While all Performance Standards (PS) are applicable to this investment, IFC’s review indicates that the investment will have impacts that must be managed in a manner consistent with the following: - PS1: Social and Environmental Assessment and Management Systems, and - PS2: Labor and Working Conditions. Applicability of other Performance Standards will be determined by the Sponsor as part of the project-specific reviews, as discussed below.

This corporate-level investment is a Category B project. Part I of the proposed investment will primarily finance or refinance several small hydropower stations owned by the Sponsor. The only new construction that will be financed by IFC in Part I is the 32 MW Tangcun power station. Water will be diverted from Longtou dam through a 5.6 km long tunnel to a power house located on the Tongxi River, just downstream of Tangcun town. The project will take advantage of the much higher head available through this configuration. Diversion of water to Tangcun will reduce the power that can be generated by the three Yungang plants; however, overall power output will be substantially increased. A 30 km transmission line will evacuate power from the plant. These will have moderate impacts typical of civil works construction. Part II is an equity investment, for which the funds will be used for construction of relatively small hydroelectric power plants. The holding company will also include three greenfield plants of 15 MW, 15 MW, and 48 MW, respectively, on the Baishuijiang River in Yunnan Province (currently under construction by the Sponsor) and financed by IFC and categorized as A. For both Parts I and II, a limited number of specific environmental and social impacts may result, which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. If the Sponsor develops any power plant that would qualify as Category A, then the Sponsor will be required to follow the requirements for Category A projects under IFC’s Performance Standards.

IFC’s appraisal reviewed the effectiveness of the Sponsor’s corporate environmental and social management activities and the ability of the organization to ensure compliance with Government of China (“GOC”) regulatory requirements and IFC’s Social and Environmental Performance Standards. The Performance Standards replaced IFC’s Safeguard Policies that were used for IFC’s earlier investment in the Sponsor’s three plants in Yunnan Province. IFC has helped and will continue to help Zhongda Hydro to strengthen its internal procedures and reporting systems, and to include IFC’s Performance Standards in its current and future operations. In addition to assessment of corporate social and environment management capacity, a site visit and project-centered social and environment assessment was undertaken for the Tangcun plant. Specific items evaluated include: >> Corporate environmental and social management systems, management performance in its existing operations, and their extension to new projects; >> Environmental and social assessment process and documentation for the Tangcun power station; >> Environmental and social performance of existing projects, including those financed by IFC; and >> Community engagement activities (public consultation and disclosure). - PS 1: Social and Environmental Assessment and Management Systems The Sponsor’s planning of new facilities follows the requisite GOC requirements related to permits and environmental and social impact analysis (ESIA). However, at present these ESIAs do not take into account IFC Performance Standards, except insofar as those correspond to Chinese law and regulation. The Sponsor recognizes that additional environmental and social and health and safety management staff will be required to implement and manage its investment program. It will ensure compliance with the national laws, norms, contractual and other requirements applicable to its energy activities by putting in place a company-wide management system that addresses environment, social, health and safety, and quality performance. This will include: -- Social and Environmental Assessment - due diligence procedures that identify social and environmental risks and impacts of new projects. As appropriate, impact assessments, audits, and other studies will be prepared to evaluate projects. -- Management Program, including Organization, Training, and Monitoring - a formal Environmental and Social Management System (ESMS) at the corporate level, which will be extended to both existing and new projects. For each new project, the Sponsor will incorporate the results and findings of the environmental and social assessment into a project-specific program of mitigation and improvement measures, including operational procedures and practices. An Action Plan will be prepared for each project that describes activities necessary for compliance as well as the organizational structure and assigned responsibilities for execution. -- Reporting - a Public Consultation and Disclosure Strategy (PCDS) and procedures for engagement with affected communities, and reporting and monitoring of project performance to its senior management as well as to government agencies and lenders. The Sponsor has regularly reported on its progress in implementing the Baishuijiang River projects; this will be strengthened as part of the PCDS. For the Tangcun power station, IFC has received the following documents: -- Tangcun hydropower plant environmental impact assessment, prepared by Zhejiang Hydropower Survey and Design Institute, 2007 -- Tangcun HPP project feasibility study, prepared by Hangzhou Water and Hydropower Survey and Design Institute, 2006 The Tangcun project received environmental clearance from Zhejiang Provincial Environmental Protection Bureau in March 2007. The plant will require about 9 ha for construction, of which about 1 ha will be permanently occupied by the power house and its support facilities. Land required is privately-owned agricultural land, and is being acquired through direct negotiations. Development of the project is not expected to require physical resettlement or affect cultural sites or protected plant or animal species. Flow in the Yungang River below Longtou dam will be decreased during full operation of the Tangcun plant by the 4.54 m3/sec of water used to operate the turbines. The reach of the river between Longtou dam and Yungang III currently has reduced flow due to diversions for the existing power plants; the affected reach will extend further downstream as a result of the Tangcun project. The Sponsor and the Zhejiang Environmental Protection Bureau have agreed on seasonal minimum flows in the affected reach to maintain ecosystem quality, for domestic use, and for irrigation. The Tangcun project will avoid greenhouse gas emissions of approximately 28,000 metric tons of CO2 equivalent compared to coal-based generation. Regarding environmental compliance of the Sponsor’s existing plants (Performance Standard 3), the greenfield plants in Yunnan are under construction, supervised by IFC’s social specialist and the Independent Engineer. These plants are in compliance with actions agreed with IFC. IFC staff also visited some of the Sponsor’s six older, small plants in Yunnan Province that were acquired in 2003 and three plants in Hunan province; no significant compliance issues were noted for the older plants. ADB staff visited the resettlement village for the over 300 persons who were displaced by construction of the Yanjia dam. The resettlement process had been undertaken by Zhejiang Province, and villagers interviewed by ADB staff expressed satisfaction with the relocation process and the quality of the houses and infrastructure in the current village. New hydroelectric projects in development by the Sponsor are expected to be located in settings similar to the existing plants, sparsely populated, relatively remote areas with mountainous topography and narrow valleys, which reduces effects to local populations from dam construction and reservoir filling. The Sponsor will prepare Resettlement Action Plans for these projects and provide assistance to affected people as required by PS 5: Land Acquisition and Involuntary Resettlement. A detailed RAP has been developed for the greenfield hydro project located at Baishuijiang river in Yunnan, China. In 2009, IFC supported Zhongda Yanjin (operational level company managing the Babishuijiang project) to update the E&S action plan for the project site. IFC staff and an external monitoring agency have been regularly tracking the progress of RAP and corrective action plan implementation through site visits in 2009 and regular liaisons with Sanchuan management and E&S personnel. IFC’s ongoing monitoring work confirms that Sanchuan has made progress towards managing social and environmental issues associated with the Baishuijiang project. The Company is developing measures to materially comply with IFC's requirements on resettlement and is committed to satisfactory resolution of all social issues associated with the project (e.g. gaining community consent by relocated persons at Cascade III). The Baishuijiang project company will continue to submit regular progress reports on the Project’s efforts to restore the livelihoods of affected local communities. At the Sanchuan holding company level, a qualified E&S manager was appointed in 2009. A visit by IFC to the newly acquired Mengnong asset in Yunnan, China confirmed that Sanchuan has conducted adequate screening of E&S risks during the acquisition due diligence process. Building on experiences gained from the Baishuijiang and Mengnong projects, Sanchuan has begun to implement a corporate level E&S risk management system. It has committed to demonstrating the establishment of an E&S management system and its effectiveness in managing E&S issues in existing projects and future projects in compliance with IFC’s Performance Standards by: establishing E&S assessment procedures and allocating required resources both at the holding company level and project level, commensurate with its expansion and rapid acquisition of new assets. This starts with SE’s internal E&S screening; retaining qualified external experts when E&S issues require specific expertise (resettlement, biodiversity, and minority ethnic groups) through the process of risk identification, management program development, and monitoring and reporting; establishing a monitoring system that could provide easy access as well as traceable and auditable information; and a methodology to effectively screen all future hydro acquisitions against IFC performance standards requirements; a set of guidelines and procedures prescribing Sanchuan’s general approach towards restoring the livelihoods of project affected persons; In addition, Sanchuan will have a plan in place for ongoing E&S training of project and management staff, and set up a platform to communicate updated E&S information to external stakeholders, especially those communities directly affected and those in areas adjacent to project sites. As described under ‘Identified Applicable Performance Standards’, applicability of all Performance Standards will be determined by the Sponsor as part of the project-specific reviews. Given that project assets are being sought in Yunnan and other provinces with ethnic minority group representation and known biodiversity values, Sanchuan will deploy early screening for significance of PS 6: Biodiversity Conservation and Sustainable Natural Resource Management and PS 7: Indigenous Peoples. Similarly for PS 8: Cultural Heritage, the presence of cultural heritage sites will be evaluated in project-specific ESIAs, and the Sponsor will have in place a chance finds procedure, to be implemented if required. - PS2: Labor and Working Conditions The Sponsor has human resources policies and procedures at both the Sanchuan holding company level as well as operating company level. During recent visits to Sanchuan’s projects in Yunnan, IFC confirmed that working conditions were reasonable and there were no signs of the use of child or forced labor. However on a visit in June 2009, IFC staff noted that a driver hired by Zhongda Yanjin operating company was driving long hours without adequate rest time to recuperate. On a subsequent trip another driver was driving at very high speed on winding mountainous roads. These could potentially compromise the safety of both drivers and passengers. To address this, Sanchuan is reviewing each operating company’s HR policy and procedures in more detail to ensure that actual implementation fulfill national and IFC requirements. As part of the review, the holding company will commit to ensuring that its contractors follow its human resource policy and requirements. Special attention will be required during the review to ensure that safe driving policies and practices are observed on the ground, so that drivers are not under any pressure to work overtime without proper rest. Sanchuan confirmed that there have been zero fatalities and zero major occupational health and safety accidents in 2009. It is committed to developing detailed occupational health & safety policies and procedures at the holding company and operating company levels.

For its Baishuijiang River hydro projects the Sponsor conducted consultation and disclosure of the Environmental Impact Assessments in accordance with GOC requirements. Upon IFC’s entry to the project the Sponsor expanded its consultation related to land acquisition and community development. Going forward, the Sponsor’s dialogue and communication with affected communities will be accomplished as part of its Public Consultation and Disclosure Strategy (PCDS), which will be designed to meet established GOC legal requirements and IFC’s Performance Standards 1 and 5. For each project, public consultation and disclosure of the social and environmental impact assessment will occur through the procedures established as part of the strategy. The Sponsor will also develop a procedure within its ESMS that addresses communication with external parties, including the handling of complaints. Sanchuan has committed to developing a platform to regularly communicate E&S information to external stakeholders such as local communities, government officials and the general public (see PS1 section). For the Tangcun plant, the Sponsor followed Provincial requirements for consultation and disclosure. Project information was disclosed in several locations, and structured questionnaires were used to solicit comments from residents and government departments. Comments were expressed related to the maintenance of minimum environmental flows, continued operation of the existing power stations to protect jobs, employment opportunities for qualified local residents, and compensation to affected people for land acquisition or loss of use. The Zhejiang Environmental Protection Bureau and Zhejiang Provincial Bureau of Water Resources held an expert meeting in November 2006, and the EIA report was posted on the Bureau’s website in September 2007.

Contact information for the Sponsor: Mr. LI Xiao Liang, Deputy General Manager, Social & Environment Department Sanchuan Energy Development Co., Ltd. 9F, Brilliant Plaza Office Building Sanshi Street, Kunming, Yunnan, China 650021 Tel: 86-871-360-2250 Fax: 86-871-360-2260 Zhongda Hydro will display the ESRS at both its headquarters in Hangzhou and at the Tangcun project site in Qiandaohu. The Company will also publish a notice of the availability of the ESRS in a newspaper in Hangzhou.