ASIAN DEVELOPMENT BANK PCR: PRC 26461

PROJECT COMPLETION REPORT

ON THE

FUJIAN MIANHUATAN HYDROPOWER PROJECT (LOAN 1417-PRC)

IN

THE PEOPLE’S REPUBLIC OF CHINA

AUGUST 2004

CURRENCY EQUIVALENTS (As of 1 August 2004)

Currency Unit – CNY (yuan)

At Appraisal At Project Completion (1 November 1995) (1 July 2004)

CNY 1.00 = $ 0.120 $ 0.121 $1.00 = CNY8.315 CNY8.300

ABBREVIATIONS ADB – Asian Development Bank CCB

CDB – –

China Construction Bank China Development Bank

EA – Executing Agency EIA – Environmental Impact Assessment EIRR – Economic Internal Rate of Return EMP – Environmental Management Program FIRR – Financial Internal Rate of Return FEPC – Fujian Electric Power Corporation Limited FMHDC – Fujian Mianhuatan Hydropower Development Company

Limited FPEPB – Fujian Province Electric Power Bureau FPEPC – Fujian Provincial Electric Power Corporation FPG – Fujian Provincial Government GDP – Gross Domestic Product ICB – International Competitive Bidding IDC – Interest During Construction LMRO – Longyan Municipal Resettlement Office NDRC – National Development and Reform Commission PMO – Project Management Office PPA – Power Purchase Agreement PPTA – Project Preparatory Technical Assistance PRC – People’s Republic of China RCC – Roller-Compacted-Concrete RP – Resettlement Plan SDPC – State Development Planning Commission SP – State Power Corporation of China TA – Technical Assistance VAT – Value-Added Tax

WEIGHTS AND MEASURES

GW – 1,000,000,000 watts GWh (gigawatt-hour) – 1,000,000,000 watt-hour kV (kilovolt) – 1,000 volts kW (kilowatt) – 1,000 watts kWh (kilowatt-hour) – Unit of electric energy MW (megawatt) – 1,000,000 watts MWh (megawatt-hour) – 1,000 kWh TWh (terawatt-hour) – 1,000 GWh V (volt) – unit of electric potential W (watt) – unit of active electric power

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 2 C. Project Costs 3 D. Disbursements 4 E. Project Schedule 4 F. Implementation Arrangements 5 G. Conditions and Covenants 6 H. Related Technical Assistance 7 I. Consultant Recruitment and Procurement 8 J. Performance of Consultants, Contractors, and Suppliers 8 K. Performance of the Borrower and the Executing Agency 9 L. Performance of ADB 9 III. EVALUATION OF PERFORMANCE 10 A. Relevance 10 B. Efficacy in Achievement of Purpose 10 C. Efficiency in Achievement of Outputs and Purpose 10 D. Preliminary Assessment of Sustainability 11 E. Environmental, Sociocultural, and Other Impacts 11 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons Learned 14 C. Recommendations 15 APPENDIX 1. Chronology of Major Events 16 2. Comparison of Project Cost at Appraisal and Completion 19 3. An Analysis of Project Cost Underrun 20 4. Estimated Financing Plan and the Actual Financing Arrangements 22 5. Projected and Actual Disbursements (1996-2002) 23 6. Projected and Actual Contract Awards (1996-2002) 24 7. Project Implementation Schedule — Projected and Actual 25 8. Fujian Mianhuatan Hydropower Development Company Limited— Shareholding

Structure

26 9. Fujian Mianhuatan Hydropower Development Company Limited — Organization

Chart 27 10. Status of Compliance with Loan Covenants 28 11. Fujian Electric Power Corporation Limited — Tariff Schedule 33 12. Financial Performance of the Executing Agency and Fujian Mianhuatan

Hydropower Development Company Limited

34 13. Technical Assistance Completion Report 41 14. Summary of Asian Development Bank-Financed Contracts 43 15. Financial Evaluation 44 16. Economic Evaluation 46 17. Forecast for Economic and Electricity Growth in the Fujian Province 51 18. Implementation of the Resettlement Plan 52 19. Training Activities under the Project 57

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number

People’s Republic of China 1417-PRC Fujian Mianhuatan Hydropower Project People’s Republic of China Fujian Province Electric Power Bureau $170 million PCR PRC 803

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – Actual 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years) 8. Terms of Relending – Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower – Third-Step Borrower

3 August 1995 25 August 1995 6 November 1995 9 November 1995 14 December 1995 11 December 1996 10 April 1997 31 December 2001 15 October 2002 1 Pool-based variable lending rate 25 6 Same as loan 25 6 Fujian Province Electric Power Bureau Fujian Mianhuatan Hydropower Development Company Limited

9. Disbursements

a. Dates

Initial Disbursement

15 Sep 1998

Final Disbursement

01 Oct 2002

Time Interval

49 months

Effective Date

10 Apr 1997

Original Closing Date

31 Dec 2001

Time Interval

57 months

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b. Amount ($ million)

Category No. Category Original

Allocation

Last Revised

Allocation

Amount Canceled

Amount Disbursed

I Construction Equipment and Material and Metal Structures 30.0 9.4 20.7 9.4

II Electric and Mechanical Equipment 73.9 32.4 41.5 32.4

III Transmission Works 15.3 0.2 15.0 0.2 IV Consulting Services, Office

Equipment, and Training 3.3 1.8 1.5 1.8

V Interest and Commitment Charge 29.4 9.2 20.2 9.2

Unallocated 18.1 0.0 18.1 0.0 Total 170.0 53.0 117.0 53.0 Source: Asian Development Bank Loan Financial Information System. C. Project Data

1. Project Cost ($ million)

Cost Appraisal Estimate Actual Foreign Exchange Cost 170.0 53.0 Local Currency Cost 551.0 384.6 Total 721.0 437.6 ADB= Asian Development Bank; IDC= Interest During Construction Source: Fujian Electric Power Corporation Limited, and Fujian Mianhuatan Hydropower Development Company

Limited. 2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs Borrower-Financed 381.3 362.4 ADB-Financed 140.6 43.9 Other External Financing 0.0 0.0 Subtotal 521.9 406.3 IDC Costs Borrower-Financed 169.7 22.2 ADB-Financed 29.4 9.1 Other External Financing 0.0 0.0

Subtotal 199.1 31.3

Total 721.0 437.6 ADB = Asian Development Bank; IDC = Interest during construction Source: Fujian Electric Power Corporation Limited and Fujian Mianhuatan Hydropower Development

Company Limited.

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3. Cost Breakdown by Project Component ($ million)

Appraisal Estimate Actual Project Component Foreign

CostLocal Cost

Total Cost

Foreign Cost

Local Cost

Total Cost

A. Base Cost 1. Civil works 26.9 87.8 114.6 8.7 96.3 105.0 2. Electromechanical Equipment 73.8 18.7 92.6 32.5 18.5 51.0 3. Metal Structures 1.3 4.3 5.6 0.7 0.8 1.5 4. Transmission Works 15.2 40.9 56.1 0.2 39.1 39.3 5. Consulting and Training 2.9 15.9 18.8 1.8 2.8 4.6 6. Miscellaneous 2.3 90.2 92.6 0.0 165.7 165.7 7. Taxes 0.0 71.1 71.1 0.0 39.2 39.2 Subtotal 122.4 329.0 451.4 43.9 362.4 406.3 B. Contingencies 18.2 52.3 70.5 0.0 0.0 0.0C. IDC 29.4 169.7 199.1 9.1 22.2 31.3 Total (A+B+C) 170.0 551.0 721.0 53.0 384.6 437.6

IDC = interest during construction Note: Figures may not add up to total because of rounding. Source: Fujian Electric Power Corporation Limited and Fujian Mianhuatan Hydropower Development Company

Limited. 4. Project Schedule

Item Appraisal Estimate Actual Date of Contract with Consultants Mar 1996 Nov 1997 Date of Contract for Training Service Nov 1996 Aug 1998 Civil Works Contract - Date of Award Jul 1994 Jul 1994 - Completion of Work Aug 2001 Jul 2002 Equipment and Supplies Dates - First Procurement Aug 1995 Jan 1996 - Last Procurement Apr 1997 Nov 2000 Completion of Equipment Installation Jun 2001 Dec 2001 Start of Operations - Completion of Tests and Commissioning Jul 2001 Dec 2001 - Beginning of Start-Up Jul 2001 Dec 2001

Other Milestones

- October 2000 The first two 220 kV transmission lines completed and connected the Power Plant to the Fujian power grid

- March 2001 Dam construction completed

- April 2001 First generating unit commissioned

- December 2001 Fourth generating unit commissioned

Source: Fujian Mianhuatan Hydropower Development Company Limited.

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5. Project Performance Report Ratings

Ratings Implementation Period Development

Objectives Implementation

Progress

Jan 1998- Dec 1998 Satisfactory Satisfactory Jan 1999- Dec 1999 Satisfactory Satisfactory Jan 2000- Dec 2000 Satisfactory Satisfactory Jan 2001- Dec 2001 Satisfactory Satisfactory Jan 2002- Oct 2002 Satisfactory Satisfactory

Source: Asian Development Bank D. Data on Asian Development Bank Missions

Name of Mission a Date No. of Persons

No. of Person-Days

Specialization of Membersa

Reconnaissance Mission Dec 1994 3 28 b, d, f Special Contact Mission Mar- Apr 1995 2 8 c, d Fact-Finding Mission May 1995 7 161 a, b, c, d, g, h, j Appraisal Mission Aug 1995 7 127 a, b, c, e, g, i, s Inception Mission Dec 1996 3 21 a, b, r Review Mission 1 Mar 1998 4 32 a, b, k, r Review Mission 2 Dec 1998 3 25 a, b, r Special Loan Review Mission (for Resettlement) Mar 1999 2 18 k, l

Special Loan Review Mission Aug 1999 4 16 a, f, k, o Review Mission 3 Oct 2000 2 14 a, r Commission Ceremony May 2001 1 1 m Review Mission 4 Nov 2001 3 24 g, r, m Review Mission 5 Oct-Nov 2002 2 12 m, r Project Completion Review b Mar 2004 7 46 f, m, n, o, p, q, r No. = number

Notes: a a - engineer, b - financial analyst, c - counsel, d - economist, e - programs officer, f - staff consultant for

resettlement, g - energy specialist, h - environment specialist, i - strategy and policy officer, j - staff consultant, social scientist, k - social development specialist, l - young professional, m - project officer, n - head, portfolio management, PRCM, o - resettlement specialist, p - finance officer, q - staff consultant (financial specialist), r - assistant project analyst, s - mission assistant.

b The Mission consisted of Yong Li (Mission Leader), Project Officer, PRCM; K. Sridhar, Head, Portfolio Management, PRCM; Scott Ferguson, Resettlement Specialist, Transport and Communications Division, East and Central Asia Department; Ms. Fang Wang, Finance Officer, PRCM; Heng Xia, Assistant Project Analyst, PRCM, Mr. Guoqing Shi, Resettlement Specialist, Consultant; and Mr. Jianhua Bai, Financial Specialist, Consultant.

Source: Asian Development Bank

I. PROJECT DESCRIPTION

1. In the early and mid 1990s, when the People’s Republic of China (PRC) was facing a severe shortage of electricity, the Government requested the Asian Development Bank (ADB) to finance the Fujian Mianhuatan Hydropower Project (the Project). The shortage in supply capacity was particularly serious during peak hours. This resulted in frequent load shedding that caused serious economic losses. Given the environmental problems caused by coal-fired power plants, the Government prioritized developing hydropower plants with peak-regulating capacity such as storage hydropower and pumped storage projects. The Fujian province has considerable hydropower resources. At the time of appraisal, the generation mix was 62% hydro and 38% thermal. Most of the then existing hydropower plants did not have seasonal regulation capacity, resulting in an insufficient peaking capacity in dry years and excess spilling in wet years. 2. The Project’s objectives were to (i) support further economic growth in Fujian Province, by providing 600 megawatt (MW) of peak power capacity; (ii) improve flood protection from the level of 20 year return period to 50 year return period; (iii) support corporatizing and restructuring the Fujian Province Electric Power Bureau (FPEPB); and (iv) support establishing an independent company for the Mianhuatan project managed on sound commercial utility principles. 3. The Project, as appraised, consisted of the following components: (i) a 111-meter high roller-compacted-concrete (RCC) gravity dam and its gated spillway; (ii) an underground power station with four 150 MW turbine generator units; (iii) a switchyard; (iv) a ship hoist; (v) auxiliary facilities; and (vi) an associated transmission system. A technical assistance (TA) grant was provided complementary to the loan to assist FPEPB in implementing its corporatization and restructuring program. 4. In December 1995, ADB approved a $170 million loan for the Project from its Ordinary Capital Resources. The Loan’s 25-year term includes a 6-year grace period, with an interest rate determined under ADB’s pool-based variable lending rate system for US dollar loans. A portion of $150 million from the loan was on-lent to the Fujian Mianhuatan Hydropower Development Company Limited1 (FMHDC), a separate company established for implementing the power plant, with the same term and conditions as the ADB loan. The balance, $20 million, was for the associated transmission system to be constructed by FPEPB. The Loan was closed on 15 October 2002. The total amount disbursed under the loan was $53.0 million, and the remaining unused amount of $117.0 million was cancelled. In April 2003, the Borrower (People’s Republic of China) prepaid all the net loan proceeds. 5. The Project was physically completed with the commissioning of the last generating unit and the associated transmission lines in December 2001, 6 months behind the original completion date. Land reallocation, replacement housing, and the village and township infrastructures at relocation sites were completed by end 2001. The loan was closed on 15 October 2002, 10 months later than the original loan closing date. Appendix 1 gives a chronology of major events. 1 The name of the company was changed to Fujian Mianhuatan Hydroelectric Development Limited Liability

Company according to its revised charter dated 29 October 2003. However, the original name used in the Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the People’s Republic of China for the Fujian Mianhuatan Hydropower Project (ADB. Manila, November 1995) is retained in this Project Completion Report.

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II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

6. At the time of project appraisal, the PRC was the world’s fourth largest electricity producer, with a total generating capacity of 215 gigawatts (GW) and annual electricity generation of 994 terawatt-hours (TWh). An average of 11 to 15 GW of generating capacity was added to the power system annually from 1988 to 1995. Yet these capacity additions could not keep pace with the fast growing demand, and the PRC was facing an acute power shortage of about 20% of the demand. The Government’s main objective in the power sector was to develop adequate power facilities to support the country’s rapid economic growth and to increase people’s access to electricity. The Project was included in the country’s Ninth Five-Year Plan (1996 – 2000), and was designed to provide additional peaking capacity of 600 MW for the Fujian power grid to meet the increasing demand. Since completion, the Project has helped meet the surging power demand in the province that has occurred since late 2002. The Project contributed to agricultural and industrial development in the poverty counties within the Project area, and helped improve people’s standard of living by supplying sufficient power. 7. The Project was consistent with ADB’s operational strategy in the PRC, which was to help the Government achieve economic growth efficiently, equitably, and sustainably. The Project also promoted ADB’s operational strategy in the PRC energy sector— supporting the Government’s two-pronged energy development program aimed at expanding energy supplies and promoting energy conservation. In addition, the Project helped the Government corporatize FPEPB, promote enterprise reforms, and tariff and financing reforms. The Project also promoted environmental protection and energy conservation. 8. In formulating the Project, extensive consultations were held with the Government, the Executing Agency (EA, or FPEPB), project entities, and other project stakeholders including people affected by the Project. B. Project Outputs

9. Construction of the RCC dam and the gated spillway [component (i)] started in April 1998, and the river closure was achieved in September 1998. Within 36 months from the commencement of construction, the dam with the spillway was completed. The reservoir started storing water in December 2000. 10. The underground powerhouse and its associated works [component (ii)] were completed in February 2001. Located on the left bank, the power station, with four turbine-generating units of 150 MW each, is accessible from a surface main gate through a 560-meter long tunnel. The underground cavern complex includes the main transformer cavern and the bus bar tunnel. The powerhouse and its associated facilities have been operating since April 2001. 11. A switchyard [component (iii)] stands on the left bank at an elevation of 180 m. All the switchgears and equipment for connecting the power station with the Fujian power grid are in the switchyard. The switchyard became operational prior to the commissioning of the first generating unit in April 2001, and has been functioning well since then. 12. A ship hoist [component (iv)] was originally designed to be constructed on the right bank of the dam to meet the navigation requirements along the Tingjiang River. This is a normal requirement under the PRC regulations on river navigation. However, during project

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implementation, considering little water transportation across the dam, the Government approved a revision to the original design of the ship hoist, and agreed that only the foundation for the ship hoist was to be constructed, leaving room to complete the ship hoist in the future if it is needed. 13. Other auxiliary facilities including (i) the bottom outlet in the dam; (ii) intakes and the surge tank for the underground power plant; (iii) power station control building; (iv) access roads, etc, [component (v)] have been completed and operating since April 2001. 14. The first phase of the associated 220 kV transmission facilities [component (vi)] consisting of the Mianhuatan-Jiuxian and the Mianhuatan-Caoxi lines was completed in October 2000, prior to the commissioning of the first generating unit. The remaining part of the transmission system, the Mianhuatan-Fengyuan line I and line II, was put into operation in November 2001. Bulk electricity from the Project is being transmitted stably and reliably through the four transmission lines. 15. In August 2002, an acceptance group authorized by the former State Power Corporation of China (SP) inspected the Mianhuatan Hydropower Project’s physical facilities, including the civil works, metal structures, and electromechanical works. The inspection concluded that the Mianhuatan Project as a whole reached excellent standards of quality2. SP awarded a formal acceptance certificate for the Mianhuatan Project. In February 2004, the Ministry of Construction awarded the Luban Prize to the Mianhuatan Project. The Luban Prize is the highest quality honor at State level3. The Mianhuatan project is one of three hydropower projects in the PRC, and the first infrastructure project in the Fujian province to win the Luban Prize. C. Project Costs

16. The Project’s total cost was estimated at $721.0 million at appraisal, including a foreign exchange component of $170.0 million. On completion, the actual project cost was $437.6 million, 60.7% of the original cost estimate, resulting in a cost underrun of $283.4 million. The actual foreign exchange cost was $53.0 million, compared with the $170.0 million estimated at appraisal. The actual local cost was $384.6 million, compared with the $551.0 million at appraisal. Appendix 2 presents a comparison between the project cost at appraisal and on completion. 17. The main reasons for the cost underrun4 include (i) high cost estimates at appraisal resulting in substantial savings in the cost of equipment and materials which reflected changes in the market conditions and strong competition in the bidding process; (ii) the Government changed its policies on taxes and interest rates, and these resulted in reduced taxes and interest costs; (iii) savings in contingencies; and (iv) cancellation of the ship hoist component. Appendix 3 provides a more detailed analysis on the reasons for cost underrun. 2 An article in the China Electric Power News on 15 September 2002 reported the Project’s acceptance, and stated

that the Project was fully accepted as a whole, which was the first one of its kind in the PRC hydropower projects. 3 Luban is known as a versatile carpenter in the PRC history. Each year, the Ministry of Construction awards the

Luban Prize to projects whose quality is extraordinarily high. A Project can apply for this prize provided the project (i) has adopted advanced design; (ii) has been completed ahead of the approved schedule; (iii) has been completed within the approved budget; and (iv) has minimum adverse environmental impacts.

4 Several other power projects financed by ADB around this time also resulted in lower actual cost compared with the appraisal estimates. A study on Project Cost Estimates and Loan Savings was carried out in 2002 by a Joint Government-ADB Working Group which identified key reasons for cost savings and recommended measures to arrive at better cost estimates.

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18. The financing plan envisaged at appraisal included a $170.0 million ADB loan to finance the entire foreign exchange cost (23.6% of the total project cost). The $551.0 million local currency cost (76.4% of the Project’s total cost) was to be financed through equity financing of $180.2 million (25.0% of the total project cost) from the shareholders and debt financing of $370.8 million (51.4% of the total project cost) from domestic banks including China Construction Bank (CCB) and China Development Bank (CDB). The actual financing from ADB was $53.0 million (12.1% of the Project’s actual total cost), and the actual borrowing from domestic banks was $266.0 million (60.8% of the actual total project cost). Appendix 4 details the financing plan at appraisal and the actual financing arrangements. D. Disbursements

19. Loan proceeds were disbursed in accordance with ADB’s Loan Disbursement Handbook. Disbursements were made mainly through letter of credit and direct payment procedures. The first disbursement occurred in September 1998, 17 months after the loan became effective. The last disbursement took place in October 2002. The Loan was closed on 15 October 2002, 10 months later than the original loan closing date. The total disbursed amount was $53.0 million, and the remaining unused $117.0 million (68.8% of the approved loan amount) was cancelled. Appendix 5 presents a comparison of the projected and the actual disbursements. Disbursements were slightly lower than the projections in the first four years, but exceeded projections in the last two years. No imprest account was considered necessary for the Project. The actual contract awards generally matched projections (Appendix 6). E. Project Schedule

20. The loan was approved in December 1995, signed in December 1996, and became effective in April 1997. The time taken from loan approval to effectiveness (16 months) is significantly longer as compared with the PRC average, which was 8.0 months in 1997. This was because that the EA did not wish to sign the loan until the feasibility study report was approved and the domestic financing commitments were obtained. CCB and CDB approved their loans only in October 1996. The State Development Planning Commission5 (SDPC) approved the Project’s feasibility study report in September 1997, after reviewing the power supply and demand position. This approach to synchronizing loan signing and project readiness allowed EA to save commitment charges6. 21. The main civil works, originally set to start in 1996, commenced in April 1998. The main electromechanical contract was scheduled to be awarded in March 1997, but was actually awarded in March 1998. The first generating unit was envisaged to start operation in July 2000, and the final unit in July 2001. In reality, the first unit was commissioned in April 2001, and the final unit in December 2001. The first transmission line was designed to be completed prior to the commissioning of the first unit. Actually, it was commissioned in October 2000, 6 months before the actual commissioning of the first unit. 22. Overall, the Project was implemented with a 6-month delay as compared with the appraisal estimate. This was mainly because of the one-year delay in the approval of the feasibility study report. The generating units were commissioned within the revised 5 The State Development Planning Commission has been restructured as National Development and Reform

Commission (NDRC) since March 2003. 6 This, however, raises the issue of project readiness when a loan is approved, since start-up delays have affected a

number of PRC projects.

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implementation schedule. The actual implementation period achieved was even shorter than the estimate at appraisal. Appendix 7 gives a comparison between the estimated and the actual implementation schedule. F. Implementation Arrangements

1. Executing Agency

23. There was considerable institutional restructuring in the PRC power sector during project implementation. As envisaged at appraisal, FPEPB was the Project’s Executing Agency. At the time of Project appraisal, FPEPB was an independent legal entity under the Ministry of Electric Power. In 1996, the SP was created to manage the assets in the power sector, and accordingly FPEPB became a subsidiary of SP. FPEPB constructed and operated power facilities in the Fujian province, including generation, transmission and distribution facilities. In 2000, FPEPB was corporatized as the Fujian Provincial Electric Power Corporation (FPEPC). Sector oversight functions were transferred to the Fujian Provincial Planning Commission, and sector regulatory functions to the Fujian Provincial Economic and Trade Commission. FPEPC managed the power assets allocated by SP including generation, transmission and distribution facilities in the province. 24. FMHDC was established in 1995 to own and operate the Mianhuatan hydropower plant. At its inception, FMHDC had four shareholders including State Development Investment Corporation (40%), FPEPB (30%), Fujian Investment and Development General Corporation (15%), and Longyan Prefecture Hydropower Development Company Limited (15%). As a new model of joint-investment for developing a power project, this arrangement was intended to mobilize financing from local entities, and to enhance the involvement of local entities in project and utility management. The equity structure changed during project implementation due to power sector restructuring. Appendix 8 details FMHDC’s shareholding structure. 25. In 2002, the Government implemented a nationwide power system reform plan to introduce competitive power markets and improve sector efficiency. Under this plan, generation and transmission operations were separated. SP was restructured into five generating companies and two power grid companies. Accordingly, FPEPC was restructured as Fujian Electric Power Corporation Limited (FEPC), a subsidiary of the State Grid Corporation of China, one of the newly established grid companies. Generation capacity previously owned by FPEPC was allocated to the new generating companies. Currently FEPC mainly manages transmission and distribution facilities, and certain generating capacity for peak and frequency regulation. It is expected that FEPC will again be restructured as Fujian Provincial Grid Corporation Limited in the near future. 26. The shares of FPEPB in the Mianhuatan project were transferred to the China Huadian Group Corporation, one of the five newly established generating companies. China Huadian Group Corporation has established the China Huadian Fujian Company as its branch in Fujian Province. Despite all these changes, FMHDC has remained an independent legal entity, and has been responsible for the management and operation of the Mianhuatan project as envisaged at appraisal. Appendix 9 provides FMHDC’s present organization chart.

2. Project Management Office

27. As envisaged during appraisal, FPEPB established and maintained, throughout project implementation, a Project Management Office (PMO) that was adequately staffed and headed

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by a vice general manager. The PMO was responsible for overall coordination on project implementation, including communications with ADB. While FMHDC focused on daily implementation of the Project, FPEPB through the PMO made decisions on major issues, particularly those related to external coordination. The PMO also oversaw all the procurement activities under the Project. Within FPEPB, the PMO managed the implementation of the associated transmission facilities [component (v), para 14]. The PMO also implemented the ADB-funded TAs, project component pertaining to tariff reform, enterprise reforms, and FPEPB’s restructuring plan. 28. There were changes in the PMO staff due to sector restructuring or reforms, but the staff assigned to the PMO were generally competent and dedicated. The impact of the organizational changes on the PMO’s functioning was therefore limited. The relationship between FPEPB/FPEPC and FMHDC has been good and cooperative. All these contributed to the smooth implementation of the Project. G. Conditions and Covenants

29. Although many loan covenants were complied with, others were not (Appendix 10). Audited project accounts and audited financial statements (AFS) were submitted on time. The EA provided 10-year financial projections and other required reports regarding energy conservation and project implementation. The environmental and social covenants were generally complied with, although work needs to be continued on resettlement aspects (para 58-62). The EA utilized the recommendations of the TA when FPEPC was set up as a corporatized entity in the year 2000. Tariff reforms were completed on time, and the Fujian electric power grid adopted a unified power tariff acceptable to ADB since June 2002. Appendix 11 presents the current power tariff in the province. 30. FPEPB/FPEPC’s financial position appears satisfactory. The AFS stated that FPEPB/FPEPC complied with the financial covenants on debt service, self-financing, and debt-equity ratios, although a review of the AFS reveals that the EA perhaps misunderstood ADB’s definitions of these ratios. The recalculations of these ratios based on ADB’s definitions suggest that FPEPB/FPEPC complied with the covenanted debt-equity ratio, but failed to meet the requirements on self-financing, and debt service coverage. However, FPEPC/FEPC so far has remained a sound cash flow position. The receivables have remained at the level of about 10 days of sales (Appendix 12). The Government has recently announced a tariff increase of CNY0.022 per kilowatt-hour (kWh), 80% of which will be allocated to grid companies. FEPC is also expected to benefit from this tariff increase. 31. No power purchase agreement (PPA) has been signed between FPEPB and FMHDC, although this was a requirement under the Loan. SDPC approved the tariff for power sale from the Project at CNY0.3747 per kWh for the Project’s economic life of 25 years. The National Development and Reform Commission (NDRC, earlier the SDPC) will review the tariff bi-annually, and adjust the tariff based on the review of electricity production costs. Although there is no PPA, FMHDC has been receiving payments from FPEPB/FPEPC/FEPC for electricity sales in a timely manner since commencement of FMHDC’s operation. FMHDC is discussing with FEPC the matter of entering into a PPA. 32. FMHDC did not submit its 10-year financial projections, despite ADB’s reminders throughout project implementation. Also, FMHDC did not provide ADB with a project evaluation report, although it carried out substantial work on project benefit monitoring and evaluation.

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H. Related Technical Assistance

33. In April 1994, ADB provided a small-scale TA7 to carry out a preliminary analysis of the Project’s feasibility, and to identify the scope of the subsequent project preparatory TA. Four individual consultants were engaged under this TA. The consulting team completed the assignment within the schedule and with high quality. 34. Subsequent to the small-scale TA, ADB approved a project preparatory TA (PPTA)8 to help the Executing Agency prepare the Project to meet ADB requirements. The PPTA consultants submitted their final report that reconfirmed the economic and financial viability of the Project, recommended technical optimization scheme, suggested efficient contract packaging, and proposed areas for improvement in the resettlement plan and environmental management program. Power tariff system in the Fujian province was reviewed and areas for improvement were identified. The PPTA also provided training for the FPEPB staff on the RCC technology. Overall, the quality of the PPTA was of high standard, and the consultants performed their tasks in a professional and effective manner. 35. During project preparation, a small-scale TA9 was provided in 1995 to support FPEPB in preparing its corporatization plan. The TA provided advice for refining and improving the corporatization plan initially prepared by FPEPB. The TA helped prepare an institutional strengthening program for FPEPB to implement its corporatization and power subsector restructuring plan. In drawing up its restructuring plan, FPEPB benefited from the TA recommendations. Overall, the TA is rated satisfactory. 36. Accompanying the Loan, an advisory TA10 was provided to FPEPB to implement its corporatization and power subsector restructuring plan. The TA (i) prepared a detailed program for implementing the corporatization and restructuring plan; (ii) developed a detailed organization chart of FPEPC under the approved restructuring plan; and (iii) recommended improvements in management control and financial systems for the corporatized FPEPC, and in power sale-purchase arrangements. The TA offered several options for resolving the asset ownership issue, which had delayed the approval of FPEPB’s corporatization program. The EA drew on the TA recommendations and resolved the ownership issue. The TA helped corportize FPEPB following sound management principles, and in a manner better than some of the other provincial power companies in eastern PRC. FEPC felt that the model power purchase agreement (PPA) developed under the TA was based on sound commercial utility practices and thus better than the PPA suggested in the power sector. Currently, FEPC has a business plan and is developing a management control system using the TA recommendations. The international field study under the TA was found useful. The TA achieved its key objectives, and is rated as successful. Appendix 13 presents the technical assistance completion report for this TA.

7 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. 8 ADB. 1994. Technical Assistance to the People’s Republic of China for the Fujian Mianhuatan Hydropower. Manila. 9 ADB. 1995. Technical Assistance to the People’s Republic of China for Support of Corporatization Plan Preparation

for Fujian Province Electric Power Bureau. Manila. 10 ADB. 1995. Technical Assistance to the People’s Republic of China for Implementation of the Fujian Province

Electric Power Bureau Corporatization and Restructuring Program. Manila.

8

I. Consultant Recruitment and Procurement

37. Using its own financing, the Executing Agency engaged a design institute as a domestic consultant to help prepare and implement the Project. The design institute carried out a project feasibility study, and prepared related project documents, which were required for obtaining the Government approval of the Project. The design institute also helped supervise civil works construction. It was the same design institute that prepared the Resettlement Plan (RP), and monitored implementation of the RP. 38. A domestic tendering company was contracted to assist in carrying out international procurement, including the preparation of the commercial part of the bidding documents, bid evaluation, contract negotiation, and contract execution. The design institute that completed the Project’s feasibility study report prepared the technical specifications for the bidding documents. Goods and related services financed by ADB were procured following the Guidelines for Procurement Under Asian Development Bank Loans. Contracts for equipment and materials financed by ADB costing above $500,000 were procured through international competitive bidding (ICB) procedures, while those valued below $500,000 were procured following international shopping procedures. Appendix 14 summarizes the contract packages financed by ADB. Local competitive bidding procedures were adopted to procure the contracts financed by counterpart funding. 39. The Executing Agency used part of the ADB loan proceeds to engage international consultants for about 45 person-months to assist in carrying out international procurement, project management, environment monitoring, and resettlement supervision and evaluation. International consultants were recruited following the Guidelines on the Use of Consultants by Asian Development Bank and its Borrower. J. Performance of Consultants, Contractors, and Suppliers

40. The domestic design institute that prepared the preliminary design and the feasibility study had experience in designing large hydropower projects. Project documents prepared by the design institute were generally of good quality. However, project cost estimates appeared to be high. The bidding documents and bid evaluation reports prepared by the design institute and the tendering company were in order. Monitoring reports on implementing the RP were submitted regularly according to the contract signed. The tendering company was familiar with ADB procurement procedures through previous experience under other ADB-financed projects. The tendering company also helped in handling customs formalities for imported goods. Overall, domestic consultants performed well. 41. The international supervision consultants performed their tasks satisfactorily. These consultants were involved in the design and construction supervision of large hydropower projects in the PRC and other countries. The international consultants provided advice on technical issues relating to project management, reviewed draft bidding documents for ICB contracts, and assisted in evaluating the bids under ICB. The consultants carried out regular resettlement and environment review missions, and submitted reports on these aspects regularly. The international consultants also helped in preparing quarterly progress reports. 42. The civil works and the equipment installation contractors were all domestic companies. The EA is satisfied with the performance of these contractors. The civil works and equipment installation contractors had extensive experience in erecting electromechanical equipment and metal structures for similar hydropower projects in the PRC, and completed their work under the

9

Project on schedule. The equipment suppliers generally complied with their contract terms. During initial operations, some minor cracks were found on the turbine blades of the generating units. The turbine-generator supplier rectified the technical defect promptly, and the defect had limited adverse impact on power generation from the Project. All the equipment procured under the Project has been functioning normally. K. Performance of the Borrower and the Executing Agency

43. The Borrower signed the loan and project agreements in about 12 months from loan approval. The loan became effective about one year later than expected, due to delays in Government’s approval for the Project’s feasibility study report. During implementation, the Government changed the designated counterpart agency for ADB operations from the People’s Bank of China to the Ministry of Finance. This change did not adversely affect project implementation. Overall, the Borrower’s performance in this Project is considered satisfactory. 44. The EA and FMHDC have extensive experience in constructing large hydropower projects. The EA used appropriate systems for project quality control and monitoring. The PMO was staffed with experienced professionals. 45. The power sector restructuring in 2002 resulted in a change in the ownership structure of the FMHDC. FEPC is no longer the shareholder. As a result, ADB’s Project Completion Review Mission encountered difficulties in collecting information on those components directly implemented by the former FPEPB, including the associated transmission and energy conservation. Overall, The EA’s performance is rated satisfactory, and FMHDC’s performance is rated highly satisfactory. L. Performance of ADB

46. ADB regularly fielded missions to review project implementation progress and assist in resolving implementation issues such as procurement, resettlement, disbursement, and TA implementation. The EA and FMHDC appreciated ADB’s prompt responses to their inquires and requests. ADB staff established good rapport with project staff in the EA and FMHDC. Various training opportunities were provided to the EA and FMHDC staff, and the trainees found these programs effective and timely. 47. The EA and FMHDC appreciated ADB’s support to the Project. The ICB procedures adopted in procurement contributed significantly in obtaining competitive prices for equipment. ADB’s support for the Project helped mobilize local financing, and brought in advanced experience and international practice in project and financial management. 48. The EA and FMHDC felt that ADB’s procurement cycle was time-consuming, and sometimes affected the Project’s construction schedule. This was partly why the EA shifted some packages to local financing. The actual project costs were significantly lower than the appraisal estimates. The main reasons for this were intensive competition under ICB procedures, general decline in equipment costs, market conditions for demand and supply of power equipment, and lower inflation rate during project implementation. Appraisal cost estimates could have been scrutinized in greater detail as they turned out to be high. Overall, ADB’s performance is considered satisfactory.

10

III. EVALUATION OF PERFORMANCE

A. Relevance

49. At the time of appraisal, severe electricity shortages restricted Fujian province’s economic growth. Additional generating capacity, particularly those that could generate electricity during peak hours, was needed. The Government therefore encouraged the development of storage hydropower projects, which could not only provide electricity supply during peak hours, but also avoid adverse environmental impact of the coal-fired power plants that would otherwise be constructed to meet the increasing power demand. The Project was included in the Government’s Ninth Five-Year Plan and was also consistent with ADB’s operational strategy for the PRC. The two advisory TAs were consistent with Government initiative to restructure the power sector in the province, and were designed appropriately to review and implement FPEPB’s restructuring and corporatization program. 50. The Project remains relevant. Since end 2002, Fujian province has been again experiencing electricity shortages. To meet the growing demand, more generating capacity is needed in the Fujian power system. The Project also remains consistent with ADB’s current strategy in the PRC energy sector. The corporatization and restructuring plan and the PPA developed under the TAs are of value to FEPC and FMHDC, and relevant for the whole power sector. In view of all these achievements, the Project is rated as highly relevant. B. Efficacy in Achievement of Purpose

51. The Project fed into the Fujian power grid 795 gigawatt-hour (GWh) of electricity in 2001, 1,118 GWh in 2002, and 1,302 GWh in 2003. The Project could have achieved even higher generation had there been sufficient rainfall in the catchment area of the reservoir. The Project contributed to the rapid economic growth in Fujian Province. Gross domestic product in the Province grew at an average annual rate of 11.5% between 1995 and 2003. Electricity consumption in the province increased at a rate of 10.6% annually during the same period, and surged by 13.1% in 2002, and 17.9% in 2003. The Project will continue contributing to the province’s economy by providing electricity. The Fujian power grid and the Eastern PRC power grid have been inter-connected through a 500 kV transmission line, which provides opportunities to export electricity to Yangtze Region in the long run. The Project also improved flood protection downstream of Tingjiang River from 20 year return period to 50 year return period. 52. The two TAs provided for project preparation (para 33-34) helped prepare the Project and address the issues such as power tariff reform, energy conservation, and environmental and social aspect. The two advisory TAs on designing and implementing FPEPB’s corporatization and restructuring program helped restructure the power sector in the province, assisted in corporatizing FPEPB, and helped the EA in developing its business strategy (para 35-36). FPEPB was corporatized and restructured into FPEPC in June 2000, and was further restructured as FEPC in 2002. With the tangible and intangible objectives being mostly achieved, the Project is rated as efficacious. C. Efficiency in Achievement of Outputs and Purpose

1. Financial analysis

53. The Project’s financial internal rate of return (FIRR) on completion is recalculated at

11

8.9% using the same methodology as used at appraisal, but based on the actual capital costs, the actual and projected energy output, and assuming that the current actual tariff level will remain constant in real terms (see Appendix 15). The FIRR is above the revised weighted average cost of capital of 4.3%, and hence the Project is considered financially viable. Despite the substantially lower actual capital costs, the FIRR is lower than the appraisal estimate (10.0%) because of the lower energy output, lower tariff, and higher operational costs.

2. Economic Evaluation

54. Following the methodology used at appraisal, the economic internal rate of return (EIRR) of the Project is reevaluated at 13.4%, compared with 16.9% at appraisal. Despite the actual lower capital costs, the EIRR is lower mainly because of the differences in assumptions used in the valuation of benefit for secondary energy output, and the lower actual energy output, compared with the appraisal estimates. In 2002 and 2003, the Tingjiang river basin encountered an unusual draught of 100 year return, which resulted in a 30% reduction in annual water inflow as compared with the annual water inflow in a normal hydrological year. The EIRR will increase to 14.2% if local environmental benefits are taken into account, and to 15.1% with global environmental benefits included. Appendix 16 presents EIRR calculations and assumptions adopted. The Project is assessed as highly efficient. D. Project’s Preliminary Assessment of Sustainability

55. Since the second half of 2003, Fujian province, like 20 other provinces in the PRC, has been short of power supply. The supply shortages occur during peak hours, both in summer and winter, reflecting an insufficient peak capacity installed in the power system. The province’s maximum load hit a record of 9,510 MW in 2003. Given the expected annual gross domestic product (GDP) growth of 9% in the Fujian province in the next two years, and 10% during the Eleventh Five-Year-Plan period (2006-2010), power consumption is also correspondingly expected to grow at 10% per annum during the same period (Appendix 17). 56. FMHDC remains an independent power producer and a limited company established in accordance with the Company Law. FMHDC has competent management and experienced staff who have been managing the company and operating the power plant successfully for the last three years. FMHDC’s past financial performance and financial projections (Appendix 12) show that it will have sufficient cash flow to operate and maintain the power plant facilities. 57. The current tariff of CNY0.3747 per kWh is adequate for FMHDC to maintain its financial soundness. In the near term, the Fujian province will continue experiencing power shortage, and it is expected that the current tariff levels will be maintained. The Government is continuing power tariff reform. Two-part tariff and time-of-use tariff systems will be introduced to manage the current power shortage and conserve energy, and ensure sustainable development of the power sector. The Project is expected to benefit from the new tariff systems, as it provides peak capacity for the power system. Based on these assumptions, the Project is likely to continue to be sustainable. E. Environmental, Sociocultural, and Other Impacts

1. Resettlement

58. Resettlement under the Project has been implemented in accordance with the regulations stipulated by the PRC Government and the provisions of the RP approved by ADB.

12

FMHDC and Longyan Municipal Resettlement Office (LMRO), the local government agency who actually implemented the RP, have made good efforts to address problems but the regulations and compensation standards limit the ability to restore livelihoods. Various training programs were arranged by LMRO to enhance resettlement management (appendix 19). The physical resettlement of people was quite successful, with one significant shortcoming— the affected people have spent too much money on housing rather than production means. However, that was the personal choice of the affected people. In terms of livelihood restoration, there are some good examples of rehabilitation but it appears that the budget was not adequate to address the needs for all people. Appendix 18 presents the details on implementation of the RP. 59. An RP was prepared by a domestic design institute in 1993. During ADB loan review missions in 1998 and 1999, it was determined that several resettlement issues, including insufficient resettlement budget, inadequate measures to restore the resettlers’ income, and lack of a detailed implementation plan, had not been properly addressed. Based on the suggestions of ADB review missions, a revised RP was prepared by FPEPB and resubmitted to ADB in December 1999. In 2000, LMRO prepared a detailed resettlement implementation plan11 based on the revised RP. As of December 2003, the actual number of people affected had been 39,393, as compared with 41,567 identified in the revised RP. Construction of the new houses and the village (and town) infrastructure at the 56 relocation sites has been inspected by the external monitor, and the monitor’s reports were submitted to FMHDC. 60. In April 2000, one of the senior officials supervising relocation was accused of receiving bribes, and received a court sentence. ADB promptly requested the Government to carefully review the implementation of the RP and ensure that all funds are used for the purpose intended. 61. As of end 2003, about CNY1,130 million, or 98.6% of the revised resettlement budget had been disbursed. LMRO reported that CNY1,256 million (111.2% of budget) has already been committed. In January 2004, The Fujian Provincial Government (FPG) agreed to release the funds paid for farmland occupation tax and other fees (totaling CNY213 million) to cover this shortfall. Also, FMHDC has been contributing to the post-relocation support fund since 2001. These funds should be used to help restore the affected people’s incomes to the pre-project levels. 62. In April 2002, the external monitor reported that many of the affected people had still not restored their pre-project income levels. The Fujian Provincial Government and LMRO disputed the monitoring results of the external monitor. The Shanghang and Yongding County Statistics Bureaus conducted a survey in early 2003 which revealed that incomes were much higher on average, but still an estimated 25% of households had not restored their pre-project income levels. As no further evaluations has been carried out since April 2002, it is recommended that LMRO and FMHDC (i) identify the households that are still facing difficulties; (ii) in consultation with the affected people, identify remedial measures, formulate an implementation plan, and forward it to ADB for review; (iii) formulate the budget required to assist these households, secure additional funding from FPG and implement these measures; and (iv) monitor the results and submit reports to ADB; and (v) after one year conduct a final external evaluation and submit a report to ADB to verify that all households have restored their incomes and living standards.

11 This implementation plan is used as the revised baseline for the Project Completion Report.

13

2. Environmental Impacts

63. The Project was clarified as an environmental Category A project. An Environmental Impact Assessment EIA) and a Summary Environmental Impact Assessment (SEIA) were prepared in May 1995 and July 1995 respectively. Based on the EIA, the EA prepared an Environment Management Program (EMP) and submitted to ADB for approval in September 1998, a 6-month delay as compared with the time specified in the Project Agreement. FMHDC set up an environmental management office to implement the EMP. In addition, an environmental management committee was established consisting of officials from FMHDC, LMRO, Longyan Environmental Protection Station, and representatives of the relocated communities to coordinate the implementation of EMP. An environmental specialist in the international consultant team checked the Project periodically. The progress reports regularly submitted to ADB included the environmental monitoring results of the international consultants. 64. Although some minor deficiencies are noted, the Project has achieved a number of key environmental objectives. The Project has contributed to environmental institutional capacity building within FMHDC, and the local government environmental agencies. Environmental protection measures have, overall, been effectively implemented. Demobilization of contractors from the Project’s construction areas, and the associated site restoration has been substantially completed. Site re-vegetation including experimental slope stabilization work has been accomplished. The Reservoir navigation authority was established and navigation aides have been installed. Fish production facilities in the form of floating net pens and embayment fisheries have been increasing. In September 2003, the State Environmental Protection Administration issued acceptance to the environmental protection work under the Project. The acceptance also stressed that the quality of the water in reservoir area and in residential areas needs to be continuously monitored.

3. Institutional Development and Other Impacts

65. Through the two advisory TAs, the Project helped FPEPB develop and implement its corporatization and restructuring plan. FPPEB was restructured and corporatized as FPEPC in 2000. The suggested charter, organization chart, and the key ideas on FPEPB’s business plan developed under the TAs were used as the basis for the corporatization. 66. The training program under the Project provided staff from the EA, FMHDC, the design institute, and relevant Government agencies with training opportunities, totaling 739 person-months. The training covered economic operation of power plants, demand side management, and environmental management. Training programs on resettlement management were conducted for the staff from LMRO, the two county resettlement offices, and the affected people. Appendix 19 details the major training activities under the Project. Based on the above, the Project’s institutional development and other impacts are assessed to be moderate.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

67. The Project’s formulation and design were consistent with Government’s priorities and ADB’s operational strategy for the PRC power sector. The project was completed with a 6-month delay as compared to the appraisal schedule due to the delay in Government’s approval of the Project’s feasibility study. However, the Project facilities were completed within a shorter implementation period and operated 6-month ahead of the revised schedule. The immediate

14

objective of accelerating the development of hydropower resources in the Fujian province by providing additional 600 MW power generating capacity has been achieved. The additional 600 MW generating capacity also provide the Fujian power grid with a flexible tool for peak and frequency regulation. The anti-flood capability of the downstream areas has been significantly improved because of the Project. The Project is part of the least-cost solution to expand the Fujian power grid. With mitigation measures specified in the EMP implemented, the Project’s net environmental impact is positive. 68. There have been power shortages in the Fujian province since 2002, and this situation is likely to continue in the next three years. The Project will play an important role in peak and frequency regulation in the power grid. The Government is initiating tariff reforms whereby two-part tariff and time-of-day tariff systems will be introduced. As an independent legal entity established in accordance with the Company Law, FMHDC enjoys full autonomy in operating the Project’s facilities and managing the company. Given the high quality of the Project facilities and the nature of the electricity from the power plant, the Project is likely to be financially viable and FMHDC, in a financially sound position. The full implementation of the RP, particularly the restoration of the resettlers’ income, however, remains an issue to be resolved satisfactorily. 69. The Project is rated as successful, based on criteria on relevance, efficacy, efficiency, sustainability, and institutional development and other impacts. B. Lessons Learned

70. The Project demonstrated a successful model for a joint-investment between the central and local governments. Local governments’ participation in the Project enhanced their ownership, and thus helped implement the Project smoothly. The local governments also played an important role in obtaining a reasonable power tariff for the Project. Establishing a project company (FMHDC) to exclusively construct and operate the Project proved to be an effective practice, which should be pursued to the extent possible in future projects. 71. The actual project cost was only 60.7% of the appraisal estimate. The main reasons for this significant cost reduction were vigorous competition in the bidding process of equipment and materials, changes in the market conditions, and the substantial reduction in the cost for interest during construction due to Government’s policy changes towards taxes and interest rates. While the latter was difficult to predict, the other factors could have been given greater weight in estimating the project costs at appraisal. 72. The successful completion within the revised implementation schedule, the stringent budget control, and the high quality of the Project’s facilities demonstrated the Project entities’ high competence in hydropower design, construction, and operation. Future PPTAs for hydropower development projects may focus more on the aspects pertaining to compliance with ADB safeguard policies. Similarly, the scope and the terms of reference (TOR) for implementation supervision consultants may be strengthened to mainly cover these areas. 73. As was the case with other power projects approved about the same time, the expected tariff increase did not materialize. The Government controls the tariffs for power sales and purchases. As a result, electricity transactions were determined more by the Government directives than through commercial negotiations between the seller and the buyer. This made it difficult for the EA to comply with the loan covenants on the signing of a sound PPA. In the context of competitive power markets in the near future, other commercial arrangements in addition to PPA may deserve consideration during project design phase.

15

74. Resettlement of large populations in a hydropower project needs prudent and thorough examination. ADB closely monitored the resettlement work during project implementation, and promptly identified deficiencies. ADB’s intervention helped improve implementation of the RP, including the provision of increased resettlement budget. Continuous monitoring of restoration of the resettlers’ income is essential to evaluate the implementation status of the RP. C. Recommendations

1. Project-Related

a. Future Monitoring

75. The status on restoration of the affected people’s income, the developments in tariff in the context of competitive power markets, and the power sector restructuring need to be further monitored in the next three years.

b. Follow-Up Actions

76. The issues pertaining to resettlement need to be brought to the attention of authorities concerned so that the RP will be completely implemented. The Borrower’s social safeguard obligations should not be relinquished simply because the loan was repaid. To completely implement the RP, the EA and the local governments should take necessary actions that are laid down in this Project Completion Report (para 62)12. ADB will review the progress in implementing the above mitigation measures.

c. Timing of Project Performance Audit Report Preparation

77. A project performance audit should be conducted in 2007. By then, the competitive power markets are expected to be functioning, and the affected people’s income would have restored if the proposed mitigation measures are fully implemented.

2. General

78. Harmonization between the Government and ADB approval procedures for project processing and implementation requires greater attention. A delay in the Government’s approval of a project’s feasibility study report, for example, may directly cause delay in project implementation. In designing future project’s implementation schedule, clear milestones should be set for obtaining Government’s internal approvals which would be synchronized with the timing of ADB’s processing. 79. A project company established exclusively for implementing a project appears to be a good practice. Such an arrangement can ensure responsibility and accountability for project implementation, and thus minimize unfavorable impacts of changes in sector organizational structure.

12 A formal letter will be sent separately to the Government on major resettlement issues and the actions to be taken

to fully implement the Resettlement Plan.

16 Appendix 1

CHRONOLOGY OF MAJOR EVENTS

A. Loan 1417-PRC: Fujian Mianhuatan Hydropower Project May 1993 Government approval of project proposal

26 Sep1994 Project preparatory technical assistance approved 6–17 Dec 1994 Reconnaissance Mission fielded

29 Mar–1 Apr 1995 Special Contact Mission fielded

4–26 May 1995 Fact-Finding Mission fielded 29 Jun 1995 Management Review Meeting held

17 Jul 1995 Summary Environmental Impact Assessment circulated to the Board 3–25 Aug 1995 Appraisal Mission fielded

18 Oct 1995 Staff Review Committee meeting held

6–9 Nov 1995 Loan Negotiations 14 Dec 1995 ADB approval of $170 million loan from ordinary capital resources

11 Dec 1996 Loan signed 15–21 Dec 1996 Inception Mission fielded

10 Apr 1997 Loan effectiveness Sep 1997 Project feasibility study report approved by the Government

30 Sep 1997 Diversion works completed

21 Nov 1997 Executing Agency signed contract with implementation consultants 15–21 Dec 1996 Inception Mission fielded

20 Apr 1998 Award of first batch of contracts for equipment and materials 15 Sep 1998 First disbursement

17–24 Mar 1998 First Loan Review Mission fielded

7–15 Dec 1998 Second Loan Review Mission fielded 1–9 Mar 1999 Special Loan Review Mission for Resettlement fielded

8–20 Aug 1999 Second Special Loan Review Mission for resettlement fielded 11 Feb 2000 $110 million of loan proceeds cancelled

26 Jun 2000 Fujian Provincial Electric Power Corporation Limited set up 24–30 Oct 2000 Third Loan Review Mission fielded

Oct 2000 220 kV transmission line commissioned

8 Mar 2001 Construction of roller-compacted-concrete gravity dam completed 25 May 2001 Commissioning Ceremony for the first generating unit

Jun 2001 Estimated project completion date (at appraisal) 29 Jun 2001 Second generating unit commissioned

5–12 Nov 2001 Fourth Loan Review Mission fielded

22 Oct 2001 Third generating unit commissioned 9 Dec 2001 Fourth generating unit commissioned

Appendix 1 17

19 Dec 2001 Loan closing date extended from 31 Dec 2001 to 30 Jun 2002

29 Dec 2001 Actual physical completion 31 Dec 2001 Original loan closing date (at appraisal)

15 Oct 2002 $7.0 million final cancellation 15 Oct 2002 Loan account closed

31 Oct–5 Nov 2002 Fifth Loan Review Mission fielded

Apr 2003 Net loan proceeds prepaid 16–30 Mar 2004 Project Completion Review Mission fielded B. TA 2085-PRC: Preliminary Analysis of Fujian and Henan Power Projects 21 Mar 1994 Technical Assistance approved 7 Jun 1994 Consultants fielded 15 Jul 1994 Final Report completed

C. TA 2168-PRC: Fujian Mianhuatan Hydropower Project

13–23 Jun 1994 TA Fact-Finding Mission fielded

19 Aug 1994 Staff Review Committee meeting held 26 Sep1994 Technical Assistance approved

14 Oct 1994 Consultants short-listed 20 Jan 1995 Consultants selected

1 Feb 1995 Technical assistance agreement signed

13 Feb 1995 Negotiations with consultants 20 Feb 1995 Consultants’ contract signed

27 Feb 1995 Consultants fielded Jun 1995 Final Report completed D. TA 2363-PRC: Support of Corporatization Plan Preparation for Fujian Province Electric Power Bureau

18 Jul 1995 Technical Assistance approved

21 Sep 1995 Consultants’ contract signed 8–9 Feb 1996 Workshop on Power Sector Restructuring and Utility Corporatization

held in Fuzhou, Fujian Province Jan 1997 Final Report completed E. TA 2472-PRC: Implementation of the Fujian Province Electric Power Bureau

Corporatization and Restructuring Program August 1995 TA fact-finding conducted together with loan fact-finding 18 Oct 1995 Staff Review Committee meeting held

18 Appendix 1

14 Dec 1995 Technical Assistance approved

Oct 1996 Original closing date 11 Dec 1996 Technical assistance agreement signed

29 Apr 1997 Consultants’ services commence 6 May 1999 Final Report completed

Sep 1999 TA account closed

COMPARISON OF PROJECT COST AT APPRAISAL AND COMPLETION

($ million)

Foreign Currency Local Currency Total Cost Items

Appraisal Estimate Actual Appraisal

Estimate Actual Appraisal Estimate Actual

A. BASE COSTS 1. Civil Works 26.9 8.7 87.8 96.3 114.6 105.0 2. Electromechanical Equipment 73.8 32.5 18.7 18.5 92.6 51.0 3. Metal Structures 1.3 0.7 4.3 0.8 5.6 1.5 4. Transmission Works 15.2 0.2 40.9 39.1 56.1 39.3 5. Consulting and Training 2.9 1.8 15.9 2.8 18.8 4.6 6. Miscellaneous 2.3 0.0 90.2 165.7 92.6 165.7 7. Taxes 0.0 0.0 71.1 39.2 71.1 39.2 Subtotal (A) 122.4 43.9 329.0 362.4 451.4 406.3 B. CONTINGENCIES 18.2 0.0 52.3 0.0 70.5 0.0 Base Cost (A) + Contingencies (B) 140.6 43.9 381.3 362.4 521.9 406.3 C. INTEREST DURING CONSTRUCTION (IDC) 29.4 9.1 169.7 22.2 199.1 31.3 TOTAL PROJECT COST (A)+(B)+(C) 170.0 53.0 551.0 384.6 721.0 437.6

Source: Fujian Electric Power Corporation Limited and Fujian Mianhuatan Hydropower Development Company Limited.

Appendix 2

19

20 Appendix 3

AN ANALYSIS OF PROJECT COST UNDERRUN

1. The Project’s total cost was estimated at $721.0 million at appraisal. On completion, the actual project cost was $437.6 million, 60.7% of the original cost estimate, resulting in a cost underrun of $283.4 million. A. Reasons for Cost Underrun

2. The reasons for the cost underrun include (i) high cost estimates at appraisal resulting in substantial savings in the cost of equipment and materials which reflected changes in the market conditions and strong competition in the bidding process; (ii) savings in contingencies; (iii) reduction in taxes and interest costs; (iv) cancellation of the ship hoist component. 3. Cost reduction in equipment and materials reflected changes in the market conditions and strong competition in the bidding process. The Government approved only a few hydropower projects during implementation of the Project, while domestic and international manufacturers were eager to win large contracts. This led to vigorous competition among bidders, and brought down the bidding price. The main contract for turbine generator, for example, attracted 7 bidders, representing all the largest turbine-generator manufacturers in the world. The awarded price for the four turbine-generating units, for instance, was $26.7 million, compared to the estimated cost of $58.7 million at appraisal. 4. Consistent with worldwide trend, interest rates in the PRC declined during project implementation. The China Development Bank (CDB) and the China Construction Bank (CCB), the Project’s two domestic co-financiers, lowered the interest rates of their loans. The interest rate was 15.3% per annum at appraisal, but decreased to 12.4% in December 1996, and further declined to 6.3% in 2003. This decrease in interest rate led to substantial reduction in financing cost of domestic loans. 5. The reduction in taxes and duties resulted from the changes in Government policy on customs duties. When the Project was appraised in 1996, imported goods under foreign-funded projects were subject to customs duties. However, customs duties and taxes levied on imported goods under multilateral and bilateral financing, including ADB financing, were waived in 1998. As a result, savings in taxes and duties were $31.9 million, or 44.9% of the appraisal estimate for this item. 6. The entire contingencies in an amount of $70.5 million were saved due to lower actual base cost. However, part of the contingencies might have been used to cover the increased costs for resettlement. The actual cost for ’Miscellaneous’ under base cost, which mainly consisted of resettlement costs, increased significantly mainly due to the increase in resettlement cost. 7. The ship hoist component was cancelled during project implementation, resulting in a cost saving of $6.5 million. B. Reasons for Loan Cancellations

8. The EA used domestic financing for some contracts costing about $43.0 million which were originally to be financed through ADB loan proceeds. These contracts included certain construction equipment, transmission equipment and materials, steel bars, and cement. The EA

Appendix 3 21

decided to use alternate financing due to (i) lower costs of domestic financing1; and (ii) comparatively shorter bid processing period under local financing which helped meet the tight construction schedule. The alternative financing resulted in part of loan cancellations. 9. In terms of foreign exchange cost, the reduction in base cost resulted in savings in interest cost and contingencies. This also contributed to loan cancellations.

1 In June 2001, ADB introduced LIBOR-based loan (LBL) facility for loans from its Ordinary Capital Resources

OCR). This made ADB’s OCR loans more competitive with domestic financing. However, the Fujian Mianhuatan Hydropower Project was ineligible for conversion to LBL loan because the undisbursed balance under the Project was less than 40% of the original loan amount as of 30 June 2001.

ESTIMATED FINANCING PLAN AND THE ACTUAL FINANCING ARRANGEMENTS

( $ million)

Appraisal Estimate Actual

Source Foreign Local Total (%) Foreign Local Total (%)

Loan

ADB 170.0 0.0 170.0 23.6 53.0 0.0 53.0 12.1

China Development Bank 0.0 232.4 232.4 32.2 0.0 143.6 143.6 32.8

China Construction Bank 0.0 184.6 184.6 25.6 0.0 98.3 98.3 22.5

Other Local Banks 0.0 0.0 0.0 0.0 0.0 24.1 24.1 5.5

SUBTOTAL 170.0 417.0 587.0 81.4 53.0 266.0 319.0 72.9 Equity

Fujian Province Electric Power Bureau 0.0 40.2 40.2 5.6 0.0 9.8 9.8 2.2

Fujian Investment and Development General Corporation 0.0 20.4 20.4 2.8 0.0 23.9 23.9 5.5

State Development Investment Corporation 0.0 53.0 53.0 7.4 0.0 0.0 0.0 0.0

Longyan Prefecture Hydropower Development Company 0.0 20.4 20.4 2.8 0.0 19.6 19.6 4.5

China Huadian Group Corporation 0.0 0.0 0.0 0.0 0.0 65.3 65.3 14.9

SUBTOTAL 0.0 134.0 134.0 18.6 0.0 118.6 118.6 27.1

TOTAL 170.0 551.0 721.0 100.0 53.0 384.6 437.6 100.0

ADB = Asian Development Bank Source: Fujian Electric Power Corporation Limited and Fujian Mianhuatan Hydropower Development Company Limited.

22 A

ppendix 4

Appendix 5 23

PROJECTED AND ACTUAL DISBURSEMENT (1996-2002)

Table A5.1: Projected and Actual Disbursements

($ million)

For the Year Cumulative

Year Projected a Actual Projected Actual %

1996 0.5 0.0 0.5 0.0 0.0 1997 0.2 0.1 0.7 0.1 0.0 1998 4.4 3.3 5.1 3.4 6.4 1999 10.3 8.1 15.4 11.5 21.7 2000 18.5 18.0 33.9 29.5 55.7 2001 15.9 17.1 49.8 46.6 87.9 2002 4.3 6.4 54.1 53.0 100.0 Total 54.1 53.0

Note: a Annual projections exclusive of interest during construction. Source: Asian Development Bank

Figure A5.1: Cumulative Disbursement (1996-2002)

0

10

20

30

40

50

60

1996 1997 1998 1999 2000 2001 2002

Year

Cum

ulat

ive

Dis

burs

emen

t($

mill

ion)

Projected Actual

Source : Asian Development Bank

24 Appendix 6

PROJECTED AND ACTUAL CONTRACT AWARDS (1996-2002)

Table A6.1: Actual Contract Awards ($ million)

For the Year Cumulative

Year Projected a Actual Projected Actual %

1996 2.1 0.0 2.1 0.0 0.0 1997 1.9 1.0 4.0 1.0 2.2 1998 24.4 28.3 28.4 29.3 66.9 1999 12.0 14.3 40.4 43.7 99.7 2000 0.5 0.2 40.9 43.8 100.0 2001 0.0 0.0 40.9 43.8 100.0

2002 0.0 0.0 40.9 43.8 100.0 Total 40.9 43.8

Note: a Annual projections exclusive of interest during construction. Source : Asian Development Bank

Figure A6.1: Cumulative Contract Awards (1996-2002)

0

10

20

30

40

50

1996 1997 1998 1999 2000 2001 2002

Year

Cum

ulat

ive

Con

trac

t Aw

ards

($ m

illio

n)

Projected Actual

Source : Asian Development Bank

PROJECT IMPLEMENTATION SCHEDULE – PROJECTED AND ACTUAL

1994 1995 1996 1997 1998 1999 2000 2001 2002 Task Name

Q1 Q2Q3 Q4Q1 Q2 Q3Q4 Q1Q2Q3 Q4Q1 Q2Q3Q4 Q1Q2 Q3Q4 Q1Q2Q3 Q4Q1 Q2Q3Q4 Q1Q2 Q3Q4 Q1Q2Q3 Q4A Project Processing

B Implementation Consultants Recruitment Implementation C Civil Works Procurement of Steel, Cement and

Diesel

Procurement of Construction Plant/Materials

Access Roads and Preparatory Works

Site Preparatory Works Diversion Works Dam and Spillway Intake and Headrace Underground Powerhouse Surge Chamber and Tailrace Switchyard Ship Lift D Mechanical/Electrical Equipment Prequalification

Finalizing Bid Documents Turbine Generator

Tendering Generating Equipment Delivery and

Installation

Commissioning Plant Operative E Transmission Lines F Environmental Monitoring and

Protection

G Resettlement

Legend: Actual Projected Actual Projected

Source: Asian Development Bank and Fujian Mianhuatan Hydropower Development Company Limited.

Appendix 7

25

26 Appendix 8

FUJIAN MIANHUATAN HYDROPOWER DEVELOPMENT COMPANY LIMITED

SHAREHOLDING STRUCTURE

(Amount in CNY million )

At Appraisal On Completion Shareholders

Amount % Amount %

SDIC 440.0 40.0 0.0 0.0 FPEPB 330.0 30.0 0.0 0.0 FIDGC 165.0 15.0 176.0 22.0 LPHDC CHGC

165.0

15.0

144.0 480.0

18.0 60.0

Total 1,100.0 100.0 800.0 100.0 CHGC = China Huadian Group Corporation FIDGC = Fujian Investment and Development General Corporation FPEPB = Fujian Province Electric Power Bureau LPHDC = Longyan Prefecture Hydropower Development Company Limited. SDIC = State Development Investment Corporation Source: Fujian Mianhuatan Hydropower Development Company Limited.

.

FUJIAN MIANHUATAN HYDROPWOER DEVELOPMENT COMPANY LIMITED

ORGANIZATION CHART

Source: Fujian Mianhuatan Hydropower Development Company Limited.

Appendix 9

27

Engineering Department

(8 Staff)

Deputy General Manager

Chief Accountant Deputy General Manager

General Manager

General Office

(9 Staff)

Technology and Safety Department

(4 Staff)

Planning and Operational Department

(5 Staff)

Production Department (55 Staff)

Finance Department

(6 Staff)

Board of Directors Board of Supervisors

Board of Shareholders

28 Appendix 10

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference Remarks

A. FPEPB Financial Mattes

1. Fujian Province Electric Power Bureau (FPEPB) will take

necessary measures, including making tariff adjustments, to ensure that its internal cash generation is sufficient to maintain a self-financing ratio of 30 % each year commencing in fiscal year 1996.

Schedule to Project Agreement (PA), II, para. 7

Not Complied1

2. Commencing in fiscal year 1996, FPEPB will not incur

additional debt unless a reasonable forecast of its revenues and expenditures shows that estimated net revenues of FPEPB for each fiscal year during the term of the debt to be incurred is at least 1.5 times the estimated debt service requirements of FPEPB in such year on all FPEPB’s debt including the debt to be incurred.

Schedule PA, II, para. 8

Not Complied2

3. Commencing from 1 January 1996, FPEPB will not incur

additional debt if after the occurrence of such debt the ratio of debt to equity will be greater than 75:25 in 1996 and 70:30 thereafter.

Schedule to PA, II, para. 9

Complied with

4. FPEPB and FMHDC will prepare rolling ten-year financial

projections each year commencing with the year in which the projections are submitted showing how the financial covenants are proposed to be complied with and submit the projections to the Bank by 1 April each year.

PA Section 2.09 (b)

Partly complied3

5. FPEPB will cause Fujian Mianhuatan Hydropower

Development Company Limited (FMHDC) to have account for the Project and its overall operations audited annually, by independent auditors acceptable to the Bank, and submit certified copies of such audited accounts to the Bank not later than nine months after the close of the financial year to which they relate.

PA Section 2.09 (a)

Complied with

Continued on next page

Source: Asian Development Bank

1 FPEPB’s audited financial statements state that this covenant has been complied with. However, a review of the

audited financial statements suggests that the EA misunderstood ADB’s definition of this ratio. Although this covenant has not been complied with, the financial position of Fujian Provincial Electric Power Corporation and Fujian Electric Power Corporation Limited appears satisfactory.

2 See footnote 1. 3 FMHDC did not submit its 10-year financial projections.

Appendix 10 29

Continued

Covenant Reference Remarks

6. FPEPB will enter into a Power Purchase Agreement

(PPA) with FMHDC for the purchase of power from Mianhuatan hydropower plant at least 60 days before the start of trial operation of the plant. The draft PPA will be submitted to the Bank for review before being finalized and the PPA will not be modified without prior approval of the Bank.

Schedule to PA, I, para. 3 and 4

Partly Complied 4

7. FPEPB will ensure through suitable provisions in the

PPA that the tariff for the sale of the power from Mianhuatan hydropower plant will be based on the principles and norms agreed with the Bank. The tariff will be sufficient to ensure the financial viability of the Project and the financial soundness of FMHDC, which will ensure, inter alia, the capacity of FMHDC to meet its debt service obligations and cover its operating expenses, working capital requirements and special fund provisions.

Schedule to PA, I, para. 5

Partly Complied 5

B. Environment

8. FPEPB will ensure that the engineer for the Project, the contractor, and the consultants carry out all agreed environmental protection measures, in particular all measures necessary to implement recommendations contained in the Environmental Impact Assessment (EIA) Report on the Project.

Schedule to PA, IV, para. 12

Complied with

9. FPEPB will require that FMHDC ensure the contractors

establish a Mianhuatan Environmental Protection Office (MEPO) and provide the MEPO with trained staff and adequate resources.

Schedule to PA, IV, para. 13

Complied with

10. FMHDC will establish a Mianhuatan Environmental

Management and Monitoring Office (MEMO) and will provide it with adequate financial, material, and staff resources.

Schedule to PA, IV, para. 17

Complied with

Continued on next page

4 A draft PPA between FPEPB and FMHDC was received by ADB in October 1998. On December 1998, the revised

PPA was sent to ADB. However, these PPAs covered only the principles governing the energy purchase and sale, and not specific details normally covered in a PPA.

5 Although there is currently no PPA wherein the tariff has been determined based on the principles agreed with ADB, NDRC has determined the tariff level for sale of power from the Project which is sufficient to make the Project financially viable, and FMHDC’s financial performance satisfactory (see paras 31 and 56)

30 Appendix 10

Continued

Covenant Reference Remarks

11. FPEPB will, before the start of construction on the main

civil works, prepare a detailed Environment Management Program that clearly indicates environmental management and monitoring activities to be undertaken during the construction phase, reporting procedures, responsibilities, costs, cooperative arrangements and authority. The Program will also contain a broader framework for environmental management and monitoring during the operational phase of the Project.

Schedule to PA, IV, para. 15

Complied Late (see para. 63)

12. FPEPB will, starting within three months after the

Effective Date, provide to the Bank quarterly reports and evaluations of environmental issues and problems together with remedial measures proposed and taken until such time that the Bank determines no further need for submission of such reports to the Bank.

Loan Agreement (LA), Schedule 6, III B, para. 12

Complied with

13. FPEPB shall submit quarterly report and evaluations of

environmental issues and problems including remedial measures proposed and taken.

Schedule to PA, para. 16

Complied with

14. Borrower shall cause FPEPB and FMHDC to ensure land

acquisition and water right for timely project implementation.

PA, Schedule 6, para. 2

Complied with

C. Social 15. The resettlement plan for the Project will be implemented

according to the approved plan and implementation schedule and, all the people affected by the Project will be provided with housing, basic civic amenities and a viable means of livelihood which are, at least, of the same level as those of villages of origin. The affected people will not be displaced from their place of residence until all arrangements for their relocation at the new sites are completed. Adequate and appropriate compensation, training and extension assistance will be provided to persons displaced by the Project in accordance with the resettlement plan accepted by the Bank.

LA, Schedule 6, III A, para. 5, 6 and 7

Mostly Complied with outstanding issues (see para 58-62).

16. The Longyan Prefecture will implement the resettlement

plant and ensure that adequate funds, facilities, services and other required resources are provided in a timely manner. Resettlement Management and Coordination Offices (RMCO) will be established at relevant prefectures, counties and townships to implement the resettlement plan.

LA, Schedule 6, para. 8 and 9

Complied with

Continued on next page

Appendix 10 31

Continued

Covenant Reference Remarks

17. FPEPB shall ensure the submission of quarterly progress reports and evaluations of the Resettlement Plan until such time the Bank determines no further need for submission.

LA, Schedule 6, para. 10

Complied with

18. FPEPB shall ensure that implementation schedule of the

Resettlement Plan is Adjusted and additional budget provided, if necessary, based on the mid-term review as referred to in para. 18 of the Schedule to the Project Agreement.

LA, Schedule 6, para. 11

Complied with

19. FPEPB will require FMHDC to appoint an independent

agency to monitor and evaluate the implementation of the Resettlement Plan and provide it with resources and authority required to effectively discharge its duties. Except as the Bank shall otherwise agree, FPEPB shall ensure that monitoring and evaluation programs are undertaken over a period of not less than seven years beginning within six months of the Effective Date.

Schedule to PA, IV, para. 17

Partly Complied 6

20. FPEPB will require FMHDC to carry out a midterm

review of the implementation of the resettlement plan. The implementation schedule will be adjusted and additional budget provided if found necessary during the midterm review of the plan.

Schedule to PA, IV, para. 18

Mostly Complied, with some outstanding issues (see para 58-62).

D. Others

21. Established, Staffed and Operating PMU/PIU Complied with 22. Project implementation consultants to commence work

during 2nd quarter 1996. Complied with

23. FPEPB shall submit Progress Report to the Bank

quarterly. LA, Section 2.08 (b)

Complied with

24. FMHDC shall undertake benefit monitoring and

evaluation of the Project. Schedule to PA, para. 21

Not Complied

25. FPEPB shall perform the obligations under the Project

Implementation Agreement it has entered into with FMHDC.

Schedule to PA, para. 2

Complied with

Continued on next page

6 The contract between the EA and the external monitor expired on June 2002. Since then ADB has been following

up with the EA and suggesting resuming the external monitoring.

32 Appendix 10

Continued

Covenant Reference Remarks

26. FPEPB will prepare and submit to the Bank by 1 April of each year beginning in fiscal year 1996 an annual program for energy conservation and an annual report concerning past achievements, during implementation of the Project.

Schedule to PA, para. 1

Complied with

27. Within one year after the Effective Date, FPEPB shall,

and shall cause FMHDC to, furnish the Bank for approval respective plans for training FPEPB and FMHDC staff to be financed by the Bank in the technical areas and resettlement arrangements.

Schedule to PA, para. 20

Complied with

28. FPEPB shall, and shall cause FMHDC to, ensure that (i)

employees who have received training in connection with the Project Implementation to be placed and retained in the Project related positions for the whole period of the Project Implementation, and (ii) employees who have received training in connection with operation of the Project facilities to be placed and retained in the positions related to Project operation for an appropriate period of time in the initial years of operation of the Project facilities.

Schedule to PA, para. 20

Complied with

29. FPEPB will enter into a Power Plant Operation and Maintenance Agreement (PPOMA) with FMHDC at least 60 days before the start of trial operation of the plant. The draft PPOMA will be submitted to the Bank for review before being finalized and the PPOMA will not be modified without prior approval of the Bank.

Schedule to PA, I, para. 6

Not Applicable7

30. FPEPB will implement the tariff reforms, including

unification of tariffs, in accordance with the tariff reforms plan approved by FPG and acceptable to the Bank, in a manner satisfactory to the Bank, in the four coastal prefectures of Fuzhou, Putian, Quanzhou, and Zhangzhou by 31 December 1996 and in the remaining areas of the province by 31 December 1997. FPEPB will keep the Bank informed about the status of implementation of the reforms.

Schedule to PA, III, para. 10

Complied with

31. FPEPB will implement the corporatization and

restructuring program in accordance with the plan approved by the Government and discussed with the Bank. FPEPB will keep the Bank informed about the status of implementation of the corporatization and restructuring program and further policy initiatives in this regard.

Schedule to PA, III, para. 11

Complied with

7 The EA advised the Loan Review Mission 2001 that FMHDC staff was experienced in constructing and operating

power plants, and therefore there is no need for a PPOMA. FMHDC’s successful operation over the past three years has confirmed this position.

FUJIAN ELECTRIC POWER CORPORATION LIMITED

TARIFF SCHEDULE

(As of December 2003)

Electricity Charge (CNY/kWh) Basic Tariff

Maximum Transformer Demand Capacity

Category of Consumer Lower than

1kV 1-10kV 35 - 110kV 110kV 220kV and higher

(CNY/kW/Mo.) (CNY/kW/Mo.)

Residential 0.422 0.417

Nonresidential Lighting 0.510 0.503

Commercial 0.780 0.733

Nonindustry/Common Industry 0.617 0.529 0.572

Large Industry 0.484 0.477 0.472 0.467 22.000 16.000

Electrolytic Caustic Soda Synthetic Ammonia, Electric Yellow Phosphorus, Electric Calcium Ammonia Phosphate, Pesticide, and Coal-mining

0.230 0.205 22.000 16.000

Calcium Carbide 0.135 0.130 0.125 22.000 16.000

Alkali Chlorine 0.370 0.365 0.360 22.000 16.000

Electric Aluminum Alloy 0.249 0.244 0.239 22.000 16.000

Agriculture 0.199 0.195 0.189

Wholesale tariff 0.450 kV = kilovolt; kW = kilowatt; kWh = kilowatt-hour; Mo. = Month Source: Fujian Electric Power Corporation Limited.

Appendix 11

33

34 Appendix 12

FINANCIAL PERFORMANCE OF THE EXECUTING AGENCY AND

FUJIAN MIANHUATAN HYDROPOWER DEVELOPMENT CORPORATION LIMITED

A. Financial Performance of the Executing Agency

1. As envisaged at appraisal, Fujian Province Electric Power Bureau (FPEPB) was the Project’s Executing Agency. At the time of Project appraisal, FPEPB was an independent legal entity under the Ministry of Electric Power. In 1996, the State Power Corporation (SP) was created to manage the assets in the power sector, and accordingly FPEPB became a subsidiary of SP. FPEPB constructed and operated power facilities in the Fujian Province, including generation, transmission and distribution facilities. In June 2000 FPEPB was corporatized as Fujian Provincial Electric Power Corporation (FPEPC). 2. In 2002, the Government announced another round of power sector restructuring to separate generation from transmission and distribution operations. FPEPC was accordingly restructured into Fujian Electric Power Corporation Limited (FEPC). The transfer of generation assets, which commenced in 2002, was completed in Nov 2003. FEPC mainly manages transmission and distribution facilities, and certain generating capacity for peak and frequency regulation. It is envisaged that FEPC will again be restructured as Fujian Provincial Grid Corporation Limited in the near future. 3. Financial covenants for FPEPB include self-financing ratio of not less than 30% starting from 1996, debt service ratio of at least 1.5 times starting from 1996, and debt/equity ratio of 75/25 for 1996, and 70/30 for 1997 and onwards. Table A12.1 presents FPEPB/FPEPC’s financial statements from 1995 to 2003, with the recalculated covenanted ratios based on ADB’s definitions. Based on this, it is seen that the EA has complied only with the debt/equity ratio. The self-financing ratios and debt service ratios fluctuated substantially over the period, due to the restructuring and corporatization, particularly the separation of generation assets in 2002. Capital investments were substantially financed by borrowings. Operating costs increased substantially since FEPC had to buy power from plants previously owned by itself. 4. However, with additional equity contributions, the debt/equity ratios were kept at levels lower than 70/30. FPEPC/FEPC maintained sound cash flow position, mainly because of a good bill collection system, evidenced by the fact that the receivables have been kept at the level of about ten days of sales. This sound cash position enables FPEPC/FEPC to make timely payment for its power purchases from Fujian Mianhuatan Hydropower Development Company Limited (FMHDC). The National Development and Reform Commission (NDRC) recently announced a tariff increase of CNY0.022 per kilowatt-hour (kWh) for all the industrial and commercial consumers, 80% of the benefit from this tariff increase will be allocated to grid companies. FEPC is expected to benefit from this tariff increase. B. Financial Performance of FMHDC

1. Analysis of Financial Performance

5. The Fujian Mianhuatan Hydropower Development Company Limited (FMHDC) was established in 1995 to own and operate the Mianhuatan hydropower plant under the Project. FMHDC’s current shareholders include China Huadian Group Corporation (60%), and Fujian

Appendix 12 35

Investment and Development General Corporation (22%), and Longyan Prefecture Hydropower Development Corporation Limited (18%). FMHDC started operation in 2001 with all the four generating units being commissioned in the year. FMHDC has been selling all the power generated from the Mianhuatan power plant to FEPC. FMHDC’s actual financial statements of 2000-2003 and the ten-year financial projections are presented in Table A12.2. Assumptions for financial projections are in Section B.2. 6. FMHDC has kept its operating cost at a low level, compared with other hydropower plants. FMHDC made profit from the first year of operation. The average return on net fixed assets was 5.4% for 2001-2003, and is expected to remain at satisfactory levels. FMHDC has been receiving payments from FPEPB/FPEC for its sales in a timely manner. Its receivables are currently maintained at about the level of one month of sales, which is satisfactory. The debt to equity ratio is lower than 70/30. 7. FMHDC’s debt service ratio dropped to less than 1.0 in 2003, because FMHDC prepaid ADB loan in the year and refinanced it with cheaper domestic loans. Based on the payment schedules of active loans, the debt service ratio is expected to increase to above 1.0 in 2004, and remains stable for the next five years. 8. FMHDC has distributed to its shareholders 80% of its profits in terms of dividend in the last three years, which has resulted in a tight cash flow for FMHDC. FMHDC should refrain from excessive dividend payment, which will undermine FMHDC’s capacity to withstand the risks of lower revenues due to fluctuations in generation as a result of poor rainfall, and due to unfavorable changes in the market. It also affects FMHDC’s ability to finance its capital investment activities with internally generated funds. FMHDC should discuss the dividend policy with its shareholders, and include the policy in the equity investment agreements and the corporate charter.

2. Assumptions for Financial Projections

9. The major assumptions underlying the financial projections include:

(i) Domestic inflation rates are 3.0% for 2004, 2.7% for 2005, and 3% for 2006 and thereafter;

(ii) The exchange rate between US dollar and CNY is 8.3; (iii) Principal repayments and interest expenses are estimated based on FMHDC’s

loan agreements with domestic banks, including the loan of CNY200 million to be borrowed in 2004 for resettlement compensation. The CNY loans have terms of 10 to 12 years and with an interest rate of 5.18%. For LIBOR based loans denominated in US dollar, interest rate of 2% is assumed;

(iv) The designed energy output of Mianhuatan is 1,510 gigawatt-hour (GWh), with

the normal water level of 173.0 m. In 2002, the State Anti-flood Office stipulated a ceiling water level of 168.7 m during flood seasons, which has reduced the Project’s annual energy output to 1,350 GWh. This reduced annual energy output is therefore used in the financial projections;

36 Appendix 12

(v) The tariff of CNY0.3747 per kWh was approved by NDRC (earlier the State Development Planning Commission) in 2003, which is maintained constant in real terms during the projection period;

(vi) The depreciation rate is 5.5%.

(vii) Maintenance costs are 1.0% of the fixed assets value, and escalated with local

inflation rate;

(viii) Other material costs are CNY4.6 per kW per annum and assumed to be escalated with local inflation rate;

(ix) Reservoir maintenance fund is be CNY0.001 per kWh, and escalated with local

inflation rate;

(x) Post-reallocation support fund is CNY0.008 per kWh generation from 2004 to 2011;

(xi) Income tax is 33% of net income before tax, and value-added tax is 17% of

operating revenue;

(xii) City construction tax and education tax are respectively 5% and 4 % of value-added tax (VAT);

(xiii) Public reserve fund is 10 % of net income after tax; the Welfare Reserve Fund is

5% of net income after tax;

(xiv) Dividend payment will not be made until debt service ratio is higher than 1.2;

(xv) Baisha Hydropower Station: FMHDC plans to develop a new hydropower station, Baisha Hydropower station with capacity of 2X35 MW. Construction will start by the end of 2004. The generating units will be put into operation in 2007. The total capital cost of the Baisha project is about CNY510 million, of which 25% is equity investment, 75% is debt. This investment is considered in the projections. The annual energy output is about 185 GWh. The average tariff is CNY0.41 per kWh, including the value added tax.

Appendix 12 37

Table A12.1: Financial Performance of the Executing Agency (CNY million)

1997 1998 1999 2000 2001 2002 2003INCOME STATEMENTS

FPEPB FPEPC FPEC Energy Sales (GWh) 20,147 21,681 24,751 28,792 31,800 39,879 47,389Tariff excluding VAT (CNY/kWh) 0.328 0.367 0.368 0.352 0.373 0.367 0.387

Operating Revenues 6,605.8 7,950.9 9,102.2 10,143.2 11,858.7 14,649.4 18,358.7

Cost and Expenses 5,442.6 6,801.5 7,871.4 8,556.3 9,975.5 12,535.5 17,202.6

Sales/ Administration 87.9 123.7 230.6 296.2 323.7 345.8 307.9

Total Operating Expenses 5,530.5 6,925.2 8,102.0 8,852.5 10,299.2 12,881.3 17,510.5

Operating Income 1,075.3 1,025.7 1,000.2 1,290.6 1,559.6 1,768.1 848.2

Less: Financial Expenses 652.9 610.3 668.0 595.3 764.9 930.9 643.3

Add: Net Non-Operating Income (18.9) (15.8) (46.3) (558.0) (71.4) (33.5) 98.3

Other Income (18.8) 28.1 136.9 318.3 189.0 215.3 133.1

Taxable Incomes 384.7 427.7 422.8 455.6 912.2 1,018.9 436.4

Income Tax 121.6 140.8 134.3 320.9 393.3 424.1 138.4

Net Income 263.0 286.9 288.5 134.7 518.9 594.8 297.9

Reserve Surplus Allocation 263.0 286.9 290.3 204.5 361.4 345.1 57.4

Dividend Allocation 0.0 0.0 0.0 0.0 141.7 293.9 163.7

Retained Earnings at End of Year 0.00 0.00 (1.7) (71.5) (55.6) (99.7) (22.9)

BALANCE SHEETS 1997 1998 1999 2000 2001 2002 2003

Cash 2,290.4 1,941.2 3,472.7 1,626.2 1,631.3 3,941.0 4,207.2 Accounts Receivable 320.2 397.5 342.0 388.5 367.6 338.3 538.2

Inventories & Others 2,051.5 2,676.4 2,005.4 4,430.7 4,301.3 2,836.4 1,911.6

Total Current Assets 4,662.1 5,015.1 5,820.1 6,445.3 6,300.2 7,115.7 6,657.1

Long-term Investments 454.4 341.4 443.3 373.8 514.7 611.7 232.9

Net Plant in Service 12,987.8 15,175.1 16,436.8 20,789.9 27,554.0 30,541.1 26,812.1

Work in Progress 2,231.5 3,372.4 4,015.6 6,028.8 2,777.7 2,755.8 1,659.2

Total Fixed Assets 15,219.3 18,547.5 20,452.3 26,818.7 30,331.7 33,296.9 28,471.3

Deferred and Intangible Assets 131.0 42.8 60.9 86.4 99.4 98.6 55.4

Total Assets 20,466.8 23,946.9 26,776.6 33,724.1 37,246.0 41,122.8 35,416.6

Accounts Payable 644.7 984.5 1,875.5 1,456.1 1,693.4 1,697.9 2,885.7

Short-term Loans & Others 1,857.4 2,436.9 2,435.2 3,044.1 3,661.1 4,534.1 3,580.2

Total Current Liabilities 2,502.1 3,421.4 4,310.7 4,500.1 5,354.5 6,232.0 6,465.8

Long-term Debts 10,022.5 10,711.5 10,633.6 14,871.8 16,566.7 19,071.9 15,956.9

Paid-in Capital 3,654.7 4,439.8 4,477.3 5,762.5 6,098.2 6,242.3 5,843.8

Capital Surplus 3,078.8 3,789.8 5,535.2 6,700.0 6,957.7 7,006.7 4,445.9

Reserve Surplus 1,208.6 1,584.3 1,821.5 1,961.2 2,324.6 2,669.7 2,727.1

Retained Earnings 0.0 0.0 (1.7) (71.5) (55.6) (99.7) (22.9)

Total Equity 7,942.1 9,814.0 11,832.3 14,352.2 15,324.8 15,818.9 12,993.9

Total Equity and Liabilities 20,466.8 23,946.9 26,776.6 33,724.1 37,246.0 41,122.8 35,416.6

Debt as % of Debt and Equity 55.8 52.2 47.3 50.9 51.9 54.7 55.1

Continued on next page FEPC = Fujian Electric Power Corporation Limited; FPEPB = Fujian Province Electric Power Bureau; FPEPC = Fujian Provincial Electric Power Corporation Limited; GWh = gigawatt-hour; kWh = kilowatt-hour; VAT = value-added tax; — = data not available. Source: FPEPB/FPEPC’s audited financial statements and calculations by ADB staff.

38 Appendix 12

Table A12.1— Continued

1997 1998 1999 2000 2001 2002 2003 CASH FLOW STATEMENTS

FPEPB FPEPC FPEC

Net Income 263.0 286.9 288.5 134.7 518.9 594.8 297.9 Depreciation 754.9 1,015.7 1,022.4 1,389.2 1,747.8 2,037.7 1,892.0

Borrowings 1,346.2 1,834.9 2,374.5 6,156.1 4,515.0 6,805.9 5,297.7

Equity 624.0 869.1 570.3 700.6 428.5 92.5 23.0 Total Sources 2,988.1 4,006.5 4,255.7 8,380.7 7,210.2 9,530.9 7,510.6

Capital Expenditure 1,794.9 3,240.1 3,503.8 4,858.1 4,412.7 4,180.8 3,335.6

Long-term Investments 92.3 (113.0) 101.8 (69.5) 141.0 97.0 11.2

Change in Working Capital 48.0 (217.1) (2,354.1) 2,343.9 794.8 (1,801.0) (119.9)

Dividend 0.0 0.0 0.0 0.0 141.7 293.9 163.7

Principal Repayment of Loans 2,004.5 1,445.7 1,472.8 3,094.8 1,714.8 4,450.6 3,853.8 Total Application 3,939.7 4,355.7 2,724.3 10,227.3 7,205.1 7,221.2 7,244.4

Changes in Cash (951.6) (349.2) 1,531.5 (1,846.6) 5.1 2,309.7 266.3

Cash, at beginning of Year 3,421.1 2,290.4 1,941.2 3,472.7 1,626.2 1,631.3 3,941.0

Cash, at end of Year 2,290.4 1,941.2 3,472.7 1,626.1 1,631.3 3,941.0 4,207.2

Debt Service Coverage Ratio 0.6 0.9 0.9 0.6 1.2 0.7 0.6 Self-Financing Ratio (%) (48.0) 6.6 54.1 (90.3) (11.7) (10.3) —

Appendix 12 39

Table A12.2: Fujian Mianhuatan Hydropower Development Company Limited Financial Statements — Past and Projections

(CNY million) INCOME STATEMENTS 2001 2002 2003 2004 2005 2006 Actual Projected Energy Sales (GWh) 794 1,118 1,302 1,287 1,350 1,350 Average Price including VAT (CNY/kWh) 0.3654 0.3842 0.3747 0.3803 0.3912 0.4023 Average Price excluding VAT (CNY/kWh) 0.3123 0.3283 0.3203 0.3251 0.3343 0.3439 Operating Revenue 290.2 429.5 487.9 489.5 528.1 543.2 Net Operating Revenues 248.0 367.1 417.0 418.4 451.4 464.3 Operation and Maintenance 14.9 27.9 41.5 41.0 46.1 47.0 Depreciation 89.3 151.1 157.7 161.8 181.3 181.3 Sales and Administration 19.3 23.5 21.7 28.1 29.2 30.1 Total Operating Expenses 123.5 202.5 220.9 230.9 256.6 258.4 Operating Income 124.5 164.6 196.1 187.5 194.8 205.9 Less: Financial Expenses 75.0 117.7 107.9 96.8 93.0 86.8 Taxable Income 49.6 47.0 88.3 90.7 101.8 119.2 Net Income 33.0 28.1 55.6 60.7 68.2 79.8 BALANCE SHEETS Cash 123.2 141.2 30.0 32.2 36.5 51.5 Accounts Receivables 33.2 6.3 20.1 21.7 22.3 Inventories and Others 31.9 5.4 5.8 6.0 6.2 6.4 Total Current Assets 155.1 179.8 42.1 58.3 64.4 80.2 Gross Fixed Assets 2,694.7 2,827.4 2,887.7 3,242.7 3,242.7 3,242.7 Accumulated Depreciation 93.9 245.0 402.7 564.5 745.9 927.2 Net Fixed Assets in Service 2,600.8 2,582.4 2,485.0 2,678.2 2,496.8 2,315.5 Work in Progress 64.5 41.9 155.0 130.0 270.0 380.0 Net Fixed Assets 2,665.3 2,624.2 2,640.0 2,808.2 2,766.8 2,695.5 Long term investments 25.1 25.8 26.4 27.2 Total Assets 2,820.4 2,804.0 2,707.1 2,892.2 2,857.7 2,802.9 Accounts Payable 34.0 23.9 28.5 30.4 31.3 Short-term Loans 30.0 26.1 27.9 28.7 Others 95.9 42.1 56.9 58.6 60.2 62.0 Total Current Liabilities 95.9 76.1 110.7 113.2 118.5 121.9 Long-term Debt 1,905.6 1,896.2 1,772.9 1,854.8 1,706.8 1,548.7 Paid-in Capital 794.7 800.0 800.0 840.0 880.0 900.0 Reserve Surplus 3.6 7.8 16.2 21.7 27.8 35.0 Retained Earnings 20.6 23.9 7.3 62.5 124.6 197.3 Total Equity 818.9 831.7 823.4 924.2 1,032.4 1,132.2 Total Equity and Liabilities 2,820.4 2,804.0 2,707.1 2,892.2 2,857.7 2,802.9 CASH FLOW STATEMENTS 2001 2002 2003 2004 2005 2006 Net Income 33.0 28.1 55.6 60.7 68.2 79.8 Depreciation 89.3 151.1 157.7 161.8 181.3 181.3 Borrowings 218.2 52.6 543.5 290.0 100.0 90.0 Equity Contribution 120.6 9.5 8.3 40.0 40.0 20.0 Total Sources of Funds 461.1 241.3 765.1 552.5 389.6 371.2 Capital Expenditures 386.4 110.0 173.4 330.0 140.0 110.0 Long-term Investments 0.0 0.0 25.0 0.8 0.7 0.8 Increase/ (decrease) in Working Capital (26.6) 30.6 (52.7) 11.5 (3.5) (2.7) Dividend 8.8 20.6 63.9 0.0 0.0 0.0 Loan Repayment 0.0 62.0 666.7 208.1 248.1 248.1 Total Applications of Funds 368.6 223.3 876.4 550.3 385.2 356.2 Net Cash Flow 92.5 18.0 (111.2) 2.2 4.3 15.0 Cash Balance at Beginning of Year 30.6 123.2 141.2 30.0 32.2 36.5 Cash Balance at End of Year 123.2 141.2 30.0 32.2 36.5 51.5 Ratios: Return on Net Fixed assets(%) 4.1 5.6 6.5 6.1 6.2 6.9 Debt/(Debt & Equity) Ratio(%) 69.9 69.5 68.3 66.7 62.3 57.8 Debt Service Ratio 2.6 1.7 0.4 1.0 1.0 1.0

Continued on next page

40 Appendix 12

Table A12.2— Continued (CNY million)

2007 2008 2009 2010 2011 2012 2013 INCOME STATEMENTS Projected

Energy Sales (GWh) 1,399 1,536 1,536 1,536 1,536 1,536 1,536 Average Price including VAT (CNY/kWh) 0.4157 0.4317 0.4446 0.4580 0.4717 0.4858 0.5004 Average Price excluding VAT (CNY/kWh) 0.3553 0.3689 0.3800 0.3914 0.4032 0.4153 0.4277 Operating Revenue 581.7 663.0 682.9 703.4 724.5 746.3 768.6 Net Operating Revenues 497.2 566.7 583.7 601.2 619.2 637.8 657.0 Operation and Maintenance 61.6 65.5 71.1 72.8 74.6 62.4 63.8 Depreciation 181.3 186.3 205.0 205.0 205.0 205.0 205.0 Sales and Administration 34.0 35.9 37.0 38.1 39.2 40.4 41.6 Total Operating Expenses 277.0 287.7 313.0 315.9 318.8 307.8 310.5 Operating Income 220.2 279.0 270.7 285.3 300.5 330.0 346.5 Less: Financial Expenses 77.6 66.2 53.1 39.8 28.0 18.5 11.2 Taxable Income 142.6 212.8 217.6 245.6 272.5 311.6 335.3 Net Income 95.5 142.6 145.8 164.5 182.5 208.8 224.6 BALANCE SHEETS Cash 84.1 137.9 210.9 191.3 216.2 288.8 496.3 Accounts Receivables 23.9 27.2 28.1 28.9 29.8 30.7 31.6 Inventories and Others 6.6 6.8 7.0 7.2 7.4 7.6 7.8 Total Current Assets 114.5 171.9 245.9 227.4 253.4 327.1 535.7 Gross Fixed Assets 3,332.7 3,673.5 3,673.5 3,673.5 3,673.5 3,673.5 3,673.5 Accumulated Depreciation 1,108.5 1,294.8 1,499.8 1,704.8 1,909.9 2,114.9 2,319.9 Net Fixed Assets in Service 2,224.2 2,378.7 2,173.7 1,968.7 1,763.6 1,558.6 1,353.6 Work in Progress 340.8 (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Net Fixed Assets 2,565.0 2,378.7 2,173.7 1,968.7 1,763.6 1,558.6 1,353.6 Long term investments 28.1 28.9 29.8 30.7 31.6 32.5 33.5 Total Assets 2,707.6 2,579.5 2,449.3 2,226.7 2,048.6 1,918.2 1,922.8 Accounts Payable 34.0 37.9 39.1 40.2 41.4 39.2 40.4 Short-term Loans 30.5 34.0 35.0 36.1 37.2 38.3 39.4 Others 63.8 65.7 67.7 69.7 71.8 74.0 76.2 Total Current Liabilities 128.3 137.7 141.8 146.0 150.4 151.4 156.0 Long-term Debt 1,340.7 1,060.6 780.6 529.9 321.3 160.0 128.0 Paid-in Capital 910.8 910.8 910.8 910.8 910.8 910.8 910.8 Reserve Surplus 43.6 56.4 69.5 84.3 100.8 119.6 139.8 Retained Earnings 284.2 414.0 546.6 555.6 565.3 576.5 588.3 Total Equity 1,238.6 1,381.2 1,527.0 1,550.7 1,576.9 1,606.8 1,638.9 Total Equity and Liabilities 2,707.6 2,579.5 2,449.3 2,226.7 2,048.6 1,918.2 1,922.8 CASH FLOW STATEMENTS Net Income 95.5 142.6 145.8 164.5 182.5 208.8 224.6 Depreciation 181.3 186.3 205.0 205.0 205.0 205.0 205.0 Borrowings 40.0 0.0 0.0 0.0 0.0 0.0 0.0 Equity Contribution 10.8 0.0 0.0 0.0 0.0 0.0 0.0 Total Sources of Funds 327.7 328.9 350.8 369.6 387.6 413.8 429.7 Capital Expenditures 50.8 0.0 0.0 0.0 0.0 0.0 0.0 Long-term Investments 0.8 0.8 0.9 0.9 0.9 0.9 1.0 Increase/ (decrease) in Working Capital (4.6) (5.8) (3.1) (3.2) (3.3) 0.1 (3.4) Dividend 0.0 0.0 0.0 140.8 156.3 178.9 192.6 Loan Repayment 248.1 280.1 280.1 250.6 208.6 161.3 32.0 Total Applications of Funds 295.1 275.1 277.8 389.1 362.6 341.2 222.2 Net Cash Flow 32.6 53.8 73.0 (19.6) 25.0 72.5 207.5 Cash Balance at Beginning of Year 51.5 84.1 137.9 210.9 191.3 216.2 288.8 Cash Balance at End of Year 84.1 137.9 210.9 191.3 216.2 288.8 496.3 Ratios: Return on Net Fixed assets(%) 7.6 9.1 8.7 9.9 11.3 13.7 16.2 Debt/(Debt & Equity) Ratio(%) 52.0 43.4 33.8 25.5 16.9 9.1 7.2 Debt Service Ratio 1.1 1.1 1.2 1.4 1.8 2.4 10.2 GWh = gigawatt-hour; kWh = kilowatt-hour; VAT = value added tax Source: Actuals from the FMHDC’s financial statements, projections from ADB staff consultant’s analysis.

Appendix 13 41

TECHNICAL ASSISTANCE COMPLETION REPORT

Division: PRCM

Amount Approved: $300,000 TA No. and Name

2472-PRC: Implementation of the Fujian Province Electric Power Bureau Corporatization and Restructuring Program

Revised Amount:

Executing Agency: Fujian Province Electric Power Bureau

Source of Funding: Japan Special Fund

TA Amount Undisbursed $1,888.3

TA Amount Utilized

$298,111.7

Date Closing Date

Approval 14 Dec 1995

Signing 11 Dec 1996

Fielding of Consultants 29 April 1997

Original Oct 1996

Actual Sep 1999

Description The Fujian Province Electric Power Bureau (FPEPB), was a state-owned enterprise, responsible for construction and operation of power facilities in Fujian Province. FPEPB was selected by the Government as one of the state-owned enterprises to be corporatized into a wholly state-owned limited liability company under the Company Law and restructured to undertake commercialized operations. FPEPB prepared a plan for corporatization with objectives of (i) separating the Government ownership and enterprise management; (ii) separating the regulatory functions from the operational functions in the power subsector; (iii) increasing the autonomy and accountability of management; (iv) adopting modern enterprise management methods; (v) separating non-core business from mainstream tasks; and (vi) introducing competition in the power subsector in the province. Earlier, ADB had approved a small-scale TA for FPEPB to recommend improvements in FPEPB’s initial plan for corporatization and restructuring. Following that TA, the Government requested ADB to provide a TA to help FPEPB implement its corporation and restructuring plan. Objectives and Scope The objective of this TA was to assist FPEPB in the implementation of the corporatization and restructuring program, including transformation of FPEPB into a limited liability company, organization restructuring and developing management information and control systems. The TA was divided into two phases. Under Phase I, the scope of work included: (i) reviewing the power subsector in Fujian Province, including the institutional and regulatory frameworks; (ii) reviewing power utility corporatization programs being undertaken in other provinces and the possible changes in the power subsector regulatory framework; (iii) studying the concepts and issues involved in implementing the corporatization program; (iv) recommending improvements in the corporatization and restructuring program. Under Phase II, consultants were required to (i) prepare detailed plan for implementing the corporatization and restructuring of the power subsector in Fujian Province; (ii) prepare a detailed organization chart of FPEPB under the approved corporatization plan; (iii) provide assistance in the preparation of draft articles of association for incorporation of the subsidiaries, corporate mission statement and objectives and goals of FPEPB and its subsidiaries; (iv) make recommendations on the size and composition of the board of directors and management; (v) identify the regulatory functions as distinct from operational functions of FPEPB and prepare recommendations on the separation of the two functions; (vi) recommend improvements in the management control and financial systems for the corporatized FPEPB; (vii) provide recommendations about delegation of authority; (viii) prepare recommendations on the establishment of power sale-purchase systems between power companies and supply and distribution bureaus under contract; and (ix) prepare and present a corporate plan and outline the corporate strategies for the company.

Evaluation of Inputs The design, scope and terms of reference of the TA were considered appropriate for achieving the TA’s objective. An international consulting firm was engaged to carry out the TA in accordance with ADB’s Guidelines on the Use of Consultants. The contract was signed on 11 Dec 1996. Fieldwork started on 29 April 1997 and completed by 6 May 1999. The firm provided a total of 6 person-months of international and 3 person-months of domestic consulting services over a period of 24 months. The consulting team comprised 7 specialists with expertise in economics, institutional reforms, legal and financial areas and power engineering. The consulting team had the appropriate technical skills to carry out the assignment. FPEPB provided full cooperation, relevant documents and information,

42 Appendix 13

counterpart staff and necessary logistics support. FPEPB also coordinated properly with the other government agencies for the TA. ADB provided close supervision through regular correspondence, inception and review missions. Evaluation of Outputs The draft Final Report was completed in April 1997. The consultants made detailed recommendations on the corporatization plan prepared by FPEPB, covering organization structure, assets revaluation and ownership, staffing, commercial operation and long-term plans, etc. The consultant concluded that asset revaluation, resolving asset ownership, removing government functions and other non-core businesses, transference of existing contracts were necessary steps for the corporatization. The consultant prepared a detailed plan for implementing the corporatization and specific steps were articulated for the transitional period. The consultant recommended a simplified corporate structure and a straightforward organizational structure, where composition of board of directors, responsibilities of management and line staff were specified. To promote commercialized operation, the consultant highlighted the importance of introducing competition and transparent incentives in the power procurement, and recommended the principles to be reflected in the power purchase agreement. The consultant also recommended accounting separation of subsidiaries as a solution for intra-corporate transactions to introduce competition. The consultant provided sample financial and management reports based on an assessment of the strategic information needs of FPEPB after the corporatization. In the area of corporate plan, the consultant prepared the corporate mission statement, identified the objectives, outlined the key strategies and prepared the Articles of Association (Corporate Charter). The TA particularly offered several options for resolving the asset ownership issue, which had delayed the approval of FPEPB’s corporatization program. The Executing Agency drew on the TA recommendations in resolving this issue. The recommendations on composition of the Board of Directors, the PPA, the contents of the corporate plan, setting up of Strategic Business Units, and separation of non-core functions are among the most valued outcomes of the TA. Fujian Electric Power Corporation Limited (FEPC) felt that the PPA developed under the TA is better than the model PPA currently suggested in the sector. The international field study was found useful. Overall Assessment and Rating The Final Report under the TA was available in May 1999. The TA helped corporatize and commercialize FPEPB as part of the power sector restructuring subsequent to the resolution of the asset ownership issue. In June 2000, FPEPB was corporatized as the Fujian Provincial Electric Power Corporation (FPEPC), an independent legal entity. The regulatory functions were separated from utility functions in Fujian power sector. Under the next phase of power sector restructuring in April 2002, the State Council announced a nationwide power sector restructuring plan to separate generation from transmission and distribution, and introduce competitive power markets. Accordingly in January 2003, FPEPC was restructured as FEPC. Assets transfer was completed in November 2003. Future work includes creating FEPC as a subsidiary of East China Power Grid Corporation Limited, and divestment of non-core businesses. The TA helped corporatize FPEPB and commercialize FPEPC in a proper way, so that it will be easier for FEPC to be restructured as a subsidiary of East China Power Grid Corporation in the future. FEPC currently has a business plan and is developing management control systems using the TA recommendations. FEPC expressed that the Consultants provided good service. The EA’s personnel involved in the Task Force learned new concepts from the TA. The TA was properly designed, well implemented, and has achieved its key objective. The TA is rated as successful. Major Lessons Learned Proper identification of the EA’s needs, a well-prepared TOR, selection of experienced industry experts, strong ownership of the EA, and close ADB supervision are important ingredients to ensure successful implementation of a TA project. TA projects in a transitional sector environment need to be adequately monitored and the TA scope adjusted when necessary to reflect the evolving situation and to remain relevant to the needs of a project entity. Recommendations and Follow-Up Actions No further action is recommended. Prepared by: Wang Fang Designation: Finance Officer, PRCM

SUMMARY OF ASIAN DEVELOPMENT BANK-FINANCED CONTRACTS

PCSS No. Contract Package Content Procurement

Mode Contact Date Country of Origin of the Contractor Value ($)1

A. Civil Works 0005 Construction Equipment Concrete Pump Truck (1 Set) ICB 07 Sep 1998 PRC 332,338 0006 Construction Equipment Double Vibratory Roller (3 Sets) ICB 06 Sep 1998 GER 238,800 0007 Construction Equipment Surface Hydraulic Crawler Drill Rig. (3 Sets) ICB 06 Sep 1998 JPN 579,088 0008 Construction Equipment Hydraulic Drill Jumbo (2 Sets) ICB 05 Sep 1998 PRC 1,511,700 0011 Cement for Construction Cement (103,547 tons) ICB 26 Jan 1999 PRC 3,043,448 0012 Steel Reinforcement Rod Steel Reinforcement Rod ICB 07 Jan 1999 PRC 2,389,997 0013 Steel Plate Steel Plate ICB 08 Jan 1999 PRC 627,038 0014 Diesel for Construction Diesel ICB 11 Jan 1999 PRC 608,415 B. Electromechanical Equipment 0002 Generator and Associated

Equipment 150MW Generators & Accessories (4 sets) ICB 20 Apr 1998 PRC 14,374,127

0003 Turbines and Associated Equipment

153MW Hydraulic Turbines & Accessories (4 Sets)

ICB 20 Apr 1998 GER 10,306,068

0004 Observation Instrument Dam Observation Instrument ICB 10 Jun 1998 USA 148,591

0016 Gas Insulation Switchgear 252KV SF6 Gas-Insulated-Metal Enclosed Switchgear

ICB 07 Jun 1999 PRC 2,180,992

0017 Main Transformers Power Transformer (2 Sets) ICB 07 Jun 1999 PRC 1,794,428 0018 Power Plant Control System Computer Supervisory & Control System ICB 07 Jun 1999 PRC 1,480,760 0019 Generator Breaker 17.5KV Generator Circuit Breakers (4 Sets) ICB 07 Jun 1999 SWI 1,240,603 0020 Cable 252 XLPE Cables (2,951m) ICB 30 Aug 1999 PRC 932,907 C. Transmission Works 0021 Composite Optical Fiber

Ground Wire Composite Optical Fiber Ground Wire ICB 29 Nov 2000 KOR 157,073

D. Consulting and Training 0001 International Consulting

Services Implementation Supervision ICS 21 Nov 1997 CAN 1,004,513

0010 Training Services 12 Overseas Training Missions for FPEPB Staff

ICS 27 Aug 1998 CAN 836,355

CAN = Canada; FPEPB = Fujian Province Electric Power Bureau; GER = Germany; ICB = international competitive bidding; ICS = international consultant selection; JPN = Japan; KOR = Republic of Korea; PRC = People’s Republic of China; SWI= Switzerland; USA = United States. Source: Asian Development Bank staff consultant’s analysis

1 Only the contracts valued at more than $100,000.

Appendix 14

43

44 Appendix 15

FINANCIAL EVALUATION

A. Basic Assumptions

1. The financial internal rate of return (FIRR) was reevaluated on the basis of financial and operational information obtained from the Fujian Mianhuatan Hydropower Development Company Limited (FMHDC) and certain revenue and cost assumptions. Capital cost was based on actual expenditures incurred for the Project, excluding interest and other financial charges during construction. All revenues and expenses were expressed in 2004 prices with actual domestic and international inflation rates. Calculation period covered the construction period and operation period of 25 year after the commissioning of the first unit in 2001. In view of the longer economic life of hydropower projects, the residual value of the Project was assumed to be 20% of the project capital cost.

2. Project revenues were determined on the basis of the electricity output from Mianhuatan Hydropower Plant, assuming an annual average energy generation of 1,350 gigawatt-hour (GWh). The present tariff of CNY0.3747 per kilowatt-hour (kWh) (including value added tax, or VAT) was assumed to be maintained constant in real terms for the calculation period. Maintenance expenses were assumed to be 1.0% of the net value of fixed assets. Other operation and administration costs were based on the actual levels, including the post-relocation support fund levied on revenues. VAT, income tax, and other taxes were excluded from the net benefits of the Project. B. Financial Internal Rate of Return

3. The FIRR was recalculated as 8.9% (see Table A15.1), compared with 10% estimated at appraisal. This variation is mainly because of the lower energy output, lower actual tariff level, and higher actual operation cost. Compared with the present tariff of CNY0.3747 per kWh (with VAT), at appraisal, the tariff was worked out to be CNY0.587 per kWh during the loan repayment period, and CNY0.316 per kWh after loan repayment. In spite of the significantly lower actual tariff levels, the FIRR is still at acceptable levels due to substantially lower actual capital costs.

4. The after-tax Weighted Average Cost of Capital (WACC), in real terms, was calculated using the actual capital mix and costs of various resources financing. The revised WACC is 4.3%1, compared with 5.0% at appraisal. The Project’s FIRR is higher than the WACC and the Project is considered financially viable.

1 The WACC for the project is revised at 4.3%, with (i) ADB’s pool-based variable US dollars loan at an interest rate

of 6.5%, (ii) domestic bank’s loan with interest rate at 5.76%, (iii) return of equity distribution at 8%. Income tax was assumed at 33% and average domestic inflation at 3.0%.

Appendix 15 45

Table A15.1: Financial Internal Rate of Return

( CNY million)

Year Capital Cost

O&M Cost

Benefits Excluding

Taxes

Net Cash Flow

1995 99.9 (99.9) 1996 146.1 (146.1) 1997 210.0 (210.0) 1998 539.0 (539.0) 1999 533.1 (533.1) 2000 834.2 (834.2) 2001 312.2 34.2 231.4 (115.0) 2002 31.6 51.4 348.2 265.3 2003 0.0 63.2 384.3 321.1 2004 302.9a 62.0 376.0 11.1 2005 66.0 394.0 328.0 2006 66.0 394.0 328.0 2007 66.0 394.0 328.0 2008 66.0 394.0 328.0 2009 66.0 394.0 328.0 2010 66.0 394.0 328.0 2011 66.0 394.0 328.0 2012 55.2 394.0 338.8 2013 55.2 394.0 338.8 2014 55.2 394.0 338.8 2015 55.2 394.0 338.8 2016 55.2 394.0 338.8 2017 55.2 394.0 338.8 2018 55.2 394.0 338.8 2019 55.2 394.0 338.8 2020 55.2 394.0 338.8 2021 55.2 394.0 338.8 2022 55.2 394.0 338.8 2023 55.2 394.0 338.8 2024 55.2 394.0 338.8 2025 55.2 394.0 338.8 2026 (601.8) 55.2 394.0 940.6 FIRR 8.9 %

FIRR = financial internal rate of return; O&M = operation and maintenance. Note: a Additional costs for resettlement and civil works in the year. Source: Asian Development Bank staff consultant’s analysis

46 Appendix 16

ECONOMIC EVALUATION

A. Basic Assumptions

1. The economic evaluation of the Project followed the same methodology used in the appraisal. The financial costs were converted into economic costs by excluding duties, taxes and interests and other financial charges during construction period, and adjusted to 2004 prices. Imported goods were valued at international prices. For local costs, specific conversion factor of 1 was applied to equipment; a standard conversion factor of 0.93 was applied to other local costs. Shadow wage rate for skilled and unskilled labor was 2.0 and 0.67 respectively. Operation and maintenance expenses were based on the actual levels, and converted to their economic prices using the standard conversion factor. 2. Economic benefits included those from firm energy output and benefits from secondary energy output. For firm energy output of the plant, the economic benefits were measured based on the consumers’ willingness to pay (WTP). The WTP, valued at CNY0.699 per kilowatt-hour (kWh), was estimated based on the energy cost of the alternative electricity or energy source for major categories of customers and consumer surplus of 35%. Table A16.3 shows the detailed calculation for WTP. 3. The benefit of secondary energy output was valued at the savings in fuel and other operation and maintenance costs of coal fired plants. Rate for mid-size coal fired plant was used for deriving the cost savings of CNY0.126 per kWh, while at appraisal CNY0.40 per kWh was used. This is because at appraisal, rates for small coal fired plants and gas turbines were used to derive the cost savings in fuel and other operation and maintenance costs. This resulted in much higher benefit for the secondary energy output during appraisal. The assumption for reevaluation is conservative, because under the current power shortage situation, secondary energy is more likely to be used to meet additional consumption rather than to displace energy from existing thermal plants, and could be valued at WTP. The costs of transmission and distribution, including system loss, were excluded from the benefits. 4. Environmental benefits were valued based on the benefits transfer method, according to the methodology adopted in ADB’s Workbook on Economic Evaluation of Environmental Impacts (1996) to determine the monetary impacts of damages caused by air pollution. Estimates of average annual climate change for carbon emissions were made to evaluate the monetary impact caused by greenhouse gas emissions, which was used for the global environmental benefit of the Project. The derived externality costs of total suspended particles (TSP), sulfur dioxide (SO2) and nitrogen oxides (NOx) were CNY6,515/ton, CNY1,534/ton, and CNY1,637/ton respectively in 2001, with an annual growth rate of 5% for the years thereafter. The derived emission factors of TSP, SO2, NOx and carbon dioxide (CO2) were 0.36 gram per kilowatt-hour (g/kWh), 4.62 g/kWh, 2.88 g/kWh, and 746.7 g/kWh respectively. B. Economic Internal Rate of Return (EIRR)

5. The reevaluated EIRR of the Project with the foregoing assumptions is 13.4%, compared with 16.9% at appraisal. The EIRR is lower mainly because of the differences in the assumptions for estimating benefit of secondary energy output, and the lower actual energy output compared with the appraisal estimates. The EIRR will increase to 14.2% when local environmental benefits are taken into account, and to 15.1% with global environmental benefits included. Details are presented in Table A16.1.

Appendix 16 47

6. Sensitivity analysis was conducted to test the impacts of variations in energy output, operation and maintenance expenses, as well as WTP (Table A16.2). The Project will still remain viable with 10% of decrease in energy output, or 20% increase of operation and maintenance expenses, or 10% decrease in WTP.

48 Appendix 16

Table A16.1: Economic Internal Rate of Return

Energy Output Mianhuatan Hydropower Project Costs Benefits Net Benefits

Firm Energy

Secon-dary

Energy LC FX O&M Firm

Energy

Secon-dary

Energy

Local Env.

Global Env. W/O Env. +Local + Local

+ Global

CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY

Year

GWh GWh million million million million million million million million million million

1995 0.0 0.0 90.7 0.0 0.0 0.0 0.0 0.0 0.0 (90.7) (90.7) (90.7)

1996 0.0 0.0 132.6 0.0 0.0 0.0 0.0 0.0 0.0 (132.6) (132.6) (132.6)

1997 0.0 0.0 190.6 0.0 0.0 0.0 0.0 0.0 0.0 (190.6) (190.6) (190.6)

1998 0.0 0.0 469.8 21.4 0.0 0.0 0.0 0.0 0.0 (491.1) (491.1) (491.1)

1999 0.0 0.0 435.5 53.1 0.0 0.0 0.0 0.0 0.0 (488.7) (488.7) (488.7)

2000 0.0 0.0 635.2 134.2 0.0 0.0 0.0 0.0 0.0 (769.4) (769.4) (769.4)

2001 417.0 389.3 172.0 122.6 31.3 254.0 49.1 12.0 21.4 (22.9) (10.9) 10.5

2002 705.0 423.7 4.8 26.3 45.6 429.3 53.4 17.7 30.2 406.1 423.8 453.9

2003 705.0 609.9 0.0 0.0 56.0 429.3 76.8 21.7 35.1 450.2 471.9 507.0

2004 705.0 595.0 274.8 0.0 61.8 429.3 75.0 22.5 34.7 167.7 190.2 224.9

2005 705.0 658.2 65.9 429.3 82.9 24.7 36.4 446.4 471.1 507.5

2006 705.0 658.2 65.9 429.3 82.9 26.0 36.4 446.4 472.4 508.8

2007 705.0 658.2 65.9 429.3 82.9 27.3 36.4 446.4 473.7 510.1

2008 705.0 658.2 65.9 429.3 82.9 28.6 36.4 446.4 475.0 511.4

2009 705.0 658.2 65.9 429.3 82.9 30.1 36.4 446.4 476.5 512.9

2010 705.0 658.2 65.9 429.3 82.9 31.6 36.4 446.4 478.0 514.4

2011 705.0 658.2 65.9 429.3 82.9 33.2 36.4 446.4 479.6 516.0

2012 705.0 658.2 55.2 429.3 82.9 34.8 36.4 457.1 491.9 528.3

2013 705.0 658.2 55.2 429.3 82.9 36.6 36.4 457.1 493.6 530.0

2014 705.0 658.2 55.2 429.3 82.9 38.4 36.4 457.1 495.5 531.9

2015 705.0 658.2 55.2 429.3 82.9 40.3 36.4 457.1 497.4 533.8

2016 705.0 658.2 55.2 429.3 82.9 42.3 36.4 457.1 499.4 535.8

2017 705.0 658.2 55.2 429.3 82.9 44.4 36.4 457.1 501.5 537.9

2018 705.0 658.2 55.2 429.3 82.9 46.7 36.4 457.1 503.7 540.1

2019 705.0 658.2 55.2 429.3 82.9 49.0 36.4 457.1 506.1 542.5

2020 705.0 658.2 55.2 429.3 82.9 51.4 36.4 457.1 508.5 544.9

2021 705.0 658.2 55.2 429.3 82.9 54.0 36.4 457.1 511.1 547.5

Continued on next page

Appendix 16 49

Table A16.1 — Continued

Energy Output Mianhuatan Hydropower Project Costs Benefits Net Benefits

Firm Energy

Secon-dary

Energy LC FX O&M Firm

Energy

Secon-dary

Energy

Local Env.

Global Env. W/O Env. +Local + Local

+ Global

CNY CNY CNY CNY CNY CNY CNY CNY CNY CNY

Year

GWh GWh million million million million million million million million million million

2022 705.0 658.2 55.2 429.3 82.9 56.7 36.4 457.1 513.8 550.2

2023 705.0 658.2 55.2 429.3 82.9 59.5 36.4 457.1 516.6 553.0

2024 705.0 658.2 55.2 429.3 82.9 62.5 36.4 457.1 519.6 556.0

2025 705.0 658.2 55.2 429.3 82.9 65.7 36.4 457.1 522.7 559.1

2026 705.0 658.2 (481.2) (71.5) 55.2 429.3 82.9 68.9 36.4 1,009.8 1,078.7 1,115.1

PV 8,354.3 7,388.3 3,788.2 488.3 696.4 5,087.8 930.9 353.8 420.3 598.1 951.9 1,372.1

EIRR 13.4% 14.2% 15.1%

EIRR = economic internal rate of return; Env. = environmental; FX = foreign exchange cost; GWh = gigawatt-hour; kWh = kilowatt-hour; LC = local cost; O&M = operation and maintenance; PV = present value; W/O Env. = without environmental benefits. Notes: (a) Willingness to Pay (WTP) for firm energy from the Project: CNY0.699/kWh (b) Value of Secondary Energy from the Project (fuel only): CNY0.126 /kWh (c) Transmission and distribution losses included in network costs. (d) Network costs: CNY0.90/kWh (e) Time-of-day tariff adjustment on industrial consumers is included. (f) Dedicated transmission line costs are not included. (g) Rate of discount: 12% Source: Asian Development Bank Staff Consultant’s analysis.

Table A16.2: Sensitivity Analysis

Case EIRR (%)

Base Case 13.4

Energy Output, -10% 11.9

Operation Cost, +20% 13.0

Willingness-to-pay, -10% 12.1 EIRR = economic internal rate of return Source: Asian Development Bank Staff Consultant’s analysis.

50 Appendix 16

Table A16.3: Willingness to Pay Calculations

Consumer category

Alternative Source of Electricity

Urban Residential Gas Lamp

Rural Residential Kerosene

Lamp

Commercial Petrol

Generator

Industrial Small Coal-fired Plant

Ratings and Usage Capacity kW 0.1 0.1 5.0 1.0

Daily Use hours 5 4 10 12 Daily Energy Output kWh 0.5 0.4 50.0 12.0

Annual Use hours 1,825 1,460 3,650 4,380 Annual Energy Output KWh/yr 183 146 18,250 4,380

Design Life years 5 5 8 25 Design Life hours 9,125 7,300 29,200 109,500

Annual Load Factor % 21 17 42 50 Investment Cost

Investment CNY/kW 3,950 900 5,448 11,000 Total Investment CNY 395 90 27,240 11,000

Annual Investment Cost CNY/yr 98 22 4,896 1,252 Unit Cost CNY/kWh 0.54 0.15 0.27 0.29

Operation and Maintenance Costs Fixed CNY/kW-yr 0 0 272.4 330

Variable CNY/kWh 0.01 0.1 0.1 0.1 Total CNY 1.825 14.6 3,187 768

Unit Cost CNY/kWh 0.01 0.10 0.17 0.18 Fuel Costs

Efficiency % 19 11 20 25 Fuel Consumption tce 0.12 0.16 11.21 2.19

Fuel Retail Price CNY/tce 1,500 1,500 1,500 395 Annual Cost CNY/yr 177.00 244.58 16,815.09 864.58

Unit Cost CNY/kWh 0.97 1.67 0.92 0.20 Local Losses % 0 0 2 10

Local Costs % 100 100 100 100 Conversion Factor 0.93 0.93 0.93 0.93

Alternative Energy Cost CNY/kWh 1.41 1.79 1.29 0.68 Willingness-to-pay Calculation

Share of Consumer Category % 0.095 0.072 0.125 0.707

End-Consumer Tariffs CNY/kWh 0.42 0.42 0.78 0.59 Consumer Surplus, at 35% CNY/kWh 0.35 0.48 0.18 0.03

Willingness To Pay CNY/kWh 0.77 0.90 0.96 0.62 Weighted

Willingness To Pay CNY/kWh 0.699 kW = kilowatt; kWh = kilowatt-hour; tce = tons of coal equivalent; yr = year Note: Figures may not add up to total because of rounding. Source: Asian Development Bank staff consultant.

FORECAST FOR ECONOMIC AND ELECTRICITY GROWTH IN THE FUJIAN PROVINCE

Electricity GDP Growth Rate Peak Load Annual Growth

Rate Consump-

tion Annual Growth Rate

Five-Year Plan Year

(%) (MW) (%) (GWh) (%)

Remarks

1995 — 26,150 8.9 9th

2000 11.8

6,307 —

40,150

2001 9.0 7,216 14.4 43,920 9.3 2002 10.5 7,757 7.5 49,680 13.1 2003 10.3 9,510 22.5 58,570 17.9

Actual

2004 9.0 10,700 12.5 64,600 10.3 10th

2005 9.0 11,900 11.2

13.3

72,500 12.2

13.3

2006 13,300 81,000 2007 14,800 90,000 2008 16,400 99,000 2009 18,000 108,000

11th

2010

10.0

19,500

10.0

117,000

9.6

12th 2015 8.5 28,330 7.8 170,000 7.8

Projected

— = data not available; MW = megawatt; GDP = gross domestic product; GWh = gigawatt-hour

Source: Fujian Electric Power Corporation Limited; China Statistical Yearbook 2003; Data of Gross Domestic Product of

China (1996-2002), the PRC Statistical Bureau, March 2004.

Appendix 17

51

52 Appendix 18

IMPLEMENTATION OF THE RESETTLEMENT PLAN

A. Resettlement Planning

1. A Resettlement Plan (RP) was prepared by a domestic design institute in 1993 wherein it was estimated that 41,054 people would be affected, of which 35,947 would need to be relocated. In 1997, Fujian Provincial Government (FPG) approved a resettlement budget of CNY958.7 million. During ADB loan review missions in 1998 and 1999, it was determined that several resettlement issues had not been properly addressed and the implementation plan had changed significantly. Subsequently, consultants were contracted to identify supplementary measures for resettlement. A revised RP was updated by the Fujian Proviince Electric Power Bureau (FBEPB) and resubmitted to ADB in December 1999, which estimated that 43,567 people would be affected, of which 38,521 people would be relocated. The revised budget for resettlement was CNY1,141.4 million. In 2000, Longyan Municipal Resettlement Office (LMRO) prepared a detailed resettlement implementation plan1 and the FPG approved a revision to the budget in the amount of CNY1,176.8 million. B. Resettlement Impacts

2. As of December 2003, the actual number of people affected was 39,393, of which 30,640 lost farmland and 36,913 lost housing. In terms of relocation, 14,756 people (40%) constructed housing in the 33 “move-back” sites around the reservoir, 13,352 people (36%) constructed housing in the 23 “move-out” sites near towns or Shanghang City, and 8,805 people (24%) relocated on their own (i.e., move away to other cities). For those who lost farmland, 12,991 people (42%) resettled nearby, 13,352 (44%) moved out, and 4,297 people (14%) moved away to seek employment in large cities. Construction of the new houses and the village (and town) infrastructure at the 56 relocation sites has been initially inspected by the external monitor and the monitor’s reports have been sent to Fujian Mianhuatan Hydropower Development Company Limited (FMHDC). These sites will be rechecked by FPG during the resettlement acceptance exercise, which is scheduled in late 2004. 3. According to FMHDC, about CNY1,130.4 million (98.6% of the revised resettlement budget) has been disbursed. LMRO reported that CNY1,256.9 million has already been committed (111.2% of budget). In January 2004, FPG agreed to release the funds paid for farmland occupation tax and other fees (totaling CNY213 million) to cover this shortfall. The Fujian Provincial Resettlement Development Bureau has confirmed this additional resettlement budget. Also, FMHDC has been contributing to the post-relocation support fund since 2001. The contribution in 2004 is expected to reach CNY12 million. However, the funds have not yet been disbursed to the counties yet pending agreement on the allocation and utilization of funds. These funds should be put to use to help solve the remaining problems with resettlement. C. Resettlement Management, Supervision and Monitoring

4. Resettlement for the Mianhuatan Project was implemented in accordance with the RP approved by ADB, and the regulations stipulated by the Government. For medium and large-scale reservoir projects that affect tens of thousands of people, resettlement and rehabilitation

1 This implementation plan is used as the revised baseline for the PCR.

Appendix 18 53

of people’s livelihoods has always been difficult. This proved true for the Mianhuatan Project and problems were identified by ADB at an early stage. FMHDC and LMRO have made good efforts to address problems but the regulations and compensation standards limit the ability to restore livelihoods. The physical resettlement of people was quite successful, with one significant shortcoming— the affected people have spent too much money on housing rather than production means. 5. All planned resettlement offices were established at provincial, municipality, county and township level. These offices were provided all necessary working offices, equipment and vehicles. Training was provided to all resettlement officers in various forms. The training covered resettlement planning, financial management, livelihood development etc. LMRO established a monitoring system within the project management to supervise the project implementation. This system extends down to the municipal and county resettlement offices and townships resettlement stations. It covers financial management, annual planning management, progress monitoring, reservoir clearance, disbursement, completion inspection, training, etc. The project had developed and established a set of management regulations and procedures covering annual planning, planning and design review procedures, progress reporting, disbursement, reservoir clearance, completion inspection, grievance redress, resettlement supervision, etc. At the same time, project staff at LMRO, County Resettlement Offices and township levels were instructed to follow through the implementation of these rules and regulations. 6. A design institute was engaged to assist the Executing Agency (EA) in designing the entire Mianhuatan Hydropower project. The design institute carried out the detailed designs jointly with the LMRO and county resettlement offices, including inventory updating, compensation rate evaluation, assessment of carrying capacity of different options of resettlement sites, feasibility of different resettlement alternatives, as well as the cost estimate. The design institute has been in charge of the technical review and checking of all resettlement budget adjustments. Their role continued through the implementation process. 7. The effective functioning of the design institute has ensured the quality and efficiency of the detailed planning and design process, helped significantly with consensus building and coordination in the implementation process. As stipulated in the Loan Agreement, the design institute was appointed in 1997 as the Independent Monitor to carry out social economic monitoring of the resettlement program. The monitoring was conducted twice each year on a sample basis since April 1997, with a final monitoring in March 2002 based on the contract with FMHDC. It covered various aspects of the resettlement program for the resettlers. Monitoring information was collected through the interview of the sample households and village surveys. The design institute provided two baseline living standard surveys, 8 regular investigation reports and 3 evaluation reports on the overall project. These reports were submitted to both the FMHDC and ADB. 8. The then Ministry of Electric Power and Fujian Provincial Resettlement Office appointed the Reservoir Resettlement Special Committee of State Hydropower Engineering Association as the Resettlement Supervisor for the project. The supervisor started working in 1998. The supervisor established a supervising team headed by a Chief Supervisor with supervising staff. The supervision was carried out on the basis of the approved Resettlement Plans, annual implementation plans, FMHDC-prefecture contracts and the supervision contract. It covered all aspects of the resettlement implementation, including resettlement physical progress, construction quality and specifications, contract management and coordination. The supervision was carried out from the field stations through regular site visits, interviews, meetings as well as

54 Appendix 18

review of progress reports. They identified bottlenecks, problems and recommended measures to address them. 9. FMHDC engaged an international resettlement specialist to assist with the supervision and monitoring resettlement aspects of the project since 1997. The last report was submitted to the EA and ADB in November 2002. This specialist played a very useful role in the project management and provided good advice in the resettlement implementation and management. D. Consultation, Participation and Grievance Redress

10. The Project followed a highly consultative and participatory process in its planning, design and implementation. While the governments and the design institutes played the leading role, the resettled communities were the actual driving force in the project. Resettlers participated in the inventory and census, planning and design as well as its implementation of their respective resettlement sites and livelihood development programs. 11. As a prerequisite for effective participation, the project followed consistently an information disclosure strategy that enabled information participation of the resettlers. All media channels were mobilized to disseminate project information for consultation and participation purpose. The resettlement information booklet was distributed to the affected households and villages. Information disseminated relate to the project, resettlement policies, compensation rates and measures, household inventory, resettlement alternatives and site designs, grievance channel. The grievance redress mechanism was established, with assigned staff at county level and an operational regulation. The resettlers could complain about incorrect measurement of affected asserts and their compensation amount. The resettlers negotiated the choice of relocation sites, house construction, land distribution and so on. The project management also maintained a continuous presence in the field to facilitate early identification and fast resolution of grievances. In general, this system functioned effectively to facilitate smooth implementation. E. Relocation of Housing

12. The project established 58 administrative villages with basic infrastructure and public facilities, such as road, water supply, drainage system, electricity and communications, health and education facilities. The new houses total about 1.5 million m2 and average 41.76 m2 per capita, with much improved construction and sanitary conditions. Monitoring data indicates that the housing conditions and physical living environment of the resettlers have substantially improved as a result of the project. The average housing area is slightly smaller than before, but housing has improved in terms of the quality of house and better living conditions. The monitor’s survey also indicates that most of the houses before resettlement were earth-timber structures (more than 70%) which were changed to brick and concrete houses (more than 97%) after relocation. The number of multi-storied houses also increased significantly. All resettlers have moved into new houses although many houses are not fully finished, since local people prefer to build extra floors and finish them when they can save up enough money. All new villages are complete with basic infrastructure and public facilities. The resettlers have improved access to public services such health, education, and better access to market, non-farm employment and information. F. Gender and Vulnerable Groups

13. Women, children and vulnerable groups account for the majority of the resettlers that need particular attention to their particular needs, concerns and problems. Women participated

Appendix 18 55

in the entire process of project planning and implementation. This includes the inventory, census, the finalization of resettlement sites, and selection of housing type. Women also played an important and active role in income generation activities. About 242 women participated in various skills training and about 140 men were organized by LMRO for the labor output to enterprises in Xiamen and Shengzheng cities. And more women participated the training in various agriculture technical training activities. All resettlement villages have improved access to education and health facilities, with much improved study environment and medical treatment. 14. The resettlers who moved to the sites near the county seats entered their children in the same primary and middle schools with the host urban children. Their education and health care conditions are much better than before. The vulnerable people — elderly, disabled, household with people suffering chronic diseases, without labor, widowed and extremely poor — have received their resettlement entitlements, and have all moved into new houses with assistance under the project and communities. Particular care was taken of the elderly and widowed people by relocating them in the local nursing homes, which was arranged by the local government and communities. The poor families relocated nearby the counties, in which the income lower than CNY120 per month per capita, can share the social welfare policies for the poor urban citizen and receive subsides from the government. G. Rehabilitation of Livelihoods and Incomes

15. The resettled population enjoys better living conditions. The outside resettlement sites have good infrastructure such as power, water supply and drainage systems, schools, and easy access to road and markets as well as none-farm job opportunities. Most of 13,115 resettlers that moved-out from the reservoir areas relocated in the sites nearby the county. These resettlers can share the higher standard education, health, transportation, and businesses. The project has achieved its target of the land-based rehabilitation strategy, and all resettlers have been allocated farmland as planned. A small number of resettlers have taken up jobs in local enterprises. 16. A major factor in income restoration and improvement is the unexpected sideline and non-farm businesses that have contributed significantly to the improvement of the resettlers’ livelihoods. This is particularly so with resettlers who moved out into the sub-urban areas or the plain areas in the countryside where easier transport and better access to markets and information have boosted the non-farm sector among resettlers based on the optimized relocation sites. The host population have also benefited from the infrastructure development such as the roads, water supply, schools, etc. All host villages have reallocated their collective farmland and invested the land compensation into productive activities that benefit the entire communities. However, a few villages that have opted to stay in the reservoir area are still experiencing difficulties to fully restore their income levels. The reasons are lack of sufficient good farmland and limited non-farm opportunities. 17. In terms of livelihood restoration, there are some good examples of rehabilitation but it appears the budget was not adequate to address the needs for all people. Fortunately, many young people were able to go outside to find employment, but this was achieved with only modest support from LMRO (i.e., less than 5% of workers going outside received training). In April 2002, the external monitor reported that most of the affected people had still not restored their pre-project income levels. The results were disputed by FPG and LMRO, but even the survey conducted in 2002 by the county Statistics Bureaus revealed that 25% of households have not restored their pre-project income levels.

56 Appendix 18

H. Conclusions and Recommendations

18. Since no further evaluations have been carried out since April 2002, there is a high probability that many of the affected households have still not restored their incomes. it is recommended that LMRO and FMHDC (i) identify the households that are still facing difficulties; (ii) In consultation with the affected people, identify remedial measures, formulate an implementation plan, and forward it to ADB for review; (iii) formulate the budget required to assist these households, secure additional funding from FPG and implement these measures; and (iv) monitor the results and submit reports to ADB; and (v) after one year conduct a final external evaluation and submit a report to ADB to verify that all households have restored their incomes and living standards. Only then would the resettlement component be in full compliance with ADB’s social safeguard policies.

Appendix 19 57

TRAINING ACTIVITIES UNDER THE PROJECT

Table 19.1: ADB-Financed Training

No. Subject Person-week Date Location

1 Economic Operation of Power Plants 16 Oct 1998 Canada 2 Economic Operation of Power Plants 16 Dec 1998 Canada 3 Dam Construction 18 Oct 1999 Canada 4 Demand Side and Tariff Management 18 Nov 1999 Canada, U.S.A 5 Construction Management 24 Mar 2000 Canada 6 Dam Safety 16 May 2000 Canada 7 Resettlement 12 Jul 2000 Thailand, Indonesia

and Singapore 8 Technology and Management of

Unmanned Hydropower Plants 21 Nov 2000 Canada

9 Flood Forecasting and Flood Warning 24 Nov 2001 Canada 10 Hydropower Planning 12 Feb 2002 Canada 11 Environmental Management and

Monitoring 14 Jan 2002 Canada

12 Financial Administration 21 Mar 2002 Canada Source: Fujian Electric Power Corporation Limited.

Table A19.2: Training Organized by Fujian Mianhuatan Hydropower Development Company Limited

No. Subject Person-month Time Location

1 Power Plant Operation 1 Aug 1999 Geheyan Power Plant, Wuqianxi Power Plant, Guangtan Power Plant

2 Electric Specialty Training 120 May 1999 Quanzhou Electric School

3 Electric ENgineering and Hydropower Machinery 250 Sep 1999 Hehai University

4 Power Plant Operation 45 Feb 2000 Shuikou Power Plant

5 Power Plant automation 105 May 2000 Guangzhou Pump Storage Power Plant

6 Power Plant Maintenance 180 Feb 2000 Xishui Power Plant, Gutian

7 Power Plant Maintenance 120 Aug 2000 Guangzhou Pump Storage Power Plant

8 Hydropower Engineering/Reservoir Dispatching/Hydrological Measurements 30 Mar 2000 Ansha Power Plant

9 Hydropower Engineering/Reservoir Dispatching/Hydrological Measurements

50 Jun 2000 Shuikou Power Plant

10 Hydropower Construction Management 3 Oct 2000 Guangzhou Pump Storage Power Plant

11 Flood Forecasting and Warning System 3 Nov 2000 Nanri Corporation

12 Business Management (for mid-level managers) 20 During

2001-2003 Fujian Electric Power Corporation Limited

13 Computer Operations 150 During 2003-2004 Company Internal Training

Source: Fujian Mianhuatan Hydropower Development Company Limited.

58 Appendix 19

Table A19.3: Training Organized by Longyan Municipal Resettlement Office

No. SUbject Person-time

Time Location

1 Resettlement Policies and Regulations 2600

Apr, May, Jun, Sep and Dec 1998 and May, Nov and Dec 1999

Counties and Townships in Reservoir the Area

2 Grapefruit Plantation 800 Nov 1998 and Dec 1999 Xianshi and Hongshan inYongding; Zhongdu and Niantian in Shanghang

3 Waxberry Plantation 50 Jan 1999 Xianshi, Yongding County

4 Fishery and Production Security Management 390 Jun 1999, Feb and Mar 2000

and Sep 2001 Xianshi and Hongshan in Yongding; Xiadu and Niantian in Shanghang

5 Shoe Manufacturing and Toy Painting Art 200 Apr 2001 Fengcheng in Yongding

6 Tuber Crops Plantation 100 Nov 2002 Fengcheng, Chengjiao and Xianshi townships, Yongding

7 Mushroom Plantation 30 Oct 2002 Chengjiao and Fengcheng, Yongding

8 Pig Raising 290 Aug, Nov and Dec 2003 Fengcheng and Hongshan in Yongding, Xiadu and Niantian inShanghang

9 Popularization of aggro-technologies 1800

Sep 1999, Mar 2000, Feb 2001, Apr 2002, May 2003, and Mar 2004

Counties and Townships in the Reservoir Area

10 Bamboo Plantation 800 Feb 2002 and Mar 2003 Counties and Townships in the Reservoir Area

11 Production Technology 30 May 1999 Longyan Agriculture School Training Center

12 Plantation and Breed Aquatics Technology 48 Oct 1999 Longyan Agriculture School Training

Center

13 Computer Operations and E-labor Management 202 Jun 2000, Feb 2001 and Jun

and Sep 2002 Longyan Agriculture School Training Center

14 Fishery Technology 59 Apr 2002 Longyan Agriculture School Training Center

15 Production Technologies for Resettlers 54 Jun 2003 Longyan Military Division Trainning

Center

16 Computer Operations and E-labor Management 60 Sep 2003 Longyan Agriculture School Training

Center

17 Computer Operations E-labor Management

40 Mar 2004 Longyan Jianqiao Technology School

Source: Longyan Municipal Resettlement Office.