Validation Report January 2021

People’s Republic of China: Gansu Tianshui Urban Infrastructure Development Project

Reference Number: PVR-758 Project Number: 43025-013 Loan Number: 2760

ABBREVIATIONS

ADB – Asian Development Bank CHG – China Huaneng Group CHP – combined heat and power plant CO2 – carbon dioxide DMF – design and monitoring framework EIRR – economic internal rate of return FIRR – financial internal rate of return GTEZ – Guanzhong–Tianshui Economic Zone LAR – land acquisition and resettlement m2 – square meter O&M – operation and maintenance PCR – project completion report PRC – People’s Republic of China THC – Tianshui Heating Company TMG – Tianshui Municipal Government TPMO – Tianshui project management office

NOTE

In this report, “$” refers to United States dollars.

Director General Marvin Taylor-Dormond, Independent Evaluation Department (IED) Deputy Director General Veronique Salze-Lozac’h, IED Director Nathan Subramaniam, Sector and Project Division (IESP) Team Leader Srinivasan Palle Venkata, Senior Evaluation Specialist, IESP

The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of IED management, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. The final ratings are the ratings of IED and may or may not coincide with those originally proposed by the consultants engaged for this report.

In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, IED does not intend to make any judgments as to the legal or other status of any territory or area.

PROJECT BASIC DATA Project number 43025-013 PCR Circulation Date 12 Oct 2020 Loan number 2760 PCR Validation Date Jan 2021 Project name Gansu Tianshui Urban Infrastructure Development Project Sector and Water and other urban Other urban services subsector infrastructure and Urban policy, institutional and capacity development services Strategic agenda Environmentally sustainable growth Inclusive economic growth Safeguard Environment A categories Involuntary resettlement A Indigenous peoples C Country People’s Republic of China Approved Actual ($ million) ($ million) ADB financing ADF: 0.00 Total project costs 229.60a 204.50 ($ million)

OCR: 100.00 Loan 100.00 98.50 Borrower 61.40 106.00 Beneficiaries 0.00 0.00 Others 68.20 0.00 Cofinancier Total cofinancing 0.00 0.00

Approval Date 29 Jun 2011 Effectiveness date 23 Jan 2012 14 May 2012

Signing Date 25 Oct 2011 Loan closing date 31 Dec 2016 31 Dec 2018 Financial closing 12 Aug 2019 date Project Officers Location From To B. Reid ADB headquarters 1 Nov 2011 12 Jan 2013 H. Maruyama ADB headquarters 23 Jan 2013 30 Jun 2015 M. P. Ancora ADB headquarters 1 Jul 2015 24 Oct 2015 X. Liu PRCM 25 Oct 2015 12 Aug 2019 IED review Director N. Subramaniam, IESP Team Leader S. Palle Venkata, Senior Evaluation Specialist, IESPb ADB = Asian Development Bank, ADF = Asian Development Fund, IED = Independent Evaluation Department, IESP = Sector and Project Division, OCR = ordinary capital resources, PCR = project completion report, PRCM = People’s Republic of China Resident Mission. a The amount was based on the breakdown of financing sources and on the cost at appraisal per appendix 2 of project completion report. b Team members: R. Brockman (Quality Reviewer), F. De Guzman (Senior Evaluation Officer), W. Zhou and J. Eerikainen (Consultants).

I. PROJECT DESCRIPTION

A. Rationale

1. Gansu was one of the least developed provinces in the People's Republic of China (PRC). In 2009, its gross domestic product per capita was the second lowest among all provinces. Development constraints were its poor infrastructure and remote inland location. Tianshui municipality, a second-tier city within the province, had an urban population of 640,000 and an urban poverty rate of 13.5% in 2009.1 Poor municipal infrastructure—district heating, urban transport, and flood control—was a barrier to its economic and social development. District heating in the city had limited coverage and caused severe air pollution due to energy- inefficient coal-fired boilers and single-family heating stoves. Tianshui’s inadequate facilities for public and nonmotorized transport lagged behind population growth. Poor traffic management meant frequent road safety issues. Also, the city had a high risk of seasonal flooding due to the convergence of Xi and Wei rivers.

2. Tianshui was a subcore city under the Guanzhong–Tianshui Economic Zone (GTEZ) Development Plan that the National Development and Reform Commission prepared in 2009.2 GTEZ was envisioned to become the economic backbone of northwest PRC by 2020. Tianshui is a major industrial center in Gansu province. Under the GTEZ, it is seen as a location for equipment manufacturing and nonmetallic mineral resources mining and utilization, and a hub for road and rail transport linking other parts of Gansu province with GTEZ. Implementation of this development plan was expected to increase the demand for Tianshui city's infrastructure. This spurred the need to prioritize the renovation and upgrading of its district heating, urban transport, and flood control facilities.

3. The PRC government requested a $100 million loan from the Asian Development Bank’s (ADB) ordinary capital resources to fund the Gansu Tianshui Urban Infrastructure Development Project (the project) that would address Tianshui’s infrastructure challenges. The ADB Board approved the loan in June 2011.3 The project aimed to promote balanced and environmentally sustainable urbanization in Tianshui through the restructuring and expansion of district heating, construction of urban roads and flood control facilities, and strengthening of its urban management capacity. The PRC was the borrower, relending the proceeds to Gansu provincial government which on-lent to Tianshui Municipal Government (TMG) on the same terms and conditions as those of the ADB loan.

B. Expected Impacts, Outcomes, and Outputs

4. The project’s design and monitoring framework (DMF) indicated that the expected impact was better living conditions in Tianshui municipality, as set out in the report and recommendation of the President and the project completion report (PCR).4 The intended outcome was improved heating, transport, and flood control services in Tianshui municipality.

1 Bulletin on 2009 Tianshui National Economic and Social Development Statistics provided by the Tianshui Municipal Statistics Bureau. By comparison, 4.2% of the PRC’s rural population was living below the national poverty line in 2008 (ADB. 2010. Basic Statistics 2010. Manila). 2 Government of PRC, National Development and Reform Commission. 2009. Guanzhong–Tianshui Economic Zone Development Plan. Beijing. 3 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the People's Republic of China for the Gansu Tianshui Urban Infrastructure Development Project. Manila. 4 ADB. 2020. Completion Report. People’s Republic of China: Gansu Tianshui Urban Infrastructure Development Project. Manila.

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There were four targeted outputs: (i) operating Qinzhou district’s upgraded heating network, (ii) operating Chengji road and flood control facilities, (iii) open urban roads and bridges to traffic and operating related services, and (iv) developed capacity and strengthened institutions. Some of the target indicators in the DMF were changed due to a minor change in scope.

C. Provision of Inputs

5. ADB’s Board approved the project in June 2011 and the loan became effective in May 2012, almost four months later than expected. Loan closing was in December 2018, two years after the original date of December 2016. Project completion was extended from June 2016 to December 2018 because of the change of the heating plant under the Qinzhou district heating development. Due to China Huaneng Group’s (CHG) cancellation of the originally planned combined heat and power plant (CHP), the loan had to be extended to December 2018 for TMG to build a new heat source plant and complete the Qinzhou district heating network component.

6. At appraisal, the total project cost was $229.6 million, with $100 million financing from ADB (43.6%), $61.4 million (26.7%) from TMG, and $68.2 million domestic loan (29.7%) from the China Development Bank (CDB). At completion, the total project cost was $204.5 million, or 89.1% of the appraised amount, of which ADB loan financed $98.5 million (48.2%) and $106.0 million (51.8%) from TMG. The proposed domestic loan from CDB was not used and TMG provided the required financing. CHG, which was to use the CDB loan, canceled the construction of the originally planned CHP. TMG instead built its own new heat source plant to supply Qinzhou District using its own fund.

7. Five consulting services packages were proposed. However, during implementation, these were combined to one in accordance with a minor change in project scope approved in September 2015. A consulting firm was selected to support project implementation through quality- and cost-based selection, and a time-based contract was awarded in October 2012. The firm provided 22 person-months of international consulting services and 89.5 person-months of national consulting services. TMG funded external monitoring agencies, design institutes, construction supervision agencies, and a procurement agent to provide related consulting services. There was no attached technical assistance to this project.

8. The project was classified as category A for both environment and involuntary resettlement, and category C for indigenous peoples. It was classed as effective gender mainstreaming. A gender action plan (GAP), with 13 tasks and eight targets, was implemented to facilitate employment opportunities for women, improve livelihoods through training, and mitigate possible negative impacts of the project on women.

D. Implementation Arrangements

9. TMG was the executing agency. A project leading group headed by TMG's vice mayor was established to provide high-level policy guidance during project implementation. The Tianshui project management office (TPMO) was set up.. It was responsible for the project’s day-to-day operations and coordinating related activities on behalf of TMG.

10. The project’s two implementation agencies were the Tianshui Urban Construction and Investment Group (TUCIC), responsible for Chengji road and flood control facilities and Tianshui urban transport improvements; and the Tianshui Heating Company (THC) for Qinzhou district heating network. The implementation agencies worked with design institutes, tendering agents, consultants, and supervising engineers. There were no changes during implementation. 3

11. The loan agreement had six and the project agreement 43 covenants. One of the project covenants was not complied with. This pertained to ensuring that from the second year of full operation of the new district heating system, THC achieves and maintains (i) a debt-equity ratio of not more than 70:30, and (ii) a debt service coverage ratio of 1.2 or higher. The PCR noted that both these ratios were not achieved as of 2019.

II. EVALUATION OF PERFORMANCE AND RATINGS

A. Relevance of Design and Formulation

12. The PCR rated the project highly relevant. At appraisal, the project was aligned with the policies, strategies and development priorities of the PRC government. The PRC's 12th five- year plan, 2011–2015, had regional development as one of its high-level policy directions.5 GTEZ was one of the key economic zones to be developed under the PRC’s Western Development strategy6 that indicated improving urban infrastructure, including public transport, heating and flood control, as a strategic priority. The project was aligned with the Gansu Province’s 12th five-year plan that targeted, among other things, increasing road area per capita, and strengthening disaster prevention and reduction, including food control.7 It was also aligned with the PRC government's 12th five-year comprehensive work plan to conserve energy and reduce emission and its 12th five-year transportation plan.8 Approved in 2016, the 13th five- year plan highlighted the importance of developing modern infrastructure. 9 The project’s components were included in TMG investment programs and were part of the 2020 Tianshui City Master Plan that the Gansu Provincial Government approved in July 2009.

13. The project was aligned with ADB’s PRC country partnership strategies for 2011–2015 and 2016–2020, 2009 energy policy, sustainable transport initiative operational plan in 2010, and water operational plan for 2011–2020.10 The project was aligned with ADB’s Strategy 2030 that emphasized low greenhouse gas emission energy, sustainable urban transport, and flood risk management as its operational priorities for tackling climate change and building livable cities.11

14. The project design was appropriate to achieve its intended outcomes. It took into account lessons from previous ADB-financed urban development projects in the PRC, such as the need for early support on ADB policies and procedures, and capacity building to strengthen management and implementation capacity. The DMF was well-articulated.

5 Government of the PRC. 2011. The 12th Five-Year Plan for National Economic and Social Development. Beijing. 6 Government of the PRC, National Development and Reform Commission. 2006. The 11th Five-Year Plan for Western Development. Beijing; and Government of the PRC, National Development and Reform Commission. 2012. The 12th Five-Year Plan for Western Development. Beijing. 7 Government of Gansu Province. 2011. The 12th Five-Year Plan for National Economic and Social Development of Gansu Province. Lanzhou. 8 Government of the PRC, State Council. 2012. The 12th Five-Year Plan Comprehensive Work Plan for Energy Conservation and Emission Reduction. Beijing; and Government of the PRC, Ministry of Transport. 2012. The 12th Five-Year Plan for Transportation. Beijing. 9 Government of the PRC. 2016. 13th Five-Year Plan for National Economic and Social Development. Beijing. 10 ADB. 2012. Country Partnership Strategy: People’s Republic of China, 2011–2015. Manila; ADB. 2016. Country Partnership Strategy: People’s Republic of China, 2016–2020. Manila; ADB. 2009. Energy Policy. Manila; ADB. 2010. Sustainable Transport Initiative Operational Plan. Manila; and ADB. 2011. Water Operational Plan 2011– 2020. Manila. 11 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 4

15. The PCR indicated that the state-owned CHG was to finance and construct a combined heat and power plant (CHP)—the heat source for output 1 of Qinzhou district heating network. This plant was not in the project, but was an essential facility to enable the accomplishment of ADB's safeguards requirements. However, CHG canceled the plant’s construction. TMG financed and built its own heating plant for Qinzhou district. This required change in project scope with minor revisions to some of the DMF indicators, as indicated in the PCR’s appendix 1. The changes in scope and the timely response from TMG helped maintain the project’s relevance and facilitated the achievement of its outcome.

16. This validation assesses the project relevant, based on its alignment with government plan priorities and ADB’s strategic priorities. Features, such as holistic urban road design and providing integrated facilities for pedestrians and bicycles, are standard good practices and are not really innovative.

B. Effectiveness in Achieving Project Outcomes and Outputs

17. The PCR rated the project effective. Effectiveness was assessed using updated target indicators due to change in project scope arising from changes in the implementation arrangements for the CHP and due to resettlement difficulty in the case of Maiji district road network.12 At completion, two of the four DMF updated outcome targets were fully achieved— flooding probability, and traveling distance; one was partially achieved—carbon dioxide (CO2) emissions reduction; and one was exceeded—job creation. Heating-related CO2 emissions were reduced from 1,082,200 to 666,797 tons per annum through reduced use of coal due to centralized district heating system which replaced the existing small-community heating boilers. The target of reducing CO2 emissions to 559,023 tons per annum could not be realized since the project covered only 80% of the targeted 15 million square meters (m2) of district heating area. The target on flooding risk was achieved as the completed Chengji flood embankment decreased the annual probability of seasonal flooding from 10% to 1%, as targeted. Traveling distances were reduced by 82% from 17.8 kilometers (km) to 3.2 km as planned due to the opening of Shetang, Shuangguo, Shuangqiao and Xiakou bridges to traffic between 2014 and 2016. The project generated 2,364 jobs, exceeding its target of 1,466 during implementation, and 668, against the planned 658 during operations. Women got 40% of these jobs, higher than the 30% target, while 21% were for the poor, as targeted.

18. The project successfully delivered its planned outputs, with 12 of the 14 output targets either fully achieved or exceeded, while two district heating-related targets were partially achieved. Roads, bridges, and flood control embankment were constructed and have become operational, as planned. Consultation meetings on road safety design, pedestrian, and nonmotorized transport access were held and met women’s participation requirement. Training events were implemented for capacity building and knowledge transfer, meeting the women’s participation target. Achievements exceeding the targets were 41.4 km of the planned 33.8 km main heating transmission pipes, and the reduced percentage of households using single-family heating stoves from 28.5% to 8.2%, a 20.3% reduction higher than the target of 13%. The two partially achieved targets were the heating coverage of 11.91 million m2—about 80% of the target, and reduction in coal usage was 188,261 tons by 2018, lower than the target of 237,120 tons.

12 The revised targets included (i) 76 heat exchange stations constructed as opposed to 78; (ii) 194 outdated coal- fired boilers closed as opposed to 199; (iii) 15 million m2 district heating area in place of 20 million m2; (iv) coal inputs for Qinzhou district heating reduced from a target of 252,000 tons reduction per annum to 237,120 tons per annum; and (v) Maiji district’s new road network length reduced from a target of 4.9 km to 2.9 km. 5

19. The project was correctly classified for safeguards categories. A consolidated environmental impact assessment was prepared in 2011 and updated in 2015 due to changes in project scope.13 Eleven environmental monitoring reports were submitted between March 2013 and January 2019. Regular monitoring reports on land acquisition and resettlement (LAR) impacts was provided to ADB.14 Two resettlement plans were prepared in 2011, one for the roads and bridges component and the other for heating supply component. These were updated in 2013 and 2014 due to changes in project scope. The resettlement plans met ADB's requirements and were adequately implemented. 15 The stakeholder consultation and participation met ADB requirements. Thirteen social monitoring reports were submitted to ADB for disclosure between July 2012 and November 2018.

20. The project was categorized effective gender mainstreaming. The PCR noted that the GAP implementation was successful. All 13 tasks and its 8 quantitative targets were met. The PCR noted positive impacts on women resulting from the project: (i) access to cleaner, safer, and reliable heating, and reduced exposure to pollutants from heating stoves; (ii) reduced domestic workload and time spent for space heating; (iii) reduced incidence of respiratory diseases from indoor air pollution; and (iv) reduced travel time and increased mobility. All gender-related performance targets in the project DMF were achieved.

21. Based on the achievements of target indicators for outputs and outcomes, this validation assesses the project effective in delivering the planned outputs and outcome. District heating was achieved with reduced coal use and reduced CO2 emissions. Flood control embankment, roads, and bridges were all constructed as planned. Environmental and social safeguard requirements were complied with and the GAP was successfully implemented.

C. Efficiency of Resource Use

22. The PCR rated the project efficient because the reevaluated economic internal rates of return (EIRRs) for its three infrastructure components—district heating, road, and flood control facilities—were higher than 12%. The PCR indicated that the reevaluated EIRRs were (i) 32.7% for Qinzhou district heating network, (ii) 13.0% for Chengji road and flood control facilities, (iii) 9.7% for Tianshui urban transport improvements, and (iv) 15.5% for the overall project, all exceeding the 12% benchmark.16 Sensitivity analysis, including a 10% increase in operation and maintenance (O&M) costs, a 10% decrease in benefits, and a combination of both, confirmed the robustness of the project's economic viability.17 The EIRRs in the three scenarios were 14.7%, 13.5%, and 12.6%.

23. The PCR's EIRR recomputation was consistent with the approach taken at appraisal and aligned with ADB guidelines.18 The economic costs of capital investment, including LAR, and environmental mitigation and monitoring costs, were updated based on actual financial costs and the implementation period. The estimate of annual O&M costs was adjusted accordingly. The economic benefits of Qinzhou district heating network included savings in coal

13 Appendix 10 of the PCR. 14 Appendix 11 of the PCR. 15 Appendix 12 of the PCR on compliance with loan covenants. 16 The high price of CO2 emissions raised reevaluated EIRR for Qinzhou district heating network. It was set at CNY266 per ton compared the price set at appraisal CNY65.28 per ton. If the price at appraisal were used for reevaluation, the EIRR would decrease from 32.7% to 18.0%, close to 15.2% obtained at appraisal. 17 Some inconsistencies were noted between the EIRR calculations in the PCR and those based on the data the PRC Resident Mission provided. However, this did not affect the conclusion that the project was economically viable. 18 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 6 consumption, increase in heating area, and reduced pollutant emissions from burning coal. The economic benefits of Chengji road and flood control facilities, and Tianshui urban transport improvements included vehicle operating cost savings, shorter travel distances for passengers, reduced accident costs, and reduced flood damages.

24. The project experienced a 2-year delay due to CHG’s cancellation of the originally planned CHP. TMG had to build a new heat source plant and complete the Qinzhou district heating network component, but this did not increase costs. This validation assesses the project efficient since its reevaluated EIRR was higher than the benchmark, and the process efficiency was satisfactory.

D. Preliminary Assessment of Sustainability

25. The PCR rated the project likely sustainable. The financial internal rate of return (FIRR) of the revenue-generating Qinzhou district heating network was reevaluated. The PCR noted that the project followed the approach at appraisal and in line with the ADB guidelines.19 The updated financial analysis adopted actual capital costs and the revised implementation period.

26. The PCR reevaluated FIRR at 11.6%, higher than the updated weighted average cost of capital (WACC) of 3.38%. This was higher than the 9.1% appraisal estimate. This was due to the difference in the projected number of heating connections from 2017 to 2025, and a proposed heating tariff increase that was assumed higher than the increase in the heating operation’s O&M expenditures. Sensitivity tests showed that the heating component would remain financially viable even if revenues decreased by 5%, or O&M costs increased by 5%. The FIRRs were 4.9% and 5.2%. However, with both the revenue decrease and the O&M cost increase, the FIRR was negative.

27. The capital costs used in FIRR reevaluation were inconsistent with the economic costs used in the EIRR reevaluation. The PCR did not include part of the engineering and equipment costs in the FIRR re-evaluation. With the corrected costs, the FIRR was below the WACC under sensitivity tests at 7.1%. Revenue decrease of 5% reduced the FIRR to 1.6% and 5% increase in O&M costs also reduced the FIRR to 1.6%. Thus, financial sustainability of Qinzhou district heating largely depended on the heating tariff increase and so was the financial position of THC, the Qinzhou district heating system operator. THC neither achieved its required debt–equity ratio, which was supposed to go below 70:30, nor the debt service coverage ratio, which was supposed to be 1.2 or higher at project closing. Until THC’s financial situation improves, it will depend on TMG’s support to sustain its operations.

28. Given the calculated FIRR’s high sensitivity to changes in assumption on costs and revenues and THC’s weak financial position, this validation assesses the project less than likely sustainable. Going forward, it is important for the THC to improve its financial performance and comply with the loan covenant on its key debt ratios.

III. OTHER PERFORMANCE ASSESSMENTS

A. Preliminary Assessment of Development Impact

29. The PCR rated the project's development impact satisfactory. The annual per capita disposable income of urban households in nominal terms in Tianshui increased by around 12%

19 ADB. 2019. Financial Analysis and Evaluation: Technical Guidance Note. Manila. 7

per annum between 2009 and 2018, twice the target of 6%. Air pollutants—sulfur oxide (SO2), nitrogen oxides (NOx), and particulate matters with 10 microns in diameter or less (PM10)— during heating seasons were reduced by 31%, 24%, and 24%, thus mitigating the incidence of respiratory diseases and other air pollution–related health risks. The flood control standard for all river embankments and bridges under the project was raised to 1 in 100 years flood resilience as an essential component of the Tianshui urban flood control plan. Given these contributions to improved living conditions in Tianshui, this validation assesses the project’s development impact satisfactory.

B. Performance of the Borrower and Executing Agency

30. The PCR rated the performance of the borrower and the executing agency satisfactory. The Ministry of Finance signed the loan agreement and amendment and requested ADB to change the project scope, extend loan closing date, reallocate loan proceeds, and increase disbursement percentage for some civil works contracts to maximize utilization of ADB loan proceeds. The executing and implementing agencies demonstrated strong ownership and commitment to the project. TMG provided counterpart funds in a timely manner. The Gansu Finance Department managed the advance account and processed fund withdrawal and reimbursement applications in a timely manner. The project leading group that the Tianshui vice mayor headed held periodic meetings to review progress and provided policy guidance. Based on these achievements, this validation assesses the performance of the borrower and the executing agency satisfactory.

C. Performance of the Asian Development Bank and Cofinanciers

31. The PCR rated ADB's performance satisfactory. ADB headquarters initially processed and administered the project. Project administration was subsequently delegated to the PRC Resident Mission in June 2015. Major milestones took place after the loan delegation, including the fielding of six missions that the resident mission closely coordinated with the headquarters. A total of ten review missions were fielded during implementation with 129 person-days input. These provided hands-on training to the executing and implementing agencies in the areas of procurement and contract management, and in addressing procurement and disbursement issues during implementation. ADB promptly updated the performance targets and indicators, and extended the project closing date after the CHP cancellation. It identified construction delay of the CHP as a risk and implemented mitigation measures. The project team provided clear and detailed guidance to enable the project’s full compliance with safeguards covenants and requirements and timely resolution of issues encountered during implementation. The public consultation meetings at the project sites were adequate and comprised project information disclosure, discussions, and public hearings. This validation assesses ADB's performance satisfactory since it monitored and supervised the project’s implementation adequately and resolved issues in a timely manner.

IV. OVERALL ASSESSMENT, LESSONS, AND RECOMMENDATIONS

A. Overall Assessment and Ratings

32. The PCR assessed the project successful, based on highly relevant, effective, efficient, and likely sustainable ratings of the core evaluation criteria. This validation assesses the project successful. It rated the project relevant in view of its alignment with the government’s plan and priorities and ADB’s strategic priorities. Project design was appropriate. Also, the TMG provided timely response to CHG’s cancellation of the CHP implementation., thus ensuring the project’s 8 relevance. This validation assesses the project effective since it largely achieved its intended outcome and outputs. It assesses the project efficient since the reevaluated EIRRs were higher than the benchmark and the process efficiency was satisfactory. This validation assesses the project less than likely sustainable, given the THC’s weak financial position and the reevaluated FIRR’s high sensitivity to changes in revenues and costs.

Overall Ratings Reason for Disagreement Validation Criteria PCR IED Review and/or Comments Relevance Highly relevant Relevant The project did not have innovative features to merit the highly relevant rating. The planned innovative CHP was canceled during implementation. Features, such as holistic urban road design, are standard good practices and cannot be considered innovative (para. 16). Effectiveness Effective Effective Efficiency Efficient Efficient Sustainability Likely Less than likely THC’s financial situation was weak and sustainable sustainable depended on TMG’s support to sustain its operations. The FIRR for the Qinzhou district heating was highly sensitive to assumptions on revenues and costs (paras. 27-28). Overall Assessment Successful Successful Preliminary Satisfactory Satisfactory Assessment of Impact

Borrower and executing Satisfactory Satisfactory agency Performance of ADB Satisfactory Satisfactory Quality of PCR Satisfactory Para. 37 ADB = Asian Development Bank, CHP = combined heat and power plant, FIRR = financial internal rate of return, IED = Independent Evaluation Department, PCR = project completion report, THC = Tianshui Heating Company, TMG = Tianshui Municipal Government. Source: ADB (IED).

B. Lessons

33. The PCR identified five lessons: (i) optimizing project design and undertaking timely measures minimize impacts that can affect project implementation, such as the risks of prolonged LAR; (ii) contract variations can be minimized through improved engineering design covering more detailed on-site surveys and adequate geological explorations, and preparing more accurate bills of quantities; (iii) properly administered bidding is essential in receiving advantageous submissions; (iv) proactive procurement management ensures construction and equipment supply quality and can lead to cost savings; and (v) the hiring of competent consultants improves project quality.

34. This validation supports the above lessons and offers additional lessons. First, assessing uncertainties and risks thoroughly and taking appropriate mitigation measures are 9

critical for project success. This applies more for urban infrastructure development projects with interrelated components. Adequate preparations to deal with adverse scenarios arising from financial and technical risks can help deal with cancellations and delays in project components. Second, defining appropriate roles for institutions and working arrangements and building institutional capacity can help them respond flexibly to changes during implementation and make the necessary changes in project design and scope.

C. Recommendations for Follow-Up

35. The PCR made two recommendations for follow-up: (i) although the geotechnical survey suggested that the area of road construction is generally stable and not prone to mudslide, TMG should continue to use the mudslide monitoring plan prepared in 2014 to respond to any possible mudslides in the future; and (ii) TMG should monitor and ensure that THC achieves the required debt-service coverage and debt–equity ratios so that the Qinzhou district heating network is financially sustainable. This validation supports these recommendations.

V. OTHER CONSIDERATIONS AND FOLLOW-UP

A. Monitoring and Reporting

36. Audited project accounts and financial statements were submitted to ADB and were generally acceptable. The external auditors provided unqualified opinions on the project financial statements during the entire project implementation period and raised no significant issues regarding management of the advance fund that was used for most withdrawals of loan proceeds. The TPMO and the implementing agencies established a project performance monitoring system. Project progress and monitoring reports were submitted to ADB on time. The TPMO also prepared the executing agency’s project completion report in both English and Chinese, which was submitted to ADB on time.

B. Comments on Project Completion Report Quality

37. The PCR was well-prepared and consistent with the pertinent guidelines. It provided a comprehensive description of the project design and implementation process, and presented an objective and convincing assessment of the project achievements. However, the PCR did not explain the reason for CHG’s cancellation of the CHP. Environmental and social safeguards were adequately summarized. Some inconsistencies were found in the data used in the PCR’s economic and financial reevaluations as indicated in the main text, appendices, and the supporting spreadsheet. However, these did not affect the conclusions on economic and financial viabilities. Overall, the PCR's findings, lessons, and recommendations were evidence- based, analytical, relevant, and useful. Notwithstanding the limitations, this validation assesses the quality of the PCR satisfactory.

C. Data Sources for Validation

38. Data sources for this validation included the PCR, report and recommendation of the President, loan and project agreements, back-to-office mission reports, environmental and social monitoring reports, and government and ADB strategies, policies, and guidelines.

D. Recommendation for Independent Evaluation Department Follow-Up

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39. The PCR suggested that a project performance evaluation report be prepared in 2022. This validation considers this to be an appropriate timing when data on the district heating area’s expected expansion, the proposed heating tariff increase, and THC’s actual financial performance are available.