Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 36566

IMPLEMENTATION COMPLETION REPORT(SCL-41720 TF-29626)

ON A

LOAN

IN THE AMOUNT OF US$400 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

INNER MONGOLIA (TUOKETUO) THERMAL POWER PROJECT

June 29, 2006

Energy and Mining Sector UnitEast Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2005)

Currency Unit = RMB (Yuan) Y1.00 = US$ 0.125US$ 1 = Y8.0

Y1.00 = 100 fen

Exchange Rate Effective throughout project implementation (1997-2005)

Currency Unit = RMB (Yuan) Y1.00 = US$0.121

US$1.00 = Y8.28

FISCAL YEARJanuary 1 December 31

ABBREVIATIONS AND ACRONYMS

CAS/CPS Country Assistance Strategy/ Country Partnership StrategyDIP Datang International Power Generation Company Limited ERP Enterprise Resource Planning SystemEMP Environmental Management ProgramFMIS Financial Management Information SystemICB International Competitive BiddingIERR Internal Economic Rate of ReturnIMAR Inner Mongolia Autonomous RegionIMEPC Inner Mongolia Electric Power CompanyJJT Beijing-Tianjin-Tangshan RegionNCPGC North China Power Group Company

(later renamed as the North China Power Grid Company)PPA Power Purchasing AgreementQAG Quality Assurance GroupRAP Resettlement Action PlanTA Technical AssistanceT&D Transmission and DistributionTEPGC Tuoketuo Electric Power Generation Company

Vice President: Jeffrey Gutman (Acting)Country Director David R. DollarSector Manager Junhui Wu

Task Team Leader/Task Manager: Jianping Zhao

CHINAINNER MONGOLIA (TUOKETUO) THERMAL POWER PROJECT

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 35. Major Factors Affecting Implementation and Outcome 136. Sustainability 157. Bank and Borrower Performance 168. Lessons Learned 189. Partner Comments 1910. Additional Information 24Annex 1. Key Performance Indicators/Log Frame Matrix 25Annex 2. Project Costs and Financing 26Annex 3. Economic Costs and Benefits 29Annex 4. Bank Inputs 30Annex 5. Ratings for Achievement of Objectives/Outputs of Components 32Annex 6. Ratings of Bank and Borrower Performance 33Annex 7. List of Supporting Documents 34

Project ID: P003650 Project Name: TUOKETUO POWER/INNERTeam Leader: Jianping Zhao TL Unit: EASEGICR Type: Core ICR Report Date: June 28, 2006

1. Project DataName: TUOKETUO POWER/INNER L/C/TF Number: SCL-41720; TF-29626

Country/Department: CHINA Region: East Asia and Pacific Region

Sector/subsector: Power (99%); Forestry (1%)Theme: Climate change (P); Pollution management and environmental health (P); Land administration

and management (P); Regulation and competition policy (P); Other financial and private sector development (P)

KEY DATES Original Revised/ActualPCD: 02/15/1996 Effective: 12/22/1998

Appraisal: 10/22/1996 MTR:Approval: 05/27/1997 Closing: 07/31/2004 12/31/2005

Borrower/Implementing Agency: Government of China/Inner Mongolia Electric Power Company (IMPEPC)/North China Power Group Company (NCPGC)

Other Partners:

STAFF Current At AppraisalVice President: Jeffrey Gutman (Acting) Jean-Michel SeverinoCountry Director: David R. Dollar Nicholas C. HopeSector Manager: Junhui Wu Richard ScurfieldTeam Leader at ICR: Jianping Zhao Noureddine BerrahICR Primary Author: Ivy H. Cheng

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: HL

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

The project’s original development objectives were to: (a) increase electricity supply and electricity trade in North China through the creation of an independent power generation company to develop a mine-mouth power plant in the Inner Mongolia Autonomous Region (IMAR) that would supply the Beijing-Tianjin-Tangshan (JJT) Regional Power Grid through long-term contractual arrangements; (b) improve the efficiency of energy supply and use in the region by: i) introducing modern technologies and implementing effective operations and maintenance practices and procedures in power generation, and ii) reducing losses in the transmission and distribution (T&D) systems of Beijing; (c) advance power sector reform process in China by promoting the development of electricity trade in North China through adequate and market-oriented commercial arrangements; (d) diversify financing sources, improve the access of power entities to international financial markets, and encourage private-sector investment in existing and new power sector enterprises; and (e) promote economic development and also improve soil conservation and desertification control in Tuoketuo County, IMAR. The objectives were responsive to the prevailing priorities of the Government, consistent with the Bank’s strategy, and supportive of the implementing agencies’ development objectives (refer to Section 3.5 Quality at Entry).

3.2 Revised Objective:

The project objectives were not revised.

3.3 Original Components:

The project included two main components, and was to be carried out by two implementing agencies. The Tuoketuo Thermal Plant Component, under the responsibility of the newly established independent Tuoketuo Electric Power Generation Company (TEPGC), included: (a) construction of the first two 600 MW coal-fired sub-critical thermal units in IMAR as the first phase of the Tuoketuo power plant; (b) technical assistance (TA) to TEPGC for: i) further development of management capacity including the design and introduction of modern accounting and financial management systems; ii) construction management and engineering services; iii) environmental management and monitoring; iv) the use of simulator and computerized systems to develop operational staff capabilities in plant operation and management; and v) implementation of a plan for assets divestiture and involvement of private investors in existing and new power projects in IMAR; and (c) a desertification control and dryland management program to improve the environmental conditions in Tuoketuo County. The component was designed to help TEPGC and IMAR achieve all the stated project objectives (refer to Section 3.5 Quality at Entry).

The Beijing Transmission and Distribution Component, under the responsibility of the North China Power Group Company (NCPGC), included: (a) construction of two 220 kV indoor substations at Xibianmen and Xizhimen; (b) addition of a third 250 MVA, 220/110/10 kV transformer in the underground Wangfujing substation; and (c) TA to NCPGC for the implementation of accounting and financial management systems. The component was designed to support NCPGC to achieve project objectives (a), (b) ii), and (c) (refer to Section 3.5 Quality at Entry).

3.4 Revised Components:

Due to concerns over slower than expected load growth, uncertainties surrounding the ongoing power sector reform, and dwindling interest from potential investors resulting from the East Asian financial crisis, the Inner Mongolia Electric Power Company (IMEPC) decided not to further pursue the asset divestiture program as earlier planned. With the Bank’s concurrence in 2001, item (b) v) of the Tuoketuo component was dropped (refer to Section 4.2 A (b) for details).

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3.5 Quality at Entry:

Satisfactory. The sector study Strategic Options in Power Sector Reform in China (1993) and the sector report China Power Sector Reform: Toward Competition and Improved Performance (1994) provided vehicles for dialogue between the Bank and Chinese institutions. The project was designed to support their joint agenda of improving the efficiency and minimizing the environmental impacts of electricity delivery and use while alleviating shortages and satisfying surging demand. Specifically, the project was to support two themes stated in the 1997 Country Assistance Strategy (CAS) for China: infrastructure development, and protecting the environment. It was also envisaged to address all key sector issues identified by Government - infrastructure bottlenecks; inadequate pricing structures; lack of commercial orientation; inadequate financing for transmission; potential negative environmental impact; and low efficiency.

The project’s objectives were to be achieved through physical investment and institutional development. The project components were designed to ensure adequate electricity supply to the fast growing JJT region, and improve the reliability and efficiency of the important JJT Power Grid. Compared to available alternatives the project was deemed the most cost effective, and the least detrimental to the environment. Besides efficient production of thermal power, the new capacity additions would also result in reduced use or retirement of older, less efficient, and more polluting units.

Prior to loan approval international engineering consultants were engaged to support TEPGC in design finalization, procurement of goods, engineering, design interface coordination, and construction management (with US$2.4 million funding from CRISSP). Project preparation also benefited from a PHRD grant (US$960,000) that funded consulting services. The Beijing T&D efficiency improvement study aimed to strengthen NCPGC’s planning capacity also involved hands-on training for one of the company’s power supply bureaus selected for piloting.

The Bank’s safeguard policies on Environmental Assessment, Indigenous Peoples, and Involuntary Resettlement were appropriately applied. Lessons learned from relevant projects were identified and taken into account in the design of the project. Government commitment and the implementing agencies’ ownership were high. At appraisal, four main categories of risks were identified and analyzed; they were: (a) financial sustainability including electricity demand and pricing; (b) cost including equipment prices, impact of delays in construction, and coal prices; (c) delay in the implementation of sector reforms; and (d) operational performance including those affected by the quality of the facilities, coal, maintenance and management. Overall risk was considered modest and manageable. Assumptions and risk mitigation measures were clearly spelled out.

In view of the project objectives’ clear linkage to the prevailing CAS and government priorities, the quality of project design, and the reasonableness of the risk assumptions, the quality at entry was considered satisfactory.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

Satisfactory. Despite a different global context (including the East Asian financial crisis), shifting government priorities, a new CAS in 2003 and a new Country Partnership Strategy (CPS) in 2006, most of the project’s outcome objectives remained relevant to the government at completion. The project, as designed, addressed a critical challenge faced by China – meeting soaring electricity demand in a cost effective and environmentally sustainable manner. It anticipated the need for corporatization and

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institutional building to further the power sector reform process. In particular, the objectives were consistent with two of the 2006 CPS themes (managing resource scarcity and environmental challenges; and improving public and market institutions) and the Bank’s social and environmental safeguard policies prevailing at the time of project completion, albeit toughened since project approval in 1997.

While project preparation and implementation overlapped with the most recent phase of power sector restructuring in China (which involved the unbundling of power generation from T&D), its objectives remained, in the main, relevant to the sector. Project outcome are summarized below.

The construction of the two 600 MW thermal units was complete, both units were well built and maintained, and had been operating efficiently and reliably since becoming operational in 2003. Output of both units consistently surpassed the end-of-project targets established at appraisal (refer to section 4.2 and Annex 1).

TEPGC and NCPGC signed a power purchasing agreement (PPA) in December 1996 and the project was appraised on that basis. As the sector’s market-orientation deepened, the Government no longer allowed power suppliers and purchasers to use the relatively rigid 20-year take-or-pay contracts. Hence, the original PPA was never executed. The Bank supported the Government’s effort to move towards a more competitive power market, and concurred that a PPA based on prevailing government policies and regulatory principles was more practical and realistic in the interim. At the time of project completion, the PPA in effect reflected a government-approved tariff and a supply quantity as determined by NCPGC’s demand and TEPGC’s generation capacity. The PPA was renewable annually, and as of the time of project completion, TEPGC had been able to produce healthy financial results since the project and subsequent two phases of development (totaling 3,600 MW) became operational. [By 2005, TEPGC became the top earner for its majority (60%) shareholder, the Datang International Power Generation Company Limited (DIP), an internationally listed company that solely or partially owned a total installed capacity of over 11 GW. For the year 2005, profits from TEPGC constituted about a third of DIP’s total net income. Similarly, for the Beijing Energy Investment Group Company, which wholly owned an installed capacity of about 7 GW and 25% of TEPGC, profit from the power plant also accounted for about a third of its total profit in 2005.] During 2004-2005, total power transferred from TEPGC to NCPGC amounted to about 15 TWh, about 12% higher than the end-of-project target established during appraisal (refer to Annex 1).

The various sub-components to strengthen the T&D systems in Beijing were completed and put into commercial operation between 2000 and 2001. Performance of the reinforced network and substations had been satisfactory, with losses in the heavy loaded, high growth urban area reduced, and efficiency and reliability of power supply in the Greater Beijing area improved. By the end of 2005, all end-of-project targets were met or exceeded (see Annex 1). The improvement would have been more obvious had load forecasts and consumption pattern been more in line with actual growth in Beijing and the JJT region. [During the period 2000 to 2005 when rapid economic growth in the JJT region resumed and demand growth accelerated, the actual average annual growth in electricity load and consumption in Beijing were about 9.4% and 8.2% respectively. As a result of the relocation of several large industrial users from Beijing to Tangshan, the corresponding average annual electricity load and consumption growth in the overall JJT region, at about 11.5% and 12.4% respectively, were even steeper. During the same five-year period, annual GDP growth in Beijing and JJT were about 11.9% and 11.8% respectively. (Refer to Section 6.1)] During the period 2003 and 2006, the increased supply from TEPGC to Beijing and Tianjin also prompted the retirement of four old and inefficient small generation units, totaling over 57 MW in installed capacity.

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Due to a changed business environment, activities leading to the diversification of financing sources did not progress as hoped and the objective was not met (refer to Section 4.2 A (b)).

The project, while aimed to promote economic development in Tuoketuo County, did not have a poverty focus by design. However, what transpired and its impact on the local economy and livelihood of county residents were dramatic and greatly exceeded the appraisal expectations (see Annex 1). In the decade from initial project preparation to final project completion (1995-2005), the project was the single most significant development in the county. While TEPGC’s main construction and maintenance work were contracted out and workers were often brought in from the outside, support services such as housing, food services and custodian services for the power plant created unprecedented business and employment opportunities for local residents. From 1995 to 2005, the county’s GDP grew from a mere $50 million to over $800 million equivalent while its population remained largely constant (from about 186,000 to about 195,000). In 1995, Tuoketuo was one of the 54 state designated poor counties in China. By 2005, its economy was ranked 57th among over 720 counties in the western region of the country (covering 11 provinces and autonomous regions), and third in IMAR. During the decade, tax revenue grew from about $4.5 million to over $130 million equivalent (of which over 60% or about $81 million was attributable to TEPGC’s direct remittances in 2005). This enabled the local government to provide higher quality social services to its residents, most noticeably truly free nine-year education, and medical coverage for the poor and agricultural tax relief, all of which greatly benefited the county’s rural population.

In the more recent past, the presence of a world-class power station (albeit its production was to supply the JJT region exclusively) also drew attention to the county and helped attract higher value national and international investment interests. At the time of project completion, planning for an industrial park and a 4-star hotel was underway, and Tuoketuo was poised to move from a predominately agricultural economy to one that would be more diversified. Double-digit growth in all fronts was expected to continue. The county’s bustling activities and immense development in recent years also greatly benefited the service sector of Hohhot, the capital of IMAR, about 70 km north and en route to Tuoketuo County.

Environment management activities had been substantial and impressive. The Environmental Management Unit was operational and moving forward steadily. Desertification control inside the plant fence was completed. The government had expanded the program in Tuoketuo County, and progress had been satisfactory. Monitoring plan was also working well.

With the exception of the asset divestiture TA program that was dropped, the project ultimately achieved or exceeded all other major outcome objectives and expectations. At the time of project completion, substantial and sustainable development results were deemed highly likely. Overall outcome was therefore satisfactory.

4.2 Outputs by components:

A. Tuoketuo Thermal Power Plant Component

(a) Construction of Two 600 MW Coal-fired Thermal Units

Satisfactory. The project constituted the first phase of development of the Tuoketuo Thermal Power Plant. Commencement of construction was held up by State Council approval for about two years because of its concern over the lower than expected electricity demand at the time. However, once final approval was obtained in October 2000, TEPGC’s prior procurement arrangements proved effective and its relentless focus on construction management and quality control also helped to accelerate implementation.

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Despite severe winter conditions in IMAR, each unit took about 40 months to construct. The two generation units were in full commercial operation by December 2003 and January 2004, about 26 and 16 months behind the appraisal timetable respectively, but about five months ahead of the revised implementation schedule.

Associated common facilities and structures included a railway system for coal transportation, a water supply system to provide cooling and make-up water, a coal and ash handling system, chimneys and step-up substations. All suffered corresponding delays but were completed and put into operation in 2002, prior to the commissioning of the generation units.

The construction works completed were of high quality. Performance test results and subsequent operation showed that all major equipment had reached the agreed performance guarantee levels. That in turn indicated that the electrical and mechanical equipment were of good quality, and the civil and installation works were performed satisfactorily. Since commercial operation, both units had functioned continuously and stably. For 2005, the 7,280 GWh of power transmitted to the North China grid was about 14% higher than the benchmark of 6,400 GWh per year set at appraisal. TEPGC also carried out on-line monitoring to maximize plant performance and reduce coal consumption. The maintenance program was effective as the units continued to operate smoothly and efficiently. To enhance the performance of the electrostatic precipitator, TEPGC had installed a flue gas conditioning system. Monitoring measurement indicated that the emission levels established in the Environmental Management Program had been met.

Under a separate project not financed by the Bank, a double circuit 500-kV line to transfer power from Tuoketuo to Anding through an intermediate switching station in Hunyuen was completed and commissioned in May 2003. To match the power plant’s increased output (by subsequent phases of development not financed by the Bank), two more 500kV lines to Bazhou, Hebei province were added in 2005. The transmission facilities continued to perform well, and were playing an important role in transmitting power from the plant to the North China Power Grid. Total electricity export from the entire Tuoketuo thermal power plant (three phases totaling 3,600 MW) amounted to about 15.3 TWh in 2005.

Component Related Resettlement

Satisfactory. The power plant, ash yard, railway line, and water supply system all involved some degree of land acquisition and resettlement [distribution by cost were: power plant 18%, ash yard 28%, railway 31% and water supply system 23%]. According to the resettlement action plan (RAP) agreed with the Bank, a total of 18 villages from seven townships and three counties were to be affected. The plan involved acquisition of cultivated and non-cultivated land, demolition of about 9,100 square meters of housing space, and relocation of 58 households. Implementation started in 1997 and the bulk of the RAP prescribed activities had concluded before the end of 2003. At the time of project completion all disputes due to land losses or water inundation were satisfactorily resolved. Actual land acquired and households displaced were within 20% of the original RAP. Compensation rates established during project preparation followed the Government’s Land Administration Law and local regulations. Extensive consultation and comprehensive reviews were conducted when modifications or alternatives were considered. Institutional arrangement was adequate and close collaboration between the various resettlement offices and local governments was instrumental in ensuring a smooth and timely implementation of the RAP. In order to ensure that people affected had indeed been able to, or would in time be able to, restore or improve their income and livelihood, an external evaluation team was hired to monitor progress regularly. Annual surveys were conducted between 1999 and 2005 and results were documented and summarized in the Resettlement Completion Report. According to the reports and spot interviews by the Bank’s supervision missions, relocated households were quite satisfied with their cash compensation and subsidies; generally

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new and better accommodation; new community setup and services; improved conditions for agricultural production; and opportunities for other income generation activities. Total cost of the resettlement plan amounted to about $19.3 million equivalent or about 50% over the RAP estimate of about $12.8 million equivalent due to the relatively more generous rates of compensation provided. As the component was relatively small, the cost overrun had little impact on the overall project cost.

(b) Technical Assistance and Training

i) Organization Restructuring and Introduction of Modern Accounting and Financial Management Systems

Satisfactory. At appraisal, it was envisaged that an international consulting firm would be hired to assist with the assessment of TEPGC’s organization and management structure, and the development of a suitable structure as well as appropriate accounting and financial management systems for the company. A consultant contract was expected to be signed by the end of 1997.

A contract for this TA component was awarded in 1998 but actual signing was suspended for almost three years because of changes in TEPGC’s operating environment not anticipated at appraisal. While TEPGC remained an independent limited liability company, its majority ownership was transferred to the Datang International Power Generation Company Ltd. (DIP) from NCPGC. Hence, design of TEPGC’s financial management information system (FMIS) was proponed until DIP’s study to ensure overall compatibility concluded. When implementation finally resumed, the consultant’s work was carried out in three phases as planned. The diagnostic study phase was completed in November 2001. After several rounds of revision to accommodate the evolving business environment, design of the FMIS was completed in February 2003. The implementation phase, which commenced in May 2003, again took longer to complete when TEPGC decided to develop the FMIS as part of the company-wide integrated enterprise resource planning (ERP) system [ownership of the TA contract also changed hands in 2004. However, as personnel involved followed the contract, execution did not suffer any interruption]. The integrated system included four modules: (a) FMIS; (b) fuel information system; (c) asset, equipment and material management system; and (d) capital construction, financing and investment planning system. The ERP system became fully operational in 2004. Development of a small and parallel human resources database was also completed in 2004.

During the system design and implementation phases, training activities included four study visits to Australia and New Zealand by two groups of 15 senior management and financial specialists, totaling about 40 staff-months. In addition, international and national consultants also conducted training workshops in China for about 70 accounting and financial professionals. Main topics included cost control and financial management.

The total cost of the TA contract was about $1.2 million, of which about $400,000 was funded from the Bank loan. Besides loan funding, internal resources of about $6 million equivalent was used to cover the cost of hardware and software development, system integration, associated system implementation, and training.

Although implementation of this component deviated substantially from the appraised plan, it remained fully consistent with macro and sector policies and the project objectives. As the power sector restructuring in China was constantly evolving during the project period, TEPGC’s pragmatic approach to learn from international practices and adjust its TA and training programs appeared appropriate, albeit the company struggled with establishing cutoffs in the face of frequent changes, and the process took much longer than expected to complete. However, given the circumstances, some delay in implementation was

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justified. The satisfactory rating of this sub-component was based on its eventual result, which was positive and practical.

ii) Construction Management and Engineering Services

Satisfactory. As part of project preparation, international consultants were engaged to support the newly established TEPGC in design finalization and procurement. Further engineering services were planned under the project to assist the company with procurement, engineering, design interface coordination, construction management, and construction supervision training.

During project implementation, TEPGC decided its in-house professionals would be able to build on the knowledge gained from the various TA and training activities to meet its construction management and engineering needs. For construction supervision, TEPGC used the Primavera Project Planner (P3) and the Contract Management Program to coordinate engineering activities, suppliers’ delivery schedule, inventory control, and contractors’ construction and installation schedules. To ascertain overall progress compatibility, TEPGC provided training to its staff and contractors so all involved could effectively communicate and share real time information online. To ensure quality of equipment delivered, TEPGC also systematically stationed quality control and testing groups at the manufacturing sites.

The approach adopted for construction management and engineering services was materially different from the one appraised. However, it proved effective and adequate, as attested by the pace and quality of construction and installation, as well as the eventual performance of the generation units. Hence, this sub-component was given a satisfactory rating.

iii) Environmental Management and Monitoring

Satisfactory. There were three aspects to institutional development in environmental management: (i) training and consultancy services – at appraisal it was envisaged that an Environmental Management Unit would be established and made operational; and its staff would be trained. When DIP gained majority ownership of TEPGC during the reform, the company was obliged to abandon the original plan and follow DIP’s environmental management structure and program. That notwithstanding, the basic tasks and assignments were neither ignored nor delayed. Full time and part time personnel were assigned, and an experienced consultant was hired to prepare guidelines, assist with the design of the environmental laboratory, and provide training. Despite significant deviation from the original plan, the approach taken was reasonable, and the extensive training provided was more appropriate to the recipients’ needs; (ii) the procurement of environmental monitoring equipment was substantially complete. The laboratory was constructed and fully operational in accordance with the project schedule; and (iii) environmental data management system development – the system was developed to generate statistics on power plant pollutant discharges. At project completion, the updated version was operational and complied with prevailing Chinese standards. All facilities, training and TA served the whole TEPGC plant, including the two phases of development subsequent to the project. This indicated that the activities had provided sustainable results.

The major issues identified in the Environmental Assessment were included in the EMP. All mitigating actions were performed in the manner specified, except for the following three modifications: (i) installation of a flue gas conditioning system so as to meet the World Bank emission guidelines; (ii) design change of the ash disposal system (from slurry type to dry ash) to conserve water and reduce the likelihood of groundwater contamination; and (iii) partial instead of full lining of the ash yard with geotextile liner as the risk of groundwater contamination was lowered, and the project was situated in a very dry region. The

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EMP was adopted by the entire TEPGC plant, and this further enhanced sustainability.

iv) Capacity Building in Plant Operation and Management

Satisfactory. Besides TA and engineering services, 13 overseas training visits to the US, UK and Japan for about 110 management and technical participants, totaling about 100 staff months had been conducted since 1998. Topics of training (often hands-on or with the use of simulators) included installation, testing, operations and maintenance of turbine generators; distributed control system (DCS); operational management; installation and operation of coal grinding machines; ash and coal handling systems; and cooling systems. Cost of training totaling close to $1 million had been included as integral parts of the supply contracts.

v) Financial and Legal Advisory Services for Asset Divestiture

Not rated. During project preparation, IMEPC, with the assistance of international consultants, prepared a divestiture plan aimed at increasing private and non-utility investments in the IMAR generation system. After the East Asia financial crisis, little serious interest from potential private sector investors remained in the power industry in Asia. The situation was further complicated by the uncertainties surrounding the ongoing power sector reform and signs of slow down in electricity demand. In view of the circumstances, IMEPC requested, and the Bank agreed, to drop this sub-component from the project in 2001. During the subsequent sector-wide restructuring process, IMEPC’s generation assets were unbundled from its T&D assets in much the same way as other provincial level power companies in China, as dictated by government policy and procedures.

(c) Desertification Control and Dryland Management

Satisfactory. The project was rated Category A under the World Bank Environmental Assessment Safeguard Policy, and as such environmental considerations were incorporated into the project objectives, institutional development, and environmental assessment and management.

In terms of achievement of the component objective to improve soil conservation and control desertification, the number of hectares planted was almost seven times the appraisal target (refer to Annex 1). Even though information on the number of trees planted was not available, it was obvious that the objective was significantly exceeded. Performance was considered highly satisfactory and sustainable.

B. Beijing Transmission and Distribution Component

(a) Physical Construction

Satisfactory. This component included the construction of two 220 kV indoor substations at Xizhimen and Xibianmen; the expansion of the underground Wangfujing substation at the center of Beijing; and the upgrading of the distribution system in the Beicheng, Huichengmen and Xizhimen areas. The Xizhimen substation and associated cable were completed and commissioned in April 2000. The Xibianmen (later renamed as Changchunjie) substation was commissioned in March 2001. Installation of the 250 MVA, 220/110/10 kV transformer in the Wangfujing substation and the associated 22 km cable were completed and put into service in August 1999. The designated distribution upgrade was also completed and put into operation in parallel.

At the time of project completion, the substations (with a total capacity of 1,150 MVA) and the upgraded

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distribution system in the urban areas were operating satisfactorily. During earlier years, NCPGC had experienced some difficulties with the 220kV/110kV substation equipment. The issue with the defective water cooling systems in the Wanfujing and Xibianmen substation transformers was resolved after the supplier replaced them, and NCPGC reconfigured their installation at its own expense. The intermittent overheating of a transformer in the Wangfujing substation persisted though it appeared to have little impact on performance. As a precautionary measure, the situation was being monitored monthly and data had been shared with the supplier for analysis. Further, it was agreed that the supplier would extend the technical quality assurance to December 31, 2008. The problem with excessive gas leakage from the 220/110 kV GIS in the Xibianmen substation had been rectified.

The augmented and strengthened T&D network continued to help reduce power supply constraints in the JJT region. Technical loss in the JJT grid continued to drop and exceeded the end of project targets; system losses in the heavily loaded and high growth Beijing municipal grid also dropped, albeit rather modestly due to continued high load growth in the area. At the same time, system reliability also improved as interruption hours decreased significantly, again exceeding the end of project target. These performance indicators show that the objectives sought under the project had been achieved or exceeded. (see Annex 1).

At appraisal, NCPGC was expected to use local financing to complete two complementary investment projects: (a) replacement of overloaded and inefficient units in Beicheng and Huichengmen substations by four 50 MVA, 220/110/10 kV transformers; and (b) upgrading the distribution system in Xizhimen area including reconductoring of the insulated overhead lines and installation of five compact 10 kV transformer stations. These projects were completed in parallel and had been operating smoothly. Actual investment significantly surpassed the scope of these two projects and the original extension and upgrade programs. Since 1998, six more 50 MVA substations had been added, and the total number of 10kV transformer stations installed in Beijing exceeded 100.

Component Related Resettlement

Satisfactory. For this component, only the Xibianmen 200kV substation located in the old city of Beijing involved land acquisition and resettlement. According to the RAP agreed with the Bank in 1996, it involved demolition of about 4,900 square meters of dwelling space and relocation of about 240 households (975 persons). Implementation started in late 1997 and was completed by the end of 1998. Due to the inclusion of additional areas for road expansion and green space, total land acquired was revised up; actual area demolished was also higher after taking into account illegal structures previously not accounted for. Following the Beijing Municipality resettlement policy, 346 apartments totaling over 23,000 square meters within 10 kilometers of the old site were allocated to the affected households. It translated to a dramatic increase in floor space, on a per capita basis it was from 5.3 square meters to over 23 square meters. Besides more living space, the quality of housing, community facilities and environment were also of higher standards. According to a household survey conducted in 2000, most resettled people were satisfied with their new housing conditions, though some suffered some negative impact on their daily commutes. This hardship was expected to lessen as the urban transport condition in Beijing improved.

(b) Technical Assistance in the Implementation of Accounting and Financial Management Systems

Satisfactory. At appraisal, it was envisaged that an international consultant firm would be employed to assist NCPGC in the study and development of a suitable financial management system that would help upgrade the company’s operational efficiency and increase its market orientation. A consultant contract was expected to be signed in 1998.

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At the outset of project implementation, an international firm was awarded the TA contract. While work was in progress ownership of the consulting firm changed hands, and the agreed TA activities were no longer adequately attended to. As NCPGC was also in a state of flux because of the power sector reform, both parties essentially allowed the contract to lapse and it was terminated de facto. Implementation stalled, only the first two of four phases of the TA (diagnostic study and conceptual design) and five overseas training visits were completed. When the Government’s sector unbundling strategy and tariff policy were clarified in 2003, NCPGC hired a different international consulting firm to assist with the company’s software development. At the time of project completion, the diagnostic study on workflow had concluded, and the development of an enterprise strategy and software was about to begin. Priority was given to the design of human resources and performance evaluation module and a fixed asset management module. The new TA contract and the associated cost of system development were being funded with NCPGC’s own resources.

Although implementation of this component was delayed and at best loosely managed for some time, progress at the time of project completion seemed to be on the right track and picking up momentum. With increased ownership on both sides, the prospect for satisfactory completion of the new contract and system development appeared robust. Given the original objective was being adhered to and work was progressing in earnest, though implementation of this sub-component had been less than satisfactory while the sector reform was being clarified, the situation appeared to have settled, and the sub-component was expected to come to closure in a satisfactorily fashion.

4.3 Net Present Value/Economic rate of return:

Satisfactory. The project was primarily justified on least cost analysis. JJT was an important region politically, and also one of the fastest growing industrial and commercial bases in China. During project preparation, a least-cost expansion study covering the period 1998-2025 was carried out. The project was the first investment of the optimal power development program. To complement this approach, a cost-benefit analysis for the Tuoketuo thermal power plant component comprising about 86% of the total project cost, was carried out at appraisal. Assumptions on tariffs were made based on prevailing pricing policies. The calculation yielded an internal economic rate of return (IERR) of 18.9%. At completion, the weight of the generation component was 89% of total project cost. Using a similar methodology, a re-estimation yielded an IERR of 16.3% (refer to Annex 3). The lower estimated return was mainly the result of a stretched out construction period and delayed completion; conservative generation projections in view of anticipated demand stabilization for a total plant capacity three times the size of the project; and the use of actual bulk supply tariff (at Y0.253/kWh net of VAT) which was significantly below the willingness to pay estimation (at Y0.33/kWh) that was used as a proxy for the estimation of benefits. The level was considered adequate.

4.4 Financial rate of return:

Financial rate of return for the project was not estimated at appraisal. Instead, financial assessment of the project focused on the financial viability of TEPGC and NCPGC, and the companies’ compliance with the financial covenants.

TEPGC - Satisfactory

Debt Service Coverage Ratio Covenant. Actual project cost was about 57% of the appraisal estimates. The corresponding reduction in the Bank loan and local borrowings, coupled with lower than expected interest rates enabled TEPGC to maintain debt service coverage ratio considerably higher than the covenanted level of 1.5 times (at 3.6 and 3.3 times for 2004 and 2005 respectively). With DIP having

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acquired 60% of ownership, the company was able to secure financing quickly and competitively to continue with its enormous investment program. The successive commissioning of new generation units prompted rapid growth in net income and depreciation. Hence, despite higher total debt service, the company expected to remain in a comfortable position with regards to meeting this covenant in the foreseeable future.

Return on Equity Covenant. Equity contribution to new construction had been at a constant rate of 20% of total capital requirement. Under the PPA, tariff was established at Y.27/kWh when the first two units began commercial operation. It was adjusted to Y.296/kWh in May 2005 to defray higher fuel costs. The rate of return for both 2004 and 2005 was 33%, significantly higher than the covenanted level of 20% and exceptional when compared to other power generation companies in China. At the time of project completion, all six generation units totaling 3,600 MW were in commercial operation, so after three years of steep upward climb, net income and rate of return were expected to plateau. Contributing factors for the high level of return were: TEPGC’s relatively low unit investment cost; relatively low fuel and fuel transportation costs; operational efficiency of new plant facilities and management (not least freedom from having to provide the once obligatory social services to its work force); and income tax holiday during the initial years of operation (none for 2003-04, 7.5% for 2005-07, 15% for 2008-09, and revert to the normal 33% income tax rate for 2010 and thereafter).

Audit Covenant. Audit reports of acceptable quality had been submitted to the Bank on time.

Rolling 8-year Financial Projections. The project was appraised based on a PPA signed between TEPGC and NCPGC in December 1996. The parameters and assumptions used were soon overtaken by events. Because of uncertainties revolving around many of the critical assumptions such as tariff formula, fuel cost, and eligibility for income tax holiday, the Bank agreed to waive this covenant until TEPGC was able to prepare a meaningful annual financial forecasts (in 2004). Overall quality of the latest set of financial projections (2005), including assumptions made was acceptable. The forecast indicated TEPGC’s financial position would continue to be very solid.

NCPGC - Satisfactory

Debt Service Coverage Covenant. Unlike the power generation component, the T&D component constituted a small proportion of NCPGC’s vast network. The company had been able to meet the covenanted level of 1.5 times, and expected to continue to maintain this level with little difficulty.

Return on Equity Covenant. The company’s rates of return on equity during the recent past, though not atypical among similar power grid companies in China, had been significantly below the covenanted levels. During project implementation, it became clear that the original intent of the covenant was no longer relevant. The sector restructuring obliged the former power group company to give up its generally more profitable generation assets to become a virtually all T&D company. At the same time, Government mandated network extensions (often in non-profitable rural areas) required NCPGC to absorb some of the negative effects of revenue losses. This severely infringed upon the company’s financial autonomy and limited its ability to generate adequate revenue to meet its obligations. The covenanted measures also proved difficult to calculate and monitor when the project assets integrated into an increasingly interconnected power grid. Moreover, there were still many distortions such as understatement of revenue (consumer contributions not reflected as income) and overstatement of expenses (depreciation as high as 7% per year) in sector practices that affected the appearance of a power company’s financial viability. At the request of the Borrower, the Bank agreed to drop this covenant.

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Audit Covenant. Audit reports of acceptable quality had been submitted to the Bank on time while the component was under implementation. This requirement had been waived since 2003, upon conclusion of disbursement for this component. NCPGC continued to abide by the government’s accounting and audit requirements.

Rolling 8-year Financial Forecasts. While the sector reform was underway NCPGC was not able to prepare any meaningful annual financial projections, and the Bank agreed to waive this covenant in the interim. The first set of forecasts and assumptions were prepared in 2004 by a consulting firm. Quality of the latest set of forecasts (2005) was acceptable. Based on the assumptions made, the forecast indicated that the company’s financial position would be maintained at levels comparable to those of the past few years.

4.5 Institutional development impact:

Through TA and training activities conducted during project preparation and implementation, TEPGC’s capacity to carry out comprehensive system planning and construction management was considerably enhanced and the company was able to put it into good use. First hand experience gained through competitive procurement processes, construction and operation of project facilities, and environmental management provided a solid foundation for subsequent phases of development. Through dozens of promotions and reassignments, the know-how and experience gained by TEPGC’s management and technical professionals also benefited other power generation companies wholly or partially owned by its three investors,. Through the implementation of the environment component and resettlement activities, the project was critical in heightening awareness and enhancing the implementing agencies’ capacity to follow good practices consistent with international and domestic standards. The ERP and human resources systems were instrumental in ascertaining the company’s operational efficiency, and enabling it to better utilize its human and financial resources. TEPGC indicated that the systematic approach to accounting and financial management had enabled it to clarify each department’s functions and responsibilities, standardize procedures, minimize delays and duplications, and strengthen internal control and information flow. The resulting centralized real-time database also made record keeping, data retrieval, statistical analysis, and reporting internally consistent, traceable and timely. After more than one full year of operation, TEPGC considered the results to-date satisfactory. Similarly, NCPGC found the various newly adopted resource management modules useful, and intended to continue with the planned system development (Section 4.2). At completion, the institutional development impact of the project was deemed substantial.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

The project completion cost was considerably lower than the original cost estimates because of a significant drop in world prices (especially in the region after the East Asian financial crisis), low contract prices and a steady decline in interest rates (refer to Section 5.4 for details). On the other hand, the East Asian financial crisis severely limited the IMAR generation system’s potential to attract diversified sources of financing and create independent power producers through the sales of power generation assets.

The supply and installation of some defective substation equipment had caused some setbacks in the initial operation of the Beijing T&D component. Even though the issues were eventually resolved, NCPGC suffered financial losses due to the cost of reinstallation, interruption of operation, and extra need for monitoring and testing.

When the ownership of the TA contract for NCPGC’s accounting and financial management system

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changed hands, the consulting firm that took over the assignment appeared to have lost all institutional memory and interest in the job. Implementation stalled and the contract eventually lapsed. This issue, however, had limited real impact on implementation, as the period coincided with the early years of sector reform when NCPGC was also uncertain about its direction and reluctant to make decisions expeditiously.

5.2 Factors generally subject to government control:

Macroeconomic policies and conditions remained stable during project implementation. The government continued to be committed and supportive of the project in principle, however, its concern over slowing power demand had delayed approval of construction for over two years (refer to Section 4.2). The power sector restructuring introduced major changes and uncertainties, particularly during the early years when details were still being worked out and clarified. The evolving situation caused slow down in the implementation of many of the project’s TA activities. The government’s approach to increase the power sector’s commercial orientation led to the annulment of the signed take-or-pay PPA between TEPGC (the supplier) and NCPGC (the purchaser) and the negotiation of a new PPA. Its strong influence on pricing also meant diminished financial autonomy for the power companies and that the tariff level was estimated and negotiated rather than determined by market forces. Actual agreed tariff level appeared to favor TEPGC, which is a brand new and highly efficient generating company. Coupled with the tax holiday it enjoyed, the company’s profit margin had been highly exceptional amongst all power generating companies in China.

The government’s decision to move several large industries out of Beijing, and the development of the service sector in the municipality greatly affected its power demand and consumption patterns. At the time of appraisal, over 70% of power supplied to Beijing was consumed by industry. By 2005, industrial users’ share dropped to below 50%, and the tertiary sector, at about 42%, became a close second. Because of the reduction in 24-hour consumption by industry, peak load grew ahead of total consumption. At one point this affected NCPGC’s performance in meeting the lower transformer loading targets set at appraisal. The situation was remedied when more T&D facilities (about and beyond the project) were added to the system in recent years.

Regional and local government support for the implementation of the RAP and EMP in Tuoketuo County and neighboring areas in IMAR was considered critical to their successful implementation (refer to Section 4.2). While the project benefited from local support, its impact on the county and region’s economic and social development was even more remarkable and highly positive (refer to Section 4.1).

5.3 Factors generally subject to implementing agency control:

Construction approval was delayed, however, TEPGC’s highly effective construction management approach and concerted effort to proactively minimize potential quality issues allowed it to make up for some lost time and complete the work ahead of the revised schedule. Despite the delays, project cost was well below estimates, counterpart funding was secured on a timely basis, and operation and maintenance of project facilities had been regular and satisfactory. TEPGC’s decision to integrate the FMIS into its ERP system was a carefully considered one, albeit the process and phased approach took much longer to complete (refer to Section 4.2). Other TA and training were well utilized and executed. Overall management effectiveness, staffing, and monitoring and evaluation were adequate.

Due to rapid growth in power demand and changes in consumption pattern, NCPGC’s expansion program was more vigorous than projected at appraisal. As the network became more interconnected, definition of the project component was somewhat blurred. The unbundling of the original group company and massive staff reassignments when the grid company was established caused some lost in institutional memory

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regarding the project assets. Though physical implementation was not negatively affected, they created some issues in monitoring and evaluation of the project’s impact.

5.4 Costs and financing:

At the time of appraisal, total financing required for the Tuoketuo Thermal Power Plant component was estimated to be $1,108.3 million, of which $494.2 million (45%) was foreign. Final estimated cost for this component was about $636.5 million, of which $271.2 million (43%) was foreign (refer to Annex 2). As compared to the appraisal estimates, the component had a cost under-run of about 43%. The savings of about $471.8 million were mainly attributable to design optimization; competitive bid prices for the main equipment and from local suppliers; efficient construction and financial management; conservative cost estimates at appraisal (based on prevailing information and projections); and lower borrowing, capitalized financing charges and inflation. Unit cost of the generation facilities built compared favorably with similar generation units in China, particularly in view of the large input required for the cooling and make-up water systems and coal transport facilities. In consideration of these savings, $78.5 million of the original $330 million Bank loan for this component was cancelled in 2000. In addition, an undisbursed balance of about $7.2 million was cancelled upon closure of the loan.

At appraisal, total financing required for the Beijing T&D component was estimated to be $182.5 million, of which $77.4 million (42%) was foreign. Actual cost was about $82.7 million, of which $45.7 million (55%) was foreign (refer to Annex 2). As compared with the appraisal estimates, the component had a cost under-run of about 55%. The savings of about $99.8 million were mainly attributable to low bid prices, reduced scope for imported equipment, highly competitive local construction contracts, conservative cost estimates at appraisal, and lower borrowing, capitalized financing charges, and inflation. In consideration of these savings, $24 million of the original $70 million Bank loan for this component was cancelled in 2000.

6. Sustainability

6.1 Rationale for sustainability rating:

The project, over its economic life, was expected to maintain and build on the achievements made. TEPGC was financially and technically strong. At the time of completion, it had already commissioned three phases of development totaling 3,600 MW, with a combined financing of over $1.5 billion equivalent. In staffing, all management and technical specialists had been retained within the DIP system. For both implementing agencies, TA and training, particularly those that were systematically carried out and had practical applications were considered highly effective, and their impact was expected to be sustained.

The move of large industries from Beijing, changes in consumer mix in the more urbanized Beijing, and the massive need for construction materials in preparation for the 2008 Olympic games had prompted high growth throughout the JJT grid. This was expected to continue for the ensuing two years; thereafter growth was expected to level off. To keep pace with demand and to ensure system reliability, NCPGC and the Beijing government had prepared investment plans amounting to over $6 billion equivalent for the period 2005 to 2010, albeit financing had not yet been fully secured. In view of this development, the T&D facilities built under the project were expected to be operated, maintained, and appropriately utilized as part of the integrated system.

At completion, given the government’s strong commitment to continued sector reform; the current policy environment; the better-run implementing agencies; and the economic, technical, financial and environmental viability of the project; the growing market demand; and the transitional arrangements already in place, sustainability of the project’s facilities and institutional impacts was deemed highly likely.

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6.2 Transition arrangement to regular operations:

Highly Satisfactory. Since commissioning, the implementing agencies had been operating the project generation and T&D facilities competently. Major efforts had been made by TEPGC to implement a comprehensive maintenance program based on predictive techniques, corrective steps, preventive measures, and monitoring and evaluation that were established in accordance with international standards and manufacturers’ recommendations. The program proved to be effective in increasing power production, availability, safety and quality of services. At completion, TEPGC and NCPGC were fully expected to continue to provide all necessary input to operate and maintain their facilities and ERP/FMIS systems satisfactorily, progress on the institutional reform front, and maintain their financial viability. These actions were sufficient for sustained satisfactory regular operations.

7. Bank and Borrower Performance

Bank7.1 Lending:

Satisfactory. At identification, linkage of project components to the CAS objectives and the government’s development strategy and sector priorities were clearly established. Thereafter, the Project Team assisted the borrower and implementing agencies in project design and in preparing the project to meet the Bank’s technical, financial, safeguard and economic standards. The Team also helped TEPGC and NCPGC to design a TA and training program to strengthen their institutional capacity to implement the project and meet their obligations. Two grants were secured to support the implementing agencies in preparation. The Project Team’s input benefited from the Bank’s extensive economic and sector work on China, as well as the experience gained and lessons learned from a highly successful Bank program in the country’s power sector. The composition of the appraisal team was comprehensive, including specialists in energy, power sector restructuring, engineering, finance, economics, legal, environment and resettlement. Bank staff established good working relationship with the government and the implementing agencies during preparation and appraisal of the project. Coverage and documentation of appraisal was comprehensive as reflected in the Staff Appraisal Report and the project files.

7.2 Supervision:

Satisfactory. Project supervision was planned and carried out regularly. By and large, supervision missions were adequately staffed, and time in the field was sufficient. The frequency of mission was adequate – 12 times (including one ICR mission) to the implementation offices and project sites over a period of about seven and a half years. The project was managed from the Bank’s Beijing country office, supervision of the Beijing T&D component tended to be less formal and discretely defined.

For the most part, staff showed flexibility in supporting the implementing agencies by accepting alternative approaches in the design and implementation of the TA and training components, and in the deletion of an obsolete TA component with IMEPC (for asset divestiture) and a no longer appropriate financial rate of return covenant with NCPGC. Working relationship among the Bank, the Borrower and the implementing agencies was collegial. All parties also paid adequate attention to the likely developmental impact of the project. Progress reporting was timely and mainly focused on the physical aspects and related TA and training activities of the project. Performance ratings in PSR were largely realistic. Agreed actions had been substantially followed-up. Supervision activities and the team’s recommendations were routinely reviewed by Bank managers. Their involvement and support at critical points of project implementation had been consistent.

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7.3 Overall Bank performance:

Satisfactory

Borrower7.4 Preparation:

Satisfactory. At the central government level, the government borrower, represented by the Ministry of Finance and the State Development and Planning Commission (which later became the National Development and Reform Commission) supported the design of the project and the reform program. At the corporate level, project preparation was coordinated by NCPGC, which at the time was responsible for power investments in the North China region. The project design was well suited to meet the urgent need for efficient production and transmission of power to the JJT region, and due attention was paid to its associated environmental and social impacts. A procurement management group including representatives from NCPGC and TEPGC was established since the inception of the project. The group, with the support of an international consulting firm and an experienced procurement agent, facilitated the planning and implementation of procurement activities that included many technologically complex equipment packages.

7.5 Government implementation performance:

Satisfactory. The Central governments took active measures in promoting power sector reforms and facilitating power trade in the North China grid. The local governments had also been most supportive of the project, and consistently facilitated its implementation. Counterpart funds (in the form of local bank loans) were available in a timely manner. On the other hand, the Government’s decision to slow down investments in the power sector during the late 1990’s, and the complex issues associated with sector unbundling also caused major delays in project construction approval and implementation.

7.6 Implementing Agency:

TEPGC – Highly Satisfactory. Management of the generation units was fully satisfactory once TEPGC came into existence and took over project implementation and facilities. During construction, high caliber management and technical specialists were recruited to implement the project. A comprehensive site program aimed to promote safety awareness and create a safe working environment to prevent injuries was consistently executed at all time and in all construction sites. TEPGC’s construction management and quality assurance efforts enabled it to establish and enforce high equipment quality and installation standards. All newly built facilities met the state level acceptance tests for commissioning. In 2005, the units built under the project received two national awards for superior quality of construction (one general and the other sector specific). The company’s FMIS was seen as a model for similar power companies. Due to its expansion programs and opportunities for learning and advancement, there had been relatively few staff turnover in TEPGC, and this contributed to the company’s stable operation and steady progress.

NCPGC – Satisfactory. NCPGC’s performance was satisfactory during the construction and operation phases. As a consequence of the sector unbundling, the company’s 51% stake in TEPGC was transferred to DIP. During its transition to a regional grid company staff turnover was high. Some institution memory was lost, and the company had not been able to meet some of the financial covenants and make significant progress in some TA plans. That said, once the situation stabilized and NCPGC was able to refocus its attention on these obligations, it was cooperative and its effort to support the project was adequate.

7.7 Overall Borrower performance:

Satisfactory

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8. Lessons Learned

The most significant lessons learned from the project are summarized as follows:

Of general application

Procurement – Neither implementing agency had prior experience with international competitive bidding (ICB). Although TPEGC and NCPGC were both supported by consultants and the Bank during the bidding process, they were surprised and perplexed by some of the subsequent events. For example, in bid evaluation, TPEGC was uncomfortable with the Bank’s guidelines that obliged the owner to accept the lowest bid of any pre-qualified supplier. They felt allowances should be made for cases where the cost differential was small, while the difference in qualification was, while not quantifiable, obvious and significant. As a mitigating measure, for major contracts, the pre-qualification requirements should be tightened and reflected in more detailed and specific bidding documents such that the differences in bidder qualification could be clarified and evaluated early on in the process.

Another example was related to the execution phase of contracts awarded through ICB. After NCPGC had dealt with the problems associated with the defective equipment supplied, its management felt it could and should have pursued the case more forcefully had it fully understood the company’s rights as owner. NCPGC suffered financial losses for time lost and the expenses it had to pay out of pocket for system reconfiguration and for the reinstallation of equipment. In retrospect, it felt the situation would most likely justify a claim, rather than the company merely holding on to the retention money, a modest sum by comparison, until the problems was fully resolved. In this case, NCPGC might have benefited from other owners’ experience with similar issues.

Overall, more intensive training, support and knowledge sharing in contract management should be planned for implementing agencies with little experience with ICB and international practices.

Specific to the Power Sector in China:

TA and Training – The project included many TA and training activities, and the majority of them were focused on supporting the implementing agencies while the power sector reform was ongoing. As the reform evolved, new needs arose and some of the originally designed TA was rendered less relevant. It became imperative for the Bank and the implementing agencies to keep sight of the project’s ultimate developmental objectives, while making adjustments to the appraised plans to reflect the situation on the ground. Also, when the sector is undergoing major changes and the borrower’s capacity is building up quickly, flexibility should be built into the design of the TA component.

While engineering services support on design optimization and procurement etc. was essential to TEPGC during the preparation phase, the company decided to use its internal resources to carryout construction management. Construction of the physical component turned out to be timely and of high quality; safety record was also excellent. Not using international consultants for construction supervision proved to be very cost effective for the company. As this project is one among several recently completed (or about to be completed) power projects in China where construction management was successfully performed by the implementing agencies themselves, moving forward the Bank should give technically strong and experienced implementing agencies special consideration in the design of TA programs, particularly in construction supervision.

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Well-planned technical training was found to be very useful. Feedback from participants was most positive for practical and hands-on training delivered in the field. They also found full-time medium-duration training (two to four weeks), while intense, was more effective as the participants were able to learn without the distraction of their day-to-day responsibilities.

On the other hand, participants found training and TA regarding institutional reform less relevant and useful unless consultants involved were familiar with the China power sector and up-to-date on the ongoing reform. Many studies and assessments were also overtaken by reform events and needed multiple revisions and updates, which were time consuming and costly. It was recognized that some of these were unavoidable given the fluidity of the situation. However, this factor should be taken into consideration in the design of reform related TA and training activities. Where appropriate, specific provisions should be included in the consultant selection process to encourage international consultants to associate with local firms to strengthen their capacity to deliver services more effectively.

The implementing agencies also observed that as they were not able to influence many of the reform decisions, some institutional development and capacity building activities might be more appropriate to organizations higher up in the power sector echelon as they, rather than the local power companies, were the key policy and decision makers. In this connection, in retrospect, the project’s developmental objectives regarding TA and training might have been overly optimistic and complex given the context of a major ongoing sector restructuring.

To the implementing agencies, the overall observation on TA and training involving international consulting firms was that these consultants often play useful roles in providing advice on concepts and principles, and in sharing knowledge and international experiences. However, international consultants were less effective or relevant in the design and implementation of concrete reform plans and activities in China, as actual practice required a much deeper understanding and appreciation of the domestic operating environment and local conditions.

Environmental Aspects: After DIP took over majority ownership of TEPGC, the TA program should have been re-examined, and the Bank team and TEPGC should have been more responsive to the new arrangements and redesign the component to better suit the implementing agency’s actual needs. Also, careful supervision of the environmental aspects, in particular implementation of the EMP, would enable the Bank team to provide more timely feedbacks and play a more active role when modifications were being contemplated.

Resettlement Aspects: Improved resettlement planning during project preparation would allow better assessment of compensation rates, rehabilitation measures and cost estimates. In the review and selection of economic rehabilitation measures, special attention should be paid to the most vulnerable groups affected. Careful appraisal of institutional arrangements including staffing and training for monitoring and evaluation are critical to implementation success.

9. Partner Comments

(a) Borrower/implementing agency:

Borrower: People’s Republic of ChinaBeneficiary: TEPGC and NCPGCLoan: US Dollars 400 MillionProject ID: P003650

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Project Description

The Tuoketuo Thermal Power Project is one of the key projects in the national Tenth Five Year Plan. It is part of the West Development Plan and the Power Transmission Project West to East. The Tuoketuo Power Plant is located in Tuoketuo County, 70 km southwest of Huhhot, the capital city of Inner Mongolia Autonomous Region. The Yellow River, the main water source of the power plant, is about 12 km southwest of the power plant and Zhungeer Open Pit Coal Mine, the fuel supplier, is 50 km south of the power plant. A 510 km high voltage (500 kV) transmission line connects the power plant to the Beijing-Tianjin-Tangshan Grid.

The Beijing Transmission and Distribution Component, under the responsibility of the North China Power Group Company (NCPGC), included: (a) construction of two 220 kV indoor substations at Xibianmen and Xizhimen; (b) addition of a third 250 MVA, 220/110/10 kV transformer in the underground Wangfujing substation; and (c) TA to NCPGC for the implementation of accounting and financial management systems.

Project Objectives

(a) Increase electricity supply and electricity trade in North China through creation of an independent power company to develop a mine-mouth power plant in Inner Mongolia Autonomous Region that will supply the Jing-Jin-Tang grid through long-term contractual arrangements; (b) improve the efficiency of energy supply and use in the region by: introducing modern technologies and implementing effective operations and maintenance practices and procedures in power generation, and reducing losses in the T & D systems of Beijing; (c) advance the power sector reform process in China by promoting the development of electricity trade in North China through adequate and market-oriented commercial arrangements; (d) diversify financing sources, improve the access of power entities to international financial markets, and encourage private-sector investment in existing and new power sector enterprises; and (e) increase economic activity and also improve soil conservation and desertification control in Tuoketuo county.

Tuoketuo Component - implemented by TEPGC

Project Implementation

The Tuoketuo Thermal Power Project is one of the successful World Bank financed energy development projects in northern China. The project is notable for its high construction speed, high construction quality and stable operation. Phase one also trained an experienced project team (both TEPGC and the construction companies) which benefited later construction of Tuoketuo phases II, III, and IV. Tuoketuo phase one consists of two 600 MW coal-fired sub-critical units financed by the World Bank. The construction of the two units started in the year 2000. Unit No. 1 was put into operation in June 2003 and Unit No.2 was synchronized to the system in July 2003. The new input greatly improved the power shortage situation in North China in the summer of 2003.

Quick Construction Speed: As soon as the project was approved by the State Planning Commission, construction of both units was progressing at a high speed. Three notable examples of high speed construction are: (i) Best in North China: less than ninety days (90) from the initial firing to unit synchronization (Unit 2); (ii) Best in North China: less than twenty eight days (28) from the commissioning test to synchronization (unit 2); and (iii) Best in China: in less than two months (2), two units (600 MW) were put into operation.

High Construction Quality: During the procurement of the turbine and boiler equipment of the two units,

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TEPGC strictly followed the Bank procurement guidelines. The consulting company BVI which is very experienced and technically professional assisted TEPGC during bid evaluation, contract negotiation and design liaison meetings. The benefit of the bidding is that high quality equipment is selected and contract price has been significantly reduced. Bidding and tendering mechanism has also been introduced into the procurement of other goods and services during construction. Thanks to the high quality equipment and qualified construction companies selected through bidding process, the construction passed the quality acceptance organized by the China Datang Corporation in 2004, and was awarded the China High Qualified Power Engineering Project prize (2005) by the China Electric Power Construction Enterprise Association, and awarded the Best Construction Project (silver medal) by the National Quality Association.

Significant Economic Benefit

The Tuoketuo phase one budget approved by the State Planning Commission is 6.07 billion Yuan. With the introduction of the bidding and tendering system and design optimization the project was completed with the cost of 5.267 billion Yuan, about 800 million less than the budget. In less than six months in the first operating year 2003, the two units were running smoothly and yielded a benefit of 133 million Yuan. Good operating performance has been maintained for three (3) years and no malfunction has occurred since operation began.

Major Power Supply to Jing-Jin-Tang Grid

The first phase of the project financed by the Bank consists of two 600 MW sub-critical coal fired units. Since operation of the first two units in 2003, the operating fleet has been growing with two more units each year. Until August 2006 when the construction of Tuoketuo phase four will be completed, the total installed capacity of the Tuoketuo Thermal Power Plant will reach 4800 MW, the biggest thermal power plant in North China and the whole country. The power plant is playing a significant role in power supply to the Beijing-Tianjin-Tangshan Grid.

Promotion of the Local Economy

The Tuoketuo Thermal Power Project is located in the Tuoketuo County, a state level poor county in China. Before construction of the project, the economic development was quite slow. The GDP of Tuoketuo County was only 410 million Yuan in 1995. Until the completion of the project in 2005 Tuoketuo’s GDP grew to 6.5 billion Yuan. Tuoketuo was ranked 57th place in the 100 western economically strong counties ranking in China and has become the third economically strong county in Inner Mongolia Autonomous Region in 2005. Because of the construction of the Tuoketuo Thermal Power Project, the local government set up an industrial park opposite to the power plant site in 2003, and it attracted huge investment from power, metallurgical, pharmaceutical, chemical companies from around the country. New business brought abundant employment opportunities for the local resident and thus resulted in dramatic change of the local economic situation.

Sustainable Experience and Skills

During the construction of the Tuoketuo Thermal Power Project, management and technical personnel involved in project construction have been trained through project implementation activities such as bid evaluation, contract negotiation and site construction. Such skills and experience benefited the construction of Tuoketuo Phases II, III, and IV. The training and technical assistances such as construction, financial and environmental management designed by the Bank proved to be very useful during the execution of the project Phases I, II, III and IV. The skills and experience learnt from the Tuoketuo Thermal Power Project not only benefited the Tuoketuo project itself, such skills have been used in other projects as a large number of Tuoketuo management and technical specialists are being promoted to new positions in many other

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Datang International plants.

High Quality Environmental Management

Environmental objectives of the project had been achieved with the help of the Bank environmental specialist and the contracted consulting institute. During the execution of each environmental task designated in the appraisal report, the awareness and commitment of environmental protection of the Tuoketuo Thermal Power Plant is becoming stronger and stronger. Apart from the listed environmental tasks in the original appraisal, Tuoketuo Thermal Power Plant installed with its own financing the flue gas conditioning systems for Phases I and II to meet the flue gas emission restriction standard. Other extra major environmental steps taken are the installation of the desulphurizing equipment for all the eight units (old and new) by the end of 2005. More water treatment equipment has been installed in order to reduce the wastewater to the river. All the environmental facilities of phase one has passed the acceptance inspection organized by the State Environmental Protection Bureau in August 2005.

Satisfactory Project Resettlement

The Tuoketuo Thermal Power Project phase one consists of the construction of the power plant, ash yard, water treatment plant, piping system and the dedicated railway line connecting the power plant and the coal mine. Affected villages are in Tuoketuo County, Helingeer County and Qingshuihe County. A resettlement office with dedicated officials has been assigned to coordinate the relocation. Regular site visits and inspection by the Bank resettlement officials and the consulting institute assures the smooth execution of the resettlement. The livelihood has been maintained and the living standard of the affected villagers has been greatly raised. The project also created job opportunities for the affected people and more employment in turn contribute to the dramatic economic development in the region.

During the implementation of the project at various project stages, Tuoketuo Thermal Power Project personnel have the opportunities to get to know the Bank officials and to learn the way the Bank is doing the job. The knowledge and the dedication of the Bank officials to their job have impressed everyone involved. We hope to use the knowledge learnt in our job and we are looking forward to working with the Bank again.

Beijing Transmission and Distribution Component - implemented by NCPGC

Project Implementation

The Xizhimen substation and associated cable were completed and commissioned in April 2000. The Xibianmen (later renamed as Changchunje) substation was commissioned in March 2001. Installation of the 250 MVA, 220/110/10 kV transformer in the Wangfujing substation and the associated 22 km cable were completed and put into service in August 1999. The designated distribution upgrade was also completed and put into operation in parallel. At the time of project completion, the substations and the upgraded distribution system in the urban areas were operating satisfactorily. The project was completed ahead of the original schedule. It strengthened the Beijing T&D network as well as the JJT grid, and it was of great importance to meeting the increasing demand for power supply in the commercial area in Beijing, the Capital of China. For example, the additional transformer in the Wangfujing substation that was put into operation in August 1999 provided reliable power supply for the Tiananmen area, the political center of China. On October 1, 1999, the 45th Anniversary Celebration Ceremony was held in the Tiananmen Square. During the period of the great political event, Wangfujing substation provided reliable power supply.

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In the meantime, the successful implementation of the project has improved the efficiency of power supply and reduced losses in transmission and distribution in Beijing. It also improved system reliability.

The project was completed successfully not only in the aspect of physical construction, but also in the aspects of introducing advanced concepts, methodologies and international practices on environmental protection, resettlement, procurement of goods, auditing, TA and institutional development. The introduction of these advanced concepts, methodologies and international practices are of more importance than the physical construction itself, and will create sustainable and active impact to NCPGC.

Environment Protection

In the appraisal stage of the project, environmental impact was carefully analyzed and evaluated. NCPGC submitted an environmental impact report to the World Bank, which included potential environmental impact and measures to be taken to minimize the impact. Although the Beijing Transmission and Distribution Component would make very little impact, the World Bank paid great attention to environmental protection. During implementation of the project, NCPGC strictly followed the World Bank’s requirements in this aspect. For example, in tendering documents, the transformer oil and noise level standards were strictly required. During construction, measures were taken to minimize the impact to the surrounding residents in the respects of noise and transport etc. In the 1990s, awareness to protecting the environment was not popular. The World Bank advanced awareness through the projects in China. In recent years, the Chinese Government has realized the importance of environment to sustainable development of the economy, and strengthened the control and administration on environmental protection. In addition, consciousness has been established in the society. From this point of view, this project created sustainable effects in China. Project Resettlement

At the appraisal stage, the World Bank paid special attention to the impact on households and persons who were involved in land acquisition and resettlement. NCPGC drew up a detailed and feasible RAP and it was agreed with the Bank. During implementation of the project, NCPGC strictly followed the RAP. All households affected were properly managed and the resettled people were satisfied with the new housing condition and community facilities; and their livelihood has been maintained.

Through implementation of the project, the World Bank pushed forward the notion of paying attention to the vulnerable groups, and that has created sustainable effect in China. In the past, the criterion to assess a project was its economic rate of return. Through implementation of the project, we realized that we should pay more attention to improving the living standard of the people. This is of great significance in establishing a harmonious society in China, which was formulated by the Chinese Government.

Advanced Procurement Practices

In the 1990s, most goods were procured through negotiation with several suppliers and comparison of technical and commercial aspects, and then decisions were made in the selection of successful suppliers. The implementing agency had no experience with ICB. In the procurement of goods for this project, the personnel of the implementing agency studied the World Bank’s Guidelines for Procurement in the aspects of principle, procedures and criteria of bid evaluation, and used the methodologies in preparing the bidding documents, formulating the bid evaluation procedure, and selecting the successful bidders. They were trained in procurement. The procurement was successful, the cost was much less than prior expectation and the loan amount for this component was cancelled by US$24 million in 1999.

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Through the project, the implementing agency learned and introduced advanced procurement practices, and the methodologies have created positive results in China. From 2000, the Chinese Government enacted the law on tendering and a series of rules to standardize procurement of goods and services. The law and rules incorporated strengths of the World Bank’s Guidelines.

Supervision

The World Bank paid close attention to the supervision of project progress. During implementation, the World Bank arranged adequate staff to supervise all aspects in the execution of the project. Power engineers, financial specialists, environment specialist, restructuring specialists, auditing specialists, resettlement specialists from the World Bank headquarters and Beijing Office visited sites and the implementing agency. In particular, the Beijing Office provided very constructive help and support to the implementation of the project through frequent formal and informal meetings, site visits and discussions. They gave prompt response to the implementing agency when difficulties and questions arose. The project would not have been completed successfully without the correct guidance and friendly help from the World Bank.

Project Management after Completion

The attention paid by the World Bank to the operation performance of the project impressed us deeply. The World Bank paid attention not only to the implementation of the project, but also to the operation performance. After the project was put into operation, the World Bank sent financial specialists and power engineers to the site to make detailed evaluation, and compared actual performance with the expected ones. The concept inspired the personnel of the implementing agency. We are certain that the new concept will transform project management and promote improvements.

Sustainable Experience and Skills

During implementation of the Beijing Transmission and Distribution Component, management and technical personnel involved in project have been trained through bid evaluation, contract negotiation, financial control, environment protection, resettlement, and site construction. The skills and experience learned not only benefit the project itself, such skills have been used in the implementation of other projects. At every stage of project implementation, NCPGC’s personnel had the opportunity to learn advanced concepts, experiences and practices from the World Bank, and the Bank officials gave timely and adequate guidance and help to NCPGC. The knowledge and the experiences gained have created sustainable results in NCPGC as well as in China.

(b) Cofinanciers:

N/A

(c) Other partners (NGOs/private sector):

N/A

10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome/Impact Indicators:

End-of-PRoject TargetEstimates at the time of

Objective Performance Indicator AppraisalBaseline(1995)

Progress in Last PSR

(Actual 04) Appraisal CompletionPower supply from TEPGC increased

Unit 1 availabilityUnit 2 availability

92%92%

85%85%

92%92%

Electricity trade in North China increased

Power transfer from TEPGC to NCPGC (GWh/year)

10,818 (including Phase

2)

6,400 2004: 7,2802005: 7,298

2006 on: 6,400JJT Grid losses (220 kV & above) 3.5% 2.6% 3.2% 2.5%Beijing City Average: System losses (110 kV & below) Interruption (10 kV) Voltage variation

6.5%21.1 hours

93.7%

6.4%1.7 hours

99.5%

6.1%5.3 hours

98.0%

6.0%1.6 hours

99.8%Substation transformer loading: Xibianmen Xizhimen Wangfujing Beicheng Huichengmen

104%98%

50%50%60%80%95%

70%70%70%65%70%

40%40%60%60%60%

Efficiency of energy supply improved

1

Xizhimen distribution pilot project: System losses (10 kV) Interruption (10 kV/LV) Voltage variation (at 10 kV)

6.0%36.8 hours

94%

5.5%20.0 hours

98%

3.4%17.5 hours

98%

3.3%3.0 hours

99.9%Adherence to PPA and other agreements

New PPA adhered to

New PPA adhered to

Rate of return on equity: TEPGC NCPGC

2004: 33%2004: 1.8%

20%12%

33%N/A (dropped)

Power sector reform process advanced

Debt service coverage: TEPGC NCPGC

2004: 3.62004: 2.1

1.51.5

3.31.5

Financing sources diversified

Divestiture of WulashanEquity offering for IM HuanengExternal investor for Haibowan

N/A(Component

dropped)

by 1997by 1996

TA by 1997

N/A(Component

dropped)

Economic growth: GDP/capita (Yuan) Taxes paid in Tuoketuo (Yuan)

2,19938 million

8,388187 million

33,0001.1 billion

Economic activities increased & soil conservation improved in Tuoketuo

Number of trees planted (million)Hectares afforested

2006: 4.9

2006: 3,375

No data available

2006: >28,5122

1

Subsequent to the project constructions, the substations at Xibianmen and Xizhimen each had an additional transformer installed in 2004; and the substations at Huichengmen and Beicheng each had three new transformers installed to replace existing older facilities in 2005. The performance measured at project completion (end-2005) reflected the combined effect of all improvements.

2

Data represents the sum of Tuoketuo, Qingshuihe and Helinger counties.

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Annex 2. Project Costs and Financing

2a. Project Cost by Component (in US$ million equivalent)

Appraisal Estimate 1

Actual/Latest Estimates 2

Percentage of Appraisal

Tuoketuo Generation Component Works 210.9 218.9 104% Equipment and Materials 502.8 346.1 69% Services 14.0 28.2 201% Total Base Cost 727.7 593.2 82% Total Cost 954.7 593.2 62%

Total Financing Required 1,108.3 636.5 57%

Beijing Transmission and Distribution Component Works 39.6 19.2 48% Equipment and Materials 65.8 47.2 72% Services 3.1 10.6 342% Total Base Cost 108.5 77.0 71% Total Cost 148.8 77.0 52%

Total Financing Required 182.4 82.7 45%

Total Project Total Base Cost 836.2 670.2 80% Total Project Cost 1,103.5 670.2 61%

Total Financing Required 1,290.7 719.2 56%

1 Figures might be slightly different from the SAR due to rounding.2 Equipment and materials imported under the project were exempted from custom duties,

and the majority of them were also exempted from VAT. A portion of local equipment purchased under the project was also exempted from VAT. Actual contract price for equipment include all applicable taxes. Most technical training and TA activities were also included as part of the equipment supply contracts.

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2b. Project Cost by Procurement Arrangements (in US$ million equivalent)

Procurement Method At Appraisal ICB Other2

NBF3 Total Cost

Works 244.8 244.8 313.8 8.4 371.5 693.7 Equipment and

Materials (313.8)1 (8.4) (322.2) 7.8 8.4 16.2 Services (7.8) (7.8)

313.8 16.2 624.7 954.7

Tuoketuo Generation Component

Total Generation Component Cost (313.8) (16.2) (330.0) Works 46.5 46.5

65.4 2.0 31.7 99.1 Equipment and Materials (65.4) (2.0) (67.4)

2.6 0.6 3.2 Services (2.6) (2.6)

65.4 4.6 78.8 148.8

Beijing T&D

Component Total T&D Component Cost (65.4) (4.6) (70.0)

379.2 20.8 703.5 1,103.5 Total Project Cost (379.2) (20.8) (400.0)

Procurement Method Actual/Latest Estimates ICB Other2

NBF3 Total Cost

Works 218.9 218.9 243.9 102.2 346.1 Equipment and

Materials (243.9)1 (243.9) 0.4 27.8 28.2 Services (0.4) (0.4)

243.9 0.4 348.9 593.2

Tuoketuo Generation Component

Total Generation Component Cost (243.9) (0.4) (244.3) Works 19.2 19.2

42.6 4.6 47.2 Equipment and Materials (42.6) (42.6) Services 10.6 10.6

42.6 34.4 77.0

Beijing T&D

Component Total T&D Component Cost (42.6) (42.6)

286.5 0.4 383.3 670.2 Total Project Cost (286.5) (0.4) (286.9)

1. Figures in parenthesis are the amounts financed by the Bank loan. All appraisal estimates include contingencies.

2. Other includes Limited ICB, International shopping, National shopping, Direct Contract, and Consultant services

3. NBF = Not Bank financed

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2c. Project Financing by Component (in US$ million equivalent)

Appraisal Estimates

Actual/Latest Estimates

Percentage of Appraisal

Tuoketuo Generation Component

Shareholder Equity Contribution 277.1 146.7 53% Domestic Borrowing 401.3 244.3 61% Cofinancing 100.0 1.2 1% Bank 330.0 244.3 74%

Total 1,108.4 636.5 57% Beijing Transmission and Distribution Component Shareholder Equity Contribution 15.8 7.4 47% Domestic Borrowing 96.6 32.7 34% Bank 70.0 42.6 61%

Total 182.4 82.7 45%

Total Project

Shareholder Equity Contribution 292.9 154.1 53% Domestic Borrowing 497.9 277.0 56% Co-financing 100.0 1.2 1% Bank 400.0 286.9 72%

Total 1,290.8 719.2 56%

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Annex 3. Economic Costs and Benefits

Satisfactory. The project was primarily justified on least cost analysis. JJT was an important region politically, and also one of the fastest growing industrial and commercial bases in China. During project preparation, a least-cost expansion study covering the period 1998-2025 was carried out. The project was the first investment of the optimal power development program. To complement this approach, a cost-benefit analysis for the Tuoketuo thermal power plant component comprising about 86% of the total project cost, was carried out at appraisal. Assumptions on tariffs were made based on prevailing pricing policies. The calculation yielded an internal economic rate of return (IERR) of 18.9%. At completion, the weight of the generation component was 89% of total project cost. Using a similar methodology, a re-estimation yielded an IERR of 16.3%. The lower estimated return was mainly the result of a stretched out construction period and delayed completion; conservative generation projections in view of anticipated demand stabilization for a total plant capacity three times the size of the project; and the use of actual bulk supply tariff (at Y0.253/kWh net of VAT) which was significantly below the willingness to pay estimation (at Y0.33/kWh) that was used as a proxy for the estimation of benefits. The level was considered adequate.

Project Costs Energy Investment Fixed O&M Fuel Total

Benefits Net Benefit Year

GWh Yuan Million 1997 109.3 109.3 -109.3 1998 73.4 73.4 -73.4

Key Values/Assumptions Used

1999 34.8 34.8 -34.8 Exchange rate Y8.28/USD 2000 546.2 546.2 -546.2 Coal consumption 330 gce/kWh 2001 1,107.8 1,107.8 -1,107.8 Coal price on site Y208/ton 2002 1,968.4 1,968.4 -1,968.4 Operating hours 5,333/year 2003 3,391 840.4 138.4 139.0 1,117.9 711.0 -406.9 Tariff (net of V AT) Y.253/kWh 2004 7,280 211.6 363.4 575.0 1,613.0 1,038.1 Fixed O&M rate 4.0% 2005 7,209 214.8 506.8 721.6 1,663.3 941.8 Discount rate 12% 2006 6,400 210.7 488.3 699.0 1,618.9 919.9 2007 6,400 210.7 488.3 699.0 1,618.9 919.9 2008 6,400 210.7 488.3 699.0 1,618.9 919.9

Investment stream net of taxes and financing charges

2009 6,400 210.7 488.3 699.0 1,618.9 919.9 2010 6,400 210.7 488.3 699.0 1,618.9 919.9 2011 6,400 210.7 488.3 699.0 1,618.9 919.9 2012 6,400 210.7 488.3 699.0 1,618.9 919.9 2013 6,400 210.7 488.3 699.0 1,618.9 919.9 2014 6,400 210.7 488.3 699.0 1,618.9 919.9 2015 6,400 210.7 488.3 699.0 1,618.9 919.9 2016 6,400 210.7 488.3 699.0 1,618.9 919.9 2017 6,400 210.7 488.3 699.0 1,618.9 919.9 2018 6,400 210.7 488.3 699.0 1,618.9 919.9 2019 6,400 210.7 488.3 699.0 1,618.9 919.9 2020 6,400 210.7 488.3 699.0 1,618.9 919.9 2021 6,400 210.7 488.3 699.0 1,618.9 919.9 2022 6,400 210.7 488.3 699.0 1,618.9 919.9 2023 6,400 210.7 488.3 699.0 1,618.9 919.9 2024 6,400 210.7 488.3 699.0 1,618.9 919.9 2025 6,400 210.7 488.3 699.0 1,618.9 919.9 Total 145,880 4,680 4,779 10,775 20,234 36,365 16,131

Internal Economic Rate of Return (IERR) = 16.3%

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation10/817/1995 8 Sr. Energy Economist;

Sr./Financial Analysts (2); Sr./Power Engineers (2); Operations Officer; Restructuring Specialist; Economist

S S

Appraisal/Negotiation06/04 - 06/23/1996

9 Sr. Energy Economist; Sr. Financial Analyst; Sr./Power Engineers (3); Operations Officer; Principal Counsel; Principal Environmental Specialist; Restructuring Spec.

S S

11/24 -12/02/1996 8 Sr. Energy Economist; Sr. Financial Analyst; Sr./Power Engineers (2); Principal Environmental Spec.; Operations Officer Restructuring Spec.; Resettlement Spec.

S S

Supervision08/10--08/14/1998

1 Resettlement Specialist

03/19--03/21/1999 1 Resettlement Specialist S S08/29 & 09/02/1999

1 Resettlement Specialist S S

12/05--12/06/ 2000 3 Lead/Sr. Energy Specialists (2); Sr. Financial Management Specialist

S S

05/7--05/25/2001 7 Lead/Sr. Energy Specialists (2); Sr. Financial Specialist; Sr./Environmental Specialists (2); Resettlement Specialists (2)

S S

11/04--11/06/2001 3 Lead/Sr. Energy Specialists (2); Environmental Specialist

S S

12/08--12/12/2001 1 Resettlement Specialist S S11/10-11/11/2003 2 Sr. Energy Specialist; Power

EngineerS S

04/01-02, 04/07-09 and 04/19/2004

5 Sr. Energy Specialist; Financial Analyst; Power Engineer; Environmental Spec.; Resettlement Spec.

S S

09/13--09/18/2004 and 10/11--10/20/2004

6 Sr. Energy Specialist; Financial Officer/Analyst (2); Power Engineer; Environmental Spec.;

S S

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Resettlement Spec.03/24-31/2005 4 Sr. Energy Specialist; Financial

Analyst; Power Engineer; Environmental Specialist

S S

ICR02/21/2006 3 Sr. Energy Specialist;

Financial Analyst, Resettlement Spec.

S S

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation N/AAppraisal/Negotiation N/A 301Supervision 48.5 133ICRTotal 48.5 434

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

ResettlementPrivate sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

• Summary of Resettlement Completion Report

• Environment Completion Report

• Project progress reports

• Project files, containing full records of project preparation and supervision aide-memoires and reports

• IERR supporting calculations

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