China - Beilungang Thermal Power Project

The World Bank |FILE COPY FOR OMCIuL USE ONLY 2 70 c#6/N Report No. 5889-CHA STAFF APPRAISAL REPORT CHINA BEILUNGANG THERMAL POWER PROJECT May 5, 1986 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performance or their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENUCY EQUIVALENTS Currency - Yuan (Y) US$1.0 = Y 2.8 Y 1.0 = 100 fen = US$0.357 (As of June 1985) Fiscal Year January 1 to December 31 Weights and Measures DWT = Dead Weight Ton km = Kilometer (= 0.62 miles) kWh = Kilowatt hour (= 860.42 kcals) CWh = Gigawatt hour (1,000,000 kilowatt hours) TWh = Terawatt hour (1,000,000,000 kilowatt hours) kW Kilowatt (1,000 watts) MW = Megawatt (1,000 kilowatts) kV = Kilovolt (1,000 volts) kVA = Kilovolt-ampere (1,000 volt-amperes) MVA = Megavolt-ampere (1,000 kilovolt-amperes) TPD = Ton per day mg = Milligram PRINCIPAL ABBREVIATIONS AND ACRONYMS USED BOC - Bank of China ECEPA - East China Electric Power Administration ECEPDI - East China Electric Power Design Institute ECPS - East China Power System COC - Government of China IAEA - International Atomic Energy Agency MOF - Ministry of Finance MWREP - Ministry of Water Resources and Electric Power PCBC - People's Construction Bank of China SAA - State Audit Administration SEC - State Economic Commission SPC - State Planning Commission WREPERI - Water Resources and Electric Power Economic Research Institute ZPEPB - Zhejiang Provincial Electric Power Bureau  FOR OMCIAL USE ONLY CHINA BEILUNGANG THERMAL POWER PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE ENERGY SECTOR ...................... T ..................... 1 A. Overview. 1 B. Resource Endowment .. 2 C. Efficiency of Energy Use. 2 II. THE POWER SUBSECTOR. 3 A. Backgroukrndn .. .. ... . .. ........... 3 B. The Market for Electricity...*.........................ei 3 C. Institutions.... 0-t.. .............. 4 D. Tariffs.... 4 E. Manpower and Training. . . 5 F. Planning... 6 C. Technology Transferr....... 7 R. Subsector Objectives and Policies . . . 7 I. Subsector Proble m.s ... 8 J. Role of the Bank.... 8 III. THE BENEFICIARY.. 9 A. Legal Status and Organization ...... ........... 9 B. Maagm nta...... g em.................. 9 C. Staffing and Training . . . 10 D. Planning, Budget and Control . . . 11 E. Accounting ... 12 F. Audit .................................................. 13 G. Tariffs ..... 14 H. Billing and Collection . . ................................. 15 I. Data Processing . . ........................................ 16 J. Insurance ....... 16 K. Distribution System. ......... ............................ 16 IV. THE POWER MARKET AND THE PROGRAM ............................ . 17 A. The East China Power System . . . 17 B. The Zhejiang Power Grid . ................................. 18 C. Load Forecast ......... ................................... 19 D. The 1985-92 Power Development Program . . . 19 This report was written by K.C. Ling, J. Sopher, W. Cao, A. Liebenthal and I.H. Cheng, who appraised the project in June 1985 with the assistance of S.Z. Sung of AEPED. This dwoment ha a restricd distribution and may be used by recipients only in the performance of their official duties. Its contnts may not otherwise be disclosed without World Bank authoizain.  - ii - Page No. V. THE PROJECT.. . ..................---. -.- - . - - 21 A. Project Objectives..o..... ............................. . 21 B. Project Deic r i p t i o n 22 C. Cost Estimate.i...at................................... 24 D. Financing Plan. 2..............................26 E. Procurement..oentt ............................ o......... 27 P. Project Impleenatono..tation...o. 28 H. Ditorsingtad Reprti.........o. .. .. . ....... ..... o. 29 C. Poaitoring and RePenpina Pe..or tai ne 2..............es. 29 Io E c o l o g y Finances .....2......... ........... .... 29 Jo ii 30 VI. FI Ce-eso .. .. 30 A. needufon.th .e..........o................ ...o......d. 30 B. Financial Sstto 3.................... ....... 31 C. Past and Present Financial Perfomace..* .. ce.. 33 D. Finsmcial Plao lan...... ..*0....... 35 E. Future Finnes..... a......c....s. 36 VTII JUSTIFICATIONe ................ ses...... .e.... 39 A. Need for the Proo j e ct.... 39 B. Leasst Cost Stuu d i es.. 40 C. Economic Rate of Return....................... &...... o.o 41 VIII. AGREEMENTS REACHED AND RECOMMENDATIONS....... ................ 41 ANNEXES 1. Installed Capacity, Electricity Generation and Sales for the Power Subsector 2. Electricity Generation by Region and by Type of Plant 3. Performance Indicators of ZPEPB (1980-84) 4. Present Training Capacity within ECEPA 5. Electricity Tariff of ZPEPB and ECEPA 6. Major Generating Facilities of the East China Power System 7. Installed Capacity, Energy Generation and Sales of Zhejiang Province 8. Energy Consumption by Ca egory of Consumers 9. Belance of East China Power System Load and Capability 10. Training Program 11. Work Program for the Tariff Study 12. Terms of Reference for Consulting Services 13. Project Cost Estimate 14. Disbursement Schedule 15. Chinese National Environmental Protection Standards 16. Income Statements (1980-84) - ZPEPB 17. Balance Sheets (1980-84) - ZPEPB 18. Fund Flow Statements (1980-84) - ZPEPB 19. Forecasts - Income Statements (1985-92) - ZPEPB  - iii - AUNEXES (Cont'd) 20. Forecasts - Balance Sheets (1985-92) - ZPEPB 21. Forecasts - Funds Flow Statements (1985-92) - ZPEPB 22. Assumptions Used for FinanciaL Forecasts 23. Forecast - Supporting Calculations 24. Economic Rate of Return 25. Selected Documents and Data in the Project File CHARTS 1. Organization of MWREP 2. Organization of ZPEPB 3. Development Program of East China Power System 4. Organization of the Construction Unit 5. Project Implementation Schedule MAP Beilungang Thermal Power Project (IBRD 19176)  CHINA BEILUNGANG THERMAL POWER PROJECT Loan and Project Summary Borrower: The People's Republic of China Beneficiary: Zhejiang Provincial Electric Power Bureau (ZPEPB) Amount: US$225.0 million Terms: 20 years, including 5 years of grace, at standard variable interest rate Onlending Terms: The pruceeds of the loan would be onlent from the Government to ZPEPB under a subsidiary loan agreement with a 20 year term, including five years grace and at an interest rate of 8.5% p.a. The foreign exchange risk (between the dollar and RHB) and commitment charges would be borne by ZPEPB. iroject Description: The project seeks to support industrial growth in East China by establishing a base-load thermal power plant along the coast of Zhejiang province using coal from Shanxi. The project would provide for construction of a coal-fired thermal power plant including coal unloading facilities at Beilungang with two generating units of 600 MW each, two single-circuits of 500 kV transmission lines and associated substations, a training program, and a tariff study. The station would be a state-of-the- art plant that would set standards for similar facilities to be built in China in the future. The project would introduce modern techniques in dynamic least cost development programaing and initiate dialog on the modernization of utility management and financial DlAnning, which are important sector issues. Cofinancing through commercial banks or export credits is being considered for the financing of the second unit of major equipment items. The project faces no special risks.  - ii - Estimated Costs: Local Foreign Total -(USS million)- Site development 21.9 - 21.9 BuiLdings and civil works 87.5 34.0 121.5 BoiLer pLant facilities 25.5 98.0 123.5 Turbine generator facilities 17.9 118.0 135.9 Balance of plant and equipment 39.4 70.9 110.3 Transmission lines and substations 78.9 38.2 117.1 Construction and office equipment 11.1 5.0 16.1 Engineering and consulting services 2.5 4.0 6.5 Supervision and administration 15.7 - 15.7 Training 1.6 3.3 4.9 Tariff study 0.5 0.2 0.7 Base Cost: 302.5 371.6 674.1 Physical contingencies 33.7 18.4 52.1 Price contingencies 96.5 104.3 200.8 Total Project Cost: 432.7 494.3 927.0 Interest during construction 36.1 81.8 117.9 Total Financing Required: 468.8 576.1 1,044.9 Note: the project is ezempted from import duties and taxes. Financing Plan: Local Foreign Total - (Us$ million)=- IBBD loan - 225.0 225.0 Commercial bank loans and/or export credits - 156.0 156.0 Local bank loans 468.8 195.1 663.9 Total 468.8 576.1 1,044.9  - iii- Estimated Disbursements: Bank FY 1986 1987 1988 1989 1990 1991 1992 (S million )- Annual - 30.0 40.0 80.0 40.0 25.0 10.0 Cmulative - 30.0 70.0 150.0 190.0 215.0 225.0 Economic Rate of Return: 8.5Z Map: IBRD No. 19176  CHINA BEILUNGANG THERMAL POWER PROJECT I. THE ENERGY SECTOR A. Overview 1.01 China is the world's fourth largest producer and third-largest consumer of commercial energy. Coal is by far the most important source of energy in China, accounting for some 70Z of its commercial energy consump- tion. Oil production has increased rapidly over the last three decades to become an important source of both commercial energy and export earnings, representing about 18% and 20% of the respective totals. Some 20 of oil pro- duction and 1% of coal production are currently exported. Natural gas (2Z), hydroelectric power (5%) and limited quantities of shale oil and geothermal power make up the balance of commercial energy. Non-commercial energy resources supply energy equivalent to about 40% of commercial production. 1.02 China's achievement in developing its energy resources over the last three decades has been remarkable. The annual production of coal has increased from some 60 million tons in 1952 to 760 miLlion tons in 1984. During the same period, annual oil production increased from 0.1 million tons to 114 mil- lion tons, and annual electricity generation increased from Iabout 7.3 TWh to 377 TWh. Nevertheless, the recent economic report on China" has concLuded that the slow growth of energy supplies couLd constitute a constraint to the Covernment's efforts to quadruple the Gross Value of Industrial and Agricul- tural Output (GVIAO) from 1980 to 2000. To ensure sufficient energv for economic development, China will need to increase coal production beyond cur- rent targets for the year 2000 and meet at Least the official output targets set for other types of energy resources. Meeting these targets will require the modernization of technology and management throughout the sector, the increased commitment of financial resources, and strengthening of planning and coordination among the diverse components of the energy sector-and also the transportation sector. In addition, serious subsectoral constraints Which exist in various aspects of technology, logistics, management and incentives need to be overcome. 1.03 In view of the complexity and difficulty of the problems anticipated in the attempt to balance supply and demand, it is crucial for China to formu- late and implement a comprehensive and coherent long-term stracegy directed at both efficient energy development and utilization. The Government, in its Sixth Five-Year Plan (1981-85), accorded high priority to the development of energv and transport sectors. and these objectives will be further emphasized 1/ China: Long Term Issues and Options, World Bank Report No. 5206-C8A, May 1985.  in the Seventh Five-Year Plan (1986-90). 7he Bank has supported the Govern- ment's objectives and formulation of a coherent sector'. strategy through economic and sector work as well as lending operationa. B. Resource Endowment 1.04 China is well endowed with primary energy. Coal and lignite reserves are concentrated in the north and northeast, which have about 70Z of the total recoverable reserves (640 billion tons). Future plans call for increasing coal production significantly, but difficuLty in transport (essen- tially a shortage of railroad capacity) appears to be a serious obstacle to achieving this objective. Biomass fuels are the second most important source of energy in China, accounting for an estimated 30% of final consumption. Recoverable reserves of oil onshore have been variously estimated between 6-15 billion tons, and estimates for offshore oil reserves range from 3-iO biiiion tons. Recoverable reserves of non-associated gas have so far been estimated at about 3 trillion cubic feet (TCF), about 90% of which are located in Sichuan province. In addition, recoverable reserves of associated gas are estimated at about 1.8 TCF. Unofficial estimates of oil shale in China place reserves at 400 billion tons. China's hydropower potential, among toe largest in the world, is estimated at 1900 TWh p.a., of which 87 TWh p.a. have so far been developed. A major constraint has been that the bulk of the undeveloped potential is in four major basins in the southwest and the northwest of China, where large-scale development would require transmission distances of 1,200- 1,500 km to major industrial load centers. The known uranium reserves in China are sufficient to sustain 15,000 MV of nuclear po-w-er plant for 30 years. Although potential sources of geothermal energy are abundant in the moun- tainous southwestern part of the country, their role is likely to remain limited, due to their distance from major load centers. C. Efficiency of Energy Use 1.05 China's consumption of energy per unit of GDP is well above that of any major developed or developing country. Several factors contribute to the high intensity and relative inefficiency of fuel use, which is particularly evident in the industrial sector: the structure of industrial production, the scale of industrial units, the raw materials used, the technology employed, and industrial organization and operating practices. In the late 1970s, it became evident that this high energy consumption rate could not be sus- tained. The Government took administrative measures to reduce the rapid growth of energy consumption including quotas, adoption of energy efficiency meAsures, retrofitting, marginal adjustments of industrial structure and the importation of energy efficient technology. These measures have had some success. Primary commercial energy consumption per unit of industrial and agricultural output has been dropping steadily since 1979. 1.06 As a result, there has been an impressive improvement in overall energy efficiency during the past five years. Energy consumption per unit of GVIAO declined by 7% p.a. during 1979-81, and by 3% p.a. during 1982-83. Preliminary data indicate a further reduction of almost 7% in 1984. Technical and operational improvements are estimated to have accounted for about 40X of these energy savings. The other 60% came from a decline in the relative  importance of heavy industry, the closure of some inefficient small-scale plants and other structural changes within industrial subsectors. 1.07 ALthough the recent administrative measures have been effective in promoting energy efficiency, the process of fine tuning the current system to provide economic signals to consumers and incentives for further improvements in efficiency will become increasingly complex. There is thus a need initially to compLement and gradually to replace the current administrative controls with a more flexible allocation system that would provide more autonomy to individual entities. The system would increasingly rely on an energy price structure that reflects the relitive scarcity of each source of energy. This wouLd influence consumption in the direction of the optimal least cost mix of energy sources required to meet future demand. Such reform of the allocation system would be a key component of a strategy to stimulate the adjustments in the structure of energy consumption which are necessary for balancing energy supply with demand in the long-term. II. THE POWER SUBSECTOR A. Background 2.01 Po-wer development in China has registered high rates of growth during the last three decades. Annual per capita generation of electricity has grown from 8 kWh in 1949 to 363 kWh in 1984. Of the total installed capacity of 79,920 MW in 1984, 32% was hydro and 68% was thermal. Power is distributed through 30 grids, of which 13 (representing over 80% of the total capacity) exceed 1,000 MW each. Energy sales in 1984 reached 319 TWh, having grown at an average 13.8% p.a. since 1949. Of these sales, 80% represented industrial consumption, 9% agricuLtural, 1% transportation and 10% residential and urban commercial usage. Abour 60% of the population has access to elec- tricity. Annex 1 s-mmarizes the growth of installed capacity, electricity generation and sales since 1949, and Annex 2 shows electricity generation by region and by type of plant. B. The Market for Electricity 2.02 Electricity consumption increased at an average rate of 10.7% p.a. between 1965 and 1979, but this rate slowed during 1979-84 when it averaged only 6.4% p.a. The major reason for the lag has been the inability of the power subsector to fully meet demand, particularly in China's major industrial centers. On a countrywide basis, the power shortage was estimated at about 40 TWh p.a. equivalent to over 15% of industrial electricity requirements. The recent economic report on China estimates that, by the year 2000, gener- ation of 960-1,290 TWh (equivalent to 109,000-178,000 MW in additional generating capacity) would be needed to meet the requirements of China's national income growth targets. 2.03 The share of electricity in total energy consumption, has his- torically been low compared to that of other countries. The principal features underlying this low share appear to be: (a) the relatively low level  - 4 - of electricity use in the residential and commercial sectors; and (b) the relative inefficiency of fuel consumption in the industrial sector, which decreases the relative share of electricity in total industrial energy consumption. As a result of China's rapid development in recent years, the share of electricity in total energy consumption has been increasing despite serious supply constraints, rising from about 13X of final commercial energy use in 1970 to about 15Z in 1975 and 18Z in 1980. This share is expected to continue to grow, reaching 26-27Z in year 2000 which is a level comparable to that currently prevailing in other major developing countries. The manufac- turing sector is projected to continue to account for at least three-quarters of final electricity consumption, although electricity use per unit of value added is likely to fall slightly. Electricity use in residential and commer- cial sectors is expected to grow at 11-13X p.a., reflecting a gradual improve- ment in the living conditions of the population and the rapid growth of the services sector. Electricity use in transportation is also projected to grow, reflecting the increase in the share of electric lJcomotives in total railway haulage. C. Institutions 2.04 In the Government reorganization of 1982, the Ministry of Water Resources and Electric Power (MWREP) was designated to oversee electric power development and water resource management, including policy making, system planning and the design, construction and operation of major power and water resource projects. Under MWREP, there are six regional power administrations which coordinate operations and load dispatching for the reFional power grids ana formulate long-term development plans for approval by MWREP and the State Planning Commission (SPC). Below the regional administrations are 22 provin- cial and municipal power bureaus operating as parts of the regional grids, while eight other power bureaus still operate in isolation (see Chart 1, Organization of MWREP). D. Tariffs 2;05 Electricity tariffs have in general remained constant since 1953. Through minor regional adjustments over the years, they have become reasonably uniform all over the country except in the Northeast where costs have been lower because electricity was supplied predominantly by hydro-power generation in the early years. The average revenue per unit has been increasing due to the growing share of consumption by light industries, commercial and residen- tial users which pay higher rates. The national average was about 6.9 fen/kWh (USC2.3/kWh) in 1984 compared with USe7.8 in Kore&, USe7.1 in Indonesia and USC6.3 in Thailand. 2.06 In the context of Chinese accounting practices, which in the past did not include in costs any return on capital (other than depreciation), this tariff yielded satisfactory financial performance for the power subsector as a whole. However, this situation is changing because of recent changes in the financial policies of the Covernment. Since 1982, capital investments in the power subsector have been financed through domestic and foreign borrowing rather than through Government budgetary allocations as in the past. In addi- tion, fuel costs have been rising and are expected to rise further. As a  -.5- result *of these changes in the costs of electricity supply, and in line with the Government's policy to reform its economic allocation system, the Govern- ment is considering a review of the electricity tariffs. To as6ist the Government with this review, the project will include .a tariff study that is designed to (a) transfer a practical, state-of-the-art tariff analysis method- ology to China; (b) serve as a reference for future power tariff adjustments in the East China region; and (c) serve as a model for tariff reform in other regions of China. E. Manpower and Training 2.07 mWREP has about 2.5 million employees of whom about 51% are directly under the Ministry and about 49% are under the provincial administrations. Of the total, lesb than 30% have received formal education beyond junior secon- dary school level. In general, the quality of staff intake has been low; there is a severe shortage of trained manpower, particularly for administra- tive and technical positions. 2.08 In the late 1970s, MWREP initiated a long-term training program to upgrade the quality of its staff at all levels. Although MWREP has organized the program, much of the implementation is carried out by the provincial power bureaus. The Ministry's immediate goal is to establish a comprehensive pro- gram which will systematically provide training to existing staff. MWREP is also strengthening its capacity for full-time training of potential employees through its Education Department which sponsors 4 universities, 39 technical colleges, television and correspondence universities and 27 secondary-level vocational schools. The total number of students was 17,700 in 1984. About 15,300 graduates are assigned to MWREP annually - 7,000 at four-year college level and 8,300 at junior college level. These programs, supplemented by periodic in-service short courses for managerial and technical staff and by on-the-job training for workers, are expected to lead gradually to improve productivity in the sector. The quality of staff will eventually improve, but the rate of change is still low. In support of these activities and the project entity's objectives for human resource requirements, the proposed project would include a training component (paras. 5.07, 5.08). F. Planning 2.09 Power system planning at the regional and provincial levels is carried out by the regional electric power administrations and the provincial electric power bureaus. Overall olanning is the responsibility of the Plan- ning Department of HWREP which reviews the plans proposed by the regional administrations and provincial bureaus on short-term (annual), medium-term (5-years) and long-term (10-15 years) bases. For major hydro projects, the investigation, planning and design are carried out by the regional hydro- electric investigation and design institutes. For system expansion, trans- mission lines and substations above ll0kV and major thermal projects, the studies, planning and design are carried out by the regional electric power design institutes. MWREP, like other line ministries, operates under the overall supervision of SPC and the State Economic Comisuion (SEC), in which are vested the ultimate authority for project approval, budget allocation, financing arrangements and supervision.  - 6 - 2.10 Under current plans, coal-based thermal power generation will continue to provide at least three quarters of total generation till the end of the century. There are important issues in this area concerning plant location and transmission network planning. For example, the locational decisions will have to carefully balance the advantages of plant location at the coal mine sites - requiring long-distance transmission to major load centers - versus development near load centers and port areas to which large quantities of coal would be transported by rail and/or water. Thus planning decisions have to take into account factors such as the regional distribution of coal resources, regional differences in coal development costs, relative costs of coal transportation and power transmission, environmental implica- tions, and external conditions such as the availability of water for cooling purposes. 2.11 As the planning of China's power subsector development becomes increasingly complex, up-to-date system planning techniques will need to be adopted, particuLarly to evaluate the feasibility and optimal timing of large- scale projects with lcng lead times and to make decisions about the generating plant mix, power plant location, and grid architecture. To assist MWREP in acquiring these techniques, arrangements were made under the second power pro- ject (Loan No. 2493) for introducing least cost investment programming tech- niques through the assistance of the International Atomic Energy Agency (IAEA). The Water Resources and Electric Power Economic Research Institute (WREPERI) in Beijing has assisted the East China Electric Power Administration (ECEPA) to formuLate a least cost development program for the East China power grid (para. 4.12). C. Technology Transfer 2.12 The transfer and development of modern technologies will be crucial if China is to increase energy production and efficiency sufficiently to achieve its broader economic goals. Technology transfer is especially important for thermal power plants, where increasing deployment of high- pressure, large-scale units and greater development of cogeneration could reduce net fuel consumption by some 201 by the year 2000, thus greatly allevi- ating pressures on coal supplies and transportation. The Government is already implementing this strategy through the gradual introduction of stan- dardized 300 MW and 600 MW coal-fired units. The Bank would assist the provi- sion of state-of-the-art technolegy in the construction and operation of 600 MW units under the proposed project. H. Subsector Objectives and Policies 2.13 The basic objectives of the Government for the power subsector are to modernize, increase efficiency, and expand it at a rate sufficient to meet the requirements of industrial development. To achieve these objectives, the Government is pursuing the following policies: (a) a phased increase in the financial autonomy of the enterprises; (b) gradual introduction of a more rational pricing system;  -7- (c) introduction of modern techniques in project design and system planning; (d) acceleration of hydro development; (e) development of mine-mouth, coal-fired thermal stations supplemented, where necessary, by stations located near port areas and load centers; (f) construction of extra high voltage transmission lines to transmit power from remote hydro sites and mine-mouth thermal stations and for interconnection between regions; (g) progressive replacement of medium and low pressure thermal units by larger size and higher pressure units to improve fuel efficiency, and the conversion of oil-fired units to coal-firing; (h) development of nuclear units in areas where other forms of energy are scarce; and 5i) improvement of energy efficiency. I. Subsector Problems 2.14 Shortage of Generating Capacity. In spite of considerable growth in generating capacity, supply has lagged behind demand and shortages are reported in the Northeast, North, South and East China grids. The power shortage countrywide was estimated at about 40 TWh in energy in 1984. Demand mnagement has been carried out in these regions by staggering holidays, changing working hours, and load shedding during shortages according to agreed priorities. 2.15 Inadequate Transmission and Distribution Facilities. The develop- ment of transmission lines and substation facilities has lagged behind that of generation. No interconnection has yet been made between regions and there are about eight provincial grids still operating in isolation. MWREP has estimated that China has a shortage of about 10,000 km of transmission lines at voltages above 110 kV. Similar shortages exist in substation capacity. Lower voltage subtransmission and distribution facilities are currently being financed by the provincial governments or municipalities. The local authori- ties usuaLly do not allocate sufficient funds for the improvement and exten- sion of these facilities which results in high system losses and inefficienct use of energy (para. 3.32). 2.16 Financial Constraints. Financial constraints have been a major factor in the shortage of generating capacity and the inadequacy of trans- mission and distribution facilities. In the past, limited budgetary allocations have caused considerable slow-down of power projects. Recently, the funding mechanism has undergone considerable revision (para. 3.10), this, and the possibility of increasing the level of sectoral self-financing through tariff increases, should improve the availability of finance. In the future, tariff increase should lead to increases in the amount of resources available  -8- for investment in the subsector and in the levels of self-financing by the power bureaus themseLves. 2.17 Technology Transfer and Training. Despite some progress, China's technology in thermal power plant design, least-cost investment programming, load dispatching and application of computers falls short of levels prevailing in developed countries. The age profile of the engineering staff is highly skewed: most are in their 50s and 60s. Only strenuous efforts to train young graduates now emerging from universities will narrow the gap. This may involve establishing specialized training institutes as well as providing on- the-job training within the country and training abroad at utility companies and other institutions. A greater understanding of the subsector's training requirements is necessary before an appropriate solution can be developed and encouraged. The Bank plans to address this issue in the context of a subsector-oriented training program. J. Role of the Bank 2.18 The Bank's role has been to use its lending operations to assist the Government in solving technical problems and rationalizing investment deci- sions. The Bank is implementing this strategy by introducting to China modern methods of system planning, project preparation, construction, operation and utility management. 2.19 The first power project (Lubuge hydroelectric, Loan 2382) will provide 600 NW of generating capacity and associated transmission system to the Yunnan power grid. The project successfully promoted cofinancing arrange- ments including export credits for the major electrical and mechanical equip- ment and bilateral grants for engineering services. It also introduced inter- national competitive bidding for civil works and modern construction techni- ques for a rockfill dam, power tunnel and underground powerhouse and enhanced the financial autonomy of the Yunnan Provincial Electric Power Bureau (YPEPB). The project included training for staff of the Runming Hydroelectric Investigation and Design Institute (KHIDI), the Lubuge Construction Management Bureau (LPCMB) and YPEPB in the areas of design, construction management, quality control, accounting and cost control through consulting services. The project also included the upgrading and equipping of an electrical training school in Kunming. 2.20 The second power project (500 kV transmission line from Xuzhou to Shanghai, Loan No. 2493) will transmit a large block of power from a mine- mouth coal-fired thermal power station at Xuzhou (500 KW in operation and 4 units of 200 MW under construction) to the East China power grid. This project also successfully promoted cofinancing with a bilateral loan for the Yangtze river crossing works, and provided for the transfer of the latest technology in 500'kV transmission line and substation design, construction, operation and maintenance to the East China Electric Power Design Institute (ECEPDI) and the Jiangsu Provincial Electric Power Bureau (JPEPB). A training component included the establishment of a training center and equipping of two other technical schools in Nanjing and Shanghai for the operation and mainte- nance of 500 kV transmission lines and substations.  -9- 2.21 Under the proposed project the Bank will finance a fully integrated state-of-the-art 600 MW coal-fired unit that will be used to set technical and economic performance standards for a series of same-size units to be installed in China and a 500 kV transmission system connected to the East China power grid. Co-financing arrangement would be sought for the second 600 MW unit. The project would also introduce the concept of a least-cost expansion plan as a basis for evaluating power projects, and is expected to contribute to the formulation of a more rational tariff through a cooperative tariff study. A program to meet the needs for project-related training and long-term human resources development would also be included. III. THE BENEFICIARY 3.01 The beneficiary of the proposed loan would be the Zhejiang Provincial Electric Power Bureau (ZPEPB). A. Legal Status and Organization 3.02 ZPEPB is a state-owned enterprise under the direction of the East China Electric Power Administration (ECEPA). It is a legal entity with con- tractual and self accounting capacity. It is assigned responsibiLity by the State for the execution within its jurisdiction of the state program for power generation, capital investment, power sales and tariffs, employment and payroll, materials consumption and tax and profit remittances to the State. A charter of ZPEPB acceptable to the Bank has been issued. 3.03 ZPEPB is headed by a director who is appointed by MWREP. Three deputy directors and a chief accountant are functionally responsible to him respectively for capital construction; production, supply and technical mat- ters (concurrently also chief engineer); labor, personnel and training; and finance. Operations are carried out through a number of units engaged in power generation, distribution, construction, and repair. Each of these units is headed by a director with line responsibility to the director of ZPEPB. A chart showing the structure of ZPEPB appears as Chart 2. B. Management 3.04 Under the current institutional framework, in which management of the power sector is highly centralized, ZPEPB appears to be well managed. Recent performance indicators show that ZPEPB has been expanding steadily, that its fuel efficiency has been improving and that its transmission and distribution losses are kept at a reasonable level (paras. 3.29-3.31 and Annex 3). In addition, ZPEPB prepares accounting information in a timely fashion (para. 3.16) and maintains an effective billing and collection system (para. 3.25). However, the institutional framework is moving toward a reduction in centralized control, with greater financial autonomy and responsibility for decision-making on the part of the power bureau, and ZPEBP needs to prepare itself to manage this transition. 3.05 Areas deserving special attention are the upgrading of management skills (paras. 3.13 and 3.17) and the strengthening of financial planning (para 3.12). In particular, managers and administrators need to familiarize themselves with modern concepts of utility management through a carefully  - 10 - designed training program which shouLd include overseas study tours and training as well as seminars organized in China (para. 5.09). The implemen- tation of modern management methods and the strengthening of financial planning will require the introduction of a management information system (pars 3.13) that is oriented towards meeting the needs of management, rather than just the reporting requirements of the Government. 3.06 ZPEPB is capable of formulating its expansion program and implementing 200 MW thermal units and medium-scale hydroelectric projects. The second stage extension of Zhenhai thermal power plant (4 x 200 MW) is being implemented by ZPEPB in a satisfactory manner with good progress and field management. However, for a large project such as Beilungang, outside assistance will be required in least-cost programming on a regional basis, engineering and design, procurement and construction management (para. 5.12). C. Staffing and Training 3.07 As of the end of 1984, ZPEPB had about 27,800 employees out of 136,600 within ECEPA. Except f2 r the core group of key technical and manager- ial personnel who are assigned_ by MWREP, virtually all of ZPEPB's employees are recruited locally. They are hired on a permanent basis with the exception of some contract labor for construction work. Of the total employed, only about 6% have received technical training equivalent to or above college level. The majority of the workers have less than nine years of formal education. ECEPA and ZPEPB face the same issues, nAmely inadequate training capacity, low quality teaching staff, out-of-date curricula, lack of facilities and equipment and shortage of management skills. Annex 4 shows the training capacity within ECEPA (totalling about 2,660 trainees p.a. at present and 3,303 including planned expansions) and ZPEPB (totalling 520 trainees p.s. at present and 660 including planned expansions). This capacity meets only abut one fourth of the annual requirements of ECEPA and ZPEPB. Additional facilities should be made available to increased capacity of training, both pre-service and in-service, and at all three levels: engineers, technicians and skilled workers. New equipment, particularly a simulator for training operators for the to-be-built 600 MS plant, is required. 3.08 The Education Division of ZPEPB administers four training insti- tutes, including one staff college, one electrical institute and two skilled workers schools. The purpose of these schools is to train junior engineers, mid-level technicians and skilled workers. With three-year courses, the Staff College trains employees who have graduated from high school and have at Least two years of practical experience. The Hangzhou Electric Institute and the two skilled workers' schools (located at Buzhou and Jingde respectively) educate junior high and high school graduates for 2-4 years depending on their curricula and background. In 1984, over 400 graduated from these four schools; nearly 60X in fields related to power generation, about 30Z in transmission and distribution and about 10% in capital construction. Special- ized training in accounting, finance and management sciences is limited. Although day-to-day operations of the bureau are adequately manned and 2/ Engineers with formal university education are centrally trained and assigned by MWREP.  - 11 - on-the-job training is commonplace and generally sufficient, ZPEPB recognizes the need for training especially in its new undertakings such as the proposed project where experience and expertise are lacking. A training component therefore has been included in the proposed project (para. 5.02). D. Planning, Budget and Control 3.09 The power bureaus are responsible for developing annual and five- year production and investment plans which are integrated with the national plans and are approved, through MWREP's auspices, by SPC. MI4EP plays a major role in shaping the bureaus' individual plans. The ministry, in conjunction with regional administrations, uses past operating results received from all the bureaus to compile the quantities and prices to be used by the bureaus in developing their operating plans. The investment plans are developed on a project by p,roject basis using estimates of quantities and prices of inputs included in feasibility studies prepared by the regional design institutes; however, the investment plans do not take account of the movement of prices after completion of final design. Thus, in the planning process, the bureaus themselves do not make a direct linkage between their projected costs and their reaLized costs. The bureaus' plans also include monitoring indicators; and variance analyses are conducted to compare actual results with plan tar- gets. Because the bureaus themselves do not link their plan targets directly to realized performance, the variance analyses have limited usefulness as measures of the efficiency of their operations or the cost effectiveness of their investment programs. Still, wirhin the environment of a centrally planned economy where large grants have been used to finance significant portions of investment and prices have been maintained at stable levels, this approach to planning has served reasonably well. 3.10 So far, all funds required for implementation of the Annual construction plans were provided through grants allocated from the State budget. Funds to cover operating requirements were similarly provided in the form of Working Capital Funds. Under China's economic reform program which began about 1978, major changes have been introduced to encourage the economic use of the Government's limited resources. Funds for major new investments are now being provided in the form of loans from the People's Construction Bank of China. These loans are made only after projects have been extensively reviewed and cost estimates have been approved. In addition to construction loans, nov bearing an annual interest rate of about 3.6%, funds are provided for working capital by way of non-repayable government contributions, which ._.rry annual finance charges of 3Z. The construction loans are scheduled for repayment over 15 years after completion of the work. 3.11 So far, the prices the power bureaus have been paying for the constituents of operating and investment costs have been controlled, mostly at constant le-vels. However, the Government has recently announced that it is liberalizing the pricing system so that, slowly, prices will move toward market levels. In coming years, with the power bureaus continuing to expand their operations rapidly (paras. 6.14-6.16) and costs increasingly becoming variable (para. 6.08), actual cost data used together with projections of (i) productivity improvements, (ii) future price movements, and (iii) interest rates will become more important as the basis for planning and budgeting. Moreover, the cost of inefficiency will certainly increase as the power bureaus expand their operations, and management will need to enhance its  - 12 - ability to evaluate and control more closely the operations of individual cost centers. 3.12 The Chinese system of planning and budgeting does not include provision for long-term financial planning. In connection with the Lubuge Hydroelectric Project (Loan 2382), the Bank furnished MWREP with a financial forecasting model to enable the power bureaus to study the impact of both their expansion plans and variations in prices on their future financial posi- tions. Assurances have been obtained that, by December 31 of each year commencing December 31, 1986, ZPEPB will furnish to the Bank a financial plan containing forecast income statements, sources and uses of funds, and balance sheets for the next five years rolled forward each year. In addition, an understanding has been reached that, at the Bank's request, ZPEPB would furnish to the Bank financial projections for an additional three years subsequent to the period of the above-mentioned financial plan,. 3.13 MWREP needs to modernize the financial and management procedures being followed by the power bureaus. Such a modernization would entail, inter alia, development of a management information system which would report financial and statistical information about the operations and new investment activities of the power bureaus on a more comprehensive and systematic basis. The resultant data base would provide a more comprehensive and systematic set of tooLs which, when coordinated with planning and budgeting processes, will permit closer monitoring and control of the performance of the power bureaus, both by internal management and by MWREP. Such a data base would also enable the power bureaus to make direct linkages between planning forecasts and realized performance and thereby play a more active role in the planning and budget processes. 3.14 Adapting a management information system to the power subsector is a relatively new and complex process in China. Many power bureaus are currently purchasing sophisticated data processing equipment (para. 3.26). The Bank engaged a consultant to conduct an assessment of the potential uses for that equipment in selected bureaus. The consultant has furnished an analysis of the needs of those bureaus for a management information system. From that diagnosis, the Bank and MWREP are engaging in a policy diaLog aimed at developing components of future projects which address modernization of the financial management practices of the power bureaus. ZPEPB has participated in the initial assessment of its data processing requirements and wilL participate in succeeding steps. E. Accounting 3.15 Each of ZPEPB's operating departments maintains financial accounts which are consolidated with those of all other ZPEPB operating departments. The construction units, however, maintain independent accounts which are not  - 13 - consolidated with those of ZPEPB's operating units.31 Accounts are prepared on an accrual basis using a double entry system. Financial regulations are established by MOF for all sectors. The HOF regulations cover matters such as accounting methods and procedures; form of accounts; procedures for distribu- tion of net income and depreciation; taxation; allocations to and use of pro- ceeds from Special Funds; etc. MOF reviews these regulations and correspond- ing accounting standards on an ongoing basis. These are supplemented by detailed implementation procedures issued by MWREP. 3.16 ZPEPB's operating departments prepare accounting information in a timely fashion monthly; headquarters compiles consolidated accounts monthly, quarterly and annually. Although the operating departments furnish consider- able data to headquarters in connection with their monthly accounts, much of this data is lost in the consolidation process. The operating units them- selves, however, do exercise some control over operating costs and conduct simple variance analyses to establish the reason for variations in costs from planned levels. 3.17 ZPEPB has an extensive accounting staff who are well trained in maintaining ledgers and compiling accounts in the prescribed manner. As the accounts are used essentially to document historical financial information, ZPEPB neither possesses nor has perceived a need for other financial analy- tical skills. As and when ZPEPB modernizes its financial management prac- tices, its staff will have to become capable of using management techniques involving the analysis of financial and cost accounts for decision-making purposes. Since the need to develop these skills is not pecuLiar to ZPEPB, appropriate training can be financed through either a free-standirg future power subsector training project or training components of future power projects. F. Audit 3.18 The financial statements of entities in China have not been subject to omprehensive audit. Historically, various bodies - including MOF, line ministries, tax bureaus, provincial financial bureaus, and banks - have conducted checks to meet their own particular needs. None of these bodies prepared an independent report on the accuracy and reliability of the annual financial statements. China has had no professional body of auditors to prescribe auditing standards and regulations. 3.19 With the ratification of China's new Constitution by the People's Congress in December 1982, this situation has changed. A State Audit 3/ As these constructions units are under MWREP's jurisdiction and have only an arms length relationship with ZPEPB, this accounting treatment is correct. However, since ZPEPB's investments have been financed with grants tht were disbursed directly to the construction units, traditional Chinese accounLing substantially understates ZEPBP's construction work in progress. For presentation to the Bank in co-ection with appraisal of the proposed project, ZPEP8 included construction work in progress, taken from the accounts of the construction units, on its balance sheet for the period 1981-1984 (Annex 17).  - 14 - Administration (SAA) was established in September 1983. It has the status of a ministry and reports directly to the State Council. Provincial audit bureaus are also being established in each province and mnnmicipality (large cities). HOF has been responsible for establishing the audit bureaus and has drafted regulations and standards based on international auditing practices in other countries. These regulations have recently been endorsed by the State Council. 3.20 Thus far, SAA's Foreign Investment Audit Bureau is conducting the audits of bank-financed projects. The Bank assisted the establishment of this Bureau (which focusses particularly on audits of enterprises or undertakings with foreign participation in the form of equity or loan finance) through an initial 3-week training seminar (held in late 1984); extensive coments on SAL's first few draft audit reports; and a follow-up seminar, planned for the near future, to review field experience with SAA's staff and clients. As evidenced by its first few audit reports, SAA's work is of a generally good standard; now, the challenges are to enhAnce the central and provincial staff capacity for handling an increasing work Load and to develop procedures for ensuring a consistently high standard of work in the provincial offices. 3.21 The Zheijiang ProvinciaL Audit Bureau (ZPAB) was established in December 1983. Under the proposed project, ZPEPB's annuaL accounts will be audited by ZPAB under the overall supervision of SAA. This arrangement is satisfactory. Assurances have been obtained from ZPEPB that it will furnish annual financial statements, certified by an acceptable auditor, to the Bank within six months of the end of each financial year. GOC has agreed that project accounts for training to be implemented by ECEPA and the tariff study (paras. 5.09 and 5.11) would be similarly audited and provided to the Bank. Internal Audit 3.22 ZPEPB has an internal audit staff who conduct examinations, sche- duled at least once during a year according to regulations, of the accounts of each operating unit; they also conduct occasional spot checks. ECEPA staff may also perform occasional spot checks of the accounting records of the mem- ber bureaus. The object of these exAminations is primarily testing for accuracy and compliance with K4F regulations. The internal aud unit does not review the appropriateness of accounting regulations and procedures; such reviews are considered to be the responsibilities of MOF and MWREP respec- tively. The Bank will review the internal audit function during project implementation with a view toward increasing its efficacy and usefulness to ZPEPB. The first audit of ZPEPB in 1986 is expected to include a review and comnentary on ZPEPB's internal checks and controls and internal audLt. C. Tariffs 3.23 ZPEPB's tariff is shown in Annex 5. The same tariff has been in effect since 1962. Large industrial consumers pay both a demand charge, based on maximum demand or capacity of the installed transformer, and an energy charge based on consumption; all other consumers pay only an energy charge. Its rate for domestic customers (15 fen or about USC 5.4 per/kWh) is about twice as great as ZPEPB's average revenue per kWh of 7.4 fen (about USC 2.6kWh); agricultural and large industrial consumers pay an energy charge averaging about 5.6 fen/kWh (USC 2.0/kWh), or about 76X of the average. The  - 15 - average of 7.4 fen/kWh represents about 65Z of long run marginal cost. Domestic consumers do not pay a connection charge to ZPEPB but must provide their own meter and internal wiring. Industrial consumers pay connection charges, which include the cost of substations, distribution lines (if any), and service drops. H. Billing and Collection 3.24 As of end of 1984, ZPEPB had about 737,810 customers categorized according to Table 3.1. Table 3.1: DISTRIBUTION OF ZPEPB's CONSUMERS (As of December 31, 1984) No. of consumers Sales Z (GWh) Z Heavy industriaL 13,071 2 4,953 44.6 Light industrial 21,569 3 2,206 19.9 Agriculture 324,421 44 3,135 28.2 Transportation 19297 - 44 0.4 Municipal 377,452 51 761 6.9 Total 737,810 100 11,099 100.0 Municipal customers consist of households or establishments being served by ZPEPB's own municipal offices. In some cases, these consist of municipalities purchasing power in bulk from ZPEPB for distribution and retailing under their own auspices. More typically, this category incLudes domestic households, co-mercial enterprises, public service establishments such as schools and hospitals, and specific municipal users, such as public transportation systems and street lighting. Although this category contains the largest number of customers, they consume only about 71 of ZPEPB's power sales. 3.25 ZPEPB conducts its billing and collection activities through 79 district offices. All industrial consumers are charged in advance three times per month at 10 day intervals based on estimated usage derived from their pro- duction or sales plans. At the end of the month, meters are read and adjust- ments to reflect actual usage are included in the first bill for the following month. Industrial and commercial consumers are all metered individually. Low voltage customers, are billed once a month based on actual usage. Many house- holds are metered individually; however, some domestic consumption is metered at the apartment building level and the charge is distributed among residents by internal arrangement. Agricultural consumption is generally metered at ZPEPB's lowest voltage step down transformer serving the particular coAmmune; the commune arranges appropriate distribution of the charges among individual farmers.  - 16 - 3.26 Industrial and commercial consumers pay their bills through direct debit from their bank accounts. Domestic and agricultural consumers render payments to meter readers who return to metered premises about three days after presenting the bill. Consumers are responsible for paying at ZPEPB offices amounts due that were not collected by meter readers. Regulations stipulate that consumers with unpaid amounts outstanding are disconnected after ten days; because this regulation is enforced, consumers very rarely allow themselves to fall into arrears. Any nonagricuLtural consumer is required to pay a charge for reconnection. These arrangements (para. 3.26) have established a reliable cash flow from sales and reduced ZPEPB's net accounts receivable to an unusually low level; at the end of 1984 they were less than Y 2 million on sales of Y 730 million. Obviously, this is satisfactory to the Bank. I. Data Processing 3.27 Recently, ZPEPB has purchased computer facilities which it plans to use to modernize its design functions. Computers would also contribute sub- stantially to modernization of ZPEPB's financial management practices. ZPEPB has agreed that the Bank may assess its data processing needs in the context of optimizing use of the equipment that ZPEPB has or plans to purchase. Since completion of that assessment, the Bank is planning to engage in a policy dialog with MWREP regarding introduction of data processing in the power bureaus and use of computers for financial and management purposes. The proposed project includes a provision for office equipment and personal compu- ters for ZPEPB. J. Insurance 3.28 Prior to 1980, coverage was not available from the domestic insurance industry and ZPEPB relied on self-insurance. ZPEPB currently is sufficiently liquid to self-insure all of its assets adequately against normal levels of risk. However, as agencies such as the People's Insurance Company of China are now making various kinds of commercial coverage available, ZPEPB intends to consider purchasing commercial insurance, particularly for vehicles and public liability, if satisfactory coverage can be obtained at a reasonable price. Z-P