The investment by IFC will support the operational expansion of ZHAOHENG HYDROPOWER HOLDINGS LIMITED (ZHAOHENG) to expand its portfolio of hydropower assets in China through IFC's loan and equity financing. Equity will be invested in a corporate entity which may use the proceeds towards any existing and future projects, some of which are as-yet undefined. It is expected that loan proceeds will be used for financing the Menglang/Gaoqiao (Yunnan Province) and Banian (Guizhou Province) assets. These assets together comprise seven projects, arranged as cascade or stand alone projects, of which five are being constructed and two are awaiting start of construction.

RISK CATEGORIZATION
The IFC reports that this is a Category A Project. 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.

EIAs have been prepared for projects for approval purposes, and most projects had been issued with environmental and social management approval conditions by the relevant Government authorities, while some projects are awaiting final EIA approval.

APPLICABLE IFC 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

ENVIRONMENTAL AND HUMAN RIGHTS RISK ASSESSMENT

RIGHT TO HEALTH

The following impacts, reported by IFC, may have implications for the right to health:

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 project 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).

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.

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 were 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. ZHAOHENG 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.

The following survey questions should be raised by communities and individuals affected by ZHAOHENG's activities:

• Has your health been affected since the beginning of the investment project?
• Have you been informed of any potential public health problems that could be caused by the planned investment project?
• Are there mechanisms through which people can file a complaint and/or obtain a remedy when their right to health has been affected?
• Has the company (or any joint venture partners, subsidiaries or sub-contractors) been accused of causing public health problems or affecting people's right to health in other regions or countries?
• Does the company have a policy or programme to ensure that its activities do not cause public health problems or affect people's right to health?
• Does the company consider that the planned investment project could cause public health problems or affect people's right to health?

LABOR RIGHTS

The IFC reports that ZHAOHENG 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. According to IFC, 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.

ZHAOHENG has committed to take steps to address the following conditions at existing power stations that could pose a safety hazard to workers: 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.

The following survey questions should be raised by workers at Zhaoheng's projects:

• Do some workers work under less safe and healthy conditions than others?
• Do women work under less safe and healthy conditions than men?
• Are all workers free to form a union and join the union of their choice?
• Are women and men equally free to form a union and join the union of their choice?
• Can you freely obtain information about unions?
• Do workers have the right to strike?
• Can you freely participate in union meetings?
• Do you consider that your union is able to function freely?
• Can you bargain for better working conditions (i.e. engage in collective bargaining with the company)?
• Do you feel that you are discriminated against because you are a member of a union?

RIGHT TO HOUSING AND PROPERTY

IFC reports:
Displacement: Five operating projects at three locations involved physical displacement of local communities: i) 3,291 persons at Sanjiang (Hunan Province) whose residential and farming land was acquired in 1988 under a Government-led process; ii) displacement of 4 persons at the Hongping (Hubei Province) project site in 2005; and iii) 634 persons at Xiawenyang (Fujian Province) relocated in 1994. Eleven projects at three locations (Jinzhuang and Bienaihe in Yunnan Province; Caoying Luodu in Sichuan Province) resulted in economic displacement of 390 persons. The other projects required land acquisition but no physical displacement, and economic displacement was limited to acquisition of mostly degraded / barren mountainous land and some farm land, especially for projects in remote mountainous parts of Yunnan, Guizhou, and Sichuan.

Compensation and Benefits for Displaced Persons: Compensation rates are negotiated directly between Zhaoheng and land use rights holders, involving mainly cash compensation for lost assets, in the form of a lump sum payment or an annuity in some cases. These were determined by referencing prevailing market rates for land and lost assets (e.g. crops) and compensation standards for other projects in the local area, leading to outcomes voluntarily agreed to by the two transacting parties.

At the Sanjiang project, persons physically resettled (affected persons or AP) from 3 villages received compensation in the form of an alternative land plot near the reservoir area with infrastructure, re-housing on the new land plot, an annual local development fund administered by the local township, and livelihood restoration assistance from the local authorities to help APs acquire new vocational skills to work in processing plants. Prior to land acquisition, local persons mainly engaged in sugarcane and citrus fruit production. The area has since undergone industrialization with primary agricultural processing plants and small steel factories becoming key sources of employment.

The following survey questions should be raised by communities and individuals affected by ZHAOHENG's activities:

• Are there laws, policies or programmes protecting property rights?
• Has the planned investment project afforded people affected by the loss of property an opportunity to meaningfully participate in the planning and compensation evaluations?
• Are there mechanisms through which people can file a complaint and/or obtain a remedy when their right property has been affected? If so, are communities of aware of this grievance mechanism?
• What opportunities (legal or other) are available if you feel that your right to adequate housing has been affected?
• If you believe that the planned investment project could affect your access to adequate housing, is the government aware of the situation?
• Have people in your community ever been forcibly evicted from their homes?

RIGHTS OF INDIGENOUS PEOPLES

The IFC reports that 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.

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, 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.

Avoidance of Adverse Impacts: Given that ZHAOHENG'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).

The following survey questions should be raised by communities and individuals affected by ZHAOHENG's activities:

• Have you (as a peoples) been consulted about the investment project?
• Has the cultural life of your community been affected since the beginning of the investment project?
• Have you (as a peoples) ever been deprived of your means of subsistence?
• Do you feel that your community has been discriminated against because of its culture?

RIGHT TO FOOD

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 and 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.

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.

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 following survey questions should be raised by communities and individuals affected by ZHAOHENG's activities:

• Has your access to good and affordable food in sufficient quantity been affected since the beginning of the investment project?
• Have some community groups' access to food been specifically affected since the beginning of the investment project?
• Has women's access to food been affected since the beginning of the investment project?

The total Project Cost is estimated at US$400 million including the construction of 125MW of hydropower projects and future acquisitions and expansions of hydropower projects. The proposed IFC investment consists of an equity investment of up to US$25 million, an "A" loan for IFC's own account of up to US$50 million, and potentially a "B" Loan of up to US$50 million if feasible subject to market climate and appetite.

Mr. Alan Peng/Mr. Kenneth Lau
19/F, Unit A, JinFengCheng Building
No 5015, Shennan East Road
Shenzhen, China 518015
Telephone : +86-755-8207 0222
Fax: + 86-755-8207 1998
Tel: +86 755 8207 0966
Fax: +86 755 8207 1998
http://www.zhyp.hk

CONSULTATION PROCESS

The IFC reported that:
A. 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, ZHAOHENG took a consultative approach to reach mutual agreement with transacting parties without resorting to compulsory means.

B. 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.

C. At Menglang, the previous owner did not proactively engage with local ethnic communities, resulting in local concerns about project impacts.

ACCOUNTABILITY MECHANISM OF IFC

The Compliance Advisor Ombudsman (CAO) is the independent complaint mechanism and fact-finding body for people who believe they are likely to be, or have been, adversely affected by an IFC or MIGA- financed project. If you submit a complaint to the CAO, they may assist you in resolving a dispute with the company and/or investigate to assess whether the IFC is following its own policies and procedures for preventing harm to people or the environment. If you want to submit a complaint electronically, you can email the CAO at CAO@worldbankgroup.org. You can learn more about the CAO and how to file a complaint at http://www.cao-ombudsman.org/