Report and Recommendation of the President to the Board of Directors

Project Number: 41935 December 2008

Proposed Equity Investment, Loan, and Technical Assistance Small Hydropower Development Project (People’s Republic of China)

In accordance with ADB’s public communications policy (PCP, 2005), this abbreviated version of the RRP excludes confidential information and ADB’s assessment of project or transaction risk as well as other information referred to in paragraph 126 of the PCP.

CURRENCY EQUIVALENTS (as of 25 November 2008)

Currency Unit – yuan (CNY)

CNY1.00 = $0.14643 $1.00 = CNY6.8292

ABBREVIATIONS

ADB – Asian Development Bank CDM – Clean Development Mechanism CEO – chief executive officer CMI – Carbon Market Initiative DMC – developing member country DSCR – debt service coverage ratio EMS – environmental management system ESU – environmental and social unit FIRR – financial internal rate of return FYP – Five-Year Plan HPP – hydropower plant IFC – International Finance Corporation IPO – initial public offering IRR – internal rate of return NDRC – National Development and Reform Commission NOx – nitrogen oxide OCR – ordinary capital resources PRC – People’s Republic of China SERC – State Electricity Regulatory Commission SO2 – sulfur dioxide TA – technical assistance WRHDP – White Water River Hydropower Development Project ZDSC – Zhejiang Zhongda Sanchuan Hydropower Development Co., Ltd.

WEIGHTS AND MEASURES

GW – gigawatts kW – kilowatt kWh – kilowatt-hours m – meter m2 – square meter mu – Chinese land area unit of measure (1 mu = 0.0667

hectare) MW – megawatts km2 – square kilometer t – ton

NOTES

(i) The fiscal year (FY) of the People’s Republic of China ends on 31 December.

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

Vice-President X. Zhao, Vice President, Operations 1 Director General P. Erquiaga, Private Sector Operations Department (PSOD) Director J. Yamagata, Infrastructure Finance Division 2, PSOD Team leader S. Pu, Investment Specialist, PSOD Team members A. Akanda, Head, Operations Coordination Unit, PSOD R. Caluag, Associate Project Analyst, PSOD C. Gin, Counsel, Office of the General Counsel S. Gupta, Senior Economist, PSOD M. Manabat, Senior Investment Officer, PSOD J. Munsayac, Senior Social Safeguards Officer, PSOD M. Pascua, Environment Officer, PSOD D. C. Song, Guarantees and Syndications Specialist, OCO S. L. Tu, Senior Environment Specialist, PSOD

CONTENTS

Page

I. THE PROPOSAL 1 II. BACKGROUND AND RATIONALE 1 A. The Power Sector 1 B. ADB Operations, Strategy, and Sector Policy 4 III. THE PROJECT 5 A. Project Description 5 B. Implementation Arrangements 5 C. Environmental Aspects and Social Dimensions 6 D. Development Impact 6 E. Development Effectiveness 7 IV. THE PROPOSED ASSISTANCE 8 A. Equity Investment 8 B. Loan 8 C. Technical Assistance 9 D. Justification 10 E. Anticorruption and Combating Money Laundering and the Financing

of Terrorism 11

V. ASSURANCES 11 VI. RECOMMENDATION 11 APPENDIXES 1. Design and Monitoring and Development Effectiveness Frameworks 132. Technical Assistance for Improving Corporate Governance and Enhancing

Institutional Capacity of Environmental and Social Management 17

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed equity investment in and a proposed loan to Sanchuan Clean Energy Development Company (Sanchuan) for the Small Hydropower Development Project in the People’s Republic of China (PRC). The report also describes a proposed technical assistance (TA) for Improving Corporate Governance and Enhancing Institutional Capacity of Environmental and Social Management, and if the Board approves the proposed equity investment and loan, I, acting under the authority delegated to me by the Board, will approve the TA. Sanchuan will use the proceeds of the equity investment and loan to finance its portfolio of small hydropower plants (HPPs) in the PRC. The design and monitoring framework is in Appendix 1.

II. BACKGROUND AND RATIONALE

A. The Power Sector

1. Background

2. The PRC has achieved and sustained rapid economic growth, averaging about 9.7% a year from 1980 to 2007. The economy continues to benefit from the comparative advantage of lower labor costs, higher productivity levels, and easier global movement of goods and services. Compared with 2000, the economy is expected to double in size by 2010 and quadruple by 2020. With a population of 1.3 billion, the PRC’s per capita electricity consumption is low, estimated at 2,150 kilowatt-hours (kWh) in 2006. By comparison, the ratios in developed countries are typically 4–7 times higher, and the world average is nearly double at 4,200 kWh. The rapid pace of economic growth and low per capita electricity consumption have created a strong demand for electricity.

2. Power Demand and Supply

3. The fast pace of economic growth and the expansion of energy-intensive industries, such as steel, aluminum, and cement, have driven electricity demand. Electricity demand grew 14% in 2007 dominated by the industry, which accounted for more than 75% of total power consumption. Residential consumption accounted for about 11% of the total, while commercial consumption accounted for 8%; agriculture accounted for the smallest portion of demand at 4%. Power consumption has grown by an average of 13% annually over the past 6 years. Demand is expected to continue to grow 11%–14% annually for the next 3–5 years. 4. The PRC’s installed power generation capacity grew from 1.85 gigawatts (GW) in 1949 to 713.3 GW in 2007, an average annual growth rate of 10.8%. Since 2002, installed capacity has increased at an annual rate of at least 13%, including 14.4% in 2007. The PRC has installed more than 275 GW in the past 3 years. The Government plans to build an additional 500 GW over the next 15 years, pushing installed capacity to an estimated 1,150–1300 GW by 2020. 5. Despite this accelerated capacity addition, the PRC has faced power shortages since 2002. However, the shortages are being eased—six provinces experienced severe power shortages in 2006 compared with 25 provinces in 2005. At the end of 2007, a balance between supply and demand in the country was generally achieved. However, various sources suggested that, without investment beyond what the Government is planning, another nationwide power shortage may occur between 2010 and 2020 because of (i) rapid economic

2

growth, (ii) the geographic separation of its coal and water resources and load demand centers, and (iii) the mismatch between economic growth and power construction cycles. Therefore, it is important to increase private sector participation and mobilize private sector investment in the sector.

3. Energy Mix and Environmental Impact

6. At the end of 2007, thermal power still accounted for 78% of the energy generated, followed by hydropower at 20%, nuclear at 1.2%, and wind power at less than 0.6%. In spite of efforts to diversify the mix of fuels, the PRC is unlikely to reduce its dependence on coal in the near future. The dominance of coal has produced a number of problems, especially environmental ones such as poor air quality. The PRC is now the world’s largest coal producer and consumer. Production of raw coal more than doubled from 1 billion tons (t) in 2000 to 2.18 billion t in 2005, when the PRC accounted for more than 37% of global production. The electric power sector is the largest consumer of coal; it consumed about 54% of the coal produced in 2005, which has resulted in 50% of the country’s sulfur dioxide (SO2) emissions, 80% of nitrogen oxide (NOX) emissions, and 26% of carbon dioxide emissions. Acid rain caused primarily by SO2 and NOx falls on one-third of the country. In 2005, of the PRC’s 342 major cities, only 128 met the acceptable air quality standards (national class II air quality standards). A combination of coal combustion and desertification causes poor air quality.

4. Sector Development and Policy Framework

7. Since April 2002, with the implementation of a power sector reform plan, the PRC’s power sector has changed substantially. The role of the market in developing, operating, and effectively regulating the power sector has been promoted. The reforms have included the introduction of competition for efficiency improvements, reduction of costs, implementation of a market-based pricing mechanism, optimal resource allocation, nationwide grid connection, and separation of government and commercial functions. 8. During the 10th Five-Year Plan (FYP), significant progress was made: (i) the State Power Corporation, the sole government entity responsible for generation, transmission, and distribution of electricity, was broken up; (ii) generation operations were separated from transmission; (iii) the generation assets of State Power were divided into five independent generation companies; and (iv) two grid companies, State Power Grid Company and South PRC Power Grid Company, were formed. The State Electricity Regulatory Commission was established in October 2002 to introduce competitive markets for power generation. Regional wholesale power markets are being piloted in the northeast, central, eastern, and southern regions. 9. Sector reforms are expected to continue and intensify in the 11th FYP. However, in line with the plan’s priority on rural development, sector policies have been aligned to (i) minimize any imbalance between urban and rural electricity services, (ii) achieve uniform urban–rural tariffs, and (iii) improve the provision of electricity to unserved rural areas. The 11th FYP also highlights the strategic significance of diversifying energy supply by providing more renewable energy, including small hydropower, wind, solar, geothermal power, and bioenergy. The objectives for renewable energy development during the 11th FYP include (i) speeding up the exploitation and utilization of renewable energy, (ii) increasing the proportion of renewable energy in the total energy consumption, (iii) solving the fuel shortage for rural populations that do not have access to electricity, (iv) promoting the development of renewable energy technology and industry, and (v) advancing the research and industrialization level of renewable

3

technology. The PRC’s goal is to increase renewable energy’s share of total energy consumption to 10% by 2010 and 15% by 2020. 10. The Government has offered preferential policies that strongly support small-scale hydropower, and has included small HPPs in its rural electrification plans. These policies include preferential taxes, soft loans and grants, the promotion of private sector investment in small HPPs, and the protection of supply areas and private property. The Government also recently implemented additional policies to encourage the development of renewable energies, such as requiring grids to purchase all the electricity output of small HPPs.

5. Tariff

11. The retail and power plant output tariffs in the PRC are regulated. They are fixed by the price bureau according to the guidance issued by the National Development and Reform Commission (NDRC). In the case of power plants, they are announced at the beginning of the year for units starting their commercial operations during that year. The generators connected to the grid sell their energy and are paid according to many factors, such as age of the plant, reasonable rates of return, and total costs of the plant. Usually once every 1–2 years, NDRC adjusts the tariffs—so far only upwards—based on various factors, including supply and demand, and fuel costs. 12. In the ongoing sector reform, retail tariffs are being unbundled into generation, and transmission and distribution tariffs. The principles of full cost recovery and adequate return on investment have been embedded in the sector tariff formulation for more than a decade and have been applied consistently. The power tariff reforms are encouraging greater use of renewable energies, including wind, solar, small hydropower, and bioenergy. Although no new take-or-pay contract in the power sector has been signed for almost a decade, under the renewable energy law passed in 2005, all energy generated from renewable sources must be purchased by the grid companies.

6. Constraints on Private Sector Participation

13. The majority of the PRC’s water resources are in the mountainous areas in the west and southwest regions, which have the most underdeveloped economies in the country. The municipal and provincial governments have responsibility and are keen to develop hydropower projects. However, public funding for hydropower projects is limited, mainly because the municipal and provincial governments (i) have small financial budgets and large overall infrastructure needs, (ii) have little access to multilateral or other external financing sources, and (iii) may not be able to meet the government’s counterpart funding requirements. Moreover, the investment, construction, and operation of HPPs require special knowledge and sector-specific experience that most local governments lack. 14. Private sector participation, accompanied by funding and experience, is needed to develop the hydropower sector in the PRC, especially in the western region. However, private investors have targeted large hydropower projects developed by major publicly listed companies. Although the Government has encouraged private sector participation in small hydropower development, private funding sources have not shown much interest because of (i) the sophisticated technical requirements, (ii) high transaction costs, and (iii) unfavorable financing market.

4

15. Setting up the complicated funding structures for small hydropower projects carries relatively high transaction costs. Traditional funding structures usually require a high proportion of equity investment and/or recourse to a strong parent company. Local investors and/or operators are typically relatively new and have limited financial resources, restricting their capacity to develop a large number of projects. Moreover, long-term private sector financing, which is desperately needed in the small hydropower sector, is nearly nonexistent, limiting local private sector participation and restricting mobilization of resources for the sector. Consequently, dedicated and qualified local sponsors of small hydropower development need to be prioritized, especially those who are willing to develop in the western region. This can be achieved through equity investment and long-term debt—ADB has extensive experience in this and similar sectors—which will in turn mobilize other financing. B. ADB Operations, Strategy, and Sector Policy

16. ADB’s country strategy for the PRC has four strategic pillars: (i) inclusive growth and balanced development, (ii) resource efficiency and environmental sustainability, (iii) regional cooperation and public goods, and (iv) enabling environment for private sector development.1 This is consistent with the three strategic development agendas highlighted in ADB’s long-term strategic framework 2008–2020 (Strategy 2020): (i) inclusive economic growth, (ii) environmentally sustainable growth, and (iii) regional integration. 2 In the PRC, ADB aims to achieve a better development balance between rural and urban areas, and between coastal and inland regions. The emphasis on infrastructure projects in rural areas and less-developed central and western regions has increased. 17. The PRC has been steadily transforming itself into a market economy, which has become the driving force for economic growth and job creation. In addition to providing policy advice to the Government on private sector development, ADB offers project-based financial assistance. ADB’s private sector operations in the PRC have focused on infrastructure and energy, finance, and environmental improvements. In infrastructure and energy, ADB prioritizes pioneering projects with innovative contractual and financial structuring to encourage private sector participation, enhance management expertise, and improve corporate governance. As agreed upon with the Government, ADB private sector operations will identify and support viable projects located in the less-developed central and western regions, and will explore the possibility of using proceeds of yuan-denominated bonds for lending to local borrowers. 18. In its 1995 Energy Policy, ADB emphasized the need to accelerate the application of renewable energy and energy efficiency in its developing member countries (DMCs).3 This emphasis was strengthened in the Energy Policy Review of 2000;4 a further review in 2006 resulted in a 2007 draft document, which is being finalized, that outlines ADB’s new energy strategy. This draft strategy—which is aligned with Strategy 2020—aims to meet energy demand in a sustainable way, provide energy access for all, and support energy sector reform and governance. 19. For a number of years, ADB has promoted clean energy initiatives to minimize adverse local and regional impacts of climate change, and has emphasized the acceleration of the widespread application of renewable energy and energy efficiency in its DMCs. The Carbon 1 ADB. 2008. Country Partnership Strategy (2008–2010): People’s Republic of China. Manila. 2 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008–2020.

Manila. 3 ADB. 1995. The Bank's Policy Initiatives for the Energy Sector. Manila. 4 ADB. 2000. Energy 2000—Review of the Energy Sector Policy of the Asian Development Bank. Manila.

5

Market Initiative (CMI), approved in November 2006, provides financial and technical support to developers and sponsors of projects eligible for certified emission reductions of greenhouse gases under the Clean Development Mechanism (CDM) of the Kyoto Protocol. As part of the CMI, the Asia Pacific Carbon Fund 5 will provide up-front funding against the purchase of an estimated 25%–50% of future carbon credits expected from projects. In addition, the initiative will provide grants for the preparation and implementation of eligible projects. The CMI was created as a mechanism to boost the viability of alternative clean energy sources in developing countries, while also assisting developed countries in meeting their Kyoto Protocol commitments for cutting greenhouse gas emissions. It is an effective tool for addressing energy security and climate change—two of the most pressing global issues today.

III. THE PROJECT

A. Project Description

20. The Project, which provides for an equity investment, loan, and technical assistance by ADB, will support the expansion and capital expenditure plan of Zhejiang Zhongda Sanchuan Hydropower Development Co., Ltd. (ZDSC) to build, rehabilitate, expand, upgrade, privatize, and/or operate small HPPs. Most of these are in the relatively underdeveloped central and western regions of the PRC. The Project aims to enhance the development of small, emission-free HPPs, which have limited environmental impacts and generate the most affordable renewable energy, through private sector participation. These plants would combat environmental degradation and the threat of climate change by reducing the country’s reliance on coal for energy generation. The Project also will support regional economic growth and equitable economic development of the country by transferring proven technology and successful experience of the private sector from the relatively developed coastal region to the relatively underdeveloped central and western regions for the development of hydropower resources in a sustainable manner. B. Implementation Arrangements

1. Holding Company

21. ZDSC, together with ADB, IFC, and other investors, will establish Sanchuan, a new holding company in Yunnan Province, to focus on the development of small HPPs in central and western PRC. In the next 3–4 years, before its planned initial public offering (IPO), Sanchuan is projecting to add about 300 MW of capacity through (i) privatization of small HPPs owned by local governments, (ii) acquisition of partly completed small HPPs that are facing financial and/or technical constraints, and (iii) development of small greenfield HPPs.

2. Small Hydropower Plants

22. The relevant local government grants each small HPP a specific hydropower development right for an unlimited period. The feasibility study, environmental impact assessment, and project design are prepared by the project sponsor and approved by the local government. Each HPP is implemented in accordance with the granted approvals, subject to government inspections during construction and operation on various aspects, including environment, safety, quality, and sanitation.

5 Contributors: the governments of Belgium, Finland, Luxembourg, Portugal, Spain, and Sweden; and the Climate

Change Foundation.

6

C. Environmental Aspects and Social Dimensions

1. Environmental Safeguards

23. The Project is categorized as FI in accordance with ADB’s Environmental Assessment Guidelines (2003) and will adopt an environmental management system (EMS) following ADB’s Environment Policy (2002). The corporate EMS will be developed under TA from ADB following the indicative EMS guidelines presented in Supplementary Appendix A. Identified subprojects will be classified as A or B based on a screening process that will determine the significance of potential environmental damage. An environmental assessment process, including an environmental management plan, will be followed and implemented for the subprojects complying with both national and ADB safeguards requirements; operational or partly completed subprojects will be audited.

2. Social Safeguards

24. Due diligence was conducted on the social safeguards of ZDSC’s current operations. As some of the HPPs visited entailed significant involuntary resettlement impacts, the Project is categorized as A in accordance with ADB’s Involuntary Resettlement Policy (1995). None of the HPPs visited affected any ethnic minorities. However, since Sanchuan is likely to expand its operations in Yunnan Province where there are many ethnic minority groups, the Project is categorized as A/B in accordance with ADB’s Policy on Indigenous Peoples (1998). The environmental and social safeguards assessment due diligence report is Appendix 5. 25. In the event that Sanchuan’s small HPPs affect ethnic minorities and involve resettlement, Sanchuan will ensure that the appropriate resettlement plan and/or ethnic minority development plan are prepared and implemented following the agreed upon social safeguards framework (Supplementary Appendix B) and in accordance with ADB’s social safeguard policy requirements. D. Development Impact

26. The Project will be an important catalyst for economic growth in the PRC, particularly in the less-developed rural areas and central and western regions. All the existing and future HPPs under the Project are in the poor, remote rural areas. As such, project activities during construction and operation will provide jobs and other significant direct benefit to the local communities. Further, the acquisition and completion of the partly completed small HPPs facing financial and/or technical constraints will utilize the idle assets, eliminating a major bottleneck in the economic development of central and western PRC. 27. HPPs will increase electricity supply through clean energy production, which will benefit most the people living in the neighboring rural areas. Relying on large coal-fired power plants to provide electricity to rural areas through an extensive transmission network is too costly and inefficient because of the substantial losses during transmission. This is why retail electricity tariffs in the rural areas are expensive compared to other areas, which constrains the development of the local economy. By locating power plants close to the end users, prices can be substantially reduced and efficiency increased—the main reasons why the Government strongly promotes small HPPs in the rural electrification program. About 50% of the rural population relies on small HPPs for reliable, affordable electricity. The Project will contribute to an increase in this percentage. The Project will also provide significant additional tax revenue to

7

the local governments, which may be used for economic development programs. Hydropower development is likely to increase the flood control capacity of the related river basins, which will strongly benefit the agricultural development. 28. The Project will have significant environmental benefits in terms of air pollution avoided from coal-fired plants that would otherwise be used to generate power. The average annual avoided emissions were estimated at 670 t of total suspended particulate, 5,400 t of SO2, 4,000 t of NOx, and more than 1 million t of carbon dioxide. On completion of the capital expenditures in 2011, the Project will have avoided about 2.8 million t of coal use per year of operation. 29. The Project will promote private sector participation in small hydropower development in the PRC, aiming to increase the amount of available private capital in the sector, which is a priority for improving the country’s energy mix. ZDSC, a local private sector developer based in a relatively advanced coastal region, will transfer its assets, financial resources, successful experience, and good practice to the less-developed Yunnan Province in central and western PRC in a sustainable manner. The private sector development of the small HPPs will free up local government resources and provide additional tax revenues, which may be used for other vital social and health expenditures. 30. The Project will have a positive impact on the development of local capital markets through its use of funds raised locally. If the Project is implemented, and subject to Government approval, ADB may issue another yuan-denominated bond (panda bond) to fund the Project. This would help the Government to improve the bond market in the PRC. The proposed loan in tranche B will catalyze the participation by international commercial banks, which rely heavily on the anchor position of ADB and IFC in the Project. Further, ADB and IFC will catalyze the first concessionary loan to be approved by the newly established China CDM Fund, which is administered by the Ministry of Finance. The Project establishes an excellent platform for the partnership of ADB, IFC, Government, local governments, local and international commercial banks, and international private equity investors. E. Development Effectiveness

31. The development effectiveness of the Project will be assessed in terms of private sector development, business success, and economic sustainability, according to the implementation guidelines contained in Good-Practice Standards for Evaluation of Private Sector Investment Operations.6 Sanchuan will be in a position to comfortably fund the construction, privatization, expansion, and rehabilitation of small HPPs in the PRC, mainly in the central and western rural areas. This will increase the supply of electricity and avoid the pollution that would otherwise have been generated by coal-fired plants. The increase in electricity supply from its HPPs will lead to higher revenue and reinforce Sanchuan’s financial sustainability and continuous operations. On a broader level, the development effectiveness will be reflected in the higher capacity and better environment in the PRC. The impact of this can be observed by assessing the general supply in the power sector and the air quality in the PRC.

6 Multilateral Development Banks Evaluation Cooperation Group. 2001. Good-Practice Standards for Evaluation of

Private Sector Investment Operations.

8

IV. THE PROPOSED ASSISTANCE

A. Equity Investment

32. The proposed equity investment will involve the subscription to ordinary shares in Sanchuan7 at a cost of up to $25 million, funded from ADB’s ordinary capital resources (OCR). The terms and conditions, including valuation, representations, warranties, and covenants, of ADB’s equity investment will be similar to or better than other equity investment in Sanchuan at about the same time. 33. The proposed ADB equity investment is an integral part of ADB’s assistance for Sanchuan and the Project. ZDSC has been seeking strategic investors to enable the company to continue to grow in the rapidly expanding sector. ADB is expected to assist Sanchuan in enhancing its corporate governance and improving its environmental and social management system. ADB’s equity investment will help Sanchuan secure the confidence of international investors and attract more funds to continue expanding in the small hydropower sector in the PRC. 34. The proposed equity investment will be documented appropriately and all contractual and financial arrangements should be satisfactory to ADB. The disbursement will be subject to comprehensive conditions precedent, including all necessary governmental, creditor, and shareholder approvals and consents. B. Loan

35. The proposed ADB loan will have two tranches: tranche A, funded by ADB; and tranche B, funded by commercial banks. 36. Tranche A is for up to CNY400 million. Tranche A will be provided from ADB’s OCR without government guarantee, and will be funded from the proceeds of yuan-denominated bonds issued by ADB.8 Tranche A will have an interest rate to be determined in accordance with procedures applicable to ADB local currency loans, as well as a commitment fee and a front-end fee to be approved by ADB’s Pricing and Credit Enhancement Committee. 37. Tranche B, for up to $120 million, will be funded by international commercial banks under terms and conditions to be mutually agreed upon between Sanchuan and the participating commercial banks, with the concurrence of ADB. ADB will charge an arrangement fee and annual administration fee, to be approved by ADB’s Pricing and Credit Enhancement Committee in accordance with ADB's credit enhancement operations policies. 38. The proposed loan will be documented in a loan agreement, which will contain standard terms and conditions that apply to loans to private sector borrowers without government guarantee. The terms of the loan will include financial and operational covenants and reporting requirements.

7 ADB may structure the proposed equity investment through an offshore special purpose company to be set up

together with other investors. This is in line with international practice. 8 The disbursement in yuan will be subject to ADB’s funding availability. If ADB is unable to procure sufficient yuan to

fund tranche A, Sanchuan can request ADB to disburse the entire or a portion of tranche A in US dollars.

9

C. Technical Assistance

1. Issues

39. Like most rapidly expanding private companies in the PRC, ZDSC has satisfactory technical and management skills. However, its major weaknesses include (i) poor corporate governance, and (ii) a lack of institutional capacity for environmental and social management.

2. Impact, Outcome, Methodology, and Key Activities

40. The outcome of the TA will be substantial improvement of Sanchuan’s corporate governance and institutional capacity of environmental and social management. It is agreed and will be documented that after the TA is implemented, Sanchuan will offer free support, including seminars and workshops, to other renewable energy companies in the PRC on corporate governance and environmental and social management. Therefore, the impact of the TA is the enhancement of the standards for corporate governance and environmental and social management of the entire sector. 41. The outputs of the TA will be (i) a set of corporate policies, procedures, and guidelines on both corporate governance and environmental and social safeguard system; and (ii) a well-designed and established corporate structure to implement the policies. Through needs assessment, training, capacity building, and an awareness campaign, the TA will offer a comprehensive capacity building package. After TA implementation, the outputs should be replicable, with easy modification, by other similar companies for the benefit the entire sector.

3. Cost and Financing

42. The TA will cost the equivalent of $800,000, of which ADB will finance $700,000 on a grant basis through the TA funding program. Sanchuan will finance the remainder, equivalent to $100,000, through in-kind contributions, including office accommodation and facilities, counterpart staff, and data collection for the TA. The cost estimates and financing plan are in Appendix 7.

4. Implementation Arrangement

43. ADB, as the Implementing Agency for the TA, will be responsible for all technical implementation issues. ADB and Sanchuan will form a TA task force comprising representatives at appropriate levels from ADB, Sanchuan, and the consultants to be hired. The task force will meet regularly to assess the needs, followed by capacity building modules. The TA will be implemented over 15 months from the date its services start. 44. The TA will be carried out by international and domestic consultants to be recruited in accordance with ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). To assist the international consultants, the national consultants will quickly become familiar with their tasks by reviewing relevant reports, analytical data, policies, and regulations, as well as translating documents into English. The outline terms of reference for consultants are in Appendix 7. To facilitate the selection process and consequently streamline the administration process, a part of the team or the whole team of international or national consultants could be recruited through consulting firms.

10

D. Justification

45. ADB’s assistance for the Project is justified based on its development impacts and demonstration effects. It will support the Government’s development plan and ADB’s operational strategies. ADB’s participation in the Project will add substantial value in the following ways:

(i) The Project will support the energy policy in the Government’s 11th FYP, which prioritizes the development of renewable energy projects in an environmentally and socially responsible manner for the purpose of optimizing the country’s energy mix, enhancing energy security, and protecting the environment.

(ii) The Project is also in line with the Government’s Western Region Development

Strategy, which aims to enhance economic development and reduce poverty in western PRC—the key theme of the 11th FYP. The strategy aims to reduce development disparities between the western and coastal regions.

(iii) The Project is in line with ADB’s country partnership strategy in the PRC and the

partnership in the energy sectors between ADB and PRC. The Project could become a model for utilizing the experience, technology, and financial resources of a private sector developer from a relatively developed area (Zhejiang Province in the Yangtze delta) to support the economic development in the remote, poor rural areas in the underdeveloped central and western PRC. It is fully in line with ADB’s primary goal in the PRC, which is to promote pro-poor equitable and inclusive growth. In the energy sector of the PRC, ADB is (a) assisting the poor and less-developed central and western regions, (b) promoting the development of clean energy, and (c) increasing interregional power transmission capacity and improving power system efficiency.

(iv) The Project is consistent with ADB’s energy policy initiative to accelerate the

application of renewable energy and energy efficiency in DMCs. The small HPPs can form part of a country’s least-cost energy development plan; and their environmental and social effects, if any, can be managed satisfactorily in accordance with established ADB policies.

(v) The Project will help to reduce the emissions of greenhouse gases by using

clean energy, which is one major objective of ADB’s program on clean energy and the environment and its associated CMI. ADB’s technical support facility under the CMI is assisting Sanchuan to process new CDM projects and generate more carbon credit and will continue to do so.

(vi) The Project reflects the energy focus of ADB’s private sector operations in the

PRC. In the infrastructure and energy sectors, ADB prioritizes pioneering projects with innovative contractual and financial structuring to encourage private sector participation, enhance management expertise, and improve corporate governance. The proposed ADB assistance will optimize Sanchuan’s capital structure and mobilize long-term commercial finance, which is currently not available to the private sector, for the small hydropower sector.

(vii) The Project will demonstrate how to finance small- and medium-scale

hydropower projects in the PRC. As a multi-project facility, the Project will enable ADB to extend its reach to smaller HPPs that would be difficult to assist directly,

11

while leveraging the experience and know-how of a local developer. The presence of ADB and IFC will also assure all project participants, including investors, financiers, and local governments, that the Project and associated small HPPs are financially, environmentally, and socially sound and sustainable in the long run.

E. Anticorruption and Combating Money Laundering and the Financing of Terrorism

46. ZDSC was advised of ADB’s Anticorruption Policy (1998, as amended to date) and the Combating of Money Laundering and the Financing of Terrorism Policy (2003). Consistent with its commitment to good governance, accountability, and transparency, ADB will require Sanchuan to institute, maintain, and comply with internal procedures and controls following international best practice standards for the purpose of preventing corruption, money laundering activities, or the financing of terrorism, and covenant with ADB to refrain from engaging in such activities. The loan and equity investment documentation between ADB and Sanchuan will further allow ADB to investigate any violation or potential violation of these undertakings.

V. ASSURANCES

47. Consistent with the Agreement Establishing the Asian Development Bank, the Government will be requested to confirm that it has no objection to the proposed assistance to Sanchuan. No funding will be disbursed until ADB receives such confirmation. ADB will enter into finance documents acceptable to ADB following the approval of the proposed financing by ADB’s Board of Directors.

VI. RECOMMENDATION

48. I am satisfied that the proposed equity investment and loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the equity investment in Sanchuan Clean Energy Development Company, Limited for an amount up to $25,000,000 to be provided from ADB’s ordinary capital resources; and

(ii) the loan, to Sanchuan Clean Energy Development Company, Limited, consisting

of (a) tranche A in an amount of up to CNY400,000,000, to be provided from ADB’s ordinary capital resources without government guarantee; an interest rate to be determined based on the procedures applicable to ADB local currency loans for private sector operations; and (b) tranche B for an amount of up to $120,000,000 to be funded by commercial banks under terms and conditions to be mutually agreed upon by Sanchuan and the participating commercial banks with the concurrence of ADB, subject to ADB’s arrangement fee and annual administration fee to be approved by ADB’s Pricing and Credit Enhancement Committee,

12

for the Small Hydropower Development Project, and on such other terms and conditions as are substantially in accordance with those set forth in this report and as may be reported to the Board.

Haruhiko Kuroda President

4 December 2008

Appendix 1 13

DESIGN AND MONITORING AND DEVELOPMENT EFFECTIVENESS FRAMEWORKS

Table A1.1: Design and Monitoring Framework

Design Summary Performance Targets/Indicators

Data Sources/ Reporting Mechanisms

Assumptions and Risks

Impact • Sustainable

growth of PRC’s economy by diversifying the energy mix through the addition of renewable energy capacity

• Energy from coal

reduced from the current 78% of total to 65% by 2020

• Renewable energy

to contribute 60 GW, or 10% of total, by 2010; 121 GW, or 15%, by 2020

• National

macroeconomic data • Power sector statistics,

as reported by local and national regulators

Assumptions • Continued

macroeconomic and political stability

• Continued political

support for renewable energy and small hydropower

Outcome • Greater installed

capacity of small hydropower

• Balanced

development of small hydropower in the PRC, between coastal and inland areas

• More private-

sector-financed and -managed power

• Additional 10 GW of

small hydropower capacity by 2010 in the PRC

• More than 50% of

new generation capacity, or 5 GW, by 2010 located in central and western PRC

• At least 5 GW of

additional small hydropower capacity developed through private investment and management

• Statistics and

information disclosed by the regulator and state government agencies

Assumptions • Stable and

consistent regulatory policies for the renewable energy sector

• Continuous support

of the Government for the development of central and western PRC

Outputs • Sanchuan’s

continuous expansion in the small hydropower sector

• About CNY2.8 billion

invested by Sanchuan in the small hydropower sector by 2011

• Sanchuan’s annual

reports • ADB’s annual review

reports

Assumptions • Sanchuan has

access to adequate financing for acquiring and building small

14 Appendix 1

Design Summary Performance Targets/Indicators

Data Sources/ Reporting Mechanisms

Assumptions and Risks

• More hydropower

capacity under Sanchuan’s management

• More efficient

operations of hydropower plants under management

• Good practice of

ESG standards • Mitigation of GHG

emissions

• 300 MW of additional

capacity through development and acquisition by 2012

• Decreasing operating

expenditures per kWh of power produced

• All the related

corporate policies in place by 2011, and operations of Sanchuan not encumbered by ESG issues

• Registration of 1

million CER generated by the Project with the CDM executive board by 2012

• CDM Executive Board

reports

hydropower plants • Local governments

continue the privatization of small HPPs

• Funds for training

on ESG are made available

• Continuation of

existing regime on CDM post-Kyoto protocol

Activities with Milestones

Inputs

1.1. Loan and investment agreements signed by 30 June 2009 1.2. Sanchuan’s capital expenditures for small HPPs total CNY2.8 billion by 2011 2. ZDSC personnel migrate to Sanchuan upon its incorporation by 31 March 2009 3. ESG training completed by 30 June 2010

ADB • Equity investment

of up to $25 million • Direct Loan of

CNY400 million • B-loan of $120

million • Technical

assistance of $700,000

Other colenders • CNY1,400 million

Other equity investors • CNY1,250 million

ADB = Asian Development Bank, CDM = Clean Development Mechanism, CER = certified emission reduction, CO2 = carbon dioxide, ESG = environmental, social, and governance, HPP = hydropower plant, GHG = greenhouse gas, kWh = kilowatt-hour, GW = gigawatt, MW = megawatt, PRC = People’s Republic of China, ZDSC = Zhejiang Zhongda Sanchuan Hydropower Development Co., Ltd.

Appendix 1 15

Table A1.2: Development Effectiveness Framework

Objective Impact Performance Targets Measurement

Private Sector Development

Project Company Impact • Company enabled to

expand operations • Company enabled to

practice high standards of ESG practices

• Possible revenue

generation from sale of GHG emissions reduction

Beyond-Company Impact • A demonstration effect for

future private sector investments in hydropower

• Support for development

of technical and operational skills to develop and efficiently manage hydropower projects

• Company increases

capacity under management to 430 MW

• Absence of ESG

issues that derail operations

• Sale of about 1

million tons of CERs per year

• Replication of the

business model that incorporates ESG-related systems

• Increased private

sector participation in the renewable-energy-based power

• Company’s

operating, financial, and environmental performance reports

• Company’s

success in identifying and developing other projects in the renewable sector

• Statistics and

information disclosed by central and state government agencies

Business Success

• Financially profitable and

sustainable operations

• Timely repayment of

debt • Satisfactory financial

internal rate of return as projected

• Amortization of

loans • Financial internal

rate of return • Sanchuan’s

financial reports

Economic Sustainability

• Contributes to economic

growth through mitigation of power shortages

• Improvement of the

environment

• Economic internal

rate of return greater than 12%

• Increase in per capita

consumption of power

• Economic rate of

return • Fewer incidences

of power shortage • Electricity sales

16 Appendix 1

Objective Impact Performance Targets Measurement

• Reduction in GHG emission

CER = certified emission reduction, ESG = environmental, social, and governance, GHG = greenhouse gas, MW = megawatt.

Appendix 2 17

TECHNICAL ASSISTANCE FOR IMPROVING CORPORATE GOVERNANCE AND ENHANCING INSTITUTIONAL CAPACITY OF ENVIRONMENTAL AND SOCIAL

MANAGEMENT

1. Zhejiang Zhongda Hydropower Development Co., Ltd. (ZDSC), a developer of small hydropower plants (HPPs) in the People’s Republic of China (PRC), has requested technical assistance (TA) from the Asian Development Bank (ADB) for (i) establishing good corporate governance, and (ii) building capacity in environmental and social safeguards. 2. The proposed TA will develop ZDSC's institutional capacity to address environment and social safeguards aspects of small-scale hydropower project development and implementation. At the corporate level, an environmental and social unit (ESU) will be established to oversee the environmental and social aspects of hydropower projects developed by project-level companies. The environment and social staff members of these companies will prepare and implement safeguards in subprojects. Training workshops will be provided. Awareness of and sensitivity to environmental and social issues will be raised with staff. A monitoring and evaluation mechanism will be built into the capacity building program. 3. For corporate governance, the TA will also undertake a thorough examination and analysis of the existing corporate governance policies and practices of ZDSC. It will also recommend ways for ZDSC to become a well-run transparent company, consequently improving its performance and access to capital. The recommendations will be in the form of an action plan outlining steps and a timetable for implementation. A. International Consultants

1. Environment Specialist (7 person-months)

4. The environmental specialist will have a degree in environmental sciences, engineering, or planning, with demonstrated experience in water resources management, river basin management, or hydropower development. Detailed and up-to-date knowledge of international financial institutions environment policies and relevant national, provincial, and local regulations and recent experience in Asian Development Bank (ADB) project implementation in the PRC are mandatory. The expert will undertake the following:

(i) Conduct a needs assessment and prepare a capacity development program. The assessment will be conducted on environmental capacity building, at the corporate level and project company level, to identify the needs, levels, and timing for capacity building.

(ii) Examine the capacity, organizational structure, major functions, budget, and staff resources of ZDSC and its project companies through surveys, file reviews, and interviews. The consultant will also assess their capacity to undertake environmental assessment in accordance with the environmental commitments made by ZDSC.

(iii) Submit a needs assessment report upon completion of the needs assessment, and make recommendations for capacity development at the corporate level and project company level, for review by ZDSC and ADB.

(iv) Undertake training on environmental issues, such as: (a) national (Ministry of Environmental Protection) and provincial laws and

regulations, as well as standards setting and update of the PRC environmental regulatory regime;

18 Appendix 2

(b) international financing institutions' policies on environmental impact assessment, environmental management, and monitoring;

(c) principles and best practices endorsed by the hydropower community, such as the World Commission on Dams; and approaches such as basin management planning, minimum flow, and cumulative impacts assessment;

(d) other relevant topics including environmental management system, aquatic and terrestrial ecology, and site management best practice;

(e) monitoring and evaluation including the design and implementation of appropriate monitoring and evaluation systems including defining monitoring indicators for impacts and/or effects to the ecosystem, such as water, air, noise, and vibration; and

(f) special training with a select group, focusing on public information, communications, and consultation strategy; working with stakeholders including the regulators, local communities, and civil society.

(v) Deliver a comprehensive training program, indicating the level, timing, staff number, and resources involved in (a) on-the-job training, (b) developing devoted classes on specialized topics, (c) arranging study tours and site visits (domestic and overseas), and (d) formulating general directions of degree or non-degree education

programs for staff. Detailed training materials, including notes, PowerPoint presentation and handouts, case studies, methodology, and theories, will be prepared in advance (in Chinese with English summary) and be reviewed by ADB.

(vi) Establish corporate policies, procedures, and guidelines on environment and management for its overall operations, corporate responsibilities, and commitments.

(vii) Develop a corporate environmental management system (EMS), prescribing the procedures and requirements in which the environmental policy can be substantiated at the corporate and subproject levels, following the indicative EMS framework provided by ADB.

(viii) Develop environmental guidelines that will provide specific instructions on how to prepare requisite documents and mitigating measures to address environmental impacts of projects and prepare environmental management plans; and to undertake due diligence on environmental issues (e.g., water qualities, ecology, air qualities, noise, waste management, and public health and safety). Similar but more detailed guidelines and handbooks may be developed for project construction and operation, and for contractors. Regular updates will be required.

(ix) Together with the social specialist, develop a capacity-building action plan to cover (a) the official establishment of the ESU, including the development plan of

the ESU up to 2020; (b) growth and development of staff at the project company level, to prepare

and implement safeguards work; and (c) an awareness-building program across all levels to sensitize the staff and

management. The ESU may be independent of any departments or integrated with one of the existing department. Its reporting functions to the chief executive officer (CEO) and other departments will be described in detail. The ESU’s responsibilities as “watchdog” or line unit supporting operations will be delineated and confirmed by

Appendix 2 19

the CEO. A draft of the action plan, including a detailed ESU development plan, with resources (budget and staffing) implications, will be discussed with the sponsor before finalization.

(x) Formulate and assist in the implementation of corporate awareness programs. (xi) Structure an outreach program with stakeholders to

(a) share lessons with other project developers and become a knowledge center of the industry for small HPPs, or renewable energy;

(b) interact with the regulators and government authorities at all levels, and (c) communicate with stakeholders, including affected communities, civil

society, and nongovernment organizations, possibly through public forums and seminars, site visits by stakeholders, and special community development activities.

The consultant shall develop an outreach program at the corporate and project site levels, have it integrated with the planning efforts of the company portfolio subprojects implementation, and make it operational. Holding seminars with the environmental protection bureaus, water resources departments of different levels, and other HPP developers on lessons learned on hydropower development could help ZDSC to learn about regulatory trends and best practices. Outreach forums and activities with local communities hosting the HPPs will sensitize ZDSC to the community concerns and improve public relations through enhanced capacity.

(xii) Coordinate implementation of safeguards requirements during project implementation.

2. Social Specialist (7 person-months)

5. The social specialist will have a degree in social sciences with demonstrated expertise in participatory rural appraisal, socioeconomic surveys, and other forms of social assessments for involuntary resettlement, indigenous peoples, poverty, and gender impact analysis. Detailed and up-to-date knowledge of international financial institutions’ social policies and relevant national, provincial, and local regulations and recent experience in ADB project implementation in the PRC are mandatory. The consultant will undertake the following:

(i) Conduct a needs assessment and prepare a capacity development program. The assessment will be conducted on social capacity building, at the corporate level and project company level, to identify the needs, levels, and timing for capacity building.

(ii) Examine the capacity, organizational structure, major functions, budget, and staff resources of ZDSC and its project companies through surveys, file reviews, and interviews. The consultant will also assess their capacity to undertake social assessment, resettlement planning, and implementation in accordance with the social commitments made by ZDSC.

(iii) Submit a needs assessment report upon completion of the needs assessment, and make recommendations for capacity development at the corporate level and the project company level, for review by ZDSC and ADB.

(iv) Undertake training on social issues, such as (a) national and provincial laws and regulations, and international financing

institutions' policies on land acquisition, resettlement, and other relevant laws;

(b) incorporating participatory processes in project development, including techniques to determine community responses to the proposed project

20 Appendix 2

interventions and procedures for community organization and active participation in project planning and implementation;

(c) poverty, social, and gender assessments associated with resettlement planning and management, including (1) designing poverty reduction measures; (2) assessing the presence of and project impacts on vulnerable groups, indigenous peoples, and ethnic minority groups in the project area, and preparing an ethnic minority development plan; and (3) assessing the impacts on women and ensuring they are consulted and benefit from the project, and preparing a gender action plan, where required;

(d) resettlement planning and management, including (1) identifying measures to minimize and mitigate adverse social and resettlement impacts, (2) asset inventory and compensation valuation methodologies, (3) identifying livelihoods at risk and designing and implementing livelihood restoration programs, and (4) preparing a resettlement;

(e) qualitative and quantitative social research methods, including rapid rural appraisal, design and implementation of census, socioeconomic surveys, perception surveys, structured and unstructured interviews, focus groups discussions, field-based assessments, and secondary data review; and

(f) monitoring and evaluation, including design and implementation of appropriate monitoring and evaluation systems, including defining monitoring indicators for conducting social audit to systematically document the valuation of assets, date and details of payment, or provision of entitlements to each affected person.

(v) Deliver a comprehensive training program, indicating the level, timing, staff number, and resources involved in (a) on-the-job training, (b) devoted classes on specialized topics, (c) study tours and site visits (domestic and international), and (d) formulation of general directions of degree or non-degree education

programs for staff. Detailed training materials, including notes, PowerPoint presentation and handouts, case studies, methodology, and theories, will be prepared in advance (in Chinese with English summary) and reviewed by ADB.

(vi) Establish corporate policies, procedures, and guidelines on a social safeguard system for its overall operations, corporate responsibilities, and commitments.

(vii) With the environment specialist, develop a capacity building action plan to cover (a) the official establishment of the ESU, including the development plan of

the ESU up to 2020; (b) growth and development of staff at the project company level, to prepare

and implement safeguards work; and (c) an awareness building program across all levels to sensitize the staff and

management. The ESU may be independent of any departments or integrated with one of the existing department. Its reporting functions to the CEO and other departments will be described in detail. The ESU’s responsibilities as a “watchdog” or line unit supporting operations will be delineated and confirmed by the CEO. A draft of the action plan, including a detailed ESU development plan, with resources (budget and staffing) implications, will be discussed with ZDSC before finalization.

(viii) Develop and formulate social guidelines, which will provide specific instructions on how to undertake due diligence on social issues (e.g., poverty, gender,

Appendix 2 21

stakeholder participation, resettlement, affordability, labor, and indigenous people’s issues and any other social risks), and prepare requisite mitigating measures to address socioeconomic impacts of projects and prepare social safeguard plans. Similar but more detailed guidelines and handbooks may be developed for project construction and operation, and for contractors. Regular updates will be required.

(ix) Formulate and assist in the implementation of corporate awareness programs. (x) Structure an outreach program with stakeholders to

(a) share lessons with other project developers and become a knowledge center of the industry for small HPPs, or renewable energy;

(b) interact with the regulators and government authorities at all levels, and communicate with stakeholders, including affected communities, civil society, and nongovernment organizations, possibly through public forums and seminars, site visits by stakeholders, and special community development activities.

The consultant shall develop an outreach program at both the corporate and project site levels, have it integrated with the planning efforts of the company portfolio subprojects implementation, and make it operational. Holding seminars with the environmental protection bureaus, water resources departments of different levels, and other HPP developers on lessons learned from hydropower development could help ZDSC to learn about the regulatory trends and best practices. Outreach forums and activities with local communities hosting the HPPs will sensitize ZDSC to community concerns and improve public relations, through enhanced capacity.

(xi) Coordinate implementation of safeguards requirements during project implementation.

3. Corporate Governance Specialist (5 person-months)

6. The corporate governance specialist will have at least 5 years experience as a company director, ideally with experience on both public and private sector boards, and past or present membership in an institute of company directors. The consultant will be familiar with current corporate governance and ethics issues, as well as community service obligations. Previous work experience in the PRC is mandatory. 7. Specifically, the specialist will

(i) undertake a general review and assessment of ZDSC’s ownership, management, and governance structure, including existing policies relating to corporate governance;

(ii) identify and enumerate company policies and practices that may inhibit management transparency and accountability;

(iii) conduct interviews and detailed discussions with principal parties who play a role in corporate governance, and assess their level of commitment and willingness to improve corporate governance;

(iv) evaluate ZDSC’s compliance with the Code of Corporate Governance for Listed Companies in China,1 and determine areas for improvement to ensure compliance in preparation for IPO and stock exchange listing;

1 January 2002; developed by the State Economic and Trade Commission now known as the State Asset

Management Commission. PRC.

22 Appendix 2

(v) develop and draft a corporate governance code that establishes a board of directors, including independent board members, subcommittees (e.g., audit and other standing committees), functions of the board, board policies, adoption of code of ethics, and guidelines on performance-based corporate culture, and treatment of minority shareholders;

(vi) explain and codify the roles, duties, and responsibilities of the board and top management;

(vii) recommend performance standards against which to assess management effectiveness and efficiency and define methodologies for project monitoring and achievement of objectives;

(viii) recommend a set of specific measures to introduce and implement solid corporate governance standards or reforms necessary to improve corporate governance, operational efficiency, and transparent management accountability; and

(ix) provide hands-on training and coaching, and assist with the implementation of a mentoring program for the board and management on their respective roles and duties.

4. Accounting Expert and Financial Control Specialist (5 person-months)

8. The accounting expert and financial control specialist will have professional qualification in accountancy and experience in advising companies on the adoption of international accounting standards, and of financial disclosure and company reporting systems to comply with international best practice in corporate governance. The financial control specialist will be responsible for developing the framework and recommending improvements in accounting and financial control. 9. Specifically, the consultant will

(i) assess the current accounting framework, standards, and reporting requirements in the PRC and ZDSC’s company accounting and disclosure practices;

(ii) review internal controls for supervision of operational risks; and separation of functions, including transaction controls, budgeting, financial management;

(iii) determine relationships and nature of related party transactions between ZDSC and company subsidiaries, and review historical related party transactions;

(iv) conduct an overall assessment of ZDSC’s financial status and business plans for the next 5 years to determine the required financial and technical support for eventual listing on the stock market;

(v) prepare a model company financial statement and model annual company report based on international accounting standards for Sanchuan’s use;

(vi) assist in introducing the format for effective budgeting and control systems, review process, and key financial indicators for performance management;

(vii) review and improve procedures and policies for effective internal audit and control and supporting good governance, ensuring adherence to internal policies and procedures, segregation of duties, internal checking, compliance with regulations, and compliance with accounting standards;

(viii) develop a manual or work aid on internal audit and control procedures, and provide a plan for implementation, training, and capacity building.

Appendix 2 23

B. National Consultants

10. A team of four national consultants with similar expertise will supplement and support the international consultants. The national consultants will be engaged for 10 person-months each (40 person-months). The national consultants will assist the international consultants to quickly become familiar with their tasks by reviewing relevant reports, analytical data, policies, and regulations; and translating relevant documents into English. All national consultants will be able to speak, read, and write fluently in English.

Table A2: Cost Estimates and Financing Plan ($ ‘000)

Item Total Cost A. Asian Development Bank (ADB) Financinga 1. International and Domestic Consultants a. Renumeration and Per Diem i. International Consultantsb 477 ii. Domestic Consultantsc 120 b. International and Local Traveld 24 c. Miscellaneous Administration and Support Costs 9 2. Report Preparation, Production, and Distribution 20 3. Capacity Building and/or Traininge 30 4. Contingencies 20 Subtotal (A) 700 B. Sponsor Financing 1. Office Accommodation and Transport 40 2. Remuneration and Per Diem of Counterpart Staff 50 3. Others 10 Subtotal (B) 100 Total 800

a ADB’s TA funding program. b Assuming 24 person-months of international consultants at $19,860 per month. c Assuming 40 person-months of domestic consultants at $3,000 per month. d Assuming 8 international roundtrips at $3,000 per trip. e Assuming 10 training sessions at $3,000 per session.

Source: ADB estimates.