Extended Annual Review Report
Project Number: 41908-001 Loan Number: LN2389/EI7270 September 2015
Loan Central and Western Airports 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 Unit – yuan (CNY)
At Appraisal At Program Completion 28 September 2007 31 December 2014 CNY1.00 – $0.13 $0.16 $1.00 – CNY7.52 CNY6.20
ABBREVIATIONS ADB – Asian Development Bank CAAC – Civil Aviation Administration of China CSR – corporate social responsibility DSCR – debt service coverage ratio EIA – environmental impact assessment EMP – environmental management plan EMS – environmental management systems EROIC – economic return on invested capital HAG – HNA Airport Holding (Group) Company, Limited HNA – HNA Group Company, Limited IRR – internal rate of return NOPLAT – net operating profit less adjusted taxes OPEX – operational expenditure PRC – People’s Republic of China PSOD – Private Sector Operations Department SASAC – State-owned Asset Supervision and Administration Commission SPIA – Sanya Phoenix International Airport Co., Ltd. XARR - Extended Annual Review Report YEMC – Yichang Environmental Monitoring Center YSA – Yichang Sanxia Airport
WEIGHTS AND MEASURES m – meter m2 – square meter km 2 – square kilometer
NOTES (i) The fiscal year (FY) of the People’s Republic of China ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 31 December 2000. (ii) In this report, "$" refers to US dollars.
Vice -Pr esident D. Gupta, Private Sector and Cofinancing Operations Director General T. Freeland, Private Sector Operations Department (PSOD) Director C. Roberts, Portfolio Management Division, PSOD
Team leade r J. Limjap, Investment Specialist, PSOD Team me mbers F.P. Macabuhay, Project Analyst, PSOD M.A. Manabat, Senior Investment Officer, PSOD A. Porras, Senior Safeguards Officer, PSOD B. Quang, Safeguards Specialist, PSOD K. Taniguchi, Senior Economist, PSOD
In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.
CONTENTS
Page
BASIC DATA i
EXECUTIVE SUMMARY ii I. THE PROJECT 1 A. Project Background 1 B. Key Project Features 2 C. Progress Highlights 2 II. EVALUATION 3 A. Project Rationale and Objectives 3 B. Development Impact 3 C. ADB Additionality 6 D. ADB Investment Profitability 6 E. ADB Work Quality 6 F. Overall Evaluation 7 III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 7 A. Issues and Lessons 7 B. Recommended Follow-Up Actions 8
APPENDIXES 1. Project-Related Data 9 2. Results and Ratings for Project Contributions to Private Sector Development and ADB Strategic Development Objectives—Infrastructure 11 3. Industry and Operations Review 16 4. Environmental Impact 18 5. Social Impact 20
BASIC DATA Central and Western Airports Development Project (41908-PRC)
As per A DB Loan Documents Actual Key Project Data (CNY million) (CNY million) Total Project Cost 7,650 a 1,231 b ADB Investment: Loan: Committed 1,200 1,200 Disbursed 400 Outstanding - Equity: $50 Committed $50 Disbursed $50 Returned $127.78 c
Financial and Economic Internal Rates of Appraisal XARR Return (%) Financial Internal Rate of Return (project 15.74% 32.26% financial rate of return on equity) Economic Internal Rate of Return - d 40.8%
Project Administration and Monitoring No. of Missions No. of Person - Days Due Diligence and Loan Negotiation 8 19 Project Administration 10 23 XARR Mission 1 21 a For the period 2007–2011. b For the period 2007–2013. c includes penalty interest amounting to $8.94 million d Not evaluated
EXECUTIVE SUMMARY
On 11 December 2007, the Board approved an equity investment of up to $50 million in HNA Airport Holding (Group) Company Limited (HAG) and a loan to HAG consisting of two tranches: A Tranche, for up to CNY1.2 billion, funded by the Asian Development Bank (ADB), and B Tranche, for up to $200 million, funded by commercial banks. The proceeds of the equity investment and loan were applied to the financing of HAG’s airport portfolio in the People’s Republic of China (PRC). The project supported HAG’s expansion and capital expenditure plan to privatize, rehabilitate, expand, upgrade, and operate small- and medium-sized airports in the PRC’s central and western regions. The project is ADB’s first private sector investment in the transportation sector in the PRC and its 21 st private sector investment in the country.
Using the criteria of the ADB Project Administration Instructions 6.07B for Extended Annual Review Reports for Nonsovereign Operations issued in July 2008, the Central and Western Airports Development Project was evaluated for (i) its development impact, (ii) ADB’s additionality, (iii) ADB’s investment profitability, and (iii) ADB’s work quality. The development result was evaluated using four criteria: (i) contributions to private sector development and ADB strategic development objectives; (ii) economic performance; (iii) environmental, social, health, and safety performance; and (iv) business success.
The contributions to private sector development and ADB strategic development objectives are rated satisfactory. ADB was able to arrange a 50% unfunded risk participation by HSH Nordbank, an international commercial bank that had limited capacity to enter the local currency market owing to the lack of yuan funding capacity. The bond issuance used to finance the project also helped the PRC’s local capital market.
The project’s economic sustainability is rated excellent . The reevaluated project economic return on invested capital (EROIC) is 40.8%, which is well above the 12.0% social discount rate. The EROIC sensitivity was tested under various adverse scenarios, and it remained well above 12.0%. The sensitivity analysis indicated that the results were not altered by parameter changes, which clearly demonstrates the robustness of the model. There is no economic return estimate from the report and recommendations of the President.
The project is rated satisfactory for environmental, social, health, and safety performance. The project has adequately met the national laws and ADB’s requirements for environmental and social safeguards. The potential environmental impacts during construction and operation were deemed minor and insignificant. There are no outstanding issues related to social safeguards. The project significantly mitigated social impacts for both involuntary resettlement and ethnic minority issues.
Notwithstanding the opposition of the management of the Civil Aviation Administration of China (CAAC) to the further privatization of airports, HAG has been registering positive operating and financial performance. HAG anchored its business plan on the expansion and organic growth of its portfolio of airports. As part of its strategy, it divested its interests in its smaller airports, as the operating costs exceeded revenues, while expanding its bigger airports to accommodate higher volumes of passengers and cargo. The halt in the privatization of airports in the PRC resulted in a significant amount of idle funds for HAG. In order to optimize yields from the idle funds, HAG provided loans and advances to its affiliates, including its parent, HNA Group Company Limited. The project is rated excellent for business success.
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ADB’s additionality is rated satisfactory. ADB’s participation was important in boosting private sector involvement in the aviation industry of the PRC. ADB’s equity investment and long-term local currency debt were able to address these issues and targeted investment needs in the less developed regions in the PRC that are the focal areas of ADB’s operations, in accordance with the country strategy and the government’s expectations with respect to ADB’s operations.
The project is rated satisfactory for ADB investment profitability. The loan margin and fees yielded a gross contribution to ADB income that exceeds (i) the amount compatible with the direct transaction cost, (ii) the risk profile of the project, and (iii) the country risk at the time of investment.
ADB’s overall work quality is rated satisfactory . ADB conducted due diligence on technical, legal, environmental, social, and financial aspects to confirm the project’s fundamentals and development impacts. ADB provided assistance in HAG’s compliance to reportorial requirements as well as waiver requests to address breaches in the facility agreement. ADB has kept itself updated on the project and HAG’s performance in all material areas through the reports submitted by the borrower.
Overall, the project is rated successful. Although HAG was not able to procure more airports as originally planned because of the unanticipated regulatory restrictions imposed by the CAAC on privatization, it is both financially and operationally successful. HAG focused on the organic growth of the remaining airports in its portfolio, where annual volumes of passengers and cargo have consistently increased.
Variations between actual performance and the assumptions in the report and recommendations of the President were largely precipitated by regulatory challenges. The CAAC management decided to put airport privatization on hold indefinitely, which affected the HAG’s business plan to acquire at least three new airports. Owing to the limited investment opportunities, HAG has a substantial amount of idle funds which it decided to use as entrustment loans to its parent company and affiliates.
In future ADB engagements in the PRC, it would be worthwhile to involve regulatory bodies in the due diligence in order to develop a full appreciation for the future plans of the government for national industries. Transparency in regulations will also aid in the structuring of future financing in the aviation sector.
I. THE PROJECT
A. Project Background
1. Before 2003, all civil airports in the People’s Republic of China (PRC) were controlled directly by the Civil Aviation Administration of China (CAAC), and most of them were suffering losses. Since 2004, all civil airports (except those in Beijing and the Tibet Autonomous Region) have been transferred to provincial or municipal governments. Although the local governments can better plan and coordinate the development of airports with other infrastructure facilities, the capital expenditure required to expand or rehabilitate airports is an additional burden on local fiscal budgets. This is especially the case in the central and western regions, where municipal and provincial governments are constrained by (i) their limited financial budgets and the overall infrastructure needs, (ii) a lack of direct access to multilateral or other external financing sources, and (iii) their inability to meet the requirements for government counterpart funding.
2. The operation of civil airports requires special knowledge and sector-specific experience that most local governments lack, thus reducing the efficiency of the airports. Local investors and operators in the PRC were relatively new and had limited financial resources, which constrained their capacity to develop a large number of projects. Long-term private sector financing for the sector was not accessible, which limited local private sector participation, especially in small- and medium-sized airports.
3. On 11 December 2007, the Board approved an equity investment of up to $50 million in HNA Airport Holding (Group) Company Limited (HAG) and a loan to HAG consisting of two tranches: A Tranche, for up to CNY1.2 billion, funded by the Asian Development Bank (ADB), and B Tranche, for up to $200 million, funded by commercial banks. The project supported HAG’s expansion and capital expenditure plan to privatize, rehabilitate, expand, upgrade and operate small- and medium-sized airports in the PRC’s central and western regions. The project is ADB’s first private sector investment in the transportation sector in the PRC and its 21 st private sector investment in the country.
4. The project aimed to (i) enhance the development of efficient medium and small airports in the central and western regions through private sector participation; (ii) ease the financial constraints faced by provincial and municipal governments through the mobilization of private sector capital; and (iii) support regional economic growth and equitable economic development in the country. The proceeds of the equity investment and loan were applied to the financing of HAG’s airport portfolio in the PRC.
5. The PRC has the second largest civil aviation market in the world, after the United States. In 2014, the CAAC reported a passenger transportation volume of 391.95 million passengers, and a cargo and postal transportation volume of 5.94 million tons—10.1% and 5.9% respectively, over 2013 levels.1
6. The PRC had 202 2 civil airports in operation in 2014. Sixty-four airports reported a total passenger volume of more than 1 million, with 24 reporting annual passenger volume of more than 10 million. China's eastern airports accounted for 28.9% of this traffic, followed by the
1 World Civil Aviation Resource Net. 2015. CAAC Issues 2014 Civil Aviation Development Statistics Bulletin. http://www.wcarn.com/news/45/45715.html. 2 Statista, The Statistics Portal. Number of civil airports in China from 1990 to 2014. http://www.statista.com/statistics/258207/number-of-civil-airports-in-china.
2 central southern region (24%), the northeast region (22.3%), the southwest region (16.2%), the northwest (5.7%), and Xinjiang (2.6%).3 In terms of cargo, China's eastern airports accounted for 41.1%, followed by the central southern region (25.4%), the northern region (16.9%), the southwest region (9.7%), the northeast region (3.4%), the northwest region (2.1%), and Xinjiang (1.3%).
B. Key Project Features
7. The project supported HAG’s expansion and capital expenditure plan to privatize, rehabilitate, expand, upgrade and operate small - and medium-sized airports in the PRC’s central and western regions.
8. HAG’s principal activities are both aeronautical and non-aeronautical; they include provision of terminal facilities, ground handling services, passenger and cargo handling services, sales of duty-free and consumable goods, leasing of commercial and retail spaces, and car parking. HAG procured the ownership and management rights to all airports in its portfolio through privatization. Its internal team conducted pre-privatization evaluation and negotiation, with support from external professionals. Each privatization structure was unique but well documented and approved by various government agencies, including the State-owned Assets Supervision and Administration Commission (SASAC) and the CAAC. The proceeds from the equity injection and loan from ADB primarily went to the expansion of the Gansu airports and the capital expenditure program of the Sanya Phoenix International Airport from 2008 to 2014. The ADB loan included 50% risk participation by HSH Nordbank AG.
C. Progress Highlights
9. HAG’s plan to expand through the acquisition of existing airports and the addition of new airports did not materialize because the CAAC opposed any further privatization of China’s airports. As such, HAG’s growth relies on the organic growth of its existing portfolio of airports. As of the end of 2013, HAG had seven airports, all medium and small feeder airports or non-hub airports, that continued to register strong performance in 2013. On a consolidated basis, aircraft movements were 162,936 (up 15% over 2012), passenger traffic was 20.5 million (up 16%), and cargo throughput was 215,563 tons (up 17%).4
10. The strong operating performance of HAG’s portfolio airports translated to growth in revenues and profitability. HAG posted revenues of CNY1.20 billion in 2013, a 25% improvement from the CNY956 million in 2012. Net profits increased by 30%, from CNY182 million in 2012 to CNY238 million in 2013. HAG also benefited from subsidies provided by the government for the development of small- and medium-sized airports, which increased from CNY54 million in 2012 to CNY106 million in 2013. Net cash from operating activities more than doubled, to CNY663 million in 2013 from CNY303 million the preceding year. HAG has excellent liquidity, with cash in hand and deposits amounting to CNY1.2 billion as at 31 December 2013. HAG has also extended up to CNY2.1 billion in interest-bearing entrustment loans to HNA and associates, as well as CNY4.0 billion in non-interest-bearing short-term loans to affiliates.
11. As a result of its inability to acquire new airports and expand its portfolio, HAG’s financial performance significantly lagged the forecast made at appraisal. Because operating costs
3 Shanghai Airport Authority. 2015. CAAC Issues Chinese Airports Performance Statistics for 2014. http://en.shairport.com/2015-04/09/content_20510117.htm 4 Despite repeated requests, HAG did not provide operating and financial statistics for 2014.
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exceeded income at four Gansu airports, HAG decided to sell its equity shares in them to the government at fair market value in 2014. HAG’s airports as of the end of 2014 appear in Table 1.
Table 1: Portfolio Airports of HAG Airport Name Province Percentage of Ownership Sanya Phoenix International Airport Hainan 56% Yichang Sanxia Airport Hubei 90% Manzhouli Xijiao Airport Inner Mongolia 67% Note: HAG holds 20% equity in Dongying Airport .
12. A summary of the consolidated operational performance of HAG’s remaining airports appears in Table 2.
Table 2: Operations Data 2009 2010 2011 2012 2013 Aircraft movements 70,230 80,157 83,692 92,451 101,365 Passenger throughput 875 1,019 1,137 1,252 1,407 Cargo throughput 103,463 122,143 134,959 147,572 172,341
II. EVALUATION
A. Project Rationale and Objectives
13. The primary objectives of ADB’s financing support to HAG are twofold: (i) support the privatization of airports in the central and western regions of the PRC to further improve airport capacity and efficiency and (ii) promote private sector participation in airport development in the PRC. The proceeds of the A Tranche loan and the equity infusion were used primarily to help finance the acquisition and expansion of the Gansu airports (Lanzhou, Dunhuang, Qingyang, and Jiayuguan) and the Sanya airport. HAG started negotiations for the acquisition of two additional airports but a change in regulatory policy stalled the process. HAG had planned to expand by acquiring at least one airport each year between 2008 and 2010, an addition of three airports to its portfolio. This has not materialized. Notwithstanding the municipal governments’ push for greater private sector participation, the incumbent head of the CAAC has opposed any further privatization of China’s airports. The last airport privatization in China was that of HAG’s Gansu Airport Group, which was initiated in 2006 and finalized in 2008. Given these developments, HAG’s growth is now anchored on the expansion of its existing airports and organic growth within its portfolio. From a policy perspective, the central government still wants the private sector to undertake infrastructure projects.
B. Development Impact
1. Contributions to Private Sector Development and ADB Strategic Development Objectives
14. Contributions to private sector development and ADB strategic development objectives is rated satisfactory. The results and ratings for project contributions to private sector development and ADB strategic development objectives appear in Appendix 2.
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15. ADB was able to arrange a 50% unfunded risk participation with HSH Nordbank, an international commercial bank that had limited capacity to enter the local currency market owing to its lack of yuan funding capacity. Moreover, the bond issuance that was used to finance the project helped the PRC’s local capital market. Although HAG was not able to expand as planned in the regulatory environment of the time, the rehabilitations it did on its existing airports significantly improved operational efficiencies.
2. Economic Performance
16. The project’s economic sustainability is rated excellent . The project generated many intangible benefits, which are not captured by the economic analysis. They include more efficient management of airports by the private sector operator, better knowledge management, high morale of staff, enhanced human capital, and local employment that would not have been generated without the airports. As the economic model does not capture these intangible benefits, the gross benefits to the economy, including the tangible and the intangible, would be higher than the estimated economic return.
3. Environment, Social, Health, and Safety Performance
17. Environment. This investment is classified as category FI under ADB’s Environment Policy (2002). As the investee company, HAG has established an environmental management system (EMS) framework to comply with applicable national laws and ADB’s requirements on environmental assessment, planning and management, public consultation, reporting, monitoring, and disclosure. For airport terminal and new airfield runway expansion works, an environmental impact assessment (EIA) reports were prepared to comply with applicable PRC laws. The project’s potential environmental impacts during construction and operation are deemed minor, temporary, and site specific, readily mitigated through the application of proven and tested engineering measures. No visual or aesthetic impact since the expansion work was made on the premises of the existing airports. Current air traffic movements—take-offs and landings—are not expected to create noise disturbances for nearby communities. No fines or penalties were incurred due to environmental non-compliance, and no material environmental claims were filed against HAG or subsidiary companies. No grievances or complaints about environmental impacts have been filed or documented. A dedicated department and/or staff have been designated at the corporate and subsidiary companies to monitor and record environmental, health, and safety performance. In addition, a third-party monitoring company was commissioned to conduct regular testing, sampling, and monitoring of environmental parameters and results met the national standards. Other necessary government approvals were also secured before implementation.
18. HAG and its airport subsidiary companies strictly complied with the Production Safety Law of the PRC (2002), safety regulations of the CAAC, and HAG’s internal safety policies and measures. The health and safety monitoring report shows that (i) no aviation accidents; (ii) no hijacking and/or terrorism attack; (iii) no ground aviation accidents; (iv) no bird strikes; and (v) no fire incidents have been reported. HAG has implemented plane performance efficiency measures that lead to reduced fuel consumption such as (i) the installation of winglets, (ii) upgrades of the engine performance of Airbus 330 and Boeing 787 planes, (iii) the installation of carbon brakes, and (iv) the retirement of planes ahead of schedule. A detailed discussion appears in Appendix 7. ADB’s requirement for an EMS is considered by HAG as a very useful framework for systematically integrating environmental and social considerations into their overall airport management and operation system. HAG will continue to adhere to
5 environmental protection requirements and will develop green and low-carbon initiatives in the aviation industry.
19. Social Safeguards . The use of ADB funding did not have any impact on land acquisition and resettlement for HAG airports as the construction and expansion of airport facilities were implemented on previously acquired land on the existing airports. In 2011, HAG submitted a Resettlement and Ethnic Minority Development Plan (REMDP) for Phase II of the Sanya Phoenix International Airport Expansion Project. The REMDP was prepared for the expansion of aircraft parking; this component is not implemented within the scope of ADB finance. Staff of the Sanya Airport reported that they submitted the master plan of resettlement site to the Sanya City authority for approval. The construction of the resettlement site would start after approval. The team visited both the village where affected households are living and the location of the resettlement site. The scope of resettlement is not changed, and the REMDP will be implemented for the expansion of the aircraft parking area, which will be funded from other sources. To gain an understanding of how land acquisition was carried out, the team interviewed staff and visited the affected villages in the areas surrounding the two airports of Sanya and Yichang. HAG and its airport managers have assigned capable staff to deal with the land acquisition and implementation under the REMDP. At the airport level, the Planning and Construction Department is responsible for land acquisition and resettlement, in close coordination with the local authority and affected communities. The review and evaluation of safeguards documents and the site visit showed that ADB and national requirements on social safeguards have been adequately met. Land acquisition for three HAG airports was concluded before the processing of ADB’s loan. There are no outstanding issues related to social safeguards. Though the REMDP implementation is delayed and out of the scope of ADB’s loan, the project team believed that HAG and the Sanya airport staff will be able to implement the plan.
20. Other Social Dimensions . In 2005, the government issued regulation 195. Under this new policy, the government manages all airports at provincial capitals. However, this policy does not have any impact on labor retrenchment. Employees at the provincial airports work for the airports under the management of the government instead of under HAG. The company has a policy of staff exchange among its airports, which enables staff from smaller airports such as Manzhouli, where the number of passengers drops in winter, to work for Sanya airport for few months. Sanya is an international airport in a tropical region with a higher volume of passengers throughout the year. This shift helps staff to gain better income and experience. HAG ensures there is no discrimination in terms of salaries and benefits and provides equal opportunities for employment to men and women as well as to qualified local residents. HAG has impressive corporate social responsibility activities both in the country and abroad. The activities are conducted with the local communities in the time of festivals. Relief is also provided for the victims of natural disasters. The “HNA Brightness Action” initiated in 2004 has cured nearly 4,800 cataract patients, using a total investment of CNY30 million in the PRC and other African countries. In May 2008, HNA invested CNY30 million to build a number of Hope Schools in different locations in the PRC.
21. The rating for environmental, social, health and safety performance of the project is satisfactory .
4. Business Success
22. Despite the government’s move toward privatizing Chinese airports, the management of the CAAC opposed any further privatization. This prevented HAG from expanding its portfolio of
6 airports as originally envisioned. HAG had expected to add one new airport a year starting in 2008, for a total of three new airports by 2010.
23. Following the regulatory restriction, HAG anchored its business plan on the expansion and organic growth of its existing portfolio of airports. As part of this strategy, it divested its interests in its smaller airports, as their operating costs exceeded revenues, while expanding its bigger airports to accommodate higher volumes of passengers and cargo. In 2014, HAG sold the Gansu airports to the government at fair market value, as determined by third-party accountants. Historical operations data show that all of HAG’s airports grew consistently at an annual average of 13% and 14% for passenger volume and cargo volume, respectively.
24. The halt in the privatization of airports left a considerable amount of HAG funds idle. The company generated significant cash flow from the operations of its existing airports but had limited expansion opportunities. In order to optimize yields from the idle funds, HAG provided loans and advances to its affiliates, including its parent, HNA Group Company Limited. The project is rated excellent for business success.
C. ADB’s Additionality
25. ADB’s additionality is rated satisfactory. ADB’s participation was important in boosting private sector involvement in the aviation industry in the PRC. At the time of the financing, the municipal and provincial governments were constrained by lack of direct access to multilateral or other financing sources. Local investors and operators were relatively new and had limited financial resources, limiting their capacity to develop a large number of projects. Also, the local financial market, especially in the central and western regions of the PRC, was unfavorable to the private sector. ADB’s equity investment and long-term local currency debt were able to address these issues and targeted the investment needs in the less developed regions in the PRC which are the focal areas of ADB’s operations, in accordance with the country strategy and the government’s expectations with respect to ADB’s operations. ADB issued its second yuan- denominated bond (the Panda Bond) to fund the project, which helped the government to further improve the local capital market. Lastly, ADB was able to negotiate a 50% unfunded risk participation arrangement with HSH Nordbank, which had the risk appetite to provide long-term local currency loans but limited capacity due to its lack of yuan funding capacity.
D. ADB Investment Profitability
26. The yuan-denominated loan had an interest rate equivalent to the rate for deposits in yuan for one year plus a margin of 225 basis points per annum. The first repayment was on 14 October 2010 and the final one on 14 April 2015. The loan was funded through the proceeds of a yuan-denominated bond issued by ADB. The loan margin and fees yielded a gross contribution to ADB income that matched (i) the amount compatible with the direct transaction cost, (ii) the risk profile of the project, and (iii) the country risk at the time of investment. The project is rated satisfactory for ADB investment profitability.
E. ADB Work Quality
27. ADB’s overall work quality is rated satisfactory . ADB conducted due diligence on technical, legal, environmental, social, and financial aspects to confirm the project’s fundamentals and development impacts. ADB provided assistance in HAG’s compliance to reportorial requirements as well as waiver requests to address breaches in the facility
7 agreement. ADB also hosted a two-day seminar in August 2011 in HAG’s headquarters on environmental and social safeguards for relevant officers from HAG’s airports. The objective of the seminar was to impress on attendees the importance of safeguards in HAG’s operations and to assist them in their submission of safeguards monitoring reports.
28. ADB has been prompt in giving its consent to waivers and requests for amendments to existing agreements, subject to thorough reviews. ADB has kept itself updated on the project and HAG’s performance in all material areas through the reports submitted by the borrower. ADB endeavored to maintain constant communications with the project’s management; however, changes in staffing prevented the company from complying with its reportorial requirements in a timely manner.
F. Overall Evaluation
29. Overall, the project is considered successful . Although HAG was not able to procure more airports as originally planned because of the unanticipated regulatory restrictions imposed by the CAAC on privatization, it is both financially and operationally successful. HAG focused on the organic growth of its remaining airports, where annual volumes of passengers and cargo have consistently increased. Table 3 summarizes the overall assessment of the project.
Table 3: Evaluation of the Central and Western Airports Development Project Partly Indicator/Rating Unsatisfactory Satisfactory Satisfactory Excellent Development Results Contributions to Private X Sector Development and ADB Strategic Development Objectives Economic Performance X Environmental, Social, X Health, and Safety Performance Business Success X ADB ’s Additionality X ADB Investment Profitability X ADB Work Quality Screening, Appraisal, and X Structuring Monitoring and Supervision X
Highly Unsuccessful Partly successful Successful successful Overall Rating X Source: Asian Development Bank.
III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS
A. Issues and Lessons
30. Regulatory environment. Variations between actual performance and the assumptions in the report and recommendations of the President were largely precipitated by regulatory challenges. The CAAC management’s decision to put airport privatization on hold indefinitely affected HAG’s plan to acquire at least three new airports. The airport sector in the PRC is
8 tightly regulated, so the regulatory changes had a substantial impact on HAG’s performance. Early engagement and constant dialogue with key government agencies would have been useful for fully understanding the likely regulatory direction.
31. Compliance with information requirements. HAG was not able to submit its information requirements on time because of the change in the management of its finance department, which is in charge of compliance with the requirements. Moving forward, legal documentation should compel borrowers to provide the information needed to prepare evaluation reports such as XARRs after loans have been fully repaid.
B. Recommended Follow-up Actions
32. Due diligence exercises. In future ADB engagements in the PRC private sector, it would be worthwhile to involve regulatory bodies in due diligence in order to fully understand the likely future plans of the government for its industries. Transparency in regulations and appreciation of policies such as those related to public–private partnerships will also aid in the structuring of future financing in the aviation sector. Involvement of the Resident Mission would also be significant for the timely monitoring of changes in the regulatory environment and would also address the communication gaps that are typically encountered in projects in the PRC.
Appendix 1 9
PROJECT-RELATED DATA
A. Investment Identification 1. Country People’s Republic of China 2. Loan number LN2389 3. Industry/Sector Transport 4. Project Title Central and Western Airports Development 5. Borrower HNA Airport Holding (Group) Co. Ltd. (HAG) 6. Amount of ADB Assistance A Tranche; Loan, CNY1,200 million; Equity, $50 million
B. Data on ADB Missions
Person - Mission Date Days Persons Specialization of Members Project 12-13 March 2007 4 2 Investment Specialist Development Investment Specialist
26 April 2007 1 1 Investment Specialist
23 May 2007 1 1 Investment Specialist
Investment 11 September 2007 1 1 Sr. Guarantees & Syndications Negotiation Specialist
29-30 October 2007 6 3 Investment Specialist Investment Specialist Counsel
24 December 2007 2 2 Director Investment Specialist
03 March 2008 2 2 Investment Specialist Counsel
10-11 July 2008 2 2 Investment Specialist
10 Appendix 1
Person - Mission Date Days Persons Specialization of Members Investment 14 January 2008 1 1 Investment Specialist Administration 18 January 2008 3 3 Director Investment Specialist Counsel
13 March 2008 1 1 Investment Specialist
21 October 2008 1 1 Investment Specialist
20-21 January 2009 2 1 Investment Specialist
26-27 May 2009 2 1 Investment Specialist
18-19 August 2009 2 1 Investment Specialist
08 December 2009 1 1 Investment Specialist
19 January 2010 2 2 Investment Specialist Counsel
23-24 August 2011 8 4 Investment Specialist Safeguards Specialist Safeguards Specialist Project Analyst
Extended 23-27 March 2015 21 5 Investment Specialist annual review Senior Economist Safeguards Specialist Senior Safeguards Officer Project Analyst
Appendix 2 11
RESULTS AND RATINGS FOR PROJECT CONTRIBUTIONS TO PRIVATE SECTOR DEVELOPMENT AND ADB STRATEGIC DEVELOPMENT OBJECTIVES—INFRASTRUCTURE
Results area Actual achievements Rating Justification Potential future Risk achievements 1. Within company PSD effects 1.1 Improved skills: New or 1. HAG offers internship programs to fresh Satisfactory HAG benefited from the HAG will continue Low strengthened strategic, graduates in order to identify potential employees. safeguards training its human resource managerial, operational, provided by ADB. To development technical, or financial skills 2. HAG conducts safety training for the date, no complaints through trainings communities surrounding the airports and hires against HAG have been and mentorship and exemplary participants. posted by employees through and other stakeholders. partnerships with 3. HAG provides regular trainings and mentorship international airports programs for existing employees. for knowledge sharing and 4. Staff rotate among airports to increase their development. exposure to the different demand profiles of the airports.
1.2 Improved business Because the regulatory restriction limited the Satisfactory The existing portfolio of HAG intends to Medium operations: Improved ways to implementation of its business plan, HAG relied on airports continues to pursue the organic operate the business and the organic growth of its remaining portfolio post growth in volume growth and compete, as seen in investee airports. It established a Quality Control and profitability. expansion of its operational performance against Department, which enabled the company to existing portfolio relevant best industry immediately address issues at the airports as they and expand its benchmarks or standards arise. The company allows staff exchange, so the business offshore staff can get assigned to a larger and busier through airport as necessary. This enables broader partnerships with knowledge sharing and training within the other international company. airports, such as European airports, and through entry into management contracts. 1.3 Improved governance: As Notwithstanding regulatory restrictions, HAG Satisfactory No grievances or HAG will continue to Low evident in set standards related managed to grow its businesses without sacrificing complaints related to liaise with its to corporate governance, environmental and social safeguards. HAG won environmental and affiliates within the stakeholder relations, ESHS several awards, such as Skytrax World’s Best VIP social safeguards have HNA Group in order fields, and/or energy Terminal for the Sanya airport. been filed. to further improve its conservation, and their governance and implementation operations. 1.4 Innovation : New or HAG is one of the largest airport investment Satisfactory 1. Installation of Partnerships with Low improved infrastructure design, management groups in the PRC. It centers its winglets for 14 737NG other international
12 Appendix 2
Results area Actual achievements Rating Justification Potential future Risk achievements technology, service delivery, operations on the core concepts of planes helped lower airports are ways to cover or contain cost, standardization, intelligence, globalization, and emissions and save 350 expected to result in manage demand or optimize green development. tons of fuel per year. more innovative utilization, improved risk 2. Installation of carbon undertakings. allocation between private brakes helped save 27 company and government, tons of fuel per plane financial structure, etc. per year. 1.5 Catalytic element: ADB was able to arrange an unfunded risk Satisfactory The ADB loan had 50% HAG’s foray into the Medium Mobilizing or inducing more local participation with HSH Nordbank AG which had risk participation from international arena or foreign market financing or the risk appetite to provide long-term local HSH Nordbank AG. could attract other foreign direct investment in the currency loans but limited capacity due to lack of investors. company yuan funding capacity. Since the investment opportunities of HAG have been limited, there was no need for additional financing. The company had a lot of excess cash as a result of successful and profitable operations so it decided instead to provide entrustment loans to its related companies. 2. Beyond company PSD effects 2.1 Private sector expansion: Although the central government established a Less than Owing to unclear The central Medium Contribution by a pioneering or series of policies that relaxed entry barriers so as satisfactory ownership regulations, government still high-profile project that facilitates to attract more private sector participation, the private and foreign espouses private in its own right, or paves the way actual share of the private sector in total airport entities are hesitant to sector involvement for, more private participation in investment was minimal as a result of the limitation invest in the airport in the industry to the sector and economy at large imposed by the CAAC management on further sector. However, the address the lack of private sector investments. CAAC has allowed such expertise of local entities to operate and governments in manage airports. running airport operations. 2.2 Competition : Contribution of The growth of a high-speed rail transport Satisfactory HAG has implemented HAG will pursue Medium new competition pressure on alternative has put pressure on the aviation sector facility improvements to organic growth and public and/or other sector to improve its operations and services. attempt to minimize the continued players to raise efficiency and flight delays that improvement of its improve access and service characterize the sector. facilities. levels in the industry 2.3 Demonstration effects : HAG’s expertise enabled it to modernize and Satisfactory HAG’s operations are HAG is considering Low Adoption of new skills, improved expand its airports to meet the growing demand of characterized by entry into the foreign infrastructure assets and the traveling public. continued growth in market as part of its services, more efficient volume and profitability. expansion plans processes, maintenance and to acquire regimes, improved standards, training and
Appendix 2 13
Results area Actual achievements Rating Justification Potential future Risk achievements risk allocation and mitigation knowledge from its beyond the project company counterparts in the international market. 2.4 Linkages : Relative to HAG had a significant amount of idle funds due to Satisfactory The entrustment loans HAG will continue Low investments, contributes notable the halt in the privatization of airports, which extended to HAG’s supporting HNA upstream or downstream linkage limited its expansion opportunities while it was affiliates supported the Group’s strategic effects to business clients, generating significant cash flows from its operating overall operations of the plans. consumers, suppliers, key subsidiaries. In order to maximize the yields of HNA Group. HAG was industries, etc. in support of these funds, it provided entrustment loans to its also able to improve the growth affiliates to fund their operations. These loans are comfort of its traveling interest bearing and payable upon demand. public by enhancing the efficiency of its airports. The improvements implemented by HAG at its airports improved the traveling experience of its customers by minimizing the flight delays typical of smaller airports. 2.5 Catalytic element : Although the central government espouses Satisfactory The Panda Bond ADB will continue Medium Mobilizing or inducing more local privatization of airports, the CAAC management issuance used to introducing or foreign market financing or continues to restrict further acquisitions of airports finance the project alternative financing foreign direct investment in the by private companies. assisted the options to the sector (beyond the company) government in further market, which will through pioneering or catalytic improving the local help increase finance capital market. private sector involvement. 2.6. Affected laws, The CAAC has restrained further privatization in Less than HAG invested in the HAG will continue Medium frameworks, regulation: the sector notwithstanding the central government satisfactory expansion of its airports its dialogue with the Contributes to improved laws strategy of increasing private sector participation. and focused on its government to and sector regulation for public– Although ownership regulations remain unclear, economic growth. After explore alternative private partnerships, private companies still continue to operate and the improvements investment concessions, joint ventures, and manage some of the small- and medium-sized made, it divested its opportunities within build-operate-transfer projects; airports. interests in the smaller the country. and liberalizing markets, as airports, particularly the applicable, for improved sector Gansu airports, in favor efficiency of the government. 3. Contribution to other ADB strategic objectives 3.1 Sector development HAG was not able to acquire more airports as Satisfactory Although HAG was not HAG will look for Medium (outputs): Contribution to other planned because of the decision of the CAAC able to meet its target of more investment sector development outputs and management to halt further privatization of acquiring more airports, opportunities outcomes not captured under airports. its portfolio of airports outside the PRC. point 2., such as capacity or realized a constant network expansion, etc. increase in the volume
14 Appendix 2
Results area Actual achievements Rating Justification Potential future Risk achievements of passengers and cargo and has been consistently profitable.
3.2 Sector development HAG was able to provide an alternative Satisfactory The improvements HAG will continue Low (outcomes): Contribution to transportation option for travelers that reduces implemented by HAG with the expansion other sector development their travel time compared with land transportation. improved the quality of and rehabilitation of outputs and outcomes not HAG’s airports likewise provided more service of its airports. its airports. captured under point 2., such as employment opportunities for PRC residents. increased infrastructure utilization or consumption, improved in-country connectivity, improved energy security, etc.
3.3 Inclusion: Improved access HAG provided the expertise in turning around Satisfactory HAG was able to HAG will continue Low to, availability or affordability of unprofitable airports in the central and western provide an additional improving the infrastructure services for the regions of the PRC. It contributed its special transportation option to services of its poor and other disadvantaged knowledge and sector-specific experience that the regions not served by airports. groups. local governments lacked thus improving the bigger airports. efficiency of the airports.
3.4 Job creation : Creation of Aside from the financial assistance that HAG Satisfactory HAG provided HAG will continue Low additional sustainable jobs or extended to the affected communities, it provided employment and with the training and self-employment; distinguish both long-term and contractual employment for the livelihood training to the development of its between jobs created within and villagers in these communities, whose main communities staff and provide beyond the company livelihood is agriculture. HAG continuously surrounding its airports. more employment develops the skills of its staff through in-house It also hires fresh as it expands its training and exchange programs within the HNA graduates from other operations. Group. provinces who show potential.
3.5 Environmental With the application of GB/T23331 in the overall Satisfactory HAG implemented HAG will continue Low sustainability: Project net operations and establishment of energy several programs to with its programs impact on GHG emissions; any conservation and emission reduction projects, ensure its operations that are in line with other contributions to HNA has saved 30,000 tons of fuel in 2013 are environmentally the government environmental improvements (150,000 tons cumulatively from 2008 to 2013) sustainable. objective of and reduced its carbon emissions by 460,000 minimizing the tons. environmental impacts of airports.
Appendix 2 15
Results area Actual achievements Rating Justification Potential future Risk achievements 3.6 Regional i ntegration: HAG airports helped boost tourism and Satisfactory The rehabilitations done HAG intends to Low Project contributions to regional accessibility to the central and western provinces. by HAG have improved continue with the cooperation and integration by the efficiency of the expansion of its facilitating trade, cross-border operations of its portfolio of airports. mobility, cross-border power airports. supplies, etc. 4. Overall Rating e Satisfactory ESHS = environmental, social, health, and safety; GHG = greenhouse gas; HAG = HNA Airport Holding (Group) Company, Limited; PSD = private sector development; VIP = very important person.
16 Appendix 3
INDUSTRY AND OPERATIONS REVIEW
A. Industry Review
1. The Civil Aviation Administration of China (CAAC) is a ministry-level entity reporting directly to the State Council. The CAAC is primarily responsible for overseeing all national civil aviation affairs. Its seven regional administrations are responsible for the administration and supervision of civil aviation affairs within their respective regions.
2. Before 2003, all civil airports were directly controlled by the CAAC, and most of them were incurring losses. Since 2004, responsibility for all civil airports (except those in Beijing and the Tibet Autonomous Region) has been transferred to provincial or municipal governments. Although the local governments can better plan and coordinate the development of airports in conjunction with other infrastructure facilities, the capital expenditure required to expand or rehabilitate airports is an additional burden on local fiscal budgets. This is especially the case in the central and western regions, where municipal and provincial governments are constrained by (i) their limited financial budgets and overall infrastructure need, (ii) lack of direct access to multilateral or other external financing sources, and (iii) inability to meet the government’s counterpart funding requirements.
3. The operation of civil airports required special knowledge and sector-specific experience that most local governments lacked, which reduced the efficiency of the airports. Local investors and operators were relatively new and had limited financial resources, which constrained their capacity to develop a large number of projects. The inaccessibility of long-term private sector financing for the sector inhibited local private sector participation, especially in small- and medium-sized airports.
4. The PRC has the second largest civil aviation market in the world, after the United States. In 2014, the CAAC reported a passenger transportation volume of 391.95 million passengers and a cargo and postal transportation volume of 5.94 million tons, increasing by 10.1% and 5.9%, respectively, over 2013 levels.1
5. The PRC had 202 2 civil airports in operation in 2014. Sixty-four airports reported a total passenger volume of more than 1 million, with 24 reporting annual volumes of over 10 million. The eastern airports accounted for 28.9% of traffic, followed by the central southern region (24%), the northeast region (22.3%), the southwest region (16.2%), the northwest region (5.7%), and Xinjiang (2.6%).3 The eastern airports accounted for 41.1% of cargo traffic, followed by the central southern region (25.4%), the northern region (16.9%), the southwest region (9.7%), the northeast region (3.4%), the northwest region (2.1%), and Xinjiang (1.3%).
6. The government believes that the PRC is still lacking in numbers of airports, especially regional airports. However, the CAAC believes that the losses incurred by the airports in recent years were mainly due to poor management of airport operations. The CAAC has proposed that
1 World Civil Aviation Resource Net. 2015. CAAC Issues 2014 Civil Aviation Development Statistics Bulletin. http://www.wcarn.com/news/45/45715.html. 2 The Statista Portal. Number of civil airports in China from 1990 to 2014. http://www.statista.com/statistics/258207/number-of-civil-airports-in-china. 3 Shanghai Airport Authority. 2015. CAAC Issues Chinese Airports Performance Statistics for 2014. http://en.shairport.com/2015-04/09/content_20510117.htmhttp://www.statista.com/statistics/258207/number-of- civil-airports-in-china/.
Appendix 3 17
the involvement of local governments should be limited to the establishment of companies to construct and operate airports.
B. Operations Review
7. The plan of HNA Airport Holding (Group) Company, Limited (HAG) to expand through the acquisition and addition of new airports did not materialize in the face of the CAAC’s opposition to further privatization of airports. As such, HAG’s growth relies on organic growth within its existing portfolio of airports. As of the end of 2013, HAG has seven airports, all medium and small feeder airports or non-hub airports that continued to register strong performance in 2013. On a consolidated basis, aircraft movements totaled 162,936 (up 15% over 2012), passenger traffic was 20.5 million (up 16%), and cargo throughput was 215,563 tons (up 17%).
8. HAG posted revenues of CNY1.20 billion in 2013, a 25% improvement from the CNY956 million posted in 2012. Net profits increased by 30%, from CNY182 million in 2012 to CNY238 million in 2013. HAG benefited from the subsidies provided by the government for the development of small and medium-sized airports, which increased from CNY54 million in 2012 to CNY106 million in 2013. Net cash from operating activities more than doubled, to CNY663 million in 2013 from CNY303 million the preceding year. HAG has excellent liquidity, with cash in hand and deposits amounting to CNY1.2 billion as of 31 December 2013. HAG has also extended up to CNY2.1 billion in interest-bearing entrustment loans to its parent company, HNA Group, and associates plus CNY4.0 billion in non-interest-bearing short-term loans to affiliates.
9. As a result of HAG’s failure to acquire new airports and expand its portfolio, the company’s financial performance significantly lags the forecast made at the time of appraisal. Because the operating costs of the four Gansu airports exceeded their income, HAG decided to sell its equity shares in those airports to the government at fair market value in 2014. HAG’s portfolio of airports as of the end of 2014 is listed in Table 3.1.
Table 3.1: Portfolio Airports of HAG
Airport Name Province Percentage of Ownership Sanya Phoenix International Airport Hainan 56% Yichang Sanxia Airport Hubei 90% Manzhouli Xijiao Airport Inner Mongolia 67%
10. A summary of the consolidated operational performance of HAG’s remaining airports appears in Table 3.2.
Table 3.2: Operations Data 2009 2010 2011 2012 2013 Aircraft movements 70,230 80,157 83,692 92,451 101,365 Passenger throughput 875 1,019 1,137 1,252 1,407 Cargo throughput (tons) 103,463 122,143 134,959 147,572 172,341
18 Appendix 4
ENVIRONMENTAL IMPACT
A. Introduction
1. This investment is classified as category FI under the Environment Policy (2002) of the Asian Development Bank (ADB), to support HAG’s expansion and capital expenditure plan to privatize, rehabilitate, expand, upgrade, and operate small- and medium-sized airports in the central and western regions of the People’s Republic of China (PRC). HNA Airport Holding (Group) Company, Ltd. (HAG), as the investee company, established an environmental management system (EMS) framework to comply with national laws and ADB requirements. 1 An evaluation of the implementation of the EMS, the environmental management plan (EMP), and the degree of compliance with environmental safeguards requirements was conducted for two airport subsidiary companies: (i) Sanya Phoenix International Airport (SPIA) 2 and (ii) Yichang Sanxia Airport (YSA).
B. Mission Review Findings
2. EMS and EIA Compliance. The EIA Reports covering the expansion works for SPIA and YSA have been approved by the respective Provincial Environmental Protection Bureau. As part of the EIA process, public consultation has been carried out and has gained positive responses from the local communities and acceptance of the project. Both airport companies have well-established environmental management procedures and practices, which were carried out in compliance with the environmental requirements of the national and local governments during the construction and operation stages. Construction impacts such as dust and noise, and occupational health and safety issues were readily mitigated through application of proven and tested engineering measures. No visual or aesthetic impact was identified because the expansion works are within the premises of existing airport. Key aspects of environmental performance that were assessed by third party experts during operations include (i) wastewater (sludge and effluent) management, (ii) solid waste management, (iii) air emissions and ambient air quality, and (iv) noise level monitoring. 3 The Operation and Safety Support Department handles environmental management activities and health and safety issues at the airport. The treated wastewater including the dry sludge, as fertilizer, is reused for landscaping within the airport. 4 Water quality for domestic and firefighting purposes is tested and results showed that the water quality meets the relevant national and standard requirements. Solid wastes generated from local and/or international flights are collected and brought by the third party contractor to the incinerator at the dumping site. Given the current relatively moderate air traffic, noise disturbance is very low and is within the prescribed
1 ADB’s Environment Policy (2002), para. 56, Category FI, states that “A loan is classified as category FI if it involves a credit line through a financial intermediary or an equity investment in a financial intermediary. For ADB projects involving equity investment in a financial intermediary, where ADB funds will not finance specific subprojects but where the FI may have operations with adverse environmental impacts, the FI must adopt an appropriate environmental management system, comprising policy, procedures, and capacity, to comply with all relevant government environmental regulations and requirements in its operations. Where ADB involvement is a credit line for subprojects, the FI must adopt an appropriate environmental management system to cover the environmental assessment process of all subprojects to be financed by ADB funds.” 2 SPIA won two awards: Skytrax 4-Star Airport and Skytrax World’s Best VIP Terminal. Skytrax is a United Kingdom-based consultancy (originally known as Inflight Research Services), which runs an airline and airport review and ranking site. Skytrax conducts research for commercial airlines, as well as surveying international travelers to rate cabins, airports, airlines, airline lounges, in-flight entertainment, on-board catering and several other elements of air travel. Skytrax holds an annual World Airline Awards and World Airport Awards as well as ranking airlines and airports. 3 An on-line monitoring system was installed for the wastewater treatment station and connected to the Environmental Monitoring and Control Platform System established by the Sanya City Environmental Protection Bureau, to access the monitoring data such as flow rate, pH and chemical oxygen demand. After disinfection and filtration processes, the effluent quality satisfied the relevant national requirements. And Yichang Environmental Monitoring Center (YEMC) carried out regular compliance monitoring activities. 4 For urban landscaping, the relevant national laws for effluent quality applies the requirement titled Reuse of Recycling Water for Urban-Rural Water Quality Standard for Urban Miscellaneous Water Consumption (GB/T18920-2002)
Appendix 4 19 government standards of less than 70 dB. Both SPIA and YSA strictly complied with the Production Safety Law of PRC (2002) and the safety regulations of the CAAC. The health and safety monitoring report shows: (i) no aviation accidents, (ii) no hijacking and/or terrorism attacks, (iii) no ground aviation accidents, (iv) no bird strikes, and (v) no fire incidents due to proper airport operation. No fines or penalties were incurred due to environmental non- compliance, and no material environmental claims were filed against HAG and/or airport subsidiary companies. No grievance or complaints about environmental impacts have been filed.
3. Energy Management System and Fuel Consumption Reduction Measures 5. In 2013 HNA took the lead in introducing GB/T23331 EMS standards geared toward green aviation, covering all aspects from technological upgrading to process management to employee awareness. 6 HAG spearheaded the following activities: (i) conducting exchanges with and learning from overseas aviation companies that have achieved outstanding performance in reducing fuel use; (ii) establishing energy-conserving and emission-reducing projects, which helped HNA to save 30,000 tons of fuel in 2013 (150,000 tons cumulatively from 2008 to 2013) and reduce its carbon emission by 460,000 tons; and (iii) introducing a flight data integration application system, which provides data support for the precise management and control of fuel consumption. HAG has implemented five plane performance-efficiency measures that lead to reduced fuel consumption: (i) Installation of winglets for 14 of its 737NG planes, saving 350 tons of fuel per year; (ii) Upgrade of the engine performance of the Airbus 330 which consumes 1.2 percent less fuel; thus each of the eight planes can save 225 tons of fuel per year; (iii) Upgrade of the engine performance of Boeing 787 planes which can save 226 tons of fuel per year per plane; (iv) Installation of carbon brakes on 27 planes. The carbon brakes weigh 40 percent less than steel brakes, which helps each plane save 27 tons of fuel per year: (v) Retirement of planes ahead of schedule. In 2013, HNA successively cancelled the lease of three high-energy- consuming Airbus 340 planes and replaced them with two Boeing 787 planes, which consume less fuel. It is expected that each plane can save 4,000 tons of fuel a year.
D. Conclusions and Recommendations
4. On the basis of the review and evaluation of available environmental monitoring reports, site visit, and interviews with the senior managers and technical staff, the national laws and ADB’s requirements have been adequately met. The project‘s potential environmental impacts during construction and operation were deemed minor and insignificant which can be readily mitigated through application of proven and tested engineering measures. No fines or penalties were incurred due to environmental non-compliance, and no material environmental claims were filed against HAG and its subsidiary companies. No grievances or complaints about environmental impacts have been filed. SPIA and YSA complied with the Production Safety Law of PRC (2002), the safety regulations of the CAAC, and their own internal safety policies and measures. According to the health and safety monitoring report, as a result of proper airport operation (i) no aviation accidents, (ii) no hijackings and/or terrorism attacks, (iii) no ground aviation accidents, (iv) no bird strikes, and (v) no fire incidents have been reported. ADB’s requirement for EMS is considered by HAG as a very useful framework for systematically integrating environmental and social considerations into their overall airport management and operation system. Thus HAG will continue to adhere to environmental protection standards and develop green and low-carbon initiatives in aviation industry.
5 Inputs are based mainly on HNA Group’s Corporate Social Responsibility Report of 2013. 6 The GB/T23331 Energy Management system (EMS) is a national standard that was released on December 31, 2009. It delineates concepts and methods of implementation for systematic management of an enterprise’s energy and is based on plan-do-check-act (PDCA) cycle methods. These measures include reducing and monitoring energy use verifying energy-saving measures, and planning for continuous improvement.
20 Appendix 5
SOCIAL IMPACT
A. Introduction
1. HNA Airport Holding (Group) Company Limited (HAG, established in October 2003, invests, manages, and operates civil airports in the People’s Republic of China (PRC). The main activities of HAG include terminal facility management, ground handling services, passengers and cargo handling services, duty-free shop services, leasing of commercial and retail spaces, and car parking services. At present, HAG manages three airports, namely Sanya Phoenix International Airport, Yichang Sanxia Airport, and Manzhouli Xijiao Airport and has 20% equity in Dongying Airport.
B. Review Findings
2. Land acquisition and resettlement. In 2011, HAG submitted to ADB a Resettlement and Ethnic Minority Development Plan (REMDP) for Phase II of the Sanya Phoenix International Airport Expansion Project. The team visited both the village where affected households are living and the resettlement site. The scope of resettlement has not changed and the REMDP will be implemented using sources of funding other than ADB’s loan.
3. The use of ADB funding during the project life did not have any impact on land acquisition and resettlement at either Sanya or Yichang airports.
4. Sanya Phoenix International Airport. In phase 1 (2007–2009), 20 hectares were acquired from Li ethnic minority groups in the village of Meicun. The area was 77% farmland, 18% woodland, and 5% garden plots. This acquisition was not funded by the ADB loan. The affected village groups are all Li people, who have historically been ethnic minorities in Hainan Province. Most can speak the national language. The phase 1 acquisition affected 148 households of 635 people. Total compensation of CNY28.75 million has been paid to the people affected by the project (including CNY2.57 million paid to Fenghuang Township for the management of the land acquisition process). Sanya airport has handled the land acquisition process well, with no pending issues. The process consisted of the following steps: (i) airport staff held village meetings with the affected communities and people to discuss the issues; (ii) the compensation rate and package for all affected people was publicly disclosed in the village; (iii) the full compensation was paid on time; and (iv) the grievance redress mechanism was put into operation and people could voice any complaints.
5. Phase 2, to be included in the REMDP, covers 10 hectares of land acquisition in Meicun, with 50 affected households supporting 213 affected people to be relocated to the resettlement site, in the same village. However, the implementation of this REMDP has been delayed by the protracted selection of the resettlement site; the implementation of the REMDP will not be funded by ADB. The renovation and expansion of the terminal and VIP lounge were implemented under the ADB project loan, and these did not involve any land acquisition as they occurred within the existing land area. The land acquisition can take place only after 50 affected households are relocated to the resettlement site with houses and infrastructure (electricity, water, roads) constructed. The whole process depends on the completion of the resettlement site; the master plan had just been submitted to the city government for approval when the mission visited Meicun.
Appendix 5 21
6. Yichang Sanxia Airport was constructed in 1994 as an integrated component of Three Gorges Dam, which is 55 km away from the airport and was put into operation in 1996. HNA Group acquired the Yichang airport in 2004. In 2011, the volume of passengers and cargo reached 778,000 people and 8,703 tons, respectively. The airport occupies 277 hectares of land authorized by the Yichang municipal government. The existing airport facilities occupied one- third of the total land area. The remaining land is sufficient for the future expansion of the airport, planned for 2020. No short-term development plan exists, but a long-term expansion plan does.
7. In 1993, land was acquired in eight nearby villages for the construction of the airport. The affected people received a compensation package, and infrastructure in the village was improved: power and tap water have been provided for the affected communities by the airport since 1996. In addition, jobs were provided for the local people; 100 long-term positions in the airport were provided for villagers as were 90 contractual jobs for gardening. There are no pending issues related to land acquisition or ethnic minorities at Yichang airport. For the expansion in 2005, the airport used its own land, as authorized by the local government in 1994, and the nearby villages were all Han people, so there were no ethnic minority issues.
8. Manzhouli Xijiao Airport was constructed in 2003 and put into operation in December 2004. It is close to Manzhouli Municipality, in Inner Mongolia Prefecture. Manzhouli is the home of many ethnic minority groups (Mongolian, Korean, Hui, Elunchun, and Russian). The airport serves six routes, one international and five domestic. In 2001, the Manzhouli land authority allocated 2 million hectares of grassland in the municipality for the construction of the airport. The Manzhouli airport started its expansion in 2009 by building a new terminal, cargo storage, and other facilities such as security checkpoints. All these components were completed in July 2010. The construction was done on land owned by the airport, without any new land acquisition. There is no pending issue related to land acquisition, and no ethnic minority groups live near the airport.
C. Other Social Dimensions .
9. Labor issues . The company has a policy of exchanging staff among its airports, allowing staff from smaller airports such as Manzhouli, where the number of passengers drops in winter, to work for Sanya airport for a few months. As Sanya is an international airport based in a tropical region with a higher volume of passengers throughout the year, this opportunity helps staff earn better income and gain experience.
10. In cooperation with Fenghuang Township, Sanya airport provided assistance to the affected communities to sustain their living standard. Together with a full compensation package paid on time, a livelihood restoration program was also implemented by providing long-term positions in the airport for affected people. The airport provided 50 unskilled jobs for villagers, including cleaning, gardening, security, and loading services. The township also conducted training for local people in the skills needed: 530 local farmers from Meicun, including 270 women, were trained in different skills.
11. Sanya airport also prepaid the endowment insurance expense for the affected households in Meicun, which lost 50% of their farmland in the phase 1 land acquisition. According to a regulation issued by Sanya Municipality in 2009, farmers who lose 50% of their farmland due to land acquisition should be subsidized by the government to buy basic endowment insurance: the affected household pays 15% and the balance of 85% is subsidized
22 Appendix 5 by the municipal government. In phase 1 of the land acquisition for Sanya airport, 30 affected households with 127 affected people joined the endowment insurance system.
12. Corporate Social Responsibilities . HAG has impressive corporate social responsibility activities both in the country and abroad. These activities are conducted with the local communities in the time of festivals. Relief goods were also provided for the victims of natural disasters. The “HNA Brightness Action” initiated in 2004 has cured nearly 4,800 cataract patients, with a total investment of CNY30 million in the PRC and in African countries. In May 2008, HAG invested CNY30 million to build a number of Hope Schools in different locations in the PRC.
D. Conclusions and Recommendations
13. The review and evaluation of safeguards documents and the site visit showed that ADB and national requirements for social safeguards have been adequately met. Land acquisition for three HAG airports was concluded prior to the processing of the ADB loan. Apart from the ongoing implementation of the Sanya airport REMDP, which will occur after the completion of ADB’s loan, there are no outstanding issues related to social safeguards. Though the REMDP implementation is delayed and will be out of the scope of ADB’s loan, the project team believed that the HAG and Sanya airport staff will be able to implement it.
14. Construction and expansion of airport facilities under the ADB loan was done within land areas owned by the three airports and no new land acquisition was involved. The project had positive social development impacts. Three airports provided employment opportunities to the local communities and implemented social programs benefitting the communities in general. The airport staff maintained effective ways of communicating with the affected communities and implementing livelihood development programs and impressive corporate social responsibility activities.
15. The borrower’s performance has been satisfactory, and the project significantly mitigates social impacts in terms of involuntary resettlement and ethnic minority issues. The borrower has submitted an REMDP for Sanya airport and social monitoring reports to ADB that focused mainly on land acquisition and ethnic minorities. HAG management will be in charge of ensuring the implementation of Sanya Airport Phase II REMDP and its monitoring. It is suggested that the future monitoring reports should also cover other social issues such as the staff exchange program. Considering that the ADB equity has already been divested and the loan has already been fully repaid, with the unused facilities terminated, requests for copies of the monitoring report for the Sanya Airport Phase II REMDP will be made on a best efforts basis.