the world bank...2008/06/23 · document of the world bank report no: icr0000788 implementation...

Document of The World Bank

Report No: ICR0000788

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-45290)

ON A

LOAN

IN THE AMOUNT OF US$197.5 MILLION

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR A

TONGBAI PUMPED STORAGE PROJECT

June 23, 2008

Transport, Energy and Mining Sector Unit China and Mongolia Department East Asia and Pacific Region

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CURRENCY EQUIVALENTS

Currency = Renminbi (RMB) Currency Unit = Yuan (Y)

Appraisal Effective January 2000

Y 1.00 = US$ 0.12 US$ 1.00 = Y8.28

Completion Effective January 2008

Y 1.00 = US$0.14 US$ 1.00 = Y 7.25

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CPS Country Partnership Strategy DSCR Debt Service Coverage Ratio DMS Distribution Management System EMP Environmental Management Plan ECCPM East China Competitive Power Market ICR Implementation Completion and Results Report IERR Internal Economic Rate of Return M&E Monitoring and Evaluation NDRC National Development and Reform Commission O&M Operation and Maintenance PAD Project Appraisal Document PDO Project Development Objective POE Panel of Experts RAP Resettlement Action Plan SERC State Electricity Regulatory Commission SFR Self-financing Ratio TA Technical Assistance T&D Transmission and Distribution TOBA Tongbai Pumped Storage Power Company Limited TPSP Tongbai Pumped Storage Power Plant ZPM Zhejiang Power MarketZPEPC Zhejiang Provincial Electric Power Company

Vice President: James Adams Country Director: David R. Dollar

Sector Manager: Junhui Wu / Ede Jorge Ijjasz-VasquezProject Team Leader: Jie Tang

ICR Team Leader: Jie Tang

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China Tongbai Pumped Storage Project

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ........................................................... 12. Key Factors Affecting Implementation and Outcomes........................................................... 33. Assessment of Outcomes ........................................................................................................ 84. Assessment of Risk to Development Outcome......................................................................135. Assessment of Bank and Borrower Performance...................................................................146. Lessons Learned.....................................................................................................................167. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ........................17 Annex 1. Project Costs and Financing .......................................................................................18Annex 2. Outputs by Component...............................................................................................19Annex 3. Economic and Financial Analysis ..............................................................................22Annex 4. Bank Lending and Implementation Support/Supervision Processes ........................229Annex 5. Beneficiary Survey Results ........................................................................................30Annex 6. Stakeholder Workshop Report and Results ................................................................30Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................................31Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................................32Annex 9. List of Supporting Documents ...................................................................................33

MAP No. IBRD 30534

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A. Basic Information

Country: China Project Name: Tongbai Pumped Storage

Project ID: P056424 L/C/TF Number(s): IBRD-45290 ICR Date: 02/12/2008 ICR Type: Core ICR Lending Instrument: SIL Borrower: Government of China Original Total Commitment:

USD 320.0M Disbursed Amount: USD197,467,044.89

Environmental Category: A Implementing Agencies: Zhejiang Provincial Electric Power Company (ZPEPC) Tongbai Pumped Storage Power Co., Ltd. (TOBA) Cofinanciers and Other External Partners: N/A B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 08/10/1998 Effectiveness: 03/20/2001 03/20/2001 Appraisal: 07/19/1999 Restructuring(s): N/A N/A Approval: 12/22/1999 Mid-term Review: N/A N/A Closing: 12/31/2007 12/31/2007 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Negligible to Low Bank Performance: Satisfactory Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Highly Satisfactory

Overall Bank Performance: Satisfactory Overall Borrower

Performance: Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

N/A

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

N/A

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Power 99 99 Sub-national government administration 1 1 Theme Code (Primary/Secondary) Climate change Primary Not Applicable Infrastructure services for private sector development Primary Not Applicable Other financial and private sector development Primary Not Applicable Regulation and competition policy Primary Primary Rural services and infrastructure Primary Primary E. Bank Staff

Positions At ICR At Approval Vice President: James Adams Jean-Michel Severino Country Director: David R. Dollar Yukon Huang Sector Manager: Junhui Wu Yoshihiko Sumi Project Team Leader: Jie Tang Berry Trembath/Ranjit Lamech ICR Team Leader: Jie Tang ICR Primary Author: Ivy H. Cheng, Jie Tang F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project has two objectives: (a) increase peaking capacity and improve load following capability and power quality in the Zhejiang and East China power systems. The construction of a major pumped storage power plant, and the implementation of an efficient mechanism to price its output in the market will be undertaken to achieve this objective; and (b) improve the operating and investment efficiency in generation by developing and implementing a competitive generation market in Zhejiang province. An associated objective is to ensure that the market structure created can easily transition to

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wholesale competition. The associated sector restructuring, regulatory capacity building and removal of transmission constraints will be undertaken as part of the project to achieve this objective. Revised Project Development Objectives (as approved by original approving authority) PDO not revised. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at Completion or Target

Years

Indicator 1: Investment Efficiency: ratio of generation capacity comprising small thermal units (<50MW)

Value quantitative or Qualitative)

1997: 25.8% 2000: 18.4% 4.7% 10.3%

Date achieved 1997 2006 2006 Comments (incl. % achievement)

Actual reduction in small thermal capacity as of 2006 fell short of the targeted value (15.5% reduction vs. 21.1% projected). This was largely due to persistent power shortages in Zhejiang.

Indictor 2: Market Concentration and Competitiveness: % generation capacity controlled by the largest market participant


1997: 57% (ZPEPC) 20% (ZPEPC) 12% (independent power generation company)

Date achieved 1997 2006 2006

Comments (incl. % achievement)

Market concentration greatly reduced during the project implementation period as a result of the sector reform whereby generation plants were divested from the original ZPEPC to form separate generation companies. The restructured ZPEPC became a grid company.

Indicator 3: Load Following Capability: increase in peaking capacity and improvement in Area Control Error (ACE)


78% 85% 96%

Date achieved 12/31/2000 12/31/2006 12/31/2006 Comments (incl. % achievement)

ACE target surpassed substantially (18% actual improvement vs. 9% targeted). The stated rate of 85% for 2006 had been met since 1999.

Indicator 4 : Power market trial operation in Zhejiang


Commencement of power market trial operation in January 2000.

Trial operation commenced on 1/ 1/00, operating ratios were 93% and 99.6% for 2001 and 2002 respectively; total contracted energy accounted for 80% of sales.

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Indicator Baseline Value

Original Target Values (from

approval documents)


Actual Value Achieved at Completion or Target

Years

Date achieved 01/31/2000 1/1/2000

Comments (incl. % achievement)

Operation of the provincial power market started ahead of schedule, but was suspended from the summer of 2003 due to a very tight supply situation. A comprehensive East China regional power market was designed and put into operation in May 2004.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value Original Target Values (from

approval documents)


Actual Value Achieved at

Completion or Target years

Indicator 1 Pumped storage power plant of 1200 MW in commercial operation Value quantitative or qualitative

Fourth (final) unit in service

Fourth (final) unit in service

Date achieved

04/30/2006 12/31/2006

Comments: All the four units, 1200 MW, was fully commissioned by the end of 2006 Indicator 2 Reinforced 500 kV transmission system in operation: Length of

Transmission Line constructed (in circuit-km) Value quantitative or qualitative

Project: 0 Project: 299 Project: 527.8

Date achieved

12/31/1997 12/31/2006 2/28/2004

Comments: The achieved target value in km is counted as the total length of 500 kV lines in single circuit.

Indicator 3 Reinforced 500 kV transmission system in operation: Transmission transformer capacity added (in MVA)

Value quantitative or qualitative

Project: 0 Project: 350 Project: 4,250

Date achieved

12/31/1997 12/31/2006 7/31/2004

Comments: Indicator 4 Reinforced 500 kV transmission system in operation: Communications

lines added Value quantitative or qualitative

Project: 0 Project: 350 Project: 0 Project: 0

Date achieved

12/31/1997 12/31/2006 12/31/2003 12/31/2007

Comments: ZPEPC decided to use internal resources to fund this subcomponent in 2003. Bank financing subsequently canceled.

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G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/29/2000 Satisfactory Satisfactory 0.00 2 12/27/2000 Satisfactory Satisfactory 0.00 3 06/29/2001 Satisfactory Satisfactory 0.00 4 12/27/2001 Satisfactory Satisfactory 2.00 5 06/28/2002 Satisfactory Satisfactory 15.06 6 12/27/2002 Satisfactory Satisfactory 15.45 7 06/25/2003 Satisfactory Satisfactory 23.56 8 11/21/2003 Satisfactory Satisfactory 47.03 9 06/24/2004 Satisfactory Satisfactory 72.91 10 12/29/2004 Satisfactory Satisfactory 119.36 11 03/21/2005 Satisfactory Satisfactory 134.33 12 09/16/2005 Satisfactory Satisfactory 163.68 13 09/06/2006 Satisfactory Satisfactory 180.46 14 09/14/2007 Satisfactory Satisfactory 191.51

H. Restructuring (if any) Not Applicable I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal At project appraisal, the power sector in China was facing many challenges including impediments to raising financing for large generation and transmission projects; transmission bottlenecks; inadequate wholesale electricity and transmission pricing systems; complicated and inappropriate tariff structures; excessively decentralized distribution operations; unclear corporation relationships between power sector entities; excessive reliance on coal; and low efficiency of electricity supply and use. The main elements of the Government’s strategy1 to address these issues included separating generation from transmission and distribution (T&D) functions (“unbundling”); introducing competition at the generation level and increasing energy supply efficiency; establishing formal regulatory mechanisms at the central and provincial levels; clarifying the relationships among power entities at the national, regional and provincial levels; mitigating the environmental impacts of a coal dominated power system; rationalizing wholesale and consumer tariffs; developing sound corporate governance practices; and mainstreaming successful strategies to raise private capital and providing government backed long-term debt to finance distribution investments. Zhejiang had a very fragmented distribution sector, with 1,600 township and village level distribution operations, 66 county level distribution entities and 14 municipal (or prefectural) power distribution entities. The Zhejiang Provincial Electric Power Company (ZPEPC) was the main power utility operating in Zhejiang province, with an installed generating capacity of over 13,000 MW. The main generation source was coal-fired thermal plants, with hydropower providing less than 10% of the supply. A growing problem was the difficulty in meeting the wide variation between peak and off-peak demand, and a substantial amount of additional peak-load type generation plant was required. The East China region and, in particular, the provinces of Shandong, Shanghai and Zhejiang had been chosen by the central government to experiment on various aspects of power sector reform. Zhejiang had been selected to pilot the implementation of power markets at the provincial level. The Bank’s strategy was to build on progress made and further partner with the Government in addressing its power sector issues. Specifically, it supported the project for the following main reasons: (a) the Zhejiang power sector institutions had, for many years, successfully partnered with the Bank to pilot and implement reforms; (b) the Bank was in a unique position to bring international experience to bear in power market design; (c) the development of a competitive generation market would lead to increased use of more efficient plants: (d) the pumped storage plant would displace inefficient coal units used for peaking; and (e) due to their cost structure and the prevailing power law in China, pumped storage and transmission investments were less able to attract private financing. 1 Project Appraisal Document, Tongbai Pumped Storage Project, December 2, 1999, the World Bank

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1.2 Original Project Development Objectives (PDO) and Key Indicators The project has two objectives: (a) to increase peaking capacity and improve load following capability and power quality in the Zhejiang and East China power systems. The construction of a major pumped storage power plant, and the implementation of an efficient mechanism to price its output in the market would help achieve this objective; and (b) to improve the operating and investment efficiency in generation by developing and implementing a competitive generation market in Zhejiang province. An associated objective is to ensure that the market structure created can easily transition to wholesale competition. The associated sector restructuring, regulatory capacity building and removal of transmission constraints would be undertaken as part of the project to achieve this objective. The key indicators for monitoring project outcomes and impacts are: (a) improvements in load following capability as measured by improvements in the area control error; and (b) market efficiency as measured by reduction in the percentage of capacity contributed by small thermal units; and generation market competitiveness potential as measured by the reduction in generation concentration (i.e. capacity owned/managed by the largest market participant). Output indicators included implementation milestones established for the project components.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDOs and the key performance indicators were not revised.

1.4 Main Beneficiaries The Project Appraisal Document (PAD) identified the economy of the Zhejiang Province, and to a lesser extent that of the East China Region, which had suffered frequent power shortages, as the direct beneficiaries of the project. The ZPEPC, the project implementing agency, was also identified as a direct beneficiary. Sector reform at the national level was expected to benefit from lessons learned from the project, given the size and strategic importance of the province. Population in the project areas also stood to benefit from the incremental job opportunities, demand for local goods and support services, and increased tax revenues available for public spending.

1.5 Original Components The project was comprised of three components: (a) construction and operation of the Tongbai Pumped Storage Power Plant (TPSP) consisting of upper and lower reservoirs and an underground powerhouse with an installed capacity of 1,200 MW; (b) 500kV transmission reinforcement in Zhejiang including transmission lines, substations, and improvements in associated equipment and management tools; and (c) a technical assistance (TA) program for power market development and sector restructuring. A more detailed description of expected and actual project outputs by component is presented in Annex 2.

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1.6 Revised Components The physical components remained relevant and were not revised. However, the TA component was modified from time to time in response to changes in the operating environment brought about by the ongoing sector reform. Certain subcomponents no longer appropriate for ZPEPC’s development were dropped while other activities were added as new needs and issues emerged (refer to Section 2.2 and Annex 2). The modifications, as endorsed by the Bank’s management, did not require approval of the Board, nor did they impact the project’s progress or its ability to meet the PDOs.

1.7 Other Significant Changes An important element of the power sector reform was the separation of generation from T&D. As a result of this unbundling process, certain project assets and liabilities were formally transferred from ZPEPC to the newly established Tongbai Pumped Storage Power Company Ltd. (TOBA). Consequently, the latter became a discrete implementing agency of the project. The Loan and Project Agreements were amended in February 2007 to reflect the new onlending and ownership arrangements. While the changes were significant from the legal and financial perspectives, the transition had little impact on project implementation. The need for Bank loan financing was re-estimated after the main equipment packages were evaluated and substantial savings in foreign cost expenditure were projected. At the request of the Borrower, US$100 million of the Bank loan was canceled in October 2003, reducing the loan amount from US$320 million to US$220 million. Final disbursement amounted to US$ 197.5 million. The unused balance was cancelled at the end of the grace period after closing.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry At appraisal, the PDOs were in line with the power sector goal stated in the Country Assistance Strategy (CAS) discussed in May, 1998. Specifically, the project was designed to help reduce infrastructure bottlenecks through the expansion of power facilities, and to target areas where private participation was unlikely due to market reasons. Government commitment was strong and explicit. Lessons learned from earlier operations were incorporated into the design of the project, and they include: (a) coordination of Bank supported activities for sector reform through a combination of economic and sector work and lending activities; (b) efficient procurement management through prequalification and/or staged bidding; (c) early government approval of project; and (d) adequate resettlement planning, consultation and monitoring. During project preparation, various generation and transmission reinforcement alternatives were considered, and it was confirmed that the selected physical investments indeed constituted parts of the least cost solution. Sustainability, realism and complexity of the selected project design were assessed from the technical, financial (including

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financial management), environmental, social, institutional and innovative perspectives. Implementation arrangements were made well in advance. In particular, adequate arrangements for financial management during the entire implementation period and the procurement plan for the first year were made before project approval based on thorough capacity assessment. No controversial aspects were identified. Critical risks were identified and none was rated higher than modest. Mitigating measures for each were clearly spelt out. Preparation of the project involved all major stakeholders, and plans were in place to keep them engaged during the design and implementation phases. They included the state power authorities, the provincial and local governments, the communities to be affected by project construction, and the investors of TOBA. In particular, a participatory approach involving extensive consultations with the affected communities and their local governments was adopted in the selection of project sites and in the formulating the Resettlement Action Plan (RAP).

2.2 Implementation The project was implemented successfully. Facilities constructed were of high quality, and final completion was within the appraisal timeframe and cost estimates. Comparisons of project cost and financing estimated at appraisal and at completion are provided in Annex 1. Assessment of project outcomes is covered in Section 3 and a summary of the outputs by component is presented in Annex 2. These achievements notwithstanding, project implementation, however, did experience a number of setbacks and adjustments in terms of delays and changes in circumstances. Implementation Delays. At the outset, procurement was hindered by a protracted government clearance process for the prequalification and bidding documents for the pumped storage plant’s main equipment. The lack of an award decision in turn held up the approval of the feasibility study report by the State Council. In all, it took 15 months vs 5 months expected at appraisal for the loan to become effective. Later, when the supplier of the main equipment failed to deliver some key components due to manufacturing backlogs, site erection was further affected, particularly for the first two units. Lengthy approval of the transmission component’s preliminary design by the State Development and Planning Commission (currently NDRC), which took eleven months, also impeded implementation. While much of the delay was beyond the control of the implementing agencies, they were proactive in minimizing their impact. Through careful planning and vigilant construction management, they were able to make up for some lost time, and the project was, by and large, able to adhere to its original completion schedule. Modification of TA Activities. Implementation of many of the TA and training activities was challenged by a number of unrelated obstacles, among them, the terrorist attack in the United States on September 11, 2001, which essentially halted visa issuance to the country for some time; outbreak of SARS in 2003 which affected international consultants’ travel to China; and tightened control of overseas study tours by the State Grid Company. The implementing agencies responded by reorganizing some activities, while reducing the scope or changing the venue of others. The resulting program was

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deemed adequate in supporting ZPEPC to meet its TA and training needs at the time. The flexible approach also proved effective in resolving the issues and minimizing their negative impacts. Zhejiang Power Market. Zhejiang had been selected by the central government to pilot the implementation of power markets at the provincial level. Trial operation of the Zhejiang power market (ZPM) commenced in 2000 as anticipated. However, after functioning for three and a half years, operation was suspended due to severe and frequent power supply shortages and load shedding during the summer of 2003. The development and operation of the ZPM provided valuable experience and lessons for the development of East China Competitive Power Market (ECCPM), covering Zhejiang province, which started trial operation in 2004, and the development of other provincial and/or regional power markets in China. Project Completion. All four units of TPSP were commissioned by the end of 2006 and the plant construction was completed by the end of 2007, except for some finishing work. The work ongoing during the ICR mission included items such as interior finishing in the machine hall cavern, improvement of office facilities, and landscaping around the premises. Even though none of the work was expected to affect the operation of the plant, they would still become part of the company’s fixed assets. An estimated US$12.7 million equivalent in local currency expenditure was budgeted for 2008 to bring the finishing work to closure.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The design of the M&E system focused on regular reporting of implementation progress and output, as well as feedback on issues and their resolution. Achievement of the PDOs and implementation milestone were regularly monitored and reported in the periodic progress reports according to a comprehensive set of quantifiable performance indicators developed during project preparation and with the assistance of the various stakeholders (refer to Data Sheet Section F). They were also evaluated against the baseline and target values. Focus on the PDOs remained throughout the implementation period, however, generation related indictors were no longer tracked by ZPEPC after its generation assets were divested (though the company continued to supply information collected from provincial statistics to the Bank). To ensure the safety of dams and hydraulic structures of TPSP, an instrumentation system was installed and became operational: quality assurance procedures were prepared and followed and regular review by the Panel of Expert (POE) was conducted during project construction. The POE reviews, dam safety examinations by the group of experts appointed by the State Electricity Regulatory Commission before and after operation of TPSP, and the final acceptance confirmed the safety and excellent quality of the dams and the project. An extensive M&E network was established to support the assessment of implementation of the agreed RAP. The feedback loop allowed corrective actions in case of complaints or deviation from the Plan. The regular reports and independent third party monitoring reinforced the communication amongst stakeholders and ensured

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smooth implementation. Similarly, implementation of the Environmental Management Plan (EMP) was closely monitored, reported and evaluated. In addition to following up on the impact and output indicators, financial performance of the implementing agencies, and their compliance with financial covenants were also regularly monitored and utilized to assess the financial viability and discipline of the companies (Section 3.3).

2.4 Safeguard and Fiduciary Compliance Resettlement: Resettlement for the TPSP component was completed by the end of 2002. Housing and infrastructure construction for all 146 relocated households were completed. Compensation was delivered to the affected villages and individuals in accordance with the approved RAP. According to a sample household survey, average income among relocated households at the end of 2007 was 53 percent higher than that before the resettlement. At the time of project completion, the only remaining issue was the rehabilitation and redistribution of temporarily occupied farmland (about 15.8 hectares). The Tiantai County Resettlement Office had since consulted and reached agreement with the affected villages on a detailed plan, and implementation was launched in June 2008. For the three new substations and two new transmission lines involving land acquisition and resettlement, all activities including resettlement of 152 households were complete by the end of 2005. Sample household surveys conducted during implementation, compared actual scope, compensation and rehabilitation outcomes against the RAP. According to the third party monitoring conducted in early 2008, compensation paid was either in line with or higher than those specified in the RAP. During implementation supervision and at the time of project completion, resettlement activities had consistently been rated highly satisfactory for its best practice consultation and participatory process, and compliance with RAPs. The final report currently being finalized by the independent third party will summarize the lessons learned and factors contributing to the smooth implementation of the resettlement program. Environment: During preparation and component design, environmental impact was fully considered, and the Environmental Impact Assessment (EIA) and EMP were found satisfactory. For the TPSP component, the main potential environmental impacts anticipated included: loss of the Baizhang valley (50ha) by inundation to form the lower reservoir; disruption of downstream flow regime by release from the lower reservoir; and short-term impact of the influx of up to 3,800 rural workers during construction. For the transmission and substation component, particularly attention was paid to the location of the substations and alignment of the transmission lines. Impact involved some tree cutting and vegetation clearing, electromagnetic radiation and corona noise; and the construction of some 38 km of access roads, mostly through mountainous areas. A framework including environmental management and supervision organizational setup, monitoring approach and methodology, and institutional strengthening and training was established to ensure smooth implementation and quality performance. Considerable

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efforts were made to follow fully the EMP, and to mitigate and monitor the project’s impact. Effective measures were taken promptly to ensure that all environmental indicators were within acceptable levels at all times. Based on the monitoring results, air, noise, water pollution were well controlled and fully met the relevant national environmental standards and certification requirements. With the completion of the major construction activities, efforts were made for further improvements. Towards the end of project implementation, a Water and Soil Conservation Plan was formulated and implemented at the TPSP site. The main features of the Plan included slope protection and greening work; rehabilitation of temporarily occupied lands; assessment of the access roads and resettlement areas; and disposal of surplus excavated materials in spoiled areas. Monthly monitoring started in May 2003, and based on the results and soil erosion status, the outcome of the water and soil conservation works was found to be highly satisfactory. Public consultation and information disclosure was a continuous process during the entire project cycle. Total expenditure on environment protection and water and soil conservation was about Y55 million or one percent of the total project cost. No unforeseen problem arose at any time.

Procurement: The project procurement packages covered civil works, electrical and mechanical equipment, erection and installation, and consulting services. These activities were effectively organized and carried out in accordance with the Bank’s guidelines. The implementing agencies were effective in following the procurement process to overcome issues such as delays in the procurement and delivery of the main equipment, and incompatibility of the various modules under the complex distribution management system (refer to Annex 2). The Bank’s oversight and close involvement in all phases helped in ensuring the transparency and effectiveness of the process, and contributed to the owners’ ability to procure high quality goods and services at very competitive prices.

Financial Management: Both ZPEPC and TOBA maintained dedicated accounts for the project and prepared their respective computerized project and corporate financial statements on a monthly basis. Annual audit reports were submitted to the Bank on time, and no significant issues were identified. Financial management supervision and selected post reviews of project accounts, documentations, and internal control procedures confirmed that management of the project funds was sound and adequate.

2.5 Post-completion Operation/Next Phase Tongbai Pumped Storage Plant. All four generation units have been in successful commercial operation since the end of 2006. Sound and comprehensive preparations for operation were launched well in advance. As early as 2002, on-the-job training in three domestic pumped storage power plants (including the Bank-financed Tianhuangping plant), and overseas study tours were arranged for plant operation staff. They also took part in the various design, procurement and testing activities during project construction to familiarize themselves with all facets of operation and maintenance (O&M). By 2005, a full team of qualified operators was on board. In parallel, preparation of the O&M

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codes, an equipment denomination system, and operational procedures for the power plant and reservoirs was completed. They were cleared by the project designers and the East China Power Grid and put in place. As an added measure an experienced team from an operational pumped storage plant in Zhejiang was contracted to lead the O&M for the first three years (2006-2008) and further train the operational staff of TPSP. Thereafter, the TOBA team is expected to fully take over the O&M of all the TPSP facilities. ZPEPC Transmission. The majority of substations and transmission lines erected under the project have been in commercial operation since 2004. As a provincial grid company, ZPEPC has a large number of operational assets and standard procedures for O&M are well established. Until the unprecedented winter storm of early 2008 (which was highly unusual in the east and south of China), all facilities had been functioning smoothly. During the severe snow storm, a lot of transmission lines and towers including those connecting the TPSP to the grid were damaged, and many collapsed under the tremendous weight of snow and ice buildup (for instance, some high voltage lines had over six cm radius of ice around them, when they were designed to withstand a maximum buildup of two cm). Repair work started as soon as conditions allowed and was carried out expeditiously. All lines and towers had been restored to full capacity by March 2008. Lessons learned will likely affect future network design standards.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation The project’s PDOs are directly linked to three of the five themes stated in the 2006 Country Partnership Strategy (CPS) with China: (a) managing resource scarcity and environmental challenges; (b) financing sustained and efficient growth; and (c) improving public and market institutions. The PDOs were consistent with China’s development priorities at the time of appraisal, and remained relevant at the time of project completion. Design of the physical components and their associated TA and training was proved effective in achieving the PDOs. As sector restructuring progressed during project implementation, flexibility in adjusting the design and content of some of the reform related activities, including the operation of a provincial power market, to accommodate evolving circumstances and needs ensured achievement of PDOs. At the time of project completion, all components remained important to meeting the development objectives of China, the Bank, and the project. They were also consistent with the Bank’s prevailing social and environmental safeguard policies and fiduciary requirements.

3.2 Achievement of Project Development Objectives The project substantially met both PDOs established at project preparation. Specifically, (a) Increase peaking capacity and improve load following capability and power quality in the Zhejiang and East China power systems.

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The TPSP added 1,200 MW of peaking capacity to the system and the plant had been in successful commercial operation since 2006. Efficiency tests on one of the units in 2007 yielded results that surpassed the guaranteed levels, and the frequency of minor incidences (twice during the first year) was considered remarkable relative to standards established for the East China region. Area control error improved from 78 percent in 1998 to 96 percent at the end of 2006, and the results compared well with the appraisal target of 85 percent. The transmission component added 4,250 MVA of 500kV transmission capacity and about 528 km of 500kV transmission lines to the Zhejiang power grid. These were significant increases during 2000 to 2006, as additions outside of the project only totaled about 2,800 MVA and 3,200 km. While supply disruptions remained (reliability at 99.9 percent), the augmentation and new practices and efficiency improvement resulting from the various TA activities greatly improved the system’s reliability, and its ability to meet fast growing demand and customer satisfaction (e.g. power consumption doubled in Wenzhou City between 2004 and 2007). The additional capacity also made maintenance of the provincial transmission system easier to schedule and implement. (b) Improve the operating and investment efficiency in generation by developing and implementing a competitive generation market in Zhejiang province. The ZPM commenced trial operations on New Year’s Day 2000, about one month ahead of schedule. Performance improved steadily after initial teething problems were resolved. By 2001, the operating ratio reached 99.5 percent (363 days) and it further improved to 99.6 percent in 2002, with 20 percent of the total energy under the spot market and 80 percent under contracts. However, rapid economic growth resulting in a surge in electricity demand in 2003 necessitated considerable load shedding. This disrupted the functioning of ZPM and operation was suspended during the summer. Nonetheless, the pioneered operation provided good experience and useful reference to the power market development in China. With the commencement of the simulation operation of the ECCPM in May 2004 (under the East China Power Transmission Project supported by the Bank), generation competition in Zhejiang province became part of the ECCPM and operation of the ZPM never resumed. Moreover, the ECCPM would facilitate a wider coverage of generation competition and was more effective than the provincial one. For the year 2005, power trade within the East China group amounted to 4,745 MW and 23.7 TWh. Regular operation of the ECCPM began in May 2006. The government objective of the power sector reform at the time of project appraisal (Section 1.1) was too ambitious, but much less was achieved for various reasons. The pioneered operation of the ZPM made great contributions to introducing competition in generation in China, and to improving the operating and investment efficiency in generation in Zhejiang province.

3.3 Efficiency

Economic Analysis: At appraisal, analysis was carried out to verify that the TPSP was part of the least cost generation expansion for Zhejiang Province. A cost benefit analysis

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was also performed using demonstrated willingness to pay (WTP) as a minimum proxy for economic benefit. The analysis yielded an internal rate of return (IERR) of 16 percent. Using a similar methodology and the same WTP tariff, a re-estimation at completion yielded an IERR of 21.3 percent. The main reason for the increase was the lower than expected generation cost. Using the highest peaking tariff of Y0.538/kWh currently paid to hydro plants as a floor (minimum proxy of the WTP), the IERR would still be 11.7 percent, at par with the 12% social discount rate established at appraisal. (Refer to Annex 3 Part A for details) Cost Comparisons: A comparison of the final and appraised project cost by component is summarized in Annex 1. As indicated in the Annex, the TPSP component, at US$410.6 million, is at par with the appraisal estimates of US$405.3 million. Suggestions of the POE on the upper reservoir dam design contributed to reduction of the associated cost. The transmission reinforcement component, at US$272.8 million, is about 83 percent of the appraisal estimates of US$329.2 million. The cost saving is mostly due to competitive procurement prices. The largest cost variation lies in the power market development and sector restructuring component, where the appraised cost was US$10 million and actual cost only amounted to US$3.0 million. Contributing factors for the variance are: (a) NDRC’s early decision to approve a reduced budget of US$4.5 million due to narrowing of ZPEPC’s responsibilities after unbundling; (b) changes in TA scope (refer to Section 2.2); and (c) lower than estimated prices (with TA and training sometimes included in the various associated equipment contracts). Financial Analysis: The financial rate of return for the project was not estimated at appraisal. Instead, financial assessment focused on: (a) tariff profile needed to yield a 12 percent return on equity to TOBA’s investors; and (b) the financial viability of ZPEPC and TOBA. Performance of the implementing agencies and their compliance with financial covenants are outlined below and summarized in Annex 3 Part B. ZPEPC: financial covenants included: (a) self financing ratio (SFR) no less than 30 percent; (b) debt service coverage ratio (DSCR) no less than 1.5 times; (c) submission of semi-annual financial reports and annual audit reports (refer to Section 2.4 Financial Management); and (d) annual submission of rolling eight-year financial projections. All covenants were substantially met, except for the SFRs in 2001 and 2003, which were 23 and 22 percent respectively. Contributing factors for the non-compliance were: (a) extraordinarily large capital investment programs (at times in excess of US$100 million a year) for rural and urban network rehabilitation and expansion. They were initiated by the Government as an economic stimulus measure in the wake of the East Asia financial crisis and continued as necessitated by rapid growth in power demand, and improvement of system efficiency; (b) substantially higher power purchase prices mainly as a result of oil and coal price hikes; and (c) after divesting its more profitable generation assets, the resulting grid company’s profit margin plunged. The Bank recognized the nature of this issue and began the process of considering a waiver of the SFR covenant. While this was in progress, however, the situation eased and the company’s SFR reached 29 percent in 2004. Since then all covenants had been met and ZPEPC had been able to generate

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adequate revenue to continue to operate and expand. According to the latest projections (2008-12), the company, with a moderating capital investment program, is expected to remain financially viable and meet all the financial covenants in the foreseeable future, with SFR at well over 50 percent and DSCR between 2.3 and 3.6 times. TOBA: At appraisal, unbundling was anticipated and the TPSP was expected to be incorporated into an independent limited liability company prior to commencement of operation. As envisioned, TOBA was established in 2000 with seven corporate shareholders; the ownership of each was proportional to the size of its equity contributions and claim to TPSP’s power production. While the company continued to operate normally, as a direct consequence of sector restructuring, its shareholding arrangement underwent several major revisions. The changes, however, did not affect TOBA’s financial performance or management, and the principle of financing through equity contribution, at 20 percent of the physical cost of the pumped storage plant, remained unchanged. During preparation, a two-part tariff was envisaged, covering capacity and energy, which would allow TOBA to meet its financial obligations and provide its investors with a 12 percent return on equity. A tariff proposal according to these principles was submitted to the National Development and Reform Commission (NDRC) for approval in 2005. In parallel the NDRC and the State Grid Company (SGC) had mobilized a team to study the tariff level for the TPSP as a pilot for 11 pumped storage plants about to be commissioned at the time. A uniform decision for the plants to operate under leasing arrangements with SGC was announced in 2007. For TOBA, the lease amounted to a maximum possible compensation of Y484 million per year. At this rate, it was estimated that all O&M costs (without having to pay for power used) would be covered. However, it would fall short of the investors’ expected return on equity as projected at appraisal. This arrangement was accepted, albeit not wholeheartedly, by TOBA’s management and Board. After amendment of the Loan and Project Agreements in 2007 to include TOBA as a formal implementing agency, the following covenants were introduced: (a) DSCR not less than 1.3 times for 2007 and 2008, and 1.5 times for 2009 and thereafter; (b) submission of financial and audit reports; and (c) annual submission of rolling eight-year financial projections. At the time of project completion, all covenants had been met, and TOBA was expected to continue to meet them in the foreseeable future.

3.4 Justification of Overall Outcome Rating Rating: Satisfactory The PDOs remained relevant to China despite a rapidly changing power sector, and are consistent with the latest CPS. In a dynamic operating environment where parallel development and reform in the power sector (such as the operation of the East China Competitive Power Market) facilitate change and piloting, the project, by and large, achieved the outcomes envisaged at appraisal. At closing these development results were highly likely to be sustained. The project had been carried out efficiently and both

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implementing agencies are expected to continue to operate efficiently as attested by the economic and financial analyses. Overall outcome is therefore rated satisfactory.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The project did not have an explicit poverty reduction theme. However, its support to continued high economic growth in Zhejiang contributed to decreased poverty and increased development opportunities. The estimated tax revenue increase of about US$1.0 million per year makes resources available for supporting more social programs. The extensive construction activities and support services during implementation and operation also provided job opportunities for laborers. (b) Institutional Change/Strengthening The project was a key element of the Bank’s overall effort to support China in the ongoing restructuring of the power sector. With the separation of generation assets from grid ownership and trial operation of the provincial power market, the reform process gained momentum. At the time of project completion, market concentration within the Zhejiang power system had dropped considerably, and the province had contributed to the development of the East China regional competitive power market and had become part of that market. At the entity level, through TA, training, study tours, and interaction with high caliber consultants, suppliers, and host institutions, the implementing agencies’ capacity to coordinate and manage complex tasks and issues was greatly enhanced. The TPSP implementation experience had generated much interest within the power industry in China. In response to demand, TOBA organized a conference on site to share its know-how and lessons learned in 2004. Since then, the company has received numerous visitors from fellow organizations, with whom they shared project information freely. Similarly, various reports prepared for and by ZPEPC under the project were disseminated in Zhejiang for the benefit of other power sector institutions. A noteworthy element of the project that is expected to have significant longer-term impact on power sector institutions is the master’s degree program conducted under ZPEPC’s training component. In 2001, 108 promising young professionals were selected from the pre-unbundled ZPEPC to pursue master’s degrees in power sector management and engineering. Education included domestic classroom lectures and study abroad, followed by dissertation and defense. As of project completion, a total of 87 advance degrees (47 in engineering and 40 MBAs) had been awarded (refer to Annex 2). Many of the graduates had since been promoted to key leadership positions in the Zhejiang and State Power Grid system. The group is believed to have contributed to the overall strong performance of the Zhejiang power industry, particularly in the areas of safety, production, innovation and technological development. The success of this program also appeared to have stimulated strong interests in replication (as in the Tianjin Municipality and Henan Province).

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(c) Other Unintended Outcomes and Impacts (positive or negative) The TPSP was built to complement base-load and other peaking power plants in the system. Besides this primary function, because of its ability to start production readily (within15 minutes), the plant is also being used as a backup source of power supply during non-peak hours. This function is highly valued by the regional grid, especially during unexpected system interruptions. The project had fulfilled a number of piloting and demonstration functions. Besides the project’s adaptation of the pumped storage concept and technology, the Zhejiang power system was selected to pilot T&D tariff reform, condition based management (CBM), competitive power market and comprehensive distribution management system (DMS). As recently as 2005, the DMS, with four functional modules, was considered the most comprehensive system in the world. With exemplary achievements in civil works, construction management, O&M, resettlement, TA and training (refer Section 5.2 (b)), the project also served to raise the bar for quality standards.

4. Assessment of Risk to Development Outcome Rating: Negligible to low At completion, the TPSP and the transmission facilities built under the project had already been in production for one to three years (Section 2.5). Main parameters for their successful operation were not likely to change. The companies are expected to remain fully staffed and continue to run well. The quality of civil work is excellent, the instrumentation systems are fully functioning, the emergency preparedness system is in place, and the risk of dam failures has been under continuous review and was assessed as minimal at the time of the ICR (the dams were designed to withstand a 200-year flood, and are expected to remain within safety limits of a 1000-year flood). The transmission facilities proved to be reliable, efficient and environmentally sound under non-extreme circumstances. After the severe snow/ice storm of 2008, recovery was well coordinated, adequately funded and swift (Section 2.5). Ongoing work (interior finishing, exterior landscaping and rehabilitation of borrowed farmland) to bring the implementation phase of the TPSP to full closure was expected to be adequately funded and continue without interruption (refer to Sections 2.2 and 2.4). The lease arrangement for TOBA’s power output, while not measuring up to the two-part tariff envisioned at appraisal, should be sufficient to cover the full O&M costs, provide for depreciation and debt service, generate profits acceptable to the investors, and allow compliance with the financial covenants (refer to Section 3.3). At the macro level, economic development and government and power sector commitment to reform remain strong. At the regional and provincial levels, demand for peaking capacity is expected to continue to grow. After completion of the project, ZPEPC has steadily added new facilities to augment and strengthen the grid to better meet the province’s energy needs and consumers’ demand for more reliable supply. On

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the institutional capacity front, both ZPEPC and TOBA intend to build on the knowledge gained from their respective experience and international exposure. With less pressing funding constraints (in part due to the strengthening of the Chinese currency), and more opportunities and potential to develop into providers of goods and services (for example, ZPEPC is poised to bid for a contract under a Bank-financed power project in Vietnam), use of TA for institutional development is expected to continue. In view of all the positive internal and external factors, and the absence of major unmanageable threats, the overall risk that the development outcomes would not be realized and maintained was considered very low at the time of assessment.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory As summarized in Sections 1.1 and 2.1, the Bank’s support for the project was based on solid rationale, and the quality at entry it helped ascertain was considered satisfactory. During preparation, the Bank team assisted the Borrower in designing the project to meet the Bank’s technical, financial, economic, and fiduciary requirements. It also helped shape the TA and training program to strengthen the institutional capacity of ZPEPC. Implementation arrangements and M&E were discussed in detailed and agreed in advance. At appraisal, a competent team was assembled to cover all aspects of the project. The appraisal coverage was comprehensive, as reflected in the PAD. Working relationship with the Borrower, based on mutual respect and constructive dialogue, was collegial at all levels. (b) Quality of Supervision Rating: Satisfactory Project supervision was planned and carried out biannually. Supervision teams were by and large appropriately staffed to address and report on implementation issues as they emerged. Early supervision focused on procurement, particularly with regards to the main equipment package for TPSP which was on the critical path of implementation. Subsequent supervision monitored the various technical issues related to construction, installation, testing and commissioning, quality of work, and kept close tabs on remedial actions taken by suppliers and contractors. The team also followed the implementation of the RAP and EMP regularly, and monitored compliance with the Bank’s fiduciary and safeguard policies. On the financial aspects, the supervision teams regularly reviewed the financial statements and audit reports of the implementing agencies. Discussions also covered issues such as tariffs, disbursements, financial projections, and appropriateness of the financial covenants and their compliance. Supervision reports were generally realistic, candid, internally consistent, and focused on the PDOs.

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After the main bids were evaluated, the project cost estimates were revised downwards. The unit prices used for cost estimation, especially for equipment, were higher than the bid prices as a result of competitive bidding. The Bank was responsive and supported the Borrower in processing a partial cancellation of the loan to minimize commitment charges. As sector restructuring progressed and ZPEPC’s priority changed after unbundling, the Bank showed flexibility in the deletion of a number of appraised TA activities that were overtaken by reform events. It also respected the company’s decisions to fund some of the activities out of its internal resources. As new needs and issues emerged, the Bank also supported the addition and expansion of some TA activities as justified and proposed by ZPEPC and TOBA (refer to Annex 2). During implementation, the Bank team was easily accessible by phone and by correspondence; the working relationship with the Borrower continued to be harmonious. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory As indicated above, ratings for both dimensions are satisfactory. Hence the rating for overall Bank performance is satisfactory.

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory Central Government: The Ministry of Finance and the National Development and Reform Commission both supported the design and PDOs of the project, and showed strong commitment to the power sector reform. Continued government commitment and support was the key to the success of the sector reform programs, particularly in the establishment and functioning of the competitive power markets at the provincial and regional levels. Counterpart funds were timely and readily available. On the other hand, the government’s lengthy review and approval process for the various feasibility study and preliminary design reports, commencement of construction, and bidding documents caused significant delays in loan effectiveness and project implementation (Section 2.2). On balance, however, given the critical support provided by the Central Government agencies on sector reform, its performance is considered satisfactory. Zhejiang Provincial and Local Governments: The provincial government was supportive of the project and its PDOs. Local governments at different project locations actively participated in the formulation the RAP and EMP. Their relationship with other stakeholders involved in the participatory process facilitated coordination. The various local authorities’ support and direct involvement in the implementation of the RAP not only helped to simplify procedures and improve efficiency, but also enhanced transparency and governance. Government performance at this level is satisfactory.

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(b) Implementing Agency or Agencies Performance Rating: Highly Satisfactory ZPEPC and TOBA were highly committed to achieving the PDOs from the outset. The staff of both companies worked closely on common issues, as evidenced by the seamless transfer of responsibilities to TOBA after it was incorporated. Both companies were proactive in dealing with the startup delays and slow procurement approvals, and achieve effective results. In the case of TOBA, through concerted efforts, it was able to put the last generation units into commercial operation within the original timeframe given the significant delays of procurement and delivery of major equipment. Safety records were excellent, with no casualty, fire hazard or accident reported. Quality control was good--of the over nine thousand sample units of work and equipment evaluated, all passed inspection and over 90 percent received excellent ratings (compared to a national standard of 85 percent). The quality of work completed by ZPEPC was also well regarded. For example, the Xiaoshan substation earned at least three prestigious awards in Zhejiang and nationally. Implementation of the RAP and EMP was efficient and both resettlement and environmental performance had been continuously rated highly satisfactory by the Bank supervision missions. Final project cost was well within the appraisal estimates despite significant depreciation of the US Dollar. Nearly all financial covenants were met, and both ZPEPC and TOBA were expected to remain financially viable in the foreseeable future. Transition to regular operation was thoughtfully planned and completed well in advance. M&E arrangements were comprehensive and operational. Focus on capacity building was apparent. For many consulting contracts, counterpart teams were put together in ZPEPC and TOBA to maximize the learning and knowledge transfer. The companies were also generous in sharing what they gained from the project; TOBA often hosted visitors from out of town, and provided details of its project experience and knowhow free of charge; ZPEPC not only disseminated its study reports regularly but also honored its commitments to every single participant of the masters program, albeit about a third of the class left the company during the unbundling process. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory Performance of the Central, provincial and local governments is rated satisfactory while performance of the two implementing agencies is rated highly satisfactory. Because of the shortcomings which resulted in significant delays in project startup, over all Borrower performance is, on balance, rated satisfactory.

6. Lessons Learned Power sector reform: The project confirmed that flexibility is paramount in dealing with a project that is being implemented while a major reform program is in progress. Commitment and support of government at various levels and strong ownership at the

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power utility level are key to the success of the sector reform and TA programs. Piloting has been a feature characteristic of Chinese reform and Bank-assisted power sector projects. Project elements explicitly designed to pilot new approaches include: competitive provincial power market, comprehensive DMS, condition-based maintenance, and leasing arrangement for a peaking generation plant. This approach, coupled with flexibility in the use of loan funding for low cost high impact TA, could be a successful means to further reform and innovations. Government Approval: Delays in government clearance and approval process resulted in significant delays of project implementation. Effective re-scheduling and re-organizing project construction activities by experienced implementing agencies can often catch up delays during the project implementation and minimize the impacts. Cost Estimation: Cost estimates proved to be too high and resulted in excessive front-end fee and commitment charges to the Borrower. Significant cost savings were also achieved by a number of other Bank-assisted power project s in China. In-depth review of project design and unit prices could help reduce unnecessary financing costs. Engagement of POE: A well experienced POE can play a key role on dam safety, and can often make suggestions resulting in significant cost savings for dam construction.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies A summary of the implementing agencies’ input is included in Annex 7. No substantive issues were raised with regards to the content of this ICR. (b) Cofinanciers Not applicable. (c) Other partners and stakeholders Not applicable

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent2)

Latest Estimates4 Components Appraisal

Estimates3 TOBA ZPEPC Total

Percentage of

Appraisal Tongbai Pumped Storage Plant 354.4 405.3 410.6 410.6 101% Transmission Reinforcement 282.3 329.2 272.8 272.8 83% Power Market Development and Sector Restructuring 10.0 10.0 3.0 3.0 30%

Total Baseline Cost 646.7 744.5 Physical Contingencies 45.1 Price Contingencies 52.8

Total Project Costs 744.5 744.5 410.6 275.8 686.4 92% Interest During Construction 156.4 156.4 19.6 6.9 26.5 17% Front-end Fee on IBRD Loan 3.2 3.2 2.24 1.0 3.2 100%

Total Financing Required 904.1 904.1 432.4 283.6 716.1 79%

(b) Financing (in USD Million equivalent)

Latest Estimates Source of Funds Type of Cofinancing

Appraisal Estimates TOBA ZPEPC Total

Percentage of Appraisal

IBRD Loan External Borrowing 320.0 140.0 57.5 197.5 62% ZPEPC and TOBA Investors

Internal Cash and Equity Contribution 176.8 101.5 43.7 145.1 82%

Local Banks Domestic Borrowing 407.3 191.0 175.0 366.0 90% Total 904.1 432.4 276.2 708.6 79%

2 Converted at exchange rate of USUS$1 = RMB Y8.28. While the exchange rates prevailing at project appraisal and completion were significantly different, it should be noted that the bulk of project spending and Bank loan disbursement took place prior to the floating of the RMB. During this period, the exchange rate between the USD and RMB remained relatively constant. 3 Project component costs estimated at appraisal: the first column does not include contingencies, and the second column includes contingencies. The “percentage of appraisal” column compares values of the latest estimated total column with values of the second column of appraisal estimates. 4 Figures in the tables may not add exactly due to rounding

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Annex 2. Outputs by Component

Appraisal Plans Actual Accomplishments at the time of ICR and Reasons for Deviation

Component 1: Tongbai Pumped Storage Plant (implementing agency: TOBA)

1 Lower reservoir impounded by a dam with a maximum height of 68.3 m

Civil work for lower reservoir and a dam of 68.3 m in height completed, final inspection conducted and approved in 2007.

2 Two inclined shafts and tunnels totaling 1270 m each to connect upper and lower reservoirs - completed by 2/04

First shaft/tunnel 1,258 m in length completed in 6/05; second shaft/tunnel 1,256 m in length completed in 6/06. Completion postponed to match the time frame of the underground powerhouse.

3 Underground powerhouse of 170m x 24m x 54m high; with installed capacity of 4 300MW reversible pump/turbine units: excavation completed by 9/02; and commercial operation of the units – Unit 1 by 9/04, Unit 4 by 4/06

4 x 300MW units installed. Excavation for powerhouse (size 182.7m x 24.5m x 53m) completed in 6/03; Unit 1 put into commercial operation in 5/06, Unit 2 in 10/06, and Units 3 and 4 both in 12/06. Initial delays mainly due to protracted procurement approval of construction start which in turn relied on the award of the main equipment contract. Main equipment contracting and actual delivery 12 months behind appraisal schedule due to manufacturing backlog. Difference partially made up by thorough geological investigation and expedited construction.

4 Implementation of an environment management plan (EMP)

EMP implemented

5 Implementation of a resettlement action plan (RAP) including 65 affected households

RAP implemented, 146 households affected

6 Consultant services in engineering, design, procurement and construction management

5 contracts implemented for: (a) procurement of main E&M equipment, later expanded to cover 500kV transformers’ factory acceptance test in Europe, and inspection of permanent workshop and other installations; (b) supervision of main equipment manufacturing, later expanded to cover P/T vibration issues; (c) Special Board of Consultants comprised of 2 international and 3 national experts. Some meetings postponed due to scheduling conflicts and SARS outbreak. All concerns and issues raised had been complied with; (d) witnessing of Pump/turbine acceptance test; and (e) training of operators in Asia, N. America and Europe conducted in 2004. Some reduction in scope due to: (a) reduction of Phase II construction supervision in view of adequate domestic capacity and a project management system that had been in place and worked well for two years; and (b) training carried out under the main equipment contracts after installation. Implementation largely completed except one ongoing for special training on equipment inspection and maintenance.

Appraisal cost estimate: US$405.3 million

ICR estimate: US$ 410.58 million

Component 2: Transmission Reinforcement (implementing agency ZPEPC)

1 Erection of 110 km twin 500 kV lines connecting Tongbai to Zhuji, and Zhuji substation

750 MVA Zhuji substation put into commercial operation in 2/04; actual length of 500kV double circuit lines between Tongbai and Zhuji 96 km, put into commercial operation in 2/05.

2 Construction of two new 500 kV 750 MVA substations at Xiaoshan and Yongxi

750 MVA Xiaoshan substation put into commercial operation in 7/04; 750 MVA Yongxi substation put into commercial operation in 6/04.

3 Expansion of Ningbo and Wenzhou substations by 1,000

Ningbo and Wenzhou substation extended by 1,000 MVA each and put into commercial operation in 7/04 and 5/04 respectively; actual length

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MVA each, and erection of 275 km 500 kV lines between the substations

of 500kV lines between the substations was 265.6 km, single circuit line put into commercial operation in 1/04 (one line was funded under the project, the other by ZPEPC).

4 Erection of three short 500 kV double circuit lines connecting Zhuji, Yongxi and Xiaoshan substations to the system

All 500kV connections completed and put into commercial operation: (a) Zhuji to Lanting, Jinhua and Pingyao substations totaling 12.2 km, put into commercial operation between 2/04 and 4/04; (b) Yongxi to Beilun power station and Lanting substation totaling 22.2 km put into commercial operation in 6/04 and 10/04 respectively; (c) Xiaoshan to Hangdong and Lanting substations totaling 0.7 km put into commercial operation in 7/04.

5 Supply and installation of associated telecommunication and dispatch automation equipment (EMS): 75 added by 2003 and 350 added by 2006

ZPEPC decided to use internal resources to fund this subcomponent in 2003. Bank financing subsequently canceled.

6 Implementation of distribution management systems (DMS) in Hangzhou and Ningbo to improve reliability and quality of energy.

DMS contract with consultant effective in 8/02 after protracted procurement process (internal review of bid evaluation report at State Planning level took 12 months, review of approval report another 4 months). Implementation substantially delayed due to technical difficulties in data conversion and compatibility issues. Installation completed in 12/04. Final acceptance after testing and trail operations occurred in 11/07, commercial operation at both sites commenced in 1/08.

7 Development of province-wide customer service centers to provide customers with one-stop information service.

ZPEPC used internal resources to join a national program of real time customer service telephone network. Bank financing for sub-component dropped in late 2001. Refer to Component 3.6 for related activities.


ICR estimate: US$272.80 million

Component 3: Power Sector Reform (implementing agency ZPEPC) 1 Implementation of a competitive

power market in Zhejiang (ZPM): commence trial operation by 1/00 and have market code formally approved by 12/01

The ZPM started trial operation in 2000, by 2002 operation rate was over 99.6%. In 2003, very tight supply entailed considerable load shedding and disrupted the functioning of ZPM. The market had been suspended since the summer of 2003. With the simulation operation of the East China regional power market commencing in 5/04, operation of ZPM never resumed.

2 Restructuring of ZPEPC, separating generation from transmission, and incorporation of all thermal generation entities as limited liability companies by 12/99

3 Consolidation of decentralized and fragmented distribution operation into county-level entities, and incorporating them into limited liability companies: 40% by 12/01 and 100% by 12/03

ZPEPC was restructured into a grid company. As the power sector reform continued and deepened, these three subcomponents were eventually dropped with the Bank’s consent as generation restructuring and regulation were removed from ZPEPC’s responsibilities by a State Council decree, and distribution restructuring would only be carried out at a later phase. In their stead, new TA needs were identified and added: Power Grid Operation Study – the objective was for ZPEPC to learn from the experience of other similar and relevant power grid operations to address a number of key issues it was facing. Companies in Japan and Korea selected, study including mutual visits completed by 7/05. ZPEPC IT Lifecycle Management and Software Development Quality Assurance (QA) Service – the TA included development of IT strategy;

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4 Development and implementation of a regulatory framework and establishment of a provincial authority

upgrade of office automation; software QA; and technical and managerial training and knowledge sharing. Work commenced in 4/06 and completed by the end of 2007. Small scale study tours on specific themes including: T&D pricing (Brazil and Argentina, 8/06) in response to Zhejiang being selected to pilot a T&D tariff reform; financing and capital management as the company was investing heavily on grid expansion (Canada, 11/07); and billing and collection, and financial management (9/07).

5 Implementation of an office automation system and an enterprise resource planning system in ZPEPC

Funded by ZPEPC’s own resources as use of Bank funding for this sub-component was not approved by the government. However, some of the added TA activities described above supported the design and implementation of these systems.

6 Studies dealing with customer relations, generation planning, retail tariff design, monitoring and maintenance

Customer Service Improvement – awarded 1/03, diagnosis study report submitted in 4/04, training delivered in 9/04, however study tours (to France, UK, USA and Japan) not conducted until Nov/Dec 2007, mainly due to rigorous control over travel abroad imposed by the State Power Grid, staff priority conflict due to power shortage crisis and weak proposals received. Generation Planning Study – contract initiated 10/01, 5 working sessions with 3 in Hangzhou and 2 in Toronto, completed in 12/04 after much delay due to a slow start in data gathering and setting up the data base, and later affected by the SARS outbreak in 2003. Consumer Tariff Design and Short-term Load Forecast Study – effective 6/02, included 2 workshops; consultant’s final report submitted in 2/04, also included subsequent study tours to Spain and the UK, workshops and short-term load forecast software. Condition-based maintenance (CBM) – investigation report finalized in 4/04, delayed due to difficulties in obtaining visas to the US after 9/11, report disseminated in Zhejiang in 2005. TA for the development of procedures and information system largely completed at the end of 2007. Piloting scheduled to start in 2008, 2 sites by March and 10 by year end using ZPEPC internal resources.

7 Training of ZPEPC staff in business administration, corporate governance, monitoring and maintenance, power station technical and commercial operation and management of power market, distribution, utilities

108 promising young professionals selected from ZPEPC (and generation plants under ZPEPC before unbundling) to pursue master degrees in power sector management (58) and engineering (50). The 3-year full-time program covered all cost of education plus full pay while on leave of absence. Training included domestic classroom lectures at Zhejiang University (completed by 5/03), study abroad to Australia (Engineering) and Europe (MBA) (completed by 12/04), and dissertation and defense. The original plan to study in the US was changed due to difficulties in obtaining visas. As of project completion, a total of 87 nationally recognized advance degrees (47 in engineering and 40 MBA) had been awarded.


ICR estimate: US$3.0 million.

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Annex 3. Economic and Financial Analysis

Part A. Economic Analysis

All generation alternatives were evaluated at appraisal. At 12% of social discount rate, pump-storage came out as the least-cost option, followed by 11*100MW gas turbine units, and then by 2*600 MW coal-fired thermal. The price of crude oil has since more than quadrupled leaving gas turbine no longer a viable low-cost alternative. Compared with 2*600 coal-fired thermal, TOBA remains the lower-cost option. Other parameters, such as project investments, capacity factor, have all changed along favorable directions that strengthen TOBA’s least-cost position among all alternatives.

Assumption. All assumptions for the analysis are summarized below:

Assumptions Stayed Same as at Appraisal Adjusted Assumptions

TOBA: Sale-to-output ratio: 98.5%

Alternative Gas Turbine:

Installed capacity: 11*100 MW Investment: 1740 Yuan/kW

Alternative Thermal Coal-Fired Thermal:

Installed capacity: 2*600 MW coal-fired units

Investment: 5471 Yuan/kW Annual operation and maintenance costs: at

4.5% of total investment Coal consumption: based on the differential

between the alternative thermal and TOBA

Other Alternatives: Hydropower station Nuclear power stations

Other Assumptions:

Power output equivalent ratio between TOBA and the alternative: 1.05

Discount rate: 12%

TOBA: Investment costs and schedule: adjusted to

actual Power sale: adjusted to actual for 2006-07

and to 2,118 GWh from 2008 onward, equivalent of about 20% capacity level, up from 15%

Operation cost adjusted from 2.0% of total investment to actual (less depreciation) for 2006-07, and to 170 million Yuan from 2008 onward

Alternative Gas Turbine: Price of crude oil: >US$70 per bbl, more than

quadrupling the initial assumption of US$14 per bbl

Alternative Coal-Fired Thermal: Costs of fuel adjusted proportionally to the

following changes: o Coal price: from 400 to 500 Yuan/ton o Power output adjustments of TOBA

Investment and output schedule adjusted to match TOBA’s actual investment and output schedule

Economic Internal Rate of Return. The updated generation cost of TOBA is 55.4 fen/kWh compared with 62.4 fen/kWh at appraisal. A detail breakdown of the components of the cost is summarized below:

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Appraisal(Yuan/kWh)

Actual (Yuan/kWh)

Change(Yuan/kWh) Reason for Change

Investment 0.432 0.289 (0.143) capacity factor change from 15% to about 20%

O&M 0.057 0.084 0.027 to reflect actual

Pumping 0.137 0.171 0.034 coal price increases from 400 to 500 yuan/ton

Total 0.626 0.554 (0.072)

Following the same method used at appraisal, the economic internal rate of return (EIRR) was re-calculated based on up-to-date demonstrated willingness-to-pay. The current peaking tariff of 0.538 Yuan/kWh is paid to hydro, and is used as a conservative proxy of willingness-to-pay. This is about 1/3 lower than the assumption at appraisal which was set at 0.80 Yuan/kWh, the actual purchase price then paid to combined cycle units running at 33% capacity factor. Despite a 7.2 fen/kWh saving on generation cost, the updated EIRR is down from 16.0% at appraisal to 11.72%, on par with the 12% social discount rate. If the WTP stays at 0.80 Yuan/kWh, EIRR would be 21.27%, 5% higher than appraisal.

Revenue

('000 Yuan)Net Benefit('000 Yuan)

Revenue ('000 Yuan)

Net Benefit('000 Yuan)

2001 282,410 - - 282,410 - - (282,410) - (282,410)2002 277,181 - - 277,181 - - (277,181) - (277,181)2003 349,559 - - 349,559 - - (349,559) - (349,559)2004 582,845 - - 582,845 - - (582,845) - (582,845)2005 1,024,268 - - 1,024,268 - - (1,024,268) - (1,024,268)2006 700,795 23,000 82,029 805,823 479,000 257,702 (548,121) 383,200 (422,623)2007 276,894 164,000 189,060 629,954 1,104,000 593,952 (36,002) 883,200 253,246 2008 86,500 169,638 362,708 618,845 2,118,000 1,139,484 520,639 1,694,400 1,075,555 2009 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2010 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2011 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2012 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2013 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2014 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2015 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2016 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2017 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2018 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2019 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2020 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2021 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2022 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2023 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055 2024 169,638 362,708 532,345 2,118,000 1,139,484 607,139 1,694,400 1,162,055

Economic Rate of Return 11.72% 21.27%

Power for Sale

('000 KWh)

Pumping Costs

('000 Yuan) Year Investment

('000 Yuan)Operation Cost

('000 Yuan)Total Costs ('000 Yuan)

Current WTP Appraisal WTP53.8 fen/kWh 80 fen/kWh

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Sensitivity Analysis. At appraisal, five types of risk factors were considered and simulated to yield a wide range of EIRR. The risk factors include (a) investment, (b) energy, (c) willingness to pay, (d) construction time, and (e) exchange rate. At project completion, uncertainties around investment, exchange rate (associated with investment),as well as construction time have been effectively eliminated, leaving fuel cost and willingness-to-pay the two remaining uncertainties. Sensitivity analysis suggests TOBA’s EIRR is highly responsive to changes in WTP in the lower range (from 50 to 80 fen/kWh). With a 10 fen/kWh increase in WTP to 63.5 fen/kWh, TOBA’s EIRR will increases to 16%.

TOBA EIRR Sensitivity to Willingness-to-Pay

y = ‐0.1196x2 + 0.5312x ‐ 0.1425

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

- 0.500 1.000 1.500 2.000 2.500

Willingness-to-Pay (yuan/kWh)

EIR

R

TOBA’s EIRR will decrease as the price of coal increases. However, this downward shift may be mitigated by a likely increase in WTP when fuel price increases.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

- 200 400 600 800 1,000 1,200

EIR

R @

WT

P =

0.53

8 yu

an/a

kWh

Price of Coal (yuan/ton)

TOBA EIRR Sensitivity to Coal Price

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Part B. Financial Analysis

Background 1. At appraisal, the financial viability of ZPEPC, the largest shareholder of TPSP, owner of the transmission component and overall implementing agency for the project, were assessed. At the time, as the company was in the process of divesting its generation assets, the analysis mainly focused on the T&D side of its business. The resulting pro-forma grid company was found to be highly capitalized (debt/equity ratio at 26/74), with ample capacity to service its debts even in view of its large investment program. However, the return on equity was very low (1.7 percent). While it was clear that without the more profitable generation operation (albeit they only made up about a tenth of ZPEPC’s total fixed assets) the company’s financial performance would suffer, the situation was expected to improve by 1999. Based on a set of assumptions made, the financial projections for the period 1999-2005 demonstrated that ZPEPC was financially viable, and was expected to strengthen its financial position over time. To promote continued prudent financial management, the following financial covenants were agreed: (a) self financing ratio (SFR) no less than 30 percent; (b) debt service coverage ratio (DSCR) no less than 1.5 times; (c) submission of semi-annual financial reports and annual audit reports (refer to Section 2.4 Financial Management); and (d) annual submission of rolling eight-year financial projections. 2. The financial viability at the TPSP level was also assessed at appraisal. The power plant, a joint investment by seven corporate shareholders, was expected to be established as a limited liability company prior to commencement of operation. As a whole, the investors were to finance 20 percent of the total financing requirement of the physical components through equity contributions. Ownership of each investor was proportional to the size of its equity shares and claim to TPSP’s power production. Financial analysis focused on the future company’s financial sustainability and the tariff profile needed to yield a 12 percent return to the investors’ contributions. It was determined that a two-part tariff for capacity and energy would be most appropriate for TOBA to meet its financial obligations. At the prevailing peak-load tariff level, and under the assumed competitive market condition, it was concluded that the plant would be financially viable. ZPEPC 3. All covenants were substantially met, except for the SFRs in 2001 and 2003, which were 23 and 22 percent respectively. Contributing factors for the non-compliance were: (a) extraordinarily large capital investment programs (at times in excess of US$100 million a year) for rural and urban network rehabilitation and expansion. They were initiated by the Government as an economic stimulus measure in the wake of the East Asia financial crisis, but continued as necessitated by rapid growth in power demand and improvement of system efficiency; (b) substantially higher power purchase prices mainly as a result of oil and coal price hikes; and (c) after divesting its more profitable generation assets, the resulting grid company’s profit margin plunged. The Bank

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recognized the nature of this issue and began the process of considering a waiver of the SFR covenant. While this was in progress, however, the situation eased and the company’s SFR reached 29 percent in 2004. Since then all covenants had been met and ZPEPC had been able to generate adequate revenue to continue to operate and expand. 4. The latest set of financial projections available at the time of project completion was for the five year period 2008-2012. Given the rapid growth and dynamic situation in Zhejiang, it was recognized that it would be difficult to make realistic assumptions beyond a five to six year time horizon. Key financial indicators of the recent past and projected period, and the main assumptions used for the financial forecast are summarized in the following Table A3B.1. The assumptions are considered reasonable. According to the projections, ZPEPC is expected to continue to expand and remain financially viable, and all financial covenants are expected to be met in the foreseeable future.

Table A3B.1: ZPEPC’s Key Financial Indicators and

Main Assumptions Used for the Five-year Financial Projections, 2008-2012

Unit: RMB million

Indicators Actual 2006 Actual 2007 Projected Average 2008-2012

Energy Sales (GWh) 153,486 166,228 212,767 Revenues 81,184 94,059 105,631 Average Tariff including VAT (fen/kWh) 57.6 58.0 60.3 Total Operating Costs 76,648 89.830 99,701 Operating Income 4,109 4,229 5,930 Financing Charges 1,449 1,664 1,923 Net Income 1,161 2,028 3,206 Internal Sources 9,092 10,149 14,181 Borrowings 6,182 7,646 7,040 Capital Expenditures 13,003 14,152 8,840 Loan Amortization 3,493 3,095 3,000 Net Fixed Assets 58,424 59,618 69,725 Equity 22,245 22,664 37,845 Self-financing Ratio (%) 38% 44% >100% Debt Service Coverage Ratio (Times) 1.8 2.2 2.9

Main Assumptions Used for the Projection Sales volume Based on 2007 actual, and increase by 8% p.a. Inflation rate 2% p.a. Tariffs and purchased power Move in the same direction and at the same pace Exchange rate US$1.00 = RMB Y7.20 Interest rate, finance charges and amortization Per loan agreements

Depreciation Weighted average of 8.5% p.a. Income tax and other taxes Income tax at 25%, others per Government policy

Capital investment program Based on 5-year plan, peaked in 2007 and decrease by 5%-10% p.a. thereafter

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TOBA 5. As envisioned, TOBA was established as a limited liability company at the end of 2000. However, as a direct consequence of the sector restructuring, its shareholding arrangement underwent several major revisions. A comparison of the original and final composition of investors and their equity shares is provided in the following Table A3B.2. The changes did not affect TOBA’s financial performance or management, and the principle of the investors funding 20 percent of the physical cost of the pumped storage plant through equity contribution remained unchanged.

Table A3B.2: TOBA Shareholding Arrangements

Equity Shares Equity Investors At Appraisal At Completion East China Electric Power Group Company 10% - ZPEPC 25% - Shanghai Electric Power Company 17% - Shennen Shareholding Company 20% 20% Jiangsu International Trust and Investment Company 13% - Zhejiang Provincial Electric Power Development Company 10% 23% Tiantai Hydropower Development Company 5% 5% Xinyuan Power Investment Company - 52%

Total 100% 100%

6. After TOBA was formally established, it became the project implementing agency responsible for the TPSP component. Financial covenants included under the amended Loan and Project Agreements effective 2007 included: (a) DSCR not less than 1.3 times for 2007 and 2008, and 1.5 times for 2009 and thereafter; (b) submission of financial and audit reports; and (c) annual submission of rolling eight-year financial projections. 7. A two-part tariff proposal according to the principles set out at appraisal was submitted to NDRC for approval in 2005. In parallel, NDRC and SGC had mobilized a team to study the tariff level for the TPSP as a pilot for about 11 pumped storage plants about to be completed at the time. A uniform decision for the plants to operate under leasing arrangements with SGC was announced in 2007, and it was to become effective from 2008 on. For TOBA, the lease amounted to a maximum compensation of Y484 million per year, when all operational and supply conditions are fully met. The central authorities determined that at this rate, all O&M costs (without having to pay for power used) would be covered, and the return on equity would be adequate. This arrangement was accepted, albeit not wholeheartedly, by TOBA’s management and Board as it fell short of their return on investment expectations.

8. The first full year of operation of TPSP was 2007, before the lease decision was made. As summarized below, revenue level was adequate to cover the full cost of O&M, depreciation, financing charges, and generate profits. At the time of project completion, all covenants had been met. The latest set of financial projections prepared at the time of

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project completion was for the five year period 2008-2012. Given the static nature of the capacity tariff under the lease, and the fact that TOBA is a single facility company with no new capital investments beyond the project, usefulness of the financial projections was somewhat limited. Nonetheless, the key financial indicators of the recent past and projected period, and the main assumptions used for the financial forecast are summarized in the following Table A3B.3. According to the projections, TOBA is expected to continue to remain financially viable and all financial covenants are expected to be met in the foreseeable future.

Table A3B.3: TOBA’s Key Financial Indicators and Main Assumptions Used for the Five-year Financial Projections, 2008-2012

Unit: RMB million

Indicators Actual 2006 (partial) Actual 2007 Projected Average

2008-2012 Energy Sales (GWh) 479 1,104 2,118 Revenues (RMB million) 123 402 465 Total Operating Cost 123 320 331 Financing Charges 37 65 60 Net Income (RMB million) (40) 10 55 Internal Sources (RMB million) 99 322 350 Loan Amortization (RMB million) - 147 171 Debt Service (RMB million) 37 212 231 Debt Service Coverage Ratio 2.7 1.5 1.5 Net Fixed Asset in Service 2,724 3,256 2,758 Equity (RMB million) 800 810 810 Rate of Return on Equity (%) - - 6.8%

Main Assumptions Used for the Projection

Sales volume

Estimated on the basis of designed hours of operation. Output will eventually fluctuate from year to year depending on system demand. Under the existing lease arrangement, output does not impact TOBA’s revenue

Power input No payment to draw power from the system Revenue Maximum Y484 million, 96% achievement Operating cost Based on 6-9 hours of operation Depreciation Weighted average of 5% p.a. Interest rate, finance charges and amortization Per loan agreements

Income tax Income tax at 25%, others per Government policy

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

1. Task Team members

Names Title Unit Responsibility/ Specialty

Lending Barry Trembath Principal Power Engineer Task Team Leader Ranjit Lamech Energy Specialist Alternate Task Team Leader Junhui Wu Power Engineer / Transmission William Lane Environment Specialist Natural resources management Vladislav Vucetic Power Engineer / Pumped storage Mikio Matsumura Power Engineer / Distribution management Clifford Garstang Lawyer Jianping Zhao Energy Specialist Sector specialist

Chau-Ching Shen Senior Financial Management Specialist Financial Management

Peter Cordukes Consultant Financial analysis Youxuan Zhu Consultant Resettlement Dennis Creamer Consultant Hydropower Lynn Yeargin Team Assistant

Supervision/ICR Barry Trembath Principal Power Engineer EASTE Previous Task Team Leader Yuling Zhou Senior Procurement Specialist ECSPS Previous Task Team Leader Jie Tang Senior Energy Specialist EASTE Task Team Leader since 9/2007 Ivy H. Cheng Consultant EASCS Financial analysis Yiren Feng Environmental Specialist EASCS Environment Haixia Li Financial Management Specialist EAPCO Financial management Zho Yu Financial Analyst LOADM Disbursement Dawei Yang Procurement Specialist EAPCO Procurement Youxuan Zhu Consultant EAPCO Resettlement Chunxiang Zhang Program Assistant EACCF Cristina Hernandez Program Assistant EASTE

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2. Staff Time and Cost

Staff Time and Cost (Bank Budget Only) Stage of Project Cycle

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY98 83.36 FY99 208.11 FY00 16 48.55 FY01 5.70 FY02 0.00 FY03 0.00 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00 FY08 0.00

Total: 16 345.72 Supervision/ICR

FY98 0.00 FY99 0.00 FY00 8 38.34 FY01 15 124.15 FY02 13 77.67 FY03 9 47.34 FY04 6 46.14 FY05 6 43.29 FY06 8 46.59 FY07 7 60.70 FY08 2 26.01

Total: 74 510.23

Annex 5. Beneficiary Survey Results None Annex 6. Stakeholder Workshop Report and Results None

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR In order to meet the urgent need of peaking capacity in the East China Regional Power Grid, the Tongbai Pumped Storage Power Plant was selected for construction in the central area of Zhejiang Province. The project construction was started at the end of 2001. By the end of 2006, four units were commissioned for power supply to the grid. Experiences and lessons learned during the project construction are worthy of summarizing for reference in the future. The Tongbai Pumped Storage Power Plant is located in the Baizhang Village, Qixia Township, Tiantai County, Zhejiang Province. It is a pumped storage power plant with daily regulation (reservoir) storage capacity. The Tongbai Pumped Storage Company Limited was founded on December 27, 2000 for the project construction and operational management. Presently, the company has 69 employees, including 49 staff members for project operation and maintenance. The underground powerhouse of the plant is installed with four vertical-shaft reversible Francis pump/turbine generator units, in a total capacity of 4 x 300 MW, and can generate 2.118 TWh of electricity annually. The total investment cost of the project is RMB 4.2 billion Yuan, or at RMB 3,565 Yuan/kW, including interests and price escalation during the project construction. The World Bank loan also covered the expansion of 500 KV transmission projects as part of the establishment of the Zhejiang Provincial Electricity Market, including (i) construction or expansion of five 500 KV substations, in a total capacity of about 4,000 MVA; (ii) erection of 640 km of 500 kV transmission lines; and (iii) installation of 380 km of optical fiber ground wires (OPGW). The project has met the fast growing demand in Zhejiang Province at the least cost. It has increased the power supply efficiency through reduction of transmission and distribution losses, and mitigated environmental impacts associated with the grid expansion. The construction of the pumped storage power plant and the associated network projects has (a) increased the peaking capacity in the Zhejiang Provincial and East China Regional Power Grids, and improved the peaking capability and electricity energy quality; (b) initiated an electricity generation competitive market in Zhejiang Province; (c) alleviated the shortage of power supply to load centers due to transmission constraint (not generation capacity insufficiency); (d) increased the peaking capacity at the least cost to meet the growing peak load, and made up the disproportion in generation capacity with excessive base load capacity; (e) provided massive employment opportunities and increased tax revenues during the project construction and operation period, benefiting directly the local communities in the project area; and (f) significantly enhanced China’s capacity in technical design, construction and selection of equipment for pumped storage power plants. Through the project construction, the borrowers of the pumped storage power plant and the associated network projects have accumulated a great number of experiences in project construction management, survey and design, construction scheduling, equipment procurement, cost control, application of new technologies and workmanship, project

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financing, preparation for operation, and land acquisition and resettlement. This has made the borrowers owned unique experience. The World Bank had made satisfactory contributions throughout the project preparation and implementation. The World Bank staffs are admirable for their continued support, respect to policies and procedures, and dedication to the work. Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders None

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Annex 9. List of Supporting Documents 1. Summary report on implementation of the Resettlement Action Plan for the TPSP

component 2. Summary report on implementation of the Resettlement Action Plan for the

Transmission component

3. Summary report on implementation of the Environmental Management Plan

4. Project Completion Report of ZPEPC and TOBA

5. IERR supporting calculations

6. ZPEPC’s financial projections and main assumptions

7. TOBA’s financial projections and main assumptions

8. Project progress reports

9. Project file containing full records of project preparation, appraisal and supervision aide-memoires and reports

10. Project Appraisal Document dated December 2, 1999