Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17355 IMPLEMENTATION COMPLETION REPORT CHINA YANSHI THERMAL POWER PROJECT (LOAN 3433 - CHA) January 31, 1998 Energy and Mining Development Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit: Yuan (Y) At Appraisal (December 1991) $1 = Y 5.38 Exchange Rates During Project Years Year Average 1991 - 5.36 1992 - 5.49 1993 - 5.75 1994 - 8.60 1995 - 8.30 1996 - 8.30 1997 - 8.30 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS EPH - Electric Power of Henan HPEPB - Henan Provincial Electric Power Bureau ICB - International Competitive Bidding ICR - Implementation Completion Report IDC - Interest During Construction IERR - Internal Economic Rate of Return LCB - Local Competitive Bidding LIB - Limited International Bidding LRMC - Long - Run Marginal Costs Vice President : Jean - Michel Severino, EAP Country Director : Yukon Huang, EACCF Sector Manager : Yoshihiko Sumi, EASEG Staff Member : Junhui Wu, Power Engineer, EASEG FOR OFFICIAL USE ONLY CONTENTS Preface....................u Evaluation Summary....................................................ii PART I: PROJECT IMPLEMENTATION ASSESSMENT.. A. Project Background.............1.......... ...................1 B. Project Objectives ...................................... .............1 C. Achievement of Project Objectives ............1........................ D. Implementation Record and Major Factors Affecting the Project ...... .........2 E. Project Sustainability ..................7........... ..............7 F. Bank Performance ..........7 G. Borrower Performance....................8......... ..............8 H. Assessment of Outcome .................................. .........8 I. F uture O peration ................................................................................................... . . 8 J. K ey L essons L earned ............................................................................................. . . 9 PART II: STATISTICAL TABLES .................................. ..... 10 Table 1: Summary of Assessments .................... .................10 Table 2: Related Bank Loans ........................................11 Table 3: Project Timetable ............................... .................15 Table 4: Loan Disbursements: Cumulative Estimated and Actual ................15 Table 5: Key Indicators for Project Implementation.............. ...........16 Table 6: Key Indicators for Project Operation.............................17 Table 7: Studies Included in Project....................................18 Table 8a - 1: Project Costs in Million US$...............................19 Table 8a - 2: Project Costs in Million Yuan........................ .....20 Table 8b: Project Financing........................ .................21 Table 9: Economic Costs and Benefits..................................21 Table 9 Attachment : Ex - Post Economic Internal Rate of Return..... .......... 22 Table 9 Attachment 1: risk Analyses.................................... 23 Table 10: Status of Legal Covenants....................................25 Table 11: Compliance with Operational Manual Statements....................26 Table 12: Bank Resources: Staff Inputs........ ......................... .........26 Table 13: Bank Resources: Missions .................................................. 27 ANNEXES Annex 1: Projected and Actual Financial Statements of PEPB. .................................. 28 Annex 2: Aide - Memoire of Supervision Mission (Extract) ................ ..... ...32 Annex 3: Project Review From The Borrower's Perspective ................. .......38 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without TWorld Bank authorization. - ii - IMPLEMENTATION COMPLETION REPORT CHINA YANSHI THERMAL POWER PROJECT (LOAN 3433 - CHA) PREFACE This is the Implementation Completion Report (ICR) for the Yanshi Thermal Power Project in China for which Loan 3433 - CHA in the amount of $180 million was approved on January 14, 1992 and made effective on July 5, 1992. The loan was closed on December 31, 1997, as scheduled. The total disbursed amount to date is $178,846,351.57. The latest disbursement date is July 1, 1997. The ICR was prepared by Heinz Pape with the assistance of Junhui Wu and Shigeru Kataoka, Energy and Mining Development Sector Unit, East Asia and Pacific Region, and reviewed by Mr. Yoshihiko Sumi, Sector Manager, and Mr. Yukon Huang, Country Director, China. The Borrower/Beneficiary provided comments, which are included as an Annex to the ICR. Preparation of the ICR began during the Bank's final supervision mission in March 1997. The ICR is based on the Staff Appraisal Report, the Loan and Project Agreements, Supervision Reports, correspondence between the Bank and the Borrower/Beneficiary, internal Bank memoranda and interviews with Bank and Borrower/Beneficiary staff involved in project implementation. The Borrower/Beneficiary contributed to the preparation of the ICR by preparing their own evaluation of the execution of the project, and by providing comments on the draft Bank ICR that were incorporated in the final version. - Ill - CHINA YANSHI THERMAL POWER PROJECT (LOAN 3433 - CHA) EVALUATION SUMMARY Introduction and Project Objectives 1. The Yanshi Thermal Power Project is located in Henan Province, central part of China. At the time of project identification and appraisal, there was an acute shortage of power supply in the province. Load shedding by rotation of supply was enforced almost daily and the majority of industrial plants was forced to operate only four days a week, resulting in underutilization of plant facilities and manpower and thus causing significant economic losses. 2. The Yanshi Thermal Power Project was designed to support the development of Henan Province by mitigating power shortages through the addition of generation and transmission capacity. The project was also used as a vehicle to: (a) support the national policy of developing large coal- -fired power plants at nearby coal mines; (b) to minimize the environmental impacts of coal- -fired power plants and to establish an environmental monitoring program; (c) to reform the tariff systems; and (d) to familiarize Henan Provincial Electric Power Bureau (HPEPB) with methods and techniques used in modern electric utilities. 3. Financing under the project provides for: (a) addition of two 300 MW coal-fired thermal units to the existing Yanshi Thermal Power Plant, (b) extension of transmission capacity by about 350 km of 220 kV lines and 600 MVA substation capacity; (c) consulting services in design and engineering; (d) technical assistance to carry out a tariff study and an action plan for tariff structure improvement; (e) provision of environmental monitoring equipment; and (f) training of HPEPB's staff in methods and techniques of utility management and operation. 4. The design of the project responded to the country's regional and sectoral objectives at the time of appraisal. The project objectives were consistent with the Government's strategy to build the coal- -fired thermal power plant at mine - mouths for efficient deployment of generation capacity and the Bank's country assistance goals regarding transfer of appropriate modern technology, staff training, and modern utility practice. Implementation Experience and Results 5. The project was executed during a period in which the power sector in China has seen substantial reforms, most of which are in line with the recommendations made by the Bank. The reforms also affected the institutional environment in which the project is embedded. HPEPB, the beneficiary of the project, was a state-owned enterprise and - iv - vertically integrated (generation, transmission and distribution) provincial power utility. HPEPB was also assigned with sector regulatory function in the province. In the course of project implementation, Electric Power of Henan (EPH) was formed from HPEPB. While HPEPB continues to assume its sector regulatory function, its commercial function is left with EPH which is a limited liability company. However, the separation of commercial entity and regulatory entity is still incomplete to date. Meanwhile, EPH has been undergoing a process to transform itself to a transmission company with less involvement in power generation. According to the sector restructuring agenda of the province, in 1998 Yanshi Thermal Power Plant will be incorporated as a limited liability company in accordance with the new Chinese Company law and will enter a power purchase agreement with EPH. 6. The project outcome is rated as highly satisfactory. The investment component was completed ahead of schedule. Institutional reforms, which were not explicitly included in the project agreements are more advanced than could be expected at the time of project appraisal. Tariff reform has been implemented with delays but substantial progress has been made in rationalizing the tariff structure. 7. Project Construction The first 300 - MW unit, unit #3, was put into commercial operation in April 1996, which was about three months behind the schedule. The major problems encountered were teething and interfacing problems. Learning from the experience, HPEPB managed to start commercial operation of the second 300 - MW unit, unit #4, more than three months ahead of schedule. In addition, a total of 374 km of 220 kV lines and 40 km of 110 kV lines have been erected. Two new substations and extension of four substations have been completed with a total added capacity of 750 MVA. The reinforced transmission system was put into service before the end of 1996. The very successful implementation of the investment component must be credited to the strong commitment and very capable management of the beneficiary. The Bank's assistance also contributed to the success. 8. Coal Issues The ash content of the coal has been higher than designed (24.2 percent) and that is likely to be the case in the future. The high ash content-- averaging 32 percent in 1996 and 26 percent in the first eight months of 1997--would prevent the power plant from being continuously operated at the rated capacity because the designed slag removal system cannot cope with slag production at that output level. The slag removal system of unit #3 was therefore retrofitted in 1997 at a cost of Y 1.9 million which was financed by HFPEPB from its own resources. The slag removal system of unit #4 will be retrofitted in 1998 at the same cost. 9. Environment Improvement Unit #3 and unit #4 have been equipped with high efficiency (99.6 and 99.8 percent respectively) electrostatic precipitators to minimize dust emissions. HPEPB also replaced the low efficiency mechanical type dust collector of unit #1, which increased the dust remove efficiency from 92.8 to 99.6 percent. The replacement of the collector of unit #2 is under way since August 1997. These replacements were financed by HPEPB. An environmental monitoring program has been set up to monitor water quality, air quality and noise levels. Measurement records indicate - V- that standards (Chinese standards and Bank guidelines) were generally adhered to. Air - quality standards were exceeded in some cases due to already existing high background levels beyond permissible limits. 10. Tariff Reforms have progressed satisfactorily. The tariff reform action plan developed through tariff studies was approved by the provincial authorities. Its implementation has so far led to the following improvements: (a) average tariff level has increased while reducing subsidies to the traditionally heavily subsidized sectors such as residential and agriculture; (b) tariff structure has been improved by applying a unified tariff system to the whole province except for six prefectures to replace the dual - track pricing system; and (c) time - of - day pricing for peak and off - peak power consumption has been offered to most consumers who have the potential to benefit from load management. A phased increase of tariff level as part of the tariff reform plan set the target that customers pay for the long - run marginal cost of supply soon after the year 2000. 11. Training programs familiarized high - level staff of HPEPB with modern utility management practices. Technical staff received training in operation and maintenance of thermal power plants and in project - related issues. The project also provides a simulator for the training of power plant operators. The hardware for the simulator has been installed but problems occurred with the supplier of the software and HPEPB is currently looking for another software supplier. 12. Economic Performance The ex - post internal economic rate of return (IERR) is estimated at 13.8 percent which is below the appraisal estimate of 15.7 percent but still significantly above the social discount rate of 12 percent. The main reason for the lower IERR is that the assumed energy production is lower than estimated at the time of project appraisal. The off - take from Yanshi is now guaranteed at 3,300 GWh per year and the ex -post IERR is based on that figure. The actual output can be higher but Yanshi will have to compete with other plants to sell more and the appraisal estimate of 3,900 GWh per year is unlikely to be reached on average. It should be noted in this context that in North America, the average annual generation of modern coal- -fired power plants of the same capacity (2*300 MW) is about 3,000 GWh. Risk analyses have been performed to complement the IERR calculation using a probability approach to access the impact of the perceived risk factors that affect the return of the project. Four risk variables have been considered in the analysis, namely, annual generation hours, output level (heat rate increases due to partial loading), energy selling price and coal cost. The expected IERR, based on the weighted average of all simulated combination is 13.6 percent. This suggests that the uncertainty of the return of the project investment is negligible and that the project's economic viability is robust. 13. Project Costs The project appraisal estimated the foreign cost at $180.0 million and the local cost at Y 941.5 million. The actual foreign cost is estimated at $178.8 million and the local cost at Y 1,708.5 million, equivalent to a total of $405.1 million. There is an overall cost overrun of about 14 percent when expressed in US dollar terms although the actual foreign cost is almost identical to the original estimate. Compared with the appraisal, the actual local cost exceeded the estimate by 81 percent. About 70 percent of - vi - local cost overrun was caused by much higher - than - expected local rates of inflation'. The other factors attributed the cost overrun are increased scope of transmission and higher material and labor costs caused by delays in construction. In order to exclude the effects of inflation, a more accurate cost analysis has been carried out by de-escalating local costs to the appraisal dates using the actual inflation rates, the analysis indicates a local cost overrun of about 18 percent, which can largely be explained by the increased scope of transmission lines and substations. The construction of 220 kV transmission lines exceeded the appraisal estimate by 24 km (374 km vs 350 km), the installed substation capacity exceeded the estimate by 150 MVA (750 MVA vs 600 MVA) and 40 km of 110 kV lines have been built which were not included in the staff appraisal report (SAR). These additions are justified on technical grounds. 14. Loan and Project Covenants were generally complied with. It is noted that financial covenants were fulfilled with two exceptions, i.e., self - financing ratio 18.4 percent in 1994 and debt - service coverage ratio 1.0 in 1995, both are lower than the covenanted financial performance ratios. However, this can largely be explained by the fact that during this transition period of sector restructuring, the ownership of HPEPB's assets cannot be clearly defined and therefore was not adequately reflected in the financial statements. Summary of Findings, Future Operations and Key Lessons Learned 15. The objectives of the project were consistent with those of the Chinese Government and the Bank. The project achieved its major objectives and the beneficiary ha- shown a strong sense of ownership. 16. It is expected that the Yanshi Thermal Power Plant will continue to be managed and operated efficiently thanks to the institutional capacity buildup through extensive training as well as experience accumulated in the course of project implementation. In 1998, Yanshi Thermal Power Plant will be incorporated as a limited liability company in accordance with the new Company Law. The agreed performance indicators sets targets for future operation in terms of annual generation, unit availability, fuel efficiency, improvement of environment, financial performance, and institutional development. 17. Key lessons can be summarized as follows: (a) A very careful analysis of the expected coal quality is of paramount importance and the design of components should be based on conservative assumptions regarding the supply quality. (b) Design and procurement of auxiliary equipment should be given the same attention as for major equipment. . The local rate of inflation increased from below 7 percent per annum. in 1991 and 1992 to values between 15.0 percent and 24.0 percent in 1993 - 95. Project appraisal assumed an average annual rate of inflation of 8.6 percent. Furthermore, the appraisal did not properly account for the annual expenditure schedule. Price contingencies were calculated as 8.6 percent of the total local costs over the investment period. - vii - (c) The fire fighting system should not be designed and procured on an island-by- island basis but should be dealt with as a separate contract for the plant as whole. (d) Procurement packages should be determined such that excessive interfacing will be avoided. Strengthening of project management is also recommended to reduce interfacing problems. (e) Accounting and financial management warrant further support given the prospect of more broad sector and enterprise reforms. Accounting standards should be brought in line with international standards. (f) Most provinces of China have seen a substantial increase in generation capacity over the recent years. Shortage of power generation has eased and in some provinces ended. In the future, the output of power plants is therefore likely to be in line with the output of power plants in countries with a well - balanced demand - supply system. The corresponding output is significantly lower than what has usually been assumed so far in appraisals of power plants in China. (g) The Bank welcomes the formation of EPH which meets the Bank's agenda to separate government from enterprise functions but the Bank should have been notified before EPH was established. Project and loan agreements should explicitly demand that the Borrower/Beneficiary has an obligation to inform the Bank in advance of the planned formation of companies as that may have repercussions on project or loan agreements. s -1. YANSHI THERMAL POWER PROJECT (LOAN 3233 - CHA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT BACKGROUND 1. The Yanshi Thermal Power Project is located in Henan Province, central part of China. At the time of project identification and appraisal, there was an acute shortage of power supply in the province. Load shedding by rotation of supply was enforced almost daily and most industries were forced to operate only four days a week, resulting in underutilization of plant facilities and manpower and thus causing significant economic losses. B. PROJECT OBJECTIVES 2. The objectives of the Yanshi Thermal Power Project were: (a) to alleviate the power shortage through the extension of the existing Yanshi power plant by two coal- - fired 300 MW thermal units; (b) to reinforce the transmission systems through the construction of about 350 km of 220 kV transmission lines and associated substations with a total capacity of 600 MVA; (c) to minimize environmental impacts by the construction of a power plant with highly efficient environmental protection facilities and by the installation of an environmental monitoring program; (d) to rationalize the tariff system through a tariff study and subsequent tariff reforms; and (d) to improve the performance of HPEPB through training programs with emphasis on the overall management of electric utilities, financial management and operation and maintenance of coal- -fired power plants. C. ACHIEVEMENT OF PROJECT OBJECTIVES 3. Alleviation of Power Shortages. The two coal--fired 300--MW units commenced commercial operation in 1996 and the construction of transmission lines and substations was completed in the same year. By the end of 1997, 4,355 GWh of electricity has been generated from the two units. The project already contributed to reduce power shortages which are still prevalent at peak times. The project can be expected to make an even greater contribution in the future when remaining minor teething problems are solved. 4. Environmental Issues. The new generating units (unit #3 and unit #4) are equipped with efficient environmental protection facilities. The electrostatic precipitators reached efficiencies of 99.6 percent (unit #3) and 99.8 percent (unit #4) respectively. HPEPB also replaced the low efficiency mechanical - type dust collector of the existing unit #1 by an electrostatic precipitator with 99.6 percent efficiency. The replacement of the unit #2 collector is under way since August 1997. These replacements were financed by HPEPB. 5. Water quality, air quality and noise levels have been monitored. Measurement records indicate that standards (Chinese standards and Bank Guidelines) were generally adhered to. Air quality standards were sometimes exceeded. That was not due to -2- emissions of the power plant but caused by high background values, some of which already exceeded the standards. It should be noted in this context that Yanshi is located in a dry area with high dust levels. Some noise levels have been noted to exceed the standard, but usually only by a small margin, which is within the statistical error margin. 6. Reform of Tariffs. A tariff study was conducted by HPEPB in 1993 and updated in 1995 with the assistance of foreign consultants. A tariff reform plan was developed and subsequently approved by the provincial government in January 1996. 7. The tariff reforms implemented so far led to the following improvements: (a) average tariff level has increased while reducing subsidies to the traditionally heavily subsidized sectors such as residential and agriculture; (b) tariff structure has been improved by applying a unified tariff system to the whole province except for six prefectures to replace the dual - track pricing system; and (c) time - of - day pricing for peak and off-peak power consumption has been offered to most consumers who have the potential to benefit from load management. 8. The average retail tariff excluding VAT and surcharges was raised from 13.8 fen/kWh in 1992 to 23.9 fen/kWh in 1996 and was in the order of 27.0 fen/kWh in 1997. Including surcharges, the average price paid by consumers was probably around 35.0 fen/kWh in 1997, which is still lower than the estimated long--run marginal costs of around 45.0 fen/kWh. A phased increase of tariff level as part of the tariff reform plan set the target that customers pay for the long--run marginal cost of supply soon after the year 2000. 9. Improving the Performance of HPEPB. In accordance with SAR, training programs were carried out in China and abroad with emphasis on training of high--level staff in management and financial issues. Technical staff members were also extensively trained to further improve HPEPB's traditionally sound technical performance. It is difficult to quantify the impacts of the training programs on the HPEPB's performance but there are encouraging signs that HPEPB is benefiting from them. The Bank has noticed an increasing awareness of the importance of efficiency among HPEPB's management staff and HPEPB explicitly acknowledges the contribution of the training programs to the capacity building of the power sector in Henan province (see the "Project Review from the Borrower's Perspective" in Annex 3). D. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT 10. Implementation Organization The project was executed during a period in which the power sector in China has seen substantial reforms, most of which are in line with the recommendations made by the Bank. The reforms also affected the institutional environment in which the project is embedded. HPEPB, the beneficiary of the project, was a state--owned enterprise and vertically integrated (generation, transmission and distribution) provincial power utility. HPEPB was also assigned with sector regulatory function in the province. In the course of project implementation, Electric Power of Henan (EPH) was formed from HPEPB. While HPEPB continues to assume its sector regulatory -3- function, its commercial function is left with EPH which is a limited liability company. However, the separation of commercial entity and regulatory entity is still incomplete to date. Meanwhile, EPH has been undergoing a process to transform itself to a transmission company with less involvement in power generation. According to the sector restructuring agenda of the province, in 1998 Yanshi Thermal Power Plant will be incorporated as a limited liability company in accordance with the new Chinese Company law and will enter a power purchase agreement with EPH. 11. Implementation Schedule. The construction of unit #3 was completed 2.5 months ahead of schedule. The unit was synchronized on May 20, 1995. Commercial operation started on April 18, 1996, which was 109 days later than foreseen. The delay was caused by interfacing and, above all, teething problems. 12. The construction of unit #4 was completed almost 10 months ahead of schedule. The unit was synchronized on December 14, 1995. Learning from the interfacing and teething problems of unit #3, HPEPB managed to largely avoid the problems at unit #4. The unit was put into commercial operation on September 14, 1996 which was 109 days ahead of schedule. 13. A total of 374 km of 220 kV lines and 40 km of 110 kV lines have been erected. Two new substations and extension of four substations have been completed with a total added capacity of 750 MVA. The reinforced transmission system was put into service before the end of 1996. 14. Teething Problems. Teething problems mainly occurred during commissioning of unit #3. The boiler repeater and the governor system of the turbines were among the components affected by teething problems. As a matter of fact, the major problems were caused by components of the auxiliary system such as the coal mill, fans, and the ash handling system. This is because inadequate attention was given to the auxiliary equipment in the design and procurement phase. 15. Interfacing Problems. The large number of contract packages--the IBRD loan financed 17 packages plus locally financed package required numerous and often complex coordination activities. Overall, the coordination activities were executed very well as indicated by the fact that unit #4 was completed ahead of schedule. However, interfacing problems occurred and caused delays, in particular with unit #3. Future projects will certainly benefit if the number and scope of procurement packages will be determined in such a way that interfacing activities are kept at manageable levels. 16. High Ash Content of the Coal. Coal is supplied by one large local mine (Yima) and several small local mines. In 1996, the average ash content was around 32.0 percent compared with a design value of 24.2 percent. In the first eight months of 1997, HPEPB managed to bring the average ash content down to about 26.0 percent by increasing the supply from small mines. Compared with the Yima mine, the small mines produce coal with a higher calorific value and a lower ash content. As there is little room left to further increase the supply from small mines, the ash content will probably continue to be higher than designed. That could prevent the units from being continuously operated at the most -4- efficient output levels because the designed slag removal system cannot cope with the slag production at output levels continuously exceeding 90 percent of rated capacity. The slag removal system of unit #3 was therefore retrofitted in 1997 at a cost of Y 1.9 million which was financed by HPEPB from its own resources. The slag removal system of unit #4 will be retrofitted in 1998 at the same cost. 17. Heat Rate. The average heat rate declined from 445 gce/kWh in 1996 to 389 gce/kWh in 1997. That is still significantly above the design heat rate of 325 gce/kWh. The design rate could be reached if the units are operated at the rated capacity. Except for short trial periods, the units were operated below the rated capacity because of the above mentioned problems with the slag removal system and, in many months of 1997, abundance of hydropower in the system. The availability of 'cheap' hydropower was the major reason why unit #3 was, on average, operated below rated capacity after the retrofitting of its slag removal system. 18. Project Costs (excluding Interest During Construction) The project appraisal estimated the foreign cost at $180.0 million and the local cost at Y 941.5 million. The final foreign cost is estimated at $178.8 million and the local cost at Y 1,708.5 million, equivalent to a total of $405.1 million. There is an overall cost overrun of about 14 percent when expressed in US dollar terms whereas the actual foreign cost is almost identical to the original estimate. 19. Compared with the appraisal, the actual local cost exceeded the estimate by 81 percent. About 70 percent of local cost overrun was caused by much higher-than- expected local rates of inflation2. Another 15 percent are due to the increased scope of the transmission facilities. The other factor is delays in construction causing higher material and labor costs. The construction of 220 kV transmission lines exceeded the appraisal estimate by 24 km (374 km vs 350 km), the installed substation capacity exceeded the estimate by 150 MVA (750 MVA vs 600 MVA) and 40 km of 110 kV lines have been built which were not included in the SAR. The additions are, however, justified on technical grounds. In order to exclude the effects of inflation, a more accurate cost analysis has been carried out by de-escalating local costs to the appraisal dates using the actual inflation rates, the analysis indicates a local cost overrun of about 18 percent, which can largely be explained by the increased scope of transmission lines and substations. 20. Loan Disbursement. Loan disbursement was slower than estimated in the initial years and caught up in the 4th year. A comparison of the estimated loan disbursements at appraisal with the actual disbursements is given in Table 4. Total disbursement to date amounted to $178,846,352. The latest disbursement date was July 1, 1997. The closing date of the loan was December 31, 1997, as planned. 2 The local rate of inflation increased from below 7 percent per annum. in 1991 and 1992 to values between 15.0 percent and 24.0 percent in 1993--95. Project appraisal assumed an average annual rate of inflation of 8.6 percent. Furthermore, the appraisal did not properly account for the annual expenditure schedule. Price contingencies were calculated as 8.6 percent of the total local costs over the investment period. -5- 21. Procurement. The project included 17 procurement contracts for equipment financed under the IBRD loan, of which 14 were awarded through international competitive bidding (ICB) and 3 through limited international bidding (LIB). The total amount of the ICB procurement contracts was $172.216 million and the amount of the LIB contracts $0.672 million. The IBRD loan also financed $3.977 million of steel products required for civil works. The steel products were procured following local competitive bidding procedures. 22. Procurement was carried out in accordance with the Bank's procurement guidelines with one exception. The exception is for the environment vehicle. HPEPB had planned foreign equipment purchases of $100,000 and local purchases of $150,000. For compatibility and maintenance reasons, HPEPB later decided to purchase all equipment from abroad. As a consequence, the estimated equipment costs exceeded the $200,000 limit for LIB purchases and should have been subject to ICB, whereas HPEPB awarded the contract through LIB procedures. The Bank considered that HPEPB had valid reasons to purchase all equipment from abroad but HPEPB should have notified the Bank prior to deviating from the agreed procurement procedures. 23. Consulting Services. Out of the total IBRD loan, an amount of $0.950 million was spent on consulting services. Consulting services were provided for (i) conducting tariff studies, and (ii) engineering. The consultants fulfilled their terms of reference and HPEPB was satisfied with their performance. The tariff reform implementation plan developed based on the outcome of tariff studies was subsequently approved by the provincial authorities. Two local and one foreign consulting companies assisted HPEPB in design of components, review of bidding documents, bid evaluation, interfacing between different islands, and review of suppliers' drawings, which facilitated the project construction. 24. Training. Training focused on power utility management, financial and technical issues. Training took place in China and abroad. In total, 315 persons (885 staff-month) received training, of which, 72 persons were trained in Hong Kong, Australia, France and Japan. In addition, technicians also received on--the--job training from the Consulting Engineer and equipment suppliers. The costs of training abroad, totaling $0.930 million were financed out of the IBRD loan. 25. The relevant authorities did not approve project funds to be used for overseas training of teaching staff and environmental protection. As the project agreement includes these training components, HPEPB decided to finance the training programs from its own resources. Six teachers participated in a two - week training course in Germany. The training course on environmental protection is scheduled for 1998. 26. Economic Performance. At appraisal, the IERR was estimated at 15.7 percent The ex - post estimate is 13.8 percent, higher than the social discount rate of 12 percent. It indicates that the project is feasible from the overall economic point of view. However, compared to the appraisal, the IERR is lower. This is because the annual generation is likely to be lower and the average heat rate is likely to be higher than the original -6- estimates. The ex-post IERR of 13.8 percent assumes that the average annual generation will equal the guaranteed sales of 3,300 GWh rather than the appraisal estimate of 3,900 GWh and that the heat rate will average 348 gce/kWh instead of 325 gce/kWh. The appraisal estimates were overly optimistic; in particular as regards the average annual generation. In North America, modem coal- -fired power plants with an installed capacity of 2*300 MW generate about 3,000 GWh per year on average. 27. Risk analyses have been performed to complement the IERR calculation using a probability approach to access the impact of the perceived risk factors that affect the return of the project. Four risk variables have been considered in the analysis, namely, annual generation hours, output level (heat rate increases due to partial loading), energy selling price and coal cost. The expected IERR, based on the weighted average of all simulated combination is 13.6 percent. The results of risk analyses based on 1000 scenarios simulation show that the IERR is likely to fall within the range between 9.7 and 17.6 percent and that the probability of the IERR being less than 12 percent ( the social discount rate in China) is only 15.5 percent. This suggests that the uncertainty of the return of the project investment is negligible and that the project's economic viability is robust. Details are provided in Table 9 and in two attachments to the table. 28. Financial Performance. HPEPB's financial statements for the period 1991--96 are displayed in Annex 1. The financial covenants require: (a) that in the years 1992--94, the net operating income equivalent does not fall below 20 percent of the average annual investment program and that it does not fall below 25 percent after 1994; (b) that HPEPB does not incur any debt unless its debt service coverage ratio is at least 1.3 times. Annex 1 shows that, with two exceptions (self - financing ratio 18.4 percent in 1994 and debt- service coverage ratio 1.0 in 1995), the covenants were complied with. It must be noted that the statements for 1995 and 1996 do not give a correct picture of HPEPB's actual financial situation. 29. As part of the ongoing power sector restructuring, ownership changes have taken place since 1995. HPEPB has been increasingly becoming a power purchase and bulk sales transmission company with less investments in power generation. Due to the nature of this transition, the ownership of HPEPB's assets cannot be clearly defined and therefore was not adequately reflected in the financial statements. 30. Environment. The project was designed to meet environmental standards as set in Chinese and World Bank guidelines and to provide for the constant monitoring of the discharge, ambient, and ash disposal areas. Measurement records indicate that noise levels and air and water quality are generally within allowable limits. For measurements which exceeded the standards were mainly caused by high background levels (air quality) or within statistical error margins (noise level). Monitoring is performed at fixed measurement stations and by the environment vehicle which was provided for the project. 31. Resettlement. No human resettlement was required for the construction of units #3 and #4. The construction of the transmission components incurred costs for land acquisition and dismantling of facilities (e.g., 10 kV line, irrigation wells, and non - -7- residential houses). Total costs amounted to Y 10.37 million, of which Y 9.51 million or 92 percent was paid for land acquisition. 32. Project Risks. The major risk factor perceived is that the average annual power production will be lower than the appraisal estimate of 3,900 GWh per year. Yanshi is guaranteed the purchase of 3,300 GWh per year. Yanshi is capable of producing more energy but will have to compete with other plants to do so. Taking into account that new and more efficient thermal power plants will be added in the future and/or that abundant 'cheap' hydropower may occasionally become available as has been the case in some months in 1997, it will not be easy for Yanshi to sell more than 3,300 GWh and it is unlikely that the appraisal estimate of 3,900 GWh will be reached on average. There are, however, strong indications that the lower - than - scheduled output will not translate into poor financial performance. The present tariff of 34.2 fen/kWh (excluding VAT) which Yanshi is paid for the contracted minimum purchase of 3,300 GWh should guarantee cost recovery and a reasonable profit. The Bank has been informed that future operation cost increases, in particular rising coal prices, will be rolled over into the selling price under a tariff adjustment mechanism. At present, Yanshi's power selling price is determined annually by the Provincial Pricing Bureau. There are certain risks that cost increases will not be rolled over entirely or with substantial delays. These, however, will not substantially affect Yanshi's financial performance. As scheduled, Yanshi power plant will be incorporated as a limited liability company in 1998. Yanshi will then sign a power purchase agreement with EPH. The power purchase agreement is expected to define a capacity charge and an energy charge which, together, will guarantee full cost recovery and a reasonable profit as long as the power plant is operated efficiently. E. PROJECT SUSTAINABILITY 33. The project is sustainable. The annual output may turn out to be lower than estimated at the time of project appraisal but the minimum contracted output and the power purchase price should enable Yanshi to cover all costs and make reasonable profits. Efficient operation and maintenance of the plant can be expected based on HPEPB's past records and the training provided by the project. Operation and maintenance will certainly also benefit from extensive training using the simulator. The training in methods and techniques of utility management has provided the foundations for the efficient management of Yanshi Thermal Power Plant which shall be established as a limited liability company in 1998. F. BANK PERFORMANCE 34. Bank performance from project preparation through completion was satisfactory. The Bank maintained good relations with the borrower, the beneficiary and the consultants. The Bank assisted HPEPB where required and supervised the project throughout the execution. A request for reallocation of the loan proceeds was speedily approved ($10 million from "Unallocated" to "Goods"). The Bank pointed to HPEPB the weak points in the tariff study which was prepared in 1993. That led to an updated version in 1995 and its tariff reform implementation plan was approved by the provincial -8- authorities. The Bank also cautioned HPEPB about delays in the implementation of project components in the initial stage, which ensured that, overall, the project was completed in a timely manner. G. BORROWER PERFORMANCE 35. The performance of HPEPB was highly satisfactory. HPEPB has shown a strong commitment to fully implement the project on time. Problems were addressed immediately and efforts were made to solve them, including spending money from own resources as needed. During the project construction, HPEPB has shown a remarkable capability to learn from experience. The teething and interfacing problems which delayed the commercial operation of unit #3 by three months were largely avoided in commissioning unit #4, enabling the unit to start commercial operation more than three months ahead of schedule. HPEPB managed to reduce the ash content by obtaining more coal from mines with better coal quality. The ash content is still above the design value but the company invested money from its own resources to retrofit the slag removal system of unit #3 and the unit can now be operated efficiently even if the ash content is higher than designed. The removal system of unit #4 will be retrofitted in 1998. 36. Institutional reforms, which were not explicitly part of project agreements, have been advanced. Tariff reforms were implemented behind the schedule but it must be noted that delays in reforms are, to a large extent, beyond the control of HPEPB. Rationalization of tariff structure achieved so far is satisfactory as regards the unification of retail tariffs and the introduction of time-of-day tariffs. Planned tariff increases also ensure that electricity tariff in the province will reach the level of the long-run marginal costs soon after the year 2000. H. ASSESSMENT OF OUTCoo4E 37. The project outcome is rated as highly satisfactory. The major objectives were achieved and the beneficiary has shown a strong sense of ownership which promises that the future performance of the power plant will be satisfactory. I. FUTURE OPERATION 38. It is expected that the Yanshi Thermal Power Plant will continue to be managed and operated efficiently thanks to the institutional capacity build - up in the course of project implementation. In 1998, Yanshi Thermal Power Plant will be incorporated as a limited liability company in accordance with the new Company Law. The power purchase agreement which Yanshi is expected to enter with EPH and the financial statements of the company will be reviewed by the Bank. If necessary, recommendations for improvement will be made. The well - established cooperation between the beneficiary and the Bank promises that the recommendations will be given due consideration. 39. The performance indicators for future operation were discussed with HPEPB during the supervision mission in April 1997. The agreed performance indicators are -9- displayed in Table 6 in Part II, which sets targets for future operation in terms of annual generation, unit availability, fuel efficiency, improvement of environment, financial performance, and institutional development. J. KEY LESSONs LEARNED 40. Key lessons can be summarized as follows: (a) A very careful analysis of the expected coal quality is of paramount importance and the design of components should be based on conservative assumptions regarding the supplied quality. (b) Design and procurement of auxiliary equipment should be given the same attention as for major equipment. (c) The fire fighting system should not be designed and procured on an island - by - island basis but should be dealt with as a separate contract for the plant as whole. (d) Procurement packages should be determined such that no excessive amount of interfacing work will be required. Strengthening of project management is also recommended to reduce interfacing problems. (e) Accounting and financial management warrant further support. (f) Most provinces of China have seen a substantial increase in generation capacity over the last years. Shortage of power generation has eased and in some provinces ended. In the future, the output of power plants is likely to be in line with the output of power plants in countries with a well balanced demand-supply system. The corresponding output is significantly lower than what has usually been assumed so far in appraisals of power plants in China. (g) Project and loan agreements should explicitly demand that the Borrower/ Beneficiary has obligations to inform the Bank in advance of the planned formation of companies as that may have repercussions on project or loan agreements. 3 HPEPB proposes to reduce the number of packages and that a single design company handles all design work in order to reduce interfacing problems; see the "Project Review from the Borrower's Perspective" in Annex 3. The latter will be very difficult to achieve as it is a long established practice that contractors use their own design companies. - 10 - PART H: STATISTICAL TABLES Table 1: SUMMARY OF ASSESSMENTS Achievement of Objectives Not Substantial Partial Negligible Applicable Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender concerns X Other social objectives X Environmental objectives X Public sector management X Private sector development X Project Sustainability Likely Unlikely Uncertain x Bank Performance Highly Satisfactory Satisfactory Deficient Identification X Preparation assistance X Appraisal X Supervision X Beneficiary Performance Highly Satisfactory Satisfactory Deficient Preparation X Implementation X Covenant compliance x Assessment of Outcome Highly Satisfactory Satisfactory Unsatisfactory Highly Unsatisfactory x - 11 - Table 2: RELATED BANK LOANS Year of Loan Title Purpose Approval Status Ln. 2382 - CHA To construct a rockfill dam, a spillway, an 02/21/84 Loan was closed on Lubuge Hydroelectric underground powerhouse, to install 4 06/30/92. Project generating units of 150 MW each, 3 single circuits of 220 kV transmission lines; to provide consultant services and a training program. Ln. 2493 - CHA To construct a 500 kV transmission line 02/19/85 Loan was closed on Second Power Project from Xuzhou to Shanghai and 5 asso- 06/30/92. ciated substations totaling 3,500 MVA in capacity, to install tele - control and tele- communications equipment for load dispatching, and to provide training for 500 kV transmission lines and substa- tions. Ln. 2706 - CHA To construct a coal- -fired thermal power 06/14/88 Loan was closed on Beilungang Thermal project with the first 600 - MW unit with 06/30/94. Power Project the first single circuit of 500 kV trans- mission line with associated substations, and to carry out a training program and a tariff study for the East China power grid. Ln. 2707 - CHA To construct a 110 m high concrete 05/29/86 Loan was closed on Yantan Hydroelectric gravity dam, a spillway, a powerhouse, 06/30/94. Project and a shiplift; to install 4 generating units of 275 MW each, 2 single circuits of 500 kV transmission lines and 3 associated substations; and to carry out a training program. Ln. 2775 - CHA & To construct a 101 m high concrete 01/06/87 & Implementation under Ln. 3515 - CHA gravity dan, a spillway, a powerhouse and 09/01/92 way. Closing dates Shuikou Hydroelectric a navigation lock; to install 7 generating 06/30/93 & 12/31/96. Projects I & II units of 20(0 MW cach; to carry out a resettlement program in the reservoir, an action plan for tariff reforrm, and a training program for planning and finan cial management - 12 - Table 2: (Cont'd) Year of Loan Title Purpose Approval Status Ln. 2852 - CHA To install 2 additional coal- -fired units 06/23/87 The loan was closed on Wujing Thermal Power of 300 MW each and associated 220 kV 06/30/95. Project transmission lines and substations; to provide online computer control and automatic load dispatching center, to carry out a masterplan study for the distribution network in Shanghai and a training program. Ln. 3387 - CHA & To construct a 240 m high arch dam 07/02/91 Implementation under Ln. 3933 - CHA with an underground powerhouse, to & way. Closing dates Ertan Hydroelectric install 6 550 - MW generating units 08/22/95 12/31/96 and Projects I & H and associated equipment; to cary out 12/31/2001. an environmental management program, studies of power pricing and reservoir operation, and a training program. Cr. 2305 - CHA & To construct a 56 m high gravity dam 10/31/91 Implementation under Ln. 3412 - CHA and an underground powerhouse with way. Closing date Daguangba Multipurpose 4 x 60 MW generating units; to erect a 12/31/97. Project 36 km long double - circuit 220 kV transmission line and to build canals to irrigate 12,700 ha of land. Ln. 3462 - CHA To install 2 additional 600 MW 04/12/92 Implementation under Zouxian Thermal Power generating units; to construct 500 kV way. Closing date Project and 220 kV transmission lines and 06/30/99. substations; and to carry out an air quality control study, a power tariff study, an action plan for tariff adjust- ment, and a training program for the technical, financial, and management staff of SPEPB. Ln. 3606 - CHA To construct a pumped - storage hydro- 05/18/93 Implementation under Tianhuangping electric power plant with six 300 MW way. Closing date Hydroelectric Project reversible pump - turbine units, together 12/31/2001. with upper and lower reservoirs, a water conveyance system, an underground powerhouse; to erect 250 km long 500 kV transmission lines; to carry out studies of optimal power plant operation and its output pricing; and to strengthen the beneficiary's organization through technical assistance and training. - 13 - Table 2: (Cont'd) Year of Loan Title Purpose Approval Status Ln. 3718 - CHA To construct a coal- -fired thermal 03/22/94 Implementation under Yangzhou Thermal power plant with two 600 MW gener- way. Closing date Power Project ating units; to erect two 500 kV trans- 12/31/2000. mission lines (30 km long); to extend technical assistance for the development and implementation of improved accounting and financial management information systems; and undertake management development and staff training. Ln. 3848 - CHA To construct a new 500 kV transmis- 02/28/95 Implementation Sichuan Transmission sion network consisting of 2,260 km of commenced. Closing date Project transmission lines and 5,250 MVA of 12/31/2001. substations; provide technical assistance for implementation of sector reform plan, organizational improvements and financial management systems. Ln. 3846 - CHA To construct Beilungang Phase II power 02/28/95 Implementation Zhejiang Power plant consisting of three 600 MW coal- commenced. Closing date Development Project -fired units; to construct 400 circuit - 12/31/2002. km of 500 kV transmission lines, 2,250 MVA of 500 kV substations and reinforce distribution networks in Hangzhou and Ningbo; to extend technical assistance to assist the power company in commercialization and corporatization, establish computerized financial management information system, improve transmission and distribution planning and upgrade enviromnental monitoring. Ln. 3980 - CHA To construct two 600 MW coal- -fired 02/27/96 Implementation Henan (Qinbei) Thermal thermal power units; to erect two commenced. Closing date Power Project 165 km 500 kV transmission lines; to 12/31/2002. assist HPEPB in engineering, procurement and construction supervision; and to extend technical assistance to support the implementation of the power sector reform action plan. - 14 - Table 2: (Cont'd) Year of Loan Title Purpose Approval Status Ln. 41720 - CHA To construct the first two coal- -fired 05/27/97 Project has been Tuoketuo Thermal Power 600 - MW units in Inner Mongolia approved but not signed Project Autonomous Region; to implement a yet. desertification control and dryland management program: to assist TEPGC with the introduction; of modern accounting and financial management systems, environmental management, operation and maintenance of the power plant and involvement of private investors in existing and new power projects in Inner Mongolia. To construct two 220 kV indoor substations in Beijing: to add a 250 MVA transformer to Wangfujing substation in Beijing; and to assist NCPGC to implement accounting and financial management systems. Ln. 41970 - CHA To construct two 900 - 1000 MW coal- 06/24/97 Project has been Waigaoqiao Thermal -fired supercritical units; to install FGD approved but not signed Power Project facilities at Shidongkou Power Plant to yet. offset S02 emissions from the project; to construct two 500 kV transmission lines; to assist SMEPC in construction supervision, interfacing and quality assurance control; to provide technical assistance to SMEPC to implement modern accounting and financial management systems, promote efficient management and power sector reforms including financial and corporate restructuring of the generation company. - 15 - Table 3: PROJECT TIMETABLE Steps in project cycle Date planned Date actual Identification/Preparation 10/86 Appraisal (a) 1989 and 1991 Negotiations (a) 05/89 Board presentation (a) 06/89 and 01/14/92 Signing 02/07/92 Effectiveness 05/07/92 Project Completion 12/31/96 09/14/96 (#) Loan closing 12/31/97 12/31/97 (a) A first Staff Appraisal Report was completed in early 1989, negotiations were held from May 8 to May 11, 1989, and Board presentation took place on June 13, 1989. Due to incidents in the People's Republic of China, the project was later put on hold until 1991. The Appraisal Report was updated in late 1991. It turned out that the most important project parameters, in particular project costs and financing requirements, had hardly changed since 1989. There was no need to change the original World Bank loan of US$180 million (excluding IDC) and as Loan and Project Agreements were still valid, formal negotiations were not held again. (#) Start of commercial operation of unit #4. Table 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL FY93 FY94 FY95 FY96 FY97 FY98 FY99 Appraisal estimate 44.20 124.10 164.70 171.30 176.60 180.00 Actual 32.37 76.03 147.74 165.90 178.85 178.85 Actual as percent of estimate 73.2 61.3 89.7 96.8 101.3 99.4 Date of latest disbursement: July 1, 1997 - 16 - Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Indicators Appraisal estimate Actual (Comparson) 1. Major equipment contract 04/15/92 02/25/92 (- 2 months) 2. Construction of 300 - MW units a) Start excavation 08/01/92 07/15/92 (- 0.5 months) b) Start boiler steel structure (unit #3) 08/15/93 06/16/93 (- 2 months) (unit #4) 04/16/94 c) Boiler Drum Lift (unit #3) 12/93 01/12/94 (+ 1 month) (unit #4) 12/06/94 d) Boiler Hydrostatic Pressure Test (unit #3) 10/15/94 07/13/94 (- 3 months) (unit #4) 05/06/95 e) Synchronizing (unit #3) 03/20/95 (unit #4) 12/14/95 f) 7 days full load test completion (end of commissioning) unit #3 06/95 09/20/95 (+ 3 months) unit #4 06/96 02/07/96 ( - 4 months) g) Commercial operation (unit #3) 12/31/95 04/18/96 (+ 3.5 months) (unit #4) 12/31/96 09/14/96 (- 3.5 months) h) Completion of Acceptance Tests - unit #3 end 1997 - unit #4 08/09/96 3. Construction of 220 - kV transmission lines and To be com - December 1996 (- 4 months) associated substations missioned in 04/97 - 17 - TABLE 6: KEY PERFORMANCE INDICATORS FOR PROJECT OPERATION Project Key Performance Indicators Baseline 1994 or 1995 1996 1997 1998 1999 Risks and Critical Assumptions Obecives Benchmark Reduction af Annual Generation (GWh) Risks Acute Power * Unit #3 1,950 (benchmark) 272.4 717.8 1,350.0 1,750.0 1,750.0 Competition from other plants Shortage * Unit #4 1,950 (benchmark) 38.6 511.6 1,465.0 1,750.0 1,750.0 Availability (percent) * Unit #3 85 (benchmark) 52.4 84.0 80.0 85.0 Equipment failures, a Unit #4 85 (benchmark) 77.0 81.2 80.0 85.0 improper maintenance Fuel efficiency (coal cons. in goe/kWh) 325 (benchmark) 423 445 389 348 348 Operating excessively in partial load, low coal quality Critical assumption Implementation of planned tariff Economdc Efliciency Average retail tariff 24.08 23.30 25.38 2650 28.22 30.05 increases; inflation not exceeding Pricing (fen/kWh, 1997 prices, excl. VAI) 4percent Applicat. ofsunified retail tariffi 7.69 7.96 8.33 15.00 100.00 10000 Continued introduction (percent ofsales) of unified tariffs Applicat. of time - of- day tariff 2 14 2.71 3.22 20.00 80.00 80.00 Continued introduction (percent of sales) of time - of- day tariffs Risks Increase of Lines constructed (km) 350 (benchmark) 270 414 414 414 414 Equipment deficiency transmission and capacity Transf capacity added (MVA) 600 (benchmark) 410 750 750 750 750 improper maintenance Risks Improvement of ESP efficiency Environment * Unit #1 (retrofitting end 1996) < 96.4 <96.4 < 96.4 99.6 99.5 99.4 ESP equipment deficiency * Unit #2 (retrofitting end 1997) < 92.8 <92.8 < 92.8 < 92.8 > 99.3 > 99.3 and * Unit #3 > 99.3 997 99.6 99.5 improper maintenance * Unit #4 99.8 99.7 99.6 99.5 Critical assumptions Financial Self financing ratio (percent, net operating 18.4 27.7 20.0 25.0 25.0 25.0 Implementation of'planned tariff Performance income/ average annual investment increases and improved financial management Critical assumption Institutional Overseas training provided 57 77 77 77 80 80 Development (staff- months) Implementation of remaimng training program as planned Domestic training provided 795 805 805 805 805 805 (staff- months) Notes: Synchronization on May 20, 1995 (unit #3) and December 14, 1995 (Unit #4). Start of commercial operation on April 18. 1996 (unit #3) and on September 14, 1996 (unit #4) - 18 - Table 7: STUDIES INCLUDED IN PROJECT Study Purpose as Defined at Status Impact of Study Appraisal Tariff Study Review level and structure of Completed. Based on the findings of the electricity tariffs on the basis studies, a tariff action plan of long - run marginal costs. A first study which was defined and approved by Define action plan to was completed in the provincial government in implement rational tariff 1993, had some weak January 1996. Substantial structures and to bring tariffs points and the study reforms of the tariff structure in line with the cost of was therefore updated have since been made; some supply. with the help of even before January 1996. international Tariffs must, however, still consultants. be raised significantly before the price paid by consumers for power supply (tariff + surcharges) reflects the long - run marginal costs. - 19 - Table 8A - 1: PROJECT COSTS IN MILLION US$ Appraisal estimate ($m) Actual/latest ($m) Item Local Foreign Total Local Foreign Total Power Plant Site preparation 10.60 - 10.60 9.15 - 9.15 Pile & Foundation 1.60 - 1.60 5.27 - 5.27 Civil Construction 31.90 6.40 38.30 51.17 3.98 55.15 Boiler 17.60 66.10 83.70 15.83 66.27 82.10 Turbine - Generator 7.20 69.30 76.50 5.49 76.67 82.16 Coal Conveying System 4.20 - 4.20 4.55 - 4.55 Oil System 0.10 - 0.10 0.08 - 0.08 Ash Disposal System 3.90 4.40 8.30 6.25 4.11 10.36 Water Treatment System 4.40 0.80 5.20 1.45 0.39 1.84 Water Supply System 3.50 - 3.50 4.86 - 4.86 Electrical Equipment 13.90 4.90 18.80 14.27 4.63 18.90 220 kV Switchgear 0.40 0.60 1.00 0.96 0.51 1.47 Instrument & Control System 2.20 10.30 12.50 4.80 14.99 19.79 Construction Equipment - 3.50 3.50 0.12 3.55 3.67 Environmental Protection 0.20 0.10 0.30 2.78 0.28 3.07 Simulator - - - 0.22 1.48 1.70 Transportation Facilities - - - 9.16 - 9.16 Production Support - - - 5.91 - 5.91 Training 1.30 1.00 2.30 1.43 0.93 2.36 Tariff Study 0.50 0.50 0.09 0.10 0.18 Engineering & Constr. Managem. 17.00 1.20 18.20 23.51 0.95 24.46 Associated Transmission 26.10 - 26.10 58.93 - 58.93 Total Base Cost 146.60 168.60 315.20 - - Contingencies Physical contingency 14.60 8.40 23.00 - - - Price contingency 13.80 3.00 16.80 - - - Total Project Cost 175.00 180.00 355.00 226.25 178.85 405.10 Interest during construction IBRD loan - 48.10 48.10 - 32.05 32.05 Local loans 56.50 - 56.50 38.61 - 38.61 Total Financing Required 231.50 228.10 459.60 264.86 210.90 475.76 Note: $1 = Y 5.38 for appraisal. Actual cost is based on compound average exchange rate of $1= Y 7.55 - 20 - Table 8A - 2: PROJECT COSTS IN MILLION RMB Appraisal (Y million) Actual/latest (Y million) Item Local Foreign Total Local Foreign Total Power Plant Site preparation 57.03 - 57.03 69.06 - 69.06 Pile & Foundation 8.61 - 8.61 39.80 - 39.80 Civil Construction 171.62 34.43 206.05 386.33 30.03 416.36 Boiler 94.69 355.62 450.31 119.50 500.34 619.84 Turbine - Generator 38.74 372.83 411.57 41.42 578.86 620.28 Coal Conveying System 22.60 - 22.60 34.36 - 34.36 Oil System 0.54 - 0.54 0.59 - 0.59 Ash Disposal System 20.98 23.67 44.65 47.54 31.03 78.57 Water Treatment System 23.67 4.30 27.98 10.95 2.95 13.90 Water Supply System 18.83 - 18.83 36.70 - 36.70 Electrical Equipment 74.78 26.36 101.14 107.73 34.96 142.69 220 kV Switchgear 2.15 3.23 5.38 7.21 3.85 11.06 Instrument & Control System 11.84 55.41 67.25 36.23 113.18 149.41 Construction Equipment 18.83 18.83 0.91 26.80 27.71 EnvironmentalProtection 1.08 0.54 1.61 21.00 2.14 23.14 Simulator - - - 1.62 11.22 12.84 Transportation Facilities - - - 69.16 - 69.16 Production Support - - - 44.58 - 44.58 Training 6.99 5.38 12.37 10.79 7.02 17.81 Tariff Study 2.69 - 2.69 0.65 0.72 1.37 Engineering & Constr. Managem. 91.46 6.46 97.92 177.47 7.20 184.67 Associated Transmission 140.42 - 140.42 444.93 - 444.93 Total Base Cost 788.71 907.07 1,695.78 - - Contingencies Physical contingency 78.55 45.19 123.74 - - - Price contingency 74.24 16.14 90.38 - - - Total Project Cost 941.50 968.40 1,909.90 1,708.53 1,350.29 3,058.82 Interest during construction - - - - - - IBRD loan - 258.78 258.78 - 241.95 241.95 Local loans 303.97 - 303.97 291.49 - 291.49 Total Financing Required 1,245.47 1,227.18 2,472.65 2,000.02 1,592.24 3,592.26 Note: $1 = Y 5.38 for appraisal. Actual cost is based on compound average exchange rate of $1= Y 7.55 - 21 - Table 8B: PROJECT FINANCING Appraisal estimate (s million) Actual/latest (s million) Item Ioal Foreign Total Lx:al Foreign Total IBRD - 180.00 180.00 - 178.85 178.85 Henan Provincial Govemnent 115.75 - 115.75 135.11 la - 135.11 People's Construction Bank of China 115.75 48.10 163.85 28.87 la - 28.87 State Development Bank - - - 124.75 /a - 124.75 HPEPB - - - 8.17 - 8.17 Total 231.50 228.10 459.60 296.90 178.85 475.75 /a including IDC of $32.05 million for IBRD loan Table 9: EcoNOMIC COSTS AND BENEFITS Appraisal Estimate Ex-post Estimate Internal Economic rate 15.7 percent 13.8 percent of return (IERR) Assumptions Price base end - 1991 end - 1996 Investment Cost Total: Y 2,216 million Total: Y 3,281 million /a Fuel Cost Y 110/ton standard coal Y 270/ton standard coal Fuel Consumption 325 gce/kWh 348 gce/ kWh /b Annual generation 3,900 GWh 3,300 GWh /b 6,500 hours at 300 MW per unit 5,893 hours at 280 MW per unit Losses Plant use and T&D losses: Plant use: 12.0 percent of gross 6.5percent of gross generation generation Price increasing from 18.1 32.9 fen/kWh (price fen/kWh in 1996 to 19.0 Yanshi was paid in 1996; from 2000 onward (average excluding VAT) retail price excl. VAT) O&M costs 1.37 fen/kWh 2.81 fen/kWh /c /a Excluding Y 417 million of transmission and distribution investment costs which were used to strengthen the T&D system but not required for the connection of the plant to the grid. /b From 1998 onward. Actual figures used for 1996 and 1997. /c From 1999 onward. - 22 - Table 9, ATTACHMENT I: EX - POsT COST - BENEFIT ANALYsis OF YANSHI THERMAL POWER PROJECT (LN. 3433 - CHA) Year Investment Cost O&M Cost Fuel Cost Generation Sale Benefit Net (Y million) (Y million) (Y million) GWh GWh (Revenues) Benefit (Y million) (Y million) 96 96 96 96 96 1991 42.88 - - - - (42.88) 1992 478.69 - - - - (478.69) 1993 750.77 - - - - (750.77) 1994 1,106.96 - - - - (1,106.96) 1995 586.06 - 35.52 311 291 95.69 (525.89) 1996 302.92 47.35 147.71 1,229 1,149 378.25 (119.73) 1997 10.73 68.55 295.66 2,815 2,632 866.10 491.16 1998 1.90 85.58 310.27 3,300 3,086 1,015.34 617.60 1999 - 98.43 310.27 3,300 3,086 1,015.34 606.65 2000 -21 - 98.43 310.27 3,300 3,086 1,015.34 606.65 IERR 13.8 percent Investment costs are net of transfer payments (taxes, subsidies, interests). Shadow pricing was not applied in ex - -post analysis. Recent data show that few cost items are subject to shadow pricing and those which are only constitute a very small portion of total costs. In the recent project proposals "Hunan Power Development Project" and "East China (Jiangsu) Transmission Project", shadow pricing resulted in economic costs which were only 1.7 percent and 1.9 percent respectively higher than financial costs. Actual foreign investment costs were converted into 1996 prices by MUV indexes. Corresponding conversion factors for local investment costs: 1991-1.937, 1992-1.813, 1993--l.462,--1994--1.224,--1995-1.065, thereafter 1.00. The coal price of 270 Y per ton of standard coal (7,000 kcal/kg) reflects the long - run marginal costs of coal. See "BERI, Economic Analysis for Leiyang Coal- -fired Power Plant (II), June 1997, Appendix C" and "Price Waterhouse, Hunan Electric Power Company Institutional Strengthening Study, August 1996, Section 5" for recent estimates of the LRMCs of coal. Calorific value of coal used in Yanshi power plant has been estimated at 4,350 kcal/kg. - 23 - TABLE 9: ATTACHMENT II: RISK ANALYSES 1000 scenarios were examined to determine the range into which the IERR is likely to fall. That was done by identifying critical variables and then defining probability distributions over the range of values of each variable. The critical variables and the probability distributions are shown below. Variable Distribution Distribution Parameters Hours fed into the grid Triangular Minimum 5,000 hours Maximum 7,000 hours Highest density about 5,900 hours Average output level Normal Minimum 260 MW per unit Maximum 300 MW per unit Bulk sale tariff (excl. VAT) Uniform Minimum 29.6 fen/kWh Maximum 36.2 fen/kWh Economic costs of coal Uniform Minimum 240 Y/ton Maximum 300 Y/ton For the years from 1998 onward, a certain scenario was obtained by drawing a value of each variable at random from the associated distribution. The annual output (hours fed into the grid times average output level) was subject to the constraint that it does not fall below 3,000 GWh. The heat rate has been calculated as: design heat rate (325gce/kWh) times rated output (300MW) divided by average output level. The results of 1000 Monte Carlo runs are: Average value of the IERR 13.6 percent. Minimum 9.7 percent. Maximum 17.6 percent. The probability that the IERR is less than the social discount rate of 12 percent is 15.5 percent. - 24 - TABLE 9: ATTACHMENT II (Cont'd) Risk Analysis Results IERR Expected value 13.56% Standard deviation 1.49% Minimum 9.74% Maximum 17.59% Coefficient of variation 0.11 Probability of negative outcome 0.0% Frequency Distribution of IERR 0.14 0.12 - :. 0.1 L 0.08 0.06 'K; - ___ 0.04 0.02 0 Cumulative Probability of IERR 100% 80%_ -60% 10%~ 240% 20% 1 -_______ ____ ___ ___ 0% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% - 25 - Table 10: STATUS OF LEGAL COVENANTS Agree - Section Cove - Present Original Revised Description of covenant Comments ment nant status fulfillment fulfillnent type date date Loan 3.01(b) 13 C Borrower shall relend the proceeds of the Article I Lan to HPEPB under a subsidiary loan agreement. Terns and conditions need Bank approval. 4.01(bXii) 1 C Borrower will funish to the Bank not later Article IV than 6 months after the end of each fiscal year the auditor's report Sched. 4 5 C Borrower and HPEPB shall employ consul- Section II tants satisfadory to the Bank. Project 2.06 10 CP HPEPB shall carry out the training in Only training on Article II accordance with a program acceptable to the environm. Bank protection still outstanding. Scheduled for 1998. 2.07 10 CP HPEPB shall carry outtariffstudy, design Implementation Article II an action plan and implement the plan. behind schedule of project appraisal 3.04 6 C HPEPB shall implement an environmental Article II monitoring program satisfactory to the Bank. 4.01(b) 2,1 C HPEPB shall furnish audited financial Financial Article IV statements and auditor's report within 6 statements are months after the end of each fiscal year. not fully in line with intemat accounting standards. 4.02 (a) 2 CP HPEPB shall take all measures (including non - compliance Article IV adjustments of the levels and structure of its in 1994. tariffs as determined by the Borrower) as Ownership shall be required to produce, for each of its changes should fiscal years after its fiscal year ending on be reflected in December 31, 1991 net operating income financial equivalent to not less than (i) 20percent of its statements when average annual investment program for the it is clarified. years 1992 - 94, (ii) 25percent for thereafter. 4.03 (a) 2 CP HPEPB shall not incur any debt unless a Same comment Article IV reasonable forecast of the revenues and as above (non - expenditures shows that the projected internal compliance in cash generation for each fiscal year during 1995). the term ofthe debt to be incurred shall be at least 1.3 times the estimated debt service requirements of H1PEPB in such year. 4.04 2 CP By April 30 of each year commencing April Article IV 30, 1993, HPEPB shall prepare and furmish a rolling long - term financial plan containing projected income statements, sources and applications of funds, and balance sheets for each of the next eight fiscal yeas. - 26 - Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS Statement Number and Title Describe and comment on lack of compliance OD 4.01 Environmental Assessment Complied but air quality standards were sometimes exceeded. This was not due to emissions of the power plant but caused by already existing high background levels. Table 12: BANK RESOURCES: STAFF INPUTS Planned Revised Actual Stage of project cycle Weeks $'000 Weeks $'000 Weeks $'000 Preparation to appraisal 42.0 79.2 Appraisal 39.6 81.7 Negotiations through 77.2 179.4 Board approval Supervision Ia 32.5 80.1 Completion /a 5.7 15.0 Total 197.0 435.4 /a Figures for FY 1998 have been estimated - 27 - Table 13: BANK RESOURCES: MISSIONS Performance Rating Specialized Imple - Develop- Conuments / Type Stage of Month/ No. of Days staff skills mentation ment of project cycle year persons in field represented /a status objectives problems Through Appraisal 08/87 1 5 EN Assessment of Environmental Impacts 12/87 3 5 E, EC, FA 09/88 3 21 E, EC, FA Appraisal 09/91 7 10 E, E, E, EC, Post Appraisal EC, FA, EN 11/91 1 2 EC Review of Henan Tariff Study Appraisal through Board approval Board approval through effectiveness Supervision 1 06/92 1 2 E 1 2 04/94 1 3 E 1 3 11/94 3 1 E, EC, C(FA) 1 4 05/95 1 2 E 1 5 03/96 3 3 E, EC, L 1 6 04/97 2 4 E, E 1 Completion 07/97 1 3 EC 1 /a E: Engineer, FA: Financial Analyst, EC: Economist, L: RMC Staff, EN: Environmental Specialist, C(FA): Consultant (Financial Analyst) Table 1: INCOME STATEMENT (Yuan Million) Year ended December 31 1991 1992 1993 1994 1995 1996 Piojecled Actual Projected Actual Piojected Actual Projected Actual Projected Actual Projected Actual Energy Sales (GWh) 25.152 25.707 27.017 28,439 28,961 30.644 31,090 33,031 33,638 36,924 37.173 39.732 Heat Sales (GJ) 11.581 11.730 12,316 12.637 10.930 9.810 Average Sates Price - Electricity (fonlkWh) 13.50 11.89 15.38 13.83 17.23 17.87 19.01 18.53 21.00 20.65 22.46 23.95 - Heat (fen/kJ) 0.41 0.47 0.49 0.86 0.81 0.90 Sales Tax 747 388 798 439 784 640 869 57 940 64 935 62 Net Operating Revenues 2,649 2,738 3.357 3,676 4,206 4,943 6.041 6,171 6.124 7,664 7,414 9,679 H q Operating Costs - Fuel 1095 974 1287 1.189 1560 1.639 1722 1.735 1964 1.968 2414 1.813 - Purchased Power 231 428 251 695 280 641 277 1.183 282 2.414 268 4.243 - O&M 454 389 548 490 654 815 765 1,033 892 1.300 1052 1.379 H0 -Admin. & Sales 126 179 148 258 170 413 193 598 219 445 248 485 - Deprecation 301 342 357 392 424 577 492 822 589 836 719 1.012 0 Total Operating Costs 2.207 2,312 2,691 3.024 3,088 4.085 3,449 5.371 3,946 6,963 4,701 8,932 Net Operating Income 442 426 766 662 1,118 8568 1,692 800 2,178 701 2,713 647 Other Income 2 3 29 5 32 65 Other Expenses 30 35 11 1 27 Financial Charges 42 136 195 126 256 270 333 222 470 135 Income Before Tax 400 398 630 620 923 730 1,336 635 1846 610 2,243 660 income Tax 125 66 231 100 313 79 575 176 649 166 848 181 %0 Net Income 275 332 399 420 610 661 761 369 1,196 344 1,396 369 Comment: Items with no entries in the column 'Projected* or *Actuar are not shown in project appraisal (Projected) or could not be inferrod from the slatements (Actual). Table 2: BALANCE SHEET (Yuan Million) Year ended December 31 1991 1992 1993 1994 1995 1996 Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Current Assets -Cash 313 468 314 600 294 804 348 989 351 1,305 408 1.219 -Accounts Receivable 359 221 422 257 490 144 566 214 661 253 768 474 - Inventories 254 271 303 336 364 427 408 385 478 265 587 346 - Other Accounts Receivable 481 624 964 1.172 1,434 3.520 Total Current Assets 927 1,441 1.038 1,817 1,148 2,339 1,322 2,759 1,490 3,268 1.761 5,669 Long-Term Investments 29 27 30 342 388 663 Fixed Assets - Plant in Service 7.186 6,700 8.835 8,188 10,394 12.295 12.118 13.269 15.078 17,352 18.437 17,62 - Accumulated Depreciation 1,931 1.968 2.288 2,361 2.712 4.227 3.204 4,913 3.792 5,550 4.511 5,113 Net Plant in Service 5.255 4,732 6.547 5,827 7.682 8.068 8,915 8,356 11.286 11.801 13.926 12,549 Work in Progress 577 609 339 522 1,089 1.038 2.060 3.736 2.080 5,624 2,226 3.277 Total Fixed Assets 6,831 6,341 6,806 6,349 8,771 9,106 10.976 12,091 13,366 17,426 16,161 16,826 Deferred Assets 58 188 276 317 330 770 Special Fund Assets 346 369 371 380 363 367 Total Assets 7,104 68.69 8,293 8,381 10,290 11,761 12,677 16.510 16,219 21,402 18,279 22,817 Current Liabilities -Accounts Payable 133 102 152 102 172 387 191 314 215 668 248 1,139 - Tax Payable 184 244 190 155 196 134 202 86 206 180 214 249 - Other Payable 510 792 843 1,367 889 1,445 - Short-Term Loan 92 95 163 108 205 795 Total Current Liabilities 317 948 342 1,144 360 1.627 393 1,876 422 1,942 460 3,629 Long-Term Debt 2,952 2,197 3,834 3,144 5,359 3,306 7,248 6,165 8,959 10,465 11,062 9,926 Special Funds and otlhur 635 771 907 1,119 1,373 1,712 Total Liabilities 3,905 3,145 4,946 4,200 6,633 4,833 8,760 8,040 10,755 12,408 13,234 13,666 Equity - Paid-in Capital 3,199 2,915 3,347 2,929 3.657 2.931 3.918 4,861 4.464 4,841 5,045 4,286 - Rutained Eanings 809 1.162 1.794 245 752 1,067 - Capital Surplus 2,193 2.364 3,401 3,909 Total Equity 3,199 3,724 3,347 4,091 3,657 6,918 3,918 7,470 4,464 8,994 5,045 9,263 Total Equity & Liabilities 7,104 8,069 8,293 8,379 10,290 11,761 12,677 15,610 16,219 21,402 18,279 22,817 Comment: Items with no entries In the column 'Piojecled" or "Actual* are not shown In project appraisal (Projected) or could not be Inferred Prom the statements (Actual).A Table 3: FUNDS FLOW STATEMENT (Yuan Million) Year ended December 31 1991 1992 1993 1994 1995 1996 Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Internal Sources -Net Income 275 332 399 420 610 651 761 359 1,196 344 1,395 369 - Depreciation 301 342 357 392 424 577 492 822 589 836 719 1.012 - Special Funds 171 198 240 280 5 324 8 399 20 Total Internal Sources 747 674 955 812 1.274 1,228 1.533 1,186 2.109 1.188 2.513 1.402 Borrowings 1,072 451 1.127 1.344 1.990 852 2.384 3.061 2.572 5,476 3.119 351 Equity 6 14 235 683 1.524 269 Total Sources of Funds 1,819 1,131 2.082 2,170 3,265 2,315 3.917 4,930 4,681 8,188 5,631 2,022 Capital Expenditures 1.330 753 1.414 1,529 2.333 1.464 2,749 3,672 3.048 5.971 3.577 (2.037) Change In Long-Term Investm. (2) 3 317 53 295 0 Interest Charged of Operation 35 24 25 65 29 Loan Repayment 184 332 244 397 441 690 441 732 793 1.176 944 891 Remittances to Government 34 55 93 68 138 20 286 27 326 27 438 27 Change in Working Capital 81 (132) 86 47 103 (68) 95 (327) 135 431 177 615 Special Fund Assels / Expend. 205 220 244 293 324 313 212 412 2,317 Total Applicat. of Funds 1.850 1,008 2,081 2,039 3,285 2,111 3.863 4,745 4,681 7.870 5,576 2,108 Net Change in Cash (31) 123 1 131 (20) 204 54 185 0 318 55 (86) Comment: Items with no entries in the column 'Projected" or "Actual" are not shown in project appraisal (Projected) or could not be inferred from the statements (Actual). Table 4: Key Financial Indicators (Yuan million unless otherwise noted) 1991 1992 1993 1994 1995 1996 Piolocted Actual Piojocted Actual Proiecled Actual Projected Actual Projected Actual Projected Actual Electricity Sales (GWh) 25.152 25.707 27,017 28.439 28.961 30.644 31.090 33.031 33.638 36,924 37.173 39,732 Average Price (fen/kWh) 13.50 11.89 15.38 13.83 17.23 17.87 19.01 18.53 21.00 20.65 22.46 23.95 Oper. Rev. from Elec. Sales 3.396 3.057 4.155 3.933 4,990 5,476 5,910 6,121 7,064 7,624 8,349 9.516 Operating Costs 2,954 2,312 3,389 3,024 3,871 4.085 4.317 5,371 4,885 6.963 5,636 8.932 Operating Income 442 426 766 552 1,119 858 1,593 800 2,179 701 2.713 647 Income after Tax 275 332 399 420 611 651 762 359 1,199 344 1,396 369 Rate Base 4,877 4.563 5,901 5.280 7,114 6,948 8.298 8,212 10,101 10,079 12,606 12,175 RoR on Rate Base (%) 5.6 7.3 6.8 8.0 8.6 9.4 9.2 4.4 11.9 3.4 11.1 3.0 Operating Ratio (%) 87.0 84.4 81.6 84.6 77.6 82.6 73.0 87.0 69.1 90.9 67.5 93.2 Current Ratio (times) 2.9 1.5 3.0 1.4 3.1 1.3 3.4 1.3 3.5 1.6 3.8 1.5 Debt-Service Cov. (times) 2.6 2.0 2.2 2.0 1.9 1.7 2.2 1.4 1.8 1.0 1.8 1.6 Self-Financing Ratio (%) 24.5 41.1 22.4 24.3 22.2 26.5 24.0 16.8 25.7 27.6 25.0 32.9'1 Comment: covenants required that the debt-service ratio is at least 1.3 and that tlie self4inancing ratio does not fall below 20% In the years 1992-1994 und not below 25% threreatter, 1): Estimate -32- ANNEX2 ANNEX 2: AIDE - MEMOIRE OF SUPERVISION MISSION (EXTRACT) (MARCH, 31 - APRIL 3,1997) General 1. A World Bank mission consisting of Messrs./Mme. S. Kataoka and J. Wu visited Zhengzhou during March 31 - April 3, 1997 to review the status of project execution, use of loan proceeds, implementation of the tariff action plan, training program and environmental monitoring, resettlement, and the financial performance of Electric Power of Henan (EPH), and compliance with Loan and Project Agreement covenants, and preparation of Implementation Completion Report (ICR). The mission would like to express its appreciation to EPHI for the excellent arrangements for the discussions, and for the warm hospitality and cooperation extended during its stay. This Aide Memoire summarizes the principal matters discussed and understandings as well as agreements reached. Implementation Overview 2. EPH successfully completed the construction of two 300 MW units. Unit #3 has been in commercial operation since April 18, 1996, which is 109 days behind the SAR schedule, and Unit #4 on September 14, 1996 which is 109 days ahead the SAR schedule. As of December 31, 1996, Unit #3 generated 717.8 GWh ( average load of 221.2 MW, coal consumption of 454 g/kWh including auxiliary use) and Unit #4 generated 511.6 GWh (average load of 253 MW, coal consumption of 441g/kWh). 3. EPH has been facing problems of coal quality. Coal is supplied from local mine Yima and two local mines in Xinan and Dengfeng area. In 1996, quality of coal supplied to the units was slightly improved, when compared with the coal quality supplied in 1995. Average calorific value of coal was 16,655 kj/kg (3,983 kcal/kg) against design coal of 17791 kj/kg (4,250 kcal/kg). Average ash content was 32 percent against design value of 24.2 percent. Sulfur content was 1.03--1.33 percent against design value of below 1.0 percent. The current maximum capacity which the units can produce is 270--280 MW. This is mainly caused by the coal quality lower than designed. EPH expects to get better quality coal to be supplied from Xinan area in the near future. 4. 220 kV transmission lines of 374 km have been completed, which is 24 km longer than that of appraisal estimate. 110 kV transmission lines of 40 km have been completed, which is additional one and not included in appraisal estimates. Two (2) new substations have been built and the capacity of their main transformers is 120 MVA respectively. The extension of four (4) substations have been completed, of which, the capacity of three (3) main transformers is 120 MVA respectively, one (1) is 150 MVA. The total added transformation capacity amount to 750 MVA (which is 150 MVA greater than that of the - 33 - ANNEX2 appraisal value). All of the above transmission lines and substations were completed and put into service before December 31, 1996. Ex - Post Review of Procurement 5. The mission reviewed the contracts subject to post review. There are three items which were procured through limited international bidding procedure, under which the firm quoted the lowest price was awarded the contract. Details are given below; costs are in US$. ZELEX American Thermal China Automatic Electronics Control Co. Water Treatment System 206,118.00 no response to call 180,590.00 for bids EnvironmentVehicle 314,130.00 284, 274.47 301,594.21 Chemical Instrument 206,718.00 293,348.10 254,193.00 6. It was found that the contract value of environment vehicle exceeds the threshold of $200,000 for other procurement procedures. EPH explained that the budget price for environment vehicle was $100,000 for foreign currency and $150,000 for local currency. However, during the execution of procurement, EPH decided to purchase all the components abroad for the compatibility of the instrument and maintenance consideration. The mission stated that EPH should have notified the Bank regarding the change of the procurement scope and that this type of mistake should not be repeated in future procurement activities, even though EPH had valid reasons to change the contract scope of the environment vehicle. Tariff Reform Implementation 7. In 1995, EPH undertook to update the 1993 tariff study with the assistance of foreign consultants. Following the study recommendations, EPH submitted to the provincial government a tariff reform implementation plan. The plan was approved in January 1996, which sets out (i) the target consumer (retail) tariffs which are Long Range Marginal Cost (LRMC) based and ensuring the financial sustainability of the supply utilities, (ii) a phased implementation strategy, and (iii) detailed measures for implementation and monitoring. In executing the plan, EPH has made the following progress: The average sales tariff level including VAT has increased by 16.0 percent (note: the inflation rate in 1996 is 6.5 percent) from Fen 24.1/kWh in 1995 to Fen 28.0/kWh in 1996, in which, agricultural tariff by 20.78 percent, residential tariff by 16.62 percent, a clear indication of reduced subsidies to these - 34 - ANNEX2 traditionally heavily subsidized sectors. In addition, the capacity charge which mainly applies to industrial customers has increased from Y 13.5/kW month in 1996 to Y 16.5/kW month in 1997. * With a target to achieve unified consumer tariffs in the whole province in 1998, EPH extended the implementation of unified consumer tariff to five more prefectures, i.e., Xinxiang, Anyang, Kaifeng, Nanyang, and Pindingshan. * Since January 1996, time - of - day tariffs have applied to the whole province, except residential, poverty counties and irrigation users. At the same time, a strict monitoring plan has been carried out to monitor the effectiveness of the time-of-day tariff. A 3--5 percent increase of load factor has been reported in some prefectures as a result of the time-of-day tariff For 1997, EPH has a plan to modify the time period of peak and off-peak for amore effective peak shaving. 8. The mission considered that despite the delays experienced in the earlier stage in implementing the Tariff Action Plan, the progress achieved in 1995 and 1996 is satisfactory and generally meets the requirement of the Project Agreement. The mission is confident that full implementation of the target tariffs will be achieved under the Qinbei project given the approved plan and the momentum of pricing reform gathered so far in the province. Financial Aspects 9. EPH informed the mission (a) that the central government decided in 1995 that in any new power generating plant, if SDB holds more than 50 percent of equity, Central China Electric Power Group Corporation (CCEPGC) will represent the ownership of the central government. Therefore, the financial statements of EPH would be reconstructed in accordance with the newly defined/clarified ownership assets and (b) that a number of generation projects included in the EPH's development plan will become IPP projects and will therefore be excluded from the EPH's financial statements. As a result of the above two factors, the amount of annual average investment will be much lower than the currently projected level. Training 10. Following the recommendations of the previous supervision mission regarding the implementation of the remaining training items: environment protection and training of teachers, EPH submitted a request to MOEP. However, the request was not approved. Under this circumstance, EPH made decision to finance the training of teachers off its own balance sheet. A total of six persons have received 2 weeks training in Germany on organization, curriculum, and laboratory facilities of vocational education. The mission commenced EPH's strong sense of ownership in carrying out the agreed training plan to meet the Project Agreement. - 35 - ANNEX2 11. Regarding the implementation of training on environment protection, EPH has already contacted a German power utility. A total of DM 70,000 was quoted by the German utility for training of four persons for 3 weeks. EPH will contact the relevant authorities again for approval. Land Acquisition and Resettlement 12. The project was an extension project to the existing Yanshi plant for which no human resettlement was required. For the transmission lines, routing was designed to avoid resettlements. Dismantling of existing facilities and buildings for (a) existing 10 kV line (compensation cost of Y 320,000); (b) 7 farm irrigation wells (Y 272,500); (c) 40 temporary houses (800 sq. meter, compensation of Y 60,000; (d) 15 non--residential houses (200 sq. meter, Y 28,500; (e) 8 cave dwelling (Y 20,000); (f) a press house within the plant (Y 15,000); and others (Y 169,000). Total compensation of Y 885,000 (against the SAR estimate of Y 860,800) based on local regulations were paid. 13. For land acquisition for transmission towers of about 77.3 mu (SAR estimate of 5.2 ha), Y 2.32 million (Y 2000/mu/year x 15 years) was compensated. For corridor alongside lines, Y 7.19 million was compensated. Total amount of the land acquisition is Y 9.51 million against the SAR estimate of Y 5.09 million. Environmental Aspects 14. The environmental monitoring report for water quality and noises measured in 1996 was presented to the mission. It was found that the monitoring results did not exceed the relevant standards, although defluorination in ash yard, ambient noise values occasionally exceeded the requirements. It was noted that the air quality monitoring after the completion of the two units has not been carried out, because of a technical problem with the power supply system for the environment monitoring instruments mounted in the vehicle which was procured for the project. The mission recommended and EPH agreed that the air quality will be monitored by end - June 1997 and the monitoring report will be submitted to the Bank by August 1997. Environmental monitoring records before and after completion of the two 300 MW units are to be evaluated. (Note: During the previous mission in March 1996, it was noted that the TSP background level always exceeded the Chinese standard and S02 background level exceeded occasionally the Chinese standard, 50 percent probability in time. Although this is considered that there is no direct relation of the project, the final report on environmental impacts of the project should include a detailed description of the current status and envisaged measures to improve the situation). 15. Replacement work of the existing dust collector for the Unit #1 with the new ESP was carried out in December 1996. The efficiency of the new ESP for the Unit #1 was 99.6 percent against a design value of 99.3 percent. The new ESP for the Unit #2 will be - 36 - ANNEX2 erected in the second semester of 1997. The efficiency of the ESP of Unit #4 was 99.8 percent against a design value of 99.3 percent. The Bank recommended and EPH agreed that performance test for the ESP of Unit #3 will be conducted in July 1997 and the result will be reported to the Bank in August 1997. Preparation of Implementation Completion Report (ICR) 16. In connection with preparation of ICR, EPH submitted to the mission the actual/latest estimated project implementation schedule, project cost estimates, evaluation of the consulting services provided, and key lessons learnt (all in Chinese). The documentation was well prepared and provided a detailed account of the project implementation to date. The mission held two special sessions with EPH to review and discuss the information provided. One session was focused on the key lessons learnt and the other on project cost estimates and complementary analyses required in order to assist the Bank in preparation of ICR. 17. It was agreed that the following complementary tasks would be carried out by EPH to finalize its own evaluation report and to assist the Bank in preparation of ICR. * EPH's own evaluation report of the project's execution and implementation, which will be submitted to the Bank by the end of April, 1997; * Analysis of the causes of cost overrun of transmission component, which will be submitted to the Bank by April 20, 1997; * Environment monitoring summer test report, which will be submitted by the end of August, 1997. 18. The Bank will send he draft ICR to EPH for review and comments by the end of September, 1997. The ICR will be completed and issued by the end of the year 1977. Key Lessons 19. During installation of the electrical and mechanical equipment, an excessive amount of coordination work had to be carried out by the owner due to the interfacing problems between different islands, which was a heavy burden to the owner and caused delays which could otherwise be avoided. It is therefore suggested that interfacing be reduced to a manageable level through careful procurement packaging. 20. The design and procurement of each fire fighting system was linked with the concerned island only. There was not design coordination among these individual systems. This caused difficulties in commissioning the entire power plant. It is suggested that the fire fighting system of the entire power plant be a separate package given its importance in plant operation safety. - 37 - ANNEX2 21. The devaluation of the US dollar against European and Japanese currencies resulted in EPH's loss of $7 million. Measures to avoid or minimize risks related to foreign currency movements should be sought. It is also suggested that price contingency include exchange rates variation among foreign currencies. 22 The design and procurement of auxiliary equipment were overlooked, while all the attention was given to the major equipment. During the commissioning of Unit #3, the poor quality of the heat damper of the coal mill caused a delay of more than 30 days. Even after the replacement, the problem still exists. It is suggested that much greater attention be given to the design and procurement of auxiliary equipment. 23. Coal quality has been a major problem to the performance and safe operation of Unit #3 and #4. There is a considerable difference in quality between the design coal and the actual coal used. The actual coal used so far features a lower heat value and higher ash content, which produces excessive slag and therefore increase the load of the slag scraper conveyer. This is largely responsible for the fact that the units cannot reach the rated output during normal operation. It is suggested that the range of the property values of the design coal and check coal be increased. - 38 - ANNEX 3 ANNEX 3: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE 1. The 2x300 MW units for Shouyangshan Thermal Power Plant Phase II Project experienced 49 months in total from the Loan Agreement signing by the World Bank to the completion of both units and the turnover to trial production (February 7, 1992 to March 14, 1996, in compliance with the World Bank Milestone Schedule and some items ahead of it). The completion of both units strengthened the power generation capacity of Henan Provincial Power Grid and alleviated the serious power demand of the system. 2. The whole construction of the project was in compliance with the progress schedule and some items in advance by the common efforts from all the aspects of designers, constructors, and equipment suppliers, the great support from authorities involved, and the great concerns from the World Bank. As a result, both units could be put into normal production and obtain benefit ahead of schedule. 3. The procurement of the equipment purchased by the World Bank loan was strictly carried out in line with the Procurement Guideline of the World Bank and International Competitive Bidding. The procured equipment was of good technical performance, reliable quality and reasonable price. There was no conflict during the smooth implementation of the contract. The major components of the contract have been completed at current. The clearance of the quality guarantee and partial technical service charge is underway now. The contract cost is ensured within the total project budget at the World Bank appraisal, and without overrun. 4. The technical service of each contractor has been implemented in conformity with the contract covenants. The time of some technical service have been extended due to the construction arrangement at jobsite, which was agreed by both owner and contractors. Hence, there is no construction delay caused by the technical service of those jobsite engineers. The Extension Department has made every effort to provide comfortable facilities for technical service engineers' living and working and to meet their reasonable requirements in the light of contract covenants. Most jobsite engineers were satisfied with their working conditions and felt at ease to stay at jobsite, which contributed great motivation to the smooth progress of the project. 5. According to the requirement of SAR, the training program has been carried out for the backbone staff from the major departments and divisions of EPH and the directors of the major power plants and bureaus under EPH's direct management on management, capital construction, power sale, financial affairs, planning, and environmental protection, which broadened their field of vision, introduced some advanced management experience of the world, and contributed greatly to the development of the power industry in Hena Province. 6. S&L Co. was selected as the foreign consulting company; China International Engineering Consulting Co. has been selected as the major local consulting company; - 39 - ANNEX 3 China Electric Power Consulting Co. and South West of China Electric Power Design Institute were selected as the assistants of CIECC. These companies carried out consulting service for the review of bidding document, bids evaluation, preparation of bids evaluation report, and technical negotiation. They contributed careful and strict review and comments so as to make the equipment meet the bidding document regarding technical performance and price. During the project designing, they gave much assistance for the coordination for interfacing of various islands and the review of vender's drawings. The consultants were familiar with the international pricing standard of electric power equipment in single item and experienced in equipment comparison for procurement especially during bids evaluation. Therefore, it is really necessary to engage foreign consulting company. 7. The advantage of ICB is that: more equipment suppliers can join into the competition; the owner can select equipment in a more broad scope; the equipment procured can be more cheap, more suitable for users, better quality performance, and better service after selling. However, an excessive amount of coordination work has to be carried out by the owner due to the interfacing problems between so many different islands. It is suggested that: * reduce the number of islands as less as possible; * if allowable or both owner and contractors agree, one designing company can be selected to work for both the owner and all the islands contractors to reduce excessive coordination work caused by so many interfaces. 8. Various up-to-date fire fighting systems have been procured for the project. During bid invitation, these systems have been separated, designed and procured in each island. It was difficult to procure the fire fighting system for I&C island, as a result that the bidding for I&C island was later than the others. It also resulted in some difficulties in the commissioning for the fire fighting system of the whole plant. It is suggested that the fire fighting system of the entire power plant be a separate package. 9. During equipment procurement, some contracts have been disbursed in Jap. Yen and DM. The devaluation of the US dollar against DM and Jap. Yen resulted in the beneficiary's loss of more than 700 million, which was made up by equipment contingency and project contingency. There was no application to the World Bank for supplementary loan. It is also suggested that the risk of exchange rates variation among foreign currencies be given full consideration. - 40 - ANNEX 3 10. The technical performance requirements of major component and main equipment have been concentrated during bids invitation and procurement. However, the auxiliary equipment were overlooked. For example, during the commissioning of Unit #3, the poor quality of the heat damper of the coal mill caused a delay of more than 30 days. Even after the replacement, the problem still exists.
Groupe de la Banque mondiale · Implementation Completion and Results Report
China - Yanshi Thermal Power Project
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