CG) through the State Energy Investment Company (SEIC) and the Jiangsu Provincial Government (JPG) through the Jiangsu Province Energy Investment Company (JPEIC). The registered capital of JPEPC is Y 2.6 billion. The Charter empowers and authorized the company to obtain funds from the following additional sources and means such as: (a) receiving investments from the state (through SEIC), the province (through JPEIC), and local governments; (b) obtaining loans from financial sources such as banks and financial organizations both domestic and foreign; (c) selling electricity to users and charging users additional payment for specific power use; (d) issuing stocks and bonds; and (e) forming joint ventures with foreign companies. It is also authorized to use its retained profits for the purpose [Article 11 (4), Charter]. Although JPEPC has the corporate powers to invest and to borrower and issue bonds, these activities are regulated and government approvals are required therefor at various levels. 3. Functions and Powers. JPEPC has been entrusted by CG and JPG with the management and administration of generation, transmission, distribution and supply of electricity in Jiangsu Province (JP). JPEPC's overall purpose is to manage and develop the provincial power industry. The scope of its business includes undertaking construction of power projects funded either by the state or by local finance. The functions and powers of JPEPC have been outlined in the Charter and further elaborated in a document regarding Confirmation of the Functions and Powers of Jiangsu Provincial Electric Power Company (Confirmation Document) approved by the Ministry of Energy [the predecessor of Ministry of Electric Power (MOEP)] in 1992. Pursuant to these documents, JPEPC has the power to obtain loans from and to enter into contracts with various organizations including foreign organizations (with the permission of the concerned government authorities). 4. Management and Administration. The Charter provides for the establishment of a board of directors ostensibly to manage the company (Articles 17-21). However, to date the board of directors has not been established and, contrarily, the  - 70- ANNEX 3.1 Confirmation Document declares that "JPEPC practices the general manager responsibility system." Accordingly, the overall management and administration of JPEPC is entrusted to a general manager (assisted by several deputy general managers) appointed (and removable) by MOEF in consultation and agreement with JPG and East China Electric Power Administrative Bureau (ECEPAB). The general manager is the legal representative of the company and responsible for the company's operations. The functions and powers of the general manger are enumerated in the Charter (Article 24). The exercise of managerial and administrative powers (e.g., hiring and firing of staff and labor) is, however, controlled by "relevant state rules and regulations." JPEPC has pursuant to the Charter established various administrative rules and regulations including regulations on power grid management. 5. Financial Matters. The Charter requires JPEPC to establish an independent financial accounting and auditing system. It furthermore makes the company responsible for its own gains and losses. However, the declaration and distribution of company profits are regulated by the Ministry of Finance (MOF) and the Jiangsu Provincial Department of Finance (JPDOF). JPEPC is required to carry out a multileveled power price policy in accordance with state regulations on price control and in consideration of the sources of investment and fuel. It is empowered to charge users additional payment for the portion of power consumption exceeding specified quota. 6. Operations. JPEPC is a provincial monopoly holding company and as such owns and/or controls all the electric power enterprises operating in JP. Legal and Regulatory Framework 7. Legal Regime. There is presentlY no central legislation in force in respect of the generation, transmission, distribution or supply of electricity in China. 8. Regulatory Framework. JPEPC is regulated by MOEP through ECEPAB, which is administratively the same as the East China Electric Power United Corporation (ECEPUC, of which JPEPC is a member!) and JPG through the Jiangsu Provincial Electric Power Bureau (JPEPB, which is administratively the same as JPEPC). There are numerous regulations at different levels of government which deal with various sectoral, institutional, and contractual aspects of power generation, transmission, distribution and supply. 9. Contractual Arrangements. JPEPC exercises control over the electric power enterprises operating in JP on the basis of contractual arrangements. Profits are declared and distributed in accordance with the terms of these contractual arrangements. The terms and conditions of the contractual arrangements are not standard and need no govemmental approval. The contractual arrangements include only a general non-standard formula for pricing which is based on the govemment's pricing policy. The actual prices are established by the State Pricing Bureau of the State Planning Commission.  -71 - ANNEX3.1 Conclusions and Recommendations 10. Legal Status and Corporate Authority. JPEPC appears to be duly organized and operating under the laws and regulations of the People's Republic of China. It also appears to have the requisite authority both, under its Charter and the Confirmation Document, to receive the proceeds of the proposed project loan through CG, to carry out the proposed project, and to enter into a project agreement in respect thereof with the World Bank (WB) subject, of course, to necessary government approvals. 11. Commercialization. This objective can, at least notionally, be achieved in the short-term through the separation of ownership and management by the establishment of a board of directors. This would not necessitate an amendment of the Charter because of the existing unimplemented provisions regarding board of directors therein. However, for the purpose of strengthening the board in accordance with the State Regulations on Transforming the Management Mechanisms of State-Owned Industrial Enterprises, 1992 (1992 Regulations), the Charter would need to be amended. It is suggested that the amended Charter include all the management rights granted by the 1992 Regulations. Since the exercise of these rights is subject to applicable laws and regulations (for example, price setting would continue to be subject to whatever pricing regulations there are in force) there would be no need to exclude any such rights in the revised charter. The present advantage would be to have a limited right as opposed to no right at all and the potential benefit would be to have an unqualified right in case the applicable regulation is rescinded in future. It would be important to ensure the application of the independent management system that may be established and to clearly demarcate the respective role of the board of directors and the general manager/chief administrative officer of the company. It is suggested that the process of commercialization involve not only institutional restructuring of the company but also include some of deregulation of various corporate activities currently controlled by "relevant state rules and regulations". 12. Corporatization. JPEPC, which is presently a State-Owned Enterprise (SOE), should consider diversifying its ownership in order, among other things, to increase its capital base in order to improve its financial status. This would also help the company to achieve financial autonomy and could be done through the eventual transformation of the company into a limited liability shareholding company under the evolving company regulations in China. It is suggested that a review of various options in this regard be undertaken by JPEPC as part of an action plan to corporatize and make the company financially autonomous. 13. Sectoral Restructuring. The ownership, management, and regulatory structure of the electricity sector appears to be rather convoluted and needs to be streamlined. It is, therefore, suggested that sectoral restructuring be carried out at the provincial level including the separation of combined regulatory and enterprise functions of JPEPB and JPEPC. 14. Legal and Regulatory Reform. The need for the formulation and promulgation of a national Electricity Law is obvious. The need to consolidate, simplify  - 72 - ANNEX 3.1 and update the numerous regulations in light of the ongoing developments in the power sector is also clearly warranted. 15. Rationalization of Contractual Arrangements. Operations of power enterprises under JPEPC's jurisdiction may also need to be streamlined. For this purpose, it is suggested that JPEPC's contractual arrangements, through which it operates the power generating plants and power supply facilities, be reviewed with a view to rationalizing the system. Consequently, model contracts for various kinds of contractual arrangements may also be formulated with a view to commercializing these arrangements. 16. Charter Amendment. While considering an amendment to introduce the management rights granted by the 1992 Regulations, it may be opportune to undertake a complete revision of the Charter in order to: (a) add clarity and precision in respect of the concept of separation of ownership and management; and (b) remove some inconsistencies between the role of the board of directors and the general manager caused by the Confirmation Document. For this purpose, a model draft charter, attached herewith, has been prepared and submitted to JPEPC in order to assist JPEPC in drafting a new charter or redrafting the existing Charter. The procedure of amending the Charter is in Articles 44 and 45 of the Charter. Accordingly, the board of directors is authorized to amend the Charter with the endorsement and approval of JPG/JPEPB and MOEF respectively. In the absence of the board of directors, the General Manager of JPEPC, who appears to exercise management powers instead of the board, would presumably have the authority to initiate the required amendment of the Charter. 17. Technical Assistance and Training. Since the concepts of commercialization and corporatization are relatively new and reregulation of the power sector a complex and specialized task, it would be essential to provide the requisite legal assistance and training to the relevant JPEPC staff to enable it to properly implement the corporate and legal reforms. It is, therefore, agreed that a portion of the proceeds of the proposed WB loan be allocated for providing assistance and training to the staff of JPEPC dealing with corporate and legal reforms.  - 73 - ANNEX 3.2 ACTION PLAN FOR THE COMMERCIALIZATION OF THE JL4NGSU PROVINCIAL ELECTRIC POWER COM1PANY 1. As raised by the World Bank mission during the appraisal of the Yangzhou Number 2 Power Project, and in order to better suit a market economy, the enterprise reform of the Jiangsu Provincial Electric Power Company (JPEPC) should be deepened. JPEPC should be developed into a power utility with autonomy in its own operations, accountability for its own profits and losses, self-sufficiency in development and self- discipline. JPEPC has developed the following action plan for the reform of IPEPC, in accordance with the "Company Law" of the Peoples Republic of China and the 1992 "Regulations on Transformation of the Operating Mechanism of State-owned Industrial Enterprises," and in the spirit of the 1993 International Workshop on Power Sector Reform Strategy in China, convened by the Ministry of Electric Power (MOEP), Ministry of Finance and the World Bank. JPEPC confirms that this action program will be fully implemented during the periods specified, once certain approvals have been provided by relevant authorities. Separation of the Utility from Government 2. First Reform Step. By the end of 1993, the scope of government regulatory functions in power sector and the scope of provincial power company responsibilities will te clearly and separately defined. 3. Additional Preparatory Measures for Separation of the Utility from the Government. Beginning in 1994, a Bureau Director (or Vice-Director) will be designated from among the leading managers of JPEPC and JPEPB and given sole responsibility for carrying out the functions of the provincial government in power industry regulation. At the same time, staff and subunits will be assigned sole responsibility for government functions in the power sector, under the leadership of the designated Director. 4. Implementation of Full Institutional Separation. In order to realize full government and enterprise separation, and to implement the separation of government and enterprise institutions, JPEPB will be provided with the mandate for carrying out government regulatory functions, and these functions will no longer be carried out by staff in a separated JPEPC. JPEPC will fully implement enterprise-oriented management, based on commercial operating principles. Detailed arrangements will be provided in the reform implementation program to be submitted for approval to MOEP and the Provincial Government during 1994 (see Reform Implementation Program, below), and implementation will take place in 1995, following relevant approval.  - 74 - ANNEX 3.2 Implementation of Rights in Enterprise Autonomy 5. Rights of enterprise autonomy provided under the " 1992 Regulations" should be provided to JPEPC as soon as possible in 1994. 6. Operating as the backbone enterprise for the Jiangsu power grid, JPEPC must develop into a utility with autonomy in development and operation, with stronger capabilities and a greater role in investment, and greater self-sufficiency in its development as an enterprise. It should be allowed to expand its productive operations, so that it can continue to fulfill its role as the backbone enterprise in the Jiangsu power grid and ensure efficient management of the power grid. 7. Urgently required rights of enterprise autonomy include rights to undertake investments and rights to raise funds. JPEPC should be allowed to earn and retains sufficient profits, after debt service, to enable it to make a reasonable contribution to the expansion of the Jiangsu power system. In order to commercialize its operations, JPEPC must be permitted to borrow in foreign and domestic markets and issue bonds on its own account, under guidelines set by relevant authorities. Consumer Power Tariff Reform 8. Following the model already established in Nantong Prefecture, two or three additional prefectures will implement uniform consumer tariffs in 1994, replacing the predominant current system of different rates for planned and nonplanned consumption. JPEPB will complete work to implement uniform consumer tariffs at the prefectural level throughout Jiangsu Province by the end of 1996. Full implementation will be completed in 1997. Accounting and Financial System Reform 9. JPEPC will implement a reform of its accounting and financial management system, in order to improve cost control and the accountability of subentities, and to provide a strong, long-term foundation for efficient commercial operation. The reform will include: (a) Conversion of JPEPC's accounting system to a new accounting system based on intemational accounting system principles and standards issued by the Ministry of Finance. (b) Design and implementation of a new accounting and financial reporting system, based on responsibility concepts. (c) Design and installation of an integrated MIS system for financial reporting. (d) Implementation of a staff reorganization and institutional restructuring in JPEPC's accounting system.  - 75 - ANNEX 3.2 (e) Completion of technical and managerial training. This reforn will be completed by the end of 1996. Company Corporatization 10. JPEPC aims to become a shareholding company. The first step, which JPEPC has already initiated, is to complete revaluation of all assets under JPEPC's management. The second step will be to complete a study and review of options for corporatization. This also will include participation in a national effort to review contractual arrangements between power companies and other enterprises. This will be completed by the end of 1995. The training program of the proposed World Bank loan will include these topics. JPEPC will then implement the most suitable option. Reforrm Implementation Program 1l. In concert with other relevant organizations, JPEPC will prepare a detailed program to implement the above action plan during 1994. The program will clarify all details required for full implementation, including the specifics of required institutional changes and a plan on how to finance associated study and implementation costs. Following discussion with the World Bank, the program should be submitted for approval to the Jiangsu Provincial Government and MOEP in 1994. Following approval, full implementation should commence by early 1995.  - 76 - ANNEX 3.3 PERFORMANCE INDICATORS FOR JIANGSU POWER SYSTEM 1985 1986 1987 1988 1989 1990 1991 1992 IualIlcd capacity (MW) 3,840.45 4,528.36 5,486.94 6,223.10 6,674.24 7,519.70 7,305.81 8,280.12 JPEPC 3,787.05 4,464.56 5,213.64 5,654.20 6,075.64 6,901.60 7,128.91 7,460.22 L Iocl& captive plant 53.40 63.80 273.30 568.90 598.60 618.10 676.90 819.90 Energy genertion (GWh) 22,558.28 25,458.58 29,432.60 33,288.86 35.403.84 39,605.62 43,369.19 47,408.01 JPEPC 22,342.69 25,156.54 28,656.80 30,887.52 32,254.07 36,327.40 39,596.34 43,031.68 Local & captive plants 215.59 302.04 775.30 2,421.34 3,149.77 3,278.22 3,772.35 4,376.33 Energy generation (GWh) 22,558.28 25,458.58 29,432.60 33,288.86 35,403.34 39,605.62 43,369.19 47,401.01 Thenrml 22,510.77 25,426.33 29,374.03 33,251.37 35,356.36 39,560.95 43,325.91 47,364.73 Hydro 47.51 32.20 53.57 36.99 47.43 44.67 43.21 43.23 Net energy purchase (GWh) JPEPC 4,299 4,322 4,233 2,905 2,029 1,074 1,439 3,481 Capacity factor (%) /a 74.0 71.6 69.3 64.7 62.6 62.0 64.7 67.3 JPEPC 78.0 75.7 74.1 68.8 65.6 65.0 68.7 71.2 Local & captive plant 46.0 45.5 45.0 40.3 39.2 38.8 40.5 44.4 Peak demand (MVW) rb JPEPC 3,S62 4,300 4,501 4,486 4,831 5,267 5,918 6,315 Energy sales (C9Wh) JPEPC 22,405.29 24,585.48 27,314.68 28,892.08 29,731.74 32,064.65 35,417.92 40,111.12 System losaes Plant use (%) 7.27 7.24 7.46 7.55 7.65 7.56 7.42 7.37 JPEPC 7.17 7.16 7.38 7.44 7.57 7.47 7.33 7.26 Local & captive plants 8.37 8.07 8.30 8.67 8.47 8.42 8.36 8.29 T&D losses(S) 8.57 8.72 8.73 8.16 7.87 7.34 7.39 8.31 lPEPC 2.73 3.28 3.30 2.35 2.52 2.39 2.73 3.07 Total (%) 15.84 15.96 16.19 15.71 15.52 15.40 15.31 15.66 JPEPC 9.90 10.44 10.68 10.29 10.09 9.86 10.06 10.33 Average coal consumption (standard coal) (g/kWh) 414.0 424.2 415.3 415.8 409.0 395.3 339.5 389.0 JPEPC 394.0 397.0 397.0 404.0 401.0 389.0 3U3.0 392.0 Local & captive planu 615.0 696.0 604.0 574.0 490.0 464.0 454.0 460.0 Numberofemployea/c 52,360 55,367 53,930 60,716 61,516 64,651 66,275 63,244 Sbaca per employee (kWh) /c 427,909 444,046 463,113 475,856 483,317 495,965 534,408 537,760 /a BHaed on average intaulled capacity of the year. /b Not including demand met by captive planu and local generation. Ic Employces including onJy administraion, generation, supply and services. Source: JPEPC.  - 77 - ANNEX 3.4 STAFFING OF JPEPC (As of December 31, 1992) Number of units Number of staff Percentage By Functional Units Headquarters 16 362 0.5 Generation 16 22,225 33.0 Supply and services 11 23,198 34.5 Construction and installation 3 14,123 21.0 Education 3 1,170 1.7 Design 1 391 0.6 Repair 6 4,775 7.1 Miscellaneous 3 1,024 1.5 Total u 67.268 100. By Speciat Staff Administration 6,217 9.2 Technical Engineers and technicians 6,409 9.5 Subtotal 12,626 18.8 Workers Junior 11,305 Average skilled 13,705 Highly skilled 17,865 Apprentices 1,648 Subtotal 44.523 66 2 Others 10,119 15.0 Total 67,268 100.0 By Schooling Received Postgraduates 131 College graduates 2,871 Graduates of polytechnical institutes 4,297 Graduates of secondary technical school 5,263 Graduates of technical schools 9,710 Middle school graduates 40,715 By Technical Titles Senior technical titles 759 Medium technical titles 3,774 Junior technical titles and technicians 7,953  - 78 - ANNEX 3.4 STAFFING OF JPEPC CLASSIFICATION OF JPEPC SK1LLED WORKERS (As of December 31, 1992) Total of skilled workers Junior Average skilled Hi2hlv skilled Number % Number % Number % Number b Generation 15,876 37.0 4,517 40.0 4,141 30.2 7,218 40.4 Power supply & services 14,594 34.0 2,649 23.4 5,344 39.0 6,601 36.9 Construction and installation 9,251 21.6 3,550 31.4 3,184 23.2 2,517 14.1 Workers in repair and manufacture enterprises 2,879 6.7 561 5.0 807 5.9 1,511 8.5 Miscellaneous 275 0.6 28 0.2 229 1.7 18 0.1 Total 42.875 100.0 11,305 100.0 13.705 100.0 17.865 100.0  - 79 - ANNEX 3.5 SCHOOLS AND TRAINING CENTERS UNDER JPEPC Current status Proposed Rlan 1992 1995 2000 Stu- Staff Grad- Stu- Staff Grad- Stu- Staff Grad- School dents uates dents uates dents uates Nanjing Elec. Power Institute 2,086 621 584 2,480 892 600 2,480 892 600 Jiangsu Staff College 170 80 35 490 80 140 440 80 120 Jianbi Tech. School 558 108 187 400 115 100 600 120 200 Suzhou Tech. School 1,455 225 480 1,080 240 330 1,080 250 360 Xuzhou Tech. School 761 221 279 1,000 311 180 1,200 350 400 Total 5.030 1.255 1.565 5.450 1.638 1.350 5.800 1.692 1.680  - 1 - ANNEX 3.7 SALES AND AVERAGE PRICE BY CATEGORY OF CONSUMERS (1992) Consumer category Energy sales Average price (GWh) (yuan/MWh) Large industrial users 14,555.7 140.49 Ordinary and commercial users 7,662.94 145.42 Agriculture and rural users 3,351.23 125.77 in which: Agriculture users Residential (lighting) users 3,806.69 214.29 Other users 4,874.22 222.4 Total 34 250.78 160.83 Source: JPEPC.  INSTALLED GENERATING CAPACITIES OF JIANGSU POWER GRID (1985-92) (Power Plants with 0.5 MW or above) (Unit: MW) Average annual growth rates from Name of plant 1985 1986 1987 1988 1989 1990 1991 1992 19RS to 1992 (%) Total 3,840.45 4,528.36 5,486.94 6,223.10 6674.24 7.519.7 7,805.81 8.280.12 11.60 Hydropower 21.38 21.82 21.88 21.88 23.48 23.48 23.88 23.88 1.59 Thermal power 3,19.07 4,506.54 5,465.06 6,201.22 6,650.77 7,496.22 7,781.93 8,256.24 11.64 1. Plants under Ministry 2,756.70 3.253.3 3,753.30 3,943.00 4,143.00 4.143.00 4259. 6.41 Xiaguan Power Plant 105.00 105.00 105.00 105.00 105.00 105.00 105.00 85.00 -2.97 Nanjing Power Plant 385.00 385.00 385.00 385.00 385.00 385.00 385.00 385.00 0.00 Jianbi Power Plant 1,025.00 1,325.00 1,625.00 1,625.00 1,625.00 1,625.00 1,625.00 1,625.00 6.80 Qishuyan Power Plant 87.70 84.30 84.30 84.30 74.00 74.00 74.00 274.00 17.67 Yangzhou Power Plant 36.00 36.00 36.00 236.00 236.00 436.00 436.00 412.00 41.65 Zhangzhu Power Plant 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 0.00 o Hanzhuang Power Plant 96.00 96.00 96.00 96.00 96.00 96.00 96.00 74.00 -3.65 Xutang Power Plant 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 0.00 Jiawang Power Plant 30.00 30.00 30.00 30.00 30.00 30.00 30.00 12.00 -12.27 Xuzhou Power Plant 900.00 1,100.00 1,300.00 1,300.00 1,300.00 1,300.00 1,300.00 1,300,00 5.39 2. Plants under Province 557.00 575.00 575.00 569.00 557.00 757.00 939.00 916.00 7.47 Tianshenggang Power Plant 324.00 324.00 324.00 324.00 324.00 324.00 324.00 324.00 0.00 Qidong Power Plant 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 0.00 Xinghai Power Plant 82.50 82.50 82.50 76.50 70.50 270.50 470.50 462.00 27.90 Huaiyin Power Plant 70.50 70.50 70.50 70.50 64.50 64.50 52.50 50.00 -4.79 Yancheng Power Plant 68.00 68.00 68.00 68.00 68.00 68.00 62.00 50.00 -2.74 Binhai Power Plant - 18.00 18.00 18.00 18.00 18.00 18.00 18.00 3. Local Plants 53.40 63.80 273.30 568.90 598.60 618.10 676.90 825.90 47.73 4. Captive Plants 451.97 614.44 863.46 1.110.02 1.202.17 1.278.12 1.323.03 1,551.34 19.27 5. Plants under Huanene 350.00 700.00 700.00 704.00 26.23 _~  -81 - ANNEX 4.2 MAJOR POWER GENERATING STATIONS IN JIANGSU PROVINCE (As of December 31, 1992) Nameplate Dependable Year of Name of plant/unit rate (MW) capacity (MW) commissioning 1. Xiaguang Power Plant No. 5 12.00 12.00 1958 No. 6 12.00 11.00 1958 No. 7 12.00 12.00 1958 No. 8 12.00 11.00 1959 No. 9 12.00 12.00 1959 No. 10 25.00 25.00 1961 Subtotal 85.00 83.00 2. Nanjing Power Plant No. 1 25.00 25.00 1960 No. 2 25.00 25.00 1960 No. 3 50.00 50.00 1968 No. 4 50.00 50.00 1971 No. 5 110.00 110.00 1975 No. 6 125.00 125.00 1976 Subtotal 385.00 385.00 3. Jianbi Power Plant No. 1 25.00 20.00 1965 No. 2 50.00 45.00 1966 No. 3 50.00 45.00 1967 No. 4 100.00 100.00 1970 No. 5 100.00 95.00 1970 No. 6 100.00 95.00 1973 No. 7 300.00 300.00 1980 No. 8 300.00 300.00 1983 No. 9 300.00 300.00 1986 No. 10 300.00 300.00 1987 Subtotal 1,625,0 1.600  - 82 - ANNEX 4.2 Nameplate Dependable Year of Name of plant/unit rate (MW) capacity (MW) commissioning 4. Qishuyan Power Plant No. 6 12.00 12.00 1984 No. 7 25.00 25.00 1973 No. 8 25.00 25.00 1981 No. 9 12.00 10.80 1981 No. 10 200.00 200.00 1992 Subtotal 274.00 272.80 5. Hanzhuang Power Plant No. 3 12.00 12.00 1959 No. 5 12.00 12.00 1961 No. 6 25.00 25.00 1960 No. 7 25.00 25.00 1961 Subtotal 74.00 74.00 6. Yangzhou Power Plant No. 1 12.00 11.00 1960 No. 4 200.00 200.00 1988 No. 5 200.00 200.00 1990 'Subtotal 412.00 411.00 7. Xutang Power Plant No. 1 40.00 40.00 1973 No. 2 40.00 40.00 1974 Subtotal 80.00 MM 8. Xuzhou Power Plant No. 1 125.00 125.00 1978 No. 2 125.00 125.00 1978 No. 3 125.00 125.00 1979 No. 4 125.00 125.00 1979 No. 5 200.00 200.00 1985 No. 6 200.00 200.00 1985 No. 7 200.00 200.00 1986 No. 8 200.00 200.00 1987 Subtotal 1300.00 1.300  - 83 - ANNEX 4.2 Nameplate Dependable Year of Name of plant/unit rate (MW) capacity (MW) commissioning 9. Tianshenggang Power Plant No. 4 12.00 12.00 1960 No. 5 12.00 12.00 1965 No. 6 25.00 25.00 1971 No. 7 25.00 25.00 1973 No. 8 125.00 125.00 1979 No. 9 125.00 125.00 1980 Subtotal 324.00 324.00 10. Xinghai Power Plant No. 7 12.00 9.00 1973 No. 8 25.00 25.00 1976 No. 9 25.00 25.00 1977 No. 11 200.00 200.00 1990 No. 12 200.00 190.00 1991 Subtotal 462.00 449.00 11. Huaiyin Power Plant No. 7 25.00 25.00 1969 No. 8 25.00 25.00 1972 Subtotal 50Q