China - Henan (Qinbei) Thermal Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6693-CHA MEMORANDUM AND RECOMNENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $440 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A HENAN (QINBEI) THERMAL POWER PROJECT JANUARY 29, 1996 This document has a restricted distribution 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 1, 1995) Currency = Yuan (Y) Y 1.00 = 100 fen $1.00 = Y8.3 Y 1.00 = $0.12 WEIGHTS AND MEASURES km = Kilometer (= 0.62 miles) kWh = Kilowatt hour (= 860.42 kcal) MWh = Megawatt hour (= 1,000 kilowatt hours) GWh = Gigawatt hour (= 1,000,000 kilowatt hours) TWh = Terawatt hour (= 1,000,000,000 kilowatt hours) kW = Kilowatt (= 1,000 watts) MW = Megawatt (1,000,000 watts) GW = Gigawatt (= 1,000,000,000 watts) kV = Kilovolt (1,000 volts) MVA = Megavolt-ampere (1,000 kilovolt-amperes) ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank CAS - Country Assistance Strategy CCEPA - Central China Electric Power Administration CCEPGC - Central China Electric Power Group Company CRISPP - China Reform, Institutional Support and Preinvestment Project EA - Environmental Assessment EPH - Electric Power of Henan GEF - Global Environment Facility HPCIC - Henan Provincial Construction and Investment Company IERR - Internal Economic Rate of Return FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY CHINA HENAN (QINBEI) THERMAL POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: People's Republic of China Beneficiary: Electric Power of Henan (EPH) Poverty: Not applicable. Amount: $440.0 million equivalent. Terms: 20 years, including a 5-year grace period, at the Bank's standard variable interest rate. Commitment Fee: 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 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: 15.2 percent Staff Appraisal Report: Report No. 1 5002-CHA Map: IBRD 27181 Project ID Number: CN-PE-3531 |This docwment has a Testricted distribution and may be used by recipients orly in the pe- ',rmance of their |official duties. Its contents may not othervise be disclosed wiLhout World Barnk author; ation.l   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 REPUBLIC OF CHINA FOR A HENAN (QINBEI) THERMAL POWER PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to China for the equivalent of $440 million. The loan 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 to the Electric Power of Henan (EPH) on the same terms and conditions as the Bank loan, with EPH bearing the foreign exchange risk. 2. Country Power Sector Policies. Large-scale energy development and improvements in the efficiency of energy supply and use are critical to meet the fast growing demand, alleviate shortages and mitigate adverse impacts on the environment in China. The Government is encouraging efficient energy use through reliance upon energy price increases 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 the "Three Electricity Offices", with a comprehensive network at the central, provincial and local levels. These offices supervise and coordinate electricity conservation investments through a variety of programs involving provincial power companies and industrial consumers. These measures have helped achieve exceptionally low energy use-GDP growth elasticities since the early 1980s, and especially during the last few years. Even with further improvements in conservation, however, generation capacity must increase by at least 15 to 16 GW a year from 1994 to 1997, and 17 to 20 GW a year from 1997 to 2000 to avoid exacerbation of the serious power shortages that already exist. The Government has adopted the strategy of constructing large-scale and cost-effective power plants to meet demand and accelerate the replacement of obsolete and heavily polluting plants with more energy-efficient units. 3. To continue the efficiency improvements and increase capital mobilization 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, 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 sector reforms have picked up during 1993-95. Recently, China has achieved three important steps in its gradual reform approach: (a) the Standing Committee of the 17th Session of the National People's Congress passed the first "Electricity Law of the People's Republic of China"; (b) the State Council decided to abolish the Ministry of Electric Power and divide its functions between existing government agencies; and (c) the State Council decided on the creation of a National Power Grid Company that would, inter alia, be designated as the representative of the state as owner of government-owned power assets. The Government's future 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) further reforms to the regulatory and legal framework; and (d) diversification of the financing  - 2 - 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 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. The Chinese Government has also initiated serious efforts to curb air pollution related to the burning of coal and particularly to reduce the power sector's contribution to the problem. In terms of emission control in large and medium-scale plants, China has made substantial progress in particulate control, through deployment of high efficiency electrostatic precipitators. The Government announced in June 1994 that it would spend about $2 billion over the next seven years on an environmental program aimed at keeping SO2 emissions at a level of 15 million metric tons a year, as part of a comprehensive program of acid rain abatement. The Government intends also to accelerate the development of hydropower and construction of large and efficient 300 and 600 MW coal-fired units to avoid the mushrooming of the small and highly polluting plants that still constitute about 60 percent of the additional installed capacity. 5. Bank Strategy. 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. Technical assistance is also currently provided to central authorities to develop an improved legal and regulatory framework for the power industry. The energy conservation support program includes technical assistance through the Global Environment Facility (GEF), lending support in selected industrial, environment and energy projects, and development of a series of new GEF investment operations. The power sector lending program now focuses on assistance for detailed aspects of implementation of the power sector reforms, as well as reducing the power shortages that continue to hamper development and slow the market orientation of the sector. 6. Provincial Background. Henan Province, where the proposed project is located, is the second most populous (89.5 million in 1994) and one of the less developed provinces in China. The installed power capacity by the end of 1994 was 8,473 MW, of which 545 MW hydro and 7,928 MW coal fired power plants. The peak load was 7,900 MW and the total electricity supply (including energy exchanges) 50 TWh. Electricity consumption per capita was 560 kWh, about three quarters of the national average. The provincial power sector is plagued by acute shortages: in 1994, load was shed about 84,000 times (more than 240 times per day) and demand during peak time exceeded supply by about 700 MW, 9 percent of the peak demand, in  - 3 - spite of severe measures to limit power use by industrial consumers. Adequate power supply and increased sector efficiency through further market orientation are crucial for sustained growth in the province. 7. While provincial authorities recognize the need for reforms to improve the performance of the sector and attract private investment, implementation lags behind that in some of the coastal provinces. The transition of the provincial power entity to an autonomous and business- oriented company has proceeded slowly. Although EPH has been established as an independent legal entity for several years, it still carries government and administrative functions and lacks the management and technical skills to efficiently carry out its core businesses. While Henan has made substantial progress in power price reform, prices are still lower than the economic costs of supply, and further progress is required to gradually phase out the multitier pricing system. 8. Following two successful reform-oriented power projects in the coastal provinces of Jiangsu and Zhejiang, Bank support has shifted inland, first to Sichuan Province with the recently approved Ertan II Hydroelectric Project (Ln. 3933-CHA), and now to Henan Province with the proposed operation. This reflects the Bank's strategy of assisting Chinese authorities in mitigating the growing regional disparities and infrastructure bottlenecks in underdeveloped provinces, where capital resources, access to financial markets, and private involvement remain very limited. This shift will extend reform to inland provinces, where progress towards a more open, efficient and financially sustainable power industry is slower than in the booming coastal provinces. While prior involvement of the Bank in Henan under the 1992 Yanshi Thermal Power Project (Ln. 3433-CHA) helped in building EPH's capability in managing construction of large projects and improving its financial situation through increased electricity prices, the proposed project focuses on reform implementation and institutional changes to ensure sustained performance and attract private investments. EPH has expressed strong commitment to reform and prepared, with the assistance of international consultants, a reform implementation plan which has been approved by provincial and central authorities. 9. Project Objectives. The main objectives of the project are to: (a) reduce the acute power shortages and foster integrated development of the power system of Henan Province in the most cost-effective and environmentally sound manner; (b) support adequate implementation of power sector and power enterprise reforms and accelerate the transition of EPH to a legally and financially autonomous and business-oriented company, in line with the recently enacted Company La>A; (c) assist in transferring new power technologies and in applying modem power operation/maintenance methods; (d) support improvements in the efficiency of electricity use; and (e) contribute to rationalization of power tariffs. 10. Project Description. The proposed project includes investment, power sector reform and institutional development components as follows: (a) construction of two 600-MW coal- fired thermal power units and associated equipment and facilities, including an on-line performance monitoring system to increase plant performance, reduce coal consumption and gradually introduce innovative maintenance techniques; (b) erection of two 165 km 500-kV transmission lines to connect the power plant to the existing power transmission network;  - 4 - (c) construction management and engineering services; (d) a technical assistance package to support the implementation of the power sector reform action plan; (e) an electricity conservation component to assist EPH and Henan Province in developing a demand side efficiency program based on market incentives rather than administrative means; and (f) a technical assistance, a training program and suitable computerized systems to build the beneficiary's operation and management capabilities. 11. A $10 million equivalent loan component is included in the project to: (a) develop pilot/demonstration projects aimed at reducing end-use electricity consumption through introduction of state-of-the-art technologies such as variable speed motors, low loss transformers, high efficiency welding machines, etc.; (b) implement a pilot/demonstration project of power loss reduction in the urban distribution system; and (c) develop adequate monitoring procedures and test new financing approaches, especially performance contracting and leasing, to speed up implementation of electricity conservation projects. 12. The Reform Implementation component is intended to enhance the business and profit orientation of the EPH and its corporate governance, strengthen its financial autonomy and initiate a restructuring of the sector that would lead to introduction of competition at the generation level, and improved contractual arrangements between the different operators through the following actions: (a) Incorporation of EPH as a Limited Liability Company. EPH revised its charter to delineate its rights and obligations and develop an adequate corporate governance framework in accordance with the new Company Law in June 1995. Its incorporation as a limited liability company (under the new Company Law) will be completed within nine months of issuance of necessary State Council regulations on restructuring state-owned enterprises. (b) Separation of Government and Enterprise Functions. EPH, the Ministry of Electric Power and the Central China Electric Power Administration have agreed to achieve this objective in a two-step approach: (i) consolidation of government and regulatory functions (i.e., bureau functions) in one division within EPH by no later than June 1996; and (ii) separation of all bureau functions to appropriate national and provincial level authorities in conformance with the regulatory framework established at the national and provincial levels. (c) Commercialization of Operations. EPH will streamline its organizational structure and focus on its core businesses by converting profit-oriented units into autonomous companies or profit centers by December 1996, and nonprofit-oriented ones (social services) into cost centers to be shifted to suitable institutions, pari pasu with the progress of social sector reforms. (d) Tariff Reform. EPH's tariff reform action plan focuses on: (i) tariff increases beginning in 1996 to meet agreed financial targets and economically adequate tariffs by the year 2000; (ii) unification of tariffs by end-1998; and  (iii) adjustment of demand charges for industrial customers, and price differentials between different voltage levels to gradually reflect the cost of supply. (e) Power Sector Restructuring. EPH will, in coordination and consultation with higher authorities, implement structural reforms to introduce competition at the generation level (end of 1998), improve contractual arrangements among the different operating entities in the sector, and increase efficiency at the distribution level (June 1997). EPH's Reform Implementation Plan is set out in the table attached to Annex 3.3 of the Staff Appraisal Report. 13. The project team also coordinated efforts with the Asian Development Bank (ADB), which is financing another thermal power project in Henan. While the proposed Bank project mainly focuses on power sector and tariff reforms, the ADB project will focus more on environmental control at the provincial level through improvements in environment and coal quality monitoring and enforcement, closure of small boilers and small and inefficient power plants, and reforestation. 14. Project Costs and Financing. The total cost of the proposed project is estimated at $1,161.1 million equivalent, with a foreign exchange component of $497.4 million equivalent. The total financing requirements, including interest during construction, are estimated at $1,411.3 million equivalent. The foreign costs would be cofinanced by the proposed Bank loan of $440.0 million equivalent, a commercial cofinancing of $55 million equivalent which consists of two tranches: a $30 million Eurodollar syndicated loan, and a private placement (Yen loan) of Yen 2.5 billion ($25 million equivalent). Retroactive financing up to $2 million would be required for expenditures to be incurred prior to the loan signing but after June 15, 1995, to avoid delay in implementation of technical assistance supported under this loan, especially consultancy services related to an organizational structure and financial management study. 15. Under the cofmancing, commercial lenders are providing funds with a final maturity of 15 years to China, represented by the Ministry of Finance (MOF). The proceeds will be onlent by MOF on the same terms to the beneficiary, EPH. MOF conducted price inquiry for the financing in October 1995 with financial institutions that indicated interest during earlier market soundings and awarded a conditional mandate to: (a) a group consisting of six commercial banks for the Dollar loan; and (b) a life insurance company for the Yen loan. The mandated interest rates for the Dollar loan and Yen loan are 0.43 and 0.30 percent per year, respectively, over the relevant 6-month LIBOR. These terms, achieved with a comfort of cofinancing arrangement with the Bank, are very favorable for the final maturity of 15 years, including a 5-year grace period. They are below the average pricing of commercial bank borrowing (about LIBOR+0.5-0.6 percent) by Chinese sovereign entities for a much shorter maturity of five to seven years.  - 6 - 16. Local cost financing would be provided by the Central China Electric Power Group Company (CCEPGC), the Henan Provincial Construction and Investment Company (HPCIC), and EPH. The loans to be provided by CCEPGC and HPCIC will have a variable interest rate and 11 years maturity, including three years' grace. Fifteen percent of the total cost will be provided by CCEPGC and HPCIC in the form of convertible loans. A breakdown of costs and the financing plan are shown in Schedule A. 17. Project Implementation. EPH is responsible for implementation of the project and has created a specialized construction unit to manage project implementation. The construction unit will benefit from the experience of the recently completed Jiaozuo (6x200 MW) and Yanshi (2x300 MW) power plants. Assistance in environmental assessment, engineering, procurement and construction management has been provided during project preparation by international engineering consultants and will be provided for construction supervision and management during project implementation. 18. 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. 15002-CHA dated January 29, 1996, is being distributed separately. 19. Project Sustainability. An indispensable sustainability factor which has already been demonstrated is the commitment of the Beneficiary to the agreed objectives of the project. Moreover, the considerable effort that has been devoted to adequate preparation of all the project components, the planned training programs, and the agreed technical assistance will assure: (i) a timely completion of the power plant and associated transmission lines; (ii) adequate and efficient operation of the power plant thereafter, and (iii) increased market and profit orientation of the Beneficiary. The institutional and financial sustainability will be assured through monitoring of adequate implementation of the agreed sectoral and enterprise reforms and compliance with the agreed financial covenants. 20. Lessons from Previous Bank Experience. Previous power sector lending operations have yielded useful lessons on project preparation, technical and operating aspects of power systems, and the sequencing of institutional and sector reforms. These experiences and broader international experience in power sector restructuring have also been taken into account in developing the Bank's power sector strategy in China, and in designing the proposed project. 21. Lessons learned from the previous seven thermal power projects in China, particularly the previous project in Henan at Yanshi (Ln. 3433-CHA), were incorporated in the preparation of the proposed project in order to: (a) avoid commissioning delays experienced in the past due to contractual interface problems and weak project management; (b) improve the quality of environmental studies and monitoring measures; and (c) ensure commitment of the beneficiary to the institutional and corporate reforms to be included in the project. Specific actions were taken to increase the involvement of international consultants in assisting the Beneficiary in assessing the environmental impacts of the project and preparing  - 7 - the environmental management plan, and in preparing a comprehensive reform plan prior to preappraisal of the proposed project. The procurement packaging has been designed so as to avoid the interface problems experienced among different suppliers and vendors during construction of the Yanshi power plant-especially those involved in implementation of the instrumentation and control module. Finally, lessons learned from a serious boiler accident under the Beilungang Thermal Power Project (Ln. 2706-CHA) have been taken into account to improve boiler design and specifications and coal quality. Complementary studies were prepared by the Beneficiary and its consultants on coal sampling and analysis to confirm coal and "check coal" specifications. The methods used were found to conform with international standards by the Bank's mining specialists. 22. International experience shows that: (a) even in advanced countries with strong legal systems and open economies, the time needed to build consensus on power sector reform, establish a new regulatory framework, and implement structural changes can be very long; and (b) commercialization and corporatization of energy and other utilities and the pursuit of transparency and accountability of energy and other utilities are the best ways to achieve progress in economic regulation. Considering China's 40-year history of a command and control economy, the progress achieved in reforming the power sector during the last decade, and especially during the early 1990s, clearly indicates the Government's commitment to reform. However, the country's difficult transition to a market-oriented macroeconomic environment and the size of the Chinese economy constrain the pace of power sector reforms, which will take a gradualist approach, adapted to the diverse provincial conditions, to avoid disruption. 23. 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) development of adequate regulatory and legal frameworks; (c) introduction of competition and transparency; (d) assurance 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. This ambitious reform program reflects the detailed strategy set out in the recent power sector report for China, which recommends support to plovincial power companies in their transition to autonomous and business-oriented enterprises. 24. The proposed project supports the Bank's strategy in the power sector in the above- mentioned areas. It will support the implementation of an ambitious reform program including: (a) incorporation of EPH as a limited liability company; (b) separation of government and corporate functions within EPH; (c) improvement of its structural organization and managerial processes to increase cost consciousness and business orientation; (d) promotion of competition at the generation level; and (e) rationalization of the pricing system within Henan Province. It also supports new approaches to disseminate electricity conservation market-based and sustainable projects, and adequate environmental protection and monitoring, in close cooperation with the Asian Development Bank.  - 8 - 25. Agreed Actions. Assurances have been obtained from the Borrower that it will: (a) furnish audited project accounts to the Bank within six months of the end of each fiscal year; (b) onlend the proceeds of the proposed Bank loan to EPH on terms and conditions satisfactory to the Bank; and (c) ensure that resettlement under the project is carried out in accordance with an agreed resettlement program. 26. To ensure a sound institutional environment and adequate and quantifiable monitoring of the project's progress, assurances have been obtained from EPH that it will: (a) carry out the Reform Implementation Plan according to the timetable agreed with the Bank, (b) implement organizational improvements, and the development of improved accounting and financial management systems according to the recommendations of and schedule determined by the study financed under the proposed project; (c) furnish the Bank with progress reports and audited project accounts, statements of expenditures, and financial statements within six months of the end of each fiscal year; (d) provide an action plan and timetable acceptable to the Bank for unifying EPH's tariffs and establishing a suitable formula for adjusting the rates; (e) carry out a management development and training program; (f) carry out resettlement of affected persons in accordance with a resettlement plan acceptable to the Bank; (g) carry out the agreed environmental management program in a manner satisfactory to the Bank; (h) take all necessary measures to ensure that it meets the financial performance targets (self-financing ratio of 25 percent in 1996, 30 percent during 1997-99, and 35 percent thereafter; and debt service coverage ratio of 1.5 times at all times); and (i) furnish to the Bank, by April 30 of each year, a rolling 8- year financial plan containing projected income statements, statements of sources and uses of funds, and balance sheets. 27. Environmental Aspects. The project is classified as Category A. Environmental Assessments (EAs) have been prepared for all components and cleared by the responsible Chinese authorities. The EAs underwent considerable refinements and complementary analyses with the assistance of international consultants in response to Bank comments, and now meet international standards. The Bank is satisfied that all environmental concerns have been satisfactorily addressed. An Environmental Assessment Summary was distributed to the Board on May 2, 1995. 28. The project is a greenfield operation located in a semirural agricultural area, about 17 km northwest of Jiyuan city. The site selected for the power plant uses land that is currently uninhabited, too poor for cultivation and offers the best possibilities for dispersion of flue gases, thus minimizing impact on the natural and human environment. Also, appropriate technologies will be applied in design of the power plant, such as high-efficiency electrostatic precipitators and low NO, burners. Additionally, the plant layout provides adequate space to install additional pollution control systems if required as a result of future changes in Chinese standards and/or technological developments. 29. Resettlement. The project will require acquisition of a total of 290 ha of land. Only 14 cultivated ha will be required for the transmission line. The project will require very limited relocation of population unless changes in the current routing of the transmission lines are required due to unidentified technical or soil problems. EPH prepared a preliminary land  - 9 - acquisition and relocation document (LARP-I) defining the resettlement policies, planning principles, institutional arrangements and design criteria for resettlement caused by the project. It was agreed that, upon finalization of the design of the transmission lines and substations, EPH will prepare a final land acquisition and relocation action plan (LARP-II) to be submitted to the Bank for its approval prior to the procurement of equipment for construction of the lines and substations, and this will be a condition of disbursement for the transmission equipment. 30. Project Benefits. The large generation additions and associated transmission lines will remove the severe constraints to economic growth and ease the hardships imposed by power shortages, especially in poor rural areas in Henan. The electricity conservation component will demonstrate new techniques in achieving Henan's conservation potential. Finally, institutional reforms will constitute a significant step towards long-term financial sustainability and economic efficiency of the power sector. 31. The least cost analysis prepared by EPH, with the assistance of local consultants, clearly shows that the proposed project is the first investment of the optimal (least cost) power development program, and remains so under a wide range of sensitivity analyses related to the risks that the project may face: a lower demand growth (6 percent per year on average compared to the expected 9 percent), cost overruns due to low cost estimate and/or construction delays, lower off-take, and higher fuel costs (see further discussion of project risks below). 32. The internal economic rate of return (IERR) is estimated at 15.2 percent, based on a power price of 39 fen/kWh (in 1994 prices) that would be paid for electricity at the 110/30 kV level in 2001, the first year of operation of the power plant, and taking into account the economic costs for equipment, construction work and fuel. 33. The IERR would decrease to the test discount rate of 12 percent, in the event of one of the following occurrences: (a) the price paid at the 110/30 kV for electricity from new power plants were 20 percent lower than the base case price: i.e., 33 fen/kWh in 1994 prices; (b) the project were to experience a cost overrun of 26 percent; (c) the power plant operation were reduced to 5,160 hours (59 percent capacity factor) per year; (d) fuel costs were 70 percent higher than the base case; and (e) the project were to experience a delay in commissioning of 29 months. 34. However, as described below, these occurrences are unlikely because EPH has a very good record in project implementation, the economic assumptions considered in the base case are very conservative, and the financial covenants of the project would ensure that prices are high enough to meet the financial and economic viability requirements.  - 10- 35. The project has also significant environmental benefits. It improves the efficiency of the generation system and reduces the average coal consumption by about 14 g/kWh. Reduction in coal consumption amounts to more than 1.4 million tons in 2003, the year after full commissioning of the plant. With development of Xiaolangdi Multipurpose Project (Ln. 3727-CHA), most of Henan's hydropower potential would have been exploited and the only alternative to Qinbei would be smaller and less efficient coal-fired units. The electricity conservation component will help EPH in identifying and testing the most promising technology to tap the important potential of electricity conservation in the province. Studies carried out by EPH showed that the implementation of an aggressive conservation program would alleviate power shortages and reduce the required generation capacity by 1,200 MW over the next seven years. 36. Risks. All proposed technologies are currently in successful use in China. Cost overrun risks have been minimized by a very conservative cost estimate and advanced procurement action; bids for major components have been prepared before loan negotiations and issued prior to Board presentation. The risk of delay in project construction due to project management shortcomings is minimal because of experience gained during the implementation of the Jiaozuo and Yanshi projects, the timely staffing and training of personnel of the Qinbei implementation unit, and the assistance provided by experienced international engineering consultants. The risk of nonperformance in the environmental and resettlement areas has been addressed by the establishment of appropriate monitoring organizations and procedures and close cooperation with ADB, which will provide special technical assistance to improve EPH's capability to monitor coal quality and strengthen the capability of the provincial/municipal environment bureaus in monitoring and enforcing environmental rules and regulations. Furthermore, sensitivity analyses show that even in case of implementation of more stringent environmental standards requiring future installation of Flue Gas Desulfurization (FGD) equipment, the project would remain economically viable. 37. Delay in implementing power sector reforms in an efficient and timely manner represents a risk that can jeopardize the progress toward more openness and efficiency of the sector and more fiscal and managerial autonomy of EPH. This risk is minimized by the strong commitment of the Chinese to reform both at the central and provincial levels. This risk is also addressed through the proposed provision of technical assistance and adequate monitoring of implementation of the agreed reform plan during project implementation. 38. The economic and financial risks would be minimal. In view of advanced preparatory works, risks associated with project construction, cost overruns, and implementation delays are within reasonable limits and manageable with the agreed supervision and involvement of competent consultants. Particular attention will be given to the safety aspects of the project, and to capability and performance of major contractors.  39. 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. James D. Wolfensohn President Attachments Washington, D. C. January 29, 1996   - 12 - Schedule A CHINA HENAN (QINBEI) THERMAL POWER PROJECT ESTIMATED COSTS AND FINANCING PLAN ($ million) Local Foreign Total Preparatory Works 11.0 0.0 11.0 Land Acquisition 7.8 0.0 7.8 Civil Works 96.2 0.0 96.2 Erection 54.5 0.0 54.5 Administration 15.0 0.0 15.0 Plant Equipment and Materials 71.8 389.4 461.2 Transmission system 154.5 22.1 176.6 Engineering Services 12.7 3.7 16.4 Environmental Protection 0.1 0.7 0.8 Technical Assistance & Studies 0.3 4.6 4.9 Training 1.8 2.8 4.6 Electricity Conservation Project 10.0 10.0 20.0 Total Base Cost 426.2 433.3 859.5 Contingencies Physical 41.6 20.8 62.4 Price 43.6 43.3 86.9 Import Duties and VAT 152.2 0.0 152.2 Total Project Cost 663.7 497.4 1.161.1 Interest During Construction /a 165.0 85.2 250.2 Total Financing Required 828.7 582.6 1,411.3 Financing Plan Central China Electric Power Group Company 414.4 42.6 457.0 Henan Prov. Construction Investment Co. 248.6 25.6 274.2 Electric Power of Henan 165.7 17.0 182.7 Cofinancing (syndicated commercial loan) 0.0 55.0 55.0 IBRD 0.0 440.0 440.0 IDA (Credit 2447-CHA) /b 0.0 2.4 2.4 Total 828.7 582.6 1,411.3 /a 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 the projected rates for commercial financing. /b Provided by the China Reform, Institutional Support and Preinvestment Project (CRISSP).   - 13 - Schedule B Page 1 CHINA HENAN (QINBEI) THERMAL POWER PROJECT SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS ($ million) Total Proposed Method project Project item ICB Other /a NBF It costs Works Preparatory works - - 12.5 12.5 Land acquisition & resettlement - - 8.9 8.9 Civil works - - 114.0 114.0 Erection works - - 54.8 54.8 Administration - - 18.2 18.2 Goods Plant equipment and materials 576.9 18.0 85.8 680.7 (384.4) (9.0) - (393.4) Transmission system equipment 31.4 - 189.0 220.4 Services (25.8) - - (25.8) Engineering services - 19.2 - 19.2/c - (3.9) - (3.9) Environmental program - 1.2 - 1.2 - (0.8) - (0.8) Technical Assistance and Studies - 5.8 - 5.8/c - (5.3) - (5.3) Training - 5.4 - 5.4 - (3.2) - (3.2) Electricity Conservation Project 5.0 5.0 10.0 20.0 (5.0) (5.0) - (10.0) Total 613.3 54.6 493.2 1.161.1 IBRD Loan (415.2) (27.2) (442.4)L Commercial Loan 46.0 9.0 - 55.0 /a Other procurement includes LIB, international and national shopping, direct contracting, and consultancy services. Lb NBF = Not Bank Financed. /c Includes the CRISPP-related financing. Note: Figures in parentheses are the amounts financed by the Bank.  - 14 - Schedule B Page 2 DISBURSEMENTS ($ million) Category Loan amount Percent financed (1) Goods 403.0 100% of foreign expenditures, 100% of local expenditures (ex- factory), and 75% for local expenditures for other items procured locally (2) Consultants services & training 12.0 100% (3) Unallocated 25.0 Total 440.0 ESTIMATED DISBURSEMENTS ($ million) IBRD FY 1997 1998 1999 2000 2001 2002 2003 Annual 35.5 94.9 167.6 91.9 18.8 21.2 10.1 Cumulative 35.5 130.4 298.0 389.9 408.7 429.9 440.0  - 15 - Schedule C CHINA HENAN (QINBEI) THERMAL POWER PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS Time taken to prepare the project 15 months Prepared by . EPH with Bank assistance First Bank mission . July 1994 Appraisal mission departure May 1995 Negotiations : January 1995 Planned date of effectiveness September 1996 List of relevant PCRs and PPARs Lubuge Hydro (Ln. 2382-CHA), PCR Power Transmission (Ln. 2493-CHA), PCR Beilungang Thermal (Ln. 2706-CHA), ICR Yantan Hydro (Ln. 3433-CHA), ICR This report is based on the findings of an appraisal mission that visited China in May 1995. The report was prepared by N. Berrah (Task Manager), S. Kataoka (Senior Power Engineer), H.E. Sun (Senior Financial Analyst), B. Baratz (Principal Environmental Specialist), R. Lamech (Restructuring Specialist), Y. Wang (Consultant, Economic Analysis), and J. Zhao (Operation Officer, Power Sector Restructuring). T. Fry (Consultant, ASTAE), F. Trimmel and E. Kulperger (Consultant, Canadian Trust Fund) assisted EPH in preparing the electricity ccnservation component. The Division Chief is Richard Scurfield and the Department Director is Nicholas C. Hope.   - 16 - Schedule D Page 1 STATUS OF BANK GROUP OPERATIONS IN TtE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of December 31, 1995) Loan/ Amount (US$ million) Credit Bor- (net of cancellations) Number FY rower Purpose Bank IDA Undisb.(a) 38 loans and 47 credits have been fully disbursed. 3,831.7 2,819.0 - 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 6.8 2794/1779 87 PRC Shanghai Sewerage 45.0 (100.0)(b) 0.6 2811/1792 87 PRC Beijing-Tianjin-Tanggu Expressway 25.0 (125.0)(b) 3.2 2812/1793 87 PRC Gansu Provincial Dev. (20.0)(b) 150.5 9.3 1885 88 PRC Northern Irrigation - 103.0 4.3 2951/1917 88 PRC Sichuan Highway 75.0 (50.0)(b) 6.7 2955 88 PRC Beilungang II 165.0 - 0.1 2958 88 PRC Phosphate Dev. 62.7 - 4.9 2968 88 PRC Railway IV 200.0 - 3.7 1984 89 PRC Jiangxi Provincial Highway - 61.0 0.7 1997 89 PRC Shaanxi Agricultural Dev. - 106.0 5.8 2009 89 PRC Integrated Reg. Health - 52.0 9.2 3006 89 PRC Ningbo & Shanghai Ports 76.4 - 2.1 3022 89 PRC Tianjin Light Industry 154.0 - 10.7 3060/2014 89 PRC Inner Mongolia Railway 70.0 (80.0) (b) 0.8 3066 89 PRC Hubei Phosphate 137.0 - 13.2 3073/2025 89 PRC Shandong Prov. Highway 60.0 (50.0) (b) 18.3 2097 90 PRC Jiangxi Agric. Dev. - 60.0 0.5 2114 90 PRC Vocational & Tech. Educ. - 50.0 2.1 2145 90 PRC National Afforestation - 300.0 49.0 2159 90 PRC Hebei Agricultural Dev. - 150.0 30.3 2172 91 PRC Mid-Yangtze Agricultural Dev. - 64.0 5.7 3265/2182 91 PRC Rural Credit IV 75.0 200.0 10.0 3274/2186 91 PRC Rural Indust Tech (SPAR.) 50.0 64.3 11.8 3286/2201 91 PRC Medium-Sized Cities Dev. 79.4 52.9 17.1 2210 91 PRC Key Studies Development - 131.2 18.0 2219 91 PRC Liaoning Urban Infrastructure - 77.8 7.8 3316/2226 91 PRC Jiangsu Provl. Transport 100.0 (53.6)(b) 15.9 2242 91 PRC Henan Agricul. Dev. - 110.0 44.9 3337/2256 91 PRC Irrig. Agricul. Intensif. 147.1 187.9 49.4 3387 92 PRC Ertan Hydroelectric 380.0 5.2 2294 92 PRC Tarim Basin - 125.0 36.4 2296 92 PRC Shanghai Metro Transport - 60.0 13.3 3406 92 PRC Railways V 330.0 - 45.3 3412/2305 92 PRC Daguangba Multipurpose 30.0 37.0 8.0 2307 92 PRC Guangdong ADP - 162.0 72.8 3415/2312 92 PRC Beijing Environment 45.0 80.0 69.1 2317 92 PRC Infectious and Endemic Disease Cont - 129.6 91.3 3433 92 PRC Yanshi Thermal Power 180.0 - 14.6 2336 92 PRC Rural Water Supply and Sanitation - 110.0 61.3 2339 92 PRC Educ. Development in Poor Provs. - 130.0 46.1 3443 92 PRC Regional Cement Industry 82.7 - 14.7 3462 92 PRC Zouxian Thermal Power 310.0 - 120.4 3471 92 PRC Zhejiang Provincial Highway 220.0 - 107.7 2387 92 PRC TJ.anjin Urban Devt. & Envir. - 100.0 65.9 2391 92 PRC Ship Waste Disposal - 15.0 16.4 2411 93 PRC Sichuan Agricultural Devt. - 147.0 77.2 3515 93 PRC Shuikou Hydroelectric II 100.0 - 64.4 2423 93 PRC Financial Sector TA - 60.0 51.1 3530 93 PRC Guangdong Provincial Transport 240.0 - 126.5  - 17 - Schedule D Page 2 Loan/ Amount (USS million) Credit Bor- (net of cancellations) Number FY rower Purpose Bank IDA Undisb.(a) 3531 93 PRC Henan Provincial Transport 120.0 - 66.6 2447. 93 PRC Ref. Inst'l and Preinvest. - 50.0 36.0 3552 93 PRC Shanghai Port Rest. and Devt. 10.0 - 78.4 2457 93 PRC Changchun Water Supply & Env. - 120.0 113.5 2462 93 PRC Agriculture Support Services - 115.0 71.8 3560/2463 93 PRC Taihu Basin Flood Control 100.0 100.0 116.7 2471 93 PRC Effective Teaching Services - 100.0 100.6 3572 93 PRC Tianjin Industry II 150.0 - 142.8 3582 93 PRC South Jiangsu Envir. Prot. 250.0 - 177.9 2475 93 PRC Zhejiang Multicities Devt. - 110.0 92.9 3581 93 PRC Railway VI 420.0 - 267.3 3606 93 PRC Tianhuangping Hydroelectric 300.0 - 257.9 3624/2518 93 PRC Grain Distribution 325.0 165.0 472.1 2522 93 PRC Environmental Tech. Assist. - 50.0 41.9 2539 94 PRC Rural Health Workers Devt. - 110.0 90.7 3652 94 PRC Shanghai Metro Transport II 150.0 - 33.2 3681 94 PRC Fujian Provincial Highways 140.0 - 116.6 3687 94 PRC Telecommunications 250.0 - 206.9 2563 94 PRC Second Red Soils Area Devt. - 150.0 109.0 2571 94 PRC Songliao Plain Agric. Devt. - 205.0 157.9 3711 94 PRC Shanghai Environment 160.0 - 151.0 3716 94 PRC Sichuan Gas Devt & Conservatn. 255.0 - 227.9 3718 94 PRC Yangzhou Thermal Power 350.0 - 319.5 3727 94 PRC Xiaolangdi Multipurpose 460.0 - 302.5 2605 94 PRC Xiaolangdi Resettlement - 110.0 90.8 2616 94 PRC Loess Plateau Watershed Devt. - lSO.0 123.5 2623 94 PRC Forest Resource Devt. & Prot. - 200.0 192.2 3748 94 PRC National Highway 380.0 - 304.2 3773/2642 95 PRC Enc. Housing/Soc Sec Reform 275.0 75.0 336.9 3781 95 PRC Liaoning Environment 110.0 - 96.6 3787 95 PRC Xinjiang Prov. Highways 150.0 - 131.9 2651 95 PRC Basic Ed for Poor/Minoricies - 100.0 92.6 3788 95 PRC Shenyang Industrial Reform 175.0 - 169.0 2654 95 PRC Economic Law Reform - 10.0 9.9 2655 95 PRC Comp Maternal/Child Health - 90.0 83.4 3846 95 PRC Zhejiang Power Development 400.0 - 398.0 3847 95 PRC Technology Development (c) 200.0 - 200.0 3848 95 PRC Sichuan Power Transmission 270.0 - 270.0 3873/2709 95 PRC Fiscal TA 25.0 25.0 47.1 3874/2710 95 PRC Yangtze Basin Water Res Devt 100.0 110.0 211.5 3897 95 PRC Railway VII (c) 400.0 - 400.0 3906/2744 95 PRC Southwest Poverty Reduction 47.5 200.0 239.1 3910 95 PRC Inland Waterways 210.0 - 210.0 3914/2756 95 PRC Iodine Deficiency rDs. Control(c) 7.0 20.0 25.9 3929 96 PRC Shanghai-Zhejiang Highway (c) 260.0 - 260.0 3933 96 PRC Ertan II Hydroelectric (c) 400.0 - 400.0 2794 96 PRC Disease Prevention (c) - 100.0 100.0 3966/2799 96 PRC Hubei Urban Environment (c) 125.0 25.0 150.0 3967/2800 96 PRC Labor Market Development (c) 10.0 20.0 30.0 Total 14,570.5 8,470.2 9,795.8 of which has been repaid 1,314.1 26.5 Total now held by Bank and IDA 13,256.4 8,443.7 Amount sold: Of which repaid - - Total Undisbursed 6,914.0 2,882.5 9,796.5 (a) As credits are denominated in SDRs (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 B. STATEMENT OF IFC INVESTMENTS (As of December 31, 1995) Invest- Type of Loan Equity Syndicate Total ment No. FY Borrower Business --------- (TSS Million) -------__ 813/2178 85/92 Guangzhou Peugeot Auto Automobile 15.0 4.5 - 19.5 974 88 China Investment Co.- Venture 3.0 - - 3.0 Capital 1020 88/ Shenzhen China Bicycle 17.5 3.4 - 20.9 92/94 Bicycles Co. Ltd. Manufacture 1066 89 Crown Electronics Manufacturing 15.0 - - 15.0 1119 89 Shenzhen-YI( Solar Energy Electric 2.0 1.0 - 3.0 Light/Power 3423 93 Shenzhen Tai-Yang PCCP Construction 4.0 1.0 - 5.0 Material 3150 93 Yanta;. Mitsubishi Cement Cement 28.7 2.0 - 30.7 3746 94 Dalian Glass Glass 30.5 2.4 30.5 32.9 3881 94 China Walden Investors Venture - 7.5 - 7.5 Capital 4470 94 Dynamic Growth Fund Venture - 20.0 - 20.0 Caoital 4534 95 Newbridge Investment Venture - 10.0 - 10.0 Capital 4755 95 Nantong Wanfu (EE1) Agribusiness 6.9 3.0 8.9 9.9 2853 96 Dupont Suzhou Polyester Textiles 24.9 3.8 52.0 28.7 4486 96 Plantation Timber Product Timber, Pulp 10.0 1.0 20.0 11.0 Total Gross Commitments 157.5 59.6 111.4 328.5 Less cancellations, terminations, 53.2 0.0 0.0 53.2 repayments, write-offs, and sales Total Commitments now Held by Syndicates - - -11.2 -11.2 Total Commitments now Held by IFC 104.3 59.6 122.5 286.4 Total Undisbursed 40.5 32.0 66.3 138.8 Subsequently canceled. 1/4/96 EA2DR  I  IBRD 27181 ! t r\>5 g ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~MOWNGOUA < IW4 (340MWI- 5 -'6 ,1 =