World Bank Documentdocuments.worldbank.org/.../pdf/multi-page.pdf · 2016-07-11 · Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10610-CRA SThA APPRAISAL REP(rJT CfINA

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 10610-CRA

SThA APPRAISAL REP(rJT

CfINA

SECOND SHUIOU FDROELECTRIC PROJECT

August 10, 1992

MICROFiCHE COPY

Report No. :1o61o-CHA Type: (SAR)Title: SHUIKOU HYDROELECTRIC PROJECT

Author: TRE:MATH, BExt.: 82891 Roora:F10045 Dept.: ASTEG

Industry and Energy Operations DivisionCountry Department 11E-ast Asia and Pacific Regional Office

This document has a resticted distibion and may be used by recipients only in the performance of

their offlcial duties. Its contents may not otherwlse be disciosed without World Bank authorization.

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CURRENCY EOUIVALNTS(As of January 31, 1992)

Currency = Yuan (Y)Y 1.00 - 100 fen$1.00 = Y 5.q3

Y 1.00 = $0.18

FISCAL YEAR

January 1 to December 31

WEIGHTS AND MEASURES

km = Kilometer (= 0.62 riles)kWh = Kilowatt hour (= 860.42 kcals)GWh = Gigawatt hour (1,000,000 kilowatt hours)TWh = Teraw&tt hour (1,000,000,000 kilowatt hours)kW = Kilowatt (1,000 watts)MW - Megawatt (1,000 kilowatts)GW = Gigawatt (1 million kilowatts)kcal = Kilocalorie (= 3.97 British thermal units)kV = Kilovolt (1,000 volts)kVA = Kilovolt-ampere (1,000 volt-amperes)MBtu = Million British thermal unitsMJ = Mega-joule (1 million joules)MVA = Megavolt-ampere (1,000 kilovolt-amperes)GVA = Gigawatt-ampere (1 million kilovolt-ampere)m = Milligram*,- = Cubic Metertoe = tons of oil equivalent

ABBREVIATIONS AND ACRONYMS USED

BERI - Beijing Economic Research Institute for Water Resources and ElectricPower

ECIDI - East China Investigation and Design InstituteFPEPB - Fujian Provincial Electric Power BureauFPG Fujian Province GridGFP - Government of Fujian ProvinceGNP - Gross National ProductGOC - Government of ChinaHIPDC - Huaneng International Power Development CorporationIER - Independent Evaluation of ResettlementMKE - Morrison Knudsen Engineering CompanyMOE - Ministry of EnergyMOF - Ministry of FinanceMWREP - Ministry of Water Resources and Electric PowerNEPA - National Environmental Protection AgencyPCBC - People's Construction Bank of ChinaSAA - State Audit AdministrationSBC - Special Board of ConsultantsSCADA - Supervisory Control and Data Aquisition SystemSEIC - State Energy Investment CorporationSPC - State Planning CommissionSRRO - Shuikou Reservoir Resettlement Office

FOR OMCAL USE ONLYCHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Loan and Proiect Summary

Borrower: People's Republic of China

Beneficiary: Fujian Provincial Electric Power Bureau (FPEPB)

Amounts $100 million equivalent

Terms: Twenty years, including five years grace, at the Bank's

standard variable interest rate, with level principal

repayments.

Onlendinq Terms: The proceeds of the loan will be onlent from the Borrower

to FPEPB under a subsidiary loan agreement, with a 20-year term, including five years grace, at the Bank's

standard variable interest rate, with level principalrepayments. FPEPB will bear the foreign exchange risk

and the commitment charges.

Proiect Obiectivesand DescriDtion: Background. The Bank's involvement in the Shuikou Hydro-

electric Scheme dates from its inception in 1987. In

view of the long gestation period of the project, theBank approved a loan (Loan 2775-CHA) covering the initial

implementation period and agreed to consider a second

loan covering the later years of implementation. The

first loan has served to support the introduction of

modern planning, procurement and construction methods,

and the enhancement of environmental and resettlementpolicies. Achievements to date include: relocation of

the railway and other infrastructure; completion of exca-

vation and placing about 75 percent of dam concrete;commencement of powerhouse equipment erection; and reset-

tlement of about 57,000 peopl.. Construction is current-

ly on schedule. Studies dealing with optimal mixed sys-tem operation, power system planning, and automated con-

trol of the power grid, have also been largely completed.

Obiectives. The proposed second loan would help finance

the completion of the ongoing Shuikou HydroelectricScheme, thus furthering the objectives of the firstphase. In addition the project would promote: (a)transfer of modern power system technology; (b) powerprice reform; (c) management training to assist the power

bureau to cope with increasing demands placed on it by

decentralization; and (d) optimal system expansion.

of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Proiect Descriotion. The proposed project would firstpro de for the completion of the Shuikou HydroelectricScheme, all components of which were partly or fullycovered covered under the first loan. These are: (a)construction of a concrete gravity dam (101 m high) withassociated spillway, powerhouse and navigation lock; (b)provision and installation of seven 200 MW generatingsets; (c) environmental management and resettlement ofsome 67,000 people; and (d) consultancy services fordesign, procurement and construction management. Inaddition, the second-phase project would include: (a)increased capacitv of navigation facilities by construc-ting a shiplift in addition to the originally proposedshiplock; (b) provision of an automated control (SCADA)system for the Fujian power grid; (c) implementation ofan action plan for tariff reform; (d) provision of tech-nical assistence and training for planning, commercialand financial management, and project-related technologyand meaagement; and (e) a study to explore hydro-basedseasonal energy storage options in Fujian Province andcompletion of studies on system planning and operations.

Benefits andRisks: Benefits. The proposed project will provide reliable and

economical electricity supply to the Fujian Province,without major adverse environmental impacts. It willhelp Fujian to cope with a rapidly growing industrialdemand resulting from the province opening to the outsideworld and will contribute to a further improvement in theliving standards of the population. The project is partof the least-cost investment program for the Fujian grid,which has an IERR of 11.4 percent based on the averagetariff required to meet financial covenants, and 19 per-cent, valuing incremental consumption using, as "willing-ness to pay," the price paid for new consumption underthe multitier tariff currently applied in Fujian. Indi-rect benefits arise from an improvement in navigationalconditions in the Min River, upgrading of infrastrt^tureand housing as part of the resettlement program andavoidance of thermal generation with associated environ-mental impacts of burning 1.6 million of standard coal/year.

Risks. The risks generally associated with hydroelectricprojects, related to potential cost and schedule over-runs, are very low for the current project, in whichfoundations and river bed work are complete, only oneflood season remains prior to dam completion, and thefirst generating unit is on schedule for commissioning inJune 1993. Similarly, the risk of poorly handled reset-tlement has largely receded with successful implementa-tion to date. The risk remains that some people affectedby the resettlement program will be disadvantaged duringthe period taken to bring new production systems up to

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full capacity. This risk is being minimized by the Inde-

pendent Evaluation of Resettlement (IER), and assurances

being obtained from the Government that it will ac'; on

the results of the IER to supplement incomes as necessary

during the transition period.

Estimated Costs:Local Foreign Total

…------- ($ million) --------

Preparatory Works 10.5 - 10.5

Resettlement 23.4 - 23.4

Civil works 24.3 45.3 69.6

Metal works 8.5 11.7 20.2Electric and mechanical equipment 47.3 26.7 74.0Engineering and construction supervision 10.0 3.5 13.5

Administration 5.5 - 5.5

Technical assistance and training 0.2 1.5 1.7

Base cost /a 129.7 88.7 218.4

Physical contingencies 9.0 7.1 16.1

Price contingencies 6.6 4.2 10.8

Total Proiect Cost 145.3 100.0 245.3

Interest during construction /b 50.0 25.7 75.7

Total Financina Recuired 195.3 125.7 321.0

Financina PlanGovernment (SEIC) 195.3 25.7 221.0

IBRD - 100.0 100.0

Total 195.3 125.7 321.0

Estimated Disbursements:

Bank FY 1993 1994 1995 1996 1997…---------------- ($ million) -------------------

Annual 32.0 53.3 13.3 1.2 0.2

Cumulative 32.0 85.3 98.6 99.8 100.0

Economic Rate of Return: 19 percent

La The project is exempt from taxes and duties.

/ Interest during construction (IDC) is based on onlending rate for pro-jected disbursement of loan proceeds. Foreign currency portion of IDC is

based on Bank loan variable rate.

v

SECOND SHUIKOU HYDROELECTRIC PROJECT

STAFF APPRAISAL REPORT

Table of ContentsPage No.

I. THE ENERGY SECTOR . . . . . . . . . . . . . . . . . . . . . . 1

A. Overview . . . . . .1

B. Energy Sector Issues .. . . . . . . . . . . 2C. Energy Sector Strategy . .. . . .. .. . . . . . . . 5D. Bank Role in the Energy Sector . . . . . . . . . . . . . 5

II. THE POWER SUBSECTOR . . . . . . . . . . . . . . . . . . . . 7

A. Background . . . . . . . . ... ....... . . . . 7B. Institutions Planning and Technology Transfer . . . . . . 7C. Power Pricing ... . . . . . . . . . . . . . .... . 8D. Subsector Issues and Strategy . . . . . . . . . . . . . . 9E. Role of Bank in the Power Subsector . . . . . . . . . . . 10

III. THE BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . . 11

A. Legal Status and organization . . . . . . . . . . . . 11B. Management .... . . . . . . . . . ..... . . . . . 11C. Staffing and Training . . . . . . . . . . . . . . . . . . 12D. Planning, Budgeting and Control . . . . . . . . . . . . . 12E. Accounting . .. . . . . . . . . . . . . . . . . . . . . 13F. Audit . . . . . . . . . . . . . . . . . . . . . . . . . . 14

G. Electricity Tariffs . . . . . . . . . . . . . . . 14H. Billing and Collection . . . . . . . . . . . . .. . . . 16I. Computer Applications and Information Management . . . . 17J. Insurance .. * . ... . . . . . . . . . .. . . . . 17

This report is based on the findings of preappraisal and appraisal missionswhich visited China in April 1990 and June/July 1991. Participating in themissions were Messrs/Mmes. Y. Albouy (Principal Energy Economist), S. Shum(Senior Financial Analyst) (preappraisal), B. Trembath (Senior Power Engi-neer), 0. Koenig (Senior Economist) W. Partridge (Senior Anthropologist) (bothmissions); H.E. Sun (Financial Analyst) and D. Graybill (Consultant) (apprais-al). The report was prepared by B. Trembath, H.E. Sun and 0. Koenig. Peerreviewers comprised: A. Ceyhan (Senior Power Engineer), K. Jechoutek (Princi-pal Econamist), M. Rasheed (Senior Financial Analyst), and S. Guggenheim(Environmental Specialist). The Division Chief is Janet de Merode and theDepartment Director is Shahid Javed Burki.

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IV. POWER MARKET AND DEVELOPMENT PLAN . . . . . . . . . . . . . . 18

A. Background on the Ftjian Province . . . . . . . . . . 18S. Energy Resources of Fujian . . . . . . . . . . . . . . . 18C. The Fujian Power Grid (FPG) . . . . . . . . . . . . . . . 19

D. Power Demand: Trends and Forecasts . . . . . . . . . . . 19

S. Investment Program.. . . . . . . . . . . . . 21

V. THE PROJECT.. . . . . . . . . . . . . . 23

A. Project Background and Objectives . ... ... . . . 23B. Project Description . . ......... . ... ..... . 23C. Project Impl ientation and operation ... .... 24D. Resettlement and Environment Aspects . . . . . .. . . . 26E. Project Cost . . ....... . .... .... . . . . 29F. Financing Plan ... . . . . . . . . . . .. . .. .*. oG. Procurement . . .. . ....... . .. . . ... . 31H. Disbursements . . .... . ....... . . ... 33I. Monitoring and Reporting. ... . . . 33

VI. FINANCIAL ASPECTS . . . ... . . . . 34

A. Introduction.. . . . . . 0 34B. Past and Present Financial Performance . . . . . . . . . 34C. Financial Performance Targets . . . . . . . . . . . . . . 35D. Future Finances.. . t . . 36E. Financing Plan . . . . . .. . . . . . . 37

VII. JUSTIFICATION . . . . . . . . . . . . . . . . . . . . . . . . 39

A. Project Benefits ... . . . . . . . . . . . . . . . . . 39B. Project as Least Cost Generating Alternative . . . . . . 39C. Project Size and Timing ................ . 40D. Economic Rate of Return . ........ . . . . . 40E. Project Risks . . . . . . . . . . . . . . . . . . . .. *. 40

VIII. AGREEMENT REACHED AND RECOMMENDATIONS . . . . . . . . . . . 42

TABLES IN TEXT

3.1 Distribution of FPEPB's Sales - 1991 . . . . . . . . . . . . . 164.1 Economic Growth and Power Generation in Fujian Trends

and Forecasts . . . . . .. .. . . . . . . . . . 204.2 Comparison of Latest Forecast for FPG with Shuikou I Forecast 20

4.3 Investment Program for the Fujian Province Grid .. . . . . . 225.1 Cost Estimate . . . . . . . . . . . . . . . . . . . . . . 305.2 Financing Plan . . . . . . . . . . . . . . . . . . . . . . . . 315.3 Summary of Procur?ement Arrangements . . . . . . . . . . . . . 326.1 FPEPB's Key Financial Indicators, 1986-90 .. . . . . . . 356.2 Key Financial Indicators, 1991-2000 . . . . . . . . . . . . . 366.3 FPEPB's Financing Plan, CY92-96 . . . . . . . . . . . . . . . 38

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ANNEXES

1.1 Production and Consumption of Enargy and its Composition ....... 441.2 organization Chart of MOE . . . . . . . . . . . . . . . . . 452.1 Installed Capacity, Electricity Generation, and Sales

in the Power Subjector . . . . . . . . . . . . . . . . .. . . 462.2 Gruwth Index cG Electricity Generation and Primary

Energy Demand .. . . . . . . . . 4. . . . . . . . . . . . . 472.3 Electricity Consumption by Sector . . . . . . . . . . . 483.1 FPEPB Organization . . . . . . . . . . . ... . 493.2 Performance Indicators for FPEPB . . . . . . . . . . . . . . . 503.3 Staff of FPEb .. . . . . 513.4 FPEr" s Existing Training Facilities and Expansion Program . . 523.5 Financial Management Training . . . . . . . . . . . . . . . . 533.6 Sales and Tariffs by Category - First Quarter 1991 . . . . . . 563.7 Action Plan for Tariff Structure Improvements . . . . . . . . 573.8 Terms of Reference for Tariff Study . . . . . . . . . . . . . 593.9 Terms of Reference for Technical Assistance and Training

for Planning and Commercial Management . . . . . . . . . . . . 624.1 Installed Capacity, Generation and Energy Sales of FPEPB . . . 654.2 Economic Growth and Electricity Consumption in Fujian 1980-90 66

4.3 Supply and Demand Balance in the Regions Supplied by FPEPB . . 674.4 Demand Forecasts . . . . . . . . . . . . . . . . . . . . . . . 685.1 Salient Physical Features of the Project . . . . . . . . . . . 715.2 Organization Chart of SHPC . . . . . . . . . . . . . . . . . . 735.3 Implementation Schedule . . . . . . . . . . . . . . . . . . . 745.4 Resettlement Plan and Implementation Experience . . . . . . . 755.5 Major Environmental Impacts and Environmental Management Plan 815.6 Project Cost Estimates . . . . . . . . . . . . . . . . . . . . 865.7 Procurement Arrangements . . . . . . . . . . . . . . . . . . . 995.8 Disbursement Schedule . . . . . . . . . . . . . . . . . . . . 1016.1 Financial System Followed by Chinese Power Bureaus . . . . . . 1026.2 Annual Financial Statements of FPEPB . . . . . . . 1056.3 Assumptions to FPEPB's Firancial Projections . . . . . . . . . 1087.1 Economic Analysis of Power Plant . . . . . . . . . . . . . . . 1148.1 Selected Documents and Data Available in the Project File . 118

1AiP

1 Fujian Power Grid (IBRD 23596R)

CH xNA

SECOND SHUIXOU HYDROELECTRIC PROJECT

I. THE ENERGY SECTOR

A. Overview

1.1 China has made remarkable progress in developing its energyresources over the last four decades and has become the third lar-vpa. producerof commercial energy in the world. In 1990, the country's prit..W., inmercialenergy supply amounted to 727 million tons of oil equivalent (toe), whilefinal consumption was about 686 million toe. Still, energy consumption percapita is low, about 0.6 toe, or one-third of the world average. Coal is themost important source of commercial energy, accounting for about 74 percent oftotal prrduction. Oil (19 percent), hydroelectric power (4.6 percent), natu-ral gas (2 percent), and small quantities of shale oil and geothermal powermake up the balance. Production and consumption of commercial energy for theperiod 1978-90 are given in Annex 1.1. The industrial sector accounts for62 percent of total consumption, followed by households (24 percent), services(9 percent), and agriculture (5 percent). About 20 percent of oil and 2 per-cent of coal production are exported, accounting for about 7 percent and1 percent, respectively, of China's merchandise exports.

Energv Resources

1.2 China has large coal reserves of about 900 billion tons, of which30 percent are proven. It produced 1.1 billion tons of raw coal in 1990, andaims to produce 1.4 billion tons by the year 2000. The best quality coals arefound in North China, where Shanxi and Inner Mongolia each have reserves ofover 200 billion tons. However, insufficient transport capacity makes it dif-ficult to move this coal to the large consuming centers.

1.3 China's hydroelectric Potential is estimated at 1,900 TWh a year,but only about 9 percent of it has been developed. Most of the potential islocated in four major river basins in the Southwest (70 percent) and Northwest(12 percent), about 1,500 km away from the main demand centers. The long ges-tation period and large capital costs of hydroelectric projects have alsoinhibited a faster development.

1.4 China's ultimately recoverable reserves of crude oil have been esti-mated at some 80 billion tons, of which 16 percent are proven. The countryproduced 138 million tons in 1990, and the target for year 2000 is 200 milliontons. Natural gas reserves are estimated at 33 trillion m3, of which 2.6 per-cent are proven; production was 15 billion m3 in 1990. About 50 percent ofgas produced is nonassociated gas, the bulk of which is located in Sichuan.Most of the gas is used as feedstock for fertilizers and petrochemicals.

1.5 Noncommercial biomass energy accounts for about one quarter of totalenergy consumption. It currently exceeds environmentally sustainable supplylevels, causing shortages of rural household fuel and deforestation problems.

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GOC is addressing the problem, by promoting more efficient use of biomass

fuel, tree planting, and fuel substitution.

1.6 Known uranium reserves in China are eufficient to sustain 15,000 MW

of nuclear Power for 30 years. Qinshan nuclear power plant (300 MW), near

Shanghai, was commissioned in 1992, and Daya Bay (2x900 MW) is planned in

1992/93; 70 percent of Daya Bay's output is Jntended for nearby Hong Kong.

The construction of a few additional nuclear power plants is planned before

the year 2000, primarily in regions which lack coal or hydroelectric

resources.

1.7 Other energy resources play a small role in energy supply and are

used mostly in remote areas. Geothermal energy has been found in more than

3,000 locations covering nearly all provinces and autonomous regions. In

Ttbut, the Yangbajing geothermal power plant supplies about 20 percent of the

electricity consumption in Lhasa's power system.

Institutions of the Enerav Sect.or

1.8 The Ministry of Energy (MOE), established in 1988, has primary

responsibility for policy, planning, and regulations regarding the rational

development and use of energy resources. MOE oversees various companies and

administrations respcnsible for operations in individual energy industries.

Annex 1.2 shows the organization chart of MOE.

1.9 The State Energy Investment Corporation (SEIC) was established to

handle project financing in the coal and electricity industries. SEIC onlends

funds for projects of national importance and represents the GOC in the joint

financing of projects with other parties; it is expected to operate as a reve-

nue earning entity. Both MOE and SEIC operate with the guidance of the State

Planning Commission (SPC), which has ultimate authority for project approval,

budget allocations, and financing arrangements.

Enerqv Investments

1.10 Energy investments in the 1980s were planned assuming GNP growth

rate of 7.5 percent. Actual growth, and more so industrial growth, exceeded

the targets by a significant margin, which nas exacerbated energy shortages

already existing at the outset. In the Seventh Five-Year Plan (1985-90), GOC

gave high priority to energy and also to transport, a bottleneck in the devel-

opment of energy resources. I 1989, investments for capital construction in

the energy sector amounted to .' 43 billion ($12 billion), 28 percent of the

total for state owned enterprises, as against 21 percent in the early 1980s.

The power sector accounted for 62 percent of the total. Some 20 percent of

energy investments were financed by foreign loans and direct investments.

B. Enerav Sector Issues

1.11 In addition to the already noted shortages, the main energy sector

issues are: (i) the high energy intensity of the Chinese economy; (ii) the

dominance of coal and associated environmental problems; (iii) the need to

improve scale and technology of energy industries; (iv) inappropriate energy

pricing; and (v) the weak investment funding system.

-3-

Inteneitv of Enerav Use

1.12 China's consumption of commercial energy per capita is low, but con-

sumption per unit of GDP is high compared with other countries. The structure

of the Chinese economy, the use of inefficient technology and inadequate

energy management practices are all major contributing factors. Since the

early 1980s, GOC has placed a strong emphasis on efficiency improvement.

Between 1978 and 1990, the average growth in conmercial energy use was about

half that of GNP, and the energy intensity per unit of GNP was reduced by

about one third (Annex 1.1). Targets for the 1990s are based on a growth

rate of 3 percent for primary energy, and 6 percent for GNP, implying that

about half of the increase in enp--vy services will have to come from e!fi-

ciency improvements. Meeting this target will require very strong energy

conservation programs.

The Dominance of Coal and Related Environmental ProbLems

1.13 Coal dominates in industrial, electric power and household energy

uses. Many environmental problems stem from this heavy use of coal and from

the dispersed, small-scale applications of coal in industry and households.

These include water pollution from disposal of mining wastes, ash disposal in

dense urban areas, sulphur dioxide and particulate emissions. The latter are

particularly serious because of the high ash content of the coal used, and

incomplete combustion due to poor matching of coal. quality to boiler type.

1.14 These environmental implications highlight the need for stronger

regulatory enforcement and more incentives and investments towards coal con-

servation and environmental impact mitigation. Cleaner fuels should also be

explored particularly for households, but the scope for substitution is lim--

ited by insufficient confirmed natural gas resources and increasing absorption

of oil production by transport and petrochemicals. Emphasis on hydropower is

increasing but major resources are far from main load centers.

Scale and Technoloav in Energv Industries

1.15 Over half of the coal produced in China is from small-scale mining

operations using traditional technologies such as hand hewing or drilling and

blasting. There is considerable potential for developing medium-sized mines

utilizing semi-mechanized or mechanized systems, with good coal washing facil.-

ities. This, together with improved design and technology in larger, cen-

trally controlled mines, would reduce safety and environmental problems while

improving output and coa) W.uality.

1.16 Large-scale Dower development will improve energy efficiency and

environmental protection. New power plants, with large unit capacities con-

sume about 25-40 percent less coal per kWh than older smaller plants, and

23 percent less than the current average. Particulate removal is also

improved.

1.17 There is also potential for productivity improvements in the vetro-

leum sector by upgrading technology in exploration, oil field development and

recovery techniques. Improvements in operating and maintenance practices and

better reservoir management would also help to raise sector productivity.

.. 4

Enerquv Ptiginq

1.18 Energy prices have risen substantially over the past five years.Coal prices have risen due to expansion of the free market which accounts forup to 50 percent of sales in some regions, with market prices in East China,for example, close to international prices. However, while the administeredprice of coal has been raised, it iB still below supply cost.

i.19 While the average price levels ol "ome light Petroleum products areclose to international prices, average prices of crude oil and heavy fuel oilare substantially lower. Producer prices for natural qas are also distortedand should be adjusted to encourage exploration and rescurce development.

1.20 Electrici_ty prices have increased substantially since 1987/88 due tothe "new plant/new price" dual pricing policy. However tariff structures arevery complex and include substantial distortions. The "old" administeredprice has also been raised to reflect coal price increases, but has not keptup with total cost increases (paras. 2.11-2.13).

1.21 The recent increases in coal and electricity prices are encouragingconservation and sound investment decisions in the sector, but full benefitswill not be realized while the dual pricing system for energy remains. Planprices below market encourage consumers to use lels covered by the planregardless of suitability, while suppliers focus on fuels offering marketprices, neglecting user requirements in the administered sector. For example,low prices for clean burning town gas discourage investments in increasedsupply. Similarly, the low "old" electricity tariff applying to older usersprovides little incentive for efficiency improvement, while new more efficientindustries pay a "now" price which may exceed the economic cost. A unifiedprice system would simplify price management and eliminate rent-seeking behav-ior, and raising plan prices towards market prices would enable the sector togenerate the financial resources necessary for its expansion.

1.22 Other improvements in price structure would also foster more effi-cient use and development of energy resources. Present coal prices do notfully reflect differences in quality and electricity tariffs insufficientlyreflect differences in supply costs for various voltage* or consumption pat-terns.

1.23 In summary, China needs strong price incentives to support itsenergy conservation policy and rationalize energy investment funding. It mustcontinue to raise energy prices, close the gap between administered and marketprices of coal, and correct distortions in price structure. Energy priceswould still remain very competitive from an international viewpoint. GOC iscommitted to its overall price Laform program, and has recently reduced rubsi-dies in a number of basic commodities, such as grains, cement, and steel. Ithas also indicated its readiness to phase out dual pricina for coal and elec-tricity, and energy is one of its priority sector for price reform.

Investment Fundq.na System

1.24 While the share of funds channeled into the energy sector is nowapproaching acceptable levels, investment funding has suffered fro.n distortedpricing policies which led to a suboptimal development of energy sources.

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Energy enterprises may not retain a substantial portion of their internallygenerated cash, and to reduce financial pressures on the central government,responsibility for investment funding has gradually been shifting to the prov-inces. In the coal subsector, local production now exceeds state productionbut is not operating at the scale required for mayimum productivity andsafety. In the power subsector, power shortages have led some local enter-prises to invest in their own power plants, and the investment approval systembiases investment in favor of less efficient, small-scale plants, which do notreqaire clearance or financial contribution by the central government.

C. Energy Sector strateav

1.25 GOC is working to eliminate energy shortages in an environment ofrapid economic growth, the key objectives being to: (a) accelerate the expan-sion of electric power and oil/gas production; (b) expand and improve thescale of coal production; (c) increase thie efficiency and change the forms ofcoal utilization; (d) minimize the environmental impact of energy use; (e)rationalize energy prices and investment funding; and (f) encourage the trans-fer of modern know-how and technology to energy industries.

1.26 Allcwing the power subsector a larger share in final energy consump-Lion will help to modernize the Chinese economy, reduce overall energy inten-sities, and curtail pollution through the harnessing of hydropower, more effi-cient technologies, and larger-scale plants. The same holds true for the oiland natural gas subsect3rs, both of which yield cleaner, more efficient fuelsthan coal. Continued development of coal mining is inescapable, but it mustoccur with higher efficiency, safety, and environmental acceptability.

D. Bank Role in the Energy Sector

1.27 The Bank has supported 11 projects in electric power, five in petro-leum (including one gas) and one in coal. In all cases, the objectives weretechnology transfer, introduction of modern management practices, and thedevelopment of efficient, large-scale energy production. Through its sectorwork and project-related technical assistance, the Bank has assisted in stud-ies on energy pricing and investment policies, and recently sponsored seminarson power and coal pricing, coal utilization and energy conservation.

1.28 With Bank assistance, GOC has made good progress in evaluating eco-nomic costs of electric power and coal, and developing approaches to pricereform. On this basis, in the power subsector, the Bank has sponsored theformulation of tariff action plans adapted to the needs of individual grids.For coal, pricing guidelines have been developed for various grades and loca-tions, but GOC needs to move decisively along these lines, which should bemore feasible now that inflationary pressures have diminished. Plans for alarge increase in administered coal prices are still alive and the Bank willcontinue to promote rationalization of coal prices.

1.29 A coal transport study, conducted jointly by the Bank and variousChinese institutes, developed a model to identify optimal infrastructureinvestments, while a coal utilization study evaluated options to improve coaluse and reduce its environmental impact. For the petroleum subsector, semi-nars organized in China have dealt with gas utilization and subsector manage-ment. Improving investment planning and operations in the power subsector has

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been an objective of many Bank operations (paras. 2.17 and 2.18), and anenergy conservation study is under way as part of the Bank's sector work,which will outline options and priorities to address the energy efficiencyissues faced by China in the 1990s. The study is broad in scope, coveringmacroeconomic policy and investment issues. This study is intended to providea basis for an expanded dialogue with the government on energy efficiency, anda yet stronger Bank assistance program, in part through further assistance onenergy conservation in the Bank's program for industry.

1.30 Future Bank operations in the energy sector will continue to supportrational and sustainable energy development, technology transfer, pricereform, energy efficiency and conservation, improved environmental management,improvements in regulatory framework, modern enterprise management, andgreater autonomy and accountability of the sector.

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II. THE POWER SUBSECTOR

A. Background

2.1 China is the fourth largest electricity producer in the world. In1990, installed capacity reached 135 GW, and generation 618 TWh. Thermalplants (90 percent coal fired) accounted for 74 percent of capacity, and80 percent of generation, with hydro plants providing the balan-e. Plant useand transmission losses account for 6.9 percent and 8.0 percent cf generationwhich is acceptable but could still be improved. By 1990, the average netfuel consumption in thermal units had decreased to 428 g of standard coal perkWh, and MOE's target is to reduce it to 368 g/kWh by the year 2000. Histori-cal trends for supply and demand of electricity are detailed in Annexes 2.1and 2.3.

2.2 Electricity generation increased at an average annual rate of7.5 percent during the 1980s, slower than GDP (8.9 percent), but significantlyfaster than total commercial energy consumption (5.0 percent). Industryaccounts for 69.4 percent of electricity consumption, while 17.3 percent isconsumed by agriculture including rural households, 2.0 percent by transportand communications, and only 11.3 percent by municipal and residential users.Gross generation per capita in 1990 was about 540 kWh per year, as againstmore than 8,000 kWh in OECD countries, and a world average of 2,200 kWh in1989. Residential and commercial consumption has increased rapidly (14-16 per-cent per annum) over the last ten years, but is still very low, and will be animportant factor in future demand growth. Some 94 percent of townships and85 percent of villages are electrified.

2.3 During the 1980s, demand increased faster than generating capacity,such that in 1988 shortages were estimated at about 20 percent of industrialdemand, imposing a substantial constraint to economic growth. During theSeventh Five-Year Plan (1986-90), capacity increased from 87,000 MW to 135,000KW, exceeding the targeted increase by 37 percent, due to accelerated commis-sioning of thermal capacity. This rapid expansion, and the economic slowdownof 1989/90, provided some breathing space in a few regions, including EastChina and Fujian, but supplies to existing customers are still strictlyrationed, and new connections are closely screened.

2.4 For the period 1991-95, generating capacity is planned to grow atabout the same rate as the economy. This may prove to be conservative. Evenwith concerted efforts in energy conservation and demand management, a fastergrowth is conceivable, in view of the planned redeployment of basic industriesand of the rapid growth of the residential component. Power investments willremain high, considering also the need to allow the retirement of old, smallcoal-fired plants, which are less efficient and more polluting.

B. Institutions Planning and Technoloov Tra..sfer

2.5 Institutions. MOE oversees all strategic aspects of power develop-ment. Under MOE are six regional power administrations, which coordinateplanning and operation of seven regional grids encompassing 22 provincial ormunicipal power bureaus. Eight provincial power bureaus operate in isolation.A number of research and design institutes, training centers, colleges, and

universities are also affiliated with MOE, as well as 16 construction compa-nies, mostly involved in power projects.

2.6 Huaneng International Power Development Corporation (HIPDC), underMOE, was created in 1985 to raise funds, construct, and operate power plantspartly financed by bilateral and supplier's credits, or commercial bank loans.HIPDC has so far constructed twelve thermal plants including one in Fujian,location of the proposed project. Corporations, such as the Ertan Hydroelec-tric Development Corporation, have also been created to develop major hydro-electric programs. These corporations, sell their production to the grids,and may reinvest their earnings into future power development.

2.7 The power industry in China employs about 1.5 million people. Lessthan 30 percent have received formal education beyond junior secondary level.As a result, there is a shortage of trained manpower, notably in technical andadministrative areas. MOE, in conjunction with provincial power bureaus, hasinitiated a long-term program to upgrade staff skills at all levels. Thetraining component of the proposed project will complement this program indeveloping human resources to suit the needs of FPEPB (para. 3.9).

2.8 Power System Plannina. Power system planning is the responsibilityof MOE's Planning Department, which reviews the plans proposed by regionalpower administrations and bureaus. Planning and design for thermal powerplants and transmission networks, are carried out by regional electric powerdesign institutes. For major hydroelectric projects, these tasks are carriedout by central and regional hydropower design institutes.

2.9 Least-cost generation planning techniques for thermal systems werefirst introduced through technical assistance from the International AtomicEnergy Agency. Extensions to hydro and mixed systems and network planningwere introduced in Sichuan and East China, under the Planning Support andSpecial Studies Project (Credit 1835-CHA). The first Shuikou project financedstudies in transmission planning, and optimal dispatch in mixed systems. Theproposed project includes a program to upgrade the operations of FPEPB's plan-ning department.

2.10 Modern Technologv Transfer. To achieve China's ambitious goals forthe power sector, the transfer of appropriate modern technology is crucial.The Bank is helping to provide such technology, related to large coal-firedunits, including environmental aspects. Technology transfer is also beingprovided for large hydroelectric projects, in areas such as construction plan-ning and management, sophisticated mechanical and electrical systems, andenvironmental assessment. The Shuikou power plant, which will be completedunder the proposed project is an important vehicle in this regard.

C. Power Pricing

2.11 Average electricity prices, after remaining practically unchangedsince the early 1970s at less than seven fen/kWh, have increased rapidly since1985, particularly in 1989/90. The current tariff structure is a complex com-bination of "old" administered rates, "new" rates for energy generated by newplants, and surcharges. In addition, customer contributions finance a largeportion of distribution expansion. A key component of recent increases hasbeen the surcharge, added to the "old" rates, to reflect coal price increases;

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other mark-ups, though less significant, have also been added to reflect, for

example, higher overhaul costs. In many provinces, mark-ups ranged from five

to seven fen/kWh in 1990, following substantial coal price increases in

1989/90. A second key component of recent tariff policy has been the "new

plant, new price" policy. Whereas old plants were financed by state grants,

new plants are largely debt financed, and higher prices are charged for their

energy, to yield adequate funds to cover debt service. These "new" rates, or

guiding prices applied to industrial users for consumption above quota, can

range from 20 to 30 fen/kWh, well above the old rates. Additionally, a sur-

charge of two fen/kWh was introduced in 1988; it is collected from industrial

users, but transferred to Provincial Power Construction Funds.

2.12 As the weight of the "new rates" increases with system expansion,

average rates continue to increase. However, the current tariff system is far

too complicated, and not sufficiently transparent. Moreover, the adjustment

of "old" rates has not kept pace with cost increases except for coal. These

low rates applying to many customers (and even lower preferential rates apply-

ing to some basic industries) provide little incentive for efficiency improve-

ments, while incremental consumption and new industrial users are charged at a

level which may exceed Long-Run Marginal Cost (LRMC). There are other sub-

stantial distortions, although some progress has been made in recent years.

To provide better incentives for demand regulation, peak/off-peak and seasonal

rates have been introduced, some preferential tariffs have been eliminated,

and recently first steps have been taken in a few regions, towards the unifi-

cation of multi-tier tariffs. However, the use of time-of-day rates should be

expanded, and tariffs should better reflect costs associated to different

demand patterns, to encourage customers to improve their load factors and to

be connected at higher voltage levels.

2.13 MOE and the State Pricing Administration have recently formulated a

policy for the next five years which addresses the issues discussed above; it

is based on five major points: (i) continued increases of tariff level to

improve the sector's internal cash generation; (ii) gradual unification of

rates within each region; (iii) phasing out of preferential tariffs; (iv)

improvement of tariff structure, notably in relation to maximum demand charge;

and (v) extended use of time-of-day rates, and of seasonal rates in hydro

regions. The proposed project includes the implementation of an action plan

to restructure FPEPB's tariff in line with this policy (Annex 3.7).

D. Subsecto? Issues and Strategy

2.14 The major issues facing the Chinese power subsector are: (i) acute

power shortages; (ii) inadequate power pricing and investment funding; (iii)

protracted implementation periods for large projects; (iv) environmentalimpacts of power supply; (v) weak interconnection within regional power Sys-

tems; (vi) scarcity of skilled manpower; and (vii) outdated methods for plan-

ning, operation, and financial management.

2.15 The Government's basic policy is to modernize, expand and increase

the efficiency of the sector, to meet the demands of industrial development

and improve the living standard of the population. This policy translates

into the following strategy: (a) expand coal-fired thermal capacity at mine-

mouths, near ports and load centers to reduce rail transportation, and use

higher grade coal in urban centers; (b) rehabilitate smaller thermal units or

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replace them with larger, less polluting, and more efficient plants; (c) acce-lerate hydroelectric development; (d) increase investments in extra high-volt-age transmission lines; (e) reform the pricing system; and (f) adopt moderntechniques in planning, design, construction and, environmental impact mitiga-tion.

E. Role of Bank in the Power Subsector

2.16 The Bank has supported the Government's sectoral strategy throughsector work, policy dialogue, and lending operations, with a particular focuson institution building, enterprise reform, and the transfer of appropriatemodern technology. The Bank has helped to finance ten large power generationprojects, five thermal and five hydro, and one high-voltage transmission proj-ect. Through these operations, the Bank has helped to introduce: (i) latesttechniques in generation, transmission and distribution planning, and systemoperations and control; (ii) modern equipment for generation, pollution abate-ment and system control; (iii) new methods of project planning, design, con-struction management, and environmental assessment; and (iv) improved finan-cial planning and management practices. Virtually all these topics areaddressed to some extent under the first and proposed second Shuikou projects.

2.17 To support price reform, the Bank financed a first tariff studyunder the Beilungang Thermal Power Project (Loan 2706-CHA), which introducedmarginal cost pricing principles which have now gained wide acceptance inChina. Since then, the Bank has continued an active dialogue with GOC onpower pricing. Action plans for tariff restructuring have been formulated, andfinancial covenants under Bank projects have helped to improve power pricelevels. Through the Second Beilungang Thermal Power Project (Loan 2955-CHA),the Bank is extending its policy dialogue to deal with reorganization, manage-ment, and regulation of power bureaus.

2.18 The implementation of most of the ongoing Bank financed projects inthe power sector has been satisfactory, largely on schedule, and within bud-get. The first power operation, Lubuge Hydroelectric Project (Loan 2382-CHA),was successfully completed. The second power operation, the 500 kV Xuzhou-Shanghai Transmission Project (Loan 2493-CHA), was commissioned on schedule.The Yantan Hydroelectric Project (Loan 2707-CHA) is also progressing satisfac-torily. Some early problems were encountered in the implementation of thefirst Shuikou project (Loan 2775-CHA) (paras. ._3-5.11), but these problemshave been solved. Construction of the Ertan Hyd.oelectric Project (Loan 3387-CHA) and of Daguangba Multipurpose Project (Loan 3412-CHA and Credit 2305-CHA)has started successfully. Some of the thermal projects encountered earlydelays due to procurement problems and poor coordination among suppliers.These problems have now been resolved, and construction is almost back onschedule.

2.19 Lessons learned from the previous power projects in China have beentaken into account in preparing the proposed project. In particular the earlyproblems encountered in implementation of the first phase project (paras.5.10-5.11), have been overcome by strengthening project management; increasingconsultant support in critical areas; clearly defining authority and responsi-bility of owner, engineer and contractor; ensuring adequacy of resettlementbudgets; strengthening environmenta; management and providing for an indepen-dent evaluation of resettlement.

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III. THE BENEFICIARY

3.1 The beneficiary of the proposed loan would be the Fujian Provincial

Electric Power Bureau (FPEPB).

A. Legal Status and Organization

3.2 FPEPB is a state-owned enterprise under the jurisdiction of MOE. It

is a legal entity with contractual and self accounting responsibilities and

has the mandate for execution, within its jurisdiction, of the national plan

for power generation with associated capital investments. It sells power

directly to final consumers or in bulk, and in conjunction with the provincial

pricing bureau sets sales tariffs and remits taxes to the state. It is also

entrusted, by the Government of Fujian Province (GFP), with supervising the

management of, and issuing technical instructions to, the publicly-owned local

electric power enterprises which are not under the jurisdiction of FPEPB. A

charter for FPEPB has been issued which is acceptable to the Bank.

3.3 FPEPB is headed by a director appointed by MOE. Under the director

there are four deputy directors, accountable for, respectively: (i) planning

and construction of the local power plants and utilities; (ii) operations and

technical matters; (iii) administration, personnel, training, and finance; and

(iv) political affairs. In addition, the director is assisted by a chief

engineer, chief economist, and chief accountant. Operations are carried out

through units engaged in power generation, transmission, distribution, con-

struction, manufacture and repair, each of which is headed by a chief report-

ina to a deputy director. The organizational structure of FPEPB is shown in

Annex 3.1.

B. Management

3.4 Within the current institutional framework, whereby the central

government maintains a high degree of control over the power subsector, FPEPB

appears to be well managed. Recent performance indicators are shown in Annex

3.2. During the last five years, average coal consumption of thermal plants

decreased 9 percent, network losses decreased from 8.2 percent to 6.9 percent,

and kWh sales per employee increased by 53 percent. In addition, FPEPB pre-

pares accounting information in a timely manner, maintains effective billing

and collection systems, and has a plan for an integrated management informa-

tion system (paras. 3.29-3.31). However, the ins itutional framework is

becoming less centralized and the bureau is receiving greater financial auto-

nomy and decision-making authority, and needs to prepare itself for these new

responsibilities.

3.5 Traditionally, all major project investments have been financed by

the state government. However GOC has decided that, in future, coastal prov-

inces including Fujian should take primary responsibility for raising funds to

finance all major power investments. To meet this challenge, FPEPB will need

to upgrade its management and financial planning capabilities. Training pro-

grams in these aspects have commenced under the first loan and will be

extended, with new emphases, under the proposed loan.

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3.6 FPEPSB is capable of formulating its expansion program and designingand constructing medium-sized thermal power projects (up to 200 MW) and trans-mission facilities (110-220 kV). For hydroelectric projects, FPEPB is able todesign medium-size plants (25-250 MW), but construction is usually carried outby contractors. For the large Shuikou project, all segments of implementationhave been contracted to external parties (paras. 5.7-5.11).

C. Staffing and Training

3.7 At the end of 1990, FPEPB had a total staff of about 18,234, with279 working at its headquarters in Fuzhou. Except for a core group of keytechnical and managerial personnel assigned by MOE, virtually all of FPEPB'semployees are recruited locally. Most are hired on a permanent basis exceptfor laborers contracted for construction.. Some 4,686 (26 percent) havereceived professional training beyond secondary level. Technical staff withformal university education are centrally trained and assigned to FPEPB at therate of about 20 per year. Staffing of FPEPB is shown in Annex 3.3.

3.8 The education division of FPEPB administers three schools for train-ing of technicians, skilled workers and administrative personnel. For aca-demic year 1990, about 600 students were enrolled and teaching staff totalled451. FPEPB's existing training facilities and their expansion plan are summa-rized in Annex 3.4. According to this plan, FPEPB expects to meet itsrecruitment needs for skilled workers and technicians from 1991 onwards.

3.9 A training component will be included in the proposed loan coveringspecialized studies associated with the project and a second phase of trainingof FPEPB and MOE accounting and financial staff (Annexes 3.9 and 3.5). Thefirst phase of this program, financed by the first loan, included an overseastraining component which is scheduled to take place in March/April 1992.

D. Planning. Budoetina and Control

3.10 The provincial power bureaus are responsible for developing annual

and five-year production and investment plans which are integrated into thenational plans and approved, through MOE, by SPC. Traditionally, these plansemphasized quantities of inputs and outputs. Financial planning was confinedto attaching monetary values, predetermined by MOE, to the planned quantities.While a bureau's plan might be revised to reflect changes in inputs and out-puts arising from changed or unforeseen circumstances, the plans would notnormally be revised to reflect differences between the planned prices andthose actually paid. Further, under the present financial system in China,heavy emphasis is placed on the annual budget as a controlling tool and finan-cial planning beyond one year is generally not undertaken.

3.11 The above planning system functioned satisfactorily in a highlycentralized economy where controlled prices ensured negligible inflation, andinvestments were financed almost exclusively by grants. However, as part ofeconomic reform, prices have escalated, loans have largely replaced grants andcentralized control is being replaced by increased financial autonomy anddecision making authority. In earlier Bank-financed power projects, signifi-cant steps were taken towards strengthening financial management, focusing ontraining in modern techniques of cost control and debt management. Thistraining was centrally managed by MOE/SEIC so as to promote coordination and

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interaction among the various bureaus. A number of training seminars in Chinaand overseas training were carried out, and the results are positive. Futuretraining activities will build on these experiences. MOE/SEIC are in theprocess of desioning a financial management training program to extend overthe next three years in consultation with the Bank. An outline of the finan-cial management training program for Bank-financed power bureaus is includedin Annex 3.5. The planning department also needs to upgrade its methodology,hardware and software notably as regards demand analysis, load forecasting,load research, and medium-term planning. Part of this will involve the busi-ness management (commercial) department who will also benefit from loadresearch programs for tariff analysis. The project includes technical assis-tance and training for the planning and commercial departments, presented inAnnex 3.9.

3.12 The proposed project would further the Bank's objective of strength-ening the financial management of the power utilities. An assurance has beenobtained from FPEPB that. by April 30 of each Year. it will continue to fur-nish to the Bank a rolling lona-term financial plan containino Rroiectedincome statements, sources and uses of funds and balance sheets for a periodof eiaht years.

E. Accountina

3.13 As in the case of all state enterprises in China, the power bureausfollow a unified Chinese accounting system promulgated by MOF in their finan-cial reporting to the Government. It is based on double-entry bookkeeping andhistorical valuation. Accrual basis accounting is used by enterprise and con-struction units, while government units are on a cash basis. The Chineseaccounting system has been satisfactory in the context of a highly centralizedand closed economy. However, while the recent economic reforms in the countryhave resulted in changes in the financial system, corresponding changes inaccounting practices are apparently lagging. For example, present Chinesepractice uses historical rather than prevailing foreign exchange rates inreporting foreign loans. Hence, the impact of exchange rate fluctuations isnot reflected in the enterprises' financial statements. At the Bank'srequest, for projects financed by the Bank, the foreign loans in the financialstatements are accounted by prevailing exchange rates in the annual auditreports furnished to the Bank.

3.14 Fixed Assets Accountina. In accordance with Chinese accountingpractices, the power bureaus mainta'n two separate sets of accounts, one setfor capital construction and the other for operation. Since these two sets ofaccounts are not consolidated, the balance sheet for operation does notinclude construction work-in-progress and the related financing. As in thecase of earlier Bank-financed projects, FPEPB would consolidate the capitalconstruction account with the operation accounts for the audited financialstatements and rolling financial plans to be furnished to the Bank.

3.15 Revaluation of Fixed Assets. The Chinese financial system does notemploy the concept of fixed asset revaluation. In the past, asset revaluationwould not have greatly affected FPEPB's financial status because of low infla-tion over most of the last 40 years and the low foreign content of thebureau's existing assets. However, with recent inflation, asset revaluationbecomes more important. A pro-forma revaluation was conducted during

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appraisal of the proposed project which indicated a reduction in the averagerate of return on assets of about 7.5 percent for the period 1991 through2000. Since the adoption of a revaluation policy would have impacts beyondpower sector, it will not be addressed solely in the context of the proposedproject. It is a component of the continuing policy dialogue between the Bankand CnC. MOF's Department of Accounting Affairs Administration is currentlyworking on the overall framework of concepts for new accounting standards.The revaluation concept is one of the issues being considered in the exercise.

F. Audit

3.16 As for other Bank-financed projects in China, the Foreign InvestmentAudit Bureau of the State Audit Administration (SAA) will have overall respon-sibil-ity for auditing FPEPB's accounts. Under SAA's supervision, the actualauditing work will be conducted by the Audit Bureau of Fujian Province. Thisarrangement is satisfactory. However, mainly due to the special features ofChinese accounting, agreement has been reached with SAA that for most Bank-financed projects, including power operations, tnere would be improved disclo-sure of accounting policies and supplementary financial information, to pro-vide an adequate illustration of the financial performance and status of proj-ects/entities. Technical assistance for SAA and the provincial auditingbureaus will continue to be financed under IDA credits.

3.17 In November 1985, following the establishment of the Audit Depart-ment within the former MWREP, an internal audit division within FPEPB was setup. Staff at each operating unit were also assigned to carry out the internalaudit functions by conducting thorough examinations of all accounts of theunit, at least annually as per regulations. Their work is subject to reviewby the audit division staff through periodic and spot checks, aimed at ensur-ing accuracy and compliance with MOF regulations.

G. Electricity Tariffs

3.18 The average rate level of FPEPB has increased from 7.3 fen/kWh in1985 to 8.8 fen/kWh in 1987, and progressed substantially since then, to reach15.2 fen/kWh in 1990, and an estimated 16.5 fen/kWh for 1991. The 88 percentincrease between 1987 and 1991 is equivalent to 27 percent in real terms, andthe average electricity price in Fujian is now one of the highest in China.This does not include the effect of the 2.0 fen/kWh surcharge, collected since1988 from industrial customers, and earmarked to the Provincial Power Con-struction fund. Financial projections indicate the need for an increase ofonly about 16 percent in real terms between 1991 and 1994, to meet financialcovenants. The tariff would then be about 19 fen/kWh in 1991 yuan and wouldremain close to that level thereafter, which is close to the estimated long-run average incremental ccst (Annex 7.1).

3.19 This impressive evolution of the tariff results primarily from thethree-tier system currently applied to industry and bulk sales. The tariff isbased on three prices: an "old" price, a "new" price for energy generated byFPEPB new plants, and a "Huaneng" price for energy generated by the HIPDCFuzhou plant (para. 2.6). The Huaneng price is used for new customers andincremental consumption beyond 1985, for consumers on the coast and in Fuzhou.In the interior, a combination of the two new prices is used, while for somesectors, new consumption is billed exclusively at FPEPB's "new" price. Under

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this arrangement, FPEPB acts as a marketing agent for HIPCD by charging acommission to cover distribution costs and losses and selling Huaneng energyat a specified price (28 fen/kWh in 1991). As only a small share of revenuesfrom sales of Huaneng energy accrues to FPEPB, the high overall tariff leveldid not reflect on FPEPB's finances.

3.20 Some progress was also made since 1985 on the "old" tariff, due to asurcharge for coal price increases amounting to 3.3 fen/kWh by end 1991,applying to most uses except lighting. However, in contrast to the "Huaneng"price, this surcharge is lower than in many other provinces. FPEPB's revenueswere also enhanced by a reduction of sectors eligible for a preferential "old"tariff (although these low rates still apply to 14 percent of sales to largeindustry), and by a selective application of time-of-day pricing.

3.21 Sales and rates by tariff category for the first quarter of 1991,are given in annex 3.6. The Huaneng price was 28 fen/kWh (for large industry,maximum demand charges add another one to two fen/kWh), more than three timesthe "old" tariff price, and almost five times the price of about 6 fen/kWhcharged to protected industries. The Huaneng price, based on debt servicerequirements over a period which is much shorter than plant life, appearshigher than the estimated economic cost of generation for a thermal system[about 23 fen/kWh in Fujian at 1991 prices (Annex 7.1)].

3.22 The high price charged to new industries, as compared to neighboringprovinces, might hinder the development of basic industries expected overcoming years to balance Fujian's industrial structure (unless new preferentialtreatments are applied), while the low "old" prices (and, more so, the prefer-ential rates) provide insufficient incentive for efficiency improvements inolder, less energy-efficient industries. Moreover, new rates are based onlyon kWh consumption and are the same for all voltage levels of supply. Thus,high-voltage, high-load-factor users (such as large basic industries) subsi-dize small, low-voltage industries for which electricity accounts for asmaller share of production costs. For large industry the demand charge hasbecome very small in regard to the new energy rates, and incentives for loadfactor improvements are minimal.

3.23 The present tariff is extremely complex to manage, inequitable andhard to understand by customers, does not reflect the structure of supplycosts, and is far from providing optimal incentives for demand regulation. Toaddress these issues, the proposed project includes an action plan (Annex3j7), which has been prepared by FPEPB with the support of regulatory author-ities. During the first phase of this plan, the primary focus will be onimplementation of already prepared measures for the unification of industrialtariffs, to achieve by end 1993, a single unified tariff, with adequate demandcharges and price differences between voltage levels. This will require,inter alia, transforming the present marketing arrangement with Huaneng (para.3.19), into a suitable purchase contract, providing incentives for optimaldispatch of the plant, while ensuring debt service coverage.

3.24 In parallel, acceptable adjustments will be made to other categories(commercial, lighting, agriculture, residential) which have so far beenshielded from the effects of higher new plant costs. In particular, the com-mercial lighting rate, presently the same as for residential uses, will beadjusted in 1992, to be consistent with other nonresidential rates after uni-

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fication of the thrce-tier system. This will eliminate the need for separatebilling ot lighting consumption. The first phase of the action plan isexpected to yield an average revenue by end 1993 of about 21 fen/kWh, close toestimated financial requirements for 1994.

3.25 During the first phase, a study (Annex 3.8) will be carried out, todefine further measures to be implemented in 1994/95, in order that tariffsbetter reflect the structure of economic supply costs, and improve incentivesfor demand regulation (notably through time-of-day/seasonal rates); this studywill also address bulk rates and purchase tariffs from independent producers.Assurances have been obtained from FPEPB. that it will imDlement a plan forDower traffic structure imDrovements acceptable to the Bank in a manner satis-factory to the Bank. including the completion of the first Phase by Decem-ber 31. 1993.

H. Billing and Collection

3.26 FPEPB's sales by consumer categories are shown in the followingTable 3.1.

Table 3.1: DISTRIBUTION OF FPEPB'S SALES - 1991

Consumers Energy Sales Sales RevenueNumber (GWh) % (Y million)

Lighting 118,052 88 845 10 136 11Large Industry 1,805 1 4,272 53 612 50General Industry La 11,298 8 785 10 138 11Agriculture 4,234 3 120 1 10 1Bulk Supply 40 - 2,074 26 333 27

Total 135,429 100 8.095 100 1.229 100

/a Includes small industry, commercial and transportation customers.

3.27 FPEPB conducts billing and collection through the sales offices ofits eight power supply bureaus. All industrial consumers and bulk purchaserspay in advance, three times per month, based on estimated usage derived fromtheir production or sales plans. At the end of the month, meters are read andadjustments to reflect actual usage included in the first bill for the nextmonth. Industrial and commercial customers are all metered individually. Lowvoltage customers are billed monthly based on actual usage. Many householdsare metered individually, but some domestic consumption is metered at theapartment building level with charges recovered from individual residentsthrough internal billing. Agricultural consumption is generally metered atFPEPB's lowest voltage step down transformers serving the particular commune;the commune arranges appropriate distribution of charges among individualfarmers.

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3.28 Industrial and commercial consumers and bulk purchasers pay theirbills in advance through direct debit to their bank accounts. Domestic andagricultural consumers make payments to meter readers or to FPEPB's districtoffices, usually within seven days of receipt of their bills. These arrange-ments have established a reliable cash flow from sales and maintained FPEPB'saccounts receivable from power sales at very low levels, averaging less than2 percent of annual sales over the past five years.

I. ComDuter Avylications and Information Management

3.29 FPEPB and its subordinate units are currently equipped with bothmainframe and mini computers, and over 300 microprocessors. Computera aremainly used for: off-line scientific calculation, automatic operation ofhydropower stations, thermal power and transformer stations, management infor-mation systems, design institute CAD system, and load control system. Chitanhydropower plant has set up a demonstration supervisory control and dataacquisition (SCADA) system, and Fuzhou and Xiamen power supply bureaus are inthe process of designing similar systems. A SCADA system for control of theFPG is a component of the proposed project. FPEPB and the eight power supplybureaus have already computerized most of their data processing functions,such as financial reporting, material management, personnel record management,payroll, reliability and safety analysis, and planning.

3.30 The progress of FPEPB's computerization program has been satis-factory. Eight local area networks (LAN) have already been set up. It isexpected that the networking between FPEPB's headquarter and its subordinateunits will be completed in 1993. The interconnected system between PPEPB andMOE is currently in planning stage.

3.31 The Fuzhou power supply bureau has completed and put into operationa pilot load control system with 207 terminals. This system rationalizes theusage of electricity among customers. The target is to expand this system toinclude 1,000 terminals, covering 70 percent of the Fuzhou load. These tar-gets are expected to be achieved by 1993. The installation of a load controlsystem is planned for other cities in Fujian over the 1992-96 period.

J. Insurance

3.32 According to a notification jointly issued by MOP, the People'sInsurance Company of Ch'na, the People's Bank of China, and the AgriculturalBank of China in 1983, all of FPEPB's fixed and current assets are eligiblefor commercial insurance coverage. In 1990, about two thirds of FPEPB'a totalassets had insurance coverage and total premium paid was about Y 1.74 million.The balance was self-insured by FPEPB. So far, it has maintained a soundliquidity position, which would allow it adequately to self-insure ore thirdof its assets against normal level of risk. Main items not insured are con-struction work-in-progress and main civil works (such as dams).

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IV. POWER MARKET AND DEVELOPMENT PLAN

A. Background on the Fujian Province

4.1 Fujian is a coastal province of southeastern China, with a pcpula-tion of about 30 million. The economy of Fujian has grown extremely rapidlyduring recent years, primarily due to the creation of special economic zonesopen to foreign investors. Industrial production took off in 1984/85, ini-tially growing at 25 percent per year, and then at an average of 19.7 percentper year between 1985 and 19V0. Agriculture also progressed durisig these fiveyears, although at a more modest 6.3 percent per year, its share in grossvalue of agricultural and industrial output (GVIAO) declining from 30 percentto 19 percent (Annex 4.1).

4.2 On the coast, Xiamen emerged as a major industrial center, wellserved by international airlines. The electric railway, now under completion,should further facilitate communication between the various centers of theregion and offer new opportunities for industrial development. Fujian, showedrelative resilience to the economic slowdown of 1989/90. The influx of directinvestment from outside, notably from Taiwar., China, remained sizeable, andseveral major projects are under construction or in preparation, including arefinery, petrochemical and fertilizer complexes in Mei-Zhou Bay, three steelmills, a new chemical complex in Fuzhou, and two paper mills. This new empha-sis an the development of basic industries during the Eighth Five-Year Planwill help to balance Fujian's industrial structure, marked by a strong devel-opment of manufacturing industries in recent years. As a consequence, growthof energy demand is expected to remain strong.

B. Enerav Resources of Fuiian

4.3 Fujian is relatively well endowed with energy resources. Coalreserves amount to 976 million tons, of which 480 million tons are exploit-able. Production was 8.6 million tons in 1988, (or 5.8 million tons of stan-dard coal), of which 29 percent was consumed by power plants. This coal has alow sulfur content but a rather poor calorific value, requiring oil to supportcombustion in power plants. Mines are not close to main load centers, andlocal coal is used primarily in mine-mouth plants. Coal from other provincesaccounted for one third (raw tonnage) of consumption in 1989, and is expectedto account for *nore than half by the late 1990s.

4.4 The Province has no significant oil or natural aas resources. Cur-rently, all petroleum products are imported from other regions, but the newrefinery, to be completed in 1992/93, will produce close to two million tonsof gasoline and diesel, and 73,000 tons of kerosene annually, meeting allprovincial requirements for petroleum products.

4.5 The province has a good hydroelectric wotential, and in 1990 hydroenergy accounted for 50 percent of generation on the interconnected grid.Theoretical potential is 10,460 MW, of which 8,880 MW is exploitable with apotential energy of 36.6 TWh per year. Only 21 percent of this potential hadbeen exploited by 1988 (1871 MW for a generation of 6722 GWh). Shuikou (1400MW) will account for 16 percent. After Shuikou, only three sites of more than250 MW remain to be developed: Muyangxi (320 MW), Mienhuatan (600 MW), and

- 19 -

Jiemian (400 MW). Some 44 percent of the total potential (3,920 MW), is in 65mid-size plants (25-250 MW), of which only 11, with capacity totalling 655 MW,have been exploited; thus further development of mid-size plants is possible,if they prove to be competitive with coal plants. The balance of the hydropotential is in sites of less than 25 MW, many of which have been developed tosupply isolated regions; however, their dry-season output is limited.

4.6 Even though the hydro potential of Fujian is substantial, it is onlyequivalent, in energy, to the total expected generation requirements of theyear 2000. Thus, from a long-term point of view, hydroelectricity should beused, to the extent possible, to meet peak and intermediate loads.

C. The Fulian Power Grid (FPG)

4.7 Fujian is not connected to neighboring provinces. In 1990, theFujian Power Grid (FPG) covered 56 counties and municipalities, out of a totalof 65. Some networks still operate in isolation. Demand in isolated systemsincreased moderately (6.4 percent per year) since 1985, but its share in thetotal decreased from 24 percent to 14 percent in 1990; Jianyang in the northand Ningde in the east account for about half and are to be connected to themain grid by 1995.

4.8 FPG, a 220/110 kV grid, connects the plants of FPEPB, the mini-hydroplants operated by county or municipal power bureaus, and, since 1989, theplant owned and operated by HIPDC (para. 2.6). Total FPG generation was11,750 GWh in 1990. FPEPB's own plants produced 52 percent of that energy,the HIPDC plant accounted for 20 percent, and mini-hydros and industrialplants for 28 percent. The weight of FPEPB in FPG's power generation hasdecreased significantly since 1980, when it was 81 percent; it is expected toincrease markedly with the commissioning of Shuikou. Purchases from minihydros and from HIPDC accounted for one third of energy sent out by FPEPB in1990 (Annex 4.3).

4.9 The 700 MW HIPDC plant is equivalent to 50 percent of FPEPB's owngeneration capacity, and is by far the most efficient thermal plant in Fujian.However, today, due to deficient pricing arrangements, but also due to opera-tional constraints and to the lower price of local coal, it does not operateas a base load plant. The pricing arrangements are expected to be reviewedunder the tariff action plan (para. 3.23).

D. Power Demand: Trends and Forecasts

4.10 Electricity demand has grown rapidly, in line with the fast pace ofeconomic development of the region. Tatle 4.1, below, indicates the pastgrowth and forecasts of gross value of industrial and agricultural output,total generation in Fujian, FPG generation and peak demand. Further detailson demand trends and forecasts are given in Annexes 4.1-4.4.

4.11 The impressive growth during the second half of the 1980s provides ameasure of Fujian economic dynamism. There was a slowdown in 1990, due toeconomic circumstances, and aggravated by typhoons, and this translated into agrowth of electricity generation of "only" 7 percent for FPG, as against17 percent during the previous four years. But demand picked up in early 1991and increased by almost 16 percent during the first semester.

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Table 4.1: ECONOMIC GROWTH AND POWER GENERATION IN FUJIANTRENDS AND FORECASTS

growth Rateo lnercent/annumr1980-85 1985-90 1990-95 1995-2000

Ind. & agri. output 12.7 16.2 9.0 8.3Energy generation Fujian 9.3 12.1 10.0 8.5Energy generation FPG 8.6 15.0 12.3 8.8Peak demand FPG 9.4 14.1 12.3 9.2Sales FPEPB 8.4 12.6 13.6 9.9Elasticity Gener./Output 0.73 0.63 1.11 1.02

4.12 Despite the high demand growth rates of the past 10 years, electric-ity generation per capita was only 450 kWh in 1990, 83 percent of the nationalaverage. Several large industrial projects have been approved or are underconstruction (para. 4.1), and the demand of the electric railway was alreadysignificant in 1991. Although a sustained economic growth at the pace of thelast five years seems improbable, there is still a large potential for highdemand growth. The forecast in Table 4.1 above, based on Fujian's economicobjectives for the Eighth Five-Year Plan, is reasonably prudent, and the pos-sibility of a higher demand growth cannot be discounted. Even though theplanned growth is significantly lower than the trend in the past five years,the planned forecast is well above the appraisal forecast for the firstShuikou loan, as seen in Table 4.2. Incremental generation requirements forthe period 1990-95 are expected to be 60 percent larger than estimated in

Table 4.2: COMPARISON OF LATEST FORECAST FOR FPG WITH THE SHUIKOU I FORECAST

Maximum load Reaulred oenerationActual Actuallatest Forecast latest Diff-

Year Forecast forecast (1986) forecast erence-------- (MW) ---- --- (GWh) (-)

1985 963 5,8391986 1,080 1,069 6,630 6,901 4.01987 1,200 1,228 7,350 7,990 9.01988 1,300 1,407 8,000 9,360 17.01989 1,410 1,675 8,700 10,982 26.01990 1,650 1,860 10,100 11,750 16.01995 2,608 3,320 15,960 21,000 32.02000 - 5,150 - 32,000

1986. As a result, Shuikou generation will only be equivalent to 53 percentof that increment as against 84 percent envisaged in 1986. In terms of peak-ing capacity, Shuikou will be equivalent to the five-year increment of peakdemand, as against the 1986 eetimate of 146 percent of that increment.

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4.13 It is clear that there is high uncertainty on electricity demand

growth in Fujian, not only related to economic growth, but also to the rela-

tionship between electricity and industrial production, which can change sig-

nificantly when rapid economic growth is accompanied by substantial structural

changes. In this context, the flexibility of the investment program to cope

with this uncertainty, becomes as important as the accuracy of the forecast.It seems reasonable, considering also financ.al constraints and preparationstatus, to plan hydro plants on the basis of a moderate forecast, and to have

a portfolio of well prepared thermal projects, with well established, easily

mobilizable financing sources.

E. Investment Program

4.14 The first phase of the Shuikou project included a 560 km tie-line to

Hangzhou, linking the Fujian and East China grids. However, exceptional load

growth in the Fujian grid led to a reexamination of its economic viability.In 1991, Beijing Economic Research Institute for Water Resources and ElectricPower (BERI) carried out a thorough study of the Fujian and East China systems

with and without the tie-line. Their report indicated prima facie, substan-tial potential benefits from the tie-line but only about 30 percent of thene

benefits arising from absorption of available hydro capacity from Shuikou and

subsequent hydro schemes. Most benefits arose from delay of new thermal plant,

because of reserve capacity sharing, and a theoretical reduction in reserve

capacity because of noncoincidence of peak loads of the two systems.

4.15 However further examination of the latter benefits indicated a prob-

able overestimation. Firstly, increased reliability was valued in the studyby a theoretical reduction in coal plant capacity; gas turbine plant or pumped

storage plant would be a more appropriate proxy, and if this were assumed then

reserve capacity benefits would be halved. Secondly, the FPEPB, as the poten-

tial investor in the tie-line doubted that there would really be an increasein reliability of their own system, by connection to East China, since whileboth systems fall short of ideal reserve capacity requirements, the East China

system is historically less reliable than the Fujian system, and this situa-

tion may continue during the planning period.

4.16 There is also considerable doubt whether peak levelling benefits can

be achieved in practice, and to whom these benefits would accrue. The nonco-

incidence of peaks is random and not reliably predictable in the case ofFujian and East China and theoretical transfers may not materialize, consider-

ing the two systems do not have unified despatch arrangements, and a situation

of general shortage in both systems.

4.17 Taking the above factors into account, the estimated benefit/costratio reduced to 0.75 and, under a higher growth scenario, to 0.64. FPEPB'oposition, which was endorsed by BERI, MOE and other central government agen-

cies, was that with economic growth rates tending to exceed planned targets,an environment of relative shortage could persist throughout the decade, suchthat the risks of the tie-line investment are too great. In this context MOE

noted, that although interconnection of iolated systems is part of theiroverall stra'egy for development of the power sector, energy transfers overmajor tie-lines so far constructed have fallen well short of expectations. It

was therefore decided to postpone the tie-line, but to configure the Shuikou

switchyard to allow future interconnection, when the supply demand balance

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stabilizes. The Bank recognized the concerns expressed, and agreed to deletethe tie line from the project scope.

4.18 FPEPB's investment program is summarized in Table 4.3 below.

Table 4.3: INVESTMENT PROGRAM FOR THE FUJIANPROVINCE GRID

Project Capacity (MW) Commissioning Year

1. HydroShuikou 1,400 (7x200) 1993-95Muyangqi Cascade 320 (2x125) 1996-97

(+2x35)Mienhuatian 600 (4x150) 2000-01

2. ThermalXiamen Shongyu 1,200 (4x300) 1994-97Huaneng II 700 (2x350) 1998-99Meizhouwan 600 (2x300) 2000-01Zhangping II 200 (2x100) 2000-01

4.19 The tie-line study drew attention to the persistence of a strongseasonality of Fujian hydro power in the long term. The main implications arethat a significant proportion of coal fired thermal plants will be effectivelyon standby. FPEPB therefore agreed to include in the project scope, a reeval-uation of the Fujian Province hydro inventory, focusing on identifying schemeswhich could provide seasonal energy storage to the Fujian system. Also thepossible role of gas turbines as reserve for extreme situations is worthexploring. Assurances have been obtained that FPEPB will carry out this hydroinventory reevaluation, with timin., specialist assistance and terms of refer-ence satisfactory to the Bank.

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V. THE PROJECT

A. Proiect Background and Objectives

5.1 Proiect Backaround. The Shuikou Hydroelectric Scheme is located on

the Min River, about 84 km upstream of Fuzhou, the capital of Fujian Province.

The Bank Board approved the first loan for the Shuikou Hydroelectric Project

in January 1987. The loan amount of $140 million, requested by GOC, was rela-

tively low in comparison to the estimated foreign and total costs of $547.3

million and $1,087.8 million. The first loan was earmarked for financing of

the first four years of construction, and in consideration of the monolithic

nature of this large project with an eight-year construction period, it was

understood that the Bank would consider a request for a second loan for the

remaining period of the project. Nevertheless, GOC agreed to provide finan-

cing for the entire project, irrespective of the Bank's provision of a second

loan.

5.2 Proiect Objectives. The principal objectives of the first-phase

project were to:

(a) develop a major hydro site to meet the growing energy requirements

of the Fujian and East China grids;

(b) employ the most modern technology available for speedy construction;

(c) link the East China and Fujian grids;

(d) promote more effective 'ntegrated operation of mixed hydro thermal

systems;

(e) provide training in management of international contracts for large

civil works and in financial management of power utilities; and

(f) enhance environmental and resettlement policies.

5.3 The objectives of the proposed project include the above, except

that MOE and FPEPB have decided not to construct the tie-line at this stage.

Improving power pricing arrangements in the province has also been included as

one of the objectives for the proposed project.

B. Proiect Description

5.4 The proposed project would first provide for the completion of the

Shuikou Hydroelectric Scheme, all the components of which were covered under

the first loan. These are detailed in Annex 5.1 and summarized below:

(a) construction of a 101 m high concrete gra'ity dam, with associated

spillway, powerhouse, navigation facilities;

(b) switchyard and transmission to connect the project to the FPG.

(c) supply and installation of seven 200 MW generating sets and asso-

ciated electrical and mechanical equipment; and

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(d) environmental management and resettlement of some 67,000 people.

The project would also include:

(a) construction of a supervisory control and data acquisition (SCADA)system for the Fujian Province Grid;

(b) continuation of consultancy services for design, procurement andconstruction management for the Shuikou development and for theSCADA system;

(c) completion of system planning and operation studies commenced underthe first project, and a new study to reevaluate the hydro-inventoryof Fujian province (para. 4.15);

(d) implementation of an action plan for tariff reform (para. 3.23); and

(e) provision of technical assistance and training programs in finan-cial management, planning, commercial and financial management, andproject-related technology and management.

5.5 The proposed navigation facilities have been upgraded in that FPEPBare now proposing to construct a three flight shiplock plus a shiplift, theshiplift replacing the raft lift originally proposed. The feasibility studyfor the SCADA system was financed under the first loan. Bid documents arescheduled to be completed by December 1992.

5.6 With the deletion of the tie-line, reinforcement of the Fujian220 kV transmission system is required, beyond the direct connection to thegrid included in the project scope. The grid expansion has been designed andscheduled with the assistance of transmission planning software and technicalassistance provided under the first project. FPEPB has secured financing forthe expansion program from SEIC. Assurances have been obtained from FPEPBthat the transmission expansion program will be carried out in accordance witha schedule satisfactory to the Bank.

C. Proiect Implementation and Operation

5.7 Engineering. Since its inception, design of the development hasbeen carried out by East China Investigation and Design Institute (ECIDI).Throughout the first phase ECIDI was assisted by Morrison Knudsen Engineers(MKE) of San Francisco, in design review, specialist advice, ICB contracts anddesign management. Up until end-1991, MKE had provided some 264 staff-monthsof services for design and construction management. Design management systemshave been notably effective enabling ECIDI to produce over 4,000 drawings bythe end of 1991, meeting the requirements of the construction schedule. MKEadvice will continue into the second phase, in relation to shiplift design andprocurement, dam instrumentation and any other areas where the need for spe-cialist assistance is identified. In addition, a Special Board of Consultants(SBC) was appointed and has so far met on eight occasions at critical stagesof design and construction. Specialists are added to the Board as required todeal with current critical issues including environmental and resettlementissues.

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5.8 A special organization, Shuikou Hydroelectric Project Construction

Corporation (SHPC) was set up to act as the "engineer" for construction super-

vision. MKE also provides assistance to SHPC in supervision and contract and

project management. Initially, SHPC was not very effective in project manage-

ment, which was attributed to: (a) inadequate quality and quantity of staff;

(b) insufficient autonomy; and (c) inadequate authority, despite a charter

indicating to the contrary. Bank supervision missions stressed the need to

strengthen SHPC, and for MOE to exert its influence on the contractor, to

ensure cooperation with and compliance with SHPC instructions. These measures

led to considerably increased effectiveness of SHPC, such that it now effi-

ciently supervises construction, deals with contractors claims and takes the

lead in scheduling initiatives (para. 5.11). The current organization chart

for SHPC is shown in Annex 5.2. Consultant support will continue into the

second phase in the areas of concrete construction, shiplift and other equip-

went erection, contract and claim management, cost and quality control, and

any other area where specialist assistance is required.

5.9 Construction. After ICB, the main civil contract was awarded to The

Fujian Hua Tian Construction Joint Venture, involving Maeda Corporation of

Japan and three Chinese partners. The bid was the lowest by a considerable

margin, but after extensive clarifications and deliberations, the Engineer

judged the construction method to be reliable, and the bid to represent the

lowest evaluated price. The Bank indicated no objection to the evaluation and

award. The construction echedule (Annex 5.3) provided for commencement in

January 1987, commissioning of the first unit after 6% years (June 1993) with

the six subsequent units commissioned at four month intervals. There were

three critical intermediate dates related to the river diversion arrangements,

in October 1989, October 1991 and April 1992. In addition, there was a criti-

cal date for handover to the powerhouse erection contractor in December 1991.

The schedule is demanding, even by the standards of an experienced interna-

tional contractor. About 18 months into the construction period, it became

evident that the contractor could not achieve the required progress with

existing equipment on which his bid was largely based, and substantial addi-

tional purchases of new construction equipment would be required. Discussions

between the parties to the contract resulted in proposals for contractual

reorganization, with a Chinese partner taking over management responsibilities

from the Japanese partner, an increase in advance payment fronm 15 percent to

25 percent with repayment over a longer period, and increase in foreign

exchange proportion from 48.4 percent to 65 percent. The Bank agreed to these

contract amendments, and MOE supported the effort by transferring experienced

construction groups to the region to act as subcontractors. As a result of

these measures progress improved considerably.

5.10 A review carried out by FPEPB in February 1989, while indicating

that the first key diversion date could be met, revealed that progress in

later stages would again be affected by lack of equipment. The Bank was

therefore requested to finance the purchase of construction equipment by the

Owner, which would be hired to the Contractor. The Bank declined, taking the

position that equipment finance was the responsibility of the equity partners.

As expected, the Contractor met the critical date for river diversion in Octo-

ber 1989, but by this time concrete preparation activities critical to second

stage diversion were estimated to be some six months behind schedule. The

Bank and MOE considered that it was possible to recover from the delays, pro-

vided plans could be devised to simplify construction and enable some concret-

- 26 -

ing to be carried over from the second to the third diversion stage. ECIDIinvestigated design changes, and SHPC took the lead in computerized schedulingstudies, resulting in a revised master schedule with diversion scheduleadjustments, but with the overall completion date maintained. By April 1,1992, all critical diversion dates had been met and the first powerhouse bayhas been handed over to the erection contractor. It therefore appears thatthe project will be completed on schedule.

5.11 operation. Procedures for inspecting, maintaining and monitoringhigh dams in China generally follow international practices and are consideredappropriate to the proposed project. Neverthelcss, assurances have beenobtained from FPEPB that it will (a) Rreoare. Prior to comoletion of the dam.a Proaram of annual maintenance of the proiect works, which is satisfactory tothe Bank. (b) undertake periodic inspections of the dam and associated worksusina indevendent experts whose cualifications and exnerience are accentableto the Bank, and (c) implement their recommendations.

D. Resettlement and Environment Aspects

5.12 Resettlement. With a total reservoir length of 96 km and a watersurface area of 93.5 km2, the Shuikou reservoir will inundate about 2,000 haof farmland, 1300 ha of forest, 700 ha of reclaimed and cultivated wasteland,137,000 fruit trees and about 20,000 dwellings, housing 67,000 people. Theresettlement plan, conforming to Bank guidelines, and implementation experi-en? to date is described in Annex 5.4 and summarized in the following para-

-*.1i The resettlement was planned within the framework of policy guide-lines laid down by the State Council, which provided for:

(a) the social and economic reestablishment of affected communities withliving standards not lowered and preferably raised;

(b) resettlement within the same county and preferably township;

(c) resumption of original employment, or training for alternative;

(d) realistic compensation levels; and

(e) reconstruction of public facilities.

5.14 Resettlement activities began in parallel with the construction ofthe dam. However, after two years it became evident that, because of startupdelays and a budget eroded by inflation, it would be difficult to meet thefirst resettlement target of 32,000 people by March 31, 1990, as required forthe second stage river diversion. FPEPB therefore modified the initial targetto cover the population at risk from a 1- in 10-year flood, and derived con-tingency plans for larger floods. MOE and SEIC approved an increased reset-tlement budget to offset inflation, and the Bank agreed to a reallocation of$10 million of the loan to finance materials for resettlement. As a result,the reduced initial target was met and resettlement was generally back onschedule by end-1990. The second target, dictated by Stage III diversion,resettlement of 55,000 people by the April 1992 flood season, has also been

- 27 -

met. Reestablishment of production systems was also delayed for the same

reasons as outlined above, but is now back on schedule.

5.15 The Bank staff carried out full reviews of the resettlement process

in April 1991, and July 1991. In both cases, the mission's aasessment of

resettlement already completed was very positive, but both missions expressed

reservations concerning two matters: (a) the approach to monitoring and

reporting of physical progress; and (b) the possibility of individual hardship

because of the time lag between reservoir impoundment and new production sys-

tems (e.g., fruit trees, fishing) reaching full production. It was noted that

the sense of well being of currant resettlers was partly due to the fact that

they were still generating income from their resumed land. As the date for

reservoir impoundment draws near, the first reservation appears to have been

overtaken by events, in that it seems highly likely that physical resettlement

activities will be completed on schedule by the end of 1992. However, the

lessons learned at Shuikou have been taken into account in later Bank-financed

projects, such as the Ertan Hydroelectric Project (Loan 3387-CHA) where a more

rigorous monitoring system was agreed.

5.16 Since physical resettlement activities were nearing completion, the

Bank decided to shift the emphasis of monitoring to end results of the reset-

tlement effort, rather than physical works. It was agreed that the previously

planned IndeDendent Evaluation of Resettlement (IER), would be designed to

provide timely warning to Government authorities of problems in reestablish-

ment of income or general welfare. The IER will be based on a sampling method

with a coverage of 15 to 20 percent of resettlers. Indicators monitored will

provide an assessment of: social and economic living standard, public health,

opportunities for women and welfare of various occupations (aimed at identify-

ing particular groups requiring assistance). The contract for the IER was

awarded to ECIDI and signed in December 1991. The evaluation will extend over

the period 1992 to 1996. In 1992 and 1993, reports will be submitted in July

and December, and thereafter in December of each year. The proposed project

would increase the opportunity for the Bank to supervise the resettlement

effort throughout the transition period. Supervision will concentrate on

upgrading the institutional capacity of the organizations responsible for man-

aging and monitoring resettlement activities, and on monitoring the reestab-

lishment of income and welfare of resettlers. Assurances have been obtained

from the Borrower and FPEPB that they will continue to carry out or cause to

be carried out a resettlement vroaram satisfactory to the Bank.

5.17 Beyond the project implementation period, the Government will con-

tinue its financial support to help resettlers fully reestablish their stan-

dard of living. Main funding sources will be two funds established under

central government regulations (the Reservoir Area Fund and the Reservoir

Development Fund), specifically intended for this purpose. Assurances have

been obtained that the Borrower will monitor the relorts of the IER. take

action to accelerate the reestablishment of income and welfare in identified

Droblem areas. and make funds available to sustain incomes at acceotable

levels until they are fully restored.

5.18 The Bank is satisfied that the planning and implementation to data

is being carried out in accordance with Bank policy guidelines. Provided the

production development period is well handled, it is very likely that the

resettlement program will achieve its primary objective of being a positive

- 28 -

experience for those directly affected. Others in the region are also bene-fiting from the expenditure locally of some $300 million including $200 mil-lion for resettlement. The contention that power plants benefit distantusers, at the expense of local inhabitants does not apply to Shuikou.

5.19 Environment. In addition to the social impacts of resttlement dealtwith above, physical impacts, potentially favorable and unfavorable, are sum-marized below and discussed in Annex 5.5, together with the Environmental Man-aement Plan (EMP), conforming to Bank policy guidelines, aimed at enhancingfavorable impacts, and mitigating unfavorable impacts. Assurances have beenobtained that the Borrower and FPEPB will carry out the EMP in a manner satis-factory to the Bank.

5.20 The project will avoid thermal generation, involving burning of1.6 million tons of standard coal/year, land use for thermal plant of 1000 haand for mining of 300 ha/year, gaseous and particle emissions of 65,000 tons/year, solid waste of 500,000 tons/year, and water usage of 125,000 tons/year.

5.21 Long-term impacts on naviaation are very favorable. Creation of thereservoir and increase of downstream minimum flows will enable 500 ton shipsto navigate the 220 km reach from the ocean to Nanping city. Navigationfacilities in the dam have been designed to accommodate major increases inriver traffic (para. 5.5). Measures have been implemented to mitigate short-term disruptions to navigation during dam construction.

5.22 Net effects on fisheries will also be positive. The river sectionupstream of the damsite affected by the reservoir, currently contains only afew species and fish catches are nominal. There are no fish species withmajor migrations through the damaite. Investigations carried out sinceShuikou I appraisal indicate that the project will have no significant effecton eel production in the province, and there is no need for transport of eelfry upstream. On the other hand, fish production from the reservoir and fromintensive fish farming around its periphery is expected to be substantial withyields projected at 655 tons/year.

5.23 Negative effects on water aualitv usually associated with largereservoirs, such as eutrophication, anoxic and low temperature discharges, andsediment and nutrient trapping, are not expected to be significant at Shuikou,since the reservoir volume is small in relation to river flow, and a high rateof flushing exists. In fact, the project will have a positive effect on down-stream agriculture and fisheries, since minimum dry season flows will beincreased, reducing salt water intrusion into the estuary. However, the EMPaddresses three water quality issues: (a) control of municipal and industrialwastes discharging into the reservoir; (b) the development of a mathematicalmodel of the assimilative capacity of the reservoir, to establish parametersfor regulation of waste discharges into the river; and (c) the relocation ofone intake for Nanping water supply clear of the reservoir impoundment area.

5.24 No adverse sediment related effects are expected. Sediment runoff,trap efficiency and resulting depositions are low, such that projected deadstorage life is at least 500 yeare, and no significant downstream erosion isexpected. Bedload deposition at the head of the reservoir will be monitoredto warn of any backwater effects impacting flood control of Nanping City.

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5.25 There are no significant effects on f1oodina. Large floods will beslightly attenuated below the reservoir. The reservoir will be operated at alower level during the flood season, and the floodway through the Nanpingfootbridge will be widened, both to prevent any deterioration in flooding con-ditions in Nanping city.

5.26 No adverse health effects are expected. Local authorities have con-cluded that the project will not lead to the spread of water related diseases,while improved water supply, sanitary facilities and medical facilities inconstruction camps and resettlement areas are expected to result in a netimprovement in community health. The IER will monitor this aspect.

5.27 In construction and resettlement areas quarry, spoil and work areashave been designed to minimize encroachment on agricultural land and theriver. Living quarters for the 3,500 person work force are of good quality,and associated facilities are of high standard. Comprehensive programs tocontrol soil erosion in the newly created resettlement areas are underway.

5.28 Monitorina of physical progress of resettlement is carried out bythe Shuikou Reservoir Resettlement Office (SRRO). Social and welfare aspectsof the resettlement will be monitored as part of the IER. The FPEPB, whichhas a specialist environmental unit, will monitor reservoir water quality andsediment deposition. Other monitoring will be carried out by the appropriateprovincial and county authorities as part of their routine responsibilities.In addition environmental and resettlement specialists are periodically addedto the SBC (para 5.7).

5.29 Overall, the net effect on the environment appears to be positive.

E. Proiect Cost

5.30 An updated cost estimate for the original project scope, excludingthe tie-line to East China, indicates an overall project cost of $658 million.This compares with the original appraisal estimate for the came work of $733million, with large increase in resettlement costs being more than compensatedby low contract prices for civil and equipment costs. With upgrading of navi-gational facilities and additional scope referred to in para. 5.5, the totalproject cost is estimated at $696 million, of which $239 million are foreigncosts. Details are included in Annex 5.6.

5.31 The estimated cost of the proposed project, covering expendituresbeyond the disbursement of the first loan until completion of construction is$245.3 million, of which $100.0 million will be foreign costs. Details areincluded in Annex 5.6 and summarized in Table 5.1. The first loan is expectedto be fully disbursed in the second quarter of FY93.

5.32 Cost estimates are based on actual expenditures up until 1991, withbase costs beyond 1991 at early 1992 cost levels. Physical contingencies havebeen applied to costs beyond 1991 at the following rates: 10 percent forcivil contract, 20 percent for the shiplift which is at preliminary designstage, five or seven percent for other equipment depending on whether bidshave been received. Price contingencies have been applied to expendituresbeyond 1991 at global foreign and local inflation rates, except for fixedprice supply contracts. Annual inflation rates assumed are 3.9 percent for

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Table 5.1: COST ESTIMATE

ForeignLocal Foreign Total Local Foreign Total as % of---- (Y million) ---- ---- ( million) ---- total

Preparatory works 57.0 - 57.0 10.5 - 10.5Resettlement 127.0 - 127.0 23.4 - 23.4 -

Civil works 132.2 245.6 377.8 24.3 45.3 69.6 65.0Metal works 46.0 63.8 109.8 8.5 11.7 20.2 58.0

Elec. and mech.equipment 256.8 145.0 401.8 47.3 26.7 74.0 36.0

Engineering and

const'n supervfn 54.4 19.1 73.5 10.0 3.5 13.5 26.0Administration 29.8 - 29.8 5.5 - 5.5 -Tech. assist. and

training 1.0 8.5 9.5 0.2 1.5 1.7 90.0

Total base coat 704.2 482.0 1.186.2 129.7 88.7 218.4 41.0

Physical contingencies 48.9 38.6 87.5 9.0 7.1 16.1 44.0

Price contingencies 58.0 39.4 97.4 6.6 4.2 10.8 39.0

Total proiectcost 811.1 560.0 1,371.1 145.3 100.0 245.3 4.C

Interest during

construction 272.0 139.6 411.6 50.0 25.7 75.7 34.0

Total financinQ

reauired 1,083.1 699.6 1,782.7 195.3 125.7 321.0 39.2

foreign costs, and for local costs, 6.0 percent in 1992 and 5.0 percent there-

after.

F. Financing Plan

5.33 The financing plan for the overall development and the proposed

project is as follows:

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Table 5.2: FINANCING PLAN($ million)

Local Foreign Total

IBRD - 100.0 100.0Local loans (SEIC) 195.3 25.7 221.0

Total 195.3 125.7 321.0

5.34 The proposed Bank loan of $100 million equivalent would meet about45 percent of the total cost of the project incurred, over the period November1992 to completion at the end of 1995. It would be used to finance expendi-tures during this period for:

(a) the ICB main civil works contract;

(b) ICE contracts for the fIcst tWo generating units, metalworks, gener-ator circuit breakers, powerhouse control system, grid SCADA system,foreign supplied materials and equipment for shiplift; and

(c) consultancy services, studies and overseas training.

5.35 Financing provided by SEIC will be used to finance all local costsand interest during construction on the Bank loan. The SEIC loan will carryan average interest rate of 5.04 percent and a maturity of ten years beyondproject commissioning.

5.36 The Bank loan would be made to the People's Republic of China at theBank's standard variable interest rate for a 20-year term including five yearsof grace, with level principal repayments. Assurances have been obtained thatGOC will anlend the Droceeds of the Bank loan to FPEPB under a subsidiary loanaareement with a 20-year term including five years arace at the Bank's stan-dard variable interest rate. FPEPB will bear the commitment charoes and for-eian exchanae risk. A Proiect Agreement will be concluded between the Bankand FPEPB. Execution of the subsidiary loan aareement satisfactory to theBank and alproval of the Loan Agreement by State Council would be conditionsof loan effectiveness.

G. Procurement

5.37 Procurement arrangements for the proposed project are summarized inTable 5.3 and detailed in Annex 5.7. Bank financed contracts for goods andworks have been, or will be, awarded through ICB in accordance with BankGuidelines except that items, or groups of items estimated to cost less thanthe equivalent of $200,000 per contract, up to an aggregate amount of $2 mil-lion, may be purchased on the basis of at least three quotations from quali-fied suppliers eligible under the Bank's procurement guidelines. Goods manu-factured in China would be eligible for a 15 percent preference in bid evalua-tion or import duties, whichever is the lower. Prior review would apply toall contracts with a value greater than $200,000 (about 96 percent of the

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Table 5.3: SUMMARY OF PROCUREMENT ARRANGEMENTS($ million equivalent)

TotalSecond

Procurement Method ICB Other La NBF Lb ProjectLc

1.1 Civil works 79.3 - 11.8 91.1(50.3) (50.3)

2. Goods2.1 Mechanical 13.2 1.0 23.7 37.9

equipment (13.2) (1.0) (14.2)2.2 Electrical 28.6 1.0 37.4 67.0

equipment (28.6) (1.0) (29.6)

3. Consultancies3.1 Engineering and 4.1 11.9 16.0

supervision (4.1) (4.1)3.2 Studies, technical 1.8 1.8

assistance andtraining (1.8) (1.8)

4. Miscellaneous4.1 Resettlement 25.0 25.04.2 Administration 6.5 6.5

Total 121.1 7.9 116.3 245.3'92.11 (7.91 1100.01

Note: Figures in parentheses are the respective amounts financed by the Bankloan.

La Shopping and Consulting Services.Lb NBF: Non-Bank fia.4nced.I_ Including physical and price contingencies.

loan). Other contracts would be subject to selective post award review. Con-sultants have been or will be selected following the Bank's Guidelines for Useof Consultants. The procurement procedures for non-Bank financed components(financed by SEIC and sourced in China) will not significantly affect thesatisfactory execution of the project in terms of cost, quality or completiontime.

5.38 All contracts proposed to be financed by the Bank were commencedunder the first loan, except for the ship-lift, the grid SCADA system, andtechnical assistance for tariff studies. The major civil works contract isbeing carried out by the Fujian Hua Tian Construction Joint Venture, involvingMaeda Corporation of Japan and three Chinese partners. The contract for twoturbines and generators being financed by the Bank is being carried out by ajoint venture of C. Itoh of Japan (agent for Hitachi Ltd.) and China Interna-tional Trust and Investment Corporation (CITIC, agent for Harbin Electric

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Machinery Works of China). All other ongoing Bank financed contracts havebeen awarded to foreign suppliers. Similarly, new Bank financed contractswill probably be awarded to foreign suppliers, since it is unlikely thatChinese manufacturers will qualify.

5.39 Procurement under the first phase project is proceeding smoothly,using the standard bidding documents developed jointly by the Bank and GOC.Procurement is the responsibility of the International Tendering Company ofChina who are now well experienced in ICB, ECIDI, and the consultants, whoreview documents and evaluations for ICB works. Similar arrangements willapply for the proposed project.

H. Disbursements

5.40 The Bank loan would be disbursed against: (a) 100 percent of for-eign expenditures for the main civil works; (b) 100 percent of foreign expen-ditures of directly imported equipment and materials, 100 percent of localexpenditures, ex-factory of locally manufactured items, and 75 percent oflocal expenditures for other items procured locally; and (c) 100 percent ofthe cost of consulting services and overseas training. For expendituresrelating to training and contracts for goods and works each valued at lessthan $200,000 equivalent, reimbursements would be made on the basis of State-ments of Expenditure (SOEs). Documentation supporting the SOEs would beretained by FPEPB and made available for review by Bank supervision missions.To facilitate disbursements, a Special Account in US dollars, with an autho-rized allocation of $5 million would be established in a bank on terms andconditions satisfactory to the Bank. Applications for replenishment would besubmitted monthly or when amounts withdrawn are equal to 50 percent of theinitial deposit, whichever occurs sooner. Retroactive financing in aggregateamount of $5 million, would be provided under the loan for expenditures whichmay be incurred before the signing date of the loan but after December 31,1991.

5.41 The disbursement schedule for the proposed loan is given in Annex5.8, together with the standard disbursement profile for all Bank-financedprojects in China. Because the proposed loan covers the second phase of anongoing pro3ect, where most contracts are already underway, the disbursementprofile is not typical. Cumulative disbursements are typical of the secondhalf of a normal S-curve. The project will be completed on December 31, 1995,and the closing date will be December 31, 1996.

I. Monitorino and ReDorting

5.42 Satisfactory procedures for monitoring and reporting are in placefor the first phase project and will continue for the current project. Theseinclude brief monthly progress reports and comprehensive quarterly reports.

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VI. FINANCIAL ASPECTS

A. Introduction

6.1 FPEPB, as in the case of most power bureaus in China, follows MOFfinancial regulations applying generally to state enterprises, and specificMOE procedures for power bureaus based on MOF regulations. Under this highlycentralized system (Annex 6.1), FPEPB's operational and investment budgetsrequire government approval, its tariffs are controlled and virtually all itssurpluses are remitted to GOC. GOC, for its part, provides all investmentfunds for approved projects. Historically, such funds were provided on agrant basis, until in the early 1980s this changed to 100 percent debt finan-cing, initially at subsidized rates, and now at commercial rates for newinvestments. Within this framework, FPEPB has managed its finances satisfac-torily.

6.2 More recently, GOC has indicated that it will phase out its loans toFPEPB for new power project investments, on the grounds that Fujian Province,a coastal province attractive to foreign financiers, is in a strong positionto raise its own funds. This follows the independent financing and develop-ment of the Fuzhou thermal plant by HIPDC, and is in line with recent trendsto establish separate corporations for developing new power projects, espe-cially hydro schemes. Unlike power bureaus, these entities are allowed toretain and reinvest profits into new developments, and thus have more incen-tives to increase their efficiency. As a result of GOC directive, FPEPB isactively exploring alternative financing sources for its new projects.

6.3 As part of the ongoing economic reforms, GOC is reassessing thepresent fiscal system, with particular focus on tax reform issues and option.Since details of such reforms are still being formulated, there is consider-able uncertainty concerning the specific parameters affecting FPEPB's futurefinances. However, in keeping with the spirit of the Enterprise Law, economicreform measures would be directed at enhancing the commercial orientation ofthe state enterprises. Reforms over the past five years have led to improvedelectricity pricing, a noticeable loosening in central control and increasedfinancial autonomy.

6.4 One of GOC's sectoral objectives is to strengthen enterprise finan-cial management so that power bureaus can perform their increased financialrole efficiently and effectively. To support this objective, the proposedproject would continue the process of institution building initiated under thefirst loan, including: (i) the extension of FPEPB's financial planning hori-zon (para. 3.12); (ii) management training for FPEPB (para. 3.9); and (iii)agreements with FPEPB on financial performance targets which would provide aframework for financial discipline (para. 6.8).

B. Past and Present Financial Performance

6.5 FPEPB's income statements and balance sheets for the period 1986-90are set out in Annex 6.2, and summarized in Table 6.1, below.

6.6 During the period 1986-90, FPEPB consistently reported modest prof-its. In 1988 its operating income and rate of return dramatically increased

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Table 6.1: FPEPB'S KEY FINANCIAL INDICATORS, 1986-90(Y million)

Growth Rate% p.a.

Year ended December 31 1986 1987 1988 1989 1990 (1986-90)

Electricity sales(GWh) 5,000 5,690 6,631 7,817 8,095 12.8

Average revenues (fen/kWh) 7.6 8.8 10.3 13.3 15.2 18.9

Operating revenues 382 498 683 1,037 1,228 33.9

Operating income /a 58 83 166 78 105 16.0

Net Income 30 60 112 56 86 30.1

Net fixed assets in operation 921 1,194 1,505 1,803 2,053 22.2

Capital expenditure 788 536 560 862 847 1.8

Operating ratio (%) 85 83 76 92 90.5

Rate of return (%) Lb 6.3 7.8 12.5 4.8 5.8

Debt service coverage (times) 6.8 1.7 1.8 1.4 2.5

Current ratio 2.0 2.2 2.6 2.0 1.8

Debt as % of debt & equity 54.8 61.4 65.9 69.7 66.7

/a Operating revenues less the aggregate of fuel, power purchases, adminis-

tration, operation and maintenance, and depreciation.

lb Based on historically valued average net fixed assets in operation.

from 1987 levels due to a higher proportion of hydro generation, (42 percent

vs 34 percent). In 1989 and 1990, the two indicators reverted to lower levels

as the thermal proportion, fuel cost, and, particularly, power purchase price

rose significantly. In 1990, FPEPB paid Y 599 million for purchased power

mainly from HIPDC, compared with Y 53 million in 1988.

6.7 Over the same five-year period, FPEPB's sales grew by about 62 per-

cent in total (13 percent/annum), while operating revenues increased by about

221 percent, due to a doubling of average revenue from 7.6 fen/kWh in 1986 to

15.2 fen/kWh in 1990. Despite this increase, the operating ratio deteriorated

from about 85 percent to about 91 percent, indicating that an overall high

tariff largely resulted from high Huaneng price did not match up to the high

cost incurred for the power supplied by Huaneng (para. 3.19). To meet pro-

jected cost increases and remain financially viable, FPEPB will need to

increase its tariff by about 6 percent a year in current terms over the period

1992-2000.

C. Financial Performance Taroets

6.8 Traditional indicators (such as rate of return and self-financing

ratio) have had limited significance in measuring the performance of power

entities operating in a highly centralized financial system. In particular,

since surplus funds are largely remitted to the Government in the form of

Adjustment Tax, self-financing ratio has been largely "notional" for most

Chinese power bureaus. However, it still can serve as an effective tool to

ensure adequate tariff levels. With a view to promoting prudent financial

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management, assurances have been obtained from FPEPB regardina the followinafinancial performance taraets:

(a) it would take all measures. includina but not limited to tariffadiustments. to ensure that its internal cash aeneration is suffi-cient to maintain a self-financina ratio of no less than 22 verceatin 1992/93. 25 Percent during 1994/95. and 30 gercent thereafter;

(b) it would incur additional debt only if a reasonable forecast showsits internal cash aenerat. ,n would provide a debt service coveraceratio of no less than 1.3 times. before 1995. and 1.5 times there-after; and

(c) it would maintain a dv''-t/eauitv ratio of no more than 75/25 in1992-96 and 70/30 ther.4fter.

These targets represent a strengthening of the financial performance indica-tors stipulated under the first phase loan in that the previous break evencovenant has been upgraded to a self-financing covenant, the debt servicecoverage has been increased to 1.5 beyond 1995, and the debt/equity coveragehas been added.

D. Future Einances

6.9 The projections of FPEPB's finances for 1991-2000 are presented inAnnex 6.3, and summarized in Table 6.2 below. The projections are based onthe assumptions contained in Annex 6.3, which include tariff adjustmentsneeded to allow FPEPB to achieve the above financial performance targets andconform to the agreed tariff action plan.

Table 6.2: KEY FINANCIAL INDICATORS 1991-2000tY million)

Year ended December 31 1991 1992 1993 I22. 1225 1996 1997 I199 199 2000

Energy saLes (GWh) 9,272 10,499 11,899 13,485 15,294 16,794 18,465 20,312 22,321 24,576Average price (fen/kWh) 16.5 17.7 21.0 22.4 24.4 25.3 25.7 25.9 26.7 29.3Operating revenue 1,530 1,863 2,497 3,016 3,736 4,253 4.760 5,268 5,969 7,192operating income 158 191 583 769 1,053 1,164 1,257 1,271 1,148 1,509AnnuaL capital expenditure920 1,231 1,722 1,580 1,349 1,160 1,019 1,202 1,626 1,534Rate Base 2,132 2,255 3,097 5,435 8,096 9,568 10,523 11,300 11,386 11,776Long-term debt taccum.) 4,011 4,921 6,294 7,407 7,998 8,235 8,251 8,348 8,813 8,994Debt service 140 193 288 493 990 1,154 1,280 1,291 1,247 1,469

Proj.avg.

Year ended December 31 1991 1992 1993 19224 22 1296 1997 1.98 129 DU 1991-2000

Rate of returnHist. valued assets lX) 7.4 8.5 18.8 14.1 13.0 12.2 11.9 11.2 10.1 12.8 12.0Not.Reval. assets (X) 1.5 1.7 4.4 4.5 5.2 5.4 5.2 5.0 4.3 5.2 4.2

Self-financing ratio (X) 22 22 22 25 25 31 38 42 37 37 30Operating ratio (X) 79.5 79.4 64.0 60.7 56.9 57.2 57.8 60.1 66.9 65.1 64.8Debt/equity ratio (X) 68.3 69.7 72.2 72.6 70.5 67.3 63.8 60.5 58.6 55.4 65.9Debt serv. coverage (timesR.7 2.5 2.5 2.0 1.5 1.5 1.5 1.5 1.6 1.6 1.9Current ratio (times) 2.3 2.5 3.1 3.6 3.9 4.2 4.6 4.9 5.0 5.1 3.9

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6.10 During the period 1991-2000, FPEPB is projected to maintain high

growth rates. Energy sales are expected to increase by about 165 percent over

1991 levels (11.5 percent a year), and net fixed assets in operation are

expected to grow by about 457 percent (21 percent a year).

6.11 From 1993 onwards, PPEPB's performance is expected to improve drama-

tically as the Shuikou hydroelectric plant is commissioned. Operating ratios

should drop from about 80 percent in 1992 to 57 to 67 percent from 1993

onwards. Similarly, the rate of return on historically valued assets will

improve from 5 to 9 percent in 1990-92, to 13 percent on average in 1993-2000.

6.12 FPEPB's finances are expected to remain satisfactory based on the

projected average tariff level. Revenues and net income will grow rapidly as

sales, and particularly average tariff level increase. The latter is pro-

jected to increase by 36 percent from 1992 to 1995 and by 18 percent in 1993,

dictated by rapidly growing debt service requirements. In fact, the projected

tariff levels are determined more by debt service coverage than self-financing

ratio targets. By 1998, FPEPB's self-financing ratio is expected to reach

42 percent,so as to achieve the required debt service coverage ratio of 1.5

times.

6.13 In line with prudent financial management practices, FPEPB needs to

monitor its rising debt carefully in order to achieve a better balance between

debt and equity. Based on the projected future investments and related finan-

cing arrangements, its capital structure would improve gradually over time.

Specifically, its debt/equity ratio is forecast to decline from a peak of

73/37 in 1994 to 55/45 in 2000, which is satisfactory.

E. Financing Plan

6.14 FPEPB's financing plan for the second phase project implementation

period (1992-96) is shown in Table 6.3. The investment program does not

include capital requirements of Fuzhou Thermal Power Station II owned by

HIPDC.

6.15 The present Chinese financial system prevents a power bureau from

financing more than nominal amounts of its investment program from internal

cash generation. In the case of FPEP3, precisely 100 percent of cash avail-

able for investment is earmarked for rex.ovations and distribution improvements

through the Special Fund allocation system. The proposed project (excluding

interest during construction) accounts for about 23 percent of FPEPB's total

fund requirements and the proposed Bank loan will meet about 8 percent of

FPEPB's financing needs during the period.

6.16 The estimated foreign exchange requirement of the proposed project

exceeds the proposed loan by $25.7 million, representing interest during con-

struction. SEIC has arranged for FPEPB to borrow the Yuan equivalent of this

amount from the People's Construction Bank of China (PCBC) at 5.04 percent per

annum interest, with repayment over a 10-year period beginning upon completion

of the project in 1995. Arrangements have also been made to allow FPEPB to

purchase the needed foreign exchange from the Bank of China to cover interest

during construction.

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Table 6.3: FPEPB's Financing Plan, CY92-96

Y million $ million

Sources of FundsInternal cash generation 5,928 1,092(less) increment in working capital 513 95(less) repayment of loans 1,838 338(less) remittances to government 368 67(less) special fund expenditures 945 174(less) interest charged to operation 1,281 236

Cash Available for Investment 983 181

IBRD loan (Phase I) 216 40Proposed IBRD loan (Phase II) 543 100Other loans for proposed project 1,324 243All other loans 3,977 732

Total borrowings 6.060 1.116

Total sources of funds 7,043 1.279

Aitplication of FundsProposed project 1,645 303Other construction 3,668 675Interest during construction 747 138Renovations 518 95Distribution improvements 465 86

Total aDilication of funds 7.043 1.297

L/ $1 = Y 5.43.

6.17 Besides the Shuikou project, the next planned major project, inFPEPB's investment program (Songyu thermal power plant) also has a foreignexchange component of 25 percent of project cost, which is assumed to befinanced by a foreign investor. Currently, FPEPB is actively seeking to forma joint venture with SEIC, Fujian Provincial Government, Xiamen InternationalTrust & Investment Corporation, and a yet to be identified foreign investor.The detailed institutional arrangements, capital and ownership structure ofthe new venture, and its relationship with FPEPB are not yet defined. Giventhese uncertainties, financial projections assume traditional financingarrangements.

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VII. PROJECT JUSTIFICATION

A. Proiect Benefits

7.1 The proposed project will provide reliable and economical electric-

ity supply to the Fujian province, without major adverse environmentalimpacts. It will help Fujian to cope with a rapidly growing industrial demand

resulting from the Province opening to the outside world, and will contribute

to a further improvement in the living standards of the population. overall

the energy generated by the Shuikou development will account for half of the

incremental energy supply to the Fujian grid between 1990 and 1995, during

which time energy demand is expected to grow at a rate of 12.3 percent peryear.

7.2 Indirect benefits arise from:

(a) improved navigational conditions in the Min River between Nanping

and Fuzhou, which will allow the capacity of river transport toincrease from its current level of about 250,000 tons/year to about

4.0 million tons of freight and 2.0 to 2.5 million m3 of timber;

(b) upgraded infrastructure and housing arising from the resettlement

program, and flow-on to others in the region from the expenditurelocally of some $300 million with $200 million for resettlement; and

(c) the avoidance of thermal generation, involving burning of 1.6 mil-

lion tons of standard coal/year, land use for thermal plant of 1000

ha and for mining of 300 ha/year, gaseous and particle emissions of

65,000 tons/year, solid waste of 500,000 tons/year, and water usage

of 125,000 tons/year.

B. Proiect as a Least Cost Generating Alternative

7.3 Prior to the appraisal of the first project, comprehensive studies

were carried out by BERI indicating that the project was part of the least

cost generation program for the interconnected East China and Fujian grids.

With the extraordinary growth of power demand in Fujian since the appraisal of

the first loan, further studies were carried out by the same research insti-

tute, leading to a recommendation not to construct the tie-line at this stage

(paras. 4.14-4.17), and developed the generation investment program for the

grid described in para. 4.18, which includes immediate development of the

Shuikou project to serve the FPG. Since there are no hydro schemes ready for

implementation, and the central government imposes restrictions on use of oil

for power generation, generation alternatives in the short term are effec-

tively limited to coal fired steam turbine plants. The analysis presented in

Annex 7.1, demonstrates that the equalizing discount rate (the rate at which

coal plants would be more economical than Shuikou) is about 19 percent, con-

firming the rationale for development of the project as early as possible.

C. Proiect Size and Timina

7.4 Full SuoDlv Level. The original design studies for Shuikou consid-

ered various full supply levels. These studies convincingly demonstrated that

- 40 -

the optimum full supply level (FSL) should be the maximum possible withinimposed constraints. Powerhouses on the upstream tributaries, Shaqikou,Afengqiao, and Gutianxi, dictate a maximum dry season FSL of El. 65.0 m. Theoperating level during flood season (April to July) of El. 61.0 m was deter-mined taking into account backwater effects during flood flows, and floodcontrol implications in Nanping City.

7.5 Installed Cagacitv. Original design studies also considered variousinstalled capacities up to a maximum of 1,600 MW. For capacities above1,200 MW, only benefits resulting from fuel savings due to additional energygeneration were considered, with no value taken for additional peaking capa-bility. This was because of considerable time before full utilization ofpeaking capability (during the dry season) by the interconnected grids. Sincesimilar considerations apply to Shuikou in the FPG, with full absorption inthe dry season not expected until the year 2003, the original optimization,yielding an optimum capacity of 1,400 MW, would be expected to remain valid.An updating of the original analysis, presented in Annex 7.1 confirms this.

7.6 Timing. Commissioning date of the first generating unit is plannedfor June 1993. The supply situation in 1993 is likely to be very tight, sincethe demand is expected to grow by more than 800 MW between 1990 and 1993, andthe last major commissionings were the 700 MW HIPDC plant in 1989 and the 200MW Shaqikou plant in 1989/90. The first two turbines of Shuikou totaling 400MW are the only commissionings planned for 1993. Since the installation oflater units is justified by fuel savings alone (para. 7.5), and all energygenerated by subsequent units can be absorbed immediately after commissioning,their installation at minimum practicable intervals is also justified.

D. Economic Rate of Return

7.7 The IERR of the Shuikou development was calculated using the esti-mated economic costs of the project at end 1991 constant prices, with associ-ated transmission and distribution. The end 1991 "Huaneng" price which isapplied to almost all new consumption, provides a lower bound estimate for"willingness to pay" and was therefore used as a proxy for the economic valueof electricity. On this basis, the IERR is about 19 percent. The benefitswere also calculated using the tariff required to meet financial covenants.The IERR thus calculated is about 14 percent.

7.8 The IERR was also calculated for the entire investment program ofthe FPG for plants commissioned up until the year 2000. The rates of returnare 19 percent and 11.4 percent, based on the Huaneng price and on the averagetariff level for 1994. Both analyses are presented in Annex 7.1.

E. Progect Risks

7.9 The risks generally associated with hydroelectric projects arerelated to potential cost and schedule overruns due to geological and hydro-logical uncertainties, and contractor and construction supervision inadequa-cies. For the current project, in which foundations and all river bed workare complete, only one flood season remains prior to dam completion, and thefirst generating unit is on schedule for commissioning in June 1993, the riskof major cost or time overruns is very low. There is a risk that the somepeople affected by the resettlement program will be disadvantaged during the

- 41 -

period taken to bring new production systems up to full capacity. This riskis being minimized by the IER, and assurances being obtained that the Govern-ment will monitor the reports of the IER, and make funds available to sustainincomes at acceptable levels until they are fully restored (para. 5.18).

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VIII. AGREEMENTS REACHED AND RECOMMENDATION

8.1 Assurances have been obtained:

(a) from the Borrower that it will:

(i) onlend the proceeds of the proposed Bank loan to FPEPB on termsand conditions satisfactory to the Bank (para. 5.36);

(ii) continue to carry out or cause to be carried out a resettlementprogram in a manner satisfactory to the Bank (para. 5.16);

(iii) monitor the reports of the Independent Evaluation of Resettle-ment, take action to accelerate the reestablishment of incomeand welfare in identified problem areas, and make funds avail-able to sustain incomes at acceptable levels until they arefully restored (para. 5.17); and

(iv) carry out the EMP jointly with FPEPB in a manner satisfactoryto the Bank (para. 5.19).

(b) from FPEPB that it will:

(i) continue to furnish to the Bank by April 30 of each year, arolling long-term financial plan containing projected incomestatements, sources and uses of funds and balance sheets, for aperiod of eight years (para. 3.12);

(ii) implement a plan for power tariff structure improvementsacceptable to the Bank in a manner satisfactory to the Bank,including the completion of the first phase by December 31,1993 (para. 3.25);

(iii) carry out a hydro project inventory reevaluation, with timing,specialist assistance and terms of reference satisfactory tothe Bank (para. 4.19);

(iv) carry out its transmission expansion program in accordance witha schedule satisfactory to the Bank (para. 5.6);

(v) prepare, prior to completion of the dam, a program of annualmaintenance of the project works, satisfactory to the Bank,undertake periodic inspections of the dam and associated worksusing independent experts whose qualifications and experienceare acceptable to the Bank, and to implement their recommenda-tions (para. 5.11);

(vi) jointly with the Borrower, continue to carry out or cause to becarried out a resettlement program in a manner satisfactory tothe Bank (para. 5.16);

(vii) carry out the EMP, jointly with the Borrower, in a manner sat-isfactory to the Bank (para. 5.19);

- 43 -

(viii) take all measures, includini but not limited to tariff adjust-ments, to ensure that its ir ernal cash generation is suffi-cient to maintain a self-financing ratio of no less than22 percent in 1992/93, 25 percent in 1994/95, and 30 percentthereafter (para. 6.8);

(ix) not incur additional debt unless a reasonable forecast showsits internal cash generation would provide a debt service cov-erage ratio of no less than 1.3 times before 1995, and 1.5times thereafter (para. 6.8); and

(x) maintain a debt/equity ratio of no more than 75/25 in 1992-96and 70/30 thereafter (para. 6.8).

8.2 Execution of a subsidiary loan agreement between the Borrower and

FPEPB and approval of the Loan Agreement by the State Council would be condi-tions of loan effectiveness (para. 5.36).

8.3 Subject to the above agreements, the proposed project is suitable

for a Bank loan of $100.0 million to the People's Republic of China. The loanwould be for a term of 20 years including a five-year grace period, at the

Bank's standard variable interest rate, with level principal repayments.

CHINA

Second Shuikou Hydroelectric Prolect

Total Production and ConsumDtion of Enermy and Its ComDositlon

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

PRODUCTION 628 646 637 632 668 713 779 855 881 913 958 1016 1039

(million of standard fue)Proportion ()

Coal 70.3 70.2 69.4 70.2 71.3 71.6 72.4 72.8 72.4 72.6 73.1 74.1 74.2

Crude OCl 23.7 23.5 23.8 22.9 21.8 21.3 21.0 20.9 21.2 21.0 20.4 19.3 19.0

Naturai Gas 2.9 3.0 3.0 2.7 2.4 2.3 2.1 2.0 2.1 2.0 2.0 2.0 2.0

Hydro Power 3.1 3.3 3.8 4.2 4.5 4.8 4.5 4.3 4.3 4.4 4.5 4.6 4.8

CONSUMPTiON 571 586 603 594 621 660 709 767 809 866 930 969 980

(million of standard fuel)Proportion (%)

Coal 70.7 '71.3 72.2 72.7 73.7 74.2 75.3 75.8 75.8 76.2 76.2 76.0 75.6

Crude Oil 22.7 21.8 20.7 20.0 18.9 18.1 17.4 17.1 17.2 17.0 17.0 17.1 17.0

Natural Gas 3.2 3.3 3.1 2.8 2.5 2.4 2.4 2.2 2.3 2.1 2.1 2.0 2.1

Hydro Power 3.4 3.6 4.0 4.5 4.9 5.3 4.9 4.9 4.7 4.7 4.7 4.9 5.3

GNP Index 100.0 107.6 116.0 121.2 131.8 145.4 166.6 187.8 203.4 225.8 250.6 260.5 274.1

(constant pdces)

Energy Intensity Index 100.0 95.4 91.0 85.8 82.5 75.9 74.5 71.5 69.7 67.2 65.0 65.1 62.6

(consumptionGNP)

Source: China Statistical Yearbook 1991.

Notes:Excluding blo-energy, solar, geothermal and nuclear energy.

All fuels are converted Into standard coal with Ihermal enuivalent of 7.000 kilocalorie per kiloaram. The conversion factors are:

1kg of coal (5000 kca) - Q714 kg of standard coal.

I kg of crude oil (10000 kcal - 1.43 kg of standard coal.

1 cubic metre of natural gas (931S0 kca - 1.33 kg of standard coal.

The conversion of hydropower Is based of the specific consumption of standard coal for thermal power genration of the year.

- 45 - Anngx 1.2

CHINASECOND SHUIKOU HYDROELECTRIC PROJECT

Organization Chart of the Ministry of Energy

Minlster

Vice Ministers

-China Natonal Nuclear Electric PowerGeneral Office . Z Industrv Corporatlon II Ospatching Center

I- sDepartment of China Natonal Oil &Energy Informaon CenterPolicy 8 Legislaton Natural Gas CoIraton

Plann I ChinOil Conal oatonr Electric Power PlanningD Oepartment ot Planning&l 7 Oil Corporaton & Engineering Institutions

DCaPitmnstructon China Northeast and Water Resources &Ca iaCos nInner-Mongolia United Hydropower SurveyDepartment of Safety Coal Industry CorporaUon & Design Institutes

& Environmental Protection _ _._.

___ -China NaUonal CollegesDepartment of l Coal Corporaton

ordination.I Scientfic & TechnicalChina Natonal Local 1HResearch Institutes= cOnmlc .oordent of Coal Minesordination Development Corporaton

Department of Enerae Conservation HiHuaneng Intemational Power

0eveloprnen t C orporatlon| Department of Science & Technolo v Regional Electric

|Power Administration

Oepartment of Education FCIChina InternatIonal Water &

D epartment of Intemabonal Cooperation I China Huadian

. H ~~~~~~~~~~~(Group) CorporationOeF~partment of

Personnel & Labor China EIecticity Cou nc

Department of Electric Power Power Leadingr Group. State Council

OepaRtment of Hydropower Development Oil to Coal Conversion

Office State CouncilO- -epa~Rment of Rural

IEnergy 6 Electrification I

D epartment of Coal

Department of Administration

I nief Enrineers Otffcefor Petroeum Industry

Chief EngIneers Officefor Nuclear Industr i ksr/wS1 118

46 -

Atnex 2. 1

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Installed Cg2acitv. Electricity Generation and Sales In the Power Subsector

Installed Capacity (MW) Energy Generation (lWh) EnergyYear Hydro Thermal Total Hydro Thermal Total Sales a/ (GWh)

1949 163 1,686 1,849 710 3,600 4,310 3,4601957 1,019 3,616 4,635 4,820 14,515 19,335 16,4071965 3,020 12,056 15.076 10,414 57,190 67,604 56,8021970 6,235 17.535 23,770 20,450 95.420 115,870 n.a.1975 13.428 29,978 43,406 47,630 148,210 195,840 156,969

1976 14,655 32,492 47,147 45,640 157,490 203,130 164,6981977 15,765 35,686 51,451 47,670 175,740 223,410 181,6911978 17,277 39,845 57,122 44,630 211,920 256,550 210,2391979 19,110 45,906 63,016 50,120 231,827 281,947 233,5771980 20,318 45,551 65,869 58,211 242,416 300,627 251,639

1981 21.933 47,069 69,002 65,546 243,723 309,269 258,9761982 22,959 49,401 72,360 74,399 253,279 327,678 275,2991983 24,160 52,279 76,440 86,150 264,9P0 351,440 297,1261984 25,547 54,373 79,920 85,780 290,207 376,987 319,6001985 26,120 60,373 86,493 92,374 318,315 410,689 348,353

1986 27,542 66,276 93,818 94,480 355,091 449,571 357,0571987 30,193 72,704 102,897 100,229 397,092 497,321 420,0191988 32,698 82,799 115,497 109,177 435,888 545,065 464,0131989 34,570 92,060 126,637 118,475 466,200 584,675 495,1351990 35,370 99,630 135,000 126,000 492,000 618,000 527,154

Average Growth rates p.a.1970-75 16.6% 11.3% 12.8% 8.2% 9.2% 11.1%1975-80 8.6% 8.7% 8.7% 4.1% 10.3% 9.0% 9.9%1980-85 5.2% 5.8% 5.6% 9.7% 5.6% 6.7% 6.7%1985-90 6.3% 10.5% 9.3% 6.4% 9.1% 8.5% 8.6%

a/ Energy sales not Including uses by stations and captive plants.

Source: MOE

- 47 -

Annex 2.2

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Growth Index of Electricity Generation and Primary Enerav Demand

Installed Capacity Electricity Generation Growth IndexTotal Share of Total Share of Primary Electricity

Year (MW) Hvdro (%Y) (TWh Hydro (%b GNP Energy Generatlon

1979 63,015.9 30.3 281.9 17.8 100 100 100

1980 65,869.1 30.8 300.6 19.4 103 107 107

1981 69,132.6 31.7 309.3 21.2 102 110 110

1982 72,359.6 31.7 327.7 22.7 106 116 116

1983 76,444.9 31.6 351.4 24.6 113 125 125

1984 80,116.9 31.9 377.0 23.0 121 134 134

1985 87,053.2 30.3 410.7 22.5 131 144 144

1986 93,818.5 29.4 449.6 2.0 138 159 159

1987 102,897.0 29.3 497.3 20.2 148 176 176

1988 115,497.1 28.3 545.1 20.0 159 193 193

1989 126,638.6 27.0 584.7 20.2 165 207 207

1990 135,000.0 26.2 618.0 20.4 167 219 219

Source: MOE

- 48 -

Annex 2.3

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Electricity Consumotion by Sectors

Natlon's Share of Share of Rural Share ofTotal Share of !ndustry (%6 Transport- (including Municipal &

Year (TWhf Whole Hcaw LWMht ation (%) household (%) Residential (%)

1949 3.5 69.1 34.4 34.7 0.6 0.6 29.81952 6.2 80.0 43.0 37.0 0.9 0.7 18.41957 16.4 82.9 58.6 24.3 0.4 0.7 16.01962 37.8 84.6 70.0 14.6 0.6 4.1 10.71966 70.0 84.1 69.1 15.0 0.6 7.8 7.51972 123.6 82.3 69.7 12.6 0.6 10.5 6.61976 164.7 78.3 64.6 13.7 1.1 14.1 6.51977 186.3 78.5 65.0 13.5 1.2 13.7 6.61978 214.9 79.0 65.9 13.1 1.1 13.7 6.3e979 233.6 79.0 65.9 13.1 0.6 13.9 6.51980 251.6 77.9 64.5 13.4 0.6 14.9 6.61981 259.0 76.2 62.6 13.6 0.8 16.0 7.01982 275.3 76.0 62.0 14.0 0.7 16.0 7.61983 297.1 75.7 60.9 14.8 0.7 16.0 7.61984 319.6 75.2 60.5 14.7 0.8 15.9 8.11985 348.5 73.8 58.8 15.0 0.9 16.5 8.81986 379.7 72.9 57.7 15.2 1.2 16.4 9.51987 423.5 72.5 57.9 14.6 1.2 16.4 9.91988 461.3 71.3 57.3 14.5 1.9 16.4 9.91989 495.2 71.0 53.9 17.1 1.9 16.7 10.41990 524.7 69.4 52.1 17.3 2.0 17.3 11.3

Source: MOE

FUJIAN PROVINCIAL ELECTRIC POWER BUREAUOrganization Chart

Th.I 1k .. 8..,

3 ......

r4iss C-;@UE. Ce"d.,ls, re-h,l Cosbz"a" C a.

D"Px" c,,. |~~1110smab so"S 01|sa;9Z "66564

Me.bbafts.. .Sm. ps". C.6...... *gat6 a C ^,bak.6 @" Ts

M... ae" irkdf

I.,. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ .. Z

pT..&bims C.R.-

3 T .&lk. kb-

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Performance Indicators for FPEPB

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Installed Capacity(M 882 880 878 975 1.037 1.122 1.312 1.381 1.456 1.525

Hydro 578 578 578 578 559 532 634 709 784 859

Thermal 304 302 300 397 478 591 678 672 672 666

Enerav Generation (_Whb 3 3.598 3.681 4.002 4.304 5.104 5.923 6.817 6.081 6.096

Hydro 2,280 2,396 2,629 2,324 2,389 2,158 2,047 2,915 2,725 3,048

Thermal 1.043 1,200 1,052 1,678 1,915 2,946 3,876 3,902 3,356 3,047

Caoacitv Factor(%) 43 47 48 47 47 52 52 56 46 46

Hydro 45 46 52 46 49 46 37 47 40 41

Thermal 39 47 40 48 46 57 65 66 57 52

Max. demand (MW) 687 694 760 860 963 1,069 1,228 1,407 1,675 1,860

Energy sales (GWh) 3,212 3.475 3,656 3,965 4.483 5,004 5,690 6,631 7,817 8,095

Growth in sales (%) 6.9 &2 5.2 &5 13.1 11.6 13.7 16.5 17.9 3.6

Plant use (%) 2.9 3.4 2.8 4.0 4.39 5.58 6.24 5.73 5.48 4.99

T&Dlosses(%) 84 8.9 84 8.2 8.24 7.85 7.56 8.03 6.79 6.87

Average coal consumption(gm of std coal per kWh) 552 555 547 547 531 516 503 495 493 482

Numberof customers n.a. 77,142 81,389 87,509 92,179 127,802 176,154 192,894 251,173 264,594

Number of employees n.a. n.a. n.a. 15,183 16,475 20,283 20,392 19,926 19,688 19,486

Saes per employee MWh) n.a. n.a. n.a. 261 272 252 290 342 397 415

NJ

- 51 - ANNEX 3.3

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Staff of FPEPB(as of December 31, 1990)

Number

By SvecialtvTechnical staff 2,628 14Administrative staff /a 2,287 12Service staff 1,920 11Operations staff 9,299 51Apprentices 295 2Other 1,805 10

Total 18 234 100

By Functional UnitsPower generation 6,852 38Operator trainees 295 2Transmission maintenance 511 3Distribution maintenance 551 3T&D construction 1,907 10Substation 1,424 8Power supply 680 4Thermal power construction 1,139 6Repair 1,932 10Dispatching and research 415 2Design 349 2Education 450 2Administration 270 2Others 1,450 8

Total 18.234 100

Ls includes finance and accounting personnel.

Source

- 52 - ANNEX 3.4

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

FPEPB's Existing Trainina Facilities and Expansion Proaram

Academic Existing Plan of Expansions1990 1991 1992 1993 1994 1995

Ouanzhou Electric Power Technological School(Established in 1984, provides 4-year curricula for training of juniorsecondary school graduates as mid-level technicians)

Total staff 250 260 260 260 260 260of which teaching staff 149 159 159 159 159 159

Students admitted 230 240 240 240 240 240Students enrolled 957 949 949 950 960 960Students graduated 83 239 245 239 230 240

Fuzhou Electric Power Technicians' School(Re-ebtablished in 1978, provides 2-year curricula for training ofsecondary graduates as skilled workers)

Total staff 168 198 198 198 198 198of which teaching staff 106 116 136 136 136 136

Students admitted 263 280 280 280 280 280Students enrolled 543 627 823 840 840 840Students graduated 173 217 84 263 280 280

Zhanazhou Electric Power Cadre School(Provides 2-year training for FPEPB mid-level technical staff and shortcourses for FPFPB administrative/managerial staff)

Total staff 33 33 33 33 33 33of which teachir.g staff 13 13 13 13 13 13

Capacity 100 100 100 100 100 100

Source: FPEPB.

- 53 - ANNEX 3.5

CHIN

SECOND SHUIKOU HYDROELECTRIC PROJECT

Financial Management Training

Background

1. As state-owned enterprises, the power bureaus are bound by thefinancial regulations established by GOC and the financial system h.3 thus farbeen highly centralized. Until the recent economic reform, these enterpriseswere essentially operating arms of the government and financial responsibili-ties/autonomy were very limited; investments were largely funded by governmentgrants and the entities' surplus funds were mostly remitted to the government.Indeed, the function of finance at these enterprises essentially has beenconfined to financial reporting; managerial-orientation and modern treasuryfunctions (such as cash and debt management) are lacking. Further, under thepresent Chinese system, heavy emphasis is placed on the annual budget as acontrolling tool, but financial planning generally is not undertaken beyondone year. Within the present institutional framework, the power bureaus haveperformed satisfactorily.

2. Under the ongoing economic and enterprise management reforms inChina, the institutional framework is becoming less centralized with corre-sponding increases in financial autonomy and responsibility for decision-mak-ing at the state enterprise level. Reforms of the funding arrangementsbetween GOC and the state enterprises continue to evolve. As a first majorstep, investments are being financed more by debt (mainly domestic loans) thanby government grants. For most of the Bank-financed power entities, the Bankloan represents their first foreign borrowings; it is also novel for most ofthese entities to bear the related foreign exchange risks. Separately, ini-tiatives are being taken to improve financial management and control. Theseinitiatives include introducing computer applications and establishing aninternal auditing function. However, these initiatives are at an initialstage of implementation and are limited in scope. In order to perform theirincreased role efficiently and effectively, power bureaus will need tostrengthen their financial management, particularly with respect to planning,cost control and debt management. Under the various Bank-financed power oper-ations in China, provisions have been made for training _n financial manage-ment. These training activities are centrally managed by MOE/SEIC. Recentlya training seminar conducted by Price Waterhouse (US and Hong Kong) was heldin Chengdu. In addition, overseas training was conducted by Electricite deFrance. Finally, the Bank recently organized a seminar in Hangzhou to providean overview on corporate planning and financial management information sys-tems.

Objectives

3. The main participants in the financial management training would beofficials from the finance/accounting and planning departments of the variousBank-financed power entities. The training activities are designed to famil-

- 54 .AMEEX 3.5

iarize these officials with selected topics in the modern financial managementof power utilities, covering both operation and project construction. Thisobjective would be achieved through a series of training seminars in China,overseas training and study tours. Initial training activities would aim atproviding a general overview of the selected topics. Subsequent trainingactivities would build on the earlier experiences and provide in-depth dis-cussions of the topics which are of particular importance and interest to theparticipants.

Scope

4. Two related and complex subjects, tariff design and system planning,are being covered separately under Bank Group-financed studies. The majortopics of financial management training are outlined below.

Financial Control. Monitoring. and Evaluation

5. For (i) operation; and (ii) project construction:

(a) budgeting units and organization of responsibility centers;

(b) transfer pricing, joint cost allocation;

(c) performance indicators for monitoring and control;

(d) methodology and procedure for cost management, including costaccounting; cost of service analyses which could in turn provide thebasis for tariff design; budget preparation and control; assessmentof potential cost savings as well as stock management; and

(e) organization and procedures for internal controls, including inter-nal auditing and operational/management audit.

Long-Term Finacial Planning

(a) methodology of long-term financial forecasting;

(b) project financial evaluations;

(e) coordination with investment planning and reiteration with capitalbudgetirng; and

(d) project financing, including various instruments of financing,debt/equity structuring, foreign debt management--including evalua-tion of different financing terms (covering different currencies,interest rates, maturities, grace periods etc.), strategies andinstruments to minimize foreign exchange risks.

State-of-the-Art in Financial Management Technigues

* including computer applications for billing and stock management,financial reporting, budgeting, long-term financial planning, con-trol and management information system.

- 55 - ANNEX 3.5

International Accounting Standards

Selected topics which are of particular relevance and interest to the powerbureaus, including for example:

(a) consolidated financial statements--Chinese accounting practice isnot to consolidate capital construction accounts with productionaccounts. However, in order to provide an overall view of the powerbureau's financial position, agreements have been reached with thevarious Bank-financed power bureaus that the financial statementsfurnished to the Bank would consolidate the capital constructionaccounts with production accounts;

(b) cash flow statements or statement of changes in financial position--They are = required for financial reporting in China. To facili-tate financial analysis and management by the power bureaus, agree-ments have been reached with the Bank-financed power bureaus thatsuch statements would be prepared and furnished to the Bank.

(b) accounting for construction contracts;

(c) information reflecting the effects of changing prices--this wouldbecome increasingly significant as inflation recently has escalatedsharply in China; and

(e) accounting for the effects of changes in foreign exchange rates--current Chinese accounting practice is an anomaly in this respect.

Contract Managmeent

* commercial aspects of bidding documents, contract terms includingfinancial claims.

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

SaWe and Tarifs bvkg aorv - Fird Quarter 191l

TOTAL ENERCY CHARGE DEMAND CHARGEPower Peak

Totl Ene0y Demand Fator Vailey

Prie ChaWe Chage Charge Chaw Old Prbe New Price Huaneng

GWh -- f&W i - - GWh UflWh GWh UkWh GWh bkWh MVA YlkVA MW YIkW

UGHTING 207.0 18.96 16.96 207.0 16.95Below 1kv 188.3 17.00 17.00 186.3 17.001-10kv and aboe 20.7 10.60 16.50 20.7 16.50

SMALL IND.& COMM 218.5 18.71 17.47 0.85 0.59 104.2 9.88 35.3 16.90 79.0 28Below 1kv 100.9 22.48 20.22 1.27 0.90 38.8 10.80 10.9 1B.90 51.4 281-10kv 76.8 16.66 16.12 0.16 0.26 47.3 9.30 2.5 16.90 27.0 2836kvand above 40.8 13.45 13.21 0.00 0.24 18.3 8.30 21.9 16.90 0.8 28

LARGEINDUSTRY 1065.0 15.39 13.37 1.69 0.11 0.22 M66.3 7.18 133.7 15.78 262.0 28 3,610 4.0 600 6.01-10kvgneral 520.0 17.16 14.83 2.23 0.26 0.44 284.4 8.10 97.4 15.78 138.2 28 2.520 4.0 250 0.01-1Okv(preftnfn 66.6 5.89 4.92 0.97 0.00 0.00 65.6 4.92 0.0 0.00 0.0 0 62 4.0 50 6.01-10kf (sbtota) 576.6 16.69 13.85 2.10 0.24 0.40 341.0 7.57 97.4 15.78 138.2 28 2,582 4.0 300 6.03SSvWgena 392.0 15.88 14.88 1.06 -0.04 0.00 231.9 7.70 36.3 15.78 123.8 28 920 4.0 80 6.036kv(pretea 96.4 8.22 4.40 1.82 0.00 0.00 96.4 4.40 0.0 0.00 0.0 0 108 4.0 220 6.035kv(gubtOt 488.4 13.97 12.7 1.21 -0.03 0.00 328.3 6.73 36.3 15.78 123.8 28 1,028 4.0 300 8.0

AGtICULTURE 37.3 10.62 10.52 37.3 10.52Below lkw 28.8 1120 11.20 26.8 11.201-10kv 7.8 9.00 9.00 7.8 11.2035kv and above 2.7 8.10 8.10 2.7 8.10

BULK SALES 632.2 17.73 17.73 0.00 -0.09 0.25 275.4 7.90 84.8 15.47 272.0 28 0 0.0 0 0.0TOTAL 2,t10.0 18.48 15.31 0.84 0.09 0.24 1293.2 9.18 253.8 15.83 613.0 28 3.810 4.0 6oo 6.0 X

-57 - 3.E 37

SECOND SHUIKOU HYDROELECTRIC PROJECT

Acton Pian for Tariff Structure Improvements

Backgroun

1. The tariff system currently applied in Fujian needs to be improvedto reflect equitably the costs of supply of the various types of consumptioncategories, encourage an efficient use of electricity, simplify billing andtariff management for the Power Bureau, and yield sufficient revenues to meetthe financial requirements of the Fujian Power Grid, including an adequatecontribution to investments. The following action plan has been designed toaddress these issues, taking into account the specific circumstances ofFujian. It will be implemented in steps, under the supervision, and with theassistance of MOE and Fujian Pricing Commission authorities.

Main Objectives

2. The main objectives of the action plan are to:

(a) gradually unify the current three-tier system applied to industryand nonlighting commercial uses, and phase out preferential indus-trial tariffs;

(b) adjust the commercial lighting tariff, with a view to eliminateseparate billing for lighting;

(c) apply appropriate differentials according to voltage level of sup-ply, increase the weight of the demand charge, and extend the use oftime-of-day/seasonal tariffs, to better reflect costs of supply andincrease incentives for a rational use of electricity;

(d) gradually adjust tariffs for agriculture and residential uses toreduce subsidies for consumers other than low-income groups; and

(e) rationalize FPEPB's tariffs for bulk supply and purchases from inde-pendent generators.

Time Frame and Phases of the Action Plan

3. The action plan includes two phases. The first phase, extendinguntil end 1993, includes the unification of industrial and commercial tariffs,the separation of commercial uses from the residential tariff, an increase ofthe demand charge for large industrial users, and an acceptable differentia-tion according to voltage level (see below). In a second phase (l994/9 ij,measures will be implemented to further improve the tariff structure (notablythrough time-of-day/seasonal rates). These measures will be the subject of astudy to be carried out based on a detailed analysis of economic costs ofsupply. This study will also address is,sues related to bulk-supply and pur-chase tariffs (terms of reference attached).

-58 - ANEX 3.7

Measures to be Imnlemented in the First Phase

4. Industrial and commercial tariffs will be restructured in steps, toreach by end 1993, a unified structure, which will include a higher demandcharge and a reasonable differentiation according to voltage level. Thiswould be achieved through the following steps:

(a) as soon as practicable, and no later than the fourth quarter of1992, the two "new" rates applied to new consumption, will be mergedinto one; this will require the transformation of the current mar-keting agreement with HIPDC into a suitable purchase contract, tak-ing into consideration the characteristics of the operations of theelectricity supply system.

(b) the demand charge applied to large industry will be adjusted by afactor of 2.5, (reflecting the increase of the average industrialrate since 1985), and reasonable differentiations according to volt-age level will be applied to the "new" energy charges (6 percentbetween 10 and 35/110 kV for large industry, 10 percent between low-voltage, 10 kV, and 35 kV for small industry);

(c) for large industry, the increase of the demand charge will be com-pensated by a reduction of the comprehensive new energy charges; forsmall industry, the "old" energy charges will be adjusted to main-tain reasonable consistency, for similar load factors, with thetariff for large industry following the raise of the demand charge;

(d) meanwhile, the "old" energy charges will be adjusted in steps, toreach gradually the levels of the "new" rates, with which they willultimately be merged by end 1993 and

(e) preferential tariffs will be adjusted gradually, aiming at theirelimination by 1995.

5. The tariff for commercial lighting will be separated from the resi-dential tariff in 1992, and set at a level consistent with the expected com-prehensive tariff for commercial and small industrial uses after unificationof the latter, which will eliminate the need for separate billing of lightingafter 1993.

6. Pending the recommendations of the study, the tariff for agricul-tural production, with possible exceptions for irrigation, will be adjustedgradually to rate not less than that of the average tariff level. The residen-tial tariff will be adjusted reasonably, notably to keep it above the averageprice paid by large industry supplied at 35/110 kV.

Measures to be Implemented in the Second Phase

7. The second phase will include the implementation of the recommenda-tions of the study, as agreed following review by MOE and the Bank. This isnotably expected to include the extension of time-of-day/seasonal tariffs, theadjustment of the residential tariff to bring it in line with other tariffsfor low-voltage supply, and the restructuring of bulk rates and rurchase tar-iffs.

-59 - ANNlE 3m 8

SECOND SHUIKOU HYDROELECTRIC PROJECT

Terms Of Reference for the Tariff Study

A. Backaround

1. The Fujian Power Grid is a mixed hydro/thermal system. Peak demandis growing rapidly, and reached 1,860 MW in 1990, for an energy generation of11,750 GWh. The largest plant today is the coal fired 2*350 HIPDC Fuzhouplant, and the main hydro plants are Shaqikou (300 MW) and Gutianqi (260 MW).A significant portion of energy is provided by mini-hydro plants. Followingthe commissioning of Shuikou (1,400 MW), the peak-shaving capabilities of thesystem will be greatly enhanced, but the seasonal variations of the coststructure are expected to be more pronounced.

2. The Fujian Power Bureau is currently engaged in the implementationof an action plan to reform its tariff structure. Until the end of 1993, themain thrust of this action plan will be the unification of the current three-tier system applied to industrial and commercial uses, covering also the tar-iff for commercial lighting currently billed at the same rate as residentialuses. The demand charge will be increased, and adequate differences betweenvoltage levels will be applied. This first phase of the action plan shouldlay the ground for further improvements to be implemented in a second phase,to further increase the efficiency of the tariff structure. These improve-ments are the subject of the proposed study, which will cover not only ratesfor final consumers, but also bulk sales and purchase tariffs.

B. Objectives of the Study

3. The tariff study will be carried out with the following objectives:

(a) to transfer to FPEPB modern methods of power tariff design based oncriteria of economic efficiency, financial adequacy, and fairness;and

(b) to look into the practical problem' raised by the transition fromcurrent pricing arrangements, and to propose a concrete program ofimplementation.

B. Scope of Wrk

4. The study will consider the design of the power tariff structure inthe framework of the desirable evolution of the tariff level, as dictatednotably by financial covenants; it will cover sales at high, medium, and low-voltage to final and bulk users, as well as purchase tariffs for independentsuppliers. The study should evaluate and highlight the relative mer-its/demerits of the proposed approach in comparison to current ones and topurely financial approaches.

5. The study will include, inter alia, the following tasks.

-60 - ANNEX 3.8

(a) Reviewing existing pricing, metering, billing arrangements for finalusers, bulk sales, and purchases from independent producers, as wellas current practices regarding the resale by power bureaus suppliedin bulk by FPEPB, connection charges, and the Power Fund surcharge;

(b) Analyzing system load and individual demand patterns by voltagelevel, including seasonal patterns at the aggregate level and forselected sectors, as well as the distribution of consumption ofresidential Asers;

(c) Analyzing load dispatch and marginal economic costs of power genera-tion, transmission, and distribution;

(d) Calculating marginal costs of service and comparing them with cur-rent revenue levels for typical consumers;

(e) Designing alternative options for the improvement of rate structuresfor sales to final consumers;

(f) Designing alternative rate structures for purchases from small andmedium independent producers, to optimize the use of theseresources;

(g) Designing alternative rate structures for bulk sales, consistentwith proposed options for retail tariffs;

(h) Analyzing the financial soundness of the proposed rates; and

(i) Recommending a target tariff structure and level, and an implementa-tion strategy, including aspects relating to metering and billingsystems.

D. Method and Organization

6. The Study will draw on the method, materials and experience gatheredfrom the East China Power Pricing Study, completed under the Beilungang Ther-mal Power Project, and will make ample use of the expertise available from theBERIWREP. However, the large share of hydropower and the emphasis on purchasetariffs are relatively novel and specific features of the study; limited for-eign consultancy services are recommended to assist on these aspects andreview the practical steps recommended for tariff improvements.

7. The transfer of know-how will take place through an overseas studytrip, on-the-job training, and workshops at the inception stage and to reviewthe study reports.

8. The study will be carried out jointly by FPEPB and the BERIWREPunder the auspices of the Ministry of Energy. It will be managed by a Steer-ing Committee represerting both FPEPB and MOE and coordinated by a Pr.incipalInvestigator. The Committee will exchange views with the Bank on the progressand findings of the study.

- 61 A

9. The study will make use of the output from recent systems planningstudies. Sample load measurements and analyses should be started as soon aspossible. Key dates in the timetable for the study are planned as follows:

Startup January 1993Interim Report August 1993Final Report December 1993

The interim report would include a specific analysis and first recommendationsregarding bulk-supply tariffs.

- 62 - ANNEX 3

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Terms of Reference for Technical Assistance and TrainingFor Planning and Commercial Management

!ackgrQund

1. The Fujian Power Grid (FPG) is a mixed hydro/thermal interconnectedsystem. It provides about 85 percent of electricity requirements of Fujian,and isolated grids are expected to be connected to the main network in thenear future. Of the 11.8 TWh generated in FPG in 1990, half was from hydro-electric plants. Due to the large share of hydroelectricity with limitedstorage capacity, thermal generation will be increasingly seasonal and sensi-tive to hydrological conditions. FPEPB is responsible for formulating thedemand forecast and investment program for the province, for the consolidationof commercial statistics, and for the formulation of tariff proposals, includ-ing for power supply bureaus which are not under its direct jurisdiction. In1990, FPEPB's own generation together with that of the coal fired plant oper-ated by HIPDC was about 72 percent of the FPG total. FPEPB's sales to itsdirect customers account for about 60 percent of consumption in the FPG, theremainder being supplied by local power bureaus who purchase in bulk fromFPEPB and have their own minihydro plants. FPG has registered record growthrates since 1985, notably in industrial and residential consumption. It isexpected to continue to grow at a fast pace, although there is a large degreeof uncertainty on medium term demand. This will require a close monitoring ofthe electricity market, improved load forecasting techniques, and enhancedtools of demand side management (DSM).

2. The Planning Department needs to upgrade its hardware, software, andmethodology, and increase computerization of its planning tasks and data man-agement, in order to improve its operations in a complex planning environment.

Objectives of the Program

3. The technical assistance program for the Planning and Business Man-agement Departments is carried out with the following objectives:

(a) to transfer state-of-the-art methods for medium to long term demandside analysis, load forecasting, and planning, and generally upgradethe operations of the planning department;

(b) to modernize the operations, hardware and software of the recentlycreated Business Management Department, as regards notably commer-cial and tariff statistics, tariff management, market analysis andload research as needed for tariff design;

(c) to provide training to both FPEPB and MOE staff in the above areas,notably through overseas study trips;

- 63 - ANNEX 3.9

4. The program encompasses both the Planning and the Business Nanage-ment Departments (the latter having functions close to that of a CommercialDepartment in Western utilities). The business management department has snimportant role to play in the gathering of market data useful for demand anal-ysis and for the load forecasts of the planning department, and demand analy-sis and load research programs are needed by the Business Management Depart-ment for tariff d?i'sign, or to develop other DSM programs, as well as for loadforecasting. The program does not cover tariff design as such.

Sc2pe of WoXk

5. For both departments the program will include two phases. The firstphase would include a detailed diagnosis of current operations, methodologies,hardware and software, and the design of an action plan for proposed improve-ments. The second phase would cover the implementation of the proposed plan.

6. Areas to be covered include, inter alia, the following points.

Market Statistics. Demand Analysis. Load Research

(a) detailed review of current praccices and proposals regarding collec-tion, consolidation, and computerization of statistics on the elec-tricity market, covering FPEPB, FPG, the isolated systems, and inde-pendent generation (capacity, gross and net generation, peak demand,number of consumers and sales by category of consumers or economicsubsector, and losses); particular attention will be given to lossesin systems supplied in bulk by FPEPB;

(b) design of specific market analysis tools for the residential sector(ownership of appliances, distribution of consumption per customer),taking into account current metering practices, and for the analysisof electric energy intensity by branch of industry and of its possi-ble evolution;

(c) design of load-research programs for tariff design and load-fore-casting;

(d) review of current practices and proposals regarding collection,consolidation, and computerization of commercial statistics on con-sumers, sales, tariff, and revenues by tariff category (FPEPB, andpower supply bureaus); this analysis should take into account thepossible extension cai time-of-day/seasonal tariffs;

(e) review of current practices in load forecasting (consumption,losses, net generation, including seasonal aspects, load curve fore-casts, problems related to isolated networks and independent genera-tion); proposals for improvements, notably in terms of load curveforecasting, assessment of the impact of changes in the economicstructure on the load curve, assessment of the impact of possibleenergy conservation measures;

a 64 - ANNEX 3-9

Generation lanning

(a) review of current practices, status of computerization, and linksbetween the Planning Department and other Departments involved inthe planning process;

(b) proposals for improvements of the medium term, multiyear generationsimulation and least-cost investment planning model; focus shouldpreferably be placed on the optimal operation of hydro plants, main-tenance scheduling and dispatch of thermal plants, evaluation ofsystem reliability and discounted cash-flow for alternative invest-ment programs, rather than on optimization algorithms for the lat-ter; the output should facilitate the forecast of coal consumptionand expenditures to be used in financial forecasts;

Method and Qrganization

7. The program will make ample use of the expertise available fromBERIWREP. However, foreign consultancy (about 5 staff-months) is needed toassist on some of the practical aspects involved in load-research, load curveforecasts, and planning model. The transfer of know-how will also take placethrough overseas study trips, courses or conferences for both FPEPB and MOEstaff.

8. The program will be carried out by FPEPB with the assistance of theBERIWREP, in coordination with MOE. It will be coordinated by a senior memberof FPEPB's management. A report would be prepared to present the review ofcurrent practices and the proposed action plan. A shorter report would*p204OXbeprepared about nine months after, to review the status of implementation.

9. The schedule is planned as follows:

Startup: October 1992Preliminary Report: August 1993Final Report: December 1993Implementation Report: September 1994

- 65 -

Annex 4.1

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Installed Capacitv. Generation and Enerav Sales of FPEPB

Installed Capacity (MW) Energy Generation (rWh) EnergyYear Hydro Thermal Total Hydro Thermal Total Sales (GWh)

1965 67.36 73.5 140.86 353.00 251 604.00 609.001970 165.30 86.9 252.20 853.00 199 1,052.00 1,021.00

1971 186.60 124.1 310.90 631.00 552 1,183.00 1,139.001972 202.90 51.5 254.40 662.00 200 862.00 1,366.001973 291.40 65.9 357.30 963.00 287 1,250.00 1,614.001974 304.40 56.5 360.90 1,121.00 210 1,331.00 1,465.001975 399.40 127.5 526.90 1,297.00 268 1,565.00 1,818.00

1976 399.40 111.0 510.40 1,450.00 288 1,738.00 1,924.001977 399.40 158.0 557.40 1,528.00 500 2,028.00 2,249.001978 431.90 189.5 621.40 1,687.00 812 2,499.00 2,574.001979 462.00 287.7 749.40 1,536.00 1,267 2,803.00 2,857.001980 577.00 310.2 887.20 1,765.00 1,404 3,169.00 3,190.00

1981 578.50 303.8 882.30 2,280.00 1,043 3,323.00 3,212.001982 578.50 310.9 880.40 2,396.00 1,200 3,596.00 3,475.001983 579.50 299.5 878.00 2,629.00 1,052 3,681.00 3,656.001984 578.50 396.5 975.00 2,324.00 1,678 4,002.00 3,965.001985 559.00 478.0 1,037.00 2,389.00 1,915 4,304.00 4,483.00

1986 531.50 590.5 1,122.00 2,158.00 2,946 5,104.00 5,003.001987 634.00 678.0 1,312.00 2,047.00 3,876 5,923.00 5,689.701988 709.00 672.0 1,381.00 2,915.00 3,902 6,817.00 6,630.701989 784.00 672.0 1,456.00 2,724.55 3,356 6,080.60 7,816.781990 859.00 666.0 1,525.00 3,048.00 3,047 6,095.00 8,094.74

Average Growth rates p.a.1965-70 19.7% 3.4% 12.4% 19.3% - 4.5% 11.7% 10.9%1970-75 19.3% 8.0% 15.9% 8.7% 6.1% 8.3% 12.2%1975-80 7.6% 19.5% 11.0% 6.4% 39.3% 15.2% 11.9%1980-85 - 0.6% 9.0% 3.2% 6.2% 6.4% 6.3% 7.0%h1985-90 9.0% 6.9% 8.0% 5.0% 9.7% 7.2% 12.5%

So____rce____ _F____E________Source: FPEPB

CHINA

Second Shuikou Hydroelectric Prolect

Economic Growth and Bectricity Consumotion In Fuiian - 1980-1990Growth Rates

1980 1981 1982 1983 1984 985 1986 1987 1988 1989 1990 1980/85 1985/90Industrial and Aori. OutpUt -------- 96-------

Industry 8,411 9,007 9,666 10,520 13,182 16,533 19,072 23,487 30,903 36,050 40,550 14.5 19.7Light industry 5.178 5,688 6,060 6,450 8,050 10,256 11,859 14,678 19,900 23,650 26,780 14.7 21.2HeavyIndustry 3,233 3,319 3,606 4,070 5,132 6,277 7,213 8,809 11,003 12,400 13,770 14.2 17.0

Agriculture 4,604 5,076 5,462 5,740 6,539 7,089 7,248 7,904 8,514 9,060 9,465 9.0 6.0

Total 14,083 15,128 16,260 19,721 23,622 26,320 31,391 39,417 45,110 50,015 12.7 16.2

In Percentaoe ____ _ __--________

Industry 64.6 64.0 63.9 64.7 66.9 70.0 72.5 74.8 78.4 79.9 81.1Light Industry 61.5 63.1 62.7 61.3 61.0 62.0 62.2 62.4 64.4 65.6 66.0Heavy Industry 38.5 36.9 37.3 38.7 39.0 38.0 37.8 37.5 35.6 34.4 34.0

Agriculture 35.4 36.0 36.1 35.3 33.1 30.0 27.5 25.2 21.6 20.1 18.9

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Eiectrbily ConsumDtlon (GWh

Indust 3,370 3,571 3,740 3,828 4,295 5,089 5,458 6,219 7,182 8,024 8,361 8.6 10.4Residentb & Commercial 345 350 404 487 550 657 886 1,096 1,356 1,721 1,922 1&8 23.9Transports&Conmunictlon 18 24 25 31 42 55 60 102 116 174 230 25.0 33.1Agricuture 651 708 770 945 979 986 1,042 1,156 1,255 1,483 1,528 8.7 9.2Total Consumption 4,384 4,653 4,939 5,291 5,866 6,787 7,446 8,573 9,909 11,402 12,041 9.1 12.1

PlantUseandLosses 572 593 779 864 887 934 1,175 1,281 1,505 1,54 1,624 10.3 11.7Total Generation 4,956 5,246 5,718 6,155 6,753 7,721 8,621 9,854 11,414 12,956 13,665 9.3 12.1

of which FPG 3,907 - - - - 5,889 6,900 7,900 9,360 10,600 11,750 8.6 14.8 xx

Generation/Yuan of GV1AO 0.38 0.37 0.38 0.38 0.34 0.33 0.33 0.31 0.29 0.29 0.27 -2.8 -3.7 4t'

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Generation and Consumption by Cateaory of Customers in the Reaion Suoliled by FPEPB

1980 1985 1986 1987 1988 1989 1990

Generation of FPEPB 3,168.97 4,304.17 5,103.68 5,903.19 6,816.72 6,080.60 6095.30

Station Useof FPEPB 129.85 189.13 284.25 369.69 390.41 333.41 303.91

(%) Station Use of FPEPB 4.10 4.39 5.58 6.24 5.73 5.48 4.99

Net Generation of FPEPB 3,039.12 4,115.04 4,819.43 5,553.50 6,426.31 5,747.19 5791.39

Purchase From Small Hydro 185.42 762.55 507.72 467.75 539.40 462.50 689.32

Purchase From Industrial Plants 69.72 8.73 102.76 133.97 76.91 26.21 16.92

Purchase from Huaneng - - - - 166.99 2,149.98 2194.24

Total Delivered to FPEPB 3,294.26 4,886.32 5,429.91 6,155.22 7,209.61 8,385.88 8691.87

Network Losses 293.18 402.60 425.99 465.48 578.88 569.10 597.13

k Losses 8.90 &24 7.85 7.56 8.03 6.79 6.87

Sales of FPEPB 3,001.08 4,483.72 5,003.92 5,689.74 6,630.73 7,816.78 8,094.74

Sales for Agriculture 109.12 215.77 323.55 341.74 403.69 519.63 578.68

For Industry 2,505.60 3,606.38 3,839.35 4,403.36 4,998.50 5,747.07 5,654.42For Ught Industry 694.35 1,116.53 1,444.07 1,561.51 1,783.60 2,050.84 1,960.95For Heavy Industry 1,811.25 2,489.85 2,395.28 2,841.85 3,214.90 3,696.23 3,693.47

ForTransp., Commercial 13.78 41.82 51.64 66.78 100.64 153.49 207.14

For Urban LMng, Residen. 372.58 619.75 789.38 877.86 1,127.90 1,396.59 1,654.50Total Sales 3,001.08 4,483.72 5,003.92 5,689.74 6,630.73 7,816.78 8,094.74

Supply by own Generation oflndustriai Plants 188.54 323.33 368.25 387.55 375.04 323.54 361.95

Supply by own Generation ofSmall Hydro 235.78 351.44 695.71 931.76 1,122.63 1,203.44 1,916.98

Total Consumption 3,425.54 5,158.49 6,067.88 7,009.05 8,128.40 9,343.76 10,373.67

xJs

(A

- 68 - -

2=lINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Demand Forecasts

1. FPEPB's demand forecasts are established, first, for the Fujianprovince as a whole, and for four sectors. Generation forecasts for theinterconnected grid are then established taking into account expected connec-tions of isolated networks to the grid, and finally, FPEPB's generation andsales forecasts are obtained taking into account the expected development ofindependent generation (mainly mini hydros).

2. Consumption forecasts for Fujian province are derived from a synthe-sis of different approaches. FPEPB has been using for several years econome-tric models distinguishing consumptions of agriculture, industry, residentialand urban, transport and communication. For the first two sectors, linearrelationships with output value give good correlations in the past, whereasfor the last two, a linear growth model is used. Special loads are added tothe econometric forecasts; however, in order to avoid douible counting, theonly special load taken into account here, is the consumption of the new elec-tric railway, expected to reach 450 GWh in 1995.

3. The u'ain issue regarding such econometric models is whether pastrelationships between industrial electricity consumption and output value canbe extrapolated far into the future, in a context of fast growth and rapidstructural change. Past trends show significant reductions in energy intensi-ties in both manufacturing and basic industries in the 80's, but the fastergrowth of manufacturing industries also explains the reduction of the aggre-gate industrial electricity consumption per Yuan of output. A faster develop-ment of basic industries is expected in coming years and several projects areunder construction or have been approved, which go in this direction. Forindividual branches, the reduction of electric energy intensities observed inthe past is also likely to slow down with the modernization of the Fujianindustry; this saturation trend was already observable during the last threeyears for manufacturing and basic industries, and, in fact would be reflectedby FPEPB's econometric model which involves a linear relation between consump-tion and output. The forecast used here for industry implies an elasticity tooutput value around 0.93, higher than in the past, yet, significantly lowerthan one (table below); the industrial forecast is half-way between the econo-metric forecast, and a forecast based on a stable aggregate electric energyintensity.

4. The aggregate elasticity of electricity generation in Fujian to thegrowth of industrial and agricultural output is of 1.1 until 1995, whichreflects the faster growth of residential uses, and the consumption of the newrailway. Total generation requirements for the province are expected to growat 10 percent per annum until 1995, and 8.4 percent thereafter, significantlyfaster than the planned total for China, but less than the 12.1 percent regis-tered in the last five years. Demand on the interconnected grid would grow at12.3 percent until 1995 (likely a little faster in 1992), and 8.8 percentthereafter, as against 14.8 percent in the last five years. Although a slower

-69 - j4

demand growth cannot be excluded, the possibility of hlgher economic growthand of higher elasticicies cannot be discounted; for purposes of sensitivityanalysis in the tie-line study, a high sconario was established as follows.

Base caseGVIAO growth (%) 9.0 8.3Electricity growth 10.0 8.4Elasticity 1.11 1.02

Hiib Sgenar±GVIAO growth (%) 10.4 10.4Electricity growth 12.8 10.7Elasticity 1.23 1.03

5. The growth of demand on the interconnected grid assumes the connec-tion of Ningde and Jiangyang networks before 1995. By then, demand in iso-lated grids would be reduced from 14 percent to 5 percent of the total. Thiscontributes to a still vigorous growth of mini-hydro generation in the inter-connected grid until 1995. Yet, 86 percent of the incremental supply on theFPG will come from the combined generation of PPEPB and Huaneng, and 48 per-cent from Shuikou. The weight of FPEPB would increase, whereas in the 80'sFPEPB and Huaneng provided only two thirds of the incremental supply on theFPG.

6. The following table gives the detail of generation and sales fore-casts.

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

DEMAND TRENDS AND FORECASTS

GROWTH RATES

ECONOMY sIY1 1980 1985 1990 1995 2000 1980-85 19865-0 1990-95 1995-00

GNP 88a0 n.a. 23300 35000 52500 - - 8.6% 8.4%

GVIAO 13015 23622 S0015 77000 114800 12.7% 16.2% 9.0% 8.3%

AGRICULTURE 4604 7089 9485 12000 14800 9.0% 6.0% 4.9% 3.9%

INDUSTRY 8411 16833 40550 es60 10X000 14.5% 19.7% 9.9% 9.0%

POPULATION (x 1000) 25178 - 30370 33020 35400 - - 1.7% 1.4%

ELECTRICITY (GWh) 1980 1985 1990 1995 2000 198085 1985-90 1990-95 1995-0

AGRICULTURE 651 966 1628 1925 2342 8.7% 9.2% 4.7% 4.0%

INDUSTRY 3370 s508 8361 12993 19522 8.6% 10.4% 9.2% 8.5%

RESIDENTIAL & URBAN 345 657 1922 3768 6306 13.7% 23.9% * 14.4% 10.8%

TRANSPORT & COMM. 18 65 230 674 870 25.0% 33.1% 24.0% 5.2%

TOTALCONSUMPTION 4384 6787 12041 1s360 29040 9.1% 12.1% 10.0% 8.4%

LOS8ES& PLANT USE 672 934 1624 2640 3960 10.3% 11.7% 10.2% 8.4%

TOTAL GENERATION FUJIAN 495 7721 13685 22000 33000 9.3% 12.1% 10.0% 8.4%

ELASTICMES

ENERGY INTENSITY (GWhIMY) 1980 1985 1990 1995 2000 1980-85 195-90 1990-95 1995-00

AGRICULTUREIGVAO 0.141 0.139 0.181 0.190 0.162 0.99 1.64 097 1.04

INDUSTRYJGVIO 0.401 0.308 0.208 0.200 0.195 0.59 083 0.93 0.94

RESIDENTUL/GVIAO 0.027 0.028 0.038 0.049 0.055 1.09 1.48 1.60 1.31

TRANSPORTIGVIAO 0.001 0.002 0.005 0.009 0.008 1.98 2.05 2.06 o.63

GENERATIONIGVIAO 0.381 0.327 0.273 0.286 0288 0.73 0.75 1.11 1.02

GENERATIONfCAPITA 197 - 460 6 932 - 8.0% 8.2% 0.9%

GENERATION A SALES FPEPBtGwh 1980 1985 1990 1995 2000 198045- 1985-00 1990-95 1905-00

ISOLATED SYSTEMS 1049 1832 101S 1000 1000 11.8% 0.9% -12.2% 0.0%

TOTAL GENERATION FPG 3907 S889 11760 21000 32000 8.5% 148% 12.3% 8.8%

INDEPENDENT PRODUCERS 738 158S 3355 4800 5000 168.5% 18.2% 06% 1.79

GROSS GENERATION FPEPB+HUANENG 3169 4304 83SS 16400 27000 0.3% 14.3% 14.3% 10.5%

(OF WHICH HUANENG) (0) (0) (2300)

NET GENERATION FPEPS.HUANENG 3039 4116 7986 15736 25715 6.2% 14.2% 14.6% 10.3%

OTHER PURCHASES 265 771 706 710 710 24.8% -1.7% 0.1% 0.0%

TOTAL SENT OUT 3294 4886 8692 16446 26425 82% 12.2% 13.6% 9.9%

LOSSES(%) 8.90% 8.24% 6.87% 7.00% 7.00%

3001 4484 8095 15295 24575 5.4% 12.5% 13.6% 9.9%

- 71 - MiX S.1

SECOND SHUIKOU HYDROELECTRIC PROJECT

Salient Physical Features of the Prolect

Unit Description

Location on the Mfnjiang River,84 km from Fuzhou

Catchment area b2 52,438Average annual inflow mJ's 15728Design flood m3/s 45,600 (P a 0.1X)Maximm flood m/s 54,500 (P * 0.01X)

ReservotrHigh water level 67.88 (P a 0.01%) max. fLoodNormal water levol m 65.00Level during flood season m 61.00Reservoir area 2 93.5

kmTotal storage capacity 360

Flood regulation (During flood season at106in3 Elevation 65 to 61)

Power generation 1O3m3 700

Available DepthFlood regulation 4.0 (Elevation 61-65)Power generation m 8.0 (Elevation 57-65)

mDiversion Channel

Length 15170Capacity 23,400 (P * 5K), 32200 (P = 2K)Depth of flowua m5/ 35.89 (P a 5K), 38.71 (P * 2X)

Dam nm Concrete gravity damType -27.0Foundation rock level 0 74.0Crest elevation m 100.0Height (maximum) m 786.0Crest length 1.83Volume 10 D

Spil tway Overflow spillwayType 43.0Overflow sill elevation m 43,685 (P = 0.1X) Design.Capacity sm3 51,641 (P 0.01K) Check

Number of gates 12

Intake On the fact of the damType 7Number 9.2 x 11.25Control gate size (U x N)

sm Embedded pipe/7Pentock 81.672 (the length of pressure

Type/nwuber pipe is 55.471)Length (total of each penstock) 10.5

23-29m

Inside diameterThickness of steel

Powerhouse mm OvergroundType 297.2 x 34.5 x 63.55

72- ANNEX 5.1

Unit Description

Generation Facilities 7Number of units 200Units capacity "S

TurbineType KaplanMaximum head 58Minimum head m 30Design head m 45.3Head for dependable output m 45.3Normal effective head m 45.3Maximun discharge a 509Output tmaximun) m/s 235Dependable NW 204Rated speed w 93.8

Generator r.p.m. Vertical shaft, umbrella typeType 222/242Rated output MVA 13.8Rated voLtage kV 90/95Power factor

Main Transformer (220 kV)Type Three phaseRated capacity 240Rated voltage range MVA 242+ 5%/13.8

kVSwitchvard

Type of breakers Hybrid GISNumber 9 bays

Annual Energv ProductionFirm energy GWh 2,100

Secondary energy GWh 2,850

Total Enerav GWh 4.950

Quantities of Work (Except diversion andtemporarv work)

Excavation 1o6n3 2.14Soft rock 106X3 6.65Hard rock 1063 0.0042

Earth and rockfill A x 0.315Concrete 10im, 3.48Curtain grouting 106wm 13,000Consolidation grouting m 32,400Gates and hoists m 13,100Penstocks tons 4,478Reinforcing steel tons 33,900

tons

CHINASHUIKOU HYDROELECTRIC PROJECT

CORPORATIONOrganization Chart

I GE NS IERAL EM MAAGER l

DEPRTMNT CONhAC MNEPMETYGMANANAG EPT .MANTA EPRTTEUPL DEP SAAERVIE AO

DEPUTY CHEEF ENGR. ||A DEPUTY NT E AENG DEPAYIT EE RECORDS OFFICEN|

SAFETY ROE O L MTER

AFFAIRS -OXF-5ARUICVS lD |CqMENET lCrA

DEPATME CONTPRACBT |ANADEPAMIENT MAA |E DEPART|MENT SUPPLY DEPT. | |LSASBOm R

CURRECY | OEPATME DEPR |E DEARTEN DEPAECa lMrETW

q LOCAL l d B0DGE| POER E ELECTRUCAL |i F R

| TEST > q KTAL WOS | LO M ATE~S |

|GENERA4 .

CHINASECOND SHUIKOU HYDROELECTRIC PROJECT

Project Implementation Schedule

._______________ _ OWWTQUANITY 1987 1988 1989 1990 1991 1992 1993 1994 1995ITEM anwa 1 2 3 4 _ 2 3 4 12 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 4 1 2 13 |4 1 3 2 3 4

1. Con..ucdon peparator.y *k .......2. DIvrsIon works

earth. sand and graVe ockA Foufadon excavabna of 2 2

dtsIrioAhnduumi 10 m SMI-

DMi_6cd l ol dieo wl l 2 2z sno l I I I I I I 1 d ^ I 1 1

edng io 2 .~~~ m 2 B OMs.at U oa(wd9fs PC Oases. oOiWdaa ksu dDdDuIomamdUkC Cosumn oftoal es cA(Om lam or | | | | I a D MamAac.hb of ndu_ cohdam C2m7 aidvwd a.diversiwicoed ae

andceeoopi3 Dam

Earth sand and gravockod 427088A Ex-. adlon of dam toumdailn---

BConcreUng ,o~2 2 8wL - &mjI* Eredion of gates ad hoists | E dps I fad baibspliway teiMe and bottom T -2 -0

4PownerhusA Foundation excavatIon 2 2~0

ear sandand t:o IS I * - - - - - - -(tunnl to pow.ausandf cablameQ 2 246

a Concreti 0o -- ... aC Emctimofollalragates jI)))4 ))~CEw and d T 97|i .A I r

o Esocdlon o bal2 lns 7and genedwato6 220kv Swttcyard

A Excmavaon and conareg 122 2fs-- roduilcsonrt em g

B Erection of haases and

7 NavIgatin worksAFoundaUoa excavailon 2 2mdewWater sand and graeVrodk tO em 8713

BCOwabv 3~~~ 3 2070

hoits nd ut ndde atC!= 81egswirdaw"7m7IIII! IIIIIWade IpaIIInsIII ChEOxstsbn^ _L. ! 8i |8 8 l || |\ || i| 8t I Ii11 Iv

-75 - AM 5.4

CHIN

SECOND SHUIKOU HYDROELECTRIC PROJECT

Resettlement Plan and Implementation Experience

General

1. The inundation of the Shuikou reservoir area will involve the reset-tlement of about 67,000 people living in 87 villageu and 16 townships inFujian Province. The affected jurisdictions include Nanping City and Gutian,Youxi and Hinqing counties. About 75 percent of the affected population isengaged in agriculture. The estimate of the affected population is based on asurvey prepared in 1982, and assumes a 1.4 percent annual increase in popula-tion until the time of resettlement of each subgroup up to 1991. The geo-graphical distribution of the population to be resettled, and the physicalassets submerged are as follows:

Nanping Gutian Youxi Minqing Total

Population Resettled

Townships affected 8 2 2 4 16Villages affected 51 17 9 11 87Total county/city pop (1982) 396,517 345,320 317,819 245,770 1,305,426Affected population (1982) 33,983 16,836 5,503 1,393 57,715of which: Agricultural (1982) 27,595 9,784 4,C61 1,043 43,033Projected resettlement (1991) 39,591 19,614 6,411 :.623 67,329

&Ua,La Suba2

Farmland (ha) 1,193 649 216 34 2,093of which: Rice fields (ha) 1,135 569 197 34 1,936

Vegetables (ha) 58 80 19 0 157Reclaimed wasteland (ha) 367 253 75 44 739Timber forest (ha) 123 575 99 187 984Economic forest (ha) Z& 94 156 4 21 275Fruit trees (ha) 32 13 15 8 68Dwellings (103 e2) 1,046 632 217 52 1,947Collective ' xildings (10' m2) 256 105 32 6 398Enterprises and institutional

buildings (103 m2) 95 99 92 18 304

LA Includes al'l tree crops such as tung oil, tea oil, tea, bamboo, olives,mulberries, etc.

-76 - ANNEX 5-4

Resettlement Organization and Planning

2. The planning for the resettlement of the population whose assetswill be inundated by the reservoir began in 1979 with a preliminary survey ofthe reservoir area population and assets undertaken by ECIDI. In 1980, thissurvey was reviewed by the Ministry of Water Resources and Electric Power(MWREP) and the Government of the Province of Fujian (GPF). On May 14, 1982,the State Council issued a "Statute for Land Requisition for Construction Useby the State." In response thereto the GPF established the Shuikou Hydro-electric Project Resettlement Planning Team. This team of 63 persons workedfor 10 months with planning groups from tthe three affected counties andNanping city to resurvey the affected areas and produce a 'Report on Resettle-ment Planning for the Shuikou Hydroelectric Station." This report wasaccepted by MWREP and GPF in 1984, and formed the basis for detailed budgetestimates and further preparations. The implementation of the resettlementplan is the responsibility is the responsibility of the Shuikou ReservoirResettlement Office (SRRO) under GPF which works together with SHPC, provin-cial authorities and county/city governments, to implement the resettlementplan.

PrinciRles for Resettlement

3. The resettlement and compensation of the affected population isbased on principles set down in such documents as the State Council's 1982'Status for Land Requisition for Construction Use by the State," the NWREP's1983 "Methods for Dealing with Reservoir Inundation and Resettlement forLarge- and Medium-Scale Hydroelectric Projects" and the Fujian ProvinicialGovernment's 1983 "Provincial Stipulations Regarding Resettlement Plans forLarge- and Medium-Scale Reservoir in Fujian."

4. Following the above documents and the current administrativepractice of the provincial government, the basic principles of resettlementwere initially established as follows:

(a) Compensation for dwelling to be based on the 1 in 20-year floodlevel.

(b) Compensation for agricultural land to be based on the 1 in 20-yearflood level. As the major crop in this area is rice, which canwithstand several days' inundation, this standard is reasonable.

(c) Displaced persons and facilities to be reestablished in the nearestavailable sites within their respective counties and, if possible,their original townships.

(d) To the extent possible, resettled persons to be enabled to continuewith the previous occupations.

(e) Resettlement to be arranged so that physical and human resources cancontinue to be at least as productive and living conditions at leastas convenient, as they were before.

(f) Plot sizes for resettled farmers to meet minimum standards so as toenable the rarmers to continue making a living on the land.

77 AHN 5.4

(g) During c transition period, the provincial government to supplementthe agricultural production of farmers with grain as required.

(h) Public facilities to be reconstructed at least to the preexistingstandards.

(i) The supply of construction materials (steels, lumber and cement) forreconstruction of dwellings, buildings and other facilities to begiven priority.

(j) Compensation for dwellings, house plots, lost wages and movingexpenses to be paid to heads of households. Compensation forproductive assets and infrastructure to be paid to the local(village) government with jurisdiction.

(k) Local governments to be involved in resettlement planning from theoutset, with affected population informed after final projectapproval.

(i) To the extent possible, the integrity of neighborhoods and hamletsto be maintained in the resettlement process.

(m) Resettled persons to be allowed to return to the reservoir area toplant and harvest crops aad salvage materials until their lands areflooded.

(n) To the extent possible, individual households to be given a range ofchoices in regard to:

(i) design of dwellings;

(ii) availability of construction materials at officials prices;

(iii) opportunity to buy additional construction materials at marketprices;

(iv) quality of dwelling;

(v) building contractor; and

(vi) disposal of materials of old home.

T=Js,%entation of Resettlement

5. Resettlement activities began in earnest in parallel with the _on-struction of the dam. However, two years into implementation it became evi-dent that it would be difficult to meet the first resettlement target of32,000 people by March 31, 1990, dictated by those at risk from the 1 in 20year flood under the Stage II river diversion configu'ation. The prime reasonfor this was that site preparation and infrastructure works in the resettle-ment areas were carried out for all three resettlement stages, before com-mencement of house construction. This work began late, and took longer thanplanned. Secondly, construction was becoming ccnstrained by budgetaryallocation which was based on 1983 prices.

- 78 -AEX 5.4

6. In response to this delay, FPEPB modified their original target tocover the population at risk from a 1 in 10 year flood (16,100 people), andderived contingency plans which would come into effect if larger floodsoccurred. MOE and SEIC approved an increase in resettlement budget fromY 410 million, based on 1984 prices, to Y 880 million, based on 1989 prices,and agreed to make further adjustments as necessary to cover inflation beyond1988. The Bank also agreed to a reallocation of $10 million of the first loanto finance resettlement materials. With these measures, the reduced targetfor March 31, 1990 was met, and resettlement was generally back on schedule bylate 1990. The second target, dictated by the Stage III diversion configura-tion, resettlement of 55,000 people by April 1992 flood season was also met.The remaining population of 10,000 are scheduled to relocate during 1992, andit appears that this schedule can comfortably be met.

7. Reestablishment of production systems was also delayed for the samereasons as outlined above, but is also back on schedule. By December 1991,percentage completion of various systems in comparison with end of projecttargets was:

247,400 ducks 97.730,652 pigs 88.8810.3 mu of pond fisheries 85.02,235 sheep (not in plan)163,873 mu of forestry 104.037,090 mu of fruit trees and tea bushes 72.02,418 mu of vegetable garden 73.07,860 mu of bamboo 54.0584 mu of land reclamation 70.0500 mu of land reclamation elsewhere inprovince for supplementary grain production

103 enterprises in operation employing3,052 workers 76.0

Note: Figures for ducks and pigs are May 1991 figures. Figures later in yearare less as animals are sold.

8. The Bank carried out full reviews of the resettlement process inApril 1991 (mid-term review) and July 1991 (appraisal of Shuikou 2). In bothcases, the mission's assessment of resettlement already completed was verypositive. The April mission reported "The mission was impressed by the sub-stantial progress that was seen in the areas that were visited. Theri hasbeen a noticeable commitment to provide the extra financial, technical andadministrative resources needed to ensure that the project will meet its tar-gets. Progress in the development of new production systems was visible inall of the sites, and in several areas resettlers were already drawing incomefrom their replacement farms and enterprises. Occupatlon rates in the newtowns were high; schools were full, small stores were active, and publicinfrastructure was largely completed and operational. Integrated farming sys-tems involving forests, fruit trees, vegetable gardens, pigs and duck farms

-79- ANNEX 5.4

that maximize the efficient use of resources, were widespread and form themodel for developing new sites. Officials in all of the sites that werevisited were well informed about resettlement progress, and were aware of dayto day performance as well as many of the more general issues. Although asustained high-intensity effort on resettlement will continue to be requiredunder Shuikou II to overcome the delays described by previous Bank missions,the mission's overall conclusion is that substantial progress is being made."

9. The July mission (different resettlement specialist) reported:"Impressirns from visual observations by the mission of selected resettlementvillages and townships are very positive. An impressive amount of infrastruc-ture, housing, land levelling and planting has been completed in the areasvisited, and a few new industrial facilities were observed. Constructionseems to have been of good quality. Many people have already been located.Facilities were in productive use. Except for heavy erosion in some exposedareas, the villages and townships visited seemed to be pleasant activecommunities that generally were in qu. -e good condition. Resettlers oldhouses in the reservoir areas had been u solished except for some sod walls.However, people in these villages and tow,ships were still intensively usingreservoir area farm land and in a few placca even land formerly occupied bystructures had been recla;.ed for temporary cultivation before impounding."

10. Despite these positive impressions of resettlement achievements,both missions expressed reservations concerning two matters:

(a) the approach to monitoring and reporting of physical progress didnot provide intermediate milestones and performance, such that anindependent evaluation of progress in completion of the physicalworks could be made; and

(b) even if resettlement activities were to be physically completedbefore impounding, the possibility of individual hardship wouldstill exist because of the delay in new production systems (e.g.,fruit trees, fishing) reaching full production. It was noted thatthe sense of well being of current resettlers was partly due to thefact that they were still generating income from their land withinthe reservoir area.

11. As the date for reservoir impounding draws close, the first reserva-tion appears to have been overtaken by events, in that it seems highly likelythat the overall target of completion of physical resettlement activities bythe end of 1992 will be met.

Independent Evaluation of Resettlement

12. In any case, during appraisal of Shuikou II, the Bank decided toshift the emphasis of monitoring to end results of the resettlement effort,rather than physical works. It was agreed that the previously planned Inde-pendent Evaluation of Resettlement (IER), which was largely intended as apost-project evaluation, would be commenced earlier, with the intention ofproviding timely warning to Government authorities of problems in reestablish-ment of income or general welfare. The IER will be based on a sampling methodwith a -overage of 15 to 20 percent of resettlers. Indicators monitored willbe the following:

- 80- MNEX 5.4

(a) Social and Economic Status (inductive assets, living amenities,fixed assets, income);

(b) Public Health (facilities in resettlement sites, health education,infant morbidity, children's health);

(c) Opportunities for Women (occupation rate, involvement in public andpolitical affairs, lifestyle);

(d) Welfare of Various Occupations (aimed at identifying particulargroups requiring assistance).

13. The contract for the IER was awarded to ECIDI and signed in December1991. The evaluation will extend over the period 1992 to 1996. In 1992 and1993, reports will be submitted in July and December, and thereafter inDecember of each year.

Funding of Resettlement Beyond ImRlenentation Period

14. Beyond the project implementation period, the Government will con-tinue its financial support to help resettlers fully reestablish theirstandard of living. The two main funding source., are the Reservoir Area Fundcollected from power revenue at the rate of Y 0.001 kWh (about Y 5 million peryear), and a reservoir development fund, provided for under a newly promul-gated State Council directive *Compensation for Land Acquisition for Construc-tion and Rep tlement of Inhabitants Relating to Large and Medium Hydropowerand Water Conservancy Projects." This directive establishes principles only,and requires more specific regulations at the provincial level.

15. Assurances will be sought that the Government will monitor thereports of the IER, take action to accelerate the reestablishment of incomeand welfare in identified problem areas, and make funds available from Reser-voir Area and Reservoir Development Funds or other sources, to sustain incomesat acceptable levels until they are fuily restored.

-81 -ANNEX 5

CHIN

SECOND SHUIKOU HYDROELECTRIC PROJECT

Major Environmental ImRactg and Environmental Management Elan

HajLox IM2acts

1. The major impact of the construction of the dam and reservoir is thedisplacement of some 67,000 people. The resettlement plan, aimed at reestab-lishing these people in accordance with Bank policy guidelines is discussed inAnnex 5-A.

2. Of other impacts, some are potentially favorable and some unfavor-able. The major impacts are discussed in the following paragraphs, togetherwith measures included in the Environmental Management Plan (EMP) aimed atmaximizing exploitation of favorable impacts, and minimizing the effects ofunfavorable impacts.

Avoidance of Thermal Generation

3. Even with maximum conservation efforts, large additions to electric-ity generation capacity will be required to accompany China's economic devel-opment. In Fujiat. province, the alternative to hydroelectric developments iscoal fired plant. The "avoided" adverse impacts include:

(a) the use of coal to the extent of some 1.6 million tons/year;

(b) land use associated with coal mining of 300 ha per year, and associ-ated with a thermal plant of about 1000 ha. In ten years land usagewould be about equal to that of the Shuikou reservoir; and

(c) each year, 65,000 tons of gaseous and particle emissions, 500,000tons of solid waste, and 125,000 tons of water usage.

Effects on Navigation

4. At present navigation on the river is limited to boats of 60 to 80tons. Creation of the reservoir will enable ships of up to 500 tons to navi-gate 94 km upstream to Nanping city. Minimum flow increase will also assistdownstream navigation, such that 500 ton ships may travel from the ocean toNanping, and connect Fuzhou and Nanping. the dam will include a shiplock anda 500 ton shiplift, enabling long term projected annual freight of 4.0 milliontons and timber of 2.0 to 2.5 million en, to be passed with a comfortablemargin. In general, this transportation by water is expected to replacetransportation by road, which is projected to result in savings in diesel fuelconsumption of some 48 million liters per year. This, in turn, should resultin reduced emissions of 120,000 tons of CO2 , 3,500 tons of noxious gases and200 tons of particulates.

5. Incroased navigation will, however, increase the risk of accid&.tsanLd spillages. To guard against these risks, navigation supervision stations

-82- ANN 5.5

will be set up at Nanping, Shuikou and Fuzhou. These stations will be respon-sible for guaranteeing raft traffic, establishing and maintaining navigationmarks, handling and investigation of accidents, and for supervision of load-ing, unloading and transportation of explosives, toxic and radioactive goods.Procedures are laid down in the inland waterway traffic safety managementregulations, the rules for supervision and management of ships carrying haz-ardous cargoes, and the regulations for certifying ships entering or exitinginland waterways. Release of contaminants from ships shall be within limitsstipulated in state standard GB 83552-83, and ships of 200 tons or greatershall be equipped with oil-water separators to prevent discharge of oilywaste.

6. During dam construction, there is some potential for navigation disrup-tion, since during third stage diversion (as existing in 1992), the river ispassed through temporary openings in the spillway structure. Under high dis-charges, flow velocities are such as to impede navigation of smaller boats.To correct this, temporary locks have been incorporated into two of the open-ings. Also, during the reservoir impoundment period, which may be up to threemonths, navigation through the damsite will not be possible. Current planningassumes that approximately half of normally occurring shipments can be broughtforward or delayed to avoid the impoundment period. The other half will betransported by railway, or around the dam by truck. Passengers will be trans-ported around the dam by vehicles included in the pro3ect budget. Amountshave also been allowed in the budget, for alternative transportation costs,and losses due to short term suspension of shipping.

Effect on Fishing

7. Extensive investigations carried out by Fujian Aquatic Production Bureau,indicate 163 species of fish in the Minjiang River. However, the river sec-tion upstream of the damsite contains only a few species and present fishcatches are nominal. There are no fish species with major migrations throughthe damsite. During the appraisal of Shuikou 1, it was understood that thecreation of the reservoir could have a significant effect on eel migration andproduction, with detrimental effects to the lucrative export industry. Clari-fications obtained during the appraisal of Shuikou 2 indicate that this is notthe case. All eels for export, and most of those for local consumption, areartificially raised in off stream breeding ponds. In the Xinjiang itself,eels are relatively unimportant, accounting for only 4.3 percent of fishcatches. Noreover, most of their habitats are in the 129 km stretch of theriver downstream of Shuikou, aind the downstream Dazhang Creek tributary. TheAquatic Production Bureau has concluded that construction of the dam will haveno significant effect on eel migration or production, and that the provisionfor upstream transport of eel fry is unnecessary.

8. On the other hand, the creation of the reservoir is expected to have avery beneficial effect on overall fish production. Species adapted to stillor slow moving water will emerge as the dominant group. Based on experiencein other reservoirs in eastern China, fish yields from the reservoir properare expected to reach 420 tons/year. Additioral production will also be gen-erated by the development of 5,000 mu of water surface in coves and baysaround the shoreline, for intensive fish farming. Experience in other reser-voirs in Fujian province with these methods suggest that additional productionof some (currently being clarified) 235 tons/year could be achieved. Detailed

.

-83- 5.5

planning for development of this industry is underway in both Gutian andNanping counties, where ideal conditions for this type of fish productionexist.

Water Qualt

9. Large reservoirs can have significant adverse effects on river waterquality, causing aquatic weed proliferation due to reservoir eutrophication,anoxic and low temperature discharges due to anaerobic decomposition and res-ervoir stratification, and entrapment of sediments and organic matter. Theseconditions can be detrimental to downstream fishing and agriculture. However,in the case of Shuikou, these effects are not expected to be significant,since the reservoir volume is small in relation to the flow of the MinjiangRiver, and a high rate of reservoir flushing exists. Average detention timein the reservoir is about 15 days, reducing to 1.5 days during the averageannual flood. In fact, Shuikou is expected to have a positive effect on down-stream agriculture and fisheries, since minimum dry season flows will beincreased, reducing salt water intrusion into the estuary.

10. There are, however, three water quality issues which have been iden-tified and addressed in the EMP:

(a) Municipal and industrial wastewater inflows into the reservoir,mainly from Nanping City, could adversely affect water quality,possibly reducing potential benefits from fish production. There-fore, in 1986, Nanping City embarked on a major program to treatexisting industrial sources. By 1990, total investment had reachY 28.6 million, involving 65 projects. A large component of theinvestment was devoted to the Nanping Pulp and Paper Mill (largestin China) where one of two planned treatment plants has beeninstalled, and the other is under construction. The EMP detailssubstantial improvements in effluent and river watar quality due tothis program. In parallel, Nanping City strengthtened the regulatoryfunctions of the Nanping Environment Protection Bureau, such thatwastewater treatment is a mandatory component of new industries.

(b) The creation of the reservoir, and change in flow conditions willhave some effect on the assimilative capacity of the biologicalenvironment (probably to increase it). To determine the net effectof this change, and to establish parameters for regulation of efflu-ent discharge into the river, a mathematical model of the reservoiris being developed and calibrated based on currently observed condi-tions. Based on experience from other reservoirs, water qualityconditions within the reservoir are expected to be suitable forintensive fish production.

(c) One intake for Nanping water supply, which is in the reservoirimpoundment area, will be moved upstream of it, to prevent potentialcontamination from nearby waste water discharges.

Sediment Considerations

11. The catchment of the Ninjiang River is well vegetated, with vegeta-tion cover rate estimated at 60 percent and soil water erosion area estimated

-84 - ANNEX L.5

at only about 5 percent of the catchment area. As a result, sediment passingthe damsite amounts to only 7.18 million tons, representing a very low erosionmodulus of 137 tons/km2/year. Matheoatical models of the sedimentation pro-cess in the reservoir, indicate a storage loss of only 3.4 percent in thefirst 30 years of operation, and a dead storage life of at least 500 years.

12. Bedload delivery to the reservoir is also estimated to be low, par-ticularly because of trapping by several upstream reservoirs. Nevertheless,deposition will be monitored particularly at the head of the reservoir, toprovide early warning of any backwater effects having implications withrespect to flood control of Nanping City.

13. Because of the limited trap efficiency of the Shuikou reservoir,downstream erosion effr'ts due to sediment deficient discharges, are alsoexpected to be insignificant.

Health Issues

14. Due to long term programs aimed at vector eradication and diseaseprevention, the incidence of water related diseases, which could be encouragedby the creation of new bodies of standing water, is low. Schistosomiasis waseradicated from the province in 1977. Filariasis monitoring programs indi-cated no positive results in 1990, and malaria incidence was below 1 in 10,000in all four counties. These factors, together with the rapid turnover of thereservoir, support the conclusion of the local health authoritles that theproject will not lead to the spread of water related diseases.

15. In construction camps and resettlement areas, water supply, sanitaryfacilities and medical facilities represent a considerable improvement frompreviously existing facilities, such that improvements in community healthstandards are expected as a result of the project. The Independent Evaluationof Resettlement will monitor this aspect.

16. Before the filling of the reservoir the reservoir will be cleared oftombs, toilets, livestock habltatlons and trees, to minimize impacts on waterquality during the early stages of reservolr filling.

Constructio_ Facilities and Resettlement Areas

17. Quarry, spoll and work areas have been designed to minimizeencroachment on agricultural land and the river. Designs and specificationsfor erosion protection and rehabilitation were reviewed by the province Waterand Soil Conservation Committee and the Environmental Protection Bureau,before incorporation in the civil works contract documents. Living quartersfor the 3,500 people working at the site are of good quality, and associatedfacilities are of high standard. Comprehensive programs to control soil ero-sion in the newly created resettloment areas are underway. Measures to con-trol serious erosion are expected to be completed by 1992, with the areasfully controlled by the year 2000. Effluent water quallty from the resettle-ment areas is being controlled as described earlier.

TransMission Linen

- 85 - AEX 5.

18. The FPEPB transmission expansion program is not part of the projectand is only partly attributable to it. Nevertheless, its environmental impacthas been investigated. Total length of transmission line is 793 km, whichdisplaces 32 ha of forests, 360 fruit trees, and 2,300 e2 of houses. Theserepresent only a small proportion of assets submerged by the Shuikou reservoir(Annex 5-&), and since they are less concentrated, they are easier to dealwith. Similar principles to those laid down for the overall resettlement planwill apply.

Monitoring

19. Monitoring of physical progress of resettlement is carried out bythe SRO. Social and welfare aspects of the resettlement will be monitored aspart of the IER. The FPEPB will carry out monitoring of reservoir water qual-ity and sediment deposition. Other areas requiring monitoring, such ashealth, water supplies, soil conservation, fishery production, navigationcontrol, will be carried out by the appropriate provincial and county authori-ties as part of their routine responsibilities.

- 86 -Annex 5.6

CHINASHUIKOU HYDROELECTRIC PROJECT

Table 1. SHUIKOW HYDROELECTRIC PROJECTORIGINAL SCOPE

Detalted Cost TableRMB

Breakdown of Totals Incl.Cont.USS

c-sssssaa_Sa-s

F.Exch Local Taxes Total........................ ...................................................

1. INVESTMENT COSTS.......... ................

A. PRELIMINARY WORKPRELIMINARY WORK 0 38236585 0 38236585RESETTLEMENT COMPENSATION 0 197245474 0 197245474RESETTLEMENT MATERIALS 10000000 0 0 10000000

........... ................. ........... .................. .........................

Sub-Total 10000000 235482059 0 245482059B. CIVIL & ASSOCIATED WORKS

DIVISION WORK 26094423 15733738 0 41828161DAM & INTAKE WORKS 58079832 28098545 0 86178377POWERHOUSE 25533255 12334111 0 37867366SWITCHYARDS 1564074 866677 0 2430751NAVIGATION 20839023 9551095 0 30390118VARIATION WORK 5838694 3096513 0 8935207PRICE ESCALATION 6399899 3690998 0 10090897

........... ................. ........... ................. ........................

Sub-Total 144349201 73371676 0 217720877C. METAL WORKS

STEEL PLATE,LARGE BEARING 5627412 0 0 5627412ANGLE STEEL & STRIP STEEL 1218015 0 0 1218015STEEL SHAPES 294333 0 0 294333SEAMLESS TUBING, ETC. 1076465 0 0 1076465I-STEELS 0 253700 0 253700POWERHOUSE BRIDGE CRANES 0 1380640 0 1380640DAM CREST GANTRY CRANE 0 626482 0 626482TAILRACE GANTRY CRANE 0 135150 0 135150GATES AND SCREENS 0 5817580 0 5817580HOISTS FOR INTAKES 0 554597 0 554597HYDRAULIC HOISTS 0 1258850 0 1258850

........ ............. ........ .................. ........... .................. .....

Sub-Total 8216225 10026999 0 182432240. ELEC. & MECH. WORKS

TURBINES 1&2, GOVRS. iTO7 13707200 0 0 13707200GENS.1&2, EXCITRS.1 TO 7 13384250 0 0 13384250UNITS 3,4,5,6,7 0 46356431 0 46356431UNIT AUTOMATIC COMPONENT 545432 0 0 545432GENS'. 13.8KV BREAKERS 4887750 0 0 4887750AUXILIARIES FOR UNITS 0 17743399 0 17743399TRANSFORMERS 0 5113052 0 5113052SWITCHGERS & AUXILIARIES 0 3102232 0 3102232CONTROL SYSTEM 6901500 0 0 6901500LOCAL TRANS. & ERECTION 0 14881621 0 14881621500KV TRANSMISSION LINES 0 0 0 0~~~~~........... ........ . ........ .....

Sub-Total 39426132 87196735 0 126622868E. ENG. & CONSTN. SUPERVW. 8930212 24657542 0 33587754F. ADMINISTRATION 0 11580512 0 11580512G. TECH. ASSIST. & TRAINING

STUDY 1391619 0 0 1391619TRAINING 1903080 957336 0 2860416

......... ..... ........... ........... .................. ...........

Sub-Total 3294698 957336 0 4252035........................... .............. ........... .................. ...........

Total INVESTMENT COSTS 214216469 443272859 0 657489328UUU 6 -- musms 683 S3 = a868 =38U685

Total 214216469 443272859 0 657489328

7/28/1992 7:19

- 87 - Annex 5.6

CHINASHUIKOU HYDROELECTRIC PROJECT

Table 2. SHUIKOU HYDROELECTRIC PROJECTADDITIONAL SCOPE

Detafled Cost TableRNS q,

*reakdown of Totals Incl.Cont.US$

_ _ uuusumunua auuuuuu

F.Exch Local Taxes Total............................................

t. !NVESTMENT COSTS..... ...... ...

A. CIVIL & ASSOCIATED WORKSNAVIGATION DESIGN CHANGE 4837270 2230099 0 7067369

B. MIETAL WORKSLIFTSHIP LOCAL MATERIAL 0 1638528 0 1638528LIFTSHIP FOREGIN MATERIAL 7800182 0 0 7800182LIFTSHIP LOCAL FABRICA' 0 2323205 0 2323205LIFTSHIP LOCAL EQUIPMENT 0 7129563 0 7129563LIFTSHIP FOREGIN EOUIPMET 6504283 0 0 6504283

....... ;... ....... . ..... ................. .......... .............. ........

Sub-Total 14304466 11091296 0 25395761C. ELEC. & NECH. WORKS

GRID AUTOMATIC SYSTEM 5797411 0 0 5797411.......... ............... .......... ............... ................ .....

Total INVESTMENT COSTS 24939146 13321395 0 38260540amuama umuuuuuu= vmumuau uSuuauuu

TotaL 24939146 13321395 0 38260540

7/28/1992 7:20

CHINASHUIKOU HYDROELECTRIC PROJECT

Summry Accouats Cost Summary

RHB USS X Total.-.---....................-.-.-..----. ------------------------------------ X Foreign Base

Local foreign Total Locat Foreign Total Exchange Costs

1. INVESTMENT COSTS...................

A. PRELIMINARIES1. PREPARATORY WORKS 146856000 0 146856000 27045304 0 27045304 0 42. Resettlweant Coapensatfon 873281000 54300000 927581000 160825230 10000000 170825230 6 28

................................................... -- - - - - - - - -- - - - - - - - - --------------------------......

Sub-Total 1020137000 54300000 1074437000 187870534 10000000 197870534 5 33B. Civil & Associated Uorks

1. ICS CIVIL WORKS 354533839 M7827693 1127361532 65291683 142325542 207617225 69 34C. NETAL MORKS

1. HATERIAL PROCMREMENT 8200o0o 77194102 85394102 1510129 14216225 15726354 90 32. MAMUFACTURINGS 88568339 27150000 115718339 16310928 5000000 21310928 . 23 4

.... ..... . ............... ,,....,,. .............. . -.-.-.-..----.-.-.......------------- ._------------------------.

Sub-Total 96768339 104344102 201112441 17821057 19216225 3703 7282 52 60. ELEC. & NECH WORKS

1. UITS & AUXILIARIES 316221000 169291110 485512110 58235912 31177000 89412912 35 152. TRANSfRMERS & SWITCIIEAR 40780000 0 40780000 7510129 0 7510129 0 13. COITRLX SYSTEM 0 62770800 62770800 0 11560000 11560000 100 24. LOCAL TRANSP. & ERECTION 735000 0 73500000 13535912 0 13535912 0 2 15. TRANSMISSIOU LINES 0 0 0 0 0 0 0 0

-- - --*---- --- * ------- *-* -*------ *- *- *--- -- -- -- -- -- -------- ------- -- -- -- -- - -- -- -- -

Sub-Total 430501000 232061910 662562910 79281952 42737000 122018952 35 20E. EIG. A CONSTh. SUPERVI. 108730675 45335525 154066200 20024065 8349084 28373149 29 5f. ADMINISTRATION 50348900 0 50348900 9272357 0 9272357 0 2G. TECN. ASSIST. & TRAINING 4669640 16216660 20886300 859971 2986494 3846464 78 1

Total BASELINE COSTS 20656db393 1225085890 3290775282 380421619 225614344 606035964 37 100Physical Contingencies 55854001 48867537 104721538 10286188 8999546 19285734 47 3Price Contingencies 55726530 -46149366 9517164 65886446 4541724 70428170 6 12

Total PROJECTS COSTS 21M69924 1227804061 3405073984 456594254 2391556 , 695749868 34 115

........... .................... ,...... .......... .... ...... .. .. ............................. ....................................................... ..................................._

7i28/192 T:23

*

CNINASHUIKOU HYDROELECTRIC PROJECTSECOND PHASE (1991 costs)

Table 1. SHUIKOU HYDROELECTRIC PROJECTORIGINAL SCOPE

Detailed Cost TableRuB

Base Costs

1985-91 1992 1993 1994 1995 Total

1. INVESTMENi COSTS. ... .... ...

A. PRELIMINARY WORKPRELIMINARY WORK 0 12000000 15000000 15000000 15000000 57000000RESETTLEMENT COMPENSATION 0 127040000 0 0 0 127040000RESETTLEMENT MATERIALS 0 0 0 0 0 0

-- - -- - - -- -- -- -- -- -- -- -- -- -- -- -- --- --- --- .--...--...-------..- ..

Sub-Total 0 139040000 15000000 15000000 15000000 184040000B. CIVIL & ASSOCIATED WORKS

DIVERSION UORK 0 247u6,9 841650 0 0 3312300DAN & INTAKE WORKS 0 73929450 50401260 0 0 124330710POWERHOUSE 0 25792500 39888780 6016440 0 71697720SWITCHYARD 220KV & 500KV 0 407250 407250 407250 407250 1629000NAVIGATION 0 7797480 124765110 15605820 0 148168410VARIATION WORK 0 0 0 0 0 0PRICE ESCALATION 0 0 J 0 0 01

Sub-Totat 0 110397330 216304050 22029510 407250 349198140C. METAL WORKS 0 4072500 0 0 0 40725000. ELEC. & MECH. WORKS

TURBINES 1&2, GOVRS. 1T07 0 1297770 18114480 5039040 1536690 25987980GENS.1&2, EXCITRS.1 TO 7 0 18597750 13194900 5104200 1411800 38308650UNITS 3,4,5,6,7 0 22500000 45000000 43000000 0 110500000UNIT AUTOMATIC COMPONENT 0 2715000 0 0 0 2715000GENS . 13.8KV BREAKERS 0 2172000 10860000 3801000 1384650 18217650AUXILIARIES FOR UNITS 0 70575000 0 0 0 70575000TRANSFORMERS 0 2500000 12700000 6800000 0 22000000SUITCHGERS & AUXILIARIES 0 3500000 4200000 0 0 7700000CONTROL SYSTEM 0 2470650 21448500 8145000 0 32064150LOCAL TRANS. & ERECTION 0 11000000 20000000 13000000 2000000 46000000500KV TRANSMISSION LINES 0 0 0 0 0 0

Sub-Total 0 137328170 145517880 84889240 6333140 374068430E. ENG. & CONSTN. SUPERVN. 0 26400000 15270000 15900000 15900000 73470000F. ADMINISTRATION 0 4500000 9000000 8270000 8000000 29770000G. TECH. ASSIST. & TRAINING

STUDY A,B,C 0 716760 1629000 0 0 2345760TRAINING 0 1517000 3412000 i100000 1100000 7129000

Sub-Total 0 2233760 5041000 1100000 k 1100000 9474760

Total INVESTMENT COSTS 0 423971760 406132930 147188750 46740390 1024033830===..===== == ==== ==:=== =:=========== ============

TotaL 0 423971760 406132930 147188750 46740390 1024033830

7/22/1992 11:51

CHINASHUIKOU HYDROELECTRIC PROJECTSECOND PHASE (1991 costs)

Table 1. SNUIKOU NYOROELECTRIC PROJECTORIGINAL SCOPE

Detailed Cost TabteRHO

Base Costs in USS

1985-91 1992 1993 1994 1995 Total.......... ................................ ...................................................

INVESTNENT COSTS................

A. PRELIMINARY WORKPRELIMINARY WORK 0 2209945 2762431 2762431 2762431 10497238RESETTLEMENT COHPENSATION 0 23395948 0 0 0 23395948RESETTLEMENT MATERIALS 0 0 0 0 0 0

... ........ ..... .............. .............---------- -- - - - - -- - - - - ----------

Sub-Total 0 25605893 2762431 2762431 2762431 33893186B. CIVIL & ASSOCIATED WORKSDIVERSION UORK 0 455000 155000 0 0 610000DAM & INTAKE WORKS 0 13615000 9282000 0 0 22897000POWERHOUSE 0 4750000 7346000 1108000 0 13204000SWITCHYARD 220KV & 500KV 0 75000 75000 75000 75000 300000NAVIGATION 0 1436000 22977000 2874000 0 27287000VARIATION WORK 0 0 0 0 0 0PRICE ESCALATION 0 0 0 0 0 0 0Sub-Total 0 20331000 39835000 4057000 75000 64298000C. METAL WORKS 0 750000 0 0 0 750000D. ELEC. & KECH. WORKSTURBINES 182, GOVRS. lT07 0 239000 3336000 928000 283000 4786000GENS.1&2, EXCITRS.1 TO 7 0 3425000 2430000 940000 260000 7055000UNITS 3,4.5,6,7 0 4143646 8287293 7918969 0 20349908UNIT AUTOMATIC COMPONENT 0 500000 0 0 0 500000GENS$. 13.8KV BREAKERS 0 400000 2000000 700000 255000 3355000AUXILIARIES FOR UNITS 0 12997238 0 0 0 12997238TRAUSFORMERS 0 460405 2338858 1252302 0 4051565SUITCHGERS & AUXILIARIES 0 644567 773481 0 0 1418048CONTROL SYSTEM 0 455000 3950000 1500000 0 5905000LOCAL TRANS. & ERECTION 0 2025783 3683241 2394107 368324 8471455500KV TRANSMISSION LINES 0 0 0 0 0 0

Sub-Total 0 25290639 26798873 15633378 1166324 68889214E. ENG. & CONSTN. SUPERVN. 0 4861878 2812155 2928177 2928177 13530387F. ADMINISTRATION 0 828729 1657459 1523020 1473297 5482505G. TECH. ASSIST. & TRAININGSTUDY A,8,C 0 132000 300000 0 0 432000TRAINING 0 217374 628361 202578 202578 1312891

Sub-Total 0 411374 928361 202578 202578 1744891

total INVESTMENT COSTS 0 78079514 74794278 27106584 8607807 188588182

Total 0 78079514 74794278 27106584 8607807 188588182

7/22/1992 11:51

CHINASHUIKOU HYDROELECTRIC PROJECT

SECOND PIIASE (1991 costs)Table 1. SHUIKOW HYDROELECTRIC PROJECT

ORIGINAL SCOPEDetailted Cost rable

RMB

Totals Inctuding Contingencies

1985-91 1992 1993 1994 1995 Total1. INVESTMENT COSTS

..... ............. ...

A. PRELININARY WORKPRELIMINARY WORK 0 12978000 17112375 17967994 18866393 66924762RESETTLEMENT COMPENSATION 0 137393760 0 0 0 137393760RESETTLEMENT MATERIALS 0 0 0 0 0 0Sub-Total 0 150371760 17112375 17967994 18866393 204318522S. CIVIL & ASSOCIATED WORKSDIVERSION WORK 0 2672032 960216 0 0 3632248DAN & INTAKE WORKS 0 83762816 60239628 0 0 144002444POWERHOUSE 0 29223164 47675103 7716955 0 84615221SWITCHYARD 220KV & 500KV 0 461418 486746 522357 536664 2007185NAVIGATION 0 8031476 135563057 18197020 0 161791553VARIATION UORK 0 0 0 0 0 0PRICE ESCALATION 0 0 0 0 0 0. ... .... .... ...... .. .. ... . . . . ... . . . . .... ... .. .... ... ..Sub-Total 0 124150907 244924749 26436332 536664 396048651C. METAL WORKS 0 4404469 0 0 0 4404469D. ELEC. & MECH. WORKSTURBINES 1&2, GOVRS. ITO7 0 1376712 19510596 5671008 1690486 28248802GENS.1&2, EXC'TRS.1 TO 7 0 19729027 14211855 5744340 1553097 41238319UNITS 3,4,5,6,7 0 24333750 51337125 51508249 0 127179124UNIT AUTOMATIC COMPONENT 0 2992243 0 0 0 2992243GENS'. 13.8KV BREAKERS 0 2348008 11919800 4359180 1552244 20179232AUXILIARIES FOR UNITS 0 77780707 0 0 0 77780707TRANSFORMERS 0 2703750 14488477 8145490 0 25337718SUITCHGEAtS & AUXILIARIES 0 3857350 4882731 0 0 8740081CONTROL SYSTEM 0 2670859 23541605 9341100 0 35553564LOCAL TRANS. & ERECTION 0 12123100 23251100 15868876 2563434 53806510500KV TRANSMISSION LINES 0 0 0 0 0 0

Sub-Total 0 149915506 163143289 100638243 7359261 421056300E. ENG. & CONSTN. SUPERVN. 0 29911307 18250251 20129438 20951454 89242450F. ADMINISTRATION 0 5098500 10756350 10378085 10541223 36714158G. TECH. ASSIST. & TRAININGSTUDY A,B,C 0 812100 1947027 0 0 2759127TRAINING 0 1718775 4078105 1423583 1449607 8670070

Sub-Total 0 2530875 6025132 1423583 1449607 11429197 ITotal INVESTMENT COSTS 0 466383325 460212146 176973674 59704602 1163273747

Totat 0 4.66383325 460212146 176973674 59704602 11632737477/22/1992 11:51 0

CHINASHUIKOU HYDROELECTRIC PROJECT

SECOND PHASE (1991 costs)Table 1. SIIUIWOU HYDROELECTRIC PROJECT

ORIGINAL SCOPEDetailed Cost Table

RH8

Totals Including Contingencies Oreakdoin of Totals Incl.Cont.

1985-91 1992 1993 1994 1995 Total F.Exch Local Taxes Total~~~~. ... .... .... ...... ........... .................... . ........ ............. .. --------------------------------

1. IUVESTMENT COSTS. .... . . . . .

A. PRELIMINARY WORKPRELIMINARY WORK 0 2365658 3072240 3087284 3316293 11841475 0 11841475 0 11841475RESETTLEMENT COMPENSATION 0 25044433 0 0 0 25044433 0 25044433 0 25044433RESETTLEMENT MATERIALS 0 0 0 0 0 0 0 0 0 0

Sub-Total 0 27410091 3072240 3087284 3316293 36885908 0 36885908 0 368859088. CIVIL B ASSOCIAED UORKS

DIVERSION WORK 0 487064 172391 0 0 659454 428650 230805 0 659454DAM & INTAKE WORKS 0 15268468 10815014 0 0 26083482 16954472 9129010 0 26083482POWERHOUSE 0 5326862 8559264 1325937 0 15212063 9898021 5314042 0 15212063SUITCHYARD 220KV & so0Kv 0 84108 87387 89752 94334 355581 231812 123769 0 355581NAVIGATION 0 1463995 24338071 3126636 0 28928702 18827688 10101014 0 28928702 1VARIATION UORK 0 0 0 0 0 0 0 0 0 0 soPRICE ESCALATION 0 0 0 0 0 0 0 0 0 0

Sub-Total 0 22630497 43972i27 4542325 94334 71239283 46340642 24898641 0 71239283C. METAL WORKS 0 802856 0 0 0 802856 802856 0 0 8028560. ELEC. & MECH. UORKS

TURBINES 1U2, GOVRS. ITO? 0 250950 3502800 974400 297150 5025300 . 5025300 0 0 50253U0GENS.182. EXCITRS.1 TO 7 0 3596250 2551500 987000 273000 7407750 7407750 0 0 7407750UNITS 3.4.5,6.7 0 435609 9216719 8850215 0 22502542 0 22502542 0 22502542tUIl AUTM0ATIC COMPONENT 0 545432 0 0 0 545432 545432 0 0 545432GENS'. 13.8KM BREAKERS 0 428000 2140000 749000 272850 3589850 3589850 0 0 3589850AUXILIARIES FOR UNITS 0 14178036 0 0 0 14178036 0 14178036 0 14178036TRANSFORMERS 0 492845 2601163 1399569 a 4493577 0 4493577 0 4493577SUITCHGERS & AUXILIARIES 0 703126 876612 0 0 1579739 0 1579739 0 1579739CONTROL SYSTEM 0 486850 4226500 1605000 0 6318350 6318350 0 0 6318350LOCAL TRANS. £ ERECTION 0 2209825 4174345 2726611 450595 9561375 0 9561375 0 9561375SOOKV TRANSMISSION LINES 0 0 0 0 0 0 0 0 0 0.. ........... ........... ........... ...........

Sub-Total 0 27326924 29289639 17291794 1293595 75201952 22886682 52315270 0 75201952E. ENG. & CONSTI. SUPERYN. 0 5452298 3276526 3458666 3682801 15870291 4148862 11721429 0 15870291F. ADMINISTRATION 0 929366 1931122 1783176 1852913 6496577 0 6496577 0 6496577G. TECH. ASSIST. & TRAINING

SITDY AUB,C 0 148031 349556 0 0 497587 497587 0 0 497587TRAINING 0 313302 732155 244402 254809 1544868 1337320 207548 0 t544868 3

....................... ........... ...................... .........................................................Sub-Total 0 461333 1081711 244602 254809 2042455 1834908 207548 0 2042455

Totat INVESTMENT COSTS 0 85013366 82623366 30407848 10494745 208539324 76013950 132525374 0 20853s9?4

Total 0 85013366 826.23366 50407848 10494745 208539324 76013950 132525374 0 208539324

7/ 2/1992 1 :51

CHINASHUIKOU HYDROELECTRIC PROJECTSECOND PHASE (1991 costs)

Table 2. SHUIKOU HYDROELECTRIC PROJECTADDITIONAL SCOPE

Detailed Cost TableRMB

Base Costs

1985-91 1992 1993 1994 1995 Total

I. INVESTMENT COSTS

A. CIVIL & ASSOCIATED WORKSNAVIGATION DESIGN CHANGE 0 11240100 16860150 564720 0 28664970

S. METAL WORKSSNIPLIFT IOC. EQUIPMENT 0 0 12500000 12500000 5000000 30000000SHIPLIFT fOR. EQUIPHENT 0 0 10860000 16290000 0 27150000SHIPLIFT LOCAL MATERIAL 0 0 7000000 0 0 7000000SHIPLIFl FOREIGN MATERIAL 0 0 13575000 19005000 0 32580000SHIPLIFT LOCAL FABRICATUN 0 1000000 8000000 0 0 9000000

Sub-Total 0 1000000 51935000 47195000 5000000 105730000C. ELEC. & MECH. JORKSGRID AUTOMATIC SYSTEN 0 2715000 21720000 3312300 0 27747300

Total INVESTMENT COSTS 0 14955100 90515150 51672020 5000000 162142270

Total 0 14955100 90515150 51672020 5000000 162142270 uD

7/22/1992 11:52

CHINASHUIKOU HYDROELECTRIC PROJECTSECOND PHASE (1991 costs)

Table 2. SHUIKOU HYOROELECTRIC PROJECTADDITIONAL SCOPE

Detailed Cost TableRM0

Base Costs in US5

1985-91 1992 1993 1994 1995 Total

1. INVESTMENT COSTS................

A. CIVIL & ASSOCIATED WORKSNAVIGATION DESIGN CHANGE 0 2070000 3105000 104000 0 5279000

9. METAL WORKSSHIPLIFT LOC. EQUIPMENT 0 0 2302026 2302026 920810 5524862SHIPLIfT FOR. EQUIPMENT 0 0 2000000 3000000 0 5000000SHIPLIFT LOCAL MATERIAL 0 0 1289134 0 0 1289134SHIPLIFT FOREIGN MATERIAL a 0 2500000 3500000 0 60L0"00SHIPLIFT LOCAL FABRICAT'N 0 184162 1473297 0 0 1657459

.......... .................. ..... ........ .................. ......... .. ---- ------- ------- --------

Sub-Totat 0 184162 9564457 8802026 920810 19471455C. ELEC. & MECH. WORKS

GRID AUTOMATIC SYSTEM 0 500000 4000000 610000 0 5110000...----- - ---------- --- ------- ---------- .--------. - -.- -------Total INVESTMENT COSTS 0 2754162 16669457 9516026 920810 29860455

Total 0 2754162 16669457 9516026 920810 29860455

=322/1992 11:52

.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ S

I.

CHINASHUIKWt HYDROELECTRIC PROJECTSECOND PHASE (1991 costs)

table 2. SHUIKOU HYDROELECTRIC PROJECTADDITIONAL SCOPE

Detail4d Cost TableRMS

Totals Including Contingencies

1985-91 1992 1993 1994 1995 Total

1. INVESTMENT COSTS................

A. CIVIL & ASSOCIA1ED WORKSNAVIGATION DESIGN CHANGE 0 12735147 20151265 724335 0 33610748

0. METAL WORKSSHIPLIFT LOC. EQIJIPNENT 0 0 16297500 17112375 7187197 4059707?SHIPLIFT FOR. EQUIPMENT 0 0 14160194 23059177 0 37219372SHIPLIFT LOCAL MATERIAL 0 0 9126600 0 0 9126600SHIPLJFT FOREIGN NATERIAL 0 0 17700243 26902374 0 44602617SHIPLIFT LOCAL FABRICAT'N 0 1081500 9126600 0 0 10208100

Sub-Total 0 1081500 66411137 67073926 7187197 141753761C. ELEC. & MECH. WORKSGRID AUTOMATIC SYSTEM 0 2992243 25252347 4180757 0 32425346

Total INVESTMENT COSTS O 16808890 111814749 71979018 7187197 207789855 UtTotal 0 16808890 111814749 71979018 7187197 207789855

7/22/1992 11:52

CHINASHUlKOU HYDROELECTRIC PROJECTSECOND PHASE (1991 costs)

Table 2. SHUIKOU HYDROELECTRIC PROJECTADDITIONAL SCOPE

Detailed Cost TableRHO

Totals Including Contingencies Breakdowm of Totals Incl.Cont.USs USS

1985-91 1992 1993 1994 1995 Total F.Exch Local Taxes Total.. ... .. ......... ..................... ........................ ...... ........... .................. .................................... .... ------------------------

1. INVESTNENT COSTS......... ............ .....

A. CIVIL & ASSOCIATED WORKSNAVIGATION DESIGN CHANGE 0 2321390 3617821 124456 0 6063668 3942387 2121281 6063668

B. METAL WORKSSHIPLIFT LOC. EQUIPMENT 0 0 2925943 2940271 1263350 7129563 0 7129563 0 7129563SHIPLIfT FOR. EQUIPMENT 0 0 2542225 3962058 0 6504283 6504283 0 0 6504283SHIPLIfT LOCAL NAlERIAL 0 0 1638528 0 0 1638528 0 1638528 0 1638528SHIPLIFT fOREIGN MATERIAL 0 0 3177781 4622401 0 7800182 7800182 0 0 7800182S8IPLIfT LOCAL fADRICAT'N 0 197138 1638528 0 0 1835666 0 1835666 0 135666

Sub-Total 0 197138 11923005 11524730 1263350 24908223 14304466 10603757 0 24908223C. ELEC. & AECN. WORKS

GRID AUTOMATIC SYSTEM 0 545432 4533635 718343 0 5797411 5797411 0 0 5797411- ...... . . . .... ... . ... ... .... ---------- --- -- - - --------.-- --- -- -- ---- ---- ---------- --.- - -- ---.-- - -- - -- -

Total INVESTMENT COSTS 0 3063961 20074461 12367529 1263350 36769301 24044263 12725038 0 36769301 c~~~~====_== = … 5S==Total 0 3065961 20074461 12367529 1263350 36769301 24044263 12725038 0 36769301

7/221992 =5 = == = =…7/22/1992 11:52

'W4~~~~~~~~~~~~~~~~~~

CHINASHUIKOW HYDROELECTRIC PROJECTSECOND PHASE (1991 costs)

Suwiary Account by Project ComponentRNB

Physical PriceContiingencies Contingencies

ORIGINAL ADDITIONAL SCOPE SCOPE Total X Amount X Amount

I. INVESTMENT COSTS...... .......................

A. PRELIMINARIES1. PREPARATORY WORKS 57000000 0 57000000 5 2850000 12 70747622. Resettlement Compensation 127040000 0 127040000 5 6352000 3 4001760

Sub-total 184040000 0 184040000 5 9202000 6 110765228. Civil & Associated Works1. ICO CIVIL WORKS 349138140 28664970 377803110 6 22797855 8 29058433C. METAL WORKS1. MATERIAL PROCUREMENT 4072500 39580000 43652500 19 8119625 15 63615612. MANUFACTURINGS 0 66150000 66150000 18 11880000 15 9994544

-- -- - -- - -- -- - -- - -- -- - -- - ............. --------------------- ---------------------

Sub-total 4072500 105730000 109802500 18 19999625 15 16356105D. ELEC. & MECH WORKS1. UNITS & AUXILIARIES 266304280 0 266304280 6 15145367 6 16168780 '42. TRANSfORMERS & SWITCHGEAR 29700000 0 29700000 6 1639000 9 27387993. CONTROL SYSTEM 32064150 27747300 59811450 7 4186801 7 39806594. LOCAL TRANSP. & ERECTION 46000000 0 46000000 7 3220000 10 45865105. TRANSMISSION LINES 0 0 0 0 0 n oSub-total 374068430 27n47300 401815730 6 24191168 7 27474748E. ENG. & CONSIN. SUPERVN. 73470000 0 73470000 10 7347000 11 8425450f. ADMINISTRATION 29770000 0 29170000 10 2977000 14 4027158G. TECH. ASSIST. & TRAINING 9474760 0 9474760 10 947476 11 1006961

Total BASELINE COSTS 1024033830 162142270 1186176100 7 87462124 8 97425377Physical Contingencies 6;'857316 24604808 87462124Price Contingencies 76382601 21t042777 97425377 7 7291915

Total PROJECT COSTS 1163273747 207789855 1371063602 7 94754039 7 97425377

Taxes 0 0 0 0 0Foreign Exchange 423063894 136100143 559964037 7 41907074

7/22/1992 11:52

CHINASHUIKOU HYDROELECTRIC PROJECT

SECOND PHASE (1991 costs)SuLaaaary Accounts Cost Summary

R1B US$ X Total-------- --------- ----........-.-----. .................................... X fooreinnBaas

Local Foreign Total Local foreign Total Exchange Costs

1. IlVESTHENT COSTS

A. PRELIMINARIES1. PREPARATORY VOAKS 57000000 0 57000000 10497238 0 10497238 0 52. Resettlegent Coupensation 127040000 0 127040000 23395948 0 23395948 0 11

-..--. -..-.-.-....----..-----..---------- ... ...... ... .... ....... ............. -- - - - - - -- - - - - -

Sub-Total 184040000 0 184040000 33893186 0 33893186 0 168. Civit & Associated Vorks

1. ICB CIVIL WORKS 132231088 245572021 377803110 24351950 45225050 69577Cac 65 32C. METAL IJORKS

1. MATERIAL PROCUREMENT 7000000 36652500 43652500 1289134 6750000 8039134 84 42. MANUFACTURINGS 39000000 27150000 66150000 7182320 5000000 12182320 41 6

Sub-Total 46000000 63802500 109802500 8471455 11750000 20221455 .58 90. ELEC. & MECH WORKS

1. UHITS l AUXILIARIES 181075000 85229280 266304280 33347145 15696000 49043145 32 222. TRANSFORMERS & SUITCHCEAR 29700000 0 29700000 5469613 0 5469613 0 33. CONTROL SYSTEM 0 59811450 !.9811450 0 11015000 11015(00 100 5 14. LOCAL TRANSP. & ERECTION 46000000 0 46000000 8471455 0 8471455 0 4 Q)

T. TRANSMISSION LINES 0 0 0 0 0 0 0 CD

Sub-Total 256775000 145040730 401815730 47288214 26711010 73999214 36 7S)E. ENG. & COUSIN. SUPERVN. 54367800 19102200 73470000 10012486 35179t1 13530387 26 6F. ADMINISTRATION 29770000 0 29770000 5482505 a 5482505 0 3G. TECH. ASSIST. & TRAINING 983740 8491020 9474760 181168 1563724 1744891 90 1

--- --- --- --- --- --- --- --- --.-- .... .... .......... ... .... .. ......... .. ............................ ......... ...... .... ..

Total BASELINE COSTS 704167628 482008471 1186176100 129680963 88767674 218448637 41 100Physical ContingencIes 48867653 38594471 87462124 8999568 7107637 16107205 44 7Price Contingencies 58064284 39361094 97425377 6569880 4182902 10752782 39 5

.. . ............. ........ ...... ... .... ...... .......... ..... -- - -- - - -- - -- - - -- - -- - - -- -- -- -- -- -- -- -- -

Total PROJECTS COSTS 811099565 559964037 1371063602 145250411 100058214 245308625 41 112

7/22/1992 11:52

-99- ANNEX 57

CHINA

SECOND SHUIKOU IDELECTRIC PROJECT

Procuremtt Arrangements($ million)

TotalProcurement method projectICB Other ja NBF . cost £

1. Works

1.1 Preparatory 11.8 11.8

1.2 Mdin civil 79.3 79.3(50.3) (50.3)

2. Goods

2.2 Turbines 1 & 2 5.6 5.6Governors 1 -7 (5.6) (5.6)

2.3 Generators 1 & 2 7.4 7.4Exciters 1-7 (7.4) (7.4)

2.4 Generating units 22.5 22.53 to 7

2.5 Generator breakers 3.6 3.6(3.6) (3.6)

2.6 Auxiliaries for units 14.2 14.2

2.7 Transformers 4.5 4.5

2.8 Switchgears 1.6 1.6& auxiliaries

2.9 Powerhouse 6.3 6.3control system (6.3) (6.3)

2.10 Powerhouse 9.6 9.6equipment erection

2.11 Netalworks 0.8 0.8(0.8) (0.8)

2.12 Shiplift control 5.5 1.0 6.5equipment (5.5) (1.0) (6.5)

* 100 -

TotalProcurement method projectICB Otner JA NBF A cost 4c

2.13 Shiplift cables 3.1 3.1(3.1) (3.1)

2.14 Shiplift hydraulic 3.7 1.0 4.7equipment (3.7) (1.0) (4.7)

2.15 Shiplift mechanical 7.1 7.1equipment

2.16 Shiplift electrical 1.6 1.6equipment

2.17 Grid SCADA system 5.8 5.8(5.8) (5.8)

3. Consultancies

3.1 Engineering and 4.1 11.7 15.8supervLsion (4.1) (4.1)

3.3 Technical assistance 1.8 0.2 2.0& trainlng (1.8) (1.8)

4. Miscellaneous

4.1 Resettlement 25.0 25.0

4.2 Administration 6.5 6.5

Total 121L1 LI 1163 245.3(22.1) (7.9) (100.0

Note: Figures in parentheses are '-he respective amounts financed by the Bankloan.

/A Other: Shopping and Consulting Services.

4k NBF: Non-Bank financed.

Lc Cost includes physical and price contingencies.

- 101 -ANNEX 5.

CHINA

SECONDSI8HUIE^ HYDLOELECTRXC PtOJICT

Diabursement schedule

Bank /I

Bank fiscal year Semester Cumulative Project Profile

and Semester (S million) (percent)

First 7.9 7.9 7.9 3.0

Second 24.1 32.0 32.0 10.0

1994First 33.0 65.0 65.0 i8.0

Second 20.3 85.3 85.3 30.0

1995First 7.6 92.9 92.9 46.0

Second 5.7 98.6 98.6 9i8.0

1996First 0.6 99.0 99.0 70.0

Second 0.6 99.8 99.8 78.0

1997first 0.2 100.0 100.0 82.0

/a Bankwide etandard disbursement profile for all sectors in China, issued on

April 25, 1S90.

- 102 -ANEX 6.1

SECONiD_'~HU1KO HYDRELECTRIC PRLOJECT

Financial System Followed by Chinese Power Bureaus

1. Power companies may accumulate capita] from three separate and dis-tinct sources. Ihese include funds for fixed assets, funds for working capi-tal, and a number of special funds.

(a) Funds for Fixed Assets. These funds are obtained from the State inlarge enough amounts to permit implementation of approved projectsaccording to agreed schedules. Until 1980, these funds were pro-vided almost entirely as grants; since then, the Government hasdecided to make these funds available as loans obtained from thebanking system or from official sources. The funds under this cate-gory are used exclusively to finance works classified as capitalexpenditures. The funds are released monthly, in accordance withplan provisions, in amounts needed to cover actually incurred expen-ditures. The power bureaus are not expected to finance significantportions of their generating and transmis._-on investments from oper-ations; rather, they are expected to remit most of their surplusincome to the Government through payment of taxes;

(b) Funds for Working Capital. These funds are also received from theState. They are based on a fixed amount established by regulationand subject to review at intervals of about 10 years. These fundsmake up only a minor part of the power bureaus' capital and, becausemost of the bureaus have drawn their entire allocations since thelast review, these funds have been used only as a minor source ofcapital in recent power projects proposed for Bank financing.Because current obligations both to and from the power bureaus aresettled almost as accrued, the working capital funds have been usedprimarily to finance operating inventory; and

(c) Sgecial Funds. These funds are earmarked for distinct purposes andare funded from net operating revenues or cash receipts in amountsestablished according to regulations. The power bureaus' accountscontain four separate categories of special funds, including thosefor: (i) maintenance; (ii) renovations; (iii) employee benefits;and (iv) distribution improvements. The special funds for main-tenance are financed by allocations charged as operating expenses indetermining net operating income before Income Tax. The specialfunds for renovations are financed by charges against GovernmentFunds (the balance sheet account showing the Government's equityinvestment in a power bureau) equal to the portiou of depreciationprovisions not used for debt repayment. The special funds foremployee bAnefits are financed using distributions from Net Incomeafter Income Tax but prior to the Adjustment Tax. Receipts andwithdrawals from the special funds associated with distributionimprovements are passed through the Flow of Funds statement and arespecifically excluded from the Income Statement. All other alloca-

- 103 - A LiL 6.1

tions to the special funds appear or are reflected on the IncomeStatement as though they are operating costs or distributions fromearnings, regardless of whether corresponding cash expenditures havebeen incurred. UndIer more traditional accounting systems, themoneys expended from the special funds would largely be classifiedas operating costs or working capital. However, items charged tothe Special Funds for both renovations and distribution improvementswould be capitalized as fixed assets once the underlying work iscompleted. Thus, when the renovations or distribution improvementsare complete4, their value is deducted from the special fundsbalance and added to the Government Funds account. The powerbureaus have only one way to channel tariff revenues into cash sinceall operating revenues must either be expensed; distributed to covercash outflows, debt service or taxes; invested in renovations ordistribution improvements; or retained for future expenditurechargeable to the special funds. The bureaus channel revenues intocash by using the excess of special fund allocations over the sum of(a) Special Fund Expenditures; (b) completed renovations and distri-bution improvements; and (c) increases in Special Fund Assets. Inturn, cash generated through the Special Funds may be interchangedwith other operating cash: however, allocations to particular spe-cial funds create an ultimate obligation for a power bureau to usethe accumulated cash only for certain categories of expenditures.

2. Until 1983, the power bureaus paid remittances to MOE equal to oper-ating revenues less the sum of cash expenditures charged directly to opera-tions, all allocations to special funds, and debt service. Since 1983, thepower bureaus pay MOF an Income Tax, assessed at 55 percent of operating reve-nues less the sum of costs (including depreciation) charged directly to opera-tions, all allocations to special funds that are treated as expenses, and debtservice in excess of the portion of depreciation provisions specifically allo-cated for debt repayment. From the residual after Income Tax, the powerbureaus must cover the special fund allocations thac are treated as distribu-tions from earnings and the amount of debt repayment and capitalized interestduring construction to be met from net income, and remit the remainder to MOEas an Adjustment Tax. / MOE has some flexibility in controlling the powerbureaus' liquidity. It can do this either by changing their allocations tothe special funds, making grants for allocation to the special funds, orrelieving the power bureaus of a portion of the Adjustment Tax. The powerbureaus appear to have adequate liquidity and MOE has not shown any inclina-tion to adjust the procedures that affect their liquidity.

3. Under the existing financial system, the Government does not intendfor the power bureaus to retain a surplus. However, tariff revenues must meetdebt service requirements and repayment per se does not represent a chargeagainst earnings. Regulations provide that certain stipulated amounts ofrepayment shall be met from cash that has been generated by depreciation;however, the remainder of the cash generated by depreciation must be added toa bureau's operating cash and a corresponding allocation must be made to theSpecial Funds for renovations. As a result, the remainder of repayment, which

2./ From an accounting point of view, the Adjustment Tax is treated in amanner similar to a dividend.

- 104 - 61

must be met from an earmarked increment of tariff revenues, creates an accumu-lation of equity in the form of a corresponding undistributed earnings.

4. Most power bureaus have units which engage in construction manage-ment and subsidiaries which function as contractors. As a rule, the accountsof the construction management units are consolidated with those of the powerbureau's operating units; however, the accounts of subsidiaries acting asconstruction contractors are, as a rule, n consolidated with those of theoperating units. As a result, when investments were financed through grants,the power bureau's consolidated accounts may have routinely understated grossfixed assets and certainly did not reflect adequately construction in pro-gress. Also, in the past, only about 85 percent of the value of governmentgrants used to finance new fixed assets was transferred from the books of theconstruction subsidiaries functioning as contractors to the power bureau'sconsolidated accounts. The residual was considered to have been expended inpurchasing moving assets, which remained with those construction subsidiariesupon the completion of construction. The change to using loans rather thangrants to finance power sector investments has caused investment funds to bechannelled from the Government through the power bureaus for payment to con-struction units acting as contractors. Thus, in the future, the consolidatedaccounts of the power bureau should more accurately reflect the value of grossfixed assets and construction in progress.

5. Given the existing financial system, the power bureaus have littlefinancial incentive to increase tariffs at the present time. Once a powerbureau has sufficient revenues to meet the costs charged directly to opera-tions and all special fund allocations and debt service, any additional reve-nues are remitted to the State through income or adjustment taxes. Thus, onceexpenses and required distributions have been met, even a large tariffincrease would not increase a power bureau's financial viability, except toimprove debt service coverage. Therefore, the familiar indicators of finan-cial performance such as rate of return and self-financing ratio have verylimited application to the financial analysis of a Chinese power bureau.

6. Nevertheless, the relationships between pricing, operating costs andsize of investment program are becoming increasingly important to MOE/SEIC.In their role as nationwide managers of the sector, MOE/SEIC have to arrangefinancing for the large and rapidly expanding investment programs of theregional power bureaus. They have, therefore, become acutely conscious of theneed to mobilize appropriate resources from the consumers. To further theirefforts for resource mobilization, recent Bank-financed power projects inmainland China have provided for financial covenants with specific targets for"notional self-financing ratio." For purposes of these agreements, theAdjustment Tax would not be considered a reduction in earned cash because itis a remittance of a residual and not a tax built into the cost structure andthe proceeds are generally recycled into investments in the power sector.

- 105- ANNEX 6.2

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Fuiian Provincial Electric Power B.ieau

Income Statement(Million Yuan)

Year ended December 31 1986 1987 1988 1989 1990

Sales increase (%) 11.6 13.7 16.5 17.9 3.6Energy sales (CWh) 5,000 5,690 6,631 7,817 8,095

Average revenue/kWh (fen) ?.6 8.8 10.3 13.3 15.2Operating revenue 382 498 683 1.037 1,228

ODeratina CostsFuel 112 155 175 198 172Purchased power 33 33 53 475 599Operations & maintenance 24 29 41 47 56

Administration 10 14 19 15 26Sales tax 89 108 139 121 218

Depreciation 56 76 90 103 46

Others - - - - 7

Total Oc,eratino Costs 324 415 517 959 1.124

operating income 58 83 166 78 105

Interest charged to operations - - 1 1 -

Other Income 2 1 2 7

Income Before Tax Al 83 166 72 112

Income tax 26 23 54 23 26

Net Income 30 60 112 56 86

Distribution of Net Income 12 8 16 12 12

Remitted to Government 7 35 55 27 54

Transferred to Government funds 11 17 41 17 20

Employee Benefits Special Fund

Net Income 30 60 112 56 86

Rate base 894 1,058 1,328 1,654 1,928

Rate of return (%) 6.3 7.8 12.5 4.8 5.8

- 106 - ANNEX 6.2

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Fulian Provincial Electric Power Bureau

Balance Sheet(Million Yuan)

Year ended December 31 1986 1987 1988 1989 1990

ASSETSCurrent AssetsCash 47 64 86 68 167Inventories 45 52 54 76 76Receivables 13 12 23 52 67

Total Current Assets 105 128 163 196 310

Fixed AssetsPlant in Service 1,261 1,583 1,950 2,319 2,654(less) Accum. depreciation 340 389 445 516 601

Net vlant in service 921 1.194 1.505 1.803 2.053

Construction w=rk-in-progress 1,183 1,505 1,898 2,628 2,639

Total Fixed Assets 2.104 2.699 3,402 4,431 4.692

Special Fund Assets 140 178 155 176 169

Total Assets 2.349 3.005 3,721 4,803 5,171

LIABILITIESCurrent LiabilitiesAccounts payable 47 54 55 85 131Due to Government 7 5 8 11 24

Total Current Liabilities 54 59 63 96 155

Long-term debt 1,127 1,650 2,348 3,202 3,339Government funds 770 830 959 1,110 1,207Working capital funds 33 37 40 49 47Special/Enterprise Funds 158 209 258 285 348Construction Appropriation 207 220 53 61 75

Total Liabilities - 2.349 3.005 3.721 4,803 5.171

Debt as % of debt & equity 54.8 61.4 65.9 69.7 66.7Current ratio 2.0 2.2 2.6 2.0 2.0

- 107 - ANNEX 6.2

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Fujian Provincial Electric Power Bureau

Funds Flow Sheet(Milllon Yuan)

Year ended December 31 1986 1987 1988 1989 1990

SOURCES OF FUNDSInternal Sources of Funds

Net income before interest 30 60 112 56 86Depreciation 39 53 64 74 88Maintenance 17 23 26 30 46Distribution expansion special funds 38 38 52 49 57Others 43 34 21 30 109

Total Internal Sources 167 208 275 239 386

Borrowings 598 523 552 854 821Government Funds - Grants 190 13 8 8 26

Total Sources of Funds 955 744 835 1.101 1,233

APPLICATION OF FUNDSCapital Expenditures 788 536 560 862 847

Ooerational RecuirementsInc/Dec in working capital -11 -3 -1 8 -44Inc/Dec in special funds assets 25 38 21 20 32Debt service 19 101 121 111 145Remittances to Government 13 9 16 12 12Special fund expenditures 104 47 96 104 182

Total Operational Requirements 150 192 253 255 327

Total Aolication of Funds 938 728 813 1.117 1.174

Increase/decrease in cash 17 16 22 -16 59

Annual debt service coverage 6.8 1.7 1.8 1.4 2.5

- 108 - ANN 6.3

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Assumptions to FPEPB's Financial Proiections

A. Income Statement

1. Energy al_ reflect FPEPB's projected expansion program. Power tobe produced by the Fuzhou Thermal Power Station and to be distributed throughthe Fujian system for which FPEPB will act as sales agent is included asFPEPB's sales.

2. Tiffs are assumed to be adjusted so that the average revenueswould be adequate for achieving the minimum financial performance targets.

3. Fuel costs are based on 1990 actual price paid for coal and areassumed to increase with the projected local inflation rates.

4. Purchased power are based on 1990 actual purchased price and areassumed to increase by 5 percent per annum for small and medium hydropower.Purchase price for electricity from large hydropower and thermal power sta-tions are based on "new plant, new price policy" and derived by full recoveryof operating cost and debt service requirement.

5. Oteration and maintenance costs include payroll and materials esca-lated with projected local inflation rates, 6 percent in 1992 and 5 percentfor 1993 and thereafter; and an allocation to the Maintenance Special Fund at2.3 percent of gross fixed assets and a charge of Y 1 per kW supplied byhydropower station for reservoir area maintenance.

6. Administration cost is based on FPEPB's 1990 actual expenditure andis assumed to increase with projected growth of energy sales and local infla-tion rates.

7. Sales tax is assumed at 20.4 percent of 'ales revenue after powerpurchase expenses.

8. DeRreciatign is assumed to be 3.5 percent of gross fixed assets inoperation at the beginning of the year.

9. Incoe tax is expected to be assessed at 55 percent of taxableincome.

B. Balane Sheet

10. Inventories. accounts receivable and accounts payable are projectedby FPEPB in accordance with its own expansion program.

11. Construction work-in-progress reflects the aggregate constructionwork-in-progress of FPEPB's own construction units and other constructionunits work as contractors for FPEPB.

- 109- AM 6!3

12. SDecial fund assets represents renovations and distribution expan-sion under construction. The renovations are financed by expenditures fromSpecial Fund for Renovations. The distribution expansions are financed fromthe Distribution Expansion Special Funds.

13. Due to Government is expected to increase by 4 percent each year.

C. Funds Flow Statement

14. Distribution Expansion SRecial Fund represents the receipts of con-sumer connections. It is assumed to be at Y 660 per incremental GWh distrib-uted by FPEPB which includes power supplied by Fuzhou Thermal Power Station.

15. Renovations and minor exRansIon represents 85 percent of previousyear's and 15 percent of the year prior to the previous year's expendituresfrom the Special Fund for Renovations.

16. Distribution expansion represent 85 percent of the previous year'sand 15 percent of the year prior to the previous year's expenditures from theDistribution Expansion Special Fund.

17. SRecial fnd exRendiet g represents aggregate amounts actuallyspent from the various special funds in a particular year. In general, expen-ditures from the special fund are assumed at 80 percent of the previous year'sand 20 percent of the year before the previous year's allocations.

ChinaShuikou Hydroelectric Project II

Fujian Provincial Electric Power BureauProjected Income Statements 1991-2000)

(Y Million)

Year Ended December 31 1991 1992 1993 1994 1995 1996 1997 19Y8 1999 2000---- ---- ~~~~~.... ..... ---- .... . .... ---- ----. ---

Sales Increase CX) 14.5 13.2 13.3 13.3 13.4 9.8 9.9 10.0 9.9 10.1Energy Sales (GWh) 9272 10499 11899 13485 15294 16794 18465 20312 22321 24576Average Revenue/kWh (fen) 16.50 17.73 20.97 22.36 24.41 25.29 25.75 25.92 26.73 29.25Min Price Indicator 16.19 17.73 20.97 22.36 24.41 25.29 25.75 25.92 26.73 29.25

Operating Revenue 1530 1863 2497 3016 3736 4253 4760 5268 5969 7192

Operating Costs

Fuel 190 273 294 335 394 524 696 875 927 1152Purchased Power 770 918 947 976 1006 1038 1070 1192 1904 2278Operation & Maintenance 129 143 196 287 364 407 465 506 531 591Administration 47 57 68 80 96 111 128 147 170 197Sales Tax 155 193 316 416 557 656 753 831 829 1002Depreciation 93 102 108 168 282 370 407 464 492 504Less: Fuzhou Thermal Cost 11 14 15 16 16 17 18 21 34 42Other Expenses

Total Operating Costs 1372 1672 1914 2247 2682 3089 3502 3997 4821 5682...... .... ---- ---- ---- ---- ---- ---- .... -- o0

Operating Income 158 191 583 769 1053 1164 1257 1271 1148 1509

Interest Chargeable to Operations 39 42 101 211 461 466 547 516 472 542Other Income 10 10 10 10 11 1; 12 12 13 13Net Income before Income Tax 129 158 491 568 603 709 722 767 688 980

Income Tax 55 64 229 246 182 194 175 158 125 201-

Net Income 75 94 263 322 421 515 547 609 563 779

Distribution of Net Income

Remitted to Governfent 22 28 77 95 89 82 61 37 30 57Transferred to Govt. Funds 16 25 59 104 256 340 388 463 432 582Employee Benefits Special f"un 13 17 47 58 76 93 98 110 101 140Enterprise Retained fund 23 24 79 65 0 0 0 0 0 0

Net Income 75 94 263 322 421 515 547 609 563 779=====================_ .=_. ===========================================

ChinaShuikou Hydroelectric Project 11

Fujian Provincial Electric Power BureauProjected Balance Sheets (1991-2000)

(Y Million)

Year Ended December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000.... ---- --- - -- --- --- --- --- - --- ........ ...

Assets

Current AssetsCash 217 304 400 509 560 626 705 800 911 1012

Inventories 80 84 88 93 98 102 108 113 119 125

Receivables 75 92 123 149 184 210 235 260 294 355

Total Current Assets 372 480 612 750 842 938 1047 1172 1324 1491.. ... ......................... .... ----. .... .... . .. .... .... . ---- ---- ----. ... .. .

Fixed AssetsPlant in Service 2907 3094 4799 8047 10571 11641 13259 14066 14388 15842

(less) Accum. Depreciation 694 796 904 1072 1353 1723 2131 2595 3087 3591

Net Plant in Service 2213 2298 3895 6975 9217 9918 11128 11471 11301 12251

Construction WIP 3268 4288 4314 2620 1400 1479 842 1173 2413 2445

Total fixed Assets 5481 6586 8209 9596 10617 11397 11970 12643 13714 14697................................ ... ... ----- -----. . ----- ----- ----- . ---- -- - -- -

Special Fund Assets 209 233 224 249 295 305 344 408 472 519

Total Assets 6061 7299 9045 10595 11754 12640 13361 14224 15509 16707.............. ----- . ----- ---- -- - -- -- -- -- -- -

Liabilities 8 Equity

Current LiabilitiesAccounts Payable 136 167 173 179 186 191 197 205 231 257

Due to Goverrment 25 26 27 28 29 30 32 33 34 36

Total Current Liabilities 161 193 200 207 215 221 229 238 266 292...............-............................... . . .. ... .. ................... .... . .... --- --- --- --- .....

Construction Appropriate r,.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0 75.0

Uorking Capital Funds 47 47 47 47 47 47 47 47 47 47

Long-term Debt 4(111 4921 6294 7407 7998 8235 8251 8348 8813 8994

Goverrment Funds 1325 1520 1770 2044 2474 3017 3574 4150 4756 5557

Special /Enterprise Fund 419 495 533 624 752 853 993 1173 1361 1549

International Borrowing 23 415 127 192 192 192 192 192 192 192

Total Liabilities & Equity m61 7299 9045 10595 11754 12640 13361 14224 15509 16707

Debt as X of Debt & Equity us.3 (.9.7 72.2 72.6 70.5 67.3 63.8 60.5 58.6 55.4

Current Ratio ;'.3 2.5 3.1 3.6 3.9 4.2 4.6 4.9 5.0 5.1

ChinaShuikou Hydroelectric Project II

Fujian Provincial Electric Power BureauProjected Funds Flow Statements (1991-2000)

(Y Million)Year Ended December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000.. . . . --- -- - - - - - - - . . - -Internal Sources of Funds... ....... .................. .

Other Sources of Funds 175 226 244 268 294 322 332 316 403 451Net Income Before Interest 113 136 364 532 882 981 1094 1126 1035 1322Depreciation 93 102 108 168 282 370 407 464 492 504Maintenance(Net of Expenditure) 3 13 9 19 29 36 37 44 46 47Total Internal Sources 384 477 725 988 1487 1709 1870 1950 1976 2324~~~. . .. -- - .... - - - --.... ---Distribution Expansion Special 95 120 92 105 119 99 110 122 133 149GrantsBorrowings

Proposed IBRD Loan 85 243 326 151 39 0Other Shuikou Project Loans 643 545 463 249 67 0 0 0 0 0Other Loans 45 272 771 994 1014 925 750 872 1240 1107Total Borrowings 772 1060 1560 1395 1120 925 750 872 1240 1107. . .. . . . .. .. . - - .. .. -- - - - .- -- - - - . - ....

Total Sources of Funds 1251 1657 2378 2487 2726 2733 2730 2944 3349 3580

Capital Expenditures..... ..... ..... .

Proposed Shuikou Project 586 601 622 316 106 0 0 0 0 0other Construction 45 260 718 870 971 848 722 802 1C'9 985Renovations and Minor Expansion 67 68 79 97 125 147 176 224 272 298Distribution Expansion 81 103 82 89 103 87 94 106 114 128Interest During Construction 142 199 220 208 44 77 28 70 151 122lotal Capital Expenditure 920 1231 1722 1580 1349 1160 1019 1202 1626 1534.......................................... .... ---- --- -- - - - .... --- --- ....-.Operational Requirements

Inc/Dec in Uorking Capital 7 -10 30 24 33 26 24 23 14 41Debt Service 140 19S 288 493 990 1154 1280 1291 1247 1469Remittances to Government 21 2( 76 94 88 81 60 36 28 55Special Fund Expenditures 113 129 164 188 216 246 269 298 322 379Total Operational Requirement ?81 339 559 798 1326 1507 1632 1647 1611 1944....... ............. . ........ .... .... - -- -- - .... --- --- --- --- ....

Total Application of Funds 1201 1570 2281 2379 2675 2667 2652 2849 3237 3478========_============= = :== ==~ ==== ==== ==== ==== ==== _=== ==== ====

Increase/Decrease in Cash 50 8;1 96 108 52 66 78 95 111 101Annual Debt Service Coverage 2.7 2.5 2.5 2.0 1.5 1.5 1.5 1.5 1.6 1.6

ChinaShuikou Hydroelectric Project II

Fujian Provincial Electric Power Bureau

Key Financial Indicators 1991-2000

(Y Million)

Year Ended December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Energy Sales GUGh) 9272 10499 11899 13485 15294 16794 18465 20312 22321 24576Average Price (fen/kUh) 16.5 17.7 21.0 22.4 24.4 25.3 25.7 25.9 26.7 29.3Operating Revenue 1530 1863 2497 3016 3736 4253 4760 5268 5969 7192Operating Income 158 191 583 769 1053 1164 1257 1271 1148 1509

Annual Capital Expenditure 920 1231 1722 1580 1349 1160 1019 1202 1626 1534

Rate Base 2132 2255 3097 5435 8096 9568 10523 11300 11386 11776

Long-term Debt (Accum.) 4011 4921 6294 7407 7998 8235 8251 8348 8813 8994

Debt Service 140 193 288 493 990 1154 1280 1291 1247 1469 ProjectedAverage

Rate of Return 1991-2000Historically Valued Assets(X) 7.4 8.5 18.8 14.1 13.0 12.2 11.9 11.2 10.1 12.8 12.0Notionally Revalued Assets (X) 1.5 1.7 4.4 4.5 5.2 5.4 5.2 5.0 4 ' 5.2 4.2

Self-financing Ratio (X) 22 22 22 25 25 31 38 42 37 37 30Operating Ratio (X) 79.5 79.4 64.0 60.7 56.9 57.2 57.8 60.1 66.9 65.1 64.8

Debt/Equity Ratio (%) 68.3 69.7 72.2 72.6 70.5 67.3 63.8 60.5 58.6 55.4 65.9

Debt Service Coverage (times) 2.7 2.5 2.5 2.0 1.5 1.5 1.5 1.5 1.6 1.6 1.9

Current Ratio (times) 2.3 2.5 3.1 3.6 3.9 4.2 4.6 4.9 5.0 5.1 3.9

- 114 - AEX 7L1

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Project Evaluation

1. The following tables provide details on the economic evaluation ofShuikou as a least-cost alternative for the expansion of the Fujian grid(project sizing and evaluation based on the costs of a thermal alternative),and of the economic rates of return of the project and of the total investmentprogram of the Fujian grid. Costs are based on 1991 price levels and actualcosts of Shuikou for the period 1985-90 have been adjusted to that level.Shadow pricing for Shuikou is based on conversion factors of 1.23 for electro-mechanical equipment, 1.1 for other local costs, and an exchange rate of Y 5.5per $ applied to the foreign portion (37 percent), yielding an aggregsate con-version factor of 1.08; the same is applied to the Nuyangxi hydro project inthe evaluation of the investment program. The economic cost of 300 KW coalfired plants is of Y 2,830/kW, based on shadow pricing of similar units inrecent Bank projects; net specific consumption is of 330 grams of standardcoal (7,000 kcal/kg). The economic cost of coal imported from North China isof Y 222/t delivered to Fujian plants, which is close to recent quotes ofmarket prices in Fujian, a relatively high-price province (about Y 220/t);whereas FPEPB's minemouth plants currently use local nontradeable coal, plantscommissioned in the 1990s will be on the coast and use imported coal (as does,today, the Huaneng plant). In project and program ROR calculations, incremen-tal transmission and distribution costs are based on a system average of4.5 fen/kWh.

Shuikou as a Least-Cost Alternative

2. As regards project size, benefits from capacities above 1,200 KWresult primarily from fuel savings due to additional energy generation; bene-fits in terms of peaking capacity are assumed negligible in the attached cal-culation of incremental costs and benefits from alternative capacities, sincewith 1,400 MW, operation at full capacity during the dry season is notexpected to occur before 2003. As indicated in the attached table, fuel sav-ings outweigh the additional investment when capacity is increased from 1,200to 1,400 NW, but not when it is increased further to 1,600 NW, confirming thatthe turbine capacity of Shuikou is appropriate.

3. The evaluation of Shuikou based on a coal-fired alternative provid-ing the same capacity in dry season, and the same energy indicates an equaliz-ing discount rate of 19 percent. Furthermore, hydro plants have advantagesover thermal plants, in terms of response to load fluctuations, which add tothis favorable balance.

Economic Rate of Return

4. In the Chinese context of electricity rationing, the GNP value perkWh consumed gives an indication of the potential weight of power shortages oneconomic growth; in 1990, this ratio was of Y 3.4/kWh for China as a whole,whereas the average revenue of FPEPB was about Y 0.165/kWh in 1991. The

- 115 - ANNEX 7.1

"Huaneng" price of 28 fen/kWh paid in 1991 by new customers under the currentmultitier tariff system, that is, about 31 fen/kWh including the demand chargeand the 2 fen/kWh surcharge for the provincial power construction fund, indi-cates a willingness to pay well above FPEPB's average rate (19 fen/kWh inaverage for 1994-2000, in 1991 Yuan, to meet financial covenants, excludingthe 2 fen/kWh surcharge). These two price levels (including the 2 fen sur-charge) are used as alternative measures of benefits.

5. The ROR of Shuikou alone, based on the average tariff level is of13.5 percent, which is higher than that of the entire investment program(11.4 percent), even though Shuikou's ROR does not fully account for its spe-cial role as a peaking plant; this is better reflected by the equalizing dis-count rate of 19 percent based on the cost of a thermal alternative (para. 3above). A price for peak time energy 30 percent higher than the average, asapplied by FPEPB to some customers, would yield a ROR of 17 percent forShuikou, which is closer to that based on the Huaneng price (19 percent). TheROR for the entire investment program providing incremental supply over theperiod 1993-2000 pzovides a more relevant measure of the adequacy of the tar-iff level as compared to economic costs of supply. The ROR of this programwould be of 19 percent based on the observed willingness to pay for incremen-tal power (Huaneng price), and of 11.4 percent based on the average tarifflevel. The Long-Run Average Incremental Cost (LRAIC) calculated on the basisof that program is of 21.7 fen/kWh, about the expected tariff level of 1994and beyond, including the power fund surcharge but not taking into account thecontribution of connection charges. The LRAIC with a purely thermal develop-ment and the same cost parameters (with FPG's current load factor of 72 per-cent) can be calculated directly and would be about 23.6 fen/kWh, as against18.7 fen/kWh for Shuikou. The investment cost of Shuikou would have to beincreased by 35 percent (including past costs) for the investment program toyield that level of LRAIC; this further illustrates the intrinsic value of theShuikou project.

SECOND SHIUIMU HTRDRCEIECIRIC PROJECT ANNEX 7.1ECONOMIC ANALYSIS OF POWER PLANT

YEAR 19a5 1088 1087 1088 198 1090 10 1092 1093 1994 105 198 107 19 19 20 200 2002 2003 204 2008 200SHUIKOU

-2045POWER ABSORPTION BY GRID MW 250 317 487 583 884 778 6 1025 1158 130 1400ENERGYABSORPTION BY GRJD (OW) 1400 2800 4450 405D 4950 4950 4950 95 495 4 495 495 405 4840CAPITAL GOS (FlNAk4CUt,Yx10^6) 21.92 93t31 181.1 297.3 351.5 422.2 740.7 7328 440.1 132.5 38MOPERAIINGCOST(Yx1O^S) 392 30.2 302 392 392 392 392 392 392 392 392 392 392 392ECONOMIC COST MX10-6) 23.87 100.7 174.0 321.1 379.8 456.0 799.9 7912 521.0 1823 78.79 392 392 392 392 392 392 392 392 392 392 292

COAL ALTERNATIVEEQJIVALENTCOAL CAPACITY a 0 0 0 0 0 0 0 313.5 307. 585.7 706.1 8328 975.8 1123. 1288. 1440. 1630. 1755.ELAVALENT COAL ENERGY 0 0 0 0 0 0 0 0 1498 29 4761. 5298. 5208. 5298. 5298. 5296. 5208. 5298. 5298. 5298. 5298. 5296.STALLATN SCHEDULE 300 300 300 30 SW 30CUMILAIIE CAPACrrY 300 600 80o 900 900 1200 1200 1500 1500 1800 1800 1800 1800 1s8xCOAL UNfT 1 84.9 254.7 339A 16098COAL UWrT2 84 284.7 330A 160.COAL UNIT3 84u 254.7 330.8 1808COAL UWT 4 84. 254.7 330.8 100.8COAL UNITG 84u 254.7 339. 16.SCOAL UNITO 84.9 254.7 330. 16sCAPITALCOSTr(Yx1o^) 0 0 0 0 0 84) 339.6 594.3 504.3 4245 4245 424S 424. 424. 424.5 424S 339. 1608fIEL COST (YxOG) 0 0 0 0 0 0 0 0 1020 204.1 324.5 30. 360.0 3603eos UBOh 36O0 380 3600 380 380) 360OPERAT1OGAND MIT. (YdXO6) 0 0 0 0 0 0 0 0 192 38.4 38.4 s7s 57* 768 78.8 g6 6 1152 115.2 1152 115.2 115.2TOTAL COSrT (OX10o ^ 0 0 0 0 0 4.9 330.6 5943 7155 667.0 787.4 8410 843.0 8622 8622 8s1A 79" 045) 4761. 478.1 478.1 478.1

COST DIFF.1DRO - COAL) -23a -100. -174. -321. -370. -371. -46t -108. 104.5 484. 708. 8803.8 83 823.0 823.0 8422 757. 608.7 436) 436U) 4360438)

MRR CALCULATIONSBENEFIToLLNGESWTOPAV) 0 0 0 0 0 0 0 0 345.0 600. 1006. 1210. 1210. 1219. 1210. 1210. 1210. 1219. 1210. 1219. 1219. 1219.BENEFfT- COST -23.0 -100. -174. -321. -370. -4U6. -709. -791. -175. 507.6 107. 1180. 1180. 1180. 1180. 1189. 1180. 1180. 118D. 118E. 11D. 1180.

BENEFIT (COVENANTED TAR"F) 0 0 0 0 0 0 0 214. 429. 88* 750.5 75s 759.5 750s 7595 750 75w 7595 759. 75.5 759.5BENEFfT - COST -236 -100. -174. -321. -m7. -456 -799. -791. -300. 2472 604.0 720.3 720.3 720.3 720.3 7203 720.3 72. 7203 720.3 7203 72&3

COAL PLANT IECONOMIC COSTS1 * SHUIKOU INSALLED CAPACITY OPTIMION (BASED ON FUEL SAVIYNS (NCAPACfTY COST (11KW GENJ 2830 OPERATING AND WANT. HYDRO (ttK 28 CAPACIrY CEASE MW 12O0-1400 1400-tO8DFU. CONSUM"PTIONH W GEN 307 DESIGN UFE HYDRO (YEARS) 50 INCREMENTAL COST YXO-0 t1O0 125.1COAL COST (YITON S3D) 222 AU)UARY POWER USE (%) 0.3 PVT COMMISSIONING DATE AT 12% 132) 1502FUEL COST PER KWH GEN) 0.068 FORCED OaJAGE (Y) 0.5 aINCREMTAL ENERGY (GWH) 27S 159DISBURSEMENT RATE COAM PLANTS 0.1 0.3 0.4 0.2ANNUAL ORU0L (DAYS) 7 ANNUAL FUEL SAVINGS (YXl0O6) 10.70 13.85OPERATNG AND 1A44NANCE(YfiH U 4 SHADOW PRICE FACTOR CAPIAL COST t .08 .. PV TO COMV80NINODATE AT12 % 15&4 12E8.E-CONOMIC LIFE (YARS 30 NpY,or-,N ............. ...- 21.AUXIUARY POWER USE % I E5 , .:05FORCED OUTAGE % s WLLNGNESS TO PAY (YOM SOD 031ANNUAL OVERHAUL (DAYS) 42 COVENANTED TARIFF (IKWH SOLD) 021

IC

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

RATE OF RETURN - FUJIAN POWER INVESTMENT PROGRAM

INVESTMENT APACITY COST COST

(W) (YAM (MY) 106 196 1337 18 130 1990 1901 1902 19 1994 19 1996 1097 1963 190 960

-2030

8HUIKOU 1400 2051 3712 24 100 174 321 380 466 800 792 482 144 40

MUYP4X 320 26 856 107 218 221 212 98

8HONQYU I S00 2830 840 86 256 340 170

SHONGYU 11 300 2630 849 s8 266 340 170

SHONGYUIII 300 2830 849 a6 255 340 170

SHONSYU IV 300 2U30 540 86 256 340 170

HUANENS I 350 2830 901 90 297 38 198

HUANNG IV 350 2830 091 90 297 396 198

TOTALCAPITALCO8T(GENERATION) 24 100 174 321 369 456 886 1132 120 1212 1126 1118, 694 lo 0

FUEL 8 3Q 62 133 234 349 60 682

OM HYDRD 39 39 so 48 48 48 48 48

O01M THERMAL 26 60 75 100 130 160 160

DS1RISUIION es 134 216 283 359 442 532 63

TOTAL INCFAENTALOA &DtSTROUTION 110 228 367 m 741 m 1246 1624

TOTALCOST 24 100 174 321 38 456 885 1132 1370 1440 1482 167 1702 1603 1444 1524

NET GEN. HYDRO 3043 3W 89 4790 6188 783 83 83 0132 0132 0132

NET GEN. THERIAL 4942 6666 718B 7295 7601 7002 9018 10413 12W0 14168 165i3

INWREMENTAL THERMAL 100 416 716 1832 3227 4814 6702 97

SALES 8004 9272 104S9 11800 13464 1629i 16797 1846 20312 22320 24675

INCREMENTAL SALES 1400 2985 4798 6298 7967 9813 11821 14076

BENEFIT(HUANENG PRICE) 434 925 1487 1062 2470 3042 3666 4304

BENEFIT (AVERAGE RATE) 294 627 1007 1323 1673 2061 2482 2966

NET SENEFIT(HUANENQ PRICE) -24 -100 -174 -321 -0 -456 -S -1132 -946 -616 6 296 768 1479 2220 2840

NETBENEFIT(AVERAGERATE) -24 -100 -174 -321 -30 - - -1132 -1085 -813 -475 -33 -29 498 1038 1432

ARORIUANEtNtV.UCE) :s 10N:.0%.....

'OR ;AVERA'E RATE) 11E.4 LRAIC THERMAL ANNUITY PER KW INSTALLFD 409 YiIW inc. (DC for dlsb.: 10%, 30%.40%.20%)

LAAI * Q.... YA0% OSM PER KW INSTALLED 85 YhkW (36 captal coa)

TOTAL PER NET, FIRM KW 664 YikW (80% availability. 7% awdfladue)

CAPACffYCOSTPERKWHSOLD 0.113 YhWh 7% Load Factor. 7% o_es)

LRAIC SHUIKOU ALONE 0.187 YAWh FUEL PER KWH SOLD 0.07B YAWh

T&D 0.045 YfAWi

Saf ultMtytolou cost mulllpil 0.00 TOTAL COST PER KWH SOLD 0.23B YAWh

- 118 - hZ,8.1

CHINA

SECOND SHUIKOU HYDROELECTRIC PROJECT

Selected Documents and Data Avail ble in the Project File

The Staff Appraisal Report for the first-phase project (Report No.6189-CHA) contains a list of 31 documents, available from the project file forLoan 2775-CHA.

The following additional documents have been forwarded to theproject file for the proposed project:

A. Selected ReRorts and Studies

1. September 1951Comprehensive Economic Evaluation of theTieline Between Fujian and East ChinaGrids - by Beijing Economic ResearchInstitute for Water Resources andHydroelectric Power.

2. Information for Preappraisal for Second April 1990Phase Loan, FPEPB

3. Information for Appraisal for Second Phase June 1991Loan, FPEPB

4. Summary Report on Execution of October 1991Environmental Evaluation, ECIDI

5. Environmental Management Plan, ECIDI August 1991

6. Contract between FPEPB and ECIDI for December 1991Independent Evaluation of Resettlement

B. Selected Work Sheets

1. Work Sheets for FPEPBA Financial Forecast

2. PCCOSTAB Cost Estimates

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JULY 1992