ASIAN DEVELOPMENT BANK PCR: PRC 28125

PROJECT COMPLETION REPORT

ON THE

HENAN POWER PROJECT (Loan 1400-PRC)

IN

THE PEOPLE’S REPUBLIC OF CHINA

December 2003

CURRENCY EQUIVALENTS

Currency Unit – yuan (CNY)

At Appraisal At Project Completion (as of 30 September 1995) (as of 12 July 2003) CNY1.00 = $0.118 $0.121 $1.00 = CNY8.45 CNY8.30

ABBREVIATIONS

ADB – Asian Development Bank BME – benefit monitoring and evaluation BTG – boiler-turbine-generator CDT – China Datang Corporation CO2 – carbon dioxide DSCR – debt service coverage ratio DSM – demand side management EA – Executing Agency EIA – environmental impact assessment EIRR – economic internal rate of return EPH – Electric Power Henan FIRR – financial internal rate of return HFES – Henan First Electrical Energy Service Company, Ltd. IA – Implementing Agency ICB – international competitive bidding IRP – integrated resource plan IS – international shopping ISO – International Standards Organization MOF – Ministry of Finance NOx – nitrogen oxides PPA – power purchase agreement PRC – People’s Republic of China SEIA – summary environmental impact assessment SP – State Power Corporation SSTA – small scale technical assistance SO2 – sulfur dioxide SOE – state-owned enterprise TA – technical assistance TSP total suspended particulates WACC – weighted average cost of capital XLG – Xuchang Longgang Power Generating Company YEPB – Yuzhou Environment Protection Bureau YMAB – Yuzhou Municipal Afforestation Bureau YMG – Yuzhou Municipal Government YCTP – Yuzhou City Thermal Power Plant YTPP – Yuzhou Thermal Power Plant

WEIGHTS AND MEASURES

GW (gigawatt) – 1,000 MW GWh (gigawatt-hour) – 1,000,000 kWh kV (kilovolt) – 1,000 V kVA (kilovolt-ampere) – 1,000 kVA kW (kilowatt) – 1,000 W kWh (kilowatt-hour) – 1,000 Wh MW (megawatt) – 1,000 kW MVA (megavolt-ampere) – 1,000 kVA TWh (terawatt-hour) – 1,000 GWh

NOTE

In this report, "$" refers to US dollars.

CONTENTS

Page BASIC DATA ii

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 4 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 8 J. Performance of Consultants, Contractors, and Suppliers 9 K. Performance of the Borrower and the Executing Agency 9 L. Performance of ADB 10

III. EVALUATION OF PERFORMANCE 10 A. Relevance 10 B. Efficacy in Achievement of Purpose 10 C. Efficiency in Achievement of Outputs and Purpose 11 D. Preliminary Assessment of Sustainability 12 E. Environmental, Sociocultural, and Other Impacts 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 14 A. Overall Assessment 14 B. Lessons Learned 14 C. Recommendations 15

APPENDIXES 1. Major Events During Project Implementation 16 2. Project Cost and Financing Plan 20 3. Projected and Actual Disbursements 21 4. Project Implementation Schedule 22 5. Organizational Chart of Xuchang Longgang Power Generating Company 23 6. Compliance with Loan Covenants 24 7. Technical Assistance Completion Report 28 8. Summary of ADB-Financed Contracts 30 9. Financial Performance of Project Enterprises 31 10. Financial Evaluation 38 11. Economic Evaluation 40 12. Operating Performance 43 13. Investments for Environmental Improvement 44 14. Environmental Monitoring Indexes 45 15. Training Provided Under the Project 46 16. Project Rating Analysis 47

BASIC DATA

A. Loan Identification

1. Country People’s Republic of China 2. Loan Number 1400-PRC 3. Project Title Henan Power Project 4. Borrower People’s Republic of China 5. Executing Agency Electric Power Henan 6. Amount of Loan US$190.08 million 7. PCR Number PCR: PRC 770

B. Loan Data 1. Appraisal – Date Started 17 Jul 1995 – Date Completed 2 Aug 1995

2. Loan Negotiations – Date Started 24 Sep 1995 – Date Completed 28 Sep 1995

3. Date of Board Approval 7 Nov 1995

4. Date of Loan Agreement 18 Jun 1996

5. Date of Loan Effectiveness – In Loan Agreement 19 Sep 1996 – Actual 28 Nov 1996 – Number of Extensions 1

6. Closing Date – In Loan Agreement 30 Jun 2001 – Actual 1 Nov 2001 – Number of Extensions 1

7. Terms of Loan – Interest Rate Pool-based variable lending rate for US$ – Maturity 25 years – Grace Period 5 years

8. Terms of Relending – Interest Rate Pool-based variable lending rate for US$ – Maturity 25 years – Grace Period 5 years – Second-Step Borrowers Electric Power Henan

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9. Disbursement a. Dates Initial Disbursement Final Disbursement Time -Interval

22 May 1997 01 Nov 2001 53 months

Effective Date Original Closing Date Time Interval

19 Sep 1996 30 Jun 2001 57 months

b. Amount ($ million)

Last Category Original Revised Amount Undisbursed Amount Allocation Allocation Disbursed Balance Canceled 1 Equipment and Materials 159.71 167.99 167.99 0.00 0.00 2 Consulting Services 0.85 0.85 0.39 0.46 0.46 3 Training 0.89 0.89 0.00 0.89 0.89 4 Interest and Commitment Charge 21.70 21.70 21.70 0.00 0.00 Unallocated 16.85 8.57 0.00 8.57 8.57 Total 200.00 200.00 190.08 9.92 9.92 Source: Asian Development Bank.

10. Local Costs (ADB-Financed) - Amount ($) 0 - Percentage of Local Costs 0 - Percentage of Total Cost 0

C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual Foreign Exchange Cost 377.00 203.87 Local Currency Cost 559.00 195.32 Total 936.00 399.19 Source: Xuchang Longgang Power Generating Company.

2. Cost and Financing Plan ($ million)

Appraisal Estimate Actual Item Foreign Local Total Foreign Local Total ADB Loan 200.00 0.00 200.00 190.08 0.00 190.08 Commercial Cofinancing 100.00 0.00 100.00 13.79 0.00 13.79 Domestic Loans 77.00 559.00 636.00 0.00 112.33 112.33 Equity 0.00 0.00 0.00 0.00 82.99 82.99 Total 377.00 559.00 936.00 203.87 195.32 399.19 Source: Xuchang Longgang Power Generating Company.

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3. Cost Breakdown by Project Component ($ million)

Appraisal Estimate Actual Cost Foreign Local Total Foreign Local Total Part A: Yuzhou Thermal Power Plant Land 0.00 5.27 5.27 0.00 7.33 7.33 Equipment 262.41 118.56 380.97 182.17 52.25 234.42 Civil Works 12.35 49.38 61.73 0.00 57.44 57.44 Consultant 0.89 7.71 8.60 0.00 1.36 1.39 Training 0.85 1.81 2.66 0.00 0.56 0.56 Taxes and Duties 0.00 107.72 107.72 0.00 2.29 2.29 Others 0.00 7.31 7.31 0.00 59.35 59.35 Subtotal 276.50 297.76 574.26 182.17 180.58 362.75 Interest and Commitment Charge 71.64 190.79 262.43 21.70 2.30 24.00 Subtotal 348.14 488.55 836.69 203.87 182.88 386.75 Part B: Yuzhou Cogeneration Plant 0.00 1.28 1.28 0.00 0.00 0.00 Part C: Closure of Old Plants 0.00 4.68 4.68 0.00 3.86 3.86 Part D: Afforestation 0.00 8.93 8.93 0.00 8.58 8.58 Contingencies 28.86 55.56 84.42 0.00 0.00 0.00 Total 377.00 559.00 936.00 203.87 195.32 399.19 Source: Xuchang Longgang Power Generating Company.

3. Project Schedule

Milestone Appraisal Estimate Actual

Part A: Yuzhou Thermal Power Plant Tendering and Evaluation Dec 1995 Feb 1999 Contract Awarding Jun 1996 Mar 1999 Power Plant Building Sep 1998 Jul 2000 Boiler, Unit 1 Mar 1999 Jan 2001 Boiler, Unit 2 Mar 2000 Jun 2001 Turbine, Unit 1 Mar 1999 Feb 2001 Turbine, Unit 2 Mar 2000 Aug 2001 Instrumentation, Unit 1 Mar 1999 Mar 2001 Instrumentation, Unit 2 Mar 2000 Sep 2001 Electrical Equipment Sep 1999 Mar 2001 Stacks Sep 1997 Jun 2001 Central Control Building Dec 1998 May 2000 Coal Conveying System Mar 1999 Nov 2000 Hydraulic Building and Equipment Mar 1999 Dec 2000 Chemical Water Treatment Dec 1998 Oct 2000 Ash Yard and Pipelines Mar 1999 Jan 2001 Distribution Equipment Mar 1999 Mar 2001

Part B: Yuzhou City Plant Conversion to Cogeneration

Unit 1 Dec 1999 Conversion was not undertaken Unit 2 Dec 1999 Conversion was not undertaken

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Milestone Appraisal Estimate Actual

Part C: Closure of Old Power Plants

Zhengzhou Cogeneration Power Plant Dec 2000 Dec 2000 Zhengzhou Thermal Power Plant Dec 2000 Dec 2000 Jiaozuo Thermal Power Plant Dec 2000 Dec 2000

Part D: Afforestation Program Dec 2000 June 2001

Source; Xuchang Longgang Power Generating Company.

4. Project Performance Report Ratings

Rating Period Development Objectives Implementation Progress Nov-Dec 1998 Satisfactory Satisfactory Jan-Jun 1999 Satisfactory Satisfactory Jul-Dec 1999 Satisfactory Satisfactory Jan-Jun 2000 Satisfactory Satisfactory Jul-Dec 2000 Satisfactory Satisfactory Jan-Jun 2001 Satisfactory Highly Satisfactory July–Dec 2001 Satisfactory Satisfactory

D. Data on Asian Development Bank Missions

No. of No. of Specialization Name of Mission Date Persons Person-Days of Membersa Fact-Finding 26 Feb–23 Mar 1995 7 101 a, c, g, l Appraisal 17 Jul–2 Aug 1995 9 120 a, c, d, g, h Inception 30 Nov–6 Dec 1995 2 14 a, f Review 12–19 Sep 1996 2 16 a, k Special Loan Review 17–18 Dec 1996 1 2 a Review 10–15 Nov 1998 2 12 a, k Review 10–15 Sep 1999 2 12 a, k Review 6 – 10 Dec 2000 2 10 b, k Review 12–16 Nov 2001 2 10 a, k Project Completion Reviewb 8–12 Jul 2003 4 20 a, b, k, m a a=engineer, b=energy specialist c=financial analyst, d=counsel, e=economist, f=procurement specialist, g=environment specialist, h=programs officer, i=young professional, j=cofinancing officer k=analys t, l=administrative assistant, m=staff consultant. b The Mission comprised Merlita Pajarillo, energy specialist (financial) and mission leader; Xavier Humbert, energy specialist; Lorna Enjaynes, assistant project analyst; and Peng Ximing, local staff consultant.

I. PROJECT DESCRIPTION

1. In the 1990s, the People’s Republic of China (PRC) had a severe shortage of electricity. With insufficient capacity to meet the requirements of the rapidly growing economy, periods of peak demand required load shedding.1 The electricity supply interruptions constrained economic growth. Henan Province was one of the most severely affected provinces, requiring frequent load shedding. As the economy expanded and the demand for electricity increased, the problem grew worse. At the time, the economy of Henan was forecast to grow 9.5% per year from 1995 to 2000 and 8% a year from 2000 to 2010. The annual energy demand and the system peak in the province were forecast to grow almost in parallel with the economy. Based on these forecasts, Electric Power Henan (EPH) developed a capacity expansion plan to address the future economic development of the province.

2. The construction of a 700-megawatt (MW) coal-fired power station, comprising of two 350-megawatt units, was identified as the least cost option to meet part of the projected capacity shortfall in Henan Province in 1999 and 2000. It was to be the first stage of a 1,400- MW plant constructed near the Yuzhou coal mines at the Xuchang Prefecture, the load center for the central and southern subregion of Henan Province. The Henan Power Project (the Project) also addressed environmental and energy-efficiency objectives, which provided the rational framework for support from the Asian Development Bank (ADB) for a coal-fired power facility to promote economic growth. The principal objectives of the Project were (i) to support economic growth in Henan Province by providing cost-effective, base-load, coal-fired electric power generating capacity using modern technology to control environmental degradation; (ii) to make the new generating units more energy efficient through international competitive bidding (ICB) for the 350 MW capacity range; and (iii) to improve energy efficiency and to reduce the potential environmental damage through closure of small in-efficient generating units and increasing afforestation. The Project also aimed to enhance the institutional capability of EPH, reform tariff policy, and develop energy conservation measures in Henan Province.

3. The Project had four parts:

(i) Part A: Constructing the first stage of the 700-MW coal-fired Yuzhou Thermal Power Plant (YTPP), which included two 350 MW coal-fired generating units and associated facilities such as ash disposal yards, railway extension, and 250 circuit-kilometers (km) of 220-kilovolt (kV) transmission lines;

(ii) Part B: Converting Units 1 and 2 (6 MW each) of Yuzhou City Thermal Power Plant (YCTP) to cogeneration, and closing and decommissioning 10 industrial boilers at four factories in the vicinity;

(iii) Part C: Closing and decommissioning 16 old, inefficient and polluting generating units at three power stations in Zhengzhou and Jiaozuo with a combined capacity of 182 MW;

(iv) Part D: Developing an afforestation program, including greening public areas and establishing forestry plantations and orchards in and around Yuzhou City, by planting 275 million trees over 5 years. This part of the Project complements the establishment of specific greenbelts under Part A.

4. In November 1995, ADB approved a loan of $200 million from its ordinary capital resources. The loan carried a term of 25 years, including a grace period of 5 years, with interest determined in accordance with ADB’s variable lending rate system for US dollar loans, plus an annual commitment fee. ADB also provided an advisory technical assistance (TA) grant to

1 Load shedding is the switching off of electricity supply to selected consumers during periods of peak demand to achieve power demand and supply balance. 2 assist EPH, the Executing Agency (EA) for the Project, to strengthen its power system planning capability and to develop a resource plan that would integrate its supply side and demand side options.2 Earlier, ADB approved another small-scale technical assistance (SSTA) grant3 to improve environmental monitoring and enforcement in the Henan Province.

5. After an initial delay of 2 years, primarily due to the delays in getting the Government approval for bids evaluation, the Project was implemented smoothly. YTPP’s Unit 1 was commissioned in March 2001 and Unit 2 in September 2001. All the required transmission facilities needed to evacuate power from YTPP—a crucial element not funded by ADB—were completed in time to match with the commissioning of generating units. However, the planned conversion to cogeneration of YCTP’s two 6 MW units under Part B was not pursued due to the passage of a government regulation mandating the closure of coal-fired power plants with generating capacity less than 50 MW . Nevertheless, the 10 industrial boilers were closed as envisaged. The 16 coal-fired power units with a combined capacity of 182 MW were shut down under Part C, while the afforestation program under Part D was carried out satisfactorily.

6. The loan was closed on 1 November 2001 after an extension of 4 months from the original schedule to complete contract payments. Loan funds of $190.08 million were disbursed, and the unutilized $9.92 million was canceled. The EA started loan repayment in April 2001, and by July 2003 had repaid principal of $8.86 million. Appendix 1 lists the chronology of major events during project implementation.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

7. At appraisal, the Government’s main objective in the power sector was to develop adequate capacity to address the recurring power shortages and support the country’s economic growth. Priority was placed on improving efficiency in the supply and use of electricity, with particular importance given to accelerating the development of the poorer, interior provinces, such as Henan Province.

8. Providing assistance to achieve economic growth in an efficient, equitable, and sustainable manner was the central theme of ADB’s country operational strategy for PRC. It focused on three strategic objectives: efficiency improvement, environmental protection, and poverty reduction. The strategy supported PRC’s market–oriented reform programs, which are geared towards increasing productivity and efficiency, and addressed the disparities in regional income and environmental degradation. ADB’s assistance in providing funds for the construction of additional generating capacity to support economic growth in the Henan Province was relevant to the Government’s program and ADB’s strategy at appraisal and at completion. Inclusion of complementary objectives regarding energy efficiency improvement and environmental protection, as well as the development of tariff policy and energy conservation reforms in Henan Province, enabled the extension of support to a coal-fired project.

9. The project components were implemented as designed except Part B, which could not be implemented due to closure of Yuzhou City Thermal Power Plant under the Government regulation. The performance level achieved under Part A demonstrated the appropriateness of the technical and environmental safeguard design parameters adopted at appraisal.

2 ADB. 1995. Technical Assistance to the People’s Republic of China for the Strengthening of Electric Power Henan Power System Planning Capability. Manila. 3 ADB. 1995. Technical Assistance to the People’s Republic of China for Improving Environmental Monitoring and Enforcement in Henan Province. Manila. 3

B. Project Outputs

10. Part A—New 2 x 350 MW Yuzhou Thermal Power Plant. The main and auxiliary components of the new power station, which were clearly established and adequately assessed at appraisal, were implemented without any major change. The capacity of YTPP was decided after receiving bids through ICB. The proposal for the 2 x 350 MW configuration achieved the energy efficiency criteria and was within the budget. All targeted project outputs were achieved. The first unit began commercial operation in June 2001, while the second unit started in December 2001. The other main and auxiliary components, including cooling towers, a coal handling system and stockpiling yard, ash handling and electrostatic precipitators, and instrumentation and control systems, were constructed or installed, and are fully operational. The railway spur to YTPP and new access roads to the station and ash disposal sites were constructed, while the roads to the coal mines were upgraded. Although not funded from the loan, the transmission facilities required to evacuate the power from the Project, consisting of 250 circuit km of 220 kV lines and substations, were constructed in time.

11. The generating units are running normally without any major defect. Well-trained plant operators are in place, operating and maintaining the plant competently. The generating units are capable of operating at the rated capacity and are at full load during peak periods. The current load factor of 60% in the first year of operation is likely to improve substantially, subject to load dispatch consideration.

12. The environmental protection measures identified in the environment impact assessment (EIA) report submitted to ADB at appraisal were incorporated in the design, construction, operation and maintenance of the facilities built under the Project. These included ensuring that land for the plant, ash disposal areas, water pipelines and dedicated railways, access roads and transmission lines had no settlements. No relocation was necessary for the Project. Persons affected by the Project were compensated properly. Training sessions on the operation and maintenance of the plant were held abroad and in the PRC attended by more than 100 company officials, technical staff, and operators.

13. Part B—Converting Thermal Plants to Cogeneration and Closing Industrial Boilers. At appraisal, two 6 MW thermal power units in Yuzhou City were to be converted to cogeneration. The conversion would have generated 61 million gigajoules of heat and 40 gigawatt-hours (GWh) of electricity annually. It also would have enabled the closure and decommissioning of 10 industrial boilers at four factories in the vicinity. However, the conversion of the small power generating units was not undertaken after the Government issued a regulation in 1998 mandating the closure of all coal-fired generating units below 50 MW within 5 years. Instead, the Yuzhou Municipal Government (YMG) rehabilitated two of the bigger and more efficient 25 MW thermal power units, a process completed in May 2002. This enabled the closure and decommissioning of 12 old and inefficient industrial boilers in the city, instead of the 10 originally identified at appraisal. Four more boilers are scheduled to be closed within the year. In addition, about 4 km of pipes were replaced to accommodate the increased amount of heat that can be supplied. At the same time, the first of the two 6 MW units targeted for conversion was shut down in 2001, while the second unit will be shut down in early 2004.

14. Part C—Decommissioning 16 Old Coal-Fired Power Units. As required under the Project, 16 coal-fired power units with a combined capacity of 182 MW were shut down by September 1998. Moreover, EPH reported that 470 MW of small thermal units, which were old, inefficient, and polluting also were decommissioned in Henan Province between 1996 and 2001. EPH continues to employ the affected workers, who assisted in the decommissioning and removal of the old power plants. They also were trained in the operation of the new and modern facilities for eventual redeployment.

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15. Part D—Developing an Afforestation Program. The afforestation program was incorporated in the design of the Project to supplement the afforestation component in Part A. The additional trees were intended to increase the potential to absorb carbon dioxide (CO2) emissions resulting from the new plant. The Yuzhou Municipal Afforestation Bureau (YMAB), with assistance from EPH, implemented the program, which involved planting 275 million trees of various types in and around Yuzhou over 5 years. Part of the original plan was to plant 200 million mulberry trees as food for silkworms. However, it was discovered later that mulberry is not suited for Yuzhou, and YMAB substituted other fruit trees. The substitution was completed by June 2001. The Yuzhou Environmental Protection Bureau (YEPB) certified that the substitution could achieve better environmental benefits. Approximately 80,000 hectares in various sites were planted with locust trees, oriental arborvitae, Chinese prickly ash, poplars, paulownias, apple, and other fruit trees. Trees also were planted along 574 km of roadsides. YMAB officials reported that an additional 11,300 hectares were afforested with about 60 million trees between 2001 and mid 2003. Intercropping with cash crops also is being practiced, providing additional income to the farmers. ADB missions inspected several afforestation sites and found them satisfactory.

C. Project Costs

16. At appraisal, the project cost, including contingencies and interest during construction (IDC), was estimated at $936.0 million equivalent. That consisted of $377.0 million in foreign exchange cost (representing 40% of the total) and $559.0 million equivalent in local currency cost (60% of the total). The actual project cost was $399.2 million equivalent, including $203.9 million in foreign exchange cost and $195.3 million equivalent in local currency cost. The actual cost was $536.8 million, or 57%, lower than the appraisal estimate. The discrepancies resulted from lower-than-estimated costs in several areas, including (i) IDC ($238.4 million, or 91% lower than the $262.4 million estimate at appraisal), (ii) taxes and duties ($105.4 million, or 98% lower than the $107.7 million estimate), and (iii) imported and local equipment ($146.6 million, or 39% lower than the $381.0 million estimate). In addition, the $84.4 million allotted for contingencies was not utilized. The partial implementation of Part B also contributed a small amount ($1.3 million) in savings. Appendix 2 compares the projected and actual project costs and financing plans.

17. The lower actual project cost of YTPP resulted in further savings from contingencies, taxes, and IDC. The base cost was compared with another ADB-funded coal-based power project in Indonesia.4 The main equipment contracts for the Indonesia project were awarded in the first half of 1993 at a unit rate of $746 per kilowatt (kW), while the Project estimate was prepared in early 1995 at $778 per kW, or 4% higher. The marginal difference is justified considering the larger size Indonesia project (1,800 MW) and inflation during the 2-year period. However, bids for the Project were invited in the second half of 1997 and was awarded at a unit rate of $515 per kW, which was 34% lower than the estimate. This substantial reduction may have resulted from the sharp fall in demand for power plant equipment following the 1997 Asian crisis. The lower awarded cost also obviated the need for contingencies, which were estimated at $84 million.

18. The Appraisal included an estimate for taxes and duties based on the prevalent regulations, but the Government subsequently waived these for ADB funded projects. Similarly, the actual IDC was limited to the charge on the ADB loan, while its estimate was based on additional commercial borrowing of $100 million, domestic financing of $636 million with no equity contribution. The lower equipment cost and the equity contribution of $82 million substantially reduced the borrowings (only 33% or estimate). The delayed but shorter implementation schedule changed the disbursement profile, which lowered the IDC further.

4 ADB. 1999. Project Completion Report, Power XXII Project (Indonesia). Manila 5

Overall, there are explanations for a large part of the reduction in project cost, but it is also clear that estimates could have been prepared using more realistic assumptions.

19. The financing plan at appraisal consisted of a loan of $200 million from ADB to cover 21% of the cost of the Project, including 53% of the foreign exchange costs. A loan of $100 million from commercial cofinancing was to be obtained to fund a portion of the foreign exchange costs. The remaining foreign exchange costs, as well as the local currency requirements, were to be provided by a combination of domestic loans and equity from Central China Electric Power Group Company, Henan Provincial Construction Investment Corporation, the Xuchang and Yuzhou Municipal Government, and EPH. The amount envisioned from cofinancing was reduced to $40 million after ADB approved the request of the Government to change the financing arrangement for the main equipment package from joint cofinancing to parallel cofinancing. This resulted in ADB financing 100% of the combined boilers and auxiliaries, and turbine generators and auxiliaries package (BTG). It also reduced the amount of cofinancing, which was to fund the procurement of instrumentation and controls and other auxiliary equipment. The share of the domestic funding was increased correspondingly. In the end, ADB financed $190.1 million, or 48%, of the project cost. A syndicate of international banks provided commercial cofinancing totaling $13.8 million, or 3% of the project cost, while domestic loans and equity contributions accounted for $195.3 million, or 49%.

D. Disbursements

20. Disbursements under the ADB loan commenced in May 1997 with the payment to the implementation consultant. Payments to the main equipment supplier for the BTG package started in October 1998. Disbursements were highest from 1999 to 2000 when the bulk of the major equipment was delivered and project implementation was in full swing. The last disbursement, for the retention payments on the contract for the supply of the BTG package, was in October 2001. When the loan was closed on 1 November 2001, disbursements totaled $168.4 million, while IDC and commitment fees amounted to $21.7 million. The unutilized balance of $9.9 million was canceled. Overall, utilization of the ADB loan was 95%. Disbursements were made mainly through letters of credit and direct payments. Contract awards and disbursements were basically in line with projections, except during the first 2 years when they lagged behind. A comparison table and graph of projected and actual disbursements are shown in Appendix 3.

E. Project Schedule

21. Part A—Constructing 2 x 350 MW Yuzhou Thermal Power Plant. At appraisal, project implementation was envisaged to take 5 years. For Part A, site preparation and construction work on the railway line to haul heavy equipment to the plant site was expected to start in late 1995. The first generating unit was scheduled for commissioning in March 1999, with commercial operation expected in September 1999. The second unit was to be commissioned in March 2000, with commercial operation in September 2000. While site work was started immediately after the approval of the loan, as planned, the evaluation and approval process for the BTG package was delayed significantly. The BTG package was awarded on 14 April 1998, almost 2 years after the bids were opened on 25 April 1996. This pushed back the completion of the Project, even though erection work and other construction activities were carried out as planned and were substantially on or ahead of schedule. Construction took 27 months. The first 350 MW generating unit was commissioned in March 2001, with commercial operation in June 2001. The second unit was commissioned in September 2001, with commercial operation in December 2001. The 220 kV transmission lines connecting YTPP to the grid substations were operational before the commissioning of the generating units. Appendix 4 shows the projected and actual implementation schedules.

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22. Part B—Converting Thermal Plants to Cogeneration and Closing Industrial Boilers. The conversion of the two 6 MW thermal plants under Part B would have commenced in 1998, and they would have been ready to provide steam to industrial users by July 2000. During implementation, however, the first unit was shut down in 2001 to comply with a recent government mandate. The second unit will be decommissioned in 2004.

23. Part C—Decommissioning 16 Old Coal-Fired Power Units. Under Part C, the 16 coal-fired generating units at three power stations in Zhengzhou and Jiazuo were shut down by the end of September 1998. Seven units of Zhengzhou Cogeneration Plant were shut down in November 1997, while the six units in Jiaozuo Power Plant were shut down in June 1998. The three units of Zhengzhou Power Plant were shut down in September 1998.

24. Part D—Afforestation Program. The afforestation program under Part D was to have been implemented over 5 years, beginning in 1996. The municipal government in cooperation with EPH implemented this component as planned with only minor delays. The program was completed by June 2001.

F. Implementation Arrangements

25. At appraisal, EPH was designated the EA for Parts A and C of the Project, while YMG was selected as the EA for Parts B and D. YMG also was designated as the Implementing Agency (IA) for Part B, while YMAB was chosen as the IA for Part D. Implementation was carried out as envisioned at appraisal for Parts B, C and D. For Part A, where EPH was to be responsible for the overall supervision and coordination of project implementation (including plant operations), a new company was created to handle these responsibilities. In July 1995, Xuchang Longgang Power Generating Company (XLG) was established to own and take responsibility for the construction and operation of the new YTPP. The responsibility for repaying the loan also was transferred to the new company, making XLG the de facto EA for this part of the Project. XLG was set up as a joint venture controlled by EPH, which held 60% of the shares before transferring ownership to China Datang Corporation (CDT) at the end of 2002. The other shareholders are Henan Provincial Construction Investment Corporation (30%) and Xuchang Economic and Technical Development Corporation (10%). ADB and the Government agreed that EPH would continue to be the EA, while XLG would be the IA. However, the loan documents have not been amended yet to reflect this change.

26. A change in the implementation arrangements during project execution is not unique to the Project. Similar developments occurred in other PRC projects, such as in Loan 1318–PRC: Hunan Lingjintan Hydropower Project, Loan 1328–PRC: Qitahe Thermal Energy and Environmental Improvement Project, and Loan 1582–PRC: Northeast Power Transmission. In each instance, the responsibilities for the implementation and operation of an ADB-funded project were transferred to newly created subsidiary companies. The subsequent changes in the ownership and the transfer of assets following the implementation of power sector reforms need to be addressed in the loan documentation.

27. Initially, a project implementation unit under the supervision of a general manager was established to implement the Project. Subsequently, monitoring and implementation activities were transferred to the new company. Appendix 5 shows the organizational setup of XLG. Weaknesses in project implementation noted by ADB during project review missions were addressed with adequate measures.

28. The sector-wide restructuring implemented by the Government at the end of 2002 resulted in the breakup of State Power Corporation (SP), EPH’s former holding company, into 11 smaller companies. These new companies included five power-generating companies, two grid-management companies and four auxiliary companies. State Power Grid Corporation, one 7 of the newly created grid-management companies, is now the holding company for EPH. Ownership of EPH’s shares in XLG was transferred to CDT, one of the newly established power-generating companies. CDT controls 32,490 MW of power generating capacity and CNY72.1 billion in assets5. Following the restructuring, the operating structure of XLG did not change much. XLG reported that CDT’s involvement has been primarily in budget control, monitoring plant efficiency and forced outage rates, and benefits.

G. Conditions and Covenants

29. In general, the loan covenants have been complied with. The key exceptions are the covenants on tariff and enterprise reforms, which are in partial compliance. A unified tariff for each consumer category at the provincial level was implemented on 1 January 2000, making tariff levels and structures closer to the economic supply costs. While substantial progress in tariff reforms in Henan Province has been made since the Project was started, more reforms are needed to allow full cost recovery. XLG reported that full implementation of the tariff level approved in 2000 is expected by the end of 2003. The recent power sector restructuring indicates movement towards market-based pricing in a competitive environment. Enterprise reforms for EPH are ongoing in line with the industry restructuring.

30. EPH has complied with the financial covenants. The covenants on debt service coverage and self-financing ratios have been met. XLG, which is not contractually bound by the loan covenants yet, did not meet the debt service and self-financing ratios prescribed in the Loan Agreement for the EA. Nevertheless, despite the losses incurred in its initial operations, XLG met its debt servicing obligations in 2002 after the plant began commercial operations. With the tariff adjustment scheduled at the end of 2003, XLG expects its operations to break even. XLG’s ability to repay its debts has raised little concern, as the depreciation charge is adequate to cover the principal repayment. The report on benefit monitoring and evaluation (BME), however, has not been submitted. Appendix 6 shows the status of compliance with covenants in the Loan Agreement.

H. Related Technical Assistance

31. ADB approved an SSTA grant6 for the preliminary analysis of the feasibility study and the review of the economic and environmental impact assessment submitted by the Borrower. The review indicated that the proposal for a conventional coal-fired power station did not demonstrate sufficient energy efficiency, conservation and environmental protection features. The SSTA is rated as successful. After the Project design was improved to incorporate strong energy efficiency and environmental components, ADB approved another SSTA grant7 to clarify the design features of the integrated project components. The TA produced a high quality report, but it is rated as partly successful because of the significant deviation between the cost estimates and the project cost.

32. ADB approved another SSTA (see footnote 2) aimed at improving the environmental monitoring and enforcement in Henan Province. This grant focused on strengthening the capability of YEPB and EPH to (i) monitor and enforce environmental rules and regulation, (ii) monitor coal quality and enforce a system of bonuses and penalties, and (iii) update the mines on current practices and technologies to upgrade their product quality. As part of the SSTA, environmental monitoring equipment was purchased for about $50,000 for YTPP’s

5 China Datang Corporation company brochure. 2003. PRC. 6 ADB. 1994. Technical Assistance to the People’s Republic of China for the Preliminary Analysis of the Fujian Mianhuatan Hydropower and Henan Power Projects. Manila. 7 ADB. 1994. Technical Assistance to the People’s Republic of China for the Henan Integrated Power. Manila.

8 environmental unit and YEPB. The consultant and the equipment suppliers also conducted training sessions. The SSTA is rated as successful.

33. ADB also approved an advisory TA (see footnote 1) in conjunction with the loan. This TA was to assist the EA in strengthening its system planning capability. Specifically, the grant provided modeling tools and training to develop the least cost power generation expansion plans and the associated long-term transmission master plans that would integrate supply-side options with achievable demand-side options, including environmental, social and economic analyses. The TA, designed to develop a prototype integrated resource plan (IRP) and a long- term transmission plan, included an organizational review with the aim of strengthening EPH’s system planning department. The outputs included the hardware and software required for load forecasting, transmission planning, load flow studies, short circuit calculations, stability studies, economic load dispatch, and contingency and reliability studies. The TA is rated as successful as the objectives set out in the terms of reference were met. The completion report for this TA is in Appendix 7.

34. Henan First Electrical Energy Service Company, Ltd. (HFES), a former subsidiary of EPH, handles the energy conservation activities in Henan Province. Since its creation in 1996, HFES has completed 309 technical retrofit projects and has invested CNY57 million8 from its revolving fund to support energy efficiency projects. Annual energy savings from these projects total about 480 GWh. Energy audits at a number of enterprises are ongoing to identify additional opportunities for energy conservation.

I. Consultant Recruitment and Procurement

35. As envisaged at appraisal, EPH engaged the services of an international consulting firm to supervise project implementation. The international consultant assisted EPH in the bid evaluation and preparation of the bid evaluation report, contract negotiations, supervision and administration, quality control, and in installation, testing and commissioning of the imported equipment. The international consultant was engaged in accordance with ADB’s Guidelines on the Use of Consultants. EPH also used the services of a domestic design institute for the engineering design of the Project, and environmental research institute for the EIA.

36. International manufacturers supplied and supervised the installation of the BTG package, ash-handling system, instrumentation and control equipment, main transformers, switchgears, and miscellaneous protection equipment. On the other hand, local contractors supplied standby transformers, constructed the civil works—including cooling towers, chimney, and coal-conveying system—and installed the auxiliary equipment. Local contractors also built the access roads and the transmission lines. EPH, using it own funds, engaged a domestic supervision firm for certain aspects of site supervision and installation of equipment. In procuring imported equipment, EPH used the services of an experienced procurement agency, which assisted in drafting the bidding documents, bid evaluation, and contract management. Because the agency was familiar the Government’s as well as ADB’s bidding procedures, this arrangement resulted in smooth and effective implementation. The ICB procedures produced tangible savings for the EA, as the lowest bid was substantially below the appraisal estimates.

37. Seven contract packages for equipment supply and installation, with a combined value of $250.26 million, were to be procured internationally. The ADB loan and the cofinancing loan were expected to jointly fund the BTG package, which was the biggest single component. However, the ADB loan was subsequently adjusted to cover the entire financing requirement for the BTG package, while the cofinancing loan was reallocated to cover the entire financing of the other six packages. Training, consulting services, and IDC were also to be funded from the ADB

8 Henan First Electrical Energy Service Company, Ltd. company brochure. 2003. PRC. 9 loan. However, the amount allocated for training was not utilized and was canceled, as the equipment manufacturer provided most of the required technical training. Procurement was made in accordance with ADB’s Guidelines for Procurement. Equipment with a contract value of $500,000 or more was procured following ICB procedures. Equipment with a value below $500,000, but not less than $50,000, was procured using international shopping (IS) procedures. Appendix 8 shows the contract packages financed by ADB and those financed from the cofinancing loan.

J. Performance of Consultants, Contractors, and Suppliers

38. The performance of the international and domestic consultants was satisfactory. The consulting services were performed in accordance with their terms of reference and contributed to the successful implementation of the Project. Project implementation and supervision was generally smooth with only minor problems. The technical design developed by the domestic design institute was optimized, but no major problems were encountered. The international consultants effectively coordinated the activities at the site, ensured quality control, and addressed the problems encountered during implementation. Their performance was rated as satisfactory.

39. The contractors for civil works and for the installation of equipment, who were selected through local competitive bidding, were competent. Their scope of work was completed within the schedule and the quality of their workmanship was generally good. The performance of equipment suppliers, selected through ICB or IS, was also generally satisfactory. Minor defects that were noted were rectified appropriately. In response to a report of a technical failure on the excitation circuit, the supplier provided a remedy as requested within a satisfactory time frame.

40. YTPP’s engineering construction received wide recognition. SP and EPH nominated YTPP as an excellent power plant in terms of construction. The Ministry of Construction, recognizing the quality of construction of the main equipment building, awarded a gold medal for demonstrating a new technology application in 2001. In 2002, the Henan Provincial Government gave XLG the Zhongzhou Cup of Construction.9

K. Performance of the Borrower and the Executing Agency

41. The performance of the Borrower, the Government through the Ministry of Finance (MOF), was generally satisfactory. The signing and effectiveness of the loan, as well as the subsidiary loan agreement for the relending of loan proceeds to EPH, were made within a year of loan approval. MOF assisted in facilitating the completion of the requirements for loan effectiveness. After the initial involvement in the evaluation of the winning bidder for the BTG package, government supervision and monitoring of the Project were minimal. EPH and then XLG, which was staffed mostly by former EPH personnel, were technically qualified and experienced in project implementation.

42. The performance of EPH and subsequently XLG was generally satisfactory. Project implementation was carried out within budget and in a systematic and timely manner, except for the initial 2-year delay during bid evaluation, which was not within their control. Although the project evaluation committee completed the evaluation of the bids within a reasonable time, the approval of the state Government took longer than expected. EPH reported that the reason for the delay was the difference in the methodology for calculating the energy conversion efficiency of the generating units. ADB recommended one methodology for the bid evaluation, which took time to reconcile with the methodology normally used in the PRC.

9 Xuchang Longgang Power Generation Co., Ltd. company brochure. 2003. PRC.

10

43. The transfer to XLG of the responsibility for the implementation and eventually the operation of the Project, as well as the ownership of the assets, was done without the prior approval of ADB. The submission of some progress reports and the project completion report (PCR) were delayed. The BME report has not been submitted. XLG committed to submit the BME report at the start of 2004 after an agreement on the reporting format is finalized.

L. Performance of ADB

44. ADB’s performance in monitoring the Project was satisfactory. Seven review missions and frequent consultations and briefings with the MOF were done to monitor the progress of project implementation. ADB staff spent adequate time reviewing physical progress and resolving implementation issues with EPH and XLG staff. ADB promptly approved ADB- financed contracts and required fund disbursements. In addition, ADB immediately approved the request for the reallocation of the loan and the change from joint cofinancing to parallel cofinancing for the equipment packages. The EA and IA expressed appreciation for the timely action of ADB in resolving outstanding project implementation issues.

III. EVALUATION OF PERFORMANCE

A. Relevance

45. The Project was consistent with ADB’s and the Government’s priorities (para. 8) and, was assessed as highly relevant. The coal-fired power plant near the coal mine sites was the least cost option to address the power shortage in Henan Province. Henan is an interior province with limited hydropower resources. Increasing the power plant capacity to 700 MW from the original planned 600 MW enhanced the relevance of the Project in power deficient Henan Province. Despite the partial implementation of Part B and the changes adopted in the implementation of Part D, the other components helped achieve the corollary objectives. The TAs attached to the Project also improved the system planning capability of EPH and the monitoring of environmental compliance. The training programs helped enhance the system planning and environmental protection perspective of the EA and IA.

B. Efficacy in Achievement of Purpose

46. The Project achieved its objectives. Part A provided urgently needed additional capacity in Henan Province, while Parts C and D (and the partial implementation of Part B) addressed energy efficiency concerns and mitigated the environmental damage of the coal-fired plant. Part A provided net annual energy output of 3.18 TWh to the grid in its first year of commercial operation. Economic activity in Henan Province is on the upswing after recovering from the Asian currency crisis that began in 1997. Electricity consumption in the province has grown more than 12% annually during the past 2 years, compared with a projection of 8% annual growth at appraisal. Power shortages are still being experienced, requiring the importation of energy from nearby provinces to augment the electricity supply. In 2002, Henan imported 23.1 TWh, or roughly 2.5% of the total electricity consumption in the province. Without the output from YTPP, energy shortages would have been greater. The Project was assessed as highly effective in meeting its primary objective of improving demand-supply imbalance.

47. The increasing energy supply in the Henan Province requires additional capacity. The second phase of the Yuzhou power plant, which involves the construction of two 600 MW units, has been incorporated into the Tenth Five-Year Plan of Henan Province. The preliminary feasibility study has been submitted to the State Planning Committee. The new plant will be built beside the existing power plant and will share the common plant facilities.

11

C. Efficiency in Achievement of Outputs and Purpose

48. Project implementation under Part A was smooth, despite the transfer of major responsibilities for project implementation from EPH to XLG. The organizational setup as well as the management and approval processes of the EA and IA were responsive to the requirements of the Project. Commercial cofinancing and counterpart funds were adequate and were provided on time. The project facilities were constructed properly, and the generating units were installed and commissioned within the adjusted time frame. The generating units, which were put into commercial operation within a few months after commissioning, reached their design capacity. The investment is equivalent to $553,000 per MW of installed capacity, which is about 20% lower than the cost per MW of another recently built coal-fired power plant of EPH with the same capacity. However, the low tariff level remains a concern. In the near term, the implementation of the approved higher tariff will provide financial relief. Over the long term, the restructuring of the PRC’s power sector is expected to address this issue. Nevertheless, YTPP is in a strong competitive position, because it is a base-load generating facility with a low cost of generation. The Project was assessed as highly efficient.

49. For Part B and Part D, the changes made during implementation were designed to make the execution of these components more efficient. Part C also was carried out efficiently.

1. Financial Performance

50. Appendix 9 summarizes the financial performance of EHP and XLG.

51. The financial internal rate of return (FIRR) for the Project was calculated only for Part A since the other components had no material financial benefits. Although a separate financial analysis was done for Part B at appraisal, an evaluation could not be done for this component at PCR because its partial implementation did not allow the generation of revenues. The FIRR was reevaluated on the basis of the financial performance of XLG up to 2002 and financial projections based on information and assumptions provided by the company. Projected revenues were based on targeted generation output and approved tariff levels. Operating and maintenance costs were assumed to remain at current levels. Capital cost was based on expenditures incurred for the Project. Revenues and expenses were valued at 2003 prices. The reevaluated FIRR of 12.4% is in line with the appraisal estimate of 12.4% and is higher than the real weighted average cost of capital (WACC) of 4.8%. The FIRR level is maintained despite the lower-than-projected tariff (about 16% below the appraisal estimate of CNY0.37, or $0.045 per kWh) due to the lower investment for the Project. Details of the FIRR calculations are shown in Appendix 10.

2. Economic Performance

52. The economic evaluation also was done only for Part A. The benefits of Part D that were identified at appraisal were not included, but they have the potential to absorb the incremental CO2 resulting from the Project. Incremental costs and benefits were determined based on a comparison of the “with project” and “without project” scenarios to determine the net benefit stream. Imported equipment were valued at its actual cost, and local costs were shadow priced by applying the appropriate conversion factor.10 Taxes, import duties, and all financial charges including IDC, have been excluded. The economic life of the generating plant, assumed at appraisal to be 20 years, was maintained. The residual value was assumed to be zero at the end of the economic life. Costs and benefits were expressed in 2003 constant prices. The economic benefits were derived from (i) resource cost savings from the displacement of inefficient generation by small coal-fired plants, and (ii) incremental energy supplied to

10 The conversion factors used in this evaluation are 1.1 for civil works, 1.1 for local machinery, and 0.93 for others.

12 consumers. Other economic benefits were identified, though they were not quantified at appraisal or at PCR.11 The economic price of coal was calculated using its border price, adjusted by the transportation and handling costs in Henan Province. For other tradable and non-tradable cost components, financial costs were converted using the standard conversion factor.

53. The recalculated economic internal rate of return (EIRR) for Part A is 14.5%, compared with the appraisal estimate of 13.5%. The EIRR is also higher than ADB’s assumed rate for economic opportunity cost of capital of 12%. The higher EIRR resulted from the lower investment cost and lower operating costs. Taking into account the externality cost12 for air pollutants, which included total suspended particulates (TSP), sulfur dioxide (SO2) and nitrogen oxides (NOx)—and following the benefit transfer method described in ADB’s Economic Evaluation of Environmental Impacts —A Workbook—the EIRR would be 13.5%. This goes down to 12.5% when the externality cost of CO2 is included. Details of the calculations are shown in Appendix 11.

D. Preliminary Assessment of Sustainability

54. The technical design, construction, and operation of the Project are sound and appropriate. XLG possesses the institutional capability to manage the power plant effectively and efficiently. The two power generating units passed technical reviews conducted by the Central China Electric Power Bureau in March and July 2002, respectively. In August 2002, SP authorized them to begin plant operation. In the first year of commercial operations, both units operated continuously for 100 days without forced outage. The relative strength of the company’s workforce, which is about 70% composed of young engineers and technical staff, is another positive factor. XLG also takes pride in having obtained ISO 9001, ISO 14001, and OHS AS 18001 certifications (footnote 7). The statistics on the operating performance of the generating units are shown in Appendix 12.

55. The financial performance of XLG, although not robust, is projected to improve with the implementation of the approved tariff. The plant’s advantageous position as a base-load facility with relatively low generating cost is also seen as a strength in the emerging competitive power market.

56. The recalculated FIRR and EIRR of the Project exceed the WACC and the assumed economic opportunity cost of capital, respectively, indicating that the Project is financially and economically viable. The Project is rated as sustainable.

E. Environmental, Sociocultural, and Other Impacts

57. Environmental Impact. A summary environmental impact assessment (SEIA) report for the Project was prepared and circulated to the Board on 9 June 1995. The measures recommended in the SEIA for mitigating environmental degradation were carried out during project implementation. An environmental protection unit was established in 2001 within the organizational structure of the plant to monitor and ensure compliance with applicable environmental and safety standards. Environmental safeguards and management measures were identified and included in the design of the Project to ensure that the proposed power generating facility is environmentally acceptable. Pollution control and monitoring equipment

11 Other benefits identified, but not quantified both at appraisal and at PCR include: (i) improved system reliability and electricity quality; (ii) reduced maintenance costs for public structures affected by acid rain; (iii) increased employment by businesses using steam; and (iv) increased recreational benefits from new greenbelt areas. 12 Externality cost refers to the cost associated to the impacts of actions taken to produce or consume a good that are not reflected in costs of prices, or otherwise affect those who are not directly involved in or compensated for its production or consumption. 13 were procured, and measures were adopted to minimize the damage of the coal-fired generating plant. About 4% of the project cost, or CNY136 million, was spent for pollution control devices and facilities and environmental protection management. Appendix 13 lists the environmental equipment and facilities that were installed in the power plant.

58. Flue gas desulfurization equipment was not incorporated in the design, as it was envisioned that the coal would have low sulfur and ash content.13 As designed, each boiler had two dual-chamber, four-field electrostatic precipitators, with a collection efficiency of 99.5%. An advanced on-line automatic analysis device also was installed, and YEPB can monitor the emission indices through a digital communication system. XLG reported that these devices are the first of their kind in the PRC. Equipment and facilities for industrial wastewater treatment, waste oil treatment, coal water treatment, and living sewage treatment were also provided. During the PCR mission, a senior staff member of YEPB confirmed the power station’s compliance with the PRC’s environmental standards. Appendix 14 summarizes the data provided on air, water and noise pollution indices, and coal characteristics. An ash disposal site—where ash is gathered, sprayed with water, rolled and compacted—was developed as envisaged at appraisal. About 30% of fly ash is being sold to cement and brick manufacturers, much higher than the insignificant amount expected at appraisal.

59. The closure of old and inefficient plants was included in the Project design to improve air quality. In addition to the establishment of forestry plantations and orchards, new greenbelts were developed as part of the greening of public areas in and around Yuzhou city to absorb the CO2 emissions from the coal consumption.

60. Social Impact. The Project did not have any major resettlement issues, as it was not necessary to relocate people or remove dwelling units. Land acquired for the Project was agricultural and wasteland, and the affected families were compensated in accordance with the PRC’s compensation policy for the transfer of their land use rights. About 60-70% of the compensation was paid directly to the affected families, while the balance was channeled to the cottage industries and services that provide means of livelihood to the community. Although a large concentration of Muslim Hui lives in Yuzhou, the Project did not adversely impact this ethnic minority group. Instead, it provided equal employment and income opportunities, as the construction of the power plant stimulated economic activity in the Yuzhou area. XLG strengthened the social infrastructure by establishing new educational, medical, and recreational facilities to support the increased economic activity. About 4,800 local residents, 15% of whom were women, found temporary employment during project construction. Moreover, the operation of the power plant created permanent employment for 297 people, 29% of whom were female. The additional coal used to operate the plant also provided long-term employment for miners in the Yuzhou coal mines. The benefits from afforestation also accrued to the local people.

61. Capacity Building. The EA regularly provides domestic and international training to its staff on technical and management issues . During project implementation, EPH sent 83 of its staff abroad for 2–4 weeks of training in plant operations and maintenance as well as coal management. Twenty employees from the plant attended another 8-week training session in Beijing on improving maintenance skills. A number of staff underwent training every year on aspects of financial management and planning, accounting, budgeting, and computer systems. The training programs are detailed in Appendix 15. ADB-sponsored training in procurement and project BME improved the staff’s confidence in conducting ICB and monitoring performance. The training programs enhanced the operational and institutional capability of the company and eventually will provide the required competence to face the demands of the restructured power

13 At appraisal, the coal to be used had design value for sulfur content of 0.3% and average ash content of 18%.

14 industry. The allocated foreign training budget was not utilized since a number of foreign training programs were already undertaken under the TA or conducted by the equipment supplier.

62. Enterprise Reforms. EPH recently went through the initial stages of the restructuring in the power sector. This is expected to lay the foundation for the introduction of a market mechanism designed to boost competition and deregulate the generation sector, with the electricity price dictated by market forces. The organizational structures of EPH and XLG are being realigned in preparation for the restructured scenario.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

63. The Government’s strategic priority and ADB’s operational strategy for the power sector in PRC were foremost considerations in formulating and designing the Project. The objective of providing additional generating capacity to address the power shortage in the Henan Province was fully achieved. The construction of a 700 MW coal-fired power plant provided a big boost to the deficient power supply in the grid. Although the commissioning was delayed, project execution was smooth and substantial savings were realized. The power plant is equipped with state-of-the art technology. Its construction and operations, which have performed at a high level, have been recognized by the Government and the construction industry. The environmental and energy efficiency concerns associated with the Project were addressed properly, increasing environmental awareness in the Yuzhou municipality in the process. The financial performance of the project company has not been robust. However, it is expected to improve with the implementation of a higher tariff and the projected increase in utilization of the plant as system-wide demand rises. Going forward, the advantageous position of YTPP as an efficient, base-load facility in the emerging competitive power market should ensure the power plant’s long-term viability.

64. Based on the criteria of relevance, efficacy, efficiency, sustainability, and institutional development and other impacts, the Project is rated highly successful. A summary of the project rating analysis is presented in Appendix 16. A Project Performance Audit may be fielded to review the financial performance of the project after 2 more years of operation. At that time, the reform program enunciated for the power sector restructuring would have been fully implemented.

B. Lessons Learned

65. A strong commitment by the project proponents, and efficient management and execution of experienced and well-trained project implementation staff, consistently have been the primary success factors in most projects in the PRC. Selection and recruitment of competent international as well as domestic consultants have ensured observance of the quality standards required for projects with high investment costs.

66. Detailed technical design and adequate planning and preparation are vital to the smooth and timely execution of a project. Timely availability of the required funds is also essential. Under this Project, availability of funds was not an issue as firm commitments on disbursement requirements were secured beforehand.

67. A properly administered bidding process has been a key factor in obtaining advantageous bid offers. However, the significant savings in project costs have cast doubt on the integrity of the cost estimates. The degree of deviation between the final project cost and the appraisal estimates bolsters the PRC’s view that project cost estimates adopted in ADB projects 15 tend to be overly conservative. In light of the PRC’s track record in generating cost savings under this Project and others, the project preparatory consultants and ADB staff must carefully review the assumptions developed at appraisal.

68. Recommendations to amend the power purchase agreement (PPA) to incorporate international practices have not shown much progress. While the PRC’s power sector is moving toward competitive pricing governed by independent market mechanisms, achieving market- based pricing still could take time. In the interim, the approved tariff levels provided in the PPA should support the requirements for basic operations and debt repayments. On the other hand, the recommendations to include international practices in the PPA would have received a warmer reception in a more open and mature power market. In the PRC’s power sector, the reality is that the seller and buyer of electricity are state-owned, and PPA contract provisions are set by the state. As a result, the EA and IA have found it difficult to comply with ADB’s recommendations. The prevailing institutional constraints in implementing commercial contractual provisions have to be recognized and considered upfront to avoid making them persistent contentious issues during the review of project implementation.

C. Recommendations

1. Project-Related

a. Further Action

69. The change in the EA during project implementation is not unique to the Project. At least three other power projects in the PRC have undergone similar changes. Rather than treat these issues individually, they should be treated as part of the PRC’s power sector restructuring program and addressed to MOF. The necessary amendments may be carried out in the loan and Project documents to reflect the change in the project implementation arrangements. XLG may be designated as the IA, while CDT is designated as the new EA. Nevertheless, further delay in the finalization of the changes is unlikely to jeopardize debt service payments from MOF to ADB.

b. Future Monitoring

70. Occasional monitoring of XLG’s monitoring system and YEPB’s reports by ADB, through the Resident Mission, would help ensure that the environmental safeguard measures designed for the Project are continuously observed.

c. Timing of the Project Performance Audit Report Preparation

71. The Project Performance Audit for the Project can be done in 2005. By that time, the power reform program, which calls for competitive market-based electricity pricing, would have been operational long enough to produce sufficient data to reassess the financial performance of the Project.

2. General

72. Strong ownership and commitment are key factors in implementing critical infrastructure projects involving high investment costs. EPH and XLG demonstrated strong management capability and preparedness in successfully undertaking projects of great magnitude. They have produced a commendable track record in terms of completing the Project without cost overruns or construction delays. The favorable experience with the Project demonstrates that a coal-fired power plant, when properly designed, built and operated, can support sustainable development.

16 Appendix 1

MAJOR EVENTS DURING PROJECT IMPLEMENTATION

A. Loan 1400-PRC: Henan Power Project

21 Apr 1994 Approval of technical assistance (TA) for $100,000 for the preliminary analysis of Fujian Mianhuatan Hydropower and Henan Power Projects and the initial review of the feasibility study submitted by the Borrower (TA 2085-PRC).

23 Dec 1994 Approval of the project preparatory TA for $100,000 to review the feasibility study and environmental impact assessment for the Project (TA 2270-PRC).

26 Feb–15 Mar 1995 Fact-finding mission.

22 May 1995 Management Review Meeting. Approval of advance recruitment of implementation consulting services and procurement with retroactive financing of payments not exceeding $20 million.

2 Jun 1995 Management approval for circulation to the Board of the Summary Environmental Impact Assessment .

30 Jul 1995 Invitations to submit proposals sent to shortlisted firms with a deadline for submission of not later than 1 October 1995.

17 Jul–2 Aug 1995 Appraisal mission.

14 Sep 1995 Staff Review Committee Meeting.

15 Sep 1995 Approval of small scale TA for $90,000 on Improving Environment Monitoring and Enforcement in Henan Province.

22 Sep 1995 Receipt of draft bidding documents for boilers, turbine generators and auxiliaries (BTG) package from the procurement agency, China Electric Power Technology Import and Export Corporation (CETIC).

24–28 Sep 1995 Loan negotiations.

23–24 Oct 1995 Comments on the draft bidding documents for BTG package sent to ADB.

2 Nov 1995 Approval of evaluation report by Electric Power Henan (EPH) on the technical proposals for implementation consulting services.

7 Nov 1995 ADB approval of loan for $200 million from ordinary capital resources (L1400-PRC). Approval of an attached TA grant of $422,000 to help EPH strengthen its system planning capability, including the integration of demand-side and supply-side options (TA 2436-PRC).

14 Nov 1995 ADB approval of the draft bidding documents for BTG package.

30 Nov–6 Dec 1995 ADB Inception mission to follow up on the procurement of BTG package. Special ADB loan administration mission to assist EPH in the contract negotiations with the implementation consultants.

6 Dec 1995 Contract signing for implementation consulting services.

Appendix 1 17

18 Dec 1995 Bidding documents for BTG package issued with 26 March 1996 as deadline for bid submission.

30 Jan 1996 Commencement of field services of implementation consultants.

30 Jan–2 Feb 1996 Pre-bid meeting for BTG package.

29 Mar 1996 Receipt of advice regarding extension of opening of bids for BTG package to 25 April 1996 from 26 March 1996.

25 Apr 1996 Bidding documents for BTG package opened.

18 Jun 1996 Loan and Project agreements signed.

12–19 Sep 1996 Review mission. EPH reports the creation of Xuchang Longgang Generating Co. Ltd. on 5 July 1995 for the purposes of owning the new Yuzhou power plant.

19 Sep 1996 Receipt of advice regarding a second extension of bid validity to 22 April 1997 from 22 Oct 1996.

24 Oct 1996 ADB forwards Borrower’s invitation letter for project cofinancing of $100 million to the Dai-Ichi Kangyo Bank, Ltd. of Hong Kong, China.

30 Oct 1996 ADB follow-up faxes sent regarding the bid evaluation report (BER) for 22 Nov 1996 BTG package. 16 Dec 1996

17–18 Dec 1996 Special review mission to discuss issues holding up the submission of the BER for the BTG package.

20 Dec 1996 ADB follow-up faxes sent regarding the BER for BTG package. 25 Feb 1997 24 Apr 1997 5 Aug 1997

25 Sep 1997 Receipt of advice regarding a third extension of bid validity to 22 Dec 1997 from 22 Oct 1997 and bid security to 22 January 1998 from 22 Nov 1997.

2 Oct 1997 ADB follow-up fax sent demanding receipt of BER for BTG package and copies of correspondence between the procurement agency and the six bidders related to the third extension of bid validity and bid security.

22 Oct 1997 ADB receipt of the BER and copies of correspondence between CETIC and the six bidders related to the extension of bid validity and bid security.

12 Nov 1997 Receipt of bid evaluation report for BTG package.

5 Dec 1997 Receipt of advice regarding a fourth extension of bid validity to 22 May 1998 from 22 Dec 1997

11 Dec 1997 ADB approval of the bid evaluation report for BTG package.

14 Apr 1998 Contract signing for BTG package, valued at $167.99 million.

18 Appendix 1

11 May 1998 ADB approval of Borrower’s request for (i) a reallocation of $8.28 million in loan proceeds from unallocated category to equipment and materials, resulting in the exclusive ADB financing of the BTG package from joint cofinancing to parallel cofinancing, and (ii) the reduction in cofinancing to $40 million from $100 million.

10–15 Nov 1998 Review mission.

18 Dec 1998 Cofinancing agreement signed between the Ministry of Finance (MOF) and the syndicate banks for $100 million.

5 Feb 1999 The subsidiary cofinancing agreement signed between MOF and EPH .

10–15 Sep 1999 Review mission.

May 2000 Completion of central control building.

Jul 2000 Completion of power plant building.

6–10 Dec 2000 Review mission.

Jan 2001 Completion of ash yard and pipelines.

Jan 2001 Completion of installation works for boiler No. 1.

Feb 2001 Completion of installation works for turbine No. 1.

Mar 2001 Commissioning of Unit 1.

Aug 2001 Completion of installation works for turbine No. 2.

1 Aug 2001 ADB approval of extension of loan closing date to 31 October 2001 from 30 June 2001.

Jun 2001 Completion of installation works for boiler No. 2.

Sep 2001 Commissioning of Unit 2.

1 Nov 2001 Loan closing and cancellation of $9.92 million.

12–16 Nov 2001 Review mission.

7–12 Jul 2003 Project completion review mission.

B. TA 2436-PRC: Strengthening Electric Power Henan Power System Planning Capability and Incorporating Integrated Resource Planning

7 Nov 1995 TA approval

7 May 1996 Signing of TA Agreement

14 May 1996 Signing of contract with consultants

17 Jun 1996 Fielding of consultants 14 Aug 1996 Receipt of inception report.

12–19 Sep 1996 First TA review mission and tripartite meeting among ADB, the EA and the consultants.

13 Jan–7 Feb 1997 Consultants develop the prototype for Integrated Resource Planning (IRP).

Appendix 1 19

14 May 1997 Receipt of interim report.

25 May 1998 Receipt of draft final report and the prototype IRP report.

28 Oct–14 Nov 1996 Overseas training of six participants on generation and transmission, demand-side and integrated resource planning.

6–9 Nov 1998 Second TA review mission and tripartite meeting.

8 Jun 1999 Receipt of final report.

22 Jun 2000 Receipt of the final prototype IRP report.

Oct 2000 Closing of TA account

20 Appendix 2

PROJECT COST AND FINANCING PLAN ($ million)

As Appraised Actual Item Foreign Local Total Foreign Local Total

A. Project Cost

1. Part A: Yuzhou Thermal Power Plant a. Land 0 5.27 5.27 0 7.33 7.33 b. Equipment 262.41 118.56 380.97 182.17 52.25 234.42 c. Civil Works 12.35 49.38 61.73 0 57.44 57.44 d. Consultants 0.89 7.71 8.6 0 1.36 1.36 e. Training 0.85 1.81 2.66 0 0.56 0.56 f. Taxes 0 107.72 107.72 0 2.29 2.29 g. Others 0 7.31 7.31 0 59.36 59.36

Subtotal 276.5 297.76 574.26 182.17 180.59 362.76

2. IDC 71.64 190.79 262.43 21.7 2.3 24

Subtotal 348.14 488.55 836.69 203.87 182.89 386.76

3. Part B: Yuzhou Cogen Plant 0 1.28 1.28 0 0 0

4. Part C: Closure of Old Plants 0 4.68 4.68 0 3.86 3.86

5. Part D: Afforestation 0 8.93 8.93 0 8.58 8.58

6. Contingencies 28.86 55.56 84.42 0 0 0

Subtotal 377 559 936 203.87 195.33 399.2

B. Financing Plan

1. Foreign Financing Bank Loan 200 0 200 190.08 0 190.08 Commercial Cofinancing 100 0 100 13.79 0 13.79

2. Domestic Financing 77 559 636 0 112.33 112.33

3. Equity 0 0 0 0 82.99 82.99

Total 377 559 936 203.87 195.32 399.19 IDC = interest during construction. Source: Xuchang Longgang Power Generating Company. Appendix 3 21 `

PROJECTED AND ACTUAL DISBURSEMENTS, 1997–2001

Table A3: Disburement Schedule

For the Year ($ million) Cumulative Year Projected Actual Projected ($ million) Actual ($ million) % of Loan

1997 30.00 0.57 30.00 0.57 0 1998 32.00 22.66 62.00 23.23 12 1999 22.00 49.40 84.00 72.63 38 2000 52.00 79.04 136.00 151.67 80 2001 64.00 38.41 200.00 190.08 100

Total 200.00 190.08 Source: Xuchang Longgang Power Generating Company.

Figure A3: Cumulative Disbursements

220 200 180 160 140 120 Projected ($ million) 100 Actual ($ million)

($ million) 80 60 40 Cumulative Disbursements 20 - 1997 1998 1999 2000 2001 Year PROJECT IMPLEMENTATION SCHEDULE 22 1995 1996 1997 1998 1999 2000 2001 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Appendix 4 Part A. Yuzhou Thermal Power Plant Tendering & Evaluation

Contract Awarding

Power Plant Building

Boiler 1

Boiler 2

Turbine 1

Turbine 2

Instrument, Unit 1

Instrument, Unit 2

Electrical Equipment

Stacks

Central Control Building

Coal Conveying System Hydraulic Building and Equipment

Chemical Water Treatment

Ash Yard and Pipelines

Distribution Equipment Part B: Yuzhou City Plant Conversion into Cogeneration Part C. Closure of Old Power Plants

Zhengzhou Cogen. Power Plant Zhengzhou Thermal Power Plant ` Jiaozuo Thermal Power Plant

Part D. Afforestation Program

Legend: Actual Planned Source: Xuchang Longgang Power Generating Company. Appendix 5 23

ORGANIZATIONAL CHART OF XUCHANG LONGGANG POWER GENERATING COMPANY

Board of Directors

President

Chief Vice Chief Engineer President Accountant

Safety and Operation Security

Maintenance Human Resources

Business Management

Administration

CCP and Labor Union

CCP = Central Communist Party. 24 Appendix 6

COMPLIANCE WITH LOAN COVENANTS

Reference of Status of Covenant Loan Document Compliance Project Implementation 1 Establish staff and operate project Project Agreement Complied with. management unit. (PA), Schedule 6, para. 1 2 E nsure that major technical PA, Schedule 6, Complied with. recommendations under the project para. 2 preparatory technical assistance (TA) from the Asian Development Bank (ADB) are incorporated into the detailed design of the Project. Financial Management and Planning 3 Maintain self-financing ratios not less than PA, Schedule 6, Complied with. 26% in 1996, 27% in 19997, 28% in 1998, para. 3(a) 29% in 1999, and 30% thereafter.

4 Maintain net revenues each fiscal year at a PA, Schedule 6, Complied with. level that will produce internally generated para. 3(b) funds equal to at least 1.5 times the debt service requirements. 6 Submit by 30 April of each year a rolling PA, Schedule 6, Complied with. financial plan for the next 8 fiscal years, para. 4 containing projected income statements, statements of sources and uses of funds, and a balance sheet. 7 Implement, in accordance with a schedule to PA, Schedule 6, Complied with. be agreed with ADB, all recommendations para. 5 resulting from the Power System Planning TA, including those regarding the incorporation of integrated resource planning into the operations of Electric Power Henan (EPH). E lectric Power Henan Enterprise Reform 8 Incorporate EPH as a wholly state-owned, PA, Schedule 6, Not applicable. limited liability company within 12 months of para. 6 (i) promulgation of State Council implementation guidelines, and (ii) the approval of its enterprise reform program by relevant authorities of the Borrower. 9 EPH shall establish its 13 affiliated power distribution bureaus as profit centers and shall operate them on the basis of commercial bulk power transfer contracts between EPH's power generation and

Appendix 6 25

Reference of Status of Covenant Loan Document Compliance transmission operation and the 13 power PA, Schedule 6, Enterprise distribution bureaus, plus the four para. 7 restructuring independent distribution bureaus, within 12 implemented in months of the incorporation of EPH. accordance with PRC’s ongoing power sector restructuring program. Benefit Monitoring and Evaluation 10 Maintain detailed and comprehensive PA, Schedule 6, Complied with. records on the operation of the plant to para. 8 enable the benefits of Part A and C of the Project to be accurately monitored and evaluated. The results shall be reported to ADB in progress reports or as reasonably requested by ADB. Such monitoring and data collection efforts shall continue to be reported to ADB for 5 years following project completion. Tariff Structure 1 1 ADB shall be kept informed, and its PA, Schedule 6, Partly complied with. comments taken into consideration, para. 9 A unified tariff for regarding the design of the revised tariff each consumer structure, which shall (i) reflect the true cost category at the of supply; (ii) provide incentives to provincial level was customers to use optimally and conserve implemented on 1 electricity; (iii) avoid administratively- January 2000, which complex metering and billing; (iv) reduce has allowed tariff discrimination among customers by 31 levels and structures December 1998; and (v) achieve its to be more in line stipulated financial targets. with economic supply costs. 1 2 Obtain necessary approvals from the PA, Schedule 6, Party complied with. authorities for the revised tariff structure, para. 10 While substantial achieving full unification of the dual price progress in tariff system by 31 December 1998. reforms in the province has been made since the Project was started, more tariff reforms are needed to achieve full cost recovery.

26 Appendix 6

Reference of Status of Covenant Loan Document Compliance Full implementation of the tariff level approved in 2000 is expected by the end of 2003. 1 3 ADB shall be incorporated in the design, PA, Schedule 6, Complied with. construction, operation and maintenance of para. 11 the facilities constructed under Part A of the Project. 1 4 An environmental protection unit shall be PA, Schedule 6, Complied with. established within the organizational para. 12 structure of the plant. 1 5 Construction and operation of the plant shall PA, Schedule 6, Complied with. conform to all applicable environmental and para. 13 safety standards of the borrower, and any violations of such standards shall be reported to ADB and promptly corrected. EPH will compile environmental and safety permits for submission to ADB annually. 1 6 Within 7 months of the effective date, EPH PA, Schedule 6, Complied with. shall submit to ADB for approval, on a no- para. 14 objection basis, its design and operation and maintenance plan for the ash disposal pits to be constructed under Part A of the Project. The plan shall incorporate the recommendations made by the consultants under the ADB-financed project preparation TA (TA2270-PRC). 1 7 Ensure that the Henan Province Water PA, Schedule 6, Complied with. Resources Office and the Henan Water para. 15 Conservancy Department make available at all times sufficient water from the Baisha Reservoir to supply the plant, while at the same time maintaining adequate water supply—whether from Baisha Reservoir or underground wells—to 202 square kilometers of farmland being supplied from the Baisha Reservoir 1 8 EPH shall ensure that the coal supplied to PA, Schedule 6, Complied with. the plant is sampled and analyzed regularly para. 16 using the instrumentation and training provided under the ADB-financed TA for strengthening environmental monitoring and enforcement in Henan (TA 2398-PRC).

Appendix 6 27

Reference of Status of Covenant Loan Document Compliance Land Acquisition and Resettlement 19 The transmission lines will be constructed PA, Schedule 6, Complied with. with adequate ground clearance and the para. 17 associated transmission equipment shall not use polychlorinated biphenyl. The routes of the transmission lines shall not encroach on any areas protected under the laws of PRC. 20 N ecessary measures to mitigate potential PA, Schedule 6, Complied with. adverse social impacts of the Project shall para. 18 be taken, including ensuring that the land required for the Project will be free from settlement. If land is expropriated, compensation will be made promptly and in accordance with the laws of PRC. Conversion of Yuzhou Municipality Power Plan to Cogeneration 2 1 Conversion of the Yuzhou Municipality PA, Schedule 6, Not applicable. Thermal Power Plant Units 1 and 2, each para. 19 This component was with a capacity of 6 megawatts (6 MW) to not implemented due cogeneration, and the subsequent closure of to the issuance of a 10 industrial boilers in Yuzhou Municipality. government regulation in 1998 mandating the closure of all coal- fired generating units below 50 MW. Power Plant Closure 2 2 Decommissioning of generating units under PA, Schedule 6, Complied with. Part C of the Project shall be carried out by para. 20 EPH in accordance with applicable PRC environmental and safety standards. Afforestation 2 3 Ensure that Yuzhuo Municipality carries out PA, Schedule 6, Complied with. the afforestation and landscaping activities para. 21 under Part D of the Project in accordance with the schedule agreed with ADB. Cofinancing 2 4 Prepare a schedule outlining cofinancing PA, Schedule 6, Complied with. arrangements and anticipated drawdown of para. 22 the cofinancing proceeds as soon as the contract for turbo generators and boilers has been awarded. Such cofinancing arrangements shall be made in a timely manner to ensure expeditious project implementation to commit the foreign currency funds intended to be provided under the cofinancing. 28 Appendix 7

TECHNICAL ASSISTANCE COMPLETION REPORT

Division: ECID TA No. and Name Amount Approved: $422,000

TA 2436-PRC: Strengthening Electric Power Henan Power Revised Amount: $422,000 System Planning Capability Incorporating Integrated Resource Planning Executing Agency: Source of Funding: TA Amount Undisbursed TA Amount Utilized Electric Power Henan (EPH) Japan Special Fund $422,000 $422,000 Date Closing Date Approval Signing Fielding of Consultants Original Actual 7 Nov 1995 7 May 1996 17 Jun 1996 Jan 1997 Oct 2000 Description

Henan Province is in the central part of the People’s Republic of China (PRC). The Henan power system used to be part of the Central Power Network, which comprised the four provincial networks in Henan, Hubei, Hunan and Jiangxi provinces. The province is supplied by an integrated alternating current transmission grid, which operates at 500 kilovolts (kV), 220 kV and some 110 kV networks. The system frequency is 50 hertz (Hz).

Rapid economic growth in the PRC in the 1990’s was accompanied by strong demand for electricity, which grew at an equivalent pace. Henan Province was one of the provinces that experienced power shortages. In 1994, the maximum load shed1 was 700 megawatts (MW). The system had an annual load factor of 79%, indicating suppressed demand. The Henan power system was characterized by energy intensity that was 37% higher than the national average. The situation suggested that there was considerable scope for introducing demand-side management (DSM), as well as supply-side planning, to meet the growing demand. In addition to the shortage of generating capacity, the reliability and quality of the Henan electricity supply was undermined by inadequate transmission line capacity, ineffective voltage regulation, and system instability. Electric Power Henan (EPH), the provincial power utility, adopted a two-pronged strategy using the least expensive option for generation capacity expansion, accompanied by energy conservation measures, to try to meet electricity demand requirements.

Objectives and Scope

The technical assistance (TA) aimed to assist EPH in developing (i) the least expensive generation expansion plan, as well as a long-term transmission master plan, to ensure a quantity and quality of supply that is economically viable and environmentally acceptable; and (ii) an integrated resource plan (IRP) that brings together supply-side options with achievable demand-side options , including attendant environmental, social and economic analyses . The TA also was to provide on-the-job training and the necessary computer hardware and software to EPH.

Evaluation of Inputs

The design of the TA and terms of reference (TOR) for the consultants were considered appropriate in meeting the objectives of the TA. A consulting firm from Australia provided about 7 person-months of international and 10 person- months of domestic consulting services over about 2 years. It took another year to review and incorporate the necessary changes before the final report could be submitted. Submission of the Prototype IRP Report, which forms part of the Final Report, required another year The consulting team comprised six specialists in the fields of power economics and power system planning, including integrated resource planning. The consultants provided their expertise in the development of the prototype IRP, administered the study tours, conducted the training programs, and selected the appropriate hardware and software packages. EPH provided the necessary office facilities, relevant data and statistics, and knowledgeable counterpart staff. ADB staff provided the required support in the coordination of the various activities involved.

Evaluation of Outputs

The contract with the consultants was signed on 14 May 1996 and fieldwork began 17 June 1996. The first tripartite meeting was held in September 1996. The Bank received the Inception Report on 14 August 1996, the Interim Report on 14 May 1997, and the Draft Final Report on 22 May 1998. The second tripartite meeting was held on 6 November 1998 to discuss the Draft Final Report. On 8 June 1999, the Final Report was received. The Final Report on Prototype IRP 1 Load shedding is the switching off of electricity supply to selected consumers during periods of peak demand to achieve power demand and supply balance. Appendix 7 29 to discuss the Draft Final Report. On 8 June 1999, the Final Report was received. The Final Report on Prototype IRP was received on 22 June 2000. A 2-week overseas study training on generation and transmission, DSM and IRP, was held in Western Europe in November 1996. The exposure to modern practices and new learning were considered useful for system planning and the conduct of IRP at EPH. The topics included (i) the integration of environmental protection and energy efficiency, and (ii) exposure to DSM, which is the key perspective in IRP analysis and implementation. The training provided EPH staff a general knowledge of how to undertake a rigorous DSM analysis. The appropriate computer hardware and software models were identified under a stringent process, and its capabilities were explored and applied by EPH planners.

The performance of the international and domestic consultants was fully satisfactory. The mid-term reports and Final Report, including the Final Report on Prototype IRP, were comprehensive and well written. The IRP report was considered useful, and many recommendations were implemented. Through the TA, EPH also procured three software packages: (i) a generation system expans ion planning model with complete functions , which allows optimization of the load requirement and the designated reliability index; (ii) a transmission system analysis model with multi-calculation functions , providing a better man-machine interface; and a (iii) DSM analysis planning model. The consultants and software vendors conducted on-the-job-training using the hardware and software packages acquired under the TA. The software packages were used by EPH and its affiliated design and research institutes in the preparation of EPH’s long- term plans. However, with EPH becoming a pure network company under the PRC’s power sector restructuring, the utility of the generation planning software for EPH has ceased. The transmission planning software remains useful.

Overall Assessment and Rating

Despite the delay in the submission of the Final Report on Prototype IRP, the TA is rated successful, as the objectives and the expected outputs were met satisfactorily. The recommendations were being implemented, and EPH utilized the procured planning models before the Final Report was submitted.

Major Lessons Learned

The implementation process took longer than envisioned. In future TAs, a more realistic schedule for completion needs to be considered to take into account the complexities of the process and the time required to integrate necessary revisions into the final output. The delay encountered on the submission of the Final Report was attributed to the resignation of the key consulting staff as the project drew to completion. Incorporating safeguards in the consulting contract should be explored to avoid such situations.

Recommendations and Follow-Up Actions

No further action is recommended.

Prepared by: Merlita Pajarillo Designation: Energy Specialist (Financial)

30 Appendix 8

SUMMARY OF ASIAN DEVELOPMENT BANK-FINANCED CONTRACTS

PCSS Country of $ Mode of Date of Date of No. Procurement Item Equivalent Procurement Approval Contract

0001 US Consulting Services 390,545 ICB 02-Nov-95 06-Dec-96 0002 US Boilers, Turbines, Generators 167,989,000 ICB 11-Dec-97 14-Apr-98

Number of Contracts 2

Amount $168,379,545

ICB = international competitive bidding, PCSS = procurement contract summary sheet, US = United States. Appendix 9 31

FINANCIAL PERFORMANCE OF PROJECT ENTERPRISES

1. The financial performance of Electric Power Henan (EPH) has been satisfactory. EPH’s profitability over the past 5 five years has been favorable. The financial covenants in the Loan Agreement have been met. The long-term projections, however, were not available. The financial profile of EPH as a pure network company is expected to be different. Due to the transfer of ownership of Xuchang Longgang Power Generating Company (XLG) to China Datang Corporation (CDT), the project completion review mission did not review the financial prospects of EPH any further. On the other hand, while financial information on CDT is not available, the company is a large power utility with registered capital of CNY12 billion and an asset base of CNY72 billion (para. 25). The financial capability of CDT to act as the new Executing Agency (EA) does not seem to be a problem.

2. The financial performance of XLG as the Implementing Agency (IA) is generally satisfactory. However, XLG’s low tariff, approved by the Provincial Price Bureau, remains a concern. It is insufficient to allow full cost recovery and provide adequate funds for investment. XLG’s revenue is also wholly dependent on the volume of energy generation and the dispatch schedule set by EPH. As these two factors are the main determinants of profitability, the financial viability of the Project hinges largely on the internal arrangements embodied in the power purchase agreement (PPA) with EPH. Nevertheless, the company generates sufficient cash to cover its debt service requirements. The long-term financial projections, prepared on the basis of existing and projected tariff levels, show that XLG would maintain a reasonably sound financial position that would enable the company to meet the financial loan covenants of the Asian Development Bank (ADB). While the tariff level of CNY0.27 per kilowatt-hour (kWh) ($0.033 per kWh) is not adequate, XLG’s analysis indicates that the approved level of CNY0.31 per kWh ($0.037 per kWh)—expected to be implemented in early 2004—would allow full cost recovery. Increased plant utilization also would improve the plant’s profitability. In addition, the long-term prospects of the company remain positive due to the plant’s efficiency and advantageous position as a base-load facility. This should enable the power plant to remain successful in the emerging competitive power market, and should ensure its long-term financial viability. 32 Appendix 9

FINANCIAL PERFORMANCE OF PROJECT ENTERPRISES

Table A9.1 : Electric Power Henan Income Statements (CNY million)

Year Ending 31 December 1995 1996 1997 1998 1999 2000 2001 2002

Operating Data Energy Sales (GWh) 36,924 39,732 43,535 43,135 47,628 51,804 57,427 65,480 Increase in Energy Sales (%) 11.8 7.6 9.6 (0.9) 10.4 8.8 10.9 14.0 Average Tariff (without VAT) Average Tariff (with VAT, f/kWh) 24.1 28.00 31.80 32.70 33.00 34.75 34.65 34.86 Increase in Tariff with VAT (%) 11.1 16.2 13.6 2.8 0.9 5.3 (0.3) 0.6 Revenues and Expenses

Revenues

Electricity (with VAT) 9,043 11,280 13,983 14,235 15,817 18,006 19,900 22,832 VAT 1,314 1,639 2,032 2,068 2,298 2,616 1,891 3,317 Other Revenues 1,216 2,075 4,856 Net Operating Revenues 7,729 9,641 11,951 12,167 13,519 16,606 20,084 24,371 Operating Costs Fuel 2,046 1,878 1,534 1,221 1,066 1,342 1,629 2,168 Purchased Power 2,394 4,350 6,844 7,430 8,909 9,809 10,656 13,746 Operation and Maintenance 1,094 1,106 1,104 1,183 1,463 2,969 4,464 3,979 Administrative Costs 651 756 831 834 650 266 411 444 Depreciation 805 904 926 993 1,098 1,547 1,977 2,642

Total Operating Costs 6,990 8,994 11,239 11,661 13,186 15,933 19,137 22,979

Other Operating Income 0 65 142 167 199 271 303 366 Operating Income 739 712 854 673 532 944 1,250 1,758 Financial Expenses 208 135 427 391 410 733 1,117 1,532 Non-operating Income/(Loss) (20) (27) (27) 119 289 130 226 163 Net Income Before Tax 511 550 400 401 411 341 359 389 Income Tax 167 181 132 168 108 119 126 180 Net Income 344 369 268 233 303 206 243 232 Ratios Rate Basea (CNY million) 12,176 12,211 12,096 12,953 17,465 26,968 34,604

Operating Ratiob (%) 93.3 94.0 95.8 97.5 95.9 95.3 94.3

Return on Rate Basec (%) 4.3 5.8 4.6 3.9 5.0 4.5 4.8 d Return on Equity (%) 4.4 5.9 4.2 3.3 4.7 4.2 4.6 f/kWh =fen per kilowatt-hour, GWh = gigawatt-hour, VAT = value-added tax.

a Average of beginning and ending net fixed assets. b Total operating expenses as a percentage of total revenues. c Net operating income after taxes as a percentage of rate base. d Net income as a percentage of total equity. Source: Submitted financial statements. Some adjustments were made in the cashflow statements for reconciliation purposes.

Appendix 9 33

Table A9.2 : Electric Power Henan Balance Sheets (CNY million)

Year Ending 31 December 1995 1996 1997 1998 1999 2000 2001 2002

Assets Fixed Assets Plant in Service 17,352 17,662 17,401 18,751 20,891 30,585 43,780 50,038 Accumulated Depreciation 5,550 5,113 5,529 6,432 7,305 9,241 11,188 13,423

Net Plant in Service 11,802 12,549 11,872 12,319 13,586 21,344 32,592 36,615 Construction Work in Progress 5,624 3,277 3,378 1,450 4,940 8,408 4,560 4,024 Total Fixed Assets 17,426 15,826 15,250 13,769 18,526 29,752 37,152 40,639 Othe r Asse ts Intangible and Deferred Assets 331 769 415 341 47 252 260 202 Long-Term Investments 388 663 1,156 2,919 3,561 1,520 2,610 2,579 Total Other Assets 719 1,432 1,571 3,260 3,608 1,772 2,870 2,781 Current Assets Cash 1,305 1,219 1,971 2,469 4,332 3,958 3,509 3,561 Accounts Receivable 253 474 981 848 1,413 1,154 1,123 1,270 Other Accounts Receivable Inventories 265 346 297 257 327 512 455 539 Other Current Assets 1,434 3,520 5,691 5,761 3,961 4,043 4,706 4,151 Total Current Assets 3,257 5,559 8,940 9,335 10,033 9,667 9,793 9,521 Total Assets 21,402 22,817 25,761 26,364 32,167 41,191 49,815 52,941

Equity and Liabilities

Equity Paid-in Capital 4,841 4,286 5,667 5,280 5,280 5,296 4,838 4,838 Capital Surplus 3,401 3,909 4,403 4,993 5,536 6,227 7,669 8,198 Undistributed Profit 0 0 62 0 6 87 358 314 Reserves and Retained Earnings 752 1,067 1,212 1,226 1,553 (259) (263) (12) Total Equity 8,994 9,262 11,344 11,499 12,375 11,351 12,602 13,338 Long-Term Debt 10,465 9,926 8,568 7,704 12,890 22,535 24,386 24,773 Current Liabilities Accounts Payable 669 1,139 2,657 2,425 2,439 2,161 3,586 3,327 Short-Term Loan 205 795 1,276 971 1,091 900 1,804 3,083 Tax Payable 180 249 359 140 89 106 3 104 Other Payables 889 1,446 1,557 3,625 3,283 3,175 6,646 7,608 Total Current Liabilities 1,943 3,629 5,849 7,161 6,902 6,342 12,039 14,122 963 788 708

Total Equity and Liabilities 21,402 22,817 25,761 26,364 32,167 41,191 49,815 52,941

Ratios Current Ratioa (x) 1.7 1.5 1.5 1.3 1.5 1.5 0.8 0.7 Debt/(Debt +Equity) Ratiob (%) 53.8 51.7 43.0 40.1 51.0 66.5 65.9 65.0 a Ratio of current assets to current liabilities. b Ratio of total long-term debt to long-term debt plus equity. Source: Submitted financial statements. Some adjustments were made in the cashflow statements for reconciliation purposes.

34 Appendix 9

Table A9.3 : Electric Power Henan Cash Flow Statements (CNY million)

Year Ending 31 December 1995 1996 1997 1998 1999 2000 2001 2002

Sources Net Income After Tax 344 369 268 233 303 206 243 232

Add: Depreciation 805 904 926 993 1,098 1,547 2,048 2,729

Other Non-cash Items 331 769 391 341 47 1,241 907 1,012 Interest 208 135 427 391 410 944 1,169 1,611 Internal Cash Generation 1,688 2,177 2,012 1,958 1,858 3,938 4,367 5,584

Long-Term Borrowings 3,245 2,904 3,949 3,963 5,841 5,916 6,798 5,296

Equity Contribution 234 35 47 0 0 102 156 255 Others 659 162 951 1,105 1,748 1,817 1,942 1,349 Total Sources 5,826 5,278 6,959 7,026 9,447 11,773 13,263 12,484

Applications

Capital Expenditures 3,956 4,123 4,328 3,681 5,061 5,648 6,897 7,168 Debt Service 1,171 1,258 1,856 1,861 2,155 3,900 4,202 4,698 Principal Repayments 963 1,123 1,429 1,470 1,745 2,956 3,033 3,087 Interest 208 135 427 391 410 944 1,169 1,611

Other payments/movements 0 0 0 0 0 3,443 2,164 Long-Term Investment 72 0 0 15 356 187 514 599 Dividends 401 Changes in Working Capital/Others 311 (17) (378) 971 12 (1,031) (65) (33)

Others (Balancing Figure) 140 (1) (855) 971 12 (1,031) (65) (33) Total Applications 5,510 5,364 6,207 6,528 7,584 12,147 13,712 12,432 Net Cash Flow 316 (86) 752 498 1,863 (374) (449) 52 Cash, Beginning 989 1,305 1,219 1,971 2,469 4,332 3,958 3,509

Cash, End 1,305 1,219 1,971 2,469 4,332 3,958 3,509 3,561 Ratios Debt Service Ratioa 1.4 1.7 1.1 1.1 0.9 1.0 1.0 1.2

Self-Financing Ratiob 5.0 22.6 13.2 (20.1) (6.4) 18.2 3.5 19.6 a Ratio of internal cash generation to debt service requirement. b Internal cash generation net of changes in working capital and debt service as a percentage of the three-year moving average

of capital expenditures.

Source: Submitted financial statements. Some adjustments were made in the cashflow statements for reconciliation purposes.

Appendix 9 35

Table A9.4 : Xuchang Longgang Power Generating Company Income Statements (CNY million)

Year Ending 31 December 2001 2002 Operating Data Energy Sales (GWh) 959 3,014 Increase in Energy Sales (%) 0 214.3 Average Tariff (without VAT, fen/kWh) 16.7 22.6 Average Tariff (with VAT, fen/kWh) 19.60 26.50 Increase in Tariff (with VAT, %) 0 35.2

Revenues and Expenses

Total Operating Revenues 160 682

Operating Costs

Fuel 89 227

Purchased Power 8 0

Operation and Maintenance 23 115

Depreciation 77 246

Administrative Costs 4 15

Total Operating Costs 200 603

Operating Income (40) 79 Financial Expenses 49 144 Non-Operating Income/(Expense) 1 3 Net Income Before Tax (88) (62) Income Tax 0 0 Net Income (88) (62) Ratios a Rate Base (CNY million) 0 2,993 b Operating Ratio (%) 124.9 88.4 c Return on Rate Base (%) 0 2.6 d Return on Equity (%) 0 f/kWh = fen per kilowatt-hour, GWh = gigawatt-hour, VAT = value added tax. a Average of beginning and ending net fixed assets. b Total operating expenses as a percentage of total revenues. c Net operating income after taxes as a percentage of rate base. d Net income as a percentage of total equity. Source: Submitted financial statements. Some adjustments were made in the cashflow statements for reconciliation purposes.

36 Appendix 9

Table A9.5 : Xuchang Longgang Power Generating Company Balance Sheets (CNY million)

Year Ending 31 December 2001 2002 Asse ts Fix e d Asse ts Gross Fixed Assets 3,238 3,158 Accumulated Depreciation 83 328 Net Fixed Assets in Service 3,155 2,830 Construction Work in Progress 37 3 Intangible and Deferred Assets 29 29 Net Fixed Assets 3,221 2,862

Long-term Investment 67

Current Assets Cash 164 181

Accounts Receivable, Net 85 153

Other Accounts Receivable

Inventories 11 72

Other Current Assets 53 45 Total Current Assets 313 451

Total Assets 3,540 3,321

Equity and Liabilities

Equity

Paid-In Capital 693 693

Reserves and Retained Earnings (87) (149)

Total Equity 606 544

Long-Term Debt

Long-Term Loan 2,478 2,440

Other Long-Term Liabilities 00

Total Long-Term Debt 2,478 2,440

Current Liabilities

Short-Term Loan 20 0

Accounts Payable 350 76

Long-Term Debt Due in One Year 0 97

Welfare and Salary Payable 2 47

Taxes Payable 5 22

Others 80 96 Total Current Liabilities 456 337

Total Equity and Liabilities 3,540 3,321

Ratios a Current Ratio (x) 0.7 1.3 Debt/(Debt +Equity) Ratiob (%) 80.4 81.8 a Ratio of current assets to current liabilities. b Ratio of total long-term debt to long-term debt plus equity. Source: Submitted financial statements. Some adjustments were made in the cashflow statements for reconciliation purposes.

Appendix 9 37

Table A9.6 : Xuchang Longgang Power Generating Company Cash Flow Statements (CNY million)

Year Ending 31 December 2001 2002

Sources

Net Income After Tax (88) (62) Add: Depreciation 77 246 Interest 49 144 Internal Cash Generation 38 328 Borrowings 743 191 Cash from Investments 168 1

Others 23 0

Total Sources 972 520 Applications Capital Expenditures 748 104 Debt Service 159 290 Principal 110 134 Interest 49 156 Changes in Working Capital/Others 82 109 Total Applications 989 503 Net Cash Flow (17) 17 Cash, Beginning 181 164 Cash, End 164 182 Ratios Debt Service Ratioa 0.2 1.1 Self-Financing Ratiob 0 (7.0) a Ratio of internal cash generation to debt service requirement. b Internal cash generation net of changes in working capital and debt service as a percentage of the three-year moving average of capital expenditures. Source: Submitted financial statements. Some adjustments were made in the cashflow statements for reconciliation purposes. 38 Appendix 10

FINANCIAL EVALUATION

A. General

1. The financial internal rate of return (FIRR) for the Project was calculated only for Part A, because the other components have no material financial benefits. Although a separate financial analysis was done for Part B at appraisal, no evaluation could be done for this component for the project completion report (PCR) because its partial implementation did not allow the generation of revenues. The FIRR was reevaluated on the basis of financial and operational information provided by Xuchang Longgang Power Generating Company (XLG). Investments made for the Project were considered. The economic life of the plant, assumed at appraisal to be 20 years, was maintained, with zero residual value. All revenues and expenditures are in constant 2003 prices and exclude depreciation and interest.

B. Revenues and Operating Costs

2. Incremental revenues were calculated based on the energy output from the Yuzhou Thermal Power Plant (YTPP) with the expected annual operation of 5,500 hours, or an annual energy generation of 3,850 gigawatt-hours (GWh). Plant utilization and losses were assumed at 5.6%. Revenues from the start of operations until mid-2003 also were considered. The tariff level of CNY0.31 per kilowatt-hour (kWh), including the value-added tax, was used in the projections and was assumed to be constant during the projection period. Operating and maintenance costs were assumed to remain at current levels. Value-added, income and other taxes were based on actual rates.

C. Financial Internal Rate of Return

3. The recalculated FIRR of the Project was 12.4%, the same level estimated at appraisal. The FIRR at PCR remained high despite the tariff that was 16% lower than assumed level of CNY0.37 per kWh at appraisal. Significantly lower investment cost (less than half the amount estimated at appraisal) was the main factor in sustaining the high FIRR. The FIRR of the Project is also much higher than the weighted average cost of capital (WACC) of 4.8%.

D. Weighted Average Cost of Capital

4. The estimated WACC for the Project—in real terms, after taxes—was derived following the methodology in the Asian Development Bank’s Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank using actual capital mix and costs of funds. The real interest costs of loan funds were considered, while the cost of equity was assumed to be 10%. Actual income tax rate was used. The standard income tax rate in the PRC is 33%, although preferential rates are given in some inland provinces. Domestic inflation is assumed at 3% per year.

5. The recalculated WACC is 4.8%, compared to 3.0% estimated at appraisal. The WACC calculated at appraisal, using a different methodology, assumed varying levels for the costs of debt and equity and a higher inflation rate.

Appendix 10 39

FINANCIAL INTERNAL RATE OF RETURN (CNY million )

Net Capital Operating Costs Cash Flow Year Costs Revenues Fuel Other O&M After Tax

1995 (59.5) (59.5) 1996 (69.1) (69.1) 1997 (91.5) (91.5) 1998 (161.0) (161.0) 1999 (686.4) (686.4) 2000 (1,011.2) (1,011.2) 2001 (614.1) 159.4 89.0 26.8 (570.6) 2002 (187.3) 675.8 227.4 108.7 152.4 2003 816.2 273.5 120.6 412.0 2004 946.6 271.0 120.6 498.2 2005 946.6 271.0 120.6 495.3 2006 946.6 271.0 120.6 492.4 2007 946.6 271.0 120.6 489.6 2008 946.6 271.0 120.6 486.7 2009 946.6 271.0 120.6 483.9 2010 946.6 271.0 120.6 481.0 2011 946.6 271.0 120.6 478.2 2012 946.6 271.0 120.6 475.3 2013 946.6 271.0 120.6 472.5 2014 946.6 271.0 120.6 429.2 2015 946.6 271.0 120.6 385.3 2016 946.6 271.0 120.6 382.4 2017 946.6 271.0 120.6 380.1 2018 946.6 271.0 120.6 378.3 2019 946.6 271.0 120.6 376.4 2020 946.6 271.0 120.6 374.6 2021 946.6 271.0 120.6 372.8 2022 946.6 271.0 120.6 371.8 2023 946.6 271.0 120.6 371.8 2024 946.6 271.0 120.6 371.8 2025 946.6 271.0 120.6 371.8

Total (2,692.8) 22,476.3 6,552.8 2,908.6 7,334.7

FIRR = 12.4% O&M = operation and maintenance. Source: Xuchang Longgang Generating Company and ADB Estimates. 40 Appendix 11

ECONOMIC EVALUATION

A. General

1. The economic evaluation was done only for Part A since Part B did not materialize as envisaged at appraisal and the impact of Part C was effectively considered in the valuation of benefits. The benefits of Part D identified at appraisal were not quantified, though they have the potential to absorb the incremental carbon dioxide (CO2 ) resulting from the Project. Incremental costs and benefits for the Project were determined. The economic life of the generating plant, assumed at appraisal to be 20 years, was maintained. The residual value at the end of the economic life was assumed to be zero. All costs and benefits were expressed in 2003 constant prices.

B. Capital Costs, Incremental Benefits, and Operating Costs

2. Imported equipment was valued at its actual cost, while local equipment was shadow priced by applying the appropriate conversion factor.1 Taxes, import duties, and all financial charges, including interest during construction, have been excluded. Other tradable and non- tradable costs were valued using the appropriate conversion factors.

3. As at appraisal, the economic benefits were derived from (i) resource cost savings from the displacement of inefficient generation by small coal-fired plants, and (ii) incremental energy supplied to consumers. The incremental energy supply is divided into: (i) the supply to existing consumers, which is measured at the current tariff for consumers; and (ii) the supply to new consumers, measured in terms of a consumer’s willingness to pay (WTP). The WTP was estimated at CNY0.62 per kWh, based on the cost of alternative electricity supplies and an assumed 35% consumer surplus adopted from appraisal. A survey was not undertaken at PCR to establish an updated consumer demand curve. However, updated assumptions on the cost of alternative electricity supplies, customer profile in Henan Province, and consumer tariffs by consumer category were used to determine the WTP.

4. Other benefits identified at appraisal, which remain valid at project completion, include: (i) improved system reliability and electricity quality, (ii) reduced maintenance costs for public structures affected by acid rain, (iii) increased employment by businesses using steam, and (iv) increased recreational benefits from new greenbelt areas. These benefits were not quantified.

5. The economic price of coal was calculated using its border price, adjusted by the transportation and handling costs in Henan Province. Other operating costs, including water, salary and welfare, and maintenance, were converted to their economic costs using the standard conversion factor. Transmission and distribution costs were assumed based on their long-run marginal cost in the People’s Republic of China. The cost of environmental pollution resulting from the consumption of coal for the Project was quantified by taking into account the externality costs2 for air pollutants, including total suspended particulates (TSP), sulfur dioxide (SO2), nitrogen oxides (NOx), and carbon dioxide (CO2). The calculation followed the benefit transfer method described in the Asian Development Bank’s Economic Evaluation of Environmental Impacts – A Workbook.

1 The conversion factors used in this evaluation are 1.1 for civil works, 1.1 for local machinery, and 0.93 for others. 2 Externality costs refers to the cost associated to the impacts of actions taken to produce or consume a good that are not reflected in costs of prices, or otherwise affect those who are not directly involved in or compensated for its production or consumption. Appendix 11 41

C. Economic Internal Rate of Return

6. The economic internal rate of return (EIRR) is recalculated at 14.5%, which is higher than the 13.5% estimated at appraisal and ADB’s 12% hurdle rate for the economic opportunity cost of capital. The higher EIRR is due to the lower capital cost of the power plant and lower operating costs. Factoring in the externality cost of TSP, SO2, and NOx, the EIRR would be 13.5%. This drops to 12.5% when the externality cost of CO2 is included.

ECONOMIC INTERNAL RATE OF RETURN 42 (CNY million)

Economic Benefits Operating Costs Net Local Net Local+Global Net Year Capital Resource Incremental Energy Operation & Transmission Economic Externality Economic Externality Economic Appendix 11 Costs Savings(EPH) Existing New Fuel Maintenance & Distribution Benefits Cost Benefits Cost Benefits

1995 (61.1) (61.1) (61.1) (61.1) 1996 (71.0) (71.0) (71.0) (71.0) 1997 (93.9) (93.9) (93.9) (93.9) 1998 (161.0) (161.0) (161.0) (161.0) 1999 (693.5) (693.5) (693.5) (693.5) 2000 (3,022.1) (3,022.1) (3,022.1) (3,022.1)

2001 (2,624.3) 34.0 15.7 57.4 91.3 26.8 60.0 (2,695.4) 15.3 (2,710.7) 38.7 (2,734.1)

2002 (192.3) 24.3 275.2 1,007.5 285.3 108.7 60.0 660.7 50.3 610.4 123.3 537.4 2003 24.3 349.4 1,279.2 347.9 120.6 60.0 1,124.4 64.4 1,060.0 153.5 970.9 2004 24.2 346.1 1,267.3 344.7 120.6 60.0 1,112.2 67.0 1,045.2 155.3 956.9 2005 24.1 346.2 1,267.6 344.7 120.6 60.0 1,112.6 70.4 1,042.3 158.6 954.0 2006 23.9 346.8 1,269.6 344.7 120.6 60.0 1,114.9 73.9 1,041.1 162.1 952.8 2007 18.1 362.8 1,328.5 344.7 120.6 60.0 1,184.0 77.6 1,106.5 165.8 1,018.2 2008 12.6 377.8 1,383.4 344.7 120.6 60.0 1,248.5 81.4 1,167.1 169.7 1,078.8 2009 7.3 392.6 1,437.6 344.7 120.6 60.0 1,312.1 85.5 1,226.6 173.8 1,138.4

2010 412.7 1,511.0 344.7 120.6 60.0 1,398.3 89.8 1,308.5 178.1 1,220.2

2011 412.7 1,511.0 344.7 120.6 60.0 1,398.3 94.3 1,304.0 182.5 1,215.7 2012 412.7 1,511.0 344.7 120.6 60.0 1,398.3 99.0 1,299.3 187.3 1,211.0 2013 412.7 1,511.0 344.7 120.6 60.0 1,398.3 103.9 1,294.3 192.2 1,206.1 2014 412.7 1,511.0 344.7 120.6 60.0 1,398.3 109.1 1,289.1 197.4 1,200.9 2015 412.7 1,511.0 344.7 120.6 60.0 1,398.3 114.6 1,283.7 202.9 1,195.4 2016 412.7 1,511.0 344.7 120.6 60.0 1,398.3 120.3 1,278.0 208.6 1,189.7 2017 412.7 1,511.0 344.7 120.6 60.0 1,398.3 126.3 1,271.9 214.6 1,183.7 2018 412.7 1,511.0 344.7 120.6 60.0 1,398.3 132.7 1,265.6 220.9 1,177.4 2019 412.7 1,511.0 344.7 120.6 60.0 1,398.3 139.3 1,259.0 227.6 1,170.7

2020 412.7 1,511.0 344.7 120.6 60.0 1,398.3 146.3 1,252.0 234.5 1,163.8 2021 412.7 1,511.0 344.7 120.6 60.0 1,398.3 153.6 1,244.7 241.8 1,156.5 2022 412.7 1,511.0 344.7 120.6 60.0 1,398.3 161.3 1,237.0 249.5 1,148.8 2023 412.7 1,511.0 344.7 120.6 60.0 1,398.3 169.3 1,229.0 257.6 1,140.7 2024 412.7 1,511.0 344.7 120.6 60.0 1,398.3 177.8 1,220.5 266.0 1,132.2 2025 412.7 1,511.0 344.7 120.6 60.0 1,398.3 186.7 1,211.6 274.9 1,123.4

Total (6,919.2) 192.7 34,473.7 8,309.0 2,909.5 1,500.0 24,444.2 2,710.1 21,734.1 4,837.3 19,606.8

EIRR 14.5% 13.5% 12.5%

EIRR = economic internal rate of return. Source: Asian Development Bank estimates. Appendix 12 43

OPERATING PERFORMANCE

Table A12.1: Availability and Reliability (2002)

Item Unit 1 % Unit 2 % Generation (hours) 6,589 75.2 6,277 71.7 Standby (hours) 530 6.1 2,097 23.9 Planned outages (hours) 1,268 14.5 227 2.6 Forced outages (hours) 372 4.2 158 1.8 Total (hours) 8,760 100.0 8,760 100.0 Availability (%) 81.3 95.6 Equivalent Reliability Rate (%) 81.0 95.3 Source: Xuchang Longgang Power Generating Company.

Table A12.2: Efficiency (2002-2003)

2003 Item Unit 2002 Jan to June Generation (gross) TWh 3.186 1.836 Sales (net) TWh 3.014 1.738 Coal consumption net g/kWh 320.7 316.8 Coal consumption gross g/kWh 340.6 335.8 g/kWh = grams per kilowatt-hour, TWh = terawatt-hour. Source: Xuchang Longgang Power Generating Company. 44 Appendix 13

INVESTMENTS FOR ENVIRONMENTAL IMPROVEMENT

Amount Type of Equipment or Process (CNY million)

Electrostatic Precipitator 37.47 Smoke stack 11.98 Ash yard rolling and spraying equipment 2.24 Sprinkler for coal transport 0.14 Industrial waste water station 12.74 Living sewage treatment station 2.60 Silencer 0.16 Plant afforestation 3.10 Oil-water separation device 0.36 Acid caustic neutralization equipment 1.37 Coal mud sedimentation pond 2.23 Coal water treatment station 4.11 Coal yard sprinkling system 0.55 Ash handling system 36.68 Ash yard 7.10 Oil-water treatment station 0.75 Ash transportation 6.25 Pyrite handling system 6.19

Total 136.03

Source: Xuchang Longgang Power Generating Company. Appendix 14 45

ENVIRONMENTAL MONITORING INDEXES

Table A14.1: Air Pollution Indexes

PRC Before Parameter Unit Standard Project 2001 2002 2003 SO2 mg/m3 0.15 0.017 0.019 0.021 0.021 TSP mg/m3 0.30 0.197 0.212 0.203 0.202 NOx mg/m3 0.10 0.017 0.018 0.023 0.022

NOx = nitrogen oxides, SO2 = sulfur oxide, TSP = total suspended particulates. Source: Xuchang Longgang Power Generating Company.

Table A14.2: Wastewater Pollution Indexes

PRC Before Parameter Unit Standard Project 2001 2002 2003 pH mg/l 6~9 n.a. 8.18 8.21 8.20 SS mg/l = 70 n.a. 34 37 35 CODCr mg/l = 100 n.a. 51 48 52 CODCr = chemical oxygen demand, pH = potential hydrogen, SS = suspended substance. Source:Xuchang Longgang Power Generating Company.

Table A14.3: Plant Boundary Noise Levels

PRC Before Unit Standard Project 2001 2002 2003 Daytime decibels = 60 Highest decibels 56 57 57 Lowest decibels 53 54 54 Nighttime decibels = 50 Highest decibels 46 46 46 Lowest decibels 41 42 42 Source: Xuchang Longgang Power Generating Company.

Table A14.4: Raw Coal Analysis

Design Parameters Unit Value Range 2001 2002 2003 Ash % 18.16 13.4 - 24.61 22.40 24.71 23.28 Sulfur % 0.29 0.21 - 0.34 0.37 0.34 0.31 Calorific Value MJ/kg 26.50 24.89 - 27.69 24.48 23.89 24.18 Volatility % 15.88 13.50 - 17.93 15.96 17.40 16.77 Moisture % 4.00 1.57 - 8.91 5.45 4.68 4.94 Carbon % 69.15 60.20 58.50 59.40 Ash fusion Temperature oC > 1500 >1400 >1400 >1400 Hargrove Grindability Index 158 121 115 117 MJ/KG = megajoules per kilogram, 0C = degrees celcius. Source: Xuchang Longgang Power Generating Company. 46 Appendix 15

TRAINING PROVIDED UNDER THE PROJECT

No. of Description Duration Participants Date Venue

Boiler Operation 4 weeks 13 May 2000 Orlando, US

Turbine Maintenance 4 weeks 15 May 2000 Orlando, US

Turbine Operation 4 weeks 19 Jun 2000 Orlando, US

Power Plant Maintenance 2 weeks 16 Jun 2000 Wickliffe, US

Power Plant Operations 2 weeks 14 Jun 2000 Wickliffe, US

Ash Handling Operations 2 weeks 6 Nov 2000 Sydney, Australia

Power Plant Operations 8 weeks 20 Aug 2000 Beijing, PRC and Maintenance

PRC = People’s Republic of China, US = United States. Source: Xuchang Longgang Power Generating Company.

PROJECT RATING ANALYSIS

Average Project Component A B C D Score

A. Relevance · Relevance of project preparation to project output at the time of appraisal Yes Yes Yes Yes · Relevance of project output to achieve project goals and purposes at the time of approval Yes Yes Yes Yes · Priority in the context of DMC’s development strategy at the time of approval Yes Yes Yes Yes · Priority in the context of ADB’s development strategy for the DMC at the time of approval Yes Yes Yes Yes · Priority in the context of the DMC’s development strategy at the time of evaluation Yes Yes Yes Yes · Priority in the context of ADB’s development strategy for the DMC at the time of evaluation Yes Yes Yes Yes · Priority in the context of one or more of ADB’s strategic objectives at the time of evaluation Yes Yes Yes Yes · Appropriate changes made at the mid-term review and other reviews to make the Project more relevant Yes No Yes Yes

Percent of Subcriteria that Met Assessment 100.0 87.5 100.0 100.0 Equivalent Rating 3 3 3 3 3.0

B. Efficacy · Achievement of most the Project’s physical outcomes Yes Yes Yes Yes · Achievement of most the Project’s intangible outcomes (e.g., technical Yes Yes Yes Yes assistance) · The likelihood of project outcomes leading to project goals Yes Yes Yes Yes

Percent of Subcriteria that Met Assessment 100.0 100.0 100.0 100.0 Equivalent Rating 3 3 3 3 3.0

C. Efficiency 1. Efficiency of investments · EIRR > 12% (where recalculated at evaluation) Yes N/A N/A N/A

· FIRR > weighted average cost of capital (where recalculated at evaluation) Yes N/A N/A N/A Appendix 16 · Cost-effectiveness in generating the project outputs Yes N/A N/A N/A 2. Efficiency of process · Manner of ADB’s internal processing of the Project Yes Yes Yes Yes

· Organization and management of executing and implementing agencies Yes Yes Yes Yes · Effectiveness of projected management Yes N/A N/A N/A · Efficiency in recruiting consultants and other procurement Yes N/A N/A N/A 47

· Timely and adequate availability of counterpart funding Yes N/A Yes Yes

Percent of Subcriteria that Met Assessment 100.0 100.0 100.0 100.0 Equivalent Rating 3 3 3 3 3.0

48

A B C D Project Component

Appendix 16 D. Sustainability · Availability of adequate and effective demand for project services or products Yes N/A N/A N/A · Probable operating and financial performance of the operational entity and the ability to recover costs Yes N/A N/A N/A

· Probable existence of appropriate maintenance policy and procedures Yes N/A N/A N/A · Probable availability of funds (cash flow) for continued operations, maintenance, and growth requirement Yes N/A N/A N/A · Probable availability of skills to continue project Yes N/A N/A Yes · Probable availability of appropriate technology and equipment to operate the project Yes N/A N/A N/A · Probable availability of the enabling environment (subsidies, tariffs, price competitiveness, and political developments) in which the project is operating at the time of evaluation No N/A N/A N/A · Government ownership and commitment to the project Yes Yes Yes Yes · The extent to which the operation affects the environment and renewable or nonrenewable resources No N/A Yes Yes · The extent to which community participation and beneficiary incentives are adequate to maintain project benefits N/A N/A N/A Yes

Percent of Subcriteria that Met Assessment 77.8 100 100 100 Equivalent Rating 2.5 3 3 3 2.60

E. Institutional Development and Other Impacts 1. Institutional development impacts · Country’s formal laws, regulations, and procedures N/A N/A N/A N/A · The people’s informal norms and practices N/A N/A N/A N/A · Institutional or organizational strengthening Yes N/A N/A N/A · Participatory attitudes of the society N/A N/A N/A Yes · Macroeconomic or sector policy framework Yes Yes Yes Yes 2. Other development impacts · Impacts on poverty Yes N/A N/A Yes · Impacts on the environment No Yes Yes Yes · Impacts on social organization N/A N/A N/A Yes · Impacts on political developments N/A N/A N/A N/A

Percent of Subcriteria that Met Assessment 75 100 100 100 Equivalent Rating 2.5 3 3 3 2.6

F. Assessment of Overall Project Performance 2.82 3 3 3 2.86

Criterion Assessment Rating (0-3) Weight (%) Weighted Rating

Relevance Highly Relevant 3.0 20 0.60 Efficacy Highly Efficacious 3.0 25 0.75 Efficiency Highly Efficient 3.0 20 0.60 Sustainability Likely 2.6 20 0.52 Institutional Development and Other Impacts Moderate 2.6 15 0.39

Overall Rating Successful 100 2.86 (Highly Successful) EIRR = economic internal rate of return, FIRR = financial internal rate of return. Equivalent rating: 0 = no achievement, 1 = some achievements, 2 = most targets, 3 = almost all targets. Appendix 16

49