ASIAN DEVELOPMENT BANK...the first stand-alone power transmission project financed by the Asian...

ASIAN DEVELOPMENT BANK PCR: PRC 29418

PROJECT COMPLETION REPORT

ON THE

NORTHEAST POWER TRANSMISSION PROJECT (Loan 1582-PRC)

IN THE

PEOPLE’S REPUBLIC OF CHINA

December 2003

CURRENCY EQUIVALENTS

Currency Unit – yuan (CNY)

At Appraisal At Project Completion (1 October 1997) (1 October 2003)

CNY1.00 = $0.120 $0.121 $1.00 = CNY8.315 CNY8.30

ABBREVIATIONS

ADB – Asian Development Bank CDB – China Development Bank EIRR

EMP FIRR IEE LARP

– – – – –

economic internal rate of return Environmental Management Plan financial internal rate of return Initial Environmental Examination Land Acquisition and Resettlement Plan

NEGC NEEPGC

– –

Northeast Grid Corporation Northeast Electric Power Group Corporation

OPGW PCR PRC

– – –

composite fiber-optic overhead ground wire project completion report People’s Republic of China

SP – State Power Corporation of China SPNC – State Power Northeast Company SPSC – Shenyang Power Supply Company

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

NOTES

(i) The fiscal year (FY) of the Government and the Executing Agency ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends.

(ii) In this report, "$" refers to US dollars.

CONTENTS Page

BASIC DATA ii MAP vii I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 4 D. Disbursements 5 E. Project Schedule 5 F. Implementation Arrangements 6 G. Conditions and Covenants 7 H. Related Technical Assistance 8 I. Consultant Recruitment and Procurement 9 J. Performance of Consultants, Contractors, and Suppliers 10 K. Performance of the Borrower and Executing Agency 11 L. Performance of the Asian Development Bank 11 III. EVALUATION OF PERFORMANCE 12 A. Relevance 12 B. Efficacy in Achievement of Purpose 12 C. Efficiency in Achievement of Outputs and Purpose 13 D. Preliminary Assessment of Sustainability 14 E. Environmental, Sociocultural, and other Impacts 14 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 16 A. Overall Assessment 16 B. Lessons Learned 17 C. Recommendations 17 APPENDIXES 191. Chronology of Major Events 192. Comparison of Project Cost at Appraisal and Completion 213. Projected and Actual Disbursement (1998—2001) 224. Project Implementation Schedule — Estimated and Actual 235. Organization Chart of State Power Northeast Company 246. Status of Compliance with Loan Covenants 257. Financial Performance of the Executing Agency 278. Summary of Asian Development Bank-financed Contracts 309. Financial Evaluation 3110. Economic Evaluation 33

BASIC DATA

A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower

5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number

People’s Republic of China 1582-PRC Northeast Power Transmission Project People’s Republic of China Northeast Electric Power Group Corporation $150 million PCR: PRC 774

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

25 July 1997 13 August 1997 17 October 1997 24 October 1997 25 November 1997 12 February 1998 12 May 1998 31 March 2001 17 December 2001 1 Pool-based variable lending rate 23 3 Same as loan 23 3 Northeast Electric Power Group Corporation

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9. Disbursements

a. Dates

Initial Disbursement 2 Jun 1999

Final Disbursement 17 Dec 2001

Time Interval 30 months

Effective Date 12 May 1998

Original Closing Date 31 Mar 2001

Time Interval 26 months

C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 150.00 51.92

Local Currency Cost 270.00 165.66

Total 420.00 217.58

b. Amount ($ million)

Category Original Allocation

Last Revised Allocation

Amount Canceled

Amount Disbursed

Undisbursed Balance

Equipment and Materials 112.10 45.33 66.77 45.33 0.00

Consulting Services and Training 1.20 0.65 0.55 0.65 0.00

Interest and Commitment Charges 16.60 5.33 11.27 5.33 0.00

Unallocated 20.10

0.00 20.10 0.00 0.00

Total 150.00 51.31 98.69 51.31 0.00

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2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs - Borrower-Financed 229.50 155.75 - ADB-Financed 133.39 45.98 - Other External Financing 0.61

Subtotal 362.89 202.33 IDC Costs - Borrower-Financed 40.50 9.92 - ADB-Financed 16.61 5.33 - Other External Financing

Subtotal 57.11 15.25

Total 420.00 217.59

ADB = Asian Development Bank IDC = interest during construction. 3. Cost Breakdown by Project Component ($ million)

Estimate at Appraisal Actual Cost Project Component Foreign

Cost Local Cost

Total Cost

Foreign Cost

Local Cost

Total Cost

A. Base Cost 1. Civil Works, Land Acquisition, and

Resettlement 0.0 23.2 23.2 0.0 29.5 29.5 2. 500 kV Transmission Lines 60.7 23.1 83.8 22.3 21.2 43.5 3. 500 and 220 kV Substations and

Switching Stations 44.7 63.9 108.6 21.6 72.2 93.8 4. 220 kV Transmission Lines 0.0 14.5 14.5 0.0 11.3 11.3 5. Communication Systems 4.9 1.6 6.5 0.9 2.4 3.3 6. Improvement of SPSC's

Operational Efficiency 1.0 3.7 4.7 0.5 2.5 3.0 7. Improvement of NEEPGC's Long-

Term Planning 1.0 2.0 3.0 0.6 1.6 2.2 8. Project Implementation 1.0 1.5 2.5 0.7 1.2 1.9 9. Project Office Administration 0.0 9.7 9.7 0.0 9.6 9.6

Subtotal 113.3 143.2 256.5 46.6 151.9 198.1 B. Taxes and Duties 55.8 55.8 4.3 4.3 C. Contingencies 1. Physical 11.4 19.9 31.3 0.0 0.0 0.0 2. Price 8.7 10.6 19.3 0.0 0.0 0.0 Subtotal 20.1 30.5 50.6 0.0 0.0 0.0 D. IDC 16.6 40.5 57.1 5.3 9.9 15.2 Total (A+B+C+D) 150.0 270.0 420.0 51.9 165.7 217.6 IDC = interest during construction

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4. Project Schedule Item Appraisal Estimate Actual

Date of Contract with Consultants Apr 1998 Jul 1998 Completion of Engineering Designs Jun 1997 Jun 1997 Award Date of Civil Works Contract May 1998 May 1998

Equipment and Supplies Procurement Dates - First Jul 1998 Jun 1998 - Last Oct 1999 Mar 2001 Completion of Equipment Installation Jul 2000 Apr 2001 Start of Operations - Completion of Tests and Commissioning Aug 2000 Jul 2001 - Beginning of Start-Up Sep 2000 Aug 2001

Other Milestones - Dec 2000 Improvement of SPSC's operational efficiency completed - May 2001 500 kV transmission lines completed - Aug 2002 Substations completed kV = kilovolt; SPSC = Shenyang Power Supply Company.

5. Project Performance Report Ratings Rating

Implementation Period Development Objectives Implementation Progress Dec1998–Nov 2000 S HS

Dec 2000–Dec 2001 S S HS = Highly Satisfactory; S = Satisfactory. D. Data on Asian Development Bank Missions

Name of Mission Date No. of People

No. of Person-Days

Specialization of Membersa

Fact-Finding Mission Apr–May 1997 7 100 a, b, c, f, g, h, e Appraisal Mission Jul–Aug 1997 6 106 a, b, c, h, I, e Inception Mission Oct–Nov 1998 2 16 a, b Special Contact Mission Dec 1998 1 1 b Special Project Administration Mission Jun 1998 1 4 c Review Mission Mar 2000 1 6 b Review Mission May 2001 2 10 a. d Project Completion Review and/or Hand-Over Mission b Dec 2002 4 20 a, b, c, e Project Completion Review Follow-Up Oct 2003 1 2 a No. = number a a = engineer; b = financial analyst; c = economist; d = procurement consultant or specialist; e = project analyst; f =

social development specialist; g = environment specialist; h = program specialist; i = counsel. b The Project Completion Review Mission included B. Q. Lin, Senior Project Economist, Energy Division, East and

Central Asia Department; Yong Li, Project Officer, ADB Resident Mission in the PRC (PRCM); Yonghui Fan, Financial Specialist, PRCM; Yanli Gao, Assistant Project Analyst, PRCM; and Wenjie Wang, Financial Specialist and Staff Consultant. Wang Fang, Finance Officer, PRCM provided assistance from PRCM office. The project completion report was prepared under the overall guidance of K. Sridhar, Head, Portfolio Management, PRCM.

I. PROJECT DESCRIPTION

1. Although the People’s Republic of China (PRC) has the second largest installed electricity generating capacity in the world, the integration of its provincial power grids and regional networks has not kept pace with the growth of installed power generating capacity. Interconnection of the grids within the regional networks, followed by interregional interconnections, will allow bulk power transfers from large coal-fired and hydropower plants to major load centers, with corresponding benefits that include optimal use of energy resources and economies of scale, reduced generating reserve margins, and improved power supply reliability. The northeast power region, in particular, has potential for such benefits. Eastern Inner Mongolia and Heilongjiang province have extensive coal reserves and large mine-mouth power plants, while Liaoning province in the southern part of the region is a major industrial base in the PRC, but did not have adequate installed capacity to meet its energy requirements. The Project was designed to strengthen inter-provincial power transmission connections in the region and contribute to the development of inter-regional connections, assist in strengthening power planning on a regional basis, improve operational efficiency at the distribution level, promote corporatization and commercialization and the institutional strengthening of the Northeast Electric Power Group Corporation (NEEPGC), and deepen tariff reforms in the region. The Project was also to support the Government’s power sector policies and reforms. This was the first stand-alone power transmission project financed by the Asian Development Bank (ADB) in the PRC. 2. The Project’s key objective was to enable transmission of increased power supply to the southern areas of the region by increasing inter-provincial power transmission capacity. Specific project objectives included (i) supporting power sector and enterprise reforms in the region; (ii) augmenting power transmission capacity by establishing additional 500 kilovolt (kV) transmission facilities; (iii) providing related 220 kV transmission facilities; (iv) modernizing load dispatching, communication, and protection systems in the region; (v) improving the operational efficiency of the Shenyang Power Supply Company (SPSC); and (vi) improving NEEPGC’s generation, transmission, and distribution planning capabilities. 3. The Project, as appraised, consisted of the following components (see Map on page vii):

(i) construction of a single-circuit, 500 kV transmission line that extends 724 circuit-kilometers from Yongyuan (near Harbin in Heilongjiang province) to Shenyang and Liaoyang (in Liaoning province), via Baojia and Hexin (in Jilin province);

(ii) construction of a new 500 kV substation at Baojia and two new 500 kV switching stations (one at Yongyuan and the other at Siping) in Jilin province;

(iii) expansion of three existing 500 kV substations (one at Hexin, one at Shaling, and one at Liaoyang);

(iv) installation of a fiber-optic communication system between Harbin and Liaoyang, a microwave communication system, and a protection system;

(v) construction of 110 circuit-kilometers of three outgoing 220 kV lines from Baojia substation;

(vi) provision of equipment and systems and consulting services for improving SPSC’s operational efficiency;

(vii) provision of computer hardware and software, including training to improve NEEPGC’s generation and transmission and distribution planning capabilities;

(viii) land acquisition and resettlement of Project-affected people; and (ix) consulting services for project implementation.

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4. In November 1997, ADB approved a $150 million loan for the Project from its ordinary capital resources. The loan carried a term of 23 years, including a grace period of 3 years, with an interest rate determined according to ADB’s pool-based variable lending rate system for US dollar loans. The loan proceeds were re-lent to NEEPGC from the Borrower with the same terms and conditions as the ADB loan, and NEEPGC took on the foreign exchange and interest variation risks. 5. The physical facilities were completed as planned and put into operation by August 2001, about 11 months behind the appraisal schedule, due to delays in the procurement of the composite fiber-optic overhead ground wire (OPGW) required for load dispatch and communication systems. The loan was closed on 17 December 2001, 9 months later than the original closing date of 31 March 2001. Of the total loan, $55 million was disbursed and $95 million was cancelled. In July 2002, the disbursed amount was fully prepaid to ADB.1

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

6. Electricity supply shortages restricted the PRC’s rapid economic growth in the 1980s and early 1990s. Recognizing this, the Government formulated a two-pronged energy development program aimed at expanding energy supply and promoting energy conservation and end-use efficiency. Integration of provincial power grids and regional networks did not keep pace with the growth of installed generation capacity. In the early 1990s, the Government began to increase investment in strengthening transmission systems, including the interconnection of power grids. By enabling the transmission of bulk power to load centers and strengthening sub-transmission systems, the Project supported the Government’s main power sector objective, which was to provide adequate power supplies to support the country’s rapid economic growth and increase people’s access to electricity. The Project was consistent with ADB’s three strategic objectives in the PRC (efficiency improvement, environmental protection, and growth promotion in less developed provinces). The Project was designed to help support ADB’s power sector policy initiatives, which focused on pricing and tariff reforms, sector restructuring, and enterprise reform. In addition, the Project supported the introduction of competitive electricity markets and energy efficiency and environment protection improvements. 7. A technical assistance 2 was provided to help the Executing Agency prepare the Project to meet ADB requirements, particularly in the areas of environmental impact assessment, resettlement, procurement, project implementation plans, and economic and financial analyses. The technical assistance also helped identify some of the Project sub-components that addressed key project issues. The quality of the technical assistance work was found to be satisfactory. The Project’s design was sound and the formulation process was considered adequate. The project scope was determined through extensive consultation with the representatives of the Government and project entities, and various interest groups including people affected by the Project. The chronology of major events in project implementation is presented in Appendix 1. 1 This is understandable since the ADB loan for the Project carried a pool-based average interest rate of about 6.5%

compared to the current domestic bank loan interest rate of 6.2% and the current 6-month London Inter-bank Offered Rate (LIBOR) for US Dollar of 1.2%.

2 ADB. 1996. Technical Assistance to the People’s Republic of China for the Northeast Power Transmission Project. Manila.

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B. Project Outputs

8. The following information refers to the components listed in para. 3. The first three components were designed to enable bulk power transfer from Heilongjiang province to Shenyang in Liaoning province, a center of industrial activity and an area with a large power demand. To maximize the benefits of the Project, the Executing Agency constructed, using its own funds, another 364-kilometer, 500 kV transmission line from Yongyuan to Qunlin and a new 500 kV substation at Qunlin. As indicated on the map, the Executing Agency also expanded two other existing 500 kV substations in Heilongjiang province. This expanded transmission system was integrated into the facilities financed under the Project. The communication facilities established under the fourth component are contributing to the effective and economical dispatch of bulk power flows in the region. The 220 kV outgoing transmission lines at Baojia substation, under the fifth component, enabled reliable and adequate power transmission at lower voltage levels. All these components are now in operation and are being used to transfer bulk power among the three provinces. 9. The sixth component was designed to improve SPSC’s operational efficiency. Computers and software were procured for a distribution management system and are being used by SPSC for improving its efficiency in distribution system planning. International consultants were engaged under loan financing to review SPSC’s organizational structure and financial management system. The consultant’s final report was submitted to SPSC and ADB in November 2000. This component helped introduce market concepts and principles to SPSC’s senior staff members and promoted the commercialization of SPSC. Some of the report’s recommendations were adopted when drafting SPSC’s rules on the establishment of an internal simulative power market. 10. The seventh component was designed to improve NEEPGC’s capabilities in power generation, transmission, and distribution planning by providing hardware and software, including training. The Executing Agency did not start procuring this hardware and software until April 2002. Due to the ongoing power sector reform, it was not clear which agency would ultimately be responsible for this function. As the ADB loan was already closed in September 2001, the Executing Agency approached the World Bank and obtained $600,000 International Development Association (IDA) funds to purchase the software. The hardware was procured using the Executing Agency’s own funds. The software package deals mainly with power network analysis and the reliability of the regional power network. The supply contract for the software was signed in December 2002, and the hardware and software are expected to be installed in January 2004. 11. Relocation of the project-affected people was carried out in accordance with the Land Acquisition and Resettlement Plan (LARP) approved by ADB during appraisal. A total of 58.8 hectares of land was acquired for the Project, comprising 24.2 hectares for towers, 32.1 hectares for substations, and 2.5 hectares for access roads. A total of 1,680 families (9,500 people) were temporarily affected by the use of their land and the loss of seasonal crops during construction. The budget provided for land acquisition and resettlement was adequate, and the LARP was well implemented. This was confirmed by the independent reviews of implementation consultants. 12. An international consulting firm was engaged as the implementation supervision consultant to assist in project implementation. Thirty person-months of consulting services were used to provide assistance in the areas of reviewing bidding documents and bid evaluation reports, supervising construction, managing the Project, implementing the environmental

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mitigation measures, monitoring the resettlement plan, and supporting capacity building and training. This helped bring international practices to project implementation. 13. All components under the Project, therefore, were implemented as appraised, except for the seventh component, for which the Executing Agency used alternate financing. C. Project Costs

14. Total project cost at appraisal was estimated at $420.0 million, including a foreign exchange component of $150.0 million. On completion, the actual project cost was $217.6 million, 51.8% of the original cost estimate, resulting in a cost underrun of $202.4 million. The actual foreign currency cost was $51.9 million, compared with the $150.0 million estimated at appraisal, and the local currency cost was $165.7 million, compared with the $270.0 million estimated at appraisal. A comparison of project cost at appraisal and completion is shown in Appendix 2. 15. The main reasons for the lower actual costs are high cost estimates during project preparation, savings in the costs of equipment and materials, and the use of alternate financing for the seventh component (para 17). There were also significant savings in taxes and duties, contingencies, and financing costs. There was a slight increase in the costs for land acquisition, civil works, and project design. 16. The cost reduction in equipment and materials reflected changes in market conditions and strong competitiveness in the bidding process. The international market price for aluminum, from which power conductors are made, decreased significantly in 1997 because of a fall in worldwide demand. This led to lower bid prices for conductors. The international competitive bidding process resulted in strong competition for the supply of the needed equipment. Since there were only a few transmission projects being implemented in the PRC during this period, most of the major suppliers participated in the bidding under the Project. The 500 kV conductor contract, for example, attracted 46 bidders. The awarded prices for equipment and materials contracts were significantly lower than the appraisal estimate, particularly when domestic suppliers won the contracts. The reduction in taxes and duties reflected changes in the Government’s customs duties policy. When the Project was appraised in 1997, imported goods under foreign-funded projects, including those financed by ADB, were subject to customs duties. However, customs duties and taxes levied on imported goods financed under multilateral and bilateral financing were waived in 1998. The reduction in taxes and duties also reflected a reduction in the costs for the goods that were anticipated to be imported during appraisal but were supplied domestically. Lower interest during construction and commitment charges resulted mainly from partial cancellation of ADB and domestic bank loans and a decrease in domestic loan interest rates. The contingencies were not used, because the actual base cost was considerably lower than the appraisal estimates. Moreover, there were no physical contingencies, and the inflation rate in the PRC averaged 0.85% during project implementation, compared with appraisal estimates of 8.00%. 17. The financing plan envisaged at appraisal (Table 1) included a $150.0 million ADB loan to finance the entire foreign currency cost (35.7% of the total Project cost). The $270.0 million local currency cost (64.3% of the Project’s total cost) was expected to be financed by a $190.0 million loan from the China Development Bank (CDB, 45.3% of the Project’s total cost) and an $80.0 million contribution from NEEPGC’s internal resources (19.0% of total project cost). The actual funding from ADB was $51.3 million (23.6% of the Project’s actual total cost). NEEPGC contributed $54.4 million (25.0% of the Project’s actual total cost), and actual borrowing from

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CDB was $111.3 million (51.1% of the Project’s actual total cost).

D. Disbursements

18. Loan proceeds were disbursed in accordance with ADB’s Loan Disbursement Handbook. Disbursements were made mainly through letter of credit and direct payment procedures. The first disbursement was made in June 1999, 11 months after the loan became effective. The loan was closed on 17 December 2001, 9 months later than the original loan closing date. The total amount disbursed was $51.3 million, and the remaining unused amount of $98.7 million (65.8% of the original loan amount) was cancelled. Actual contract awards exceeded projections for the first 2 years and closely matched expectations during the third year. Disbursements always exceeded projections. An imprest fund was not considered necessary during appraisal. In July 2002, the Borrower prepaid all loan proceeds. The detailed disbursement profile is presented in Appendix 3. E. Project Schedule

19. The loan was approved by ADB on 25 November 1997. Signed on 12 February 1998, the loan became effective on 12 May 1998. Having only 168 days between approval and effectiveness is considered an impressive achievement, compared with ADB and PRC averages. The Project was expected to be completed by 30 September 2000. Main project facilities were completed on time, but there were delays in the commissioning of some components. The final substation was commissioned in August 2001, 11 months behind the schedule. Originally, the loan was to be closed on 31 March 2001. But the closing date was extended once for 6 months. Appendix 4 presents the original and actual implementation schedule. 20. While there were delays in local procurement activities, the key delay in project completion related to delay in procurement of OPGW. The draft bidding documents for OPGW were submitted to ADB for review and approval in December 1997. Bids were called for and evaluated in December 1998. At that time, the Executing Agency requested a revision of the technical specifications3 to upgrade the communication capacity of the wires to be procured. As approved by ADB, bids for this contract were called for again in April 1999, against the revised 3 The technical specifications for OPGW were upgraded from the original 12 core to 24 core, following the

Government’s directive to meet national standards.

Table 1: Project Financing Plan ($ million)

Appraisal Actual Total % Source

Foreign Local Foreign Local Appraisal Actual Appraisal Actual NEEPGC 0.0 80.0 0.0 54.4 80.0 54.4 19.0 25.0 ADB 150.0 0.0 51.3 0.0 150.0 51.3 35.7 23.6 World Bank a 0.0 0.0 0.6 0.0 0.0 0.6 0.0 0.3 CDB 0.0 190.0 0.0 111.3 190.0 111.3 45.3 51.1

Total 150.0 270.0 51.9 165.7 420.0 217.6 100.0 100.0 ADB = Asian Development Bank; NEEPGC = Northeast Electric Power Group Corporation; CDB = China Development Bank Note: a About $0.6 million of World Bank funds were used for the procurement of software for strengthening

NEEPGC’s long-term planning capability.

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bidding documents. In September 1999, the Executing Agency submitted the bid evaluation report for the package. ADB approved the report’s recommendation in November 1999. The procurement of OPGW suffered further delays when the State Power Corporation of China (SP) was internally reorganized in March 1999. Under the reorganization, NEEPGC was restructured as the State Power Northeast Company (SPNC), a branch company of SP. This reorganization changed the legal position of the original Executing Agency. 21. When the OPGW contract was ready to be signed with the supplier, the issue of the change in Executing Agency arose. It took 6 months to resolve this issue, and the signed contract for OPGW was approved by ADB in May 2000. All in all, the procurement process for OPGW took 29 months. Due to the delays in OPGW procurement, and since OPGW facilities had to be installed together with conductors, the overall construction schedule of the transmission lines and substations was delayed. F. Implementation Arrangements

1. Executing Agency

22. As envisaged at appraisal, NEEPGC was the Project’s Executing Agency . At the time of project appraisal, NEEPGC was a subsidiary of SP and an independent legal entity. NEEPGC was responsible for the power sector in the three northeast provinces (Heilongjiang, Jilin, and Liaoning) and in the eastern part of Inner Mongolia, covering generation, transmission, and distribution operations in the northeast region. 23. SP was reorganized in March 1999, and four out of the five regional power companies, including NEEPGC, were restructured as the branch companies of SP. These companies functioned as departments in the respective regions and were no longer independent legal entities. NEEPGC was abolished, and SPNC was established as a branch of SP. The Government was advised by ADB that an independent legal entity had to be identified as the new Executing Agency to continue implementing the Project. In March 2000, the Government conveyed that SP would be the Executing Agency and SPNC would be the Implementing Agency, authorized to implement the Project on behalf of SP. Subsequently, discussions on the changes in the implementation arrangements, including an appraisal of SP as the Executing Agency and the necessary amendments to the loan documents, were held with the Executing Agency and the Government on several occasions. The Government, however, expressed that the appraisal of SP (the entity owning more than 50% of the assets in the entire sector) in the context of the Project alone was not feasible. The Government also expressed that further sector reforms were planned, through which SPNC could again be restructured into a separate legal entity. Under these circumstances, and to ensure continued project implementation, ADB proceeded and agreed to SP’s becoming the Executing Agency pending formalization. The project facilities were completed under these arrangements. 24. In April 2002, the Government announced a power system reform plan4 to establish competitive electricity markets. Under this plan, generation and transmission operations were separated. SP was restructured into five generating companies and two power grid companies. One of the two power grid companies, the State Grid Corporation of China, is responsible for grid development and operation and will have subsidiary grid companies at regional and

4 The key objectives of the reform included (i) breaking monopolies and introducing competition, (ii) improving

efficiency and reducing costs, (iii) improving price setting mechanisms, (iv) optimizing the allocation of power resources, and (v) establishing an impartial and transparent regulatory framework and competitive power markets.

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provincial levels. Accordingly, in September 2003, SPNC was further restructured into the Northeast Grid Corporation (NEGC), a subsidiary of the State Grid Corporation of China. While NEGC will still keep a certain generating capacity, the corporation will be mainly engaged in transmission and distribution operations that ensure effective peak regulation and safe operation of the power grid. Although the specific business scope, asset base, and institutional structure of NEGC has not been announced, transmission lines, particularly inter-provincial transmission lines, will be operated and maintained by NEGC, to facilitate power transfers within the region. The operation and maintenance of the Project facilities will also rest with NEGC. With the establishment of an integrated power market in the region and interconnection between northern and northeastern power grids, Project benefits will be maximized.

2. Project Management Office

25. In 1996, a project management office was established within NEEPGC, as envisaged at appraisal, for the preparation and implementation of the Project. The office comprised staff members from NEEPGC’s planning, finance, construction, and comprehensive departments, with a vice president of NEEPGC as its head. Two subproject offices were also established, to supervise the implementation of Project facilities in Heilongjiang and Jilin provinces. Similar work in Liaoning province was undertaken by the project management office itself. A subproject office was set up within SPSC, to implement the component on improving SPSC’s operational efficiency. The project management office was in charge of international procurement, periodic review of work progress, counterpart funding, quality control, and overall coordination and communication with ADB during project implementation. Project management office’s efficiency ensured the successful implementation of the Project. G. Conditions and Covenants

26. The covenants were designed to cover sector reform, tariff and enterprise reforms, environment and social impacts, financial performance of the Executing Agency, and implementation issues. The loan covenants were generally complied with (Appendix 6). As part of the sector reforms, the Government selected the northeast region as a pilot area for testing the introduction of an integrated regional competitive power market.5 An enterprise reform plan was developed under the Project. The Executing Agency carried out a study on tariff reforms and submitted for the Government’s approval a tariff reform action plan in 1998, as covenanted in the loan documents. This plan included unification of tariffs at the provincial level, rationalization of classification of consumer categories, and implementation of increased capacity charges. Tariff unification was achieved as the first step in implementing the proposed tariff reform plan. The implementation progress on other aspects of the plan was slower than envisaged, because the ongoing power sector reform requires a new approach to tariff setting. With the establishment of a competitive electricity market, separate transmission tariffs are expected to be introduced. 27. The covenants on environmental and social impacts were complied with. The Land Acquisition and Resettlement Plan (LARP) and the initial environmental examination (IEE) report were formulated and approved by ADB, and measures under the LARP and the IEE were well implemented. No independent domestic agency evaluated the implementation of the LARP, as required under the covenants. However, the implementation supervision consultants carried

5 An advisory technical assistance (ADB. 1997. Technical Assistance to the People’s Republic of China on Power

Sector Restructuring) developed during and processed in parallel to the Project’s appraisal contributed significantly to the preparation of the sector reform plan.

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out a review in 1998 that confirmed compliance with its implementation. The Project Completion Review Mission visited the relocation areas and confirmed proper implementation according to the LARP. The Project progress reports and annual audited financial reports were submitted on time, as required, but the 10-year financial projections were submitted late. The Executing Agency prepared a draft project completion report (PCR) in December 2002 covering the execution and initial operation of the Project. The Executing Agency did not undertake benefit monitoring and evaluation. 28. There were financial covenants in the Project Agreement covering NEEPGC’s return on net historical fixed assets, self-financing ratio, and debt service ratio. Because of its non-autonomous status and significant reduction of assets base and business scope, SPNC was not comparable with NEEPGC. However, the financial covenants designed for NEEPGC were relevant for SPNC, and the ratios were calculated for SPNC in the financial performance evaluation. SPNC’s financial statements for 1999–2001 and projections for 2002–2005 are shown in Table A7 (Appendix 7). NEEPGC’s financial statements for 1998 are also shown in Table A7. 29. The financial performance evaluation and projections made for SPNC should be largely valid for the newly created NEGC, although NEGC’s specific asset ownership is not decided. SPNC’s financial performance was unsatisfactory from 1999 to 2001, soon after the reorganization. By 2002, the financial performance improved. The debt service ratio was 1.4 and the self-financing ratio was 37.8%. The return on net fixed assets increased to 4.3%. Projections for NEGC indicate an improving trend for the period beginning in 2002, in terms of return on net fixed assets, debt-equity ratio, debt service ratio, and self-financing ratio. Capital structure indicators (a debt ratio maintained at lower than 50% and a debt service ratio higher than 1.4) show that NEGC’s financial risk is moderate for the projection period. The self-financing ratio will remain over 30% after 2002, as a result of a low cash requirement for debt service. The return on net fixed assets will improve, but the return will remain at low levels (less than 8%), since lack of a well-designed price setting mechanism restricts the entity’s profitability. 30. A transmission charge should be set on the basis of an appropriate formula that allows a satisfactory rate of return for NEGC. This issue is expected to be addressed in the context of the ongoing power sector reform. Tariff reform should be expedited, with special attention given to the separation and rationalization of the tariffs for power generation, transmission, and distribution. H. Related Technical Assistance

31. ADB approved a project preparatory technical assistance grant to review and ascertain the Project’s technical, financial, and economic feasibility (para. 7). The technical assistance confirmed that the project scope and selection of subprojects were appropriate and that the Project was cost-effective and financially sound. The technical assistance helped the Executing Agency prepare the Project and meet ADB requirements, particularly in the areas of resettlement and procurement and environmental impact assessment, project implementation plans, and economic and financial analyses. The technical assistance also helped detail the scope of the Project’s subcomponents (including the improvement of SPSC’s operational efficiency and NEEPGC’s planning systems) that addressed key project issues. The technical assistance particularly contributed to preparation of the Environmental Management Plan (EMP) and a resettlement plan. The quality of the technical assistance work on the financial analysis of the Executing Agency and the Project was of a high standard. However, project costs should have been estimated more carefully. Overall, the technical assistance is rated as successful.

9

32. An advisory technical assistance 6 was approved to accompany the loan and to recommend measures to strengthen NEEPGC’s financial soundness and improve its capability to provide an adequate and reliable electricity supply in the Northeast Power Grid. The technical assistance focused on the organizational restructuring and commercialization of NEEPGC’s operations and strengthening its institutional capabilities, to allow effective and efficient performance of corporate functions. The design, scope, and terms of reference of this technical assistance were appropriate for achieving the objectives. The final report from the consultant was received in June 2000. The report was comprehensive and its recommendations useful, particularly in the areas of power sector restructuring, power market principles, financial management methods, and performance monitoring system implementation. The consultant recommended medium- and long-term market structures for NEEPGC, in the context of national power sector restructuring. An assessment of the company’s accounting and financial system as well as overall management information system was carried out and measures were identified for improvement in these areas. There were some delays in technical assistance implementation, due to additional analysis that covered SPNC’s new operating focus, which resulted from SP’s internal reorganization. A separate technical assistance completion report was prepared, and that report rated the technical assistance successful. 7 Most of the institutional reforms recommended under the technical assistance were implemented, such as those relating to commercialization and financial management, accounting and control systems, and tariff reforms. I. Consultant Recruitment and Procurement

33. Using its own financing, the Executing Agency engaged a design institute during project preparation as a domestic consultant to carry out a feasibility study and prepare related project documents and reports needed for obtaining the Government’s approval for the Project. Domestic experts were also recruited to carry out a tariff study and develop a tariff reform plan. During project implementation, another engineering supervision company was contracted, following the implementation of government regulations mandating supervision of construction progress and safety, compliance with quality standards, and assistance in the verification of changes in detailed design. 34. Part of the ADB loan proceeds under the Project were used to engage international consultants for about 30 person-months to assist the Executing Agency in the areas of procurement, project management, the implementation of environmental mitigation measures, and capacity building and training. Moreover, consultants helped carry out a study for the improvement of SPSC’s operational efficiency. International consultants were engaged in accordance with the Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers. 35. The Executing Agency engaged two tendering companies as procurement agents to assist in carrying out international procurement, including the preparation of the commercial part of the bidding documents, bid evaluation, contract negotiation, and contract execution. The design institute that prepared the project feasibility study (para. 33) was contracted to provide technical support for procurement, including the preparation of the technical specifications for the bidding documents. Goods and related services financed by ADB were procured in 6 ADB. 1997. Technical Assistance to the People’s Republic of China for Institutional Strengthening of Northeast

Electric Power Group Corporation. Manila. 7 ADB. 2003. Technical Assistance Completion Report on the Institutional Strengthening of Northeast Electric Power

Group Corporation. Manila.

10

accordance with the Guidelines for Procurement Under Asian Development Bank Loans. Contracts for equipment and material financed by ADB valued above $500,000 were procured using international competitive bidding procedures. Contracts valued below $500,000 were procured following international shopping procedures. Local competitive bidding procedures were adopted for the procurement of goods and installation and civil works contracts financed by domestic counterpart funding, following the Government’s regulations. Appendix 8 presents the details of the procurement packages financed by ADB. 36. Domestic procurement under Borrower financing was carried out smoothly and efficiently. Related laws and Government regulations were followed. While most international procurement was handled efficiently and effectively, the procurement of OPGW suffered delays resulting partly from the Executing Agency’s decision to upgrade technical specifications (para 20) after the original bids were received and evaluated. With ADB’s approval, the Executing Agency invited new bids using the revised technical specifications. In the case of the procurement of insulators, the bid evaluation report failed to provide adequate justification to support its recommendation for awarding the contract to a domestic manufacturer. The Executing Agency eventually opted to use its own funds to finance that contract. J. Performance of Consultants, Contractors, and Suppliers

37. The domestic design institute that prepared the preliminary design and the project feasibility study had experience in designing 500 kV transmission projects. The first 500 kV transmission line in the northeast region, which runs parallel to the transmission line financed under the Project, was designed by this institute. Project documents prepared by the design institute were generally of good quality. The design institute also prepared the technical specifications in the bidding documents, and in this work the institute consulted other design institutes in the country that were previously involved in similar assignments for ADB-financed projects. The procurement agents engaged by the Executing Agency handled international procurement and were familiar with ADB procurement procedures through previous experience under other ADB-financed projects. The procurement agents also assisted the Executing Agency in obtaining Government approval for the bidding documents and bid evaluation reports and the handling of customs formalities for imported goods. The domestic supervision consultant competently performed the assignments, which contributed to budget and quality control. Overall, the domestic consultants were well qualified and performed well. 38. The international supervision consultants performed their tasks satisfactorily. These consultants were involved in the design and construction supervision of high-voltage transmission lines in Australia and other countries. The international consultants provided advice on technical issues relating to project management, reviewed bidding documents for international competitive bidding contracts, and assisted the Executing Agency in the evaluation of bids under international competitive bidding procedures and in project management. The consultants also helped the Executing Agency in the implementation of the EMP and the LARP. The consultants’ contract was extended to provide consulting services for the improvement of SPSC’s operational efficiency. A number of recommendations were made by the consultants for improving SPSC’s operational efficiency. The international consultants’ recommendations on project management and environment management were effective and most were adopted for project implementation. The consultants brought international best practices into project management. The Executing Agency and the international consultants had a good relationship, and the Executing Agency appreciated the consultants’ contributions.

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39. The civil work contractors and the equipment installation contractors were all domestic companies. They were competent and completed all work to the satisfaction of the Executing Agency. Equipment suppliers generally complied with their contract terms. Nine out of 23 sets of 500 kV circuit breakers were damaged during sea transportation, and the supplier was required to replace some parts. This caused some delays in equipment installation. Some of these circuit breakers could not meet the technical specifications regarding the moisture content of sulfur hexafluoride (SF6) gas during commissioning. Discussions and negotiations were held between the Executing Agency and the supplier to resolve this problem. The problem was eventually resolved with the help of domestic experts, and the circuit breakers now operate normally. The line protection relays procured under the Project were also damaged during sea transportation but functioned well after replacing some parts. K. Performance of the Borrower and Executing Agency

40. The Borrower executed the loan and project agreements in about 75 days from the date of project approval and met all loan effectiveness requirements within the specified 90 days from loan signing. Project implementation started promptly after the loan became effective. Implementation was generally in line with the arrangements envisaged at appraisal. During implementation, the Government changed the designated agency for ADB operations from the People’s Bank of China to the Ministry of Finance. This change did not adversely impact project implementation. The March 1999 SP reorganization resulted in substantial changes in the structure of the power industry in the northeast region and affected the Executing Agency’s legal position. ADB was not advised by the Government of this reorganization until December 1999. This change affected project implementation to some extent (paras. 23 and 24). Overall, the Borrower’s performance is rated as satisfactory. 41. Based on its solid experience in the construction of high-voltage transmission lines, particularly the first 500 kV transmission line in the region, the Executing Agency implemented the Project’s physical components efficiently. The project management office was staffed with experienced professionals. The Executing Agency designed appropriate systems for project monitoring and quality control. Overall, the Executing Agency’s performance is considered highly satisfactory. L. Performance of the Asian Development Bank

42. ADB regularly fielded missions to review implementation progress and assist in resolving procurement and implementation problems. The Executing Agency appreciated this and was satisfied with the timeliness and adequacy of ADB’s responses to the Executing Agency’s requests. ADB’s quick review of procurement documents was particularly appreciated by the Executing Agency. Various training opportunities were provided by ADB to Executing Agency and government officials, and the Executing Agency’s trainees found these effective and timely. 43. When SP’s internal reorganization was reported in the media, ADB foresaw possible problems in the change of the Executing Agency and asked the Government and the Executing Agency to provide adequate information to assess the impact of the change on project implementation. The issue of change in the Executing Agency caused a delay in ADB’s approval of the OPGW contract, since NEEPGC was no longer an independent entity and thus unable to sign the supply contract. This issue was resolved through ADB’s continuous consultation with the Borrower and the Executing Agency. ADB’s practical solution to this issue avoided further delays in project implementation and was highly appreciated by the Executing Agency.

12

44. Appraisals cost estimates were higher than actual costs. While the main reasons for the lower actual costs were intense bidding competition, subsequent and unforeseen drop in material prices, and much lower inflations levels, project cost estimates at appraisal could have been scrutinized in greater detail.8 45. ADB staff members established a good rapport with the Executing Agency’s project staff, and the Executing Agency recognized the value added by ADB’s involvement in the Project’s preparation and implementation.9 Overall, ADB’s performance can be considered satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

46. At the time of project appraisal, the PRC’s power generating capacity had grown rapidly, at an average rate of 8.3% per year, and by the end of 1996 the power generating capacity was 237 gigawatts. However, the integration of provincial power grids and regional networks did not keep pace with the growth of the installed generating capacity. The Project was consistent with the Government’s priorities in the power sector, which included strengthening the transmission networks, particularly the interconnection of provincial power grids. In addition to the backbone 500 kV system, the Project also included the construction of lower voltage sub-transmission systems and the strengthening of the planning for city distribution systems. This helped improve the safety and reliability of the region’s transmission grid. The Project helped the Government optimize power resources by providing transmission interconnection between areas with resources for power generation (the northern part of the region possessing coal resources) and load centers (the southern part of the region). The Project was also in line with ADB’s operational priorities for the country. The Project helped reduce environmental pollution through the provision of a transmission system that avoids coal transport for thermal plants in load centers, which aggravates air pollution. The Project also reduced the need to construct coal-based plants in the more populated southern part of the region. The Project addressed the issues of tariff reforms and institutional strengthening of power utilities. The Project, with the accompanying technical assistance, helped to build the capacity necessary to introduce competitive electricity markets in the region.10 In view of these accomplishments, the Project is considered highly relevant. B. Efficacy in Achievement of Purpose

47. The northeast region’s gross domestic product grew at 9.2% in 2001 and 10.1% in 2002. Liaoning province’s gross domestic product grew at 9.0% in 2001 and 10.2% in 2002. Power consumption in the region increased by 4.3% in 2002, from 2.2% in 2001. However, in the first half of 2003, electricity consumption in the region surged by 10.8%. In Liaoning and Jilin provinces, power consumption in the first two quarters of 2003 increased by 12.5% and 14.4%, respectively. 48. The Project supported the economic growth. Since the time the Project’s 500 kV and 8 Several other projects approved by ADB around this time also resulted in low actual costs when compared with

appraisal cost estimates. 9 As the Project was being implemented, in 2000, ADB received a request for financing the Shen-Da Power

Transmission and Grid Rehabilitation Project in the region. 10 The northeast region is one of the 6 regions selected to introduce competitive electricity markets.

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220 kV transmission facilities were made operational, the maximum power transmission capacity between Heilongjiang and Jilin provinces increased by 800 megawatts (MW), to 1,500 MW. Similarly, the transmission capacity between Jilin and Liaoning provinces increased from 1,400 MW to 1,800 MW. In 2002, about 2,000 gigawatt-hours (GWh) were transferred from Heilongjiang to Jilin, and 3,500 GWh were transferred from Jilin to Liaoning. There were 179 outages in the Northeast Power Grid in 2002, 44% less than the number prior to the Project. The Project enabled large hydropower plants, including the Fengman and Baishan plants in Jilin province, to supply an additional 1,000 GWh of environmentally clean hydropower to the power grid each year and generate electricity at full capacity during the flood season. This avoided unnecessary water discharge resulting from insufficient transmission capacity, which was the case prior to the Project. The interconnection between the northeastern and northern regional power networks was completed in May 2001. About 2,800 GWh of bulk power was transferred in 2002 from the northeast power network to meet electricity shortages in the northern region. Analyses of system stability show that the interconnection of the two regional power grids would not have materialized without the Project. With the operation of the Project, the maximum power transfer between the two regional networks can reach 1,500 MW. 49. The Project, along with the ADB-financed Shen-Da Power Transmission and Grid Rehabilitation Project,11 strengthened the backbone 500 kV high-voltage transmission system in the region and facilitated the transfer of bulk power from Heilongjiang in the north to Shenyang and Dalian in the south. The Project also improved the northeast power network’s security and stability and provided additional system reserve for the northern power network, through the interconnection of the two regional power networks. 50. The Project fully met the objectives of providing increased power transmission capacity in the region, enabling a greater use of hydropower capacity during the flood season, and improving the reliability of the regional power systems. Load dispatch was modernized by the adoption of advanced technology and equipment procured under the Project, and communication and protection systems were upgraded. The OPGW facilities improved dispatch and communication capacities in the region. SPSC benefited from the study’s recommendations to improve operational efficiency and financial management. The technical assistance associated with the Project resulted in a number of recommendations that helped bring corporate and commercial principles to the Executing Agency. Accordingly, the Project is assessed to be efficacious. C. Efficiency in Achievement of Outputs and Purpose

1. Financial Analysis

51. The financial internal rate of return (FIRR) is recalculated at 12.0%, using the same methodology used at appraisal but based on actual capital costs and revised projections for the volume of power transmission and transmission charges (Appendix 9). The FIRR compares favorably to the revised weighted average cost of capital 12 of 5.6%. Based on these calculations, the Project is considered to be financially viable. The FIRR is higher than the appraisal estimate because of the considerable capital cost savings, even though the volume of 11 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

People’s Republic of China for the Shen-Da Power Transmission and Grid Rehabilitation Project. Manila. 12 The weighted average cost of capital for the Project is revised at 5.64%, with (i) ADB’s pool-based variable US

dollar loan carried at 6.40%, (ii) domestic bank loan carried at 6.21%, and (iii) return of equity distribution at 12.00%. Income tax was assumed to be at 33% and average domestic inflation at 0.85%.

14

power transmission and transmission charges are now projected to be lower than appraisal estimates and the commissioning of Project facilities was delayed by 11 months.

2. Economic Analysis

52. Following the methodology used at appraisal, the economic internal rate of return (EIRR) on a Project-specific basis is reevaluated to be 12.5%, compared with 15.4% estimated at appraisal. The Project’s benefits were valued on the basis of consumers’ willingness to pay. Incremental capital investments for power generation associated with the Project were also included in the calculation. The decline in the EIRR on a Project-specific basis is primarily due to the lower incremental power transfer attributable to the Project and a lower estimate of willingness to pay. Appendix 10 presents the assumptions and EIRR tables. 53. With most of the economic and financial targets achieved, the Project is rated highly efficient. D. Preliminary Assessment of Sustainability

54. Under the ongoing power sector restructuring program, SPNC was restructured into a regional grid company, or the NEGC. While the minimum generating capacity will be kept by NEGC to facilitate peak and frequency regulation and ensure the power grid’s safety, most of the generating assets previously owned by SPNC were allocated to the newly established generating companies. NEGC will mainly deal with transmission and distribution businesses. Since there is no separate transmission and distribution tariff and the quality of power supply (such as system reserves and frequency) is not clearly reflected in the current tariff system, NEGC’s financial performance may not be satisfactory in the next few years. This, however, will improve, as further tariff reforms are expected when the Government proceeds with the separation of transmission and distribution costs from generating costs. The objective should be to ensure that grid companies recover their costs and earn reasonable returns from transmission and distribution charges. To that end, the Government is making efforts to establish regional and provincial power markets, but this is a process that will take some time. 55. There were power shortages in the PRC in 2002. Electricity consumption in the country increased by 13.5% in 2002 and continued to grow at 15.4% during the first half of 2003. In the northeast region, power consumption increased by 10.8% in the first half of 2003. As market demand grows, power transfer through project facilities will increase. This will improve the Project’s and NEGC’s sustainability in the longer term. Training and capacity-building components provided under the Project will help the grid company increase its operational efficiency and improve management skills. Overall, the Project is likely to be sustainable. E. Environmental, Sociocultural, and Other Impacts

1. Environmental Impacts

56. The Project was classified as Environmental Category B. The IEE for the Project was circulated to the Board of Directors in 1997. Because of the limited potential adverse environmental impacts associated with transmission projects, a formal environmental impact assessment was not required under ADB or government procedures. The district, city, and provincial environmental protection bureaus conducted initial assessments and approved transmission facilities’ sites and routes.

15

57. A detailed EMP was prepared for the Project. The EMP provided a range of strategies to ensure that the issues raised in the IEE were managed through the course of project implementation. An environmental management and monitoring office was established within the project management office, with provincial level offices in Jilin and Heilongjiang provinces, to implement the EMP. Because of the essential role played by water and soil conservation management in addressing issues identified in the IEE, the Executing Agency engaged the Jilin Provincial Science Institute of Water and Soil Conservation to prepare a detailed water and soil conservation plan. 58. The Executing Agency included appropriate clauses in the contracts with its contractors to mitigate potential environmental harm caused by the Project. The application of these contractual obligations was monitored by the environmental management and monitoring office. The EMP was revised, based on the periodic review of the plan’s implementation status. Environmental management and monitoring office staff members were trained in line with the EMP. Measures recommended under the EMP were implemented to mitigate possible adverse environmental impacts. The 500 kV and 220 kV transmission lines pass through the Song-Liao Plain, most of which is agricultural land. There were no primary forests or protected species of trees, ecologically sensitive areas, or migratory paths of birds and wildlife along the transmission route. No known archeological, historical, or cultural sites or monuments were along the route, near the substation sites, or within the route’s or sites’ 3-kilometer corridor. No environmental incidents occurred during project implementation or the Project’s initial operation period. On project completion, local governments issued certificates of acceptance for environmental protection efforts. 59. The Project provided major environmental benefits, since it helped avoid the need to build coal-fired power generating capacity in the densely populated and urbanized southern area of the region. In 7 years, up to 2003, no coal-fired power plants were built in the southern area. The increase in power consumption in the area was met by power transmitted from the northern areas, using project facilities.

2. Social and Other Impacts

60. The LARP was prepared by a domestic design institute in May 1997 in accordance with government laws and regulations. The LARP was reviewed by ADB and found to be consistent with ADB’s Policy on Involuntary Resettlement. The LARP identified 61.7 hectares of permanent land acquisition, 29 houses to be removed or relocated, and 9,500 people to be temporarily affected by the Project. At project completion, while the total number of temporarily affected people and permanent land acquisition for project facilities remained about the same, an additional 30 houses were relocated because of the new 1998 government regulation covering the impact caused by electromagnetic waves. Accordingly, the number of people affected due to house relocation increased from 115 to 218. The total cost for land acquisition and relocation increased correspondingly from the $8.7 million estimated at appraisal to $11.3 million at project completion. Table 2 presents the LARP’s features. During project construction, some 9,330 affected people were employed, of which 1,109 were female laborers. A Specialist engaged by the implementation consultants reviewed the LARP’s implementation in November 1999. The review concluded that the LARP was well implemented. The Project accordingly is assessed to have a moderate impact on institutional development.

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IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

61. The Project, the first stand-alone power transmission project financed by ADB in the PRC, was formulated and designed to be consistent with the Government’s priorities and ADB’s operational strategy for the PRC power sector. The Project achieved its main objective of enabling the provision of increased power supply efficiently to southern areas of the region by increasing the inter-provincial power transmission capacity. The 500 kV transmission line constructed under the Project serves as the backbone of the Northeast Power Grid and has improved the power system’s stability and reliability. The Project contributed to the sub-transmission system’s strengthening. Apart from providing inter-provincial connection within the region, the Project facilitated inter-regional transmission between the northeastern and the northern regional power grids. Dispatch, communication, and protection systems in the region were improved with the establishment of project facilities. SPSC, the biggest distribution utility in the region, benefited from the study’s recommendations related to improving SPSC’s operational efficiency. The Project supported enterprise and tariff reforms. The main facilities under the Project were commissioned on time. Project implementation was impacted to some extent by the institutional changes resulting from ongoing power sector restructuring. Initial project operations were affected by lower than projected growth in power demand in the southern part of the region and the lack of a clear formula for the power transmission tariff. However, with the expected increase in power demand in the region and the commissioning of the interconnection between the northeastern and northern regions, the Project facilities are expected to be fully used. 62. Key Project facilities were completed on schedule, but the implementation of minor components was delayed. These delays were mainly due to the reorganization of SP, which resulted in changes in the Executing Agency arrangement and a delay in procurement. The facilities provided under the Project performed as envisaged. During the initial years, actual achievement in terms of the amount of power transmitted and financial performance was generally lower than that estimated at appraisal. Additional benefits were obtained by the interconnection between the northeastern and northern power networks. In the longer term, the benefits envisaged at appraisal will likely be achieved. 63. The Project is rated successful, based on relevance, efficacy, efficiency, and

Table 2: Implementation of the Land Acquisition and Resettlement Plan

Parameters At Appraisal Actual

Permanent Land Acquisition (hectares) 61.7 59.0Houses Removed and/or Relocated 29 59People Affected (number) 115 218People Temporarily Affected (number) 9,500 9,500Total Cost ($ million) 8.7 13.3Source: Executing Agency’s project completion report.

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sustainability and institutional development and other impacts.13 A project performance audit report may no longer be necessary, since the loan’s full amount was repaid. B. Lessons Learned

64. Designing and implementing projects in sectors that are undergoing major restructuring, such as the power sector, involves many uncertainties. These may include policy and institutional uncertainties that can not fully be foreseen at appraisal. To cope with uncertainties and unexpected developments, close consultations between ADB, the Government and Executing Agencies during project implementation should be held at sector level, as opposed to project level. Coping also calls for flexibility on both sides when dealing with unexpected developments. 65. The other lessons learned from the Project include

(i) A well-designed project, an experienced Executing Agency with a strong sense of project ownership, and a committed project management office staff make up a formula for project success.

(ii) There is a need to pay greater attention to project cost estimates and the size of ADB loan at appraisal, to avoid subsequent loan savings.

(iii) Government and Executing Agencies should advise ADB prior to any institutional changes resulting from sector restructuring, particularly changes that will impact on project implementation.

(iv) There is a strong emphasis in the PRC on project technical issues. The Government and Executing Agencies need to pay greater attention to project financial issues, including the financial viability of projects. ADB review missions need to pay more attention to financial issues.

C. Recommendations

1. Project-Related

a. Further Monitoring

66. ADB should monitor further development regarding the formulation of an appropriate transmission tariff that will ensure the Project’s financial viability.

b. Follow-Up Actions

67. NEGC has emerged as a subsidiary of the State Grid Corporation of China. Power sector reforms in the PRC are ongoing, and as a result there could be further changes in the institutional set-up in the power sector in general and the northeast region. In particular, the introduction of competitive electricity markets in the region needs to be monitored by ADB. The northeast has been chosen as one of the pilot regions for the development of power markets. The Government or the newly established regulator (the State Electricity Regulation Commission) should ensure that the tariff for power transmission allows the Project to be financially viable.

13 The PCR is part of a sample of PCRs independently reviewed by the Operations Evaluation Department. The

review validated the methodology used and the rating given.

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68. In addition, NEGC needs to undertake follow-up action on the implementation of the recommendations of the studies on improving SPSC’s operational efficiency and the Executing Agency’s institutional strengthening. These recommendations are valid, regardless of changes that may occur as a result of sector reforms.

2. General

69. A more realistic approach by ADB and the Executing Agencies for estimating project costs is recommended at the project design phase, to avoid overestimates of project costs and resultant high loan savings and cancellations.14 Technical assistance consultants involved in project preparation should be advised to review cost estimates more carefully. Although predicting a winning bid under international competitive bidding procedures is difficult, there is a strong capacity in the PRC in civil works and manufacturing and supply of equipment and materials. Therefore, the chances of domestic bidders winning contracts are quite high. In view of this, domestic market prices in the recent past should be given greater weight in estimating future project costs. 70. The reforms in the power sector resulted in changes in project implementation arrangements. Further sector restructuring will take place over the next few years. ADB must, therefore, carefully review with the Government and executing agencies the implementation arrangements for the power projects that will be approved during this transitional period. 71. Financial aspects of executing agencies and projects deserve increased attention during project implementation. ADB review missions need to be appropriately staffed to undertake this work. This will require ADB to recruit more financial analysts in the energy divisions or provide a larger budget for staff consultants.

14 ADB and the Government jointly carried out a Study on Project Cost Estimates and Loan Savings in December

2002. The study analyzed the key reasons for the lower actual costs compared with appraisal estimates and provided a number of recommendations for achieving better cost estimates. ADB. 2003. Technical Assistance for Thematic Evaluation Studies for 2003 includes a special evaluation study of project cost estimates.

Appendix 1 19

CHRONOLOGY OF MAJOR EVENTS A. Loan 1582-PRC: Northeast Power Transmission Project 30 Jul 1996 Project preparatory technical assistance approved 15 Mar 1996 Government approval of project feasibility study 29 Apr–19 May 1997 Fact-Finding Mission fielded 24 Jun 1997 Management Review Meeting 25 Jul–13 Aug 1997 Appraisal Mission fielded 22 Sep 1997 Staff Review Committee meeting 20–22 Oct 1997 Loan negotiations conducted 25 Nov 1997 ADB approval of $150 million loan from ordinary capital resources 12 Feb 1998 Loan signed 12 May 1998 Loan effectiveness 10 Jul 1998 Executing Agency signs contract with implementation consultants 29 Oct 1998 Inception Mission fielded 24 Nov 1998 Award of first batch of contracts for equipment and materials 2 Jun 1999 First disbursement 31 Mar 2000 First Loan Review Mission fielded 30 Sep 2000 Estimated project completion date (at appraisal) 7 Nov 2000 $95 million partially cancelled 31 Mar 2001 Loan closing date (at appraisal) 28 Aug 2001 Project completion date (actual) 17 Dec 2001 Loan closing date (actual) 17 Dec 2001 Loan account closed 5 Jul 2002 Full loan balance prepaid 16 Dec 2002 Project Completion Review Mission fielded 16 Oct 2003 Follow-up project completion review B. TA 2620-PRC: Northeast Power Transmission 2–12 Feb 1996 Reconnaissance Mission fielded 16 –29 April 1996 Fact-Finding Mission fielded 30 Jul 1996 Technical assistance approved 16 Oct 1996 Technical assistance agreement signed 24 Nov 1996 Consultants fielded 22 Jan–2 Feb 1997 Review Mission fielded 8 Apr 1997 Draft final report received 15 May 1997 Final report received

20 Appendix 1

C. TA 2919-PRC: Institutional Strengthening of Northeast Electric Power Group Corporation

25 Nov 1997 Technical assistance approved 22 Apr 1998 Technical assistance agreement signed 8 May 1998 Consultants’ contract signed 6 Jul 1998 Consultants fielded 7 – 14 Jul 1998 Inception Mission fielded 26 Feb 1999 Draft final report received 24 – 27 Aug 1999 Tripartite meeting held 23 Jun 2000 Final report received 31 Dec 2002 Technical assistance account closed 9 May 2003 Technical assistance completion report completed

Appendix 2 21

COMPARISON OF PROJECT COST AT APPRAISAL AND COMPLETION ($million)

Foreign Currency Local Currency Total Cost Component Original

Estimate ActualOriginal

Estimate Actual Original

Estimate Actual

A. Base Cost 1. Land Acquisition and Resettlement 0.0 0.0 10.8 13.3 10.8 13.32. Civil Works 0.0 0.0 12.5 16.1 12.5 16.13. Equipment and Materials 110.3 44.8 34.9 38.0 145.2 82.8

a. Transmission Line Materials 60.7 22.3 23.1 21.2 83.8 43.5b. Substation Equipment and Materials 39.3 19.0 5.3 11.7 44.6 30.7c. Substation Control, Metering, Line, and

Transformer Protection Equipment 5.4 2.7 4.9 2.7 10.3 5.4d. Communication Equipment 4.9 0.8 1.6 2.4 6.5 3.2

4. Installation and Construction 0.0 0.0 49.0 51.0 49.0 51.05. Project Design 0.0 0.0 4.7 6.8 4.7 6.86. Outgoing 220 kV Lines at Baojia 0.0 0.0 14.5 11.3 14.5 11.37. Modernization of Shenyang Area Dispatch

Center 0.7 0.5 3.2 2.5 3.9 3.08. Improvement of NEEPGC's Long-Term

Planning Capability 1.0 0.6 2.0 1.6 3.0 2.29. Improvement of SPSC's Operational

Efficiency a 0.4 — 0.5 — 0.9 —10. Project Implementation 1.0 0.7 1.2 1.0 2.2 1.7

a. International Experts 1.0 0.7 - 1.0 0.7b. Domestic Experts 0.0 0.0 1.2 1.0 1.2 1.0

11. Domestic Training 0.0 0.0 0.2 0.2 0.2 0.212. Administration and Miscellaneous

(including project vehicles) 0.0 0.0 9.7 9.6 9.7 9.613. Taxes and Duties 0.0 0.0 55.8 4.3 55.8 4.3

Subtotal (A) 113.4 46.6 199.0 155.7 312.4 202.3

B. Contingencies 1. Physical 11.3 0.0 19.9 0.0 31.2 0.02. Price 8.7 0.0 10.6 0.0 19.3 0.0

Subtotal (B) 20.0 0.0 30.5 0.0 50.5 0.0Base Cost + Contingencies 133.4 46.6 229.5 155.7 362.9 202.3

C. Interest During Construction + Commitment Charges

1. ADB 16.6 5.3 0.0 0.0 16.6 5.32. China Development Bank 0.0 0.0 40.5 10.0 40.5 10.0

Subtotal (C) 16.6 5.3 40.5 10.0 57.1 15.3

Total Project Cost (A + B + C) 150.0 51.9 270.0 165.7 420.0 217.6 — = data not available ADB = Asian Development Bank; kV = kilovolt; NEEPGC = Northeast Electric Power Group Corporation; SPSC = Shenyang Power Supply Company. Note: a Actuals included in the actuals of cost under item A.10.

22 Appendix 3

PROJECTED AND ACTUAL DISBURSEMENT (1998–2001)

For the Year ($ million) Cumulative

Year Projected a Actual

Projected ($ million)

Actual ($ million)

Percent of Loan

1998 0.1 0.1 0.1 0.1 0.01999 12.9 21.8 13.0 21.9 43.02000 20.0 22.8 33.0 44.7 87.02001 6.3 6.6 39.3 51.3 100.0

Total 39.3 51.3

Note: a Annual projections exclude interest during construction. Source: Asian Development Bank estimates.

Appendix 4 23

IMPLEMENTATION SCHEDULE — ESTIMATED AND ACTUAL

1997 1998 1999 2000 2001 2002 Activity

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IVA. ADB Loan Approved

B. Local Procurement (including manufacture and delivery)

- Transmission Line Material

- Substation Equipment

C. International Procurement (including manufacture and delivery)

- Transmission Line Material

- OPGW


D. Construction, Installation, and Commissioning

- Transmission Line


E. Other Components - Improvement of SPSC’s

Operational Efficiency - Improvement of NEEPGC’s Long-

Term Planning

ADB = Asian Development Bank; OPGW = composite fiber-optic overhead ground wire; SPSC = Shenyang Power Supply Company; NEEPGC = Northeast Electric Power Group Corporation; I, II,III and IV = the first, second, third and the fourth quarter of a year. Legend: Estimated

Actual

24 Appendix 5

ORGANIZATION CHART OF STATE POWER NORTHEAST COMPANY

General Manager

Deputy General Manager Deputy General Manager Chief Engineer Deputy General Manager Chief Accountant Head of Trade Union

General Office

Human Resources

ProductionManagement

Developmentand Planning

Northeast Power Transmission Project Office

Auditing

Finance

Political AffairsDepartment

HydropowerManagement

SafetySupervision

Power NetworkManagement

andConstruction

Appendix 6 25

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant Reference Remarks Sector Reforms

1. The Borrower shall hold semiannual consultations with the Asian Development Bank (ADB) on power sector policy issues and power sector reform plans.

Loan Agreement (LA), Schedule 6, para. 16

Complied with

2. The Borrower shall develop plans, in consultation with

ADB, by 31 March 1999, for the introduction of competitive power markets in the region.

LA, Schedule 6, para. 17

Complied with

Environmental

3. NEEPGC shall provide the Northeast Power Transmission Environmental Management and Monitoring Office with adequate resources and carry out the agreed environmental protection measures that appear in the initial environmental examination report.


Complied with

4. NEEPGC shall prepare a detailed environmental

management program before the start of construction.


Complied with

Social

5. The Borrower shall cause NEEPGC to ensure that all land and rights of way are made available, implement the agreed Land Acquisition and Resettlement Plan (LARP), and report implementation progress quarterly.


Complied with

6. NEEPGC shall have the LARP evaluated by an

independent agency 1 year after project completion. LA, Schedule 6, para. 15

Partly complied with a

Financial

7. NEEPGC shall meet minimum annual return on net historical fixed assets: 8% in 1998, 10% in 1999, and 12% from 2000 onward.

Project Agreement (PA), Section 2.16

Not complied With

8. NEEPGC shall meet minimum self-financing ratio:

25% in 1998/99 and 30% thereafter. PA, Section 2.17 Complied with

9. NEEPGC shall maintain an annual debt service ratio

of 1.3 times. PA, Section 2.18 Complied with

10. NEEPGC shall prepare 10-year financial projections

showing how financial covenants are proposed to be complied with.

PA, Section 2.19 Delayed Compliance

11. NEEPGC shall submit an action plan on operational

cost control and implement cost control measures. PA, Section 2.20 Complied with

12. NEEPGC shall determine transmission costs for the

use of facilities under the Project, based on principles, methodology, and norms agreed upon with ADB.


Partly complied with b

Continued on next page

26 Appendix 6

Table: STATUS OF COMPLIANCE WITH LOAN COVENANTS - Continued

Covenant Reference Status of Compliance Others

13. NEEPGC shall establish, staff, and operate a project management unit and/or project implementation unit.


Complied with

14. NEEPGC shall (a) employ competent and qualified

consultants and contractors acceptable to ADB; (b) goods and services shall be procured in accordance with schedule 4 and schedule 5 to the LA.

PA, Section 2.03 Complied with

15. NEEPGC shall submit quarterly Project progress

reports. PA, Section 2.08(b) Complied with

16. NEEPGC shall complete the tariff reforms, in phases,

by 31 December 1999. LA, Schedule 6, paras. 4–7

Partly complied with c

17. NEEPGC shall implement its enterprise reform plan

starting in 1998, and complete the plan by December 1999.


Complied with

18. NEEPGC shall complete Yimin Power Plant, associated

transmission facilities, and power sale and/or purchase arrangements ahead of Project completion.


Complied with

19. NEEPGC shall provide for ADB’s approval a plan for

the training NEEPGC staff on NEEPGC's long-term planning capability.

LA, Schedule 6, para. 18(a)

Not Applicable d

20. NEEPGC shall submit to ADB a report on the Project’s

execution and initial operation not later than 3 months after physical completion.

PA, Section 2.08 (c) Delayed compliance e

21. NEEPGC shall undertake benefit monitoring and

evaluation of the Project in accordance with ADB-accepted methods and an ADB-agreed schedule and terms of reference.


Not complied with

Notes: a The LARP was not evaluated by an independent agency. But the resettlement specialist on the implementation

consultant’s team reviewed the work and concluded that the LARP was well implemented. b The Executing Agency carried out studies in this regard and reported the necessity of introducing separate

transmission charges. The Government is considering addressing this issue in the context of establishing regional competitive electricity markets.

c The tariff reforms agreed included (i) unifying the tariff at provincial levels, (ii) submitting to ADB the report of a study on tariff reforms and an action plan for tariff reforms and carrying out the tariff reforms, (iii) rationalizing the classification of consumer categories, (iv) increasing in capacity charges based on transformer capacity and the annual peak load demand, and (v) having the Government give the necessary approvals to enable the Executing Agency to meet the provisions mentioned. The Executing Agency carried out the study on tariff reforms and developed an action plan based on the study. The report on the study and the tariff reforms action plan were submitted to ADB. The action plan was submitted to the Government for approval. Tariff unification was already achieved in 2000. Items (iii) and (iv) were included in the action plan, which was not approved by the Government. These are expected to be implemented in the context of the ongoing sector reform.

d The Executing Agency did not use ADB financing for this portion of the Project. e The Implementing Agency submitted the required report in December 2002.

Appendix 7 27

Financial Performance of the Executing Agency

1. The Project’s Executing Agency was the Northeast Electric Power Group Corporation (NEEPGC), a wholly owned subsidiary, with an independent legal status, of the State Power Corporation (SP). Being responsible for the power sector in the three northeast provinces and the eastern part of Inner Mongolia, NEEPGC operated and maintained the region’s electricity generation and transmission assets. 2. In March 1999, NEEPGC was abolished, as part of the power sector reform. In its place, the State Power Northeast Company (SPNC) was established as a branch company of SP, with no independent legal status. SPNC took over transmission assets from the former NEEPGC, including all Project facilities. SPNC’s business scope was not the same as NEEPGC’s, as SPNC mainly concerned itself with electricity transmission and distribution, but SPNC was still partially involved in electricity generation. 3. In December 2002, SP was restructured into five power generation group companies and two grid companies. Of these, the State Grid Corporation of China (SGC) took over the assets and operation of SPNC. As part of the ongoing power sector reform, the Northeast Grid Corporation (NEGC) was established in September 2003, to replace SPNC. At this stage, the internal institutional scheme and asset ownership of NEGC is not clear. In the absence of this information, financial projections were made based on the assets and business scope of SPNC. 4. To facilitate project implementation, in May 2000, the Asian Development Bank (ADB) approved the Government’s request that SP be the Project’s new Executing Agency and SPNC, the Implementing Agency. The financial performance evaluation in this project completion report therefore focuses on the Implementing Agency’s performance during the 1999–2002 period and projections for the years 2003–2005. 5. The financial covenants for NEEPGC include a return on net historical fixed assets of not less than 8% in 1998, 10% in 1999, and 12% in 2000 and each year thereafter; a self-financing ratio of not less than 25% in 1998 and 1999 and not less than 30% thereafter; and a debt service ratio of not less than 1.3 from 1998 on. SPNC, the Project’s Implementing Agency since March 1999, is not comparable with the former NEEPGC, due to its nonautonomous status and significant reduction of assets base and business scope. However, the financial covenants designed for NEEPGC are all relevant for SPNC, and the ratios were therefore calculated for SPNC in the financial performance evaluation. SPNC’s financial statements for 1999–2002 and projections for 2003–2005 are shown in Table A7. NEEPGC’s financial statements for 1998 are also shown in Table A7. 6. SPNC’s financial performance was unsatisfactory in the 1999–2001 transition period (after the reorganization). However, financial performance improved in 2002, a trend that is expected to continue. The financial projections given in Table A7 are based on the assumptions (i) energy sale will increase by 3.69% annually from 2002 to 2005; (ii) energy price will remain constant in real terms; (iii) interest rate of local loans will be 5.76%, the current lending rate of China Development Bank; (iv) fixed assets depreciation is derived using the straight-line method; and (v) operating costs will increase at domestic inflation rate. Capital structure indicators (a debt ratio lower than 50% and a debt service ratio higher than 1.4) demonstrate that these operations carry a very modest financial risk. The self-financing ratio will remain over 30% after 2002, as a result of the low cash requirement for debt services. Return on net fixed assets will improve but remain below 8%, because NEGC has no price setting authority and the current tariff does not provide a satisfactory return on assets.

28 Appendix 7

7. The key factors that affect the financial performance of SPNC or NEGC are the level of transmission charge and the volume of power transmitted. The transmission charge for project facilities needs to be raised to a level that allows NEGC a satisfactory rate of return on the likely amount of power to be transmitted through the facilities. This tariff issue is expected to be addressed in the context of the ongoing power sector reform. Tariff reform in the power sector will be expedited to realize the separation and rationalization of tariffs for generation, transmission, and distribution.

Appendix 7 29

Table A7: Financial Statements of the Executing Agency ( million yuan)

1998 1999 2000 2001 2002 2003 2004 2005 NEEPGC SPNC SPNC SPNC SPNC NEGCa NEGC NEGC Item

Actual Projected Assumptions: Energy Sales (GWh) 101,342 9,357 15,945 19,087 19,791 20,521 21,279 22,064 Growth in Energy Sales (%) 70.41 19.71 3.69 3.69 3.69 3.69 Sale Price of Electricity (y/kWh) 0.331 0.238 0.247 0.252 0.252 0.255 0.261 0.270 Increase in Electricity Price (%) 3.69 2.21 0.00 0.99 2.51 3.49 Income Statements Net Revenue 31,185 2,454 4,002 5,060 5,147 5,402 5,373 6,140 Cash Operating Expenses 26,885 1,804 3,382 4,206 4,248 4,355 4,507 4,711 Depreciation 2,776 308 326 464 496 531 566 603 Operating Profit 1,524 342 295 390 403 517 663 826 Financial Costs 569 259 247 276 308 322 333 341 Other Income (226) (22) (1) (35) (11) 85 85 85 Taxable Income 729 61 47 79 84 279 415 569 Income Tax 225 7 7 7 28 92 137 188 Net Income 505 54 40 72 56 187 278 381 Balance Sheet Assets - Net Fixed Assets 37,961 6,001 7,512 8,308 8,575 8,814 9,038 9,252 - Other Assets 22,473 4,731 3,497 1,787 1,787 1,787 1,788 1,788 - Current Assets 28,175 3,102 2,127 2,638 2,531 2,711 2,955 3,275 Total Assets 88,609 13,834 13,136 12,733 12,893 13,312 13,781 14,315 Equity and Liabilities - Equity 48,564 5,665 5,705 5,777 5,833 6,020 6,298 6,679 - Long-Term Debt 19,673 5,278 5,406 5,046 4,968 5,146 5,275 5,357 - Other Liabilities 1,416 1,043 205 191 191 191 191 191 - Current Liabilities 18,956 1,848 1,820 1,719 1,901 1,955 2,017 2,088 Total Equity and Liabilities 88,609 13,834 13,136 12,733 12,893 13,312 13,781 14,315 Cash Flow Statements Sources - Internal Cash Generation 3,850 621 613 812 860 1040 1177 1325 - Borrowings 6,722 1308 1008 913 610 616 632 654 - Other Sources 9,096 1704 (426) 403 0 0 0 0 Total Sources 19,668 3,633 1,195 2,128 1,470 1,656 1,809 1,979 Applications - Capital Expenditures 6,457 1,433 938 283 763 770 790 817 - Debt Service 1,328 259 1,126 1,549 621 697 771 845 - Change in Working Capital (987) 504 (121) 198 10 41 43 44 - Others 0 0 0 (438) 0 0 0 0 Total Applications 6,798 2,196 1,943 1,592 1,394 1,508 1,604 1,706 Net Cash Flow 12,870 1,437 (748) 536 76 148 205 273 Cash, Beginning 7,380 335 1,772 1,024 1,560 1,636 1,784 1,989 Cash, Ending 20,250 1,772 1,024 1,560 1,636 1,784 1,989 2,262 Ratios Return on Net Fixed Assets (%) 2.8 5.2 4.2 4.4 4.3 5.9 6.8 7.9 Debt/(Debt + Equity) (%) 28.8 48.2 51.3 47.4 46.8 46.9 46.3 45.2 Debt Service Ratio b 2.9 2.4 0.5 0.5 1.4 1.5 1.5 1.6 Self-financing Ratio c 54.3 (4.8) (44.3) (75.2) 37.8 39.0 45.8 53.1 — = data not available; GWh = gigawatt-hour; NEEPGC = Northeast Electric Power Group Corporation; NEGC = Northeast Grid Corporation; SPNC = State Power Northeast Company; y/kWh = yuan per kilowatt-hour. Notes: a From 2003 onward, the projections are based on the operations of the former SPNC, because the details of the institutional structure and operations and assets base of NEGC have not yet been clarified. b Funds from internal sources devided by debt service; c Funds from internal sources minus debt service, plus/minus change in working capital divided by 3-year average of capital expenditure; d Numbers may not match because of rounding. Source: Actuals from SPNC’s audited financial statements; projections based on estimates by staff consultant and ADB staff.

30 Appendix 8

SUMMARY OF ASIAN DEVELOPMENT BANK-FINANCED CONTRACTS a

PCSS No. Item Mode of

Procurement Date of

Contract Value ($)

0001 Consulting services ICB 10 Jul 98 611,1900002 500 kV current transformer ICB 21 Jan 99 1,630,3750003 220 kV current transformer ICB 21 Jan 99 343,1560004 66 kV current transformer ICB 21 Jan 99 152,0210006 500 kV capacitive voltage transformer ICB 19 Jan 99 579,0400009 66 kV shunt reactor ICB 16 Jan 99 1,926,0000010 35 kV shunt reactor ICB 16 Jan 99 408,0000011 15.75 kV series current-limiting reactor ICB 16 Jan 99 205,2000013 Post insulator ICB 06 Jan 99 239,2880016 500 kV power transformer ICB 26 Dec 98 1,781,3770017 500 kV power transformer ICB 26 Dec 98 1,791,6020018 Microwave communication equipment ICB 14 Jan 99 134,8770019 500 kV disconnecting switch and grounding switch ICB 18 Jan 99 1,811,8930020 220 kV disconnecting switch ICB 18 Jan 99 402,4410021 500 kV transmission line protection (I) ICB 30 Jan 99 614,0920022 500 kV transmission line protection (II) ICB 02 Feb 99 592,0850023 500 kV transmission line protection (III) ICB 02 Feb 99 330,1890024 500 kV busbar protection ICB 28 Jan 99 522,4920025 500 kV fault oscillograph ICB 27 Jan 99 279,3930026 500 kV transformer protection ICB 28 Jan 99 322,4260028 160 kN normal porcelain insulator ICB 03 Feb 99 486,8230029 ACSR 400/35 conductors ICB 29 Jan 99 4,831,9750030 Optical communication equipment ICB 09 Jan 99 718,2930031 Composite suspension insulators ICB 20 Jan 99 385,2780032 160 kN antipollution porcelain insulator ICB 03 Feb 99 798,0000033 Circuit breakers ICB 15 Jan 99 5,117,6480034 Circuit breakers ICB 15 Jan 99 1,678,1080035 Circuit breakers ICB 15 Jan 99 580,8430036 Circuit breakers ICB 15 Jan 99 133,6460037 ACSR transmission wires ICB 29 Jan 99 4,934,3000038 ACSR transmission wires ICB 29 Jan 99 4,934,3000039 ACSR transmission wires ICB 01 Feb 99 2,549,1830040 Overhead ground wires ICB 20 Jan 99 274,1090042 OPGW and accessories ICB 18 May 00 3,072,8610043 Computers and network equipment of distribution

management system IS 18 Mar 00 508,480 ACSR = aluminum conductor steel reinforced; ICB = international competitive bidding; IS = international shopping; kN = kilo-Newton; No. = number; OPGW = composite fiber-optic overhead ground wire; PCSS = Procurement Contract Summary Sheet. Note: a including only those contracts valued at more than $100,000. Source: Asian Development Bank

Appendix 9 31

FINANCIAL EVALUATION

1. Project components envisaged at appraisal were implemented with minor design changes and were commissioned in August 2001, almost 1 year later than expected. There was a substantial reduction (48%) in the total project cost. This resulted in the cancellation of $95 million of the $150 million in loan proceeds. In parallel with project construction, another 364-kilometer transmission line and a new substation were constructed, and two other substations were expanded by the Executing Agency using own resources. All these facilities were integrated with the Project’s facilities and played an important role in realizing the optimal use of these. 2. The power transfer through the Project’s facilities was derived by assuming 13% of the power transmission between Heilongjiang and Jilin, 40% of the power transmission between Jilin and Liaoning, and 50% of the power transmission between the northeast power network and the north power network. This assumption is based on the Project’s proportion in the region’s power transmission capacity and the Project’s role in the region’s power grid.1 For the Project’s first full year of operation (2002), the power transmission volume for the Project was 3,066 gigawatt-hours.2 This volume is estimated to increase at an annual rate of 6% during 2003–2007 and 5% from 2008 on, till full capacity is reached in 2020. The electricity growth rate envisaged for the country in the Tenth Five-Year-Plan is between 6% and 8%. 3. The Project’s facilities and the State Power Northeast Company (SPNC) derive their revenue from the sale of electricity to end users and other regional power networks, through a revenue clearance system of the State Power Corporation of China (SP). This system is designed to ensure a full cost recovery and a reasonable profit. Following this clearance system, the Project’s transmission charge is estimated to be at the current SPNC level of 7.4 fen per kilowatt-hour,3 in constant prices for the Project’s life. 4. The financial internal rate of return (FIRR) was recalculated as 12.0% (see Table A9), using the same methodology used at appraisal but based on the actual capital cost excluding financing charges, the revised power transmission volume, and the estimated transmission charge that is based on the current system for revenue transfer to SPNC. The recalculated FIRR exceeds the revised weighted average cost of capital4 of 5.6%. Therefore, the Project is considered financially viable. The FIRR is higher than the 10.7% appraisal estimate because of the considerable capital cost savings, even though the transmission volume and transmission charge are lower than expected and the facilities’ commissioning was delayed by 11 months.

1 Assuming that (i) one-third of all power flows between Heilongjiang and Jilin and two-third of all power flows

between Jilin and Liaoning will be through the Project’s facilities and (ii) the proportion of length of 500 kV lines under the Project is in the ratio of 40:60 between Heilongjiang and Jilin and Jilin and Liaoning.

2 In 2002, power transmission between Heilongjiang and Jilin and between Jilin and Liaoning was 2,000 gigawatt-hours and 3,500 gigawatt-hours, respectively. Power transmission between the northeast power network and the north power network was 2,800 gigawatt-hours.

3 The transmission charge is derived by dividing SPNC’s reported revenue, net of purchased power, by the sale of power in 2001.

4 The weighted average cost of capital for the Project is revised at 5.64%, with (i) ADB’s pool-based variable US dollar loan at an interest rate of 6.4%, (ii) domestic bank loan with an interest rate of 6.21%, and (iii) return of equity distribution at 12%. Income tax was assumed at 33% and average domestic inflation at 0.85%.

32 Appendix 9

Table A9: Financial Internal Rate of Return ( million yuan)

Capital Cost O&M Cost Benefit Cash FlowYear Appraisal PCR Appraisal PCR Appraisal PCR Appraisal PCR

1997 179.9 116.5 (179.9) (116.5) 1998 1209.1 760.0 (1209.1) (760.0) 1999 1367.7 834.6 (1367.7) (834.6) 2000 94.8 56.7 30.5 278.8 153.5 (56.7) 2001 61.1 36.1 557.5 113.4 496.4 77.3 2002 61.1 36.1 557.5 226.9 496.4 190.8 2003 61.1 36.1 557.5 240.5 496.4 204.4 2004 61.1 36.1 557.5 254.9 496.4 218.8 2005 61.1 36.1 557.5 270.2 496.4 234.1 2006 61.1 36.1 557.5 286.4 496.4 250.3 2007 61.1 36.1 410.4 300.8 349.3 264.6 2008 61.1 36.1 263.2 315.8 202.1 279.7 2009 61.1 36.1 263.2 331.6 202.1 295.5 2010 61.1 36.1 263.2 348.2 202.1 312.0 2011 61.1 36.1 263.2 365.6 202.1 329.5 2012 61.1 36.1 263.2 383.9 202.1 347.7 2013 61.1 36.1 263.2 403.0 202.1 366.9 2014 61.1 36.1 263.2 423.2 202.1 387.1 2015 61.1 36.1 263.2 444.4 202.1 408.2 2016 61.1 36.1 263.2 466.6 202.1 430.5 2017 61.1 36.1 263.2 489.9 202.1 453.8 2018 61.1 36.1 263.2 514.4 202.1 478.3 2019 61.1 36.1 263.2 517.3 202.1 481.1 2020 61.1 36.1 263.2 517.3 202.1 481.1 2021 61.1 36.1 263.2 517.3 202.1 481.1 2022 61.1 36.1 263.2 517.3 202.1 481.1 2023 61.1 36.1 263.2 517.3 202.1 481.1 2024 61.1 36.1 263.2 517.3 202.1 481.1 2025 (266.9) (88.4) 30.5 36.1 131.6 517.3 368.0 569.5

FIRR 10.7% 12.0%

WACC 5.3% 5.6%

FIRR = Financial Internal Rate of Return; O&M = Operation and Maintenance; PCR = Project Completion Report

Assumptions: (i) Power flow through the Project facilities will increase by 6% annually from 2003 to 2007, and 6% thereafter to reach 6,990 gigawatt-hour in 2020, the Project’s full capacity; (ii) transmission charge will be 7.4 fen per kilowatt-hour, and will remain constant in real terms during the Project’s life; (iii) operation and maintenance cost is 2% of the Project cost.

Source: Staff estimates

Appendix 10 33

ECONOMIC EVALUATION

A. Basic Assumptions

1. The economic evaluation of the Project was carried out following the same methodology used at appraisal. Net benefits were derived based on incremental costs and incremental benefits associated with the Project. Financial capital costs and financial operation and maintenance costs were converted into economic costs by applying a standard conversion factor. Coal costs were estimated by applying average coal consumption for power generation and the economic price of coal.

2. The economic benefits were measured based on the consumers’ willingness to pay. Willingness to pay was estimated by calculating the energy cost of the alternative electricity or energy source for major categories of customers, as shown in Table A10.1. The Project’s benefits were conservatively valued, since the greater flexibility of the transmission system, which increased generating system efficiency, and the network’s stability and reliability, introduced by the Project, were not considered. Environmental impacts were not quantified for the evaluation.

3. The volume of power transmitted through project facilities and the annual growth rate are the same as those used in the financial evaluation.

B. Economic Internal Rate of Return

4. The Project’s reevaluated EIRR, with the foregoing assumptions, is 12.5%, compared with 15.4% at appraisal. The decrease in Project’s EIRR is primarily due to the lower incremental power transferred through the Project facilities.

34 Appendix 10

Table A10.1: Willingness to Pay of Consumers

Consumer Type Urban ResidentialRural

Residential Commercial Industrial

Alternative Source of Electricity Unit Gas Lamp Kerosene

Lamp Petrol

Generator Small Coal-Fired Plant

Ratings and Usage Capacity kW 0.1 0.1 5.0 1.0 Daily Use hours 5.0 4.0 10.0 12.0 Daily Energy Output kWh 0.5 0.4 50.0 12.0 Annual Use hours 1,825.0 1,460.0 3,650.0 4,380.0 Annual Energy Output kWh/year 183.0 146.0 18250.0 4,380.0 Design Life yrs 5.0 5.0 8.0 25.0 Design Life hours 9,125.0 7,300.0 29200 109,500.0 Annual Load Factor % 21.0 17.0 42.0 50.0

Investment Cost Investment y/kW 3,950.0 900.0 5,448.0 11,000.0 Total Investment y 395.0 90.0 27,240.0 11,000.0 Annual Investment Cost y/yr 98.0 22.0 4,896.0 1,252.0 Unit Cost fen/kWh 53.6 35% 15.3 8% 26.8 20% 28.6

Operation and Maintenance Costs Fixed y/kW-yr 0.0 0.0 272.4 330.0 Variable y/kWh 0.01 0.1 0.1 0.1 Total y 1.825 14.6 3,187.0 768.0 Unit Cost fen/kWh 1.0 1% 10.0 5% 17.5 13% 17.5

Fuel Costs Efficiency % 19.0 11.0 20.0 25.0 Fuel Consumption tce 0.1 0.2 11.2 2.2 Fuel Retail Price y/tce 1,500.0 1,500.0 1,500.0 320.8 Annual Cost y/yr 177.0 244.6 1,6815.1 701.7 Unit Cost fen/kWh 97.0 64% 167.5 87% 92.14 68% 16.0 Local Losses 0% 0% 2% 10% Local Costs 100% 100% 100% 100% Conversion Factor 0.93 0.93 0.93 0.93 Alternative Energy Cost fen/kWh 141.0 179.3 129.5 64.2

Calculation of Willingness To Pay Share of Consumer Category % 0.07 0.05 0.12 0.76 End-Consumer Tariffs fen/kWh 34.1 34.1 48.8 41.5 Consumer Surplus, at 35% fen/kWh 37.4 50.8 28.2 8.0 Willingness To Pay fen/kWh 71.5 84.9 77.0 49.5

Weighted Willingness To Pay fen/kWh 56.0 tce = ton of coal equivalent; y = yuan; yr = year; yrs = years; Notes: (i) 1 yuan = 100 fen; (ii) The allocation of willingness to pay to different components was based on the ratio of cost for each component. For the Project, the allocation ratio of 12.7% was adopted; and (iii) Numbers do not equal totals because of rounding. Source: Asian Development Bank Staff Consultant’s analysis.

Appendix 10 35

Table A10.2: Economic Analysis for the Project (million yuan)

Year

Incre-mental Power Supply

(GWh)

Incre-mental

Revenue Valued at

WTP

Capital Invest-

ment for Yimin Plant

Capital Invest-

ment for Plants

and Lines

Coal Cost

Incre-mental

O&M Cost for

Generation

Incre-mental O&M

Cost for the

Project

Total Incre-mental Cost

Net

Benefits

1997 0 0 2,107 108 0 2,215 (2,215) 1998 0 0 2,107 838 0 2,945 (2,945) 1999 0 0 2,107 1,039 0 3,146 (3,146) 2000 0 0 2,107 316 0 2,423 (2,423) 2001 1,553 858 107 253 57 417 442 2002 3,066 1,717 215 253 57 524 1,193 2003 3,250 1,820 227 253 57 537 1,283 2004 3,445 1,929 241 253 57 551 1,378 2005 3,652 2,045 256 253 57 565 1,480 2006 3,871 2,168 271 253 57 581 1,587 2007 4,064 2,276 285 253 57 594 1,682 2008 4,268 2,390 299 253 57 608 1,781 2009 4,481 2,509 314 253 57 623 1,886 2010 4,705 2,635 329 253 57 639 1,996 2011 4,940 2,766 346 253 57 655 2,111 2012 5,187 2,905 363 253 57 673 2,232 2013 5,447 3,050 381 253 57 691 2,359 2014 5,719 3,203 400 253 57 710 2,493 2015 6,005 3,363 420 253 57 730 2,633 2016 6,305 3,531 441 253 57 751 2,780 2017 6,620 3,707 463 253 57 773 2,934 2018 6,951 3,893 487 253 57 796 3,096 2019 6,990 3,914 489 253 57 799 3,115 2020 6,990 3,914 489 253 57 799 3,115 2021 6,990 3,914 489 253 57 799 3,115 2022 6,990 3,914 489 253 57 799 3,115 2023 6,990 3,914 489 253 57 799 3,115 2024 6,990 3,914 489 253 57 799 3,115 2025 6,990 3,914 489 253 57 771 3,144

PV (@12%) 20,561 11,514 6,400 1,705 2,265 1,983 282 11,086 428

EIRR 12.5%

EIRR at Appraisal 15.4%

EIRR = Economic Internal Rate of Return; GWh = gigawatt-hour; O&M = Operation and Maintenance; PV = present value.

Key assumptions: (i) standard conversion factor = 0.93; (ii) economic cost for coals consumption = 0.07 yuan per kilowatt-hour; (iii) operation and maintenance cost for power plant = 3% of investment; (iv) operation and maintenance cost for transmission = 2% of the investment; and (v) Willingness to pay = 0.56 yuan per kilowatt-hour.

Source: Asian Development Bank Staff Consultant’s analysis.

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