People’s Republic of China:

Performance
Evaluation Gansu Heihe Rural Hydropower
Report Development Investment Program—
Erlongshan Hydropower Project

Independent
Evaluation
Performance Evaluation Report
November 2015

People's Republic of China:

Gansu Heihe Rural Hydropower Development
Investment Program—Erlongshan Hydropower
Project

This document is being disclosed to the public in accordance with ADB’s Public Communications
Policy 2011.

Reference Number: PPE:PRC 2015-13

Project Number: 39652-02
Loan Number: 2296
Independent Evaluation: PE-782
 NOTES

(i) In this report, “$” refers to US dollars.

(ii) The fiscal year (FY) of the government ends on 31 December.
(iii) For an explanation of rating descriptions used in Asian Development
Bank evaluation reports, see Asian Development Bank. 2006.
Guidelines for Preparing Performance Evaluation Reports for Public
Sector Operations. Manila (including amendments made to the
guidelines on 25 March 2013).

Director General V. Thomas, Independent Evaluation Department (IED)

Director B. Finlayson, Independent Evaluation Division 2, IED

Team leader K. Hewitt, Evaluation Specialist, IED

Team members M.O. Nuestro, Evaluation Officer, IED
E. Li-Mancenido, Evaluation Analyst, IED

In preparing any evaluation report, or by making any designation of or reference to a

particular territory or geographic area in this document, the Independent Evaluation
Department (IED) does not intend to make any judgments as to the legal or other
status of any territory or area.

The guidelines formally adopted by IED on avoiding conflict of interest in its

independent evaluations were observed in the preparation of this report. To the
knowledge of the management of IED, there were no conflicts of interest of the
persons preparing, reviewing, or approving this report.
Abbreviations
ADB – Asian Development Bank
CDM – Clean Development Mechanism
CER – certified emission reduction
DMF – design and monitoring framework
EIRR – economic internal rate of return
FIRR – financial internal rate of return
GWh – gigawatt-hour
kV – kilovolt
kWh – kilowatt-hour
MFF – multitranche financing facility
MW – megawatt
O&M – operation and maintenance
PCR – project completion report
PPER – project performance evaluation report
PRC – People's Republic of China
RRP – report and recommendation of the President
TA – technical assistance

Currency Equivalents
Currency Unit – yuan (CNY)

At Appraisal At Project Completion At Evaluation

(20 October 2006) (20 October 2010) (10 July 2015)
CNY1.00 = $0.126 $0.150 $0.1609
$1.00 = CNY7.91 CNY6.68 CNY6.2119
Contents

Basic Data vii

Executive Summary ix
Chapter 1: Introduction: Evaluation Purpose and Process 1
Chapter 2: Design and Implementation 3
A. Formulation 3
B. Rationale 3
C. Impact and Outcome 4
D. Outputs 4
E. Time, Cost, Financing, and Executing Arrangements 4
F. Safeguard Arrangements 5
G. Procurement, Construction, and Scheduling 6
H. Design Changes 6
I. Consultants 6
J. Loan Covenants 6
K. Project Monitoring and Evaluation 7
Chapter 3: Performance Assessment 8
A. Relevance 8
B. Effectiveness 8
C. Efficiency 9
D. Sustainability 10
E. Impact 11
Chapter 4: Other Assessments 12
A. Asian Development Bank’s Performance 12
B. Borrower’s Performance 12
Chapter 5: Overall Assessment, Lessons, and Recommendations 13
A. Overall Assessment 13
B. Lessons 13
C. Recommendations 14

Appendixes
1. Chronology of Major Project Events 16
2. Design and Monitoring Framework 17
3. Appraisal and Actual Project Costs 19
4. Economic Evaluation 20
5. Financial Evaluation 22
Basic Data

Gansu Heihe Rural Hydropower Development Investment Program – Tranche 1:

Erlongshan Hydropower Project (Loan 2296-PRC)

Project Preparation
Person-
TA No. TA Name Type Months Amount ($) Approval Date
4783 Preparing the Gansu Heihe PPTA 14 500,000 28 Apr 2006
Hydropower Development

Key Project Data ($ million) As per ADB Loan Documents Actual

Total project cost 49.09 57.900
Foreign exchange cost 25.78 22.000
Local currency cost 23.31 35.900
ADB loan amount/utilization 22.00 21.998
ADB loan amount cancelled 0.002

Mission Key Dates Expected Actual

Fact-finding 17 July–1 Aug 2006
Loan negotiations 24–25 Oct 2006
Board approval 18 Dec 2006
Loan agreement 19 Jan 2007
Loan effectiveness 19 Apr 2007 16 Mar 2007
Project completion 31 Dec 2009 8 Apr 2008
Loan closing 30 Jun 2010 1 Apr 2010
Months (effectiveness to completion) 32 25

Borrower People’s Republic of China

Executing Agency Gansu Provincial Government

Mission Data
Type of Mission No. of Missions No. of Person-Days
Fact-Finding 1 36
Special loan review 2 10
Review 3 32
Project completion 1 25
Independent evaluation 1 15
ADB = Asian Development Bank, No. = number, PPTA = project preparatory technical assistance, PRC =
People's Republic of China, TA = technical assistance.
Source: Asian Development Bank.
Executive Summary

On 18 December 2006, the Asian Development Bank (ADB) Board approved a

report and recommendation of the President (RRP) for a multitranche financing facility
(MFF) of $50 million for the Gansu Heihe Rural Hydropower Development Investment
Program to help finance two hydropower projects on the Heihe River in Gansu Province
in the People’s Republic of China (PRC). The Erlongshan Hydropower Project accounted
for $22 million of the MFF loan funds. The ADB funds were disbursed between 2007
and 2009. The executing agency was the Gansu provincial government and the
implementing agency was the Erlongshan Hydropower Company—a public sector
project company that had been formed to build, own, and operate the power station.

This report provides a post project evaluation review by ADB’s Independent

Evaluation Department (IED) in association with the PRC Ministry of Finance. The report
assesses the results of the Erlongshan Hydropower Project and the project related
performance of ADB and the Borrower. This joint evaluation aimed to facilitate the
exchange of knowledge between ADB and the PRC. IED sought knowledge on best
practice the PRC state-owned enterprise audit practices that would bolster IED’s current
and future project evaluation capacity. The PRC Ministry of Finance aimed to gather
knowledge to improve its evaluation guidelines; and to strengthen linkages between
lessons learned from evaluation with appropriate feedback into the PRC infrastructure
and development project designs. The endeavor was viewed by IED and the PRC
Ministry of Finance as initiating opportunity for future operational and knowledge
sharing partnership.

The project was approved in 2006 in response to rapid and prolonged

economic growth of electricity consumption in the PRC that had fueled demand for
electricity and it was leading to serious power shortages in many areas. The electricity
sector had become a major air polluter as production was overwhelmingly based on
coal. In the province of Gansu, 81% of its electricity was produced by coal-fired plants
and 13 of its 14 cities did not meet air quality standards. To meet Gansu’s growing
electricity demand in an environmentally sustainable manner and to support growth in
the rural areas the government committed to the development of the Heihe River
Cascade Hydropower Development Scheme. The Heihe River is the PRC’s second largest
inland river. The Heihe hydropower scheme comprises a “cascade” of eight run-of-river
small to medium-sized hydropower projects on the Heihe River. The Heihe cascade is an
integral part of Gansu Province’s least cost generation expansion plan and it was
designed to provide environmentally clean power supply to help meet demand and
foster growth in rural areas near Zhangye City. The Erlongshan Hydropower Project is
one component of the Heihe hydropower scheme.

Project preparation of the Erlongshan Hydropower Project started on

18 November 2004. ADB subsequently became involved and helped the project access
Clean Development Mechanism credits to supplement project revenues. The financing
was approved in 2006, and the Erlongshan Hydropower Plant was completed on
budget and commenced normal operations in April 2008, some 20 months ahead of
the schedule presented in the RRP. A parallel investment for the upgrading of the
power supply network in rural areas of Zhangye City, funded by Erlongshan
x Gansu Heihe Rural Hydropower Development Investment Program—Erlongshan Hydropower Project

Hydropower Company, was completed in December 2009. A feature of the Erlongshan

Hydropower Project was the Erlongshan Hydropower Company’s success in obtaining
regular carbon emission reduction income from the United Nations’ Clean Development
Mechanism.

The power station facilities were constructed in accordance with the original
designs presented in the RRP. The other anticipated outputs of the Erlongshan
Hydropower Project, namely the parallel investment to strengthen the local network
and the institutional capacity building of Erlongshan Hydropower Company, were
completed successfully. Greater electricity output is being generated compared to what
was anticipated because of better than expected river flow. The construction of the
power station has enabled the supply of environmentally clean hydropower to rural
areas of Zhangye City, thereby contributing to economic growth and a reduction in the
incidence of poverty. The power station has been operating for 6 years without
incident or malfunction, and is on track to achieve the high economic and satisfactory
financial returns that were estimated at appraisal. The success of the project is an
excellent testament to the commitment and competence of staff in the concerned
agencies, consultancies, and ADB.

Overall, this project performance evaluation report rates the Erlongshan

Hydropower Project highly successful based on the ratings of highly relevant, highly
effective, highly efficient, and likely to be sustainable.
 CHAPTER 1
Introduction: Evaluation
Purpose and Process

1. By 2006, demand for electricity had outpaced economic growth for

three consecutive years in the People’s Republic of China (PRC), leading to power
supply shortages throughout the country. High levels of investment in coal fueled
electricity generation capacity were made from 2000 to 2006 to offset continued
shortages. Coal based power generation, representing 81% of the country’s power
generation at that time, intensified air pollution throughout the PRC and increased
carbon dioxide (CO2) emissions. Coastal and urban regions experienced higher levels of
economic growth and better access to electricity compared to rural areas and western
interior regions. At the same time, rural and western regions were suffering from the
consequences of air pollution and were disproportionally affected by power shortages.
These economic, social, and environmental challenges provided the rationale for Asian
Development Bank (ADB) energy sector activities in Gansu Province—a poor western
province. ADB’s Board of Directors approved the Gansu Heihe Rural Hydropower
Development Investment Program—Erlongshan Hydropower Project in the PRC in
2006—and it is the subject of this project performance evaluation report (PPER). 1

2. The Heihe river cascade hydropower development scheme was a large

infrastructure project with eight discrete run-of-river medium sized hydropower plants.
ADB aimed to partially finance the project investment program using the newly rolled
out multitranche financing facility (MFF). The MFF amounted to $50 million,
representing about 45% of the total project costs. The specific loan for the Erlongshan
Hydropower Project was the first tranche of a two tranche MFF and it totaled
$22 million. The loan was sourced from the ordinary capital resources of the ADB. The
project was completed earlier than expected in April 2008 within budget.

3. This PPER for the Erlongshan Hydropower Project has been scheduled 5 years
after project completion, an interval that allows adequate time to assess project
performance. The purpose of this PPER is to assess project performance and derive
lessons from the project to help inform the design of future projects and programs.

4. The evaluation was part of a joint undertaking with the PRC Ministry of
Finance. 2 The process for the preparation of the PPER included the following activities:

1
ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche
Financing Facility to the People’s Republic of China for the Gansu Heihe Rural Hydropower Development
Investment Program. Manila.
2
The PRC Ministry of Finance aimed to gather knowledge from this joint project evaluation to improve its
evaluation guidelines, and to strengthen the links between lessons learned from such evaluations and
feedback into project designs. The endeavor was viewed by Independent Evaluation Department and the
Ministry of Finance as an initial opportunity for a future operational and knowledge sharing partnership.
2 Gansu Heihe Rural Hydropower Development Investment Program—Erlongshan Hydropower Project

(i) conducting a desk review of all relevant project documents;

(ii) gathering and reviewing secondary data including relevant reports on
Erlongshan Hydropower Project operations;
(iii) holding discussions with project staff from ADB’s East Asia
Department;
(iv) conducting a joint evaluation and in-field mission discussions with
officials from relevant provincial government offices, including
meetings with Heihe Hydropower Development Company and the
Erlongshan Hydropower Company; and
(v) recalculating economic and financial rates of return for the project.

5. This PPER was prepared in accordance with current ADB Guidelines for
Preparing Performance Evaluation Reports for Public Sector Operations. 3

3
ADB. 2006. Guidelines for Preparing Performance Evaluation Reports for Public Sector Operations. Manila
(including amendments made to the guidelines on 25 March 2013).
 CHAPTER 2
Design and Implementation

A. Formulation
6. In 2006, the central government enacted the Renewable Energy Law, which
was expected to lead to about 120 gigawatts of additional clean and renewable energy
in the PRC by 2020. 4 Small and medium hydropower development was seen as an
integral part of the renewable energy program and was expected to provide 80
gigawatts of additional clean capacity by 2020. The Heihe River, which is the second
largest inland river in the PRC, passes through the remote rural areas of Zhangye City of
Gansu Province. Thus, the Heihe River presented a source of clean and renewable
energy that was close to the power deficient area in Gansu. Zhangye city government
and Gansu provincial government committed to using this energy source to provide
benefits to Zhangye City and the Hexi corridor in an environmentally sustainable
manner.

7. ADB has had a long engagement with the Heihe River scheme in Gansu. In
2001, ADB assisted the PRC in preparing plans for the overall development of
hydropower resources on the Heihe River by providing project preparatory technical
assistance (TA). 5 This TA laid the basis for subsequent ADB support. The first of the
Heihe River power stations financed by ADB was the 102-megawatt (MW) Xiaogushan
Hydropower Project. 6 Once the initial power station investments had confirmed the
feasibility of the concept, there was an opportunity to provide progressive ADB support
to the subsequent hydropower investments. Project preparation for the Erlongshan
Hydropower Project started on 18 November 2004. ADB subsequently became involved
and helped access Clean Development Mechanism credits to supplement project
revenues. Further project preparatory technical assistance was provided by ADB in 2006
for the Erlongshan Hydropower Project and other activities. 7 Appendix 1 details the
chronology of major project events.

B. Rationale
8. The decision to support the development of the Heihe River cascade in Gansu,
one of the PRC’s poorest provinces, had a clear rationale. First, the development of
clean energy sources such as hydropower was consistent with the government’s
objectives under the PRC’s Renewable Energy Law to reduce dependence on fossil fuels
and alleviate the adverse environmental impacts of coal fired generation. Second, the

4
Adopted at the 14th Meeting of the Standing Committee of the Tenth National People’s Congress on
28 February 2005; Amended according to the Decision of the 12th Meeting of the Standing Committee of
the Eleventh National People’s Congress of the People’s Republic of China on 26 December 2009.
5
ADB. 2001. Technical Assistance to the People’s Republic of China for Gansu Hydropower Development.
Manila.
6
ADB. 2003. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the
People’s Republic of China for the Gansu Clean Energy Development Project. Manila.
7
ADB. 2006. Technical Assistance to the People’s Republic of China for Preparing the Gansu Heihe
Hydropower Development Project. Manila.
4 Gansu Heihe Rural Hydropower Development Investment Program—Erlongshan Hydropower Project

Heihe cascade development investment would help overcome electricity shortages; the
provision of additional generation capacity was an essential requirement to support the
government’s efforts to spur economic growth in impoverished rural areas around
Zhangye City.

9. The project was in accord with ADB’s policies. ADB’s previous engagement in
the scheme had meant that officials in the Zhangye City administration, and Gansu
provincial government were familiar with ADB procedures and had developed sound
working relationships with their counterparts in ADB. The continued support of ADB
was justified by the need for timely decisions that would take full advantage of the
knowledge and trust that had been built up between ADB and other stakeholders over
several years.

C. Impact and Outcome

10. The expected impact of the Erlongshan Hydropower Project was to provide
environmentally clean power supply to support economic growth in rural areas of
Gansu. This goal was to be accomplished by providing environmentally clean
hydropower generation closer to the rural areas of Zhangye City, with the aim of
(i) meeting additional rural power demand to overcome shortages; (ii) improving the
reliability of power supply to rural areas; (iii) facilitating loss reduction; and
(iv) advancing policy reforms for clean and renewable energy development in Zhangye
City and Gansu Province.

D. Outputs
11. Project outputs consisted of: (i) the construction of a 50.5 MW hydropower
station that was designed to generate annually 174 gigawatt-hours (GWh) of
electricity, and a 110 kilovolt (kV) transmission line to connect the Erlongshan
Hydropower Plant to the Heihe grid; (ii) a parallel investment for the expansion and
improvement of the Zhangye rural power network through an upgrade of the 10 kV
and 35 kV rural power supply systems, which would be financed and implemented by
the Zhangye city government; and (iii) the development of the institutional capacity of
the Erlongshan Hydropower Company and its parent company, the Heihe Hydropower
Development Company, to obtain carbon revenues using the Clean Development
Mechanism (CDM). Appendix 2 details the design and monitoring framework.

E. Time, Cost, Financing, and Executing Arrangements

12. The estimated project cost at appraisal was $49 million, inclusive of allowances
for contingencies and financial charges during construction. The project cost calculated
at project completion was $57.9 million. The increase in actual project cost of 18% was
largely due to the strengthening of the yuan between 2006 and 2009. The “real”
project cost in constant 2006 dollars (excluding inflation and financial charges during
construction) was virtually identical to the costs estimated at appraisal. Table 1
compares the estimated and actual project costs.
 Design and Implementation 5

Table 1: Erlongshan Hydropower Project—Estimated and Actual Project Cost

Cost Component Unit Appraisal Actual Ratio (%)
Base costs $ [2006] million 40.60 41.77 102.90
Physical contingencies $ [2006] million 1.20 0.0
Subtotal (“real” costs) $ [2006] million 41.80 41.77 99.90
Price escalation $ million 1.50 13.13
FDC $ million 5.70 3.00 52.90
Total project cost $ million 49.03 57.90 118.00
FDC = financial charges during construction.
Sources: Asian Development Bank Independent Evaluation Department; ADB. 2011. Completion Report:
Gansu Heihe Rural Hydropower Development Investment Program—Erlongshan Hydropower Project. Manila.

13. The MFF loan allocation for the Erlongshan Hydropower Project was
$22 million, with foreign exchange and interest variation risks being borne by
Erlongshan Hydropower Company. Other funding for the project comprised
(i) government funding of $16.22 million equivalent (equity), and (ii) domestic bank
funding of $19.68 million equivalent. There was no significant discrepancy between the
financing plan at appraisal and actual financing in regard to the ADB loan, domestic
loan, or equity capital. Equity capital accounted for 28% of the total funding compared
with the 20% estimated at appraisal. Appendix 3 details Appraisal and actual Project
Costs.

14. The project generation plant was completed ahead of the appraisal schedule,
which enabled the Erlongshan Hydropower Plant to generate electricity in April 2008
rather than 2009. All power grid renovation work was completed on time by December
2009. The Erlongshan Hydropower Plant registered at the United Nations as a CDM
project in November 2006, and CDM training was completed on time in 2007.

15. The Gansu provincial government was the executing agency for the project,
while the Erlongshan Hydropower Company, which is a joint stock company, was the
implementing agency. The Erlongshan Hydropower Company was assisted by a team of
international and national consultants (footnote 7).

F. Safeguard Arrangements
16. The project was classified category B for both involuntary resettlement and
indigenous people safeguards policies. The local people are mainly Tibetans.
Requirements for social safeguards were addressed in both the short resettlement plan
and the ongoing community development plan set up for Xiaogushan Hydropower
Plant on the Heihe River hydropower cascade under the Gansu Clean Energy
Development Project (footnote 6). Land acquisition and resettlement began in early
2005 and most activities were completed by the end of 2006. In total, 43.5 mu of land
were permanently acquired (as estimated in the resettlement plan) and 76.5 mu were
temporarily used (8% more than the original estimate). 8 Land acquisition actually
affected 81 Tibetan herders in 23 households; 2 of the 23 households were affected by
both permanent acquisition and temporary use of their land, and 21 households were
affected only by temporary use of their land during construction. In addition, one
seasonal herding camp was demolished and relocated. Compensation paid was either
the same as or higher than planned, and was funded by the Erlongshan Hydropower
Company.

8
The mu is a Chinese unit of measurement (1 mu = 666.67 square meters).
6 Gansu Heihe Rural Hydropower Development Investment Program—Erlongshan Hydropower Project

17. The project site was subject to physical works and classified as environmental
category A. There were no problems during construction. The project successfully
registered with the CDM Executive Board of the United Nations in November 2006, and
its crediting period began on 1 July 2007. The project was expected to generate
emission reductions of 103,558 tons of CO2 equivalent per year, but because of the
higher than anticipated output of electricity, it achieved an issuance success rate of
106%. 9 CDM income was received by Erlongshan Hydropower Company for operations
of the plant from 2007 to 2014.

G. Procurement, Construction, and Scheduling

18. The government asked ADB to approve advance action to expedite
procurement of civil works and critical equipment. ADB approved this request, as well
as the government’s request to utilize up to 20% of the loan amount in retroactive
financing for equipment and civil works for the period between 28 March 2006 and
loan effectiveness. The procurement was completed utilizing advanced contracting
methods. There were 14 contract packages financed by ADB—5 for civil works and 9
for equipment—which were procured according to ADB’s Procurement Guidelines. The
Erlongshan Hydropower Company hired China CNTC International Tendering
Corporation to act as procurement agent for international and national competitive
bidding. Procurement plans and packages were reportedly prepared without major
problems, facilitating effective delivery of supplies, completed works, and technical
supervision.

H. Design Changes
19. The feasibility study and engineering design for Erlongshan Hydropower Project
were prepared by the provincial design institute and reviewed by a team of
international and national consultants. No changes were made to the overall Heihe
system or to the original design of the project.

I. Consultants
20. As envisaged at appraisal, the Erlongshan Hydropower Company engaged an
international consulting firm to supervise overall project implementation. The contract
for consulting services was signed between the Erlongshan Hydropower Company and
GHD Consulting on 27 July 2007. Two supervision contracts were signed—one with the
Supervision Company of the Yellow River Water Resources Commission and one with
the Northwest Investigation Design and Research Institute. About 10 person-months of
international consulting services and 432 person-months of national construction
supervision consulting services were provided.

J. Loan Covenants
21. All major loan covenants concerning implementation arrangements, reporting,
environmental protection, social and resettlement issues, and economic and financial
performance were complied with.

9
Certified emission reduction (CER) issuance success rate = CERs issued compared to CERs foreseen in
project design documents.
 Design and Implementation 7

K. Project Monitoring and Evaluation

22. A reporting system was established to supervise, monitor, and improve the
performance of the contractors for the project’s construction works. Project reporting
was adequate. In general, the required monitoring and evaluation reports were
submitted on time and appear to have been of good quality. The project completion
report (PCR) for the project was issued on 9 December 2011. 10 The PCR rated the
project highly relevant, highly effective, efficient, and most likely sustainable. The PCR
gave the project an overall rating of highly successful. In November 2013, Independent
Evaluation Department validated the PCR, upgrading the PCR efficiency rating to highly
efficient, and confirmed the PCR’s overall rating.

10
ADB. 2011. Completion Report: Gansu Heihe Rural Hydropower Development Investment Program—
Erlongshan Hydropower Project in the People’s Republic of China. Manila; Independent Evaluation
Department. 2013. Validation Report: Gansu Heihe Rural Hydropower Development Investment Program—
Erlongshan Hydropower Project in the People’s Republic of China. Manila: ADB.
CHAPTER 3
Performance Assessment

23. This chapter provides details on Independent Evaluation Department’s

evaluation of the core ratings of relevance, effectiveness, efficiency, and sustainability.

A. Relevance
24. At the time of approval, the project was consistent with the priorities of the
government’s 11th Five-Year Plan (2006–2010), which emphasized resource-efficient
and environment-friendly power sector development. 11 It was also in line with the
Renewable Energy Law, which was ratified by the People’s Congress in 2005, and
became effective in January 2006 (footnote 4).

25. The project was consistent with the Gansu provincial government’s 2001–2010
poverty reduction and development program, and its priorities and plans to promote
hydropower development in Zhangye City and Gansu to meet the growing electricity
demand in an environmentally sustainable manner. The scheme was expected to be an
integral part of the power system planning and least-cost generation expansion plan in
Gansu to provide additional generation capacity. It was also a core infrastructure
project included in the Zhangye city government’s investment plan for 2006–2010, as
well as part of the Heihe river basin plan, prepared by the Ministry of Water Resources
and approved by the State Council in 2001.

26. The project was aligned with ADB’s country strategy in the PRC for 2004–2006,
which aimed to reduce adverse environmental impacts associated with energy
production and use and to provide electricity to the poor. 12 Project design was
innovative and inclusive. More than 4,400 stakeholders from local government
agencies, civil society, and project-affected people participated in design consultations
to discuss project alternatives, environmental concerns, land acquisition, and economic
development potential. The additional hydropower generating capacity provided by the
project increased availability of electricity supply, and enabled the displacement of
electricity from coal fired power plants. This additional capacity avoided adverse
environmental consequences, and enabled the subsequent benefit of CDM revenues to
accrue to the project. The project is rated highly relevant.

B. Effectiveness
1. Outputs

27. The first output of the project was the construction of a 50.5 MW hydropower
generating plant with an annual output of 174 GWh of electrical energy connected to
the Heihe grid through a 110 kV transmission line by 2009. The generation plant and

11
ADB. 2012. Toward an Environmentally Sustainable Future: Country Environmental Analysis of the People’s
Republic of China. Manila.
12
ADB. 2003. Country Strategy and Program: Peoples Republic of China, 2004–2006. Manila.
 Performance Assessment 9

line were completed and operable by 2008. Since operations commenced, electrical
output has averaged 196 GWh per year, which is 12.5% higher than expected.

28. The second output was the expansion and improvement of the Zhangye rural
power network. It was financed and implemented by the Zhangye city government. The
expected upgrade of 10 kV and 35 kV rural power supply systems was completed on
schedule in December 2009.

29. The third output referred to capacity development of employees in the

Erlongshan Hydropower Company and its parent company, the Heihe Hydropower
Development Company. This assistance was provided to enable the project to capture
carbon revenues from clean energy development, and integrate environment and social
issues in the project cycle. On-the-job training was provided on mainstreaming
environmental and social issues in project development, design, and implementation.
The company was registered as a CDM facility in November 2006 and has since
accumulated 1.11 million tons of certified emission reduction (CER) 13 credits, with
realized carbon reduction revenues of approximately $13 million. 14

2. Outcomes

30. The project outcome was reliable, clean, and affordable hydropower supplied
to rural consumers in Zhangye City and Gansu Province. The Erlongshan Hydropower
Project contributed to development of a more reliable and affordable energy supply for
rural consumers in Zhangye City. Design and monitoring framework (DMF) targets
consisted of the following: (i) improvement to the rural consumer average interruption
duration index by 50%, (ii) movement to a uniform urban–rural power tariff, and
(iii) increased rural power consumption from 226 GWh in 2005 to more than 300 GWh.
All of these DMF targets were set for 2012 and they were achieved by 2009. Results
included the following: (i) the rural consumer average interruption duration index in
Zhangye City improved by over 450%, (ii) a uniform urban–rural power tariff was
implemented, and (iii) annual rural power consumption in Zhangye City reached 313
GWh.

31. In addition to successful output, operation, and provincial income results, the
project was effective in garnering and enabling the sharing of important knowledge on
best practice run-of-river hydropower engineering design and construction, financial
and technical operations, and CERs. Knowledge harnessed from the project was shared
with other PRC provinces and countries in the Asia and Pacific Region. The project
exceeded most, if not all, expectations and it is rated highly effective.

C. Efficiency
32. The economic internal rate of return (EIRR) estimated at appraisal was 19.6%.
In the PCR, the EIRR increased to 24.1% due to better than expected flows of water and
therefore larger power generation volume during 2008–2010. The recalculated EIRR in
the PPER is 16.1% (Appendix 4).

33. The EIRR at appraisal and project completion was derived using consumers’
“willingness to pay” to estimate benefits. The appraisal EIRR assumed that project

13
A CER is a type of emission unit (or carbon credit) issued by the CDM Executive Board of the United
Nations.
14
The buyers are the Asia-Pacific Carbon Fund of the ADB, Mitsui & Co. Ltd, and the Future Carbon Fund of
ADB.
10 Gansu Heihe Rural Hydropower Development Investment Program—Erlongshan Hydropower Project

implementation would start in 2006, while the EIRR calculated at completion assumed
a 2004 start date. The recalculated EIRR in the PPER assumed that: (i) the bulk of the
electricity output is valued at the (avoided) cost of counterfactual generation from coal-
fired power plants and the balance of output (after deduction of losses in the
transmission and distribution network) is valued at the appraisal’s estimate of
consumer willingness to pay; (ii) implementation commenced in 2004 rather than in
2006; and (iii) actual levels of electricity production were higher than expected.

34. An assessment of economic benefits requires estimates of the volume of sales

to the grid, CO2 emission reductions, and correct values to cost emissions. Until
recently, the general practice in ADB when valuing emissions was to refer to the price
of CERs when the approval document was prepared. This approach was convenient,
because there was an objective reference to a market price. However, the collapse in
the price of CERs in 2011, caused by insufficient demand due to the absence of a
15
legally binding global climate change agreement, changed the situation. The
recalculated EIRR in this PPER does not include environmental benefits. With sales to
the grid being greater than anticipated, if the environmental benefits of hydropower
are taken into account, the project’s EIRR would be significantly higher. Given this
result, the PPER rates the project highly efficient.

D. Sustainability
35. The evaluation of sustainability is based on an assessment of technical,
financial, environmental, and other considerations. During the first 6 years of operation
from 2008 to 2014, the hydropower plant has consistently delivered a reliable supply of
electricity ranging from 10 to 20% above planning expectations. This has helped to
meet an ongoing and growing demand for electricity within Gansu. The Erlongshan
hydropower plant has not suffered any undue deterioration of equipment or marked
loss of performance. Funds are being accumulated by the project company for planned
operation and maintenance, as well as periodic major overhauls and refurbishments.

36. The financial accounts and the position of Erlongshan Hydropower Company
were reassessed and found to be in order. A financial issue of cross-lending, which was
flagged in the 2010 audit report, affected earlier projections, but this has now been
addressed. 16 The financial projections prepared at project completion were updated
using new information provided by Erlongshan Hydropower Company on actual
generation performance, revenues from sales of electricity, CDM revenues, and
operating and financial costs up to and including 2014. The revised assessment of
Erlongshan Hydropower Company’s financial performance (Appendix 5) shows that it is
meeting its debt service obligations, is profitable, and in a sound financial condition.
The PPER’s recalculated financial internal rate of return of 5.8% exceeds the weighted
average cost of capital of 3.9% even without any additional CDM income over and
above what has already been received. Based on these findings, the project is rated
likely sustainable.

15
In 2007, the spot market price for CERs averaged about €9. In mid-2008 the price had risen to about €20
but then fell to about € 8.00 by early 2009. Thereafter, until mid-2011, the price fluctuated between €12
and €14. It then began to slide, reaching €4 in January 2012, and then falling below €1 by November
2012.
16
The audited report disclosed cross-lending between related stakeholders of the Erlongshan Hydropower
Company during project construction. Audited reports have been reviewed by the evaluation team from
2011–2014, with no issue of cross-lending noted, indicating that the necessary measures to tighten
internal controls and improve financial governance have been effectuated.
 Performance Assessment 11

E. Impact
37. The evaluation of impact is based on an assessment of the project’s
contribution to the targeted economic, social, and environmental benefits.

38. Economic. The economic impact has been positive and substantial. The project
improved the supply and reliability of electricity service to Zhangye City and enabled
the export of off-peak excess electricity to the China National Grid to serve neighboring
townships north of Zhangye City and in the Inner Mongolia Autonomous Region. The
project facilitated economic and industrial development in those geographic areas, and
supported the average economic growth rate for Zhangye City of 13.5% between 2008
and 2014.

39. Social. The social impact was not referenced in the DMF, but it has been
substantial. The availability of a reliable electricity supply has improved local health
facilities, schools, and small agricultural production. In addition, statistics provided by
the Zhangye City Poverty Reduction Office in 2012 show that the incidence of poverty
in Zhangye City declined sharply from 30% in 2002 to 8% in 2011. This result is
consistent with the remarkable progress the PRC has made over the past decade in
reducing poverty in its poor regional areas. Many factors contributed to this reduction
in poverty, but the progress in Zhangye City is closely correlated with the development
and operation of the Heihe hydropower cascade system. In particular, there were
improvements following the beginning of the production of clean, low-cost electricity
from the Erlongshan Hydropower Project and the parallel renovation of the area’s rural
network.

40. Environmental. The design of the project as a run-of-river hydropower plant

with minimal storage enabled the avoidance of substantial adverse environmental
impacts. Potential adverse effects on the surrounding environment during construction
were small and were successfully minimized by the contractors. The operation of the
hydropower plant has had very little negative impact on the environment as Erlongshan
Hydropower Company has taken effective measures to manage solid waste and control
ground water pollution. The project has provided substantial positive environmental
impacts for the broader community as it enabled Gansu Province to replace coal-fired
generation and avoid harmful emissions.

41. Based on these findings, the project impact is assessed as being substantial.
CHAPTER 4
Other Assessments

A. Asian Development Bank’s Performance

42. ADB’s performance is rated highly satisfactory. This rating is based on ADB’s
solid and consistent management capacity during project preparation, design, and
implementation. Continuity of ADB staff, combined with their extensive knowledge of
project implementation, enabled the transfer of project processing and hydropower
plant operational skills to Erlonghsan Hydropower Project stakeholders in Gansu
Province and other provinces in the PRC, as well as to countries in the Asia and Pacific
Region.

43. Provincial and municipal government officials, as well as Erlongshan

Hydropower Company staff, provided positive feedback on the quality of ADB’s
supervision and performance throughout project implementation.

B. Borrower’s Performance
44. The overall performance of the borrower, implementing agency, and executing
agency was rated highly satisfactory. Executing arrangements worked well and the
project was implemented ahead of time and below budget. Adequate counterpart
funds were provided in a timely manner. In general, the performance of the borrower,
the Gansu provincial government as the executing agency, and the Erlongshan
Hydropower Company as the implementing agency was highly satisfactory.
 CHAPTER 5
Overall Assessment, Lessons,
and Recommendations

A. Overall Assessment
45. Overall, the project is rated highly successful. As shown in Table 2, the rating is
based on the ratings of highly relevant, highly effective, highly efficient, and likely to be
sustainable. The power station facilities were constructed in accordance with the
original designs, and completed on budget and ahead of schedule. The parallel
investment to strengthen the local network and the institutional capacity building of
Erlongshan Hydropower Company were fully achieved. Greater electricity output is
being generated compared to what was originally designed, resulting in the use of
environmentally clean hydroelectric power to help support economic growth in the
rural areas around Zhangye City. The power station has now been operating smoothly
for 6 years without incident or malfunction.

Table 2: Rating Matrix for Core Evaluation Criteria

PPER Weighted
Criteria Assessment Rating (0–3) Weighted (%) Rating
Relevance Highly relevant 3 25 0.75
Effectiveness Highly effective 3 25 0.75
Efficiency Highly efficient 3 25 0.75
Sustainability Likely 2 25 0.50
Overall Highly successful 2.75
PPER = project performance evaluation report.
Source: Asian Development Bank Independent Evaluation Department.

B. Lessons
46. The success of the Erlongshan Hydropower Project resulted from a combination
of strong government ownership and the commitment of the Erlongshan Hydropower
Company. These factors ensured that any actual or potential problems were quickly and
effectively resolved.

47. Continuity of officials and staff at the executing agency, implementing agency,
and ADB, who were involved in the development, implementation, and operation of
the project, was maintained throughout the project. This continuity, together with
stability in personnel capacity, was an important factor in the success of the project.
While this lesson may be self-evident, it is not easily achieved and is often overlooked.

48. The project demonstrated the importance of retaining qualified and competent
consultants at the project preparation stage. Knowledge of the project design and
implementation that was transferred from ADB to the government was highly valued,
and officials expressed the view that this was more important than the loan financing.
14 Gansu Heihe Rural Hydropower Development Investment Program—Erlongshan Hydropower Project

49. The project was the first tranche of the first MFF investment program
developed in the PRC. 17 Based on the experience from this project, the MFF modality
should be suitable for future projects in the PRC where there are discrete components.
The MFF enabled sequential construction and financing requirements that were funded
by separate tranches, thus limiting unnecessary duplication of administrative effort and
approvals.

50. The timely availability of counterpart funding prevented cash flow problems
from arising, which could have delayed project completion. Because counterpart
government funding was timely, there were no delays and the project was completed
early.

C. Recommendations
51. None.

17
ADB. 2008. Mainstreaming the Multitranche Financing Facility. Manila.
Appendixes
APPENDIX 1: CHRONOLOGY OF MAJOR PROJECT EVENTS

Date Project Events

18 November 2004 Project implementation commenced
28 April 2006 TA 4783-PRC: Technical Assistance to the PRC for Preparing Gansu Heihe
Hydropower Development Project approved by ADB for $500,000
17 July–1 August 2006 ADB loan fact-finding mission
11 September 2006 Management review meeting, appraisal mission waived, staff review committee
meeting waived
24–25 October 2006 Loan negotiations
18 December 2006 Loan approval
19 January 2007 Loan signing
12–15 February 2007 ADB special loan review mission
8 March 2007 ADB approved award of five NCB packages for civil works: (i) diversion tunnel no.
1, (ii) diversion tunnel no. 2, (iii) surge shaft and penstocks, (iv) main powerhouse
construction, and (v) diversion weir
9 March 2007 ADB approved award of eight NCB packages: (i) high-voltage switchgear, (ii) low-
voltage switchgear, (iii) protection and control system, (iv) main inlet valves,
(v) excitation equipment, (vi) drainage and dewatering pumps, (vii) powerhouse
equipment erection, and (viii) high-voltage equipment.
16 March 2007 Loan effectiveness
9 May 2007 ADB approved award of one ICB package for hydro-generator sets and auxiliaries
17–24 May 2007 ADB loan review mission
30 Aug 2007 Completion of 110 kV transmission line
14–19 September 2007 ADB special loan review mission
30 September 2007 Generating unit no.2 started operation
28 October 2007 Generating unit no.3 started operation
25 November 2007 Generating unit no.1 started operation
15–16 July 2008 ADB loan review mission
9–13 March 2009 ADB midterm MFF review and loan review mission
16 March 2009 Transfer of MFF project administration responsibility to ADB PRC Resident Mission
27 April 2009 Final disbursement of loan proceeds
1 April 2010 Cancellation of loan savings and effective date of loan closing
30 June 2010 Original loan closing date
8–15 October 2010 Project completion review mission
4–11 July 2015 Post project evaluation review mission
ADB = Asian Development Bank, ICB = international competitive bidding, kV = kilovolt, MFF = multitranche financing facility,
NCB = non-competitive bidding, No. = number, PRC = People's Republic of China, TA = technical assistance.
Source: ADB Independent Evaluation Department.
APPENDIX 2: DESIGN AND MONITORING FRAMEWORK

Design Performance Indicators and Targets Monitoring Assumptions and

Summary Appraisal Actual Mechanisms Risks
Impact Assumptions

Environmentally clean Contribution of clean The share of The statistical The PRC remains
power supply and renewable renewable yearbook of Gansu committed to
supporting economic hydropower production hydropower Province and the PRC promoting clean
growth in the rural increased from 19% in production increased and renewable
areas of Gansu 2005 to 23% by 2015 to 35.9% in 2009 in energy
Province Gansu Province

Rural economic growth From 2006 to 2009, Statistical yearbook Sound

sustained at an average the rural per capita of Gansu macroeconomic
of 6% up to 2015 income in Gansu conditions continue
Province grew by in the PRC and
11.7% annually Gansu

More than 99% of 100% of villages Statistical yearbook

villages electrified by electrified by 2009 of Gansu
2015
Outcome Assumptions

Reliable, clean, and 50% improvement in By 2009, the rural Zhangye power The PRC’s priority
affordable rural CAIDI by 2012 CAIDI in Zhangye City bureau data on rural
hydropower supplied reached 2.53 hours, supported by development is
to rural consumers in which was an consumer surveys at maintained and
Zhangye City of improvement of project completion supported by
Gansu Province 453% from 2006 adequate funds
allocation

Uniform urban-rural Uniform urban-rural Zhangye tariff Ongoing tariff

power tariffs enforced power tariff (for schedule reforms continue;
by 2012 urban and rural supply cost
residences) already reductions due to
implemented by 2009 efficiency gains are
passed on to
consumers

Increases in rural power Rural power Zhangye power Rural grid

consumption from 226 consumption in bureau data improvement
GWh in 2005 to more Zhangye City reached projects are
than 300 GWh by 2012 313 GWh in 2009 implemented
Outputs Risks

1. Hydropower 50.5 MW incremental 50.5 MW incremental Quarterly progress Increase in project

developed through hydropower capacity hydropower capacity report, loan review cost and
Erlongshan and 174 GWh additional was added in April missions, PPRs implementation due
Hydropower Project annual energy produced 2008 to weak site
by 2009 geology
The project generated
197.7 GWh in 2009 Decrease in energy
and 192.1 GWh in production due to
2010 inaccurate
hydrological data
18 Appendix 2

Design Performance Indicators and Targets Monitoring Assumptions and

Summary Appraisal Actual Mechanisms Risks
2. Expanded and 35 kV and 10 kV rural All power grid Zhangye power Assumptions
improved rural power power grid renovated in renovation work bureau data
network five counties in Zhangye completed by Feasibility reports
City by 2009 31 December 2009 for each project are
approved on time

110 kV grid
substation is
constructed on time

Phases 2 and 3 of
the Zhangye city
government’s
ongoing rural grid
improvements are
carried out

3. Capacity developed On-the-job training All training programs Consultants’ final Trained staff stay
in seeking carbon provided to mainstream conducted by project report and TA review with the PIAs long
revenues from clean environmental and socialpreparatory TA team missions enough to promote
energy development, issues in project in 2007 CDM and sale of
and integrating development, design, residual CERs
environment and and implementation by Erlongshan CMI documentation
social issues in the 2007 Hydropower Project
project cycle was successfully
Reinforced capacity on registered at the
seeking carbon revenues United Nations
from clean energy Executive Board as a
project development by CDM project in
2007 November 2006
CAIDI = consumer average interruption duration index, CDM = Clean Development Mechanism, CER = certified emission
reduction, CMI = carbon market initiative, GWh = gigawatt-hour, kV = kilovolt, MW = megawatt, PIA = project implementing
agency, PPR = project performance report, PRC = People’s Republic of China, TA = technical assistance.
Source: Asian Development Bank database and Independent Evaluation Department.
APPENDIX 3: APPRAISAL AND ACTUAL PROJECT COSTS

Appraisal Actual
Component Foreign Local Total Foreign Local Total
A. Base Cost Constant ($ million)
1. Civil works 11.69 12.10 23.79 13.07 12.74 25.81
2. Power plant equipment 8.04 0.65 8.69 4.57 4.48 9.05
3. Hydro-mechanical and service 0.43 0.37 0.80
equipment
4. Environment protection 0.37 0.37 0.32 0.32
5. Power transmission and 1.41 0.29 1.70 1.92 1.92
distribution
6. Design and supervision 0.06 3.37 3.43 1.53 1.53
7. Land acquisition and other 1.86 1.86 3.14 3.14
charges a
Subtotal 22.00 18.64 40.64 17.64 24.13 41.77
B. Contingencies ($ million)
1. Physical contingencies 1.22 1.22
2. Price escalation 1.52 1.52 3.44 9.67 13.11

C. Financial Charges during 3.78 1.93 5.71 0.92 2.10 3.02

Development b
Total 25.78 23.31 49.09 22.00 35.90 57.90
a
Includes land acquisition and resettlement costs, survey and design expenses, construction management expenses, and
other temporary project costs.
b
Includes interest during construction and commitment charges.
Sources: Heihe Hydropower Development Company and Asian Development Bank, Independent Evaluation Department.
APPENDIX 4: ECONOMIC EVALUATION

A. General Approach and Methodology

1. The least cost generation expansion plan for Gansu Province was completed under an advisory
technical assistance (TA) in 2002. 1 The TA found that the Heihe hydropower system development
program, which included the Erlongshan Hydropower Project, would be a valid component of the
province’s least cost generation expansion plan. The hydropower projects in the scheme were expected
to have in 2006 an average economic incremental cost (AEIC) of CNY0.22 per kilowatt-hour (kWh). The
counterfactual generation option to the development of the Heihe hydropower system was identified
as coal-fired electricity with an AEIC of CNY0.29 per kWh. The current AEIC generation costs of the
Erlongshan Hydropower Company, based on the higher than expected output, was estimated for the
project performance evaluation report to be CNY0.16 per kWh—well below the available alternatives
and lower than the AEIC of CNY0.22 per kWh used to justify inclusion of the project within Gansu’s
least cost generation expansion program.

B. Methodology for Calculating Economic Benefit

2. The project’s economic internal rate of return (EIRR) was estimated at 19.6% during appraisal,
excluding any allowances for the environmental benefits of avoided emissions from the counterfactual
coal-fired alternatives. The EIRR at appraisal was derived by using consumers’ calculated “willingness to
pay” to estimate benefits; and it assumed that project implementation would start in 2006. The EIRR
was recalculated at completion as 24.1%. The main reasons for the difference from the original EIRR
calculated at appraisal were as follows: (i) the larger power generation volume during 2008–2010, and
(ii) higher willingness to pay by consumers.

3. The EIRR was re-calculated for this project performance evaluation report by assuming (i) the
bulk of the electricity output is valued at the (avoided) cost of counterfactual generation from coal-
fired power plants and that the balance of output (after deduction of losses in the transmission and
distribution network) is valued at the appraisal’s estimate of consumer willingness to pay,
(ii) investment commenced in 2004 rather than in 2006, and (iii) the levels of electricity production
were higher than expected. The recalculated EIRR of 16.1% is presented in Table A4. If the
environmental benefits of hydropower are taken into account, the project EIRR would be significantly
higher.

1
ADB. 2001. Technical Assistance to the People’s Republic of China for Preparing the Gansu Hydropower Project. Manila (TA
3730).
 Economic Evaluation 21

Table A4: Economic Internal Rate of Return

(CNY 2010 $ million)

Fixed O&M O&M Total Total Net

Year Assets Overhauls Inventory Direct Fixed Costs Benefits Benefits
2004 3.9 3.9 (3.9)
2005 32.2 32.2 (32.2)
2006 99.0 99.0 (99.0)
2007 134.6 134.6 (134.6)
2008 93.7 93.7 (93.7)
2009 6.1 5.5 5.7 2.8 20.9 70.7 50.6
2010 5.5 2.8 9.7 83.0 74.6
2011 5.9 2.8 10.3 87.3 78.5
2012 5.9 2.8 11.4 88.5 79.7
2013 5.9 2.8 10.9 87.6 78.9
2014 5.7 2.8 10.2 85.3 76.8
2015 5.8 2.8 10.1 85.9 77.3
2016 5.8 2.8 10.2 86.1 77.5
2017 5.8 2.8 10.3 86.1 77.5
2018 5.5 4.3 2.8 12.7 67.4 54.8
2019 5.8 2.8 10.3 82.4 73.7
2020 5.8 2.8 10.4 86.1 77.5
2021 5.8 2.8 10.4 86.1 77.5
2022 5.8 2.8 10.5 86.1 77.5
2023 5.8 2.8 10.5 86.1 77.5
2024 5.8 2.8 10.5 86.1 77.5
2025 5.8 2.8 10.5 86.1 77.5
2026 5.8 2.8 10.5 86.1 77.5
2027 5.8 2.8 10.5 86.1 77.5
2028 5.5 4.3 2.8 13.1 67.4 54.8
2029 5.8 2.8 10.5 82.4 73.7
2030 5.8 2.8 10.5 86.1 77.5
2031 5.8 2.8 10.5 86.1 77.5
2032 5.8 2.8 10.5 86.1 77.5
2033 5.8 2.8 10.5 86.1 77.5
EIRR 16.1%
( ) = negative, EIRR = economic internal rate of return, O&M = operation and maintenance.
Source: Asian Development Bank Independent Evaluation Department.
 APPENDIX 5: FINANCIAL EVALUATION

1. The financial internal rate of return (FIRR) for the Erlongshan Hydropower Project was
estimated at appraisal to be 6.8%, relative to a weighted average cost of capital (WACC) of 4.2%. At
project completion, the FIRR was recalculated as 4.73% without carbon emission reductions, 6.58%
with carbon emission reductions revenue, and the WACC was estimated to be 3.9%.

2. The FIRR was recalculated for this project performance evaluation report by using actual figures
for 2008–2014 for power generation and sales, as provided by Erlongshan Hydropower Company. The
key assumptions are as follows: (i) fixed assets in the financial statements include financial charges
during construction; (ii) allowance is made for major rehabilitation every 10 years; (iii) electricity income
is net of taxes; (iv) forecasts from 2014 assume no “carbon” income; and (v) increases of 1% per year in
Erlongshan Hydropower Company’s selling price are below the projected rate of inflation of 2.5% per
year. Further details are provided in Table A5.1.

Table A5.1: Project Performance Assumptions—Assumptions for Forecasts

Item/Assumption Unit Input Comment
Constant currency year 2010
Constant currency units CNY million
Electrical Energy GWh
Investment Parameters
Start of construction calendar year 2004
Gross generating capacity MW 50.5
Project life operating years 25.0 From start of operations
Construction period year 5 From 2004
Overnight cost CNY [2010] / kW 7,168 Excludes IDC
O&M inventory (spare parts, etc.) % Investment 1.5%
Operational Parameters
Load factor % time 44.3% Actual average 6 years
Administration and general costs % fixed O&M 15.0%
Major O&M frequency years 10
Major O&M % investment 1.5%
Major O&M downtime weeks 6
Commercial Parameters
Escalation in tariff % per year 1% From 2015
Average credit months 2.00 Receivables and payables
Costs of Capital real
WACC % per year 3.90%
Required return on equity % per year 10.0%
Taxation
Tax rate % profit pre tax 7.5% Then 15.0%
Financing Terms interest rate Repayments
Loans nominal Start year
ADB 3.9% 8
Domestic 5.0% 7
ADB = Asian Development Bank, GWh = gigawatt-hour, IDC = interest during construction, kW = kilowatt, MW =
megawatt, O&M = operation and maintenance, WACC = weighted average cost of capital.
Source: ADB Independent Evaluation Department.

3. As shown in Table A5.2, the recalculated FIRR of 5.8% continues to be almost 2% above the
recalculated WACC of 3.9%. The WACC was recalculated for this evaluation using an actual capital mix
and the cost of various sources of financing.
 Financial Evaluation 23

Table A5.2: Financial Internal Rate of Return

Fixed Inventory O&M O&M Total Cash Net
Overhauls
Year Assets Direct Fixed Costs Inflows Cash Flow
2004 3.9 3.9 (3.9)
2005 32.2 32.2 (32.2)
2006 99.0 99.0 (99.0)
2007 134.6 134.6 (134.6)
2008 93.7 93.7 (93.7)
2009 6.1 5.5 5.7 2.8 20.9 44.0 23.1
2010 5.5 2.8 9.7 54.7 45.0
2011 5.9 2.8 10.3 56.0 45.7
2012 5.9 2.8 11.4 50.6 39.2
2013 5.9 2.8 10.9 47.0 36.1
2014 5.7 2.8 10.2 40.5 30.3
2015 5.8 2.8 10.1 38.4 28.3
2016 5.8 2.8 10.2 38.7 28.5
2017 5.8 2.8 10.3 38.6 28.3
2018 5.5 4.3 2.8 12.7 29.9 17.1
2019 5.8 2.8 10.3 36.0 25.7
2020 5.8 2.8 10.4 37.1 26.7
2021 5.8 2.8 10.4 36.5 26.1
2022 5.8 2.8 10.5 36.0 25.5
2023 5.8 2.8 10.5 35.5 25.0
2024 5.8 2.8 10.5 34.9 24.5
2025 5.8 2.8 10.5 34.4 23.9
2026 5.8 2.8 10.5 33.9 23.4
2027 5.8 2.8 10.5 33.4 22.9
2028 5.5 4.3 2.8 13.1 25.8 12.7
2029 5.8 2.8 10.5 31.0 20.6
2030 5.8 2.8 10.5 32.0 21.5
2031 5.8 2.8 10.5 31.5 21.0
2032 5.8 2.8 10.5 31.0 20.6
2033 5.8 2.8 10.5 30.6 88.8
FIRR 5.8%
FIRR = financial internal rate of return, O&M = operation and maintenance.
Source: Asian Development Bank Independent Evaluation Department.

4. The financial position of Erlongshan Hydropower Company was also reassessed. Table A5.3
shows the company’s income statement from 2004 to 2013. A financial issue of cross-lending, which
was flagged in the 2010 audit report, affected earlier projections, yet this now appears to have been
addressed. Table A5.4 shows that the Erlongshan Hydropower Company is meeting its debt service
obligations, is profitable, and in a sound financial condition.
 24
Appendix 4
Table A5.3: Income Statements for Erlongshan Hydropower Company
(Erlongshan Hydropower Project Actual and Projected Income Statement CNY million)
Project Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2032 2033
Net Sales 0.0 0.0 0.0 0.0 0.0 38.5 39.9 45.6 48.8 45.1 44.3 45.4 45.8 53.7 54.3
Cost of sales 0.0 0.0 0.0 0.0 0.0 5.5 5.5 6.4 6.6 6.7 6.6 6.8 6.8 10.0 10.2
Gross profit 0.0 0.0 0.0 0.0 0.0 33.1 34.4 39.2 42.1 38.4 37.7 38.6 39.0 43.7 44.0
Overhead Costs
Administrative 0.0 0.0 0.0 0.0 0.0 2.7 2.8 3.1 3.2 3.3 3.3 3.4 3.4 4.9 5.0
expenses
Depreciation 0.0 0.0 0.0 0.0 0.0 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8
Interest expense 0.0 0.0 0.0 0.0 0.0 10.9 9.6 8.7 7.9 7.2 6.6 6.0 5.4 (3.0) (3.5)
Subtotal overhead 0.0 0.0 0.0 0.0 0.0 27.4 26.3 25.6 24.9 24.3 23.7 23.1 22.5 15.7 15.3
costs
Net Profit Before Tax 0.0 0.0 0.0 0.0 0.0 15.6 23.1 29.2 25.5 22.3 16.6 15.4 16.5 28.1 28.7
Less profit tax 0.0 0.0 0.0 0.0 0.0 0.9 1.7 2.2 3.8 3.4 2.5 2.3 2.5 4.2 4.3
Net Profit After Tax 0.0 0.0 0.0 0.0 0.0 14.7 21.4 27.0 21.6 19.0 14.1 13.1 14.0 23.9 24.4

Notes:
Dividends (equity 0.00 0.00 0.00 0.00 0.00 0.00 20.00 21.70 20.00 20.00 11.81 12.00 12.00 27.50 27.50
injections)
Ratios (% sales)
Gross margin 0.0 NA NA NA NA 86% 86% 86% 86% 85% 85% 85% 85% 81% 81%
Earnings before 0.0 NA NA NA NA 43% 44% 49% 52% 47% 46% 47% 48% 47% 46%
interest & taxes
Net profit after tax 0.0 NA NA NA NA 38% 54% 59% 44% 42% 32% 29% 31% 44% 45%
margin
( ) = negative, NA = not applicable.
Note: Actual and/or estimated information up to 2014 plus forecasts from 2015 onwards.
Sources: Asian Development Bank, Heihe Hydropower Development Company, and Independent Evaluation Department.
 Table A5.4: Balance Sheet Details and Liquidity Ratios for Erlongshan Hydropower Company
(Erlongshan Hydropower Project Actual and Projected Balance Sheet Details CNY million)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2032 2033
Assets
Gross fixed assets 3.0 29.2 114.5 238.9 338.5 344.3 344.3 344.3 344.3 344.3 344.3 344.3 344.3 344.3 344.3
Accumulated 0.0 0.0 0.0 0.0 0.0 13.8 27.5 41.3 55.1 68.9 82.6 96.4 110.2 330.5 344.3
depreciation
Net Fixed Assets 3.0 29.2 114.5 238.9 338.5 330.5 316.7 303.0 289.2 275.4 261.7 247.9 234.1 13.8 0.0

Working Capital
Accounts 0.0 0.0 0.0 0.0 0.0 6.4 6.7 7.6 8.1 7.5 7.4 7.6 7.6 9.0 9.0
receivable
Inventory and 0.0 0.0 0.0 0.0 0.0 5.3 5.5 5.9 6.2 6.3 6.4 6.5 6.5 9.5 9.8
other
Accounts payable 0.0 0.0 0.0 0.0 0.0 (1.1) (2.1) (3.0) (3.6) (5.2) (4.7) (3.9) (3.7) (6.2) (2.1)
Cash (overdraft) 0.0 0.0 0.0 0.0 0.0 24.7 34.5 38.0 39.3 38.1 37.3 35.4 35.5 55.8 62.2
Subtotal 0.0 0.0 0.0 0.0 0.0 35.3 44.5 48.5 50.0 46.8 46.4 45.6 45.9 68.1 78.9
Total Assets 3.0 29.2 114.5 238.9 338.5 365.8 361.3 351.5 339.2 322.2 308.1 293.5 280.1 81.8 78.9

Equity
Initial capital 3.0 3.7 32.5 39.1 67.8 73.6 73.6 73.6 73.6 73.6 73.6 73.6 73.6 73.6 73.6
Reserves 0.0 0.0 0.0 0.0 0.0 14.7 16.1 21.3 23.0 22.0 24.3 25.4 27.4 (1.9) (4.9)
Net Worth 3.0 3.7 32.5 39.1 67.8 88.3 89.7 95.0 96.6 95.6 97.9 99.0 101.0 71.8 68.7
Debt 0.0 25.5 82.0 199.7 270.6 277.5 271.6 256.5 242.6 226.6 210.2 194.5 179.1 10.1 10.2
Total Funding 3.0 29.2 114.5 238.9 338.5 365.8 361.3 351.5 339.2 322.2 308.1 293.5 280.1 81.8 78.9
Ratios
Debt to equity 0 :100 87 :13 72 :28 84 :16 80 :20 76 :24 75 :25 73 :27 72 :28 70 :30 68 :32 66 :34 64 :36 12 :88 13 :87
Current NA NA NA NA NA 32.1 22.2 16.9 15.1 10.0 10.8 12.7 13.3 12.0 38.1
( ) = negative, NA = not applicable.
Note: Actual and/or estimated results up to 2014 and forecasts from 2015 onwards
Sources: Asian Development Bank, Heihe Hydropower Development Company, and Independent Evaluation Department.

Financial Evaluation
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