Performance Evaluation Report

Project Number: PPE: PRC 29712 Equity Investment Number: 7144 Loan Number: 1610-PRC June 2006

Peoples Republic of China: Fujian Pacific Electric Company Limited

Operations Evaluation Department

Asian Development Bank

Director Team Leader Team Members

D. Edwards, Operations Evaluation Division 2, OED R. Schenck, Evaluation Specialist, Operations Evaluation Division 2, OED B. Palacios, Senior Evaluation Officer, Operations Evaluation Division 2, OED A. Silverio, Operations Evaluation Assistant, Operations Evaluation Division 2, OED Operations Evaluation Department, PE-680

In accordance with the guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations, the Director General of OED did not review this report delegated approval of this evaluation to the Director of Operations Evaluation Division 2. The field work was undertaken by Elsa Y. Zhao (Environment Specialist) and Gouqing Shi (Resettlement and Socioeconomic Specialist) under the guidance of the Mission Leader. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. This report contains information that maybe subjected to disclosure restrictions agreed between ADB and the relevant sponsor or recipient of funds from ADB. Recipients should therefore not disclose this content to third parties, except in connection with the performance of their official duties. A summary of this report shall be made publicly available in accordance with ADBs Public Communications Policy (PCP) and such summary shall not include any confidential information and other information that falls within the exceptions set out in Paragraphs 126, 127 and 130 of the PCP.

As agreed by the Operations Evaluation Department, Office of the General Counsel, Office of the Secretary, and the Department of External relations, only the two-paged redacted summary will be uploaded in the Board Document System.

FUJIAN PACIFIC ELECTRIC COMPANY IN THE PEOPLES REPUBLIC OF CHINA Project Performance Evaluation Report

In February 1998, the Asian development Bank (ADB) approved an equity investment of $10 million and a loan of $40 million equivalent to the Fujian Pacific Electric Company Limited (FPECL, the project) for the development, construction, and operation of a coal-fired power plant at Meizhou Wan, Fujian Province in the Peoples Republic of China (PRC). The project intended to facilitate efficient economic growth in Fujian Province by increasing the supply of reliable electricity in a region which was not able to meet demand. Specifically, the Project was to (i) provide 2x360 megawatts (MW) of power capacity and a minimum of 3,500 gigawatt-hours (GWh) of annual electricity output to the Fujian Province Electric Power Bureau (FPEPB) to meet demand and reduce power shortages; (ii) improve voltage and frequency stability of the power distribution system by providing a technologically-advanced base load plant; (iii) increase the availability of thermal power and reduce reliance on hydropower which depended on the amount of rainfall; and (iv) establish one of the first wholly foreign-owned build-operate transfer (BOT) power projects in the PRC financed on a limited recourse basis as there were serious deficiencies in foreign exchange funding available to the FPECL. By the time the generation plant was accomplished, both the problems of undersupply in the Fujian electricity grid and a lack of foreign exchange funding had been alleviated. There was an abundant supply of local currency finance and an oversupply of generation capacity. The Project completion was achieved at the end of July 2001. Possible further savings may have been achieved if the contractor for the Project construction had been competitively bid. ADBs role in the renegotiation of the tariff has been praised by the plant owners as instrumental in reaching a conclusion with the off-takers. There was an oversupply of generation plant in the period 2001 to 2002, and the Project was dispatched at lower than anticipated levels. In 2003 and 2004, there were low regional hydrology conditions. A significant amount of energy is exported by the FPEPB each year to other undersupplied areas of the grid. Hence, the plant would have not only contributed to alleviating shortages locally and regionally, but also had an important effect on the regional economy. The Project has significantly reduced Fujian Provinces reliance on hydropower to 2005. It has further contributed to the PRCs eastern grids regional economy as the region became a net exporter. However, in the future, the Project will have a lesser impact due to increased supply conditions again from 2006 onwards. Demand in Fujian is expected to grow annually by 12% in the next 5 years. However, supply is expected to grow at a higher rate. New generation to be commissioned includes 5,000 MW of generation by the end of 2006, and another 3,000 hydropower in Fujian Province. It will also make the Project less competitive, as the newer plant has higher technical efficiency than the Project. However, if exports to the PRCs eastern grid increase further and dry hydro conditions reappear, then the plant is likely to generate at higher levels than the take-or-pay. Moreover, the operations at the Project indicate world best practice O&M and promote economic efficiencies, environmental compliance, and safe operations which counter some of the technological disadvantages. These suggest that the Project will remain sustainable in the foreseeable future. The resettlement of the persons affected by the project was reassessed by the Operations Evaluation Mission (OEM). Findings indicate that a successful program has been implemented. All persons resettled have completed the move to new housing, and the quality and size of new residences are superior to previous accommodation. A significant and commendable ongoing

2 financial contribution is made by the Project to the local community. These resulted in the increase in public amenities, such as schooling and water, and has provided over 90 permanent positions at the project. The OEM gives a satisfactory rating for the compliance with environmental safeguards. Environmental monitoring is ongoing, and evaluations indicate emissions and coal handling fall within acceptable guidelines. However, the OEM consultant indicated that ash precipitators are operating below specifications. Nevertheless, these are expected to be rectified in the near future. Overall, the Project achieved only a part of its objectives. OEM rates the relevance and objectives below what could have been achieved. ADBs role as a catalyst for further BOT projects was not achieved because of a combination of (i) ADBs lack of due diligence, and (ii) and a change in the supply of local financing and generation capacity. No system-wide technical due diligence was performed. The generation technology was dated and best practice environmental mitigation measures, i.e., flue gas desulphurization were not implemented. Furthermore, even as demand projections were reasonable, there was insufficient due diligence performed on the supply side, including due diligence on both the technology, and the volume of new plant under construction. The initial tariff was also much higher than the regional tariffs, at the same time, possibly indicating future issues if the supply and demand conditions changed. There also did not appear to be a full understanding about the need to negotiate the tariffs with the provincial government. The Project is rated as successful, bordering on partly successful. Project development outcomes were satisfactory. The Project is sustainable and the social impacts were highly successful and lost opportunity to insist best practice environmental technology and efficiency may have been avoided.

David Edwards Director Operations Evaluation Department Evaluation Division 2

MANAGEMENT RESPONSE TO THE PROJECT PERFORMANCE EVALUATION REPORT FOR THE FUJIAN PACIFIC ELECTRIC COMPANY IN THE PEOPLES REPUBLIC OF CHINA (Equity Investment 7144 and Loan 1610-PRC)

On 18 September 2006, the Director General, Operations Evaluation Department, received the following response from the Managing Director General on behalf of Management:

A.

Overall Assessment

1. Management appreciates OEDs endeavor to carry-out an evaluation of this private sector equity investment and loan project for the Fujian Pacific Electric Company in the Peoples Republic of China. The project started in 1998 and was completed in 2004. We note that the Project Performance Evaluation Report (PPER) rated this project as successful, it being sustainable, its social impacts highly successful, and its development outcomes satisfactory. B. Findings, Lessons Identified, and Follow-up Actions

2. On the issue of the projects tariff and environmental mitigation measures, the PPER suggests that the project should have installed flue gas desulfurization (FGD) equipment as best practice environmental mitigation measures, for which Fujian Province offers a 1.5 fen per kilowatt-hour premium covering most of additional costs of FGD equipment (paras. 21 & 57). If this were the case, the project tariff could have gone up by the premium paid. However, it is pointed out that the projects relatively higher tariff was a disadvantage in competing in Fujian electricity system. These two aspects seem to be conflicting. Therefore, it would have been more desirable if the PPER had provided a more practical analysis and recommendation on how these (conflicting) issues could have been structured in the project. 3. We note the lessons identified in the PPER for future similar projects. For the suggested follow up actions; however, since ADB disinvested its holdings in this private company in September 2004 and ADBs loan was also fully prepaid, we may have little leverage to carry out or enforce their implementation effectively. We would notify and suggest the project company to consider the follow up actions.