Report No. 21891 The Bank's Assistance to China's Energy Sector An OED Country Sector Evaluation February 28, 2001 Sector and Thematic Evaluations Group Operations Evaluation Department Document of the World Bank mm~mmmmmmm Currency Equivalents (annual averages) Currency Unit = Yuan (19 1986 US$1.00 Y 3.46 1987 US$1.00 Y 3.73 1988 US$1.00 Y 3.73 1989 US$1.00 Y 3.73 1990 US$1.00 Y 4.86 1991 US$1.00 Y 5.36 1992 US$1.00 Y 5.49 1993 US$1.00 Y 5.75 1994 US$1.00 Y 8.60 1995 US$1.00 Y 8.30 1999 US$1.00 Y 8.28 Abbreviations and Acronyms AAA Analytical and advisory activities LNG Liquefied natural gas ASTAE Asia Alternative Energy Program MIGA Multilateral Investment Guarantee BERI Beijing Electric Research Institute Agency BOT Build-operate-transfer MW Megawatt BTU British thermal unit NGO Nongovernmental organization CNPC China National Petroleum NOx Nitrogen oxide Corporation OD Operational Directive CNOOC China National Offshore Oil OED Operations Evaluation Department Corporation OP Operational Policy EA Environmental assessment OPN Operational Policy Note EPA Environmental Protection Agency PAR Performance Audit Report ESMAP Energy Sector Management and PHRD Policy and Human Resources Assistance Program Development Fund FBC Fluidized-bed combustion QAG Quality Assurance Group FGD Flue-gas desulphurization SDPC State Development Planning GDP Gross domestic product Commission GEF Global Environment Facility SEPA State Environmental Protection GP Good Practices Agency GW Gigawatt (1 GW=1,000 MW) SETC State Economic and Trade ICR Implementation Completion Report Commission IDF Institutional Development Fund SPA Sichuan Petroleum Administration IFC International Finance Corporation SPC State Power Corporation IGCC Integrated gasification combined cycle Fiscal Year Government: January 1 - December 31 Director-General, Operations Evaluation Mr. Robert Picciotto Director, Operations Evaluation Department Mr. Gregory K. Ingram Manager, Sector and Thematic Evaluation Group Mr. Alain Barbu Task Manager Mr. Alain Barbu FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. fice of the Director-General iperations Evaluation February 28, 2001 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: The Bank's Assistance to China's Energy Sector An OED Country Sector Evaluation China is now the second largest energy consumer in the world and the largest producer and consumer of coal. Owing to its large coal resources, it is and will remain in the foreseeable future largely energy self-sufficient, although crude oil imports have steadily increased since 1993. While the country's energy intensity, at 60,000 BTU per dollar of GDP, is three times the world average and twice that of all developing countries, it has been falling as a result of concerted energy conservation efforts over the past two decades. Industry accounts for as much as 75% of total energy consumption, but household use, now only 10%, is growing fast with recent improvements in the standard of living. Although service is of uneven quality, rural access to electricity is high: about 96% of the nation's villages and about 80% of rural families now have access to electricity. In just 17 years, China has become the Bank's largest borrower in the energy sector having received about $7 billion in loans to date. Energy accounted for 20% of the Bank's total lending to China between 1983 and 1999. Electric power received the most (86%), followed by oil and gas (10%), energy efficiency and renewables (2%), and coal (2%). The sector also received $90 million in Global Environment Facility grants through the Bank. The Bank has also carried out a substantial amount of analytical and advisory services. Despite the amount of lending to the energy sector, the sheer size of the sector in China has made the World Bank, at least in financial terms, a relatively marginal player. Indeed, the Bank has had only limited involvement in the subsectors most critical to China's energy strategy, coal and petroleum. The Bank's activities have been through four distinct periods. In the Early Years (1983-88), the Bank's assistance aimed at helping China's integration into the global economy. It focussed on removing bottlenecks to the country's accelerating economic growth and on institutional development (emphasizing technology transfer and capacity building). In the Years of Transition (1991-93), which followed a two- year hiatus in Bank lending the focus was on consolidating earlier assistance to the power sector, with an added emphasis on addressing the resettlement issues associated with hydroelectric projects. In the Power Reform Years (1994-97), the Bank's focus shifted to policy change and broad reform, primarily, although not exclusively, in the electric power sector. This coincided with economic reforms initiated by China in the early 1990s and the greater urgency attached to that subsector by the government in light of persistent power shortages in fast-growing Eastern China. In the Years ofDiversification (since 1998), Bank assistance continued and strengthened a move beyond the power sector that had started in 1997. Lending operations were added in energy conservation, district heating, and renewable energy and AAA activities in the oil and gas sector were renewed. Only two power loans have been made since 1998, resulting in a significant decrease in overall energy lending. With none of 20 completed projects rated unsatisfactory and only one of the 19 ongoing projects rated a problem project, the performance of the China energy portfolio is without equal. But an assessment of the Bank's impact in a country like China needs to go beyond the immediate achievements 2 of Bank projects, which ultimately account for only a minute portion of overall sector investments. In this respect, the Bank's strategy in the earlier part of its involvement in the sector, from 1985 to 1993, was highly relevant to the sector's needs and fully consistent with the Bank's support of China's gradualist approach to economic reform. Most projects had minimal policy content, but they all shared a strong emphasis on technology transfer and capacity building. Projects were targeted to a few selected sector institutions and geared to maximize their demonstration effect to the rest of the sector, particularly in terms of the benefits to be derived from modern technology and management methods, international procurement, and resettlement approaches. This approach had extremely successful outcomes, the sector made remarkable progress in assimilating new technologies and technical skills, and increasing efficiency of project management and operation. The latter was critical to China's ability to rapidly expand energy supply in order to sustain a booming economy. Despite its limited policy content, the institutional development impact of the Bank's program for this initial period is thus rated substantial. These early physical and institutional achievements were fully sustainable and, indeed, paved the way for the more ambitious policy reforms of the mid- and late 1990s. The performance of the Bank is rated fully satisfactory, particularly for the solid technical advice and support it provided in the context of project preparation and implementation. Borrower performance is rated highly satisfactory because of the remarkable degree of commitment and ownership shown by central as well as provincial authorities throughout the initial period. The ambitious power sector reform strategy the Bank has pursued since 1994 was, and continues to be, highly relevant in light of the importance of the sector and of the government's stated commitment to reform. However, the implementation of that strategy could have been strengthened by a more proactive, and earlier, stance on tariff structure distortions, accounting and auditing issues and a better articulation of its position on private sector development. More important, the concentration of efforts on the power sector may have distracted the Bank from making serious attempts at renewing a dialogue on the critical coal and petroleum sectors, where reform has been lagging, and at promoting an integrated approach to energy planning. The generally successful outcomes of the Bank's ambitious agenda in the power sector, then, are mitigated by its minimal impact in these two other sectors. The outcome of the Bank's energy assistance program since 1994 is rated satisfactory, its institutional development impact substantial, and its achievements sustainable, considering the government's continued commitment. Bank performance during the period is rated highly satisfactory, while borrower performance is rated satisfactory, with excellence in such aspects as resettlement, sustained commitment to energy efficiency, and renewed promotion of renewables offset by weaknesses such as lack of effective sectoral coordination at the central level, slow pace of power tariff reform, insufficient enforcement of environmental regulations, and lack of progress in reforming the coal sector. Lessons * An incremental approach to institutional development, initially emphasizing technology transfer and capacity-building can be extremely effective. However, it requires the Bank and the borrower to see it from the outset as a prelude to a second phase of policy reform; a minimum level of absorptive capacity in the country; high borrower ownership; and Bank assistance designed with a specific demonstration effect in mind. * Internal Bank factors are critical to building up and sustaining an effective long-term sector dialogue. The Bank's successes in power, energy efficiency, and renewables in China have much to do with staff continuity, the high caliber of individual task managers, the existence of a dedicated pool of expertise on specialized aspects, and management's willingness to invest resources in quality, highly participatory sector work. 3 * In focusing on the ultimate introduction of market forces in the energy sector as part of its policy dialogue, Bank staffshould not lose sight of the importance offundamentals. Good financial reporting, use of economic criteria in investment decisions and tariff setting, and integrated approach to energy planning are all fully pertinent during a prolonged period of transition to market. * A two-pronged approach that combines high-level policy dialogue with central authorities and a direct operational involvement with a representative set ofprovincial utilities is essential to success. The second level of involvement was critical in China, where issues and constraints vary significantly from one province to the next and where the level of detailed information available at the central level is increasingly scarce. * The Bank should be particularly sensitive to possible misinterpretation by outsiders of its stance on private sector development issues. This requires a determined and coordinated effort on the part of Bank, IFC, and MIGA staff to clearly articulate and explain the Bank Group's strategy to all relevant stakeholders, and especially to potential foreign investors. * The Bank's emphasis on ensuring compliance with environmental guidelines in the design of the projects it finances and on the design and enactment of appropriate environmental regulations at the national level, needs to be complemented by similar efforts at the monitoring and enforcement levels. In China's power sector, the financing of monitoring equipment under Bank loans has proved an effective way to achieve this. Recommendations The Bank is at a crossroads in its energy sector dialogue with China. After the major policy breakthroughs of the mid- 1 990s in the power sector, progress on sector reform has slowed and major policy issues in such critical subsectors as coal, oil and gas have largely gone unattended. To address this the Bank could choose to focus increasingly on "peripheral" subsectors such as renewables and energy efficiency where policy issues are less sensitive and government buy-in more likely. This approach would likely lead to a marginalization of the Bank's role in a sector of central importance to the country's future development, and at a time when IFC is not positioned to expand its involvement - precisely because major institutional and policy issues remain to be addressed. A more difficult path would be for the Bank to continue its sizeable financial support to the energy sector but frame it within a truly comprehensive dialogue on national energy policy issues. This evaluation clearly suggests that this is where the Bank's comparative advantage lies. In particular: * Help promote comprehensive energy planning in China. The Bank should offer to help at two levels: regionally, preferably in Sichuan province, which has a varied resource endowment and where the Bank has ongoing operations and institutional relationships; and nationally, possibly building on the working dialogue recently initiated with the State Council, the just-completed PHRD-financed study of LNG demand, and the (older) major study of China's coal and electricity delivery services. * Continue to balance assistance in terms of subsectoral priorities, mix of instruments, and central versus local dialogue. An appropriate mix of lending and non-lending instruments will continue to be needed for maximum impact. And sector interventions will need to continue following a parallel track, at both the central and provincial levels. While future energy policy dialogue will need to be comprehensive, calling for broad-ranging economic and sector work, the scope of individual project interventions need not be. Instead, they may be geared to areas neglected in past Bank lending, and where potential lFC involvement is less likely, at least initially. Specifically: 4 * In the power sector, the Bank should increase its attention to inefficiencies at the distribution level and broaden the efforts initiated in Zhejiang province under the recently approved Tongbai project. This increased emphasis on local issues, together with the photovoltaic pilot financed by the Bank under the recent Renewable Energy project could pave the way for a more proactive, and better- integrated, Bank strategy on rural energy. * Direct assistance toward municipal-level natural gas distribution and demand - for example, by replacing coal-fired furnaces with gas-fired furnaces, co-generation, and district heating. Loans to municipalities could help expand municipal gas-distribution infrastructure and utilization of natural gas in urban district heating systems. * Make a renewed and determined attempt to engage Chinese authorities in a full-fledged dialogue on the coal sector. The coal sector is too important to China's future social, environmental, and economic development, and the issues the sector are facing too daunting, for the Bank to continue ignoring it in its assistance strategy. * In its future lending to the power sector - and possibly the petroleum sector - the Bank should give a higher priority to the early resolution ofpending asset ownership issues, which continue to cloud the reliability of many sector agencies' financial statements. In this context, the Bank should consider revisiting its current auditing requirements (which only provide for certification by government audit bureaus) and at a minimum ask to be provided with audit reports from international auditors whenever these have been prepared (e.g. for those power companies which have obtained, or are seeking, partial listing on foreign stock exchanges). Attachment Contents 1. Study Objectives, Scope, and Limitation ............................................................................. 1 2. The Bank's Assistance Strategy in the Energy Sector .........................................................1 Country and Sectoral Context............................................................................................. 1 O verview ............................................................................................................................. 2 Petroleum (Oil and Gas) Sector ......................................................................................... 4 C o a l..................................................................................................................................... 4 Electric Power .................................................................................................................... 4 Energy Efficiency and Renewable Energy.......................................................................... 6 3. Project and Sector Otcom es ................................................................................................. 6 Efficacy ofBank Projects: Performance and Outcomes .................................................... 6 Com pletion and Supervision Ratings.....................................................................6 Safeguard Policies.................................................................................................. 6 Achievem ent of Physical Objectives..................................................................... 7 Environm ental Objectives...................................................................................... 9 Institutional Developm ent Impact and Sustainability.......................................... 10 Perform ance Drivers ............................................................................................ 12 Bank Perform ance................................................................................................ 13 Sector Performance and Outcomes .................................................................................. 14 Relevance of Bank Assistance........................................................................................... 16 4. K ey O utstanding Issue ......................................................................................................... 17 Electric Power Tariffs....................................................................................................... 17 Energy Planning and Fuel Choice.................................................................................... 18 Bank's Role in Private Power Development .................................................................... 19 Environmental Policy Linkages........................................................................................ 20 Poverty Impact of the Bank's Assistance.......................................................................... 21 Petroleum (Oil and Gas) and Coal - The Unfinished Agenda......................................... 22 This report was prepared by Messrs. Alain Barbu (Task Manager), Eric Martinot, and Jorge Larrieu (Consultants) who visited China in October 1999. Mr. William Hurlbut edited the report. Ms. Soon-Won Pak provided administrative support. ii 5. Conclusions, Lessons Learned, and Recommendations.....................................................22 Main Findings and Overall Ratings................................................................................. 22 Key Lessons Learned........................................................................................................ 23 Recommendations............................................................................................................. 24 Annexes A. China Energy Projects ........................................................................................................... 27 B. Major Institutional Development Components of Bank-financed Power Projects................ 29 C. China Energy Projects-Completion Ratings.......................................................................... 33 D. China Energy Projects-Supervision Ratings.......................................................................... 35 E. Characteristics of Power Projects financed by W orld Bank Loans....................................... 37 F. Unit Costs of Power Facilities under W orld Bank Power Projects........................................39 G. Summary of Procurement Arrangements ..............................................................................43 H. Unit Cost of New Coal-Fired Power Plants in China............................................................45 I. Thermal Efficiency and Availability of Bank-financed Coal-Fired Power Plants................ 47 J. Key Performance Indicators .................................................................................................. 49 K. China Energy Sector-Major Economic and Sector W ork......................................................51 L. Borrower's Comments ..........................................................................................................53 1 1. Study Objectives, Scope, and Limitations 1.1 The purpose of this evaluation is to assess the relevance, efficacy, and efficiency of World Bank assistance (comprising both lending and non-lending services) to China's energy sector over the 17 years since the first energy loan to China in 1983. The study findings are based primarily on available project evaluation findings (18 project ICRs and one recent PAR) and Quality Assurance Group reviews (5); selected supervision reports for 18 active projects; selected analytical and advisory outputs; interviews of Bank staff; and interviews of selected provincial utility staff and central government officials during a 10-day mission to China in October 1999. Three background papers were prepared for the study - on the coal sector, the Bank's assistance to electric power (technical aspects), and the environmental dimensions of the Bank's energy assistance.' 1.2 Despite the size of its assistance to the sector (about US$7 billion worth of loans to date), the Bank has been, in financial terms at least, a relatively marginal player in the Chinese energy sector, given the sector's sheer size. Indeed, the Bank has had only limited involvement in the coal and petroleum subsectors despite their critical importance to China's energy strategy. Under these circumstances, the study does not purport to provide a thorough assessment of the performance of China's whole energy sector during the period considered, an undertaking which would in any case be well nigh impossible within the timeframe and budget of this study, given the dearth of sector performance data available at the central level - even for the power sector in which the Bank has been most active. Nor does it aim at evaluating the economic and social impact of the government's energy development strategy, a topic that would require extensive research. Instead, the study's primary focus is squarely on Bank interventions and the sector assistance strategy that underpinned them. 2. The Bank's Assistance Strategy in the Energy Sector Country and Sectoral Context 2.1 China has become the second largest energy consumer in the world and the largest producer and consumer of coal, which accounts for as much as 71% of its total primary energy consumption (followed by oil 20%, hydropower 6%, natural gas 2%, and nuclear 1%). It is and will remain in the foreseeable future largely energy self-sufficient thanks to its large coal resources (more than 126 billion tons) - although crude oil imports have steadily increased since 1993 (about 10% of total consumption in 1997). While the country's energy intensity, at 60,000 BTU per dollar of GDP, remains high (three times the world average and twice that of all developing countries), it has been falling as a result of concerted energy conservation efforts over the past two decades: whereas the economy grew at 12% a year from 1980 to 1995, energy consumption grew at only 4% a year, a remarkable achievement for a developing country. Industry still accounts for as much as 75% of total energy consumption but household use (now only 10%) is growing fast with recent improvements in the standard of living: the total stock of refrigerators rose from 4 million in 1985 to 60 million in 1996 and refrigerators now account for half of residential consumption. Air conditioners are become ubiquitous and private car ownership is spreading rapidly. Although service is of uneven quality, rural access to electricity is 1. Martinot, Eric, "World Bank Energy Projects in China. Influences on Environmental Protection" (Draft), May 2000; Larrieu, Jorge, "Evaluation of the World Bank's Assistance to the Power Sector (Technical Aspects)" (Draft), December 1999; Prasher, Brahm, "Review of the China Coal Sector" (Draft), July 1998. 2 high: about 96% of the nation's villages and about 80% of rural families now have access to electricity. 2.2 Coal. Most resources are located in remote northern and northwestern China (Shaanxi, Shanxi, and Inner Mongolia) and large quantities of coal have to be transported, mostly by rail, to the main population centers of Central and Eastern China. More than half of China's coal is mined in small and inefficient local mines (state-owned or rural collectives) with a poor environmental and safety record. Industry accounts for 55% of domestic coal use and the electric power sector for 35%, with the rest accounted for by commercial and residential use (heating and cooking). Foreign investment in the sector remains very limited. 2.3 Oil and Gas. Ninety percent of the oil produced (about 150 million tons in 1997) comes from onshore fields (the largest of which are in Northeast China) operated by subsidiaries of China National Petroleum Corporation (CNPC). However, investment by foreign oil companies has spurred increased offshore exploration and development in recent years. China's natural gas resources are estimated to be substantial but remain underdeveloped. More than half of the current production (25 billion cubic meters) is non-associated gas produced in Sichuan province. 2.4 Electric Power. China is the world's second largest power producer, with an installed capacity of 260 gigawatts (GW). Most of this capacity (75%) is thermal, primarily coal-based. The country's hydroelectric potential is significant but resources are mostly located in central and western regions, away from the main consuming centers. Nonetheless, major hydro projects under construction (such as Three Gorges, with its planned capacity of 18 GW) will ensure that hydropower retains a sizeable share of the country's future power production. Nuclear power's share (currently 1%) is expected to remain small. Despite its rapid expansion since the mid- 1980s, the power network could not keep up with the booming economy, particularly in eastern provinces, and suffered from severe shortages (estimated at 15-20% of demand) until 1997. Most of the country's power is still produced and transmitted by a small number of state-owned provincial utilities, but the private sector (in majority Hong-Kong and US investors) may have accounted for as much as 10 % of total sector investments in recent years, and for an estimated installed capacity of 11.5 GW (with another 14 GW under construction). Electricity distribution, on the other hand, is highly decentralized, with municipalities, counties, townships, and villages operating a multitude of separate distribution networks? 2.5 Other Energy Resources. Biomass, geothermal, solar, and wind energies still play a small role in China's energy supply and are used mostly in remote areas. Geothermal power currently accounts for some 30 megawatts (MW; up 50% from 1990 while wind and solar power capacity, currently a mere 50 MW, is expected to grow rapidly as a result of renewed Bank-supported government efforts (para. 2.14). Biomass resources are assessed at 260 million tons oil equivalent. Overview 2.6 In just 17 years, China has become the Bank's largest borrower in the energy sector, with 38 energy and energy-related loans totaling close to US$7 billion (list in Annex A). Energy has also accounted for a major share (close to a fifth) of the Bank's total lending to China between 1983 and 1999. Overall, electric power has taken the lion's share of lending (86%), followed by oil and gas (10%), energy efficiency and renewables (2%), and coal (2%). In addition, the sector 2. Except for some large power plants and transmission lines operated by regional and central authorities. 3. In Zhejiang province alone, some 1,600 townships, 66 counties, and 14 municipalities operate their own networks. 3 received US$90 million in Global Environment Facility (GEF) grants through the Bank. Furthermore, the Bank has carried out a substantial amount of analytical and advisory (AAA) services, financed under a variety of trust funds (particularly the Energy Sector Management and Assistance Program, or ESMAP, and the Policy and Human Resources Development Fund, or PHRD), Institutional Development Fund (IDF) grants, as well as the Bank's own budget. Figure 1 illustrates key trends and patterns in energy lending to China. 2.7 The Bank's energy program in Figure 1. Energy Lending to China, by Subsector China can be roughly broken down into four distinct periods: 2500 (1) The Early Years (1983-88), during which the Bank's assistance, in energy 2000 as well as in other sectors, aimed at helping China's reintegration into the 2 iso global economy, following years of isolation. Its focus was on removing 1000 bottlenecks to the country's accelerating economic growth and on institutional development (with an a emphasis on technology transfer and 1983-85 1986-88 1989-91 1992-94 1995-97 1998-00 capacity building). To this end, the Bank provided a broad range of lending and non-lending assistance in the electric power, oil and gas, coal mining, and rural energy sectors. (2) The Years of Transition (1991-93), which followed the two-year hiatus in Bank lending in the aftermath of Tiananmen Square. The focus was on consolidating earlier assistance to the power sector (including the approval of several projects that had been prepared prior to the halt in Bank lending), with an added emphasis on addressing the resettlement issues associated with hydroelectric projects. (3) The Power Reform Years (1994-97), during which the Bank's agenda shifted to a "higher plane," with a main focus on policy change and broad reform, primarily, although not exclusively, in the electric power sector. This coincided with the second wave of economic reforms initiated by China in the early 1990s and the greater urgency attached to that subsector by the government in light of persistent power shortages in fast-growing Eastern China. Power lending during that period averaged US$665 million per year, complemented by a wide range of AAA services. Notwithstanding this heavy concentration on power, the Bank also provided some limited assistance in gas as well as in district heating and industrial energy efficiency (under components of non-energy projects). (4) The Years ofDiversification (since 1998), during which the diversification of the Bank's assistance beyond the power sector, already started in 1997, took on full meaning, with lending operations in energy conservation, district heating, and renewable energy and renewed AAA activities in the oil and gas sector. In contrast, only two power loans have been made since 1998, resulting in a significant decrease in overall energy lending (down to US$100 million in fiscal 1999 and US$320 million in fiscal 2000). 4 Petroleum (Oil and Gas) Sector 2.8 Between 1983 and 1986 the Bank made five loans to the petroleum sector, totaling US$418 million. Given the absence of major discoveries through the 1970s and the actual decline of oil production in 1981/82, the Bank's early lending for oil had three objectives: (i) to develop the known hydrocarbon-bearing structures; (ii) to provide a vehicle for introducing modern technology; and (iii) to upgrade the operating, technical, and managerial skills of China's oil industry staff. The three oil projects targeted regions where the introduction of modern technology was critical: Daqing (China's largest and most mature field where production was already declining), Zhongyuan (which presented major drilling challenges), and Karamay (for cost-effective development of heavy oil reserves). The three oil loans amounted to US$363 million toward project costs of US$1.7 billion. The two subsequent loans (totaling US$55 million) financed technical assistance projects in the gas sector, aimed at assessing the feasibility of rehabilitating the Weiyuan gas field (the largest gas field in Sichuan Province) and of developing a small offshore gas field in the Liaodong Bay. Both projects included substantial capacity-building components. 2.9 A sixth loan (US$255 million) for the Sichuan Gas Development and Conservation Project was made in 1994, five years after the last gas technical assistance project had already been completed. Its stated objectives were much more ambitious, namely: to support the restructuring of the upstream oil and gas sector; to promote the development and conservation of gas resources in an economic, efficient, and environmentally sound manner; and to strengthen the institutional capabilities of the China National Petroleum Corporation (CNPC) and its subsidiary, the Sichuan Petroleum Administration (SPA). This project is still under implementation and is scheduled to close in fiscal 2001. Coal 2.10 The Bank made its first loan in the coal sector as early as 19854 a reflection of the critical importance of coal for the Chinese economy. The US$126 million loan financed the Changcun (Luan) Coal Mining Project in Shanxi province and was aimed at demonstrating the benefits of introducing modern technology to mine design, engineering, and construction and to coal preparation. However, problems in the implementation of the project (see para. 3.5), together with the government's unwillingness at the time to reform coal pricing, prevented the Bank from expanding its lending to the sector. While progress has since been made on the pricing front, renewed Bank lending has apparently never seriously been considered by the government, probably a reflection of its anxiety about the social impact of a radical reform of the sector. Nonetheless, several coal-related AAA activities have been undertaken in the 1990s, most notably under the Bank's Clean Coal Initiative. Electric Power 2.11 Between 1984 and 1999, the Bank made 23 power loans to China for a total of US$5.9 billion (about US$260 million on average per year), making it the Bank's largest borrower in this sector. Twenty of these loans were primarily targeted to power generation facilities (11 to coal- fired thermal plants and 9 to hydroelectric plants) while 3 were primarily targeted to transmission facilities.! None were specifically targeted to subtransmission and distributions Most loans 4. Files reveal that a second loan for the Chengzhuang (Jincheng) Coal Mining Project was prepared at about the same time (through yellow cover stage) but was never finalized, for reasons unknown. 5. In addition, generation loans typically included funds for associated transmission facilities. 5 included substantial funds for institutional Figure 2. Lending to China's Power Sector, by Primary components (training, studies, consulting services), ranging from 2 to 9% of the loan Purpose amount (see details in Annex B). 2500 2.12 The projects' objectives and the __ _ characteristics of their physical and 2000 institutional components changed over time to r reflect the evolution of the Bank's assistance strategy in the sector (para. 2.7). In the 1980s 1000 and early 1990s, physical components of Bank 5 projects were aimed primarily at relieving 500 power supply shortages, particularly in fast- growing East China (Shanghai, Zhejiang, 198345 198648 1989-91 1992-94 1995-97 1998-00 Jiangsu, Fujian, and Shandong provinces), through the construction of large, modem and 11Hydroelectric Generation OTherrnal Generation DTranamlssion more efficient coal-fired stations and the harnessing of cheap hydroelectric power. Related objectives were to expose selected provincial utilities to the latest technology in plant design and construction and improve their efficiency via technical assistance and training in technical, financial, and managerial areas, with the expectation that their progress would be emulated in other (non-borrowing) provinces. Another important objective for hydro projects was to ensure that resettlement programs (involving up to 84,000 people for the Shuikou dam) were designed and implemented appropriately. While economic power pricing was a stated objective of most power projects of that period, the Bank did not condition its support to actual progress in that area, limiting its involvement to funding studies and training on the topic, with the expectation that knowledge gained that way would somehow find its way into the central government's policy agenda. The Bank's early involvement (1988) in the feasibility stage of the Three Gorges project at the government's request, was short-lived and ultimately unsuccessful (see para. 4.5). 2.13 With the advent of the second wave of economic reforms in the early 1990s, the Bank's agenda in the power sector shifted dramatically toward the promotion of structural reform at the national level. The watershed event was the 1994 IDF-funded report and conference on power sector reform, which set the stage for a radical restructuring of the sector based on market principles. All subsequent loans and AAA activities have provided institutional support (in the form of bank staff advice, consulting services, and training) to the implementation of the reform agenda on the following fronts: improvement of the national legal and regulatory framework (including to foster private investment); establishment of separate regulatory institutions at both the national and provincial level; greater financial and managerial autonomy of provincial utilities; unbundling of generation assets into separate enterprises; and gradual introduction of competition, starting at the generation level. The physical objectives of post-1994 projects have also shifted, with more emphasis put on less-developed provinces (Sichuan, Henan, Inner Mongolia, Hunan), transmission facilities (Sichuan and Jiangsu projects), and hydroelectric development (Ertan II and Tongbai). Continuing assistance to the most-developed utilities was limited and aimed at introducing new technology (supercritical coal-fired units in Shanghai) and pioneering sector reform (generation market development in Zhejiang). In addition, all recent power projects have incorporated environmental protection as a core objective. 6. A negligible amount (US$53 million or 1% of the Bank's total lending to the sector) was assigned to finance urban distribution networks under three generation loans. 6 Energy Efficiency and Renewable Energy 2.14 The Bank's lending in these areas prior to 1995 was limited to the energy efficiency component of the Fertilizer project (1987) and the district heating component of the Beijing Environment project (1992). However, a significant amount of AAA work was carried out during that period, which provided the groundwork for subsequent (post-1995) lending operations. In particular, ESMAP funded several studies and related training focusing on rural energy while a major GEF-funded greenhouse emission control study (1994) led to a new dialogue between the Bank and China on energy efficiency and renewable issues. As part of its portfolio diversification strategy (para. 2.7), the Bank gradually increased its financial support from 1995 onwards, via components of environment and industrial pollution projects (Liaoning 1995 and Shandong 1998), a stand-alone GEF project (Efficient Industrial Boilers, US$32.8 million, 1997) as well as two major dedicated lending operations with GEF support: the Energy Conservation loan (US$63 million, 1998) and the Renewable Energy loan (US$100 million, 1999). The efficient boilers project aims to develop national markets for high-efficiency boilers, while the energy conservation project aims at promoting the development of performance contracting for energy efficiency (via commercial energy services companies). The renewable energy project aims at pioneering the commercial development of solar and wind energy. 3. Project and Sector Outcomes Efficacy of Bank Projects: Performance and Outcomes Completion and Supervision Ratings 3.1 The record of completed energy and energy-related projects (Annex C) is nothing short of impressive, even by China's standards: none of the 20 projects had an unsatisfactory outcome (6 were rated highly satisfactory while 4 were rated marginally satisfactory; one project was not rated).' Sustainability was rated likely for all but one project (the Daguangba multipurpose hydroelectric project, which was rated uncertain). And institutional development impact was rated substantial or high for all but 3 projects (the Daguangba, Changcun Mining, and Fertilizer Rationalization projects, which all had a modest rating). 3.2 Similarly, the latest supervision ratings of the 19 ongoing projects (Annex D) show a very strong performance, with only one problem/at risk project (the Shandong Environment project, of which energy/district heating is only one component). Safeguard Policies 3.3 Information available indicates that all Bank energy projects have complied with applicable Bank safeguard policies. All hydroelectric projects (Lubuge, Yantan, Ertan, Daguangba, Shuikou, Tianhuangpin, and Tongbai) have provided for the establishment of independent panels of experts or boards of consultants to advise on dam safety and related technical issues, in conformity with Operational Policy (OP) 4.37. Indeed, this Bank requirement has been acknowledged as extremely helpful by utility officials and has since been emulated by non-Bank borrowers. Formal environmental assessment (EA) reports have been prepared for all 7. The Henan (Qinbei) Power project (Loan 3980, approved in fiscal 1996) was cancelled at China's request before being declared effective. 7 projects approved after 1989, the year OP 4.00 came into effect (of those approved before that date only the Beilungang Thermal Power Extension project, approved in 1988, included a formal EA). Not surprisingly, the nature and depth of these EAs has evolved over time to reflect the Bank's increasingly stringent guidelines and the different issues associated with hydro and coal- fired plants; notwithstanding full compliance with the OP, however, environmental monitoring and enforcement has proved to be an issue to this date (see para. 3.8). Completion reports and available supervision documentation on energy projects have not highlighted issues concerning compliance with OP 4.04 on natural habitats, Operational Directive (OD) 4.30 on indigenous people, 'and Operational Policy Note 11.03 on cultural property. 3.4 Resettlement Aspects. Bank-financed hydroelectric projects have involved the involuntary resettlement of a significant number of people (up to 84,000 for Shuikou). Thermal generation and transmission projects have also required some resettlement, but to a more limited extent (typically 500-1,000 people for thermal plants and 5,000-10,000 people for high-voltage transmission projects). All projects have provided for the preparation and implementation of satisfactory resettlement plans consistent with OD 4.30. Although the Bank's design input and direct financial support was greater in later projects than in earlier ones (for example, the 1986 appraisal mission for Yantan did not even include a resettlement expert), China's resettlement record in Bank-financed energy projects appears to have been generally good; in fact, a recent (1998) OED study pointed to China's approach as best practice (see Box 1). One exception is the Daguangba resettlement program, which has suffered serious delays (largely the result of the Hainan provincial government's particularly weak financial and institutional capacity and of the project's special characteristics as a multipurpose dam). Box 1. Shuikon and Yantan Resettlement At Shuikou, 67,000 people were relocated from the valley floor and another 17,000 from Nanping City, at the upstream end of the reservoir, to make way for embankments that avoided the need to relocate more of Nanping's 200,000 inhabitants. All relocation was completed by 1992. Although the original resettlement plan called for using traditional agriculture to rehabilitate 74% of those displaced, in actuality 75% were rehabilitated by other means. Local government officers aggressively developed the reservoir fishery, oyster beds, fruit and timber trees, and township and village enterprises, and even recruited foreign investors to establish factories to employ resettlers. The incomes of displaced people recovered to pre-move levels by 1994 and increased 44% by 1996, almost doubling the increase in non-resettler income growth. Treating resettlement as a development opportunity led to the most successful resettlement outcomes among the case study projects. Yantan displaced 43,000 people and affected the incomes of another 19,000. Located in a much more remote and isolated region, Yantan did not benefit from a rapidly growing coastal economy. Nonetheless, resettler incomes increased, and were supplemented by a grain ration until they reached the target level. Furthermore, the government arranged to transfer several thousand households to two sugar estates and another state farm in other parts of the province. Average incomes among those resettlers have increased the fastest. Source: From OED Precis no. 194, Involuntary Resettlement. The Large Dam Experience (2000). Achievement ofPhysical Objectives 3.5 All evaluated Bank projects have met or exceeded their physical objectives, except for the one coal mining project (see below). Some early projects (for example, Beilungang thermal plant, Daqing and Zhongyauan oil development) suffered implementation delays due to the 8. OED's 1998 study on resettlement found that while 80% of the people resettled in Yantan were minorities, they were treated no differently from the Han Chinese resettlees. 8 borrowers' lack of familiarity with Bank procurement guidelines and suboptimal procurement packaging. But most projects approved from the late 1980s onwards were completed within schedule and generally at or below cost estimates. The latter can be largely attributed to the use of international competitive bidding (see Annex G), the introduction of which both the Chinese government and borrowing agencies unanimously view as one of the Bank's major contributions (most provincial power utilities have now incorporated large sections of the Bank's guidelines in their own bidding documents, evaluation procedures, and contractual documents). As a result, the average unit cost of coal-fired power plants financed by the Bank, at US$682 per kilowatt, compares very favorably with that of similar plants in China and other developing countries (see Annex F). In contrast, the Changcun coal project suffered from serious implementation delays caused by poor contractor performance and weak agency commitment. The project's rate of return, re-estimated at completion, was a marginal 11% and most of its institution-building and demonstration objectives were not achieved. Of the ongoing projects, only one (Sichuan gas development) has encountered serious implementation delays related to procurement problems, but these have reportedly been solved and the project is now rated as satisfactory. 3.6 But for the coal project, the operating record of all completed Bank projects has been excellent and their physical sustainability is not in doubt. In Daqing, oil production was 40% higher than appraisal estimates and in Karamay, production of heavy oil was raised from 550,000 tons a year to more than 1.4 million tons in 1990. Bank-financed coal-fired thermal units now in operation have performed extremely well and at or close to developed country standards, in terms of specific coal consumption, availability, and reliability, as shown in Annex I? All new units far outperform (by as much as 30%) older units located in the same plants. Also, Bank-financed hydroelectric plants, which are characterized by their large reservoir capacities with pluri-annual regulation, operate at higher plant capacity and availability factors than older Chinese hydro plants."o All in all, in the power sector, the Bank has helped finance the addition to the grid between 1986 and 1999 of some 20 GW of cheap and reliable generation capacity, 25,000 megavolt-amperes (MVA) of transformer capacity and 7,500 kilometers of transmission lines (details in Annex E). This represents a relatively small but significant proportion of the total additions required to meet the rapid growth of electricity demand during that period (averaging 6% per year and requiring 8-12 GW of new generation capacity each year). The combined effect of these substantial capacity additions and of the recent slowdown in demand caused by the Asian economic crisis has been to eliminate shortages in most provincial grids in 1998/99. 3.7 The transfer of technology and technical know-how in the petroleum and power sectors - both directly via Bank-financed project components, and indirectly through their demonstration effect on the sectors as a whole - is widely acknowledged in China as having been one of the most fundamental contributions the Bank made in the energy sector. All early Bank projects involved the import of modem equipment not widely used in China at the time, the introduction of modem construction technologies (through the use of foreign consultants and panels of experts) and the exposure of large numbers of local staff to the latest technical know-how (via formal and on-the-job training, visits to foreign factories and close working arrangements with foreign consultants, contractors, and manufacturers). The speed at which these new technologies 9. With one exception: in 1993, two years after the first Beilungang unit was commissioned, the boiler exploded causing the death of 25 people. An investigation of the cause was inconclusive but suggested that the explosion resulted from a combination of factors: (a) poor design of the boiler; (b) substandard quality of the coal used; and (c) the utility's lack of experience in operating this type of unit. Major improvements have since been made and both units have performed extremely well in recent years. In fact, the Beilungang plant has been awarded the (top) "five-star" rating for operational efficiency by central authorities and is now showcased as a model to be emulated by other power plants in China. 10. Except for the Ertan plant, due to non-technical factors (see para. 4.2). 9 and practices was assimilated was particularly impressive in the power sector, with the efficient construction and operation of some of the largest hydroelectric plants in the world, the roll-out of an extensive network of extra-high voltage (EHV) 550 kV transmission lines throughout China (with the attendant modem switching, load dispatch, and SCADA [supervisory control and data acquisition] equipment), and the mainstreaming of 300 and 600 MW coal-fired stations - to such an extent that local boiler manufacturers are now able to manufacture these units virtually with all domestic content. Low-NOx (nitrogen oxide) combustion technology and high-efficiency electrostatic precipitators specified in Bank projects have also been mainstreamed in all new power plants. And the Waigaoqao project, currently under construction in Shanghai, is introducing cutting-edge technology to China through the design and construction of two 900 MW coal-fired supercritical units equipped with highly efficient boiler-turbine arrangements, on-line coal consumption monitoring systems, and sophisticated pollution control equipment. Box 2. Bank-Supported Technology Transfer in China's Oil Industry The main sources of China's impressive progress in transferring oilfield technology were: * Permanent training institutions for engineers and skilled workers within each oilfield region. A core group of instructors were trained abroad in the use of curricula and methods for teaching advanced oilfield operation techniques and practices. * A national program for petroleum-related education. The scope and content of the courses taught were expanded, and overseas training programs for their staff were established. * Training, in China and abroad, provided by the suppliers of modem and sophisticated equipment purchased under the project. This training was explicitly specified in the bidding documents for equipment. * Interaction between implementing agency staff and consultants, both in China and at the consultants' headquarters, on the various consultant studies, particularly those related to reservoir analysis, oilfield operations, and safety practices. * The consultants' assistance, at the oilfields, with the initial implementation of the recommendations from their studies, particularly in the areas of drilling and oilfield practices and safety standards. Source: From OED Precis no 73. Petroleum Development in China (1994). Environmental Objectives 3.8 In the power sector, Bank projects helped reduce environmental emissions through the introduction of more efficient power generation, low-NOx burner technology, high-efficiency electrostatic precipitators, and the promotion of least-cost approaches to flue-gas desulfurization (FGD) investments. Investments in hydropower have potentially displaced emissions from coal- fired plants. Investments in environmental monitoring equipment as part of Bank projects, where it has occurred, have had substantial impact on local environmental regulation and future power plant specifications for improved environmental performance. But many early Bank projects did not provide for systematic environmental monitoring, leaving this task to the local environmental protection agency or the plants themselves. As a result, emissions data from early Bank-financed power plants were generally not made available regularly to the Bank by Chinese counterparts." 3.9 But the environmental dimensions of energy production and use in China go beyond the power sector and are many. Not surprisingly, they have increasingly come to be at the core of the 11. Still, in a recent (1999) report by the Bank's Environment Department on the environmental performance of Bank- financed power plants in China, emissions in eight power plants were noted to be within acceptable limits. 10 Bank's sector assistance strategy, particularly as global issues have come to the fore. The study identified some 20 such dimensions and rated the extent of Bank influence in each one of them, either directly via the financing of related investments or indirectly via policy work and advice (Table 1). Table 1. Bank Influence on Twenty Key Environmental Dimensions Rating Dimension S Mainstream large-scale efficient coal power plants S Harness cheap and clean hydroelectric power S Mainstream use of electrostatic precipitators, flue-gas desulfurization and low-NOx burners S Mainstream high-quality environmental assessments (EAs) for all new plants S Promote performance contracting as a commercial model for energy efficiency M Locate coal power plants at the mine mouth and construct transmission lines M Promote use of low-sulfur coal in power plants M Expand natural-gas production and imports M Promote environmentally-safe design and operation of oil and gas pipelines M Promote commercial wind power M Promote use of PV, small hydro, wind and biomass technologies in rural areas M Promote co-generation and efficient district heating L Retire smaller, less-efficient power plants (that is, less than 50 MW) L Rehabilitate existing power plants L Set and enforce quantitative emissions targets (by plant, city or province) L Monitor emissions from power plants and nearby ambient air concentrations L Develop fluidized-bed combustion (FBC) and IGCC technologies for power plants L Mainstream coal-washing at the mine before transport L Promote gas-fired power plants and gas distribution systems L Promote industrial energy-efficiency improvements S=strong influence: M=moderate influence; L-litftle or no influence 3.10 The above assessment shows that in the power sector, the Bank's impact has been highest in promoting the construction of more efficient and less polluting coal-fired plants and the use of renewable hydroelectric energy and in mainstreaming the carrying out of high-quality environmental assessments for new power plants. It has had only moderate success in promoting the use of higher quality, low-sulfur coal in thermal plants, the mainstreaming of systematic emission and ambient air quality monitoring at and around power plants, and the location of new coal-fired plants at mine mouth. And it has had very little or no direct influence on the rehabilitation of older thermal plants, the retiring of smaller (less than 50 MW) and most polluting units, and the piloting of newer environment-friendly power plant technologies (such as fluidized-bed combustion, or FBC, and integrated gasification combined cycle, or IGCC). In the all-important coal sector, it has had practically no influence on promoting coal washing at the mine. In the petroleum sector, it has had some influence on expanding domestic production of clean natural gas (in Sichuan) and promoting environmentally safe construction and operation of pipelines (also limited to Sichuan) but little direct impact (so far) in raising awareness of the potential for increased use of clean natural gas (including imported LNG) in power, industry, and residences. The Bank has had a significant influence in promoting new approaches to energy efficiency (commercial performance contracting) through the preparation of the recent energy conservation project. It also had some success in its direct support of energy efficiency improvements in some areas (co-generation, district heating) but less in others (large industries, for example, fertilizer plants). Finally, in the renewable energy sector, it has just begun to play a successful role in promoting, via the 1999 project, the commercial development of wind power and rural use of photovoltaic technologies - although it is still early to assess ultimate impact. Institutional Development Impact and Sustainability 3.11 In contrast with the Bank's highly positive impact on technology and technical know- how, the results of Bank-financed capacity-building efforts in non-technical areas have been 11 somewhat less dramatic. The recent OED performance audit of three early power projects found that while broad middle-management training programs were credited by Chinese officials for contributing to instilling a new "commercial" culture in power utilities, specialized financial management and economic training was generally neglected. Not surprisingly, the reliability of financial data, even in the most advanced provincial utilities, remains uneven and tariff policy as well as investment decisions have been insufficiently grounded in solid economic analyses. Admittedly, Bank-sponsored tariff studies and least-cost planning exercises have helped build related expertise in selected Chinese consulting firms (most notably the Beijing Electric Research Institute, BERI) but skills within utilities and government agencies (for example, provincial pricing or planning bureaus) are still sorely lacking. Training programs associated with the reform components of most recent power projects (see below) are aimed to fill these gaps. 3.12 Energy Pricing. Pricing reform was pursued most actively by the Bank in the power sector, with only modest results so far, as serious distortions persist in tariff structure at both wholesale and retail levels (see Chapter 4). The Bank's early efforts to promote the economic pricing of coal were doomed by the problems encountered in the coal mining project and the resulting halt in Bank lending (para. 2.10). However, the subsequent increases in coal prices implemented by the government in the mid-1 990s (prices are now reportedly close to international parity) built at least in part on the recommendations of a 1991 Bank study!2 Although some progress was recently achieved in raising wellhead gas prices to economic levels in Sichuan province (under the Sichuan Gas Development project), retail gas prices in both Sichuan and China as a whole remain heavily distorted. And no dialogue has been carried out between the Chinese government and the Bank on the pricing of petroleum products. While the slow progress made on energy pricing reform did not prove to be a major impediment to China's successful drive for greater energy efficiency under the old centrally planned economic system, persistent pricing distortions are becoming a major obstacle to further improving energy efficiency now that the economy is increasingly market-oriented (see para. 3.25). 3.13 Financial objectives were pursued by the Bank primarily in the power sector via standard financial covenants (mostly self-financing, debt service coverage, and debt-equity ratios). These have almost always been complied with by borrowing provincial utilities, which have, for the most part, remained financially healthy thanks to the significant across-the-board tariff increases implemented during the past decade (see Chapter 4). While comprehensive information on non- Bank borrowers could not be obtained, the continued financial health of Bank borrowers and (limited) consolidated financial data available from State Power Corporation (SPC, the national holding company for the power sector created out of the ex-Ministry of Power in 1998) point to generally healthy finances for the power sector as a whole, with two caveats: first, some utilities in less economically developed provinces may be increasingly suffering from local government reluctance to authorize tariff increases (as appears to be the case in Hainan where the Daguangba project was recently completed); and second, some utilities (such as Shanghai) have seen their accounts receivable increase in recent years as a result of the difficult financial situation of large state-owned enterprises. The corollary objective of promoting the introduction of modem accounting and auditing standards in Bank borrowers has only been partially achieved: a recent OED performance audit of three power projects" raised concerns about the reliability of financial data and the consistency of the accounting standards used in China (one critical issue relates to the variable accounting treatment of the still-uncertain ownership structure of some assets devolved by the central government). 12. Albouy, Yves, "Coal Pricing in China. Issues and Reform Strategy" (Discussion Paper), The World Bank, 1991 13. Performance Audit Report on Loans 2706, 2852 and 2955 (OED), 1999 12 3.14 The fundamental restructuring of the power sector has been the most ambitious institutional objective pursued by the Bank in the energy sector since 1994. Progress achieved to date along the five main dimensions of the reform program (see para. 2.13) has been generally slower than expected, which is not surprising considering its radical nature in the Chinese context. Significant progress has been made in providing more financial and managerial autonomy to provincial utilities - to such an extent that, ironically, it is now difficult to obtain centralized data on power sector performance. Significant progress has also been made in improving the national legal and regulatory framework, with the enactment of the Electricity Law (1995) and related regulations (although some unfinished business remains in the area of private sector investment promotion, illustrated by the still-pending enactment of the BOT [build- operate-transfer] legislation after years of discussions). Some progress has been achieved in the unbundling of generation assets in selected provinces (for example, creation of separate power generation companies in Shanghai, Zhejiang, and elsewhere, and the partial opening of their capital to local and/or foreign private investors via stock market placements). More limited progress has been achieved so far in establishing separate regulatory institutions at the local and national levels: the elimination of the Ministry of Power in 1998 and the creation of State Power Corporation as the holding company for state assets in provincial utilities, together with the full devolution of its policymaking and regulatory powers to the State Planning agency (SDPC) and the State Economic and Trade Commission, have resulted in lack of clarity in the three institutions' respective roles and staffing issues (including high turnover). At the local level, the creation of Provincial Power Bureaus separate from Power Corporations and entrusted with regulatory authority, has remained for the most part a paper fiction. Finally, much remains to be done in introducing competition in the sector: the practical modalities for piloting a wholesale (generation) market in selected provinces are just now being developed, with the Bank's help (under the two ongoing projects in Zhejiang province). Performance Drivers 3.15 The most critical factor behind the very good performance of the Chinese energy portfolio has been client ownership at both the national and local levels. In fact, the one case of marginal performance (coal mining project) can be largely attributed to a clear lack of ownership by both central authorities (for pricing and sector reform) and the executing agency (on managerial improvements). In contrast, ownership in the power sector has taken many forms, such as: insistence on large capacity-building components in most projects and willingness to involve a large number of highly motivated staff in them; ensuring maximum exposure of counterpart staff to foreign contractors and consultants' work and to Bank sector work (for example, on sector reform and environmental policy); government's willingness to force managerial changes in (rare) cases of weak utility commitment to project objectives; utilities' willingness to learn from mistakes (for example, poor procurement packaging and fragmented contract management in earlier projects); and government's insistence on agreeing only to realistic (usually incremental) policy commitments but consistently meeting them. 3.16 Bank projects were also seen by the government and utilities alike as testing grounds for new technologies and approaches, with the potential for powerful demonstration effects on the whole sector (power plant technology, resettlement, and sector reform). Consequently, Bank projects generally benefited from being assigned the best staff, from enhanced attention by utilities' management, and from close monitoring by government authorities. On the other hand, an impediment to the full success of Bank interventions, particularly as their focus has shifted to policy issues in recent years, has been the increasingly complex and fragmented decisionmaking process both at the central level and between central and local authorities. This has been exacerbated by the ongoing general decentralization of authority to provinces and, in the power sector, by the somewhat hasty 1998 transformation/elimination of the Ministry of Power and the 13 resulting high staff turnover. Beside these country factors, strong portfolio performance also owes much to a consistently above-average Bank performance, as discussed next. Bank Performance 3.17 Both OED and Quality Assurance Group (QAG) ratings point to a much-better-than- average Bank performance. In only one of the 18 completed projects was performance rated unsatisfactory (Liadong Oil technical assistance project, because the Bank misread reserves estimates and was unwillingness to follow up with a promising development prospect). And QAG rated Bank performance highly satisfactory for three more-recent power projects (supervision of Ertan II and Waigaoqao projects and quality-at-entry of Renewable Energy Development project) and satisfactory for two others (quality-at-entry of Waigaoqao and Tuoketuo). In light of these ratings, the fact that standard indicators of process efficiency have remained well within accepted benchmarks is particularly noteworthy: total project identification and preparation time (from Project Concept Document to Board approval) has rarely exceeded 18 months and was in some instances as short as 8 and 9 months (Hunan and Jiangsu power projects, respectively). Lending costs for the 13 projects approved between fiscal 1993 and fiscal 1999 have averaged US$340,000 per project and supervision costs US$32,000 per project per year during the same period -both below Bank averages.14 This can be explained by several factors: a high degree of borrower involvement in project design, preparation, and supervision, thanks to high local capacity and ownership (see above); the ability to rely on high-quality and highly participatory sector work (funded in part by trust funds); some "economies of scale" resulting from repeater projects (for the power sector); and the high-caliber and remarkable continuity of the staff assigned to the China energy program over the years. 3.18 Sector work has been a strong and important aspect of the Bank's involvement in the Chinese energy sector. The Bank has completed with the Chinese a total of 14 energy-related sectoral studies, as well as 2 workshop/roundtables with published proceedings, and several discussion and policy working papers. This volume of intellectual work has been much greater for China than for any other recipient of World Bank assistance. Chinese nationals have been major participants and managers of the sector work, which has enhanced their uptake and ownership. In general, sector work has greatly facilitated the Chinese willingness and commitment to new environmentally preferable strategies for energy sector development and strengthened the ability of Chinese scientists and policymakers to push for new environmental strategies in the energy sector. 3.19 Notwithstanding this very good overall record, a recent OED performance audit pointed out two areas where Bank performance could have been stronger: first, a lack of emphasis in earlier oil and power projects on environmental monitoring issues (largely offset by the region's commendable initiative to carry out in 1999 an ex-post environmental review of eight coal-fired power plants after loan closing); and second, a lack of aggressiveness in insisting on the auditing of utility accounts by nongovernment external auditors, in light of persisting deficiencies in accounting systems. Also, OED discussions with private sector representatives revealed that the Bank's position regarding private sector involvement in the power sector could have been better articulated and presented in public forums (see Chapter 4). The relevance of the Bank's strategy and the appropriateness of its instruments are discussed in paras. 3.27 through 3.31. 14. Average supervision costs have increased in the last two years (to US$39,000 in fiscal 1998 and US$57,000 in fiscal 1999) probably the result of the increased policy-intensity and complexity of more recent projects. 14 Sector Performance and Outcomes 3.20 Given the breadth of the topic and the dearth of detailed aggregate sector performance data (even for the power subsector where the Bank has been most involved), this section aims primarily at providing a minimal background for the subsequent discussion of the Bank's role and relevance, rather than comprehensive coverage of the performance of China's energy sector. 3.21 Coal. China has become the world's largest coal producer and a major exporter (mainly to Japan and South Korea). The rapid increase in production over the past two decades (near doubling since 1985) derived mostly from the development of small local mines, which the government encouraged. They are estimated to number 60,000; comprise provincial, county, collective, and individual mines; and now account for 55% of the country's total output. A large proportion of these involves traditional shallow seam mining, have a poor safety and environmental record, and are financially weak and unable to invest in modern washing and sizing methods. The other 45% come from about 600 larger, mostly underground, mines operated by the central government. Overstaffing remains prevalent in the state sector and productivity has stayed generally low by international standards, even where full mechanization has been introduced. Although it has steadily increased, the proportion of coal that is washed at the mine remains low, at only 20% (there are also reports that washing is not systematically used even where installations exist). Furthermore, most of the washed coal is coking coal destined for use in metallurgical industries. In addition, screening and sizing of coal is not practiced widely in China. These combined deficiencies result in increased air pollution and an added burden on an already stretched railway transport system. 3.22 Both the local and state mining sectors remain in dire need of managerial improvement, restructuring, and consolidation. Monitoring and enforcement of environmental regulations remain poor, particularly in local mines. And coal prices, although reported close to economic cost on average, remain distorted (with prices to power plants and households still subsidized), and do not provide small mines with sufficient resources to invest in safety, environment, and technology improvements. Of particular concern (and rarely mentioned) is the widespread practice in the industry to allow for the continuous large-scale spontaneous combustion of coal deep in underground mines." Recent amendments to China's Mineral Resource Law (1997) are geared to encourage foreign investment, which has so far remained marginal. 3.23 Petroleum. China's oil and gas industry has remained almost exclusively state-owned, with the exception of a limited number of joint ventures with foreign companies (mostly for offshore oil exploration and development and secondary recovery in selected onshore basins). Results of exploration efforts over the past two decades have been disappointing and the moderate increase in oil production has not kept up with fast-growing consumption. As a consequence, the country is now a net oil importer. Largely on account of an inefficient policy and pricing framework, domestic gas reserves remain underdeveloped and potentially more economic alternative supply options (import of LNG and/or piped Russian gas) were not considered until very recently. Until 1998, the sector was controlled by three state-owned monopolies responsible respectively for onshore petroleum exploration and production (CNPC), offshore operations (China National Offshore Oil Corporation, CNOOC), and downstream activities (refining, distribution, and petrochemicals, Sinopec). The 1998 sector restructuring led to the reshuffling of CNPC and CNOOC's assets and the creation of two vertically-integrated state-owned regional companies, one for north and west China, and the other for eastern and coastal areas (excluding offshore activities, which remain under CNOOC). How this new 15. China has been estimated to lose about 100 million tons of coal every year due to uncontrolled continuous underground fires. 15 organization will result in a more efficient and competitive sector remains to be seen (to help in its implementation, the Bank is currently assisting the government is setting up a new regulatory framework for petroleum). 3.24 Power. At the most basic levels, the progress made by the power sector since the mid- 1980s is remarkable: efficiency in the construction and operation of power plants has improved dramatically - at least in Bank-borrowing provinces where data are available (para. 3.6); the network has been expanding at breakneck speed for two decades (from 72 GW in 1982 to 260 GW in 1999), and severe shortages have all but been eliminated; the sector has weaned itself from government subsidies, diversified its sources of funding (including increasingly from the private sector), and stayed on a generally sound financial footing throughout the period; and access to electricity by rural families has reached 80%. For illustrative purposes, Table 2 summarizes the dramatic improvements achieved on key technical and financial performance indicators by two Bank-borrowing utilities (in Zhejiang and Shanghai), admittedly among the best-performing in China (details in Annex J). " Table 2. Zhejiang and Shanghai - Key Performance Indicators ZPEC (Zhejiang) SMEC (Shanghai) US/Canada 1987 1999 1987 1999 Average (1999) System load factor (%) 86.5 88.6' 86.7 84.4 Average coal consumption (g/kwh) 410.0 342.0 360.0 33.0c Coal plant availability (%) 84.0a 85.0b Sales per employee (Mwh) 420.0 940.0 540.0 900.0 Self-financing ratio (%) 8.0 -c 31.0 --.-c a. Beilungang; b. Wujing; c. 1995 or 1997 figure 3.25 But a number of serious issues remain to be addressed for the sector to sustain its rapid growth, as highlighted in recent Bank reports and elaborated upon in various parts of this report: gaps in the legal and regularly framework for private participation; suboptimal system planning, which led to a relative neglect of transmission and distribution investments and gas-fired generation, and the unbridled growth of small and inefficient locally-financed power plants; persisting distortions in wholesale and retail tariffs; apparent inefficiencies in local distribution systems; persisting lack of clarity in power assets ownership and insufficient reliability of utilities' financial data; and uneven monitoring and enforcement of environmental regulations. The reforms promoted by the Bank under its recent projects aim at addressing most of these issues. 3.26 Energy Efficiency. The need to pursue energy efficiency in parallel with the development of energy supply has been a cornerstone of China's energy policy since the early 1980s. As a result, China is one of the few countries at an early stage of industrialization in which energy demand has consistently grown less rapidly than GDP (para. 2.1). Improving energy efficiency has also been at the core of the country's environmental protection strategy as a means to abate local and regional air pollution and increases in greenhouse gas emissions. In fact, the country's existing energy conservation system has grown into one of the most extensive in the world. It includes a series of specialized energy conservation units at national, provincial, and county levels, operating under the State Economic and Trade Commission and its provincial and local affiliated commissions. The system, based on industrial enterprise energy input quotas and government funding mechanisms for state-owned enterprises, was quite effective under the old centrally planned economic system. But it has become ill adapted to the increased market orientation of the economy. The recent introduction of new commercially-oriented approaches, 16. Similar data for a larger sample of (primarily non-Bank-borrowing) utilities could not be obtained despite repeated requests to the government. 16 spurred by the Bank's assistance (para. 2.14), is aimed at addressing current constraints to the further deepening of energy efficiency efforts: lack of information on potential energy-saving opportunities; barriers to technology transfer; high transaction costs; limited access to commercial financing; and an obsolete institutional framework. 3.27 Renewable Energy. Despite its small contribution to the country's overall energy supply, renewable energy has traditionally played an important role in isolated rural communities, via the use of small hydropower, biogas, and small wind turbines. The increased use of renewable energy has recently become the focus of more government attention, with its increased emphasis on reducing the country's reliance on coal to reduce global and local air pollution. In particular, it issued in 1995 its New and Renewable Energy Development Program for 1996-2010, which aims at improving the efficiency of renewable energy technologies, lowering production costs, and increasing its contribution to total energy supply via market-based solutions. Recent Bank- supported efforts in wind and solar power (para. 2.14) aim at addressing current major constraints to their large-scale development, including: limited access to capital; lack of legal framework for private involvement; inadequate information on resource and equipment characteristics (wind); and poor quality of products and services (for photovoltaics). Relevance of Bank Assistance 3.28 Any assessment of the relevance of Bank involvement in China's energy sector needs to start with the recognition that in financial terms alone, Bank support has represented but a minute portion of the sector's total investment needs: even in the power sector where the Bank has been most active, total lending between 1984 and 1995 (US$3.4 billion) accounted for a mere 3.4% of sector investments. Under these circumstances, and notwithstanding any actual or potential direct benefits of Bank projects, the relevance of Bank assistance has to be seen primarily in terms of whether it was geared (in terms of targeting, type of instruments, partnerships) to achieve maximum catalytic or demonstration effect and policy impact in areas emphasized by the Bank's corporate, sector, and country assistance strategies. 3.29 The Bank's assistance strategy in the early years and through 1993 was highly relevant to the country's needs and policies during that period, which were to speed up China's reintegration into the global economy (para. 2.7). The Bank took a multi-pronged approach, starting a dialogue on all major subsectors and emphasizing transfer of technology and capacity building in all its initial interventions as a necessary prelude to more radical policy reform. This was fully appropriate considering that in the mid- 1 980s China had just initiated its transition from a centrally planned economy and that its energy sector was still characterized by fundamental structural deficiencies, including obsolete technology, absence of modern financial and managerial systems, and wholly inefficient pricing. The initial focus on the most developed provinces was fully justified as these were the ones with the most severe supply bottlenecks and those in the best position to pilot and demonstrate the benefits of new technologies and approaches. The promotion of model resettlement approaches also became an integral part of the Bank's strategy in the late 1980s and early 1990s, fully consistent with the Bank's evolving guidelines and with the government's increased awareness of, and commitment to, these matters. The Bank's withdrawal from the coal sector after only one project was justified in light of that project's implementation problems and of the coal sector authorities' lack of interest in continued Bank assistance. On the other hand, it appears that the Bank's retrenchment from the oil and gas sector in the late 1980s after a string of largely successful operations was of the Bank's own doing, mostly the result of an overly restrictive interpretation of the revised guidelines for petroleum lending. In retrospect, this was clearly premature as the Bank's absence from the sector for several years prevented it from building on its early success to promote sector reform when the overall policy environment became favorable in the early 1990s - as it was able to do in the 17 power sector. A second area where the Bank's strategy could have been more relevant in these early years is that of power tariff reform, as discussed in Chapter 4. 3.30 In 1993/94, the Bank's strategy rightly shifted to the policy sphere, capitalizing on the government's new willingness to undertake radical sector reform. But in contrast with the earlier period, the Bank focused most of its efforts in one subsector, power. In that subsector, the Bank's strategy was and remains highly relevant, combining the piloting of deep sector restructuring in selected eastern provinces with an increased emphasis on less-developed inland provinces. It was fully consistent with the thrust of the Bank's new policy on electric power issued in 1993 The Bank's more recent emphasis on energy efficiency and renewable energy is also fully consistent with the thrust of the Bank's Sector Strategy Paper on Energy and the Environment ("Fuel for Thought," June 2000). Notwithstanding this positive overall assessment, the strategy could have gained from greater emphasis on three specific issues: power tariff structure; linkages with the Bank's poverty reduction agenda; and private sector development policy. Chapter 4 elaborates on each of these three outstanding issues. 3.31 In hindsight, it appears that the Bank could have been more proactive in attempting to renew a dialogue in the critical coal sector after the government finally raised prices in the mid- 1990s. And in the petroleum sector, the Bank's attempt to address major country-level structural and policy issues in such a huge sector through a single province-based investment operation (Sichuan gas development loan, 1994) was wholly unrealistic, particularly after a hiatus of several years in lending. The magnitude and complexity of policy issues in this subsector and their critical importance for the rest of the economy clearly warranted - and does warrant to this day - a broad and sustained effort at both the central and provincial level similar to the approach taken in the power sector. Given the Bank's poverty agenda and China's rural character, more attention could also have been paid to energy for rural development, including rural energy planning and alternatives to small coal-fired plants like small hydro, biomass, and biogas. The Bank's early groundbreaking work through ESMAP on rural energy in the late 1980s and early 1990s did not translate into lending operations until the Renewable Energy Development project in 1999. 3.32 Finally, the Bank's assistance strategy could have given more emphasis to the promotion of integrated country-level energy planning, a dimension that has been sorely lacking in Chinese economic policy and in which the Bank has gained ample international experience and is in a position to provide valuable objective advice. Admittedly, the Bank's (lukewarm) attempts to engage Chinese authorities on this critical topic have been hampered by two major obstacles: first, the particularly fragmented organization of the Chinese energy sector, with separate and powerful ministries/agencies for coal, power, petroleum, nuclear, and water resources; and second, the continued weight of political factors in most major investment decisions, lately exacerbated by the increased devolution of economic powers to (often-competing) provinces. 4. Key Outstanding Issues Electric Power Tariffs 4.1 The seeds of the current problems in the structure of power tariffs were planted in the mid-1980s when the government sought to alleviate the sector's lack of internal funding by 17. Embodied in "The World Bank's Role in the Electric Power Sector" (1993), subsequently reflected in GP 4.45 (May 1996), most recently converted to OP 4.45 (July 2000). 18 introducing a multi-rate power tariff (the so-called "new plant-new price" policy). It allowed new entrants at the generation level to charge prices based on debt repayment and the power companies to pass on the higher costs of "new" electricity to final consumers through a multi-tier pricing system. The resulting across-the-board tariff increases had the immediate effect to foster new investment (including by the private sector) and to put the sector back on a sound financial footing by ensuring a high level of self-financing for all utilities. For instance, average tariffs in Zhejiang and Shanghai provinces, respectively, increased by 4.8 and 3.9% per year in real terms between 1987 and 1997. Indeed, to this day, most Chinese provincial utilities appear to have retained sound balance sheets. 4.2 But the emphasis on financial costs also had two nefarious effects: first, it introduced fundamental distortions in the economic allocation of resources by privileging the dispatch of older, usually less efficient and more polluting "low (financial) cost" generating plants (with little or no debt service obligations); and second, it fostered the development of an excessively complex array of retail tariffs and local surcharges, with the same category of consumers often being charged widely different prices in various parts of the same province. Although the Bank had recognized the pervasive and long-term negative impact of these distortions as early as 1987 (during the supervision of the Shuikou project), it was slow in elevating the issue at the highest level. It is only on the occasion of the 1994 seminal report on power sector reform (para. 2.13) that they were put squarely at the center of the Bank's policy dialogue with sector authorities. And even since then, progress has been quite uneven: while the most advanced borrowers (such as Shanghai and Zhejiang) have gradually removed the most glaring distortions at both he wholesale and retail levels by introducing uniform tariffs and time-of-day differentials, removing many surcharges and eliminating most cross-subsidies (mostly to agriculture and fertilizer plants), there are indications that problems persist in many other provinces. The most disturbing illustration of current inefficiencies was provided in 1999 as the large Ertan hydroelectric plant was unable to produce much of its (economically much cheaper) energy when the Sichuan power company preferred to dispatch lower-tariff (but economically much more costly) power from older coal-fired plants. In fact, the introduction of an economically efficient two-part (energy and capacity) wholesale tariff and the further simplification of retail prices - in Zhejiang province only - are still an integral part of the policy agenda pursued under the most recent Bank power project (Tongbai pumped storage, 1999). Energy Planning and Fuel Choice 4.3 Persisting distortions in power tariffs are but one factor contributing to an economically suboptimal allocation of resources in the energy sector as a whole. In the power sector, the Bank has required that all of the projects it finances be economically justified based on thorough least- cost economic analyses and has contributed via this requirement to the development of strong local consulting expertise in project optimization methodologies and system planning (para. 3.11). But there is ample evidence that for the most part, these analyses have been carried out after the fact, that is, to justify a project presented to the Bank for funding once the political decision to undertake it (and the choice of fuel whenever applicable) had, for all practical purposes, already been cleared by central authorities. Most provincial utilities (and certainly the ones in less-developed provinces) have yet to mainstream these modem methods in the long-term planning of their overall system, even though such an exercise remains critical given the absence of appropriate market signals - at least for the time being and likely for several years to come. Indeed, the relative neglect of transmission and distribution (until recent years) in the national power network can, in part, be attributed to the insufficient attention paid by both utilities and central power authorities to systematic integrated power system planning. 19 4.4 Even more glaring (and surprising in a formerly centrally planned economy) has been the quasi-absence of comprehensive energy planning either at the regional or national level. While there are no obvious examples of "white elephants," there is a sense that opportunities have been missed for lack of a broader energy sector perspective and coherent strategic thinking, that is, in the development of an interconnected national electricity grid; the use of natural gas in electric power generation, industry, and households; the potential for interregional gas trade and import of LNG; municipal gas distribution; and the location of more thermal power plants near coal mines. The case of Sichuan province is particularly illustrative: in a province endowed with ample resources of hydropower and natural gas, a sizeable local market, and the potential to export energy to other provinces on a large scale, there is no record that integrated analyses have ever been carried out systematically - or for that matter been promoted by the Bank. Instead, power load dispatch remains suboptimal (para. 4.2) and important investment decisions are made ad hoc and on the project level (for example, the just-initiated and privately sponsored Sichuan-Hubei gas pipeline cum power plant venture). 4.5 The Bank's short involvement with the Three Gorges Project on the Yangtze River further illustrates weaknesses in energy planning - and the limits of the Bank's clout when China's high politics interfere. After 30 years of inconclusive studies on the largest multipurpose hydro project in the world, the government was keen for one of world-class quality on which to ground a decision and a call for international funding. The Canadian International Development Agency agreed to finance that study and the Bank to supervise it. It was carried out in 1986-88 as a model application of Bank policies and project evaluation techniques. The study singled out as best and feasible a scheme in which power generation and flood control would account for 96% of the project benefits and navigation improvements for the remaining 4%. Based on its findings, the Bank declared variants increasing slightly the latter but raising the number of resettlees to more than 700,000 as economically suboptimal and likely to violate its policies." However, the government decided to go ahead with an alternative involving the resettlement of 1.3 million people. This scheme is now under construction without any multilateral development bank assistance. It faces rapidly escalating costs and problems notably in the governance and execution of resettlement." Bank's Role in Private Power Development 4.6 Some critics (including several of the private investors active in China) have depicted the Bank's involvement in China's power sector as detrimental to the development of private participation on two grounds: first, the Bank's advice would have been, explicitly or implicitly, too supportive of an excessively rigid and restrictive government policy vis-A-vis foreign power investors; and second, Bank lending for power projects would have effectively crowded out private investment. However, an objective look at the facts reveals that the Bank's policy advice since 1994 has been generally supportive of private investment in (i) emphasizing the need for a more transparent legal and regulatory framework; (ii) assisting the government develop a draft BOT law; (iii) trying to promote the use of modem accounting and auditing standards; (iv) promoting the unbundling of generation assets and their eventual private ownership; and (v) helping pioneer the set up of a competitive wholesale market for electricity. Also, the Bank's recent detailed study of the status of private investment in China's power sectofo and the related 18. Three Gorges Water Control Project-Feasibility Report, Vol.1, Appendix A, CIPM-Yangtze Joint Venture sponsored by the Canadian International Development Agency, August 1988. 19. The Government commented that "the resettlement has been proceeding in compliance with the resettlement plan and relevant laws". (see Annex L) 20. "The Private Sector and Power Generation in China" (Working Paper), The World Bank, 2000 20 Bank-sponsored June 1999 conference on the subject have been unanimously praised by private sector representatives as ground-breaking and a unique and long-overdue opportunity to discuss controversial issues in an open forum. 4.7 On the other hand, it is also true that the Bank never went as far as formally conditioning its assistance (for example, via effectiveness conditions or policy covenants) to actual progress in any of these fronts and that it could have been more forceful in pursuing (i) and (iii). And the Bank could have given more emphasis, in its advice on the setting up of competitive wholesale markets, to the need for the government to ensure clear and transparent transition arrangements to deal with existing long-term power purchase contracts with private power producers, a matter of obvious importance to them. But some investors' complaints that the Bank was not forceful enough in objecting to alleged government strong-arming of foreign companies (for example, on annual tariff negotiations) in cases where the Bank was not directly involved, reflect a clear misunderstanding of the Bank's role. Some foreign sponsors of small local power projects (50 MW or less) have also been unhappy with the Bank's (fully appropriate) support of the government's renewed resolve to force the shutting down of small inefficient power plants for environmental reasons. 4.8 Given the marginal nature of Bank lending in terms of the sector's overall funding needs (para. 3.27), there is prima facie little evidence that it may have crowded out potential private investors. But in this matter, perceptions are at least as important as reality. The fact is that by continuing to lend for large-scale public generation projects through the mid- and late 1990s and at the same time not directly supporting (for example, via Bank guarantees and/or International Finance Corporation involvement) any private-sponsored project," the Bank was projecting an ambivalent posture vis-A-vis the need for China to resort to private investment. This in turn could be perceived by some as an encouragement to the government to take an unrealistically restrictive attitude. These perceptions were clearly exacerbated with the Bank's agreement in 1997 to fund the large Waigaoqao thermal plant in one of China's most developed provinces, following the Shanghai government 's unsuccessful attempts at attracting private investment on acceptable terms. But if this alleged lack of interest had been demonstrated through a more formal and open "testing of the market" by Chinese authorities, this would have avoided later criticisms by some potential private investors and strengthened the Bank's argument that Bank funding was justified in light of the cutting-edge nature of the project (in terms of its technology and of the innovative environmental arrangements involved)?2 23 Environmental Policy Linkages 4.9 The linkages between national environmental policy and Bank energy operations have been weak. While Bank-financed power plants have incorporated high environmental standards and levels of technical performance, the Bank has had little influence on broad environmental policy reforms and stronger enforcement of existing regulations - which could set the stage for improved environmental performance in the power sector as a whole. In particular, the Bank has 21. With the possible exception of the 1997 Tokuetuo thermal project, where Bank funding was explicitly linked to the partial privatization of the borrowing utility (through its eventual takeover by the partially private Beijing Datang Power Generating Company). 22. The region commented that the Shanghai Government tested the market for potential investors for three or four years before approaching the Bank in 1996, without any solid proposals resulting from these efforts. 23. Following recent press reports about a Government probe of corruption in the power sector, the Chinese Government subsequently informed Bank management that their investigation was centered on SPC and did not involve Bank-financed projects, including Waigaoqao, which is being implemented by SMEC, not SPC (the Waigaoqao project was rated by QAG as satisfactory for quality at entry and highly satisfactory for supervision). 21 not provided SEPA (China's National Environmental Protection Agency) with sufficient technical assistance and training to enhance its capabilities to develop and enforce national environmental regulations. Market instruments, like emissions trading and pollution levies, could be encouraged at the national level (limited emissions trading schemes have already been piloted in some provinces). Better enforcement and monitoring capabilities for existing laws would also help - for example, by ensuring and monitoring that installed flue-gas desulfurization units are actually operating. 4.10 In general, SEPA has not been not well informed about Bank operations and has not been able to learn from them - in terms of technologies, specifications, performance, and emissions. Apparently, local EPA officials do not routinely furnish such information to national officials'4 Admittedly, the Bank has made a positive contribution to environmental policy research, notably with the Chinese Research Academy of Environmental Sciences on industrial pollution control policies. Poverty Impact of the Bank's Assistance 4.11 In energy, as in other infrastructure sectors, a major part of the Bank's impact on poverty is indirect, having to do with how the development of these sectors contributes to general economic growth. The review found that little analytical work had been carried out within the Bank to ascertain whether the patterns of growth favored by China's energy policy (and most particularly the past emphasis on thermal-based power generation in coastal provinces) were ultimately beneficial to China's poor (both urban and rural). This is a complex topic (which is clearly beyond the scope of this review) but there is no doubt that any future Bank assistance strategy for the energy sector will have to better articulate these linkages, in the context of Poverty Reduction Strategy Paper-type approaches. 4.12 Bank energy assistance can also have a direct impact on poverty when it is directly targeted to benefit poor people, as in rural electrification programs and household energy projects. In China, poverty-targeted lending interventions have been conspicuous by their quasi- absence in the Bank's assistance strategy, until the very recent rural energy (photovoltaic) component of the Renewable Energy project (1999) and the Zhejiang distribution restructuring assistance included in the Tongbai project (2000). Prior to these, the Bank's main efforts in this area had been in the form of limited sector work and ESMAP-funded studies on rural energy (para. 2.14). Two factors seem to explain this apparent neglect. First, China's poor have had access to modern fuels, particularly coal and electricity, at subsidized prices. The high electricity coverage, the result of decades of state-sponsored rural electrification programs, led the government to give lower priority to rural energy issues on its sector reform agenda. Second, the central power authorities had until recently insisted on limiting the use of Bank funds to investments with very high foreign content (in sharp contrast with the policy in effect in other infrastructure sectors, such as transport). This limitation essentially precluded the Bank from financially supporting any sizeable urban distribution and/or rural electrification projects/components, irrespective of their potential institutional development or poverty- reduction impact. 24. "We should get more information on the experience gained [from Bank projects] that can be used in national policy-making," one SEPA official said to the OED mission. 22 Petroleum (Oil and Gas) and Coal - The Unfinished Agenda 4.13 In contrast with the situation in most other developing countries, in China reform of the petroleum sector has lagged behind that of the power sector. Both the level and structure of domestic oil and gas prices are out of line with economic costs. The sector remains by and large organized according to an outdated vertically integrated and monopolistic model, with private involvement largely consigned to peripheral activities (such as offshore exploration and development). And the potential role of gas in the country's development remains under-analyzed and misunderstood. Yet the Bank has largely kept itself out of the sector since the late 1980s (with the exception of 1994 Sichuan gas project), precluding any substantial contribution to helping the government resolve the major policy issues it is facing. While the very recent trust- funded studies of LNG demand and petroleum sector regulation provide useful entry points for a renewed policy dialogue, the experience in other countries and in China suggests that only a multi-pronged approach combining the whole range of Bank/IFC financial and non-financial instruments (and privileging partnerships with the private sector) is most likely to bring about sustained institutional impact in a sector as complex and sensitive as this one. 4.14 A similarly unfinished reform agenda prevails in the coal sector. Clearly the history of Bank involvement in this sector is less propitious and the social implications of reform are formidable. Yet the potential useful role the Bank could play in mitigating the latter (as it is doing in Russia's coal sector), and the sector's obvious relevance to the Bank's global environmental agenda, is precisely why the Bank cannot afford to continue limiting its dialogue to low-impact sector work. 5. Conclusions, Lessons Learned, and Recommendations Main Findings and Overall Ratings 5.1 With none of 20 completed projects rated unsatisfactory and only one of the 19 ongoing projects rated a problem project, the performance of the China energy portfolio is without equal. But an assessment of the Bank's impact in a country like China needs to go beyond the immediate achievements of Bank projects, which ultimately account for but a minute portion of overall sector investments - despite the sizeable absolute amounts involved. In this respect, the Bank's strategy in the earlier part of its involvement in the sector, from 1985 to 1993, was highly relevant to the sector's needs and fully consistent with the Bank's support of China's gradualist approach to economic reform. Most projects were of the "bread-and-butter" type with minimal policy content, but they all shared a strong emphasis on technology transfer and capacity building. Projects were targeted to a few selected sector institutions and geared to maximize their demonstration effect to the rest of the sector (particularly in terms of the benefits to be derived from modern technology and management methods, international procurement, and resettlement approaches). 5.2 This approach had extremely successful outcomes, as shown by the remarkable progress made in the sector during those years in terms of assimilation of new technologies and technical skills, and efficiency of project management and operation. The latter was critical to China's ability to rapidly expand energy supply in order to sustain a booming economy. Despite its limited policy content, the institutional development impact of the Bank's program for this initial period is thus rated as substantial. These early physical and institutional achievements were fully sustainable and indeed paved the way for the more ambitious policy reforms of the mid- and late 1990s. The performance of the Bank is rated fully satisfactory, particularly for the solid technical 23 advice and support it provided in the context of project preparation and implementation. Borrower performance is rated as highly satisfactory because of the remarkable degree of commitment and ownership shown by central as well as provincial authorities throughout the initial period (para. 3.15). 5.3 Since 1994, the Bank has pursued a more ambitious strategy, emphasizing policy reform in the power sector and more recently diversifying its lending to areas (energy efficiency and renewables) where it has had a mixed record in other countries. The strong emphasis on power sector reform was, and continues to be, highly relevant in light of the sector's importance and of the government's stated commitment to reform. However, while the overall goal was highly relevant, actual strategy implementation could have been strengthened by a more proactive, and earlier, stance on tariff structure distortions, accounting and auditing issues and a better articulation of its position on private sector development (in retrospect, and notwithstanding the project-level merits of Bank involvement, the Bank's decision to finance Waigaoqao proved counterproductive given the negative reactions it elicited from a number of foreign investors). More important, the concentration of efforts on the power sector (in terms of lending, staff resources, and management attention) may have distracted the Bank from making serious attempts at renewing a dialogue on the critical coal and petroleum sectors, where reform has been lagging, and at promoting an integrated approach to energy planning. The generally successful outcomes to date of the Bank's ambitious agenda in the power sector (including in terms of policy changes) are mitigated by the Bank's minimal impact in these two other sectors. 5.4 As a whole, the outcome of the Bank's energy assistance program since 1994 is rated satisfactory, its institutional development impact substantial (albeit uneven across subsectors), and its achievements sustainable, considering the government's continued commitment. Bank performance during that period is rated highly satisfactory in terms of workmanship and efficiency (para. 3.17), whereas borrower performance is rated merely satisfactory, with excellence in some aspects (for example, resettlement, sustained commitment to energy efficiency, and renewed promotion of renewables) offset by weaknesses in others (lack of effective sectoral coordination at the central level, slow pace of power tariff reform, insufficient enforcement of environmental regulations, and lack of progress in reforming the coal sector). Key Lessons Learned 5.5 A number of important lessons emerge from the Bank's experience in assisting China's energy sector, some generic and some specific to China: * An incremental approach to institutional development, initially emphasizing technology transfer and capacity-building can be extremely effective. However, it requires the Bank and the borrower to see it from the outset as a prelude to a second phase of policy reform; a minimum level of absorptive capacity in the country (particularly in terms of basic technical skills); high borrower ownership (demonstrated, among other things, by a willingness to assign staff and management resources to Bank-funded programs); and Bank assistance designed with a specific demonstration effect in mind. * Internal Bank factors are critical to building up and sustaining an effective long-term sector dialogue. The Bank's successes in power, energy efficiency, and renewables in China have much to do with staff continuity, the high caliber of individual task managers, the existence of a dedicated pool of expertise on specialized aspects (the Bank's Asia Alternative Energy Program unit, ASTAE), and management's willingness to invest resources in quality, highly participatory sector work. 24 * In focusing on the ultimate introduction of market forces in the energy sector as part of its policy dialogue, consistent with the Bank's energy sector strategy, Bank staff should not lose sight of the importance offundamentals. Good financial reporting, use of economic criteria in investment decisions and tariff setting, and integrated approach to energy planning are all fully pertinent during a prolonged period of transition to market. * A two-pronged approach that combines high-levelpolicy dialogue with central authorities and a direct operational involvement with a representative set ofprovincial utilities is essential to success. The second level of involvement was critical in a country like China where issues and constraints vary significantly from one province to the next and where the level of detailed information available at the central level is increasingly scarce. * The Bank should be particularly sensitive to possible misinterpretation by outsiders of its stance on private sector development issues. This requires a determined and coordinated effort on the part of Bank, IFC, and MIGA staff to clearly articulate and explain the Bank Group's strategy to all relevant stakeholders, and especially to potential foreign investors. * The Bank's emphasis on ensuring compliance with environmental guidelines in the design of the projects it finances and on the design and enactment of appropriate environmental regulations at the national level, needs to be complemented by similar efforts at the monitoring and enforcement levels. In China's power sector, the financing of monitoring equipment under Bank loans has proved an effective way to achieve this. Recommendations 5.6 The Bank is at a crossroads in its energy sector dialogue with China. After the major policy breakthroughs of the mid-1990s in the power sector, progress on sector reform has slowed and major policy issues in such critical subsectors as coal, oil and gas have largely gone unattended. Since it is hard to imagine a return to the "early years" of the China program where projects were justified mainly on the basis of their contribution to economic growth and narrow capacity-building objectives, the Bank's future energy assistance strategy could follow two very different paths. A first path would be for the Bank to focus increasingly on "peripheral" subsectors where policy issues are less sensitive and government buy-in - not to mention NGO support - more likely, that is, renewables and energy efficiency. While easier, this approach would likely lead to a marginalization of the Bank's role in a sector of central importance to the country's future development, and at a time when IFC is hardly positioned to expand its (so far negligible) involvement - precisely because major institutional and policy issues remain to be addressed. The other, and more difficult, path would be for the Bank to continue its sizeable financial support to the energy sector but frame it in the context of a truly comprehensive dialogue on national energy policy issues. This evaluation clearly suggests that this is where the Bank's comparative advantage lies. In particular: * Help promote comprehensive energy planning in China. The Bank should offer to help at two levels: regionally, preferably in Sichuan province, which has a varied resource endowment and where the Bank has ongoing operations with the Ertan hydroelectric company, the Sichuan power company, and the Sichuan petroleum administration; and nationally, possibly building on the working dialogue recently initiated with the State Council, the just-completed PHRD-financed study of LNG demand, and the (older) major study of China's coal and electricity delivery services. 25 * Continue to balance assistance in terms of subsectoral priorities, mix of instruments, and central versus local dialogue. An appropriate mix of lending and non-lending instruments will continue to be needed for maximum impact (it was made amply clear to OED staff by all Chinese officials they met that the weight of its policy advice in the sector has been inextricably linked to its sizeable financial support). And sector interventions will need to continue following a parallel track, at both the central and provincial levels. 5.7 While future energy policy dialogue will need to be comprehensive, calling for broad- ranging economic and sector work, the scope of individual project interventions need not be. Instead, they may be geared to areas neglected in past Bank lending, and where potential IFC involvement is less likely, at least initially. Specifically: * In the power sector, the Bank should increase its attention to inefficiencies at the distribution level and broaden the efforts initiated in Zhejiang province under the recently approved Tongbai project. This increased emphasis on local issues, together with the photovoltaic pilot financed by the Bank under the recent Renewable Energy project could pave the way for a more proactive, and better-integrated, Bank strategy on rural energy. * Direct assistance toward municipal-level natural gas distribution and demand - for example, by replacing coal-fired furnaces with gas-fired furnaces, co-generation, and district heating. Loans to municipalities could help expand municipal gas-distribution infrastructure and utilization of natural gas in urban district heating systems. Now that the Chinese government has recognized gas as an alternative to coal and initiated policies favorable toward gas, the Bank has an opportunity to reduce urban air pollution through natural gas utilization. * Make a renewed and determined attempt to engage Chinese authorities in a full-fledged dialogue on the coal sector that goes beyond the low-level dialogue pursued so far under the Clean Coal Initiative. The coal sector is too important to China's future social, environmental, and economic development, and the issues the sector are facing too daunting, for the Bank to continue ignoring it in its assistance strategy. * In its future lending to the power sector - and possibly the petroleum sector - the Bank should give a higher priority to the early resolution ofpending asset ownership issues, which continue to cloud the reliability of many sector agencies' financial statements. In this context, the Bank should consider revisiting its current auditing requirements (which only provide for certification by government audit bureaus) and at a minimum ask to be provided with audit reports from international auditors whenever these have been prepared (e.g. for those power companies which have obtained, or are seeking, partial listing on foreign stock exchanges). 2 25. The region commented that (i) based on an agreement between the Bank and China, the National Audit Office (NAO) has been the only organization responsible for audits of Bank-financed projects; (ii) audit standards promulgated by NAO are fairly close to the international ones and the gap has been narrowing; and (iii) the hiring of international auditors is not the solution to financial issues encountered in any projects. 27 Annex A China Energy Projects Power Projects Loan Year Project Name Borrower Amount (US$ million) 2000 Tongbai Pumped Storage Zhejiang Provincial Electric Power Co 320 1998 Hunan Power Development Hunan Electric Power Co. 300 4303 1998 Power Transmission. East China Electric Power Group Co. 250 4197 1997 Waigaoqiao Thermal Shanghai Municipal Power Bureau 400 4172 1997 Tuoketuo Power Tuoketuo Electric Power Generation Co 330 and North China Power Group 70 3980 1996 Henan (Qinbei) Power Electric Power of Henan 440 3933 1995 Ertan II Hydro Ertan Hydroelectric Development Co. 400 3848 1995 Sichuan Power Transmission Sichuan Electric Power Co 270 3846 1995 Zhejian Power Development Zhejiang Provincial Electric Power Co. 400 3718 1994 Yangzhou Thermal Power Jiangsu Provincial Electric Power Co 350 3606 1993 Tianhuangping Hydro E. China Electric Power Group Co. 300 3515 1992 Shuikou II Hydro Fujian Electric Power Bureau 100 3462 1992 Zouxian Thermal Shandong Provincial Electric Power Bureau 310 3433 1991 Yanshi Thermal Henan Provincial Electric Power Bureau 180 3412 1991 Daguangba Multipurpose Hainan Provincial Electric Power Co 65 3387 1991 Ertan I Hydro Ertan Hydroelectric Development Corp. 380 2955 1988 Beilungang II Zhejiang Electric Power Bureau 165 2852 1987 Wujing Thermal Shanghai Municipal Power Bureau 190 2775 1986 Shuikou I Hydro Fujian Electric Power Bureau 140 2707 1986 Yantan Hydro Guangxi Electric Power Bureau 52 2706 1986 Beilungang I Zhejiang Electric Power Bureau 225 2493 1985 Power II Jiangsu Provincial Electric Power Bureau 117 2382 1984 Lubuge Hydro Yunan Provincial Electric Power Bureau 145 Total number of loans: 23 Total amount of loans: US$5,899 million 28 Annex A Petroleum Projects Loan Year Project Name Borrower Amount (US$ million) 1995 Sichuan Gas Dev. & Conserv. Sichuan Petrol. Authority 255 2708 1986 Liadong Bay Petroleum 30 2580 1985 Weiyuan Gasfield TA 25 2426 1984 Karamay Petroleum 100 2252 1983 Zhonggyuan Wenlia Petrol. 101 2231 1983 Daqing Oilfield-Gaotazi Reservoir 162 Total number of loans: 6 Total amount of loans: US$673 million Coal Project Loan Year Project Name Borrower Amount (US$ million) 2501 1985 Changcun Coal Mining 126 Total number of loans: 1 Total amount of loans: US$126 million Other Energy Related Projects Loan Year Project Name Borrower Amount (US$ million) 1999 Renewable energy Development 100 1998 Energy Conservation 63 1998 Shandong Environment 95 1997 Xiaolangi Multipurpose 430 1997 Efficient Industrial Boilers (GEF) n.a. 1995 Liaoning Environment 110 1992 Beijing Environment n.a. 1987 Fertilizer Rationalization n.a. Total number of loans: 8 29 Annex B Major Institutional Development Components of Bank-Financed Power Projects Loan Project Name Borrower Components US$ m.(%)' Outcome 4303 East China E. China Electric - Power Exchange Policies, Transmission 9.0 (4%) Project currently under Transmission Power Group Corp. Planning, engineering & construction implementation 4197 Waigaoqiao Shanghai Municipal - Large power plant construction, advanced 7.6 (2%) Project currently under Thermal Power Bureau operation, and preventive maintenance implementation - on-job training engineering and construction management under consultants - engineering under contract for equipment - operation and maintenance of power plants 4172 Tuoketuo Power Tuoketuo Electric Power - Simulator and computer systems for plant 9.5 (2%) Project currently under Gneration Company and operation implementation N. China Power Group - Engineering & construction 3980 Henan Thermal Electric Power of Henan - Electricity conservation 17.4 (4%) Project currently under Power - System operation and management implementation - Engineering & construction 3933 Ertan II Hydro Ertan Hydroelectric - Studies on: (i) reservoir operations; 37.2 (9%) Project currently under Development Corp. and (ii) preparation of future power projects implementation - Investigations/tests on: (i) safety of structures; (ii) monitoring of energy dissipation facilities; and (iii) powerhouse ventilation - Training in planning, feasibility studies, design, hydrology, monitoring - Engineering & construction 30 Annex B Loan Project Name Borrower Components US$ m.(%)' Outcome 3848 Sichuan Sichuan Electric - Technical training 6.8 (3%) Project currently under Transmission Power Company - On-job training, engineering and construction implementation management under consultants - Engineering under contract for major plant equipment - Training in operation & maintenance 3846 Zhejian Power Zhejiang Provincial - Improvement of T&D planning 12.5 (3%) Project currently under Development Electric Power Co. - Training implementation - T.A. for cogeneration plant 3718 Yangzhou Thermal Jiangsu Provincial Electric - Training: (a) utility management; (b) project 11.1(3%) Project currently under Power Power Co related (consultants, contractors, suppliers); and implementation (c) training facilities 3606 Tianhuangping E. China Electric Power - Optimization of Operations Study 11.3 (4%) Project currently under Hydro United Co - Training: (a) utility management; (b) project implementation related (consultants, contractors, suppliers); and (c) training facilities 3515 Shuikou II Hydro Fujian Electric - SCADA system for new load dispatch center 5.9 (6%) Project completed. Studies and Power Bureau - Studies on: (a) system planning and operation; training completed. and (b) hydro inventory - Training: Planning and project related technology and management Engineering & construction 3462 Zouxian Thermal Shandong Provincial - Large power plants, HV transmission, grid 5.7 (2%) Project completed. Training Electric Power Bureau management w/ SCADA and studies completed. - On-job training engineering and construction management under consultants - engineering under contract for major plant equipment. Air pollution study - operation and maintenance of power plants in China and abroad 31 Annex B Loan Project Name Borrower Components US$ m.(%)' Outcome 3433 Yanshi Thermal Henan Provincial - Training on: (a) large power plants and automated 2.0 (1%) Training components Electric Power Bureau networks;(b) HV transmission; (c) project related successfully (consultants, construction, suppliers, O&M) completcd. 3412 Daguangba Hainan Govt. and - Studies for: (a) network telecontrol; and (b) power 2.6 (9%) Project currently under Multipurpose Hainan Provincial dispatch system implementation. Electric Power Co - Training on project construction management 3387 Ertan I Hydro Ertan Hydroelectric - Studies on: (i) reservoir operations; and 13.0 (3%) - Studies successfully Development Corp (ii) preparation of future power projects completed. - Investigations/tests on: (i) safety of structures; - Technology for dam/plant (ii) monitoring of energy dissipation facilities; construction and operation and (iii) powerhouse ventilation successfully introduced. - Training in planning, feasibility studies, design, - Transfer of know-how and hydrology, monitoring technology well achieved. 2955 Beilungang II Zhejiang Electric - Study for enhancement of distribution grids 2.7 (2%) - Completed. Improved operation Power Bureau and tech. assist. on: (a) procurement; and (b) planning - Enhanced procurement and - Training for O&M of power plants planning procedures - Successfully completed 2852 Wujing Thermal Shanghai Municipal - SCADA system for new load dispatch center 4.4 (2%) - System is operational: increase Power Bureau - Master Plan for Shanghai's distribution system load regulation & economic - Staff Training for design, construction, operation dispatch capabilities and maintenance - Improvement in system plannin; & reliability. Standard system voltages - Transfer of technology & practii for large power plants and distribution 2775 Shuikou I Hydro Fujian Electric - Studies for: (a) operation of hydro plants; 9.1 (7%) - Enable to increased use of hydrt Power Bureau and (b) power system control and load dispatch generation. Dispatch center - Training on utility management software allows annual planning 32 Annex B Loan Project Name Borrower Components US$ m.(%), Outcome 2707 Yantan Hydro Guangxi Electric - Training: (a) on-job training, engineering and 0.6 (1%) - High contribution on dam safety Power Bureau construction management under consultants; computerized scheduling, (b) planning; and (c) purchase of equipment quality control 2706 Beilungang I Zhejiang Electric - Training: (a) on-job training, engineering and 6.1 (3%) - Successfully introduced know-I Power Bureau construction management under consultants; and technology of large coal-fire (b) supplies; (c) O& M of power plants; and power plants and enhanced 0 & (d) utility management practices 2493 II Power Project Jiangsu Provincial - Training: (a) new center; (b) transmission 0.4 (0.3%) - The impact of the T.A. compont Electric Power Bureau system studies and design;; and (c) O&M in appear to be very limited , excer transmission and substations for transfer of know-how on EHV lines 2382 Lubuge Hydro Yunan Provincial - Training: (a) on-job training, engineering and 11.5 (8%) - The training program provided Electric Power Bureau construction management under consultants; enhanced design, construction, (b) supplies; (c) O& M of power plants; and and 0 & M practices . A t ee na et 1. Amount includes all the T.A. components financed by the Bank loan. % relates to the total amount of the loan. 33 Annex C China Energy Projects - Completion Ratings Loan Year Project Name Outcome Sustainability ID Impact Bank Borrower Performance Performance Power Projects 3980 1996 Henan (Qinbei) Thermal Power NR' NR' NR1 S U 3515 1992 Shuikou 11 Hydro HS L S HS HS 3433 1991 Yanshi Thermal S L S S D 3412 1991 Daguangba Multipurpose MS U M S U 3387 1991 Ertan I Hydro HS L S S HS 2955 1988 Beilungang II S L S HS HS 2852 1987 Wujing Thermal S L S S S 2775 1986 Shuikou I Hydro HS L S HS HS 2707 1986 Yantan Hydro S L S S S 2706 1986 Beilungang I S L S S S 2493 1985 Powerll S L S S S 2382 1984 LubugeHydro S L S S S Petroleum Projects 2708 1986 Liadong Bay Petroleum MS L S U S 2580 1985 Weiyuan Gasfield TA HS L S S S 2426 1984 Karamay Petroleum HS L S S S 2252 1983 Zhonggyuan Wenlia Petrol. HS L S S S 2231 1983 Daqing Oilfield-Gaotazi Reservoir HS L S S S Other Energy related Projects 1992 Beijing Environment 1987 Fertilizer Rationalization MS L M S S 2501 1985 Changcun Coal Mining MS L M S U 1. Not Rated: loan was fully cancelled before being declared effective. Ratings: Outcome/Bank & Borrower Performance: HS=Highly Satisfactory; S=Satisfactory; U=Unsatisfactory Sustainability: L=Likely; U=Uncertain ID Impact: S=Substantial; M=Modest 35 Annex D China Energy Projects - Latest Supervision Ratings (as of June 2000) Loan Year Project Name IP DO At Risk Power Projects 2000 Tongbai Pumped Storage S S No 1998 Hunan Power Development S S No 4303 1998 Power Transmission. S S No 4197 1997 Waigaoqiao Thermal S S No 4172 1997 Tuoketuo Power S S No 3980 1996 Henan Thermal Power S S No 3933 1995 Ertan II Hydro HS S No 3848 1995 Sichuan Power Transmission S S No 3846 1995 Zhejian Power Development HS S No 3718 1994 Yangzhou Thermal Power S S No 3606 1993 Tianhuangping Hydro HS S No 3462 1992 Zouxian Thermal S No Petroleum Project 1995 Sichuan Gas Dev. & Conserv. S S No Energy Related Projects 1999 Renewable energy Development S S No 1998 Energy Conservation S S No 1998 Shandong Environment U S Yes 1997 Xiaolangi Multipurpose S HS No 1997 Efficient Industrial Boilers (GEF) 1995 Liaoning Environment Ratings: IP/DO: HS=Highly Satisfactory; S=Satisfactory; U=Unsatisfactory 37 Annex E Power Generation Projects Financed by World Bank loans (1984-1998) Thermal Hydro Total Number of loans 11 9 20 Number of projects 10 7 17 Power plant capacity added (MW) 11,600 9,490 19,290 World Bank loan amounts (US$ million) 3,360 1,902 5262 % of total World Bank loan allocations 57 32 89 Transmission Lines and Substations Transmission Lines and Substations financed Grand Financed by World Bank loans (1984-1998) Under World Bank Power Generation Loans Total Number of loans 3 Number of loans 15 18 Number of projects 3 Number of projects 14 17 Lines Length added (km) 3,870 Lines Length added (km) 3649 7519 Substations (MVA) 13,250 Substations (MVA) 11,920 25,170 WB loan amounts (US$ million) 637 Amount (US$ million) N.A. N.A. % of total WB loan allocations 11 39 Annex F Unit Costs of Power Facilities Installed under World Bank Financing Loan Project Name Borrower Type Capacity/Length Unit Cost US$KW or AVA US$Ikm 4303 Power Transmission E. China Electric Tr. Lines 500kV/993 km 405,000 a! Power Group Co. Substations 5,500 MVA 82,100 a/ 4197 Waigaoqiao Thermal Shanghai Municipal Thermal 2x1,000 MW 830 a! Power Bureau Tr. Lines 500 kV/50 km c/ Substations 2,750 MVA c/ 4172 Tuoketuo Power Tuoketuo Electric Power Thermal 2x600 MW 923 a/ Generation Company and Substations 1,150 MVA 78,200 a/ N. China Power Group 3980 Henan Thermal Power Electric Power Thermal 2x600 MW 760 a! of Henan Tr. Lines 500 kV/330 km c/ 3933 Ertan II Hydro Ertan Hydroelectric Hydro 6x550 MW see Ln. 3387 Development Corp. 3848 Sichuan Power Sichuan Electric Tr. Lines 500 kV/2,260 km 220,000 Transmission Power Co Substations 5250 MVA 46,000 3846 Zhejian Power Zhejiang Provincial Thermal 3x600 MW 750 a/ c/ Development Electric Power Co. Tr. Lines 500 kV/400 km Substations 2,250 MVA C/ 3718 Yangzhou Thermal Jiangsu Provincial Thermal 2x600 MW 810 a/ Power Electric Power Co Tr. Lines 500 kV/30 km 360,000 3606 Tianhuangping E. China Electric Hydro 6x300 MW 380 a/ Hydro Power Group Co. Tr. Lines 500 kV/250 km c/ 40 Annex F Loan Project Name Borrower Type Capacity/Length Unit Cost US$KW or MVA US$/km 3515 Shuikou II Hydro Fujian Electric Hydro 7x200 MW see Ln. 2775 Power Bureau 3462 Zouxian Thermal Shandong Provincial Thermal 2x600 MW 700 a/ Electric Power Bureau Tr. Lines 500 kV/258 km C/ Substations 1,250 MVA C/ 3433 Yanshi Thermal Henan Provincial Thermal 2x300 MW 690 b/ Electric Power Bureau Tr. Lines 220 kV/350 km C/ Substations 600 MVA c/ 3412 Daguangba Hainan Govt. and Hydro 4x60 MW 835 a/ Multipurpose Hainan Provincial Tr. Lines 220 kV/36 km c/ Electric Power Co 3387 Ertan I Hydro Ertan Hydroelectric Hydro 6x550 MW 930 b/ Development Corp. 2955 Beilungang II Zhejiang Electric Thermal 1x600 MW 390 b/ Power Bureau Tr. Lines 500 kV/245 km 179,000 2852 Wujing Thermal Shanghai Municipal Thermal 2x300 MW 445 b/ Power Bureau Tr. Lines 220 kV/54 km N/A b/ 2775 Shuikou I Hydro Fujian Electric Hydro 7x200 MW 880 b/ Power Bureau 2707 Yantan Hydro Guangxi Electric Hydro 4x275 MW 490 b/ Power Bureau 41 Annex F Loan Project Name Borrower Type Capacity/Length Unit Cost US$KW or MVA US$Ikm 2706 Beilungang I Zhejiang Electric Thermal 1x600 MW 500 b/ Power Bureau Tr. Lines 500 kV/245 km C/ 2493 Power II Jiangsu Provincial Tr. Lines 500 kV/617 km 145,000 b/ Electric Power Bureau Substations 2500 MVA 59,800 b/ 2382 Lubuge Hydro Yunan Provincial Hydro 3x150 MW 1,250 b/ Electric Power Bureau Tr. Lines 220 kV/497 km c/ a. Cost estimate based on SAR. b. Actual cost based on ICR. c. The SAR or ICR provide only aggregated costs of transmission and substations. 43 Annex G Summary of Procurement Arrangements under World Bank Loans to the Power Sector Category ICB LCB Other Grand Total Percentages Total Cost Bank Loans Works 1,687.3 4,054.6 189.5 5,931.4 36.8 % (840.6) (18.4) (859.0) (16.3 %) Goods 5,486.8 2,945.0 1,142.6 9,574.4 59.4 % (4,146.9) (7.5) (85.7) (4,240.1) (80.3 %) Services 610.9 610.9 3.8 % (180.3) (180.3) (3.4%) Grand Total 7,174.1 6,999.6 1,943.0 16,116.7 100% (4,987.5) (25.9) (266.0) (5,279.4) (100 %) Percentages Total Cost 44.5 % 43.4 % 12.1 % 100 % Bank Loans (94.5 %) (0.5 %) (5.0 %) (100 %) 45 Annex H Unit Cost of New Coal-Fired Power Plants in China (300 - 600 MW) (Not financed under World Bank loans) Capcity Construction Unit Cost Name of Plant MW Period US$IKW Sanke 2x350 1996-1999 778 Dangdong 2x350 1997-1999 854 Hegang 2x300 1992-1999 720 Yimin 2x500 1992-1998 926 Laicheng 2x300 1998-2000 615 Erzhou 2x300 1992-1998 913 Xiangtan 2x300 1996-1998 689 Xiangfan 4x300 1997-1999 668 Fengchang 4x300 1994-1999 539 Guangang 2x300 1997-1999 675 Sushan 2x300 1995-1999 632 Qujing 2x300 1995-1999 668 Average Unit Cost 723 Unit Cost of New Coal-Fired Power Plants in China (300 - 600 MW) (financed with World Bank loans) Capcity Construction Unit Cost Name of Plant MW Period US$IKW BeilungangI 1x600 1987-1992 630 Wujing 2x300 1988-1992 636 BeilungangiI 1x600 1988-1994 462 Yanshi 2x300 1992-1997 592 Zouxian 2x600 1992-1998 663 Yangzhou 2x600 1992-1999 694 Henan 2x600 1996-2002 841 Tuoketuo 2x600 1997-2004 796 Waigaoqiao 2x1000 1998-2005 829 Average Unit Cost 682 47 Annex I Thermal Efficiency and Availability of Bank-financed Coal - Fired Power Plants Coal Consumption Availability g/kWh' % Waigaoqiao station2 348 70 Waigaoqiao3 295 85 Yangzhou system2 390 72 4 Yangzhou3 305 85 Zouxian system2 370 71 Zouxian3 3104 85 Yanshi system2 375 65 Yanshi3 315 4 85 Beilungang system 385 4 704 Beilungang3 320 84 Wujing system 345 73 4 Wujing3 332 85 1. Grams of coal per kilowatt-hour. 2. Existing plant or system. 3. Bank financed project. 4. Estimate. 49 Annex J Key Performance Indicators ZPEPC (Zhejiang) 1987 1989 1991 1993 1995 1997 * Energy Sales (Gwh) 14,187 16,372 20,569 26,935 34,123 * System load factor (%) 86.5 85.9 85.3 86.6 87.3 88.6 * Average coal consumption (g/kwh) 410 408 397 388 342 * No. of customers per employee 27 32 34 33 38 * Net sales per employee (Mwh) 420 510 610 770 940 * Average tariff (1997 ferkwh)* 21.3 20.3 25.2 36.1 32.0 33.9 * Self financing ratio (%) 8 15 44 104 * Debt service coverage (times) 2.0 2.4 2.1 3.5 * Debt equity ratio 36:64 53:47 64:36 49:51 * Accounts receivable (days of sales) * excl. VAT SMEPC (Shanghai) 1987 1989 1991 1993 1995 1997 * Energy Sales (Gwh) 17,190 18,751 20,774 25,885 28,737 * System load factor (%) 86.7 85.0 84.8 84.8 84.4 * Average coal consumption (g/kwh) 360 357 351 334 333 * No. of customers per employee 24 31 38 49 79 * Net sales per employee (Mwh) 540 600 670 810 900 * Average tariff (1997 fen/kwh)* 23.3 25.7 28.2 34.5 31.7 * Self financing ratio (%) 31 32 24 28 * Debt service coverage (times) 4.1 5.2 4.9 * Debt equity ratio 43:57 47:53 57:43 52:48 * Accounts receivable (days of sales) 24 29 * excl. VAT 51 Annex K China Energy Sector - Major Economic and Sector Work Sector Reports Country-level rural energy assessments, 1989 (ESMAP) Fuelwood development and conservation project Hunan province, 1989 (ESMAP) Rural energy development strategies, 1991 (in Chinese) Efficiency and environmental impact of coal use, 1991 Environment Strategy Paper, 1992 Energy Conservation Study, 1993 Energy efficiency and pollution control in township and village enterprises, 1994 (ESMAP) Issues and options in greenhouse gas control, 1994 Urban environmental service management, 1994 Power sector reform: toward competition and improved performance, 1994 Investment strategies for China's coal and electricity delivery system, 1995 Energy for rural development in China, 1996 (ESMAP) Renewable energy for electric power, 1996 Clear water, blue skies, 1997 Roundtable/Meeting Proceedings Strategic options for power sector reform in China, 1993, Beijing (ESMAP) Clean coal initiative, 12/96, Washington, D.C. Discussion Papers, Policy Research Working Papers, Misc. Papers Biomass, 1992 [policy] Energy supply and the investment environment, 1995 [policy] China's coal sector-moving to a market economy, 1996 [paper X. Wang] Power sector regulation in a socialist market economy, 1997 [discussion] A strategy for international assistance to accelerate renewable energy development, 1998 [disc.] 53 Annex L Borrower's Comments Chinese Government Comments on An Evaluation of the Bank's Assistance in the Energy 1. Para. 4.5 Bank's involvement in the Three Gorges Project is considerably limited and short, the attempt of the report to address the project issue is thus incomplete and inappropriate. The construction of the project is much more the result of the comprehensive, long-time study that involved thousands of domestic and international experts, rather than political decision. The resettlement has been processing in compliance with the resettlement plan and relevant laws. Suggestion: simply delete the paragraph. 2. Para. 5.5 An important lessons learned in the Bank's previous activities in China's Power Sector is that the Bank should focus its efforts on the key issues that the sector and the Government is addressing. An example is that Bank's involvement in the reform of power sector has been highly satisfactory, since the Government and the sector was extremely keen on restructuring of the whole sector. 3. Para. 5.6 Recommendations a) Given Bank's valuable assistance for power sector restructuring in mid 1990's, since power sector will involve another round of reform. The Bank may assist the Government, using its vast expertise and experience and by its mix of financing instruments, to advise various options in relation to the institutional change, tariff rationalization, asset ownership and establishment of competitive power market. Bank's involvement in the reform will keep it always addressing sector outstanding issues, which have been elaborated in the report. b) Another urgent priority of the Bank's assistance in the near future is to focus more efforts on the development of Western Areas. The Bank may provide its assistance not only in the physical development, but also in the area of tariff setting, energy efficiency, legal and regulatory framework, etc. In fact, Bank may once again play an important role, as it did in the early stage of its involvement in China's power sector, in the Government's strategy of "power and gas transmission from the west to the east".