Document of

The World Bank

FOR OMCiAL USE ONLY

A a-Repwt Ng. P-4769-CUA

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO $165.0 MILLION

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR THE

BEILURGANG THERMAL POWER EXTENSION PROJECT

May 18, 1988

Thi doument has a rstrcted ditibuton and may be usd by rnipints only in the perfomance oftheir officil dutis Its contents may not otherwise be disclosed without world Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Yuan (Y)1 Yuan = 100 fen

Caleadar 1987 March 1988$1.00 = Y 3.7 $1.00 = Y 3.7Y 1.0 = $0.27 Y 1.0 - $0.27

FISCAL YEAR

January 1 to December 31

WEIGHTS AND MEASURES

GWh = Gigawatt hour (1,000,000 kilosatt hours)kWh = Kilowatt hour (860.42 kcals)MW = Megawatt (1,000 kilowatts)

PRINCIPAL ABBREVIATIONS AND ACRONYMS

MWREP - Ministry of Water Resources and Electric PowerZPEPB - Zhejiang Provincial Electric Power BureauPCBC - People's Construction Bank of China

FOR OMCIAL USE ONLY

CHINA

BEILUNGANG THERMAL POWER EXTENSION PROJECT

Loan and Project Summary

Borrower: People's Republic of China

Beneficiary: Zhejiang Provincial Electric Power Bureau (ZPEPB)

Loan Amount: US$165.0 million equivalent

Terms: 20 years,-including five years of grace, at standardvariable interest rate

Onlending Terms: The proceeds of the loan would be onlent from the Govern-ment to ZPEPB under a subsidiary loan agreement, with a20 year term, including five years grace, and at a variableinterest rate equal to that of the Bank. ZPEPB will bearthe foreign exchange risk and the commitment charges.

Financing Plan: Local Foreign Total.(US$ million)

IBRD loan - 165.0 165.0Provincial Government 54.1 - 54.1PCBC loan 35.9 34.7 70.6

Total 90.0 199.7 289.7

Economic Rateof Return: 15.0Z

Staff AppraisalReport: 7164-CHA dated May 12, 1988.

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

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN

TO THE PEOPLE'S REPUBLIC OF CHINAFOR THE BEILUNGANG THERMAL POWER EXTENSION PROJECT

1. The following memorandum and recommendation on a proposed loan tothe People's Republic of China to help finance the Beilungang Thermal PowerExtension Project, is submitted for approval. The loan for $165.0 millionwould have a term of 20 years, including 5 years of grace, at the standardvariable interest rate. The proceeds of the loan would be onlent to theZhejiang Provincial Electric Power Bureau (ZPEPB) under a subsidiary loanagreement with a 20-year term, including 5 years of grace, at a variableinterest rate equal to that of the Bank. The foreign exchange risk betweenthe dollar and local currency will be borne by ZPEPB.

2. Background. Inadequacies in electric generating capacity have beena major constraint on China's economic growth in the past. This situation islikely to be continued in the near term. The Government gives high priorityto electric power development, with a strategy that combines (a) expandinggenerating capacity by developing coal-fired thermal stations at mine-mouthsand near ports and load centers and accelerating the pace of hydroelectricdevelopment; (b) increasing the financial and management autonomy of the powerbureaus; (c) introducing a more rational pricing system; (d) adopting moderntechniques in project design and system planning including environmentalaspects; (e) constructing extra high voltage transmission lines forinterconnection between regions; and (f) re'tacing low pressure medium size(50-100 MW) thermal units by higher pressure 300-600 MW units and convertingoil-fired units to coal-fired.

3. There are seven-major regional grids that account for about 80X oftotal eeneration, which are managed by electric power administrations underthe supervision of the Ministry of Water Resources and Electric Power (MWREP).Thirty percent out of the total installed capacity is hydro and 70Z thermal.

4. Of the seven major regional Grids, the East China Regional Grid isby far the largest and suffers the most acute shortages of electricity. TheZhejiang Provincial Electric Power Grid is one of the most important gridscovered by the Regional Grid. The rapid growth in industrial, agriculturaland municipal uses in Zhejiang province has exceeded generation and trans-mission capacity, requiring restricted power use within the Province. Theserestrictions have severely curtailed industrial production, and, because theRegional Grid as a whole is short of power, it is unable to supply the addi-tional power needed to support this industrial production. Therefore, toalleviate the acute power shortages and meet the expected demand in the early1990s, there is an urgent need to expand generation and transmission capacityin Zhejiang.

5. Rationale for Bank Involvement. The Bank is supporting major ele-ments in the Government's power strategy by so far financing six power pro-jects. The major thrust of Bank assistance has been to introduce modernconcepts of utility management, and power system technology including

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environment assessment and pollution control; international competitivebidding; modern construction techniques in complex hydroelectric projects(Lubuge, Yantan and Shuikou); technology transfer in the fields of extra highvoltage transmission lines and large, coal-fired thermal power stations of300 MW and 600 MW units; and system planning techniques including least-costinvestment planning. The Bank also has been instrumental in the undertakingof a tariff study, has systematically strived towards strengthening financialplanning and management capabilities of the power bureaus, and has recentlyinitiated a second set of sector studies with the Government involvingorganizational and regulatory policies, load forecasting and planning, andtransmission strategy. The tariff study has been successfully completed. Onthe basis of the tariff study the Bank will explore with GOC how to formulatethe first major tariff adjustment in the context of China's overall pricereform process.

6. The proposed project would be the second project involving theBeilungang thermal power plant. The first project, which was approved by theBank on May 29, 1986 (Loan 2706-CHA), is under construction and proceedingwell. It was originally expected that the second unit (600 MW) would befinanced with commercial/export credits on favorable terms; however, theresults 'of an optional bidding on the second unit did not produce financingpackages that were any more favorable than what China was obtaining underother power projects without Bank assistance. The external debt situation forthe power subsector as a whole in 1987 was very tight; the Government isfinancing ten other thermal power projects in the Seventh Five-year Plan withabout US$1.5-1.8 billion in supplier's credits. As a result, the Governmenthas 'clamped-down' on further supplier's credit borrowing in the sector.During the annual review meeviUg with the Bank in October 1987, the Governmentrequested the Bank's assistance for financing the second unit. Since GOC isdetermined to reorganize the power subsector in China and plans to beginchanging ZPEPB into a power company as one of the first test cases forincreased autonomy, the proposed project would allow the Bank to deepen itsinvolvement in the reform process of power entities in China by providing awider range of technical assistance focused on ZPEPB's reorganization andmanagement improvement.

7. Project Objectives. The proposed project seeks to: (i) alleviatethe acute power shortage of a major load center in East China; (ii) supportthe national policies of developing large coal-fired thermal power generatingunits to make effective use of China's abundant coal reserves; (iii) continuethe effort to introduce the modern technology in plant design and constructionmanagement of 600 MW thermal power units; and (iv) provide technicalassistance to,ZPEPB for reorganizing its operations and strengthening itsmanagement. This assistance will facilitate its transformation from a powerbureau to a more autonomous power entity.

8. Project Description. The proposed project is located about 25 kmeast of the city of Ningbo at Beilungang sea port in Zhejiang Province. Theproject would extend the Beilungang thermal plant by adding a second unit of600 MW at a site being developed (first unit of 600 MW scheduled for commis-sioning in 1990). In addition, the project includes construction of a secondsingle circuit of 500 kV transmission line and extension of a substation;provision of consulting services for engineering and procurement; provision oftechnical assistance for a study on ZPEPB's reorganization and management

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improvement; a study for exterding and improving the distribution networks forthe cities of Hangzhou and Wing.o; and a training program.

9. The project would be carried out by ZPEBP over five years and wouldcover funds for civil works, equipment and materials, technical assistance,and training. The total financing requirement of the project is estimated atUS$289.7 million equivalent (including interest during construction), with aforeign exchange component of US$199.7 mil'lion (69%). A breakdown of costsand the financing plan are shown in Schedule A. Amounts and methods ofprocurement and disbursement and the disbursement schedule are given inSchedule B. A timetable of key project processing events and the status ofBank Group operations in China are given in Schedules C and D, respectively.A map showing project locations are also attached. The Staff AppraisalReport, No. 7164-CHA, dated May 12, 1988, is being distributed separately.

10. Agreed Actions. Assurance has been obtained at neeotiations:(a) from the Government that it will: (i) onlend the proceeds of the loan toZPEPB on terms satisfactory to the Bank (see para. 1); and (ii) take intoaccount the results of the tariff study carried out under the BeilungangThermal Power Project (Loan 2706-CHA)'in determining the levels and structuresof ZPEPB's-electricity tariffs; (b) from ZPEPB that it will: (i) take mea-sures, including but not limited to tariff adjustments, to ensure thatannually it earns cash surpluses sufficient to meet a minimum of 12.5% of itsannual investment program for the period 1988-90, a minimum of 201 of itsannual investment program for the period 1991-93, and a minimum of 25% of itsannual investment program thereafter; (ii) incur additional debt only if areasonable forecast of its revenues and expenditures indicates that internalcash generation would provide debt service coverage of not less than 1.3;(iii) furnish each year a rolling eight-year financial plan containingprojected income statements, sources and application of funds, and balancesheets; (iv) furnish its annual financial statements, certified by anacceptable auditor within six months from the end or each financial year;(v) carry out a study on ZPEPB's reorganization and management improvement inaccordance with the terms of reference and timing-agreed with the Bank, andexchange views with the Bank on the progress and'the findings of the study;(vi) carry out an environmental monitoring program satisfactory to the Bank;and (vii) carry out a resettlement plan satisfactory to the Bank. Executionof the subsidiary loan agreement between the Government and ZPEPB and approvalof the Loan Agreement by the State Council would be conditions of loaneffectiveness.

11. Justification. Zhejiang Provincial Grid provides 23Z of the capa-city and 18% of the power generation in East China Region. Electricity short-ages have been one of the major constraints to economic development. Powercurtailment by rotation has been enforced in almost all industries, limitingtheir operation to only four to five days a week and causing considerableunderutilization of plant facilities and manpower. In Zhejiang provincialgrid alone, in 1986, the shortage in peaking capacity was about 600-700 MW.In addition, there were 167 MW in capacity of large consumers ready to receivepower but not connected. A detailed economic study by the Ministry of WaterResources and Electric Power (MWREP), which was reviewed by the Bank, hasestablished that extension of the existing Beilungang thermal power stationprovides the least cost and fastest solution to meeting the power shortage inEast China. The internal economic rate of return (IERR) of the project is

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estimated at 15.0X. Finally, the project will contribute substantiallytowards institutional building to improve efficiency and management of a powerutility.

12. No special risks are expected with the proposed project, since it isan extension of an ongoing project. Land is already available and site condi-tions are well known. The technical soundness and economic feasibility of theproject have been well established. An environmental assessment has resultedin the inclusion of pollution control equipment and monitoring program.Consulting engineers, both local anid foreign, will assist in engineering anddesign, procurement and coordination.

13. Recommendation. I am satisfied that the proposed loan would complywith the Articles of Agreement of the Bank and recommend that the ExecutiveDirectors approve the proposed loan.

Barber B. ConablePresident

Attachments

Washington, D.C.May 18, -1988

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Schedule A

CHINA

BEILUNGANG THERMAL POWER EXTENSION PROJECT

Estimated Costs and Financing Plan(US$ million)

Local Foreign Total

Civil works 26.4 - 26.4Plant equipment and materials 12.4 156.1 168.5Associated transmission 18.8 - 18.8Training 1.2 - 1.2--TA on reorganization and management 0.5 0.5 1.0Distribution network study 0.5 0.4 0.9Engineering and supervision 9.2 2.3 11.5

Base Cost 69.0 159.3 228.3

Physical contingencies 7.0 5.7 12.7Price contingencies 6.9 13.0 19.9

Total Project Cost /a 82.9 178.0 260.9

Interest during construction 7.1 21.7 28.8

Total Financing Required 90.0 199.7 289.7

Financing Plan

IBRD- - 165.0 165.0Provincial government 54.1 - 54.1Local bank loans 35.9 34.7 70.6

Total 90.0 199.7 289.7

/a The project is exempt from taxes and duties.

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Schedule BPage 1

CHINA

BEILUNGANG THERMAL POWER EXTENSION PROJECT

Procurement Methods and Disbursements(US$ million)

Procurment method TotalItem ICB LI5 Others /a NA cost

Civil works - - 28.8 - 28.8

.Plant equipment and materials 180.0 1.0 14.9 - 195.9(160.2) /b (1.0) (0.6) (161.8)

Transmission system - - 22.8 - 22.8

Distribution network study - - - .9 - 0.9(0.4) (0.4)

Technical assistance forinstitutional building - - 1.0 - 1.0

(0.5) (0.5)

Consultants' Services 3 - 3 3.4(2.3) (2.3)

Supervision - - - - 8.1 8.1

Total 180.0 1.0 71.8 8.1 260.9(160.2) (1.0) (3.8) (165.0)

/a Other methods include goods to be procured within the country, civilworks and equipment erection to be executed by ZPEPB or its contractors,studies, and consultants' services.

/b Figures in parentheses are the respective amounts financed out of theproposed Bank loan.

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Schedule BPage 2

Disbursements

Category Amount Percent to be Financed(US$ million)

Power Plant and substation 161.8 100o of foreign expenditures;equipment and materials 1002 of local expenditures

(ex-factory); 751 of localexpenditures.

Consulting services and training 3.2 1002

Total 165.0

Estimated IBRD Disbursements

Estimated Disbursements .,s Bank FY 1989 1990 1991. 1992 1993

-- (US$ million)-----------

Annual 25.0 75.5 39.6 109. 14.0Cumulative 25.0 100.5 140.1 151.0 165.0

Iv- 8 -Schedule C

CHINA

BEILUNGANG THERMAL POWER EXTENSION PROJECT

Timetable of Key Project Processing Events

Time taken to prepare : One year

Prepared by s Zhejiang Provincial ElectricPower Bureau and East ChinaElectric Power Designinstitute

First Bank mission - November 1987

Appraisal mission departure s January 1988

Negotiations t May 1988

Planned date of effectiveness : August 1988

List of relevant PCRs and PPARs : None

-9-Schedule DPage 1 of 3

THE STATUS OF ANK GROUP OPERATIONS IN PEOPLE'S REPUBLIC OF CHINA

A. STATEMNT_ OF BAMK LOANS AND IDA CREDITS(as of March 31, 1988)

Loan/ Amount (US$ million)Credit Fiscal (less cancellations)Number Year Borrower Purpose Bank IDA Undisbursed LA

One loan and one credit have been fully disbursed

2021/1167 81 PRC University Development 100.00 100.00 Q.O01261 82 PRC North China Plain Agriculture - 60.00 4.792207 83 PRC Three Ports 67.97 - 1.561297 83 PRC Agric. Education & Research - 75.40 8.55

2226/1313 83 PRC Industrial Credit I (CIB I) 40.60 30.00 5.362231 &3 PRC Petroleum I (Daqing) 162.40 - 25.732252 83 PRC Petroleum II (Zhongyuan-Wenliu) 100.80 - 39.84

2261/1347 83 PRC State Farms I (Heilongjiang) 25.30 45.00 1.981411 84 PRC Polytechnic/TV University - 85.00 33.831412 84 PRC Technical Cooperation - 10.00 1.371417 84 PRC Rubber Development - 100.00 32.602382 84 PRC Lubuge Hydroelectric 145.40 - 53.112394 84 PRC Railway 220.00 - 42.971462 84 PRC Rural Credit I - 50.00 10.341472 84 PRC Rural Health & Medical Educ. - 85.00 30.462426 84 PRC Petroleum III (Karamay) 99.50 - 41.57

2434/1491 84 PRC Industrial Credit II (CIB II) 105.00 70.00 35.242444/1500 84 PRC Agricultural Education II 45.30 23.50 19.47

1516 85 PRC Agricultural Research II - 25.00 13.011551 85 PRC University Development II - 145.00 82.582493 85 PRC Power II 117.00 - 49.202501 85 PRC Changcun (Luan) Coal Mining 120.50 - 108.111577 85 PRC Seeds - 40.00 21.031578 85 PRC Rural Water Supply 80.00 82.16

2539/1594 85 PRC Highway I 42.60 30.00 41.382540 85 PRC Railway II 235.00 - 209.712541 85 PRC Fertilizer Rehabilitation & 97.00 - 44.35

Energt Saving -1605 85 PRC Forestry Development - 47.30 42.08

2579/1606 85 PRC PiShiHang-Chaohu Area Developmant 17.00 75.00 73.532580 85 PRC Weiyuan Gas Field Technical 25.00 - 16.78

Assistance1642 86 PRC Rural Credit II - 90.00 45.63

2659/1663 86 PRC Industrial Credit III (CIB III) 75.00 25.00 32.801664 86 PRC Technical Cooperation Credit II - 20.00 21.691671 86 PRC Provincial Universities 120.00 81.42

2678/1680 86 PRC Third Railway 160.00 70.00 245.922689 86 PRC Tianjin Port 130.00 - 121.171689 86 PRC Freshwater Fisheries - 60.00 45.48

- 10 -

Schedule DPage 2 of 3

Loan/ Amount (US$ million)Credit Fiscal (les9 cancellations)Number Year Borrower Purpose Bank IDA Undisbursed A

2706 86 PRC Beilungang Thermal Power 225.00 * 204.552707 86 PRC Yantan Hydroelectric 52.00 - 35.102708 86 PRC Liaodong Bay Petroleum Appraisal 30.00 - 20.66

2723/1713 86 PRC Rural Health & Preventive Med. 15.00 65.00 80.931733 87 PRC Red Soils - 40.00 30.632775 87 PRC Shuikou Hydroelectric 140.00 - 123.40

2783/1763 87 PRC Industrial Credit IV (CIB IV) 250.00 50.00 282.742784 87 PRC Shanghai Machine Tools 100.00 99.401764 87 PRC Xinjiang Agricultural Development - 70.00 73.67

2811/1792 87 PRC Beijing-Tianjin-Tanggu Expressway 25.00 125.00 162.202812/1793 87 PRC Gansu Provincial Development 20.00 150.50 174.151835 87 PRC Planning Support & Special Studies - 20.70 20.53

2794/1779 87 PRC Shanghai Sewerage 45.00 100.00 144.022838 87 PRC Fertilizer Rationalization 97.40 - 97.402852 87 PRC Wujing Thermal Power 190.00 - 190.001871 Ak 88 PRC Rural Credit III 170.00 171.75

Total 3,320.77 2.352.40

of which has been repaid 71.41 -

Total now held bv Bank and IDA 3.249.36 2.352.40

Amount sold: Of which repaid - -

Total Undisbursed 2170.28 1.507.65 X677.93

La As credits are denominated in SDRs (since IDA Replenishment VI), undisbursed SDR creditbalances are converted to dollars at the current exchange rate between the dollar and theSDR. In some cases, therefore, the undisbursed balance indicates a dollar amount greaterthan the original principal credit amount expressed in dollars.

/b Not yet effective.

Notes: (1) The status of the projects listed in Part A is described in a separate report onall Bank/IDA financial projects in execution, which is updated twice yearly andcirculated to the Executive Directors on April 30 and October 31.

(2) The following loans and credits have been approved but are not yet signed.

a. Huangpu Port (2877/1845) - $63.0 M loan and SDR 19.8 K (equivalent $25.0 M)credit

b. Dalian Port (2907/1875) $71.0 X loan and SDR 18.2 M (equivalent $25.0 M)credit

c. Northern Irrigation (1885) - SDR 72.7 M (equivalent $103.0 M) creditd. Coastal Lands Devt. (2924/1887) - $40.0 M loan and SDR 40.0 M (equivalent

$60.0 M) credit

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Page 3 of 3

B. STATEMENT OF IFC INVESTMENTS(as of March 31, 1988)

Invest- Fiscal Type of Loan Equity Totalment no. year Obligor business -- (USS million) --

813 1985 Guangzhou and Peugeot Automobile 15.00 2.00 17.00

974 1987 China Investment Co. Investment 3.00 0.04 3.04

1020 1987 Shenzen China Bicycle 5.00 - 5.00Bicycles Co. Ltd. Manufacture

Total Gross Commitments 23.00 2.0Q 25.04

Less cancellations, terminationsrepayment and sales - -

Total Commitments now Held by IFC 23.00 204_ 2-5.04

Total Disbursed 4.40 0.04 4.44

Total Undisbursgd 18.60 2.Q0 20.60

IBRD 20490117- 118 119* J120 12 ' 12? 12r

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