China - Efficient Industrial Boilers Project

GLOBAL ENVIRONMENT FACILITY /G4/32 China Efficient Industrial Boilers Project Document November 1996 EWO THE WORLD BANK  GEF Documentation The Global Environment Facility (GEF) assists developing countries to protect the global environment in four areas: global warming, pollution of international waters, destruction of biodiversity, and depletion of the ozone layer. The GEF is jointly implemented bythe United Nations Development Programme,the United Nations Environment Programme, and the World Bank. GEF Project Documents - identified by a green band - provide extended project- specific information. The implementing agency responsible for each project is identified by its logo on the cover of the document. Global Environment Coordination Division Environment Department World Bank 1818 H Street, NW Washington, DC 20433 Telephone: (202) 473-1816 Fax: (202) 522-3256  Report No. 16132-CHA China Efficient Industrial Boilers Project Document November 1996 Environment and Municipal Development Operations Division China and Mongolia Department East Asia and Pacific Regional Office  CURRENCY EQUIVALENTS Currency Name - Renminbi Currency Unit = Yuan (Y) Y 1.00 = $0.12 $1.00 =Y 8.5 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 cubic meter (mi) = 35.3 cubic feet 1 kilogram (kg) = 2.2046 pounds (lbs) ABBREVIATIONS AND ACRONYMS BCEC - Beijing Clean Combustion Engineering Co. Ltd. CAS - Country Assistance Strategy CMIC - China Machine-Building International Corporation CO2 - Carbon Dioxide DBM - Domestic Boiler Manufacturer FBC - Fluidized Bed Combustion GEF - Global Environment Facility GHG - Greenhouse Gas Emissions IB - Industrial Boiler IRR - Internal Rate of Return LIB - Limited International Bidding M&E - Monitoring and Evaluation MMI - Ministry of Machinery Industry MOF - Ministry of Finance Mt - Million Tons NEPA - National Environmental Protection Agency NOX - Nitrogen Oxides PIP - Project Implementation Plan PLG - Project Leading Group PMO - Project Management Office S02 - Sulfur Dioxide SOE - Statement of Expenditure TA - Technical Assistance tph - Tons Per Hour (Steam) TSP - Total Suspended Particulates TVE - Township and Village Enterprises Vice President (Acting) Nicholas C. Hope, EA2 Director : Nicholas C. Hope, EA2 Division Chief Jane Loos, EA2EM Staff Member Neil C. Hughes, Sr. Operations Officer, EA2EM  CONTENTS PART I: PROJECT SUMMARY .....................................................i Schedule A: Cost Estimates And Financing Plan ................................................. 21 Schedule B: Procurement Arrangements .................................................... 22 Schedule C: Estimated Disbursement Schedule ................................................... 23 Schedule D: Timetable Of Key Project Processing Events .................................. 24 Schedule E: Status Of Bank Group Operations In China ..................................... 25 Schedule F: China At A Glance .................................................... 28 PART II: TECHNICAL ANNEXES .................................................... 31 ANNEX 1: Boiler Technology Packages .33 ANNEX 2: Domestic Enterprise Selection .40 ANNEX 3: Procurement, Disbursement, Accounting, Auditing And Reporting .43 ANNEX 4: Project Implementation Schedule .47 ANNEX 5: Financial And Economic Analysis .48 ANNEX 6: Incremental Costs .52 ANNEX 7: Project Performance, Monitoring And Evaluation .57 ANNEX 8: Social Assessment And Stakeholder Consultation .61 ANNEX 9: Environmental Analysis .64 ANNEX 10: Boiler Market Analysis .............................................. 71 ANNEX 11: Supervision Plan .............................................. 80 ANNEX 12: Detailed Project Cost And Financing .............................................. 81 ANNEX 13: Technical Assistance .............................................. 83 ANNEX 14: Selected Documents Available In The Project File ......................... 89 This report is based on an appraisal mission that visited China in June/July 1996. The report was prepared by Neil Hughes (Senior Operations Officer and Task Manager), Lily Uy Hale (Operations Officer), Todd Johnson (Economist), Brooks Howell (Consultant/ Boiler Engineer), R. Gopalkrishnan (Procurement Specialist) and Ying Xiang (RMC/ Operations Officer). The peer reviewers are: Elaine Sun (Senior Financial Analyst), Roger Heath (Principal Chemical Engineer) and Jack Fritz (Environment/Energy Specialist).   PART I: PROJECT SUMMARY   - 1 - CHINA EFFICIENT INDUSTRIAL BOILERS Country/Sector Background 1. Scientific evidence is mounting that a buildup in atmospheric concentrations of greenhouse gases (GHGs), especially carbon dioxide (CO2) from fossil fuel consumption, is contributing to a warming of the Earth's atmosphere. In China, CO2 from energy consumption accounts for roughly 80 percent of the country's GHG emissions, the largest single source of which is coal combustion in industrial boilers. Medium and small-scale industrial boilers (IBs)-defined as boilers which produce less than 65 tons of steam per hour (tph)-consumed over 350 million tons of coal in China in 1990, accounting for around 35 percent of the country's coal use and around 715 million tons of CO2, equal to 30 percent of total GHG emissions from energy consumption. For comparison, power sector boilers consumed about 250 million tons of coal in 1990, accounting for one- quarter of total coal use and about one-fifth of GHG emissions from energy consumption. 2. There are an estimated half million lBs in use in China and unit sizes are small by international standards; over half of all lBs in China are between 1 and 4 tph, and the average size is only 2.3 tph. In contrast to other major industrial countries, where coal- fired boilers outside of the power sector have been largely phased out, over 95 percent of industrial boilers in China burn coal. Given the cost advantages of coal relative to oil, and the lack of large-scale supplies of gas in China, the use of large amounts of coal by small boilers will continue well into the next century. 3. The market for industrial boilers has grown significantly since 1978, closely paralleling the growth of the Chinese economy. The two most important sources of demand for industrial boilers are: (a) light and textile industries, which require process heat and power; and (b) space heating for individual apartment buildings, district residential areas (district heating), and commercial buildings, particularly in northern Chinese cities. Three regions of the country-North, Northeast, and East'-which represent economically active areas with growing space heating demands, accounted for 70.3 percent of total installed capacity in tph of industrial boilers in 1993. Given the expected future growth of light industry, township and village enterprises (TVEs) and an increase in the area of space heating in northern China, new and replacement boiler North China (Huabei) includes Hebei and Shanxi provinces, Inner Mongolia autonomous region, and Beijing municipality. Northeast China (Dongbei) includes Heilongjiang, Jilin, and Liaoning provinces. East China (Huadong) includes Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi, and Shandong provinces.  -2 - annual demand is conservatively anticipated to rise by about 30 percent over the coming 15 years.2 4. Chinese industrial boiler designs and production methods are based on pre-1950 design principles. Typical efficiency levels for Chinese lBs lie in the range of 60-65 percent. Boilers of similar scale and application in developed countries rarely operate below 80 percent net efficiency. In developed countries, significant improvements in production techniques, materials, and auxiliary equipment (fans, stokers, controls) over the past three decades have resulted in significant improvements in the thermal efficiency of small and medium-sized industrial boilers. If the thermal efficiency of the current stock of lBs in China could be raised to those of similar sizes in the developed countries, coal consumption by small boilers could be reduced by 60 million tons per year-a savings of about 17 percent. Retrofitting existing boilers has been deemed insufficient for sustaining efficiency improvements in the sector, because: (a) the demand for new boiler technology in China is growing, making existing boilers an ever-smaller percentage of the total market; (b) the lifespan of a typical boiler in China today is only about 15 years; and (c) improved boiler production techniques are a critical aspect of raising thermal efficiency by minimizing exit gas temperature and excess air in the boiler.3 5. The desirability of improving the energy efficiency of industrial boilers is widely recognized in China, however, a variety of factors have prevented improvements from being realized. The current boiler production base was built up over a thirty-year period when the economy was characterized by command-and-control decisions, artificially low prices of coal, and a primary focus among enterprises on meeting or exceeding production quotas. The economic environment in China has changed significantly with the shift towards a market economy: (a) firms now have a profit incentive; (b) coal pricing is largely market-driven; and (c) environmental regulations have become increasingly more strict. Despite the importance of these changes for improving energy efficiency in China, especially over the longer term, additional measures are needed to hasten major efficiency improvements in China over the coming decade, when a large amount of new and replacement IB capacity will be added. 6. Barriers to the Adoption of Energy Efficient Boilers. Despite major advances in boiler technology worldwide over the past 40 years, China's industrial boiler industry has operated largely in isolation from the world market. Since 1980, major international companies have shown considerable interest in China's large-scale electric power boiler sector and, to a lesser extent, in medium-sized oil and gas-fired boilers. However, there has been a striking absence of interest in coal-fired lBs. Among the reasons are: (a) IB profit margins for international firms are low compared to the power boiler market; 2 Prefeasibility Study on High Efficiency Industrial Boilers, China Greenhouse Gas Study, Subreport No. 11, August 1994. Prefeasibility Study on High Efficiency Industrial Boilers, China Greenhouse Gas Study, Subreport No. 11, August 1994.  - 3 - (b) product development is likely to take time, and be characterized by adaptation and integration, rather than sales of "off-the-shelf' components or package boilers; (c) unlike the power boiler market, improved IB designs could be more easily replicated and disseminated, thus forfeiting the ability to recoup development and investment costs; (d) the few international firms that continue to produce lBs are mostly small companies, and have been unwilling to become involved in China, due to perceived high risks and startup costs; and (e) there is little export potential for coal-fired IBs, and thus an inability to directly earn foreign exchange. 7. There are numerous domestic barriers, as well, on both the producer and consumer side: (a) the industry is in the midst of transition from plan to market, and production by about two dozen major producers and hundreds of smaller ones is still significantly below economic scale; (b) product marketing and customer service, basically nonexistent under the planned economy, are still weak, which has inhibited the introduction of new boiler models; (c) standards for thermal efficiency, coal quality, and environmental performance for lBs are out-of-date, and enforcement at the local level, while improving, continues to be difficult without clear incentives; (d) decentralized production and weak industry associations have resulted in a scarcity of information exchange within the industry; (e) low profitability in the industry, due to below-economic scale production, rising input costs, and intense competition in the small, low-technology end of the industry, has inhibited the development and marketing of new products; (f) the lack of consumer information on energy savings has inhibited demand for more efficient but higher-priced boilers, and without such information, consumers have shown a disinterest in purchasing energy-efficient boiler models unless there are other significant benefits, such as reduced local pollution emissions, ease of use, and increased safety; and (g) underdeveloped capital markets have been reluctant to lend to producers for domestically untested new products or to consumers for capital investments with payback periods of more than a few years. As a result of these factors, energy efficiency improvements in coal-fired industrial boilers in China over the past decade have been very modest, with minimal investment in produc-. development and production line overhaul. Project Identification 8. A Prefeasibility Study of High Efficiency Boilers (1994), carried out as part of the GEF-supported China Greenhouse Gas Study by the World Bank and the Chinese government, concludes that major improvements in the energy efficiency of Chinese industrial boilers can be achieved only through a systematic program of acquiring and demonstrating advanced international technologies in China, and by removing the barriers to widespread dissemination. As part of the prefeasibility study, the Ministry of Machinery Industry (MMI), with the assistance of international boiler experts and the Bank, conducted a detailed assessment of boiler producers and users in China, including future demand trends, and identified the IB technologies that will be most needed in both steam and hot water applications. In addition, market studies of China's industrial boiler industry were conducted by MMI's Project Planning and Research Institute in Hangzhou  in 1988, 1991, and 1994, and these studies have been used as the basis for determining the demand for the boiler models to be supported by the project, and for determining the price of the new boilers. The boiler models proposed for the GEF project (see Annex 1) represent about 70 percent of the current industrial boiler market in China, of which hot water, cogeneration, and fluidized bed combustion (FBC) boilers are expected to gain in market share in the future. The project enterprises will produce an estimated 27,000 tph of new boiler capacity by the year 2002, compared to an estimated total industrial boiler production for China around 105,000 tph. Project Objectives 9. The principal objective of the GEF project is to reduce GHG emissions, as well as emissions of total suspended particulates (TSP), sulfur dioxide (SO2) and nitrogen oxides (NOx), through: (a) the development of affordable energy-efficient and cleaner IB designs; (b) the mass production and marketing of the improved boiler models that have successfully met performance criteria; and (c) the broad dissemination of more energy- efficient and cleaner IB technologies throughout China through institutional strengthening, improved information exchange, and energy efficiency and environmental policy reform. Project Description 10. The project would be composed of the following components (estimated total project cost and GEF financing): (a) Upgrading of existing Chinese boiler models ($53.1 million, GEF contribution of $16.5 million) through the introduction from abroad of advanced combustion systems and auxiliary equipment, especially the application of simple automatic controls. The following Chinese IB models, which currently account for about 60 percent of market demand in China, have been selected for improvement: * packaged watertube boiler * improved packaged firetube-watertube boiler * modular watertube boiler * high sulfur coal boiler * packaged and modular hot water boiler * packaged and modular extended furnace watertube-firetube boiler (b) Adoption of new high efficiency boiler models ($44.1 million, GEF contribution of $13.7 million) through the introduction of modem manufacturing techniques and boiler designs suitable for burning Chinese coals. Three new boiler designs, which will occupy a growing share of China's IB market, are targeted for introduction under the project:  * medium capacity steam boiler (cogeneration) * medium capacity hot water boiler (district heating boiler) * fluidized bed combustion (FBC) boiler (c) Technical assistance (TA) and training for boiler producers and consumers ($2.1 million, GEF contribution of $1.3 million): (i) improve the quality of boiler operation in China through advanced training and by initiating steps for establishing an IB operation certification program; (ii) assist boiler producers develop marketing plans for improved boilers; (iii) establish a pilot program in three municipalities in China (Beijing, Chongqing and Harbin) to stimulate the demand for more efficient and cleaner IBs; (iv) strengthen customer service programs by domestic boiler manufacturers (DBMs); (v) disseminate successful boiler technologies to other boiler producers in China; (vi) revise national standards for thermal efficiency, environmental emissions, and coal quality for IBs; (vii) extend design improvements for lBs throughout China; and (viii) improve boiler standards for IB auxiliary equipment. (d) Monitoring and evaluation (M&E), and project management ($2.1 million, GEF contribution of $1.3 million): institutional strengthening will be provided to MMI and related companies and research institutes in order to effectively implement the project and upgrade long-term institutional capacity. Support would be provided to develop monitoring and evaluation systems, including provision of monitoring equipment and training of project management office (PMO) staff. 11. Investment funding would be provided to nine Chinese boiler manufacturing enterprises in two phases. Under Phase 1, GEF funds would be used to acquire advanced international technologies for new and existing Chinese IB models and produce the model IB units. At the end of Phase 1, the model units would be evaluated against agreed technical, environmental and safety performance indicators, while project enterprises would be required to show viable production, marketing and financing plans for Phase 2. Under Phase 2, GEF grant funds would be used to acquire advanced production equipment from abroad to upgrade their production lines, in order to mass produce the successful models. TA and training would be provided to the IB industry in China to improve boiler operation, to ensure effective dissemination and marketing of high- efficiency IB models, and to improve standards for thermal efficiency, coal supply, and pollution control for Chinese LBs. Project Preparation 12. MMI is responsible for implementing this GEF project. PMO was established by MMI for coordinating all activities during project preparation and for preparing a project implementation plan (PIP). A GEF Block C grant of $746,000 was obtained for the  - 6 - purposes of preparing the project and is being used for: (a) an international technology assessment and evaluation of potential international technology suppliers; (b) the prequalification and selection of DBMs; (c) financial and economic evaluation training for DBMs and PMO; (d) short- and long-term international technical and procurement specialists to assist in project preparation; and (e) other costs of project preparation activities through Board approval. 13. Technical Review. As required for GEF projects, this project was reviewed in December 1994 by an external technical reviewer from the GEF's Scientific and Technical Advisory Panel. The reviewer noted that the project offers significant potential for GHG reduction but that successful marketing and dissemination of the improved boilers would hinge not only upon energy efficiency, but on other attributes such as cost, pollution controls, ease of operation, and the provision of full service by the boiler manufacturers. These issues were addressed during project preparation, and have been incorporated into the present project design. In a second review in January 1996, the same reviewer noted the progress that had been made in addressing "sustainability" issues in the project design, including the need for customer service and the importance of meeting energy efficiency and environmental standards in the improved boiler designs. 14. Stakeholder Identification. During project identification and preparation, key stakeholders were identified (see Annex 8). The key stakeholders in the project are: (a) consumers or users of industrial boilers, both current and prospective; (b) industrial boiler manufacturers; (c) MMI, in setting design standards, regulating the manufacture of industrial boilers, and disseminating best-practice within the industry; (d) local governments involved in commissioning, testing, and monitoring industrial boilers for safety and environmental compliance; (e) domestic and international research institutes involved in design and testing of new boiler models; (f) international industrial boiler technology suppliers; and, (g) the Bank. 15. Selection of Domestic Boiler Manufacturers (DBM). The selection of DBMs to participate in the project was undertaken in two stages, i.e., prequalification and final selection, to ensure that enterprises met strict technical, financial, and commercial qualifications and to ensure "ownership" of the project. All boiler enterprises in China were notified about the project and of the opportunity to participate. Of 33 firms that submitted prefeasibility studies, 20 were prequalified and allowed to proceed to the feasibility study stage and final selection. Prequalified firms next participated in an international technology assessment tour to visit potential technology suppliers. Subsequently, these firms incorporated their initial technology acquisition needs into a feasibility study required for final selection. Both prequalification and final selection were carried out by PMO, with assistance from international boiler consultants and a local financial consultant in accordance with Bank-agreed criteria (see Annex 2). As a result, nine DBMs have been selected with the Bank's "no objection" to acquire the advanced technology outlined in para. 10 above.  -7 - 16. Role of DBMs and the Enterprise Group. Each boiler subproject would involve design, demonstration testing, and manufacture of the new boiler by an enterprise group comprised of a leading enterprise (the DBM), one or more manufacturers of auxiliary boiler equipment, and as needed, a boiler design institute. The DBM would (a) receive the proceeds of the subgrant, (b) be responsible for implementation of the subproject, and (c) enter into arrangements with the auxiliary equipment manufacturers to assist in carrying out the subproject, including the procurement of appropriate auxiliary equipment technology. Associated Investment Project 17. The GEF Efficient Industrial Boilers Project is programmatically and thematically linked to the Chongqing Industrial Pollution Control and Reform Project, which seeks to: (a) significantly reduce industrial pollution from Chongqing's most polluting industry, iron and steel; (b) establish a strategy for reducing industrial pollution for the entire industrial sector; and (c) initiate a pilot program to assist other industrial subsectors to restructure productive facilities, minimize pollution, and adopt modem corporate structures. A loan of $170 million was approved by the Bank's Board of Directors on June 18, 1996. 18. In Chongqing, small and medium-sized industrial boilers account for as much as half of the municipality's coal consumption, contributing to severe air pollution and ambient concentrations of SO2 which are among the highest in the world. Through the Chongqing Project, Chongqing Municipality is providing support for the implementation of this project, by improving its regulatory structure for controlling boiler emissions, and as a condition of loan effectiveness for the Chongqing project, the municipal government would adopt a plan for reducing boiler SO2 emissions through implementing a municipal- wide SO2 pollution levy system. Reduction of non-SO2 boiler emissions will be addressed through strengthening enforcement of environmental standards for other pollutants. In a parallel effort supported by this project, Chongqing will participate in a pilot program for (a) improving further regulatory enforcement for controlling emissions, and (b) disseminating more efficient and cleaner industrial boiler technologies (see para. l0(c)(iii) and Annex 13). Project Costs and Financing 19. Preliminary investment cost estimates for the Efficient Industrial Boilers Project are $101.4 million, of which an estimated $68.6 million equivalent would be provided through local counterpart funding, consisting primarily of enterprises' own funds and commercial bank loans. The remaining balance of $32.8 million (SDR 22.8 million) has been approved by the GEF Council to finance the incremental costs involved (see Annex 6). During negotiations, agreement was reached that the proceeds of the grant will be made available to participating enterprises on terms and conditions satisfactory to the Bank. Estimated project cost and sources of financing for Phases I and 2 are presented in Schedule A and summarized below ($'000):  -8 - Phase I Phase 2 Total Estimated Project Cost: (a) Upgrading of existing boilers 15,220 27,846 43,066 (b) Adoption of new boiler models 14,137 21,860 35,997 (c) Technical assistance 1,249 834 2,083 (d) M&E and project management 1,336 783 2,119 (e) Interest during construction 314 5,272 5,586 (f) Contingencies 5,173 7,353 12,526 Total Project Cost 37,429 63,948 101,377 Enterprise Self- GEF Local Bank Loan financed Total Financing Plan: (a) Upgrading of existing boilers 16,456 25,648 10,991 53,095 (b) Adoption of new boiler models 13,756 21,226 9,098 44,080 (c) Technical assistance 1,294 789 2,083 (d) M&E and project management 1,306 813 2,119 Total sources of financing 32,812 48,476 20,089 101,377 Incremental Costs 20. The GEF will finance the incremental costs of the project, calculated as the difference between the costs of the "GEF alternative" and the costs of the "baseline," the latter being defined as the costs that would otherwise be incurred by China to meet the same level of industrial boiler demand. Incremental costs faced by boiler producers to acquire advanced boiler technologies from abroad include licensing, procurement of engineering services, selected purchase of embodied technology, and their commercial demonstration. Additional costs include the modification of production facilities to produce new more energy-efficient boilers. The net incremental cost for boiler producers for undertaking the GEF alternative is approximately $30.2 million. Additional costs of $2.6 million are needed to ensure sustainability and effective implementation of the project, including monitoring and evaluation, and project management. Details of the incremental costs calculations are provided in Annex 6. Procurement Arrangements 21. Procurement for this project involves the identification of appropriate international suppliers of advanced IB technologies, and the subsequent acquisition of foreign technology and production equipment by the DBMs through licensing and other purchase arrangements. The identification of foreign technology sources is being conducted under an open and competitive process with the objective of acquiring the best available IB technologies for the DBMs at the lowest possible cost. Procurement of  - 9 - advanced IB technologies from international suppliers for producing the model unit will take place during Phase 1 of the project, followed by procurement of production equipment for mass producing the improved boilers during Phase 2. A summary of the procurement process is discussed below, with additional details provided in Annex 3. 22. Prequalification of Technology Suppliers. A notice requesting interested technology suppliers to submit prequalification information and expressions of interest was published in Development Business on December 31, 1994 and the China Mechanical and Electrical Daily in December 1994. Notification letters were also sent to foreign embassies in Beijing and to trade associations in various countries, and were followed up with telephone inquiries and visits to well-known international boiler and ancillary companies. Based on criteria agreed between PMO and the Bank, 17 international technology suppliers were prequalified. Procedures for selection of technology suppliers are in accordance with the Bank's Procurement Guidelines. The evaluation system for bids incorporates in addition to price, weights for other factors that influence the success of the technology transfer, including adaptability to the Chinese context, service contracts, and personnel training arrangements. Following bid evaluation, an evaluation report along with a revised subproject implementation plan, including revised total project costs, financing plan and timetable of investments, would be sent to the Bank, for a "no objection" response. During negotiations, agreement was reached that expenditures be made under Phase 1 only for subprojects for which satisfactory implementation plans had been approved by the Bank. PMO will be required to provide the locations of the model units and would assure that environmental assessments from appropriate local government agencies be obtained prior to model unit construction. 23. Technology Transfer Phase 1. During Phase 1, procurement of technology rights and demonstration units will be subject to a two stage bidding process for all subprojects that have two or more prequalified technology sources (Schedule B). Procurement procedures will be based on the Instructions to Bidders from the Bank's Standard Bidding Documents for Supply and the Installation of Plant & Equipment, and the Conditions Of Contract For Process Technology Procurement that have been agreed to by the Bank and Chinese government authorities. For subprojects with only one prequalified technology source, direct contracting will be used for procurement, based on the Bank's Standard Bidding Documents for Supply and the Installation of Plant & Equipment, and the Conditions Of Contract For Process Technology Procurement. Technology rights, goods and services will be procured during Phase 1 through limited international bidding (LIB) estimated to amount to $16.4 million. With the Bank's prior agreement, proprietary items are to be procured through direct contracting, estimated at $6.5 million. Aggregate amounts for LIB and direct contracting cannot be determined at this stage of the technology transfer. 24. At the end of Phase 1 of each subproject, PMO will evaluate the demonstration model and determine whether the model and the participating enterprises have: (a) met predetermined technical and environmental performance criteria; (b) met domestic and  - 10- international safety standards; (c) presented an acceptable Phase 2 (i) production plan, including financing; and (ii) marketing plan. Should an enterprise fail to satisfactorily complete the Phase 1 evaluation, MMI would select an alternative subproject, satisfactory to the World Bank. During negotiations, assurances were received that the verification of the technical and environmental performance of demonstration models for each subproject be carried out according to criteria satisfactory to the Bank, including compliance with domestic and international safety standards, and that expenditures be made under Phase 2 only for subprojects whose model units have met Phase 1 criteria. 25. Technology Transfer Phase 2. During Phase 2, the boiler enterprises that have successfully met their subproject performance criteria will procure production equipment to put the new boiler designs into production. Goods and services procured under shopping are expected to amount to $3.7 million. Items costing more than $250,000, but less than $2 million, are to be procured through international shopping based on quotations from at least three suppliers from at least two countries, up to an aggregate amount not to exceed $2,690,000. Items costing less than $250,000 are to be procured through national shopping, up to an aggregate amount not to exceed $1,000,000. Bank- approved proprietary items, procured through direct contracting, are expected to amount to $3.9 million. 26. Consultants for both Phases will be engaged on the basis of Guidelines for the use of Consultants by World Bank Borrowers and World Bank as Executing Agency dated August, 1981. Prior review of about 80 percent of procurement documentation by the Bank will include all goods contracts of $200,000 equivalent or more, and all consultant services in excess of $100,000 equivalent for firms, and above $50,000 equivalent for individuals. For contracts not subject to prior review, post review will be carried out during project supervision, to include at least 25 percent of such contracts. The consultant terms of reference and technical requirements regarding experience and capacity, single selection of consulting firms, and amended contracts which exceed their thresholds, will be subject to prior review for all consultancy contracts. Project Implementation 27. MMI is responsible for the overall implementation of the project. A Project Leading Group (PLG) was established at project inception with the Vice-Minister of MMI as head of the PLG. A PMO was organized under the PLG to oversee project preparation and coordination of various project implementation activities. During project preparation, PMO established capable technical support and administrative teams to carry out project implementation. Following additional training in Bank procedures and guidelines, the administrative team will be responsible for procurement, disbursement, and financial aspects of the project during implementation. PMO has also appointed two companies under MMI to assist in carrying out implementation activities: (i) the China Machine-Building International Corporation (CMIC) will be responsible for procurement of goods and services for all subprojects; and (ii) the Beijing Clean Combustion Engineering Co. Ltd. (BCCEC) will be responsible for procurement of the rights to the  - 11 - advanced technology, and will assist with industry-wide issues related to technology diffusion of high-efficiency and cleaner industrial boilers, product standardization, and quality control. During negotiations, assurances were received that PMO be maintained with sufficient competent staff on a full- or part-time basis, as required, to carry out the project, including: (a) boiler house design engineer to analyze and evaluate boiler house design and ensure compliance with design and safety standards; (b) boiler design and manufacturing engineer to analyze and evaluate boiler and other production facility designs and provide quality control assurance and monitoring; (c) boiler test engineer to provide field testing and evaluation of boilers; (d) environmental engineer to work with enterprises to ensure that boiler house designs are consistent with the project environmental objectives; (e) lawyer/legal expert to provide advice on legal aspects of technology transfer and assist in subproject contractual negotiations; Go accountant/disbursement expert familiar with Bank disbursement procedures to handle disbursement, accounting and internal auditing; (g) financial analyst familiar with Bank reporting requirements to monitor the financial condition and performance of the participating enterprises and subprojects, and prepare periodic reports for the Recipient and the Bank; (h) procurement expert familiar with Bank procurement procedures to prepare procurement packages and bidding documents; (i) marketing/commercial expert with boiler sector experience to help develop enterprise commercial strategies and marketing plans and plans for dissemination of the new boiler technologies; and (j) training coordinator to plan, coordinate and implement training at the enterprise and municipal levels. The services of such staff would be obtained prior to December 31, 1996. PMO will also obtain support from the National Environment Protection Agency (NEPA) for conducting environmental evaluations during the verification of boiler demonstration models, monitoring emissions indicators of the boilers, reviewing and formulating new standards and emissions fee systems, and help in the establishment of local pilot programs for effective dissemination of the new boiler technologies. 28. With Bank assistance, PMO has prepared a PIP (see Project File) and a summary of key events in the Project Implementation Schedule (Annex 4). The proposed project would be implemented over a four-year period from 1997-2000. A Grant Agreement between the World Bank and the Chinese Government represented by the Ministry of Finance (MOF) establishes the terms and conditions of project implementation. To ensure that the nine subprojects are implemented smoothly, there will be a Subgrant Agreement, satisfactory to the Bank, for each of the nine subprojects to be signed by the participating DBMs and MMI. During negotiations, agreement was reached that: (a) each subgrant shall not exceed 40 percent of any boiler subproject cost, net of taxes; (b) at least 10 percent of the total cost of any boiler subproject shall be financed by the enterprise concernedfrom resources raised on its own; and (c) at least 25 percent of the proceeds of any subgrant shall be allocated to Phase 2 of the project. 29. Project grant funds will be channeled through a Special Account to be set up by MOF. MOF will reimburse all expenditures incurred by the enterprises upon approval and verification by PMO. Estimated disbursements are presented in Schedule C.  - 12 - Disbursement would be 100 percent for subgrants for foreign technology acquisition, including proprietary equipment and training. Disbursement for goods for project management will follow the World Bank's standard disbursement guidelines of 100 percent of foreign expenditures, 100 percent of local ex-factory expenditures, and 75 percent of local expenditures for other items procured locally. Monitoring and Evaluation 30. Monitoring of project implementation will be the responsibility of PMO. BCCEC will assist with the monitoring and evaluation of implementation activities and performance indicators. Implementation activities will be monitored by tracking essential inputs to the project, including the amount of GEF grant funds received, the progress of disbursement, the availability of counterpart financing, technology transfer contracts signed, consultants hired, and equipment purchased, according to the two phases of project implementation described in the PIP. Reporting of these activities will form part of PMO's semiannual project implementation progress report. Two sets of implementation performance indicators will be monitored: (a) output/outcome indicators will be used to track the thermal efficiency of the model boilers units, and a final evaluation of the model units will be undertaken at the completion of Phase 1 (1998/1999); and (b) development impact indicators will measure the success of the project as they relate to its environmental objectives. The nature of this project is such that impact of the reduction of CO2 emissions from improved coal use will be measured only two years after the project is completed (2002), because the reduction in the interim years will be minimal. Participating boiler manufacturers are therefore being required to keep track of the thermal efficiency of all the boilers that they produce and sell, including the model unit, starting in Phase 2 when mass production is initiated, until 2002. Specifically, as part of their subproject completion report, they should include information on the amount of coal use per steam-ton of output from a sample of new boilers that they produced and sold during the project implementation period. During negotiations, assurances were received that PMO would monitor and evaluate the progress of the project in accordance with indicators agreeable to the Bank The output/outcome and development impact indicators are summarized below; the indicators, as well as additional details, will be included in a supplemental letter to the Grant Agreement, and are provided in Annex 7. The Bank's project supervision plan is shown in Annex 11. (a) Output/outcome indicators (1999/2000): * Higher thermal efficiencies in model boiler units * Reduced dust emissions in model boiler units * Reduced S02 emissions in model boiler units  - 13 - (b) Development impact indicators: * Reduced CO2 emissions through improved coal utilization: to be monitored two years after project completion (2002). * Increased new boiler production and sales volume of each subproject: * 18,000 tph at project completion (2000) * 27,000 tph two years after project completion (2002) * Ratio of new boilers to total boiler production: * 19,000/100,000 tph at project completion (2000) = 19 percent * 36,820/105,000 tph two years after project completion (2002) = 35 percent Reporting and Auditing 31. PMO would be responsible for the preparation of semiannual reports on progress of project implementation, disbursement status of each subproject, and annual reports on the financial status of each subproject enterprise and monitoring and evaluation of the project. Auditing of the proposed project will be conducted by the State Audit Administration's Foreign Funds Application Department. During negotiations, assurances were received that the following reports would be submitted to the Bank: (a) annual audits, within six months of the end of the financial year: (i) audit of project accounts maintained by PMO; (ii) audit of the Special Account; and (iii) audit of statements of expenditures (SOEs); (b) annual reports on the financial condition and operational status of each subproject enterprise, no later than February 15 of each year, according to parameters agreed with the Bank; and (c) semiannual progress reports on progress achieved in carrying out the project, and the disbursement status of each subproject, not later than February 15 and August 15 of each year. Project Sustainability 32. Sustainability of the project will depend on the technical strengths and financial advantages of the new boiler models being introduced, and on the successful marketing and dissemination of the boilers by Chinese boiler manufacturers, industry associations, MMI, and local energy and environmental agencies. Major stakeholders in the project (boiler producers, users, research institutes, government agencies, international agencies) have been involved in the design and preparation of the project, and will be included in implementation. Leading and well-established DBMs with sound financial positions have been selected to participate in the project through an open and competitive process. Assistance is being provided to DBMs in product marketing and customer service. Prior to going ahead with the mass production of the new models, DBMs will have to provide the Bank with satisfactory marketing and financing plans. Technologies that are proven to be technically and commercially successful will be disseminated to other boiler  - 14- producers in China. Design and research institutes will be involved in extending the imnproved international designs into other boiler models, and in improving the standards for boiler auxiliary equipment. A pilot program involving national and local environment and planning agencies will be established in Beijing, Chongqing and Harbin for the purpose of stimulating the demand for more efficient and cleaner industrial boilers. The intent of the municipal pilot programs is to provide information to boiler consumers on the benefits of adopting the new boilers, and developing penalties for the continued use of older inefficient boilers through stricter enforcement of environmental emissions standards. During negotiations, assurances were received that a plan for the implementation of the pilot dissemination in each of the municipalities participating in the program will be submitted to the Bank no later than February 28, 1997. Bank Group Assistance Strategy and the Rationale for Bank and GEF Involvement 33. China ratified the United Nations Framework Convention on Climate Change on January 5, 1993. The project is consistent with Operational Program #5 of the GEF Operational Strategy for climate change, where one of the long-term mitigation measures is to remove the barriers to energy conservation. The Bank Group's assistance to China emphasizes environmental protection as articulated in the Country Assistance Strategy (CAS) presented to the Board on June 1, 1995 and the Progress Report discussed on March 26, 1996. The CAS calls for working with the GEF to reduce GHG emissions, amnong other objectives. The Bank's environmental strategy for the industrial sector seeks to reduce industrial point source pollution within the context of improvements in the regulatory incentive structure and reform of the industrial enterprises involved. Bank sector work underpins and validates this approach. China: Environmental Strategy Paper (1992) highlights the interrelationships between environmental issues and economic growth issues, such as technology development and transfer. China: Efficiency and Environmental Impacts of Coal Use (1991) identifies various means of reducing China's serious SO2 and TSP problems by using coal more efficiently, especially through technology transfer and improving the operating efficiency and technical quality of conventional industrial boilers. Finally, the China Greenhouse Gas Study (1994) and the 1994 prefeasibility study for boilers mentioned above, note the key role of economic reforms in controlling GHG and other forms of pollution, the need for a parallel strengthening of the environrental regulatory system, and the importance of technology transfer for achieving effective energy efficiency and pollution control. Lessons Learned 34. As China moves from a planned to a market economy, it is important to design projects that emphasize market solutions. The Bank's experience in industrial lending has revealed the importance of early involvement of the enterprises which will have to operate in such markets. The GEF Efficient Industrial Boilers Project is innovative in this regard in that proposals on measures to increase thermal efficiency of industrial boilers were solicited from domestic boiler enterprises. Domestic firms were provided information about foreign advances in boiler design and production, including the  - 15 - opportunity to visit international technology suppliers. The final selection of both domestic and foreign participating firms is being done through an open and competitive process. The Bank's experience in dealing with the public sector in China has also shown that it is critical to involve government agencies at both the central and local government levels. MMI is responsible for implementing the project but will work closely with provincial and municipal governments in the dissemination of the new boiler technology. 35. The GEF Efficient Industrial Boilers Project is the first project in a series of GEF and Bank operations in China designed to improve the efficiency of energy use and to promote the use of renewable energy. In undertaking a new initiative, it is critical to identify and obtain the commitment of major stakeholders (see Annex 8). An extended dialogue during the prefeasibility study and preparation of the GEF project has resulted in a strong commitment from the Chinese government to this project. Input on project design has also been sought from a broad range of stakeholders in the boiler industry at large, and among the municipalities which will be the long term beneficiaries of this project. 36. Lessons learned from designing industrial projects, which can reduce risk and contribute to successful implementation, have been applied to this project. They include: (a) utilizing market studies to provide clear cost-benefit tradeoffs to introducing and disseminating new technologies; (b) the phasing of disbursement to make sure that the phase two financing of mass production of new boiler prototypes only takes place after phase one model verification is satisfactorily concluded; (c) strengthening regulatory enforcement governing boiler operations in parallel with the adoption of the new technology; and (d) ensuring sufficient local counterpart financing is available, including commitments from lenders and beneficiary enterprises to provide their own resources. Environmental Aspects 37. The industrial boiler sector currently accounts for about 28 percent of China's CO2 emissions, 37 percent of TSP emissions, and 39 percent of SO2 emissions from energy consumption. As shown in the project benefits section (para. 40), the project will result in significant reductions of GHG emissions, which will reduce the threat of global climate change. In addition, particulate and sulfur emissions will be reduced through reduced coal consumption, coal preparation, the use of advanced cyclones and baghouses, and the adoption of sulfur-control combustion technology (FBC) in boiler design. In accordance with the requirements of OD 4.01 (Environmental Assessment-EA), the project has been assigned an environmental category of "B", and an environmental analysis report satisfactory to the Bank has been prepared. As with all industrial boiler installations in China, local environmental clearance will be needed prior to construction of the nine subproject model boiler units. The pollution control improvements embodied in the new boiler technologies will be disseminated throughout China's boiler industry, and will be the basis for reviewing existing enviromnental standards for industrial boilers and making recommendations for revising such standards (see Annex 13).  - 16 - Economic and Financial Analysis 38. The improvement of domestic boiler design and production capabilities through technology transfer was determined to be one of the most cost-effective and immediately implementable of the options for improving energy efficiency in the industrial boiler sector. Without the project, it has been estimated that there would be unnecessary energy use on the order of 300-500 million tons of coal over the life of the project, and excess emissions of 600-1,000 million tons of CO2. In addition to the reduction in C02, the project will generate substantial financial benefits to consumers in terns of lower energy expenditures and significant, though less easily quantifiable, benefits in terms of reduced TSP and SO2 emissions. 39. Market prices of the new boilers were estimated based on price surveys of existing boiler models and on the cost projections for new boilers carried out in the project financial and economic analysis. (See Annex 5) The new boiler prices were between 14 and 20 percent higher than existing (less efficient) comparably-sized boiler models. Rate of return analysis for both consumers and producers was undertaken using market prices for coal and the estimated market prices of the new boilers. The incremental analysis ("with" minus "without" project case) for consumers was found to generate internal rate of returns (IRRs) of between 20 and 30 percent, depending on the subproject, and payback periods of four to five years, similar to existing boiler models. Without the GEF grant, the prices of the new boilers were found to be between 25 and 35 percent higher than existing (less efficient) comparably-sized models, resulting in lower IRRs and longer payback periods for consumers than for existing boilers. The incremental analysis for producers found that the IRR was between six and seven percent without the GEF grant, and 11 to 13 percent with the GEF grant. The economic and financial analysis (Annex 5) shows that the IRRs for both boiler producers and consumers are very sensitive to changes in the price of the new boiler. While increases in the boiler price will have large positive benefits for boiler producers, price decreases, which are unlikely, would pose serious financial difficulties for boiler producers. Once the new boilers have been proven in the market, and the nonfinancial benefits of the boilers displayed, consumers are likely to accept a higher price for the new boilers. Details on economic analysis and industrial boiler market survey can be found in Annexes 5 and 10, respectively. Project Benefits and Risks 40. Upgrading the technology of Chinese coal-fired industrial boilers is a critical element in China's plan to increase the overall energy efficiency of the economy, and in the process, reduce both local (TSP, SO2) and global (CO2) emissions through reduced fuel use. The more efficient industrial boilers developed under the project are projected to account for roughly 35 percent of IB output by the year 2002, and should grow to 50- 60 percent of total IB output in China by the year 2010. Direct coal savings of IB boilers produced by the participating DBMs are estimated at about 102 million tons (Mt) of coal, resulting in the reduction of about 181 Mt of CO2. Indirect benefits of the project,  - 17- through the dissemination of advanced boiler designs and auxiliary equipment to other boiler producers, are conservatively estimated to be in the range of 230-416 Mt of coal savings, and a reduction of CO2 of 456-824 Mt. The net cost per ton of CO2 reduced for the GEF investment for the project is between $0.03 and $0.05 per ton of CO2 (total direct plus indirect CO2 reductions), which is substantially below $20 per ton that has been proposed by some developed countries as a shadow value for CO2. Improved boiler designs will also result in significant reductions of local pollution emissions, especially TSP and S02, which has been shown to have important benefits to human health. Direct project reductions alone of TSP and S02 are estimated at 4.5 and 25.4 million tons, respectively, through both energy efficiency improvements and the introduction of emission control technologies. 41. Additional important benefits to China are the safety, reliability, and additional environmental benefits embodied in advanced boiler technologies from abroad. The project will address the two other major factors responsible for the relatively low operational thermal efficiency achieved by Chinese industrial boilers, namely, efficient boiler operation, and inconsistent and poor quality coal supply. Through technical assistance components (see Annex 13), the project will strengthen efficiency, safety, and environmental standards for industrial boilers, establish a training program for boiler operators, and identify the benefits of, and regulatory measures needed to improve, the quality of coal supplied to industrial boilers. 42. The project is subject to technical, commercial, and financial risks. Technical risks are viewed as limited, in that all of the boiler designs proposed have been commercially demonstrated abroad. One serious technical risk is the inability of the new boilers to achieve target operational thermal efficiencies due to poor operation. This risk is being reduced through the establishment of a boiler operator training and certification program under the project. Technical risk is also being minimized through competitive bidding for DBMs, close collaboration between Chinese and international engineers, and the evaluation of technical performance of the model units at the end of Phase 1, and with successful evaluation as a condition of Phase 2. Commercial risk will be reduced by requiring DBMs to have a clear marketing strategy in place, prior to moving to Phase 2 mass production. The use of the GEF grant to purchase foreign technology licenses will help to ensure the successful marketing of the boilers by limiting the financial cost of technology transfer, and thus limiting the price increase of the new boiler (see para. 39 and Annex 5). Market price surveys and project economic analysis show that it will be difficult for the new boilers to be marketed if the price increases for the nine new boilers is more than 15-20 percent higher than existing comparable models. The price of the new boilers used in the analysis takes into consideration a pricing level sufficient to induce boiler users to switch to the new boilers while at the same time minimizing the subsidy from the grant. This calibration of the pricing level to accommodate both objectives is inherently risky as noted in the sales price analysis in Annex 5 (para. 8). Commercial and financial risks will also be reduced by: (a) requiring that DBMs have the required counterpart funding (including a commitment letter from a bank) as part of their feasibility study, and a clear and verifiable financing plan prior to going into commercial  - 18- production; and (b) working with local governments to establish a pilot program for marketing the energy-efficient and less-polluting boilers by strengthening enforcement of boiler emission regulations, beginning in municipalities where industrial boilers have been identified as serious sources of pollution. Agreements Reached 43. During negotiations, agreement was reached with the Recipient: (a) that the proceeds of the grant would be made available to participating enterprises on terms and conditions satisfactory to the Bank (para. 19); (b) to require that the locations of the model units be identified and that environmental assessments from appropriate local government agencies be obtained prior to model unit construction (para. 22); (c) to carry out the verification of the technical and environmental performance of model units for each subproject according to criteria satisfactory to the Bank, and to test compliance with domestic and international safety standards (para. 24); (d) to maintain PMO with sufficient competent staff to carry out the project (para. 27); (e) to ensure that each subgrant shall not exceed 40 percent of any boiler subproject cost, net of taxes (para. 28); (f) to ensure that at least 10 percent of the total cost of any boiler subproject shall be financed by the participating enterprise concerned from resources raised on its own (para. 28); (g) to ensure that at least 25 percent of the proceeds of any subgrant shall be allocated to Phase 2 of the subproject (para. 28); (h) to monitor and evaluate the progress of the project in accordance with indicators satisfactory to the Bank (such indicators are included in a supplemental letter to the Grant Agreement) (para. 30); (i) to furnish the Bank with independently audited financial statements for the Special Account, statements of expenditure, project accounts and relevant records, within six months of the end of each fiscal year (para. 31); (j) to submit semiannual progress reports on progress achieved in carrying out the project, and the disbursement status of each subproject, not later than February 15 and August 15 of each year (para. 31);  - 19 - (k) to submit annual reports by February 15 on the financial condition and operational status of each subproject enterprise according to parameters agreed with the Bank (para. 31); (1) to prepare and furnish to the Bank no later than February 28, 1997 a plan for the implementation of the pilot dissemination in each of the municipalities participating in the program (para. 32). 44. As a condition of disbursement, the Recipient would: (a) ensure that expenditures under Phase 1 are incurred only for subprojects whose subgrant agreement has been approved by the Bank, and which have a satisfactory implementation plan (para. 22); and (b) ensure that expenditures under Phase 2 are incurred only for subprojects which have met evaluation criteria satisfactory to the Bank (para. 24).   - 21 - Schedule A SCHEDULE A: COST ESTIMATES AND FINANCING PLAN ($'000) Estimated Costs First Phase Second Phase Local Foreign Subtotal Local Foreign Subtotal Total Upgrading of Existing Boilers: Construction Engineering - - - 3,069 - 3,069 3,609 Equipment 4,626 1,311 5,937 4,755 3,933 8,688 14,625 Technology Transfer Licensing - 9,075 9,075 - - - 9,075 Engineering Services - 5,595 5,595 - 5,595 License - 3,480 3,480 - - - 3,480 Installation - - - - - - Others - - - 796 - 796 796 Working Capital 208 - 208 14,753 - 14,753 14,961 Subtotal 4,834 10,386 15,220 23,913 3,933 27,846 43,066 Adoption of New Boiler Design: Construction Engineering - - - 2,544 - 2,544 2,544 Equipment 3,973 1,160 5,133 4,167 2,520 6,687 11,820 Technology Transfer Licensing - 8,310 8,310 - - - 8,310 Engineering Services - 4,872 4,872 - - - 4,872 License - 3,438 3,438 - - 3,438 Installation - - - 347 347 347 Others - - Working Capital 694 - 694 12,282 - 12,282 13,522 Subtotal 4,667 9,470 14,137 19,340 2,520 21,860 35,997 Technical Assistance 424 825 1,249 365 469 834 2,083 Project Monitoring & Evaluation 151 610 761 353 195 548 1,309 Project Management 205 370 575 104 131 235 810 Subtotal 780 1,805 2,585 822 795 1,617 4,201 Total 10,281 21,661 31,992 44,075 7,248 51,323 83,265 Physical Contingencies 860 1,986 2,846 1,622 645 2,267 5,113 Price Contingencies 1,494 833 2,327 4,647 439 5,086 7,413 Total Project Cost 12,635 24,480 37,115 50,344 8,332 58,676 95,791 Interest During Construction 314 - 314 5,272 - 5,272 5,586 Total Financing Required 12,949 24,480 37,429 55,616 8,332 63,948 101,377 Sources of Financing GEF - 24,480 24,480 - 8,332 8,332 32,812 Local Bank Loan 8,252 - 8,252 19,676 - 19,676 27,928 Working Capital Loan 632 - 632 18,925 - 18,925 19,557 Enterprise Self-raised Fund 4,065 - 4,065 17,015 - 17,015 21,080 Total Sources of Financing 12,949 24,480 37,429 55,616 8,332 63,948 101,377  - 22 - Schedule B SCHEDULE B: PROCUREMENT ARRANGEMENTS ($'000) Direct Project Components LIB Contract Others La Total Phase 1 Upgrading of existing boilers 6,861 5,081 - 11,942 Adoption of new boiler designs 9,550 1,370 - 10,920 Phase I Subtotal 16,411 6,451 22,862 Phase 2 Production Equipment - 3,910 3,440 7,350 Technical Assistance (TA) 1. Operator Training - - 234 234 2. Marketing/dissemination - - 350 350 3. Revision of standards - - 350 350 4. Boiler Design and Implementation - - 185 185 5. Boiler house standards development - - 175 175 Subtotal - - 1,294 1,294 Monitoring and Evaluation (M&E) 1. Project evaluation - - 122 122 2. Thermal efficiency monitoring - - 127 127 3. Emissions monitoring - - 157 157 4. Safety validation - - 200 200 Subtotal - - 606 606 Project Management (PM) - - 450 450 Office and Monitoring & Evaluation Equipment - - 250 250 Total TA/M&E/PM - - 2,600 2,600 Total GEF financing 16,411 10,361 6,040 32,812 da: Others include international and national shopping, and consultant services.  - 23 - Schedule C SCHEDULE C: ESTIMATED DISBURSEMENT SCHEDULE Grant Amount Category ($ million) Percentage of Financing 1. Subgrants 26.309 100% 2. Consultant Services 2.350 100% 3. Goods (for project management) 0.250 100% of foreign expenditures 100% of local expenditures (ex-factory cost) 75% of local expenditures for other items procured locally 4. Unallocated 3.903 Total 32.812 ESTIMATED DISBURSEMENT IBRD Fiscal Year 1998 1999 2000 2001 Annual 17.4 13.0 2.2 0.2 Cumulative 17.4 30.4 32.6 32.8  - 24 - Schedule D SCHEDULE D: TIMETABLE OF KEY PROJECT PROCESSING EVENTS Key Dates 1. Identification Mission Jan 1994 2. Preparation Mission Jul 1-15, 1994 3. Project Preparation Advance approved by GEF Operations Committee Mar 15, 1995 4. Preappraisal Mission Dec 10-22, 1995 5. GEF Council Endorsement Apr 4, 1996 6. Final Executive Project Summary (FEPS) Review Meeting Jun 12, 1996 7. Appraisal Mission Jun 30, 1996 8. Prenegotiation package to RVP and AGCO Sep 25, 1996 9. AGCO and RVP Clearance and initiate Invitation to Negotiate Oct 2, 1996 10. Send formal invitation to negotiate to borrower Oct 10, 1996 11. Submit the revised version of Project Document to GEF Council Oct 10, 1996 12. Negotiation in Washington Nov 11-15, 1996 13. Clearance from Director Nov 22, 1996 14. Receive letter from GEF CEO clearing the project for final approval Nov 22, 1996 15. Send approved final package with Cover Form (2337/BP 10.00 Annex I) Dec 4, 1996 to the Board 16. Board Presentation Dec 23, 1996 17. Planned Effectiveness Date for the Grant Dec 31, 1996 18. Planned Project Completion Dec 31, 2000 19. Planned Project Closing Date Jun 30, 2001  - 25 - STATUS OF BANK GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA Schedule E A. STATEMENT OF BANK LOANS AND IDA CREDITS Page I of 3 (As of September 30. 1996) -1a1i Amount (USS million) Credit (net of cancellations) Number FY Borrower Purpose Bank IDA Undisb.(a) 47 loans and 51 credits have been disbursed 4,596.8 3,432.2 of which SECAL: 2967/1932 88 PRC Rural Sector Adj. 200.0 93.2 - Active Loans 1885 88 PRC Northern Irrigation - 103.0 1.4 2951/1917 88 PRC Sichuan Highway 75.0 (50.0)(b) 0.8 2968 88 PRC Railway IV 200.0 - 2.8 1997 89 PRC Shaanxi Prov. Agriculture - 106.0 0.2 2009 89 PRC Integrated Reg. Health - 52.0 1.2 3022 89 PRC Tianjin Light Industry 154.0 - 5.6 3060/2014 89 PRC Inner Mongolia Railway 70.0 (80.0)(b) 0.8 3066 89 PRC Hubei Phosphate 137.0 33 3073/2025 89 PRC Shandong Prov Highway 60.0 (50.0)(b) 15.1 2114 90 PRC Vocational & Tech. Educ. - 50.0 1.7 2145 90 PRC National Afforestation - 300.0 12.3 2159 90 PRC Hebei Agricultural Dev. 150.0 5.3 2172 91 PRC Mid-Yangtze Agricuitural Dev. - 64.0 1.6 3265/2182 91 PRC Rural Credit IV 75.0 200.0 1.4 3274/2186 91 PRC Rural Indust Tech (SPARK) 50.0 64.3 4.4 3286/2201 91 PRC Medium-Sized Cities Dev. 79.4 89.0 6.0 2210 91 PRC Key Studies Development 131.2 10 8 2219 91 PRC Liaoning Urban Infrastrucrure 77.8 4.8 2242 91 PRC Henan Agricul. Dev. 110.0 15.0 3337/2256 91 PRC Irrig. Agricul. Intensif. 147.1 187.9 15.4 3387 92 PRC Ertan Hydroelectric 380.0 - 2.9 2294 92 PRC Tarim Basin - 125.0 12.2 2296 92 PRC Shanghai Metro Transport - 60.0 8.2 3406 92 PRC Railways V 330.0 - 38.3 3412/2305 92 PRC Daguangba Multipurpose 30.0 37.0 4 6 2307 92 PRC Guangdong ADP - 162.0 75.6 3415/2312 92 PRC Beijing Environment 45.0 80.0 43.7 2317 92 PRC Infectious and Endemic Disease Cont. - 129.6 74.9 3433 92 PRC Yanshi Thermal Power 180.0 - 7 5 2336 92 PRC Rural Water Supply and Sanitation - 110.0 27.7 2339 92 PRC Educ. Development in Poor Provs. - 130.0 24 0 3443 92 PRC Regional Cement Industry 82.7 - 12.3 3462 92 PRC Zouxian Thermal Power 310.0 37 8 3471 92 PRC Zhejiang Provincial Highway 220.0 - 84.0 2387 92 PRC Tianjin Urban Devt. & Envir. - 100.0 50 4 2391 92 PRC Ship Waste Disposal - 15.0 10.6 2411 93 PRC Sichuan Agricultural Devt. - 147.0 50.5 3515 93 PRC Shuikou Hydroeiectric 11 100.0 - 47.4 2423 93 PRC Financial Sector TA - 60.0 47.0 3530 93 PRC Guangdong Provincial Transport 240.0 - 57.1 3531 93 PRC Henan Provincial Transport 120.0 - 33.0 2447 93 PRC Ref. Inst'l and Preinvest. - 50.0 29.4 3552 93 PRC Shanghai Port Rest. and Devt. 124.3 - 15.1 2457 93 PRC Changchun Water Supply & Env. - 120.0 82.7 2462 93 PRC Agriculture Support Services - 115.0 29 4 3560/2463 93 PRC Taihu Basin Flood Control 100.0 100.0 107.6 2471 93 PRC Effective Teaching Services - 100.0 57 2 3572 93 PRC Tianjin Industry 11 134.0 - 110.0 3581 93 PRC Railway VI 420.0 215.1 3582 93 PRC South Jiangsu Envir. Prot. 250.0 - 71.5 2475 93 PRC Zhejiang Multicities Devt. - 110.0 81.3 3606 93 PRC Tianhuangping Hydroelectric 300.0 - 232.4 3624/2518 93 PRC Grain Distribution 325.0 165.0 456.2 2522 93 PRC EnvironmentaJ Tech. Assist. - 50.0 30.4 2539 94 PRC Rural Health Workers Devt. - 110.0 76.9 3652 94 PRC Shanghai Metro Transport 11 150.0 - 20.0 3681 94 PRC Fujian Provincial Highways 140.0 - 98.1 3687 94 PRC Telecommunications 250.0 - 179.4 2563 94 PRC Second Red Soils Area Devt. - 150.0 72.4 2571 94 PRC Songliao Plain Agric. Devt. - 205.0 113.7 3711 94 PRC Shanghai Environment 160.0 - 134.2 3716 94 PRC Sichuan Gas Devt & Conservatn. 255.0 - 182.3  - 26 - SchedulH E STATUS OF BANK GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA Page 2 of 3 A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of September 30, 1996) Loan/ Amount (US$ million) Credit (net of cancellations) Number FY Borrower Purpose Bank IDA Undisb.(ai 3718 94 PRC Yangzhou Thermal Power 350.0 - 27Tr B103 94 PRC Yangzhou Thermal Power 57.2 -5.7 3727 94 PRC Xiaolangdi Multipurpose 460.0 - 209,.5 2605 94 PRC Xiaolangdi Resettlement - 110.0 6t.6 2616 94 PRC Loess Plateau Watershed Devt. - 150.0 8E 7 2623 94 PRC Forest Resource Devt. & Prot. - 200.0 152.1 3748 94 PRC National Highway 380.0 - 23' .4 3773/2642 95 PRC Ent. Housing/Soc Sec Retorm 275.0 75.0 314.0 3781 95 PRC Liaoning Environment 110.0 - 8- .4 3787 95 PRC Xinjiang Prov. Highways 150.0 - 1lt .4 2651 95 PRC Basic Ed for Poor/Minorities - 100.0 6!.6 3788 95 PRC Shenyang Industrial Reform 175.0 - 15( .8 2654 95 PRC Economic Law Reform - 10.0 E.7 2655 95 PRC Comp Maternal/Child Health - 90.0 5&.1 3846 95 PRC Zhejiang Power Development 400.0 - 37C.0 B105 95 PRC Zhejiang Power Development 64.3 - 62.3 3847 95 PRC Technology Development 200.0 - 195.0 3848 95 PRC Sichuan Power Transmission 270.0 - 27C.0 3873/2709 95 PRC Fiscal TA 25.0 25.0 45.4 3874/2710 95 PRC Yangtze Basin Water Res Devt 100.0 110.0 146.6 3897 95 PRC Railway VII 400.0 - 40C.0 3906/2744 95 PRC Southwest Poverty Reduction 47.5 200.0 215.0 3910 95 PRC Inland Waterways 210.0 - 203.4 3914/2756 95 PRC Iodine Deficiency Dis. Control 7.0 20.0 23.2 3929 96 PRC Shanghai-Zhejiang Highway 260.0 - 219.7 3933 96 PRC Ertan 11 Hydroelectric 400.0 - 342.0 8106 96 PRC Ertan II Hydroelectric 50.0 - 48.6 2794 96 PRC Disease Prevention - 100.0 9:'.7 3966/2799 96 PRC Hubei Urban Environment (c) 125.0 25.0 150.0 3967/2800 96 PRC Labor Market Development 10.0 20.0 2'.4 3980 96 PRC Henan (Qinbei) Thermal (c) 440.0 - 440.0 3986 96 PRC Second Shaanxi Prov. Highways 210.0 - 210.0 3987 96 PRC Second Shanghai Sewerage 250.0 - 250..0 2831 96 PRC Third Basic Education - 100.0 92.7 2834 96 PRC Shanxi Poverty Alleviation - 100.0 9" .1 4001 96 PRC Animal Feed 150.0 - 150.0 4027 96 PRC Second Henan Prov. Highway 210.0 - 210.0 4028/2870 96 PRC Gansu Hexi Corridor 60.0 90.0 14''.2 4044/2886 96 PRC Seeds Sector Commercialization (c) 80.0 20.0 100.0 4045 96 PRC Chongqing Ind. Pollution Control (c) 170.0 - 170.0 4055/2892 96 PRC Yunnan Environment (c) 125.0 25.0 150.0 4063/2898 97 PRC Vocational Education Reform (c) 10.0 20.0 20.0 Total 16,395.8 8,914.9 10,014 0 of which has been repaid 1,559.0 42.8 Total now held by Bank and IDA (a) 14.836.8 8,872.1 Amount sold: Of which repaid - - Total Undisbursed 7,635.3 2,378.7 10,014.0 (a) As credits are denominated in SDRs (since IDA Replenishment VI), undisbursed SDR credit balances are converted to dollars at the current exchange rate between the dollar and the SDR. In some cases, therefore, the undisbursed balance and total credit amount held indicate a dollar amount greater than the original principal credit amount expressed in dollars. (b) Fully disbursed. (c) Not yet effective.  - 27 - Schedule E Page 3 of 3 B. STATEMENT OF IFC INVESTMENTS (As of September 30, 1996) Loan Equity Syndicate Total FY Borrower Type of Business (US$ Million) - 85/92 Guangzhou Peugeot Auto Automobile 2.8 4.6 - 7.4 88/ Shenzhen China Bicycle 8.5 3.4 - 11.9 92/94 Bicycles Co. Ltd. Manufacture 89 Crown Electronics Manufacturing 3.9 - - 3.9 93 Shenzhen Tai-Yang PCCP Construction Material 3.8 1.0 - 4.8 93 Yantai Mitsubishi Cement Cement 18.7 2.0 10.0 30.7 94 Dalian Glass Glass 20.5 2.4 40.5 63.4 94 China Walden Investors Venture Capital - 7.5 - 7.5 94 Dynamic Growth Fund Venture Capital - 12.4 - 12.4 94 Plantation Timber Product Timber, Pulp & Paper 10.0 1.0 20.0 31.0 95 Newbridge Investment Venture Capital - 10.0 - 10.0 95 Nantong Wanfu (EEI) Agribusiness 6.3 2.7 - 9.0 95 Dupont Suzhou Polyester Textiles 24.9 3.8 52.0 80.7 96 Nanjing Kumho Tire Co., Lt Motor Vehicles 16.0 3.8 45.5 65.3 96 Weihai Weidongri 4.9 - - 4.9 Total Gross Commitments 342.9 Total Comritments now Held by IFC 167.1 Total Undisbursed 175.8  - 28 - Schedule F Page 1 of 2 China at a glance POVERTY and SOCtAL East Low- China Aisi income Development dlamond. Populton mid-1906 (nWlAons) 1,201,4 1.709 3,188 Life expeocncy GNP per capiba 199 (US$) 620 830 480 GNP199E(biHkon.USS) 744.9 1,418 1,4668 Average annual growth, 1,100-96 Population (% 1.1 13GNP G1oss Labor force * 1.1 1.4 1.9 por~ ~ ~~~~~~omr Most recant estimate (lebty0rwfisbied since 199) capis lnromnt Poverty: hedcount indewx(%o(poputedon) t11* Urban population (%:of Jipopuladonj 30 ~ 31 :28 Lif expectancy at birh (yea go): UG& Infantimmlity(perlAWhe 1f 29 -3 oo-;- Chiddmolnutriio n{osh5 (% ofdMkilw fnd 177 7Access to saee water Alo tsee wat( (% a(o-MM ::l 7t 67 C 66f Illiteracy (r o(populeWoE,aget15* 19 17. t 35 Gro. priny enroiimti (% orcAhoo".agepopulation) 118 117 10 - n Mole 1 - 4 y -E ,- L 0 i50 t20 120G 112: -Low-income group F mabt.' 116 116 968 KEY ECONOMIC RATIO34and LONG-TERM TRENDS 1975 1966 194 10996 - : 0 f 0 t; 0 ~~~~~~~Economic ratoes GOP (b/Wfn. US$) 160.3 304.9 5222 663O3pn o nm Gros domestic invlnentlGOP 30.3 37.8 42.1 405O Exports of goods and nonactorservices(GOP 5.2 9.2 24.0 22.2 Gros domestic savngsliGOP 30.S 33.1 44.0 43.2 Gros natbnal savings/GOP: 30.6 33.5 44.0 42.9 Currnt account bianuelGOP: -0.2 -3.9 f.4 2.:3' Savings af Irwestrent Interest paymentslGOP 02 0.7 0.8 Toals debtUGOP . 535 19.3 17-uS t Total debt aer4csspofts .. 8.3 8 9.2 Preeentv aluofdekbUGOPi - .. 17.1 Present valu of debtiexpofts . .. - Indabtednes, 1975484 I11-84 13114 199s 1396-04. (averag, annual g-0tlj- GOP 7.7 9.5 11.8 10.2 8S. -Chins GNP per capita 7.0 80 10.4 :8. 7.7 -Low-income group Export, of goods and nts 202 13.T 286 1.2 '86 _ _ _ _ _ STRUCTURE of the ECONOMY (% of GOP) 1975 1s8 1W 4106 Growth ate of output and inveaet % Agriculture 32.0 28.4 21.0 20.5 25 A Industry 42.8 43.1 47.2 48.0 2/- Iinufacturing 31.6 35.4 37.0 37.6 - Services 25.2 28.5 31.8 31.5 Private consumption 61.9 53.7 42.7 47.6 to Gneral govenment consumption 7.6 13.2 13.2 9.2 oo 01 * a b Imports of goods and non-factor services 5.0 13.9 22.0 19.5 -001 -GOP (average annual gnmwUl 1975-84 198-95 1934 1986 Growth rates of exporte and ltporns(% Agriculture 5.1 4.1 4.0 4.0 4I Industry 10.0 12.7 17.4 13.0 Mtanufacturing 13.1 12.3 17.2 13.0 30 Services 8.7 9.4 8.2 10.1 Private consumption 7.5 8.5 5.7 18.9 General government consumption 8.5 7.7 6.6 O. rs 02 a 4 0 Gross domestic investment 8.9 9.4 12.8 8.4 .i Y Imports of goods and non-actor services 24.1 9.2 8.9 10.8 Gross national product 8.5 9.5 1 1.6 9.9 - Note: 1995 data are preliminary estimates. ' The diamonds show four Ite indicators in the country (in boid) compared Mith its incomegroup aveage. If data are mising, lhe diamond wiMt be incomplete.  - 29 - Schedule F Page 2 of 2 China PRICES and GOVERNMENT FINANCE 1975 1985 1994 1996 Inflaton(% Damestic pntc2s (% c2ange)T Consumer prices 0.2 9.3 24.1 13.2 20 Implicit GOP deflator -0.9 10.1 16.6 11.0 Government finance (% of GOP) __ __._*_ _ Current revenue 25.5 12.4 12.3 o of 02 93 Is Current budget balance 6.7 0.4 0.3 -O de nC 9 Overall surplus/deficit -0.5 -1.6 -1.7 -GD CPI TRADE 1975 19U is" 19 - Export and Import levels (mill. US$) (mrillions USS) Total exports (fob) 27.350 121.03S 148,750 Food 3,S03 10,017 12,828 Petroleum 7.132 4.061 4.152 _ 1 Manufactures 13.522 101.331 127,638 Total imports (cif) 42252 115,693 132.308 Food 1,881 4.996 6.562 ooooe0 Fuel and energy 172 4.034 5,244 Capital goods 18.694 556720 56.882 FM Export price index (1987-100) .. 92 1:24 130 1 Import price index (1987f100) .. 78 122 128 go so 02 92 o4 is Terms of trade (1987-100) . 117 102 102 CExpoet zImra BALANCE of PAYMENTS (nmilions US5) 1975 1988 1904 1996 Current account balance to GOP rweo (%j Exports of goods and non-factor services 7,828 28,163 118,811 147,155 ' Imports of goods and non-factor services 8,097 41,149 111,472 129,279 Resource balance -269 -12.986 7,339 17,876 2 Net factor income 0 932 -1,018 -3.886 Net current transfers 0 171 836 724 _ o _ , _ _ _ i _ _ _ _ _ , _ Current account balance. L011 0 01 92 Is 04 | r before official transfers -269 -11.383 7,157 14.734 Financing items (net) 9,443 23,370 8.266 Changes in net reserves 2,440 -30,527 -23,000 Memo: Reserves including gold (mill. USS) .. 16,881 57,794 76,592 Conversion rate (JocalVUSS) 1.9 2.9 8.6 8.3 EXTERNAL DEBT and RESOURCE FLOWS (millicns USS) 1975 1 $111115 1" 1