Document of The World Bank Report No. 15002-CHA STAFF APPRAISAL REPORT CHINA HENAN (QINBEI) THERMAL POWER PROJECT JANUARY 29, 1996 Infrastructure Operations Division China and Mongolia Department East Asia and Pacific Region CURRENCY EQUIVALENTS (as of December 1] 1995) (Currencv l1nit Yuan (Y) S 1 .0(J( - Y 83 Y 1.(( = $0.12 FISC AL YEAR January 1 - December 31 WFI(GITS ANI) MEAStJRES \Ietric SN stem kmi K ilonmeter (= 0.62 miles) h 'A i. KilWaItt hour (Cv 860.42 kcal) I Wh - N\fcawatt houLr (= 1,000 kWh) W11h v (ii"Miatt 1ourL- O 1.000,000 kilowatt hours) 1-Wh TelralWatt houLr (Cs 1 .000,000,000 kilowatt hours) !W - Kilo^watt (= 1 .00() watts) NIW "' Nega\\ att (I 1.000,000 watts) k V Kilovolt ( ].000 vrolts) IN \' \ Me 1ga o1t-amnpere (1,000 kilovolt-amperes) jABBREVIATI1IONS AND ACRONYMS .ADH - Asian Development Bank (C' - tCOUlnt} VAssistance Strategy ( 1NiTSPP *- hina JlOrm Institutional Support and Preinvestment Project I .nvironmcitai Assessinent Report Hi1'1i i lictric Power oi I lenan I 'I11 -- I :fl\irmnncintal Mklanag,ement Program rii) 1F1 lie ( IaS I )CsulIurization r il )s) ( ilSro,Ns L)oiestic lProdUCt ilIl"- - ( lobal nIlVironiment lFacility 1( 11 f' - NIinistrv o1 I lectric Poxver 1(F) NMl inistry \l l'inance 1. L\P -- 1Rcsettlemcnt Action lPlan s.! )11H - Stat[ I )c. elcpment Banik of China SI)](' State D)evelopment Investment Company S(I St ilc-( )\necd Iunterprises , 1 StL- -;tte lPlanning2 (Conmission CHINA HENAN (QINBEI) THERMAL POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: People's Republic of China Beneficiary: Electric Power of Henan (EPH) Poverty: Not applicable. Amount: $440.0 million equivalent. Terms: 20 years, including a 5-year grace period, at the Bank's standard variable interest rate. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Onlending Terms: The proceeds of the loan would be onlent from the Borrower to the Beneficiary under a subsidiary loan agreement on the same terms and conditions as the Bank loan, with the Beneficiary bearing the foreign exchange risk. Financing Plan: See Schedule A. Economic Rate of Return: 15.2 percent Staff Appraisal Report: Report No. 15002-CHA Map: IBRD 27181 Project ID Number: CN-PE-353 1 CONTENTS 1. INTRODUCTION .................................................1 A. Overview of the Energy Sector .................................................1 B. The Power Sector .................................................2 C. Power Sector Reforms-Progress and Future Directions ...................................4 D. Electricity Conservation and Environmental Protection .....................................9 E. Role of the World Bank ................................................ 10 2. THE HENAN POWER GRID ................................................. 13 A. The Henan Power System ................................................ l 3 B. Load Forecast ................................................ 14 C. Role of the Project in Henan Province ................................................ 15 3. THE BENEFICIARY ................................................ 17 A. Legal Status and Organization of EPH ................................................ 17 B. Other Provincial Entities ................................................ 17 C. Organization and Management ................................................ 18 D. Reform Implementation Plan ................................................ 19 E. Staffing and Training ................................................ 22 F. Planning, Budgeting and Control ................................................ 22 G. Accounting ................................................ 23 H. Audit ................................................ 23 1. Tariffs ................................................ 24 J. Billing and Collections ................................................ 26 4. THE PROJECT ................................................ 27 A. Project Objectives ................................................ 27 B. Project Description ................................................ 27 C. Cost Estimate ................................................ 30 D. Financing Plan ................................................ 32 E. Procurement ................................................ 33 F. Project Implementation ................................................ 36 G. Disbursement ................................................ 36 This report is based on the findings of an appraisal mission that visited China in May 1995. The report was prepared by N. Berrah (Task Manager), S. Kataoka (Senior Power Engineer), H.E. Sun (Senior Financial Analyst), B. Baratz (Principal Environmental Specialist), R. Lamech (Restructuring Specialist), Y. Wang (Consultant, Economic Analysis), J. Zhao (Operation Officer, Power Sector Restructuring). T. Fry (Consultant, ASTAE), F. Trimmel and Ed Kulperger (Consultant, Canadian Trust Fund) assisted EPH in preparing the electricity conservation component. The Division Chief is Richard Scurfield and the Department Director is Nicholas C. Hope. - ii - H. Environmental Considerations and Resettlement ............................................. 37 I. Reporting and Monitoring ..................................................... 39 5. FINANCIAL ASPECTS ..................................................... 40 A. Introduction ..................................................... 40 B. EPH's Past and Present Financial Performance ................................................ 41 C. Financial Performance Targets ..................................................... 42 D. Future Finances ..................................................... 43 6. PROJECT JUSTIFICATION AND RISKS ...................................................... 46 A. Least Cost Study ...................................................... 46 B. Economic Rate of Retum ..................................................... 47 C. Project Risks ...................................................... 48 7. AGREEMENTS AND RECOMMENDATION ...................................................... 50 TABLES IN TEXT Table 2.1: Load Growth of Henan Power Grid (HPG) ..................................................... 14 Table 2.2: Load Forecast for Henan Power Grid (HPG) .................................................. 15 Table 3.1: Electricity Consumption in Henan Province (1994) ........................................ 26 Table 4.1: Summary of Project Costs ...................................................... 31 Table 4.2: Financing Plan for the Project ...................................................... 32 Table 4.3: Summary of Proposed Procurement Arrangements ......................................... 35 Table 4.4: Implementation Schedule: Estimated Annual Contractual and Other Payments ..................................................... 36 Table 5.1: EPH's Key Financial Indicators (1990-94) ..................................................... 41 Table 5.2: Key Financial Indicators (1995-2004) ..................................................... 44 BOXES IN TEXT Box 1.1: Power Sector Reform Experiments in China ..................................................... 5 Box 4.1: Proposed ADB Henan Power Project ..................................................... 28 - 111 - ANNEXES Annex 1.1: Primary Energy Output In China (1949-94) .................................................. 53 Annex 1.2: Total Production And Consumption Of Energy Vs. GNP Growth ................ 54 Annex 1.3: Installed Capacity, Electricity Generation, And Sales In The Power Subsector ............................................................ 55 Annex 1.4: Electricity Consumption By Sectors ............................................................ 56 Annex 1.5: Power Projects Financed By The World Bank ............................................... 57 Annex 2.1: Installed Generating Capacity Of Henan Power Grid (1989-1994) ............... 58 Annex 2.2: Major Power Generating Facilities In Henan Province ................................. 59 Annex 2.3: Transmission Network Of EPH ........................................................... 62 Annex 2.4: Energy Consumption By Category Of Consumers In Henan Province ......... 63 Annex 2.5: Energy Consumption Forecast For Henan Power Grid .................................. 64 Annex 3.1: Power Sector Structure In Henan Province .................................................... 65 Annex 3.2: Performance Indicators For Henan Power System . . 69 Annex 3.3: Reform Implementation Plan Electric Power Of Henan (May 1995) ........... 70 Annex 3.3: Attachment-Reform Implementation Plan .................................................. 78 Annex 3.4: Organizational Restructuring And Financial Management Systems ... 83 Annex 3.5: Legal Consulting Services ............................................................ 89 Annex 3.6: Tariff Structure Consulting Services ........................................................... 93 Annex 3.7: Staffing Of EPH ........................................................... 96 Annex 3.8: Schools And Training Centers Under EPH .................................................... 97 Annex 3.9: Power Pricing In Henan Province ......................................... 98 Annex 4.1: Project Description ............................................................ 103 Annex 4.2: Electricity Conservation Project Component ............................... 106 Annex 4.3: Terms Of Reference For Consulting Services .............................. 112 Annex 4.4: Management Development And Training ................................. 124 Annex 4.5 Procurement Schedule ............................................................ 129 Annex 4.6: Key Dates Of The Project Schedule ........................................................... 130 Annex 4.7: Disbursement Profile ........................................................... 131 Annex 4.8: Land Acquisition And Relocation ....................................... 132 Annex 4.9: Environmental Management Program .................................... 138 Annex 4.10: Bank Supervision Input Into Key Activities ............................... 153 Annex 4.11: Monitoring Framework And Indicators .................................. 154 Annex 5.1: Actual Financial Statements Of EPH (1990-94) . ............................ 157 Annex 5.2: Forecast Financial Statements Of EPH (1995-2004) . ........................ 160 Annex 5.3: Major Assumptions For EPH's Financial Projections . ....................... 164 Annex 6.1: EPH's Power Development Program (1994-2004) . .......................... 166 Annex 6.2: System Demand And Energy Balances For Henan Power Grid . ................ 167 Annex 7.1: Selected Documents And Data Available In The Project File . ................. 168 CHARTS Chart 1: Organization of MOEP ........................................................... 169 Chart 2: Organization of EPH ........................................................... 170 Chart 3: Project Construction Unit Organization ............................................................ 171 Chart 4: Implementation Schedule ............................................................ 172 MAP IBRD 27181 1. INTRODUCTION A. OVERVIEW OF THE ENERGY SECTOR Supply and Demand 1.1 China has become the third largest producer of energy in the world. The country's primary commercial energy supply and consumption increased at around 4.4 percent per year from 1980 to 1994 to reach 1,169 and 1,175 million tons of standard coal equivalent (tce), respectively. Coal is the most important source of energy, accounting for about 74.1 percent, and oil for 18 percent of the total production. Hydroelectric power (6 percent), natural gas (1.9 percent), and small quantities of shale oil and geothermal power make up the balance. The largest consumer of energy is the industrial sector (75.4 percent), followed by households (9.7 percent), services (8.6 percent), and agriculture (6.3 percent). Details of the primary energy outputs are given in Annex 1.1, and total energy production and consumption in Annex 1.2. Energy Resources 1.2 Coal. China has large coal deposits, with recoverable reserves of about 900 billion tons, of which 30 percent are proven. In 1994, the country produced 1.2 billion tons of raw coal. By the year 2000, China aims to produce 1.4 billion tons of coal a year. The best quality coals are found in North China, where Shanxi and Inner Mongolia each have reserves of 200 billion tons. However, insufficient transport capacity makes it extremely difficult to move sufficient coal to the large consuming centers in Central and East China. 1.3 Hydroelectric Potential. China is rich in water resources and has a long tradition of harnessing them for energy and other uses. The country's hydroelectric potential is estimated at 1,900 TWh a year, but only about 9 percent of it has been developed. Most of the potential is located in the Southwest (70 percent), about 1,500 km away from the main demand centers. However, the long gestation period for hydroelectric projects and the lack of capital have slowed the development and utilization of hydroelectric resources. 1.4 Crude Oil. China's ultimately recoverable reserves of crude oil are estimated at some 80 billion tons, of which approximately 20 percent are proven. The 1994 production amounted to 147.65 million tons of crude oil and cumulative production reached 2.3 billion tons. China's refining capacity is the sixth largest in the world. However, with the sharply increasing consumption, the country will become net importer in the near future. -2- 1.5 Natural Gas. China's natural gas resources are estimated at 33 trillion m3, of which 3 to 5 percent are proven. In 1994, China produced 16.97 billion m3 of natural gas. About 58 percent of the current production is nonassociated gas, mostly from Sichuan Province. The remaining gas production is associated with onshore crude oil production. 1.6 Biomass. Noncommercial biomass energy use currently amounts to about one quarter of total energy consumption in China. Fuelwood and agricultural residues are the chief biomass fuels, and they are consumed almost entirely by rural households. China is promoting a variety of measures to achieve environmentally sustainable biomass supply and consumption levels, including more efficient use of biomass, tree planting, and substitution of other fuels for traditional biomass fuels. 1.7 Nuclear Energy. Known uranium reserves in China are sufficient to sustain 15,000 MW of nuclear power capacity for 30 years. China commissioned its first commercial nuclear power plant (300 MW) in 1992, in Zhejiang Province. In 1993/94, the Daya Bay nuclear power plant (2x900 MW) was also commissioned; 70 percent of its output is intended for nearby Hong Kong. The construction of a few additional plants is planned to start before the year 2000, primarily in regions which lack coal and hydroelectric resources. 1.8 Other Energy Resources. Other energy resources play a small role in energy supply and are used mostly in remote areas. Geothermal energy has been found in locations throughout the country. Although wind and solar energy have promising prospects, they are not expected to significantly affect the overall supply of energy in the near future. Oil shale deposits are large, but little is exploited because of lack of viable technology. B. THE POWER SECTOR Supply and Demand 1.9 China is the second largest producer of electricity in the world. By the end of 1994, China's total installed capacity reached about 200 GW, 74 percent of which is thermal capacity and the rest hydropower (25 percent) and nuclear power (I percent) (Annex 1.3). China has 5 regional and 8 separate provincial power networks, of which 7 have installed capacities of 10 GW or more. The five regional power grids (East China, North China, Northeast China, Central China and Northwest China) coordinate the systems of several provinces together. The total length of the high and medium voltage transmission lines (i.e., from 500 kV down to 110 kV) lines amounted to 236,149 km and the transformer capacity of substations down to the 110 kV level (owned and operated by the power utilities) was about 179 GVA. Considering the power supply as a whole from production to end-user supply, transmission and distribution losses amounted to about 16 percent of generation. 1.10 Total power generation in China increased by two and one-half times between 1980 and 1994, an average increase of 8.0 percent per year over 14 years. About - 3 - 927.8 TWh were generated in 1994, with thermal power accounting for 80 percent. The share of hydroelectric power has remained fairly stable over the last decade. Even though the Government has maintained a strong commitment to hydropower development, capital constraints and the distance of major resources from load centers inhibit more rapid development. Coal-fired power plants provide about 90percent of thermal generation, with oil-fired generation accounting for most of the balance. The share of oil- fired generation has declined sharply since the early 1980s, owing to a concerted government policy to minimize petroleum use for power. The share of natural-gas based generation is negligible and is expected to remain so barring unforeseen major natural gas discoveries. 1.11 Industry continues to dominate electricity consumption in China, accounting for 75.4 percent of electricity use in 1994; agriculture accounted for 6.3 percent, residential consumers for 9.7 percent, municipal and commercial consumers for 6.7 percent, and transport and communications for 1.9 (Annex 1.4). Industrial demand has continued to drive overall power demand; more than 70 percent of incremental electricity use between 1985 and 1994 was in the industrial sector. Although service is of uneven quality, rural access to electricity is high; about 96 percent of the nation's villages and about 80 percent of rural families now have access to electricity. 1.12 Despite the strong growth in electricity output, most areas of China continue to suffer from severe power shortages. Since GDP grew by 9.3 percent per year during 1980-94, the elasticity of electricity consumption growth relative to GDP growth was only 0.86-an exceptionally low elasticity for any country over a sustained period, and particularly for an industrializing country such as China. Chinese officials estimate the shortfall between peak power demand and supply at more than 10 percent. Daily load curves are relatively flat, as industries have had to respond to power shortages during the peak daytime periods through rescheduling of work shifts. The annual load factor in the Henan power grid in 1994, for example, was 72 percent. 1.13 China's GDP is expected to grow by at least 8 to 9 percent per year during 1994-2000. This rapid economic growth will put tremendous pressure on China's electric power industry to avoid yet worse shortages. The total investment in China in 1994 was Y 208 billion, of which Y 85.9 billion (41 percent) was in the power sector. China's electric power construction program for the 1990s will certainly be the world's largest. Assuming that an aggressive conservation effort can enable an electricity demand/GDP growth elasticity of 1.0 to be sustained, electricity demand could be expected to continue to grow at average rates of 8 to 9 percent per year during 1994-2000. To keep pace with this demand growth, China would need to add some 17-20 GW of capacity per year. 1.14 Although China's current power development program emphasizes addition of 200 to 600 MW units, over one half of China's thermal power capacity is still in units below 200 MW. Only about 12 percent of the total installed capacity is in units of 300 MW or more, compared to 60 to 80 percent in industrialized countries. The average gross conversion efficiency of thermal units over 6 MW has improved over the 1980s, -4 - reaching 32 percent in 1993. This efficiency level is not unreasonable given the low average unit sizes in operation, but is substantially lower than the 36 to 37 percent typical of systems with larger units. Power Sector Institutions 1.15 In the period 1988-92, the Ministry of Energy (MOE) maintained primary responsibility within the Central Government for policy, planning and regulation of the power and related energy subsectors. In May 1993 MOE was restructured during a broad government reorganization, and a Ministry of Electric Power (MOEP) was established, along with a Ministry of Coal and the existing China National Petroleum Corporation. Chart I shows the entities that are within MOEP oversight. The State Planning Commission (SPC), on behalf of the State Council, has the responsibility for review and approval of the strategic plans, investment programs and general pricing policy of the energy sector. 1.16 Until early 1993, the State Energy Investment Corporation (SEIC) channeled Government funds to finance coal and electricity projects. SEIC was responsible for onlending funds for projects of national importance and representing the Government in jointly financed projects. However, in April 1994, SEIC (and five other specialized investment companies under SPC) were merged into a new policy bank, the State Development Bank of China (SDBC). The People's Construction Bank of China will perform policy lending as an agency of SDBC, and commercial banking activities on its own account. For provincial power companies, it appears that equity and loans/debt shall be channeled through the regional groups, and equity stakes will be held by the State Development Investment Corporation (SDIC). C. POWER SECTOR REFORMS-PROGRESS AND FUTURE DIRECTIONS 1.17 Reforms in China's power sector during the 1980s involved a series of incremental adjustments, largely to mobilize additional investment capital to finance rapid growth. Taken as a whole, these adjustments have resulted in a sector structure that is largely unrecognizable from that in the early 1980s. In 1980, the power sector was fully controlled, managed and funded by Central Government departments. By the early 1990s, the sector had become much more decentralized, less vertically integrated and open to nonutility producers. 1.18 In conformance with broad national reforms towards a market economy begun in mid-1992, the Government initiated, in the early 1990s, a program of power sector reforms. The reforrm agenda includes: (a) institutional restructuring-commercialization and corporatization of power companies, and associated sector restructuring; (b) overhaul of the regulatory and legal framework for the sector, including the promulgation of a National Electricity Law; (c) further diversification in financing for power development, including private sector participation; and, (d) the rationalization of power tariffs. The Chinese approach to reform encourages experimentation with different reform options - 5 - and institutional forms. This gradual approach permits the Chinese to examine the relevance and applicability of specific reforms, and also fine-tune implementation for their broader dissemination or replication in other parts of the country. Box 1.1 provides a snapshot of some of these pilot experiments. Box 1.1: POWER SECTOR REFORM EXPERIMENTS IN CHINA Industry Structure: - System operation with separation of transmission and distribution from generation is being conducted in Hainan Province. Actions undertaken include: creation of a single transmission and distribution shareholding company and several generation companies, including a wholly foreign-owned one. - The creation of independent generation companies which will have their equity traded internationally through either a share-listing on the New York or Hong Kong Stock Exchange is being considered in Shandong Province. Regulation: - Complete functional and institutional separation of sector regulation and government oversight from the provincial power company/bureau has been completed in Hainan Province. A separate agency was established on June 1, 1995 to regulate the sector. A more ambitious experiment is under consideration for Fujian Province. The success of these experiments should speed up the less radical reforms initiated in Jiangsu, Zhejiang and Henan. Foreign Investment Financing: - Huaneng International Power Development Company (HIPDC) and Shandong Power Development Company, both raised equity capital through American Depository Receipt issues in New York in 1994. - Meizhou Wan Power Project is a Build-Own-Operate-Transfer (BOOT) project of 2x350 MW in Fujian Province. The project, which is 100 percent foreign owned, is being sponsored by a Consortium of several international companies. IFC is exploring options for participating in the project. The project was approved by SPC in September 1993. - Rizhao Power Project is a joint-venture project of 2x350 MW in Shandong Province. The project is sponsored by two international and five domestic investors. The foreign debt of $350 million is being raised from two foreign financial institutions on a nonrecourse project-financing basis. - Laibin B Power Project of 2x350 MW coal-fired plant in Guangxi Autonomous Region is the first Build- Own-Transfer (BOT) project approved by the Government for international competitive bidding. The owner has already solicited applications for prequalification. 1.19 Institutional and Corporate Restructuring. MOEP is charged with overall sector coordination and policy guidance, and is no longer involved in enterprise management. Regional power entities are charged with responsibilities for regional grid coordination and dispatching. Provincial power companies have become the utilities in charge of management and operation of the bulk of the nation's power system. - 6- 1.20 The operational scope of the provincial power companies varies substantially, but none of them has a monopoly of power supply in their respective provinces. At the distribution level, about one-third of the country's urban distribution companies and over 80 percent of the country's rural distribution utilities are separate economic entities. At the generation level, semi-independent joint-investment plants and fully independent power plants have been developed in many areas, selling power to the provincial power companies. 1.21 Efforts are underway to restructure the provincial power entities to operate more like commercial corporations. In parallel, the sector structure is being reformed to facilitate transparent relationships between, and in some instances, complete separation of distribution and generation operations from the transmission core. 1.22 Further restructuring of the the power sector is under consideration. The current plans are for MOEP to be dissolved in early 1996 and its oversight and regulatory functions divided between SPC, the State Economic and Trade Commission (SETC), the China Electricity Council, and the soon to be created National Power Company (NPC). NPC would: (a) be designated by the State Council as the authorized representative of the State as owner of government-owned power assets and is further authorized to make investments in the power sector on behalf of the state; (b) operate the national (i.e. interregional) transmission network; and (c) function as a holding company with the five regional power group companies and the provincial power companies as subsidiaries. After transformation of MOEP, the existing regional power administrations and provincial power bureaus will undergo similar restructuring. 1.23 Legal and Regulatory Reform. China is in the process of developing a comprehensive legal and regulatory framework for operations in the power industry. The existing legal framework consists of a multitude of inconsistent regulations and rulings, developed over many years. The Government recognizes the need for overhauling the regulatory framework and establishing more transparent and commercially driven relationships between the various entities now involved in the sector, including regional and provincial grids, semiautonomous joint-investment power plants and independent power producers. 1.24 The Central Government is preparing a new Electricity Law, which will provide the umbrella principles for the legal and regulatory system for the sector, for possible promulgation in 1995. The Central Government is also preparing a series of more specific regulations, consistent with the principles of the proposed Law. The emerging regulatory system for the sector will clearly define government regulatory functions at central and provincial levels, and will facilitate the separation of government oversight functions from power company management. The World Bank is assisting MOEP in assessing the existing laws and regulations and evaluating options to develop a new regulatory framework through an IDF-funded technical assistance grant. 1.25 An important and innovative experiment in regulatory reform is being conducted in Hainan Province to make the transition to an unbundled sector structure with separate regulation. Actions undertaken include: creation of a single transmission and distribution shareholding company; several generating companies, including a wholly foreign owned one; and establishment on June 1, 1995 of a separate agency to regulate the sector. Lessons learned from this experiment will be taken into account in furthering the power sector reform efforts in other provinces. A more ambitious experiment is under consideration for Fujian Province. 1.26 Diversification of Financing Sources. Following changes in power project financing from Government grants to loans in the early 1980s, the Govermnent encouraged the development of additional financing sources from provincial and local governments, large consumers, and, in some cases, private foreign partners. Since the mid-1980s, the Government has allowed power produced from power plants financed through these nontraditional sources to be sold at prices which provide for full debt servicing and reasonable profit. This is referred to as the "new plant, new price policy." The share of Central Government financing in power sector investment has fallen sharply, from 91 percent in 1980 to less than 30 percent in 1994. Empowered with rights to impose surcharges to accumulate funds for investment in power construction, provincial and local governments have become a key source of financing, providing about almost half of the investment funding for the sector in 1994. 1.27 Newly formed corporations have also become important players. The Huaneng International Power Development Corporation (HIPDC) was formed in 1985 with the aim of attracting foreign capital and technology for power plants located mainly in coastal areas. As an independent power producer, HIPDC operates its 15 plants (5,800 MW total) under a build, own, and operate (BOO) framework. HIPDC had a mandate to raise ftunds from the international financial market, and it has tapped bilateral and suppliers' credits, and commercial bank loans. HIPDC was able to raise foreign equity capital through an American Depository Receipt (ADR) issue in New York in 1994. The Sunburst Energy Development Corporation (SEDC), with three large power projects under implementation, and the recently established China Power Investment Corporation (CPIC) are other windows for the Government's investment, and cofinancing with the local governments and foreign sources in power projects. Build, own and transfer (BOT) schemes have also been introduced in China, most notably the privately-financed Shajiao B and Shajiao C thermal power plants in Guangdong Province; and the recently approved projects Meizhou Wan in Fujian province, and Lai Bin, the first power project approved for international competitive bidding, in Guangxi Autonomous Region. 1.28 Many other BOO and BOT schemes are in the negotiation stages, but progress is slow because the Government has not yet developed a clear regulatory framework and policies to encourage competition at entry. Rapid expansion of this form of foreign investment may also require Government acceptance of higher rates of return to investors and/or underwriting of certain risks, especially foreign exchange convertibility and other - 8 - policy related risks. Competitive bidding for power projects would be the best means of establishing the market rate of return to international investors. 1.29 Power Pricing. Electricity price reform in China has involved a series of incremental changes over the last 10 years. In the mid-1980s, multiple-track pricing was introduced for both producers and consumers, in line with the shift away from full vertical integration in the industry. This strategy was successful in increasing overall tariff levels but, by the end of the decade, the power pricing system had become too complex and difficult to manage. Recent reformns have therefore focused on simplification and rationalization of the system. 1.30 At the producer level, the state catalog prices charged for power produced by Central Government-financed plants were modified in 1993. Prices for the electricity produced from all new power plants are now set by contract to cover financing and operating costs, on a plant-by-plant basis, and rolled into the average power tariff. Cost recovery through the tariff system for new investments is thus ensured. Prices also are similarly determined for existing plants financed through loans. The electricity tariff applied for plants built with grant financing before 1985 has been rationalized to now include an improved mechanism to automatically adjust prices annually to reflect fuel and transportation cost variations. It is expected that producer prices for old power plants will be revised to provide a reasonable rate of return on revalued assets. 1.31 At the consumer level, the prices are in general an average of the state catalog prices and the guidance prices (that reflect full costs of supply from sources not financed through the Central Government) plus national and local fees and surcharges. While the situation varies between regions, the nature of the existing pricing system is such that average consumer prices (including fees and surcharges) approximate long-run levels in areas with rapid load growth, such as the coastal provinces. For example, average consumer prices in Zhejiang Province are estimated to be about 50 fen/kWh compared to a long-run average incremental cost of 45 fenikWh. Prices in underdeveloped areas, such as Sichuan and Henan, are still below long-run marginal cost (LRMC) levels, but will gradually be rationalized with increasing supply from new plants. 1.32 While tariff levels are approaching satisfactory levels, the structure of consumer prices, however, remains too complex, lacks transparency, and is inequitable. In most areas, including Henan Province, unfair "old" administered rates and "new" guidance rates continue to be applied to different consumers. Some consumers are protected from high cost electricity supply charges and certain local surcharges because they still hold "in-plan" quota allocations, but other new or small consumers must pay high prices well above actual supply costs. -9 - D. ELECTRICITY CONSERVATION AND ENVIRONMENTAL PROTECTION Electricity Conservation 1.33 China has over 10 years of experience in the active promotion of electricity conservation, with a solid record of achievement. The strength of its program lies in the well developed institutional framework. Electricity conservation is handled by the network of "Three Electricity Offices," with offices at central, provincial, prefectural and county levels throughout the country. These offices are under the leadership of local Economic Commissions, and coordinate their work with provincial power companies. They monitor electricity intensity and use patterns in all major enterprises, promote adoption of conservation technologies and electricity management improvements, and assist in organizing funding for efficiency programs supported by the Government. 1.34 Further improvements in the efficiency of electricity use are imperative if China is to realize its economic growth goals in an environmentally sustainable way. Henan Province where the proposed project is located is a pioneer in many aspects of electricity conservation. Efforts in place include: (a) an electricity conservation fund which provides governnent cofinancing for conservation investments in industrial and commercial sites; and (b) a program to popularize the use of high-efficiency lamps. Environmental Protection 1.35 Thermal power production currently accounts for about one quarter of China's coal consumption, and this share is expected to increase gradually. Improvements in the efficiency of coal use in this sector not only alleviate pressure on the coal production and transportation system, but also have a major impact on particulate, sulfur and carbon dioxide emissions. 1.36 The achievement of economies of scale in thermal power production, through expanded development of large generating units, is a priority because of the recent rapid growth of small coal-fired power plants, in unit sizes of 50 MW or less. While national policy emphasizes the addition of 300 MW and 600 MW units, new projects have lagged behind demand and local governments are continuing to invest in large numbers of new small plants, largely due to difficulties in mobilizing the necessary investment resources. Compared with a state-of-the-art plant, these plants consume over 60 percent more coal per unit of electricity produced. This results in at least 60 percent higher sulfur dioxide emissions (depending upon the coal used), and roughly 60 percent greater emissions of carbon dioxide. Particulate emissions from the small plants are proportionally even higher, due to use of inefficient particulate control technology. If a sufficient number of large-scale projects cannot be brought on stream in a timely fashion to substitute smaller inefficient units, there is little doubt that this problem will worsen. 1.37 In terrns of emission control. in large and medium-scale plants, China has made substantial progress in particulate control, through deployment of high efficiency electrostatic precipitators. As the country has large reserves of low sulfur coal, China is -10- just beginning to employ sulfur dioxide control devices in areas where ambient air quality standards require them. Top priority should be given to areas which must rely on local high sulfur coal, such as in southwest China. In these regions, thermal power plants often burn coal of over 4 percent sulfur content (e.g., 5 to 10 times the level typical through most of north and east China), and development of sulfur dioxide control strategies and corresponding investments are now urgent in these areas. Several pilot flue gas desulfurization (FGD) projects have been implemented in areas where the sulfur content of coal is relatively high: Luohang in Sichuan Province, Japanese-assisted projects in Shandong Province and Taiyuan in Shanxi Province. 1.38 Recently, the Chinese Government initiated serious efforts to curb air pollution related to the burning of coal and particularly to reduce the power sector's contribution to the problem. The Government announced in June 1994 that it will spend about $2 billion over the next seven years on an environmental program aimed at keeping S02 emissions at a level of 15 million metric tons a year, as part of a comprehensive program of acid rain abatement. The government also announced its intention to keep particulate emissions at about 3.8 million tons (1992 level). E. ROLE OF THE WORLD BANK World Bank Power Sector Assistance Strategy 1.39 In line with Bankwide policies, the Bank's energy assistance program in China places special emphasis on sector reform and energy conservation. During the last two years, the Bank's technical assistance program for the power sector has focused on helping the Chinese in assessing reform options (through a study funded by the Bank's Institutional Development Fund), defining implementation strategies (through sector work on power sector reform), and exploring options for mobilizing domestic and foreign private funds to meet the capital needs of sector development (through informal sector work). The study (Strategic Options in Power Sector Reform in China, 1993) and sector report (China Power Sector Reform: Towards Competition and Improved Performance, Report 12929-CHA, 1994) provide vehicles for dialogue between the Bank and Chinese institutions. Technical assistance is also now being provided to help the central authorities develop an improved legal and regulatory framework for the sector. The energy conservation support program includes technical assistance through the Global Environment Facility (GEF), lending support in selected industrial, environment and energy projects, and development of a series of new GEF investment operations. The power sector lending program now focuses on assistance for the detailed aspects of implementation of the power sector reforms, primarily in the less-advanced inland provinces, as well as reducing the power shortages that continue to hamper development and slow the market orientation of the sector. 1.40 The Bank also supports the Chinese Government's serious efforts to: (a) curb air pollution related to the burning of coal and particularly to reduce the power sector's contribution to the problem; and (b) accelerate the development of hydropower and construction of large and efficient 300 and 600 MW coal-fired units to avoid the mushrooming of the small and highly polluting plants that still constitute about 60 percent of the additional installed capacity. Rationale for Bank Involvement 1.41 The proposed project is consistent with the Country Assistance Strategy (CAS) for China presented to the Board on June 1, 1995. For the power sector, the CAS identified six focal points for Bank assistance: (a) commercialization and corporatization of operating companies and enterprises; (b) development of adequate regulatory and legal frameworks; (c) introduction of competition and transparency; (d) assurance of adequate tariff policies; (e) development of new sources and methods of financing; and (f) transfer of new technology and modern operational and environmental management techniques. This ambitious reform program reflects the detailed strategy set out in the recent power sector strategy for China. 1.42 The project supports this strategy by including implementation of a reform program to: (a) incorporate the provincial company, Electric Power of Henan (EPH), as a limited liability company; (b) separate government and corporate functions within the Company; (c) improve its structural organization and managerial processes to increase cost conscientiousness and business orientation; (d) promote competition at the generation level; and (e) rationalize the pricing system within the province (see Chapter 3). It also supports electricity conservation and adequate environmental protection and monitoring (in close cooperation with the Asian Development Bank). Past Bank Involvement and Lessons Learned 1.43 Since the first project for the power sector in 1982, the Bank has helped to finance 17 large power generation and load management projects, seven thermal, eight hydro, and two transmission projects (Annex 1.5). Technical assistance in project management, system operations, finance, management and institutional reform has been included in the projects. Through these operations, the Bank has helped to introduce: (a) state-of-art technologies and control systems in generation, transmission, distribution and pollution control; (b) modem operational practices and procedures to improve power system reliability and control; (c) improved methods for project planning, design, construction management, and environmental impact assessment; (d) improved financial planning and utility management tools and practices; (e) techniques for computing and establishing appropriate tariff structures and levels; and, (f) assistance in sector and regulatory reform. 1.44 These operations have yielded useful lessons on project preparation, technical and operating aspects of power systems, and sequencing of institutional reform. The experience gained from these projects and broader international experience in power sector restructuring have also been taken into account in developing the Bank power sector strategy in China, and in designing the proposed project. - 12 - 1.45 Lessons learned from the previous seven thermal power projects were considered during preparation of the proposed project in order to (a) avoid commissioning delays experienced in the past due to contractual interface problems and weak project management, (b) improve the quality of environmental studies and monitoring measures, and (c) ensure commitment of the beneficiary to the institutional and corporate reforms to be included in the project. Specific actions have been taken to increase involvement of foreign consultants in assisting the Beneficiary in assessing the environmental impacts of the project and preparing the environmental management plan, and in preparing a comprehensive reform plan prior to the preappraisal mission. The procurement packaging was revised to avoid problems experienced during the construction of the Yanshi project (Loan 3433-CHA) in coordinating the different suppliers and vendors- especially those involved in implementation of the instrumentation and control module. Finally, a serious boiler accident at Beilungang has been taken into account in boiler design and specifications, coal specifications and "check coal" specifications, and intensified coal monitoring. Complementary studies were prepared by the Beneficiary and its consultants on coal sampling and analysis and the methods used were found to conform with international standards by the Bank's mining specialists. 1.46 In power sector restructuring and reform implementation, international experience shows that even in advanced countries with strong legal systems and open economies, the time needed to build consensus on the reform directions, establish a new regulatory framework, and implement structural changes can be very long. In Central and Eastern Europe, hopes for achieving quick progress in economic regulation in the energy sector have not materialized because of the weaknesses of legal systems and the lack of interest of governments in attracting large-scale private investments to meet current and prospective demands.' A comparative study on the progress in power sector reforms in these countries concluded that pursuit of transparency and accountability of energy and other utilities is the best way to achieve progress in economic regulation.2 In Asian economies, the reform effort has met with mixed success. Efforts to encourage private investments have been successful in Pakistan, the Philippines and Thailand, but private- sector initiatives are taking more time to implement than originally expected. Restructuring of the power industry in both regions is cautious. The industry is still mostly vertically integrated and gradually evolving toward the purchasing agency model. Considering China's 40-year history of a command and control economy, the progress achieved during the last decade and especially during the early 1990s, clearly indicates the Government's commitment to reform. However, the difficult transition to market oriented macroeconomic environment, without disruption, will take time and effort because of the size of the system and the complexity of the issues involved. I Jon Stem, "Economic Regulation in Central and Eastern Europe" (paper for Conference on The Regulation of Utilities in Economies in Transition, organized by the National Economic Research Associates on The Regulations of Utilities in Economies in Transition, June 3, 1994). 2 Ibid. - 13 - 2. THE HENAN POWER GRID 2.1 Henan province, where the proposed project is located, is the second-most populous province in China (with 89.5 million in 1994) and is still one of the less developed. In 1994, its per capita gross domestic product (GDP) amounted to less than 70 percent of the national average. The province is nevertheless experiencing remarkable growth-from 1980 to 1994 its GDP increased at an annual average of 10.4 percent, which is 1.2 percent above the national average. In 1994, its industrial output increased by 8.8 percent, despite acute power shortages. Power supply constraints in the area have been overcome by improved power system performance, energy conservation and load management measures. Adequate power supply and increased sector efficiency through further market orientation are crucial for sustained growth in the province. A. THE HENAN POWER SYSTEM 2.2 In 1994, the Henan Power Grid (HPG) had a total installed generating capacity of 8,473 MW, 7,928 MW coal-based and only 545 MW of hydropower (Annex 2.1). The peak load was 7,900 MW and the total electricity supply (including energy exchanges) was 5,405 GWh. Electricity consumption per capita was 560 kWh, about three quarters of the national average. The provincial power sector is plagued by acute shortages: in 1994, load was shed about 84,000 times (more than 240 times a day) and demand during peak time exceeded supply by about 700 MW, 9 percent of the peak demand, despite severe measures to limit power use by industrial consumers. 2.3 Henan's generating facilities include 12 major thermal power plants, one hydropower station, and a number of small captive and other plants. Major power generating plants greater than 50 MW in installed capacity are listed in Annex 2.2. The local and captive power plants total about 2,742 MW in installed capacity. Electricity generated in the province in 1994 amounted to 48,486 GWh, about 71 percent of the total of which was supplied by Electric Power of Hunan (EPH). 2.4 The transmission system in 1994 consisted of 323 km of 500 kV lines, 3,844 km of 220 kV lines, and 7,868 km of 110 kV lines. EPH owns and operates almost all 500 kV, 220 kV, and part of the 110 kV lines. The system also includes transformer substations, with a total capacity of 24,391 MVA (Annex2.3. 2.5 The growth of energy requirements in HPG between 1989 and 1994 is shown in Annex 2.4 and summarized in Table 2.1. HPG's peak demand has increased more rapidly than energy requirements, 10.6 percent on average compared to 8.8 percent. indicating improved supply conditions. The system has a maximum daily load factor of about 87 percent and an annual load factor of 72 percent. The peak load usually occurs in August. - 14- Table 2.1: LOAD GROWTH OF HENAN POWER GRID (HPG) Year Energy requirement (GWh) La Peak demand (MW) 1989 32,735 4,770 1990 33,744 5,000 1991 36,867 5,450 1992 41,889 6,250 1993 45,630 6,850 1994 50,016 7,900 Average annual growth 8.8% 10.6% la On a provincial basis, including generation and purchased energy. 2.6 In 1994, electricity consumption of the HPG amounted to 50,016 GWh; of which industry, 77.2 percent; agriculture, 8.3 percent; residential, commercial and other municipal customers in the cities, 8.62 percent; and the transport/telecommunication sector, 2.8 percent. Energy consumption by consumer categories for HPG in the period 1989-94 is shown in Annex 2A. B. LOAD FORECAST 2.7 The load forecasting is based on the premise that the electricity conservation efforts will be sustained to improve the 1.1 electricity-GNP elasticity factor that was achieved during the last decade. Electricity conservation programs in Henan province saved more than 11 TWh from 1980 to 1993, through technical renovation, adoption of advanced technologies and promotion of efficient end-use equipment, especially Compact Fluorescent Lamps. 2.8 Load forecasts for the years 1994 through 2004 have been developed as part of the economic planning process carried out by EPH. The forecasts were obtained by applying a combination of econometric methods to the total electricity demand; and analytical methods to the major consumer categories' demand. In particular, industrial loads were estimated on the basis of market surveys and projected industrial output growth and electricity intensities for different categories of industry. Rural loads were estimated based on past trends for drainage and irrigation, rural industries loads, and lighting. Municipal loads were estimated based on market surveys of hotels, buildings, and government projects. Specific demand management and energy conservation measures have been fully incorporated in the load forecasts. Details of the energy forecasts for HPG are given in Annex 2.5 and summarized in Table 2.2. - 15 - Table 2.2: LOAD FORECAST FOR HENAN POWER GRID (HPG) La Year Energy requirement (GWh) Peak demand (MW) 1994 (actual) 50,016 7,900 1995 53,000 8,500 1996 58,020 9,000 1997 63,061 9,710 1998 68,331 10,526 1999 74,021 11,414 2000 81,662 12,610 2001 88,948 13,617 2002 96,330 14,703 2003 101,768 15,633 2004 110,215 16,880 Average annual growth 8.3% 7.9% La On a provincial basis. 2.9 The peak demand for the system is projected to increase from 7,900 MW in 1994 to 12,610 MW in 2000, and 16,880 MW in 2004, an average annual growth of 7.9 percent from 1994 to 2004. Electricity supply would increase from 50 TWh in 1994 to 82 TWh in 2000 and 110 TWh in 2004, averaging an annual growth of 8.3 percent over the whole period. C. ROLE OF THE PROJECT IN HENAN PROVINCE 2.10 The proposed project would ease the power shortage in the province, and, as described in the following chapter, will support major institutional and financial reform in the sector with the aim of putting Henan's power sector on a commercial footing. The proposed physical investments include: (a) a generation component to provide reliable and economical electricity supply in Henan and the Central China region, an area which is experiencing strong and sustained economic growth. It will help the region cope with a rapidly growving industrial demand resulting from its opening to the outside world, and will further improve living standards in one of the poorest provinces in China; (b) a transmission component to accommodate the new generation, improve the quality and reliability of supply, and reduce the supply-side losses; and (c) an electricity conservation component to accelerate the implementation of electricity conservation measures by supporting economically and financially viable projects and substituting market incentives for administrative measures to sustain progress in achieving Henan's conservation potential. 2.11 The project overall is expected to have positive environmental benefits compared to available alternatives. The proposed Qinbei power plant (phase I) to be constructed under the project will introduce the first two 600 MW units to efficiently meet base load; the units are designed to meet strict atmospheric emission standards and to minimize other environmental impacts. The new capacity addition will result in reduced use, and in - 16- some case retirement, of older, less efficient and more polluting plants. The net effect will be a large increase in energy generation and a substantial improvement in overall efficiency of the power system, without a substantial increase in air pollution. 2.12 Finally, and as described in Chapter 3, the project will significantly contribute to the provincial power sector reform and to the commercialization and corporatization of EPH, which will remain one of the major operators in the sector. - 17 - 3. THE BENEFICIARY A. LEGAL STATUS AND ORGANIZATION OF EPH 3.1 The beneficiary of the proposed loan is the Electric Power of Henan (EPH), which is one of three closely related provincial power sector entities. The others are the Henan Province Electric Power Bureau (HPEPB) and Henan Province Construction Investment Company (HPCIC). The functions of the three entities can be broadly defined as commercial, regulatory and investment. All three entities have counterparts at prefecture/ municipal and county level-at the regional level, the equivalent bodies are the Central China Electric Power Group Company (CCEPGC), Central China Electric Power Administration (CCEPA), and Central China Electric Power Investment Company (CCEPIC). A more detailed explanation of the power sector structure in Henan Province is given in Annex 3. 1. 3.2 EPH is an independent legal entity possessing the status of a limited liability company. Its charter has been formulated under the Law on Industrial Enterprises, and the State Council's regulation on the "Structural Reformation of Central China Power Network," prior to the promulgation of the new Company Law. EPH's legal status and Charter require revision to conform with the new Company Law, promulgated in December 1994. EPH is an affiliate of CCEPGC. CCEPGC is responsible for coordination, development and operation of the Central China power system comprising power companies in Henan, Hubei, Hunan and Jiangxi Provinces. 3.3 The functions of EPH are outlined in its existing charter. These include construction of power projects and raising of funds from various sources. In practice, EPH obtains investment funds from state, provincial and local governments and through borrowing from local banks and financial institutions. EPH also has the corporate power to issue bonds and shares with the approval of relevant authorities. It has the authority to receive the proceeds of the proposed World Bank loan through the Central Government, to carry out the proposed project, and to enter into a Project Agreement with the World Bank. B. OTHER PROVINCIAL ENTITIES 3.4 EPH was formed from HPEPB, which until 1988 was entrusted by central and provincial governments with overall responsibility for provision of safe, reliable electricity supply throughout the province. Its responsibilities included planning, construction, operation and marketing at the provincial level, as well as administration and regulation of enterprises at the county and municipal level. In 1988, the State Council approved the "Scheme of Power Industry Managerial System Reform," which provided for setting up provincial power companies to take over commercial functions of - 18- the power bureaus. EPH thus became responsible for construction, operation and marketing, while HPEPB retained the administrative and regulatory functions. In practice this separation of functions has still not occurred and the sector is still administered under the policy known as "one entity-two nameplates." Currently, the general manager of EPH is also head of the HPEPB. This requires him and other staff of EPH to exercise several regulatory functions in addition to core management and operational functions. As part of the ongoing power sector reform program in China, the Government is planning to separate the regulatory functions of the Bureau from the Corporation. 3.5 HPCIC is a provincial government-owned enterprise entrusted with management of provincial investments in power facilities. It raises funds from external sources for financing components of EPH's power development program. The most important source of funds administered by HPCIC is the 2 fen/kWh surcharge collected from consumers. HPCIC expects to receive a return/dividend on its investments and interest on its loans. For new power generation, funds are usually pooled with those from other state, municipal or county-level investors to finance "joint investment" projects, constructed, managed and operated by EPH. C. ORGANIZATION AND MANAGEMENT 3.6 EPH's Charter provides for a Board of Directors to manage the company, but to date the Board has not been established. Accordingly, the overall management of EPH is entrusted to a general manager/director (assisted by four deputy directors) appointed by MOEP in consultation and agreement with the Provincial Government and CCEPA. The general manager is the legal representative of the company and responsible for its operations. The exercise of his powers (e.g., hiring and firing of staff and labor) is, however, subject to "relevant state rules and regulations." 3.7 EPH has 49 functional divisions and offices, including 12 power plants, 13 prefecture/municipal power supply enterprises, two construction companies, separate companies for material and fuel supply and seven training institutions. The organization structure is detailed in Chart 2. 3.8 EPH has traditionally had a technically strong and effective management. Current performance indicators for EPH reveal high plant capacity factors (with thermal capacity factors reaching as high as 82 percent in periods of severely constrained supply), with transmission and distribution losses generally less than 6 percent (Annex3.2). EPH prepares accounting information in a timely fashion and operates an effective billing and collection system. However, the company is now in a dynamic growth stage. Over the period 1990-94, EPH revenues trebled from Y 2.6 billion to Y 7.5 billion, and over the period to 2004, they are projected to increase more than sevenfold to Y 51.8 billion. This dramatic growth requires EPH's transformation to a fully corporatized self-sufficient entity and considerable upgrading of its institutional and, most important, financial capabilities. -19- 3.9 As part of the preparatory work for this project, EPH carried out a study to define measures needed to reorganize its operations and further strengthen its management. EPH appointed a task force to carry out this study assisted by international consultants, financed by the Bank. The reform action plan and proposed improvement of management information systems included in this project are based on the recommendations of the study. D. REFORM IMPLEMENTATION PLAN 3.10 A key objective of the proposed project is to assist and facilitate the corporate restructuring of EPH and its affiliated enterprises, promote a more open sector structure, and initiate competition at the generation level. In consultation with the Bank, EPH has prepared and agreed to implement a package of sector and enterprise-related reforms (Annex 3.3), consisting of appropriately sequenced and time-bound actions. The main elements of the implementation plan are as follows: (a) Incorporation of EPH as a Limited Liability Company. EPH will revise its charter to delineate its rights and obligations and develop an adequate corporate governance framework in accordance with the new Company Law. EPH will then be incorporated as a limited liability company (under the new Company Law) within nine months of issuance of necessary State Council regulations on restructuring state-owned enterprises. (b) Separation of Government and Enterprise Functions. An important objective of power sector reform at the provincial level is to separate government ownership and regulatory functions from enterprise operation and management functions. EPH, MOEP and CCEPA agreed to achieve this objective in a two step approach: (i) consolidation of government and regulatory functions (i.e., bureau functions) within one division within EPH no later than June 1996; and (ii) separation of all bureau functions to appropriate national and provincial level authorities in conformance with the regulatory framework established at the national and provincial levels. This separation will be achieved within 9 months of issuance of implementing regulations. (c) Commercialization of Operations. EPH has agreed to streamline its organizational structure and focus on its core businesses by converting profit oriented units into autonomous companies or profit centers and nonprofit oriented ones (social services) into cost centers to be shifted to suitable institutions, pari pasu with the progress of social sector reforms. It was agreed that technical assistance will be provided to EPH under this project to develop and implement an organizational structure and management system consistent with the above objectives and aiming at improving the operational and managerial efficiency of the Company. - 20 - (d) Tariff Reform. EPH is finalizing a tariff reform action plan to achieve the following: (i) tariff increases beginning in 1996 to meet agreed upon financial targets and economically adequate tariffs by 2000; (ii) unification of tariffs by end-1998; and (iii) adjustment of demand charges for industrial customers, and price differentials between different voltage levels to gradually reflect the cost of supply. (e) Power Sector Restructuring. EPH will, in coordination and consultation with higher authorities, implement structural reforms to introduce competition at the generation level, improve contractual arrangements arnongst the different operating entities in the sector, and increase efficiency at the distribution level. To achieve these objectives, EPH agreed to: (i) establish a competitive solicitation program for additional supply and procure, on this basis, at least one generation plant by the end of 1998; (ii) incorporate its generation units (seven state owned power plants) and its development power company into limited liability companies by mid-1996; (iii) establish its 13 supply bureaus as profit centers with transfer prices based on EPH's bulk sale prices by mid-1997; (iv) develop model commercial contracts by mid-1 996; and (v) introduce formal commercial contractual arrangements with other sector entities, such as independent distribution bureaus, IPPs, fuel supply companies, etc. 3.11 In general, the timing of the various steps is more ambitious in areas which EPH generally considers to be within its control, and more cautious in areas where legislative action, or issue of regulations is required, even though such actions are anticipated. 3.12 In the area of regulation, the Electricity Law, which was approved in December 1995, identifies the basic principles for regulation of the electricity supply industry. However, international experience clearly shows that development and/or changes in regulatory frameworks are complicated and slow processes, especially for a country like China where major macroeconomic reforms and decentralization of decision making are being carried out at the same time. Assistance is being provided to the Central Government in carrying out this major effort in the most efficient and comprehensive way (see para. 1.39). 3.13 The pricing policy requires profound changes both at the wholesale and final consumer levels. At the wholesale level, electricity generated from all "new" plants is being priced, on a plant-by-plant basis, at "debt repayment price" levels, allowing for payment of full debt service costs based on a 10-year repayment period after commissioning of new power plants, while electricity generated from "old" power plants (built before 1986) is being sold at prices fixed by the central government. This principle has been effective in promoting alternative financing sources to substitute decreasing budget allocations during recent years but it is not considered to be sustainable in the long term. With the expected coming on line of large numbers of new plants, the 10-year repayment principle would impose an unreasonable burden on EPH's finances over the -21 - next few years but would lead to a much higher level of profits after the tenth year. It is unreasonable to expect consumers to repay, over such a short period, loans which are financing fixed assets which have a life of 2 to 3 times this period. At the consumer level, prices depend on the source (old or new power plants) of the power they purportedly are using. This means that customers in the same service area and with the same consumption characteristics pay different prices. The multitier pricing might have been useful for phasing in higher electricity prices to consumers, but it has become a major impediment for progress towards economic pricing and results in distorted consumption behavior. Unification of consumer tariffs is a priority. 3.14 In the corporatization area, the most urgent requirement is for the determination of the respective ownership rights of the State and Provincial Governments in the fixed assets of EPH and its affiliated enterprises. While China operated under a centrally planned economy, all fixed assets belonged to the State and enterprises were entrusted with the responsibility for their maintenance and use. There was no concept of ownership in the legal sense. All fixed assets were financed up to 1985 from budget allocations but since then, China has progressively moved towards loan financing, and since 1988 other investors (provincial and local governments and HIPDC) have been investing in EPH assets. In order to track the interests of the respective owners, and since ownership of "state" assets had not been determined, separate records have had to be maintained for various classes of assets and owners. Resolution of the ownership interests in EPH and affiliated enterprises is dependent on the issuance of State Council implementing guidelines for the restructuring of state-owned enterprises. Issuance of these guidelines has been delayed because of conflicting interests of the numerous parties involved in power sector development. 3.15 The project includes a comprehensive technical assistance component to assist EPH with all aspects of its reform efforts: (a) an institutional strengthening component directed at organizational restructuring and modernization of its financial management and administrative practices (AnnexJ.4); (b) a comprehensive package of legal services to assist in corporatization, and preparation of the necessary contractual documents for sector restructuring (AnnxJ3.5); and (c) assistance in developing an appropriate tariff structure and transition plan to achieve the agreed financial targets (Annex3.). Training is included in all of the above technical assistance packages. Assurances were obtained from EPH during negotiations that it would engage by June 1996 consultants to assist in the review of its organization and management system, furnish the results and recommendations of such reviews to the Bank by March 1, 1998, and thereafter implement the recommended organizational improvements and accounting andfinancial management systems, taking into account Bank comments. 3.16 EPH has established a working group comprising senior officials of the company to manage the reform process, and its implementation is well underway. The program is being supported by MOEP, CCEPAB and the Henan Provincial Government. Assurances - 22 - were obtained from EPH during negotiations that it would carry out the Reform Implementation Plan according to the timetable agreed with the Bank (Annex3.). E. STAFFING AND TRAINING 3.17 As of December 31, 1994, the company had a total staff of 53,384, of which about 21.8 percent were engineers and technicians, 6.7 percent administrative staff and 71.5 percent workers, including skilled and unskilled, apprentices and others. Except for the core group of key technical and managerial personnel who are assigned by the State, almost all of EPH's employees are recruited locally. Most of the employees are hired under contracts based on their skills and training. Details of EPH's staffing are shown in Annex 3.7. 3.18 EPH runs technical schools at Zhengzhou and Nanyang for skilled workers, a management school for economists and two universities at Zhengzhou. There were 985 teaching and administrative staff in these training and educational centers, which had a total enrollment of 4,848 students in 1994 (details in Anne.8A). This training capacity is basically sufficient to meet EPH's long-term needs. However, the skills of teaching staff and quality of teaching facilities are being improved and modernized. Training is being designed to improve professional skills of staff engaged in planning, financial, personnel, project construction and operational management areas. The proposed project would support the EPH training program over a four-year period, financing foreign costs of instructors, study tours and upgrading and equipping training facilities. F. PLANNING, BUDGETING AND CONTROL 3.19 Power bureaus and companies are responsible for developing annual and five-year production and investment plans which are integrated into the national plans and are approved, through MOEP's auspices, by SPC. In the past, financial planning was confined to attaching monetary values, predetermined by MOEP, to the power production being planned. Although a power bureau's plan might be revised to reflect changes, it would ordinarily not be revised to reflect differences between estimated prices and actual prices. However, with the economic changes in the 1980s, prices have begun to move toward market levels and the Government now finances investments through loans rather than grants. Centralized control is being relaxed and replaced by greater financial autonomy and responsibilities for the power entities. To address these changes, EPH will need to adjust its planning system to include modem financial planning. 3.20 MOEP recognizes the importance of financial management in the power sector in China and is promoting relevant training programs for all the power institutions under its control. Many of the power bureaus/companies, including EPH, have been equipped with personal computers and software for planning, budgeting, and accounting functions. Information from the bureaus/companies can be transferred to MOEP and consolidated into regional and national data. - 23 - 3.21 These systems represent a good first generation of automated management information; however, they still are not sufficient and integrated as a network to promptly provide financial and related statistical information about a power entity's operations to the various management levels, supplying each level with the necessary details at the appropriate times. With EPH's rapid growth and commercialization, it is also necessary for it to introduce an accounting and financial management system that will: (a) enable managers to be held accountable for costs of activities and functions over which they have control; (b) provide information for comparative analysis of actual costs with budgets for decision making; and (c) provide transparency of information for investors, government, lenders, and the public in general. The proposed project would include a technical assistance component to support EPH in establishing a new organizational structure and appropriate systems and procedures to upgrade its budgeting and financial accounting systems, including provision of software and hardware, as well as enhancement of its staff skills. The terms of reference for the proposed study under this project is presented in Annex 3.4. G. ACCOUNTING 3.22 EPH followed until recently a uniform enterprise accounting system and detailed regulations established by the Ministry of Finance (MOF) which were developed in the context of a highly centralized, planned economy. Recently, as part of China's efforts to speed the transition to a market-oriented economy and improve the financial management of enterprises, new regulations covering accounting rules and financial affairs were introduced by MOF on July 1, 1993. These revised accounting principles are generally consistent with those of international accounting standards. Within this broad framework, specific accounting standards will be developed with the assistance of the Bank Group for all Chinese enterprises under the Financial Sector Technical Assistance Project (Credit 2423-CHA). 3.23 While EPH has made good progress in implementing the new system, there are still some areas where its accounting practices are not in accordance with international practice. For example, EPH did not include the construction work in progress in the accounts for 1994's financial statements due to the absence of specific accounting standards and regulations which remain to be issued by MOF. Agreement to help make further changes to regularize EPH's accounting and financial practices is therefore included in the technical assistance component (para. 3.15). H. Audit External Audit 3.24 The State Audit Administration (SAA) was established in 1983 and given the status of a ministry reporting directly to the State Council. In addition, provincial audit bureaus have been established in each province and large municipality. The audit regulations and standards prepared by MOF are based on international auditing practices and were promulgated by the State Council on October 21, 1988. Audits of Bank- - 24 - financed projects have been conducted by SAA's Foreign Investment Audit Bureau or one of the Provincial Audit Bureaus (PAB) under its guidance. SAA and PABs have been receiving training through an IDA-financed Technical Assistance Credit. 3.25 Under the proposed project, EPH's accounts will continued to be audited by Henan Provincial Audit Bureau (to be confirmed during negotiations) under the supervision of SAA. This arrangement is satisfactory. Assurances were obtainedfrom EPH that it would: (a) maintain and provide to the Bank semiannual progress reports with unaudited project accounts to reflect project expenditures for the period under report compared with the original project cost estimate; (b) furnish the Bank with the audited accounts for the project, statements of expenditures, and financial statements of EPH within six months of the end of each fiscal year; (c) implement any changes to its accounting practices as recommended by its financial management consultants to meet international accounting standards; and (d) require its auditors to comply with international auditing practices and provide audit plans prior to each audit. For the FY95 audited financial statements, the auditors will provide: (a) their audit plan; (b) a summary of the effects of accounting changes arising from the adoption of new MOF regulations and corrections of any deviations from MOF regulations as interpreted with reference to international accounting standards and practices; and (c) a management letter summarizing any significant matters that may have arisen during the conduct of the audit. Internal Audit 3.26 EPH established an internal auditing section (staffed with qualified accountants) in 1986, which periodically examines the accounts of each operating unit. The objective of these examinations is primarily to test for accuracy and compliance with MOF regulations. The section will serve as liaison between external auditors and the project entity. I. TARIFFS 3.27 Power pricing in Henan Province, as in other parts of China, underwent major evolution during recent years. The current situation is detailed in Annex 3.9, and is summarized here. As the economy moved to free markets, a multitier pricing system was adopted. Power produced by plants financed by central government budget allocations (prior to about 1985), and allocated through the old "in-plan quota" system, is sold at catalog prices (first tier) which are established by MOEP and approved by SPC. These are adjusted periodically to reflect increases in the costs of fuel and fuel transportation, and, more recently, debt service costs. Electricity sold from power plants financed by joint investments from State, Provincial and Local Governments is sold at "out of plan" prices, referred to as the "guidance" price (second tier) based on full cost recovery including debt repayment over 10 years and providing a reasonable return on investment. In some provinces, power taken by consumers in excess of the quotas is priced about - 25 - 50 percent higher than the state catalog price (third tier). The guidance prices are established by the provincial utilities and approved by the provincial power bureaus. 3.28 The state catalog prices, which used to be artificially low at about 6.5 fen/kWh until 1985, have been gradually increased to an average of 16.5 to 18 fen/kWh for agriculture, 22 fen/kWh for residential consumers, 22 to 23 fen/kWh for commercial users and small industries, and finally 16.5 to 18 fen/kWh for medium and large industries. 3.29 The guidance price is established annually based on the supply cost of out of plan power. Out of plan power is provided by power plants financed by provincial and local governments, independent power producers, and state plants above and beyond their planned production. In Henan, the collective fund price averaged, in 1994, 25.2 fenlkWh. This is expected to increase to about 29.7 fen/kWh by the end of 1995. 3.30 A variety of additional fees are added to the prices charged to consumers. With the exception of a new 0.45 fen/kWh levy on all consumers throughout the country to help finance the Three Gorges Hydroelectric project, these charges are levied by provincial and local governments. In Henan Province, power sales to commercial and industrial users are subject to a 2 fen/kWh surcharge for a Provincial Power Construction Fund. Some other fees are earmarked to cover a part of local distribution costs or street lighting. However, average prices to final consumers remain lower than the long-run marginal cost (LRMC). 3.31 The operation of the above multitier pricing system has proved to be useful for phasing in higher prices to consumers and in creating a situation through which investment decisions can be based on market prices. Now, since the difference between the state catalog and the guidance prices has narrowed, EPH intends to begin the unification of its pricing system in 1996, and complete it by offering uniform tariffs to all customers of similar categories in 1998. This would be a major step in rationalizing the pricing system in Henan. A task force to plan this process, comprising officials of EPH and the Provincial Pricing Bureau, has discussed its tariff reform plan with the Beijing Economic Research Institute (BERI), SPC and MOEP. At negotiations, the Bank agreed with EPH and the Government on an action plan and timetable for unifying EPH's tariffs and establishing a suitable formula for adjusting the level of rates which would enable it to meet the financial performance targets to be agreed under the proposed loan (para. 5.12.). This would require an increase of about 4.0 percent in real terms over the period 1995 to 2004 (para. 5.16). Rate structure improvements were also made in 1994 by introducing time-of-the-day tariffs for bulk and large retail consumers. Peak rates are twice off-peak rates for bulk supply customers and three times off-peak rates for retail consumers, which limits administrative interference and introduces economic incentives for load management, at the demand side. - 26 - J. BILLING AND COLLECTIONS 3.32 As of December 31, 1994, electricity consumption in Henan Province, distributed according to the consumer categories, is shown in Table 3.1. Details of the sales and average price by category of consumers are given in Annex 3.9. Table 3.1: ELECTRICITY CONSUMPTION IN HENAN PROVINCE (1994) Customer category Consumption (GWh) Percent Agriculture 4,152 8.3 Industry 38,975 77.93 Transportation & communications 1,407 2.81 Commercial 592 1.18 Residential load 3,719 7.44 Others 1,171 2.34 IQTa 50016 100.00 3.33 EPH conducts its billing and collection activities through 13 power supply units. All major industrial consumers receiving supply over 320 kVA are charged in advance three times per month at approximate 10-day intervals. The last two bills, rendered on about the sixteenth and twenty-fifth days of the month, are based on estimated usage derived from the consumer's contractual power consumption. The first bill, rendered on about the sixth day of the month, is also based on estimated usage but includes an adjustment to reflect the previous month's actual usage as computed from a meter reading. All other customers are billed once a month based on actual usage. 3.34 Industrial commercial and bulk consumers pay their bills through direct debit from their bank accounts. Urban residential and low voltage agricultural consumers receiving power directly from EPH render payments to local branches of the National Bank. Payment is due within five days of receipt of the bill. Regulations stipulate that consumers who do not pay within this period are to be charged a fine of 0.03 percent per day of delay on the unpaid bill, and that after several notices those who still refuse to pay their bills are disconnected. These billing and collection arrangements have established a reliable cash flow from sales. - 27 - 4. THE PROJECT A. PROJECT OBJECTIVES 4.1 The main objectives of the project are to: (a) reduce the acute power shortages and foster integrated development of the power system of Henan Province in the most cost-effective and environmentally sound manner; (b) support adequate implementation of power sector and power enterprise reforms and accelerate the transition of the Electric Power of Henan to a legally and financially autonomous and business-oriented company, in line with the recently enacted Company Law; (c) assist in transferring new power technologies and in applying modem power operation/maintenance methods; (d) support improvements in the efficiency of electricity use; and (e) contribute to rationalization of power tariffs. During project preparation, the Beneficiary demonstrated full commitment to these objectives and assisted in identifying performance indicators and critical success factors to ensure the effective monitoring of project implementation and achievement of the agreed objectives, and for recognition of potential problems during supervision (cf. Section I of the present chapter). B. PROJECT DESCRIPTION 4.2 The project team worked in close coordination with the Asian Development Bank (ADB), which is also financing a thermal power project in Henan, to avoid duplication and ensure complementary objectives between the two projects. It has been agreed that the proposed project focuses mainly on tariff and power sector reform and the ADB project includes greater focus on environmental control at the provincial level through improvements in environmental monitoring and enforcement, and closure of small industrial boilers and small inefficient power plants (see Box 4.1). Therefore, the proposed project includes investment, power sector reform, electricity conservation pilot projects, and institutional development components as follows: (a) construction of two 600-MW coal-fired thermal power units and associated equipment and facilities, including, for the first time in China, an online performance monitoring system to increase plant performance, reduce coal consumption and gradually introduce innovative maintenance techniques; (b) erection of two 165 km 500-kV transmission lines to connect the power plant to the existing power transmission network; (c) services to assist the beneficiary in engineering, procurement and construction supervision; - 28 - (d) a technical assistance package to support the implementation of the power sector reform action plan described in paras. 3.10-3.16; Box 4. 1: PROPOSED ADB HENAN POWER PROJECT Part A: First stage of the new Yuzhou Coal-Fired Power Station including ash disposal yards, access roads, railway extension, water pipelines, and 250 circuit-km of 220 kV transmission reinforcement with costing based on 350 MW units and international competitive bidding based on 300-350 MW series; Part B: Cogeneration Plan including (B1) conversion of small Yuzhou City 2x6 MW plant, thereby allowing the closure of 10 industrial boilers in Yuzhou City; and (B2) construction of new 2x142 MW cogeneration station in Luoyang, thereby allowing the closure of an additional 146 industrial and 113 residential boilers; Part C: Closure of 21 inefficient, polluting and aging generating units from four power stations located in Zhengzhou, Luoyang and Jiaozuo with total capacity 307 MW and their replacement by more efficient capacity created under the Project; Part D: Development of greening in public areas and forestry plantations and orchards in and around Yuzhou City over a five-year period involving the planting of about 275 million trees such that the reforestation rate for Yuzhou City will be improved from 16.5 to 20 percent. This program is in addition to project-specific green belts associated with Part A above. Improving Environmental Monitoring and Enforcement in Henan Province. The objectives of the TA are to: (a) strengthen the capability of both the Yuzhou Environmental Protection Bureau (YEPB) and EPH Yuzhou Power Station Environmental Protection Unit in monitoring and enforcing environmental rules and regulations; (b) improve the capability of EPH and YEPB to monitor coal quality and EPH to enforce a system of bonuses and penalties, thereby inducing the mines to deliver good-quality coal; and (c) update the mines on current practices and technologies to upgrade their product quality. Although EPH would be the Executing Agency, the main focus of the TA will be on improving the monitoring and enforcement capabilities of YEPB and EPH Yuzhou Power Station Environmental Protection Unit. The TA will be implemented over a calendar period of four months by a team of individual international and local consultants specializing in environmental management and clean coal technology, including coal sampling and analysis. Source: Excerpt from the ADB Project Report (published with the authorization of the Chinese government). (e) an electricity conservation component to support EPH's efforts in improving demand side efficiency through market incentives rather than administrative means; and (f) technical assistance, consulting services and training programs to build the beneficiary's capabilities in power system operation and management practices. - 29 - 4.3 The two generation units to be constructed under the proposed project consist of subcritical, drum-type boilers with low NO, burners, single shaft condensing turbines and 600 MW generators. They share a single 240-m stack. The plant's design coal is a blend in the ratio of 1 part bituminous, 2 parts lean, and 1 part washed middlings, having an aggregate sulfur and ash content of 0.41 percent and 24.95 percent, respectively. Emission controls consist of electrostatic precipitators with an efficiency of 99.6 percent for removal of dust from the gas emissions. The plant will also include an online monitoring system to maximize efficiency and reduce coal consumption and provide useful data for preventive maintenance (see Annx 4.1). 4.4 Two 165 km 500-kV transmission lines and two 750 MVA transformers will connect the plant to the existing power system. The lines will be supported by a total of 408 steel towers of the guyed V-type, 38 m total height and 28 m width. The existing towers of the Yellow River crossing are 114 m total height (see Annex 4.1). Electricity Conservation Component 4.5 As part of the preparation of the proposed project, EPH carried out, with the assistance of BERI, an integrated resource planning exercise. The study, Electricity Conservation in Henan Province, highlighted the economic benefits of electricity conservation investments and showed that the implementation of an aggressive electricity conservation program could alleviate electricity shortages and reduce the required generation capacity by 1,200 MW over the next seven years. It also indicated that, over the same period, coal consumption for power generation could be reduced by 10 million tons. The potential and identified technologies were reviewed and confirmed by international consultants during appraisal. 4.6 According to the prevailing Chinese administrative regulations, only the provincial "Three Electricity Office" is mandated to implement social electricity conservation (outside the power sector) projects. However, given EPH's strong interest in electricity conservation, it was discussed and agreed to include in the proposed project a $ 10 million loan component to: (a) develop pilot/demonstration projects aimed at reducing electricity consumption through introduction of state-of-the-art technologies such as variable speed motor control systems; low loss transformers, high efficiency welding machines, etc.; (b) implement a pilot/demonstration project of power loss reduction in the urban distribution system; (c) demonstrate the viability of innovative commercially-based contractual and financing mechanisms; and - 30 - (d) develop adequate monitoring procedures and test new and market-oriented approaches, especially performance contracting and leasing, to speed up the implementation of electricity conservation projects. 4.7 EPH initiated the selection of the projects to be included in the electricity conservation component according to the following principles: financial and economic profitability, measurability, technical innovation and replicability. Annex 4.2 summarizes: (a) the ongoing electricity conservation program in Henan, (b) the principles and criteria that guided the selection and would guide the implementation of the conservation project; and (c) a concise description and cost estimate of the projects to be undertaken under this component, a costibenefit analysis of the selected projects, and a time-bound two-year implementation plan. Project Design and Consulting Services 4.8 The project feasibility study and design report were completed by the Northwest Electric Power Design Institute (NWEPDI) in 1993, and revised in September 1994. The project was approved by SPC in 1992. Following the Bank's Guidelines, international engineering consultants are being selected to assist in finalizing designs, procurement of goods and works, and construction management (Annex A43). Funding in the amount of $2.45 million out of the China Reform, Institutional Support and Preinvestment Project- CRISPP (Credit 2447-CHA) has been approved for engineering and preparation of the project. A first version of the Environmental Impact Assessment Report (EIAR) was prepared in 1993 by NWEPDI. The report was revised with the assistance of international consultants to conform with the Chinese and Bank environmental procedures and guidelines for thermal power projects and finalized in April 1995. The EIAR has been approved by all Government authorities, and its summary was distributed to the Executive Directors on May 1, 1995. The overall project concept and design is satisfactory. Management Development and Training 4.9 To meet EPH's long-term staffing requirements and to further develop EPH's management capability, a comprehensive training program is included under the proposed project. It consists of the following: (a) training in utility management and financial planning; (b) project-related training for technical staff; and (c) upgrading of and equipment for EPH's training facilities. It is estimated that 394 staff in various fields, totaling 863 staff-months, will be trained abroad and in China (see Annex4.4A). Assurances were obtained from EPH that it would carry out the management development and training program as agreed with the Bank. C. COST ESTIMATE 4.10 The total cost of the project is estimated at $1,161.1 million equivalent, excluding interest during construction (IDC), of which $497.4 million (43 percent) represents the foreign exchange component. Table 4.1 provides a summary of the project cost - 31 - breakdown. The cost estimates reflect mid-1995 prices and are based on the recent tendering information available for similar projects, including prices for major generating equipment and control systems. Physical contingencies are calculated at 10 percent for preparatory and other works, local cost of equipment and services, and 5 percent for the costs of plant equipment and materials, and transmission facilities. Price-contingency allowances for foreign costs estimated in US dollars are calculated according to anticipated international price increases of 2.4 percent a year on average for the period 1996-2002 and 4.5 percent for 1995. The price escalation for costs expressed in local currency is calculated according to projected domestic inflation rates of 14.0 percent for 1995, 10.5 percent for 1996, 8.5 percent for 1997, 7.0 percent for 1998 and 6.5 percent for 1999 and 6.2 percent for 2000-03. The exchange rate used in the cost estimate was Y 8.43 for $1. Table 4.1: SUMMARY OF PROJECT COSTS Foreign Local Foreign Total Local Foreign Total as % of ----(Y million) ---------- --------($ million)--------- Total Preparatory Works 93.1 0.0 93.1 11.0 0.0 11.0 0.0 Land Acquisition 65.9 0.0 65.9 7.8 0.0 7.8 0.0 Civil Works 811.1 0.0 811.1 96.2 0.0 96.2 0.0 Erection 379.1 0.0 379.1 54.5 0.0 54.5 0.0 Administration 126.7 0.0 126.7 15.0 0.0 15.0 0.0 Plant Equipment and Materials 605.2 3,282.7 3,887.9 71.8 389.4 461.2 84.4 Transmission system 1,302.1 186.3 1,488.4 154.5 22.1 176.6 12.5 Engineering Scrvices 107.1 31.2 138.3 12.7 3.7 16.4 22.6 Environmental Protection 0.5 5.9 6.4 0.1 0.7 0.8 92.1 Technical Assistance & Studies 2.8 38.8 41.6 0.3 4.6 4.9 93.3 Training 15.1 23.6 38.7 1.8 2.8 4.6 61.0 Electricity Conservation Project 84.3 84.3 168.6 10.0 10.0 20.0 50.0 Total Base Cost 3.50 3.652.8 7,245.7 4262 433I 3 59. 50Q4 Contingencies Physical 350.9 175.3 526.2 41.6 20.8 62.4 33.3 Price 1,426.6 1,425.8 2,852.4 43.6 43.3 86.9 49.8 Import Duties and VAT 1,283.4 0.0 1,283.4 152.2 0.0 152.2 0.0 TotalProjectCost 6.653.8 5I2539 11,907.7 6637 49.4 1.161.1 428 InterestDuringConstruction/. 1,391.1 718.2 2,109.3 165.0 85.2 250.2 34.1 Total Financing Required 8,044.9 5,972.1 14,017.0 82&7 582.6 1411.3 41. /A Interest during construction (IDC) is based on onlending rates for projected disbursements of loan proceeds. The foreign currency portion of IDC is based on the Bank's variable loan rate and the projected rates for commercial financing. - 32 - D. FINANCING PLAN 4.11 The total financing requirements (including IDC of $250.2 million equivalent), are estimated at $1,411.3 million equivalent. Central China Electric Power Group Company CCEPGC (50 percent), Henan Provincial Construction and Investment Company (HPCIC) (30 percent), and EPH (20 percent) will cover the financing of the local cost and IDC. The loans provided by CCEPG and HPCIC will have a variable interest rate (currently 15.1 percent a year) and 11 years maturity, including 3 years' grace. Fifteen percent of the total cost will be provided by CCEPG and HPCIC in the form of convertible loans, which can be converted to equity contributions to the new company if the financiers decide to establish a limited liability company for the project later. The local financial arrangements are acceptable to the Bank. 4.12 The foreign cost for the project estimated at $497.4, excluding IDC of $85.2 million, will be covered by the proposed loan of $440 million, a credit of $2.45 million under CRISPP from the Bank and a cofinancing program of about $55 million from international commercial lenders. Details of the financing plan are summarized in Table 4.2. The Bank loan will be used to finance the following project items: (a) major power plant equipment, including boilers, turbine-generators, and instrumentation and control islands; (b) 500-kV substation equipment; (c) construction equipment and materials; (d) consulting services for engineering and construction management; (e) environmental management program; (f) organizational restructuring and development of accounting and financial management systems; and (g) management development and training; and (h) part of the electricity conservation equipment. - 33 - Table 4.2: FINANCING PLAN FOR THE PROJECT ($ million equivalent) Local cost Foreign cost Total cost Central China Electric Power Group Company 414.4 42.6 457.0 Henan Province Construction Investment Company 248.6 25.6 274.2 Electric Power of Henan 165.7 17.0 182.7 Cofinancing 0.0 55.0 55.0 IBRD 0.0 440.0 440.0 IDA 0.0 2.4 2.4 ITotl 8287 582 141 4.13 The proposed Bank loan will be made to the People's Republic of China at the Bank's standard variable interest rate for a 20-year term, including 5 years' grace. Proceeds of the loan would be onlent from the Government to EPH with Henan Provincial Government's guarantee at the same terms as the Bank loan. Assurances were obtained from the Government that it would onlend the proceeds of the proposed Bank loan to EPH under a subsidiary loan agreement with a term of 20 years, including a 5- year grace period, at the Bank's standard variable interest rate. EPH will bear the foreign exchange risk. Execution of the subsidiary loan agreement between the Government and EPH by the State Council will be a condition of effectiveness for the loan. 4.14 The foreign costs gap will be covered by commercial cofinancing of $55 million equivalent which consists of two tranches: a $30 million Eurodollar syndicated loan (Dollar loan), and a Yen 2.5 billion ($25 million equivalent) private placement (Yen loan). Under the cofinancing scheme, commercial lenders are providing funds with a final maturity of 15 years to China, represented by the Ministry of Finance. The proceeds will be onlent by the MOF on the same terms to the beneficiary, EPH. MOF conducted price inquiry for the financing in October 1995 with financial institutions that indicated interest during earlier market soundings and awarded conditional mandate to: (a) a group of six commercial banks for the Dollar loan; and (b) a life insurance company for the Yen loan. The mandated interest rates for the Dollar loan and the Yen loan are 0.43 and 0.30 percent per year, respectively, over the relevant 6-month LIBOR. These terms, achieved with a comfort of cofinancing arrangement, are very favorable for the final maturity of 15 years, including 5-year grace period. They are below the average pricing of commercial bank borrowing (about LIBOR+0.5-0.6 percent) by Chinese sovereign entities for a much shorter maturity of five to seven years. E. PROCUREMENT 4.15 Procurement arrangements and the related procurement schedules for various packages are given in Annex 4.5. The Bank's Procurement Guidelines (January 1995 - 34 - version) will be applied to all Bank-financed procurement. The Bank loan will be largely disbursed against plant equipment and materials, and major equipment contracts for transmission systems through international competitive bidding (ICB). Five contracts amounting to about $10 million in total for consulting services covering environmental studies, engineering and construction management, organizational restructuring and financial management systems, legal framework, and tariff studies will be awarded in accordance with Bank Guidelines for Use of Consultants. Some specialized equipment estimated to cost less than $300,000 per contract up to an aggregate amount of $6 million and which can only be purchased from a limited number of suppliers, regardless of the cost thereof, will be procured through limited international bidding (LIB). Goods, instruments and accessories needed for construction and operation of the power plant, including equipment for environmental monitoring and training, which are readily available off-the-shelf or are standard specification commodities, and which are estimated to cost less than $300,000 per contract up to an aggregate amount of $2.5 million, will be procured through contracts awarded on the basis of international shopping procedures for up to an aggregate amount not to exceed $2 million or national shopping procedures for up to an aggregate amount not to exceed $0.5 million. Goods of a proprietary nature may be procured through direct contracting with the Bank's prior agreement up to an aggregate amount not to exceed $0.5 million. For the Electricity Conservation Component, equipment for distribution loss reduction and high-efficiency transformers will be procured through ICB. International and national shopping will be applied to miscellaneous equipment, and technical services. 4.16 Because of foreign exchange limitations, civil works (fully locally financed) and non-Bank-financed equipment will be procured locally through competitive bidding procedures acceptable to the Bank, particularly for 220 kV transmission and substation components, where local contractors and suppliers are fully capable and very competitive. The procurement procedures for non-Bank-financed components will not adversely affect the execution of the project in terms of cost, quality or completion time. 4.17 In ICB procurement, model bidding documents developed in consultation with the Bank would be used, and goods and components of goods manufactured in China would be eligible for a 15 percent (or import duties, whichever is less) preference in bid evaluation. The proposed procurement arrangements are summarized in Table 4.3. 4.18 Prior review would apply to all Bank-financed contracts for goods, with an estimated cost of $5 million equivalent or above (about 94 percent of the loan). Prior review would also apply to the first three contracts under $5 million. Other contracts would be subject to selective post-award review. Prior review would also be required for all consultancy contracts with an estimated cost exceeding $50,000 for individuals, or $100,000 for firms. Exceptions to prior review would not apply to the terms of reference for all consultancy contracts and single-source selection of consulting firms. - 35 - Table 4.3: SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS ($ million) Total Proposed Method project Project item ICB Other La NBF L costs Works Preparatory works - - 12.5 12.5 Land acquisition & resettlement - - 8.9 8.9 Civil works - - 114.0 114.0 Erection works - - 54.8 54.8 Administration - - 18.2 18.2 Goods Plant equipment and materials 576.9 18.0 85.8 680.7 (384.4) (9.0) - (393.4) Transmission system equipment 31.4 - 189.0 220.4 (25.8) - - (25.8) Services Engineering services - 19.2 - 19.2L - (3.9) - (3.9) Environmental program - 1.2 - 1.2 - (0.8) - (0.8) Technical Assistance and Studies - 5.8 - 5.8L/ - (5.3) - (5.3) Training - 5.4 - 5.4 - (3.2) - (3.2) Electricity Conservation Project 5.0 5.0 10.0 20.0 (5.0) (5.0) - (10.0) Total 613 3 54.6 4922 1,161.1 IBRD Loan (415.2) (27.2) - (442.4)L Commercial loan 46.0 9.0 - 55.0 La Other procurement includes LIB, international and national shopping, direct contracting, and consultancy services. Lb NBF = Not Bank Financed. L Includes the CRISPP-related financing. Note: Figures in parentheses are the amounts financed by the Bank. - 36 - F. PROJECT IMPLEMENTATION 4.19 EPH will be responsible for project implementation and operation. A specialized construction unit has been established to manage site construction activities. Its organizational structure is shown in Chart 3. Preparatory works including access roads and construction power supply started in January 1995 and have been progressing satisfactorily. The bidding documents for the procurement of the main boiler and turbine- generator packages are scheduled to be issued in January 1996 to be opened in April 1996. The commercial operation of the first generating unit is expected in end-March 2001 and the second unit by the end of December 2001. Thus, the project completion date would be December 30, 2002 and the closing date of the Bank loan would be June 30, 2003. Chart 4 presents the implementation schedule for the various components of the project. Furthermore, key dates of project implementation are given in Annex 4.6, and estimated annual contractual and other payments are summarized Table 4.4. Table 4.4: IMPLEMENTATION SCHEDULE: ESTIMATED ANNUAL CONTRACTUAL AND OTHER PAYMENTS ($ million equivalent) Total 1995 1996 1997 1998 1999 2000 2001 2002 payment Remarks before Works Preparatory works 6.1 3.1 1.3 1.3 0.7 0.0 0.0 0.0 12.5 NBF Land acquisition & Resettlement 3.2 1.8 2.1 1.8 0.0 0.0 0.0 0.0 8.9 NBF Civil works 3.2 27.4 30.3 23.0 11.8 6.0 6.2 6.3 114.0 NBF, NCB Erection 0.0 2.6 5.2 13.4 16.5 8.4 5.8 2.9 54.8 NBF Construction management 0.8 0.9 1.8 4.5 4.6 2.8 1.9 1.0 18.2 NBF Goods Plantequipment&materials 0.7 51.7 52.1 264.2 237.5 17.8 28.9 27.8 680.7 ICB,Other - (22.4) (9.7) (158.1) (155.6) (7.8) (19.6) (20.2) (393.4) NCB Transmission system 0.0 0.0 21.1 43.0 77.0 56.3 23.0 0.0 220.4 ICB, NCB - - (2.5) (5.0) (9.0) (6.6) (2.7) - (25.8) Services Engineering services 3.1 3.0 2.2 3.8 3.9 1.6 1.6 0.0 19.2 Other (2.4) (1.6) 0.0 0.0 - - - (3.9) Environmental protection 0.0 0.0 0.1 0.4 0.4 0.1 0.0 0.0 1.2 Other - 0.0 (0.1) (0.3) (0.3) - - (0.8) Technical Assistance - 0.1 0.6 2.2 2.1 0.6 0.0 0.0 5.8 Other 0.0 (0.5) (2.1) (2.1) (0.5) 0.0 0.0 (5.3) Training 0.1 0.2 0.7 1.9 1.7 0.5 0.1 0.0 5.4 Other - 0.0 (0.3) (1.3) (1.3) (0.3) 0.0 0.0 (3.2) Electricity Conservation Project - 0.0 20.0 - - - - 20.0 NBF, ICB & - 0.0 (10.0) - - - (10.0) Other Iotal 1.2 2J 1U3 A 359. 36A 24 67 L 1J161 (IBRD & IDA) (2.4) (24.0) (23.0) (166.8) (168.4) (15.4) (22.2) (20.2) (442.4) (Cofinancing) - 12.5 12.5 20.0 10.0 - - - 55.0 G. DISBURSEMENT 4.20 The Bank loan will be disbursed against: (a) 100 percent of the foreign expenditures for directly imported equipment and materials quoted on a c.i.f. basis; - 37 - (b) 100 percent of local expenditures ex-factory for locally manufactured items, and 75 percent of local expenditures for other items procured locally; and (c) 100 percent of the expenditure for consulting services and training. For expenditures pertaining to goods contracts valued at less than $5,000,000 (except for the first three such contracts), consultancy contracts valued at less than $100,000 for firms and $50,000 for individuals and all training, reimbursement will be made on the basis of Statements of Expenditures. Supporting documents need not be submitted to the Bank but will be retained in the EPH office for review by Bank supervision missions. To facilitate disbursements under this project, a Special Account will be established with an authorized allocation of $15 million, representing approximately four months of average project disbursements. Applications for replenishment will be submitted monthly or when the amounts withdrawn equal 50 percent of the initial deposit, whichever comes sooner. Annex 4.7 presents the disbursement schedule for the proposed Bank loan as well as a standard profile of disbursements for all sectors in China. The disbursements are expected to be completed in six years, very close to the standard disbursement profile for China. The last year is for payment of retention money. H. ENVIRONMENTAL CONSIDERATIONS AND RESETTLEMENT 4.21 In accordance with OD 4.01 (Environmental Assessment), the project has been assigned to Category A. The Environmental Assessment (EA), prepared with the assistance of international consultants specializing in environmental issues related to thermal power plants, has been approved by the Environmental Protection Bureau of Henan Province and the National Environmental Protection Agency. The EA has been reviewed by the World Bank; it is considered that all environmental aspects of the project are satisfactorily addressed and in compliance with all Chinese and World Bank environmental regulations, policies and procedures. The project has been designed and will be carried out in accordance with modem concepts of environmental management. Consequently, the project should cause minimum disturbance to the environment. A monitoring program will be incorporated to ascertain and verify these conclusions on a sustained basis. 4.22 The project is a greenfield operation located in a semirural agricultural area of Jiyuan municipality in the northwestern part of Henan Province, about 17 km to the northwest of Jiyuan city. Alternative locations for the power plant had been considered. The selected site for the power plant, at the foot of Taihang and Wangwushan mountains, received the highest environmental ranking. It uses land that is currently uninhabited, too poor for cultivation and offers the best possibilities for dispersion of flue gases, thus avoiding relocation of population and providing the smallest impact on the natural and human environment. It will require acquisition of a total of 290 ha of land, of which only 14 ha, required by the transmission line, are cultivated. The construction of the transmission lines and substations will require very limited relocation of population unless routing changes will be required due to unidentified technical and/or soil problems. A land acquisition and relocation document (LARP-I) defining the resettlement policies, planning principles, institutional arrangements and design criteria - 38 - for the estimated maximum resettlement that could be caused by the project, was prepared by EPH (Annax4.8A). It was agreed that EPH will: (a) carry out the environmental management program in a manner satisfactory to the Bank; (b) prepare a final Land Acquisition and Relocation Plan (LARP-II) when the final survey and detailed engineering of the 500 kV lines and substations are completed; and (c) carry out the LARP-II as agreed with the Bank The Borrower will submit the LARP-II for Bank approval prior to the procurement of equipment for the construction of the lines and substations and this will be a condition for disbursement for that equipment.. 4.23 Modern pollution control technologies will be incorporated into the design of the power plant, such as high-efficiency electrostatic precipitators and low NO, burners. Additionally, the plant layout provides adequate space to install additional pollution control systems if required as a result of future changes in Chinese standards and/or technological developments. Annex 4.9 provides a summary of key environmental issues associated with the project and their anticipated impacts, the mitigating plan to assure these impacts are minimized, and the monitoring program with which environmental impacts will be measured and compared with EA predictions. Further strengthening of EPH institutional capabilities is included in the project design. It will cover both training and acquisition of appropriate environmental monitoring equipment (see Annex 4.9, Part C). Moreover, mitigation measures identified in the EA and included into the project design for the transmission lines include: adequate tower placement to minimize impact on farm fields, a 100-meter corridor to place the transmission lines as far as possible from population centers, and sufficient height of the line span, at the point of maximum line slack, to avoid interference with road traffic. 4.24 Environmental issues associated with the project (power station and transmission line) and addressed in the EA included all concerns expressed by affected parties in a series of public meetings. The local public and local authorities support the project and the recommended mitigating measures offered in the EA. The mitigation and monitoring plans presented in the EA (see Annex 4.9, Parts B and C) will be fully implemented. 4.25 Key issues addressed in the EA include: air pollution (dust, sulfur dioxide), water pollution (primarily groundwater at the ash disposal site), coal storage and handling, ash disposal, worker health and safety, electric field, noise and bird flight patterns (transmission line), and the influence of the construction and operation labor force on the local infrastructure. Furthermore, the proposed project (2 units of 600 MW) is the first phase of an overall program to develop 3,600 MW at the Qinbei site. To avoid future adverse environmental consequences, the EA examined both the immediate impacts of the subject project (1,200 MW) as well as the cumulative impacts of the overall 3,600 MW program. 4.26 All mitigating measures for air, water, and solids management (coal, ash) are designed to meet appropriate Chinese requirements and/or World Bank guidelines, whichever is stricter. In the absence of either, international standards of codes of practice will be used. - 39- I. REPORTING AND MONITORING 4.27 Satisfactory performance indicators and procedures for monitoring, evaluating, and reporting on the project have been discussed with and agreed by EPH. The Bank would be furnished with semiannual and annual project progress reports, The annual project progress reports would include, inter alia, EPH's proposals regarding project costs and financing plan for the following year. The scope and content of the project progress reports have also been agreed. 4.28 With regard to the construction of the Qinbei power plant and transmission lines, monitoring of costs, quality and schedule is the main function of the project unit within EPH, and their consultants. The Bank will monitor procurement progress in accordance with the procurement schedule in Annex 4.5, and construction progress in accordance with the schedule of Chart 4 and the key dates in the main contracts, of which major milestones are set out in Annex 4.6. Overall costs will be monitored in accordance with Table 4.1. The guiding principles for the resettlement are described in Annex 4.9 and detailed indicators will be defined in the RAP. The responsibility for environmental monitoring is comprehensively presented in Annex 4.9. Key data for the implementation of the reform plan is provided in the matrix at the end of Annex 3.3. 4.29 The Bank supervision plan attached in Annex 4.10 will focus on the core activities of the project implementation and achievement of the agreed objectives. These include physical construction, environmental management, the resettlement plan (including compensation), corporatization of EPH, power sector reform in Henan Province, and the financial covenants set out in Table 5.2. The key monitoring indicators of each of the objectives sought through the proposed project are provided in Annex 4.1 1. - 40 - 5. FINANCIAL ASPECTS A. INTRODUCTION 5.1 EPH follows MOF financial regulations applicable to state-owned enterprises. These regulations have gradually evolved over the last decade from a system in which all investment funds were provided by the Government and all surpluses remitted to it, to one which provides some autonomy and incentives for efficiency. 5.2 The new accounting principles and financial rules effective July 1, 1993 will have far-reaching impacts on the sector. First, they require power entities to clarify and separate debt from equity. This is an important step for power entities moving toward limited liability companies and eventually shareholding companies. Diversification of ownership is critical to mobilizing more resources to the sector. Secondly, under the new profit allocation system specified in the new financial rules issued by MOF, the adjustment tax and special fund allocations have been abolished. The management of power entities are given greater autonomy in making decisions on profit distribution. Thirdly, enterprises are permitted to design their own internal accounting and financial management system based on their business needs. Overall, the new financial rules together with the rationalization of state assets management, and other fiscal and financial sector reforms, will lead the state to gradually play an ownership role rather than being involved in the management of power entities. With new autonomy and increased accountability power entities will also have an incentive to improve their budgetary and cost controls as well as cash management in order to stay competitive in a market- oriented environment. 5.3 The Government promulgated a series of important new tax laws at the end of 1993. From 1994, the negotiated contract responsibility system was replaced by a uniform and simplified tax system. A corporate income tax rate of 33 percent is being applied to all domestic enterprises. The old sales taxes (about 25 percent of sales) levied for power generation and distribution were also replaced by a new value-added tax (VAT) at 17 percent. The new tax policy does not necessarily reduce the tax burden for power entities. However, it eliminates the lengthy and complicated negotiations between enterprises and the Government. More importantly, it is conducive to strengthening the planning and financial management functions of the power companies. 5.4 The power sector was selected as one of the sectors under experiment for assets revaluation in 1993. The exercise has been undertaken in five steps: (a) inventory check of the existing assets; (b) classification of ownership (source of investment for all assets); (c) revaluation of fixed assets; (d) validating cash position; and (e) property right registration. All power companies, regional, provincial, and municipal, have completed -41 - the work up to the fourth step and now are awaiting the central government to issue state assets management implementation regulations in order to carry out the final step. 5.5 The methodology used in revaluing assets is generally consistent with international practice. Four methods in the following order have been tested in the revaluation exercise: (a) price indexed approach; (b) price quotations specified in the revaluation booklet; (c) replacement cost approach; and (d) foreign cost adjustment for all imported equipment. Both gross and net fixed assets have been revalued according to the booklet issued by the Government. The Central Enterprise Division in MOF's Finance Bureau in the power company's jurisdiction is responsible for reviewing whether the exercise is done properly. The results of revaluation have been double checked by the regional power company which is administratively in charge of the provincial or municipal company. Finally, the Central Enterprise Division of the Finance Bureau in the regional power company's jurisdiction is responsible for validation of the revaluation results. B. EPH's PAST AND PRESENT FINANCIAL PERFORMANCE 5.6 EPH's financial performance in the past was generally satisfactory. It has been able to meet the financial covenants in connection with the previous Bank-financed Yanshi project (Loan 3433-CHA). EPH's income statements, balance sheets, and funds flow statements for the period 1990-94 are set out in Annex 5.1. Key ratios and indicators highlighting its past and present finances are summarized in Table 5.1. Table 5.1: EPH'S KEY FINANCIAL INDICATORS (1990-94) (Million Yuan) Growth Rate Year Ended December31 1990 1991 1992 1993 1994 %p.a. Electricity Sales (GWh) 23,892 25,707 28,439 30,644 33,031 8.4 Heat Sales (JG) 11,502 11,581 11,730 12,316 12,637 2.4 Avg. Electricity Tariff (fen/kWh) 10.65 11.89 13.83 17.87 21.68 19.4 Avg. Heat Tariff (fen/KJ) 0.42 0.41 0.47 0.49 0.86 19.6 Operating Revenues 2,613 3,125 4,015 5,583 7,457 30.0 Operating Income 424 425 553 858 874 19.8 Net Income 320 332 422 651 434 Net Fixed Assets in Operation 4,393 4,732 5,827 8,068 8,356 17.4 Capital Expenditures 827 753 1,529 1,464 3,685 45.3 Operating Ratio 71 74 75 73 86 Rate of Return La 8.3 7.9 8.6 11.2 8.7 Debt Service Ratio 2.2 2.0 2.1 1.7 1.8 Debt as % of Debt and Equity fb 37 37 44 32 44 La Based on historically valued average net fixed assets in operation for 1990-92 and on revalued net fixed assets in operation in 1993-94. /b Impact of Renminbi devaluation in 1994 has been taken into account and reflected in the 1993 ending balance of foreign currency loans. - 42 - 5.7 The decline in net profit observed in 1994 after three years of steady increase, is mainly due to different accounting treatments of depreciation and interest expenses, and new tax laws enacted in 1994. Operating costs increased dramatically in 1994 mostly because of the accelerated depreciation methods implemented by mid-1993 and higher taxation rate following the implementation of the new VAT. 5.8 Under the previous Bank loan for the Yanshi Thermal Power Project, EPH agreed to maintain its net operating income equivalent to not less than (a) 20 percent of its average annual investment program for the years 1992-94, and (b) 25 percent thereafter, and not to incur any debt unless its debt service coverage ratio is greater than 1.3 times. EPH's net operating incomes were 24.2 percent, 26.2 percent and 22.2 percent of three years' average capital expenditures in 1992, 1993, and 1994 respectively. The debt service coverage ratios in 1992, 1993, and 1994 were 2.1, 1.7 and 1.8 times, respectively. Therefore, EPH has met the financial performance targets set out under the previous loan. 5.9 The pre-1993 financial statements have limited value as predictors of future performance, because of several factors: (a) Fixed assets and accumulated depreciation provisions were revalued in 1993 but not in previous years; (b) Depreciation rates were increased in 1993; power plant equipment is now amortized over 12 years, well below its economic/technical life; (c) Value of construction work-in-progress and related sources of funds were not recorded in EPH's accounts; and (d) New financial regulations, mostly based on International Accounting Standards (IAS), effective July 1, 1993, have required financial statements to follow the definitions and classifications of accounts promulgated by MOF, which are different from those under the old accounting system. C. FINANCIAL PERFORMANCE TARGETS 5.10 A self-financing ratio was chosen to promote prudent financial management and adequate tariff levels for two reasons: (a) the ownership of EPH's assets cannot be clarified and decided before issuance of the State Council regulations related to the implementation of the new Company Law, and, (b) mobilization of funds to meet the important investment needs of the power sector will remain one of the most important challenges in Henan Province. The self-financing ratio will also be easy to monitor. 5.11 The rationale for raising the final target of the self-financing ratio from 25 percent under the previous Bank loan (para. 5.8) to 35 percent by the year 2000 are threefold: (a) EPH's internal tariff projection, with an increasing share of new-generation units entering into the rate base by the end of the century, suggests a higher tariff level than a self-financing ratio of 25 percent can achieve; (b) EPH's current tariff level is well below - 43 - the long-run marginal cost and a higher self-financing ratio is aimed to bring up the tariff level close to the economic price by the year 2000; and (c) EPH has increased the depreciation rate from 4.73 percent to 7.18 percent of the gross fixed assets under operation since 1994 and is no longer obligated to contribute to the "two funds" under the new financial rules. 5.12 With a view to promoting this reform and prudent financial management, assurances were obtainedfrom EPH that it will: (a) take all necessary measures, including but not limited to tariff adjustments, to ensure its internal cash surpluses, qfter meeting (i) cash operating expenses; (ii) interest charged to operations; (iii) all taxes; (iv) gross increases in working capital; and (iv) loan repayments, are sufficient to maintain self-financing ratios of no less than 25 percent in 1996, 30 percent during 199 7-1999, and 35 percent thereafter; (b) take all necessary measures, including but not limited to tariff adjustments, to ensure its internal cash generation would provide a debt service coverage ratio of no less than 1.5 times at all times, and (c) by April 30 of each year, fiurnish to the Bank a rolling eight-year financial plan containing projected income statements, statements of sources and uses offunds, and balance sheets. 5.13 By taking this approach, the magnitude of required tariff increases is significant. With the large investment program anticipated and the current low tariff, major adjustments need to be initiated. In order to meet these financial targets, projections show that EPH's average price must be increased by a minimum of above 15 percent (over 6 percent in real terms) per annum from the 1994 level as shown in Table 5.2 during the remainder of the 1 990s for EPH to make a reasonable contribution to its future investment program. D. FUTURE FINANCES 5.14 The projections of EPH's finances for 1995-2004 are presented in Annex 5.2, and the salient features of these finances are highlighted below in Table 5.2. The projections are based on the assumptions contained in Annex 5.3. The average prices shown depict the minimum tariff adjustments needed to allow EPH to achieve the above financial performance targets. 5.15 Table 5.2 shows the projected level of increases in purchased power prices, prices for EPH's own generation, and the weighted average of those two that will be required to meet the financial covenants. The prices for purchased power will be determined on a plant-by-plant basis, at "debt service price" levels, allowing for full debt service based on 7- to 8-year repayment period after commissioning of new power plants. - 44 - Table 5.2: KEY FINANCIAL INDICATORS (1995-2004) (Million Yuan) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Energy Sales (GWh) 35,740 40,528 44,400 48,600 53,011 57,717 62,434 67,112 73,160 78,650 Average Price-including VAT 25.90 30.42 36.97 42.94 45.82 50.54 58.27 60.14 61.07 65.81 (fen/kWh) EPH's own avg. price 25.95 30.57 37.69 43.39 45.53 50.24 57.94 58.95 59.09 63.62 Purchased power's avg. price 25.73 29.73 33.08 40.71 47.43 52.46 60.34 68.49 75.72 81.46 Operating Revenue-net of VAT 7,838 10,438 13,899 17,669 20,564 24,699 30,800 34,171 37,831 43,825 and changes Tariff in 1994 prices Average Price 24.21 25.35 28.15 30.35 30.34 31.48 34.17 33.21 31.75 32.22 EPH's own avg. price 24.25 25.48 28.70 30.67 30.15 31.29 33.98 32.55 30.72 31.15 Purchased power's avg. price 24.04 24.78 25.19 28.78 31.41 32.67 35.38 37.82 39.37 39.88 Operating Income 1,746 2,397 4,298 5,790 6,293 7,614 9,486 8,711 8,648 9,109 Annual Capital Expenditure 4,204 5,294 7,111 11,362 13,910 11,389 11,460 11,916 12,138 13,427 Rate Base 8,033 10,112 13,388 14,970 17,391 22,570 32,177 43,173 48,036 53,189 Long -term Debt 7,488 9,523 12,493 18,480 25,570 28,227 29,549 31,343 33,078 39,520 Debt Service 1,091 1,854 2,347 2,681 2,797 3,427 5,842 6,659 6,886 7,695 Cash in Bank 1,708 1,896 2,905 4,292 5,360 6,209 5,639 5,498 5,685 5,299 Rate of Returm Historically Valued Assets(%) 15.9 17.9 23.7 28.1 26.1 24.5 22.1 15.8 14.0 13.4 Revalued Assets (%) 14.4 15.7 21.7 26.0 24.5 23.2 21.1 15.0 13.2 12.7 Self Financing Ratio (%) 25.1 25.2 30.0 30.1 30.2 35.1 35.0 35.3 35.1 35.0 Operating Ratio (%) 77.0 76.3 68.4 66.6 68.7 68.5 68.6 73.8 76.4 78.5 Current Ratio (time) 1.2 1.2 1.4 1.6 1.7 1.5 1.4 1.3 1.3 2.1 Debt/Total Capital (%) 45.6 47.0 47.1 49.7 51.6 49.0 45.9 44.3 43.0 45.1 Debt Service Coverage (time) 2.1 1.8 2.1 2.3 2.5 2.5 2.0 1.8 1.8 1.9 5.16 EPH's financial position, however, depends on revenues that it collects from its own generation plants. In order to meet the expansion plan and projected cost increases in the future and comply with the financial performance targets set forth above, EPH's average tariff will need to increase by an estimated 11.7 percent in current terms or 4.0 percent in real terms a year from 1995 to 2004. Given the current low catalog prices, 18.9 fen/kWh in 1994 and 20.4 fen/kWh in 1995, EPH's own average revenue needs to have a substantial increase of about 130 percent from 1994 (21.63 fen/kWh) to 2000 (50.24 fen/kWh) to achieve the final target self-financing ratio of 35 percent. 5.17 Although the rate of increases in the catalog prices required to achieve the covenanted self-financing ratio for EPH are large, much of the increase should stem from the entry of new generating plant into the rate base. Because of the rapid load growth, the bulk of the tariff increase required will be met through implementation of the new pricing principles. By 1996, more than half of EPH's own generation is expected to come from plants built after 1993. By 2004, the share rises to 75 percent. -45 - 5.18 During the period 1995-2004, EPH is expected to maintain relatively high rates of growth necessitated by the prospective strong economic growth in Henan Province. Based on latest demand forecast and expansion plan assumptions, energy sales are expected to rise by 138 percent over 1994 levels, representing a compound annual growth rate of about 9.1 percent. EPH's annual investment program and net fixed assets in operation are expected to expand by 219 and 562 percent over the period, an annual increase of about 14 and 23 percent, respectively. 5.19 During 1995-2004, EPH's performance is anticipated to improve gradually and steadily as the tariff level of EPH's own generation be raised to meet the financial targets, from 21.68 fen/kWh in 1994 to 65.81 fen/kWh in 2004, tariff structure is further rationalized, and self-financing as well as debt service requirements emerge as dominant factors in pricing formulation. Based on the projected minimum tariff level, about 11.4 percent increase per year for its own generation and 14 percent for purchased power from 1994 to 2004, both revenues and net incomes are expected to grow considerably over the period. The rate of return on historically valued assets and on revalued assets will improve significantly during 1995-2001 as the tariff level moving towards economic prices and decline to a more sustainable level, 12 to 15 percent, afterwards. - 46 - 6. PROJECT JUSTIFICATION AND RISKS A. LEAST COST STUDY 6.1 Henan Province has limited hydroelectric potential and large coal resources, and is next to Shanxi Province, which has abundant resources of high quality coal. Therefore state-of-the-art 300 and 600 MW coal-fired units are attractive candidates for the provincial and regional development programs. They complement hydropower developments in Henan (Xiaolangdi, Loan 3727-CHA) and in neighboring provinces, such as Hunan and Hebei, to ensure optimal and environmentally sustainable development of the Central China power system. 6.2 During the preparation of the project, a least-cost expansion study was carried out by BERI, covering 1996-2010 with a focus on 1996-2005. The study was carried out using an optimization model that determines the optimal capacity and generation mix to meet the demand with the minimum cost (net present value of investment and operating costs), given a predetermined reliability criteria. It considered all potential candidates including: power exchanges with neighboring provinces, distillate fueled combined cycle plant, 300 and 600 MW coal-fired units, hydropower and pumped storage plants, and gas turbines. It showed that the expansion program should be based, up to the year 2002, on 300 MW and 600 MW coal-fired units and that the proposed project is the first investment of the optimal (least-cost) power development program. 6.3 Sensitivity analyses showed the robustness of the proposed project, which remains the first investment of the provincial expansion program(s) under a wide range of assumptions: (a) the project will still be required by year 2001, even if the demand growth would slow from projected 9 percent per year to only 6 percent between 1994 and 2001. (b) The project remains more economical than an equivalent combined cycle power plant even if the cost of distillate were 46 percent lower than in the base case ($113 per ton compared to $209 per ton) or if the investment cost of combined cycle were 58 percent lower than in the base case ($250 per kW installed compared to $600 per kW installed). (c) The project remains the first investment of the least-cost program and is still needed in 2001 even if the discount rate is increased from 12 to 16 percent. - 47 - 6.4 A summary of the power development program (1994-2004) for the HPG system is given in Annex 6. 1. The balances between power demand and supply are presented in Annex 6.2. They demonstrate that the power system will be short of energy supply and capacity up to the year 2001. B. ECONOMIC RATE OF RETURN Power Plant and Transmission Components 6.5 The internal economic rate of return (IERR) for the proposed project was calculated based on the estimated power price of 39 fen/kWh (in 1994 prices) that will be paid for electricity at the 110/35 kV level in 2001, the first year of operation, based on existing policies for pricing of power output from new power plants. This price, based on revenues generated by the new power plant rather than the economic value of a shortfall in electric power supply, underestimates the economic benefits of the project. It yielded an IERR of about 15.2 percent 6.6 The IERR would decrease to the test discount rate of 12 percent, in the case of one of the following occurrences: (a) the price paid at the 110/30 kV for electricity from new power plants were 20 percent lower than the base case price: i.e., 33 fen/kWh in 1994 prices; (b) the project were to experience a cost overrun of 26 percent; (c) the power plant operation were reduced to 5,160 hours per year; (d) the economic fuel cost were 70 percent higher than the base case; (e) the project were to experience a delay in commissioning of 29 months. 6.7 However, these occurrences are very unlikely because EPH has a very good record in project implementation, the economic assumptions considered in the base case are stringent ,and the financial covenants of the project would ensure that prices are high enough to meet the economic viability requirements.. As examples, (a) the price paid by new power plants in the province is already higher than the assumed price and prices accepted for some of newly commissioned or under construction power plants are in the range of 45-50 fen/kWh; and (b) EPH managed to build the Jiaozuo power plant (6x200 MW) and the Bank supported Yanshi project (2x300 MW) within schedule and without cost overruns, and (c) the cost per kW installed considered in the base case is more than 20 percent higher than the cost of the latest Bank supported projects in China. Environmental Benefits 6.8 The project has also significant environmental benefits. It improves the efficiency of the generation system and reduces the average coal consumption by about 14 g/kWh. Reduction in coal consumption amounts to more than 1.4 million tons in 2003, the year - 48 - after full commissioning of the plant. With the development of Xiaolangdi (multipurpose hydro project-No. 3727-CHA), most of Henan's hydropower potential would have been exploited and the only alternatives to Qinbei would be smaller and less efficient coal- fired units. The electricity conservation component will also contribute in speeding up the implementation of electricity conservation projects and significantly reduce the coal consumption over the medium term (see para. 4.6). C. PROJECT RISKS 6.9 All proposed technologies are currently in successful use in China. Cost estimate risks have been addressed by advanced procurement action; bids for major components have already been prepared before loan negotiations and issued prior to Board presentation. The risk of delay in project construction due to project management shortcomings is minimal because of the experience gained during the implementation of the Jiaozuo and Yanshi projects, the timely staffing and training of personnel of the Qinbei implementation unit , and the assistance provided by experienced engineering consultants. The risk of nonperformance in the environmental and resettlement area has been addressed by the establishment of appropriate monitoring organizations and procedures (see para. 4.24). More importantly, sensitivity analyses show that even in case of implementation of more stringent enviromnental standards requiring future installation of FGD, the project would remain economically viable. 6.10 Delay in implementing power sector reforms in an efficient and timely manner represents a risk that can jeopardize the progress toward more openness and efficiency of the sector and more fiscal and managerial autonomy of EPH. This risk is minimized by the strong commitment of Chinese to reform both at the central and provincial level. This risk is also addressed through provision of required technical assistance and adequate monitoring of implementation of the agreed upon reform plan during the project cycle (cf. para. 3. 10). 6.11 The economic and financial risks would be minimal. In view of advanced preparatory works, risks associated with project construction, cost overruns, and implementation delays are within reasonable limits and manageable with the agreed supervision and involvement of competent consultants. Particular attention will be given to the safety aspects of the project, and to capability and performance of major contractors. - 49 - Table 6.1: INTERNAL ECONOMIC RATE OF RETURN (BASE) (million yuan) Generation Fuel O&M Total Benefits Net Year Costs PV Cost Cost Cost GWh Yuan Benefit 1994 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1995 146.68 116.93 0.00 0.00 146.68 0.00 0.00 -146.68 1996 764.60 544.23 0.00 0.00 764.60 0.00 0.00 -764.60 1997 984.62 625.75 0.00 0.00 984.62 0.00 0.00 -984.62 1998 3,010.35 1,708.16 0.00 0.00 3,010.35 0.00 0.00 -3,010.35 1999 2,983.38 1,511.47 0.00 0.00 2,983.38 0.00 0.00 -2,983.38 2000 788.21 356.54 0.00 0.00 788.21 0.00 0.00 -788.21 2001 563.97 227.78 344.41 277.25 1,185.63 3,900.00 1,524.90 339.27 2002 316.97 114.30 688.82 286.76 1,292.55 7,800.00 3,049.80 1,757.25 2003 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2004 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2005 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2006 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2007 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2008 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2009 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2010 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2011 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2012 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2013 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2014 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2015 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2016 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2017 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2018 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2019 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2020 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2021 0.00 0.00 688.82 286.76 975.58 7,800.00 3,049.80 2,074.22 2022 0.00 0.00 516.61 274.81 791.42 5,850.00 2,287.35 1,495.93 2023 0.00 0.00 516.61 274.81 791.42 5,850.00 2,287.35 1,495.93 2024 0.00 0.00 344.41 274.81 619.22 3,900.00 1,524.90 905.68 2025 0.00 0.00 344.41 274.81 619.22 3,900.00 1,524.90 905.68 2026 0.00 0.00 344.41 274.81 619.22 3,900.00 1,524.90 905.68 Total 9.558.78 5.205 16 16.187.27 7.386 55 33.132.59 183.300.00 71.670.30 38.537.71 Assumptions: Results: Official exchange rate (Y/S): 8.43 Economic IRR (%): 15.2% Shadow exchange rate (Y/S): 8.43 PV of investment costs (Y) 5205.16 Standard conversion factor: 1.00 PV of total costs (Y): 8505.00 Coal price: PV of benefits (GWh): 25832.66 Export price, FOB Qinhuangdao (S/TCE): 35.00 PV of benefits (Y) 10100.57 Export price in yuan 295.05 Shadow AIC (Y/kWh): 0.33 Shadow transport cost to plant(Y/ton-km): 0.08 Break-even tariff (Y/kWh): 0.33 Shadow project cost (YlkW): 6002.00 Shadow price for coal: 267.00 Financial project cost (Y/kW): 7965.65 Net heat rate (gCE/kWh) 315.00 as numeraire (Y/kW): 0.75 Auxiliary rate 0.05 Derived shadow fuel cost (YlkWh): 0.09 O&M cost 0.03 Project operation (hrs/year): 6500.0 Capacity/unit (GW) 0.6 Total generation less line loss (Not considered here) 100.00% Shadow electricity value (Y/kWh): 2 - 50 - 7. AGREEMENTS AND RECOMMENDATION 7.1 The following assurances will be obtained at negotiations: (a) From the Borrower that it would: (i) furnish audited project accounts to the Bank within six months of the end of each fiscal year (para. 3.25); (ii) ensure the proceeds of the loan would be onlent from the Borrower through Henan Province to the Beneficiary under a subsidiary loan agreement on the same terms and conditions as the Bank loan, with the Beneficiary bearing the foreign exchange risk (para. 4.13); and (iii) ensure that resettlement under the project is carried out in accordance with an agreed resettlement program (para. 4.22). (b) From EPH that it would: (i) carry out the Reform Implementation Plan according to the timetable agreed with the Bank (paras. 3.10 and 3.16, Annex3.3); (ii) carry out implementation of its organizational improvements, and the development of improved accounting and financial management systems as agreed with the Bank (para. 3.15); (iii) furnish the Bank with semiannual progress reports, audited project accounts, statements of expenditures, and financial statements within six months of the end of each fiscal year; implement any changes to its accounting practices as recommended by its financial management consultants to meet international accounting standards; and require its auditors to comply with international auditing practices and provide audit plans prior to each audit (para. 3.25); (iv) provide an action plan and timetable for unifying EPH's tariffs and establishing a suitable formula for adjusting the level of rates which would enable it to meet the financial performance targets to be agreed during negotiation (para. 3.31); -51 - (v) carry out the management development and training program as agreed with the Bank (para. 4.9); (vi) prepare a RAP when the final survey and detailed engineering of the 500 kV lines are completed. The RAP will be submitted for Bank approval prior to the procurement of the equipment for the lines and substations and will be a condition for disbursement (para. 4.22); (vii) carry out the environmental management program and the resettlement action plan as agreed with the Bank (para. 4.22); (viii) take all necessary measures, including but not limited to tariff adjustments, to ensure its internal cash surpluses after meeting cash operating expenses, interest charged to operations, all taxes, gross increases in working capital, loan repayments are sufficient to maintain self-financing ratios of no less than 25 percent in 1996, 30 percent during 1997-99, and 35 percent thereafter [para. 5.12(a)]; (ix) take all necessary measures, including but not limited to tariff adjustments, to ensure its internal cash generation would provide a debt service coverage ratio of no less than 1.5 times at all times [para. 5.12(b)]; and (x) by April 30 of each year, furnish to the Bank a rolling eight-year financial plan containing projected income statements, statements of sources and uses of funds, and balance sheets [para. 5.12(c)]. 7.2 Execution of the subsidiary loan agreement between the Government and EPH will be a condition of effectiveness for the loan. 7.3 Subject to the above agreements, the proposed project would be suitable for a Bank loan of $440 million to the People's Republic of China. The loan would be for a term of 20 years, including a 5-year grace period, at the Bank's standard variable interest rate. Retroactive financing, in an aggregate amount not exceeding $2 million, is required for anticipated contractual payments after June 15, 1995. -53 - ANNEX 1.1 ANNEX 1.1: PRIMARY ENERGY OUTPUT IN CHINA (1949-94) Year Raw Crude Natural Total Electiciy coal oil gas output of which: (106t) ( lt) (103m3) (TWh) Hydropower (Twh) 1949 32.0 0.12 0.07 4.3 0.7 1955 98.0 0.97 0.17 12.3 2.4 1960 397.0 5.20 10.40 59.4 7.4 1965 232.0 11.31 11.00 67.6 10.4 1970 354.0 30.65 28.70 115.9 20.5 1975 482.0 77.06 88.50 195.8 47.6 1980 620.0 105.95 142.70 300.6 58.2 1981 622.0 101.22 127.40 309.3 65.5 1982 666.3 102.12 119.30 327.7 74.4 1983 714.5 106.07 122.10 351.4 86.4 1984 789.2 114.61 124.20 377.0 86.8 1985 872.3 124.89 129.30 410.7 92.4 1986 894.0 130.69 137.60 449.5 94.5 1987 928.1 134.14 138.94 497.3 100.2 1988 979.9 137.05 142.64 545.2 109.1 1989 1,054.2 137.65 150.49 584.7 118.4 1990 1,079.9 138.31 152.98 621.3 126.4 1991 1,087.4 140.99 153.96 677.5 124.7 1992 1,115.0 142.10 157.90 754.2 131.5 1993 1,141.0 144.00 165.60 836.4 150.7 1994 1,212.0 147.65 169.70 927.8 166.8 Source: MOEP. ANNEX 1.2: TOTAL PRODUCTION AND CONSUMPTION OF ENERGY VS. GNP GROWTH 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (million tons of standard coal equivalent) 646 637 632 668 713 779 855 881 913 958 1,016 1,039 1,048 1,073 1,117 1,169 Proport'ion ('%!6 Coal 70.2 69.4 70.2 71.3 71.6 72.4 72.8 72.4 72.6 73.1 74.1 74.2 74.1 74.3 74.2 74.1 Crude oil 23.5 23.8 22.9 21.8 21.3 21.0 20.9 21.2 21.0 20.4 19.3 19.0 19.2 18.9 18.5 18.0 Natura gas 3.0 3.0 2.7 2.4 2.3 2.1 2.0 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.9 Hydropower 3.3 3.8 4.2 4.5 4.8 4.5 4.3 4.3 4.4 4.5 4.6 4.8 4.7 4.8 5.3 6.0 Consumzgon (million tons of standard coal equivalent) 586 603 594 621 660 709 767 809 866 930 969 980 1,038 1,087 1,122 1,175 Proportion Coal 71.3 72.2 72.7 73.7 74.2 75.3 75.8 75.8 76.2 76.2 76.0 75.6 76.1 76.1 73.2 73.8 Crude oil 21.8 20.7 20.0 18.9 18.1 17.4 17.1 17.2 17.0 17.0 17.1 17.0 17.1 17.1 19.4 18.3 Natiral gas 3.3 3.1 2.8 2.5 2.4 2.4 2.2 2.3 2.1 2.1 2.0 2.1 2.0 1.9 2.0 1.9 Hydropower 3.6 4.0 4.5 4.9 5.3 4.9 4.9 4.7 4.7 4.7 4.9 5.3 4.8 4.9 5.4 6.0 GDP Index (constant prices) 107.6 116.0 121.2 131.8 145.4 166.9 188.2 203.5 225.7 251.2 262.1 272.7 295.0 333.4 379.0 424.1 Energy Intensity Index (consumption/GNP) 95.4 91.0 85.8 82.5 75.9 74.5 71.5 69.7 67.2 65.0 65.1 62.6 61.6 57.3 51.9 49.54 Notes: (1) Excluding bio-energy, solar, geothermal and nuclear energy. (2) All fuels are converted into standard coal with thermal equivalent of 7,000 kilocalorie per kilogram. The conversion factors are: I kg of coal (5,000 kcal) = 0.714 kg of standard coal I kg of crude oil (10,000 kcal) = 1.43 kg of standard coal I cubic meter of natural gas (9,310 kcal) = 1.33 kg of standard coal (3) The conversion of hydropower is based on the specific consumption of standard coal for thermal power generation of the year. Source: China Statistical Yearbook 1991.1 and MOEP. -55 - ANNEX 1.3 ANNEX 1.3: INSTALLED CAPACITY, ELECTRICITY GENERATION, AND SALES IN THE POWER SUBSECTOR Installed Electricity Electricity Capacity (MW) /a Generation (GWh) /a Consumption Lb Year Hydro Thermal Total Hydro Thermal Total (GWh) 1949 163 1,686 1,849 710 3,600 4,310 3,460 1952 188 1,776 1,964 1,260 6,001 7,261 -- 1957 1,019 3,616 4,635 4,820 14,515 19,335 16,407 1962 2,379 10,686 13,065 9,042 36,753 45,795 n.a. 1965 3,020 12,056 15,076 10,414 57,190 67,604 56,802 1970 6,235 17,535 23,770 20,450 95,420 115,870 n.a. 1971 7,804 18,478 26,282 25,060 113,300 138,360 101,274 1972 8,700 20,801 29,501 28,820 123,630 152,450 123,600 1973 10,299 23,626 33,925 38,900 127,860 166,760 135,106 1974 11,817 26,291 38,108 41,440 127,410 168,850 135,708 1975 13,428 29,978 43,406 47,630 148,210 195,840 156,969 1976 14,655 32,492 47,147 45,640 157,490 203,130 164,698 1977 15,765 35,686 51,451 47,670 175,740 223,410 181,691 1978 17,277 39,845 57,122 44,630 211,920 256,550 210,239 1979 19,110 43,906 63,016 50,120 231,827 281,947 233,577 1980 20,318 45,551 65,869 58,211 242,416 300,627 251,639 1981 21,933 47,069 69,002 65,546 243,723 309,269 258,976 1982 22,959 49,401 72,360 74,399 253,279 327,678 275,299 1983 24,160 52,280 76,440 86,450 264,990 351,440 297,126 1984 25,547 54,373 79,920 86,780 290,207 376,987 319,600 1985 26,120 60,373 86,493 92,374 318,315 410,689 348,353 1986 27,542 66,276 93,818 94,480 355,091 449,571 357,057 1987 30,193 72,704 102,897 100,229 397,092 497,321 420,019 1988 32,698 82,799 115,497 109,177 435,888 545,065 464,013 1989 34,570 92,060 126,637 118,475 466,200 584,675 495,135 1990 36,050 101,844 137,894 126,350 494,986 621,318 527,154 1991 37,884 113,589 151,473 124,845 552,649 677,494 575,219 1992 40,681 125,852 166,533 131,466 622,723 754,189 644,696 1993 44,593 138,318 182,911 150,743 685,686 836,429 698,255 1994 49,061 148,736 199,897 166,780 747,049 927,878 769,725 la On a countrywide basis. Lb Energy consumption not including uses by stations and line losses. Source: MOEP. - 56 - ANNEX 1.4 ANNEX 1.4: ELECTRICITY CONSUMPTION BY SECTORS La Total industry Agri- Resi- Trans- Municipal Consumption Sub- cul- den- porta- and Year (Twh) Heavy Light total tural tial tion Commercial 1985 411.7 63.8 15.9 79.7 7.7 5.4 1.5 5.7 1986 456.7 64.9 15.8 80.7 7.1 5.5 1.5 5.2 1987 498.5 64.0 16.4 80.4 7.2 5.7 1.5 5.2 1988 546.7 62.8 17.0 79.8 6.9 6.3 1.6 5.4 1989 586.5 63.0 16.2 79.2 7.0 6.7 1.7 5.4 1990 623.0 62.2 16.0 78.2 6.9 7.7 1.7 5.5 1991 680.4 61.2 16.2 77.4 7.1 8.0 1.7 5.8 1992 745.5 61.2 15.9 77.1 6.8 8.5 1.8 5.8 1993 820.1 61.2 15.4 76.6 6.3 8.9 1.9 6.3 1994 904.6 60.3 15.1 75.4 6.3 9.7 1.9 6.7 /a On a countrywide basis, including station uses and line losses for power industry. Source: MOEP. -57 - ANNEX 1.5 ANNEX 1.5: POWER PROJECTS FINANCED BY THE WORLD BANK Project Loan/Credit No. 1. Lubuge Hydroelectric Loan 2382-CHA 2. 500-kV Xuzhou-Shanghai Transmission Loan 2493-CHA 3. Yantan Hydroelectric Loan 2707-CHA 4. Beilungang Thermal Loan 2706-CHA 5. Wujing Thermal Loan 2852-CHA 6. Shuikou Hydroelectric Loan 2775-CHA and Loan 3515-CHA 7. Ertan Hydroelectric Project Loan 3387-CHA 8. Daguangba Multipurpose Project Loan 3412-CHA and Credit 2305-CHA 9. Tianhuangping Pumped-Storage Hydroelectric Project Loan 3606-CHA 10. Beilungang Extension Loan 2955-CHA 11. Yanshi Thermal Loan 3433-CHA 12. Zouxian Thermal Loan 3462-CHA 13. Shuikou Hydroelectric II Loan 3515-CHA 14. Yangzhou Thernal Loan 3718-CHA 15. Sichuan Power Transmission Project Loan 3848-CHA 16. Zhejiang Power Development Project Loan 3846-CHA 17. Ertan II Hydroelectric Project Loan 3507-CHA - 58 - ANNEX 2.1 ANNEX 2.1: INSTALLED GENERATING CAPACITY OF HENAN POWER GRID (1989-1994) (Power Plants With 0.5 MW or Above) Unit: MW 1989 1990 1991 1992 1993 1994 Total Capacity of Henan Grid 5,651 6,081 6,587 7,633 8,189 8,473 Among Which: Hydro Power 389 393 395 456 475 545 Thermal Power 5,262 5,688 6,192 7,117 7,715 7,928 A: Power Plants Under the 4,322 4,522 4,848 5,498 5,656 5,731 Ministry 1. Sanmenxia Hydrolic Power 250 250 250 250 250 325 Station La 2. LuoyangPowerPlant 175 175 175 175 175 175 3. Zhengzhou Power Plant 116 116 116 316 516 516 4. Yaomeng Power Plant 1,200 1,200 1,200 1,200 1,170 1,170 5. Jiaozuo Power Plant 824 824 1,000 1,200 1,200 1,200 6. Anyang Power Plant 340 340 340 340 340 340 7. Kaifeng Power Plant 330 330 330 330 330 330 8. Danhe Power Plant 200 200 200 200 200 200 9. Xinxiang Power Plant 350 550 500 500 500 500 10. Pingdingshan Power Plant 125 125 125 175 175 175 11. Nanyang Power Plant 12 12 12 12 -- -- 12. Hebi Power Plant -- -- 200 400 400 400 13. Yanshi Power Plant 400 400 400 400 400 400 B: Local and Captive Power Plants 1,329 1,559 1,738 2,135 2,533 2,742 La Power plant under the control of EPH on behalf of the Ministry. Remark: Total 59 generation units, among which: below 75 MW, 31 units; 100-200 MW, 24 units; 250-300 MW, 4 units. - 59- ANNEX 2.2 ANNEX 2.2: MAJOR POWER GENERATING FACILITIES IN HENAN PROVINCE (As of December 31, 1994) Name of Nameplate Year of Dependable Plant/Unit Rating (MW) Commissioning Capacity (MW) Luoyang Cogeneration Power Plant No. 1 25.0 1957 25.0 No. 2 25.0 1958 25.0 No. 3 25.0 1958 25.0 No. 4 25.0 1959 25.0 No. 5 25.0 1960 25.0 No. 6 50.0 1961 50.0 Subtotal L75.0 1L7Q Zhengzhou Cogeneration Power Plant No. 1 12.5 1957 10.5 No. 2 12.5 1957 10.5 No. 3 6.0 1965 0.0 No. 4 10.0 1960 8.0 No. 5 25.0 1965 25.0 No. 6 25.0 1966 25.0 No. 7 25.0 1967 25.0 No. 8 200.0 1992 200.0 No. 9 200.0 1993 200.0 Subtotal 516.Q 50.0 Xinxiang Thermal Power Plant No. 1 50.0 1966 50.0 No. 2 50.0 1969 50.0 No. 3 200.0 1989 200.0 No. 4 200.0 1990 200.0 Subtotal 5000 - 60 - ANNEX 2.2 Name of Nameplate Year of Dependable Plant/Unit Rating (MW) Commissioning Capacity (MW) Anyang Thermal Power Plant No. 3 25.0 1960 20.0 No. 4 25.0 1961 20.0 No. 5 40.0 1972 40.0 No. 6 50.0 1975 50.0 No. 7 100.0 1977 100.0 No. 8 100.0 1977 100.0 Subtotal 340.0 Kaifeng Thermal Power Plant No. 1 40.0 1973 40.0 No. 2 40.0 1974 40.0 No. 3 125.0 1978 125.0 No. 4 125.0 1978 125.0 Subtotal 33 330 0Q Danhe Thermal Power Plant No. 1 100.0 1973 100.0 No. 2 100.0 1975 100.0 Subtotal 20Q0. 20Q 0 Yaomeng Thermal Power Plant No. 1 270.0 1975 270.0 No. 2 300.0 1980 240.0 No. 3 300.0 1985 300.0 No. 4 300.0 1987 300.0 Subtotal 1,170.0 1,110.0 Jiaozuo Thermal Power Plant No. 1 200.0 1979 200.0 No. 2 200.0 1980 200.0 No. 3 200.0 1985 200.0 No. 4 200.0 1986 200.0 No. 5 200.0 1991 200.0 No. 6 200.0 1992 200.0 Subtotal 1,200.0 1,200.0 -61- ANNEX 2.2 Name of Nameplate Year of Dependable Plant/Unit Rating (MW) Commissioning Capacity (MW) Yanshi Thermal No. 1 200.0 1988 200.0 No. 2 200.0 1989 200.0 Subtotal 400.Q 400.0 Pingdingshan Thermal Power Plant No. 1 50.0 1970 50.0 No. 2 50.0 1971 47.0 No. 3 25.0 1987 25.0 No. 4 50.0 1992 50.0 Subtotal 175Q 172.0 Sanmenxia Hydro Power Pl=nt No. 1 50.0 1977 50.0 No. 2 50.0 1976 50.0 No. 3 50.0 1973 50.0 No. 4 50.0 1973 50.0 No. 5 50.0 1979 50.0 No. 6 75.0 1994 75.0 Subtotal 325Q 325.Q Hebi Thermal Power Plant No. 1 200.0 1991 200.0 No. 2 200.0 1992 200.0 Subtotal 40Q0 400-0 EPH Subtotal 5,731.0 5.526.0 Local and Captive Plants 2,742.0 2,712.0 Total 8.473.0 8.238.0 ANNEX 2.3: TRANSMISSION NETWORK OF EPH (As of December 31,1994) Transformer Transmission Line Public Transforner Consumer's Transformer - --Overhead Linc Set/Unit Nameplate Set/Unit Nameplate No. of Line Length of Line Length of Circuits (MVA) (MVA) (KW) (KM) Total of HPG 1065/2036 24,391.3 382/823 5,107.8 2371 2,7548 2,9382 500KV 1/3 750 -- 3 323 992 220KV 36/68 7,690 1/1 90 86 3,844 4,472 110KV 218/508 10,554.7 45/107 2,461 786 7,868 8,188 35KV 810/1457 5,396.6 336/715 2,556.8 1496 15,513 15,730 In Which Under EPH 216/410 16,373.7 528 9,771 10,704 500KV 1/3 750 3 324 324 220KV 36/68 7,690 85 3,767 4,856 110KV 138/258 7,311.5 309 4,568 4,856 35KV 41/81 622.2 131 1,112 1,129 ANNEX 2.4: ENERGY CONSUMPTION BY CATEGORY OF CONSUMERS IN HENAN PROVINCE (1989-1994) GWh Avg. Year 1989 1990 1991 1992 1993 1994 Growth Rate GW % GWh % GWh % GWh % GWh % GWh % % 1. Agricultural 2,97 9.1 2,900 8.6 3,396 9.2 3,852 9.2 3,724 8.1 4,152 8.3 6.93 load 2. Industrial 26,49 80.6 26,950 79.7 28,895 78.3 32,556 77.7 35,490 77.8 38,625 77.23 7.83 load 3. Geological 1 0.04 12 0.03 14 0.03 16 0.03 14 0.03 16 0.03 4.24 prospecting load 4. Architectural 13 0.4 135 0.4 137 0.3 198 0.4 279 0.6 334 0.67 19.16 load 5. Load fortrans- 60 1.8 660 1.9 737 2.0 1,031 2.4 1,301 2.8 1,407 2.81 18.58 portation & com- munication, etc. 6. Commercial 21 0.6 325 0.9 390 1.0 452 1.0 505 1.1 592 1.18 22.45 load 7. Residential 1,71 5.2 2,045 6.0 2,435 6.6 2,857 6.8 3,259 7.1 3,719 7.44 16.72 load S. Others 68 2.1 788 2.3 897 2.4 959 2.3 1,058 2.3 1,171 2.34 11.35 IQtal 32.834 100 33817 100 36.901 1000 45.630 l 50016 lO ANNEX 2.5: ENERGY CONSUMPTION FORECAST FOR HENAN POWER GRID (1994-2004) (GWh) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Avg. Actual Growth Rate (/*) 1. Agriculural 4,152 4,340 4,813 5,234 5,671 6,143 6,777 7,382 7,995 8,446 9,147 8.2 load 2. Industrial 38,625 40,929 44,776 48,661 52,724 57,028 62,879 68,461 74,141 78,318 84,865 8.2 load 3. Gcological 16 20 30 42 52 72 102 110 120 136 145 24.6 prospecting 4. Architectural 334 354 388 422 451 496 547 596 646 6S2 738 8.3 load 5. Load for trans- 1,407 1,491 1,632 1,774 1,923 2,087 2,303 2,580 2,746 2,951 3,141 8.4 portation & conununication, etc. 6. Commercial & 592 627 686 757 820 888 980 1,067 1,204 1,221 1,322 8.4 otier load 7. Residential 3,719 3,998 4,318 4,695 5,091 5,552 6,163 6,671 7,224 7,633 8,278 8.3 load 8. Others 1,171 1,241 1,357 1,476 1,599 1,755 1,911 2,081 2,254 2,381 2,579 8.2 oQl 50.016 53.000 58.000 6301 i68.331 74l021 8L662 88.948 96.330 IQL68 110.215ia 'ur -65 - ANNEX 3.1 ANNEX 3.1: POWER SECTOR STRUCTURE IN HENAN PROVINCE Institutional Framework 1. There are four groups of enterprises associated with construction, management and operation of the electric power sector in Henan Province: (a) provincial power enterprises; (b) prefectural/municipal power enterprises; (c) county power enterprises; and (d) power plant enterprises. Provincial Power Enterprises 2. The Electric Power of Henan (EPH) and Henan General Construction Investment Company (HGCIC) are independent legal entities. EPH has the status of a limited-liability company under its charters formulated pursuant to the law on State-Owned Enterprises. 3. EPH is a state-owned enterprise administrated by Central China Electric Power Administration (CCEPA) on behalf of MOEP. It is owned jointly by the central government and the Henan Provincial Government. EPH is responsible for construction, management and operation of generation, transmission and distribution in the province. It has 31 dependent enterprises; 13 prefectural/municipal power enterprises, 7 power plant enterprises, 4 power plants under construction (offices for management of projects under construction), 2 technical school, 2 training school, a staff training center, a power test and research center, and a power dispatch center. These subsidiaries have no separate legal status and have commitments with EPH to achieve specific production and cost performance. EPH collects all revenue from their electricity sales and pays their salaries and operating costs. 4. EPH also has 13 independent enterprises that are separate legal entities, which are self-accounting and operate like subsidiaries. They include five service companies; for material supply, consulting, fuel supply, industry and commerce and general construction; four construction and installation companies; two factories for repair of equipment; one investment company and one design institute. EPH controls them by appointing their - 66 - ANNEX 3.1 management, limiting the size of their staff and salary levels. The service and construction companies are required to pay dividends each year to EPH based on their profits. 5. HGCIC is an enterprise owned by the Provincial Government, entrusted by it to manage its investment in capital construction projects, mainly in transportation, power, coal, raw material and industry sector, whether in the form of joint investment or joint ventures. Administratively, it is affiliated with the Henan Provincial Planning and Economic Commission. HGCIC's articles of association state that it is an investment company administrated by the provincial government. HGCIC's income is derived mainly from capital construction surcharges, including the 2 fen/kwh power construction fund, for financing new construction and from dividends on its investments. It has the right to raise funds and borrow to finance its investment on behalf of the Provincial Government. 6. HGCIC has by the end of 1994 invested about Y 2.1 billion in twelve power projects in Henan Province. These are contractual joint ventures (except Zhengzhou Cogeneration Power Plant is ajoint-investment company with legal status). The contractual joint ventures are with the central government, the provincial power company and prefectural/municipal governments. HGCIC is responsible for making investment and it is not involved in the construction, operation and management process. For contractual joint venture power projects, EPH is entrusted to construct, manage and operate them on behalf of all the investors. Prefectural/Municipal Power Enterprises 7. The prefectural/municipal power companies are responsible for power distribution in the main cities of the province. Ten of these companies are part of EPH and have no separate legal status. Four of these companies are separate legal entities independent from EPH and they are owned by the respective prefectural/municipal governments. The independent power companies purchase power from EPH on a wholesale basis and resell the power to the county power companies or directly to the consumers. County Power Enterprises 8. There are 118 county-level power companies, most of whom have small coal-fired plants and operate local distribution. All these companies are independent entities owned by county governments. They purchase bulk power from EPH and sell any surplus to it from their small thermal plants. Power Plant Enterprises 9. Henan Province has 13 large power plants. Firstly, there are seven state-owned power plants operated by EPH. Four other plants are owned independently as joint investments. However, EPH operates and manages them under contract and purchases their output. Then, there is the Zhengzhou Cogeneration Power Plant (ZCPP), which is an independent legal entity jointly owned by Xinli Company, HGCIC and EPH. ZCPP's daily - 67 - ANNEX 3.1 operation and maintenance is entrusted to EPH through an O&M contract and its energy is sold to EPH through a Power Purchase Agreement. Lastly, the Sanmenxia Hydropower Plant is owned and operated by the Ministry of Water Resources, and its energy is dispatched by and sold to EPH. Regulatory Framework 10. The main institutions involved with the regulation of the sector are: (a) State Planning Commission (SPC); (b) Ministry of Electric Power (MOEP); (c) Central China Electric Power Administration (CCEPA); (d) Henan Provincial Electric Power Bureau (HPEPB); (e) Henan Provincial Planning and Economic Commission (HPPEC); (f) Henan Provincial Price Bureau (HPPB); (g) Prefectural/Municipal Power Bureau; and (h) County Power Bureau 11. There are several levels of regulation controlling the activities of the electric power enterprises in Henan province. At the top are the central government agencies like the State Planning Commission (SPC), which approves all large investments and tariff level for energy produced by government grant financed plants, the Ministry of Electric Power (MOEP), which formulates the major policies and legislation governing the power sector, the Ministry of Finance (MOF) and the Ministry of Foreign Trade and Economic Corporation (MOFTEC). At the regional level is the Central China Electric Power Administration (CCEPA), which is delegated responsibility for administration of the provincial power enterprises in the central China grid by MOEP. 12. At the provincial level, the Henan Provincial Electric Power Bureau acts on behalf of MOEP through CCEPA. Administratively, CCEPA is integrated with EPH and has the same staff and management. Its main functions are to implement the laws and regulations issued by the central government for the power sector. HPEPB administers the sector enterprises, provides technical support to them and prepares the provincial power development plan. 13. The other main regulatory agency is the Henan Provincial Planning and Economic Commission (HPPEC). HPPEC approves project investments up to Y 200 million. Above this level, it submits proposed project to SPC for approval. It also approves fund raising by - 68 - ANNEX 3.1 HGCIC such as surcharges and bond issues and power consumption quotas and allocations based on monthly plans prepared by EPH. Prefecture-level power prices and prices for above-quota power supply are also approved by HPPEC. HPPEC also, jointly with HPEPA, approves the "network tariffs" of the new power plants built under joint- investment projects. 14. Finally, there are the Prefectural/Municipal and County-level bureau, which operate like HPEPA and on its behalf at this level. In addition, power development enterprises similar to HGCIC in the prefectures or in the counties, an electricity office (referred to as the "three electricity office") approves investments, power allocations and retail prices. These bodies also collect local surcharges from consumers and arrange investment of these funds on behalf of county governments, mostly in distribution. The three specific functions of the electricity offices are to take responsibility for electricity consumptions, conservation and safety. - 69- ANNEX 3.2 ANNEX 3.2: PERFORMANCE INDICATORS FOR HENAN POWER SYSTEM 1989 1990 1991 1992 1993 1994 Installed Capacity (MW) 5.651.1 6.0816 6587 7.63 V19 8473 EPH 4,322 4,522 4,848 5,498 5,656 5,731 Local & Captive Plants 1,329 1,559.6 1,739 2,135 2,533 2,742 Energy Generation (GWh) 29.980 31.777 35 427 40 374 43.636 48.486 EPH 24,364 25,168 27,074 30,083 31,824 34,305 Local &Captive Plants 5,616 6,609 8,353 10,291 11,812 14,181 Ener2 Generation (GWh) 29,980 31777 35 427 40.374 43.636 48,486 Thermal 28,421 30,373 34,084 39,092 42,152 46,776 Hydro 1,559 1,404 1,343 1,282 1,484 1,710 Net Elergy Purchased (GWh) 2.755 1.467 14406 1.515.4 12994 1,530 EPH 2,283.2 1,417 1,199.2 1,373.8 16,97.0 1,131.9 Capacity Factor (%) 629 57. 8 52 u 65.3 EPH 67.7 60.8 58.9 65.4 64.3 68.3 Local & Captive Plants 48.3 48.4 54.8 53.1 53 59 Peak LoadMW) 4.770 5000 5 40 6.250 650 7900 EPH 3,932 3,956 4,179 4,698 5,240 5,405 Energy Sales (GWh) EPH 23,393 23,892 25,707 28,439 30,644 33,031 System Losses (GWh) 3.533 1543 3116 3.667 40.44 4.218 Plant Use (%) 8.04 8.29 8.17 8.27 8.38 8.22 EPH 8.17 8.38 8.10 8.06 7.98 7.87 Local & Captive Plant 9.47 9.25 9.19 9.38 9.55 8.97 T&D losses ! 249.92 . 9.37 9317 9.42 EPH 6.56 6.02 6.44 6.72 6.58 6.81 TotalLosses (2i) 17.70 17.20 16.77 17.32 17.45 17.64 EPH 14.50 14.10 14.32 14.59 14.76 14.68 Average Coal Consumption (Standard Coal) (g/kWh) 412 411 407 400 397 399 EPH 377 375 369 364 360 395 Local & Captive Plants 566 548 540 513 499 502 Number of Customers 265-754 275,404 6,505,340 7.569.061 7.801.321 9.062489 Number of Employees 48.268 48L692 51-210 52.200 53.742 53,384 Sales Per Employee (kWh) 480.649 487.985 502.110 546.666 571.750 621 497 - 70 - ANNEX 3.3 ANNEX 3.3: REFORM IMPLEMENTATION PLAN ELECTRIC POWER OF HENAN (MAY 1995) 1. The Chinese Government has initiated various measures designed to meet the requirements of the power sector within a socialist market economy and to establish a modem enterprise system. This new system is based on: the clear definition of property rights; commercial orientation and autonomous management; financial independence; and, the separation of government ownership and regulation from enterprise management. Electric Power of Henan (EPH) and Henan Provincial Electric Power Bureau (HPEPB) have made some progress to achieve the above goals by: (a) completing the identification, revaluation and registration of fixed assets; (b) initiating financial and accounting reforms consistent with new rules and regulations issued by the Ministry of Finance; (c) developing a new tariff structure to achieve economic pricing in five years; and (d) continuing management system reforms according to the Regulations for Transformation of Operation Mechanism of Enterprises Owned by the Whole People. 2. These measures provide favorable conditions to develop China's power industry and for a gradual transition to a socialist market economy. To further the progress achieved it is now necessary to deepen reform. Accordingly, EPH and HPEPB have defined a Reform Implementation Plan with the assistance of international consultants. 3. This plan takes account of the Decision on Several Problems in Establishing the Socialist Market Economy, the Company Law of the People's Republic of China, the Regulations for Transformation of the Operating Mechanism of Enterprises Owned by the Whole People, as well as the Power Sector Reform Strategy for China prepared jointly by the Ministry of Electric Power (MOEP) and the World Bank. 4. EPH, MOEP and Central China Electric Power Group Administration (CCEPGA) confirm that the reforms planned will be fully implemented in accordance with the applicable laws and implementing regulations-some of which are yet to be promulgated. The reform actions, timing and linkage to the Qinbei Thermal Power Project loan are summarized in the attached table. -71- ANNEX3.3 Reform Objectives 5. EPH has established the following reform objectives: (a) separation of government ownership, government regulation and enterprise management; and, to establish a mechanism for effective and coordinated regulation; (b) clear specification of EPH's commercial objectives and introduction of management methods which are scientific and suited to the market system, in order to increase management autonomy and accountability; (c) gradual rationalization of electricity tariffs to reach economic levels and achieve financial adequacy; (d) the introduction of competition and market forces into the power sector. 6. To attain these objectives, the Reform Implementation Plan defines a series of step- by-step reforms involving: (a) incorporation of EPH as a limited liability company in accordance with the Company Law; (b) separating the regulatory functions of the power bureau from EPH; (c) commercialization of EPH's operations; (d) reforming tariffs to reach economic and financially adequate levels; and, (e) restructuring the sector to introduce competition at the generation level, and improve commercial contractual arrangements between the different operating entities in the sector. This strategy is consistent with the reforms outlined in the Power Sector Strategy Study developed jointly by the MOEP and the World Bank. As an integrated package, subject to certain statutory approvals by the State Council and the promulgation of supporting laws and regulations, these reforms will be fully implemented by the end of 2000. A. Corporatization of EPH 7. EPH will be incorporated as a limited liability company under the new Company Law.' The precise schedule for incorporation cannot be defined, because the State Council has yet to issue implementing guidelines for restructuring state-owned enterprises as Companies-Article 21, Chapter 2, of the Company Law. Towards achieving this goal EPH has completed an asset valuation and verification of accounts. 8. As a transitional step towards incorporation as a limited liability company (LLC), EPH and MOEP explored the possibility of incorporating EPH as a Wholly State-Owned 1 The Company Law of the People's Republic of China specifies two broad corporate forms: Limited Liability Companies and Joint Stock Limited Companies (Chapter 2 and Chapter 3 respectively, in the Company Law). Under the category of Liability Liability Companies there are two organizational forms: (i). a limited liability company (LLC) which has not less than two and not more than fifty shareholders; and, a wholly State-owned limited liability company (WSOLLC) for state-owned enterprises that have a "single investing entity". - 72 - ANNEX 3.3 limited liability Company (WSOLLC). It was established that even to be incorporated as a WSOLLC it would require State Council implementing guidelines for restructuring state- owned enterprises as Companies. 9. To prepare for incorporation as a limited liability company, EPH will prepare Articles of Association and internal regulations that will be consistent with the Company Law. The Articles of Association (except for capital restructuring provisions which will require State Council implementing regulations) will be prepared by June, 1995. According to the Reform Implementation Plan, EPH will be incorporated as a limited liability corporation within nine months of the issuance of the State Council implementing regulations. 10. EPH will also establish its state-owned generation plants as wholly-owned limited liability companies (this is discussed in more detail in Section E, Sector Restructuring). B. Separation of Government Functions from Enterprise 11. An important reform objective is to separate government functions (i.e. regulatory functions) from EPH. This reform is not entirely within the control of EPH, MOEP and CCEPGA and will require additional government regulations on implementing power sector reform. Consequently, EPH will adopt a two phase strategy. In the first phase, which is within the control of EPH, all government functions will be consolidated within a Power Bureau Department within EPH working independently from EPH operations. In the second phase, the Power Bureau Department and the government functions it performns will be completely separated from EPH. This second phase will need to be pursued in accordance with an overall government program to establish effective power sector regulation in China, as well as the province of Henan. 12. EPH will begin the first phase immediately. All government functions being performed by the Power Bureau will be identified and consolidated within a Power Bureau Department. The new department will have its own Director, its own staff and be the only departmnent that performs government functions. Internal company regulations and procedures will be developed that will ensure that the Power Bureau Department will operate separate from EPH, and will include procedures about: (a) the Power Bureau Department's authority over EPH's operations; (b) communication between EPH's internal divisions and external units and the Power Bureau Department; and (c) the Power Bureau Departnent's communication with other government organizations. The plan for establishing the Power Department will be completed by June 1995, and implemented no later than June 1996. 13. Initiation of the second phase will need to await governmental reforms and implementation directives. EPH, CCEPGA and MOEP have in principle agreed to achieve formal separation of all government functions within nine (9) months of issuance of the necessary regulations. Policy dialogue on this aspect of regulatory separation will continue, -73 - ANNEX 3.3 more specifically through the IDF-financed technical assistance on power sector regulation being managed by MOEP. C. Commercialization of EPH Operations 14. EPH will implement four types of reform to deepen commercialization. The reforms will include: (a) rationalizing noncore businesses from the core power business of EPH, with gradual divestiture of noncore businesses; (b) establishing power supply bureaus as independent accounting profit centers to operate based on a transparent bulk transfer price; (c) restructuring of internal organization and improvement of management control systems; and (d) implementing a suitable financial management and accounting system appropriate to restructured internal organization. Separation and Potential Transfer of Noncore Activities 15. EPH has a number of activities that are either not related or ancillary to its power activities. These activities have different degrees of financial autonomy, separation of costs and commercial orientation. Several of the activities provide social services important to EPH workers and staff. EPH will first review its external units to differentiate between those subsidiary activities that are: (a) existing profit-centers with independent accounting and separate legal status (Category A) such as the four Construction and Installation Companies and the Industrial and Commercial Group; (b) cost-centers that can be transformed into profit centers (Category B), such as the two Technical Schools and one Training School for Skilled Workers; and (c) cost centers that mainly provide social and welfare services (Category C). 16. The review to differentiate EPH's noncore activities and classification into the three categories (i.e. A, B and C) will be completed by June 1995. Category A entities, which are already independent accounting profit-centers with separate legal status, will establish clear commercial relationship based on contractual agreements with EPH by December 1996. These commercial entities will be incorporated as Companies in accordance with the Company Law when State Council guidelines on restructuring state-owned enterprises are promulgated. 17. Category B and C activities will first be set up as profit-centers and cost-centers respectively. This will require appropriate transfer prices that reflect the costs of the services being provided. This will be completed by December 1996. Category C cost- centers will be separated once the government establishes suitable institutions and mechanisms to facilitate separation. Establishing Power Supply Bureaus as Independent Accounting Profit-Centers 18. EPH will establish the thirteen (13) EPH-affiliated power supply bureaus as independent accounting profit-centers to operate on the basis of: (a) a clear and transparent bulk transfer price for electricity (also called the internal settlement price); and (b) a - 74 - ANNEX3.3 commercial contractual arrangement that specifies performance targets providing a framework for efficient operation and management of these power supply bureaus. The tariff technical assistance will assist in developing the bulk transfer price for electricity (see paragraph 22.of Section D), and the legal technical assistance will develop the required contractual agreements. Restructuring of Internal Organization and Management Control Systems and Implementation of a Modern Accounting and Financial Management Information System 19. To successfully implement a commercially oriented organizational structure and management systems consistent with the objective of improving operational efficiency, the following actions will be undertaken: (a) a diagnostic study of the internal organization, operating and administrative procedures. The assessment will determine how existing business units functionally relate to each other and their respective scope of responsibility. Overlapping lines of responsibility, excessive centralization of decision- making and departments with excessively wide functional scope will be identified. An organizational structure that will improve internal management will be identified. The functional boundaries of the different departments, work units and subsidiaries. This could include the merging, separation or elimination of certain functions. Correspondingly, this could involve the strengthening or expansion of certain functions, for e.g. financial operations at the headquarters and work unit level, establishing a division for the competitive procurement of supply, etc. (b) assess accounting procedures, documentation, reporting formats and the nature of financial transactions between the various departments, power generation and supply entities, and service subsidiaries. The accounting units and activities, reporting requirements, formats for information flow and frequency of such information exchange will be redefined. A basic design for the new financial and accounting information system will be developed. The new financial and accounting management information system be totally consistent with the proposed reorganization of business processes and procedures. (c) The international consultants to perform and assist in the above diagnostic and implementation activities will be financed from technical assistance component in the project. The terms of reference for the task will be prepared by June 1995, with the draft diagnostic report and implementation plan to be completed by June 1996. All organizational reforms and the implementation of the accounting and financial management information systems, will be completed within two years of the submission of the diagnostic report. The implementation of organizational reforms and the -75 - ANNEX3.3 accounting and financial management systems will be covenanted in the project agreement. D. Tariff Reform 20. EPH's tariff reform plan is supported by the Chinese government agencies at the Central and Provincial levels. The reform is founded on the following principles: (a) the tariff structure will be gradually adjusted to reflect the economic cost of supply for different consumer classes in order to promote the efficient use of electricity; and (b) the tariff levels will be gradually increased to reach economic levels by year 2000, to ensure that EPH can meet its financial obligations and provide reasonable contribution for the future investment requirements of Henan's power sector. 21. It is recognized that tariff reform in Henan province will need to be consistent with tariff reform guidelines of the relevant provincial and central government authorities, and will be subject to their approval. However, any deviation from economic cost of supply which require government subsidies should be fully transparent-implying that the total amount of subsidies and the consumer groups benefiting from the subsidies are clearly indicated 22. Tariff System Implementation Study: EPH will prepare with the assistance of foreign consultants an tariff implementation plan that ensures smooth transition from the existing dual-track pricing system to a tariff system based on long-run marginal cost pricing principles. This study will be initiated in August 1995 and the preliminary tariff system presented to the World Bank for comments by March 15, 1996. The revised tariff system which takes into account the comments and suggestions of the World Bank will be proposed for Central and Provincial authorities for approval and finalized before June 30, 1996. 23. The implementation plan for tariff reform should achieve-the average tariff level increases agreed with EPH during project appraisal, approved by the relevant provincial authorities before project negotiations and covenanted in the project agreement. 24. The tariff system to be developed though the tariff study (paragraph 21), will achieve the following tariff reform objectives: (a) Rationalization of Capacity Charge: Gradual increase of the capacity charge, particularly for industrial and large commercial consumers, to more accurately reflect the cost of electricity supply. Future average price - 76 - ANNEX 3.3 increases for these customers should be achieved through the increase of capacity charge rather than the energy price. (b) Introduction and Extension of time-of-day (TOD) tariffs: Appropriate TOD tariffs should be developed and offered to (not imposed) all consumers who have the potential to benefit from load management. The objective is to extend TOD tariffs to the whole province by year-200 according to the following schedule: - 1996 introduction for 400 large industrial consumers in 9 prefectures. - 1997 extension to large industrial consumers in 4 additional prefectures. - 1998 1,000 more consumers, including commercial consumers. - 2000 TOD tariff choice available to all consumers in the province. (c) Unification of Dual-track Tariffs: Through a suitable transitional strategy the dual-track pricing system will be eliminated by more rapid increases of "in-plan" electricity prices. The unification of tariffs should be completed as early as possible, although no later than year- 1998. (d) Commercial Bulk Tariffs for Power Supply Bureaus: By-end 1997 all power supply bureaus who are affiliated to EPH and those that are independent should operate on the basis of a transparent bulk electricity tariff (also called the internal settlement price for EPH power supply bureaus). The intention is facilitate true profit-center and commercial operation at the distribution level. E. Sector Restructuring 25. The objective of sector restructuring in Henan is to establish clear commercial relationship between the core power sector operations of EPH and increase the efficiency of generation and distribution operations. Sector restructuring will also introduce competition in the procurement of new generation. The reformns to be implemented include: (a) Design and implementation of a competitive solicitation program to obtain power supply: The design of the competitive solicitation program with all documentation will be completed by December 1995. Subject to State Council approval this program will be implemented to procure at least one generation project by the end-of 1998. (b) EPH will restructure the generation company (with seven state-owned power plants), and the power development company as profit-centers by March 1997. These entities will be incorporated as limited liability companies in accordance with the Company Law following establishment as - 77 - ANNEX 3.3 profit centers in March 1997, or availability of State Council guidelines whichever is later. (c) Development of Model Commercial Contracts: EPH will develop model contracts to define its commercial relationships with power sector companies. The contracts include: * Power sales agreements between EPH transmission and generation operations and EPH supply bureaus and independent supply bureaus. * Power purchase agreements between separate/independent generators and EPH. * Operational and commercial agreement between Central China Power Group Corporation/Administration and EPH. These contracts will be developed by December 1996. These contracts will be made effective by June 1997. ANNEX 3.3: ATTACHMENT-REFORM IMPLEMENTATION PLAN Within Scope of Government Actions Implementation Monitorable Status of Reform Steps/Elements EPH/MOEP and Assistance through Dates Implementation CCEPGA Complementary Reforms Project TA Responsibility Required A. Corportization of EPH 1. Preparation of Articles of Partly Review by EPH lawyer hired June 1995 Completed on Association for Except for specific for project preparation. schedule. incorporation as Limited capital restructuring Liability Company provisions. Items (6) and (7) in Article 22 of Company Law 2. Incorporation of EPH as No Yes Assistance will be provided Within nine (9) months - Completed in Limited Liability Company State Council to formulate through the Legal TA. of promulgation of State September 1995. implementing procedures for Council guidelines - Provided to the restructuring of state-owned Bank. x enterprises as Companies. Article 21, Company Law. B. Separation of Government Functions from Operation I . Plan for consolidation of Yes No June 1995 EPH Bureau functions within single department. 2. Creation of, and Yes No Institutional TA will review June 1996 consolidation of bureau plan and suggest modifications functions within single if required within broader department organizational restructuring. 3. Separation of all Bureau No Yes No link to project TA. How- Formal separation to functions from EPH to Divestment must be consis- ever, EPH officials will be occur within 9 months appropriate national and tent with forthcoming regu- engaged in the IDF-grant of comprehensive power m ;. provincial level authorities. lations, the Electricity Law, financed TA on the develop- reform implementation and proposed separation of ment of electricity regulations. regulations. national and provincial This TA activity is being regulatory responsibilities. coordinated by MOEP. t i Within Scope of Government Actions Implementation Assistance Monitorable Status of Reform Steps/Elements EPHIMOEP and through Dates Implementation CCEPGC Complementary Reforms Project TA Responsibility Required C. Commercialization of EPH 1. Review io differentiate between Yes No June 1995 Completed in core and noncore activities con- September 1995. ducted by EPH. Classification and Category A, B and C. 2. Clarification of commercial Yes No Institutional TA will assist in December 1996 relationship between Category A commercializing the relationship independent accounting entities between Category A entities and and EPH. EPH 3. Establishment of Category B as Yes No Institutional TA will address the December 1996 profit centers and Category C as organizational restructuring issue cost-centers. of functional boundaries of service units and departments. 4. Establishing all 13 power supply Yes No Guidelines will be developed December 1996 bureaus under EPH as profit through the institutional TA centers to operate on the basis of study. - a transparent bulk transfer price (see Section D, 4) - commercial contract (see Section E, 2) 5. Separation of Category C No Yes activities from EPH Require government to estab- lish suitable institutional mech- anisms to undertake enterprise social welfare responsibilities. Cf us'J Within Scope of Government Actions Implementation Monitorable Status of Reform Step/lElements EPH/MOEP and Assistance Dates Implementation CCEPGC Complementary through Responsibility Reforms Required Project TA D. Tariff Reform 1. Achievement of economically Provincial Go-enument approval will be obtained before Dectmber 2000 and financially adequate elec- negotiations. tricity tariff level in Henan 2. Unification of dual-track Provincial Govemment approval will be obtained before December 1998 - Completed in 10 pilot electricity tariff system in negotiations. perfectures in 1995. Henan - 10 others planned for 1996. 3. Development of an Imple- Provincial Govemment and MOEP approval of new tariff Tariff Study and TA will Submit proposed tariff - Intemal consultant mentation Plan for Revised structure is required. assist in developing new structure and hired in August 1995. Tariff Structure: structure. implementation plan to - Draft Report - time-of-day pricing Bank by March 1996 (December 1995) under - rationalize capacity charge revision by EPH. Plan approved by all - Study given high concemed authorities priority, will be by June 30, 1996 finalized on schedule. 4. Establishment of bulk electri- Yes No Tariff Study and TA will October 1996 Covered by the soon to city transfer price (also called assist in developing the be completed study. 0o the intermal settlement price) bulk transfer price issue. between EPH generation and transmission business and 13 EPH-affiliated and 4 indepen- dent power supply bureaus. IW Within Scope of Government Implementation Monitorable Status of Reform Steps/Elements EPH/MOEP Actions Assistance through Dates Implementation CCEPGC and Project TA Responsibility Complementary Reforms Required E. Sector Restructuring 1. Design and implement compe- Partly Yes Legal TA will assist in (a). Design to be completed Consultant to be titive bidding program for Design of competitive solicita- For implementing the design and prepara- by September 1996 hired in June 1996 at acquiring power supply. tion program can be done competitive solicita- tion of competitive (b). Implementation of program and the same time as the within project scope. Imple- tion program solicitation programs solicitation of one generation consultants for the mentation would require approval of State with all required plant by end-1998 financial study. higher level regulatory Council required for documentation. approval. projects larger than 25 MW. 2. Development of Model Com- Yes No Legal TA will assist in Contract developed by December mercial contracts between EPH preparation of the neces- 1996 and other power sector entities: sary commercial con- - power sales agreements tracts and agreements to Contracts to made effective by June with EPH supply bureaus allow subsequent steps 1997 and independent supply 3, 4 and 5 below. bureaus - agreement between separate generators and EPH transmission unit; - agreement between Central China Power Group and EPH. 3. Restructuring of: (a). Yes (a). No (a). Institutional and (a). March 1997 - generation company (com- legal TA will assist in prised of 7 State-owned (b). No (b). Yes profit-center establish- plants); and, State Council imple- ment with clear con- - power development company menting guidelines tractual relationship Reform Actions: required. (a) Establishment as profit centers (b) Incorporation as limited liability company. a, i Status of Reform Steps/Elemenb Scope of Work Time Schedule Implementaion F. Technical Assistance to Support Reform Implementation 1. Organizational Restructuring * Diagnostic review and analysis of: existing organizational - June 1996 Isque LOI (prior to negotiations) and Financial Management- structure; financial management practices; reporting systems; Sept. 1996 Proposal deadline Institutional TA flow of information; and budgeting and accounting systems. - Feb. 1997 Award contract ) EPH is preparing bid * Development of improved organizational structure; design of - Sept. 1997 Interim Report ) documents. required accounting, financial and budgeting systems to meet - June 1998 Final Report the need of efficient management and decentralized decision- - June 1999 Implementation completed ) making * Implementation of recommcnded organizational structure and systems including training 2. Legal Consulting Services Comprehensive legal advice for: - Sept. 1996 Select Legal Advisor * Incorporation of: EPH; Power Development Company; and, Seven State-Financed Power Stations in a single entity. Some tasks have specific dates, the other tasks * Preparation of by-laws and corporate procedures for consolida- will depend on the promulgation of specific tion of regulatory responsibilities in single EPH department, laws and regulations. Consequently, the legal including assistance for full regulatory separation from EPH advice will be provided on a as needed when national laws and implementing regulations are promul- retainership basis. gated. x * Development of Commercial Contracts: to - Power purchase agreements (EPH and generators) - Power sales agreements (EPH and distributors) - Operational agreement between CCEPGC and EPH * Development of Competitive power solicitation program * Assistance in commercializing EPH by the separation of noncore activities 3. Development of Tariff * Review existing tariff study prepared by EPH and BERI; - June 1995 Start-up - Study on schedule. Structure and Implementa- examine assumptions and methodology. - March 1996 Present prcliminary tariff - Formal approval by tion Plan * Develop suitable rate structure for EPH: rationalize capacity structure to the World Bank for comments. the Provincial Govt. and energy charges for large consumers; appropriate time of day - June 1996 Final Tariff structure agreed Provided during pricing schedules; upon and with detailed Implementation Plan negotiations. * Define tariff structure implementation plan to achieve tariff unification by 1998 and average LRMC tariffs by 2000. -83 - ANNEX 3.4 ANNEX 3.4: ORGANIZATIONAL RESTRUCTURING AND FINANCIAL MANAGEMENT SYSTEMS DRAFT TERMS OF REFERENCE I. Background and Objectives 1. Electric Power of Henan (EPH) is undertaking major changes to meet the operational challenges of power sector reforms initiated by the Chinese Government. One of the major objectives of these reforms is to establish a modem enterprise system characterized by clear definition of property rights, autonomous management, commercial orientation, financial independence, and separation of government ownership and regulatory functions from enterprise management. The reforms are mainly based on: (i) new accounting regulations, promulgated by the Ministry of Finance in July 1994, that are generally consistent with International Accounting Standards, and, (ii) the improved enterprise policy and governance framework defined by the Company Law enacted in July 1994. 2. To achieve these objectives, the Chinese Government and the World Bank jointly developed an implementation program of sector reforms that stresses full corporatization and greater autonomy and accountability of power enterprises.' The reform strategy is intended to improve the operational efficiency and increase the market orientation of the power sector. 3. Like most state-owned enterprises, EPH is faced with the following problems: (i) government interference in management, administrative and operational decisions reflecting the former central planning orientation of the economy; (ii) lack of full accountability of managers stemming from an inadequate, highly centralized decision making and non availability of timely and accurate financial information at different operational activity levels; (iii) lack of transparency of the financial situation: financial statements that are now prepared based on the new accounting regulations, still do not provide full disclosure of EPH's financial position and, (iv) lack of focus on the core business operations and involvement in many side activities that include profitable activities such as construction companies, design/engineering institutes, as well as welfare responsibilities such as housing, schools, hospitals etc. China Power Sector Reform: Toward Competition and Improved Performance, Report No. 12929-CHA, Document of the World Bank, September 15, 1994. -84 - ANNEX 3.4 4. This technical assistance activity is financed through the Henan (Qinbei) thermal power project and is designed to address the above mentioned organizational and financial issues and problems. It stresses the strengthening of internal organizational and management practices, and the introduction of appropriate accounting, budgeting and financial management systems. To achieve the full benefits of organizational reform and improved financial reporting and monitoring systems, it is proposed to carry out the project in three distinct but fully integrated phases: (a) a comprehensive diagnostic review of the current organizational structure, management practices, and financial/accounting practices and reporting systems, with particular attention to division of responsibilities, flow of information and quality of reporting, and budgeting and accounting systems and procedures. (b) development of an improved organizational structure, design of the required accounting and financial and budgeting systems to meet the need of efficient management and decentralized decision making, and preparation of a detailed plan for implementation. (c) implementation of the organizational structure and systems approved by EPH including computer, software and training needs. 5. This work to be undertaken is closely related to the implementation of various institutional reforms in EPH/Henan's power system. It will be extremely important to coordinate the tasks under this activity with the overall reform effort in EPH. Coordination with legal advisors hired by EPH for reform implementation will be crucial. The Reform Implementation Plan and the Termns of Reference for Legal Consulting Services are attached (Attachment 1 and 2, respectively). II. Scope of Work 6. The project will include, but not necessarily limited to, the following tasks: Phase 1: Diagnostic Review and Analysis 7. During the first phase, the consultants are required to carry out a detailed assessment of the current organizational structure and financial management practices in EPH. The preliminary work done by EPH consultants in November 1994, may be used as a background document. The scope of this review will include: (a) A review and assessment of EPH's internal organization and operating and administrative procedures with particular attention to the responsibilities of the existing business units or subunits (such as, generation plants, prefecture supply bureaus, county/city supply bureaus, construction -85 - ANNEX 3.4 companies, etc.) and their functional relations, overlap in lines of responsibility, excessive centralization of decision-making, and organizational deficiencies. (b) Review and analysis of accounting procedures, documentation, reporting formats and the nature of financial transactions between the various departments, power generation and supply entities, and service subsidiaries. (c) Critical assessment of Cost Accounting, Financial Planning, Budgeting, and Internal Audit systems and procedures. Special attention will be given to the existing organization of accounting units and reporting requirements. (d) Evaluation of performance monitoring systems: establishment of performance targets and indicators, methods for communicating, controlling and monitoring them. Phase 2: Master plan for Internal Reorganization and Financial Management Systems 8. During the second phase, the consultants will, jointly with EPH, develop an organizational structure and related management, accounting, financial, control and reporting systems that address the deficiencies and weaknesses identified during the first phase, satisfy EPH's long-term corporate objectives and increase its cost consciousness and business orientation. The work of this phase is organized in three subactivities: Organizational and Management Structure 9. Redefinition of the functional boundaries and responsibilities of the different departments, work units and subsidiaries. Special attention should be given EPH's main functions (e.g. generation, transmission, distribution and customer management) and financial operations at the headquarters and operational unit levels. The recommended organization should also prepare EPH to its role of major player in a more competitive power sector by assessing the need for an autonomous unit responsible for planning and competitive procurement of supply. 10. Definition of interorganizational relationships, communication and reporting channels between the different units. 11. Assistance in the preparation of an Operational Manual that describes the organizational structure, functional boundaries, job descriptions, communication and reporting channels, limits of authority, etc. Special attention should be given to accounting and financial units. - 86- ANNEX 3.4 12. Recommendation of optimal staffing and preparation of job description and qualification requirements for all posts of reasonable importance in the recommended organizational structure. Accounting Systems and Practices 13. Redefinition of accounting units and activities clearly identifying cost and profit centers, reporting requirements, formats for information flow and frequency of information exchange. This task will develop a basic design for the new financial and accounting information system. It is of crucial importance that this basic design of the financial and accounting management information system be totally consistent with the proposed reorganization of business processes and procedures. 14. Development of a Standard Financial Accounting System and general accounts classification detailing balance sheets, income statements, and cash flow statements. This should include policies and system procedures, recommended principles for accounting classification, and follow-up methods. The system should develop and provide for the timely collection of accounts receivable and settlement of accounts payable. It should also contain standards for depreciation for fixed asset accounting. 15. Assistance in the preparation of an Accounting Manual setting forth a coded chart of accounts, detailing and describing balance sheet accounts, income accounts, functional and department accounts, cost/profit centers, objective accounts, policies, standard procedure instructions, report formats (including an inventory of reports describing their purpose and method of preparation, assigning responsibilities for preparation, timetable, frequency and distribution lists), use of capital and expense budget programs (including guidelines distinguishing capital items and items charges directly to expense). 16. Improvement of the Internal Control and Audit System through approval and audit procedures, internal review systems-especially for purchasing, inventory and stores, handling of cash, and payroll. Budgeting and Performance-Based Management Information Systems 17. Redefinition of the process of setting performance targets, and the systems for controlling and monitoring them in practice. This would include policies and procedures, related analytical techniques, and mechanical tools to ensure project planning, formulation, justification, management and control of budgets, including analysis of budget variances. 18. Procedures to integrate MIS with the cost accounting system so that it can generate information for assigning responsibility, measure labor and input productivity against standards, analyze and control cost variances (i.e. input and labor price and quantity, efficiency, overheads, and capacity variances) from standards. This should -87 - ANNEX3.4 facilitate the determination of the level of profitability of EPH so that pricing decisions can be taken with the full knowledge of costs. 19. Development of a Financial Planning system, including the introduction of operational objectives and planned allocation of resources in the form of Operating Expense Budgets and Capital Expenditure Budgets, and the frequency for issuance. The budgeting system should be coordinated with the financial accounts in order to reconcile budget variances with financial figures; 20. Improvement of the planning and control of operational support functions or central service functions, such as, maintenance and work planning/preparation, materials management, procurement, quality control, transportation, personnel management, etc.. 21. The consultant will prepare a detailed scope of tasks and a clearly defined implementation strategy for a smooth transition from the current organizational structure to the recommended one and progressive replacement of existing systems by the newly designed ones. The implementation strategy will be divided into actions and targets with a timetable and should identify the priorities of and sequence in organizational change and systems development. Phase 3: Implementation 22. During this phase, the consultant will assist EPH in implementing the recommended changes in organizational structure, business practices, financial management and reporting systems. The work will include: (a) assistance in implementing the new organizational structure and organizing work sessions/seminars to help managers and financial/ accounting staff fully understand the proposed changes; (b) assistance in selecting and installing suitable hardware and software, especially a new general ledger package and appropriate centralized/distributed computer systems to be linked to desk-top terminals. (c) identification of staffing and skills required to implement the new financial/accounting systems and appropriate in-house, external training programs, and assistance in preparation of training manuals. III. Approach, Reporting, Outputs and Time Schedule 23. The international consultants will submit a proposal to cover all three phases of the work. However, the proposal should delineate clearly the costs for each phase of the work. The proposal will detail: (i) the proposed work plan, approach and organization of the consultant's project team; (ii) the tasks to be undertaken by each member of the team, - 88 - ANNEX 3.4 and (iii) time allocated to each member in the field and head office to carry out his/her assignment. Apart from providing a full complement of skills to undertake this task, the consultants will be required to demonstrate work experience on similar assignments and good knowledge of the power utility industry. 24. The task will be supervised and coordinated by a Steering Committee of senior management and department directors to ensure that decisions are made promptly, especially at the end of the first and second phases. The Committee will designate a high level project manager and a multidisciplinary working group to work with the consultants and to ensure timely availability of data and full cooperation of staff at various levels of the company. The international consultant will report problems and difficulties in carrying his assignment to the project manager and Steering Committee, and make recommendations to address them and ensure smooth and timely progress of the assignment. The foreign consultants and the working group will work as a joint team to carry out the project, however, the foreign consultant will remain responsible for the quality of the work and for the recommendations presented to the Steering Committee at the end of each phase of the process. Reporting 25. The Consultant will prepare interim reports for each phase of work to be submitted to the Steering Committee for review and decision. The report should in addition to the Consultant's conclusions and recommendations, clearly identify: (i) outstanding issues and/or problems encountered; and, (ii) decisions that need to made by the Steering Committee and/or EPH management. All reporting will be in English. The Consultant will provide ten (10) copies of all interim and final reports. Time Schedule and Outputs 1996 March - Letter of Intent (LOI) issued. June - Deadline for submission of proposals. September - Evaluation of bids. November - Award and negotiation of contract. 1997 March - Presentation of diagnostic review findings to EPH and World Bank. Submission of report on Phase I. June - Delivery of interim master plan report (Phase It) and recommendations. September - Deadline for EPH and World Bank comments on revision and changes. December - Submission of draft final report (Phase I) and implementation strategy. 1998 March - Submission of fnal report and implementation strategy (Phase II). June - Begin implementation (Phase III). 1999 March - Implementation completed. Consultant transfers systems to EPH counterpart. - 89 - ANNEX 3.5 ANNEX 3.5: LEGAL CONSULTING SERVICES TERMS OF REFERENCE I. Background and Objectives I. The Electric Power of Henan (EPH), a government-owned power company, is seeking a loan from the World Bank to finance the Qinbei Thermal Power Plant. It is proposed to include in the proposed loan, funds for financing the cost of legal technical training and consulting services to support enterprise and regulatory Teform. 2. EPH has adopted a "Reform Implementation Plan" which includes: the corporatization of EPH and its subsidiary power related activities; the separation of government bureau functions (i.e. regulatory functions) from enterprise ownership and management; and, the restructuring of the provincial power sector with clear cost separation of core generation and distribution to increase efficiency and pave the way for eventual separation through divestment. EPH has already used an international legal advisor in the preparation of the Reform Implementation Plan. 3. To implement these reforms EPH will require legal technical assistance to: create corporate legal instruments; establish internal rules and regulations; and, develop and execute a variety of commercial contracts. In addition, the expected creation of a new legal and regulatory framework for the power sector in China and increased commercial orientation of EPH will require EPH to development internal legal expertise sufficient to support its commercial and financial activities within this new framework. 4. This Terms of Reference for legal consulting services is designed to provide EPH with the required legal assistance on a timely basis. The timing for certain aspects in the scope of work are contingent upon specific government actions, consequently, the legal consulting services will be provided when required by EPH to meet the schedules established in the Reform Implementation Plan. 5. A parallel technical assistance activity will focus on organizational restructuring and financial management procedures. Outputs of this work, particularly the definition of internal functional boundaries and business units, will be an important input to some of the legal technical assistance. The Legal Consultant will be kept informed on the progress of this work. It will be important for the Legal Consultant to ensure that the legal advise is consistent with the organizational restructuring being undertaken by EPH. -90 - ANNEX 3.5 II. Scope of Work 6. The legal Consultant will undertake to deliver the specific legal tasks identified below, as well as legal training and briefings as required in order to keep the client (i.e. EPH) fully informed of the implications of the recommended actions. This legal training can be conducted through informal lectures and seminars and will assist in the development of in-house EPH legal capability. 7. Incorporation of EPH as a Limited Liability Company. Preparation of Articles of Association and all statutory documentation required to incorporate EPH as a Limited Liability Company as per Company Law in China. A draft Articles of Association prepared by EPH will form the initial basis of this work. The process of incorporation will be formally initiated when the State Council issues the regulations on the restructuring of state-owned enterprises as Companies. The Legal Consultant will assist EPH in all procedural matters required by the Company Registry and other statutory agencies in China. A key task for the Legal Consultant will be to ensure that the capital restructuring issues in the Articles of Association which relate to the clarification of ownership are consistent with the implementing regulations to be issued by the State Council. In addition, advise will be provided in responding to questions raised and clarifications requested by statutory agencies involved in the process of incorporation. 8. The assistance provided for incorporation as a limited liability company will in also focus on the development of suitable procedures and guidelines to facilitate operation under the new structure. This will include: corporate charters; by-laws and internal administrative procedures/regulations consistent with the new corporate form. The internal procedures should focus on the development of clear profit and cost centers that will ease subsequent stages of restructuring envisaged i.e. separation of generation company and creation of distribution profit-centers. 9. Consolidation of Government Functions within EPH and subsequent Separation. As a first step towards the separation of government (i.e. power bureau) functions from EPH, it is proposed that a single department be responsible for all these activities. This plan will be developed by EPH with assistance provided through organizational restructuring study. The Legal Consultant will assist EPH in developing the necessary internal guidelines to facilitate this organizational change. Coordination with the Consultant responsible for the organizational restructuring study will be required. 10. Once the Government clearly defines the procedures for implementing new power sector regulation arrangements, the Legal Consultant will assist EPH in transferring the bureau functions to the entities specified in the government implementation regulations. 11. Commercialization of Noncore Activities of EPH. EPH has undertaken to delineate their noncore activities into three categories: -91- ANNEX 3.5 Category A: Activities that are currently accounted for separately and which have the potential to be separated as independent companies. Category B: Commercial activities that are can be operated as profit- centers Category C: Welfare activities that can be established as cost-centers. EPH will separate Category A activities into wholly-owned limited liability companies as a first step. The Legal Consultant will advise on all relevant legal and procedural aspects of this task. In addition, advise will be provided on the internal procedures and guidelines to facilitate the operation of Category B activities as profit-centers and Category C activities as cost-centers. 12. Design of Competitive Bidding Program for Acquiring New Generation. The legal consultant will assist EPH in designing comprehensive documentation and procedures to acquire new generation resources. This task will include: Request for Proposals (RFP) documentation; model power purchase contracts; implementation agreements; etc. These documents will be designed based on the power system parameters of EPH. This task will be completed by June 1996. 13. Development of Model Commercial Contracts. Three types of commercial contractual arrangements will need to be developed to assist EPH in dealing with independent companies engaged in generation and distribution, as well as formalizing its relationship with the Central China Power Group Corporation. These commercial contracts are: (a) power sales and operating agreements between EPH and its affiliated and nonaffiliated power supply bureaus (i.e. distribution entities); (b) power purchase and operating agreements between EPH and separate generation entities; and (c) commercial and operating agreement between EPH and the Central China Power Group Corporation. 14. The commercial arrangements (a) and (b) should be based on the principle of treating entities affiliated to EPH and those which are independent on an equal, nondiscriminatory basis. The intention is that these commercial arrangements form the basis of any restructuring undertaken in the power sector in Henan. 15. As such commercial contractual arrangements are relatively new in China, the Legal Consultant must provide all the required training to EPH staff on how to negotiate and execute these contracts. This task will be completed by December 1996. The Legal - 92 - ANNEX 3.5 Consultant will assist in implementing and making these contracts effective by June 1997. 16. Incorporation of Generation Company and Power Development Company. The seven state-owned plants within EPH will be consolidated and incorporated as a limited liability company wholly-owned by EPH. The Legal Consultant will assist in the incorporation process, as well as provide advise on the actual implementation of the commercial contract between generation entities and EPH (see task 5 above). A similar incorporation process will be adopted for the Power Development Company. 17. Development of Electricity Conservation Performance Contracts. EPH plans to establish and independent profit-center to pursue electricity conservation activities and programs. Some of these activities will be conducted on the basis of "performance contracts" between the conservation profit-center and the client. In addition, some activities would require commercial contracts to specify financing terms and associated services. The Legal Consultant will provide the advise required by EPH on the development of these contracts. This tentative schedule for this task is June 1996. III. Organization of Work and Consultant Qualifications 18. The Legal Consultant will be a reputed international law firm. The Consultant will be selected by EPH (i.e. the Client) with the assistance of the World Bank. The following criteria will guide the selection of the Legal Consultant: (a) Demonstrated experience in providing corporate, commercial, financial and regulatory legal services to electric utilities, including representation of utilities in their acquisition of power from independent power producers; (b) Direct experience in advising Chinese and foreign clients on the application of the Chinese Company Law. Experience in assisting entities to incorporate as limited liability companies in China would be a distinct advantage; and (c) A law firm which has a strong Asian presence, and a legal staff with Chinese language ability will be favorably considered. Previous experience in advising power sector entities in China would be an advantage. The Legal Consultant will need to clearly specify the legal staff who will be made available for each of the above tasks. The Client reserves the right to reject any legal staff who substitute the individuals specified at the time of selection. The Legal Consultant will be selected by end-July 1995. -93 - ANNEX 3.6 ANNEX 3.6: TARIFF STRUCTURE CONSULTING SERVICES TERMS OF REFERENCE I. Background and Objectives 1. The principal objective of this study is to assist Electric Power of Henan (EPH) in developing a tariff structure and feasible transition plan that will reflect the following principles: (a) full adoption of a unified electricity tariff in Henan based on financially sufficient long-run marginal cost principles; (b) a rational capacity charge for industrial and large consumers; (c) a time-of-day tariff system that is feasible; and (d) a nondiscriminatory bulk sale power tariff for power sold to power supply bureaus. 2. Electric Power of Henan (EPH) has with the assistance of Beijing Economic Research Institute (BERI) prepared a tariff study which will forn the basis for this technical assistance. This tariff study (Attachment I) represents an excellent analytic exercise towards achieving the above objectives. The Consultant will work with EPH and related agencies in assessing the assumptions, computations and recommendations in the tariff study. Additionally, the Consultant will provide the necessary training to ensure that EPH develops adequate in-house capacity to undertake future tariff reviews and revisions. II. Scope of Work 3 . The Consultant will perform the specific tasks identified below: (a) Review the computations performed to arrive at the Long-Run Marginal Cost (LRMC) tariff in the tariff study conducted by EPH. The Consultant will: - 94 - ANNEX 3.6 (i) examine the appropriateness of the economic assumptions made; (ii) review the load forecasts and surveys conducted; (iii) review system expansion plan and operating policies; and (iv) review the basis for selecting time-of-day tariff intervals selected. (b) Examine the rate structure developed in the tariff study and suggest suitable modifications if necessary. The Consultant will compare the proposed tariff structure with different alternatives, and clearly explain the advantages and disadvantages of each approach. In making these comparisons it will be important to stress the practical aspects of tariff administration in addition to the economic efficiency of a given tariff structure. (c) Assist EPH in designing and selecting a suitable rate structure and defining a workable tariff reform implementation plan. The purpose of the tariff reform implementation plan is to achieve a suitable transition to LRMC pricing. As EPH intends to make a gradual transition to a corporate entity operating on commercial principles, the Consultant will: (i) analyze the financial cost and revenues associated with the rate structure to ensure that the commercial financial targets can be achieved by EPH; and (ii) ensure consistency with the new direct and in-direct taxation policy in China, as well as the financial accounting standards established. (d) Develop a suitable nondiscriminatory bulk electricity transfer price (also called the internal settlement price for EPH-affiliated power supply bureaus). It is important that the method of establishing the bulk electricity transfer price ensures equal treatment of a the 13 EPH-affiliated and 4 independent power supply bureaus. III. Organization of Work 4. This technical assistance activity will be managed by EPH with the assistance of the World Bank. The Consultant selected must demonstrate prior expertise in developing electricity utility rate structures. Experience in advising electric utilities and regulatory agencies in developing countries will considered favorably. 5. It is envisaged that two experienced professional will form the core Consultant Team. About 10 weeks of work will be required by each professional, of which 7 will be in the field. Two trips each to China are planned. -95- ANNEX 3.6 Time Schedule: June 1995 Start-up - Contract awarded August 1995 1st mission Sept./Oct. 1995 : 2nd mission December 15, 1995 Draft Report January 15, 1996 : Final Report Background Documents: 1. Tariff Study prepared by EPH and BERIWREP 2. Economic Analysis Report for Qinbei Thermal Power Plant (December 1994) Addendum to Economic Analysis (to be prepared by June 30, 1995) 3. Reform Implementation Plan -96 - ANNEX 3.7 ANNEX 3.7: STAFFING OF EPH (As of December 31, 1994) Number of Units Number of Staff Percent By Specialty Staff Administration 3,568 6.7 Technical Engineers 7,840 14.87 Technicians 3,785 7.1 Subtotal 15.193 2L- Workers Junior 9,815 18.5 Average skilled 19,456 36.4 Highly skilled 2,669 5.0 Apprentices 568 1.0 Subtotal 32,508 60.9 -Others IQ1 53,384 100Q. By Functional Units Headquarters 19 296 0.6 Generation 12 24,568 46.0 Supply and services 13 14,887 27.9 Construction and 4 9,054 17.0 installation Education 4 985 1.80 Design 1 675 1.30 Repair 2 1,237 2.30 Miscellaneous 13 1,682 3.10 IQt 6 53,384 100 - 97 - ANNEX 3.8 ANNEX 3.8: SCHOOLS AND TRAINING CENTERS UNDER EPH Current Status Proposed Plan School Students Staff Graduates Students Staff Graduates Zhengzhou Elec. Power Technical College 1,708 408 600 2,000 585 1,360 Henan Power StaffCollege 615 119 30 360 162 120 Henan Elec. Power Tech. for workers 1,258 271 441 1,500 408 480 Nanyang Elec. Power Tech. for workers 1,267 187 393 720 225 240 ITo 4IM48 29 iA464 4,580 I1,80 LI3 -98 - ANNEX 3.9 ANNEX 3.9: POWER PRICING IN HENAN PROVINCE 1. Power Pricing in Henan Province, as other part in China, underwent major evolution during the past years. As the economy moved to freer markets, a multitier pricing system has been introduced in 1985 based on: (a) "in-plan quotas", electricity provided by power plants owned by the state, priced at a state base price fixed by SPC and MOEP; (b) out of plan quotas", electricity provided by most plants built after 1985 and financed mostly by provincial and local governments, parapublic independent producers (Huaneng and Sunburst Power Company, essentially) and eventually joint-ventures, priced at a collected fund price approved on a yearly basis by the provincial government;' In Henan, in 1994, about 57 percent of the total electricity sales were priced at the "State- base price", 43 percent of the sales were priced at the "collected fund price". State Base Price 2. The state base prices, also referred as the catalog prices, used to be artificially low at about 6.54 fen/kWh until 1985, were gradually increased to reflect coal and transport price increases. In 1993, they were fully revised throughout China and substantially increased. Demand charges have been increased by about 50 percent and energy prices by about 40 percent. The new system will thereafter be adjusted annually by SPC and MOEP to reflect charges in supply costs, specially fuel prices. 3. State prices in Henan increased from an average of 10.6 fen/kWh in 1992 to an average of about 14.4 fen/kWh in 1993 and about 18.92 fen/kWh, in 1994. State base prices for Henan in 1994 are provided in Table 1. The Collected Fund Price 4. The "collected fund price", also referred to as guided prices, is based on the "new plant-new price" policy introduced by the Government in 1986. Under this policy, power Unlike in other provinces such as Zhejiang: Henan doesn't have "above quota" or "processed" electricity, purchased from other provinces or captive plants and/or by all power plants after meeting their planed generation targets. The "above quota" electricity price in Henan province, are about 40 percent higher than the "catalog price". - 99- ANNEX 3.9 from "new plants" is sold to provincial company at "debt-repayment prices". Calculated and paid on a plant-by-plant basis, the debt-repayment prices are designed to provide sufficient revenue for the "repayment of loan capital with interest", generally within ten years. The collected fund price in Henan was 25.2 fen/kWh in 1994. Table 1: State Base Prices in Henan Province, April 1994 Energy charge (Y/kWh) Demand charge Maximum Substation Low 35 kVA load capacity Consumer category voltage 1-10 kVA & above (YIkW/mo.) (YAkVA/mo.) Residences 0.22 0.215 Nonresident 0.321 0.313 Small and nonindustrial 0.23 0.224 0.216 Large industry 0.161 0.152 13.50 9.00 Agriculture 0.18 0.17.4 0.16.5 Source: EPH. Fees and Surcharges 5. Additional fees and surcharges are added to the prices paid by the consumers. With the exception of the 0.4 fen/kWh levy on all consumers throughout the country to help finance the Three Gorges Hydroelectric Project, these charges are levied by provincial and local governments. In Henan, industrial and commercial electricity sales are subject to both a 2.0 fen/kWh surcharge for a Provincial Power Construction Fund (as in other provinces) and a surcharge rate of 8 to 10 percent over total consumption for Local Construction Funds operated by prefectural governments. Some additional fees are earmarked in some areas to partially cover part of local distribution and transmission costs or street lighting. The bulk of the revenue collected through these additional fees are managed by the "three electricity bureau" (supply, security, conservation), controlled by local governments at different levels. Consumer Tariffs 6. Consumer tariffs in Zhengzhou city and Zhumadian Prefecture are shown in Table 2 and 3. The consolidated add-ons include: 0.02 development fund; 0.004 Three Gorges Fund; local development fund 8 percent- 10 percent of total energy cost. -100- ANNEX3.9 Table 2: Tariff and Add-ons in Zhengzhou City Three Power Average Average Consumer Tariff Gorges Development Catalog Collected Add-on Y/kWh Fund Tariff Fund Tariff Residential Lighting 10% 0.004 0.246 Commercial Lighting 10% 0.004 0.02 0.377 Large Industry 8% 0.004 0.02 0.272 0.326/0.284 Small Industry 8% 0.004 0.02/0.03 0.198 0.305/0.288 Fertilizer Factory 8% 0.004 0.143 0.231 Agriculture 0.004 0.184 0.284 Irrigations 0.096 Table 3: 1995 Consolidated Tariff in Zhumadian Prefecture Consolidated Item Demand Charge Tariff Add-ons Total Residential Lighting 0.350 0.037 0.387 Commercial Lighting 0.450 0.047 0.497 Large Industry Max. Load 13.5Y/kW/mo 0.318 0.047 0.365 Substation capacity 9Y/kVA/mo Small Industry 0.370 0.047 0.417 Agriculture 0.335 0.037 0.372 7. In Zhengzhou city, residential customers are charged at a low tariff, slightly higher than the catalog price, of about 30 fen/kWh 300 plus industrial customers still enjoy in-plan quotas of about 3000 GWh, about 60 percent of the total electricity consumption in 1993 estimated at 5,400 GWh; they are charged at tariffs of 18.8 to 19.8 fen/kWh for in-plan compared with 30.5 fen/kWh paid by similar consumers without quotas, except agriculture and fertilizer customers who enjoy a tariff at a subsidized level: 14 fen/kWh and 18.4 fen/kWh respectively. The fertilizer factories consumed about 6 GWh in 1993, 1.1 percent of the total consumption. 8. Final consumers prices based on bills issued in June 1994 for typical consumers in Zhengzhou city are as below: -101- ANNEX 3.9 Large industry in-plan 0.24/yuan/kWh Large industry out of plan 0.35/yuan/kWh Industrial installation Co. 0.34/yuan/kWh Wood product Co. 0.37/yuan/kWh City Telecom. Bureau 0.30/yuan/kWh DuKang Hotel 0.38/yuan/kWh University 0.32/yuan/kWh All these prices are much lower than the long-run average incremental cost of supply of the provincial system estimated at about 39 fen/kWh at the 35 kV level and LRMC of 43 at 10 kV level.(Beijing Economic Research Institute of Water Resources and Electric Power: The Economic Analysis Report for Qinbei, November, 1994 and Henan Power Grid Tariff Study, October, 1994). Consumer Price Reform 9. Henan provincial government has attached great importance to tariff reform. The government has promised to raise the average tariff to a level equivalent to US$0.6 by the year 2000. EPH has gradually raised the final consumer prices to reflect the real cost of the resources. The consolidated tariff has been increased from 6.54 fen/kWh in 1985 to 21.6 fen/kWh in 1994. EPH has also introduced incentives to improve efficiency specially by introducing time-of-the-day tariffs and reducing economically unjustified discrimination among customers. In Luoyang and Zhengzhou prefectures a time-of-the-day tariff was introduced on an experimental basis. The difference between peak tariff and off-peak tariff is 5:1. Starting from 1996, EPH will prepare a time-of-the-day tariff to large consumers with a four year schedule expanding from 400 large industrial consumers in 9 prefectures to the full availability of TOD tariff choice to all consumers in the province. EPH will also introduce a new tariff for commercial consumers. 10. EPH is committed to increase the pace of the tariff reforn in the province based on its past successes and leading experiences in other areas in China. EPH will gradually increase capacity charge to large consumers starting from 1996. It is specially committed to the abolition of the two track system and unification of bulk sale tariffs and final consumer tariffs and avoid discrimination among customers based on "in-plan" and "out-of-plan" quotas. EPH will adopt a unified sales tariff by the end of 1998. EPH will prepare with the assistance of foreign consultants an tariff implementation plan that ensures smooth transition from the existing dual-track pricing system to a tariff system based on long-run marginal cost pricing principles. This study will be initiated in August 1995 and the preliminary tariff system presented to the World Bank for comments by March 15, 1996. The revised tariff system which takes into account the comments and suggestions of the World Bank will be proposed for Central and Provincial authorities for approval and finalized before June 30, 1996. -102- ANNEX3.9 11. By the year 2000, EPH will have finally rationalized the tariff structure, giving consumers a choice of a flat tariff or time-of-the-day tariff, and raised the tariff level not much lower than the LRMC level of 42.5 fen. -103- ANNEX4.1 ANNEX 4.1: PROJECT DESCRIPTION General 1. The proposed Henan (Qinbei) thermal power plant is located at Wulongkou town, 17 km northeast of Jiyuan City and about 140 km northwest of Zhengzhou City, Henan Province. The north of the plant site faces Taihangshan Mountains and the south is close to the Qinbei Railway Station where Jiaozuo-Zhicheng railway passes through. The topography of the plant site is flat and open. Most of the land is too poor to be farmed without resettlement, the relief is higher with a slope of 3-4 percent and the plant will be leveled above the 100-year flood line. The seismic intensity scale is 6 degree. In its first phase, the plant will have an installed capacity of 1,200 MW (2 x 600 MW units) of ultimate capacity of 3,600 MW (6 x 600 MW). The scheduled dates of commercial operation of the two units are as follows: Unit 1 - March 2001 Unit 2 - December 2001 Coal 2. Basic design parameters for the boilers and turbine generators will follow the standard specifications of 600 MW coal-fired subcritical units of proven technology. The power plant will consume up to 3.5 million tons of mixed coal a year. Coal produced at Linfen, Houzhou and Changzhi coal mines in the southern region of Shanxi Province will be transported to the coal yard of the power plant directly by train. The coal transporting distance is 150-270 km from these coal mines to the power plant. The units will be designed to bum design coal (mixture of lean coal/bituminous coal/washed middlings of 2:1:1 ratio; 21297 kJ/kg LHV; Ash 24.95 percent; Sulfur 0.41 percent; volatile matter 15.40 percent) and check coal (mixture of lean coal/bituminous coal/washed middlings of 2:0:1 ratio; 22083 kJ/kg; Ash 25.27 percent; sulfur 0.56 percent; volatile matter 12.95 percent). The supply and transportation of the fuel coal have been approved by the related authorities. Cooling Water System 3. The north of the plant site is facing Taihangshan Mountains and sufficient quantity of ground water is available to meet the water demand of the plant for the makeup and cooling requirements for the plant. For the circulating water system, the closed circulating system will be adopted. The makeup water required by the plant will be supplied from the underground water of the Qin River alluvial plain. Each unit will be equipped with one cooling tower and three circulating water pumps. -104 - ANNEX 4.1 Transmission Lines and Associated Substations 4. Two 500 kV transmission lines, 165 km each, will be constructed to connect the Qinbei power plant and Xiao-Liu substation, which is one of the existing substations in the Henan Power Grid. In Xiao-Liu substation, one 750 MVA step-down transformer will be installed. The existing 500 kV transmission line between Xiaoliu-Yaomeng-Shuanghe connect the Xiao-Liu substation and Nanyang substation. In the Nanyang substation, one 750 MVA step-down transformer will be installed. Turbine and Generator 5. Turbines will have the nominal rated output of 600 MW with steam pressure of 16.7 MPa at high-pressure turbine inlet and superheat and reheat temperature of 538 degree C. each unit will be equipped with one high-pressure turbine bypass system and one low- pressure turbine bypass system. 6. Turbine generator units will have a nominal capacity of 600 MW each. The voltage of the generators is 22 KV and the cooling mode is of water-hydrogen-hydrogen type. Steam Generator 7. The stream generators will be of the subcritical, single reheat, dry bottom ash, balanced draft, semioutdoor, drum type, each rated to MCR of 2020 T/h, steam pressure of 18.18 MPa and steam temperature of 541 degree C at superheater and reheater outlets. For pulverized coal system, the double inlet and double outlet ball mill, directly firing system or directly firing medium speed mill system will be adopted. Each unit will be equipped with two forced draft fans, two primary air fans and two induced draft fans. The four-field electrostatic precipitator with 99.6 percent efficiency will be adopted. Two boilers will share one common chimney with a height of 240 m. For air pollution mitigation, the units will be designed to provide low NO, burners and other low NO, technology and provide space for future provision of the flue gas desulfurization plant. Ash Handling System 8. The power plant (2x600 MW) will produce 19.97 T/H slag and 113.167 T/H ash, and about 0.87 million tons of ash and slag each year. The slag from the bottom of boilers will be conveyed hydraulically to the dewatering bin. The dewatered slag will be delivered to the ash yard by trucks. The fine ash from the electrostatic precipitators and the bottom of economizers of the two units will be conveyed pneumatically to dry ash silo where the dry ash will be added with water to the moisture of about 25 percent so as to avoid the ash flying and easy to be rolled and piled in the ash yard. The ash yard is situated on the flood land of Qin River, 4.5 km away from the plant site. The ash yard will be provided to meet the ash and slag disposal from 6x600 MW units, for 17 years operation. -105- ANNEX4.1 Instrumentation and Control System 9. A microprocessor-based distributed control system including data acquisition system (DAS), supervisory control system (SCS), control coordination system (CCS), furnace fire fighting system (FSSS), etc. will be provided. Display of plant-specific equipment status and operating parameters on CRTs installed in the central control room will provide real-time interface between operators and plant systems. On-line performance monitoring system will be provided to increase plant performance, reduce coal consumption and gradually introduce innovative advanced maintenance techniques. - 106 - ANNEX4.2 ANNEX 4.2: ELECTRICITY CONSERVATION PROJECT COMPONENT A. Electricity Conservation Programs in Henan Province I. Electricity conservation programs in Henan are part of an integrated planning process conducted at the provincial, prefectural and county levels based on new national/provincial electricity conservation policies and administrative programs. They are implemented through the "three electricity office" of Henan province. Three electricity offices are government entities charged with the implementation and monitoring of conservation programs. This includes participation in and supervision of conservation programs, providing advice to enterprises, disseminating good practice and monitoring targets. Three electricity offices are found at all levels of government within a province, with the provincial power entity being the effective umbrella organization. They are called three electricity offices because their responsibilities include planning and safety, in addition to energy conservation. 2. Cumulative electrical energy savings in Henan province for the period from 1980 to 1989 were approximately 6,800 GWh/year, of which 5,000 GWh resulted from structural changes in industry and 1,800 GWh/year were technical savings. These savings have been achieved through the implementation of energy efficiency codes and standards with other agencies. The standards are implemented through a variety of programs, the most notable of which are: (a) Renovation of Enterprise Technologies: This program has been carried out since 1981. It consists of renovation or replacement of electricity- inefficient technologies and equipment with measures such as high- frequency electric furnaces, variable-speed motors, etc.. More than 40,000 equipment units have been renovated and more than 115,000 new units installed. Total savings of the measures are 1,260 GWh/year. (b) Renovation of Enterprise Transformers: This programs is part of a comprehensive provincial and EPH plan to decrease losses in enterprise owned and maintained transformers. (c) Efficient Lighting Program: Henan province and EPH aggressively promote this program for the replacement of standard lighting technologies and compact fluorescent bulbs, fluorescent tubes, high intensity discharge lamps, and high pressure sodium lamps in enterprises. (Zhengzhou, the capital of Henan, is perhaps the only Chinese city where a -107- ANNEX4.2 large number of shopping centers, hotels and commercial establishments use CFLs and other modem lighting technologies extensively). 3. The main electricity conservation activities conducted by EPH include: to sustain these efforts the Henan Provincial Government established a fund for cofinancing investments in energy efficiency technologies made by enterprises. This Conservation Investment Program, began as a pilot program in early 1994. The pilot began with a fund corpus of Yuan 50 million-28 million came from the provincial government and 22 million from EPH. Savings of approximately 240 GWh/year have been obtained for a total investment of 76 million Yuan (i.e. EPH 15 plus Customer 61) in 117 projects with 76 enterprises. The basic features of the fund are as follows: (a) EPH cofinancing takes the forrn of loans to industrial customers, with the criterion that the customer make up the bulk of the capital required. The average contribution from EPH has been about 20 percent. (b) Repayments are made by the customer directly into an EPH account. (The potentially easier method of direct bill collection is not used as it could be interpreted as a tariff for which EPH has no authority to set.) (c) EPH expects to recover its investment within six months to two years for typical projects. (d) The interest rate on the loan is below market rates and therefore represents a subsidy. B. Electricity Conservation Component Project Selection and Implementation Principles 4. The principal objective of the $10 million electricity conservation component under the proposed loan is to complement ongoing efforts by promoting market-based sustainable programs. The sustainability of the projects will be ensured by: (a) the economic and financial viability of the selected projects; (b) the full payment of the project costs by the users; and (c) the verified and proper measurement of energy savings. These projects will disseminate energy efficient technologies, demonstrate effective measurement and monitoring practices, and demonstrate the viability of innovative commercially-based contractual and financing mechanisms. The agreed principles for project selection and implementation are: (i) Projects should be economicallly and financially viable with an internal rate of return higher than for supply-side (i.e. generation) projects. (ii) Pilot projects should demonstrate new high-efficiency technologies. To successfully demonstrate and ensure wider -108 - ANNEX4.2 application of these technologies, EPH will ensure that: a) the actual energy savings are measured and verified against planning estimates; and b) the results are disseminated in Henan through case-studies or information brochures. (iii) All projects undertaken jointly by EPH and electricity consumers will be based on commercial terms with appropriate contractual relationships. (iv) Pilot projects should demonstrate new financing techniques for energy conservation projects. These techniques include equipment leasing and shared savings contracts. Description of Conservation Projects 5. The projects included under the electricity conservation project component, the estimated energy savings, and the financial intemal rate for EPH are outlined in the following table. The proposed energy conservation loan component of $10.00 million equivalent comprises $6 million for conservation projects within EPH, $3.80 million for projects with EPH clients, and about $200,000 for up-front implementation technical assistance. This division of the energy conservation loan component between EPH subsidiaries (approx. 60 percent) and EPH electricity consumers (approx. 40 percent) reflects a balance desired by EPH to increase their confidence in guaranteeing the loan repayment. Estimated Estimated EPH Financial World Bank Energy Internal Rate Financing Savings of Return Project Name (million US $) (million kWh) (FIRR) 1. Zhengzhou City Distribution Loss 3.30 20.8 37.8% Reduction Program 2. High-Efficiency Transformer Program 2.35 10.2 23.3% 3. High-Efficiency Welding Machine Program 0.35 2.3 20.2% 4. Upgradation of facilities in Luoyang Steel 2.80 32.0 Commercial Plant Return La 5. Variable Speed Drives (VSD) Leasing 1.00 6.7 Commercial program Return La 6. Implementation Technical Assistance 0.20 Total I0.00 72.0 Proposed Loan Amount La 10.00 La Internal Rate of return for client enterprises are very high and exceed 20%. Financial return to EPH will be based on commercial terms, presently benchmarked at about 18.3% i.e. published state commercial bank lending rate for 3 to 5 year loans (presently 15.3%), plus 3% to cover the cost of energy services and adminstrative expenses. - 109 - ANNEX 4.2 6. The economic rate of return was very attractive for all projects, exceeding 30 percent. The financial rate of return exceed the return on supply-side projects in accordance with established principles. To underscore the importance of complementary tariff reforms, it was found that the return increases dramatically when economic tariffs are instituted. 7. Zhengzhou City Distribution Loss Reduction Program: The scope of this project includes the modernization and improvement of system operations in one distribution circle in Zhengzhou city. The objective of the project from an electricity conservation stand-point is to demonstrate the large reductions in distribution system losses that can be achieved by optimizing the operation of the distribution network. The project includes an investment component of about $2.9 million and a technical assistance component of about $0.4 million. The technical assistance component provided for international consulting services for project basic engineering, development of measurement and monitoring techniques, introduction of modern distribution system planning techniques including computer hardware/software, and training in load research and managment. 8. High-Efficiency Transformer Program: This project is intended to: (a) reduce distribution system losses in the supply bureaus of EPH; and (b) demonstrate the suitability of high-efficiency transformers. The project scope will include the procurement and installation of about 800 distribution transformers, and the performance monitoring of a valid sample number of these transformers. A feasibility study will be prepared by EPH to define the number and type of distribution transformers to be procured. This study will evaluate the use of BS9 and higher efficiency transformers as replacement for the existing SJ-type transformers. At least 5 percent of the total funds will be used to procure amorphous core tranformers. This will be done to evaluate the suitability and cost-effectiveness of such transformers for wider use in the EPH distribution network. 9. High-Efficiency Welding Machine Program: This project is intended to: (a) introduce high-efficiency welding machines in EPH subsidiaries; and (b) demonstrate the energy savings and operational benefits of such equipment. The project scope will include the procurement and installation of about 300 high-efficiency welding machines, and the performance monitoring of an appropriate sample of these welding machines. The financing of this project is conditional on an increase in the World Bank electricity conservation loan component. 10. Upgradation of Facilities at Luoyang Steel Plant: This project is intended to: (a) assist a major industrial electricity consumer in Henan to install energy efficiency equipment, and (b) demonstrate the application of commercial contractual relationships between EPH and consumers for the financing and implementation of mutually beneficial I The BS-type transformers are hermetically sealed tranformers that are both more efficient, as well as require much lower maintenance than the SJ-type of transformers. -110 - ANNEX4.2 energy conservation projects. The project scope will include the procurement and installation of state-of-art oxygen production equipment at one plant of the Louyang Steel Company. EPH will finance the equipment and enter into a performance based contract with Louyang Steel Company that links the repayment to energy savings and improved productivity at the Luoyang Steel plant. A minimum payment will be established to ensure recovery of the investment costs and also a reasonable profit. In addition, a shared savings contract provision will enable Luoyang Steel Company to accelerate repayment by utilizing the energy savings and productivity benefits that exceed the minimum debt repayment. The contractual relationship will be based on commercial financing terms applicable in China, plus a margin for services rendered and adminstrative expenses. Technical assistance will be provided to develop the contractual arrangements and repayment based on shared savings performance contracting terms. 11. Variable Speed Drives (VSDs)-Leasing Program: This project is intended to: (a) encourage the use of VSDs in applications that deliver financially viable energy savings benefits; and (b) demonstrate the applicability of leasing as a means to provide consumer credit for the financing of energy efficient equipment in Henan. The project scope will include the procurement and leasing of variable speed drives (VSDs). EPH will procure the VSDs and lease them to consumers. The leasing terms will be commercially based. The advantages of leasing as a means of financing energy efficient equipment are: (a) increased credit security for EPH, as it will own the equipment until it is transferred to the consumer (lessor) at the end of the leasing period. This mode of leasing is referred to as a full-payout lease; and (b) provides consumers with 100 percent upfront financing, thereby encouraging the adoption of the energy efficient equipment. Technical assistance to prepare model contracts and procedures for lease financing of energy efficient equipment has been included in the project. Implementation Arrangements 12. The main implementation arrangements agreed upon are: (a) EPH will be responsible for the implementation of all energy conservation projects included under the proposed loan. (b) All projects will include adequate provisions for the measurement and verification of energy savings. The measurement of energy savings will ensure that the performance of these pilot demonstration projects are appropriately monitored to facilitate future dissemination of results and project replicability. The measurement and monitoring protocols, as well as the reporting requirements will be defined as part of the up-front technical assistance for project implementation (item 6. in project list) and agreed upon with the World Bank. (c) The energy conservation projects implemented by EPH with clients/consumers will be based on commercial terms. The direct cost of funds for both on-lending in the case of Luoyang Steel (item 4. in project -111I I - ANNEX4.2 list) and the VSD leasing program (item 5. in project list) will at a minimum be the published state commercial bank rate for comparable loan maturities, plus an administrative margin of 3 percent per year on outstanding interest and principal. (d) All procurement will be done in accordance with World Bank procurement guidelines. Technical specifications for all equipment procurement will be reviewed by the World Bank. Disbursement of funds will be based on the agreed schedule. Technical Assistance and Training 13. To asure successful implementation, the proposed loan component includes technical assistance in two elements: (a) a $400,000 component to support EPH's distribution loss reduction demonstration project. These funds will be used for preparing the basic engineering work required, as well as support the introduction of improved distribution load management and planning techniques; and (b) a $200,000 component for general support of project preparation and implementation. These funds will be used mainly for the technical and contractual work required for the Luoyang Steel shared savings program and VSD leasing program. These funds will also be used to develop adequate monitoring and measurement protocols for all projects. 14. A broader package of training and technical assistance initiatives are planned. These initiatives cover both the business management aspects and technical aspects of a commercially oriented electricity conservation program. Funding for these activities will be proposed for financing from multilateral and bilateral technical assistance grant funds. The following technical assistance initiatives are planned: (a) Commercial Business Planning and Management Module: Topics relating to financial analysis, project management, business planning will be covered. (b) Energy Service Contracting: Performance contracting for energy services at a customer site will be crucial to mitigating performance risk to levels where energy efficiency projects become viable. The introduction of performance contracting as an integral part of in energy service provision would address issues of project structure, marketing, and building project linkages between customer, service providers and financiers. (c) Energy monitoring and targeting (M&T): M&T is seen as a crucial element of energy service provision. Without effective practices in M&T it is difficult to focus scarce resources on the highest yield efficiency investments and it is also not possible to maintain performance at design levels over the long-term. -112- ANNEX 43 ANNEX 4.3: TERMS OF REFERENCE FOR CONSULTING SERVICES Project Description 1. The site of Qinbei Thermal Power Plant is located in the suburbs of Jiyuan City, Henan province, about 140 km northwest of Zhenzhou City, the capital of the Province in Central China. The owner of the plant is the Henan Provincial Electric Power Company (HPEPC). The domestic designer is the Northwest Electric Power Design Institute (NWEPDI). The contractors for construction of civil works and plant installation will be selected through local competitive bidding. The site has favorable topographical and geological conditions and easy access by railway and highway. Two coal-fired turbo- generating units of 600 MW each will be installed in the plant to be financed under a proposed World Bank loan. The target dates of the project completion are November 30, 1999 and November 30, 2000 for its first and second unit respectively. 2. The contents of the project are listed below: (a) Two coal-fired steam turbo-generating units each having a nameplate rating of 600 MW, complete with all electric and mechanical accessories and auxiliaries as well as control equipment. (b) Coal handling system. (c) Ash disposal system. (d) 500 kV step-up substation. (e) Two 165 km 500 kV transmission lines and step-down substations. (f) Cooling water and freshwater intake and discharge facilities and water treatment system. (g) All associated buildings and structures. 3. The owner will be responsible for the preparation of bidding documents for all plant equipment with the assistance from NWEPDI and a local consulting firm. It is intended to engage a foreign consulting firm to provide consulting services listed below for the project. -113 - ANNEX4.3 Procurement Arrangement 4. The proposed components to be financed by the World Bank will be procured separately through international competitive bidding (ICB), limited international bidding (LIB) and international shopping (IS) in the following islands and packages: (a) Boiler and auxiliaries island. (b) Turbine-generator and auxiliaries island. (c) Instrumentation and control (I&C) island. (d) Ash disposal plant. (e) 500 kV transmission and substation equipment. (f) Construction machinery. (g) Miscellaneous items, such as communication system, remote control equipment, environmental monitoring equipment. The procurement of above-mentioned equipment will be carried out in accordance with the World Bank's Procurement Guidelines. Most BOP equipment will be procured locally by local financing. Scope of Consulting Services to be Provided by Foreign Consulting Firm 5. Consulting services for this project will be carried out in three stages: (a) Stage 1: Review of bidding documents, technical bid evaluation and contract negotiations. (b) Stage 2: Engineering and design interface coordination, vendor drawing review, attendance at design liaison meetings and training for construction management (c) Stage 3: Construction management (Note: Services for Stage 1 and Stage 2 will be included in one contract, which will be signed by the end of October 1995. Services for Stage 3 will be included in another separate contract which will be signed after the loan agreement has been entered into force between the World Bank and HPEPC.) -114 - ANNEX4.3 Stage 1: Assistance in Review of Bidding Documents, Bid Evaluation and Contract Negotiation 6. Task 1: Assistance in review of bidding documents and finalization of bidding documents. Consultants shall review the bidding documents for Boiler Island, TG Island and I&C Island and provide a list of interfaces among these islands and review reports to the owner. In reviewing the bidding documents, consultants shall place special emphasis on the following aspects: (a) technical parameters (b) codes and standards (c) scope of contracts and completeness of specifications (d) design criteria (including calculation methods and type of drawing) (e) quality assurance (f) erection assistance (g) interfaces among various islands 7. The review of the interface aspects shall (a) ensure that scope of supply and design responsibility split is clearly defined in each bid package, especially in the areas of integrated system operation, piping, floor elevations, cables, intermediate junction boxes, cable trays and supports; the division of design responsibility shall be clearly identified, easy to understand and shall make all interfacing contractors responsible for the interfacing design; (b) verify that interface points are shown correctly and not in contradiction with the bid specifications; (c) ensure consistency between turbine-generator and boiler technical parameters; (d) check capacity, sizing, and proposed location of common facilities to be provided with the new units, such as auxiliary boiler, water treatment system, compressed air system, service water system, portable water supply system, fuel oil storage and transfer facilities, switchyard and communication system; consultants shall also assist in setting up turbine building floor elevation, heater bay and deaerator elevation and column line arrangement; -115 - ANNEX4.3 (e) check the interface between the tripper floor of the coal handling system and the boiler island supply and other interfaces between the coal handing control room and the control room in the power block; check that the coal handling system is adequate for both units; and (f) review one line diagrams and layout of the switchyard. In the course of reviewing, consultant shall correct any faulty wording in English in the bidding documents. 8. Task 2. Attendance at the pre-bid meeting. The consulting firm shall send his mechanical, electrical and I&C experts to China to attend the pre-bid meeting for boiler island and TG island held by the owner for 5-7 days and assist the owner in answering the questions raised by bidders during the prebid meeting. 9. Task 3. Assistance to Owner in bid evaluation, preparing bid evaluation report (a) Copies of all technical bids will be submitted to the consulting firm's headquarters at the same time they are submitted to the Owner. The Owner will prepare a bidders list consisting of 3-4 bidders for Consultants' in-depth evaluation. Consultant shall conduct a preliminary review and prepare preliminary comments in its home office, then send a team of technical personnel consisting of Project Engineer, Mechanical Engineer, Electrical Engineer, I&C Engineer, Civil Engineer and Boiler/Turbine- Generator experts to China for four weeks, duration to work with the Owner to reach preliminary results of evaluation for Boiler Island and Turbine-Generator Island. Consultant's team will attend the clarification meeting to be held by the Owner during the bid evaluation period and assist in preparation of bid evaluation report for each island respectively. (b) In the course of bid evaluation, Consultant shall: (i) review and clarify questions and problems; (ii) assist in technical review of bids; (iii) prepare a list of questions that require clarification from bidders; (iv) assist in negotiation for alteration, adjustment and in answering questions on the contents of specifications; (v) discuss preliminary evaluation results with the Owner; (vi) discuss resolution of questions and problems in the bids with the Owner and bidders; -116 - ANNEX4.3 (vii) review the responses from bidders during bid evaluation; (viii) assist the Owner to determine the ranking of the bidders; and (ix) provide formal written comments on the qualification and experience of main subcontractors of vendors. (c) After the Owner has submitted the bid evaluation reports to the World Bank, if the Bank has any questions regarding the evaluation report, Consultant shall assist the Owner in answering them to the satisfaction of the World Bank. 10. Task 4. Assist in technical negotiation of contracts, review technical contract document (a) After the World Bank has given its no-objection to the bid evaluation report, Consultant shall prepare associated data in his home office and send a team consisting of five engineers to China for four weeks' duration for Boiler and TG island to work with the Owner in technical negotiation of contracts. During negotiation Consultant shall assure that interfaces among various islands are clearly defined and interface parameters and criteria determined through negotiation to be further confirmed in contract documents. Consultant shall make efforts to define the contents and schedule of the required design information exchange among Vendors and the Owner's design engineers. Consultant shall also help to set up the project procedures of correspondence and drawing numbering system. (b) Consultant will take the lead in addressing the interface design aspect and answer any questions that the contractors may raise in order to make them fully understand their design responsibility and the entire work plan and project schedules. Stage 2: Engineering and Design Interface Coordination, Vendor Drawing Review, Attendance at design Liaison Meetings and Training for Construction Management 11. Task 1. Interface coordination (a) Consultant shall be responsible for coordinating interfaces and resolving interface problems among island Vendors. Based on the interface list and interface procedure manual established in contracts between the Owner and contractors, Consultant will be responsible for supplementing and complementing above documents. Consultant shall provide Home Office coordination of Vendor's interfaces, engineering scope of island Vendors. -117 - ANNEX4.3 In order to monitor and expedite schedules of interface, Consultant shall coordinate the project schedules among island Vendors, so that interface coordination would be performed in time and data are complete; there should be no gaps and overlaps. (b) Each of the Vendors will provide a monthly report about the interfacing condition. Consultant, based on the schedule of information exchange, supervise, manage and expedite the Vendor to exchange design information based on interfacing condition. Consultant shall be responsible for review of equipment drawings technical documents and calculations to coordinate the interfaces between each island contractors and to resolve interface problems and potential interference in design done by contractors. Consultant shall examine the interfaces between Vendors' drawings, shall quickly handle the comments from various vendors so as to ensure all interface points be confirmed. Comments on Vendors' drawings shall be directly forwarded to them and copies shall be sent back to the Owner and NWEPDI. (c) Consultant shall direct the Vendors of Boiler Island and TG Island to compose a uniform piping interface list, in which the size, wall thickness, material requirements as well as the preparing sketch of welding ends will be all listed. (d) Consultant shall hold design coordination meetings in his home office for the following items: (i) major piping design meeting (boiler island, TG island, ash handling system and Owner's yard piping); (ii) raceway (cable tray and conduit) coordination meetings (boiler island, TG island, ash disposal system and Owner's underground electrical); (iii) civil design coordination meeting (boiler island, TG island and Owner's foundation design); and (iv) I&C design meeting (boiler island and TG island). (e) Consultant shall give assistance to the Owner for the coordination of data transfer, drawings and information exchange between Vendors in accordance with the interface manual prepared by Consultant. Each Vendor shall maintain a list of submitted drawings and their disposition for Owner and Consultant use. -118- ANNEX4.3 12. Task 2. Review of Vendor's drawings: (a) Consultant shall assist the Owner in reviewing Vendors' drawings, technical documents and calculations for compliance with the specifications. The review by Owner's engineers will be accomplished in three phases, with the second phase performed in Consultant's office. The second phase will start two months prior to the second design liaison meeting and will last six months. The Owner's engineers (mechanical, electrical, I&C and civil )will work together with Consultant's engineers in review of Vendors' drawings. All comments including comments interface will be marked on the drawings and will be returned to Vendors. Consultant shall assist the Owner's engineers in answering questions and provide support service for the joint drawing review effort. (b) Consultant shall assist the Owner in rechecking the interfaces and the potential interference between various equipment manufacturers/vendors. The review shall include but not be limited to the following: (i) proper equipment identification; (ii) conformance to the required codes and standards; (iii) conformance to the specifications; (iv) vendor calculation methods and accuracy; (v) correctness and integrity of interfaces between different equipment vendors; (vi) system and equipment arrangement for construction and operation; (vii) convenience of equipment arrangement for construction and operation; and (viii) operational and maintenance requirements. 13. Task 3. Attendance at design liaison meetings and assistance to Owner in coordination and resolution of design interface problems (a) Consultant shall attend the design liaison meetings in four times (two will be held in China, two in Vendors' host countries) and provide assistance to the owner; a total of about 20 person-trips are included. Consultant will be responsible for the interface design coordination, and take charge of the design liaison meeting to resolve interface problems. -119 - ANNEX443 (b) Consultant shall provide Home Office project expediting and assist the Owner in coordination of Vendor engineering, component completion and shipment for the three prime vendors. (c) Consultant shall review document submittal schedule of the three prime vendors of interface design engineering data, drawings and procedures to meet Contract requirements. For potentially delinquent items, explore corrective measures with prime vendors and exert pressure on prime vendors' management for compliance with contract schedule commitments. 14. Task 4. Construction management support (a) Consultant shall provide construction management support to assist the Owner in managing the construction activities for the project. Consultant's construction manager shall work closely with Owner's construction personnel to provide guidance on major facts of construction management, including project execution, material control, construction contract control, scheduling, quality control and construction sequencing to insure that the Owner has a modem, up-to-date project control system. (b) Consultant shall assist the Owner in developing a viable critical path method (CPM) project schedule which will enable the Owner to make accurate forecasts of project progress resulting in better control of the project. (c) Construction cost control and financial accounting will also be a major point of involvement by Consultant's construction management team. Consultant shall assist the Owner in coordinating schedule activities with the financial aspects of the project thereby assuring a smooth cash flow situation and minimizing financial hazards, such as a short term borrowing of construction funds. 15. Task 5. Training of managerial/construction personnel: (a) Consultant shall, in conjunction with the Owner, provide 10-15 of the Owner's managerial/construction personnel a four-month intensive training course in project management. The course shall be held in Consultant's country and shall be taught by experts in various disciplines presented. The program and course details will be discussed and agreed upon three months prior to the start of the training. (b) The training shall be intentionally intensive as the subjects covered generally cannot be adequately covered in the four-month period. Consultant shall assume that the Owner's candidates will have a working knowledge of some of the basic concepts of scheduling, accounting -120 - ANNEX443 construction methods, materials and equipment. Consultant shall provide training in construction management, Consultant shall provide training in construction management, management techniques, cost control and financial accounting. Stage 3: Consulting Services for Construction Management 16. The scope of consulting services for construction management includes: (a) project execution management; (b) contract management; (c) construction scheduling and reporting; (d) cost control and accounting; (e) material, equipment and fuel management; (f) quality control and quality assurance; and (g) information and document control. Consultant shall send a project management team headed by a project manager with 5-7 engineers for the following tasks. The Project Manager shall represent the project management team and shall be responsible for planning and executing all activities. 17. Task 1: Consultant shall: (a) establish methodologies of various phases of the project management and implementation schedules for: (i) contract management; (ii) design interface management; (iii) erection procedures of main plant equipment and auxiliaries; and (iv) commissioning procedures of main equipment and auxiliaries; (b) review the major island contractors' plans for equipment delivery schedule and dispatching schedules of site supervising engineers; (c) give the Owner's construction personnel the field training for site construction management, establish and expedite the equipment installation training schedule; (d) assist the Owner in solving the problems encountered during project implementation and in managing deficiencies of products found during site construction; - 121 - ANNEX 4.3 (e) assist the Owner in lodging claims against various contractors or insurance companies for equipment/material defects or equipment/document delivery delay; (f) assist the Owner in reviewing the qualifications of various contractors' representatives for qualified site services; and (g) assist the Owner in coordinating the interfaces and interference between various contractors during construction and commissioning stages. 18. Task 2: Consultant shall: (a) assist the Owner to establish a master and submaster implementation schedules including monthly and weekly schedules; (b) assist the Owner to monitor and expedite the master and submaster schedules. The schedule control shall include review of progress of interfacing and coordination among islands contractors, so that interface coordination can be performed in timely manner; and (c) assist the Owner to manage monthly progress reports provided by each island contractor and establish and expedite schedules of design and site construction information exchange. 19. Task 3: Consultant shall: (a) assist the owner in setting up programmable computerized system for equipment and material management including site storage system for parts, equipment and materials, outdoor and indoor storage; (b) assist, in cooperation with Task 1 staff, the Owner in controlling delivery of the parts/equipment/material supplied by various contractors in order to meet with the project schedule; and (c) assist the Owner in establishing plant fuel management system and fuel quality monitoring system with regard to coal quality management and air pollution impacts. 20. Task 4: Consultant shall (a) assist the Owner in establishing and implementing methodologies for project cost control and accounting system; (b) establish and assist to maintain a cost control system that continuously monitors in foreign and local currency: incurred costs, committed costs and cost estimate variations due to actual geological conditions, design changes, additional work, escalation and currency fluctuations; and -122 - ANNEX4.3 (c) assist in six-monthly updates of cost estimate to completion and projected disbursement schedules for each financier. 21. Task 5: Consultant shall assist the Owner in setting up and implementing quality control system and quality assurance system during site construction and commissioning stages, including: (a) monitoring of performance of construction and technical supervision thereof to ensure compliance with contracts; (b) documenting the progress and quality of all stages of construction, including daily records of progress, events and oral instruction; weekly updating of as-built records and marked-up drawings; recording of quality control and quality assurance records including test data; (c) monitoring of contractor's quality control activities, review of test results and recommendation of remedial actions; and (d) review and approval of contractors' submissions with respect to sequence and timing of work, equipment, materials, temporary works detailed working of construction drawings and other documents submitted in accordance with the contracts. 22. Task 6: Consultant shall assist the Owner in setting up programmable computer system for information/document control which includes: (a) all communications, letters, telexes, faxes relating to site construction among the Owner contractors, consultants and other related organizations; (b) daily records of quantities of work performed under the contract; (c) daily diary of all events occurring at the job site connected with the progress of the work; (d) as-built records and marked-up drawings on a weekly basis at project site; (e) quality control and quality assurance records including test data; (f) documents recording authorized changes in the work on a weekly basis; and (g) records of all contractors' claims and their disposal on a weekly basis. -123 - ANNEX4.3 Local Support 23. The Owner will provide the following local support to the foreign consultants: (a) make available all basic data, information and documents needed to carry out the required consulting services; and (b) provide all services required to carry out the work efficiently while working in China, including office space, facilities and supplies, telex communication, local transportation, translation and typing services. Consulting Service Fee 24. The consulting service fee will be financed under a World Bank's CRISPP credit (for Stages I and 2) and an IBRD loan (for Stage 3). Each consulting firm shall make an estimate of person-months required for the services and itemized prices for the services. The total number of person-months for Stage 1 and Stage 2 shall not exceed 120 person- months and that for Stage 3 shall not exceed 80 person-months. Time Schedule 25. The time schedule for consulting services is based on a prediction of equipment procurement schedule which is subjected to change. Scope of Service Time of Completion (1) Review of bidding documents for boiler island Mar.-Apr. 1995 and TG island. (2) Attendance at prebid meeting for boiler island Jan.-Feb. 1996 and TG island. (3) Assistance in bid evaluation for boiler island and TG island. May-Jul. 1996 (4) Assistance in boiler and TG contract negotiations. Sept.-Oct. 1996 (5) Interface coordination and review of Vendor's drawings. Jan.-Jun. 1997 (6) Construction management. Sept. 1998- Mar. 2001 -124 - ANNEX 4.4 ANNEX 4.4: MANAGEMENT DEVELOPMENT AND TRAINING A. Objectives 1. The management development and staff training program is designed to enhance EPH's managerial, legal, technical and financial capabilities. The main objectives of the program are: (a) to enable EPH to function as an autonomous entity for the efficient and accelerated development of its long-range investment program; and (b) to staff EPH with professionally skilled personnel capable of handling power development and financial planing, power sector reform, tariff reform, and advanced operation and maintenance techniques. B. Scope 2. Training program will consist of the following three main categories: (a) Training for personnel of managerial, planning, financial, legal, technical, environmental, and teachers; (b) Project-related training for technical staff by working together with consultants and those financed under vendors' contracts; and (c) Upgrading and equipping of EPH's training facilities. 3. High level management, planning and financial staff will receive training in modem management and decision-making techniques, particularly in utility management, planning of investments, power sector reform and power pricing reform, financial operations and management information systems. Engineering personnel will also receive training in their specific fields, especially related to large thermal power projects, such as advanced plant operation and preventive maintenance, energy conservation, etc. 4. Project-related training will include: (a) on-the-job training for the engineering and construction management staff to be implemented by working together with the foreign consultants; (b) training of engineering staff under the contract for major plant equipment; and (c) training of operation and maintenance staff at other similar thermal - 125 - ANNEX 4.4 power plants in China and abroad. The cost of such training will be included in the equipment contracts. C. Organization of Training 5. EPH will be responsible for planning and organizing the training program with the approval and support of MOEP. The training program will be conducted both abroad and in China. Initial training activities would aim at providing a general overview of the selected topics by a series of training seminars in China. Both local and foreign experts will be invited to give lectures on these specific topics. Study tours and overseas training will then be followed for senior management and financial and technical staff. D. Implementation 6. Implementation plan for the management development and staff training program is presented below: (a) Domestic Training. About 250 staff of various fields, totaling 490 staff- months will be trained in China (Table); 115 staff-months of foreign experts will be required for training in China. (b) Overseas Training. Study tours and overseas training will be conducted in 1996-1999 for 144 staff, totaling 373 staff-months. The number of trainees, duration of training, staff-months and timing of different specialties of personnel are shown in Table 1. (c) Project-Related Training for Technical Staff. A total of 477 trainees with a total staff-months of 107.5 will be trained in manufacturers' offices and factories. Sixty staff-months will be trained in the contract for consulting engineers. (d) Training Equipment. Equipment to be purchased are given in Table 3. (e) Estimated Training Cost. The total training cost will be Y 44.7 million equivalent in local currency and 5.3 million in foreign currency. (Tables 1- 4). -126- ANNEX 4.4 Table 1: Domestic and Overseas Training Experts Duration required No. of of training Staff- (staff- Estimated trainees (months) months months) Timing cost($'000) Training in China Utility management 50 2 100 2 40 Financial management 50 2 100 4 80 Legal 5 2 10 1 20 Planning management 40 2 80 2 40 Preventive maintenance 50 2 100 2 40 Dispatching automation 20 1 20 1 20 Sector reform & tariff reform 10 3 30 1 20 Resettlement 5 2 10 1 20 Environment monitoring 20 2 40 1 20 iQo a 490 15 300 Training Abroad Legal staff 5 2 10 1996/199 80 Management staff 40 2 80 1996/199 640 Financial staff 30 2 60 1996/199 480 Operational staff 20 4 80 1996/199 640 Maintenance staff 10 4 40 1996/199 320 Planning staff 9 2 18 1996/199 140 Construction staff 15 4 60 1996/199 480 Teacher 10 2 20 1996/199 80 Environmental staff 5 1 5 1996/199 40 IToal 1A4 2E90Q - 127 - ANNEX 4.4 Table 2: Project-related Training Program for Technical Staff Estimated No. of Training period Staff- cost Category of staff trainees (months) months Timing ($'000) A. Training for Design and Eneer~ingStaff Design staff 5 2 10 1997/1998 200 Engineering staff 5 2 10 1997/1998 200 ITI I 2Q 400 B. Training for Electrical and Mechanical Staff B/G B/G B/G I&C staff 7/8 2/1.5 14/12 1997/1998 130 Testing & commissioning 10/11 1.5/1.5 15/16.5 1997/1998 157.5 Commission staff 10/11 1/1 10/10 1997/1998 100 Operation & management 5/5 1/1 5/5 1997/1998 50 Ial 67 105 E 4375 Note: 1. Training for A and B will be included in Vendors' contracts. 2. Training for C will be carried out in China. Table 3: Training Equipment to be Procured Item Specification quantity Unit price Estimated cost (sets) ($'000) ($'000) Simulator for training 1 1200.0 Color projection equipment 3 10 30.0 Software for training of 2 10 20.0 simulated management Multipen recorder 1 20 20.0 Computer 2 4 8.0 Ttal 1,278.0 -128 - ANNEX 4.4 Table 4: Summary of Training Cost No. of Duration of training Estimated foreign cost trainees (staff-months) ($'000) Training in China 250 490.0 300.0 Training abroad 144 373.0 2,900.0 Project-related training la 76 167.5 837.5 Training facilities and equipment -- -- 1,278.0 IclW 470 1t030.5 5,315.5 /a Included under the contracts for engineering services and major equipment. ANNEX 4.5: PROCUREMENT SCHEDULE Series number 1 2 3 4 5 6 7 8 9 Plant monitoring Electric Ash handling Coal handling Construction and testing Work content Boiler Turbine I&C equipment equipment instrument Steel Start preparation of bidding documents 05/05/95 05/05/95 08/05/95 09/05/95 09/30/95 10/30/95 11/30/95 08/30195 10/01/95 Approval by Chinese government 09/20/95 09/20/95 01/20/96 01/20/96 02/20/96 02/20/96 02/20/96 09/15/96 1215/95 10/20/95 10/20/95 02/20/96 02/20/96 03/20196 03/20/96 03/20/96 10/15/96 01/15/96 Review by the World Bank 10/25/95 10/25/95 02/25/96 02/25/96 03/30/96 03/30/96 03/30/96 10/25/96 01/25/96 11/25/95 11/25/95 03/25/96 03/25/96 04/30/96 04/30/96 05/10/96 11/31/96 02/25/96 . Issue bidding documents 1210/95 1210/95 04/10/96 04/10/96 05/20/96 05/20/96 06/05/96 02/01/97 03/10/96 Prebidding meeting 01/10/96 01/10/96 05/10/96 05/10/96 06/20/96 06/20/96 01/20/96 01/20/96 05/20/96 05/20/96 06/28/96 06/28/96 Bid opening 04/10/96 04/10/96 08/10/96 08/10/96 09/31/96 09/31/96 09/05/96 05/31/97 05/15/96 Bid evaluation 04/10/96 04/10/96 08/10/96 08/10/96 09/31/96 09/31/96 09/05/96 06/01/97 05/15/96 08/01/96 08/01/96 12/10/96 12/10/96 12/31/96 12/31/96 11/20/96 10/30/97 06/15/96 Approval by Chinese government 08/15/96 08/15/96 01/10/97 01/10/97 01/30/97 01/30/97 12/10/96 11/15/97 07/15/96 Confirmation of World Bank 09/15/96 09/15/96 02/15/97 02/15/97 02/28/97 02/28/97 01/10/97 12/15/97 08/15/96 Contract discussion and signing 10/30/96 10/30/96 03/30/97 03/30/97 04/10/97 04/10/97 01/10/97 01/30/98 10/30/96 .~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~4 -130- ANNEX 4.6 ANNEX 4.6: KEY DATES OF THE PROJECT SCHEDULE Completion date A. Procurement of major Equipment for Plant Preparation of bidding documents for boiler and turbo-generator May 1995 Review and approval by the Chinese government October 1995 Review and approval by IBRD December 1995 Issuance of bid documents January 1996 Bid opening April 1996 Deadline of bid evaluation August 1996 Contract negotiation and signing October 1996 B. Project Schedule Excavation June 1997 Boiler steel structure erection February 1998 Boiler Drum lift August 1998 Turbine LP casing in place September 1998 Hydraulic pressure test of boiler August 1999 Trial run First unit September 2000 Second unit June 2001 Commercial operation First unit March 2001 Second unit December 2001 Project completion December 2002 Loan closing June 2003 -131- ANNEX 4.7 ANNEX 4.7: DISBURSEMENT PROFILE (For IBRD Loans) Bank FY and Semester Cumulative Project Bank profile a semester ($ million) (Percent) 1997 December 31, 1996 24.0 24.0 5.5 6.0 June30, 1997 11.5 35.5 8.1 18.0 1998 December31, 1997 11.5 47.0 10.7 26.0 June 30, 1998 83.4 130.4 29.6 38.0 December31, 1998 83.4 213.8 48.6 50.0 June 30, 1999 84.2 298.0 67.7 58.0 2000 December 31, 1999 84.2 382.2 86.9 66.0 June 30, 2000 7.7 389.9 88.6 74.0 20Q1 December 31, 2000 7.7 397.6 90.4 78.0 June 30, 2001 11.1 408.7 92.9 74.0 2002 December 31, 2001 11.1 419.8 95.4 86.0 June 30, 2002 10.1 429.9 97.9 90.0 2003 December 31, 2002 10.1 440.0 100.0 94.0 la Standard disbursement profile for the power sector in China, August 1995. -132- ANNEX 4.8 ANNEX 4.8: LAND ACQUISITION AND RELOCATION Scope of Relocation 1. Qinbei Thennal Power Project includes construction of a new power plant and a new 500-kV network consisting of about 165 kilometers (kin) of transmission lines, with 2 substations (1,500 MVA). The power plant is a greenfield operation located in a semirural agricultural area of Jiyuan municipality in the northwestern part of Henan province, about 17km to the northwest of Jiyuan City. The actual location of the plant is an uninhabited wasteland area at the foot of Taihangshan and Wangwushan Mountains. The topography of the plant site is flat and open. Most of the land is too poor to be farmed. There is no resident on it, and no relocation necessary. There will be no adverse social and economic impact through the loss of houses, agricultural land, grazing land or other economic activity. According to the preliminary design there is no relocation involved in the transmission component. However after considering the fact that the construction of transmission will be implemented in 1997, EPH has budgeted for a certain amount of land acquisition and possible relocation of households in case of possible changes in the route of the transmission lines. Therefore, according to the relocation plan, the project will acquire a total of 84.24 hectares (ha) of land, relocating at most 30 to 40 households or 150 to 160 persons. In addition, as many as 358.4 ha of land will be required temporarily during the project construction. Table 1: Scope of Resettlement of Qinbei Thermal Power Project* Number of Amount of Amount of Amount of Number Relocated Removed Floor Land Acquisition Land Leased of People Item Households Space ( sq. m) (mu**) (mu) Affected PowerPlant 0 0 4,138.4 0 0 (uncultivated land from the state) Substations 0 0 150.0 0 0 Transmission 30-40 4,320.0 63.6 5,376.0 150-16 Ttal 30-4 4,320.0 4,352.0 5,376.0 150-16 Note: * To be adjusted after finalization of the design. ** I hectare = 15 mu -133- ANNEX 4.8 Purpose and Strategy of Resettlement 2. The priority was given to minimize the scope of resettlement throughout the project design and planning. In order to achieve such an objective EPH spared no efforts to minimize utilization of agriculture land and relocation of households and avoid mines, historic, tourist and urban areas. 3. There is no relocation of human beings in the preliminary planning. However, the final routing of the lines have not been finalized yet, and the soil conditions or technical constraints could have some changes. EPH estimated that relocation of a maximum of 30 to 40 households might be required if technical studies underway would require changes in the routing of the lines. For those households who might be affected by the construction of transmission lines, they will be compensated and supported to rebuild their houses with better housing and living conditions within the same villages not far from the existing site, averaging 100 to 200m to guarantee a smooth completion of the construction. 4. If a resettlement action plan would be required, it would be developed according to Chinese policy and regulations and the Bank procedures, and in consultation with local government regarding compensation standards and baseline surveys. Legal Framework 5. The Bank Requirements. The resettlement action plan (RAP) will be developed in line with the requirements contained in the World Bank's Operational Directive 4.30: Involuntary Resettlement. 6. National and Local Policies. The legal basis for land acquisition and resettlement of Qinbei Power Project is provided by laws and regulations enacted by the Central Government, and implementation regulations of provincial and local municipalities. The main state law and regulations, the "Land Administration Law" was enacted in 1986. The local implementation regulations include: "The Compensation Standards for the land acquisition by the State," and "Henan Province Land Administration Laws and Regulations" issued by Henan Provincial Government.(1989), "Further Strengthening of Land Management in the Infrastructure Construction." jointed issued by Henan Provincial Economic Planning Commission and Henan Provincial Land Administration." (No. 111, 1991), and "The Decisions on the Compensation for the land acquisition by the State" issued by Zhengzhou City and Prefecture Government (No. 144, 1993), and various related regulations or decrees adopted by local municipal or county governments. 7. Under this project, since most land acquisition and relocation will take place in rural areas. Most of the resettlement activities will be governed by both the "Land Administration Law" and its local implementation measures. According to the "Land Administration Law," S ection 1, Article 2: "for the public interest, the state could -134 - ANNEX 4.8 expropriate collectively owned farmland." The essence of the policy is that when the state acquires farmland, the land-using units will pay not only a basic compensation for land, crop and attached properties, but also job resettlement subsidies. Based on the documents issued by the provincial govermment, local governments have specified a detailed compensation plan. 8. The compensation rates are as follows: (a) State land (uncultivated) at power plant site: Y 1 1,000/mu/1 5 years. (b) Crop land on the transmission route: Y 16,800/mu/l5 years. (c) Vegetable land: Y 17,600/mu/15 years. (d) Crop land leased for construction: Y 1,690/mu. (e) Vegetable land leased for construction: Y 1,780/mu. (f) Closing of small quarry used by single family: Y 50,000 per place. (g) Regular tree: Y 30/piece. (h) Fruit tree: Y 200/piece. (i) Land for transformers: Y 38,000/mu. (j) Relocation of households: Y 200/m2. (k) Relocation subsidy: Y 30/person. Resettlement Institutional Responsibility 9. EPH has set up a Land Acquisition and Compensation Group composed of three to four professionals and local representatives to be responsible for the resettlement. The Land Acquisition and Resettlement Group will provide overall leadership and coordination during the process of resettlement planning and implementation, which includes thirty party supervisor. More specifically, it will: (a) participate in the process of preliminary design and alignment selection, including surveys of land acquisition and any affected households, consultation with local communities; and estimation of compensation costs; (b) participate in the finalization of alignment design in the field, including verification of land acquisition, determination of the number of affected -135 - ANNEX 4.8 households, and other lost properties; and formulation of "Project Land Acquisition and Building Demolition Table," which will be the basis for the resettlement action plan; (c) discuss with relevant local government agencies on various compensation policies and resettlement programs, which will then be formulated into local decrees issued by the local governments; (d) negotiate compensation and rehabilitation contracts with affected communities, particularly for all substations; and processing land acquisition applications with provincial and affected county land bureaus; and (e) supervise and coordinate individual contractors during the implementation the resettlement action plan. Budget and Timetable 10. Based on the preliminary budget projection, resettlement costs will total approximately Y 70.33 million. This includes a 6 percent contingency and 3 percent administration expense. According to Chinese regulations, the Y 49.62 million on the state land acquisition will be paid to the Jiyuan City Government. Table 2: Cost Estimate of Possible Relocation for Qinbei Power Project Items Quantity Rate (Yuan) Total (Y10,000) Power Plant 4,138.4 mu 11,000 4,552.200 Two Substations 150 38,000 570.000 Electric Tower crop land 55 mu* 16,800 92.400 vegetable land 8.6 mu 17,600 1.136 Temporary Land Leasing crop land 4,830 mu 1,690 816.270 vegetable land 546 mu 1,780 97.190 Family Quarry 12 50,000 60.000 Standing Tree regular tree 43,160 30 129.480 Compensation fruit tree 1,629 200 32.580 Relocation of House 4,320 sq. m 200 86.400 Relocation subsidy 160 30 Subtotal 6,452.13 Contingency 6% 387.100 Administration 3% 193.560 I1 ~7,032.800 Note: I hectare = 15 mu. -136- ANNEX4.8 Table 3: Total Cost for Possible Relocation (Include Contingency and Administration) Items Subtotal (Million yuan) Power Plant 49.62 Transmission and substations 20.71 TQW 7033 Timetable for the project construction and compensation for land acquisition: Table 4: Resettlement Schedule Time Work March 1995 Project Feasibility Study April 1997 Completion of Preliminary Design March 1998 Completion of Blueprint Design May 1998 Resettlement Action Plan August 1998 Compensation for Land Acquisition December 1999 Completion of Construction Monitoring and Evaluation 11. The objective of monitoring and evaluation is to ensure that the resettlement program is implemented smoothly and to see whether resettled people restore their living condition and income level after relocation. The agreed outline of the first-year monitoring report includes reviewing resettlement progress among all components; examining the us of resettlement funds; and assessing situation regarding production restoration among relocated population, if any; living condition improvements (housing and related services and facilities); and administration capacity of resettlement organizations. The group will produce a resettlement progress report for the project office and the Bank every six months. After the completion of resettlement implementation, a resettlement evaluation report will be completed. Conflict Resolution and Grievance Procedure 12. If an affected person is not satisfied with the compensation package or if, for any reason, the compensation does not materialized according to the agreed schedule, he or she could go through a grievance procedure specified in the resettlement action plan. -137 - ANNEX 4.8 13. The complainer can voice his or her concern to the responsible resettlement offices, or could bring the case to the "Public Complaint Office," which exists in both county and municipality level governments, directly under the governors' offices, or request an administrative review of the case by the same or higher level of government and appeal directly in court, if he or she is not satisfied with the governor's decision. -138 - ANNEX 4.9 ANNEX 4.9: ENVIRONMENTAL MANAGEMENT PROGRAM A. Summary of Key Project Environmental Issues Air Pollution 1. Table 1 presents air pollution characteristics for the proposed project (1,200 MW) and the total power program planned for the site (3,600 MW). As can be seen, emission standards for dust, sulfur dioxide and nitrogen oxides are all in compliance with Chinese standards and World Bank guidelines for both design coal and check coal cases. Air quality data are also presented, and for sulfur dioxide, the project (1,200 MW) and overall program (3,600 MW) will not result in a violation of World Bank guidelines. PRC (Grade Il) standards are likewise not exceeded for annual and 24-hour averages, though one exceedance of the 1-hour standard was predicted from the dispersion modeling in a nonprotected portion of the mountain region (details may be found in the EAR). Existing background dust levels exceed both Chinese standards and World Bank guidelines. This is not unusual for China in general, and in particular for this area which is exceptionally dry. With project implementation, and ultimately with the overall program, these dust levels will be slightly elevated (a maximum of 0.5 percent for the project and 1.5 percent for the program, with respect to "one maximum" values). This is not believed to be problematic for several reasons; maximums are at the plant site which is uninhabited and, at the nearest major population center (Jiyuan City), anticipated increases in dust levels are about one third the values of those at the plant site. These differences are well below the monitoring errors and the modeling uncertainties (0.2 percent for the project and 0.6 percent for the program); and the local government (including the regional environmental protection board) supports the project. 2. Although ambient measurements of nitrogen oxides were not made, it is unlikely to be a problem because of limited sources (traffic, fuel combustion) in the region. Furthermore, low NOx burners are to be included in order to meet emission levels to comply with Chinese and World Bank emission standards for NOx. Thus appropriate mitigating measures are being taken as would be taken had an issue of NOx been identified. 3. Carbon dioxide emissions are estimated to be 0.0065 and 0.0195 billion tons/year for the 1,200 MW and 3,600 MW situations respectively. This represents 0.03 and 0.09 percent of the annual industrial global burden. Therefore both the project and the overall program should present an insignificant impact on global warming. -139 - ANNEX 4.9 Water Pollution 4. Wastewaters will be discharged after appropriate treatment to meet Chinese standards and World Bank guidelines. Treatment will be physical, chemical and/or biological. Cooling towers will be used and some cooling tower blowdown will be used for bottom ash sluicing and dust suppression at the ash disposal yard. All effluent discharges, after treatment, will be to the Baijan river, which is primarily a dry river bed from September to June and only experiences flow conditions during July and August. There is a potential issue of these effluent discharges contaminating downstream groundwater used for irrigation. If the effluent and irrigation water monitoring program (see Table C.2) indicate a problem, EPH agreed to drill alternate wells and construct necessary irrigation systems to provide farmers an acceptable water supply. Drinking water wells are all upstream of the discharge and should not be affected. During these dry periods these surface discharges percolate to the aquifer and thereby recharge (in part) the water supply source for this project. Table 1: Air Pollution Characteristics of the Qinbei Thermal Power Plant Air Quality (ug/m3) World Bank standard Chinese National Background Level Standard SO2 TSP NO, SO2 TSP NOx A B SO2 TSP SO2 TSP Annual average 100 100 100 60 33 193 33 216 Daily 500 500 150 300 100 60 525 73 404 maximum Once maximum 500 1,000 150 188 1,230 180 1,100 Design Coal Background value and 2 x 600 MW Background value and 6 x 600 MW A B A B SO2 TSP SO2 TSP SO2 TSP SO2 TSP Annual average 33.8 193.2 34.0 216.0 35.4 193.6 36.0 216.0 Daily maximum 62.0 525.4 86.0 406.0 66.0 526.2 112.0 410.0 Once maximum 196.0 1,231.6 212.0 1,106.4 212.0 1,234.8 276.0 1,119.2 - 140 - ANNEX 4.9 Check Coal Background value and 2 x 600 MW Background value and 6 x 600 MW A B A B SO2 TSP SO2 TSP S02 TSP SO2 TSP Annual average 34.1 193.2 34.0 216.0 36.3 193.6 37.0 216.0 Daily maximum 62.7 525.4 91.0 404.0 68.2 526.2 126.0 404.0 Oncemaximum 198.9 1,231.6 233.5 1,106.5 220.6 1,234.8 310.6 1,119.2 Notes: The Chinese standard is II - class standard. A: Jiyuan city B: Plant vicinity Emissions (units as indicated) Planning World Bank Chinese national Phase I Capacity Coal standard standard (2 x 600 MW) (6 x 600 MW) Sulfur (%) Design 0.41 0.41 Check 0.56 0.56 Ash (%) Design 24.95 24.95 Check 25.27 25.27 Stack height (m) I x240 3 x 240 ESP efficiency (%) 99.6 99.6 Emission amount of Design 500 479.4 85.2 255.6 SO2 (t/day) Check 500 479.4 116.4 349.2 Emission Design 100 266.8 83.6 83.6 concentration of TSP (mg/NM 3) Check 100 270.5 83.6 83.6 Emission amount of Design 300 273 273 NOx (nanograms/J) Check 300 273 273 La Determined procedures defined in Regulation No. GB 13223-91, "Emission Standards of Atmospheric Pollutions". - 141 - ANNEX 4.9 During dry periods, surface discharges percolate through the ground and recharge the local aquifer, which is the exclusive water supply source for this project. 5. Table 2 details all liquid effluent streams, their pollution characteristics, and control measures to be taken. Additionally, Chinese effluent standards are provided. As can be seen in the table, all effluents are in compliance with all applicable standards. Table 2: Summary of Wastewater Control Pollutant Wastewater Amount Discharge Pollutant Control Effluent Dis- Dis- Source Mode Factor Measure Quality charge charge (ppm) Standard Direc- tion (1,200 MW) (3,600 MW) Demineral- 200 m3/d 600 m3/d Continuous pH Neutralization pH = 6.0- 6-9 izer Reject SS & mixing 8.8 70 COD with central- SS <70 100 Metals ized waste- COD 0.1/1.0 water <100 Metals 0.05/0.8 Sanitary 100 t/H 300 t/H Continuous BOD 2-stage <30 30 Baijian Effluent SS biochemical <70 70 River treatment & chlorination Oil Con- 110 ttH 330 t/H Intermittent Oil Air flotation <10 10 Baijian taminated & separation River Wastewater Boiler 3,000 m3 9,000 m3 Interminent pH Evaporation - - Chemical each time each time COD in Boiler after Cleaning pH neutrali- Wastewater zation and filtration Combined 692 ttH 2,076 t/H Continuous TDS Monitoring <1,000 1,000 Baijian Wastewater River Effluent Coal yard 700 t/d 2,100 t/d During rain pH Coagulation 8 6-9 Baijian runoff I SS and Settling 30-70 70 River GBS978-88 "Standard of Integrated Discharge of Effluents, Class I" - Federal Regulation. Notes: SS - suspended solids t = metric tons COD = chemical oxygen demand H = hour BOD = biological oxygen demand d = day Coal Transport and Handling 6. Fuel will be supplied from the two main sources: the Houzhou Coal Mine Bureau (Linfen prefecture) and the Changzi Coal Transport and Supply Branch Company. Fuel from the Houzhou mines will be shipped by rail along the southern Tong-Pu railway line and the Houma-Yueshan railway line to the Qinbei north railway station. Fuel from the Changzi mines will be shipped by the Tai Jiao railway line and then along the Jiao Zhi - 142 - ANNEX 4.9 railway line to Qinbei. The power station is about 150 km from the Changzi mines and 270 km from the Houzhou mines. For the project (1,200 MW) about 3.5 million tons/year of fuel will be supplied from both mines. Fuel will be a mixture of lean coal, bituminous, and washed middlings in the following proportions: Lean Coal Bituminous Washed Middlings Design coal 2 : I : I Checkcoal 2 0 1 7. Washed middlings are derived from a coal washing plant in Houzhou whose main customer is a nearby steel mill. 8. Both rail lines are to be utilized for a variety of freight, and project implementation would not overburden current or future freight movement. Project requirements and overall freight line capacities are indicated below: Line Capacity Current Use Fuel Transport (MMTPY) (MMTPY) 1,200 MW 3,600 MW MMTPY (% cap.) MMTPY (% cap.) Houma-Youeshan 70.0 Under 1.75 (2.5) 5.25 (7.5) construction Tai-Jiao 50.0 35.0 1.75 (3.5) 5.25 (10.5) 9. At the coal storage yard, water sprinkling facilities will be installed to prevent coal dust dispersion. Spraying will be done on a regular basis and during coal dumping. The coal coniveyor operation, crusher room, rotary dumper rooms and transfer points will be enclosed and dust collection equipment installed. All excess water runoff at the coal yard will be collected and treated (suspended solids and pH) prior to discharge. Ash Management 10. Fly ash and slag will be removed separately. Slag will be slurried and pumped to a dewatering bin and then either trucked or conveyed to the dry ash disposal area or sold. Trucking and conveying alternatives are currently under study in terms of environmental/economic factors. If trucking is determined to be the appropriate alternative, a dedicated highway will be constructed to avoid truck traffic interference with local residents. Excess water will be sent for treatment as part of the chemical wastewater stream. Fly ash will be sent to an ash silo pneumatically where it will be mixed with a small amount of water (25 percent) and either trucked or conveyed to the dry ash disposal yard or sold to consumers. -143- ANNEX4.9 11. Two dry ash disposal yards sites are available: the Liuchun and Dongluzai sites. The Liuchun side located in the flood plain on the left bank of the Qin river about 4.5 km south of the plant site is preferred. All boundaries of this ashyard will be confined by dikes whose height will be established to protect against the 50-year flood. An additional dike will be constructed to contain any flooding which might result from the alternate runoff pattern introduced by the presence of the ashyard. The Dongluzai dry ashyard is located 4 km east of the plant site. Both sites can together accommodate about 15 years of ash deposition (either design or check coal) at the full operation of 3,600 MW. 12. Permeability at the site of Liuchun is relatively high (10-5 cm/sec) so an impermeable liner of either compacted clay or plastic will be laid down at the ashyard first. Groundwater in the area is used by farmers for drinking and irrigation; however, groundwater beneath the ashyard is expected to flow away from any drinking water wells. Additionally, in this region, annual evaporation rates exceed precipitation rates by almost 1,000 mm and laboratory tests indicated that water migration from the ashyard should not reach the groundwater level which is three to four meters below the base of the ashyard. 13. Nonetheless, the Liuchun ashyard does present a slightly greater than normal risk of groundwater contamination. Therefore, groundwater monitoring will play a critical role in the environmental management plan. In addition, if a problem arises, the Borrower will reevaluate the liner design and construction and make necessary corrections before disposal is continued. The sector of the ash disposal site in use at the time problems are identified would be capped with clay and topsoil, and disposal resumed at a section of the ashyard that would have been repaired. If the problem still persists, the Borrower agrees to switch ash disposal to the Dongluzai site. 14. Dust suppression will be maintained by spraying 10 mm of water per month during periods of low or no rainfall. Additionally, the ash surface will be compressed by rolling, and trees planted at the periphery to decrease wind speed. 15. When the site is complete, it will be covered with clay and topsoil and then planted with vegetation. Transmission Line 16. The 165-km 500 kV transmission line will be designed in such fashion that the maximum electric field strength at 1.5 meters above the ground surface will be 5 kV/m (500 KV Substation Design Provisional Technical Regulation: SDGJ69-85). The design will further limit induction currents to 0.5 ma. There are no World Bank standards for electric field strengths, but the maximum value is considered safe (within limits experienced by using an electric heating blanket) and should not cause damage to any vegetation. The transmission line route has been selected to avoid villages and towns, so there are no issues of resettlement or compensation for dismantling of existing structures. Approximately 80 m2 of land is occupied by each cable support tower. Affected -144- ANNEX 4.9 landowners will be reimbursed for this use with a one-time payment based upon loss-of- land use for fifteen years. Noise levels on the average comply with Chinese standards and World Bank guidelines. Both electric field monitoring along the transmission route and noise monitoring are part of the overall monitoring plan (see Section C). 17. The issue of migratory bird routes over the transmission corridors were examined in the updated EAR (April, 1995) and it was concluded that any impacts would be small or negligible. Additionally, the Henan Provincial Environmental Protection Agency has verified that the proposed project does not cross or influence any natural protection zones. Aquatic/Terrestrial Ecology 18. The plant will be located at a site that is uninhabited and consists of poor quality, uncultivated soil. There are no nature preservation areas, wildlife, fisheries, or forest cover of any significance. Any existing ecological communities could establish themselves quickly and easily in any number of nearby areas with similar environmental conditions. Occupational Health and Safety 19. Project design will be such that international standards of worker safety will be included in all bidding documents of project equipment. Boilers and other dangerous equipment will be designed to meet ASME standards of safety and will be so specified in the bidding documents. Polychlorinated biphenyls (PCBs) are illegal in China, their use is prohibited in the project. Prohibition of asbestos use will be specified in the bid documents. Human Environment 20. No socio-cultural resources were identified with the Qinbei Power Plant construction or operational area of impact. A primary concern is increased truck traffic on local roads if ash disposal is to be conducted this way. However, if this alternative for ash disposal is selected, impacts would be mitigated by construction of a dedicated road and using trucks with increased capacity (to minimize frequency of deliveries). EPH is studying the alternative of a dry ash conveyor system. Based upon study results, the most economic and environmentally acceptable choice will be made. Noise 21. Noise estimates indicate that the project (power station and transmission line) will conform to Chinese standards and World Bank guidelines as indicated in Table 3. - 145 - ANNEX 4.9 Table 3: Noise Prediction (decibels) Predicted World Bank Chinese Standard Background Predicted Value Points Guideline Day T Night Value 1,200 MW | 3,600 MW Concentrating 55 60 50 42 <50 TBD Residential Quarters La Power plant _ 65 55 45 55 TBD Boundaries Lb Office Area in 60 50 42 <55 TBD Power Plant Noise-Insulation 75 65 55 42 <60 TBD Control Area Under EHV Line 60 37 <60 TBD /a Environment Noise Standard in Urban Area (GB3096-93). lb Noise Standard at Boundaries of Industry and Enterprise (GB 12349-90). TBD -- To Be Supplied by KBN. - 146 - ANNEX 4.9 B. Mitigating Plan Summary of Mitigating/Issues Measures Issue/Pollutants Control Method Recommended Sulfur Dioxide Emissions Burning low sulfur coal (S=0.41 percent for design coal). High chimney (240m) dispersion and reserve space to install desulfurization device (FGD) if necessary. Dust Emissions Use of high efficiency (99.6 percent) electrostatic precipitator (ESP) to satisfy exit concentration limit of 100 mg/Nm 3, possible installation of flue gas conditioning (FGC) system if ESP performance does not meet standard. Nitrogen Oxides Use of low NOx burner, with design specifications in the bid document of NOx discharge concentrations to be less than 273 ng/J. Chemical Wastewater Various streams collected and sent to chemical wastewater treatment plant prior to discharge. Sanitary Sewage Biochemical treatment. Oil Contaminated Air flotation separation. Wastewater Coal Yard Runoff Collected, sent to setting pond for removal of suspended solids. Ash and Slag Disposal After wetting, dry ash and slag from boiler are conveyed (truck or belt) to dry ash disposal yard. Ash and slag deposited at the yard will be leveled, rolled and sprayed with water in time. Ashyard is partitioned in blocks. When one block pile of ash reaches the designated height, it is covered by clay, then topsoil, then planted with grass. Development of a program/market for utilization of ash and slag. For prevent groundwater contamination, either a clay or plastic membrane liner will be placed at the ash site with a permeability of 10 7 cm/sec. If the groundwater monitoring program indicates development of adverse water quality conditions, the block will be capped with clay, the remaining liner construction examined to check permeability. If detective, the remaining liner will be repaired, and disposal continued in the repaired section of the ashyard. If this measure is unsuccessful, the Dongluzai site will be prepared and used for ash disposal. Dust (at Ashyard) Trees planted at the edge of the yard to suppress dust formation. Cooling tower blowdown water sprinkled on active ash block. After block is complete, it will be covered and planted. Noise Maximum allowable noise levels to be specified in bid document is 90 dB(A). When necessary, install sound insulation cover or build sound insulation room. Silencers to be installed at steam discharge pipe outlet, safety valve and forced draft fan (FDF) outlet. Vegetative Die-off Replant affected areas with hardier/pollution resistant species. Flooding Upstream of the Additional upstream dike construction to confine floodwaters. Ashyard Dike -147 - ANNEX 4.9 C. Environment Monitoring Program Table C-1: Summary of Atmospheric Pollution Monitoring Location of Factors to be Instruments Distribution of Monitoring Monitoring Monitored Used Monitoring Points Frequency Chimney Dust, S02 Flue gas Sampling point at Automatic, NOx ,CO monitoring 1/3 height of continuous CO2 system chimney ESP outlet/inlet Dust Dust sampler Upstream and After ESP downstream of ESP overhaul or change of fuel Within the plant Total suspended Air quality At coal yard, front Once/season fence particulates (TSP) monitoring vehicle, area of power plant (one week Settleable dust, automatic and single workers' campaign) SO2, NOx monitoring system living quarters Outside power plant TSP, SO2 Air quality Intervals of I km One day per NOx monitoring vehicle. for 10 km both week for all Atmospheric (fixed) upwind and down year automatic wind of plant site, monitoring system and in the two protected areas Points of predicted TSP, SO2, visual Portable monitoring Single point in the One week high levels at air inspection of equipment middle of predicted campaign pollution by EAR vegetation exceedance area per season modeling Monitoring method for TSP, see GB 9802-88 Monitoring method for SO2, see GB 8970-88 Monitoring method for NOx, see GB 8969-88 Monitoring method for flue gas dust, see GB 5460-85 - 148 - ANNEX 4.9 Table C-2: Summary of Monitored Water Pollution Monitored Item Monitored Factors Instruments Used Monitoring Frequency Locations Chemical pH, suspended pH meter, turbidity Effluent outlet at Continuous wastewater solids (SS), COD, meter, COD chemical during heavy metals analyzer, atomic wastewater discharge. absorption treatment plant Heavy metals twice/season Sewage BOD, SS, oil and BOD analyzer, Outlet of sanitary Twice/month grease turbidity meter, wastewater hexane extraction treatment plant Groundwater at pH, heavy metals, pH meter, atomic At four corners of Once/month ashyard fluoride absorption, the ashyard spectrophotometer Coal pond pH, SS pH meter, turbidity Discharge port of During discharge meter coal settling pond periods of discharge Oil contaminated Oil and grease Gravimeter At effluent of During water oil-water separa- discharge, tion system about twice/month Combined Total dissolved Conductivity meter Point of discharge Continuous wastewater effluent solids (TDS) into Baijan river Drinking water TDS, pH, lead Conductivity meter, Potable water Once/month wells fluorine (F) pH meter, atomic wells in general during dry absorption, project area weather spectrophotometer Irrigation wells TDS, trace metals Conductivity, Downstream of Spring and (particularly arsenic atomic absorption, project ashyard summer and selenium) spectrophotometer once/month Method of analysis: pH GB6920-86 BOD5 GB7488-87 Mercury GB7468-87 SS GB1 1901-89 F GB7488-87 Chrome (VI) GB7467-87 COD PS-7-85 Heavy metals GB7475-87 Oil PS-9-85 - 149 - ANNEX 4.9 Table C-3: Monitoring on Noise and Electromagnetic Radiation Monitoring Points Monitoring Lines Instruments Location Monitoring Method Various equipment in Various parts of rotary Points selected Im from GB 7441-87 main power building and machineries, turbine, coal the large equipment. For "Power Plant auxiliary building (noise) pulverizer, forced draft small devices, point Noise Testing and fan, induced draft fan, selected at a distance of Measuring and coal crusher half of their lengths Method" Outside power plant Office area, front area of I m outside the power GB 12349-90 fence and residential power plant residential plant fence, points set up GB 3090-93 quarters quarters at an interval of 100- 200m, Im outside the windows in residential area Transmission Line Electromagnetic radiation Along the transmission GB 3096-93 and noise line passage of some GB 6702-88 residential areas (about 20 locations) Table C-4: Labor Safety and Health Monitoring Plan Items Factors to be Monitoring Location Monitoring Devices Monitoring Monitored Frequency Fire and explosion Fume Dangerous goods Fume alarm Automatic and prevention storage and oil tank continuous areas Hydrogen Hydrogen Generation Hydrogen leak Automatic and System detector continuous Fumace Inside Furnace FSS-meter Automatic and temperature continuous Dustproof and Coal Dust Coal crushing Coal dust sampler Once a month Poison Prevention workshop So2, CO, NOx Operating floor in Portable atmosphere Once a month boiler house monitoring instrument Noise prevention Noise level Various on-duty room Sound-meter Once a month in main building, office area, living quarters -150 - ANNEX 4.9 D. Institutional Strengthening /Technical Assistance Table D-1: Training Proposed Training Number of (Year from start) Duration/Venue Total Staff I /2 / 3 1 4 (months) Staff- months Pollution Control Technology - FGC, SO2, NOx,Dust 9 ----/ 4/ 5 / - / - 2/staff 18 Ash Utilization 2 ----! - I - / 2 / - I /staff 2 AirQuality Modeling 2 ----/ - / 2 / - / - I /staff 2 Ground Water Modeling I ---- / - / I / - / - I /staff I Surface Water Modeling I ---- I - I / - / - 1/ staff I Dry Ash Management 2 ---/- / - / - / 2 1 / staff 2 Environmental I ----/I / - / - /- 2 / staff 2 Assessment Monitoring Technology Air 2 ---- / - 2 / - I /staff 2 Water 2 ---- / - 2 / - I /staff 2 tals 22 5 9 6 2 (staff) (year 1)(Year 2)(Year 3)(Year 4) Staff months 32 Approximate Cost (at 5,000 USD/Staff month): 160,000 USD. -151- ANNEX 4.9 Table D-2: Equipment to be Purchased Locally for Environmental Monitoring Station Equipment Quantity Remarks Analytical Balance 2 Sensitive amount 0.1 mg Spectrophotometer 1 751 Gmodel pH Meter 2 PHS-3C or PXJ-IC model Conductivity Meter I Polarograph I Flue Gas Dust Tester 2 Flow Meter 2 Precision Sound-Meter 2 Refrigerator 2 Sampling Car I Meteorological Parameter Acquisition I package System Computer 1 AST 486 Recorder I Printer I TSP Sampler 4 FC-2 model Electromagnetic Intensity Meter 2 Measuring electromagnetic energy Atmosphere Sampler 4 Measuring S02, NOx etc. -- pollutants in the air. Noise automatic measuring system 2 HS6211 model Biomicroscope (1600*) 1 ZXC 11 model Water Discharge Flow Meter 7 TOTAL, Y 1.9 rnillion -152 - ANNEX 4.9 Table D-3: Equipment to be Imported for the Environmental Monitoring Station Instrument Equipment Name Quantity Remarks Flue Gas Automonitor system I or 2 depending on whether Including sampling analyzing (SO2, NOx, CO2, TSP) separate system for TSP is offered and recording Atmospheric Environment 3 One for central control Automatic Monitoring Instrument station, one for fixed station, (SO2, NOx, TSP) the other for moveable station Portable Flue Gas Monitoring 2 Measuring SO2, TSP, Instrument temperature pollutants in flue gas COD Meter I BOD5 Meter I Atomic absorption I With graphite oven spectrophotometer TOTAL USS800.000 -153 - ANNEX 4.10 ANNEX 4.10: BANK SUPERVISION INPUT INTO KEY ACTIVITIES Approximate Expected Staff inputs dates Activity skill requirements (staff-weeks) 12/96 Supervision Mission Engineering 5.0 Project Implementation Financial analysis Start-up Procurement Environment Compensation/RAP 09/97 Supervision Mission Engineering 4.0 Status of the Project Financial study Implementation of tariff reform 09/98 Supervision Mission Engineering 5.0 Status of the Project Implementation of the recommendations of the financial study Environment Review of progress in power sector reform 09/99 Supervision Mission Engineering 4.0 Status of the Project Financial analysis Execution of the Studies Implementation of tariff reform plan 09/2000 Supervision Mission Engineering 4.0 Financial situation Environment Compensation/Resettlement Review of progress in power sector reform 12/2001 Supervision Mission Engineering 5.0 Status of the Project Review of financial and pricing covenants 08/2002 Supervision Mission Engineering 6.0 Status of Project Economic/financial analysis Completion and compliance Environment with covenants Preparation of PCR Note: Supervision missions will be coordinated with other Bank-financed power projects in China. -154 - ANNEX 4.11 ANNEX 4.11: MONITORING FRAMEWORK AND INDICATORS Project Objective (a): Reduce acute power shortages and faster integrated development of the power system of Henan Province in the most cost-effective and environmentally sound manner. 1. Construction and Project Management Procurement (major equipment) Bid Opening April 1996 Completion of Bid Evaluation August 1996 Contract signing October 1996 Proiect Milestones Commence excavation June 1997 Commence boiler structure erection February 1998 Boiler drum lifted into position (Unit I) August 1998 LP Turbine casing closed (Unit 1) September 1998 Boiler pressure tested August 1999 Unit Synchronization Unit I September 2000 Unit II June 2001 Commercial Operation Unit I March 2001 Unit II December 2001 Project Completion December 2002 Loan Closing June 2003 2. Resettlement Program (Resettlement only along 500 KV transmission line right-of-way) Preliminary design and survey completed April 1997 Resettlement Action Plan (RAP) prepared October 1997 Detailed engineering design completed March 1998 Compensation for land acquisition August 1998 Completion of all construction and resettlement December 1999 3. Environmental Management Program Equipment for monitoring station procured June 1998 Environmental monitoring station established June 1999 -155- ANNEX4.11 Environmental monitoring program review November 2000- (every six months from unit start-up) onward Project Objective (b): Support adequate implementation of power sector and power enterprise reforms and accelerate the transition of Electric Power of Henan to a legally and financially autonomous company. 1. Institutional Development Corporatization and Commercialization of EPH: Incorporation of EPH as Limited Liability Company Within 9 months of issuance of State Council Guidelines Bureau functions consolidated in one Dept. June 1996 Complete separation of bureau functions Within 9 months of issuance of Power Sector Regulations Commercial Contractual Relationships: Draft commercial contracts prepared: December 1996 - Power sales agreements with supply bureaus - Purchase and operating agreement between independent generators and EPH - Commercial agreement with Central China Power Group Contracts made effective June 1997 Organizational and Financial Restructuring: Completion and submission of recommendations for Organizational Restructuring and Financial Management Technical Assistance June 1998 Implementation of recommendations completed June 1999 2. Financial Indicators 1995 1996 1997 1998 1999 2000 2001 2002 2003 Self-financing Ratio (SFR) 25.1 25.2 30.0 30.1 30.2 35.1 35.0 35.3 35.1 Debt Service Coverage 2.1 1.8 2.1 2.3 2.5 2.0 1.8 1.8 1.9 EPH Average Price (fen/kWh) 25.95 30.57 37.69 43.39 45.53 50.24 57.94 58.95 59.09 -156 - ANNEX 4.11 Project Objective (c): Assist in transferring new power technologies and in applying modem power system operation/maintenance methods. Procurement and installaiton of on-line plant Included in I&C monitoring system as part of plant instrumentation package and to be installed prior to plant commissioning Training inpreventive maintenance techniques September 2000 Project Objective (d): Support improvements in the efficiency of electricity use. Preparation of constractual documents and implementation agreements for equipment learning program and shared- savings program September 1996 Completion of Zhengzhou City Loss Reduction engineering design and procurement package June 1996 Training in energy monitoring and targeting December 1996 Full implementation of electricity conservation projects December 1998 Project Objective (e): Contribute to rationalization of power tariffs. New Tariff Structure proposal and implementation plan submitted to World Bank March 1996 Plan approved by all concerned authorities June 1996 Bulk transfer price between EPH generation and transmission business and supply bureaus established June 1996 Unification of dual-track tariff system December 1998 Economic and Financially adequate tariffs achieved December 2000 -157- ANNEX 5.1 ANNEX 5.1: ACTUAL FINANCIAL STATEMENTS OF EPH (1990-94) Table 1: ELECTRIC POWER OF HENAN - INCOME STATEMENT (Yuan Million) 1990 1991 1992 1993 1994 Energy sales (GWh) - Electric Power 23,892 25,707 28,439 30,644 33.031 Sales increase % 2.1 7.6 10.6 7.8 7.8 Heat sales (GJ) - Heat 11,052 11,581 11,730 12,316 12,637 Average price (fen/KWh) (VAT excluded) 10.65 11.89 13.83 17.87 18.53 Average price (fen/KWh) (VAT included) 21.68 EPH's own avg. price Purchased power's avg. price Average price (fen/KJ)-Heat 0.42 0.41 0.47 0.49 0.86 Tariff increase % 6.9 11.6 16.4 29.2 21.3 Total Operating Revenue 2,613 3,125 4,015 5,583 6.228 Total Operating Revenue (including VAT) 2,613 3,125 4,015 5,583 7,457 Value-added Tax Plus Others 334 388 439 640 1,229 Net Operating Revenue 2.279 2.738 3.576 4.943 6Ž.22~8 Operating Costs Fuel 941 974 1,189 1,639 1.735 Purchased Power 208 428 695 641 1,183 Operation & Maintenance 318 389 490 815 1,000 Administration & sales expenses 137 179 258 413 598 Depreciation 251 342 392 577 838 Other Total Operatinp Costs 1.855 2.312 3.023 4.085 5354 Net Operating Income 424 425 553 858 874 Other Income 6 2 3 29 25 Other expenses 26 30 35 31 24 Financial Charges 126 284 Long-term Loan 126 284 Short-term Loan Nonoperating Income (20) (28) (31) (2) 1 Income before Income Tax 404 397 522 730 591 Income Tax 84 66 100 79 157 Net Income 320 332 422 651 434 -158 - ANNEX 5.1 Table 2: Electric Power of Henan - Balance Sheet (Yuan Million) 1990 1991 1992 1993 1994 Current Assets Cash 344 468 600 804 1,069 Accounts Receivable 205 221 257 144 134 Inventories 227 271 336 427 385 Other Accounts Receivable 534 481 624 964 1,387 Total Current Assets 1.130 1.441 .17 238 2.974 Long Termn Investments 29 29 27 30 342 Fixed Assets Plant in Service 6,023 6,700 8,188 12,295 13,270 Accumulated Depreciation 1,630 1,968 2,361 4,227 4,914 Net Plant in Service 493 4 732 5 827 8 Construction WIP 488 609 522 1,038 3,555 Total Fixed Assets 4,88 5.3A2 6.3A9 29.10 11.912 Deferred Assets 107 58 188 276 317 Total Asset cm 327 6.708.8 11 750 15 546 Current Liabilities Accounts Payable 103 102 102 387 385 Tax Payable 176 244 155 134 86 Other Payable 488 510 792 843 1,006 Short Term Loan 41 92 95 163 440 L-T Loan due in 12 Months Total Current Liabilities 24 1.144 1 2 1.917 Long Term Debt 2,078 2,197 3,144 3,306 6,004 Total Liabifities 2.8863 4 428 4.834 7921 Eau& Paid-in Capital 2,909 2,915 2,929 2,931 2,931 Eamed Surplus 233 534 Retained Eamings 533 809 1,162 1,794 2,201 Capital Reserve 1,960 1,960 Total Equi 3.441 3.724 4AM92 6.9I1 7 24 Total Liabilities and Equity 6,322 6.870 8.380 11.750 15,546 -159- ANNEX5.1 Table 3: Electric Power of Henan - Funds Flow Statement (Yuan Million) 1990 1991 1992 1993 1994 INTERNAL SOURCES Net income before interest 320 332 422 778 718 Depreciation 251 342 392 577 838 Total Internal Sources 571 674 813 1.355 1.557 Borrowings 565 451 1,344 852 3,268 Equity 171 6 14 234 301 TOTAL SOURCES OF FUNDS 1.307 1.131 2.171 2.441 5.126 Capital Expenditures 827 753 1,529 1,464 3,685 Long-term investment 4 (0) (2) 3 312 Interest Charged of Operation 126 284 Loan Repayment 265 332 397 690 570 Total Debt Service 265 332 397 817 854 Bonus & Remittance to Govt. 62 55 68 20 27 Changes in Working Capital 129 (132) 47 (66) (17) Operational Requirements 456 255 512 771 864 TOTAL APPLICATIONS OF FUNDS 1.287 1.007 2.039 2.237 4.861 NET CHANGE IN CASH 20 124 133 203 265 Cash at the beginning of the year 323 344 468 600 804 Cash at end of the year 344 468 600 804 1,069 ANNEX 5.2: FORECAST FINANCIAL STATEMENTS OF EPH (1995-2004) Table 1: Electric Power of Henan - Forecast Income Statement (Yuan Million) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Energy sales (GWh) - Electric Power 35,740 40,528 44.400 48,600 53,011 57,717 62,434 67.112 73,160 78,650 Sales increase % 8.2 13.4 9.6 9.5 9.1 8.9 8.2 7.5 9.0 7.5 Heat sales (GJ) - Heat 13.268 13,932 14.628 15.360 16.128 16,934 17,781 18,670 19,603 20,584 Average price (fen/KWh) (VAT excluded) 22.14 26.00 31.60 36.70 39.16 43.20 49.80 51.40 52.20 56.25 Average price (fen/KWh) (VAT included) 25.90 30.42 36.97 42.94 45.82 50.54 58.27 60.14 61.07 65.81 EPH's own avg. price Purchased power's avg. price Average price (fen/KJ)-Heat 0.90 0.95 1.00 1.05 1.10 1.15 1.21 1.27 1.34 1.40 I Tariff increase % 19.5 17.4 21.5 16.1 6.7 10.3 15.3 3.2 1.6 7.8 Total Operating Revenue 7,913 10,537 14,030 17.836 20,759 24,934 31,092 34,496 38,190 44,241 O Total Operating Revenue (including VAT) 9,258 12,329 16,416 20,868 24,288 29,172 36,378 40,360 44,682 51 762 ° Value-added Tax Plus Others 1.420 1,890 2,517 3,200 3.724 4,473 5,578 6,189 6,851 7,937 Net Operating Revenue 7.838 10438 13.899 17.669 20,564 24.699 30.800 34.171 37.831 43825 Operating Costs Fuel 1.980 2.644 3,401 4.091 5,038 5,976 6,947 8,112 9,565 10,983 Purchased Power 1,273 1,569 1.654 2.503 2,885 3,198 3,975 4,515 5,247 6,259 Operation & Maintenance 1,077 1,501 1,859 2,245 2,790 3,583 4,739 5.977 6,966 8.669 Administration & sales expenses 786 902 1.018 1,132 1,237 1,292 1,433 1,558 1,695 1.859 Depreciation 976 1,424 1.669 1.908 2,320 3,036 4,221 5,298 5,710 6,947 Other Total Operating Costs 6.093 8.041 9.600 11.879 14.271 17.086 21.314 25.461 29.183 34716 Net Operating Income 1.746 2.397 4298 5.290 6.293 7.614 9.486 8.711 8.648 9.109 Other Income 45 68 93 121 151 184 221 261 306 355 Other expenses 26 29 31 35 38 42 46 51 56 61 Financial Charges 348 671 970 1,099 1,110 1,409 2.445 3,152 3,018 3,411 . Long-term Loan 276 587 870 985 980 1,262 2,275 2,952 2.791 3,162 Short-term Loan 71 84 99 114 130 147 169 200 227 249 Nonoperating Income 20 40 62 86 113 143 175 211 250 293 Income before Income Tax 1.418 176 3.390 4.777 5.296 6.347 7.216 5.770 5.880 5 990 Income Tax 468 583 1,119 1,576 1,748 2,095 2,381 1,904 1,940 1,977 J Net Income 295 1.U83 2.272 3201 3.54 45 4.835 .66 3.940 4014 W Table 2: Electric Power of Henan - Forecast Balance Sheet (Yuan Million) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Current Assets Cash 1.708 1,896 2.905 4.292 5.360 6.209 5,639 5,498 5.685 5.299 Accounts Receivable 309 411 547 696 810 972 1,213 1.345 1.489 1,725 Inventories 437 617 748 872 1,066 1,344 1,755 2,152 2,387 2,850 Other Accounts Receivable 1,498 1,618 1,748 1,887 2,038 2,201 2,378 2.568 2.773 2,995 Total Current Assets 3.52 4.542 5.948 7.747 9.274 10.727 10.984 iI1.63 12 335 12.870 Long Term Investments 364 364 364 364 364 364 364 364 364 364 Fixed Assets Plant in Service 13,599 19.828 23.243 26,569 32,314 42,282 58,785 73.793 79.520 96.755 Accumulated Depreciation 5.890 7,314 8,982 10,890 13.210 16.246 20.467 25,765 31,475 38,422 NetPlantinService 7709 12514 14.261 15.679 19A03 26.036 38.318 48.027 48.046 58333 Construction WIP 7,430 6,495 10,192 18,227 26,393 27,813 22,770 19,679 26,089 22,282 Total Fixed Assets 15139 19.010 24,452 33.906 45.496 53.849 61088 67j6 74.135 80.6 Deferred Assets 254 190 127 63 0 0 0 0 0 0 Iotal Assets 19710 24_107 30.891 42.081 55.135 64,94 12.436 8 6.34 8834 9349 Current Liabilities Accounts Payable 404 505 579 714 817 905 1,030 1,132 1,236 1,463 Tax Payable 136 173 218 261 286 322 375 386 428 457 Other Payable 1,106 1,217 1,338 1,472 1,620 1,781 1,960 2,156 2,371 2,608 ShortTermLoan 476 561 661 761 864 979 1,129 1,336 1,516 1,663 L-T Loan due in 12 Months 1,183 1,377 1,582 1,688 2,018 3,397 3,507 3,868 4.283 0 Total Current Liabilities 3.306 3.832 4.379 4.897 5.605 7.384 "01 8.878 9.834 6191 Long Term Debt 7,488 9,523 12,493 18,480 25,570 28,227 29,549 31,343 33,078 39,520 Total Liabilities 10 794 13.355 16.872 23.377 31.174 35.611 37550 40.221 42.912 45.711 Equity Paid-in Capital 2,931 2,931 2,931 2,931 2,931 2,931 2,931 2,931 2,931 2,931 Earned Surplus 875 1,528 2,598 4,214 6,162 7,752 9,417 11,124 12.818 14,723 Retained Earnings 3,150 4,333 6,532 9,601 12,908 16,687 20,579 23,398 26,213 28,525 Capital Reserve 1,960 1,960 1,960 1,960 1,960 1.960 1.960 1,960 1,960 1.960 Total Equity 8.916 10.751 14,020 18.J05 23.960 29329 34.887 39.413 43.922 48.138 Total Liabilities and Euity v19.10 24 107 30891 42.081 55135 64.940 72436 79.634 86.834 93.849 2 Table 3: Electric Power of Henan - Forecast Funds Flow Statement (Yuan Million) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 INTERNAL SOURCES Net income befcre interest 1.298 1.854 3.241 4.300 4,658 5,662 7.279 7.018 6.958 7,425 Depreciation 976 1,424 1,669 1.908 2.320 3.036 4,221 5.298 5.710 6.947 Consumer Contributions 84 95 104 114 125 136 147 158 172 185 Amortization of Deferred Assets 63 63 63 63 63 0 0 0 0 0 Total Intemal Sources 2421 3.437 5.078 7166 8833 11.647 12 474 12.839 14.557 BORROWING IBRDforQinbeiPhasel 0 451 445 2,210 2,331 583 467 258 0 0 Other loans - project related 0 372 730 891 1,024 572 408 19 0 0 - nonproject related 3,403 2.579 3.367 4,564 5,743 4,887 3,943 5,374 6,004 6.429 Total Borrowines 3.403 3.401 4$43 7.6 9.098 6 043 4.818 5 652 6004 6.429 Equity 264 569 975 1.511 1,835 1.465 1,530 1,561 1,536 1,733 TOTAL SOURCES OF FUNDS 6.089 7,407 10.595 i561 18.098 16.341 17.995 1966 2Q.379 22.718 Capital Expenditures Qinbei Phase I 0 1,153 1,602 4,193 4,601 1.793 1,326 463 0 0 t' Other Capital Expenditure 3,658 3,621 4,946 6,224 7.801 7.793 8,761 10,264 10,747 12,277 IDC 546 520 564 945 1,508 1,802 1,372 1,190 1.391 1,150 Total Capital Expenditures 4,204 5294 7t 111 11.362 13.910 11.389 11 460 11.916 12.138 13.427 Long-term investrnent 22 0 0 0 0 0 0 0 0 0 Debt Service InterestChargedofOperation 348 671 970 1,099 1,110 1,409 2,445 3,152 3,018 3,411 Repayment 743 1,183 1,377 1,582 1,688 2.018 3,397 3,507 3,868 4,283 Total Debt Service 1.091 1.854 2.347 2,681 22797 3A427 5.842 6.659 6.86 7.695 Dividends 0 0 73 132 242 473 942 1,047 1,124 1,702 Changes in Working Capital 132 70 55 0 81 203 321 204 44 280 Operational Reouirements 1.223 1.925 2.475 2.u 3.120 4.103 7.104 7.911 8.054 9.677 TOTAL APPLICATIONS OF FUNDS 5.449 7.219 9.57 14,174 17.030 15.492 l8.4 19.827 20.192 23.104 NET CHANGE IN CASH 640 188 1,009 1.387 1.068 849 (570) (141) 187 (386) Cash at the beginning of the year 1,069 1.708 1,896 2.905 4,292 5,360 6,209 5.639 5,498 5,685 Cash at end of the year 1.708 1,896 2.905 4,292 5,360 6.209 5,639 5.498 5,685 5,299 Table 4: Electric Power of Henan - Forecast Key Financial Indicators (Yuan Million) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Energy Sales (GWh) 35,740 40,528 44,400 48,600 53,011 57,717 62.434 67,112 73,160 78,650 22.14 26.00 31.60 36.70 39.16 43.20 49.80 51.40 52.20 56.25 Average Price (fen/kWh) - including VAT 25.90 30.42 36.97 42.94 45.82 50.54 58.27 60.14 61.07 65.81 EPH's own avg. price 25.95 30.57 37.69 43.39 45.53 50.24 57.94 58.95 59.09 63.62 Purchased power's avg. price 25.73 29.73 33.08 40.71 47.43 52.46 60.34 68.49 75.72 81.46 Operating Revenue - net of VAT and Charges 7,838 10,438 13,899 17,669 20,564 24,699 30,800 34,171 37,831 43,825 Tariff in 1994 prices Average Price 24.21 25.35 28.15 30.35 30.34 31.48 34.17 33.21 31.75 32.22 EPH's own avg. price 24.25 25.48 28.70 30.67 30.15 31.29 33.98 32.55 30.72 31.15 Purchased power's avg. price 24.04 24.78 25.19 28.78 31.41 32.67 35.38 37.82 39.37 39.88 Operating Income 1,746 2,397 4,298 5,790 6,293 7,614 9,486 8,711 8,648 9,109 AnnualCapitalExpenditure 4,204 5,294 7,111 11,362 13,910 11,389 11,460 11,916 12,138 13,427 Rate Base 8,033 10,112 13,388 14,970 17,391 22,570 32,177 43,173 48,036 53,189 Long -term Debt 7,488 9,523 12,493 18,480 25,570 28,227 29,549 31,343 33,078 39,520 Debt Service 1,091 1,854 2,347 2,681 2,797 3,427 5,842 6,659 6,886 7,695 Cash in Bank 1,708 1,896 2,905 4,292 5,360 6,209 5,639 5,498 5,685 5,299 Rate of Return Historically Valued Assets (%) 15.9 17.9 23.7 28.1 26.1 24.5 22.1 15.8 14.0 13.4 Revalued Assets (%) 14.4 15.7 21.7 26.0 24.5 23.2 21.1 15.0 13.2 12.7 Self Financing Ratio (%/) 25.1 25.2 30.0 30.1 30.2 35.1 35.0 35.3 35.1 35.0 Operating Ratio (%) 77.0 76.3 68.4 66.6 68.7 68.5 68.6 73.8 76.4 78.5 Current Ratio (time) 1.2 1.2 1.4 1.6 1.7 1.5 1.4 1.3 1.3 2.1 Debt/Total Capital (%) 45.6 47.0 47.1 49.7 51.6 49.0 45.9 44.3 43.0 45.1 Debt Service Coverage (time) 2.1 1.8 2.1 2.3 2.5 2.5 2.0 1.8 1.8 1.9 tn - 164 - ANNEX 5.3 ANNEX 5.3: MAJOR ASSUMPTIONS FOR EPH'S FINANCIAL PROJECTIONS A. Income Statement 1. Energy sales reflect EPH's projected expansion program. 2. Tariffs are assumed to be adjusted so that the average revenues would be adequate for achieving the minimum financial performance targets. 3. General local inflation rates are assumed at 14 percent in 1995, 10.5 percent in 1996, 8.5 percent in 1997, 7 percent in 1998, 6.5 percent in 1999, and at 6.2 percent thereafter. 4. Fuel costs are based on 1994 actual price paid for coal and are assumed to increase by 3 percent per year in real terms till 1999 and to escalate with the projected local inflation rates thereafter. 5. Purchased power are based on 1994 actual purchased price and are assumed to increase by 2 percent per year in real terms and with the projected local inflation. For electricity from Danjingkou and Gezhouba the purchased prices are assumed to increase by 2 percent per year in real terms during 1995-2000 and 5 percent from 2001 onwards based on the actual prices in 1994. 6. Operation and Maintenance costs based on 1994 actual expenses include payroll and materials are assumed to increase by 5 percent in real terms and escalate with projected local inflation rates. Maintenance cost is assumed to increase per year by 2.5 percent of annual increase in the gross fixed assets. 7. Administration cost is based on EPH's 1994 actual expenditure and is assumed to increase by 5 percent per year in real terms with projected local inflation rates. 8. Value-added tax rate is 17 percent and the effective rate is assumed to be 9.4 percent after deducting VAT included in the costs for fuel and materials from 1995 onwards. 9. Depreciation is assumed to be 7.18 percent of gross fixed assets in operation at the beginning of the year. 10. Income tax is expected to be assessed at 33 percent of taxable income. - 165 - ANNEX 5.3 B. Balance Sheet 1. Inventories are assumed to be one month of fuel supply plus 2 percent of annual fixed assets additions. 2. Accounts receivable is assumed to be 12 days' sales revenue. 3. Other accounts receivable is assumed to increase by 8 percent a year based on 1994 actual. 4. Accounts payable is assumed to decrease gradually from 40 days of costs for fuel, purchased power, and sales tax in 1994 to 20 days by 2004. 5. Tax payable is assumed to decrease gradually from 40 days of the effective VAT and other surcharges to 22 days by 2004. 6. Other payable is assumed to increase by 10 percent a year based on 1994 actual. 7. Construction work-in-progress reflects the aggregate construction work-in- progress of EPH's own construction units and other construction units work as contractors for EPH. C. Funds Flow Statement 1. Consumer contributions represents the receipts of consumer connections and is assumed to increase by annual energy sales growth rate based on 1994 actual collection. -166 - ANNEX 6.1 ANNEX 6.1: EPH'S POWER DEVELOPMENT PROGRAM (1994-2004) Scheduled Installed Capacity Number of Unit Size Commissioning Name of Plant (MW) Units (MW) Date 1. Plant Under EPH Sanmenxia Hydro 75 1 75 1996 Kaifeng Thermal 125 1 125 1995 Sanmenxia Thernal 600 2 300 1995, 1996 Yanshi Thermal 600 2 300 1995, 1995 Zhengzhou Thermal 200 1 200 1995 Luoyang Thermal 282 2 142 1996, 1997 Anyang Thermal 600 2 300 1996, 1997 Yahekou Thernal 700 2 350 1996, 1997 Yaomeng Thermnal 600 2 300 1998, 1999 Hebi Thermal 600 2 300 1997, 1998 Yuzhou Thermal 600 2 300 1998, 1999 Dengfeng Thermal 700 2 350 1998, 1999 Qinbei Thermal 1,200 2 600 2000, 2001 Xinyang Thermal 600 2 300 2000, 2001 Xiaolangdi Hydro 1,800 6 300 2000, 2000 2001, 2001 2002, 2002 Xinxiang Thermal 600 2 300 2001, 2002 Qinbei Thermal (II) 1,200 2 600 2003, 2004 Baoquan Pump Storge 600 2 300 2004 Yongcheng Thermal 600 2 300 2001, 2002 Yuzhou Thermal (II) 600 2 300 2002, 2003 Yahekou Thermal (II) 1,200 2 600 2003, 2004 2. Local and Captiv 100 2 50 1994, 1995 Total 14.182 Source: EPH -167 - ANNEX 6.2 ANNEX 6.2: SYSTEM DEMAND AND ENERGY BALANCES FOR HENAN POWER GRID System Demand System Capacity Energy Generated Power Purchased Reserve Power Balance Peak Energy Installed Dependable Margin Year (MW) (GWh) (MW) (MW) (GWh) (MW) (GWh) (MW) (%) (GWh) 1994 7,900 50,016 8,473 6,250 48,486 600 1,530 -1,050 -13.3 0 1995 8,500 53,000 9,682 6,357 52,200 600 800 -1,543 -18.1 0 1996 9,000 58,000 10,700 7,499 57,060 600 900 -901 -10 -40 1997 9,710 63,061 11,668 8,576 61,840 600 1,200 -534 -5.5 -21 1998 10,526 68,331 12,858 9,608 67,500 300 800 -618 -5.8 -31 1999 11,414 74,021 15,058 10,708 72,380 300 800 -406 -3.5 -921 2000 12,610 81,662 15,500 11,750 79,800 60 1,500 -260 -2.0 -362 2001 13,617 88,948 17,092 12,992 89,733 400 900 -225 -1.6 1,685 2002 14,703 96,330 18,231 14,992 96,624 --- --- 289 1.9 294 2003 15,633 101,768 20,092 16,292 105,483 --- -- 659 0.4 3,715 2004 16,880 110,215 21,592 18,010 113,358 --- --- 1,130 6.7 3,143 Source: EPH -168- ANNEX7.1 ANNEX 7.1: SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE Selected Reports and Studies Related to the Project 1. Complementary Documents for World Bank Appraisal of Henan Qinbei Thermal Power Project (EPH), May 1995. 2. Economic Analysis for Henan Qinbei Thermal Power Plant (BERIWREP), December 1994. 3. China-Henan Power Grid Tariff Study and Action Plan of Tariff Reform (BERIWREP), May 1995. 4. Electricity Conservation in Henan Province (EPH, BERIWREP and International Consultants), April 1995. 5. Environmental Assessments of the Qinbei Power Plant Project and Associated 500 kV Transmission Line (EPH with the assistance of KBN Engineering and Applied Science, Inc. and Northwest Electric Power Design Institute), April 1995. 6. Feasibility Study for Qinbei Power Plant (Phase I) (Northwest Electric Power Design Institute), September 1995. 7. Power Sector Reform for the Henan Provincial Electric Power Bureau, Consultant Report. Selected Worksheets 1. EPH Financial Forecasts 2. Cost Tables 3. Implementation Schedules and Charts -169- Henan (Qinbei) Thermal Power Project Chart 1: ORGANIZATION CHART OF MOEP Ministry of Electric Power Minister Shi Dazhen Vice Ministers: Zhao Xizheng Zha Keming Lu Yanchang Wang Shucheng China Electricity Council …----------… MlEPs Internal Organization Groups & Provincial Companies Provincial Companies MOEP's Internal Organization Under Auspices of MOEP Under Groups { Northeast | r Jilin Power Company -General OfficeNotes -General Office 7 ~~~~Electric Power Group 7_Heilongjiang Power Company -Department of Planning -Department of Policies & Legislation -Department of Economical Regulation Shanxi Power Company & Control of State Property North China Hebei Power Company -Department of Personnel & Education Electric Power Group Inner Mongolia Power Company -Department of International Cooperation - Tanjin Power CompanyI Department of Science & Technology Department of Safety & Production Coordination ~~~~~~~~~~~Shanghai Power Company Coordination _ -Department of Capital Construction East China Jiangsu Power Company Coordination Electric Power Group Anhui Power Company Department of Hydropower Development & Rural Electrification -Zhejiang Power Company LMOEP's Affiliated Enterprises & Institutions Hubei Power Company F Central China -Henan Power Company -National Power Dispatching & Electric Power Group -Hunan Power Company Communication Center - Information Center -Jiangxi Power Company -Logistics Bureaul Logistics Bureau ~ ~ ~ ~Gansu Power CompanyI -Planning Design & Engineering Institutes -Research Institutes Northwest -inghai Power Company -Universities & College Electric Power Group Ningxia Power Company -Specialized Corps. - Xinjiang Power CompanyI Scholarly Societies & Associations -Huaneng Group, Electric Power Enterprises -South China Electric Power Joint Venture Corporation -Shandong Power Company e -Fujian Power Company -Sichuan Power Company Provincial Companies Guangxi Power Company Non-Directly Under MOEP Yunnan Power Company FGuizhou Power Company Guangdong Power Company Hainan Power Company Xizang Industry & Power Administration - 170 - Henan (Qinbei) Thermal Power Project Chart 2: ELECTRIC POWER OF HENAN (EPH) ORGANIZATION CHART - 12 Power Plants 13 Power Supply Enterprises - | + 4 Power Plant Preparatory Offices 4 Construction & Installation Companies 2 Pepair Works| 2 Technical Schools| 2 Trainng Schodls for Skill Workers Staff Training Center XeDesign Institute | _ oQ Dispatching Center| J) . + Power Developent Companyt D _FGeneral Construction Corporation i Fuel Supply Company _ --FConsulting Company co- Materials Supply Company _ ~ ~ ~ ~ ~~L~ Industry & Commerce Comp~any~ m a Foreign Affairs Office 76 4 Retired Staff Management c, C~~~~~~~ osc Rural Electrification| o Ln> --FCapital Construction I a T Power Supply a) a , X v Prodcution| c) _g O~a Technical st - I a) _- Safety & Environmental Protection 15 -4 ~~~~~Securty --General Manager Office Planning Multi Economy Hygiene| Company Cultural - 171 - Henan (Qinbei) Thermal Power Project Chart 3: PROJECT CONSTRUCTION UNIT ORGANIZATION CHART Labor & Personnel _ r Legalhea Aars i X 9 3 8 Files Maragement |~ Foreign AFianrsc ~~ ! ~~Computer j' E ~~~Contract| CL~~~ : _a Comprehensive Affairs| _ H C~~~omprehensive AHairs| 0 Program Copltn | _ _ oa r ° _ Tralnm | U - < _ :^ _ _ 8 ° X : ~Data Management di,0~~ 0 C: o a) E a) CALENDAR YEAR 1995 1996 1997 1998 1999 2000 2001 w ~~~~~~~~~~~~~~~~~~~~~z z w -~~~~~~~~~~~ ~~~~z z (3 Z W Ow Li. n < W uJ Z O') Ca cj a~ a (n z t O z- w- U- i Z PROJECT PREPARATION tfl ~~~~~~~~~~~~~~< 0 l c Preparation at Boiler & TG Z ~~~~~~~~~~~~~~~~~~~~UJ< -2 Bidding Document -1 9 r'J~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~cc. 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FUTURE PROJECT X $ < / , % < X . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~5OOkV TRANSAMSSION UNES O \ < g / ~~~~~~~~~~~~~~~~~~Z H U M A D I A N A A 5OOkV SUBSTATIONS >.wt >. t / / g \ n q \ i * * * * ~~~~~~~~~~~~~~~~~THERh POWER RANS V X , ,5., X _ - ~~~~~~~~~~~~~~~~HMRO POWER PLAN - 0 og- X -$ \ S * * R~~~~~~~~~~~~~~~~~~~~~~~~~~~~~FAILROADS H U B E I / t C C ws o S _ _~~~~~~~2.0OM PREFECTURE E,OUNDARIES // t , 9 f 2 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~INTERNATIONAL BOUNDARIES mm.s of 0e H_ boo i ,o W < f O ~~ ~ ~~~ ~ ~~~ ~~~~~~~~~~~~~~~~~~~~SO 100 ISO 200 ee ant o_oto_f_ff t wj~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7 KILOmETERS IMAGING Report No: 15002 CHA Type: SAR