China - E. China - Jiangsu Power Transmission

 ICRR 12556 Report Number : ICRR12556 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 01/10/2007 PROJ ID : P051736 Appraisal Actual Project Name : E. China - Jiangsu US$M ): Project Costs (US$M): 888.6 552.2 Power Transmission Country : China Loan /Credit (US$M): Loan/ US$M ): 250 151.1 Sector Board : EMT US$M): Cofinancing (US$M ): Sector (s): Power (95%) Sub-national government administration (3%) Information technology (2%) Theme (s): Regional integration (33% - P) Pollution management and environmental health (33% - P) State enterprise/bank restructuring and privatization (17% - S) Other urban development (17% - S) L/C Number : L4303 Board Approval Date : 03/26/1998 Partners involved : Closing Date : 09/30/2004 03/31/2006 Evaluator : Panel Reviewer : Group Manager : Group : Robert Mark Lacey Peter Nigel Freeman Alain A. Barbu IEGSG 2. Project Objectives and Components: a. Objectives: The project’s two key development objectives were: (a) to alleviate critical bottlenecks in the power transmission infrastructure; and (b) to advance sector reform through increased electricity trading on a commercial basis in the East China Region . b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): The project included a physical component consisting of the supply and construction of 993 km of 500 kV transmission lines and reinforcement of the Nanjing urban transmission systems . In addition, TA and consulting services were financed to support the design and implementation of the East China power market, as well as improved accounting, financial and general management, and training in the main implementing agencies, East China Grid Company (ECGC) and Jiangsu Provincial Electric Power Company (JPEPC). Revisions . Thanks to substantial cost savings on the original components, a further one was added in 2002: two new 500 kV/220 kV substations, plus extension of two existing substations, adding a total transmission capacity of 2,500 MVA. The new component helped meet the power demand in Jiangsu Province, which was growing much faster than anticipated at appraisal, and also reinforced interconnection with Anhui, Zhejiang and Shanghai, thereby facilitating power trading and extending project benefits to East China. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Project Cost . Total project financing requirements at completion were US$ 552.2 million, 38 percent lower than the US$888.6 million forecast at appraisal . This is despite the additional component described above which amounted to US$31.1 million in foreign costs. Total foreign exchange costs were, at US$151.1 million, still 40 percent less than the US$250 million estimated at appraisal . The IBRD loan amounted to 28.1 percent of total project costs at appraisal, and 27.4 percent at closure. Of the original loan amount of US$250 million, $151.1 million were disbursed. Forty percent of the project loan was cancelled. The substantial cost under-runs were caused by (a) low bid prices stemming from intense competition in the fast growing Chinese market, and especially from the increased participation of Chinese firms in the ICB process; (b) lower inflation and interest rates than expected at appraisal; (c) optimal design during implementation which largely eliminated the need to resort to contingency funding; (d) favorable foreign exchange rate movements; (e) efficient construction and financial management; and (f) inadequate attention to emerging trends in the Chinese market at appraisal . This operation fits into a distinct pattern of substantial cost overestimation at appraisal of major power projects in China in the 1990s. This suggests that Bank guidelines should be revisited to take account of the highly late 1990s competitive nature of this market . Financing . The IBRD loan was to cover 28 percent of total project financing requirements as estimated at appraisal. The remaining 72 percent was to come from local borrowing, counterpart financing, and shareholder equity (the ICR provides no breakdown of the local contribution). Latest available estimates show roughly the same percentages at completion. The cost savings thus affected local and foreign exchange components about equally. Because of the lower than expected project costs, US$31.1 million of the Bank loan were used to finance the additional component, US$86 million were cancelled in 2002, and a further undisbursed balance of US$12.9 million was cancelled at closure . Nonetheless, the substantial overestimate caused the Borrower unnecessarily high IBRD financing charges . Dates The original closing date of September 30, 2004, was extended by one-year-and-a-half until March Dates. 31, 2006. The main causes of the delay were: (a) the project did not become effective until July 1999, 16 months after approval (for reasons which the ICR does not explain); (b) construction of the Yangtze River Crossing (a major sub-component) was awarded to a firm bidding substantially lower than the competition, but the performance of a key subcontractor was inadequate. Tower construction did not meet standards and some components had to be replaced. This caused a delay of about one year; (c) government procurement procedures were cumbersome, and the implementing agency was unfamiliar with Bank procurement requirements; and (d) the project was implemented during a period of major change and restructuring in China’s power sector. 3. Relevance of Objectives & Design: The project was responsive to the priorities of the Chinese Authorities, both national and local, and reflected the Bank’s strategic goals in China. It helped to meet soaring electricity demand in a more efficient and environmentally sensitive manner . Although project preparation and implementation coincided with major energy sector reforms in China, a changing global context (including the East Asian crisis), and shifting government priorities, it remains relevant . It is consistent with at least two key goals stated in the 2003 CAS and 2006 Country Partnership Strategy: managing resource scarcity and environmental challenges; and strengthening public and market institutions . 4. Achievement of Objectives (Efficacy): The project achieved all of its development objectives . Despite some delays, physical investment was fully and satisfactorily completed . (a) Alleviation of critical bottlenecks in the power supply system in Jiangsu Province and Eastern China . Rating: High. The considerable strengthening of the power transmission systems through the project is enabling soaring electricity demand to be met in a cost effective and environmentally sustainable manner . The targets for the reduction in the value of lost production due to power rationing, of unused generating capacity because of transmission and network overloading, of transmission faults, and of lost energy because of transmission outages, were appropriate and realistic, and were all surpassed . The importance of the project’s contribution is underlined by the very rapid urban growth rates in Jiangsu Province – both power consumption and GDP were expanding at rates well in excess of 20 percent per year. Fortunately, the 12 month delay on the Yangtze River Crossing construction had no adverse effects on North -South transmission capabilities since commissioning of the power sources in the North was also postponed . (b) Increase in electricity trading on a commercial basis . Rating: Substantial. New regulations issued in 2002, and the fact that East China was chosen as a pilot region, facilitated the development of a competitive power market. The TA and energy management system components of the project contributed to the market’s design and operation. Regular operations began in May 2006, earlier than foreseen at appraisal. The increase in power imports to the Jiangsu grid was just over 80 percent of the appraisal target by closure, while power trading in Eastern China exceeded the end -of-project target by about 54 percent in capacity and 75 percent in energy sales. (c) Institutional development. Rating: Substantial. Capacity building and training produced satisfactory results for ECGC and JPEPC in the areas of transmission and distribution planning, financial management and resettlement. As in other power projects in China, the implementing agency eschewed external consultancy services for the development and implementation of modernized accounting and financial systems, and adopted a phased approach using internal resources . Again as elsewhere, this proved to be effective: the company's operating efficiency and planning and financial management capacities have all been enhanced. 5. Efficiency (not applicable to DPLs): The project was justified primarily on cost effectiveness grounds . To complement this, a cost-benefit analysis was carried out based the total investment program and related maintenance and operating costs and the financial benefits from the incremental power sales valued at the average covenanted tariff . The ERR at project completion was estimated at 23.6 percent compared to 19.1 percent at appraisal. Originally the investments were to have been carried out by the provincial power companies . The increased role of ECGC in the light of the decision to develop a regional power market considerably increased the volume of total investments as well as related maintenance and operating costs . However, these were more than offset by higher transmission tariffs and by the fact that more power was sold than foreseen. The project has also increased energy efficiency in ways which do not show up in the cost benefit analysis --.for example, through increased reliability, reduced losses and outages, and more efficient use of existing generation capacity . ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re- re -estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal Yes 19.1% 95% ICR estimate Yes 23.6% 95% * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The project development objectives remained relevant and were achieved . The project contributed to more efficient, reliable and environmentally sound power supply in the affected region . A competitive regional market has been established and is operating satisfactorily . The ERR achieved was higher than the opportunity cost of capital. Transmission prices have been increased and cover the costs of power supply. They also permit an adequate return on equity and assets. a. Outcome Rating : Satisfactory 7. Rationale for Risk to Development Outcome Rating: The substations and transmission lines financed by the project meet all quality assurances and performance tests. ECGC has the technical and managerial capacity to operate them satisfactorily . Government commitment to reform remains strong. The regional power market is a closely monitored pilot. Transmission prices allow adequate returns on equity and assets . Foreseen foreign exchange movements would increase the project’s profitability. a. Risk to Development Outcome Rating : Negligible to Low 8. Assessment of Bank Performance: Although project design was reasonably sound, quality at entry was less than fully satisfactory, Project cost estimates at appraisal were much too high, reflecting both over -cautious Bank policies and guidelines as well as insufficient attention to emerging trends in the Chinese market . Environmental indicators were not specifically included .The 16 month effectiveness delay is unexplained in the ICR, and may have reflected shortcomings in preparation as well as general country issues. Supervision was satisfactory. Good working relations with counterparts were established, and the Bank acted in a flexible and timely manner to adjust to rapidly changing circumstances . Although this is unclear from the ICR, it would appear as if the poor performance of the local subcontractor in the manufacture of the towers for the Yangtze River Crossing did not reflect shortcomings in supervision . In the end, the tower construction met the highest international standard. at -Entry :Moderately Satisfactory a. Ensuring Quality -at- b. Quality of Supervision :Satisfactory c. Overall Bank Performance :Satisfactory 9. Assessment of Borrower Performance: The Government’s commitment to the project objectives and sector reform is strong . The power companies and sector agencies performed well, exceptionally well in the case of ECGC . Some problems arose during the design of the competitive market thanks to lack of adequate coordination among concerned agencies, but these were overcome. a. Government Performance :Satisfactory b. Implementing Agency Performance :Highly Satisfactory c. Overall Borrower Performance :Satisfactory 10. M&E Design, Implementation, & Utilization: The design of both the overall development and project objectives and of the key performance indicators is moderately satisfactory. Although the indicators are relevant and easily monitorable, and were appropriately used during supervision, their presentation in the ICR could have been better . Annex 1 shows a mixture of outcome and output indicators without a clear hierarchy and limited causal chain . a. M&E Quality Rating : Modest 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): Environment . This area is not covered in the ICR in an adequate and well organized way . Although there is a discussion of the satisfactory implementation of the Environmental Management Plan (EMP), the project’s categorization (A, B or C) is not mentioned or justified in the appropriate section . Nor is there adequate discussion of training requirements, acquisition of laboratory equipment etc . Although it is stated in the “Monitoring and Evaluation