The World Bank

Document of The World Bank

FOR OFFICIAL USE ONLY

/-A/ 3Vb? - 69/4'

Public Disclosure Authorized * 4 4 s Report No. 7969-CHA

STAFF APPRAISAL REPORT

CHINA Public Disclosure Authorized DAGUANGBA MULTIPURPOSE PROJECT

SEPTEMBER 30, 1991 Public Disclosure Authorized

Industry and Energy Operations Division Country Department III Asia Regional Office Public Disclosure Authorized

This documenthas a restriceddistribution and may be used by recipents only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (As of April 1991)

Currency Unit - Yuan (Y) 1 Yuan - 100 fen 1 Yuan m US$0.19 US$1.00 - Y5.24

WEIGHTSAND MEASUIRES

ha - Hectare (15 mu) km ' Kilometer (0.62 miles) kWh Kilowatt hour (860 kcals) GWh - Gigawatt hour (1.000,000kilowatt hours) TWh = Terawatt hour (1,000,000,000kilowatt hours) kW Kilowatt (1,000watts) MW Megawatt (1,000 kilowatts) kV Kilovolt (1,000 volts) kVA Kilovolt-ampere(1,000 volt-amperes) MVA = Megavolt-ampere(1,000 kilovolt-amperes) toe = Tons of oil equivalent

PRINCIPAL ABBREVIATIONSAND ACRONYMS USED

CIECC - China InternationalEngineering Consulting Corporation GIDI - Guangxi Electric Power Bureau Investigationsand Design Institute GVIAO - Gross Value of Industrial and AgriculturalOutput HEPCO - Hainan Provincial Electric Power Company HMC - High Main Canal HPG - Hainan Provincial Government MOE - Ministry of Energy MOF - Ministry of Finance MSDI - Mid-South Design Institute for HydroelectricProjects MWR - Ministry of Water Resources MWREP - Ministry of Water Resources and Electric Power PMO - Project Management Office RCC - Roller-compacted concrete RRP - Resettlementand RehabilitationProgram SAA - State Audit Administration SBC - Special Board of Consultants SEIC - State Energy Investment Corporation SEZ - Special Economic Zone SPC - State Planning Commission TCC - Technical Cooperation Credit WREPERI - Water Resources and Electric Power Economic Research Institute YGCB - Yangtze Gezhouba ConstructionBureau

FISCAL YEAR

January 1 to December 31 FOR OFFICIAL USE ONLY

CHINA

DAGUANW4BAMULTIPURPOSE PROJECT

Loan/Creditand ProiectSummary

Borrower: People'sRepublic of China

Beneficiaries: Hainan ProvincialGovernment (HPG) Hainan ProvincialElectric Power Company(HEPCO)

Amounts IBRD loan: US$30 million equivalent IDA credit:SDR 28.1 million (US$37million equivalent)

Terms: IBRD loan: 20 years, including 5 years of grace, at standardvariable interest rate. IDA credit:standard, with 35 years maturity

OnlendineTerms: The proceedsof the loan/creditwill be onlent from the Government to HPG, who in turn will relend to HEPCO with the same terms under a subsidiary loan agreement with 20 years of maturity,including five years of grace, at a relending rate of 7Z p.a. HEPCO will bear the foreign exchangerisk and the commitmentcharges.

Proiect Obiectives and Description: The proposedproject is designedto promoteeconomic growth and alleviatepoverty in one of the less developed provincesof China. The main projectobjectives are to: (a) increasethe developmentof non-pollutingand cost- effectivehydropower resources to provideneeded peaking power in a predominantlythermal system; (b) increase agriculturalproduction to meet the needs of the growing population;(c) increasethe income of the poor farmersby intensifyingagricultural production and increasingthe productivityof croplandby alleviatingwater shortages and optimizingthe croppingpattern; (d) improvethe environmentalquality and public health of the regionby implementingan environmentalmanagement program; (e) strengthenlocal capabilitiesin developmentplanning of both power and agriculturalsectors; (f) promote rationalpricing of power ar..irrigation water; and (g) enhancethe operationa'efficiency and financial managementof HEPCO.

The project includestwo main categoriesof components, power and agriculture/resettlement.The major power componentscomprise: (a) constructionof a 56 m high, 719 m long gravitydam of roller-compactedconcrete (RCC), flankedby about 5,100 m long earth embf.ibments; (b) constructionof an undergroundpowerhouse, equipped with four 60 MW generationsets, a surge shaft and 420 m long twin tailracetunnels; (c) erectionof about 36 km

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

double circuit 220 kV transmissionline and Changjiang substation; (d) installationof a computerizedload dispatch system for the Hlainanpower grid; and (e) technical assistance and training in project design, power system planning and tariff studies, utility and financial management. The major agricultural/resettlementcomponents comprise: (a) constructionof about 16-km long High Main Canal (HMC), about 154 km long branch/lateralcanals and on-farm works for the first stage development of irrigation totalllng about 12,700 ha in Dongfang County, of which about 1,400 ha would be related to resettlement; (b) resettlementof about 23,800 people in Dongfang and Ledong Counties, and provision of housing, infrastructure, on-farm works and land development for irrigation of about 2,300 ha; (c) provision of agriculturalsupport services; (d) provision of environmentalmanagement; and (e) technical assistance fcr the preparationof an agricultural deve'lopmentplan.

Benefits: Cost-effectivesupply of needed peaking power and irrigation water under the project would promote economic development and raise the standard of living in an impoverishedregion. The proposed power component is part of a least-cost power developmentprogram in Hainan. The overall economic rate of return of the project is 15 percent. Average per capita income of the farmers in the project area would increase from about US$75 to US$253 at full development. These ir;comeincreases would be significantin reducing the income imbalance of some 5,000 of the poorest families in Hainan. Farming activities under the project would generate abcut 14,300 new jobs, including increased employment opportunitiesfor women. Other unquantifiablebenefits of the project include institutionalbuilding, improved water supplies in a drought-proneregion and mitigation of environmental degradation. The development of renewable hydropower resourceswould mitigate air pollutior through the avoidance of burning some 300,000 tons of raw coal per year in Hainan. The water quality and public health in the region would also be enhanced by the implementationof the environmentalmanagement program (includingwastewater treatmentand a monitoring process) under this project.

Risks: No major risks, includingenvironmental pro..lems, are foreseen for the proposed project. The tecehiicaland geological risks are expected to be minimal, as the project has been well investigatedand site conditions favor rapid constructionof the dam. To minimize potential risks associatedwith the execution of the project, including resettlement,assurances were obtained from the Government that it would ensure an adequate and timely flow of funds, and maintain effective project implementationmanagement. - lii -

Estimated Costs: Local Forsizn Total ------(USS million) ------

Preparatory Works 4.9 0.2 5.1 Resettlement 25.9 2.9 28.8 Environmental Management 1.2 0.7 1.9 Civil Works (Dam and Power Facilities) 35.3 0.9 36.2 HMC and Sanjiaolu canal system 7.5 2.5 10.0 Canals and on-farm works beyond resettlement 12.0 3.1 15.1 Major construction materials 1.0 25.7 26.7 Gates and Hoists 3.0 1.3 4.3 Turbines and Generators, and other plant equipment 13.5 1.2 14.7 T & G Governors and Static Excitation 0.2 3.8 3.9 PLC Equipment, transmission line, substation 2.2 5.1 7.3 Load Dispatch System for Hainan Island Grid 0.0 2.5 2.5 Agricultural f.pport Services 0.8 0.0 0.8 Project Management and Engineering 5.2 1.3 6.3 Technical Assistance and Training 1.0 1.4 2.3 Total Base Costs /a 113.6 52.2 165.8

Contingencies: Physical 10.5 2.9 13.4 Price 9.8 4.0 13.7 Total Prolect Costs 133.8 59.1 193.0

Interest during Constructions IBRD loan /b 4.8 2.0 6.8 Other loans 17.9 0.0 17.9 Total Financing Required /c 156.5 61.1 217.7

Project Financina Plan IBRD/IDA 17.0 50.0 67.0 TCC II 1d _ 0.3 0.3 UNDP - 0.1 0.1 Ministry of Water Resources 12.0 - 12.0 State Energy Investment Corporation 21.0 - 21.0 Hainan Provincial Government Loans 98.5 10.7 109.2 Grants 8.0 - 8.0 Total 156.5 61.1 217.7

Estimated IBRD/IDA Disbursements IBRD/IDA Fiscal Year 1992 1993 1994 1995 1996

-______----- (US$ million) ------Annual 27.1 17.5 14.7 7.2 0.5 Cumulative 27.1 44.6 59.3 66.5 67.0

Economic Rate of Return: 15L

La The project is exempt from taxes and import duties. /b Interest during construction (IDC) is based on onlending rate for projected disbursements of loan/credit proceeds. Foreign currency portion of ITDCis based on Bank loan variable rate for projected disbursements of loan proceeds. .L Figures may not add exactly due to rounding. /d Credit 1664-CHA. - iv -

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

STAFF APPRAISAL REPORT

Table of Contents

Paxe No.

I. THE POWER AND AGRICULTURALSECTORS ...... 1

A. The Power Sector ...... 1 B. The Agricultural Sector ...... 6

II. THE PROJECT AREA ...... 10

A. Background on Hainan Island ...... 10 B. The Power Narket and the Program ...... 11 C. Agriculture in Hainan ...... 14

III. THE BENEFICIARY ...... 18

A. Introduction ...... s18 B. The Hainan Provincial Electric Power Company . . . 1i

IV. THE PROJECT ...... 22

A. Project Objectives and Rationale for Bank/IDA Participation ...... 22 B: Project Description ...... 23 C. Resettlement ...... 24 D. Environmental Management Program ...... 26 E. Project Origin and Design ...... 27 F. Project Organization and Management ...... 27 G. Project Implementation Schedule ...... 28 H. ProjectCosts ...... 29 I. Project Financing ...... 31 J. Procurement .. . . 4...... 32 K. Disbursements ...... * ...... 33 L. Project Monitoring, Reporting, and Supervision 34 M. Project Risks ...... 35

This report is based on the findingsof a preappraisal misslon to China in November 1988, an appraisal mission in April 1989, and a post-appraisalmission in February 1991. The reportwas prepared by S. Shum (Senior Financial Analyst, Task Manager), Y. Albouy (Principal Energy Economist),H. Kim (Economist),W. Partridge (SeniorAnthropologist), H. Plusquellec (Irrigation Advisor), W. P. Ting (SeniorAgriculturalist), P. Judd (Agriculturalist,Consultant) and A. Posada (Power Engineer, Consultant). Peer reviewerscomprised: N. Anderson (SeniorCountry Officer),A. Piazza (Economist),L. Tay (SeniorIrrigation Engineer), W. Cao (Senior Power Engineer), V. Mastilovic (SeniorPower Engineer),A. Mejia (PrincipalFinancial Analyst), K. Jechoutek (SeniorEconomist) and D. Williams (SeniorUrban and EnvironmentSpecialist). The Division Chief is R. Stern (AS3IE) and the DepartmentDirector is S. J. Burki (AS3DR). -v -

Paze No.

V. FINANCIALASPECTS ...... 36

A. Introduction ...... 36 B. Past Finances and Present Financial Position . . 36 C. Financial Performance Targets .38 D. Future Finances ...... 38

VI. PR0ECT JUSTIFICATION ...... 41

A. General ...... 41 B. Justification of Project Size ...... 41 C. Least Cost Power Generating Program ...... 42 D. Agriculture/IrrigationBenefits .. . 43 E. Economic Rate of Return and Benefit/Cost Ratios . 44

VII. AGREEMENTS REACHED AND RECOMMENDATION .46

ANNEXES

1 Installed Capacity, Electricity Generation and Sales in the Pcwer Subsector .48 2 Electricity Rates .49 3 Performance Indicators for Hainan Main Power Grid . . 50 4 Composition of HEPCO Power Sales .51 5 Electricity Tariff of HEPCO .52 6 Power Generating Capacity in Hainan Island .53 7 HEPCO's Projected Generation and Transmission Investment (1991-2C00). 54 8 Capacity/EnergyForecasts for Hainan Power Grid (1991-2000) .55 9 Power Pricing Study: Terms of Reference ...... 56 10 Power System Planning Study: Terms of Reference . . . 58 11 Outline of HEPCO's Training Program . . .60 12 Multipurpose Dam/Power Facilities .66 13 Technical Assistance under TCC II .72 14 Special Board of Consultants: Terms of Reference . . 75 15 Construction Management Services: Scope of Work . . . 78 16 Resettlement .. 81 17 EnvironmentalManagement Program ...... 92 18 Detailed Procurement Arrangement and Timetable . . . . 95 19 Disbursement Schedule .97 20 Frameworkfor Project Monitoring and Reporting . . . . 98 21 Financial System Followed by Chinese Power Bureaus . . 101 22 HEPCO's Income Statements (1986-1990) .104 23 HEPCO's Balance Sheets (1986-1990) ...... 105 24 Assumptions to Financial Projections ...... 106 25 HEPCO's Projected Financial Statements (1991-1998) . . 109 26 Agriculture and Irrigation Component .112 27 Cost of Power Alternatives to Project ...... 143 28 Economic Rate of Return of Hainan Power Expansion Plan 146 29 Project Internal Rate of Return.. . . 149 30 Selected Documents and Data Available in the Project File . . . .. 150 - vi -

CHARTS

1. OrganizationChart of MOE 2. OrganizationChart of SEIC 3. OrganizationChart of HEPCO 4. Project OrganizationChart 5. Project ImplementationSchedule

NAPS

IBRD 21407R Daguangba MultipurposeProject IBRD 21673 High Main Canal IrrigationSystem IBRD 21686 ResettlementZones CHINA

DAGUANGBAMULTIPURPOSE PROJECT

I. THE POWER AND)AGRICULTURAL SECTORS

A. The Power Sector

Energy-Sector Overview

1.1 China is the third largest producer and consumer of commercial energy in the world. Coal is the most important source of energy in the country, accounting for about 74 percent of primary commarcial energy consumption. In addition, oil is an important source of both commercial energy and export earnings, representing about 19 percent and 7 percent of the respe_tive totals in 1988. Hydroelectric lower (4 percent), natural gas (2 percent), and limited quantities of shale oil and geothermialpower make up the balance of commercial energy resources. Noncommercial E.nergy, equivalent to about one-third of commercial energy production, is very Laportant in rural China.

1.2 China has made remarkable progress in developing energy resources over the last four decades. In that period, annual coal production has increased from about 60 million tons to 1.1 billion tons, and annual oil production increased from 0.1 million tons to 138 million tons. During the same period, annual electricity generation increased from about 7.3 TWh to 618 TWh in 1990, of which 126 TWh was from hydropower. However, despite these achievements, the country still faces acute energy shortages; encr6 y consumption per capita is low--about 0.6 tons oil equivalent (toe) ow one-third of the world avetage. To keep energy bottlenecks from restricting economic development, China will need to increase electricity generation beyond current targets, at least meet the official output targets set for other energy resot-rces, and improve the efficiency of energy use, particularly coal utilization.

1.3 The energy intensity of China's economy is high, and efforts to improve the efficiency of energy use must be included as a cornerstone in China's energy development strategy. Due to a combination of structural change in China's economy, and increasingly strong Government efforts to improve energy management and foster investment in energy conservation, energy consumption per unit of GDP fell by about 30 percent during the 1980s. Despite .his improvement, however, the Chinese economy remains highly energy inefficient. The Government's economic growth and energy supply targets for the 1990s imply that about one-half of the increased energy requirements would be met by increased energy supplies, while the other half would have to come from energy efficiency improvements. Toward this end, further progress has to be fostered through a combination of broad industrial modernization and restructuring, further reform in the levels and structure of energy prices, and specific energy conservation programs. The Bank is providing support for these efforts, both through a range of studies on coal and electricity prices, coal utilization efficiency and environmental impact, and energy conservation, and through industry and energy lending operations. -2-

Background on the Power Sector

1.4 Since the 1950s, Chira has grown to become the fourth largest producer of electricity in the world. The total installed capacity amounted to 135 GW in 1990, of which about 74 percent based on thermal power and 26 percent based on h,. opower. In that year, electricityconsumption, excluding svstem losses, totaled 535 TWh. About 80 percent was consumed by industry, 7.8 percent by agriculture,6.2 percent by household, 2 percent by transportation/communications,and 4 percent by other services. Power is distributedthrcugh 13 major grids, 11 of which exceed 1,000 MW in size and altogetherprovide about 85 percent of total capacity. Approximately 94 percent of the townships and 85 percent of the country's villages are electrified. The Government'srural electrificationpolicy emphasizes the developmentof local energy resources for local needs where feasible; small- scale hydropower developmr.nthac been encouraged in the many areas where resources permit.

1.5 The growth of the power sector since 1949 is shown in Annex 1. With the ta:get of quadruplingthe Gross Value of Industrial and AgriculturalOut- put (GVIAO) from 1980 to the year 2000, average annual growth rates of GNP and power demand should average 6.6 percent and 7.0 percent, respectively. On this basis, the Seventh Five-Year Plan (1986-90)called for an increase in generating capacity of about 35 GW (of which 8 GW from hydropower). In addition, 120 GW will need to be commissionedbetween 1990 and 2000. Large thermal power stations are being constructedat ports along the sea coast and near major coal mines. The ma hydroelEctricstations are planned at the middle and upper reaches of the 4 leys of the Yellow River, the Yangtze River, and Hongshui River. Two nuclear power plants are being constructedin Guangdong and Zhejiang Provinces. A 500-kV transmissionnetwork is also being built gradually to integrate regional grids. The first high voltage direct-current transmissionline was commissionedin 1989 to transfer power from Gezhouba in Hubei Province to Shanghai.

Market Conditions

1.6 Between 1986 and 1990, electricitydemand increased faster than generating capacity. As a result, power shortages reached about 20 percent of estimated industrial electr_cityrequirements. The rapid growth of demand can be attributed both to the very rapid economic growth and to the increasing use of electricityin commercial energy requirementsfollowing well-established internationaltrends. Since 1986, residential,manufacturing, and transportation showed the highest growth rates: 20 percent for residentialuses due to incom_ growth and 19 percent for transportationrailway electrification. The manufacturingsector already accounts for a large share of final electricity consumption,and robust growth in this sector also is expected to continue.

1.7 Notwithstandingconcerted efforts in energy conservation,the growth of power supply should not fall behind the rate of GNP growth, in order to both alleviate current severe shortages and provide additional power for economic growth. With economic growth targeted to grow at 6 percent/year under the Eighth and Ninth Five-Year Plans, the power output is planned to - 3 -

grow at the commensuraterate of 5.8 percent/yearto 1,100 TWh in the year 2000. Especially consideringexisting shortages, such a figure may prove too conservative,even with major gains in the efficiency of electricityuse. Even so, a faster pace of power svstem developmentmay still be justified in order to accelerate the retirement of the less efficient and more polluting small coal-fired plants.

Institutions

1.8 The Ministry of Energy (MOE) oversees all strategic aspects of power development,including six regional power administrationswhich coordinate operations of the power systems and prepare long-term developmentprograms for the approval of MOE. There are 22 provincial and municipal power bureaus under the regional administrationsoperating as part of the regional power systems. In addition, eight power bureaus operate in isolation; one of these bureaus is the project entity, Hainan Provincial Electric Pcwer Company (HEPCO),whose jurisdictionextends over the entire connected grid of Hainan Island. The organizationchart of MOE is presented in Chart 1.

1.9 The State Energy Investment Corporation (SEIC) is one of six spe- cialized investment corporationsthat were set up by the State Council in 1988 to manage large projects which require the approval of the State Planning Commission (SPC). SEIC's two major functions are to: (a) onlend funds for energy projects of national importance that fall under the country's unified energy developmentplan; and (b) represent the central government in providing joint financing of power projects with local enterprises. SEIC reports directly to SPC and is responsible for managing the state's investmentin coal ard electricity industries. The petroleum and nuclear power industries are operated separatelyunder their respective energy corporations. The organization of SEIC is shown in Chart 2.

Planninz

1.10 Overall power system planning is the responsibilityof the Planning Department of MOE. This department reviews the proposals submitted by the regional administrationsand provincial bureaus for short-term (1 year), medium-term (5 year), and long-term (10 to 15 year) plans. The planning and design of major hydro projects is carried out by regional hydroelectricinves- tigation and design institutes. The proposals of these institutes are reviewed by the Water Resources and Hydro Power Planning Institute for MOE. Planning and design for system expansion, transmissionlines and substations above 110 kV, and major thermal pro'4ects is done by the regional electric power design institutes. Their prok.3alS are reviewed by the Electric Power Planning and Engineering Institute (EPPEI) on behalf of MOE.

1.11 As the planning of China's power developmentbecomes more complex, there is a compelling need for Chinese planners to adopt state-of-the-art system planning techniques. Least-cost generation planning techniqueswere first introduced in East China through technical assistance from the Interna- tional Atomic Energy Agency.l/ Under th' Planning Support and Special Stu-

1/ Under the Bank's Second Power Project (Loan 2493-CHA). dies Project (Credit 1835-CHA), techniques for hydroelectric generatton and transmission planning were being introduced as part of the expansion plans for Sichuar. and East China powet system. Ttaining i.n thle use of t.he!;, ttchniques was provided to staff of the concerned p.wer bureaus and the Water Resources and Electric Power Economic Research Institute (WREPERI). This training, in turn has, in turn, allowed WTEPERI to ossist other power bureaus and regional power administrations in the use of modern planning teehn{ques.

Power Pricing

1.12 China's current electricity pricing system has evolved from reforms begun in the mid-1980s and strengthened during the last three years. The current prices faced by consumers represcnt a complex eombirmt±cw. oi "old system" rates, which build upon long-cstabJished State quota :rics, and a new set of rates and surcharges for above-quoca allocation, which are basically designed to improve cost recovery, especially for new investment. Recent reforms have included both reforms in the "old system" base .ates, and the 1evelopment and expansion of the role of the new set of rates and surcharges. "Old system" base rates were increased by 57 percent during 1986-90, and, adding in a new across-the-board surcharge, "old system" rates now average from 10 fen to 17 fen/kWh, depending upon the region. The "new rates" are generally 20-30 fen/kWh, or twice as high as the base rates. A key component is the price charged for electricity from new generating planits utnder the "new plant, new price" policy enacteCd 'n 1988. Under this policy, prices for power from tiew plants, which are largely debt-financed, sre set at significantly higher levels to adequately cover the debt service of the power utilities.

1.13 As the role of the "new rates" increases with system expansion, the combined average rates faced by consumers continues to increase. Based on the pricing criteria in Dlace, the actual electricity prices paid by consumers have been increasing substantially faster than inflation, and stveragenational consumer electricity prices are expected to reach average len;-runmarginal cost (LRMC) levels by the mid-1990s. However, there remain considerable distortions in the structure of electricity prices. Further, the prevailing system is far too complicated, and not sufficiently transparent. The GOC has made commitments to confront these issues. It has announced its intentior. to unify old and new system rates into single, more transparent, average tariffs, end has taken concrete measures in this direction. Introduction cf peak!off- peak and seasonal rates has been expanding. The Government also is elimina- ting certain preferential 1rices which have existed for some. very electricity intensive heavy industries.

1.14 The Bank is engaged in a very active dialogue with the Government on the topic of power pricing. The financial covenants under Bank-financed projects have long supported improvements in power price levels, and collaborative work on tariffs is now reinforcing the corrective actions already taken by GOC to adjust prices. In a specific effort to support a systematic overhaul of power prices by the Government, the Bank financed a study covering East China under the Beilungang Thermal Power Project (Loan 2706-CHA). The primary recommendations of this study--to bring tariffs rmore in line with the LRIC-- are gaining broad accep_aaLnceaxd arc boirLn used in ioarmulntjnf- pricing reforms for power systemn 7s o akiy 'C,. 1J' , I However9 this prototype study cannot be applied to grids with significant hydroelectric generation such as in Hainan. This is because, in systems with substantial hydropower, the energy LRMC may vary according to the season and the fact that the peaking capacity cost is lower than in systems primarily fueled by coal. Therefore, a specific power pricing study is included in this project.

Power Subsector Strategy

1.15 C.hina faces the following manjor issues in the power subsector: (i) acute power shortages; (ii) iniadeciuatopvwer pricing and investment funding; (iii) protracted implementation periods for large projects; (iv) environmental impacts of power supply; (v) weak interconnection within regional power systems; (vi) scarcity of skilled manpower; and (vii) outdated methods for planning, opero.tin, and financial management.

1.16 The Government's basic policy for the power subsector is to modern- ize it, and increase both its efficiency and its capacity at a rate sufficient to meet the requirements of industrial development and improve the living conditions ofr the population. This policy translates into the following ob4ectives: (a) expand coal-fired thermal capacity at minemouths or near ports and load centers in order to reduce the rail transportation requirements and use of lower grade coal in urban centers; (b) replace small- and medium- size thermal units with larger, less polluting, and more effic4ent units; (c) acceThrate the pace of hydroelectric development; (d) construct extra high-voltage tranemission lines; (e) introduce a more rational pricing system; and (f) adopt modern techniques in project design, environmental impact mitigat:'.on,and system planning.

Role of- the sank in the Power Subsector

1.17 The bank's particriDation in the power subsector in China has particularly focused or institul,ionbuilding and the tranEA"nr of appropriate modern technoic,y. The Bank has supported the Government's sectoral strateg7 through sector work, policy dialogue, and a series of lending operations in associa- tion with the regional power bureaus. The Bank has helped to introduce state- cf-the-art system planning methodologies which identify cost-effective, sus- tainable development policies for the power subsector and, presently, it is participating in the formulation of the Five-Year Plans in Sichuan and East China. The Banks's active involvement in power pricing issues (para. 1.14) has included assistance through pricing studies, reinforced by assistance in concrete application through follow-up projects. This has both helped foster a broadening acceptance of marginal-cost pricing, and allowed support for the design and implementationof a series of concrete tariff reform action plans for different regional systems. Through the becond Beilungang Thermal Power Project (Loan 2955-CHA), the Bank is extending its policy dialogue to cover the reorganization,management, anc regulation of power bureaus.

1.18 Since China has become a member of the Wor'.dBank Group, the Bank has helped to finance seven :.aroepover gererai-iorprojects (600-3,300MW)-- three thermal and four hydrr o er't±ors - one h!gh-voltagetransmission project. Through these apereti'onin,-. he Bank ha's successfully (i) introduced internationalcompetitive biddn-7, (ICE) for ctiv-'l wyorks and equipment; (ii) supported x:hetransfer of modern technology in project constructionand management; (iii) ihlped to improve the efficiency of pollution abatement equipment; (iv) promoted the integrationof a regional power system in East China; (v) supported the developmentof master plans for modern distribution networks; and (vi) promoted operationalefficiency and prudent financialmanagement. Under the Technical CooperationCredit (TCC), the Bank assisted in supervising and reviewing a feasibilitystudy for the Three Gorges Project.

1.19 Most of the ongoing power projects financed by the Bank are being implementedin a satisfactorymanner, on schedule,and within budget. The first power operation, Lubuge Hydroelectric(Loan 2382-CHA), is about to be completed. The second power operation, the 500 kV Xuzhou-ShanghaiTransmis- sion Project (Loan 2493-CHA),was put into service, as scheduled. The Yantan HydroelectricProject (Loan 2707-CHA) is also progressing satisfactorily. Several problems were encounteredearly in the implementationof the Siuikou HydroelectricProject (Loan 2775-CHA): project management was weak, and the original Government allocationwas too low to cover large cost increases associated with the resettlementcomponent. Among measures to resolve these problems, the Bank agreed to revise the loan allocation and finance th:eimporta- tion of materials needed for resettlement;project management is also being strengthened. The protect is now back on schedule. The Beilungang project (Loan 2706-CHA) encountereddelays early on due to procurementproblems and poor coordinationamong the suppliers of various islands. These problems have now been resolved, and constructionis almost back on schedule. To minimize problems of coordinationamong s'ippliersfor the Wujing project (Loan 2852- CHA), procurementwas carried out using a single responsibilitycontract.

1.20 The lessons learned from the previous power projects in China have been taken into account in preparing the proposed project. These lessons Include: (a) proper assessment of resettlementcosts; (b) improving the moni- tor4ng of resettlementand environmentalmanagement programs through local independentdevelopment research institutes; (c) improving procurement and contractual arrangements;and (d) enhancing the role of project management and the use of engineering consultants. Particular attentionwas given to the satisfactoryresults achieved and lessons learned in connectionwith the resettlementof the population during the implementationof the first two Bank-financedhydroelectric projects in China--Lubugeand Yantan.

B. The AgriculturalSector gyerview

1.21 Agriculture in China--includingcrops, livestock, forestry and fisheries--providessustenance for over 1.16 billion people; it is an important sourceof income for some 190 million farm families and accounts for about 30 percent of the country'sGDP. Only about 137 million ha of China's land area of 960 million ha are arable. Farming systems are intensivewith heavy inputs of labor, fertilizer,small machinery and water. Nearly half of the cropped area is irrigated. Foodgrains occupy about 70 percent of total cropland and account for about one-third of the value of agriculturaloutput. Intensive farming has allowed China to meet the basic food requirementsof its population, about 22 percent of the world's total, and to produce an increas- Itgly sophisticatedmix of cash and commercial crops, from less than 11 percent of the world's arable lind. China's rural reform program, introduced in 1978, also has stimulated the agriculturalsector. This program produced impressive growth and structural change by introducingthe production responsibility system, increasingproducer prices, and expanding the role of the market.

1.22 The gross value of agriculturaloutput (GVAO) increased by 83 percent in real terms during the 1978-88 period (5.7 percent per annum), substantially faster than during the previous 25-year period (3.2 percent per annum). While significantgrowth in grain productionwas achieved in the early part of the period (peaking at 407 million tons in 1984), stagnating grain production has been the Government'scentral concern in recent years with production ranging between 391-402 million tons during the 1985-88 period as farmers substitutedother crops for grain. Major recent efforts have been made to increase grain production and the 1984 record was surpassedwith 408 million tons in 1989 and 435 million tons in 1990. The Government'sstrategy to increase grain production includes diverse measures, such as increasing state investment in agriculture,mainly in irrigation rehabilitationand expansion, and introducingpartial reforms in grain procurement,distribution, prices and subsidies.

Agriculture/IrrigationWater

1.23 China's water resources are limited and unevenly distributed. About 45 percent of China's total land area is located in regions with less than 400 mm annual rainfall,mostly in the north, west and northwest. In these areas, along with low volumes, the seasonal concentrationof rainfall has made agriculture dependent on irrigation.

1.24 A rapid expansion of irrigated farmland took place between the early 1950s and the mid-1980s. Through this expansion, the effectively irrigated area in the country increased from about 20 million ha in 1952 to 33 million ha in 1965, 45 million ha in 1976 and 48.5 million ha in 1984. This growth in irrigated area reflected the high priority attached to irrigation and agriculture in the State investment program, the ability of communes to mobilize rural inhabitantsfor labor-intensiveconstruction projects, and the wide- spread introductionof tubewell technology for exploiting groundwater in the early 1970s. Today, about 82 percent of the national irrigated area is fed by surface water and about 18 percent is fed by groundwater.

1.25 The productivityof China's irrigated land is about twice that of its rainfed land. Irrigated agricultureaccounts for about two-thirds of total grain production and three-quartersof commercial crop production. Irrigation allows both higher cropping intensitiesand higher yields. In China, it permits cropping intensitiesranging from 1.2 in the northernmost areas to 2.5 to 3 in the southern provinces. Irrigation can generate average yields of 3 tons/ha for wheat, 5.3 tons/ha for rice, 3.9 tons/ha for corn, 0.9 tons/ha for cotton, and 1.4 tons/ha for soybean. These yields place China among the highest-yieldingcountries in Asia.

1.26 Current Constraints in Irrigated ARriculture. Despite past suc- cesses, China now faces numerous problems in the irrigation sector. Many of the large schemes constructedin the 1950s and 1960s now require major - 8 -

upgrading or rehabilitation. Many lack drainage and irrigationnetworks at the tertiary and farm level. Large tracts of cultivated land have been affected by Laterlogging and soil salinization as a result of excessive irrigation without effective drainage to control the rise of the water table. Be- cause improvementworks must be planned and implementedin an integratedman- ner for large contiguousblocks of land, large investmentsare needed. The uncontrolledconstruction of tubewelle,prompted by governmentsubsidies, the low capital cost of constructionand equipment, and low electrlcitvcharges for pumping has led to overexploitationof groundwater,excess_ve d'awdowin of the water level and land subsidence,particularly in the North Chlna Plain. Operation and maintenance have been inadequatein many areas due to inadequate funding from the counties and townships. The investment in and maintenance of on-farm facilities, formerly a communal responsibilityduring the slack w-inter season, has been disrupted b) the introductionof the household production responsibilitysystem, under which households tend to look after their contracted interests. Measures to alleviate some of these problems were curtailed by cuts in the governmentbudget for irrigationbeginning in 1980. State capital investmentin irrigationhas rebounded somewhat since 1985 but still falls short of pre-1980 levels. The developmentof new water r3sources has not kept pace with the growth in water demand from agriculture,industry, and urban centers.

1.27 The agriculturalsupport services sector also has is much room for improvement,particularly on the low-yield and medium-yieldlands. Many of these lands contain problem soils which are low in fertility,and subject to frequent drought, flooding and waterlogging. The prolonged use of far-mma- chinery also has resulted in the creation of a hard pan 10 to 20 cm below ths soil surface. A major program is under way to upgrade and strengthenthe extension services in the country. However, so far, only about one-third of the 2,300 counties have establishedagrotechnic&l extension centers and 20 percent of the counties have no formal extensionprogram at all. Extension services need to move towards a client-supplierrelationship, and offer a better-qualityservice to producers. Linkages among research, training and extension also remain very weak.

1.28 Seeds production and agromachineryservices also need improving. Quality control for seed production is inadequateand varietal purity has become a problem in some areas. Many of the county seed companies are poorly equipped and lack facilitiessuch as seed stores, drying floors, laboratories, garages and transportvehicles. The extension and demonstrationof quality seeds has been neglected. Agromachineryservice centers are becoming increasingly important in helping to maintain small tractors, the type most commonly owned by farm households. There are some 37,000 collectivelyoperated mecha- nization centers providing service to individualfarmers. The centers also provide training to operators of medium and large machinery used for land improvement. But most of these centers still function with weak management, outdated facilities,and inadequatetools and equipment.

AgriculturalSector Objectivesand Bank/IDA Lending

1.29 The Government'slong-term objectivesfor the agriculturalsector are to increase production to meet the requirementscreated by population and income growth and to increase income and employment in rural areas. Given - 9 -

China's shortage of arable land, developmentplanners have focused on the need to increase the productivityof presently cropped areas and to develop efficiently the few remaining areas of unutilized lands. A major objective is to stabili2e grain output. Per capita and total value added in the crop subsector are to be raised primarily by increasing the yield and quality of food, feed, orchard, and industrial crops and also by increasing the volume of agroprocessing. Although investment in agriculture (including irrigation) declined markedly during the initial reforms of 1980-85, due to the enhanced profitabilityof nonagriculturalinvestments to subnational levels of government and their freedom to make these investments,agricultural investment has since rebounded at all levels due to firm national and provincial commitment to increas1ng production.

1.30 Bank/IDA agriculturallending to date has comprised 28 operations amounting to $3.3 billion and has covered a wide spectrum of geogtaphic areas and subsectors,with overall focuses on land development,irrigation and drainage (five projects), upgrading of agriculturalsupport services including agriculturalresearch, education, credit and seed improvement (seven projects), development of specializedsubsectors including rubber, forestry, fruit and fisheries (eight projects), and area development (six projects). In recent years, the Bank/IDA has supported a series of provincial development projects in which an area developmentapproach has been applied. In these projects, the responsibilityfor proposing, preparing and implementingthe projects and repaying project funds rests with provincial and lower-level governments. A major objective of several recent Bank projects has been to assist in the Government'songoing reform process. The Rural Sector Adjustment Loan (Credit 1932-CHA/Loan2967-CHA), which was approved during 1988, contributedto the articulationof the overall reform process. Several projects approved since 1989, notably the National Afforestation (Credit 2145-CHA), Mid-YangtzeAgricultural Development (Credit 2172-CHA), Fourth Rural Credit (Loan 3265-CHA/Credit2182-CHA), Henan AgriculturalDevelopment (Credit 2240-CHA) and Tarim Basin (Credit 2294-CHA) projects contain significant subsectoralreform elements.

1.31 Implementationof most ongoing Bank/IDA-financedprojects in the agriculture sector is on schedule. Experience in previous Bank agricultural projects in China is that physical works have been completed on time or ahead of schedule. Disbursementsfor agriculturalprojects, in fact, usually out- pace those in other sectors. Notable features of all the projects are the high standard of project management, the active participationof farmers and the effective collaborationof government authorities at all levels. Six agricultureprojects have been completed. North China Plains and Heilongjiang Land Reclamation,First Rural Credit, Seeds, Rubber Development,and Rural Sector Adjustment Projects have been completed. The project completion reports for these projects indicate that implementationwas successful,that economic rates of return reached or exceeded appraisal estimates, and that the technologiesused were sound and appropriatefor wider application. - 10 -

II. THE PROJECT AREA

A. Background on Hainan Island

2.1 The proposed project is located in the western part of Hainan Island, the driest and poorest region of the province 1/. The island is situated at 108-1110E and 18-200N, and lies across thc.strait from Guangdong Province in the South China Sea. It is located in the tropical and 2 subtropicalzones and has a surface area of 34,000 kM . Hainan's population is about 6.4 million, of which about 17 percent are ethnic minorities. Agricultural and industrial development in the region has been hampered by water and electricityshortages. The island is among the less developed provinces of China. In 1990, its GVIAO per capita was Y 1,704, which was well below the national average of Y 2,763.

2.2 Hainan Island has good potentia] for tropical crop cultivation, mineral resource exploitationand tourism. However, its potential for economic growth has remained largely untapped mainly due to the lack of infrastructure, and financial and skilled human resources. In order to accelerate the economic growth of the island, the Government elevated the status of Hainan from that of an administrativeregion (under Guangdong Province) to that of a province in April 1988. Hainan was also declared to be the largest and most open Special Economic Zone (SEZ) of the country; the Government'sintention was to treat it as a "laboratoryfor reform". Subject to the Central Government'sapproval, the Provincial Government has the authority to promulgate economic regulationswhich are more liberal than those on the mainland.

2.3 However, because of its infrastructureand resource constraints, Hainan is not well equipped to assume the increased responsibilitiesasso- ciated with its SEZ status. Therefore, the Government is faced with a major challenge to attain its target of bringing the island up to the level of the mainland's coastal areas over the next two decades. In order to overcome the island's constraints,the Government'sstrategy is to promote large infusions of foreign investment and technology, and to deepen economic and enterprise reforms toward increased commercial and market-orientation. Building on the experiences of the other SEZs, new initiativesrecently have been put forth to promote foreign investment in the island, including a host of liberal tax and investmentpolicies. The developmentplan of Hainan calls for accelerating infrastructuredevelopment as a critical first step in promoting the economic growth of the island. It is in this context that the Government has accorded the proposed project high priority.

1/ Average per capita income of the rural population in the project area is about " 390 (US$75),which is well below the provincial average of Y 1,090 (US$208) in 1990. - 11 -

B. The Power Market and the Program

Background

2.4 In 1990, per capita power consumptionin Hainan was about 16 kWh/month, which was only 40 percent that of the national average. In the mid-80s, power shortageswere most severe because of: (a) excessive reliance on run-of-the-rivermini hydropower,which was curtailed during the dry season; and (b) bottlenecks in coal transport from northern China. Consequently,during the 1987-88 drought in Hainan, considerableamounts of electricitywere generated by costly imported diesel. Furthermore,even though power tariffs were increased sharply to cover the high costs of generation, demand continued to grow faster than supply.

2.5 Hainan's economic hydro potential is estimated at about 1,600 GWh per annum, of which 22 percent has been harnessed. Proven coal reserves are about 300 million tons, half of which has a calorific content of less than 4,000 kcal/kg. Proven natural gas resources, located 100 km offshore south of the island, are estimated at about 100 billion m 3. The first phase of gas production is expected to begin in the mid-1990s,with 3.25 billion m per annum. The gas is planned to be mainly exported, and, to a far lesser extent, for domestic fertilizer production and possibly power generation.

2.6 With a view to prcnoting economic growth, the Hainan Provincial Government (HPG) has recently stepped up infrastructureinvestments. From 1987 to 1990, for example, the island's thermal power capacity connected to the grid increased tenfold. This increase resulted in an installed capacity totalling 560 MW, of which 129 MW is seasonal hydropower. Since the new units are relatively large, the peak power that can be reliably served on the grid did not grow as quickly; in 1990, that peak power capabilitywas only 245 MW; energy generationwas 992 GWh, of which 51 percent was of thermal origin. In that year, the installed generating capacity of isolated systems was 150 MW, most of which was hydropower;these systems generated about 360 GWh.

2.7 In 1990, HEPCO commissionedits first 220 kV facilities (60 km of lines, 150 MVA transformercapacity, 2 substations);the next highest transmission voltage was 110 kV (830 km, 15 substations,and 294 MVA). This was followed in importanceby 35 kV transmission(737 km, 34 substations)and 10 kV transmission. Most districts are electrified,and power is now accessi- ble to 95.7 percent of cities and townships and 72 percent of farm houses. The ownership and control arrangementsfor the power facilities are complex: HEPCO owns the main grid in the northern part of the island around the provincial capital city, Haikou; Shilu Iron Mine owns a coal-based 66 kV network; and autonomous prefectures and hydro and agriculturalreclamation authorities own several smaller facilities. In 1988, the southern and northern grids were interconnectedunder HEPCO's unified dispatch. Generation and losses statistics for 1981-90 are given in Annex 3.

2.8 The composition of HEPCO's electricitysales is representativeof the island's pattern of consumption (Annex 4). In contrast to the mainland, the island's power load factor is low. This is because the bulk of the demand corresponds to one day-shift industries and services. Since power rationing - 12 -

could be eliminated in the foresee&blefuture, the daytime demand could grow very rapidly, further eroding the load factor. For this reason, the provision of adequate time-of-useprice signals to major consumerswill become an important policy instrument in rationalizingdemand and the utilization of power generation and transmissionfacilities. The current electricity tariff structure would not be adequate for this purpose (Annex 5). Therefore, the proposed project includes a power pricing study leading to an action plan for tariff reform in Haiian. An assurancehas been obtained from HEPCO that the power pricing study -ill be completed and reviewed with the Bank/IDA by June 30, 1993. The agreed Terms of Reference of this study are presented in Annex 9.

Development P orram

2.9 In addition to investmentsfor infrastructure,HPG has planned an ambitious program of industrial and agriculturaldevelopment based on the island's natural resource endowment. During the Eighth Five-Year Plan (1991- 95), industry--consistingmc&Lly of cement, petrochemicals,and minerals--is expected to grow at 15 percent per annum and agricultureat 7 percerLtper annum. HPG is also expecting high growth in services,which seems uncertain at this stage. The existing load carrying capability of the grid is detailed in Annex 6. The power sector expansion plan proposed by HEPCO is based on the above growth estimates and therefore may overestimatethe actual need for power generation capacity.

2.10 In line with the practices of prudent investmentplanning, the proposed project has been appraised on the basis of an economic growth rate of 11 percent per annum. This rate is lower than the one considered by HPG, but because of the special conditions of Hainan, higher than the rate now considered plausible for the mainland economy. The base case forecast assumes a "natural" (unsuppressed)energy demand on the grid growing at 13.2 percent per annum. Peak demand is assumed to grow at the same rate until 1995, afterwards the growth is assumed to be 12.7 percent per annum beca,'seof increases in the load factor. A pessimisticeconomic growth rate of 7.5 percent per annum is also considered in the risk analysis (para. 6.7) whereby power demand grows at 9 percent per annum over the period 1991-2000. Both the base case and the lower scenario correspond to an elasticity of electricity demand of 1.2 with respect to economic growth. The projected power investments (Annex 7) would allow the full load to be met in 1995, when the proposed project is fully commissioned. Before then, electricityshortages would occur at peak times and their magnitude would depend on the reliabilityof the recently committed coal-firedunits (2 x 125 NW). The projected capacity and energy balance for the period 1990-2000 is presented in Annex 8. The outlook for the Hainan power grid is summarized below: - 13 -

Table 2.1: DEMANDAND SUPPLY FORECAST FOR THE HAINAN POWER GRID (1990-2000)

System Demand Net Capacity Average Out-ut Peak Energy Margin /a Hydro Thermal Year (MW) (GWh) (MW) (GWh) (GWh)

1990 (actual) 217 951 +28 444 507 1991 245 1,080 +50 480 600 1992 280 1,220 +5 480 740 1993 315 1,330 -20 480 900 1994 360 1,560 -18 640 920 1995 410 1,770 +30 1,000 770 1996 460 2,000 +40 1,000 1,000 1997 520 2,220 +50 1,000 1,220 1998 585 2,570 +55 1,000 1,570 1999 660 2,910 +50 1,000 1,910 2000 745 3,300 +55 1,000 2 ,300

/a Defined as the differencebetween peak demand and the peaking capability with the two largest thermal units out of service (planned and forced outages).

2.11 Based on the above scenario, no new generation capacity should be commissionedbetween now and 1994 except for the proposed project and projects already underway. Otherwise,there is a risk of creating excess reserve margin which would reduce project benefits. In order to promote prudent investment programming and to build up HEPCO's planning capability, the proposed project will include a system planning study for generation, transmission,and distribution. This study will take into account the many uncertaintiesrelated to the rate of load growth, the potential availability of natural gas, and the rate of connection of isolated systems to the main grid. The agreed Terms of Reference for this study are presented in Annex 10. An assurance has been obtained from HEPCO that it will complete the above study and review the findings of the study with the Bank/IDA by June 30. 1993. In addition. an assurancehas been obtained from the Hainan Government that. durina proiect implementation,it will consult with the Bank/lDA prior to committing to malor new power plants. taking into account the results of '-he system planninR study. Finally, the agreed financialperformance covenants on debt control and self-financingrequirements for future investments (para. 5.8) would complement the above efforts to promote prudent investment planning. - 14 -

C. Agriculture in H&inan

Overview

2.12 Agriculture is the mainstay of Hainan'o economy, accounting for about 52 percent of its gross value of industrial and agriculturaloutput (GVIAO) and more than 70 percent of total employment. Over the period 1980-89, Hainan's GVIAO expressed in 1980 prices has increased from less than Y 1.9 billion to close to Y 5.3 billion, equivalentto an average annual growth of about 12.2 percent (10 percent for agricultureand 15 percent for the industrialsector).

2.13 Hainan Island consists primarily of plains and low plateaus,with mountains in the south-centralinterior rising to about 2,000 m. Of the total land area of about 3.4 million ha. a little over 1.8 million ha are considered suitable for agricultureand tropical tree crops such as rubber. Hainan island is located in the tropical and subtropicalzones, with temperatures frequently reaching40'C in the eummer and rarely falling below 15-C in the winter, except in higher elevations. The climate is monsoonal,with heavy rains during the May-Octoberperiod and little rainfall in the November-April season. The lack of rain in the period November-Aprilcauses serious water shortages, particularlyin the western and southwesternregions that are located in the rain shadow of the central mountain range. The eastern and northeasternparts of the island are subject to typhoons that sometimes result in serious damage during the rainy season.

2.14 The total value of Hainan's agriculturaloutput, including annual and perennial crops, forestry, animal husbandry, fisheries and sideline activities, was about Y 2.73 billion in 1989 and Y 2.87 billion in 1990 2/. Of this total, field crops accounted for about 30 percent, tree crops and forestry 45 percent, animal husbandry 12 pe:cent, fisheries 4 percent and sideline activities9 percent. Over the last decade, the area planted to annual field crops has been fairly stable, while the area under fruit and tropical tree crops has undergone a modest but steady increase. Although significantyield increaseshave been achieved for most crops including staple foodgrainsand oilseeds, average yields are still low, mainly due to unreliatle rainfall and inadequate supply of fertilizers.

2.15 The area under annual and perennial crops is estimated at about 925,000 ha, equivalent to half of the total land area suitable for agriculture and tree-crop production in Hainan. The area under annual field crops covers about 432,000 ha, 44 percent of which is planted with rice, and 41 percent sugarcane. The planted area of annual field crops is about 740,000 ha, giving a cropping intensity of about 170 percent. About 442,000 ha are planted to rubber and other tropical perennial crops, e.g., taangotbanana, coconut, cashew, pineapple,pepper, and sisal. The provincial livestock herd includes 1.2 million buffalo and cattle, 2.8 million pigs, 350,000 goats and sheep and 33 million poultry. Livestock production is largely undertaken by village households and there are few large commercialunits.

aI In 1980 constant prices, Y 6.5 billion at current prices in 1990. - 15 -

2.16 Hainan province is a net importer of foodgrainsand about 450,000 tons of grain (mostly rice and wheat) are imported from the mainland each year, equivalent to about 20-25 percent of the provincial consumption. On the other han.A,most of Hainan's rubber and sugar production is sold to the mainland; Hainan accounts for over half of China's total output of natural rubber. Hainan also exports to the mainland and to foreign countries various other agriculturalproducts includingvegetables, tropical fruit, pepper, sesame, tea and cashew, as well as aquatic products, pigs, and canned foods such as coconut milk drink.

2.17 Hainan'5 agriculturallabor force is currently estimated at about 2.1 million people, of which about 1.6 million are engaged in individual household production and about 0.5 million are employed by state-owned enterprises. The majority of food crops (includingrice, sweet potato, oilseeds, legumes, sugar, vegetable, fruit) and some tropical tree crops such as coconut are grown mainly by individualhouseholds. Virtually all of Hainan's rubber and sisal output and part of the production of other commoditiessuch as sugar or tea is produced on state farms. The recent liberalizationof agriculturalcommodity markets and prices has, mainly, benefitted the individual farmers, particularlyin production of vegetable, fruit, fisheries and meat.

2.18 There are 154 rivers in Hainan, of which 40 have a catchment in excess of 100 km2. Mean annual runoff is about 875 mm depth per year and equivalent to 29.7 billion m 3, but is subject to large fluctuations3/. i - ~~~~3 Total roundwater resources are estimated at 14 billion m3 with about 4.7 billion m available for extraction. The province has 2,448 reservoirswith a total storage of 6.87 billion m and effective storage of 4.23 billion n3. There are 3,349 small gravity diversion schemes with an estimated diversion discharge of 160.6 m3/sec and 1,200 pump irrigation schemes with an installed capacity of 32,000 kW.

2.19 About 370,000 ha of irrigationhave been designed but engineering work.shave been completed for 240,000 ha. Only 185,000 ha of this area has guaranteed water supply. Constraintsto efficient use of availablewater include: inadequate infrastructure;inefficient methods of irrigation,&nd inadequate incentives for water saving. The province has an ongoing program to develop and upgrade irrigation systems, but lack of investment fund has been the major constraint.

Proiect Areas

2.20 The agriculture/irrigationcomponent is located in Dongfang County, at the western end of Hainan Island. The project area has a gross area of about 20,800 ha, with a net irrigable area of 12,667 ha and includes 4 townships, 15 villages and 2 state farms.4/ The project includes Phase I

3/ 12.0 billion m 3 (1969) to 56.6 billion mi3 (1978).

4/ Townships are Baoban, Datain, Xinje ard Sanjia. State farms are Hongquan and Guangba state farms. - 16 -

of two phased agriculturaldevelopment programs extending to the year 2000. The total command areas for both Phases I and II would be 66,700 ha.

Climate. Topography and Soils

2.21 Climate. The project area is in the rain shadow of the central mountain range and is in the driest part of the Island. Total annual rainfall is about 1,350 mm, with over 80 percent &.lling during May-September. Rainfall is highly variable between and within years. Annual evaporation is about 2,200 mm and exceeds rainfall for eight months of the year. Therefore, the main constraint is rainfall. Annual crops can only be grown successfully without supplementaryirrigation In the April-Octoberperiod, but can still be subject to drought periods. Low rainfall in the November-Aprilperiod reduces the potential yield of rubber, sisal, sugar and mango, the main crops grown in the region. Average monthly temperaturesvary from 12'C in January to 35 C during summer. Annual sunshine hours average about 2,600 hours.

2.22 TopoRraphy. The general slope of the project area is from the southeast at the site of the dam to the northwest and western coastline. Hilly and undulating land gradually gives way to the gently sloping to flat coastal plains. Due to the relativelysteep gradients of the river systems, there are not extensive river flood plains. The proposed Phase I irrigation system under the project would command undulating land between an elevation of 100 m and 47 m in the south eastern segment of the project area. Substantial land levelling and t-rra^ingwill be required in some sections to distribute water evenly at farm 2eval. Steep land rising to 250 m will be reserved for forest.

2.23 Soils. Soils in the project area are derived from granite arena- ceous shale, limestone and river wash and have been surveyed and mapped on a scale of 1:50,000. Soil pits were dug at regular intervals and soil sampled and analyzed for each major horizon. The predominant soil types are described as brown laterite, red calcareous and dry red soil. The depth of soil over rock is reported to vary between the range of 2-5 m but some shallow stony soils are also present. Physical and chemical analyses indicate that the soils are predominantlyfree draining,well-aerated sands and sandy loams. They are slightly acid (pH 6.0-6.5) with a rather low cation exchange capacity and water holding capacity.

2.24 Uncultivatedsoils have reasonable levels of organic matter and total nitrogen. Under regular cultivation,the soils lose organic matter, nitrogen and phosphate. During land levelling, it will be important to stockpile surface soil and plant a green manure crop. Adequate applications of organic material, nitrogen and phosphatewould be required to achieve good yields. Due to the high permeabilityand rather low water holding capacity of upland soils, shallow rooted annual crops would be subject to some moisture stress even with irrigation during months of high evaporation. Mulching could reduce this problem. In areas with shallow soils, the potential fcr seepage of excess irrigation water from high areas to lower areas would need to be monitored along with groundwaterlevels. 17 -

Land Use. Farm Size and Population

2.25 The command area of the High Main Canal irrigation system has a gross area of 20,800 ha. Currently, about 6,608 ha is cultivated and about 133 ha is 4rrigated from small streams and reservoirs. Principal crops are rice, sugarcane,mango, forest trees, which are often intercroppedwith coffee, pineappie; and rubber. The average farm sizes for small farm and state farm households are about I ha and 1.7 ha/family respectively. The rest of the cultivable land in the project area is under light scrub, with an un- specified area cultivated on a contract basis by the County, employing about 12,000 landless unemployed laborers. Approximately 1,400 ha of uncultivated state farm land and scrub land would be developed for the resettlementof 9,000 people displaced by the proposed reservoir. The balance of the affected families, 12,400 people, would be allocated reclaimed land totalling about 2,300 ha in Dongfang and Ledong Counties (see IBRD Map 21686). They would be prov .dedirrigation from establishmentof minor irrigationworks or extension of existing irrigation canals.

2.26 Total population in the project area in 1989 was estimated at 23 745 people. This ccrrespondsto an average population density of about 114/kma which is below that of Dongfang county as a whole (134/km). Almost all population in the project area is agricultural,vith about 5,000 households. Total agriculturallabor force in the project area is estimated at 10,279. On the basis of 300 person-days per person per year, this corresponds to about 3.08 million person-daysper year for agriculturalwork in the project area.

Present AgriculturalProduction Constraints

2.27 The main constraintsto agriculturalproduction in the project area are limited and variable rainfall, infertile soils, inadequate supply of good quality seeds and improved varieties, fertilizer and agrochemicals,a lack of credit available to farmers and insufficientextension services. These constraints have resulted in low yields and underutilizationof cultivated land. In the low lying areas, two crops of rice and a crop of peanut is grown when water supplies are adequate. Peanuts, sweet potatoes and sugarcane are usually grown on upland areas. Where adequate land is available, these crops are rotated around the land for ferti1'ty build up under scrub fallow. Details on the agricultural/irrigationcomponent are in Annex 26. - 18 -

III. THE BENEFICIARY

A. Introduction

3.1 The proposed multipurpose project involves two beneficiaries: the Hainan Provincial Electric Power r,mpany (HEPCO), and the Hainan Provincial Government through the Project ManAgemer.t Office (PMO). HEPCO is responsible for the power component while the PMO has overall responsibility for the agriculture/irrigation, resettlement and environmental management components. The specific arrangements for project organization and management are covered in paras. 4.10-4.13.

B. The Hainan Provincial Electric Power Company

L gal Status and Organization

3.2 In mid-1988, when Hainan Island was made a province, the Hainan Electric Power Company (HEPC) waa elevated to a provincial power bureau and renamed the Hainan Provincial Electric Power Company (HEPCO). A charter for the company was issued by the Provincial Government. This charter, which is consistent with the spirit of the "Enterprise Law" recently enacted by the Central Government, is acceptable to the Bank. HEPCO is a separate legal and accounLting entity. It is a state-owned enterprise responsible for the construction and operation of the power system in Hainan Island. It operates the distribution system in Haikou; distribution in other areas of the island is handled by the municipalities that purchase bulk power supply from the company.

3.3 HEPCO is headed by a General Manager appointed by the Hainan Govern- ment. The General Manager reports directly to Hainan's Deputy Provincial Governor and is in charge of setting corporate goals for the company. These goals are to be consistent with the economic development policies of the Hainan Government. The General Manager is assisted by four Deputy General Managers, a Chief Engineer and a Deput. Chief Engineer. HEPCO has 21 divisions representing the various activities of the company and 13 operating groups in charge of running the power stations. The company's organization chart is presented in Chart 3. HEPCO thus far has performed satisfactorily; recent performance indicators for the Hainan Main Power Grid are set out in Annex 3.

Staffing and Training

3.4 HEPCO currently employs about 5,000 staff, most of whom have been retained from the old HEPC. The management of HEPCO is competent and experienced. However, the company is understaffed in engineers and technicians. Staff at the foreman level, in particular, appears to be inadequately trained. Furthermore, in order to cope with the rapid increase in its activities, the staffing of the company would have to increase significantly over the next ten years. In sum, the present institutional capabilities of HEPCO appear inadequate both qualitatively and quantitatively. In the short run, HEPCO relies heavily on experienced staff from the mainland. For the longer r-in, HEPCO will train its own staff, which will take place both in the mainland and - 19 -

Hainan. Toward this end, a training center is planned to be establishedby the company. In addition, the proposed project would complement the local training efforts by helping to finance foreign training--primarilyin financial management, operation and maintenance of power facilities (para. 3.5). An assurance has been obtained from HEPCO that it will carry out staffinR and training in accordance with the progrjamand timing agreed with the Bank/IDA. The agreed training program is presented in Annex 11.

Operation and Maintenance

3.5 Operation and rmaintenancefunctions at HEPCO have a number of drawbacks. First, there i; a shortage of well trained personnel. Second, substation and distributionfacilities need strengthening,and some need to be rebuilt. Third, the maintenance shops are not adequately equipped. These shortcomingshave, in turn, reduced the reliability of power transmission/ distributionand exacerbatedthe problems of power outages. HEPCO's management is aware of the need to strengthen the company's operation and maintenance activities. The planned remedial measures would focus on increased staff training, and the recruitmentof experiencedand competent personnel from the mainland. Moreover, the proposed project would support improvements in maintenanceby providing for maintenance equipment and tools, and training of maintenance and operating personnel.

Billing and Collection

3.6 HEPCO's sales by consumer categories are shown in Annex 4. Meter reading, billing and collection activities at HEPCO are conducted by three power supply bureaus. All the customers are charged once a month according to the meter readings. Until 1989, major industrial consumers paid their bills through direct debit of their bank accounts and HEPCO's collection of payment from power sales was maintained at no more than 30 days. Since 1989, all consumers have made payment directly to the power supply bureaus. When the average collection period increased to 38 days in 1989, HEPCO started to adopt various measures, including, inter alia, (a) charging major customers a one- month payment in advance, making an adjustment at year-end based on actual usage; (b) imposing penalties on customerswith overdue payments; and (c) dis- connecting customerswho maintain continuous arrears. These measures have helped to reduce the average collection period to 34 days in 1990 and allow HEPCO to maintain a more reliable cash flow from sales.

Planning. Budgetint and Control

3.7 HEPCO is responsiblefor developing one-year and five-year production and investment plans which are integrated into Hainan's provincial plans. Investments involving Central Government financing require SPC's approval and MOE's clearance. As HEPCO lacks a system planning capability, it relies on the assistance from the research and design institute*;of MOE. In order to build up HEPCO's system planning capability, technical assistancewill be provided for this under the project (para. 2.11). Financial planning at the company has been confined to attaching monetary values, predetermined by MOE, to the quantities being planned. The plans, in general, are not revised to reflect differences between the planned prices and the prices actually paid by the company. Furthermore, under the present financial system in China, heavy - 20 -

emphasis is placed on the annuial.budget as a controlllng tool; however, financial planning beyond one year i1 general iy not. undertaken.

3.8 The above planning system futictf eel satisfactorily in a hxighly centralized economy whereby controlled pri -s kept the inflation rate negligi- ble and investments were financed almost exclusively by grants. However, with the recent economic reforms, prices have escalated considerably, and Govern- ment grants have been largely replaced by loans. In addition, the institutional framework is moving t outrd a rodorl i(n il centializecl conitrol,with corresponding increase in financial respunsibi]ity st the power bureau level. In earlier Bank-financed power proJecLs, tbe Bank lhas initiated significant first steps toward strengthening financial management at the various project entities. The measures adopted include the extension of financial planning horizon and provisions for training in modern financial management. The training has focused on modern techniques in corporate planning, and on cost and debt management. The above training is centrally managed by MOE/SEIC in order to promote coordination and cross-fertilization among the various regional power bureaus. A series of training seminars in China and overseas training have recently taken place and future training activities would build on these experiences. An outline of the financial training program for Bank- financed power bureaus is attached (Annex i1)

3.9 The proposed project would further the Bank's objective of strengthening the financial management of the power utilities. An assurance has been obtained from HEPCO that, by May 31 of each year, starting from May 31, 1992, it will furnish to the Bank/IDA a rolling long-term financial plan containing proiected income statements, sources and uses of funds and balance sheets for a period of no less than seven years. Furthermore, to help prepare HEPCO to assume increasing financial responsibilities, financial management training would be provided under this project. HEPCO would participate in the aforementioned training activities centrally managed by MOE/SEIC.

Accountl

3.10 As in the case of all state enterprises in China, the power bureaus follow a unified Chinese accounting system in their financial reporting to the Government. The Chinese accounting system has been largely satisfactory in the context of a highly centralized and closed economy. However, while the recent economic reforms in the country have resulted in changes in the financial system, corresponding changes in accounting practices are apparently lagging. For example, present Chinese practice uses historical rather than prevailing foreign exchange rates in reporting foreign loans. Hence, the impact of exchange rate fluctuatiors is not reflected in the enterprises' financial statements. With a view to promoting prudent fiiancial management, including foreign debt management, a training seminar on selected aspects of international accounting practices was recently held in China.

3.11 In accordance with Chinese accounting practices, the power bureaus maintain two separate sets of accounts--one set for capital construction and the other for operation. Since these two sets of accounts are not being consolidated, the balance sheet for operatlon does riot include construction work- in-progress and the related financing. As -jrrhe case of earlier Blnl-- finasned projects, HEPCO would coltooldn6- . ij. r-pital conqtrVuCLciou1 ecwcount 21 -

with thc operatiou account for the audited financial statements and rolling financial plans to be futrnished to the Bank.

Computer Applications and Information Management

3.12 HEPCO's accounting system relies primarily on manual operations and computer usage is limited. The financial training program would include computer applications to be used as a management tool, and management information system (MIS).

Internal Audit

3.13 Regulationis requiting state-owned pow7er bureaus to undertake inter-

nal auditing were promulgated in 1985. However,9IEPCO has not as yet set up such a function, mainly due to staff conistraint. Given the company's rapid expansion in operations and increasee financial responsibilities, it will need to enhance its internal control system, including the undertaking of internal auditing. An assurance has been obtained from HEPCO that it will provide the Bank/IDA. by June 30, 1992, with an action plan to organize and staff an internal audit unit at HEPCO and take into account the Bank's comments in the implementationof this plan.

External Audit

3.14 As with other Bank-financedprojects in China, the Foreign Invest- ment Audit Bureau of the State Audit Administration(SAA) will have the overall responsibilityfor auditing HEPCO's accounts, Under SAA's supervision, the actual auditing work will be conducted by the Audit Bureau of Hainan Prov- ince. This arrangementis satisfactory. However, mainly due to the special features of Chinese accounting,agreement was reached with SAA that for Bank- financed projects, including power operations,there would be improved disclosure of accounting policies and supplementaryfinancial informationin order to provide an adequate illustrationof the financial performance and status of projects/entities. Technical assistance for SAA and the provincial auditing bureaus will continue to be financed under IDA credits. An assurance has been obtained from HEPCO that it will maintain separate accounts for the prolect and that the audited project accounts and financial statements of HEPCO will be furnished to the Bank/IDA within six months after the end of each fiscal year.

Insurance

3.15 HEPCO relies entirely on self-insurance. So far, it has maintained a sound liquidityposition, which would allow it adequately to self-insure its assets against normal levels of risk. - 22 -

IV. THE PROJECT

A. Prolect Oblectives and Rationale for Bank/IDA Participation

4.1 The proposed operation is designed to promote economic growth and alleviate poverty in an impoverishedregion. The project would help address major infrastructureand resource constraints faced by Hainan Province. This would, in turn, enhance Hainan's capability to assume its role as a Special Economic Zone, thus complementingthe Government'sopen-door policy to attract foreign investmentsand reform initiativesto transform the province into a market-orientedeconomy (para. 2.3).

4.2 The proposed multipurposeproject provides a unique opportunityfor the Bank/IDA to further its developmentobjectives in two key sectors, energy and agriculture. The main project objectives are to:

(a) increase the developmentof non-pollutingand cost-effective hydropower resources to provide needed peaking power in a predominantlythermal system;

(b) increase agriculturalproduction to meet the needs of a growing population;

(c) increase the income of the poor farmers by intensifying agriculturalproduction and increasingthe productivityof cropland by alleviatingwater shortagesand optimizing the cropping pattern;

(d) improve the environmentalquality and public health of the region by implementingan environmentalmanagement program;

(e) promote prudent investmentprogramming and strengthen local capabilitiesin developmentplanning of both power and agricultural sectors;

(f) promote rational pricing of electricityand irrigationwater; and

(g) enhance the operationalefficiency and financialmanagement of HEPCO.

4.3 HEPCO is in a difficultperiod of transition (para. 5.2). During the course of project preparation,the Bank was instrumentalin effecting up- front actions for strengtheningthe company's finances, including realistic electricity tariff setting (para. 5.5) and improved debt management and control (para. 5.11). Bank/IDA participationhas also contributed to improvementsin the design and implementationarrangements of the various components, including the dam, power facilities,resettlement, irrigation and environmentalmanagement. Special care will continue to be taken to minimize the disruption to the resettled families, reestablishtheir economic productivityand improve the standard of living in a region of extreme poverty. Building on the experiencesof earlier projects, Bank/IDA involvement would contribute toward timely implementationof the resettlement - 23 -

component tnrough: (a) financing essential items of the resettlementprogram; and (b) enhancementsin project costing and monitoring of implementation.

B. Proiect Description

4.4 The project includes two main categories of components,power and agriculture/resettlement.

A. Power

(a) constructionof a 56 m high, 719 m long grivity dam of roller- compacted concrete (RCC), flanked by about 5,100 m long earth embankments;

(b) constructionof an undergroundpowerhouse, equik ed with four 60 MW generation sets, a surge shaft and 420 m long twin tailrace tunnels;

(d) installationof a computerizedload dispatch system for the Hainan power grid; and

(e) technical assistance and training in project design, power system planning and tariff studies, utility and financialmanagement.

B. Agriculture/Resettlement

(a) constructionof about 16-km long High Main Canal (HMC), about 154 km long branch/lateralcanals and on-farm works for irrigation of about 12,700 ha in Dongfang County, of which about 1,400 ha would be related to resettlement;

(b) resettlementof about 23,800 people in Dongfang and Ledong Counties, and provision of housing, infrastructure(including pubiic buildings), on-farm works and land developmentfor irrigation of about 2,300 ha;

(d) provision of environmentalmanagement; and

(e) technical assistance for the preparationof an agricultural developmentplan.

4.5 The proposed project is part of a multipurposecascade development of Changhua river. The dam is to be located in the middle reaches of the river, about 700 m upstream of a 40 m natural waterfall. The drainage area above the proposed dam site is 3,498 km2 , accounting for 60 percent of the river basin. The reservoir created by the dam would cover 99 k2, with 1.5 billion m 3 useful storage capacity. Based on 32 year hydrologic records, the long-term average annual streamflow discharge of the river at Daguangba is - 24 -

estimated at 97 m3/second3 or 3.05 billion m~~~~~~~~~~~3 /year. The multi-annual regulation provided by the reservoir would allow 90 percent of the discharge to be used for power genaration (520 GWh on average), irrigationby gravity (up to 66,700 ha), and provision of industrialand domestic water in the nearby region. The project is primarily a hydropower scheme. The results of a reset-;oirsimulation study indicate that, in order to maximize economic benefits, the volume of water to be diverted directly from the reservoir for irrigationpurposes would amount to only 4 percent of the average regulated flow of the project (about 4 m3/second).

4.6 In contrast to the existing run-of-the-riverhydropower in Hainan, Daguangba power plant would provide firm power as the seasonal water inflows would be regulated by the reservoir. Power from Dag.:angbawould be integrated into the grid of Hainan Province. The proposed hydropower plant is designed to operate as a peaking plant. A plant factor of 0.25 has been selected on the basis of an optimizationstudy, and an installed capacity of 240 MW in four units was selected as the optimum size for the power generating facility. Additional informationon the dam/power facilities is presented in Annex 12.

4.7 The proposed project represents the first phase of the Hainan Government'splan to expand irrigation in the western region. In this first phase, approximately12,700 ha of gravity irrigation system would be established,covering about 20 percent of the tDtal area (66,700 ha) in the overall plan. Water will be diverted from the Daguangba reservoir,with an annual average flow of 123 million m 3, to provide water to presently low- yielding cropland. The size of the HMC irrigation system has been determined by the area topographywith the objectives to fully utilize the Changhua River's water resources and the limited irrigable land in Dongfang County, and to maximize energy generation. The project would support the establishmentof irrigated agricultureresearch and trial plots to determine crop response to irrigation frequency, crop water requirements,and to develop improved technology and cropping systems for the project areas. The project would also strengthen training and extension services. Further informationon the agriculture/irrigationcomponent is presented in Annex 26.

C. Resettlement

4.8 The inundation of the Daguangba reservoirwill entail the resettlement of about 23,800 people. The RRP is designed to restore the livelihoods and homes of the affected population in Dongfang and Ledong Counties (see IBRD Map 21686). About 83 percent of the families to be resettled are agricultural;the balance are uwban. Most of the affected agricultural families are Li and Miao ethnic mincrities. Details on the resettlementand rehabilitationprogram (RRP) are presented in Annex 16.

4.9 The RRP under the project has been well planned. It specifies the development of resettlementreceiving areas, family entitlements,transport arrangements,subsistence during transition, and implementation responsibilities. The program was reviewed by the Bank and found to be satisfactory. The affected families have been associatedwith the planning of the RRP and are willing to be resettled. The population in the project area now lives in extreme poverty; the provisions of water supply, irrigation and promotion of agriculturaldevelopment under the project would open up new - 25 -

opportunitiesfor improving their standard of living. An assurance has been obtained from the Hadnan Government that it will implement the agreed resettlementprogram.

ResettlementPrinciples

4.10 The formulation of the procedures for compensation,resettlement and reestablishmentof the affected people is guided by the statutes of land administrationissued by both the central government and Guangdong Province (under which Hainan Island was previously governed) as well as the design norms for handling reservoir inundationsissued by the Ministry of Water Resources and Electric Power (MWREP), the predecessor of MOE. The basic principles of resettlement,detailed in Annex 16, are to enable the affected population to become economicallyand socially reestablishedon a sound productive basis, to restore its communities,to attain a higher standard of living, and fully to reconstructand develop the affected means of prodaction. Special care will be taken to minimize disruption to the way of life of the affected population and, to the extent possible, to preserve the integrity of the original social units.

Reestablishmentof Economic Productivity

4.11 The affected rural population are living in extreme poverty. Under the proposed project, the provision of irrigationwater in a dry area would open up new opportunitiesfor poverty alleviation (para. 6.9) and increased employment of women (para. 6.12). Agriculturalredevelopment would be the core of the program for re-establishingeconomic productivity. Each of the affected farm families would be allocated irrigated land for crop cultivation and also land for tree crops (mainlymango and rubber) sufficient to provide opportunity for significantincreases in productivitycompared to today. Where necessary, as in the case of families to be resettled around the High Main Canal areas, resettlerswould be provided with 0.1 ha of fuelwood land as their existing fuelwood lots would be inundated by the reservoir.

4.12 Most of the urban families affected reside in Ledong County. These families would continue in their present occupations since only their residences would be affected. Their places of employment,in large part government offices, will remain the same and the residenceswill be reconstructedat locationswhich would keep transportationcosts to a minimum.

4.13 Free transportationand hauling of belongings would be provided to the affected families. During the transfer and reconstructionperiod, urban residentswill be paid a subsistenceallowance up to 60 days of work missed. The rural population will be provided rations of grain, fuelwood, and fodder in their new settlements during a two-year transitionperiod, between transfer and resumption of full economic productivity.

ImnlementationSchedule

4.14 The resettlementcomponent is being implementedover seven years (1989-95),beginning with preparation of the new sites. The schedule for relocating the population out of the reservoir site (Annex 16) has been designed to allow a gradual pace in relocationwhile not impeding the - 26 -

constructionprogress of the project. On average, resettlementand reestablishmentof a village is planned to take place over a period of about three years, including one year of site preparation. Agriculturalextension, literacy courses and communitypublic health training courses (to address problems like trash disposal, sanitation and hygiene, etc.) will begin the year following the transfer to the new sites.

D. EnvironmentalManagement Pro#ram

4.15 No major environmentalproblems are expected under this project. Indeed, implementationof the proposed project will generally enhance the environmentalquality in the region. The project would help mitigate air pollution through the avoidance of burning some 300,000 tons of coal per year. This would, in turn, avoid the annual emissions of some 14,200 tons of SO2, 1.8 million tons of C02, and 3,800 tons of particulate. Other environmental benefits include the avoidance of ash and scrubber sludge production as well as blowdown water disposal associatedwith a thermal power system. Further, the project would support improvementsin water quality, municipal and industrialwaste disposal, fisheries and public health in the region. An EnvironmentalImpact Statement (EIS) identified issues which were then addressed systematicallyin the proposed EnvironmentalManagement Program (EMP). The EIS and EMP were prepared by NSDI in collaborationwith the Hainan EnvironmentalResources Administrationand the Governments of Dongfang and Ledong Counties. The Bank has reviewed the design of the project's EnvironmentalManagement Program and found it to be satisfactory.

4.16 The project area is subtropicaland devoid of tropical forest; the reservoir area is predominantlydense brush two to three meters in height. All the vegetation will be cleared from the reservoir prior to its filling in order to lower the risks of anaerobic conditions in the reservoir, to minimize health risks stemming from nutrient-richwater facilitatingvegetative growth, and to disperse disease-bearingpests more gradually. Effluent from the sugar mill and sewage discharges from Ledong County Seat will be treated before release into the reservoir. Exposure to malaria vectors will be reduced by lined irrigation canals, distributariesand laterals down to the field channel level, and the filling or leveling of borrow pits. Health clinics will be established at the project site and in resettlementareas, and workers will receive health screening and treatment before employment. Existing afforestationprograms in Ledong and Dongfang counties will be focused on reforestationof the reservoirmargin and resettlementzones. About 35 percent of the area for the proposed irrigationprogram will be planted with forest trees which will in turn reduce run-off and erosion. Increases in fertilizer use and agrochemicalswould not create any signifcanthazard. It is the local government policy to emphasize integrated pest management and the use of chemicalswith low toxicity. Separately,protection measures of the Datian Mountain Deer ConservationArea will be strengthened. Further details on the EnvironmentalManagement Program are presented in Annex 17.

4.17 The EnvironmentalManagement Program would be implementedby the PMO. The program would include two EnvironmentalSurveillance Stations to monitor disease vectors, public health, and ecological change. Reservoir water quality will be monitored by the Project ConstructionHeadquarters with the guidance of the Hainan Provincial Environmental Administration. An - 27 -

assurance has been obtained from the Hainan Govo:nment that it will imolement the agreed EnvironmentalManagement Program.

E. Proiect Origin and Desian

4.18 The proposed project was first investigatedin 1964 by the Mid- South Design Institute for HydroelectricProjects (IMSDI)of the MWREP. Since then, extensive field investigationshave been carried out to confirm the good geo'.ogicconditions at the project site. A feasibilitystudy of the project was prepared by MSDI in 1984 and was approved in principle by MWREP in 1985. The project was identified in September 1986; since then the Bank/IDA has made varicus recommendationsregarding optimizationof the project design and these were adopted. A preliminary design of the project was completed by MSDI in end-1987. This was reviewed by the China InternationalEngineering Consulting Corporation (CIECC) on behalf of the SPC and found to be satisfactory. The project was approved by SPC in April 1989.

4.19 HEPCO has engaged MSDI to prepare a detailed design of the dam/ power facilities and to produce the constructiondrawings. MSDI is competent and has adequate experience in the design of similar projects. However, local technology is still lagging in modern techniques for designing and constructingRCC dams ane undergroundstructures proposed for the project. Therefore, under TCC II (Cr. 1412-CHA),$350,000 has been made available to finance technical assistance/trainingin the detailed design of dam construction and power plant facilities,and for the developmentof technical specifications for the telecommunicationscontrol system of the grid (Annex 13). In addition, HEPCO has set up a Special Board of Consultants (SBC) to review the design of the project and monitor its construction,including any design modifications proposed during construction. The SBC board includes international experts from the U.S., France, and Germany. The Terms of Reference for the SBC are presented in Annex 14. An assurance has been obtained from HEPCO that it will continue to employ an SBC to review the detailed conetructiondesign for the power component and to advise HEPCO during constructionof the proie't. Insofar as the agriculture/irrigation component is concerned, UNDP-financedconsultants assisted the Hainan Government in the formulationof an agriculturaldevelopment plan in the project area which is satisfactory.

F. Proiect Organizationand ManaRement

4.20 Overall implementationof the project is overseen by the Hainan Province Daguangba Project Steering Committee headed by the Deputy Provincial Governor. Day-to-day management of the power component is carried out by the Project ConstructionHeadquarters, headed by HEPCO's Deputy Manager. Coordinationof activities at the dam site and with other project components is carried out by the Project CoordinationOffice. These arrangementsare adequate for the implementationof the project.

4.21 The main civil works for dam/powerhouseare being carried out by the Yangtze Gezhouba ConstructionBureau (YGCB), an experienced contractor which has performed satisfactorilyfor the ongoing Yantan Hydroelectric - 28 -

Project (Loan 2707-CHA) 1/. Constructionsupervision at the project site is being carried out by the Guangxi Electric Power Bureau Investigationand Design Institute (GIDI). GIDI has ample experience in supervising construction and it has also performed satisfactorilyfor the Yantan project. MSDI would continue to be the consultant engineer for the project and, as necessary, adjust the constructiondesigns. ln addition, an experienced and qualified internationalconsultant would assist HEPCO in managing project construction. The scope of work of the iuiternationalconsultant during the entire implementationperiod will include contract administration,cost control, constructionplanning, schedule monitoring and coordination, constructioninspection and quality assurance and training of HEPCO personnel (Annex 15). An assurance has been obtained from HEPCO that it will continue to employ qualified consultantsto desiRn and supervise prolect construction. An organizationchart for the project is presented in Chart 4.

4.22 A Project Management Office (PMO) has been establishedunder the project's Steering Committee to plan, coordinate, supervise and monitor the progress of the agriculture/irrigation,resettlement and environmental components of the project, and would be responsible for their overall management. It has been staffed by senior staff from the Department of Agriculture, the Bureau of Water Conservancy,the EnvironmentalResources Administration,and the ResettlementOffice. The provincial PMO would provide the county PMO with technical support, personnel and other resources required for successful implementationof the project. It also would assist in procurement and in organizing the project training program.

4.23 The existing resettlementcommittees in Dongfang and Ledong Counties has been expanded to form a PMO for each of the two counties and for the affected State farms. The county PMO would have the primary responsibilityfor detailed planning and i .plementationof the irrigation, resettlementand environmentalcomponents of the project. The county PMO is headed by a project manager and staffed with about 25 professionals. The PMO comprises a general administrativeoffice and six divisions for: (a) finance; (b) material and equipment; (c) irrigation and agriculture; (d) monitoring and evaluation; (e) resettlement;and (f) environment. The county PMO would be given technical support and assistancewith planning and execution by an Advisory Committee chaired by the deputy governor of the county (responsible for agriculture/resettlement).The Project Manager is secretary of this committee, and members of the committee include representativesfrom the relevant agencies for agriculture,resettlement and environmentalmanagement. The organizationand implementationarrangements for the agriculture/irrigation and resettlementcomponents are presented more fully in Annexes 26 and 16, respectively.

G. Proiect ImplementationSchedule

4.24 The project is being implementedover eight years (1989-96). The implementationschedule Is presented in Chart 5. Constructionof civil works

1/ Gezhouba and foreign partners were selected as the contractor for the undergroundpowerhouse works in the recentlyapproved Ertan HydroelectricProject (Loan 3387-CHA). - 29 -

for the dam/powerhousecommenced in 1989. The closure of dam structures in the right bank was completed in April 1991. Land acquisition for resettlement purposes has been completed and about 4,500 people have been successfully relocated. A partial impounding of the Daguangba reservoirwould take place around July 1992. The High Main Canal and Sanjiaolu branch canal would be completed by mid-1994, and related lateral canal constructionand on-farm developmentworks would be completedby 1995. During the interval between relocation of the villages and the start of irrigation at the new site, provision would be made for the affected families to receive fodder, food and fuel subsidies. The first two power generating ttnitswould be commissionedin 1993 under partial reservoir impounding. Full loading of the units would take place late in 1994 once full reservoir impounding is achieved. The implementation of the irrigation component beyond the resettlementareas would be completed by 1996. The project completion date would be December 31, 1996 and the closing date would be December 31, 1997.

H. Prolect Costs

4.25 The total costs of the project are estimated to be US$193 million equivalent,of which US$59 million (31 percent) represents the foreign exchange costs. The project base costs are in early-1991 prices which are derived from: (a) actual constructioncosts for completed preparatoryworks; (b) contracts concluded for the main civil works for dam/powerhouse,turbines and generators; (c) recent bid prices for major constructionmaterials; and (d) recent qiotations for similar works and equipment in other areas of China. Table 4.1 presents a summary of the project costs.

4.26 Physical contingenciesare calculated at 5 percent for electrical equipment, irrigation canal system and on-farm works, and 10 percent for the main civil works for dam/powerhouse. Even though the resettlementcomponent has been well planned and the cost has been carefully estimated (Annex 16), experiences from past projects indicate that resettlementprograms by nature are subject to considerableuncertainties and a physical contingency of 20 percent has been assumed. The price escalation for costs expressed in terms of foreign exchange (US dollars) is calculated according to anticipated internationalprice escalation of 3.9 percent p.a. for 1991-95. The price escalation for costs expressed in local currency is calculated according to projected local inflation rates of 10 percent for 1991, 8 percent for 1992 and 5 percent p.a. for 1993-95. Table 4.1s PROJECT COSTS SUMMARY

Local Foreimn Total Local Foreien Total Foreidn as Percent (Yuan Million) (US$ Million) of Total

Preparatory Works 24.0 0.9 25.0 Resettlement 4.9 0.2 5.1 4 135.4 15.1 150.5 25.9 2.9 Environmental Management 28.8 10 6.2 3.7 9.9 1.2 0.7 Civil Works (Dam and Power Facilities) 1.9 38 182.1 4.5 186.6 35.3 0.9 36.2 HNC and Sanjiaolu canal system 2 39.1 13.2 52.2 7.5 2.5 10.0 25 Canals and on-farm works beyond resettlement 62.8 16.3 79.1 12.0 3.1 15.1 21 Majorconstruction materials 5.2 133.1 138.3 Gates and Hoists 1.0 25.7 26.7 96 15.3 6.8 22.1 3.0 1.3 :..3 30 Turbines and Generators, a.'dother plant equipment 70.1 6.3 76.4 13.5 1.2 T & G Governors and Static Excitation 14.7 8 0.9 19.6 20.5 0.2 3.8 3.9 PLC Equilment, transmission line, substation 96 11.6 26.5 38.1 2.2 5.1 7.3 Load Dispatch System for 0ainan 70 Island Grid 0.2 13.1 13.3 0.0 2.5 Agricultural Support Services 2.5 98 4.2 0.0 4.2 0.8 0.0 Project Management and Engineering 0.8 0 26.0 5.4 31.5 5.2 1.0 Teehbical Assistance and Training 6.3 17 5.0 7.0 12.0 1.0 1.4 2.3 59 Total Base Costs /a 588.0 271.7 859.7 113.6 52.2 165.8 32 Contingencies: Physical 59s.0 15.4 74.3 10.5 Price .9 13.4 22 107.6 44.9 152.5 9.8 4.0 13.7 29 Total Prolect Costs 754.5 332.0 1,086.5 133.8 59.1 193.0 31 Interest during Construction: IBRD loan lb 26.5 12.2 38.7 4.8 2.0 6.8 Other loans 29 101.5 0.0 101.5 17.9 0.0 17.9 0 Total Financing Required Ic 882.5 344.2 1,226.7 156.5 61.1 217.7 28

The project is exempt from taxeh and duties. Interest during construction (IDC) is based on onlending fb rate for projected disbursementsof loanlcreditproceeds. Foreign currency portion of IDC ls based on Bank loan variable rare for projected disbirsements of loan proceeds. le Figures may not total exactly due to rounding. -31 -

I. Project Financin,q

4.27 The financingplan for the project is shown in Table 4.2:

Table 4.2: PROJECT FINANCING PLAN (US$ Million Equivalent)

Percentage Source Local Foreign Total of Financing

IBRD/IDA 17.0 50.0 67.0 31Z TCC II /a - 0.3 0.3 - UNDP - 0.1 0.1 - MWR 12.0 - 12.0 5% SEIC 21.0 - 21.0 10% Hainan Government Loans 98.5 10.7 109.2 50% Grants 8.0 - 8.0 4%

Total Financing Required Lb 156.5 61.1 217.7 1002

/a Credit 1664-CHA. Lb Includes IDC of about $25 million; all of the financing sources would finance IDC relating to their own loans.

4.28 The total financing requirements,including interest during construction (IDC) of $25 m:.llion,would amount to $218 million. The Bank/IDA loan/creditwould amount to $67 million, of which $50 million would finance 82 percent of the foreign exchange requirements,and the balance ($17 million) would finance 11 percent of the local funding requirements. The proposed loan/creditwould include financingof IDC on Bank loan ($2 million) in order to help alleviate HEPCO's debt service burden over the medium term (;ara. 5.10). The balance of the local financingwould be met by the Ministry of Water Resources (MWR) ($12 million), SEIC ($21 million) and the Hainan Provincial Government ($117 million). Part of the on-farm works financing requirementswould be met by contribtltedlabor from beneficiary farmers in carrying out earthworks for canal and small structures construction.

4.29 The Bank/IDA loan/creditwould finance 48 percent of the project costs net of reserved procurement (para. 4.20). Proceeds of the loan/credit would be onlent by the Government to the Hainan Provincial Governmentwho in turn would relend the proceeds to HEPCO with the same terms. An assurance has been obtained from the Hainan Government that it will relend the proce<.ds of the proposed loan/creditto HEPCO on terms satisfactoryto the Bank/IDA. The relending rate would be 7 percent p.a., representingthe weighted average of the prevailing onlending rates under Bank/IDA operations for power and irrigation sectors in China (Bank loan variable rate and 5 percent p.a. - 32 -

respectively). The weights for each sector reflect the relative shares of the gross benefits of power and irrigation whir-h are estimated at 76 percent and 24 percent respectively. HEPCO would bear the foreign exchange risk and the commitment charges. Execution of the respective subsidiary loan aAreements between MOF and the Hainan Government. and between Hainan Government and HEPCO will be a condition of loan/credit effectiveness.

J. Procurement

4.30 Local competitive bidding (LCB) procured contracts for the main civil works (dam/powerhouse) and electrical equipment (including turbines and generators) are considered reserved procurement. As such, these contracts would not be eligible for the proposed loan/credit financing. The total contract value for these items is about $54 million. The local contractors and suppliers ha"a the relevant experience and competence to perform the above contracts efficiently and economically. Under the circumstances, reserved procurement will not affect the satisfactory execution of the project in terms of costs, quality and completion time.

4.31 International competitive bidding (ICB) will be applied for the procurement of major construction materials (cement, steel and timber), power plant equipment and transmission facilities to be financed under the proposed loan/credit. LCB will be adopted, for each contract value estimated to cost $200,000 or more, for the civil works for environmental management, irrigation canals, and infrastructure for resettlement. Force account may be applied, as appropriate, for resettlement housing and on-farm works up to an aggregate amount of $2 million. All bidding packages financed by the loan/credit and estimated to cost $150,000 or more for goods, and $500,000 or more for works, would be subject to the Bank/IDA's prior review of procurement documents. These would cover most of the Bank/IDA-financed contracts. Items or groups of items estimated to cost less than the equivalent of $150,000 per contract, up to an aggregate amount of $1 million, may be procured under limited international bidding (LIB). Small items estimated to cost less than the equivalent of $50,000/contract and up to an aggregate amount of $500,000, may be procured under contracts awarded on the basis of comparison of price quotations solicited from a list of at least three eligible suppliers. Consultants financed under the loan/credit would be selected in accordance with principles and procedures satisfactory to the Bank/IDA on the basis of the "Guidelines for the Use of Consultants by World Bank borrowers and by the World Bank as Executing Agency." The procurement arrangements for the project are summarized in Table 4.3, and more details on procurement arrangements and the related timetable are presented in Annex 18. - 33 -

Table 4.3: SUMMARYOF PROCUREMENTARRANGEMENTS (US$ Million equivalent)

Procurement Method ICB LIB LCB Other La N.A. / Total

Resettlement/preparatoryworks - - 20.8 20.8 0.70 42.3 _ _ (9.8) (2.0) (0.40) (12.2) Environmental Protection - - - 0.7 - 0.7 - - - (0.2) - (0.2) HMC & SanjiaoluCanals (incl. on-farm works for 3,667 ha) - - 8.7 3.1 - 11.8 (resettlement area) - - (5.4) - - (5.4)

Other canals & on-farm works for 9,000 ha - - 5.2 12.9 - 18.1 (outside resettlement area) ------

Dam & Power Facilities - 0.3 41.4 - - 41.7 - (0.3) - - - (0.3) Transmission line erection - _ 3.0 - - 3.0 _ _ (2.3) - - (2.3)

Turbine, Generators and Auxiliaries - - 16.5 - - 16.5

Other Equipment 12.3 0.4 6.0 0.5 - 19.2 (12.3) (0.4) (0.5) (0.3) - (13.5)

Materials (Steel, Cement, Timber) /c 29.4 - _ _ - 29.4 (28.5) - - - - (28.5)

TechnicalAssistance and Training - - - - 2.6 2.6 _ _ _ _ (1.0) (1.0)

Project Management and Engineering - - - - 6.8 6.8 _ _ _ - (1.2) (1.2)

AgriculturalSupport Services - - - - 0.8 0.8 - - - - (0.4) (0.4)

Total 41.7 0.7 101.6 38.0 10.9 193.0 Bank/IDAFinanced /d (40.8) (0.7) (18.0) (2.5) (3.0) (65.0)

/a Includesforce account and prudent shopping. /b Includesadministrative overheads and consultantservices. PC Materials for dam/powerhouse,resettlement, irrigation and environmental management. /d Before IDC on Bank loan of about $2 million. Note: Figures in bxqck.cs indicatethe Bank/IDA-ftnancedportion.

K. Disbursements

4.32 The loan/creditwill be disbursed against: (a) 100 percent of foreign expendituresfor directly imported materials and equipment or 100 percent of local expenditures (ex-factory)for locally manufactured equipment and 75 percent of local expendituresfor other items procured locally; (b) 75 percent of civil works carried out through LCB; (c) 50 percent of on-farm works carried out through force account; (d) 100 percent of consultant'sservice and training; and (e) interest and other charges on the - 34 -

Bank Loan during construction prior to April 14, 1995. Disbursements of the loan/credit for expenditures relating to training, civil works carried out through force account, and contracts for works and goods, each costing less than $150,000 equivalent, would be made against statements of expenditures (SOE). Documentation supporting the SOEs will be retained by HEPCO and made available for review by the Bank/IDA's supervision missions. To facilitate disbursements, a Special Account will be established with an authorized allocation of $4 million, representing approximately four months' average expenditures. Applications for replenishment will be submitted monthly or when the amounts withdrawn equal 50 percent of the initial deposit, whichever comes sooner. Retroactive financing of up to SDR 5.1 million ($6.7 million) would be provided under the loan/credit to cover the costs of urgently needed construction materials and consultants' services incurred after January 1, 1991.

4.33 Annex 19 presents the disbursement schedule for the proposed loan/credit as well as a Bank-wide standard profile of disbursements for all sectors. Since project implementation has already commenced and advanced contracting would be concluded for construction materials procured under ICB, disbursements of the loan/credit are expected to be faster than the Bank-wide profile.

L. Proiect Monitoring, Reporting, and Supervision

4.34 The Provincial PMO for the irrigation, resettlement, and environmental components would establish a monitoring and evaluation system for these project components. Under the Provincial PMO's supervision, the county PMO would establish a system of project monitoring and evaluation to identify constraints early and initiate corrective measures. The system also would be expected to foster improvements in local implementation capabilities. The principal elements for monitoring and evaluation of the agriculture and irrigation component would include: (a) project implementation; (b) identification of specific developmental or operational problems; (c) periodic evaluation of the progress in generating expected production benefits; and (d) an ex-post evaluation of the component's financial and economic benefits and its overall impact.

4.35 In order to ensure timely implementationof the project, and building upon the experiencesof past projects, it is imperativethat the implementationof the resettlementcomponent be closely monitored. Toward this end, an independentdevelopment research institutewould be contractedby HEPCO to assist in monitoring the resettlementoperations. The terms of reference for resettlementmonitoring are attached in Annex 16. The research institutewould submit semi-annualreports to the Project Construction Headquartersand Hainan ProvincialGovernment. In addition, the research institutewould assemble and analyze environmentalmonitoring data collected by the Project Construction Headquarters and the County Resettlement Offices, and include both data and analyses in the reports. Annual reports will evaluate performance over the previous 12 months and recommend measures to improve future performancebased on the positive and negative experience of the past. These reports would be furnished to the Bank/IDA for review. - 35 -

4.36 The county PMO would be responsiblefor maintaining detailed accounts of the irrigation,resettlement and environmentalcomponents. Summarized project progress reports and expenditurerecords, along with the relevant documentation,would be forwarded to the provincial PM0 for review and consolidation. HEPCO would have overall responsibilityfor consolidating the project accounts and for maintainingdetailed accounts on the power component.

4.37 Satisfactoryprocedures for monitoring, evaluation,and reporting for the proiect were agreed during negotiations. The Bank/IDA will be furnishedwith half yearly project progress reports by July 31 and January 31 of each year. Furthermore,a P;oject Completion Report will be submitted to the Bank no later than six months after the completion of the project. The timely implementationof the project critically depends on adequate financial resources being made availablewhen needed; HEPCO's annual proposal regarding project costs and financingplan for the followingyear as well as the Government'sapproved budget would be furnished to the Bank/IDA. An agreed framework for project monitoring and reporting is presented in Annex 20.

4.38 Given that this project is multi-sectoral,the annual supervision requirementsare likaly to exceed Bank-wide average by roughly 30 percent. Various measures would be taken to help contain supervisioncosts, including: (a) an agreement with the Hainan Government and HEPCO regarding satisfactory arrangementsfor project monitoring and evaluation; (b) employment of consultantsby HEPCO to assist in supervisionof project constructtor.and monitoring or resettlementoperations; and (c) adding supervision ror this project in the terms of reference of other project missions as well.

M. Proiect Risks

4.39 No major risks, including environmentalproblems, are foreseen for the proposed project. The technical and geological risks associatedwith the project are expected to be minimal. The project has been well investigated; site conditions favor rapid constructionof the dam. The technical assistance provided through SBC will ensure that the engineeringand constructionof the dam and undergroundworks receives the techr4.calsupport needed from internationalexperts. The arrangementsfor overall project management and supervisionof constructionare adequate and will minimize the risk of implementationdelays. Risks related to the timely and effective implementationof the overall project, including the resettlementprogram, will be minimized by obtaining commitmentsfrom the Hainan Government to ensure adequate financialresources, satisfactoryimplementation arrangements, and regular and systematic monitoring/evaluationof project implementation.

4.40 In order to ensure the safety of the dam, an assurance has been obtained from HEPCO that it will prepare. at least one year before the dam is completed, a satisfactoryprogram of annual maintenance of the proiect works and that it will undertake periodic inspection of the dam and associated works with the assistance of independentengineering experts whose qualifications will be reviewed with the Bank/IDA, and that it will implement these recommen- dattIons. - 36

V. FINANCIAL ASPECTS

A. Introduction

5.1 HEPCO's predecessor, Hainan Electric Power Company (HEPC), followed the same highly centralized financial system as most of the power bureaus on the mainland (Annex 21). When Hainan was declared a province in mid-1988, HEPC became Hainan Provincial Electric Power Company (HEPCO). As part of the initiatives to promote Hainan as the most open SEZ in China, major economic reform has been implemented by the province. As an example, HEPCO's surplus funds are no longer remitted to the Government; the earnings thus retained could help finance its future investments. In addition, HEPCO is exempted from sales tax, and the corporate income tax rate has been reduced (from 55 percent to 15 percent), although interest expense and principal repayments are no longer tax-deductible. In sum, the overall economic reform in Hainan is directed toward reducing centralization in the financial system. This is consistent with the spirit of the recently enacted "Enterprise Law" in China.

5.2 HEPCO is in a period of transition. In addition to the deepening economic reforms in Hainan and the increasing financial accountability at the state enterprise level, the scope and complexity of HEPCO's activities also are expanding considerably. However, HEPCO's present financial condition is weak and the company is not fully prepared to assume its increased financial responsibilities.

5.3 In view of the foregoing, the proposed project is a vehicle for the Bank/IDA to effect its development objective of strengthening HEPCO's financial capability and increasing its efficiency and effectiveness in carrying out the ongoing economic reforms. During the course of project preparation, the Bank was instrumental in effecting up-front actions for realistic electricity tariff setting (paras. 5.5, 5.6) and improved debt management and control (para. 5.11). Further, the project would provide for: (a) studies and related action plans on system planning and electricity tariff reforms to promote prudent investment planning as well as rationalization of both the levels and structure of tariffs; (b) training in financial management; and (c) financial covenants which would establish a framework for greater financial discipline, including gradual improvements in targets for cash generation and debt/equity ratio targets to direct the company toward a sound capital structure.

B. Past Finances and Present Financial Position

5.4 HEPCO's income statements and balance sheets for the period 1986-90 are set out in Annexes 22 and 23. Salient features highlightingits past and present finances are summarizedbelow (Table 5.1). - 37 -

Table 5.1: HEPCO'S KEY FINANCIAL INDICATORS, 1986-90 (million Yuan)

Z p.a. Growth Rate 1986 1987 1988 1989 1990 (1986-90)

Energy Sales (GWh) 418 309 415 656 746 16 Average Price/kWh (fen) 10.5 11.2 30.5 31.0 32.6 33 Net Sales Revenues 35 37 125 203 243 62 Operating Income 9 -0.1 17 76 72 67 Net Income 5 -0.1 11 51 51 79 Long-term Debt 57 174 267 355 847 97 Rate Base 184 189 224 386 753 42

Rate of Return on Assets (Z) 3 0 6 17 8 Operating Ratio (%) 79 127 86 62 70 Debt/Equity Ratio 27/73 52/48 52/48 51/49 69/31

Current Ratio 3.1 3.0 4.1 3.4 2.8

5.5 Until 1987, HEPCO had consistentlyreported modest profits. In 1987, with an average tariff of 11.2 fen/kWh, the company reported a modest net loss for the first time. This was largely due to an extended period of drought and resulting curtailmentin hydropower generation, a significant portion of which was replaced by expensive diesel generated power. As the drought continued in early 1988, the average electricitytariff of HEPCO was increased almost threefold to 30.5 fen/kWh. This allowed the company to turn around from its earlier operating loss tc achieve an after-tax profit of Y 11 million in 1988.

5.6 Although the drought ended in mid 1988. HEPCO's average tariff continued to be increased slightly to 32.6 fen/kWh in 1990 (which approximates the LRMC) in order to allow the company to cover both operating costs and sharply increased debt service from internally generated funds. The heavy debt service requirementswere largely attributableto the bunching of HEPCO's investmentsand related borrowingswith relatively short repayment periods, mostly varying between five and seven years.

5.7 Over the past five years, HEPCO's capital structure has changed considerablyas a result of rapid increases in debt-financedinvestments. The company's debt/equityratio increased sharply from 27/73 in 1986 to 69/31 in 1990. Its liquidityposition has remained sound during this period, as indicated by a current ratio of no less than 2.8 times. - 38 -

C. Financial PerformanceTargets

5.8 Traditional indicatorsof financialperformance have had limited significancefor most of the power bureaus on the mainland, as these bureaus operate under a highly centralizedfinancial system. In particular, their surplus funds are largely remitted to the government in the form of Adjustment Tax. Therefore, self-financingratios have been largely "notional" for most of the mainland power bureaus (Annex 21). On the other hand, HEPCO's surplus funds are not subject to Adjustment Tax and self-financingratio is thus a meaningful indicator of its financialperformance. In order to direct the company toward prudent financial management, assurances have been obtained from HEPCO that it will:

(a) take all measures, includingbut not limited to tariff adjustments, to ensure that its internal cash generation is sufficient to: (i) cover all operating costs and debt services from 1991/92; and (ii) maintain a self-financingratio of no less than 20 percent in 1993, 25 percent in 1994, and 30 percent thereafter (Table 5.2);

(b) take all measures, includingbut not limited to tariff adjustments, improvementsin operationalefficiency and debt control, to ensure that its debt service coverage is at least 1.1 times from 1991-93, 1.2 times from 1994-96, ard 1.3 times thereafter;

(c) maintain a debt/equityratio of no more than 85/15 in 1991, 80/20 in 1992/93, 75/25 in 1994/95, and 70/30 thereafter; and

(d) annually furnish the Bank/IDA with projected financial statements (para. 3.9) and exchange views with the Bank on the company's future finances, focusing on '3mparison of actual financial performance with the agreed targets, production cost trend, future investment and related financing arrangements.

D. Future Finances

5.9 The projectionsof HEPCO's finances for 1991-98 are presented in Annex 25, and the salient features of these finances are highlightedbelow (Table 5.2). The projectionsare based on the assumptions contained in Annex 24, which include the tariff adjustmentsneeded to allow HEPCO to achieve the above financial performancetargets. - 39 -

Table 5.2: HEPCO'S KEY FINANCIAL INDICATORS (million Yuan)

% p.a. Average Growth Rate Year Ended 12/31 1991 1992 1994 1996 1998 1991-98 (1991-98)

Energy Sales (GWh) 845 956 1,225 1,570 2,012 1,357 13 Average Price/kWh (fen) 33.5 30.6 47.5 51.6 49.7 44 6 Sales Revenues 283 292 582 811 1.001 626 20 Operating income 79 94 322 415 443 67 39 Net Income 1 9 164 196 228 136 125 Annual Capital Expenditures 264 421 383 420 614 390 13 Debt Service 97 104 281 404 423 279 23 Long-term debt 1,046 1,383 1,700 1,820 1,840 1,605 8 Rate Base 988 985 1,359 2,426 2,905 1,790 17

Rate of Return (%) Historically Valued Assets 7 8 20 15 13 14 Notionally Revalued Assets 5 5 14 11 9 10 Self-financing Ratio (%) 8 13 25 36 40 26 operating Ratio (%) 72 68 45 49 56 55 Debt/Equity Ratio 72 75 68 60 51 65 Debt Service Coverage (times) 1.3 1.? 1.2 1.2 1.3 1.3 Current Ratio (times) 2.8 2.8 2.8 2.8 2.8 2.8

Re-venue Position

5.10 HEPCO's finances over the medium term are projected to remain in a difficultperiod of transition. HEPCO's present average tariff of about 33 fen/kWh is among the highest in the country (about three times that of the national average). However, in the absence of other remedial measures, the average tariff would need to be increased further to a peak of about 51.6 fen/kWh (36.6 fen/kWh in 1991 prices) in 1996 in order to allow the company to achieve the agreed debt service coverage ratio.

5.11 HEPCO's management is aware of the need to strengthen the company's finances and, in addition to tariff adjustments,would pursue other remedial measures. These measures include, inter alia: (a) making improvementsin operational efficiency and cost controls; (b) using more prudent investment planning, taking into account the company's financial constraints;and (c) maximizing loan maturities for future investments,beginning with the proposed project which would be financed primarily by 15-20 year loans.

5.12 Over the period 1991-98, the minimum tariff requirementsof HEPCO are projected to increase by an average of 6 percent per annum (about 1 percent in real terms). Based on the projected tariff levels, HEPCO is expected to achieve a sound revenue position within the next eight years, with relatively low operating ratios estimated to range from 45-72 percent. During the same period, the rates of return on historical assets and notionally revalued assets are projected to average 14 percent and 10 percent per annum, respectively,which are satisfactory. - 40 -

Flow of Funds

5.13 HEPCO's financing plan over the period 1991-98 is presented in Annex 25. A significantshare of the tariff r^quirementswould continue to be used for debt servicing,amounting to an average of 43 percent of HEPCO's projected average tariff. Indeed, the projected minimum tariff requirements are determinedmore by the debt service coverage requirementsthan the self- financing ratio targets. Over the next eight years, HEPCO's self-financing ratio is expected to improve considerably,increasing from 8 percent in 1991 to 40 percent in 1998. During the same period, HEPCO's share of the proposed project (includinginterest during constructionbut excluding irrigationand on-farm works beyond resettlementareas) would account for about 33 percent of the company's total investmentprogram, and the proposed loan/creditwould meet about 7 percent of HEPCO's total financing requirements.

Capital Structure

5.14 In line with prudent financialmanagement practices, the company needs to monitor its rising debts carefully in order to achieve a better balance between debt and equity. Based on the company's projected future investments and related financing arrangements,its capital structure would improve considerablyover time. Specifically,its debt/equityratio is forecast to decline gradually from a peak of 75/25 in 1992 to 51/49 in 1998, which is satisfactory. - 41 -

VI. PROJECT JUSTIFICATION

A. General

6.1 The Daguangba MultipurposeProject is primarily a power project; it would provide cost-effectivepeaking hydropower to an already large, predominantlythermal system. The implementationof the proposed project would help to mitigate air pollution through the avoidance of burning some 300,000 tons of coal per annum (para. 4.33). The project also has an irrigation component, but the share of regulatedwater it'lows utilized for irrigation is limited to only 4 percent in order to maximize the economic benefits of the project (para. 4.5).

6.2 This chapter will first establish that the project size and timing reasonablymaximizes economic benefits and is superior to alternatives. The analysis is based on the method of "separable costs and remaining benefits" (net of separable costs). As a first approximation,the project can be justified as a least cost component of the power expansion program in Hainan, with all joint costs allocated to power, and as an irrigation project with only the separable costs of irrigation attributed to this component. Second, the chapter will provide a refinement of this analysis, covering the following aspects:

(a) overall internal economic rate of return (ERR);

(b) joint cost allocation based on the respective share of power and irrigation benefits;

(d) economic rate of return of Hainan power expansion plan (including the project costs allocated ti power).

6.3 The joint costs of the project include the preparatoryworks, civil and metal works for the dam, and the costs of resettlementand environmental management. The separable costs of power consist of the powerhouse, turbines, generators,and control and transmissionequipment associatedwith the plant. The separable costs of irrigation include all the canals and related on-farm works. These three categories represent, respectively,58 percent, 29 percent, and 13 percent of total investment costs. Benefits and costs are evaluated using constant 1990 economic prices net of taxes and subsidies. Tradable commodities are valued at border prices with a shadow exchange rate of Y 5.5/S1.

B. Justificationof Prolect Size

6.4 The Daguangba project is the first and possibly the last hydropower project in Hainan which conveys a capability for peak load duty and seasonal

1/ Since the joint cost allocation is a function of the discount rate, it is not meaningful co calculate separate ERRs for power and irrigation. - 42 -

inflow regulation commensuratewith the needs of the power grid. One sensitive project issue is human resettlement. Because the geological characteristicsof the project area do not provide adequate groundwater resources for irrigation,the most cost-effectiveway of enhancing the resettlers' livelihood is to provide irrigation w7aterfrom the Daguangba reservoir. To extend irrigation from the 1,400 ha needed for resettlementto about 12,700 ha is economicallyprofitable: the incremental investment is small and the peaking capabilityof the power plant is not critically diminished. By comparison,preliminary plans to irrigate an additional 54,000 ha would require almost ten times higher capital expendituresand a much longer gestation period than for the area targeted under the proposed project. For this reason, a possible second stage of irrigation is beyond the scope of this project.

6.5 The average regulated inflow for the proposed project would be 88 m3/s but only 4 m3 /s of this inflow would be dedic;-tedto irrigation. A small turbine would be used to generate electricityat the diversion to the irrigation system above the main dam. The flow would be diverted through the main irrigation canal. The regulated flow to the powerhouse ensures 320 GWh of firm annual energy and 520 GWh of average output. Since the cost of the incrementalcapacity at Daguangba is only a fraction of that for a thermal peaking plant, the project rated capacity has been maximized to reach 240 MW for about four hours daily in the dry season during a dry year; to increase the capacity further would bring this plant factor to an unacceptably low level.

C. Least-Cost Power Generating Program

6.6 Without the irrigation component, the project may be viewed as an integral part of HEPCO's least-cost core developmentprogram for 1991-2000. In order to optimize the plant design and commissioningschedule for the program, MSDI carried out power generation and transmissionstudies for the next ten years. The results of these planning studies and the economic analyses indicate that the project is less expensive than the best alternative,which is a mix of peaking coal and gas-fired plants. This alternativewould cost Y 886 million in present value, about one-third of it in fuel outlays and two-thirds in capacity costs--priinarilyto meet the peak load. In the base case, the present value of these savings net of the separable project costs of power is Y 635 million. These remaining benefits exceed the joint investment costs by nearly 42 percent (Annex 27).

6.7 Power Component Risks and Timing. The project appraisal is based on a lower load scenario than the one planned by HEPCO. Based on this lower scenario, the commissioning of two generation units is justified in 1993 and the balance of two units is justified in 1994. The major risk associated with the power component is that, under a pessimistic scenario,power demand could grow at a slower pace, e.g., 9 percent (para. 2.10). In this case, 150 MW of gas turbines, half of the capacity that the project substitutesfor, could be postponed from 1994 to 1999 and the savings in power capacity costs would be reduced by 13 percent. However, it would still be economicallyjustified to commission all four units as scheduled,because the net savings from delaying installationof one or two units is smaller than the additional fuel savings that could be generated by these units during the rainy season. - 43 -

D. Aericulture/IrrigationBenefits

Production and Benefits

6.8 The major benefits from the project would be derived from incrementalcrop production,expa:ded irrigation facilities,improved extension services, adoption of improved technologies,and improved input availabilityand farm management. The present value of the benefits from incrementalproduction is estimated at Y 361 million (in constant 1990 prices) over the 30-year economic life of the project.

Emiloyment and Incomes

6.9 Employment opportunitiesgenerated by the project will help reduce seasonal unemploymentamong the rural labor force in and around the project areas. At full development,an annual increase of about 4.3 million person- days per year, equivalent to about 14,300 new jobs, would be created. In total, the project would reduce the income imbalance of about 5,000 of the poorest families in Hainan. The farm model analysis shows that at full development,the annual income of a representativevillage household would increase from Y 1,954 (US$373) to Y 6,635 (US$1,266);the average per capita income of the farmerswould be increased from Y 390 (US$75) to Y 1,327 (US$253).

Rent and Cost Recovery

6.10 Given the diversity of crops to be grown in the project area, the irrigationwater charges would be based on a binomial formula for estimating water fees which includes a fixed rate per unit area (YImu)and a volumetric water fee (fen/m). This structure of water charges already has been applied in the main land. During negotiations.an assurance has been obtained from the Hainan Government that adequate irriaationwater chargeswould be levied and collected to meet at least the full operating and maintenance costs of the irrigation system.

6.11 Incrementaltax receipts generatedby the project would give a cost recovery index of about 54 percent. Substantialincremental tax revenues would accrue to government as a result of the project. At full development, it is expected that incrementaltax revenues would exceed Y 10 million per year, of which more than half would be derived from the taxes paid by sugar factories (currentlyY 10/ton of sugarcane purchased from the farmers, plus Y 300-310/tonof white sugar produced by the mill). The rest would come from land taxes paid by the farmers on the basis of their paddy field area, and from the production taxes they pay when selling tneir products.

Women in Development

6.12 A major social benefit arising from the project, apart from real income increase and employment generation for the general population,would be the generation of employment opportunitiesfor women. Rubber tapping is primarily done by women and as incrementalproduction of various annual and perennial products eases the raw material constraints,the post-harvestprocess- ing activities,which usually employ more women, would increase job openings - 44 -

for women. Women constitute about 50 percent of the labor force in the project, however, traditionally,women are trained proportionallyless than maen. To overcome such bias, the planned training program for farmers and agriculturalextension workers would emphasize recruitingwomen as trainees as well as trainers and assure that at least 25 percent of trainees would be women.

Financial and economic analyses

6.13 The financial and economic analyses are based on detailed crop budgets prepared for all the annual and perennial crops (Annex 26). The farm model analysis shows a substantial increase in farmers' income indicating strong financial incentives to execute the project. An economic analysis was carried out for the irrigation component as a whole. The economic investment costs are based on the separable costs for the irrigation component. The Bank's price projections or average export prices actually realized in China were used to estimate the farmgate economic prices in 1990 constant terms for traded inputs and outputs. Conversion factors for nontradeableresources were estimated and applied to ccnvert financialvalues to economic costs. Incremental on-farm labor has been valued at Y 3.6 per person-day, representing60 percent of the prevailing market wage rate of Y 6 per person- day. Based on these assumptionsand an assumed project life of 30 years, the the net present value is estimated at Y 83 million. This estimate is conservative,since only benefits from incrementalproduction of crops have been considered and benefits from irrigatedmeadows have not been taken into account.

E. Economic Rate of Return and Benefit/CostRatios

6.14 Based on the estimatedbenefits of power and irrigatlon,an ERR has been calculated for the project as a whole. In appraising power projects, it is customary to value the output of the project on the basis of the consumer's minimum willingness to pay, as evidencedby existing or covenanted power pricing levels. This approximationgenerally underestimatesthe value of 'ectricitybecause many customers have a demand that is rather inelastic to prices. In Hainan, there are no power tariffs at the generating plant level to provide a bench mark of this willingness to pay. However, existing pricing arrangements (at other levels of supply) show that this willingness to pay is at least equal to the long-run marginal cost at all the other levels of supply (para. 5.6). The project power benefits are thus valued at 100 percent of the generatingLRMC. For the kind of peaking service delivered by the project, the LRMC is estimated at 36 fen/kWh, 84 percent of which corresponds to capacity costs. Based on this assumption for the power benefits, the overall ERR for the project (including irrigationbenefits) is 15 percent. A detailed calculation of the ERR is shown in Annex 29.

6.15 The joint project costs are allocated according to the proportion of power and irrigation benefits remaining after deduction of separable costs, which amounts to 91 percent and 9 percent, respectively. This calculation, shown in Table 6.1, results in an overall investment cost allocation of 82 percent for power and 18 percent for irrigation. On this basis, the benefit to investment cost ratios for power and irrigation are 1.78 and 2.54, respectively. - 45 -

6.16 To account for the risk of project cost overruns and lower demand for power, a sensitivityanalysis has been carried out. If overall project costs are increased by 10 percent and power benefits reduced by 10 percent, the ERR is 12 percent which is still satisfactory.

Table 6.1: SUMMARY AND ALLOCATION OF COSTS AND BENEFITS (Base Case Present Value to 1990 in Y million)

Power Irrigation Total

Gross benefits 1,125 361 1,486 Separable costs 251 278 529 Remaining benefits 874 83 957 Joint costs allocation 461 44 505

Net benefits 413 39 452 Total costs allocation 712 322 1,034

Investment cost allocation 631 .42 773 Benefit/InvestmentRatio 1.78 2.54 1.92

6.17 An economic rate of return has also been calculated for the power expansion plan of the Hainan grid over the period 1990-2000, of which the project is a part (Annex 28). The incrementalenergy sales made possible by the expansion plan are valued first on the basis of existing power price levels. The 1990 tariff (excludingcustomers' contributionsto connection and distributionoutlays) reveals a minimum willingness to pay of about 33 fen/kWh at end-1990 prices2/. On this basis, the ERR for the overall power expansion program is 14.6 percent3/. If the tariff follows the covenanted minimum revenue requirementsand the inputs are not shadow-priced,the internal rate of return on the expansionprogram is 15 percent.

2/ Customer contributionsto connection and distributionsystems have been netted out of the investmentprogram for transmissionand distributionshown in Annex 27.

3/ The results of sensitivityanalysis indicate that if 100 percent of the joini.costs are allocated to power, the ERR for the overall power expansio-I program would be reduced slightly to 14.1 percent, which is still satisfactory. - 46 -

VII. AGREEMENTSREACHED AND RECOMMENDATION

7.1 During negotiations,the following assurances have been obtained:

(a) from the Hainan ProvincialGovernment, that it will:

(i. during project implementation,consult with the Bank/IDA prior to committing to major new power plants (para. 2.11);

(ii) relend the proceeds of the loan/creditto HEPCO on terms satisfactory to the Bank/IDA (para. 4.29);

(iii) carry out or cause to be carried out the agreed resettlement program (para. 4.9);

(iv) carry out or cause to be carried out the agreed environmental management program (para. 4.17); and

(v) provide for adequate irrigationwater charges which would be collected to meet at least the full operating and maintenance costs of the irrigation system (para. 6.10).

(b) from HEPCO, that it will:

(i) carry out a tariff study for Hainan provincial power grid and review the resulting action plan for tariff reform with the Bank/IDA by June 30, 1993 (para. 2.8);

(ii) carry out a power system planning study for Hainan province and use the results of the study as the basis for its review of the investmentprogram with the Bank/IDA by June 30, 1993 (para. 2.11);

(iii) carry out staffing and training in accordancewith the program and timing agreed with the Bank/IDA (para. 3.4);

(iv) furnish each year to the Bank/IDA a rolling long-term financial plan of no less than seven years and exchange views with the Bank regarding HEPCO's future finances (para. 3.9);

(v) furnish the Bank/IDA with an action plan for the organization and staffing of internal auditing, and implement the action plan taking into account the Bank/IDA's comments (para. 3.13);

(vi) furnish its annual financial statements and project accounts, certified by an acceptable auditor, within six months from the end of each financial year (para. 3.14);

(vii) continue to employ a Special Board of Consultants to review detailed constructiondesigns related to the power component and to advise HFPCO during constructionof the project (para. 4.19); - 47 -

(viii) continue to employ qualifiedconsultants for the design and supervisionof proiect construction(para. 4.21);

(ix) prepare a satisfactoryprogram of annual maintenance of project works, and employ qualified, independentengineering experts, after project constructionis completed,to undertake periodic inspectionsof the dam and associatedworks (para. 4.40);

(x) take measures, includingbut not limited to tariff adjustments, to ensure that it earns a cash surplus sufficient to: (a) cover all operating costs and debt service in 1991/92; and (b) maintain a self-financingratio of no less than 20 percent in 1993, 25 percent in 1994, and 30 percent thereafter (para. 5.8(a));

(xi) take measures, including but not limited to tariff adjustments, to ensure that its debt service coverage is no less than 1.1 times in 1991-93, 1.2 times in 1994-96, and 1.3 times thereafter (para. 5.8(b)); and

(xii) maintain a debt/equityratio of no more than 85/15 in 1991, 80/20 in 1992/93, 75/25 in 1994/95 and 70/30 thereafter (para. 5.8(c)).

7.2 Execution of the respective subsidiary loan agreements between MOF and the Hainan Government,and between Hainan Government and HEPCO will be a condition of loan/crediteffectiveness (para. 4.29).

7.3 Subject to the above agreements,the proposed project is suitable for a Bank loan of $30 million equivalent and an IDA credit of SDR 28.1 million (equivalentto $37 million) to the People's Republic of China. The loan would be for a term of 20 years, including a five-year grace period, at the standard variable interest rate, and the credit would be on standard IDA terms, with 35 years maturity. - 48 - ANNEX 1

CHINA

DAGUANGBA MULTIPURPOSE PROJECT

Installed Capacity, Electricity Generation, and Sales in the Power Subsector

Installed Energy Energy capacity (MW) /a generation (GWh) ja salesJb Year Hydro Thermal Total Hydro Thermal Total (GWh)

1949 163 1,686 1,849 710 3,600 4,310 3,460 1952 188 1,776 1,964 1,260 6,001 7,261 6,277 1957 1,019 3,616 4,635 4,820 14,515 19,335 16,407 1962 2,379 10,686 13,065 9,042 36,753 45,795 N.A. 1965 3,020 12,056 15,076 10,414 57,190 67,604 56,802 1970 6,235 17,535 ?¾,770 20,450 95,420 115,870 N.A. 1971 7,804 18,478 2u,282 25,060 113,300 138,360 101,274 1972 8,700 20,801 29,501 28,820 123,630 152,450 123,600 1973 10,299 23,626 33,925 38,900 127,860 166,760 135,106 1974 11,817 26,291 38,108 41,440 127,410 168,850 135,708 1975 13,428 29,978 43,406 47,F 0 148,210 195,840 156,969 1976 14,655 32,492 47,147 45,640 157,490 203,130 164,698 1977 15,765 35,686 51,451 47,6b0 175,740 223,410 181,691 1978 17,277 39,845 57,122 44,630 211,920 256,550 210,239 1979 19,110 43,906 63,016 50,120 231,827 281,947 233,577 1980 20,318 45,551 65,869 58,211 242,416 300,627 251,639 1981 21,933 47,069 69,002 65,546 243,723 309,269 258,976 1982 22,959 49,401 72,360 74,399 253,279 327,678 275,299 1983 24,160 52,280 76,440 86,450 264,990 351,440 297,126 1984 25,547 54,373 79,920 86,780 290,207 376,987 319,600 1985 26,120 60,373 86,493 92,374 318,315 410,689 348,353 1986 27,542 66,276 93,818 94,480 355,091 449,571 357,057 1987 30,193 72,704 102,897 100,229 397,092 497,321 420,019 1988 32,698 82,799 115,497 109,177 435,900 545,065 461,300 1989 34,570 92,060 126,639 118,475 466,200 584,675 495,200 1990 35,370 99,630 135,000 126,000 492,000 615,000 535,000

Average growth 11.21 13.3Z 13.5t rate (p.a.)

/a On a countrywide basis.

/b Energy sales not including uses by stations and captive plants.

Source: MOE. ANNEX 2 - 49 -

CHINA

DAGUANGBA MULTIPURPOSE PROJECT

Electricity Rates (Yuan/MWh)

National Large Year average industry Agriculture Residential

1973 66.02 63.28 54.82 157.03

1975 66.09 63.42 58.16 156.95

1980 65.47 61.88 53.96 161.20

1985 70.85 66.59 55.93 162.17

1986 75.26 71.10 59.15 163.76

1987 78.66 74.51 60.38 165.21

1988 87.02 80.48 63.28 168.01

1989 102.48 96.47 73.40 171.40

Source: MOE. ANNEX 3 CHINA

DAGUANGBAMULTIPURPOSE PROJECT

Performance Indicators for Hainan Main Power Grid La

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Installed Capacity (MW) 125 145 145 145 16'; 166 166 270 316 Hydro 560 109 129 129 129 129 129 129 129 129 Thermal 129 17 17 17 17 38 38 38 141 187 431 Enermy Generation (GWh) 284 359 411 435 445 542 438 521 835 Hydro 951 279 358 403 423 399 488 314 252 Thermal 462 444 5 1 8 12 46 54 124 269 373 507 Energy Purchases (GWh) 1 0 3 12 10 21 9 1 36 41 Peak Demand (MW) 70 83 101 106 103 117 114 169 183 217 Load factor (2) 46.5 49.4 46.8 48.1 50.4 54.9 44.8 35.3 54.3 52.2 Enerxy Served (GWh) 254 309 366 392 394 479 387 438 721 839 System Losses Plant use (2) 0.65 0.40 0.55 0.63 1.77 1.51 3.89 3.55 5.56 6.21 T&D losses (2) 10.28 13.54 11.10 11.84 11.88 13.54 v.98 13.00 12.59 10.08 U' Coal Consumption ('000 tons) 5.8 2.0 8.9 13.7 42.3 55.6 123.4 154.9 228.8 227.1 Grams of coal equivalent/kWh 1,160 2,000 742 1,140 920 1,030 995 712 476 465 Number of Customers 10,260 11,430 12,553 13,474 15,573 16,958 18,564 20,023 25,932 29,469 Number of Employees 2,219 2,407 2,475 2,567 2,669 2,693 2,897 4,011 4,759 4,836 Sales per Employee (MWh) 114 128 148 153 148 178 133 107 150 172 la Includes generation and consumption by captive thermal and mini-hydro power plants connected to the main grid. Excludes Southern Grid.

Source: HEPCO. -51- ANE 4

CHINA

DAGUANGBA MULTIPURPOSE PROJECT

Composition of HEPCO Power Sales

Number of Maxlomu 1987 1988 1989 1990 Consumer category Consumers Demand load share load share load share load share in 1990 (MW) (GWh) (2) (GWh) (2) (GWh) (2) (GWh) (2)

Agriculture, forestry 126 11.1 16.4 5.3 19.5 4.7 36.7 5.6 35.1 4.7

Industry 1,330 170.4 195.3 63.2 246.1 59.3 330.3 50.3 384.1 51.5

Transport/communications 185 5.9 6.5 2.1 9.5 2.3 21.6 3.3 22.2 3.0

Comercial services 2,219 32.9 28.4 9.2 35.7 8.6 78.2 11.9 79.4 10.6

Other (administration) 1,584 122.9 45.7 14.8 83.0 20.0 145.6 22.2 173.5 23.3

Residential lighting 24,025 32.9 16.4 5.3 21.2 5.1 43.8 6.7 51.6 6.9 Of which: Rural 5.6 1.8 5.0 1.2 9.0 -- 7.4 -- Urban 10.8 3.6 16.2 4.0 34.8 -- 44.2 --

Total 29.469 376.0 308.7 100.0 415.0 100.0 656.2 100.0 745.9 100.0

/a Sum of noncoincident maxlium demands. - 52 - ANNEX5 CHINA

DAGUANGBA MULTIPURPOSEPROJECT

ElectricityTariffs of HEPCO (As of December 31, 1990)

Tariff structure Market share (Z) Tariff category /a Y/kVAi.moithFen/kWh Consumption No. consumers

Agriculture, irrigation - 22.84 0.3 0.4

Large industry 4 32.51 23.5 4.5

Small industry, transport - 35.95 25.9 0.6

Commercial services, hotels - 45.00 1.6 7.6

Lighting - 34.80 24.8 86.9

Bulk sales - 25.90 23.9 0.1

Average Revenue (fen/kWh) 32.56 /b 100.0 100.0

La Connections are at voltage levels 10 kV and above for all large industry, 20 percent of small industry and transport,and 44 percent of lighting (mostly industriallighting) and all bulk sales.

Lb Including 1.52/kWh of revenues from the demand charge to large industry. - 53 - ANNEX6

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

Power GeneratingCapacity in Hainan Island (as of 12/31/90)

A. Installed Capacity (MW)

Plant name/type Main Isolated Island Thermal Fuel grid svstems total

Small units Coal 31 - 31 Gas turbines Oil/gas 50 - 50 Large steam units Coal 350 - 350

Total Thermal 431 0 431

Hydro Average Output (GWh)

Niululing (peaking) Hydro 80 - 80 293 Nanfeng (run-of-river) Hydro 20 - 20 87 Other (run-of-river) Hydro 29 150 179 n.a.

Total Hydro 129 129 279

Total 560 150 442

B. Load Carrving Capabilitvof Main Grid

Peak (MW) Dry year (CWh)

Small steam units 31 50 Gas turbines 50 200 Large steam units 175 /a 1,425

Total Thermal 256 (131) /b 1.675

Niululing 80 176 Nanfeng 15 104 Other hydro 19 165

Total Hydro 114 445

Total 268 (178) /a 1.321

/a One 50 MW unit out of service for 1990/91; one 125 MW out for a 5-week maintenance each year during the wet season. /b With the largest thermal unit out of service (random forced outage). Source: MDSI and mission estimates. - 54 - ANNEX 7

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

HEPCO's Proiected Generation and TransmissionInvestment (1991-2000)

A. GeneratingFacilities

Installed Commissioning Plant name and tone capacitv (MW) date

Daguangba (hydro) 4 x 60 Late 1993, 1994

Sanya Stage I (gas turbine) 2 x 70 1996, 1997

Sanya Stage II (heat recovery boiler) 1 x 70 1998

Haikou Stage III (steam/coal) 1 x 100 1999

Yangpu Stage I (steam/coal) 2 x 150 2000, 2001

B. High-VoltageTransmission Facilities

Transformer Transmissionlines (km) capacity (MVA) Year 220 kV 110 kV 220 kV 110 kV

1991 146 73 - 136

1992 148 138 120 71.5

1993 2 x 48 138 - 230

1994 141 150 240 200

1995 286 150 180 251.5

1996 - 150 120 155

1997 145 150 120 190

1998 - 150 120 201.5

1999 95 150 180 200

2000 - 150 330 213

Source: MSDI and mission estimates. -55- ANNEX 8

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

Capacity/Energv Forecasts for the Hainan Power Grid (1991-2000)

Dry-year System Demand Installed capability Average output Year Peak Energy capacitv;a Peak/b Energylc Hydro Coal Oil/gas (MW) (GWh) (MW4) (MW) (GWh) ----- (GWh)------

1991 255 1,200 566 268 2,356 580 600 65

1992 285 1,410 566 269 2,701 580 830 -

1993 325 1,595 566 268 2,701 580 1,015 -

1994 365 1,805 670 375 3,000 740 1,065 -

1995 410 2,045 790 495 3,000 1,100 945 -

1996 460 2,315 790 495 3,000 1,100 1,215 -

1997 520 2,620 840 545 3,200 1,100 1,420 100

1998 585 2,970 890 595 3,400 1,100 1,700 160

1999 660 3,360 990 685 3,610 1,100 2,380 320

2000 745 3,800 1,090 775 4,210 1,100 2,380 320

Growth rates (Z p.a.)

1991-2000 12.7 13.2 10.7

/a As of January 1 of each year, retired capacity in 1994: 16 MW thermal (capability 13 MW, 21 GWh). /b With the two largest thermal units out of service. /c Utilization of gas turbines/diesels4,000 hours/year, of new steam units 6,000 hours (3,000 houw- in first year). - 56 - ANNEX 9 Page 1 of 2

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

Power Pricing Study

Terms of Reference background

1. Hainan Island has a population of about 6 million people. As of January 1989, the capacity connected to the grid was 311 MW, of which 145 MW was provided by seasonal hydropower and the rest consisted of small coal-fired units, and diesel and gas turbine sets. The highest transmissionvoltage is 110 kV, followed in importance by 35 kV transwission.

2. By the year 2000, installed capacity is expected to exceed 1200 Mh with three major hydro plants totalling 350 MW and four major thermal plant sites totalling 850 MW. A 220-kV network will be developed, and the 35-kV network will be used increasinglyfor subtransmission. The major transmission and generation facilities will be controlled by the Hainan Provincial Electric Power Company (HEPCO).

3. With the completion of the already committed expansionprogram, power shortages could be eliminated by the mid-1990s. However, by then, the growth in daytime demand could be very rapie and deteriorate an already low load factor. For this reason, the major consumerswill need to be provided with appropriatesignals to rationalizetheir demand patterns and use of power supply facilities.

Obiectives

4. The power pricing study to be undertakenwill aim to:

(a) transfer to HEPCO modern methods of power tariff design based on the criteria of economic efficiency,financial viability and fairness to power consumers and suppliers.

(b) look into the practical problems raised by the transition from the existing pricing system to more desirable pricing arrangementsand to propose a medium-term action plan.

Scope of Works

5. The pricing study will consider the design of power price levels and *tructure; it will cover sales at high, medium and low voltage as well as contractswith non-utility suppliers. The study should compare the relative merits and drawbacks of the proposed approach with those of the approaches adopted in China so far and those of the financialembedded cost approaches.

6. The study will include the following tasks:

! - 57 - ANNEX 9 Page 2 of 2

(a) analyzing system and tndividual load patterns by voltage level;

(b) reviewing existing tariffs and arrangementsfor metering and bill- , ing;

(d) calculatingmarginal cost of service and comparing it with existing sales revenues for typical customers;

(e) designing several candidate rate structures;

(f) analyzing the financial viability of these rate structures;

(g) selecting a target tariff structure and level,

(h) designing an implementationstrategy for the target tariff including improvementsin metering and billing; and

(i) recommendinga medium-term action plan based on the study's findings.

Method and Organization

7. The study will build on the method, materials, and experience gath- ered from the East China Power Pricing Study which was completed under the Beilungang Thermal Power Project. It will make ample use of the expertise available from the Water Resources and Electric Power Research Institute in Beijing. About one-man month foreign consulting assistance may be used to review the study, focusing on the recommendedaction plan and practical steps suggested for its implementation.

8. The transfer of know-he,wwill take place through on the job training and three workshops organized at the beginning, middle and final stages of the study.

9. The study will be carried out by HEPCO under MOE auspices. It will be managed by a Steering Committee representingboth HEPCO and MOE and will be coordinatedby a Principal Investigatorfrom MOE. HEPCO and MOE will exchange views with the Bank on the progress and findings of the study.

10. The pricing study will make use of the preliminaryand final output from the system planning studies which are expected after December 1990. Sample load measurementsand analyses will be started earlier. Key dates in the timetable for the study are planned as follows:

Start-up January 1992 Interim Report December 1992 Final Report June 1993 ANNEX 10 - 58 - Page 1 of 2

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

Power System Planning Study

Terms of Reference

Background

1. Hainan Island has a population of about 6 million people. As of January 1989, the capacity connected to the grid was 311 MW, of which 145 MW was provided by seasonal hydropower and the rest by small coal-fired units, and diesel and gas turbine sets. The highest transmissionvoltage is 110 kV (830 km of lines, 13 substations),followed in importanceby 35 kV transmission (638 km, 10 substations).

2. By the year 2000, instal.ed capacity is expected to exceed 1200 MW, with three major hydro totalling 350 MW and four major thermal plant sites totalling 850 MW. A 220-kV network will be developedwith about 10 substations, and the 35-kV network will be used increasinglyfor subtransmission. The major transmissionand generation facilities referred to as the Hainan Electric Power Grid (HEPG) will be controlledby the Hainan Provincial Elec- tric Power Company (HEPCO) from facilities to be located at the major thermal plant site near the capital city of Haikou.

Obiectives

3. The major objective of the study is to develop an appropriatemeth- odology for establishinginvestment plans in Hainan which take into account uncertaintiesabout load forecast, the availabilityand price of fuels, and the rate of connection of isolated systems to the main grid. This methodology later could be replicated for similar cases in mainland China.

4. A second objective is to strengthenHEPCO's capability in routinely applying some of the planning methods identified from the study and in developing and maintaining the required database.

Scope of Works

5. The power system planning study will first cover the areas of generation and transmission. It will focus on optimizing investments considered for comitment during 1991-2000. The major tasks to be carried out include.

(a) developing coherent scenarios for power demand growth, fuel availability, and rate of connection;

(b) designing core and optional programs for new generating plants; and

6. The study also will assist in the planring of distributionnetwork investmentsfor 1991-95. The major tasks to be covered include:

(a) developing a data base for distributionloads and facilities to be used for medium-and low-voltagenetwork planning;

(b) screening distributioninvestments for 1991-92 with the help of appropriateload flow models; and

Method and Organization

7. The use of local resourceswill be maximized: generation and transmission studies should make ample use of the expertise and analytical tools available from Chinese institutes,and particularlyfrom WREPERI in Beijing. Bank staff will provide guidance in the handling of uncertainties in generation planning. Foreign consultantswill be used mainly in developing the data base and methods for distributionplanning (about four staff-months).

8. The transfer of know-how will take place in several ways:

(a) in the areas of generation and transmission,trainees will attend an inceptionworkshop, and produce interim and final reports to be presented in two subsequentworkshops.

(b) in the area of distribution,the same method will be followed but consultantswill be more involved after the inceptionworkshop and only one report will be produced by the trainees.

10. Key dates in the timetable for the study are planned as follows:

Start-up December 1991 Interim Reports November 1992 Final Reports May 1993 - 60 - ANNEX11 Page 1 of 6

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

OUTLINE OF THE TRAINING PROGRAM

A. Objectives and Requirements

1. The training program is designed to provide HEPCO's technical, managerial, and financial staff with sufficient professionalskills to carry out their duties. Since HEPCO is in a transitionalperiod to assume increasing responsibilities,it plans to continue recruiting staff from power utilities in mainland China, while at the same time instituting appropriate training programs for existing staff, managers, technicians,and administrativeclerks. Roughly two-thirds of the technical staff and half of the technicianswould be recruited from mainland China, while only about a quarter of the administrativeand financial staff would come from the mainland.

2. The training program has the following broad objectives:

(a) to allow HEPCO to function as an autonomous organization,able to operate its plant and manage its own financial affairs as planned under the new "EnterpriseLaw;" and

(b) to equip HEPCO with a professionallyskilled staff capable of handling day-to-day operations and carrying out planned expansion of the entity's activities.

3. High-level staff would receive training in modern management and decision-makingtechniques, particularly in: planning of grid expansion, planning of power system investment, funds management, tariff policies, sales management, personnel management, informationprocessing systems, contract management, and energy efficiency techniques. Training of the high-level staff would be accomplishedmainly in the mainland in power utilities and, for selected staff, overseas.

4. Technicians and clerk-levelpersonnel would be trained in mainland China and in HEPCO's training facilities. Given the relatively low skill level of existing personnel, most training activities in the next couple of years would be devoted to retraining of this personnel. The retraining would have to be done in the existing training facilities and through on-the-job training by instructorsbrought over from the mainland.

B. The Technical Training Program

5. Training programs would be designed for: (a) high-level staff; (b) engineers and technicians;(c) power plant operators and lineman; and (d) teaching staff of the training center. A program on procurement of training equipment would also be included. - 61 - ANNEX 11 Page 2 of 6

6. The training program for the high-level staff would be carried out in three stages: (i) theoreticalstudies; (ii) review of electric utility practices in mainland China and elsewhere; and (iii) practical application to the Hainan power system. In the first stage, high-level staff of HEPCO, including division chiefs and project managers,would receive instruction in the theoreticalbasis of power systems operation and management. In the second stage, HEPCO staff would review managerial methodologyand technology as actually applied in public power utility practice. They would be asked to identify any improvementsif needed in the management of their department or division,power station or power project, and distributionoffice. During the third stage, desirable improvementswould be implemented,under the supervision of advisors from mainland China power utilities and from foreign power utilities fully conversantwith the Chinese language.

7. Table 1 shows the technical training program foreseen for high-level and teaching staff, and Table 2 presents the training program for the technical staff.

Table 1: TRAINING PROGRAMFOR HIGH-LEVEL AND TEACHINGSTAFF

Number of Duration Trainees (months)

Overseas Training (foreign costs)

Department heads 5 1 Division chiefs and project managers 23 1

This training would be developed over a two-year period.

Training in Mainland China (local costs)

Department heads 5 6 Division chiefs and project managex. 23 6 Power plant superintendents 5 12 Teaching staff 20 12 Management information system 5 6 Load dispatch and telecommunications 10 6 Planning 5 6

This training program would be developed over a four-year period. - 62 - ANNEX 11 Page 3 of 6

Table 2: TRAININGPROGRAM FOR TECHNICALSTAFF

Number of Duration Trainees (months)

Design Staff

Power plants 10 4 Transmissionand distribution 10 4

ConstructionSupervision

Power plants 20 6 Transmissionand distribution 20 6 Contract management 5 3 Tendering 3 3

Operation and Maintenance

Power plants 20 6 Transmissionand distribution 20 6

This training program would be conducted locally in Hainan and mainland China over a four-year period.

C. FinancialManagement Training

BackRround

8. As state-owned enterprises,the power bureaus are bound by the financial regulationsestablished by GOC and the financial system has thus far been highly centralized. Until the recent economic reform, these enterprises were essentially operating arms of the government and financial responsibilities/autonomywere very limited; investmentswere largely funded by government grants and the entities' surplus funds were mostly remitted to the government. Indeed, the function of finance at these enterprises essentiallyhas been confined to financial reporting; managerial-orientationand modern treasury functions (such as cash and debt management) are lacking. Further, under the present Chinese system, heavy emphasis is placed on the annual budget as a controllingtool, but financial planning generally is not undertaken beyond one year. Within the present institutionalframework, the power bureaus have performed satisfactorily. - 63 - ANNEX 11 Page 4 of 6

9. Under the ongoing economic and enterprisemanagement reforms in China, the institutionalframework is becoming less centralizedwith corresponding increases in financial autonomy and responsibilityfor decision-making at the state enterprise level. Reforms of the funding arrangements between GOC and the state enterprisescontinue to evolve. As a first major step, investments are being financed more by debt (mainly domestic loans) than by government grants. For most of the Bank-financedpower entities, the Bank loan represents their first foreign borrowings; it is also novel for most of these entities to bear the related foreign exchange risks. Separately, initiatives are being taken to improve financialmanagement and control. These initiativesinclude introducingcomputer applicationsand establishingan internal auditing function. However, these initiativesare at an initial stage of implementationand are limited in scope. In order to perform their increased role efficientlyand effectively,power bureaus will need to strengthen their financialmanagement, particularly with respect to planning, cost control and debt management. Under the various Bank-financedpower operations in China, provisions have been made for training in financial management. These training activities are centrallymanaged by MOE/SEIC. Recently a training seminar conducted by Price Waterhouse (US and Hong Kong) was held in Chengdu. In addition, overseas training was conducted by Electricitede France. Finally, the Bank recently organized a seminar in Hangzhou to provide an overview on corporate planning and financialmanagement informationsys- tems.

Obiectives

10. The main participantsin the financialmanagement training would be officials from the finance/accountingand planning departmentsof the various Bank-financedpower entities. The training activities are designed to famil- iarize these officialswith selected topics in the modern financialmanagement of power utilities, covering both operation and project construction. This objective would be achieved through a series of training seminars in China, overseas training and study tours. Initial training activities would aim at providing a general overview of the selected topics. Suibsequenttraining activitieswould build on the earlier experiences and provide in-depth dis- cussions of the topics which are of particular importance and interest to the participants.

Scope

11. Two related and complex subjects, tariff design and system planning, are being covered separately under Bank Group-financedstudies. The major topics of financialmanagement training are outlined below.

Financial Control. Monitoring. and Evaluation

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

-- budgeting units and organizationof responsibilitycenters;

-- transfer pricing, joint cost allocation; - 64 - ANNEX 11 Page 5 of 6

-- performance indicators for monitoring and control;

-- methodology and procedure for cost management, including cost accounting;cost of service analyses which could in turn provide the basis for tariff design; budget preparationand control; assessment of potential cost savings as well as stock management; and

-- organizationand procedures for internal controls, including internal auditing and operational/managementaudit.

Lone-term Financial Planning

-- methodology of long-term financial forecasting;

-- project financial evaluations;

-- coordinationwith investmentplanning and reiterationwith capital budgeting;

-- project financing, includingvarious instrumentsof financing, debt/equity structuring,foreign debt management--includingevalua- tion of different financing terms (coveringdifferent currencies, interest rates, maturities, grace periods etc.), strategies and instrumentsto minimize foreign exchange risks.

State-of-the-artin financialmanagement techniaues

-- including computer applicationsfor billing and stock management, financial reporting,budgeting, long-term financial planning, control and management informationsystem.

InternationalAccounting Standards

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

(i) consolidatedfinancial statements--Chineseaccounting practice is not to consolidatecapital constructionaccounts with production accounts. However, in order to provide an overall view of the power bureau's financialposition, agreements have been reached with the various Bank-financedpower bureaus that the financial statements furnishedto the Bank would consolidatethe capital constructionaccounts with production accounts;

(ii) cash flow statements or statement of changes in financial position--They are not required for financial reporting in China. To facilitate financial analysis and management by the power bureaus, agreements have been reached with the Bank-financedpower bureaus that such statementswould be prepared and furnished to the Bank. - 65 ANNEX11 Page 6 of 6

(iii) accounting for constructioncontracts;

(iv) informationreflecting the effects of changing prices--thiswould become increasinglysignificant as inflation recently has escalated sharply in China; and

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

Contract management

-- commercialaspects of bidding documents, contract terms including financial claims. - 66 - ANNEX 12 Page 1 of 6

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

Main Prolect Data

1. The dam site is located in a river channel approximately500 m wide. The bedrock in the river channel is exposed and consists of sound massive porphyric granite with few joints and these are tight. No major fault crosses the project area and those that exist are tight and inactive. The reservoir area is underlined by an extensive granite batholit; therefore, there is no danger of leakage to adjoiningvalleys. There are no steep slopes in the reservoir area that could slide and originatewaves that would threaten the integrity of the dam structures.

2. Flood studies using typhoons modeling have established the Probable Maximum Flood (PMF) at 46,000 m/second, or 13.15 m3/km2 of drainage area, one of the highest flood intensity in the world. The 16-bay overflow spillway controlled by radial gates is designed to accommodatethe PMF without the dam being overtopped. Aside from this, sediment load studies indicate that long- term average sediment deposition in the reservoirwould be in the order of 700,000 cubic meters per year. At this rate of sedimentation,the total reservoir capacity at normal pool elevationwould be reduced about 4 percent in 100 years.

3. An extensive geologic investigationscampaign has been carried out to establish the foundation conditions under the dam, as well as for the undergroundworks. Likewise, detailed geotechnicalinvestigations have been done of potential borrow areas for fill materials to be used in building the embankmentportion of the dam and of quarries for concrete aggregates. All in all, these investigationshave confirmed the good geologic conditions present at the project site and the availabilityof sufficientmaterials to build the project structures.

Main Prolect Data

Hvdrology

Drainage area upstream of dam site: 3,498 sq km Hydrologicalseries used: 32 year (6/1953 to 5/1985) Long-term average runoff: 3,050 million cubic meters/year Long-term average discharge: 97 cubic meters per second Deduced historical maximum discharge 21,700 cubic meters per second Probable maximum flood (PUE) discharge 46,000 cubic meters per second Estimated 1,000-year flood 31,800 cubic meters per second Estimated 10,000-yearflood 42,700 cubic meters per Constructiondiversion discharges: - Dry period (10-fear freq.) 278 cubic meters per second - Wet period (30-year freq.) 13,500 cubic meters per second - 67 - ANNEX 12 Page 2 of 6

Flood Volumes: - 1,000-year (3 days) 2,890 million cubic meters - 10,000-year (3 days) 3,880 million cubic meters - PMF (3 days) 3,620 million cubic meters Suppended Sediment Estimate: - Long-term average sediment load: 713,000 tons/year - Long-term average sediment charge: 0.22 kg per cubic meter

Reservoir

Reservoir level at PMF: Elev. 142.0 m Normal storage level: Elev. 140.0 m Freeboard,excluding parapet wall on dam: 2.0 m Freeboard, includingparapet wall on dam: 7.7 m Reservoir area at normal water level: 99 km2 Backwater length: 52 km Reservoir capacities: - Total at Elev. 142.0 1,710 million cubic meters - Dead storage at Elev. 116.0 180 million cubic meters - Regulating storage between Elev. 140.0 and 116.0 1,315 million cubic meters - Useful storage 1,495 million cubic meters Storage coefficient: 42.9 percent Water utilization factor: 91.7 percent Rated discharge per generatingunit: 94 cubic meters per second Discharge of four units: 376 cubic meters per second

Reservoir Impact

Farmland flooded: 1,900 hectares (28,500mu) Population affected: 21,400 inhabitants Rubber plantation flooded: 270 hectares (4,050 mu) Highway flooded: 23 km

Dam and Power Plant

Power and Enerav Output

Installed capacity: 4 x 60 MW - 240 MW Firm continuous capacity: 34.2 MW Long-term average energy output: 520 GWh/year Plant factor: 0.25 Annual utilizationhours: 2,160 -68 - ANNEX12 Page 3 of 6

Main Structures and Eguipment

Dam: - Type Rolled compacted concrete gravity dam and homogeneous earth embankment wing dams - Bedrock Porphyric granite on riverbed, soil weathered from granite on both banks Concrete dam crest: Elev. 144.0 m Earth dam crest: Elev. 143.7 m Dam crest parapet wall: Elev. 145.2 m Max. dam height: 60 m above foundations (concrete dam) Dam crest length: 5,842 m of which 719 for the RCC dam 5,123 m for the wing dams (left 2,792 m arndright 2,331 m) Overflow section of dam: Weir crest elevation 126.0 m Length 314.5 m Number of spillway bays: 16 bays Dimension of spillway bays: 16 m x 14.5 m each Gate type: Steel radial gate with oblique arm Hoist type: Pendular hydraulic hoist

Power Intake: Type: Intake incorporatedin dam Sill: Elev. 103.0 m Openings: 4 openings; each 4.5 m wide x 6.5 m high

Penstocks: Type Steel lined Quantity 4 Length 109.6 m Internal diameter 5 m Flow velocity 4.8 m per second

Powerhouse: Type Underground Rock Porphyric granite Dimension (LxWxH) 87.0 m x 14.0 m x 35.7 m Center line of turbine elev. 49.5 m - 69 - ANNEX 12 Page 4 of 6

Intake of High Main Canal: Type Embedded in left bank concrete sector Sill Elev. 111.0 m Dimensions (w x h) 0.8 m x 1.8 m Maximum design discharge 12 m3/s

Surge Shaft: Type Simple vertical Dimension (LxW) 55.0 m x 7.5 m Height 32.0 m

Tailrace Tunnels: Shape Circular Number Two Internal diameter 8.0 m Length 430.0 m and 422.0 m

Substation: Type Surface outdoor Dimensions (LxW) 91 m x 43 m

Main ElectromechanicalEauipment

Turbine type Francis Number 4 Specific speed 249 m-Kw RPM speed 214.3 Maximum gross operating head 87.4 m Minimum gross operating head 62.9 m Design head 73.0 m Rated output 61.5 MW

Generator: Number 4 Rated output 60.0 MW MVA Power factor 0.85 Excitation Static excitation Voltage 10.5 kV

Main Transformer: Rated capacity 4 x 75 MA (three phase) Type Force air cooled/watercooled Voltage ratio 242/10.5 Kv Tapse 2 x 2.52

PowerhouseCrane: Number One Capacity 2 x 125/25 tons - 70 - ANNEX 12 Page 5 of 6

TransmissionLine:

Voltage 220 Kv Number of circuits 2 Conductor 400 mm ACSR (aluminum core steel reinforced) Transmissiondestination Haikou & Sanya via Changjiang Subt. Transmissiondistances: to Changjiang 36 km to Haikou 165 km to Sanya 112 km

Irrigation

Total irrigated are: 190,000mu From High Main Canal: Maximum draw off through High Main Canal 10 m3/s initially 12 m3/s later Average annual demand of High Main Canal: 119 million m3

High Main Canal 15.6 km

Hongguan Lateral Main Canal 10.2 km

Sanjiaolu Branch Canal 10.3 km

Jiucun Branch Canal 9.0 km

Lateral Branch Canal 29.0 km

Field Ditches 6:.5 km

Small Field Ditches 51.3 km

Main Work Quantities

Dam and Power Facilitiet

- Earth and rock open cut 890,000 cubic meters

- Vlndergroundrock excavation 180,000 cubic meters

- Placement of earth and rock fill 5,120,000 cubic meters - 71 - ANNEX 12 Page 6 of 6

- Placement of concrete 912,000 cubic meters

Of which:

roller compact concrete 518,000 cubic meters

conventionalcast concrete 394,000 cubic meters

- Steel structures erection 3,495 tons

To perform these works the following quantities of main building materials are needed:

- Timber (structuraland formwork) 12,000 cubic meters

- Cement 175,000 tons

- Steel reinforcementbars for concrete 5,200 tons

- Structural steel and plates 7,190 tons

Since China is a net importer of these materials all the quantities indicated will be imported and procured through ICB. - 72 - ANNEX 13 Page 1 of 3

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

TECHNICALASSISTANCE UNDERTCC II (Credit No. 1664-CHA)

The scope of TCC-financedtechnical assistance,totalling $350,000, is outlined below.

1. Telecommunicationand Control erstem for Hainan grid ($160,000)

The preparation consists of a feasibilitystudy and the preparation of technical/performancespecifications to be included in biddIng documents. Foreign consultants (10 staff-months)will be needed to ensure that all the specified equipment and procedures and the required performance tests are in accordancewith the state of the art. The main areas to be covered are:

(a) data processing in the Haikou control center;

(b) data acquisition in substationsand plants; and

Local expertisewill be used where applicable and available, particularlyfor the PLC equipment and control building facilities in Haikou. Draft Terms of Reference for this study are attached.

2. Power Plant Electrical Equipment ($90,000)

The scope of works includes a review of design principles by a consultant (3 staff-months)and a study tour (4 persons x 20 days) to familiarizeChinese engineerswith the state of the art in the following areas:

(a) computer assisted plant control; and

(b) alternative schemes for plant protection and insulation.

3. Main Civil Works DesiRn and Execution ($100,000)

The preparationwill include the first Special Board of Consultants (SBC) meeting, a visit to experts on rock bolting techniques, instrumentationfor undergroundworks and dams, as well as a tour of rolled compacted concrete dams under construction(3 persons x 30 days); all the above visits by Chinese engineers are likely to improve the design and constructionmetbod of the project. - 73 - ANNEX13 Page 2 of 3

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

Preparation of Study/TechnicalSpecifications for the Power Dispatch System

Terms of Reference

I. Background

1. Hainan Island has a population of about 6 million. As of January 1989 the capacity connected to the grid was 311 MW, of which 145 MW was provided by seasonal hydropower and the rest by small coal-fired units, and diesel and gas turbine sets. The highest transmissionvoltage is 110 kV (830 km of lines, 13 substations),followed in importanceby 35 kV transmission (638 km, 10 substations).

2. By the year 2000, installed capacity is expected to exceed 1200 MW with three major hydro plants totalling 350 MW and four major thermal plant sites totalling 850 MW. A 220-'-Vnetwork will be developed with a.out 10 substations,and the 35-kV network will be ubed increasinglyfor subtransmission. The major transmissionand generation facilities referred to as the Hainan Electric Power Grid (HEPG) will be controlled by the Hainan Provincial Electric Power Company (HEPCO) from facilities to be located at the major thermal plant site near the capital city of Haikou.

II. Obiectives

3. To enhance the efficiency and reliability of HEPG operations,a study will be undertaken with the followingobjectives:

(a) to review the existing organization,methods, and equipment used for dispatch at HEPG;

(b) to propose improvementsfor the dispatch system of HEPG, including an estimation of the cost and staffing required; and

III. Scope of Works

4. The study will focus on the requirementsof HEPG around the year 2000. It will include the following tasks:

(a) Inspecting HEPG dispatch facilities and expansion plans, and presentationof the consultant experience and principles in designing the dispatch system; - 74 - ANNEX 13 Page 3 of 3

(b) analyzing functions to be performed in real time and off-line at remote stations and at the Haikou control center;

(c) assessing data processing needs in remote stations, and at the Haikou control center to perform real time SupervisoryControl/Data Acquisition (SCADA) and Automatic Frequency Control (AFC);

(d) assessing data processing needs at t,ieHaikou control center to perform "off-line" functions including load flow calculationsand line security analysis;

(e) assessing data collection and communicationrequirements; improving/makingadditions to the existing system at Haikou control center, remote stations, and plants; improving/makingadditions to the existing telecommunicationplan and equipment;

(f) improving/makingadditions to the existing hardware and software to handle the data identified in tasks (c) and (d) above;

(g) improving the existing or planned building facilities that will host the control center (uninterruptedpower supply, insulation, and air conditioning);and

(h) improving/makingadditions to the existing staffing arrangements (organization,management, job profiles) for operating and maintaining the system.

5. Functional and performance specificationsare required for new equipment proposed under tasks (e), (f), and (g) above. At this stage, a dispatch system design with several control centers and computerizedfunctions other than those mentioned under (c) and (d) is not envisaged.

6. The assignment shall not exceed ten (10) staff-months. - 75 - ANNEX 14 Page 1 of 3

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

Special Board of Consultants: Terms of Reference

Composition

1. The Special Board of Consultants (SBC) would consist of five members as follows:

(a) a hydroelectricengineer to be Chairman of the SBC; (b) a grouting specialist; (c) a rock/soilmechanics specialist; (d) an RCC dams expert; and (e) a power systems specialist.

Scope of Work of SBC

2. The SBC would visit the project site periodically to review the project constructionand advise HEPCO on any particular design or construction matters brought to its attentionby HEPCO's project management field staff, MSDI (Design Engineers) or GIDI (ConstructionSupervision and Inspection Engineers). These visits would take place approximatelyonce every six months starting in mid-1989. During the initial visit the SBC would review the project design features as well as the project constructionschedule. HEPCO also could commission any member of the SBC to undertake tasks concerning particular aspects of the project and could request their presence collectivelyor individuallyto advise on any unusual happening during constructionof the project. In general, visits to Hainan and the project site should be limited to one week, with up to one week travelling time to and from home station, including stopover en route.

Remuneration

3. The individual members of the SEC shall be paid a professionalfee per day devoted to the project includingtime spent en route to the project site and time employed at their home station in matters concerning the project. In addition, the SBC members shall be paid the cost of round-trip airline tickets in executive (business)class plus expenses en route, including hotel, meals, baggage handling,visas, airport taxes and telexes. In Hainan, their hotel and meal expenses, and local transportationexpenses, shall be covered directly by HEPCO. In general, both professionalfees and expenses should be in line with World Bank practices.

Profile of SBC Members

4. Chairman. The SBC Chairman should be an engineer with broad experience in projects similar to Daguangba and in power system operations. He should be a generalist in the field of electric power with a good background - 76 - ANhEX 14 Page 2 of 3

in design, construction,and management and with at least 30 years experience, preferably in internationalprojects.

5. Grouting Specialist. The Grouting Specialist should be an internationally-knownengineer-geologist with at least 25 years experience in international projects involving rock grouting under dams, preferably connected with a technical university active in experimentalwork in the field of rock grouting.

6. Rock/Soil Mechanics Specialist. This member of the SBC should be an internationally-knownexpert in the field of rock/soilmechanics with a strong background in rock-bolting. 4e should have at least 25 years experience in internationalprojects involv.;; extensive rock bolting and rock anchoring, preferably connectedwith a t.chnical university active in experimentalwork in the field of rock/soil mechanics.

7. RCC Dam Expert. This member of the SBC should have a strong background in the design and constructionof the RCC dams. He should be an internationally-knownengineer with at least 25 years experience in design and constructionof dams, particularlyconcrete and RCC dams.

8. Power Systems Specialist. The power systems specialist should be an internationally-knownelectric engineer with at least 25 years experience in the field of power plant equipment and transmissionsystems, preferably connected with a technical university or experimentalinstitute in the field of power engineering.

Specific Scope of Work for SBC Members

9. Chairman. The SBC Chairman will preside over the discussionscon- cerning points submitted to the SBC and will be responsible for assuring timely preparation of the SBC report to HEPCO at the completion of each field visit. He should summarize the results of the SBC visit, review the progress of the constructionwork, and assess the quality of workmanship ex6ibited by the works, and of the organizationalsetup of the contractor.

10. Grouting Specialist. The Grouting Specialist should review the proposed grouting program and assess its appropriatenessfor the work conditions. He should review the rock groutabilityon the basis of the field tests so far performed and determine if additional tests are needed. He should assess if the extent and density of the deep curtain grouting is necessary as designed or if grouting could be reduced and in which areas. With respect to consolidationgrouting, he should review the grouting procedure to assure the integrity of the rock foundation under the dam. He also should review the results of the grouting to satisfy HEPCO of the grouting effectiveness. In addition, he should inspect the contractor'sgrouting equipment to determine its suitability for the proposed grouting program and the ability of pressure control devices to keep grout pressure below safe values.

11. Rock/Soil Mechanics Specialist. The Rock/Soil Mechanics Specialist ahould review the design of the proposed rock bolting scheme and recommend any changes warranted, particularlythose concerning the stabilizationof rock - 77 - ANNEX 14 Page 3 of 3 wedges adjoining large undergroundexcavations. He should review the design of the filters in the earth dams to assess their effectivenessin controlling migration of soil particles from the earth embankment and from the foundation. He should review the techniquesproposed for undergroundexcavation and rock blasting, as well as for embankment fill placement. He should review the results of the photoelastictest performed by the Design Engineers the determine the best way to attach the beams supporting the underground power house crane to the rock walls.

12. RCC Dams Expcert. This SBC member will be responsiblefor advising on details of desigr,for the RCC dam, and on constructiontechniques. He should ascertain if the existing design is adequate for construction. He should assess the proposed concrete mix and make appropriate recommendations on the handling, placing, and compacting of concrete. Furthermore,he should review :he contractor'sproposed constructionplan and the equipment available for this work.

13. Power System Specialist. This member of the SBC will review the electric design of the power plant and substation equipment and the protection scheme. He should assist HEPCO in determiningthe insulation coordinationfor substation apparatus and transmissionlines for the entire Hainan Grid in accordancewith the isokeuraniclevel (number of electric storms power year). He also should review the transient and steady-statestability of the network. Given the plans to add to he Hainan Grid steam turbo-generatorswith capacities ih excess of 100 MW, he should determine if there is danger of subsyn- chronous resonance. He also will be responsible for establishingthe short- circuit capacities available in the network and to assist HEPCO in designing an appropriateprotection scheme. Concerning the power plant at Daguangba, he should examine if the protection scheme and the substation arrangement are adequate and give a high degree of reliability. He also will be responsible for assisting HEPCO in establishingthe reactive compensationneeded in the transmissionnetworks. - 78 - ANNEX 15 Page 1 of 3

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

HAINANPROVINCIAL ELECTRIC POWERCORPORATION (HEPCO)

CONSTRUCTIONMANAGEMENT SERVICES

Summary of Scope of Work

General

1. The principal management responsibilitiesof the Construction Management (CM) organizationare:

(a) Contract administrationincluding control of costs, schedule monitoring and coordination,change control, communicationand document control, and the establishmentof correspondingprocedures.

(b) Constructioninspection and quality assurance including site survey, constructioninspection and inspection in manufacturers facilities to confirm the compliancewith contractualdocuments, drawings and specifications.

(c) Design engineering services, as required, to supplement engineering services rendered by others. This may include preparation or review of material and equipment specifications,of constructiondrawings, incorporationof design changes, review of contractors'and manufacturers' submittals,register of drawings, and board of consultants' support.

(d) Site administrationservices including safety, camp management, inventory control, office services,project services, etc.

(e) Training of HEPCO staff.

Contract Administration

2. The main responsibilitiesof the CM organizationin this area include the following:

Cost Control. Measuring and verification and certification of work done for the purpose of making interim and final payments to the contractors and suppliers. Inspection,testing, and approval of the contractors' materials and workmanship will be required prior to certification.

Schedule Monitorint and Coordination. Review and approval of schedules oubmitted by contractorsand suppliers. The approved schedule will be the basis for monitoring contractorsand suppliers'performance. Identi- fication of factors that could cause or cause delays so that measures can be taken to resolve them. - 79 - ANNEX15 Page 2 of 3

Change Control. Facilitate settlement of disputes or claims within the terms of each contract. Analysis of claims so that measures can be taken to resolve them.

Communicationand Document Control. Control of correspondenceto and from the contractors. This will include certifications,schedules, material deliveries, submittals,and contractualcorrespondence.

Establishmentof Procedures. Preparation "nd implementationof procedures to effectivelyexercise control of the project without introducing avoidable costs and delays. This procedureswill encompass all aspects of contract administration,engineering and constructionmanagement, constructionsupervision and quality assurance, site administration,and training.

ConstructionInspection and Quality Assurance

3. The CM organizationwill be responsiblefor developing and executing the inspection and testing program to ensure that each item that is a part of the permanent works has been constructedin accordancewith the design and constructionspecifications. This program will include:

Site Surveys. Have survey teams to check contractors'layouts and to maintain a permanent network of monuments and markets for measurementsof quantities, setting formwork, etc.

ConstructionInspection. Maintain inspectionservices at the construction sites whenever work is in progress. Establish and implement labora- tory and field procedures and program for testing. This program should be based upon routine quality control measurements,which after processing, will provide a record of trends and enable early adjustments and correctionsto be made, if necessary. The program must measure and record what is done and process the data so that design parameters and constructionspecifications can be checked and usable records developed for future safety appraisals.

Inspection in Manufacturers'Facilities. Prepare and implement a quality assurance program to confirm compliancewith standards for design, manufacturing and testing. Visit and inspect manufacturers'facilities to check the various stages of the manufacturingprocess, to examine materials and test certificatee,to witness tests, and if appropriate,to arrange for independenttests. Check on progress in manufacture, testing and preparation of shipment. Recommend to management any measures needed to expedite matters.

Start-un and Commissioninaof the Works. Coordinate the performance of tests with the various manufacturersand other entities involved in the commissioningand start-up. Assist in the developmentof accurate and safety start-up and test procedures, in performing tests and evaluating tests results. Coordinate the preparatior,of final start-up and test reports and formulate recommendationsfor operating procedures and manuals. - 80 - ANNEX 15 Page 3 of 3

Desi8n EngineeringServices

4. Supplement,as required, design engineering services being rendered by others. This may include assistance in the preparation of specifications and of constructiondrawings, incorporationof design changes, ensuring that designs and drawings prepared by the constructioncontractors and by the equipment manufacturersare completed in accordancewith contract documents, preparationof "as built" drawings, and providing support for meetings of the board of consultants.

Site AdmJnistration

5. The CM organizationwill be responsible for all matters pertaining to the administrationof site services and project lands, as follows:

(a) Safety, includingmonitoring of the contractors'safety programs;

(b) Inventory control including purchasing and warehouse management; and

Training of HEPCO Staff

6. The consultantwill impart training to HEPCO staff in modern constructionmanagement, particularly in project management systems, management of claims and disputes, constructioncost estimating, constructioncost control, constructionplanning, constructionschedule monitoring, construction supervision,and quality assurance control. A part of this training may be done abroad. Particular attentionwill be given to the selection of candi- dates to be trained and their adequate preparation before sending them abroad for training. - 81 - ANNEX 16 Page 1 of 11

CHINA

DAGUANGBA MULTIPURPOSE PROJECT

Resettlement

Scope of Resettlement

1. The inundation of the Daguangba Reservoir on the Changhua River to EL 148 m (backwater elevation of 1/20 year flood for houses) will entail the resettlement of approximately 23,800 people in Dongfang and Ledong Counties (1990 survey data adjusted for population growth). The propos-d resettlement and rehabilitation plan (RRP) is designed to restore the livelihoods and homes of the affected people, about 80 percent of whom are agriculturalists and about 20 percent of whom are urbanites. The majority are Li and Miao national ethnic minorities.

Resettlement planning has been carried out by County Resettlement Committees through consultation with local Resettlement Committees representing each of the Li and Miao villages to be resettled. The resettlement desti- nations and the house designs, irrigation system layouts, designs for public buildings, etc., were discussed with and approved by the displaced population. The participation of minorities in the planning process has been facilitated by the appointment of Li-speaking and Miao-speaking officials and technical staff to the Country Resettlement Committees. These committees will be expanded to County Project Management Offices to implement resettlement, farm development, and environmental components of the project.

3. Resettlement sites have been identified and mapped (IBRD Map 21686). Site-specific development plans were examined and found to be satisfactory. In Dongfang County 17 villages will be affected. Appi.oximately half of the people will move to new settlements in the Datian and Jiatou areas which will be provided irrigation from the High Main Canal and Sanjiaolu Branch Canal. The other half will move to new settlements in the Nawen area which will be provided irrigation from Baicha, Nawen, and Guojie reservoirs. In Ledong County 1I villages will be affected. Since this is the tail end of the Daguangba Reservoir, most villages will relocate to higher elevations near their present location, because most of their farmland is unaffected. New paddy fields will be irrigated on reclaimed lands now utilized by the affected people for rainfed crops. Portions of the Guangba State Farm, Shanrong State Farm, and Houmiling Tree Farm also will be affected. Relatively fewer persons will require relocation on the state farms, as inundation primarily affects land. The distribution of the affected population, with a 2.5 percent adjustment for population growth in 1990-95 is described in Table 1.

4. Table 2 displays the nature and magnitude of physical losses due to the reservoir. -82 - ANNEX 16 Page 2 of 11

Table 1: POPULATION AFFECTED

Dongfang Ledong Guangba Houmiling Shanrong County County State State State Farm Farm Farm Total

Displaced Population (1990) Agricultural 11,637 5,110 -- 16,747 Nonagricultural 215 1,645 446 310 660 3,276

Subtotal 11,852 6,755 446 310 660 20.023

Projected Growth 2,240 1,275 85 60 125 3,785 (1995)

Total 14,092 8.030 531 370 785 23.808

ResettlementPlanning ar.dOrganization

5. The Planning Commission of Hainan Island organized the Reservoir Area ResettlementPlanning Group to plan the resettlementand rehabilitation program. This group is composed of Land and ConstructionOffices of Dongfang and Ledong Counties and the Mid-South Design Institute (MSDI). Field surveys of the affected zones and the receiving areas were carried out in 1983 and a preliminary report was approved by the Ministry of Water Resourcea (MWREP) in 1985. In 1986, the Government of Hainan formed the County Resettlement Offices in Dongfang and Ledong Counties; these offices in turn organized township and village ResettlementCommittees to finalize the plans. Assisted by MSDI, these groups updated planning surveys to the present, demarcated the reservoir boundaries, inventoriedaffected properties,and carried out planning of new settlement site development.

6. County ResettlementCommittees have selected new settlement sites and finalized site-specificdevelopment plans through consultationwith the local ResettlementCommittees representingthe people of each village and township to be resettled. Participationof the families to be resettled in both the planning and in the implementation of the plans is facilitated by appointmentof Li-speaking and Miao-speakingofficials and technical staff to the (ounty ResettlementCommittees. Alternative sites were identified by the County ResettlementCommittee and ratified or rejected by the villagers. The final settlement sites (see IBRD Map 21686) have been chosen with the local ResettlementCommittees. Through this process of participatoryplanning, County officials have secured the willingness of the affected families to resettle in the agreed areas. Similarly,house designs, irrigation system - 83 - ANNEX 16 Page 3 of 11

Table 2: PROPERTIES AFFECTED

Guangba Houmiling Shanrong Dongfang Ledong State State State County County Farm Farm Farm Total

Farm land (ha) Paddy fields 428.3 413.1 0.4 841.8 Dry fields 388.2 79.4 1.5 6.9 476.0 Sloping land 317.2 186.4 34.6 2.1 26.0 566.4

Other land (ha) Vegetable plots 8.0 0.7 8.7 Fish ponds 4.7 9.2 0.6 3.0 17.5 Rubber plantation 24.2 21.8 176.8 59.2 282.0 Orchard 37.9 302.7 41.5 34 1.9 418.0

Economic Trees /a 48,200 41,427 4,261 154 396 94,438

Dwellings (m2) 122,648 43,026 742 1,580 167,996 Public Bldgs (m2) 10,986 37,092 11,022 2,717 19,605 81,422 Highway/road (km) 85 9 6 1 12 113 Telephone line (km) 70 3 7 25 106 10,000 kv line (km) 12 26 6 5 7 56 Brick/Tile Kiln (nos) 21 17 38 Turbine/pump (nos) 5 7 1 13

/L Includes tree crops such as silk cotton, betel, coconut, bamboo, etc.

layouts and the design of public buildings have been approved by the affected Li and Miao people. These designs are not only consider appropriateby these resettlers but an improvementover prior conditions in their villages (i.e., a brick house is seen as providing better protection against typhoons which destroy many wooden houses). Resettlers are allowed to modify the house and to build additional structures out of materials of their choice, such as livestock pens, granaries, etc.

7. Implementationof the RRP would be guided by the Provincial Project Management Office (PMO). Responsibilityfor implementationworks would rest with the County Project Office. The County Project Office, directed by a County Deputy Head, will work directly through township,village, and state farm resettlementcommittees to implement the resettlementprogram. The following diagram displays the organizationalscheme. - 84 - ANNEX 16 Page 4 of 11

Government of Hainan Province

------Provincial PMO

Government of Dongfang County

Guangba State Farm Admn Government of Ledong County

Houmil._agTree Farm Admn

Shanrong State Farm Admn Dongfang County Project Office

Ledong County Project Office

Township/Village/FarmResettlement Committee

ResettlementPrinciRles and Guidelines

8. Compensation,resettlement, and re-establishmentof the affected people is guided by "The Law of Land Administrationof the People's Republic of China" issued by the State Council, "Measures of Land AdministrationPrac- tice of Guangdong Province" issued by the Provincial Government to which Hainan Island then pertained, and "Design Norms for Handling Reservoir Inunda- tions in Water Conservancyand HydroelectricProjects" issued by MWREP. These documents and the present administrativepractice of Hainan Province provide the following basic principles of resettlementand rehabilitation.

(a) Compensationfor dwelling is based on a 1-in-20-yearflood level;

(b) Compensationfor agriculturalland is based on a 1-in-5-yearflood level;

(c) Displaced persons and facilitieswill be reestablishedin the near- est available sites within their respectixe counties and, if possible, within their original townships;

(d) To the extent possible, displacedpeople should be allowed to continue in their prior occupations;

(e) Resettlement should be arranged so that phys'cai and human resources can continue to be at least as productive and living conditions at least as convenient as they were before the move; - 85 - ANNEX 16 Page 5 of 11

(f) Plot sizes for resettled farmers should meet minimum standards so as to enable the farmers to continue making a living on the land;

(g) During the transition period, the provincial government will supplement the agriculturalproduction of farmers with grain, fuel, and fodder as required;

(h) Public facilitieswill be recorstructedto at least preexisting standards;

(i) Supply of constructionmaterials (steel, lumber and cement) for reconstructionof dwellings, building, and other facilitieswill be given priority;

(j) Compensationfor dwellings, house plots, lost wages and moving expenses will be paid to heads of households shortly before the move. Compensationfor productive assets and infrastructurewill be paid to the local (village)government within the jurisdiction;

(k) To the extent possible, the integrity of neighborhoodsand hamlets will be maintained in the resettlementprocess;

(1) Resettled persons will be allowed to return to the reservoir area to plant and harvest crops and salvage materials tntil their lands are flooded;

(m) To the extent possible, individualhouseholds will be given a range of choice in regard to:

(i) design of dwelling;

(ii) availabilityof constructionmaterials at official prices;

(iii) opportunity to buy additional constructionmaterials at market prices;

(iv) quality of dwelling;

(v) building contractor;and

(vi) disposal of materials of old home.

(n) new houses will be built to the standard of at least 10 sq.m. per person and new kitchens to the standard of at least 1.5 sq.m. per person. ANNEX 16 - 86 - Page 6 cf 1l

CompensationCriteria

9. Resettlementand rehabilitationoperations in China are financed mainly through reinvestmentof compensationmonies paid to displaced families, enterprises,and governmententities for assets acquired. Where such compensation rates fall short of actual reestablishmentcosts, additional financial resources are made available to local governmentto carry out resettlement.

10. Compensationrates for assets acquired by the Daguangba Project are based on the guidelinesestablished in the documentsmentioned in para. 8 above. The compensationrates are as follows:

(a) Rice fields are valued at 5 times plus a resettlementallowance averaging 4 times the value of annual production based on the average of official prices and surplus purchase prices;

(b) Vegetable plots are valued at 10 times annual production plus Y 10,000/mu for new plot construction;

(d) Timber and fuel forest are valued on basis of production costs invested in the forest plus a resettlementallowance of one-third the rice field value;

(e) Economic trees are valued on basis of a multiple of annual output plus a resettlementallowance one-half the rice field value;

(f) Collective orchards,excluding trees around the houseplot, are valued on basis of annual output plus a settlementallowance of one- half the rice field value;

(g) Buildings are valued on the basis of replacement cost for a structure of same quality and type, with a deduction for the age of the home and the value of materials salvaged, plus the cost of moving materials to the new site.

(h) Enterprises are compensatedon the basis of all of the following:

(i) 20 percent of fixed assets;

(ii) moving costs plus 20 percent of moving costs for losses due to damage in route;

(iii) one month's vages to compensate for disruptionin industrialenterprises; or

(iv) two month's wages to compensatefor disruption in commercial enterprises;and

(v) 70 percent reduction in taxes during the shutdown period. - 87 - ANNEX 16 Page 7 of 11

(i) Other compensationincludes:

(i) Y 18.34 m for highway, electricity,and telephone connections;

(ii) Y 0.45 m for recervoir clearing and relocating ancestral tombs;

(iii) Y 1.41 m for reconstructionof small power plants, brick kilns.

Re-establishmentof Economic Productivity

11. Nine affected villages in Dongfang Cour.tywill be relocated to four receiving areas sorved by the High Main Canal. The settler families will be allocated approximately 15.5 mu (1 ha) of irrigated land, of which 4 mu will be for rice paddy cultivation,and about 0.75 mu for vegetable plot, 3 mu for sweet potatoe-peanut-cornrotation, and 6 mu for tropical tree crops or tropical cash crops such as mango and pineapple. An additional 1.5 mu of fuelwood land will be provided to each family. In the Nawen resettlementarea nine villages will be moved to fc-irreceiving areas; these areas will be provided irrigation by the constructio.of small dams to create the Baicha, Nawen, and Guojie reservoirs. The amounts of land to be allocated in the Nawen settlements are about the same, except for fuelwood land, which is not required because family fuelwood lots are not inundated in this area.

12. In Ledong County the affected families are moving backward on land they presently use for rainfed crops. The land will be irrigeted by extending existing irrigation canals from the Daan, Zhangmao and Chenkao reservoirs and the Narba Barrage. Families will be allocated approximately8 mu of irrigated land for paddy cultivationand approximately6 mu for sugar cane cultivation. Irrigationwater, which is now a scarce resource,will increase the productivity of these lands and raise incomes beyond present levels, even though the land base will be reduced. In addition, about 7.5 mu of tropical tree crop land will be provided to each family, in most instances rubber trees.

13. Most of the urban families affected reside in Ledong County. These familieswill continue in their present occupations since only their residences will be affected. Places of employment, in large part government offices, will remain the same and residenceswill be reconstructedkeeping transportationcosts to a minimum.

14. Free transportationand hauling of belongings will be provided to affected families. During the transfer and reconstructionperiod, urban residents will be paid a subsistenceallowance equal to a maximum 60 da7s of work missed. The rural populationwill be provided rations of grain, fuelwood, and fodder in their new settlementsduring the three-year transition period between mobilization and resumption of full economic productivity.

ImplementationSchedule

15. The RRP requires a seven-year implementationtimetable (1909-95), beginning with preparation of the new sites. Site preparation includes construction of the High Main Canal and other minor dams/canals to supply irrigation to the new farmlands, or extension of some existing systems. The on-farm ANNEX16 ? ge 8 of 11

works required includes clearing of and leveling land, terracing, road building, and so forth.

16. House construction,including provision of livestock pens, kitchens, and grain drying areas, digging of drinking water wells, building of access roads and constructionof schools and other public facilitieswill take place one year prior to transfer of the population. Initiation of irrigationworks, on-farm works, farm roads, tree planting, as well as food, fuel, and fertilizer allowanceswill continue for two years after year of transfer. Therefore, the resettlementand re-establishmentof villages is planned to take place over a three-yearperiod. Table 3 displays the implementation schedulewith the number of persons to be moved in the the year of transfer.

Table 3: RELOCATION OF PEOPLE BY YEAR

Phase 1989 1990 1991 1992 1993 1994 1995

------1,157------II… ----- 3,369 … III ------7,522 … IV ------7,000- V ------4,760--- -

Total 23,808

17. In 1990, 1,157 persons from a village at the construction site named Guangba were successfully resettled, and in 1991 some 3,369 persons from Marong, Yudao and Giatou viliages were resettled successfully. Bank resettlement specialists visited these sites and reviewed the progress of the resettlement program in October 1990 and July 1991 and found them satisfactory.

Cost Estimate

16. In addition to steel, cement and timbet for construction and the High Main Canal and Sanjiaolu Branch, the additional cost of the resettlement and rehabilitation component is estimated at $37.22 million. To avoid the type of sharp cost overrun that was experiencedwith resettlementunder the Shuikou Hydroelectric Project, the cost of the reseztlement component under the proposed proj"ct has b.een carefully estimated. The cost estimates for major construction materials (steel,cement and timber) are based on recent bid prices. The population estimate has taken into account the projected inc4ease in the number of affected households until the year of resettlement. Compensation estimates are expected to be more accurate than those for Shuikou Project because the project area is located in the most remote region of the province, so the potential appreciation in land prices is not expected to be as rapid as in the case of Shuikou which is located near the provincial capital city of Fuzhou. - 89 - ANNEX16 Page 9 of 11

Monitorint and evaluation

19. In order to ensure timely implementationof the project, and building upon the experiencesof past projects, it is imperative that the implementation of the resettlementcomponent be closely monitored. Toward this end, an independent local research institutewould be contracted by HEPCO to assist in monitoring the resettlementoperations. The terms of reference for resettlementmonitoring are in Attachment 1 to this annex.

20. The research institutewould submit semi-annualreports to the Project ConstructionHeadquarters and Hainan Provincial Government. In addition, the research institutewould assemble snd analyze environmental monitoring data collected by the Project ConstructionHeadquarters and the County ResettlemenitOffices, and include both data and analyses in the reports. Annual reports will evaluate performance over the previous 12 months and recommendmeasures to improve future performancebased on the positive and negative experience of the past. These reports would be furnished to the Bank Group for review. Further, key monitoring data on resettlementare included in the overall project progress report (Annex 20).

r - 90 - ANNEX !6 Attachment 1 Page 10 of 11

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

MONITORING AND EVALUATION OF RESETTLEMENT COMPONENT

Terms Jr RAeference

1. Objective. The evaluationwill provide to HEPCO and the Government of Hainan Province: (a) an independenitassessment of the success of the reset'lementoperation in improving, after a reasonable transition r-riod, the levels of livelihood of the affected population, and (b) recommendationsfor modifications in elements of the resettlementprogram design or implementation strategy which will facilitate improving levels of livelihood of the affected population.

2. Approach. Evaluation is a flexible procedure to assess progress and identify problems in achieving resettlementobjectives. The approach should focus upon a small number of selected, sensitivekey indicators of well-being of the affected population and use both qualitative and quantitativeanalyti- cal techniques for making assessments. Key indicators selected may differ among rural and urban affected populationsand in relation to locational factors. Indicatorsmay include, but are not limited to, (a) acquisition or lose of assets, (b) agriculturalyields, (c) health of children aged 1-60 months, (d) development opport nities for women, and (e) morbidity rates. In addition to ke7 indicators,direct observations,case study techniques and qualitative judgments regarding conditions in resettlementareas will be used as needed to provide the context and framework for analysis and recommendations.

3. Timing. Baseline informationon each of the key indicators is gath- ered during the year prior to transfer to the new site for each village/townshipto be moved during the next season. Ass6ssments are conducted the following year once during the dry season and once during the wet season arl results are compared to the baseline information. Assessments are repeated until satisfactoryimprovement in levels of livelihood are achieved. Duration of assignmant: Start--end-1991;Finish--end-1996.

4. Methodoloxv. Every new village/townshipsite will be evaluated. Stratified sample survey techniqueswill be used to disaggregatethe affected population in each new site by sex and general age categories. Sample size will vary with the size of the village/township.

5. Reporting Reguirements. Annual reports containing information on progress, analysis of problems, and recommendationswill be submitted in draft to HEPCO and Ht-an Provincial Government for review and comment. Final reports will be prepared taking into account these comments. Draft reports will be submitted by May 30 and, subject to timely receipt of comments, final reports will be submitted by September 30 each year. - 91 - ANNEX 16 Attachment 1 Page 11 of 11

6. Staffing Requirements. A qualified and experiencedsenior resettlement specialistwill direct the evaluationwork. Consultant social scien- tists, agronomists,agricultural engineers, etc., may be retained from time to time as needed to advise on technical issues. Field work will be assisted by a team composed of two staff who are familiar with the resettlementareas for each county. Data processingwill be conducted by a senior resettlementspe- cialist assisted by staff skilled ir.computerized data processing and reporting.

7. Equipment. Materiais. and Supplies. Personal computers will be utilized to establish files on each village/townshipsample, which can be updated periodicallyas field informationis made available, and which can produce draft and final reports. Local authoritieswill provide necessary arrangementsfor transportation. The evaluation team will obtain space for field offices near resettlementareas of each county. - 92 - ANNEX 17 Page 1 of 3

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

ENVIRONMENTALMANAGEMENT PROGRAM

1. Implementationof the Daguangba MultipurposeProject and its EnvironmentalManagement Program componentwill generally enhance environmentalquality of the region. The project would support improvements in water quality, municipal and industrialwaste disposal, fisheries, and public health. An EnvironmentalImpact Statement (EIS) identified issues which were then addressed systematicallyin the proposed Environmental Management Program (EMP). The EIS and EMP were designed by MSDI in collaborationwith the Hainan EnvironmentalResources Administrationand the Governments of Dongfang and Ledong Counties.

2. The project area is subtropical,characterized by high annual rainfall concentratedin a few monthlsfollowed by a long and severe dry season. As a result, the region is devoid of moist tropical forest; vegetation in the upper catchment of the river bELsin(above 700-800 m in altitude above sea l.evel)is monsoon evergreen forest. The reservoir area itself is predominantlydense brush two-threemeters in height, and most trees in the area are orchard or economic specieswhich are the product of human .sntervention.The main impact on terrestrialplants will be the flooding of about 87 ha of flowering pear trees (Ormosia henrvi) which are considered precious because of high demand for them in furnituremanufacturing. However, there is no risk of extinction of this species as it is common throughout Hainan Island.

3. An analysis of the results of monitoring the Changhua River water quality, including BOD (biochemicaloxygen demand), DO (dissolvedoxygen), trace elements of metals and minerals, and total bacteria count, indicates that Changhua River is a Grade II quality water source, except for high counts of colon bacillus bacteria due to sewage dumped in the river by Ledong County Seat. (In China, Grade I is pristine or unaffected by human activity, Grade II is drinking water quality, and Grade III is acceptable for irrigation, bathing, etc.). The reservoir area will be cleared of both brush and trees one year prior to filling in order to lower risks of anaerobic conditions in the reservoir. This, togetherwith treatment of municipal and industrial waste discharges into the reservoir (para. 5), should preserve all water quality parameters at Grade II levels and markedly reduce bacterial contamination.

4. Impacts upon riverine fisherieswould be minor. Reservoir clearing will reduce the risk of fish kills after impoundment of the reservoir and downstream due to deoxygenationof water by rotting vegetation. A small barrage on the Changhua River at approximatelvthe proposed dam site has already changed the aquatic environmentin the area from riverine to lacustrene. Reservoir fish species are already present in this zone. Increasing the volume of water, further reducing flow and increasing depth, -93 - ANNEX 17 Page 2 of 3

means an increase in invertebratesand plankton at the bottom of the reservoir. These conditions wilA favor silver carp, bighead c7arp,mud carp, common carp, and African crucian carp which will be the dominant species in the reservoir. Grass carp will increase along the banks of the reservoir. These species are particularlyrelished by the people of Hainan Island. Impacts upon the downstream portion of the Changhua River are positive, since regulated releases throughout the year will increase river flow during the dry season, currently only a trickle, by 50 percent in normal years and by 30 percent in dry years. This will help to improve present poor water quality conditions downstream due to dumping of industrialand municipal waste, which becomes a public health hazard during most dry seasons.

5. Effluent from the Baoyou Sugar Refinery and sewerage discharges from the Ledong County Seat presently are dumped into the CIlanghuaRiver without treatment. Under the EnvironmentalManagement Program these discharges will be treated before release into the reservoir. Constructionof a sewage treatment plant for Ledong County Seat will be financed under the project to protect water quality in the reservoir and human health in the project area. The waste water of Baoyou Sugar Refinery will first be subject to anaerobic respi- ration treatment, the facility for which will be financed under the project, and then drained through the sewage treatmentplant before release into the reservoir.

6. Exposure to malaria vectors already present in the project area will be increased if water seeps from the irrigation system and stagnates in low areas and borrow pits created during road and canal construction. This risk would be reduced by using lined irrigation canals, distributaries,and laterals down to the field chann2l level, and by filling or leveling borrow pits followingconstruction. The concentrationof people in new settlements and constructioncamps increases the risk of exposure to infectious diseases such as Aysentery, enteritis, and infectious hepatitis generally, but the provision of safe drinking w.aterand sanitation facilities under the project will lovar the incidence of these diseases to below pre-project levels. Health cli;ics will be establishedat the project site and in resettlementareas, and workers will receive health screening and treatmentbefore employment to prevent introductionof diseases now absent from the area such as cholera. Reservoir clearing would disperse rodent populations from the reservoir area gradually, thus lowering the risk of sudden exposure of the population to hemorrhagic fever and leptospirosis. Public health would be monitored in settlement areas and at constructionsites, with particular :ttentionto water-bo=ne diseases such as malaria, by the Env4ronmentalSurveillance Stations financed under the project. Neither schistosomiasisnor the host Oncomelaniasnail are present in the ptoject area, but these will be carefullymonitored along with all other vectors and diseases vhether present or potential.

7. Existing afforestationprograms in Ledong and Dongfang counties will be expanded and focus on reforestationof the reservoir margin and resettlement zones (mostly economic trees such as rubber and citrus). About 35 percent of the area for the proposed irrigationprogram will be planted to forest trees which will reduce run-off and erosion. Increase in fertiliz.3r use and agrochemicalswould not create any significanthazard. It is local -94 - ANNEX 17 Page 3 of 3

government policy to emphasize integratedpest management and the use of chemicalswith low toxicity.

8. Measures to protect the rare Datian Deer, Cervus eldi, will be strengthenedby extendingwire fencing to co.er three sides of the already existing Datian Mountain Deer ConservaticnArea (the fourth side abuts a mountain). The habitats of terrestrialanimals such as boar, deer, squirrels, etc., in the reservoir area will be flooded, but most of these animals are expected to migrate up the catchmentwhen reservoir clearing begins. With the formation of the reservoir habitats for other terrestrialanimals such as hare, _tter and tortoise, habitats for amphibians and certain aquatic species such as the Hainan Frog, soft-shelledturtle, and snakes as well as a broad variety of aquatic birds and migratory birds will be enhanced.

9. The Hainan EnvironmentalResources Administration,as part of its responsibilitiesin the Project Mar.agementOffice, will monitcr implementation of the EnvironmentalManagement Program by County Project Offices, including establishingthe EnvironmentUnit in each office and creating and operating an EnviroinmentalSurveillance Station in each County. The EnvironmentalSur- veillance Stationwill be responsible for monitoring disease vectors, public health conditions,afforestation and watershed protection, ecological change, status of the Datian Mountain Deer, and other environmentalcorditions. The water quality of the reservoirwill be mcnitored by HEPCO under the guidance of the Hainan EnvironmentalResources Administration. ANIIX AS Page 1 of 2

CHINA

DAGUANGdAH'.LIFURPOSE PROJECT

Procurement Timetable

Bid Data Bid Date of Date of Date of Date of World Bank Date Yethod DocumentDocuments World Bank Sale of Bid Bid Submission Acceptanceof Contract of No. Sent to W8 Concurrence Documents Opening to WB Bid Evaluation Signed Procurement

Civil Works: Hydro Complex B1 11/88 LCB HDC and Saujiaolu(incl. on-farmworks for 3667 ha) B2 10/90 03/91 10/91 12191 01192 02192 02/92 LCB & V.A. Other canals and on-farm vorks for 9,000 ha 83 12191 01/92 02/92 04/92 05/92 07/92 08192 LCB & F.A. 220 kV transmissionline B4 11/91 12/91 01192 03/92 04J92 05192 06192 LCB EaniumentWorks:

Turbine and generator Cl 09/89 LCB Gates and hoistsmanufacturing C2 09/90 LCB Transformers C3 10/91 LCB 220 kV switchgear C4 12/91 LCB Plant monitoringsystem C5 10/91 11191 12/91 02/92 04/92 05/92 0(192 lCB Turbine governors C6 10191 11/91 12/91 02/92 04/92 05/92 06/92 ICB Static excitation C7 10/91 11/91 12/91 02/92 04192 05/92 06/92 LCB Power line carrierequipment CB 12/91 03192 02/92 04/92 06/92 07/92 08/92 ICB Instrumentationfor dam C9 11/91 12/91 01/22 03/92 05/92 06/92 07/92 LIB Inst-nmentationfor envirormental LIB/ protection CIO Shopping Steel (rebarsand other) jj C1I (a) 10/89 01/90 02/90 05/90 03/91 07/9x 11/91 lCB Cement f (b) 10/89 01/90 02/90 05/90 03/91 07/91 11/91 lCB Timber L (c) 10/89 01/90 02/90 05190 03/91 07/91 11/91 ICB Conductor C12 (a) 10191 11/91 12/91 02192 04192 05/92 06/92 ICB Structuralsteel for transmission line towere (b) 10/91 11/91 12/91 03/92 04192 05192 06/92 ICB Insulators (c) 10/91 11/91 12/91 03/92 04/92 05/92 06/92 ICB Transmissionline hardware (d) 10/91 11191 12/91 03/92 04/92 05/92 06192 ICB Grounduire (e) 10/91 11/91 12/91 03/92 04/92 05/92 06/92 ICD Load dispatchaystem C13 02/93 04/93 05/93 07/93 08/93 09/93 10/93 ICB LaThis data is for the first bid; secondbid will start in March 1992. DNZWp I6LTIP'fPUSB- PROW8CT

Detailed Procuresent Arranogaent. (In uss milli

PROCUREMIENT MET"OD lcD LID LCO nLtract Bank- Contract Dact Dak- tV. lu Value Financed Value Planced Value inaanced It_e Pinanced Item Financed It_m rinanced Prenatory Vorks ResetU ment - 5.3 - - - 5.3 - - - - 15.5 9.8 20.8 2.0 0.70.4 37.0 12.2 Civil works: DM and power facilitie- - - - 41 OM and Sani3aolu c l wstom 4 - - - - - 41 4 - - - - - 7 5.4 Other canla and on-fars works fox 9.000 ha 3.1 - - - 11.8 5.4 (outside iresttlement) - - - - 5.2 - 12.9 - - - bfvirnaental protection works - - - 19.1 - Troanmisio - - - 07 0.2 - - 0.7 line earctJon - - - 0.2 - 3.0 2.3 - - - - 3.0 2 3 imalmt a*d vearials Turbine. geneators. and otbr plant q nt - - - - *jdroulic 16 5 - - - - - 16 - gates and hbosts ftbrication - - -47 - 4.7 - Power plant monitoring equiliant. turbine go.ernws. n rttic excitation sytem 4.6 4.6 Power line carrlar t lac - - 4.6 mmnicstion equpient - - - - 0.7 4.6 Instriumntation - - - - - 0 7 - for dm and unde ground facilities - - 0.3 0.3 B p&iguetand ------0.3 instrunentation for anvironuetal protection - 0.4 0.4 0.3 0.6 0.5 0.5 0.3 - - 1.5 1.2 cmAt. steel (rbae and structural). tiJbr (formork adA tructural) Le 29.4 28.5 - Donirmt for - - - - - 29 4 220 kV trenaesslon lie and substation 4.7 4.7 - 28 5 load disatch ------system fox ainan Island grid 3.0 3.0 - 4.7 4.7 ------3.0 3.0 ftcwcal assistance and trainin - - - 2.6 1.0 2.6 1.0 Project mrnont and nApineriwn ------6.6 1.2 6.8 1.2 Agricultural unoort ervice ------0.8 0.4 0.8 0.4 Towals 41.7 40.8 0.7 0.7 101.6 18.0 38.0 2.5 10.1 3.0 193.0 65.0

Includes force account and prudent shoping. Z Includs land edainiatr-ativ overheds and consultancy services. S tarials tor da/poerhoua. resetttlemnt. end sirigatlon. Excludes IDC on Bank loan (us$2 adilion). - 97 - ANNEX19

CIlNA

DAGUANGBA MULTIPURPOSEPROJECT

DisbursementSchedule

Bank Bank fiscal year Semester Cumulative Project Profile /a and semester ---- ($ million) ------(z) ------

1992 First _ _ _ _ Second 17.9 17.9 27.0 6.0

1993 First 9.2 27.1 40.0 10.0 Second 9.1 36.2 54.0 14.0

1994 First 8.4 44.6 67.0 26.0 Second 8.5 53.1 79.0 38.0

1995 First 6.2 59.3 88.0 46.0 Second 5.7 65.0 97.0 54.0

1996 First 1.5 66.5 99.0 66.0 Second 0.5 67.0 100.0 74.0

1997 First - - - 86.0 Second _ _ 94.0

1998 First - - - 98.0 Second - - - 100.0

/a Bankwide standard disbursementprofile for all sectors in China issued on April 25, 1990. ANNEX 20 - 98 - Page 1 of 3

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

Framework for Project 14onitoringand Reporting

1. Project monitoring will focus on a series of target dates for major events in the project implementationprogram (Chart 5). The project progress reports to be furnished to the Bank semi-annuallywill include a summary of the status of project 'mplementationand performance indicators, actual costs incurred and revised project cost estimate, project financing arrangements, Bank Group loan/creditdisbursements by major categories, and HEPCO's financial statements.

Power Component

2. Records of selected performance indicaturswould be maintained by HEPCO to allow for the comparison of forecast against actual results, including the following:

(a) Tht.project:

(i) constructionprogress;

(ii) comparison of actual costs with budget;

(iii) procurement,i.e., preparation of bidding documents, bid opening, contract awards;

(iv) progress in staff training; and

(v) progress of studies.

(b) HEPCO:

(i) energy production a.d purchases;

(ii) peak energy demand;

(iii) energy sales;

(iv) power losses;

(v) coal consumptionin power plants;

(vi) number of outages and their duration;

(vii) number of customers by categories;

(viii) statisticson staffing; - 99 - ANNEX 20 Page 2 of 3

(ix) tariff levels and structures;and

(x) financial performance indicators--includingrates of return on net fixed assets, self-financingratio, operating ratio, debt/equityratio, debt service coverage, and current ratio.

ResettlementComponent

3. Key indicators for the resettlementcomponent are set out in the followingtable:

DACUANC8ARESETTLEMENT MONITOR:NC SCHED8ULE: KEY INDICATORS

Unit App. Act. App. Act. App. Act. App. Act. App. Act. App. Act. App. Item Cost (Y) Unit 19iO 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 Total

Donfana County: House conat. 195 m2 6.880 7,587 27,624 46,128 10,856 3,960 95,448 Kitchen conmt. 195 m2 2.064 2,334 5,180 8,649 2,036 743 18,672 Plot clearing 75 mu 35 35 125 210 50 20 440 Wells 36,000 nos 2 2 10 5 5 4 21 School/clinic/shop 207 m2 688 320 3,453 5.766 1,359 495 11,761 Lavatories 110 m2 20 170 290 60 20 560 Electric lines 24,000 km 30 24 14 68 Access roads 20.000 km 250 165 60 57 53 585 Land prep! paddy 580 mu 7,680 2.680 1,234 11,594 Land prep: slope 540 mu 4,176 2,943 1,412 560 9,091 Land prep: trees 300 mu 7,242 6,252 3,930 2,565 19,889 Farm roads 6,000 km 61 43 26 25 2S 180 Minor irrigatior Earth work, masonry 8 a3 269.840 299,300 268.370 143,520 18.680 999,710 Cement 220 ton 1,960 1,430 770 510 240 4,910 Steel 2,100 ton 26 13 9 10 10 68 Timber 750 m3 540 310 210 150 90 1,300

Ledona County: 2 Mouse con-t: rural 205 m 13,232 17,488 10,152 16,040 40.872 W,use conatt urban 225 m2 1,645 16.040 Kitchen conet. 205 m2 2,481 3,279 1,905 7,665 Plot clearing 75 mu 30 80 50 1,805 Wells 36,000 no2 12 16 12 40 School/clinic/ehop 215 m 1,654 2,186 1,270 5,110 2 Lav8torie* 115 m 85 110 64 259 Electric line. 24,000 km 9 7 5 7 28 Access roads 20,000 kfr 17 12 8 5 42 Land prep: Paddy 980 mu :,854 2,186 713 556 5,109 Land prep: Slope 540 mu 1,654 2,186 713 556 5,10e and prep: Trees 300 mu 1,654 2,186 713 656 I, Minor irrigation 3 EsrtF work, masonry 8 m 350,100 228,800 167,700 94,590 646 841.8 6 C*e-n 240 ton 2,180 2,360 1,250 660 26 6,4'6 Steel 2,200 -on 82 80 SO 30 36 '78 3 Timber 780 m 190 135 70 50 445 2 7, 300 S,.385 2 ~~~~785 House const. 140 m 0 Plot clearing 75 mu 1 4 2 7 Electric lines 24,000 km 1 10 6 17 Access roads 20,000 km 3 25 12 40 Land prep: Rubber 1.050 mu 500 1,710 2,020 2,020 4,230 Land prep: Fruit 500 mu 1,215 450 600 100 2,265 ANNEX 20 - 100 - Page 3 of 3

AGRICJLTV.RE/IRRIOATIONCOMPONENT--KEY MONrTORINO INDICATORS

Indicators Unit 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 (a) (b) (a) (b) (a) (b) (a) (h) (a) (b) (a) (b) (a) (b) (a) (b) (a) (b) (a) (b)

Land iJyzloaent Civil works Lateral km Sublateral km Structure Aqueduct m Tunnel m Highway bridges no. Small bridge no Ditch offtnkes no. Main drain& km Fare roads km

On-farm works Land clear'ing ha Land levelling ha Soil improvement ha

Materials A equipment Fertilizer ton Agrochemiesls ton Seeds kg/no. Seedlings kg/no. Vehicles 2-wheel tractor no. Motorcycle no. Filld vehicle no Crop protection equip, lot Researchequipment lot M terological equip. no. Extension equip. no.

Acricul :ural Production Sugar Area cultivated he Average yield t,hQ Total production ton Rubber Area cultivated han Avorage yield tlhe Total production ton Rice (wet-season rice) Area cultivated ha Average yield t/ha Total production ton Rice (dry-season rice) Area cultivated ha Average yi lId t/ha Tot I production ton (to repast for other crops)

Traininn Farmers m-month Project etaff; Local troni ng m-month Ove,rea training o-month Coneultant eervicee m-month Socioeconomc L Houeehold gross income yuan Household *xpenditure yuan Per capita Income yuan

La Based on sampling of predetermined ares selected for monitoring, 101 - ANNX 21 Fage 1 of 3

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

Financial Sy.tem Followed by Chinese Power Bureaus

1. Power companies may accumulate capital from three separate and distinct sources. These include funds for fixed assets, funds for working capital, and a number of special funds.

(a) Funds for Fixed Assets. These funds are obtained from the State in large enough amounts to permit implementationof approved project. according to agreed schedules. Until 1980, these funds were provided almost entirely as grants; since then, the Government has decided to make these funds available as loans obtained from the banking system or from official sources. The funds under this category are used exclusivelyto financeworks classified as capital expenditures. The funds are released monthly, in accordancewith plan provisions, in amounts needed to cover actually incurred exper.- ditures. The power bureaus are not expected to finance significant portions of their generating and transmissioninvestments from operations; rather, they are expected to remit most of their surplus income to the Government through payment of taxes;

(b) Funds for Working Capital. These funds are also received from the State. They are based on a fixed amount establishedby regulation and subject to review at intervals of about 10 years. These funds make up only a minor part of the power bureaus' capital and, because most of the bureaus have drawn their entire allocations since the last review, these funds have been used only as a minor source of capital in recent power projects proposed for Bank financing. Because current obligationsboth to and from the power bureaus are settled almost as accrued, the working capital funds have been used primarily to finance operating inventory; and

(c) Special Funds. These funds are earmarked for distinct purposes and are funded from net operating revenues or cash receipts in amounts established according to regulations. The power bureaus' accounts contain four separate categoriesof special funds, including those for: (i) maintenance; (ii) renovations; (iii) employee benefits; and (iv) distributionimprovements. The special funds for maintenance are financeL '-yallocations charged as operating expenses in determiningne" operating income before Income Tax. The special funds for renovationsare financed by charges against Government Funds (the balance sheet account showing the Government'sequity investment in a power bureau) equal to the portion of depreciation provisions not used for debt repayment. The special funds for employee benefits are financed using distributionsfrom Net Income after Income Tax but pri r to the Adjustment Tax. Receipts and withdrawals from the special funds associatedwith distribution improvementsare passed through the Flow of Funds statement and are - 102 --102- ~~~~Pagoe2ofANNEX 21 3

specificallyexcluded from the Income Statement. All other allocations to the special funds appear or are ref'ected on the Income Statement as though they are operating costs or distributionsfrom earnings, regardless of whether correspondingcash expenditureshave been incurred. Under more traditionalaccountinS systems, the moneys expended from the special funds would largely be classified as operating costs or working capital. However, items charged to the Special Funds for both renovationsand distributionimprovements would be capitalizedas fixed assets once the underlying work is completed. Thus, when the renovationsor distributionimprovements are completed, their value is deducted from the special funds balance and added to the Government Finds account. The power bureaus have only one way to channel tariff revenues into cash since all operating revenues must either be expensed; distributed to cover cash outflows, debt service or taxes; invested in renovationsor distributionimprovements; or retained for future expenditure chargeable to the special funds. The bureaus channel revenues into cash by using the excess of special fund allocations over the sum of (a) Special Fund Expenditurest(b) completed renovations and distribution improvements;and (c) increases in Special Fund Assets. In turn, cash generated through the Special Funds may be interchanged with other operating cash; however, allocations to particular special funds create an ultimate obligation for a power bureau to use the accumulated cash only for certain categories of expenditures.

2. Until 1983, the power bureaus paid remittanceato MOE equal to operating revenues less the sum of cash expenditurescharged directly to operations, all allocationsto special funds, and debt service. Since 1983, the power bureaus pay MOF an Income Tax, assessed at 55 percent of operating revenues less the sum of costs (includingdepreciation) charged directly to operations, all allocationsto special funds that are treated as expenses, and debt service in excess of the portion of depreciationprovisions specificallyallo- cated for debt repayment. From the residual after Income Tax, the power bureaus must cover the special fund allocationsthat are treated as distribu- tions from earnings and the amount of debt repayment and capitalized interest during constructionto be met from net income, and remit the remainder to MOE as an Adjustment Tax.1/ MOE has some flexibilityin controllingthe power bureaus' liquidity. It can do this either by changing their allocations to the special funds, making grants for allocation to the special funds, or relieving the power bureaus of a portion of the Adjustment Tax. The power bureaus appear to hive adequate liquidity and MOE has not shown any inclina- tion to adjust the p-ocedures that affect their liquidity.

3. Under the existing financial system, the Government does not intend for the power bureaus to retain a surplus. However, tariff revenues must meet debt service requirementsand repaymentner se does not represent a charge against earnings. Regulationsprovide that certain stipulated amounts of repayment shall be met from cash that has been generated by depreciation;

1/ From an acczunting point of view, the Adjustment Tax is treated in a manner similar to a dividend. - 103 --103- ~~~~PageANNEX3of 21 3

however, the remainder of the cash generatedby depreciationmust be added to a bureau's operating cash and a correspondingallocation must be made to the Special Funds for renovations. As a result, the remainder of repayment, which must be met from an earmarked increment of tariff revenues, creates an accumu- lation of equity in the form of a correspondingundistributed earnings.

4. Most power bureaus have units which engage in constructionmanagement and subsidiarieswhich function as contractors. As a rule, the accounts of the constructionmanagement units are consolidatedwith those of the power bureau's operating units; however, the accounts of subsidiariesacting as constructioncontractors are, as a rule, not consolidatedwith those of the operating units. As a result, when investmentswere financed through grants, the power bureau's consolidatedaccounts may have routinely understated gross fixed assets and certainly did not reflect adequately constructionin progress. Also, in the past, only about 85 percent of the value of government grants used to finance new fixed assets was transferiedfrom the books of the construetionsubsidiaries functioning as contractorsto the power bureau's consolidatedaccounts. The residualwas considered to have been expended in purchasing moving assets, which remained with those constructionsubsidiaries upon the completion of construction. The change to using loans rather than grants to finance power sector investmentshas caused investment funds to be channelled from the Government through the power bureaus for payment to construction units acting as contractors. Thus, in the future, the consolidated accounts of the power bureau should more accurately reflect the value of gross fixed assets and constructionin progress.

5. Given the existing financial system, the power bureaus have little financial incentive to increase tariffs at the present time. Once a power bureau has sufficient revenues to meet the costs charged directly to operations and all special fund allocationsand debt service, any additional revenues are remitted to the State through income or adjustment taxes. Thus, once expenses and required distributionshave been met, even a large tariff increase would not increase a power bureau's financialviability, except to improve debt service coverage. Therefore, the familiar indicatcrs of financial performance such as rate of return and self-financingratio have very limited application to the financial analysis of a Chinece power bureau.

6. Nevertheless,the relationshipsbetween pricing, operating costs and size of investment program are becoming increasinglyimportant to MOE/SEIC. In their role as nationwide managers of the sector, MOE/SEIC have to arr&.,ge financing for the large and rapidly expanding investment programs of the regional power bureaus. They have, therefore,become acutely conscious of the need to mobilize appropriateresources from the consumers. To further their efforts for resource mobilization, recent Bank-financedpower projects in mainland China have provided for financialcovenants with specific targets for "notionalself-financing ratio." For purposes of these agreements,the Adjustment Tax would not be considered a rezit:.on in earned cash because it is a remittance of a residual and not a tax V-ilt into the cost structure and the proceeds are generally recycled into investmentsin the power sector. ANNEX 22 - 104 - CHINA

DAGUANGBAMULTIPURPOSE PROJECT

HAINAN PROVINCIALELECTRIC POWER COMPANY (HEPCO)

Income Statements (1986-90) (Y million)

Year ended December 31 1986 1987 1988 1989 1990

Energy sales (GWh) 418 309 415 656 746 Average revenue/kWh (fen) 10.5 11.2 30.5 31.0 32.6

Revenues Total revenues La 14.3 44.0 126.4 203.1 242.9 (less) Sales tax 8.8 6.6 ;.5 0.1 0.1 Net sales revenues 35.4 37.4 124.8 203.0 242.8

Expenses Fuel 6.4 15.9 60.4 55.7 82.9 Purchased power 1.3 2.3 15.2 5.9 9.5 Operation & maintenance 10.3 9.7 13.1 32.1 35.3 Administration 1.9 2.4 7.0 16.2 14.3 Depreciation 6.3 7.2 11.8 16.8 29.0

Total expenses 26.1 37.5 107.6 126.8 171.0

Operating income 9.3 -0.1 17.2 76.2 71.8

Interest expense 0.0 0.0 2.8 14.0 10.0 Income tax 4.3 0.0 3.8 10.8 10.8

Net income 5.0 -0.1 10.6 51.4 51.0

Operating ratio (%) 79.0 127.0 86.0 62.0 70.0

Return on net fixed assets (Z) 2.7 -0.1 6.0 16.9 8.1 la Includes sales and other non-operatingrevenues. - 105 - ANNEX 23

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

HAINAN PROVINCIALELECTRIC POWER COMPANY (HEPCO)

Balance Sheets (1986-90) (Y million)

Year ended December 31 1986 1987 1988 1989 1990

Assets Current assets Cash 13.7 14.9 33.8 29.3 83.7 Inventories 5.7 4.4 7.9 61.1 49.3 Accounts receivable 0.2 1.9 10.5 21.3 22.7 Other assets 3.5 7.7 24.0 35.9 79.6 Total current assets 23.1 28.9 76.2 147.6 235.3 Fixed assets Plant in service 217.4 235.9 324.6 598.2 1,113.5 (less) Accum. depreciation 29.2 45.1 66.9 84.1 121.4 Net plant in service 188.2 190.7 257.7 514.1 992.1 Constructionin progress 8.3 117.4 194.2 81.5 87.8 Total fixed assets 196.5 308.1 451.9 595.6 1,079.9 Special fund assets 1.5 7.2 3.1 1.3 2.7 Total assets 221.1 344.2 531.2 744.5 1.317.8 Liabilities and equity Current liabilities Accounts payable 6.7 9.3 16.3 31.4 45.5 Due to Government 0.7 0.4 2.1 2.0 -0.1 Short-term loans 0.0 0.0 0.0 10.0 40.0 Total current liabilities 7.4 9.7 18.4 43.4 85.3 Long-term debt 56.8 173.8 267.4 354.6 847.5 Total liabilities 64.2 183.5 285.8 398.0 932.8

Equity Working capital fund 2.6 2.9 5.6 13.7 15.9 Government fund 139.8 140.3 206.6 275.3 328.2 Special/enterprisefund 14.5 17.5 33.2 57.4 40.9 Total equity 156.9 160.7 245.4 346.4 385.0 Total liabilitiesand equity 221.1 344.2 531.2 744.5 1.317.8 Debt as percent of debt and equity 27.0 52.0 52.0 51.0 69.0 Current ratio 3.1 3.0 4.1 3.4 2.8 - 106 - ANNEX 24 Page 1 of 3

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

Assumptions to Financial Proiections

Income Statement

1. Energy sales reflect HEPCO's projected expansion program as detailed in Annex 7. Power distributionloss has been assumed at 11.5 percent.

2. Tariffs are assumed to be adjusted so that the average revenues would be adequate for achieving the minimum financialperformance targets (para. 5.8).

(a) Under the break-even covenant (1991-93),HEPCO's minimum operating revenues would have to cover: (i) costs directly chargeable to operations including provisions for depreciationand allocationsto the Maintenance Special Fund, (ii) operational interest; (iii) income tax; (iv) debt repayment in excess of the amount repay- able from the provisions for depreciation;(v) allocation from net income to the Employee Benefits Special Fund; and (vi) required increase in working capital.

(b) Under the sel -financing ratio covenant (1994 and thereafter), earned surplus cash available for financing future investments has been defined as total cash (includingincome from the sale of electricity and consumer connection receipts) less the aggregate of (i) cash operating expenses; (ii) operationalinterest; (iii) income taxes; (iv) required increases in working capital; (v) net increases in Special Fund assets; (vi) loan repayments;and (vii) Special Fund expendituresfor maintenance and employee benefits. Separately,the average annual investment program has been defined as the average of the previous year's actual capital expenditures,the current year's planned capital expenditures,and the next year's projected capital expenditures.

(c) For purposes of calculatingthe debt service coverage covenant, internal cash generationhas been defined as net income (after income taxes) plus operationalinterest and loan repayment from depreciation. The various special funds which are earmarked for specific purposes other than debt servicingwould have to be excluded from the internal cash generation calculationfor debt servicing capability.

3. Fuel. The price of coal is assumed to escalate with projected local inflation rates.

4. Purchased Hvdropower. Base prices are actual 1990 prices assumed to escalate with local inflation rates. ANNEX 24 - 107 - Page 2 of 3

5. Material costs are assumed to increase with HEPCO's power generation and local inflation.

6. Wages are assumed to escalate at the same rate as fuel costs noted above.

7. Depreciation is assumed to remain constant at an average composite rate of 4 percent of gross fixed assets in operation.

8. Allocation to the Maintenance Special Fund is calculated at 1.4 percent of gross fixed assets in operation.

9. Other operating costs are assumed to escalate with inflation rates.

10. Income tax is assumed to be 15 percent of net operating income.

Balance Sheet

1. Capital constructionaccounts are consolidatedwith operation accounts.

2. The average collection period of accounts receivable is assumed to be 30 days.

3. Inventoriesturnover is assumed to increase with fuel and material costs.

4. Accounts savable is assumed to increase with energy sales.

5. Due to government is assumed to increase with income taxes.

Funds Flow Statement

1. DistributionExpansion SDecial Fund represents the receipts of consumer connections. The fund is assumed to be set at Y 66 per incrementalMWh distributedby HEPCO.

2. EmDloyee Benefit SDecial Fund allocation is assumed to be 15 percent of after-tax net income.

3. Borrowings. The following terms are assumed in the financial projections: - 108 - -108- ~~~~~PageANNEX3of 24 3

Source Projects Interest Maturity and grace period

IBRD Daguangba 7% p.a. 20 years inc'uding 5 years (planned) of grace

SEIC Daguangba 3.6% p.a 15 years maturity, grace period during project construction

MWC Daguangba 3.6% p.s Same terms as SEIC

HPG Daguangba 8.28% p.a Grace period during project construction,7-year repayment

Local loan Haikou thermal 3.6% p.a. (50%) 15 years maturity, grace 1st phase 8.28% p.a. period during project (50%) construction

Foreign Haikou thermal 9% p.a. plus 7 years repayment, 4 years loan 2nd phase $20 million grace period ever 10 years

Local loan Haikou thermal 8.28% p.a. 10 years maturity, grace 3rd phase psriod during project (planned) construction

Local loan Gas turbine 8.28% p.a 4-5 years repayr.ent,1 year grace

Local loan Combined cycle 8.28% p.a. 10 years maturity, grace plant (planned) period during project construction

Local loan Yangpu thermal 8.28% p.a. Same as above (planned) ANNEX 26 - 109- Pe I of a

CHINA DAGUANOBAMULTIPURPOSE PROJECT

HAINAN PROVINCIALELECTRIC POWER COMPANY (HEPCO)

HEPCO'S Prolected Inc,me Statements(1991-98) (Y million)

Year ended DecemberaI 1991 1992 1993 1994 1996 1998 1997 1990

Energy sale (GWh) 846 958 1,082 1,225 1,387 1,670 1,777 2,012 Average revenue/kWh(fen) 88.6 80.6 46.0 47.5 47.6 61.6 60.6 49.7 ROV*nu*3 Sales revenues 282.5 292.4 488.6 582.1 659.0 810.7 898.6 1,000.6 (less) Sales tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Not sales revenues 282.6 292.4 488.e 682.1 e69.0 810.7 896.6 1,000.5 Total rovenues 282.5 292.4 486.6 682.1 659.0 810.7 898.8 1.000.6 Expenses Fuel 92.9 78.9 100.2 104.6 111.6 180.8 171.5 219.7 Purchasedpower 6.5 6.0 6.4 e.6 6.8 7.2 7.6 7.9 Operation& maintenance 38.4 39.8 43.0 47.7 68.8 71.2 79.8 88.7 Administration 16.3 18.3 20.0 21.8 23.9 28.1 28.5 81.1 Depreciation 52.3 66.2 60.2 79.1 121.8 160.6 184.2 210.4 Total expenses 203.6 198.3 229.8 259.6 322.9 895.8 471.3 667.7 Operating income 79.0 94.1 268.8 322.4 338.2 416.1 426.3 442.8

Interestexpense 68.4 71.4 79.9 110.2 144.0 166.6 154.2 148.9 Net income before incometax 12.6 22.7 177.0 212.2 192.2 268.7 271.1 293.9 Incometax 11.9 14.1 as.33 48.4 50.4 62.3 68.8 66.4 Net income 0.8 8.6 138.4 163.9 141.8 198.4 207.3 227.6 Operatingratio (%) 72 68 47 46 49 49 5p 56 Return on net fixed assets (%) 6.8 8.1 21.4 20.2 14.4 14.6 18.8 18.0 ANNEX 26 - 110 - Page 2 of 3

CHINA DAGUANOBAMULTIPURPOSE PROJECT

HAINAN PROVINCIALELECTRIC POWER COMPANY (HEPCO) HEPCO'S ProlectedBalance Sheets (1991-98) (Y million)

Year ended December31 1991 1992 1993 1994 1995 1998 1997 1998

Assets Current assets Cash 85.8 86.9 102.9 82.7 91.6 96.6 100.8 96.6 InventoriOs 88.9 83.0 104.2 108.6 116.7 134.7 160.8 197.8 Receivables(sales) 23.2 24.0 40.0 47.8 64.2 68.8 73.7 82.2 Other receivables 79.6 79.8 79.8 79.8 79.8 79.8 79.8 79.8 Total current assets 257.3 273.6 328.7 318.7 341.0 376.4 414.9 458.1

Fixed assets Plant 'n service 1,167.8 1,214.7 1,347.8 2,027.3 2,803.1 3,189.4 3,698.2 4,091.3 (less)Accum. depreciation 173.7 229.0 289.2 368.2 490.0 650.8 834.8 1,046.1 Net plant In service 983.8 985.7 1,' 8.6 1,859.1 2,313.0 2,638.8 2,783.6 3,046.1 ConstructionWIP 307.6 571.1 934.7 637.6 212.1 244.9 103.3 222.1

Total f;xed assets 1,291.6 1,es6.8 1,993.3 2.29e.6 2.S26.1 2.78a.e 2.see.s a.2es.2 Special fund assets 3.0 3.3 6.0 6.2 8.6 9.8 12.2 14.4 Totel assets 1,651.8 1,933.5 2,326.1 2,621.4 2,874.8 3,169.C 3,293.8 3,738.8

Liabillties & equity Current liabilitieu Accounts payable 61.4 58.2 66.9 74.6 84.6 95.6 108.3 122.6 Due to Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Short-term loan 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 Total current liabilities 91.4 98.2 106.9 114 6 124.6 135.8 148.3 162.6 Long-termdebt 1,046.1 1,382.6 1,601.9 1,700.1 1,768.8 1,820.4 1,683.6 1,840.3 Total liabilities 1.137.6 1.480.8 1.707.8 1.814.8 1.892.8 1.965.1 1.831.8 2.002.8

E uite 96irking capital fund 16.9 15.9 16.9 15.9 16.9 15.9 16.9 16.9 Governmentfund 841.2 365.8 464.7 699.7 726.0 891.3 1,059.8 1,237.7 Special/enterprlsofund 67.2 81.8 148.7 191.1 240.9 306.2 386.3 482.3

Total equity 414.2 462.7 817.s 806.7 981.8 1.213.6 1,462.0 1.786.9 Total liabilities& equity 1,561.8 1,933.5 2,325.1 2,621.4 2,874.8 3,169.5 3,293.8 3,738.8 Debt Equity ratio 72 75 72 es 64 6o 64 51

Current ratio 2.8 2.8 3.1 2.8 2.7 2.8 2.8 2.8 ANNEX26 Pogo a of a - 111 -. e.3o

CHINA DAGUANOBAMULTIPURPOSE PROJECT

HAINAN PROVINCIALELECTRIC POWER COMPANY (HEPCO) ProjectedSources and Us-s of Funds (1991-98) (Y million)

Year ended December 31 1991 1992 1993 1994 1995 1998 1997 1998

InternalSources of Funds Net incomebefore terest 87 80 218 274 288 363 382 876 Depreciation 62 66 so 79 122 181 184 210 Maintenance 13 14 15 16 24 34 38 43 Distributionexpxnsion special F 22 26 28 32 3e 41 4e 52 Totsl internalsources 155 174 321 401 468 688 830 682

Borrowings ProposedIBRD loan 0 181 119 98 42 3 0 0 Other project loans 206 133 187 8s a 6 0 0 Other loons 24 76 47 86 201 292 119 431 Total borrowings 229 369 332 289 246 300 119 431

Orants 5 4 2 0 0 0 0 0 Total sources of funds 389 647 e68 e70 714 888 749 1.113

Capital expenditures Proposed Daguangba Project 198 286 234 160 46 0 0 0 Other construction 24 89 a6 146 231 332 171 491 Renovations snd minor expansion 10 9 18 24 87 40 64 es Distributionexpansion 21 24 27 31 36 40 45 61 Interestduring construction 13 34 63 34 5 0 0 6 Total capital expenditures 284 421 899 383 353 420 270 614

Operational requtrements Increase/decreasein working capital 14 8 0o a 4 20 21 S1 Increase/decreaseSF asset 0 0 0 0 0 0 0 0

Debt service 97 104 193 281 822 404 410 423 Remittancesto Government 0 0 0 0 0 0 0 0 Special fund expenditures 12 13 19 22 27 89 43 49 Total operationalrequirements 128 125 241 307 352 464 474 603 Total applicationof funds 387 646 840 890 706 884 744 1.118

Increase/decreasein cash 2 1 16 -20 9 4 6 -4 Annual debt service coverage 1.8 1.3 1.4 1.2 1.2 1.2 1.3 1.8 - 112 - AnnexPage 126 of 31

CHINA

DAGUANGBA MULTIPURPOSEPROJECT

Agriculture and Irrigation Component

I. THE PROJECT COMPONENTAREA

A. Location

1. The project is located in Dongfang County at the western end of Hainan Island. The project area has a gross area of about 20,800 ha with a net irrigable area of 12,667 ha and includes 4 townships, 15 villages and 2 state farms.1/ The project includes Phase I of two phased developmentprograms extending to the year 2000.2t

B. Climate, Topogra§Rhyand Soils

2. Climate. The project area is in the rain shadow of the central mountain range and is in the driest part of the Island. Total annual rainfall is about 1,350 mm, with over 80 percent falling during May-September. Rain- fall is highly variable between years and within years. Annual evaporation is about 2,200 mm and exceeds rainfall for eight months of the year. Average monthly temperaturesvary from 12'C in January to 35 C during summer. Annual sunshine hours average about 2,600 hours.

3. The temperatureand rcdiation regime is suitable for the production of a wide range of crops. However, winter temperaturesare too low for rice production and other low temperaturesensitive crops. The main constraint is rainfall. Annual crops can only be grown successfullywithout supplementary irrigation in the April-Octoberperiod, but can still be subject to drought periods. Low rainfall in the November-Aprilperiod reduces the potential yield of rubber, sisal, sugar and mango, the main crops grown in the region.

4. _ojography. The general slope of the project area is from the southeast at the site of the main dam and high main canal to the northwest and western coastline. Hilly and undulating land gradually gives way to the gently slopiug to flat coastal plains. Due to the relatively steep gradients of the river systems there are not extensive river flood plains. The Phase I Irrigation system will command undulating land between an elevation of 100 m and 47 m in the southeasterr.segment of the rprojectarea. Substantial land levelling and terracingwill be required in some sections to achieve even

I/ Townships are Baoban, Datain, Xinje and Sanjia. State farms are Hongquan and Guangba state farms.

2/ The total command areas under both phase I and II would be 66,700 ha. - 113 - Annex 26 Page 2 of 31

water di.islbutionat farm level. Steep outcrops rising to 250 m will be reserved for forest.

5. Soils. Soils in the project area are derived from granite arena- ceoutSch,l± lAmnestotie and river wash and have been surveyed and mapped on a scale r•i 1 ic(l,000, Soil pits were dug at regular intervals and soil sampled

antd.!) W Ic' "di for eich major horizon. The predominant soil types are described as brr)-,rL-terito, red calcareous and dry red soil. The depth of soil over ro-, 1 !- opco('d ic-) vtk3u-y within the range 2-5 m but some shallow stony soils are prosanr... Physical and chemical analyses indicate thot the soils are pre- dominau;-t_L- diaining, well-aerated sands and sandy loams. They are slightlv .Acd (pH 6.0-6.5) with a rather low cation exchange capacity and water- holding, capacity.

6. Unlcultivated soils have reasonable levels of organic matter and total nitirogen- UJnder regular cultivation, the soils lose organic matter, nitrotei d phosphate. During land levelling, it will be important to stockpile 'llil-i-e soil and plant a green manure crop, anLd incorporate it into surface soi L efare cropping commences. Adequate applications of organic mater..-

al9 nl.-vf'gen anid phosphate would be required to achieve good yields. Due to the Iigli porrmeability and rather low water holding capacity of upland soils, shallow -:oted annual crops would be subject to some moisture stress even with irrig&2i.) drto-ing molnthsof high evaporation. Mulching could reduce this probler- in areas with shallow soils, the potential for seepage of excess irrigat;rn xiater from high areas to lower areas would need to be monitored along ,wth groundwater levels.

7. Watier Resources and Irrigation Development. The Bureau of Agricul- ture cf Jl,rigfangCounty estimates that about 7,300 ha of rice land is irrigated, a,ddri t:i.on, there are small areas of irrigated vegetable, melon and mango. Waier supplies are draw-afrom small reservoirs, diverted from streams or pumpedl )from small ponds, rivers and groundwater. In the project area, there are twzo small reservoirs, and some small ponds and minor diversion works and the total irrigated area is about 133 ha. There are limited supplies of groundw7aterin the sand and gravel layers of the terraces of the basin at 1.0- 6.0 ci dpth and in the fracture zones and fissures of the underlying granite and meremorphic rocks at greater depth. Although water quality is satisfactory oveq Pbie fJows are insufficient to support large scale irrigation devel- opmeIiL. r nc'h of the existing irrigated area in Dongfang County and the project )-r,;i is sulbjectto unreliablewater supply and low standards of design and inanege.ron I

C. Land Use. Farm Size and Population

8. Basic statistics for Dongfang County and the project area are pre- ser,ed .ghlef 3.. The project area constitutesabout 10 percent of the coun- cy's gr'c area. Presently about 6,608 ha or 52 percent of the potertial r:^;: ~-,-ra(if 12,667 ha is now planted on a permanent basis to tree crops, si i, i j, d crops, rice, commercial forest and pasture. An additional 2.5)" "n'"Upland Crop" land and about 3 547 ha of scrub land would be i)ormtno'nentproduction. The main crops grown are sugar, mango and - 114 - Annex 26 Page 3 of 31

forest trees, often intercroppedwith coffee, pineapple, rubber and conservation forest. PRESENT LAND USE (ha)

Paddy rice land 587 Upland cropland 4,486 Tree crops 1,587 Sisal 1,047 Commercial Eorest 1,013 Grazing land 400 Natural forest/scrub 9,200 Village area 133 Others 2,347

Total 20.800

9. There are three main categories of land operators: village households (64 percent); state farm households (29 percent); and households contracting land from village, township or county (7 percent). With the introduction of refc:-s and the production responsibilitysystem (PRS), 0.06 - 0.20 ha of cultivated l,nd was allocated to households on a per capita basis depending on thL aw4ilabilityof land. This led to fragme.Atationof land into small plots and considerablevariations in farm size per ..ousehold.

10. Total population in the project area in 1989 was estimated at 23 745 people. This correspondsto an average population density of about 114/km] which is below that of Dongfang county as a whole (134/km ). Almost all population in the project area is agricultural,with about 5,000 households. Total agriculturallabor force in the project area is estimated at 10,279. On the basis of 300 person-days per person per year, this corresponds to about 3.1 million person-daysper year for agriculturalwork in the project area.

11. About 1,535 village households would be resettled in the project area following constructionand impounding of the Daguangba reservoir. These households would be settled in the Sanjiaolu/HighMain Canal area, ou land that currently belongs to the Baoban townshipwhich is at present mostly unoc- cupied. Following resettlement,each householdwould be granted 1 ha of irrigated land, and would enjoy the same rights as other local village residents of the project area. A total of 121 households have already been moved to the project area, and have been provided with housing, resettlementallowances and land plots in the area that would be irrigated from the Sanjiaolu canal system. Population growth in the project area is estimated at about 1.2 percent per year. Taking this into account, it is estimated that the total population of the project area would reach about 36,087 people by year 2000, with a total labor availabilityfor agriculturalwork of close to 4.7 million person-days per year. - 115 - Annex 26 Page 4 of 31

D. Present AgriculturalProduction

12. The main constraintsto agriculturalproduction in the project area are limited and variable rainfall, infertile soils, inadequate supply of good quality seeds and improved varieties, fertilizer and agrochemicals,a lack of credit available to farmers and insufficientextension services. These constraints have resulted in low yields and underutilizationof cultivated land. In the low ,yin!gareas, two crops of rice and a crop of peanut is grown when water supplies are adequate. Peanuts, sweet potatoes and sugarcane are usually grown on upland areas. W4hereadequate land is available, these crops are rotated around the land for fertility build up under scrub fallow.

13. Present planted area and yields of c:ops are sunmmarizedbelow:

PROJECT AREA: PRESENT AGRICULTURALPRODUCTION

Area Yield Production (ha) (ton/ha) (ton)

Rice 720 2.70 1,944 Vegetables 273 7.50 2,048 Sweet potato 273 1.58/a 431 Peanut 234 1.26 295 Watermelon 203 18.00 3,654 Corn 159 1.30 207 Sugarcane 619 25.00/b 15,475 Mango 493 8.50 4,191 Rubber 1,093 0.70 765 Sisal 1,047 1.32 1,382

/a Grain equivalent lb Average yield plant crop and two ratoon crops.

14. The average net income of village farmers in Dongfang county was about Y 523 per person per year in 1989, which is about 15 percent lower than the provincial average of Y 619. Based on estimates of present population and crop production in the project area, the average income of village households could be as low as Y 355 per capita (see farm models for details) excluding income from livestock and other enterprises. The average annual income of a state farm worker is reported by the state farms at about Y 1,200-Y 1,400 per year depending on his performance,and some contract households on the Tangong mango plantation have incomes that exceed Y 4,000 per year.

15. Both in financial and economic terms, the crops that give the highest return to labor and the highest net income per hectare are mango, water- me*lon,pepper, and to a lesser extent, sugarcane. Rubber also gives good results once it reaches full production,but its long gestation period makes it much less attractive than other perennial crops such as mango or pepper. - 11b - Annex 26 Page 5 of 31

With labor valued at Y 6 per person-day, the financial rate of return on investment in a rubber plantation is only about 12 percent (excluding all investments in infrastructure and auxiliary facilities), as compared to over 30 percent for mango. In comparison with these crops, the returns from foodcrops are rather poor. Rice cultivation is more profitable in economic terms than in financial terrt , mainly as a result of taxes and price controls that contribute to maintaini..g the producer price at a relatively low level. Watermelon, pepper, mango and vegetable are the croDs that could be expected to give the highest returns to the proposed investment in gravity irrigacion, as measured by the net present value of annual cash incomes per hectare. Sugarcane and foodcrops come next. Even with a r,rojected yield increase of 20 percent under irrigation, both sisal and rubber give a significantly lower return to investment in irrigation than all the above crops, mainly as a result of a relatively low production value per hectare (e.g., sisal) and/or of a long gestation period (e.g., rubber).

16. There is a reasonable varietal and technological base to achieve economic yields of a wide range of crops tinder irrigation. In the short term, results would be highly dependent on improving extension and training to transfer known technology to project farmers on irrigated cropping and to significantly improve the supply of fertilizer and other inputs. To maximize benefits from irrigation for the longer term, it is a priority to establish an irrigated cropping research and training facility in the project area. The crops grown by farmers in the future and the yields achieved would be determined by the relative profitability of the crops in terms of return to land, labor and capital, the risk factor, and the farmers income and ability to invest in the recommended levels of cash inputs.

E. Agricultural Support Services Organization

17. Orpanization. The Provincial Department of Agriculture is responsible for formulating agricultural policy, planning and administering provin,ial production programs and providing technical support and training. A provincial agrotechnical center admin4,ters applied research and extension. Three units or stations administer seed production, crop protection and soil and fertilizer programs, respectively. A tropical crop division administers all tropical crop production programs outside of state farms. The provincial agricultural college provides formal and short course training for agricultural technicians. The provincial agricultural research institute carries out research and provides technical support. The South China Academy of Tropical Crops (SCATC) located at Danxian, is part of the national research institute network and carries out research and training on rubber and other tropical crops. The Provincial Land Reclamation and Cultivation Bureau is responsible for state farms.

18. Water Resources was formerly a division within the Department of Agriculture. It has recently been upgraded to a Bureau of Water Resources. It has six divisions and six specializedunits including the design institute which provides technical support and formal and short course training to water conservancy technicians. The Songtao IrrigationManagement Bureau manages the Songtao Irrigation Project. In Dongfang County, agriculture and waiar conservancy are admInisteredby an agrictUturcicofdspion. Annex 26 - 117 - Page 6 of 31

19. Agriculture Research. Extension and Training are closely linked. The provincial agriculturalresearch institute has 154 staff, close links with the Chinese Academy of AgriculturalSciences and SCATC and the Guangdong Sugar Experiment Station. It now focuses on rice, peanut, fruits and horticultural crops and plans to establish a sugarcane research program. As a recently establishedinntitute, it lacks land, facilities,equipment and budget. The provincial agriculturecollege provides formal and short courses for agricul- tiuretechnicians, with technical support as required from the research institute. The research institutealso provides technical support to the Provin- cial Department oi Agriculture and the county agrotechnicalcenters which are responsiblefor applied research and extension. SCATC has good facilitiesand equipment, an extensive campus and substationsfor coconut and cashew, and a station at Baoting covering a wide range of crops.

20. Applied research, extension, technician and farmer training is carried out by the Dongfang AgrotechnicalCenter, and township agrotechnical stations. The county center has regular contacts with the provincial agricultural research institute and agrotechnicalcenter and a staff member of SCATC lives and works in the county. Only 7 of the 17 townships in the county have agrotechnicalstations and there are few trained permanent staff at township level to service the 45,000 agriculturalhouseholds. Demonstrationplots and farmer techniciansat village level, and short course training are extensively used to introduce new technology. There are no regular and permanent communi- cation links between the majority of village households, the township extension workers, the county technical staff and the research service. The province has recently launched a program to construct township agrotechnicalcenters and has appointed 50 additional township extension workers to Dongfang County. Fifteen of these have been allocated to the four townships in the project area.

21. Input Supply. The county seed company and the supply and marketing cooperatives (SMC) are responsiblefor input supply. The county agricultural commission prepares a production program for quota crops in consultationwith the department of agriculture and assesses seed, fertilizer and agrochemical requirementsfor the expected production program in each township. Estimates are forwarded to the department of agriculturewhich prepares a procurement and allocation plan for the whole province. The SMC procures and distributes fertilizer and agrochemicalsaccording to the plan. State farms prepare their own plan for input requirements. The county seed company with assistance from the provincial seed station procures and distributes seed. Currently, provincial seed production facilities can only meet about 20 percent of requirements. The Dongfang Seed Company has no permanent seed production facilities or seed cleaning equipment. It must procure the bulk of seed required from province seed stations in other counties or the mainland. Much of the vegetable seed is imported.

22. The supply of fertilizer and pesticide is organized by the agricultural commission. There are three maii channels of supply. Central government allocation of contract price fertilizer for quota production of crops is largely used for rice, rubber, sisal and sugar. Domestic fertilizer is also procured at negotiated prices, and fertilizer is imported from overseas using provincial or county finance. An estimate is made of requirementsin each - 118 - Annex 26 Page 7 of 31

township production area. This data is sent to the agriculture department. Arrangements for procurement and delivery are made by the provincialmaterial supply company, who deliver to the county material supply company for distribution to the townships. Supplies of urea, phosphate and compound fertilizer are not adequate and there are sometimesproblems with the timing of deliveries. Only about 50 percent of Hainan Province and Dongfang County fertilizer demand can be met. Similar problems were reported for agrochemicals,most of which must be imported. Only 30-40 percent of the requirementsare met, and there is a problem with effectivelycontrolling aphids, other pests and diseases on vegetables and cucumbers. The plant ProtectionDivision of the Bu- reau has a crop protection center, along with prediction stations in each major productionarea, to monitor the occurrenceand build-up of pest and disease so that producers can be warned when to spray. However, this service is not fully effective at present.

23. AgriculturalCredit is the responsibilityof the Agriculture Bank of China (ABC). It has a provincial office, a branch office in each of Hainan's 19 counties, and 328 offices at township level, of which 13 are located in Dongfang County. ABC provides short- and medium/long-termloans. Small farms are largely serviced through a network of Rural Credit Cooperativ's (RCC) who provide credit to members and township and village enterprises. The ABC trains RCC staff, provides credit and supervisesoperations. There are 20 RCCs and 43 credit offices in Dongfang County to service 17 townships.

II. THE AGRICULTUREAND IRRIGATIONACTIVITIES

A. Obiectives and Relation to Sector

24. The main objectivesof the agricultureand irrigationactivities are to:

(a) increase the productivityof cropland by alleviating the water shortage;

(b) maximize the benefits from irrigatinga total of 12,667 ha (6,533 ha of dryland and the rest, wasteland) through optimizingthe cropping pattern;

(d) establish newly irrigated land for resettlementof farmers. H

In addition, an effective operation and maintenance system would be established with annual costs met by water charges. Extension, credit, crop protection, and input supply services would be strengthenedthrough ongoing local progr-ms with soBa assistancefrom the project. The project would support the establishmentof an irrigated agricultureadaptive research and training center. The proposed developmentwould facilitatesubstantial increases in sugar, rice and oil seed production and establish a productionbase for good quality mango fruit for export. These efforts, which would be coordinated - 119 - Annex 26 Page 8 of 31 with the constructionof the dam and canal works, would result in a medium- term agriculturaldevelopment program which, with a sufficient lead time, would contribute significantlyto agriculturaldevelopment not only for the prcject area but also for the region as well.

B. Prolect Description

25. The proposed project is the first phase of the Hainan government's plan to expand irrigated areas in the western region. The first phase pro- poses to establish 12,667 ha of gravity irrigation system which would cover 20 percent of the total 66,667 ha being consideredunder the overall plan. The project would provide water to presently low-yieldingcropland. Water would be diverted from the Daguangba reservoirwith an annual average flow of 123 million m3. The project includes:

(a) constructionof the High Main Canal with a discharge capacity of 12 m3/sec and a distributionsystem of lateral and branch canals with a total length of about 154 km;

(b) intake for the High Main Canal on the left branch of the Daguangba dam;

(c) on-farm developmentwork including land clearing, land levelling, constructionof field canals and drains, farm roads and associated structures;

(d) upgrading of operations and maintenance system by constructingwater management stations;

(e) establishmentof an IrrigatedAgriculture Research and Training Center; and

(f) strengtheningof training and extension services by providing equipment, facilities, study tours and technical assistance.

C. Status of Preparation

26. Detailed design of the High Main Canal and Sanjiaolu Canal have been completed and bid documents prepared. Preliminary designs for the rest of the main system have been prepared. Design of on-farm works for about 2,667 ha of land in the Sanjiaolu Canal area have been completed. Other facilities,e.g., for operation and maintenance, and the research and training center, are still at an early stage of design. The Project Management Office (PMO) would have the capacity to carry out all final design work and to prepare bid documents on schedule.

D. ImplementationSchedule

27. The provincial government is committed to timely implementationof the proposed project in order to avoid significantescalation of costs and to ensure that the benefits from addition of power supply and irrigation development are not delayed. The agricultural/irrigationproject component - 120 - Anciex Z( Page 9 of 3J

would be implementedover a five-year period, 1992-96. The irrigation system would be divided into three sections for construction: the High .llrW and Sanjiaolu Canal (1992 to mid-1994) with lateral. canal constructIon m-'vion- farm development works extending to 1995; the Datian and Hongquani submŽt canals through the Hongquan Farm branch canal and the remaindet-of iAlc Hongquan submain canal to the Hongcao Canal would be constructed over E ihree- year period between 1993-95; other associated laterals and on-favi: doet1cpveut work would be constructed in the period of 1993-96.

E. Cost Estimates

28. The cost estimates including contingencies total Y 183.3 mill)o!n (US$35.1 million) of which 28 percent (US$9.7million equivalelTi)d aI, : mated foreign exchange element. 3/

III. ORGANIZATIONAND MANAGEMENT

A. The Management of Agriculture and Irrigation Activities COILI!t-LI

29. The PMO would have a director for irrigation and another oo,- i. agriculture. Two temporary directors and five staff have been apor' .o date. An advisory committeewith representativesof the Department of At}-i culture, Water Resources Bureau, Water Conservancy and Power Design l ABC, SMC, SCATC and the Provincial AgriculturalResearch Institute wxur,10et every six months or as required by the PMO, to assist with plannlng; coordination,and supervision of implementation. A Dongfang Couxirv> -nt Committee chaired by a county governor would coordinate project &rCL±v. ( monitor implementationand resolve any policy issues which may arise a- llUym level. Directors of all key bureaus would be members of the comnmvUtsee. including agriculture,water resources, planning, finance, etc.

3/ Cost estimates are based on the Mid-South Design Institntots. vised cost estimates of August 1989 for the irrigation Fyntc; ,-. :LI cost estimates of on-farm works and soil conservation and etin.man;@tc 5-Cr O&Mcosts as of end-1990. The World Bank guidelines LOI 1J:XLL i- aL,*_rOn have been used. The cost estimates are in end-1990 prices. Annex 26 - 121 - Page 10 of 31

%Foreign 2 Base Local Foreign Total Local Foreign Total exchangecost ------(Y '000)------($ '000)------

IrriattionSystem HighMain Caaal 17,281 16,873 34,154 3,633 2,910 6,543 49 22.6 SanjiaoluCtnal Sys. 4,416 2,837 7,253 912 478 1,390 39 4.8 Othercanals 20,153 12,496 32,650 4,162 2,093 6,255 38 21.6 Subtotal 41.850 32.206 74.057 8.707 5.480 14.187 44 48.9 On-Farm Works & Soil Improvement On-farm works 49,390 13,114 62,505 9,462 2,512 11,974 21 41.3 Soll improvement 7,200 0 7,200 1,379 0 1,379 0 4.85

Subtotal 56,591 13.114 69.705 10.841 2.512 13.354 19 46.1 O&MFacilities & 3.438 0 3.438 658 0 658 0 2.3 Eniuiment SUpaort Services Extension & associated 957 0 957 183 0 183 0 0.6 Research 2,558 0 2,558 490 0 490 0 1.7 Training 73 0 73 14 0 14 0 0 ProjectOffice 639 0 639 122 0 122 0 0.4 Subtotal 4,226 0 4.227 810 0 810 0 :.8 TotalBase Costs 106*k06 45,320 151.427 21,015 7.993 29,008 27.5 100.0 Contingencies Physical 4,604 2,266 6,870 883 434 1,317 35 4.3 Price 21,825 3,161 24,986 3,492 1,295 4,787 27 16.5 TotalProject Costs 13.25312 50.748 183,283 25,390 9.722 35.112 28 120.8

30. A project office would be established at Basuo to plan and implement the on-farm development, land allocation and agriculture development program and to monitor and evaluate progress. The project office would have a director, three deputy directors and seven sections--administration,finance, materials and equipment, farm development and water conservancy, resettlement, environment, and monitoring and evaluation. The office would ultimately have a staff of 60. To date 30 officers have been appointed including the director, deputies and section chiefs. The farm development and water conservancy section would be responsible for survey, design and supervising the implementation of the on-farm development and soil improvement program. The materials and equipment section would be responsible for procurement, preparation of bid documents and award of contracts for on-farm development works, soil improvement and agriculture components.

31. An advisory committee would be appointed under the chairmanship of a member of the Agricultural Commission. The committee would include working level members of all agencies involved in the development program, e.g., agriculture, water conservation, state land management, forestry, animal hus- - 122 - Annex 26 Page 11 of 31

bandry, grain bureau, SMC, ABC, etc. The committeewould meet regularlywith PMO every three months or as required by the Project Office. The committee members would provide the project office management with technical advice, and informationon their agencies programs relevant to the project area. They would assist the project office to coordinate field activities in the project area and plan to provide services and inputs to meet project requirements. They would review progress of the project and assist to resolve any implementation problems that may arise. A project committeewould be established in each project township chaired by the chief of the township. It would include the key township personnel for planning, finance, taxes, land management, water resources, agriculture,input supply, agriculturalcredit and grain procurement and the chiefs of project villageE. The committeewould be responsible for assisting the project office with project implementationand management and in particular, ensuring that water charges, land and production taxes and land lease fees were collected on time from farmers and contractors.

B. Execution of Proiect Works

32. The PMO would have overall responsibilityfor planning, coordinating and supervisingthe constructionof project engineeringworks and establishing the operation and maintenance system. The provincial Bureau of Water Conser- vancy would play the key role in design, preparation of bid documents, award of contracts, procurement of material, constructionsupervision and training of operations and maintenance staff. HEPCO would procure items to be purchased under ICB for the main irrigation system.

33. The county project office assisted and supervised by the PMO and ProvincialWater Resources Bureau would be responsible for survey, design, preparation of bid documents, award of contract, procurement of materials and constructionsupervision of on-farm developmentworks. It would work closely with county and township government to ensure that land allocation had been completedwell before on-farm developmentwork commenced. This would ensure that existing laad holders and contractorscould contribute to final design to suit the proposed cropping pattern, and contribute labor. State farm personnel would participate in the final design for on-farmworks for the state farms. The project office assisted by the Provincial and County Bureau of Agriculture,the SMC and Grain Bureau would be responsible for the soil improvement program, the constructionof the IrrigatedAgriculture Adaptive Research and Training Center and the township storages for the Grain Bureau and SMC.

C. Operation and Maintenance

34. The Provincial Water Resources Bureau and the Dongfang County Water Resources Bureau would be responsible for the establishmentof the High Main Canal Division operation and maintenance system. The High Main Canal Water Management Station would be responsiblefor the operation and maintenance of the small hydropower unit in the dam off-take, the Water Use Experiment Sta- tion, and the High Main Canal down to the distributingsluice which supplies water to the Lemei Reservoir and the submain canals. Water would be released to each canal according to the estimates of water requirementsprepared by the submai.ncanal water management stations, based on cropping patterns and calen- - 123 - Annex 26 Page 12 of 31

dars prepared by each lateral adjusted for precipitation. In addition, the High Main Canal Station would provide technical support and supervisionto the three substations.

35. Each water management substationwould be responsible for operation of the submain branch and lateral canals down to each outlet which would command about 30-40 ha. Water releases from each outlet to sublateralswould be based on water requirementsestimated by a lateralwater management committee which would supervise about 70-500 ha of land depending on location. The lateral water management committeewould be comprised of village officials and farmers elected by the water users. It would consist of a chairman, secretary and a number of water tenders who would distributewater and organize maintenance for the area served by each outlet. Each lateral water management committee would be responsible for all operation and maintenance below the lateral outlets and for the collection of water charges. They would receive a small monthly remunerationfor thair work from the water users. The amount would be determined by local economic circumstancesand would be negotiated between the committee and water users. It would be of the order of Y 30-40 per month, which would be collected as part of water charges. All water users would be required to contributeup to 20 days per year free labor as required for maintenance of the main system.

36. A binomial formulawould be used to determinewater charges. The rates are estimated as follows: rice, Y 75 per ha plus Y 0.003 per m3 of water; all other crops Y 45 per ha plus Y 0.003 per m3 of water. On the basis of estimatedwater quotas for each crop, the water charge in Y/ha would be: paddy (Y 70); sweet potato (Y 52); upland c-ops (Y 55); watermelon; vegetable (Y 64); sugarcane (Y 75); tropical crops, e.g., mango, rubber (Y 55.0); and pasture (Y 60); water charge revenue at full derelopmentwould be about Y 1.2 million and would not be very sensitive to potential changes in cropping patterns. This would adequately cover annua' operation and maintenance cost of Y 0.84 million. Operation and maintenance facilities would be constructed and staff recruited and trained by the Bureau of Water Resources, several months before operations of the High Main Canal and the three submain canal systems commence. The Bureau of Water Resources would select experienced staff from ongoing irrigationprojects to fill key posts in the operations and maintenance system.

D. Land Allocation

37. The Dongfang Project Office would monitor the allocation of additional land coming into production at village and township level to ensure equitable distributionamong existing agriculturalhouseholds. It would screen contractors applying for leases on uncultivated land to determine that they had sufficient resources and expertisebefore referring them to county and township government for lease negotiation. It would ensure that land was allocated in a fair and equitableway; that the correct standard procedures were followed; that contractorsmet minimum standards for their contract workers and that the contractorsinstalled on-farm developmentworks to project standards. It would monitor collection of lease and production tax payments. - 124 - Annex 26 Page 13 of 31

E. AgriculturalExtension

38. The province and county agriculturebureaus have an ongoing program to upgrade extension services in the project area. The project would supplement the program via provision of basic extension and training equipment. At township level, a senior extension officer would be appointed to each township tcosupervise extension programs. An assistantwould also be appointed at each township to supervise administration,statistics and to coordinate input supply and marketing services with township production. Field extension workers would be assigned to service 2 villages or 400-500 farmers. To ensure close and regular contact with the majority of farmers, the extensionworker would work with the village chief to establish five groups of 40-50 farmers in each village, preferably on the basis of adjoining fields. Each group would elect a leader and an assistant leader for each 10 households. Their duties would be to ensure that every member of the group and subgroups is fully informed on new technology,project objectives and project programs. This would be particularly important as a majority of farmers would be growing irrigated crops for the first time. Before each planting season, a two-day meeting would be held to review the succe@ses and failures of the past season's program and to plan the next season's program, based on the plans prepared by each field extensionworker with his village groups. Estimateswould be made of the inputs and services required to support the production program and the extension materials and training programs rieededto support the extension program.

39. The extension worker would (a) inspect the group's fields; (b) advise on technical and management problems; (c) run a short training and demon- stration session appropriate to the group's immediate needs; (d) keep them informed of importantmatters such as market prospects, input supply, prices, eredit and project programs, and when appropriate;and (e) establish small demonstrationor trial plots with the farmer techniciansor group leaders to evaluate new technology in their fields. He would work closely with the pest and disease observers to be trained in every village, to train farmers in early ider.tificationof pests and diseases, correct control methods and integrated pest management.

40. At county level, a county extension officer, assisted by an extension programs officer and training officer would supervise and support the township extension programs. They would be assisted by a team of subject matter specialists (SMS) selected from the technical bureau and sections of the County Agricultural Commission,in areas such as sugarcane, fruit tree and mango, vegetable, oil crops, soils, water management, crop protection, seeds, and farm management. They would maintain close contact with the research services;participate in the evaluation and refinement of new technology in the county; regularly review technical recommendationsand spend at least 60 percent of their time providing technical support and training to township extensionworkers to upgrade their skills, and assisting to solve field problems. They would attend township extension meetings as required and also provide technical services to the contractors. Once the extension system is established,running well and achieving good results, the project would formulate an appropriate program to collect service fees from village groups and contractors on the basis of recorded increases in productivityand income to meet part of the operating costs of the service. - 125 - Annex 26 Page 14 of 31

41. At province level, the Department of Agriculturewould appoint an extension officer, programs officer, and training officer and a group of subject matter specialistsat the Province AgriculturalTechnical Extension Center (PATEC) to provide supervisionand technical assistance to the project extension service. A research, extension and training committee comprised of experts from the Provincial AgriculturalResearch institute, SCATC, Hainan AgriculturalCollege and the Water Resources Design Institutewould provide assistance to the PATEC and the project as required with review and planning of project extension, research and training programs.

F. Irritated AgricultureAdaptive Research and Training Center

42. The project would support establishmentof the IrrigatedAgriculture Adaptive Research and Training Center (the Center) by providing funds for civil works, equipment and one year of incrementaloperating costs. The Cen- ter would be primarily concernedwith adaptive research and training field workers and farmers. The Center would introduce and screen improved crop varieties, determine optimum plant population and fertilizer requirements, evaluate response to irrigation frequency, develop appropriatepost-harvest technology,and establish pest and disease monitoring stations in the project area. The Center would ultimately serve the entire 66,000 ha Daguangba Irri- gatio.LProject. At this stage, it is envisaged that it would be a joint provincial and county facility with technical suppert from the Provincial Agri- cultural Research Institute, the SCATC and possibly the Chinese Academy of AgriculturalSciences.

G. Management of Production Activities

43. The Agriculture and Forestry Department at province level and the Agriculture Commission and equivalentbureaux at county level would be responsible for supervisingproduction activities outside the state farm boundaries. The Provincial Bureau of Land Reclamation and Cultivationand the Hongquan and Guangba State Farms would be responsiblefor production activities on state farms. The provincLal seed station and the county seed company would procure and distribute project area seed requirements. High quality grafted mango seedlings of improved varieties and pineapple planting material would initially be procured from the SCATC Baoting Station until nursery facilitieswould be established in the project area under the supervision of the Bureau of Agric'.lture. Pepper seedlings of recommendedvarieties would be procured from nurseries recommendedby SCATC. Planting cane of improved sugarcanevarieties would be supplied from a sugarcanenursery and demonstrationfarm to be established by the county agriculturalcommission, with technical support from the Provincial AgriculturalResearch Institute.

44. The Provincial AgriculturalDepartment would seek additional allocations for fertilizer and agrochemicalsfrom central government and would ensure that project fertilizersand agrochemicalrequirements are met. The provincial and county SMC have the capacity to procure and diqtribute requirod inputs. Local supplies of phosphate fertilizersand urea would improve significantly with the completion of fertilizer plants included in the Eighth Five-Year Plan. The Provincial ABC has given the project an assurance that adequate funds would be provided to meet project credit requirementsand that - 126 - Annex 26 Page 15 of 31

priority would be given to training ABC and RCC staff operating in the project area.

H. Monitoring and Evaluation

45. The Project Office monitoring and evaluation section would be responsible for monitoring and evaluation. It would keep a current account of the physical and financial progress of each of the project components to compare with management projections. Physical indicatorswould include: the kilometers of irrigation and drainage system and service roads completed; the area of on-farm works and soil improvementcompleted; the m2 of construction completed for project buildings, the procurement of constructionmaterials, vehicles and equipment; the procurement and distributionof fertilizers,agrochemicals and planting material; the area under irrigated cropping and the planted area and average yield of project area crops. Financial monitoring would track actual expendituresagainst projected expendituresand claims for disbursementagainst credit proceeds for each project component. It would also check collection of land and production taxes and water charges to compare with planned collection. The Project Office would submit the information to the Provincial PMO in December and June of each year. During the first two years of implementation,the project office with the assistance of the county agroeconomicand cost of production survey unit would conduct a baseline survey on a random sample of existing village households and contractors to check farm size, cropping pattern, use of labor and inputs and yield of major crops and other important farm activities and total farm household incomes and expenditure. Repeat surveys in year 5 on the same sample plus new settlers and contractorswould provide a sound basis for assessing the impact of the project on farm production and income. The above monitoring and evaluation system would provide the basis for the PMO to prepare a project completion report on the agriculture and irrigation component.

IV. PRODUCTION.MARKETING AND PRICES

A. Production

46. Under the project, the cultivated area would expand from 6,749 ha to 18,597 ha with increase of crop intensity from 53 percent to 147 percent. The project also includes irrigation trials on rubber and sisal. Since the results would not be available until about 1996/97, two alternative cropping patterns were developed. In Scenario I, which is the base case used for the overall project economic rate of return, it is assumed that rubber and sisal give an economic response to irrigation and that the state farms irrigate existing rubber and sisal and plant an additional 440 ha of vacant land to rubber. Sugarcane and mango, the two potential substitute crops would be expanded to 3,212 ha and 1,360 ha, respectively. In Scenario II, it is assumed that the response of rubber and sisal to irrigation is marginal. The existing productive rubber area (1,093 ha) would be retained, Dut sisal would be progress:velyreplaced with sugarcane as it rcached the end of its production cycle. The vacant state farm land would be planted to mango which would result in 4,260 ha of sugar and 1,800 ha of mango. In both cases, eucalypt - 127 - Annex 26 Page 16 of 31

forest would be replaced by sugatcane as the trees reach maturitv. The planted area of rice, peanut, sweet potato and vegetable would be increased significantly to meet current deficits in supply of food crops and oil. Plantings of pepper and pineapplewould be kept small until the marketing system was better developed.

47. The projected crop yield increasesare modest and in most cases, have already been exceeded by farmers with access to irrigationwater. Sweet potato yields are expressed in grain equivalent and the yields of suga?cane are the average yield per year for the production cycle. A 20 percent yield increase is assumed for irriga.tedrubber and sisal based on SCATC irrigated rubber experiments in a higher rainfall zone and the estimates of local sisal specialists. Provision of irrigation and eliminationof water stress; introduction of improved varieties and increased fertilizer supply and the estab- lishment of an effective extension servicewould be the main factors contrib- uting to yield increases. There would be significantincreases in the production of paddy (23,650 tons), vegetables (13,340 tons), watermelon (4,570 tons), peanut (2,069 tons), sweet potatoes (2,200 tons), pineapple (1,900 tons), and black peppercorns (328 tons). The increases in production of other crops would depend on the response of rubber and sisal to irrigation and the planting program adopted by the state farms. The potential incrementalproduction would be: sugarcane, 142,000 to 195,000 tons; mango, 11,600 to 17,000 tons; and rubber, 221 tons to 823 tons.

PLANtD AREA,YIELDS ANDPRODUCTION

Planted Area (ha) Crop Yield (ton/ha) Production (tone) Without with with Without - ith _ tt wlthout witt With Project Project I Project 1I Project Project I Project II Project Project I Project II

oroC e 720 b,000 6,000 3.00 4.30 4.30 2,160 25,800 25,800 Vegetable 287 1.334 1,334 7.50 10.00 10.00 2.153 13,340 13.340 Watermelon 210 334 334 18.00 25.00 25.00 3,780 8,350 8,350 Corn 160 334 334 1.30 3.50 3.50 208 1,169 1,169 Peanut 234 1,140 1,140 1.39 2.10 2.10 325 2,394 2,394 Beano 40 334 334 0.90 1.80 1.80 36 601 601 Sveet potato 290 927 927 2.00 3.00 3.00 580 2,781 2,781 Green ,anu e - 334 334 ------

Subtotal 1,941 10,737 10,737

Perennial Crops g arcane 720 3,212 4,260 25.00 50.00 50.00 18,000 160,600 213,000 Pineapple 36 200 200 8.50 11.00 11.00 306 2,200 2.200 Pepper 6 134 134 1.20 2.50 2.50 7 335 335 MangO 493 1,360 1,800 8.50 11.60 11.80 4,191 15,780 21,236 Sibber 1,093 1,534 1,093 1.1o 1.32 1.32 1,202 2,025 1,443 Sisall 1,047 1,047 - 1.25 1.50 - 1,309 1,571 - Eucalyptue 1,013 - - - _ - - _- Paeture 400 373 373 Subtotal 4,808 7,860 7.860 Total 6,749 18,597 18.597 Land area 12,667 12,667 12,667

Crop intensity (Z) 53.3 147 147

B. Markets

48. Hainan province is a net importer of foodgrains,procuring about 200,000 tons of rice and 250,000 tons of wheat every year from the mainland. Dongfang County presently purchases about 11,000 tons of grain. Local demand vould readily absorb the incremental24,000 tons of paddy that are expected to - 128 - Annex 26 Page 17 of 31

be produced under the project. It is expected that a large share of the incrementalpaddy productionwould be sold on the free market and be handled by private traders who are already active in Dongfang County. Hainan Island is barely self-sufficientin peanut oil. Its total production of peanuts (in shell) was estimated at about 42,500 tons in 1989, which correspondsat most to about 10,000 tons of peanut oil or about 1.6 kg per inhabitant,against an average consumptionestimated at 1.7 kg per person per year. Given present population growth and consumptionof edible oils in Hainan, the expected additional production of about 2,100 tons of peanut in shell in the project area should find a ready market. It would be processed in underutilizedexisting facilitiesin Dongfang County, or in new facilities to be establishedby the Grain Bureau and private operators. Foodcrops such as sweat potato, corn and beans could be readily marketed locally. The relatively large increment in sweet potato production (close to 2,400 tons at full development)would be mainly used for feeding pigs.

49. The incrementalproduction of vegetableswould be absorbed by the local provincialmarket, and also through shipments of winter vegetables to the mainland. The output of winter watermelonwould more than double, but would not create any marketing difficulty given the establishedwatermelon trade with mainland China and the strong demand. There is a large market for good quality fresh mango and other tropical fruit in mainland China, which would readily absorb the 16,000 to 22,500 tons of fresh tnangothat would be produced in the project area at full development. DongfaLngCounty has an advantage in this market because of the possibility of growing out if season varieties. Incrementalpepper productionwould be absorbed by the domestic mainland market and also through exports to foreign countries,with possibili- ties for further expansion of productionand export trade in the future if favorable results are obtained. Incrementalpineapple productionwould be sold as fresh fruit or for processing in provincial factories.

50. China is a major importer of refined sugar and encourages domestic production in order to substitutefor imports. China's net imports of refined sugar reached almost 3.5 million tons in 1988 and close to 1.2 million tons in 1989. Most of the sugar produced in Hainan is sent to mainland China, and the market is guaranteed fo= the 15,000 to 20,000 tons of sugar expected to be produced. Given the priority that is allocated to sugar production, government authoritieswould be ready to finance any additional sugar processing facility that may be required if actual output in the project area exceeded processing capacity in Dongfang County. China imports substantial quantities of natural rubber for its domestic industry,and Hainan Island is a major production center for this essential commodity. China's imports of natural -'bber were about 362,000 tons in 1988 and 380,000 tons in 1989. The domestic market would readily absorb the additional production from the project area. Sisal would continue to be sold by state farms on the mainland and to export markets.

C. Prices

51. Farmers are required to sell a portion of their food grain (rice) to the State, at a contact price that is set by provincial authoritieswhich currently amounts to Y 0.54/kg for paddy of average quality as compared to a - 129 - Annex 26 Page 18 of 31

free market price of about Y 0.80/kg. In return, they receive fertilizer at subsidized contract price at planting time. The quantity of rice to be delivered by Hainan's farmers to the Grain Bureau at contract price amounts to about 27 kg per mu of paddy field, in addition to a duty quota or tax (delivered without payment) of about 10-11 kg per mu. The quantity of fertilizer received by farmers at contract price in exchange for quota deliveries varies according to availability. A similar quota system which was applied to state purchases of other food crops such as peanuts has been discontinued.

52. Apart from contract prices set at provincial level, negotiated prices for crops and fertilizerare set by county authorities in order to encourage the sale of these crops to public institutions. In Dongfang County, this system is applied for purchases of grain and peanut by the Grain Bureau and for some fruit and vegetable by SMC. With the exceptior.of sugarcane, farmers can also sell most of their products--includinggrains (after fulfill- ment of the rice quota), sweet potato, beans, peanuts and various kinds of fruit and vegetable--andbuy fertilizer,agrochemicals and other farm inputs at free market prices.

53. The price of sugarcanepurchased from the farmers is determined by central government,wi'h only minor adjustmentsallowed at the provincial or county level. The sugar factories have a monopoly on sugarcane purchases and sugar processing,but must sell all their sugar output to the Tobacco, Sugar and Wine Marketing Company at government prices. They pay taxes to government and the amount is set at central level. The sugarcane price to farmers has been increased in recent years, from Y 62/ton in 1987 to Y 125/ton in 1989 and 1990. The price for the 1990/91 season is Y 135/ton. Price premium of Y 5-10/ton are applied for varieties with high sugar contents,with a resulting average price for the whole of Hainan Province of about Y 137/ton. In principle, farmers are entitled to about 10 kg of fertilizer at contract price per ton of sugarcane produced. Contract price fertilizer has been in short supply in recent years and has been allocatedmainly to paddy. In the future, the Provincial Industry Department (which oversees the sugar factories) plans to establish a Sugar Development Fund with part of the proceeds from sugar mill profits. This would be used to provide fertilizer to sugarcane growers at subsidized prices and to drill irrigationwells.

54. All rubber must be sold to the government at a fixed state procurement price that depends on the quality of the product, with an average of about Y 7,898/ton for all dry rubber produced by Hainan State farms in 1989. The price received by Hongquan State Farm for its sisal output depends on market conditions, and averaged Y 1,427/tonfor sisal fiber and Y 3,088/ton for sisal rope in 1989. The state farms received a fertilizer allocation from central government at contract prices.

55. Input and output pricsksused in crop budgets for financial analysis are presented in Table 3. For economic analyses, the farm gate value of fertilizers has been calculated on the basis of World Bank internationalirice projections (import parity value), with appropriateadjustments for nutrient contents, domestic and internationaltransport and handling costs. The economic value of most other farm inputs such as agrochemicalsand organic manure has been considered equivalent to the financialprice. For farm outputs, - 130 - Annex 26 Page 19 of ,1

import parity values based on World Bank Irice projections have been used for paddy, sugar and rubber, and actual export price data for Malaysian pepper have been taken into account in order to estimate the export parity value of pepper. The economic values of sweet potato, corn, beans, watermelon seeds and sisal have been considered as equivalent to their financialprices.

V. BENEFITS. JUSTIFICATION AND RISKS

A. Production Benefits

56. The major benefits from the project will derive from incremental crop production,which will be the result of investmentsmade in irrigation facilities together with an improved extension service, adoption of improved technologies,improved input availabilityand farm management.

B. Employment and Incomes

57. Employment opportunitiesgenerated by the project will help reduce seasonal unemploymentamong the rural labor force in and around the project areas. At full development,an annual increase of about 4.3 million person- days per year, equivalent to about 14,300 new jobs would be created. In total, the project would directly benefit about 5,000 village households. The farm model analysis shows that at full development,the annual income of a representativevillage household would increase from Y 1,954 to a maximum of Y 6,635.

C. Cost Recovery

58. Contractors and state farms would pay for the full amount of their on-farm developmentworks, accounting for about 8.6 percent of the total project cost. Village farmers would provide a labor contributionfor the execution of these works on their land, amounting to an estimated 5.1 percent of the total project cost. The proposed level of water charge collectionwould raise about Y 1.2 million per year. Annual operation and maintenance costs of the irrigation system are estimated at about Y842,000. At this rate, full recovery of operation and maintenance cost would be achieved by 1996. Incre- mental tax receipts generated by the project would give a cost recovery index of about 54 percent for production Scenario I and 66 percent for production Scenario II. Substantialincremental tax revenues would accrue to government as a result of the project. At full development,it is expected that incremental tax revenues would exceed Y 10 million per year, of which more than half would be derived from the taxes paid by sugar factories.4/ The rest would come from land taxes paid by the farmers on the basis of their paddy field area, and from the production taxes they pay when selling their products.

4/ Currently Y 10 per ton of sugarcane purchased from the farmers, plus Y 300-310 per ton of white sugar produced by the mill. - 131 - Annex 26 Page 20 of 31

D. Financial and Economic Analvsis

59. The financial and economic analyses are based on detailed crop budgets prepared for all the annual and perennial crops.5/ The farm model analysis shows a substantialincrease in farmers' income indicating the strong financial incentives to execute the project. An economic analysiswas carried out for the component as a whole. The total economic investment cost includes physical contingenciesbut excludes price contingencies,subsidies, resettlement grants and taxes. Local financial prices have been adjusted for the purpose of economic analysis by distinguishingoutputs and inputs as tradeable and nontradeable. The World Bank price projections or average export prices actually realized in China were used to estimate the farmgate economic prices in 1990 constant terms for traded inputs and outputs. Conversion factors for nontradeableresources were estimated and applied to convert financialvalues to economic costs. Incrementalon-farm labor has been valued at Y 3.6 per person-day, representing60 percent of the prevailingmarket wage rate of Y 6 per person-day. Based on these assumptionsand an assumed project life of 30 years, the ERR for the base case is estimated to be close to 15 percent under Scenario I and 16 percent under Scenario II, with a net present value of Y 83- 101 million. This estimate is conservative,since only crops have been considered and benefits from irrigatedmeadows have not been taken into account. Summary results of economic analysis are presented below. The sensitivityanalyses indicate that a satisfactoryERR could still be achieved with a two-year delay in benefits or a 20 percent reduction in benefits.

Scenario I Scenario II ERR NPV ERR NPV 'Z) (Y million) (Z) (Y million)

Base case 15 83 16 101 Project costs up 20% 13 62 14 80 Benefits delayed 2 years 14 64 15 81 Benefits down 20% 13 44 14 60

j/ Detailed crop budgets are available in the project file. ANNEX26 - 132 - Page 21 of 31 Tatle 1

CHINA

DAGUANGBA MULTIPURPOSEPROJECT ...... F. _.. ._. AGRICULTUREtIRRIGATIONCOMPONENT ...... _ BASIC STATISTICS

Project Area

Hainan Dongfang Peasant St&t Province County Farmer Farm Total

Land Area ('000 ha)

Gross area 3391 226 20.8 Cultivated area 432 24 17.1 Sown area 760 42 2.2 2.2 Irrigatedarea 147 7 0.1 0.1 Paddy area 388 16 0.9 0.9 Tropical crop area 423 11 0.2 4.0 4.2 Of which: Rubber 347 1 3.2 3.2 Sisal hemp 1 0 0.8 0.8 Sugarcane 83 4 1.0 1.0 Mango 3 0 0.0 0.0 Vegetable 37 4 0.1 0.1 0.2

Population ('000)

total population 6388 302 15.9 9.5 25.4 AgricuLturaLpopulation 5062 223 14.9 9.1 24.0 Agricultural labor force 1738 97 6.5 4.2 10.7 Farmer household ('000 number) 1369 46 2.6 2.3 4.9

AdministrativeUnits (number) ,,,,,...... County 19 1 Township 307 17 3 ViLtLage 19424 143 10

Grain Production ('000 ton) 1335 64 3.8 3.8 ...... Of which: Paddy rice 1301 58 1.9 1.9 Dry Gum 158 0 2.3 2.3 Sisal fiber 2.3 1.4 1.2 1.2 Sugarcane 2869 44 13.0 13.0 Mango 2.5 1.3 0.03 Vegetable 531 20 2.0 0.8 1.4

Total Output Value (mil. Yuan) 1/ 10350 380 17.0 29.5 46.4 _-- _ ;. .... _ . _ ...... Agriculturaloutput value 6447 203 10.8 16.0 26.7 Of which: Crops 2708 61 4.3 0.6 4.9 Forestry 1536 4 0.2 8.3 8.o Animal Husbandry 1293 52 1.6 1.3 2.9 Fishery 525 5 0.04 0.04 0.1 Industrial output value 3903 141 2.1 10.5 12.6

Rural Income per Capita 619 523 355 _ ...... …...... _...... _...... Source: Hainan Provincial Goverrnment

1/ 1989 data ANNEX2 6 - 133 - rage 22 of 31 Table 2

CHINA DAGUANGSA MULTIPURPOSEPROJECT Basic Data on Crop Production in Hainan Island and the Project Area

HAINAN ISLAND (PROVINCE) DONGFANG COUNTY PROJECT * ~~AREA 1980 1985 1986 1987 1988 1989 1988 1989 1989

Rice (paddy) : sown area (ha) 1/ 433,027 395,200 405,867 387,667 367,639 403,793 13,648 17,675 720 production (ton) 999,600 1,071,000 1,221,4001,149,500 1,009,992 1,300,000 41,192 58,064 1,922 yield (kg/ha sown) 2,308 2,710 3,009 2,965 2,747 3,219 3,018 3,285 2,670 Sweet potato : 2/ area (ha) 113,287 95,293 97,473 104,780 109,470 113,553 7,684 7,295 273 production (ton) 132,000 129,000 144,700 167,300 166,018 181,287 11,167 8,317 430 yield (kg/ha) 1,165 1,354 1,485 1,597 1,517 1,596 1,453 1,140 1,575 Peanut (in shell) : area (ha) 34,240 37,533 40,460 39,067 36,668 36,320 3,435 3,298 234 production (ton) 19,535 34,615 40,700 41,337 39,194 42,479 5,066 5,194 295 yield (kg/ha) 571 922 1,006 1,058 1,069 1,170 1,475 1,575 1,260 Sugarcane : area (ha) 25,607 115,700 99,013 83,293 71,656 78,067 1,943 1,642 619 productfon (ton) 659,300 4,057,000 3,225,200 2,613,9002,434,084 2,868,600 31,106 43,773 13,309 yield (kg/ha) 25,747 35,065 32,574 31,382 33,969 36,745 16,007 26,655 21,500 Vegetable : area (he) 17,167 27,347 33,207 37,767 43,751 50,314 4,159 4,789 273 production (ton) 184,926 245,875 307,708 402,424 450,044 531,705 20,843 2C,184 2,048 yield (kg/ha) 1C,772 8,991 9,266 10,656 10,287 10,568 5,011 4,215 7,500 Pineapple : area (ha) 6,413 10,480 15,880 20,587 18,587 18,000 351 309 36 production (ton) 16,778 33,635 65,415 76,158 95,894 98,900 45 677 79 yield (kg/ha) 2,616 3,209 4,119 3,699 5 459 5,494 128 2,190 2,190 Banana - area (ha) 1,193 4,173 8,733 ',613 9,175 9,133 219 production (ton) 4,041 14,205 37,3W9 52,304 67,143 67,000 568 yield (kg/ha) 3,386 3,404 4,282 5,441 7,318 7,336 2,588 Mango : area (ha) 2,713 3,764 3,733 925 1,105 493 production (ton) 1,641 2,541 2,500 1,344 821 26 yield (kg/ha) 605 675 670 1,453 743 53 Rubber (dry) - area (ha) 228,147 310,207 328,980 347,287 356,871 364,093 928 1,352 1,093 production (ton) 70,326 126,266 138,262 158,239 156,478 145,407 77 807 yield (kg/ha) 308 407 420 456 438 399 83 738 Cashew : area (ha) 11,587 10,713 9,447 11,639 1,040 production (ton) 179 500 701 976 79 yield (kg/ha) 15 47 74 84 76 Coconut - area (ha) 11,607 16,667 18,433 19,553 20,453 21,047 213 214 production ('000 nu 25,230 45,710 54,050 65,470 61,270 66,u20 204 350 yield (nuts/ha) 2,174 2,743 2,932 3,348 2,996 3,165 956 1,635 Pepper area (ha) 4,500 4,587 8,080 11,733 13,042 13,136 26 27 5 production (ton) 784 2,852 3,383 3,054 3,800 4,000 . 8 2 yield (kg/ha) 174 622 419 260 291 305 - 310 300 Sisal (raw fiber) : area (ha) 2,227 933 907 953 1,827 1,933 633 1,047 production (ton) 694 711 1,296 1,178 1,365 1,148 315 1,305 yield (kg/ha) 312 762 1,429 1,236 747 594 498 1,246 Lemon grass : area (ha) 9,533 4,047 7,640 9,804 47 production (ton) 491 394 645 924 2 yield (kg/ha) 52 97 84 94 43 Coffee : area (ha) 553 1,660 14,080 15,852 27 203 production (ton) 56 180 430 642 3,806 yield (kg/ha) 101 108 31 41 18,750 ...----- .- -.-----.. .. ------.-. _..--.-....-.------....------.--..----- ANNEX26 - 134 - Page 23 of 31 Table 3

CHINA DaguangbaMultipurpose Project FinancialPrices of main Agricultural Outputs and Inputs

end-1990 PRICEDATA averageprice Nature of good used in type of price unit 1990 crop budgets

Rice (paddy) 1/ contractprice Y/kg 0.54 negotiated- Haikou Y/kg 0.58 - Dongfang Y/kg ... 0.78 free market- Haikou Y/kg 0.80 It - Dongfang Y/kg ... Rice (milLed)1/ contractprice Y/kg 0.80 negotiated Haikou Y/kg 0.87 - Dongfang Y/kg ... free market- Haikou Y/kg 1.45 Peanut(in shell)1/ contractprice Y/kg 0.89 negotiated- Haikou Y/kg 1.34 free market- Haikou Y/kg 2.00 Peanut(shelled) 1/ contractprice Y/kg 1.21 negotiated- Haikou Y/kg 1.81 free market- Haikou Y/kg 2.60 Sugarcane2/ contractprice Y/kg 0.125 0.135 Rubber(dry) 3/ stateprocurement price Y/kg ... 7.898 Sisal (fiber) 4/ statefarm sateprice Y/kg ... 1.427 Sweet potato(gr.eqvt) 5/ freemarket price Y/kg ... 0.7 Bean * Y/kg ... 2 Watermelon (fruit) YY/kg ... 0.5 Vegetable Y/kg ... 0.51 Mango YV/kg ... 2.09 PineappLe * Y/kg ... 0.4 Pepper Y/kg ... 15 Urea (46%N) contractprice Y/kg 0.57 negotiatedprice Y/kg 0.96 0.6 free marketprice Y/kg 1.22 Phosphate(18% P205) contractprice Y/kg 0.24 negotiatedprice Y/kg 0.28 0.4 free marketprice Y/kg 0.40 Potass.Chlor.(60%K20) contractprice Y/kg 0.17 negotiatedprice Y/kg 0.34 0.4 free marketprice Y/kg 0.60 Compound(15-15-15) contractprice Y/kg 0.45 negotiated price Y/kg ... 1.0 free marketprice Y/kg 1.20 Agrochemicals(average) free marketprice Y/kg 24.00 24 Diesel contractprice Y/kg 0.67 negotiated- DongfangY/kg 1.40 freemarket - Dongfang Y/kg 1.60

Gasoline contractprice Y/kg 0.82 negotiated - DongfangY/kg 1.80 freemarket DongfangY/kg 2.20

1/ Averageprices for productof mediumquality. 2/ The farmers'price of sugarcanehas been fncreasedfrom 0.125 to 0.135Y/kg startingend 1990. 3/ All rubbermaust be sold to Government.The priceindicated here is the average sellingprice of driedrubber to the Stateby Hainan'sstate farms. 4/ The price indicatedhere is the averageselling price of sisalfiber by Hongquan state farm. 5/ Price for a weightof freshtubers equivalent to 1 kg of grain (i.e.5 kg of fresh tubers). Source:Hainan Provincial Government ANN'EX 26

- 135- Page 24 of 31 - 135 - ~~~~Table4

CHINA OAGUANGBAMULTtPURPOSE PROJECT

EconomicValues of Main AgriculturalOutputs and Inputs (farmgatevalues)

Rice Sugar Rubber Pepper Urea T.S.P, Potassium 3/ 4/ 5/ 6/ 7/ 8/ Chlor.9/ no trad status (I-ISport; E-Export) I I x I I

1990 prices

EPO price (1985USS) 1/ USS/ton 197 271 640 * 87 97 69 (1990USS) 2/ USS/ton 254 391 924 3,000 126 140 100 Ocean freightand insurance USS/ton 15 50 50 0 50 SO 50 FOB/CIFHaikou In S USS/ton 299 3,000 176 190 150 FOB/CIFHaikou In Yuan 10/ Y/ton 1,563 15,660 917 992 781 CIf vaLue minland China S USS/ton 441 974 CIF value mainlandChJna Yuan Y/ton 2,304 5,085 FreightHaikou-mainland 11/ Y/ton (40) (40) Port charges& handtIng 12/ Y/ton 166 (232) (483) (1,434) 107 114 95 TransportHaikou/Oongfang 13/ Y/ton 95 (95) (95) (95) 95 95 95 Domesticmarketing cost 14/ Y/ton 91 (97) (223) (707) 56 60 49 Processingcost 15/ Y/ton (500) (600) §c.value- localmarket/factory Y/ton 1,915 1,339 3,644 13,424 1,175 1,262 1,020 Paddy Sugarcane Phosphate(18%) Adjustmentfactor 65X 10X 1 1 1 36X 1 Transport farm/loc.market 16/ Y/ton p.m. p.m. p.m. p.m. p.m. p.m. p.m. EconomicvaLue - farmgate Y/ton 1,245 134 3,64S 13,424 1,175 454 1,020 2000 prices .s=u=uuur EPO price(1985 USS) 1/ USS/ton 166 216 940 * 125 141 73 (1990USS) 2/ USS/ton 240 312 1,357 3,000 181 204 105 Ocean freightand insurance USS/ton 15 50 50 0 50 50 50 FOS/CIF Haikou In S USS/ton 255 3,000 231 254 155 FOC/CIF Haikou in Yuan 10/ Y/ton 1,330 15,660 1,203 1,324 811 CIF value mainland China S USS/ton 362 1,407 CIF value mainLandChina Yuan Y/ton 1,889 7,346 Freight Nafkou-mainland11/ Y/ton (40) (40) Port charges& handLing 12/ Y/ton 145 (195) (686) (1,434) 133 144 98 TransportNaikou/Oongfang 13/ Y/ton 95 (95) (95) (95) 95 95 95 Domesticmarketing cost 14/ Y/ton 78 (78) (326) (707) 72 78 50 Processingcost 15/ Y/ton (500) (600) Ec.value- localmarket/factory Y/ton 1,648 981 5,599 13,424 1,503 1,641 1,054 Paddy Sugarcane Phosphate(182) Adjustmentfactor 65X 10X 1 1 1 36X 1 Transport farm/Loc.market 16/ Y/ton p.m. p.m. p.m. p.m. p.m. p.m. p.m. Economir value - farmgate Y/ton 1,071 98 5,599 13,424 1,503 591 1,054

1/ World Bank EPO price projectionin 1985 constant USS. 2/ EPOprice In 1985 constant USS adjusted to constant1990 price using EPO's MUV Index of 144.39 3/ Rice (Thai), white,milled, 52 broken, governrnatstandard, export price FOB Bangkok. 4/ Sugar (World),ISA daily price, FOB and stowed at greaterCaribbean ports. 5/ Rubber tRSS No.1), In bales, spot New York. 6/ Based on actual early 1989 price of USS 3000/ton, FOBMalaysia. 7/ Urea (any origfn), bagged, FOBN.W. Europe. 8/ TSP (Triple Superphosphate), bulk, FOB US Gulf. 9/ PotassIum Chloride, bulk, FOBVancouver. 10/ At prevailing exchange rate as of end-1990of USS la Yuan 5.22 11/ Sea freight from Haikou to mainland estimated at approximately: 40 Yuan/ton 12/ Estimated at approximately : 9.0X of CIF value, plus 25 y/ton for handling 13/ Estimated on the basis of about : 300 km by road 0.264 Yuan/ton/km, with adjustment by Conversion Factor (CF) of 1.2 14/ Margin for domestfc marketfng estimated at about: 5.0% 15/ MiIling cost of paddy into rice assumedto be offsetby value of by-product. Processing cost for sugar (net of value of by-products : molasses & bagasse) estfmated on the basfs of data from Hainan Provincial Industry Oepartment at 500 Yuan/ton. Processing cost for rubber estimated at approximately : 600 Yuan/ton. 16/ Cost of transport between farm and local market is taken Into accountin on-farm labor requirements for paddy, pepper and fertilizers. For sugarcane and rubber,transport cost is Included in the processingcost. ANNEX 26 - 136 - Page 25 of 31 Table 5

CHINA DAGUANGBAMULTIPURPOSE PROJECT FinanciaLand economicprofitability of main cropsgrown in the Projectarea

PRESENTSITUATION FUTURESITUATION WITH PROJECT NET PRESENTVALUE (IRRIGATION- full development) (Y/ha) 2/ not cash incom returnto Labor net cash income returnto Labor without with (Y/ha/crop)1/ (Y/manday)1/ CY/he/crop)1/ (Y/manday)1/ Project Project

A. Financialresults ...... $...... rice (paddy) 1,542 5.6 2,410 7.4 16,301 43,069 sweet potato 789 6.6 1,651 11.8 9,458 29,898 peanut 1,743 7.7 3,030 12.6 18,220 54,559 corn 878 5.9 2,648 14.7 8,468 47,936 beans negligiblearea 3,063 19.1 13,844 54,820 watermelon(fruit) 5,890 16.8 9,446 23.6 56,804 171,186 vegetable 2,860 4.4 3,748 7.5 27,582 86,457 sugarcane 2,374 10.8 5,343 19.4 22,678 47,860 mango 12,048 40.2 20,164 53.8 59,785 105,626 pineapple neglfgiblearea 2,173 7.9 neg. 18,714 pepper negligibiearea 33,133 22.1 neg. 167,931 rubber(dry) 7,697 30.8 9,380 35.4 18,698 23,919 sisal (fiber) 1,072 7.1 1,374 7.6 8,355 11,020 B. Economicvalues ...... rice (paddy) 2,132 7.8 3,379 10.4 sweetpotato 789 6.6 1,668 11.9 peanut 1,500 6.7 2,649 11.0 corn 829 5.5 j 2,504 13.9 beans negligiblearea 3,054 19.1 watermeLon(fruit) 3,438 9.8 6,598 16.5 vegetable 2,286 3.5 3,014 6.0 sugarcane 1,320 6.0 3,272 11.9 mango 9,428 31.4 16,607 44.3 pIneapple negligiblearea 1,060 3.9 pepper negligiblearea 28,388 18.9 rubber(dry) 5,087 20.3 6,310 23.8 sisal (fiber) 997 6.6 1,354 7.5

1/ ResuLtsindicated here are averagesover a full3-year cycle for sugarcaneand pineappleand 12-yearcycle for sisal; for mango,pepper and rubber,results are givenat fulldevelopment 2/ Net presentvalue (at 10 X discountrate) of annualnet cash incomesper hectare. With the Project,average future cropping intensity of 200 X for riceand otter foodcropsand 250 X for vegetablehas been taken intoaccount. CRIIA DAGUANGSAIULTIPURPOSE PROJECT ECOWIIICANALYSIS cnnstant end-1990 prices

fuli.dev. 1990 1991 1992 1993 1994 1995 1996 1997 19 1999 2000 2001/19 Incrmntal productian (ton) ...... Paidv 23640 0 0 0 0 0 5789 13090 17469 19106 20906 22490 23386 Sweet Potato 2201 0 0 0 0 0 571 1297 1780 1988 2132 2187 2201 Peanwt 2069 0 0 0 0 0 548 1213 1574 1775 1957 2048 2069 Corn 961 0 0 0 0 0 255 566 735 832 910 950 961 1e1m 565 0 0 0 0 0 146 322 432 502 547 563 565 Vaterwlon 4570 0 0 0 0 0 1036 2220 3105 3726 4248 4512 4570 Vegetable 11188 0 0 0 0 0 3223 7246 9330 9990 10649 11063 11188 Sugarcane scenario 1 142650 0 0 0 0 0 23080 68860 92775 101140 122510 130105 125210 scenario tl 195000 0 0 0 0 0 26720 76660 103660 116735 143595 154875 155340 ango scenario 1 11589 0 0 0 0 0 0 185 706 1755 3341 4978 6299 scenario 11 17045 0 0 0 0 0 0 185 806 2283 4623 7065 9021 Intercr. scenario I 0 0 0 0 0 0 168 387 508 340 121 0 0 scenario I 0 0 0 0 0 0 246 570 769 523 199 0 0 Pinapple 2200 0 0 0 0 0 0 2260 2183 1317 2813 2343 1404 Pepper 335 0 0 0 0 0 0 0 24 69 116 142 167 3nber scenario 823 0 0 0 0 0 0 38 107 181 228 240 240 scenario 11 240 0 0 0 0 0 0 38 107 181 228 240 240 I Sisal scenario 1 262 0 0 0 0 0 90 201 262 262 262 262 262 scenario 11 -1309 0 0 0 0 0 -130 -260 -390 -520 -650 -780 -910 Inrmntal Costs ...... Paddy 6748 0 0 0 0 0 1535 3512 4728 5214 5728 6269 6627 Sweet Potato 295 0 0 0 0 0 103 224 279 288 294 296 295 Peanut 728 0 0 0 0 0 208 457 574 626 684 719 728 Corn 161 0 0 0 0 0 37 85 112 131 148 159 161 seas 167 0 0 0 0 0 53 116 144 153 161 166 167 Watemeln 346 0 0 0 0 0 96 179 243 280 316 340 346 Vegetable 1782 0 0 0 0 0 490 1109 1444 1566 1686 1760 1782 suarcane scenario I 4418 0 0 0 0 0 636 1694 2187 2553 2905 3285 3757 scenrio 11 6123 0 0 0 0 0 750 1903 2491 2996 3455 3956 4665 Iango scenario 1 5846 0 0 0 0 0 519 1102 1433 1645 2243 3108 4222 scenario 11 8796 0 0 0 0 0 756 1615 2154 2449 3332 4624 6295 Intercr. scenario I 0 0 0 0 0 0 280 646 848 568 202 0 0 scenario 11 0 0 0 0 0 0 411 952 1284 873 332 0 0 PineappLe 492 0 0 0 0 0 557 389 382 663 431 382 663 Pepper 685 0 0 0 0 0 796 1228 1157 529 555 585 605 Fj 3 : RLhber scenario 1 453 0 0 0 0 0 164 459 521 464 456 453 453 o Era scenario 11 0 0 0 0 0 0 0 0 0 0 0 0 0 ^ H n m Sisal scenarioI 0 0 0 0 0 0 0 0 0 0 0 0 0 m N X scario 11 -824 0 0 0 0 0 -82 -164 -245 -327 -409 -491 -573 o O 0 CHINA DAIGUMGRAIITIPURPOSE PROJECT (contimed) ECONOMICANALYSIS fuIl.dev. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/19 ...... ------.- Incremental Labor Requirement (P'day 000) ...... Padd* 1748 0 0 0 0 0 581 1283 1633 1663 1693 17m 1742 SweetPotato 94 0 0 0 0 0 30 67 83 86 90 93 94 Peanut 221 0 0 0 0 0 80 172 208 211 216 220 221 Corn 36 0 0 0 0 0 13 27 31 33 35 36 36 Beans 48 0 0 0 0 0 18 38 45 47 48 48 48 Uaterelon 60 0 0 0 0 0 19 39 50 54 57 60 60 Vegetable 480 0 0 0 0 0 184 400 483 482 482 481 480 Sugarcanescenario I 25 0 0 0 0 0 163 438 579 637 674 667 685 scenarioIt 1013 0 0 0 0 0 190 489 654 741 802 821 871 Mango scenario 1 21 0 0 0 0 0 72 173 233 161 69 19 21 scenarioII 511 0 0 0 0 0 176 297 297 221 261 312 355 intercr.scenario I 0 0 0 0 0 0 72 166 218 146 52 0 0 scenario11 0 0 0 0 0 0 105 244 330 224 85 0 0 Pineaaple 55 0 0 0 0 0 29 38 47 52 51 51 55 Pepper 201 0 0 0 0 0 38 81 109 105 112 127 143 RLi*er scenario1 133 0 0 0 0 0 60 144 129 94 94 94 94 scenarioI 16 0 0 0 0 0 6 13 16 16 16 16 16 Sisal scenarioI 31 0 0 0 0 0 11 24 31 31 31 31 31 scenarioI I -157 0 0 0 0 0 -16 -31 -47 -62 -78 -94 -109 Incr -mntal on-fare net benefit CY '000)

Paddy 12253 0 0 0 0 0 2570 5877 8085 9243 10547 11594 1212S SweetPotato 909 0 0 0 0 0 188 445 668 793 873 900 909 Peamut 1828 0 0 0 0 0 392 890 1229 1488 1707 1807 1828 Corn 573 0 0 0 0 0 147 327 437 499 545 567 573 Beans 791 0 0 0 0 0 174 392 558 683 762 787 791 Natermelon 1265 0 0 0 0 0 251 570 819 1015 1176 1251 1265 Vegetable 1635 0 0 0 0 0 329 785 1109 1292 1478 1597 1635 Sugarcanescenarlo 1 6951 0 0 0 0 0 1038 3478 4819 5065 6674 7065 6049 scenario 11 9339 0 0 0 0 0 1184 3850 5314 5776 7728 8265 7423 Nango scenario 1 15867 0 0 0 0 0 -778 -1377 -945 1073 3789 6183 7546 scenario11 21410 0 0 0 0 0 -1388 -2336 -1710 1C49 4418 7533 9386 intercr. scenario I 0 0 0 0 0 0 300 692 909 608 216 0 0 scenario It 0 0 0 0 0 0 440 1020 1376 936 356 0 0 PIneapple 14 0 0 0 0 0 -663 197 146 -427 287 185 -413 Pepper 3080 0 0 0 0 0 -933 -1521 -1226 22 592 856 1114 Rubber scenario 1 3640 0 0 0 0 0 -380 -768 -389 207 476 547 547 scenarIo 11 1278 0 0 0 0 0 -22 164 536 950 1210 1278 1278 r- ei Sisal scenrio1 260 0 0 0 0 0 90 200 260 260 260 260 260 0 t a scenario II -478 0 0 0 0 0 -48 -95 -143 -190 -238 -285 -333 rF p

Total CY '000) scenarIo 1 49066 0 0 0 0 0 2724 10187 16479 21823 29384 33601 34230 '4 ...... scenario It 53897 0 0 0 0 0 2621 10564 17199 23129 31442 36336 37583 0 WPVOl '000) scenario 1 177190 a 10X scenario 11 194703 CHINA DAGUANGBANULTIPURPOSE PROJECT ECONWIICANALYSIS (continued) corstant end-1990prices fuLt.dev. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/19 Increeentat Met Benfit (Y '000)

scenerio 1 49066 0 0 0 0 0 2724 10187 16479 21823 29384 33601 34230 scenario If 53897 0 0 0 0 0 2621 10564 17199 23129 31442 36336 37583 Project cost (Y '000)

Investmentcost 0 0 36090 37760 35767 30055 15868 0 0 0 0 0 aSHcost 0 0 0 0 623 786 842 842 842 842 842 842 Other operating cost 0 0 0 0 0 0 506 506 506 506 506 506 PROJECTNET BENEFIT CY '000)

scenario I 0 0 -36090 -37760 -36389 -28118 -7028 15131 20476 28036 32253 32883 scenario II 0 0 -36090 -37760 -36389 -28220 -6651 15851 21781 30095 34989 36235 ERR scenario 1 15.3X NPV 82616 Basecase scenario 11 16.4X (at 10X.) 10.477 SENSITIVITYANALYSIS a) Projectinvestment and O&H cost up 10X scenarlo I Met benefit 72060 0 0 -39699 -41536 -40028 -31202 -8699 15047 20391 27952 32169 32798 1 ERR 14.31 scenarioit letbenefit 90921 0 0 -39699 -41536 -40028 -31304 -8322 15767 21697 30011 34904 36151 ERR 15.31 b) Projectinvestment and OAK cost up 201: scenario I Net benefit 61505 0 0 -43308 -45312 -43667 -34286 -10370 14963 20307 27868 32085 32714 ERR 13.3X scenario11 Metbenefit 80365 0 0 -43308 -45312 -43667 -34388 -9993 15683 21613 29926 34820 36067 ERR 14.3X c) On-farmnet benefitsdelayed 1 year: scenario I Netbenefit 63952 0 0 -36090 -37760 -36389 -30842 -14491 8840 15131 20476 28036 32253 ERR 13.81 scenario 11 Net benefit 80968 0 0 -36090 -37760 -36389 -30842 -14594 9217 15851 21781 30095 34989 EtR 14.71 d) On-farmnet benefits doin101 : scenario I Net benefit 63528 0 0 -36090 -37760 -36389 -28390 -8047 13484 18293 25098 28893 29460 ERR 14.1X scenario11 Met benefit 80503 0 0 -36090 -37760 -36389 -28482 -7707 14131 19469 26951 31355 32477 oJ ERR 15.21 I'd o lb e) On-namnet benefitsdom 201: t,h, scenario I Not benefit 44440 0 0 -36090 -37760 -36389 -28662 -9065 11836 16111 22159 25533 26037 W X ERR 12.8J1\ 0t scenario 11 Net benefit 59529 0 0 -36090 -37760 -36389 -28744 -8764 12411 17156 23806 27M71 28719 ERR 13.8X 0 ih ANNEX 2 6 Page 29 of 31 - 140 - Table 7 1 of 2 CHINA DAGUANGBAMULTIPURPOSE PROJECT FARM MODEL

MMoELA (Yuan) WITH PROJECT : :present: yr 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr 10+

Gross value of production 2917 9041 9839 10734 11592 12094 12467 12767 12767 12767 .'76 ._...... ----- ...... --..---...... rice (paddy) 562 1092 1165 1274 1383 1492 1565 1565 1565' 1565 1565 other foodgrains 192 267 291 340 352 364 364 364 364 364 364 peanut 197 234 250 281 312 328 328 328 328 328 328 sugarcane 765 6300 6900 7500 8100 8400 8700 9000 9000 9000 9000 watermeLon 720 740 800 880 960 1000 1000 1000 1000 1000 1000 vegetabLe 383 408 434 459 485 510 510 510 510 510 510 mango & otherfrult 0 0 0 0 0 0 0 0 0 0 0

Total cost of cash fnputs 824 1735 1867 1987 2109 2373 2622 2839 2839 2839 2839 ...... o/w water charges 0 158 158 158 158 158 158 158 158 158 158

Land/productfontaxes 1/ 40 77 85 97 108 115 115 115 115 115 115

NET CASH INCOME (Yuan) 1954 7'.10 7887 864* 9374 9607 9730 9813 9813 9813 9813

Labor requirement(workdays) 257 579 591 604 616 628 638 645 645 645 645

RETURN TO LABiR (YIworkday) 7.6 12.4 13.3 14.3 15.2 15.3 15.3 15.2 15.2 15.2 15.2 MOOEL e Gross value of production 2817 3812 4112 5800 9968 13537 15785 17876 20086 22125 26375 ...... _ ...... rice Cpaddy) 562 1092 1165 1274 1383 1492 1565 1565 1565 1565 1565 other foodgrains 192 267 29, 340 352 364 364 364 364 364 364 peanut 197 234 250 281 312 328 328 328 328 328 328 sugarcane 765 1071 1173 1275 1377 1428 1479 1530 1530 1530 1530 watermelon 720 740 800 880 960 1000 1000 1000 1000 1000 1000 vegetable 383 408 434 459 485 510 510 510 510 510 510 mango & other fruit 0 0 0 1292 5100 8415 10539 12579 14789 16829 21078

Total cost of cash fnputs 824 2341 2062 2228 2725 3606 4526 5633 5888 5920 5961 ...... o/w water charges 0 120 120 120 120 120 120 120 120 120 120

Land/productiontaxes 1/ 40 77 85 240 669 1040 1274 1498 1741 1966 2433

NET CASH INCOME (Yuan) 1954 1394 1965 3332 6574 8890 9985 10744 12457 14239 17981

Labor requirement(workdays) 257 655 433 447 477 519 551 565 593 601 646

RETURN TO LABOR(Y/workday) 7.6 2.1 4.5 7.5 13.8 17.1 18.1 19.0 21.0 23.7 27.8

MOOL C Gross value of production 2817 6254 6722 7390 7f98 8473 8721 8772 8772 8772 8772 ...... rice (paddy) 562 2964 3162 3458 3754 4051 4248 4248 4248 4248 4248 other foodgsrains 192 441 482 562 582 602 602 602 602 602 602 peanut 197 630 672 756 840 882 882 882 882 882 882 sugarcane 765 1071 1173 1275 1377 1428 1479 1530 1530 1530 1530 watermelon 720 740 800 880 960 1000 1000 1000 1000 1000 1000 vegetable 383 408 434 459 485 510 510 510 510 510 510 mango & otherfrult 0 0 0 0 0 0 0 0 0 0 0

Total cost of cash inputs 824 1576 1667 1779 1894 2034 2161 2198 2198 2198 2198 ,_...... o/w water charges 0 144 144 144 144 144 144 144 144 ¶44 144

Land/productiontaxes 1/ 40 215 225 240 253 260 260 260 260 260 260

MET CASH INCOME(Yuan) 1954 4464 4830 5371 5851 6178 6300 6315 6315 6315 6315

Labor requirmemntCworkdays) 257 601 611 621 632 643 651 652 652 652 652

RgTURN To LAWOR (Y/workday) 7.6 7.4 7.9 8.6 9.3 9.6 9.7 9.7 9.7 9.7 9.7

1/ Land tax estimatedon the basis of 150 Yuan per ha of rice crop, and productionor sales tax for other crops on the basis of the folLowingsales percentegesand tax rates. - 141 - ANNEX 2 6

CHINA Page 30 of 31 DAGUANGBAMULTIPURPOSE PROJECT Table 7 FARMMODEL 2 of 2 WITH PROJECT MODELD :present: yr I yr2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr lo+

Gross value of production 2817 6484 6981 7661 8281 8745 8992 9073 9073 9073 9073 rice (paddy) 562 2496 2662 2912 3162 3411 3578 3578 3578 3578 3578 other foodgrains 192 441 482 562 582 602 602 602 602 602 602 peanut 197 630 672 756 840 882 882 J82 882 882 882 sugarcanc 765 1701 1863 2025 2187 2268 2349 2430 2430 Z430 2430 watermelon 720 617 667 733 800 833 833 833 833 833 833 vegetable 383 598 636 673 711 748 748 748 748 748 748 mango& other fruit 0 0 0 a 0 0 0 0 0 0 0 Total cost of cash inputs 824 1563 1654 1764 1876 2026 2161 2219 2219 2219 2219 o/w water charges 0 143 143 143 143 143 1C3 143 143 143 143 Land/productiontaxes 1/ 40 177 187 201 212 219 219 219 219 219 219 NET CASH INCOME(Yuan) 1954 4743 5141 5697 6193 6499 6612 6635 6635 6635 6635

Labor requirement(workdays) 257 591 601 611 622 632 640 642 642 642 642 RETURNTO LABOR (Y/workday) 7.6 8.0 8.6 9.3 10.0 10.3 10.3 10.3 10.3 10.3 10.3

FAiIMMODEL PROFILES pre-ent------Future------Farm Models A B C D

Crop areasper household 14.0 33.6 29.2 32.9 32.4

rice (paddy) 4.0 7.0 7.0 19.0 16.0 other foodgrains2/ 2.6 2.6 2.6 4.3 4.3 peanut 1.3 1.3 1.3 3.5 3.5 sugarcane 3.4 20.0 3.4 3.4 5.4 watermelon 1.2 1.2 1.2 1.2 1.0 vegetable . 1.5 1.5 1.5 1.5 2.2 mangoA other fruit - 12.2 Size of household ...... number of people 5.5 5.5 5.5 5.5 5.5 o@w Labor force 2.4 2.4 2.4 ? 4 2.4 (max.workdays/yr) 720 720 720 720 72)

1/ It has been assumedthat all foodcrops (including watermelon and vegetable) and sugarcene grc.n in the Projectarea are cultivatedby villagehouseholds. It has beenconsidered that fruitand ot;ier perennialcrops are grownmainly by contractand state farms:souseholds. 2/ Includes sweet potato, corn and beans. Sweet potato is assumedto be the representative crop. 3/ In modeLA, the farmer is assumedto grow enough rice to satisfy his family needs (i.e. about 3.5 mu of irrigated paddy fields, with a doubLe crop of rice), and to expand his area under sugarcaneup to the limitof his familyLabor availability. In model B, the farmer is assumedto grow enough rice to satisfy his family needs (i.e. about 3.5 mu of irrigated paddy fields, with a doublecrop of rice),to keep the same area under sugarcane, and to engage in mangoproduction up to the limit of his family labor availability. In model C, the farmer is assumedto grow enough rice to satisfy his familyneeds (I.e.about 3.5 mu of frrigated paddy fields, with a double crop of rice), and to engage in further productionof rice and other foodgrainsand peanut for saLe.He does not expandhis area under sugarcane,and does not engagein fruit production to any appreciable extent. Model 0 corresponds to the average future cropping pattern considered for the whole Project area, with a projected total numb*village households. ANNEX 26 Page 31 of 31 - 142 - Table B

CHINA DAGUANGIAMULTIPURPOSE PROJECT COSTRECOVERY (constant end-1990 prices) ...... L...... ,,,...... ful.dev 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003/27 ......

A. WATERCHARGES 1/ scenrio 1 1189 0 0 0 408 921 1177 1189 1189 1189° 1189 1189 1189 scenrio It 1210 0 0 0 397 891 1143 1163 1170 1178 1186 1194 1202

POJECT 0 &" COST (Y 000) 842 0 0 623 786 842 842 842 842 842 842 842 842

COST RECOVERY INDEX - o & (1) scenario 1 141.2% - - 0.01 51.8% 109.41 139.8X 141.21 141.2% 141.2X 141.21 141.21 141.2% scenrio 11 143.71 - 0.0% 50.51 105.9X 135.7 .11 139.0X 139.91 140.91 141.81 142.81

O INCREMENTALLAND AND PRODUCTIONTAXES Incremental paddy \area (ha) 5280 0 0 0 1918 4202 5280 5280 5280 5280 5280 5280 5280 Inc. landtax Y 000) 2/ 792 0 0 0 288 630 792 792 792 792 792 792 792

Inc. production/sales tax (Y'000) 3/ scenario t 10041 0 0 0 1151 3436 4741 5413 6817 7529 7627 8586 9164 scenario It 13065 0 0 0 1295 3749 5201 6141 7917 8943 9396 10708 11534

o/u sugar scenario 1 5849 0 0 0 946 2823 3804 4147 5023 5334 5134 5714 5972 scenario II 7995 0 0 0 1096 3143 4250 4786 5887 6350 6.69 7204 7636

Total Incremental Taxes (Y' 000)

scenario 1 10833 0 0 0 1439 4066 55 6205 7609 8321 8419 9378 9956 scenario It 13857 0 0 0 1583 4379 5993 6933 8709 9735 10188 11500 12326

PROJECT INVESTMENTCOST tY p000) total lnvestment cost 121583 36090 37760 35767 30055 16373 ainua benficiary contribution 16323 2036 2036 6107 7690 4750

Total Incremental taxes tY '000) scenario 1 56756 scenario II 69448

COSTRECOVERY INOEX X): scenario 1 53.9X scenario II 66.0X

1/ Cotlected at the following rates in Y/ha per crop cf. table 17-8) pd1y 69.6 a it potato 52.2 penmt, cor, beans, mure crop 54.8 watmtlon, vegetable 64.2 sugarcae 75.1 m-ngo, pineapple pepper 55.0 ruber, sisal madosi 60.1

Z/ Estio_te Is based on : 150 Y/ha par rice crop 3/SaJ ud on the ftollowng sales percentages and tax rates for fncremental production of the various crops. sales X tax rate smeet potato, penut, corn, bean 80 4.01 & vegetable watermlon, mAngo,pineapple 1001 11.01 pepper 1001 7.7X ubr * sisal 100l 5.5X

Sals, prices for thes crop are those indicated in table 17-A and In the crop budgets. For sugar, the txes paid by the sugarmills have ben estimated an the basis of 10 Y/ton of sgarcane received at the mill, plus 310 Y/ton of white sugr produced by the mill, with an average extractfon rate of 101 Annex 27 Pag8 I of 3 CHINA DAGUANGBAMULTIPURPOSE PROJECT Power Alternativeto the ProJoct (Y Million in 1990 prices) Base Case Sconario

CALCULATIONOF FIXED COSTS CALCULATIONOF FUEL COSTS ALTERNATIVECOSTS PROJECTCOST SUMMARY/I (at financial prices) (at financial prices) (at finoncial prices) INVESTMENTCOSTS OAM COSTS OUTPUT(CWh) FUEL COSTS INVEST. OAM TOTAL INVEST OhM TOTAL Year St.coal Gao T. St.coal Gas T. St.coal Gas T. St.coal Gas T. Fuel C.

1990 1s 16 16 68 as 1991 48 0 of investoentcost 48 48 188 168 1992 64 63 0 0 0 117 117 221 221 1993 32 186 0 0 0 0 218 218 192 192 1994 169 a 8 180 0 28 0 28 169 12 197 119 10 128 1995 6 10 400 120 65 26 89 0 16 10S 23 11 34 19m 6 10 4,00 120 66 26 89 0 16 16S 12 12 1997 6 10 4e0 120 e6 26 89 0 16 105 12 12 1999-2023 6 i0 4ee 120 65 26 89 0 16 10S 12 12

Conv.Foct. 100% 100% Conv.Fac 100X lOOX 100X

InvostmentData Fuel Cost Data Presont Values at 10% Discount Rato St.coal Gas T. St.coal Gas T. 636 390 98 1009 683 76 667 ------Maximum amount attributableto power: 683 75 668 Y/kW 1880 1771 Y/kwh 0.162 0.208 of which: 100X of joint costs 390 s0 439 ------MW------Y/unit 0.311 0.620 Separable power costs 193 26 218 1994 85 76 unit/kWh 0.620 0.396 1996 160 unit kg cumt

1. OhM: Standard coal-firedplant is 3.5X of investment. Gas-firod plant is 2.5S of investment. Proposed hydro plant Is 1.6X of investment. Page 2 of 3 CHINA DAGUANGBAWMLTIPURPOSE PROJECT Power Alternativeto the Project (Y Million In 1990 prices) Baso Case Scenario

CALCtP-T!ON OF FIXED COSTS CALCUIATION OF FUEL COSTS ALTERNATIAVECOSTS PROJECTCOST SUMMARy/1 (at fihancil prices) (at economic p.-cIn) (at economic prices) INVESTNENTCOS (S 0DM COSTS OUTPUT(Cwh) FUEL COSTS INVEST. O&M TOTAL INVEST. Year St.coal O&M TOTAL Gas T. St.coal Gas T. St.coal Gas T. St.coal Gas T. Fuol C.

1996 16 26 26 76 76 1991 46 o 77 77 194 194 1992 64 53 0 0 0 169 169 264 264 1993 32 186 0 0 0 247 247 221 0 221 1994 169 8 8 0 0 a 0 187 12 179 137 11 148 1996 0 8 10 100 0 16 0 le 0 16 33 28 13 39 1996 8 10 400 120 41 16 66 0 18 73 14 14 1997 6 10 400 120 41 16 58 0 16 73 14 14 199 6 10 400 120 41 15 6e 0 16 73 14 14 1999 8 10 499 120 41 16 56 0 18 73 14 14 2eee-2023 6 l 400 120 41 1s 6e 0 18 73 14 14

Conv.Fact 161% 1056 Conv.Fac 105% 11S% 10SX InvestmentDate Fuel Cost Data Present Values at 10X Discount Rate St.coal Gba T. St.coal Gas T. 306 479 103 s88 670 86 ______------76B Maximum amount attributableto power: 670 86 765 Y/kW 1680 1771 Y/kWh 0.102 0.127 1O0X of joint costs 448 67 60S ------MW------Y/unit 0.197 0.320 Separablepower costs 222 28 261 1994 86 75 unit/kWh 0.520 0.398 1996 160 unit kg cumt

1. OhM: Standard coal-firedplant Is 3.56 of investment. Gas-fired plant Is 2.6% of investment. Proposed hydro project Is 1.56 of investment. - 145 - Annex 27 P&Se 3 of 3

Note 1: Fixed and variable cost for alternativefrom MSDI study of thermal peaking in Hainan.

Note 2: Economic cost of coal has been estimated at Y 197/ton, standard coal (29 GJtton), reflecting the long-run marginal cost of coal in northern China plus freight to Hainan Island.

Economic cost of gas has been estimated at Y320/MCM or US$58.2/MCM (shadowpriced at Y5.5/US$1). Offshore natural gas will be jointly developed by Chinese (CNOOC) and foreign partners (ARCO/SantaFe). The economic cost of gas is approximatedby the sum of the following NPV costs: (i) CNOOC's share (51X) of upstream gas field development and offshore pipeline; (ii) foreign partner's share of projected landfall gas price, excluding royalty and tax; and (iii) onshore gas transmissioncosts (10OZ to be borne by CNOOC).

Note 3: Capacity of alternativesto the project are based on the following data:

Peak Time Outages Availability Plant Spinning Capacity ------Factor Losses Reserve Equiva- Planned Forced(Z) (X) (Z) (2) lent

(days) Steam Turbine (ST) 42 15 75 9.0 10 1.47 Gas Turbine (GT) 21 15 80 1.5 10 1.27 Daguangba 14 5 91 0.2 0 1.00

Note 4: If the last two gas turbines are commissionedin 1999 instead of 1994, the present value of economic costs is decreased by 13Z. ^"^^x2S Pap I of 3 CHIiNA DACUANOCAMULTIPURPOSE PROJECT HainanPower Grid Expansion Plan (1990-2000) (in Y million) 1/

Peak GenerationInvastment Outlays Transmission/Distribution OperationA Maintenance Load Hydro (240 MW) Coal Gas T. NR/3 Total NEPCOIN. SPF TAL Total Hyd. Coal Cas T&D Total Year MW Joint Power Total/I (100 MW)(140 11)(70 MW) F8 , ------financial prices------Eco. pr. ---financial pric----- Eco.Pr.

199. 217 68 7 60 72 14 21 39 1991 245 140 23 165 18 23 20 47 1992 1 1 280 142 79 260 260 76 24 100 4 4 1993 315 10 02 183 220 49 27 84 1994 a 7 368 62 87 114 1a7 107 31 162 11 1i 22 1995 410 16 7 21 50 77 a 35' 136 11 13 28 1 1998 468 o 46 124 26 236 Sb 40 138 1997 620 11 17 29 320 74 26 626 8 46 122 11 3 20 368 199 686 Be Is 180 136 61 206 11 1009 880 a 26 48 0% a8 61 44 68 112 11 9 29 2000-2023 8 69 746 0 102 a6 184 11 17 8 34 73 1 rotal 614 276 743 491 248 83 203d 789 417 1327 ------ConversionFactor---- C.F. C.F. 1201 1811 105X 140X 11ox 106X Jnit cost Per InstalledkW Per Peak kW OhM/Inv. Ratio Yuan 3094 1880 1770 900 2706 1678 1io0 2863 1.61 3.SX 2.SX 2.01 1/ Costs of *ach Item at *nd-19 0 financil prices, total at econoeic prices after multiplicationby indicatadconversion factors (C.F.) - 2/ Shnro of Joint costs allocated to power: 915 3/ Heat recovery boiler. ARAMx28 Page 2 of 3

CHINA DAGUANGBA MULTIPURPOSE PROJECT ECONOMICRATE OF RETURN OF POWEREXPANSION At economic pric, with current power tariff

Thermal Generation Fuel Investment Incremental Total Average Incr. Incr. Cash Year Load Coal Gas D.Oil Outlays Gen. TAD/I OAM Fuel Costs Price Sales Revenue Flow Gn ------CGWh------Y million ------Y/kWh GWh -- Y million --

1990 961 463 44 67 72 18 6 0 88 0.33 0 0 -88 1991 1080 540 60 70 186 25 1 13 228 0.33 116 38 -188 1992 1220 740 82 260 83 4 6 342 0.33 240 79 -283 1993 1380 900 76 220 64 7 19 300 0.33 383 126 -173 1994 1680 920 77 137 118 23 21 298 0.33 644 179 -119 1996 1770 770 65 77 98 27 8 210 0.33 731 241 31 1996 2000 1000 84 238 94 31 27 390 0.33 937 309 -81 1997 2220 1120 100 102 628 73 38 45 783 0.33 1133 374 -410 1998 2670 1400 170 131 16O 149 49 74 431 0.33 1448 477 48 1999 2910 1600 310 168 81 48 62 101 272 0.33 1749 677 305 2000 3300 1980 320 191 0 112 77 134 323 0.33 2097 692 389 2001-23 0 0 77 134 323 0.33 2097 692 369

Fuel Coat Data

St.Coal Gas D.Oil Y/kWh 0.08 0.08 0.41 Y/unit 0.20 0.32 1.18 ERR= 14.641 unit/kWh 0.42 0.24 0.34 unit= kg cum kg

1/ Investments financed by customer contributions (special fund) have been netted out. Annex 28 Pate 3 of 3

CHINA DAGUANGBAMULTIPURPOSE PROJECT INTERNAL RATE OF RETURN OF POWEREXPANSION At financial price with covenanted minimum tariff

Thermal Generation Fuel Investment Incremental Total Average Incr. Incr. Year Load Coal Gas D.Oil Outlays Cash Cen. TAD/i O&U Fuel Costs Price Sales Revenuo Flow GWh ------GWh------Y million ------Y/kWh GWh --Y million --

1990 961 463 44 78 SO 14 0 0 1991 1090 74 0.32 0 0 -74 640 8e 96 15S 23 1 17 196 1992 1220 0.27 115 31 -186 740 97 208 76 4 18 306 0.37 240 1993 1380 900 89 -217 118 183 49 a 39 277 0.37 383 142 -135 1994 16B0 920 120 114 107 20 1996 42 283 0.36 544 192 -91 1770 770 101 71 89 23 22 206 1998 2000 0.37 731 288 82 100 131 194 86 27 62 368 1997 2220 0.34 937 319 -39 1120 100 169 419 8e 33 80 699 0.32 1996 2670 1400 170 1133 383 -238 204 101 136 42 128 404 0.32 1446 463 S8 1999 2910 1800 310 248 38 44 20D0 54 169 305 0.32 1749 680 256 3300 1980 320 299 0 102 87 2001-23 220. 390 0.32 2097 671 281 0 0 67 220 390 0.32 2097 871 281 00 Fu-l Cost Data ______. St.Coal Gas D.Otl Y/kWh 0.13 0.12 0.41 IRR= 15.14X V/unit 0.31 0.52 1.18 unit/kWh 0.42 0.24 0.34 unit= kg cum kg

1/ Investmentsfinanced by cuetomercontributions (special fund) have been netted out. AR9leZ_29

DAGUANGBAMULTIPURPOSE PROJECT Internal Economic Rate of Return Base Case

Power at Y/kWh 0.38 ERR 16.041

Year Power Ben-fits Cash Total Output Power Irrigation Total Costs Flow Power Irrigation Gh ------Y million…------Benefits 1125 361 1486 Present V. 1126 381 1486 1034 462 Sharo 75.7X 24.3a 160.06

1990 76 -76 Separabl costs 261 278 629 1991 194 -194 Remaining Benefits 874 83 957 1992 286 -286 Share 91.3X 8.71 166.61 1993 258 -268 Joint costs 461 44 605 1994 1" 58 S8 188 -130 Not Benefits 413 39 452 1995 520 187 13 200 84 117 Total costs 712 322 1034 1993 620 187 33 220 55 166 Share 68.9X 31.1X 166.OX 1997 620 187 44 232 39 193 326 1998 620 187 60 237 40 197 Separable Investment 222 103 1999 520 187 69 246 42 204 Joint Investment 409 39 448 773 2666 620 187 64 261 46 208 Total Investment 831 142 2661 620 187 67 265 49 208 2082 620 187 72 280 61 209 Benefit/Invest.Ratio 1.78 2.64 1.92 2668/23 620 187 76 283 52 211 - 150 - Annex 30 Page 1 of 2

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

Selected Documents and Data Available in the Proiect File

A. Selected Reports and Studies Related to the Prolect

1. Preliminary Design (Final Report) of the Daguangba Multipurpose Project. (MWREP and MSDI, People's Republic of China. October 1987).

(a) Main report--hydrocomplex (vol. 1) and irrigationworks (vol. 2); (b) Annex I--meteorologyand hydrology; (c) Annex II--engineeringgeology; (d) Annex III--resettlementplanning; (e) Annex IV--environmental assessment; (f) Annex V--amendmentto design of earthfillwing dam; and (g) Drawings.

2. "Water Pollution Prevention and Control Law of People's Republic of China" (adopted at the Fifth Session of the Standing Committee of the Sixth National People's Congress), dated May 11, 1984.

3. "Standard for IrrigationWater Quality, National Standard of People's Republic of China", dated April 25, 1985.

4. "DaguangbaMultipurpose Project: EnvironmentalProtection Plan", MWREPand MSDI. March 1989.

5. ResettlementPlanning and InvestmentEstimate for Dongfang and Ledong Counties and State Farms. (Dongfangand Ledong County Governments,and MSDI. March 1989).

6. "Hainan Island: Power System Present Starus and Prospects". (MSDI, October 1988).

7. "Estimates of Probable Maximum Precipitationand Flood for the Daguangba Project in the Changhua River, Hainan Island: Comprehensive Report". (Lin Bingzhang, Department of Hydrology, Hohai University, and MSDI, March 1988).

8. "Daguangba Multipurpose Project: High Main Canal Irrigation Component Economic Analysis: PreliminaryReport". (MSDI, October 1988).

9. Supplementaryinformation on the proposed irrigation area under the Daguangba Multipurpose Project. (MSDI, November 1988). - 151 - Annex 30 Page 2 of 2

10. "AgriculturalDevelopment Plan Report for the Phase I area". (UNDP Technical Assistance Program, 1991).

B. Selected Work Sheets

11. For agriculture/irrigationcomponent,

(a) cost estimate for crop protection; (b) cost estimate for research and extension; and (c) crop budgets.

12. For power component,work sheets for HEPCO's financial forecast. Chart I

CHINA DAGUANOBAMULTIPURPOSE PROJECT OrganizatlonChart of the Mlnistry of Energy

Miriater

Vice Mlisters

j Offic Chrna NasUonalNuclesrw Ebottric PowerL ~~Gneraenersl fce IndustryCorvoration Diagat2ft Center

Pollc & Ledslatlon NaturalGas Car ration etrb Pwe; Planng Departmentof Plan aChinNationalCo_oraton r Ofrshore L I ktI -tu1nr

separtment of Chia Northest and wat esouro&es n italCa Construction mImer-MongollaUnited HydropowerSurvey Coal IndustryCorporation 1 ej Institutes &~ ~PotenCoina Cooation CItQ ~ CoordiCoal Cornoraton en Produ:flo;"QCoordinatlon ICtina Nstonal Loc Scientific 8 Toechical Coal Mines _ ResearchInstitute oepartmentof DevelopmentCo ratin EconomicCoord1naton I aneg Interna t l Power- Departmentof Devi tont oration EnerayConservation . I ~~RealonlEeactricL Deparbient of PowerAdminatrationa S18ence& Technoloov aIntemstlonaWate Departmentof Educalon | Eectric PowerCo oraton Cha n of G(3ro) Co ration I InternatonalCooeration Departmentof OChina Electrcity Commail Rclear Power e DOepartmentof Eletric Power -statSeS Council cm0to Coal ConvesonL Deparinent of Ice. state CouncU n HDower oment

n Dpartment of Rutral -1Enero & Eleotrtlication

Departmentof Coal

Deparmnt of Adimntraston ,~~~~ ce ClYefEn*aeS Otfflce I forPebum kistrv Ch Erak e Otf for Nudew hdtry kw/w4401U Chart 2

CHNA DAMUANCBAEIUIPURPOSE PROJECT OrganIzatIonChart of the State EnergyInvestment Corpowation

ICWtEbo1 1 =: ChW w

haXduS}E r .w4..l3. Offce of t Ghoeneral Mnager

EnterprlseManagement Oflce

Teochral

PowerDispatch

[ Cata Con tetbnicio

S|ience & Technology

Safety _nspectio

Power Usage MCI Educatlon I

Matrhb Supply AlnimtratIon [ i.o" Labor Wage 1o

.tcLfty 2 n

n-iowrlEusne Off_ce

dPolftcalAffah.

Discwlry Commme 1lo t t b~~~~Wrlerlkdon

Yout League

HairanEbefical .

3 PowerSupply Bureaus 's

9 PowerPants

aguangba I CHINA Chart DAGUANGBAMULTIPURPOSE PROJECT 4 ProjectOrganization

Halna Pmvr Daguangba (10 SSc Cose)

ProJocrdhawnon O 0 C _uxdComd | I~~~~~~~~~~~~~~~~~~~~~ttI H &rWs8d B =Farmsof WatercWVNyeatim DeguangW ProjoctPManagnmgCtOmio RoIW ~~~~~~~~~~~~~~~Dnfag ofo Counies (10SSetin) r s Donglus& ~~~~~~~~~~~~Leadong Coupfs

Z ~~ ~ ~.Itt - ~ -- an m

Pif0angre1PJofo roet rn ~~~~

o .l 4 ii~~~~~9 | c 4 .# ~~~Sarnasfor Dongfarq t L Sameasfbr (7 dongaeL Advlso~~~~~~~~~~~~~~~~~~~~u~493StatFe= CHART 6

CHINA

DAGUANGBAMULTIPURPOSE PROJECT

Project Implementation Schedule

1989 1990 1991 _ 1992 1993 1994 1995 1996 Activity .1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4.

Preparatoryworks .////////////////////////

Civil works dam A power facilities x Supply of materials FabricationErection Hydraulic gates & hoists xxxxxxxxxxxx//////////// ///////lt 2t/3t 45. I I2. I I4. Generatingunits xxxxxxxxx//////////////////////// /

Substation xxxxxxxxxx /////////.////////// Supply of Materials Installation Transmissionline x xxxxxx////// /////f///////// ManufactureInstallation PLC A load dispatch system ./////////// xxxxxxxxxxx/////////// HMC A Sanjiaolucanal (3,687ha) xxx.xxx/////////.////////////://///// Othercanals (9,000 ha) & on-farm works / / /

Resettlement

Environmental protOction . ////////////,,,,,,,,,/,,, xxx Bidding Process MAP SECTION IBRD 21407R

-5. ,d1Ao -t,9,, - I4totd MtflowO.sWt -M.~ .d

C°.yd Im °04d h Xuwene rhrror

Qiangz>hou Str,fl* HAIKOU1 Baibu 0ay Dongyin

,<(t hg / , I Wenchangt -- 6 Wenchang| 1 / angja ,FhA pan Xi~~~~~~~~~~AN\fENX $E / .)>a CI5ANgcheng / I

Sa ADAGUANGBAMULTIQiPURPOSEPROJ

t+P9 s 19O 9 i) +>, To~~ngshi

ExisBaotingor Q\n8hoaagd' 0. i.

MONCLIA

Ya D I U Hydro-power plants IQlndao 0* Thermal power plants

0\ A A Substations *ines C H I N A harghal 220KV Transmission - -- 4 110KVTransmission lines _tingboE IJ Dams and Reservoirs (*ed 18- L Irrigation area 18@

- -- *.-- - Main canals Xamen1 7 7 Guangzhcu K' Roads KOfl&U.K%Ul - Rivers V,>_'IETt ;4kou Railroads 0 20 40 60

5M XAreaChina of Sou/th KILOMETERS THAILA%XS SeAl 1101--9 AUGUST1989 IBRD216 ToChongjiog o 1 2 3 4 5

GeL 'lu <~ A

KIOETERS : Z9RO

Ci/

HIGHMAIN SYSTEM~~W&SIOCANAL IRRIGATION

r=====~ ~~~~~~~~tAOAAFAel nUNGOUON

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DAGUANGBAMULTIPURPOSE PROJECT GANGDON -rt-rgatn Arear Conol X

4Do sa Dom Zboniin°nDo ~- Rum c \ X

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--~Province8oundaries I 0ll l l ;

DANE11'19B9 IRESETTLEMENTZONES

PROPOSEOPROJECT.

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-c ' Roilroods \ aoqriillooun - -J ~~ ~.-.-- ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~Rd \ '( *; ,, Rivvs~~~~~~~~~~~~~~~~~~~~~~~~Fm, MOUNTAJNDEER A A Forms PROTECTEDAREA Jiucun I-- -. - CounryBo-ndori

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