While all Performance Standards are applicable to this investment, IFCs environmental and social due diligence indicates that the investment will have impacts which must be managed in a manner consistent with the following Performance Standards. If IFCs investment proceeds, IFC will periodically review the the project’s ongoing compliance with the Performance Standards

PS 1 – Assessment and Management of Environmental and Social Risks and Impacts
PS 2 - Labor and working conditions
PS 3 - Resource Efficiency and Pollution Prevention
PS 4 – Community Health, Safety and Security
PS 5 – Land Acquisition and Involuntary Resettlement
PS 6 – Biodiversity Conservation and Sustainable Management of Living Natural Resources
PS 7 – Indigenous Peoples
PS 8 – Cultural Heritage
If IFC’s investment proceeds, IFC will periodically review the the project’s ongoing compliance with the Performance Standards

While the majority of the Sponsor’s existing projects -- as well as the seven projects that will receive IFC loan proceeds -- are small-scale hydropower projects located on small streams in upper catchments, medium-scale projects on larger rivers may be potentially acquired or developed by the Sponsor in future. These will be in rural areas potentially inhabited by ethnic minorities who may become adversely impacted by project activities, and some project locations may also be in proximity to biologically sensitive areas where potentially significant adverse environmental impacts may result from the Sponsor’s projects. Based on the above, this Investment is classified as Category A according to IFC’s E&S Review Procedures.

IFC's appraisal considered the environmental and social management planning process and documentation for the project and gaps, if any, between these and IFCs requirements. Where necessary, corrective measures, intended to close these gaps within a reasonable period of time, are summarized in the paragraphs that follow and (if applicable) in an agreed Environmental and Social Action Plan (ESAP). Through the implementation of these measures, the project is expected to be designed and operated in accordance with Performance Standards objectives.

This section is structured as follows: PS1 analyses the Company’s current E&S Management System (ESMS) and identifies required reinforcements to systems-level processes which will enable the Company to effectively identify and manage risks in all assets including undefined future assets consistent with the Performance Standards. PS1 conclusions are supported by site finding analysis including that of the loan-financed assets of Menglang/Banian/Gaoqiao which are described under PS2-PS8.



Policy: The Sponsor’s corporate level Quality, Environmental, Health & Safety Management System (ESMS) document states the policy goal of “ensuring safety…emphasizing pollution control…and human-centric development to promote harmonious development” (excerpt). Senior managers and operational staff emphasized the need to conduct operations in a manner consistent with principles of environmental and social sustainability. The Company will update its policy goal to state that it will adopt and ensure that all operations comply with IFC’s Performance Standards (2012).



Identification of Risks and Impacts: The Sponsor’s experience in identifying and managing E&S risks associated with the planning of new hydropower facilities has been mainly acquired through its 11 greenfield plant developments, while planning of the other 49 plants was undertaken by the original project developers. The Sponsor’s design and assessment of new projects follows Government requirements relating to project approval and permit applications, including the EIA application process. EIAs prepared to date are undertaken to conform to Chinese legal requirements.



EIAs have been prepared for projects for approval purposes, and most projects had been issued with E&S management approval conditions by the relevant Government authorities, while some projects are awaiting final EIA approval. The Company does not have a copy of the original EIA on file for every project, as the previous proprietors may not have retained the report. To address this, the Company will obtain a copy of all EIAs (except for those projects where after demonstrated multiple efforts the client is unable to obtain a copy of the EIA from the previous owner or local environmental authorities - refer to ESAP) and also develop a EIA Implementation Standard Operating Procedure (SOP) which will describe steps to verify due implementation of management measures and the monitoring regime set out in each project EIA and associated permit conditions.



For potential project acquisition (under construction, recently completed, or in operation), the Company and the developer enter into a Memorandum of Understanding (MoU), allowing the Company to undertake a due diligence (DD) review. An internal team from the Company conducts the review, supplemented with an external technical consultant assessing economic, engineering, technical, and E&S aspects. A key objective of this review is to identify and avoid acquiring projects with known si
gnificant structural and management issues that may open the company to liability, be costly to remedy or hinder project operation. Due diligence E&S criteria include: i) whether there are known adverse ecological impacts, unresolved land acquisition issues, and any other community concerns; and ii) the project approval/permit conditions. These criteria were applied to the seven projects to which IFC’s loan proceeds are expected to be directed.



To refine its due diligence approach, the Company will develop a SOP on E&S DD of potential acquisitions: this will include a list of revised/expanded DD E&S criteria consistent with the Performance Standards to assess impacts and risks of each potential acquisition, thereby informing acquisition decisions. It will describe screening-phase and DD-phase procedures. Qualified and experienced external consultants will be commissioned to conduct DD on each potential acquisition project.



Management Programs: The Sponsor states that once a project has been acquired, it conducts an on-site audit of operating conditions (i.e. plant efficiency, worker safety, and human resource conditions), from which a set of actions is developed to improve plant operation. Subsequently over a period of up to one year, the Company assigns an on-site team to implement the actions, and take over from the operational team of the previous owner in a transition process. Upon completion of the transition, the Company will have installed its own operational E&S policies and procedures to govern the project’s day-to-day operations.



Zhaoheng’s E&S policies and procedures at corporate, hub office, and project levels are a work in progress to be refined and standardized:



i) The Sponsor has a corporate level Environmental Health & Safety (EHS) Manual as part of its ESMS. The ESMS contains E&S Key Performance Indicators (KPI) and broad operational requirements;

ii) hub offices have a series of E&S related policies/procedures (e.g. on health & safety) that they apply to manage projects under their respective jurisdictions;

iii) each inspected project and hub office has various project-specific management plans that were either developed by the previous owner or subsequently introduced by the Sponsor; and

iv) the content of plans and documents at the three levels is not standardized and varies from project to project.



Zhaoheng acknowledges the need to develop a set of “turnkey” E&S procedures and operating manuals synchronized at all levels. Once the transitional phase of a newly acquired or developed project is completed, a standardized set of E&S requirements and procedures consistent with the Performance Standards will be installed at the project, and staff will be trained to implement them effectively. Refer to the ESAP for details.



Organizational Capacity: The Sponsor’s corporate-level personnel with E&S responsibilities include an Engineer from the Technical Management Department assigned to assume E&S duties (E&S Coo
rdinator), a Clean Development Mechanism (CDM) Manager focusing on carbon credit projects, and a Human Resources Manager whose responsibilities include overall HR management and Occupational Health & Safety oversight. The E&S Coordinator and CDM Manager report to the Chief Technical Officer, while the Construction Management Team reports to a Senior Vice President (VP) of the Company. A VP of Acquisition works with regional hub offices on acquisitions of new projects including the associated due diligence review process. Day-to-day management of on-site issues, including engagement of local communities, is the responsibility of staff based at individual plants and also the regional hub office managers. On environmental issues, hub office managers liaise with the E&S Coordinator. Zhaoheng provides an annual budget for the training of new and existing staff, with training content related to E&S focusing on health and safety issues, and construction waste management.



Monitoring and Review: The Company undertakes monthly monitoring and reporting of key operational parameters, with the results consolidated and regularly reported to corporate headquarters. This does not include E&S monitoring results, which are reported on an exception basis i.e. when events such as work injuries occur. The local Government Environmental Protection Bureau conducts external monitoring annually of the environmental compliance status of projects e.g. whether the riparian flow is regularly released as agreed with local communities and as per EIA requirement.



Zhaoheng is committed to E&S sustainability in its operations, and has various components of a basic ESMS in place. ESMS reinforcement and standardized application to all projects (through development and implementation of Standard Operating Procedures or SOPs) will be an important risk management tool for the Company, particularly as it expands, and to ensure consistency with IFC PS requirements. To achieve this, the Sponsor will revise its corporate ESMS to adopt the Performance Standards and include the following and other SOPs, applicable to all levels of the Company:



(i) SOPs related to pollution prevention: these will apply the appropriate World Bank Group General EHS Guidelines (April 2007) to address: construction spoil (muck) disposal; weir pond/reservoir sediment disposal; solid waste management; monitoring of stream water quality upstream and downstream of construction sites; provisions for noise control; and ongoing aquatic biological monitoring. These SOPs will include ongoing ambient environmental monitoring throughout the life of the projects and actions to address impacts as they arise.



(ii) SOPs on community health and safety - these will outline steps to: ensure compliance of the design of all project structures, including upstream water storage structures, with internationally accepted engineering standards for structural integrity; obtain independent engineer certification for all struc
tural designs prior to commencement of construction; implementation of procedures to inspect all project works against design specifications on a quarterly basis; undertake contingency and catastrophic risk event assessment, including dam safety assessment and seismic studies by qualified experts; undertake regular monitoring of dam/weir stability; and prepare scenario-based (e.g. floods, landslides, earthquakes, fire/explosion, traffic accidents, spill of hazardous materials) emergency preparedness and response procedures (EPRP) applicable to staff/contractors/local communities.



(iii) SOP on land acquisition and involuntary resettlement: These will include formal procedures to ensure the Sponsor’s land acquisition and resettlement activities and that of previous owners are PS5-compliant.



(iv) Biodiversity SOPs – these will describe corporate requirements and detailed procedures on: how to assess, avoid and mitigate material impacts on threatened species of flora and fauna and their habitats; post-construction habitat rehabilitation; riparian release protocols (i.e. designing, releasing and recording a measured riparian flow in accordance with permit conditions and good international practice, and assessing if additional releases are required to meet human uses such as seasonal irrigation); commissioning qualified and experienced external experts to screen and assess impacts of potential projects located in ecologically sensitive areas (i.e. natural/critical habitats/legally protected areas/internationally recognized areas e.g. Nu river basin) to ensure PS6 compliance – refer to ESAP for details.



(v) SOP on engaging ethnic minorities - this will include an engagement framework; where projects are likely to adversely impact ethnic minority communities, the SOP will describe requirements to commission social assessments by qualified external experts as needed, develop site-specific Stakeholder Engagement Plans (SEP) on the basis of Informed Participation and Consultation with affected communities, and evaluate SEP effectiveness to verify mitigation of adverse impacts. Local good practices will be compiled as case studies to enrich the SOP and facilitate dissemination of good practice among staff. The SOP will also include protocols for communicating social assessment results and the SEP to ethnic communities in a culturally appropriate manner.



(vi) SOP related to cultural heritage: this will describe the chance find procedures for finds of archaeological, paleontological, historical, cultural, artistic, and religious value, as well as unique natural environmental features that embody cultural values; and establish procedures to protect and enhance cultural properties in consultation with community members.



The revised ESMS will delineate (at corporate, hub office, and project levels) the E&S organizational structure, roles and responsibilities, reporting lines, required resources, and KPIs to ensure effective implementation. The Comp
any will initiate a staff and contractor training and implementation program to help hub offices and power stations develop site-specific procedures and E&S management plans consistent with the revised ESMS. It will also commission qualified and experienced E&S consultants to review ESMS implementation effectiveness. The Company will appoint an appropriately qualified individual, supported by adequate resources, who will have overall corporate responsibility for ESMS development and implementation, and a direct line of reporting to the CEO’s office.

Working Conditions and Management of Worker Relationship: The Company has a workforce of 670 full time staff and 20 part time or temporary workers, of whom 610 are located at project sites or hub offices, and 40 workers are hired by a labor intermediary. Terms of Employment and employee rights and obligations are stated in employment contracts and the Company’s Human Resource Manual.



There is a worker’s union at all except three power stations, and the Company ensures the right of workers to unionize or negotiate a collective bargaining agreement should they wish to. Labor unions at Zhaoheng are responsible for organizing staff recreational activities, and facilitating communications and consultations between workers and management. HR practices at the Company recognize the principles of non-discrimination and equal opportunity. Weekly staff meetings are held at various levels, as is the use of an anonymous email and one-on-one staff interviews as means to ensure regular communications between management and staff, to receive any work related grievances, and to address them.



The Company’s employment contract template has provisions on major retrenchment (i.e. of more than 20 workers at one time, or less than 20 but constituting more than 10% of the Company’s workforce). During the period after Zhaoheng has signed a MoU with the proprietor of a potential asset and before the final acquisition agreement is signed, the Company conducts in-depth operational due diligence on the target asset and this includes human resource aspects; it is possible that the Company may decide not to retain some or all of the proprietor’s workers when it formally takes over operations. Should the Company decide not to, it will develop, communicate, and implement an appropriate retrenchment plan consistent with PS2 requirements for each such potential retrenchment situation – refer to the ESAP.



Protecting the Workforce: All full time staff is provided social security coverage by the Company, and part time workers are covered by the Company’s commercial accident insurance policy. For workers hired by the labor intermediary, Zhaoheng reviews employment contracts to ensure consistency with national labor law requirements, and also asks for copies of worker social insurance coverage documentation. There are no signs of the use of child or forced labor at Company operations.



Occupational Health & Safety: In the past 12 months, there were no fatality incidents and one lost time traffic incident with a worker injured. In October 2011, during construction at the Menglang (Yunnan) project site, four workers hired locally by a contractor died from carbon monoxide poisoning inside a diversion tunnel. The incident report cited “workers bringing a gasoline generator inside the tunnel against company requirements which emitted large amounts of CO” as the cause, and outlined a number of corrective actions taken by the Company. As a result the Company made personnel changes
at the Menglang operating company, including appointment of a new safety officer to reinforce OHS management.



Zhaoheng has in place OHS policies and procedures at the corporate and operating company levels, and has defined corporate OHS targets e.g. minor accident rate not exceeding 2%. While all power stations visited by IFC have OHS procedures on file, the content and level of detail of these procedures varies from project to project as it is drafted by the head of each power station. Corporate policies and procedures describe broad, principle-based aspects of OHS, with fewer details on specific operation-level requirements such as step-by-step instructions on operating in confined spaces.



The Company’s ongoing acquisition of new assets, dispersed over a large geographical expanse across China, will continually absorb new workers into its workforce and also new contractors and their workers at a fast pace, which can potentially create systemic OHS risks, as it will take time to ensure that the latter fully adjust to the Company’s OHS requirements. This is further complicated by the fact that local contractors may employ short term construction workers locally to perform tasks such as tunnel drilling, and the transient nature of the construction workforce creates further challenges in OHS conformance.



In view of this, the Company already has a due diligence and operational streamlining process in place, whereby it takes up to one year as needed to evaluate new assets and to make operational adjustments to recently acquired assets. The Company will further reinforce the streamlining process, by developing and implementing a SOP on OHS (applicable to staff and contractor workers) - this will include requirements for undertaking hazard point analysis at each project site, development of mitigation measures, a monitoring and reporting regime, monitoring parameters (e.g. Lost Time Incident Frequency Rate, Number of Near Misses), a regular site cleanliness and equipment maintenance program, etc.



The Company will take steps to address the following conditions at existing power stations that could pose a safety hazard: i) oil residue found on turbine hall floors; ii) broken and/or missing man-hole covers in some turbine halls; and iii) missing safety grills/covers over moving generator parts.

Construction Risks and Management: Pollution risks occur during project construction and operation. Construction activities involved site clearance, excavation and earthmoving, blasting and tunneling, quarrying, concrete batching, concreting and building erection. Pollution risks associated with these activities included noise, dust, erosion and sedimentation, water quality decline, waste disposal and spoil disposal.



Zhaoheng adhered to local environmental permitting requirements in relation to construction waste management. The Gaoqiao/Menglang/Banian EIA documents specify requirements on: i) setting up a dedicated waste collection area at an appropriate location on the riverbank typically about 30-50m from the river – the Company was required as per permit conditions to fence the lower end to prevent waste from entering into the river by gravity; construction waste and tunnel spoil would be reused as construction material where possible, or collected by local waste handlers; ii) setting up sedimentation pools whereby after sedimentation of suspended solids, waste water was reused for construction activities to minimize external discharge.



The Gaoqiao/Menglang/Banian projects follow permitting requirements on construction pollution prevention and control measures to be implemented such as: erosion and sediment controls on disturbed areas, and site re-vegetation; requirements on setting up proper drainage; protection of stream/river water quality with sediment/effluent settling and treatment; use of excavated rock and general spoil for construction purposes, and disposal of excess spoil in a stable manner that does not cause land or river degradation; camp wastewater treatment; dust suppression; equipment/vehicle exhaust emissions control; and solid and hazardous waste disposal. Local services cut by construction works such as roads, power lines, and water supply pipelines were to be reinstated.



Inherited pollution risks: Inheritance of issues relating to sub-optimal construction practices is a key source of risks faced by Zhaoheng e.g. At the site of one project previously considered for acquisition, the previous owner had dumped significant volumes of tunnel spoil into a stretch (about 100m) of the local river, resulting in a substantial restriction of the watercourse which could cause localized flooding and impact on aquatic ecology. The same issue was reported at Gaoqiao and Menglang, and the Company took corrective action to address this e.g. setting up dedicated spoil disposal and waste collection areas as part of its spoil and waste management practices. As the Company acquires more assets, similar inherited risks will be encountered. Refer to PS1 (SOP on E&S due diligence) for the corporate level action required to address this.



Operation Risks and Management: On most established projects, construction-related pollution has ceased, but pollution from operational activities has to be managed. Pollution risks related to projec
t operation, include oil leaks from turbine/machinery, solid waste disposal of plant materials (such as oils, hydraulic fluid, machinery parts at Mangyahe I), and excessive operating noise received at nearby dwellings (at Mangyahe I).



Some plants (including Menglang) experience small oil leaks from the turbines/generators, with the floor of the turbine hall next to generator covered in oil and usually draining into the nearest floor drain. Oily water from these drains was reported as being collected in drums at some plants. At one recently acquired plant (Mangyahe I) where the Company is still making operational adjustments, noise levels in the nearby village appeared to be excessive, while solid waste was being burnt in an open area near the plant. Some project roads and associated structures had unstable cuttings and embankments that were eroding or subject to landslip. Sediment removed from weir ponds and reservoirs to maintain capacity was being disposed of on nearby river banks, while at one location local people remove sediment once a year for their private use (e.g. sand for construction material, fill for site leveling, and soil for gardens) with the permission of the Sponsor. Sewage from offices and accommodation is treated in on-site septic systems.



Zhaoheng will address the above issues through site-specific measures (refer to ESAP), and also develop standardized pollution control procedures applicable to all projects – refer to PS1 (SOP on Pollution Prevention).



Water Quality: The impact of the Gaoqiao, Banian, Mangyahe, Menglang, Xinzu, Jinzhuang, and Bienaihe projects on downstream water quality is considered limited for the following reasons: i) small scale run-of-river projects with a very short water detention time; ii) insignificant quantities of biomass in the weir ponds plus removal of some of this material; iii) application of soil and river bank erosion mitigation requirements by the Sponsor that limits the erosion hazard (except in the case of inherited issues – refer to earlier discussion) – these are referred to extensively in the Gaoqiao and Menglang EIAs; and iv) controlled release of a riparian flow as referred to in all reviewed EIA’s. The Company has a corporate policy outlining its approach to two aspects related to water quality management: i) reservoir water quality monitoring of parameters such as pH, COD, Coliform, Total Phosphorus, Suspended Solids, etc every two months; and ii) requirements for the removal of biomass and deposited sediment from weir ponds/reservoirs. The Company will include summary results of reservoir water quality monitoring in Annual Monitoring Reports (refer to ESAP).



Greenhouse Gas Emissions: It is estimated that the Sponsor’s 683 MW of installed hydropower capacity producing a total of 2,500 GWh per annum offsets the production of around 3.25 million T CO2e per annum (based on China’s average GHG emission coefficient of 1,300 g/kWh in the coal-electricity fuel chain in 2003)
. The Sponsor certifies 970,190 T CO2e carbon credits from 16 projects through the Clean Development Mechanism (CDM) and sells these credits on the open market. The volume of greenhouse gas emissions from the decomposition of vegetation and soil carbon in weir ponds and reservoir areas over the initial years of project operation have been easily exceeded by the emission savings from hydropower generation instead of fossil fuel-fired generation due to the limited size of the pondages, generally ranging between less than a hectare for most weir ponds, and up to 1,460 ha for the largest reservoirs.



Emergency Response: Project companies have Emergency Response Plans in various forms (e.g. for flood hazards) and power station control rooms were found to have telephones that provided the means of notifying authorities of emergencies. Refer to PS1 for development of a SOP to achieve standardization across facilities.

Inspected project structures were located at various distances from local communities, the closest being several hundred meters away. Typically there were isolated houses scattered along the catchment and larger human settlements located farther away from the main catchment area e.g. at Menglang, a local hamlet was located at about 1 km from the upper catchment area. At certain locations local communities were residing close to powerhouses, as in the case of Mangyahe I (see below).



Five Zhaoheng projects feature a diversion/dam with a height exceeding 40 m, while the rest of the projects consist of a small diversion weir averaging between 3-20 m in height. Given the above and the fact that almost all of the Company’s existing projects are small-scale run-of-river facilities with small storage reservoirs, the risks posed by project structures (including those visited) to local communities (mainly in relation to flooding and catastrophic consequences of dam failures) are limited. This may change if in future the Company acquires medium scale assets featuring larger reservoirs and volumes of water, higher dams/weirs and in closer proximity to concentrated local communities. Given small reservoir surface areas and the fact that none of the projects are located in known active malaria and dengue fever locations, potential risks to community health associated with the creation of mosquito breeding areas are considered negligible.



Site Security and Access: The client employs security guards to patrol project premises during construction and operation. There are no known previous security incidents at Gaoqiao, Menglang and Banian as well as other assets.



Construction impacts: At Banian, Gaoqiao, Menglang and other visited projects, the primary construction-related risks to community health and safety were associated with traffic safety, the use of explosives for tunneling, noise, and dust generated by the transport of materials, equipment, and workers to and from the project site. The Company’s procedures specify requirements and provisions to manage these impacts e.g. watering road surfaces regularly as a de-dusting measure; disallowing construction workers from local logging and dynamite-based fishing activities. The procurement, transport, and storage of explosives are strictly regulated by the local authorities at the county or prefectural levels e.g. Lijiang city. It will be noted that given small scale assets, construction phases of visited projects did not result in any significant influx of non-local workers.



Noise impacts on communities: While most turbine halls are set well back from the nearest houses (i.e. in excess of 300 m), the turbine hall of a recently acquired plant (Mangyahe I) was delivering excessive noise levels in a nearby village located less than 150 m away. The side of the turbine hall facing the village consisted of glass windows, with some missing and many kept open during the warmer, dry months. Local villages wer
e concerned about high noise levels from operating turbines, and the previous project owner had taken no action to mitigate this impact. No construction or operation phase community noise issues are reported at Gaoqiao, Banian and Menglang.



The Company will undertake necessary provisions to minimize noise from the Mangyahe I power house such as a solid wall, double-glazed windows, and noise dampening on the side of the buildings facing local communities. It will also undertake a review of all other projects to identify those with potential noise concerns, and take appropriate actions to minimize impacts. Refer to the ESAP.



Dam safety, flooding and seismic risks: The Company regularly conducts visual monitoring of dam structural integrity, increasing the monitoring frequency during rainy seasons. Most dams and weirs will have insignificant impact on flooding as the few dams with storage have a relatively small storage volume (e.g. the Bienaihe 2 reservoir at 100,000 m3). While individual projects divert a number of small streams, Zhaoheng reported that only one project (Jinfeng) was an inter-basin transfer. A number of local people reported that pre-project, they would stay away from the streams during the rainy season as there was the potential to be washed in due to fast flowing currents; whereas post-project, storage reservoirs have been acting as a flood regulating mechanism (also refer to PS6 on controlled release of riparian flow). Therefore, the project structures (e.g. at Jinzhuang 3) have in fact contributed to reduced flooding risks under non-contingent circumstances.



In terms of contingency scenarios, the due diligence work by external consultants on potential assets included analysis of flood control measures and risks, but did not address in full detailed aspects such as: i) the assessed structures’ ability to resist the maximum probable flood (PMF), the maximum credible earthquake (MCE) in seismically active areas, and other events (e.g. mudslides which occurred in the local areas of a number of sites) without catastrophic failure i.e. uncontrolled release of water from the reservoir due to either dam fractures or water overflow; ii) reservoir flood routing study results to determine the maximum discharge and highest reservoir levels that would occur during design flood levels; and iii) verification that all facility repairs/reinforcements required as per regulatory permitting conditions have been met.



A 2004 document issued by the Banian Land and Resources Bureau confirmed that the geological disaster risk assessment for Banian was duly undertaken by external experts; the Company states that the same assessment has been completed for Menglang which includes analysis of risks associated with mudslides, landslides and earthquakes. The Company does not commission seismic assessment studies by qualified experts for all assets located in seismically active areas of Yunnan and Sichuan. An external due diligence report (Februar
y 2013) on an acquired project in northeast Yunnan (a prefecture with a history of earthquakes) recommended “…pseudo seismic analysis (to be conducted) on the stability of dam/relevant structural design as per relevant local codes.” The same seismic analysis is not available in the same report on another acquired project in Sichuan province, which is also located near an area previously affected by a major earthquake. To address the above, the Company will provide a copy of the Dam Safety Verification Report for projects featuring an individual dam/weir height of 5 meters above ground or an individual storage reservoir volume greater than 50,000m3, prepared by qualified external experts.



Emergency Preparedness and Response: Zhaoheng’s policies include Emergency Preparedness and Response (EPR) requirements on its operating companies – these describe broad, principle-based aspects including broad description of roles and responsibilities. The EPR plan of the Lijiang operating company lists the chain of command and site-specific requirements under different flooding scenarios (e.g. actions required when river flow exceeds 100m/s); while the Mangyahe I EPR plan describe broad-based requirements without specifics. The EPR documents do not contain details on such aspects as: i) scenario-based risk-likelihood-analysis and required preventative actions and mitigations under each anticipated scenario e.g. dam failure due to extreme floods or due to earthquakes; ii) mechanisms of helping local communities to prepare for each emergency scenario (e.g. live drills as needed) and notifying them when actual events transpire. The Company will refine its EPR system through development of the relevant SOP (refer to PS1).

Gaoqiao, Banian and Menglang project sites are not located within or near nationally protected areas. The Gaoqiao EIA states that endangered flora and fauna species are not found at project areas, and concludes that the project will result in limited impact on terrestrial species and reptiles, as well as on local loaches and Sisoridae/Schizothoracine fish species commonly found in local rivers. The EIA also concludes that as long as construction-phase habitat protection and rehabilitation measures are duly undertaken, construction impacts will be location specific and will not negatively impact on the biodiversity and ecological integrity of the area. The Menglang EIA reports 132 flora species in the broader Binglang river basin area within which Menglang projects are located; 10 species of amphibians (of which the tiger frog is listed as a class two nationally protected species); 10 reptile species (of which the Red Mountain Ratsnake and Indo-Chinese Ratsnake are listed as locally rare species); 94 bird species (seven of which are nationally protected e.g. Crested Goshawk and Lady Amherst Pheasant); 19 mammal species; and 16 species of fish. The Menglang EIA concludes limited impacts on local animal species; and that while some impacts on terrestrial species can be expected during breeding seasons, given the broad expanse of similar habitats in the vicinity of project sites, impacts will be limited as wildlife will move away from construction areas and can readily find a similar habitat nearby. Company personnel confirmed that Banian project sites (in central southern Guizhou) are not located within or near protected areas.



Typically, existing plants have a small footprint and were installed in areas that have been heavily utilized (i.e. for agriculture, forest harvesting, etc). Accordingly, the impact on terrestrial species has been limited. For example, the Jinzhuang 3 EIA post-construction inspection document identified 88 species of vertebrates in the project area but none were endangered species. During construction the Company has taken steps to limit disturbance to wildlife by undertaking activities with high noise emissions during the day when animals tend to be less active. The Gaoqiao and Menglang EIAs both specify detailed measures that Zhaoheng is required to follow to minimize / mitigate potential impacts on local fauna and flora during construction.



Fish diversity and populations in the smaller upper catchment streams was reported by local residents to be low, mainly due to the small flows and steep gradients of the streams. The pre-project fish species in the Jinzhuang river streams were described in the Jinzhuang 3 and Chufeng Reservoir EIA post-construction inspection documents (2011) as consisting of the following upper Yangtze fish species: i) Pseudogyrincheilus procheilus (commonly found in Sichuan, Yunnan and Guangxi); ii) Onychostoma sima; and iii) Schizothorax wangchiachii (categorized in 2011 as “Near Threatened” on
the IUCN Red List). No nationally endangered fish species were found in the project area and the species of fish present could survive in stream segments truncated by weirs and other project structures.



Post-construction Rehabilitation: Local environmental permits require project developers to rehabilitate construction sites, as is the case for Gaoqiao, Banian and Menglang. For example, disturbed land at Jinzhuang 3 was planted with grasses and over 5,000 tree saplings to stabilize soil. The Company will ensure that disturbed areas at all construction sites are stabilized by re-vegetating this land (refer to SOP – Biodiversity under PS1).



Based on the above, IFC’s review concludes that existing and known future projects do not fall within or have adverse impacts on areas of critical habitat and legally protected areas, or on endangered species. The Company will establish an SOP applicable to potential future projects located in ecologically sensitive areas (see PS1 and ESAP for details).



Riparian Flows: Stream flow diversions for generation are proportional to the natural flow in each diverted stream/river. In general, the location of plants ranged from small upper catchment streams with an average annual flow rate of between 0.5-5 m3/s (around 55% of projects), larger streams with average annual flow rates between 5-40 m3/s (around 30% of projects), and rivers with average annual flow rates >40 m3/s (around 15% of projects). All of the Sponsor’s projects except Jinfeng (a 13.6 MW intra-basin diversion of 2 m3/s design discharge) are run-of-river diversions with either no or minimal water storage. Plants divert water around a 1-4.5 km stretch of stream between the intake and tailrace outlet, although some projects not inspected have longer diversions. In the dry season the majority of the river flow is diverted, although a riparian flow was reported to be released from most projects throughout the year. In the wet season flows in excess of the design discharge capacity of the plant spill over the weir/dam, providing a greater flow between the intake and tailrace outlet. On most cascade projects the intake of the downstream project is located a short distance downstream of the tailrace outlet of the upstream project, creating a series of dewatered river sections separated by weir ponds.



The release of a riparian or environmental flow from the weir/dam to supply water to maintain aquatic ecology and human uses of the stream/river and river water in the dewatered section is commonly undertaken to meet government approval conditions and in agreement with local stream users (e.g. farmers requiring irrigation water). This requirement is stated in Gaoqiao, Menglang and Banian permitting documents and will be adhered to once those assets commence operation. Although the release of a riparian flow was a project permit condition, it appeared that the volume released was not measured or regulated against the specified minimum flow at Bienaihe a
nd Jinzhuang. The environmental release was small and restricted to either the flow specified in project approval conditions or a leak from the weir or settling basin. As a result of this reduced stream flow and the installation of weirs/dams that created barriers to fish movement, fish numbers have been substantially reduced along the dewatered river sections according to interviewed local persons. To address this, the Company will provide measurement information of the current riparian release levels to ensure they meet the required release as per project permit conditions – refer to the ESAP. On small streams in upper catchments the significance of this adverse impact was limited (compared to mid or lower basin locations on small rivers) because fish diversity and population was naturally low, with local people reporting a reduction in the availability of one or two species of small fish (around 10-15 cm in length) in the streams. At Gaoqiao, Menglang and Banian, fishing is mainly a recreational activity rather than a commercial activity or a key source of household protein. This is consistent with the observation that most interviewed local communities had a diversified source of income (e.g. cash crops, paddy rice, walnuts, Chinese medicines / wild mushrooms from forests, wood/timber sales, etc), and their average level of income appeared to be above subsistence/poverty level, such that they did not rely on fishing to support their livelihoods.



Local persons living in project catchments obtained domestic water supply from springs or sidestreams where the water quality was reported to be good and water could be easily reticulated to villages, rather than extracting water from the project-diverted stream/river. Irrigation water was sourced from the dewatered section of some of the diverted streams at certain times of the year. Several plant managers (including at Menglang) reported releasing flows specifically to supply irrigation water, in agreement with local farmers and in addition to the riparian flow specified in permit conditions, but this practice did not appear to have been formalized in agreements.



The above described limited adverse impacts from the Sponsor’s projects on downstream hydrology and water uses which have been partly mitigated through a regime of controlled flow release in compliance with permit conditions and in consultation with affected downstream water users. To standardize and further improve practices to be consistent with the Performance Standards’ approach to managing/protecting biodiversity in project areas, the Sponsor will develop a related SOP (refer to PS1).

About 60% of Zhaoheng projects (by number) are located in the ethnically diverse provinces of Yunnan, Guizhou and Sichuan whose populations comprise large numbers of ethnic minority persons. Key ethnic groups near project sites as identified by the Company are: Tujia, Dong, Miao, Zhuang, Yi, Buyi, Lisu, Jingpo, Yao, and Tibetan. Some of the ethnic minority persons at some locations maintain traditional norms and practices (e.g. Torch festival), and many have assimilated to different extents into the mainstream Han Chinese culture. The Company employs 100 ethnic minority persons in its workforce recruited from local areas.



The four villages near the Banian project catchment area consist of Han Chinese and also members of the following ethnic groups: Shui; Yao; Miao; Buyi, Mao Nan, and Dong. Near the Gaoqiao project site area, a number of hamlets from two villages have a population of about 1,000 persons of mostly Han Chinese, and a smaller number of Yi, Hui, and Miao persons. About 700 persons (about two-thirds Han Chinese and one-third Jingpo ethnic persons) reside downstream in the Menglang catchment.



Participation and Consent: The tenure arrangement in rural areas of China is such that all rural land is held under village collective or state ownership with use rights for some land parcels assigned to individual villagers (refer to PS5). This is also the case for land acquired for the Sponsor’s projects, including Banian/Menglang/Gaoqiao, and therefore it is not considered traditional or customary land. At project sites there were no signs of the presence of critical cultural heritage linked to the identity of ethnic groups. Given the above, existing projects do not invoke the PS7 requirement of obtaining Free, Prior, and Informed Consent (FPIC) by affected ethnic communities.



At Bienaihe, the Zhaoheng project manager has adopted a consultative approach with local ethnic communities on a regular basis e.g. by learning the Jingpo dialect as a Han Chinese person over the years for more effective dialogue; by providing recovered mud and debris removed from reservoir beds to local community members as home building materials instead of selling it to local brick factories; and by helping locals solve day to day problems (e.g. applying for marriage certificates) where possible. Villagers expressed appreciation of efforts by Zhaoheng to maintain ongoing communications. Company personnel at both Lijiang and Bienaihe projects regularly participate in local ethnic festivals organized by villagers, and the Company would contribute food and other items at these events. At Mangyahe I, the Company recruited a Jingpo staff as its community liaison person and translator, to support the community engagement work of the Bienaihe project manager with local Jingpo and Dai persons. Company staff highlighted the need to understand and respect local cultures in order to build good will. This sentiment was echoed by Zhaoheng senior managers in Shenzhen who emp
hasized the need to be good neighbors with local communities.



Avoidance of Adverse Impacts: Given that the Company’s projects in ethnically diverse locations are mostly small scale run-of-river facilities with limited areas of inundation, impacts on local ethnic communities are considered limited. One key aspect associated with ethnic cultures, evident at both the Lijiang and Dehong plants that were inspected, is the use and access of local natural resources by ethnic minority persons, especially forest-based resources. There are limited impacts from Zhaoheng projects in this regard, mainly occurring during the construction phase of projects; it finds no apparent changes to the local way of life and access to resources (except for river fish but the impact is limited as discussed under PS6).



The Company’s practices at Bienaihe provide a sound basis on which to replicate and standardize the consultative approach of local engagement with ethnic groups. Given that some future Zhaoheng projects will likely be located in ethnic minority areas, the Company will update its corporate policies and procedures to enable such replication across other projects in ethnic areas. Refer to the relevant SOP in PS1.

Projects in Yunnan and those in the Sponsor’s portfolio of existing projects are not known to affect cultural heritage; the Gaoqiao and Menglang EIAs state that the presence of protected cultural heritage is not found near either project area. The same is confirmed by Banian project personnel.



However, there is the potential for future unidentified projects to affect physical cultural resources such as shrines and historic structures that are located on or near watercourses, particularly in ethnically diverse areas of Yunnan (e.g. in certain parts of Dehong prefecture with religious relics), Guizhou, and Sichuan. Project structures or water bodies could result in the removal or destruction of a culturally important feature, or a reduction in downstream flow could compromise the cultural value of an area. To address this, the Company will develop an appropriate corporate level SOP - refer to PS1.

At the Sanjiang project, on average there have been several cases of grievances each year since resettlement in the late 1980’s, but no major incidents according to the Company. At project sites where Zhaoheng directly acquired land from local communities, the Company took a consultative approach to reach mutual agreement with transacting parties without resorting to compulsory means. There are positive signs of strong and proactive local community engagement by Zhaoheng personnel during the process of acquiring land. At Mangyahe I, the original developer did not prioritize relationship building with local communities and engagement was minimal, resulting in some local resentment. After taking over, Zhaoheng assigned the Bienaihe project manager to Mangyahe I with a goal of bringing his community development experience from Bienaihe to re-build local rapport. A similar scenario transpired at Menglang: the previous owner did not proactively engage with local ethnic communities, resulting in local concerns about project impacts. After Zhaoheng acquired the Menglang asset, it prioritized efforts to reach out to local communities in order to rebuild local relations.

Some examples of the Company’s engagement activities at Bienaihe, Lijiang, and Menglang project sites are: i) providing land lease compensation to community members as an annuity (the amount of which is inflation-adjusted by pegging to each year’s prevailing local grain prices) rather than a lump sum, and tracking household expenditures and productive activities as a means to help households channel compensation funds towards productive activities; ii) supporting local infrastructure e.g. rebuilding local irrigation canals, and building bridges to facilitate villager access to forested areas for cattle grazing; iii) Zhaoheng staff conducting random household interviews during the first site visit to a potential project to understand the local context; iv) organizing village meetings to communicate potential construction impacts of a project and to answer questions from community members; iv) having regular informal discussions with villagers during a project’s operational phase – also a key means by which Company personnel understand local concerns and receive grievances if any.

The experience at Bienaihe attests to a nuanced and community-based approach to engagement which considers the long term interest of local communities including ethnic minority communities. It is likely that there are similar local practices at other Zhaoheng project sites. At present these tend to be standalone cases, and there is an opportunity for the Company to identify and summarize local practice and use the results to build the stakeholder engagement part of its ESMS into a corporate level standardized approach, so that all projects and sub-regional operating companies adopt the same broad approach, and adjust specifics according to the local context (refer to PS1/ESAP). The Company may also consider organizing sessions for local staff to exchange good local practice and build up case study materials for the benefit of new staff.

The Company’s due diligence process already assesses the social context of potential assets and avoids those with known issues particularly land related issues. As part of the ESMS development and standardization process (refer to PS1/ESAP), the Company will reinforce the process through development of relevant SOPs related to PS5 and PS7.

The following Sponsor representative will be able to provide further E&S information on the Investment:

Mr. Alan Peng
F/19, Unit A, Jinfengcheng Building, No. 5015, E. Rd. Shennan
Shenzhen, China 518015
Tel: +86 755 8207 0966
Fax: +86 755 8207 1998
http://www.zhyp.hk

The Sponsor will place a local language advertisement in a major newspaper in Shenzhen, Kunming, Guiyang, Changsha, Nanning, Chengdu, and Shijiazhuang for five working days to inform the public that results from IFC’s E&S review are available for access. It will post a summary of the local language E&S Review Summary (ESRS) and E&S Action Plan (ESAP) in a conspicuous location (e.g. front gate) at each of the project sites and at its corporate website.

Broad Community Support is not applicable for this project

Title	Anticipated completion Date	Status	Comments	Completion Date
Formulate and implement a staff/contractor training and implementation program to help hub offices/power stations translate revised corporate E&S Management System (ESMS) requirements into site-specific procedures and management plans consistent with corporate requirements.	12/31/2013 12:00:00 AM	Completed	Completed	04/01/2014 12:00:00 AM
Commission qualified and experienced E&S consultants to conduct site-based DD review of potential acquisition projects using the E&S DD SOP. This is required if E&S risk screening of a potential project by the external consultant(s) has determined a potential project to have met a number of pre-agreed screening criteria to be developed as part of the SOP under 2(j).	10/30/2013 12:00:00 AM	Completed	Completed	10/31/2013 12:00:00 AM
Undertake an annual ESMS implementation effectiveness review, with the first review conducted by a qualified external consultant.	12/31/2013 12:00:00 AM	Completed	Completed	06/14/2013 12:00:00 AM
All existing power stations reviewed to ensure remediation of the following (where applicable) - oil residues on floor; uncovered manholes in turbine halls; missing safety covers over moving generator parts.	10/31/2013 12:00:00 AM	In Progress	Under discussion with IFC client
Undertake necessary actions to minimize noise from the Mangyahe I power house, and other acquired Zhaoheng facilities in close proximity to local communities (i.e. less than 100 meters away) e.g. a solid wall and/or noise dampening on the side of the turbine hall near dwelling, double-glazed windows, etc.	12/31/2013 12:00:00 AM	Completed	Completed	03/18/2014 12:00:00 AM
Should the Company consider acquiring or developing project(s) in a critical habitat area, or in a legally protected area, or in an internationally recognized area (e.g. Nu/Salween river basin), before finalizing acquisition or development plans, the Company will commission assessments by a qualified and experienced external expert to confirm that requirements listed in paragraphs 16-20 of IFC Performance Standard 6 have been met. Where the assessment finds gaps but recommends that mitigations can be undertaken to address those gaps, the Company will confirm its commitment to implementing proposed mitigation measures, and IFC will retain prior review rights before the proposed acquisitions/developments are finalized. An external audit by a qualified and experienced expert will be conducted to verify mitigation effectiveness. Note: Refer to paragraphs 16-20 of IFC Performance Standard 6 for definitions of critical habitat, legally protected, and internationally recognized areas.	03/31/2014	In Progress	Under discussion with IFC client