Tangshan and Chengde Environmental Improvement Project in People’S Republic Of
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Project Performance Audit Report PPA: PRC 25023 (Final) Tangshan and Chengde Environmental Improvement Project in People’s Republic of China (Loan 1270-PRC) December 2004 Operations Evaluation Department Asian Development Bank CURRENCY EQUIVALENTS Currency Unit – yuan (CNY) At Appraisal At Project Completion At Operations Evaluation (15 Oct 1993) (15 Jun 2002) (8 Jun 2004) CNY1.00 = $0.173 = $0.121 = $0.121 $1.00 = CNY5.787 = CNY8.276 = CNY8.277 ABBREVIATIONS ADB – Asian Development Bank ADTA – advisory technical assistance CMG – Chengde Municipal Government COD – chemical oxygen demand EA – Executing Agency EIRR – economic internal rate of return EPB – environmental protection bureau FIRR – financial internal rate of return LPG – liquefied petroleum gas MRM – Management Review Meeting NO2 – nitrogen dioxide NOx – nitrogen oxides O&M – operation and maintenance OEM – Operations Evaluation Mission PCO – Project Coordination Office PCR – project completion report PIA – Project Implementation Agency PPAR – project performance audit report PPTA – project preparatory technical assistance PRC – People’s Republic of China RRP – Report and Recommendation of the President SO2 – sulfur dioxide SOE – state-owned enterprise TA – technical assistance TMG – Tangshan Municipal Government TSP – total suspended particulate matter WACC – weight and average cost of capital WEIGHTS AND MEASURES km – kilometer m – meter m2 – square meter m3 – cubic meter MJ – mega joule mm – millimeter NOTE In this report, "$" refers to US dollars. Director, Operations Evaluation Division 2 : David Edwards Evaluation Team Leader : C.C. Yu Operations Evaluation Department, PE-654 CONTENTS Page BASIC DATA iii EXECUTIVE SUMMARY v I. BACKGROUND 1 A. Rationale 1 B. Formulation 1 C. Purpose and Outputs 1 D. Cost, Financing, and Executing Arrangements at Appraisal 3 E. Completion and Self-Evaluation 3 F. Operations Evaluation 3 II. PLANNING AND IMPLEMENTATION PERFORMANCE 4 A. Formulation and Design 4 B. Achievement of Outputs 6 C. Cost and Scheduling 7 D. Procurement and Construction 7 E. Organization and Management 8 III. ACHIEVEMENT OF PROJECT PURPOSE 9 A. Operational Performance 9 B. Performance of the Operating Entities 11 C. Financial and Economic Reevaluation 12 D. Sustainability 13 IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 14 A. Socioeconomic Impact 14 B. Environment and Health Impacts 14 C. Impacts on Institutions and Policy 15 V. OVERALL ASSESSMENT 16 A. Relevance 17 B. Efficacy 17 C. Efficiency 18 D. Sustainability 18 E. Institutional Development and Other Impacts 18 F. Overall Rating 19 G. Assessment of Asian Development Bank and Executing Agency Performance 19 C.C. Yu, senior evaluation specialist (team leader), was responsible for the preparation of this report; conducted document reviews and key informant interviews; and guided the fieldwork undertaken by Naiyi Hu, Dongming Li, and Zhaohui Hu (staff consultants). In accordance with the guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations, the Director General of OED did not review this report and delegated approval of this evaluation to the Director of Operations Evaluation Division 2. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. ii VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 20 A. Key Issues for the Future 20 B. Lessons Identified 21 C. Follow-Up Actions and Recommendations 22 APPENDIXES 1. Subproject 1: Gas Supply and Distribution Network System 23 2. Subproject 2: District Heating System 28 3. Subproject 3: Coal Gasification Plants Under the New Gas Company 33 4. Subproject 4: Pollution Abatement at Tangshan No. 2 Porcelain Factory 35 5. Subproject 5: Pollution Abatement at Tangshan No. 6 Ceramics Factory 40 6. Subproject 6: Tangshan Dongjiao Wastewater Treatment Plant 45 7. Subproject 7: Coal Gasification Plant Under the New Gas Company 51 8. Project Costs 56 9. Assumptions for Financial Analysis 59 10. Assumptions for Economic Analysis 68 11. Environmental Indicators for Tangshan 78 Attachment: Management Response on the Project Performance Audit Report on Tangshan and Chengde Environmental Improvement Project in the People’s Republic of China and Operations Evaluation Department Comment on Management Response BASIC DATA Tangshan and Chengde Environmental Improvement Project (Loan 1270-PRC) Project Preparation/Institution Building TA Technical Assistance Name Type Person- Amount Approval No. Months ($’000) Date 1831 Tangshan and Chengde Environmental PPTA 4.0 100.0 31 Dec 1992 Improvement Project 1916 Institutional Strengthening of the Environmental ADTA 22.5 450.0 28 Jul 1993 Protection Bureaus of Tangshan and Chengde Municipalities Key Project Data ($ million) As per ADB Loan Actual Documents Total Project Cost 237.0 291.86 Foreign Exchange Cost 140.0 124.93 ADB Loan Amount/Utilization 140.0 124.93 ADB Loan Amount/Cancellation 15.07 Key Dates Expected Actual Fact-Finding 9–30 May 1993 Appraisal I–III Aug 1993 17 Aug–2 Sep 1993 Loan Negotiations III Oct 1993 25–27 Oct 1993 Board Approval 23 Nov 1993 25 Nov 1993 Loan Agreement 22 Mar 1994 Loan Effectiveness 22 Jun 1994 9 Jun 1994 First Disbursement 6 Dec 1994 Project Completion May 1999 Jan 2000 Loan Closing 30 Jun 1999 29 Sep 2000 Months (effectiveness to completion) 60 66 ECONOMIC AND FINANCIAL Appraisal PCR PPAR INTERNAL RATES OF RETURN (%) Economic Internal Rate of Return Subproject 1 18.6 14.4 16.8 2 12.3 14.1 13.4 3 and 5 16.11 5.0 4.2 4 14.6 10.7 -4.2 6 - 14.1 13.5 7 14.0 10.1 17.6 Project - 11.9 14.7 Financial Internal Rate of Return 1 12.1 9.8 11.5 2 10.8 5.9 6.2 3 and 5 13.8 3 -2.4 4 8.3 4.2 -8.5 6 11.8 7 3.6 7 10.7 7.6 11.7 Project 11.1 7.1 8.5 1 Estimated for Subproject 5 only, not Subproject 3. iv Borrower People’s Republic of China Executing Agencies Tangshan Municipal Government Chengde Municipal Government Mission Data Type of Mission No. of Missions Person-Days Fact-Finding 1 231 Appraisal 1 96 Project Administration Review 7 59 Project Completion 1 39 Operations Evaluation 1 76 EXECUTIVE SUMMARY Rapid industrialization and years of neglect of environmental protection resulted in severe environmental degradation and pollution in the People’s Republic of China (PRC), particularly during the 1980s and 1990s. In the urban areas, heavy use of coal for both industrial production and heating/cooking, often based on obsolete and inefficient combustion technologies, caused excessive air emissions. Government policies for addressing environmental problems and for ensuring sustained, stable, and coordinated economic development were contained in the Eighth Five-Year Plan (1991–1995), which, inter alia, addressed the need to develop comprehensive environmental management at the municipal level. The operational strategy of the Asian Development Bank (ADB) in the PRC in the early 1990s aimed to achieve three objectives: improving economic efficiency, reducing poverty, and improving the environment and conserving natural resources. The Tangshan and Chengde Environmental Improvement Project (the Project) was an integral part of the national plan for urban environmental improvement and a part of the long- term strategy for addressing the serious air and water pollution in these municipalities in Hebei Province. The main purpose of the Project was to reduce air and water pollution in the two municipalities, which had reached severe levels. The Project also aimed to introduce the most advanced and environmentally friendly technologies to maximize the beneficial impact on environment, which would have beneficial externalities in terms of energy and industrial efficiency, and product quality. It was to consist of two parts. Part A, for Tangshan Municipality, was to comprise six subprojects: five to supply coal gas and district heating, and to convert old, inefficient, coal-fired industrial kilns to modern, efficient, gas-fired kilns; and one to build a wastewater treatment plant. Part B, for Chengde Municipality, was to comprise one subproject to build a coal gasification plant to supply the city with coal gas. In addition, an advisory technical assistance (TA) grant was approved, prior to loan approval, to strengthen the capabilities of the Tangshan and Chengde environmental protection bureaus (EPBs), including improving their organizational arrangements, establishing a comprehensive computer-based management information system, developing of environmental planning guidelines, and addressing short-term and long-term training and human resources needs. A loan of $140.0 million, approved by ADB in November 1993, became effective in June 1994. The total project cost was estimated at $237.0 million equivalent, including $140.0 million in foreign exchange cost and $97.0 million equivalent in local currency cost. The foreign exchange cost was to be financed by ADB, while the local currency cost was to be financed by the Executing Agencies’ own resources and by domestic banks. The Operations Evaluation Mission (OEM) visited Beijing, Tangshan, and Chengde in June 2004. It found that, while project components were mostly implemented as envisaged at appraisal, the quality of implementation varied, ranging from highly satisfactory or excellent to dysfunctional. Despite the complexities of the Project and changes in scope, the loan was closed in September 2000 after one extension, 15 months behind schedule. The actual project cost at completion was $291.86 million equivalent, comprising $124.93 million in foreign exchange cost and $166.93 million equivalent in local currency cost, resulting in a $54.86 million cost overrun, or 23% more than the appraisal estimate. ADB loan utilization amounted to $124.93 million to cover the foreign exchange cost; the remaining $15.07 million was cancelled. Since its commercial commissioning in October 1999, Subproject 1 (Gas Supply and Distribution) has increased the gas supply capacity of the Project Implementation Agency (PIA) by 85%, from 365,000 cubic meters per day (m3/day) in 1993 to the present 670,000 m3/day.