ASIAN DEVELOPMENT BANK

Transcription

1 ASIAN DEVELOPMENT BANK PCR: PRC PROJECT COMPLETION REPORT ON THE HUNAN LINGJINTAN HYDROPOWER PROJECT (Loan 1318-PRC) IN THE PEOPLE S REPUBLIC OF CHINA November 2003

2 CURRENCY EQUIVALENTS Currency Unit yuan (CNY) At Appraisal At Project Completion (Sep 1994) (Aug 2003) CNY1.00 = $0.115 $0.121 $1.00 = CNY8.70 CNY8.30 ABBREVIATIONS BOO build-own-operate BOT build-operate-transfer CPIC China Power Investment Corporation EA executing Agency EIRR economic internal rate of return FIRR financial internal rate of return HEPC Hunan Electric Power Company HPS Hunan Power System IA implementing agency IS international shopping ICB international competitive bidding MOF Ministry of Finance OED Operations Evaluation Department PCR project completion report PPA power purchase agreement PRC People s Republic of China SMPC Shanghai Municipal Electric Power Company SPC State Power Corporation WACC weighted average cost of capital WHDC Wuling Hydropower Development Corporation WEIGHTS AND MEASURES GW (gigawatt) 1,000 megawatts GWh (gigawatt-hour) 1,000,000 kilowatt-hours ha (hectare) 10,000 square meters km (kilometer) 1,000 meters kv (kilovolt) 1,000 volts kva (kilovolt-ampere) 1,000 volt-amperes kw (kilowatt) 1,000 watts kwh (kilowatt-hour) 1,000 watt-hours MW (megawatt) 1,000 kilowatts NOTE In this report, "$" refers to US dollars.

3 CONTENTS BASIC DATA Page ii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 2 C. Project Costs 3 D. Disbursements 3 E. Project Schedule 4 F. Implementation Arrangements 4 G. Conditions and Covenants 5 H. Related Technical Assistance 6 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 8 K. Performance of the Borrower and the Executing Agency 8 L. Performance of ADB 8 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Efficacy in Achievement of Purpose 9 C. Efficiency in Achievement of Outputs and Purpose 9 D. Preliminary Assessment of Sustainability 11 E. Environmental, Socio-cultural, and Other Impacts 11 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 14 B. Lessons Learned 14 C. Recommendations 15 APPENDIXES 1. Major Events During Project Implementation Project Cost and Financing Plan Projected and Actual Disbursements, Project Implementation Schedule Wuling Hydropower Development Corporation Organization Chart Compliance with Loan Covenants Financial Performance of Project Enterprises Summary of ADB-Financed Contracts Financial Evaluation Economic Evaluation Environment Quality Monitoring Scope of Resettlement Impact for Lingjintan Hydropower Project Training Provided Under the Project Project Rating Analysis 40

4 BASIC DATA A. Loan Identification 1. Country People s Republic of China 2. Loan Number 1318-PRC 3. Project Title Hunan Lingjintan Hydropower Project 4. Borrower People s Republic of China 5. Executing Agency Hunan Electric Power Company 6. Amount of Loan $89.3 million 7. PCR Number PCR: PRC 769 B. Loan Data 1. Appraisal Date Started 20 April 1994 Date Completed 10 May Loan Negotiations Date Started 22 Aug 1994 Date Completed 24 Aug Date of Board Approval 27 Sep Date of Loan Agreement 02 Mar Date of Loan Effectiveness In Loan Agreement 30 May 1995 Actual 30 May 1995 Number of Extensions 0 6. Closing Date In Loan Agreement 30 Apr 2001 Actual 08 Nov 2001 Number of Extensions 1 7. Terms of Loan Interest Rate Pool-based variable lending rate for US dollars Maturity (no. of years) 25 Grace Period (no. of years) 6 8. Terms of Relending (if any) Interest Rate Same as loan Maturity (no. of years) 25 Grace Period (no. of years) 6 Second-Step Borrower Hunan Electric Power Company 9. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval 7 Feb Nov months Effective Date Original Closing Date Time Interval 30 May Apr months

5 iii b. Amount ($ million) Original Allocation Revised Allocation Amount Disbursed Amount Cancelled (Reallocated) Electro-Mechanical Works Equipment (6.1) Steel (0.5) Consulting Services Interest During Construction Unallocated Total Source: Wuling Hydropower Development Corporation. 10. Local Costs (Financed) Amount ($) 0 Percentage of Local Costs 0 Percentage of Total Cost 0 C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost Local Currency Cost Total Source: Wuling Hydropower Development Corporation. 2. Financing Plan ($ million) Appraisal Estimate Actual Cost Foreign Local Total Foreign Local Total Implementation Costs Borrower-Financed ADB-Financed Other External Financing Subtotal IDC Costs Borrower-Financed ADB-Financed Other External Financing Subtotal Total ADB = Asian Development Bank, IDC = interest during construction. Source: Wuling Hydropower Development Corporation.

6 iv 3. Cost Breakdown by Project Components ($ million) Appraisal Estimate Actual Cost Foreign Local Total Foreign Local Total Civil Works Electro-Mechanical Equipment Metal Structures Resettlement Cost Consulting Services Miscellaneous Contingencies IDC Total IDC = interest during construction. Source: Wuling Hydropower Development Corporation. 4. Project Schedule Milestone Appraisal Estimate Actual Date of Contract with Implementation Consultant Jan 1995 Jul 1995 Date of Contract with Energy Conservation Consultant Apr 1995 May 2000 Award of Civil Works Contract Sep 1994 Jan 1995 Completion of Civil Works Phase 1 Sep 1996 Dec 1996 Completion of Civil Works Phase 2 Nov 2000 Nov 2000 Equipment and Supplies First Procurement Jun 1994 Nov 1995 Last Procurement Sep 1999 Completion of Transmission Lines Nov 1998 Dec 1999 Commissioning Oct 2000 Dec Project Performance Report Ratings Rating Period Development Objectives Implementation Progress Jul Dec 1998 Satisfactory Satisfactory Jan Jun 1999 Satisfactory Satisfactory July Dec 1999 Satisfactory Satisfactory Jan Jun 2000 Satisfactory Satisfactory Jul Dec 2000 Satisfactory Satisfactory D. Data on Asian Development Bank Missions Name of Mission Date No. of Person No. of Person-Days Specialization of Members a Reconnaissance Jul a, d, n Fact-Finding 2 17 Nov a, b, d, i Appraisal 20 Apr 10 May a, b, c, d, g, h, j, m Review Nov a Review 2 3 May b Disbursement 26 May 6 Jun f Review Dec a, b, l Meeting 16 Aug a Review Dec a, b, k Review Apr b, c, k, n Review May d, l Project Completion Review b Jul b, l, n a a = engineer, b = financial analyst, c = counsel, d = economist, e = procurement/consultant specialist, f = control officer, g = programs officer, h = investment officer i = environment specialist, j = young professional, k = sector specialist, l = assistant project analyst, m = secretary, n = staff consultant. b The mission comprised Merlita Pajarillo, energy specialist (financial) and mission leader; Lorna Enjaynes, assistant project analyst; Zhu Youxuan, resettlement consultant; and Bai Jianhua, financial consultant.

7 I. PROJECT DESCRIPTION 1. Economic growth was bullish in the People s Republic of China (PRC) in the 1980s and 1990s. Growth in gross domestic product (GDP) averaged more than 9.0% per year. Demand for electricity grew at an equivalent rate. But installation of new electricity generating capacity did not keep pace with the fast-growing demand. The resulting severe electricity shortages caused serious losses to the economy. This was the situation in Hunan Province, which suffered frequent power shortages. The annual growth rate of Hunan s GDP averaged 8.1% during , and reached 12.3% in But annual growth in electricity supply lagged behind at 7.8%, and the total installed capacity increased at an average of only 6.4% annually. The high incidence of load shedding in the Hunan Power System (HPS) was expected to grow even more serious because of the increasing requirements of the rapidly growing economy, which was then projected to grow further at an average rate of 10% annually over the next 10 years. The annual energy demand in HPS was also forecast to follow that growth trend. Based on these forecasts, the Hunan Electric Power Company (HEPC) developed a plan for capacity expansion that called for the addition of 7,390 megawatts (MW) from 1994 to 2003, with 1,440 MW coming from hydropower and the balance from thermal power. HEPC was the Executing Agency (EA) for the resulting Hunan Lingjintan Hydropower Project (the Project). 2. The Project was one of two hydropower projects included in HEPC s capacity expansion plan (the other was the Wuqiangxi project, which was already under construction at the time of appraisal). It is in northern Hunan, and is the most downstream of the 17 proposed hydropower schemes on the Yuanshui River and its tributaries. The Project s main objective was to accelerate the development of Hunan s hydropower resources, thus avoiding the need to construct expensive and more environmentally adverse thermal plants to increase power supply. The Project involved construction of a 240-MW run-of-river hydropower plant with eight generating units, which would add urgently needed capacity to address the power shortages and strengthen the peaking capability of HPS. The plant will also serve as a reregulating station for the 1,200-MW Wuqiangxi hydropower plant 47.5 kilometer (km) upstream, and will improve downstream river navigation. The Project also envisioned enhancement of HEPC s institutional capability, and development of tariff policy and energy conservation reforms in Hunan Province. 3. The Project has the following components: (i) civil works associated with the hydropower plant and reregulating station, consisting mainly of a structure 1,006 m long and 53.5 m high across the Yuanshui River, plus ancillary structures; (ii) supply and installation of eight 30-MW bulb turbine units; (iii) supply and installation of associated generator sets and ancillary equipment; (iv) supply and installation of auxiliary equipment, including switchgear, communications, and power plant control systems; (v) supply and installation of metal structures, including sluice gates, gates at the shiplock, cranes, steel trash racks, and rakes; and (vi) land acquisition, resettlement of affected people, and improvement of adjacent infrastructure and ancillary facilities. Also provided were consulting services for project design and implementation, energy conservation, and training for managerial and technical personnel. 4. The Asian Development Bank (ADB) approved, in September 1994, a loan of $116 million from its ordinary capital resources for the Project. The loan carried a term of 25 years, including a grace period of 6 years, with interest determined in accordance with ADB s variable lending rate system for US dollar loans, and an annual commitment fee. A technical

8 2 assistance (TA) grant was also extended to help the EA strengthen its institutional capability. 1 Another TA 2 was provided, in conjunction with the loan, to assist the Government in introducing an appropriate framework and arrangements for a build-own-operate/build-operate-transfer (BOO/BOT) scheme for a specific power project. Separate technical assistance completion reports were prepared. Paras. 24 to 26 summarize the evaluation. 5. Project implementation was smooth, with only minor delays. The plant s capacity was increased to 270 MW with the addition of one 30-MW unit financed from loan savings. All nine units were completed and operating by December 2000, only 2 months behind schedule. The loan was closed on 8 November 2001, after a 6-month extension to complete the commissioning activities and final payment to contractors. A total of $89.30 million in loan funds was disbursed, and the nonutilized amount of $26.70 million was canceled. Loan repayment started on 15 March 2001, but by 2 January 2003, the EA had prepaid the entire loan, including the prepayment premium of $2.8 million. Appendix 1 gives the chronology of events during project implementation. II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 6. A major government concern at appraisal was electricity shortages, which were expected to aggravate with sustained economic development. The appraisal report noted high load shedding and suppressed demand in HPS. To support economic growth, the Government s main objectives in the power sector were to develop adequate power facilities, and to enhance access to electricity in rural areas. The improvement of efficiency in the supply and use of electricity received high priority. Acceleration of the development of hydropower resources was considered particularly important. 7. The central theme of ADB s country operational strategy for PRC, at appraisal, was to assist economic growth in an efficient, equitable, and sustainable manner. The assistance focused on three strategic objectives: improved efficiency, environmental protection, and poverty reduction. ADB s assistance in providing funds to accelerate the development of hydropower to support economic growth was clearly relevant to both the Government and ADB s strategies. ADB s support in development of the Project was equally relevant at appraisal, and at completion. Inclusion of other objectives to enhance HEPC s institutional capability, and development of tariff policy and energy conservation reforms in Hunan Province, were necessary to address concerns of efficiency and sustainability. B. Project Outputs 8. All project components were clearly established and adequately assessed at appraisal, and implemented with no major changes except for the addition of a 30-MW unit, funded from loan savings. All targeted project outputs were achieved. The nine generating units and the regulating station were all completed and operating by December The required auxiliary equipment, including switchgear, and communications and power plant control systems, were fully installed and operational. The shiplock has been operational since December All 1 ADB Technical Assistance to the People s Republic of China for the Institutional Strengthening of Hunan Electric Power Company. Manila. 2 ADB Technical Assistance to the People s Republic of China for Introducing BOO/BOT Concept for Shanghai Waigaoqiao Stage II Project. Manila.

9 3 installed floodgates have been operational since November Two 220-kilovolt (kv) transmission lines were built to connect the Lingjintan project to Taoyuan (a 20-km line, completed in December 1998), and to Taojian (a 50-km line, completed in December 1999). But the generating units still cannot operate at the performance level expected, because of problems in turbine operation (repairs are still underway). At the Project Completion Review Mission, both the equipment designer and the manufacturer were still on site, making repairs. Six of the turbine units are reported to have been repaired, and should function normally. Repair of the other three units is scheduled, and should be completed by the end of Repair works on the units have to be done in sequence to minimize outage time. 9. Most of the planned resettlement actions (i.e., house reconstruction, land development, and village infrastructure) have been completed, with some small activities for economic rehabilitation continuing to date. But funding was lacking for economic rehabilitation, so income levels for some village groups still have not been restored. Issues to be addressed were identified during the project completion review (paras ). 10. The required consultancy services for energy conservation were rendered adequately, and two oversea training sessions were carried out in October and December 2000, with 20 HEPC officials and staff participating. A subsequent domestic training program was also conducted, attended by more than 50 participants from the subsidiary companies of HEPC and commercial Hunan establishments. But no information could be provided on subsequent accomplishments in energy conservation. C. Project Costs 11. The total cost, including contingencies and interest and other loan charges during construction, was estimated at $366.8 million equivalent at appraisal. The estimated cost consisted of $129.5 million foreign exchange cost, representing 35% of the total, and $237.3 million equivalent in local currency, the other 65%. The actual project cost was $369.8 million equivalent, with a foreign exchange cost of $89.3 million (24%) and $280.5 million equivalent (76%) in local currency costs. The total project cost was $3.0 million, or 1% higher than the estimate at appraisal. The actual foreign exchange cost was $40.2 million, or 31%, lower than the appraisal estimate, while the local cost exceeded the estimate by $43.2 million, or 18%. The lower foreign exchange costs resulted from lower costs of imported equipment because of strong competitive bidding and thus, lower interest on the foreign currency loan. The overrun in local cost, on the other hand, resulted from increased costs for resettlement, and civil and electromechanical works. 12. The financing plan at appraisal consisted of an ADB loan of $116 million to finance 90% of the Project s foreign exchange costs and 32% of the total costs. The remaining portion of the foreign exchange costs, as well as the entire local currency requirements, were to be provided through loans from the Hunan provincial government and the State Development Bank. Of the actual funding, $89.3 million, or 24% of the total project cost, came from the ADB loan; $207.0 million, or 56%, came from domestic borrowing; and $73.5 million, or 20%, was from equity contributions from HEPC. Appendix 2 compares appraised and actual project costs, and shows sources of financing. D. Disbursements 13. Disbursements under the ADB loan began in February 1996, 8 months after the loan became effective, with an initial $0.14 million payment for consulting services. Disbursements

10 4 were highest from 1998 to 2000 when most of the major equipment was delivered and project implementation was fully underway. The last disbursement was in November 2001 for the retention payments on the contract for the supply of turbogenerator units. The loan was closed on 8 November By the loan closing date, disbursements were $89.3 million, and the nonutilized amount of $12.0 million was canceled. Also, $14.7 million in loan savings had been identified and cancelled earlier. Overall, utilization of the ADB loan was only 77%. Disbursements were made mainly through letters of credit and direct payments. No imprest fund was established for the Project; it was deemed unnecessary. Contract awards and disbursements were basically in line with projections. Appendix 3 has a table and graph comparing projected and actual disbursements. E. Project Schedule 14. Site work was envisaged to begin in the third quarter of 1994, and be completed by October Installation and commissioning of the units were also scheduled for completion in October The actual mobilization began in October 1994, immediately after the loan approval. Physical construction was carried out as planned, with no major problems, and was largely on schedule. Actual construction took 74 months, only 2 months longer than planned (the extra time was mainly because another 30 MW generating unit was added). All excavation and civil works construction, and installation of metal structures and other structural elements in the dam, were completed as programmed. The first generating unit of 30 MW was commissioned in 1998, followed by four more units in The remaining four units were commissioned in late By December 2000, all nine 30-MW units were operating. The 220- kv transmission line connecting the Project to the Hunan Provincial Power Grid in Taoyuan became fully operational in December 1998, and to Taojian in December Appendix 4 shows the projected and actual implementation schedules. F. Implementation Arrangements 15. HEPC was the Project s designated EA in the loan and project agreements. HEPC was to be responsible for overall supervision and coordination of project implementation, including plant operations. In December 1997, HEPC formally informed ADB that it had transferred all responsibilities related to project implementation, and all the substantive obligations under the project agreement, to the Wuling Hydropower Development Corporation (WHDC) after its establishment in May Responsibility for loan repayment was also transferred to WHDC, making the new company almost the de facto EA. WHDC is a joint venture company with shareholdings by the Central China Power Group (12%); HEPC (transferred to the China Power Investment Corporation (CPIC) in December 2002) (56%); and the Hunan Economic Construction Investment Company (32%). As a river development authority, WHDC has responsibility for the development and operation of cascading hydropower projects along the Yuanshui River Basin. WHDC owns and operates the 1,200-MW Wuqiangxi hydropower station, whose operation HEPC transferred in 2000, and the 63-MW Jinweizhou hydropower plant. Five other hydropower projects, with a total planned installed capacity of 2,260 MW, are being developed, and are programmed for completion within 5 years. Development of other hydropower projects along the Yuanshui River is also planned. 16. Initially, a project construction office was established within the Wuqiangxi project construction unit, directly supervised by the assistant general manager, to implement the Project. Subsequently, all related construction, implementation and monitoring were transferred to the newly created WHDC. Appendix 5 shows WHDC s organizational setup.

11 5 17. ADB recruited staff consultants to review the institutional and financial aspects of both HEPC and WHDC before making the required changes in the project loan documents. Based on the staff consultants detailed evaluation of WHDC, the Government and ADB agreed that WHDC could be the Project s implementing agency (IA). But the loan documents had not been changed to reflect the agreement by the time the loan was prepaid. Also, the change in implementation arrangements during project execution is not unique to this project. Responsibilities for other ADB-funded projects in PRC had been transferred to newly created companies, such as in Loan 1400 PRC: Henan Power Project; Loan 1328 PRC: Qitahe Thermal Energy and Environmental Improvement Project; and Loan 1582 PRC: Northeast Power Transmission Project. 18. The consultants review noted weaknesses that would adversely affect WHDC s financial position and threaten the Project s financial viability. The sale of project-generated power is covered by a power purchase agreement (PPA) between HEPC and WHDC. But the PPA, which was based on a model agreement recommended by the State Power Corporation (SP), has weaknesses. As it stands, the PPA clearly shows HEPC s controlling position being the sole purchaser and distributor of electricity in the Hunan grid. In general, the contract does not guarantee sufficient revenue stream to keep the Project profitable. The revenue level required to recover fixed and variable costs, and provide for payment of loans, is not assured. The PPA s main weak points, summarized from the consultants reports, are: (i) exclusivity for HEPC; (ii) no minimum off-take; (iii) lack of fixed tariff formula, price guarantees, mechanism for tariff adjustment; (iv) share in risk of failure to collect electricity charges from end-users, and an undetermined period for payment settlements; and (v) short-term validity period (only 1 year). 19. ADB review missions and policy dialogue with the Government have emphasized the need to address the issues by modifying the PPA to lower the commercial risk. With the recent restructuring of the power sector, and the move toward market-based pricing of electricity, such contract-based pricing structure will become less relevant. 20. In end 2002, the Government implemented a major sector-wide restructuring by breaking up SP, HEPC s former holding company, into 11 smaller companies comprising five power generation companies, two grid management companies, and four auxiliary companies. HEPC s holding company is now the State Power Grid Corporation, one of the two newly created grid management companies, while ownership of WHDC shares was transferred to CPIC, a newly established power generation company. G. Conditions and Covenants 21. Loan covenants were generally complied with, except for: (i) the covenant on providing adequate tariff to ensure the Project s viability; (ii) the covenants on submission of certain reports such as the energy conservation plan and action program, the project completion report (PCR), and the report on benefit monitoring and evaluation (BME); (iii) the financial covenants for 1999 and 2000; and (iv) the resettlement assurances. Although tariff reform was introduced in 2000, the present tariff level is still not in line with economic costs. The shift to marketdetermined pricing mechanism will help address the issue. 22. From 1996 to 2000, HEPC submitted audited financial statements, with an unqualified auditor s opinion, regularly and on time. But from 2001, submission of the audited financial statements ceased. The covenants on debt service coverage and self-financing ratios were met, except in 1999 and The computed ratios for WHDC, based on financial statements submitted from 2000 to 2002, are also lower than the prescribed levels because of lower-than-

12 6 projected revenues, resulting from the lower tariff provided in the PPA, and the lower plant utilization because of unit shutdowns for repair. Appendix 6 assesses compliance with covenants in the Loan Agreement. Appendix 7 summarizes HEPC and WHDC s financial performance. H. Related Technical Assistance 23. ADB approved two small-scale technical assistance (SSTA) 3 grants to: (i) review the project feasibility report prepared by the design institute, the Hunan demand forecast, the leastcost development programme, the generating unit size and the environmental aspect; (ii) formulate contract packages, technical specifications and tender documents; and (iii) assist in prequalifying bidders. The SSTAs were rated successful. 24. ADB approved a TA grant (footnote 1) to help the EA transform into a more selfsufficient and financially sound modern utility that can provide the reliable power supply needed to support Hunan s economic development. The TA was designed to: (i) recommend improvements in HEPC s organizational structure and management, accounting, and financial planning systems, and in management information and control systems; (ii) recommend reforms in HEPC s tariff level and structure, considering the economic, financial, and equity implications; and (iii) provide external and internal training for HEPC staff. An international consulting firm, in association with another international and a local firm, provided about 13 months of consulting services. The TA was rated as successful 4 because the objectives set in the terms of reference were met, although the implementation process was delayed by 8 months. The report submitted was comprehensive and, generally, of high quality, and was considered useful. More training programs were conducted for both senior and mid-level management staff. Training topics included electricity generation and distribution; financial management; tariffs; energy trading; power sector reforms; implications for organizational, financial, and management information systems; privatization trends and emerging models in other countries; and organizational options for HEPC. HEPC implemented recommended reform measures on financial management, accounting and control systems, tariff reforms (to a limited extent), and commercialization. But some recommendations could not be addressed at the EA or provincial level because of institutional constraints whereby SP must first issue policy initiatives and directions; only afterward can the provincial utilities follow. Also, some suggested tariff reforms could not be implemented because of inherent constraints in the tariff approval process. 25. Another complementary TA (footnote 2) was approved in conjunction with the loan. The TA was to help the Government introduce an appropriate framework and arrangements for a BOO/BOT scheme for the Waigaoqiao Stage II Project, with the Shanghai Municipal Electric Power Company (SMPC) as the EA. The Waigaoqiao Project involves construction of a 1,800- MW thermal power plant in Shanghai. The TA was to assist in identifying the project scope; in developing procedures, guidelines, and documents for bidding; and in providing a field study for key Government and SMPC officials. 26. A consulting firm based in Hong Kong, in association with consulting firms from the United Kingdom, the United States, and PRC, provided about 23 months of consulting services. A significant amount of technical, financial, legal, and environmental expertise was provided to 3 ADB Technical Assistance to the People s Republic of China for the Hunan Lingjintan Hydropower. Manila; ADB Technical Assistance to the People s Republic of China for the Hunan Lingjintan Hydropower. Manila 4 ADB Technical Assistance Completion Report to the PRC for the Institutional Strengthening of Hunan Electric Power Company. Manila.

13 7 prepare model documents for the restructuring of a BOT power project, in accordance with international standards and practices. The documents were comprehensive and generally of good quality and these can be adopted for similar BOO/BOT projects. Two groups were sent for training to power plants where the BOT financing scheme is considered successful. The objectives and terms of reference of the TA were met. But the TA was rated only as partly successful 5 because SMPC subsequently decided not to pursue this project financing route, which could result in delays because of the anticipated long approval process and time required to finalize implementation arrangements. Technical and cost considerations were also cited. The BOT power project was eventually implemented, with World Bank financing. I. Consultant Recruitment and Procurement 27. As envisaged at appraisal, HEPC engaged an international consulting firm to supervise overall project implementation. An independent international inspection firm was also engaged to certify the origin of supplied items, and their conformity with bid requirements. An international consultant on energy conservation was recruited to help HEPC strengthen its energy conservation activities by improving planning, and exposing HEPC s staff to modern demand-side management and integrated resource planning concepts and techniques. These international consultants were engaged in accordance with ADB s Guidelines on the Use of Consultants. The domestic design institute, which prepared the feasibility study, was retained to undertake the Project s engineering design. The same design institute was also made responsible for supervising foundation and steel works. International manufacturers supplied and supervised the installation of the electromechanical equipment. Local contractors constructed civil works, installed equipment, and built the transmission lines. HEPC also used its own funds to engage domestic supervision firms for some aspects of site supervision and equipment installation. 28. HEPC used an experienced procurement agent to procure imported equipment financed under the loan, including drafting of the bidding documents, bid evaluation, and subsequent contract management. Procurement was smooth, and the appointment was considered effective. Results of international competitive bidding were favorable. The lowest bid price was substantially lower than the appraisal estimates which allowed the EA to add an additional 30- MW unit, funded from loan savings. 29. The ADB loan funded 17 contract packages for equipment supply and consulting services, valued at $73.4 million. Procurement of the bulb turbines and generators, and associated equipment (all funded through the ADB loan) was in accordance with ADB s Guidelines for Procurement. Equipment with a contract value of $500,000 or more was procured following international competitive bidding (ICB) procedures. Equipment valued at less than $500,000, but more than $50,000, was procured using international shopping procedures. ADB considered, favorably, subsequent changes that the EA requested for reallocation of proceeds. On 21 February 1997, ADB approved a change of scope and reallocation of proceeds to procure the 220 kv gas insulated switchgear system, and four 70 kilovolt-ampere (kva) transformers in category II. On 13 May 1997, ADB approved the use of surplus loan funds to procure an additional bulb turbine-generator set and accessories in category I. On 30 January 1998, ADB approved the use of surplus loan savings to procure four additional category II items through international shopping (IS) procurement procedures. Appendix 8 shows the ADBfinanced contract packages. 5 ADB Technical Assistance Completion Report to the PRC for Introducing BOO/BOT Concept for Shanghai Waigaoqiao Stage II Project, Manila.

14 8 J. Performance of Consultants, Contractors, and Suppliers 30. Both international and domestic consultants provided services according to the terms of reference, and contributed positively to successful project implementation. The Project was, completed with only 2-month delay. Project implementation and supervision were generally smooth. The international consultant coordinated activities at the site effectively, and ensured quality control. The local procurement agency facilitated the procurement of imported equipment with no major problems. The performance of both international and domestic consultants was rated as satisfactory. 31. The contractors for civil works and for equipment installation were selected through local competitive bidding, and were competent. They completed their responsibilities on time. The contractors quality of work was, generally, good. But for the main ICB-procured equipment, common technical defects were noted in the turbine generators of all units during commissioning and subsequent operations (para. 8). K. Performance of the Borrower and the Executing Agency 32. The Government s performance, as the Borrower through the Ministry of Finance (MOF), was satisfactory. Requirements for loan effectiveness were completed in a reasonable time. The signing and effectivity of the loan and the subsidiary loan agreement for the relending of loan proceeds to HEPC were within 8 months of loan approval. Government supervision and monitoring of the Project were minimal because HEPC and, subsequently, WHDC, are technically qualified and experienced in project implementation. ADB review missions regularly briefed MOF on the Project s progress and implementation issues. 33. HEPC s performance, mainly through WHDC, was partly satisfactory. The Project was implemented systematically and timely, with insignificant cost overruns. Quarterly progress reports were submitted on time. But ADB did not formally approve transfer of asset ownership and responsibility for the Project s implementation and, eventually, operation. Furthermore, the turnaround time was slow or there was no action for responding to other ADB requests for more information and courses of action on outstanding issues such as recommendations made by ADB s Operation Evaluation Department (OED) for resettlement. Also, the EA has not progressed substantively in meeting targets in areas that require definitive action as highlighted by previous ADB missions (e.g., reducing receivables, and making necessary changes to the PPA). Also, the energy conservation plans, including the action program, the project completion report (PCR), and the BME report, were not submitted. Requests for data on the plant s operating parameters and performance indicators were not granted, because WHDC feels these are no longer relevant to ADB because the loan has been fully repaid. Both the EA and IA believe that they are no longer obligated to comply with the loan conditions. Furthermore, no information could be provided on performance of the EA and the HPS, nor on energy conservation. Little additional information on the Project could be obtained during the Project Completion Review Mission because almost all staff responsible for project implementation have been reassigned. L. Performance of ADB 34. ADB s performance in project monitoring was satisfactory, except for resettlement. ADB made substantial efforts to monitor the progress of project implementation through regular project review missions, and frequent consultations and briefings with MOF. ADB fielded eight missions and spent adequate time reviewing physical progress and resolving outstanding

15 9 implementation issues with HEPC and WHDC staff during the 5-year implementation period. Approvals for ADB-financed contracts and fund disbursements were given promptly. ADB immediately approved a request for an additional generating unit when the ICB results indicated that the remaining loan funds could accommodate it. Although numerous followup letters requesting details on implementation of the resettlement program were sent, the resettlement concerns related to a reduction in incomes were not apparent until the Project was almost complete. By then, ADB s leverage with the IA had diminished. ADB also brought to MOF s attention, in a briefing, the difficulties, findings, and observations made during the Project Completion Review Mission. III. EVALUATION OF PERFORMANCE A. Relevance 35. The Project remains relevant and consistent with priorities of ADB and the Government at appraisal, and at present. The additional generation from the added 270-MW capacity and the regulating function for the 1,200-MW Wuqiangxi hydropower plant boost the supply profile of HPS. Although not yet operating at full capacity (performance tests and repair of some units are still ongoing), the Project is expected to provide a net annual energy output of 1,215 GWh to the grid. As the grid s load growth continues to increase, the Project s operation is even more relevant. The Project is considered a beneficial component of the HPS, and can operate at full capacity. 36. Five new hydropower projects with a total capacity of 2,260 MW are now in various stages of implementation. Another 1,200 MW of new pumped storage facility is also planned to start in These additional capacities are to meet Hunan s increasing demand for electricity. B. Efficacy in Achievement of Purpose 37. The addition of a 270-MW plant met the Project s main objective of accelerating the development of Hunan s hydropower resources, and relieved current and future constraints to the grid s capacity. The Project also enabled the Wuqiangxi hydropower plant to maximize its capacity. Without that, the Wuqiangxi plant s dependable peaking capacity would have been limited by 150 MW. 6 After the Project s completion, downstream river navigation improved markedly. The TA associated with the Project also improved HEPC s institutional capability. Project training programs enhanced the management and institutional perspectives of both the EA and the IA. The Project is considered efficacious. C. Efficiency in Achievement of Outputs and Purpose 38. Project implementation remained smooth, despite the transfer of major responsibilities from HEPC to WHDC. Project facilities were built as planned, and the generating units were installed and commissioned on schedule. The organization and management of the EA and IA were responsive to Project requirements. The recruitment of a procurement agency facilitated the ICB process. The favorable outcome of the ICB allowed addition of another 30-MW unit, 6 According to the appraisal report, and as confirmed during the Project Completion Review Mission, without the Project, generation of Wuqiangxi power plant would be curtailed by 150 MW. With the Project, navigation in the Lingjintan reservoir would be improved, and 380 m 3 /sec of water would be conserved. The conserved water could be used to generate about 150 MW or 1,248 GWh per year of available peaking capacity, otherwise that water would have to be released to guarantee a minimum water depth required for downstream navigation.

16 10 within the original allocation. Counterpart funding was adequate, and was provided timely. The transmission facilities, although not financed under the loan, were available in time to synchronize the generating units to the grid. All generating units were commissioned as planned, with only minor delays. But technical problems hindered timely commercial operation of the turbines. 1. Financial Performance 39. HEPC s financial performance was generally satisfactory. HEPC s profitability from 1996 to 2000 (no financial statements were submitted for ) was moderate, and financial covenants were essentially met, except in 1999 and But accounts receivable, although not a loan covenant, remained high at 7 months of sales because of the difficulty of collection from some major customers (state-owned steel mills and mining companies). HEPC s future financial profile will change after restructuring of the power sector. WHDC is also reasonably sound, financially, although its internal cash generation falls short of the covenant. Appendix 7 summarizes HEPC and WHDC s financial performances. 40. The financial internal rate of return (FIRR) for the Project was reevaluated on the basis of its actual financial performance until 2002, and financial projections based on data from WHDC. Projected revenues were based on projected generation output and current tariffs. Assumptions were made for operating and maintenance costs. Capital cost was based on actual expenditures incurred for the Project. Revenues and expenses were maintained at 2003 prices. The reevaluated FIRR of the Project 5.6% is lower than the appraisal estimate of 9.3%. The lower FIRR is mainly because the tariff was about 50% lower than estimated at appraisal. The lower utilization of capacity in the initial years of operation also contributed to the lower return. The reevaluated FIRR is still higher than the real weighted average cost of capital (WACC) of 4.8%, indicating that the Project is financially viable. Appendix 9 gives details of the FIRR calculations. 2. Economic Performance 41. An economic evaluation of the Project followed the methodology adopted at appraisal, but with modification in the valuation of benefits to reflect HPS s actual situation. Incremental costs and benefits associated with the Project were quantified. The economic life of project components assumed at appraisal is maintained. The residual value at the end of the economic life is assumed to be zero. All prices and costs are expressed in 2003 constant prices. Imported equipment was valued at its actual international price, including transport and handling costs. Other tradable and nontradable costs were derived from the actual financial costs, and converted to economic values by applying the conversion factors 7 commonly used for PRC projects. Excluded were taxes, import duties, and all financial charges, including interest during construction. Economic benefits were derived from the energy output from the Lingjintan plant, and the increase in the dependable peaking capacity of the Wuqiangxi plant. The energy output from the Lingjintan plant was valued at the consumers willingness to pay, estimated at CNY0.62/kWh. The increase in the dependable peaking capacity of the Wuqiangxi plant was valued at CNY0.05/kwh the difference in the fuel cost between the base load power plant and the peaking power plant. Operating costs were based on actual and projected levels and converted to their current economic values using the standard conversion factor. 7 The conversion factors used in this evaluation are 1.1 for civil works, 1.1 for local machinery, and 0.93 for other items.

17 The recalculated economic internal rate of return (EIRR) of the Project is 12.4%; the estimate at appraisal was 16.6%. The EIRR is lower because of differences in assumptions used in the valuation of project benefits. The reevaluated EIRR for the Project is still higher than the assumed economic opportunity cost of capital of 12%. Appendix 10 gives details of the calculations. D. Preliminary Assessment of Sustainability 43. The continuing demand for additional capacity in Hunan Province assures the Project s optimum utilization. The design of the Project as a hydropower peaking plant is appropriate to meet the requirements of HPS. WHDC is also equipped with well-trained and competent staff that can operate and maintain the plant facilities efficiently. Although WHDC s financial performance is not currently robust, it is expected to improve with improvement in operating performance of the Project, and prospects for future tariff adjustments. With full implementation of the reforms, the Project s financial performance should improve as the units operations are optimized. The exposure to modern utility management practices, through project implementation and overseas training, has provided better insights and competence to address certain execution, operational, and profitability concerns. The reevaluated FIRR exceeds the WACC and the reevaluated EIRR exceeds the economic opportunity cost of capital. The Project is expected to be sustainable. E. Environmental, Sociocultural, and Other Impacts 1. Environmental Impact 44. An environmental protection program, developed at the Project s start, was implemented and monitored during project implementation. The EA prepared an assessment of the Project s environmental impact, and a summary report was circulated to the ADB Board on 27 May Upon ADB s request, WHDC established an environment monitoring system through the county environment protection agency. After monitoring from 1997 to 2000, it was concluded that the Project caused no major changes in the environmental quality of air, water, or noise in the Lingjintan area. Appendix 11 gives results of the environmental monitoring. 45. The Special Evaluation Study on the Social and Environmental Impacts of Selected Hydropower Projects 8 was prepared by the OED in January The Lingjintan project was one of its four case studies. The environmental impact of a hydroelectric power project was generally considered insignificant. The OED study commented that, as a run-of-the-river hydropower facility, the Project will have minimum impact on water chemistry, except for a possible modest seasonal increase in temperature, and no impact on air quality. The study also suggested that Project monitoring should emphasize air and water quality less, and biological impacts more, because construction associated with the Project will probably affect biological organisms. Furthermore, the study noted that the Project will change the Yuanshui River from free flowing to a lake-like condition. WHDC assured that mitigating measures recommended in the summary environmental impact assessment, and in the OED study, were carried out during project implementation. This claim was supported by a report from the independent monitoring agency that addressed, point-by-point, issues raised in the OED report. 8 ADB Special Evaluation Study on the Social and Environmental Impacts of Selected Hydropower Projects. Manila.

18 12 2. Social Impact 46. A resettlement plan was prepared in 1996, which the Ministry of Electric Power and State Planning Commission approved in The Project created a 25.8 km 2 reservoir, which inundated 425 hectare (ha) of farmland. The Project resettlement plan identified 4,753 persons that would need economic rehabilitation and 4,060 persons, in about 812 households, that would have to be relocated from their residential and agricultural lands. About 2,700 people lost both land and housing. The total affected people is estimated at 6,100 about 800 of which are Tujia ethnic minority. Appendix 12 shows the scope of resettlement impact for the Lingjintan project. A budget of $27.4 million (CNY228 million, or 8% of the Project s base cost) was allocated. Most of the affected people were resettled from 1996 to By the time of project commissioning, the required relocation had been completed. The amount spent for resettlement totaled $24.4 million (CNY203 million), a 227% increase over the $7.5 million budget allocated at appraisal, although it was $3.0 million, or 11%, less than the expenditure programmed and approved in Affected inhabitants were resettled as close as possible to their original homes. Each household was provided a standard-size brick house equipped with necessary amenities. The new houses were often larger and of better quality than the original houses. Resettlers invested their own savings (an average of 40 50% more than the compensation amount) in the new homes. The 2000 OED study noted that the resettlers were generally happy with their new houses, because they are superior to the old houses, but that the resettlers were concerned about their lower potential to generate income, mainly because their agricultural land was reduced by about 50%, to about 0.7 ha each. Some resettlers reported decreased income. OED concluded that, The current trend, which appears to be gradual impoverishment of some affected persons, is not satisfactory. 48. About 800 ha have been developed into agricultural land. Farming continues to be the community s main occupation, but animal husbandry and aquaculture have become important livelihood sources. Light industries such as making bamboo products and freshwater pearl culture also provide supplementary income. But the Project Completion Review Mission reported that disbursement of funds for economic rehabilitation was slow, and is still insufficient to meet requirements. Consequently, incomes of many affected people have still not been fully restored. The objective was to achieve annual net incomes of CNY1,800 per capita for rural resettlers, but according to the county resettlement officials, the estimated per capita income last year was about CNY1,300. WHDC has no specific plans to resolve the problem. 49. WHDC had monitoring consultants supervise physical implementation of the resettlement program and reported that the Provincial Resettlement Bureau had monitored the accomplishments. The ADB staff consultant who joined the Project Completion Review Mission reported several issues that should be addressed, including: (i) slow disbursement and shortfall in the release of the resettlement budget to the affected people; (ii) diversion of CNY19 million from the Taoyuan County finance department s resettlement budget to pay alleged shortfalls in the cultivated land tax; (iii) slow progress of evaluation and acceptance of resettlement completion; (iv) land slide along the bank reservoir, which may require further household relocations; and (v) occasional flooding of the reservoir area, which makes restoration of livelihood and income difficult for certain households (flooding threatens about 700 persons near the reservoir shore). Also, no funding has been made available from the project profits (the reservoir development fund). Thus, further measures are urgently needed to ensure that the