China - Zouxian Thermal Power Project

A-A 5 S_Cf Document of The World Bank FOR OMCIAL USE ONLY MICROFICHE COPY Report No. P- 5743-CHA rype: (PM) RearNg.P-5743-CHA MASTILOVIC/ X82450 / A8081/ EA2IE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$310 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR THE ZOUXIAN THERMAL POWER PROJECT MARCH 24, 1992 This document has a reseicted distnbuion 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 (As of December 31, 1991) Currency - Yuan (Y) Y 1.00 100 fen $1.00 Q Y 5.38 Y 1.00 m $0.19 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 Kilometer (km) 0.62 miles 1 Gigawatt hour (GWh) X I million kilowatt hours (kWh) i Terawatt hour (TWh) - 1 billion kWh 1 Megawatt (MW) G 1 thousand kW 1 Kilovolt (kV) 8 1 thousand volts ABBREVIATIONS AND ACRONYMS GOC - Government of China SPEPB - Shandong Provincial Electric Power Bureau MOE - Ministry of Energy MOF - Ministry of Finance SEIC - State Energy Investment Corporation TCC - Technical Cooperation Credit  FOR OMCIUL USE ONLY CHINA ZOUXIAN THERMAL POWER PROJECT Loan and Proiect Summary Borrower: People's Republic of China Bencficiarv: Shandong Provincial Electric Power Bureau (SPEPB) Amount: $310 million equivalent Terms: Twenty years, including a five-year grace period, at the Bank's standard variable interest rate Onlendinx Terms: The proceeds of the loan would be onlent from the Government through Shandong Province to SPEPB under a subsidiary loan agreement, with a 20-year term, including five years grace at the Bank's standard variable interest rate. SPEPB will bear the foreign exchange risk and commitment charges. Financint Plan: Local Foreign Total -$ million - IBRD - 310.0 310.0 State Energy Investment Corp. (SEIC) 265.7 - 265.7 Shandong Province 265.7 115.1 380.8 Japanese Grant Facility - 0.9 0.9 Total 531.4 426.0 957.4 Economic Rate of Return: 14 percent Staff Appraisal Report! Report No. 10432-CHA Map: IBRD 22046 This document has a restricted distribution and may be used by recipients only in the perIrm& ice of their official duties. Its contents may not otherwise be disclosed without World Bank auu.,rization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PEOPLE'S REPW3LIC OF CHINA FOR THE ZOUXIAN THERMAL POWER PROJECT 1. The following memorandum and recommendation on a proposed loan to the People's Republic of China to help finance the Zouxian Thermal Power Proj- ect is submitted for approval. The loan for $310 million would be at the Bank's standard variable interest rate, with a maturity of 20 years, including five years of grace. The proceeds of the loan would be onlent from the Gov- ernment of China (GOC) through Skandong Province to the Shandong Provincial Electric Power Bureau (SPEPB) with the same terms as the Bank loan. 2. Backtround. The shortage of electricity has become a major con- straint to China's economic growth and improving the living standards of the population. In many provinces, including Shandong where the proposed project is located, customer demand exceses the available electricity supply by about 20 percent, and this shortage is likely to continue until the end of this decade. The GOC has given high priority to electric power and its strategy is to promote energy conservation, accelerate the pace of indigenous energy resources development, construct large-scale, high efficiency and cost- effective coal-fired thermal power plants, interconnect power systems through extension of transmission networks, and replace obsolete and heavily polluting plants with more efficient units. Moreover, improvements in energy effi- ciency, fuel diversification, and larger scale of plants (which can support more effective combustion controls) will all alleviate the onvironmental impact of electric power growth. 3. To strengthen the institutions in the power industry, the GOC has initiated a number of actions to introduce modern energy technologies and methods, improve energy efficiency and conservation, recognize environmental consequences and mitigate adverse impacts, increase the financial and manage- ment autonomy of power supply entities, and rationalize power pricing policy. Particularly, GOC's "new plant, new price" policy guarantees debt servicing for new power investments with the result that by the mid-1990s the average price of electricity will approximate the long-run marginal cost of power generation. The GOC also has recently announced its intention to gradually unify the old and new system rates into single, more transparent, average tariffs, and has taken concrete measures designed to eliminate gradually other distortions associated with the outmoded structure of power tariffs. Under a number of previous Bank projects and with the assistance of Bank staff, the Chinese have done considerable work to evaluate the economic costs of electric power with a view to refining the ongoing reform of the overall tariff level and structure. 4. Rationale for Bank Involvement. The Bank's strategy in the energy sector, and specifically the electric power subsector, is to support national energy development and technology transfer, energy efficiency and conserva- tion, and improved environmental management. Through both project and sector work, the Bank seeks to encourage policies which provide appropriate incen- tives for sustainable energy development and efficient energy use. The Bank also seeks to promote modern management, and greater enterprise autonomy and accountability.  S. Bank participation in large and complex power projects, with a num- ber of unique technical features, will particularly contribute to the optimal development and use of hydropower and coal resources in China; it will also support needed fuel diversification and the related reduction of atmospheric pollution. The proposed project will encourage development of an efficient power system and modern utility management; it will contribute to the intro- duction of state-of-thb art power system planning, transfer of modern technol- ogies, and extension of technical assistance and staff training. Institution building will be another major objective for the Bank's participation in this project as the beneficiary, Shandong Provincial Electric Power Bureau (SPEPB), needs assistance in strengthening its organization and developing opera- tionallfinancial capabilities. The Bank's sUP2ort will promote economic power pricing in Shandong Province. An action plan for tariff structure improve- ments will be implemented under the project. 6. Proiect Obiectives. The principal objectives of the project are to: (i) alleviate the acute power shortage in Shandong Province; (ii) develop large modern mine-mouth thermal power generating units to make effective use of China's abundant coal resources; (iii) continue the effort to transfer the appropriate advanced technology in plant design and project management for 600 MW thesmal power units; (iv) strengthen SPEPB's capabilities in the areas of environmental planning for thermal power stations and improving the level and structure of electricity tariffs; and (v) upgrade SPEPB's capability in financial management, accounting and budgetary control, and in the operation and maintenance of thermal power plants. 7. Prolect Descrigtion. The proposed project is located about 175 km south of Jinan in Shandong Province. The project consists of: (i) the addi- tion of two 600 MW generating units to the existing Zouxian thermal power plant, to raise its total capacity to 2,40O MW; (ii) construction of 500 kV and 220 kV transmission lines and substations; (iii) provision of consulting services; (iv) provision of technical assistance to study the impact on air quality of thermal power expansion programs and to develop methodologies for selecting sites which minimize adverse environmental impacts in China's coas- tal areas; (v) carrying out a tariff study and a phased, time-bound action plan for improving Shandong's tariff structure; and (vi) a training program for the technical, financial and management staff of SPEPB. Review by local and expatriate engineering consultants confirmed that the design of the proj- ect meets the highest standards and is entirely satisfactory in its overall concept. 8. Environmental Aspects. A comprehensive environmental impact assess- ment report has been prepared by the local consultants in accordance with long-standing GOC environmental procedures for thermal power projects. The report has been reviewed by the Bank and consultants and was found fully sat- isfactory. The proposed project provides for technical assistance for a study on air pollution control. This study is designed to develop guidelines and methodologies for minimizing air pollution from thermal power plants sited in coastal regions of China. The Japanese Grant Facility will be used to finance the study. The contract was signed in July 1991 and the study work already started. 9. Proiect lunlementation. Expatriate engineering consultants (financed under Technical Cooperation Credit, 1664-CRA) will assist In prepar- ing bidding documents, bid evaluation, including the preparation of bid evalu-  - 3 - ation reports, and in interfacing engineering and design for different project islands. The land needed for the power plant is already "-ailable and most of the common facilities have been completed. A well-staffed construction unit has been set up under SPEPB to supervise and coordinate the construction of the project. Bidding documents for major equipment are expected to be issued in June 1992. The turbine-generator units will be procured through a joint manufacturing agreement between Japanese and Chinese firms, which will facili- tate technology transfer and promote the dev.lopment of local industries. Commissioning of the first unit is scheduled tor December 1996, and the second unit twelve months later. 10. Proiecs Sustainability. The institutional and financial sustainabi- lity of the project will be enhanced by the planned strengthening of the bene- ficiary's organizational structure, increased autonomy in managerial, procure- ment, accounting and personnel matters, as well as the capability for debt servicing and internal cash generation for self financing of future invest- ments. Pricing of the project output will be devised in a manner to properly reflect the costs and benefits of this project as well as its role ir. the power grid. Furthermore, the current imperfections in power tariff structures will be addressed and an action plan will be formulated to gradually eliminate distortions in the provincial power riff structure. 11. Lessons from Previous Bank Involvement. The lessons learned from the previous power projects, particularly thermal power projects (Wujing, Beilungang and Yanshi), have been taken into account in preparing the proposed project. These lessons basically emphasize the importance of proper assess- ment of project costs, appropriate technical and financial criteria, improving and accelerating procurement procedures, enhancing the role of project manage- ment, and the timely appointment of engineering consultants. 12. Proiect Cost and Financing. The total cost of the project is esti- mated at $795.0 million equivalent, with a foreign exchange component of $373.5 million (47 percent). Total financial requirements, including interest during construction, amount to $957.4 million. The State Energy Investment Corporation (SEIC) and Shandong Province would cover the financing of local costs and interest during construction. A detailed breakdown of project costs and the financing plan are shown in Schedule A. The amounts and methods of procurement and of disbursements and the disbursement schedule are shown in Schedule B. The project would be completed by June 30, 1998, and the closing date of the Bank loan woule be June 30, 1999. A timetable of key project processing events and the status of Bank Group operations in China are given in Schedules C and D, respectively. A map (IBRD No. 22046) is also attached. The Staff Appraisal Report, No. 10432-CHA, dated March 24, 1992, is being dis- tributed separately. 13. Agreed Actions. Major actions agreed with the GOC were that it would: (i) onlend the proceeds of the proposed Bank loan through Shandong Province to SPEPB with the sams terms as the Bank loan; and (ii) carry out the study on air pollution controi in accordance with the terms of reference and timing agreed with the Bank, and exchange views with the Bank on the progress and findings of the study. 14. Assurances also were obtained from SPEPB that it would: (i) carry out the tariff study and an action plan for the Shandong power system as agreed with the Bank; (ii) take measures, including but not limited to  - 4 - increasing its tariffs, to ensure that it earns a net cash surplus sufficient to meet a minimum of 25 percent of its annual investment program during 1993194 and 30 percent thereafter; (iii) maintain a debt/equity ratio of no more than 75!25 from 1992 to 1996, and 70/30 thereafter; (iv) maintain a debt service coverage of no less than 1.4 timest (v) furnish each year to the Bank, by April 30 of each year commencing in 1993, a rolling eight-year financial plan containing projected income statements, statements of sources and uses of funds, and balance sheets; (vi) incorporate all recommended mitigating mea- sures identified in the environmental impact statement intj the project design; (vii) take all the necessary steps to implement the environmental monitoring program agreed with the Bank; and (viii) carry out relocation of persons affected by the project in accordance with a plan acceptable to the Bank. 15. Prolect Benefits. The project will greatly increase the generating capability of the Shandong power system. An economic analysis of the project, based on optimizing the power system has confirmed that there are no better alternatives than the proposed project for meeting future power demand. The extension of the existing Zouxian power station provides the most cost-effec- tive and efficient method of augmenting power system generating capacity in Shandong Province. The developiment of the project vill also enhance indus- trial and agricultural production in nearby areas. Furthermore, the project will address the subsector's institutional development, system operations, and management and staffing. The economic rate of return, based on the covenanted tariff, is estimated at 14 percent. 16. Risks. No major risks are foreseen for the proposed project. Con- struction risks are within raasonable limits and should be manageable with the continuous supervision arrangements, with assistance of foreign and Chinese consultants, which are already involved in implementation of the project. The economic risks, if any, would be minimal. No specific environmental problems are expected under the project and the implementation of the proposed environ- mental program should enhance the environmental quality in coastal regions and the project area. 17. Recommendations. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. March 24, 1992  -5 - chedule A ZQtl%N THEMAL POWER PROJECT Estimated Costs lnd Flnancing Plan ($ million) Local Foreign Total Estimated Costs Site preparation 8.4 0.0 8.4 Civil vo:gs 87.7 16.9 104.6 Plant equipment and mavirials 144.7 265.1 409.8 Transmission system 63.8 24.4 88.2 Air pollution control study 0.1 0.9 1.0 Training 1.3 2.2 3.5 Tariff action program 0.1 0.1 0.2 Engineering and construction management 30.3 2.6 32.9 Base Cost 336.4 648.6 Contingencies Physical 33.7 15.6 49.3 Price 51.4 45.7 97.1 Total Ptroect Cost la 421.5 373.5 725.0 Interest during construction Lb 109.9 52.5 162.4 Total Financina Reauired 531.4 4260 9S7.4 Financing Plan IBRD - 310.0 310.0 SEIC 265.7 - 265.7 Shandong Province 265.7 115.1 380.8 Japanese Grant Facility - 0.9 0.9 Total 531.4 426.0 957.4 La The project is exempt from taxes and duties. /l Interest during construction (IDC) is based on onlending rate for pro- jected disbursements of loan proceeds. The foreign currency portion of IDC is based on the Bank loan variable rate.  - 6 - Schedule B Page 1 of 2 CHINA ZOUXIAN THERMAL POWER PROJECT Procurement Method and Disbursements ($ million) Procurement Item Procurement Method Total ICB Other N.B.P. /a cost 1. Works 1.1 Site preparation - - 10.0 10.0 1.2 Civil works - - 106.3 106.3 2. Goods 2.1 Plant equipment & materials 273.9 9.0 /b 234.8 517.7 (263.4) (9.0) (272.4) 2.2 Transmission systems 29.9 - 81.8 111.7 (29.9) (29.9) 2.3 Construction equipment 2.0 - 0.5 2.5 (2.0) (2.0) 3. Consultancies 3.1 Engineering & construction management - 3.1 38.1 41.2 - _ (3.1) (3.1) 3.2 Training - 2.5 1.7 4.2 (2.5) (2.5) 3.3 Tariff study - 0.1 0.1 0.2 (0.1) (0.1) 3.4 Air pollution control study - - 1.2 1.2 Total 305.8 14.7 474.5 795.0 (295.3) (14.7) (310.0) la N.B.P. = Not Bank-financed. /b LIB and IS Note: Figures in parentheses are the respective amounts financed by the Bank loan.  -7 - Schedule B Page 2 of 2 Disbursements ($ million) Amount of the loan Percentage of expenditures Category to be allocated to be financed (1) Goods 275.0 1002 of foreign expenditures, 100% of local expenditures (ex-factory), and 751 for local expenditures for other items procured locally (2) Consultants services & training 5.0 1001 (3) Unallocated 30.0 Total 310.0 Estimated IBRD Disbursements ($ million) Bank FY 1993 1994 1995 1996 1997 1998 1999 Annual 12.9 52.9 92.8 98.9 32.7 14.8 5.0 Cumulative 12.9 65.8 158.6 257.5 290.2 305.0 310.0  - 8 - Schedule C ZOUXW' ThDIMAL POWER PROJECT Timetable and Rev Prolect Processing Events (a) Time taken to prepares Four years (b) Prepared by: GOC and SPEPB with Bank asoistan"e (c) First Bank missiont May 1988 (d) Appraisal mission: May 1990 (e) Post-appraisal mission: September 1991 (f) Negotiations: March 1992 (g) Planned Date of Effectiveness: July 1992 (h) List of relevant PCRs and PPARs: none  -9- Schceule 0 Page 1 of 3 STATlS OF Nt NW OPE"RATIS IN TUB PEWOLES RLIC OF CINA A. sTAIuT oF AN Lam An IoA DmiTS (As of 0eCOr 31, 1991) Louv AmsMs (USS million) Credit br- (net of canemltation) ludrFY reraw Purpose Sk 10 Undieb. (a) Fourt. toem ad seventeen credits hea been fully disbirsd. 1320.94 983.9 Of hiceh SECAL: 2967/1932 88 PRC Rural Sector AdJ. 200.0 100.0 .............. 1411 84 PC Polytechnic/Tv University 85.0 16.3 Z382 84 PRC L ug Hydroelectric 141.4 - 1.0 1472 84 PRC Rural Health & d1ical Educ. 85.0 2.2 2444/1500 84 PRC Agicultural Eduation it 45.3 (23.5)(b) 3.3 1516 85 NC Agricuttural Research It 25.0 1.1 1SS1 85 PRC University Development 11 145.0 12.0 2493 8S PRC PoWr 11 117.0 7.4 2501 85 PRC Chb nsun (Luan) Coal Mining 79.5 41.0 178 85 PRC Rural Water Supply S0.0 0.0 2540 85 PoC Railway II 220.0 74.1 1605 85 PRC Forestry Development 47.3 7.1 2579/1606 8S PRC PiShilang*Chachu Area 0ev. 17.0 (75.0)(b) 0.8 250 85 PRC laiyuen Ga Field Technical 25.0 - 4.5 Assistane 1664 86 PNC Technical Cooperation Credit 1t 20.0 1S.3 1671 86 PRC Provincial Universities 120.0 11.5 2678/1680 86 PRC Third Raltway 160.0 70.0 109.5 2689 86 PRC Tianjin Port 130.0 - 53.4 1689 86 PRC Freshwater Flsherfes 60.0 1.8 270 86 PRC Bei tiuang Themal Power 225.0 38.1 2707 86 NC Yantan Nydroelectric 52.0 14.S 2f23/1713 86 PRC Rural Nealth & Preventive Ned. 1S.0 65.0 43.2 173 87 PRC Red Soils ' 40.0 0.8 277 8? PRC Shufkou Nydroelectric 140.0 39.4 27/1763 87 NC Industrial Credit IV (CIS IV) 250.0 50.0 76.6 2784 87 NC Shanghai Mechine Tools 100.0 - 30.1 174 87 PRC Xinjfang Agricultural Dev. 70.0 20.4 2794/1719 87 PRC Shngshai Sewerage 45.0 100.0 94.9 2811/1792 87 PC Beijing-Tfanjin-tanggu ExpresswsY 25.0 125.0 55.1 2812/1793 87 PRC Ganau Provincial Dev. 20.0 150.S 93.4 1835 8 PRC Plaming Support & Special Studies 20.7 14.1 Z838 87 NC Fertilizer Rationalization 97.4 17.4 2852 87 P:; tujing Thermal Power 190.0 60.4 1871 8 PRC Rural Credit III 170.0 15.3 2877/1845 88 PNC Humnpu Port 63.0 25.0 66.4 2907/1875 J8 PRC DOlian Port 71.0 25.0 40.3 1885 88 PC Northern Irrigation 103.0 49.3 2924/188r S PRC Coestal Lards Dov. 40.0 (60.0)(b) 24.1 1900 8S PC Tea her Trainng 50.0 11.0 2943 88 NC Pharmaeauticals 127.0 29.1 2951/1917 8 PNC Sichumn Highway 75.0 SO.0 90.6 2952 8 PRC SbeanMi Highway 50.0 16.7 1918 88 PC Oaxing An Ling Forestry 56.9 23.3 2955 S PRC Seilunewa 11 165.0 - 43.4 295 SS PRC Phosphate Oev. 62.7 58.8 2968 aS NC Rai tay IV 200.0 - 102.8 19" 8 NC Jienl Provincial Nighway 61.0 41.0 19? J9 PRC shemi gicultural 0ev. . 106.0 87.5 2006 St PNC Textbook Developnt - 57.0 4.2 2009 S9 PRC Iterated Reg. elth 52.0 43.7 3006 89 PRC ingbo Shanghai Port 76.4 29.1  - 11n- Schedule 0 Page 2 of 3 LoanV Amcut (USS miIlion) Credit Bor- (net of cancellations) umber FY rower Purpose Bank ICA Undisb. (a) 3007 89 PRC Xiamen Port 36.0 - 29.9 3022 89 PRC Tianjin Light Industry 154.0 121.1 3060/2014 89 PRC Inner Mongolia Railway 70.0 80.0 112.7 2017 89 PRC Shandong Agriculture Dev. 109.0 50.4 3066 89 PRC Hubei Phosphate 137.0 - 132.5 3073/2025 89 PRC Shmndong Prov. Highway 60.0 50.0 91.1 3075 89 PRC Fifth Industrial Credit 300.0 - 199.5 2091 90 PRC N.China Earthquake Reconstr. - 30.0 3.1 2097 90 PRC Jiangxi Agric. Oev. 60.0 50.7 2114 90 PRC Vocational & Tech. Educ. 50.0 39.1 2145 90 PRC mational Afforestation 300.0 270.4 2159 90 PRC Heuei Agricultural Dev. - 150.0 118.8 2172 91 PRC Mid-Yangtze Agricultural Oev. 66.0 55.2 3265/2182 91 PAC Rural Credit IV 75.0 200.0 205.0 3274/2186 91 PRC Rural Indust Tech (SPARK) 50.0 66.3 111.4 3286/2201 91 PRC medium-Sized Cities Dev. 79.6 89.0 154.0 3288 91 PRC Shanghai Industrial Dev. 150.0 - 148.5 2210 91 PRC Key Studies Oevelopment 131.2 122.2 2219 91 PRC Liaoning Urban Infrastructure 77.8 64.2 3316/2226 91 PRC Jiangsu Provl. Transport 100.0 S3.6 136.0 2242 91 PRC Henan Agricul. Dev. 110.0 110.0 3337/2256 91 PRC Irrig. Agricul. Intensif. 147.1 187.9 305.6 3387 92 PRC Ertan Hydroelectric 380.0 261.7 2296 92 PAC Tarim Basin Cc) - 125.0 134.1 2296 92 PRC Shanghai Metro Transport - 60.0 63.5 3406 92 PRC Railways V 330.0 330.0 3412/2305 92 PRC Oauwangba ultipurpose Cc) 30.0 37.0 70.2 2307 92 PRC Cu_ndoN ADP (c) - 162.0 174.0 V415/2312 92 PRC Beijing Envirornmnt (c) 4S.0 80.0 130.9 2317 92 PRC Infectious and Endemic Oisease Cont.(c) 129.6 137.1 s........................... Total 6489.1 5498.7 5670.1 of which has been repaid 408.0 0.4 Total now held by Bank and IDA 6081.2 5498.3 Amowit sold: Of which repaid Total Undisbursed 3015.1 26S4.9 5670.1 (a) As credits are denominated in SORs (since IDA Replenishment VI). %isbursed SDR credit balances are converted to dollars at the current exchange rate between the dollar and the SDR. In sao cases, therefore, the undisbrsed balance indicates a dollar mamt greater than the original principal credit amsmt expressed in dollars. (b) Credit fully disburned. (c) Not yet effective.  - 11 - Schduilo 0 Pae 3 of 3 B. STATEMENT OF IFC IWVESINTS (As of Decieno 31. 1991) Invest- TyR of Lotn Equity Total mmnt No. FY Borrougr Susiness ----- (US Nitlion) ----- 813/2178 85/91 Ouvngzhou and Peuseot Automobite 15.0 4.5 19.5 974 87 China Investment Co. Investment 3.J 0.0 3.0 1020 8? Shenthen China icyctle S.0 5.0 licycles Co. Ltd. amufaecture 1061 8s Crown Electronics Electronics 15.0 15.0 1119 89 Shenzhon Chronar Solar Solar (a) 2.0 1.0 3.0 Energy Energy Total Gross Comitments 40.0 5.S 4S.S Les canellations torminations 2.0 2.0 rprfapmnt and sales Total Commitments no Held by IFC 38.0 5.5 43.5 Total Undisbursed 0.0 0.0 (a) Lon subsequently cancelled. 01/10/92 EA2DR/od  MAP SECTION  IBRD 22046 O5O. O . * . , t,e' ff7- 118' lfff' 12 12,1 132 \, W _ , , ,, S To Ch.