Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: PAD719

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

Public Disclosure Authorized IN THE AMOUNT OF US$100 MILLION

TO THE

PEOPLE’S REPUBLIC OF

FOR A

SHANXI GAS UTILIZATION PROJECT

Public Disclosure Authorized February 26, 2014

China and Mongolia Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region

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

CURRENCY EQUIVALENTS

(Exchange Rate Effective November 1, 2013)

Currency Unit = RMB (Chinese Yuan Renminbi) US$ 1 = RMB 6.10

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS bcma Billion cubic meters per annum NDRC National Development and Reform Commission CBM Coal Bed Methane Nm3 Normal Cubic Meters CHP Combined Heat and Power NOx Nitrogen Oxides CNG Compressed Natural Gas PDO Project Development Objective DA Designated Account PMO Project Management Office EA Environmental Assessment QKNGC Qingxu Kaitong Natural Gas Company EHS Environmental, Health and Safety RAP Resettlement Action Plan EIA Environmental Impact RPF Resettlement Policy Framework Assessment EIRR Economic Internal Rate of Return SCADA Supervisory Control and Data Acquisition EMP Environmental Management Plan SCPTC CBM (Natural Gas) Pipeline and Transportation Company FIRR Financial Internal Rate of Return SNGC Shanxi Natural Gas Company FM Financial Management SO2 Sulfur Dioxide GJ Gigajoule GWh Gigawatt Hour SOE State Owned Enterprises GXED Shanxi Guoxin Energy SPAO Shanxi Provincial Audit Office Development Group IA Implementing Agency SPFB Shanxi Provincial Finance Bureau ICB International Competitive Bidding SSS Single Source Selection IPF Investment Project Financing TA Technical Assistance kWh Kilowatt Hour tcm Trillion cubic meters LNG Liquefied Natural Gas TSP Total suspended particulate matter MOF Ministry of Finance WA Withdrawal Applications MWe Megawatt WTP Willingness-to-pay NCB National Competitive Bidding Y Yuan

Regional Vice President: Axel van Trotsenburg, EAPVP Country Director: Klaus Rohland, EACCF Sector Director: John Roome, EASSD Sector Manager: Charles Feinstein, EASWE Task Team Leader: Ximing Peng, EASCS CHINA Shanxi Gas Utilization Project

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT ...... 1 A. Country Context ...... 1 B. Sectoral and Institutional Context ...... 2 C. Higher Level Objectives to which the Project Contributes ...... 3

II. PROJECT DEVELOPMENT OBJECTIVE ...... 3 A. PDO...... 3 B. Project Beneficiaries ...... 3 C. PDO Level Results Indicators ...... 4

III. PROJECT DESCRIPTION ...... 4 A. Project Components ...... 4 B. Project Financing ...... 5 C. Lessons Learned and Reflected in the Project Design ...... 5

IV. IMPLEMENTATION ...... 7 A. Institutional and Implementation Arrangements ...... 7 B. Results Monitoring and Evaluation ...... 7 C. Sustainability...... 7

V. KEY RISKS AND MITIGATION MEASURES ...... 8 A. Risk Ratings Summary Table ...... 8 B. Overall Risk Rating Explanation ...... 8

VI. APPRAISAL SUMMARY ...... 9 A. Economic and Financial Analysis ...... 9 B. Technical ...... 10 C. Financial Management ...... 10 D. Procurement ...... 11 E. Social (including Safeguards) ...... 11 F. Environment (including Safeguards) ...... 13 G. Other Safeguards Policies Triggered ...... 14

Annex 1: Results Framework and Monitoring ...... 15

Annex 2: Detailed Project Description ...... 18

Annex 3: Implementation Arrangements ...... 22

Annex 4: Operational Risk Assessment Framework (ORAF) ...... 35

Annex 5: Implementation Support Plan ...... 39

Annex 6: Economic and Financial Analysis ...... 42

Annex 7: Map ...... 50

. PAD DATA SHEET China Shanxi Gas Utilization (P133531) PROJECT APPRAISAL DOCUMENT

. EAST ASIA AND PACIFIC EASCS

Report No.: PAD719

. Basic Information Project ID Lending Instrument EA Category Team Leader P133531 Investment Project A - Full Assessment Ximing Peng Financing Project Implementation Start Date Project Implementation End Date 28-Mar-2014 31-Dec-2019 Expected Effectiveness Date Expected Closing Date 31-Aug-2014 30-Jun-2020 Joint IFC No Sector Manager Sector Director Country Director Regional Vice President Charles M. Feinstein John A. Roome Klaus Rohland Axel van Trotsenburg

. Borrower: People’s Republic of China Responsible Agency: Shanxi Guoxin Energy Development Group Corporation Contact: Ms. Sun Libin Title: Director of PMO Telephone 86-351-7216030 Email: [email protected] No.:

. Project Financing Data(in USD Million) [ X ] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee Total Project Cost: 295.39 Total Bank Financing: 100.00 Total Cofinancing: 195.39 Financing Gap: 0.00

. Financing Source Amount Borrower 92.39 International Bank for Reconstruction and 100.0 Development Local Sources of Borrowing Country 103.0 Total 295.39

. Expected Disbursements (in USD Million) Fiscal 2015 2016 2017 2018 2019 2020 0000 0000 0000 Year Annual 5.00 15.00 30.00 35.00 10.00 5.00 0.00 0.00 0.00 Cumulati 5.00 20.00 50.00 85.00 95.00 100.00 0.00 0.00 0.00 ve

. Proposed Development Objective(s) The proposed Project Development Objective (PDO) is to increase gas utilization to reduce greenhouse gases emission in selected counties of Shanxi province.

. Components Component Name Cost (USD Millions) Distributed Gas-fired CHP Plants Component 260.29 Expansion of Gas Distribution Network Component 32.35 Technical Assistance Component 2.75

. Institutional Data Sector Board Energy and Mining

. Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co-benefits % Co-benefits % Energy and mining Oil and gas 60 60 Energy and mining Thermal Power 40 40 Generation Total 100 I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project.

. Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Environment and natural resources Climate change 100 management Total 100

. Compliance Policy Does the project depart from the CAS in content or in other significant Yes [ ] No [ X ] respects?

. Does the project require any waivers of Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ X ] Is approval for any policy waiver sought from the Board? Yes [ ] No [ ] Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]

. Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X

. Conditions Name Recurrent Due Date Frequency Signing Subsidiary Loan Agreement Effectiveness Description of Covenant The Project Implementing Entity shall enter into a subsidiary loan agreement with GXED, under terms and conditions acceptable to the Bank Name Recurrent Due Date Frequency Signing Implementation Agreements Disbursement Description of Covenant Disbursement conditions - GXED shall enter into: (a) an implementation agreement with SNGC before the disbursement of Category (1); and (b) GXED shall enter into implementation agreements with each of SCPTC and QKNGC respectively before the disbursement of Category (2), all such agreements under terms and conditions acceptable to the Bank

. Legal Covenants Name Recurrent Due Date Frequency Signing of Heating Supply Contracts in 31-Dec-2015 each of the selected counties under Part 1 of the Project Description of Covenant The Project Implementing Entity, through GXED, shall have caused SNGC to enter into heating supply contracts with heating companies in each of the selected counties under Part 1 of the Project in order to channel heating supply service thereto. Name Recurrent Due Date Frequency Domestic approval of the on-grid 31-Dec-2015 electricity tariff for the CHP plants in each of the selected counties under Part 1 of the Project Description of Covenant The Project Implementing Entity shall have approved on-grid electricity tariffs for distributed gas-fired combined heat and power plants in each of the selected counties under Part 1 of the Project, in order to ensure the financial viability of CHP sub-projects. Name Recurrent Due Date Frequency Signing of Coal-bed methane or gas 31-Dec-2015 supply contracts for each sub-project Description of Covenant The Project Implementing Entity, through GXED, shall have caused SNGC, SCPTC and QKNGC to sign gas supply contracts with local gas suppliers in order to define the specific commercial terms under the existing gas supply agreements. Name Recurrent Due Date Frequency An independent safety panel will be 31-Dec-2014 established Description of Covenant The Project Implementing Entity shall cause GXED to establish an independent safety panel with the responsibility for monitoring and evaluating the implementation of the safety management plan.

. Team Composition Bank Staff Name Title Specialization Unit Cristina Hernandez Program Assistant Program Assistant EASWE Alan F. Townsend Senior Energy Specialist Technical EASWE Ximing Peng Senior Energy Specialist Team Lead EASCS Sameena Dost Senior Counsel Lawyer LEGES Alejandro Alcala Senior Counsel Lawyer LEGES Haixia Li Senior Financial Financial Management EASFM Management Specialist Yiren Feng Senior Environmental Environmental EASCS Specialist Safeguard Yunlong Liu Procurement Specialist Procurement EASR2 Kun Cao Team Assistant Team Assistant EACCF Dan Xie Team Assistant Team Assistant EACCF Non Bank Staff Name Title Office Phone City Youxuan Zhu Social Safeguards US Wenqiang Gong Gas Power Engineer Huizhou Mingye Sun Gas Engineer Beijing Juha Vainikka Gas Engineer Finland

. Locations Country First Location Planned Actual Comments Administrative Division China Shanxi Sheng X

I. STRATEGIC CONTEXT

A. Country Context

1. Severe pollution facing the country has driven China to speed up clean energy development in its energy and climate change strategy to address the country’s environmental challenges. China’s fast economic development in the past three decades has relied heavily on coal consumption1 and the country is suffering from serious environmental pollution. The smoggy weather in more than 15 large cities in northern China and serious nationwide water, land, and air pollution have partially offset people’s welfare, accumulated in the past decades as a result of economic development. China has to speed up development of clean energy and shift towards a less coal-dominated economy. Gas is one of the important sources to support this clean development in China.

2. Gas consumption still represents quite a small share in the overall energy mix and the growth of gas consumption is well below its potential, suggesting gas could substantially replace coal consumption. Despite a rapid increase since the 2000s, gas consumption in 2011 still represented only about 5% of total energy consumption, well below the average share in the world (about 24%) and the Asia Pacific region (11%).2 The official statistical data shows that China is not short on gas resources. China’s Ministry of Land and Resources, in its 2010 Dynamic Assessment on Oil and Gas Resources, says the nation has total natural gas reserves of 52 trillion cubic meters (tcm), of which 32 tcm is technically recoverable. The domestic exploitation has confirmed a total of 3.78 tcm of technically recoverable natural gas by the end of 2010, about 40 times the actual production in 2010. These large gas resources suggest that a more rapid development in the use of gas to replace coal could be possible, compared to what has been seen in the past decades.

3. The Government of China has set up an ambitious plan to accelerate gas development. In 2012, the National Development and Reform Commission (NDRC) updated the National Natural Gas Utilization Policy, while the National Energy Administration issued the National Natural Gas Development 12th Five-Year-Plan (2011-15) and the State Council issued its National Energy Development 12th Five-Year-Plan (2011-15), aimed at increasing the share of gas consumption in primary energy to 7.5% by 2015. As a result, the population’s access to gas will increase from 188 million people (14% of the national total) in 2010 to 250 million (18% of national total) in 2015. To secure the gas supply, the government has urged domestic enterprises to expand exploration and develop both conventional and non-conventional gas (shale gas, coal bed methane, and coal-converted gas), in addition to expanding the import from countries in Central Asia, Myanmar, and Russia. Furthermore, pilot gas pricing reform has been initiated by NDRC and private investments are encouraged for upstream gas development, especially for the exploitation of non-conventional gas.

1 Coal consumption has been kept at about 70% of the total energy consumption in China since the late 1990s. 2 The domestic gas production in China increased from 27 billion cubic meters per annum (bcma) in 2000 to 103 bcma in 2011, with an average annual growth rate of about 13%; moreover, the average annual growth rate of gas consumption was about 16% from 2000 to 2011. In comparison, the average annual growth rate of energy consumption in China was 8.2% from 2000 to 2011.

1 B. Sectoral and Institutional Context

4. The government of Shanxi province has launched an encouraging provincial gasification program to shift its economic structure away from coal-dominated industries through clean energy development. Shanxi province is the second largest coal producer among all provinces in China,3 producing about 25% of the national total in 2011. Economic development in the province has relied heavily on the coal industry, but this has created serious environmental problems. The provincial government has decided to promote the use of gas to transform its economic structure along a green path.

(a) Targets: The government issued its Gasification Program in late 2010 and plans to increase gas utilization within Shanxi from about 0.7 billion cubic meters per annum (bcma) in 2008 to 9.0 bcma in 2015 and 28.0 bcma in 2020. The total gas supply by Shanxi is estimated to be about 12.0 bcma by 2015 and 36.0 bcma by 2020 when the gas export to other provinces is included.4

(b) Gas Sources: The four main sources of gas in Shanxi province are domestic coal bed methane (CBM), imported natural gas, coke gas, and local coal converted gas (“the four gases”). Both CBM and imported natural gas are the focus of the initiative as Shanxi has abundant coal bed methane resources (its reserve is about one-third of the national total reserves) and five main natural gas trunk pipelines passing through the province. Those lines, operated by PetroChina and SinoPec, can provide imported natural gas to the province. The provincial government also expects to make use of coke gas and coal converted gas as complementary sources to meet the booming gas market in Shanxi province. The coke gas is present in the province and is used separately (not injected to the provincial main pipelines), while coal gasification is still in an experimental stage.5

(c) Targeted Market: The main markets targeted for gas utilization in Shanxi province are city gas, industrial, chemical, power generation, and transportation (both compressed natural gas (CNG) and liquefied natural gas (LNG) fuelled vehicles). Currently these consumers rely on coal, coal gas, LPG or diesel as their main fuels.

(d) Main Market Players: Both national and provincial State-owned enterprises (SOEs) are engaged in this sector, as well as private local and foreign companies. The upstream gas developers include PetroChina, SinoPec, China CBM (a national SOE), Mining Group (provincial SOE), and several international energy enterprises. The construction of gas transportation pipelines and associated

3 Shanxi used to be the largest coal producer in China. In 2009, coal production in Inner Mongolia exceeded the production in Shanxi province. 4 Shanxi Provincial Government approved an updated plan to promote the CBM development in August 2013. The aim is to reach a CBM production of 19.5 bcma by 2015 and 40.0 bcma by 2020. Gas penetration by population is targeted at about 20 million in 2015 (more than 50% of the total population of 36 million) and expanded to almost the entire population by 2020. 5 The gas source for the proposed project is the provincial gas network, which use both domestic CBM and imported natural gas as the gas sources. Both the coke gas and coal converted gas are not the gas sources of the provincial gas network, so they are not associated with the proposed project.

2 infrastructure is led by Shanxi Guoxin Energy Development Group (GXED) in participation with other provincial SOEs. GXED has, by the end of 2011, built about 3,000 kilometers of main gas transmission network across the province, covering 94 of its 119 counties. Downstream gas utilization is diversified, with GXED’s subsidiaries providing the gas distribution services in most counties.

5. Implementation of the provincial gasification program is not without challenges. National level gas regulation is still absent. The distorted gas pricing, a quota system to allocate the use of gas, and government driven consumption have limited the growth of gas consumption in recent decades. To achieve the targets of the provincial program, the Shanxi provincial government is working closely with the central government to establish enabling gas policies and a regulatory framework to guide the sound development of the sector. Proper financing mechanisms are also required to fill in the gap in infrastructure development, mainly the distribution network in counties and townships. Furthermore, the affordability of gas by consumers needs to be assessed adequately to ensure the social risk is manageable.

6. The sharing of international good practice will provide very timely and useful support to improve the quality of the Shanxi Provincial Gasification Program. Considering the long history in both the United States and Europe in using gas, examples of international good practices in maintaining safety and efficient operation of the gas network, as well as lessons and experience in regulating the sector, will be extremely helpful for the program.

C. Higher Level Objectives to which the Project Contributes

7. The proposed project is fully consistent with the Country Partnership Strategy (CPS) for 2013-2016 (Report No. 67566-CN, dated October 11, 2012), and is in line with the Strategic Theme One of the CPS, “Supporting Greener Growth.” The proposed project could contribute to Outcome 1.1: Shifting to a Sustainable Energy Path under this theme and is also expected to contribute to China’s efforts to expand use of clean energy and mitigate climate change.

II. PROJECT DEVELOPMENT OBJECTIVE

A. PDO

8. The proposed Project Development Objective (PDO) is to increase gas utilization to reduce greenhouse gases emission in selected counties in Shanxi province.

9. The proposed project is part of the provincial gasification program and the objective is to be achieved through the investment in both distributed gas-fired combined heat and power (CHP) plants and the expansion of the gas distribution network in selected counties.

B. Project Beneficiaries

10. Project beneficiaries include (a) GXED and its subsidiaries who will implement the project, to improve their capacities in both gas supply/utilization and project management through introduction of international best practices; (b) Shanxi provincial government to facilitate the achievement of the provincial gasification program; (c) the gas consumers supplied by the project, to improve their living standards through use of clean energy; and (d) the global

3 community who benefits from avoided greenhouse gas emissions, which contribute to global climate change mitigation.

C. PDO Level Results Indicators

11. The achievement of the project development objective would be measured by the following indicators: (a) annual gas utilization (cubic meters); and (b) the avoided carbon emissions (tons of CO2 equivalent) in the county cities and CHP plants supported by the project. In addition, the intermediate result indicators are (a) installed capacity (in Megawatt, MW) and annual power supply (in Gigawatt hours, GWh) from the two distributed gas-fired CHP plants; (b) annual heating supply (gigajoule, GJ) from the two distributed gas-fired CHP plants; and (c) number of households and other gas users supplied by the gas distribution network sub-projects.

III. PROJECT DESCRIPTION

A. Project Components

12. The proposed project has three components covering (a) distributed gas-fired CHP Plants; (b) expansion of the gas distribution network; and (c) technical assistance. Components (a) and (b) further include a total of six investment sub-projects in six different counties in the province. These are the Baode and Xiyang gas-fired CHP sub-projects under Component (a), and the Xiangyuan, , Tunliu, and Qingxu gas distribution sub-projects under Component (b).

13. Component 1: Distributed Gas-fired CHP Plants (indicative cost estimate: US$260.29 million, of which US$ 79 million from IBRD loan). This component includes two investment sub-projects with the same size: Baode 3x42MWe and Xiyang 3x42MWe gas-fired CHP plants and affiliated facilities. Both sub-projects are green-field power plants and will be built for power generation and heating supply to the adjacent county level cities (Baode and Xiyang County City).

14. The gas source for both sub-projects is the provincial gas network, which has been extended to both cities. The provincial gas network is operated by Shanxi Natural Gas Company (SNGC), which is also the implementing agency of both sub-projects. Annual gas consumption is an estimated 285 million cubic meters for both sub-projects combined. The generated electricity (total installed capacity of 252 MWe and an estimated generation of 1,160 GWh annually) will be delivered to the provincial power grid to meet the electricity demand in the province. Heating (total thermal capacity of about 120 MWt) will be supplied to the two county cities to meet their expanded heating demand for a total floor area of about 2.37 million square meters. SNGC plans to start the construction of both investment sub-projects in April 2014 and complete construction in October 2015.

15. Component 2: Expansion of the Gas Distribution Network (indicative cost estimate: US$32.35 million, of which US$18 million from IBRD loan). This component includes four investment sub-projects in the four county cities in Xiangyuan, Changzhi, Tunliu, and Qingxu counties. The proposed sub-projects would install pipelines and pressure regulating stations in the four counties to expand the gas distribution network to residential, commercial, and industrial

4 consumers. The sub-project would also establish Supervisory Control and Data Acquisition (SCADA) systems to monitor the operation of each gas distribution network.

16. The main gas source is the provincial gas network operated by SNGC, with only the gas for the Changzhi sub-project supplied by a local CBM developer who is connected to the provincial gas network. The proposed four sub-projects are expected to meet the increase in gas demand in the four cities by 2030—for an estimated total of 136,700 households and 21 industrial consumers—with an annual gas supply of about 244.15 million cubic meters. The project implementing agencies plan to start the construction of all four sub-projects in October 2014 and complete construction in late 2019.

17. Component 3: Technical Assistance (indicative cost estimate: US$2.75 million, financed from IBRD loan). A technical assistance component is included to mitigate the risks related to project design and management, covering activities for capacity building and technical support to the implementing agencies, as well as activities to upgrade the provincial gas network system.

18. The project description is further detailed in Annex 2.

B. Project Financing

Lending Instrument

19. The lending instrument is an Investment Project Financing (IPF).The loan will be a single currency, variable spread loan of US$100 million, with a maturity of 25 years (including a grace period of 5 years) and a front-end fee of 0.25%. The client decided to adopt a level repayment method to repay the IBRD loan.

Project Cost and Financing

20. Based on the feasibility studies that were carried out for each investment sub-project, the total project cost was estimated at US$295.39 million. The financing sources include equity of US$92.39 million, IBRD loan of US$100.0 million, and local loan of US103.0 million. The break-down of project cost by component is summarized in table below.

Table: Estimated Project Cost by Component and Source of Funding Project Cost IBRD Financing Project Components % Financing (US$ million) (US$ million) 1.Distributed Gas-fired CHP plants 260.29 79.00 30.4% 2.Expansion of Gas Distribution Network 32.35 18.00 55.6% 3.Technical Assistance 2.75 2.75 100.0% Total Financing Required 295.39 100.00 33.9%

C. Lessons Learned and Reflected in the Project Design

21. Lessons from the preparation and implementation of other energy projects have been summarized to guide the design of the proposed project. In the past several years, appraisal of

5 some of the energy projects in China was not completed, while some of them ran into problems during the project implementation stage. The lessons learned can be summarized as follows:

(a) Commitments from both the government and the project implementing agencies are critical to the success of a project. Guarantees for adequate capacity of the implementing agencies should be built into the project design.

(b) Early discussions with both the government and project implementing agencies on the project scope, even before the pipeline discussion, are useful to identify the common areas each party can support. These areas should be among the priority strategic considerations of the country or province.

(c) Project implementation should not involve too many agencies to avoid complicated coordination among sub-projects. If this can’t be avoided, a framework approach or financial intermediary lending could be considered.

(d) The design of the technical assistance activities should be practical and attributed by the project implementing agencies. If some activities are extended to the national or provincial levels, early involvement and commitment by the relevant government agencies is needed during the project design stage.

22. Lessons from other gas projects that have been financed by the Bank in other countries also suggested that: (a) market survey is an important part of project preparation and sufficient market demand is a key for the economic justification of the project; (b) parallel sector reform and sound pricing mechanism increase the opportunity of success of the project; and (c) extensive project supervision are important and must be regularly scheduled, not only to oversee progress of the project and solve problems, but also to study the developments in the sector and offer unobtrusive guidance and advice.

23. In line with these lessons learned, the Bank team initiated discussion of project concepts with the relevant Shanxi provincial government agencies and the potential project implementing agencies before the project proposal was submitted to the national government for consideration. The project focuses on support to the provincial gasification program, which has been committed to by the provincial government for implementation in the coming years. GXED and its subsidiaries were identified as the implementing agencies based on GXED’s role as a major SOE to implement the provincial gasification program.

Alternatives Considered and Reasons for Rejection

24. Alternative investments that have been considered during discussions about the project concept included utilization of low-concentration coal mine methane and the replacement of diesel by CNG for trucks. All alternatives were rejected because the projects either were not financially viable under the current circumstances or would involve too many implementing agencies and complicated government approvals. Therefore, the final project scope was streamlined to be focused on the demonstration of gas-fired CHP plants and expansion of the gas distribution network. The improvement of the provincial gas pipeline network and/or further expansion of the gas distribution network in more counties could be considered for Bank support in a second stage if supported by both the provincial and national governments.

6 IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

25. The Project Implementing Entity is Shanxi Province, which shall cause the Project to be implemented by the Shanxi Guoxin Energy Development Group (GXED) and its three subsidiaries: the Shanxi Natural Gas Company (SNGC), the Shanxi CBM (Natural Gas) Pipeline and Transportation Company (SCPTC), and the Qingxu Kaitong Natural Gas Company (QKNGC). SNGC will implement the two gas-fired CHP plants investment sub-projects under the Distributed Gas-fired CHP Plants component, while SCPTC will implement the Xiangyuan, Changzhi, and Tunliu gas distribution investment sub-projects and QKNGC the Qingxu gas distribution investment sub-project. GXED itself will implement the TA component. SNGC will establish two branch companies or subsidiaries to each implement one of the two CHP sub- projects and SCPTC has established three branch companies to implement the respective Xiangyuan, Changzhi and Tunliu gas distribution sub-projects. All branch companies or subsidiaries will be staffed with professional managers and engineers.

26. A Project Management Office (PMO), established at project identification, is led by GXED with the participation of its three subsidiaries. The PMO will remain active throughout the implementation period and be responsible for coordinating project implementation.

27. All project institutional implementation arrangements, discussed and agreed with Shanxi Province, GXED and its subsidiaries, are further detailed in Annex 3.

B. Results Monitoring and Evaluation

28. Annex 1 provides a detailed description of the performance indicators to be tracked under the project and also specifies the sources for data collection as well as methodologies to calculate the indicators. Progress will be regularly monitored by the PMO and reported in periodic progress reports.

C. Sustainability

29. Sustainability at project level. The sustainability of the project is ensured by both the dedicated project companies, staffed with professionally experienced managers and engineers to guarantee the successful implementation and operation of the project. Sustainability is also ensured by support from the provincial government in providing for the financial viability of the project. The design and implementation of the TA component are focused on capacity building, enhancing the technical support for the implementation of the project, and establishing an enabling environment to support gas utilization in Shanxi province.

30. Appropriate measures to mitigate the social and environmental impacts associated with the project, as well as safety management measures, have been developed by the project implementing agencies and agreed with the World Bank. These measures will ensure the social and environmental sustainability of the project as summarized in the safeguards framework and related environmental management plans.

7 31. Sustainability at the provincial level. The knowledge and experience associated with the development of the proposed project will benefit not only GXED and its subsidiaries, but also various key market players in the gas industry in Shanxi province. The project experience will also support the provincial government in achieving the ambitious targets in its provincial gasification program. Moreover, GXED and its subsidiaries will be able to apply any new practices and experience to other locations in the province.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Risk Category Rating Stakeholder Risk Low Implementing Agency Risk - Capacity Moderate - Governance Moderate Project Risk - Design Substantial - Social and Environmental Moderate - Program and Donor Low - Delivery Monitoring and Sustainability Substantial - Other (Security of Gas Sources) Substantial - Other (Safety Operation) Moderate Overall Implementation Risk Substantial

B. Overall Risk Rating Explanation

32. The overall risk rating of the proposed project is substantial, based on the findings and agreements about mitigation measures reached by completion of project negotiation. These in particular involve the design of the TA component and the issuing of a government decree to guarantee the financial viability of the project. Risks and associate mitigation measures are presented in the Operational Risk Assessment Framework (Annex 4). Key risks include: (a) financial losses as a result of a potentially low approved tariff or when the approved tariff cannot be adjusted by the government in a timely manner to cover the potential increase in gas prices; (b) insufficient gas sources, if gas supply contracts are not signed in a timely manner or if the gas amount is not adequate to meet gas demand; and (c) below-standard project performance if the project does not meet the agreed standards and targets due to institutional barriers with the grid connection or limited capacity of the project companies.

33. Mitigation measures have been included in the project design and project preparation as follows: (a) the provincial government has issued a note to guarantee the financial viability of the project and has also committed to approve the on-grid tariff for distributed gas-fired CHP plants after the project is put into operation. A dated covenant, required to be satisfied by a specified

8 deadline, is included in the Project Agreement to request for the government’s approval of the on-grid tariff for both CHP plants; (b) GXED and its subsidiaries have signed gas supply agreements with PetroChina, Sinopec, and other local gas suppliers, and will negotiate with each supplier on the gas supply contracts before the commissioning of each investment sub-project; and (c) the provincial grid company has been consulted and has committed to supporting the clean energy and accelerating the review of the grid connection schemes. Capacity building is included in the TA component to ensure the companies will have adequate capacity to operate the project.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analysis

34. Economic Analysis. The economic analysis of the project was carried out for each of the six investment sub-projects based on cost benefit analyses. The costs include the investment cost and operation cost of each sub-project, while the benefits include both the economic values of the electricity, heating, and gas supply, as well as the global environmental benefits due to the replacement of coal consumption by gas utilization. The project costs and benefits are valued at constant 2012 prices, net of taxes and subsidies.

35. The electricity sales from the two CHP sub-projects to the power grid were valued based on the willingness-to-pay (WTP) for electricity, with the estimate on-grid tariff to be approved by the provincial government used as a proxy of WTP. At project pre-appraisal, the Shanxi provincial government committed to approving a higher tariff for gas-fired electricity generation compared to the provincial benchmark tariff, taking into account the environmental benefits of gas-fired generation (mainly reduction of local pollutants such as TSP, SO2 and NOx). This tariff, however, has not yet been specified and instead the approved on-grid tariff for gas-fired generation in other provinces (adjusted for the difference in gas prices between Shanxi and other provinces) has been taken as a reference. The price of heating supply was assumed at 40 Yuan/GJ based on reference heat price applied in one of the cities and sector practices. The gas prices are regulated by the government though a pricing reform is under consideration by the Government of China and has been piloted in two provinces. So the regulated gas prices were used in the analysis.

36. Environmental benefits were estimated for avoided carbon emissions only, valued at US$30/ton CO2 equivalent. This is a conservative estimate for the gas distribution component in which substantial emissions of local pollutants would be avoided by the replacement of coal with gas (even as part of the gas would replace LPG and coal gas in the project cities).

37. The cost benefit analysis concluded that the economic internal rates of return (EIRRs) for the two gas-fired CHP sub-projects were 17.5 and 14.0 percent respectively, and the EIRRs for the four gas-distribution sub-projects ranged from 21.4 to 47.4 percent--all above the social discount rate of 10 percent required by the Government of China, indicating the project is economically justified. The sensitivity analysis showed that the results were robust.

9 38. Financial Analysis. The financial analyses were carried out at both project and corporate levels to assess both the financial viability of the project and the financial sustainability of the project companies.

39. Financial Analysis at the Project Level. The financial internal rates of return (FIRRs) were calculated for each of the six investment sub-projects based on cash flow analyses. The income of each sub-project comprises of electricity sales, heating supply and gas sales, combined or separately, and the expenditures include investment, gas purchase, other operation expenses, and income tax. The results showed that the FIRRs for the two gas-fired CHP sub-projects were 6.9 and 3.2 percent respectively, and the FIRRs for the four gas-fired distribution sub-projects ranged from 9.6 to 11.1 percent. All these rates are close to or higher than the investors’ hurdle rate (about 5 percent), indicating the project is financially viable. The sensitivity analysis showed that the results of the financial analysis were robust.

40. Corporate Level Financial Analysis. Three-year historical financial statements and ten- year financial projections were analyzed for the four project implementing agencies—GXED, SNGC, SCPTC and QKNGC. The analysis showed that all four companies can have positive net profits over the next 10 years and that debt service coverage ratios can be kept at values above 1.2 after 2015. This concluded the financial sustainability of the project implementing agencies.

B. Technical

41. The same technical design was considered for both gas-fired CHP sub-projects. Each plant will install two 40MWe level combined cycle gas turbine units and one steam turbine to produce both electricity and heating. Proven technology will be adopted for the gas turbine and the equipment can be provided by both international and domestic manufacturers. The expansion of the gas distribution network will involve the construction of conventional intermediate and medium pressure pipelines and regulating stations. An advanced SCADA system will be introduced to improve the operation of the gas network.

42. The proposed project will be required to meet Chinese technical standards for design, equipment specifications, construction, and safety operation. Technical support will be provided through the Technical Assistance component of the project to ensure international standards and good practices will be introduced. As a result, the technical risk is considered to be minimal.

C. Financial Management

43. The PMO, established by GXED and its subsidiaries, is responsible for the overall coordination and the day-to-day project management during project implementation. The Bank loan proceeds, including overseeing the Designated Account, will be managed by the Shanxi Provincial Finance Bureau (SPFB). A financial management capacity assessment has been conducted by the Bank and actions to strengthen the project’s financial management capacity have been agreed with the relevant project implementing agencies. The FM assessment has concluded that the financial management arrangements, with the implementation of these agreed actions, will satisfy the Bank’s requirements under OP/BP 10.00. Annex 3 of the PAD provides additional information on financial management.

10 D. Procurement

44. GXED and its three subsidiaries will be responsible for procurement and contract management of specific contracts under the project. The PMO will be responsible for the overall coordination and communications with the Bank, as well as obtaining the required domestic approvals and submitting procurement documents for Bank review.

45. None of the procurement staff at GXED or its three subsidiaries has any previous experience or knowledge of Bank procurement policies and procedures. However, the officials have experience in conducting procurement under the national procurement local laws and regulations and using the local procedures. The major risk identified from the procurement capacity and risk assessment of the implementing agencies are delays and possible non- compliance with Bank procurement policies due to unfamiliarity with Bank procurement policies and procedures or as a result of procurement decisions negatively affected by local procurement procedures in the case of major differences with Bank procurement policies. These risks will be mitigated through: (a) employment of a qualified procurement agent with requisite experience in procurement in projects financed by the Bank or other multilateral financial institutions; (b) preparation of a procurement manual to guide procurement cycle management; (c) close coordination with the client and necessary guidance and supervision from the Bank; and (d) targeted training and capacity building of the procurement staff. The procurement staff of the project implementing agencies should have adequate capacity and experience to carry out the project procurement work, with the support and guidance of a qualified procurement agent.

46. A draft procurement plan for the whole project, prepared by the client, has been reviewed by the Bank and the procurement packaging for the investment components has been agreed with the Bank team. The procurement plan will be updated in agreement with the Bank annually or as required to reflect actual project implementation needs. Further details on procurement are provided in Annex 3 of the PAD.

E. Social (including Safeguards)

47. Involuntary Resettlement Safeguards (OP4.12). The proposed project will trigger the Bank’s Involuntary Resettlement (OP/BP 4.12) Safeguard Policy. The construction of the project will involve a certain amount of land acquisition and resettlement, but house demolition will not be involved. The two distributed gas-fired CHP plants will require both permanent and temporary land acquisition for the plant site, access roads, and transmission towers, while the four gas distribution sub-projects will require temporary land occupation only. Total land acquisition includes 211 mu (equivalent to 14 hectares) rural land that will be permanently acquired for the sites of the two CHP plants and 3501 mu (or 233 hectares) that will be occupied temporarily. The total number of affected household amounts to 1,265 in the six project counties.

48. To address the impacts, a resettlement action plan (RAP) has been prepared in accordance with relevant Chinese laws, regulations, and World Bank Operational Policy (OP4.12). The RAP was disclosed locally on October 6, 2013 and was submitted to the InfoShop for public disclosure on November 6, 2013. The proposed compensation standards for both permanent and temporary land acquisition are in line with policies that have been implemented in these cities and counties and generally are acceptable to the local villagers and residents.

11 49. Given the changing nature of the gas distribution component, a resettlement policy framework (RPF) has also been prepared for activities whose locations and scope might be determined during project implementation. The RPF follows the same compensation policies for relevant cities or counties and defines procedures and steps for RAP preparation and grievance procedures. The RPF was disclosed together with the RAP locally and was submitted to the InfoShop for public disclosure on November 6, 2013.

50. Public consultations have been conducted during RAP/RPF preparation including both social economic surveys and public meetings with project-affected people. Information about the project impacts, compensation policies, rehabilitation options and grievance procedures have been provided to the affected people through distribution of resettlement information booklets to affected villages. Group discussions with the affected people were also conducted to collect their views and preferences regarding resettlement impacts, compensation policies, and rehabilitation measures. These views and preferences have been taken into account during the RAP preparation process.

51. Implementation of the RAP/RPF and its monitoring were also agreed. The project implementing agencies will lead resettlement operations under the oversight of the resettlement leading groups in project cities and counties. An experienced external monitoring agency will be contracted to conduct independent monitoring and evaluation over the course of the project implementation. The monitoring results will be reported twice a year and, if needed, remedial actions will be designed.

52. Indigenous People Safeguards (OP4.10). Based on the social assessment conducted during the project preparation, the proposed project will not trigger the Bank’s OP 4.10 on Indigenous People. Consultations with local government agencies and affected people for all components have been conducted under the social assessment and it was concluded that there are no ethnic minority communities in the project affected areas for both the CHP and gas distribution components.

53. Gender Impacts. The gender impacts were analyzed based on the social assessment conducted during the project preparation. The assessment concluded that (a) the difference of the education levels between men and women is not large in the project area, but women’s incomes are markedly lower than men’s; (b) women have almost the same influence with men in deciding family affairs, apart from investment decisions; (c) women are still the major bearers of the housework; and (d) women have a positive attitude on the village public affairs, but their participation is still inferior to males. Women would be the major beneficiaries of the proposed project through (a) releasing from direct and indirect housework due to coal replacement by gas; (b) improved health conditions due to improvement on both in-door environment and sanitation conditions.

54. Other Social Impacts. Based on the social assessment, considerable social benefits will be brought by the project. The key social benefits include the provision of clean and affordable energy, an enhancement of the living environment, reduced workloads (particularly for women), and reduced health risk. However, the project would also potentially cause other social impacts, such as the land acquisition, inconvenience during pipeline construction, and a potential financial burden for low-income households due to the collection of a connection charge. The key

12 recommendations to mitigate these impacts include conducting sufficient consultation with affected people—particularly women—during project implementation, providing adequate and timely compensation to affected households due to land acquisition and occupation, and providing a subsidy or waiver of the connection charge for low-income households. All these recommendations have been accepted by the project implementing agencies and were built into the project design.

F. Environment (including Safeguards)

55. The project was classified as a Category A project as per the Bank’s OP4.01. Environment Assessment (EA) reports were prepared in accordance with national requirements and the Bank’s OP 4.01. The reports include an Environmental Assessment (EA) Executive Summary, and both an Environmental Impact Assessment (EIA) and Environmental Management Plan (EMP) for each investment sub-project. The Bank’s comments have been incorporated into these EA reports, and the final EA reports are found to be satisfactory.

56. The project will bring significant positive environmental impacts by expanding the gas utilization in the selected counties in Shanxi province, which will have significant environmental benefits including reduced emissions of air pollutants by replacing coal consumption.

57. The main potential environmental impacts include safety issues such as explosions and fire risks, as well as NOx emissions, noise, and wastewater from the two gas-fired CHP plants. To enhance the environmental benefits of the project, the project has integrated the mitigation measures into the project design, construction phase, and operational phase respectively. These environmental and social impacts are thoroughly analyzed in the EIAs and preventive and mitigation measures have been developed in the EMPs. Bank review has concluded that these adverse environmental and social impacts can be adequately avoided, minimized, and mitigated with good management practice and mitigation measures, as developed in the EIAs/EMPs.

58. Physical Cultural Resources OP/BP 4.11 is triggered, as the whole territory of (including the project site of one gas-fired CHP sub-project) has been classified as a Vertebrate Fossil Area protected at the provincial level. Moreover, the Baode CHP plant will be located in the protection area of the Diaoyutai Rock Cave, which is protected at the municipal level.

59. Adequate site survey and consultation with relevant stakeholders was conducted during EA preparation to ensure all relevant cultural relics were identified and the potential impacts carefully addressed through project design, construction technologies, good construction management, and other mitigation measures. Chance-find procedures include provisions and procedures stipulated in the Cultural Property Law and will be included in the bidding documents and contracts. The site of Baode CHP plant is 11.3 km from the core area of the Vertebrate Fossil Area and 500 meters from the Diaoyutai Rock Cave. The water supply pipeline will be constructed along the existing highway G249, which at its closest point is 20 meters away from the cave. The EA report concluded that the vibration impact on the Diaoyutai Rock Cave is negligible and that the impact of dust and vibration to the cave is also minor as the water supply pipeline is small, requiring only a small quantity of earthworks.

13 60. A Physical Cultural Resources Management Plan has been prepared as part of the EIA/EMP, which includes the mitigation measures and institutional strengthening, as well as the chance-find procedures that will be applied throughout the construction stage of the Baode CHP plant and its associated works. A monitoring plan is also included.

61. Two rounds of public consultations including expert consultations, questionnaires, symposia, and interviews were conducted with the different stakeholders during EA preparation, in accordance with the requirements of both Chinese legislations and the World Bank’s OP 4.01. The project information has been disclosed locally throughout the public consultation process. The availability of the EA reports, and how to access to them was announced in major local newspapers in each project county on August 1, 2013. The EIAs/EMPs were also disclosed in the Shanxi Economy Daily on August 6, 2013. The EA report was further disclosed on the website of GXED on October 3, 2013 and was submitted together with the EA executive summary to the InfoShop for public disclosure on November 6, 2013.

G. Other Safeguards Policies Triggered

62. No other safeguards policies are triggered.

14 Annex 1: Results Framework and Monitoring China: Shanxi Gas Utilization Project

Results Framework

. Project Development Objectives

. PDO Statement The proposed Project Development Objective (PDO) is to increase gas utilization to reduce greenhouse gases emission in selected counties of Shanxi province. These results are at Project Level

. Project Development Objective Indicators Data Responsibility Cumulative Target Values Source/ for 2019 Methodolog Data Collection Unit of Indicator Name Core Baseline 2015 2016 2017 2018 (End Frequency y Measure Target) Project Annual avoided Metric ton - 567150 717930 769110 820290 Once a year See note 1. Implementing CO emission 2 Agencies Project Annual Gas Cubic 250000 315000 340000 3650000 - Once a year See note 2. Implementing Utilization Meter(m3) 00 000 000 000 Agencies

. Intermediate Results Indicators Data Responsibility Cumulative Target Values Source/ for 2019 Methodolog Data Collection Unit of Indicator Name Core Baseline 2015 2016 2017 2018 (End Frequency y Measure Target)

15 Metering by Installed Shanxi Shanxi Natural capacity of the Megawatt - 252 252 252 252 Once a year Natural Gas Gas Company CHPs Company Metering by Annual Gigawatt Shanxi Shanxi Natural electricity - 1100 1100 1100 1100 Once a year hour (GWh) Natural Gas Gas Company supply Company metering by Annual heating Gigajoule 100000 Shanxi Shanxi Natural - 300000 650000 1300000 Once a year supply (GJ) 0 Natural Gas Gas Company Company Statistic data provided by Number of Project the project household and Number - 30000 35000 40000 45000 Once a year implementing implementi other gas users agencies ng agencies and local government Note 1: The indicator will be calculated based on total gas consumption by the project and emission factors. Emission factors will be adopted as 3 3 follows based on the feasibility study reports: 2.490 kgCO2/Nm for CHPs component, and 1.383 kgCO2/Nm for gas distribution component.

Note2: Metering by the project implementing agencies. The yearly indicator s were interpolated based on the estimated gas utilization in 2020/2030.

. Project Development Objective Indicators Indicator Name Description (indicator definition etc.)

Annual avoided CO2 emission The indicator is calculated based on the amount of fossil fuel consumption that is avoided in the county cities and CHP plants supported by the project. Annual Gas Utilization Sum of annual gas consumption in both CHPs and gas sales for the four gas distribution sub-projects

.

16 Intermediate Results Indicators Indicator Name Description (indicator definition etc.) Annual electricity supply Annual electricity sales from the two gas-fired CHP plants to the provincial grid. Annual heating supply Annual heating supply from the two gas-fired CHP plants to the city heating supply companies. Number of households and other gas users Total number of households and industrial gas users supplied in the four project cities by the gas distribution component of the project.

17 Annex 2: Detailed Project Description China: Shanxi Gas Utilization Project

1. The project consists of three components: (a) distributed gas-fired CHP plants; (b) expansion of gas distribution network; and (c) technical assistance. A total six investment sub- projects are included in the project based on their locations: Baode and Xiyang gas-fired CHP sub-projects under Component (a), and Xiangyuan, Changzhi, Tunliu and Qingxu gas distribution sub-projects under Component (b). These sub-projects are located in six different counties in Shanxi province.

Component 1: Distributed Gas-fired CHP Plants

2. This component includes two investment sub-projects with the same size: Baode and Xiyang gas-fired CHP plants and affiliated facilities. Each plant is a combined cycle gas turbine CHP plant with a capacity of 126 MW, including two gas turbines 42 MW each and a steam turbine 42MW, and its planned maximum heat output is about 60 MWt. Both sub-projects are green-field power plants and will be built for power generation and space heating supply to the adjacent county level cities (Baode and Xiyang County City).

3. Different technical designs were compared in the feasibility study reports and the proposed technical design of both gas-fired CHP plants is the same. In each plant, two 6B or equivalent gas turbines (GTs) will be installed to drive two generators. Heat recovered in two heat recovery steam generators (HRSGs) to drive one combined cycle steam turbine and a third generator. The flow chart of the power plant design is illustrated in figure A2.1.

Figure A2.1: Flow Chart of both the Baode and Xiyang Gas-fired CHP Plants

Note: CBM=Coal Bed Methane; HRSG=Heat Recovery Steam Generator; G1,G2,G3= Generators

18 4. Each CHP is about 3 kilometers from the city area, located at the boundary area of each city. The two CHPs will be operated in co-generation mode in the heating season to provide space heating to both cities while it generates electricity; then it will be operated in condensing mode for power generation only in non-heating season. About 55% of its operation hours will be the co-generation mode based on the feasibility study reports.

5. The gas source of both CHP plants is the provincial gas network, which has been extended to both cities. The provincial gas network is operated by Shanxi Natural Gas Company (SNGC), who is also the implementing agency of both CHP plants. The electricity will be delivered to the provincial power grid to meet the electricity demand in the prefectures, while the heating will be supplied to the two county cities to meet their expanded heating demand.

6. The main indicators of both CHP plants are presented in table A2.1 below.

Table A2.1: Indicators Baode and Xiyang CHP plants Baode CHP Xiyang CHP Project scope New construction of 3x42MWe CCGT CHP New construction of 3x42MWe CCGT CHP and affiliated facilities and affiliated facilities Market To meet the electricity demand in To meet the electricity demand in Xinzhou prefecture and expand space heating supply prefecture and expand space heating supply in Baode County City in Xiyang County City Production Annual electricity sales: 585 GWh; annual Annual electricity sales: 576 GWh; annual heating supply of about 690 TJ to supply 1.2 heating supply of about 645 TJ to supply million m2. 1.17 million m2. Gas source Provincial gas pipeline network, annual gas Provincial gas pipeline network, annual gas consumption 140 million m3. consumption 145 million m3. Land acquisition Total 501 mu (119 permanent, 382 Total 250 mu (92 permanent, 158 temporary). temporary). Grid connection One circuit of 110kV line to Dongguan One circuit of 110kV line to Huangyan Substation. Substation. Heating Baode County Heating Supply Company will Xiyang Heat & Gas Management Center will purchase the heat and supply to Baode coordinate the heating supply to Xiyang County City. County City. Water Supplied from Baode Waste Water Supplied from Xiyang Waste Water Treatment Plant. Treatment Plant. Implementation 2014.4 – 2015. 10 2014.4 – 2015. 10 schedule

Component 2: Expansion of Gas Distribution Network

7. This component includes four investment sub-projects located in four county cities, namely Xiangyuan, Changzhi, Tunliu, and Qingxu County. The proposed sub-projects would install pipelines and pressure regulating stations in the four counties to expand the gas distribution network to residential, commercial, and industrial consumers, as well as the establishment of SCADA systems to monitor the operation of each gas distribution network.

8. GXED and its subsidiaries started the construction of the provincial gas pipeline network in the late 2000s and have extended the gas network to the distribution system in county level cities. By the end of 2011, more than 3,000 kilometers of gas transmission pipeline have been

19 built, covering 94 of Shanxi province’s 119 counties. The four sub-projects are part of the gas distribution program to be implemented by GXED and its subsidiaries.

9. The main gas source is the provincial gas network operated by SNGC, although the gas for the Changzhi sub-project is to be supplied by a local CBM developer who is also connected to the provincial gas network. The proposed four sub-projects are expected to meet the incremental gas demand in the four cities by 2030, amounting to a total of 136,700 households and 21 industrial consumers, with an annual gas supply of about 244.15 million cubic meters.

10. The details of each sub-project are presented in table A2.2.

Table A2.2: Sub-project Details Xiangyuan Changzhi Tunliu Qingxu Project scope Construction of gas Construction of gas Construction of gas Construction of gas distribution distribution network distribution network distribution network network from from Changzhi Gate from Tunliu Gate from Qingxu Branch Xiangyuan Gate Station to the pressure Station to the Gas Transmission Station to the regulators of pressure regulators Station to the rural pressure regulators townships, villages and of townships, village towns. of townships, industrial users. villages and villages and industrial users. industrial users. Project size 83 km of new 53 km of new 86 km of new 32 km of new medium intermediate intermediate pressure intermediate pressure pressure pipelines. pressure pipelines pipelines and 12 pipelines and 9 and 11 pressure pressure regulating pressure regulating regulating stations. stations. stations. Annual gas 62.95 million m3 89.73 million m3 by 84.84 million m3 by 6.63 million m3 by supply by 2030. 2030. 2030. 2020. Gas consumers 88,100 residential 30,800 residential 12,200 residential 5,600 residential users, users, 12 industrial users, 3 industrial users and 1 industrial and 5 industrial user. users. users. user. Implementation 2014.10-2019.12 2014.10-2019.12 2014.10-2019.12 2014.10-2017.12 schedule

11. Gas pricing: similar to the electricity tariff, the gas prices are regulated by the government and are adjusted from time to time. A pricing reform is under consideration by the central government to link the gas prices to other competitive fuels. This new pricing mechanism has been piloted in two provinces (Guangdong and Guangxi) and is expected to be applied nationally during the project implementation period.

12. The in-house gas connection pipeline systems are not included as part of the project. The provincial government has issued decree regarding the collection and usage of gas connection charge for the installation of in-house pipeline system. It mentions that: (i) gas connection charge is paid by gas users and used for the construction of in-house pipeline systems; (ii) gas company is responsible for the installation, operation and maintenance of in-house pipeline system; (iii) in- house pipeline systems are owned by the gas users; and (iv) for newly constructed housing estate, gas connection charge is paid by developers and included in the house price. For the low- income households, the connection charge is normally reduced or waived by gas companies.

20 Component 3: Technical Assistance

13. A technical assistance component is included to mitigate the risks related to project design and management, covering activities for capacity building and technical support to the implementing agencies, as well as activities to upgrade the provincial gas network system.

(a) Capacity building. GXED and the other three project implementing agencies are quite new in the gas business. Under the TA component, training programs, study tours, and workshops are planned to improve the capacity of the project implementing agencies in both project management and operation. GXED would build the TA into the overall program it will be implementing in the next five years. Detailed activities will be proposed for discussion with the Bank team at an early stage of project implementation.

(b) Technical support to the project implementation agencies. Three types of technical support would be considered:

(i) Hiring of external experts and agencies for project monitoring and evaluation, including the safety panel, implementation of both environmental management plan and resettlement action plan.

(ii) Technical support to the implementation of the two CHP sub-projects. The technical team will be enhanced through the hiring of external technical consultants to support SNGC in the preparation of bidding documents and to provide technical advice during the project construction and operation stages.

(iii)Technical support to improve the provincial gas network system, including but not limited to the diagnosis of the existing provincial gas pipeline system, which has been built and operated by GXED and its subsidiaries, and upgrading of the automatic monitoring and control system for the entire provincial gas pipeline system to international standards.

Project Cost by Sub-projects

Table A2.3: Cost by Sub-project Subproject Baode Xiyang Xiangyuan Changzhi Tunliu Qingxu TA Total Civil Works 16.49 18.10 1.94 1.30 1.47 0.62 ‐ 39.92 Goods Supply 74.16 75.45 0.83 0.89 0.63 0.03 ‐ 151.99 Installation 12.44 11.40 3.95 4.00 4.70 0.87 ‐ 37.36 Other Costs 14.49 15.03 2.32 2.26 1.50 0.64 2.75 38.99 Physical Contingency 5.75 5.86 0.90 0.85 0.83 0.22 ‐ 14.41 Base Cost 123.33 125.84 9.94 9.30 9.13 2.38 2.75 282.67 Price Contingency ‐‐‐‐‐‐‐0.00 IDC 4.04 4.14 0.13 0.13 0.10 0.03 ‐ 8.57 Initial Working Capital 1.31 1.38 0.32 0.44 0.42 0.03 ‐ 3.90 Front‐end Fee ‐‐‐‐‐‐0.25 0.25 Total Investment 128.68 131.36 10.39 9.87 9.65 2.44 3.00 295.39

21 Annex 3: Implementation Arrangements China: Shanxi Gas Utilization Project

Project Institutional and Implementation Arrangements

Project administration mechanisms

14. The Project Implementing Entity is Shanxi province, which shall cause the project to be implemented by Shanxi Guoxin Energy Development Group (GXED) and its three subsidiaries: Shanxi Natural Gas Company (SNGC), Shanxi CBM (Natural Gas) Pipeline and Transportation Company (SCPTC), and Qingxu Kaitong Natural Gas Company (QKNGC). SNGC will implement the two gas-fired CHP plants investment sub-projects under the distributed gas-fired CHP plants component; SCPTC will implement the Xiangyuan, Changzhi, and Tunliu gas distribution investment sub-projects and QKNGC the Qingxu gas distribution investment sub- project, all four under the expansion of the gas distribution network component. GXED itself will implement the TA component. SNGC will establish two branch companies or subsidiaries to each implement one of the two CHP sub-projects and SCPTC has established three branch companies to implement the respective Xiangyuan, Changzhi and Tunliu gas distribution sub- projects. All branch companies or subsidiaries will be staffed with professional managers and engineers.

15. A Project Management Office (PMO) was established at project identification and is led by GXED, with the participation of SNGC, SCPTC, and QKNGC. The PMO will remain in function throughout the implementation period and be responsible for the coordination of project preparation and implementation.

16. GXED, established in 1981, is a provincial government-owned enterprise, its major business in recent years focusing on coal transportation, trade of commodities, and gas. In 2011, it became one of the top 500 Chinese enterprises. Since the late 2000s, GXED, as one of the main SOEs to implement the provincial gasification program, has been expanding its business to the construction and operation of gas infrastructure. By the end of 2011, GXED and its subsidiaries had built more than 3,000 kilometers of gas transmission pipeline and extended its gas network to 94 counties in Shanxi province.

17. SNGC is a subsidiary of GXED—its share owned by three investors, with GXED holding 51%. SNGC’s main business is to develop the gas related projects, including the construction and operation of the provincial gas pipeline network. SNGC is also the largest shareholder of both SCPTC and QKNGC: 65% of SCPTC’s shares and 70% of QKNGC’s shares are owned by SNGC. SCPTC’s main business includes gas pipeline transportation, storage, and distribution, as well as sales of both CNG and LNG, while QKNGC focuses its business on gas distribution in Qingxu county. The ownership of all project implementing agencies is illustrated in Figure A3.1. and the institutional arrangements for project implementation is illustrated in Figure A3.2.

22 Figure A3.1 Shareholders of the Project Implementing Agencies (2013)

Figure A3.2: Institutional Arrangement for Project Implementation.

23

Financial Management, Disbursements and Procurement

Financial Management

18. The financial management (FM) capacity assessment identified the following principal risks: (i) the PMO and the Implementing Agencies (IAs) are new to Bank-financed projects; (ii) the IAs are implementing project activities separately and there is the risk of error or delay in the preparation of consolidated financial information on the project.

19. Mitigation measures to address the above risks, which are agreed, include: (i) FM/disbursement training (formal and ad hoc) for the project financial staff to be provided by the Shanxi Provincial Finance Bureau (SPFB) and the Bank; (ii) close monitoring and guidance from SPFB and the Bank team; (iii) consolidation, by the PMO, of the financial reporting by the IAs for the annual audit with the support of SPFB; and (iv) preparation of a project financial management manual by the PMO with support by SPFB to standardize project financial management requirements and procedures.

20. Overall, the residual financial management risk after mitigating measures for the project is assessed as Moderate.

21. Budgeting. Annual project implementation plans including capital budgets will be prepared by each IA. The budgets for counterpart funds committed by the IAs will be reviewed and approved by the Board of Directors of each IA, and be included in their financial budgets. Budget variance analysis will be conducted regularly by the IAs providing financial information on project execution, thus enabling timely corrective actions.

22. Funds flow. One segregated designated account (DA) in U.S. dollars will be opened at a commercial bank acceptable to the Bank and will be managed by SPFB. The ceiling of the DA will be determined and documented in the Disbursement Letter. SPFB will be directly responsible for the management, maintenance, and reconciliation of the DA activities of the project.

23. Contractors and suppliers will be paid by the IAs or PMO, which will request reimbursement from the DA managed by SPFB based on payment requests submitted by the IAs or PMO.

24. The IAs or PMO will prepare Statements of Expenditures, Summary Sheets, and other supporting documents to request reimbursement of expenditures and submit them for approval and verification by SPFB. SPFB will transfer the reimbursement to the IAs or PMO or pay contractors/suppliers directly. SPFB will prepare and send a Withdrawal Application (WA) to the World Bank to replenish the DA as needed. The proposed flow of funds and WA’s supporting document are as follows:

24

25. The Bank loan will be signed between the Bank and the People’s Republic of China through its Ministry of Finance (MOF). On-lending arrangements for the Bank loan will be signed between MOF and the Shanxi Provincial Government through its SPFB, and then between SPFB and GXED through a subsidiary loan agreement. Implementation Agreements will also be signed between GXED and its three subsidiaries to on-lend the Bank loan to each project implementing agency.

26. Accounting and financial reporting. The existing accounting system of GXED and the other IAs – Langchao accounting system, which is set up based on the “Enterprise Accounting standards” and the “Accounting Regulation for State-Owned Construction Enterprises” issued by MOF, is acceptable and can provide the required accounting information. Therefore, it is agreed that the IA’s accounting policies, procedures, and chart of account, which are consistent with Circular 13, will be used. However, in order to facilitate reporting and monitoring, the format and content of financial statements stipulated in Circular 13 will be used for project financial reporting.

27. The PMO and each IA will manage, monitor, and maintain the project accounting records for components they implement. Original supporting documents for project activities will be retained by the PMO and IAs respectively. The PMO and each IA will prepare the project financial statements separately, which will then be consolidated by the PMO and submitted to the Bank for review and comment on a regular basis. The interim unaudited project financial statements should be prepared and furnished to the Bank by the PMO no later than 60 days following each semester (due dates will be August 31 and February 28), in form and substance satisfactory to the Bank. The PMO will also consolidate the financial statements prepared by the IAs for the purpose of the annual audit.

28. Internal Control. The related accounting policy, procedures, and regulations have been issued by MOF and will be followed by the PMO and IAs.

29. Detailed internal control procedures including segregation of duties, review, approval, and reporting procedures, as well as the safeguarding of assets will be established and documented in each IA’s own financial management manual.

30. Audit. Shanxi Provincial Audit Office (SPAO) has been identified as the auditor for the project. Annual audit reports will be issued by SPAO and will be due to the Bank within 6 months after the end of each calendar year. Following the World Bank’s formal receipt of the

25 audited financial statements from the borrower, the World Bank will make them available to the public in accordance with the World Bank Policy on Access to Information.

Disbursements

31. Four disbursement methods: advance, reimbursement, direct payment, and special commitment are available for the project. The primary Bank disbursement method will be advances to the DA. Withdrawal Applications (WAs) will be prepared to request Bank disbursements and to document the use of Bank financing. WAs will include supporting documents in the form of Statement of Expenditures, Summary Sheets, and source documents identified in the Disbursement Letter issued by the Bank.

32. The Bank loan would be disbursed against eligible expenditures (taxes inclusive) as in the following table:

Table A3.1: Disbursement Categories

IBRD Loan Disbursement Categories Allocated Amount Percentage of Expenditures to (US$) be financed (percentage) (1) Goods and civil works for 100% * 79,000,000 CHP plants (2) Goods and civil works for 100% 18,000,000 gas distribution network (3) Consulting services, 100% 2,750,000 training and workshops (4) Front-end fee 250,000 100% Total 100,000,000 Note: * The IBRD loan will be used to finance the goods and civil works in the two CHP plants, with a total amount up to US$ 79.0 million.

Procurement

33. Procurement entity. GXED and its three subsidiaries will be responsible for procurement and contract management of specific contracts under the project. The PMO will be responsible for the overall coordination and communications with the Bank, while GXED will carry out the selection process of consulting services contracts under the Technical Assistance component. The three subsidiaries, with support of a selected procurement agent, will carry out procurement of goods and works contracts under their own respective sub-projects, including preparing the procurement plan and its updates, the bidding documents, and the request for proposals, organizing the bidding/selection process, procurement and contract monitoring and obtaining the required domestic approvals and submitting procurement documents for Bank review.

34. Procurement risk assessment and mitigation measures. The procurement staff at GXED and its three subsidiaries do not have prior experience or knowledge about Bank procurement policies and procedures. However, the personnel are familiar with the local procurement procedures under the domestic laws and regulations. The key risks concerning procurement for

26 implementation of the project are: (i) delays and non-compliance with Bank procurement guidelines due to either unfamiliarity with specific Bank procurement policies and procedures or a tendency to comply with local procedures when they conflict with Bank procurement guidelines; (ii) weak capacity of the staff in procurement cycle management and contract management.

35. In order to mitigate these risks, the following actions will be carried out during project preparation and implementation: (i) employment of a procurement agent with experience in procurement for Bank-financed projects to support and guide the procurement work of GXED and its three subsidiaries; (ii) provision of training sessions to the procurement staff on the Bank’s procurement policies, methods, and procedures, as well as the use of standard bidding/proposal documents and evaluation principles; (iii) preparation of a procurement procedures manual to provide guidance to project implementers; (iv) where necessary, early procurement support missions by the Bank’s procurement specialist; (v) annual field procurement supervision missions to review procurement actions where needed, (vi) close coordination between the client and the Bank team; and (vii) hiring of an additional GXED staff member with excellent English communication skills (oral and writing) and procurement knowledge.

36. Considering that most of the Bank loan will be used for the procurement of two gas-fired CHP plants (which will be packaged into large contracts and be subject to Bank prior review), the overall procurement risk for the project is assessed as Moderate.

37. Procurement policies and guidelines. Procurement for the proposed project would be carried out in accordance with the World Bank’s "Guidelines: Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011, and "Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers" dated January 2011, and the provisions stipulated in the legal agreements. National Competitive Bidding (NCB) shall be carried out in accordance with the Law on Tendering and Bidding of the People’s Republic of China promulgated by Order of the President of the People’s Republic of China on August 30, 1999 subject to the modifications stipulated in the Legal Agreement in order to ensure broad consistency with the Bank’s Procurement/Consultant Guidelines and relevant procurement policies.

38. Procurement of goods and works. Procurement will be done by using the Bank’s Standard Bidding Document for all International Competitive Bidding (ICB) contracts and National Model Bidding Documents agreed with or satisfactory to the Bank for all National Competitive Bidding. Further details are provided in the Procurement Plan.

39. Selection of consultants. The Bank loan will finance consulting services contracts to assist GXED and its subsidiaries in capacity building during project implementation. The Bank’s Standard Request for Proposal shall be used for all consulting assignments with firms. Short lists of consultants (firms) for services estimated to cost less than US$ 500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

27 40. Procurement plan. A draft project procurement plan for the first 18 months of project implementation, dated October 29, 2013, has been prepared and reviewed by the Bank. It will also be available in the project’s database and on the Bank’s external website and is also available at the clients’ offices. The procurement plan will be updated in agreement with the Bank annually or as required to reflect actual project implementation needs and improvements in institutional capacity.

41. Procurement methods and bank prior reviews. The thresholds for procurement methods and Bank prior review as indicated in Table A3.2 below will be followed for project procurement implementation. Specific prior review requirements will be indicated in the project procurement plan.

42. In addition to the prior review supervision carried out from the Bank offices, Bank procurement supervision missions will visit the field to carry out procurement supervision or post-review of procurement activities at least once every 12 months. The post review sampling ratio would be one out of 10 contracts.

43. Advance contracting and retroactive financing. Retroactive financing of up to US$ 20.0 million would be available for eligible expenditures incurred on and after October 1, 2013. Retroactive financing will be processed according to the requirements specified in the loan agreement and project agreement. Payments will be made only for contracts procured in accordance with applicable Bank procurement procedures.

Table A3.2: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Procurement Method Prior Review Threshold (US$) Category Threshold (US$) 1. Civil works ≥25,000,000 ICB All <25,000,000 NCB First 2 NCB Contracts by each IA irrespective of value and all contracts ≥USD 15 million <200,000 Shopping First Shopping Contract 2. Goods ≥3,000,000 ICB All <3,000,000 NCB First 2 NCB Contracts by each IA irrespective of value <100,000 Shopping First Shopping Contract Direct Contracting All DC contracts regardless of value 3. Consultant ≥300,000 QCBS/QBS All services <300,000 CQS First CQS Contract Individual Consultants Only in exceptional cases Single Source Selection (Firm) All single source contracts Single Source Selection ≥USD 20,000 (Individual)

Notes: ICB: International Competitive Bidding CQS: Selection Based on the Consultants’ Qualifications NCB: National Competitive Bidding SSS: Single Source Selection DC: Direct Contracting IC: Individual Consultant selection procedure QCBS: Quality- and Cost-Based Selection NA: Not Applicable QBS: Quality-Based Selection

28 Environmental and Social (including safeguards)

Environmental Safeguards

44. The project was classified as a Category A project as per OP4.01 due to its potential impacts and risks. Environment Assessment (EA) reports were prepared by the EA consultant (Coal Chemistry Institute of China Academy of Sciences) hired by GXED in accordance with relevant national laws, regulations, and technical guidelines and standards applicable to the project, as well as the World Bank Safeguards Policies. The reports include an EA Executive Summary and Environmental Impact Assessment (EIA) and Environmental Management Plan (EMP) reports for each investment sub-project. The EA report has incorporated the Bank’s comments and has been found satisfactory.

45. Main environmental impacts and mitigation measures. The EA identified and assessed the project’s benefits and impacts to the natural and social environment and concluded it will bring significant net positive environmental benefits by facilitating the use of gas to displace coal consumption in Shanxi province. This will have significant environmental benefits, including reduced emissions of air pollutants as a result of reduced coal consumption.

46. The main potential environmental impacts include (i) safety issues, such as explosions and fire risks, (ii) NOx emissions, noise, and wastewater from the gas-fired CHP plants, and (iii) potential social impacts such as disturbance to traffic, temporary occupancy of lands, and impacts on residents and businesses during construction. Relevant mitigation measures have been incorporated into the EIA/EMP.

47. Physical Cultural Resources OP/BP 4.11. Baode County in its entirety has been classified as a Vertebrate Fossil Area, protected at the provincial level. In addition, the Baode CHP plant will be located within the Diaoyutai Rock Cave protection area, which is protected at the municipal level. As a result, the Physical Cultural Resources (PCR) policy is triggered.

48. Adequate site survey and consultation with relevant stakeholders was conducted during EA preparation to ensure all relevant cultural relics were identified and potential impacts carefully addressed through project design, construction technologies, good construction management, and other mitigation measures. Chance-find procedures include provisions and procedures stipulated in the Cultural Property Law, and these procedures will be included in the bidding documents and contracts. The site of the Baode CHP plant is 11.3 km from the core area of the Vertebrate Fossil Area and 500 meters from the Diaoyutai Rock Cave. In addition, the water supply pipeline will be constructed along the existing highway G249, which at its closest is 20 meters from the cave. The EA report concluded that the vibration impact on the Diaoyutai Rock Cave is negligible and that the impacts of dust and vibration to the cave are also minor as the water supply pipeline is small, requiring only a small amount of earthworks.

49. A Physical Cultural Resources Management Plan has been prepared as part of the EIA/EMP, describing the mitigation measures, institutional strengthening, and chance-find procedure that will be applied throughout the construction stage of the Baode CHP plant and its associated works, along with a monitoring plan.

29 50. Other sensitive sites. In addition to the sites with cultural relics, other sensitive sites have been screened within the project areas of influence, i.e., residential areas, schools, rural roads, highways, and railways that are subject to potential impacts during the construction and operation stages. Based on the EA, these impacts are considered to be minor.

51. Cumulative impacts. Shanxi province has developed an ambitious target for air pollution reduction through its 12th Five Year Plan (2011-2015) for Environmental Protection. In response to the plan, a series of action plans has been initiated, including the Shanxi Provincial Gasification Program. The proposed project is an integral part of this provincial program. Based on the feasibility study reports, the project is expected to reduce emissions of total suspended particulate matter (TSP) with 13,700 tons/year (t/a), SO2 with 15,100 t/a, and CO2 with 1.5 million t/a when the project’s capacity is fully used.. The project will greatly contribute to air quality improvements in the project cities. Moreover, the experience and practices gained through project design and implementation are expected to be replicated in other areas of Shanxi province.

52. Mitigation measures. To enhance its environmental benefits, the project has integrated the mitigation measures into the project design, construction phase, and operation phase. These environmental and social impacts are thoroughly addressed by the EIA report and preventive and mitigation measures have been developed in the EMP. Bank review has concluded that these adverse environmental and social impacts can be adequately avoided, minimized, and mitigated with good management practice and mitigation measures, as developed in the EIA and EMP.

(a) Project feasibility study and design. During the design phase, the EA teams worked closely with the IAs and the feasibility study teams to compare and evaluate alternatives. The EA identified, evaluated, and compared various options for pipeline alignment, CHP plant locations, fuel types, NOx control technologies, and cooling water sources and treatment processes. Optimal alternatives were selected based on the avoidance of (or least adverse) social and environmental impacts, as well as on other engineering, technology, and financial considerations for least cost solutions. A “no project” scenario was also considered as an alternative. Adequate engineering measures have been designed to mitigate the expected impacts, for example through the use of noise reduction equipment and an intensive greening plan.

As a result of the feasibility study, pipeline alignment and CHP locations were optimized to reduce land acquisition, decrease construction risks, minimize resettlement, and avoid environmental sensitive sites, while reducing costs. Further optimization will be conducted during preliminary design and detailed design.

(b) Construction phase. To address the potential adverse impacts such as dust, wastewater, solid waste, noise, soil erosion, and social impacts during the construction phase, preventive and mitigation measures have been developed in the EMP to adequately avoid, minimize, and mitigate these adverse environmental and social impacts. These measures include but are not limited to: (i) the implementation of a soil and water conservation plan, public consultation throughout the construction period to address public concerns and improve construction activities, proper management of solid wastes, and careful scheduling of construction activities; (ii) restricting night-time construction;

30 (iii) use of advanced construction technologies such as directional drilling and pipe- jacking technique; and (iv) measures for air and wastewater pollutant control, risks assessments, and Environmental, Health and Safety (EHS) measures.

(c) Operation phase. To address potential impacts during the operation phase, a number of mitigation measures have been adopted. They include but are not limited to: the use of low-noise equipment; the installation of noise barriers, low-noise silencers, and vibration-reduction facilities; collection and treatment of wastewater and solid waste; EHS measures; implementation of a safety management plan; and the regular monitoring of waste gas, wastewater, and noise.

53. Risks analysis and management. The potential risks associated with the CHP plants and gas pipelines have been identified to be fire and explosion, as well as a malfunctioning of the transformers due to the quality control problems in the construction stage or management problems. The critical sources for the risks are the gas pipeline with DN (diameter of a rolling element) above 200 mm and the boilers. The probabilities of the risks and the radius of the buffer area have been estimated. Based on the layout of the CHP plants and the alignment of the gas pipelines, the aftermath of the risks has been estimated as well. Risk management measures involve:

(a) Safety Management Plan. A Safety Management Plan has been prepared as part of the EIA/EMP to cope with the potential risks. This includes the institutional arrangements, mitigation measures and management system, emergency planning and response, as well as training and monitoring plans.

(b) Environmental Management Plan (EMP). A stand-alone EMP has been developed, which details the policy bases, applicable environmental standards, environmental management organization and responsibilities, sufficient mitigation measures, a capacity training plan, environmental monitoring program, and budget estimates of EMP implementation. The EMP measures were developed to be consistent with World Bank Group EHS Guidelines. The EMP measures will be incorporated into bidding documents and contracts in order to ensure effective implementation.

Environmental management responsibility will be built into the relevant divisions of the overall project management structure, with dedicated management staff to ensure effective EMP implementation. A training plan will be implemented prior to and during construction for project management staff, technical staff, and contractors.

Environment Codes of Practices and site-specific management plans, as well as a soil conservation plan have been developed and incorporated into the EIA and the EMP. Environmental and soil conservation monitoring plans have been designed for both construction and operation phases of the project and are also incorporated into the EMP. The plans cover monitoring location, monitoring parameters, methods, frequency, and cost estimates. Environmental monitoring reports will provide key and timely information, especially on environmental impacts and mitigation, to the borrower and the Bank to evaluate the success of the environmental management.

31 54. Public consultation and information disclosure. In accordance with the requirements of China’s EA Law and the World Bank, two rounds of public consultation were conducted by the EIA team during EA preparation.

(a) The first round was conducted from April to July 2013 through meetings, field interviews, and questionnaire surveys among people affected by the project as well as experts and relevant key stakeholders. The surveys and meetings aimed to identify public concerns and key environmental issues, as well as draw public response and comments on the initially developed mitigation measures for the potential adverse impacts, before finalization of the terms of reference (TOR) for the EA. The main concerns raised by the public were resettlement compensation, construction related impacts, safety of gas use, and affordability of gas use and heating supply. All concerns were addressed in the RAP and EIA/EMP.

(b) The second round was conducted in August 2013 after the draft EIA report had been prepared. During the consultation, the key findings of the draft EIA report and proposed mitigation measures were explained, and responses were given to the questions raised during the first round of consultation.

55. From the consultations, it is understood that the public strongly supports the project as they think it would be a good approach for improving air quality and livelihoods. The public concerns shared during the consultations have been carefully considered in the impact assessment and the development of mitigation measures. As a result, those who raised the concerns expressed satisfaction with the conclusion and mitigation measures.

56. In accordance with the OP 4.11, the relevant government departments and experts have been consulted as a part of the public consultation. The relevant departments have confirmed the significance of the Diaoyutai Rock Cave and Baode County Vertebrate Fossil Area. They have also agreed on the location of the Baode CHP plant and required that the chance-find procedure be included in the mitigation measures. During the second-round of consultation, the relevant departments and experts were satisfied with the management plan for the physical cultural resources.

57. Project information has been disclosed to the public throughout the public consultation process. The availability of the EA reports, and how to access to them, was announced in a major local newspaper in each project county in early August 2013. The EIA/EMP was also disclosed in the Shanxi Economy Daily on August 6, 2013. The EA report was further also disclosed on the website of GXED on October 3, 2013 and was submitted together with the EA executive summary to the Infoshop for public disclosure on November 6, 2013.

Social Safeguards

58. The project has significant social benefits as it supports clean energy development in Shanxi province by investing in distributed gas-fired combined heat and power (CHP) and the expansion of the gas distribution network in selected counties. Both urban and rural residents in the project areas would benefit from the clean energy sources and improvement of air quality.

32 59. The construction of the project will involve a certain amount of land acquisition and resettlement: (i) For the two distributed gas-fired CHP plants, a total of 211 mu (equivalent to 14 hectares) of rural land areas will be acquired permanently for plant sites, access roads, and transmission towers. About 70 percent of this is farmland, affecting 80 households and 256 persons from two villages in Xiyang and Baode County. In addition, a total of 540 mu of land areas will be occupied temporarily for the construction of gas and heating pipelines and transmission facilities. About half of this involves dryland, affecting 91 households and 293 persons from 15 villages in two counties. No house demolition will be involved. (ii) For the four gas distribution subprojects, the land occupation will be only be temporary, involving a total of 2,961 mu of land that is 80 percent farmland, affecting 1,084 households and 4,059 persons from 147 villages in four counties. Most of these impacts will be limited to a few months during gas pipeline construction stage.

60. To address these impacts, a resettlement action plan (RAP) has been prepared in accordance with relevant Chinese laws and regulations and World Bank Operational Policy (OP4.12), disclosed locally on October 6, 2013 and was submitted to the InfoShop for public disclosure on November 6, 2013. The proposed compensation for permanent land acquisition is set at 22-28 times of the average annual output value (AAOV) of the land at CNY32,000 to CNY70,000 per mu. For temporary land occupation, compensation is set at CNY1,000 per mu for most rural land and CNY3,000 per mu for affected vegetable land. These policies have been implemented in those cities/counties and generally are acceptable to local villagers and residents.

61. Given the changing nature of the gas distribution component, a resettlement policy framework (RPF) has also been prepared for activities whose locations and scope might be determined during project implementation. The RPF follows the same compensation policies for relevant cities or counties and defines procedures and steps for RAP preparation and grievance procedures. The RPF was disclosed together with RAP locally on October 6, 2013 and was submitted to the InfoShop for public disclosure on November 6, 2013.

62. Public consultations had been conducted during RAP/RPF preparation, including social economic surveys and public meetings with project-affected people. Information about the project impacts, compensation policies, rehabilitation options, and grievance procedures have been provided to the affected people through the distribution of resettlement information booklets to affected villages and the disclosure of the RAP in the local offices of the project implementing agencies and in the affected towns in September 2013. Focus group discussions and key informant interviews have been used to consult with potentially affected persons and obtain views and preferences regarding resettlement impacts, compensation policies, and rehabilitation measures. These views and preferences have been taken into account during RAP revision.

63. Implementation of the RAP/RPF and its monitoring were also agreed. The project implementing agencies will lead resettlement operations under the oversight of the resettlement leading groups in project cities and counties. They will work closely with the city or county government resettlement implementation agencies and cooperate with the town or village involved. An experienced external monitoring agency will be contracted to conduct independent monitoring and evaluation during project implementation. The monitoring results will be reported twice a year and, if needed, remedial actions designed.

33 64. A social assessment has been conducted in the project-affected areas based on consultations with local government agencies and affected people. According to the assessment, there are no ethnic minority communities in the project-affected areas for both the CHP plants and gas distribution sub-projects. The Bank’s Indigenous People Safeguard Policy (OP4.10) is not triggered for the project.

65. In addition to social safeguard issues, considerable social benefits will be brought by the project. The key social benefits include the provision of clean and affordable energy, an enhancement of the living environment, reduced workload, particularly for women, and reduced health risks. The potential social impacts besides land acquisition include inconvenience during pipeline construction and a potential financial burden for low-income households due to the collection of a connection charge. The key recommendations include conducting sufficient consultations with affected people (particularly women) during project implementation, providing adequate and timely compensation to affected households for land acquisition and occupation, and providing a subsidy or waiver of the connection charge for low-income households. All these recommendations have been accepted by the project implementing agencies and were built into the project design.

Gender Impacts

66. The gender impacts were analyzed based on the social assessment conducted during the project preparation. The assessment concluded that (a) the difference of the education levels between men and women is not large in the project area, but women’s incomes are markedly lower than men’s; (b) women have almost the same influence with men in deciding family affairs, apart from investment decisions; (c) women are still the major bearers of the housework; and (d) women have a positive attitude on the village public affairs, but their participation is still inferior to males. Women would be the major beneficiaries of the proposed project through (a) releasing from direct and indirect housework due to coal replacement by gas; (b) improved health conditions due to improvement on both in-door environment and sanitation conditions.

Monitoring & Evaluation

67. Annex 1 provides a detailed description of the performance indicators to be tracked under the project and specifies the sources and schedule for date collection. The PMO will coordinate the project IAs and be responsible for the overall M&E system, including regular data collection to assess progress towards achieving results. The PMO will furnish to the Bank semi-annual progress reports on project implementation by February 15 and August 15 of each year, starting with August 15, 2014. In addition, it will prepare a mid-term review report by August 15, 2017. Based on the recommendations of these reports and the Bank’s reviews and comments thereon, the PMO will coordinate each project implementing agency to take action, satisfactory to the Bank, to address any emerging issues in order to meet the targets set in the results framework.

Role of Partners (if applicable)

68. Not applicable.

34

Annex 4: Operational Risk Assessment Framework (ORAF) China: Shanxi Gas Utilization (P133531) .

. Project Stakeholder Risks Stakeholder Risk Rating Low Risk Description: Risk Management: Clean energy development (including gas) is a strategic Shanxi Provincial Government has announced the Provincial Gasification Program, and objective of China’s energy and climate change strategy. urged the sponsors to accelerate gas business development. The provincial government These objectives are widely supported by government also approved an action plan in early August 2013 to promote the development and agencies and non-governmental organizations. utilization of coal bed methane in the province. Shanxi Provincial Government has committed to promote GXED has the concession right from the provincial government to construct and operate the provincial gasification program. gas transportation and distribution. The team will monitor closely the latest development of sector policies. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Preparation Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Moderate Risk Description: Risk Management: GXED and its subsidiaries have only several years of The capacity of the implementing agencies has been assessed during the project pre- experience in gas transmission and distribution and are appraisal and appraisal. A TA component has been agreed to finance the activities for still new to power generation. The possible inefficient capacity building and technical support to the project implementing agencies, as well as coordination among the stakeholders may also delay the studies to support the provincial gasification program. project preparation and implementation. Communication with both the national and provincial government agencies will be conducted to facilitate the coordination among the government and other stakeholders. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both Governance Rating Moderate Risk Description: Risk Management: The project implementing agencies are not familiar with Training has been provided during the project preparation to the project implementing Bank procedures. agencies and further training will be provided to make them familiar with Bank

35 procedures. It was agreed that designated full-time staff will be appointed or hired in the PMO to coordinate the project implementation. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both Risk Management: The loan beneficiaries will receive the loan through the government fiscal channels. The government will also monitor the use of the IBRD loan and agreement has been reached regarding the setup and management of the designated account. Financial management assessment has been conducted during the project preparation. The project implementing agencies will be required to take the suggested remedial actions for the gap identified. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both Project Risks Design Rating Substantial Risk Description: Risk Management: Technologies to be used under the proposed project are mature and commercially The performance of the project may not meet the agreed proven. Bank technical experts have reviewed the technical design during the project standards or targets. preparation. Thirty-party review of the provincial gas pipeline system has also been Institutional barriers exist for the grid connection of conducted during project preparation. Further studies will be conducted during project distributed generation in China due to the reluctance of implementation and suggested improvements will be implemented, to be supported grid companies. under the TA component. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Both Risk Management: The government of China has issued policies and regulations to remove these barriers, but implementation may vary. Both technical review of the grid connection and communication with the grid company have been conducted during project preparation to ensure both CHP sub-projects can have full access to the grid. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client Completed Preparation

36 Social and Environmental Rating Moderate Risk Description: Risk Management: Unfamiliarity with Bank procedures might lead to project Natural gas is a clean energy provided it can be used properly. delays and possible non-compliance with the Bank’s Training on Bank’s safeguards requirements will be provided during project preparation safeguards policy. and implementation. Social assessments on the affordability of gas/heat by consumers was carried out as part of project preparation. The conclusion is positive. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Both Program and Donor Rating Low Risk Description: Risk Management: There are no anticipated risks in this regard. Resp: Status: Stage: Recurrent: Due Date: Frequency:

Delivery Monitoring and Sustainability Rating Substantial Risk Description: Risk Management: Financial losses may be suffered due to the regulated Accurate metering of both the gas consumption and gas purchase from different sources tariff, or the tariff cannot be adjusted by the government in will be conducted during project implementation. a timely manner. The corporate financial analysis showed that the project implementing agencies can meet the required financial requirements based on their 10-year financial projections. The project financial analysis showed that risks exist for the two CHP sub-projects, but the provincial pricing bureau has issued a note to guarantee the financial viability of the two sub-projects during project preparation. Follow-up is required on the approval of the on-grid tariff. Consultation with the government agencies will be conducted during both the preparation and implementation periods. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Implementation Other (Optional) Rating Substantial Risk Description: Risk Management: Security of gas sources: The gas sources for GXED and its The project implementing agencies have signed gas supply or sales agreements with the subsidiaries include natural gas supplied by both major gas suppliers or consumers, and these agreements were provided to the Bank for

37 PetroChina and Sinopec, and indigenous coal bed methane review during project preparation. Signing gas supply contracts under these agreements developed by both PetroChina and local SOEs. Other is listed as a disbursement condition before project implementation. operators also compete with GXED for those gas sources. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Both Other (Optional) Rating Moderate Risk Description: Risk Management: Safety operation: The provincial gas network has been Training and capacity building of the IAs has been agreed as a major part of the TA constructed by SNGC and fast expansion is still ongoing. component. In addition, a safety review of the provincial gas network by a third party SNGC and other project implementing agencies will need was conducted during project preparation to identify the gap for improvement during adequate technical skills to operate the entire gas project implementation. transportation system as well as each sub-project. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Both Overall Risk Overall Implementation Risk: Rating Substantial Risk Description: The policy risk (approval of on-grid electricity tariff for the two CHP plants, and variance of gas prices for the gas distribution subproject) and security of gas supply could be high at the implementation stage. Though the provincial government approved an action plan to promote the provincial gasification program, the enforcement of the policies may be delayed then the project implementation will be affected. The guarantee of counterpart funds could a risk either though the commitments of these funds are provided during the project appraisal.

38 Annex 5: Implementation Support Plan China: Shanxi Gas Utilization Project

Strategy and Approach for Implementation Support

1. The strategy for implementation support has been developed based on the project design and its risk profile. It aims at providing sufficient technical support to GXED and the other three project implementing agencies, ensuring all risk mitigation measures defined in the ORAF are adequately undertaken during the project. Specifically, the strategic approach for implementation support includes the following:

(a) Technical: The Bank team has provided extensive technical expertise during project preparation and will continue to provide extensive technical support to the four project implementing agencies to effectively monitor and implement the project activities. Good practices in gas pipeline system planning, design, and operation, and experience in the operation and maintenance (O&M) of gas distribution networks would be introduced to improve the current practices in the project cities during the project implementation stage.

(b) Environmental and Social Safeguards: The World Bank team will supervise the implementation of the agreed Environmental Management Plan and Resettlement Action Plan for the project and ensure compliance with World Bank safeguards policies.

(c) Procurement: Procurement implementation support would include (i) facilitation of a training program targeting procurement staff in the PMO and implementing agencies to help them fully understand the Bank’s procurement guidelines; (ii) review of procurement documents and timely provision of feedback on results of prior and post reviews to the concerned parties; and (iii) monitoring procurement progress against the agreed procurement plan.

(d) Financial Management: Supervision of project financial management will be performed on a regular basis by the Bank’s financial management specialist. The supervision will review the project’s financial management system, including but not limited to accounting, reporting, and internal controls.

Implementation Support Plan

2. To successfully implement the project, the task team consists of both domestic and international experts on design and operation of gas projects and other relevant subject matters. Formal supervision and field visits will be conducted at least twice each year. Detailed inputs from the World Bank team are outlined below:

(a) Technical: Both domestic and international experts in gas pipeline operation will review and provide input to the detailed engineering design for the project. The experts will also participate in project supervision and field visits during the construction stage to monitor and inspect the works performed under the project.

39 They will also review the technical specifications of the bidding documents as required. Implementation support missions will be carried out semi-annually to review progress during the construction phase of the project, followed by annual missions thereafter.

(b) Environmental and Social Safeguards: The experienced environmental and social specialists in the task team will monitor and evaluate the implementation effectiveness of the agreed Environmental Management Plan and Resettlement Action Plan. Formal supervision will be carried out bi-annually and continuous support is available as required by the client.

(c) Fiduciary requirements and inputs: Supervision of project financial management and procurement will be performed on a risk-based approach. During implementation and in coordination with the task team, the procurement and FM specialist will conduct annual reviews, including review of requisite reports as per the Project Agreement, checking for compliance with agreed procurement and FM procedures, identifying potential capacity gaps, and evaluating adequacy of documentation and record keeping arrangements. Trainings will be provided to the staff of the PMO and implementing agencies by country office-based World Bank procurement and financial management specialists prior to commencement of project implementation. Formal supervision will be carried out at least twice per year and continuous support will be made available by the China based specialists as required by the client.

Table A5.1: Project Implementation Support Input Requirements Time Focus Skills Needed Resource Partner Estimate Role First twelve  Staffing, co-financing  Technical 6-7 staff, 2 trips NA months  Disbursement conditions  Safeguards per staff  Project design,  FM implementation and  Procurement supervision  FM & procurement  Capacity building 12-48 months  Project implementation  Technical 6-7 staff, 2 trips NA and supervision  Safeguards per staff  FM & procurement  FM annually  M&E  Procurement Other

Table A5.2: Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments Task Team Leader 6 SWs annually 2 trips annually, field Country office based visits as required Gas Power Engineer 4 SWs annually 2 trips annually Local expert Gas Engineer 3 SWs annually 1 trip annually International expert (international) Gas Engineer (local) 4 SWs annually 2 trips annually Local expert

40 Environmental 3 SWs annually Field trips as required Country office based safeguards specialist Social safeguards 3 SWs annually Field trips as required Country office based specialist FM specialist 1 SW annually Field trips as required Country office based Procurement specialist 3 SWs annually Field trips as required Country office based

41 Annex 6: Economic and Financial Analysis China: Shanxi Gas Utilization Project

Economic Analysis

1. The economic analysis of the project was carried out for the two CHPs and four gas distribution investment sub-projects based on cost benefit analysis. Economic internal rates of return (EIRRs) for each sub-project were estimated to test the economic justification of the investment sub-projects.

Methodology

2. Cost benefit analyses were carried out to estimate the EIRRs of the six investment sub- projects, based on the feasibility studies undertaken by the consultants hired by the project implementing agencies. The economic costs include investment cost and operation cost of each sub-project, while the benefits include both the economic values of electricity, heating, and gas supply, and the global environmental benefits due to replacement of coal consumption by gas utilization. The project costs and benefits are valued at constant 2012 prices, net of taxes and subsidies.

3. The electricity sales from the two CHP sub-projects to the power grid were valued based on the willingness-to-pay (WTP) for electricity, with the on-grid tariff approved by the provincial government used as a proxy of WTP. By the project pre-appraisal, Shanxi provincial government has committed to approve a higher tariff for gas-fired electricity generation than the provincial benchmark tariff, taking into account the environmental benefits (mainly reduction of local pollutants like TSP, SO2 and NOx) of gas-fired generation, though the tariff was not specified yet. So the approved on-grid tariff for gas-fired generation in other provinces6 was taken as reference, adjusted by the different gas prices between Shanxi and other provinces. The price of heating supply was assumed at 40 Yuan/GJ based on reference heat price applied in one of the cities and sector practices. The gas prices are regulated by the government though a pricing reform is under consideration by the Government of China and has been piloted in two provinces. So the current gas prices in each project city were used as proxy to measure the economic values of gas purchase and sales.

4. The environmental benefit was estimated for the avoided carbon emission only– this is a conservative estimate for the gas distribution component as substantial local pollutants would be avoided as a result of coal replacement by gas, though part of the gas would also be replacing LPG and coal gas in the project cities. Quantification of the avoided carbon emissions for each sub-project were conducted based on the comparison of both “with project” and “without project” cases. For the two CHP sub-projects, the alternative options of the sub-projects are to supply electricity from the Shanxi provincial power grid and supply heating by local coal-fired CHPs; for the four gas distribution sub-projects, the alternative options are to use coal, LPG, and

6 At present, the government approved on-grid tariffs for gas-fired generation are 0.713 Y/kWh (gas price 2.28 Y/m3) in Beijing, an average of about 0.755 Y/kWh (gas price 2.32 Y/m3) in Shanghai, and 0.904 Y/kWh (LNG price 3.22 Y/m3) in Zhejiang.

42 coal gas for both residential and industrial users. The penetrations of different types of gas users were based on the feasibility study reports. The technical losses of the gas pipelines and its resulted climate change impacts were also taken into account when the carbon emission was estimated for each gas distribution sub-project. Next, the avoided carbon emissions were calculated based on the emission factors of both the “with project” case and the “without project” case, by types of replaced fossil fuels.

Major Assumptions

5. The key assumption in estimating the economic costs and benefits of the project are summarized in Table A6.1 and A6.2 below. The carbon price was adopted at US$30 per ton of CO2 equivalent.

Table A6.1: Major Assumptions for both Baode and Xiyang CHP Sub-projects Baode CHP Xiyang CHP Investment cost * million Yuan 752.37 767.69 (Y) Annual generation GWh 602.2 595.0 Annual heating supply TJ 690 645 Plant use % 2.78% 3.18% Annual gas consumption million m3 140.5 144.5 Gas purchase price (with VAT) Y/m3 1.73 1.80 WTP in Shanxi power grid Y/kWh 0.65 (VAT included) Economic life Years 20 Note: *IDC and taxes are excluded.

Table A6.2: Major Assumption for Gas-distribution Sub-projects Xiangyuan Changzhi Tunliu Qingxu Investment cost * million 60.63 56.73 55.69 14.52 Yuan (mY) Annual gas supply ** million m3 62.95 89.73 84.84 6.62 Line losses rate % 3% 3% 3% 3% Gas price – purchase (with VAT) Y/m3 1.99 1.99 1.99 1.67 Gas price – sales (with VAT) Y/m3 2.46 2.36 2.38 2.19 Construction period 2014-2019 2014-2019 2014-2019 2014-2017 Year to achieve 100% load 2030 2030 2030 2020 Economic life Years 30 30 30 30 Note: * IDC and taxes are excluded. ** includes gas sales to both residential and industrial users. The ratio of gas sales to both residential and industrial users is about 30%:70%.

EIRRs Calculation

6. The cost benefits concluded that the EIRRs for Baode and Xiyang CHP sub-projects were 17.5 and 14.0 percent respectively, and the EIRRs for Xiangyuan, Changzhi, Tunliu and Qingxu gas distribution sub-projects were 21.4, 28.3, 23.3 and 47.4 percent respectively. All above EIRRs are higher than the social discount rate of 10 percent as required by the Government of China, so the project is economically justified. The spreadsheets used to calculate the EIRRs are illustrated in Table A6.3-A6.8.

43 7. Sensitivity analyses were conducted to take into account the uncertainties of (a) investment cost, (b) gas purchase price, (c) environmental benefit, and (d) project commission schedule of each sub-project. The results of the sensitivity analyses were illustrated in Table A6.3, which shows that the economic justification of each sub-project is robust.

Table A6.3: Sensitivity Analysis of EIRRs Calculation Baode Xiyang Xiangyuan Changzhi Tunliu Qingxu CHP CHP

EIRR (base case) 17.5% 14.0% 21.4% 28.3% 23.3% 47.4%

Investment Cost +10% 15.9% 12.5% 18.7% 25.2% 20.5% 40.8%

Gas purchase price +10% 14.8% 10.8% 9.1% 9.4% 4.9% 31.6%

Exclusion of 8.5% 4.6% 11.5% 12.1% 12.7% 14.5% environmental benefits

Project commission 14.9% 12.0% 19.1% 26.5% 20.9% 41.6% delayed by one year

Table A6.4: EIRR Calculation – Baode CHP Sub-project (million Yuan) Capital CO2 To t a l Year O&M Cost Total Cost Sale Benefit Net Benefit Cost Reduction Benefit 2014 376.2 - 376.2 - - - (376.2) 2015 376.2 - 376.2 - - - (376.2) 2016 267.1 267.1 349.7 66.9 416.6 149.5 2017 267.1 267.1 349.7 66.9 416.6 149.5 2018 267.1 267.1 349.7 66.9 416.6 149.5 2019 267.1 267.1 349.7 66.9 416.6 149.5 2020 267.1 267.1 349.7 66.9 416.6 149.5 2021 267.1 267.1 349.7 66.9 416.6 149.5 2022 267.1 267.1 349.7 66.9 416.6 149.5 2023 267.1 267.1 349.7 66.9 416.6 149.5 2024 267.1 267.1 349.7 66.9 416.6 149.5 2025 267.1 267.1 349.7 66.9 416.6 149.5 2026-2035 267.1 267.1 349.7 66.9 416.6 149.5 NPV @ 12% 635.8 1,590.3 2,226.1 2,082.3 398.2 2,480.5 254.4 EIRR= 17.5%

44

Table A6.5: EIRR Calculation – Xiyang CHP Sub-project (million Yuan) Capital CO2 To t a l Net Year O&M Cost Total Cost Sale Benefit Cost Reduction Benefit Benefit 2014 383.8 - 383.8 - - - (383.8) 2015 383.8 - 383.8 - - - (383.8) 2016 282.2 282.2 342.9 63.0 405.9 123.7 2017 282.2 282.2 342.9 63.0 405.9 123.7 2018 282.2 282.2 342.9 63.0 405.9 123.7 2019 282.2 282.2 342.9 63.0 405.9 123.7 2020 282.2 282.2 342.9 63.0 405.9 123.7 2021 282.2 282.2 342.9 63.0 405.9 123.7 2022 282.2 282.2 342.9 63.0 405.9 123.7 2023 282.2 282.2 342.9 63.0 405.9 123.7 2024 282.2 282.2 342.9 63.0 405.9 123.7 2025 282.2 282.2 342.9 63.0 405.9 123.7 2026-2035 282.2 282.2 342.9 63.0 405.9 123.7 NPV @ 12% 648.7 1,680.7 2,329.4 2,041.7 375.2 2,416.9 87.6 EIRR= 14.0%

Table A6.6: EIRR Calculation – Xiangyuan Gas Distribution Sub-project (million Yuan) CO2 Year Capital Cost O&M Cost Total Cost Sale Benefit Total Benefit Net Benefit Reduction 2014 6.1 - 6.1 - - - (6.1) 2015 12.1 27.9 40.0 28.2 3.6 31.9 (8.1) 2016 12.1 30.6 42.7 31.4 4.0 35.4 (7.3) 2017 12.1 33.6 45.7 34.8 4.5 39.3 (6.4) 2018 12.1 36.9 49.1 38.7 5.0 43.7 (5.4) 2019 6.1 40.7 46.7 43.0 5.5 48.6 1.8 2020 44.8 44.8 47.8 6.2 54.0 9.1 2021 49.4 49.4 53.1 6.2 59.3 9.8 2022 54.5 54.5 59.0 6.2 65.2 10.6 2023 60.2 60.2 65.5 6.2 71.7 11.5 2024 66.5 66.5 72.8 6.2 79.0 12.4 2025 73.6 73.6 80.9 6.2 87.1 13.5 2026 81.4 81.4 89.9 6.2 96.1 14.7 2027 90.0 90.0 99.9 6.2 106.1 16.0 2028 99.7 99.7 111.0 6.2 117.2 17.5 2029 110.4 110.4 123.3 6.2 129.5 19.2 2030 122.2 122.2 137.0 6.2 143.2 21.0 2031-2045 122.2 122.2 137.0 6.2 143.2 21.0 2046 122.2 122.2 137.0 6.2 143.2 21.0 NPV @ 12% 41.3 439.4 480.8 478.4 39.1 517.5 36.8 EIRR= 21.4%

45 Table A6.7: EIRR Calculation – Changzhi Gas Distribution Sub-project (million Yuan) CO2 Year Capital Cost O&M Cost Total Cost Sale Benefit Total Benefit Net Benefit Reduction 2014 5.7 - 5.7 - - - (5.7) 2015 11.3 38.2 49.5 38.6 5.0 43.6 (5.9) 2016 11.3 42.1 53.4 42.9 5.6 48.5 (4.9) 2017 11.3 46.4 57.7 47.6 6.2 53.9 (3.8) 2018 11.3 51.1 62.5 52.9 6.9 59.8 (2.6) 2019 5.7 56.5 62.1 58.8 7.7 66.5 4.4 2020 62.4 62.4 65.3 8.5 73.9 11.5 2021 68.9 68.9 72.6 8.5 81.1 12.2 2022 76.2 76.2 80.7 8.5 89.2 13.0 2023 84.3 84.3 89.6 8.5 98.2 13.8 2024 93.3 93.3 99.6 8.5 108.1 14.8 2025 103.3 103.3 110.7 8.5 119.2 15.9 2026 114.4 114.4 122.9 8.5 131.5 17.0 2027 126.8 126.8 136.6 8.5 145.2 18.4 2028 140.5 140.5 151.8 8.5 160.3 19.8 2029 155.8 155.8 168.7 8.5 177.2 21.4 2030 172.7 172.7 187.4 8.5 195.9 23.2 2031-2045 172.7 172.7 187.4 8.5 195.9 23.2 2046 172.7 172.7 187.4 8.5 195.9 23.2 NPV @ 12% 38.7 615.3 654.0 654.2 54.2 708.4 54.4 EIRR= 28.3% Table A6.8: EIRR Calculation – Tunliu Gas Distribution Sub-project (million Yuan) CO2 Year Capital Cost O&M Cost Total Cost Sale Benefit Total Benefit Net Benefit Reduction 2014 5.6 - 5.6 - - - (5.6) 2015 11.1 36.3 47.4 36.8 3.5 40.3 (7.1) 2016 11.1 39.9 51.1 40.9 3.9 44.8 (6.3) 2017 11.1 44.0 55.1 45.4 4.3 49.8 (5.4) 2018 11.1 48.5 59.7 50.5 4.8 55.3 (4.4) 2019 5.6 53.5 59.1 56.1 5.4 61.4 2.3 2020 59.1 59.1 62.3 6.0 68.3 9.1 2021 65.3 65.3 69.2 6.0 75.2 9.8 2022 72.2 72.2 76.9 6.0 82.9 10.6 2023 79.9 79.9 85.5 6.0 91.4 11.5 2024 88.4 88.4 95.0 6.0 100.9 12.5 2025 97.9 97.9 105.5 6.0 111.5 13.6 2026 108.4 108.4 117.2 6.0 123.2 14.8 2027 120.1 120.1 130.3 6.0 136.2 16.2 2028 133.0 133.0 144.7 6.0 150.7 17.7 2029 147.4 147.4 160.8 6.0 166.8 19.3 2030 163.5 163.5 178.7 6.0 184.6 21.2 2031-2045 163.5 163.5 178.7 6.0 184.6 21.2 2046 163.5 163.5 178.7 6.0 184.6 21.2 NPV @ 12% 38.0 583.0 621.0 623.8 37.8 661.6 40.6 EIRR= 23.3%

46

Table A6.9: EIRR Calculation – Qingxu Gas Distribution Sub-project (million Yuan) CO2 Year Capital Cost O&M Cost Total Cost Sale Benefit Total Benefit Net Benefit Reduction 2014 1.5 0.0 1.5 0.0 0.0 0.0 -1.5 2015 2.9 6.7 9.6 7.6 1.5 9.1 -0.5 2016 2.9 7.3 10.3 8.4 1.7 10.1 -0.2 2017 2.9 8.1 11.0 9.4 1.8 11.2 0.2 2018 2.9 9.0 11.9 10.4 2.0 12.4 0.6 2019 1.5 9.9 11.4 11.6 2.3 13.8 2.5 2020 11.0 11.0 12.8 2.5 15.4 4.4 2021 11.0 11.0 12.8 2.5 15.4 4.4 2022 11.0 11.0 12.8 2.5 15.4 4.4 2023 11.0 11.0 12.8 2.5 15.4 4.4 2024 11.0 11.0 12.8 2.5 15.4 4.4 2025 11.0 11.0 12.8 2.5 15.4 4.4 2026 11.0 11.0 12.8 2.5 15.4 4.4 2027 11.0 11.0 12.8 2.5 15.4 4.4 2028 11.0 11.0 12.8 2.5 15.4 4.4 2029 11.0 11.0 12.8 2.5 15.4 4.4 2030 11.0 11.0 12.8 2.5 15.4 4.4 2031-2045 11.0 11.0 12.8 2.5 15.4 4.4 2046 11.0 11.0 12.8 2.5 15.4 4.4 NPV @ 12% 9.9 69.9 79.8 81.4 16.0 97.4 17.6 EIRR= 47.4%

Financial Analysis

8. The financial analyses were carried out at both project level and corporate level to assess the financial viability of the project and financial sustainability of the project companies. The project level financial analysis focused on the calculation of financial internal rates of return (FIRRs) for each investment sub-project. Corporate level financial analyses were conducted for each project implementing agency based on their ten-year financial projection and analysis of their financial statements.

Project Level Financial Analysis

9. The major assumptions considered in the financial analysis of each investment sub- project include:

(a) All cash flows are incremental.

(b) All prices are at 2012 price level.

(c) Exchange rate: 1 US$ = 6.1 Chinese Yuan (early November 2013)

47 (d) Income tax: 25%

(e) Domestic inflation rate was assumed to be 3% in 2013 and the years after.

(f) Cost estimates: The cost estimates were based on the feasibility study reports. The capital expenditure includes civil works, capital goods and equipment, environmental management, land acquisition, surveys, design, investigations and construction supervision, project management, and physical contingencies.

(g) Operation data: The data was based on the feasibility study reports. The operation data includes gas sale volume, gas price, manpower requirements, maintenance costs, administration expenses and other costs and expenses. As the electricity price (on-grid tariff) for both CHP sub-projects has not yet been approved by the government, the WTP of electricity (0.65 Y/kWh, with VAT) was used in the financial analysis.

(h) Financing sources include equity, IBRD loan, and local loan; 20% of investment was assumed to be equity provided by each implementing agency.

10. The FIRRs were calculated for each of the six investment sub-projects based on a cash flow analysis, taking into account the major assumptions mentioned above. The income of each sub-project comprises of electricity sales, heating supply, and gas sales combined or separately. Expenditures include investment, gas purchase, other operation expenses, and income tax. The results showed that the FIRRs for Baode and Xiyang gas-fired CHP sub-projects were 6.9 and 3.2 percent respectively, and the FIRRs for the four gas-fired distribution sub-projects ranged from 9.6 to 11.1 percent. All these rates are close to or higher than the investors’ hurdle rate (about 5 percent), so the project is financial viable.

11. Sensitivity analyses were conducted to take into account the uncertainties of (a) investment cost, (b) gas purchase price, and (c) project commission schedule of each sub-project. The results of the sensitivity analyses were illustrated in Table A6.10, which shows that the financial return is very sensitive to the gas purchase price though the changes of both investment cost and commission schedule would result less impacts to the financial viability of the sub- projects.

Table A6.10: Sensitivity Analysis of FIRRs Calculation Baode Xiyang Xiangyuan Changzhi Tunliu Qingxu CHP CHP

FIRR (base case) 6.9% 3.2% 9.6% 10.0% 10.8% 11.1%

Investment Cost +10% 5.5% 1.7% 8.7% 9.3% 9.9% 9.7%

Gas purchase price +10% 3.5% <0 <0 <0 <0 4.4%

Project commission 5.9% 2.6% 9.5% 9.9% 10.8% 11.0% delayed by one year

48 Corporate Level Financial Analysis

12. Corporate level financial analyses of the project implementing agency—GXED, SNGC, SCPTC, and QKNGC—were conducted based on historical financial statements of the past three years and projected financial statements for the next 10 years, also taking into account the IA’s current financial status, any development planning for near future, and operation of the proposed project.

13. The major assumptions considered in the corporate level financial analysis of the IA’s include: (a) financial statements were prepared based on Accrual Basis; (b) income tax - 25%; VAT – 13% for gas, coal and water, 17% for electricity; (c) the domestic inflation rate is assumed to be 3% in 2013 and the years after; and (d) the gas sale prices and purchase prices were assumed to increase annually following the domestic inflation rate and other operation expenses.

14. The analyses showed that all four companies can have positive net profits over the next 10 years and the debt service coverage ratios can be kept at above 1.2 after 2015. As a result, the financial sustainability of each project implementing agency could be concluded. The summary of the projected financial statements for each project implementing agency is provided in the project files.

49 IBRD 40279 112° E 114° E 116° E CHINA 0 25 50 75 100 Kilometers SHANXI GAS UTILIZATION PROJECT Shanxi Province 0 25 50 75 100 Miles

PROJECT COUNTIES PROVINCE CAPITAL COUNTY/DISTRICT BOUNDARIES NEI MONGOL PREFECTURE BOUNDARIES PROVINCE BOUNDARIES 40° N 110° E BEIJING

40° N NEI MONGOL

Baode County Xinzhou HEBEI Baode CHP Prefecture

38° N Taiyuan Prefecture Taiyuan 38° N Luliang Qingxu Xiyang County County Xiyang CHP Qingxu Gas Distribution Prefecture

Changzhi Xiangyuan Prefecture County Xiangyuan Gas Distribution Tunliu County 36° N Changzhi Tunliu Gas Distribution County Changzhi Gas Distribution

36° N Jincheng SHAANXI HENAN

114° E RUSSIAN FEDERATION

HEILONGJIANG

MONGOLIA JILIN

GSDPM Sea of Map Design Unit XINJIANG LIAONING D.P.R. OF Japan NEI MONGOL BEIJING KOREA This map was produced by BEIJING TIANJIN the Map Design Unit of The HEBEI REP. OF SHANXI World Bank. The boundaries, SHANDONG Yellow KOREA colors, denominations and HENAN QINGHAI NINGXIA Sea JAPAN GANSU JIANGSU SHAANXI HENAN any other information shown ANHUI

. on this map do not imply, on R SHANGHAI 34° N n a XIZANG HUBEI H East the part of The World Bank SICHUAN ZHEJIANG China Group, any judgment on the CHONGQING Sea legal status of any territory, HUNAN JIANGXI National FUJIAN or any endorsement or Capital GUIZHOU TAIWAN YUNNAN PACIFIC acceptance of such Province GUANGXI GUANGDONG boundaries. Boundaries HONG KONG, SAR MYANMAR MACAO, SAR OCEAN International LAO VIETNAM 100° E 110° E 112° E Boundaries P.D.R. HAINAN PHILIPPINES AUGUST 2013