China - Sichuan Power Transmission Project

 ICRR 11832 Report Number : ICRR11832 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 08/16/2004 PROJ ID : P036947 Appraisal Actual Project Name : Cn-sichuan Power Project Costs 1,078.7 965.3 Transmission Project US$M ) (US$M) Country : China Loan /Credit (US$M) Loan/ US$M ) 270.0 166.4 Sector (s): Board: EMT - Power Cofinancing 0 0 (100%) US$M ) (US$M) L/C Number : L3848 Board Approval 95 FY ) (FY) Partners involved : Closing Date 12/31/2002 12/31/2003 Prepared by : Reviewed by : Group Manager : Group : Alvaro J. Ronald S. Parker Alain A. Barbu OEDST Covarrubias 2. Project Objectives and Components a. Objectives The project objectives were to: (i) alleviate acute power shortages in the Sichuan grid; (ii) assist in the introduction of power sub-sector reforms in Sichuan Province; (iii) support power tariff rationalization; (iv) promote technology transfer for extra-high voltage (EHV) transmission; (v) strengthen institutional capability for environmental and resettlement management; and (vi) upgrade management and operation capabilities through staff training. b. Components Physical components: (i) construction of about 2,650 km of 500-kV transmission lines; (ii) construction of five 500/220 kV transformer substations (5,250 MVA) and one 500-kV switching substation; (iii) reinforcement of the existing transmission network. Environmental components: (i) establishment of environmental management and monitoring programs; and (ii) resettlement and rehabilitation of persons affected by transmission network expansion. Technical assistance components; (i) strengthening of SEPC’s capability to implement an Action Plan comprising improvement in organization, accounting and financial management information systems; (ii) strengthening the environmental and resettlement management capabilities of SEPC, and (iv) provision of engineering and construction management services and training. c. Comments on Project Cost, Financing and Dates The US$270.0 million Bank loan was intended to cover direct foreign exchange costs excluding interest during construction. By the time the project closed after a two year delay (due to contracting and commissioning problems), only about US$166.4 million had been disbursed--intense competition resulted in foreign costs about 39 percent lower than the appraisal estimate for goods needed in the transmission network . The loan also covered technical assistance services (about US$5.9 million). Cancellations of US$65 million and US$30 million took place on in July and November 2001, respectively. A balance of US$8.6 million was cancelled at loan closing in December 2003.The project was completed at a total cost of US$965.3 million (11 percent lower than the appraisal estimate of US$1,078.7 million) because actual interest charges during construction were 46 percent lower than the appraisal estimate. Local costs (equivalent to US$799.0 million) financed by the Borrower were 34 percent higher than the appraisal estimate. This covered the transmission network (US$609.9 million), resettlement and rehabilitation (US$ 63.6 million), technical assistance (US$12.1 million) and interest during construction (US$113.4 million). 3. Achievement of Relevant Objectives: The project objectives were substantially achieved as follows: (i) the acute power shortage (about 20 percent) in the Sichuan province were alleviated by completing the high voltage transmission facilities required to inject the output of the Ertan Hydro Project into the Sichuan power grid; (ii) the power sub-sector of the Sichuan Province was reformed by restructuring Sichuan Electric Power Company (SEPC) and creating a competitive market for power generation; (iii) power tariff rationalization was not done as expected: elimination of all preferential tariffs was not achieved and tariffs remained below the estimated long-run marginal cost; (iv) extra-high voltage (EHV) transmission transfer was successfully achieved and technical capabilities in transmission line construction introduced; (v) institutional capability for environmental and resettlement management and monitoring was strengthened ; and (vi) staff training upgraded management and operation capabilities of SEPC. 4. Significant Outcomes/Impacts: • Construction of a 500 kV transmission network brought power from the Ertan Hydroelectric Project to Sichuan Province – a total of 146,000 million kWh alleviated potential power shortages in 2002. • Restructuring of SEPC: (i) its government functions were transferred to the Sichuan Economic Commission; (ii) in 1999, power plants jointly owned by SEPC and other investors became limited liability companies; and (iii) social services units and non-core businesses are being removed from SEPC. • In 2002, the State Council approved a National Plan calling for separation of generation, transmission and distribution companies and introduction of competition in generation (SEPC began to develop skills and capacity to implement the plan). • The State Power Corporation of China named the Changshou 500 kV substation as the best substation in the southwest region, recognizing the remarkable expertise acquired by SEPC in constructing and operating extra-high voltage transmission lines and substations. • The successful implementation of a US$18 million training program of more than 800 staff-month as well as project-provided technical assistance services has substantially strengthened SEPC’s operational capability in EHV technology, corporate planning, utility management, power pricing, competitive power market development, and resettlement and environmental management and monitoring. 5. Significant Shortcomings (including non-compliance with safeguard policies): • The Provincial Government failed to take active measures to adjust tariffs levels which could have improved the financial status of SEPC. This action, influenced by the regional economic/financial crises, forced tariff discounts for certain key customers, but was later limited to about 20 percent of the customer base. • SEPC failed to provide timely resettlement monitoring and evaluation reports. • Although the project included a long list of performance indicators, it failed to define indicators to monitor progress and achievements in the implementation of the institutional reform. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. NOTE: 7. Lessons of Broad Applicability: (1) During project supervision, the Bank should periodically review the key performance indicators of projects requiring substantive reforms and restructuring to determine if they remain valid or need fine-tuning. This is particularly important when the project experiences major external shocks such as a natural disaster or a regional financial crisis or a change in the provincial or regional administrative status that affects the development indicators. (2) Construction of high-voltage transmission networks in mountainous areas requires a careful evaluation of capacity and capabilities of local contractors as well as the interface of specifications with foreign suppliers. Failure to pay sufficient attention to such matters delays implementation and risks significant cost overruns. (3) In power transmission projects, the resettlement analysis needs to be closely aligned with facilities design and routing in order to minimize the social impact. Resettlement plans should be developed during appraisal, and they must include clearly stated details regarding compensation. . 8. Assessment Recommended? Yes No Why? Several power projects in China including power sector reform and restructuring have been completed recently. These could be assessed in a cluster to better illustrate the overall impact of the Bank's work on the performance of the Chinese power sector. 9. Comments on Quality of ICR: The ICR complies with the Bank guidelines for ICRs. It gives a thorough yet concise account of the project achievements and shortcomings, and adequately reviews important aspects of Bank and Borrower performance. ICR annexes on the Implementation of Environmental Management Plan, the Implementation of Resettlement Action Plan, and the Borrower’s Evaluation Report are helpful and informative. The latter contested the (provisional) unsatisfactory performance rating given by the draft ICR to the implementing agency, and it was convincing enough that the final version of the ICR upgraded that rating to satisfactory.