Extended Annual Review Report
Project Numbers: 45900-014 (Phase 1) and 47923-001 (Phase 2) Loan Numbers: LN2753 and CF58 (Phase 1) and LN3071 and CF63 (Phase 2) December 2020
China Water Affairs Group Limited Phase 1: Municipal Water Distribution Infrastructure Development Project Phase 2: Urban–Rural Integration Water Distribution Project (People’s Republic of China)
This is an abbreviated version of the document, which excludes information that is subject to exceptions to disclosure set forth in ADB’s Access to Information Policy.
CURRENCY EQUIVALENTS Currency units – yuan (CNY) – Hong Kong dollar (HK$)
At Appraisal At Operations Evaluation Phase 1: Phase 2: 12 Feb 2011 30 Sep 2013 27 May 2020 CNY1.00 – $0.15 $0.16 $0.14 HK$1.00 – $0.13 $0.13 $0.13 $1.00 – CNY6.59 CNY6.12 CNY7.13 $1.00 – HK$7.80 HK$7.76 HK$7.75
ABBREVIATIONS
ADB – Asian Development Bank CIL – China Water Affairs Investment Limited CWA – China Water Affairs Group Limited DEMR – development effectiveness monitoring report DMF – design and monitoring framework EHS – environment, health, and safety EIRR – economic internal rate of return ESG – environment, sustainability, and governance ESHS – environment, social, health, and safety ESMS – environmental and social management system FIRR – financial internal rate of return km – kilometer m3 – cubic meter PPP – public–private partnership PRC – People’s Republic of China RRP – report and recommendation of the President US – United States
NOTES
(i) The fiscal year (FY) of China Water Affairs Group Limited ends on 31 March. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g. FY2019 ends on 31 March 2019.
(ii) In this report, “$” refers to United States dollars unless otherwise stated.
Vice-President Ashok Lavasa, Private Sector Operations and Public–Private Partnerships Director General Michael Peter Barrow, Private Sector Operations Department (PSOD) Director Maria Eufemia V. Apilado, Portfolio Management Division (PSPM), PSOD
Team leader Suhail Yaqoob Khan, Principal Investment Specialist, PSPM, PSOD Team members Jhiedon Florentino, Economics Officer, Private Sector Transaction Support Division (PSTS), PSOD Hayato Hoshi, Senior Investment Specialist, PSPM, PSOD Manfred Kiefer, Senior Economist, PSTS, PSOD Lingkai Li, Investment Officer, PSPM, PSOD Arlene Ponce De Leon Porras, Senior Safeguards Officer, PSTS, PSOD Raneliza Deguia Samiano, Senior Social Development Officer, PSTS, PSOD Yee To Wong, Investment Specialist, PSPM, PSOD
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page
BASIC DATA i EXECUTIVE SUMMARY iii I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 2 II. EVALUATION 3 A. Project Rationale and Objectives 3 B. Development Results 4 C. ADB Additionality 6 D. ADB Investment Profitability 7 E. ADB Work Quality 7 F. Overall Evaluation 8 III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS AFTER VISIT 8 A. Issues and Lessons 8 B. Recommendations and Follow-Up Actions 8
APPENDIXES 1. Project-Related Data 9 2. Results and Ratings for Project Contributions to Private Sector 10 Development and ADB Strategic Development Objectives—Infrastructure 3. Sector Review 14 4. Environmental Impact 16 5. Social Impact 19
BASIC DATA Municipal Water Distribution Infrastructure Development Project (Phase 1) (LN2753 and CF58-PRC)
As per ADB Project Documents Actual Key Project Data ($ million) ($ million) ADB Investment: A Loan: 100.0 Committed 100.0 Disbursed 100.0 B Loan: 100.0 Committed 100.0 Disbursed 100.0 ADB = Asian Development Bank.
Key Dates Expected Actual Concept Clearance Approval 14 February 2011 14 February 2011 Board Approval 25 April 2011 25 April 2011 Signing of A Loan Documents 30 June 2011 8 July 2011 First Disbursement under A Loan 30 June 2011 7 November 2011 Signing of B Loan Documents 31 December 2012 1 February 2013 First Disbursement under B Loan 31 December 2012 10 April 2013
Project Administration and Monitoring Number of Missions Number of Person-Days Due Diligence and Appraisal 4 19 Negotiations and Signing 5 23 XARR Missiona 1 6 XARR = extended annual review report. a The mission was in the form of a virtual meeting because of travel restrictions related to the coronavirus disease (COVID-19) pandemic. ii
BASIC DATA Urban–Rural Integration Water Distribution Project (Phase 2) (LN3071 and CF63-PRC)
As per ADB Project Documents Actual Key Project Data ($ million) ($ million) ADB Investment: A Loan: 100.0 Committed 100.0 Disbursed 100.0 B Loana: 200.0 Committed 200.0 Disbursed 200.0 ADB = Asian Development Bank. a B Loan commitment of up to $100 million was approved by ADB’s Board of Directors on 3 December 2013. The Investment Committee approved on 29 October 2015 a request to upsize B loan commitment to up to $200 million in total.
Key Dates Expected Actual Concept Clearance Approval 5 August 2013 5 August 2013 Board Approval 3 December 2013 3 December 2013 Signing of A Loan Documents 31 March 2014 27 May 2014 First Disbursement under A Loan 30 September 2014 18 June 2015 Signing of B Loan Documents 30 September 2015 18 January 2016 First Disbursement under B Loan 30 September 2015 27 January 2016
Project Administration and Monitoring Number of Missions Number of Person-Days Due Diligence and Appraisal 1 9 Negotiations and Signing 6 24 XARR Missiona 1 6 XARR = extended annual review report. a The mission was in the form of a virtual meeting because of travel restrictions related to the coronavirus disease (COVID-19) pandemic.
EXECUTIVE SUMMARY
This extended annual review report covers two projects with China Water Affairs Group Limited (CWA): (i) the Municipal Water Distribution Infrastructure Development Project (phase 1), approved by the Board of the Asian Development Bank (ADB) in April 2011, (ii) and the Urban–Rural Integration Water Distribution Project (phase 2), approved in December 2013. Phase 1 assistance comprised (i) a United States (US) dollar–yuan dual currency A loan of $100 million equivalent, and (ii) a B loan of $100 million. Phase 2 assistance comprised (i) a US dollar–yuan dual currency A loan of $100 million equivalent, and (ii) a B loan of $200 million.
The projects supported improved water distribution services in second- and third-tier cities in the People’s Republic of China (PRC), where the government encouraged public–private partnerships at the municipal level in strengthening access to safe and reliable water supply. Phase 2 extended the scope further to include the surrounding semi-urban and rural areas of target cities to address the urban–rural imbalance in water access and quality. In both projects, ADB provided financing to CWA and its subsidiary holding companies to support their investments in a portfolio of eligible subprojects across the country, with the proceeds applied toward repairing or replacing old pipelines, upgrading water treatment plants, and optimizing network connections.
The projects are rated successful overall.
The development impact is rated satisfactory based on the following:
(i) The contribution to private sector development and ADB strategic development objectives is satisfactory. The key output objective—the efficient operation of water supply facilities at designed performance levels of up to 2 million cubic meters (m3) per day—was substantially met. Phase 1 and phase 2 supported a total of 19 subproject entities that added combined new capacity of about 2.4 million m3 per day, a major increase from CWA’s total capacity of 4.1 million m3 per day prior to ADB’s intervention. The projects have also exceeded the targets on reduction of nonrevenue water (water that is pumped and then lost or unaccounted for because of leaks and other causes). (ii) CWA’s economic performance is rated satisfactory. The recalculated economic internal rates of return (EIRRs) for phase 1 and for phase 2 both exceeded the 10% threshold indicated in the extended annual review report guidelines, as well as the reference social discount rates of 10% used in phase 1 and 12% used in phase 2 and the 9% recommended by ADB’s 2017 Guidelines for the Economic Analysis of Projects. (iii) The projects’ environment, social, health, and safety performance is rated satisfactory. CWA established and updated its environmental and social management system and created a department to oversee its implementation. Based on information gathered during a virtual mission and available documents, CWA has complied with national laws and regulations as well as the applicable provisions under ADB’s Safeguard Policy Statement (2009), with no litigation or grievances outstanding. (iv) The project’s business success is rated satisfactory. CWA has consistently achieved high profit margins and growth rates because of a supportive government policy environment and a well-executed sustainable business strategy of acquiring controlling interests in water service companies run by municipal governments and turning them into efficient operations. iv
ADB’s additionality is rated satisfactory. Through the B loans in both phases, ADB secured $300 million of commitments in aggregate from a diverse group of commercial financial institutions. In doing so, ADB successfully attracted private sector capital that CWA otherwise would have had difficulty mobilizing. In terms of nonfinancial additionality, CWA enhanced its environment, health, safety, and social policies as a condition for disbursement of the ADB loans and established a separate department to implement the environmental and social management system. The safeguards best practices adopted by CWA set a benchmark for industry peers to follow.
ADB’s investment profitability is rated satisfactory. The interest margins received by ADB were in line with CWA’s credit profile and comparable transactions in the water infrastructure sector.
ADB’s work quality is rated satisfactory based on a satisfactory rating for screening, appraisal, and structuring, and for monitoring and supervision.
Finally, the experience in assisting CWA offers several lessons for future ADB projects focused on transforming public utilities such as water supply services in developing member countries. Development impact can be maximized through public–private partnerships involving capable enterprises, timely intervention during a company’s growth stage, and corporate finance structures with a portfolio approach.
ADB maintains good relationship with CWA while monitoring the performance of projects still in progress and will continue to identify potential opportunities to replicate the transaction structure for improving municipal water supply services in developing member countries.
I. THE PROJECT
A. Project Background
1. On 25 April 2011, the Board of Directors of the Asian Development Bank (ADB) approved the Municipal Water Distribution Infrastructure Development Project, representing the first phase of ADB’s assistance to China Water Affairs Group Limited (CWA). Phase 1 was designed to support the rehabilitation and expansion of water distribution networks in second- and third-tier cities in the People’s Republic of China (PRC) by funding multiple subprojects undertaken by CWA and China Water Affairs Investment Limited (CIL), which would be established as a wholly- owned subsidiary of CWA and as a holding company for CWA’s PRC urban water supply operations. ADB’s financing package comprised (i) a United States (US) dollar–yuan dual currency A loan of up to $100 million equivalent, with US dollar loans available to CWA and yuan loans available to CIL; and (ii) a B loan of up to $100 million available to CWA, funded by commercial banks.
2. On 3 December 2013, the Board approved the Urban–Rural Integration Water Distribution Project, a follow-on transaction to finance CWA’s investment in additional subprojects that would reach rural and semi-urban communities adjacent to existing service networks and establish new distribution hubs in second- and third-tier cities. Phase 2 assistance was provided to CWA and Shanghai Silver Dragon Investment Limited, an investment holding company wholly owned by CWA, consisting of (i) a US dollar–yuan dual currency A loan of up to $100 million equivalent, and (ii) a US dollar–yuan dual currency complementary loan of up to $100 million equivalent. On 4 December 2016, ADB approved an upsizing of the complementary loan by up to $100 million, resulting in total B loan commitment of up to $200 million under phase 2.
3. Economic growth and industrialization have resulted in rapid urbanization in the PRC. The urban population was 190 million in 1980 and accounted for 19% of the total population. By 2018, it had grown to 824 million and accounted for 59% of the total population, placing significant pressure on urban infrastructure and increasing urban demand for access to reliable and safe water.1 Up until 2010, a considerable proportion of rural residents lacked household tap connections and bore the brunt of negative health and livelihood impacts caused by scarce or substandard water. Although government policies encourage private sector investment in and operation of water supply infrastructure, a lack of access to finance has been a bottleneck for private sector participation and a barrier to expanding safely managed water services.
4. Although all three levels of government in the PRC (municipal, provincial, and central) are involved in the development and supervision of water supply, water distribution services have historically been the responsibility of municipal governments, with water utilities typically operated by local government financing vehicles empowered to incur debt and receive tariffs. Provincial governments oversee compliance with regulations, review tariff structures, and approve investment projects. The central government sets guidelines for drinking water quality and manages the overall planning of water supply infrastructure.
5. Municipal water supply commercialization began in 1998 with a national policy mandating that urban water utilities earn a return on equity and introducing clear tariff-setting procedures. Furthermore, government economic and enterprise reform initiatives required that all water supply and wastewater projects be financially sustainable and capable of recovering costs. According to national tariff guidelines, water distribution tariffs were to be set on a cost-plus basis, including
1 World Bank. World Development Indicators (accessed 16 June 2020). 2 the costs of treated water, costs of distribution, specified returns on equity, and taxes. To improve operational efficiency, in 2004 water distribution in medium-sized and small cities was opened to joint ventures involving foreign investors.
B. Key Project Features
6. CWA is a private company incorporated in Bermuda and listed on the Hong Kong Stock Exchange, with operation management centers in Beijing and Shenzhen. Following government policies promoting private sector investment in urban water services, CWA was founded by experienced industry executives in the PRC and has grown rapidly to become a pioneer in water supply and distribution.
7. Individual concession contracts govern each of CWA’s water supply and wastewater treatment subprojects, structured through majority-owned or controlled joint-venture entities with local governments. These service concession arrangements generally involve CWA as operator (i) constructing water supply and sewage treatment infrastructure on a build–operate–transfer basis; (ii) paying a specific amount for those arrangements on a transfer–operate–transfer basis; and (iii) operating and maintaining the infrastructure at a specified level of serviceability on behalf of the relevant government authorities for periods ranging from 10 to 55 years. CWA is paid for its services over the concession periods at prices stipulated through a pricing mechanism.
8. Both phases of ADB assistance were intended to support water treatment and distribution subprojects meeting certain eligibility criteria on location, investment purpose, environmental and social risk mitigation, water efficiency improvement, and financial return. Investments in each subproject would be targeted at: (i) repairing or replacing old pipelines and upgrading water treatment plants; (ii) optimizing network connections by adding pumping stations and changing the diameter of pipes; (iii) centralizing management and dispatching systems with new information technology, remote network supervision, and automation of pumping stations; and (iv) expanding and densifying water distribution networks.
9. Loan proceeds were used to fund eligible subprojects on a portfolio basis to reduce transaction costs and diversify risk. This approach enabled ADB to provide financing support to multiple water supply subprojects that would be too small and time-consuming for ADB or international banks to finance on a stand-alone basis. Additionally, the transaction structure was designed to facilitate the mobilization of private capital through the B loans.
C. Progress Highlights
10. Before the phase 1 loan agreements were signed, it was decided that, rather than establishing CIL, CWA would designate Shanghai Silver Dragon Investment Limited, an existing subsidiary company, as the PRC onshore borrower for the phase 1 loans. The A loan under phase 1 was fully disbursed as of 16 October 2012 to fund six subprojects. The B loan under phase 1 was successfully syndicated to 17 commercial banks and was fully disbursed as of 1 August 2013. The phase 1 B loan funded seven subprojects (four of which were also financed by A loan proceeds)
11. Under phase 2, the A loan was fully disbursed as of 14 September 2015 to fund five subprojects (three of which were also supported by proceeds from phase 1 financing), while the B loan was successfully syndicated to 20 commercial lenders and fully disbursed as of 29 September 2016 to fund nine subprojects (one of which also benefited from phase 1 3
financing).2 Phase 2 thus financed 10 new subprojects in total. Table 1 provides an overview of subprojects financed.
Table 1: List of Subprojects Subproject Location Phase 1 Changsha (China Water Affairs) Co., Ltd. Changsha, Hunan Chongqing Yongchuan Qiaoli Water Affairs Limited Yongchuan, Chongqing Gao'an Water Affairs Limited Yichun, Jiangxi Ji'an Water Affairs Co., Limited Ji'an, Jiangxi Jiangxi Wannian Silver Dragon Water Affairs Limiteda Shangrao, Jiangxi Luxi Water Affairs Limited Pingxiang, Jiangxi Pingxiang Water Affairs Limited Pingxiang, Jiangxi Xinyu Water Affairs Group Limited Xinyu, Jiangxi Yifeng Silver Dragon Water Affairs Limited Yichun, Jiangxi
Phase 2 Changde Anxiang Silver Dragon Water Affairs Co., Ltd. Changde, Hunan Changsha (China Water Affairs) Co., Ltd. Changsha, Hunan Gao'an Water Affairs Limited - Cunqian Water Plant Yichun, Jiangxi Gao'an Water Affairs Limited - Ruiyang Water Plant Yichun, Jiangxi Henan Guoyuan Water Affairs Co. Ltd. Zhengzhou, Henan Heyuan Water Industry Group Co., Ltd. Heyuan, Guangdong Huaihua Yuanchen Water Affairs Co,, Ltd. Huaihua, Hunan Ji'an Water Affairs Co., Limited Ji'an, Jiangxi Jiangxi Huanggangshan Water Development Co. Ltd. Shangrao, Jiangxi Jiangxi Yichun Pinang Water Co., Ltd. Yichun, Jiangxi Jingzhou Water Affairs Group Co., Ltd. Jingzhou, Hubei Longyao Silver Dragon Water Affairs Co., Ltd. Xingtai, Hebei Yuncheng Airport Development Zone Hongyi Water Supply Co., Ltd. Yuncheng, Shanxi Zhoukou Silver Dragon Water Affairs Co., Ltd. Zhoukou, Henan
II. EVALUATION
A. Project Rationale and Objectives
12. Protection and development of water resources have been priority goals of economic planning in the PRC for both the government and ADB. Despite being the world’s second-largest economy and home to 21% of the global population, the PRC has only 6% of the world’s freshwater resources.3 The impacts of water scarcity, including water pollution, have cost the country roughly 2.3% per annum of gross domestic product.4 The projects thus addressed crucial PRC development needs.
13. The projects were aligned with ADB’s Strategy 20205 as they supported poverty reduction and inclusive growth through (i) environmentally sustainable development, (ii) public–private partnerships, and (iii) private sector engagement. The projects were consistent with the three pillars underpinning ADB’s country partnership strategies for the PRC for 2008–2010 6
2 Part of phase 2 loan proceeds supported phase 1 subprojects. Phase 2 was a follow-on transaction that built on the scope of phase 1 by extending support to surrounding semi-urban and rural areas of cities already served by CWA. 3 World Bank. 2018. China: A Watershed Moment for Water Governance. Beijing. 4 ADB. 2018. Managing Water Resources for Sustainable Socioeconomic Development. Manila. 5 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank. 2008–2020. Manila. 6 ADB. 2008. Country Partnership Strategy: People’s Republic of China. 2008–2010. Manila.
4 and 2011–2015:7 (i) inclusive growth and balanced development, (ii) resource efficiency and environmental sustainability, and (iii) regional cooperation and public goods. The projects were also in line with ADB’s water sector policy, 8 which underlined careful management and participatory approaches to conserve water.
B. Development Results
14. Overall, the development results are rated satisfactory.
1. Contributions to Private Sector Development and ADB’s Strategic Development Objectives
15. The key output objectives under the design and monitoring frameworks (DMFs) for phase 1 and phase 2 were, for each phase, the financing of 10 subprojects resulting in the efficient operation at designed performance levels of up to 2 million cubic meters (m3) per day of water supply facilities that comply with ADB standards. The performance indicators were met at a satisfactory level. The phase 1 and phase 2 subprojects contributed to aggregate new capacity of about 2.4 million m3 per day, a significant expansion from CWA’s total capacity of 4.1 million m3 per day before ADB’s intervention. All subprojects regularly passed water quality testing and complied with national standards. The ADB phase 1 and phase 2 loans financed 19 subproject entities, all in second- and third-tier cities, substantially meeting the target of creating 10 joint ventures of such nature in each phase. Within the first 5 years of phase 1 assistance (FY2012– FY2016), the nonrevenue water ratio of ADB-supported subprojects declined from 32% to 19%, representing a 41% decline in tap water waste and meeting the target output of a 40% reduction.9 With respect to phase 2 subprojects, during FY2014–FY2018, the nonrevenue water ratio saw a 9% weighted average decline, exceeding the target of a 5% decline.10 The key outcome under the phase 1 DMF was improved water services in second- and third-tier PRC cities. The project achieved this target. The nine subprojects financed by ADB have added 2,500 kilometers (km) of new pipelines to municipal water supply systems, providing 360 million m3 of water annually to more than 43,000 households with close to 1.7 million connections, which include those in outlying urban areas populated by poorer urban residents. The subprojects have created 1,500 construction jobs and contributed about CNY320 million annually to local economies through procurement of goods and services.11 The subprojects generate about CNY90 million of revenue for the PRC government annually through taxes and water fees, which exceeds the CNY66 million that they generated in 2010 but falls short of the phase 1 DMF output target of CNY213 million by 2015.
16. The key outcome under the phase 2 DMF was improved water services in second-tier and third-tier cities and surrounding semi-urban and rural areas. This has been achieved. The phase 2 subprojects serve more than 910,000 new users and provide more than 330 million m3 of water annually. More than 2,300 km of new pipelines have been added and more than 1,600 construction jobs have been created through phase 2 subprojects. More than CNY1.1 billion of local goods and services were procured and more than CNY316 million was paid in local taxes in 2018.
7 ADB. 2008. Country Partnership Strategy: People’s Republic of China. 2011–2015. Manila. 8 ADB. 2001. Water for All. Manila. 9 CWA data and ADB calculations. 10 Changes in nonrevenue water ratios of subprojects from April 2015 to September 2019 weighted by amount of water supplied; ADB calculations. 11 ADB. Development Effectiveness Monitoring Reports, April 2015–September 2019. 5
17. The overall rating for contributions to private sector development and ADB’s strategic development objectives is satisfactory. The projects have contributed to the intended impacts related to overall development of the PRC’s water sector: (i) expanded access to quality water supply for urban households and other customers, and (ii) improved water efficiency through increased private sector participation in urban water supply.
2. Economic Performance
18. The projects are economically viable as the recalculated combined EIRR exceeds the reference social discount rates of 10% (used in phase 1) and 12% (used in phase 2) as well as the 9% discount rate recommended by ADB guidelines.12 Based on these and the fact that the estimated individual EIRR exceeded the 10% threshold indicated in the extended annual review report guidelines, the economic viability for both phases is reconfirmed and their economic performance is rated satisfactory.
3. Environment, Social, Health, and Safety Performance
19. In compliance with ADB’s Safeguard Policy Statement (2009), the assessment of the potential environment, health, and safety (EHS) impacts and risks classified both projects as category B for environment.
20. The extended annual review ascertained that CWA has established and updated its environmental and social management system (ESMS), as required by ADB, to ensure compliance with local and national regulations. The review also acknowledged that CWA and its subsidiaries complied with national environmental laws; regional environmental regulations, policies, and standards; and the requirements of the concessionaire agreement, joint venture agreement, and ADB’s Safeguard Policy Statement. The review also confirmed that CWA submitted to ADB the environmental and social compliance audit report prior to actual project implementation, and submitted annual environmental and social performance reports for 2012–2019. CWA confirmed that no significant accident has occurred and that no litigation, complaint, regulatory notice, or fine has arisen or been issued during project operation. In addition, CWA has been disclosing details of its environmental and social safeguards performance to stakeholders through annual reports; and has been posting environment, sustainability, and governance (ESG) reports on its website.
21. CWA has established an ESMS Department to oversee implementation of the ESMS. The department is headed by the deputy general manager of CWA and consists of capable and qualified team members at the corporate and subproject/subsidiary level. ESMS training is conducted routinely at headquarters and subsidiaries for EHS staff assigned to subproject sites. Some ADB-funded subprojects have obtained International Organization on Standardization (ISO) 14001:2015 certification, and CWA confirms that it has implemented a robust EHS management system. 13 According to the published ESG reports, some subsidiary companies have been granted awards and recognition for exemplary EHS performance.
22. On social safeguards, both projects (phases 1 and 2) were categorized B for involuntary resettlement and C for indigenous peoples in compliance with ADB’s Safeguard Policy Statement. However, screening and audits undertaken for each subproject indicated that no subprojects would result in involuntary resettlement or indigenous peoples impacts; therefore, all subprojects
12 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 13 ISO 14001:2015 specifies the requirements for an environmental management system that an organization can use to enhance its environmental performance.
6 were categorized C both for involuntary resettlement and indigenous peoples. Compensation for all subprojects has been completed and there are no grievances raised in relation to land acquired by the government for ADB-funded subprojects. No subproject sites belong to indigenous peoples or vulnerable ethnic minority groups, nor are any project sites being claimed as ancestral domain areas. Project facilities are located in areas where the population is primarily of Han ethnicity.
23. CWA reported that, at its peak, 3,898 employees (15 full-time, 38 part-time and 3,845 contractual employees) were employed by 19 subproject companies. CWA, its contractors, and its subcontractors complied with applicable national labor laws and regulations. No noncompliance has been identified. Subproject companies are monitored in relation to implementation of corporate policy. CWA also requires its contractors to comply with national labor policies and screens out subcontractors with ethical issues. Environmental and social audits undertaken for subprojects indicated that, as early as phase 1, a grievance redress mechanism had been established at the corporate and subproject levels to address worker and community grievances; however, no grievances had been filed as of the time of this review. The borrower has been responsive to community requests and has implemented beneficial community development programs in subproject areas (Appendix 7: Social Impacts).
24. Based on the review and evaluation of project documents and data gathered from a virtual meeting, the EHS performance of the project is rated satisfactory.
4. Business Success
25. Since phase 1 of ADB’s intervention, CWA has grown rapidly in terms of both operating scale and financial results. As of the end of FY2012, the core water supply business had about 5 million connections in 21 cities across eight provinces and/or administrative areas; by the end of FY2019, it had about 22 million connected customers in 60 cities across 14 provinces and/or administrative areas.14 Balance sheet and income growth have been strong, particularly during FY2015–FY2019 when average revenue growth was 23% per annum. Revenue growth has mainly been a result of growth in the volume of water sold following acquisition of new subsidiaries and expanded operations of existing joint ventures, with average water tariffs remaining level during the period. From FY2014 to FY2019, CWA’s annual water delivery increased from 565 million tons to more than 1 billion tons. CWA’s net profit margins during FY2012–FY2019 ranged from 19% to 26%, compared with overall PRC water supply industry levels of 9% to 12%.15
26. CWA’s strong operating and financial performance is largely attributable to (i) the close alignment of its business strategy with government policies encouraging privatization and public–private partnerships; (ii) its ability to acquire controlling interests in poor quality water companies run by municipal governments and make them efficient and profitable; and (iii) CWA management’s industry knowledge and ability to capitalize on market trends.
27. The overall business success rating is satisfactory.
C. ADB Additionality
28. ADB’s financial additionality was critical in two areas. First, ADB’s involvement encouraged injections of private sector capital that would otherwise have been a challenge to mobilize. ADB’s direct loans provided confidence to potential investors and resulted in the phase 1 B loan attracting $100 million of commitment from 17 commercial lenders and the
14 ADB calculations; and ADB. Development Effectiveness Monitoring Reports, April 2015–September 2019. 15 ADB calculations; and China Bureau of Statistics. China Statistical Yearbooks, 2012 and 2019. 7
phase 2 B loan securing $200 million in funding from 20 private sector financial institutions. Second, the project design, which ADB developed by drawing on its experience with other PRC infrastructure finance projects, provided long-term financing at commercially acceptable rates to support a series of water supply subprojects that would have been difficult to finance on a stand- alone basis because of high transaction costs. This portfolio approach also facilitated risk diversification from lenders’ perspective.
29. ADB’s nonfinancial additionality was also significant. As a condition for the first disbursement under phase 1, ADB required CWA to revise its environment, social, health, and safety (ESHS) policies, originally put in place in 2008, to comply with ADB’s Safeguard Policy Statement. CWA conducted annual evaluations of the operations of all subsidiaries, and provided semiannual confirmations to ADB attesting that it remained compliant with all national regulations and ADB safeguard standards. ADB guidance to CWA beginning in 2012 has led to corrective actions at certain water treatment facilities (such as installation of chlorine absorption facilities and upgrading of vitriol ponds) and improved institutional capacity in ESHS management, with a separate department established for ESMS implementation. The safeguard components of the projects have served as examples of best practices to CWA’s industry peers, enhancing awareness and compliance in the industry.
30. The overall rating for ADB additionality is satisfactory.
D. ADB Investment Profitability
31. ADB’s investment profitability is rated satisfactory. The interest margins received by ADB under both phases were approved by the Investment Committee and deemed within the price range of similar transactions in the sector. The deal economics yielded investment returns for ADB that matched the loan tenors and the projects’ credit risk profile. CWA complied with all of its debt service obligations, having made principal and interest payments early or on time.
E. ADB Work Quality
32. ADB’s effectiveness in screening, appraisal, and structuring is rated satisfactory. The project evaluation and approval processes were conducted within a reasonable timeframe: for phase 1, concept clearance was completed in February 2011, with ADB Board approval obtained in April 2011; for phase 2, concept clearance was done in August 2013, with ADB Board approval secured in December 2013. Due diligence prior to project approval was comprehensive, focusing on issues relevant to project risks and effectiveness, including CWA’s aggressive business plan, expected increase in leverage, user payment risks, and regulatory issues. Financing agreements for the phase 1 A loan were signed in July 2011, followed by the first disbursement in November 2011. Documents for the phase 2 A loan were signed in May 2014 and the first disbursement was made in June 2015.
33. Monitoring and supervision quality is rated satisfactory. The ADB deal team monitored CWA’s operating and financial performance through regular communication and follow-up on information submission, including financial statements, updates on subproject entities benefiting from ADB assistance, and annual environmental and social performance reports. CWA complied with all reporting requirements in a timely manner. As a result, ADB has been up to date and well informed throughout the project.
34. ADB’s overall work quality is rated satisfactory.
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F. Overall Evaluation
35. Overall, the projects are considered successful.
III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS AFTER VISIT
A. Issues and Lessons
36. Private sector participation in water services is critical. The success of both projects can be attributed to ADB’s strategic support for public–private partnerships against the backdrop of the PRC’s transition to an economy weighted toward the private sector. The projects have demonstrated that well-managed private enterprises with access to capital can bring value to public utilities such as water supply services companies. Private sector participation will be essential to water resource protection and development in the future.
37. Timely assistance for high-growth companies can enhance promotion of safeguard standards. ADB’s intervention was timely in that the project instilled environmental and social safeguard best practices just as CWA was ramping up its operations and the PRC water supply industry was adapting to regulatory alignment with international standards. Additional ADB assistance for high-growth enterprises looking to scale up their business could catalyze the adoption of more rigorous safeguard standards across the industry.
38. Partnership with capable enterprises and full understanding of management’s vision increase the likelihood of project success. ADB’s selection of a capable partner with significant growth potential contributed to the satisfactory result of the projects. CWA’s business strategy was aligned with government policies and priorities, thus creating the right conditions for its major expansion into second- and third-tier cities. In-depth due diligence prior to project approval allowed ADB to fully understand the vision of CWA’s management: to take advantage of promising industry dynamics and build an operating model based on long-term concession arrangements and diversified geographic coverage. Such an understanding drove the design of the projects and contributed to their eventual positive outcomes.
39. Corporate finance structures that support a portfolio of subprojects can optimize development impact. The projects have illustrated the replicability of ADB’s multi-subproject financing structure. Through providing long-term financing for a pool of subprojects that meet predefined eligibility criteria, maximum development impact could be unlocked, especially where it would have been unfeasible to fund the subprojects individually because of high transaction costs and risk concentration. Moreover, the dual-tranche structure, whereby ADB’s direct loan lowers the perception of risk by commercial banks, has proven to be an effective catalyst in mobilizing private sector investment.
a. Recommendations and Follow-Up Actions
40. ADB should continue to cooperate with CWA to monitor the performance of projects still in progress to ensure optimal development results.
41. CWA’s business model could prove instructive to other Asian countries with inefficient, underdeveloped municipal water supply services in need of improved management and private capital. ADB should identify suitable transaction opportunities where the design and structure of these projects may be replicated. Appendix 1 9
PROJECT-RELATED DATA
Table A1.1: Investment Identification Phase 1 Phase 2 1. Country PRC PRC 2. Project Number 45900-014 47923-001 3. Loan Number 2753 and CF58 3071 and CF63 4. Type of Business Urban water supply Urban water supply 5. Project Title Municipal Water Distribution Urban–Rural Integration Water Infrastructure Development Project Distribution Project 6. Borrower China Water Affairs Group Limited; China Water Affairs Group Limited; China Water Affairs International Shanghai Silver Dragon Investment Limiteda Limited 7. Amount of Approved ADB A Loan: $100 million A Loan: $100 million Assistance B Loan: $100 million B Loan: $200 millionb CF = complementary fund, PRC = People’s Republic of China. a Replaced by Shanghai Silver Dragon Investment Limited after project approval. b B loan commitment of up to $100 million was approved by ADB’s Board of Directors on 3 December 2013. The Investment Committee approved on 29 October 2015 a request to upsize the B loan commitment to up to $200 million in total. Source: Asian Development Bank.
Table A1.2: Investment Data Phase 1 Phase 2 1. Concept Clearance Approval 14 February 2011 5 August 2013 2. Date of Board Approval 25 April 2011 3 December 2013 3. Signing of A Loan Documents 8 July 2011 27 May 2014 4. Initial A Loan Disbursement 7 November 2011 18 June 2015 5. Signing of B Loan Documents 1 February 2013 18 January 2016 6. Initial B Loan Disbursement 10 April 2013 27 January 2016 Source: Asian Development Bank.
10 Appendix 2
RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES– INFRASTRUCTURE
Actual Potential future Results area achievements Rating Justification achievements Risk 1. Within company PSD effects 1.1 Improved skills. Transmission from Satisfactory In 2018, 92% of Ongoing Low New or strengthened corporate head female and 90% of investment in strategic, managerial, office to male mid-level to skills operational, technical subsidiaries of senior management development and or financial skills. knowledge and personnel received learning to skills for an average 48 hours maintain growth operational, of training. More and market financial, legal, and than 96% of all other leadership. ESHS staff received 45 to management. 56 hours of training.
Internal training at all levels prioritized. 1.2 Improved CWA’s sustainable Satisfactory CWA has Further Low business business poised for consistently acquisition of operations. Improved multiyear growth by outperformed the poorly managed ways to operate the forming joint- market: net profit and performing business and venture margins of 23%– water supply compete, as seen in partnerships with 25% during FY2015– projects to gain investee operational local water utilities FY2019, compared market share. performance against focused on making with an average of relevant best industry profit by reducing 9%–12% for water benchmarks or water loss and companies in the standards. ramping up new PRC from 2015 to connections. 2018. 1.3 Improved Enhanced Satisfactory In 2011, CWA Close alignment Low governance. As institutional adopted an ESMS, with the latest evident in set capacity in ESHS which underwent best practices in standards related to management. multiple revisions in ESHS corporate the following years, management governance, with the latest and corporate stakeholder relations, version prepared in governance. ESHS fields, and/or January 2018. A energy conservation, department created and their to implement the implementation. ESMS had grown to 50 staff as of the end of FY2019. 1.4 Innovation. New Use of clean Satisfactory Solar energy Development of Low or improved energy through equipment has been new product infrastructure design, installation of solar installed at dozens of capabilities and technology, and panels in open water plants and treatment service delivery; ways spaces at water sewage treatment processes. to cover or contain plants and on plants in Hebei, costs, manage rooftops of Henan, Hubei, demand, or optimize buildings. Hunan, Jiangxi, and utilization; improved Guangdong. In risk allocation FY2019, clean between private energy accounted for companies and about 10% of CWA’s government; financial total power structure, etc. consumption. 1.5 Catalytic Success of B loan Excellent Phase 1 B loan Access to more Low element. Mobilizing syndications in both attracted wide-ranging
Appendix 2 11
Actual Potential future Results area achievements Rating Justification achievements Risk or inducing more local phases and commitments of financing or foreign market increase in CWA’s $100 million from a channels. financing or foreign access to private syndicate of 17 direct investment in sector funding. foreign and local the company. banks. Phase 2 B loan secured $200 million from a larger bank group, diversifying CWA’s capital sources. 2. Beyond company PSD effects 2.1 Private sector Viability of privately Satisfactory From 2011 through Greater private Medium expansion. owned enterprises 2018 the proportion sector Contribution by a in the PRC water of private sector participation in pioneering or low- supply sector firms in the PRC the PRC water profile project that demonstrated water supply market supply industry. facilitates in its own through track grew from 9% to right, or paves the record of turning 12%. way for, more private around distressed participation in the state-owned water sector and economy utilities. at large. 2.2 Competition. Significant Satisfactory CWA’s growth has Higher quality Low Contribution of new expansion of intensified and more cost- competition pressure geographic footprint competition in efficient services on public and/or other from 7 to 14 second- and third- across the sector players to raise provinces and tier city markets and industry. efficiency and direct-administered inflated asset prices, improve access and municipalities since evidenced by higher service levels in the 2011. project acquisition industry. costs. 2.3 Demonstration Strict compliance Satisfactory From 2011 to 2018, Improvement in Low effects. Adoption of with government the PRC water water service new skills, improved policies and supply industry delivery infrastructure assets operational reported profit nationwide and and services, more efficiency through growth of 22% per growth in PPPs. efficient processes, PPPs exemplary for annum compared maintenance regimes, the overall industry. with revenue growth improved standards, of 12% per annum, risk allocation and indicating improving mitigation beyond the industry efficiency. project company. 2.4 Linkages. Positive impact on Satisfactory Criteria for supplier Low Relative to both upstream and selection include investments, the downstream well-established project contributes stakeholders. policies in respect to notable upstream or environmental downstream linkage protection and social effects to business risk management. clients, consumers, suppliers, key CWA provides free industries etc. in water or water tariff support of growth. discounts to households receiving subsistence allowance. 2.5 Catalytic Successful phase 1 Excellent The project design Broader Low element. Mobilizing and phase 2 B loan featuring a portfolio application of or inducing more local syndications. approach allowed a corporate finance or foreign market syndicate of lenders project structures
12 Appendix 2
Actual Potential future Results area achievements Rating Justification achievements Risk financing or foreign to finance multiple to optimize direct investment in subprojects that development the sector (beyond would have been impact. the company) through less bankable on a pioneering or catalytic stand-alone basis. finance. 2.6 Affected laws, Wider acceptance Satisfactory PPPs are Low frameworks, of the PPP model encouraged by the regulation. supported by national government Contributes to CWA’s strong to promote market improved laws and operating and liberalization under sector regulation for financial the latest Five-Year PPPs, concessions, performance. Action Plan and are joint ventures, and implemented in build–operate– every province in the transfer projects; and PRC. liberalizing markets as applicable for improved sector efficiency. 3. Contribution to other ADB strategic objectives 3.1 Sector Improved access to Satisfactory Phase 1 and phase Water Low development clean tap water in 2 subprojects infrastructure outputs. Contribution second- and third- supported by ADB development and to other sector tier cities in the added more than efficiency development outputs PRC. 2.4 million m3 per improvement in and outcomes not day of water an expanded captured under point distribution capacity network of target 2, such as capacity or and about 4,900 km markets. network expansion. of new pipelines to municipal water supply systems. 3.2 Sector Significant capacity Satisfactory Phase 1 and phase Water Low development growth through new 2 subprojects added infrastructure outcomes. connections and more than 1.6 million development and Contribution to other better tap water new users, including efficiency sector development waste prevention. in outlying urban improvement in outputs and outcomes areas populated by an expanded not captured under poorer residents, network of target point 2, such as with decline in markets. increased nonrevenue water infrastructure ratio of 41% for utilization or phase 1 subprojects consumption, and 9% for phase 2 improved in-country subprojects within connectivity, improved the first 5 years of energy security. operation. 3.3 Inclusion. Enhancement of Satisfactory CWA’s business Increase in Low Improved access to, water treatment strategy of focusing services availability or and supply services on second- and provided to affordability of outside first-tier third-tier cities and disadvantaged infrastructure services cities. on urban–rural communities in for the poor and other integration rural and disadvantaged contributed to economically groups. reduced structural less developed imbalances between areas. first-tier cities and the rest of the country.
Appendix 2 13
Actual Potential future Results area achievements Rating Justification achievements Risk 3.4 Job creation. Sustainable Satisfactory Since ADB’s Low Creation of additional employment assistance began in sustainable jobs or created with new 2011, CWA staff self-employment; jobs in operations have grown from distinguish between and construction. 4,500 to 8,600, with jobs created within an annual turnover and beyond the rate of only 1.2%, company. suggesting a positive working environment.
Phase 1 and phase 2 subprojects created more than 3,100 construction jobs. 3.5 Environmental Negligible GHG Satisfactory Water supply Continued Low sustainability. emissions and operations are adoption of and Project net impact on effective processing relatively free of adherence to the GHG emissions; any of sewage GHG emissions. highest other contributions to discharge. environmental environmental Discharge and standards. improvements. sludge from wastewater treatment meet national standards and are disposed of by qualified professional companies. 3.6 Regional N/A integration. Project contributions to regional cooperation and integration by facilitating trade, cross-border mobility, cross-border power supplies, etc. 4. Overall Ratinga Satisfactory ADB = Asian Development Bank; CWA = China Water Affairs Group Limited; ESHS = environment, social, health, and safety; ESMS = environmental and social management system; FY = fiscal year; GHG = greenhouse gas; km = kilometer; m3 = cubic meter; N/A = not applicable; PPP = public–private partnership; PRC = People’s Republic of China, PSD = private sector development. a The overall rating scale is: Unsatisfactory, Less than Satisfactory, Satisfactory, Excellent. Source: Asian Development Bank.
14 Appendix 3
SECTOR REVIEW
1. Since 1950, the People’s Republic of China (PRC) economy has evolved in the context of successive five-year action plans that define economic, social, and political priorities. With water pollution and scarcity costing roughly 2.3% of gross domestic product annually,1 the 13th Five- Year Plan, 2016–2020 places water at the center of components on green development, environmental protection, and urban–rural integration. Specifically, several of the plan’s goals are centered on improving water resource quality, among them: (i) formulate holistic, basin-wide solutions to control pollution, (ii) protect good-quality water bodies, (iii) tackle groundwater pollution, and (iv) improve polluted urban water bodies.
2. The PRC water industry is controlled and managed through three levels of government: the central government sets strategy and policy direction; provincial governments implement laws and regulations; municipal governments manage water supply and distribution infrastructure. Laws are implemented with secondary legislations, backed by State Council decrees and sector administrative regulations. Local governments adopt these directives as part of the provincial regulatory framework. In the late 1990s, private sector participation was encouraged to catalyze reform and bring in capital. In 2004, water distribution in medium–sized and small cities was opened to joint ventures involving foreign investors governed by standard concession agreements.
3. The gap between rising demand for water driven by economic growth and a limited supply of water of acceptable quality is creating pressure to use water more efficiently in all sectors, in particular agriculture and industry, which together account for more than 80% of total water use.2 Household consumption has grown in line with urbanization, increasing from 10% of total consumption in 2000 to 14% in 2018. Over that period, household water consumption grew 2.3% per annum on average, compared with overall water use growth of 0.5% per annum. Urban residential water consumption is expected to grow at an annual average rate of 3.4% through 2030 (footnote 1).
4. The proportion of the urban population with access to safe drinking water has been relatively stable, moving from 93.3% in 2000 to 92.3% in 2017.3 The slight decline was due to rapid urbanization, with more than 350 million people migrating into urban areas during the period. 4 Remaining challenges include tap water quality and wastage. Almost 10% of the monitoring points for centralized drinking water sources in prefecture-level cities and above recorded values below the national quality standard in 2017.5 Although water use efficiency has improved in recent years, urban water pipeline network leakage rates are still as high as 15%.6
5. Of the more than 601 billion cubic meters of water supplied in 2018 in the PRC, 82% was from surface water sources and slightly more than 16% was from groundwater sources (footnote 2). Only 70% of surface drinking water sources used for public water supply meet national water quality standards (footnote 1). The level of development and utilization of water resources is uneven across the country—higher in the north and lower in the south. Surface water quality has improved in some areas in recent years, but groundwater pollution continues to be a
1 ADB. 2018. Managing Water Resources for Sustainable Socioeconomic Development. Manila. 2 China National Bureau of Statistics. China Statistical Yearbook 2019. 3 ADB. 2019. Key Indicators for Asia And the Pacific. Manila. 4 World Bank. World Development Indicators (accessed 29 May 2020). 5 World Bank. 2018. A New Era of Water Governance in China. Policy Brief. 27 December. 6 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to China Water Affairs Group Limited and China Water Affairs Investment Limited for the Municipal Water Distribution Infrastructure Development Project in the People’s Republic of China. Manila.
Appendix 3 15
problem. In 2015, the level of water stress (the proportion of freshwater withdrawal from available freshwater resources) was 43.4% (footnote 4), whereas above 40% is considered excessive.
6. Privatization of water provision services that began in the late 1990s has led to a significant change in the composition of sector participants. In 2000, there were 2,400 enterprises providing tap water supply; of these, 93% were state-owned. Efficiency improvements brought by policy reform and increased private sector involvement has brought about significant consolidation. By 2018, there were slightly more than 1,900 enterprises providing tap water, of which fewer than 60% were state-owned. The number of private and joint-venture tap water providers grew during the period from 177 to more than 800.7
7. Investment in wastewater treatment infrastructure has become an area of focus in light of government priorities to protect the environment, use water resources efficiently, and improve living standards. In addition to the 13th Five-Year Action Plan for National Municipal Wastewater Treatment and Reuse Infrastructure Construction, sector guidance comes from the Water Pollution Prevention and Control Action Plan (the “Water Ten Plan”) promulgated by the State Council in April 2015. 8 This plan requires the Ministry of Ecology and Environment, jointly with the Ministry of Housing and Urban–Rural Development and the National Development and Reform Commission, to construct and renovate more infrastructure for urban wastewater treatment and reuse. The Ministry of Finance provides funding and subsidies for wastewater treatment projects. Provincial governments are responsible for enforcing relevant policies and regulations and for supervising city and county governments in implementing them.
8. Wastewater treatment tariffs are collected as government proceeds, managed by local governments as fiscal funds, and earmarked for construction and operation of municipal wastewater treatment facilities and sludge disposal. Local governments contract with water utilities to collect monthly wastewater treatment tariffs for their treasuries. Tariff proceeds and fiscal subsidies are paid to providers of wastewater treatment services.
9. In 2016–2017, the central government stepped up policy action to address pollution in water systems. This largely built on the foundation established by the State Council’s Water Ten Plan. The revised Water Pollution Prevention and Control Law went into effect in January 2018 to implement more explicit requirements for safe drinking water, strengthen fines and other punishments (including criminal charges) for pollution violations, and improve accountability mechanisms for local officials.
7 China Bureau of Statistics. China Statistical Yearbooks, various years. 8 Government of the People’s Republic of China, State Council. 2015. The Water Pollution Prevention and Control Action Plan. Beijing.
16 Appendix 4
ENVIRONMENTAL IMPACT
A. Introduction
1. Both phase 1 and phase 2 of the Asian Development Bank (ADB) assistance to China Water Affairs Group Limited (CWA) aimed to expand the supply of safe and reliable drinking water in second- and third-tier cities in the People’s Republic of China (PRC). To comply with requirements for corporate finance transactions under ADB’s Safeguard Policy Statement (2009), CWA established an environmental and social management system (ESMS) in 2013 under phase 1. The ESMS underwent multiple revisions in response to growing operations under both phase 1 and phase 2. CWA has confirmed that it has implemented the ESMS across subprojects and throughout the life of the two projects. The ESMS policy was translated into Chinese and distributed to and discussed with all of CWA’s operating subproject companies.
2. Because of the coronavirus disease (COVID-19) pandemic, ADB did not conduct site visits for this extended annual review. Instead, the ADB deal team met with CWA’s management team virtually on 17 June 2020. After the virtual meeting, ADB sent follow-up questions to CWA, and CWA responded on 13 July 2020.
B. Desk Review Findings
3. Compliance with ADB safeguards and applicable government regulatory requirements. Phase 1 and phase 2 used proceeds of the ADB loans to fund a total of 19 subsidiaries.1 Based on the nature of business operations and their impacts, both phase 1 and phase 2 were classified category B for environment under ADB’s Safeguard Policy Statement. To comply with environment category B requirements, CWA prepared environmental impact assessments (EIAs) on the subprojects. Environmental and social compliance audit reports (ESCARs) were submitted and reviewed prior to disbursement of ADB funds to each subproject company.2 CWA submitted annual environmental and social performance reports to ADB for review and disclosure on ADB website. The extended annual review confirmed that CWA complied with applicable national environmental laws and regulations, standards, and obligations under the concessionaire agreement and joint venture agreement. To maintain smooth subproject operation, CWA’s subsidiaries obtained government approvals, permits, and licenses such as (i) water withdrawal permits, (ii) registration certificates for project completion acceptance, (iii) discharge pollutant licenses and (iv) health permits. Records showed that random inspections conducted by local environmental protection bureaus found no environment, health, and safety (EHS) or operational issues. To demonstrate strong EHS performance and compliance with applicable national laws and standards, CWA publicly disclosed on its website (i) interim and annual reports from 2012 to 2019,3 and (ii) environment, sustainability, and governance (ESG) reports.4
4. Environmental management and monitoring activites. CWA operates its water treatment plants under a standardized operation and maintenance (O&M) model for water purification or treatment, management of equipment, and production safety to ensure delivery of
1 Refer to Table 1 in the main text of the extended annual review report for a full list. 2 All 19 subsidiary companies have EIAs and ESCARs archived by CWA. Several ESCARs are published on ADB’s website. CWA reported that all EIAs and ESCARs of subprojects have been kept and archived and will be available upon request by any NGO or other stakeholder or in the event of any future independent portfolio audit. 3 China Water Affairs Group Limited. Annual Reports, 2012–2019. 4 China Water Affairs Group Limited. 2018. Environment, Social, and Governance Report.
Appendix 4 17
good-quality potable water to consumers. The company formulated technical specifications for its laboratories to improve sampling and testing procedures and ensure the reliability of water quality testing. CWA has established two fully equipped laboratories that can test 106 parameters and eight quality-control laboratories that cover 42 parameters for self-testing purposes only. Based on a review of laboratory water-quality test results, it was confirmed that treated drinking water test results showed proof of compliance with the applicable national drinking water quality standards (GB5749-2006). CWA claims that all of its subprojects are subject to regular water purification or treatment and regular water quality testing.
5. CWA conducts annual evaluations of water production processes for its subsidiaries to ensure that they comply with O&M standards. These are done through site inspections and review of evaluation reports. The evaluations aim to validate that all CWA subsidiaries are carrying out proper EHS management from subproject launch through subproject operation. CWA has established a strong contingency plan for accidents, including those involving leakage of chlorine or other hazardous materials. Emergency mock drills are conducted twice a year for each subproject. CWA reported that water treatment plants have been designed and built with wastewater and sludge treatment processes. The wastewater discharge benchmark is to achieve "zero" emissions, and sludge after treatment and testing can be used as landfill or soil conditioner.
6. If operational issues such as substandard water quality arise, CWA has contingency solutions. These include (i) shutting down the outflow valve to stop water distribution to consumers, and (ii) switching operations to a nearby water treatment plant (WTP). The second option is possible because CWA sites have more than one operating WTP within a given service area to avoid water supply interruptions. CWA confirmed that no significant accident has occurred and that no litigation, complaint, regulatory notice, or fine has arisen or been issued during project operation.
7. EHS staff capacity and training programs. CWA has established an ESMS Department with an oversight committee headed by the deputy general manager. CWA’s ESMS Department is supported by (i) the Budgetary, Monitoring and Audit Department; (ii) the Training, Human Resource and Compliance Management Department; (iii) the Environmental and Social Protection Department; and (iv) the Public Communication and Project Coordination Department.5 The ESMS Department is responsible for dealing with any environmental and social issues arising from operations of the subsidiary companies. It checks subsidiary companies’ compliance with applicable requirements in the ESMS, such as preparation of ESCARs prior to ADB fund disbursements. The Audit Department monitors all aspects of ongoing operations and maintenance, including project establishment, budgeting, design, construction, and inspection of water treatment facilities to ensure compliance with applicable national laws and regulations and ADB’s environmental and social requirements. CWA conducts training and development to improve employees’ skills and enhance team cohesiveness. Routine ESMS training is conducted at headquarters and subsidiaries for EHS staff assigned to subproject sites. In 2013, ESMS training was provided to the staff of 20 to 30 subsidiary companies. In addition, CWA has dispatched four to five ESMS officers from its headquarters in Beijing to subsidiary companies across the country to conduct ESMS audits as part of the on-the-job training for local ESMS managers. In addition, CWA requires all subsidiaries to carry out "green operation" training covering energy savings, emissions reduction, clean production, green construction, healthy working and living habits, conservation of resources, and environmental protection.
5 The ESMS Department is supported by seven staff working at operation headquarters in Beijing. Each subsidiary company has designated ESMS personal who coordinate with ESMS colleagues in Beijing.
18 Appendix 4
8. International Organization for Standardization accreditation 14001 and awards received. Subprojects funded by ADB that have obtained International Organization for Standardization (ISO) 14001:2015 certification include Xinyu Water Affairs Group Limited and Jingzhou Water Affairs Group Co., Ltd.6 Other subsidiaries are not yet ISO 14001:2015 certified, but apply CWA’s robust EHS management system in their overall operations. In terms of awards received, as noted in its ESG report, CWA was named the “Enterprise with the Most Professional Operation and Services in the Water Industry 2018” in the Water Enterprises Awards 2018. Xinyu Water Affairs Group Limited was named the “Most Socially Responsible Service-Type Enterprise in the Jiangxi Water Industry” in 2017.
C. Conclusion and Recommendation
9. This extended annual review confirms that CWA and its subsidiaries have complied with applicable national EHS laws and standards, and have met their obligations in respect to EHS requirements under the concessionaire agreement and joint venture agreement. It also confirms that the ESMS has been implemented across subprojects and throughout the project cycle—from preparation of the EIAs and ESCARs to regular monitoring of and reporting on the EHS performance of subprojects. CWA’s publicly disclosed reports, such as its interim and annual reports from 2012 to 2019 and the 2018 ESG report, indicate compliance with applicable national standards for drinking water. CWA is committed to consistently implementing the standardized O&M model for water treatment and purification, management of equipment, and production safety. It maintains close collaboration and engages with government regulatory bodies and host communities to ensure the smooth operation of all WTPs.
6 ISO 14001:2015 specifies the requirements for an environmental management system that an organization can use to enhance its environmental performance.
Appendix 5 19
SOCIAL IMPACT
A. Introduction
1. Phase 1 of the Asian Development Bank (ADB) assistance to China Water Affairs Group Limited (CWA) focused on expanding and improving water distribution, developing transmission and treatment infrastructure, and increasing the quality and reliability of the water supply in selected second- and third-tier cities in the People’s Republic of China. Phase 2 supported CWA’s investment in second- and third-tier cities with the potential for urban–rural integration. An environmental and social management system (ESMS) was established in 2011 for phase 1 and updated in 2015. An ESMS manager at CWA headquarters in Beijing oversees environmental and social issues.
2. No site visit was undertaken for this review because of the coronavirus disease (COVID- 19) pandemic. Facts provided in this report were based on desktop interviews with CWA’s environmental and social officers, annual environmental and social performance reports, development effectiveness monitoring reports (DEMRs), 1 and environmental and social compliance audit reports (ESCARs) submitted by CWA to ADB, as well as environment, sustainability and governance (ESG) reports published on its website.
B. Review findings
3. Involuntary resettlement and indigenous peoples. The projects (phase 1 and phase 2) were processed as corporate finance transactions where ADB funds were used to fund 19 subsidiary companies involving acquisition, expansion, or new construction of water treatment plants and water distribution infrastructure, all of which were operational as of the time of this review. Both phases were categorized B for involuntary resettlement and C for indigenous peoples in compliance with ADB's Safeguard Policy Statement (2009). For all ADB-funded subprojects, lands where the facilities are located were acquired by the local government prior to awarding of concessions and before construction. Environment and social compliance audits were undertaken for each subproject prior to ADB disbursement to confirm whether land acquisition complied with national laws and ADB’s Safeguard Policy Statement. Subprojects are either (i) located on lands acquired by the government, with construction undertaken by CWA; (ii) acquired by CWA, with land acquisition including construction having already been completed; (iii) located within existing water facilities, with no further land acquisition required; or (iv) located within existing road reserves (for distribution networks). Compensation for land acquisition for all subprojects funded by ADB has been completed and all required land use certificates have been issued.
4. Screening, including a compliance audit, was undertaken for each subproject to determine whether there were outstanding issues in relation to involuntary resettlement and indigenous peoples.2 The audits indicate that no subproject activities caused involuntary resettlement or indigenous peoples impacts. Thus, all subprojects were categorized C both for involuntary resettlement and indigenous peoples. Compensation for all subprojects has been completed and no grievances were raised in relation to land acquired by the government for ADB-funded subprojects. No indigenous peoples or vulnerable ethnic minorities were impacted by any
1 DEMRs reviewed are as follows: DEMR (October 2015–March 2016); DEMR (October 2016–March 2017); DEMR (April 2017–September 2017); DEMR (October 2017–March 2018); DEMR (April 2018–September 2018); DEMR (October 2018–March 2019); and DEMR (April 2019–September 2019). 2 The ESMS requires that an environment and social compliance audit be undertaken per subproject proposed for ADB funding prior to disbursement.
20 Appendix 5 subprojects, as subproject facilities are located in areas where the population is primarily of Han ethnicity.
5. Employment generation and compliance with applicable labor laws and regulations. CWA indicated in its DEMRs that at its peak, 3,898 employees (15 full-time, 38 part-time, and 3,845 contractual) were employed by 19 subproject companies (Table A7). CWA complied with applicable national labor laws and regulations and no instances of noncompliance were identified in the annual environmental and social performance reports submitted to ADB and the annual ESG reports disclosed on CWA’s website. CWA’s human resources department monitors its subproject companies for proper implementation of corporate policy in relation to equal opportunity, fair treatment, and nondiscrimination in recruitment and hiring, compensation, working conditions, and terms of employment (including prohibition of any form of discrimination against women during hiring and providing equal work for equal pay for men and women engaged by CWA). CWA also requires its contractors to comply with national labor policies and screens out subcontractors with ethical issues.
Table A7: Employment Generation for China Water Affairs Group Limited Subprojects Number of Employees Reporting Period Full-Timea Part-Time Temporary Contractual Total Oct 2015–Mar 2016b 171 45 142 6 364 Oct 2016–Mar 2017c 15 38 0 1,240 1,293 Apr 2017–Sep 2017c 15 50 0 1,240 1,305 Oct 2017–Mar 2018d 15 44 0 3,620 3,679 Apr 2018–Sep 2018d 15 33 0 3,620 3,668 Oct 2018–Mar 2019d 15 33 0 3,616 3,664 Apr 2019–Sep 2019d 15 38 0 3,845 3,898 a Full-time employees have contracts for at least 12 months per annum and work for an average of at least 8 hours per day, or 40 hours a week. Temporary employees are hired on short-term contracts and do not have access to company benefits. Part-time employees have contracts for less than 12 months per annum, or work less than 40 hours per week. Contractors are hired by third parties and have no direct contractual relation to ADB-funded subproject companies. b Data is for 8 subproject companies. c Data is for 14 subproject companies. d Data is for 19 subproject companies. Source: China Water Affairs Group Limited’s development effectiveness monitoring reports.
6. Based on CWA’s 2019 ESG report, Women occupied 13% of senior management positions, 31% of mid-management positions, and about 46% of technical positions. 3 CWA provides employees with competitive remuneration packages and fringe benefits and other assistance during special circumstances. Training is provided to employees to enhance their professional knowledge and skills.
7. Grievance redress mechanism. Environmental and social audits undertaken for subprojects indicated that, as early as phase 1, a grievance redress mechanism had been established at the corporate and subproject levels to address worker and community grievances. Workers’ complaints and issues are channeled through CWA’s labor union. The human resources department and the labor union work together to organize activities (workshops at the subsidiary level and annual meetings) where issues can be raised and discussed. There had been no worker issues or complaints as of the time of this review.
3 Environment, Social, and Governance Report as of end-March 2019.
Appendix 5 21
8. A comprehensive complaint mechanism is in place at the subproject level based on the requirements of CWA’s standardized management system and ESMS. Several policies have been developed to ensure that user complaints are processed in a timely and effective manner.4 Subproject companies publish information on their service scope and service standards and maintain 24-hour user complaint and service hotlines. In addition, they promptly follow up with customers to gauge their satisfaction in relation to complaints processing. There are no outstanding consumer complaints as service standards of CWA require immediate and effective resolution of such issues.
9. Stakeholder engagement and corporate social responsibility. CWA has made a strong contribution to improving the city landscape and the living standards of urban and rural residents through its subprojects. The integration of urban and rural water supply is particularly beneficial to rural users through improved water services. Based on the latest DEMR, 79,170 new households have been connected to improved sources of potable water, of which 4,531 were poor households.
10. CWA robustly responds to community requests and runs community development programs that support community education, infrastructure development, and environmental improvement. CWA also prioritizes employment of local workers and selection of local suppliers— CWA’s 2019 ESG report indicated that local employees accounted for 88% of total employees. CWA pays close attention to vulnerable households and offers free water or water discounts to urban users in distress so that all users can access safe and clean water. CWA also provides free water equipment maintenance services to users with disabilities.
C. Conclusion and Recommendation
11. The review confirmed the compliance of CWA and its subsidiaries with applicable national laws and regulations and ADB’s Safeguard Policy Statement. Project performance in terms of social impact is rated satisfactory for both phase 1 and 2. The ESMS has been implemented across subprojects and CWA’s commitment to uphold its standards in delivering improved water services for urban and rural households is notable.
4 Sample policies developed to ensure service standards in responding to complaints include: Water Supply Service Commitment System, Customer Hotline Management System, Water Supply Information Release System, User Complaint Process System, and User Revisit System.