World Bank Documents, Including the Restructuring Papers and Implementation Status and Results Reports

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Document of The World Bank

Public Disclosure Authorized Report No: ICR00003811

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-75240)

ON A

LOAN

Public Disclosure Authorized IN THE AMOUNT OF US$191 MILLION

TO THE

PEOPLE’S REPUBLIC OF CHINA

FOR A

LIAONING THIRD MEDIUM CITIES INFRASTRUCTURE PROJECT

Public Disclosure Authorized December 20, 2016

Energy and Extractives Global Practice

East Asia and Pacific Region Public Disclosure Authorized

CURRENCY (Exchange Rate as of June 30, 2016)

Currency Unit = Chinese Yuan (CNY) US$1 = CNY 6.64

FISCAL YEAR China: January 1 – December 31 World Bank Group: July 1 – June 30

ABBREVIATIONS, ACRONYMS

BLS Building-level Substation IR Intermediate Result CHP Combined Heat and Power IRR Internal Rate of Return CPS Country Partnership Strategy LMC3 Liaoning Third Medium Cities Infrastructure Project DH District Heating M&E Monitoring and Evaluation DRC Development and Reform MOC Ministry of Construction Commission EDZ Economic Development Zone O&M Operation and Maintenance EMP Environmental Management Plan PAD Project Appraisal Document EIRR Economic Internal Rate Of Return PDO Project Development Objective FIRR Financial Internal Rate Of Return PIU Project Implementation Unit FM Financial Management PMO Project Management Office GEF Global Environment Facility RAP Resettlement Action Plan HES Heat Exchange Substation SCADA Supervisory Control and Data Acquisition HOB Heat-only Boiler SO2 Sulfur Dioxide ICR Implementation Completion and TSP Total Suspended Particulates Results Report

Senior Global Practice Director: Riccardo Puliti Practice Manager: Jie Tang Project Team Leader: Yanqin Song ICR Team Leader: Yuriy Myroshnychenko

CHINA Liaoning Third Medium Cities Infrastructure Project

CONTENTS

A. Basic Information ...... i B. Key Dates ...... i C. Ratings Summary ...... i D. Sector and Theme Codes ...... ii E. Bank Staff ...... ii F. Results Framework Analysis ...... ii G. Ratings of Project Performance in ISRs ...... vi H. Restructuring (if any) ...... vi 1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 7 3. Assessment of Outcomes...... 16 4. Assessment of Risk to Development Outcome ...... 23 5. Assessment of Bank and Borrower Performance ...... 23 6. Lessons Learned ...... 26 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...... 28 Annex 1. Project Costs and Financing ...... 30 Annex 2. Outputs by Component ...... 31 Annex 3. PDO Indicators and Underlying Heat Area Values at the Project and Subproject Levels ...... 33 Annex 4. Economic and Financial Analysis ...... 35 Annex 5. Bank Lending and Implementation Support/Supervision Processes ...... 38 Annex 6. Beneficiary Survey Results ...... 40 Annex 7. Stakeholder Workshop Report and Results ...... 44 Annex 8. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 45 Annex 9. Comments of Cofinanciers and Other Partners/Stakeholders ...... 51 Annex 10. List of Supporting Documents ...... 52 MAP ...... 53

DATASHEET

A. Basic Information Liaoning Third Country: China Project Name: Medium Cities Infrastructure Project ID: P099224 L/C/TF Number(s): IBRD-75240 ICR Date: 12/20/2016 ICR Type: Core ICR GOVERNMENT OF Specific Investment Lending Instrument: Borrower: CHINA; LIAONING Loan PROVINCE Original Total US$191.00 million Disbursed Amount: US$165.00 million Commitment: Revised Amount: US$191.00 million Environmental Category: B Implementing Agencies: Liaoning Province Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 04/05/2006 Effectiveness: 11/18/2008 11/18/2008 01/10/2014 Appraisal: 01/08/2008 Restructuring(s): 12/19/2014 Approval: 05/27/2008 Mid-term Review: 11/01/2012 12/03/2012 Closing: 12/31/2013 06/30/2016

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately Satisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies:

Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance:

C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Moderately

Closing/Inactive status: Satisfactory

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Energy efficiency in Heat and Power 97 100 Oil and Gas 3 0

Theme Code (as % of total Bank financing) City-wide Infrastructure and Service Delivery 50 50 Climate change 50 50

E. Bank Staff Positions At ICR At Approval Vice President: Victoria Kwakwa James W. Adams Country Director: Bert Hofman David R. Dollar Practice Jie Tang Junhui Wu Manager/Manager: Project Team Leader: Yanqin Song Gailius J. Draugelis ICR Team Leader: Yuriy Myroshnychenko ICR Primary Author: Yuriy Myroshnychenko

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The project development objective is to assist Liaoning Province in improving the energy efficiency and environmental performance of heating and gas services in Project areas of the Project Cities.

Revised Project Development Objectives (as approved by original approving authority) The project development objective is to assist Liaoning Province in improving the energy efficiency and environmental performance of heating services in Project areas of the Project Cities.

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Indicator 1: Fuel consumption per connected floor area (provided for calendar years) Value (Quantitative or 199.5 kWh/m2 138.9 kWh/m2 144.9 kWh/m2 137.9 kWh/ m2 Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Target exceeded. All subprojects, but Chaoyang, were completed and achieved or Comments exceeded the target. The Chaoyang subproject was not expected to be completed (including % by the project closing date, so at appraisal its PDO targets were set equal to its achievement) PDO baseline. This comment applies to the other four PDO indicators. Indicator 2: Electricity used for DH/connected floor area (provided for calendar years) Value (Quantitative or 4.4 kWh/m2 2.7 kWh/m2 3.3 kWh/m2 2.7 kWh/m2 Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments (including % Target exceeded. See above. achievement) Indicator 3: Make-up water used/connected floor area (provided for calendar years) Value (Quantitative or 115.4 L/m2 96.7 L/m2 96.0 L/m2 79.34 L/m2 Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments (including % Target exceeded. See above. achievement) Indicator 4: TSP emissions/connected floor area (provided for calendar years) Value (Quantitative or 0.494 kg/m2 0.02 kg/m2 0.09 kg/m2 0.07 kg/m2 Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments (incl. % Target met. See above. achievement)

Indicator 5: SO2 emissions/connected floor area (provided for calendar years) Value (Quantitative or 0.285 kg/m2 0.04 kg/m2 0.07 kg/m2 0.05 kg/m2 Qualitative)

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Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments (including % Target exceeded. See above. achievement) Reduced gas loss after distribution system rehabilitation within two years after Indicator 6: commissioning (provided for calendar years) Value (Quantitative or 14.1% 2.8% n.a. n.a. Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments The indicator was dropped as a result of cancelling Component 2 (gas (including % component) under the first restructuring. achievement)

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Indicator 1: Central Heating: % of planned m2 connected to centralized heating Value (Quantitative 0 100 100 92 or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Largely achieved. The shortfall of 8% is due to the slowdown in housing Comments development faced by nearly all cities during project implementation. The actual (including % achieved value excludes Chaoyang since the subproject was not planned to be achievement) completed by the project closing date. If Chaoyang is included, the actual value achieved at completion would be 70%. Indicator 2: Central Heating: % of planned kilometers of pipelines installed Value (Quantitative 0 100 100 91.4 or Qualitative) Date achieved 05/27/2008 12/31/2014 06/30/2016 06/30/2016 Largely achieved. The gap of 8.6% between the target and actual results is due to Comments a smaller heat area connected under the project, as well as differences between (including % design numbers, which were used to set the targets, and the actual (smaller) achievement) needs. Indicator 3: Central Heating: % of planned number of substations installed Value (Quantitative 0 100 100 66 or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Partially achieved. The shortfall is mostly due to the Chaoyang subproject that Comments accounted for 29% of the project substations, but did not install them at project (including % completion. Another reason is reduced heat area due to the slowdown in achievement) construction of new buildings.

Indicator 4: Central Heating: % of planned number of heat meters installed Value (Quantitative 0 100 100 105 or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments (including % Exceeded. achievement) Indicator 5 : Central Heating: % of planned capacity of boilers installed Value (Quantitative 0 100 100 100 or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments (including % Fully achieved. All planned boiler capacity was installed. achievement) Central Heating: % of planned number and capacity of boilers replaced with Indicator 6: centralized heating Value (Quantitative 0 100 100 89 or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Partially achieved. The actual value achieved is for the number of replaced Comments boilers. The actual value for capacity is 65%. The shortfall is mostly due to the (including % Chaoyang subproject that accounted for about 32% of the total heat generation achievement) capacity (including old big boilers and CHP plant) that was planned to be replaced under the project. Indicator 7: Urban Gas: # of gas storage tanks rehabilitated or new built Value 2 rehabilitated 1 (Quantitative 0 n.a. n.a. new built or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments The indicator was dropped as a result of cancelling Component 2 under the first (including % restructuring. achievement) Indicator 8: Urban Gas: % of planned kilometers of gas pipelines rehabilitated. Value (Quantitative 0 100 n.a. n.a. or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016 Comments The indicator was dropped as a result of cancelling Component 2 under the first (including % restructuring achievement) Indicator 9: Institutional Development: number of person-days training Value (Quantitative 0 135 135 140 or Qualitative) Date achieved 05/27/2008 12/31/2013 06/30/2016 06/30/2016

Comments (including % Exceeded. The achievement rate is about 104%. achievement)

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (US$, millions) 1 02/05/2009 Satisfactory Satisfactory 0.00 2 06/29/2010 Satisfactory Satisfactory 16.50 Moderately 3 06/27/2011 Moderately Satisfactory 35.60 Unsatisfactory Moderately 4 01/29/2012 Moderately Satisfactory 44.29 Unsatisfactory 5 10/06/2012 Unsatisfactory Unsatisfactory 55.77 Moderately 6 05/28/2013 Unsatisfactory 70.46 Unsatisfactory Moderately Moderately 7 12/22/2013 70.46 Unsatisfactory Unsatisfactory 8 06/04/2014 Moderately Satisfactory Moderately Satisfactory 76.70 9 12/29/2014 Moderately Satisfactory Moderately Satisfactory 84.22 10 06/08/2015 Moderately Satisfactory Moderately Satisfactory 88.54 11 12/17/2015 Moderately Satisfactory Moderately Satisfactory 97.86 12 06/27/2016 Moderately Satisfactory Moderately Satisfactory 116.61

H. Restructuring (if any)

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in US$, millions The PDO was revised to reflect cancellation of Component B (gas services); four subprojects in Component A were cancelled and two new subprojects (Kangping and Lingyuan) were added. The loan proceeds were 01/10/2014 Y MU MU 70.46 reallocated between disbursement categories and the closing date was extended by 12 months until December 31, 2014. The PDO and IR target indicators were revised because of dropping of four subprojects and replacing them with two

ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in US$, millions new subprojects. Two new subprojects were added (Chaoyang and Yixian); loan proceeds were reallocated between disbursement categories. The closing date was 12/19/2014 MS MS 84.22 extended by 18 months until June 30, 2016. The PDO and IR target indicators were further revised because of adding two new subprojects.

If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Unsatisfactory Against Formally Revised PDO/Targets Moderately Satisfactory Overall (weighted) rating Moderately Satisfactory

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

Country Context

1. China became an international symbol of economic growth and poverty alleviation in the two decades preceding the project. However, the countrywide indicators of economic growth and poverty reduction masked regional differences. Liaoning Province used to be one of the country’s major industrial centers, focusing on heavy industry and mining. Much of the urban population in the province settled in medium cities with economies anchored around state-owned industrial and mining enterprises. Such enterprises have had mixed success in the transition to a market economy. As a result, at a time when many of the cities in China’s coastal region (as well as the two large cities of Shenyang and Dalian in Liaoning) invested heavily in infrastructure, the medium cities of Liaoning suffered from systemic underinvestment and deferred infrastructure maintenance, despite continued urban growth, that resulted in an accelerated deterioration of the asset base for urban services.

2. By the time of project preparation, energy conservation became a high priority for China’s Government. Its 11th Five-Year Plan set a target of reducing 20 percent of energy consumption per unit of gross domestic product from 2006 to 2010. Important drivers for the Government’s energy conservation initiatives were the dominance of coal in China’s fuel mix, accounting for 69 percent of total primary energy consumption and the associated environmental impacts on public health, urban livability, and global warming.

3. The plan included ten key projects to achieve its energy conservation objectives covering a comprehensive list of measures. Given the predominance of coal in urban heating supply and the need to expand urban heating in view of the rapidly growing urban population, the plan measures included building energy efficiency and the replacement of distributed small coal-fired boilers for heating with central heating supply.

Sector Context

Urban Heating

4. China’s unprecedented urbanization and construction boom drove demand high for heating services in China’s Northern provinces. The urban residential building stock in Northern China was expected to grow from 4 billion m2 to 10 billion m2 by 2024. The provincial government expected Liaoning’s building stock to grow by 7 percent–10 percent per year. At appraisal, the building stock consumed between 50 percent and 100 percent more energy for heating compared to buildings in comparable climates in Northern Europe and North America due to antiquated equipment, lack of incentives to use energy for heating efficiently, poor enforcement of building codes, and lack of consumer controls for heating.

5. In the early stages of urbanization, cities invested in small, coal-fired boilers to provide space heating for new urban areas. However, over time, larger boilers replaced some of these small boilers. The remaining ones were still located in dense urban centers in smaller and medium cities of Liaoning. Most of it was in urgent need of modernization. Most systems, and

nearly all small boiler systems, relied on Soviet-era technology, but provided only heat, without domestic hot water. Small coal-fired boilers, a major source of winter air pollution, only operated at a reported 40 percent–60 percent efficiency (compared to about 75 percent–85 percent efficiency of large boilers) and used little, if any, equipment to remove total suspended particulates (TSP) or sulfur. The impact on human health and city aesthetics with coal dust and slag in residential centers and smoke stacks emitting black smoke over apartment buildings was severely negative. Liaoning Province was planning to undertake a major move forward in this project by implementing dust removal and flue gas desulfurization systems for new boiler plants, exceeding national standards and local practices of the time, and thus contribute to a national goal of reduction in sulfur dioxide (SO2) emissions in the 11th Five-Year Plan.

6. In July 2003, the Central Government instructed pilot cities of China’s 16 Northern provinces and autonomous regions, including Liaoning Province, to reform their heating systems. The goals of the heat reform were to commodify heating by addressing key sector issues: (a) discontinuing employer payment of heating bills and making households responsible for payment of the heating bill; (b) introducing heat metering and consumption-based billing, promoting consumer control of heating and building energy efficiency; (c) developing safe, clean, and demand-responsive heat supply systems; (d) reforming heat pricing; and (e) accelerating the reform of heating enterprises, consolidating many small enterprises in cities, introducing competition, and fostering and standardizing the heat market. The enforcement of the Government’s building energy efficiency standards for all new residential buildings was also an important part of the effort. However, implementation was slow and was mainly limited to larger cities.

7. The pace of reform in Liaoning was very gradual, but there were some signs of moving forward. In July 2007, Liaoning Province issued guidelines mandating heat-metering systems in new real estate developments proposed after August 2007 and set a schedule for installation of metering systems in existing buildings. Municipalities, including the Liaoning Third Medium Cities Infrastructure Project (LMC3) cities, were promoting consolidation of enterprises through the use of larger centralized heating systems and discontinuing use of small boiler houses.

Urban Gas Supply

8. In Liaoning, gas supply networks first were constructed in the 1920s–1930s and gradually expanded since then. The networks and storage facilities generally were not well maintained, corroded, and leaking, which in turn led to growing safety concerns. They required rehabilitation and upgrading to ensure safe and efficient supply of natural gas to the consumers.

Rationale for World Bank Involvement

9. During several years preceding the project, the World Bank supported China’s Ministry of Construction (MOC) to develop and implement consumption-based billing for heating, as well as to increase efficiency of heating use in buildings. This support culminated in the Heat Reform and Building Energy Efficiency Project, financed by an US$18 million grant from the Global Environment Facility (GEF). The project enabled the World Bank and the MOC to gain experience implementing consumption-based billing and building energy efficiency improvements in Tianjin and other cities of Northern Chinese provinces.

10. Furthermore, during the 1990s and 2000s the World Bank had accumulated rich experience in modernizing the district’s heating sector in Central and Eastern Europe and former Soviet Union countries.

11. The project was consistent with the 2006–2010 Country Partnership Strategy (CPS) (approved by the World Bank’s Board of Directors on May 23, 2006), which sought, among other themes, to engage China on managing resource scarcity and environmental challenges, reducing air pollution and optimizing energy use.

12. At the time of appraisal, no other long-term funding sources were available to most of the heating companies in the province. In addition, the implementation of heating sector reforms in Liaoning was very gradual. Mature technologies used in modern DH systems were barely adopted by heating companies in the province. The World Bank’s support in knowledge transfer with respect to good practices in the design and implementation of modern DH facilities, together with funding, made it attractive for cities and their heating companies to participate in the project.

1.2 Original Project Development Objectives (PDO) and Key Indicators

13. The PDO was to assist Liaoning Province in improving the energy efficiency and environmental performance of heating and gas services in Project areas of the Project Cities. The key indicators are provided in the following section.

1.3 Revised PDO and Key Indicators

14. The PDO was revised under the first restructuring (Level I), approved in January 2014, as follows: “The objective of the project is to assist Liaoning Province in improving the energy efficiency and environmental performance of heating services in the Project areas of the Project Cities.” The reference to ‘gas services’ was dropped from the PDO because Part B (Component 2) of the project, which comprised the only gas subproject, was cancelled as part of restructuring. Besides, four heat subprojects were cancelled. All five subprojects were cancelled because they opted for local financing. Two new subprojects were added under Part A (Component 1) during the first restructuring. Two more heat subprojects were added under the second restructuring (Level II), held in December 2014, without any further changes to the PDO.

15. The changes in the composition of the heating subprojects and the cancellation of the gas subproject that took place under the two restructurings required a revision of the PDO indicators as shown in table 1.

Table 1. Project Baseline and Outcome Indicators Unit of Baseline in PDO Target PDO Target Values Measure PAD* Indicators in Revised under the

PAD Second Restructuring Indicator 1: kWh/m2 199.5 138.9 144.9 Fuel consumption per connected floor area Indicator 2: Electricity used for DH/connected floor kWh/m2 4.4 2.7 3.3 area

Unit of Baseline in PDO Target PDO Target Values Measure PAD* Indicators in Revised under the

PAD Second Restructuring Indicator 3: L/m2 115.4 96.7 96 Make-up water used/connected floor area Indicator 4: kg/m2 0.494 0.02 0.09 TSP emissions/connected floor area Indicator 5: kg/m2 0.285 0.04 0.07 SO2 emissions/connected floor area Indicator 6: Reduced gas loss after distribution system % 14.1 2.8 n.a. rehabilitation within two years after commissioning Note: * The PDO baseline values were not revised as part of the restructurings. PAD = Project Appraisal Document.

1.4 Main Beneficiaries

16. While the main beneficiaries were not specified in the PAD, it is estimated that over 1 million people in the ten project cities directly benefited from the project at the time of its completion. This includes about 635,000 persons who gained access to district heating (DH) and 372,000 persons who benefited from rehabilitated and hence more energy-efficient and cleaner DH systems. The abovementioned estimates are not inclusive of commercial, public, and administrative buildings that were connected to project-supported DH.

17. The project beneficiaries are the customers of the participating DH companies that benefited from the access to rehabilitated and newly constructed DH systems. All residents of participating cities, regardless of the fact that they resided in areas covered by the project, also benefited from avoided TSP and particulate emissions and associated improvement in outdoor air quality during the heating season. Other beneficiaries include the participating heating companies that received technical assistance under the project. In addition, the Liaoning provincial government and the participating local governments and districts acquired and/or enhanced their knowledge on preparing and managing municipal investment projects in line with the World Bank’s rules/best international practices.

1.5 Original Components

18. The project originally consisted of three components, as stated in the PAD, or three parts—A, B, and C—as stated in the Loan Agreement.

19. Component 1 (Part A): Centralized Heating Infrastructure (US$364 million equivalent; IBRD US$185.7 million). This component included ten subprojects to rehabilitate and expand DH through closure of inefficient and polluting small coal-fired, heat-only boilers (HOBs), rehabilitation and/construction of DH pipes and heat substations, and installation of a centralized monitoring and control system (Supervisory Control and Data Acquisition [SCADA]). The investments under this component aimed (a) to reduce energy waste and air pollution by replacing small, inefficient HOB-based systems with more efficient centralized heating systems based on combined heat and power (CHP) plants and/or more efficient HOBs with advanced emission monitoring and reduction equipment and (b) enable demand-driven approaches across

the heating chain through technological changes on the supply side and metering and building- level substations (BLSs) on the demand side.

20. Component 2 (Part B): Urban Gas Infrastructure (US$11 million equivalent; IBRD US$4.1 million). This component comprised one subproject (in Yingkou City) to rehabilitate gas transmission and gas storage facilities as well as the gas distribution network.

21. Component 3 (Part C): Institutional Development (US$1.22 million equivalent; IBRD US$1.22 million). The component included the following:

 Package A: Project Management and Bid Document Preparation, Design Review and Advisory Assistance (US$1.2 million). Provision of technical assistance and training to the project participating DH companies with respect to bidding documents preparation, engineering design review, project management, project monitoring and evaluation (M&E), equipment operation and maintenance (O&M), and monitoring of BLSs and building-level heat meters.

 Package B: Review of Safety and Security Measures of the Yingkou Gas Company (US$0.02 million). Provision of technical assistance and training to Yingkou Gas Company with respect to bidding documents preparation, engineering design review, project management, project M&E, and operation safety measures and procedures.

1.6 Revised Components

22. At the beginning of project implementation, four subprojects under Component 1 and the subproject under Component 2 opted for local financing, outside the project, for reasons discussed in paragraph 38. However, the provincial government was reluctant to cancel the five subprojects without replacing them with new ones. Identifying new subprojects that were suitable for World Bank financing took a long time, for reasons provided in subsequent sections of the Implementation Completion and Results Report (ICR). Initially, two new subprojects were appraised and included in the project as part of the first restructuring, prepared in the second half of 2013 and approved in January 2014. Subsequently, another two subprojects were appraised and included in the project as part of the second restructuring in December 2014.

23. The following paragraphs summarize the changes in the project components that were implemented under the two restructurings.

Restructuring # 1 (Level I)

 Component 1: Four originally selected heat subprojects were cancelled (Benxi General, Fushun, Haicheng, and Yingkou North) while two new heat subprojects were added (Kangping and Lingyuan).

 Component 2: The only subproject under this component (Yingkou Gas) was cancelled; therefore, the entire component was dropped, and the corresponding PDO indicator was dropped as well.

 Component 3: Package B that concerned gas services was dropped because it was linked to Component 2.

Restructuring # 2 (Level II)

 Component 1: Two new heat subprojects were added (Yixian and Chaoyang).

24. Table 3 summarizes the information on cancellation and addition of subprojects under the two restructurings.

1.7 Other Significant Changes

25. The following changes were made to funding allocation through the two restructurings: (a) the World Bank proceeds from Component 2, that were dropped under the first restructuring, were reallocated to Component 1, which increased its financing by the World Bank from US$185.7 million to US$189.8 million; (b) the World Bank loan proceeds freed up as a result of cancelling four subprojects under Component 1 were partially used for supporting the two new subprojects that were added under the first restructuring, while for the balance of about US$64 million, an unallocated category was created; (c) Package B of Component 3 was dropped and the related World Bank loan proceeds of US$20,000 became available for Package A.

26. To provide time for implementation of the two new subprojects and completion of two original ones, the loan’s closing date was extended from December 31, 2013 to December 31, 2014 under the first restructuring that was implemented in two phases: (a) extension of the closing date through approval of the restructuring package by the regional vice president in December 2013 and (b) approval of the entire restructuring package, including changes to the PDO, by the Board in January 2014. The closing date was further extended to June 30, 2016, under the second restructuring to allow for implementation of the two new subprojects added under the second restructuring and completion of several earlier subprojects.

27. In addition, under the second restructuring, loan reallocation between categories were made to (a) accommodate changes in investment cost variation resulting from price increases in civil works in Part A, scope reduction in the Benxi Steel subproject, and labor cost increases in Part C and (b) ensure sufficient loan allocation for the two new subprojects in Part A. Specifically, US$3.08 million of the loan was allocated to the Lingyuan subproject, US$2.61 million to the Huludao (Yangjiazhangzi) subproject, and US$7.70 million to the Benxi Nanfen subproject, while US$7.70 million of the loan was reduced from the Benxi Steel subproject, and the unallocated disbursement category was reduced to zero. In Part C, US$0.01 million was added.

28. At project completion, the undisbursed loan amount of US$26 million was cancelled. The main reasons for not utilizing the abovementioned amount of the loan were (a) competitive procurement and related loan savings, (b) overestimated investment needs at appraisal, and (c) reduced scope of subprojects caused by the slowdown in housing development and related decreases in heat area.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design, and Quality at Entry

Background Analysis

29. In preparing the LMC3, the World Bank relied on the knowledge and lessons learned through its sectoral analytical work in China, including the Heat Reform and Energy Efficiency Project, financed from a GEF grant of US$18 million, as well as its investment operations and technical assistance in the DH sector implemented in a number of former Soviet Union and East European countries. Thus, even though, the World Bank did not have investment operations in China in DH before the LMC3, the DH sector analytical work in China together with practical experience in and lessons learned from interventions in the DH sector of other countries, which had similar DH systems, supported the adequacy of analysis of issues and options and the optimal scale and scope of investments to achieve the project objectives.

30. The World Bank has also worked with the Chinese Government on gas sector reforms, institutional development of the operating agencies, and rehabilitation and capacity expansion of gas fields and gas supply infrastructure. This provided solid foundations for preparing the project.

Assessment of the Project Design

31. Programmatic approach. The project was part of a Liaoning Medium Cities Infrastructure Program agreed between the Chinese authorities and the World Bank. The program was supposed to be supported by World Bank loans totaling US$600 million and included three sectors: roads, water supply, and sanitation and heating. Several alternatives were considered to determine the optimal packaging for the urban infrastructure investments proposed in the program. The Adaptable Program Loan approach (with three stages) was not deemed appropriate because of the difficulty in defining appropriate triggers for the second and third projects in the context of multisector and multicity projects. The design of three successive multisector projects was not found feasible because of the long lead time required for preparing a comprehensive project with an appropriate set of investments and corresponding reforms in multiple sectors. Thus, the option was selected to have three separate single-sector projects, which were planned to be implemented at about the same time, each focused on a different sector and each to be supported by a World Bank loan of about US$200 million. The LMC3 is the third of these three projects.

32. Project objective, components, and organization. The project objective was clear, simple, and reflective of government priorities to improve energy efficiency and air quality. The first investment component, which aimed to extend and improve DH in the ten subprojects by eliminating small coal-fired HOBs and introducing innovative DH approaches such as demand- driven operation, metering, and BLSs, included the proven set of technical measures to achieve the stated objectives. The second investment component, which intended to improve the efficiency of the gas distribution system in a project city, was also relying on sound and optimal technical solutions. The amount of the World Bank loan in support of the project, which was agreed between the central and provincial governments at the time of project initiation, and the average size of subproject, determined the number of subprojects to be included in the project.

33. The technical assistance component focused on enhancing project implementation capacity of the participating heating companies through study tours, workshops, and seminars. The project management responsibilities were clear and simple, with a Project Management Office (PMO), housed in a provincial Development and Reform Commission (DRC), overseeing implementation of the subprojects by Project Implementation Units (PIUs) established at each project participating company.

Government Commitment

34. The Liaoning government and the authorities of participating cities were committed to the project given the high importance of heating to the livelihoods of people. They provided support during project preparation with respect to identification of subprojects.

Risks

35. At appraisal, three main risks were identified. Two of them—slow implementation due to the lack of coordination among 11 subprojects and reluctance of municipalities to adjust tariffs to meet input costs were rated Substantial. The other one—shortage of counterpart funding—was rated Moderate. The project’s overall risk rating was considered Moderate. The mitigation measures proposed for the three risks were adequately identified and implemented. As a result, none of the issues identified through risk assessment materially impacted the project during implementation.

36. However, the risk of cancellation of subprojects, which was not obvious at appraisal, but became the main issue affecting project implementation and the achievement of PDOs, was not recorded in the PAD. Another project risk that was not stated in the PAD, was the lack of project management experience by participating heating companies and their unfamiliarity with the World Bank procurement procedures. This risk was largely mitigated by including a Project Management Consultant in the technical assistance component. Nonetheless, the risk materialized for some subprojects and slowed down project implementation. In retrospect, given the large number of subprojects and the two abovementioned risks that faced project implementation, the project’s overall risk should have been rated Substantial. Table 2 summarizes the main project risks.

Table 2. Adequacy of Risk Assessment Risks Impact Stated in the PAD Slower implementation due to major coordination Did not materialize because of implementation of identified effort needed among 11 subprojects mitigation measures Reluctance of municipalities to adjust tariffs to meet Materialized but did not affect project implementation input costs because local budgets co-financed subprojects as needed Shortage of counterpart funding Did not materialize Not Stated in the PAD Cancellation of subprojects Materialized and delayed project implementation and achievement of PDO Implementation delays due to capacity issues of Materialized for some subprojects and delayed project understanding World Bank procurement procedures implementation and achievement of PDO for implementing agencies

2.2 Implementation

37. The project originally included ten heat and one gas subprojects and was expected to be implemented over a five-year period—from September 15, 2008, through the end of December 2013. The gas subproject and four original heat subprojects were cancelled, and four new heat subprojects were added, and the project implementation took nearly eight years. In total, nine out of ten heating subprojects were completed by the project closing date and achieved or exceeded their respective PDO indicators. The following sections summarize the main factors that affected project implementation.

Cancellation of Subprojects

38. Shortly after the World Bank loan was approved, the Chinese Government announced a stimulus package of US$586 billion equivalent to sustain the country’s economic growth in the wake of the global financial and economic crisis of 2008. The bulk of this support focused on the infrastructure sector, also including the municipal infrastructure such as urban heating and gas supply. Four heat subprojects and the gas subproject included in the project opted for procurement based on national rules and local financing, including the stimulus package, and effectively dropped off at the very beginning of project implementation. Formally, these five subprojects remained ‘on the project balance’ until after the first restructuring that was approved in January 2014. As there was no disbursement under the five subprojects and they accounted for US$100.96 million of 53 percent of the World Bank loan, the overall loan disbursements fell well below the targets. By the end of 2012, only 27 percent of the World Bank loan proceeds were disbursed. This affected the achievement of the PDO and implementation progress and both PDO and implementation progress ratings were downgraded to the unsatisfactory level.

39. The World Bank project team, starting from early supervision missions consistently raised the issue with provincial authorities about project restructuring to cancel the five subprojects (four subprojects from Component 1 and the subproject under Component 2). However, the provincial government did not agree to cancel the subprojects without replacing them with new ones because of the risk of losing nearly 53 percent of the loan associated with the subprojects to cancel.

40. It took nearly five years to find new subprojects satisfactory to the World Bank because of the following two reasons:

 Shortage of subprojects. A number of subprojects proposed by the provincial authorities and appraised by the World Bank were rejected because of ongoing/completed procurement and/or capacity to implement investments within a short time frame in accordance with the World Bank fiduciary and safeguards requirements. Several potential subprojects opted for local financing, supported by the stimulus package funds, which subproject owners often preferred as a financing source because it allowed them to use national procurement and safeguards rules and thus implement investments more rapidly than under World Bank financing.

 Provincial government procedures. The provincial government first offered the original project cities a chance to find a new subproject before taking away their

loan allocation. After it became clear that no new subprojects will be proposed, it took a long time to formalize withdrawal of loan allocations because of provincial internal procedures. Also, the need to coordinate the selection and approval of all new subprojects between the concerned government bodies, including DRC and the Ministry of Finance, required time.

Procurement

41. In several subprojects, implementation was delayed because of procurement complaints. The most conspicuous case is the Chaoyang subproject that was added under the second restructuring and therefore had only a little more than 18 months to implement an ambitious investment program of about US$50 million.1 Because of procurement complaints and a slow response to them by the Chaoyang heating company, for nearly 9 out of 18 months, procurement activities were suspended. As a result, subproject investments only began close to the project end. Further details on procurement issues are provided in paragraphs 65–66. Also, a procurement complaint, which ultimately was satisfactorily addressed, significantly delayed the awarding of the contract for the Project Management Consultant under the technical assistance component, which in turn had an impact on the pace of implementation at the beginning of the project.

Land Ownership and Right-of-Way

42. The implementation of one of the original subprojects—Benxi Nanfen—was blocked for about five years because of difficulties in resolving land ownership issues for constructing a heating source and obtaining right-of-ways for a DH pipeline to cross railways.

Delays in Constructing Associated Facilities

43. The Chaoyang subproject aimed to switch the heat supply for an area of 11.57 million m2 from an old CHP plant and number of HOBs, to a new CHP plant, comprising two units of 350 MW each. The new CHP plant was financed outside of the project. At the time the subproject was added, in December 2014, the Government expected the construction of the plant to be largely completed by the project’s closing date and commission the first CHP plant unit in October 2016 and the second one in January 2017. In practice, the construction of the plant faced delays, at least partially because of unfavorable weather conditions, including the prolonged winter season in 2015/2016 and the unusually very rainy summer in 2016. The delay in constructing the CHP plant, to some extent, slowed down the implementation of subproject investments. At the time of ICR preparation, the plant was only expected to be completed by the 2017/2018 heating season. Had a CHP unit came on stream by the 2016/2017 heating season, as originally planned, the subproject owners would have been compelled to complete a corresponding part of the subproject by the heating season.

1 The cost of the subproject of US$95.6 million, as stated in the second Restructuring Paper, reflected the costs of the northern and southern parts of the city, whereas the project supported investments only in the northern part. The cost of the northern part, according to a feasibility study was US$72 million. It was adjusted to US$50 million, based on a final design and specifications. Owing to competitive procurement, the actual cost of the subproject was US$37.5 million.

Slowdown in Housing Development

44. The project forecasts for construction of new buildings to be connected to DH turned out to be too optimistic. Housing development slowed down in nearly all project cities during project implementation. As a result, the new area connected to DH under the project fell short of the original targets. This required scaling back implementation plans and/or partially utilization of the assets installed under the project until after the new housing area reaches target levels in coming years.

45. Another reason was the lack of local budget funds for constructing new housing. Most of new housing under the project was built by private developers, except in the Huludao subproject, which is located in a mining town with mining activities being phased out, where public funds were used to construct new housing. Because of shortage of local budget funds for new housing that had to be connected to DH, the Huludao subproject was only completed in 2015, but still the connected heat area for this subproject fell short of the target level.

46. Table 3 provides information on inclusion and dropping or completing the 15 subprojects that at various times were part of the project.

Table 3. List of 15 Subprojects No. Subproject First Second Status at the Status at the Status Restructuring Restructuring Original Revised Before the Closing Date of Closing Date of 2016/2017 December 31, June 30, 2016 Heating 2013 Season The 11 original subprojects, including 10 heat subprojects under Component 1 and the gas subproject under Component 2 (subproject # 5) 1 Benxi General Dropped 2 Fushun Dropped 3 Haicheng Dropped 4 Yingkou North Dropped 5 Yingkou Gas Dropped 6 Benxi Steel Retained Retained Completed 7 Gongchangling Retained Retained Completed 8 Yingkou EDZ Retained Retained Completed 9 Yingkou Retained Retained Completed Dashiqiao 10 Huludao Retained Retained Almost Completed completed 11 Benxi Nanfen Retained Retained Implementation Almost Completed completed The subprojects added under Component 1 through the two restructurings 12 Kangping Added Retained Implementation Completed 13 Lingyuan Added Retained Implementation Completed 14 Yixian Added Implementation Completed 15 Chaoyang Added Implementation Implementation Not completed Note: EDZ = Economic Development Zone.

2.3 Monitoring and Evaluation (M&E) Design, Implementation, and Utilization

47. The rating for M&E was Satisfactory from the beginning of the project to the end of 2013. Thereafter, it was downgraded and remained Moderately Satisfactory through the closure of the project because of malfunctioning of heat meters installed under the project. However, that rationale for downgrading is questionable because heat meters were not required for measuring PDO indicators, listed in paragraph 48.

M&E Design

PDO Indicators

48. To monitor the achievement of PDO under Component 1, three energy/resource reduction indicators and two emission reduction indicators were adopted, each expressed in relative terms - - per connected floor area2 -- and measured annually:

 Fuel consumption, kWh/m2

 Electricity consumption, kWh/m2

 Make-up water, L/m2

 TSP emissions, kg/m2

2  SO2 emissions, kg/m

49. The indicators were well aligned with the PDO of improving energy efficiency and environmental performance of heating the project areas. The PDO target values were reflective of planned investments. It could be argued that network heat losses could have been included in the PDO indicators because they are very informative in assessing the DH system efficiency. However, in the absence of the reliable baseline data for network losses, selecting efficiency- related PDO indicators for which baseline data was available and easily measurable (fuel consumption, electricity use, and make-up water) and measuring them per square meter of connected area was a sensible approach given the circumstances.

50. As all the PDO indicators were measured in relative terms—per square meter of floor area connected to the centralized heating systems3 that were improved and/or constructed under the project. In view of this and given its importance in assessing project results, it would have been appropriate to also include the floor area as part of the PDO indicators and as part of intermediate results (IRs) indicators.

2The term ‘connected floor area’ referred to in the PAD and the term ‘heat(ed) area’ referred to in this ICR have the same meaning.

3 In this ICR, the term ‘centralized heating systems’ and the term ‘district heating (DH)’ have the same meaning.

51. The PDO indicator for Component 2—Reduced gas loss after distribution system rehabilitation within two years after commissioning—was adequate and easily measurable.

Intermediate Results Indicators

52. Overall, the IR indicators for both components were well related to the PDO indicators and adequate for monitoring physical implementation of the project. For clarity purposes, the indicator concerning the floor area connected to DH could have included two separate sub- indicators: (a) the area that existed and was supplied by inefficient and polluting heat sources before the project and (b) the area that was expected to be constructed and connected to DH during the project.

M&E Implementation

53. The data for the PDO and IR indicators were collected and reported regularly by the PMO, supported by project management consultants hired under Component 3. The first three PDO indicators and all IR indicators were measured, whereas the last two PDO indicators were computed based on fuel consumption associated with heating the project areas, energy generation emission reduction equipment in use, and coal quality. The computed values were cross-checked against emission levels of heat plants that were measured by the local environmental authorities.

54. Both the PDO and IR indicators were monitored for each subproject separately, making their measurement or computation straightforward with respect to location. The PDO indicators measured at the subproject level were aggregated at the project level for project reporting purposes. However, at the time of the ICR, it was found that the PDO and IR indicators of subprojects were not always correctly reported by the PMO and subsequently recorded in the World Bank documents, including the restructuring papers and Implementation Status and Results Reports.

55. During preparation of the ICR, the PDO and IR indicators at the subproject project level were adjusted based on the updated data received from the project team and PMO. The revised indicators are presented in annexes 2 and 3.

56. During project implementation, the PDO target indicators of Component 1 were revised twice to take into account the cancellation and addition of subprojects. The baseline PDO indicators were not updated as part of the restructurings and their level, recorded in the Implementation Status and Results Reports, remained at the appraisal level throughout project implementation, which was not correct.

M&E Utilization

57. The indicators were utilized to monitor project progress and identify implementation issues. The IR indicators were used to monitor progress with physical investments toward achievement of subproject outputs, while the PDO indicators were instrumental in tracking subproject performance with respect to the project outcomes.

58. Several project participating DH companies strengthened their M&E capacity and used PDO indicators to identify issues and address them. For instance, Yingkou Dashiqiao, after analyzing data on electricity use per heat area (PDO indicator 2), implemented investments to reduce electricity consumption by modernizing pumps and associated equipment.

2.4 Safeguard and Fiduciary Compliance

Environmental and Social Safeguards

59. The compliance with the World Bank environmental and social safeguards was rated Satisfactory most of the time. The project was assigned Category B and at appraisal triggered OP 4.01 on Environmental Assessment and OP 4.12 on Involuntary Resettlement during project preparation. During implementation, no change was made to the project safeguards category and policy. Implementation of the Environmental Management Plan (EMP) with respect to closure of small coal boilers faced issues because the boilers were not owned by the participating DH companies. The World Bank team had to intervene to ensure that municipal governments assumed responsibility for disposal of small boilers in accordance with the EMP. Initially the PMO encountered difficulties in supervising compliance with EMP of all the subprojects. To address this issue, in 2010, the PMO hired environmental monitoring consultants, who helped ensure proper monitoring of environmental management by each subproject. Flue gas emissions, wastewater, and noise were duly monitored, as required by each EMP. The EMP implementation and monitoring were adequately reported every six months by the PMO to the World Bank.

60. The World Bank team visited the subprojects regularly during implementation and trained the original six and the additional four participating DH companies on environment safeguard requirements.

61. Several subprojects involved land acquisition for the construction of new heat sources. These included Yingkou Dashiqiao, Benxi Nanfen, and Huludao subprojects. For these subprojects, Resettlement Action Plans (RAPs) were prepared and approved by the World Bank during appraisal. During implementation, four new subprojects were added to the project. Because most of these subprojects supported the construction of new heat pipelines and heat substations, none of them involved land acquisition. However, for one of the new subprojects— Chaoyang, a due diligence review was conducted for the associated CHP heat source that completed land acquisition and resettlement before joining the project. The due diligence review confirmed that the land acquisition and resettlement for the associated CHP site were implemented in compliance with national laws and local regulations.

62. According to monitoring reports, which were carried out by consultants hired by the PMO throughout project implementation, all affected people were compensated for land acquisition and rehabilitation measures in accordance with the RAPs. In addition, efforts were also made by subproject sponsors to ensure redeployment of boiler workers affected by closure of small coal boilers, which included providing continuous employment in heat supply companies and skill training. Every six months, the resettlement implementation and rehabilitation efforts of boiler workers were reported by the PMO to the World Bank.

63. The World Bank team will need to ensure the compliance of the Chaoyang subproject with the World Bank environmental and social safeguard requirements during implementation of the remaining investments that are part of the subproject (see section 2.5).

Financial Management

64. The project's financial management (FM) was rated Moderately Satisfactory during the entire project, except for the first two years when it was rated Satisfactory. The interim financial reports were submitted on time. All project audit reports received unqualified (clean) audit opinions and were submitted on time. During implementation no significant FM issues arose. However, the project faced disbursement delays due to implementation delays but also because of the lengthy and complicated internal approval procedures on the client side, as well as the lack of experience with the World Bank disbursement requirements by project implementing agencies. The project included ten PIUs that differed with respect to FM capacity. The World Bank’s FM team provided a number of training and implementation support and guidance throughout project implementation to build capacity of the entities and ensure compliance with the World Bank disbursement requirements. By the end of the grace period for disbursements—October 31, 2016, US$165 million, or about 86.4 percent, of the World Bank loan was disbursed.

Procurement

65. All works, goods, and consultant services were procured and completed satisfactorily, in accordance with legal covenants and World Bank procurement policy and procedural requirements. By the end of 2012, the procurement activities of the project were downgraded from Satisfactory to Moderately Satisfactory and remained at that level through the project closure, except for the second half of 2015 when they were rated Moderately Unsatisfactory. The downgrading was due to procurement delays that in turn were caused by a number of complaints from bidders and anonymous parties about the qualification requirements and technical specifications of bidding documents. In some cases, in an effort to avoid procurement of poor quality materials, the qualification requirements and technical specifications of bidding documents were set unnecessarily at a very high level, which was seen as too onerous for some bidders. In some other cases, they were attempts to inappropriately tailor them to concrete suppliers.

66. In addition, there were multiple complaints under the project, 12 of which were reported to the Integrity Vice-Presidency. The complaints were related to collusion and fraud and some implicated the local PMOs. All complaints were ultimately addressed and closed. However, the concerned DH companies often took many months to resolve them even when complaints were groundless.

67. The World Bank team provided a number of procurement trainings before and during project implementation and closely followed up with the PMO and project participating DH companies on the procurement complaints.

2.5 Post-completion Operation/Next Phase

Continued Supervision Support

68. The Chaoyang subproject has not been completed by the project closing date or by the time of ICR preparation and will require World Bank supervision support with respect to safeguards until after the subproject related activities are completed.

69. The Chaoyang subproject plans to complete its investment program in the course of 2017–2018. During that period, the following main activities will be carried out:

 Closure of 31 HOBs with total capacity of 695 MW

 Closure of an old CHP plant of 220 MW

 Installation of 106 group substations, all of which have been supplied under the project

 Installation of 33 BLSs, all of which have been supplied under the project

70. The distribution of the these activities between 2017 and 2018 will depend on the time of completing and commissioning the two units of the new CHP plant, which is now expected by August 2017, and the pace of implementing the works listed in the paragraph above. The new plant will provide heat to the project area that so far has been supplied by old HOBs and a CHP plant.

Sustainability of Project Investments

71. The investments implemented under the project form an integral part of the DH assets of the participating DH companies and are critical for heat supply in the respective subproject areas.

72. Some assets, such as pre-insulated DH pipelines will require little maintenance, while some others such as generation sources and substations will need to be properly maintained to maximize the operation lifespan of equipment. The revenues generated by the DH companies are not always sufficient to adequately finance repair and maintenance works, in which case local budgets typically provide support.

73. The main reasons for insufficient revenues are depressed heat tariffs and a lower than expected occupancy rate in newly constructed residential buildings. The related issues of financial viability of the DH sector and heat tariff pricing at CHP plants require attention and the World Bank could provide advisory support in this area.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design, and Implementation Overall Rating: Substantial

74. Relevance of objectives. Rating: High. The project’s original development objective was to assist Liaoning Province in improving energy efficiency and environmental performance of heating and gas services in selected areas of the project cities. The achievement of the original objective related to gas services is not rated because the gas component and related development objectives were dropped under the first restructuring.

75. Both the original and revised objectives were consistent with the Government’s Five- Year Plans and the World Bank Group’s China CPS at the time of preparation and completion. China’s Five-Year Plans for 2006–2010, 2011–2015, and 2016–2020 feature successive targets to reduce the economy’s energy and carbon intensities and reduce air pollution. Specifically, the 2011–2015 and 2016–2020 plans required the reduction in energy consumption per unit of gross domestic product by 20 percent and 18 percent, respectively. Furthermore, the 2016–2020 plan of Liaoning Province requires (a) increasing the use of industrial heat that would otherwise be wasted, to heat 50 million m2 by 2020 and (b) removing all HOBs with capacity below 7 MW and 14 MW by 2018 and 2020, respectively. The project supported the use of industrial heat and closure of small HOBs in all project cities.

76. The Government’s priorities with respect to energy efficiency and environmental improvements were reflected in the World Bank Group’s China CPS of 2006–2010 (Pillar 3: Managing resource scarcity and environmental challenges) and CPS of FY13–FY16 (Strategic Theme 1: Supporting greener growth).

77. Relevance of design and implementation. Rating: Substantial. The design and the causal chain of investment activities to the objective were highly relevant at the time of preparation. The project was designed to achieve the PDO by extending and upgrading DH (Component 1) and gas supply (Component 2) in the project participating cities. Component 3 supported project management and advisory assistance and capacity building of the participating heating and gas companies.

78. Notwithstanding the cancellation of four subprojects under Component 1 and the gas subproject under Component 2, the project design remained relevant during implementation and at completion for the following reasons. All nine subprojects that were completed under the project achieved or exceeded their respective PDO targets, which confirms the right design and effective implementation on the basis that the PDO targets were relevant to the objective. The Chaoyang subproject did not achieve the PDO targets but only because it was not completed by the end of the project. It is expected that it will reach the targets upon completing the construction and commissioning of the CHP plant and implementing the remaining investments under the subproject during 2017–2018.

79. The five cancelled subprojects were as well designed and relevant for achieving the PDO as the remaining six original and four added subprojects. Therefore, it would be reasonable to assume that they would have achieved their PDO results had they been implemented under the project. It is worth mentioning that all four cancelled heat subprojects were successfully implemented outside of the project and became operational by 2011. The cancelled gas subproject was also largely commissioned in 2011 but it was fully completed in 2016. All five subprojects benefited from quality preparation under the LMC3 that helped subproject owners obtain local financing, supported by the government anti-crisis stimulus package of 2008.

3.2 Achievement of Project Development Objectives

80. Project efficacy. Rating: Substantial. The project has achieved its objectives of improving energy efficiency and environmental performance of heating services in the project areas of project cities. The original objective of improving energy efficiency and environmental

performance of gas services, which was dropped as part of the first restructuring, was not achieved under the project.

81. All PDO-level indicators, revised under the first restructuring after dropping gas sector- related indicators, were achieved or exceed at both project and subproject levels4, except for the Chaoyang subproject. Had this subproject been completed during the 2016/2017 heating season, as planned under the second restructuring, project efficacy could have been rated High. Table 4 shows the level of achievement at the project level. Indicators 1–3 demonstrate the achievement of the energy and water efficiency targets; indicators 4–5 show the achievement of the environmental performance targets.

Table 4. PDO Indicators

Unit of Baseline June 30, 2016 June 30, 2016

Measure Target* Actual* Indicator 1: kWh/m2 199.5 144.9 137.9 Fuel consumption per connected floor area Indicator 2: kWh/m2 4.4 3.3 2.7 Electricity used for DH/connected floor area Indicator 3: L/m2 115.4 96.0 79.34 Make-up water used/connected floor area Indicator 4: kg/m2 0.494 0.09 0.07 TSP emissions/connected floor area Indicator 5: kg/m2 0.285 0.07 0.05 SO2 emissions/connected floor area Note: * The target and results are shown as appraised and recorded under the second restructuring. However, the data for Chaoyang subproject covered the northern and southern parts of the city, whereas the World Bank-supported investment only concerned the northern part. It should have included only the northern part.

82. Six subprojects that were completed before the 2015/2016 heating season exceeded their respective targets on the five PDO indicators. For the three subprojects that were completed only by the end of the project, PDO results are shown equal to PDO targets because the actual PDO results will be available only after the 2016/2017 heating season. This is a conservative approach because all six subprojects completed earlier exceeded their targets. The achievement of the five PDO indicators at the subproject and project levels is provided in annex 3. The detailed PDO data at the project and subproject levels are provided for two cases: Northern and Southern Chaoyang (as reflected in the second Restructuring Paper) and only Northern Chaoyang (the actual case). In the case of Northern Chaoyang, all PDO indicators at the project level also were achieved or exceeded.

4 The average temperature for the 2015/2016 heating season (from October 2015 to March 2016), which was used for measuring the PDO results for the subprojects completed before the heating season, was – 8.7 ºC. This was the lowest temperature for a heating season since the project outset (the highest was -4.7 ºC for 2013/2014). Lower temperatures imply higher energy consumption and emissions. However, the PDO results presented in table 4 were not adjusted for conservative purposes. Small variations in the quality of coal used by the project heating companies and associated CHP plants during project implementation did not have a material impact on PDO results, and therefore were not taken into account. The impact of energy efficiency improvements in existing buildings was not analyzed because of the lack of reliable comprehensive data.

83. For the Chaoyang subproject, the PDO results were set equal to the baseline indicators because the subproject was not completed by the project closing date. At the time of the second restructuring, the PDO targets for Chaoyang were set equal to the baseline indicators because shortly before the approval of the restructuring—in November 2014—it became clear that the associated CHP plant, without which the subproject benefits could not be realized, will not come on stream before the end of 2016 or early 2017. The rationale of including this subproject, given that it could not be completed by the project closing date, is questionable. Had the PDO targets for Chaoyang been set at the levels expected upon its completion, two out of five project PDO indicators would not have been met by the project closing date as shown in table 5.

Table 5. The PDO Target and Results Indicators with the Chaoyang Subproject PDO Targets Set at the Level of the Completed Subproject PDO Indicator Target* Results* Fuel consumption, kWh/m2 136.13 135.05 Electricity consumption, kWh/m2 2.26 2.39 Make-up water, L/m2 75.45 74.65 TSP emissions, kg/m2 0.01 0.02 2 SO2 emissions, kg/m 0.04 0.03 Note: * Includes only the northern part of the Chaoyang subproject.

84. While the heat area was included in the IR indicators, it merits to be considered together with PDO indicators, all of which were measured in relative units per square meter. The nine completed subprojects collectively connected about 92 percent of the area planned to be connected to centralized heating. The planned area included both buildings that existed before the project (accounting for about two-thirds of the area) and buildings to be constructed during project implementation (which accounted for the remaining one-third of the area). The shortfall of about 8 percent was caused by slowdown in housing development facing all project cities, compared to housing development estimates at the time of appraisal which were not updated during implementation. However, because the project connected to centralized/improved heating all available buildings in the project areas of the nine cities, this shortfall, which is outside of the project control, does not affect the achievement of this IR indicator. Instead, it is reflected as a shortfall of the World Bank and PMO teams that missed an opportunity to timely revise the indicator during project implementation.

85. The Chaoyang subproject was not expected to achieve the PDO results and connect the heat area of 11.57 million m2 by the end of the project. The achievement of these objectives was dependent on completion and commissioning of the associated CHP plant that was planned to be made operational in stages, namely the first unit—in October 2016 and the second one—in January 2017. The completion of the plant, which is outside of the project control, was delayed and now is expected by August 2017. While it is possible that the total subproject area of 11.57 million m2 will be connected to a centralized heating system by the 2017/2018 heating season, for the purposes of project financial and economic analysis it was conservatively assumed that 50 percent of the area will be connected by the 2017/2018 heating season and the remaining by the following heating season. Although the connections will take place after the project closing date, they can be directly attributed to the subproject. In view of the above, the achieved and planned project heat areas are as shown in table 6.

Table 6. Project Heat Area* Target Set under the Achieved by June 2016 Planned to be Achieved Planned to be Achieved Second Restructuring (end of the project) by September 2017 by September 2018 47.2 million m2 32.8 million m2 38.6 million m2 44.37 million m2 100% 70% 82% 94% Note: * Including the Chaoyang subproject.

86. Based on the split evaluation methodology for restructured projects, the overall project achievement has been assessed against the three phases of the operation: (a) project effectiveness to first restructuring, (b) first restructuring—second restructuring, and (c) second restructuring— end of the project. The split evaluation resulted in the Moderately Satisfactory rating with respect to achieving the PDO. This, together with delays in completing the Chaoyang subproject, determined the Substantial rating for efficacy.

Table 7. Split Evaluation of PDO Achievement Phase I Phase II Phase III Overall Moderately Moderately Moderately Moderately Rating Unsatisfactory Satisfactory Satisfactory Satisfactory Rating 3 4 4 Cumulative disbursements, 70.46 84.22 165 165 US$, millions Weight (%) 43 8 49 100 Rating weighted value 1.28 0.33 1.96 3.57

3.3 Efficiency Rating: Moderate

87. The economic internal rates of return (EIRRs) and financial internal rates of return (FIRRs) were recalculated based on the methodology applied at appraisal, using actual costs and benefits. The EIRRs were estimated using a cost-benefit analysis, while the FIRRs were estimated through a cash flow analysis. The costs included investment and O&M costs, while the economic benefits included cost savings from replacement of small boilers with large boilers and CHPs, expanded heating supply to new demands, and environmental benefits. The FIRRs were calculated based on cash flow analysis, using the same approach as used at appraisal. The investment cost, annual operation expenses, annual income from heating sales, and income tax were calculated to derive the net income after tax, then estimate the financial return of each investment sub-projects. The annual income from heating sales were calculated based on the forecast tariffs and projected heat areas. The results of calculation of EIRRs and FIRRs at ICR and appraisal are summarized in table 8 and detailed in annex 4.

88. The EIRRs/FIRRs of five subprojects at ICR were close to those at appraisal/restructuring (Benxi Nanfen, Gongchangling, Yingkou Dashiqiao, Liyuan, and Yixian). Another four subprojects (Benxi Steel, Huludao, Yingkou EDZ, and Kangping) achieved lower EIRRs/FIRRs at ICR, as compared to those at appraisal/restructuring. The main causes of lower levels of IRRs were (a) reduced project scope and/or heat area; (b) higher fuel/heat prices; (c) lower collection rate of heat payments from customers; and/or (d) higher O&M costs. Finally, the Chaoyang subproject was not completed at the time of ICR preparation for the reasons

elaborated in other sections of ICR but is expected to be completed by the 2017/2018 heating season.

89. The EIRR and FIRR at the project level were estimated for two cases: (a) with the Chaoyang subproject not completed, in which case its EIRR and FIRR are equal to 0 and (b) with the completed Chaoyang subproject. Table 8 shows the results for both cases. Furthermore, the four subprojects added to the project under the restructurings (marked in table 8 by *) were appraised by using a different model for financial and economic analysis, as compared to the original model developed at project appraisal in 2007/2008. At the time of ICR, the appraisal estimates for these four subprojects were recomputed by using the original appraisal model for consistency purposes. Table 8 provides two appraisal estimates for these four subprojects: the higher numbers are the ones formally recorded in the respective Restructuring Paper, whereas the lower numbers, as recomputed at ICR. The internal rates of return (IRRs) at the project level are presented separately for the two levels of IRRs at appraisal.

90. The weighted average EIRR at the project level at ICR was 16.8 percent with Chaoyang completed and 12.9 percent with Chaoyang not completed. The project FIRR levels for these two cases were 6 percent and 4.8 percent, respectively. However, both EIRR and FIRR5 at the project level exceed the social discount rate and hurdle rate, respectively, which demonstrates the economic and financial viability of the project.

Table 8. EIRRs and FIRRs at ICR and Appraisal Project EIRR FIRR Reasons for Differences Between Appraisal and Completion Levels ICR (%) Appraisal ICR (%) Appraisal

(%) (%) Benxi Nanfen 18.5 19.8 6.4 6.8 Reduced project scope and heat Benxi Steel 15.3 24.0 12.3 17.1 area Gongchangling 20.0 16.4 5.4 5.2 Low collection rate and high Huludao 0.8 13.3 < 0 5.7 O&M costs Yingkou Dashiqiao 27.3 29.9 7.4 8.1 Yingkou EDZ 17.0 26.3 5.1 9.1 Higher heat prices from CHP 21 Higher heat prices from CHP; Kangping* 13.7 3.4 6.2 18.3 different model at appraisal 41 Lingyuan* 13.4 9.2 10.8 Different model at appraisal 12.8 9 Yixian* 21.1 8.9 8.6 Different model at appraisal 22.5 18 Higher heat price from CHP; Chaoyang* 15.1 4.9 7.7 18.5 different model at appraisal Total project with 22.8 17.1 16.8 6 Chaoyang completed 21.3 8.7 Total project with 22.8 17.1 12.9 4.8 Chaoyang not 21.3 8.7

5 The project FIRR will exceed the hurdle rate of 5 percent after completing the Chaoyang subproject.

Project EIRR FIRR Reasons for Differences Between Appraisal and Completion Levels ICR (%) Appraisal ICR (%) Appraisal

(%) (%) completed Note: * Appraised by using a different model for financial and economic analysis, as compared to the original model developed at project appraisal in 2007/2008.

3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory

91. This rating is based on the combination of the abovementioned ratings and the following considerations: (a) high relevance of the project objectives at the time of project completion; (b) substantial relevance of design; (c) substantial efficacy with respect to the achievement of the PDOs indicators; and (d) moderate efficiency. The project directly contributed to the achievement of its objectives of improving energy efficiency and environmental performance of heating services in the project areas of the participating cities.

3.5 Overarching Themes, Other Outcomes, and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

92. By helping improve heat supply and air quality in the project municipalities and counties, the project benefited the urban poor, who are usually least able to cope with deficient heat supply and air pollution. The closure of small, polluting coal-fired HOBs has reduced emissions that are harmful not only to human health but also to crop, forests, and water through disposal of ash and slag. While these impacts are difficult to quantify, the updated values of emissions reduction used in the economic analysis reflect some of the social benefits. The project design and M&E reports did not include a specific gender dimension. The number of women and men in the project areas is about the same; they equally benefited from improved heating services. Elderly people, who often stay home in winter, benefited the most from modernized heat supply and related improvements in indoor temperature and comfort conditions.

(b) Institutional Change/Strengthening

93. The project enhanced the capacity of the project participating companies with respect to World Bank fiduciary and safeguards aspects of investment operations, as well as embracing the DH sector best practices and technologies, such as BLS, metering, and SCADA. The provincial government further deepened its knowledge and experience on managing investment projects financed by international financial institutions.

94. During project implementation, the World Bank team supported the initiative of some project companies to pilot distributed pumping—that is, pumping heat carriers with pumps installed at heat substations and not at heat plants, as is usually the case. This innovative technical solution was implemented in two subprojects—Yixian and Benxi Nanfen—and helped achieve further reductions in electricity consumption.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

95. At the end of the project, to assess the impact of the project on the ground, the Liaoning Academy of Social Sciences was contracted to conduct a social survey in project cities. The survey was carried out in July 2016 in the cities that completed their respective subproject by the heating season of 2015/2016. In total, 426 families from seven cities participated in the survey.

96. According to the outcomes of the survey, about 51 percent of respondents were not satisfied with heating services before the project. During the project, the share of respondents connected to DH increased from 26 percent to 92 percent. After the project, the share of respondents satisfied with heating increased from 49 percent to 87 percent; the share of respondents who considered the outdoor air quality as excellent or good went up from 30 percent before the project to 74 percent after it. Further details are provided in annex 6.

4. Assessment of Risk to Development Outcome Rating: Moderate

97. The project faces two main risks to development outcome. First, the sustainability of project investments. The assets constructed under the project are an integral part of the DH systems in the project cities. The project DH heating companies are mandated to provide heat to its customers and therefore have an intrinsic interest to maintain and operate the assets to extend their economic lifetime. Some of the assets put in place under the project, such as pre-insulated DH pipes, which accounted for more than half of the project-supported investments, require little maintenance. Some others, such as substations and heat sources need to be regularly and properly maintained to maximize their lifetime. The heat tariffs of the project DH utilities (as well as all DH utilities in China) are regulated and could be kept at levels insufficient for proper maintenance of assets. However, in that case, municipal budget transfers often complement the revenue collected from DH customers to allow DH companies to implement maintenance and repair works in a timely manner.

98. Second, completion of the Chaoyang subproject. According to the city authorities, the subproject is planned to be completed by the 2017/2018 heating season, including both project- supported investments and the CHP plant that has been under construction outside of the project. The ICR conservatively assessed that only half of the project heat area will be connected to the CHP plan by the 2017/2018 heating season, while the other half will be connected by the following heating season. Given the high level of completion of the CHP plant and the fact that most of the equipment under the project has been procured and only needs to be installed, the risk of not completing the subproject is low. Based on the results achieved by the other subprojects, it is highly likely that the project PDO outcomes will be met or exceeded upon completion.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Quality at Entry Rating: Satisfactory

99. The development of the project concept benefited from the World Bank’s understanding of the country context and priorities that were developed over decades of successful partnership and collaboration with the Chinese Government. Furthermore, the World Bank accumulated firsthand sectoral knowledge through its previous work in the heating and gas sector in China and a number of countries in the Europe and Central Asia Region. However, this was the first lending project in China, supported by the World Bank, which focused on DH. Given the differences between DH in China and countries of the Europe and Central Asia Region with respect to institutional arrangements, experience of contractors, scale, and a relatively large share of new connections to DH associated with the continued urbanization in China, both the Government and World Bank had to learn by doing from the outset of the project.

100. Technical, financial, and economic analyses for the project appraisal were well developed and detailed. Implementation arrangements were designed based on similar infrastructure projects, with participation of a number of municipalities, supported by the World Bank in China, including the preceding Liaoning Medium Cities Infrastructure Project and the Second Liaoning Medium Cities Infrastructure Project in Liaoning Province. Fiduciary and safeguards aspects of the project were well developed and the related capacity of the implementing entities was enhanced during project preparation. The M&E framework and arrangements taken to implement it were adequate. Several risks were correctly identified and adequate mitigation measures were proposed. The risk of cancelling of subprojects was not fully recognized; it materialized and caused delays in project implementation and achievement of PDO. However, at the time of appraisal it was difficult, if possible at all, to anticipate the stimulus package that was made available by the Government in the wake of the global crisis of 2008, and prompted several subprojects to opt for local financing.

(b) Quality of Supervision Rating: Moderately Satisfactory

101. Project supervision was carried out regularly, on average through two to three missions per year. In total, 14 supervision missions took place during the project implementation period. The supervision teams comprised all the specialists required to assess project progress, identify and discuss issues, and provide implementation support. The project management on the World Bank side (task team leader) was transferred in about three years after effectiveness. Thereafter, it was managed until project closure by the same team leader, who was based in Beijing and who spoke Chinese, which facilitated communication with project counterparts and helped provide effective and timely support. The quality of supervision also benefited from having a key international DH expert overseeing financial and economic aspects, as well as technical matters, from appraisal to the project completion.

102. The World Bank provided a number of trainings to project implementing agencies on fiduciary and safeguards during implementation, as well as guidance and advice on specific project issues during implementation support mission. The World Bank promptly reacted to all procurement complains and closely followed up with the concerned implemented agencies to address and close them.

103. Supervision efforts focused on ensuring timely implementation of the project and the compliance with the World Bank fiduciary and safeguards requirements. In particular, the project

team had to spend a lot of time and effort on procurement issues that were faced by several subprojects in the past years of project implementation.

104. At the same time, the team missed an opportunity to revise the PDO baseline indicators and the heat area IR indicator as part of the restructurings. In addition, the results data on the PDO and IR indicators, that were provided from the PMO and their consultants could have been monitored and checked for accuracy more closely and recorded in project files more diligently. Furthermore, the time line for completion of the Chaoyang subproject, as stated in the second Restructuring Paper, was not made consistent with the revised PDO targets that reflected the fact that the subproject would not be completed by the project’s closing date. In addition, a portion of the World Bank loan could have been cancelled shortly after the second restructuring, by taking into account the savings realized by the completed projects and the refined cost of the Chaoyang subproject. What’s more, the model used for financial and economic analysis of the four subprojects added under the two restructurings was different from the one developed at appraisal (and used for ICR). Finally, to meet the PDO, the project had to be restructured twice and the implementation period was extended by two and a half years because the first restructuring took place only in about five years from the beginning of project implementation. These delays badly affected the efficiency of implementation. While project implementation delays were largely outside of the World Bank’s control, they could possibly have been somewhat reduced had the World Bank more proactively discussed the issues with the Chinese provincial and central authorities during the first years of project implementation.

105. Based on the Satisfactory rating for quality at entry and Moderately Satisfactory rating for quality of supervision, the overall World Bank performance is rated Moderately Satisfactory.

5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory

106. The provincial government showed commitment during project identification and preparation and provided the required support during that stage, which could be rated Satisfactory. However, the reluctance to promptly cancel the five subprojects at the early stages of implementation and the long time taken to identify suitable subprojects for replacement adversely affected the project implementation schedule. The project implementation period was extended twice, in total for two and half years to provide time for the implementation of the newly added subproject. In addition, more active involvement of local governments in resolving land acquisition issues for some subprojects would have helped implement them and provide more efficient and clean heating services to their customers on time.

(b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory

107. The project included the PMO at the provincial level and PIUs at the subproject level. Overall, the PMO’s performance was Satisfactory except for aspects related to procurement.

More close supervision, guidance, and support could have helped if not to avoid, but at least to reduce the number of procurement complaints, some of which were escalated to the Integrity Vice-Presidency. In addition, the PMO could have provided more support to the PIU that faced capacity issues.

108. The performance of the PIUs varied from subproject to subproject. Some PIUs, including five original subprojects that were completed by the project original closing date, demonstrated both commitment and capacity. Others, in particular smaller ones, did not have enough capacity but showed strong commitment. Finally, there were PIUs that were capable of implementing their respective subprojects on time but lacked commitment and were reluctant to comply with the World Bank’s fiduciary requirements, in particular with respect to procurement. This resulted in implementation delays and the biggest subproject—Chaoyang—could not be fully completed by project closure, nor by the beginning of the heating season, following project closure. Taking this into account, the overall performance of the PMO and PIUs is rated Moderately Satisfactory.

109. The project included financial covenants to assess the financial performance of project companies and subsequently their ability to co-finance and implement their respective subprojects. Most of the companies did not comply with project financial covenants. However, the non-compliance proved to have little impact on the companies’ ability to make subproject investments on time. Local budgets provided support as needed. Therefore, the financial covenants were not enforced.

110. Based on the ratings of the Government and implementing agencies’ performance, and considering that nine of the ten subprojects were successfully completed by the beginning of the 2016/2017 heating season that followed the project closing date, the borrower’s performance is rated Moderately Satisfactory.

6. Lessons Learned

111. The project generated a number of lessons learned that could be applied to similar DH operations, as well as projects in other utility sectors:

 Number of subprojects. Projects in a single city, with one implementing agency, allow deep project impacts, especially with respect to institutional strengthening. This stands in contrast to investments with multiple sub-projects, borrowers and implementing agencies across disparate geographic locations, which hinder the concentration of Bank and borrower implementation support efforts. For projects in the municipal utility sectors, which include a number of participating cities/subprojects, it is advisable to include up to four subprojects. In that case, it would be possible to provide more deep implementation support and expand it beyond immediate project implementation to more systemic issues such as financial viability; implementation of sector reform elements (such as metering, consumption- based billing); and implementation of new technologies and approaches (such as BLS and SCADA). The lesson was taken into account by the World Bank team

while designing the Urumqi District Heating Project that worked with one large utility, as well as the Hebei Clean Heating Project that includes four subprojects.

 Selection of subprojects. When deciding whether to include a subproject in the project, its implementation time lines should be carefully assessed against the size and complexity of the planned investments and familiarity of the project implementing entity with the World Bank fiduciary and safeguards requirements. A conservative approach with respect to implementation time lines should be applied to candidate subprojects that critically depend on facilities to be constructed outside of the project.

 Role of PMO. In multiple city projects, it is essential for the central PMO to have good competence not only in project management but also in the sector in which investments are made. Also, the PMO needs to make efforts to establish good relations and communication with local counterparts for a smooth and well- coordinated operation. Establishing the PMO under the bureau responsible for the sector could be an additional measure to strengthen links between knowledge of the sector, local counterparts and the central Project Management Office. Also, a Project Management Consultant can help strengthen management tools and sector knowledge.

 Value added by technical consultants. Project which aim to modernize large district heating systems in lagging regions and/or that have many subprojects across multiple cities should use very strong technical consultants to help prepare feasibility studies, technical designs and bid documents. Consultants are bridges between the Bank team and the district heating companies and are a key link in a dialogue that aims to convince a traditionally conservative district heating enterprise to change familiar designs and operating methods. A high quality consultant also improves efficiency in project preparation because it is able to reflect more comprehensively the requirements of the Government and the Bank in the preparatory studies.

 Monitoring project results. Close attention needs to be paid to the capacity of the counterpart to provide high quality data and information for monitoring and evaluation. This assessment should then be taken into account in the resource planning for supervision of the Bank team.

 Implementation of new technical solutions. Introducing new technical solutions is a key benefit of participating in World Bank investment projects in China. Many new technologies have been piloted and then scaled up. Successful pilots require adequate support, including: (a) attention to technical designs which can be easily understood by contractors/suppliers; (b) pre-bid conferences to discuss with prospective bidders the proposed technical solutions and answer questions; (c) extra resources, supported with technical consultants, placed on implementation supervision, including receiving, installation and commissioning of the solution; (d) sufficient training is built into the supply contracts or though supplementary technical assistance for operation and maintenance, such as for SCADA; (e) the

monitoring and evaluation of the pilot is planned in advance and budgeted appropriately to ensure lessons learned are captured.

 Inclusion of financial covenants. The project experience confirmed the findings from other utility projects in China with respect to financial covenants. The compliance with financial covenants at the utility level depends largely on tariffs that are set by local governments and therefore highly politicized and established at below cost-recovery levels. However, local governments often provide financial support to municipal/county utilities to compensate for the loss-making tariffs. In these circumstances, including financial covenants does not help make utilities more financial viable but the non-compliance with the covenants does not really affect the ability of the project utilities to implement project investments. Based on these lessons learned, the Hebei Clean Heating Project, approved by the Board in January 2016, does not include financial covenants.

 Procurement

. A market assessment during project preparation and the procurement planning stage, helps inform procurement strategy and packaging as well as accurately assessing cost estimates.

. Procurement documents including technical specifications and bill of quantities need to be prepared based on detailed design.

. Regular supervision of and implementation support from the Bank and PMO teams to the PIUs that are new to the World Bank’s procurement rules or lack commitment to comply with them helps timely address procurement issues.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies

112. The PMO’s comments and minor corrections on a draft ICR have been reflected in this version of the ICR. In their comments, the PMO also expressed appreciation to the World Bank TTLs and expert team for the strong support that made it possible to successfully implement the project, and reassured the World Bank that the project will be successfully completed (with respect to the Chaoyang subproject).

(b) Cofinanciers. Not applicable.

113. Two subprojects—Yingkou EDZ and Dashiqiao signed an Emission Reduction Purchase Agreement with the Spanish Carbon Fund. According to the project ICRs, both of them successfully implemented their respective investments that generated the target levels of emission reduction. The Yingkou Dashiqiao subproject was able to certify the realized emission reductions and therefore satisfactorily achieved the PDO. The Yingkou EDZ subproject could

not certify the achieved emission reduction because of non-compliance with the registered monitoring plan and methodology, and therefore was rated Unsatisfactory.

Annex 1. Project Costs and Financing

(a) Project Cost by Component (in US$, millions equivalent)

Actual as Share of Estimates at Estimates after Estimates after Component Actual Appraisal Restructurings Restructurings (%) Component 1 350.81 360.55 241.30 67 Component 2 10.64 0.00 0.00 Component 3 1.22 1.40 1.32 94 Total Components 362.67 361.95 242.62 67 Front-end-fee 0.48 0.48 0.48 100 Interest during construction 12.70 15.50 8.12 52 Total Costs 375.85 377.93 251.22 66

(b) Financing

Actual as Share of Estimates at Estimates after Estimates after Source of Funds Actual Appraisal Restructurings Restructurings (%) Borrower 184.85 186.93 86.21 46 International Bank for 191.00 191.00 165.00 86 Reconstruction and Development Total Financing 375.85 377.93 251.22 66

Annex 2. Outputs by Component

1. This annex presents information on outputs produced by the project end under Components 1 and 3. Component 2 was cancelled as part of the second restructuring; no investment was made under this component.

2. Component 1: Centralized Heating Infrastructure (total cost estimated at appraisal US$350.8 million (net of interest during construction and front-end-fee), revised under the restructurings US$360.55 million, actual at completion US$241.3 million; IBRD financing planned US$191 million, after the restructurings US$191 million, actual US$165 million).

3. In total, nine out of ten subprojects were completed and delivered the planned outputs, adjusted by the reduced heat area. The Chaoyang subproject could complete only 80 percent of the required primary network of 32.5 km. Because Chaoyang was a relatively large subproject, it had material impact on the level of achievement of outputs at the project level. The Benxi Nanfen and Lingyuan subprojects fell short of their targets with respect to substations because of the slowdown in housing development and related reduction in the new area that had to be connected to DH by the end of the project.

4. Table 2.1 provides details on the outputs targets and results achieved by each of the ten subprojects, including the outputs reflected in the IR indicators, as well as those that were not covered by the IR indicators. The IRs outputs are provided in more detailed form than specified in IR indicators. For instance, the data on DH pipelines are split into primary and secondary networks; substations are divided into group and BLSs. For group substations, both the number of plants/houses and the number of units are shown (there could be more than a unit/plant).

Table 2.1. Component 1 Outputs

Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Total % Heated Area, mln m2 Target 1.30 1.20 2.49 1.70 4.46 12.86 3.00 7.00 1.57 0.00 35.58 Actual as of end June 2016 0.82 1.30 2.59 1.20 4.30 13.00 2.30 6.00 1.30 0.00 32.81 92% Installation of PRIMARY DH Pipelines (trench length), km Target 19.2 24.0 35.0 14.0 32.6 104.0 21.2 31.0 11.0 33.5 325.5 Actual as of end June 2016 19.2 0.0 33.0 14.0 33.0 104.0 22.6 22.4 11.0 26.0 285.2 88% Installation of SECONDARY DH Pipelines (trench length), km Target 0.0 42.0 0.0 17.0 0.0 0.0 83.5 0.0 35.0 0.0 177.5 Actual as of end June 2016 0.0 42.0 0.0 17.0 0.0 0.0 80.6 0.0 35.0 0.0 174.6 98% Installation of Group Heat Substation PLANTS, pcs Target 9.0 0.0 20.0 13.0 31.0 93.0 28.0 54.0 15.0 106.0 369 Actual as of end June 2016 10.0 0.0 20.0 13.0 31.0 94.0 28.0 27.0 15.0 0.0 238 64% Installation of Group Heat Substation UNITS, pcs Target 14.0 0.0 21.0 24.0 34.0 120.0 39.0 78.0 18.0 156.0 504 Actual as of end June 2016 12.0 0.0 21.0 24.0 34.0 120.0 39.0 50.0 22.0 0.0 322 64% Installation of Building Level Substations (BLS), pcs Target 17.0 0.0 15.0 13.0 12.0 11.0 8.0 3.0 3.0 34.0 116 Actual as of end June 2016 17.0 0.0 15.0 13.0 12.0 11.0 8.0 3.0 3.0 0.0 82 71% Installation of Heat Meters, pcs Target 40.0 0.0 25.0 7.0 56.0 39.0 20.0 82.0 54.0 11.0 334 Actual as of end June 2016 69.0 0.0 25.0 7.0 56.0 39.0 20.0 82.0 54.0 0.0 352 105% Installation of New Boiler Capacity (MW) Target 87.0 0.0 174.0 87.0 256.0 0.0 0.0 0.0 0.0 0.0 604 Actual as of end June 2016 87.0 0.0 174.0 87.0 256.0 0.0 0.0 0.0 0.0 0.0 604 100% Replacement of Boilers, capacity (MW) Target 98.7 0.0 261.0 58.0 396.5 819.1 269.0 27.5 35.7 915.0 2,880 Actual as of end June 2016 98.7 0.0 261.0 58.0 396.5 739.0 269.0 27.5 35.7 1,885 65% Replacement of Boiler HOUSES, pcs Target 7.0 0.0 19.0 6.0 56.0 83.0 90.0 25.0 4.0 31.0 321 Actual as of end June 2016 7.0 0.0 19.0 6.0 64.0 70.0 90.0 25.0 4.0 285 89% Replacement of INDIVIDUAL Boilers in them, pcs Target 20.0 0.0 43.0 12.0 73.0 133.0 92.0 28.0 5.0 60.0 466 Actual as of end June 2016 20.0 0.0 43.0 12.0 73.0 117.0 92.0 28.0 5.0 390 84% New SCADA Target 1.0 0.0 1.0 1.0 1.0 1.0 1.0 1.0 0.0 1.0 8 Actual as of end June 2016 1.0 0.0 1.0 1.0 1.0 1.0 1.0 1.0 0.0 0.0 7 88% Note: The Chaoyang subproject target heat area is shown as 0 because the subproject was not planned to be completed by the project closing date. Had the target area been shown 11.57 million m2, the actual achievement level for the project-heat area would be 70 percent instead of 92 percent.

Component 3 Institutional Development (total cost planned US$1.22 million, revised under the restructurings US$1.4 million, actual at completion US$1.32 million; it was fully financed by IBRD. During the project implementation, the PMO organized 1 international study tour on best practices in DH and 15 local study tours and training courses that mainly focused on DH technologies and various project management and implementation aspects. In total, about 140 people participated in the study tours and training courses, which significantly improved the capacity of the project companies to implement the project.

Annex 3. PDO Indicators and Underlying Heat Area Values at the Project and Subproject Levels

Case I: The Chaoyang subproject PDO indicators include both the northern and southern parts of the city, as recorded in the second Restructuring Paper.

Heated Area (mln m2) Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang* Total Baseline 0.57 1.00 1.80 0.47 3.60 7.70 2.01 3.75 1.57 11.57 34.04 Target Total (revised at restructuring) 1.30 1.20 2.49 1.70 4.46 12.86 3.00 7.00 1.57 11.57 47.15 Actual Total as of end June 2016 0.82 1.30 2.59 1.20 4.30 13.00 2.30 6.00 1.30 11.57 44.38 Baseline 2% 3% 5% 1% 11% 23% 6% 11% 5% 34% 100% Target Total (revised at restructuring) 3% 3% 5% 4% 9% 27% 6% 15% 3% 25% 100% Actual Total as of end June 2016 2% 3% 6% 3% 10% 29% 5% 14% 3% 26% 100% * Chaoyang actual total area as of end June 2016 is zero but shown 11.57 only for the purposes of computing the weighted average PDO results at the project level

Baseline PDO Indicators Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Weighted Average Fuel consumption, kWh/m2 279.20 117.40 218.70 215.20 248.00 187.00 178.20 188.20 174.78 149.00 181.15 Electricity consumption, kWh/m2 5.40 3.60 4.30 6.20 3.90 4.00 4.20 3.60 4.00 5.20 4.42 Make up water, l/m2 118.80 132.90 159.30 157.70 100.70 55.00 118.20 110.20 72.00 162.00 117.09 TSP emissions, kg/m2 1.043 0.015 0.693 0.591 0.782 0.306 0.724 0.754 0.150 0.260 0.44 SO2 emissions, kg/m2 0.737 0.032 0.522 0.271 0.629 0.234 0.628 0.610 0.047 0.131 0.32

Targets PDO Indicators Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Weighted Average* Fuel consumption, kWh/m2 155.40 145.10 144.80 156.10 148.10 132.50 145.40 167.16 149.00 144.47 Electricity consumption, kWh/m2 4.00 3.60 3.10 3.50 1.20 3.30 2.70 2.65 5.20 3.05 Make up water, l/m2 99.00 234.00 96.60 84.20 89.40 43.30 86.30 74.20 52.00 162.00 95.08 TSP emissions, kg/m2 0.006 0.006 0.004 0.005 0.023 0.004 0.021 0.046 0.260 0.08 SO2 emissions, kg/m2 0.042 0.040 0.064 0.042 0.043 0.044 0.051 0.046 0.131 0.07 ** The target values are slightly different from the ones recorded in the second Restructuring Paper. Reasons for the difference were not possible to determine in view of the absense of the PDO spreadsheets produced at the time of the second restructuring

Results PDO Indicators Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Weighted Average Fuel consumption, kWh/m2 155.40 145.76 144.80 146.73 137.77 115.04 135.68 167.16 149.00 137.91 Electricity consumption, kWh/m2 4.00 2.91 1.92 3.10 1.65 1.11 1.43 2.60 2.65 5.20 2.70 Make up water, l/m2 99.00 88.08 42.47 84.20 33.49 34.69 81.57 65.00 52.00 162.00 79.34 TSP emissions, kg/m2 0.006 0.006 0.004 0.003 0.003 0.002 0.015 0.046 0.260 0.07 SO2 emissions, kg/m2 0.042 0.003 0.064 0.015 0.009 0.003 0.040 0.046 0.131 0.05

Case II: The Chaoyang subproject PDO indicators include the northern part of the city that was supported by project investments.

Heated Area (mln m2) Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Total Baseline 0.57 1.00 1.80 0.47 3.60 7.70 2.01 3.75 1.57 11.57 34.04 Target Total (revised at restructuring) 1.30 1.20 2.49 1.70 4.46 12.86 3.00 7.00 1.57 11.57 47.15 Actual Total as of end June 2016 0.82 1.30 2.59 1.20 4.30 13.00 2.30 6.00 1.30 11.57 44.38 Baseline 2%3%5%1%11%23%6%11%5%34%100% Target Total (revised at restructuring) 3% 3% 5% 4% 9% 27% 6% 15% 3% 25% 100% Actual Total as of end June 2016 2% 3% 6% 3% 10% 29% 5% 14% 3% 26% 100% * Chaoyang actual total area as of end June 2016 is zero but shown 11.57 only for the purposes of computing the weighted average PDO results at the project level

Baseline PDO Indicators Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Weighted Average Fuel consumption, kWh/m2 279.20 117.40 218.70 215.20 248.00 187.00 178.20 188.20 174.78 138.00 177.41 Electricity consumption, kWh/m2 5.40 3.60 4.30 6.20 3.90 4.00 4.20 3.60 4.00 4.00 4.02 Make up water, l/m2 118.80 132.90 159.30 157.70 100.70 55.00 118.20 110.20 72.00 144.00 110.97 TSP emissions, kg/m2 1.043 0.015 0.693 0.591 0.782 0.306 0.724 0.754 0.150 0.049 0.36 SO2 emissions, kg/m2 0.737 0.032 0.522 0.271 0.629 0.234 0.628 0.610 0.047 0.069 0.29

Targets PDO Indicators Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Weighted Average Fuel consumption, kWh/m2 155.40 145.10 144.80 156.10 148.10 132.50 145.40 167.16 138.00 141.77 Electricity consumption, kWh/m2 4.00 4.90 3.60 3.10 3.50 1.20 3.30 2.70 2.65 4.00 2.88 Make up water, l/m2 99.00 234.00 96.60 84.20 89.40 43.30 86.30 74.20 52.00 144.00 90.66 TSP emissions, kg/m2 0.006 0.006 0.004 0.005 0.023 0.004 0.021 0.046 0.049 0.02 SO2 emissions, kg/m2 0.042 0.040 0.064 0.042 0.043 0.044 0.051 0.046 0.069 0.05

Results PDO Indicators Benxi Nanfen Benxi Steel Gongchangling Huludao Yingkou DSQ Yingkou EDZ Kangping Lingyuan Yixian Chaoyang Weighted Average Fuel consumption, kWh/m2 155.40 145.76 144.80 146.73 137.77 115.04 135.68 167.16 138.00 135.05 Electricity consumption, kWh/m2 4.00 2.91 1.92 3.10 1.65 1.11 1.43 2.60 2.65 4.00 2.39 Make up water, l/m2 99.00 88.08 42.47 84.20 33.49 34.69 81.57 65.00 52.00 144.00 74.65 TSP emissions, kg/m2 0.006 0.006 0.004 0.003 0.003 0.002 0.015 0.046 0.049 0.02 SO2 emissions, kg/m2 0.042 0.003 0.064 0.015 0.009 0.003 0.040 0.046 0.069 0.03

Annex 4. Economic and Financial Analysis

Economic Analysis

1. The economic analysis of subprojects was conducted at appraisal to justify their economic viability. This applied to the 11 subprojects at appraisal. Five subprojects were dropped and four new subprojects were added during the project restructurings. Thus, in total, ten investment subprojects were implemented under the project. Cost-benefit analyses were carried out to estimate the EIRRs of all ten subprojects at appraisal/restructuring. The same methodology, that is, cost-benefit analysis, was applied to recalculate the EIRRs at completion.

2. Methodology of cost-benefit analysis. The cost-benefit analysis was conducted to compute the EIRR of each subproject. The economic costs include total investment costs of heating plants, substations, and pipelines, fuel or heat purchase costs, and other O&M costs. The major benefits considered in the analysis were (a) cost saving due to improved heating supply efficiency of the existing area due to discontinued use of obsolete inefficient heating sources; (b) additional heating supply services for new demand, which is quantified using consumers’ tariff as a proxy of willingness-to-pay; and (c) local environmental benefits due to improved environmental performance. The EIRR of each subproject was estimated after the costs and benefits were identified, while the actual costs and benefits were used at ICR. All costs and benefits were calculated in real terms, excluding taxes and duties.

3. At appraisal, local pollution emission reduction benefits were estimated based on the externality cost of particulate and SO2 which were calculated using the Benefit Transfer Method, based on the New York Externality Model (Rowe and others 1994). For consistency, the same externality cost for local pollution emission reduction was used in the ICR, that is, CNY 5,609 per ton for TSP, CNY 1,301 per ton for SO2, and CNY 1,413 per ton for NOx. The global environmental benefits from carbon emission reduction were conducted as sensitivity analysis at appraisal. The same sensitivity analysis for carbon emission reduction was also conducted at ICR, but the carbon price was set according to the World Bank’s guideline,6 US$30 per ton in 2015, US$35 per ton in 2020, and US$50 per ton in 2030.

Table 4.1. EIRRs at Appraisal and ICR EIRR at Subproject EIRR at ICR (%) Appraisal/Restructuring (%) Without Carbon Without Carbon With Carbon 1. Benxi Nanfen 19.8 18.5 27.70 2. Benxi Steel 24.0 15.3 18.00 3. Gongchangling 16.4 20.0 20.40 4. Huludao 13.3 0.8 6.80 5. Yingkou Dashiqiao 29.9 27.3 37.40 6. Yingkou EDZ 26.3 17.0 17.60 7. Lingyuan 12.8 13.4 22.86 8. Yixian 22.5 21.1 33.50 9. Chaoyang 18.5 15.1 23.80 10.Kangping 18.3 13.7 40.40 Total project 21.3 16.8 25.20

6 Social Value of Carbon in project appraisal, Guidance Note to the World Bank Group Staff, September 2014.

Note: The EIRRs for four subprojects added during the project restructurings were recalculated using the same model as the one used at both appraisal in 2007–2008 and ICR.

4. The project yielded economic benefits above the social discount rate of 12 percent. All of the subprojects proved to be economically viable with the exception of Huludao, which accounts for only 3 percent of the total project heat area; thus, it does not have a major impact on the overall efficiency of the project.

5. The EIRRs of five subprojects at ICR are close to those at appraisal/restructuring (Benxi Nanfen, Gongchangling, Yingkou Dashiqiao, Liyuan, and Yixian); for another four subprojects (Benxi Steel, Huludao, Yingkou EDZ, and Kangping), the EIRRs at ICR are lower than that at appraisal/restructuring:

 Benxi Steel. The subproject originally included three components but two of them were dropped and resulted in reduction of the heat area to about 1.3 million m2, or 30 percent, of the planned heating supply area at appraisal.

 Huludao. The operation cost was much higher than anticipated at appraisal.

 Yingkou EDZ. The heat purchase price from the existing CHP plant was ¥ 37.5 per Giga joule, about 30 percent higher than that at appraisal.

 Chaoyang. The heat purchase price from the new CHP (to be completed) is expected to be higher than at appraisal.

 Kangping. The heat purchase price from the existing CHP plant was ¥ 43.5 per Giga joule, about 50 percent higher than that at appraisal.

Financial Analysis

6. The project-level financial analysis was conducted at ICR to compare the results at appraisal. The same methodology was adopted, namely cash flow analysis, and the FIRRs were recalculated using the actual investment costs, operation costs, and revenues.

Table 4.2. FIRRs at Appraisal and ICR FIRR at Appraisal/ Subproject FIRR at ICR (%) Restructuring (%) Benxi Nanfen 6.8 6.4 Benxi Steel 17.1 12.3 Gongchangling 5.2 5.4 Huludao 5.7 < 0 Yingkou Dashiqiao 8.1 7.4 Yingkou EDZ 9.1 5.1 Kangping 6.2 3.4 Lingyuan 10.8 9.2 Yixian 8.6 8.9 Chaoyang 7.7 4.9 Total project 8.7 6.0 Note: The FIRRs for four subprojects added during the project restructurings were recalculated using the same model as the one used at both appraisal in 2007–2008 and ICR.

WACC = Weighted Average Cost of Capital.

7. The project yielded financial benefits above the hurdle rates. All of the subprojects were financially viable with the exception of the Huludao Central Heating Supply subproject and the Kangping Central Heating Supply subproject. The two subprojects account for 85 percent of the total project heat area; therefore, they do not have a major impact on the overall efficiency of the project.

8. The FIRRs of five out of ten subprojects were relatively low in comparison to the ones at appraisal/restructuring. These are the Benxi Steel, Huludao, Yingkou EDZ, Chaoyang, and Kangping subprojects. The main reasons for the low FIRRs of these subprojects are the same as provided under the EIRR section in paragraph 5.

9. Table 4.3 summarizes the results of economic and financial analysis of the project.

Table 4.3. EIRRs and FIRRs at ICR and Appraisal Project EIRR FIRR Reasons for Differences between Appraisal and Completion Levels Appraisal Appraisal ICR (%) ICR (%) (%) (%) Benxi Nanfen 18.5 19.8 6.4 6.8 Reduced project scope and heat Benxi Steel 15.3 24.0 12.3 17.1 area Gongchangling 20.0 16.4 5.4 5.2 Low collection rate and high Huludao 0.8 13.3 < 0 5.7 O&M costs Yingkou Dashiqiao 27.3 29.9 7.4 8.1 Yingkou EDZ 17.0 26.3 5.1 9.1 Higher heat prices from CHP 21 Higher heat prices from CHP; 3.4 Kangping* 13.7 18.3 6.2 different model at appraisal 41 Different model at appraisal Lingyuan* 13.4 12.8 9.2 10.8 9 Different model at appraisal Yixian* 21.1 22.5 8.9 8.6 18 Higher heat price from CHP; Chaoyang* 15.1 18.5 4.9 7.7 different model at appraisal Total project with 22.8 17.1 Chaoyang 16.8 6 21.3 8.7 completed** Total project with 22.8 17.1 Chaoyang not 12.9 4.8 21.3 8.7 completed** Note: * Appraised by using a different model for financial and economic analysis, as compared to the original model developed at project appraisal in 2007/2008

** Subproject heat area is used as the weighting coefficient.

Annex 5. Bank Lending and Implementation Support/Supervision Processes (a) Task Team Members Responsibility/ Names Title Unit Specialty Lending Gailius J. Draugelis Lead Energy Specialist GEE02 Task Team Leader Ximing Peng Senior Energy Specialist GEE02 Feng Liu Senior Energy Specialist GEE03 Mei Wang Senior Counsel LEGAM Chongwu Sun Senior Environmental Specialist GEN02 Safeguards Specialist Chaogang Wang Senior Social Development Specialist GSU05 Safeguards Specialist Financial Haixia Li Senior Financial Management Specialist GGO20 Management Specialist Procurement Zhentu Liu Senior Procurement Specialist GGO08 Specialist Junxue Chu Division Manager WFALN Cristina Hernandez Program Assistant GEE02 Bernd Kalkum HQ Consultant ST GEE02 Bernard Baratz Consultant GEEDR Safeguards Specialist Arto Emerik Nuorkivi Consultant GEEDR Robert P. Taylor Consultant GEE03 Margaret A. Wilson Consultant GEE06

Supervision/ICR Gailius J. Draugelis Lead Energy Specialist GEE02 Task Team Leader Yanqin Song Senior Energy Specialist GEE09 Task Team Leader Ximing Peng Senior Energy Specialist GEE02 Xin Ren Senior Environmental Specialist GEN02 Safeguards Specialist Chongwu Sun Senior Environmental Specialist GEN02 Safeguards Specialist Chaogang Wang Senior Social Development Specialist GSU05 Safeguards Specialist Jun Zeng Senior Social Development Specialist GSU06 Safeguards Specialist Haixia Li Senior Financial Management Specialist GGO20 Financial Management Fang Zhang Financial Management Specialist GGO20 Specialist Yuan Wang Procurement Specialist GGO08 Arto Emerik Nuorkivi Consultant GEEDR Bernard Baratz Consultant GEEDR Safeguards Specialist Noureddine Berrah Consultant GEE04 EASCS - Salahuddin Khwaja Consultant HIS Xujun Liu Consultant GSURR Kishore Laxmikant Nadkarni Consultant GCCCF Robert P. Taylor Consultant GEE03 Cristina Hernandez Program Assistant GEE02 Yuriy Myroshnychenko Senior Energy Specialist GEE02 ICR Team Leader Senior Monitoring & Evaluation Juliana Victor GEESO PMSO Specialist Fowzia Hassan Senior Operations Officer GEE02 Quality Assurance Financial and Arthur Kochnakyan Senior Energy Specialist GEE03 Economic Analysis Yadviga Semikolenova Senior Energy Economist GEE01 ICR Peer-reviewer

Alan David Lee Energy Specialist GEE09 ICR Peer-reviewer Victor Loksha Senior Energy Economist GEEES ICR Peer-reviewer Togzhan Alibekova Program Assistant ECCKA ICR Assistant Shanshan Ye Team Assistant EACCF ICR Assistant

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle US$, thousands (including travel No. of Staff Weeks and consultant costs) Lending FY06 7.73 45.62 FY07 27.38 183.19 FY08 30.26 234.27

Total: 65.37 463.08 Supervision/ICR FY08 0.60 2.68 FY09 14.01 68.81 FY10 6.93 39.79 FY11 9.89 69.68 FY12 14.68 83.97 FY13 9.48 98.43 FY14 6.96 62.03 FY15 6.30 84.14 FY16 9.57 101.50 FY17 5.05 22.09

Total: 83.47 633.12

Annex 6. Beneficiary Survey Results

The Liaoning Third Medium Cities Infrastructure Project Outcomes of a Household Survey

1. Upon completion of the LMC3, a household survey was conducted to obtain feedback from direct project beneficiaries on project results.

2. The survey took place in July 2016 and included 426 families in seven project cities distributed as follows: Yingkou Dashiqiao - 9.2 percent, Yixian - 21.8 percent, Gongchangling - 8 percent, Yingkou EDZ - 7 percent, Huludao - 7 percent, Kangping - 23.5 percent, and Lingyuan - 23.5 percent.

3. The interviewed households had the liberty to determine the family member to fill out the survey questionnaire. Male respondents accounted for 60 percent, whereas women accounted for the remaining 40 percent.

4. The distribution of the age groups of respondents is presented in figure 6.1.

Figure 6.1. Distribution of the Respondents’ Age Groups

18-29 years old

30-39 years old

40-49 years old

50-59 years old

> 60 years old

0% 5% 10% 15% 20% 25% 30%

Source: The project household survey of July 2016

5. Nearly all respondents resided in multi-apartment buildings (98.6 percent), while the remaining 1.4 percent lived in private family houses. The housing area for more than nearly 90 percent of the respondents was between 60 m2 and 119 m2.

6. According to the survey, central heating has become the main method of heating (92.26 percent). Only a small proportion (7.8 percent) still uses small boilers in Yi County, Dashiqiao, and Lingyuan. In 2009, the situation was quite different: boilers as the method of heating were reported by more than half of the respondents (59.3 percent) followed by central heating (26.1 percent).

7. In 2009, less than half (48.7 percent) of the respondents were satisfied with the heating condition. The poor heating with the indoor temperature below 19 degrees was reported by more

than half (53.6 percent) of the respondents. Over the 2009–2015 period, the situation has greatly improved. The level of satisfaction with central heating increased to reach 86.7 percent. Nearly three-fourths (73 percent) of the respondents noted that the heating quality has improved since 2009. The number of households complaining about the indoor temperature being below 19 degrees reduced to 21.5 percent of respondents. Some respondents explained that their dissatisfaction with the heating conditions was caused by the discomfort due to the increase in the indoor temperature.

Figure 6.2. Satisfaction Level with the Heating Situation in 2009 and 2015

Very Satisfied 70.8 25.9

Satisfied 15.9 22.7

Not very satisfied 10.8 31.5

Not Satisfied 2.4 19.8

0 1020304050607080

2015 2009

Source: The project household survey of July 2016

8. The survey shows the improvement in the households’ perception of the outdoor air quality. The satisfaction level more than doubled from 30.3 percent in 2009 to 73.5 percent in 2015. The outdoor air quality was rated poor by a small proportion (8.3 percent) in 2015, while this figure reached 40 percent in 2009 (figure 6.3).

Figure 6.3. Outdoor Air Quality

50 45 40 35 30 25 20 15 10 5 0 Poor Acceptable Good Excellent

2009 2015

Source: The project household survey of July 2016

9. The survey findings show that the majority of local residents (89.1 percent) acknowledged the importance of the project, while a small proportion (1.4 percent) believed that it was not important.

Figure 6.4. The Importance of the World Bank Central Heating Project

80 67.6 70 60 50 40 30 21.5 20 9.5 10 0.5 0.9 0 Very important Important Neutral Not very Not important important

Source: The project household survey of July 2016

10. A high proportion (77.6 percent) of the respondents assessed positively the impact of the project on the quality of residential environment. A small proportion (1.9 percent) believed that the project worsened the quality of environment as shown in figure 6.5.

Figure 6.5. The Impact of the Project on the Quality of the Residential Environment

80 77.6

20 10.1 10.4 10 1.9 0 Improved Getting worse No impact Don't know

Source: The project household survey of July 2016

11. Overall, a high proportion of the respondents were satisfied with the heating conditions at home (86.7 percent) and outdoor air quality (73.5 percent). The majority (77.6 percent) of respondents admitted the positive impact of the project on the quality of residential environment.

Annex 7. Stakeholder Workshop Report and Results

Not Applicable

Annex 8. Summary of Borrower's ICR and/or Comments on Draft ICR

Completion Report (Draft) Liaoning Provincial Development and Reform Commission Foreign Funds Utilization Project Office

SUMMARY Project Description

Loan Number: 7524-CN

Project Title: Liaoning Third Medium Cities Infrastructure Project - Heating Sector (the Project)

Borrower: The People’s Republic of China (PRC)

Executing Agency: Liaoning Department of Finance (LDF)

Date of Board Approval: May 27, 2008

Date of Loan Agreement Signing: July 1, 2008

Date of Loan Effectiveness: November 18, 2008

Loan Closing Date: December 31, 2013 June 30, 2016 (Extended)

Project Implementing Agencies :  Benxi Steel (Group) Heating Development Company  Gongchangling Qinglong Heating Co., Ltd.  Haicheng Hengye Heating Co., Ltd. (has withdrawn)  Yingkou Municipal Heating Co. (has withdrawn)  Dashiqiao Urban Construction and Investment Company (DUCIC)  Yingkou Economic Development Zone Huayuan Heating Co., Ltd.  Huludao Yangjiazhangzi Economic & Technical Development Zone Mudu District Heating Co., Ltd.  Benxi Hengze Heating Development Company (has withdrawn)  Fushun Thermal Power Plant Co., Ltd. (has withdrawn)  Yingkou Gas Company (has withdrawn)

Project Implementing Agencies Added  Kangping Urban Zhongwang Heating Co., Ltd after Midterm Adjustment  Lingyuan Antai Heating Co., Ltd  Jinzhou Guanda Heating Co., Ltd  Chaoyang City Heating Co., Ltd

Project Cost and Financing Plan: The total project cost is estimated at US$376 million, of which US$191 million is covered by the World Bank loan, with the remainder coming from local governments and commercial bank loans.

1. The project was timely and in line with the Government’s heating reform. The borrower benefited from a number of innovations:

 Demand driven-enabled operation in the primary and secondary network. Heating supply systems in China have traditionally been production driven by

supplying heating at a constant flow rate under an assumed indoor temperature and adjusting the temperature of the water at the boiler plant based on the outside air temperature. This causes under- and overheating in the apartments and waste of energy. China’s heating systems are currently being converted to a demand-driven mode.

 BLSs. One of the reasons for over and under-heating is the use of group substations that supply too many buildings that have different heating demand—it is hard to keep the proper hydraulic balance in the network. The use of BLSs on a pilot basis in heating subprojects of all project cities is expected to demonstrate benefits associated with linking substations to fewer buildings such as (a) improved hydraulic balance in the network, which improves responsiveness and quality of heating within each building; (b) improved energy savings from reduced pumping costs; and (c) extended lifetime of the small-size pipelines that are part of an extended primary network, replacing the need for larger secondary network pipelines.

 Metering of the system up to the building. Metering provides data about production efficiency, network losses, and actual heating sales per building and allows calculation of consumption-based heating tariffs.

 World Bank procurement in DH. Project municipalities were familiarized with the World Bank guidelines which require efficiency and transparency in procurement.

Key Factors Affecting Implementation and Outcomes

2. Implementation. During the implementation, 5 out of 11 subprojects—Haicheng Central Heating, YingkouHuaneng Central Heating, Fushun Central Heating, Benxi II Central Heating, and Yingkou Gas infrastructure subprojects—were officially dropped from the project. In addition, the heating network utilizing CHP waste heat and slag water heating were dropped from the project. After the midterm adjustment, the Kangping, Lingyuan, Chaoyang, and Yi County subprojects were added to the project.

3. The works have been fully completed under the contracts for the Yingkou Dashiqiao, Yingkou EDZ, Gongchangling, Huludao, Benxi Steel, Nanfen, Kangping, Yixian, and Lingyuan subprojects.

4. The Chaoyang subproject included (a) the construction of primary hot-water network of 2 x 33.5 km; (b) 106 group heat exchange substations (HESs) and 34 building-level HESs; and (c) 1 heating network control center and 11 heat meters. Construction of the state Chaoyang thermal power plant started in August 2015 and it was originally planned to put the first unit into operation in November 2016. However, due to weather conditions, the construction was delayed twice. It is planned to put the plant into operation in June 2017.

5. Affected by delays in construction of the thermal power plant, the delivered heat exchange and other equipment was not installed and was transferred to the owner for storage. It is expected that the equipment will be installed after the end of the heating season in 2016. In

October 2016, the owner of Chaoyang has installed three HESs and one building-level HES in the new delivered districts.

6. Institutional strengthening. During the project implementation, the PMU organized 18 trainings and 10 domestic study tours for the project implementing agencies. Trainings and study tours helped raise awareness and share experience and about the World Bank guidelines and procedures, construction supervision, central/DH, environmental monitoring, contract management, FM, heating supply operation adjustment, and building-level heat exchange substations.

7. Safeguards. The EMPs were prepared for each project that included environmental impact mitigation measures and environmental monitoring programs. Mitigation measures related to air quality, flying dust, water pollution, noise from pumps, fans and vehicles, wastewater, and solid waste were implemented according to the EMP. The RAP was prepared for nine subprojects which involved resettlement and land acquisition. The resettled workers and owners of closed small boilers were satisfied with the compensation.

3. Assessment of Outcomes

8. The key performance indicators were the following:

2  TSP and sulfur dioxide (SO2) emissions per m connected floor area per boiler plant

 Fuel and electricity consumption per m2 connected floor area

 Make-up water per m2 connected floor area

 Reduction of gas losses to an agreed target (removed after withdrawal of the gas subproject)

9. The project performance target and results indicators are as shown in table 8.1.

Table 8.1. Project Performance Target and Results Indicators Performance Indicator Unit of Targets (revised Results Achieved by the Measurement under the second Project Closing Date* restructuring) Fuel consumption per connected Kwh/m2 114.9 135.05 floor area Power consumption per connected Kwh/m2 3.3 2.39 floor area Make-up water used per connected L/m2 96.0 74.65 floor area TSP emissions per connected floor Kg/m2 0.09 0.02 area 2 SO2 emissions per connected floor Kg/m 0.07 0.03 area Note: * The results are provided for the Chaoyang subproject, including only the northern part of the city.

10. Impact on environment. The project helps reduce dust and SO2 emissions from small coal-fired boilers with thermal efficiencies of only 45 percent to 65 percent. The project contributes to reducing greenhouse gas emissions and coal consumption.

Table 8.2. Project Outputs Contributing to Reducing Emissions of Greenhouse Gases Subproject Yingkou EDZ 70 small coal-fired boiler houses (117 boilers) were closed. Yingkou Dashiqiao 64 small coal-fired boiler houses (73 boilers) were closed. Gongchangling 19 small coal-fired boiler houses (43 boilers) were closed. Huludao 6 small coal-fired boiler houses (12 boilers) were closed; at the same time, about 10,000 chimneys are replaced in the shanty town. Benxi Nanfen 7 small coal-fired boiler houses (20 boilers) were closed. Kangping 90 small coal-fired boiler houses (92 boilers) were closed. Yixian 4 small coal-fired boiler houses (5 boilers) were closed. Lingyuan 25 small coal-fired boiler houses (28 boilers) were closed. Chaoyang 31 small coal-fired boiler houses (60 boilers) have not been closed and will continue to supply heat in 2016 because the State Power Chaoyang Thermal Power Plant cannot be put into use in October 2016. The boiler houses will be closed when the thermal power plant starts to operate and subproject investments are implemented and connect 11.57 million m2 of heat area, which is expected by the 2017/2018 heating season.

4. Assessment of Bank and Borrower Performance

4.1 Bank Performance

11. Over 2009–2016, the World Bank completed 12 missions. The World Bank team reviewed project performance indicators, implementation and management of subprojects, disbursement and FM, technical assistance, and implementation of the EMP and the resettlement plan. The World Bank team provided clear guidance on how to solve the issues that arose during implementation. Extensive trainings conducted by the World Bank team improved participants’ knowledge and facilitated the project implementation.

4.2 Borrower Performance

12. At all levels, the Government demonstrated strong ownership and commitment to the project implementation. Performance of the Liaoning Foreign Fund Utilization Project Office, PMU, was assessed as effective.

13. The responsibilities were shared as follows:

Table 8.3. Sharing of Responsibilities Agency Responsibility A Liaoning Provincial Coordinating Group High-level guidance and coordination of policy and institutional issues Liaoning Foreign Fund Utilization Project Overall project management Office Liaoning Province Department of Finance Integrated management of the project, providing guidance to the Liaoning Foreign Fund Utilization Project Office and the project cities, and managing the project designated account Liaoning Provincial Development and Overall infrastructure planning management in Liaoning

Reform Commission Project implementing agency at subproject Design, procurement, construction, and operation of the subprojects level

14. A consulting company, H&J Inc., and an experienced procurement consultant were hired to provide consulting services for project management and preparation of bidding documents, design review, and advisory assistance.

6. Lessons Learned

15. The borrower identified the following lessons learned:

 World Bank procedures. Subproject management staff should be properly informed of the World Bank procedures and requirements before the procurement starts.

 Advanced procurement. In energy projects where the heating season limits the time available for procurement and performance of works/services, preparation of bidding documents could start well in advance.

 Bidding procedures. Complaints and subsequent long investigation process delay the procurement schedule. Better design of bidding documents, clear selection criteria, and effective clarification of the bidding procedures and selection criteria to bidders might help prevent complaints about unfair contract awards.

16. In addition, the borrower highlighted the following positive lessons that could be applied to other similar projects.

 Replacement of inefficient coal-fired boilers by central heating systems enhances the heating efficiency, improves the heating quality, saves energy, and reduces pollutant emissions.

 Use of demineralized water devices and bypass filters could help improve the life service of the heating system by preventing clogging of the equipment scaling pipe and removing the particulate impurities in the secondary network system.

 The heat exchange station has a number of benefits, including higher quality of heating, improved water balance of the heating pipe network, reduced pipe network water loss rate, reduced power consumption of the pump, extended primary network, and longer service life of small diameter pipe network.

 Equipment of the heat exchange stations with heating network control center and the SCADA system offers additional functions, for example, monitoring of the actual situation and management of operating conditions.

 Meters, temperature controllers, and variable frequency circulating water pumps at the heat exchange stations allow reasonable allocation of energy by adjusting the temperature and volume according to the collected data.

 Coal consumption and pollutant emissions could be reduced by installation of advanced and efficient dust removal and desulfurization equipment (for example, the Lingyuan subproject).

 Energy saving could be achieved by distributed variable frequency pump system (for example, Dashiqiao, and Nanfen subprojects).

 Heat-metering data present an important source of information for calculating the unit price based on heat consumption.

Annex 9. Comments of Cofinanciers and Other Partners/Stakeholders

Not applicable

Annex 10. List of Supporting Documents

1. Project Appraisal Document

2. Project Implementation Status and Results Reports, Sequences 1–12

3. Aide Memoires

4. Restructuring Papers: Report No: RES12538 and Report No: RES15521

5. Implementation Completion and Results Report on a Proposed Purchase of Emission Reductions from the Spanish Carbon Fund to Dashiqiao Urban Construction and Investment Company Ltd. for the Dashiqiao Central Heating Supply Project

6. Implementation Completion and Results Report on a Proposed Purchase of Emission Reductions from the Spanish Carbon Fund to Yingkou EDZ Huayuan Heating Company Ltd. for the Yingkou Economic Development Zone District Heating Project

MAP