China - Second ERTAN Hydroelectric Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6571-CHA 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 $400 MILLION AND PROPOSED GUARANTEES OF COMMERCIAL FINANCING IN AN AMOUNT EQUIVALENT TO $150 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR AN ERTAN II HYDROELECTRIC PROJECT JULY 11, 1995 This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of March 1, 1995) Currency Yuan (Y) Y 1.00 = 100fen $1.00 = Y 8.5 Y 1.00 $0.12 WEIGHTS AND MEASURES km Kilometer (= 0.62 miles) kWh = Kilowatt hour (= 860.42 kcal) GWh = Gigawatt hour (1,000,000 kilowatt hours) TWh = Terawatt hour (1,000,000,000 kilowatt hours) MW = Megawatt (1,000 kilowatts) kV = Kilovolt (1,000 volts) MVA Megavolt-ampere (1,000 kilovolt-amperes) ABBREVIATIONS AND ACRONYMS EAR - Environmental Assessment Report EHDC - Ertan Hydroelectric Development Company, Ltd. EMP - Environmental Management Program GEF - Global Environment Facility MOEP - Ministry of Electric Power MOF - Ministry of Finance SDB - State Development Bank SDIC - State Development Investment Company SEPC - Sichuan Electric Power Company SIC - Sichuan Investment Company SOEs - State-Owned Enterprises SPC - State Planning Commission FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY CHINA ERTAN II HYDROELECTRIC PROJECT LOAN AND PROJECT SUMMARY Borrower: People's Republic of China Beneficiary: Ertan Hydropower Development Company, Ltd. (EHDC) Poverty Category: Not applicable. Amount: $400.0 million equivalent. A guarantee operation is also proposed to support commercial financing of $150 million equivalent. Terms: Twenty years, including a five-year grace period, at the Bank's standard variable interest rate. Commitment Fees: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Onlending Terms: The proceeds of the loan would be onlent from the Borrower through Sichuan Province to the Beneficiary under a subsidiary loan agreement on the same terms and conditions as the Bank loan, with the Beneficiary bearing the foreign exchange risk. Financing Plan: See Schedule A. Economic Rate of Return: 16 percent Staff Appraisal Report: Report No. 14072-CHA Map: IBRD 26552 Project ID Number: CN-PA-3507 This document has a restricted distribution and may be used by recipients only in the performrance of their official duties. Its contenls may not otherwise be disclosed wiLhout World Bank authorization.   MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND GUARANTEE TO THE PEOPLE'S REPUBLIC OF CHINA FOR AN ERTAN II HYDROELECTRIC PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to China for the equivalent of $400 million, and a proposed guarantee operation to support the equivalent of $150 million in commercial loans to help finance the Ertan II Hydroelectric Project. The loan would be at the Bank's standard variable interest rate, with a maturity of 20 years, including 5 years of grace. The proceeds of the loan would be onlent to the Ertan Hydropower Development Company, Ltd. (EHDC) through Sichuan Province on the same terms and conditions as the Bank loan, with EHDC bearing the foreign exchange risk. The proceeds of the commercial loans under the guarantees would be onlent to EHDC under the same terms and conditions as the commercial loans. 2. Background. Expansion of the power supply and improvements in the power industry's efficiency are essential to sustaining China's rapid economic growth, mitigating adverse environmental impacts of energy development, and improving living standards. China is steadily improving the efficiency of energy use through reliance upon economic energy pricing and a well-developed institutional network for energy conservation. Consumer prices for the major forms of energy now largely reflect economic costs. Electricity conservation is promoted through a comprehensive network of specialized agencies at all levels, and electricity conservation investments are made through a variety of programs coordinated with provincial power companies and industrial consumers. Even with yet more dramatic success in conservation, however, generation capacity must increase by at least 17,000 MW a year in order to avoid exacerbation of the serious power shortages that already exist. The Government has adopted the strategy of constructing large and cost-effective power plants to meet demand and accelerate the replacement of obsolete and heavily polluting plants with more energy-efficient and environmentally sustainable units. 3. To continue the efficiency improvements and increase capital mobilization necessary for further development of the power industry, China is now actively pursuing an ambitious program of power sector reforms. Particular progress has been made in sector decentralization, improvements in cost recovery through major tariff reforms, and diversification of financing sources, including development of a variety of independent power generation schemes. The pace and depth of the sector reforms have picked up during 1993-94, and the Government's integrated agenda for action now includes: (a) commercialization and corporatization of power companies, together with achievement of greater enterprise autonomy, (b) further measures to rationalize power tariffs, (c) realignment of the regulatory and legal framework, including the promulgation of a National Electricity Law, and (d) active encouragement for diversification in financing for power development, including private sector participation. Although consensus exists at the national level on the basic directions of the program, the difficult task of implementing  - 2 - the reform program at provincial and local levels throughout the country is just beginning. While actions have been initiated on all of the above fronts, measures to commercialize the power entities are now a focal point in the overall effort. These measures include separating the producing entities from the Government, granting them autonomy in business decision-making, and subjecting them to market forces in an arms-length regulatory framework. 4. In line with Bankwide policies, the Bank's energy assistance program in China places special emphasis on sector reform and energy conservation. During the last two years, the Bank's technical assistance program for the power sector has focused on helping the Chinese in assessing reform options (through a study funded by the Bank's Institutional Development Fund), defining implementation strategies (through sector work on power sector reform), and exploring options for mobilizing further resources to meet the capital needs of sector development (through informal sector work). The study (Strategic Options in Power Sector Reform in China, 1993) and sector report (China Power Sector Reform: Towards Competition and Improved Performance, 1994) provide vehicles for dialogue between the Bank and Chinese institutions. The energy conservation support program includes technical assistance through the Global Environment Facility (GEF), lending support in selected industrial projects, environment and energy, and development of a series of new GEF investment operations. The power sector lending program now focuses on assistance for the detailed aspects of implementation of the power sector reforms, primarily in the less-advanced inland provinces, as well as reducing the power shortages that continue to hamper development and slow the market orientation of the sector. 5. Sichuan Province, where the proposed project is located, is one of the less developed provinces in China. Implementation of power sector reforms also lags behind that in more advanced provinces where the Bank has been active in supporting reforms through lending operations. The process of restructuring the power industry of the province from management by a government department to management by suitably autonomous power companies is just beginning. Recent years have brought substantial progress in power price reform, but in this area as well, Sichuan also lags behind other provinces. 6. Project Objectives. The main objectives of the proposed project are to: (a) alleviate an acute shortage of electricity in a least-cost manner by completing the construction of the ongoing Ertan hydroelectric project; (b) assist in implementing power subsector reforms in Sichuan Province, through development of the beneficiary as an autonomous, commercially oriented entity; (c) promote competition at the generation level through establishment of market-oriented commercial arrangements between power generation and marketing entities; (d) encourage alternative financing strategies for power development; (e) establish management and accounting systems to enable the Beneficiary to operate efficiently in a commercial environment; (f) transfer modern technologies and environmental and resettlement management practices for hydroelectric power plants; and (g) upgrade management and operation capabilities through well-focused staff training programs.  7. Project Description. The proposed project would comprise completion of the construction of the Ertan hydroelectric development and power sector reform, technical assistance, and training components to ensure the smooth transition of EHDC from a construction-focused company to the most important independent power producer of the province. The Ertan project, appraised in 1991 and supported by Bank Loan 3387-CHA, includes the construction of a 240 m high dam and an underground powerhouse complex with an installed capacity of 3,300 MW, resettlement of about 35,000 people, an environmental management program, consulting services, studies, and training. There are virtually no changes in the technical scope covered by the first project and the proposed project. The power sector reforn component of the proposed project consists of a time- bound Reform Implementation Plan that includes: (a) revision of EHDC's charter to incorporate it as a limited-liability company, in accordance with China's new Company Law; (b) organizational restructuring and establishment of accounting and management systems; and (c) finalizing contractual arrangements for sale of power and energy generated by the Ertan power plant to protect EHDC's commercial interests and ensure economic and efficient dispatch. The technical assistance and training components are designed to assist EHDC to: carry out its Reform Implementation Plan and prepare it for future operations; design and manage the construction of the Ertan development; and implement the Environmental Management Program (EMP). 8. Project Costs and Financing. The Executive Directors approved the first loan for the Ertan Hydroelectric Project in July 1991. The loan amount of $380 million, requested by the Governrnent, was relatively low in comparison to the estimated foreign costs of $1,155 million at that time. The first loan was earmarked for financing of the first five years of construction, and in consideration of the size of this project with a nine-year construction period, it was understood that the Bank would consider a request for a second loan for the remaining period of the project. Nevertheless, the Government has agreed to provide financing for the entire project, irrespective of the Bank's provision of a second loan. The total financing requirements for the proposed project, excluding interest during construction (IDC), are estimated at $2,200.2 million equivalent. A second Bank loan of $400 million and commercial financing of $150 million supported by Bank guarantees are proposed to cover the remaining foreign exchange costs, excluding IDC. Retroactive financing, totaling $30 million, would be provided for expenditures incurred before loan signing for expenditures on ongoing contracts which were commenced under the first loan to avoid disruption of the construction work. Detailed cash flow forecasts, provided by the Beneficiary, indicate that the first loan (Loan 3387-CHA) is expected to be fully disbursed by June 30, 1995 and that anticipated contractual payments between July 1, 1995 and the expected date of signing of the proposed loan (around the end of September 1995) amount to about $30 million. Financing of local costs would come both in the form of loans and equity contribution. A breakdown of costs and the financing plan are shown in Schedule A. 9. The Proposed Guarantees. Following the endorsement of the Guarantee Review Committee of the proposed guarantee operation for the Ertan II Hydroelectric Project in May 1995, the Bank and the Ministry of Finance (MOF) determined the detailed financing framework for the guarantee operation. The borrower of the Bank-guaranteed financing would be the People's Republic of China represented by the MOF and the proceeds would be onlent to the beneficiary, EHDC. The financing would consist of a  - 4 - $100 million Eurodollar syndicated loan (the Dollar Loan) and a $50 million equivalent Euro Deutsche Mark syndicated loan (the DM Loan), both from commercial banks. These would match revenue flows in renminbi to meet civil work contract payments in DM over time. Both the Dollar Loan and the DM Loan would be on a floating interest rate basis. The maturity of both loans would be 15 years, with a 5-year grace period and semiannual equal installments of the principal thereafter. The summary terms are as shown in Annex 1. 10. It is proposed that the Bank guarantees would be in the form of partial credit guarantees to cover the principal amount outstanding on and after 12 years, on an accelerable basis on and after that point. The nominal amount of the guarantee at the maximum would be approximately $50 million, or 33 percent of the total financing mobilized by the guarantees. The Bank's exposure under the guarantee represented by the present value of the guarantees would be approximately $20 million initially, or 14 percent of the total loan amount, calculated at a discount rate for the respective currencies. Two options would be included in the proposed guaranteed loans to allow a further reduction in the Bank's exposure under the guarantees: the borrower would have prepayment options and the lender would have guarantee release options, canceling both the loan and the guarantee. Since the borrower would be the government of the People's Republic of China itself, the Bank would charge a net guarantee fee of 0.25 percent per year of the Bank's exposure. This is the same arrangement as the previous Bank-guaranteed financing for China for the Zhejiang Power Development Project approved by the Board in February 1995. 11. MOF conducted competitive bidding for the financing in June 1995 and awarded a conditional mandate to an underwriting group of 14 commercial banks consisting of: the Asahi Bank, Bank of America NT&SA, Daiwa Overseas Finance, the Fuji Bank, the Industrial Bank of Japan, the Korea Development Bank, the Long-Term Credit Bank of Japan. the Mitsubishi Trust & Banking, the Sakura Bank, Sanwa International Finance, the Sumitomo Bank, Sumitomo Trust & Banking, the Tokai Bank, and the Zenshinren Bank. The mandate is for both the Dollar Loan and DM Loan as one package and on a fully committed and underwritten basis, subject to the approval of the Board of Executive Directors of the World Bank and the conclusion of documentation satisfactory to MOF, the Bank and the lenders. The mandated financial institutions have agreed in principle that the legal terms and conditions of the loan and the guarantee will need to comply with the policy and legal requirements for the Bank's guarantee. Consents under the Bank's Articles will be obtained from member countries for the currencies and markets involved in the financing. 12. The mandated pricing for both loans is an interest rate of six-month LIBOR+0.3 percent per year and an up-front management fee of 0.5 percent (i.e., an all- in cost of LIBOR+0.35 percent on a simple yield basis). This is very favorable pricing for loans with a final maturity of 15 years, well below the average pricing of commercial bank borrowing (about LIBOR+0.5-0.6 percent all-in) by Chinese sovereign entities for a much shorter maturity of 5 to 7 years. The Ertan financing represents the Bank's third guarantee operation for China. The mandated pricing is an improvement over the attractive pricing achieved for the previous Bank-guaranteed commercial bank borrowing by China for the Yangzhou Thermal Power Project closed in May 1994 (LIBOR+0.475  percent all-in); and for the Zhejiang Power Development Project closed in March 1995 (LIBOR+0.4 percent all-in). The very low cost was achieved despite a reduction of the Bank's guarantee coverage from China's previous transactions. 13. Project Implementation. EHDC is responsible for implementation of the project and has created a specialized construction unit to manage project implementation. Assistance in engineering, procurement and construction management is being provided by foreign engineering consultants. Review functions are undertaken by three expert panels. one each for technical aspects, resolution of disputes in the civil contracts, and environment and resettlement matters. Construction of the Ertan hydroelectric plant is progressing satisfactorily, on schedule and within budget. Procurement of the works and goods has been virtually completed in the first phase of the project. The two main civil contracts were awarded to well-qualified foreign/local joint ventures. The main contract for generating equipment was awarded to an experienced foreign supplier who is subcontracting a substantial proportion of the work to local manufacturers. Schedule B shows procurement arrangements and the disbursement schedule. 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 is also attached. The Staff Appraisal Report, No. 14072-CHA dated July 7, 1995, is being distributed separately. 14. Project Sustainability. The institutional and financial sustainability of the project will be secured by EHDC's Reform Implementation Plan, which provides for its incorporation as an autonomous limited-liability company (completed), organizational restructuring, setting up of accounting and management systems, and a power sales agreement for the sale of power from the Ertan plant. The principles of the power sales agreement, which ensure EHDC's financial viability, and economic dispatch of power produced have been agreed. The projected funds flow statement is provided in Schedule E. 15. Lessons from Previous Bank Experience. Project Completion Reports (Report 12549) has been completed for the Lubuge Hydroelectric Project (Loan 2382- CHA) and the Yantan Hydroelectric Project (Loan 2707-CHA). The Shuikou Hydroelectric Project (Loans 2775-CHA and 3515-CHA) is also nearing completion. Lessons learned from these projects informed the preparation of the first Ertan project, and are largely responsible for its successful execution to date. For example, weaknesses in the International Competitive Bidding (ICB) process for civil works, particularly in regard to prequalification of foreign/local joint ventures, were corrected; as a result, strong joint ventures have been employed for Ertan. Similarly, the ICB process for mechanical/electrical equipment has been adjusted to ensure that, in all cases, a technically and financially qualified manufacturer takes full responsibility for supply. Local procurement in previous projects has generally achieved its objectives of not adversely affecting the project in terms of cost, quality and completion time. Exceptions have been taken into account in the current project, in that high voltage (500 kV) transformers are now internationally procured (as quality of the Chinese supply is still variable). The Chinese also learned from the earlier projects the value of experienced foreign consultants and expert review panels and, for the Ertan project, authorities have reinforced the experienced local organizations with the best expertise available internationally.  - 6 - 16. In some projects, executing entities were slow to start institutional development studies. Therefore, in the proposed project, procurement of consultants for the organization and management study has already commenced, and the supervision plan includes appropriate specialists to ensure that these studies achieve their objectives. 17. Other lessons emerge from earlier reservoir resettlement projects in China: the need to allow for inflation in resettlement budgeting, the need for flexibility in resettlement planning to accommodate the preferences of affected persons, and the need for independent monitoring. All of these aspects have been taken into account in the proposed project. 18. Performance in environmental aspects of previous Bank-financed Chinese hydroelectric projects has been satisfactory, particularly measured against the standards applying at the time of their approval. During recent years, environmental awareness has improved in China and authorities have given more emphasis to the environmental assessment during preparation of the first Ertan project, and to upgrading of monitoring and mitigation plans during preparation of the current project. 19. Bankwide experience has shown that the main reasons for ineffective environmental management and monitoring in all types of environmentally significant projects are: (a) the lack of a well-designed and specific EMP that is included in Bank documentation and disseminated among and understood by relevant staff of the implementing agency; (b) failure to specify persons within the implementation unit to be responsible for plan implementation; (c) inadequate provision of counterpart funds; and, (d) failure to feed the results of environmental monitoring back into the management program. Potential problems (a) and (b) have been directly addressed in project preparation. Problem (c) has been a shortcoming in China in the past, but experience in recent years, particularly on large dam developments such as Ertan and Xiaolangdi, has been very encouraging. Reason (d) will be addressed through periodic reviews by an Environmental Resettlement Panel (ERP) and by regular inclusion of environmental specialists in Bank supervision missions. 20. In power sector restructuring and reform implementation, international experience shows that even in countries with strong legal systems and open economies, the time needed to build consensus on the reform directions, establish a new regulatory framework, and implement structural changes can be very long. In the United Kingdom, the pioneer country in implementing power sector reforms, it took: (a) about 10 years for a government strongly committed to divesting and "demonopolizing" the utility sectors to build consensus and put out the "White Paper" that laid out the reform options; (b) two more years to draft the law and the licenses; and (c) another two years (for about 1,000 full-time specialists) to design the mechanisms to introduce competition. Currently, only large customers can choose their supplier and full choice for customers has been delayed until 1998. In the United States, where the power industry is mostly private, significant development of the independent power business began to take place more than 10 years after the enactment of the basic legal framework-which was intended to encourage cogeneration and alternative generation technology, not the business of independent merchant generation using medium- to large-scale conventional technologies. The first important structural change, under discussion in California, is planned to go into effect  - 7 - after 1996. In Central and Eastern European countries, hopes for achieving quick progress in economic regulation in all sectors have not materialized because of perceived weaknesses in their legal systems and the lack of interest of governments in attracting large-scale private investments because of overcapacities and slow growth of demand. Considering China's 40-year history of a command and control economy, the progress achieved during the last decade and especially during the early 1990s clearly indicates the government's commitment to reform and to increasing the credibility of its macroeconomic policies, but the process will take time and require tremendous efforts as the country is learning by doing as well as from the experiences of other countries. As experience in Central and Eastern Europe shows, the pursuit of transparency and accountability of energy and other utilities is the best way to achieve progress in economic regulation. Along the same lines, the Bank's two-pronged power assistance program in China focuses on (a) policy dialogue at the central government level to clarify the concepts of, and stress the need for, economic regulation and an adequate legal framework through technical assistance activities; and (b) requirement and implementation of adequate and reliable accounting and financial systems, proper methods for financial control of state-owned enterprises, encouragement of diversification of ownership, and adequate and binding contractual arrangements to increase transparency and accountability through lending projects. 21. Rationale for Bank Involvement. The proposed project is consistent with the Country Assistance Strategy (CAS) for China presented to the Board on June 1, 1995. For the power sector, the CAS identified six focal points for Bank assistance: (a) commercialization and corporatization of operating companies and enterprises; (b) realignment of regulatory and legal frameworks; (c) introduction of competition and transparency; (d) ensurance of adequate tariff policies; (e) development of new sources and methods of financing; and (f) transfer of new technology and modern operational and environmental techniques. The proposed project supports the Bank strategy in most of the above areas. Commercialization and corporatization are achieved through the incorporation of EHDC as a limited-liability company, and through its Reform Implementation Plan. Competition, transparency and tariff reform are promoted through the establishment of EHDC as an independent power producer with a fully commercial power sales agreement with Sichuan Electric Power Company (SEPC), which ensures an economic tariff level and structure. Financing diversification is supported through the use of the Bank-guaranteed commercial cofinancing. The power sector and tariff reform measures of the proposed project complement those agreed to be implemented as part of the recently approved Sichuan Power Transmission Project (Loan 3848-CHA). The latter project targeted reform of the overall power sector in Sichuan, and particularly SEPC. It provided for: (a) studies to define the optimum structure of the power sector in Sichuan Province; (b) implementation of a package of province-wide tariff reforms, that would more than double the power sale price by the year 2000 and improve tariff structure to adequately reflect costs of supply; and (c) separation of government functions from, and incorporation of, SEPC. Taken together, the two projects provide for comprehensive power sector reform at the provincial level. 22. Agreed Actions. Assurances were obtained from the Borrower that it will: (a) ensure that SEPC enters into a power sales contract with EHDC by June 30, 1997; (b) ensure that resettlement under the project is carried out in accordance with an agreed  - 8 - resettlement program; and (c) onlend the proceeds of the proposed Bank loan through Sichuan to EHDC on terms and conditions satisfactory to the Bank. 23. To ensure adequate and quantifiable monitoring of the project's progress, assurances were obtained from EHDC that it will: (a) furnish the Bank with audited project accounts, statements of expenditures, and financial statements within six months of the end of each fiscal year; (b) take all measures required on its part to enter into the power sales contract with SEPC; (c) continue to employ its Special Board of Consultants and Environmental and Resettlement Panel; (d) implement organizational improvements, and the development of improved accounting and financial management systems; (e) carry out a management development and training program; (f) carry out an environmental management program in a manner satisfactory to the Bank; (g) carry out resettlement of affected persons in accordance with a resettlement plan acceptable to the Bank; (h) prepare annual reports integrating the results of monitoring activities carried out in the previous year; (i) take all necessary measures to ensure that it meets its financial performance targets (rate of return on average net revalued fixed assets in operation of 12 percent in 1999 and 15 percent thereafter, debt service coverage ratio of 1.3 times in 1999, and 1.5 times thereafter, and debt/equity ratio of no more than 85/15 in 1995-97, 80/20 in 1998- 2000, and 70/30 thereafter); and (j) furnish to the Bank, by April 30 of each year, a rolling eight-year financial plan containing projected income statements, statements of sources and uses of funds, and balance sheets. 24. Environmental Aspects. The project is classified as Category A for purposes of environmental review. An Environmental Assessment Report (EAR) and summary for the Ertan Development. prepared by the Beneficiary with the assistance of international consultants, were both updated in February 1995. With respect to biodiversity, the main impact arises due to inundation of land and water resources by the reservoir. The reservoir will be 140 km long, with a remarkably low average width of about 550 m. The biodiversity impacts will be registered on terrestrial ecosystems, due to inundation, and on aquatic systems, due to the conversion of a riverine environment to a lacustrine environment. Most of the terrestrial vegetation to be inundated is of neither conservation nor economic value. The total area of forest to be inundated is about 3,000 ha, of which 2,000 ha is regularly harvested fuelwood forest and the remaining 1,000 ha consists of scattered remnants of broadleaf evergreen forest of the type that once used to dominate the area. To compensate for losses, the EMP provides that EHDC will assume management responsibility for a 100 m (vertical elevation) buffer zone above the maximum operational water surface elevation along the entire periphery of the reservoir and implement active management plans for the preservation and enhancement of remnant tracts of native broadleaf forest. Regarding fish and other aquatic organisms, potential impacts arise due to the conversion of 140 km of riverine habitat into a lake-like habitat and the physical barrier to migratory fish posed by the dam. The latter is of limited significance since none of the identified species is migratory. Species requiring high- velocity flow conditions and feeding primarily on bottom-dwelling organisms will not survive in the reservoir area although they will be replaced either naturally, or through stocking programs, by other, better adapted species. Public health is another important consideration. Malaria was eradicated in the area in 1991 and special precautions are being financed under the project to ensure that this situation is maintained. Schistosomiasis was also eradicated by the late 1980s, but the EMP includes several  specific subcomponents directed at eliminating any residual risks. In addition, the World Health Organization's Chief of Schistosomiasis. who accompanied the Bank mission to the area, is a member of the Environment and Resettlement Panel. 25. Resettlement. The Ertan development requires the resettlement of approximately 35,000 people living in 31 villages (24,000 rural people) and one town (11,000 urban people) in five counties of Sichuan Province. The 101 km2. 140 km long reservoir transverses a steep, sparsely populated mountain valley. No Yi national ethnic minority people will be displaced by the project, since they occupy higher-altitude slopes of the valley. Those affected by the project are from the Chinese majority people who occupy the lower-altitude alluvial soils along the banks of the Yalong River and its tributaries. The Resettlement Plan agreed with the Bank for the first phase of the Ertan project based on 1984 census data has been updated through a 1992 census conducted by resettlement officials when the physical survey and demarcation of the reservoir boundary was completed. Approximately 5,500 rural people were resettled in the first phase to higher elevations in their own villages or to newly reclaimed agricultural lands in new irrigation zones. Lessons learned during that operation such as the need for timely compensation, extensive community participation, and adequate recordkeeping, have been incorporated into the revised Resettlement Plan. A notable feature of the ongoing resettlement process is the extensive involvement of the affected population and of community leaders in both planning and implementation. Also, the real value of compensation has been maintained through adjustments to offset the effects of inflation. The revised Resettlement Plan meets all requirements of the Bank's resettlement policy guidelines. 26. Project Benefits. This large power project will greatly increase the critically needed power generation and transmission capability of Sichuan Province and the Southwest China power grid as a whole. According to comprehensive analyses, the project is clearly part of the least-cost development program of the Sichuan Province power system for meeting future power supply needs. The internal economic rate of return (IERR) is estimated at about 16 percent. Other intangible benefits are also important, such as institutional development, improved power grid operation, and the favorable influence on society at large by relieving hardships caused by the acute power supply shortages. 27. The IERR of the project was estimated, in the base case, using the economic costs of the project and associated transmission lines to the main load centers, and the average price paid by the final consumers for electricity purchased from nonutility producers in 1994 as a minimum proxy for the economic value of electricity. If only the incremental costs are taken into account, the IERR would increase to 23 percent. 28. The IERR would be reduced by 1 percent in the case of a cost overrun of 15 percent, and by 2 percent if the commissioning of the power plant were delayed by one year. The IERR would be equal to the 12 percent discount rate if: (a) the full cost of the project (including sunk costs) is taken into account, and (i) the project were to experience total cost overruns of 70 percent; (ii) the commissioning of the first unit were delayed three years; and (iii) the plant  - 10 - output were to be reduced by 30 percent or sold at 26 fen/kWh, 30 percent lower than the base case economic price; (b) only incremental investment costs are considered and (i) the project were to experience incremental cost overruns of 200 percent; (ii) the commissioning of the first unit were delayed six years; and (iii) the plant output were reduced by 50 percent or sold at 18 fen/kWh, 50 percent lower than the base economic price. 29. Risks. The main risks generally associated with hydroelectric projects are related to potential cost and schedule overruns due to geological and hydrological uncertainties, and contractor and construction supervision inadequacies. For the current project, foundations and all riverbed work are completed, cofferdams are designed to survive overtopping, dam concreting has commenced, underground works are at an advanced stage and the first generating unit is on schedule for commissioning in July 1998. The risk of major cost or time overruns due to implementation problems is thus very low. 30. Design quality has been assured by the reinforcement of the very experienced design institute with foreign consultants, and through the periodic reviews by a consultant panel composed of world-renowned Chinese and foreign experts. Construction quality is assured by the award of civil works contracts to very well qualified foreign/local joint ventures. Risks associated with the quality of the generating equipment have been minimized by the employment of well-qualified foreign manufacturers for all key equipment, and strict pre- or post-qualification criteria in all other cases. Guarantees are also backed up with performance bonds. 31. There is a risk of delay due to nonavailability of local funds (mainly from provincial sources). This is a generic problem in China in the current macroeconomic environment. Therefore, this issue was examined in detail by Bank staff at appraisal, and has also been given increased emphasis by national authorities in their project approval process. EHDC was able to demonstrate that, to date, funds availability has not constrained project execution, and because of the high priority of the project, such constraint is unlikely in the future. 32. The most critical risk regarding environmental management would be failure to implement the public health management components. However, all of the management and control measures, in general, are standard practice on large infrastructure development projects in China, and the record on recent projects has been very good. The risk that the resettlement plan will not achieve its objectives appears to be small, given the advanced stage of the process and the demonstrated responsiveness of the responsible authorities to views of the affected people. An independent monitoring program also mitigates that risk. 33. The market risk relating to power sales is minimal, given current power shortages, the continuation of strong demand growth, and the projected low price of the power in comparison to alternative sources. Nevertheless, risks have been further reduced by obtaining the assurances of the Government, the owner of the SEPC, on the principles of the power sales agreement. These have been elaborated in a memorandum of understanding, between SEPC and EHDC. Elimination of market risk, and the explicit  - 11 - inclusion of financial performance targets in the principles of the power sales agreement, also ensure that financial risks are low. 34. Bank experience in other major hydroelectric projects is that, in the Chinese context, operation and maintenance risks are relatively low. Operation and maintenance procedures are institutionalized, very experienced staff are selected for key positions, and training of other staff is commenced long before commissioning. For the proposed project, these procedures have been reinforced through Bank support to training programs, and covenants relating to inspection and maintenance procedures. Economic risks are judged to be minimal. 35. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and I recommend that the Executive Directors approve it, with retroactive financing in an aggregate amount not exceeding $30 million equivalent. I also recommend that the Executive Directors approve the provision of the partial credit guarantees for the proposed $150 million equivalent syndicated commercial loans to the People's Republic of China. The terms and conditions of the guarantees will be determined by either the President, the Vice President for East Asia and the Pacific, or the Vice President, Cofinancing and Advisory Services and the Executive Directors will be informed accordingly. If there is any substantial change in the terms and conditions of the guarantees as described in this Memorandum, the approval of the Executive Directors will be sought. James D. Wolfensohn President Washington, D.C. July 11, 1995 Attachments  - 12 - Schedule A CHINA ERTAN II HYDROELECTRIC PROJECT ESTIMATED COSTS AND FINANCING PLAN ($ million) Local Foreign Total Estimated Cost Preparatory works 107.5 0.0 107.5 Land acquisition & resettlement 168.2 0.0 168.2 Civil Works 413.3 639.9 1,053.2 Administration and other works 145.9 2.7 148.6 Electromechanical equipment 109.3 146.7 256.0 Power transformers 6.1 22.2 28.2 Gates/hoists, etc. 36.5 3.5 40.0 Engineering & construction management 44.4 28.2 72.6 Environmental protection 6.8 0.5 7.3 Reform plan & financial MIS 0.5 2.0 2.5 Training 3.1 3.0 6.1 Total Base Cost 1,041.5 848.6 1,890.1 Physical contingencies 68.6 62.3 130.9 Price contingencies 27.4 19.1 46.5 Taxes and duties 132.7 0.0 132.7 Total Project Cost 1.270.2 930.0 2,200.2 Interest during construction 459.3 280.6 739.9 Total Financing Required 1,729.5 1,210.6 2,940.1 Financing Plan Loan 3387-CHA 0.0 380.0 380.0 IBRD loan 0.0 400.0 400.0 State Development Investment Co. (equity) 261.6 0.0 261.6 State Development Bank (loan) 490.7 103.4 594.1 Construction Bank (central) 77.5 31.3 108.8 Sichuan Investment Co. (equity) 261.6 0.0 261.6 Sichuan Investment Co. (loan) 566.8 134.7 701.5 Construction Bank (province) 1.4 0.0 1.4 Sichuan Electric Power Co. (equity) 21.8 0.0 21.8 Local bank 48.1 11.2 59.3 Guarantee financing 0.0 150.0 150.0 Total 1_729.5 1,210.6 2.940.1 Notes: 1. Base costs are at early 1995 prices and prevailing exchange rate of $1/Y 8.5. 2. Interest during construction (IDC) is based on onlending rates for projected disbursements of loan proceeds. The foreign currency portion of IDC is based on the Bank's variable loan rate, and on respective rates for guaranteed commercial financing tranches.  - 13 - Schedule B Page 1 of 2 CHINA ERTAN II HYDROELECTRIC PROJECT SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS ($ million equivalent) Procurement Method /a ICB Other/b NBF/c Total Cost Civil and Other Works Preparatory works - - 109.1 109.1 Resettlement - - 175.4 175.4 Land requisition - - 12.3 12.3 Arch dam (Lot I) 661.5 - - 661.5 (369.8) (369.8) Powerhouse (Lot II) 561.2 - - 561.2 (269.2) (269.2) Administration and other - 3.2 151.4 154.6 works (3.2) (3.2) Goods Electromechanical equipment 335.3 5.0 - 340.3 (87.4) (5.0) (92.4) Power transformers 42.0 - - 42.0 (7.1) (7.1) Gates/hoists 3.9 - 42.7 46.6 (0.6) (0.6) Consultancies Engineering and construction - 79.5 - 79.5 management (31.5) (31.5) Environmental protection - 7.8 - 7.8 (0.5) (0.5) Reform plan and financial MIS - 3.0 - 3.0 (2.3) (2.3) Training - 6.9 - 6.9 (3.4) (3.4) Total 1,604.9 104.4 490.9 2,200.2 IBRD Loan (363.3) (36.7) (400.0) Loan 3387-CHA (370.8) (9.2) (380.0) Guarantee Financing 150.0 150.0 /a Amounts include taxes and duties of $132.7 million. Figures in parentheses are the respective amounts to be financed under the prospective Bank loan. /b Consultants employed in accordance with Bank guidelines. Equipment purchased by LIB or shopping. /c NBF = Not Bank-financed.  - 14 - Schedule B Page 2 of 2 DISBURSEMENTS ($ million) Amount of the Loan Percentage of Expenditure Category allocated to be financed (1) Works 270.0 100% of foreign expenditures (2) Goods 85.0 100% of foreign expenditures, 100% of local expenditures (ex-factory), and 75% for local expenditures for other items procured locally (3) Consultants services & training 12.5 100% (4) Unallocated 32.5 Total 400.0 Estimated IBRD Disbursements Bank FY 1996 1997 1998 1999 2000 2001 -- -------------------------- $ million -------------------------------- Annual 104.7 110.6 90.6 49.9 31.2 13.0 Cumulative 104.7 215.3 305.9 355.8 387.0 400.0  - 15 - Schedule C CHINA ERTAN II HYDROELECTRIC PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare the project: 20 months (b) Prepared by: EHDC with Bank Assistance (c) First Bank mission: February 1988 (d) Appraisal mission departure: March 1995 (e) Negotiations: June 1995 (f) Planned date of effectiveness: October 1995 (g) List of relevant PCRs and PPARs: Lubuge Hydro (LN 2382-CHA), PCR Power Transmission (LN 2493-CHA), PCR This report is based on the findings of an appraisal mission that visited China in March 1995. The report was prepared by V. Mastilovic (Senior Engineer), E. Sun (Financial Analyst), N. Berrah (Senior Economist), B. Trembath (Senior Engineer), S. Kataoka (Senior Engineer), R. Goodland (Environmental Advisor), W. Partridge (Principal Resettlement Specialist), T. Matsukawa (Financial Officer) and K.C. Ling (Consultant). Peer reviewers comprised: W. Cao (technical), M. Layec (economic), and S. Shum (institutional and financial). The Division Chief is Richard S. Newfarmer and the Department Director is Nicholas C. Hope.  - 16 - Schedule D Page 1 of 3 STATUS OF BANK GROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of June 30, 1995) Loan/ Amount (USS million) Credit Bor- (net of canceLLations) Nunber FY rower Purpose Bank IDA Undisb.(a) 36 Loans and 43 credits have been fully disbursed. 3,571.8 2,659.3 - Of which SECAL: 2967/1932 88 PRC Rural Sector Adj. 200.0 93.2 - 2678/1680 86 PRC Third Railway 160.0 (70.0)(b) 1.3 2723/1713 86 PRC Rural Health & Preventive Med. 15.0 65.0 10.9 1764 87 PRC Xinjiang Agricultural Dev. - 70.0 0.5 2794/1779 87 PRC Shanghai Sewerage 45.0 (100.0)(b) 2.3 2811/1792 87 PRC Beijing-Tianjin-Tanggu Expressway 25.0 125.0 7.2 2812/1793 87 PRC Gansu Provincial Dev. (20.0)(b) 150.5 13.5 1835 87 PRC Planning Support & SpeciaL Studies - 20.7 2.4 2852 87 PRC Wujing Thermal Power 190.0 - 3.3 2877/1845 88 PRC Huangpu Port 63.0 (25.0)(b) 2.3 1885 88 PRC Northern Irrigation - 103.0 7.0 2943 88 PRC Pharmaceuticals 127.0 - 0.4 2951/1917 88 PRC Sichuan Highway 75.0 (50.0)(b) 8.2 2955 88 PRC BeiLungang II 165.0 - 19.8 2958 88 PRC Phosphate Dev. 62.7 - 4.9 2968 88 PRC Railway IV 200.0 - 4.5 1984 89 PRC Jiangxi Provincial Highway - 61.0 0.8 1997 89 PRC Shaanxi Agricultural Dev. - 106.0 9.1 2009 89 PRC Integrated Reg. Health - 52.0 13.4 3006 89 PRC Ningbo & Shanghai Ports 76.4 - 2.8 3022 89 PRC Tianjin Light Industry 154.0 22.5 3060/2014 89 PRC Inner Mongolia RaiLway 70.0 (80.0)(b) 6.0 3066 89 PRC Hubei Phosphate 137.0 - 22.7 3073/2025 89 PRC Shandong Prov. Highway 60.0 (50.0)(b) 21.8 2097 90 PRC Jiangxi Agric. Dev. - 60.0 0.5 2114 90 PRC Vocational & Tech. Educ. - 50.0 2.7 2145 90 PRC National Afforestation - 300.0 72.8 2159 90 PRC Hebei Agricultural Dev. - 150.0 40.8 2172 91 PRC Mid-Yangtze Agricultural Dev. - 64.0 10.1 3265/2182 91 PRC RuraL Credit IV 75.0 200.0 23.5 3274/2186 91 PRC Rural Indust Tech (SPARK) 50.0 64.3 21.7 3286/2201 91 PRC Medium-Sized Cities Dev. 79.4 52.9 31.8 2210 91 PRC Key Studies Development - 131.2 27.9 2219 91 PRC Liaoning Urban Infrastructure - 77.8 9.6 3316/2226 91 PRC Jiangsu Provl. Transport 100.0 (53.6)(b) 24.4 2242 91 PRC Henan Agricul. Dev. - 110.0 62.0 3337/2256 91 PRC Irrig. Agricul. Intensif. 147.1 187.9 79.9 3387 92 PRC Ertan Hydroelectric 380.0 8.7 2294 92 PRC Tarim Basin - 125.0 55.0 2296 92 PRC Shanghai Metro Transport - 60.0 17.8 3406 92 PRC Railways V 330.0 - 73.8 3412/2305 92 PRC Daguangba Multipurpose 30.0 37.0 8.5 2307 92 PRC Guangdong ADP - 162.0 102.4 3415/2312 92 PRC Beijing Environment 45.0 80.0 77.0 2317 92 PRC Infectious and Endemic Disease Cont - 129.6 112.6 3433 92 PRC Yanshi Thermal Power 180.0 - 19.6 2336 92 PRC Rural Water Supply and Sanitation - 110.0 70.9 2339 92 PRC Educ. Development in Poor Provs. - 130.0 62.1 3443 92 PRC RegionaL Cement Industry 82.7 - 49.2 3462 92 PRC Zouxian Thermal Power 310.0 - 171.9 3471 92 PRC Zhejiang Provincial Highway 220.0 - 128.1 2387 92 PRC Tianjin Urban Devt. & Envir. - 100.0 73.0  - 17 - Schedule D Page 2 of 3 Loan/ Amount (USS milLion) Credit Bor- (net of cancellations) Number FY rower Purpose Bank IDA Undisb.(a) 2391 92 PRC Ship Waste Disposal - 15.0 17.3 2411 93 PRC Sichuan Agricultural Devt. - 147.0 97.4 3515 93 PRC Shuikou Hydroelectric II 100.0 - 67.2 2423 93 PRC Financial Sector TA - 60.0 56.2 3530 93 PRC Guangdong Provincial Transport 240.0 - 154.3 3531 93 PRC Henan Provincial Transport 120.0 - 78.7 2447 93 PRC Ref. Inst'L and Preinvest. - 50.0 43.6 3552 93 PRC Shanghai Port Rest. and Devt. 150.0 - 115.4 2457 93 PRC Changchun Water Supply & Env. - 120.0 125.9 2462 93 PRC Agriculture Support Services - 115.0 91.1 3560/2463 93 PRC Taihu Basin Flood Control 100.0 100.0 129.6 2471 93 PRC Effective Teaching Services - 100.0 106.8 3572 93 PRC Tianjin Industry 11 150.0 - 150.0 3582 93 PRC South Jiangsu Envir. Prot. 250.0 - 227.8 2475 93 PRC Zhejiang Multicities Devt. - 110.0 106.0 3581 93 PRC Railway VI 420.0 - 324.1 3606 93 PRC Tianhuangping Hydroelectric 300.0 - 274.4 3624/2518 93 PRC Grain Distribution 325.0 165.0 487.3 2522 93 PRC Environmental Tech. Assist. - 50.0 49.0 2539 94 PRC Rural Health Workers Devt. - 110.0 104.1 3652 94 PRC Shanghai Metro Transport II 150.0 - 46.8 3681 94 PRC Fujian ProvinciaL Highways 140.0 - 120.1 3687 94 PRC Telecommunications 250.0 - 225.3 2563 94 PRC Second Red Soils Area Devt. - 150.0 137.1 2571 94 PRC Songliao PLain Agric. Devt. - 205.0 197.3 3711 94 PRC Shanghai Environment 160.0 - 155.0 3716 94 PRC Sichuan Gas Devt & Conservatn. 255.0 - 239.1 3718 94 PRC Yangzhou Thermal Power 350.0 - 320.8 3727 94 PRC Xiaolangdi Multipurpose 460.0 - 366.4 2605 94 PRC Xiaolangdi Resettlement - 110.0 110.4 2616 94 PRC Loess Plateau Watershed Devt. 150.0 150.2 2623 94 PRC Forest Resource Devt. & Prot. - 200.0 209.3 3748 94 PRC National Highway 380.0 - 338.9 3773/2642 95 PRC Ent. Housing/Soc Sec Reform 275.0 75.0 347.8 3781 95 PRC Liaoning Environment 110.0 - 98.6 3787 95 PRC Xinjiang Prov. Highways 150.0 - 150.0 2651 95 PRC Basic Ed for Poor/Minorities - 100.0 101.9 3788 95 PRC Shenyang Industrial Reform 175.0 - 175.0 2654 95 PRC Economic Law Reform - 10.0 10.6 2655 95 PRC Comp Maternal/Child Health - 90.0 93.5 3846 95 PRC Zhejiang Power Development (c) 400.0 - 400.0 3847 95 PRC Technology Development (c) 200.0 - 200.0 3848 95 PRC Sichuan Power Transmission (c) 270.0 - 270.0 3873/2709 95 PRC Fiscal TA (c) 25.0 25.0 50.0 3874/2710 95 PRC Yangtze Basin Water Res Devt (c) 100.0 110.0 210.0 3897 95 PRC Railway VII (c) 400.0 - 400.0 3906/2744 95 PRC Southwest Poverty Reduction (c) 47.5 200.0 247.5 3910 95 PRC Inland Waterways (c) 210.0 - 210.0 3914/2756 95 PRC Iodine Deficiency Dis. Control(c) 7.0 20.0 27.0 Total 13,895.6 8,381.2 10,040.1 of which has been repaid 1,172.8 18.1 TotaL now held by Bank and IDA 12,722.8 8,363.1 Amount soLd: Of which repaid - - TotaL Undisbursed 6,761.7 3,278.3 10,040.0 (a) As credits are denominated in SORs (since IDA Replenishment VI), undisbursed SDR credit balances are converted to dollars at the current exchange rate between the dollar and the SDR. In some cases, therefore, the undisbursed balance indicates a dollar amount greater than the original principal credit amount expressed in dollars. (b) Credit fully disbursed. (c) Not yet effective.  - 18 - ScheduLe D Page 3 of 3 B. STATEHENT OF IFC INVESTMENTS (As of June 30, 1995) Invest- Type of Loan Equity Syndicate Total ment No. FY Borrower Business --------- (USS Million) ---------- 813/2178 85/ Guangzhou Auto Automobile 15.0 4.5 - 19.5 86/91 974 87/88 China Investment Co. DFCs 3.0 - - 3.0 1020 88/ Shenzhen China Bicycle 17.5 3.4 - 20.9 92/94 Bicycles Co. Ltd. Manufacture 1066 89 Crown ELectronics ELectronics 15.0 - - 15.0 1119 89 Shenzhen Solar Electric 2.0 1.0 - 3.0 Light/Power 3423 93 Shenzhen PCCP Manufacturing 4.0 1.0 - 5.0 3150 93 Yantai Mitsubishi Cement Cement 28.7 2.0 - 30.7 3881 94 China Walden Mgt. Capital Mkts. - 7.5 - 7.5 4470 94 Dynamic Growth Fund Venture 20.0 - 20.0 CapitaL 4534 95 Newbridge Inv. Securities Mk - 10.0 - 10.0 Financing Instit. 3746 95 Dalian Glass Glass 30.5 - 30.5 61.0 4755 95 Mantong Wanfu Food/ 7.9 3.4 10.2 21.5 Agribusiness Total Gross Commitments 123.6 52.8 40.7 217.1 Less cancellations, terminations, 28.5 - 10.2 38.7 repayments, write-offs, and sales Total Commitments now HeLd by IFC 95.1 52.8 30.5 178.4 TotaL Undisbursed 13.4 32.8 16.5 62.7 7/3/95 EA2DR  PRoJEcTED FUNDS FLOw STATEMENT (Y million) Year Ended December 31 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources of Funds Internal Sources of Funds: Net Income Before Interest (1) (1) (1) 548 2,347 3,736 4,854 4,653 4,407 4,926 Depreciation I 1 1 106 508 826 826 826 826 905 Total Internal Sources 0 0 0 654 2 855 4.562 5.680 5.479 5 233 5 831 Borrowings Proposed Project - IBRD Loan 935 862 1,007 520 307 219 0 0 0 0 Proposed Project - ECO 0 507 507 253 0 0 0 0 0 0 Proposed Project - Local Borrowing 2,531 1,980 2,436 2,004 1,507 847 0 0 0 0 Other Borrowing 0 0 0 0 0 0 0 290 1,331 946 Total Borrowings 3 467 3 349 3 950 3.452 1.815 1.067 0 290 1.331 946 Equitv Contribution 1 010 1 010 1 010 1,010 0 0 0 0 0 0 Total Sources of Funds 4.477 4.359 4.960 4.442 4.669 5.629 5.679 5.767 6.563 6777 Application of Funds Capital Expenditures: Proposed Project 3,639 3,120 3,325 1,912 834 483 0 0 0 0 Other Construction 0 0 0 0 598 971 1,504 2,123 2,956 2,724 Interest During Construction 837 1,239 1,635 1,875 981 584 0 20 131 146 Total Capital Expenditure 4 476 4 359 4 960 3.788 2.412 2,038 1,504 2.143 3.087 2 870 Operational Requirements Inc/dec in Working Capital (38) (69) 3 150 247 83 (53) 40 (62) 29 Debt Service 0 0 0 426 1,852 2,834 3,755 3,588 3,421 3,500 Dividend Issuance 0 0 0 0 0 0 0 111 302 505 Total Operational Requirement (38) (69) 3 576 2.099 2,917 3,702 3.739 3.661 4.034 Total Applications of Funds 4.438 4,290 4,963 4.364 4.511 4.956 5,206 5.882 6748 6904 Increase/Decrease in Cash 38 69 (3) 78 158 673 474 (114) (185) (126) Annual Debt Service Coverage 0.0 0.0 0.0 1.5 1.5 1.6 1.5 1.5 1.5 1.7 CD  - 20 - ANNEX 1 CHINA ERTAN II HYDROELECTRIC PROJECT SUMMARY OF TERMS OF BANK-GUARANTEED FINANCING Borrower: People's Republic of China (PRC) represented by the Ministry of Finance Beneficiary: Ertan Hydropower Development Company, Ltd. (EHDC) Guarantor: International Bank for Reconstruction and Development Lenders: Syndicate of international commercial banks Lead Managers: The Asahi Bank, Ltd.; Bank of America NT&SA; Daiwa Overseas Finance, Ltd.; the Fuji Bank, Ltd.; the Industrial Bank of Japan, Ltd.; the Korea Development Bank; the Long-Term Credit Bank of Japan, Ltd.; the Mitsubishi Trust & Banking Corporation; the Sakura Bank, Ltd.; Sanwa International Finance Ltd.; the Sumitomo Bank, Ltd.; Sumitomo Trust & Banking Co., Ltd.; the Tokai Bank, Ltd.; the Zenshinren Bank Loan Amount: Dollar Loan: $100 million DM Loan: $50 million equivalent in Deutsche Mark Maturity: 15 years Grace Period: 5 years Repayment: Semiannual equal installments commencing from the fifth anniversary of the signing date Availability Period: 3 years from the signing date Prepayment: The Borrower may prepay at the end of any interest period Guarantee Release: Any Lender may release the Bank's Guarantee for the remaining life of the Loan on and after the fifth anniversary of the signing date. A Lender who exercises the option and thereby cancels the Bank's Guarantee will receive in return compensation from the Borrower in the form of additional interest payment. Such compensation is payable semiannually in arrears and equivalent to 0.25 percent per year of the reduction as a result of such release in the Bank's exposure under the Guarantee (calculated on a present value basis).  - 21- ANNEX 1 Interest Rate: 0.3 percent per year over the relevant six-month LIBOR, payable semiannually in arrears. Commitment Fee: 0.125 percent per year on the undisbursed amount, commencing on the 61st day from the signing date, payable semiannually in arrears. Management Fee: 0.5 percent flat. Agency Fee: $7,000 per year, payable annually. Expenses: Out-of-pocket expenses to be paid by the Borrower up to $65,000, including legal fees. Governing Law: Laws of England Taxes: All payments to be made free and clear of any Chinese taxes and duties. Agent Bank: To be appointed. IBRD Guarantee: The Bank will provide a guarantee covering the principal amount outstanding on and after the 15th installment under the proposed repayment schedule on an accelerated basis. Maximum Amount of Guarantee. Maximum nominal exposure under the Guarantees will be equal to the outstanding amount of the Loans on the 12th anniversary, based on the original repayment schedule; this will be 33 percent of the initial total Loan amounts or approximately $50 million equivalent. The Bank's actual Guarantee exposure, represented by the present value of the total guaranteed amount, will initially amount to approximately $20 million equivalent or 14 percent of the total amount of the Loans. IBRD Guarantee Fee: 0.25 percent per year of the Bank's exposure under the Guarantee (calculated on a present value basis) discounted for a six-month period payable by the Borrower to the IBRD in advance for each semiannual period. Indemnity by PRC: PRC will enter into Indemnity Agreements with the World Bank in respect of its guarantees. Under these Agreements, PRC will undertake to reimburse the Bank on demand, or as the Bank may otherwise determine, for any payment made or expense incurred by the World Bank under the Guarantees.   IBRD 26552 98 100 IN, 104- C H I N A '10 -> UNDER ERTAN HYDROELECTRIC PROJECT CONSTRUCTION EXISTING FUTURE PROJECT 34- * | { i t n;~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ HYDRO POWER PLANTS .. '., 0 . -~ S * * * THERMAL POWER PLANTS ~~~~~J ~~~~~~A 500WV SUBSTATIONS t\ --1,,, - 4 aJ \ <SHUNT REACTORS E ~~~~~~~~~~~~ u Z ~~~~~~~~~~~~~~~~~~CONVERTER STATIONS - \ ._ -' ~ ~ - - _ - 500kV AC TRANSMISSION LINES _ - , , , > \\ __ g i 400--75OkV DC TRANSMISSION LINES > _--- - - a '- ioozhushi a 33-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3 K '-D 7- Jiangyo 32 0 so loo I50 200 190 2'_> Gerdo y xiouw g H= y_guhan KILOuETERS The boundaries, colors, ./ 30 denominations ancl any other nformation shown 30 on this mop do not impiy, on the part of h3n The World Bank Group, a ony' judgment on the legalelin status of any territory, or any endorsement Yooheoo t h h ogqi . u or acceptance of such Nanyaheh s u " Gonzhu long,o boundaries. gnoe !09 onzu e,s50, 1F, - iP:'E.M -iON ---t . * -png )z uabn rocn __> - ------ > ! tvJI X RAILROADS i -- 3 9 -V <ow '- 'RN - \\ -- -~ RIVERS Hemenkott-* 0 - ) PROVINCE CAPITAL Xinzhuong PREFECTURE BOUNDARIES < , .- ,f 'U :.' ,~- aPnz o a PROVINCE BOUNDARIES r-l --_ ~-_-_' 4 g/~ - ' INTERNATIONAL BOUNDARIES FEBRUARY 1993    :- -s L - ; L; ,_ , e !,-