Loan Municipal District Energy Infrastructure Development Project (People’S Republic of China)
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Extended Annual Review Report Project Number: 41957-014 Investment Number: 7279 Loan Number: 2422 August 2016 Loan Municipal District Energy Infrastructure Development Project (People’s Republic of China) This is the abbreviated version of the document that excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB’s Public Communications Policy 2011. CURRENCY EQUIVALENTS Currency Units – yuan (CNY) At Appraisal At Project Completion 15 April 2008 31 December 2015 CNY1.00 – $0.14 $0.15 $1.00 – CNY7.00 CNY6.49 ABBREVIATIONS ADB – Asian Development Bank CHP – combined heat and power CO 2 – carbon dioxide DES – district energy system DHS – district heating system EIA – environmental impact assessment ISO – International Organization for Standardization OHSAS – occupational health and safety assessment services PRC – People’s Republic of China PSD – private sector development QEHS – quality, environment, health, and safety RRP – report and recommendation of the President NOTES (i) The fiscal year (FY) of the borrower ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 31 December 2010. (ii) In this report, "$" refers to US dollars. Vice -President D. Gupta, Private Sector and Cofinancing Operations Director General M. Barrow, Private Sector Operations Department (PSOD) Director C. Roberts, Portfolio Management Division, PSOD Team leader J. Limjap, Investment Specialist, PSOD Team members C. Dizon, Associate Investment Officer, PSOD M. Manabat, Senior Investment Officer, PSOD A. Porras, Senior Safeguards Officer, PSOD M. Principe, Senior Social Development Officer, PSOD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page BASIC DATA i I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 1 II. EVALUATION 3 A. Project Rationale and Objectives 3 B. Development Impact 3 C. ADB Additionality 7 D. ADB Investment Profitability 8 E. ADB Work Quality 8 III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 9 A. Issues and Lessons 9 B. Recommendations and Follow-Up Actions 10 APPENDIXES 1. Project-Related Data 11 2. Results and Ratings for Project Contributions to Private Sector Development and ADB Strategic Development Objectives—Infrastructure 13 3. Industry and Operations Review 22 4. Environmental Impact 25 5. Social Impact 31 BASIC DATA Municipal District Energy Infrastructure Development Project (L2422/EI7279-PRC) As per ADB Loan Documents Actual Key Project Data (CNY million) (CNY million) Total Project Cost 8,996 2,240 ADB Investment: A Loan: Committed 1,400 950 Disbursed 950 950 Outstanding 537 B Loan 1: Committed 1,400 0 Disbursed 0 0 Outstanding 0 0 ADB = Asian Development Bank. Note: Actual project cost is less than the original estimate in the RRP as the original estimate was projected for 8-10 projects. Actual financing was used for only 2 projects. 1 The B loan was terminated on 27 January 2016. Key Dates Expected Actual Concept Clearance Approval 23 Nov 2007 23 Nov 2007 Board Approval 2 Jun 2008 2 Jun 2008 Loan Agreement Tranche 1 19 Jun 2008 19 Jun 2008 Tranche 2 27 Jul 2012 27 Jul 2012 Tranche 3 27 Jul 2012 27 Jul 2012 Loan Effectiveness Tranche 1 19 Jun 2008 4 Dec 2009 Tranche 2 27 Jul 2012 9 Oct 2013 Tranche 3 27 Jul 2012 12 Dec 2012 First Disbursement 8 Dec 2009 8 Dec 2009 Note: Tranches 2 and 3 have been considered in the Facility Agreement signed on 19 June 2008. Project Administration and Monitoring Number of Missions Number of Person-Days Due Diligence and Appraisal 3 16 Loan Negotiations and Signing 7 21 Loan and TA Administration 3 13 XARR Mission 1 25 TA = technical assistance, XARR = extended annual review report. I. THE PROJECT A. Project Background 1. On 2 June 2008, the Asian Development Bank (ADB) approved (i) a direct loan (A loan) of up to CNY1,400,000,000 from ADB’s ordinary capital resources without government guarantee, and (ii) a complementary loan (B loan) of up to CNY1,400,000,000, to be funded by international or local banks, to Veolia (Harbin) Heat Power Co., Ltd.,1 Veolia (Jiamusi) Urban Heating Co., Ltd.,2 and Veolia Changyang Thermal Energy (Chongqing) Co., Ltd. 3 The A loan had a tenor of 10 years, inclusive of a grace period of 2 years. 4 The unutilized A and B loans were terminated on 27 January 2016.5 The funds were used to support Veolia’s investment plan to fund a series of district energy infrastructure projects in municipalities in the People’s Republic of China (PRC) known collectively as the Municipal District Energy Infrastructure Development Project. Veolia Environnement irrevocably and unconditionally guarantees the loans. 6 2. The project involved the establishment, acquisition, rehabilitation, and operation of district energy systems (DES) to address the operational inefficiency and financial constraints faced by municipalities. The A loan supported the investment plan of Veolia to rehabilitate and expand DES in municipalities through joint ventures with local partners across the PRC. The joint ventures sought to provide DES services to residential clients and industrial and commercial businesses. Veolia operates two joint ventures funded by the ADB loan, namely: (i) Veolia Jiamusi, a joint venture between Veolia Energy Asia Pte. Ltd. (65%) and Jiamusi Yongxu Environmental Protection Energy Co. Limited (35%), and (ii) Veolia Harbin, a joint venture between Veolia Energy Asia Pte., Ltd. (95%) and Harbin Property Heating Group Co., Ltd. (5%). 3. The ADB assistance funded the construction and operation of two district heating networks serving Jiamusi, the third largest city in Heilongjiang Province, and southwest Harbin, capital of Heilongjiang Province. B. Key Project Features 4. District heating refers to the distribution of steam and hot water generated from a heat source via a pipeline network to a city or municipality for household and commercial use. The technologies used in providing district heating include (i) heat-only boilers, and (ii) combined heat and power (CHP), also known as cogeneration. CHP is one of the most effective ways to maximize the energy efficiency of heating and the electricity generation process. When the district heating’s small coal-fired heat-only boilers are replaced with CHP boilers with the same production capacity, CHP technology reduces local air pollution and carbon dioxide (CO 2) 1Formerly Dalkia Sunshine (Harbin) Heat Power Co., Ltd. 2Formerly Dalkia (Jiamusi) Urban Heating Co., Ltd. 3Formerly Dalkia Changyang Thermal Energy (Chongqing) Co., Ltd. 4 The A loan was disbursed in three tranches: Tranche 1 of CNY700 million was disbursed to Veolia Harbin (CNY500 million) and Veolia Jiamusi (CNY200 million), Tranche 2 of CNY100 million was disbursed to Veolia Harbin, and Tranche 3 (CNY150 million) was disbursed to Veolia Harbin. 5 Veolia has indicated that it has sufficient internal cash to fund future expansions of Veolia Harbin. As for the B loan, certain international commercial banks offered USD-denominated B loans, but Veolia preferred CNY-denominated financing to minimize foreign currency risks since their revenues are in local currency. 6 Dalkia SAS, a subsidiary of Veolia, was formerly the guarantor of the loan facility. In August 2008, due to a change in the Veolia Group’s financial policy, Dalkia SAS requested that it be replaced by Veolia Environnement (ultimate parent) as guarantor. 2 emissions in addition to saving energy through economy of scale in heat production and reuse of waste energy. Heat supply efficiency of CHP is 50% more than that of small boilers. The project is the first private sector district energy project under ADB’s Energy Efficiency Initiative. 5. Veolia Jiamusi is involved in heating distribution. Its main heat production sources are from two CHPs, belonging to third parties.7 Veolia Harbin, on the other hand, is involved in both heat production and distribution. Its main heating source comes from heat-only boilers and its own CHP.8 Both Veolia Harbin and Veolia Jiamusi build network systems to supply heat to residential and commercial customers. Table 1 shows the sources of Veolia Jiamusi and Veolia Harbin’s heating networks. Table 1. Source of Production - Veolia Harbin and Veolia Jiamusi Heating Source Veolia Jiamusi Veolia Harbin Fuel source Production capacity Fuel source Production capacity West Cogeneration Coal Boilers 2x220 t/h (Third Party) Turbines 1x50 MWe + 1x25 MWe East Cogeneration Coal Boilers 1x1,050 t/h (Third Party) Turbines 1x300 MWe Jinjiang Boiler House Coal Boilers 3x29 MWth (+1x29 MWth back-up) Small Boiler House Coal Boilers 7.35 MWth Heat-Only Boilers Coal Boilers 6x58 MWth (Phase 1) Combined Heat and Coal Boilers 4 x 220 t/h Power (Phase 2) Turbines 2x50 MWe Gas-Fired House Gas Boilers 3x2 t/h 6. The joint ventures (Veolia Harbin and Veolia Jiamusi) are based on a concession agreement or similar contractual arrangements with the municipal government, wherein the agreed tariff and tariff revision mechanism are documented. Concessions are awarded on an exclusive basis for a 25-year period. In these joint ventures, Veolia takes more than 50% direct ownership of the project companies. This strategy ensures stable operation under exclusive rights and fully leverages Veolia’s technical expertise and operational know-how. 7. The project risks are effectively mitigated by the unconditional and irrevocable guarantee from a strong guarantor, Veolia Environnement, a leading provider of environmental services worldwide. Veolia is rated Baa1/Stable by Moody’s, and BBB/Stable by Standard & Poor’s. 8. ADB’s intervention has achieved important improvements in energy savings and pollution reduction, and improved heating service quality at the same time.