Document of The World Bank Report No: 21909-CHA PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A THIRD INLAND WATERWAYS PROJECT May 24, 2001 Transport Sector Unit East Asia and Pacific Region CURRENCY EQUIVALENTS (Exchange Rate Effective January 1, 2001) Currency Unit = Yuan Yuan 1.00 = US$0.12 US$1.00 = Yuan 8.30 FISCAL YEAR January I -- December 31 ABBREVIATIONS AND ACRONYMS CNAO China National Audit Office MBD Model Bidding Document CQ Consultants' Qualification MERR Modified Economic Rate of Return EA Environmental Assessment MOC Ministry of Commnunication EAP Environmental Action Plan MOF Ministry of Finance EIA Environmental Impact Assessment NCB National Competitive Bidding EPO Environmental Protection Office NPV Net Present Value EPS Environmental Protection Sections OED Operations Evaluation Department ERR Economic Rate of Return PAP Project Affected Person FIRR Financial Internal Rate of Return PHRD Policy and Human Resources GDP Gross Domestic Product Development GOC Government of China PIP Project Implementation Plan GPN General Procurement Notice PRC People's Republic of China HPCD Hunan Provincial QCBS Quality and Cost-Based Selection Communications Department RAP Resettlement Action Plan HPFB Hunan Provincial Finance Bureau RIB Resettlement Information Booklet HPEPC Hunan Provincial Electric Power SDPC State Development Planning Company Commission HXNCDC Hunan Xiangjiang Navigation SOE Statement of Expenditure Construction and Development SOE State-owned Enterprises Corp. Ltd. SPN Specific Procurement Notice ICB International Competitive Bidding TA Technical Assistance IWT Inland Waterway Transport TOR Terms of Reference IWW Inland Waterway WBOB World Bank Office in Beijing Kwh Kilo-watt-hour Vice President: Jemal-ud-din Kassum, EAPVP Country Director: Yukon Huang, EACCF Sector Director: Jitendra N. Bajpai, EASTR Task Team Leader/Sr. Port Engineer: Toshiro Tsutsumi, EASTR CHINA THIRD INLAND WATERWAYS CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 4 C. Project Description Summary 1. Project components 5 2. Key policy and institutional reforms supported by the project 6 3. Benefits and target population 7 4. Institutional and implementation arrangements 7 D. Project Rationale 1. Project alternatives considered and reasons for rejection 8 2. Major related projects financed by the Bank and other development agencies 8 3. Lessons learned and reflected in proposed project design 9 4. Indications of borrower commitment and ownership I 0 5. Value added of Bank support in this project 10 E. Summary Project Analysis 1. Economic 10 2. Financial I1 3. Technical 11 4. Institutional 12 5. Environmental 1 3 6. Social 15 7. Safeguard Policies 17 F. Sustainability and Risks 1. Sustainability 17 2. Critical risks 18 3. Possible controversial aspects 19 G. Main Loan Conditions 1. Effectiveness Condition 19 2. Other 19 H. Readiness for Implementation 21 I. Compliance with Bank Policies 21 Annexes Annex 1: Project Design Summary 22 Annex 2: Detailed Project Description 26 Annex 3: Estimated Project Costs 32 Annex 4: Cost Benefit Analysis Summary 34 Annex 5: Financial Summary 42 Annex 6: Procurement and Disbursement Arrangements 53 Annex 7: Project Processing Schedule 61 Annex 8: Documents in the Project File 62 Annex 9: Statement of Loans and Credits 64 Annex 10: Country at a Glance 68 Annex I1: Summary of Environmental Assessment and Action Plan 70 Annex 12: Summary of Resettlement Action Plan 80 Annex 13: Review of Financial Management System 84 Annex 14: (Draft) Terms of Reference for Study of Containerization Development Along 91 Xiangjiang River Annex 15: The Power Demand Assessment 94 Annex 16: Poverty Alleviation Impact 96 MAP(S) IBRD 31205, May 2001 IBRD 31206, May 2001 CHINA Third Inland Waterways Project Appraisal Document East Asia and Pacific Region EASTR Date: May 24, 2001 Team Leader: Toshiro Tsutsumi Country Director: Yukon Huang Sector Director: Jitendra N. Bajpai Project ID: P056199 Sector(s): TP - Ports & Waterways Lending Instrument: Specific Investment Loan (SIL) Theme(s): Transport Poverty Targeted Intervention: N Program Financing Data [X] Loan [ ] Credit E ] Grant ] Guarantee [ Other: For Loans/Credits/Others: Amount (US$m): $100.00 Proposed Terms (IBRD): Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan (US$m): Source Local Foreign Total BORROWER 120.22 0.00 120.22 IBRD 0.00 100.00 100.00 Total: 120.22 100.00 220.22 Borrower: PEOPLE'S REPUBLIC OF CHINA Responsible agency: HUNAN PROVINCIAL GOVERNMENT EXECUTED BY HIUNAN XIANGJIANG NAVIGATION CONSTRUCTION AND DEVELOPMENT CORPORATION LTD. (HXNCDC) Address: 286 West Wuyi Road, Changsha, Hunan Contact Person: Mr. Li Jun Tel: 0731-2252233 Fax: 0731-2252299 Email: Hxncdl@Sina.com Estimated disbursements ( Bank FY/US$m): FY 2002 2003 2004 2005 2006 2007 2008 Annual 2.50 10.00 21.00 28.00 21.00 15.00 2.50 Cumulative 2.50 12.50 33.50 61.50 82.50 97.50 100.00 Project implementation period: May 2001 - June 30, 2007 Expected effectiveness date: 11/21/2001 Expected closing date: 12/31/2007 DCS -A -Rl RV -aE 200 A. Project Development Objective 1. Project development objective: (see Annex 1) The objective of the Third Inland Waterways Project is to reduce transport and energy bottlenecks by: (a) improving market access of the remote inland areas of Hunan Province; (b) providing more efficient and economic inland waterway transport (IWT); and (c) generating power to supplement the needs of the remote areas. 2. Key performance indicators: (see Annex 1) Key perfornance indicators are proposed in accordance with the project's major objectives: Project Objectives Outcome/Impact Indicators Performance Indicators 1. Improve market access The freight tariff for IWT is lower than for Waterway Traffic ('000) (Zhuzhou of remote inland areas railway and highway. IWT will remain Section) competitive mode and the traffic will increase. Container Traffic (teus) 2. Provide more efficient Economic and financial costs in ton-km will Average Barge Size (dwt) at the and economic inland decrease with the increase of inland water Zhuzhou Shiplock Section waterway transport vessel size along the Xiangjiang River. Inland Waterway Agency, Hunan Xiangjiang Financial Performance Navigation Cconstruction and Development (a) Working Ratio (%) Corporation Ltd. (HXNCDC), is financially (b) Self-financing Ratio (%) sustainable. (c) Debt Service Coverage Ratio (%) 3. Generate power to Annual power output and sales: (a) Output Power Output of Zhuzhou Dam (MWh) supplement the needs 640.5 million kwh/year; (b) Utilization 4,575 of the remote areas hours/year; and (c) Sale price 0.27 Yuan/kwh. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R98-107 (CAS Progress Report) Date of latest CAS discussion: 05/28/98 The CAS, which reflects the Bank's strategic goal to foster growth and reduce poverty, identifies infrastructure improvement as a key area to support China's development agenda, particularly in inland provinces. The proposed project, a combination of navigation and hydropower, aims to ameliorate the economic well-being of the majority of families along Xiangjiang River in Hunan Province (5.9 million inhabitants) with below dollar per day average income (Annex 16). The project will remove dangerous shoals, upgrade 157 km channel, create a deeper channel along Xiangjiang River to enhance safety and productivity of the IWW system. These improvement will facilitate transition to a more efficient mix of vessel sizes using the waterways (from 40-300 dwt to 1000 dwt), and reduce their travel time by up to 2.5 hours. In addition, almost 640.5 million kwh power will be produced annually for Hunan Province to reduce the incidence of outage. -2 - The sector specific goals supported by the project are: * to promote growth by reducing infrastructure bottlenecks in transport and power deliveries; * to improve transport accessibility of inland poor regions; and * to strengthen governance and competitiveness of IWT through improved waterway management and planning. 2. Main sector issues and Government strategy: The main issues and Government strategy in China's inland water transport are as follows: (a) Competitive development of IWT sector Investment in waterways infrastructure over the last half century has been insignificant compared with the investment in other transport modes. The waterways infrastructure is presently inadequate, and thus it prevents IWT from contributing fully to support economic development. Railway and highway infrastructure have steadily improved, and is now close to allowing these sectors' operations to be cost-effective and user-friendly. In contrast, waterways infrastructure has improved little, and in the last three Five-Year Plans, its share of investment has been significantly less than its share of ton-kms. Although some waterway services are efficient, most are operated by inefficient companies that have small vessels with high operating costs. (O) Decentralization and institutional reform of IWW Although the inland waterways sector has been significantly decentralized, and some institutional responsibilities have been commercialized, further restructuring and commercialization are needed to make the agencies that oversee inland waterway transport more responsive to users' needs. Lack of coordination between agencies representing different users of the waterways (irrigation, power generation, water supply, and transport) has seriously impeded development of waterway transport. In addition, separation of responsibilities for waterway and railway transport between different ministries impedes the cooperation and coordination needed for both sectors to fulfill their roles. Because most potential inland waterway freight requires another mode of transport at the beginning or end of its journey, greater facilitation of multimodal freight transport is necessary for waterways to increase their share of traffic. (c) Deregulation offreight tariff A long period of controlled tariffs that lasted until 1998 hampered the competitiveness of the IWT sector. Under the regulated tariff, operators had no significant advantage in operating larger and more cost-effective vessels, so they had also no incentives to replace smaller vessels with larger ones. Most waterway vessels are powered barges that operate as independent units rather than in convoys. The lack of serious competition between waterway transport companies and the lack of cost-consciousness by users have contributed to the failure of waterway operations to become more efficient. The greatest impediment to increased operating efficiency and increased modal share has been the lack of any incentive to increase vessel sizes and therefore reduce costs. Since most freight tariffs were deregulated, there is a growing awareness of the advantages of larger, more cost-effective vessels and in particular of push-tow convoys (especially the push tow convoys that have proved so effective in other parts of the world which are used little in China). -3 - (d) Provision of investment funds Most provinces with large waterway systems have implemented some form of direct user charges, typically including a channel maintenance fee, a channel construction fee and charges for use of shiplocks. The revenues from channel maintenance and construction fees were expected to cover the amortization of charges of loans for waterway development. A new system is being considered to replace these charges with a uniform fuel price surcharge. Under this system, the fees would be collected by the company supplying the fuel, then passed on to the agency responsible for admninistering the charge. The Government of China (GOC) utilizes loans from the World Bank for waterway investment and then lends the funds to the provinces to cover about 40 percent of project costs. The remainder comes from the provinces' own resources. The resulting level of cost recovery from users is one of the highest cost-recovery levels for waterway investment and maintenance in the world. (In comparison, in the United States which is considered a good example, cost-recovery levels are 20 percent overall -- 100 percent for new investment and 0 percent for maintenance.) (e) Policy guidelines for modernization of IWTfleet While waterway transport has the potential to provide the lowest transport cost for a wide range of products over a range of travel distances, these low costs are very dependent on vessel size. There are many family-owned barges in operation -- in some provinces, more than 90 percent of all vessels are individually owned. Family businesses do not have access to sufficient financing to invest in larger and more efficient vessels and are too small to implement the integrated logistics systems that are necessary to take advantage of the lower operating costs that come push-tow operations allow. The few commercial fleets presently in operation are owned mostly by companies in which provincial or municipal governments have a controlling interest. Until now, these companies have had little incentive to become more efficient. MOC has realized the critical importance of vessel size on operating costs and is undertaking studies to find the best way to bring about a rapid increase in average vessel size. 3. Sector issues to be addressed by the project and strategic choices: (a) Competitive development of IWT sector Modal competition exists in the Xiangjiang River corridor. Generally, high-value cargo is transported by highway or railway, while low-value bulk cargo is transported by waterway. It is important for cargo to be transported by larger vessels to enable IWT to become more economic and efficient. Under the proposed project, a section of the waterways will be upgraded from Class V - (3) to Class III - (3). This upgrade will allow 1,000-dwt vessels (four barges, in two lines of two barges, plus one push tow unit) to navigate year round from Hengyang to the confluence of the Xiangjiang and Yangtze Rivers, and upstream to Chongqin, and downstream to Shanghai. (b) Decentralization and institutional reform of IWW Hunan Province has benefited from MOC's decentralization of waterway transportation responsibilities and has evolved institutional systems for dealing with the joint use of waterway facilities for transport and energy purposes. But these institutions continue to suffer from lack of coordination with other transport agencies. This lack of coordination prevents the stimulation of multimodal transport, permits the building of bridges over the waterways that inhibit the passage of large vessels, and makes extracting water for irrigation accessible. Under the proposed project, Hunan Province will strengthen its decentralized waterway transportation agencies, expand the use of commercial incentives in the operation of their - 4 - subagencies, implement better coordination measures with other provincial transport agencies and seek to work more closely with agricultural users of the waterways. (c) Provision of investmentfunds The previous under-investment in the waterways will be vigorously addressed by the investments proposed under the project. Hunan Province has already begun to address the problem of under-investment in its waterways and has almost completed the first Bank-financed IWW project in China (IWW1--Loan 3910-CHA). The IWWl project also involves the construction of a dam/shiplock with power generating capability. The state-owned enterprise (SOE) responsible for project (HXNCDC) is eventually expected to become financially sustainable; it will provide part of the investment funds for the proposed project. A second dam/shiplock will contribute to the faster realization of provision of investment funds, while allowing large vessels to use an extensive part of the provincial waterway network. Dayuandu (Hunan) Shiplock under IWW 1 Dayuandu Dam under IWW I (d) Policy guidelinesfor modernization of IWTfleet The principal transportation benefit from the upgraded waterways will be realized by the use of larger vessels. At the present rate of replacement of vessels, however, these benefits will take a long time to be realized. To address a similar situation in Jiangsu Province, a vessel modemization study is being implemented under the Second Inland Waterways Project. This study will indicate the measures necessary to accelerate the replacement of vessels to maximize the benefits of the project. During the preparation of the proposed project, support was given to MOC to develop guidelines for provinces nationwide on how to build up and maintain a database of vessels and the freight they transport, how to implement a waterway management system, and how to stimulate a rapid evolution of vessel fleets. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The proposed project will include: A. Construction of Zhuzhou Shiplock; B. Construction of Zhuzhou Dam and Powerhouse (a dam about 15 m high) with a capacity of 140 megawatts of hydroelectric power generation primarily to increase upstream water depth for navigation and power supply, and to provide a highway bridge over the Xiangjiang River in Hunan Province; C. Construction of access roads; -5 - D. Construction of river bank protection; E. Upgrading the Xiangtan - Zhuzhou channel section by dredging; F. Strengthening of sector management and further commercialization of HXNCDC, the IWT agency, through: (a) training, (b) technical assistance, and (c) enhancement of its financial capacity; and G. Resettlement. Indicative Bank- % of Component Sector Costs % of financing Bank- (US$M) Total (US$M) financing A. Construction of Zhuzhou Shiplock Ports & 23.34 10.6 11.81 11.8 Waterways B. Construction of Zhuzhou Dam and Hydro 117.52 53.4 76.82 76.8 Powerhouse C. Construction of Access Roads Highways 6.97 3.2 3.27 3.3 D. Bank Protection Ports & 31.54 14.3 5.51 5.5 Waterways E. Channel Improvement (Zhuzhou - Ports & 2.00 0.9 0.00 0.0 Xiangtan Section) Waterways F. Technical Assistance and Training Institutional 9.78 4.4 1.59 1.6 Development G. Resettlement Resettlement 9.75 4.4 0.00 0.0 Total Project Costs 200.90 91.2 99.00 99.0 Interest during construction 18.32 8.3 0.00 0.0 Front-end fee 1.00 0.5 1.00 1.0 Total Financing Required 220.22 100.0 100.00 100.0 2. Key policy and institutional reforms supported by the project: The project will support the following GOC policy of making IWT more efficient: Modernization of inland water vessels. During the preparation and implementation of the ongoing Bank-financed IWW projects, MOC became aware of the importance of grea.ter average vessel size to making transport by waterway competitive with transport by rail and road. IWT has a long history in China, but its evolution has stagnated because of the under-development of the waterways and the consequent continuing use of very small and inefficient vessels. MOC has begun to develop a policy to stimulate an increase in average vessel size. The proposed project will support the development and implementation of the recommendations of this policy study. Commercialization of IWT agencies. Through the two ongoing IWT projects, the Bank has supported the GOC's policy of commercializing IWT agencies by creating financially autonomous entities supported by revenue-generating dams and shiplocks that provide electrical energy and make IWW transportation more efficient. The proposed project will build on the experience gained in these projects to extend the same strategy to inland waterways and land-locked provinces. Improvement of navigational channels. The project will support policy to make IWT more efficient by improving a 157-kin section of Xiangjiang River to enable four 1,000-dwt barges up to navigate to Hengyang City, 439 km upstream of the river. - 6 - Increasing the competitiveness ofIWTfor multimodal transportation. Container transport on the Yangtze River and other waterways has recently emerged as a potentially competitive transport mode. Zhuzhou port downstream of the proposed dam/shiplock is no exception. Zhuzhou port (see picture below) is investing in container terminal construction utilizing private sector financing. HXNCDC would like to assess further development potential of IWW transport, including interrnodal transportation, under the project. The Bank's involvement to support and assist the proposed technical assistance will be essential. (Container Operation at Zhuzhou Port) 3. Benefits and target population: The project will have an indirect impact on the poverty dimensions of Hunan Province. It will directly influence the earning potential of vessel operators, shipping companies, and those manufacturers and producers in the nearby cities and counties that are within the project service area. Increases in wages and profits of navigation community and other waterways dependent businesses will raise their consumption and in turn stimulate the economic life in counties adjacent to the Xiangjiang River. In addition, future use of large size vessels will provide a better living environment for families of small vessel owners and crew (See Annex 16), who presently live aboard small vessels and are deprived of any formal education and decent social life. It is expected that the population that will benefit from the project comprises 5.89 million inhabitants with less than one dollar per day average income of Zhuzhou, Hengyang, Chanzhou and Leiyang Cities, and Zhuzhou, Hengdong, Hengshan and Hengnan Counties (please see Annex 16 for details). And about 62.6 rnillion inhabitants of Hunan Province will experience indirect benefits of the project. 4. Institutional and implementation arrangements: The proposed project will be carried out by Hunan Province. The implementing agency will be HXNCDC in accordance with the Subsidiary Loan Agreement between Hunan Province and HXNCDC. HXNCDC is a State-Owned limited liability company, established in November 1994 by HPCD and authorized by Hunan Province to implement IWWI. Financial management and disbursement. The financial management aspects of the project are to be handled by the Finance Department of HXNCDC and by Hunan Provincial Finance Bureau (HPFB). Specifically, the HXNCDC finance department will be responsible for bookkeeping, collecting and maintaining supporting documents, preparing withdrawal applications, monitoring project payments and preparing project financial statements. HPFB will be responsible for maintaining, monitoring and reconciling the special account to be set up for the project, and reviewing, verifying and approving withdrawal applications prepared by HXNCDC before submitting them to the Bank for withdrawal processing. -7 - In terms of disbursement technique, the project will disburse using traditional disbursement techniques and will not be using Project Management Report- (PMR) based disbursements, in accordance with Bank and MOF policies. Auditing Arrangements. As with other Bank-financed projects in China, the Foreign Investment Audit Bureau of the China National Audit Office (CNAO), established in 1983 under the name of the State Audit Administration, will have overall responsibility for auditing project accounts. The Hunan Provincial Audit Bureau will conduct the fieldwork and issue audit reports. The Bank currently accepts audits performed under the supervision and responsibility of CNAO. Audits of the financial statements of the project, and the audit of the Special Account and Statement of Expenditures will be submitted to the Bank within six months of the end of the financial year. The audit reports of the project will also include opinions on whether the project was in compliance with financial covenants, if any. D. Project Rationale 1. Project alternatives considered and reasons for rejection: To make the river navigable by I ,000-dwt vessels, the altemative to building dams with shiplocks would have been to deepen the river through dredging, then to maintain the new depth by continuous maintenance dredging. This would have been very difficult technically because of the solid-rock river bed, and much more expensive as well. Dredging also would have limited river flow in dry season, and would not have had the revenue-generating capability of the dams. What is more, given the projected shortage of generating capacity in Hunan, the altemative to the hydroelectricity generated by the dam (totaling 140 MW) would have been coal-fired power stations in other provinces. This altemative would have been more expensive and much less reliable and would have involved emission of pollutants. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project I (PSR) Ratings I (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Remove transport bottleneck by IWW I and IWW2 S S improving IWT facilities Construct dam/shiplock with power IWW I S S generating capability Commercialization of IWW agency IWW 1 and IWW2 S S Other development agencies Develop intermodal transportation Netherlands Technical along the Yangtze River Assistance IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) - 8 - 3. Lessons learned and reflected in the project design: Although the proposed project will be the third IWT project in China (the First and Second projects are ongoing), Bank experience in this subsector is very limited. China's two projects are progressing satisfactorily both in physical and institutional terms. Short-term financial viability for the cross-subsidy from the power generation and sale of electricity has been proven, but long-term sustainability has not yet been tested. Major contracts for both civil works and procurement of equipment have been awarded without any significant delays. Implementation is also being carried out close to schedule. This is due mainly to the strength of China's executing agencies in preparing engineering design and handling the bidding process. The major institutional reform has been achieved by establishing SOEs for damlshiplock operation and by separating these SOEs from the Provincial Communication Departments (in Hunan and Guangxi Provinces). Implementation of resettlement action plans and environmental action plans has also been satisfactory. Executing agencies pay close attention to the conditions of resettlement, as well as to progress achieved. In terms of dam construction under IWW agencies, however, engagement of experienced consultants with particular expertise in designing and constructing dam will be essential. Drawing on experience gained from the first two projects, the IWW agency identified and appointed qualified consultants to carry out the preparation of the proposed project. Because China has greater expertise in waterway and small hydro-dam design and construction than other countries, and because the experience from the first two projects was satisfactory, local design will be used for the proposed project. Local experience in waterway construction and dredging from the previous projects was also satisfactory. Although Hunan Province used international competitive bidding (ICB) to contract its dam construction under the first project, Guangxi Province used domestic national competitive bidding (NCB) financed locally. Both results were satisfactory, although the Hunan outcome was slightly better. Local supervision consultants for all civil works components (financed locally) have been satisfactory and will be used again in the proposed project. Power generators were procured under ICB and installed locally. This proved acceptable to the provinces and the Bank and had a satisfactory outcome, and this course of action will be followed again. The Operations Evaluation Department's (OED) analysis of 35 Bank-financed projects completed between 1980 and 1992 in the port subsector (not only in China) indicated two major problems: (a) long implementation periods due to the underestimation of the time needed for procurement and civil works construction; and (b) lower-than-expected benefits due to over-optimistic traffic projections. To minimize the first of these problems in the proposed project, engineering design has been substantially completed, and procurement procedures have been agreed and are similar to those used before. Because the project does not include complicated or unfamiliar civil works, delayed project execution is unlikely. The Bank has carefully reviewed the provinces' traffic forecasts and reduced them to levels compatible with current Bank expectations of national, regional and provincial economic development. China's highway experience in some Bank-financed projects indicates: (a) inadequate quality of construction, and (b) cost overruns. Although the proposed project would not require advanced technology for civil works construction, the project will take into account the need to use experienced and competent contractors and supervision consultants, as well as careful determination of project cost estimates. -9- 4. Indications of borrower commitment and ownership: The State Development Planning Committee (SDPC), Ministry of Finance (MOF), and MOC fully support the proposed project. SDPC has authorized the final feasibility study. Provincial project components have already been included in the 10th Five-Year Plan. HPCD has committed to providing counterpart funds as a grant to HXNCDC. The Provincial Power Bureau agreed in principle to include Zhuzhou dam in its network, which indicates its commitment to purchase generated power from the proposed project. Zhuzhou City has already committed to purchase electricity from the proposed project. 5. Value added of Bank support in this project: Bank involvement in the project will provide further IWT policy reform. Through preparation of the project, the Bank is assisting MOC in developing and implementing national policy guidelines for modernizing the IWT fleet. The Bank, under the ongoing second Inland Waterways project, is also assisting Jiangsu Province in drawing up a provincial policy for modernizing the IWT fleet. It is expected that the proposed project will integrate China's policy guidelines on fleet modernization. The proposed project will also assist commercialization of HXNCDC. The IWW I project implementation provided inland provinces, including Hunan Province, opportunities to learn competitive and transparent procurement processes, as well as institutional capacity development. The proposed project will assist HXNCDC in providing a development strategy for Xiangjiang IWT, including containerization of waterway transportation. In addition, the proposed project will assist institutional development of HXNCDC, including strengthening its financial management to ensure that the proposed project is financially sustainable. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): e Cost benefit NPV=US$225 million; ERR = 18.8%, MERR 14.5 % (see Annex 4) o Cost effectiveness O Other (specify) This is a multi-purpose project, with quantified benefits coming from deferring the need to build a coal-fired power station, reducing the costs of navigation on the Xiangjiang River, reducing road transport costs for vehicles that will cross the bridge to be built over the dam, reducing irrigation costs, increasing agricultural output, and increasing output from fishing in the Xiangjiang River. The quantified benefits are distributed among the various sources in the following proportions: Navigation: 69.2% Energy: 18.3% Agriculture and fisheries: 7.1% Road transport: 5.5% The benefits were assessed using the avoided investment and operating costs of the best alternative investment (for the energy component of the project), the cost savings to transport activities that would accrue whether or not the project were to be completed, the net value added of additional agricultural and fishing activity, and the reduced cost of irrigation compared with what would be incurred without the project. - 10- Additional, unquantified benefits come from a reduced risk of vessel navigation and flooding for residents of communities close to the river banks, and increased potential economic output from the regions of Hunan Province along the upper Xiangjiang River resulting from improved waterway access. 2. Financial (see Annex 4 and Annex 5): NPV=US$ 18 million; FRR = 6.8 % (see Annex 4) The financial analyses will focus on the consolidated financial capacity of HXNCDC as well as the financial impact on HXNCDC of the proposed Zhuzhou dam/shiplock. HXNCDC's main revenue will come from the sale of power from Dayuandu and Zhuzhou dams/powerhouses. The company is planning to use the revenue to cover its operating costs, including loan amortization charges. Although the company will generate enough total revenue over the loan period, with a standard amortization schedule, it will have cash deficits from 2002 to 2005 when it begins to repay the first Bank loan in 2001. These annual deficits can be covered by transferring reserve funds from previous years. The financial internal rate of return (FIRR) for the project is expected to be 6.8 percent. The expected financial net present value (NPV) of excess revenue after all maintenance and operating costs and loan repayments have been met is equivalent to Yuan 149.1 million (US$18.0 million) at a 5.9-percent discount rate. A detailed assessment is provided in Annex 5. Fiscal Impact: The project task team determined that counterpart funds for the project will certainly be available because the expenditures for the proposed project constitute only a small fraction of GOC, HPCD and HXNCDC's funding flow. The successful implementation of the similar, larger IWW1 project has confirmed counterpart fund availability. The risk of lack of counterpart funds therefore is assessed as negligible. 3. Technical: The task team carefully and thoroughly reviewed the technical aspects of the project, including the waterway channel, dam/shiplock, and power generation design, and found them sound. Experienced, first-class consultants were engaged to prepare the project. Technical coordination among the Central and Provincial Governments, Municipalities, related dam operators (in particular upstream of the Xiangjiang River), stakeholders (shipping companies, port operators, Zhuzhou city and others) and HXNCDC has been established. The consultants to prepare the technical aspects of the project are: (a) Hunan Provincial Communication Planning, Survey and Design Institute (for the shiplock design); (b) Mid-South Design and Research Institute for Hydraulic Projects (for the reservoir design and resettlement); (c) Hunan Environmental Protection Research Institute (for environmental assessment); (d) Hunan Provincial Water Resources and Hydropower Design Institute (for the dam and powerhouse design); (e) Changsha Communications University (for overall model tests); and (f) Tianjin Research Institute for Water Transport Engineering (for the hydraulic laboratory model test for the shiplock). China has extensive experience in designing and constructing large hydraulic dams. The size and scale of the proposed dam is small for China. HXNCDC has successfully implemented a similar project, including a larger dam (the Dayuandu Dam/Shiplock complex) under the IWW1 project. No technical difficulties are - 11 - expected. In addition, a dam safety panel has been established, according to the terms of reference reviewed by and acceptable to the Bank, to ensure safety in design, bid tendering, construction, operation and maintenance. The panel of experts held its first meeting on February 20, 2001. About half of the experts have participated in IWW 1. 4. Institutional: 4.1 Executing agencies: HXNCDC will be the executing agency. It is a wholly-owned state company under HPCD. HXNCDC has proven its capacity by conducting a highly satisfactory implementation of the IWWI project. The team detemnined that HXNCDC has sufficient capacity to prepare and implement the proposed project, which is similar in nature to IWWI and somewhat smaller. HXNCDC has four departments -- General Administration, Technical, Dayuandu Operation, and Port Construction and Administration. The General Administration department has four sections -- Administration, Personnel, Finance, and Security/service; the Technical department has three sections -- Environment, Planning and Development, and Reservoir; the Dayuandu Operation department has five sections -- Administration, Navigation, Power Generation, Hydraulic, and Maintenance; and the Port Construction and Administration department has two sections -- Zhuzhou and Hengyang. Forty staff members are currently assigned to the Dayuandu Operation department. About 40 staff members are being recruited to create a new department, the Zhuzhou Dam/Shiplock department, to implement the proposed project. Experience from the IWW1 project will be shared and put to use. 4.2 Project management: HXNCDC will be responsible for the implementation of the proposed project. It has carefully prepared and will follow the Project Implementation Plan (PIP), in which all implementation arrangements and responsibilities have been clearly defined. HXNCDC will select an experienced local consulting firm, of which qualification satisfies the Bank, for construction supervision. The same arrangement was carried out under the IWW I, and the result was satisfactory. Implementation of resettlement will be carried out by municipal and county governments, which have sufficient experience in resettlement. To ensure that resettlement follows the agreed resettlement action plan (RAP) policy, the task team worked very closely with the government agencies carrying out this work before appraisal, as well as with the relevant department of HXNCDC. The selected dam safety panel of experts will ensure safety in design, bid tendering, construction, operation and maintenance. Environmental monitoring will be entrusted to municipal and county environmental protection offices, which are staffed with experienced and capable staff. 4.3 Procurement issues: A procurement assessment, a summary of which is presented in Annex 6, was performed during project preparation. HXNCDC has highly satisfactorily implemented the Hunan component of the IWW1 project and has proven its strong capability in managing procurement. HXNCDC is familiar with Bank procurement guidelines, its improved capacity is reflected in the preparation of the proposed project. - 12 - HXNCDC has been registered SOE to implement the project. The responsibility and ethics code for each level of the agency and its staff are spelled out in job descriptions for the proposed project. HXNCDC will retain the procurement staff from IWW1 for the proposed project. HXNCDC is expected to fulfill its procurement function and administer procurement in an efficient and transparent way. HXNCDC has committed to strictly follow the Bank's procurement rules, policy and guidelines. All works and equipment will be procured through competitive bidding. There will be no force account. HXNCDC has appointed China National Chemical Construction Corporation International Tendering Company (CNCCCITC) and CMC International Tendering Company for ICB civil works and goods, respectively. Both companies have extensive experience in carrying out international competitive bidding under Bank-financed projects, as well as projects financed locally or by other international institutions. 4.4 Financial management issues: The task team has conducted an assessment of the adequacy of the project financial management system (see Annex 13). The assessment concluded that the project meets minimum Bank financial management requirements. The task team will continue to be attentive to financial management matters during project supervision. The project will produce project financial management reports in line with the format and content agreed to between the Bank and China. See Annex 13: Project Financial Management System, Section IV: Financial and Accounting System, and Section VI: Reporting Requirements, for details. No audits or audit issues are outstanding with the executing agency involved in the proposed project. See Annex 13: Project Financial Management System, and Section VII: Audit Arrangement, for further informnation. 5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The project complies with the requirements of OD 4.01. The project is classified Category A since it includes involuntary resettlement, channel dredging and construction of a dam. Preparation of EIA and EAP. After the pre-feasibility study report for Zhuzhou Navigation and Hydropower Project was completed, the environmental assessment works for this project started in 1999 with the appointment of the Hunan Environmental Protection Research Institute as Environmental Assessment (EA) consultant. The EA was prepared according to the Chinese national procedures and the World Bank's OP 4.01. The Environmental Impact Assessment (EIA), Environmental Action Plan (EAP) and EA Summary reports for this project were reviewed by the Bank and discussed with HPCD during the pre-appraisal mission in December 2000. The final draft EIA, EAP and EA Summary were submitted to the Bank in January 2001, and were found satisfactory. During the EA work, the local people in the project area were intensively consulted, and their opinions have been reflected in the project design and environmental mitigation measures, as appropriate. The relevant information and documents were provided before each consultation. The final EA reports were disclosed locally on January 19, 2001 with an advertisement in the local newspaper, and were sent to the World Bank's InfoShop for disclosure on January 22, 2001. The major findings and discussions are sumrnarized below. More detailed information is given in Annex 11. Potential Impacts and their Mitigation Measures. Major potential impacts during the construction phase include: noise, air and water pollution due to construction works; vegetation loss; soil erosion; and pollution due to dredging. Potential impacts during the operation phase include: inundation of land; impedance of fish migration; and water pollution in the reservoir. - 13 - Two options for the dam site were studied to minimize the adverse impacts at the design state, and no distinct differences in environmental impacts were found except for the inundation of farmland. The site selected for the dam provokes inundation of 30 percent less farmland and generates 30 percent more electricity than the other site. In addition, this project, compared with the no-project option, will provide environmental benefits in two ways. First, the dam's generation of hydropower will emit fewer air pollutants than a thermal power plant, which would be built in a no project scenario. Second, the project will relieve traffic congestion on highways by shifting cargo transport from highway to inland waterway. The EA has ascertained that the area affected by the project has no critical natural habitat, no environmentally protected areas, no rare fauna or flora, and no cultural relics. To minimize the inundation of farmland, project design includes construction of drainage channels downstream, the raising of the level of farmland, and construction of pump stations. These measures will reduce the inundation area by 86 percent to 186 ha. What is more, given that the release of fry at Dayuandu Dam, located 96 km upstream and constructed under IWWI project, has been successful in mitigating the dam's impact on fishery resources, this project will also employ the same measure. 5.2 What are the main features of the EMP and are they adequate? The major aspects of the EAP include the integration of appropriate mitigation measures in the engineering design and technical specifications for the project. The EAP involves practical and cost-effective measures necessary to mitigate the project-related impacts by incorporating them in the design and by implementing them during the construction and operation phases. The EAP specifies the appropriate mitigation measures, environmental monitoring plans, training, institutional arrangements, implementation schedule, and budget needs necessary to implement it. To mitigate environmental impacts during construction, the EAP identifies certain measures, including prohibiting blasting at night, watering construction roads, and collecting and treating wastewater and solid waste in construction sites and camps. In particular, to prevent pollution from dredging, the quality of dredged sediments will be monitored beforehand. The disposal plan will be developed, reviewed and approved by local environmental protection authorities Dredged sediments will be disposed of on land, and the disposal sites will be covered with soil and planted with trees and grasses. To mitigate the deterioration of water quality in the reservoir after the dam is put into operation, the relevant environmental protection authorities with prime responsibility for water quality protection will enforce comprehensive pollution control measures. In support of these activities, the Waterway Navigation Bureau will also implement measures to minimize water pollution from navigation activities, including: (a) strictly enforcing national regulations preventing disposal of oily water and other wastes from vessels; (b) establishing waste oil processing facilities and garbage collection stations at all dock sites along the Xiangjiang River to collect waste oil and domestic garbage from vessels; and (c) establishing contingency plans and units to handle accidental leakage of toxic substance from vessels. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: January 2001 The Bank reviewed the terms of reference (TOR) of the EIA in March 2000. The first draft of the EIA and EAP were submitted to the Bank and reviewed in October 2000. During the pre-appraisal mission in December 2000, the Bank reviewed the second draft of the EA reports. The Bank received the third and final draft of the EIA, EAP and EA Sumrnary in January 2001, and found them to be satisfactory. These were sent to the Bank's InfoShop for disclosure on January 22, 2001. - 14 - 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Project-affected people, local villagers, were intensively consulted. A two-stage public consultation was carried out according to the World Bank's guideline: (a) shortly after environmental screening and before the terms of reference for the EA were finalized (July 1999); and (b) after the draft EA report was prepared (July 2000). The consultation was conducted by meeting with local people at project-affected towns and analyzing the public opinion questionnaire. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? During the construction and operation phases, environmental monitoring will be carried out to verify the project's actual impact on the environment, identify unexpected environmental problems at an early stage, and adjust environmental measures as appropriate. Environmental monitoring will be entrusted to local environmental monitoring centers. A semi-annual and an annual monitoring report will be furnished to the Bank by December 31 and June 30 of each year starting in 2001. Environmental monitoring plans are provided in Annex 11, Table 2. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. OD 4.30 on Involuntary Resettlement applies to this project. The key social impact of the project relates to involuntary resettlement. Without protective works, the project would have affected 90 villages -- 1,342 ha of land, most of which are farmland, and 68,737 square meters of houses -- largely by inundating land and demolishing structures. Extensive efforts have been devoted to minimizing adverse impacts and different alternatives have been compared. As a result, protective works have been chosen and designed, and are detailed in the RAP (see Annex 12). The protective works as designed will protect 45 villages from losing land. These works reduce the amount of farmland to be inundated from 1,342 ha to 186 ha -- a decrease of 86 percent. Similarly, the number of people losing land will be reduced to 2,189, and the number of people relocating will be reduced from 1,205 to 280. The impact assessment indicates that the run-off nature of the reservoir and the minimization efforts will keep project impacts scattered and relatively small. Of the 45 villages losing farmland, three villages will lose more than 20 percent of their land holding, one will lose 16 percent, nine will lose from 5 percent to 10 percent, and 32 will lose less than 5 percent. Under the village land-sharing arrangements, no one is losing all their farmland. The land to be inundated is low-yielding and subject to annual flooding. The socioeconomic survey indicates that the income structure of the affected farmers is quite diverse, and on-farm income accounts for only 26 percent of their household income. Resettlement planning for the project started in May 1999. Planning activities included the development of topographic maps (1:2000 scale), a detailed census of the affected population, the inventory of affected assets, a sample socioeconomic survey, consultations on resettlement and rehabilitation strategy, as well designs of the protective works. On the basis of these activities, an RAP was prepared in line with local laws and World Bank OD 4.30 on Involuntary Resettlement. Because the number of relocating households is small, they will all be relocated within existing villages. For those affected by farmland acquisition, the rehabilitation strategy is land- and agriculture-based, and includes land reallocation and land and fish pond development. The RAP contains details on the following aspects of resettlement: (a) the census; (b) - 15- inventory; (c) analysis of impacts; (d) the legal framework and resettlement principles; (e) rehabilitation action plan; (f) reconstruction of affected infrastructure; (g) design of protective works; (h) resettlement and rehabilitation budget; (i) institutional arrangements; () consultation and participation of the affected people; (k) grievance mechanisms; (1) monitoring arrangements; and (m) training of resettlers, and preferential policies. 6.2 Participatory Approach: How are key stakeholders participating in the project? The project conceptualization is based on extensive consultation with stakeholders, including different levels of governmental departments, port and navigation management agencies, shipping companies, industrial and commercial business, and private sectors that will benefit from the project. All the affected households and comnmunities have been identified through the census and inventory. Project information was provided to the affected communities and local governments through newspapers, posters and public meetings. Focus group discussions and extensive key informant interviews were conducted with local government officials and the affected communities to: (a) further disseminate project information; (b) collect people's concerns and needs; and (c) consult the affected people on the resettlement and rehabilitation strategy. People's needs and concems have been incorporated into the RAP. The affected population participated actively in the resettlement planning process, particularly in the census, inventory and the formulation of the relocation and rehabilitation programs. The RAP was placed in the Bank's InfoShop on January 22, 2001 and in all project county and city libraries on February 14, 2001. Availability of the RAP was advertized in local newspapers on February 19, 2001. Information dissemination and consultation are designed to continue during the project implementation. A resettlement information booklet, including the detailed entitlements of each household, compensation and entitlement policies and grievance procedures will be distributed to the affected people before resettlement implementation. The affected communities will play the key role in finalizing and implementing their livelihood restoration programs. Both internal and independent monitoring of the resettlement program will be conducted regularly during project implementation. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? The Mid-south Hydro-electric Survey and Design Institute was contracted to carry out the resettlement planning in collaboration with the project offices. The entire process of resettlement planning has been participatory. Extensive consultations took place with local commnunities to solicit views and concerns that have been already incorporated into the RAP. The Second Navigation Survey and Design Institute has been identified to conduct independent monitoring of the resettlement program. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? The project office has successfully implemented its component under IWWI project. Its institutional setup for resettlement planning and implementation has been maintained at both the project and county level. Much experience has been accumulated in implementing the resettlement program under IWWI. The same resettlement offices will continue to operate for the resettlement program under the proposed project. Zhuzhou County, not included in IWW 1, has already set up its resettlement office. For the project, the Resettlement Management Office of the Hunan Provincial Government, responsible for all reservoir projects within the province, has assumed the supervision and monitoring responsibility. Its involvement has further strengthened the institutional setup for resettlement implementation. - 16 - 6.5 How will the project monitor performance in terms of social development outcomes? An independent external monitor has been identified and will be appointed to monitor the implementation of the resettlement action programs. Monitoring will take place twice a year during project implementation, and reports will be submitted to the Bank for review. An internal monitoring mechanism has been designed as part of the resettlement management setup as well. Internal monitoring will continue throughout the implementation period. 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? ._ _ _ __ _ _ _ ___ __ Poli -- _ _ _ _ _ A p l c b i Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes 0 No Natural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) 0 Yes * No Pest Management (OP 4.09) 0 Yes * No Cultural Property (OPN 11.03) 0 Yes * No Indigenous Peoples (OD 4.20) 0 Yes * No Involuntary Resettlement (OD 4.30) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes C No | Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. During the identification mission in December 1999, the Bank's environmental and social specialists visited the proposed project sites and determined that the risk associated with the Bank's safeguards policies was low. To meet the environmental safeguard policies of the Bank, HPCD hired an independent consulting firm, the Hunan Environmental Protection Research Institute, to prepare the EIA reports. At both TOR and draft EIA stages, the consultant, in cooperation with HPCD held public consultations and incorporated the comments from the public in the EIA. It was concluded that the project will not affect indigenous people by reviewing the statistical data and socioeconomic survey and screening for ethnic mninority in the project area. A Panel of Experts for Dam Safety, comprising five domestic experts in hydraulic structures, engineering geology, hydropower and resettlement, and port/waterway engineering, has been established, according to the terms of reference reviewed and accepted by the Bank. The first meeting was held on February 20, 2001 and the Panel will continue to review the safety of the dam during construction and operation periods, according to the scope of works provided in terms of reference. F. Sustainability and Risks 1. Sustainability: The benefits of the proposed project are likely to be sustainable. The traffic along the Xiangjiang River is steadily increasing, indicating that inland waterways offer a competitive transportation mode. Under the IWWI project, Xiangjiang traffic and vessel size have increased and it is expected that IWT on the - 17- Xiangjiang River will be more competitive after 1,000-dwt vehicles can navigate up to Hengyang (from Shanghai or Wuhan on the Yangtze River) during the dry season. Siltation along Xiangjiang has been minor and would not be changed in future. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective MOC's policy guidelines for vessel M MOC is using technical assistance (TA) funded modemization are not established by the Policy and Human Resources Development (PHRD) to develop a policy to modemize barge vessel by September 2001. The Bank will monitor implementation of the above policy. Financing will not be available to upgrade M Shipping companies will financially benefit from vessel size. the project and have an incentive to upgrade vessels resulting in improved efficiency. In addition, guidelines for a financing system will be provided by GOC to the shipping companies in the PHRD TA. IWT traffic will not increase as expected. M Largely extemal risk. The sensitivity analysis shows that at least 12 percent of IRR would be insured without any increase. Port facilities will not be improved for N The Bank will review the current planned port larger vessels. facilities. Port development along the Xiangjiang River is in accordance with the proposed waterway development. Railway subsidy will be increased. N A rail subsidy increase is not likely given the Govemment thrusts to commeTcialized rail operators. However, a Bank-financed railway project is promoting cost-based tariff setting procedure. There is long shiplock waiting time. N Shiplock operators are properly trained and equipment is maintained. Design and maintenance of equipment is N The project will appoint experienced engineering not as expected. consultants and properly trained power operators. Development of altemative power N If an altemative hydraulic power plant is built generation is carried out. outside of Hunan province, transmission cost of altemative services will be very high. - 18 - From Components to Outputs Qualified Dam Safety Panel, adequacy of N The Bank will conduct a critical review of the engineering designs, qualified contractors, qualifications of the Panel of Experts on Dam and quality of supervision and Safety, engineers, consultants and contractors, satisfactory implementation of RAP will and will give prior agreement to the RAP not be in place. implementation arrangements. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: There are no controversial aspects. G. Main Loan Conditions 1. Effectiveness Condition The only condition for effectiveness, other than the legal opinions, is the execution of a subsidiary loan agreement by Hunan Province and HXNCDC, satisfactory to the Bank. 2. Other [classify according to covenant types used in the Legal Agreements.] 2.1 Agreement Reached with the Government: The Borrower will ensure that the proceeds of the loan are onlent to Hunan Province, which will on-lend to HXNCDC on the same terms and conditions as the Bank loan, with HXNCDC bearing the foreign exchange risk. 2.2 Agreement Reached with the Beneficiary: (a) Financial Conditions: (i) IHXNCDC's working ratio not to exceed 20 percent from 2001 through 2010; (ii) HXNCDC to provide each year a 5-year rolling business plan for the Bank's review and implement such plan; and (iii) HXNCDC to sign Power Sales Agreement acceptable to the Bank by July 2006. (b) Overseas Training: By December 31 of each year starting in 2001, HXNCDC to provide to the Bank for review an annual training program, and implement such program. - 19- (c) Environment, Land Acquisition and Resettlement: (i) HXNCDC to carry out the EAP and RAP, in a manner satisfactory to the Bank, and furnish any proposed revision of these plans to the Bank for its approval; (ii) HXNCDC to maintain adequate policies and procedures, in accordance with indicators acceptable to the Bank to enable it to monitor and evaluate on an ongoing basis the implementation of EAP and RAP; and (iii) under terms of reference acceptable to the Bank, HXNCDC to prepare and furnish to the Bank: (a) semi-annual reports and annual environmental monitoring reports starting December 31, 2001 and ending on December 31, 2006; (b) by June 30, and December 31 of each year, starting December 31, 2001 until two years after completion of the Project, an internal resettlement report prepared by agencies of Hunan Province responsible for resettlement activities on the implementation and results of such activities during the preceding six-month period; and (c) by March 31 and September 30 of each year, starting March 31, 2002 until two years after completion of the Project, an external resettlement report prepared by an independent entity acceptable to the Bank, on the implementation and results of the resettlement activities during the same six-month period referred to in clause (b) above. (d) Dam Safety Panel: HXNCDC to: (a) during the period of implementation of the project, continue to employ a panel of qualified experts under termns of reference and with resources acceptable to the Bank, to review the adequacy of the design and construction procedures of the darn and its associated structures; and (b) prepare, in a manner and according to a timetable satisfactory to the Bank, detailed plans for: (i) construction supervision and quality assurance; (ii) instrumentation; (iii) operation and maintenance; and (iv) emergency preparedness; and (c) carry out periodic safety inspections of said dam after its completion. (e) Reporting, monitoring, and auditing: Using guidelines acceptable to the Bank and based on the agreed performance indicators, HXNCDC to furnish to the Bank: (i) quarterly progress reports on implementation of all project components; (ii) an annual monitoring report, in a form satisfactory to the Bank, that assesses the degree to which implementation and development goals were achieved for all components, by March 31, of each year, beginning in 2002 and ending in 2007; (iii) information or other arrangements required for an Implementation Completion Report within the timing to be agreed during implementation of the project; (iv) audited accounts for the project, statements of expenditures and special accounts prepared by independent auditors acceptable to the Bank, within six months at the end of each fiscal year; and (v) audited consolidated financial statements of HXNCDC (including, but are not limited to, income statement, cash flow statement and balance sheet) within six months after the end of each financial year. - 20 - H. Readiness for Implementation 2 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0 1. b) Not applicable. Z 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. O 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 0 4. The following items are lacking and are discussed under loan conditions (Section G): Detailed design and bidding documents for construction of access roads (proposed to be procured through NCB) have been completed and submitted to the Bank for review in March 2001. Bidding documents for river bank protection (proposed under NCB) have been completed. Pre-qualification documents for major civil works (construction of shiplock and dam/powerhouse) under ICB have been submitted to the Bank for review. .. Compliance with Bank Policies Z 1. This project complies with all applicable Bank policies. El 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. (A __ __ A 74 Toshiro Tsutsumi Jitendra N. Bajpai ukan Hhmig Team Leader Sector Director Country Dim r - 21 - Annex 1: Project Design Summary CHINA: Third Inland Waterways Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Reduce transport and energy IWT traffic (in tons) will Transport Sector Report Transport development bottlenecks by improving IWT increase every year at the stimulates economic sub-sector and constructing same rate as economic development, and thus helps hydropower-generating development along the alleviate poverty. facilities Xiangjiang River. Energy demand in the project Energy Sector Report areas will increase. Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective: Indicators: Improve market access The freight tariff for IWT is Monitor tariff in three modes IWT provides good service lower than for railway and (IWW, rail, and road) standard in transportation. highway: For door-to-door transportation of the major coal users along the Xiangjiang, River IWT tariff should be 10% and 30% lower than rail and highway, respectively. Provide efficient IWT Economic and financial costs Monitor vessel size (a) The transport industry, in in ton-km will decrease with particular, shipping the increase of inland water companies, modernize their vessel size along the fleets; and (b) freight tariff is Xiangjiang River (from an not regularized. average of 175 dwt in 1998 to 300 dwt in 2010). Generate power to supplement Annual power output and Financial statement will Hydro-electricity has lowest the needs of the remote areas sales: assess: marginal cost; local demand will exceed local supply. Output: 640.5 million (a) expected output; (b) actual kwh/year output; (c) output sold; and Utilization: 4,575 hours/year (d) revenue. Sale price: an average higher than 0.27 Yuan/kwh - 22 - Key Performance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Upgrade Xiangjiang IWW Survey and updated Navigation charts (a) MOC's policy guidelines (Zhuzhou - Dayuandu section) navigation charts are for vessel modernization are to Class III - (3) (1,000 dwt) completed. Navigable limits established; are marked and waterway (b) financing is available to category is reclassified. upgrade vessel size; (c) IWT traffic increases as expected; (d) port facilities for larger vessels are improved; and (e) railway subsidy is not increased. Zhuzhou Shiplock is Cycle-time of shiplock Monitoring report There is no shiplock waiting completed and operating operation (not more that one time. efficiently. hour) and shiplock traffic Power generating facilities are Availability of turbine: firm Production report Design and maintenance of properly operating. output is 90% turbines are as expected. Price of "imported" electricity remains high. - 23 - Key Perfornance Hierarchy of Objectives Indicators Monitoring & Evaluation Critical Assumptions Project Components Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Construction of Zhuzhou US$23.3 million Progress Report and Bank (a) The quality of engineering shiplock supervision designs and supervision of consultants is sufficient, and consultant are qualified; and (b) EAP and RAP are implemented satisfactorily. Construction of Zhuzhou US$117.5 million Progress Report and Bank (a) Experienced Dam Safety dam/powerhouse supervision Panels are appointed; (b) the quality of engineering designs and supervision of consultants is sufficient, and contractors are qualified; and (c) EAP and RAP are implemented satisfactorily. Construction of access roads US$7.0 million Progress Report and Bank (a) The quality of engineering supervision designs and supervision of consultants is sufficient, and contractors are qualified; and (b) EAP and RAP are implemented satisfactorily. Construction of river bank US$31.5 million Progress Report and Bank (a) The quality of engineering protection supervision designs and supervision of consultants is sufficient, and contractors are qualified; and (b) EAP and RAP are implemented satisfactorily. Channel improvement US$2.0 million Progress report and Bank (a) The quality of engineering between Zhuzhou and supervision designs and supervision of Xiangtan consultants is sufficient, and contractors are qualified; and (b) EAP and RAP are implemented satisfactorily. Institutional development for US$1.5 million Progress report and Bank High-quality consultants with Hunan Province supervision extensive knowledge of international and local conditions and economy are hired. Technical assistance for US$0.1 million Progress Report and Bank High quality consultants with aContainerization Study supervision extensive knowledge of local conditions and economy. Resettlement US$9.8 million Monitoring report and Bank RAP is implemented supervision satisfactorily. - 24 - Performance Indicators 1998 2003 2005 2010 Attainment of Project 1st Objectives Operational ____________________ _ _ _Baseline Benchmark Year Benchmark 1. Improve market access in Waterway Traffic ('000) 4,700 5,600 6,300 7,400 remote inland remote areas (Zhuzhou Section) Container Traffic (teus) 12,000 2. Provide more efficient and Average Barge Size (dwt) at 175 220 250 300 economic inland waterway the Zhuzhou Shiplock transport Section Financial Performance (a) Working Ratio (%) 6.70 11.80 13.50 14.80 (b) Self-financing Ratio (%) 10.20 1.00 0.29 1.00 (c) Debt Service Coverage 1.38 1.84 1.39 Ratio (%) 3. Generate power to Power Output of Zhuzhou none none 250,000 640,500 supplement the needs of the Dam (MWh) remote areas Implementation Indicators ________________________ _FY2002 FY2003 | FY2004 FY2005 FY2006 FY2007 % of civil works completed 5 30 65 85 90 100 % of equipment contracted 5 65 75 85 100 100 % of training (person) completed 10 30 50 70 90 100 % of resettlement comDleted 20 20 50 75 100 100 - 25 - Annex 2: Detailed Project Description CHINA: Third Inland Waterways 1. The Xiangjiang River is a tributary of the Yangtze River. It connects the cities between Chenglingji (at the confluence of the Xiangjiang and Yangtze Rivers) and Hengyang in Hunan Province. The three-stage development plan of the GOC for the Xiangjiang River will result in the river being navigable by vessels of up to 1,000 dwt, Class IU - (3) standard (four 1,000-dwt barges -- in a two-by-two formation -- plus one push tow). The 257 km section of the Xiangjiang River from Chenglingji to Zhuzhou was completed in 1994, except for the channel between Xiangtan and Zhuzhou which is still in Class III - (4) (two 1,000-dwt barges - one line, two barges - plus one push tow), and the 62 km upstream section from Hengyang to Dayuandu, which is partly funded through the IWW I project and will be completed by the end of 2001. 2. The proposed project will comprise the final 96-km section from Zhuzhou to Dayuandu where currently only 300-dwt vessels can navigate. This project will help remove the navigational bottleneck between Zhuzhou and Dayuandu. After the project is complete, four 1,000-dwt barges will be able to navigate as far as Hengyang from the Yangtze River, and as a result, inland waterway transportation costs will decline. The larger vessels will have operating costs about half of those at present. The main products among the 3.5 million tons now transported through Dayuandu are coal, salt, iron/steel, timber, mineral ores, and construction materials. At Zhuzhou Port (just downstream of the proposed dam and shiplock), regular container transport services by barge have started. 3. The proposed project will include: (a) construction of the Zhuzhou shiplock, dam and powerhouse; (b) power-generating capability (five units of 28 MW, for a total of 140 MW); (c) upgrading the Xiangtan- Zhuzhou section of the Xiangjiang river by dredging; and (d) technical assistance for: (i) development of containerization along the Xiangjiang River and (ii) training. By Component: Project Component I - US$23.34 million A. Zhuzhou Shiplock Al. Construction of Shiplock: One lane of a shiplock designed for a Class III - (3) channel will be constructed beside the dam to enable vessels to navigate the 10-m difference in water levels between upstream and downstream of the dam. The shiplock will have the same dimensions as the shiplock at Dayuandu--23 m wide, 180 m long and 3.5 m deep at the sill-and the same annual traffic capacity of 15.6 million tons dwt to satisfy the demands of an estimated 10.4 million tons of traffic in 2030. One operation cycle of the shiplock is expected to take about 40 minutes. A2. Shiplock Gates and Hoists: One set of miter gates at the upstream and downstream of the shiplock will be provided at the shiplock. The miter gates will be operated by hydraulic hoist, with two 630 kN (upstream) and two 1,000 kN (downstream). The upstream and the downstream gates will have design heads of 5.2 m and 10.3 m, respectively. Project Component 2 - US$117.52 million B. Construction of Zhuzhou Dam and Powerhouse B 1. Major Civil Works: The Zhuzhou dam and powerhouse will be constructed at the Kongzhou Island section of Xiangjiang River 24 km upstream from Zhuzhou City and 96 km downstream from - 26 - Dayuandu. The dam/powerhouse will have three sections -- right and left of Kongzhou Island and an island section. The dam/powerhouse is connected to the shiplock section at the right side of the river. The total length of the dam/powerhouse is 982.5 m. The dam will have five intakes for powerhouse and 26 sluice bays in total, 12 bays on the left and 14 bays on the right of the island. Each sluice bay is 20 m wide and is equipped with a sluice gate to control river flow. A Class II bridge (12 m wide and 1,230 m long) will also be constructed as part of the dam to connect both sides of the Xiangjiang River. Construction will follow two phases, including the first phase cofferdam connecting between the left bank and Kongzhou Island, and the second phase cofferdam between the right bank and Kongzhou island. B2. Supply and Installation of Turbines and Power Generators: Five bulb-tubular turbine-and-generator units, each with a capacity of 28 MW, will be procured and installed in the powerhouse. Maximum, minimum and rated water heads are 10.56 m, 3.0 m and 6.9 m, respectively. The runner's diameter will be 7.5 m. The powerhouse will have both fixed and movable roofs, with the operation floor at an elevation of 35.5 m. Each machine hall is 19 m wide and 41.7 m high. Each generation unit will be installed at 22.15 m of elevation, with 21.4 m between units. B3. Sluice Gates and Hydraulic Hoist, Cranes, Trash Screens, Roof Cover and Other Small Equipment: A metal radial sluice gate (12.5 m high and 20 m wide) will be installed in each of the 26 sluice bays. Each sluice gate will have one set of two hydraulic hoists (2,200 kN each) with a 7.8 m traveling arm to operate the sluice and a stoplog. The elevation of the sluice bed is 28.5 m. The dam will be provided with the following equipment: one 2,000-kN gantry crane for installing and maintaining turbine and generator units, one overhead double-beam crane for powerhouse small equipment, one small gantry crane (2 x 250 kN) for trash rack and screen, and one small gantry crane (2 x 400 kN) for tail gates. Small equipment such as elevators, water pumps, and power cable breakers also will be provided. B4. Transformers and Switch Yard: Two step-up transformers of 63 MW and 90 MW will be provided at the 10.5 kV side of the generators. Two generators will be connected to a 63-MW transformer. A switch yard for 220 kV (74 m by 62 m) will be located on the upstream bank of the dam along the left bank at an elevation of 48.8 m. B5. Transmission Lines: The Zhuzhou power plant will be connected to the Zhuxi substation by two 220-kV circuits of LGJ-300. Transmission lines will have two lines 30 km long and a 70 MW capacity under normal operation. However, both lines will have a maximum transmission capacity of 140 MW in case the other line has any problems. - 27 - Key Particulars of Zhuzhou Dam/Powerhouse Hydrology Total catchment area 94,660 km2 Catchment above dam site 65,220 km2 Annual average runoff 53,000 million m3 Maximum design flood 22,200 m3/second Reservoir levels (normal pool level -- NPL) 40.50 m Reservoir surface area at NPL 58.90 km2 Reservoir capacity at NPL 474.30 million m3 Dam Sill elevation 28.50 m No. of bays 26.00 bays Dimension of bay 20 m (W) x 19.7 m (H) Total sluice length 612.50 m Power generation No. of units 5 units Rated output of unit 28.00 MW Rated speed 65.20 rpm Max. water head 10.56 m Min. water head 3.00 m Rated water head 6.90 m Rated voltage of generators 10.50 kV Powerhouse machine hall 146.1 m (L) x 19 m (W) x 42 m (H) Annual average energy output 640.50 Gwh Annual utilization hours 4,575 hrs Project Component 3 - US$ 6.97 million C. Access Roads This component includes (a) access roads from existing roads to the project site and (b) access roads within the project complex, mainly between the dam complex to Kongzhou Island. Cl. Construction ofAccess Roads to Outside: A Class III highway standard was selected according to the estimated traffic density during construction and after the project. The west bank will connect to Provincial Highway No. 1815 (6.04 km long), and the east bank will connect to the Beijing-Zhuzhou Expressway (8.09 km long). The access road will be 8.5 m wide and 14.13 km long in total. C2. Construction ofAccess Road within Zhuzhou Complex: This temporal component is for transporting construction materials. It includes roads (3.7 km long) and three landing stages for waterway transportation. One landing stage is for unloading heavy equipment such as power generating equipment, and the two landing stages, one at each side of the river, are for construction materials. One access bridge from the dam bridge to Kongzhou Island (276 m long and 8.5m wide) and an overpass bridge (90m long and 8.5 m wide) for the Sanmen discharge channel will also be included. Project Component 4 - US$31.54 million D. Bank Protection Works D 1. Xiangjiang River Bank Protection: The left river bank (1,900 m long) and the right (2,630 m long) river bank will be protected. The elevation of the banks will be 42.0 m - 46.5 m. D2. Kongzhou Island Bank Protection: Kongzhou Island is about 1,800 m long and 200 m wide. The entire island will be protected with rock masonry to an elevation of 46.5 m. - 28 - D3. Reservoir Area Protection: The elevation of the reservoir protection is planned at 41.5 m (40.5-m water level plus 1.0 m). Slope protection and wall protection of a total length of 24.1 km will be constructed along both sides of the reservoir. Project Component 5 - US$2.00 million E. Channel Improvement between Zhuzhou and Xiangtan The 37-km-long section between Zhuzhou and Xiangtan currently is a Class-III - (4) channel (60 m wide and 2.0 m deep, for one line of two 1,000-dwt barges and one push tow). Under the project, this section will be upgraded to Class III - (3) (90 m wide and 2.0 m deep) by removing eight shoals through (a) dredging (270,350 m3); (b) rock blasting (4,000 m3); and (c) constructing groins (44,700 m3) along 439 km of the Xiangjiang waterway between the Yangtze River and Hengyang. Project Component 6 - US$9.78 million F. Technical Assistance and Training In order to strengthen institutional capacity, a forward-looking waterway management strategy will be developed and construction quality will be ensured. The project will include training, a containerization study and construction supervision. Fl. Training: Domestic training (354 staff-months) and overseas training (143 staff-months) will be provided under the project. Training topics will include: (a) waterway management; (b) intermodal container transportation; (c) the environment; (d) shiplock and port operation and management; (e) World Bank guidelines; (f) project management; (g) procurement; (h) engineering design; (i) construction supervision; (j) financial management; (k) management information systems; (I)operators; and (m) English language. F2. Containerization Development Study: While container traffic at China's deep-sea ports has increased quite sharply, IWT container traffic, except on the Yangtze River, has not increased significantly. Because the Xiangjiang is a tributary of the Yangtze, Zhuzhou port launched regular container operations, and potential container traffic appears to be substantial. HXNCDC will implement a study to review and assess IWT containerization along the Xiangjiang River. F3. Construction Supervision: This component will be financed locally. The IWW1 project has proven the capacity of the domestic consultants in supervising a similar and even larger project. Qualified domestic consultants selected though a competitive process will implement this component. Project Component 7 - US$9.75 million G. Resettlement, shiplock and port operation and management This component will include land acquisition, compensation for resettlement, cleaning of the reservoir area and other resettlement related activities. - 29 - Table A: Training Program Domestic Overseas Implementation Nature of Training Number Duration Number Duration Timing of Person (month) of Person (month) t. Policy Support Inland Waterway Management 8 1 2002 Environmental and Monitoring 12 1 2003 & 05 Operation and Management for Shiplock and Port 12 0.5 9 1 2004 & 07 Intermodal Transportation 6 0.7 2003 Subtotal 12 35 2. Implementation Support Bank Loan Procedures 20 0.3 2001 Procurement and Contract 16 1 2001, 03 & 04 Waterway Engineering Design 16 0.7 2002 & 03 Construction Supervision 30 1 16 1 2001, 02 & 03 Subtotal 50 48 3. Institutional Development Economic Analysis and Evaluation 9 1 2002 Project Management 16 1 2004 & 05 Financial Management 4 1 12 1 2003, 04 & 06 Management Information System 18 1 2003 & 05 Operators 45 5 16 1 2006 & 07 English 6 3 2001 Subtotal 55 71 Grand Total 117 154 - 30 - Table B: Overall Implementation Schedule 2001 2002 2003 2004 2005 2006 2007 General Procurement Notice (March 31, 2001, No. 555) 1. Access Road 2. Zhuzhou Shiplock Civil works T _ _ _ Equipment r _ - _ _ l 3. Zhuzhou Dam/Powerhouse Civil works 1 1 _ _ Power generators _ _ _ Sluice gates r J i 4. Transformer and switch yard _ _ _ _ 5. Bank Protection - 6. Reservoir Protection El _ 7. Channel Improvement _ _ (Xiangtiang - Zhuzhou Section) 8. Training 1011111111111I 9. Study _ _ _ Preparation of bidding documents/TOR Prequalification Bidding process/Shortlist and selection of consultants Implementation of contract - 31 - Annex 3: Estimated Project Costs CHINA: Third Inland Waterways Pr~oj~tCpts~y ompRent us $ O00S~OQ U$Q A. Zhuzhou Shiplock 9,402.86 10,145.85 19,548.71 1. Shiplock Construction 9,402.86 9,138.85 18,541.71 2. Shiplock Gates 0.00 1,007.00 1,007.00 B. Zhuzhou Dam and Powerhouse 32,412.41 64,589.72 97,002.13 1. Major Civil Works 21,452.98 19,234.73 40,687.71 2. Power Generating Equipment 1,325.30 35,372.16 36,697.46 3. Sluice Gates and Small Equipment 0.00 8,799.83 8,799.83 4. Transformer and Switch Yard 0.00 1,183.00 1,183.00 5. Transmission Lines 9,634.13 0.00 9,634.13 C. Access Roads 3,046.97 2,816.50 5,863.47 1. Inside Road 1,865.72 1,830.50 3,696.22 2. Outside Road 1,181.25 986.00 2,167.25 D. Bank Protection 19,148.07 4,759.00 23,907.07 1. Inundation Protection 14,176.17 0.00 14,176.17 2. Drainage for Sanmen 2,484.95 2,547.70 5,032.65 3. Kongzhou Bank Protection 2,486.96 2,211.30 4,698.26 E. Channel Improvement 1. Zhuzhou-Xiangtan WW 1,464.27 0.00 1,464.27 F. TA and Training 6,604.30 1,590.00 8,194.30 1. Design 4,087.97 0.00 4,087.97 2. Supervision Consultants 2,516.33 0.00 2,516.33 3. Training 0.00 1,510.00 1,510.00 4. Container Study 0.00 80.00 80.00 G. Resettlement (excluding D. 1. and D.2.) 9,750.00 0.00 9,750.00 Total Baseline Cost 81,828.90 83,901.07 165,729.96 Physical Contingency 8,182.89 8,231.15 16,414.04 Price Contingency 11,888.48 6,867.78 18,756.26 Total Project Costs 101,900.26 99,000.00 200,900.26 Interest during construction 18,324.41 0.00 18,324.41 Front-end Fee 0.00 1,000.00 1,000.00 Total Financing Required 120,224.67 100,000.00 220,224.67 - 32 - Local Foreign Total Proiect Costs By Component us V00Q US $'000 -$DQ! Goods 13,769.25 55,347.55 69,116.80 Works 70,190.72 42,062.45 112,253.17 Services 8,190.29 80.00 8,270.29 Training 0.00 1,510.00 1,510.00 Resettlement 9.750.00 _ 0.00 _ 9.750.00 Total Project Costs 101.900.26 99,0000 200,900 Interest during construction 18.324.41 0.00 18,324.41 Front-end Fee 0.00 000.00 L.oonOM Total FinancinQ Required 120.224.67 100 000.00 220.224.67 - 33 - Annex 4: Cost Benefit Analysis Summary CHINA: Third Inland Waterways Summary of Benefits and Costs: 1. The economic rate of return of the project is estimated at 18.8 percent, with a modified economic rate of return of 14.5 percent. The net present value is estimated at US$98 million, using a standard discount rate of 12 percent. Distribution of Benefits by Source Source of Benefit NPV Share of Benefits US$ million Navigation 96.4 42.8% Energy 59.1 26.3% Road transport 57.8 25.7% Agriculture and Fishing 11.7 5.2% Total 225.0 100.0% ERR 18.8% MERR 14.5% Main Assumptions: 2. It was originally intended that the dam at Dayuandu would allow the upgrading of the Xiangjiang River as far as Chenglingji to Class III standards (permitting the navigation of four I ,000-dwt convoys), but the flow of water over the dam would not be sufficient for this. It was then intended that the 19 shoals between Dayuandu and Kongzhou, with a total length of 33.7 km, could be blasted and dredged, but this proved unfeasible from an engineering perspective. Given the severe shortage of electric power in Zhuzhou area, the construction of a multipurpose facility including a dam, shiplock and power station was proposed as the most cost-effective solution to the two problems to upgrade the section between Dayuandu and Kongzhou to Class III. 3. Although the project is aimed primarily at aiding navigation on the Xiangjiang River, the cost of the dam and shiplock is so high that benefits from improved navigation alone are not sufficient to justify the project. However, building the dam created the opportunity to provide a hydro-power station and a new bridge across the river at a small marginal cost. The hydroelectricity and the additional benefits of increased agricultural and fishing output and lower irrigation costs allow the sum of the benefits to exceed costs by a margin sufficient to demonstrate the economic feasibility of the project. - 34 - GDP and Traffic Growth Rates 1998 to 2009 2010 to 2030 GDP in Hunan 4.0% 3.0% Elasticity of demand with respect to GDP Waterway transport 0.75 0.75 Road transport 1.25 1.25 Waterway transport growth rate 3.0% 2.25% Road transport growth rate 5.0% 3.75% 4. The rate of growth of the economy of Hunan Province, and particularly of the region in which the project is located, is the most fundamental assumption. During the 1990s, the GDP of Hunan Province increased at an average rate of almost I I percent, while that of the project hinterland increased slightly faster. The output of industrial production grew at about 20 percent in both Hunan Province and hinterland, while agricultural output grew at only about 6.6 percent in the province and 7 percent in the hinterland. The projections of waterway and road transport both assume a GDP growth rate of 4 percent until 2010 and 2.5 percent thereafter. Because Hunan Province and its hinterland already suffer from a shortage of electric power, it was not necessary to assess the impact of future GDP growth on the demand for elasticity. Because most short-term projections of GDP growth are significantly higher than those used here, the principle alternative value used in the probability analysis is 2 percent throughout the evaluation period. 5. The elasticity of inland waterway transport with respect to GDP growth was assumed to be 0.75 while that for road transport was assumed to be 1.25. It was further assumed that the markets for waterway, road and rail transport were largely independent and that investments and improvements to services in one mode would have a negligible effect on demand for services in other modes. Navigation benefits 6. The project will generate two types of navigational benefits. First, all vessels using the section of river upstream of the dam will be able to navigate at a higher speed, as the width and depth of the navigation channel will increase. Second, the increased dimensions of the channel will allow larger vessels and convoys to operate. There would be fewer vessels and the average size would increase less than proportionally. 7. The 96-km river section from Dayuandu to Kongzhou is a 40-m-wide Class V channel with a maximum vessel size of 300 dwt. The next 24-km section from Kongzhou to Zhuzhou is a 90-m-wide Class III - (3) channel allowing for convoys of up to four 1,000-dwt vessels, but the 37-km section from Zhuzhou to Xiangtan is a 60-m-wide Class III - (4) channel allowing only two 1,000-dwt convoys. The channel from Xiangtan to the confluence of the Xiangjiang and Yangtze rivers is Class III - (3), with a 90-m width allowing the passage of convoys of up to four 1 ,000-dwt barges. Both the river sections upstream from Dayuandu to Hengyang and downstream from Xiangtan to Chenglingji allow convoys of up to four 1,000-dwt barges to operate. So the section of the river between Hengyang to Chenglingji, and particularly the section between Dayuandu and Kongzhou, creates a bottleneck in the 439-km waterway. The project is intended to eliminate this bottleneck and allow efficient operation of larger vessels along the entire 439-km section of the river. - 35 - 8. The operation of convoys up to four 1,000-dwt vessels throughout this 439-km length of waterway will not only reduce convoy operating costs, but will also make it possible to reduce the fleet size, as the operation of larger convoys will allow a higher ratio of barges to powered vessels. The benefits will extend beyond Chenglingji, because the Yangtze River allows for convoys of up to twelve 2,000-dwt vessels, as well as single vessels of up to 5,000 dwt. 9. Only major freight flows over relatively long distances between ports with adequate berthing facilities will be able to take advantage of the capacity for larger convoys. Approximately 30 percent of current freight tonnage passing through the site of the proposed dam and shiplock meets these conditions. Although more freight flows will be able to take advantage of the increased capacity for larger vessels between Zhuzhou and Xiangtan, about half the freight that passes the site of the proposed dam and shiplock will continue to be transported in vessels of less than 120 dwt and will benefit from neither the capacity for larger vessels nor the increase in maximum speed. Characteristics of Sections of the Xiangjiang River Length Class Width Maximum Section of River kms Meters Convoy Hengyang to Dayuandu 62 Class III - (3) 90 4 x 1000 dwt Dayuandu to Kongzhou 96 Class V 40 300 dwt Kongzhou to Zhuzhou 24 Class III - (3) 90 4 x 1000 dwt Zhuzhou to Xiangtan 37 Class III - (4) 60 2 x 1000 dwt Xiangtan to Chenglingji 220 Class III - (3) 90 4 x 1000 dwt Total 439 Freight volume 10. In 1998 about 5.21 million tons of freight were transported on the section of the Xiangjiang River between Hengyang and Zhuzhou, with about 3 million tons passing the dam and shiplock site at Kongzhou. This traffic is expected to grow by about 4 percent per year until 2010, and then by about 3.5 percent per year until the end of the evaluation period in 2030, by which time it will have reached about 10.4 million tons. The average trip length for freight that would benefit from the increase in vessel size is about 236 km. Reduction in transit time 11. The reduction in transit time with the project would be about 2.45 hours, taking into account an average lock time of about 45 minutes, and an increase in vessel operating speed from 8.6 km/hr to 10.5 km/hr. For the average trip distance, the without-project transit time would be about 33.2 hours. The with-project reduction in transit time represents about 7 percent of the without-project transit time. Vesselfleet 12. More than 65 percent of freight passing Kongzhou currently is transported in vessels of less than 100 dwt. This percentage is expected to decrease to about 50 percent by 2020 whether or not the project is completed. Limitations on vessel size now result in 25 percent of freight being transported in vessels of between 100 dwt and 300 dwt, and 10 percent in convoys of four 300-dwt vessels. With the project, about - 36 - 13 percent of freight would be transported in convoys of four 1,000-dwt vessels, and a further 10 percent in convoys of two 1,000-dwt vessels. Vessels of between 100 dwt and 300 dwt would transport the remaining 25 percent of freight. It is expected that the average vessel size, presently about 175 dwt tons, would increase to about 453 dwt by 2030 without the project, but to about 845 dwt with the project. Operating and capital costs 13. The changes in the vessel fleet would reduce the average operating cost from the equivalent of about US$0.074 (US 7.4 cents) per ton-km to about US$0.064 (US 6.4 cents) per ton-kin, a reduction of about 13 percent. Furthermore, because larger vessels have a lower unit capital cost than smaller vessels, and because to transport a given volume of freight fewer vessels will be needed with the project than without the project, costs will decline even more. With the project, average vessel size will almost double by 2030. The number of vessels will decline in proportion to the increase in vessel size, and replacement costs will decline to about 37 percent of what they would be without the project. The savings in vessel capital cost represents about 20 percent of the total of navigation benefits. Energy savings 14. The hydro-power station that is part of the project will have a capacity of 140 MW and a net output of about 591 million kwh, taking into account efficiency and transmission losses and the impact of periods of a reduced head of water in the reservoir. A coal-fired power station of about 70 MW would produce about the same net output, but the output would be more evenly distributed throughout the year. The benefit of the hydro-power station is estimated by calculating the avoided capital and operating costs of a coal-fired power station of this size. Although the calculations are not necessary for the overall economic evaluation of the project, the hydro-power station's share of the project cost amounts to about US$127 million. Using standard unit costs, a coal-fired station would cost about USS42 million. However, the operating cost per kwh of the hydro-station will be only about US 0.2 cents compared to US 2.2 cents for the coal-fired station (both excluding capital costs). About 80 percent of the cost of the coal-fired station would represent the cost of the coal itself. Comparison of Hydro- and Coal-Fired Power Stations Units Hydro-power Coal-fired Station Station Capacity MW 140 95 Investment cost US$ million US$127 million US$42 million Operating Hours/year 7,200 hours/year Gross output kwh 622 million 643 rnillion Net output kwh 591 mnillion 591 million Unit cost US cents/kwh 0.2 2.2 Road transport savings 15. Road traffic that crosses the Xiangjiang River in the vicinity of Zhuzhou must detour about 33 kms to Xiangtan or use one of two ferries. At present, about 550 vehicles cross on the ferries each day. These and an estimated additional 800 vehicles per day that use the bridge at Xiangtan would use a bridge built at Kongzhou. At the projected annual growth rates of 5 percent for the next ten years and 4 percent thereafter, - 37 - traffic crossing the bridge will reach about 5,300 medium-truck equivalents per day by 2030. Saving about 33 km in distance and about 1.2 hours in travel time will provide several benefits, including reduced vehicle operating costs, a smaller truck fleet, and slightly reduced value of freight in transit. There would be savings in operating the ferries and additional savings in accident costs, but these have not been valued. These benefits would be offset by the costs to improve the access roads to the dam site and to build a new road across the dam. The 14.1 km of access roads will be built to a Class III standard, while the new road across the dam itself will be built to a Class II standard. Agricultural and fishing benefits 16. The costs of irrigation using waters of the Xiangjiang River will decline as the water level rises, bringing about an increase of 290 ha in the area of irrigated land on the left of the river and 280 ha on the right bank. This additional irrigated land could be used for rice production at a net value of about 13,860 yuan/ha, and a further 530 ha on the right bank could be converted to orchards. The surface area available to fishing will increase by about 200 ha, bringing the overall annual yield from increased agriculture and fishing activities to about 28 million yuan. Sensitivity analysis / Switching values of critical items: 17. Because there are several sources of benefits of the project, the economic evaluation is susceptible to a larger than usual number of assumptions. The most important were included in the following table in a compound probability evaluation using a Monte Carlo simulation model (Crystal Ball). - 38 - Range of Values of Principal Variables Variable Low value Median value High value Type of distribution GDP growth rate in Hunan 2% reducing 4% reducing to 5% reducing to Nonnal to 3% after 3% after 2010 4% after 2010 2010 Elasticity of waterway 0.50 0.75 1.00 Nonnal transport with respect to GDP2 Elasticity of road transport 1.00 1.25 1.50 Normal with respect to GDP Necessary output of 453 m 591 m kw/hr 700 m kw hr Normal electricity to satisfy demand kw hr in 2005 Cost of an equivalent 90 US$36.9 m US$42.6 m US$57.6 m Lognornal MW coal fired power station Unit operating cost of US 1.5 cents US 0.02 cents US 0.03 cents Nornal producing hydro-power kw/hr kw/hr kw/hr Unit cost of producing US 1.5 cents US 2.2 cents US 2.5 cents Normal coal-fired power station knm/hr km/hr kw/hr Average vessel size with 700 dwt 845 dwt 925 dwt Negative project ' exponential Reduction in ship operating 5% 7% 10% Normal cost with project Road traffic on bridge in 3,000 MTE 4,700 MTE 6,000 MTE Negative 2030 exponential Feasibility Study, Report, Hunan, August 2000, based on submission to Tenth Five-Year Plan. The average GDP growth rate for the last ten years has been in excess of 8%. An analysis of waterway ton-km and GDP at a national level over the last ten years indicates an elasticity of about 0.8. Most estimates f the GDP elasticity of road freight in China, as in most developing economies, are excess of 1.2. Feasibility Study Report, Hunan, August 2000. World Bank estimates based on assumed replacement rate of 7% of the fleet each year and implementation of scheme to finance purchase of larger vessels. - 39 - 18. The results of this evaluation show (Figure 1) a wider than usual distribution of benefits because of the relatively small impact of each of a large number of variables. The figure also shows that there is a negligible probability that the net present value will be less than Y400 million or more than Y I billion. Figure 1: Frequency Distribution of Net Present Value of Project Forecast: net present value 1,000 Trials Frequency Chart I Outlier .031- 31 P R F 0 .023. ....... _.._.._. l .. .23.25 R B E AQ I N T B ...... ... 7 -1.75 C y .008 l* ll*l *l|ill | !77 .000 $400.00 $575.00 $750.00 $925.00 $1,100.00 19. Although the number of assumptions is larger than for a project with a single source of benefits, this also makes the outcome of the project more robust against a change in any one of the assumptions or benefit sources. For example, whereas the benefits of a coal fired power station would be highly sensitive to the price of coal, as the power output of a multipurpose dam only represents about a 26% of the benefits, the sensitivity to coal price is much less (and in this case in the opposite direction, since an increase in the price of coal would increase the benefits rather than reduce them). Similarly, the benefits of a highway project would be highly sensitive to assumptions about changes in vehicle operating costs, but in this case, the benefits of the road bridge also represent only 26% of the total, so the impact of the assumption of level of vehicle operating cots is much less. This particular project is especially robust in front of assunptions relating to any particular benefit source, since even if any one of the principal sources produced zero benefits, the others would still contribute sufficient to make the project economically viable. So the switching value of most variables in zero. An exception is the construction cost, and this could increase by 75% without producing an unacceptable rate of return. ERR and MERR if benefit Source of Benefit from this source reduced to zero Navigation 12.0% 12.0% Energy 14.4% 13.0% Roadbridge 14.7% 13.1% Agriculture and fishing 17.9% 14.2% - 40 - 20. However, all the benefits except those from the road bridge are susceptible to a reduction in the flow of water in the river. This would reduce the amount of energy that could be produced, restruct navigation downstream of the dam and reduce the volume of water available for irrigation and fishing. The flow of water is a particularly sensitive issue, as it is the lack of water flowing over the upstream dam at Dayuandu that mrakes it necessary to build this dam at Zhuzhou. For the overall benefits of the project to reduce to below 12%, the volume of water passing downstream from Dayuandu would have to be just 43% or less than that now projected. This is considered to be extremely unlikely. - 41 - Annex 5: Financial Summary CHINA: Third Inland Waterways Preface 1. The financial evaluation of the project is comprised of two parts. Part I is the overall financial evaluation of HXNCDC, and Part II is the financial evaluation of the proposed project, including the sensitivity analysis and probabilistic risk analysis. Except for the World Bank loan, HX-NCDC does not have any outstanding long-term debt. To measure the opportunity cost of capital for the local grants, an overall average of 5 percent is applied. The financial cost of the project is calculated on the basis of the weighted average cost of the various sources of funds. The weighted average financial cost of the capital is estimated to be 5.9 percent (45.4 percent from the Bank at 7 percent and 54.6 percent from local grants at 5 percent). PART I: FINANCIAL EVALUATION OF HXNCDC 2. HXNCDC was established in 1994. Invested by HPCD, this state-owned company was formed for the construction and operation of the Dayuandu dam under the IWWTI project. It is the sole owner of both the Dayuandu facilities and the Zhuzhou facilities (for the proposed project). The financial evaluation will focus on the consolidated financial capacity of the company. The main financial revenue of the company is the income from power sales, and power sales price is strictly regulated by the government. 3. The construction of the Dayuandu dam is nearly completed. The trial operation started in 1999 and the dam was fully operational in 2000. The major operational features of the company can be summarized below: (a) A financially independent company. During the construction period, MOC and HPCD will provide the financial grants to HXNCDC. After the project is completed, neither MOC nor HPCD will provide any funds for the company's daily operations. The company will pay all its operating costs, including its financial obligations, i.e., repayment of interest and principal of the loans. (b) Shiplock operations. HPCD has decided not to collect shiplock fee from the project. (c) Delivery network. The company does not have its own power delivery network. It must sell power to the provincial power company and use that company's delivery network. (d) Power sales contract. Under the supervision of the provincial government, a power sales contract, including a formula to determrine the power price, was signed between HXNCDC and the provincial power company. The power sales price will be reviewed every year. Financial Objective 4. HPCD advised that the main purpose of operating revenue will be to repay the Bank loan and cover operating and non-operating expenses and routine and major maintenance instead of to maximize the financial rate of return on the investment. Currently, the contracted year-round power sales price is YO.348 /kwh. It is assumed that the power sales price will increase once for each of the five years and grow 10 percent for the first five years (or 1.9 percent per year), and 15 percent (or 2.8 percent per year) for the subsequent five years. - 42 - Past and Present Financial Performance 5. HXNCDC, in its present configuration, has a very short period of business practice (less than two years of full operational experience), and no single set of financial statements fully presents historical results on a basis comparable with current and projected future results. For this purpose, a pro-forma consolidation has been made with data extracted from the limited past financial statements. The salient points of HXNCDC's results for 1999-2000 appear in the following table. HXNCDC Income Statement 1999 2000 Power sales (Gwh) 189.0 380.0 Total operating revenue(Y million) 31.56 119.09 Operating costs, taxes and expenses (Y million) 33.65 115.47 Net cash surplus (Y million) (2.09) 3.62 Working ratio (%) 6.9 6.7 6. The overall financial performance of HXNCDC in 2000, the first full year of operations, is good. Net cash surplus (or net profit after tax) improved greatly from 1999, the trial period. The working ratio (operational efficiency of the company) is in a very comfortable range of 6.7 percent. The depreciation reserve (Y 72.0 million) is more than 10 times the total working cost (Y 6.78 million), which generates a strong internal cash flow. The return on average net fixed assets (the profitability of the company) was low (0.2 percent), mainly because the project investment is also included in the construction of the shiplock facilities. HXNCDC will have to start repaying the Bank loan for the IWW1 project in 2001. These financial obligations will affect the company's income statement, which may produce negative figures between 2002 and 2005, although the amount is relatively small (in average, under 3 percent of total revenue) (Table 1: Incorme Statement). 7. The current low profit margin will not affect the daily operations of the company. This is because the large sum of the depreciation reserve will provide sufficient funds for the company. However, the low cash reserve in 1999 will affect the current ratio (the liquidity of the company) in 2000. In addition, because of borrowing from the Bank, the self-financing ratio will not be sound, particularly during the construction period and early operating years of the Zhuzhou facilities. The pressure of the self-financing ratio of the company is expected to be fully relieved after 2006 (Table 2: Sources and Applications of Funds). 8. Except for the current ratio in 2000, the financial indicators of HXNCDC are sound. The shortage of cash in 2000 will affect the current ratio in that year, which was estimated to be 0.9 (to avoid short-term solvency problems, the current ratio should be more than 1.0). The strong internal cash generation from the depreciation reserve will be able to limnit the shortage of cash during 2000 only. The financial leverage of the company, debt/ (debt plus equity) ratio,is in a very comfortable range because of the large amount of equity. The balance sheet, summarized for 1999 and 2000, is presented in Table 3. - 43 - HXNCDC Balance Sheet (million Yuan) 1999 2000 Assets: Fixed assets / a 1,629.00 1,901.43 Current assets 9.15 40.10 Other assets -- -- Total 1,638.15 1941.53 Equity 895.09 1,149.86 Long-term debts 740.02 748.7 Current liabilities 3.04 42.97 Other liabilities -- -- Total 1,638.15 1941.53 Current ratio 3.0 0.9 Debt/ (debt +-equity) rafio 45.13 39.4 /_a: Net value. Future Financial Performance 9. The power market in the project area has two special characteristics. First is the steady market demandfor electricity. Zhuzhou city (the project area) is a heavy industrial center. About 70 percent of local electricity is imported from outside of Zhuzhou city. Even with the imported electricity, in 2000, supply met only about 65 percent of demand. The shortage of electricity in Zhuzhou city indicates a strong demand for electricity. Second is power sales. The government of Zhuzhou city has released an official document to the Bank expressing its intention to purchase all the electricity generated from the project. 10. Operating practices of the Dayuandu facilities allow the operating costs of HXNCDC to be categorized in the following way: working cost [(a) wage and benefits, (b) fuel and power, (c) material and equipment, (d) maintenance, and (e) others)], and operating cost (working cost plus depreciation). All other expenses, such as taxes, administration, and interest payments on the Bank loan, are included in the calculation of the profitability of HXNCDC. The major financial assumptions are in Table 4. 11. In 2001, HXNCDC will receive its full operational revenue from the IWWI project. With the completion of the proposed project (Zhuzhou) in 2007, HXNCDC's revenue will double. The proposed project is scheduled to be put into trial operation in 2005 and in full operation in 2007. 12. The large amount of government grants (about 59 percent in total average, of which 63 percent for Dayuandu and 55 percent for Zhuzhou) will generate a large supply of equity for the company. The relatively low liabilities combined with higher depreciation reserve cause the debt/ (debt plus equity) ratio and working ratio to be in a healthy range during construction as well as operating periods of the company. It is estimated that from 2000 through 2010, the debt/ (debt plus equity) ratio will be in the range of 33 to 53 percent and the working ratio from 7 to 15 percent. - 44 - PART II: THE FINANCIAL EVALUATION OF THE PROJECT Financial Internal Rate of Return (FIRR) 13. The calculation of the FIRR focuses on the Zhuzhou facilities (the project) only, and not on the entire HXNCDC. The low profit margin and the low power price escalation assumptions, which are based on the government's strategy, may not generate much financial difficulty in the daily operations of HXNCDC, although it will produce a large financial impact on the FIRR. The FIRR of the project is estimated at 6.8 percent, as summarized below: FIRR and Net Present Value FIRR (in %) 6.8 Net Present Value (Y million, 5.9%) 149.1 Sensitivity Analysis 14. The sensitivity analysis tested the different scenarios on the bases of the changes in some major parameters. HXNCDC does not plan to collect a bridge toll or shiplock fee from users, the but their impact on the financial evaluation of the project is minimal in any case. For the purposes of the sensitivity analysis, the bridge toll is assumed to be 10 yuan/MTE (based on 75 percent of the total vehicle operating cost savings) and the shiplock fee is assumed to be 0.5 yuan/ton (based on the current shiplock fee in Hunan province). 15. The principal endogenous and exogenous parameters that could affect the project's financial results are: power sales price, working costs, total capital cost, bridge toll, shiplock fee and delay of the opening year by one year. The results show that: (a) an increase in total working costs has the least effect on the financial evaluation; (b) collection of bridge toll and shiplock fee also has little effect on the project (if they were collected, the FIRR would increase by only 0.4 percent); and (c) a project cost overrun and/or a delay in opening the facilities by one year could affect the financial results the most. The financial result sunimary by different scenarios for 2007 is shown in the following table. FINANCIAL SENSITIVITY ANALYSIS SUMMARY (in %) Base Power sales Working Total Collect Collect Combine Delay case price costs costs bridge ship lock (a) and one (-15%) (+15%) (+15%) toll (a) fee (b) (b) year FIRR 6.8 5.9 6.6 5.3 7.1 6.9 7.2 5.3 Profitability: Retum on ANFA /1 2.3 0.9 2.1 1.7 2.6 2.4 2.7 0.6 Working ratio 12.6 14.8 14.5 12.6 12.3 12.5 12.1 12.9 Operating ratio 38.3 45.0 40.2 42.1 37.2 37.8 36.8 44.9 Liquidity: Current ratio 9.7 9.3 9.4 9.8 10.0 9.8 10.1 3.9 Leverage: Debt service coverage ratio 1.46 1.27 1.44 1.48 1.50 1.47 1.50 1.24 Debt! (debt + equity) ratio 51.2 52.6 51.4 52.4 50.8 51.0 50.6 553 I_1: Average net fixed assets. - 45 - Project Risks 16. The sensitivity test shows that a project cost overrun and/or delay in opening the facilities by one year will have a large financial impact on the project. Based on the experiences learned from the IWWI project, it is expected that the risk due to the delay and cost overrun to the proposed project, which is similar to the first one, is negligible. In addition to the sensitivity analysis for each factor, a Monte Carlo probability risk analysis was carried out to estimate the degree of uncertainty. Probabilistic Risk Analysis 17. To determine the degree of uncertainty for the project, a probabilistic risk analysis using Monte Carlo techniques was carried out. In a Monte Carlo analysis, each uncertainty factor is allowed to vary at random between set limits and all uncertainty factors are allowed to change simultaneously. Monte Carlo simulation provides probability distributions of the potential outcomes of decisions. By analyzing these distributions, we can assess the risk associated with making various decisions (or probabilistic risk analysis). The product of the analysis is a judgment on the possible range of the decision variable, and on the likelihood of each value within this range. 18. For the proposed project, six uncertain factors that may affect the result of financial evaluation have been identified: (a) power generation, (b) power sales price, (c) total working costs, (d) power sales price escalation, (e) capital investment, and (f) delay in opening the facilities by one year. The result of financial probabilistic analysis reveals that the most likely FIRR for the project is 6.4 percent, while the worst and the best FIRR are 5.8 percent and 7.2 percent, respectively. The details of the FIRR and NPV are in Table 5 and summarized as follows: Summary of Financial Probabilistic Analysis Range of FIRR & NPV Most Likely FRR &NPV Std. Error of the Mean FIRR (in %) 5.8% - 7.2% 6.4% 0.0% NPV (5.9%, Y million) - 23.2 - 233.0 94.9 7.6 Financial Performance Indicators 19. To ensure that the project is financially successful, an assurance was obtained from HXNCDC that beginning in June 2002, HXNCDC will prepare annually a rolling five-year financial plan that will include the projected revenue and capital expenditure costs and discuss the plan with the Bank. 20. The financial performnance indicators are: operating ratio, self-financing ratio and debt service coverage ratio. The Bank will closely monitor these financial performance indicators during project supervision. A variance of less than plus or minus 15 percent will be considered acceptable. HXNCDC will be required to improve its financial performance in the following year by increasing tariffs or reducing costs or capital expenditures if the selected targets (three indicators) are not achieved. - 46 - Financial Performance Indicators (in %) Workine Ratio (%) Self-financine Ratio Debt Service Coveraee Ratio 2000 6.7 0.17 -- 2001 10.2 0.28 1.56 2002 11.2 0.74 1.39 2003 11.8 1.00 1.38 2004 12.4 0.15 1.37 2005 13.5 0.29 1.84 2006 12.3 0.85 2.96 2007 12.8 1.00 1.45 2008 13.4 1.00 1.43 2009 14.1 1.00 1.41 2010 14.8 1.00 1.39 Notes: Working ratio = Total working costs/(Operating revenue - Business taxes) Self-financing ratio = Average the last three years' total investments/(Net profit + Depreciation) Debt service coverage ratio = (Net profit + Depreciation + Interest + Foreign exchange risk) / (Principal + Interest + Foreign exchange risk) - 47 - Table 1: Income Statement (Y million, year ending December 31) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Power Generation (Gwh) 193 414 560 560 560 560 752.15 1072.4 1200.5 1200.5 1200.5 1200.5 Power Sales (Gwh) 189.0 380.0 500.0 500.0 500.0 500.0 678.7 976.5 1095.6 1095.6 1095.6 1095.6 Operating Revenue 31.56 119.09 174.00 174.00 174.00 174.00 236.18 373.90 419.50 419.50 419.50 419.50 Business Taxes /1 Value-added tax 3.90 16.02 27.84 27.84 27.84 27.84 37.79 59.82 67.12 67.12 67.12 67.12 City construction tax 0.19 0.80 1.39 1.39 1.39 1.39 1.89 2.99 3.35 3.35 3.35 3.35 Education levy 0.12 0.48 0.84 0.84 0.84 0.84 1.14 1.80 2.01 2.01 2.01 2.01 Total 4.21 17.30 30.07 30.07 30.07 30.07 40.82 64.61 72.48 72.48 72.48 72.48 Net Sales 27.35 101.79 143.93 143.93 143.93 143.93 195.36 309.29 347.02 347.02 347.02 347.02 Operating Costs: Salaries, wages and benefits 0.31 0.84 1.62 1.70 1.78 1.87 3.65 3.83 4.02 4.22 4.43 4.65 Fuel andpower 0.26 0.60 1.10 1.16 1.22 1.28 1.64 2.25 2.58 2.71 2.85 2.99 Material and equipment 1.18 1.60 5.51 6.18 6.48 6.81 9.07 12.89 14.94 15.70 16.48 17.31 Maintenance 0.13 1.80 4.41 4.90 5.15 5.40 8.70 14.40 17.35 18.21 19.12 20.07 Others - 1.94 2.10 2.21 2.32 2.44 3.29 4.73 5.50 5.77 6.06 6.37 1.88 6.78 14.74 16.15 16.95 17.80 26.35 38.10 44.39 46.61 48.94 51.39 Total working costs____ ___ Depreciation 27.00 72.00 72.00 72.00 72.00 72.00 117.54 120.26 120,41 120.57 120.74 120.92 Total operating costs 28.88 78.78 86.74 88.15 88.95 89.80 143.89 158.36 164.80 167.18 169.68 172.31 OperatingProfit: (1.53) 23.01 57.19 55.78 54.98 54.13 51,47 150.93 182.22 179.S4 177.34 174.71 Administrative expenses 0.56 0.96 1.01 1.06 1.11 1.17 1.98 2.08 2.18 2.29 2.40 2.52 Financial charges - 18.43 51.83 49.72 47.47 45.07 42.49 39.73 94.29 88.79 82.89 76.58 Foreign exchange loss (gain) - - - 9.71 9.71 9.71 9.71 9.71 21.35 21.35 21.34 21.35 Non-operating expenses (net) - - - - - - - - - - ProfitBeforeTaxes (2.09) 3.62 4.35 (4.71) (3.31) (1.82) (2.71) 99.41 64.40 67.41 70.71 74.26 Income tax /2 - - - - - - - - 21.25 22.25 23.34 24.50 Other taxes - - NetProfitAfterTax (2.09) 3.62 4.35 (4.71) (3.31) (1.82) (2.71) 99.41 43.15 45.16 47.37 49.76 Return on Average Net Fixed Assets -0.1% 0.2% 0.2% -0.2% -0.2% -0.1% -0.1% 2.9% 1.3% 1.3% 1.4% 1.5% Working Ratio 6.9% 6.7% 10.2% 11.2% 11.8% 12.4% 13.5% 12.3% 12.8% 13.4% 14.1% 14.8% Operating Rstio 105.6% 77.4% 60.3% 61.2% 61.8% 62.4% 73.7% 51.2% 47.5% 48.2% 48.9% 49.7% /_I: Tax rates: Value- Added Tax (VAT)= 16% of total revenue, city construction tax = 5% of VAT and education levy = 3% of VAT. /_2: Income tax rates = Starting 2007, 33% of profit before taxes. - 48 - Table 2: Sources And Applications of Funds (Y million, year ending December 31) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: Net profits - - - - (2.09) 3.62 4.35 (4.71) (3,31) (1.82) (2.71) 99.41 43.15 45.16 47.37 49.76 Depreciation - - - - 27.00 72.00 72.00 72.00 72.00 72.00 117.54 120.26 120.41 120.57 120.74 120.92 Government contribution 140.20 236.20 220.10 339.54 201.99 96.20 143.46 266.94 274.48 175.14 115.21 59.95 - - - - Borrowing: - IBRD - 89.50 92.03 300.87 257,62 8.68 45.23 139.68 224.59 276.79 100.72 42.99 -Local Others - - - - - - - - - - - - - - - - Subtotal 140.20 325.70 312.13 640.41 48452 180.5 345.04 573.92 667.77 622.13 350.75 322.60 163.56 165.73 168.11 170.68 Applications: Capital expenditures 104.67 301.78 359.68 587.13 557.29 189.48 232.79 409.23 501.81 454.80 218.93 106.10 6.40 6.72 7.04 7.40 Other expenditures - - - - - - - - - - - - - - Loan repayments: - IBRD - - - - - - 30.47 31.58 33.83 36.23 38.81 41.57 77.26 82.76 88.66 94.97 - Local - - - - - - - - - - Change in working capital 6.93 (57.73) 7.32 34.46 123 5.28 3.57 6.18 1.04 1.11 2.12 5.13 2.21 1.62 1.72 1.80 Subtotal 111.60 244.05 367.00 621.59 558.52 194.76 266.83 446.99 536.68 492.14 259.86 152.80 8587 91.10 97.42 104.17 Net Funds Flow 28.60 81.65 (54.871 18.82 (74.00) (14.26) 78 21 126.94 131.10 129.99 90.89 169.80 77.69 74.63 70.69 66.51 Opening Balance - 28.60 110.25 55.38 74.20 0.20 (14.06) 64.15 191.09 322.18 452.17 54306 712.86 790.55 865.18 93587 Closing Balance 28.60 110.25 55.38 74.20 0.20 (14.06) 64.15 191.09 322.18 452.17 543.06 712.86 790.55 865.18 935.87 1002.38 Debt Service Coverage Ratio -- -- -- -- -- -- 1.56 1.39 1.38 1.37 1.84 2.96 1.45 1.43 1.41 1.39 Self financing Ratio -- -- -- -- 0.05 0.17 0.28 0.74 1.00 0.15 0.29 0.85 1.0 1.00 1.00 1.00 - 49 - Table 3: Balance Sheet (Y million, year ending December 31) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Assets: Fixed Assets At cost [656.00 2000.43 2066.43 2069.50 2072.72 2076.10 3459.59 3545.66 3554.26 3563.27 3572.73 3582.67 Less: depreciation 27.00 99.00 171.00 243.00 315.00 387.00 504.54 624.80 745.21 865.78 986.52 1107.44 Subtotal 1629.00 1901.43 1895.43 1826.50 1757.72 1689.10 2955.05 2920.86 2809.05 2697.49 2586.21 2475.23 Current Assets Cash 0.20 (14.06) 64.15 191.09 322.18 452.17 543.06 712.86 790.55 865.18 935.87 1002.38 Inventory 0.00 0.00 2.76 3.09 3.24 3.41 4.54 6.45 7.47 7.85 8.25 8.66 Receivables 8.95 54.16 20.00 26.68 28.01 29.41 37.11 54.85 62.63 65.74 69.03 72.51 Subtotal 9.15 40.10 86.91 220.86 353.43 484.99 584.71 774.16 860.65 938.77 1013.15 1083.55 Other assets - - - - - - 13.34 14.37 14.61 14.84 15.05 15.25 TotalAssets 1638.15 194L.53 198234 20473 6 2111.15 217J4 .2 37039 37.3. 3631 Ml 3614.41 3574.03 Liabilities & Equity Equity-Statefunds 895.09 1149.88 1176.13 1171.88 1169.05 1167.74 1771.53 1911.23 1956.52 2004.14 2054.07 2106.50 L-Tdebts 740.02 748.70 763.46 871.56 1062.32 1302.88 1364.79 1366.21 1288.95 1206.19 1117.53 1022.56 Current liabilities 3.04 42.97 8.00 8.83 9.27 9.73 16.44 30.96 37.55 39.42 41.39 43.48 Other liabilities - - - - - - 0.31 0.96 1.26 1.32 1.39 1.46 Total Liabilities & Equity 163815 194851 UU2.34 20473.6 211115 2174.09 3 9 3s04.1 36Lo 3614.41 3574.03 Current Ratio 3.0 0.9 10.9 25.0 38.1 49.8 35.6 25.0 22.9 23.8 24.5 24.9 Debt/(debt +equity) Ratio 45.3 39.4 39.4 42.7 47.6 52.7 43.5 41.7 39.7 37.6 35.2 32.7 /_-: Fixed assets: Including the construction in processing; - 50 - Table 4: Major Financial Assumptions 1. Power Generation and Sales As in income statement. 2. Power Sales Price: 0.348 Y Ikwh with an increase once every 5 years; The first five years is 10% and 15% thereafter. 3. Toll and fee: Bridge toll Nil Ship lock fee Nil 4. Business Taxes: Value-added tax (VAT) 16 % of operation revenue. City construction tax 5 % of VAT. Education levy 3 % of VAT. 5. Operating Costs: 5 % increase per year. Salaries, wages and benefits Total 120 persons, 10,000 Y/person/year and 40% for benefits. Fuel and power 0.2 % of total equipment cost. Material and equipment 0.01 Y/kwh/year. Maintenance 0.55 % of the project investment. Others 0.0038 Y/kwh/year. 6. Depreciation 30 years straight- line method. 7. Administrative Expenses 62.3% of the salaries. 8. Income Tax Starting 2007, 33% of profit before taxes. 9. Capital Expenditures (after completion): Annual 0.004 Y /Kwh/year plus 0.33% of salary. Medium Once every 5 years and 2 times higher then the normal year. Major Once every 10 years and 4 times higher then the normal year. 10. Loan: -IBRD 7 % LIBOR-Based signal currency in USD loan and 20 year maturates including 5 year grace. -Domestic Nil - 51 - Table 5: FIRR Simulation and Probabilistic Risk Analysis Summary: Display Range is from 2.0% to 10.0% (in %) Entire Range is from 2.7% to 10.3% (in %) After 1,000 Trials, the Std. Error of the Mean is 0.0% Statistics: Value Percentiles: Trials 1000 Mean 6.5% Percentile (in %) Median 6.4% 0% 2.7% Mode --- 10% 4.8% Standard Deviation 1.3% Low Scenario 20% 5.3% Variance 0.0% 30% 5.8% Skewness 0.05 Most Likely 40% 6.1% Kurtosis 2.61 50% 6.4% Coeff. of Variability 0.21 High Scenario 60% 6.8% Range Minimum 2.7% 70% 7.2% Range Maximum 10.3% 80% 7.6% Range Widtlh 7.6% 90% 8.3% Mean Std. Error 0.04% 100% 10.3% Forecast: Zhuzhou Dam - FIRR (2006) 1,000 Trials Frequency Chart 2 Outliers p 029 29 R F R 0 .022 21.75 E B A B .015 .. .. . .. .. . -- - -- - 14.5 u I ~~~~~~~~~~~~~~~E L N T Y y -000 0 2.0% 4.0% 6.0% 8.0% 10.0% (in %) Assumptions Power Generation Power Sales Prices Normal distribution with parameters: Normal distribution with parameters: Mean 100% Mean 100% Standard Dev. 10% Standard Dev. 10% Selected range is from -Infinity to +Infinity Selected range is fiom -Infinity to +Infinity Mean value in simulation was 100% Mean value in simulation was 100% Total Working Cost Power Prices Growth Rate Triangular distribution with parameters: Triangular distribution with parameters: Minimum 90% Minimum 90% Likeliest 100% Likeliest 100% Maximum 110% Maximum 110% Selected range is from 90% to 110% Selected range is from 90% to 110% Mean value in simulation was 100% Mean value in simulation was 100% Total Capital Investment Triangular distribution with parameters: Minimum 90% Likeliest 100% Maximum 110% Selected range is from 90% to 110% Mean value in simulation was 100% - 52 - Annex 6: Procurement and Disbursement Arrangements CHINA: Third Inland Waterways Procurement Summary of Agency's Procurement Capacity Assessment I. A procurement capacity assessment of the project executing agency was carried out during preparation of the project, and the Procurement Capacity Assessment Report of November 2000 is in the project file. This annex summarizes the findings and assessment of the report. 2. HXNCDC will be responsible for all project-related procurement activities. HXNCDC has implemented the first Bank-financed Inland Waterways Project (Hunan component), and proven its procurement capacity by handling procurement in accordance with the Bank procurement guidelines. HXNCDC comprises about 80 staff, of which 40 staff will be allocated to the proposed project. About 10 experienced procurement staff, the same as for the IWW1 project, will be in charge of the proposed project. 3. HXNCDC has appointed China National Chemical Construction Corporation International Tendering Company (CNCCCITC) and CMC International Tendering Company for international competitive bidding (ICB) civil works and goods, respectively. They have extensive experience in carrying out ICB under Bank-financed projects as well as under other intemational financing institutions and domestically financed projects. They also are familiar with national competitive bidding on World Bank-financed projects. This procurement arrangement is also the same as in IWW1I. 4. The assessment confirmed that HXNCDC is fully capable of satisfactorily managing all procurement activities. HXNCDC staff have been involved with the IWWI project and have increased their familiarity with the Bank's requirements during the process of preparing the proposed project by selecting consultants and preparing the retroactively financed contract and other contract documents. 5. While China's domestic procurement procedures do not fully comply with the Bank's procurement guidelines, such as permitting bracketing and a merit point system for bid evaluation, GOC, Hunan Province and HXNCDC have fully committed to strictly following the Bank's guidelines. If any discrepancies arise between domestic policy and Bank guidelines, the Bank's policy and guidelines prevail. For this purpose, a supplementary letter to the Loan Agreement will be signed by Hunan Province. The letter specifies that the following procedures will be followed: (a) all invitations to prequalify or to bid shall be advertised in a newspaper of national circulation in China; (b) such advertisement shall be made in sufficient time for prospective bidders to obtain prequalification or bidding documents and prepare and submit their response; and in any event a minimum of 30 days shall be given to bidders between the date of advertisement and the deadline for submission of bids, and the advertisement and bidding documents shall specify the required form and amount of any security; (e) the time for opening of all bids shall be the same as the deadline for receipt of such bids; (f) all bids shall be opened in public; all bidders shall be afforded an opportunity to be present (either in person or through their representatives) at the time of bid opening, but bidders shall not be required to be present at the bid opening; (g) no bid may be rejected solely on the basis that the bid price falls outside any standard contract estimate, or margin or bracket of average bids established by Hunan Province; and (h) each contract shall be awarded to the lowest evaluated bidder, that is to say, the bidder who meets the appropriate standards of capacity and resources and whose bid has been determined (i) to be substantially responsive to the bidding documents and (ii) to offer the lowest evaluated - 53 - cost. The winning bidder shall not be required, as a condition of award, to undertake responsibilities for work not stipulated in the bidding documents or otherwise to modify the bid as originally submitted. Procurement methods (Table A) 6. Procurement will be carried out as shown in Tables A and A3. Procurement of goods and works will be executed according to the World Bank's "Guidelines Procurement under IBRD Loans and IDA Credits" (January 1995, revised January and August 1996, September 1997 and January 1999) and the" Guidelines Selection and Employment of Consultants by World Bank Borrowers" (January 1997, revised September 1997 and January 1999) for services. Chinese Model Bidding Documents (MBD), which were standardized for local conditions by the Chinese government and the Bank on the basis of standard bidding documents, will be used for procurement under the project. All consultant assignments will follow the Standard Request for Proposals - Selection of Consultants (July 1997, revised April 1998 and July 1999). Where no MBD exists, Bank standard documents will be used. The General Procurement Notice (GPN) for the project was published in UN Development Business on March 31, 2001, issue No. 555. 7. Works (US$ 112.3million, including contingencies). Civil works contracts over US$10 million per contract will be procured through the ICB procedure. Two contracts of an aggregate estimated amount of US$67.3 million will follow ICB. Prequalification of contractors for ICB will also be required. For civil works to cost over US$ 10 million, invitation for prequalification will be advertised as Specific Procurement Notice (SPN) in the UN Development Business, in addition to the advertisement in at least one newspaper of national circulation in China. 8. Other works, including construction of access roads to the site and minor bank protection works, each contract to cost below US$10 million, will be procured through an NCB procedure acceptable to the Bank. Because these contracts will be relatively small, labor-intensive and geographically scattered, no foreign bidders are expected to be interested. However, eligible foreign bidders may participate. Four contracts with an aggregate amount of US$18.5 million will follow the NCB procedure. Works totaling US$26.4 million for channel improvement between Zhuzhou and Xiangtan.inundation protection, and other small works will be financed locally (not-Bank-Financed -- N.B.F.). 9. Equipment (US$ 69.1 million, including contingencies). Contracts for goods and equipment for over US$300,000 per contract will be procured through ICB. An estimated aggregated contract amount of US$53.6 million will be through ICB. Domestic manufacturers competing under ICB will be eligible for a margin of preference in the comparison of bids of 15 percent for goods, or the prevailing customs duties, whichever is lower. Contracts of between US$300,000 and US$100,000 per contract will be procured through NCB acceptable to the Bank. Because goods are available locally at prices below those on the intemational market, no foreign bidders are expected to be interested. However, eligible foreign bidders may participate in NCB bids. An estimated aggregate contract amount of US$0.55 million will be under NCB procedure. Other items or groups of items covering small maintenance equipment (readily available off-the-shelf goods or standard specification commodities) estimated to be under US$100,000 per contract package, with an aggregate amount not exceeding US$1.2 million (amount rounded), will be procured following national shopping procedures on the basis of comparison of price quotations solicited from at least three suppliers under the Bank Guidelines for Procurement. Transmission Lines and Installation of Bulb Turbine and Generator Units, estimated aggregate amount of US$13.8 million, will be financed locally (N.B.F.). 10. Consultants (US$ 9.78 million, including contingencies). All consultants required for technical assistance and studies, and staff training to be implemented under the project will be selected and employed under terms and conditions acceptable to the Bank according to Guidelines on the "Selection and Employment of Consultants by World Bank Borrowers" (January 1997, revised in July 1997 and January - 54 - 1999). Details of staff training, technical assistance and studies are presented in the project files. For consultants services, the Standard Request for Proposals (July 1997, revised in April 1998 and July 1999) will be used. Under the project no consulting services estimated to be over USS 100,000 are expected. Services that are estimated to cost less than the specified threshold per contract, may, with the Bank's prior agreement, be procured by Consultants' Qualification (CQ) according to paras. 3.1 and 3.7 of the guidelines. CQ procedure was proposed for training contracts and a small study for which the need for preparing and evaluating a competitive proposal is not justified. The estimated aggregate amount under CQ procedure is US$1.59 million. Consultants services totaling US$8.19 million for construction supervision, an independent panel of experts for the dam safety, and technical design will be financed locally (N.B.F.). Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCB Other N.B.F. Total Cost 1. Works 67.33 18.51 0.00 26.41 112.25 (33.28) (8.78) (0.00) (0.00) (42.06) 2. Goods 53.61 0.55 1.19 13.77 69.12 (53.61) (0.55) (1.19) (0.00) (55.35) 3. Services 0.00 0.00 1.59 8.19 9.78 (0.00) (0.00) (1.59) (0.00) (1.59) 4. Resettlement 0.00 0.00 0.00 9.75 9.75 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Interest during 0.00 0.00 0.00 18.32 18.32 construction (0.00) (0.00) (0.00) (0.00) (0.00) 6. Front-end fee 0.00 0.00 1.00 0.00 1.00 (0.00) (0.00) (1.00) (0.00) (1.00) Total 120.94 19.06 3.78 76.44 220.22 (86.89) (9.33) (3.78) (0.00) (100.00) Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to: (i) managing the project; and (ii) re-lending project funds to local government units. - 55 - Table Al: Consultant Selection Arrangements (US$ million equivalent) Consultant ServicesScetnM bo Expenditure QCBS QBS SFB LCS CQ Wte NABF i! A. Finns 0.00 0.00 0.00 0.00 1.59 0.00 8.19 9.78 (0.00) (
Группа Всемирного банка · Project Appraisal Document
China - Third Inland Waterways Project
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