China - Hubei Hydroelectric Development in Poor Areas Project

Docmwent of The WorId BOnkc Report No: 22670/oC-N PROJECT APPRAISAL DOCUMEN ONA PROPOSED LOAN IN THE AMOUNT OF US$105 MILLION TO THE PEOPLE'S REPUBLIC OF CHNA FOR HUBEI HYDROPOWER DEVELOPMENT IN POOR AREAS PROJECT May 30, 2002 Energy and Mining Sectr Development UUit East Asia and Pacific Region  CURRENCY EQFUIVALENTS (Exchange Rate Effective 11/15/2001) Currency Unit Yuan (Y) Y; - T TOO^ a . I I uiaau.il US$1 Y8.28 FISCAL YEAR january I - December 31 ABBREVIATIONS AND ACRONYMS ,m,, - Meter km - Kilometer (=0.62 miles) kW - Kilowatt (=1,000 watts) MW - Megawatt (1,000,000 watts) GW - Gigawatt kWh - Kilowatt hour (=860.42 kcal) MWh - Megawatt hour (=1,000 kWh) CGWh - Cigawatt hour (= l00fO0 kilowatt hniirs kV - Kilovolt (1,000 volts) MVA - Megavolt-Amnpere (1,000 klovolt-am"peres) Vice President: Jemal-ud-din Kassum Country Manager/Director: Yukon Huang Acting Sector Manager/Director: Mohanuad Farhandi Task Team Leader/Task Manager: Barry Trembath  ABBREVIATIONS AND ACRONYMS - . 2.... I -m . AtDO - Asiai Djveopmenit Baiik HrrAO - Hiueci Pruvinciai Poverty A;leviation Oflice ASTAE - Asia Alternative Energy Programme HPPDC - Hubei Provincial Planning and Development Commission BP - Bank Procedures IAS - Lnternational Accounting Standards CAS - Country Assistance Strategy IBRD - Intemational Bank for Reconstruction and Development CFAA - Country Financial Accountability Assessment ICB - Intemational Competitive Bidding CFB - County Finance Bureau IDC - Interest During Construction CIF - Cost, Insurance, Freight LGPR - Leading Group for Poverty Reduction COSU - Cer.al Opet..,tion-a1 SerVi.ce 'Jni:t D - M riar.ce Bueau CPC - Chinese Communist Party MOF - Ministry of Finance CPMO - County Project Management Office MMS - Mandated Marked Share CQ - Selection Based on Consultants' Qualifications MS Co. - Hydropower Construction Engineering Consulting CRAES - Chinese Research Academy of Environmental Mid-South Company Sciences MWR - Ministry of Water Resources CRESP - China Renewable Energy Scale-up Program NCB - National Competitive Bidding CWP^C hnjian.g Water Reso es Commission TlT . l DRA - Debt Reserve Account OD - Operational Directives DSCR - Debt Service Coverage Ratio OP - Operational Policies EA - Environmental Assessment PAP - Project Affected People EDR - Equalizing Discount Rate PCD - Project Concept Document EiKR - Economic intemal Rate of Retum PDR - Preliminary Design Report EMP - Environmental Management Plan PIP - Project Implementation Plan ESCO - Energy Service Company DpAAi Prvobable Maximurm Flood ESMAP - Energry Sector Management Assistance Programme POE - Panel of Experts ETI - Sichuan Ertan International Engineering Consulting PPMO - Provincial Project Management Office Company, Ltd. PRA - Participatory Rural Appraisals FIRR - Financial Internal Rate of Return QCBS - Quality and Cost Based Selection FMIS - Finacial Management information System RAP - Resettlement Action Plan FSR - Feasibility Study Report RLG - Resettlement Leading Group _,AAP - yeneral AcAnntMA Annniinfin, Prin.^inlpe SA - S A GEF - Global Environmental Facility SDPC - State Development and Planning Commission GHG - Greenhouse Gas SE - Supervision Engineer GOC - Govemment of China SPC - State Power Corporation GP - Good Practices SPEC - State Power Economic Research Center HEPB - Hubei Environmental Protection Bureau SS - Singie-Source Selection HEPRI - Hubei Environmental Protection Research Institute TTL - Task Team Leader HIDI - Hubei Investigation and Desien Lns:titute IU NDP - Unitted Nations Developm-ent Programme HPFB - Hubei Provincial Finance Bureau I WBOB - World Bank Office in Beijing   CHINA kiUJ3il HYDROPOWER DEVELOPMENT IN POOR AREAS PROJECT CONTENT1S A. Project Development Objective Page 1. Project development objective 3 2. Ke, perforxmnance indictors 3 B. Strategic Context 1. Sector-related Country Assistance Strategv (CAS) goal sunppored by the project 3 2. Main sector issues and Government strategy 3 3.,* Set sues to be ad&-Sesse by +u.e ro arA-, sua : egc hics C. Project DeSt-rintin.,mm,a,r 1. Project components l3 2. Key policy and institutional reforms supported by the project 16 3. Beefitsaned- aget population 16 4. Institutional and implementation arrangements 17 D. Project Rationale 1. Project alternatives considered and reasons for rejection 17 2. Maijuiorrela piujcw~ finianced byi[ie Bank and o"mer development agencies 3. Lessons learned and reflected in the project design 23 4. Indications of borrower commitment and ownership 24 5. Value added of Bank support in this project 24 E. Summary Project Analysis 1. Economic 25 2. Financial 26 3. Technical 28 4. Institutional 29 5. Environmental 33 6. Social 37 7. Safeguard Policies A44  V Q1,0;~011i~,arA WaI,a F . S lfl.taiAUt**Js .......... 1 Sustainabilitv 45 2. Critical risks 45 3. PD co-ta nnfrnnveraial ianr-tQ 47 G. Main Conditions 1. Effectiveness Condition 47 2. Other 47 H. Readiness for Implementation 50 I. Compliance with Bank Policies 50 Annexes Amlex 1 : riuject Desisgn 'uan 51 Annex 2: Detailed Project Description 54 Annex 3: Estimated Project Costs 66 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 67 Annex 5: Financial Sununary for Revenue-Earning Project Entities, or Financial Summary 73 Annex 6: Procurement and Disbursement Arrangements 88 Annex 7: Project Processing Schedule 108 AnneX 82 DlTnn,mntv in the Prniprt File l 09 Annex 9: Statement of Loans and Credits 110 Aniniex 10: Country at a Glance 114 Annex 11: Energy Sector Issues and Bank Strategy 116 Annex 12: Financial Management Assessment 127 Annex 13: Environmental Summary 135 Annex 14: Land Acquisition and Resettlement 145 Annex 15: Social Assessment 159 Annex 16: Poverty Alleviation Impacts 172 Annex 17: Social Assessmennt Appraisal Mission Report 180 Annex 18: Institutional Arrangements for Inplementation and Operation 192 MAP(S) ItiB 35892  CHINA Hubei Hydropower Development in Poor Areas Proiect Project Appraisal Document East Asia and Pacific Region EASEG IDate: May30.2002 Team Leader: BarryvTrembath Country Manager/Director: Yukon Huang Sector Manager/Director: M. Farhandi I ro,ect mI: P068I09 Sector(S): PH = H-- Lending Instrument: Specific Investment Loan (SEL) Theme(s): Environment; Poverty Reduction; Energy Poverrty Targeted intervenuun; N [XI Loan I ] Credit [ ] Grant [ ] Guarantee [ J Other: I Fo Loans.'Credits.Others: Amount (US$m): 105.0 Borrower Rationale for Choice of Loan Terms Available on File: ER Yes roposeU I UerMnS ;;BRCJ;: VdrnU1le-pread Curreney Loan kVSL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee (FEF) on Bank loan: 1.00% Payment for FEF: Capitalize from Loan Proceeds IBORROWER | 0.00 I 0.00 I 0.00 IBRD 0.00 105.00 105.00 LOCAL GOVTS. (PROV., DISTRICT- CITY) OF BORROWTN.G 6.12 0.00 6.12 COUNTRY TOCrAT 4z-TRpn;nR?w r nTrp Iz2QA 1nA2'C1I SUB-BORROWER(S) | 47.18 0.001 47.18 To'ta: j 107.10 1 iiS.3i | 222.41  Borrower: CHINA EesponsiCie agency:FINi4CE BuIREAU Hubei Provincial Project Management Office (PPMO) Address: 8 zhongbei Road, wuchang Distnct, wuhan City, Hubei 4JU071, Lhlfna Contact Person: Mme. Guo Shimin Tel: (86-27) 8784-9682 Fax: (86-27) 8784-9682 Email: guoshiminiwh@l63.com flthor A.genmrr,floa): Project Companies: Xuan-en Dongping Hydroelectric Power Company Limnited Atr pcq Xnn-en 2n,m ntv Reat Mub-hi 430077 China Contact Person: Mr. Cheng Tao, President Te! (86=1~27)866522 1FAv (862i'7) 8678)1234 >! Laifeng C(Ymntv Naiitan 1-Tvdrnelectric Power Develonment Comnanv Limited Address: 39 Fengnan Road, Xiangfeng Town, Laifeng County, Hubei 445700, China Contac^t Psrvn,r Mr 7lwn R hihAll Vine Precident Tel: (86-718) 6287398 Fax: (86-718) 6287398 Email: Zhushan Duhe Hydroelectric Power Development Company Limited Address: 39 Renmin Roadc Zhushan Countv Seat- Hubei 442200, China Contact Person: Mr. Zhu Ze, President Te:1 (86-719) 4226191 Fnv: 86-719)422d9A1 E.mnil Nanzhang Xiakou Electric Power Company Limited Address: 424 Shuijing Road, Nangzhang County Seat, Hubei 441500, China Contact Person: Mr. Wu Hanxin. President Tel: (86-710) 5258660 Fax: (86-710) 5258660 Email: Estimated Disbursements ( Bank FY/US$m): Annual 12.00 | 27.50 | 32.50 | 20.00 | .00 | 4.00| numuiativel 12.00 1 39.50 1 72.00 1 92.00 1 101.00 I 105.00 P Project implementation period: Seven years |Expected effectiveness date: 09/30/2002 Expected closing date: 12/31/2008 -2 -  A. Project Development Objective 1. Project development objective: (see Annex 1) The project has three objectives: (a) facilitate economic growth' in Hubei by expanding electric power generation capacity in an economically and environmentally sustainable manner; (b) enhance the efficiency of the electricity sector in Hubei by commercializing county level generation companies; and (c) contribute to poverty alleviation efforts in poor communities in Hubei. 2. Key performance indicators: (see Annex 1) The perfornance indicators for monitoring and evaluation purposes are listed in Annex 1. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Doumen:,u., numbIer:UE. R~ 98-107t iriuFe~~ 1 ss Reii Da. d.M scussion. 05/29./ I199o The CAS goals were to reduce infrastructure bottlenecks by adjusting the investment pattern in favor of water management, energy, transportation, and telecommunications, to adjust the balance between energy development and conservation, and to develop altemative energy sources. The CAS is currently under revision amd is expected to be presented to the Board in October 2002 and major themes emerging are assistance to China in its transitions from a command economy to a market economy; and from a niral- agricultual economy to an urban society, focusing on development of institutional frameworks, develnmnrent of envimnmentallv -nihtqinRh1P. inf ro-tnirirP. rnil 1dirreincy the needs of fi1Av2nt9ged peoples and regions. The Bankc's energy sector strategy contributes to these three objectives focusing on: transitioning the state 1.m ed ...- tL . 'a;-l ..e r.ILULMtL Ubased aywtul; cnV.verUsion to0clea1n IUVLO andU Ui1%raasird energy efficiency; and raising incomes in poorer westem areas by assisting them to develop and export their energy resources. ThLe curtren't status, major Issues an,d Bank sttuegy in addressing uhese issues (Wihu particular reference to the power sub-sector) are described in Annex 11, and summarized in the following paragraphis, -wi parucular reference tw ute issues addressed oy tne curreni project. 2. Main sector issues and Government strategy: Transitioning the Power Sub Sector Rackground- Until the ea-rly 1980s, China's po.wer systems were entirely goveprnment own.eA Fr the m.ost part, power was provided through a centralized government department with operating units at the pnrvince, prefecture tr(or miinicipality) and conii ,ty levels.r 1%ana,ar, becaus i r.ot o11 Ireas were connected to main grids, local systems also grew up at county level and even at local government levels "tmuIneh onAtvill Jrp r * W VAA A SU S/tZ I. At+ VAS-A _ At Q;AA LU Ut -a UUt +A.,l A Govenmment Below the county level, governments are considered to be representatives of collectives, WhichU WcL%t tV,IUIAItiy Virat"Zdte. LoILU %.UUU (oUII ri1UW I IeLd U LU b LUWJWl-iUJlTp and urigaUes (no-wU reeu rreud to as villiages). Except for local governnent systems, investnents were centally decided and financed Uhroug,l udget alocationls. rlkcs were cenUtally controlled and covered only a smaii portion of supply costs. Private ownership of power assets was illegal. Power shortages were endemic. Over the two decades since 1980 there have been very great changes. The sector is now largely corporatized and its ownership is diverse, budget allocations have been phased out, subsidies eliminated - 3 -  and electricity prices are in line with or above marginal supply costs in most grids. This has enabled the sector to grow dramatically with installed capacity and generation quadrupling to over 300 GW and about 1250 TWh, such that China's power sector is by now the second largest in the world, and supply and demRnn are hasicallv in balance. The provnncial power companies sti1l fnrm the cnre nf the current system. These state owned entities own and operate the main transmission grids, act as single buyers in the purchase of power from generators (except for "er,bedded" grn.rto. a.nd its sole tn trihiitnrz 2ndi cn,ntiniue tn have siihstqntinl interestq in generation and distribution. The single buyer structure has showed strains in recent years and the Go e- L ---- :-e- A- i - - to..A -. -A e+ 44 o.,4_ _,,r ,x,,th. (r.t.-.t1fln 11 the shnrt term and eventually extending to retail competition in the longer term (5 to 10 years). As initial steps, the governnent ManUated u,e sepa-UL1on of generation I'orU M U--AvAI4isiu4n- auu -u;-bu+A, provinces to test competitive generation markets and started to revise the Electricity Law to provide a stronger legal basis for reform. Tin1s was 1ulouweU inl liW eVV V uy aI rUVV11UIG11L IIICULUarI L. State Development Planning Commission (SDPC) to investigate in detail the future direction of power sector reform. SDPC's recommendations, wnich have been substantively adopted in April, 2002b y Siaie CounciI include the following measures: Objectives. Break up monopolies and introduce competition to improve efficiency and reduce cost while optimizing resource allocation and promoting power development, through acceleration of grid integration and development of a fair, orderly and healthy power market system under appropriate government regulation. Restructure State-owned Assets In Power Sector. Principles for this restructuring are as follows: * Separate generation and network business businesses at all administrative levels. * Restructure State Power Corporation (SPC) owned generation assets into independent generation PntpwrriQ suc inh that the rnancitv share of a renertfinn crnnnanv in a nnwer market should not exceed 20 percent. * Establish a national grid company and six regional grid companies, with provincial grid companies transmission and distribution locally. * The grid companies may retain both transmission and distribution business during the 10th plan period, but should achieve accounting separation. In case of muitipie asset ownership within a county, limited liability or shareholding companies should be established based on net assets owned by each party. Bid for Dispatch and New Pricing Mechanisms. The following principles will apply: * Power trading centers will be established and generators will bid for dispatch. Within the iurisdiction of each regional grid company, one or more dispatch centers will be established depending on local conditions, all managed by the regional grid companies with free trading between dispatch centers. * Th. issue of pnice difference relating to different histnrical costsq shnulid he mnanaged hy asset -4 -  restructuring or merging and acquisition to form independent power plants with revalued assets, able to compete fairly in the new market environment; the detailed procedure for introduction of competition may be developed by each power dispatch and trading center. * Environmental emission pricing standards are to be implemented along with the introduction of bidding for dispatch. In order to support the development of clean energy, preferential policies should be developed for newly commissioned hydropower and wind power proiects; VAT should not exceed eight percent and detailed methods will be developed by MOF. * T'he precise timetable to introduce competition should be determined by the structure of the local IrdautIf 1nalo mann,apement Canbilith , arn. nadeiiuac nf tepchniral siupnnrt systpms RPpmin,, with the needed conditions should establish trading centers and introduce bidding for dispatch as early as possible. * A~ raduuInlu wiluei puwer pricing ziictalurulril saiule d-uvelopeu. iic uelecuuaty prices will ue divided into generation, transmission, distribution price and consumer supply. The generation price will consist of a government determined fixed capacity price and competitive-market determined energy price. The govemnment will determine the principles of transmission pricing and distribution pricing. The consumer price will be made up of the above prices and will fluctuate withi generation price. The government will regulate and monitor the prices of each segment according to the principles of efficiency, incentive mechanisms, taking into consideration the need to attract investment and the absorption capability of society. * ]n areas where conditions permit, direct electricity supply of generators to large energy consumers and distributors should be piloted. The generation price will be negotiated between the parties; the government will determine the transmission price. State Power Regulatory Agency. A power regulatory agency will be established under the State Council. It will perform the regulatory duties and functions authorized by the State Council. The institutional framework of the regulatory agency will follow a vertical approach. The regulatnrv agency will have branch offices in areas with regional power grid companies and trading centers. The principle duties of the Satit rewnihatyntrr agency inchide: rIpv.elonv.Pit nf no.u,pr mn*lrpt rile air.i mnnit.rincg of maArpet rrntpr%tinnc ensuring fair competition, recommending price adjustment to the government, supervising the service niinlity of tlh.e pwe Pr. temrn:ses issuincg nndi cimpr%Asin.g licrs-epe rpesolx r.g m,,>rvwt fdisptw a.t d nn it.rr the implementation of public access. Staged Power Sector Reform. Highest priority should be given to the establishment of the state regulawory agency. The natuiona;l rid coompany, reginal g id companiies and power grlertiuon comilpaniies should be established within about one year. Each regional grid company should start to deploy the necessary technical support systems for bidding and to implement monitoring facilities for environmental compliance. By the end of the 10th five-year plan period, all the main generation companies in each region should participate in bidding for dispatch. A new power pricing mechanism will be implemented nationally. After completion of the above refomis, separation of transmission from distribution should be gradually piloted and implemented and retail competition introduced. The goal of proceeding to retail competition, over a single decade, to a power sector as large and diverse as that existing in China, while at the same time ensuring at least 200 GW growth in capacity, is ambitious. However, this has been facilitated by the clear statement of the principles and timing now established by -5 -  government Clearly, the challenge now is to implement this strategy in accordance with principles laid down, without dilution that could occur through the influence of vested interests. Impediments to widespread implementation include the following: Regulation. Implementation of a new regulation system appropriate to competitive markets will be key to implementation of competitive power markets. The current regulatory system is still reflective of a command economy and the challenge will be to change the mind-set of the regulators such that they allow the market to determine prices where appropriate. Power markets cannot function unless there is a clear and timely mechanism for passing variations in wholesale prices (as deternined by the market) through to consumers, and procedures for timely licensing of new capacity according to needs signaled by the market Tn addition, power market reuilation involving matters such as market code development ancillary services pricing, transmission pricing, and market monitoring, requires substantial institutional capacity and specialist skil There istherefore Ar gent need to developnthee detaeiex iprinciples ofm narket regnlatinn followed by the related regulations. This will need to be paralleled by development of the necessary skills *n ..gu,lat.o by persoAnn.el ,.t v.aritou s levels of g rn -nrnen0t