China - Ertan Hydroelectric Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16583-CHA IMPLEMENTATION COMPLETION REPORT CHINA ERTAN HYDROELECTRIC' PROJECT (LOAN 3387-CHA) May 15. 1997 Infrastructure Operations Division China and Mongolia Department East Asia and Pacific Regional Office 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 Currency Unit: Yuan (Y) At Appraisal ( April 1, 1991) $1=Y5.24 Exchange Rates During Project Years Year Ave. 1991 - Y 5.36 1992 - Y 5.49 1993 - Y 5.75 1994 - Y 8.60 1995 - Y 8.30 1996 - Y 8.30 WEIGHTS AND MEASURES Metric System FISCAL YEAR January I to December 31 ABBREVIATION AND ACRONYMS CHIDI Chengdu Hydroelectric Investigation & Design Institute DRB Dispute Review Board EA Environmental Assessment EEC Ertan Engineering Corporation EHDC Ertan Hydroelectric Development Corporation EMP Environmental Management Plan ERP Environmental and Resettlement Panel PPA Power Purchase Agreement GOC Government of China SBC Special Board of Consultants SDB State Development Bank SDIC State Development Investment Corporation SEPC Sichuan Electric Power C(ompany SIC Sichuan Investment Company SPRO Sichuan Provincial Resettlement Office WHO World Health Organization Vice President : Jean-Michel Severino, EA1' Director : Nicholas C. Hope, EA2 Division Chief : Richard Scurfield, EA2IN Staff Member : Noureddine Berrah, Principle Energy Specialist, EA21N  J~ ~~ U -i~~- - | - Arch Dam completed to half final height New Yaba - Tow for, - Resettlement New ~- i Yaba Town .o Ura Reetlmn   FOR OFFICIAL USE ONLY CONTENTS Preface .......................................................... Evaluation Summary ........................................................v PART I: PROJECT IMPLEMENTATION ASSESSMENT .......................................1 A. Project Objectives and Description ......................................................1l B. Achievement of Project Objectives ......................................................3 C. Implementation Record and Major Factors Affecting the Project ..................... 4 D. Project Sustainability ................................................... 16 E. Bank Performance ...................................................... 17 F. Borrower Performance ...................................................... 18 G. Assessment of Outcome ....................................................... 19 H. Future Operation ....................................................... 19 I. Key Lessons Learned ...................................................... 19 Part II: Statistical Tables ....................................................... 22 Table 1: Summary of Assessment .22 Table 2: Related Bank Loans .23 Table 3: Project Timetable .26 Table 4: Loan Disbursements: Cumulative Estimated and Actual .26 Table 5: Key Indicators for Project Implementation .27 Table 6: Key Indicators for Project Operation .27 Table 7: Studies Included in the Project .28 Table 8A-1: Project Costs ................. 29 Table 8A-2: Project Costs ................. 30 Table 8B: Project Financing .30 Table 9: Reestimated Economic Costs and Benefits .31 Table 10: Status of Legal Covenants .32 Table 11: Compliance with Operational Manual Statement .33 Table 12: Bank Resources: Staff Inputs .34 Table 13: Bank Resources: Missions .34 Figure 1: Actual Progress vs. Target Schedule .35 Annex 1: EHDC Financial Statements .37 Annex 2: Executive Summary of EHDC's Own Evaluation .40 Annex 3: Extract of Completion Mission Aide Memoire .43 Annex 4: Key Monitoring Indicators .49 Annex 5: Inflation and Exchange Rates .51 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.  - 11 - Annex 6.1: Reestimated Economic Costs and Benefits (Incorporating Environmental Benefits of Avoided SO2 and Particulates Emissions) ................................. 52 Annex 6.2: Reestimated Economic Costs and Benefits (Incorporating Environmental Benefits of Avoided SO2, Particulates and CO2 Emissions) ......................... 53 Annex 6.3: Project Risk Analysis ............................................................. 54 MAP: IBRD22093R1 MAP: IBRD 21308R  - iii - IMPLEMENTATION COMPLETION REPORT CHINA ERTAN HYDROELECTRIC PROJECT (LOAN 3387-CHA) PREFACE This is the Implementation Completion Report (ICR) for the first phase of the Ertan Hydroelectric Project in China, for which two consecutive loans have been provided. The first loan (Loan 3387-CHA) in the amount of $380 million was approved on July 2, 1991 and made effective on September 6, 1991. To complete the construction of the project, a second loan (Loan 3933-CHA) in the amount of $400 million was subsequently approved on August 22, 1995 and made effective on January 17, 1996. The first loan was closed on December 31, 1996, as originally scheduled. It was fully disbursed, and the last disbursement took place on December 17, 1996. This ICR covers the implementation of the first phase of the project for the period up to September 1996. It was prepared by Junhui Wu with the assistance of Barry Trembath and Noureddine Berrah, Infrastructure Operations Division, China and Mongolia Department of the East Asia and Pacific Region, and reviewed by Mr. Richard Scurfield, Division Chief, and Mr. Yo Kimura, Project Advisor. Preparation of this ICR was begun during the Bank's supervision mission in November 1996. It is based on the Staff Appraisal Report, the Loan and Project Agreements, Supervision Reports, correspondence between the Bank and the Borrower/ Beneficiary, and interviews with Bank and Borrower/Beneficiary staff involved in project implementation. The Borrower/Beneficiary contributed to the preparation of the ICR by preparing their own evaluation of the execution of the project, and by providing comments on the draft Bank ICR that were incorporated in the final version.   v - CHINA ERTAN HYDROELECTRIC PROJECT (LOAN 3387-CHA) EVALUATION SUMMARY Introduction and Project Objectives 1. The Ertan Hydroelectric Scheme is located on the lower reaches of the Yalong River in the southwestern province of Sichuan. Shortages of electricity in the province were, when the project was identified, and still are a major constraint to its economic development and to the improvement of the population's living standards. 2. The objectives of the Project were to: (a) provide additional generation capacity in Sichuan Province to alleviate the acute shortage of electricity; (b) assist in the transfer of modern power technology and efficient dam construction method; (c) contribute to further improvements in the analyses of environmental and ecological impacts of hydroelectric resource development; (d) enhance the institutional development of the beneficiary, Ertan Hydroelectric Development Corporation (EHDC), by strengthening its organization through a comprehensive management training program and introduction of economic efficiency and sound pricing principles; and (e) provide technical assistance in project design and implementation, and for the promotion of the optimal operation of the power system, prudent financial management, and manpower development. 3. The project consisted of: (a) preparatory works; (b) construction of a parabolic, double-curvature arch dam (240 m high) across the Yalong River together with an underground powerhouse complex, a log conveyance system, and appurtenant works and structures; (c) provision and installation of six 550-MW generating units and associated equipment; (d) resettlement of about 45,812 people affected by the project; (e) an environmental science station and management program; (f) consultancy services for engineering, procurement, construction management, and preparation of future power projects; (g) studies of power pricing and power plant and reservoir operation; and (h) strengthening EHDC's organization, technical assistance and staff training, together with related equipment and accessories. 4. The design of the project responded to the country's regional and sectoral objectives at the time of appraisal. The project objectives were consistent with the Government's strategy to accelerate the development of the large and economic hydroelectric potential and the Bank's country assistance goals regarding transfer of appropriate modern technology, staff training, and modern utility practice. Phasing of Bank support for the project, with Loan 3387-CHA ($380 million) followed by Loan  - vi - 3933-CHA for $400 million, is considered appropriate given the project's long gestation period. It allowed the Bank to assist EHDC in better addressing environmental and resettlement issues and complying with environmental and resettlement guidelines issued after appraisal. Implementation Experience and Results 5. The progress made toward achieving the primary objective of the project, i.e., to build a hydroelectric scheme of 3,300 MW, has been very satisfactory. All the key target dates of physical construction were met. The Yalong River was successfully diverted in November 1993. By the end of October 1996, excavation for the dam and the underground powerhouse complex were virtually completed. Concrete placement is generally on schedule despite delays at the earlier stage. The dam is approximately half complete in terms of both height and volume. Reservoir filling will start in Spring 1998 as scheduled. This laid a solid ground for timely completion of the second phase of the project. 6. The latest estimates of the project cost to completion (excluding interest during construction) are $941.87 million in foreign costs and Y 10,653.86 million in local costs, equivalent to a total of $2,282.41 million. In comparison with appraisal estimates, there is an overall cost overrun of about 21 percent when expressed in US dollars and 60 percent when expressed in local currency, in which the foreign cost overrun is about 5 percent. The cost overrun is largely due to (a) the higher-than-expected inflation in China (an inflation rate of 5 percent per year for 1993-2000 at appraisal compared to actual rates of 24 percent in 1993, 19.5 percent in 1994 and 14.9 percent in 1995), (b) the devaluation of US dollar against major European currencies during 1992-96, and (c) the devaluation of the local currency against the US dollar from an exchange rate of Y 5.24/$l at the time of appraisal to Y 8.30/$l in 1996. 7. If actual expenditures and latest estimates are de-escalated to the appraisal date, then overall costs are about 22 percent above those originally anticipated. This can be largely explained by the cost overrun in real terms of three components: (a) resettlement by 138 percent ($130.4 million equivalent), (b) engineering/contract administration/ technical assistance by 223 percent ($162.2 million equivalent), and (c) civil works for the dam by 7 percent ($42.1 million). Large resettlement cost overruns are partly attributable to the lesser preparation status of the resettlement component at the outset of the project,' and partly to the fact that increases of resettlement costs substantially exceed general inflation rates in times of dynamic economic growth. Significant cost increases had occurred in both local and foreign components of engineering/contract administration. The large overrun in local costs is attributable to the fact that wages and salaries in this area have risen much faster than the general inflation. In addition, in line with the corporatization of the power sector, all costs (direct and indirect) are now i The scope of resettlement changed over time from 30,000 persons to 45,812 persons.  - vii - charged to the project, in contrast to the earlier situation where significant proportions were off-budget. With regard to the foreign assistance in these areas, the budgeted level of effort, though it far exceeded anything previously used in China, still proved to be inadequate, and it is to EHDC's credit that they recognized this and increased expenditures in response to the need. The cost overrun in the civil works can be attributed to an inadequate contingency allowance to cover the claims resulting from unforeseen geological conditions. However, a 7 percent cost overrun for a civil contract of this magnitude is considered acceptable. 8. The project internal economic rate of return (IERR) has been recalculated using the most recent estimates of costs and benefits. The calculation is based on an economic cost 14 percent higher than the estimated economic cost at appraisal. However, in present value terms (both costs discounted to the same year at 12 percent), the revised cost is only 5 percent higher than the original estimates. The 5 percent cost increase would result in a reduced IERR from 14.90 percent (appraisal estimate) to 14.49 percent, if the benefits remain unchanged. However, given the profound changes in power pricing in China, benefits should also be revised. They are estimated based on a proxy of SEPC's (the buyer) willingness to pay for new generation at the plant gate (35.0 fen/kWh, 1996 price). This approach yielded an IERR of 16.11 percent, which is higher than the appraisal estimate (14.90 percent). This shows that the increased plant gate price (about 12 percent higher than the covenanted tariff in real terms) outweighs the cost overrun of the project. It should be noted that the above calculations have not taken into account the environmental benefits of the project. The project will avoid mining, transporting, and burning of some 10 million tons of raw coal a year in Sichuan Province, which has the highest level of air pollution in China. If environmental benefits, i.e., the avoided sulfur dioxide (SO2), particulates (PMIO) and carbon dioxide (C02) emissions are considered, an IERR of 17.99 percent is obtained using the most conservative values of the externality Cost of S02, particulates and the climate change. Finally, risk analyses have been performed using a probability approach to assess the impact of the perceived risk factors that affect the return of the project. Five broad categories of risk have been considered in the analysis, namely, demand risk, price risk, cost risk, operational performance risk and hydrological risk. The expected IERR, based on the weighted average of all simulated combinations is 15.81 percent, only about 0.3 percent lower than the base case value without consideration of project risks. This suggests that the uncertainty of the return of the project investment is much reduced at the completion of the first-phase construction and that the project's economic viability is robust. 9. Modern technology for construction of large-scale dams and powerhouses was successfully introduced through international consulting services and training. This is demonstrated by EHDC's capability in managing the critical path of a project of such magnitude and complexity and achieving timely implementation. 10. In the course of project implementation, the successful incorporation of EHDC as a limited liability company in accordance with China's new Company Law furthered power sector and enterprise reforms in the country. Improved corporate governance has  - viii - been achieved through the establishment of a Board of Directors. EHDC is now allowed to make important management and investment decisions on its own instead of seeking instructions from government agencies. The institutional capability of EHDC will be further strengthened following completion of the ongoing study on organizational restructuring and financial management. Implementation of the recommendations of the study will prepare EHDC to assume its role as the most important independent (nonutility) power producer in the province. 11. The resettlement task has been carried out successfully according to the resettlement implementation plan that was updated during preparation of the second project to incorporate lessons learned at that time from the first project. In total, 45,812 people needed to be resettled, in which 28,482 people live in rural areas. By the end of October 1996, 12,286 out of 28,482, or 43 percent of project-affected persons in rural areas were physically relocated. Resettlement activities have been intensified for the last two years and significant physical progress has been achieved in construction of the new town (housing 15,000 people), rural resettlement sites, and key infrastructure facilities, thus creating favorable conditions for completing all required resettlement work before the end of 1997. While urban resettlement in 1997 is well planned and organized, continuing resettlement efforts will concentrate on providing extensive assistance in relocating rural people, in particular, less able resettlers like the elderly. 12. The environment component has been proceeding satisfactorily following the environmental management plan (EMP). The environmental assessment (EA) and EMP were also revised for the second phase to comply with more stringent national EA procedures and Bank policies. Work under the first phase mainly comprised implementation of identified mitigation measures and establishment of environmental baselines for the reservoir and catchment area. The mitigation measures implemented include: (a) public health, schistosomiasis treatment and prevention, (b) construction worker health inspections, and (c) preservation of cultural relics. Through the comprehensive monitoring systems, a large amount of data has been collected covering meteorology, hydrology, water quality, sedimentation, and health. In addition, biodiversity investigations were conducted through field walks, sample surveys and interviews with the local peasants. These data will be used (a) to devise environmental mitigation measures as required and (b) to study the effects of large dams in the province to assist in the evaluation of future projects. The major tasks for the second phase will be to establish a conservation management zone around the periphery of the reservoir, building on the work completed during the first phase, and to promote and support catchment rehabilitation. 13. The achievements of the first phase can mainly be attributed to three factors: (a) the overall implementation organization was structured according to modern management practices; (b) the project executing agency, EHDC, was incorporated in the course of project implementation as a limited liability company with sole responsibility for construction and commercial operation of the Ertan scheme, and therefore had a strong sense of ownership; and (c) the efficient integration of the Advisory Group (which  -ix - comprises about 50 international experts specialized in different technical and managerial areas) into the project management team throughout the construction. Summary of Findings, Future Operations, and Key Lessons Learned 14. The objectives of the project were consistent with those of the Chinese Government and the Bank. The progress made toward achieving all project objectives has been very satisfactory. The outcome is rated as highly satisfactory, and sustainability likely. 15. The project is now entering a new phase where construction priorities have gradually shifted from civil works to installation of electrical and mechanical equipment. Drawing lessons from other Bank-financed projects in China, the following measures have been taken to ensure a smooth implementation in the second phase: (a) conclusion of a single contract with one foreign firm assuming full responsibility for supply of both hydraulic turbines and generators. This would reduce interfacing problems and thereby reduce potential delays in equipment delivery, equipment defects and mismatching; (b) extension of consulting services provided by the- Advisory Group into the second phase, with more emphasis on electrical and mechanical aspects; and (c) development of computerized project management systems that consist of a master schedule for civil works and erection of electrical and mechanical equipment, equipment and design drawing production and delivery control system and cost control system. The second- phase implementation will continue to be supervised and monitored in terms of physical construction, the environmental management program, resettlement action plan, institutional development and financial performance. 16. To prepare for future operation, EHDC has hired about 150 college graduates and sent them for one year of training in operating an existing large hydropower station. In addition, EHDC signed an agreement in 1996 with Gezhouba Hydropower Plant, which will assist EHDC in preparation, operation, and maintenance of the Ertan Hydropower Plant for the period 1996-2000. Preparation of performance indicators for future operation was discussed during the November 1996 supervision mission. Due to the need to incorporate the outcome of the optimization study (ongoing study) in the operation plan of the plant and reservoir, the operation plan including performance indicators will be prepared in 1997 when the study results become available and will be included in the ICR for the second project. 17. Ertan is the first large-scale hydroelectric project in China implemented entirely with international contracting and construction management procedures. Many of the difficulties experienced in implementing the new system were due to the relative newness of economic and enterprise reforms in China. In retrospect, it is doubtful whether matters could have been handled differently. However, given the economic and enterprise reforms that have now occurred and the prospects for even broader reform, it is possible to formulate key lessons from project implementation that will benefit future projects in  - x - the sector, including the second phase of the Ertan Project. The key lessons are summarized as follows: * In implementing a project of the magnitude and complexity of Ertan, implementation will be greatly assisted if an implementing organization is in place at the outset of the project, which is commercially independent and has full decision-making authority and responsibility for its performance. Initial delays in project implementation, resulting in sizable contractors' claims for acceleration of works, largely resulted from EHDC's inability to make timely decisions. The incorporation of EHDC in 1995 as a limited liability company following the promulgation of the new Company Law led to major improvements in this regard, allowing EHDC to make quick decisions on its own instead of seeking instructions from govermment agencies. This single factor is largely responsible for the recovery from earlier difficulties to the currently successful implementation and probability of timely completion of the second project. * Prior to the start of construction, construction management personnel should be trained in contract administration and modern project management techniques. This training should include fairly lengthy assignments on ongoing projects where these techniques are in use. China routinely undertakes such training of operating personnel prior to the commissioning of all large hydropower plants and this is very successful. Similar training of construction management personnel will increase their competence and improve response time through allowing increased delegation rather than involving senior management in matters of detail. * Improved communication among various parties (owner, engineer, designer, advisors and contractors, etc.) should be actively pursued from the outset, to avoid misunderstandings that could cause delays and/or losses to the project. Communication difficulties were perhaps the most difficult to resolve in construction of the Ertan scheme. The issue is not simply translation between different languages, but of communicating ideas and concepts across international boundaries of training and culture. * Development of project management systems should also commence before construction in order to manage the construction more efficiently. These should include contractual documentation management systems, a project master schedule, procurement and delivery schedule for employer-supplied equipment, a design drawing control system and cost control system. EHDC has now developed systems in most of these areas, which has resulted in less exposure of EHDC to claims resulting from delayed supply of information or equipment.  - xi - * In the future, consideration should also be given to reducing interfacing by procuring equipment in smaller numbers of larger packages. In retrospect, the division of civil activities among the two major contractors was not ideal, resulting in an increased number of interfaces that led to contractual difficulties. * With regard to resettlement, the lessons learned are the necessity to advance the preparation of the resettlement implementation plan at the outset of the project, which will allow a better coordination of various resettlement activities and more detailed cost estimates to be carried out. In this project, the problems encountered in implementing the resettlement component at the early stage were largely due to a lack of a detailed resettlement implementation plan, which was only completed in 1995. In addition, in preparing the resettlement cost estimates, adequate contingency allowances should be made to cover the costs of compensation and the measures necessary to restore incomes.   - 1 - CHINA ERTAN HYDROELECTRIC PROJECT (LOAN 3387-CHA) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES AND DESCRIPTION 1. The Ertan Hydroelectric Scheme is located on the lower reaches of the Yalong River in the southwestern province of Sichuan. When the project was identified, the shortage of electricity in the province was a major constraint to its economic development and improving the living standards of the population. 2. The Government of China (GOC) has given high priority to electric power development. Its strategy is to accelerate the pace of hydropower development, construct large-scale and high-efficiency coal-fired thermal power plants, interconnect power systems through high-voltage extension of transmission networks, and replace obsolete generating plants. These measures will lead to improved energy efficiency and conservation, and therefore mitigate the adverse environmental impact of electric power growth. 3. On the institutional front, GOC's commitment to economic reform has called for modernizing the power sector and making it more efficient. A number of actions were taken to introduce modern energy technologies and modern construction management methods, increase the autonomy of power supply entities, and rationalize power pricing. 4. The design of the Ertan Project responded to the country's regional and sectoral objectives by: (a) providing additional generation capacity in Sichuan Province to alleviate acute shortages of electricity; (b) assisting in the transfer of modern power technology and efficient dam construction methods; (c) contributing to further improvements in the analyses of environmental and ecological impacts of hydroelectric resource development; (d) enhancing the institutional development of the beneficiary, the Ertan Hydroelectric Development Corporation (EHDC), by strengthening its organization through a modern management training program and introduction of economic efficiency and sound pricing principles; and (e) providing technical assistance in project design and implementation, and for the promotion of the optimal operation of the power system, prudent financial management, and manpower development. In particular, the project was consistent with the GOC goal of accelerating development of the country's large and economic hydroelectric potential and the Bank's country assistance goals regarding transfer of appropriate modern technology, staff training, least-cost investment planning, and modern utility practice. Phasing of Bank support for the project, with Loan 3387-  - 2 - CHA ($380 million) followed by Loan 3933-CHA for $400 million, is considered appropriate given the project's long gestation period. It allowed the Bank to assist EHDC in better addressing environmental and resettlement issues and complying with environmental and resettlement guidelines issued after appraisal. 5. The Ertan Hydroelectric Project consisted of: (a) preparatory works; (b) construction of a parabolic, double-curvature arch dam (240 m high) across the Yalong River, together with an underground powerhouse complex, a log conveyance system, and appurtenant works and structures; (c) provision and installation of six 550-MW generating units and associated equipment; (d) resettlement of about 45,812 people; (e) an environmental science station and management program; (f) consultant services for engineering, procurement, management of construction, and preparation of future power projects; (g) studies of power pricing and power plant and reservoir operation; and (h) strengthening EHDC's organization, technical assistance and staff training, together with related equipment and accessories. 6. In the course of project implementation, in February 1995, EHDC was incorporated as a limited liability company (known as Ertan Hydropower Development Limited Liability Company) in accordance with China's new Company Law. It has three shareholders: the State Development and Investment Corporation (SDIC), Sichuan Investment Company (SIC) and Sichuan Electric Power Company (SEPC). The Board of Directors consisting of 10 members was established at the same time, with its role being to represent the interests of the shareholders, appoint and dismiss the general manager and high-level staff, and supervise the management of the Company. Members of the Board of Directors are appointed by the shareholders. In May 1995, the Board of Directors appointed a new general manager and other high-level management staff of EHDC. In response to the need to prepare EHDC to assume the role as the most important independent power producer in the province for commercial operation of the Ertan scheme and for development of future projects on the Yalong River, the second project (Ertan II Hydroelectric Project) included a Reform Implementation Plan, supported by technical assistance and training to facilitate EHDC's transformation. 7. With regard to resettlement, there has been a change of scope in terms of the number of people to be affected. The first appraisal estimate was about 30,000 people,  - 3 - based on 1984 census data. The Staff Appraisal Report (SAR) for the second project established that about 35,000 people would be relocated according to the revised plan based on a physical survey and demarcation of the reservoir boundary after the 1992 census. More recently, the scope of resettlement impacts was further revised by the Sichuan Provincial Resettlement Office (SPRO) to include those who will lose land only and do not require relocation, those who will be indirectly affected by sliding reservoir banks, and natural population growth until 1998. As a result, the total number of affected people increased to 45,812 persons, of which 28,412 live in rural areas. Meanwhile, the total budget of the plan was raised from Y 0.61 billion to about Y 2.0 billion and was approved by the central government in November 1996. The resettlement budget on a per person basis was more than doubled. B. ACHIEVEMENT OF PROJECT OBJECTIVES 8. The progress toward achieving the primary objective of the project, i.e., to build a hydroelectric scheme of 3,300 MW, has been very satisfactory thus far. All the key target dates of physical construction were met. By the end of October 1996, the dam was approximately half complete in terms of height and volume. About 97 percent of the excavation work and 63 percent of the concrete work was complete for the underground powerhouse complex. The installation of electrical and mechanical equipment commenced as planned. This laid a solid ground for timely completion of the second phase of the project. The reestimated Internal Economic Rate of Return (IERR) is 14.26 percent using the most recent estimates of costs and benefits. 9. The modem technology for dam and power station construction was successfully introduced through: (a) the participation of the Advisory Group, which comprises 17 international experts on a permanent basis and about 30 on an ad-hoc basis specializing in different technical and managerial areas; (b) training courses conducted in management systems for hydropower construction and monitoring techniques for arch dams and underground works; and (c) project studies. This is demonstrated by EHDC's capability in managing the critical path of a project of this magnitude and complexity and achieving timely implementation. 10. EHDC was the first commercially independent power enterprise to be the beneficiary of a Bank-financed power project in China. The successful incorporation of EHDC furthered power sector and enterprise reforms in the country. EHDC's corporate governance has been improved by the establishment of a Board of Directors following its incorporation. This allows EHDC to make important management and investment decisions on its own instead of seeking instructions from government agencies. The institutional capability of EHDC has been improved during project implementation and will be further strengthened upon completion of the ongoing study on organizational restructuring and financial management. 11. The resettlement of the affected population is being carried out successfully according to the resettlement implementation plan. By the end of October 1996, 12,286  - 4 - out of 28,482, or 43 percent of project-affected persons in rural areas were physically relocated. To date, Y 947 million has been spent on resettlement. Significant physical progress was achieved in construction of the new town, rural resettlement sites and associated facilities, thus creating favorable conditions for completing all required resettlement work before the end of 1997. 12. Progress toward improving analyses of environmental and ecological impacts of hydropower development was satisfactory. With assistance from a variety of international experts, EHDC has been monitoring meteorological, hydrological, water quality, sedimentation, and sanitation aspects of the project since 1993. Nine new meteorological stations have been built and functioning since April 1996 and will provide 2-3 years' data before the filling of the reservoir scheduled in spring 1998. Three major biodiversity surveys have been fielded so far to collect samples and specimens, which covered the whole catchment area. These data will be used (a) to devise environmental mitigation measures as required, and (b) to study the effects of a large dam to assist in the evaluation of future projects. 13. Financial performance was not reassessed at this stage because the project is still at the construction stage. It will be fully assessed in the ICR for the second-phase project (Ln. 3933-CHA). C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT Implementation Organization 14. EHDC is the executing agency for the project. It has assigned construction supervision and management responsibility to Ertan Engineering Corporation (EEC), which is a subsidiary of EHDC, specially set up for the project. Chengdu Hydroelectric Investigation and Design Institute (CHIDI) was contracted as the designer of the project. CHIDI is one of the most experienced design institutes in China and has been responsible for the design of several large hydroelectric projects. Since the start of project preparation, CHIDI and EEC have been assisted by an Advisory Group consisting of international consultants, as well as three expert panels: the Special Board of Consultants (SBC), the Environmental and Resettlement Panel (ERP), and a Dispute Review Board (DRB). The SBC and ERP are composed of prominent foreign and Chinese experts in their respective areas and have convened regularly to review and advise on important technical and management matters. With the progress of the project, a mechanical and electrical branch of SBC also met to review bid documents for the main equipment. The DRB was set up to facilitate prompt resolution of disputes relating to civil works contracts. The contractors and EHDC each selected a member of the DRB and the third member, the chairman of DRB, was selected by the two sides. 15. Resettlement of people and reconstruction of structures being displaced by the reservoir and the construction site areas are carried out by SPRO, which is a governmental body responsible for resettlement associated with large-scale hydropower projects. EHDC signed a contract for independent monitoring and evaluation of the  resettlement program in October 1994 with the Resettlement Engineering Development Center of Sichuan Province (REDC), which has a staff of 25 professionals. Implementation Schedule 16. The implementation schedule established in the SAR of the first project required commencement of the main civil works on September 15, 1991, river closure by December 1993, commissioning of the first unit on July 1, 1998 and the last unit on April 1, 2000, and project completion by the end of the year 2000. Critical intermediate dates for commissioning of the first unit are completion of powerhouse draft tube liner of the first unit on October 1, 1996 and reservoir filling in spring 1998. It is a very demanding schedule to build this large and complex a hydroelectric scheme in only nine years instead of the originally planned 12 years, even for an experienced international contractor. The nine-year implementation schedule was slightly revised in the SAR of the second project by advancing the commissioning operation of the first unit by one month and the last unit by four months. 17. Despite some delays at various stages, but particularly at the beginning, project management with the support of all concerned parties has been able to recoup the delays and keep the construction on schedule (see Figure 1). The two major contractors of civil works (Lot I for the dam and plunge pools, and Lot II for the underground powerhouse complex) started work on September 15, 1991 as planned. The Yalong River was successfully diverted in November 1993, one month ahead of schedule. The dam foundation excavation was completed by January 1995. There was a five-month delay in starting dam concrete placement; however, the accumulated delays were substantially recovered in 1996. The monthly concrete production exceeded 200,000 m3 in October 1996, of which 150,000 m3 were placed in the dam. At the beginning of November 1996, the arch dam was about 150 meters above ground level (designed height 240 m). 18. For underground works, excavation was substantially completed in the powerhouse cavern, headrace tunnels, the main transformer chamber, tailrace surge chambers and tailrace tunnel No. 2. Excavation is continuing on tailrace tunnel No. 1. Power conduits and penstock tunnels were completed in advance of the date required. The draft tube liner of the first unit (Unit 6) was completed three months ahead of schedule. By the end of October 1996, embedding the steel lining of the draft tube for the second unit (Unit 5) was nearly completed and embedding the lining for the third unit (Unit 4) was ongoing. The erection bay was handed over for installation of electric and mechanical equipment by the milestone date (August 1, 1996). Regarding the construction of log-passing facilities, there were delays due to modification of the design and a landslide that occurred in June 1996. EHDC has recently negotiated an agreement with the Lot I contractor for partial completion of the log-passing structure by August 1997 and overall completion by the end of 1997. No major problems are foreseen in this work.  - 6 - 19. The contract for erection of electrical and mechanical equipment (Lot III) was awarded on February 29, 1996. Notice to proceed was issued on April 1, 1996. Construction at the gas-insulated switchgear (GIS) yard started on June 1, 1996. Soil conditions and requirements for additional excavation and rock support caused some initial delay. However, structural concrete work is now underway and progressing satisfactorily on an accelerated basis to overcome the time lost. By the end of October 1996, erection of discharge and stay rings for Unit 6 was completed and 75 percent of the spiral case segments were set and welding had begun. 20. Major factors causing the delays were: (a) Institutional Problems. At the early stage of project implementation, EHDC's inability to make quick decisions to solve problems encountered during the construction was the major cause for initial delays. This was largely overcome after the incorporation of EHDC in 1995. (b) Unforeseen Geological Conditions, such as Rockbursts, Rock Movements and Cracking, and Landslides. Two major rock bursts occurred in the powerhouse complex. There has been considerable additional support work carried out in critical areas. This was done without significantly affecting critical activities although a major claim is expected. (c) Problems Experienced in the Aggregate Production Plants. This includes undersized and improperly selected equipment and lack of maintenance. In addition, the primary crusher had a major breakdown for two months in December 1995 and January 1996. This was overcome by the addition of supplementary equipment and improvement of maintenance, so that aggregate production is no longer a critical path item. Concrete production reached 200,000 m3 per month in October 1996. (d) Late Delivery of Drawings by CHIDI. This caused a significant delay and has become a major concern. Late delivery and defects of employer- supplied equipment and materials also caused delays. However, EHDC substantially increased communication in this area, and project delays and claims due to drawing delays are expected to decline. Other measures also being taken to ensure timely delivery of drawings and employer-supplied equipment and materials include development of computerized project management systems. 21. During the last few years, EHDC developed a number of computer databases to keep records of project activities. However, the databases were not interrelated and did not have the capability of scheduling and coordination. EHDC has undertaken to develop an integrated computerized project management system to identify the critical path items at any moment of construction and to coordinate all related activities. By the end of October 1996, the master schedule was developed in some detail and continued to be  - 7 - elaborated in critical areas, particularly those that have numerous interfaces between contractors, equipment suppliers and/or designers. Systems for tracking the status of equipment production and delivery, including production and review of manufacturers' drawings, have also been largely developed, and continue to be refined. Project Costs 22. The estimated cost of the project at appraisal (excluding interest during construction) was $896.4 million in foreign costs and Y 5,679.2 million in local costs, equivalent to a total of $1,885.5 million. The latest estimates of the project cost to completion were $941.87 million in foreign costs and Y 10,653.86 million in local costs, equivalent to a total of $2,282.41 million (see Table 8). In total, there is a cost overrun of about 21 percent when expressed in US dollars and 60 percent when expressed in local currency. The cost overrun is largely due to: (a) the higher-than-expected inflation in China (an inflation rate of 5 percent per year for 1993-2000 was projected at appraisal compared to actual rates of 24 percent in 1993, 19.5 percent in 1994 and 14.9 percent in 1995, see Annex 5); (b) devaluation of the US dollar against major European currencies during 1992-96, which resulted in exchange losses of $63.34 million; and (c) the devaluation of the local currency from an exchange rate of Y 5.24/$1 at the time of appraisal to Y 8.30/$1 in 1996. The foreign cost overrun is about 5 percent (equivalent to $ 45.5 million) when expressed in US dollars, which can be attributed to: (a) the procurement of power transformers changed from local to foreign suppliers ($17.9 million); (b) increased person-months for engineering and contract management ($21.8 million); and (c) a combination of exchange losses and deduction of duties and taxation. With regard to local costs, significant cost variations were found in the following components: SAR estimate Actual/latest estimate (including contingencies) (including contingencies) Increase (Y million) (Y million) (%) Resettlement & land acquisition 635.8 2,259.49 255.0 Arch dam (Lot 1), local portion 1,828.01 2,552.02 39.6 Engineering /contract admin./ 366.9 1,800.28 390.7 technical assistance, local portion 23. Analyses of base cost estimates indicated that costs for resettlement and engineering/contract administration/technical assistance were largely underestimated. The scope of resettlement changed from 30,000 persons to 45,812 persons over the time, and the resettlement cost on a per person basis more than doubled. Regarding the cost of engineering/contract administration/technical assistance, for the local portion, there is a significant real increase of person-month rates (almost quadrupled in five years). For the foreign portion, there is an increased scope for consulting services for construction management, totaling about 600 person-months (see para. 26).  - 8 - 24. To verify the adequacy of various contingencies, detailed analyses have been carried out for the two major civil contracts, i.e., Lot I (dam) and Lot II (underground powerhouse). In terms of physical contingencies including changes in bill of quantities, variation orders and claims, it was found that the original estimate of 10 percent for Lot I is inadequate in comparison with the actual increase of about 16 percent and that the original estimate of 20 percent for Lot II is close to the actual increase of about 22 percent. The difference in contingency allowances arises from the difference in the type of work. Allowance of 20 percent and 1O percent is generally considered appropriate for underground and surface work respectively. However, in retrospect, quantities and costs for Lot I were also subject to considerable variations due to geological conditions. Unforeseen geological conditions are a large factor in claims for extension of time, which were eventually resolved through approval of additional costs for acceleration. 25. With respect to price contingencies, it was found that the price contingency for foreign currency adequately covered actual inflation except for foreign exchange losses resulting from the devaluation of US dollars against major European currencies. The exchange losses were, however, largely offset by deduction of duties and taxes. The price contingency for local currency was significantly lower than the actual inflation level. 26. In order to exclude the effects of inflation and devaluation, a more accurate cost analysis has been carried out by de-escalating both foreign and local costs to the appraisal date, using respective foreign and local inflation rates, combining the two at the appraisal exchange rate, and comparing the resultant value with the appraisal estimates (including physical contingencies). This analysis indicates a total cost overrun of about 22 percent, which can be largely explained by the cost overrun of three components: (a) resettlement by 138 percent ($130.4 million equivalent), (b) engineering/contract administration! technical assistance by 223 percent ($162.2 million equivalent), and (c) the Lot I contract by 7 percent ($42.1 million). The large resettlement cost overrun has been the norn for hydroelectric projects in China. They are partly attributable to the lesser preparation status of the resettlement component at the outset of the project, and partly to the fact that increases of resettlement costs substantially exceed general inflation rates in times of dynamic economic growth. Significant increases occurred in both foreign and local components of engineering/contract administration. With regard to the foreign assistance in these areas, the budgeted level of effort far exceeded anything previously used in China. In any event, it proved to be inadequate, and it is to EHDC's credit that they recognized this and increased expenditures in response to the need. The large overruns in local costs is attributable to the fact that wages and salaries in this area have risen much faster than the general inflation. In addition, in line with the corporatization of the power sector, all costs (direct and indirect) are charged to the project, in contrast to the earlier situation where significant proportions were off budget. The cost overrun in the civil works can be attributed to unforeseen factors not taken into account in the contingency allowance as explained above. 27. An arrangement has been made to enhance the cost control in executing the second phase. A cost control system is being developed, which would provide periodic  - 9 - updates of current committed costs and expected costs to completion in the two currencies of US Dollars and Renminbi. This system will be fully in place by the end of May 1997. The agreed budget for Phase II advisory services includes provisions for a cost engineer to initiate the cost control system and support it for a period of 18 months so that it will be fully established and can be continued by others. Procurement and Disbursement 28. The project included 38 major procurement contracts, of which 9 entailed international competitive bidding (ICB). The total amount of the procurement contracts including the second phase was $2,350.3 million equivalent, of which $1,655.8 million equivalent was under ICB packages. All procurement activities for the project were performed in accordance with the Bank's procurement guidelines and were generally carried out satisfactorily. Involvement of foreign engineering consultants in the procurement process and the use of Model Bidding Documents contributed to efficient procurement. Disbursements were made ahead of the original estimates. The last disbursement was made on December 17, 1996. 29. Procurement was largely carried out as scheduled. The two major civil works contracts were signed six days before the loan effective date, using retroactive financing. This allowed timely commencement of civil works. Delays occurred in two major procurement items, i.e., a seven-month delay for main transformers and a one-year delay for gates and hoists. However, delivery of these items was not on the critical path of construction. By the end of 1996, all major contracts were awarded, requiring no major procurement tasks for the rest of the project period. 30. The major civil works contracts (Lots I and II) were awarded to two joint ventures respectively, each consisting of a number of foreign and domestic contractors. Both contracts were signed on August 31, 1991. Lot I consists mainly of the dam and plunge pool. Lot II is for the underground powerhouse, two spillway tunnels, a log-passing tunnel, and two diversion tunnels. In retrospect, the division of civil works among two major contractors was not ideal, resulting in an increased number of interfaces that led to contractual difficulties. The contract for Lot III, installation of electrical and mechanical equipment was awarded on February 29, 1996 to a joint venture of three local contractors and a local equipment supplier. 31. For supply of electrical and mechanical equipment, a single contract was concluded on March 28, 1994 with a foreign manufacturer for supply of both hydraulic turbines (6 sets) and generators (6 sets). Although four out of the six turbines and generators will be supplied by the local manufacturers through subcontracting, the foreign manufacturer will assume the full responsibility for the supply of all the contracted equipment. This would greatly reduce the interfacing problem and ensure timely delivery and quality of equipment. As the project is entering the phase of installation of electrical and mechanical equipment, EHDC is planning to meet with the foreign manufacturer to insist that they step up their control and supervision in all supplier factories.  - 10- 32. For procurement of the main civil works, the DRB was set up to facilitate prompt resolution of disputes. Up to the end of 1996, 23 claims and disputes were handled. This has so far greatly accelerated the construction pace. However, dissatisfaction exists with recent DRB recommendations, which was not found adequately justified. Consulting Services, Training and Studies 33. Due to the magnitude and complexity of the project, international consulting firms have been engaged throughout the project period to assist EHDC and CHIDI in construction management and design including contract administration, cost control, scheduling, construction inspection and quality assurance, design engineering services, and construction site administration. About 1,000 person-months of consulting services were contracted for the first phase of the project. These services were financed through grants, the Bank Group-supported Technical Cooperation Credit (TCC) and Loan 3387- CHA. The advisory services were performed satisfactorily and made a significant contribution to efficient project management. 34. The advisory service has been retained for the second phase of the project and the agreement was signed in December 1995. In total, 544 person-months were budgeted for the period from July 1995 to 1999. The budget covers the services of (a) the core advisory group providing general support and consultation on contractual matters, (b) the DRB, (c) specialists in civil, underground, mechanical and electrical engineering, (d) establishment of a cost control system, and (e) startup coordination during the commissioning stage. The projected level of input and the anticipated staffing mix is considered appropriate. 35. Project training concentrated on modern management of hydropower construction and decision-making techniques, particularly in project economics and investment planning, preparation of reconnaissance and feasibility studies, construction management, hydrology forecasting and measurements, monitoring procedures, resolution of claims and disputes, tariff and power pricing, financial management, environmental protection, human resettlement matters, safety and inspection of hydroworks, log transport facilities, and personnel management. Training was conducted both abroad and in China. Some domestic training was carried out by the Sino-Norwegian Training Center, sponsored by EHDC and a Norwegian group and supported by Norwegian grants. Other training was provided by a number of reputable Chinese universities and research institutes. In total, 228 persons received domestic training for 607 person-months. The international training, including visits to Canada, France, Norway and the United States, covered the subjects of monitoring techniques for arch dams and underground works, engineering management, environment and resettlement. 36. Three studies were envisaged in the SAR, namely, power pricing, optimization of plant and reservoir operations, and preparation of future power projects. Despite some delays in starting these studies, they were all carried out satisfactorily. The power pricing study was completed in April 1996. The optimization study and preparation of future  - 11 - power projects study are expected to be completed in 1997. The results of the pricing study and optimization study have provided a sound basis for setting the price formula and dispatching provisions of a power purchase agreement (PPA). The PPA will be signed in June 1997, under which EHDC would sell electricity generated from the Ertan scheme to the Sichuan provincial grid. Since EHDC was incorporated as a generation company in 1994, the implementation of retail tariff reforms is no longer relevant and is carried forward by another Bank-financed project, i.e., the Sichuan Power Transmission Project. The results of the study for preparation of future power projects were approved by the Chinese authorities, and an investment is planned for a hydroelectric project (Guandi) to be built on Yalong River as part of the cascade development plan (see Table 7). Resettlement 37. Resettlement was carried out satisfactorily according to the resettlement implementation plan, which was updated during preparation of the second project to incorporate lessons learned from the first project. In the initial period, only a small number of people who lived in the construction site were relocated. Most of them moved their houses to the higher elevation locations not far from their original homes. Resettlement activities have been intensified for the last two years with increased resettlement spending (Y 316 million for 1995 and Y 600 million for 1996). By the end of October 1996, 12,286 out of 28,482, or 43 percent of project-affected persons in rural areas were physically relocated, 397,603 m2 of new houses were built and 14,501 out of 27421 mu, or 53 percent of farmland, was developed. Significant physical progress has been achieved in various aspects of the resettlement implementation, ranging from construction of Yanbian New Town (housing 15,000 people), the Hongge rural resettlement site (housing 7,000 people), the reservoir boundary road, and key irrigation facilities, thus creating favorable conditions for completing all required resettlement work before the end of 1997. While urban resettlement in 1997 is well planned and organized, continuing resettlement efforts will concentrate on providing extensive assistance in relocating rural people including transporting construction materials to the site, technical advice on house construction, and helping to build houses for less able resettlers, e.g., the elderly. 38. The major factor that affected the progress of resettlement was the delayed approval of the resettlement budget, which was only granted in November 1996 by the central government. Meanwhile, resettlement had to proceed without an approved budget. This slowed down the overall resettlement pace in 1995 and 1996 and a number of resettlement projects lagged behind their implementation schedule. The other factor that affected resettlement implementation was the lack of coordination mechanisms at the early stage to link the allocation of the budget to each county with the quality and pace of their resettlement implementation. Several rural settlements were built without proper design and planning, and lack of user participation. SPRO has recently revised its work plan and prepared a detailed timetable for each affected village, with milestone dates for each implementation phase, and its supervision and coordination activities will be  - 12- intensified in future implementation. In order to strengthen the training center of SPRO for population resettlement and environmental impact, a grant provided by the Institutional Development Fund (IDF) has been approved in association with the second loan. It was agreed that the first training activity will be focused on providing training for county-level resettlement staff of the Ertan project. The training will be held in Ertan during the first half of 1997. 39. Monitoring and evaluation of resettlement has been carried out by REDC. Key staff members of REDC participated in the workshop for resettlement monitoring and evaluation sponsored by the Bank and ODA in October 1994. Since then, resettlement monitoring and evaluation reports were produced regularly by REDC based on the results of their field surveys. The fourth and latest report covers the period up to April 1996. These reports provided a detailed review of the resettlement status, and more importantly, a detailed description of the changes of livelihood among resettlers. 40. The environment component has been proceeding satisfactorily following the environment management plan (EMP). The environmental assessment (EA) was revised for the second phase to comply with more stringent national EA procedures and Bank policies. The work carried out covered (a) public health and schistosomiasis treatment, (b) construction worker health inspections, (c) biodiversity surveys, and (d) preservation of cultural relics. Monitoring activities have so far focused on establishing environmental baselines of the reservoir and catchment area, which includes biodiversity studies in the reservoir area and monitoring systems in particular meteorological observatories. EHDC has maintained a team of more than 200 staff members engaged in environment-related activities. 41. Historically, four townships under the jurisdiction of Yanbian County in the location of the Ertan reservoir area had been an epidemic schistosomiasis area. The disease had generally disappeared but was recurrent on a small scale. A control and surveillance program was carried out with the assistance of the World Health Organization (WHO). An agreement for schistosomiasis prevention was signed with the Public Health Bureau of Yanbian County in February 1996 and Y 750,000 were spent on the program. The prevention program includes treatments for human and animal diseases, eradication of italics snails that are the intermediate host of schistosomiasis, and management of excrement. Public awareness has been greatly increased since then. However, recent investigation indicated that the snail eradication program has not been totally effective to date. There is a need to revise the scope of the current control program, and work in this regard is proceeding. Major preventive measures are planned to be implemented before impoundment begins and to be continued thereafter. 42. With regard to preservation of cultural relics, the task is undertaken by Panzhihua Resettlement Bureau, which concluded a contract with the Provincial Cultural Relics Management Department. Preliminary investigation of cultural relics in the reservoir area was completed in 1995. The work of unearthing the cultural relics will be completed by the end of 1997.  - 13 - 43. Preparation for the biodiversity investigation started in March 1995. The agreement on biodiversity studies in the Ertan Reservoir Area was signed with the Rare Fauna and Flora Research Institute of Sichuan Teachers' College in September 1995. Foreign experts were engaged for both the bird and fish surveys. Investigations were carried out through field walks, sample surveys, monitoring and interviews with the local peasants. Terrestrial biodiversity subjects investigated were comprehensive and included vegetation, birds, mammals, reptiles and amphibians. The aquatic biodiversity survey covered a large number of sites. 44. The monitoring systems started to function at different dates according to the object of monitoring. Water quality monitoring has been carried out since 1993, sedimentation and wastewater, noise and air quality, aquatic resources since 1994, land use and earthquake since 1995, water level/precipitation since 1996. Nine new meteorological monitoring stations have been built and functioning since April 1996 and staffed with professional meteorologists to provide 2-3 years' data before the reservoir impoundment. These data will be used (a) to devise environmental mitigation measures if required and (b) to study the effects of large dams in the province to assist in the evaluation of future projects. 45. Establishment of a conservation management zone around the periphery of the reservoir has been proceeding as planned. Large-scale mapping was delegated to the Forestry Department to allow them to carry out detailed planning of a 100 m wide buffer zone, the management of which will be covered by the EHDC budget. Construction of a perireservoir highway, which is a component of the resettlement plan, has caused some destruction of vegetation. EHDC has entrusted the construction company to take effective water and soil conservation measures to minimize the adverse impact of road construction. In the wider catchment area, the major issue identified in executing the EMP is human activity causing environmental degradation, due largely to inappropriate land use and insidious forest clearance. EHDC is taking measures to promote and support the catchment rehabilitation including a preliminary plan to develop part of the catchment area into a National Park. The Bank has cautioned that this will need careful planning to allow achievement of both tourism and conservation objectives. In addition, a workshop focusing on watershed issues for the five counties affected by the reservoir will be convened in Chengdu in 1997 by the SPRO Training Center. Economic Rate of Return 46. At appraisal, the internal economic rate of return (IERR) was estimated at about 15.0 percent, based on the shadow-priced investment and O&M costs and the covenanted tariff level. The IERR was reestimated using the most recent estimates of costs (including sunk costs) and benefits. The calculation is based on an economic cost 14 percent higher than the estimated economic cost at appraisal. However, in present value terms (both costs discounted to the same year at 12 percent), the revised cost is only 5.2 percent higher than the original estimates. The 5.2 percent cost increase would result in a reduced IERR from 14.90 percent (appraisal estimate) to 14.49 percent, if the benefits  - 14 - remain unchanged (see Case 2). In spite of the cost increase, the return of the project is still higher than the opportunity cost (12 percent) of capital investment in China. 47. However, given the profound changes in power pricing in China, the benefits also should be revised. They are estimated based on a proxy of SEPC's (the buyer) willingness to pay for new generation at the plant gate. The highest price that SEPC is current paying is 44.9 fen/kWh for purchase of power from a new coal-fired, fluidized- bed combustion thermal power plant. However, this price is considered rather high because of the new technology involved in the power plant. A better proxy of SEPC's willingness to pay is the average value (35.0 fen/kWh, 1996 price) for purchase power from new conventional coal-fired plants. This approach yielded an IERR of 16.11 percent. This shows that the increased plant-gate price (about 12 percent higher than the covenanted tariff in real terms) outweighs the cost overrun of the project. 48. A comparison of IERRs under different assumptions is shown below: Case Economic Costs Benefits IERR (%) 1 Appraisal Appraisal (covenanted tariff at plant 14.90 Present value (1991) gate, 16 fen/kWh, 1991 price) Y 5,568 million, 1991 price 2 Reestimated The same as appraisal 14.47 Present value (1991) Y 5,860 million, 1991 price 3 Reestimated Reestimated (proxy of SEPC' s 16.11 Present value (1991) willingness to pay for new generation, Y 5,860 million, 1991 price 18 fen/kWh, 1991 price) 49. Finally, if the full cost of the transmission cost is added to the project cost, the IERR would be reduced to 13.2 percent. This minimum IERR to be expected from the project is still higher than the test discount rate of 12 percent. It should be noted that this very conservative estimate does not take into account that a large part of the power will be produced during peak hours and has therefore a higher value to the system. A more accurate estimate will be carried out following completion of the reservoir optimization study. 50. It should also be noted that none of the above calculations has taken into account the environmental benefits of the project. The project will avoid mining, transporting, and burning of some 10 million tons of raw coal a year in Sichuan Province, which has the highest level of air pollution in China. According to the detailed simulation of two  - 15- systems (with and without) carried out during the preparation for the second phase, in the without-Ertan project case, S02 emissions in the province would increase 10,200 tons per year for the period 1998-99, 236,500 tons for 2000-04, 198,300 tons for 2005-09, and 252,500 tons for 2010 and beyond. It is estimated that annual emission of about 6,000 tons of fine particulates (PM1O) will be avoided as a result of Ertan hydropower generation. The externality cost of SO2 and particulates emission is in the range of $400- $5,000 and $20-$90 per ton, respectively.' If the lowest value of the control cost is used as a proxy of the externality value to estimate the minimum environmental benefits of the project, the IERR will be increased to 17.39 percent. Furthermore, hydropower generation from the Ertan Scheme will avoid emission of about 5 million tons of CO2 each year. If this is credited to the project, an IERR of 17.99 percent will be obtained using a lower-range value of climate change externality cost2 and an IERR of 18.71 percent using a higher-range value (see Annex 6). Project Risks 51. To complement the above deterministic analysis, risk analyses have been performed using a probabilistic approach to assess the impact of the perceived risk factors that affect the return of the project. Five broad categories of risk have been considered in the analysis: (a) Demand Risk. Demand risk is related to lower load growth than expected and/or breach of contract by the purchaser. Demand risk is not perceived as a major risk factor in the short term with energy shortages prevailing in the Sichuan Provincial Power Grid. However, a low-load growth and/or an important reduction in electricity offtake could jeopardize the economic viability of the project. (b) Price Risk. Price risk is related to the willingness and ability of the power purchaser to pay and/or changes in pricing policy. This risk is normally mitigated or managed through long-term contractual arrangements and/or the financial covenants of the project. However, experience shows that the seller could still be confronted with unexpected price changes. (c) Cost Risk. This risk is significantly reduced at this stage of the project with all the major contracts signed and major excavation works completed. However, delays of construction due to interfacing problems between different equipment suppliers and unforeseen site conditions may still cause cost overrun. Source of information: Economic Analysis of Environmental Impacts by J.A. Dixon, L.F. Scura, R.A. Carpenter and P.B. Sherman, published in association with the Asian Development Bank (ADB) and the World Bank, 1994. 2 Source of information: Economic Evaluation of Environmental Impacts, A Workbook, published by ADB in March 1996.  - 16 - (d) Operational Performance Risk. Poor operational performance could be caused by: (i) low quality of generating equipment and facilities, and (ii) inadequate maintenance and poor management. (e) Hydrological Risk. The uncertainty of hydrology was captured in the basic simulation model analyses of the hydropower system energy yield. The financial implications of the higher and/or lower-than-expected output has been investigated in the risk analysis. 52. Based on the foregoing considerations and extensive sensitivity analyses, four variables have been selected as the crucial risk variables because of their significant impact on the project economic viability. Annex 6.3 presents the selected variables, the assumed value ranges and the probability distributions attached to them based on past Bank experience in power projects in general and China in particular. 53. The risk analysis was carried out with the Risk Master computer software, which uses the Monte Carlo simulation3 technique (see Annex 6.3). The expected IERR, based on the weighted average of all simulated combinations (1,000 simulations), is 15.81 percent (with a standard deviation of 1.4 percent), only about 0.3 percent lower than the base case value without consideration of project risks. This suggests that the uncertainty of the return of the project investment is much reduced at the completion of the first- phase construction. The minimum and maximum IERR, under the considered uncertainties, are respectively 11.58 and 19.29 percent. The probability of a negative outcome (negative net present value) is zero. And finally, the probability for the IERR to be below the considered discount rate (12 percent) is negligible. All the above analyses clearly show that the project is robust under future uncertainties. Financial Performance 54. Financial performance was not reassessed at this stage since the project will not generate income until 1998. The actual FY91-95 financial statements attached at Annex 1, Tables 2 and 3, were prepared following the new accounting regulations effective July 1, 1993. The estimated financial statements given in the SAR are not included in this ICR because they were prepared based on the old Chinese accounting system and therefore do not correspond to the actual statements. D. PROJECT SUSTAINABILITY 55. The project is sustainable because all necessary conditions were or are likely to be achieved: (a) the construction of the first phase was on time; (b) the project implementation organization was structured following modem management practice and 3 Monte Carlo simulation works by generating a series of random numbers following the distribution of probability of each risk variable. For each simulation that represents a combination of different state of four variables, IERR is calculated and recorded. The results of 1,000 simulations are averaged.  - 17 - has had a proven record of working efficiently in the last five years; (c) the institutional capability of EHDC has been strengthened in the course of implementation; (d) efficient procurement arrangements for the supply of electrical and mechanical equipment led to reduced interfacing problems; and (e) transfer of modem management technology will continue in the second phase through continued involvement of international consulting services. 56. As an essential external element, the demand for electricity remains high as power shortages continue to be acute and economic growth has been sustained at a high level. On the commercial side, in July 1995, EHDC signed an agreement with SEPC for sales/ purchases of power generated from the Ertan scheme to the provincial grid. Despite the fact that the agreement is not a full PPA, it laid down the pricing principles that will allow EHDC to cover all operating costs, full repayment of loan principal and interest, and an agreed profit margin. By June 1997, EHDC and SEPC will sign a full PPA for selling Ertan power to the grid. The results of the power pricing study and the optimization study of the plant and reservoir operation will provide a rational basis for negotiating a PPA that would ensure financial viability of EHDC as well as efficient use of the resources in the province. 57. The resettlement objective, i.e., to provide the affected people with a better standard of living than before the project, can be achieved because of a very comprehensive resettlement plan and matching budget in place, construction of the new sites as scheduled, and an effective monitoring system with participation of an independent agency. With respect to environmental sustainability, the Ertan project has relatively benign environmental impacts when compared to thermal alternatives. Through continued monitoring, additional mitigation measures can be devised and implemented as necessary. E. BANK PERFORMANCE 58. Bank performance from project preparation to implementation was highly satisfactory. At the early stage, the Bank supported the establishment of EHDC as commercially independent entity responsible for construction of the project, instead of as a provincial power utility as was the practice at that time in China. Later on, the Bank supported the reorganization of EHDC as a limited liability company in line with China's enterprise reform policy. 59. Drawing lessons from other projects regarding the interfacing problems caused by an excessive number of contract packages and the benefits of having international experts involved in the construction management, the Bank played an instrumental role in structuring the procurement arrangements for goods and services. This included (a) conclusion of a single contract with one foreign firm assuming full responsibility for supply of both hydraulic turbines and generators, and (b) extension of consulting services provided by the Advisory Group into the second phase. The first would reduce interfacing problems and thereby reduce potential delays in equipment delivery,  - 18- equipment defects and mismatching. The latter would enhance the project management of the second phase by continued transfer of modem management practices. 60. In order to meet the implementation schedule, the Bank arranged the second loan in a timely manner to allow for the continuation of construction. Seeing that lack of funds had postponed preparation of a 500 kV transmission line project (which was not part of the project and was originally planned to be financed locally) to send electricity generated from Ertan to the provincial grid, the Bank provided Loan 3848-CHA to finance the Sichuan Transmission Project. 61. The Bank regularly supervised the project and attached high priority to implementation issues related to resettlement and environmental aspects. The Bank advised high-level government officials on delayed approval of the resettlement implementation plan (budget) when it had become a major cause of delayed resettlement. This accelerated the approval process. During the recent supervision missions, the Bank identified environmental problems owing to tree cutting by local farmers and advised EHDC to take actions for catchment rehabilitation and development. F. BORROWER PERFORMANCE 62. EHDC has successfully implemented the first phase of the project. Its primary achievement was to meet all the milestone dates of the physical construction. Its institutional capability has been strengthened in the course of transforming itself to a limited liability company, which contributed to further the power sector and enterprise reforms in China. To become better prepared to undertake its future operational and commercial functions, EHDC promptly arranged inception of the study of organizational restructuring and financial management systems in the second phase at the suggestion of the Bank. Throughout the implementation of the project, the performance of EHDC was highly satisfactory. 63. EHDC has been open to new technologies and construction management techniques and willing to adopt the best practice in terms of organization and project management systems. The successful integration of the Advisory Group into the management team was largely responsible for efficient management of construction. When delays occurred at various stages of construction, EHDC was able to promptly identify the problems on the critical path and take measures to solve them. Recently, EHDC has reached a settlement (with a value of about $65 million) with the Lot 1 contractor for all claims for time extension up until May 31, 1996 in order to reestablish the original contract completion dates. 64. EHDC has a strong sense of project ownership and this was reflected in the fact that for at least the past two years, EHDC, with the support of its Board of Directors, covered investment expenditures of about $110 million for both resettlement and environment, in the absence of an approved budget from the central government (the budget was only granted in November 1996). This prevented serious delays in executing resettlement and environment programs.  - 19 - G. ASSESSMENT OF OUTCOME 65. Progress toward achievement of all project objectives was substantial and laid a solid ground for timely completion of the second project. The project outcome is rated as highly satisfactory. Sustainability is likely. Bank performance is rated highly satisfactory during project identification, preparation assistance and supervision, and satisfactory for appraisal. Borrower performance is rated highly satisfactory for project implementation and covenant compliance and satisfactory for project preparation. H. FUTURE OPERATION 66. The Ertan project is still under construction. Its second-phase implementation in terms of physical construction, environment management program, resettlement action plan, institutional development and financial performance will continue to be monitored according to key (implementation) monitoring indicators set out in the SAR for the second project (see Annex 4). 67. To prepare for future operation, 29 graduates from colleges and/or professional schools were hired in 1995 and sent to Geheyan Hydropower Station for one year of training. In 1996, 120 more graduates were employed as part of the future operation staff. EHDC has also employed five experienced technical persons from other power stations in China. They will serve as the operating backbone in the future. In addition, EHDC signed an agreement in 1996 with Gezhouba Hydropower Plant, which will assist EHDC in preparation, operation, and maintenance of the Ertan Hydropower Plant for the period 1996-2000. 68. Preparation of performance indicators for future operation was discussed during the November 1996 supervision mission. Due to the need to incorporate the outcome of the optimization study (ongoing study) in the operation plan of the plant and reservoir, the operation plan including performance indicators will be prepared in 1997 when the study results become available and will be included in the ICR for the second project. 1. KEY LESSONS LEARNED 69. Ertan is the first large-scale hydroelectric project in China to use only international contracting and construction management procedures. Many of the difficulties experienced in implementing the new system were caused by the relative newness of economic and enterprise reform in China. In retrospect, it is doubtful that matters could have been handled differently. However, given the economic and enterprise reforms that have now occurred and the prospects for even broader reform, it is possible to formulate key lessons from project implementation that will benefit future projects and the second phase of the Ertan Project. The key lessons are summarized as follows: (a) In implementing a project of the magnitude and complexity of Ertan, implementation will be greatly assisted if there is an implementing  - 20 - organization in place at the outset of the project, which is commercially independent and has full decision-making authority and responsibility for its performance. Initial delays in project implementation, resulting in sizable contractors' claims for acceleration, largely resulted from EHDC's inability to make timely decisions. The incorporation of EHDC in 1995 (four years after the commencement of construction) as a limited liability company led to major improvements in this regard, allowing EHDC to make quick decisions on its own instead of seeking instructions from government agencies. This single factor is largely responsible for the recovery from earlier difficulties, to the currently successful implementation and probability of timely completion of the second project. (b) Prior to the start of construction, construction management personnel should be trained in contract administration and modem project management techniques. This training should include deputation for substantial periods to ongoing projects where these techniques are in use. China routinely undertakes similar training of operating personnel prior to the commissioning of all large hydropower plants and this is very successful. Similar training of construction management personnel will increase their competence and improve response time through allowing increased delegation rather than involving senior management in matters of detail. (c) Improved communication among various parties (owner, engineer, designer, advisors and contractors, etc.) should be actively pursued from the outset, to avoid misunderstandings which could cause delays and/or losses to the project. Communication difficulties were perhaps the most difficult to resolve in construction of the Ertan scheme. This issue is not simply of translation between different languages, but of communicating ideas and concepts across international boundaries of training and culture. (d) Development of project management systems should also commence before construction in order to manage construction more efficiently. These should include contractual documentation management systems, a project master schedule, a procurement and delivery schedule for employer-supplied equipment, a design drawing control system and cost control system. EHDC has now developed systems in most of these areas, which has resulted in less exposure of EHDC to claims resulting from delayed supply of information or equipment. (e) In the future, consideration should also be given to reducing interfacing by procuring equipment in smaller numbers of larger packages. In retrospect, the division of civil works activities among two major contractors was not  - 21 - ideal, resulting in an increased number of interfaces that led to contractual difficulties. (f) With regard to resettlement, the lessons learned are the necessity to advance the preparation of the resettlement implementation plan at the outset of the project, which will allow a better coordination of various resettlement activities and more detailed cost estimates to be carried out. In this project, the problems encountered in implementing the resettlement component at the early stage were largely due to a lack of a detailed resettlement implementation plan, which was only completed in 1995. In addition, in preparing the resettlement cost estimates, adequate contingency allowances should be made to cover the costs of compensation and the measures necessary to restore incomes.  - 22 - PART II: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENT A. Achievement of Objectives Substantial Partial Negligible Not Applicable Macroeconomic policies x Sector policies x Financial objectives x Institutional development x Physical objectives x Poverty reduction x Gender issues x Other social objectives x Environmental objectives x Public sector management x Private sector development x B Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly Satisfactory Satisfactory Deficient identification x Preparation assistance x Appraisal x Supervision x D. Borrower Performance Highly Satisfactory Satisfactory Deficient Preparation x Implementation x Covenant compliance x Operation (if applicable) E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory x  - 23 - TABLE 2: RELATED BANK LOANS Year of Loan Title Purpose Approval Status Ln. 2382-CHA To construct a rockfill damn, a spillway, an 02/21/84 Loan was closed on Lubuge Hydroelectric underground powerhouse, to install 4 gen- 06/30/92. Project erating units of 150 MW each, 3 single circuits of 220 kV transmission lines; to provide consultant services and a training program. Ln. 2493-CHA To construct a 500 kV transmission line 02/19/85 Loan was closed on Second Power Project from Xuzhou to Shanghai and 5 associated 06/30/92. substations totaling 3,500 MVA in capa- city, to install telecontrol and telecommu- nications equipment for load dispatching, and to provide training for 400 kV trans- mission lines and substations. Ln. 2706-CHA & To construct a coal-fired thermal power 05/29/86 First loan closed Ln. 2955-CHA project with two units of 600 MW and two 06/14/88 06/30/94. Second loan Beilungang Thermal single circuit of 500 kV transmission lines, closed 06/30/95. Power Projects I and 11 and to carry out a tariff study, a study on ZPEPB reorganization and management improvement and a study for improvement of distribution networks for the cities of Ningbo and Hangzhou. Ln. 2707-CHA To construct a 110 m high concrete 05/29/86 Loan was closed on Yantan Hydroelectric gravity dam, a spillway, a powerhouse, 06/30/94. Project and a shiplift; to install 4 generating units of 275 MW each, 2 single circuits of 500 kV transmission lines and 3 associated substations; and to carry out a training program. Ln. 2775-CHA & To construct a 101 m high concrete grav- 01/06/87 Closed 6/30/93. Ln. 3515-CHA ity dam, a spillway, a powerhouse and a ICR for first project Shuikou Hydroelectric navigation lock; to install 7 generating issued 4/28/96. Projects I & II units of 200 MW each; to carry out a resettlement program in the reservoir. To complete the ongoing Shuikou dam 09/01/92 12/31/97. and hydroelectric power plan, upgrade the control and data acquisition system of the Fujian grid, canry out an action plan for tariff reform, and a training program for planning and financial management.  - 24 - Table 2: (Cont'd) Year of Loan Title Purpose Approval Status Ln. 3387-CHA & To construct a 240 m high arch dam with an 07/02/91 Implementation under Ln. 3933-CHA underground powerhouse, to install six 550- & way. Closing dates Ertan Hydroelectric MW generating units and associated equip- 08/22/95 12/31/96 & 12/31/2001. Projects I & II ment; to carry out an environmental manage- ment program, studies of power pricing and reservoir operation, and a training program. Cr. 2305-CHA & To construct a 56 m high gravity dam and an 10/31/91 Implementation under Ln. 3412-CHA underground powerhouse with 4 x 60 MW way. Closing date Daguangba Multi- generating units; to erect a 36 km long 12/31/97. purpose Project double-circuit 220 kV transmission line and to build canals to irrigate 12,700 ha of land. Ln. 3433-CHA To install 2 300-MW generating units and 01/14/92 Implementation under Yanshi Thermal five 220-kV transmission lines and asso- way. Closing date Power Project ciated substations; to carry out a tariff study, 12/31/97. a tariff action plan, and a training program for upgrading the technical, fnancial and management skills for HPEPB staff. Ln. 3462-CHA To install 2 additional 600 MW generating 04/12/92 Implementation under Zouxian Thermal units; to construct 500 kV and 220 kV trans- way. Closing date Power Project mission lines and substations; and to carry 06/30/99. out an air quality control study, a power tariff study, an action plan for tariff adjustment, and a training program for the technical, financial, and management staff of SPEPB. Ln. 3606-CHA To construct a pumped-storage hydroelectric 05/18/93 Implementation under Tianhuangping power plant with six 300 MW reversible way. Closing date Hydroelectric Project pump-turbine units, together with upper and 12/31/2001. lower reservoirs, a water conveyance system, an underground powerhouse; to erect 250 km long 500 kV transmission lines; to carry out studies of optimal power plant operation and its output pricing; and to strengthen the beneficiary's organization through technical assistance and training.  - 25 - Table 2: (Cont'd) Year of Loan Title Purpose Approval Status Ln. 3718-CHA To construct a coal-fired thermal power plant 03/22/94 Implementation Yangzhou Thermal with two 600 MW generating units; to erect under way. Closing Power Project two 500 kV transmission lines (30 km long); date 12/31/2000. to extend technical assistance for the develop- ment and implementation of improved accounting and financial management infor- mation systems; and undertake management development and staff training. Ln. 3848-CHA To construct a new 500 kV transmission 02/28/95 Implementation Sichuan Transmission network consisting of 2,260 km of transmis- commenced. Project sion lines and 5,250 MVA of substations; Closing date provide technical assistance for implementa- 12/31/2001. tion of sector reform plan, organizational improvements and financial management systems. Ln. 3846-CHA To construct Beilungang Phase II power plant 02/28/95 Implementation Zhejiang Power consisting of three 600 MW coal-fired units; commenced. Development Project to construct 400 circuit-km of 500 kV trans- Closing date mission lines, 2,250 MVA of 500 kV substa- 12/31/2002. tions and reinforce distribution networks in Hangzhou and Ningbo; to extend technical assistance to assist the power company in commercialization and corporatization, estab- lish computerized financial management information system, improve transmission and distribution planning and upgrade environ- mental monitoring. Ln. 3980-CHA To construct two 600 MW coal-fired thermal 02/27/96 Implementation Henan (Qinbei) Thermal power units; to erect two 165 km 500 kV commenced.. Power Project transmission lines; to assist HPEPB in engi- Closing date neering, procurement and construction super- 12/31/2002. vision; and to extend technical assistance to support the implementation of the power sector reform action plan.  - 26 - TABLE 3: PROJECT TIMETABLE Steps in project cycle Date planned Date Actual/latest estimate Identification/Preparation 07/03/87 Appraisal 12/89 11/26/89 Negotiations 03/25/91 Board presentation 07/91 07/02/91 Signing 07/91 07/11/91 Effectiveness 09/91 09/06/91 Project completion La 12/31/2000 12/31/2000 Loan closing 12/31/96 12/31/96 La Including Phases I and II. TABLE 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL FY92 FY93 FY94 FY95 FY96 FY97 Appraisal estimnate 110.0 213.0 286.0 380.0 Actual 139.1 243.5 294.4 371.1 377.0 380.0 Actual as % of estimate 126.5 114.5 102.9 97.7 Date of final disbursement December 17, 1996  - 27 - TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION (Refer to Figure 1) Note: Key monitoring indicators for implementation of the second-phase project are attached in Annex 4. TABLE 6: KEY INDICATORS FOR PROJECT OPERATION (Not Applicable at this stage but will be included for Phase II)  - 28 - TABLE 7: STUDIES INCLUDED IN THE PROJECT Study Purpose Status Impact of Study Power pricing study To provide a basis Contract signed in July 1994 Study results on the Ertan power sale price for price determina- will be used to establish the price formula tion in PPA and pro- Final report completed April in negotiating the PPA between EHDC and mote tariff reforms 1996 SEPC. PPA will be signed in June 1997 in the Sichuan grid Since EHDC was incorporated as a gener- ating company in 1995, retail tariff reform in the provincial grid is no longer relevant to EHDC. The study results of retail tariff structure and level have been followed up through another Bank financed project in the province-Sichuan Transmission Proj- ect (Ln.3848-CHA) for implementation of sector reform plan. Optimization of To examine the tech- Contract signed in The study results will be incorporated in the reservoir operations nical and economic November 1995 price formula and dispatch arrangements in aspects of operating PPA to achieve the objectives of (a) mini- the Ertan Hydroelec- Expected completion date mizing thermal generation in the Sichuan tric Station and its May 1997 grid and (b) maximizing the profit of storage reservoir and EHDC under the terms and conditions of to establish rules and PPA procedures for their optimum exploita- The study results will be used to formulate tion an operating plan (including rule curves)of the plant and the reservoir Techniques and software for power system operation optimization has been transferred to HDC staff members along with the progress of the study. Preparation of future To help prepare Contract signed in October The study effectively helped prepare future power projects EHDC's future 1993 projects to be undertaken by EHDC on the projects Yalong river: The study includes prepara- * One of the study results "Yalong River tion of Cascade Development Plan" was * Prefeasibility study for approved by Chinese authorities in 1995, Tongzhiling Hydroelectric in which 5 projects were identified, with Project (completed in Guandi Hydroelectric Project to be the 1994) next to be built. * Yalong River Cascade * A prefeasibility study and site selection Development Plan (com- report for Guandi Hydroelectric Project pleted in 1995) was approved in March 1996. * Prefeasibility study for Guandi Hydroelectric Project (completed in December 1995) * Feasibility study of Guandi Hydroelectric Project (ongoing) Expected completion date December 1997.  - 29 - TABLE 8A-1: PROJECT COSTS Appraisal estimate ($ M) Actual/latest ($ M)* Local Foreign Total Local Foreign Total Preparatory works 102.4 0.0 102.4 79.27 79.27 Resettlement 82.3 0.0 82.3 227.95 227.95 Land acquisition 7.1 0.0 7.1 10.15 10.15 Arch dam (lot no. 1) 217.8 284.3 502.2 315.76 375.94 691.70 Powerhouse (lot no. 2) 159.8 212.4 372.3 216.03 308.32 524.35 E&M equipment/a 108.7 148.7 257.4 141.77 200.32 342.09 Engineering/Contract admin. /b 52.3 19.4 71.7 221.16 40.12 261.28 Training & Studies 1.2 1.8 3.0 4.18 1.54 5.72 Environmental protection 1.6 0.3 1.9 4.10 4.10 Total Base Cost 733.1 667.0 1,400.1 1,220.37 926.24 2,146.61 Contingencies: Physical 80.8 83.2 164.0 25.16 11.24 36.40 Price 107.9 120.8 228.7 21.31 4.38 25.70 Taxes and duties 67.3 25.5 92.8 73.70 73.70 Total Project Cost 989.1 896.4 1,885.5 1,340.54 941.87 2,281.41 Interest during construction (IDC) 342.9 258.7 601.6 552.30 233.60 785.90 Total Financing Required 1,332.0 1,155.1 2,487.1 1,892.84 1,175.47 3,068.31 L/ Including transformers and gates/hoists, etc. /b Including technical assistance  -30 - TABLE 8A-2: PROJECT COSTS Appraisal estimate (Y million) Actual/latest (Y million) Local Foreign Total Local Foreign Total Preparatory works 439.1 0.0 439.1 468.40 468.40 Resettlement 429.4 0.0 429.4 1,797.08 1,797.08 Land acquisition 26-9 0.0 26.9 67.11 67.11 Arch dam (lot no. 1) 1,140.3 1,488.8 2,629.0 2,461.42 2,725.04 5,186.46 Powerhouse (lot no. 2) 836.7 1,112.0 1,948.7 1,604.23 2,194.51 3,798.74 E&M equipmentLa 568.9 778.9 1347.8 1,176.70 1,662.66 2,839.36 Engineering & Contract administration 256.9 98.3 355.3 1,643.77 310.87 1,954.64 Training&Studies 6.1 9.5 15.6 30.8 12.78 43.58 Environmental protection 8.3 1.5 9.9 33.8 33.8 Total Base Cost 3,712.5 3,488.9 7,201.4 9,283.31 6,905.87 16,189.18 Contingencies: Physical 423.0 435.3 858.3 208.84 93.32 302.16 Price 1,191.2 1,320.3 2,511.5 549.71 53.77 603.47 Taxes and duties 352.5 133.2 485.7 612.00 612.00 Total Project Cost 5,679.2 5,377.7 11,056.9 10,653.86 7,052.95 17,706.81 Interest during construction (IDC) 1,794.9 1,354.5 3,149.4 4,540.90 1,881.20 6,422.10 Total Financing Required 7,474.1 6,732.2 14,206.3 15,194.76 8,934.15 24,128.91 Za Including transformers and gates/hoists, etc. TABLE 8B: PROJECT FINANCING ($ million equivalent) Appraisal estimate ($ M) Actual/latest (X M) Local Foreign Total Local Foreign Total IBRD - 380.0 380.0 0.00 780.00 780.00 IDA (TCC) - 3.3 3.3 0.00 2.58 2.58 US Exim Bank Credit - 30.0 30.0 0.00 0.00 0.00 Guarantee financing 0.00 0.00 0.00 0.00 150.00 150.00 Norwegian Grant - 5.0 5.0 0.00 5.00 5.00 GOC (through SEIC) 666.0 129.4 795.4 803.34 0.00 803.34 Sichuan (through ETIC) 666.0 129.4 795.4 803.34 0.00 803.34 SDIC Equity 0.00 0.00 0.00 238.92 0.00 238.92 SIC Equity 0.00 0.00 0.00 238.92 0.00 238.92 SEPC 0.00 0.00 0.00 19.91 0.00 19.91 Other financing - 478.00 478.00 0.00 26.30 26.30 Total 1,332.00 1,155.10 2,487.10 2,104.43 963.88 3,068.31  -31 - TABLE 9: REESTIMATED ECONOMIC COSTS AND BENEFITS (1996 Constant Million Yuan) Year Generation Fuel O&M Total Benefit Net Capital Cost Cost Cost Cost GWh M Yuan Benefit 1991 1,128.33 0.00 0.00 1,128.33 0.00 0.00 -1,128.33 1992 3,193.95 0.00 0.00 3,193.95 0.00 0.00 -3,193.95 1993 1,472.89 0.00 0.00 1,472.89 0.00 0.00 -1,472.89 1994 1,510.31 0.00 0.00 1,510.31 0.00 0.00 -1,510.31 1995 1,786.43 0.00 0.00 1,786.43 0.00 0.00 -1,786.43 1996 3,791.49 0.00 0.00 3,791.49 0.00 0.00 -3,791.49 1997 4,486.28 0.00 0.00 4,486.28 0.00 0.00 -4,486.28 1998 1,472.59 0.00 188.42 1,661.01 1,198.00 419.30 -1,241.71 1999 523.79 0.00 193.66 717.45 10,032.00 3,511.20 2,793.75 2000 128.58 0.00 194.95 323.53 15,273.00 5,345.55 5,022.02 2001 0.00 0.00 194.95 194.95 15,878.00 5,557.30 5,362.35 2002 0.00 0.00 194.95 194.95 16,094.00 5,632.90 5,437.95 2003 0.00 0.00 194.95 194.95 15,897.00 5,563.95 5,369.00 2004 0.00 0.00 194.95 194.95 15,885.70 5,560.00 5,365.05 2005 0.00 0.00 194.95 194.95 16,071.00 5,624.85 5,429.90 2006 0.00 0.00 194.95 194.95 15,990.90 5,596.82 5,401.87 2007 0.00 0.00 194.95 194.95 16,531.00 5,785.85 5,590.90 2008 0.00 0.00 194.95 194.95 16,574.10 5,800.94 5,605.99 2009 0.00 0.00 194.95 194.95 16,124.60 5,643.61 5,448.66 2010 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2011 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2012 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2013 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2014 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2015 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2016 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2017 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2018 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2019 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2020 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2021 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2022 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2023 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2024 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2025 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2026 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 2027 0.00 0.00 194.95 194.95 17,559.60 6,145.86 5,950.91 Total 19,494.64 0.00 5,840.58 25,335.22 487,622.10 170,667.74 145,332.51 Present ValueLa 11,350.80 0.00 707.24 12,058.03 51,368.40 17,978.94 5,920.91 Intemal Economic Rate of Retum (IERR) 16.11% Assumptions: Official exchange rate (Y/$) 8.3 Shadow exchange rate (Y/$) 8.3 Standard Conversion Factor 1.0 Willingness to pay (Y/kWh) 0.35 Discount rate 0.12 La Discountedtoyear 1991.  - 32 - TABLE 10: STATUS OF LEGAL COVENANTS Cove- Original Revised Agree- nant Present fulfillment fulfillment ment Section type status date date Description of covenant Comments Loan 3.01(b) 3 C Relend the proceeds of the loan through Sichuan to EHDC, under temms and conditions satisfactory to the Bank 3.04 2 CP 06/30/97 Take all steps necessary to enable Memorandum of Understanding EHDC and SCEPA to enter into covenanted identifying the prin- the purchases agreement no later ciples that will govem the process than June 30, 1996. agreement has been signed by EHDC and SCEPA. New cove- nanted date for signing of the Power Purchase Agreement under Ertan 11 by 6/97 3.05 5 CP (i) Fumish or cause to be fur- Bank involved in the construction nished to the Bank a plan for of the 500 kV transmission line completion of the 500 kV line under the Sichuan Power Trans- connecting Ertan Hydroelectric mission Project (Loan 3848) station with the power transmis- sion system in Sichuan; (ii) im- plement such plan not later than June 1998. 3.6 7 C Carry out, or cause to be carried Satisfactory progress out, the resettlement of the people affected by the project, in accord- ance with the plan agreement with the Bank 3.04(b) 10 NYD Propose to the Bank the compo- nents for inspection, not less than one year prior to expected com- pletion 4.01 1 NYD 06/30/97 (a) Maintain records and accounts None adequate to reflect its operating and financial condition; (b) have its records, accounts and financial statements for each fiscal year audited; fumish to the Bank not later than six months after the end of each year 4.02 2 NYD Produce net operating income The self-financing ratio covenant equivalent to not less than (a) 201 replaced with a rate of return on in 1999, (b) 151 in 2000, and (c) revalued assets under the Ertan II 351 percent of its average annual Project (Loan 3933) investment program 4.03 2 NYD 12/31/99 Ensure that interval cash genera- tion for each fiscal year during the term of the debt to be incurred shall be at least (i) 1.3 times in 1999, and (ii) 1.5 times thereafter 4.04 2 C Not incur any debt, if after the Debt/equity ratios slightly incurrence of such debt the ratio changed under Ertan 11: (i) 85/15 of debt to equity shall be greater in 1995-97; (ii) 80/20 in 1998- that (i) 82 to 18 for each year from 2000 and 70/30 thereafter. 1991 through 1997; (ii) 80 to 20 for each of 1998 and 1999, and (iii) 70 to 30 thereafter.  - 33 - Table 10 (Cont'd) Cove- Original Revised Agree- nant Present fulfillment fulfillment ment Section type status date date Description of covenant Comments Schedule 10 C 1. Maintain the Project Manage- ment Unit with staffing and responsibilities satisfactory to the Bank Schedule 10 NYD 06/30/97 2. Carry out, no later than June Bank agreed to delay studies. 30, 1993, the studies related to the Tariff study completed and project in accordance with the contract for optimal operation of terms of reference and a schedule the reservoir signed and initiated agreed with the Bank studies will continue under phase 11 Loan. Schedule 10 C 3. Carry out the training and the Implementation on schedule project in accordance with a program agreed with the Bank. Schedule 10 C 4. Carry out an environmental Progress satisfactory management program as agreed with the Bank Covenant Class: Status: I = Accounts/audits 8 = Indigenous people C = covenant complied with 2 = Financial performance/revenue 9 = Monitoring, review, and reporting CD = complied with after delay generation from beneficiaries 10 = Project implementation not CP = complied with partially 3 = Flow and utilization of project covered by categories 1-9 funds II = Sectoral or cross-sectoral 4 = Counterpart funding budgetary or other resources 5 = Management aspects of the allocation project or executing agency 12 = Sectoral or cross-sectoral policy/ 6 = Environmental covenants regulatory/institutional action 7 = Involuntary resettlement 13 = Other TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENT The project was carried out in full compliance with the following Operational Directives: Describe and comment on lack of Statement Number and Title compliance 1. OMS 3.80 - Dam Safety Fully Complied. 2. OD 4.00B - Environmental Policy for OD not in force at the time of first project, Dam and Reservoir Projects but fully reflected in second project. 3. OD 4.01 - Environmental Assessment OD not in force at the time of first project, but fully reflected in second project. 4. OD 4.02 - Environmental Action Plans OD not in force at the time of first project, but fully reflected in second project. 5. OD 4.30 - Involuntary Resettlement Fully Complied  -34 - TABLE 12: BANK RESOURCES: STAFF INPUTS Planned Revised Actual Stage of project cycle Weeks $'000 Weeks $'000 Weeks $'000 Preparation to appraisal 141.5 397.9 Appraisal 32.5 98.2 Negotiations through 39.5 125.4 Board approval Supervision 46.1 121.0 Completion 4.3 11.1 Total 2632 953.6 TABLE 13: BANK RESOURCES: MISSIONS Performance rating Specialized staff Imple- Devel- Stage of project cycle Month/ No. Of Days skills represented mentation opment Type of year persons in field L status objectives problems Through appraisal 02/91 5 5 E,FA,FA,R,EN Appraisal through Board approval Board approval through effectiveness Supervision 1 08/92 2 3 E,E 2 07/93 1 4 E. 3 04/94 2 4 Ec,Ec Tariff Study delayed 4 07/94 1 13 E I 5 10/95 4 11 E,En.R,En I 6 06/96 3 4 E, En. R. I Resettlement budget approval delayed 7 11/96 4 5 E,E,R.Ec I Completion \k /A E: Engineer, Ec: Economist, En: Environmental Consultant, FA: Financial Analyst, R: Resettlement Specialist 1k Combined with the 7th supervision mission.  -35- Figure 1: Actual Progress vs. Target Schedule aM unwn urrsnTarget1 1 9419 11 1 1 1 2 2 I [ I ID Start iM Start FiTir" AtIVER DAEMIC 2100 j;0. 3_0_019_ 1OF 09 3_ Arcodas Foundaton ncfDoersan T Treantment__ 1300~~~~~ ~~~~ I2r9 7k9 xeeM _ I I I I I I I | i ||200t200 I 49500t|30+ 5 111111 3200 3 95 3009m , A|u | |ncaon |a|ation a Treat m |m 3 l2Ats0" ||. 9 X U 10 1 r19 l nstallalon ol Sp,ay Gales and Ho,sts PLE POOL IfAVLUGEROORAFTUEE + ER_ __DROELECRO 5 2M 00 [+ I.99101X9p0eeft+JnrfSnp9 .. .. -n l X,[ Ill;Concrongif =ooOApr94 3OcrnO pA oE,3r,"l Curn S-edl vs Tage ScheduleniGtenE> __ z TUNNEL SPILLWAY ~ o Cr,~e.o. ji 1 1 S,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~e o,I.13 li tZO |O6JnnOllt1M rSS|OlJ n95gtlMd l I I eis b V e n: D o n Slall I I I I I I I I IG Is Ind Is Ist I1.1 || ar0 tA1J OOlu lun 31-9 Co |||||t||| i||'"|gcr .'""" IgC1*mtiatos||||- blol&el_9Pxn97120Jun3lmq _ 1, LLflL IlIIL 1!IIs lationl of Gaes Tajr& an m Pro90c 01A 0AJan9 | Tllxhd`1 MANPOWERHOS E OlJunOO AND PRArogs l TUBANESREETRCPR JC o2oo~~~~~~ ool*-9j,.,q)sq Comalat In SURGD,1E CHAMB 5| I.   - 37 - ANNEX 1 ANNEX 1: EHDC FINANCIAL STATEMENTS TABLE 1: INCOME STATEMENT The project is under construction and will not generate any income until late 1998.  -38 - ANNEX 1 ACTUAL FINANCIAL STATEMENTS OF EHDC (1991-95) TABLE 2: BALANCE SHEET (Y million) Year Ended December 31 1991 1992 1993 1994 1995 ASSETS Current Assets Cash 45.45 51.26 104.25 95.52 91.41 Inventories 0.00 0.00 1.41 3.32 7.11 Other Current Assets 37.46 132.91 106.03 138.90 7.84 Receivable 0.00 0.00 0.00 0.00 0.00 Total Current Assets 82.91 184.17 211.69 237.74 106.36 Fixed Assets Plant in Service 2.58 23.29 24.06 30.87 37.72 Less: Accumulated Depreciation (0.25) (0.58) (2.50) (4.64) (6.76) Net Plant in Service 2.33 22.71 21.56 26.23 30.96 Construction WIP 1,370.47 2,420.17 3,726.40 6,065.70 8,587.45 Total Fixed Assets 1,372.80 2,442.88 3,747.96 6,091.93 8,618.41 Special Funds 0.00 0.00 0.00 0.00 0.00 TOTAL ASSETS 1,455.71 2,627.05 3,959.65 6,329.67 8,724.77 LIABILITIES & EQUITY Current Liabilities 0.00 0.00 0.00 0.00 0.00 Accounts Payable 70.95 163.34 121.56 127.26 122.54 Tax Payable 0.00 0.00 0.00 0.00 0.00 Short-term Loan 0.00 0.00 50.00 25.00 199.15 Total Current Liabilities 70.95 163.34 171.56 152.26 321.69 Working Capital 0.00 0.00 0.00 0.00 0.00 Long term Liabilities 1,086.94 1,903.23 2,893.23 5,606.05 6,935.90 Govemment Funds 0.00 0.00 0.00 0.00 0.00 Special Funds 0.28 0.82 0.00 0.00 0.00 Hydropower Development Funds 0.00 0.00 0.00 0.00 0.00 Fixed Capital 2.33 22.71 0.00 0.00 0.00 Capital Surplus 295.21 533.37 885.09 560.00 1,450.00 Retained Capital 0.00 3.58 9.02 12.36 17.18 TOTAL LIABILITIES & EQUITY 1,455.71 2,627.05 3,959.65 6,329.67 8,724.77 Debt/ (Debt and Equity) Ratio (%) 78.49 77.25 84.98 90.73 82.54  - 39 - ANNEX 1 ACTUAL FINANCIAL STATEMENT OF EHDC (1991-95) TABLE 3: FUNDS FLOW STATEMENT (Y million) Year End December 31 1991 1992 1993 1994 1995 SOURCE OF FUNDS Profit for the Year Depreciation 0.25 0.33 1.92 2.14 2.12 Maintenance 0.03 0.00 0.00 0.00 0.00 Internally Generate 0.00 0.0( 0.00 0.00 0.00 Subtotal 0.28 0.33 1.92 2.14 2.12 Other Sources Long-term Debt Increased 1,086.94 816.29 990.75 2,711.07 1,330.85 Withdraw of long-term Investment 0.00 0.00 0.00 0.00 0.00 Fixed/lntangible Assets Sales Proceed 0.00 0.00 0.00 0.00 0.00 Subtotal 1,086.94 816.29 990.75 2,711.07 1,330.85 Net increase on Capital Raised 297.54 258.54 329.01 (325.09) 890.00 Net increase on Capital reserve 0.00 3.58 5.44 3.34 4.82 TOTAL SOURCE OF FUNDS 1,384.76 1,078.74 1,327.12 2,391.46 2,227.79 APPLICATIONS OF FUNDS Distribution of Profit Income Tax Payable 0.00 0.00 0.00 0.00 0.00 Drawing for Profit Surplus 0.00 0.00 0.00 0.00 0.00 Dividend Payable 0.00 0.00 0.00 0.00 0.00 Others 0.00 0.00 0.00 0.00 0.00 Adjustment for Profit previous year 0.00 0.00 0.00 0.00 0.00 OTHER APPLICATIONS Increase on Fixed Assets 2.58 20.71 0.77 6.81 6.85 Increase on Work in Progress 1,370.22 1,049.16 1,307.05 2,339.30 2,521.75 Repayment of Long-term Debt 0.00 0.00 0.00 0.00 0.00 Increase in Long-term Investment 0.00 0.00 0.00 0.00 0.00 Others 0.00 0.00 0.00 0.00 0.00 Subtotal 1,327.80 1,069.87 1,307.82 2,346.11 2,528.60 TOTAL VALUE OF APPLICATION 1,372.80 1,069.87 1,307.82 2,346.11 2,528.60 Net Increase on Cash 11.96 8.87 19.30 45.35 (300.81)  -40 - ANNEX2 ANNEX 2: EXECUTIVE SUMMARY OF EHDC'S OWN EVALUATION 1. The principal objective of the Ertan Hydroelectric Project is to provide inexpensive, clean, and dependable electrical power to Sichuan Province, the most populous province in China. 2. Ertan is located in the southern part of Sichuan on the Yalong River, about 50 kilometers north of Panzhihua City. The Project comprises the construction of a double- curvature, 240-meter high concrete arch dam; an underground powerhouse with six generating units and a total installed capacity of 3,300 MW; the associated power intake, spillway, tailrace tunnels, accesses, and other appurtenant works; and a log-passing facility. The overall scope of the project also includes land acquisition and resettlement of the population that will be displaced by the reservoir, environmental studies and procedures to minimize any adverse effects of the dam, and the design and construction management services necessary to initiate and oversee the work. 3. Construction began in 1991, and, at present (Fall 1996), the Ertan Project appears well on the way toward completion according to the originally forecast schedule. Excavation is essentially complete. The first dam concrete was placed in February 1995, and the dam is now about half complete in terms of height and volume. Placing concrete in the Plunge Pool and Plunge Pool Dam began in late 1995, and is approximately 40 percent complete. Progress on the Power Intake structure, the log-passing facility, and the Tunnel Spillway is also at commensurate levels. 4. The underground works are also progressing well. Nearly all the required excavation is complete, and about 65 percent of the concrete has been placed. Most of the work associated with the erection bay, power conduits, penstock tunnels, and spillway tunnels is complete. Installation of the steel draft tube liners, excavation and lining of the Tailrace Tunnels, and other work in the Powerhouse is ongoing. Erection of the turbines and generators began in August 1996. 5. Most of the major electrical and mechanical equipment, and other equipment, has been purchased. Equipment delivery has begun. 6. All necessary land has been acquired, and construction of the resettlement areas is progressing well. The environmental mitigation program has also been timely and successful.  -41- ANNEX2 7. All elements are present, therefore, to suggest the project will be completed as foreseen. The quality of the work performed has generally met or exceeded the requirements, indicating that the finished product will operate as planned. 8. This Implementation Completion Report provides a series of Financial Tables that summarize the status of the cost aspects, actual and forecast through completion, of the Ertan Hydroelectric Project at the end of the period encompassed by the Phase One Loan. 9. As of mid-1996, well past the halfway point of the project, the key lessons learned to date may be summarized as follows: * A basic requirement for implementing such a large project is early establishment of the organizational structure that will manage the work, and definition of the relationships and dependencies of all parties involved. * Timely action is essential. To the contractors, "Time Is Money." This attitude demands decisions be made quickly, at the working front if possible. Therefore, responsible persons with clearly defined tasks and limits of authority must be available. Decisions must be taken at appropriate levels, and responsibility must be delegated. * Large international contractors are expert at building dams, and also at preparing claims and identifying alleged problems to justify these claims. Management must, therefore, avoid any action that may be construed as an obstruction to the progress of the work. * A trained core staff of personnel, at various levels, conversant in the ways of modern contract administration and project management techniques, is essential. * Initially, true communication proved to be very difficult. This was not just a matter of translation, but of really communicating ideas and thoughts across international boundaries of training and culture. Suspicion and mistrust among the parties amplified these difficulties at that time. Once an atmosphere of confidence was established, this situation was generally alleviated. * The hardware and software systems that will be used to manage the project must be in place before construction actually begins. Moreover, these systems must be practical, flexible, and address the actual needs of the project as it develops. * The manner in which individual portions of the work are contracted has an effect on how the work will be performed, and the level of effort required to manage it. When the work is divided into many discrete portions and awarded  -42 - ANNEX2 to different parties, scheduling and coordination become more confused and complicated. It is very difficult to both maximize progress and minimize costs. Increasing production seems to inevitably lead to increased costs. 10. The process of learning is ongoing. From the foregoing, Ertan must be considered as a building block for the future. The persons involved with Ertan will be able to use the experience they have gained to instruct others. The "ripple effect" of the experiences gained at Ertan should be far-reaching. It is this gained, and shared, experience, more than any specific lessons that may have been learned, which will greatly influence and facilitate the management of future projects. 11. There are three general parameters for judging the success of a project such as Ertan: quality of the completed work, cost of the work (compared with the original estimates), and progress of the work (compared with the original completion schedule). According to these general parameters, the progress at Ertan to date must be considered a success.  - 43 - ANNEX3 ANNEX 3: EXTRACT OF COMPLETION MISSION AIDE MEMOIRE (November 5, 1996) 1. This is an extract from the aide memoire of the completion mission for the Ertan Hydroelectric Project. Since the same mission also supervised the ongoing Ertan II Hydroelectric Project, those parts not relevant to the first project have been deleted. 2. A World Bank mission comprising Messrs./Mmes. Scurfield, Berrah, Trembath, Sun, Wu, Zhu and Zhao visited Ertan over the period November 5 to 9 to prepare for the ICR for the first project and to supervise the Phase II project. The mission would like to thank all parties participating in the mission for their excellent cooperation and cordial hospitality. The main findings of the mission and agreements reached are summarized in this aide memoire. Construction Progress and Status 3. A good summary of progress is provided in EHDC's draft Project Completion Report for the first project. It is gratifying to note that the project is generally on schedule, and on-time impoundment and commissioning of the first unit is becoming a strong probability. EHDC is even hopeful that commissioning of the second generating unit (Unit No. 5) will be ahead of schedule. Contractual Issues 4. The most significant event since the last mission was that EHDC reached a settlement with the Lot I contractor on his claim for acceleration. The settlement is comprehensive, settling all claims for extension of time up until May 31, 1996, and reestablishing the original contract completion dates. The package is valued at approximately $65 million. Although the amount involved is large, the mission supports and congratulates EHDC in resolving this major set of disputes. There are a few remaining disputes with the Lot II contractor, where the contractor has indicated his intent to proceed to arbitration in dissatisfaction of DRB recommendations. Project Management Systems 5. Good progress has been made in development of project management systems in all areas. The master schedule has now been developed in some detail and continues to be elaborated in critical areas, particularly those that have numerous interfaces between contractors, equipment suppliers and/or designers. Systems for tracking production and delivery status of equipment, including production and review of manufacturers'  -44 - ANNEX3 drawings have also been largely developed, and continue to be refined, particularly in relation to tracking progress of equipment manufacture in addition to actual delivery date. Design drawings from CHIDI have posed a problem until recently, but EHDC has substantially increased communication in this area, and EHDC are cautiously optimistic that the scope for project delays or claims due to drawing delays has been greatly reduced. 6. EHDC have also begun to develop a cost control system that would provide periodic updates (at least have yearly) of current committed costs and expected costs to completion (versus time) in the two currencies of account US dollars and Renminbi. This system will be fully in place by the end of May 1997. Resettlement 7. With increasing intensity of using resettlement funding (Y 600 million for 1996), considerable physical progress has been achieved in Yanbian County, Hongge Resettlement Site, Reservoir Highway, and key irrigation facilities. Conditions are now favorable for completing all required resettlement works before the end of 1997. 8. The long-awaited resettlement budget was finally approved by the central government in November 1996. Based on this approved budget, SPRO is planning to issue final compensation policies and standards for Ertan reservoir resettlement, which will provide the basis for the final stage of resettlement implementation in 1997. Environmental Component 9. The mission was able to follow up on the recommendations of the June mission and have brief discussions concerning the report of the Environmental panel of Experts dated October 25, 1996. However, since this report was only received by EHDC on November 6, and had not been translated, a full discussion was not possible. 10. However, the Panel report and the aide memoire of the last mission identify a number of issues of continuing concern, including: 11. Schistosomiasis. The Panel's considers that schistosomiasis risks are increasing rather than decreasing, concluding that snail eradication program has not been effective to date. The mission requested that EHDC consult with their schistosomiasis advisors and seriously address the detailed recommendations of the Panel, particularly the need for revising the scope of the current control program. Biodiversity. This continues to be a major concern of both the Panel and the Bank's environmental specialist. It is noted that considered that an additional survey in the fall would be valuable. The mission strongly supports their recommendations for an additional survey.  -45 - ANNEX3 Boundary Road and Buffer Zone. The Environmental Assessment approval considered that the proposed buffer zone was beyond what could reasonably be required of a project entity. This is in contrast to the statements in the Panel report that the 100 m elevation buffer zone is required by national legislation. EHDC clarified that the 100 m requirement applies to rivers but not reservoirs. While the reservoir boundary road is acknowledged to be necessary to replace the previous road link following the river, the mission endorsed the Panel recommendation that EHDC give increasing attention to environmental mitigation measures in road construction, particularly in relation to slope protection and spoil disposal. Tariff, Optimal Operation Studies and Power Sales Agreement 11. Based on the aide memoire of the last mission and correspondence since then, the mission was expecting to have comprehensive discussions on this aspect. Unfortunately, however, relevant parties such as SEPC, BERI and SMEC consultants dealing with the optimal operation study were not present and only abbreviated discussions were possible. The mission strongly recommended that EHDC commission a further study aimed at producing draft provisions relating to pricing and dispatch arrangements for Ertan. This should be aimed at bringing together all of the other work on optimal operations and pricing that has already been carried out. EHDC agreed to carry out the study and proposed that it be carried out as an extension of existing studies, possible through joint venture of existing consultants, rather than involved one more set of consultants. The mission indicated no objection to this arrangement. The scope of the optimal operations study would be extended to include the commercial issues related to power sales and the preparation of power sales agreements meeting the principles agreed with the Bank during negotiations of the Phase II loan. It would also take into account the results of all studies carried out to date including those carried out by EDF and BERI under the first loan. Implementation Completion Report (ICR) for Ertan I 12. In connection with preparation of ICR for the first loan (Ln. 3387-CHA), EHDC submitted to the mission a draft version of their own evaluation report of project implementation. The report was well prepared and provided a detailed account of the project implementation to date. The mission held two special sessions with EHDC to review and discuss the evaluation report. One session was focused on the key lessons learned and the other on modifications and complementary analyses required in order to finalize the evaluation report and to assist the Bank in preparation of its own ICR. Key Lessons 13. Ertan is the first large-scale hydroelectric project in China to adopt entirely international contracting and construction management procedures. Many of the difficulties experienced in implementing the new system are founded in the immature  - 46 - ANNEX3 status of economic and enterprise reform, and even in retrospect it is difficult to see how things could have been done differently. However, given the economic and enterprise reforms that have now occurred and the prospects for even broader reform, it is possible to formulate key lessons from project implementation that will not only benefit future projects but also the implementation of the second phase of Ertan Project. The mission's version of these lessons, which are based on those set out by EHDC in its completion report, as elaborated during discussion and which also incorporate the mission's opinion in some areas are summarized as follows: * In implementing a project of the magnitude and complexity such as Ertan implementation will be greatly assisted if there is an implementing organization in place at the outset of the project that is commercially independent and has full decision-making authority and responsibility for its performance. Initial delays in project implementation, resulting in sizable claims for acceleration largely resulted from EHDC's inability to respond to the need for decisions. The incorporation of EHDC in 1995 (four years after the commencement of construction) as a limited liability company resulted in major improvements in this regard, allowing EHDC to make quick decisions on its own instead of seeking instructions from the government agencies. This single factor is largely responsible for the recovery from earlier difficulties to the stage where the project is being successfully implemented and on-time completion is increasingly probable. 3 Prior to the start of construction, construction management personnel should be trained in contract administration and modem project management techniques. This training should include deputation for substantial periods to ongoing projects where these techniques are in use. China routinely undertakes similar training of operating personnel prior to the commissioning of all large hydropower plants and this is very successful. Similar training of construction management personnel will increase their competence and improve response time through allowing increased delegation rather than involving senior management in matters of detail. * Improved communication among various parties (owner, engineer, designer, advisors and contractors, etc.) should be actively pursued from the outset, to avoid misunderstandings that could cause delays and/or losses to the project. Communication difficulties were perhaps the most difficult to resolve in construction of the Ertan scheme. It is not just a matter of translation between different languages, but of communicating ideas and thoughts across international boundaries of training and culture. * Development of project management systems should also commence before construction in order to manage the construction more efficiently. These should include contractual documentation management systems, project master schedule, procurement and delivery schedule for Employer-supplied  - 47 - ANNEX3 equipment, design drawing control system and cost control system. EHDC has now developed systems in most of these areas, which seems is resulting in less exposure of EHDC to claims resulting from delayed supply of information or equipment. * In the future, consideration should also be given to reducing interfacing by procuring equipment in smaller numbers of larger packages. In retrospect, the division of civil activities among the two major contractors was not ideal, resulting in an increased number of interfaces, which led to contractual difficulties. 14. With regard to resettlement, lessons learned are as follows: the need to strengthen the resettlement organization at the provincial level to provide necessary leadership, technical assistance and monitoring of resettlement activities at the local levels, as shared by other power projects in China. Further Work Scope and Schedule 15. It was agreed that EHDC would carry out some revisions and complementary tasks to finalize its own evaluation report and to assist the Bank in preparation of its ICR. These are detailed hereafter. EHDC agreed to submit the additional information by the end of December 1996. 16. The project cost estimate (Table 8a-1 and 8a-2) should be revised based on standard Bank methodology. For costs incurred to date, the base cost should include expenses relating to both physical and price contingency. Only for future estimates, should these contingencies be presented separately. The latest Bank published MUV index and local currency inflation index (provided by the mission) should be used for price escalation projections. Foreign and local currency components should be presented separately and when combined, converting from Renminbi to US dollars, or vice versa, the applicable exchange rate in the year of disbursement should be used. For consistency with previous Bank estimates, the exchange rate for the future should include devaluation of the Renminbi to maintain current purchasing power parity. 17. A full analysis of cost variations should be conducted for Lot I and II, covering bill of quantity adjustments, variation orders, price variations, exchange rate variations (between US dollars and contract currencies), claims, and variation of taxes and duties. The foreign currency portion and local currency portion should be treated separately. For items where there are significant changes to the BOQ, physical quantities and brief explanation of the reasons for the changes should be shown in the notes. 18. To exclude the effects of inflation and devaluation, a complementary analysis of project cost variations should be carried out by de-escalating both foreign and local costs to the appraisal date using respective foreign and local inflation rates and combining the two at the appraisal exchange rate.  -48 - ANNEX3 19. Yearly streams of costs (1991-2000) should also be presented, for local and foreign expenditure including expenditures for physical contingencies, but excluding expenditures from price contingency and tax and duties. These streams will be used to recalculate the EIRR of the project. 20. A table should be prepared to show the total contract amounts of electrical and mechanical equipment (both foreign and local contracts) and the equipment erection contract (Lot III). Major contracts should be itemized. Financing table (Table 8b) should be revised using the applicable exchange rates.  -49 - ANNEX4 ANNEX 4: KEY MONITORING INDICATORS Indicators Target Dates A. Physical Construction Construction Progress Diversion Tunnel Closure December 1, 1993 Completion of Powerhouse Draft Tube Liners Unit 6 October 1, 1996 Unit 1 June, 1, 1998 Commercial Operation Unit 6 October 1, 1998 Unit I June 1, 2000 Procurement Progress 1995-1996 500 kV Dry Cable Generator Circuit Breakers 500 kV GIS Main Transformers Gates, Hoists, Cranes Overall Cost Control 1995-2000 B. Environmental Management Program Mitigation Program 1991-1997 Environmental Monitoring System 1994-1996 Environmental Monitoring during Construction 1993-2000 Staff Training and Study Tour 1991-1998 Scientific Research 1995-1998 Environmental Evaluation Panel 1994-1998 C. Resettlement Action Plan Liangshan County (resettlement of 1,705 inhabitants) 1995 Yanbian County (resettlement of 19,574 inhabitants) 1995-1997 Miyi County (resettlement of 3,406 inhabitants) 1995-1997 Relocation of 12 Small Plants 1995-1997 Road Construction 1995-1997 Telecommunication, Power Transmission Line 1995-1997 Fish Farm  - 50 - ANNEX4 Indicators Target Dates D. Institutional Development Corporatization Incorporate EHDC as a Limited Liability Company 1995 Establish a Board of Director 1995 Commercialization Study of Organizational Restructuring and Financial Management System 1995-1996 Implementation of the New Organization Structure and Financial Management System 1997 Power Sales Bulk Sales Study 1995 Memorandum of Understanding with SEPC 1995 Reservoir Optimization Study June 30, 1995 Signing of the Power Sales Agreement with SEPC June 30, 1997 Training Program Senior Management 1995-1997 Technical and Business Staff 1995-1997 Financial Staff 1995-1997 Environmental and Resettlement 1996-1997 Power Station 1996-1997 E. Financial Indicators (in %) 1998 1999 2000 2001 2002 2003 2000 Rate ofReturnonRevalued Assets 0.8 20.0 17.0 17.5 16.3 15.0 15.0 Long-term Debt (LT Debt and Equity) 79.0 77.0 71.0 63.0 56.0 52.0 47.0 Debt Service Coverage 1.5 1.5 1.6 1.5 1.5 1.5 1.5  - 51- ANNEX5 ANNEX 5: INFLATION AND EXCHANGE RATES 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 INFLATION RATES Annual Rates At Appraisal Local 10.0 8.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 Foreign 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 Actual/Latest Estimates Local /a 6.2 6.8 24.0 19.5 14.9 6.5 6.2 5.8 5.5 5.5 Foreign 2.1 4.3 -0.3 3.6 8.3 -2.5 1.7 2.2 2.6 2.8 Inflation Allowance L At Appraisal Local 5.0 14.4 21.8 27.9 34.3 41.0 48.0 55.4 63.2 71.3 Foreign 1.7 5.2 8.7 12.4 16.3 20.2 24.3 28.5 32.9 37.4 Actual/Latest Estimates Local 3.1 9.8 27.0 54.4 80.6 99.4 112.0 124.7 137.4 150.5 Foreign 1.1 4.3 6.3 8.1 14.6 17.6 17.1 19.4 22.3 25.6 Exchange Rates (Yuan/$) Rates used at Appraisal 5.24 5.24 5.24 5.24 5.24 5.24 5.24 5.24 5.24 5.24 Actual/Latest Estimates LZ 5.36 5.49 5.75 8.60 8.30 8.30 8.30 8.30 8.30 8.30 Sources of information: la Percentage change from previous year. 1991-94, Industry Producer's Price Index, China Statistics; 1995-2000, China Price Contingencies Updates, EA2CO, the World Bank, December 20, 1996. Lb Percentage change from previous year. 1991-2000, Index of Unit Value of Manufactured Exports (MUV), the World Bank, November 1996. L Compounded inflation rates. Ld Nominal official exchange rate (annual average). 1991-94, The Chinese Economy-Fighting Inflation, Deepening Reforms, A World Bank Country Study, 1995-2000, project staff appraisal reports.  - 52 - ANNEX 6.1 ANNEX 6.1: REESTIMATED ECONOMIC COSTS AND BENEFITS (INCORPORATING ENVIRONMENTAL BENEFITS OF AVOIDED S02 AND PARTICULATES EMISSIONS) (1996 Constant Million Yuan) Total Benefit | Avoided SO, Emission I Avoided PM,0 Emission Total Net Year Cost /a GWh M Yuan ton M Yuan ton M Yuan Benefit Benefit 1991 1,128.33 0.00 0.00 0.00 -1,128.33 1992 3,193.95 0.00 0.00 0.00 -3,193.95 1993 1,472.89 0.00 0.00 0.00 -1,472.89 1994 1,510.31 0.00 0.00 0.00 -1,510.31 1995 1,786.43 0.00 0.00 0.00 -1,786.43 1996 3,791.49 0.00 0.00 0.00 -3,791.49 1997 4,486.28 0.00 0.00 0.00 -4,486.28 1998 1,661.01 1,198.00 419.30 1,020.00 3.39 438.69 0.07 422.76 -1,238.25 1999 717.45 10,032.00 3,511.20 10,200.00 33.86 3,673.59 0.61 3,545.67 2,828.22 2000 323.52 15,273.00 5,345.55 236,500.00 785.18 5,592.78 0.93 6,131.66 5,808.13 2001 194.94 15,878.00 5,557.30 236,500.00 785.18 5,814.33 0.97 6,343.45 6,148.50 2002 194.94 16,094.00 5,632.90 236,500.00 785.18 5,893.42 0.98 6,419.06 6,224.11 2003 194.94 15,897.00 5,563.95 236,500.00 785.18 5,821.28 0.97 6,350.10 6,155.15 2004 194.94 15,885.70 5,560.00 236,500.00 785.18 5,817.14 0.97 6,346.14 6,151.19 2005 194.94 16,071.00 5,624.85 198,300.00 658.36 5,885.00 0.98 6,284.18 6,089.24 2006 194.94 15,990.90 5,596.82 198,300.00 658.36 5,855.67 0.97 6,256.14 6,061.20 2007 194.94 16,531.00 5,785.85 198,300.00 658.36 6,053.45 1.00 6,445.21 6,250.26 2008 194.94 16,574.10 5,800.94 198,300.00 658.36 6,069.23 1.01 6,460.30 6,265.35 2009 194.94 16,124.60 5,643.61 198,300.00 658.36 5,904.63 0.98 6,302.95 6,108.00 2010 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2011 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2012 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2013 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2014 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2015 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2016 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2017 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2018 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2019 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2020 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2021 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2022 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2023 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2024 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2025 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2026 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 2027 194.94 17,559.60 6,145.86 252,500.00 838.30 6,430.11 1.07 6,985.23 6,790.28 Total 25,335.22 487,622.10 170,667.74 6,730,220.00 22,344.33 178,561.12 29.64 193,041.71 167,706.48 PresentValuel 12,058.03 51,368.40 17,978.94 1,481,879.39 4,919.84 41,583.95 6.90 20,207.55 8,149.51 Internal Economic Rate of Return (IERR) 17.39% Assumptions: Official exchange rate (Y/S) 8.3 Y/ton SO2: 3,320 Y/ton PMis: 166 Shadow exchange rate (Y/$) 8.3 Sources of information: "Economic Analysis of Environmental Impacts" Shadow conversion factor 1.0 by ].A. Dixon, and L.F. Scura, published in association with the Asian Development Willingness to pay (Y/kWh) 0.35 Bank and the World Bank, 1994. Discount rate 0.12 /a Including Capital Investment & O&M costs. /b Discounted to year 1991.  w~~~~~~~~~~~~~~~~~~~~~I ll ll n Ic n '